<PAGE>
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 June 30, 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 1-672
--------------------------------------------------
Rochester Gas and Electric Corporation
-------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-0612110
-------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 East Avenue, Rochester, NY 14649
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 546-2700
--------------
N/A
-------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $5 par value, at July 31, 1998: 38,600,130
-----------
<PAGE>
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheet - June 30, 1998 and
December 31, 1997................................................. 1 - 2
Consolidated Statements of Income - Three Months and Six
Months Ended June 30, 1998 and 1997................................ 3 - 4
Consolidated Statement of Cash Flows - Six Months Ended
June 30, 1998 and 1997............................................ 5
Notes to Financial Statements........................................ 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 10 -18
PART II - OTHER INFORMATION
Legal Proceedings .................................................. 19
Other Information ................................................... 19
Exhibits and Reports on Form 8-K .................................... 19
Signatures .......................................................... 20
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
June 30, December 31,
1998 1997
Assets (Unaudited)
- -------------------------------------------------------------------------------
Utility Plant
Electric $2,466,746 $2,439,108
Gas 427,667 416,989
Common 136,363 134,938
Nuclear fuel 253,095 243,042
-------------- ------------
3,283,871 3,234,077
Less: Accumulated depreciation 1,574,548 1,510,074
Nuclear fuel amortization 213,039 204,294
-------------- ------------
1,496,284 1,519,709
Construction work in progress 60,420 74,018
-------------- ------------
Net Utility Plant 1,556,704 1,593,727
-------------- ------------
Current Assets
Cash and cash equivalents 59,639 25,405
Accounts receivable, net of
allowance for doubtful accounts:
1998 - $27,271, 1997 - $26,926 82,598 104,781
Unbilled revenue receivable 26,011 48,438
Materials, supplies and fuels, at
average cost 32,680 39,929
Prepayments 25,355 23,818
-------------- ------------
Total Current Assets 226,283 242,371
-------------- ------------
Deferred Debits
Nuclear generating plant
decommissioning fund 156,742 132,540
Nine Mile Two deferred costs 29,783 30,309
Unamortized debt expense 16,048 16,943
Other deferred debits 28,116 20,411
Regulatory assets 209,261 231,988
-------------- ------------
Total Deferred Debits 439,950 432,191
-------------- ------------
Total Assets $2,222,937 $2,268,289
- ------------------ -------------- ------------
1
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
June 30, December 31,
1998 1997
Capitalization and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
Capitalization
Long term debt - mortgage bonds $485,468 $485,434
- promissory notes 101,900 101,900
Preferred stock redeemable at option of Company 47,000 47,000
Preferred stock subject to mandatory redemption 35,000 35,000
Common shareholders' equity:
Common stock
Authorized 50,000,000 shares; 38,712,130
shares outstanding at June 30, 1998
and 38,862,347 shares outstanding at
December 31, 1997 699,431 699,031
Retained earnings 125,670 109,313
---------- ----------
825,101 808,344
Less: Treasury stock at cost (162,8000 shares) 5,094 --
---------- ----------
Total common shareholders' equity 820,007 808,344
---------- ----------
Total Capitalization 1,489,375 1,477,678
---------- ----------
Long Term Liabilities (Department of Energy)
Nuclear waste disposal 85,486 83,261
Uranium enrichment decommissioning 13,548 13,465
---------- ----------
Total Long Term Liabilities 99,034 96,726
---------- ----------
Current Liabilities
Long term debt due within one year 30,000 30,000
Preferred stock redeemable within one year 10,000 10,000
Short term debt -- 20,000
Accounts payable 38,224 53,195
Dividends payable 18,720 18,791
Taxes accrued 11,386 5,041
Interest accrued 8,513 8,593
Other 42,946 43,697
---------- ----------
Total Current Liabilities 159,789 189,317
---------- ----------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 320,583 344,969
Pension costs accrued 71,037 67,361
Other 83,119 92,238
---------- ----------
Total Deferred Credits and Other Liabilities 474,739 504,568
---------- ----------
Commitments and Other Matters -- --
---------- ----------
Total Capitalization and Liabilities $2,222,937 $2,268,289
- ---------------------------------------------------------------- ----------
2
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
For the Three Months Ended
June 30,
1998 1997
- --------------------------------------- -----------------------
Operating Revenues
Electric $158,666 $163,355
Gas 46,017 61,053
---------- ---------
204,683 224,408
Electric sales to other utilities 6,014 5,011
---------- ---------
Total Operating Revenues 210,697 229,419
---------- ---------
Operating Expenses
Fuel Expenses
Fuel for electric generation 12,661 11,530
Purchased electricity 7,167 5,556
Gas purchased for resale 29,075 35,727
---------- ---------
Total Fuel Expenses 48,903 52,813
---------- ---------
Operating Revenue Less Fuel Expenses 161,794 176,606
Other Operating Expenses
Operations excluding fuel expenses 61,957 64,771
Maintenance 11,178 10,254
Depreciation and amortization 29,936 29,312
Taxes - local, state and other 27,802 28,090
Federal income tax 7,716 13,054
---------- ---------
Total Other Operating Expenses 138,589 145,481
---------- ---------
Operating Income 23,205 31,125
Other (Income) and Deductions
Allowance for other funds
used during construction (99) (62)
Federal income tax 2,489 (1,007)
Other, net (6,284) 981
---------- ---------
Total Other (Income) and Deductions (3,894) (88)
Interest Charges
Long term debt 10,929 11,287
Other, net 673 1,852
Allowance for borrowed funds
used during construction (158) (98)
---------- ---------
Total Interest Charges 11,444 13,041
---------- ---------
Net Income 15,655 18,172
---------- ---------
Dividends on Preferred Stock 1,305 1,491
---------- ---------
Earnings Applicable to Common Stock $14,350 $16,681
---------- ---------
Average Number of Common Shares (000's)
Common Stock 38,807 38,851
Common Stock and Equivalents 38,957 38,851
Earnings per Common Share - Basic $0.37 $0.42
Earnings per Common Share - Diluted $0.37 $0.42
Cash Dividends Paid per Common Share $0.45 $0.45
3
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
For the Six Months Ended
June 30,
1998 1997
- ------------------------------------- ----------------------
Operating Revenues
Electric $320,487 $337,417
Gas 159,532 198,046
---------- ---------
480,019 535,463
Electric sales to other utilities 13,193 8,801
---------- ---------
Total Operating Revenues 493,212 544,264
---------- ---------
Operating Expenses
Fuel Expenses
Fuel for electric generation 24,459 22,362
Purchased electricity 12,611 10,440
Gas purchased for resale 90,738 115,083
---------- ---------
Total Fuel Expenses 127,808 147,885
---------- ---------
Operating Revenue Less Fuel Expenses 365,404 396,379
Other Operating Expenses
Operations excluding fuel expenses 121,751 128,964
Maintenance 20,693 21,783
Depreciation and amortization 59,118 58,524
Taxes - local, state and other 60,332 63,057
Federal income tax 31,395 37,732
---------- ---------
Total Other Operating Expenses 293,289 310,060
---------- ---------
Operating Income 72,115 86,319
Other (Income) and Deductions
Allowance for other funds
used during construction (192) (133)
Federal income tax 2,937 (1,770)
Other, net (7,418) 2,166
---------- ---------
Total Other (Income) and Deductions (4,673) 263
Interest Charges
Long term debt 21,713 23,140
Other, net 1,473 3,524
Allowance for borrowed funds
used during construction (308) (213)
---------- ---------
Total Interest Charges 22,878 26,451
---------- ---------
Net Income 53,910 59,605
---------- ---------
Dividends on Preferred Stock 2,610 3,195
---------- ---------
Earnings Applicable to Common Stock $51,300 $56,410
---------- ---------
Average Number of Common Shares (000's)
Common Stock 38,831 38,851
Common Stock and Equivalents 38,981 38,851
Earnings per Common Share - Basic $1.32 $1.45
Earnings per Common Share - Diluted $1.32 $1.45
Cash Dividends Paid per Common Share $0.90 $0.90
4
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
(Thousands of Dollars) June 30,
- ------------------------------------------------------------------------------
1998 1997
---------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $53,910 $59,605
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization 67,800 68,034
Deferred fuel 8,423 9,613
Deferred income taxes (19,002) (10,158)
Allowance for funds used during construction (500) (345)
Unbilled revenue, net 22,427 20,605
Nuclear generating plant decommissioning fund (10,427) (9,931)
Pension costs accrued (3,458) (2,198)
Post employment benefit 3,750 3,933
Changes in certain current assets and liabilities:
Accounts receivable 22,183 4,943
Materials, supplies and fuels 7,249 14,874
Taxes accrued 6,345 8,698
Accounts payable (14,971) (5,041)
Other current assets and liabilities, net 6,651 144
Other, net (2,660) 12,149
---------- ---------
Total Operating 147,720 174,925
---------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Net additions to utility plant (42,024) (29,509)
Other, net (7) --
---------- ---------
Total Investing (42,031) (29,509)
---------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from:
Sale/issuance of common stock 314 --
Short term borrowings (20,000) (14,000)
Retirement of preferred stock -- (20,000)
Retirement of long term debt -- (49,668)
Dividends paid on preferred stock (2,610) (3,570)
Dividends paid on common stock (34,977) (34,966)
Purchase of treasury stock (5,094) --
Other, net (9,088) (1,998)
---------- ---------
Total Financing (71,455) (124,202)
---------- ---------
Increase in cash and cash equivalents 34,234 21,214
Cash and cash equivalents at beginning of period 25,405 21,301
---------- ---------
Cash and cash equivalents at end of period $59,639 $42,515
---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Six Months Ended
(Thousands of Dollars) June 30,
- ------------------------------------------------------------------------------
1998 1997
---------- ---------
Cash Paid During the Period
Interest paid (net of capitalized amount) $22,195 $26,735
---------- ---------
Income taxes paid $41,160 39,000
---------- ---------
5
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1: GENERAL
The Company, in the opinion of management, has included adjustments (which
include normal recurring adjustments) necessary for the fair statement of the
results of operations for the interim periods presented. The consolidated
financial statements for 1998 are subject to adjustment at the end of the year
when they will be audited by independent accountants. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
results for these interim periods are not necessarily indicative of results to
be expected for the year, due to seasonal, operating, and other factors. These
financial statements should be read in conjunction with the financial statements
and notes thereto contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
Segment Disclosures. In June 1997, the Financial Accounting Standards Board
-------------------
(FASB) issued Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
establishes standards for reporting information about operating segments for
annual and interim financial statements. It also requires related disclosures
about products and services, geographic areas and major customers. The Company
will adopt SFAS 131 for the fiscal year ended December 31, 1998. The Company
does not expect that adoption of SFAS 131 will have a significant impact on its
reporting requirements.
Derivatives and Hedging Activities. The FASB has issued SFAS 133,
----------------------------------
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires all derivatives to be recognized at fair value as either assets or
liabilities on the balance sheet. Any gain or loss resulting from changes in
such fair value is required to be recognized in earnings to the extent the
derivatives are not effective as hedges. SFAS 133 is effective for fiscal years
beginning after June 15, 1999, and is effective for interim periods in the
initial year of adoption. The Company has not yet determined the effect, if
any, of the adoption of SFAS 133 on results of operations, financial position or
liquidity.
Note 2. COMMITMENTS AND OTHER MATTERS
The following matters supplement the information contained in Note 10 to the
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 and should be read in conjunction with the
material contained in that Note.
LITIGATION
PSC Competitive Opportunities Case Settlement. In an Opinion issued
----------------------------------------------
January 14, 1998 the PSC confirmed its November 1997 approval of the Company's
Settlement Agreement (the "Settlement"). The Company is in the process of
implementing the Settlement. Several parties to the settlement negotiations
petitioned for rehearing and another commenced an action for declaratory and
injunctive relief as to certain portions of the Settlement and the PSC's
approval of it. In an Order issued May, 22, 1998 the PSC denied all of the
petitions for rehearing of the PSC's Order approving the Settlement. The Company
and the PSC have moved to dismiss the action for declaratory and injunctive
relief that was commenced by one of the parties opposing the Settlement. The
Company is unable, at this time, to predict the outcome of that litigation.
6
<PAGE>
Litigation with Co-Generator. On or about May 29, 1998, the company,
----------------------------
General Electric Capital Corporation (GECC), and Kamine/Besicorp Allegany L.P.
("Kamine") (and other Kamine affiliates), signed a Global Settlement Agreement
to compromise, settle and resolve all disputes and claims among the parties in
respect of the Power Purchase Agreement between the Company and Kamine/Besicorp
Allegany L.P., the Consent and Agreement between the Company and GECC, and the
various lawsuits, adversary proceedings and administrative proceedings pending
between or among the parties in regard to these matters. The Global Settlement
Agreement is subject to the approval of the United States Bankruptcy Court for
the District of New Jersey and the PSC. Under the terms of the Global Settlement
Agreement, the Power Purchase Agreement will be terminated for payments by the
Company of $178 million over the next 16 years, without interest (including an
initial $10 million payment). The Global Settlement Agreement also contemplates
the purchase of the Kamine generation facility for $15 million.
The Company does not expect the terms of the Global Settlement Agreement to
have any material effect on its earnings. The PSC Settlement Agreement contains
provisions which would accommodate the tentative settlement and, assuming the
Company's Petition for approval of the settlement by the PSC is granted, its
overall cost is expected to be recovered in the rates for utility service.
Department of Justice Lawsuit. On February 20, 1998, the Company and the
--------------------------------
Department of Justice entered into a stipulation agreeing to a Consent Judgment
in the civil litigation brought against the Company by the Antitrust Division of
the Department of Justice. Following a public comment period after publication
of a Competitive Impact Statement, United States District Court Judge Michael A.
Telesca signed the Consent Judgment without change on June 17, 1998. This
action is now concluded. By the terms of the Consent Judgment, the Company shall
not enforce the challenged provision in the contract with the University of
Rochester or include any such provision in any other flexible rate contract, nor
will it enter into or enforce a covenant or agreement not to compete in the sale
of electricity with any competitor or potential competitor in the retail sale of
electricity. Agreements not to compete that are reasonably ancillary to certain
agreements will not be interpreted as a violation of the Consent Judgment.
Nothing in the Consent Judgment prohibits the Company from engaging in any
conduct which is exempt from or immune under the antitrust laws. The Consent
Judgment has a ten-year term, but may be terminated sooner if the Company can
demonstrate that it is making less than fifty percent of the non-residential
retail sales of electricity made at unregulated prices in Monroe County. In
addition, the Company agreed to maintain an antitrust compliance program.
Spent Nuclear Fuel Litigation. On June 12, 1998, 16 electric utilities from
------------------------------
across the country, including the Company, filed a multi-count complaint against
the United States government in the United States District Court for the
Southern District of New York challenging the constitutionality of a $2.25
billion retroactive assessment imposed by the federal government on domestic
nuclear power companies to pay for the clean up of the federal government's
three uranium enrichment plants. Those plants are located at Oak Ridge,
Tennessee, Paducah, Kentucky, and Portsmouth, Ohio. The Oak Ridge plant went
into operation in 1945, and the other two plants began operation during the
1950s.
The assessment, enacted by Congress as part of the Energy Policy Act of 1992,
is based on the amount of uranium enrichment services purchased by the utilities
as far back as the 1950s and is to be collected over a 15-year period. The
assessment, if not overturned, would relieve the government of a substantial
portion of the costs it would otherwise have to pay for decommissioning and
decontaminating its three uranium enrichment facilities. In their complaint,
the utilities seek a declaratory judgment that the assessment violates the due
process clause of the Constitution because it abrogates vested rights the
7
<PAGE>
utilities obtained under fixed-price agreements with the government when they
purchased uranium enrichment services. The utilities also challenge the
assessment as unreasonably retroactive. The suit seeks an injunction
prohibiting the government from continuing to collect the assessment from the
plaintiff utilities.
ENVIRONMENTAL MATTERS
Company-Owned Waste Site Activities. As part of its commitment to
------------------------------------
environmental excellence, the Company is conducting proactive Site Investigation
and/or Remediation (SIR) efforts at six Company-owned sites listed below where
past waste handling and disposal may have occurred. Remediation activities at
four of these sites are in various stages of planning or completion and the
Company is conducting a program to restore the other two sites. The Company
anticipates spending approximately $15.5 million on SIR efforts at the six
Company-owned sites listed in the table above. This estimate has been increased
by $2.7 million since December 31, 1997, an amount consistent with the increased
costs of complying with new Federal regulations which have resulted in an
increase in the cost of management of hazardous wastes. For further information
regarding SIR efforts at these sites see the Company's Form 10-K for the Fiscal
Year Ended December 31, 1997 under Item 8, Note 10 of the Notes to Financial
Statements.
COMPANY-OWNED SITES
<TABLE>
<CAPTION>
Estimated
Site Name Location Company Cost
- ---------------------------- --------------- ---------------------
<S> <C> <C>
West Station* Rochester, NY Ultimate costs have
East Station Rochester, NY not been determined.
Front Street* Rochester, NY The Company has
Brewer Street Rochester, NY incurred aggregate
Brooks Avenue Rochester, NY costs for these sites
Canandaigua Canandaigua, NY through June 30,
1998 of $4.4 million.
</TABLE>
* Voluntary agreement signed.
Federal Clean Air Act Amendments. The Company is developing strategies
---------------------------------
responsive to the federal clean air act amendments of 1990 (Amendments) which
will primarily affect air emissions from the Company's fossil-fueled generating
facilities. The strategy being developed is a combination of hardware solutions
which have a capital and operation and maintenance (O&M) component and allowance
trading solutions which have only an O&M impact. The most recent strategic
developments still envision this combination of efforts as the most cost
effective means of proceeding although there is some New York State legislative
activity that could impact the Company's ability to rely upon the emission
allowance market to meet some of its environmental commitments. The Company
cannot predict the outcome of these matters in the Legislature and, as a result,
the Company's projections are based solely on the combination strategy. Capital
costs of approximately $3.0 million are being expended in 1998 to deal with
opacity issues. In 1999, it is estimated that additional O&M costs for
emissions control will range between $1.1 million and $1.4 million. Beginning
in the year 2000, these additional O&M costs could rise to approximately $2.1
million and remain there until Phase III Federal NOx control limits become
effective in 2003. O&M costs could increase further after this point depending
on the course that Federal regulations take. Further capital expenditures for
additional NOx control have been deferred until after 2000. These additional
capital costs and any increases in annual operating costs that would be incurred
as a result of these capital additions beyond the year 2000 cannot be predicted
accurately until
8
<PAGE>
a final strategy is chosen which will await pending Federal and State regulatory
decisions.
Opacity Issue. The negotiations with the New York State Department of
--------------
Environmental Conservation to resolve allegations of past opacity violations at
the Company's Beebee and Russell Stations has resulted in a Stipulation and
Order resolving the matter, which was entered in New York State Supreme Court on
March 18, 1998. The Stipulation and Order requires payment of a $400,000 civil
penalty, implementation of an environmental benefit project valued at $700,000,
and the completion of specified engineering work at the Stations. Opacity
violations occurring after entry of the Stipulation and Order are subject to
automatic stipulated penalties which are not expected to be significant. The
derating of the Stations has been reduced as a result of system upgrades which
were completed in May 1998.
NUCLEAR-RELATED MATTERS
Uranium Enrichment Decontamination and Decommissioning Fund. The litigation
-------------------------------------------------------------
by a group of utilities against the DOE concerning the right of DOE to assess
utilities for decommissioning costs was decided against the utilities in the
Court of Appeals for the Federal Circuit and will not be reviewed by the United
States Supreme Court. The Company had previously filed a similar suit in the
U.S. District Court which is still pending. The decision of the Court of
Appeals is believed not to have a material impact on the District Court action,
as the claims made differ in distinguishable ways.
Decommissioning Costs. The Nuclear Regulatory Commission (NRC) has issued a
----------------------
policy statement relating to industry restructuring which addresses, in part,
the prospects of joint and several liability of co-owners for nuclear
decommissioning costs, such as co-owners of Nine Mile Two. The NRC recognizes
that co-owners generally divide costs and output from their facilities by using
a contractually-defined, pro rata share standard. The NRC has implicitly
accepted this practice in the past and believes that it should continue to be
the operative practice, but reserves the right, in highly unusual situations
where adequate protection of public health and safety would be compromised if
such action were not taken, to consider imposing joint and several liability on
co-owners when one or more co-owners have defaulted.
1995 GAS SETTLEMENT
The Company has entered into several agreements to help manage its pipeline
capacity costs and has successfully met Settlement targets for capacity
remarketing for the twelve months ending October 31, 1997, thereby avoiding
negative financial impacts for that period. In July, the Company entered into
an agreement with Dynegy Marketing and Trade to provide advise with respect to
the management of the Company's gas supply, transportation and storage costs
consistent with the goal of providing reliable service and reducing the cost of
gas. The Company believes that it will also be successful in meeting the
Settlement targets in the remaining year of the Settlement period, although no
assurance may be given.
The FERC approved a change in rate design for the Great Lakes Gas
Transmission Limited Partnership (Great Lakes) on which the Company holds
transportation capacity. This change resulted in a retroactive surcharge by
Great Lakes to the Company in the amount of approximately $8 million, including
interest. Under the terms of the 1995 Gas Settlement, the Company may recover
approximately one-half of the surcharge in rates charged to customers; but the
remainder may not be passed through and has been previously reserved. The
Company, which paid the Great Lakes assessment under protest, vigorously
contested it before the FERC, but on April 25, 1996, the FERC upheld this
determination that the charge to the Company is proper. The Company's petition
to the U.S. Court of Appeals was denied on January 16, 1998. The court's order
9
<PAGE>
imposed additional interest charges on the Company and on other similarly
situated customers. The Company, along with other participants filed a Petition
of Rehearing with the D.C. Circuit on this interest issue, which Petition was
denied on May 21, 1998. The Company will be required to pay approximately $680
thousand in additional interest charges.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is Management's assessment of certain significant factors
affecting the financial condition and operating results of the Company. This
assessment contains statements which are not historical fact and which can be
classified as forward looking. These statements can be identified by the use of
certain words which suggest forward looking information such as "believes",
"expects", "projects", "estimates" and "anticipates" or, words which relate to
future goals or strategies. In addition to the assumptions and other factors
referred to specifically in connection with such statements, some of the factors
that could make a significant difference in the forward-looking statements
include: state and federal legislative and regulatory initiatives that affect
cost and investment recovery, have an impact on rate structures, or affect the
speed and degree to which competition enters the electric and natural gas
industries; recoverability of environmental compliance costs and nuclear
decommissioning costs through rates; industrial, commercial and residential
growth in the service territories; technological developments; the weather and
other natural phenomena; growth in opportunities for the Company's unregulated
subsidiary operations; the timing and extent of changes in commodity prices and
interest rates; and other considerations that may be disclosed from time to time
in the Company's publicly disseminated documents and filings.
EARNINGS SUMMARY
Basic and diluted earnings per common share for the current and prior year
three month and six month periods ended June 30, are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Three Months $ .37 $ .42
Six Months $1.32 $1.45
</TABLE>
Earnings for the second quarter of 1998 were down $.05 per share compared
with the second quarter last year primarily due to warmer temperatures reducing
natural gas space-heating demand. Successful efforts to reduce expenses
partially offset the weather effect, despite a refueling outage at the Nine Mile
Two Nuclear Power Plant during the quarter. There were no plant outages in the
second quarter of 1997. Retail electric sales were up 1.4% in the second
quarter when compared to the same period last year. Gas sales were down 19.6%
in the same comparison periods. Temperatures in the second quarter were 35.7%
warmer than in 1997.
Earnings for the first six months of 1998 were down $.13 per share compared
with a year earlier. Mild weather during the first quarter of 1998 continued in
April and May and was a primary contributor to a decline in retail revenues and
sales for the first six months of 1998. While operating revenues less fuel
expenses were down nearly $31.0 million, maintaining a tight control on expenses
resulted in earnings applicable to common stock declining only $5.1 million over
the period. Despite a refueling outage at Nine Mile Two during the second
quarter, wholesale electric sales posted a strong gain for the first six months
10
<PAGE>
of the year. Outstanding performance at the Company's Ginna Nuclear Plant and
its fossil-fueled generating units during the first half of 1998 allowed the
Company to pursue an aggressive marketing strategy for wholesale electric sales
which helped to partially offset the decline in earnings.
The impact of developing competition in the energy marketplace may affect
future earnings. The Settlement allows for a phase-in to open electric markets
while lowering customer prices and establishing an opportunity for competitive
returns on shareholder investments. The nature and magnitude of the potential
impact of the Competitive Opportunities Settlement on the Company will depend on
several factors including, the availability of qualified energy suppliers in the
Company's service territory, the degree of customer participation and ultimate
selection of an alternative energy supplier, the Company's ability to be
competitive by controlling its operating expenses, and the Company's ultimate
success in the development of its unregulated business opportunities as
permitted under the Settlement.
COMPETITION
See the Company's Form 10-K for the fiscal year ended December 31, 1997,
Item 8.- Note 10 of the Notes to Financial Statements for a discussion of
regulatory and strandable assets and related accounting issues.
PSC COMPETITIVE OPPORTUNITIES CASE SETTLEMENT. The Competitive
Opportunities Settlement provides for a transition to competition during its
five-year term (July 1, 1997 to June 30, 2002) and establishes the Company's
electric rates for each annual period. Over the five year period the Company's
total rate decreases will be approximately $64.6 million. A Retail Access
Program will be phased in over a four-year period, allowing customers to
purchase electricity, and later electricity and capacity commitments, from
sources other than the Company. The Company will be given a reasonable
opportunity to recover prudently incurred costs, including those pertaining to
generation and purchased power. The Settlement also requires the Company to
functionally separate its regulated operations: distribution, generation, and
retailing. Any unregulated retail operations must be structurally separate from
the regulated utility functions but may be funded with up to $100 million.
Although the Settlement provides incentives for the sale of generating assets,
it requires neither divestiture of generating or other assets nor write-off of
stranded costs. The Company believes that the Settlement will not adversely
affect its eligibility to continue to apply SFAS-71- "Accounting for the Effects
of Certain Types of Regulation", with the exception of certain to-go costs
associated with non-nuclear generation. If, contrary to the Company's view,
such eligibility were adversely affected, a material write-down of assets, the
amount of which is not presently determinable, could be required. (See the
Company's 1997 Form 10-K, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "PSC Competitive Opportunities
Case Settlement" for a detailed description of the Rate Plan, Retail Access and
Generating Assets aspects of the Settlement.)
Retail Access. The Energy Choice Program approved by the PSC as part of the
Company's Settlement went into effect on July 1, 1998. Under the Settlement,
customers whose electric energy represents approximately 10% of the Company's
total annual retail sales are now eligible to purchase electricity (but not
capacity commitments) from alternative suppliers.
Generating Assets. The Company and Niagara Mohawk Power Corporation
("Niagara Mohawk") have entered into an agreement dated June 8, 1998 ("Sale
Agreement") whereby the Company's 24% ownership interest in the Oswego
Generating Facility Unit 6 ("Oswego 6") non-nuclear generating facility will be
included in the bidding process for Niagara Mohawk's non-nuclear generation
pursuant to
11
<PAGE>
Niagara Mohawk's electric restructuring agreement approved by the PSC. Niagara
Mohawk owns the remaining 76% of Oswego 6.
The Sale Agreement provides for the allocation of proceeds and liabilities
pertaining to the Oswego 6 facility in accordance with the ownership interests
of the Company and Niagara Mohawk. For purposes of the Sale agreement, the
Company's 24% interest in the Oswego 6 facility has been deemed equivalent to a
12% interest in the entire Oswego Generation Facility, which consists of Oswego
6, another operational unit, Oswego 5, that is virtually identical to Oswego 6,
and four older, non-operational units, Oswego 1-4. The Sale Agreement has been
approved by the PSC. The Company cannot predict whether Oswego 6 will be sold
or at what price. The book value of the Company's interest in Oswego 6 at June
30, 1998 was $54.9 million.
BUSINESS AND FINANCIAL STRATEGY. Under the terms of the Settlement, the
Company has functionally separated its generation, distribution, and regulated
energy services businesses. The Company expects to pursue the actions necessary
to form a holding company structure later this year and in early 1999. As
permitted by the Settlement, the Company has established a separate unregulated
subsidiary called Energetix, which will be able to compete for energy, energy
services and products both in and outside the Company's existing franchise
service territory. In June 1998 Energetix moved its operations into a separate
facility. The Company has also developed an integrated financial strategy that
includes new business development initiatives and a Common Stock share
repurchase program. See the Company's 1997 Form 10-K, Item 7.- "Competition"
under "Nuclear Operating Company" for a discussion of organizing utilities'
plans to establish a New York Nuclear Operating Company.
Energy Choice. Within the framework of the Energy Choice Program, the
Company will unbundle traditional utility services. Retail electric customers
in the Company's service territory will have the opportunity to purchase energy,
capacity, and retailing services from competitive energy service companies,
referred to as distribution customers or load-serving entities (LSEs). They may
also continue to purchase fully bundled electric service from the Company under
existing retail tariffs.
Energy Choice adopts the "single-retailer" model for the relationship
between RG&E, the distribution customers, and retail customers. Under the
"single-retailer" model the regulated utility's customer is the distribution
customer, whose customers are the retail customers. A distribution customer
purchases delivery services from RG&E, and bundles those services with energy
and retailing and any other products or services they wish to sell, to meet the
needs of their own retail customers. The distribution customer assumes
responsibility for providing its retail customers with bundled energy and
delivery services, and for virtually all related retailing functions, including
direct contact and communications with retail customers. With the exception of
transmission and distribution service, the distribution customer will procure
for its customers, or will itself create and provide them with, all necessary
components of fully bundled service on a competitive basis.
Throughout the term of the Settlement, RG&E will continue to provide
regulated and fully bundled electric service under its retail service tariff to
customers who choose to continue with or return to such service, and to
customers to whom no competitive alternative is offered.
Until the development of a wholesale market for generating capacity, there
will be no suitable mechanism for the reallocation, from the regulated utility
to the distribution customer, of responsibility for ensuring adequate installed
reserve capacity. Accordingly, during the initial "Energy Only" stage of the
Energy Choice Program (July 1, 1998 to July 1, 1999), distribution customers
will be able to choose their own sources of energy supply, while RG&E will
provide to distribution customers, and will be compensated for, the generating
capacity (installed reserve) needed to serve their retail customers reliably.
Distribution customers will only be able to purchase "full-requirements"
electricity (i.e. delivery services and energy) from RG&E during the Energy Only
phase of retail access. During the "Energy
12
<PAGE>
and Capacity" stage commencing July 1, 1999, the distribution customers will be
able to select, and will be responsible for procuring, generating capacity, as
well as energy, to serve the loads of their retail customers, and distribution
charges will be accordingly reduced as hereinafter described. If by July 1, 1999
there is not a functioning Statewide energy and capacity market (see discussion
under FERC Open Transmission Orders), the Company may petition the PSC for
deferral of the scheduled commencement of the Energy and Capacity stage.
The PSC has approved both the pilot program and full-scale retail access
tariffs proposed by RG&E, subject to modifications that would not substantially
change either program. The availability of distribution customers to serve
eligible customers and how quickly they decide to become involved cannot be
determined. Likewise, the Company is not able to predict the number of customers
that may choose to no longer be served under the Company's regulated tariffs.
Through June 30, 1998 including Energetix, six distribution customers have been
qualified by RG&E to serve retail customers under these programs. Two
distribution customers have begun offering unregulated retail services under the
pilot program. The other four distribution customers are qualified to serve
retail customers under the full-scale program beginning July 1, 1998. As of
June 30, 1998 all 4,252 MWH of sales of electricity to distribution customers
were made on a full-requirements basis under the pilot program.
Holding Company. The Company is in the process of filing applications with
various regulatory agencies seeking approval for formation of a holding company.
The holding company structure is consistent with provisions of the Competitive
Opportunities Settlement.
Unregulated Subsidiaries. It is part of the Company's financial strategy
to achieve growth by entering into unregulated businesses. The Competitive
Opportunities Settlement allows for the investment of up to $100 million in
unregulated businesses. The first step in this direction was the formation and
operation of Energetix effective January 1, 1998. Energetix is an unregulated
subsidiary of the Company that will bring energy products and services to the
marketplace both within and outside the Company's franchise area. Energetix
intends to market electricity, natural gas, oil and propane fuel energy services
over an area extending in a 150-mile radius of Rochester.
In April the Company announced that Energetix had agreed to acquire
Griffith Energy, the second largest oil and propane distribution Company in New
York State. Griffith will give Energetix access to 65,000 new customers, with
60,000 of them residing outside of the Company's regulated franchise territory.
In addition to its current products, Griffith will sell electricity, natural
gas, and other services offered by Energetix to their existing customers.
Griffith has approximately 350 employees and operates 16 customer service
centers. The acquisition was completed in August 1998.
Energetix also announced an alliance with the Greater Rochester Metro
Chamber of Commerce to offer discounts on energy to the Chamber's 3,400 members.
In June, Energetix launched ServiceCare, an appliance warranty and repair
program.
On July 1, 1997 the Company and Energetix filed with the Federal Energy
Regulatory Commission (FERC) seeking authorization to engage in the wholesale
sale of electric energy and capacity at market-based rates. These applications
were accepted by FERC on September 12, 1997. The Company must seek separate
authorization in order to sell electric energy to Energetix at market-based
rates.
During the second quarter of 1998, the Company formed a new unregulated
subsidiary, RGS Development Corporation (RGS). RGS was formed to pursue
unregulated business opportunities in the energy marketplace.
Stock Repurchase Plan. By order issued April 24, 1998 the PSC approved a
Stock Repurchase Plan providing for the repurchase of Common Stock having an
13
<PAGE>
aggregate market value of not to exceed $145 million. The Company began the
repurchasing program in May 1998 and has repurchased 162,800 shares of Common
Stock for approximately $5.1 million through June 30, 1998.
PSC PROCEEDING ON NUCLEAR GENERATION. On March 20, 1998, the PSC
initiated a proceeding to examine a number of issues raised by the Staff
position paper on nuclear generation and the comments received in response to
it. In reviewing the Staff paper and parties' comments, the PSC (a) adopted as
a rebuttable presumption the premise that nuclear power should be priced on a
market basis to the same degree as power from other sources, with parties
challenging that premise having to bear a substantial burden of persuasion, (b)
characterized the proposals in the Staff paper as by and large consistent in
concept with the PSC's goal of a competitive, market-based electricity industry,
(c) questioned Staff's position that would leave funding and other
decommissioning responsibilities with the sellers of nuclear power interests and
(d) indicated interest in the potential for the New York Nuclear Operating
Company (NYNOC) (see the Company's 1997 Form 10-K, Item 7, under Competition
Nuclear Operating Company) to benefit customers through efficiency gains and
directed pursuit of that matter in this nuclear generating proceeding or
separately upon the filing of a formal NYNOC proposal. The Company's strandable
assets in nuclear plant could be impacted by the outcome of this proceeding.
The proceeding is intended to be completed by the second quarter of 1999.
FERC OPEN TRANSMISSION ORDERS AND COMPANY FILINGS. On January 31, 1997, the
New York electric utilities filed a "Comprehensive Proposal To Restructure the
New York Wholesale Electric Market" with the FERC. As proposed, the existing
New York Power Pool (NYPP) will be dissolved and an independent system operator
(NYISO) will administer a state-wide open access tariff and provide for the
short-term reliable operation of the bulk power system in the state. In addition
to proposing a FERC-endorsed NYISO, the proposal calls for creation of a New
York Power Exchange and a New York State Reliability Council.
On June 30, 1998, FERC issued its Order Conditionally Authorizing
Establishment of Independent System Operator, a draft order that conditionally
authorizes the establishment of the NYISO by the Member Systems of the NYPP. In
issuing its draft order FERC noted that the NYISO proposal satisfies FERC's
eleven ISO principles that were delineated in Order No. 888. The draft order is
considered to be modified at this time, since FERC has deferred consideration of
the tariff and the member agreements. FERC noted that these will be addressed in
a future order, but at this time, no specific date has been set. FERC has also
recommended that concerned parties revisit the independent system operator
weighted voting distribution relative to governance.
Significant changes to pricing procedures now in effect within NYPP are
expected, but it is unclear what effect these changes may have once other
regulatory changes in New York State are implemented. At the present time, the
Company cannot predict what effects regulations ultimately adopted by FERC will
have, if any, on future operations or the financial condition of the Company.
PSC GAS RESTRUCTURING PROCEEDING. On May 4, 1998 the Company petitioned
for rehearing of the PSC's April 3, 1998 Order denying the Company's Petition to
defer, for possible subsequent recovery, costs associated with the
implementation of certain PSC-required measures pertaining to competition in the
natural gas market. Under the Order, the Company would be precluded from
recovering approximately $1.20 million incurred in 1996 and $.86 million
incurred in 1997.
14
<PAGE>
RATES AND REGULATORY MATTERS
1996 ELECTRIC RATE SETTLEMENT. The PSC approved a Settlement Agreement
(1996 Rate Settlement) among the Company, PSC Staff and several other parties
which set rates for a three-year period, ending June 30, 1999. The Competitive
Opportunities Settlement (Settlement) discussed earlier supersedes the 1996 Rate
Settlement. After approval of the Settlement becomes final and non-appealable
the Company will terminate its petition seeking judicial review of the 1996 Rate
Settlement.
1995 GAS SETTLEMENT. The Company continues to believe that it will be
successful in meeting the targets for capacity remarketing for the twelve months
ending October 31, 1998, as established in the 1995 Gas Settlement. The Company
[has concluded or is negotiating] a natural gas supply portfolio management
agreement ("Portfolio Agreement") with a new manager to assist the Company in
managing its pipeline capacity and other costs.
Because the 1995 Settlement expires on October 31, 1998, the Company is
preparing a proposal for a multi-year settlement to succeed the 1995 Settlement.
The Company expects to commence settlement negotiations with the Staff of the
PSC and other interested parties in August 1998. The Company cannot predict the
outcome of this process at this time.
FLEXIBLE PRICING TARIFF. Under its flexible pricing tariff for major
industrial and commercial electric customers, the Company may negotiate
competitive electric rates at discount prices to compete with alternative power
sources, such as customer-owned generation facilities. For further information
with respect to the flexible pricing tariff see the Company's 1997 Form 10-K,
Item 7 under Rates and Regulatory Matters.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1998 cash flow from operations (see
Consolidated Statement of Cash Flows), provided the funds for construction
expenditures and the payment of dividends and short-term debt. At June 30, 1998
the Company had cash and cash equivalents of $59.6 million of which $30 million
was used to redeem bonds which matured on July 1, 1998. Capital requirements
during 1998 are anticipated to be satisfied primarily from the combination of
internally generated funds and the use of short-term credit arrangements with
some external financing possible in the second half of 1998.
CAPITAL AND OTHER REQUIREMENTS. The Company's capital requirements
relate primarily to expenditures for energy delivery, including electric
transmission and distribution facilities and gas mains and services as well as
nuclear fuel, electric production and the repayment of existing debt. The
Company has no plans to install additional baseload generation.
Total 1998 capital requirements are currently estimated at $165 million,
of which $125 million is for construction and $40 million is for the redemption
of maturing securities and sinking fund obligations. Approximately $44 million
had been expended for construction as of June 30, 1998, reflecting primarily
expenditures for nuclear fuel and upgrading electric transmission
and distribution facilities and gas mains.
Purchased Power Requirement. Under federal and New York State laws and
regulations, the Company is required to purchase the electrical output of
unregulated cogeneration facilities that meet certain criteria (Qualifying
15
<PAGE>
Facilities). The Company was compelled by regulators to enter into a contract
with Kamine for approximately 55 megawatts of capacity. In June, 1998 a
proposed settlement between the Company and Kamine was filed with the PSC for
its approval. The circumstances regarding the Kamine contract, related
litigation and the Global Settlement Agreement are discussed in this report
under Note 2 of the Notes to Financial Statements. Under the terms of the
Global Settlement Agreement, the Power Purchase Agreement will be terminated for
payment by the Company of $178 million over the next 16 years, without interest
(including an initial $10 million payment). The Global Settlement Agreement also
contemplates the purchase of the Kamine generation facility for $15 million.
The Company has no other long-term obligations to purchase energy from
Qualifying Facilities.
Year 2000 Computer Issues. As the year 2000 ("Y2K") approaches the
Company, like most companies, faces potentially serious information and
operational systems (computer and microprocessor-based devices) problems because
many software applications and embedded systems programs created in the past
will not properly recognize calendar dates beginning with the year 2000 or that
the year 2000 is a "leap-year". Failure to address Y2K issues properly could
cause the Company to, among other things, issue inaccurate bills, report
inaccurate data, or incur plant outages and/or energy delivery problems.
The Company identified the need to address Y2K issues early and in June
1996 established the Y2K Project ("Y2K Project"). Resources from across the
enterprise have been committed to the Y2K Project. The Company has assigned
approximately 40 full-time equivalent people to work on the Y2K Project as well
as retaining certain outside consultants to assist in the inventory, assessment,
and certification of date aware devices. The Company expects to fund its Y2K
Project internally and estimates it will incur approximately $15 million of
costs through January 1, 2000, associated with making the necessary
modifications identified to date. This amount includes a contingency allowance
for replacement systems that may be required. The Company is also participating
in the Y2K activities of several organizations such as the New York Power Pool,
North American Electric Reliability Council, Electric Power Research Institute
and others.
The Y2K Project is divided into five primary phases. The first phase is the
inventory phase during which applications (both internally developed and vendor)
and devices are identified and criticality to the business is determined. During
the next phase, the assessment phase, the Y2K readiness of the items is
determined. The third phase, fixing, is when replacement or remediation of the
items is performed. The fourth phase is the testing phase, when the items are
functionally verified and date tested. The final phase is the contingency phase
when contingency plans will be developed for all critical applications, devices
and systems.
To date, the Y2K Project has completed identification and assessment of
internally developed applications and has begun fixing activities. To this end,
the Company has implemented a new Y2K-ready customer information and billing
system. Starting in April 1998 and continuing through the first half of 1999,
the Company is replacing its PC workstations and software with Y2K-ready
equipment and software. The completion of a pilot application remediation
project has provided better time estimates for completion of the remaining
fixing and testing phases of the Y2K Project. The Company expects to be through
the fixing phase for all internally developed and vendor applications by year-
end 1998. Device identification, assessment, and fixing are underway and are
expected to be completed in the first half of 1999. Identification of critical
external parties including customers, suppliers, business partners, government
agencies, and financial institutions is also in progress. The Company expects to
survey these critical external parties to
16
<PAGE>
assess their degree of Y2K readiness. This assessment phase is expected to be
completed during the fourth quarter of 1998. Testing of individual applications
and devices as well as systems will take place primarily in the first half of
1999 with completion of all activities by the third quarter of 1999.
The Company has in place a Business Recovery Plan describing alternative
processes and procedures to ensure the integrity of its energy and financial
systems. The Business Recovery Plan will serve as the basis for any Y2K
contingencies.
FINANCING. The Company had no long-term financing during the first six
months of 1998. In September 1998 the Company is completing the delivery of
$25.5 million of 5.95% New York State Energy Research and Development Authority
tax-exempt bonds due September 1, 2033. Proceeds will be used to redeem an
issue of tax-exempt first mortgage bonds, which becomes redeemable in December
1998. (See Form 10-K for the fiscal year ended December 31, 1997, Item 8. Note
9. Short-Term Debt, regarding the Company's short-term borrowing arrangements.)
REDEMPTION OF SECURITIES. On July 1, 1997 the Company redeemed at maturity
$30 million principal amount of its First Mortgage 6.70% Bonds, Series X. On
September 1, 1998, the Company will redeem, pursuant to a mandatory sinking
fund, 100,000 shares of 7.55% Preferred Stock, Series T, at $100 per share.
FOSSIL UNIT RATINGS AND STATUS. Several of the Company's fossil-fueled
generating units have been derated since February 1997 to maintain acceptable
opacity levels while the Company investigated additional engineering solutions
to address the opacity of the units' emissions. The derating of the units has
been reduced to minimal levels as a result of system upgrades completed in May
1998. The financial impact of the deratings included the lost opportunity
associated with energy sales and, at times, the need to make additional
purchases to meet system requirements. While the deratings have decreased
earnings, the amount has not been nor is it expected to be significant.
On January 21, 1998 the Company decided to retire Beebee Station by mid-
1999. Factors such as the plant's age, location in an area no longer consistent
with the surrounding development, lack of a rail/coal delivery system and more
stringent clean air regulations made the plant uneconomical in the developing
competitive generation business. The retirement of Beebee Station is not
expected to have a material effect on the Company's financial position or
results of operations. The plant will be fully depreciated at the time of
retirement. The Settlement provides that all prudently incurred incremental
costs associated with the shut down and decommissioning of the plant are
recoverable through the Company's distribution access tariff. The electric
capability and energy currently provided by the plant is expected to be replaced
by purchased power as needed.
RESULTS OF OPERATIONS
The following financial review identifies the causes of significant
changes in the amounts of revenues and expenses, comparing the three-month and
six-month periods ended June 30, 1998 to the three-month and six-month periods
ended June 30, 1997.
OPERATING REVENUES AND SALES. Total Company revenues for the first six
months of 1998 were $51.1 million or 10% below the first six months of 1997 with
decreases in customer electric kilowatt-hour sales and lower therm
17
<PAGE>
sales of gas due to milder weather than last year partially offset by higher
revenues from electric sales to other electric utilities (OEU sales). Total
Company revenues for the second quarter of 1998 were $18.7 million or 8% below
the second quarter of 1997. Higher revenues from OEU sales were offset by lower
unit sales of electricity and gas due to this year's markedly milder weather.
Another factor decreasing revenues in both comparison periods was the accounting
effect of a revenue sharing mechanism which ended June 30,1997 under the
Company's 1996 Rate Settlement with the PSC. As a result, non-cash revenues
decreased approximately $8 million and $4 million for the six months and second
quarter comparison periods, respectively. The last of these monthly adjustments
occurred in June 1997. Revenues from OEU sales rose in both comparison periods
due to a favorable wholesale market, a lower retail load and increased marketing
of available capacity.
FUEL EXPENSES. The decreases in fuel expenses in both comparison periods
were driven by a decrease in gas purchased for resale expense due to reduced
volume from warmer weather. The purchased gas expense decrease was partially
offset by higher unit costs and increased generation for fossil fuel and higher
purchases of electricity in both periods.
OPERATIONS EXCLUDING FUEL EXPENSES AND MAINTENANCE EXPENSES. The decreases
in operations excluding fuel and maintenance expenses reflect the amortization
of early retirement costs which ended in June of 1997, decreases associated with
uncollectible accounts in the second quarter and first half of 1998 and
dividends received on insurance policies.
TAXES. The decreases in local, state and other taxes in both comparison
periods reflect mainly lower revenue taxes due to decreased revenues. Federal
income taxes decreased in the second quarter and for the six months ending June
30, 1998 when compared to a year ago primarily because pre-tax earnings are
lower this year.
OTHER STATEMENT OF INCOME ITEMS. The decrease in Other Income and
Deductions, Other-net in both comparison periods reflects mainly accounting
adjustments no longer required as provided under the Competitive Opportunities
Settlement relating to the elimination of the Nine Mile Two O&M expense deferral
mechanism and taking into income carrying charges on pension benefits. Interest
charges decreased due to refinancings and the early redemption of long-term debt
in 1997 as well as lower miscellaneous interest charges on pension and other
post-employment benefits.
DIVIDEND POLICY
On June 17, 1998, the Board of Directors authorized a common stock dividend
of $.45 per share, which was paid on July 25, 1998 to shareholders of record on
July 2, 1998. The level of future cash dividend payments on Common Stock will
be dependent upon the Company's future earnings, its financial requirements, and
other factors. The Company's Certificate of Incorporation provides for the
payment of dividends on Common Stock out of the surplus net profits (retained
earnings) of the Company.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information on Legal Proceedings reference is made to Note 2 of the
Notes to Financial Statements.
ITEM 5. OTHER INFORMATION
BOARD OF DIRECTORS CHANGE. On July 15, 1998 the Board of Directors
elected Cleve L. Killingsworth Jr. a director of the Company. Mr. Killingsworth
is President and Chief Executive Officer of the Health Alliance Plan, a
corporate subsidiary of the Henry Ford Health System.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index below.
(b) Reports on Form 8-K:
There were no Form 8-K Reports filed during the second quarter of 1998.
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule pursuant to Item 601 (c) of
Regulation S-K.
19
<PAGE>
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.
ROCHESTER GAS AND ELECTRIC CORPORATION
--------------------------------------
(Registrant)
Date: August 10, 1998 By /s/ J.B. STOKES
-----------------------------------------
J. Burt Stokes
Senior Vice President, Corporate Services
and Chief Financial Officer
Date: August 10, 1998 By /s/ WILLIAM J. REDDY
-----------------------------------------
William J. Reddy
Controller
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
This schedule contain summary financial information extracted from consolidated
balance sheet, consolidated statement of income and consolidated statement of
cash flows and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,556,704
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 226,283
<TOTAL-DEFERRED-CHARGES> 439,950
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,222,937
<COMMON> 193,561
<CAPITAL-SURPLUS-PAID-IN> 500,776
<RETAINED-EARNINGS> 125,670
<TOTAL-COMMON-STOCKHOLDERS-EQ> 820,007
35,000
47,000
<LONG-TERM-DEBT-NET> 485,451
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 101,900
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 30,000
10,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 693,562
<TOT-CAPITALIZATION-AND-LIAB> 2,222,937
<GROSS-OPERATING-REVENUE> 493,212
<INCOME-TAX-EXPENSE> 34,332
<OTHER-OPERATING-EXPENSES> 389,702
<TOTAL-OPERATING-EXPENSES> 421,097
<OPERATING-INCOME-LOSS> 48,910
<OTHER-INCOME-NET> 7,610
<INCOME-BEFORE-INTEREST-EXPEN> 76,788
<TOTAL-INTEREST-EXPENSE> 22,878
<NET-INCOME> 53,910
2,610
<EARNINGS-AVAILABLE-FOR-COMM> 51,300
<COMMON-STOCK-DIVIDENDS> 34,905
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 147,720
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 0
</TABLE>
