<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 September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-672
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Rochester Gas and Electric Corporation
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(Exact name of registrant as specified in its charter)
New York 16-0612110
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 East Avenue, Rochester, NY 14649
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 546-2700
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N/A
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(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 October 31, 1998: 37,948,313
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<PAGE>
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheet - September 30, 1998 and
December 31, 1997..................................................... 1 - 2
Consolidated Statements of Income - Three Months and Nine
Months Ended September 30, 1998 and 1997............................. 3 - 4
Consolidated Statement of Cash Flows - Nine Months Ended
September 30, 1998 and 1997........................................... 5
Notes to Financial Statements.......................................... 6 -10
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 11 -21
PART II - OTHER INFORMATION
Legal Proceedings...................................................... 21
Other Information...................................................... 21
Exhibits and Reports on Form 8-K....................................... 21
Signatures............................................................. 22
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
Assets (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Utility Plant
Electric $2,474,960 $2,439,108
Gas 431,586 416,989
Common 150,920 134,938
Nuclear fuel 253,149 243,042
------------- ---------------
3,310,615 3,234,077
Less: Accumulated depreciation 1,599,364 1,510,074
Nuclear fuel amortization 217,877 204,294
------------- ---------------
1,493,374 1,519,709
Construction work in progress 72,885 74,018
------------- ---------------
Net Utility Plant 1,566,259 1,593,727
------------- ---------------
Current Assets
Cash and cash equivalents 11,324 25,405
Accounts receivable, net of allowance for
doubtful accounts: 1998 - $25,847, 1997 - $26,926 80,957 104,781
Unbilled revenue receivable 20,693 48,438
Materials, supplies and fuels, at average cost 44,290 39,929
Prepayments 32,265 23,818
Other 1,244 -
------------- ---------------
Total Current Assets 190,773 242,371
------------- ---------------
Intangible Assets
Goodwill, net 13,821 -
Other Intangible Assets 5,415 -
------------- ---------------
Total Intangible Assets 19,236 -
------------- ---------------
Deferred Debits and Other Assets
Nuclear generating plant decommissioning fund 159,989 132,540
Nine Mile Two deferred costs 29,520 30,309
Unamortized debt expense 15,683 16,943
Other deferred debits 29,828 20,411
Regulatory assets 213,922 231,988
Other Assets 1,427 -
------------- ---------------
Total Deferred Debits and Other Assets 450,369 432,191
------------- ---------------
Total Assets $2,226,637 $2,268,289
------------- ---------------
</TABLE>
1
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ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
Capitalization and Liabilities (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalization
Long term debt - mortage bonds $459,985 $485,434
- promissory notes 132,286 101,900
Preferred stock redeemable at option of Company 47,000 47,000
Preferred stock subject to mandatory redemption 25,000 35,000
Common shareholders' equity:
Common stock
Authorized 50,000,000 shares; 38,220,613
shares outstanding at September 30, 1998
and 38,862,347 shares outstanding at
December 31, 1997. 699,756 699,031
Retained earnings 132,217 109,313
-------------- --------------
831,973 808,344
Less: Treasury stock at cost (665,200 shares) 20,442 -
-------------- ---------------
Total common shareholders' equity 811,531 808,344
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Total Capitalization 1,475,802 1,477,678
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Long Term Liabilities (Department of Energy)
Nuclear waste disposal 86,569 83,261
Uranium enrichment decommissioning 13,651 13,465
-------------- ---------------
Total Long Term Liabilities 100,220 96,726
-------------- ---------------
Current Liabilities
Long term debt due within one year 25,500 30,000
Preferred stock redeemable within one year 10,000 10,000
Short term debt - 20,000
Accounts payable 63,720 53,195
Dividends payable 18,504 18,791
Taxes accrued 2,637 5,041
Interest accrued 12,954 8,593
Other 46,973 43,697
-------------- ---------------
Total Current Liabilities 180,288 189,317
-------------- ---------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 315,965 344,969
Pension costs accrued 70,837 67,361
Other 83,525 92,238
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Total Deferred Credits and Other Liabilities 470,327 504,568
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Commitments and Other Matters - -
-------------- ---------------
Total Capitalization and Liabilities $2,226,637 $2,268,289
-------------- ---------------
</TABLE>
2
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Rochester Gas and Electric Corporation
Consolidated Statement of Income
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
1998 1997
- ------------------------------------------------------------------- -------- --------
<S> <C> <C>
Operating Revenues
Electric $189,360 $184,449
Gas 36,665 36,886
Other 27,581 -
-------- --------
Total Operating Revenues 253,606 221,335
Fuel Expenses
Fuel for electric generation 16,535 13,463
Purchased electricity 8,766 6,873
Gas purchased for resale 22,580 22,606
Unregulated fuel expenses 23,446 -
-------- --------
Total Fuel Expenses 71,327 42,942
-------- --------
Operating Revenues Less Fuel Expenses 182,279 178,393
Other Operating Expenses
Operations and maintenance excluding fuel 71,613 71,523
Unregulated operating and maintenance expenses excluding fuel 4,434 -
Depreciation and amortizaton 28,254 29,051
Taxes - state, local & other 27,779 27,539
Federal income tax 15,755 15,664
-------- --------
Total Other Operating Expenses 147,835 143,777
-------- --------
Operating Income 34,444 34,616
Other (Income) & Deductions
Allowance for other funds used during construction (101) (150)
Federal income tax 373 (626)
Other - net (2,340) 1,355
-------- --------
Total Other (Income) & Deductions (2,068) 579
-------- --------
Income Before Interest Charges 36,512 34,037
Interest Charges
Long term debt 10,394 10,859
Other - net 1,067 1,695
Allowance for borrowed funds used during construction (162) (241)
-------- --------
Total Interest Charges 11,299 12,313
-------- --------
Net Income 25,213 21,724
-------- --------
Dividends on Preferred Stock 1,305 1,305
-------- --------
Earnings Applicable to Common Stock 23,908 20,419
-------- --------
Average Number of Common Shares (000's)
Common Stock 38,490 38,851
Common Stock and Equivalents 38,623 38,851
Earnings per Common Share - Basic $0.62 $0.53
Earnings per Common Share - Diluted $0.62 $0.53
Cash Dividends Paid per Common Share $0.45 $0.45
</TABLE>
3
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Rochester Gas and Electric Corporation
Consolidated Statement of Income
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1998 1997
- --------------------------------------------------------------- -------- --------
<S> <C> <C>
Operating Revenues
Electric $523,400 $530,667
Gas 196,274 234,932
Other 27,582 -
-------- --------
Total Operating Revenues 747,256 765,599
Fuel Expenses
Fuel for electric generation 40,994 35,825
Purchased electricity 21,377 17,313
Gas purchased for resale 113,318 137,689
Unregulated fuel expenses 23,857 -
-------- --------
Total Fuel Expenses 199,546 190,827
-------- --------
Operating Revenues Less Fuel Expenses 547,710 574,772
Other Operating Expenses
Operations and maintenance excluding fuel 216,056 222,271
Unregulated operating and maintenance expenses excluding fuel 6,113 -
Depreciation and amortizaton 87,376 87,575
Taxes - state, local & other 88,199 90,596
Federal income tax 47,151 53,395
-------- --------
Total Other Operating Expenses 444,895 453,837
-------- --------
Operating Income 102,815 120,935
Other (Income) & Deductions
Allowance for other funds used during construction (293) (283)
Federal income tax 3,310 (2,395)
Other - net (13,502) 3,519
-------- --------
Total Other (Income) & Deductions (10,485) 841
-------- --------
Income Before Interest Charges 113,300 120,094
Interest Charges
Long term debt 32,107 33,999
Other - net 2,539 5,220
Allowance for borrowed funds used during construction (469) (454)
-------- --------
Total Interest Charges 34,177 38,765
-------- --------
Net Income 79,123 81,329
-------- --------
Dividends on Preferred Stock 3,915 4,500
-------- --------
Earnings Applicable to Common Stock 75,208 76,829
-------- --------
Average Number of Common Shares (000's)
Common Stock 38,707 38,851
Common Stock and Equivalents 38,845 38,851
Earnings per Common Share - Basic $1.94 $1.98
Earnings per Common Share - Diluted $1.94 $1.98
Cash Dividends Paid per Common Share $1.35 $1.35
</TABLE>
4
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
(Thousands of Dollars) September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
CASH FLOW FROM OPERATING ACTIVITIES -----------------------------
<S> <C> <C>
Net income $79,123 $81,329
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization 100,213 101,713
Deferred fuel (4,491) (1,709)
Deferred income taxes (19,899) (2,116)
Allowance for funds used during construction (763) (737)
Unbilled revenue, net 27,745 20,051
Nuclear generating plant decommissioning fund (15,627) (14,831)
Pension costs accrued (3,657) (2,383)
Post employment benefit 9,727 4,998
Changes in certain current assets and liabilities:
Accounts receivable 23,824 26,969
Materials, supplies and fuels (4,361) 7,822
Taxes accrued (2,404) (3,936)
Accounts payable 10,525 7,396
Other current assets and liabilities, net 6,980 (2,607)
Other, net (6,487) 14,653
------------ ------------
Total Operating 200,448 236,612
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CASH FLOW FROM INVESTING ACTIVITIES
Net additions to utility plant (80,835) (55,710)
Other, net (18,772) -
------------ ------------
Total Investing (99,607) (55,710)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from:
Sale/issuance of common stock 586 -
Issuance of promissory notes 30,386 101,900
Short term borrowings (20,000) (14,000)
Retirement of preferred stock (10,000) (30,000)
Retirement of long term debt (30,000) (49,668)
Dividends paid on preferred stock (3,915) (5,061)
Dividends paid on common stock (52,393) (52,449)
Purchase of treasury stock (20,442) -
Other, net (9,144) 108
------------ ------------
Total Financing (114,922) (49,170)
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(Decrease) increase in cash and cash equivalents (14,081) 131,732
Cash and cash equivalents at beginning of period 25,405 21,301
------------ ------------
Cash and cash equivalents at end of period $11,324 $153,033
------------ ------------
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Nine Months Ended
(Thousands of Dollars) September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
--------- -----------
<S> <C> <C>
Cash Paid During the Period
Interest paid (net of capitalized amount) $22,195 $33,906
------------ ------------
Income taxes paid $56,660 47,000
------------ ------------
</TABLE>
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) which are 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. Moreover, 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.
Acquisition. On August 3, 1998, the Company's unregulated subsidiary,
--------------
Energetix, completed its acquisition of Griffith Oil, Inc. (Griffith) an oil and
propane distribution company. Energetix accounted for its acquisition of
Griffith as a purchase in the amount of $31,500,000, and purchase accounting
adjustments, including goodwill, are reflected in the consolidated financial
statements of the Company for the period subsequent to August 3, 1998.
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.
Comprehensive Income. Effective January 1, 1998, the Company adopted SFAS
---------------------
130, "Reporting Comprehensive Income". SFAS 130 requires that all items
recognized under accounting standards as components of comprehensive income be
reported in a financial statement displayed with the same prominence as other
financial statements. It also requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a balance
sheet. The effects of adoption of SFAS 130 are not significant for the Company.
Note 2. COMMITMENTS AND OTHER MATTERS
The following matters supplement the information contained in Note 10 to the
6
<PAGE>
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 New York State Public Service Commission (PSC) confirmed
its November 1997 approval of the Company's Settlement Agreement (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 is unable, at this time, to predict the outcome of the
action for declaratory and injunctive relief that was commenced by one of the
parties opposing the Settlement.
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, 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
Company's purchase of the Kamine generation facility for $15 million.
On June 5, 1998, the Company petitioned the PSC for approval of the Global
Settlement Agreement and the transactions necessary to effectuate it. On August
31, 1998, the PSC issued an order approving the terms of the Global Settlement
Agreement with certain modifications. The PSC concluded that the payments to be
made under the Global Settlement Agreement were reasonable and authorized the
Company to recover those payments consistent with the payment schedule that had
been previously established under the Settlement Agreement. The PSC also
authorized the Company to defer for subsequent recovery the amount by which any
payments made under the Global Settlement Agreement exceed the amounts contained
in the payment schedule adopted in the Competitive Opportunities Proceeding
Settlement.
With regard to the Company's purchase of the Kamine facility under the
terms of the Global Settlement Agreement, the PSC determined that the Company
must bear any operating losses and retain any operating gains if it should
choose to keep and operate the facility. If the Company should sell the
facility and realize a gain on the sale, the gain would be shared with customers
under a sharing formula which would apply after recovery by the Company from
such gain of certain costs. If such a sale were to result in a loss, the loss
would generally be recoverable from customers, again in accordance with the
Settlement Agreement.
The PSC approved the promissory note evidencing the Company's indebtedness
for the Global Settlement Agreement payments, but required shareholders to bear
certain costs that may result from provisions of the promissory note under which
a default may occur in the event that a subsidiary of the Company defaults on
certain types of obligations exceeding $3 million.
The Bankruptcy Court approved the Global Settlement Agreement on October
7
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29, 1998. A closing is expected before year end.
The Company does not expect the terms of the Global Settlement Agreement to
have any material effect on its earnings.
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 $16.7 million on SIR efforts at the six
Company-owned sites listed in the table below. 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 The Company has
East Station Rochester, NY incurred aggregate
Front Street* Rochester, NY costs for these sites
Brewer Street Rochester, NY through September 30,
Brooks Avenue Rochester, NY 1998 of $5.1 million.
Canandaigua Canandaigua, NY
</TABLE>
* Voluntary agreement signed.
On one of the sites listed in the Table above (Brewer Street), the County
of Monroe, through its Pure Waters Sewer District, constructed certain retention
ponds into which it placed certain fossil-fuel-based materials (materials)
encountered during construction of a sewer tunnel. In a November 1997 letter,
the County claimed that the Company was the original generator of the materials
and asserted that the Company was liable to the County for 50% of all County
costs incurred to date to excavate, treat and dispose of the materials placed in
the ponds and to implement whatever further cleanup activities may be required
by the New York State Department of Environmental Conservation (NYSDEC). The
Company and the County have reached a settlement in principle and are working
out the details of a written settlement agreement. Pursuant to the settlement,
the Company will bear 20% of the remediation costs and has committed to be
responsible for the construction management function. The Company's overall
costs are estimated to be approximately $1.4 million, excluding a 20% share of
ongoing long-term operation and maintenance (O&M) work which is judged to be
insignificant at this time. There is a mutual waiver and release as to all
past claims regarding this property.
Griffith Facilities. The Company's subsidiary, Energetix recently acquired
--------------------
Griffith, an oil and propane distribution company. A review and audit was
conducted of all Griffith facilities by a nationally recognized engineering firm
on all applicable sites as part of the due diligence acquisition process by
Energetix. As a result of the review of 43 sites and subsequent subsurface
investigations of 26 sites, thirteen new NYSDEC spill numbers were assigned.
These sites are currently undergoing evaluation and remediation planning for
8
<PAGE>
corrective action. Using historical NYSDEC remedial actions as a guide,
Energetix estimates the aggregate cleanup costs for all 43 sites will
approximate $1.9 million over a five-year period.
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 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
$0.9 million and $1.1 million. Beginning in the year 2000, these additional O&M
costs could rise to approximately $5.3 million, annually 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. Any 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 a
final strategy is chosen which will await pending Federal and State regulatory
decisions.
NUCLEAR-RELATED MATTERS
Uranium Enrichment Decontamination and Decommissioning Fund. 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. The suit
challenges 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
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.
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
9
<PAGE>
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 believes it has successfully met Settlement targets for
capacity remarketing for the twelve months ending October 31, 1998, thereby
avoiding negative financial impacts for that period. In July, the Company
entered into an agreement with Dynegy Marketing and Trade to provide advice 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.
On October 16, 1998, the Company, the staff of the PSC and certain other
parties entered into an interim settlement agreement, designed to address the
period between expiration of the 1995 Settlement and the implementation of a new
multi-year settlement to be negotiated. The interim settlement was approved by
the PSC on November 4, 1998. In its ruling the PSC indicated that the
allocation of transition costs may be changed in the future after it considers
similar issues in another case. Major elements of the interim settlement
include: (1) the term is from December 1, 1998 through the earlier of June 30,
1999 or the effective date of a new multi-year agreement; (2) base rates, which
cover the cost of the local system, will remain frozen for all customers at the
July 1, 1998 level while the Gas Cost Adjustment will continue to vary from
month to month; (3) a level of revenues ($11.9 million on an annual basis) which
corresponds to the Company's anticipated revenues from capacity remarketing
transactions currently in place is imputed to the Company; (4) the Company will
share 15% of the savings realized from the reduction of capacity commitments;
(5) the Company will simplify the transportation gas program and cap the
migration of customers at 10% of annual retail sales and not assign capacity
costs to certain migrating customers; (6) the Company will be allowed to recover
the upstream costs that may be stranded by migration; and, (7) certain issues
relating to past gas costs have been resolved whereby the Company shall set
aside, in a manner to be determined by the PSC for the benefit of customers,
$2.2 million of the total amount recovered through the Gas Cost Adjustment.
The Federal Energy Regulatory Commission (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 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 paid
approximately $680 thousand in additional interest charges pursuant to the FERC
order.
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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: (1) 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; (2) recoverability of environmental compliance costs and nuclear
decommissioning costs through rates; (3) industrial, commercial and residential
growth in the service territories; (4) technological developments; (5) the
weather and other natural phenomena; (6) possible growth opportunities and risks
for the Company's unregulated subsidiary operations, such as competition and
reliance on certain suppliers and customers; (7) the timing and extent of
changes in commodity prices and interest rates; (8) unanticipated developments
associated with identifying, assessing, fixing and testing the modifications
necessary to mitigate Year 2000 compliance problems, as well as the indirect
impacts of third parties with whom RG&E does business and who do not
sufficiently mitigate their Year 2000 compliance problems; and (9) other
considerations that may be disclosed from time to time in the Company's publicly
disseminated documents and filings.
LABOR DAY STORM
At approximately midnight, Monday morning, September 7, a severe lightning
and windstorm struck the Company's franchise area. The storm damaged the
Company's electrical system at several hundred different locations. The Company
immediately declared its highest state of storm emergency. Subsequently,
several counties within the Company's franchise area were declared state and
federal disaster areas.
The Company estimates that initially as many as 100,000 customers lost
power due to the storm. The Company requested mutual aid from other utilities
both within and outside of New York State. A peak workforce of more than 1,200
people was engaged in the repair effort both in the field and at recovery
centers to restore power. On Saturday afternoon, September 12, the Company
announced that all power had been restored, in all but a few isolated cases.
The Company is still assessing the total cost incurred as a result of this
storm. The Company anticipates costs will be at least $8 million. Under the
Settlement with the PSC, if incremental costs resulting from a "catastrophic
event" exceed $2.5 million, such costs would be deferred. Under the Settlement,
the Company agreed to defer, for future recovery, up to $30 million of
catastrophic and other unanticipated costs. However, if the deferral of such
costs exceeds $30 million, the Company may seek to recover a portion of such
costs during the term of the Settlement.
EARNINGS SUMMARY
Basic and diluted earnings per common share for the current and prior year
three-month and nine-month periods ended September 30, are as follows:
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<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Three Months $ .62 $ .53
Nine Months $1.94 $1.98
</TABLE>
Earnings for the third quarter of 1998 were up $.09 per share compared with
the third quarter last year primarily due to warmer summer temperatures leading
to $6.1 million more in revenue from electricity sales to wholesale customers.
Retail electric sales were up 0.6% in the third quarter when compared to the
same period last year. Retail electric revenue declined $2.7 million due
primarily to an additional electric rate decrease. Gas sales were down 3.6% in
the same comparison period. Total operating revenues were up $32.3 million on
the strength of the electric wholesale, electric sales to other marketers and
$29.2 million in unregulated revenue. Earnings applicable to common stock were
up $3.5 million in the quarter.
Competitive supplier choice began for up to 10% of the Company's electric
load on July 1, 1998. The impact was not significant with the loss of Company
retail sales being roughly offset by the sale of distribution service and
electricity to marketers, including Energetix, the Company's unregulated
subsidiary.
Earnings for the nine-month period ended September 30, 1998 were down $0.04
per share compared with a year earlier. The principal factor decreasing revenue
was warmer weather in the heating season and the impact on earnings was
partially offset by reduced expenses. Retail electric sales were down 1.4% for
the nine-month comparison period. Gas sales were down 12.3%. Temperatures
during periods of heating for the nine-month comparison period were 20.7%
warmer. Earnings applicable to common stock were down $1.6 million.
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 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 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 total 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,
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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 does not require the Company to divest 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 purchases represent 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
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 bidding process is continuing into November 1998. 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 September 30, 1998 was $54.3
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 energy 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.
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
the Company as the distribution provider, qualified distribution customers, and
retail (end-use) customers.
In this model, retail customers have the opportunity for choice in their
energy service company (distribution customer) and receive only one electric
bill
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<PAGE>
from the company that serves them. With the exception of emergency
services, which remain the Company's responsibility, retail customers' primary
point of contact is with their chosen energy service company.
Under this model, energy service companies are responsible for buying or
otherwise providing the electricity their retail customers will use, paying
regulated rates for transmission and distribution, and selling electricity to
their retail customers (the price of which would include the cost of the
electricity itself and the cost to transport electricity through the Company's
distribution system).
These companies may also bundle products and services which fit the needs of
their customers, package them together with electricity and render one bill to
the retail customer.
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 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 tariffs for both the pilot and full-scale retail
access programs. Both programs are substantially the same. The pilot program
began on February 1, 1998, will last for two years, and is open to eligible
farmers and food processors only. The full-scale program began on July 1, 1998
and is open to all retail customers of all classes and sizes. To ensure an
orderly transition as electric deregulation unfolds, the amount of electricity
that can be sold competitively will be phased-in over a four-year period. This
phase-in is limited to approximately 10% of the Company's total retail electric
sales during the first year, up to 20% in the second year, up to 30% in the
third year, and is eliminated thereafter.
Through September 30, 1998, seven distribution customers, including Energetix,
have been qualified by the Company to serve retail customers under these
programs. Also, as of September 30, 1998, all distribution customers have opted
to purchase "full requirements" power from the Company to serve their retail
customers. The Company has distributed approximately 32,123 MWH (annualized) to
retail customers under the pilot program and 531,296 (annualized) MWH to retail
customers, representing about 80% of the first-year cap, under the full scale
program.
The PSC has also initiated a statewide proceeding to recommend "uniform
business rules" dealing with electric retail access programs for each of the
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<PAGE>
utilities it regulates. This proceeding may ultimately result in tariff
changes, but at this time the Company cannot predict the scope of such changes.
Holding Company. During the third quarter, the Company filed applications
with various regulatory agencies, including the PSC, FERC, and NRC, requesting
approval of a corporate restructuring including the creation of a holding
company. RG&E Holdings, Inc., a New York corporation, was organized in November
1998 for the purpose of carrying out the restructuring. Subject to regulatory
and shareholder approvals, the Company anticipates forming the holding company
structure by mid-1999. 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 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 August 1998, Energetix acquired Griffith Oil Inc., 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.
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 1998, Energetix launched ServiceCare, an appliance warranty and repair
program.
On July 1, 1997 the Company and Energetix filed with the 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
aggregate market value of not to exceed $145 million. The Company began the
repurchasing program in May 1998 and has repurchased 665,200 shares of Common
Stock for approximately $20.4 million through September 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
15
<PAGE>
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 in 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. The
draft order addresses areas of governance, standards of conduct and reliability.
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.
On October 23, 1998 the Company's ISO Governance Settlement Agreement was filed
with FERC.
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 POLICY STATEMENT. On November 3, 1998, the PSC
issued their "Policy Statement Concerning the Future of the Natural Gas Industry
in New York State and Order Terminating Capacity Assignment". The Policy
Statement announces the PSC's view on how to best ensure a competitive market
for natural gas in New York. The PSC concludes that the most effective way to
establish a robust competitive market for gas supply is for local distribution
companies to exit the merchant function. The concomitant order also requires
that local distribution companies cease assigning capacity to customers
migrating from sales to transportation service no later than April 1, 1999. The
Company is in the process of evaluating this Policy Statement and will respond
to the specific requirements of the Order.
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 was 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 concluded a natural gas
supply portfolio management agreement ("Portfolio Agreement") with a new manager
to assist the Company in managing its pipeline capacity and
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<PAGE>
other costs through June 30, 2000. Because the 1995 Settlement expires on
October 31, 1998, the Company prepared a proposal for a multi-year settlement to
succeed the 1995 Settlement. The Company commenced settlement negotiations with
the Staff of the PSC and other interested parties in August 1998. The Company
does not expect that a multi-year settlement will be concluded and become
effective prior to 1999.
On October 16, 1998, the Company, the staff of the PSC and certain other
parties entered into an interim settlement agreement, designed to address the
period between expiration of the 1995 Settlement and the implementation of a new
multi-year settlement to be negotiated. The interim settlement was approved by
the PSC on November 4, 1998. In its ruling the PSC indicated that the
allocation of transition costs may be changed in the future after it considers
similar issues in another case. Major elements of the interim settlement
include: (1) the term is from December 1, 1998 through the earlier of June 30,
1999 or the effective date of a new multi-year agreement; (2) base rates, which
cover the cost of the local system, will remain frozen for all customers at the
July 1, 1998 level while the Gas Cost Adjustment will continue to vary from
month to month; (3) a level of revenues ($11.9 million on an annual basis) which
corresponds to the Company's anticipated revenues from capacity remarketing
transactions currently in place is imputed to the Company; (4) the Company will
share 15% of the savings realized from the reduction of capacity commitments;
(5) the Company will simplify the transportation gas program and cap the
migration of customers at 10% of annual retail sales and not assign capacity
costs to certain migrating customers; (6) the Company will be allowed to recover
the upstream costs that may be stranded by migration; and, (7) certain issues
relating to past gas costs have been resolved whereby the Company shall set
aside, in a manner to be determined by the PSC for the benefit of customers,
$2.2 million of the total amount recovered through the Gas Cost Adjustment.
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 nine months of 1998 cash flow from operations (see
Consolidated Statement of Cash Flows), provided the funds for construction
expenditures, the share repurchase program, the payment of dividends, the
redemption of preferred stock, long-term and short-term debt. At September 30,
1998 the Company had cash and cash equivalents of $11.3 million. 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 fourth quarter 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 $70 million
had been expended for construction as of September 30, 1998, reflecting
primarily expenditures for nuclear fuel and upgrading electric
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<PAGE>
transmission and distribution facilities and gas mains.
Settlement with Co-generator. In May 1998 the Company entered into a
Global Settlement Agreement regarding the termination of a power purchase
contract with Kamine/Besicorp Allegany L.P. (Kamine). In August 1998 the PSC
approved the Global Settlement Agreement. 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 Readiness Information. 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".
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 has incurred
approximately $4.6 million of costs through September 30 1998. 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
developed) 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. Testing for Y2K readiness has begun. 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
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<PAGE>
to survey these critical external parties to 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. Contingency planning commenced in October 1998 and is expected
to be completed by June 1999. The Company will be able to identify its most
reasonably likely worst case Y2K contingency scenario when it completes the
Scenario Risk Analysis phase of contingency planning. Failure to address Y2k
issues properly, however, could cause the Company to, among other things, issue
inaccurate bills, report inaccurate data, or incur plant outages and/or energy
delivery problems.
Energetix, the Company's wholly owned subsidiary, including its recently
acquired Griffith, estimates the cost of making the necessary modifications
identified to date to be less than $100,000. Most of its systems, personal
computers and operating equipment are less than seven years old. Energetix has
identified items that are the most vulnerable to the Y2K problem and is in
various stages of assessing, fixing and testing those items. These items are
expected to be Y2K-ready by the second quarter of 1999. Energetix has begun to
survey critical third parties including customers, suppliers, business partners
and financial institutions to assess their degree of Y2K readiness and develop
contingency plans to ensure the integrity of its operational and financial
systems.
FINANCING. In September 1998 the Company completed the delivery of $25.5
million of 5.95% New York State Energy Research and Development Authority
(NYSERDA) tax-exempt bonds due September 1, 2033. (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, 1998, the Company redeemed at
maturity $30 million principal amount of its First Mortgage 6.70% Bonds, Series
X. On September 1, 1998, the Company redeemed, pursuant to a mandatory sinking
fund, 100,000 shares of 7.55% Preferred Stock, Series T, at $100 per share. On
December 1, 1998 the Company will redeem $25.5 million principal amount of First
Mortgage Bonds, due 2028, Series OO at a redemption price of 102%. The Series
OO Bonds secure an issue of NYSERDA tax-exempt bonds which will be redeemed on
December 1, 1998 with the proceeds of the Series OO redemption.
FOSSIL UNIT STATUS. On January 21, 1998, the Company decided to retire
Beebee Station by mid-1999. Factors such as the plant's age, location no longer
consistent with the development of the surrounding area, 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.
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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
nine-month periods ended September 30, 1998 to the three-month and nine-month
periods ended September 30, 1997.
OPERATING REVENUES AND SALES. Total Company revenues for the first nine
months of 1998 were $18.3 million or 2% below the first nine months of 1997.
Lower therm sales of gas due to milder weather than last year were partially
offset by higher revenues from wholesale electric sales. Total Company revenues
for the third quarter of 1998 were $32.3 million or 15% above the third quarter
of 1997. The revenue increase reflects primarily higher wholesale electric
sales due to a favorable wholesale market and increased marketing of available
capacity.
INCOME STATEMENT CHANGES. Operating revenues have been reclassified into
three components. Two, electric operating revenues and gas operating revenues,
include all regulated and unregulated sales of electricity and gas,
respectively. The third, other operating revenues, includes mainly sales from
Griffith Oil, Inc., an oil and propane distribution company recently acquired by
Energetix, as well as other energy products. Unregulated fuel expenses and
unregulated O&M expenses excluding fuel reflect certain operating expenses of
Energetix.
FUEL EXPENSES. The fuel expense increases in both comparison periods were
driven by higher electric sales in the third quarter this year partially offset
by lower purchases of gas due to milder weather during the heating season.
OPERATIONS EXCLUDING FUEL EXPENSES AND MAINTENANCE EXPENSES. O&M excluding
fuel expenses decreased for the nine-month comparison period reflecting mainly
lower depreciation expense due to the termination of certain charges in June
1998 as required under the Settlement, 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. For the third quarter comparison these expenses were flat.
TAXES. The decrease in local, state and other taxes for the nine month
comparison period reflects mainly lower state revenue taxes due to decreased
revenues. For the third quarter comparison, local, state and other tax expenses
were flat. Changes in Federal income taxes in both comparison periods reflect
primarily variations in pre-tax earnings.
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 Settlement relating to the elimination of
the Nine Mile Two O&M expense deferral mechanism and, for the nine-month
comparison period, the resolution of certain pension and other employee benefit
charges as required under the Settlement. Interest charges decreased due to
refinancings and the redemption of long-term debt in 1997 and 1998 as well as
lower miscellaneous interest charges on pension and other post-employment
benefits.
DIVIDEND POLICY
On September 16, 1998, the Board of Directors authorized a common stock
dividend of $.45 per share, which was paid on October 24, 1998 to shareholders
of record on October 2, 1998. The level of future cash dividend payments on
20
<PAGE>
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.
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
1999 Annual Meeting Shareholders' Proposals. Rule 14a-4(c) of the
Securities and Exchange Commission's proxy rules allows the Company to use
discretionary voting authority to vote on a matter coming before an annual
meeting of shareholders which is not included in the Company's proxy statement,
if the Company does not have notice of the matter at least 90 days before the
date of the annual meeting of shareholders. In addition, discretionary voting
authority may generally also be used if the Company receives timely notice of
such matter (as described in the preceding sentence) and if, the Company
describes the nature of such matter in the proxy statement. Accordingly, for
the 1999 Annual Meeting of Shareholders any such notice must be received by the
Secretary of the Company on or before January 28, 1999.
The Company's by-laws provide that any shareholder who wishes to submit a
proposal must notify the Company 90 days in advance of the meeting and must
submit the following: (a) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting the business at
that meeting, (b) the shareholder's name and address, as they appear on the
Company's books, (c) the class and number of shares of the Company that are
owned by the shareholder and (d) any may material interest of such shareholder
in such business.
These requirements are separate and apart from the Securities and Exchange
Commission's requirements that a shareholder must meet in order to have a
shareholder proposal included in the Company's proxy statement for its 1999
Annual Meeting. Specific proposals of common shareholders intended to be
presented at the 1999 Annual Meeting of Shareholders must be received by the
Secretary of the Company no later than November 3, 1998 in order to be eligible
for inclusion in the Company's proxy materials relating to that meeting.
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 third quarter of 1998.
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule pursuant to Item 601 (c) of
Regulation S-K.
21
<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: November 9, 1998 By /s/ J.B. STOKES
------------------------------------
J. Burt Stokes
Senior Vice President, Corporate Services
and Chief Financial Officer
Date: November 9, 1998 By /s/ WILLIAM J. REDDY
------------------------------------
William J. Reddy
Controller
22
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<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS 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
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</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,566,259
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 190,773
<TOTAL-DEFERRED-CHARGES> 450,369
<OTHER-ASSETS> 19,236
<TOTAL-ASSETS> 2,226,637
<COMMON> 191,103
<CAPITAL-SURPLUS-PAID-IN> 488,211
<RETAINED-EARNINGS> 132,217
<TOTAL-COMMON-STOCKHOLDERS-EQ> 811,531
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47,000
<LONG-TERM-DEBT-NET> 459,985
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 132,286
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 25,500
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<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 715,335
<TOT-CAPITALIZATION-AND-LIAB> 2,226,637
<GROSS-OPERATING-REVENUE> 747,256
<INCOME-TAX-EXPENSE> 50,461
<OTHER-OPERATING-EXPENSES> 597,290
<TOTAL-OPERATING-EXPENSES> 644,441
<OPERATING-INCOME-LOSS> 102,815
<OTHER-INCOME-NET> 13,795
<INCOME-BEFORE-INTEREST-EXPEN> 113,300
<TOTAL-INTEREST-EXPENSE> 34,177
<NET-INCOME> 79,123
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<EARNINGS-AVAILABLE-FOR-COMM> 75,208
<COMMON-STOCK-DIVIDENDS> 52,106
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