<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4315
ORANGE AND ROCKLAND UTILITIES, INC.
(Exact name of registrant as specified in its charter)
New York 13-1727729
(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)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the close of the latest practicable date.
Common Stock - $5 Par Value 13,524,915 shares
(Class) (Outstanding at March 31, 1999)
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets (Unaudited) at
March 31, 1999 and December 31, 1998 1
Consolidated Statements of Income (Unaudited)
for the three months ended March 31, 1999
March 31, 1998 3
Consolidated Cash Flow Statements (Unaudited)
for the three months ended March 31, 1999
and March 31, 1998 4
Notes to Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
UTILITY PLANT:
Electric $1,069,023 $1,065,912
Gas 248,724 246,845
Common 107,026 103,064
---------- ----------
Utility Plant in Service 1,424,773 1,415,821
Less accumulated depreciation 508,308 498,652
---------- ----------
Net Utility Plant in Service 916,465 917,169
Construction work in progress 32,349 34,401
---------- ----------
Net Utility Plant 948,814 951,570
---------- ----------
NON-UTILITY PROPERTY:
Non-utility property 7,779 7,780
Less accumulated depreciation, depletion
and amortization 264 252
---------- ----------
Net Non-utility Property 7,515 7,528
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 6,315 5,643
Temporary cash investments 500 500
Customer accounts receivable, less allowance for
uncollectible accounts of $3,926 and $3,686 73,745 57,095
Accrued utility revenue 25,007 28,489
Other accounts receivable, less allowance for
uncollectible accounts of $268 and $286 14,972 16,173
Materials and supplies (at average cost) 24,093 34,161
Prepaid property taxes 23,058 22,768
Prepayments and other current assets 71,602 30,019
---------- ----------
Total Current Assets 239,292 194,848
---------- ----------
DEFERRED DEBITS:
Income tax recoverable in future rates 73,643 74,330
Deferred revenue taxes 11,371 11,915
Deferred pension and other postretirement benefits 1,999 4,097
IPP settlements 2,948 5,330
Unamortized debt expense (amortized over term
of securities) 11,271 10,840
Other deferred debits 39,516 44,135
---------- ----------
Total Deferred Debits 140,748 150,647
---------- ----------
TOTAL $1,336,369 $1,304,593
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 4
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CAPITALIZATION:
Common stock (13,524,915 & 13,519,988 shares
outstanding) $ 67,625 $ 67,599
Premium on capital stock 132,339 132,321
Capital stock expense (6,044) (6,045)
Retained earnings 189,315 186,520
----------- -----------
Total 383,235 380,395
----------- -----------
Long-term debt 401,466 357,156
----------- -----------
Total Capitalization 784,701 737,551
----------- -----------
NON-CURRENT LIABILITIES:
Reserve for claims and damages 4,193 4,078
Postretirement benefits 7,678 9,759
Pension costs 48,306 47,481
----------- -----------
Total Non-current Liabilities 60,177 61,318
----------- -----------
CURRENT LIABILITIES:
Notes payable and obligations due within one year 131,183 150,740
Preferred and Preference stock to be redeemed
within one year 44,066 43,516
Accounts payable 48,080 60,573
Accrued Federal income and other taxes 14,753 516
Refundable gas costs 6,319 7,816
Deferred fuel costs 13,166 (3,547)
Refunds to customers 1,165 1,223
Other current liabilities 22,010 22,502
----------- -----------
Total Current Liabilities 280,742 283,339
----------- -----------
DEFERRED TAXES AND OTHER:
Deferred Federal income taxes 191,717 197,698
Deferred investment tax credits 13,465 13,654
Accrued Order 636 transition costs 1,340 1,340
Other deferred credits 4,227 9,693
----------- -----------
Total Deferred Taxes and Other 210,749 222,385
----------- -----------
TOTAL $ 1,336,369 $ 1,304,593
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
----------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
OPERATING REVENUES:
Electric $ 108,914 $ 106,096
Gas 74,068 58,826
--------- ---------
Total Utility Revenues 182,982 164,922
Diversified Activities 73 159
--------- ---------
Total Operating Revenues 183,055 165,081
--------- ---------
OPERATING EXPENSES:
Operations:
Fuel used in electric production 19,629 16,274
Electricity purchased for resale 12,680 15,987
Gas purchased for resale 42,063 30,955
Other expenses of operation 37,623 34,225
Maintenance 8,957 7,292
Depreciation and amortization 9,488 8,561
Taxes other than income taxes 24,797 23,804
Federal income taxes 7,205 6,501
--------- ---------
Total Operating Expenses 162,442 143,599
--------- ---------
INCOME FROM OPERATIONS 20,613 21,482
--------- ---------
OTHER INCOME AND (DEDUCTIONS):
Allowance for other funds used during
construction 9 (3)
Other - net (165) 621
Taxes other than income taxes 43 (70)
Federal income taxes 142 (51)
--------- ---------
Total Other Income and (Deductions) 29 497
--------- ---------
INCOME BEFORE INTEREST CHARGES 20,642 21,979
--------- ---------
INTEREST CHARGES:
Interest on long-term debt 6,067 5,945
Other interest 2,113 2,557
Amortization of debt premium, expense-net 295 283
Allowance for borrowed funds used
during construction (48) (610)
--------- ---------
Total Interest Charges 8,427 8,175
--------- ---------
NET INCOME 12,215 13,804
Preferred and preference
stock requirements 699 700
--------- ---------
Earnings applicable to common stock $ 11,516 $ 13,104
========= =========
Avg. number of common shares outstanding
(000's) 13,522 13,520
========= =========
Earnings Per Average Common Share
Outstanding $ .85 $ .97
========= =========
Dividends declared per common share
outstanding $ .645 $ .645
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
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ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------------------
CASH FLOW FROM OPERATIONS: (THOUSANDS OF DOLLARS)
<S> <C> <C>
Net income $ 12,215 $ 13,804
Adjustments to reconcile net income to net cash provided
by (used in)operating activities:
Depreciation and amortization 9,376 8,449
Deferred Federal income taxes (5,500) (1,333)
Deferred investment tax credit (189) (193)
Deferred and refundable fuel and gas costs 15,216 2,170
Allowance for funds used during construction (57) (607)
Other non-cash charges 792 705
Changes in certain current assets and liabilities:
Accounts receivable (net) and
accrued utility revenues (11,967) 15,043
Materials and supplies 10,068 10,056
Prepaid property taxes (290) (726)
Prepayments and other current assets (41,583) (2,136)
Operating accounts payable (12,493) (18,800)
Accrued Federal Income and other taxes 14,237 7,662
Accrued interest (1,438) (2,362)
Refunds to customers (58) 306
Other current liabilities 946 (3,271)
Other-net 4,559 1,650
-------- --------
Net Cash Provided from Operations (6,166) 30,417
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to plant (9,236) (8,357)
Allowance for funds used during construction 57 607
-------- --------
Net Cash Used in Investing Activities (9,179) (7,750)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from:
Issuance of long-term debt 45,000 --
Retirements of:
Common Stock -- (3,225)
Long-term debt (10) (10)
Capital lease obligations - net (1,654) (39)
Net borrowings (repayments) under
short-term debt arrangements* (17,900) (9,215)
Dividends on preferred and common stock (9,419) (9,438)
-------- --------
Net Cash Provided by Financing Activities 16,017 (21,927)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 672 740
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,643 3,513
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,315 $ 4,253
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 9,269 $ 10,226
Federal income taxes -- $ 3,000
</TABLE>
*Debt with maturities of 90 days or less
The accompanying notes are an integral part of these statements.
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<PAGE> 7
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated balance sheet as of March 31, 1999, the consolidated
statements of income for the three month periods ended March 31, 1999
and 1998, and the consolidated cash flow statements for the three month
periods then ended have been prepared by Orange and Rockland Utilities,
Inc. (the "Company") without an audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments)
necessary to fairly present the financial position and results of
operations at March 31, 1999, and for all periods presented, have been
made. The amounts in the consolidated balance sheet as of December 31,
1998 have been derived from audited financial statements.
2. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
unaudited consolidated financial statements, notes to consolidated
financial statements and management's discussion and analysis of
financial condition and results of operations be read in conjunction
with the consolidated financial statements, the review of the Company's
results of operations and financial condition and the notes to
consolidated financial statements included in the Company's December
31, 1998 Annual Report to Shareholders, which material is incorporated
by reference to the Company's Form 10-K Annual Report for the year
ended December 31, 1998. The results of operations for the period ended
March 31, 1999 are not necessarily indicative of the results of
operations for the full year.
3. The consolidated financial statements include the accounts of the
Company, all subsidiaries and the Company's pro rata share of an
unincorporated joint venture. All intercompany balances and
transactions have been eliminated.
4. Contingencies at March 31, 1999 are substantially the same as the
contingencies described in the "Notes to Consolidated Financial
Statements" included in the Company's December 31, 1998 Annual Report
to Shareholders, which material is incorporated by reference to the
Company's December 31, 1998 Form 10-K Annual Report, and in Item 3,
Legal Proceedings of the Company's Form 10-K Annual Report for the
fiscal year ended December 31, 1998, except changes in the status of
regulatory matters which are updated in Part I, Item 2 under the
caption "Rate Activities" and the status of certain Legal Proceedings
which are updated in Part II, Item I, "Legal Proceedings".
5. 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
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<PAGE> 8
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.
The Merger has been approved by the New York Public Service Commission
(the "NYPSC"), the New Jersey Board of Public Utilities ("NJBPU") and
the Pennsylvania Public Utility Commission ("PAPUC") as well as by the
Federal Energy Regulatory Commission (the "FERC"). Approvals from the
U.S. Department of Justice and Securities and Exchange Commission are
pending. The Merger effective date will immediately follow the final
approvals.
The Merger will result in liabilities for contractual termination
benefits, workforce reductions and curtailment losses under employee
benefit plans triggered by the consummation of the business
combination. 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. 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. The estimated charge to income for
these costs is approximately $15 million.
6. 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 The Southern Company, for the sale
of the Company's electric generating assets. The sale price for all
generating facilities, including the two-thirds interest in the Bowline
Point generating facility owned by Consolidated Edison Company of New
York, Inc. is approximately $480 million, plus certain fuel inventory
and other adjustments. The Company's share of the sales price is
approximately $345 million. The net book value of the Company's
generating assets at March 31, 1999 is approximately $262 million. In
addition, the carrying value of the material and supplies inventories
total approximately $11.0 million, other direct selling costs of
approximately $17.0 million (including employee costs of approximately
$11.0 million), and all applicable income taxes will be deducted from
the sales price to determine the net gain.
The divestiture will trigger curtailment and special termination
benefits accounting as required by SFAS No. 88. The Company's
Transition Program for its generating employees contains special
provisions that allow early vesting and enhancements to the benefit
plans for those employees not offered employment or who are
involuntarily terminated by the new owner within five years from the
date of transfer. The expected costs of these
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<PAGE> 9
enhancements, together with curtailment costs, is estimated to result
in additional pension and post-retirement benefit costs of $1.6 million
and $0.8 million, respectively. These estimates are included in the
$11.0 million of employee costs in determining the cost of the sale.
The Company will retain the pension assets and liabilities as well as
the obligation relating to their period of employment with the Company.
The Company will make a $10.0 million settlement payment to Southern
Energy with respect to certain pension calculations, and will
reduce the Company's pension and other post-retirement benefit
liability by $10.0 million.
The sale of the Company's generating facilities to Southern Energy of
New York, Inc. is subject to the approval of the NYPSC, the NJBPU, the
PAPUC, the FERC and the filing of requisite notification with the
Federal Trade Commission and the Department of Justice ("DOJ") under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and the expiration of the applicable waiting period thereunder. On
February 18, 1999 the DOJ granted early termination of the waiting
period. All other regulatory approvals are pending.
7. In accordance with the requirements of Statement of Financial
Accounting Standards 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 includes energy services and land
development. Total utility revenue as reported in the Consolidated
Statements of Income includes both sales to unaffiliated customers and
intersegment sales which are billed at tariff rates.
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<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
----------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Operating Information:
Operating revenues:
Sales to unaffiliated customers:
Electric $ 108,910 $ 106,093
Gas 74,036 58,812
Intersegment sales:
Electric 4 3
Gas 32 14
--------- ---------
Total Utility Operating Revenues 182,982 164,922
Diversified activities 73 159
--------- ---------
Total Operating Revenues $ 183,055 $ 165,081
--------- ---------
Operating income before income taxes:
Electric $12,921 $ 15,033
Gas 15,852 13,334
Diversified activities (955) (384)
--------- ---------
Total Operating Income Before
Income Taxes $ 27,818 $ 27,983
--------- ---------
</TABLE>
8. Certain amounts from prior years have been reclassified to conform to
the current year presentation.
-8-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION:
FINANCIAL PERFORMANCE
The Company's consolidated earnings per average common share outstanding for the
first quarter of 1999 were $0.85 as compared to $0.97 for the first quarter of
1998. Fluctuations within the components of earnings are discussed in the
"Results of Operations." The average number of common shares outstanding was
13.5 million for both periods.
The return on average common equity for the twelve months ended March 31, 1999
was 10.81% as compared to 11.81% for the twelve months ended March 31, 1998.
CAPITAL RESOURCES AND LIQUIDITY
At March 31, 1999, the Company and its utility subsidiaries had unsecured bank
lines of credit totaling $155.0 million. The Company may borrow under the lines
of credit through the issuance of promissory notes to the banks. However, the
Company 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 average daily balance of short-term borrowings for the three months
ended March 31, 1999 amounted to $138.8 million at an effective interest rate of
5.2% as compared to $125.5 million at an effective interest rate of 5.9% for the
same period of 1998. The average daily balance of temporary cash investments for
the three months ended March 31, 1999 was $1.2 million with an effective
interest rate of 4.5% compared to $0.5 million at an effective interest rate of
5.1% for the same period of 1998. The non-utility subsidiaries of the Company
and of Rockland Electric Company ("RECO"), a wholly owned utility subsidiary of
the Company, had no bank lines of credit at March 31, 1999.
The Merger Agreement requires that the Company call for redemption all of its
outstanding Preference Stock and Preferred Stock. The Company's $1.52
Convertible Cumulative Preference Stock, Series A, no par value, the only
Preference Stock outstanding, was called for redemption on April 6, 1999. All
outstanding series of the Company's Cumulative Preferred Stock, par value $100
per share, were called for redemption on April 20, 1999. The aggregate
redemption price of the Preferred and Preference Stock, including call premiums
was $43.9 million.
On March 9, 1999, the Company issued $45 million of 7% Debentures due 2029,
Series G (the "Series G Debentures"). The Series G Debentures
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<PAGE> 12
were sold by means of competitive bid at a price of 98.458%. The Series G
Debentures are callable, at the option of the Company, on or after March 1,
2009. The net proceeds from the issuance of the Series G Debentures were used to
call for redemption, during April 1999, all of the Company's outstanding
Preferred Stock and Preference Stock, as discussed above.
As a result of the Merger Agreement, it is expected that all of the outstanding
Common Stock, $5 par value, of the Company (the "Common Stock") will cease to be
outstanding at the Effective Time of the Merger. At the Effective Time of the
Merger, each share of the Company's Common Stock will be cancelled and converted
into the right to receive the Merger Consideration price of $58.50 per share.
The Company's Dividend Reinvestment and Stock Purchase Plan (the "DRP") and the
Employee Stock Purchase and Dividend Reinvestment Plan (the "ESPP") (together,
the "Plans"), provide for the reinvestment of dividends and the investment of
optional cash payments in shares of Common Stock, which can, at the option of
the Company, be either shares of original issue Common Stock or Common Stock
purchased on the open market by the agent under the Plans. Because the effective
date of the Merger could occur in early May, the Company notified ESPP
participants on April 2, 1999 that optional cash payments under the ESPP were
discontinued on and after April 1, 1999 and that dividends payable on May 1,
1999 on shares of Common Stock held under the ESPP were not expected to be
reinvested to purchase additional shares of Common Stock. DRP participants were
notified on April 6, 1999, that optional cash payments were discontinued after
April 8, 1999 and that dividends payable on May 1, 1999 on all shares held under
the DRP would be paid by check and not reinvested in shares of Common Stock. It
is expected that both Plans will be terminated at or after the effective date of
the Merger
REGULATORY ACTIVITIES
PROPOSED MERGER WITH CONSOLIDATED EDISON, INC.
Reference is made to Item 1, Business, under the caption "Merger with
Consolidated Edison, Inc." in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, for information regarding the various regulatory
bodies which must approve the Merger.
On April 1, 1999, the NJBPU issued an order approving the Merger Agreement
subject to certain conditions, including the following: (1) the Company must
file a cost allocation manual with the NJBPU by January 1, 2000; (2) net merger
savings will be allocated between ratepayers and shareholders on a 75%/25%
basis; (3) costs to achieve the Merger will be amortized by RECO over a ten year
period effective May 1, 1999; (4) upon consummation of the Merger, RECO will
reduce its electric base rates by $1.434 million or 1.05%, which represents 75%
of the average annual net merger savings allocated to RECO over the first four
years following the consummation of the Merger; (5) this electric base rate
decrease will be applied on an equal percentage basis across all rate classes
and shall be counted towards
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<PAGE> 13
the percentage rate reduction required by the restructuring legislation signed
into law on February 9, 1999; and(6) simultaneous with the merger related base
rate decrease, RECO will increase its deferred fuel balance recovery component
of its Levelized Energy Adjustment Charge ("LEAC") rate by a dollar amount
equal to that of the base rate decrease, resulting in no decrease in the
overall level of rates billed to customers. The NJBPU also found that there
will be no adverse impact on competition as a result of the Merger. On April
15, 1999, RECO submitted a letter to the NJBPU advising them of its plan to
implement the NJBPU's order by utilizing accounting entries to reduce the LEAC
deferred balance without the need to reduce rates, RECO has not received any
objection to its plan.
On March 8, 1999, the Company, CEI, the staff of the New York Department of
Public Service (the "NYPSC Staff") and several other parties submitted a
settlement agreement in the Merger proceeding to the NYPSC ("Settlement
Agreement"). 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 gas base 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.
On April 2 and April 14, 1999, the NYPSC issued orders authorizing the Merger
and adopting the Settlement Agreement.
The Company has also received approval to complete the Merger from the PAPUC.
The PAPUC settlement agreement, which was approved by an Administrative Law
Judge ("ALJ") and the PAPUC, allows the Company to retain all merger savings,
net of costs to achieve, until its next electric and gas rate case at which time
the treatment of net merger savings will be determined.
Approvals from the Department of Justice and the Securities and Exchange
Commission are pending.
NEW YORK COMPETITIVE OPPORTUNITIES PROCEEDING
Reference is made to Item 3, Legal Proceedings, under the caption "New York
Competitive Opportunities Proceeding" in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 for a description of the NYPSC's
Competitive Opportunities Proceeding.
On August 13, 1998, the Company, NYPSC Staff and interested parties reached an
agreement to establish production related revenue requirements for the purposes
of unbundling the Company's electric tariffs in the revenue requirement phase of
the New York Unbundling proceeding. On September 18, 1998, a settlement
concerning the rate design and all other issues had been reached as well.
Settlements were submitted to an ALJ for review. The NYPSC approved the
settlement agreements by Order issued February 4, 1999. As a result, unbundled
rates will become effective on May 1, 1999.
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<PAGE> 14
As provided for in the Settlement Agreement in Case 96-E-0900, the Company has
commenced the process of divesting its generating assets. Final bids were
submitted and on November 24, 1998, the Company and CEI executed Asset Sales
Agreements ("ASAs") with affiliates of Southern Energy, Inc. The companies have
filed petitions for the approval of the asset sale with the FERC, the NYPSC, the
NJBPU and the PAPUC. All regulatory approvals are expected in May 1999, but
could encounter some delay. In accordance with approved agreements in New York
and Pennsylvania, the Company is allowed to retain for shareholders a portion of
the gain on the sale of the generating assets. The final amount of any gain
retained by shareholders will be determined after the closing date and recorded
on the Company's financial statements after all regulatory approvals are
received. In addition, the Company has a proposal before the NJBPU for
shareholder retention of 25% of any gain applicable to New Jersey operations.
NEW JERSEY ENERGY MASTER PLAN
Reference is made to Item 3, Legal Proceedings, under the caption "New Jersey -
Energy Master Plan" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, for information regarding the NJBPU 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.
RECO made such filings and hearings on RECO's unbundled rates and stranded cost
filings were held before an ALJ while hearings on the restructuring filing were
held before the NJBPU. Legislation was passed in New Jersey on February 9, 1999
which provides the NJBPU the requisite authority to make generation a
competitive service. The legislation provides for (1) the implementation of full
retail access for all customers by August 1, 1999, and (2) a reduction in
aggregate rate levels for each customer class of at least 10% relative to the
aggregate level of bundled rates in effect as of April 30, 1997. the NJBPU may
allow the 10% reduction to be phased in over 36 months, provided that the
electric utility shall implement a reduction in rates of at least 5% effective
with the implementation of customer choice. The maximum level of reduction must
be maintained at least until the 48th month following the starting date for
implementation of full retail access. In its filings to the NJBPU, the Company
proposed a reduction in revenues net of fuel, purchase power and taxes of 5%.
The Company expects to enter settlement negotiations in May, 1999 to develop a
specific plan for complying with the legislation. It is not possible to predict
the outcome of the NJBPU proceedings or its effect, if any, on the Company's
consolidated financial position or results of operations.
YEAR 2000 UPDATE
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., 99) rather than four digits
(e.g., 1999). With the change in the century, software and embedded chip
technology that use a two-digit field to record a year may malfunction or
provide inaccurate results.
-12-
<PAGE> 15
Overall responsibility for the Company's Y2K efforts resides with an Executive
Sponsorship Committee ("Committee") which monitors the Company's Y2K progress
and is responsible for ensuring that appropriate plans are implemented and
adequate resources are available. The Committee includes several members of
senior management. The Chairperson of the Committee periodically reports to the
Company's Board of Directors on Y2K issues.
The Company has developed a Y2K Plan ("Y2K Plan")which details the actions the
Company is taking 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 customers or the failure of certain normal business operations.
Accordingly, the Company is unable to determine at this time whether Y2K issues
will have a material adverse effect on the Company's results of operations,
liquidity or financial condition.
In accordance with its Y2K Plan, the Company has completed an inventory and
assessment of its information technology and embedded technology and prioritized
such inventoried technology as either Mission Critical or Business Critical.
Pursuant to the definitions adopted by the Company, the malfunction 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 malfunction 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, the
Company's Mission Critical systems/devices will be Y2K ready by July 1, 1999,
and its Business Critical systems/devices will be Y2K ready by October 1, 1999.
The Company has evaluated and replaced various computer applications, including
its electric and gas Energy Management Systems, Customer Information Management
System, Fixed Asset System and other core accounting and management systems.
This effort was undertaken to provide additional functionality, automated
processing, and improved access to information, as well as to address Y2K
issues. The Company's remaining computer applications and hardware have been
remediated and approximately 35% of the integrated testing has been completed as
of March 31, 1999.
As noted above, an inventory and assessment of embedded technology throughout
the Company has been completed. The assessment indicates that a relatively small
number of critical systems require further testing or remediation. These
embedded chips have been substantially remediated 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
-13-
<PAGE> 16
identified and contacted its critical suppliers, including those which supply
telecommunication services, coal, oil or natural gas and electricity. Each
supplier is required to provide assurance that they are taking appropriate steps
to address Y2K issues.
The Company is working with the New York Power Pool("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 and utilities
across the nation successfully participated in a drill designed to test
contingency communication networks on April 9, 1999. The drill simulated the
partial loss of voice and data communications between the NYPP, the Company's
Energy Control Center, power plants and critical substations and required
participants to utilize two-way radios and cellular telephones to transmit
readings which ordinarily are transmitted instantaneously via computers.
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 $5.2 million has been incurred through March 31,
1999. These expenditures include costs related to the replacement of certain
core accounting systems so as to provide enhanced functionality while also
addressing Y2K issues; however, such expenditures do not include costs related
to other systems that were replaced in the normal course of business for
operating reasons, even though such replacement also addressed Y2K issues. The
Company has and will continue to fund these costs from the operations of the
Company.
QUARTERLY COMPARISON
RESULTS OF OPERATIONS
The Company's consolidated earnings per average common share outstanding for the
first quarter of 1999 amounted to $0.85 per share as compared to $0.97 per share
for the first quarter of 1998. The lower earnings reflect increased operation
and maintenance expenses including higher depreciation and taxes, higher
electric distribution maintenance, the costs associated with the Company's
customer information system and the timing of scheduled overhauls of electric
generation facilities compared with the same period a year ago.
ELECTRIC AND GAS REVENUES
Electric and gas operating revenues, including fuel cost and purchased gas cost
recoveries, increased by $18.1 million during the first quarter of 1999 as
compared to the same quarter of 1998, as a
-14-
<PAGE> 17
result of higher electric and gas sales and higher fuel cost recoveries.
Electric operating revenues during the current quarter were $108.9 million as
compared to $106.1 million for the first quarter of 1998, an increase of $2.8
million.
Actual total sales of electric energy to retail customers during the first
quarter of 1999 were 1,165,257 megawatt hours ("Mwh"), compared with 1,129,511
Mwh during the comparable period a year ago. Revenues associated with these
sales were $106.3 million during the current quarter compared to $101.7 million
during the first quarter of 1998. This increase in revenue was the result of
higher sales and higher fuel cost recoveries. Sales to other utilities for the
first quarter of 1999 amounted to 36,830 Mwh with revenues of $0.8 million
compared to 120,977 Mwh and $3.4 million in 1998. Revenue from these sales are
primarily a recovery of costs, and under the applicable tariff regulations, have
a minimal impact on earnings.
Gas operating revenues during the current quarter were $74.1 million compared to
$58.8 million for the first quarter of 1998, an increase of $15.3 million. This
increase is primarily the result of an increase in demand and the timing of fuel
cost recoveries.
Sales of gas to firm customers during the first quarter of 1999 totaled 9,461
million cubic feet ("Mmcf"), compared with 7,860 Mmcf during the same period a
year ago. The sales increase was the result of colder winter weather (and an
increase in average customer usage.) Gas revenues from firm customers were $69.2
million, compared with $54.7 million in the first quarter of 1998. 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 shortfalls or
excesses of firm net revenues greater than 2.2% during a heating season due to
variation from normal weather (which is the basis for projecting base tariff
requirements). Interruptible gas sales were 937 Mmcf for the first quarter of
1999 compared to 873 Mmcf for the same period of 1998. Revenues from
interruptible customers were $3.1 million for the first quarter of 1999 compared
to $2.9 million for the first quarter of 1998.
FUEL, PURCHASED ELECTRICITY AND PURCHASED GAS COSTS
The cost of fuel used in the production of electricity and purchased electricity
costs remained relatively unchanged during the first quarter of 1999 when
compared to the same quarter of 1998.
Purchased gas costs were $42.1 million in the first quarter of 1999 compared to
$31.0 million in 1998, an increase of $11.1 million. This increase in gas costs
is attributable to the higher volume of gas purchased for resale and higher gas
cost recoveries.
-15-
<PAGE> 18
OTHER OPERATING AND MAINTENANCE EXPENSES
The Company's total operating expenses excluding fuel, purchased power and gas
purchased for resale for the first quarter of 1999 increased by $7.7 million
compared with the same period in 1998. Utility operating expenses increased $7.4
million. Diversified operations expenses increased by $0.3 million.
The increase in utility operating expenses is primarily the result of higher
depreciation and amortization expenses of $1.0 million, higher taxes other than
income taxes of $0.9 million, higher maintenance expenses of $1.7 million and an
increase in other operation expenses of $2.9 million, of which $0.8 million
represents regulatory amortizations that have no net earnings impact.
Depreciation and amortization expense increased due to the amortization of the
corporate financial and customer information systems that were placed in service
during 1998 as well as normal plant additions. Taxes other than income taxes
increased primarily due to higher property taxes. The increase in maintenance
expense is the result of higher electric and gas distribution maintenance and
the timing of scheduled overhauls at the generating facilities when compared to
the same period a year ago. The increase in other operation expenses is due
mainly to higher administrative and general expenses, including maintenance
costs associated with the Company's customer information system.
DIVERSIFIED ACTIVITIES
The Company's diversified activities consist of energy services and land
development businesses conducted through wholly-owned non-utility subsidiaries.
Losses from diversified activities were $(0.5)million in the first quarter of
1999 compared with $(0.1) million in the same period a year ago. These results
were partially due to the costs associated with closing Palisades Energy
Services, Inc. ("Palisades"), an indirect wholly owned subsidiary of the
Company, in anticipation of the Merger. No additional charges to income will
occur as a result of closing Palisades.
OTHER INCOME, DEDUCTIONS AND INTEREST CHARGES - NET
Other income, net of interest charges and other deductions, decreased by $0.7
million during the first quarter of 1999 when compared to the same quarter of
1998. This decrease is primarily the result of lower interest income from
accrued carrying costs on certain regulatory assets.
-16-
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3, Legal Proceedings, under the caption "Environmental
Litigation and Administrative Proceedings" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, for a discussion regarding the
Company's former Manufactured Gas Plant ("MGP") sites.
Preliminary Site Assessment ("PSA") reports for two former MGP sites located in
Middletown and Port Jervis, New York showed varying degrees of contamination at
these sites. As a result, the Company and the New York State Department of
Environmental Conservation ("NYDEC") have executed a Consent Order, dated as of
March 11, 1999, to conduct a remedial investigation and feasibility study
("RI/FS") at these two sites. This Consent Order also provides for any necessary
remediation at these two sites as well as the four former MGP sites covered by
the Consent Order dated as of September 29, 1998.
The Company and the NYDEC have executed a Consent Order, dated as of March 11,
1999, to conduct a PSA and, if required, an RI/FS and any necessary remediation
at the former MGP site located in Nyack, New York. The Company has also executed
an access agreement with the owner of this site.
The Company is unable at this time to estimate the total costs to be incurred at
the seven former MGP sites.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Company has made forward-looking statements in this Form 10-Q Quarterly
Report with respect to the financial condition, results of operations and
business of the Company in the future, which involve certain risks and
uncertainties. Forward-looking statements are included in Item I of Part I in
the Notes to Consolidated Financial Statements and in Item 2 of Part I,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, under the captions "Capital Resources and Liquidity," "Regulatory
Activities," and "Year 2000 Update" and "Quarterly Comparison." 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 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.
-17-
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule.
(b) Reports on Form 8-K
None.
-18-
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORANGE AND ROCKLAND UTILITIES, INC.
(Registrant)
Date: April 30, 1999 By ROBERT J. McBENNETT
------------------------
Robert J. McBennett
Treasurer
Date: April 30, 1999 By EDWARD M. McKENNA
-------------------------
Edward M. McKenna
Controller
-19-
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