<PAGE> 1
UNITED STATES 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 1-4315
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ORANGE AND ROCKLAND UTILITIES, INC.
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(Exact name of registrant as specified in its charter)
New York 13-1727729
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(State or other jurisdiction of (I.R.S. Employer
incorporation or 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)
Common Stock, $5 Par Value -- New York Stock Exchange, Inc.
------------------------------------------------------------
(Securities registered pursuant to Section 12(b) of the Act)
Preference Stock, No Par Value
------------------------------------------------------------
(Securities registered pursuant to Section 12(g) of the Act)
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|
(Continued)
<PAGE> 2
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Continued from first page)
ORANGE AND ROCKLAND UTILITIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
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 |_|
At February 28, 1999, the approximate aggregate market value of the voting stock
held by non-affiliates of the registrant was $757,714,000*.
At February 28, 1999, the registrant had 13,519,994 shares of Common Stock ($5
par value) outstanding.
Documents incorporated by reference:
Annual Report to Shareholders for the year ended December 31, 1998
incorporated in Part I, Part II and Part IV to the extent described
therein.
* For purposes of this calculation, it is assumed that only directors and
officers of the registrant are affiliates of the registrant.
<PAGE> 3
TABLE OF CONTENTS
PART I. Page
ITEM 1. Business
General Development of Business 1
Merger with Consolidated Edison, Inc. 1
Divestiture of Electric Generating Assets 3
Financial Information about Industry Segments 4
Narrative Description of Business:
Principal Business 4
Electric Operations 5
Gas Operations 10
Diversified Activities 11
Construction Program and Financing 13
Regulatory Matters 14
Utility Industry Risk Factors and Competition 15
Environmental Matters 17
Research and Development 20
Franchises 20
Employee Relations 21
ITEM 2. Properties 22
ITEM 3. Legal Proceedings 24
ITEM 4. Submission of Matters to a Vote of Security Holders 35
PART II.
ITEM 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 35
ITEM 6. Selected Financial Data 36
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 36
ITEM 8. Financial Statements and Supplementary Data 37
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 42
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management 55
ITEM 13. Certain Relationships and Related Transactions 57
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 57
Signatures 67
Report of Independent Public Accountants on Financial
Statement Schedules 69
Consent of Independent Public Accountants 69
<PAGE> 4
PART I
ITEM 1. Business
General Development of Business:
Orange and Rockland Utilities, Inc. (the "Company") is a New York corporation,
with its principal office at One Blue Hill Plaza, Pearl River, New York 10965
(telephone number 914-352-6000), which was formed originally under the name
Rockland Light and Power Company on May 21, 1926 through the consolidation of a
company having the latter name (organized in 1899), Catskill Power Corporation
and Orange County Public Service Company, Inc. Its present name was adopted on
February 28, 1958, when The Orange and Rockland Electric Company was
consolidated with Rockland Light and Power Company.
The Company has two wholly-owned utility subsidiaries, Rockland Electric Company
("RECO"), a New Jersey corporation, and Pike County Light & Power Company
("Pike"), a Pennsylvania corporation. The Company has two wholly-owned active
non-utility subsidiaries, Clove Development Corporation ("Clove"), a New York
corporation and O&R Development, Inc. ("ORD"), a Delaware corporation. RECO has
two wholly-owned non-utility subsidiaries, Saddle River Holdings Corp. ("SRH")
and Enserve Holdings, Inc. ("Enserve"), both Delaware corporations. NORSTAR
Holdings, Inc. ("NHI"), a Delaware corporation and wholly-owned non-utility
subsidiary of SRH, has two wholly-owned non-utility subsidiaries, NORSTAR
Management, Inc. ("NMI"), and Millbrook Holdings, Inc. ("Millbrook"), both
Delaware corporations. NMI is the sole general partner of a Delaware limited
partnership, NORSTAR Energy Limited Partnership ("NORSTAR Partnership"), of
which NHI is the sole limited partner. EnServe has two wholly-owned non-utility
subsidiaries, Palisades Energy Services, Inc. ("Palisades") and Compass
Resources, Inc. ("Compass"), both of which are inactive Delaware corporations.
The businesses of the non-utility subsidiaries are described under the
subheading "Diversified Activities" in this Item 1.
Merger with Consolidated Edison, Inc.:
On May 10, 1998, the Company, Consolidated Edison, Inc., a New York corporation
("CEI"), and C Acquisition Corp., a New York corporation and a wholly-owned
subsidiary of CEI ("Merger Sub"), entered into an Agreement and Plan of Merger,
dated as of May 10, 1998 (the "Merger Agreement"), pursuant to which the Merger
Sub will merge with and into the Company (the "Merger") with the Company being
the surviving corporation and becoming a wholly-owned subsidiary of CEI (the
"Surviving Corporation"). The Merger, which was unanimously approved by the
board of directors of each of the Company, CEI and Merger Sub, is expected to
occur shortly after all of the conditions to the consummation of the Merger,
including the receipt of certain Federal and state regulatory approvals,
discussed below, are met or waived. The Merger Agreement was approved by the
Company's shareholders at a special meeting held on August 20, 1998.
Under the terms of the Merger Agreement, upon the effectiveness of the Merger
(the "Effective Time") each outstanding share of the Company's common stock,
$5.00 par value per share (the "Company Common Stock"), other than shares, if
any, owned by the Company, CEI or any of their wholly-owned subsidiaries, will
be converted into the right to receive $58.50 in cash (the "Merger
Consideration"). The Merger Consideration is expected to be taxed as capital
gain to the holders of the Company Common Stock. As of the Effective Time,
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each of the Directors of the Company will resign and the directors of the Merger
Sub will be the Directors of the Company.
Pursuant to the Merger Agreement, approximately $790 million in cash will be
paid to holders of shares of Company Common Stock. In addition, the Merger
Agreement requires the Company to call for redemption all outstanding shares of
the Company's cumulative preferred stock, par value $100.00 per share, and the
Company's cumulative preference stock, no par value, in each case at a
redemption price equal to the amount set forth in the Company's Restated
Certificate of Incorporation, together with all dividends accrued and unpaid to
the date of such redemption.
The Merger is subject to certain customary closing conditions, including,
without limitation, the approval of the New York Public Service Commission
("NYPSC"), the New Jersey Board of Public Utilities (the "NJBPU") and the
Pennsylvania Public Utility Commission (the "PAPUC"), the approval of the
Federal Energy Regulatory Commission ("FERC"), the approval of the Securities
and Exchange Commission (the "SEC") under the Public Utility Holding Company Act
of 1935, as amended, (the "Holding Company Act") and the filing of the requisite
notification with the Federal Trade Commission (the "FTC") and the Department of
Justice (the "DOJ") under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, (the "Hart-Scott-Rodino Act") and the expiration of the
applicable waiting period thereunder. All regulatory filings have been made. On
January 27, 1999, the FERC issued an order approving the Merger Agreement. The
PAPUC approved the Merger by an order dated March 11, 1999, which adopted the
settlement agreement dated January 14, 1999, among Pike, the Office of Consumer
Advocate and the Office of the Small Business Advocate. The settlement
agreement allows Pike to retain all merger savings, net of cost to achieve,
until its next electric and gas base rate case.
On March 5, 1998, the Company, CEI, the staff of the State of New York
Department of Public Service (the "NYPSC Staff") and several other parties
submitted a settlement agreement in the Merger proceeding to the NYPSC. The
settlement agreement provides for the approval of the Merger Agreement subject
to certain conditions, including the following: (1) On December 1, 1999, the
Company will reduce its electric base rates by $5.8 million, or 1.9%; (2) The
Company will not seek to effectuate an increase in its base electric rates prior
to January 1, 2003; (3) The Company's electric operations will no longer be
subject to an earnings sharing mechanism which currently requires sharing with
electric customers equity returns in excess of 11.4%; (4) The Company will
reduce its base gas rates by $1.0 million, or 0.7%, effective in the month
following consummation of the Merger; and (5) The Company will withdraw its
December 1998 gas rate filing upon consummation of the Merger and may not file
to increase its gas rates prior to December 1, 1999.
The Company anticipates that the NYPSC will consider the settlement agreement
during April 1999 and that all other regulatory decisions will be
issued no later than the second quarter of 1999.
The Merger Agreement contains certain representations, warrants and covenants of
the parties including, without limitation, covenants of the Company regarding
operations of the Company pending the consummation of the Merger. Generally,
except for the divestiture of the Company's generation assets in accordance with
the settlement agreement and the final divestiture plan approved by the NYPSC,
the Company must carry on its business in the ordinary course consistent with
past practice and use all commercially reasonable efforts to preserve intact its
present business organization and goodwill. In addition, the Company may not
increase dividends on the Company Common Stock or issue any capital stock. The
Merger Agreement also contains certain restrictions and limitations on the
Company with respect to, among other things, amendments to the Company's
Restated Certificate of Incorporation and By-Laws, capital expenditures,
acquisitions, dispositions, incurrence of indebtedness, certain increases in
employee compensation and benefits, affiliate transactions, rate matters,
contracts and discharge of liabilities.
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One current member of the Company's Board of Directors, selected by the
Nominating Committee of CEI's Board of Directors, will be appointed to the Board
of Directors of CEI. In addition, the Surviving Corporation will have an
advisory board, with equal numbers of members from CEI and the Company, that
will provide advice and input regarding the implementation of the Merger and the
ongoing operations of the Surviving Corporation.
The Merger Agreement may be terminated under certain circumstances, including by
mutual consent of the parties; by either CEI or the Company if the Merger is not
consummated by November 30, 1999 (the "Initial Termination Date"), subject to an
automatic extension of six months if the requisite statutory approvals have not
yet been obtained by the Initial Termination Date but all other conditions to
closing have been fulfilled or are capable of being fulfilled by such date; by
either CEI or the Company if the requisite approval of the Company's
shareholders had not been obtained at a duly held shareholders' meeting; by a
non-breaching party if there occurs a material breach of any representation,
warranty, covenant or agreement contained in the Merger Agreement which is not
cured within twenty business days; or by the Company, under certain
circumstances, in order to accept a Superior Proposal, subject to certain
limitations and procedures and to the payment of a termination fee.
Additional information regarding the proposed Merger is contained in the 1998
Annual Report to Shareholders in the "Review of the Company's Results of
Operations and Financial Condition" beginning on page 6 under the captions
"Major Developments - 1998 - Merger" and "Other Developments - Termination
Benefits Relating to the Merger" and in Note 4 of the Notes to Consolidated
Financial Statements, on page 21, which material is incorporated by reference in
this Form 10-K Annual Report.
Divestiture of Electric Generating Assets:
On November 24, 1998, the Company entered into definitive agreements with three
subsidiaries of Southern Energy, Inc. ("SEI"), an affiliate of The Southern
Company, to sell its generating assets, described in Item 2 under the caption
"Sale of Generating Assets", for approximately $480 million in cash. The
Company's share of the sales price is approximately $345 million, which excludes
the sales price attributable to the two-thirds share of the Bowline Point Plant
which is owned by Con Edison Company of New York, Inc. ("Con Ed"). SEI was the
successful bidder in an auction process that was established pursuant to the
Company's New York Electric Rate and Restructuring Plan, which was approved by
the NYPSC by Orders dated November 26 and December 31, 1997, and the subsequent
final Divestiture Plan, which was approved by the NYPSC by Orders dated April 16
and 26, 1998. The sale is subject to federal and state regulatory review and
approval. The closing of the sale has been tentatively scheduled for the end of
May 1999, subject to satisfaction of the conditions set forth in the agreements.
The closing date may be adjusted to a later date up to September 30, 1999,
except that if all conditions to the closing other than receipt of specified
regulatory approvals have been fulfilled by September 30, 1999, then up to the
day which is eighteen months from November 24, 1998. In addition, under the
terms of the agreements, if approval by the FERC of the establishment of the
Independent System Operator ("ISO"), as described in this Item 1 under the
caption "Electric Operations" has not been obtained, the parties have agreed to
defer the closing of the sale, but, if all other conditions to the consummation
of the sale have been met, in no event to a date later than August 31, 1999.
The sale of the generating assets is subject to certain customary closing
conditions, including, without limitation, the receipt of all necessary
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governmental approvals and the making of all necessary governmental filings,
including the approval of the NYPSC, the NJBPU and the PAPUC, the approval of
the FERC, and the filing of the requisite notification with the FTC and the DOJ
under the Hart-Scott-Rodino Act and the expiration of the applicable waiting
period thereunder. On February 18, 1999, the DOJ granted early termination of
the waiting period applicable to the filings made by The Southern Company and
the Company relating to the sale of the Company's generating assets.
In addition to the agreements to sell its electric generating assets, the
Company and subsidiaries of SEI entered into a Transition Power Sales Agreement,
two Load Pocket Call Option Agreements and three Continuing Site/Interconnection
Agreements (the "Ancillary Agreements") in order to ensure reliable supply and
distribution of electricity to the Company's customers in the transition period
and into the future.
Additional information regarding the divestiture of the Company's electric
generating assets is contained in the 1998 Annual Report to Shareholders in the
"Review of the Company's Results of Operations and Financial Condition"
beginning on page 6 under the captions "Major Developments - 1998 - Divestiture"
and "Other Developments - Termination Benefits Relating to the Merger," and in
Note 5 of the Notes to Consolidated Financial Statements on page 22, which
information is incorporated by reference in this Form 10-K Annual Report.
Reference is also made to Item 3, Legal Proceedings of this Form 10-K under the
caption "New York Competitive Opportunities Proceeding."
Financial Information about Industry Segments:
Consolidated financial information regarding the Company's principal business
segments, Electric Operations, Gas Operations and Diversified Activities is
contained in Note 14 of the Notes to Consolidated Financial Statements on page
29 of the 1998 Annual Report to Shareholders, which material is incorporated by
reference in this Form 10-K Annual Report.
Narrative Description of Business:
Principal Business
The Company and its utility subsidiaries supply electricity and gas to a
territory covering approximately 1,350 square miles. The eastern boundary of the
Company's service territory extends along the west bank of the Hudson River from
a point in New Jersey six miles north of the George Washington Bridge northerly
for approximately 37 miles to a point in New York a short distance north of the
United States Military Academy at West Point. From the Hudson River, the
Company's territory in New York State extends westward to the Delaware River,
embracing all of Rockland County, most of Orange County and a part of Sullivan
County. In New Jersey, RECO supplies electricity to the northern parts of Bergen
and Passaic Counties and small areas in the northeastern and northwestern parts
of Sussex County. Pike supplies electricity and gas to the northeastern corner
of Pike County, Pennsylvania.
As of December 31, 1998, the Company and its utility subsidiaries furnished
electric service to approximately 274,000 customers in 96 communities with an
estimated population of 687,000 and gas service to approximately 117,000
customers in 57 communities with an estimated population of 485,000. There was a
modest increase in the population of the Company's service territory and in the
number of customers served in 1998. At December 31, 1997, electric service was
provided to approximately 269,000 customers in 96 communities with an estimated
population of 681,000 and gas service was provided to approximately 114,000
customers in 57 communities with an estimated population
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of 482,000. At December 31, 1998 and 1997, 95% of the Company's residential gas
customers used gas as their major heating fuel. While the territory served is
predominantly residential, the Company and its utility subsidiaries also serve a
number of commercial and industrial customers in diversified lines of business
activities from which significant electric and gas revenues are derived. No
single customer accounts for more than 10% of either gas or electric revenue.
The business of the Company and its utility subsidiaries is seasonal to the
extent that sales of electricity are higher during the summer, mainly due to air
conditioning requirements, and sales of gas are greater in the winter months,
primarily as a result of heating requirements.
Electric Operations
Sale of Generating Assets. The electric operations of the Company and its
utility subsidiaries have historically included the traditional, vertically
integrated utility services of production, transmission and distribution of
electricity. The Company currently supplies substantially all of the electric
power needs of customers in its retail electric franchise areas in the three
states in which the Company and its utility subsidiaries operate. The
electricity required to supply such demand is either produced at the Company's
generating plants or purchased by the Company for distribution to its customers.
In addition, the Company has historically provided related utility services such
as customer accounting and billing activities, meter reading and customer
services.
As a result of efforts at the Federal and state levels to increase competition
in the electric utility industry, the nature of the Company's electric
operations will change. The primary change is the planned sale by the Company of
its electric production assets to subsidiaries of SEI, an affiliate of The
Southern Company.
As a result of the foregoing, the following description of the Company's
electric operations should be read in conjunction with disclosures regarding the
competitive initiatives at the Federal and state level, the filings made by the
Company and its utility subsidiaries regarding these initiatives, the sale of
the Company's electric generation assets to SEI, the continued operations of the
Company as an electric transmission and distribution company within the context
of the proposed merger with CEI and the anticipated effect that these
initiatives will have on the future operations of the Company and its utility
subsidiaries. Such disclosures are contained in this Item 1 under the captions
"Merger With Consolidated Edison, Inc." and "Divestitute of Electric Generating
Assets." Reference is also made to the 1998 Annual Report to Shareholders as
follows: the "Review of the Company's Results of Operations and Financial
Condition" beginning on page 6 under the captions "Major Developments - 1998 -
Merger," "- Divestiture," "- Competition," and "Other Developments - Termination
Benefits Related to Divestiture" and "- Termination Benefits Related to the
Merger"; and in the Notes to Consolidated Financial Statements beginning on page
19 in Note 4 and Note 5, which information is incorporated by reference in this
Form 10-K Annual Report, as well as Item III, Legal Proceedings of this Form
10-K under the heading "Regulatory Matters".
Generating Capacity and Purchased Power. As described more fully in Item 2 of
this Form 10-K Annual Report under the subheading "Electric Generating
Facilities," the nameplate capacity of the Company's plants provides the Company
with a net generating capacity of 981 megawatts ("Mw") in the summer and 993 Mw
in the winter. Additionally, the Company purchases capacity, as more fully
described below, to satisfy its reserve requirements, as well as any demand in
excess of its installed capacity. The electric energy which RECO and Pike
distribute to their customers is supplied by the Company. The
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maximum historical one-hour demand for the Company and its utility subsidiaries
occurred on July 15, 1997 and was 1,143 Mw and the maximum one-hour demand
during 1998 occurred on June 25, 1998 and was 1,122 Mw.
In addition to the energy produced at its generating facilities, the Company,
through various transmission interconnections, purchases both capacity and
energy when needed to meet load and reserve requirements and also when such
power is available at a price lower than the Company's cost of production. The
Company maintains transmission interconnections with Central Hudson Gas and
Electric Corporation ("Central Hudson"), Public Service Electric and Gas Company
("PSE&G") and Con Ed. Through these interconnections, and as a member of the New
York Power Pool ("NYPP"), the Company can exchange power directly with the above
utilities and, through the facilities of other members of the NYPP, the Company
can exchange power with all members of the NYPP and with utilities in pools in
neighboring states. In addition, members of the NYPP are able to coordinate
inter-utility transfers of bulk power in order to achieve economy and
efficiency, cooperate in long range planning of generation and transmission
facilities and coordinate inter-utility operating and emergency procedures to
assure reliable, adequate and economic electric service throughout the state.
Through the NYPP control center, the Company is able to purchase power in order
to optimize its generation-interchange mix, using the lowest cost energy
available to the Company in the interconnected system.
On January 31, 1997, the Company, in conjunction with the other seven member
systems of the NYPP, filed tariffs with the FERC seeking to establish an ISO and
related institutions which would replace the NYPP. The ISO structure is intended
to foster a fully competitive market in New York State by facilitating a more
efficient electricity market and by providing for a visible spot energy market
as well as a state-wide locational pricing mechanism and an associated
transmission congestion pricing mechanism. On December 19, 1997, a supplemental
filing was made with the FERC which provides for a revised governance structure
with an ISO board comprised of individuals unaffiliated with the member systems
or any other market participant.
The contemplated ISO structure would provide enhanced operating efficiencies
with respect to the transfer of power between power producers and power
purchasers. The primary economic difference between the existing NYPP structure
and the ISO structure will be the move from the current cost-based rates to a
market-based rate structure for pricing power transactions. Power producers
seeking to sell power through the ISO would have their power dispatched based on
price, with the least expensive power being dispatched first, and the price of
power at any location would be the lowest price generation that is next
available for dispatch. Regional operating problems, such as load pockets and
transmission constraints, would be addressed through a locational marginal
pricing mechanism.
In an Order dated January 27, 1999, the FERC conditionally accepted the proposed
ISO Tariff and the proposed market rules of the ISO. The Order requires
substantial modifications to the proposed ISO Tariff including separation of the
transmission tariff from the rate schedules that govern non-transmission tariff
functions. The NYPP members must submit a revised monitoring program to identify
both the exercise of market power and market design flaws. The FERC also set a
hearing to consider certain rate issues and noted that an application pursuant
to Section 203 of the Federal Power Act requesting transfer of control of all
necessary facilities from the NYPP members to the ISO must be submitted to and
approved by the FERC. The NYPP members filed the Section 203 applications on
February 5, 1999. The Company is unable to predict when the ISO will become
operational.
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During 1998, the Company had agreements in place for both capacity and energy
purchases. Capacity purchases included an agreement with PSE&G which provided
190 Mw of winter capacity and 350 Mw of summer capacity, an agreement with the
New York Power Authority ("NYPA") for 25 Mw of year-round capacity from the
Blenheim-Gilboa pumped storage facility (the "Gilboa Facility") and an agreement
with North American Energy Conservation, Inc. ("NAEC") which provided for 100 Mw
of capacity in the winter capability period and 150 Mw during the summer
capability period. The NAEC Agreement expired in October 1998.
With regard to energy, the Company purchased approximately 34% of its energy
requirements during 1998. These purchases, which were made primarily through
short-term purchase agreements and interchange agreements, were primarily
economy transactions made in the interest of lowering costs to the Company's
customers. This is demonstrated by the fact that the Company's installed
generating capability for the 1998 summer capability period could have provided
over 88% of the Company's energy requirements at the time of the Company's peak
demand. The use of purchased power under these circumstances reflects the
Company's policy of supplementing its electric generation with purchased power
not only when needed to meet load requirements but also when such power is
available at a cost lower than the cost of production.
Information regarding future power supply is contained under the caption "Future
Energy Supply and Demand" in this Item 1. Reference is also made to the
information contained under the caption "Utility Industry Risk Factors and
Competition" in this Item 1.
Fuel Supply. The Company's 981 Mw summer generating nameplate capacity rating is
available from the following fuel sources:
<TABLE>
<CAPTION>
Coal,
Oil Oil Gas
Plant & Gas & Gas Hydro Turbine Total
- ------------------------------------------------------------------------------
(Megawatts)
<S> <C> <C> <C> <C> <C>
Lovett Plant
Unit 3 63.0 63.0
Units 4 & 5 399.6 399.6
Hydro Plants
Swinging Bridge
Mongaup, Rio and
Grahamsville 43.8 43.8
Gas Turbine Plants
Hillburn and
Shoemaker 74.0 74.0
Bowline Point Plant
Units 1 & 2 400.6 400.6
----- ----- ----- ----- -----
463.6 399.6 43.8 74.0 981.0
===== ===== ===== ===== =====
</TABLE>
* For a description of the Company's generating plants, see "Electric
Generating Facilities" in Item 2 of this Form 10-K Annual Report.
The Company's principal generating plants use natural gas, coal or oil as their
primary fuels. This tri-fuel strategy enables the Company to control, to some
extent, the risks associated with one of the most volatile components of
electric production costs based on relative fuel prices and fuel availability.
In addition, the Company's fuel strategy has enabled it to reduce its dependence
on oil through the use of coal as the primary fuel for
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<PAGE> 11
the Lovett Plant's two largest generating units and incorporates economy power
purchases from other systems when such purchases are less expensive than
generation. There are, however, certain factors which affect fuel price and
availability which are beyond the control of the Company. These factors include
the domestic and international fuel supply situation, environmental regulations,
conservation measures and the availability of alternative fuels.
Electricity available for sale is provided through a mix of Company generation
by various fuel types, supplemented by purchased power when such power is
available at a price lower than the price of generation or is needed to meet
load requirements. Details for the years 1994 through 1998 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gas 23% 23% 8% 14% 29%
Coal 36 27 33 34 28
Oil 6 7 1 2 7
Hydro 3 3 4 3 2
Purchased Power 32 40 54 47 34
--- --- --- --- --
Total 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
Gas - Natural gas is used as fuel for electric generation at the Company's
Lovett and Bowline Point Plants and at the Hillburn and Shoemaker Gas Turbine
Plants when it is available and economic. Substantially all of the natural gas
used in electric generation is acquired through spot market purchases. During
1998, natural gas was the predominant fuel burned at the Bowline Point Plant.
The Company expects to use natural gas in the Bowline Point Plant and the Lovett
Plant during 1999, whenever such gas is more economical than alternative fuels.
In 1998, the Company used 4.8 billion cubic feet ("Bcf") and 25.5 Bcf of gas at
the Lovett Plant and the Bowline Point Plant, respectively.
Coal - The low sulfur coal (1.0 lbs - SO2 per million British Thermal Unit
("MMBTU")) used in Lovett Plant Units 4 and 5 is supplied to the Company
primarily through a long term contract with Massey Coal Sales Company, Inc.
Under this contract, the Company maintains the ability to purchase alternative
fuel in place of coal whenever it is in its best interest to do so. The coal
burned in the Lovett Plant is low in ash (typically 8%) and high in BTU content
(26 MMBTU's per ton). During 1998, coal was the predominant fuel burned at the
Lovett Plant and the Company expects to use coal in 1999 as long as it is more
economical than alternative fuels. Information regarding the Company's coal
supply contract is contained in Note 13 of the Notes to Consolidated Financial
Statements under the caption "Coal Supply Contracts" on page 27 of the 1998
Annual Report to Shareholders, which material is incorporated by reference in
this Form 10-K Annual Report.
Oil - The Company has the ability to burn oil at all of the generating units at
the Lovett Plant and the Bowline Point Plant. The Company purchased no oil for
its Lovett Plant in 1998. Con Ed supplies #6 oil (0.37% maximum sulfur content
by weight) to the Bowline Point Plant under a contract between it and the
Company. Pursuant to that contract, Con Ed has also agreed to provide a backup
oil supply for the Company's Lovett Plant under certain conditions.
Hydro - Water for the operation of the Company's Mongaup River Hydro Plants is
controlled by the Company through the ownership of the necessary land in fee or
through easements. In the case of the Company's Grahamsville Hydro Plant, water
is obtained under contract with the City of New York Board of Water Supply. This
contract, which expires in 2005, entitles the Company to 8.1 Bcf of free water
each year. In 1998, the total amount of water used was
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<PAGE> 12
12.7 Bcf. Of this total, 4.6 Bcf was billed at varying rates based on an average
cost of all fuels used in power generation.
Purchased Power - The Company's practice regarding purchased power is to
supplement the Company's electric generation by purchasing both capacity and
energy when needed to meet load and reserve requirements and also when such
power is available at a price lower than the cost of production. Details
regarding purchased power arrangements are contained under the captions
"Generating Capacity and Purchased Power" and "Future Energy Supply and Demand"
in this Item 1.
Additional information regarding fuel and purchased power costs, including a
description of the fuel adjustment clauses contained in the Company's tariff
schedules, is contained in the 1998 Annual Report to Shareholders in the "Review
of the Company's Results of Operations and Financial Condition" under the
caption "Electric Energy Costs" on page 11 and in Note 1 of the Notes to
Consolidated Financial Statements under the caption "Fuel Costs" on page 19,
which information is incorporated by reference in this Form 10-K Annual Report.
Future Energy Supply and Demand. The Company continues to be committed to
meeting customer energy needs by providing reliable energy service at the lowest
prudent cost and in an environmentally sound manner. The transition to a
competitive business environment will, however, affect the traditional
vertically integrated utility structure and will necessitate changes in the way
the Company's customers provide for their power needs.
As a result of the planned divestiture of the Company's generating assets, and
in the context of regulatory proceedings regarding competition in the electric
utility industry, it is expected that the Company and its utility subsidiaries
will implement full retail competition for all customers during mid-1999. The
Company will act as a provider of last resort for those customers who do not
contract with third party energy suppliers to meet their energy needs. As a
result, the future energy requirements of the Company as a provider of last
resort are expected to be substantially lower than in the past. Such
requirements will initially be satisfied through a Transitional Power Supply
Agreement between the Company and subsidiaries of SEI whereby, from the later of
May 1, 1999 or the closing of the sale of the Company's generating assets
through October 31, 2000, the Company will purchase specified amounts of
capacity and energy. In addition, the Company currently has two firm capacity
contracts in place; an agreement with the NYPA for the purchase of 25 Mw of
firm, year-round capacity from the Gilboa Facility and a firm capacity agreement
with PSE&G which will provide between 100 Mw and 200 Mw of capacity during the
contract term which extends through October 2000. At the option of the Company,
additional capacity purchases are available throughout the term of the PSE&G
contract, which, together with the firm contract capacity, would bring the total
capacity available under the PSE&G contract to between 300 Mw and 400 Mw. The
Company currently has no firm, long-term energy contracts in place, other than
the Transitional Power Sales Agreement cited above. Capacity and energy
requirements after this transition period are expected to be satisfied by the
Company within the operating policies of the ISO or through bilateral purchase
agreements.
Information regarding future payments under capacity purchase contracts is
contained in Note 13 of the Notes to Consolidated Financial Statements under the
caption "Power Purchase Agreements" on page 27 of the 1998 Annual Report to
Shareholders, which information is incorporated by reference in this Form 10-K
Annual Report.
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<PAGE> 13
Gas Operations
The Company distributes purchased natural gas, supplemented at times of peak
load by gas produced in its propane air gas plants.
As of December 31, 1998, the gas distribution system included 1,764 miles of
mains. The highest historical maximum firm daily gas sendout of 206,038 thousand
cubic feet ("Mcf") occurred on January 19, 1994. The maximum firm daily sendout
during 1998 occurred on December 30 and amounted to 151,577 Mcf.
Competitive Initiatives. As a result of initiatives at both the Federal and
state level to foster competition in the gas utility industry, the nature of the
gas operations of local gas distribution companies ("LDCs"), such as the
Company, has undergone certain changes, and it is expected that additional
changes will occur. At the Federal level, the FERC issued Order 636 in 1992,
which was aimed at increasing competition on interstate natural gas pipelines.
Information regarding the impact on the Company of FERC Order 636 is contained
in the 1998 Annual Report to Shareholders in the "Review of the Company's
Results of Operations and Financial Condition" on page 11 under the caption "Gas
Sales and Revenues," which information is incorporated by reference in this Form
10-K Annual Report. At the state level, the NYPSC, by its orders issued in March
and September 1996, approved gas utility restructuring plans designed to open
local natural gas markets to competition by allowing residential and small
commercial customers of LDCs to purchase gas from a variety of sources other
than the franchised local utility company. A discussion of competitive
initiatives at the state level is contained in Item 3, Legal Proceedings of this
Form 10-K under the caption "Regulatory Matters - Competition", as well as in
the 1998 Annual Report to Shareholders as follows: in the "Review of the
Company's Results of Operations and Financial Condition" beginning on page 6
under the caption "New York Competitive Opportunities Proceeding - Gas" and "Gas
Energy Costs" and in Note 13 of the Notes to Consolidated Financial Statements
under the caption "Gas Supply and Storage Contracts" on page 27, which
information is incorporated by reference in this Form 10-K Annual Report.
Accordingly, the following description of the Company's gas operations should be
read in conjunction with disclosures regarding regulatory competitive
initiatives contained elsewhere or incorporated by reference in this Form 10-K
Annual Report.
Supply, Transportation and Storage. The Company has both long-term and
short-term firm gas supply contracts with seven gas producers. Together these
contracts account for all of the Company's firm gas requirements and include a
contract with a Canadian producer which accounts for approximately 28% of firm
contracted supply and expires in the year 2002. Contracts for the remaining 72%
of the Company's firm gas supply have been executed with six domestic producers.
Four of these contracts are scheduled to expire in 1999. Replacement gas
supplies will be negotiated, consistent with the Company's firm gas
requirements. The remainder have expiration dates ranging between 2000 and 2010.
All of the gas supply contracts contain options for renewal and certain of the
agreements contain "re-opener" provisions which allow the Company to modify
price and operating terms under certain conditions.
In addition to its long-term and short-term contracted supply sources, the
Company purchases spot gas from producers primarily for the Company's use in
electric generation. During 1998, the Company made spot purchases of
approximately 30.8 million Mcf of gas or 60% of the total gas supply.
To supplement purchased gas, the Company manufactures gas at its propane air gas
plants located in Middletown, Orangeburg and Suffern, New York which have
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<PAGE> 14
a combined capacity of 30,600 Mcf per day of natural gas equivalent. This
capacity, together with gas purchases under contracts between the Company and
its suppliers, is expected to provide adequate peak day supplies to serve
existing customers.
In addition to the gas supply contracts, the Company has provided for the
transportation of gas through firm, long-term transportation agreements with
four major pipeline companies: Tennessee Gas Pipeline Company ("Tennessee"),
Columbia Gas Transmission Corporation ("Columbia"), Algonquin Gas Transmission
Company ("Algonquin") and Texas Eastern Transmission Corporation ("Texas
Eastern"). The transportation agreements with Tennessee will expire during
November 2000. Transportation contracts with the other three pipeline companies
have expiration dates from 2004 through 2012. The Company also has entered into
interruptible transportation agreements with the same pipeline companies. All
transportation contracts contain options for renewal.
With regard to gas storage, the Company also has long-term gas storage contract
arrangements with Tennessee, Columbia and Texas Eastern. The earliest expiration
date of any of these storage contracts is 2000 and all storage contracts contain
options for renewal.
As noted earlier, the Company's maximum firm daily sendout of gas occurred
during January 1994 and amounted to 206,038 Mcf. This compares to the maximum
daily firm gas delivery capability of 225,839 Mcf which is available from the
following sources: direct purchases - 118,471 Mcf; storage withdrawals - 76,768
Mcf; and Company manufactured gas - 30,600 Mcf.
Additional information regarding gas supply and gas storage contracts is
contained in Note 13 of the Notes to Consolidated Financial Statements under the
caption "Gas Supply and Storage Contracts" on page 27 of the 1998 Annual Report
to Shareholders, which material is incorporated by reference in this Form 10-K
Annual Report.
Transportation for Others. The Company provides firm and interruptible gas
transportation services for end users in its service territory who elect to
obtain their own direct gas supplies. During 1998, approximately 6.2 Bcf of gas
was transported for such end users.
Pipeline Capacity and Off-System Sales. As a result of the provisions of FERC
Orders 636 and 63, and in conjunction with the NYPSC Order in Case 92-G-0050,
the Company has marketed excess pipeline transmission capacity and has retained
certain profit levels attributable to both the marketed capacity and to
off-system gas sales. Information regarding these items is contained in the
"Review of the Company's Results of Operations and Financial Condition" under
the caption "Gas Sales and Revenues" on page 11 of the 1998 Annual Report to
Shareholders, which information is incorporated by reference in this Form 10-K
Annual Report.
Diversified Activities
Both the Company and RECO have certain non-utility subsidiaries which, at
December 31, 1998, were engaged in energy services ventures and land
development. The energy services ventures have now been suspended. The Company's
Consolidated Financial Statements, which are incorporated in this Form 10-K
Annual Report by reference to the Company's 1998 Annual Report to Shareholders,
include the results of operations of all diversified activities, including the
activities of the gas marketing business which has been discontinued and, as
such, are reported on the Company's consolidated financial statements as
"Discontinued Operations." Neither the assets of the remaining non-regulated
businesses nor the continued operation of the remaining non-regulated business
lines are material to the operations
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<PAGE> 15
of the Company. For these reasons, the disclosure related to the Company's
ongoing diversified activities, as prescribed by Regulation S-K, has, with few
exceptions, been omitted from other sections of this Form 10-K Annual Report.
Capital contributions to the non-utility subsidiaries by the Company and RECO
are borne by the Company's shareholders. Any profits, losses, or tax savings
from investments in non-utility subsidiaries accrue to such shareholders and are
not included in the cost of service for ratemaking purposes. A description of
the relevant non-utility subsidiaries of RECO and the Company follows.
Saddle River Holdings Corp. SRH, a wholly-owned subsidiary of RECO, was
established for the purpose of investing in non-utility business ventures. NMI,
an indirect subsidiary of SRH which was engaged in natural gas marketing, has
discontinued all gas marketing activities and the winding-up of the gas
marketing business is substantially complete. NMI is the sole general partner of
NORSTAR Partnership, of which NHI is the sole limited partner and Shell NORSTAR
Inc., a wholly-owned subsidiary of Shell Gas Trading Company, was a limited
partner until August 20, 1997. Additional information regarding the
discontinued gas marketing operations, including its effect on the Company's
consolidated financial position and results of operations, is contained in the
1998 Annual Report to Shareholders in the "Review of the Company's Results of
Operations and Financial Conditions" beginning on page 6 under the captions
"Discontinued Operations," "Financial Performance" and "Results of Operations,"
which information is incorporated by reference in this Form 10-K Annual Report.
Reference is also made to Note 3 of the Notes to Consolidated Financial
Statements on page 21 of the 1998 Annual Report to Shareholders, which
information is also incorporated by reference in this Form 10-K Annual Report.
Millbrook, a subsidiary of NHI, leases approximately twelve acres of non-utility
real estate in Morris County, New Jersey, pursuant to a renewable ten-year
leasehold agreement. In 1997, Millbrook secured an option to purchase the leased
property, or otherwise arrange for the transfer or sale of the property,
including Millbrook's leasehold interest, to a third party under an arrangement
that would defer payment until a third party sale is completed. A third-party
sales agreement is pending which is subject to the receipt of satisfactory
subdivision approvals. The Company does not expect that the sale of the
Millbrook property will have a material effect on the Company's results of
operations or financial condition.
Clove Development Corporation. Clove, a wholly-owned subsidiary of the Company,
holds approximately 5,200 acres of real estate, located primarily in the Mongaup
Valley region of Sullivan County, New York. Historically, Clove's revenues have
been derived primarily from the sale of timber and sand, property rentals and
periodic sales of land.
Certain portions of Clove's property lend themselves to recreational
development. Two small subdivisions have been developed and substantially sold
off. A third development, Lakeside Forest at Swinging Bridge, is being marketed.
O&R Development, Inc.. ORD, a wholly-owned subsidiary of the Company, was
established to promote industrial and corporate development within the Company's
service territory by providing improved sites and buildings. ORD owns
Interchange Commerce Center ("ICC Project"), a 220 acre tract of land in Orange
County, New York, which is being marketed for sale.
Additional information regarding the non-utility subsidiaries of the Company and
of RECO is contained in the 1998 Annual Report to Shareholders, which
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<PAGE> 16
information is incorporated by reference in this Form 10-K Annual Report, as
follows: in the "Review of the Company's Results of Operations and Financial
Condition" beginning on page 6 under the captions "Discontinued Operations,"
"Financial Performance," "Results of Operations" and "Diversified Activities";
and in the Notes to Consolidated Financial Statements beginning on page 19 in
Note 1 under the captions "Principles of Consolidation," in Note 3, and in Note
14.
Construction Program and Financing
Construction Program. The construction expenditures, excluding allowance for
funds used during construction, of the Company and its utility subsidiaries for
1999 are estimated at approximately $41 million, which consist primarily of
routine projects for capital replacements or system betterments, and does not
include any additions to generating capacity. This estimate includes
approximately four months of pre-divestiture spending related to the Company's
electric generating assets. If the sale of the generating assets is delayed, the
Company may incur additional capital expenditures related to generation assets.
The Company's construction program is under continuous review and the estimated
construction expenditures are, therefore, subject to periodic revision to
reflect, among other things, changes in energy demands, economic conditions,
environmental regulations, changes in the timing of construction activities, the
level of internally generated funds and other modifications to the construction
program.
Information regarding the Company's construction program is contained under the
caption "Liquidity and Capital Resources" in the "Review of the Company's
Results of Operations and Financial Condition" and under the caption
"Construction Program" in Note 13 of the Notes to Consolidated Financial
Statements on pages 13 and 27 respectively, of the 1998 Annual Report to
Shareholders, which material is incorporated by reference in this Form 10-K
Annual Report.
Financing. The Company has historically used short-term borrowings in the form
of commercial paper to finance construction expenditures when such expenditures
exceeded internally generated funds and to finance short-term working capital
requirements. Short-term borrowings undertaken for construction expenditures are
periodically repaid with internally generated funds and the proceeds of
long-term debt and equity offerings.
At December 31, 1998, the Company and its utility subsidiaries had unsecured
bank lines of credit totaling $160 million. Effective January 1, 1999, such
lines were reduced to $155 million. Commercial paper borrowings, which are
supported by such credit lines, amounted to $149.1 million at year end.
As a result of the planned divestiture of the Company's generating facilities,
it is expected that the Company will have approximately $225 million of net cash
proceeds from divestiture available at the close of the sale. Additional
information regarding the Company's short-term debt position is contained in
Note 9 of the Notes to Consolidated Financial Statements on page 24 of the 1998
Annual Report to Shareholders, which material is incorporated by reference in
this Form 10-K Annual Report.
The financing activities of the Company and its utility subsidiaries during 1998
consisted of a debt refinancing by Pike, and the repurchase of Company common
stock. During 1999, the Company expects, as required by the Merger Agreement, to
call for redemption all of its Non-Redeemable Cumulative Preferred Stock and all
of its Non-Redeemable Preference Stock (the "Preferred and Preference Stock")
outstanding. The Non-Redeemable Preference Stock is convertible into shares of
Common Stock, prior to redemption, at a ratio of
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<PAGE> 17
1.47 shares of Common Stock for each share of Preference Stock. In March 1999,
the Company issued $45 million in long-term debt to provide funds necessary to
call the Preferred and Preference Stock. Information regarding these activities
is found in the "Review of the Company's Results of Operations and Financial
Condition" under the caption "Liquidity and Capital Resources" on page 13 of the
1998 Annual Report to Shareholders as well as in Note 7, and Note 8 in the Notes
to Consolidated Financial Statements beginning on page 22 of the 1998 Annual
Report to Shareholders, which information is incorporated by reference in this
Form 10-K Annual Report.
Neither the Company nor its utility subsidiaries have any plans at the present
time for additional external financing other than the securities issued to
provide funds to call the Company's Preferred and Preference Stock. It is
expected that all other capital requirements will be met primarily with
internally generated funds, supplemented with short-term debt as required.
Information regarding certain financial statistics of the Company is contained
under the caption "Financial Statistics" on page 32 of the 1998 Annual Report to
Shareholders, which material is incorporated by reference in this Form 10-K
Annual Report.
Credit Ratings. The current ratings of the Company's principal securities and
its commercial paper are as follows:
<TABLE>
<CAPTION>
Moody's Standard Duff and Phelps
Investor's & Poor's Credit
Service, Inc. Corp. Rating Company
------------- ----- --------------
<S> <C> <C> <C>
Pollution Control Bonds A3 A- A
Unsecured Debt A3 A- A
Preferred Stock baa1 BBB+ A-
Commercial Paper P-2 A-2 D-1
</TABLE>
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.
Regulatory Matters
A description of the general character of rate regulation and its effect on the
financial statements of the Company and its utility subsidiaries, including a
disclosure of the Company's regulatory assets, is contained in Note 1 of the
Notes to Consolidated Financial Statements under the caption "Rate Regulation"
on page 19 of the 1998 Annual Report to Shareholders, which information is
incorporated by reference in this Form 10-K Annual Report.
State Regulation. The Company and its utility subsidiaries are subject to the
jurisdiction of state commissions in their respective states of incorporation.
The state commissions have the authority to regulate, among other things, rates,
services, the issuance of securities and accounting and depreciation procedures.
The Company is subject to the jurisdiction of the NYPSC, which covers
approximately 75% of consolidated utility energy sales. RECO is subject to the
jurisdiction of the NJBPU, which covers approximately 22% of consolidated
utility energy sales. Pike is subject to the jurisdiction of the PAPUC, which
covers approximately 1% of consolidated utility energy sales. Sales for resale,
which are subject to regulation by the FERC, accounted for approximately 2% of
consolidated utility energy sales.
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<PAGE> 18
Federal Regulation. The Company, pursuant to an order of the Securities and
Exchange Commission, has been exempted from all of the provisions of the Holding
Company Act, except Section 9(a)(2) thereof relating to the acquisition of
securities of other public utility companies.
The Company and its utility subsidiaries are subject to the jurisdiction of the
FERC as "public utilities." This regulation primarily relates to sales and
exchanges of electricity for resale, certain transportation, sales and exchanges
of natural gas under the Natural Gas Act, Company sales to its utility
subsidiaries and certain other matters including accounting, recordkeeping and
reporting.
Other Regulation. The Company and its utility subsidiaries are also subject to
regulation by various other Federal, state, county and local agencies under
numerous regulations dealing with, among other things, environmental matters,
energy conservation, long-range planning, fuel use, plant siting and gas
pricing.
Competitive Proceedings. Regulatory agencies at the Federal level as well as the
three states in which the Company has retail electric and gas franchises have
implemented certain changes and are evaluating other changes in regulatory and
rate-making practices designed to promote increased competition consistent with
safety, reliability and affordability standards. For the Company, these changes
have included, among other things, the NYPSC directive to divest its generating
assets, the expected implementation of full electric retail access during
mid-1999 and the potential effects of the NYPSC Policy Statement regarding the
transition of gas utilities exiting the gas merchant function. As a result of
these initiatives, and depending on future developments in this area, the
Company's market share and profit margins will become subject to competitive
pressures in addition to regulatory constraints with respect to both its
electric and gas operations. A discussion of the current Federal and state
competitive initiatives with respect to electric and gas operations is contained
in Item 3, Legal Proceedings, of this Form 10-K under the captions
"Restructuring Litigation" and "Regulatory Matters - Competition." Reference is
also made to the 1998 Annual Report to Shareholders in the "Review of the
Company's Results of Operations and Financial Condition" beginning on page 6
under the captions "Competition" "Electric Sales and Revenue" and "Gas Energy
Costs" and in the Notes to Consolidated Financial Statements beginning on page
19 in Note 5 and in Note 13 under the caption "Gas Supply and Storage
Contracts", which material is incorporated by reference to this Form 10-K Annual
Report.
Current Rate Activities. Information regarding recent electric and gas rate
activities of the Company and its utility subsidiaries, including the gas base
rate increase petition filed by the Company with the NYPSC on December 30, 1998,
is contained in the 1998 Annual Report to Shareholders in the "Review of the
Company's Results of Operations and Financial Condition" on page 9 under the
caption "Rate Activities", which information is incorporated by reference to
this Form 10-K Annual Report. Reference is also made to Item 3, Legal
Proceedings of this Form 10-K under the caption "Rate Activities".
Utility Industry Risk Factors and Competition
The electric and gas utility industry is exposed to many of the general business
and financial risks which affect all industries on a local, national or
international level. It is also exposed to business and financial risks that are
particular to the provision of utility services and to operating a business in a
changing regulated environment. In particular, the industry is exposed to risks
relating to, among other things, increasing competition in
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<PAGE> 19
the wholesale power markets and a move to competition in the retail sector;
uncertainties regarding the transition mechanisms, both operating and financial,
as the industry moves to deregulation, including the potential for stranded, or
non-recoverable, costs; increases in fuel costs and uncertainties as to fuel
supplies; numerous environmental restrictions, including potential liabilities
for environmental matters; regulatory constraints, including the timing and
adequacy of rate relief; increases in the cost of, and delays in, construction
in an industry which is fixed-asset intensive; the attraction of capital in an
industry which is capital intensive; the effects of energy conservation and
weather related sales fluctuations, both of which have the potential of causing
revenue erosion; and the requirement to provide for growth in demand for energy
services.
In addition, there are competitive factors present in the electric and gas
industry which affect utility companies in varying degrees. Among these are the
use by interruptible or dual-fuel customers of lower priced alternative fuels;
the establishment of municipal distribution agencies; the ability of gas
producers to sell gas directly to end users, usually through an independent gas
marketer; the presence of cogenerating systems, small power producers and
independent power producers; and the increasing interest in, and research on,
the development of energy sources other than those now in use. In addition,
regulatory agencies in the states in which the Company has retail electric and
gas franchises are currently evaluating, and have implemented, changes in
regulatory and ratemaking practices designed to promote increased competition.
Depending on future development in this area, the Company's market share and
profit margins are expected to become subject to competitive pressures in
addition to regulatory constraints.
As the electric and gas industries move to increased competition and potential
deregulation, the Company has taken an active role in the competitive
opportunities proceedings in the states in which it operates and has worked
extensively with industry groups and the NYPP in designing the future framework
for the utility industry. With regard to such proceedings in New York State, the
NYPSC approved the Company's Restructuring Plan during 1997. The Restructuring
Plan, which provides the framework for the transition to a competitive market
for the Company's electric operations, provided for the sale of the Company's
generation assets. On November 24, 1998, the Company entered into agreements
with three subsidiaries of SEI for the sale of the Company's generating assets.
The sales price of approximately $480 million, which includes Con Ed's share of
proceeds from the jointly-owned Bowline Point plant, will provide the Company
with a modest gain over book cost and expense of sale, thereby eliminating the
risk of stranded costs related to the sale price of generation assets. With the
sale of its generating assets, the Company has eliminated future risks related
to the ownership and operation of electric generating facilities. In addition,
as a result of the approval of the Restructuring Plan by the NYPSC, certain
aspects of risk associated with the transition to a competitive electric market
have been mitigated. This includes, among other things, a Competitive Transition
Charge ("CTC") which provides for the recovery of above-market generation costs
should the transfer of title to the Company's generation assets not occur before
May 1, 1999. A discussion of the CTC is contained under Item 3, Legal
Proceedings, of the Form 10-K Annual Report under the heading "New York
Competitive Opportunities Proceedings." Information regarding the competitive
initiatives undertaken at the Federal and state levels with regard to the
Company's electric and gas utility operations as well as information on the
provisions of the Company's Restructuring Plan and the divestiture of its
electric generating assets is contained in the 1998 Annual Shareholders Report
in the "Review of the Company's Results of Operations and Financial Condition"
beginning on page 6 under the captions "Major Developments - 1998 -
Divestiture," "Competition" and "Gas Energy Costs" and in the Notes to
Consolidated Financial Statements
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<PAGE> 20
beginning on page 19 in Note 1 under the caption "Rate Regulation," Note 5, and
Note 13 under the captions "Gas Supply and Storage Contracts" and "Legal
Proceedings - Restructuring Litigation," which information is incorporated by
reference in this Form 10-K Annual Report.
The Company is committed to continue to manage the risks which are present in
the changing utility environment. Included in this strategy are the maintenance
of low construction and operating budgets and minimizing external financing.
With regard to future power supply, and as provided in the Restructuring Plan,
this will involve maintaining, through prudent and competitive purchasing
policies, energy and capacity sufficient to act as the provider of last resort
for those customers who do not purchase electricity from other sources.
In addition, rate procedures which are in effect for the Company's New York gas
operations have the effect of mitigating certain risks related to the effect of
weather on the Company's gas sales. Information concerning the gas weather
normalization adjustment is contained under the caption "Gas Sales and Revenues"
in the "Review of the Company's Results of Operations and Financial Condition"
on page 11 of the 1998 Annual Report to Shareholders, which material is
incorporated by reference in this Form 10-K Annual Report. Reference is also
made to the caption "Future Energy Supply and Demand" in this Item 1.
The problems associated with nuclear energy have not affected the Company as it
has no operating nuclear plants nor any under construction, and has no plans for
future participation in nuclear projects.
Environmental Matters
The Company is subject to regulation by Federal, state, county and, to some
extent, local authorities with respect to the environmental effects of its
operations, including regulations relating to air and water quality, aesthetics,
levels of noise, hazardous wastes, toxic substances, protection of vegetation
and wildlife and limitations on land use. In connection with such regulation,
various permits are required with respect to the Company's facilities. The sale
by the Company of its electric generating facilities will impact the extent to
which the Company remains subject to the environmental regulations discussed
below. Generally, the principal environmental areas and requirements to which
the Company is subject are as follows:
Water Quality. The Company is required to comply with Federal and State water
quality statutes and regulations, including the Federal Clean Water Act ("Clean
Water Act"). The Clean Water Act requires that Company generating stations be in
compliance with state issued State Pollutant Discharge Elimination System
Permits ("SPDES permits"), which prescribe applicable conditions to protect
water quality. Effective July 1, 1994, the State of New York Department of
Environmental Conservation ("NYSDEC") issued a SPDES permit for the Company's
Lovett Coal Ash Management Facility, which expires July 1, 1999. A renewal
application was filed on October 8, 1998. The NYSDEC also has issued a SPDES
permit, effective October 1, 1991 for the Company's Lovett generating station.
The Lovett SPDES permit expired on October 1, 1996. Since a renewal application
was filed within the statutory deadline, the expired permit remains in effect
until a new permit is issued by the NYSDEC.
The Bowline Point generating station currently operates under a SPDES permit
which expired on October 1, 1992. This permit remains in effect since a permit
renewal application was filed within the statutory deadline for renewal
application. The Company is now proceeding with the State Environmental
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<PAGE> 21
Quality Review Act ("SEQRA") process as part of the permit renewal procedure.
The SEQRA process, and the resulting delay in issuance of a new permit to the
Company, has had no practical impact on the operation of the Bowline Point
generating station.
The Company entered into a settlement with the United States Environmental
Protection Agency ("EPA") and others that relieved the Company for at least 10
years from a regulatory agency requirement that, in effect, would have required
that cooling towers be installed at the Bowline Point generating station. In
return, the Company agreed to certain plant modifications, operating
restrictions and other measures. This settlement expired in May 1991. Pursuant
to an Interim Agreement between the Company, the NYSDEC and others, as well as a
Consent Order, including extensions to the Consent Order, by which the Company
agreed to certain operating limitations and biological monitoring requirements,
the Bowline Point plant has continued to operate without cooling tower
installation. The most recent extension of the Consent Order expired on February
1, 1998. The parties are currently negotiating another extension of the Consent
Order. During the negotiation process, the Company will continue to abide by the
operating limitations and biological monitoring requirements set forth in the
Consent Order.
Air Quality. Under the Federal Clean Air Act ("Clean Air Act"), the EPA has
promulgated national primary and secondary air quality standards for certain
pollutants, including sulfur dioxides, particulate matter and nitrogen oxides.
The NYSDEC has adopted, and the EPA has approved, the New York State
Implementation Plan ("SIP") for the attainment, maintenance and enforcement of
these standards. In order to comply with the SIP, the Company burns #6 fuel oil
with a 0.37% maximum sulfur content by weight at its Lovett and Bowline Point
generating stations.
Pursuant to the SIP, the Company is governed by the following limitations when
it is burning coal at Lovett Units 4 and 5: if one unit is burning, the Company
may emit sulfur dioxide at a rate not to exceed 1.5 lb./MMBTU, and if two units
are burning, the Company may emit sulfur dioxide at a rate not to exceed 1.0
lb./MMBTU per unit.
The Company and the NYSDEC entered into an Order and Consent, dated as of August
18, 1998, in DEC Index No. D3-9000-97-08, relating to the occurrence of excess
opacity exceedances in violation of 6 NYCRR Section 227 and ECL Section 19-0301
at the Company's Bowline Point and Lovett Generating Stations. Under the terms
of the Order on Consent, the Company paid $20,000 to settle excess opacity
exceedances for quarterly periods prior to the execution of the Order on Consent
and agreed to a stipulated schedule of penalties in the event of future excess
opacity exceedances.
The SIP provides a mechanism for air emissions fee billing pursuant to Title V
of the Clean Air Act. The owners of Title V sources in New York State, which
sources include the Company's Lovett and Bowline Point Plants and the Shoemaker
and Hillburn Gas Turbines are required to pay an emission fee based upon actual
air emissions reported to NYSDEC at a rate of approximately $32.64 per ton of
air emissions. In 1998, the Company paid approximately $430,800 in such emission
fees, approximately $46,700 of which was recovered from Con Ed pursuant to the
Bowline Point Plant operating agreement. In 1999, this emission fee will be
based on 1998 air emissions at a rate established by the NYSDEC not to exceed
$50 per ton.
The Clean Air Act Amendments of 1990 could restrict the Company's ability to
meet increased electric energy demand after the year 2000 or could substantially
increase the cost to meet such demand. The Company has spent approximately $28.7
million to comply with the Reasonably Available Control
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<PAGE> 22
Technology ("RACT") Phase I emissions limitations for nitrogen oxide established
by the NYSDEC to achieve ozone attainment. New York and eleven other member
states of the Ozone Transport Commission have entered into a Memorandum of
Understanding which calls for the states to adopt more stringent nitrogen oxide
emissions limits for Phases II and III reductions. Phases II and III are to take
effect in May 1999 and May 2003, respectively. The NYSDEC will propose
regulations that will establish an annual NOx allocation program during the
ozone season (May - September) to limit emissions. The Company does not
anticipate incurring additional capital costs to comply with these requirements.
The EPA finalized, during July 1997, new national ambient air quality standards
for ozone and particulate matter. The Company will continue to assess the impact
of the Clean Air Act Amendments of 1990 and new ozone and particulate matter
standards on its power generating operations as additional regulations
implementing these Amendments and standards are promulgated.
Toxic Substances and Hazardous Wastes. The Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("Superfund"), provides that both the
owners and operators of facilities where releases of hazardous substances into
the environment have occurred or are imminent, and the generators and
transporters of hazardous substances disposed of at the facilities, are,
regardless of fault, jointly and severally liable for all response, removal and
remedial action costs and also for damages to natural resources.
As part of its operations, the Company generates materials which are deemed to
be hazardous substances under Superfund. These materials include asbestos and
dielectric fluids containing polychlorinated biphenyls ("PCBs"), both of which
are disposed of at licensed, off-site locations not owned by the Company. Other
hazardous substances may be generated in the course of the Company's operations
or may be present at Company-owned locations.
The Company has, from time to time, received process or notice of claims under
Superfund or similar state statutes relating to sites at which it is alleged
that hazardous substances generated by the Company (and, in most instances, by a
large number of other potentially responsible parties) were disposed of. Similar
claims may be asserted from time to time hereafter, involving additional sites.
Typically, many months, and sometimes years, are required to determine fully the
probable magnitude of the cleanup costs for a site, the extent, if any, of the
Company's responsibility, the number and responsibility of other parties
involved, the financial ability of the other parties to pay their proportionate
share of any costs, and the probable ultimate liability exposure, if any, of the
Company. This process is still under way at most of the sites of which the
Company has notice, and the costs at some of these sites may be substantial. The
Company does not believe that certain proceedings will have a material effect on
the Company, while as to others, the Company is unable at this time to estimate
what, if any, costs it will incur.
Information concerning certain Superfund claims involving the Company is
included in Item 3, "Legal Proceedings" of this Form 10-K Annual Report.
Environmental Expenditures. The Company's environmental expenditures amounted to
approximately $15.4 million in 1998.
Compliance with Federal, state and local laws and regulations which have been
enacted or adopted regulating the discharge of materials into the environment
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<PAGE> 23
or otherwise relating to the protection of the environment is not anticipated to
have a material effect on the financial condition of the Company.
The Company's projected environmental expenditures are under continuous review
and are revised periodically to reflect changes in environmental regulations,
inflation, technology and other factors which are beyond the control of the
Company. Although the Company is unable to predict the ultimate impact of
environmental regulations on existing or proposed facilities or on the
operations of the Company, the Company believes that its expenditures for
compliance with environmental regulations will be given appropriate rate
treatment by the respective regulatory commissions.
Information concerning environmental issues and their potential effect on the
Company's operations is included in Note 13 of the Notes to Consolidated
Financial Statements under the captions "Environmental Litigation" and
"Environmental" beginning on page 28 of the 1998 Annual Report to Shareholders,
which information is incorporated by reference in this Form 10-K Annual Report,
as well as in Item 3 "Legal Proceedings" of this Form 10-K Annual Report.
Research and Development
The Company supports research and development agencies involved in utility
research, provides funds for joint utility research projects and conducts its
own internal program. Research and development expenditures amounted to
approximately $2.1 million in 1998, $2.4 million in 1997 and $2.6 million in
1996.
The Company provides support to national agencies such as the Electric Power
Research Institute and the Gas Research Institute. At the state level, the
Company supports the Empire State Electric Energy Research Corporation, the New
York State Energy Research and Development Authority and the New York Gas Group.
The Company's internal research and development program includes projects which
seek improvement of transmission and distribution systems and enhancement of the
value of electric energy for customers. Current projects include an evaluation
of the performance characteristics of underground distribution cable, Year 2000
compliance solutions, distributed resources/alternative planning tools, storm
planning, intranet technologies, on-line graphic circuit tool and order
generator and the automation of group operated air breaker switches. Additional
information regarding the Company's Year 2000 compliance strategy is contained
on page 13 of the 1998 Annual Report to Shareholders in the "Review of the
Company's Results of Operations and Financial Condition" under the caption "Year
2000 Compliance," which information is incorporated by reference in this Form
10-K Annual Report.
Franchises
The Company and its utility subsidiaries, RECO and Pike, have municipal consents
or franchises, together with their corporate or charter powers, which give each
of them the right to carry on their respective operations in the territories
served. The municipal consents or franchises held by the Company and its utility
subsidiaries are not exclusive. In certain municipalities, the areas served by
the Company, RECO and Pike are limited either by the terms of the consents or
franchises or by order of the NYPSC, the NJBPU, or the PAPUC, respectively.
Under the present provisions of the State laws of New York, New Jersey and
Pennsylvania, no other private corporation can commence public utility
operations in any part of the territories now served by the
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<PAGE> 24
Company, RECO or Pike, respectively, without obtaining a certificate of public
convenience and necessity from the applicable state utility commission.
A certificate of public convenience and necessity would not be required with
respect to a municipality furnishing electric or gas service within its borders
under the present provisions of the state laws of New York, New Jersey or
Pennsylvania. Municipal corporations, upon compliance with the state laws of New
York, New Jersey or Pennsylvania, as applicable, are authorized to acquire the
public utility service of any public utility company by purchase or by
condemnation. The Company does not expect any municipal corporation to acquire
the public utility service of the Company or its utility subsidiaries through
either purchase or condemnation.
The municipal consents or franchises of the Company and its utility subsidiaries
are not uniform and contain, in certain instances, provisions relating to, among
other things, the time of commencing operations, the furnishing of service to
the particular municipality, the approval by the municipal authorities of the
location and construction of distribution facilities, indemnification of the
municipality against liabilities and damages in consequence of construction, and
administrative matters. Such provisions are not considered by the Company to be
unduly burdensome.
As discussed in Item 3, Legal Proceedings, of this Form 10-K under the caption
"Regulatory Matters - Competition," efforts are underway in New York, New Jersey
and Pennsylvania to restructure the electric utility industry. The Company, RECO
and Pike all have proposed to open their franchise service territories to full
retail competition by May 1, 1999. Unless otherwise ordered by the respective
state utility commissions, the Company, RECO and Pike will remain the provider
of last resort of energy and capacity and will remain the electric distribution
company in their respective franchise territories.
Employee Relations
At December 31, 1998, the Company had 1,396 full-time employees and 31 part-time
employees. The Company considers its relationship with its employees to be
satisfactory. The current contract with Local 503 of the International
Brotherhood of Electrical Workers ("IBEW") representing 844 production,
maintenance, commercial and service employees of the Company became effective
June 1, 1997 and expires June 1, 2000. This contract does not cover supervisory
employees.
As a result of the planned sale of the Company's electric generating assets to
SEI, the Company will experience a reduction in its workforce relative to
electric production department personnel and related support personnel. SEI has
agreed to honor the current collective bargaining agreement between the Company
and the affected bargaining unit employees and it is expected that the Company's
affected bargaining unit employees will become employees of SEI. Some of the
Company's non-bargaining unit electric production department employees and
support personnel have been offered employment with SEI. The Company has agreed
to provide career management, outplacement services and certain benefits to
affected management employees not offered employment with SEI. Any changes
affecting bargaining unit employees must be negotiated with the IBEW. In
addition, the Merger Agreement between the Company and CEI provides that CEI
will honor the current collective bargaining agreement between the Company and
its affected bargaining unit employees. The Merger Agreement further provides
that subject to applicable law and obligations under applicable collective
bargaining agreements, for a period of three years following the Merger, any
reductions in workforce in respect of employees of the Company and its
subsidiaries will be made on a fair and equitable basis as
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<PAGE> 25
determined by the Surviving Corporation, without regard to whether employment
was with the Company, CEI, or either company's subsidiaries, and with due
consideration to prior experience and skills. Generally, any employee whose
employment is terminated or job is eliminated during such period will be
entitled to participate in the job opportunity and employment placement programs
offered by CEI or the Company or any of their subsidiaries for which they are
eligible. Any workforce reductions carried out following the Merger by the
Company and its subsidiaries will be done in accordance with all applicable
collective bargaining agreements and all laws and regulations governing the
employment relationship and termination thereof including, without limitation,
the Worker Adjustment and Retraining Notification Act and regulations
promulgated thereunder, and any comparable state or local law. Information
regarding the separation of employees and the recovery of employee costs
associated with the divestiture and the merger is included in Item 3, Legal
Proceedings, of this Form 10-K under the caption "Regulatory Matters -
Competition," as well as in the 1998 Annual Report to Shareholders in the
"Review of the Company's Results of Operations and Financial Condition"
beginning on page 6 under the captions "Divestiture," "Termination Benefits
Relating to Divestiture" and "Termination Benefits Relating to the Merger,"
which information is incorporated by reference in this Form 10-K Annual Report.
The Company's utility subsidiaries, RECO and Pike, have no employees other than
officers. All services are performed for the utility subsidiaries by employees
of the Company pursuant to Joint Operating Agreements approved by the NJBPU and
the PAPUC, through which the Company is reimbursed for these services. Several
employees of the Company provide managerial and clerical services for the
non-utility subsidiaries of the Company and of RECO, the cost of which are
either paid directly by the subsidiaries or are reimbursed to the Company
through periodic billings. In addition, the non-utility subsidiaries, at
December 31, 1998, had 11 full-time employees and one part-time employee, none
of whom were participants in the Company's various employee benefit plans or
were covered by the Company's contract with the IBEW.
ITEM 2. Properties
The Company's property consists primarily of electric generation, transmission
and distribution facilities and gas distribution facilities. This property is
required for the continued operation of the Company's major business segments.
In addition, the Company maintains certain miscellaneous utility and non-utility
property. The Company's facilities are in satisfactory condition, are suitable
for the particular purpose for which they were acquired, and are adequate for
the Company's present operations.
Sale of Generating Assets. On November 24, 1998, the Company entered into
definitive transaction agreements for the sale of all of the Company's
generating assets to subsidiaries of Southern Energy, itself a subsidiary of The
Southern Company. The facilities to be sold to Southern Energy include the
Lovett Plant, the Bowline Point Plant, including Con Edison's two-thirds share
of the plant, the gas turbine generating units and all of the hyroelectric
generating units. The sale is subject, among other closing conditions, to
receipt of specified federal and state regulatory approvals. Additional
information regarding the planned divestiture of the Company's electric
generating facilities is contained in the 1998 Annual Report to Shareholders as
follows: in the "Review of the Company's Results of Operations and Financial
Condition" on page 7 under the caption "Divestiture" and in Note 5 of the Notes
to Consolidated Financial Statements on page 22, which information is
incorporated by reference in this Form 10-K Annual Report. Reference is also
made to Item 1 of this Form 10-K under the caption
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<PAGE> 26
"Divestiture of Electric Generating Assets" and to Item 3, Legal Proceedings
under the caption "Regulatory Matters - Competition."
Electric Generating Facilities. The Company's generating plants, all of which
are located in New York State, are as follows:
<TABLE>
<CAPTION>
Maximum
Summer Percent Net Mwh
Net Mw of Total Generated
Plant Name Units Energy Source Capacity Capacity in 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Swinging Bridge,
Mongaup & Rio 8 Hydroelectric 25.8 2.6% 47,754
Grahamsville 1 Hydroelectric 18.0 1.8 81,273
Hillburn 1 Jet Fuel/Gas 37.0 3.8 6,859
Shoemaker 1 Jet Fuel/Gas 37.0 3.8 17,373
Lovett 3 Coal/Oil/Gas 462.6 47.2 2,072,746
Bowline Point 2 Oil/Gas 400.6(1) 40.8 1,603,022
----- ----- ---------
981.0 100.0% 3,829,027
===== ===== =========
</TABLE>
(1) Company's share of maximum summer net megawatt capability.
Electric Transmission and Distribution Facilities. The Company and its utility
subsidiaries own, in whole or in part, and operate overhead and underground
transmission and distribution facilities which include 617 circuit miles of
transmission lines, 77 substations, 87,416 in-service line transformers, 5,014
pole miles of overhead distribution lines and 2,398 miles of underground
distribution lines. With the exception of the Grahamsville Substation, the
electric transmission and distribution facilities of the Company and its utility
subsidiaries are located within the Company's New York, New Jersey and
Pennsylvania service territory, which is described under the caption "Principal
Business" in Item 1 of this Form 10-K. The Bowline Substation and the related
transmission facilities are jointly owned by the Company and Con Ed and are
operated by the Company. The Ramapo Substation and certain related transmission
facilities consist of property which is either owned by the Company, owned by
Con Ed or jointly owned by the Company and Con Ed and which is operated and
maintained by the Company except for the 500/345 Kv section of the Ramapo
substation and a 500 Kv transmission line which is operated and maintained by
Con Ed. In addition, certain minor portions of substation equipment are jointly
owned by the Company and major customers of the Company.
Gas Facilities. The Company owns and operates three propane air gas plants at
Middletown, Orangeburg and Suffern, New York, and the Company and Pike own their
gas distribution systems, which are located within their gas franchise
territories in New York and Pennsylvania and include 1,764 miles of mains.
Miscellaneous Properties. The Company owns office buildings and operating
facilities in Middletown, Spring Valley, Blooming Grove and West Nyack, New
York, and other structures at different locations within the Company's service
territory which are used as offices, service buildings, store houses and
garages. The Company leases its corporate headquarters in Pearl River, New York,
as well as office space at other locations. In addition, the Company has lease
agreements covering certain of its data processing equipment, office equipment
and vehicle fleet.
Character of Ownership. The Company's electric and gas plants and its major
electric substations are located on land owned by the Company in fee, except for
the Grahamsville Plant and the Bowline Point Plant. The greater portion of the
Grahamsville Plant is located on land leased from The City of New York, and the
Bowline Point Plant is located on land in which the Company has a one-
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<PAGE> 27
third undivided interest, with the remainder being owned by Con Ed. Water power
and flowage rights for the operation of its Mongaup River Hydro Plants are
controlled by the Company either through ownership of the necessary land in fee
or through easements which are, in practically all cases, perpetual. In the case
of the Grahamsville Plant, however, water is obtained under contract with the
City of New York.
Electric transmission facilities of the Company and its utility subsidiaries
(including substations) are, with minor exceptions, located on land owned in fee
or occupied pursuant to perpetual easements. Electric distribution lines and gas
mains are located in, on or under public highways or private lands pursuant to
lease, easement, permit, municipal consent, agreement or license, express or
implied through use by the Company or its utility subsidiaries without objection
by the owners. In the case of distribution lines, the Company and its utility
subsidiaries own approximately 60% of the poles upon which their wires are
installed and have a joint right of use in the remaining poles on which their
wires are installed, which poles are owned, in most cases, by telephone
companies.
The Company's electric and gas plants are owned by the Company except for the
Bowline Point Plant which is jointly owned with Con Ed and operated by the
Company. The gas turbines at Hillburn and Shoemaker which were leased, were
purchased by the Company from the lessor, effective February 1, 1999 in
preparation for divestiture. Additional information regarding the investment in
the Bowline Point Plant by the Company and Con Ed is included in Note 1 of the
Notes to Consolidated Financial Statements under the caption "Jointly Owned
Utility Plant" on page 20 of the 1998 Annual Report to Shareholders, which
material is incorporated by reference in this Form 10-K Annual Report.
Substantially all of the utility plant and other physical property of the
Company's utility subsidiaries, RECO and Pike, is subject to the liens of the
respective indentures securing first mortgage bonds of each company.
ITEM 3. Legal Proceedings
Restructuring Litigation:
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. Details concerning the Competitive
Opportunities Proceeding are contained under the subheading "Regulatory Matters
- - Competition" in this Item 3. 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.
On November 26, 1996, the Supreme Court issued a ruling denying the Article 78
petition. In its ruling, the Court determined that because the Commission has
not yet directed retail wheeling, generation deregulation and asset divestiture,
there is no justiciable controversy regarding these issues. Despite this
finding, the Court proceeded to opine that the Commission is not precluded by
state or Federal law from ordering retail wheeling or generation divestiture.
The Court also determined that the utilities are not entitled, as a matter of
law, to recover from customers the full amount of the utilities' strandable
costs. On December 24, 1996, the Energy Association and the New York utilities
appealed to the Appellate Division of the Supreme Court for the
- 24 -
<PAGE> 28
Third Judicial Department from the Supreme Court's November 26, 1996 decision.
The Supreme Court of the State of New York, Appellate Division, Third
Department, has granted several motions by the petitioners for an extension of
time to perfect the appeal. By Decision and Order on Motion dated March 11,
1999, the Appellate Division has granted a motion to extend the time to perfect
appeals to June 9, 1999. The Company's Restructuring Plan requires the Company
to petition the Appellate Division to withdraw its appeal. This petition must
be filed "following final Commission approval of this agreement" ("i.e., when
any appeals from such approval are exhausted or the time to appeal has
expired"). On April 30, 1998 the Public Utility Law Project of New York, Inc.
("PULP") instituted litigation in New York State Supreme Court against the NYPSC
and the Company challenging the Company's Restructuring Plan. The NYPSC and the
Company each filed a Motion to Dismiss this litigation on May 26, 1998. The
Court denied these Motions on September 1, 1998 and ordered that PULP's action
be converted into an Article 78 proceeding. The Company is unable to predict the
final result of this litigation.
Environmental Litigation and Administrative Proceedings:
On March 29, 1989, the New Jersey Department of Environmental Protection
("NJDEP") issued a directive under the New Jersey Spill and Control Act to
various potentially responsible parties ("PRPs"), including the Company, with
respect to a site formerly owned and operated by Borne Chemical Company in
Elizabeth, Union County, New Jersey, ordering certain interim actions directed
at both site security and the off-site removal of certain hazardous substances.
Certain PRPs, including the Company, signed an administrative consent order with
the NJDEP requiring them to remove and dispose of the hazardous substances
located above ground at the Borne site, which removal and disposal was completed
on June 22, 1992. In October 1995, the PRPs entered into an additional
administrative consent order with the NJDEP which obligated the PRPs, including
the Company, to perform a remedial investigation to determine what, if any,
subsurface remediation at the Borne site is required. The remedial investigation
is proceeding. The Company does not believe that this matter will have a
material effect on the financial condition of the Company.
On May 29, 1991, a group of ten electric utilities (the "Metal Bank Group")
entered into an Administrative Consent Order with the United States
Environmental Protection Agency ("EPA") to perform a remedial investigation and
feasibility study ("RIFS") at the Cottman Avenue/Metal Bank Superfund site in
Philadelphia, Pennsylvania. Polychlorinated biphenyls ("PCBs") have been
discharged at the Cottman Avenue site from an underground storage tank and the
handling of transformers and other electrical equipment at the site. On May 25,
1994, the Company entered into a tolling agreement pursuant to which the Metal
Bank Group reserved its right to file suit against the Company while the Metal
Bank Group and the Company entered into discussions to determine the extent of
the Company's involvement with the Cottman Avenue site. The RIFS was completed
and submitted to the EPA for determination of what remedial measures will be
required at the Cottman Avenue site. On February 10, 1998, the Company received
a letter from the EPA related to this site. The letter encloses, inter alia, the
Record of Decision ("ROD") executed by the EPA on December 31, 1997, which
presents the final remedial action selected for the site (estimated by the EPA
to cost approximately $17.2 million on a present worth basis). The letter
formally notifies the Company of its potential liability with respect to the
site; formally demands reimbursement for costs paid by the EPA (with interest)
in conducting and/or overseeing response
- 25 -
<PAGE> 29
actions at the site; notifies the Company of a limited period of formal
negotiations for an agreement under which the Company would implement the
requirements of the ROD; and includes other related documents.
On July 6, 1998, the EPA issued an administrative order to the Company and the
members of the Metal Bank Group ordering them to commence remediation of the
site. On July 28, 1998, the Metal Bank Group and the Company notified the EPA of
their intent to proceed with the work required by the July 6, 1998 order. By
letter dated September 22, 1998, EPA selected the Metal Bank Group's consultant
to perform the remedial design for the site. The consultant has developed and
the Metal Bank Group has submitted a draft remedial design work plan to EPA for
comment.
On November 23, 1998 the Company executed a settlement agreement with the Metal
Bank Group wherein they agreed that the Company would become a member of the
Metal Bank Group and that the Company would pay the Metal Bank Group $350,000,
which represents the Company's share of costs incurred by the Metal Bank Group
at the Cottman Avenue site through July 20, 1998. On November 30, 1998 the
Company executed the Cottman Avenue PRP Group amended agreement, thereby
becoming a member of the Metal Bank Group. This agreement allocated to the
Company 4.57% of shared costs. The Company's share of costs to join the Metal
Bank Group, as well as a provision for the Company's share of the projected
liability, are included in the Company's Consolidated Financial Statements at
December 31, 1998.
On August 2, 1994, the Company entered into a Consent Order with the New York
State Department of Environmental Conservation ("NYSDEC") in which the Company
agreed to conduct a remedial investigation of certain property it owns in West
Nyack, New York. PCBs have been discovered at the West Nyack site. Petroleum
contamination related to a leaking underground storage tank has been found as
well. The Company has completed this remedial investigation. The Company and the
NYSDEC have executed a second Consent Order to implement a ROD, dated October
20, 1997 issued by the NYSDEC. The ROD provides for the removal and off-site
disposal of soils contaminated with PCBs and other petroleum-related
contaminants and the post-remedial monitoring of groundwater. The Company
completed all remediation at the West Nyack site in April 1998 except for the
ongoing groundwater monitoring which will continue through March 2000. The
Company anticipates that the NYSDEC will determine whether any additional
groundwater remediation will be required once such monitoring is completed. The
Company does not believe that this matter will have a material effect on the
financial condition of the Company.
The Company has identified seven former Manufactured Gas Plant ("MGP") sites
which were owned or operated by the Company or its predecessors. The Company may
be named as a PRP for these sites under relevant environmental laws, which may
require the Company to clean up these sites. To date, no claims have been
asserted against the Company. The Company and the NYSDEC have executed a Consent
Order, dated as of January 8, 1996, which provides for preliminary site
assessments of these seven MGP sites. Preliminary Site Assessment ("PSA")
reports for four sites were submitted to the NYSDEC on September 1, 1997. These
reports showed varying degrees of contamination at each of the sites which
necessitates further investigation. The Company entered into a Consent Order
dated September 29, 1998 to conduct an RIFS at each of these sites. Field
investigations began in October 1998 and are ongoing. The Company anticipates
that final reports will be submitted to NYSDEC in the third quarter of 1999. In
addition, the Company has completed PSAs at two of its other MGP sites and
submitted PSA reports to NYSDEC in September 1998. Since MGP contamination was
found at each of these two sites, the Company expects that an RIFS will need to
be performed at these sites. Due to difficulties in obtaining access, the
Company has not commenced a PSA for its MGP site located
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<PAGE> 30
in Nyack, New York. The Company currently is negotiating a separate consent
order with NYSDEC for this MGP site, as well as an access agreement with the
current site owner. The Company is unable at this time to estimate the total
costs to be incurred at the seven MGP sites.
The Company has been named as a defendant or third-party defendant in a number
of proceedings involving alleged personal injuries, primarily to construction
workers, as a result of exposure to asbestos at facilities owned and operated by
the Company. Discovery with regard to these cases will determine, among other
things, if the plaintiffs in each of these cases worked at Company facilities.
The Company anticipates that similar asbestos-related claims may be asserted
against the Company from time to time in the future. However, at this time the
Company does not believe that the asbestos-related lawsuits currently
outstanding, nor those which may be brought in the future, will, individually or
in the aggregate, have a material effect on the financial condition of the
Company.
Superfund and certain similar state statutes authorize various governmental
authorities to issue orders compelling responsible parties to take cleanup
action at sites determined to present an imminent and substantial danger to the
public and to the environment because of an actual or threatened release of
hazardous substances. As discussed above, the Company is a party to a number of
administrative and litigation proceedings involving potential impact to the
environment. Such proceedings arise out of, without limitation, the operation
and maintenance of facilities for the generation, transmission and distribution
of electricity and natural gas. Information regarding the Company's involvement
in these various proceedings is included in Note 13 of the Notes to Consolidated
Financial Statements under the caption "Environmental" on page 28 of the 1998
Annual Report to Shareholders, which information is incorporated by reference in
Item 1 of this Form 10-K Annual Report, as well as under the subheading,
"Environmental Matters" of this Form 10-K Annual Report. As noted above, the
Company does not believe that certain proceedings will have a material effect on
the Company, while as to others, the Company is unable at this time to estimate
what, if any, costs it will incur.
Other Litigation:
On November 19, 1996, the Company was served with a Summons and Complaint in a
litigation entitled Crossroads Cogeneration Corporation v. Orange and Rockland
Utilities, Inc., filed in the United States District Court for the District of
New Jersey. The litigation relates to a power sales agreement between the
Company and Crossroads Cogeneration Corporation ("Crossroads"), which requires
the Company to purchase electric capacity and associated energy from a
cogeneration facility in Mahwah, New Jersey. The Complaint alleges damage claims
for breach of contract, breach of the implied covenant of good faith and fair
dealing and violations of the Federal antitrust laws and seeks a declaration of
Crossroads' rights under the Agreement. By Opinion and Order dated June 30, 1997
("Order"), the Court dismissed Crossroads' Complaint in its entirety with
prejudice and dismissed Crossroads' cross-motion for partial summary judgment as
moot. Crossroads filed an appeal from the Order to the United States Court of
Appeals for the Third Circuit. On October 27, 1998, the United States Court of
Appeals for the Third Circuit issued its decision in this case. The Third
Circuit confirmed the trial court's dismissal with prejudice of Crossroads
Federal antitrust claims but rejected the trial court's determination that the
NYPSC's November 29, 1996 decision was determinative of Crossroads' state
contract claims. This case has been remanded to the United States District Court
for the District of New Jersey. The Company cannot predict the ultimate outcome
of this proceeding.
- 27 -
<PAGE> 31
On March 9, 1998, three shareholders of the Company filed a purported derivative
action on behalf of the Company alleging various claims against its directors,
several current officers and one former officer, certain other defendants and
nominally against the Company. Plaintiffs filed the action, entitled Virgilio
Ciullo, et al. V. Orange and Rockland Utilities, Inc. et al, in the Supreme
Court of the State of New York, County of New York. The complaint was
subsequently amended several times to assert additional purported derivative and
class action claims. Plaintiffs were seeking various types of relief, including
compensatory damages in the approximate amount of $120 million. By order dated
January 8, 1999 and entered on January 12, 1999, the State Supreme Court granted
defendants' motion to dismiss the complaint and denied plantiffs' motion to
further amend their complaint to add additional causes of action. On February
10, 1999, plaintiffs filed a notice of appeal from the trial court's decision to
the Appellate Division, First Department.
Regulatory Matters:
Merger with Consolidated Edison, Inc.
On May 10, 1998, the Company, CEI, and Merger Sub, entered into the Merger
Agreement, providing for a merger transaction among the Company, CEI and the
Merger Sub. Certain Federal and state regulatory requirements must be complied
with before the Merger is consummated. For a discussion of the status of the
regulatory filings made by the Company regarding the Merger, see Item 1 of this
Form 10-K under the heading "Merger with Consolidated Edison, Inc."
Competition
Regulatory agencies at the Federal level as well as the three states in which
the Company has retail electric franchises are currently evaluating changes in
regulatory and rate-making practices designed to promote increased competition
consistent with safety, reliability and affordability standards. Depending on
ongoing developments in this area, the Company's market share and profit margins
will become subject to competitive pressures in addition to regulatory
constraints. A discussion of current Federal and state competitive initiatives
follows.
Electric
Federal Initiative. On April 24, 1996, the FERC issued its final order (FERC
Order 888) requiring electric utilities to file non-discriminatory open access
transmission tariffs that would be available to wholesale sellers and buyers of
electric energy. The order also provided for the recovery of related legitimate
and verifiable strandable costs subject to FERC's jurisdiction. The Company's
open access transmission tariff, as originally filed with the FERC on July 9,
1996 and amended through October 1997, offers transmission service and certain
ancillary services to wholesale customers on a basis that is comparable to that
which it provides itself. The Company is operating under the filed tariff,
subject to refund, pending final FERC approval of the Company's filing. The
Company participates in the wholesale electric market primarily as a buyer of
energy and, as a result, Order 888 is not expected to materially impact the
Company's financial condition or results of operations.
On January 31, 1997, the Company, in conjunction with the other members of the
NYPP, filed tariffs with the FERC seeking permission to restructure the NYPP
into an ISO. On December 19, 1997, the Company and the other members of the NYPP
made a supplemental filing with the FERC which provides for a revised ISO
governance structure. In an Order dated January 27, 1999, the FERC conditionally
accepted the proposed ISO Tariff and the proposed market rules
- 28 -
<PAGE> 32
of the ISO. The Order requires substantial modifications to the proposed ISO
Tariff including separation of the transmission tariff from the rate schedules
that govern non-transmission functions. The NYPP members must submit a revised
monitoring program to identify both the exercise of market power and market
design flaws. The FERC also set a hearing to consider certain rate issues and
noted that an application pursuant to Section 203 of the Federal Power Act
requesting transfer of control of all necessary facilities from the NYPP members
to the ISO must be submitted to and approved by the FERC. The NYPP members filed
such Section 203 applications with the FERC on February 5, 1999. The Company is
unable to predict when the ISO will become operational.
New York Competitive Opportunities Proceeding. On May 20, 1996, the NYPSC issued
an order setting forth its vision and goals for the future of the electric
industry in New York. The order endorsed a fundamental restructuring of the
industry based on competition in the generation and energy services sectors of
the industry.
On November 26 and December 31, 1997, the NYPSC issued orders approving the
Restructuring Plan, which had been filed on November 6, 1997 by the Company, the
NYPSC Staff and other parties in the Company's Competitive Opportunities
Proceeding (Case 96-E-0900). The Restructuring Plan provides for the sale of all
of the Company's generating assets (i.e., all units at the Lovett Generating
Station, the Company's one-third interest in the Bowline Generating Station, as
well as its hydro-electric facilities and gas turbines) and for lower electric
rates.
Under the terms of the Restructuring Plan, which covers a four-year period
commencing with NYPSC approval, the Company has agreed to commence immediately
the process of auctioning all of its generating assets. In accordance with the
schedule in the Restructuring Plan, the Company filed its final divestiture plan
("Divestiture Plan") with the NYPSC on February 4, 1998. The Divestiture Plan,
which provides for a two phase auction process, was approved by the NYPSC in
orders issued April 16, 1998 and May 26, 1998. The Company retained Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") to act as its financial advisor
in connection with the divestiture of the generating assets.
Following the review of final bids and negotiations with the winning bidder, on
November 24, 1998, the Company entered into four separate Asset Sales Agreements
("ASAs") with subsidiaries of SEI, a subsidiary of The Southern Company. The
sales price for all generating facilities, including the two-thirds interest in
Bowline Point Generating Plant ("Bowline") owned by Con Edison, is approximately
$480 million, plus certain fuel inventory and other adjustments. The Company's
share of the sales price is approximately $345 million. The sale is subject to
federal and state regulatory review and approval. The ASAs provide for the
closing of the sale to occur on April 30, 1999, which date may be adjusted
depending on the receipt of regulatory approvals. Under the terms of the ASA, if
approval by FERC of the establishment of the ISO, as described above, has not
been obtained, the parties have agreed to defer the closing of the sale, but in
no event to a date later than August 31, 1999.
The Restructuring Plan provides that the New York share of any net book gains
from the divestiture of the generating assets will be shared between the
Company's New York customers and shareholders, with shareholders receiving 25
percent of the gain, up to $20 million.
The terms of the Restructuring Plan permit the Company to defer and recover up
to $7.5 million (New York electric share) of prudent and verifiable non-officer
employee costs associated with the divestiture, such as retraining,
- 29 -
<PAGE> 33
outplacement, severance, early retirement and employee retention programs. Under
the terms of the Restructuring Plan, the Company will be authorized to petition
the NYPSC for recovery of employee costs in excess of $7.5 million. In addition,
the Restructuring Plan provides for the recovery of all prudent and verifiable
costs of the sale.
In addition, the terms of the Restructuring Plan permit the Company to retain
all earnings up to an 11.4% return on equity and provide that earnings in excess
of 11.4% are to be shared, with 75% to be used to offset NYPSC approved
deferrals or otherwise inure to the Company's customers, and 25% to be retained
by the Company's shareholders. The Company's existing PowerPick(TM) program,
whereby customers can purchase energy (but not capacity) from suppliers other
than the Company, will be expanded to all customers on May 1, 1999. The
Restructuring Plan further provides that full retail access to a competitive
energy and capacity market will be available for all customers by May 1, 1999.
Unless otherwise ordered by the NYPSC, the Company will remain the provider of
last resort.
The Restructuring Plan also provides for electric price reductions of
approximately $32.4 million over its four-year term and for recovery, through a
Competitive Transition Charge ("CTC"), of above-market generation costs should
the transfer of title to the Company's generating assets not occur before May 1,
1999. Under the terms of the Restructing Plan, should a CTC be required, the
Company would be authorized to recover the difference between its non-variable
costs of generation, including 75% of fixed production labor expenses and
property taxes, and the revenues, net of fuel and variable operating and
maintenance expenses, derived from the operation of the Company's generating
assets in a deregulated competitive market. If title to the generating assets
has not transferred as of May 1, 2000, the CTC would be modified so as to allow
a maximum recovery of 65% of fixed production labor expenses and property taxes.
The modified CTC would remain effective until the earlier of the date title to
the generating assets is transferred or October 31, 2000. In the event title to
the generating assets is not to be transferred by October 31, 2000, the Company
would be authorized to petition the NYPSC for permission to continue a CTC until
the date title to the generating assets is transferred. The CTC does not allow
for the recovery of inflationary increases in non-fuel operating and maintenance
production costs, property tax increases, wage rate increases, or increased
costs associated with capital additions or changes in the costs of capital
applicable to production costs.
The Restructuring Plan indicates that reciprocity would be required in order to
implement retail access. That is, if utility generators are allowed access to
the Company's retail customers, the Company shall be permitted equal access to
the customers of those utilities within New York State, if it so chooses.
The Restructuring Plan also provides a schedule for the submission of comments
by the Company, the NYPSC Staff and other interested parties to the NYPSC on the
degree and timing of introducing competition in metering and billing services.
The NYPSC initiated proceedings in these areas during 1998. The Company cannot
predict at this time the ultimate outcome of the proceedings or their effect, if
any, on the Company's consolidated financial position or results of operations.
Settlement agreements, providing for the implementation of unbundled rates,
effective May 1, 1999, which separate the components of existing tariffs into
production, transmission, distribution and customer cost categories, were
reached on August 13 and September 18, 1998 between the Company, the NYPSC Staff
and other interested parties. The NYPSC approved these settlement agreements
with minor modification by Order dated February 4, 1999.
- 30 -
<PAGE> 34
Additional information on the provisions of the Restructuring Plan is contained
below under "Regulatory Matters: Rate Activities - New York Electric."
New Jersey - Energy Master Plan. On April 30, 1997, the NJBPU issued an order
"Adopting and Releasing Final Report in its Energy Master Plan Phase II
Proceeding to Investigate the Future Structure of the Electric Power Industry
(Docket No. EX 94120585Y)." The Order required RECO and other New Jersey
investor owned electric utilities each to file unbundled rates, a stranded cost
proposal and a restructuring plan by July 15, 1997. As part of its stranded cost
proposal, the NJBPU has required that each utility provide a 5-10% rate
reduction.
RECO's filing was made on July 15, 1997. The filing includes a Restructuring
Plan, a Stranded Costs Filing and an Unbundled Rates Filing.
On December 8, 1997, RECO submitted an Amended and Restated Restructuring Plan
and Stranded Costs Filing with the NJBPU to reflect the fact that the Company
has committed to divest all its generating assets by auction.
The Restructuring Plan calls for RECO to remain a regulated transmission and
distribution company within a holding company structure. Standards of Conduct
and Affiliate Rules have been proposed in order to promote effective competition
and ensure that regulated operations do not subsidize unregulated operations.
RECO has proposed to implement full retail competition (energy and capacity) for
all customers by May 1, 1999, the same date approved for retail access in New
York. As discussed below, the recently approved New Jersey restructuring
legislation would delay the implementation of full retail access between June 1
and August 1, 1999. With the implementation of retail competition, RECO proposes
to continue to serve as the "provider of last resort" for those customers who do
not choose an alternate provider or whose provider defaults.
In its Stranded Costs Filing, RECO has identified two categories of potential
stranded costs: generation investment and power purchase contracts with
non-utility generators ("NUGS"). Divestiture of the Company's generating assets
will determine their market value and the related stranded costs, if any. RECO
proposes to recover its share of stranded generation investment, if any, through
regulated delivery rates by means of a Market Transition Charge ("MTC"). The MTC
would be in effect over a period of up to eight years, commencing May 1, 1999.
Stranded NUG contract payments are proposed to be recovered over the remaining
life of the contracts through a non-bypassable wires charge also assessed by the
regulated delivery company. Given the results of the sale of the Company's
generation facilities, it is likely that RECO's stranded costs will be limited
to uneconomic NUG contracts, which the proposed legislation provides for
recovery over the life of the contract.
RECO also made an Unbundled Rates Filing which separates the components of
existing tariffs into production, transmission, distribution and customer cost
categories. The Unbundled Rates Filing, which was updated on January 30, 1998,
would serve as the basis to segregate the costs of the generation function from
rates in order to facilitate customer choice. In addition, the MTC mechanism
would be added to the existing rate structure to allow for recovery of stranded
costs, and a non-bypassable societal benefits charge would be created as a
billing mechanism for mandated public policy programs.
Hearings with respect to RECO's filings were held in the spring of 1998 and a
decision is pending. The NJBPU has indicated that it will consider RECO's
filings in conjunction with its implementation of the recently enacted
legislation described in the next sentence. On January 28, 1999, the New
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<PAGE> 35
Jersey Assembly and Senate approved restructuring legislation which provides for
the implementaton of full retail access by no earlier than June 1, 1999 and no
later than August 1, 1999. In addition, the legislation requires rate reductions
of at least 5% at the start of retail access from the level of aggregate rates
in effect on April 30, 1997 and of at least an additional 5% within thirty-six
months of the start of retail access. Further, these reductions must be
sustained for a total of four years from the start of retail access. In
addition, the proposed legislation authorizes the NJBPU to establish "shopping
credits" for those customers choosing an alternative supplier of electricity.
New Jersey's Governor signed this legislation into law on February 9, 1999. RECO
has proposed to reduce its annual net revenue (revenue net of fuel, purchased
power and applicable taxes) by $4.3 million, or 5.1%, effective with the
implementation of retail competition. Until a procedural schedule is established
by the NJBPU to address RECO-specific issues, the Company is unable to predict
the outcome of this proceeding or its effect, if any, on the Company's
consolidated financial position or results of operations.
Pennsylvania - Competition Legislation. On December 3, 1996, the "Electricity
Generation Customer Choice and Competition Act" ("Act") was signed into law by
the Governor of the Commonwealth of Pennsylvania. The Act provides for a
transition of the Pennsylvania electric industry from a vertically integrated
structure to a functionally separated model that permits direct access by
customers to a competitive electric generation market while retaining the
existing regulation and customer protections in the transmission and
distribution systems. The transition plan of the Act calls for a three year
phase-in of retail access with one-third of customers being phased in on each
January 1st beginning in 1999. The Act also provides for the opportunity for
recovery of prudent and verifiable costs resulting from the restructuring
through the implementation of a Competitive Transition Charge ("CTC") for a
period of up to nine years and the imposition of rate caps designed to prevent a
customer's total electric costs from increasing above current levels during the
transition period. In addition, the Act permits the refinancing of certain
approved transition costs through the issuance of bonds secured by revenue
streams guaranteed by the PAPUC. The savings associated with this financing
mechanism will be used to reduce strandable costs.
On September 30, 1997, in accordance with the requirements of the Act, Pike
submitted its electric restructuring filing to the PAPUC. On December 15, 1997,
Pike submitted an amended and restated electric restructuring filing with the
PAPUC to reflect the fact that the Company has committed to divest all of its
generating assets by auction. In this amended and restated filing, Pike proposed
that full retail competition be implemented for all customers by May 1, 1999,
the same date approved for retail access in New York. With the implementation of
retail competition, Pike proposes to continue to serve as the "provider of last
resort" for those consumers who do not choose an alternate provider, or whose
alternate provider defaults. Pike proposed to remain a regulated transmission
and distribution company within a holding company structure.
On September 30, 1997, Pike also submitted proposed unbundled rates which
separate the components of existing tariffs into production, transmission,
distribution and customer cost categories. This filing was updated on January
30, 1998.
On May 15, 1998, Pike reached a settlement agreement which resolved all issues
in the restructuring and rate unbundling proceeding. On July 23, 1998, the PAPUC
approved Pike's electric restructuring settlement agreement. The agreement calls
for implementation of full retail access by May 1, 1999, provides for unbundled
electric rates, including a CTC which allows full
- 32 -
<PAGE> 36
recovery of all stranded costs and a Basic Generation Service charge for
customers who remain with Pike for generation services. In addition, the
settlement allows shareholders to retain $55,000 of Pike's pro rata share of any
gain on the sale of the Company's generating facilities.
Gas
New York. In 1996, the NYPSC approved utility restructuring plans designed to
open up the local natural gas market to competition. As part of the utility
restructuring, the NYPSC has required LDCs to provide firm transportation
service, thereby allowing residential and small commercial customers of LDCs the
ability to purchase, through aggregation groups, gas supplies from a variety of
sources, other than the LDC.
On November 3, 1998, the NYPSC issued a Policy Statement Concerning the Future
of the Natural Gas Industry in New York State and Order Terminating Capacity
Assignment (the "Policy Statement"). The Policy Statement envisions a three to
seven year transition for gas utilities to exit the gas merchant function. To
further this process and increase gas competition in the State, the NYPSC has
directed that gas utilities no longer require customers migrating from sales to
transportation service to continue utilizing upstream pipeline capacity
contracted for by the utility, except where specific operational or reliability
requirements warrant. According to the Policy Statement, utilities will be
provided a reasonable opportunity to recover strandable costs. The Company
ceased requiring transportation customers to utilize its upstream capacity as of
October 1, 1998. As of December 31, 1998, the Company has not incurred any
stranded costs related to its upstream pipeline capacity.
As the transition to a competitive retail market develops, the Company will
determine what supply, transportation and storage contracts it will maintain. As
the Company moves to a competitive market, traditional cost recovery may be
replaced by performance or market-based mechanisms.
Rate Activities
Gas
New York. On June 5, 1997, the NYPSC issued an Order Requiring the Filing of
Proposals to Ameliorate Gas Price Volatility and Requesting Comments in Case
97-G-0600, In the Matter of the Commission's Request for Gas Distribution
Companies to Reduce Gas Cost Volatility and Provide for Alternative Gas
Purchasing Mechanisms. Under the Order, gas utilities in New York were required
to submit proposals for fixed-price gas sales options to be available for use by
all customers during the 1997-1998 heating season.
The Company's proposal, as approved by the NYPSC in October 1997, provided a
fixed-price commodity cost option to firm sales customers for the 1997-1998
heating season. The option was limited to ten percent of customers in each
eligible customer class. The NYPSC order provided that costs associated with any
variations between gas utilized by customers electing the fixed-price option and
volumes locked in by the Company, to the extent prudently incurred, will be
recoverable. Approximately 2,500 customers participated in this program.
On December 30, 1998, the Company filed a gas base rate case with the NYPSC, the
Company's first such filing since 1991. The Company's rate year cost of service
justifies an increase in gas revenue of $13 million, or 8.2%. This increase is
due primarily to gas construction expenditures necessary to maintain a safe and
reliable infrastrcture, property tax increases and expenditures for
environmental investigation and remediation. In order to
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<PAGE> 37
avoid a sudden and relatively large rate increase, the Company is limiting its
rate year request to an increase of $3.9 million, or 2.5%. The Company's
proposal to limit the increase to $3.9 million is conditioned on the approval of
the following provisions: the Company has requested that it be allowed to (1)
continue to defer environmental investigation and remediation costs associated
with its former manufactured gas plant sites and its West Nyack, New York
facility; (2) defer prospective increases in gas property tax expense; (3)
amortize deferred credits associated with pension and management audit costs
over a two-year period; and (4) amortize, over a two-year period, a $4 million
depreciation reserve credit which represents the difference between book and
theoretical reserve as well as the remaining balance from a previous
depreciation study.
The Company also has proposed a second stage adjustment to gas rates to take
effect October 1, 2000 and a third stage adjustment to take effect October 1,
2001. These adjustments would include the following: (1) inflation on all
operation and maintenance expenses other than fixed amortizations and taxes
other than income taxes; (2) recovery of any deferred property tax expense; (3)
recovery of carrying costs and depreciation on the forecasted increases in rate
base for the ensuing rate year due to increases in plant in service less
depreciation reserves and deferred income taxes related to gas plant and the gas
portion of common plant; and (4) recovery of previously deferred environmental
investigation or remediation costs.
As discussed in Item 1 of this Form 10-K under the heading "Merger with
Consolidated Edison, Inc.," under the terms of the proposed settlement agreement
submitted to the NYPSC, the Company has agreed to withdraw this gas base rate
case upon consummation of the Merger and may not file to increase its gas rates
prior to December 1, 1999.
By statute, the NYPSC has eleven months to issue a final decision on the
Company's filing. If the gas rate case is not withdrawn, an Administrative Law
Judge will establish the procedural schedule for the proceeding.
Electric
New York. On May 3, 1996, the NYPSC approved, subject to modifications required
by the NYPSC decision in the New York Competitive Opportunities Proceeding (as
previously discussed), a Settlement Agreement ("1996 Agreement") among the
Company, NYPSC Staff and other parties which resolved all remaining revenue
requirement issues in the proceeding for a three-year period commencing May 1,
1996, and concluding April 30, 1999. Under the 1996 Agreement, the Company
reduced its annual electric retail revenues in New York by an additional $7.75
million, or 2.3%, effective May 1, 1996. The settlement provides for several
performance mechanisms related to service reliability and customer service, and
the elimination of all revenue and most expense reconciliation provisions of the
RDM. The 1996 Agreement provides the Company with the opportunity to retain all
New York electric earnings up to a 10.9% return on equity annually for each of
the next three years. Earnings in excess of 10.9% would be shared equally
between customers and shareholders. The Restructuring Plan increased this
earnings threshold to 11.4%. Earnings in excess of 11.4% will be shared as
follows: 75% to be used to offset NYPSC-approved deferrals or otherwise inure to
the benefit of customers and 25% to be credited to the Company's shareholders.
The 1996 Agreement implements several competitive initiatives sought by the
Company. These include price reductions, the offering of service guarantees and
the introduction of PowerPick(TM) - an innovative retail access program that
allows participating customers to choose their electric energy supplier. The
PowerPick(TM) program was expanded as part of the Restructuring Plan.
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<PAGE> 38
On December 1, 1997, as part of the Restructuring Plan, the Company implemented
the first year of the electric rate reduction in the amount of $5.9 million. An
incremental rate reduction of $2.9 million was implemented, as part of the
Restructuring Plan, on December 1, 1998.
Additional information on New York electric rate activities is contained in the
previous discussion of the New York Competitive Opportunities Proceeding.
New Jersey. The NJBPU on January 8, 1997 approved a stipulation among New Jersey
utilities, NJBPU Staff and NJ Division of Ratepayer Advocate which provides a
recovery plan for costs associated with the change in accounting required by
Statement of Financial Accounting Standards No. 106, "Employer Accounting for
Postretirement Benefits Other Than Pensions." The approved plan provides several
alternative recovery mechanisms. RECO received approval from the NJBPU on
December 17, 1997 to begin amortizing these costs effective January 1, 1998.
On January 23, 1997, a residential customer of RECO filed a petition with the
NJBPU requesting a lowering of RECO's rates by $21.2 million, or 16%, based on
financial data for the twelve months ended December 31, 1995 as adjusted. A
central issue raised by the petition is whether RECO's continued purchase of all
of its power supply requirement from the Company continues to be appropriate
when alleged lower cost energy is available from other sources. On January 23,
1998, the NJBPU issued an Order in this proceeding which required that this
petition be held in abeyance pending the outcome of RECO's unbundling, stranded
cost and restructuring filings. RECO believes that this petition is without
merit and intends to contest it vigorously.
Cautionary Statement Regarding Forward-Looking Information
This document contains forward-looking statements with respect to the financial
condition, results of operations and business of the Company in the future,
which involve certain risks and uncertainties. Actual results or developments
might differ materially from those included in the forward-looking statements
because of factors such as competition and industry restructuring, changes in
economic conditions, changes in laws, regulations or regulatory policies,
uncertainties relating to the ultimate outcome of the Merger and the sale of the
Company's generating assets, the outcome of certain assumptions made in regard
to Year 2000 (Y2K)issues, the outcome of litigation being materially unfavorable
to the Company and other uncertainties. For all of those statements, the Company
claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock, par value $5.00 per share ("Common Stock"), is
listed on the New York Stock Exchange under the ticker symbol ORU. At
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<PAGE> 39
December 31, 1998, there were 17,650 holders of record of the Company's Common
Stock.
During December 1997, the Company initiated a Common Stock Repurchase Program
pursuant to which a total of 136,300 shares of the Company's Common Stock were
repurchased at an average price of $45.72 before the program was discontinued
during the second quarter of 1998.
As a result of the Merger Agreement, and contingent upon the receipt of
regulatory approval of the Merger Agreement, it is expected that the Company's
Common Stock will be purchased by CEI during the second quarter of 1999. The
purchase price, as stated in the Merger Agreement, will be $58.50 per share.
Additional information regarding the Common Stock Repurchase Program and the
Merger Agreement is contained in the 1998 Annual Report to Shareholders in the
"Review of the Company's Results of Operations and Financial Condition"
beginning on page 6 under the captions "Major Developments - 1998 - Merger" and
"Liquidity and Capital Resources" as well as in the Notes to Consolidated
Financial Statements beginning on page 19 in Note 4 and Note 7, which
information is incorporated by reference in this Form 10-K Annual Report.
During 1998, dividend payments were made to holders of the Company's Common
Stock on February 1, May 1, August 1 and November 1. Quarterly market price and
dividend information on the Company's Common Stock is as follows:
<TABLE>
<CAPTION>
Quarter High Low Dividend
------- ---- --- --------
<S> <C> <C> <C> <C>
1998 1 $47 3/8 $42 13/16 $.645
2 54 1/2 40 .645
3 55 53 5/16 .645
4 57 1/16 53 9/16 .645
1997 1 $36 7/8 $35 3/8 $.645
2 35 5/8 30 1/8 .645
3 37 5/16 32 5/16 .645
4 48 5/8 35 .645
</TABLE>
Information regarding the restriction of retained earnings for dividend payments
is contained in Note 6 of the Notes to Consolidated Financial Statements on page
22 of the 1998 Annual Report to Shareholders, which material is incorporated by
reference in this Form 10-K Annual Report.
ITEM 6. Selected Financial Data
The information required by this Item is contained under the captions "Financial
Statistics - Common Stock Data," and "Financial Statistics - Selected Financial
Data" on page 32 of the 1998 Annual Report to Shareholders, which material is
incorporated by reference in this Form 10-K Annual Report.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this Item is contained under the caption "Review of
the Company's Results of Operations and Financial Condition" on pages 6 through
14 of the 1998 Annual Report to shareholders, which material is incorporated by
reference in this Form 10-K Annual Report.
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<PAGE> 40
ITEM 8. Financial Statements and Supplementary Data
The financial statements and supplementary financial information required by
this Item are contained on pages 15 through 30 of the 1998 Annual Report to
Shareholders, which material is incorporated by reference in this Form 10-K
Annual Report. Such information is listed in Item l4(a)(1) "Financial
Statements" of this Form 10-K Annual Report.
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
Directors
Under the Company's Certificate of Incorporation and By-Laws, the members of the
Board of Directors of the Company are classified into three classes, one of
which is elected at each annual meeting of common shareholders to hold office
for a three-year term until successors of such class are elected and qualified.
There are currently nine Directors. As of the Effective Time, each of the
Directors of the Company will resign and the Directors of the Merger Sub at the
Effective Time will be the Directors of the Surviving Corporation.
Shown below as to each Director is the person's age as of March 1, 1999, term
of office as a Director, period of service as a Director, membership on
committees of the Board of Directors, as applicable, and business experience
for at least five years.
<TABLE>
<CAPTION>
Name, Age, Term, and
Period of Service Business Experience Past Five Years
- -------------------- -----------------------------------
<S> <C>
Ralph M. Baruch, 56 Member, Compensation Committee
Term expiring in 1999 and Executive Committee.
Director since 1983 Communications Consultant. Mr.
Baruch was the founder of Viacom,
International, Inc. ("Viacom"), New
York, New York, a diversified
communications and entertainment
company and served as its Chief
Executive Officer from 1971 to 1983
and its Chairman of the Board of
Directors from 1983 to 1987. Mr.
Baruch was a Consultant to Viacom
from 1987 until 1998 and was a
Senior Fellow, Gannett Center for
Media Studies at Columbia
University from 1987 until 1988.
Mr. Baruch was President of Ralph
M. Baruch, Inc., a communications
consulting firm, from 1987 to 1992.
</TABLE>
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<PAGE> 41
<TABLE>
<CAPTION>
Name, Age, Term, and
Period of Service Business Experience Past Five Years
- -------------------- -----------------------------------
<S> <C>
J. Fletcher Creamer, 72 Member, Compensation Committee.
Term expiring in 2000 Chairman of the Board of Directors
Director since 1987 and Chief Executive Officer, J.
Fletcher Creamer & Son, Inc.,
Hackensack, New Jersey, a
construction company, since 1982.
Director, Commerce Bank/North.
Michael J. Del Giudice, 56 Chairman of the Board of
Term expiring in 1999 Directors of the Company, Pearl
Director since 1988 River, New York, since February
1998, and of RECO and Pike, utility
subsidiaries of the Company, since
April 1998. Member, Audit Committee
and Executive Committee. Managing
Director, Millennium Credit
Markets, LLC, New York, New York,
an investment banking firm, since
November 1997 and of Millennium
Capital Markets, LLC from 1995 to
November 1997. Mr. Del Giudice was
a Managing Director and Partner of
Lazard Freres & Co., LLC, New York,
New York, an investment banking
firm, from 1985 to 1995, and Senior
Vice President of Shearson Loeb
Rhoades & Co. from 1981 to 1983.
Jon F. Hanson, 62 Chairman, Audit Committee.
Term expiring in 2000 Chairman, Hampshire Management
Director since 1995 Company, Hackensack, New Jersey, a
real estate investment and
management firm, since 1976.
Director, Prudential Insurance
Company of America, United Water
Resources, Inc., Consolidated
Delivery Logistics, Inc., Neuman
Distributors, Inc. and Fleet Trust
and Investment Services Company,
N.A.
Kenneth D. McPherson, 64 Director, RECO since 1995.
Term expiring in 2000 Chairman, Compensation Committee
Director since 1993 and Member, Executive Committee.
Senior Partner, Waters, McPherson,
McNeill, P.C., Secaucus, New
Jersey, a law firm, since 1963.
</TABLE>
- 38 -
<PAGE> 42
<TABLE>
<CAPTION>
Name, Age, Term, and
Period of Service Business Experience Past Five Years
- -------------------- -----------------------------------
<S> <C>
Robert E. Mulcahy III, 62 Member, Audit Committee.
Term expiring in 2001 Director of Athletics, Rutgers
Director since 1997 University, Piscataway, New Jersey
since April 1998. President and
Chief Executive Officer, New Jersey
Sports and Exposition Authority,
East Rutherford, New Jersey, a
competitive sports and
entertainment management
organization, from 1979 until April
1998. Director, Wickes Lumber
Company.
James F. O'Grady, Jr., 71 Chairman, Executive Committee and
Term expiring in 2001 Member, Compensation Committee.
Director since 1980 President, O'Grady and Associates,
Vero Beach, Florida, a media
brokerage and consulting firm,
founded in 1986. President,
International Communications
Management Corp., a consulting and
television and radio program
production and syndication firm,
since 1996. Vice President, Allcom
Marketing Corp., Goshen, New York,
from 1987 until 1996. Director, SFX
Entertainment Corp., Video for
Broadcast, Inc. and The Insurance
Broadcast System, Inc. Mr. O'Grady,
an attorney, has been Of Counsel to
the law firm of Cahill & Cahill,
Brooklyn, New York, since 1986.
</TABLE>
- 39 -
<PAGE> 43
<TABLE>
<CAPTION>
Name, Age, Term, and
Period of Service Business Experience Past Five Years
- -------------------- -----------------------------------
<S> <C>
D. Louis Peoples, 58 Vice Chairman of the Board of
Term expiring in 2001 Directors and Chief Executive
Director since 1994 Officer of the Company, Pearl
River, New York, and of RECO and
Pike since 1994. Member, Executive
Committee. Mr. Peoples was
Executive Vice President and a
member of the Board of Directors of
Madison Gas and Electric Company,
Madison, Wisconsin, an
investor-owned electric and gas
utility, from 1992 to 1993. He was
Senior Vice President of
RCG/Hagler, Bailly, Inc., San
Francisco, California, a management
consulting firm specializing in
energy and environmental affairs,
from 1991 to 1992. Director, United
Services Automobile Association, a
unitary bank holding company and
insurance company.
Linda C. Taliaferro, 51 Director, Pike since 1995.
Term expiring in 2000 Member, Audit Committee. Member,
Director since 1990 Taliaferro & Associates,
Harrisburg, Pennsylvania, a law
firm, since 1991. President and
founder, The Talin Group,
Harrisburg, Pennsylvania, a
management development and training
firm, an independent affiliate of
Resource Associates Corp., Mohntan,
Pennsylvania since January 1999.
Ms. Taliaferro was a partner in the
law firm of Reed Smith Shaw &
McClay, Harrisburg, Pennsylvania
from 1988 to 1991. Ms. Taliaferro
was a Commissioner of the PAPUC
from 1979 until 1988, and served as
its Chair from 1983 until 1987.
</TABLE>
- 40 -
<PAGE> 44
Executive Officers
All of the officers of the Company are appointed on an annual basis at the first
Board of Directors' meeting following the annual meeting. The following list
includes one Company employee who, due to the policy making function he performs
for the Company, is considered an executive officer under SEC criteria, but who
is not an officer of the Company and who is not appointed on an annual basis.
Shown below as to each officer is the person's age as of March 1, 1999, title
and business experience for at least five years.
<TABLE>
<CAPTION>
Name, Age, and Title Business Experience Past Five Years
- -------------------- -----------------------------------
<S> <C>
D. Louis Peoples, 58 Vice Chairman of the Board and Chief
Vice Chairman of the Executive Officer since July 1994.
Board of Directors and Executive Vice President, and a member
Chief Executive Officer of the Board of Directors, Madison Gas and
Electric Company, Madison, Wisconsin from
1992 to 1993.
R. Lee Haney, 59 Senior Vice President and Chief
Senior Vice President and Financial Officer since April 1996.
Chief Financial Officer Vice President and Chief Financial Officer
from September 1994 to April 1996. Senior
Vice President Marketing and Customer
Service, San Diego Gas & Electric Co., from
January 1993 until September 1994.
G. D. Caliendo, 58 Senior Vice President, General Counsel
Senior Vice President, and Secretary since April 1996. Vice
General Counsel President, General Counsel and Secretary
and Secretary from March 1995 to April 1996. Senior Vice
President, General Counsel and Secretary,
Pennsylvania Power and Light Company,
Allentown, Pennsylvania from 1989 to 1994.
Robert J. Biederman, Jr., 46 Vice President since April 1990.
Vice President, Operations
Nancy M. Jakobs, 58 Vice President since April 1995.
Vice President, Partner, Jakobs and Associates
Human Resources International, New City, New York from 1991
to 1995.
Robert J. McBennett, 56 Treasurer since 1984. Treasurer and
Treasurer Controller from May 1995 to May 1996.
Edward M. McKenna, 49 Controller since May 1996. Director,
Controller Internal Audit from January 1995 to May 1996.
Director, Internal Audit, American Brands
from 1994 to January 1995. Senior Manager,
Finance/ Operational Audits, American Brands
from 1991 to 1994.
</TABLE>
- 41 -
<PAGE> 45
<TABLE>
<CAPTION>
Name, Age, and Title Business Experience Past Five Years
- -------------------- -----------------------------------
<S> <C>
George V. Bubolo, Jr., 54 Vice President since April 1998.
Vice President, Energy Division Vice President - Engineering
Delivery Services and Systems Operations from March 1996 until
April 1998. Director, Engineering and System
Operations from November 1994 until March
1996. Director, Electric Operations from 1983
until November 1994.
Vincent R. Tummarello, 48 Division Vice President - Electric
Division Vice President, Production since November 1994. Director,
Electric Production Electric Production from April 1985 until
November 1994.
</TABLE>
ITEM 11. Executive Compensation
Summary Compensation Table
The table below shows all compensation awarded to, earned by or paid to the
person serving as Chief Executive Officer in 1998 and the four other most highly
compensated executive officers of the Company for services rendered in all
capacities to the Company and its subsidiaries during the fiscal years ended
December 31, 1998, December 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION Payouts All Other
Salary Bonus LTIP Payouts Compensation
Name & Principal Position Year ($) ($) ($)(1) ($)(2)
- ------------------------- ---- --- --- ------ ------
<S> <C> <C> <C> <C> <C>
D. Louis Peoples 1998 410,000 218,264 710,298 4,055
Vice Chairman of the 1997 404,659 87,638 83,288 13,449
Board and Chief 1996 394,583 162,900 130,073 27,735
Executive Officer
R. Lee Haney 1998 205,000 97,006 213,089 3,290
Senior Vice President 1997 205,000 49,200 28,707 6,606
and Chief Financial 1996 205,000 76,260 46,246 7,933
Officer
G. D. Caliendo 1998 205,000 97,006 213,089 3,167
Senior Vice President, 1997 204,009 45,810 24,764 5,598
General Counsel 1996 195,833 71,676 42,303 11,155
and Secretary
Robert J. Biederman, Jr. 1998 165,000 67,972 177,575 2,677
Vice President, 1997 165,000 64,928 74,473 6,280
Operations 1996 160,000 53,040 49,638 4,155
George V. Bubolo, Jr. 1998 147,766 53,147 120,751 (3) 2,256
Vice President, 1997 137,130 40,974 44,987 3,347
Energy Delivery Services 1996 137,130 37,985 26,238 3,347
</TABLE>
(1) The LTIP payments shown include performance share units ("PSUs")
earned pursuant to the Long-Term Performance Share Unit Plan ("PSU Plan") in the
years 1996 and 1997 and PSU grants with respect to the 1996-98, 1997-99 and
1998-2000 performance periods which were deemed earned in full and which
- 42 -
<PAGE> 46
were paid in 1998 as a result of the execution of the Merger Agreement, which
constituted a potential change in control under the terms of the PSU Plan. The
dollar values of earned PSUs shown for 1996 were calculated based on the price
of the Company's Common Stock on December 31, 1996. The dollar values of PSUs
paid with respect to the 1995-1997 performance period and the DSUs paid for the
1995-1996 transitional performance period were based on the average price of the
Company's Common Stock during the fourth quarter of 1997. The dollar values of
PSUs paid in 1998 with respect to the 1996-98, 1997-99 and 1998-2000 performance
periods were based on the average of the high and low sales price ($42.625 per
share) of the Company's Common Stock on the date prior to the potential change
in control.
(2) Included in All Other Compensation for 1998 for the named executive
officers were the following:
(a) The Company's matching contribution to each individual's account
under the Company's Management Employees' Savings Plan, as follows: Messrs
Peoples, Caliendo, Haney and Biederman $2,400 each; and Mr. Bubolo $1,823.
(b) A term life insurance premium for each individual, as follows:
Mr. Peoples, $1,655; Mr. Haney, $890; Mr. Caliendo, $767; Mr. Biederman,
$277; and Mr. Bubolo, $433.
(3) Does not include the amount paid with respect to long-term incentive
plan compensation payable in prior periods but deferred at Mr. Bubolo's
election.
Long-Term Incentive Plans--Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Performance Estimate Future
Number of or Other Share Unit Payments(2)
Shares, Units Period Until -------------------------------
or Other Maturation Threshold Target Maximum
Name Rights(1) or Payout (#) (#) (#)
---- --------- --------- --- --- ---
<S> <C> <C> <C> <C> <C>
D. Louis Peoples 5,000 1998-2000 250 5,000 6,000
R. Lee Haney 1,500 1998-2000 75 1,500 1,800
G. D. Caliendo 1,500 1998-2000 75 1,500 1,800
Robert J. Biederman, Jr. 1,250 1998-2000 63 1,250 1,500
George V. Bubolo, Jr. 850 1998-2000 43 850 1,020
</TABLE>
(1) The numbers shown in this column reflect the PSUs awarded in 1998 to each
named executive officer under the PSU Plan for the 1998-2000 performance
period. The number of PSUs shown is exclusive of dividend equivalents
which are credited during the performance period in additional PSUs.
(2) The execution of the Merger Agreement constituted a potential change in
control under the PSU Plan. Accordingly, under the terms of the PSU Plan
the 1998-2000 PSUs (and associated dividend equivalent PSUs) were deemed
earned in full as of the date of such potential change in control and were
paid out to participants. The amounts paid out are included in the Summary
Compensation Table in the column "LTIP Payouts" for 1998.
- 43 -
<PAGE> 47
Pension Plans
The following table sets forth as of December 31, 1998 the estimated aggregate
annual dollar benefit payable under the Company's non-contributory Employees'
Retirement Plan ("Retirement Plan") as well as under the Officers' Supplemental
Retirement Plan ("Supplemental Plan") to participants in the Supplemental Plan
upon retirement at age 65 with the exception of Mr. Peoples, whose pension
benefits are addressed below:
RETIREMENT AND
SUPPLEMENTAL PLAN TABLE
<TABLE>
<CAPTION>
Years of Service
----------------
Remuneration 5 10 15 20 25 30 35
- ------------ - -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C>
100,000 20,000 40,000 50,000 60,000 62,500 65,000 67,500
125,000 25,000 50,000 62,500 75,000 78,125 81,250 84,375
150,000 30,000 60,000 75,000 90,000 93,750 97,500 101,250
175,000 35,000 70,000 87,500 105,000 109,375 113,750 118,125
200,000 40,000 80,000 100,000 120,000 125,000 130,000 135,000
225,000 45,000 90,000 112,500 135,000 140,625 146,250 151,875
250,000 50,000 100,000 125,000 150,000 156,250 162,500 168,750
300,000 60,000 120,000 150,000 180,000 187,500 195,000 202,500
400,000 80,000 160,000 200,000 240,000 250,000 260,000 270,000
450,000 90,000 180,000 225,000 270,000 281,250 292,500 303,750
500,000 100,000 200,000 250,000 300,000 312,500 325,000 337,500
</TABLE>
Compensation covered by the Retirement Plan consists of regular compensation
(which excludes any overtime or special pay) and incentive compensation earned
under the Company's Annual Team Incentive Plan, up to $160,000 annually (with
such limitation subject to cost of living adjustment). Under the terms of the
Supplemental Plan, covered compensation consists of regular compensation and an
amount equal to the targeted annual award (the "Targeted Annual Award") under
the Company's Annual Team Incentive Plan. With the exception of Mr. Peoples,
whose pension benefits are addressed below, the current compensation covered by
the Supplemental Plan for each of the named executive officers is as follows:
Mr. Haney, $287,000; Mr. Caliendo, $282,260; Mr. Biederman, $220,500; and Mr.
Bubolo, $194,350. The amounts shown in the Retirement and Supplemental Plan
Table are calculated on the basis of years of service as defined in the
Supplemental Plan. The years of service for each of the named executive officers
are as follows: Mr. Haney, 10 years; Mr. Caliendo, 8 years; Mr. Biederman, 25
years; and Mr. Bubolo, 21 years.
The Retirement Plan provides for benefits based on modified career-average
earnings. The benefit formula is (1) an amount equal to 2% of compensation for
each year of credited service after December 31, 1992 (including two additional
years of credited service at the final rate of compensation limited to $160,000)
and (2) an additional amount equal to 1 1/2% of the annual rate of compensation
as of January 1, 1993 multiplied by the number of years of credited service
prior to that date. The Retirement Plan also provides a pension supplement of
$600 per month to employees who retire at the age of 60 or 61. This supplement
becomes payable on the retirement date of the individual and will remain in
place until the first of the month on or before attaining their 62nd birthday. A
participant's benefits become vested upon completion of five years of eligible
service or on reaching age 65 while employed. A participant's benefits also
become vested upon a change in control. Shareholder approval of the Merger
Agreement constituted a change in control under the terms of the Retirement
Plan. Benefits payable under the Retirement Plan for retirements after age 55
and prior to age 60 are reduced 1/3 of 1% for each month the participant is
under 60 years of age at the time
- 44 -
<PAGE> 48
benefits commence. However, participants may receive an unreduced pension
benefit at age 60, or if the sum of the participant's age and years of service
totals at least 85 between ages 55 and 60. Benefits under the Retirement Plan
are not subject to Social Security or any other offset amounts. Benefits under
the Retirement Plan are subject to annual post-retirement adjustment once the
Consumer Price Index increases at least 20% since retirement. Directors who are
not employees of the Company are not covered by the Retirement Plan. Under the
terms of the Retirement Plan, upon a change in control of the Company, benefits
can be increased to the extent there are surplus funds (as defined in the
Retirement Plan) held under the Retirement Plan. Upon shareholder approval of
the Merger Agreement, which constituted a change in control under the terms of
the Retirement Plan, there were no such surplus funds (as defined in the
Retirement Plan) held under the Retirement Plan.
The Supplemental Plan is designed to provide additional retirement benefits to
officers of the Company who are participants in the Supplemental Plan and have
at least five years of service as officers. Directors who are not employees of
the Company are not covered by the Supplemental Plan. The Supplemental Plan
provides for benefits calculated by applying a percentage based on years of
service to average compensation (base salary and Targeted Annual Award) over the
three years of highest compensation during the 10 years immediately prior to
retirement, termination or cessation of officer status, reduced by the
participant's Retirement Plan benefit. Benefits payable under the Supplemental
Plan for retirements after age 55 and prior to age 60 are reduced 1/3 of 1% for
each month the participant is under 60 years of age at the time the benefits
commence. However, participants may receive an unreduced pension benefit at age
60, or if the sum of the participant's age and years of service totals at least
85 between ages 55 and 60. Benefits under the Supplemental Plan are subject to
annual post-retirement adjustment once the Consumer Price Index increases at
least 20% since retirement. For non-vested participants, benefits would vest
upon termination of employment following a change in control or potential change
in control of the Company, and the named officers could receive credit for
additional years of service in the calculation of their benefit. The Company has
established a trust for the payment of benefits under the Supplemental Plan.
Notwithstanding the creation of the trust, the Company continues to be primarily
liable for the benefits payable under the Supplemental Plan and will be
obligated to make such payments to the extent the trust does not.
Pursuant to agreements with the Company, Messrs. Peoples, Haney and Caliendo
became participants in the Supplemental Plan upon their appointment as officers
and are treated as having satisfied the five years of service as an officer
required for vesting in the Supplemental Plan. Under Mr. Peoples' agreement, on
the basis of his five years of service, his Supplemental Plan benefit percent is
currently 70% of an aggregate of his base salary and his Targeted Annual Award.
As of December 31, 1998, Mr. Peoples' estimated annual benefit payable under the
Supplemental Plan upon retirement at age 65 is $409,127. Under agreements with
Messrs. Haney and Caliendo, they receive credit under the Supplemental Plan for
two years of service for each of their first five years of service, and two and
one half years of service for the next six years of service, and their benefit
formula under the Supplemental Plan will be calculated accordingly.
Compensation of Directors
Under the former Board of Directors' compensation structure in effect through
March 31, 1998, Directors who were not current or former officers of the Company
or its subsidiaries each were paid an annual retainer of $20,000 and a fee of
$900 for each meeting of the Board of Directors such Director attended, except
that the Chairman of the Board of Directors was paid a fee of $1,800
- 45 -
<PAGE> 49
for each such meeting attended. Each such Director was also paid a fee for each
Committee meeting attended in the amount of $700 if the Committee meeting was
held on the same day as a meeting of the Board of Directors, or $800 if held on
a separate day, and was entitled to compensation of $900 per day for each full
day or major portion of a day spent on the business of the Board or a Committee
on days other than days of Board or Committee meetings, plus reimbursement for
out-of-pocket expenses.
Directors were permitted to defer receipt of their retainer and meeting fees
under the Deferred Compensation Plan for Non-Employee Directors (the "Directors'
Deferred Compensation Plan"). In addition, the Post-Director Service Retainer
Continuation Program (the "Directors' Pension Program") provided for the
continued payment of the annual retainer to an Eligible Director (as defined
under the Directors' Pension Program) for a period equal to the Eligible
Director's years of service on the Board. Upon the recommendation of the Board
of Directors' independent compensation consultant, on February 5, 1998 the Board
of Directors adopted a new compensation structure (the "Compensation Program"),
replacing the compensation structure described above. The Compensation Program
was designed by the Board's independent compensation consultant to meet industry
standards, and in recognition of the general trend to align Director
compensation with shareholder interests.
Under the Compensation Program, which became effective April 1, 1998, the annual
$20,000 retainer, all meeting fees, and the $900 per diem payment for each full
day or major portion of a day spent on Board business were eliminated, and the
Directors' Pension Program was discontinued. The Compensation Program provides
that Directors who are not current or former officers of the Company or its
subsidiaries each are to be paid an annual fee of $50,000, of which $25,000 is
payable in cash and $25,000 is to be deferred in phantom share units and
credited to a phantom share unit account under the Directors' Deferred
Compensation Plan until cessation of the Director's service on the Board. Under
the Compensation Program, the Chairperson of each committee of the Board of
Directors receives an additional annual cash fee of $1,600 for service as
Chairperson. The Chairman of the Board receives an annual cash fee of $20,000
for service in that capacity. These annual fees are paid in lieu of the enhanced
meeting fee paid to the Chairman of the Board under the discontinued
compensation structure. All cash fees are paid quarterly.
The Directors' Pension Program was discontinued effective April 1, 1998. Any
benefit due a former Director under the Directors' Pension Program will be paid
in accordance with the terms of the Directors' Pension Program in effect at the
time the Director left the Board. Upon the Board's adoption of the new
Compensation Program on February 5, 1998, the then present value of each
Director's accrued benefit under the Director's Pension Program, whether or not
vested, was calculated (by rounding Directors' years of service under the
Directors' Pension Program to the nearest complete year of service as of April
8, 1998) and converted to equivalent deferred phantom share units, based on the
fair market value (as defined in the Directors' Deferred Compensation Plan) of
the Company's Common Stock on February 5, 1998. These deferred phantom share
units were then credited to the Director's phantom share unit account under the
Directors' Deferred Compensation Plan, and became subject to the terms of that
Plan.
Pursuant to the Directors' Deferred Compensation Plan, a Director could elect to
defer receipt of all or part of his or her cash compensation for services as a
Director. Directors could elect to defer future cash compensation either into a
phantom share unit account or into an investment account, in which Directors'
deferred compensation would be credited with returns based on the
- 46 -
<PAGE> 50
performance of one or more available investment funds, as selected by the
Director.
Amounts deferred to a Directors' phantom share unit account under the Directors'
Deferred Compensation Plan, either at the election of the Director or pursuant
to the terms of the Compensation Program, were deemed to be invested in a number
of phantom share units equal to the dollar amount of such deferral divided by
the fair market value of the Company's Common Stock on the date the fees would
have been payable. Phantom share units varied in value with increases and
decreases in the fair market value of the Common Stock. Phantom share units were
also credited with dividend equivalents, with such dividend equivalents deemed
reinvested in additional phantom share units based upon the fair market value of
Common Stock on the dividend payment date.
The Directors' Deferred Compensation Plan provides that all amounts are to be
paid out automatically upon a change in control or potential change in control
of the Company (as defined in the Deferred Compensation Plan), with phantom
share units valued based on the average of the high and low sales price of the
Company's Common Stock on the day prior to the potential change in control. The
execution of the Merger Agreement constituted a potential change in control
under the Directors' Deferred Compensation Plan. As a result, the following
Directors received the following amounts: Mr. Baruch, $350,913; Mr. Creamer,
$691,853; Mr. Del Giudice, $204,770; Mr. Hanson, $152,193; Mr. McPherson,
$180,893; Mr. Mulcahy, $22,113; Mr. O'Grady, $365,729; and Ms. Taliaferro,
$95,223. As a result of the proposed Merger, from and after the potential change
in control, the non-employee Directors have been paid their annual fees entirely
in cash.
Employment and Severance Agreements
The Company has employment agreements with Messrs. Peoples, Haney and Caliendo
setting forth the terms of their employment, including position, base salary,
opportunity for incentive compensation, relocation allowance, retirement
arrangements, and other benefits. Mr. Peoples' agreement provides that he shall
serve as Vice Chairman of the Board and Chief Executive Officer of the Company,
at a minimum base salary of $325,000, with participation in the Company's
incentive plans. Mr. Haney's agreement provides that he shall serve as Vice
President and Chief Financial Officer of the Company, at a minimum base salary
of $195,000, with participation in the Company's incentive plans. Mr. Caliendo's
agreement provides that he shall serve as Vice President, General Counsel and
Secretary of the Company, at a minimum base salary of $185,000, with
participation in the Company's incentive plans. Their participation in the
Company's retirement plans is described above under "Pension Plans."
In addition, the Company has also entered into severance agreements with named
executive officers that provide for certain payments to be made and benefits to
be provided (as described below) in the event of an involuntary termination
other than for cause, or termination by the individual for good reason, in the
case of Messrs. Peoples, Haney and Caliendo, within 36 months following, and in
the case of Mr. Biederman and Mr. Bubolo, within 24 months following, a change
in control of the Company.
On May 10, 1998, the Company and Consolidated Edison, Inc. entered into
individual letter agreements (each, a "Letter Agreement"), with each of Mr.
Peoples, Mr. Caliendo, and Mr. Haney ("the Executive(s)"), each of which Letter
Agreement provides that, for purposes of the Executive's severance agreement (i)
the approval of the Merger Agreement by the shareholders of the Company
constitutes a change in control, (ii) at the Effective Time (as defined in the
Merger Agreement), the Executive will terminate his employment
- 47 -
<PAGE> 51
with the Company and (iii) such termination will be deemed to have been by the
Executive with Good Reason. Accordingly, pursuant to the Executive's severance
agreement, upon each Executive's termination of employment at the Effective
Time, each such Executive will be entitled to receive, in lieu of any other
payments due to the Executive: (1) a cash payment equal to three times the sum
of (a) the higher of (i) such Executive's annual base compensation in effect at
the time of termination and (ii) such Executive's annual base compensation in
effect immediately prior to the change in control and (b) the higher of (i) the
average of the annual bonuses earned or received by such Executive for the three
performance years ended prior to the date of termination and (ii) the average of
the annual bonuses awarded to such Executive for the three fiscal years ended
prior to the change in control, (2) a cash payment equal to a pro rata portion,
through the date of termination, of the aggregate value of all contingent
incentive compensation awards for all uncompleted periods under the incentive
compensation plans of the Company (other than the PSU Plan), assuming the
achievement of all target levels established with respect to such awards, (3)
benefits under the Supplemental Plan commencing immediately following the date
of termination, calculated (a) without reduction on account of the Executive's
age (in the case of Mr. Peoples) and (b) in the case of Messrs. Caliendo and
Haney, as if the Executive had been credited with an additional three years of
service (resulting in an increase by 15 percentage points in the Benefit Formula
Percentage (as defined in the Supplemental Plan)), (4) the continuation of
employee welfare benefits for three years following the date of termination,
reduced to the extent the executive receives such benefits from a subsequent
employer, (5) if the Executive would have otherwise been entitled to
post-retirement health care or life insurance had he continued to be employed
for three additional years, such post-retirement health care and life insurance
commencing on the later of (a) the date that such coverage would have first
become available to the Executive and (b) the date that the benefits described
in clause (4) above terminate, (6) the reimbursement of legal fees and expenses,
if any, incurred by the Executive in disputing any issue relating to the
termination of his employment following a change in control, (7) the right to
purchase the Executive's Company-provided automobile pursuant to Company policy
and (8) an additional cash payment to hold the Executive harmless from the
excise tax (the "Excise Tax") imposed by Section 4999 of the Code.
Pursuant to the terms of their severance agreements and the Letter Agreements,
it is presently estimated (based on available information) that each Executive
will be entitled to an aggregate lump sum cash payment at the Effective Time
approximately in the following amounts: Mr. Peoples, $2,710,000; Mr. Caliendo,
$1,330,000; and Mr. Haney, $1,351,000. After payment of all excise and income
taxes imposed on such lump sum cash payments, each Executive will retain a net
amount of approximately 35% of such lump sum cash payments.
The Company has a Severance Pay Plan ("Severance Plan") applicable to all
non-bargaining unit personnel with one or more years of service. The Severance
Plan provides eligible employees with specified severance pay upon a termination
of employment for the Company's convenience or following a change in control of
the Company. Upon a "Termination of Employment for the Company's Convenience"
(which is defined in the Severance Plan and which includes termination of
employment by the Company under specified circumstances other than for cause),
an employee is entitled to receive a severance payment calculated under formulas
based on years of service and salary grades. Upon an "Involuntary Termination"
(which is defined in the Severance Plan and which includes termination of
employment under specified circumstances within two years following a change in
control of the Company) an employee is entitled to receive a severance payment
based on grade. In either event, higher benefits are paid to employees in higher
salary grades. Aggregate severance payments, which cannot exceed an employee's
annual
- 48 -
<PAGE> 52
compensation, are payable monthly at the employee's final rate of compensation
or, in the event of a change in control of the Company, immediately. In
addition, life and health insurance benefits are continued for the severance
period for eligible employees following termination of employment.
Compensation Committee Report on Executive Compensation
The Company's compensation program for executive officers is established and
administered by the Compensation Committee of the Board of Directors. All
members of the Compensation Committee are independent, non-employee Directors
who are not eligible to participate in any part of the executive officer
compensation program.
As noted herein, the entering into of the Merger Agreement constituted a
potential change in control under various compensation plans and agreements
applicable to the Company's executive officers.
In 1995, the Compensation Committee, after extensive discussion and work with
independent compensation consultants retained by it, implemented an executive
officer compensation program designed to:
o Establish compensation which is competitive with the practices of
utility industry peer groups (discussed below);
o Provide a strong and direct link between executive pay and Company
performance on behalf of its shareholders and customers;
o Compensate executive officers for their successful long-term
strategic management of the Company; and
o Base actual compensation on the achievement of the Company's annual
goals, long-term strategic objectives and performance relative to
utility industry peer groups (discussed below).
Compensation Philosophy
The executive compensation program was designed to strengthen the linkage
between executive officer compensation, shareholder value and customer service.
By placing greater emphasis on performance incentives than on salary increases,
the program enhances the alignment of management and shareholder interests.
Salary and Performance Incentives
The Company's executive compensation program has three principal components:
o Salary: Executive officer salaries are administered relative to the
median of salary data for executive officers with comparable
functional responsibilities in utilities included in utility
industry peer groups (discussed below).
o Annual Team Incentive Plan ("Incentive Plan"): Incentive payments
are based on various Company objectives that focus on shareholder
interests and division-specific operating objectives, such as cost
management, efficiency, productivity, safety and customer service.
These objectives are established annually.
o Long-Term Performance Share Unit Plan (PSU Plan): Executive officers
(and certain key employees) are provided with the opportunity to
earn
- 49 -
<PAGE> 53
cash payments and, subject to the receipt of necessary approvals,
payments in stock at the end of a three-year performance period,
based on the Company's earnings per share performance and its total
shareholder return (stock price appreciation plus dividends) during
such performance period, measured relative to a group of national
comparison utilities ("National Comparison Utilities").
Under the executive officer compensation program, the competitiveness of salary
ranges and annual and long-term incentive award opportunities is evaluated
annually. Utility peer groups are used for comparison purposes to establish
total compensation as well as criteria for incentive payments to be awarded
under the Incentive Plan and PSU Plan.
Specifically, comparison is made to data included in the compensation survey
("EEI Survey") prepared by the Edison Electric Institute, an electric utility
industry trade group (which includes other combination gas and electric
companies). Compensation data in the EEI Survey is adjusted through regression
analysis to correlate utility company revenues with actual base salary and
incentives. Executive officer annual and long-term incentive opportunities are
configured so that total compensation approximates the 60th percentile of the
revenue-adjusted EEI Survey data when targeted results are achieved.
Salary Structure and Salary Increases
Salary ranges reflect a minimum amount and a position rate that approximates the
50th percentile of the distribution of salaries for executive officers with
comparable functional responsibilities in utilities included in the utility
industry peer group used for comparison purposes.
Annual Team Incentive Plan
Incentive Plan target award opportunities for executive officers are established
annually. The target award opportunity is considered to be 100% accomplishment
of stated objectives. Actual awards may range from 0% to 120% based on
performance.
For 1998, Incentive Plan target award opportunities ranged from 30% to 45% of
salary at December 31, 1998. Incentive Plan performance for 1998 was evaluated
using shareholder, management, customer satisfaction and division-specific
measures as follows:
o Shareholder Measure (weight 55%): Earnings per share measured
against pre-established threshold, target and outstanding levels.
The chief executive officer, chief financial officer and chief legal
officer were evaluated on Company earnings per share results. All
other executive officers were measured on utility earnings per share
results.
o Management Measure (weight 15%): Operating and maintenance
expenditures compared to pre-established standards.
o Customer Satisfaction Measure (weight 10%): Utility customer
satisfaction was measured based on the Company's annual customer
satisfaction survey results.
o Division-Specific Measure (weight 20%): Efficiency and productivity
enhancements specific to each division within the Company. The chief
executive officer, chief financial officer and chief legal officer
- 50 -
<PAGE> 54
were evaluated on the average results of the divisions (weighted by
number of participants). All other executive officers were measured
on results within their respective divisions.
The Compensation Committee may, at its discretion and in consultation with the
chief executive officer, adjust Incentive Plan awards plus or minus 25% to
reflect strategic and other factors affecting business operations and results.
During 1998, the shareholder measure was achieved at 66%, the management measure
was achieved at 18% and the customer satisfaction measure was achieved at 12%.
Division-specific measures were achieved at 14% to 24%. The average of these
factors combined to result in awards ranging from 110% to 120% of targeted
levels.
For 1999, Incentive Plan performance will be evaluated using three measures, an
earnings measure (weight 65%), a management measure (weight 20%) and a customer
satisfaction measure (weight 15%).
Long-Term Performance Share Unit Plan
Participation
The PSU Plan provides that the Compensation Committee can designate executive
officers (and certain key employees) to participate in the PSU Plan.
Participants are selected based on an evaluation of their position's long-term
strategic performance impact and influence on shareholder value -- i.e., future
stock price appreciation and annual dividend payments.
PSU Grants
The PSU Plan provides that the Compensation Committee can make grants of PSUs to
designated participants at the start of each year for a three-year performance
period. The size of these grants was based on the results of the annual
compensation program evaluation. (Participants whose participation in the PSU
Plan commenced in 1995 or 1996 also received PSU grants for one-year and
two-year transitional performance periods equal to one-third and two-thirds of
the corresponding three-year performance period.)
Under the PSU Plan, each PSU is given a value equal to one share of the
Company's Common Stock. The maximum number of PSUs that can be earned with
respect to a performance period is 120% of the number of PSUs granted. In
addition, the value of dividend equivalents that accumulate during a performance
period is deemed reinvested in additional PSUs. These dividend equivalent PSUs
are calculated by multiplying the number of PSUs granted by the dividend
payments made during the performance period on a share of Common Stock and
dividing the resultant amounts by the average of the high and low stock price on
the date the dividends were paid. Dividend equivalent PSUs are then also
credited with dividend equivalent PSUs on dividends declared subsequently during
the performance period.
As described below, the execution of the Merger Agreement constituted a
potential change in control under the PSU Plan and named executive officers
received payment for all outstanding PSUs and DSUs (defined below) during 1998.
Determinations Regarding Earning and Payment of PSUs
The PSU Plan provides that PSUs are earned based on performance criteria that
are determined annually for the three-year performance period then commencing.
- 51 -
<PAGE> 55
For the 1996-98 performance period (and the related transitional periods) and
the 1997-99 performance periods, these performance criteria, which were weighted
75%/25%, respectively, were:
o Average annual total shareholder return (stock price appreciation
plus dividends) compared to National Comparison Utilities using
pre-established ranking criteria.
o Earnings per share compared to pre-established threshold, target and
maximum levels.
The 1998-2000 performance period was based entirely on average annual total
shareholder return.
The PSU Plan provides that following the close of a performance period the
Company's performance is evaluated by the Compensation Committee in consultation
with its independent compensation consultant relative to applicable
pre-established performance criteria, and the number of PSUs (and associated
dividend equivalent PSUs) earned is determined for each participant.
The PSU Plan was designed to align management and shareholder financial
interests. The PSU Plan accordingly provides for payment of PSUs earned to be
made in cash or, subject to receipt of necessary shareholder and other
approvals, in shares of the Company's Common Stock; or in a combination of such
payment forms. (Transitional (i.e., one- and two-year) PSU awards that were
earned were deferred in the form of deferred performance share units ("DSUs")
and then were to be paid at the end of the applicable full three-year
performance period.) Under the PSU Plan, participants can also voluntarily elect
to defer payment of earned PSU awards that are otherwise payable. Such
deferrals, at the participant's election, are credited either (i) to the various
investment fund options in which participants may elect to place their deferred
compensation under the terms of the PSU Plan; or (ii) in DSUs until such future
post-service date or dates as the participant elects to begin receiving a
distribution. DSUs are credited with dividend equivalents that are deemed
reinvested in additional DSUs.
The PSU Plan provides that upon a change in control or potential change in
control during a performance period, all PSUs (and associated dividend
equivalent PSUs) are deemed earned in full as of the date of such change in
control or potential change in control. As soon as practicable following such
change in control or potential change in control, the Company is to pay to each
participant a lump sum cash payment equal to the sum of (i) the product of (A)
and (B), where (A) equals the aggregate number of PSUs (and associated dividend
equivalent PSUs) deemed earned in full or deferred, as described above, and (B)
equals the average of the high and low sales price of the Company's Common Stock
on the date immediately preceding the change in control or potential change in
control; and (ii) the value of amounts deferred in various investment vehicles
as of the date immediately preceding the change in control or potential change
in control. The execution of the Merger Agreement constituted a potential change
in control under the PSU Plan.
Chief Executive Officer Compensation
Mr. Peoples' 1998 salary, as Vice Chairman of the Board of Directors and Chief
Executive Officer of the Company, was based on a position rate that approximates
the 50th percentile for chief executive officer positions included in the EEI
Survey. Mr. Peoples' actual 1998 salary was at the position rate.
- 52 -
<PAGE> 56
Mr. Peoples' Incentive Plan award for 1998 was based, as described above, on the
Company's 1998 performance at 118% of target.
Policy with Respect to Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
provides that, unless an appropriate exemption applies, a tax deduction for the
Company for compensation of certain executive officers named in the Summary
Compensation Table will not be allowed to the extent such compensation in any
taxable year exceeds $1 million. Generally, no amounts paid by the Company in
1997 and prior years have failed to be deductible by virtue of Section 162(m) of
the Code. However, as a result of the interaction between Section 162(m) and
Section 280G of the Code, some of the amounts that were paid in 1998 and that
may be paid in the future in connection with the Merger may be rendered
non-deductible by virtue of Section 162(m).
COMPENSATION COMMITTEE
Kenneth D. McPherson, Chairman J. Fletcher Creamer
Ralph M. Baruch James F. O'Grady, Jr.
March 4, 1999
- 53 -
<PAGE> 57
Stock Performance Graph
Comparison of Five-Year Cumulative Total Return*
Orange and Rockland Utilities, Inc. Common Stock, Standard & Poor's 500 Index
and Edison Electric Institute Combination Gas and Electric
Investor-Owned Utilities
DOLLARS
[GRAPHIC OMITTED]
Cumulative Total Return
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Legend 1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Orange and Rockland [OBJECT OMITTED] 100.00 86.23 102.50 110.70 154.82 199.93
- --------------------------------------------------------------------------------------------
S&P 500 Index [OBJECT OMITTED] 100.00 101.32 139.40 171.40 228.57 293.87
- --------------------------------------------------------------------------------------------
EEI Index [OBJECT OMITTED] 100.00 87.12 110.96 110.27 142.54 165.62
- --------------------------------------------------------------------------------------------
</TABLE>
*Assumes $100 invested on December 31, 1993 and reinvestment of dividends.
- 54 -
<PAGE> 58
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The following table sets forth, as of March 1, 1999, certain information
regarding persons known by the Company to be the beneficial owner(s) of more
than 5% of the outstanding shares of the Company's Common Stock.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial
Beneficial Owner Ownership(1) Percent of Class
- ------------------- ----------------- ----------------
<S> <C> <C>
Gabelli Funds, Inc. 169,000 (2) 1.25%
One Corporate Center
Rye, NY 10580
GAMCO Investors, Inc. 422,600 (3) 3.13%
One Corporate Center
Rye, NY 10580
Gabelli Associates Fund 73,000 0.54%
One Corporate Center
Rye, NY 10580
Gabelli Fund, LDC 500 0.00%
c/o Tremont (Bermuda) Limited
Tremont House
4 Park Road
Hamilton HM II, Bermuda
Gabelli & Company, Inc. Profit 3,000 0.02%
Sharing Plan
Gabelli Funds
One Corporate Center
Rye, NY 10580
Gabelli Foundation, Inc. 10,500 0.08%
165 West Liberty Street
Reno, Nevada 89501
Marc J. Gabelli 0 0.00%
One Corporate Center
Rye, NY 10580
Mario J. Gabelli 0 (4) 0.00%
One Corporate Center
Rye, NY 10580
</TABLE>
(1) All information contained in this table and the notes thereto is based
on information furnished to the Company on a Schedule 13D dated November 30,
1998, filed by Mario J. Gabelli and Marc J. Gabelli and various entities which
either one directly or indirectly controls or for which either one acts as chief
investment officer. Each person has sole voting and investment power with
respect to the shares listed, unless otherwise indicated. Beneficial ownership
includes shares over which the indicated beneficial owner exercises direct or
indirect voting and/or investment power.
(2) Gabelli Funds, Inc. is deemed to have beneficial ownership of the
securities owned beneficially by each of the persons listed in the table other
than Mario Gabelli, Marc Gabelli and Gabelli Foundation, Inc.
- 55 -
<PAGE> 59
(3) Includes 43,500 shares over which GAMCO Investors, Inc. does not have
authority to vote, but has sole dispositive power.
(4) Mario Gabelli is deemed to have beneficial ownership of the securities
owned beneficially by each of the foregoing persons other than Marc Gabelli.
Security Ownership of Management
The following table shows, as of March 1, 1999, all of the Company's Common
Stock owned beneficially by each Director and each executive officer named in
the Summary Compensation Table as well as Common Stock holdings of all Directors
and executive officers as a group.
<TABLE>
<CAPTION>
Shares of
Common Stock Owned
Name Beneficially (1)(2)
- ---- -------------------
<S> <C>
Ralph M. Baruch 0
Robert J. Biederman, Jr. 0
George V. Bubolo, Jr. 26
G. D. Caliendo 208
J. Fletcher Creamer 8,983
Michael J. Del Giudice 1,167
R. Lee Haney 889
Jon F. Hanson 3,045
Kenneth D. McPherson 1,000
Robert E. Mulcahy III 248
James F. O'Grady, Jr. 1,000
D. Louis Peoples 1,875
Linda C. Taliaferro 569
17 Directors and executive 19,527
officers as a group
</TABLE>
(1) Based on information furnished to the Company by the Directors and
executive officers. Includes shares of Common Stock owned beneficially pursuant
to the Company's Management Employees' Savings Plan through February 26, 1999,
the latest date for which such information is available.
(2) As of March 1, 1999, no Director owned beneficially more than .066% of
the outstanding shares of Common Stock, no named executive officer owned more
than .014% of such shares and Directors and executive officers as a group owned
.1445% of such shares.
Changes in Control
Pursuant to the Merger Agreement, at the Effective Time the outstanding shares
of Common Stock will be converted into the right to receive $58.50 in cash and
the Common Stock will no longer be publicly traded. At the Effective Time all of
the capital stock of the Company (which will be the Surviving Corporation) will
be owned by CEI. As of the Effective Time, each of the Directors of the Company
will resign and the directors of the Merger Sub at the Effective Time will be
the directors of the Surviving Corporation.
- 56 -
<PAGE> 60
Item 13. Certain Relationships and Related Transactions
None.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries appearing on pages 15 through 30 of the 1998 Annual Report to
Shareholders are incorporated by reference in this Form 10-K Annual Report. With
the exception of these consolidated financial statements and the information
incorporated in Items 1, 2, 3, 5, 6, 7 and 8, herein, the 1998 Annual Report to
shareholders is not deemed filed as part of this Form 10-K Annual Report.
Page*
-----
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996. 15
Consolidated Balance Sheets as of December 31, 1998 and 1997. 16
Consolidated Cash Flow Statements for the years ended
December 31, 1998, 1997 and 1996. 18
Notes to Consolidated Financial Statements. 19
Report of Independent Public Accountants. 30
*Page number reference is to the 1998 Annual Report
to Shareholders
(a)(2) Financial Statement Schedules Page**
------
Valuation and Qualifying Accounts and Reserves for the years
ended December 31, 1998, 1997 and 1996 (Schedule II). 70
**Page number reference is to this Form 10-K Annual Report
All other schedules are omitted because they are not applicable.
- 57 -
<PAGE> 61
(a)(3) Exhibits
*3.2 By-Laws, as amended through June 29, 1995. (Exhibit 3.2 to Form 10-Q
for the period ended June 30, 1995, File No. 1-4315).
*3.4 Restated Certificate of Incorporation dated May 7, 1996. (Exhibit
3.4 to Form 10-Q for the period ended March 31, 1996, File No.
1-4315).
*4.3 Mortgage Trust Indenture of Rockland Electric Company, dated as of
July 1, 1954. (Exhibit 2.16 to Registration Statement No. 2-14159).
*4.11 Mortgage Trust Indenture of Pike County Light & Power Company, dated
as of July 15, 1971. (Exhibit 4.31 to Registration Statement No.
2-45632).
*4.25 Indenture between the Company and The Bank of New York as Trustee
regarding unsecured debt, dated March 1, 1990. (Exhibit 4.25 to Form
10-K for the fiscal year ended December 31, 1990, File No. 1-4315).
*4.26 First Supplemental Indenture between the Company and The Bank of New
York as Trustee regarding unsecured debt, dated March 7, 1990.
(Exhibit 4.26 to Form 10-K for the fiscal year ended December 31,
1990, File No. 1-4315).
*4.27 Second Supplemental Indenture between the Company and the Bank of
New York as Trustee regarding unsecured debt, dated October 15,
1992. (Exhibit 4.27 to Form 10-K for the fiscal year ended December
31, 1992, File No. 1-4315).
*4.29 Third Supplemental Indenture between the Company and The Bank of New
York as Trustee regarding unsecured debt, dated as of March 1, 1993.
(Exhibit 4.29 to Form 10-K for the fiscal year ended December 31,
1992, File No. 1-4315).
*4.30 Ninth Supplemental Indenture of Rockland Electric Company, dated as
of March 1, 1993. (Exhibit 4.30 to Form 10-K for the fiscal year
ended December 31, 1992, File No. 1-4315).
*4.31 Fourth Supplemental Indenture between the Company and the Bank of
New York as Trustee regarding unsecured debt dated as of December 1,
1997. (Exhibit 4.5 to Company's Registration Statement on Form S-4,
File No. 333-43953).
*4.32 Form of Fifth Supplemental Indenture between the Company and The
Bank of New York as Trustee regarding unsecured debt dated as of
March 1, 1999. (Exhibit 4.7 to the Company's Registration Statement
No. 333-72289 on Form S-3, File No. 1-4315).
*10.1 General Agreement: Bowline Point Generating Plant, dated as of
October 10, 1969. (Exhibit 5(b) to Registration Statement No.
2-42156).
*10.1A Amendment to the General Agreement: Bowline Point Generating Plant,
dated May 31, 1996. (Exhibit 10.1A to Form 10-K for the fiscal year
ended December 31, 1996, File No. 1-4315).
- 58 -
<PAGE> 62
*10.3 Orange and Rockland Utilities, Inc. Eligible Employees Compensation
Deferral Plan (formerly the Officers Salary Deferral Plan), as
amended and restated on June 5, 1997, effective January 1, 1998.
(Exhibit 10.3 to Form 10-K for the fiscal year ended December 31,
1997, File No. 1-4315).
*10.7 New York Power Pool Agreement, dated July 16, 1985. (Exhibit 10.7 to
Form 10-K for the fiscal year ended December 31, 1990, File No.
1-4315).
*10.8 Agreement governing the supply of residual fuel oil by Con Edison to
Bowline Point Generating Station dated August 31, 1983. (Exhibit
10.8 to Form 10-K for fiscal year ended December 31, 1991, File No.
1-4315).
*10.10 PJM Facilities Agreement, dated May 1, 1970, as amended December 12,
1972. (Exhibit 10.10 to Form 10-K for the fiscal year ended December
31, 1992, File No. 1-4315).
+*10.11 Officers' Supplemental Retirement Plan, as amended and restated on
June 5, 1997 effective July 1, 1997. (Exhibit 10.11 to Form 10-Q for
the quarter ended June 30, 1997, File No. 1-4315).
+*10.12 Incentive Compensation Plan, amended January 3, 1991. (Exhibit 10.12
to Form 10-K for the fiscal year ended December 31, 1990, File No.
1-4315).
*10.13 Severance Pay Plan, as amended and restated on November 6, 1997.
(Exhibit 10.13 to Form 10-K for the fiscal year ended December 31,
1997, File No. 1-4315).
*10.14 Management Long-Term Disability Plan as amended January 1, 1996.
(Exhibit 10.14 to Form 10-K for the fiscal year ended December 31,
1995, File No. 1-4315).
*10.17 Coal Purchase and Sale Agreement among Orange and Rockland
Utilities, Inc., Rawl Sales and Processing Company, and Massey Coal
Sales, Inc., dated March 9, 1984, as amended through July 1, 1991.
(Exhibit 10.17 to Form 10-K for the fiscal year ended December 31,
1991, File No. 1-4315).
*10.17A Seventh Amendment to the Coal Purchase and Sales Agreement among
Orange and Rockland Utilities, Inc., Rawl Sales and Processing
Company, and Massey Coal Sales, Inc., dated July 1, 1994. (Exhibit
10.17 to Form 10-K for the fiscal year ended December 31, 1994, File
No. 1-4315).
*10.17B Eighth Amendment to the Coal Purchase and Sales Agreement among
Orange and Rockland Utilities, Inc., Rawl Sales and Processing
Company, and Massey Coal Sales, Inc., dated July 1, 1996. (Exhibit
10.17B to Form 10-K for the fiscal year ended December 31, 1996,
File No. 1-4315).
+*10.20 Orange and Rockland Utilities, Inc. Post Director Service Retainer
Continuation Program, as amended and restated on June 5, 1997,
effective July 1, 1997. (Exhibit 10.20 to Form 10-Q for the quarter
ended June 30, 1997, File No. 1-4315).
- 59 -
<PAGE> 63
+*10.22 Form of Severance Agreement entered into between Orange and Rockland
Utilities, Inc. and each of R. J. Biederman, Jr., effective October
29, 1997; N. M. Jakobs, effective October 27, 1997; R. J. McBennett,
effective October 27, 1997; and E. M. McKenna, effective October 31,
1997. (Exhibit 10.22 to Form 10-K for the fiscal year ended December
31, 1997, File No. 1-4315).
+*10.22A Form of Agreement, amending Exhibit 10.22, entered into between
Orange and Rockland Utilities, Inc. and each of R. J. Biederman,
Jr., R. J. McBennett and E. M. McKenna, effective January 27, 1998
and N. M. Jakobs, effective January 8, 1998. (Exhibit 10.22A to Form
10-K for the fiscal year ended December 31, 1997, File No. 1-4315).
+*10.26 Letter agreement dated September 29, 1994 between Orange and
Rockland Utilities, Inc. and R. Lee Haney regarding participation in
the Officers' Supplemental Retirement Plan of Orange and Rockland
Utilities, Inc. (Exhibit 10.26 to Form 10-Q for the period ended
September 30, 1994, File No. 1-4315).
+*10.26A Agreement between Orange and Rockland Utilities, Inc. and R. Lee
Haney effective July 1, 1997, amending Exhibit 10.26. (Exhibit
10.26A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.27 Letter agreement dated September 29, 1994 between Orange and
Rockland Utilities, Inc. and D. Louis Peoples regarding
participation in the Officers' Supplemental Retirement Plan of
Orange and Rockland Utilities, Inc. (Exhibit 10.27 to Form 10-Q for
the period ended September 30, 1994, File No. 1-4315).
+*10.27A Agreement between Orange and Rockland Utilities, Inc. and D. Louis
Peoples effective July 1, 1997, amending Exhibit 10.27. (Exhibit
10.27A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.29 Orange and Rockland Utilities, Inc. Deferred Compensation Plan for
Non-Employee Directors as amended and restated on February 5, 1998.
(Exhibit 10.29 to Form 10-K for the fiscal year ended December 31,
1997, File No. 1-4315).
+*10.30 Letter Agreement dated April 6, 1995 between Orange and Rockland
Utilities, Inc. and G. D. Caliendo regarding participation in the
Officers' Supplemental Retirement Plan of Orange and Rockland
Utilities, Inc. (Exhibit 10.30 to Form 10-Q for the period ended
June 30, 1995, File No. 1-4315).
+*10.30A Agreement between Orange and Rockland Utilities, Inc. and G. D.
Caliendo effective July 1, 1997, amending Exhibit 10.30. (Exhibit
10.30A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.31 Letter Agreement dated September 21, 1995 between Orange and
Rockland Utilities, Inc. and Nancy M. Jakobs regarding participation
in the Officers' Supplemental Retirement Plan of Orange and Rockland
Utilities, Inc. (Exhibit 10.31 to Form 10-Q for the period ended
September 30, 1995, File No. 1-4315).
- 60 -
<PAGE> 64
+*10.31A Agreement between Orange and Rockland Utilities, Inc. and Nancy M.
Jakobs effective July 1, 1997, amending Exhibit 10.31. (Exhibit
10.31A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.36 Agreement dated January 22, 1996 between Orange and Rockland
Utilities, Inc. and D. L. Peoples regarding change in control
arrangements. (Exhibit 10.36 to Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-4315).
+*10.36A Agreement between Orange and Rockland Utilities, Inc. and D. L.
Peoples dated July 23, 1997, amending Exhibit 10.36. (Exhibit 10.36A
to Form 10-K for the fiscal year ended December 31, 1997, File No.
1-4315).
+*10.37 Agreement dated January 21, 1996 between Orange and Rockland
Utilities, Inc. and G. D. Caliendo regarding change in control
arrangements. (Exhibit 10.37 to Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-4315).
+*10.37A Agreement between Orange and Rockland Utilities, Inc. and G. D.
Caliendo dated July 23, 1997, amending Exhibit 10.37. (Exhibit
10.37A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.37B Letter agreement between Orange and Rockland Utilities, Inc. and G.
D. Caliendo dated February 25, 1998, amending Exhibits 10.30 and
10.37. (Exhibit 10.37B to Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-4315).
+*10.38 Agreement dated January 22, 1996 between Orange and Rockland
Utilities, Inc. and R. L. Haney regarding change in control
arrangements. (Exhibit 10.38 to Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-4315).
+*10.38A Agreement between Orange and Rockland Utilities, Inc. and R. L.
Haney dated July 23, 1997, amending Exhibit 10.38. (Exhibit 10.38A
to Form 10-K for the fiscal year ended December 31, 1997, File No.
1-4315).
+*10.38B Letter agreement between Orange and Rockland Utilities, Inc. and R.
Lee Haney dated February 25, 1998, amending Exhibits 10.26 and
10.38. (Exhibit 10.38B to Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-4315).
+*10.40 Long-Term Performance Share Unit Plan as amended, effective July 1,
1997. (Exhibit 10.40 to Form 10-Q for the quarter ended June 30,
1997, File No. 1-4315).
+*10.41 Annual Team Incentive Plan effective January 1, 1995, described on
pages 9-10 of the Company's definitive proxy statement filed with
the Securities and Exchange Commission on March 6, 1998 for its 1998
Annual Meeting of shareholders, which description is hereby
incorporated by reference (File No. 1-4315).
+*10.42 Letter Agreement dated February 16, 1995 between Orange and Rockland
Utilities, Inc. and G. D. Caliendo regarding employment. (Exhibit
10.42 to Form 10-K for the fiscal year ended December 31, 1995, File
No. 1-4315).
- 61 -
<PAGE> 65
+*10.43 Letter Agreement dated July 14, 1994 between Orange and Rockland
Utilities, Inc. and D. L. Peoples regarding employment. (Exhibit
10.43 to Form 10-K for the fiscal year ended December 31, 1995, File
No. 1-4315).
+*10.44 Letter Agreement dated November 14, 1995 between Orange and Rockland
Utilities, Inc. and L. S. Brodsky regarding employment. (Exhibit
10.44 to Form 10-K for the fiscal year ended December 31, 1995, File
No. 1-4315).
+*10.44A Agreement between Orange and Rockland Utilities, Inc. and L. S.
Brodsky effective July 1, 1997, amending Exhibit 10.44. (Exhibit
10.44A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.45 Letter Agreement dated March 21, 1995 between Orange and Rockland
Utilities, Inc. and Nancy M. Jakobs regarding employment. (Exhibit
10.45 to Form 10-K for the fiscal year ended December 31, 1995, File
No. 1-4315).
+*10.46 Letter Agreement dated September 2, 1994 between Orange and Rockland
Utilities, Inc. and R. L. Haney regarding employment. (Exhibit 10.46
to Form 10-K for the fiscal year ended December 31, 1995, File No.
1-4315).
*10.47 Eligible Employees' Insurance Program, effective July 1, 1997.
(Exhibit 10.48 to Form 10-Q for the quarter ended June 30, 1997,
File No. 1-4315).
+*10.48 Agreement and General Release dated August 27, 1997 between Orange
and Rockland Utilities, Inc. and Larry S. Brodsky. (Exhibit 10.49 to
Form 10-Q for the quarter ended September 30, 1997, File No.
1-4315).
*10.49 Management Employee Transition Program, as described in
correspondence to employees, dated December 11, 1997 and January 9,
1998. (Exhibit 10.49 to Form 10K for the fiscal year ended December
31, 1997, File No. 1-4315).
*10.50 Settlement Agreement (Electric Rate and Restructuring Plan) dated
November 6, 1997 among the Registrant, the New York State Department
of Public Service, the New York State Department of Economic
Development, the National Association of Energy Service Companies,
the Joint Supporters, the Industrial Energy Users Association, the
Independent Power Producers of New York, Inc. and Pace Energy
Project in Case 96-E-0900 - In the Matter of Orange and Rockland
Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to
Opinion No. 96-12. (Exhibit 99.7 to Form 10-Q for the quarter ended
September 30, 1997, File No. 1-4315).
*10.51 Agreement and Plan of Merger, dated as of May 10, 1998, among the
Company, CEI and Merger Sub. (Exhibit 10.51 to Form 8-K dated May
10, 1998, File No. 1-4315).
- 62 -
<PAGE> 66
+*10.52 Agreement among the Company, Consolidated Edison, Inc., C
Acquisition Corp. and G. D. Caliendo, dated May 10, 1998, providing
for the termination of Mr. Caliendo's employment with the Company at
the effective time of the Merger and the payment of certain amounts
in accordance with the severance agreement between the Company and
G. D. Caliendo dated January 21, 1996. (Exhibit 10.52 to Form 10-Q
for the quarter ended March 31, 1998, File No. 1-4315).
+*10.53 Agreement among the Company, Consolidated Edison, Inc., C
Acquisition Corp. and R. Lee Haney, dated May 10, 1998, providing
for the termination of Mr. Haney's employment with the Company at
the effective time of the Merger and the payment of certain amounts
in accordance with the severance agreement between the Company and
R. Lee Haney dated January 22, 1996. (Exhibit 10.53 to Form 10-Q for
the quarter ended March 31, 1998, File No. 4315).
+*10.54 Agreement among the Company, Consolidated Edison, Inc. C Acquisition
Corp. and Robert McBennett, dated March 10, 1998, providing for the
termination of Mr. McBennett's employment with the Company at the
latter of the effective time of the Merger or July 1, 1999 and the
payment of certain amounts in accordance with the severance
agreement between the Company and Robert McBennett dated October 27,
1997. (Exhibit 10.54 to Form 10-Q for the quarter ended March 31,
1998, File No. 1-4315).
+*10.55 Agreement among the Company, Consolidated Edison, Inc., C
Acquisition Corp. and D. Louis Peoples, dated May 10, 1998,
providing for the termination of Mr. People's employment with the
Company at the effective time of the Merger and the payment of
certain amounts in accordance with the severance agreement between
the Company and D. Louis Peoples dated January 22, 1996. (Exhibit
10.55 to Form 10-Q for the quarter ended March 31, 1998, File No.
1-4315).
+*10.56 Agreement among the Company, Consolidated Edison, Inc., C
Acquisition Corp. and N. M. Jakobs dated July 15, 1998, providing
for the termination of Ms. Jakobs employment with the Company at the
effective time of the Merger and the payment of certain amounts in
accordance with the severance agreement between the Company and N.
M. Jakobs dated October 27, 1997 as amended January 8, 1998.
(Exhibit 10.56 to Form 10-Q for the quarter ended June 30, 1998,
File No. 1-4315).
+*10.57 Severance Agreement entered into between Orange and Rockland
Utilities, Inc. and G. V. Bubolo, Jr. effective April 10, 1998.
(Exhibit 10.57 to Form 10-Q for the quarter ended June 30, 1998,
File No. 1-4315).
*10.58 Bowline Point Generating Station Sales Agreement by and between
Orange and Rockland Utilities, Inc., Consolidated Edison Company of
New York, Inc. and Southern Energy Bowline, L.L.C., dated as of
November 24, 1998. (Exhibit 10.58 to Form 8-K dated November 24,
1998, File No. 1-4315).
*10.59 Lovett Generating Station Sales Agreement between Orange and
Rockland Utilities, Inc. and Southern Energy Lovett, L.L.C., dated
as of November 24, 1998. (Exhibit 10.59 to Form 8-K dated November
24, 1998, File No. 1-4315).
- 63 -
<PAGE> 67
*10.60 Gas Turbine and Hydroelectric Generating Stations Sales Agreement
between Orange and Rockland Utilities, Inc. and Southern Energy
NY-Gen, L.L.C., dated as of November 24, 1998. (Exhibit 10.60 to
Form 8-K dated November 24, 1998, File No. 1-4315).
*10.61 Bowline Adjacent Property Sales Agreement by and between Orange and
Rockland Utilities, Inc. and Southern Energy Bowline, L.L.C., dated
as of November 24, 1998. (Exhibit 10.61 to Form 8-K dated November
24, 1998, File No. 1-4315).
*10.62 Transition Power Sales Agreement by and between Orange and Rockland
Utilities, Inc., Southern Energy Bowline, L.L.C., Southern Energy
Lovett, L.L.C. and Southern Energy NY - Gen., L.L.C., dated as of
November 24, 1998. (Exhibit 10.62 to Form 8-K dated November 24,
1998, File No. 1-4315).
*10.63 Eastern Loan Pocket Call Option Agreement between Orange and
Rockland Utilities, Inc. and Southern Energy Lovett, L.L.C., dated
as of November 24, 1998. (Exhibit 10.63 to Form 8-K dated November
24, 1998, File No. 1-4315).
*10.64 Western Loan Pocket Call Option Agreement between Orange and
Rockland Utilities, Inc. and Southern Energy NY-Gen, L.L.C., dated
as of November 24, 1998. (Exhibit 10.64 to Form 8-K dated November
24, 1998, File No. 1-4315).
*10.65 Bowline Guaranty, dated as of November 24, 1998, given by Southern
Energy, Inc. in favor of Orange and Rockland Utilities, Inc. and
Consolidated Edison Company of New York, Inc. (Exhibit 10.65 to Form
8-K dated November 24, 1998, File No. 1-4315).
*10.66 Lovett, Gas Turbine and Hydroelectric Generating Facilities
Guaranty, dated as of November 24, 1998, given by Southern Energy,
Inc. in favor of Orange and Rockland Utilities, Inc. (Exhibit 10.66
to Form 8-K dated November 24, 1998, File No. 1-4315).
13 The Company's 1998 Annual Report to Shareholders to the extent
incorporated by reference in this Form 10-K Annual Report for the
fiscal year ended December 31, 1998. [Note: Except for those
portions of such Annual Report expressly incorporated by reference
in this Form 10-K Annual Report, such Annual Report is not deemed
"filed" as part of the filing of this Form 10-K Annual Report.]
*21 Subsidiaries of the Company. (Exhibit 21 to Company's Registration
Statement on Form S-4, File No. 333-43953).
24 Powers of Attorney.
27 Financial Data Schedule.
*99 Press Release of the Company dated February 5, 1998. (Exhibit 99 to
Form 8-K dated February 5, 1998, File No. 1-4315).
*99.1 Joint Cooperation Agreement between the Office of the Rockland
County District Attorney and Orange and Rockland Utilities, Inc.,
dated November 3, 1993 (Exhibit 99.1 to Form 10-Q for the quarter
ended September 30, 1993, File No. 1-4315).
- 64 -
<PAGE> 68
*99.2 NYPSC Order Adopting Terms of Settlement, Issued and Effective
November 26, 1997, in Case 96-E-0900. (Exhibit 99.10 to Form 8-K
dated November 25, 1997, File No. 1-4315).
*99.3 NYPSC Opinion (No. 97-20) and Order Adopting Terms of Settlement,
Issued and Effective December 31, 1997, in Case 96-E-0900. (Exhibit
99.3 to Form 10-K for the fiscal year ended December 31, 1997, File
No. 1-4315).
*99.5 Agreement Between Orange and Rockland Utilities, Inc. and Kroll
Associates, Inc. dated as of November 1, 1994. (Exhibit 99.5 to Form
10-Q for the period ended September 30, 1994, File No. 1-4315).
*99.12 Press Release of the Company dated April 8, 1998. (Exhibit 99.12 to
Form 8-K dated April 8, 1998, File No. 1-4315).
*99.13 Joint Press Released the Company and CEI issued May 11, 1998.
(Exhibit 99.13 to Form 8-K dated May 10, 1998, File No. 1-4315).
*99.14 The Company's Final Divestiture Plan as approved by the NYPSC on
April 8, 1998. (Exhibit 99.14 to Form 10-Q for the quarter ended
March 31, 1998, File No. 1-4315).
*99.14A Press Release of the Company dated August 20, 1998. (Exhibit 99.14
to Form 8-K dated August 20, 1998, File No. 1-4315).
*99.15 Press Release of the Company dated August 20, 1998. (Exhibit 99.15
to Form 8-K dated August 20, 1998, File No. 1-4315).
*99.16 Orange and Rockland Utilities, Inc. Press Release issued November
24, 1998. (Exhibit 99.16 to Form 8-K dated November 24, 1998, File
No. 1-4315).
99.18 Communication mailed on March 11, 1999 to Common Shareholders of
the Company.
+ Denotes executive compensation plans and arrangements.
* Incorporated by reference to the indicated filings.
The securities issued in connection with each of the following agreements were
not registered with the Securities and Exchange Commission and the total amount
of securities authorized under each agreement does not exceed 10% of the total
assets of the Company and its subsidiaries on a consolidated basis. Therefore,
as provided in Item 601 of Regulation S-K, the following agreements are not
filed as exhibits. The Company agrees, however, to furnish to the Commission a
copy of each agreement upon request:
- First Supplemental Indenture, dated August 15, 1990, to the
Indenture of Mortgage and Deed of Trust of Pike County Light & Power
Company.
- Second Supplemental Indenture, dated October 1, 1998, to the
Indenture of Mortgage and Deed of Trust of Pike County Light & Power
Company.
- Indenture of Trust between NYSERDA and the Bank of New York, as
Trustee, relating to the Pollution Control Revenue Bonds (Orange and
Rockland Utilities, Inc. Project) dated as of August 15, 1994.
- 65 -
<PAGE> 69
- Participation Agreement between NYSERDA and Orange and Rockland
Utilities, Inc., dated as of August 15, 1994.
- Indenture of Trust between NYSERDA and the Bank of New York, as
Trustee, relating to the Pollution Control Refunding Revenue
Bonds dated as of July 1, 1995.
- Participation Agreement between NYSERDA and Orange and Rockland
Utilities, Inc., dated as of July 1, 1995.
- Tenth Supplemental Indenture of Rockland Electric Company, dated as
of February 1, 1997.
(b) Reports on Form 8-K
During the fourth quarter of the year ended December 31, 1998, the Company filed
the following report on Form 8-K:
- Form 8-K dated November 24, 1998, reporting under Item 5, "Other
Events," that the Company had signed definitive agreements with
three subsidiaries of Southern Energy, Inc., an affiliate of
Southern Company to sell its generating assets.
- 66 -
<PAGE> 70
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.
ORANGE AND ROCKLAND UTILITIES, INC.
-----------------------------------
(Registrant)
By D. LOUIS PEOPLES
-------------------------------------
(D. Louis Peoples
Vice Chairman of the
Board of Directors and
Chief Executive Officer)
Date: March 22, 1999
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.
Signature and Title Capacity in Which Signing
------------------- -------------------------
D. LOUIS PEOPLES* Chief Executive
------------------------------------ Officer, Director
(D. Louis Peoples,
Vice Chairman of the
Board of Directors and
Chief Executive Officer)
R. LEE HANEY* Chief Financial Officer
------------------------------------
(R. Lee Haney, Sr. Vice President
and Chief Financial Officer)
EDWARD M. McKENNA* Principal Accounting Officer
------------------------------------
(Edward M. McKenna, Controller)
MICHAEL J. DEL GIUDICE* Chairman of the
------------------------------------ Board of Directors
(Michael J. Del Giudice)
RALPH M. BARUCH* Director
------------------------------------
(Ralph M. Baruch)
J. FLETCHER CREAMER* Director
------------------------------------
(J. Fletcher Creamer)
JON F. HANSON* Director
------------------------------------
(Jon F. Hanson)
KENNETH D. McPHERSON* Director
------------------------------------
(Kenneth D. McPherson)
- 67 -
<PAGE> 71
Signature and Title Capacity in Which Signing
------------------- -------------------------
ROBERT E. MULCAHY* Director
------------------------------------
(Robert E. Mulcahy)
JAMES F. O'GRADY, JR.* Director
------------------------------------
(James F. O'Grady, Jr.)
LINDA C. TALIAFERRO* Director
------------------------------------
(Linda C. Taliaferro)
*By G. D. CALIENDO
------------------------------------
(G. D. Caliendo,
Attorney-in-fact)
Date: March 22, 1999
- 68 -
<PAGE> 72
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Orange and Rockland Utilities,
Inc.'s Annual Report to Shareholders incorporated by reference in this Form
10-K, and have issued our report thereon dated February 4, 1999. Our audit was
made for the purpose of forming an opinion on those consolidated financial
statements taken as a whole. Supplemental Schedule II, Valuation and Qualifying
Accounts and Reserves is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
February 4, 1999
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included or incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-8 (File Nos.
33-25358, 33-25359 and 33-22129) and on Form S-3 (File No. 333-26337).
ARTHUR ANDERSEN LLP
New York, New York
March 22, 1999
- 69 -
<PAGE> 73
SCHEDULE II
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1998, 1997 and 1996
(Thousands of Dollars)
<TABLE>
<CAPTION>
Additions
--------------------
(1) (2) Balance
Balance at Charged to Charged at
beginning costs and to other end of
Description of period expenses accounts Deductions period
----------- --------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
December 31, 1998
Allowance for Uncollect-
ible accounts:
Customer Accounts $2,530 $4,001 $423 $3,268 $3,686
Other Accounts 258 465 75 513 285
------ ------ ---- ------ ------
$2,788 $4,466 $498(A) $3,781(B) $3,971
====== ====== ==== ====== ======
Reserve for Claims
and Damages $4,591 $2,635 $187 $3,335(C) $4,078
====== ====== ==== ====== ======
Gas Turbine Maint.
Reserve $ (104) $ 368 $ -- $ 275(C) $ (11)
====== ====== ==== ====== ======
December 31, 1997
Allowance for Uncollect-
ible accounts:
Customer Accounts $2,391 $2,959 $499 $3,319 $2,530
Other Accounts 258 259 80 339 258
------ ------ ---- ------ ------
$2,649 $3,218 $579(A) $3,658(B) $2,788
====== ====== ==== ====== ======
Reserve for Claims
and Damages $3,843 $2,331 $84 $1,667(C) $4,591
====== ====== ==== ====== ======
Gas Turbine Maint.
Reserve $ (88) $ 366 $ -- $ 382(C) $ (104)
====== ====== ==== ====== ======
</TABLE>
(Schedule II continued on next page)
- 70 -
<PAGE> 74
SCHEDULE II
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 1998, 1997 and 1996
(Thousands of Dollars)
<TABLE>
<CAPTION>
Additions
--------------------
(1) (2) Balance
Balance at Charged to Charged at
beginning costs and to other end of
Description of period expenses accounts Deductions period
----------- --------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
December 31, 1996
Allowance for Uncollect-
ible accounts:
Customer Accounts $2,307 $2,508 $616 $3,040 $2,391
Other Accounts 169 268 197 376 258
------ ------ ---- ------ ------
$2,476 $2,776 $813(A) $3,416(B) $2,649
====== ====== ==== ====== ======
Reserve for Claims
and Damages $3,848 $1,773 $472 $2,250(C) $3,843
====== ====== ==== ====== ======
Gas Turbine Maint.
Reserve $ (202) $ 453 $ -- $ 339(C) $ (88)
====== ====== ==== ====== ======
</TABLE>
(A) Includes collection of accounts previously written off of $498 in 1998,
$579 in 1997, and $813 in 1996.
(B) Accounts considered uncollectible and charged off of $3,781 in 1998,
$3,658 in 1997 and $3,416 in 1996.
(C) Payments of damage claims of $2,635 in 1998, $1,667 in 1997 and $2,250 in
1996 and maintenance expenses of $275 in 1998, $382 in 1997 and $339 in
1996.
- 71 -
<PAGE> 75
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
For Year Ended December 31, 1998 Commission File Number 1-4315
ORANGE AND ROCKLAND UTILITIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
EXHIBITS
<PAGE> 76
Orange and Rockland Utilities, Inc.
Index of Exhibits
1998 Form 10-K
*3.2 By-Laws, as amended through June 29, 1995. (Exhibit 3.2 to Form 10-Q
for the period ended June 30, 1995, File No. 1-4315).
*3.4 Restated Certificate of Incorporation dated May 7, 1996. (Exhibit
3.4 to Form 10-Q for the period ended March 31, 1996, File No.
1-4315).
*4.3 Mortgage Trust Indenture of Rockland Electric Company, dated as of
July 1, 1954. (Exhibit 2.16 to Registration Statement No. 2-14159).
*4.11 Mortgage Trust Indenture of Pike County Light & Power Company, dated
as of July 15, 1971. (Exhibit 4.31 to Registration Statement No.
2-45632).
*4.25 Indenture between the Company and The Bank of New York as Trustee
regarding unsecured debt, dated March 1, 1990. (Exhibit 4.25 to Form
10-K for the fiscal year ended December 31, 1990, File No. 1-4315).
*4.26 First Supplemental Indenture between the Company and The Bank of New
York as Trustee regarding unsecured debt, dated March 7, 1990.
(Exhibit 4.26 to Form 10-K for the fiscal year ended December 31,
1990, File No. 1-4315).
*4.27 Second Supplemental Indenture between the Company and the Bank of
New York as Trustee regarding unsecured debt, dated October 15,
1992. (Exhibit 4.27 to Form 10-K for the fiscal year ended December
31, 1992, File No. 1-4315).
*4.29 Third Supplemental Indenture between the Company and The Bank of New
York as Trustee regarding unsecured debt, dated as of March 1, 1993.
(Exhibit 4.29 to Form 10-K for the fiscal year ended December 31,
1992, File No. 1-4315).
*4.30 Ninth Supplemental Indenture of Rockland Electric Company, dated as
of March 1, 1993. (Exhibit 4.30 to Form 10-K for the fiscal year
ended December 31, 1992, File No. 1-4315).
*4.31 Fourth Supplemental Indenture between the Company and the Bank of
New York as Trustee regarding unsecured debt dated as of December 1,
1997. (Exhibit 4.5 to Company's Registration Statement on Form S-4,
File No. 333-43953).
*4.32 Form of Fifth Supplemental Indenture between the Company and The
Bank of New York as Trustee regarding unsecured debt dated as of
March 1, 1999. (Exhibit 4.7 to the Company's Registration Statement
No. 333-72289 on Form S-3, File No. 1-4315).
*10.1 General Agreement: Bowline Point Generating Plant, dated as of
October 10, 1969. (Exhibit 5(b) to Registration Statement No.
2-42156).
*10.1A Amendment to the General Agreement: Bowline Point Generating Plant,
dated May 31, 1996. (Exhibit 10.1A to Form 10-K for the fiscal year
ended December 31, 1996, File No. 1-4315).
<PAGE> 77
*10.3 Orange and Rockland Utilities, Inc. Eligible Employees Compensation
Deferral Plan (formerly the Officers Salary Deferral Plan), as
amended and restated on June 5, 1997, effective January 1, 1998.
(Exhibit 10.3 to Form 10-K for the fiscal year ended December 31,
1997, File No. 1-4315).
*10.7 New York Power Pool Agreement, dated July 16, 1985. (Exhibit 10.7 to
Form 10-K for the fiscal year ended December 31, 1990, File No.
1-4315).
*10.8 Agreement governing the supply of residual fuel oil by Con Edison to
Bowline Point Generating Station dated August 31, 1983. (Exhibit
10.8 to Form 10-K for fiscal year ended December 31, 1991, File No.
1-4315).
*10.10 PJM Facilities Agreement, dated May 1, 1970, as amended December 12,
1972. (Exhibit 10.10 to Form 10-K for the fiscal year ended December
31, 1992, File No. 1-4315).
+*10.11 Officers' Supplemental Retirement Plan, as amended and restated on
June 5, 1997 effective July 1, 1997. (Exhibit 10.11 to Form 10-Q for
the quarter ended June 30, 1997, File No. 1-4315).
+*10.12 Incentive Compensation Plan, amended January 3, 1991. (Exhibit 10.12
to Form 10-K for the fiscal year ended December 31, 1990, File No.
1-4315).
*10.13 Severance Pay Plan, as amended and restated on November 6, 1997.
(Exhibit 10.13 to Form 10-K for the fiscal year ended December 31,
1997, File No. 1-4315).
*10.14 Management Long-Term Disability Plan as amended January 1, 1996.
(Exhibit 10.14 to Form 10-K for the fiscal year ended December 31,
1995, File No. 1-4315).
*10.17 Coal Purchase and Sale Agreement among Orange and Rockland
Utilities, Inc., Rawl Sales and Processing Company, and Massey Coal
Sales, Inc., dated March 9, 1984, as amended through July 1, 1991.
(Exhibit 10.17 to Form 10-K for the fiscal year ended December 31,
1991, File No. 1-4315).
*10.17A Seventh Amendment to the Coal Purchase and Sales Agreement among
Orange and Rockland Utilities, Inc., Rawl Sales and Processing
Company, and Massey Coal Sales, Inc., dated July 1, 1994. (Exhibit
10.17 to Form 10-K for the fiscal year ended December 31, 1994, File
No. 1-4315).
*10.17B Eighth Amendment to the Coal Purchase and Sales Agreement among
Orange and Rockland Utilities, Inc., Rawl Sales and Processing
Company, and Massey Coal Sales, Inc., dated July 1, 1996. (Exhibit
10.17B to Form 10-K for the fiscal year ended December 31, 1996,
File No. 1-4315).
+*10.20 Orange and Rockland Utilities, Inc. Post Director Service Retainer
Continuation Program, as amended and restated on June 5, 1997,
effective July 1, 1997. (Exhibit 10.20 to Form 10-Q for the quarter
ended June 30, 1997, File No. 1-4315).
<PAGE> 78
+*10.22 Form of Severance Agreement entered into between Orange and Rockland
Utilities, Inc. and each of R. J. Biederman, Jr., effective October
29, 1997; N. M. Jakobs, effective October 27, 1997; R. J. McBennett,
effective October 27, 1997; and E. M. McKenna, effective October 31,
1997. (Exhibit 10.22 to Form 10-K for the fiscal year ended December
31, 1997, File No. 1-4315).
+*10.22A Form of Agreement, amending Exhibit 10.22, entered into between
Orange and Rockland Utilities, Inc. and each of R. J. Biederman,
Jr., R. J. McBennett and E. M. McKenna, effective January 27, 1998
and N. M. Jakobs, effective January 8, 1998. (Exhibit 10.22A to Form
10-K for the fiscal year ended December 31, 1997, File No. 1-4315).
+*10.26 Letter agreement dated September 29, 1994 between Orange and
Rockland Utilities, Inc. and R. Lee Haney regarding participation in
the Officers' Supplemental Retirement Plan of Orange and Rockland
Utilities, Inc. (Exhibit 10.26 to Form 10-Q for the period ended
September 30, 1994, File No. 1-4315).
+*10.26A Agreement between Orange and Rockland Utilities, Inc. and R. Lee
Haney effective July 1, 1997, amending Exhibit 10.26. (Exhibit
10.26A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.27 Letter agreement dated September 29, 1994 between Orange and
Rockland Utilities, Inc. and D. Louis Peoples regarding
participation in the Officers' Supplemental Retirement Plan of
Orange and Rockland Utilities, Inc. (Exhibit 10.27 to Form 10-Q for
the period ended September 30, 1994, File No. 1-4315).
+*10.27A Agreement between Orange and Rockland Utilities, Inc. and D. Louis
Peoples effective July 1, 1997, amending Exhibit 10.27. (Exhibit
10.27A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.29 Orange and Rockland Utilities, Inc. Deferred Compensation Plan for
Non-Employee Directors as amended and restated on February 5, 1998.
(Exhibit 10.29 to Form 10-K for the fiscal year ended December 31,
1997, File No. 1-4315).
+*10.30 Letter Agreement dated April 6, 1995 between Orange and Rockland
Utilities, Inc. and G. D. Caliendo regarding participation in the
Officers' Supplemental Retirement Plan of Orange and Rockland
Utilities, Inc. (Exhibit 10.30 to Form 10-Q for the period ended
June 30, 1995, File No. 1-4315).
+*10.30A Agreement between Orange and Rockland Utilities, Inc. and G. D.
Caliendo effective July 1, 1997, amending Exhibit 10.30. (Exhibit
10.30A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.31 Letter Agreement dated September 21, 1995 between Orange and
Rockland Utilities, Inc. and Nancy M. Jakobs regarding participation
in the Officers' Supplemental Retirement Plan of Orange and Rockland
Utilities, Inc. (Exhibit 10.31 to Form 10-Q for the period ended
September 30, 1995, File No. 1-4315).
<PAGE> 79
+*10.31A Agreement between Orange and Rockland Utilities, Inc. and Nancy M.
Jakobs effective July 1, 1997, amending Exhibit 10.31. (Exhibit
10.31A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.36 Agreement dated January 22, 1996 between Orange and Rockland
Utilities, Inc. and D. L. Peoples regarding change in control
arrangements. (Exhibit 10.36 to Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-4315).
+*10.36A Agreement between Orange and Rockland Utilities, Inc. and D. L.
Peoples dated July 23, 1997, amending Exhibit 10.36. (Exhibit 10.36A
to Form 10-K for the fiscal year ended December 31, 1997, File No.
1-4315).
+*10.37 Agreement dated January 21, 1996 between Orange and Rockland
Utilities, Inc. and G. D. Caliendo regarding change in control
arrangements. (Exhibit 10.37 to Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-4315).
+*10.37A Agreement between Orange and Rockland Utilities, Inc. and G. D.
Caliendo dated July 23, 1997, amending Exhibit 10.37. (Exhibit
10.37A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.37B Letter agreement between Orange and Rockland Utilities, Inc. and G.
D. Caliendo dated February 25, 1998, amending Exhibits 10.30 and
10.37. (Exhibit 10.37B to Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-4315).
+*10.38 Agreement dated January 22, 1996 between Orange and Rockland
Utilities, Inc. and R. L. Haney regarding change in control
arrangements. (Exhibit 10.38 to Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-4315).
+*10.38A Agreement between Orange and Rockland Utilities, Inc. and R. L.
Haney dated July 23, 1997, amending Exhibit 10.38. (Exhibit 10.38A
to Form 10-K for the fiscal year ended December 31, 1997, File No.
1-4315).
+*10.38B Letter agreement between Orange and Rockland Utilities, Inc. and R.
Lee Haney dated February 25, 1998, amending Exhibits 10.26 and
10.38. (Exhibit 10.38B to Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-4315).
+*10.40 Long-Term Performance Share Unit Plan as amended, effective July 1,
1997. (Exhibit 10.40 to Form 10-Q for the quarter ended June 30,
1997, File No. 1-4315).
+*10.41 Annual Team Incentive Plan effective January 1, 1995, described on
pages 9-10 of the Company's definitive proxy statement filed with
the Securities and Exchange Commission on March 6, 1998 for its 1998
Annual Meeting of shareholders, which description is hereby
incorporated by reference (File No. 1-4315).
+*10.42 Letter Agreement dated February 16, 1995 between Orange and Rockland
Utilities, Inc. and G. D. Caliendo regarding employment. (Exhibit
10.42 to Form 10-K for the fiscal year ended December 31, 1995, File
No. 1-4315).
<PAGE> 80
+*10.43 Letter Agreement dated July 14, 1994 between Orange and Rockland
Utilities, Inc. and D. L. Peoples regarding employment. (Exhibit
10.43 to Form 10-K for the fiscal year ended December 31, 1995, File
No. 1-4315).
+*10.44 Letter Agreement dated November 14, 1995 between Orange and Rockland
Utilities, Inc. and L. S. Brodsky regarding employment. (Exhibit
10.44 to Form 10-K for the fiscal year ended December 31, 1995, File
No. 1-4315).
+*10.44A Agreement between Orange and Rockland Utilities, Inc. and L. S.
Brodsky effective July 1, 1997, amending Exhibit 10.44. (Exhibit
10.44A to Form 10-K for the fiscal year ended December 31, 1997,
File No. 1-4315).
+*10.45 Letter Agreement dated March 21, 1995 between Orange and Rockland
Utilities, Inc. and Nancy M. Jakobs regarding employment. (Exhibit
10.45 to Form 10-K for the fiscal year ended December 31, 1995, File
No. 1-4315).
+*10.46 Letter Agreement dated September 2, 1994 between Orange and Rockland
Utilities, Inc. and R. L. Haney regarding employment. (Exhibit 10.46
to Form 10-K for the fiscal year ended December 31, 1995, File No.
1-4315).
*10.47 Eligible Employees' Insurance Program, effective July 1, 1997.
(Exhibit 10.48 to Form 10-Q for the quarter ended June 30, 1997,
File No. 1-4315).
+*10.48 Agreement and General Release dated August 27, 1997 between Orange
and Rockland Utilities, Inc. and Larry S. Brodsky. (Exhibit 10.49 to
Form 10-Q for the quarter ended September 30, 1997, File No.
1-4315).
*10.49 Management Employee Transition Program, as described in
correspondence to employees, dated December 11, 1997 and January 9,
1998. (Exhibit 10.49 to Form 10K for the fiscal year ended December
31, 1997, File No. 1-4315).
*10.50 Settlement Agreement (Electric Rate and Restructuring Plan) dated
November 6, 1997 among the Registrant, the New York State Department
of Public Service, the New York State Department of Economic
Development, the National Association of Energy Service Companies,
the Joint Supporters, the Industrial Energy Users Association, the
Independent Power Producers of New York, Inc. and Pace Energy
Project in Case 96-E-0900 - In the Matter of Orange and Rockland
Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to
Opinion No. 96-12. (Exhibit 99.7 to Form 10-Q for the quarter ended
September 30, 1997, File No. 1-4315).
*10.51 Agreement and Plan of Merger, dated as of May 10, 1998, among the
Company, CEI and Merger Sub. (Exhibit 10.51 to Form 8-K dated May
10, 1998, File No. 1-4315).
<PAGE> 81
+*10.52 Agreement among the Company, Consolidated Edison, Inc., C
Acquisition Corp. and G. D. Caliendo, dated May 10, 1998, providing
for the termination of Mr. Caliendo's employment with the Company at
the effective time of the Merger and the payment of certain amounts
in accordance with the severance agreement between the Company and
G. D. Caliendo dated January 21, 1996. (Exhibit 10.52 to Form 10-Q
for the quarter ended March 31, 1998, File No. 1-4315).
+*10.53 Agreement among the Company, Consolidated Edison, Inc., C
Acquisition Corp. and R. Lee Haney, dated May 10, 1998, providing
for the termination of Mr. Haney's employment with the Company at
the effective time of the Merger and the payment of certain amounts
in accordance with the severance agreement between the Company and
R. Lee Haney dated January 22, 1996. (Exhibit 10.53 to Form 10-Q for
the quarter ended March 31, 1998, File No. 4315).
+*10.54 Agreement among the Company, Consolidated Edison, Inc. C Acquisition
Corp. and Robert McBennett, dated March 10, 1998, providing for the
termination of Mr. McBennett's employment with the Company at the
latter of the effective time of the Merger or July 1, 1999 and the
payment of certain amounts in accordance with the severance
agreement between the Company and Robert McBennett dated October 27,
1997. (Exhibit 10.54 to Form 10-Q for the quarter ended March 31,
1998, File No. 1-4315).
+*10.55 Agreement among the Company, Consolidated Edison, Inc., C
Acquisition Corp. and D. Louis Peoples, dated May 10, 1998,
providing for the termination of Mr. People's employment with the
Company at the effective time of the Merger and the payment of
certain amounts in accordance with the severance agreement between
the Company and D. Louis Peoples dated January 22, 1996. (Exhibit
10.55 to Form 10-Q for the quarter ended March 31, 1998, File No.
1-4315).
+*10.56 Agreement among the Company, Consolidated Edison, Inc., C
Acquisition Corp. and N. M. Jakobs dated July 15, 1998, providing
for the termination of Ms. Jakobs employment with the Company at the
effective time of the Merger and the payment of certain amounts in
accordance with the severance agreement between the Company and N.
M. Jakobs dated October 27, 1997 as amended January 8, 1998.
(Exhibit 10.56 to Form 10-Q for the quarter ended June 30, 1998,
File No. 1-4315).
+*10.57 Severance Agreement entered into between Orange and Rockland
Utilities, Inc. and G. V. Bubolo, Jr. effective April 10, 1998.
(Exhibit 10.57 to Form 10-Q for the quarter ended June 30, 1998,
File No. 1-4315).
*10.58 Bowline Point Generating Station Sales Agreement by and between
Orange and Rockland Utilities, Inc., Consolidated Edison Company of
New York, Inc. and Southern Energy Bowline, L.L.C., dated as of
November 24, 1998. (Exhibit 10.58 to Form 8-K dated November 24,
1998, File No. 1-4315).
*10.59 Lovett Generating Station Sales Agreement between Orange and
Rockland Utilities, Inc. and Southern Energy Lovett, L.L.C., dated
as of November 24, 1998. (Exhibit 10.59 to Form 8-K dated November
24, 1998, File No. 1-4315).
<PAGE> 82
*10.60 Gas Turbine and Hydroelectric Generating Stations Sales Agreement
between Orange and Rockland Utilities, Inc. and Southern Energy
NY-Gen, L.L.C., dated as of November 24, 1998. (Exhibit 10.60 to
Form 8-K dated November 24, 1998, File No. 1-4315).
*10.61 Bowline Adjacent Property Sales Agreement by and between Orange and
Rockland Utilities, Inc. and Southern Energy Bowline, L.L.C., dated
as of November 24, 1998. (Exhibit 10.61 to Form 8-K dated November
24, 1998, File No. 1-4315).
*10.62 Transition Power Sales Agreement by and between Orange and Rockland
Utilities, Inc., Southern Energy Bowline, L.L.C., Southern Energy
Lovett, L.L.C. and Southern Energy NY - Gen., L.L.C., dated as of
November 24, 1998. (Exhibit 10.62 to Form 8-K dated November 24,
1998, File No. 1-4315).
*10.63 Eastern Loan Pocket Call Option Agreement between Orange and
Rockland Utilities, Inc. and Southern Energy Lovett, L.L.C., dated
as of November 24, 1998. (Exhibit 10.63 to Form 8-K dated November
24, 1998, File No. 1-4315).
*10.64 Western Loan Pocket Call Option Agreement between Orange and
Rockland Utilities, Inc. and Southern Energy NY-Gen, L.L.C., dated
as of November 24, 1998. (Exhibit 10.64 to Form 8-K dated November
24, 1998, File No. 1-4315).
*10.65 Bowline Guaranty, dated as of November 24, 1998, given by Southern
Energy, Inc. in favor of Orange and Rockland Utilities, Inc. and
Consolidated Edison Company of New York, Inc. (Exhibit 10.65 to Form
8-K dated November 24, 1998, File No. 1-4315).
*10.66 Lovett, Gas Turbine and Hydroelectric Generating Facilities
Guaranty, dated as of November 24, 1998, given by Southern Energy,
Inc. in favor of Orange and Rockland Utilities, Inc. (Exhibit 10.66
to Form 8-K dated November 24, 1998, File No. 1-4315).
13 The Company's 1998 Annual Report to Shareholders to the extent
incorporated by reference in this Form 10-K Annual Report for the
fiscal year ended December 31, 1998. [Note: Except for those
portions of such Annual Report expressly incorporated by reference
in this Form 10-K Annual Report, such Annual Report is not deemed
"filed" as part of the filing of this Form 10-K Annual Report.]
*21 Subsidiaries of the Company. (Exhibit 21 to Company's Registration
Statement on Form S-4, File No. 333-43953).
24 Powers of Attorney.
27 Financial Data Schedule.
*99 Press Release of the Company dated February 5, 1998. (Exhibit 99 to
Form 8-K dated February 5, 1998, File No. 1-4315).
*99.1 Joint Cooperation Agreement between the Office of the Rockland
County District Attorney and Orange and Rockland Utilities, Inc.,
dated November 3, 1993 (Exhibit 99.1 to Form 10-Q for the quarter
ended September 30, 1993, File No. 1-4315).
<PAGE> 83
*99.2 NYPSC Order Adopting Terms of Settlement, Issued and Effective
November 26, 1997, in Case 96-E-0900. (Exhibit 99.10 to Form 8-K
dated November 25, 1997, File No. 1-4315).
*99.3 NYPSC Opinion (No. 97-20) and Order Adopting Terms of Settlement,
Issued and Effective December 31, 1997, in Case 96-E-0900. (Exhibit
99.3 to Form 10-K for the fiscal year ended December 31, 1997, File
No. 1-4315).
*99.5 Agreement Between Orange and Rockland Utilities, Inc. and Kroll
Associates, Inc. dated as of November 1, 1994. (Exhibit 99.5 to Form
10-Q for the period ended September 30, 1994, File No. 1-4315).
*99.12 Press Release of the Company dated April 8, 1998. (Exhibit 99.12 to
Form 8-K dated April 8, 1998, File No. 1-4315).
*99.13 Joint Press Released the Company and CEI issued May 11, 1998.
(Exhibit 99.13 to Form 8-K dated May 10, 1998, File No. 1-4315).
*99.14 The Company's Final Divestiture Plan as approved by the NYPSC on
April 8, 1998. (Exhibit 99.14 to Form 10-Q for the quarter ended
March 31, 1998, File No. 1-4315).
*99.14A Press Release of the Company dated August 20, 1998. (Exhibit 99.14
to Form 8-K dated August 20, 1998, File No. 1-4315).
*99.15 Press Release of the Company dated August 20, 1998. (Exhibit 99.15
to Form 8-K dated August 20, 1998, File No. 1-4315).
*99.16 Orange and Rockland Utilities, Inc. Press Release issued November
24, 1998. (Exhibit 99.16 to Form 8-K dated November 24, 1998, File
No. 1-4315).
99.18 Communication mailed on March 11, 1999 to Common Shareholders of
the Company.
+ Denotes executive compensation plans and arrangements.
* Incorporated by reference to the indicated filings.
The securities issued in connection with each of the following agreements were
not registered with the Securities and Exchange Commission and the total amount
of securities authorized under each agreement does not exceed 10% of the total
assets of the Company and its subsidiaries on a consolidated basis. Therefore,
as provided in Item 601 of Regulation S-K, the following agreements are not
filed as exhibits. The Company agrees, however, to furnish to the Commission a
copy of each agreement upon request:
- First Supplemental Indenture, dated August 15, 1990, to the
Indenture of Mortgage and Deed of Trust of Pike County Light & Power
Company.
- Second Supplemental Indenture, dated October 1, 1998, to the
Indenture of Mortgage and Deed of Trust of Pike County Light & Power
Company.
- Indenture of Trust between NYSERDA and the Bank of New York, as
Trustee, relating to the Pollution Control Revenue Bonds (Orange and
Rockland Utilities, Inc. Project) dated as of August 15, 1994.
<PAGE> 84
- Participation Agreement between NYSERDA and Orange and Rockland
Utilities, Inc., dated as of August 15, 1994.
- Indenture of Trust between NYSERDA and the Bank of New York, as
Trustee, relating to the Pollution Control Refunding Revenue Bonds
dated as of July 1, 1995.
- Participation Agreement between NYSERDA and Orange and Rockland
Utilities, Inc., dated as of July 1, 1995.
- Tenth Supplemental Indenture of Rockland Electric Company, dated as
of February 1, 1997.
<PAGE> 1
Review of the Company's Results of
Operations and Financial Condition
Major Developments -- 1998
Merger
On May 10, 1998, the Company, Consolidated Edison Inc. (CEI) and
C Acquisition Corp., a wholly owned subsidiary of CEI (Merger Sub), entered into
an Agreement and Plan of Merger (Merger Agreement) providing for a merger
transaction among the Company, CEI and the Merger Sub. Pursuant to the Merger
Agreement, Merger Sub will merge with and into the Company (the Merger), with
the Company being the surviving corporation and becoming a wholly owned
subsidiary of CEI.
On June 22, 1998, the Company and CEI and Consolidated Edison Company of
New York, Inc. (Con Edison) filed a Joint Petition (Joint Petition) with the New
York Public Service Commission (NYPSC) requesting approval of the Merger. The
Parties have requested regulatory reviews and approvals prior to March 31, 1999.
In this Joint Petition, the Company reaffirmed its commitment to honor the
provisions of its NYPSC-approved Electric Rate and Restructuring Plan, dated
November 26, 1997 (Restructuring Plan). Accordingly, the Company has proceeded
with its efforts to divest all of its generating assets and to implement full
retail access for all customers by May 1, 1999.
Since both the Company and Con Edison have agreed to implement full
retail access and have committed to comprehensive generation divestiture
programs, the Company and Con Edison, in their filing described below with the
Federal Energy Regulatory Commission (FERC), took the position that the Merger
will not have an adverse impact on competition in the electric industry.
The Merger is anticipated to result in cost savings, net of transaction
costs and costs to achieve, of approximately $468 million over the first 10
years following the closing of the transaction. Transaction costs and costs to
achieve are the incremental legal, financial, employee and organizational costs
incurred and to be incurred to effectuate and implement the Merger and related
costs savings activities. The Parties have proposed in the Joint Petition that
these cost savings be allocated between customers and shareholders on a 50/50
basis. In addition, the Parties have proposed a cost allocation methodology and
accounting procedure which would govern them and their various affiliates.
On July 2, 1998, Rockland Electric Company (RECO) and Pike County Light &
Power Company (Pike), wholly owned utility subsidiaries of the Company, filed
similar petitions with the New Jersey Board of Public Utilities (NJBPU) and the
Pennsylvania Public Utility Commission (PPUC), respectively, for approval of
the Merger. The proceedings before the NYPSC, the NJBPU and the PPUC have
established schedules that provide for final decisions by March 31, 1999. The
Company can give no assurance that any of the Commissions will issue orders by
that date or what, if any, conditions may be imposed by such Commissions to
such orders.
On January 14, 1999, Pike, the Office of the Consumer Advocate and the
Office of the Small Business Advocate executed a settlement agreement which
allows Pike to retain all merger savings, net of costs to achieve, until its
next electric and gas base rate case. An Administrative Law Judge (ALJ) issued a
Recommended Decision to the PPUC on February 3, 1999 recommending approval of
the settlement in its entirety. A final PPUC order is expected prior to
March 31, 1999.
Orange and Rockland Utilities, Inc. and Subsidiaries
On September 9, 1998, the Company and Con Edison filed an Application for
Approval of Merger and Related Authorizations with the FERC. On January 27,
1999, FERC issued an order approving the merger consistent with the terms of
said application.
On February 3, 1999, the Company and CEI filed an application with the
Securities and Exchange Commission seeking approval of the Merger under the
Public Utility Holding Company Act of 1935.
On January 26, 1999, the Company and CEI each filed a Notification and
Report Form under the Hart-Scott-Rodino Act of 1976, as amended, (HSR Act) with
the Department of Justice and the Federal Trade Commission. Under the provisions
of the HSR Act, consummation of the Merger is subject to the expiration or
earlier termination of the applicable waiting period.
At a Special Meeting of the Common Shareholders of the Company held on
August 20, 1998, the Merger Agreement was approved by a vote of approximately
74% of the common shares entitled to vote. The Merger is expected to occur
shortly after all of the conditions to the consummation of the Merger,
including the receipt of all regulatory approvals, are met or waived.
Divestiture
In accordance with the schedule in the Restructuring Plan, the Company
filed its final divestiture plan (Divestiture Plan) with the NYPSC on February
4, 1998. The Divestiture Plan, which provides for a two-phase auction process,
was approved by the NYPSC in orders issued April 16, 1998 and May 26, 1998. The
Company retained Donaldson, Lufkin & Jenrette Securities Corporation to act as
its financial advisor in connection with the divestiture of the generating
assets.
Following the review of final bids and negotiations with the winning
bidder, on November 24, 1998, the Company entered into four separate Asset Sales
Agreements (ASAs) with subsidiaries of Southern Energy, Inc. (Southern Energy),
a subsidiary of Southern Company. The sales price for all generating facilities,
including the two-thirds interest in Bowline Point Generating Plant (Bowline)
owned by Con Edison, is approximately $480 million, plus certain fuel inventory
and other adjustments. The Company's share of the sales price is approximately
$345 million. The sale is subject to federal and state regulatory review and
approval. The ASAs provide for the closing of the sale to occur on April 30,
1999, which date may be adjusted depending on the receipt of regulatory
approvals. Under the terms of the ASAs, if approval by FERC of the establishment
of the Independent System Operator, as described below, has not been obtained by
the time all other regulatory approvals have been obtained, the parties have
agreed to defer the closing of the sale, but in no event to a date later than
August 31, 1999.
The Restructuring Plan provides that the New York share of any net book
gains from the divestiture of the generating assets will be shared between the
Company's New York customers and shareholders, with shareholders receiving
25 percent of the gain, up to $20 million.
The terms of the Restructuring Plan also permit the Company to defer and
recover up to $7.5 million (New York electric share) of prudent and verifiable
non-officer employee costs associated with the divestiture, such as retraining,
outplacement, severance, early retirement and employee retention programs. Under
the terms of the Restructuring Plan, the Company will be authorized to petition
the NYPSC for recovery of employee costs in excess of $7.5 million. In addition,
the Restructuring Plan provides for the recovery of all prudent and verifiable
costs of the sale.
The NJBPU has not yet decided how RECO's share of any gain will be
allocated between ratepayers and shareholders. Pike's settlement will allow
shareholders to retain $55,000 of any gain.
Competition
Regulatory agencies at the federal level, as well as in the three states
in which the Company has retail electric franchises, are currently implementing
changes in regulatory and rate-making practices, as described below, designed to
promote increased competition consistent with safety, reliability and
affordability standards. Depending on ongoing developments in this area, the
Company's market share and profit margins will become subject to competitive
pressures in addition to regulatory constraints.
Federal Initiative
On April 24, 1996, the FERC issued its final order (FERC Order 888)
requiring electric utilities to file non-discriminatory open access transmission
tariffs that would be available to wholesale sellers and buyers of electric
energy. The order also provided for the recovery of related legitimate and
verifiable strandable costs subject to the FERC's jurisdiction. The Company's
open access transmission tariff, as originally filed with the FERC on July 9,
1996 and amended through October 1997, offers transmission service and certain
ancillary services to wholesale customers on a basis that is comparable to that
which it provides itself. The Company is operating under the filed tariff,
subject to refund, pending final FERC approval of the Company's filing. The
Company participates in the wholesale electric market primarily as a buyer of
energy and, as a result, Order 888 is not expected to materially impact the
Company's financial condition or results of operations.
On January 31, 1997, the Company, in conjunction with the other members of
the New York Power Pool (NYPP), filed tariffs with the FERC seeking permission
to restructure the NYPP into an Independent System Operator (ISO). On December
19, 1997, the Company and the other members of the NYPP made a supplemental
filing with the FERC which provides for a revised ISO governance structure. In
an Order dated January 27, 1999, the FERC conditionally accepted the proposed
ISO Tariff and the proposed market rules of the ISO. The Order requires
substantial modifications to the proposed ISO Tariff including separation of the
transmission tariff from the rate schedules that govern non-transmission
functions. The NYPP members must submit a revised monitoring program to identify
both the exercise of market power and market design flaws. The FERC also set a
hearing to consider certain rate issues and noted that an application pursuant
to Section 203 of the Federal Power Act requesting transfer of control of all
necessary facilities from the NYPP members to the ISO must be submitted to and
approved by the FERC. The NYPP members filed such Section 203 applications with
the FERC on February 5, 1999. The Company is unable to predict when the ISO will
become operational.
New York Competitive Opportunities Proceeding
Electric
The Restructuring Plan, in addition to providing for the divestiture of
the electric generating facilities discussed above, provides that full retail
access to a competitive energy and capacity market will be available for all
customers by May 1, 1999.
The Restructuring Plan also provides for electric price reductions of
approximately $32.4 million over its four-year term and for recovery, through a
Competitive Transition Charge (CTC), of above-market generation costs should the
transfer of title to the Company's generating assets not occur before May 1,
1999. Should a CTC be required, the Company would be authorized to recover the
difference between its non-variable costs of generation, including 75% of fixed
production labor expenses and property taxes, and the revenues, net of fuel and
variable operating and maintenance expenses, derived from the operation of the
Company's generating assets in a deregulated competitive market. If title to the
generating assets has not transferred as of May 1, 2000, the CTC would be
modified so as to allow a maximum recovery of 65% of fixed production labor
expenses and property taxes. The modified CTC would remain effective until the
earlier of the date title to the generating assets is
- --------------------------------------------------------------------------------
7
<PAGE> 2
Orange and Rockland Utilities, Inc. and Subsidiaries
transferred or October 31, 2000. In the event title to the generating assets is
not to be transferred by October 31, 2000, the Company would be authorized to
petition the NYPSC for permission to continue a CTC until the date title to the
generating assets is transferred. The CTC does not allow for the recovery of
inflationary increases in non-fuel operating and maintenance production costs,
property tax increases, wage rate increases, or increased costs associated with
capital additions or changes in the costs of capital applicable to production
costs.
The Restructuring Plan also provides a schedule for the submission of
comments by the Company, the staff of the New York State Department of Public
Service (the Staff) and other interested parties to the NYPSC on the degree and
timing of introducing competition in metering and billing services. The NYPSC
initiated proceedings in these areas during 1998. The Company cannot predict at
this time the ultimate outcome of the proceedings or their effect, if any, on
the Company's consolidated financial position or results of operations.
Settlement agreements, providing for the implementation of unbundled
rates, effective May 1, 1999, which separate the components of existing tariffs
into production, transmission, distribution and customer cost categories, were
reached on August 13 and September 18, 1998 between the Company, the Staff and
other interested parties. By Orders dated February 4, 1999, the NYPSC approved
the settlement agreements with minor modifications.
Gas
In 1996, the NYPSC approved utility restructuring plans designed to open
up the local natural gas market to competition and allow residential and small
commercial users the ability to purchase gas supplies from a variety of sources,
other than the franchised local distribution utility. On November 3, 1998, the
NYPSC issued a Policy Statement Concerning the Future of the Natural Gas
Industry in New York State and Order Terminating Capacity Assignment (Case
97-G-1380). The Policy Statement envisions a three- to seven-year transition for
gas utilities to exit the gas merchant function. To further this process and
increase gas competition in the state, the NYPSC has directed that gas utilities
no longer require customers migrating from sales to transportation service to
continue utilizing upstream pipeline capacity contracted for by the utility,
except where specific operational or reliability requirements warrant. According
to the Order, utilities will be provided a reasonable opportunity to recover
strandable costs. The Company ceased requiring transportation customers to
utilize its upstream capacity as of October 1, 1998. As of December 31, 1998,
the Company has not incurred any stranded costs related to its upstream pipeline
capacity. As the Company moves to a competitive market, traditional cost
recovery mechanisms may be replaced by market-based methods. It is not possible
to predict the outcome of this proceeding or its effect on the Company's
consolidated financial position or results of operations.
New Jersey -- Energy Master Plan
On April 30, 1997, the NJBPU issued an order "Adopting and Releasing Final
Report in its Energy Master Plan Phase II Proceeding to Investigate the Future
Structure of the Electric Power Industry (Docket No. EX 94120585Y)." The Order
required RECO and other New Jersey investor-owned electric utilities each to
file unbundled rates, a stranded cost proposal and a restructuring plan by July
15, 1997. As part of its stranded cost proposal, the NJBPU recommended that each
utility provide a 5-10% rate reduction.
RECO's filing was made on July 15, 1997. The filing includes a
Restructuring Plan, a Stranded Costs Filing and an Unbundled Rates Filing.
On December 8, 1997, RECO submitted an Amended and Restated Restructuring
Plan and Stranded Costs Filing with the NJBPU to reflect the fact that the
Company has committed to divest all of its electric generating assets by
auction.
The Restructuring Plan calls for RECO to remain a regulated transmission
and distribution company. Standards of Conduct and Affiliate Rules have been
proposed in order to promote effective competition and ensure that regulated
operations do not subsidize unregulated operations. RECO has proposed to
implement full retail competition (energy and capacity) for all customers by May
1, 1999, the same date approved for retail access in New York. As discussed
below, the recently approved New Jersey restructuring legislation would delay
the implementation of full retail access until June 1, 1999. Under this
schedule, full retail access will be achieved 13 months ahead of the NJBPU's
proposed phase-in schedule.
In its Stranded Costs Filing, RECO has identified two categories of
potential stranded costs: generation investment and power purchase contracts
with non-utility generators (NUG). Divestiture of the Company's generating
assets will determine their market value and the related stranded costs, if any.
RECO proposes to recover its share of stranded generation investment, if any,
through regulated delivery rates by means of a Market Transition Charge (MTC).
The MTC would be in effect over a period of up to eight years, commencing May 1,
1999. Stranded NUG contract payments are proposed to be recovered over the
remaining life of the contracts through a non-bypassable wires charge also
assessed by the regulated delivery company. RECO proposed to reduce its annual
net revenue (revenue net of fuel, purchased power and applicable taxes) by $4.3
million, or 5.1%, effective with the implementation of retail competition.
RECO also made an Unbundled Rates Filing, which was updated on January 30,
1998, and would serve as the basis to segregate the costs of the generation
function from rates in order to facilitate customer choice. In addition, the MTC
mechanism would be added to the existing rate structure to allow for recovery of
stranded costs, and a non-bypassable societal benefits charge would be created
as a billing mechanism for mandated public policy programs.
Hearings with respect to RECO's filings were held in the spring of 1998
and a decision is pending. The NJBPU has indicated that it will consider RECO's
filings as required by the recently enacted utility legislation discussed below.
On January 28, 1999, the New Jersey Assembly and Senate approved restructuring
legislation. The Governor signed this legislation into law on February 9, 1999.
The legislation provides for the implementation of full retail access by no
earlier than June 1, 1999 and no later than August 1, 1999. In addition, the
legislation requires rate reductions of at least 5% at the start of retail
access from the level of aggregate rates in effect on April 30, 1997 and of at
least an additional 5% within thirty-six months of the start of retail access.
Further, these reductions must be sustained for a total of four years from the
start of retail access. In addition, the legislation authorizes the NJBPU to
establish "shopping credits" for those customers choosing an alternative
supplier of electricity. Given the results of the sale of the Company's
generation facilities, it is likely that RECO's stranded costs will be limited
to uneconomic NUG contracts, for which the legislation provides recovery over
the life of the contract. As discussed above, RECO has proposed to reduce its
revenues net of fuel and taxes by 5.1%. Until a procedural schedule is
established by the NJBPU to address RECO-specific issues, the Company is unable
to predict the outcome of this proceeding or its effect, if any, on the
Company's consolidated financial position or results of operations.
Pennsylvania -- Competition Legislation
On December 3, 1996, the Electricity Generation Customer Choice and
Competition Act (Act) was signed into law by the Governor of the Commonwealth of
Pennsylvania. The Act provides for a transition of the Pennsylvania electric
industry from a vertically integrated structure to a functionally separated
model that permits direct access by customers to a competitive electric
generation market while retaining the existing
- --------------------------------------------------------------------------------
8
<PAGE> 3
Orange and Rockland Utilities, Inc. and Subsidiaries
regulation and customer protections in the transmission and distribution
systems. The transition plan of the Act calls for a three-year phase-in of
retail access beginning January 1, 1999, and concluding January 1, 2001. The Act
also provides for the opportunity for recovery of prudent and verifiable costs
resulting from the restructuring through the implementation of a Competitive
Transition Charge (CTC) for a period of up to nine years and the imposition of
rate caps designed to prevent a customer's total electric costs from increasing
above current levels during the transition period. In addition, the Act permits
the refinancing of certain approved transition costs through the issuance of
bonds secured by revenue streams, the continuation of which are guaranteed by
the PPUC. The savings associated with this financing mechanism will be used to
reduce strandable costs.
On September 30, 1997, in accordance with the requirements of the Act,
Pike submitted its electric restructuring filing to the PPUC. On December 15,
1997, Pike submitted an Amended and Restated Electric Restructuring Filing with
the PPUC to reflect the fact that the Company has committed to divest all of its
electric generating assets by auction. In this amended and restated filing, Pike
proposed that full retail competition be implemented for all customers by May 1,
1999. With the implementation of retail competition, Pike proposed to continue
to serve as the "provider of last resort" for those consumers who do not choose
an alternate provider, or whose alternate provider defaults. Pike proposed to
remain a regulated transmission and distribution company.
On September 30, 1997, Pike also submitted proposed unbundled rates which
separate the components of existing tariffs into production, transmission,
distribution and customer cost categories. This filing was updated on January
30, 1998.
On May 15, 1998, Pike reached a settlement agreement which resolved all
issues in the restructuring and rate unbundling proceeding. On July 23, 1998,
the PPUC approved Pike's electric restructuring settlement agreement. The
agreement calls for implementation of full retail access by May 1, 1999,
provides for unbundled electric rates, including a CTC which allows full
recovery of all stranded costs and a Basic Generation Service charge for
customers who remain with Pike for generation services. In addition, the
settlement allows shareholders to retain $55,000 of Pike's pro rata share of any
gain on the sale of the Company's generating facilities.
Rate Activities
New York -- Gas
On December 30, 1998, the Company filed a gas base rate case with the
NYPSC, the Company's first such filing since 1991. The Company's rate year cost
of service justifies an increase in gas revenue of $13 million, or 8.2%. This
increase is due primarily to gas construction expenditures necessary to maintain
a safe and reliable infrastructure, property tax increases and expenditures for
environmental investigation and remediation. In order to avoid a sudden and
relatively large rate increase, the Company is limiting its rate year request to
an increase of $3.9 million, or 2.5%. The Company's proposal to limit the
increase to $3.9 million is conditioned on the approval of several provisions.
The Company has requested that it be allowed to: (1) continue to defer
environmental investigation and remediation costs associated with its former
manufactured gas plant sites and its West Nyack, New York facility; (2) defer
prospective increases in gas property tax expense; (3) amortize deferred credits
associated with pension and management audit costs over a two-year period; and
(4) amortize, over a two-year period, a $4 million depreciation reserve credit
which represents the difference between book and theoretical reserve as well as
the remaining balance from a previous depreciation study.
The Company also has proposed a second stage adjustment to gas rates to
take effect October 1, 2000 and a third stage adjustment to take effect October
1, 2001. These adjustments would include the following: (1) inflation on all
operation and maintenance expenses other than fixed amortizations and taxes
other than income taxes; (2) recovery of any deferred property tax expense; (3)
recovery of carrying costs and depreciation on the forecasted increases in rate
base for the ensuing rate year due to increases in plant in service, less
depreciation reserves and deferred income taxes related to gas plant and the gas
portion of common plant; and (4) recovery of previously deferred environmental
investigation or remediation costs.
An ALJ will establish the procedural schedule for the proceeding.
New York -- Electric
On May 3, 1996, the NYPSC approved, subject to modifications required by
the NYPSC decision in the New York Competitive Opportunities Proceeding (as
previously discussed), a Settlement Agreement (1996 Agreement) among the
Company, Staff and other parties which resolved all remaining revenue
requirement issues in the proceeding for a three-year period commencing May 1,
1996, and concluding April 30, 1999. Under the 1996 Agreement, the Company
reduced its annual electric retail revenues in New York by $7.75 million, or
2.3%, effective May 1, 1996. The settlement provided for several performance
mechanisms related to service reliability and customer service, and the
elimination of all revenue and most expense reconciliation provisions contained
in the Revenue Decoupling Mechanism then in effect. The 1996 Agreement provided
the Company with the opportunity to retain all New York electric earnings up to
a 10.9% return on equity annually for each of the next three years. Earnings in
excess of 10.9% would be shared equally between customers and shareholders. By
orders dated November 26 and December 31, 1997, the Company, on December 1,
1997, as part of the approved Restructuring Plan, implemented the first year of
the electric rate reduction in the amount of $5.9 million. An incremental rate
reduction of $2.9 million was implemented as part of this agreement on December
1, 1998. In addition, the Restructuring Plan permits the Company to retain all
earnings up to an 11.4% return on equity and provides that earnings in excess of
11.4% are to be shared, with 75% to be used to offset NYPSC approved deferrals
or otherwise inure to the Company's customers, and 25% to be retained by the
Company's shareholders. (This supersedes the 10.9% contained in the 1996
Agreement).
Additional information on New York electric rate activities is contained
in the previous discussion of the New York Competitive Opportunities Proceeding.
New Jersey
The NJBPU on January 8, 1997 approved a stipulation among New Jersey
utilities, NJBPU Staff and NJ Division of Ratepayer Advocate which provides a
recovery plan for costs associated with the change in accounting required by
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The approved plan provides several
alternative recovery mechanisms. RECO received approval from the NJBPU on
December 17, 1997 to begin amortizing these costs effective January 1, 1998.
On January 23, 1997, a residential customer of RECO filed a petition with
the NJBPU requesting a lowering of RECO's rates by $21.2 million, or 16%, based
on financial data for the twelve months ended December 31, 1995, as adjusted. A
central issue raised by the petition is whether RECO's continued purchase of all
of its power supply requirement from the Company continues to be appropriate
when alleged lower cost energy is available from other sources. In an Order
dated January 23, 1998, the NJBPU did not approve petitioner's request to reduce
RECO's rates.
- --------------------------------------------------------------------------------
9
<PAGE> 4
Orange and Rockland Utilities, Inc. and Subsidiaries
The Order held the petition in abeyance pending the outcome of the unbundling,
stranded costs and restructuring filings by RECO. In addition, the NJBPU granted
petitioner intervenor status in RECO's restructuring proceedings to raise issues
related to the continued purchase by RECO of its power supply requirements from
the Company. The Company does not expect the petition to have a material effect
on the Company's consolidated financial position or results of operations.
Discontinued Operations
In August 1997, Norstar Management, Inc. (NMI), a wholly owned indirect
subsidiary of the Company, sold certain of the assets of NORSTAR Energy Limited
Partnership (NORSTAR), a natural gas services and marketing company of which NMI
is the general partner. The assets sold consisted primarily of customer
contracts and accounts receivable. The Company believes all liabilities related
to NORSTAR were fully provided for in 1997 and that the Company's future results
of operations are not expected to be materially affected thereby. In accordance
with Accounting Principles Board Opinion No. 30, the financial results for this
segment are reported as "Discontinued Operations." The total losses related to
discontinued operations were $(15,432,000), or $(1.13) per share, for 1997 and
$(1,844,000), or $(0.13) per share, for 1996.
Financial Performance
Earnings per share from continuing operations were $3.12 for 1998,
compared to $3.09 in 1997 and $3.30 in 1996. The increase in continuing
operations earnings between 1998 and 1997 was primarily the result of increased
electric retail sales, higher other income, the conclusion of the incurrence of
investigation and litigation costs during 1997 and the lower number of shares
outstanding. Partially offsetting the increase were lower gas sales and higher
operating and maintenance expenses. The decrease between 1997 and 1996 was
primarily the result of decreased electric and gas net revenues, increased
investigation and litigation costs and increased interest charges, partially
offset by lower operating and maintenance expenses. Consolidated earnings per
share were $3.12, $1.96 and $3.17 for the years 1998, 1997 and 1996,
respectively. The increase in consolidated earnings per share in 1998 is
primarily the result of the costs associated with discontinuing the Company's
gas marketing subsidiary during 1997.
Earnings per average common share are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
================================================================================
<S> <C> <C> <C>
Utility operations $ 3.18 $ 3.25 $ 3.39
Events affecting the Company:
Investigation & litigation costs -- (0.13) (0.09)
Diversified activities (0.06) (0.03) --
- --------------------------------------------------------------------------------
Earnings per share from continuing operations 3.12 3.09 3.30
Loss per share from discontinued operations -- (1.13) (0.13)
- --------------------------------------------------------------------------------
Consolidated earnings per share $ 3.12 $ 1.96 $ 3.17
- --------------------------------------------------------------------------------
</TABLE>
The earned return on common equity was 11.3% in 1998, compared to 7.1% in
1997 and 11.3% in 1996. If the effect of the Company's discontinued operations
were excluded, the earned return on common equity would have been 11.2% and
12.2% in 1997 and 1996, respectively. Book value per share at year-end 1998 was
$28.14, compared to $27.69 in 1997 and $28.41 in 1996.
The dividends paid on common stock were $2.58 per share in 1998, 1997 and
1996. Under the terms of the Merger Agreement, the Company has agreed not to pay
dividends in any quarter in excess of the dividend amount paid for the same
period of the prior fiscal year. The Company has maintained the following
capital structure: 46% long-term debt, 6% preferred stock and 48% common equity.
Results of Operations
The discussion which follows identifies the principal causes of the
significant changes in the amounts of revenues and expenses affecting income
available for common stock by comparing 1998 to 1997 and 1997 to 1996. This
discussion should be read in conjunction with the Notes to Consolidated
Financial Statements and other financial and statistical information contained
elsewhere in this report.
The following is a summary of the changes in earnings available for common
stock:
<TABLE>
<CAPTION>
Increase (Decrease) from prior year 1998 1997
================================================================================
(Millions of Dollars)
<S> <C> <C>
Utility operations:
Operating revenues $ (22.4) $ (5.6)
Energy and gas costs (18.3) 3.8
- --------------------------------------------------------------------------------
Net revenues from utility operations (4.1) (9.4)
Other utility operating expenses and taxes (3.0) (5.7)
- --------------------------------------------------------------------------------
Operating income from utility operations (1.1) (3.7)
Diversified revenues (0.2) (0.5)
Diversified operating expenses and taxes (0.3) 1.5
- --------------------------------------------------------------------------------
Income from operations (1.0) (5.7)
Other income and deductions 3.1 3.2
Interest charges 2.0 0.7
- --------------------------------------------------------------------------------
Income from continuing operations 0.1 (3.2)
Discontinued operations 15.4 (13.6)
- --------------------------------------------------------------------------------
Net income 15.5 (16.8)
Preferred dividends -- (0.2)
- --------------------------------------------------------------------------------
Earnings applicable to common stock $ 15.5 $ (16.6)
- --------------------------------------------------------------------------------
</TABLE>
Electric Operating Results
Electric operating revenues, net of fuel and purchased power costs,
increased by 0.3%, or $1.1 million, in 1998 after decreasing by 1.0%, or $3.7
million, in 1997.
These changes are attributable to the following factors:
<TABLE>
<CAPTION>
Increase (Decrease) from prior year 1998 1997
================================================================================
(Millions of Dollars)
<S> <C> <C>
Retail sales:
Price changes $(5.2) $(5.7)
Sales volume changes 11.8 6.5
- --------------------------------------------------------------------------------
Subtotal 6.6 0.8
Sales for resale 6.8 4.0
Other operating revenues (3.0) (2.4)
- --------------------------------------------------------------------------------
Total electric revenues 10.4 2.4
Electric energy costs 9.3 6.1
- --------------------------------------------------------------------------------
Net electric revenues $ 1.1 $(3.7)
- --------------------------------------------------------------------------------
</TABLE>
Electric Sales and Revenues
Total sales of electric energy to retail customers during 1998 were
4,865,286 Mwh (megawatt hours), compared with 4,691,935 Mwh during 1997 and
4,605,262 Mwh in 1996. Revenues associated with these sales were $472.4 million,
$465.8 million and $465.0 million in 1998, 1997 and 1996, respectively. Electric
revenues were reduced by $8.0 million during the year due to the change
necessitated by the New Jersey Uniform Transitional Utilities Assessment Act.
This act, although it resulted in a change in the method of recording the tax by
lowering revenue and correspondingly lowering taxes other than income taxes, did
not affect the Company's tax liability or the Company's net income for the
period. Electric sales to customers for the last five years are shown in the
accompanying chart:
Electric Sales to Customers
Mwh (Millions)
[GRAPHIC OMITTED]
[The following table was depicted as a bar chart in the printed material.]
'94 '95 '96 '97 '98
4.46 4.53 4.61 4.69 4.87
- --------------------------------------------------------------------------------
10
<PAGE> 5
Orange and Rockland Utilities, Inc. and Subsidiaries
The changes in electric sales by class of customer from the prior year are
as follows:
<TABLE>
<CAPTION>
1998 1997
================================================================================
<S> <C> <C>
Residential 2.5% 3.5%
Commercial 7.4% (4.2%)
Industrial (2.9%) 12.2%
Public street lighting 6.7% (8.9%)
Sales to public authorities 7.0% 43.3%
- --------------------------------------------------------------------------------
</TABLE>
Customer usage increased as a result of an increase in the average
kilowatt hours (Kwh) used per customer and an increase in the average number of
customers. Electric sales increased 3.7%, 1.9% and 1.7% in 1998, 1997 and 1996,
respectively.
Under its Restructuring Plans, the Company and its utility subsidiaries
will remain regulated transmission and distribution companies that will deliver
electricity to its customers and maintain reliable service. All New York and
Pennsylvania customers will be provided the opportunity to choose an alternative
electric supplier effective May 1, 1999. Under legislation recently adopted in
New Jersey, customers there will be provided full retail access by no earlier
than June 1, 1999 and no later than August 1, 1999. The Company and its utility
subsidiaries will remain the "provider of last resort" for those of its
customers who do not purchase electricity from other sources.
The Company will continue to introduce programs which are designed to
reduce peak load and encourage efficient energy usage. The Company's future
electric earnings will be affected by changes in sales volumes resulting from
the strength of the economy, weather conditions and conservation efforts of
customers.
Sales for resale increased by $6.8 million to $14.0 million in 1998 when
compared to 1997, after increasing $4.0 million in 1997. Revenues from these
sales are primarily a recovery of costs, under the applicable tariff
regulations, and have a minimal impact on the Company's earnings.
Electric Energy Costs
The cost of fuel used in electric generation and purchased power increased
6.9%, or $9.3 million, in 1998, after increasing 4.7%, or $6.1 million, in 1997.
The components of these changes in electric energy costs are as follows:
<TABLE>
<CAPTION>
Increase (Decrease) from prior year 1998 1997
================================================================================
(Millions of Dollars)
<S> <C> <C>
Prices paid for fuel and purchased power $(7.6) $ --
Changes in Kwh generated or purchased 11.6 6.3
Deferred fuel charges 5.3 (0.2)
- --------------------------------------------------------------------------------
Total $ 9.3 $ 6.1
- --------------------------------------------------------------------------------
</TABLE>
The increase in electric energy costs in both 1998 and 1997 is primarily
the result of increased sales.
Cost Per KwH
Cents
[GRAPHIC OMITTED]
[The following table was depicted as a bar chart in the printed material.]
'94 '95 '96 '97 '98
2.51 2.46 2.48 2.49 2.36
The price paid for fuel and purchased power per kilowatt hour over the
last five years is shown in the accompanying chart:
The Company maintains an aggressive program of managing its sources of
fuel and energy purchases to provide its customers with the lowest cost of
energy available at any given time. Energy is purchased whenever available at a
price lower than the cost of production at the Company's generating plants. The
Company continues to use the least costly fuel available for generating
electricity.
Once the sale of the Company's generating assets is completed, electric
energy costs will consist of purchased power costs necessary to meet the needs
of customers under the "provider of last resort" clause contained in the
restructuring plans.
Gas Operating Results
Gas operating revenues, net of gas purchased for resale, decreased by
7.5%, or $5.2 million, in 1998 when compared to 1997, after decreasing by 7.6%,
or $5.7 million in 1997.
These changes are attributable to the following factors:
<TABLE>
<CAPTION>
Increase (Decrease) from prior year 1998 1997
================================================================================
(Millions of Dollars)
<S> <C> <C>
Sales to firm customers:
Price changes (including gas recoveries) $(20.3) $(2.0)
Sales volume changes (8.8) (1.8)
- --------------------------------------------------------------------------------
Subtotal (29.1) (3.8)
Sales to interruptible customers (3.7) (1.2)
Sales for resale -- --
Other operating revenues -- (3.0)
- --------------------------------------------------------------------------------
Total gas revenues (32.8) (8.0)
Gas energy costs (27.6) (2.3)
- --------------------------------------------------------------------------------
Net gas revenues $ (5.2) $(5.7)
- --------------------------------------------------------------------------------
</TABLE>
Gas Sales and Revenues
Firm gas sales amounted to 17,342 million cubic feet (Mmcf) in 1998, a
decrease of 14.7% from the 20,321 Mmcf recorded in 1997. The decrease in sales
in 1997 was 2.9% from the 1996 level of 20,918 Mmcf. Gas revenues from firm
customers were $121.0 million, $150.1 million and $153.9 million in 1998, 1997
and 1996, respectively.
Firm Gas Sales
Mmcf (thousands)
[GRAPHIC OMITTED]
[The following table was depicted as a bar chart in the printed material.]
'94 '95 '96 '97 '98
20.4 19.8 20.9 20.3 17.3
Gas sales to firm customers for the last five years are shown in the
accompanying chart:
The changes in firm gas sales by class of customer from the prior year are
as follows:
<TABLE>
<CAPTION>
1998 1997
================================================================================
<S> <C> <C>
Residential (16.7%) (4.4%)
Commercial and industrial (8.8%) 1.7%
- --------------------------------------------------------------------------------
</TABLE>
The decrease in 1998 was primarily the result of the warmest winter
weather in the last thirty years. Annual heating degree days were 21% below
normal. This decrease was somewhat offset by an increase in the average number
of customers. The decrease in 1997 was primarily the result of milder weather
conditions offset somewhat by an increase in the average number of customers.
Under the terms of the current gas rate agreement in New York, the level
of firm sales is subject to a weather normalization adjustment. The Company
adjusts firm gas sales revenues to the extent actual degree days vary more than
plus or minus 2.2% from the degree days utilized to project sales during a
heating season. Therefore, severe weather conditions will not have an impact on
gas operating results.
The FERC's Order 636 required pipeline supply companies to separate or
unbundle their charges for providing natural gas to the local distribution
companies. Subsequent to unbundling under FERC's Order 636, the Company
implemented tariffs which, as approved by the NYPSC, granted the Company
permission to retain 15% of all revenues derived from the release of upstream
pipeline capacity beginning in 1996. Additionally, as part of the Company's rate
agreement in Case 92-G-0050, the Company is allowed to retain 25% of net
revenues derived from the FERC's Order 63 off-system transactions. Revenues
retained from Order 636 and Order 63 transactions in 1998 amounted to $0.3
million.
- --------------------------------------------------------------------------------
11
<PAGE> 6
Orange and Rockland Utilities, Inc. and Subsidiaries
Revenues from interruptible gas customers (customers with alternative fuel
sources) decreased by 26.3% in 1998 after decreasing by 7.9% in 1997 when
compared to the previous year. These sales are dependent upon the availability
and price competitiveness of alternative fuel sources. As a result of applicable
tariff regulations, these interruptible sales do not have a substantial impact
on earnings.
Gas Energy Costs
Utility gas energy costs decreased by 27.9%, or $27.6 million, in 1998
after a decrease of 2.3%, or $2.3 million, in 1997.
The changes in utility gas energy costs for the years 1998 and 1997 are a
result of the following:
<TABLE>
<CAPTION>
Increase (Decrease) from prior year 1998 1997
================================================================================
(Millions of Dollars)
<S> <C> <C>
Prices paid to gas suppliers* $ (5.2) $ 0.5
Firm and interruptible Mcf sendout (14.7) (5.8)
Deferred fuel charges (7.7) 3.0
- --------------------------------------------------------------------------------
Total $(27.6) $(2.3)
- --------------------------------------------------------------------------------
*Net of refunds received from gas suppliers.
</TABLE>
The Company continues its policy of the aggressive use of spot market
purchases in order to provide price flexibility, while assuring an adequate
supply of gas through a variety of long-term and short-term gas contracts. In
addition, to stabilize gas prices during the winter heating season as directed
by the NYPSC, the Company establishes fixed gas prices on a monthly basis under
its gas purchase agreements for a percentage of its gas purchases at New York
Mercantile Exchange prices.
The price paid for purchased gas per thousand cubic feet (Mcf) over the
last five years is shown in the accompanying chart:
Cost Per Mcf
Dollars
[GRAPHIC OMITTED]
[The following table was depicted as a bar chart in the printed material.]
'94 '95 '96 '97 '98
3.52 3.43 4.05 4.07 3.82
The NYPSC, in its effort to promote competition, has required the Company
to provide firm transportation service for those customers who elect to purchase
their gas supply from a marketer rather than the Company. Marketers are
permitted to aggregate customers. On November 3, 1998, the NYPSC issued a Policy
Statement Concerning the Future of the Natural Gas Industry in New York State
and Order Terminating Capacity Assignment (Case 97-G-1380). The Policy Statement
envisions a three- to seven-year transition for gas utilities to exit the gas
merchant function. To further this process and increase gas competition in the
State, the NYPSC has directed that gas utilities no longer require customers
migrating from sales to transportation service to continue utilizing upstream
capacity contracted for by the utility, except where specific operational or
reliability requirements warrant. According to the Order, utilities will be
provided a reasonable opportunity to recover strandable costs. The Company
ceased requiring transportation customers to utilize its upstream capacity as of
October 1, 1998. As of December 31, 1998, the Company has not incurred any
stranded costs related to its upstream pipeline capacity. As the transition to a
competitive retail market continues, the Company will determine what supply
capacity and storage contracts it maintains. As the Company moves to a
competitive market, traditional cost recovery mechanisms may be replaced by
market-based methods.
Other Utility Operating Expenses and Taxes
A comparison of other operating expenses and taxes for utility operations
is presented in the following table:
<TABLE>
<CAPTION>
Increase (Decrease) from prior year 1998 1997
================================================================================
(Millions of Dollars)
<S> <C> <C>
Other operating expenses $ 5.6 $(5.8)
Maintenance 1.5 (1.4)
Depreciation and amortization (0.1) 3.7
Taxes (10.0) (2.2)
- --------------------------------------------------------------------------------
Total $ (3.0) $(5.7)
- --------------------------------------------------------------------------------
</TABLE>
The primary reason for the increase in utility other operating expenses
for 1998 is increased customer accounting and service costs primarily related to
the Company's new Customer Information Management System, increased
uncollectible accounts and higher transmission expenses, partially offset by
reduced administrative and general expenses. The costs of Demand Side Management
(DSM) programs, which were $6.0 million, $5.2 million and $4.7 million in 1998,
1997 and 1996, respectively, also caused utility operating expense to increase.
However, the DSM costs are recovered in rates on a current basis and therefore
have no impact on earnings. The remaining increase between 1997 and 1996 was the
amortization of independent power producer costs of $9.8 million in 1997
compared to the $16.2 million amortized in 1996.
Maintenance costs increased 4.1% in 1998 after decreasing by 3.7% in 1997.
The increase in 1998 is primarily the result of increased plant and transmission
system maintenance partially offset by decreased distribution system
maintenance. In 1997, the decrease is primarily the result of lower scheduled
plant maintenance costs when compared to 1996.
Depreciation and amortization expenses decreased by $0.1 million in 1998,
after increasing by $3.7 million in 1997 as a result of plant additions. After
eliminating the regulatory adjustments approved in the New York Electric
Restructuring Case, 1998 depreciation expense increased by $2.3 million due to
normal plant additions and the amortization of the Company's new customer
accounting system.
Taxes other than income taxes decreased $8.7 million in 1998, after
decreasing by $0.1 million in 1997. The decrease in 1998 is primarily due to the
change necessitated by the New Jersey Uniform Transitional Utilities Assessment
Act. This act, effective January 1, 1998, resulted in a change in the method of
recording the tax by lowering revenue and correspondingly lowering taxes other
than income taxes. After eliminating regulatory adjustments approved in the New
York Electric Restructuring Case, property taxes increased by $2.1 million.
Federal income tax decreased by $1.3 million in 1998, after decreasing
$2.1 million in 1997. The changes in both years are the result of changes in
pre-tax book income. For a detailed analysis of income tax components, see Note
2 of Notes to Consolidated Financial Statements.
Diversified Activities
The Company's diversified activities, at year end, excluding the
discontinued gas marketing operations, consisted of energy services and land
development businesses conducted by wholly owned non-utility subsidiaries.
Revenues from diversified activities decreased by $0.2 million in 1998,
after decreasing by $0.5 million in 1997. Operating expenses incurred by the
non-utility subsidiaries decreased by $0.3 million in 1998, after increasing by
$1.5 million in 1997. Earnings from diversified activities decreased by $0.3
million in 1998, after decreasing by $0.6 million in 1997.
The reduction in 1998 earnings is primarily the result of the decrease in
rental income resulting from sales of these properties in prior years. The
reduction in 1997 earnings is primarily related to the start-up costs for
Palisades Energy Services, Inc., an indirect subsidiary of the Company.
- --------------------------------------------------------------------------------
12
<PAGE> 7
Orange and Rockland Utilities, Inc. and Subsidiaries
As mentioned previously, the Company has discontinued its gas marketing
operations. Diversified operations in the future will focus on promoting energy
services-related operations.
Other Income and Deductions and Interest Charges
Other income and deductions increased by $3.1 million in 1998 after
increasing by $3.2 million in 1997. The increase in 1998 was the result of the
absence of investigation and litigation costs which was concluded in 1997,
increased interest income, gain on the sale of securities and the recognition of
other income as a result of marking securities to market (see Note 10 of Notes
to Consolidated Financial Statements). The increase in 1997 was the result of
the 1996 New York rate decision offset by increased investigation charges.
Interest charges increased $2.0 million in 1998 when compared to 1997,
after increasing $0.7 million in 1997. The increases in 1998 and 1997 are the
result of increased short-term debt.
Liquidity and Capital Resources
The Company's construction program is designed to maintain reliable
electric and gas service, meet future customer service requirements and improve
the Company's competitive position. The cash expenditures related to the
construction program and other capital requirements for the years 1996-1998 were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
================================================================================
(Millions of Dollars)
<S> <C> <C> <C>
Construction expenditures $55.4 $73.1 $60.9
Retirement of long-term debt & equity -- net 2.9 5.8 1.8
- --------------------------------------------------------------------------------
Total $58.3 $78.9 $62.7
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the Company estimated the cost of its construction
program in 1999 to be $41.0 million. This estimate includes four months of
construction expenditures related to the Company's generating facilities. It is
expected that the Company's capital requirements for 1999 will be met primarily
with funds from operations, supplemented by short-term borrowings.
The financing activities of the Company and its utility subsidiaries
during 1998 consisted of a debt refinancing and the repurchase of common stock.
With regard to long-term debt refinancing, on November 10, 1998, Pike
issued $3.2 million of First Mortgage Bonds Series C, 7.07% due October 1, 2018
(the Series C Bonds). The proceeds from the sale of the Series C Bonds were used
primarily to redeem the two series of Pike First Mortgage Bonds then
outstanding; the Series A Bonds, 9% due 2001 and the Series B Bonds, 9.95% due
2020, with the remaining proceeds being used to finance capital spending.
With regard to common stock, the Company, pursuant to an order of the
NYPSC, initiated a Common Stock Repurchase Program (the Repurchase Program)
during December 1997. Funds were provided for the Repurchase Program through a
Credit Agreement between the Company and Mellon Bank, N. A. During 1998, the
Company repurchased 70,400 shares of its Common Stock at an average price of
$45.81 per share. The Repurchase Program was suspended in the first quarter of
1998. The total number of shares of common stock repurchased under the
Repurchase Program was 136,300 shares at an average price of $45.75 per share.
Both the Repurchase Program and the Credit Agreement were canceled during the
second quarter of 1998.
The Company's Dividend Reinvestment Plan (DRP) and its Employee Stock
Purchase and Dividend Reinvestment Plan (ESPP) provide that, at the option of
the Company, the common stock requirements of the plans may be satisfied by
either the original issue of common stock or open market purchases. Since
November 1, 1994, the requirements of both plans have been satisfied by open
market purchases.
The Company has outstanding 428,443 shares of Non-Redeemable Cumulative
Preferred Stock and 10,684 shares of Non-Redeemable Preference Stock (the
Preferred and Preference Stock) in various series, which together amount to
$43.5 million. Both the Preferred Stock and the Preference Stock are redeemable
at the option of the Company. The 10,684 shares of Non-Redeemable Preference
Stock are convertible into shares of the Company's common stock, prior to
redemption, at a ratio of 1.47 shares of common stock for each share of
Preference Stock. The Merger Agreement calls for the redemption of all of the
Company's Preferred and Preference Stock prior to the effective date of the
Merger. On October 7, 1998, the Company filed a petition with the NYPSC for
permission to issue up to $45 million aggregate principal amount of unsecured
debentures and to use the proceeds from the sale of the unsecured debentures to
redeem all of the Company's outstanding Preferred Stock and Preference Stock.
The NYPSC approved the Company's petition on January 13, 1999. The Company
intends to redeem all of the outstanding Preferred and Preference Stock as soon
as practicable.
Neither the Company nor its utility subsidiaries have any plans at the
present time for additional external financing other than debt securities
proposed to be issued in connection with the redemption of the Company's
Preferred and Preference Stock as described above.
Pursuant to an order of the FERC, the Company has authority to issue up to
$200 million of short-term debt through September 30, 1999 and RECO has
authority to issue up to $15 million of short-term debt through December 31,
1999. At December 31, 1998, the Company and its utility subsidiaries had
unsecured bank lines of credit totaling $160 million. At January 1, 1999, the
Company reduced such lines of credit to $155 million. The Company may borrow
under the lines of credit through the issuance of promissory notes to the banks.
The Company, however, primarily 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. The non-utility subsidiaries of the Company and of RECO had no
bank lines of credit at December 31, 1998.
As a result of the planned divestiture of the Company's generating
facilities, it is expected that the Company will have approximately $225 million
of cash proceeds available when the sale is complete.
Other Developments
Year 2000 Compliance
Since 1996, the Company has been working to address Year 2000 (Y2K)
issues. Y2K issues arise as a result of a computer programming standard that
traditionally recorded a year as two digits (e.g., 98) rather than four digits
(e.g., 1998). With the change in the century, software and embedded chip
technology that use a two-digit field for the year may malfunction or provide
inaccurate results.
Overall responsibility for the Company's Y2K efforts resides with an
Executive Sponsorship Committee which is responsible for ensuring that
appropriate plans are implemented and adequate resources are available and for
monitoring the Company's Y2K progress. The Committee consists of several members
of senior management. The Chairperson of the Committee is responsible for
reporting to the Company's Board of Directors on Y2K issues on a periodic basis.
The Company's Y2K Plan includes the following phases: (1) awareness (i.e.,
the communication of Y2K issues and their importance); (2) assessment, including
the development of a detailed inventory of all information technology and
embedded chip technology and the assessment of the inventory for Year 2000
vulnerability; (3) remediation (i.e., repair, replacement, retirement) of
affected systems; (4) validation of the individual application or device once it
has been repaired followed by testing of integrated systems; and (5) contingency
planning in the event problems arise in connection with critical systems or
devices.
- --------------------------------------------------------------------------------
13
<PAGE> 8
Orange and Rockland Utilities, Inc. and Subsidiaries
The Company has completed an inventory and assessment of its information
and embedded technology and prioritized the inventoried technology as either
Mission Critical or Business Critical. Pursuant to the definitions adopted by
the Company, the misoperation of a Mission Critical system or device could
directly contribute to the interruption of electric or gas service or could
adversely affect the safety of the general population and/or employees.
Similarly, the misoperation of a Business Critical system or device could
directly contribute to the loss of a department's capability to perform its
function (e.g., customer service, accounting). Consistent with the target date
established for the energy industry, all Mission Critical systems/devices will
be Y2K ready by July 1, 1999, and all Business Critical systems/devices will be
Y2K ready by October 1, 1999.
Over the past several years, the Company has been evaluating and replacing
various computer applications, including its Customer Information Management
System, Fixed Asset System and other core accounting and management systems.
This effort was undertaken to provide additional functionality, automated
processing, improved access to information, as well as to address Y2K issues.
The Company's remaining computer applications and hardware have been
substantially remediated and this effort is targeted for completion by March 31,
1999.
In addition, inventory and assessment of embedded chips throughout the
Company, including the power generation, transmission and distribution and
telecommunications areas, have been completed. Remediation and testing of
non-compliant embedded chips have begun and the Company expects to meet the
targeted completion dates of July 1, 1999 and October 1, 1999 for Mission and
Business Critical systems, respectively.
The Company's systems may be vulnerable to its critical suppliers should
such suppliers themselves not be Y2K ready. The Company has identified its
critical suppliers, including those which supply telecommunication services,
coal, oil or natural gas and electricity. Assessment of the critical suppliers'
Y2K readiness has begun and will be completed in February 1999. The Company is
working with the NYPP and the North American Electric Reliability Council to
ensure that appropriate steps are being taken to address the reliability of the
power grid.
The Company has procedures in place should a system failure occur. The
Company is developing contingency plans based on the results of its testing and
critical supplier assessments and is reviewing existing emergency plans and
procedures which will be modified as appropriate to address Y2K-specific issues.
Contingency plans for Mission Critical systems and suppliers will be completed
by July 1, 1999, and for Business Critical systems by October 1, 1999.
The total estimated cost to execute the Company's Y2K Plan is
approximately $8.5 million, of which approximately $4.9 million has been
incurred through December 31, 1998. These expenditures include core accounting
systems which provide both enhanced functionality and address Y2K issues, but do
not include other systems that were replaced in the normal course of business
for operating reasons, which also address Y2K issues. The Company has and will
continue to fund these costs from the operations of the Company.
The Company has developed a Y2K Plan which details the steps the Company
must take to mitigate the impact of the century change. The Company believes
that with the full implementation of its Y2K Plan, the possibility of
significant Y2K problems will be greatly reduced, if not eliminated. However,
the failure of the Company, or one or more of the Company's key suppliers or
vendors, to correct a material Y2K problem could result in the interruption of
service to its customers or the failure of certain normal business operations.
Accordingly, the Company is unable to determine at this time whether the
consequences of Y2K will have a material adverse effect on the Company's results
of operations, liquidity or financial condition.
Termination Benefits Relating to the Divestiture
The proposed sale of the Company's generating assets will result in
workforce reductions. The Company plans to provide, where appropriate,
termination benefits that include pension protection, severance and outplacement
services to affected employees. Statement of Financial Accounting Standards No.
88 (SFAS No. 88), "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," applies to any
employer that offers benefits to employees in connection with their termination
of employment. The divestiture will trigger curtailment, settlement and special
termination benefits accounting. Due to the demographic uncertainty, a
reasonable estimate of the obligation cannot be made at this time, but will be
made when acceptances of employment and involuntary terminations become known.
Since the Restructuring Plan includes provisions to recover such costs, they are
not expected to have a material impact on the Company's results of operations.
Termination Benefits Relating to the Merger
The Merger may also result in liabilities for contractual termination
benefits, workforce reductions and curtailment losses under employee benefit
plans triggered by the consummation of the business combination. In accordance
with Emerging Issues Task Force 96-5, "Recognition of Liabilities for
Contractual Termination Benefits or Changing Benefit Plan Assumptions in
Anticipation of a Business Combination," the Company will recognize any SFAS No.
88 costs when the Merger is consummated.
New Financial Accounting Standards
During 1997 and 1998, the Financial Accounting Standards Board issued the
following accounting standards: Statement of Financial Accounting Standards No.
130 (SFAS No. 130), "Reporting Comprehensive Income;" Statement of Financial
Accounting Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an
Enterprise and Related Income;" Statement of Financial Accounting Standards No.
132 (SFAS No. 132), "Employers' Disclosures about Pension and Other
Postretirement Benefits;" and Statement of Financial Accounting Standards No.
133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging
Activities." The Company has adopted these standards for the year ended December
31, 1998. Adoption of these standards had no effect on the results of operations
of the Company.
Effects of Inflation
The Company's utility revenues are based on rate regulation, which
provides for recovery of operating costs and a return on rate base. Inflation
affects the Company's construction costs, operating expenses and interest
charges and can impact the Company's financial performance if rate relief is not
granted on a timely basis. Financial statements, which are prepared in
accordance with generally accepted accounting principles, report operating
results in terms of historical costs and do not generally recognize the impact
of inflation.
Cautionary Statement Regarding Forward-Looking Information
This document contains forward-looking statements with respect to the
financial condition, results of operations and business of the Company in the
future, which involve certain risks and uncertainties. Actual results or
developments might differ materially from those included in the forward-looking
statements because of factors such as competition and industry restructuring,
changes in economic conditions, changes in laws, regulations or regulatory
policies, uncertainties relating to the ultimate outcome of the Merger and the
sale of the Company's generating assets, the outcome of certain assumptions made
in regard to Y2K issues and other uncertainties. For all of those statements,
the Company claims the protections of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
- --------------------------------------------------------------------------------
14
<PAGE> 9
Orange and Rockland Utilities, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
=============================================================================================================
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Revenues:
Electric (Note 1) $ 475,922 $ 472,364 $ 473,936
Gas (Note 1) 135,619 168,450 176,442
Electric sales to other utilities 13,956 7,109 3,106
- -------------------------------------------------------------------------------------------------------------
Total Utility Revenues 625,497 647,923 653,484
Diversified activities 607 851 1,405
- -------------------------------------------------------------------------------------------------------------
Total Operating Revenues 626,104 648,774 654,889
- -------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operations:
Fuel used in electric production (Note 1) 94,503 69,261 54,917
Electricity purchased for resale (Note 1) 49,588 65,500 73,776
Gas purchased for resale (Note 1) 71,649 99,321 101,614
Other expenses of operation 149,141 143,675 147,819
Maintenance 36,735 35,285 36,652
Depreciation and amortization (Note 1) 35,735 35,861 32,272
Taxes other than income taxes 90,250 98,996 98,829
Federal income taxes (Notes 1 and 2) 22,513 23,878 26,366
- -------------------------------------------------------------------------------------------------------------
Total Operating Expenses 550,114 571,777 572,245
- -------------------------------------------------------------------------------------------------------------
Income from Operations 75,990 76,997 82,644
- -------------------------------------------------------------------------------------------------------------
Other Income and Deductions:
Allowance for other funds used during construction 4 40 20
Investigation and litigation costs -- (2,761) (1,800)
Other -- net 2,826 949 (2,268)
Taxes other than income taxes (280) (270) (246)
Federal income taxes (Notes 1 and 2) 11 1,562 662
- -------------------------------------------------------------------------------------------------------------
Total Other Income and Deductions 2,561 (480) (3,632)
- -------------------------------------------------------------------------------------------------------------
Income Before Interest Charges 78,551 76,517 79,012
- -------------------------------------------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 23,867 23,215 24,221
Other interest 9,449 8,233 5,748
Amortization of debt premium and expense -- net 1,137 1,521 1,462
Allowance for borrowed funds used during construction (869) (1,390) (566)
- -------------------------------------------------------------------------------------------------------------
Total Interest Charges 33,584 31,579 30,865
- -------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 44,967 44,938 48,147
- -------------------------------------------------------------------------------------------------------------
Discontinued Operations: (Note 3)
Operating loss -- net of taxes -- (6,738) (1,844)
Estimated loss on disposal -- (8,694) --
- -------------------------------------------------------------------------------------------------------------
Loss from Discontinued Operations -- (15,432) (1,844)
- -------------------------------------------------------------------------------------------------------------
Net Income 44,967 29,506 46,303
Dividends on preferred and preference stock, at required rates 2,797 2,800 3,024
- -------------------------------------------------------------------------------------------------------------
Earnings applicable to common stock $ 42,170 $ 26,706 $ 43,279
=============================================================================================================
Average number of common shares outstanding (000's) 13,520 13,649 13,654
- -------------------------------------------------------------------------------------------------------------
Earnings per average common share outstanding:
Continuing operations $ 3.12 $ 3.09 $ 3.30
Discontinued operations -- (0.49) (0.13)
Estimated loss on disposal -- (0.64) --
- -------------------------------------------------------------------------------------------------------------
Total earnings per average common share outstanding $ 3.12 $ 1.96 $ 3.17
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
15
<PAGE> 10
Orange and Rockland Utilities, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1998 1997
=========================================================================================================
(Thousands of Dollars)
<S> <C> <C>
Assets:
Utility Plant:
Electric $1,065,912 $1,047,857
Gas 246,845 232,206
Common 103,064 64,570
- ---------------------------------------------------------------------------------------------------------
Utility Plant in Service 1,415,821 1,344,633
Less accumulated depreciation 498,652 471,865
- ---------------------------------------------------------------------------------------------------------
Net Utility Plant in Service 917,169 872,768
Construction work in progress 34,401 63,445
- ---------------------------------------------------------------------------------------------------------
Net Utility Plant (Notes 1, 5, 8 and 13) 951,570 936,213
- ---------------------------------------------------------------------------------------------------------
Non-utility Property:
Non-utility property 7,780 11,651
Less accumulated depreciation and amortization 252 1,109
- ---------------------------------------------------------------------------------------------------------
Net Non-utility Property (Notes 1 and 8) 7,528 10,542
- ---------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (Notes 9 and 10) 5,643 3,513
Temporary cash investments (Note 10) 500 518
Customer accounts receivable, less allowance for uncollectible
accounts of $3,686 and $2,530, respectively 57,095 61,817
Accrued utility revenue (Note 1) 28,489 22,869
Other accounts receivable, less allowance for uncollectible
accounts of $286 and $258, respectively 16,173 20,450
Materials and supplies (at average cost):
Fuel for electric generation 7,255 8,875
Gas in storage 12,097 11,103
Construction and other supplies 14,809 15,291
Prepaid property taxes 22,768 21,575
Prepayments and other current assets 30,019 21,469
- ---------------------------------------------------------------------------------------------------------
Total Current Assets 194,848 187,480
- ---------------------------------------------------------------------------------------------------------
Deferred Debits:
Income tax recoverable in future rates (Notes 1 and 2) 74,330 74,731
Deferred Order 636 transition costs (Note 1) 1,478 1,476
Deferred revenue taxes (Note 1) 11,915 10,923
Deferred pension and other postretirement benefits (Notes 1 and 11) 4,097 9,334
IPP settlement agreements 5,330 14,238
Unamortized debt expense (amortized over term of securities) 10,840 11,153
Other deferred debits 46,204 31,919
- ---------------------------------------------------------------------------------------------------------
Total Deferred Debits 154,194 153,774
- ---------------------------------------------------------------------------------------------------------
Total Assets $1,308,140 $1,288,009
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
16
<PAGE> 11
Orange and Rockland Utilities, Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31,
1998 1997
===============================================================================================================
(Thousands of Dollars)
<S> <C> <C>
Capitalization and Liabilities:
Capitalization:
Common stock (Notes 4 and 7) $ 67,599 $ 67,945
Premium on capital stock (Note 7) 132,321 132,985
Capital stock expense (6,045) (6,084)
Retained earnings (Note 6) 186,520 181,473
- ---------------------------------------------------------------------------------------------------------------
Total Common Stock Equity 380,395 376,319
- ---------------------------------------------------------------------------------------------------------------
Non-redeemable preferred stock -- 42,844
Non-redeemable cumulative preference stock -- 379
- ---------------------------------------------------------------------------------------------------------------
Total Non-Redeemable Stock (Note 7) -- 43,223
- ---------------------------------------------------------------------------------------------------------------
Long-term debt (Notes 8 and 10) 357,156 356,637
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization 737,551 776,179
- ---------------------------------------------------------------------------------------------------------------
Non-current Liabilities:
Reserve for claims and damages (Note 1) 4,078 4,591
Postretirement benefits (Note 11) 9,759 15,334
Pension costs (Note 11) 47,481 43,618
Obligations under capital leases (Note 12) -- 1,646
- ---------------------------------------------------------------------------------------------------------------
Total Non-current Liabilities 61,318 65,189
- ---------------------------------------------------------------------------------------------------------------
Current Liabilities:
Long-term debt and capital lease obligations
due within one year (Notes 8 and 12) 1,690 209
Preferred and Preference stock to be redeemed within one year (Note 7) 43,516 --
Commercial paper (Notes 9 and 10) 149,050 130,400
Accounts payable 60,573 57,630
Dividends payable 637 637
Customer deposits 3,427 4,639
Accrued Federal income and other taxes 516 2,929
Accrued interest 6,500 6,011
Refundable gas costs (Note 1) 7,816 5,893
Refunds to customers 1,223 986
Other current liabilities 11,938 19,391
- ---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 286,886 228,725
- ---------------------------------------------------------------------------------------------------------------
Deferred Taxes and Other:
Deferred Federal income taxes (Notes 1 and 2) 197,698 192,514
Deferred investment tax credits (Notes 1 and 2) 13,654 14,482
Accrued Order 636 transition costs 1,340 1,340
Other deferred credits 9,693 9,580
- ---------------------------------------------------------------------------------------------------------------
Total Deferred Taxes and Other 222,385 217,916
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 13): -- --
- ---------------------------------------------------------------------------------------------------------------
Total Capitalization and Liabilities $ 1,308,140 $ 1,288,009
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE> 12
Orange and Rockland Utilities, Inc. and Subsidiaries
Consolidated Cash Flow Statements
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
=====================================================================================================================
(Thousands of Dollars)
<S> <C> <C> <C>
Cash Flow from Operations:
Net income $ 44,967 $ 29,506 $ 46,303
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 35,286 35,415 33,765
Deferred Federal income taxes 5,612 7,280 5,353
Amortization of investment tax credit (828) (810) (925)
Deferred and refundable fuel and gas costs 423 (1,096) (6,371)
Allowance for funds used during construction (873) (1,430) (586)
Other non-cash changes (1) 5,021 3,759
Changes in certain current assets and liabilities:
Accounts receivable, net and accrued utility revenue 3,379 (13,723) (26)
Materials and supplies 1,108 326 (2,927)
Prepaid property taxes (1,193) (1,524) 636
Prepayments and other current assets (8,550) 71 2,708
Accounts payable 2,943 (9,819) 5,367
Accrued Federal income and other taxes (2,413) 1,905 (800)
Accrued interest 489 (1,028) (213)
Refunds to customers 237 (830) (12,087)
Other current liabilities (8,665) (4,066) 1,478
Other -- net 4,271 22,565 1,888
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations 76,192 67,763 77,322
- ---------------------------------------------------------------------------------------------------------------------
Cash Flow from Investing Activities:
Additions to plant (53,037) (73,986) (58,834)
Temporary cash investments 18 771 46
Allowance for funds used during construction 873 1,430 586
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (52,146) (71,785) (58,202)
- ---------------------------------------------------------------------------------------------------------------------
Cash Flow from Financing Activities:
Proceeds from:
Issuance of long-term debt 3,200 100,088 26
Issuance of capital lease obligation -- 2,020 --
Retirement of:
Common stock (3,225) (3,012) --
Preference and preferred stock -- (1,390) (1,384)
Long-term debt (2,684) (103,261) (195)
Capital lease obligations (161) (204) (275)
Net borrowings (repayments) under short-term
debt arrangements 18,650 48,030 21,120
Dividends on preferred and common stock (37,696) (38,057) (38,280)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (21,916) 4,214 (18,988)
- ---------------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 2,130 192 132
Cash and Cash Equivalents at Beginning of Year 3,513 3,321 3,189
- ---------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 5,643 $ 3,513 $ 3,321
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest, net of amounts capitalized $ 32,139 $ 32,313 $ 29,209
Federal income taxes $ 21,011 $ 10,000 $ 17,982
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
18
<PAGE> 13
Orange and Rockland Utilities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies.
General
Orange and Rockland Utilities, Inc. (the Company) and its wholly owned
utility subsidiaries, Rockland Electric Company (RECO) and Pike County Light &
Power Company (Pike), are subject to regulation by the Federal Energy Regulatory
Commission (FERC) and various state regulatory authorities with respect to their
rates and accounting. Accounting policies conform to generally accepted
accounting principles, as applied in the case of regulated public utilities, and
are in accordance with the accounting requirements and rate-making practices of
the regulatory authority having jurisdiction. The preparation of 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 and disclosure of contingent 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. A description of the significant accounting policies follows.
Principles of Consolidation
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 intercompany balances and transactions have been eliminated.
The Company's ongoing diversified activities, at year end, consisted of
energy services and land development businesses conducted by its wholly owned
non-utility subsidiaries.
Rate Regulation
The Company, RECO and Pike are subject to rate regulation by the New York
Public Service Commission (NYPSC), the New Jersey Board of Public Utilities
(NJBPU), and the Pennsylvania Public Utility Commission (PPUC), respectively,
and the FERC. The consolidated financial statements of the Company are based on
generally accepted accounting principles, including the provisions of Statement
of Financial Accounting Standards No. 71 (SFAS No. 71), "Accounting for the
Effects of Certain Types of Regulation," which gives recognition to the
rate-making and accounting practices of the regulatory agencies. The principal
effect of the rate-making process on the Company's consolidated financial
statements is that of the timing of the recognition of incurred costs. If rate
regulation provides assurance that an incurred cost will be recovered in a
future period by inclusion of that cost in rates, SFAS No. 71 requires the
capitalization of the cost. Regulatory assets represent probable future revenue
associated with certain incurred costs, as these costs are recovered through the
rate-making process. The following regulatory assets were reflected in the
Consolidated Balance Sheets as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
================================================================================
(Thousands of Dollars)
<S> <C> <C>
Deferred Income Taxes (Note 1) $ 74,330 $ 74,731
FERC Order 636 Costs 1,478 1,476
Deferred Revenue Taxes (Note 1) 11,915 10,923
Deferred Pension and Other
Postretirement Benefits (Note 11) 4,097 9,334
Gas Take-or-Pay Costs 298 1,473
Deferred Plant Maintenance Costs (Note 1) 4,231 4,251
Demand Side Management Costs 3,756 3,047
Deferred Fuel and Gas Costs (Note 1) (4,269) (3,848)
IPP Settlement Agreements 5,330 14,238
Merger Costs (Note 4) 10,535 --
Divestiture Costs (Note 5) 3,290 --
Other 7,783 7,663
- --------------------------------------------------------------------------------
Total $ 122,774 $ 123,288
- --------------------------------------------------------------------------------
</TABLE>
The Company's Electric Rate and Restructuring Plan (Restructuring Plan),
as approved by the NYPSC, provides for full recovery of all regulatory assets.
The Company will continue application of SFAS No. 71 for the generation portion
of the business until the divestiture is complete (see Note 5).
Utility Revenues
Utility revenues are recorded on the basis of cycle billings rendered to
customers monthly. Unbilled revenues are accrued at the end of each month for
estimated energy usage since the last meter reading.
The level of revenues from gas sales in New York is subject to a weather
normalization clause that requires recovery from or refund to firm customers of
a portion of the shortfalls or excesses of firm net revenues which result from
variations of more than plus or minus 2.2% in actual degree days from the number
of degree days used to project heating season sales.
Fuel Costs
The tariff schedules for electric and gas services in New York include
adjustment clauses under which fuel, purchased gas and certain purchased power
costs, above or below levels allowed in approved rate schedules, are billed or
credited to customers up to approximately 60 days after the costs are incurred.
In accordance with regulatory commission policy, such costs, along with the
related income tax effects, are deferred until billed or credited to customers.
A reconciliation of New York recoverable gas costs with billed gas
revenues is done annually as of August 31, and the excess or deficiency is
refunded to or recovered from customers during a subsequent twelve-month period.
The NYPSC provides for a modified electric fuel adjustment clause requiring an
80%/20% sharing between customers and shareholders of variations between actual
and forecasted fuel costs annually. The 20% portion of fluctuations from
forecasted costs is limited to a maximum of $1,762,000 annually. The fuel costs
targets are approved by the NYPSC for each calendar year following the Company's
filing of forecasted fuel costs. Tariffs for electric and gas service in
Pennsylvania and electric service in New Jersey contain adjustment clauses which
utilize estimated prospective energy costs on an annual basis. The recovery of
such estimated costs is made
- --------------------------------------------------------------------------------
19
<PAGE> 14
Orange and Rockland Utilities, Inc. and Subsidiaries
through equal monthly charges over the year of projection. Any over- or
under-recoveries are deferred and refunded or charged to customers during the
subsequent twelve-month period.
Utility Plant
Utility plant is stated at original cost. The cost of additions to, and
replacements of, utility plant include contracted work, direct labor and
material, allocable overheads, allowance for funds used during construction and
indirect charges for engineering and supervision. Replacement of minor items of
property and the cost of repairs are charged to maintenance expense. At the time
depreciable plant is retired or otherwise disposed of, the original cost,
together with removal cost less salvage, is charged to the accumulated provision
for depreciation.
Depreciation
For financial reporting purposes, depreciation is computed on the
straight-line method based on the estimated useful lives of the various classes
of property. Provisions for depreciation are equivalent to the following
composite rates based on the average depreciable plant balances at the beginning
and end of the year:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Plant Classification:
Electric 2.80% 3.03% 2.88%
Gas 2.86% 2.90% 2.91%
Common 7.78% 7.21% 5.93%
- --------------------------------------------------------------------------------
</TABLE>
The composite gas depreciation rate excludes the effects of adjustments
provided for in a 1996 gas rate agreement with the NYPSC.
Jointly Owned Utility Plant
The Company has a one-third interest in the 1,200 megawatt Bowline Point
generating facility (Bowline), which it owns jointly with Consolidated Edison
Company of New York, Inc. (Con Edison). The Company is the operator of the joint
venture. Energy is allocated to the participants based on an agreement dated May
31, 1996. This agreement entitles each company to a certain amount of energy at
different periods during the year. The operation and maintenance expenses of the
facility are allocated to the Company on a one-third basis, except for major
maintenance which is allocated based on the energy received from the plant by
the partners. Under this agreement, each co-owner has an undivided interest in
the facility and is responsible for its own financing. The Company's interest in
this jointly owned plant consists primarily of the following:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
================================================================================
(Thousands of Dollars)
<S> <C> <C>
Electric Utility Plant in Service $103,776 $103,217
Construction Work in Progress $ 483 $ 739
- --------------------------------------------------------------------------------
</TABLE>
Federal Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return, and income taxes are allocated based on the taxable income or loss of
each company. Investment tax credits, which were available prior to the Tax
Reform Act of 1986, have been fully normalized and are being amortized over the
remaining useful life of the related property for financial reporting purposes.
The consolidated financial statements of the Company are prepared pursuant to
the provisions of Statement of Financial Accounting Standards No. 109 (SFAS No.
109), "Accounting for Income Taxes," which requires the asset and liability
method of accounting for income taxes. SFAS No. 109 requires the recording of
deferred income taxes for temporary differences that are reported in different
years for financial reporting and tax purposes. The statement also requires that
deferred tax liabilities or assets be adjusted for the future effects of any
changes in tax laws or rates and that regulated enterprises recognize an
offsetting regulatory asset or liability, as appropriate.
Deferred Revenue Taxes
Deferred revenue taxes represent the unamortized balance of an accelerated
payment of New Jersey Gross Receipts and Franchise Tax (NJGRFT) required by
legislation enacted effective June 1, 1991, as well as certain New York State
revenue taxes which are deferred and amortized over a twelve-month period
following payment, in accordance with the requirements of the NYPSC. In
accordance with an order by the NJBPU, the NJGRFT has been deferred and is being
recovered in rates, with a carrying charge of 7.5% on the unamortized balance.
This amortization, originally being amortized over a ten-year period, was
extended by an NJBPU Order dated February 9, 1998 as part of RECO's approval of
recovery of the Postretirement Benefits Other Than Pensions.
Deferred Plant Maintenance Costs
The Company utilizes a silicone injection procedure as part of its
maintenance program for residential underground electric cable in order to
prevent premature failures and ensure the realization of the expected useful
life of the facilities. In 1992, the FERC issued an accounting order that
required the cost of this procedure to be treated as maintenance expense rather
than as a plant addition. The Company requested deferred accounting for these
expenditures from the NYPSC and NJBPU in order to properly match the cost of the
procedure with the periods benefited. In 1994, the NYPSC approved the deferred
accounting request and authorized a ten-year amortization for rate purposes. On
January 12, 1996, the NJBPU authorized RECO to capitalize these costs until the
next base rate case.
Reserve for Claims and Damages
Costs arising from workers' compensation claims, property damage, general
liability and unusual production plant repair costs are partially self-funded.
Provisions for the reserves are based on experience, risk of loss and the
rate-making practices of regulatory authorities.
Reclassifications
Certain amounts from prior years have been reclassified to conform with
the current year presentation.
- --------------------------------------------------------------------------------
20
<PAGE> 15
Orange and Rockland Utilities, Inc. and Subsidiaries
Note 2. Federal Income Taxes.
The Internal Revenue Service (IRS) has completed its examination of the
Company's tax returns for 1995 and 1996. The Company and the IRS have agreed to
a refund of tax and interest, which had a minimal effect on the operating
results of the Company.
The components of federal income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
================================================================================
(Thousands of Dollars)
<S> <C> <C> <C>
Charged to operations:
Current $17,449 $17,517 $21,120
Deferred-net 5,186 6,482 5,374
Amortization of investment tax credit (122) (121) (128)
- --------------------------------------------------------------------------------
Total charged to operations 22,513 23,878 26,366
- --------------------------------------------------------------------------------
Charged to other income:
Current 268 (1,671) 155
Deferred-net 426 798 (21)
Amortization of investment tax credit (705) (689) (796)
- --------------------------------------------------------------------------------
Total charged to other income (11) (1,562) (662)
- --------------------------------------------------------------------------------
Total $22,502 $22,316 $25,704
- --------------------------------------------------------------------------------
</TABLE>
The tax effect of temporary differences which gave rise to deferred tax
assets and liabilities is as follows:
<TABLE>
<CAPTION>
As of December 31, 1998 1997
================================================================================
(Thousands of Dollars)
<S> <C> <C>
Liabilities:
Accelerated depreciation $ 193,756 $ 191,438
Other 39,369 39,305
- --------------------------------------------------------------------------------
Total liabilities 233,125 230,743
- --------------------------------------------------------------------------------
Assets:
Employee benefits (17,480) (19,650)
Other (17,947) (18,579)
- --------------------------------------------------------------------------------
Total assets (35,427) (38,229)
- --------------------------------------------------------------------------------
Net Liability $ 197,698 $ 192,514
- --------------------------------------------------------------------------------
</TABLE>
Reconciliation of the difference between federal income tax expenses and
the amount computed by applying the prevailing statutory income tax rate to
income before income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
================================================================================
(% of Pre-tax Income)
<S> <C> <C> <C>
Statutory tax rate 35% 35% 35%
Changes in computed taxes
resulting from:
Amortization of investment tax credits (1%) (1%) (1%)
Cost of removal (2%) (1%) (1%)
Additional depreciation deducted for
book purposes 2% 3% 4%
Other (1%) (3%) (3%)
- --------------------------------------------------------------------------------
Effective Tax Rate 33% 33% 34%
- --------------------------------------------------------------------------------
</TABLE>
Note 3. Discontinued Operations.
In August 1997, Norstar Management, Inc. (NMI), a wholly owned indirect
subsidiary of the Company, sold certain of the assets of NORSTAR Energy Limited
Partnership (NORSTAR), a natural gas services and marketing company of which NMI
is the general partner. The assets sold consisted primarily of customer
contracts and accounts receivable. In accordance with Accounting Principles
Board Opinion No. 30, the financial results for this segment are reported as
"Discontinued Operations." Discontinued operations had no material effect on the
1998 results of operations. The total losses related to discontinued operations
were $(15,432,000), or $ (1.13) per share, for 1997 and $(1,844,000), or $
(0.13) per share, for 1996. The net assets of these operations at December 31,
1998 consist of cash of $0.9 million, net accounts receivable of $0.1 million
and other current assets of $0.1 million partially offset by accounts payable of
$0.1 million.
Note 4. Proposed Merger with Consolidated Edison, Inc.
On May 10, 1998, the Company, Consolidated Edison, Inc. (CEI) and C
Acquisition Corp., a wholly owned subsidiary of CEI (Merger Sub), entered into
an Agreement and Plan of Merger (Merger Agreement) providing for a merger
transaction among the Company, CEI and the Merger Sub. Pursuant to the Merger
Agreement, Merger Sub will merge with and into the Company (the Merger), with
the Company being the surviving corporation and becoming a wholly owned
subsidiary of CEI.
On June 22, 1998, the Company and CEI and Con Edison filed a Joint
Petition (Joint Petition) with the NYPSC requesting approval of the Merger. The
Parties have requested regulatory reviews and approvals prior to March 31, 1999.
The Merger is anticipated to result in cost savings, net of transaction
costs and costs to achieve, of approximately $468 million over the first 10
years following the closing of the transaction. Transaction costs and costs to
achieve are the incremental legal, financial, employee and organizational costs
incurred and to be incurred to effectuate and implement the Merger and related
cost savings activities. The Parties have proposed in the Joint Petition that
these cost savings be allocated between customers and shareholders on a 50/50
basis. In addition, the Parties have proposed a cost allocation methodology and
accounting procedure which would govern them and their various affiliates.
On July 2, 1998, RECO and Pike filed similar petitions with the NJBPU and
the PPUC, respectively, for approval of the Merger. The proceedings before the
NYPSC, the NJBPU and the PPUC have established schedules that provided for
final decisions by March 31, 1999. The Company can give no assurance that any of
the Commissions will issue orders by that date or what, if any, conditions may
be imposed by such Commissions to such orders.
On January 14, 1999, Pike, the Office of the Consumer Advocate and the
Office of the Small Business Advocate executed a settlement agreement which
allows Pike to retain all merger savings, net of costs to achieve, until its
next electric and gas base rate case. An Administrative Law Judge issued a
Recommended Decision to the PPUC on February 3, 1999 recommending approval of
the settlement in its entirety. A final PPUC order is expected prior to March
31, 1999.
- --------------------------------------------------------------------------------
21
<PAGE> 16
Orange and Rockland Utilities, Inc. and Subsidiaries
On September 9, 1998, the Company and Con Edison filed an Application for
Approval of Merger and Related Authorizations with the FERC. On January 27,
1999, the FERC issued an order approving the merger consistent with the terms of
said application.
On February 3, 1999, the Company and CEI filed an application with the
Securities and Exchange Commission seeking approval of the Merger under the
Public Utility Holding Company Act of 1935.
On January 26, 1999, the Company and CEI each filed a Notification and
Report Form under the Hart-Scott-Rodino Act of 1976, as amended, (HSR Act) with
the Department of Justice and the Federal Trade Commission. Under the provisions
of the HSR Act, consummation of the Merger is subject to the expiration or
earlier termination of the applicable waiting period.
At a Special Meeting of the Common Shareholders of the Company held on
August 20, 1998, the Merger Agreement was approved by a vote of approximately
74% of the common shares entitled to vote. The Merger is expected to occur
shortly after all of the conditions to the consummation of the Merger, including
the receipt of all regulatory approvals, are met or waived.
Note 5. Divestiture of Power Plants.
In accordance with the schedule in the Restructuring Plan, the Company
filed its Final Divestiture Plan (Divestiture Plan) on February 4, 1998. The
Divestiture Plan which provides for a two-phase auction process, was approved by
the NYPSC in orders issued April 16, 1998 and May 26, 1998. The Company retained
Donaldson, Lufkin & Jenrette Securities Corporation to act as its financial
advisor in connection with the divestiture of the generating assets.
Following the review of final bids and negotiations with the winning
bidder, on November 24, 1998, the Company entered into four separate Asset Sales
Agreements (ASAs) with subsidiaries of Southern Energy, Inc. (Southern Energy),
a subsidiary of Southern Company. The sales price for all generating facilities,
including the two-thirds interest in Bowline owned by Con Edison, is
approximately $480 million, plus certain fuel inventory and other adjustments.
The Company's share of the sales price is approximately $345 million. The total
net book value of the plant assets at December 31, 1998 is approximately $264
million. In addition, fuel and material and supplies inventories, with a
carrying value of $17.5 million at December 31, 1998, will be included in the
sale. The sale is subject to federal and state regulatory review and approval.
The ASAs provide for the closing of the sale to occur on April 30, 1999, which
date may be adjusted depending on the receipt of regulatory approvals. The New
York Power Pool is currently in the process of restructuring itself into an
Independent System Operator (ISO) which requires FERC approval. In an order
dated January 27, 1999 the FERC conditionally accepted the proposed ISO Tariff
subject to certain modifications. Under the terms of the ASAs, if approval by
FERC of the establishment of the ISO has not been obtained by the time all other
regulatory approvals have been obtained, the parties have agreed to defer the
closing of the sale, but in no event to a date later than August 31, 1999.
The Restructuring Plan provides that the New York share of any net book
gains from the divestiture of the generating assets will be shared between the
Company's New York customers and shareholders, with shareholders receiving 25
percent of the gain, up to $20 million.
The terms of the Restructuring Plan also permit the Company to defer and
recover up to $7.5 million (New York electric share) of prudent and verifiable
non-officer employee costs associated with the divestiture, such as retraining,
outplacement, severance, early retirement and employee retention programs. Under
the terms of the Restructuring Plan, the Company will be authorized to petition
the NYPSC for recovery of employee costs in excess of $7.5 million. In addition,
the Restructuring Plan provides for the recovery of all prudent and verifiable
costs of the sale.
The NJBPU has not yet decided how RECO's share of any gain will be
allocated between ratepayers and shareholders. Pike's settlement will allow
shareholders to retain $55,000 of any gain.
Note 6. Retained Earnings.
Consolidated Statements of Retained Earnings:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
================================================================================
(Thousands of Dollars)
<S> <C> <C> <C>
Balance at beginning of year $ 181,473 $ 192,060 $184,008
Net income 44,967 29,506 46,303
- --------------------------------------------------------------------------------
226,440 221,566 230,311
- --------------------------------------------------------------------------------
Less: Dividends
Preferred stock 2,797 2,800 3,024
Common stock 34,899 35,229 35,227
- --------------------------------------------------------------------------------
37,696 38,029 38,251
- --------------------------------------------------------------------------------
Capital stock repurchase (2,213) (2,064) --
- --------------------------------------------------------------------------------
Capital stock expense (11) -- --
- --------------------------------------------------------------------------------
Balance at end of year $ 186,520 $ 181,473 $192,060
- --------------------------------------------------------------------------------
</TABLE>
Various restrictions on the availability of retained earnings of RECO for
cash dividends are contained in, or result from, covenants in indentures
supplemental to that company's Mortgage Trust Indenture. Approximately
$7,501,600 at December 31, 1998 and 1997 were so restricted.
Note 7. Capital Stock.
The table below summarizes the changes in Capital Stock, issued and
outstanding, for the years 1996, 1997 and 1998.
<TABLE>
<CAPTION>
(B) (C)
Non-Redeemable Non-Redeemable
(A) Cumulative Cumulative
Common Preferred Preference Capital
Stock Stock Stock Stock
($5 par value) ($100 par value) (no par value) Premium
============================================================================================================================
Shares Amount* Shares Amount* Shares Amount* Amount*
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
12/31/95: 13,653,613 $ 68,268 428,443 $ 42,844 12,539 $409 $133,607
Conversions 508 3 (359) (12) 9
- ----------------------------------------------------------------------------------------------------------------------------
Balance
12/31/96: 13,654,121 68,271 428,443 42,844 12,180 397 133,616
Reacquired
Stock (65,900) (330) -- -- (644)
Conversions 790 4 (541) (18) 13
- ----------------------------------------------------------------------------------------------------------------------------
Balance
12/31/97: 13,589,011 67,945 428,443 42,844 11,639 379 132,985
Reacquired
Stock (70,400) (352) -- -- (688)
Conversions 1,377 6 (955) (31) 24
Accretion of
call premium 324
- ----------------------------------------------------------------------------------------------------------------------------
Balance
12/31/98: 13,519,988 $ 67,599 428,443 $ 43,168 10,684 $348 $132,321
- ----------------------------------------------------------------------------------------------------------------------------
Shares
Authorized 50,000,000 820,000 1,500,000
- ----------------------------------------------------------------------------------------------------------------------------
*(in thousands)
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE> 17
Orange and Rockland Utilities, Inc. and Subsidiaries
(A) Pursuant to a December 1997 Order of the NYPSC, the Company had
authority to repurchase up to 700,000 shares of its common stock and to issue up
to $25 million of long- term debt to provide funds for the common stock
repurchase. During 1998 the Company repurchased 70,400 shares of its Common
Stock at an average price of $45.81 per share. The Repurchase Program was
suspended in the first quarter of 1998. The total number of shares of common
stock repurchased under the Repurchase Program was 136,300 shares at an average
market price of $45.75 per share. The Repurchase Program was canceled during the
second quarter of 1998. The Company then discharged the long-term debt
associated with the program.
At December 31, 1998, 15,705 shares of common stock were reserved for
conversion of preference stock.
(B) Non-Redeemable Preferred Stock (cumulative):
<TABLE>
<CAPTION>
Par Value
------------------- Callable
Shares December 31, Redemption
Series Outstanding 1996, 1997 and 1998 Price Per Share
================================================================================
(Thousands of Dollars)
<S> <C> <C> <C>
A, 4.65% 50,000 $ 5,000 $104.25
B, 4.75% 40,000 4,000 $102.00
D, 4.00% 3,443 344 $100.00
F, 4.68% 75,000 7,500 $102.00
G, 7.10% 110,000 11,000 $101.00
H, 8.08% 150,000 15,000 $102.43
- --------------------------------------------------------------------------------
428,443 $ 42,844
- --------------------------------------------------------------------------------
</TABLE>
This stock is subject to redemption, at any time, solely at the option of
the Company on 30 days minimum notice upon payment of the redemption price, plus
accrued and unpaid dividends to the date fixed for redemption. Furthermore, the
preferred stock is superior to cumulative preference stock and common stock with
respect to dividends and liquidation rights. (See discussion below of the
Company's intention to redeem these securities).
(C) The Non-Redeemable $1.52 Convertible Cumulative Preference Stock,
Series A, is redeemable at the option of the Company on 30 days minimum notice
upon payment of the redemption price, plus accrued and unpaid dividends. The
redemption price per share is $32.50 plus accrued and unpaid dividends to the
date fixed for redemption. This stock ranks junior to cumulative preferred stock
and superior to common stock as to dividends and liquidation rights.
Furthermore, this stock is convertible, at the option of the shareholder, into
common stock at the ratio of 1.47 shares of common stock for each share of
preference stock, subject to adjustment. (See discussion below of the Company's
intention to redeem these securities).
As a result of the Merger Agreement, and contingent upon regulatory
approvals of the Merger Agreement, it is expected that the Company's common
stock will be acquired by CEI during the second quarter of 1999. The price, as
stated in the Merger Agreement, will be $58.50 per share. In addition, the
Merger Agreement requires that the Company's Preferred Stock and Preference
Stock be called for redemption prior to the effective date of the Merger. The
Company intends to redeem all of the outstanding Preferred Stock and Preference
Stock as soon as practicable. These issues of stock are reflected on the
Consolidated Balance Sheet at December 31, 1998 as Current Liabilities.
Effective July 1, 1998, the Company began accreting the estimated call price
over the carrying amount for the Preferred and Preference Stock to be redeemed.
On October 7, 1998, the Company filed a petition with the NYPSC for permission
to issue $45 million of long-term debt, the proceeds of which will be used to
call for redemption of all of the Company's outstanding Preferred and Preference
Stock. The NYPSC approved the Company's petition on January 13, 1999.
Note 8. Long-Term Debt.
During 1997, the final series of bonds outstanding under the Orange and
Rockland Utilities, Inc. First Mortgage Indenture was redeemed at maturity, and
the Company has canceled its First Mortgage and discharged the lien thereof. The
indenture under which the Company's debentures are issued contains a covenant
restricting the issuance by the Company of secured indebtedness while any
securities are outstanding under the debenture indenture. Pike was required,
pursuant to its First Mortgage Indenture, to make annual sinking fund payments
in the amount of $9,500 on July 15 of each year, with respect to its Series "A"
Bonds. The sinking fund requirements of Pike for 1997 were satisfied by the
allocation of an amount of additional property. Pike is not required to make
annual sinking fund payments with respect to its Series "C" Bonds.
Details of long-term debt at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
================================================================================
(Thousands of Dollars)
<S> <C> <C>
Orange and Rockland Utilities, Inc.:
Promissory Notes (unsecured):
6.9% - 7.0% due through April 15, 2001 $ 67 $ 106
6.09% due Oct. 1, 2014 (a) 55,000 55,000
Variable due Aug. 1, 2015 (b) 44,000 44,000
Debentures:
Series A, 93/8% due Mar. 15, 2000 80,000 80,000
Series C, 6.14% due Mar. 1, 2000 20,000 20,000
Series D, 6.56% due Mar. 1, 2003 35,000 35,000
Series F, 61/2% due Dec. 1, 2027 (c) 80,000 80,000
Rockland Electric Company:
First Mortgage Bonds:
Series I, 6% due July 1, 2000 20,000 20,000
Series J, 71/8% due Feb. 1, 2007 20,000 20,000
Pike County Light & Power Company:
First Mortgage Bonds
Series A, 9% due July 15, 2001 -- 884
Series B, 9.95% due Aug. 15, 2020 -- 1,800
Series C, 7.07% due Oct. 1, 2018 (d) 3,200 --
- --------------------------------------------------------------------------------
357,267 356,790
Less: Amount due within one year 35 39
- --------------------------------------------------------------------------------
357,232 356,751
Unamortized discount on long-term debt (76) (114)
- --------------------------------------------------------------------------------
Total Long-Term Debt $ 357,156 $ 356,637
- --------------------------------------------------------------------------------
</TABLE>
(a) The Company's $55 million Promissory Note was issued in connection
with the New York State Energy Research and Development Authority (NYSERDA)
variable rate Pollution Control Refunding Revenue Bonds (Orange and Rockland
Utilities, Inc. Projects), 1994 Series A (1994 Bonds). Pursuant to an interest
rate swap agreement, the Company pays interest at a fixed rate of 6.09% to a
swap counterparty and receives a variable rate of interest in return which is
identical to the variable rate on the 1994 Bonds. The result is to effectively
establish a fixed rate of interest on the 1994 Bonds of 6.09%.
- --------------------------------------------------------------------------------
23
<PAGE> 18
Orange and Rockland Utilities, Inc. and Subsidiaries
(b) The Company's $44 million Promissory Note was issued in connection
with the NYSERDA's $44 million variable rate Pollution Control Refunding Bonds
due August 1, 2015 (the 1995 Bonds). The average interest rate on the 1995 Bonds
was 3.20% in 1998 and 3.54% in 1997. The interest rate is adjusted weekly,
unless converted to another interest rate mode.
(c) The Series F Debentures are not redeemable prior to their stated
maturity. However, the holders may elect to have their Series F Debentures
repaid on December 1, 2004 at 100% of the principal amount of such debentures.
(d) On November 10, 1998, Pike issued $3.2 million of First Mortgage Bonds
Series C, 7.07% due October 1, 2018 (the Series C Bonds). The proceeds from the
sale of the Series C Bonds were used primarily to redeem Pike's First Mortgage
Bonds Series A and Series B. The Series C Bonds are redeemable at the option of
Pike on or after October 1, 2008 at varying rates.
In January 1998, the Company entered into a Credit Agreement with Mellon
Bank, N.A., the proceeds of which were used to provide funds for the Company's
Common Stock Repurchase Program. The Common Stock Repurchase Program was
suspended in the first quarter of 1998 and was canceled during the second
quarter of 1998 and the amounts outstanding under the Credit Agreement were
subsequently paid and the Credit Agreement was canceled.
The aggregate amount of debt maturities, all of which will be satisfied by
cash payments for each of the five years following 1998 is as follows:
1999-$35,000; 2000-$120,028,000; 2001-$4,000; 2002-$-0-; 2003-$35,000,000.
Substantially all of the utility plant and other physical property of the
Company's utility subsidiaries, RECO and Pike, are subject to the liens of the
respective indentures securing the First Mortgage Bonds of each company.
Note 9. Cash and Short-Term Debt.
The Company considers all cash and highly liquid debt instruments
purchased with a maturity date of three months or less to be cash and cash
equivalents for the purposes of the Consolidated Financial Statements.
At December 31, 1998, the Company and its utility subsidiaries had
unsecured bank lines of credit totaling $160 million. Effective January 1, 1999,
such lines of credit were reduced to $155 million. The Company may borrow under
the lines of credit through the issuance of promissory notes to the banks at
their prevailing interest rate for prime commercial borrowers. The Company,
however, primarily utilizes such lines of credit to fully support commercial
paper borrowings, which are issued through dealers at the prevailing interest
rate for prime commercial paper. The aggregate amount of borrowings through the
issuance of promissory notes and commercial paper cannot exceed the aggregate
lines of credit. All borrowings for 1998, 1997 and 1996 had maturity dates of
three months or less. Information regarding short-term borrowings during the
past three years is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
================================================================================
(Millions of Dollars)
<S> <C> <C> <C>
Weighted average interest rate at year-end 6.3% 7.0% 6.5%
Amount outstanding at year-end $149.1 $130.4 $82.4
Average amount outstanding for the year $130.7 $119.9 $66.6
Daily weighted average interest rate
during the year 5.8% 5.9% 5.7%
Maximum amount outstanding at any month-end $154.2 $204.5 $97.5
- --------------------------------------------------------------------------------
</TABLE>
As a result of the planned divestiture of the Company's generating
facilities, it is expected that the Company will have approximately $225 million
of cash proceeds available when the sale is complete.
Note 10. Fair Value of Financial Instruments.
Financial Assets and Liabilities
For the Company, financial assets and liabilities consist principally of
cash and cash equivalents, temporary cash investments, short-term debt,
commercial paper, long-term debt and funds held in benefit trust. The methods
and assumptions used to estimate the fair value of each class of financial
assets and liabilities for which it is practicable to estimate that value are as
follows:
Cash equivalents and temporary cash investments: The carrying amount
reasonably approximates fair value because of the short maturity of those
instruments.
Long-term debt: The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar issues.
Commercial paper: The carrying amount reasonably approximates fair value
because of the short maturity of those instruments.
Funds held in benefit trust: The fair value of the funds held in benefit
trust consisting of fixed income securities, insurance contracts and temporary
cash investments are based on quoted market prices of the fixed income
securities, the stated cash surrender values of the insurance contracts and the
carrying amount of the temporary cash investments which approximate their fair
value.
<TABLE>
<CAPTION>
1998 1997
===================================================================================
Carrying Fair Carrying Fair
Amount Amount Amount Amount
- -----------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 5,643 $ 5,643 $ 3,513 $ 3,513
Temporary cash investments 500 500 518 518
Long-term debt 357,267 367,149 356,790 362,908
Commercial paper 149,050 149,050 130,400 130,400
Funds held in benefit trust 16,343 16,343 10,647 12,414
- -----------------------------------------------------------------------------------
</TABLE>
Off Balance Sheet and Derivative Financial Instruments
The Company utilizes an interest rate swap derivative financial
instrument. At this time, no energy derivatives for its electric and natural gas
operations are in use. Information regarding the interest rate swap agreement is
as follows:
Swap Agreement -- In connection with the issuance of the 1994 Bonds, the
Company entered into a single interest rate swap agreement during 1992. Under
the terms of the interest rate swap
- --------------------------------------------------------------------------------
24
<PAGE> 19
Orange and Rockland Utilities, Inc. and Subsidiaries
agreement, the Company pays interest at a fixed rate of 6.09% to a swap
counterparty and receives a variable rate of interest in return. The variable
rate is identical to the variable rate on the 1994 Bonds. The result is to
effectively fix the interest rate on the 1994 Bonds at 6.09%. There were no
gains or losses due to the execution of the swap agreement. The terms and
conditions of the swap agreement are specific to the financing described. As a
result, no market price is available. Under certain circumstances, although none
are anticipated, the agreement may be terminated. The fair value of the
agreement is the amount which one counterparty may be required to pay the other
upon early termination. If the agreement had been terminated on December 31,
1998, it is estimated that the Company would have been required to make a
payment of approximately $8.4 million to the swap counterparty.
Note 11. Pension and Postretirement Benefits.
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 (SFAS No. 132), "Employers' Disclosures
About Pensions and Other Postretirement Benefits." This standard revises the
disclosure requirements of Statement of Financial Accounting Standards No. 87
(SFAS No. 87), "Employers' Accounting for Pensions," Statement of Financial
Accounting Standards No. 88 (SFAS No. 88), "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and Statement of Financial Accounting Standards No. 106
(SFAS No. 106), "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans.
Pension Benefits
The Company maintains a qualified, non-contributory defined benefit
retirement plan, covering substantially all employees and non-qualified,
non-contributory supplemental retirement plans covering certain management
employees. The plans call for benefits, based primarily on years of service and
average compensation, to be paid to eligible employees at retirement. The Plans
were last amended in 1997 to update the benefit formula to a January 1, 1993
pivot date (from January 1, 1988), provide unreduced early retirement benefits
to employees meeting the Rule of 85 (age and years of service total to 85 or
more, with a minimum age of 55), and to change the definition of compensation to
include awards paid to management employees under the Company's annual team
incentive plan.
The following table sets forth the plans' funded status and amounts
recognized in the Consolidated Balance Sheets at December 31, 1998 and 1997.
Plan assets are stated at fair market value and are composed primarily of common
stocks and investment grade debt securities. The information presented in the
following tables does not include the effect of the proposed divestiture of the
Company's generating assets, which is expected to take place during 1999. Due to
the uncertainties concerning employee issues and the inability to determine
which employees or how many employees will be impacted by the divestiture, the
costs to the retirement plan cannot be determined at this time.
<TABLE>
<CAPTION>
December 31, 1998 1997
================================================================================
(Thousands of Dollars)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 260,306 $ 232,990
Service cost 6,868 6,535
Interest cost 19,194 17,993
Amendments -- 12,852
Benefits paid (14,978) (12,451)
Actuarial (gain)/loss 18,375 2,387
- --------------------------------------------------------------------------------
Benefit Obligation at End of Year $ 289,765 $ 260,306
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 247,523 $ 225,997
Actual return on plan assets 33,119 33,163
Benefits paid (14,131) (11,637)
- --------------------------------------------------------------------------------
Fair Value of Plan Assets at End of Year $ 266,511 $ 247,523
- --------------------------------------------------------------------------------
Funded status $ (23,254) $ (12,783)
Unamortized net transition asset (3,026) (4,034)
Unrecognized prior service costs 35,830 40,081
Unrecognized (net gain)/loss (57,031) (66,108)
- --------------------------------------------------------------------------------
Accrued Pension Cost $ (47,481) $ (42,844)
- --------------------------------------------------------------------------------
</TABLE>
The following table provides the amounts recognized in the Company's
Consolidated Balance Sheets for the years 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998 1997
================================================================================
(Thousands of Dollars)
<S> <C> <C>
Accrued benefit liability $(52,118) $(46,795)
Intangible asset 1,503 1,920
Accumulated other comprehensive income 3,134 2,031
- --------------------------------------------------------------------------------
Net Amount Recognized $(47,481) $(42,844)
- --------------------------------------------------------------------------------
</TABLE>
The Company's non-qualified plans, which are included in the tables above,
were the only plans with an accumulated benefit obligation in excess of plan
assets. The non-qualified plans accumulated benefit obligations at December 31,
1998 and 1997 were $20.6 million and $17.6 million, respectively. The plans have
segregated assets held in a separate benefit trust for the payment of benefits,
the fair market value of which were $16.3 million and $12.4 million at December
31, 1998 and December 31, 1997, respectively. The plans' net periodic pension
cost for the years 1998, 1997 and 1996 were $3.2 million, $2.8 million and $2.3
million, respectively.
Net periodic pension expense for the Company's qualified plan for the
years 1998, 1997 and 1996 includes the following components:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
================================================================================
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost $ 5,849 $ 5,695 $ 5,456
Interest cost 17,836 16,686 15,135
Expected return on plan assets (17,480) (15,838) (14,746)
Amortization of:
Unrecognized net transition asset (1,114) (1,114) (1,114)
Unrecognized prior service costs 3,939 3,509 2,970
Unrecognized net gain (6,714) (4,968) (4,824)
- --------------------------------------------------------------------------------
Net Pension Expense $ 2,316 $ 3,970 $ 2,877
- --------------------------------------------------------------------------------
</TABLE>
Weighted average assumptions used in the accounting for these plans were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
================================================================================
<S> <C> <C> <C>
Discount rate 6.75% 7.5% 7.5%
Expected return on plan assets 8.0% 8.0% 8.0%
Rate of compensation increase:
Hourly 3.0% 3.0% 3.0%
Management 1.0% 1.0% 2.0%
Rate of consumer price increase 2.1% 2.6% 2.8%
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE> 20
Orange and Rockland Utilities, Inc. and Subsidiaries
Postretirement Benefits
In addition to providing pension benefits, the Company and its
subsidiaries provide certain health care and life insurance benefits for retired
employees. Employees retiring from the Company on or after having attained age
55 and who have rendered at least 10 years of service are entitled to
postretirement health care coverage.
The NYPSC, NJBPU and PPUC currently allow the Company to recover in rates
the SFAS No. 106 costs applicable to electric and gas operations. Under the
provisions of SFAS No. 71, the Company adopted deferred accounting for any
difference between the expense charge required under SFAS No. 106 and the
current rate allowance authorized by each jurisdiction. As permitted by SFAS No.
106, the Company elected to amortize the accumulated postretirement benefit
obligation at the date of adoption of the accounting standard, January 1, 1993,
over a 20-year period. This transition obligation totaled $57.2 million. At
December 31, 1998, $34.6 million remains.
In order to provide funding for postretirement benefit payments to
retirees, the Company established Voluntary Employees' Beneficiary Association
(VEBA) trusts. Contributions to the VEBA trusts are tax deductible, subject to
limitations contained in the Internal Revenue Code. The Company's policy is to
fund postretirement health and life insurance costs to the extent recoveries are
realized for these costs through rates.
The following table provides a reconciliation of the changes in the plans'
benefit obligations and the fair value of the VEBA trusts assets over the
two-year period ending December 31, 1998, a statement of the changes in funded
status as of December 31 of both years, and the net accrued liability recognized
in the Company's Consolidated Financial Statements:
<TABLE>
<CAPTION>
December 31, 1998 1997
================================================================================
(Thousands of Dollars)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 80,625 $ 82,999
Service cost 1,463 1,863
Interest cost 5,326 6,013
Plan participants' contributions 101 --
Amendments 98 (6,898)
Actual gain/(loss) (1,802) 1,230
Benefits paid (5,334) (4,582)
- --------------------------------------------------------------------------------
Benefit Obligation at End of Year $ 80,477 $ 80,625
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 22,238 $ 14,822
Actual return on plan assets 2,086 735
Employer contribution 12,089 11,263
Plan participants' contributions 101 --
Benefits paid (5,334) (4,582)
- --------------------------------------------------------------------------------
Fair Value of Plan Assets at End of Year $ 31,180 $ 22,238
- --------------------------------------------------------------------------------
Excess of projected benefit obligation
over plan assets $ 49,297 $ 58,387
Unrecognized transition obligation (34,601) (37,027)
Unrecognized prior service cost (89) --
Unrecognized actuarial (gain)/loss (5,016) (6,393)
- --------------------------------------------------------------------------------
Accrued Postretirement Benefit Cost $ 9,591 $ 14,967
- --------------------------------------------------------------------------------
</TABLE>
The following table provides the components of net periodic benefit cost
for the postretirement plans for the years ended December 31, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
================================================================================
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost $ 1,463 $ 1,863 $ 2,050
Interest cost 5,326 6,013 5,925
Return on plan assets (1,654) (907) (546)
Amortization of transition obligation 2,427 2,572 2,776
Prior service cost 9 84 202
Net losses 21 1,011 855
Amortized/(deferred and capitalized) 3,169 (1,009) (2,400)
- --------------------------------------------------------------------------------
Net Expense $ 10,761 $ 9,627 $ 8,862
- --------------------------------------------------------------------------------
</TABLE>
The Company's postretirement plans provide for health care and life
insurance benefits. The health care plan became contributory starting in 1995,
with participants contributing toward their medical coverage; the life insurance
plan is non-contributory. Written agreements dictate the calculation of
premiums to be paid by retirees. The accounting for the health care plans
reflects future cost-sharing changes consistent with the Company's expressed
intent that retirees share in the overall cost of benefits each year.
The assumptions used in the measurement of the Company's benefit
obligation are shown in the following table:
<TABLE>
<CAPTION>
Assumptions as of December 31, 1998 1997
================================================================================
<S> <C> <C>
Discount rate 6.75% 7.5%
Expected return on plan assets 6.25% 6.25%
Medical cost rate of increase 7.0% 7.5%
Prescription drug cost rate increase 9.0% 10.0%
- --------------------------------------------------------------------------------
</TABLE>
For measurement purposes the health care and prescription drug trend rates
shown above are assumed to decrease by 0.5% and 1.0%, respectively, each year to
a rate of 5.0% in 2002 and thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A 1.0% change in assumed health care
cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% 1%
Increase Decrease
================================================================================
(Thousands of Dollars)
<S> <C> <C>
Effect on total service and interest
cost components of net periodic
postretirement health care benefit cost $ 817 $ (651)
Effect on health care component of the
accumulated postretirement obligation $7,983 $(6,454)
- --------------------------------------------------------------------------------
</TABLE>
Note 12. Leases.
The Company maintains leases for certain property and equipment which meet
the accounting criteria for capitalization. As required by SFAS No. 71, the
Company has recorded such leases on its balance sheets. The amount of net assets
under capital leases included in the accompanying Consolidated Balance Sheets is
$1.7 million and $1.8 million, at December 31, 1998 and 1997, respectively.
Although current rate-making practices treat all leases as operating
leases, SFAS No. 71 provides that regulated utilities shall recognize as a
charge against income an amount equal to the rental expense allowed for
rate-making purposes. Therefore, the rental payments on these leases have no
impact on the Company's financial results.
- --------------------------------------------------------------------------------
26
<PAGE> 21
Orange and Rockland Utilities, Inc. and Subsidiaries
In accordance with the terms of sale agreements with Southern Energy (see
Note 5), the Company purchased the two leased gas turbines on February 1, 1999
for $1.7 million. These assets will be sold to a subsidiary of Southern Energy
when the sale is completed. The lease is reflected as a current liability on the
Consolidated Balance Sheet at December 31, 1998.
The future minimum rental commitments under the Company's non-cancellable
operating leases are as follows:
<TABLE>
<CAPTION>
Non-cancellable
Operating
Leases
================================================================================
(Thousands of Dollars)
<S> <C>
1999 $ 4,500
2000 4,300
2001 3,800
2002 2,600
2003 1,500
All years thereafter 28,300
- --------------------------------------------------------------------------------
Total $45,000
- --------------------------------------------------------------------------------
</TABLE>
Rental expense for 1998, 1997 and 1996 was $6.0 million, $5.8 million and
$6.2 million, respectively.
Note 13. Commitments and Contingencies.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105 "Financial Instruments with Concentrations of Credit Risk,"
consist principally of temporary cash investments and accounts receivable. The
Company places its temporary cash investments with highly rated financial
institutions. Concentrations of credit risk with respect to accounts receivable
are limited due to the Company's large, diverse customer base within its service
territory. Therefore, as of December 31, 1998, the Company had no significant
concentrations of credit risk.
Construction Program
Under the construction program of the Company and its subsidiaries, it is
estimated that expenditures (excluding allowance for funds used during
construction) of approximately $41.0 million will be incurred during 1999. This
estimate includes four months of construction expenditures related to the
Company's generating facilities. Construction expenditures, including cost of
removal and salvage, amounted to $55.4 million for 1998.
Gas Supply and Storage Contracts
The Company has long-term and short-term contracts for firm supply,
transportation and storage of gas. The contracts contain provisions that permit
the Company to extend the contracts beyond their primary term if they are still
required to serve firm customers.
Approximately 90 percent of the Company's existing contracts will expire
between 2000 and 2004. The Company's obligations under these contracts for the
five years following 1998 are as follows: 1999-$60,100,000; 2000-$56,200,000;
2001-$42,400,000; 2002-$39,700,000 and 2003-$25,400,000.
The NYPSC, in its effort to promote competition, has required the Company
to provide firm transportation service for those customers that elect to
purchase their gas supply from a marketer rather than the Company. Marketers are
permitted to aggregate customers. As the transition to a competitive retail
market develops, the Company will determine what supply capacity and storage
contracts it maintains. As the Company moves to a competitive market,
traditional cost recovery mechanisms may be replaced by market-based methods.
Coal Supply Contracts
The Company has one long-term contract for the supply of coal and two
long-term contracts and a letter of intent for the transportation of coal. The
Company has the right under the long-term coal purchase contract to suspend the
purchase of coal if an alternative fuel source becomes less expensive. As part
of the divestiture, the coal contracts will be assigned to various subsidiaries
of Southern Energy.
The aggregate contract obligations for the supply and transportation of
coal for each of the five years following 1998 are as follows: 1999-$30,300,000;
2000-$29,600,000; 2001-$29,000,000; 2002-$29,000,000; 2003-$29,100,000.
Power Purchase Agreements
The Company has two long-term contracts for the purchase of electric
generating capacity and energy. The contracts expire in 2000 and 2015,
respectively.
The Company's aggregate contract obligations for the purchase of electric
capacity and energy for each of the five years following 1998 are as follows:
1999-$3,100,000; 2000-$3,300,000; 2001-$700,000; 2002-$700,000; 2003-$700,000.
Legal Proceedings
Restructuring Litigation
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 that the
NYPSC lacks the authority to order retail wheeling or divestiture.
On November 26, 1996, the Supreme Court issued a ruling denying the
Article 78 petition. In its ruling, the Court determined that because the NYPSC
had not yet directed retail wheeling, generation deregulation and asset
divestiture, there was no justiciable controversy regarding these issues.
Despite this finding, the Court proceeded to opine that the NYPSC is not
precluded by state or federal law from ordering retail wheeling or generation
divestiture. The Court also determined that the utilities are not entitled, as a
matter of law, to recover from customers the full amount of the utilities'
strandable costs. On December 24, 1996, the Energy Association and the New York
utilities appealed to the Appellate Division of the Supreme Court for the Third
Judicial Department from the Supreme Court's November 26, 1996 decision. The
Supreme Court of the State of New York, Appellate Division, Third Department,
has granted several motions by the petitioners for an extension of time to
- --------------------------------------------------------------------------------
27
<PAGE> 22
Orange and Rockland Utilities, Inc. and Subsidiaries
perfect the appeal. By Decision and Order on Motion dated October 28, 1998, the
Appellate Division has granted a motion to extend the time to perfect appeals to
February 25, 1999. The Company's Restructuring Plan approved by the NYPSC's
Orders of November 26 and December 31, 1997 requires the Company to petition the
Appellate Division to withdraw its appeal. This petition must be filed
"following final Commission approval of this agreement" (i.e., when any appeals
from such approval are exhausted or the time to appeal has expired). On April
30, 1998, the Public Utility Law Project of New York, Inc. (PULP) instituted
litigation in New York State Supreme Court against the NYPSC and the Company
challenging the Company's Restructuring Plan. The NYPSC and the Company each
filed a Motion to Dismiss this litigation on May 26, 1998. The Court denied
these Motions on September 1, 1998 and ordered that PULP's action be converted
into an Article 78 proceeding. The Company is unable to predict the final result
of this litigation.
Environmental Litigation
On March 29, 1989, the New Jersey Department of Environmental Protection
(NJDEP) issued a directive under the New Jersey Spill and Control Act to various
potentially responsible parties (PRPs), including the Company, with respect to a
site formerly owned and operated by Borne Chemical Company in Elizabeth, Union
County, New Jersey, ordering certain interim actions directed at both site
security and the off-site removal of certain hazardous substances. The Company
and other PRPs are currently conducting a remedial investigation to determine
what, if any, subsurface remediation at the Borne site is required. The Company
does not believe that this matter will have a material effect on the financial
condition of the Company.
On August 2, 1994, the Company entered into a Consent Order with the New
York State Department of Environmental Conservation (DEC) in which the Company
agreed to conduct a remedial investigation of certain property it owns in West
Nyack, New York. Polychlorinated biphenyls (PCBs) have been discovered at the
West Nyack site. Petroleum contamination related to a leaking underground
storage tank was found as well. The Company has completed this remedial
investigation. The Company and the DEC have executed a second Consent Order to
implement a Record of Decision (ROD), dated October 20, 1997 issued by the DEC.
The ROD provides for the removal and off-site disposal of soils contaminated
with PCBs and other petroleum-related contaminants and the post-remedial
monitoring of groundwater. The Company completed all remediation at the West
Nyack site in April 1998 except for the ongoing groundwater monitoring which
will continue through March 2000. The Company anticipates that the DEC will
determine whether any additional groundwater remediation will be required once
such monitoring is completed. Deferred accounting treatment has been approved by
the NYPSC and these costs are expected to be recovered in rates.
The Company has identified seven former Manufactured Gas Plant (MGP) sites
which were owned and operated by the Company or its predecessors. The Company
may be named as a PRP for these sites under relevant environmental laws, which
may require the Company to clean up these sites. To date, no claims have been
asserted against the Company. The Company and the DEC have executed a Consent
Order dated as of January 8, 1996, which provides for preliminary site
assessments of these seven MGP sites. Preliminary Site Assessment (PSA) reports
for four sites were submitted to the DEC on September 1, 1997. These reports
showed varying degrees of contamination at each of the sites which necessitates
further investigation. The Company entered into a Consent Order dated September
29, 1998 to conduct a Remedial Investigation and Feasibility Study (RIFS) at
each of these sites. Field investigations began in October 1998 and are ongoing.
The Company anticipates that final reports will be submitted to DEC in the third
quarter of 1999. In addition, the Company has completed PSAs at two of its other
MGP sites and submitted PSA reports to DEC in September 1998. Since MGP
contamination was found at each of these two sites, the Company expects that a
RIFS will need to be performed at these sites. Due to difficulties in obtaining
access, the Company has not commenced a PSA for its MGP site located in Nyack,
New York. The Company currently is negotiating a separate consent order with DEC
for this MGP site, as well as an access agreement with the current site owner.
Although the Company is unable at this time to estimate the total costs to be
incurred at the seven MGP sites, deferred accounting treatment has been approved
by the NYPSC and these costs are expected to be recovered in rates.
On May 29, 1991, a group of ten electric utilities (Metal Bank Group)
entered into an Administrative Consent Order with the United States
Environmental Protection Agency (EPA) to perform a RIFS at the Cottman
Avenue/Metal Bank Superfund site in Philadelphia, Pennsylvania. PCBs have been
discharged at the Cottman Avenue site from an underground storage tank and the
handling of transformers and other electrical equipment. On December 31, 1997,
the EPA executed a ROD which presents the final remedial action selected for the
site, which EPA estimates will cost approximately $17.2 million. On July 6,
1998, the EPA issued an administrative order to the Company and the members of
the Metal Bank Group ordering them to commence remediation of the site. On July
28, 1998, the Metal Bank Group and the Company notified the EPA of their intent
to proceed with the work required by the July 6, 1998 order. By letter dated
September 22, 1998, EPA selected the Metal Bank Group's consultant to perform
the remedial design for the site. This consultant has developed and the Metal
Bank Group has submitted a draft remedial design work plan to EPA for comment.
On November 23, 1998, the Company executed a settlement agreement with the Metal
Bank Group wherein they agreed that the Company would become a member of the
Metal Bank Group and that the Company would pay the Metal Bank Group $350,000,
which represents the Company's share of costs incurred by the Metal Bank Group
at the Cottman Avenue site through July 20, 1998. On November 30, 1998, the
Company executed the Cottman Avenue PRP Group amended agreement, thereby
becoming a member of the Metal Bank Group. This agreement allocated to the
Company 4.57% of shared costs. The consolidated financial results include the
Company's share of costs to join the Metal Bank Group as well as a provision for
the Company's share of the projected liability.
- --------------------------------------------------------------------------------
28
<PAGE> 23
Orange and Rockland Utilities, Inc. and Subsidiaries
Other Litigation
On November 19, 1996, the Company was served with a Summons and Complaint
(Summons and Complaint) in a litigation entitled Crossroads Cogeneration
Corporation v. Orange and Rockland Utilities, Inc., filed in the United States
District Court for the District of New Jersey. The litigation relates to a
certain Power Sales Agreement between the Company and Crossroads Cogeneration
Corporation (Crossroads), which requires the Company to purchase electric
capacity and associated energy from a cogeneration facility in Mahwah, New
Jersey. The Complaint alleges damage claims for breach of contract, breach of
the implied covenant of good faith and fair dealing and violations of the
Federal Antitrust laws and seeks a declaration of Crossroads' rights under the
Agreement. By Opinion and Order dated June 30, 1997 (Order), the Court dismissed
Crossroads' Complaint in its entirety with prejudice, whereupon Crossroads
appealed to the United States Court of Appeals for the Third Circuit. On October
27, 1998, the United States Court of Appeals for the Third Circuit issued its
decision in this case. The Third Circuit confirmed the trial court's dismissal
with prejudice of Crossroads federal antitrust claims but rejected the trial
court's determination that the NYPSC's November 29, 1996 decision was
determinative of Crossroads' state contract claims. This case has been remanded
to the United States District Court for the District of New Jersey. The Company
cannot predict the ultimate outcome of this proceeding.
On March 9, 1998, three shareholders of the Company filed a purported
derivative action on behalf of the Company alleging various claims against its
directors, several current officers and one former officer, certain other
defendants and nominally against the Company. Plaintiffs filed the action,
entitled Virgilio Ciullo, et al. v. Orange and Rockland Utilities, Inc. et al.
in the Supreme Court of the State of New York, County of New York. The complaint
was subsequently amended several times to assert additional purported derivative
and class action claims. By order dated January 8, 1999 and entered on January
12, 1999, the State Supreme Court granted defendants' motion to dismiss the
complaint in its entirety and denied plaintiffs' motion to further amend their
complaint to add additional causes of actions. On February 10, 1999, plaintiffs
filed a notice of appeal from the trial court's decision to the Appellate
Division.
Environmental
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 (CERCLA) and certain similar state statutes authorize various
governmental authorities to issue orders compelling responsible parties to take
cleanup action at sites determined to present an imminent and substantial danger
to the public and to the environment because of an actual or threatened release
of hazardous substances. As discussed above, the Company is a party to a number
of administrative and litigation proceedings involving potential impact on the
environment. Such proceedings arise out of, without limitation, the operation
and maintenance of facilities for the generation, transmission and distribution
of electricity and natural gas. As noted above, the Company does not believe
that certain proceedings will have a material effect on the Company, while as to
others, the Company is unable at this time to estimate what, if any, costs it
will incur. Pursuant to the Clean Air Act Amendments of 1990, which became law
on November 15, 1990, a permanent nationwide reduction of 10 million tons in
sulfur dioxide emissions from 1980 levels, as well as a permanent nationwide
reduction of 2 million tons of nitrogen oxide emissions from 1980 levels, must
be achieved by January 1, 2000. In addition, continuous emission monitoring
systems were required at all affected facilities effective January 1, 1995.
Pursuant to New York State attainment of ozone standards, nitrogen oxide
(NOx) reductions were achieved effective May 31, 1995. Additional NOx reductions
will be required effective May 1999 for the annual ozone season (May -
September).
The Company has two base load generating stations that burn fossil fuels
that are affected by this legislation. These generating facilities already burn
low sulfur fuels, so additional capital costs are not anticipated for compliance
with the sulfur dioxide emission requirements. The Company installed low
nitrogen oxide burners at the Lovett Plant and made operational modifications at
Bowline Plant to meet NOx reduction levels for ozone attainment. Additional
emission monitoring systems were installed at both facilities.
In compliance with DEC proposed regulations, effective May 1, 1999, the
Company will be allocated NOx emission allowances for the annual ozone season.
The Company does not anticipate incurring additional capital costs to comply
with these proposed regulations.
Beginning with calendar year 1994, Title V sources (Bowline and Lovett)
are required to pay an emission fee. Each facility's fees are based upon actual
air emissions reported to the DEC for the preceding calendar year. For 1998, the
Company paid an emission rate of approximately $32.64 per ton based upon 1997
emissions. The emission fee will be reevaluated by New York State annually.
The EPA finalized in July 1997 new national ambient air quality standards
for ozone particulate matter.
By agreements dated November 24, 1998, the Company agreed to sell all of
its electric generating facilities to subsidiaries of Southern Energy. Pending
the closing, the Company will continue to assess the impact of the Clean Air Act
Amendments of 1990 and new ozone and particulate standards on its power
generating operations as additional regulations implementing these Amendments
and standards are promulgated.
Note 14. Segments of Business.
In accordance with the requirements of Statement of Financial Accounting
Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise
and Related Information," the Company defines its principal business segments as
utility (electric and gas) and diversified activities. The diversified segment,
at year end, included energy services and land development. Total utility
revenue as reported in the Consolidated Statements of Income include both sales
to unaffiliated customers and intersegment sales which are billed at tariff
rates. Income from operations is total revenue less operating expenses. General
corporate expenses were allocated in the manner used in the rate-making process.
Identifiable assets by segment are those assets that are used in the
production, distribution and sales operations in each segment. Allocations were
made in a manner consistent with the rate-making process. Corporate assets are
principally property, cash, sundry receivables and unamortized debt expense.
- --------------------------------------------------------------------------------
29
<PAGE> 24
Orange and Rockland Utilities, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
===========================================================================================
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Information:
Operating revenues:
Sales to unaffiliated customers:
Electric $ 489,869 $ 479,463 $ 477,032
Gas 135,605 168,421 176,400
Intersegment sales:
Electric 9 10 10
Gas 14 29 42
- -------------------------------------------------------------------------------------------
Total Utility Operating Revenues 625,497 647,923 653,484
Diversified activities 607 851 1,405
- -------------------------------------------------------------------------------------------
Total Operating Revenues $ 626,104 $ 648,774 $ 654,889
- -------------------------------------------------------------------------------------------
Operating income before income taxes:
Electric $ 89,160 $ 87,430 $ 86,161
Gas 11,352 15,382 22,447
Diversified activities (2,009) (1,937) 402
- -------------------------------------------------------------------------------------------
Total Operating Income
Before Income Taxes 98,503 100,875 109,010
- -------------------------------------------------------------------------------------------
Income Taxes:
Electric 21,770 21,837 21,585
Gas 1,301 2,491 4,879
Diversified activities (558) (450) (98)
- -------------------------------------------------------------------------------------------
Total Income Taxes 22,513 23,878 26,366
- -------------------------------------------------------------------------------------------
Total Income From Operations $ 75,990 $ 76,997 $ 82,644
- -------------------------------------------------------------------------------------------
Other Information:
Identifiable assets:
Electric $ 1,004,102 $ 996,647 $ 978,952
Gas 260,754 241,656 240,471
Diversified activities 11,913 13,162 24,220
- -------------------------------------------------------------------------------------------
Total Identifiable Assets 1,276,769 1,251,465 1,243,643
Corporate assets 31,371 36,544 22,489
- -------------------------------------------------------------------------------------------
Total Assets $ 1,308,140 $ 1,288,009 $ 1,266,132
- -------------------------------------------------------------------------------------------
Depreciation expense:
Electric $ 29,919 $ 30,597 $ 29,430
Gas 5,688 5,091 2,578
Diversified activities 128 173 264
- -------------------------------------------------------------------------------------------
Total Depreciation Expense $ 35,735 $ 35,861 $ 32,272
- -------------------------------------------------------------------------------------------
Additions to plants:
Electric $ 33,910 $ 48,555 $ 41,932
Gas 19,109 25,257 16,766
Diversified activities 18 174 136
- -------------------------------------------------------------------------------------------
Total Additions $ 53,037 $ 73,986 $ 58,834
- -------------------------------------------------------------------------------------------
</TABLE>
Note 15. Summary of Quarterly Results of Operations (Unaudited).
<TABLE>
<CAPTION>
Earnings Earnings
Applicable Per
Income To Average
Operating From Net Common Common
Revenues Operations Income Stock Share
===================================================================================
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Quarter Ended
1998
March 31 $165,081 $21,482 $ 13,804 $ 13,104 $ 0.97
June 30 139,549 12,712 5,076 4,377 0.32
September 30 172,118 26,902 18,449 17,588 1.30
December 31 149,356 14,894 7,638 7,101 0.53
- -----------------------------------------------------------------------------------
1997
March 31 $185,318 $21,395 $ 6,916 $ 6,216 $ 0.46
June 30 137,195 13,068 (994) (1,693) (0.13)
September 30 159,728 23,741 12,568 11,868 0.87
December 31 166,533 18,793 11,016 10,315 0.76
- -----------------------------------------------------------------------------------
</TABLE>
Quarterly results reflect the seasonal effect of electric and gas sales as
well as the results of the NORSTAR discontinued operations.
Report of Independent Public Accountants
ARTHUR ANDERSEN LLP
To the Board of Directors and Shareholders of Orange and Rockland Utilities,
Inc.:
We have audited the accompanying consolidated balance sheets of Orange and
Rockland Utilities, Inc. (a New York Corporation) and Subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income
and retained earnings and cash flows for each of the three years in the period
ended December 31, 1998. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Orange and
Rockland Utilities, Inc. and Subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for the three
years ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
New York, New York
February 4, 1999
- --------------------------------------------------------------------------------
30
<PAGE> 25
Orange and Rockland Utilities, Inc. and Subsidiaries
Operating Statistics
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Electric:
Sales (Mwh):
Residential 1,836,916 1,791,676 1,731,105 1,685,110 1,660,755
Commercial 2,105,741 1,959,862 2,044,759 2,056,185 2,049,265
Industrial 815,089 839,851 748,484 680,678 657,142
Public Street Lighting 28,713 26,899 29,522 28,107 27,836
Public Authorities 78,827 73,647 51,392 75,506 68,972
- --------------------------------------------------------------------------------------------------------------------------------
Total Sales to Customers 4,865,286 4,691,935 4,605,262 4,525,586 4,463,970
Other Utilities for Resale 556,679 305,445 190,394 118,730 265,311
- --------------------------------------------------------------------------------------------------------------------------------
Total Sales of Electricity 5,421,965 4,997,380 4,795,656 4,644,316 4,729,281
- --------------------------------------------------------------------------------------------------------------------------------
Revenues (000's):
Residential $ 219,170 $ 218,974 $ 209,706 $ 208,862 $ 214,439
Commercial 202,054 194,102 200,281 204,240 212,214
Industrial 42,818 44,936 46,663 50,205 51,316
Public Street Lighting 4,945 5,040 4,903 4,930 4,939
Public Authorities 3,402 2,754 3,453 4,257 4,051
- --------------------------------------------------------------------------------------------------------------------------------
Total Revenues from Sales to Customers 472,389 465,806 465,006 472,494 486,959
Other Utilities for Resale 13,956 7,109 3,106 2,150 6,636
- --------------------------------------------------------------------------------------------------------------------------------
Total Revenues from Sales of Electricity 486,345 472,915 468,112 474,644 493,595
Other Electric Operating Revenues 3,533 6,558 8,930 (14,661) (14,566)
- --------------------------------------------------------------------------------------------------------------------------------
Total Electric Operating Revenues $ 489,878 $ 479,473 $ 477,042 $ 459,983 $ 479,029
================================================================================================================================
Gas:
Sales (Mmcf):
Residential 12,489 14,997 15,685 14,759 15,164
Commercial and Industrial 4,853 5,324 5,233 5,066 5,257
- --------------------------------------------------------------------------------------------------------------------------------
Total Firm Sales 17,342 20,321 20,918 19,825 20,421
Interruptible 3,114 3,527 3,996 2,327 1,023
Other Utilities for Resale 7 3 4 4 27
- --------------------------------------------------------------------------------------------------------------------------------
Total Sales of Gas 20,463 23,851 24,918 22,156 21,471
- --------------------------------------------------------------------------------------------------------------------------------
Revenues (000's):
Residential $ 93,630 $ 115,335 $ 116,981 $ 96,737 $ 112,759
Commercial and Industrial 27,412 34,771 36,954 31,226 36,676
- --------------------------------------------------------------------------------------------------------------------------------
Total Revenues from Firm Sales 121,042 150,106 153,935 127,963 149,435
Interruptible 10,256 13,915 15,101 6,725 3,996
Other Utilities for Resale 69 75 94 59 203
- --------------------------------------------------------------------------------------------------------------------------------
Total Revenues from Sales of Gas 131,367 164,096 169,130 134,747 153,634
Other Gas Revenues 4,252 4,354 7,312 5,477 3,534
- --------------------------------------------------------------------------------------------------------------------------------
Total Gas Operating Revenues $ 135,619 $ 168,450 $ 176,442 $ 140,224 $ 157,168
================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE> 26
Orange and Rockland Utilities, Inc. and Subsidiaries
Financial Statistics
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Common Stock Data:
Earnings Per Average Common Share:
Continuing Operations $ 3.12 $ 3.09 $ 3.30 $ 2.54 $ 2.45
Discontinued Operations $ -- $ (1.13) $ (0.13) $ 0.06 $ 0.05
- --------------------------------------------------------------------------------------------------------------------------------
Consolidated Earnings Per Average Common Share $ 3.12 $ 1.96 $ 3.17 $ 2.60 $ 2.50
- --------------------------------------------------------------------------------------------------------------------------------
Dividends Declared Per Share $ 2.58 $ 2.58 $ 2.58 $ 2.57 $ 2.54
Book Value Per Share (Year End) $ 28.14 $ 27.69 $ 28.41 $ 27.82 $ 27.79
Market Price Range Per Share:
High $ 57 1/16 $ 48 5/8 $ 37 1/8 $ 37 3/8 $ 41 1/4
Low $ 40 $ 30 1/8 $ 33 3/8 $ 30 7/8 $ 28 3/8
Year End $ 57 $ 46 9/16 $ 35 7/8 $ 35 3/4 $ 32 1/2
Price Earnings Ratio 18.27 23.76 11.32 13.75 13.00
Dividend Payout Ratio 82.69% 131.63% 81.39% 98.85% 101.60%
Common Shareholders at Year End 17,650 19,682 21,322 22,916 23,299
Average Number of Common Shares Outstanding (000's) 13,520 13,649 13,654 13,653 13,594
Total Common Shares Outstanding
at Year End (000's) 13,520 13,589 13,654 13,654 13,653
Return on Average Common Equity 11.29% 7.09% 11.33% 9.35% 9.01%
- --------------------------------------------------------------------------------------------------------------------------------
Capitalization Data (000's):
Common Stock Equity $ 380,395 $ 376,319 $ 387,850 $ 379,776 $ 379,403
Non-Redeemable Preferred and Preference Stock 43,516 43,223 43,241 43,253 43,268
Redeemable Preferred Stock -- -- -- 1,390 2,774
Long-Term Debt (includes current portion) 357,192 356,676 359,825 359,928 379,014
- --------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $ 781,103 $ 776,218 $ 790,916 $ 784,347 $ 804,459
- --------------------------------------------------------------------------------------------------------------------------------
Capitalization Ratios:
Common Stock Equity 48.70% 48.48% 49.04% 48.42% 47.16%
Non-Redeemable Preferred Stock 5.57% 5.57% 5.47% 5.51% 5.38%
Redeemable Preferred Stock -- -- -- 0.18% 0.35%
Long-Term Debt (includes current portion) 45.73% 45.95% 45.49% 45.89% 47.11%
- --------------------------------------------------------------------------------------------------------------------------------
Selected Financial Data (000's):
Operating Revenues $ 626,104 $ 648,774 $ 654,889 $ 602,310 $ 638,404
Operating Expenses $ 550,114 $ 571,777 $ 572,245 $ 526,741 $ 562,810
Operating Income $ 75,990 $ 76,997 $ 82,644 $ 75,569 $ 75,594
Net Income $ 44,967 $ 29,506 $ 46,303 $ 38,573 $ 37,217
Earnings Applicable to Common Stock $ 42,170 $ 26,706 $ 43,279 $ 35,438 $ 33,966
Net Utility Plant $ 951,570 $ 936,213 $ 899,643 $ 873,668 $ 856,289
Total Assets $1,308,140 $1,288,009 $1,266,132 $1,251,541 $1,230,726
Long-Term Debt Including
Redeemable Preferred Stock $ 357,192 $ 356,676 $ 359,825 $ 361,318 $ 381,788
Ratio of Long-Term Debt to Net Plant 37.7% 38.1% 40.0% 41.2% 44.3%
Ratio of Accumulated Depreciation to
Utility Plant in Service 35.2% 35.1% 33.8% 33.3% 33.1%
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Credit Ratings Duff & Phelps Moody's Standard &
Credit Rating Investors Poor's
Company Service Corp.
=================================================================================================================================
<S> <C> <C> <C>
Commercial paper D-1 P-2 A-2
Pollution control bonds A A3 A-
Unsecured debt A A3 A-
Preferred stock A- baa1 BBB+
=================================================================================================================================
</TABLE>
- -------------------------------------------------------------------------------
32
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and a
Director of Orange and Rockland Utilities, Inc., which Company proposes to file
with the Securities and Exchange Commission an Annual Report on Form 10-K for
the Company's fiscal year ended December 31, 1998 pursuant to the provisions of
the Securities Exchange Act of 1934, as amended, has made, constituted and
appointed and by these presents does hereby make, constitute and appoint G. D.
CALIENDO his true and lawful attorney, for him and in his name, place and stead,
and in his office and capacity as aforesaid, to sign and file said Form 10-K and
any amendments thereto, and any and all other documents to be signed and filed
with the Securities and Exchange Commission in connection therewith, hereby
granting to said G. D. CALIENDO full power and authority to do and perform each
and every act as fully, to all intents and purposes, as he might or could do if
personally present, hereby ratifying and confirming in all respects all that G.
D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 4th day
of March, 1999.
/s/ D. Louis Peoples
------------------------------
D. Louis Peoples
Vice Chairman of the Board and
Chief Executive Officer
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer of Orange
and Rockland Utilities, Inc., which Company proposes to file with the Securities
and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal
year ended December 31, 1998 pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, has made, constituted and appointed and by
these presents does hereby make, constitute and appoint G. D. CALIENDO his true
and lawful attorney, for him and in his name, place and stead, and in his office
and capacity as aforesaid, to sign and file said Form 10-K and any amendments
thereto, and any and all other documents to be signed and filed with the
Securities and Exchange Commission in connection therewith, hereby granting to
said G. D. CALIENDO full power and authority to do and perform each and every
act as fully, to all intents and purposes, as he might or could do if personally
present, hereby ratifying and confirming in all respects all that G. D. CALIENDO
may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 25th
day of February, 1999.
/s/ R. Lee Haney
-------------------------
R. Lee Haney
Senior Vice President and
Chief Financial Officer
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer of Orange
and Rockland Utilities, Inc., which Company proposes to file with the Securities
and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal
year ended December 31, 1998 pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, has made, constituted and appointed and by
these presents does hereby make, constitute and appoint G. D. CALIENDO his true
and lawful attorney, for him and in his name, place and stead, and in his office
and capacity as aforesaid, to sign and file said Form 10-K and any amendments
thereto, and any and all other documents to be signed and filed with the
Securities and Exchange Commission in connection therewith, hereby granting to
said G. D. CALIENDO full power and authority to do and perform each and every
act as fully, to all intents and purposes, as he might or could do if personally
present, hereby ratifying and confirming in all respects all that G. D. CALIENDO
may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 25th
day of February, 1999.
/s/ Edward M. McKenna
---------------------
Edward M. McKenna
Controller
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange
and Rockland Utilities, Inc., which Company proposes to file with the Securities
and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal
year ended December 31, 1998 pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, has made, constituted and appointed and by
these presents does hereby make, constitute and appoint G. D. CALIENDO his true
and lawful attorney, for him and in his name, place and stead, and in his office
and capacity as aforesaid, to sign and file said Form 10-K and any amendments
thereto, and any and all other documents to be signed and filed with the
Securities and Exchange Commission in connection therewith, hereby granting to
said G. D. CALIENDO full power and authority to do and perform each and every
act as fully, to all intents and purposes, as he might or could do if personally
present, hereby ratifying and confirming in all respects all that G. D. CALIENDO
may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 27th
day of February, 1999.
/s/ Ralph M. Baruch
-------------------
Ralph M. Baruch
Director
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange
and Rockland Utilities, Inc., which Company proposes to file with the Securities
and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal
year ended December 31, 1998 pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, has made, constituted and appointed and by
these presents does hereby make, constitute and appoint G. D. CALIENDO his true
and lawful attorney, for him and in his name, place and stead, and in his office
and capacity as aforesaid, to sign and file said Form 10-K and any amendments
thereto, and any and all other documents to be signed and filed with the
Securities and Exchange Commission in connection therewith, hereby granting to
said G. D. CALIENDO full power and authority to do and perform each and every
act as fully, to all intents and purposes, as he might or could do if personally
present, hereby ratifying and confirming in all respects all that G. D. CALIENDO
may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 1st day
of February, 1999.
/s/ J. Fletcher Creamer
-----------------------
J. Fletcher Creamer
Director
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange
and Rockland Utilities, Inc., which Company proposes to file with the Securities
and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal
year ended December 31, 1998 pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, has made, constituted and appointed and by
these presents does hereby make, constitute and appoint G. D. CALIENDO his true
and lawful attorney, for him and in his name, place and stead, and in his office
and capacity as aforesaid, to sign and file said Form 10-K and any amendments
thereto, and any and all other documents to be signed and filed with the
Securities and Exchange Commission in connection therewith, hereby granting to
said G. D. CALIENDO full power and authority to do and perform each and every
act as fully, to all intents and purposes, as he might or could do if personally
present, hereby ratifying and confirming in all respects all that G. D. CALIENDO
may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 4th day
of February, 1999.
/s/ Michael J. Del Giudice
--------------------------
Michael J. Del Giudice
Chairman of the Board of Directors
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange
and Rockland Utilities, Inc., which Company proposes to file with the Securities
and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal
year ended December 31, 1998 pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, has made, constituted and appointed and by
these presents does hereby make, constitute and appoint G. D. CALIENDO his true
and lawful attorney, for him and in his name, place and stead, and in his office
and capacity as aforesaid, to sign and file said Form 10-K and any amendments
thereto, and any and all other documents to be signed and filed with the
Securities and Exchange Commission in connection therewith, hereby granting to
said G. D. CALIENDO full power and authority to do and perform each and every
act as fully, to all intents and purposes, as he might or could do if personally
present, hereby ratifying and confirming in all respects all that G. D. CALIENDO
may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 1st day
of March, 1999.
/s/ Jon F. Hanson
-----------------
Jon F. Hanson
Director
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange
and Rockland Utilities, Inc., which Company proposes to file with the Securities
and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal
year ended December 31, 1998 pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, has made, constituted and appointed and by
these presents does hereby make, constitute and appoint G. D. CALIENDO his true
and lawful attorney, for him and in his name, place and stead, and in his office
and capacity as aforesaid, to sign and file said Form 10-K and any amendments
thereto, and any and all other documents to be signed and filed with the
Securities and Exchange Commission in connection therewith, hereby granting to
said G. D. CALIENDO full power and authority to do and perform each and every
act as fully, to all intents and purposes, as he might or could do if personally
present, hereby ratifying and confirming in all respects all that G. D. CALIENDO
may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 4th day
of March, 1999.
/s/ Kenneth D. McPherson
------------------------
Kenneth D. McPherson
Director
<PAGE> 9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange
and Rockland Utilities, Inc., which Company proposes to file with the Securities
and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal
year ended December 31, 1998 pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, has made, constituted and appointed and by
these presents does hereby make, constitute and appoint G. D. CALIENDO his true
and lawful attorney, for him and in his name, place and stead, and in his office
and capacity as aforesaid, to sign and file said Form 10-K and any amendments
thereto, and any and all other documents to be signed and filed with the
Securities and Exchange Commission in connection therewith, hereby granting to
said G. D. CALIENDO full power and authority to do and perform each and every
act as fully, to all intents and purposes, as he might or could do if personally
present, hereby ratifying and confirming in all respects all that G. D. CALIENDO
may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 4th day
of March, 1999.
/s/ Robert E. Mulcahy III
-------------------------
Robert E. Mulcahy III
Director
<PAGE> 10
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange
and Rockland Utilities, Inc., which Company proposes to file with the Securities
and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal
year ended December 31, 1998 pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, has made, constituted and appointed and by
these presents does hereby make, constitute and appoint G. D. CALIENDO his true
and lawful attorney, for him and in his name, place and stead, and in his office
and capacity as aforesaid, to sign and file said Form 10-K and any amendments
thereto, and any and all other documents to be signed and filed with the
Securities and Exchange Commission in connection therewith, hereby granting to
said G. D. CALIENDO full power and authority to do and perform each and every
act as fully, to all intents and purposes, as he might or could do if personally
present, hereby ratifying and confirming in all respects all that G. D. CALIENDO
may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set his hand and seal this 4th day
of March, 1999.
/s/ James F. O'Grady
--------------------
James F. O'Grady, Jr.
Director
<PAGE> 11
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange
and Rockland Utilities, Inc., which Company proposes to file with the Securities
and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal
year ended December 31, 1998 pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, has made, constituted and appointed and by
these presents does hereby make, constitute and appoint G. D. CALIENDO her true
and lawful attorney, for her and in her name, place and stead, and in her office
and capacity as aforesaid, to sign and file said Form 10-K and any amendments
thereto, and any and all other documents to be signed and filed with the
Securities and Exchange Commission in connection therewith, hereby granting to
said G. D. CALIENDO full power and authority to do and perform each and every
act as fully, to all intents and purposes, as she might or could do if
personally present, hereby ratifying and confirming in all respects all that G.
D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has set her hand and seal this 4th day
of March, 1999.
/s/ Linda C. Taliaferro
-----------------------
Linda C. Taliaferro
Director
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> Per-Book
<TOTAL-NET-UTILITY-PLANT> 951,570
<OTHER-PROPERTY-AND-INVEST> 7,528
<TOTAL-CURRENT-ASSETS> 194,848
<TOTAL-DEFERRED-CHARGES> 154,194
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,308,140
<COMMON> 67,599
<CAPITAL-SURPLUS-PAID-IN> 126,276
<RETAINED-EARNINGS> 186,520
<TOTAL-COMMON-STOCKHOLDERS-EQ> 380,395
0
0
<LONG-TERM-DEBT-NET> 357,156
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 149,050
<LONG-TERM-DEBT-CURRENT-PORT> 36
43,516
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 1,654
<OTHER-ITEMS-CAPITAL-AND-LIAB> 376,333
<TOT-CAPITALIZATION-AND-LIAB> 1,308,140
<GROSS-OPERATING-REVENUE> 626,104
<INCOME-TAX-EXPENSE> 22,513
<OTHER-OPERATING-EXPENSES> 527,601
<TOTAL-OPERATING-EXPENSES> 550,114
<OPERATING-INCOME-LOSS> 75,990
<OTHER-INCOME-NET> 2,561
<INCOME-BEFORE-INTEREST-EXPEN> 78,551
<TOTAL-INTEREST-EXPENSE> 33,584
<NET-INCOME> 44,967
2,797
<EARNINGS-AVAILABLE-FOR-COMM> 42,170
<COMMON-STOCK-DIVIDENDS> 34,899
<TOTAL-INTEREST-ON-BONDS> 23,867
<CASH-FLOW-OPERATIONS> 76,192
<EPS-PRIMARY> 3.12
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
ORANGE AND ROCKLAND
Dear Shareholder:
The Annual Meeting of Common Shareholders, originally scheduled for
Wednesday, April 14, 1999, has been rescheduled to June 23, 1999, at a time and
place to be announced. Shareholders of record at the close of business on May
17, 1999, will be entitled to vote at the June 23, 1999 meeting.
The decision to postpone the Annual Meeting was made at a special meeting of
the Board of Directors on March 8, 1999. The Board's action reflects the filing
with the New York Public Service Commission on March 8, 1999 of a Merger
Approval Agreement signed by Consolidated Edison, Inc., the Company, the New
York Public Service Commission Staff and other interested parties, and the
expectation of regulatory decisions in the near future regarding the Company's
pending merger with Consolidated Edison, Inc.
Sincerely yours,
Michael J. Del Giudice
Chairman of the Board of
Directors
