<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1998
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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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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $5 par value New York Stock Exchange
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, $100 par value
4% Series F 4.95% Series K
4.10% Series H 4.55% Series M
4.75% Series I
4.10% Series J
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On January 1, 1999 the aggregate market value of the voting stock held by
nonaffiliates of the Registrant was approximately $1,161,000,000.
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
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date.
Common Stock, $5 par value, at January 1, 1999, 37,378,813.
Documents Incorporated by Reference Part of Form 10-K
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Definitive proxy statement in connection III
with annual meeting of shareholders to be
held April 29, 1999.
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
Information Required on Form 10-K
Item
Number Description Page
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Part I
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Item 1 Business 1
Item 2 Properties 14
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 4A Executive Officers of the Registrant 19
Part II
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Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 21
Item 6 Selected Financial Data 22
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 7A Quantitative and Qualitative Disclosures about
Market Risk 43
Item 8 Financial Statements and Supplementary Data 44
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 74
Part III
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Item 10 Directors and Executive Officers of the Registrant 75
Item 11 Executive Compensation 75
Item 12 Security Ownership of Certain Beneficial Owners and
Management 75
Item 13 Certain Relationships and Related Transactions 75
Part IV
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Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 76
Signatures 81
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1
PART I
Item 1. BUSINESS
The following are discussed under the general heading of "Business".
Reference is made to the various other Items as applicable.
CAPTION PAGE
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General 1
Regulatory Matters 3
Electric Operations 4
Gas Operations 7
Unregulated Operations 7
Fuel Supply 7
Financing and Capital Requirements Program 8
Environmental Quality Control 10
Research and Development 11
Operating Statistics 12
GENERAL
Incorporated in 1904 in the State of New York, the Company is engaged
principally in the business of generating, purchasing, transmitting and
distributing electricity, and purchasing, transporting and distributing natural
gas. The regulated business produces and distributes electricity and distributes
gas in parts of nine counties centering about the City of Rochester. At
December 31, 1998 the Company and its subsidiaries had 2,333 employees.
The Company's service area for its regulated business has a population of
approximately one million and is well diversified among residential, commercial
and industrial consumers. In addition to the City of Rochester, which is the
third largest city and a major industrial center in New York State, it includes
a substantial suburban area with commercial growth and a large and prosperous
farming area. A majority of the industrial firms in the Company's service area
manufacture consumer goods. Many of the Company's industrial customers are
nationally known, such as Xerox Corporation, Eastman Kodak Company, General
Motors Corporation, and Bausch & Lomb Incorporated.
Present Businesses. The business of the Company is seasonal. With respect
to electricity, winter peak loads are attained due to spaceheating sales and
shorter daylight hours and summer peak loads are reached due to the use of air-
conditioning and other cooling equipment. With respect to natural gas,
kerosene, propane and heating oil, the greatest sales occur in the winter months
due to spaceheating usage. In addition, gasoline sales reflect seasonal
fluctuations due to increased consumer driving during the warmer months. In
each of the communities in which it renders regulated utility service, the
Company, with minor exceptions, holds the necessary municipal franchises, none
of which contains burdensome restrictions. The franchises are non-exclusive,
and are either unlimited as to time or run for terms of years. In 1998, the
Company entered into unregulated businesses to bring energy products and
services to the marketplace both within and outside the Company's franchise area
as described below.
Energetix, Inc. It is part of the Company's financial strategy to seek
growth by entering into unregulated businesses. The Competitive Opportunities
Settlement (discussed under Item 7, Management's Discussion and Analysis of
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2
Financial Condition and Results of Operations) allows the Company to invest up
to $100 million in unregulated businesses. The first step in this direction was
the formation and operation of Energetix, Inc. ("Energetix"). Energetix is an
unregulated subsidiary that brings energy products and services to the
marketplace including the marketing of electricity, natural gas, gasoline, oil
and propane fuel energy services in an area extending approximately in a 150-
mile radius around Rochester.
In August 1998, Energetix announced the acquisition of Griffith Oil Co.,
Inc. ("Griffith"), the second largest oil and propane distribution company in
New York State. Griffith gives Energetix access to 65,000 new customers, 60,000
of which are residing outside of the Company's regulated franchise territory.
In addition to its current products, Griffith sells electricity, natural gas and
other services offered by Energetix to its existing customers. Griffith has
approximately 350 employees and operates 16 customer service centers.
RGS Development Corporation. During the second quarter of 1998, the
Company formed a new unregulated subsidiary, RGS Development Corporation ("RGS
Development"). RGS Development was formed to pursue unregulated business
opportunities in the energy marketplace.
RGS Energy Group, Inc. RGS Energy Group, Inc. ("RGS Energy") was organized
in 1998 for the purpose of carrying out the reorganization of the Company into a
holding company structure. RGS Energy is currently a direct subsidiary of the
Company. Subject to regulatory and shareholder approvals, all of the
outstanding shares of the Company's common stock will be exchanged on a share-
for-share basis for RGS Energy common stock. RGS Energy will become the parent
of the Company, Energetix, and RGS Development. The Company expects to complete
the reorganization by mid-1999.
Information concerning revenues, operating profits and identifiable assets
for significant industry segments is set forth in Note 4 of the Notes to the
Company's financial statements under Item 8. Information relating to the
principal classes of service from which regulated electric and gas revenues are
derived and other operating data are included herein under "Operating
Statistics". A discussion of the causes of significant changes in revenues is
presented in Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. Percentages of the Company's operating
revenues derived from electric and gas service and unregulated businesses for
each of the last three years are as follows:
1998 1997 1996
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Electric 66.4% 67.6% 67.1%
Gas 26.6% 32.4% 32.9%
Unregulated 7.0% -- % -- %
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100.0% 100.0% 100.0%
The Company is operating in a rapidly changing competitive marketplace for
electric and gas service. This competitive environment includes a federal and
State trend toward deregulation and promotion of open-market choices for
consumers.
In November 1997 the New York State Public Service Commission (PSC)
approved a Settlement Agreement among the Company, PSC staff and other parties
which sets the framework for the introduction and development of open
competition in the electric energy marketplace in New York State through July 1,
2002. Regarding the Company's electric business, in early 1996 the Federal
Energy
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3
Regulatory Commission (FERC) issued new rules to facilitate the development of
competitive wholesale markets. In 1997 the Company together with other New York
utilities filed with FERC a "Comprehensive Proposal to Restructure the New York
Wholesale Market". In 1998, FERC issued an order that conditionally authorizes
the establishment of an independent system operator (NYSIO) to administer a
state-wide open access tariff but deferred consideration of the tariff to a
future order for which no specific date has been set. At the State level, the
PSC endorsed a fundamental restructuring of the electric utility industry in the
State in its "Competitive Opportunities Proceeding". The Company's Competitive
Opportunities Settlement in 1997, including its retail access program called
"Energy Choice", allows for a phase-in to open electric markets while lowering
customer prices and establishing an opportunity for competitive returns on
shareholder investments. Through December 31, 1998, eight energy service
companies have been qualified by the Company to serve retail customers under the
Energy Choice Program. In 1998 the PSC also initiated a proceeding to examine a
number of issues relating to nuclear generation in a competitive market-based
electricity industry. This proceeding is intended to be completed in the fourth
quarter of 1999.
With the unbundling of interstate gas pipeline services as directed by FERC
Order 636, primary responsibility for reliable natural gas has shifted from
interstate pipeline companies to local distribution companies, such as the
Company. All gas customers have had a choice of suppliers since November 1996,
subject to certain phase-in limitations through 1998 for loss of gas commodity
sales. Some of these companies are large, nationally known, publicly held
companies. In 1997 the Company commenced negotiations with the staff of the PSC
and other parties with the objective of developing a multi-year settlement of
issues pertaining to the Company's gas business. In 1998 the PSC issued a gas
restructuring policy statement which concluded, among other things, that the
most effective way to establish a competitive gas supply market is for gas
distribution companies to cease selling gas. The PSC has encouraged settlement
negotiations with each gas utility pertaining to the transition to a fully
competitive gas market.
See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations under the heading "Competition" for further
information on the Competitive Opportunities Settlement, Energy Choice Program,
FERC Open Access, PSC Proceeding on Nuclear Generation, PSC Gas Restructuring
and the competitive challenges the Company faces in its electric and gas
business and how it is responding to those challenges.
REGULATORY MATTERS
The Company is subject to PSC regulation of rates, service, and sale of
securities, among other matters. The Company is also regulated by the FERC on a
limited basis, in the areas of interstate sales and exchanges of electricity,
intrastate sales of electricity for resale, transmission wheeling service for
other utilities, and licensing of hydroelectric facilities. As a licensee and
operator of nuclear facilities, the Company is also subject to regulation by the
Nuclear Regulatory Commission (NRC). The impact of regulation is discussed
throughout this report.
On July 29, 1998, the FERC issued a Notice of Proposed Rulemaking (NOPR)
(RM98-10) on short-term natural gas transportation services, which proposed an
integrated package of revisions to its regulations governing interstate natural
gas pipelines. "Short term" has been defined in the NOPR as all transactions of
less than one year. The short-term market could be priced at market-based
rates. Under the proposed approach, cost-based regulation would be eliminated
for short-term transportation and replaced by regulatory policies intended to
maximize
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4
competition in the short-term transportation market, mitigate the ability of
companies to exercise residual pipeline market power, and provide opportunities
for greater flexibility providing pipeline services without disadvantaging
customers that have limited access to gas supplies. The proposed changes
include, among other things, initiatives to revise pipeline scheduling
procedures and the policies that govern the flow of gas through the pipelines;
require pipelines to auction short-term capacity; and permit pipelines to
negotiate rates and terms of services.
In conjunction with the NOPR, the FERC also issued a Notice of Inquiry
(NOI) (RM98-12) on its pricing policies in the existing long-term market and
pricing policies for new capacity. The FERC wants to ensure that its policies
are not biased toward either short-term or long-term service, provide accurate
price signals and the right incentives for pipelines to provide optimal
transportation services and construct facilities that meet future demand, but do
not result in over building and excess capacity. Comments on the NOPR and NOI
are due April 22, 1999. The Company is reviewing the NOPR and NOI but any
ultimate resolution at this stage is unknown. The Company is presently unable
to estimate the effects of these matters on future operations.
See Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations under the heading "Rates and Regulatory Matters" for
information regarding a gas settlement proposal and an interim gas settlement
and a flexible pricing tariff for major industrial and commercial electric
customers.
ELECTRIC OPERATIONS
Electric System. The total net generating capacity of the Company's
electric system is 1,239,000 kilowatts (Kw). In addition the Company purchases
120,000 Kw of firm power under contract and 35,000 Kw of non-contractual peaking
power from the New York Power Authority, 150,000 Kw of a 1,000,000 Kw pumped
storage plant owned by the Power Authority in Schoharie County, New York and
44,000 Kw of firm power from the Power Authority's 821,000 Kw FitzPatrick
Nuclear Power Plant near Oswego, New York. The Company's net peak load of
1,425,000 Kw occurred on August 15, 1995.
The percentages of electricity actually generated and purchased for the
years 1994-1998 are as follows:
1998 1997 1996 1995 1994
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Sources of Generated Energy:
Nuclear 60.1% 61.6% 49.4% 52.8% 55.3%
Fossil 22.2 20.0 18.2 18.6 18.1
Hydro and Other 2.1 2.7 3.0 2.0 2.7
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Total Generated Net 84.4 84.3 70.6 73.4 76.1
Purchased 15.6 15.7 29.4 26.6 23.9
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Total Electric Energy 100.0% 100.0% 100.0% 100.0% 100.0%
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The Company, six other New York utilities and the Power Authority are
members of the New York Power Pool (NYPP). The primary purposes of the NYPP are
to coordinate inter-utility sales of bulk power, long range planning of
generation and transmission facilities, and inter-utility operating and
emergency procedures in order to better assure reliable, adequate and economic
electric service throughout the State. For a discussion of potential changes to
the NYPP, see Item 7, Management's Discussion and Analysis of Financial
Condition and
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5
Results of Operations - "FERC Open Access Transmission Orders and Company
filings".
Generating Facilities. The Company's five major generating facilities are
two nuclear units, the Ginna Nuclear Plant (Ginna Plant) and the Company's 14%
share of Nine Mile Point Nuclear Plant Unit No. 2 (Nine Mile Two), and three
fossil fuel generating stations, the Russell and Beebee Stations and the
Company's 24% share of Oswego Unit Six. In terms of capacity these comprise
39%, 13%, 20%, 7% and 15%, respectively, of the Company's current electric
generating system. On December 1, 1998 the Company purchased a natural gas
combined cycle generating facility rated at approximately 65 megawatts (Mw)
which it intends to operate in 1999.
For information relating to the retirement of Beebee Station and a sale
agreement for Oswego Unit Six see Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations - "Fossil Unit Status".
Nine Mile Two, a nuclear generating unit in Oswego County, New York with a
designed capability of 1,143 Mw as estimated by Niagara Mohawk, was completed
and entered commercial service in Spring 1988. Niagara Mohawk is operating the
Unit on behalf of all owners pursuant to a full power operating license, which
the NRC issued on July 2, 1987 for a 40-year term beginning October 31, 1986.
Under arrangements dating from September 1975, ownership, output and cost of the
project are shared by the Company (14%), Niagara Mohawk (41%) Long Island Power
Authority (formerly Long Island Lighting Company) (18%), New York State Electric
& Gas Corporation (18%) and Central Hudson Gas & Electric Corporation (9%).
Under the operating Agreement, Niagara Mohawk serves as operator of Nine Mile
Two, but all five cotenant owners share certain policy, budget and managerial
oversight functions. The base term of the Operating Agreement is 24 months from
its effective date, with automatic extension, unless terminated by written
notice of one or more of the cotenant owners to the other cotenant owners; such
termination becomes effective six months from the receipt of any such notice of
termination by all the cotenant owners receiving such notice. The gross and net
book cost of the Company's share of Nine Mile Two including $374 million of
disallowed costs previously written off, as of December 31, 1998 are $877
million and $384 million, respectively.
The Company's Ginna Plant, which has been in commercial operation since
July 1, 1970, provides 480 Mw of the Company's electric generating capacity. In
August 1991 the NRC approved the Company's application for amendment to extend
the Ginna Plant operating license expiration date from April 25, 2006 to
September 18, 2009.
The gross and net book cost of the Ginna Plant as of December 31, 1998 are
$595 million and $279 million, respectively. From time to time the NRC issues
directives requiring all or a certain group of reactor licensees to perform
analyses as to their ability to meet specified criteria, guidelines or operating
objectives and where necessary to modify facilities, systems or procedures to
conform thereto. Typically, these directives are premised on the NRC's
obligation to protect the public health and safety. The Company reviews such
directives and implements a variety of modifications based on these directives
and resulting analyses. Expenditures at the Ginna Plant, including the cost of
these modifications, are estimated to be $12.9 million, $4.6 million and $6.9
million for the years 1999, 2000 and 2001, respectively, and are included in the
capital expenditure amounts presented under Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Company has four licensed hydroelectric generating stations with an
aggregate capability of 47 megawatts. The Company received renewed final
licenses for Stations 2,5 and 26. Overly stringent environmental conditions,
governmental requirements and high property taxes have nullified the economic
viability of the
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6
fourth station, number 160 (less than one megawatt net capacity). It will not be
relicensed.
Nuclear Operating Company. In October 1996, the Company and Niagara Mohawk
announced plans to establish a nuclear operating company to be known as the New
York Nuclear Operating Company (NYNOC). Since that time NYNOC has been
organized as a New York Limited Liability Company with three members: the
Company, Niagara Mohawk, and Consolidated Edison, Inc. Although not a member,
the New York Power Authority has participated in the development of plans to
implement NYNOC. The principal function of NYNOC, should it be implemented,
would be to operate and manage, but not to own, six operational nuclear plants
in New York, including the Company's totally owned Ginna Nuclear Plant and
jointly owned Nine Mile Point Unit 2. The Company continues to believe that
NYNOC, or a similar arrangement, would contribute to maintaining a high level of
operational performance and satisfactory NRC compliance, and would provide
opportunities for further cost reduction. The initial work associated with plans
for implementation of NYNOC was completed in 1998. Although the Company plans
to maintain NYNOC as an option in 1999, no substantial further work on its
implementation is anticipated until completion of the PSC proceeding regarding
the future of nuclear power plants in New York State.
Insurance. The Price-Anderson Act establishes a federal program insuring
against public liability in the event of a nuclear accident at a licensed U.S.
reactor. Under the program, claims would first be met by insurance which
licensees are required to carry in the maximum amount available (currently $200
million). If claims exceed that amount, licensees are subject to a
retrospective assessment up to $88.1 million per licensed facility for each
nuclear incident, payable at a rate not to exceed $10 million per incident per
year. Those assessments are subject to periodic inflation indexing and a
surcharge for New York State premium taxes. The Company's interests in two
nuclear units could expose it to a potential liability for each accident of
$100.4 million through retrospective assessments of $11.4 million per incident
per year in the event of a sufficiently serious nuclear accident at its own or
another U.S. commercial nuclear reactor.
As a licensee of a commercial nuclear power plant in the United States, the
Company is required to have and maintain financial protection to cover radiation
injury claims of certain nuclear workers. The Company purchases primary
insurance to meet this requirement. On January 1, 1998, a new insurance policy
was issued that applies to claims first reported on or after January 1, 1998.
This policy has a limit of $200 million (reinstated annually if certain
conditions are met) for radiation injury claims against the Company, or against
other licensees who are insured by this policy. If these claims exceed the $200
million limit of primary coverage, the provisions of the Price-Anderson Act
(discussed above) would apply. Since reserves for outstanding claims under
former policies could be insufficient and certain claims may still be made under
former policies due to a discovery period, the Company could be assessed under
these former policies along with the other policyholders. The Company's share
could be up to $3.2 million in any one year.
The Company is a member of Nuclear Electric Insurance Limited, which
provides insurance coverage for the cost of replacement power during certain
prolonged accidental outages of nuclear generating units and coverage for
property damage at nuclear generating units. If an insuring program's losses
exceeded its other resources available to pay claims, the Company could be
subject to maximum assessments in any one policy year of approximately $2.4
million and $10.4 million in the event of losses under the replacement power and
property damage coverages, respectively.
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7
GAS OPERATIONS
As of December 31, 1998 the Company's daily city gate resource capability
is 4,380,000 therms and its daily contracted transportation capacity is
4,080,000 therms (where one Therm is equivalent to 100,000 British Thermal
Units). The Company optimizes its assets by contracting for gas resources that
align with its system requirements. The Company experienced on January 19,
1994, its maximum daily throughput of approximately 4,740,000 therms, (3,910,000
therms sold to retail customers and 830,000 therms delivered for transportation
customers).
The Company purchases all of its required gas supply from numerous
marketers and producers under contracts containing various terms and conditions.
See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations under the caption "Energy Management and Costs - Gas" for
a discussion of that topic.
Approximately 33% of the gas delivered to customers by the Company during
1998 was purchased directly by commercial, industrial and municipal customers
from brokers, producers and pipelines. The Company provided the transportation
of gas on its system to these customers' premises.
UNREGULATED OPERATIONS
Energetix serves electric and gas customers, appliance service warranty
customers and, through its acquisition of Griffith, approximately 65,000
customers for its products including oil, diesel, kerosene, propane and
gasoline. See Note 4 of the Notes to Financial Statements for additional
operating information and Management's Discussion and Analysis of Financial
Condition and Results of Operations under Unregulated Operating Revenues and
Sales for information on products, revenues and sales.
FUEL SUPPLY
Nuclear. Generally, the nuclear fuel cycle consists of the following: (1)
the procurement of uranium concentrate (yellowcake), (2) the conversion of
uranium concentrate to uranium hexafluoride, (3) the enrichment of the uranium
hexafluoride, (4) the fabrication of fuel assemblies, (5) the utilization of the
nuclear fuel in generating station reactors and (6) the appropriate storage or
disposition of spent fuel and radioactive wastes. Arrangements for nuclear fuel
materials and services for the Ginna Plant and Nine Mile Two have been made to
permit operation of the units through the years indicated:
Ginna Plant Nine Mile Two/(1)/
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Uranium Concentrate 2001/(3)/ 2002/(2)/
Conversion 2000/(4)/ 2002/(2)/
Enrichment 2009/(5)/ /(6)/
Fabrication 2009 2003
(1) Information was supplied by Niagara Mohawk Power Corporation.
(2) Arrangements have been made for procuring the majority of the uranium and
conversion requirements through 2002, leaving the remaining portion of the
requirements uncommitted.
(3) The Company has a contract under which it may procure up to 80 percent of
the annual Ginna Plant uranium requirements. A second contract is in place
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8
to supply about 30% of the annual requirements through 1999, and 100% of
requirements in 2000. A third contract is in place, which will supply
500,000 pounds of uranium between 1999 and 2004 as scheduled by the
Company. This material may be scheduled for delivery against requirements
in 2001, or may be scheduled for later delivery depending on the market
price of uranium at the time. The remaining requirements are uncommitted.
(4) A contract is in place covering 70% of requirements in 1999 and 100% in
2000. Remaining requirements will be filled from market purchases or a new
long term contract.
(5) The Company has a contract with United States Enrichment Corporation (USEC)
for nuclear fuel enrichment services which, assures provision of 70% of the
Ginna Plant's requirements through 1999. A second enrichment contract is
in place which, assures 30% of the Ginna Plant's requirements through 1999
and 100% of requirements through the end of the current operating license.
(6) Nine Mile Two is covered for 75% of requirements through 2003 (with an
option to increase to 100%).
With appropriate lead times, the Company will pursue arrangements for the
supply of uranium requirements and related services beyond those years for which
arrangements have been made as shown above.
See Note 10 of the Notes to Financial Statements under Item 8 for
additional information regarding nuclear fuel disposal costs, nuclear plant
decommissioning and DOE uranium enrichment facility decontamination and
decommissioning.
Coal. The Company's 1999 coal requirements are expected to be approximately
650,000 tons. In 1998 73% of its requirements were purchased under contract and
27% were purchased on the spot market. Currently, the Company maintains a
current reserve supply of coal ranging from 30-60 days supply at maximum burn
rates.
The sulfur content of the coal utilized in the Company's existing coal-
fired facilities ranges from 1.0 to 1.9 pounds per million BTU. Under existing
New York State regulations, the Company's coal-fired facilities may not burn
coal which exceeds 2.5 pounds per million BTU, and must average no higher than
1.7 pounds per million BTU over a 12-month period or 1.9 pounds per million BTU
over a three-month period.
FINANCING AND CAPITAL REQUIREMENTS PROGRAM
A discussion of the Company's capital requirements, financial objectives
and the resources available to meet such requirements may be found in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The sale of additional securities depends on regulatory approval
and the Company's ability to meet certain requirements contained in its mortgage
and Restated Certificate of Incorporation.
Under the New York State Public Service Law, the Company is required to
secure authorization from the Public Service Commission of the State of New York
(PSC) prior to issuance of any stock or any debt having a maturity of more than
one year.
The Company's First Mortgage Bonds are issued under a General Mortgage
dated September 1, 1918, between the Company and Bankers Trust Company, as
Trustee, which has been amended and supplemented by thirty-nine supplemental
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9
indentures. Before additional First Mortgage Bonds are issued, the following
financial requirements must be satisfied:
(a) The First Mortgage prohibits the issuance of additional First Mortgage
Bonds unless earnings (as defined) for a period of twelve months ending not
earlier than sixty days prior to the issue date of the additional bonds are
at least 2.00 times the annual interest charges on First Mortgage Bonds,
both those outstanding and those proposed to be outstanding. The ratio
under this test for the twelve months ended December 31, 1998 was 6.65.
(b) The First Mortgage also provides that, if additional First Mortgage Bonds
are being issued on the basis of property additions (as defined), the
principal amount of the bonds may not exceed 60% of available property
additions. As of December 31, 1998 the amount of additional First Mortgage
Bonds which could be issued on that basis was approximately $411,410,000.
In addition to issuance on the basis of property additions, First Mortgage
Bonds may be issued on the basis of 100% of the principal amount of other
First Mortgage Bonds which have been redeemed, paid at maturity, or
otherwise reacquired by the Company. As of December 31, 1998, the Company
could issue $327,169,000 of Bonds against Bonds that have matured or been
redeemed.
The Company's Restated Certificate of Incorporation (Charter) provides
that, without consent by two-thirds of the votes entitled to be cast by the
preferred stockholders, the Company may not issue additional preferred stock
unless in a 12-month period within the preceding 15 months: (a) net earnings
applicable to payment of dividends on preferred stock, after taxes, have been at
least 2.00 times the annual dividend requirements on preferred stock, including
the shares both outstanding and proposed to be issued, and (b) net earnings
available for interest on indebtedness, after taxes, have been at least 1.50
times the annual interest requirements on indebtedness and annual dividend
requirements on preferred stock, including the shares both outstanding and
proposed to be issued. For the twelve months ended December 31, 1998, the
coverage ratio under (b) above (the more restrictive provision) was 2.06.
For other information with respect to long-term and short-term borrowing
arrangements and limitations see Item 8, Note 6 - Long-Term Debt and Note 9 -
Short-Term Debt.
The Company's Charter does not contain any financial tests for the issuance
of preference or common stock.
The Company's securities ratings at December 31, 1998 were:
First
Mortgage Preferred
Bonds Stock
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Standard & Poor's Corporation A- BBB+
Moody's Investors Service A3 baa1
Duff & Phelps A- BBB
The securities ratings set forth in the table are subject to revision
and/or withdrawal at any time by the respective rating organizations and should
not be considered a recommendation to buy, sell or hold securities of the
Company.
<PAGE>
10
ENVIRONMENTAL QUALITY CONTROL
Operations at the Company's facilities are subject to various federal,
state and local environmental standards. To assure the Company's compliance
with these requirements, the Company expended approximately $6.4 million on a
variety of projects and facility additions during 1998.
The federal Low Level Radioactive Waste Policy Act (Act), as amended in
1985, provides for states to join compacts or individually develop their own low
level radioactive waste disposal sites. The Company can provide no assurance as
to what disposal arrangements, if any, New York will have in place. The State
has not passed legislation that would designate a site for the disposal of low
level radioactive waste. The Company has storage capacity at the Ginna Plant
through the end of its license in 2009. A low level radioactive waste
management and contingency plan is currently ongoing to provide assurance that
Nine Mile Two will be properly prepared to handle interim storage of low level
radioactive waste for the next ten years and beyond, if necessary.
The Company has wastewater discharge permits from NYSDEC for each of its
steam electric generating stations. The Ginna Station permit is dated February
1998; the current Beebee station permit is dated February 1994 and has been
renewed with an effective date of February 1999; and the current Russell Station
permit is dated June 1994 and is presently in the renewal process with an
anticipated effective date of June 1999. These permits are each valid for a
period of five years from their effective dates. Consistent with the Ginna and
Beebee permits, no significant changes to the wastewater discharge treatment
systems are currently required, nor anticipated. At Russell Station an
oil/water separator is being installed as a preventive measure against oil
contamination within the station wastewaters. The cost of this separator is
approximately $.7 million.
The Company is developing strategies responsive to the Federal Clean Air Act
amendments of 1990 (CAA) 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 expenditures due to CAA requirements
are expected to be limited to less than $250 thousand in 1999. 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 $3.0 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 Federal regulations. 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.
The Company believes that additional expenditures and costs made necessary
by mandated environmental protection programs will be fully allowable for
ratemaking purposes under cost of service rate regulation, subject to the terms
of the Company's Competitive Opportunities Settlement Agreement. Capital
expenditures for meeting various federal, State and local environmental
standards
<PAGE>
11
are estimated to be $2.7 million for the year 1999, $2.1 million for the year
2000 and $.5 million for the year 2001. These expenditures are included under
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, in the table entitled "Capital Requirements".
See Item 3 - Legal Proceedings and Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations, with respect to other
environmental matters.
RESEARCH AND DEVELOPMENT
The Company's research activities are designed to improve existing energy
technologies and to develop new technologies for the production, distribution,
utilization and conservation of energy while preserving environmental quality.
Research and development expenditures in 1998, 1997 and 1996 were $3.4 million,
$4.5 million, and $4.9 million, respectively. These expenditures represent the
Company's contribution to research administered by Electric Power Research
Institute, Empire State Electric Energy Research Corporation and an assessment
for state government sponsored research by the New York State Energy Research
and Development Authority, as well as internal research projects.
<PAGE>
12
Electric Department Statistics
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Electric Revenue (000's)
Residential $ 250,073 $ 252,464 $ 254,885 $ 256,294 $ 243,961 $ 234,866
Commercial 203,338 210,643 215,763 215,696 206,545 196,100
Industrial 130,778 144,305 153,337 157,464 150,372 148,084
Municipal and Other 58,889 72,061 66,898 67,128 57,270 59,905
---------- ---------- ---------- ---------- ---------- ----------
Electric revenue from our customers 643,078 679,473 690,883 696,582 658,148 638,955
Wholesale electric sales * 44,022 20,856 16,885 25,883 16,605 16,361
---------- ---------- ---------- ---------- ---------- ----------
Total electric revenue 687,100 700,329 707,768 722,465 674,753 655,316
Electric Expense (000's)
Fuel used in electric generation 53,954 47,665 40,938 44,190 44,961 45,871
Purchased electricity 27,024 28,347 46,484 54,167 37,002 31,563
Other operation 195,400 205,058 204,746 199,524 192,360 192,749
Maintenance 38,022 41,217 41,429 44,032 47,295 52,464
Depreciation and amortization 102,123 103,395 92,615 78,812 75,211 72,326
Taxes - local, state and other 89,164 91,111 95,010 102,380 97,919 96,043
---------- ---------- ---------- ---------- ---------- ----------
Total electric expense 505,687 516,793 521,222 523,105 494,748 491,016
---------- ---------- ---------- ---------- ---------- ----------
Operating Income before
Federal Income Tax 181,413 183,536 186,546 199,360 180,005 164,300
Federal income tax 61,477 61,837 61,901 59,500 52,842 43,845
---------- ---------- ---------- ---------- ---------- ----------
Operating Income from
Electric Operations (000's) $ 119,936 $ 121,699 $ 124,645 $ 139,860 $ 127,163 $ 120,455
---------- ---------- ---------- ---------- ---------- ----------
Electric Operating Ratio % 45.8 46.0 47.1 47.3 47.7 49.2
Electric Sales - KWH (000's)
Residential 2,111,739 2,139,064 2,132,902 2,144,718 2,117,168 2,123,277
Commercial 2,007,282 2,118,991 2,061,625 2,064,813 2,028,611 1,986,100
Industrial 1,929,268 2,010,613 2,010,963 1,964,975 1,860,833 1,892,700
Municipal and Other 514,243 537,051 520,885 531,311 513,675 504,987
---------- ---------- ---------- ---------- ---------- ----------
Total customer sales 6,562,532 6,805,719 6,726,375 6,705,817 6,520,287 6,507,064
Wholesale electric sales* 1,671,959 1,218,794 994,842 1,484,196 1,021,733 743,588
---------- ---------- ---------- ---------- ---------- ----------
Total electric sales 8,234,491 8,024,513 7,721,217 8,190,013 7,542,020 7,250,652
---------- ---------- ---------- ---------- ---------- ----------
Electric Customers at December 31
Residential 309,931 308,909 307,181 306,601 304,494 302,219
Commercial 30,248 30,940 30,620 30,426 29,984 29,635
Industrial 1,279 1,300 1,325 1,347 1,361 1,382
Municipal and Other 2,594 2,824 2,688 2,711 2,670 2,638
---------- ---------- ---------- ---------- ---------- ----------
Total electric customers 344,052 343,973 341,841 341,085 338,509 335,874
---------- ---------- ---------- ---------- ---------- ----------
Electricity Generated and
Purchased - KWH (000's)
Fossil 1,962,889 1,664,914 1,512,513 1,631,933 1,478,120 1,520,936
Nuclear 5,323,639 5,119,544 4,094,272 4,645,646 4,527,178 4,495,457
Hydro 189,512 227,867 248,990 171,886 218,129 199,239
Pumped storage 232,927 238,900 246,726 237,904 247,550 233,477
Less energy for pumping (348,438) (358,350) (370,097) (361,144) (371,383) (355,725)
Other 195 890 936 1,565 1,245 2,559
---------- ---------- ---------- ---------- ---------- ----------
Total generated - net 7,360,724 6,893,765 5,733,340 6,327,790 6,100,839 6,095,943
Purchased 1,376,221 1,301,636 2,437,433 2,343,484 1,998,882 1,646,244
---------- ---------- ---------- ---------- ---------- ----------
Total electric energy 8,736,945 8,195,401 8,170,773 8,671,274 8,099,721 7,742,187
---------- ---------- ---------- ---------- ---------- ----------
System Net Capability -
KW at December 31
Fossil 526,000 526,000 529,000 529,000 532,000 541,000
Nuclear 638,000 638,000 638,000 640,000 617,000 620,000
Hydro 47,000 47,000 47,000 47,000 47,000 47,000
Other 28,000 28,000 28,000 28,000 29,000 29,000
Purchased 349,000 375,000 375,000 375,000 375,000 347,000
---------- ---------- ---------- ---------- ---------- ----------
Total system net capability 1,588,000 1,614,000 1,617,000 1,619,000 1,600,000 1,584,000
---------- ---------- ---------- ---------- ---------- ----------
Net Peak Load - KW 1,388,000 1,421,000 1,305,000 1,425,000 1,374,000 1,333,000
Annual Load Factor - Net % 59.5 56.1 61.9 57.6 58.8 59.1
</TABLE>
* Includes sales to energy marketers and bulk sales.
<PAGE>
13
Gas Department Statistics
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996 1995 1994 1993
---------- ---------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gas Revenue (000's)
Residential $ 2,944 $ 5,852 $ 6,010 $ 4,081 $ 5,935 $ 5,526
Residential spaceheating 201,686 249,101 246,945 230,934 215,974 201,129
Commercial 40,196 51,893 52,073 51,117 49,115 46,321
Industrial 4,222 5,800 6,175 6,686 7,088 6,368
Municipal and other 25,492 23,663 35,076 1,045 47,949 34,364
---------- ---------- ---------- --------- -------- ----------
Total gas revenue 274,540 336,309 346,279 293,863 326,061 293,708
---------- ---------- ---------- --------- -------- ----------
Gas Expense (000's)
Gas purchased for resale 155,497 196,579 202,297 167,762 194,390 166,884
Other operation 63,014 63,416 61,348 59,684 49,312 47,593
Maintenance 5,188 5,418 5,634 5,194 7,774 9,229
Depreciation 12,867 13,127 12,999 12,781 12,250 11,851
Taxes - local, state and other 27,672 30,685 31,858 31,514 31,859 30,849
---------- ---------- ---------- --------- -------- ----------
Total gas expense 264,238 309,225 314,136 276,935 295,585 266,406
---------- ---------- ---------- --------- -------- ----------
Operating Income before
Federal Income Tax 10,302 27,084 32,143 16,928 30,476 27,302
Federal income tax (92) 3,442 7,600 6,715 8,403 5,485
---------- ---------- ---------- --------- -------- ----------
Operating Income from
Gas Operations (000's) $ 10,394 $ 23,642 $ 24,543 $ 10,213 $ 22,073 $ 21,817
---------- ---------- ---------- --------- -------- ----------
Gas Operating Ratio % 81.5 78.9 77.8 79.2 77.1 76.2
Gas Sales - Therms (000's)
Residential 3,599 5,773 6,455 7,167 6,535 6,871
Residential spaceheating 239,740 285,395 299,085 280,763 283,039 295,093
Commercial 53,552 65,675 70,543 68,380 72,410 78,887
Industrial 6,079 7,828 9,334 9,560 11,420 12,030
Municipal 6,388 7,331 8,086 8,219 10,230 12,188
---------- ---------- ---------- --------- -------- ----------
Total gas sales 309,358 372,002 393,503 374,089 383,634 405,069
Transportation of customer-owned gas 163,575 166,060 167,779 146,149 136,372 124,436
---------- ---------- ---------- --------- -------- ----------
Total gas sold and transported 472,933 538,062 561,282 520,238 520,006 529,505
---------- ---------- ---------- --------- -------- ----------
Gas Customers at December 31
Residential 16,944 16,265 16,718 17,443 17,836 18,389
Residential spaceheating 249,684 243,264 240,685 238,267 235,313 231,937
Commercial 18,633 19,118 19,045 18,978 18,742 18,636
Industrial 778 829 857 879 905 924
Municipal 965 1,117 961 981 988 1,001
Transportation 1,900 836 744 655 558 466
---------- ---------- ---------- --------- -------- ----------
Total gas customers 288,904 281,429 279,010 277,203 274,342 271,353
---------- ---------- ---------- --------- -------- ----------
Gas - Therms (000's)
Purchased for resale 203,677 274,430 279,353 237,728 262,267 347,778
Gas from storage 111,164 104,317 122,843 152,852 134,802 76,378
Other 1,496 1,410 1,082 1,800 2,959 1,039
---------- ---------- ---------- --------- -------- ----------
Total gas available 316,337 380,157 403,278 392,380 400,028 425,195
---------- ---------- ---------- --------- -------- ----------
Total Daily Capacity -
Therms at December 31* 4,380,000 4,380,000 4,480,000 5,230,000 5,625,000 5,625,000
---------- ---------- ---------- --------- -------- ----------
Maximum daily throughput - Therms 3,583,500 4,114,290 4,022,600 3,980,000 4,735,690 3,864,850
Degree Days (Calendar Month)
For the period 5,666 6,916 6,998 6,535 6,699 7,044
Percent colder (warmer) than normal (15.9) 2.8 3.9 (3.0) (0.6) 4.4
</TABLE>
* Method for determining daily capacity, based on current network analysis,
reflects the maximum demand which the transmission systems can accept without
a deficiency.
<PAGE>
14
Item 2. PROPERTIES
ELECTRIC PROPERTIES
The net capability of the Company's electric generating plants in operation
as of December 31, 1998 and the net generation of each plant for the year ended
December 31, 1998, and the year each plant was placed in service are as set
forth below:
Electric Generating Plants
<TABLE>
<CAPTION>
Net Net
Year Unit (Nameplate) Generation
Placed in Capability thousands
Type of Fuel Service (Mw) (KWH)
------------ --------- ---------- ---------
<S> <C> <C> <C> <C>
Beebee Station
(Steam) Coal 1959 80 508,476
Beebee Station
(Gas Turbine) Oil 1969 14 86
Russell Station
(Steam) Coal 1949-1957 257 1,393,216
Ginna Station
(Steam) Nuclear 1970 480 4,308,112
Oswego Unit 6/(1)/
(Steam) Oil 1980 189 61,197
Nine Mile Point
Unit No. 2/(2)/
(Steam) Nuclear 1988 158 1,015,527
Station No. 9
(Gas Turbine) Gas 1969 14 109
Station 5
(Hydro) Water 1917 39 150,779
5 Other Stations
(Hydro) Water 1906-1960 8 38,733
----- ---------
7,476,235
Pumped Storage /(3)/ 232,927
Less: energy for pumping (348,438)
---------
1,239 7,360,724
===== =========
</TABLE>
(1) Represents 24% share of jointly-owned facility.
(2) Represents 14% share of jointly-owned facility.
(3) Owned and operated by the Power Authority.
<PAGE>
15
The Company owns 147 distribution substations having an aggregate rated
transformer capacity of 2,172,154 Kva, of which 138, having an aggregate rated
capacity of 1,992,988 Kva, were located on lands owned in fee, and nine of
which, having an aggregate rated capacity of 179,166 Kva, were located on land
under easements, leases or license agreements. The Company also has 71,407 line
transformers with a capacity of 2,850,977 Kva. The Company also owns 24
transmission substations having an aggregate rated capacity of 3,065,617 Kva of
which 23, having an aggregate rated capacity of 2,990,950 Kva, were located on
land owned in fee and one, having a rated capacity of 74,667 Kva, was located on
land under easements. The Company's transmission system consists of
approximately 716 circuit miles of overhead lines and approximately 405 circuit
miles of underground lines. The distribution system consists of approximately
16,264 circuit miles of overhead lines, approximately 3,917 circuit miles of
underground lines and 353,512 installed meters. The electric transmission and
distribution system is entirely interconnected and, in the central portion of
the City of Rochester, is underground. The electric system of the Company is
directly interconnected with other electric utility systems in New York and
indirectly interconnected with most of the electric utility systems in the
United States and Canada. (See Item 1 - Business, "Electric Operations".)
GAS PROPERTIES
The gas distribution systems consist of 4,273 miles of gas mains and
294,844 installed meters. (See Item 1 - Business, "Gas Operations" and "Gas
Department Statistics".
UNREGULATED SUBSIDIARIES
Griffith, acquired by Energetix in August 1998, owns or leases 47 properties
for use in its business operations. These properties consist of:
- (3) Pipeline Terminal facilities: these major bulk petroleum storage
facilities are primarily supplied by pipeline and have an aggregate
storage capacity of approximately 475,000 barrels.
- (10) Bulk Plant Facilities: these bulk petroleum facilities are
primarily supplied by truck and have an aggregate storage capacity of
105,000 barrels.
- (14) Service Stations: these retail sites are sublet to a dealer who
provides various services at retail to the general public.
- (20) Other properties: there are a mixture of other properties
including office buildings, warehouses and garage facilities used in the
general operation of the business.
OTHER PROPERTIES
The Company owns a ten-story office building centrally located in Rochester
and other structures and property. On December 1, 1998 the Company purchased a
natural gas combined cycle generating facility rated at approximately 65 mw,
which it intends to operate in 1999. The Company also leases approximately
502,000 square feet of facilities for administrative offices and operating
activities in the Rochester area.
The Company has good title in fee, with minor exceptions, to its principal
plants and important units, except rights of way and flowage rights, subject to
restrictions, reservations, rights of way, leases, easements, covenants,
contracts, similar encumbrances and minor defects of a character common to
properties of the size and nature of those of the Company. The electric and gas
transmission and distribution lines and mains are located in part in or upon
public streets and highways and in part on private property, either pursuant to
easements granted by the apparent owner
<PAGE>
16
containing in some instances removal and relocation provisions and time
limitations, or without easements but without objection of the owners. The First
Mortgage securing the Company's outstanding bonds is a first lien on
substantially all the property owned by the Company (except cash and accounts
receivable). Mortgages securing the Company's revolving credit agreement and a
long term note are also liens on substantially all the property owned by the
Company (except cash and accounts receivable) subject and subordinate to the
lien of the First Mortgage. The Company has credit agreements with a domestic
bank under which short-term borrowings are secured by the Company's accounts
receivable.
Item 3. LEGAL PROCEEDINGS
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 seven Company-owned sites where past waste
handling and disposal may have occurred. Remediation activities at five 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 has recorded a
total liability of approximately $21.6 million which it anticipates spending on
SIR efforts at the seven Company-owned sites. Through December 31, 1998 the
Company has incurred aggregate costs of $5.4 million for these sites.
In mid-1995, the New York State Department of Environmental Conservation
(NYSDEC) developed a listing of sites called "The Hazardous Substance Site
Inventory". Under current New York State law, unless a site, which is determined
to pose a public health or environmental risk, contains hazardous wastes, State
"Superfund" monies cannot be used to assist in the cleanup. The State wanted to
have some sense of the scale of this problem before the legislature considered
other avenues of legal and financial redress than those currently available. The
NYSDEC's "Hazardous Substance Waste Disposal Site Study" was developed to assess
the number of and cost to remediate sites where hazardous chemicals, but not
hazardous wastes are present. Of the seven Company-owned sites three are listed
in this inventory. These are East Station, Front Street and Brooks Avenue, all
located in Rochester, NY. In addition to these three sites, the inventory
includes Ambrose Yard and Lindberg Heat Treating. These two sites are owned by
the Company (and are in addition to the seven mentioned above) however, the
Company does not believe that additional SIR work for which the Company is
responsible is required at either site. At this time, the Company is unable to
predict what action will be necessitated as a result of the listing.
Manufactured Gas Sites. The Company and its predecessors formerly owned and
operated five manufactured gas facilities for which SIR costs are estimated to
be approximately $20 million. Three sites, located in the Rochester area are
known as West Station, East Station and Front Street. Cleanup activities on a
portion of the West Station site were concluded in July 1996 under a voluntary
agreement with the NYSDEC. The Company received release from future liability
and a covenant not to sue from the NYSDEC for this work. There remain other
portions of the property where additional remedial work is expected; however,
only a preliminary scope and schedule have been determined.
At the second site known as East Station, an interim remedial action was
undertaken in late 1993. Ground water monitoring wells were also installed to
assess the quality of the ground water at this location. The Company has
informed the NYSDEC of the results of the samples taken. A supplemental remedial
investigation and feasibility study is in progress and is expected to be
completed in early 1999.
At the third site (Front Street) a boring placed in the fall of 1988 for a
sewer system project showed a layer containing a black viscous material. The
study of the layer found that some of the soil and ground water on-site had been
adversely impacted. The matter was reported to the NYSDEC and, in September
1990, the Company also provided the agency with a risk assessment. The Company
signed a consent order to perform limited remedial activities. That work was
completed in late 1998. Additional investigative work and remedial action is
expected to occur under separate agreement now under negotiation.
<PAGE>
17
Another property owned by the Company where gas manufacturing took place is
located in Canandaigua, New York. Limited investigative work performed there
during the summer of 1995 has shown evidence of both the former gas
manufacturing operations and leakage from fuel tanks. The NYSDEC was informed;
the fuel tanks removed; and additional investigative work continues. The NYSDEC
is awaiting the Company's proposal for supplemental remedial investigation.
A preliminary phase 1 investigation was completed in 1998 on a 3/4 acre site
located in Brockport, New York. Evidence from residuals from gas manufacturing
operations suggest further investigation is necessary and may ultimately warrant
remedial action. No estimates can be made based on available information at this
time.
Other Sites. On another portion of the Company's property in Rochester, NY
(Brewer Street), the County of Monroe has installed and operates sewer lines.
During sewer installation, the County constructed over Company property certain
retention ponds which reportedly received from the sewer construction area
certain waste materials (the materials) found there. 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 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 $1.3 million,
excluding a 20% share of ongoing long-term operation and maintenance 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.
Monitoring wells installed at another Company facility (Brooks Avenue) in
1989 revealed that an undetermined amount of leaded gasoline had reached the
ground water. The Company has continued to monitor free product levels in the
wells, and has begun a modest free product recovery project. It is estimated
that further investigative work into this problem may cost up to $100,000. While
the cost of corrective actions cannot be determined until investigations are
completed, preliminary estimates are not expected to exceed $500,000.
SUPERFUND AND NON-OWNED OTHER SITES. The Company has been or may be associated
as a potentially responsible party at eight sites not owned by it and has
recorded estimated liabilities of approximately $.8 million in connection with
SIR efforts at these sites. The Company has signed orders on consent for five of
these sites.
In one site, known as the Quanta Resources Site, the Company signed a
consent order with the Environmental Protection Agency (EPA) and paid its
$27,500 share of remedial cost. The Company was again contacted by EPA in late
August, 1996. The EPA informed the Company that it believed certain additional
work was required, including a study to determine the extent to which additional
removal of waste materials was required. The EPA's list of PRPs had grown to
about 80. The Company, along with most of those PRPs, has agreed (through an
Administrative Order on Consent) to conduct the required study. The Company
anticipates its obligation through this phase will be less than $10,000. On May
12, 1997, the Company signed an Administrative Order on Consent with the NYSDEC.
This agreement served to obligate the respective parties to pay NYSDEC's past
costs at the Site, the Company's share of which was determined to be $1,500.
There is as yet, no information on which to determine the cost to design and
conduct at the site any remedial measures which federal or State authorities may
require, but the Company does not expect its additional costs to exceed
$150,000.
On May 21, 1993, the Company was notified by NYSDEC that it was considered
a PRP for the Frontier Chemical Pendleton Superfund Site located in Pendleton,
NY. The Company has signed, along with other participating parties, an
Administrative Order on Consent with NYSDEC. The Order on Consent obligates the
parties to implement a work plan and remediate the site. The PRPs have
negotiated a work plan for site remediation and have retained a consulting firm
to implement the work plan. Preliminary estimates indicate the Company's share
of additional site remediation costs are not expected to exceed $500,000. The
Company is participating with the group to allocate costs among the PRPs.
Subsequent work has indicated that the final cost is likely to be lower.
<PAGE>
18
The Company is involved in the investigation and cleanup of the Maxey Flats
Nuclear Disposal Site in Morehead, Kentucky and has signed various consent
orders to that effect. The Company has contributed to a study of the site and
estimates that its share of the additional costs of investigation and
remediation is not expected to exceed $232,000.
The Company has been named as a PRP at three other sites and has been
associated with two other sites for which the Company's share of total
additional projected costs is not expected to exceed $30,000. Actual Company
expenditures for these sites are dependent upon the total cost of investigation
and remediation and the ultimate determination of the Company's share of
responsibility for such costs as well as the financial viability of other
identified responsible parties.
The Company has begun negotiations with its past insurance carriers seeking
to obtain coverage for environmental remediation costs at some Company
locations.
GRIFFITH OWNED SITES. In connection with its Big Flats, New York terminal,
Griffith has been complying with the Unilateral Administrative Order issued by
the EPA. Pursuant to a cost sharing agreement with Sun Pipe Line Company,
Griffith continues to undertake one-half of the costs necessary to comply with
the order. To date Griffith has spent $1.6 million on this compliance. Griffith
continues to disclaim that it is either the owner or operator of a failed spur
where petroleum was discharged, and compliance is proceeding on this basis
accordingly.
Since February 1996, Griffith has been involved in a legal proceeding in
New York State Supreme Court for Steuben County, related to the environmental
matter in the above paragraph. In Steuben Contracting v. Sun Pipe Line Company,
Griffith Oil Co., Inc. and Chevron, USA, the plaintiff is seeking compensation
for property damage associated with petroleum discharge at Big Flats. The
parties have engaged in depositions and disclosure activities. Such disclosure
has not revealed any facts that have altered Griffith's position that the other
parties reimburse Griffith for costs, expenses and damages associated with site
remediation at Big Flats.
In May 1998, the State of New York (State of New York v. Griffith Oil Co.,
Inc.) commenced an action against Griffith in New York State Supreme Court for
Albany County, for statutory penalties in connection with the discharge of
petroleum at Big Flats, New York. The complaint alleges Griffith failed to
report the discharge within two hours of discovery, and further alleges a
violation of Griffith's Major Oil Storage Facility License for failure to report
such discharge. Griffith has answered the complaint and denied the allegations.
Griffith's position is that it complied with practice established with DEC, and
promptly reported the discharge upon confirmation of the presence of subsurface
petroleum. Griffith has offered to settle this matter for $15,000 subject to a
mutually acceptable agreement of settlement. Griffith continues to deny
responsibility for this matter and unless otherwise settled will defend this
matter in the usual course.
In April 1998, the State of New York commenced an action against Griffith
and other parties (State of New York v. Griffith Oil Co., Inc., Sugar Creek
Stores, Inc. and Mahl Bros. Oil Co., Inc. [Springville Bulk Plant]) in New York
State Supreme Court for Erie County, for reimbursement of the sum of $180,962.43
to the New York Environmental Protection and Spill Compensation Fund in
connection with subsurface petroleum contamination in the vicinity of
Springville, New York. Until December 1997, Griffith leased a petroleum bulk
storage facility at the location. Cross-claims also exist among the defendants
related to causes of action associated with the contamination and lease of the
property. While the presence of subsurface contamination is evident, an analysis
of the contamination is substantially associated with a parent product produced
no later than 1985. This date precedes the interest of Griffith. Griffith will
continue to vigorously defend this matter.
In connection with the acquisition of Griffith by Energetix, a stock
purchase agreement obligates the Seller to pay for environmental claims or
remedial action on Griffith property once the amount of environmental losses
incurred by Energetix exceeds
<PAGE>
19
$3.5 million less any reserve reflected on the balance sheet at the time of
acquisition. The amount of that reserve at the time of acquisition was $1.9
million.
See Item 8, Note 10 - Commitments and Other Matters.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
Item 4-A. EXECUTIVE OFFICERS OF THE REGISTRANT
Age Positions, Offices and Business Experience
Name 1/1/99 1994 to date
- ---- ------- ------------------------------------------
Thomas S. Richards 55 Chairman of the Board, President and Chief
Executive Officer - January 1998 to date.
President and Chief Operating Officer
March 1996 to December 1997.
Senior Vice President, Energy Services -
August 1995 to March 1996.
Senior Vice President, Corporate Services and
General Counsel - August, 1994 to August 1995.
Senior Vice President, Finance and General Counsel
- 1994 to August, 1994.
Michael J. Bovalino 43 President and Chief Executive Officer, Energetix,
Inc (a wholly owned subsidiary of the Company)
January 1998 to date.
Senior Vice President, Energy Services
January 1997 to December 1997.
Vice President, Retail Services for Plum Street
Enterprises (a wholly owned subsidiary of Niagara
Mohawk Power Corporation, 300 Erie Boulevard West,
Syracuse, NY 13202) prior to joining the Company.
J. Burt Stokes 55 Senior Vice President, Corporate Services and
Chief Financial Officer - January 1, 1996 to date.
Chief Financial Officer and acting Chief Executive
Officer for General Railway Signal Corporation,
150 Sawgrass Dr., Rochester, NY 14692 prior to
joining the Company.
<PAGE>
20
Age at Positions, Offices and Business Experience
Name 1/1/99 1994 to date
- ---- ------ ------------------------------------------
Michael T. Tomaino 61 Senior Vice President and General Counsel -
October 1997 to Date.
Vice President, General Counsel and
Secretary for Goulds Pumps, Inc.,
300 Willowbrook Office Park, Fairport, NY
14450 prior to joining the Company.
Paul C. Wilkens 51 Senior Vice President, Generation - March 1998 to
Date.
Director, Gas Services - January 1996 -
March 1998.
Principal Consultant - May 1995 - January 1996.
Department Manager - Nuclear Engineering
Services - 1994 - May 1995.
William J. Reddy 51 Controller - April 1997 to Date.
Group Manager, Public Affairs Services -
January 1995 to April 1997.
Division Manager, Public Affairs Services
October 1994 to January 1995.
Department Manager, Forecasts and Budgets
1994 to September 1994.
The term of office of each officer extends to the meeting of the Board of
Directors following the next annual meeting of shareholders and until his or her
successor is elected and qualifies.
<PAGE>
21
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMMON STOCK AND DIVIDENDS
<TABLE>
<CAPTION>
Earnings/Dividends 1998 1997 1996 Shares/Shareholders 1998 1997 1996
- -------------------------- ------ ------ ------- ----------------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings per share Number of shares (000's)
- basic $2.32 $2.30 $2.32 Weighted average - basic 38,462 38,853 38,762
- diluted $2.31 $2.30 $2.32 - diluted 38,600 38,909 38,762
Dividends paid Actual number at
per share $1.80 $1.80 $1.80 December 31 37,379 38,862 38,851
Number of shareholders
at December 31 28,995 31,337 33,675
</TABLE>
TAX STATUS OF CASH DIVIDENDS
Cash dividends paid in 1998, 1997 and 1996 were 100 percent taxable for
federal income tax purposes.
DIVIDEND POLICY
The Company has paid cash dividends quarterly on its Common Stock without
interruption since it became publicly held in 1949. The level of future cash
dividend payments 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.
Quarterly dividends on Common Stock are generally paid on the twenty-fifth
day of January, April, July and October. In January 1999, the Company paid a
cash dividend of $.45 per share on its Common Stock. The January 1999 dividend
payment is equivalent to $1.80 on an annual basis.
COMMON STOCK TRADING
Shares of the Company's Common Stock are traded on the New York Stock
Exchange under the symbol "RGS".
<TABLE>
<CAPTION>
Common Stock - Price Range 1998 1997 1996
- ---------------------------- -------- -------- --------
<S> <C> <C> <C>
High
1st quarter 33 1/4 20 3/8 23 3/4
2nd quarter 32 3/4 21 7/16 21 7/8
3rd quarter 32 7/16 24 15/16 21 3/8
4th quarter 33 1/4 34 1/2 19 5/8
Low
1st quarter 29 1/2 18 7/8 21 1/4
2nd quarter 29 5/16 18 19 7/8
3rd quarter 28 3/8 20 5/8 18
4th quarter 28 9/16 23 3/4 17 7/8
At December 31 31 1/4 34 19 1/8
</TABLE>
<PAGE>
22
ITEM 6 - SELECTED FINANCIAL DATA
CONSOLIDATED SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
(Thousands of Dollars) Year Ended December 31 1998 1997* 1996* 1995* 1994* 1993*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Electric $687,970 $700,329 $707,768 $722,465 $674,753 $655,316
Gas 275,177 336,309 346,279 293,863 326,061 293,708
Other 71,215 - - - - -
--------- -------- -------- --------- -------- --------
Total Operating Revenues 1,034,362 1,036,638 1,054,047 1,016,328 1,000,814 949,024
Operating Expenses
Fuel Expenses
Fuel for electric generation 53,954 47,665 40,938 44,190 44,961 45,871
Purchased electricity 27,024 28,347 46,484 54,167 37,002 31,563
Gas purchased for resale 155,497 196,579 202,297 167,762 194,390 166,884
Unregulated fuel expenses 60,001 - - - - -
--------- -------- -------- --------- -------- --------
Total Fuel Expenses 296,476 272,591 289,719 266,119 276,353 244,318
--------- -------- -------- --------- -------- --------
Operating Revenues Less Fuel Expenses 737,886 764,047 764,328 750,209 724,461 704,706
Other Operating Expenses
Operations and maintenance excluding fuel expenses 301,625 315,109 313,157 308,433 296,741 302,035
Unregulated operating and maintenance expenses
excluding fuel 13,257 - - - - -
Depreciation and amortization 116,122 116,522 105,614 91,593 87,461 84,177
Taxes - local, state and other 118,337 121,796 126,868 133,895 129,778 126,892
Federal income tax - current 70,541 69,812 65,757 65,368 35,658 33,453
- deferred (9,156) (4,533) 3,744 847 25,587 15,877
--------- -------- -------- --------- -------- --------
Total Other Operating Expenses 610,726 618,706 615,140 600,136 575,225 562,434
--------- -------- -------- --------- -------- --------
Operating Income 127,160 145,341 149,188 150,073 149,236 142,272
Other (Income) and Deductions
Allowance for other funds used during
construction (408) (351) (684) (585) (396) (153)
Federal income tax 516 (3,704) (3,450) (16,948) (16,259) (9,827)
Regulatory disallowances - - - 26,866 600 1,953
Pension Plan Curtailment - - - - 33,679 8,179
Other, net (13,181) 3,308 (712) 9,631 (923) 2,113
--------- -------- -------- --------- -------- --------
Total Other (Income) and Deductions (13,073) (747) (4,846) 18,964 16,701 2,265
Interest Charges
Long term debt 42,590 44,615 48,618 53,026 53,606 56,451
Short term debt 431 47 21 398 1,808 1,487
Other, net 3,727 6,629 9,307 8,658 4,758 5,220
Allowance for borrowed funds used during
construction (653) (563) (1,423) (2,901) (2,012) (1,714)
--------- -------- -------- --------- -------- --------
Total Interest Charges 46,095 50,728 56,523 59,181 58,160 61,444
Net Income 94,138 95,360 97,511 71,928 74,375 78,563
Dividends on Preferred Stock
at required rates 4,842 5,805 7,465 7,465 7,369 7,300
--------- -------- -------- --------- -------- --------
Earnings Applicable to Common Stock $89,296 $89,555 $90,046 $64,463 $67,006 $71,263
========== ========= ========= ========== ========= =========
Earnings per Common Share - Basic $2.32 $2.30 $2.32 $1.69 $1.79 $2.00
Earnings per Common Share - Diluted $2.31 $2.30 $2.32 $1.69 $1.79 $2.00
Cash Dividends Declared per Common Share $1.80 $1.80 $1.80 $1.80 $1.77 $1.73
</TABLE>
* Reclassified for comparative purposes.
<PAGE>
23
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Thousands of Dollars) At December 31 1998 1997* 1996* 1995* 1994* 1993*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Utility Plant $3,326,995 $3,234,077 $3,159,759 $3,068,103 $2,981,151 $2,890,799
Less: Accumulated depreciation and
amortization 1,863,475 1,714,368 1,569,078 1,518,878 1,423,098 1,335,083
------------ ------------ ------------ ------------ ------------ ------------
1,463,520 1,519,709 1,590,681 1,549,225 1,558,053 1,555,716
Construction work in progress 98,554 74,018 69,711 121,725 128,860 112,750
------------ ------------ ------------ ------------ ------------ ------------
Net utility plant 1,562,074 1,593,727 1,660,392 1,670,950 1,686,913 1,668,466
Current Assets 202,963 242,371 250,461 292,596 236,519 248,589
Investment in Empire - - - 38,879 38,560 38,560
Intangible Assets 21,062 - - - - -
Deferred Debits and Other Assets 666,836 432,191 450,623 453,726 484,962 488,527
------------ ------------ ------------ ------------ ------------ ------------
Total Assets $2,452,935 $2,268,289 $2,361,476 $2,456,151 $2,446,954 $2,444,142
------------ ------------ ------------ ------------ ------------ ------------
CAPITALIZATION AND LIABILITIES
Capitalization
Long term debt $758,226 $587,334 $646,954 $716,232 $735,178 $747,631
Preferred stock redeemable at option
of Company 47,000 47,000 67,000 67,000 67,000 67,000
Preferred stock subject to mandatory
redemption 25,000 35,000 45,000 55,000 55,000 42,000
Common shareholders' equity:
Common stock 699,730 699,031 696,019 687,518 670,569 652,172
Retained earnings 129,484 109,313 90,540 70,330 74,566 75,126
Less: Treasury stock at cost (1,507,000 shares) 46,433 - - - - -
------------ ------------ ------------ ------------ ------------ ------------
Total common shareholders' equity 782,781 808,344 786,559 757,848 745,135 727,298
------------ ------------ ------------ ------------ ------------ ------------
Total Capitalization 1,613,007 1,477,678 1,545,513 1,596,080 1,602,313 1,583,929
------------ ------------ ------------ ------------ ------------ ------------
Long Term Liabilities (Department
of Energy and Site Remediation) 123,920 110,352 106,578 101,561 88,500 89,804
Current Liabilities 183,369 175,691 145,391 171,664 180,653 234,530
Deferred Credits and Other Liabilities 532,639 504,568 563,994 586,846 575,488 535,879
------------ ------------ ------------ ------------ ------------ ------------
Total Capitalization and Liabilities $2,452,935 $2,268,289 $2,361,476 $2,456,151 $2,446,954 $2,444,142
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
* Reclassified for comparative purposes.
<PAGE>
24
Financial Data
<TABLE>
<CAPTION>
At December 31 1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Capitalization Ratios (a) (percent)
Long-term debt 49.8 43.0 44.7 47.4 48.2 49.4
Preferred Stock 4.2 5.2 6.9 7.3 7.3 6.6
Common shareholders' equity 46.0 51.8 48.4 45.3 44.5 44.0
------ ------ ------ ------ ------ ------
Total 100.0 100.0 100.0 100.0 100.0 100.0
Book Value per Common Share - Year End $20.94 $20.80 $20.24 $19.71 $19.78 $19.70
Rate of Return on Average Common Equity (b)
(percent) 11.22 11.00 11.41 8.37 8.92 10.25
Embedded Cost of Senior Capital (percent)
Long-term debt 7.20 7.32 7.33 7.38 7.40 7.36
Preferred stock 5.56 5.80 6.26 6.26 6.26 6.69
Effective Federal Income Tax Rate (percent) 39.7 39.2 40.4 40.7 37.7 33.5
Depreciation Rate (percent) - Electric 3.09 3.12 2.99 2.76 2.69 2.62
- Gas 2.64 2.60 2.60 2.59 2.62 2.60
Interest Coverages
Before federal income taxes (incld. AFUDC) 4.41 4.06 3.82 2.95 2.98 2.87
(excld. AFUDC) 4.38 4.04 3.79 2.90 2.94 2.84
After federal income taxes (incld. AFUDC) 3.06 2.86 2.68 2.16 2.24 2.24
(excld. AFUDC) 3.03 2.84 2.65 2.10 2.20 2.21
Interest Coverages Excluding Non-Recurring
Items (c)
Before federal income taxes (incld. AFUDC) 4.41 4.06 3.82 3.66 3.55 3.03
(excld. AFUDC) 4.38 4.04 3.79 3.61 3.51 3.00
After federal income taxes (incld. AFUDC) 3.06 2.86 2.68 2.62 2.61 2.35
(excld. AFUDC) 3.03 2.84 2.65 2.57 2.57 2.32
</TABLE>
(a) Includes Company's long-term liability to the Department of Energy (DOE)
for nuclear waste disposal. Excludes DOE long-term liability for uranium
enrichment decommissioning and amounts due or redeemable within one year.
(b) The return on average common equity for 1995 excluding effects of the 1995
Gas Settlement is 12.10%. The rate of return on average common equity
excluding effects of retirement enhancement programs recognized by the
Company in 1994 and 1993 is 11.90% and 11.20%, respectively.
(c) Coverages for 1994 and 1993 exclude the effects of retirement enhancement
programs recognized by the Company during each year and certain gas
purchase undercharges written off in 1994 and 1993. Coverages in 1995
exclude the economic effect of the 1995 Gas Settlement ($44.2 million,
pretax).
<PAGE>
25
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following is Management's assessment of certain significant factors
affecting the financial condition and operating results of Rochester Gas and
Electric Corporation ("RG&E") and its subsidiaries (RG&E, together with its
subsidiaries, is referred to as "the Company") over the past three years. The
Consolidated Financial Statements and the Notes thereto contain additional data.
For the twelve months ended December 31, 1998, 66 percent of the Company's
operating revenues were derived from electric service, 27 percent from natural
gas service, and 7 percent from unregulated businesses.
The discussion presented below contains statements which are not historic
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," "will," "expects," "projects," "estimates" and
"anticipates". They can also be identified by the use of words which relate to
future goals or strategies. In addition to the assumptions and other factors
referred to specifically in connection with the forward looking statements, some
of the factors that could have a significant difference in whether the forward
looking statements ultimately prove to be accurate include:
(1) any state or federal legislative or regulatory initiatives that affect the
cost or recovery of investments necessary to provide utility service in the
electric and natural gas industries. Such initiatives could include, for
example, changes in the regulation of rate structures or changes in the speed or
degree to which competition occurs in the electric and natural gas industries;
(2) any changes in the ability of the Company to recover environmental
compliance costs through increased rates;
(3) any changes in the regulatory status of nuclear generating facilities and
their related costs, including recovery of costs related to spent fuel and
decommissioning;
(4) any changes in the rate of industrial, commercial and residential growth in
the Company's service territories;
(5) the development of any new technologies which allow customers to
generate their own energy or produce lower cost energy;
(6) any unusual or extreme weather or other natural phenomena;
(7) the ability of the Company to manage profitably new unregulated operations;
(8) certain unknowable risks involved in operating unregulated businesses in new
territories and new industries;
(9) the timing and extent of changes in commodity prices and interest rates;
(10) any unanticipated developments associated with identifying, assessing,
fixing and testing the modifications necessary to mitigate Year 2000 compliance
problems, including the possible indirect impact of customers, suppliers and
other business partners who do not sufficiently mitigate their Year 2000
compliance problems; and
(11) any other considerations that may be disclosed from time to time in the
Company's publicly disseminated documents and filings.
<PAGE>
26
Shown below is a listing of the principal items discussed.
Earnings Summary Page 26
Competition Page 27
PSC Competitive Opportunities Case Settlement
Business and Financial Strategy
PSC Proceeding on Nuclear Generation
FERC Open Access Transmission Orders and
Company Filings
PSC Gas Restructuring Policy Statement
Prospective Financial Position
Rates and Regulatory Matters Page 33
Gas Proposal and Interim Settlement
Flexible Pricing Tariff
Liquidity and Capital Resources Page 34
Capital and Other Requirements
Environmental Issues
Redemption of Securities
Financing
Results of Operations Page 38
Operating Revenues and Sales
Fossil Unit Status
Operating Expenses
Dividend Policy Page 43
EARNINGS SUMMARY
Operating performance of the Company's generating plants, expense control,
the sale of electric energy to wholesale customers, and the recognition of $17.4
million of non-recurring income during the year (see Other Statement of Income
Items) allowed the Company to keep 1998 earnings applicable to Common Stock at
about the same level as 1997, despite rate decreases and warmer temperatures
during the 1998 heating seasons.
Basic earnings per share were $2.32 in 1998, compared with $2.30 in 1997,
and $2.32 a year earlier. Earnings per Common Share - Diluted were $2.31 in
1998, $2.30 in 1997, and $2.32 in 1996. Earnings per share in 1998 were
improved by approximately $.02 per share resulting from the buyback of Common
Stock under the Company's Stock Repurchase Program.
For the twelve month period ending December 31, 1998, the Company's
unregulated subsidiary, Energetix, Inc., had a pretax operating loss of $4.1
million, which reduced consolidated earnings by approximately $0.06 per basic
share. This loss is primarily due to initial start-up and marketing costs.
Moreover, while Energetix was formed January 1, 1998, the first revenues were
not received until April of 1998. In addition, revenues from Griffith Oil Co.,
Inc., a company acquired by Energetix, only reflect sales since acquisition in
August 1998. Energetix revenues for 1999 from electric and gas operations are
expected to increase over 1998 levels as Energetix expands its customer base,
although no assurance may be given that Energetix will achieve a net operating
gain in 1999 or that new business opportunities will not impact its operating
results.
<PAGE>
27
The impact of developing competition in the energy marketplace may affect
future earnings. The Competitive Opportunities Case Settlement (the
"Settlement", see description below) 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 business of 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.
Although under the current regulatory environment the Company does not earn
a return on the gas commodity it acquires for distribution, future earnings may
also be affected, in part, by the ultimate outcome of a November 1998 New York
State Public Service Commission ("PSC") gas restructuring policy statement. That
policy statement concludes that the most effective way to establish a robust
competitive market for gas supply in New York State is for local distribution
businesses, such as the Company, to exit the merchant function of acquiring gas
for distribution. In addition, local distribution companies must cease
assigning capacity to customers migrating from sales to transportation service
no later than April 1, 1999. The nature and magnitude of the potential impact
of these policies will depend on individual negotiations the Company will
undertake with PSC Staff and other interested parties on RG&E-specific
restructuring, as well as a number of Statewide collaborative efforts that will
deal with such issues as provider of last resort, reliability, recovery of
stranded costs, and market power as the transition is made to a more competitive
gas business.
COMPETITION
PSC COMPETITIVE OPPORTUNITIES CASE SETTLEMENT. During 1996 and 1997, RG&E,
the staff of the PSC and several other parties negotiated an agreement which was
approved by the PSC in November 1997 (the "Settlement"). The Settlement sets
the framework for the introduction and development of open competition in the
electric energy marketplace and lasts through June 30, 2002. Over this time,
the way electricity is provided to customers will fundamentally change. In
phases, RG&E will allow customers to purchase electricity, and later capacity
commitments, from sources other than RG&E through its retail access program,
Energy Choice. These energy service companies will compete to package and sell
energy and related services to customers. The competing energy service companies
will purchase distribution services from RG&E who will remain the sole provider
of distribution services, and will be responsible for maintaining the
distribution system and for responding to emergencies.
The Settlement sets RG&E's electric rates for each year during its five-
year term. Over the five-year term of the Settlement, the cumulative rate
reductions for the bundled service will be as follows: Rate Year 1 (July 1, 1997
to June 30, 1998) $3.5 million; Rate Year 2 $12.8 million; Rate Year 3 $27.6
million; Rate Year 4 $39.5 million; and Rate Year 5 $64.6 million.
The Settlement permits RG&E to fund its unregulated operations with up to
$100 million.
In the event that RG&E earns a return on common equity in excess of an
effective rate of 11.50 percent over the entire five-year term of the
Settlement, 50 percent of such excess will be used to write down deferred costs
accumulated during the term. The other 50 percent of the excess will be used to
write down accumulated deferrals or investment in electric plant or Regulatory
Assets (which are deferred costs whose classification as an asset on the balance
sheet is
<PAGE>
28
permitted by SFAS-71, Accounting for the Effects of Certain Types of
Regulation). If certain extraordinary events occur, including a rate of return
on common equity below 8.5 percent or above 14.5 percent, or a pretax interest
coverage below 2.5 times, then either the Company or any other party to the
Settlement would have the right to petition the PSC for review of the Settlement
and appropriate remedial action.
The Settlement requires RG&E to functionally separate its three regulated
operations: distribution, generation and retailing. Additionally, unregulated
energy retailing operations must be structurally separate from the regulated
utility functions. Although the Settlement provides incentives for the sale of
generating assets, it does not require RG&E to divest generating or other assets
or write-off stranded costs. Additionally, RG&E will be given a reasonable
opportunity to recover substantially all of its prudently incurred costs,
including those pertaining to generation and purchased power.
RG&E believes that the Settlement will not adversely affect its eligibility
to continue to apply certain accounting rules applicable to regulated
industries. In particular, RG&E believes it will continue to be eligible for the
treatment provided by SFAS-71 which allows RG&E to include assets on its balance
sheet based on its regulated ability to recoup the cost of those assets.
However, this may not be the case with respect to certain operational costs
associated with non-nuclear generation (see Note 10 of the Notes to Financial
Statements under the heading Other Matters, EITF Issue 97-4, Deregulation of the
Pricing of Electricity).
The Company's retail access program, Energy Choice, was approved by the PSC
as part of the Settlement and went into effect on July 1, 1998. Details of the
Energy Choice Program are discussed below.
One party to the Settlement negotiations has commenced an action for
declaratory and injunctive relief as to certain provisions of the Settlement and
the PSC's approval of it. The Company is unable, at this time, to predict the
outcome of this action.
BUSINESS AND FINANCIAL STRATEGY. Under the terms of the Settlement, the
Company has functionally separated its generation, distribution, and regulated
energy services businesses. Consistent with the Settlement, the Company has
begun to implement a business and financial strategy which consists of the
following: (1) the reorganization of its corporate structure into a holding
company in order to more fully implement the separation of its regulated and
unregulated businesses, (2) the establishment of a separate unregulated
subsidiary, Energetix, Inc. ("Energetix"), which will be able to compete for
energy, energy services and products both in and outside the Company's existing
franchise service territory, and (3) the development of an integrated financial
strategy that includes new business initiatives and a Common Stock share
repurchase program of $145 million.
ENERGY CHOICE. On July 1, 1998, the Company launched its full-scale retail
Energy Choice Program. There are three basic components of the sale of energy:
the sale of electricity which is the amount of energy actually used by the
consumer, the sale of capacity which is the ability through generating
facilities or otherwise, to provide electricity when it is needed, and the sale
of distribution, which is the physical delivery of electricity to the consumer.
Historically, the Company has sold all three components bundled together for a
fixed rate approved by the PSC. Up to ten percent of RG&E's retail electric
customers can now seek out or be approached by alternative energy service
companies for electricity to be delivered over RG&E's distribution system.
Participation in Energy Choice is limited to no more than 10 percent of RG&E's
total annual retail electric kilowatt-hour sales during the first year of the
program. This limit increases to 20 percent the second year and 30 percent
<PAGE>
29
in the third year. In July, 2001, all retail customers will be eligible to
purchase energy from alternative energy service companies.
The phase-in of the Energy Choice Program over the next few years
eventually will give retail electric customers the opportunity to purchase
energy, capacity and retailing services from competitive energy service
companies. They may also continue to purchase fully bundled electric service
from RG&E under existing retail tariffs.
Energy Choice adopts the single-retailer model for the relationship between
the Company as the distribution provider, qualified energy service companies,
and retail (end-use) customers. In this model, retail customers have the
opportunity for choice in their energy service company and receive only one
electric bill from the company that serves them. With the exception of
emergency services, which remain the Company's responsibility, the retail
customers' primary point of contact is with their chosen energy service company.
Under the single-retailer 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 RG&E's
distribution system).
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 energy service company, 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), energy service companies
will be able to choose their own sources of energy supply, while RG&E will
continue to provide to them, through its bundled distribution rates, the
generating capacity (installed reserve) needed to serve their retail customers
reliably.
During the "Energy Only" stage, energy service companies have the option of
purchasing "full-requirements" (i.e., delivery services and energy) from RG&E.
During the "Energy and Capacity" stage, scheduled to commence July 1, 1999,
energy service companies will no longer have the option of purchasing "full-
requirements" from RG&E and will be responsible for procuring generating
capacity, as well as energy, to serve the loads of their retail customers.
Distribution charges will be accordingly reduced as described below.
According to the terms of the Settlement, if a Statewide energy and
capacity market is not implemented by July 1, 1999, RG&E may petition the PSC
for a delay in the implementation of the "Energy and Capacity" stage of RG&E's
retail access program. At this time, a functioning Statewide energy and
capacity market does not exist (see discussion under FERC Open Access
Transmission Orders and Company Filings). If a functioning Statewide energy and
capacity market is not functioning in the near future, the Company will need to
seek a delay of the scheduled commencement of the "Energy and Capacity" stage.
During the initial "Energy Only" stage of the Retail Access Program, RG&E's
distribution rate will be set by deducting 2.3 cents per kilowatt-hour from its
full service ("bundled") rates. The 2.3 cents per kilowatt-hour is comprised of
1.9 cents per kilowatt-hour (an estimate of the wholesale market price of
<PAGE>
30
electricity) plus 0.4 cents per kilowatt-hour for its avoided cost of retailing
services. During the "Energy and Capacity" stage, RG&E's distribution rates
will equal the bundled rate less RG&E's cost of the electric commodity and
RG&E's non-nuclear generating capacity. During this stage of the program,
RG&E's distribution rates will be set by deducting 3.2 cents per kilowatt-hour,
inclusive of applicable gross receipts taxes, from its full service ("bundled")
rates. The 3.2 cents per kilowatt-hour is comprised of 2.8 cents per kilowatt-
hour (an estimate of the wholesale market price of electric energy and capacity,
inclusive of gross receipts taxes) plus 0.4 cents per kilowatt-hour for its
avoided cost of retailing services.
Through January 31, 1999, eight energy service companies, including
Energetix, the Company's unregulated subsidiary, have been qualified by RG&E to
serve retail customers under the Energy Choice Program. In addition to
Energetix, these companies are Columbia Energy Power Marketing Corporation,
Enserch Energy Services (New York), Inc., Florida Power & Light (FPL Energy
Services), Inc., NEV East, L.L.C.(New Energy Ventures), Northeast Energy
Services, Inc.(NORESCO), North American Energy, and Select Energy Inc.
(Northeast Utilities Wholesale Power). As of January 31, 1999, all energy
service companies have opted to purchase "full-requirements" from RG&E to serve
their retail customers. As "full-requirements" customers, energy service
companies are able to purchase electricity from RG&E at 1.9 cents per kilowatt-
hour. RG&E has distributed approximately 670,000 (annualized) megawatt-hours to
retail customers of energy service companies, thereby reaching 100 percent of
the first-year cap of 10% for the full-scale program. This impact was not
significant because the loss of RG&E retail sales is roughly offset by the sale
of distribution service and electricity to energy service companies. Although
it is too early to quantify at this time, a substantial part of this revenue
loss is expected to be offset by cost reductions resulting from the shift in
retailing responsibilities from RG&E to energy service companies.
Looking ahead to the latter part of 1999, up to 20% of the total annual
electric sales will be eligible for retail access. With implementation of the
Energy and Capacity phase of the full-scale program, the Company will also be
shifting the responsibility for purchasing not only electricity, but also
capacity to these energy service companies. Similarly, there will be a slight
revenue loss as a result of the increased back-out rate. However, the Company
expects to manage this revenue impact with offsetting savings in costs no longer
incurred for the acquisition and maintenance of capacity and increasing
wholesale revenues through the sale of available capacity.
The PSC initiated a Statewide proceeding to recommend "uniform business
rules" dealing with electric retail access programs for each of the utilities it
regulates. In addition to this proceeding, there are three other proceedings
underway: Electronic Data Interchange, Competitive Metering, and the Single
Billing Option. These proceedings are intended to bring more consistency among
New York State utilities and potentially offer additional services for energy
service companies to provide. The outcome of these proceedings may ultimately
result in changes to the Company's business, but at this time the Company cannot
predict the scope of such changes.
HOLDING COMPANY. During the second half of 1998, the Company filed
applications with various regulatory agencies, including the PSC, Securities and
Exchange Commission ("SEC"), Federal Energy Regulatory Commission ("FERC"), and
the Nuclear Regulatory Commission ("NRC"), requesting approval of a corporate
restructuring including the creation of a holding company. RGS Energy Group,
Inc. ("RGS Energy"), 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. FERC approved the Company's
<PAGE>
31
application in late November 1998 and the NRC gave approval in December 1998.
The remaining regulatory approvals are expected to be received before mid-1999.
At the Company's 1999 Annual Meeting of Shareholders, shareholders will
vote on a Plan of Exchange which provides that all of the outstanding shares of
RG&E common stock will be exchanged on a share-for-share basis for RGS Energy
common stock. Upon consummation of the exchange, RGS Energy will become the
parent company of RG&E. Moreover, RG&E intends to transfer its unregulated
subsidiaries, Energetix and RGS Development Corporation, to RGS Energy
immediately prior to the exchange so that RGS Energy will become the parent
company of RG&E and such subsidiaries.
The holding company structure is consistent with provisions of the
Competitive Opportunities Settlement.
Unregulated Subsidiaries. It is part of RG&E's financial strategy to seek
growth by entering into unregulated businesses. The Settlement allows RG&E to
invest 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 that brings energy products and
services to the marketplace both within and outside of RG&E's regulated
franchise territory. Energetix markets electricity, natural gas, oil, gasoline,
and propane fuel energy services in an area extending in approximately a 150-
mile radius around Rochester.
In August 1998, Energetix announced the acquisition of Griffith Oil Co.,
Inc. ("Griffith"), the second largest oil and propane distribution company in
New York State. 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 at December 31, 1998.
Griffith gives Energetix access to 65,000 new customers, 60,000 of which
are outside of RG&E's regulated franchise territory. In addition to its current
products, Griffith sells electricity, natural gas and other services offered by
Energetix to its existing customers. Griffith has approximately 350 employees
and operates 16 customer service centers.
Additional information on Energetix's operations (including Griffith) is
presented under the headings Operating Revenues, Operating Expenses, and is
contained in Note 4 of the Notes to Financial Statements.
During the second quarter of 1998, the Company formed a new unregulated
subsidiary, RGS Development Corporation ("RGS Development"). RGS Development
was formed to pursue unregulated business opportunities in the energy
marketplace. Through December 31, 1998, RGS Development operations have not
been material to the Company's results of operations or its financial condition.
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 not to exceed $145 million. The Company began the
repurchase program in May 1998 and has repurchased 1,507,000 shares of Common
Stock for approximately $46.4 million through December 31, 1998. The Company
expects to repurchase up to an additional three million shares over the next two
years.
PSC PROCEEDING ON NUCLEAR GENERATION. On March 20, 1998, the PSC initiated
a proceeding to examine a number of issues raised by a Staff position paper on
nuclear generation and the comments received in response to it. In reviewing
the Staff paper and parties' comments, the PSC:
<PAGE>
32
(1) 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;
(2) 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;
(3) questioned Staff's position that would leave funding and other
decommissioning responsibilities with the sellers of nuclear power
interests and;
(4) indicated interest in the potential for a New York Nuclear Operating
Company (NYNOC) proposal 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 potentially strandable assets in nuclear plant could be
impacted by the outcome of this proceeding. The initial collaborative
conference for this proceeding was held on January 20, 1999. This proceeding is
intended to be completed in the fourth quarter of 1999.
FERC OPEN ACCESS 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 Statewide 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 an Order that conditionally authorizes the
establishment of the NYISO by the member systems of the NYPP. The order
addresses areas of governance, standards of conduct and reliability. A NYISO
Board of Directors has been formed. FERC has deferred consideration of the
unexecuted tariff and agreements filed under Section 205 of the Federal Power
Act. FERC noted that these filings 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 member systems of
the NYPP filed a proposed settlement agreement for a comprehensive settlement of
governance issues and an explanatory statement of the settlement agreement. The
explanatory statement represents the settlement agreement to be in compliance
with the Commission's June 30, 1998 Order.
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
a gas restructuring policy statement ("Gas Policy Statement") announcing its
conclusion that, among other things, the most effective way to establish a
competitive gas supply market is for gas distribution utilities to cease selling
gas. The PSC established a transition process in which it plans to address
three groups of issues: (1) individual gas utility plans to implement the PSC's
vision of the market; (2) key generic issues to be dealt with through
collaboration among gas utilities, marketers, pipelines and other stakeholders,
and (3) coordination of issues that are common to both the gas and the electric
<PAGE>
33
industries. The Company is in the process of evaluating this Gas Policy
Statement and will respond to the specific requirements of the Order. The PSC
has encouraged settlement negotiations with each gas utility pertaining to the
transition to a fully competitive gas market.
COMPETITION AND THE COMPANY'S PROSPECTIVE FINANCIAL POSITION. With PSC
approval, the Company has deferred certain costs rather than recognize them on
its books when incurred. Such deferred costs are recognized as expenses when
they are included in rates and recovered from customers. Such deferral
accounting is permitted by SFAS-71. These deferred costs are shown as Regulatory
Assets on the Company's Balance Sheet and a discussion and summarization of such
Regulatory Assets is presented in Note 10 of the Notes to Financial Statements.
In a competitive electric market, strandable assets would arise when
investments made in facilities, or costs incurred to service customers, are not
fully recoverable in market-based rates. Estimates of such strandable assets
are highly sensitive to assumptions of competitive wholesale market prices. In
a competitive natural gas market, strandable assets could arise where customers
migrate away from dependence on the Company for full service, leaving the
Company with surplus pipeline and storage capacity, as well as natural gas
supplies, under contract. A discussion of strandable assets is presented in
Note 10 of the Notes to Financial Statements.
At December 31, 1998, the Company believes that its regulatory assets are
not impaired and are probable of recovery. The Settlement in the Competitive
Opportunities Proceeding does not impair the opportunity of the Company to
recover its investment in these assets. However, the PSC issued an Opinion and
Order Instituting Further Inquiry on March 20, 1998 to address issues
surrounding nuclear generation. The ultimate determination in this proceeding
could have an impact on strandable assets and the recovery of nuclear costs.
The initial meeting in this Inquiry was held in January 1999 and such a
determination is unlikely before year-end.
RATES AND REGULATORY MATTERS
GAS PROPOSAL AND INTERIM SETTLEMENT. In August 1998, prior to issuance of
the PSC's Gas Policy Statement (see PSC Gas Restructuring Policy Statement
above), RG&E had commenced negotiations with the PSC staff and other parties to
develop a comprehensive multi-year settlement of various issues, including rates
and the structure of RG&E's gas business. Because the negotiation of a
comprehensive settlement is not anticipated to conclude until mid-1999, the
parties to the negotiations agreed to an Interim Settlement, effective November
1998 through June 1999, that deals with such issues as rates, transportation and
storage capacity costs, assignment of capacity, and retail access. Under the
Interim Settlement, which was approved by the PSC on November 9, 1998, base
rates for gas service remain frozen at their current levels (which were fixed
pursuant to a 1995 Settlement that expired at the end of October 1998).
Additionally, RG&E must provide a guaranteed level of benefits to customers from
the re-marketing of unneeded transportation and storage capacity, and RG&E must
permit marketers serving up to ten percent of retail and aggregated customer
annual throughput to do so without mandatory assignment of the corresponding
capacity. RG&E is permitted to recover the costs associated with non-assigned
capacity from all customers, with certain exceptions.
An Interim Gas Settlement having been reached and the PSC having issued its
Gas Policy Statement, RG&E and other parties anticipate proceeding with
discussions with PSC Staff based on the Company's August 1998 comprehensive
proposal and the PSC's Gas Policy Statement. RG&E's objective is to have a
<PAGE>
34
comprehensive final settlement in place prior to July 1, 1999, although no
assurance can be given.
Under a March 1996 Order, the PSC permitted RG&E and other gas distribution
companies to assign to marketers the pipeline and storage capacity held by RG&E
to serve their customers. In its Gas Policy Statement issued in November 1998,
the PSC ordered that the mandatory assignment of capacity, permitted by the
March 1996 Order, be terminated effective April 1, 1999. According to the Gas
Policy Statement, however, the utilities are to be afforded a reasonable
opportunity to recover resulting strandable costs, if any.
FLEXIBLE PRICING TARIFF. Under its flexible pricing tariff for major
industrial and commercial electric customers, RG&E may negotiate competitive
electric rates at discount prices to compete with alternative power sources,
such as customer-owned generation facilities. Pursuant to the terms of the
Settlement under the Competitive Opportunities Proceeding, RG&E will absorb, as
it has done since the inception of these rates, the difference between the
discounted rates paid under these individual contracts and the rates that would
otherwise apply. Approximately 29 percent of all electric sales to customers
are made under long-term contracts, primarily to large industrial customers.
These contracts represent approximately 45 percent of RG&E's revenues from its
commercial and industrial customers.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations, external long-term debt financing, and short-
term borrowings provided the funds for construction expenditures, funding of
unregulated operations, the Company's stock repurchase program, debt reductions,
redemption of Preferred Stock and the payment of dividends during 1998. Capital
requirements of the Company during 1999 are anticipated to be satisfied from the
combination of internally generated funds, short-term credit arrangements, and
possibly some external long-term financing.
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, the repayment of existing debt, and the repurchase of
outstanding shares of Common Stock. Construction expenditures in 1998 reflect
primarily expenditures for nuclear fuel and upgrading electric transmission and
distribution facilities and gas mains. The Company has no plans to install
additional baseload generation.
1998 Labor Day Storm. At approximately midnight, Monday morning, September
7, 1998, a severe lightning and windstorm struck the Company's franchise area.
The storm damaged the Company's electrical system at several hundred different
locations. 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. On Saturday afternoon, September 12, the Company announced
that all power had been restored, in all but a few isolated cases.
In 1998, the Company incurred $7.2 million of costs associated with this
storm. Under the Competitive Opportunities Settlement with the PSC, if
incremental costs resulting from a "catastrophic event" exceed $2.5 million,
such costs could be deferred. The Company has submitted a petition to the PSC
for deferral of costs associated with this storm.
<PAGE>
35
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, and on December 1, 1998, the Agreement
became effective. The Global Settlement Agreement is discussed under Note 10 of
the Notes to Financial Statements. Under the terms of the Global Settlement
Agreement the Power Purchase Agreement was terminated in consideration of
payment by the Company of $168 million over the next 16 years, without interest,
with an initial payment of $10 million. Also, under the terms of the Global
Settlement Agreement, the Company paid an additional $15 million for the
purchase of the Kamine generation facility. The plant may be operated if market
conditions warrant and the Company will assess the possible disposition of the
plant. The Company does not expect the terms of the Global Settlement
Agreement to have any material effect on its earnings. Pursuant to a PSC order
approving the terms of the Global Settlement Agreement, regulatory assets have
been established by the Company to account for the initial payment, the facility
purchase, and future payments. The Company has no other long-term obligations to
purchase energy from other cogeneration 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 between $10 to $12 million of
incremental costs through January 1, 2000, associated with making the necessary
modifications identified to date to applications ($11 million) and devices ($1
million). This projection includes contingencies and replacement systems that
may be required and represents 25% of the Corporate Information Technology (IT)
budget. The Company has not deferred any other major IT project due to this
effort. The Company has incurred approximately $5.3 million of its $12 million
total costs through December 31, 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 for the development of a network to verify the risks and costs
nationally, in the Northeast, in New York State, and in the Company.
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 (in the generation plants, delivery substations and
facilities) are identified and criticality to the business is determined.
During the next phase, the assessment phase, the Y2K Readiness of the items is
determined. Year 2000 Readiness is defined as a computer system or application
that has been determined to be suitable for continued use into the Year 2000
even though the computer system or application is not fully Y2K compliant. 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 the inventory phase, which was the
identification of internally developed applications, devices, vendor
applications and critical external parties including customers, suppliers,
business partners,
<PAGE>
36
government agencies, and financial institutions. The Company will prioritize
these critical parties and independently evaluate the most critical of these by
various methods, such as mandatory written verification to the Company of their
status or testing transfer of information.
The Y2K Project, in the assessment phase, has completed assessment of
internally developed applications and critical devices. The Company expects to
complete the assessment of critical external parties and vendor applications by
the end of the first quarter of 1999. Results of these assessments will be
given to the Business Areas for further action.
The fix phase activities of the Y2K project for internally developed
applications is 82% complete and for critical devices is 75% complete. The
phase is expected to be complete by the end of the first half of 1999. As part
of this phase, a recently implemented customer information and billing system is
Y2K ready, and 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. As facility maintenance outages occur this spring, Y2K
critical device replacement/modifications will be performed. Critical devices
are an integral part of the system which controls, monitors, and assists in the
operation of equipment, machinery, or plant.
Testing of internal applications for Y2K readiness has begun and is 28%
complete. Testing of critical applications, devices, and systems will take place
primarily in the first half of 1999 and is currently in the initial stages.
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 Y2K contingency
plans. 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 by the end of the first
quarter of 1999 when it completes the Scenario Risk Analysis phase of
contingency planning. 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.
All activities in support of mission critical systems are expected to be
completed by July 1999, as required by the PSC. Likewise, the Company fully
expects to meet the July 1999 completion criteria set by the NRC for the
Company's Ginna facility.
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, 50% of which relate to devices and
50% to applications. The cost represents approximately 50% of their IT budget,
but no major IT projects have been deferred due to Y2K. 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 third quarter of 1999, at which time a
Scenario Risk Analysis will be completed. Energetix has a Business Recovery
Plan, which will serve as the basis for Y2K contingency planning by the third
quarter of 1999 also. 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. Energetix will prioritize
these critical parties and independently evaluate the most critical of these by
various methods, such as mandatory verification of their status or testing
transfer of information.
<PAGE>
37
ENVIRONMENTAL ISSUES. The production and delivery of energy are
necessarily accompanied by the release of by-products subject to environmental
controls. The Company has taken a variety of measures (e.g., self-auditing,
recycling and waste minimization, training of employees in hazardous waste
management) to reduce the potential for adverse environmental effects from its
energy operations.
The Company has recorded liabilities to reflect specific issues where
remediation activities are currently deemed to be probable and where the cost of
remediation can be estimated. Estimates of the extent of the Company's degree of
responsibility at a particular site and the method and ultimate cost of
remediation require a number of assumptions for which the ultimate outcome may
differ from current estimates. While the Company does not anticipate that any
adjustment would be material to its financial statements, it is reasonably
possible that the result of ongoing and/or future environmental studies or other
factors could alter this expectation and require the recording of additional
liabilities. The extent or amount of such events, if any, cannot be estimated
at this time.
Additional information concerning the Company's environmental matters can
be found in Note 10 of the Notes to Financial Statements.
REDEMPTION OF SECURITIES. In addition to first mortgage bond maturities
and mandatory sinking fund obligations over the past three years, discretionary
redemption of securities totaled $49 million in 1996, $152 million in 1997, and
$25.5 million in 1998. Included in discretionary redemptions for 1997 and 1998
were over $127 million of tax-exempt securities.
CAPITAL REQUIREMENTS - SUMMARY. Excluding the Kamine Global Settlement
obligations discussed above, capital requirements for the Company over the
three-year period 1996 to 1998 and the current estimate of capital requirements
through 2001 are summarized in the Capital Requirements table.
The Company's capital expenditures program is under continuous review and
could be revised for any number of issues. The Company also may consider, as
conditions warrant, the redemption or refinancing of certain outstanding long-
term securities.
Capital Requirements
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Actual Projected
1996 1997 1998 1999 2000 2001
<S> <C> <C> <C> <C> <C> <C>
Type of Facilities (Millions of Dollars)
- -------------------------------------------------------------------------------
Electric Property
Production $ 57 $ 9 $ 16 $ 20 $ 11 $11
Energy Delivery 23 28 41 35 34 19
---- ---- ---- ---- ---- ---
Subtotal 80 37 57 55 45 30
Nuclear Fuel 16 19 14 16 27 9
---- ---- ---- ---- ---- ---
Total Electric 96 56 71 71 72 39
Gas Property 17 22 21 18 21 19
Common Property 6 9 21 24 14 11
---- ---- ---- ---- ---- ---
Total 119 87 113 113 107 69
Carrying Costs
Allowance for Funds Used During
Construction 2 1 1 1 1 1
---- ---- ---- ---- ---- ---
Total Construction Requirements 121 88 114 114 108 70
Securities Redemptions, Maturities
and Sinking Fund Obligations* 67 182 66 10 30 --
---- ---- ---- ---- ---- ---
Total Capital Requirements $188 $270 $180 $124 $138 $70
---- ---- ---- ---- ---- ---
</TABLE>
* Excludes prospective refinancings.
<PAGE>
38
FINANCING. On December 22, 1998 the Company issued $50 million of 5.84%
First Mortgage Bonds, Designated Secured Medium-Term Notes, Series B. The net
proceeds from this financing were used to repay short-term debt.
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. Proceeds were used to redeem $25.5 million
of outstanding tax-exempt First Mortgage 8 3/8% Bonds, Series OO, on December 1,
1998.
Included on the Company's consolidated Balance Sheet as of December 31,
1998 is a $24.6 million Promissory Note issued by Energetix in connection with
the acquisition of Griffith in August 1998, as discussed under Competition -
Unregulated Subsidiaries. This Note is payable in seven annual installments of
principal and interest. Also included at year-end 1998 is a $94.8 million
liability associated with the $168 million Promissory Note issued in connection
with the Kamine Global Settlement Agreement (see Liquidity and Capital Resources
- - Settlement with Co-Generator). This amount represents the present value at
December 31, 1998 of future obligations under the Note assuming a discount rate
of 7.5 percent. This Note is secured by a subordinate mortgage on the Company's
property. Additional information about these Promissory Notes is discussed in
Note 6 of the Notes to Financial Statements.
Under the Company's Performance Stock Option Plan, options for 403,605
shares of Common Stock became exercisable due to Common Stock market price
performance during 1997. During 1998, additional options for 43,141 shares were
granted, none of which became exercisable. Common Stock shares outstanding
increased by 10,883 shares in 1997 and 23,466 shares in 1998 as a result of
those options which were actually exercised. These were the only shares of
Common Stock issued by the Company during 1997 and 1998.
In 1998 the Company began funding a stock repurchase program and
investments in unregulated businesses as discussed under Competition.
Capital requirements during 1999 are anticipated to be satisfied primarily
from the combination of internally generated funds and the use of short-term
credit arrangements with some external long-term financing possible during the
year. The Company may refinance long-term securities obligations during 1999
depending on prevailing financial market conditions.
The Company anticipates utilizing its credit agreements and unsecured lines
of credit to meet any interim external financing needs prior to issuing any
long-term securities. For information with respect to short-term borrowing
arrangements and limitations, see Note 9 of the Notes to Financial Statements.
As financial market conditions warrant, the Company may also, from time to time,
redeem higher-cost senior securities.
RESULTS OF OPERATIONS
The following financial review identifies the causes of significant changes
in the amounts of revenues and expenses, comparing 1998 to 1997 and 1997 to
1996. The Notes to Financial Statements contain additional information.
INCOME STATEMENT CHANGES. Operating revenues have been reclassified into
three components. Two of them, 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
<PAGE>
39
Griffith, as well as other energy products. Unregulated fuel expenses and
unregulated operating and maintenance expenses excluding fuel reflect certain
operating expenses of Energetix.
OPERATING REVENUES AND SALES - SUMMARY. Total Company operating revenues in
1998 were $1,034 million, or 0.2% below 1997. Revenues in 1998 reflect
unregulated operations as discussed below. For 1998, a decrease in electric base
rates and lower therm sales of gas due to milder weather during the heating
season were partially offset by higher wholesale electric sales. In 1997,
operating revenues were lower than 1996 with the effect of RG&E's electric base
rate decreases in July 1996 and 1997 and lower therm sales of gas due to milder
weather partially offset by higher electric kilowatt-hour sales.
Unregulated Operating Revenues and Sales. Included in total operating
revenues for 1998 are $10.6 million of electric and gas operating revenues
received by Energetix and $71.2 million of Griffith operating revenues.
During 1998, Energetix derived 99% of its revenues (excluding Griffith
revenues) from electric and gas sales. The balance of revenues was derived from
ServiceCare, the appliance warranty service. Electric sales do not reflect
significant seasonal variances. Gas revenues, however, are subject to seasonal
fluctuations due to the dependence on spaceheating sales during the heating
season. While Energetix was formed January 1, 1998, its first revenues were not
received until April of 1998. As a result, 1998 gas revenues reflect only a
small amount of spaceheating sales.
During 1998 and since its acquisition by Energetix in August, Griffith
derived 97% of its total revenues from distillates (heating oil, kerosene, and
diesel), and gasoline sales. The balance of revenues was mainly derived from
propane, servicing and motor lubricant sales. Griffith separates the business
into three general segments: retail or residential, wholesale which consists of
large commercial and reseller accounts, and dealers or service stations. For
distillates and propane sales, Griffith experiences seasonal fluctuations due to
the dependence on spaceheating sales during the heating season. In addition,
gasoline sales reflect seasonal fluctuations due to increased consumer driving
during the warmer months.
Regulated Operating Revenues and Sales. The effect of weather variations
on operating revenues is most measurable in the Gas Department, where revenues
from spaceheating customers comprise about 90 to 95 percent of total gas
operating revenues. Compared to a year earlier, weather in the Company's
service area was 13.6 percent warmer during the first three months of 1998 and
18.1 percent warmer for the entire year on a calendar month heating degree day
basis. Likewise, weather during 1997 was 1.2 percent warmer than 1996 on a
calendar month heating degree day basis. The Company has no weather
normalization clause in its gas tariff; therefore, abnormal weather variations
will have a more pronounced effect on gas revenues. Warmer summer weather
during 1998 boosted electric energy sales to meet the demand for air
conditioning usage, compared to the cool 1997 summer weather conditions. On a
cooling degree day basis, weather in 1998 was 62 percent warmer than 1997, while
in contrast, the 1997 weather was approximately 27 percent cooler than 1996.
Compared with a year earlier, kilowatt-hour sales of energy to retail
customers were down 3.6 percent in 1998, following a 1.2 percent increase in
1997. Commercial and industrial sales were down in 1998 due, in part, to the
opening of the electric market under terms of the Competitive Opportunities
Settlement. Reported retail sales are depressed as former RG&E customers choose
an alternative energy supplier as permitted under the terms of the Competitive
Opportunities Settlement. RG&E, however, also sells electric energy, as well as
distribution services, to qualified energy marketers in its franchise territory,
which has the effect of increasing electric wholesale sales and revenues as
<PAGE>
40
discussed in the following paragraph. Partially offsetting the decline in
electric sales in 1998 to retail customers was the increased demand for air
conditioning usage caused by the warmer summer weather. In contrast, cooler
summer weather had a negative impact on kilowatt-hour sales in 1997.
Under its Energy Choice Program, RG&E on July 1, 1998 began selling
electricity and distribution services to qualified energy marketers to serve
their retail customers as permitted by the terms of the Competitive
Opportunities Settlement. Electric sales to energy marketers, including the
Company's unregulated subsidiary Energetix, totaled 174,676 megawatt-hours in
1998. Revenue from these energy marketers for electricity and distribution
services totaled $15.0 million and is included in electric operating revenues.
Fluctuations in revenues from electric sales to other utilities are
generally related to RG&E's customer energy requirements, the wholesale energy
market, availability of transmission, and the availability of electric
generation from RG&E's facilities. Revenues from electric sales to other
utilities were $29.0 million in 1998, an increase of $8.1 million over 1997.
These revenues are included in electric operating revenues. The higher revenues
in 1998 reflect a favorable wholesale market and increased marketing of
available capacity. Revenues in 1997 from electric sales to other utilities
also rose compared with a year earlier due to increased sales resulting from
greater availability of RG&E's combined nuclear and fossil generation, a
favorable wholesale market in the second half of the year, and increased
marketing of available capacity.
The transportation of gas for large-volume customers who are able to
purchase natural gas from sources other than the Company is an important
component of the Company's marketing mix. Company facilities are used to
distribute this gas, which amounted to 16.4 million dekatherms in 1998 and 16.6
million dekatherms in 1997. These purchases by eligible customers have caused
decreases in the Company's retail gas customer revenues, with offsetting
decreases in purchased gas expenses and, in general, do not adversely affect
earnings because transportation customers are billed at rates which, except for
the cost of buying and transporting gas to the Company's city gate, are the same
as the rates charged the Company's retail gas service customers. Moreover,
under the current regulatory environment, the Company does not earn a return on
the gas commodity it acquires for distribution. Gas supplies transported in
this manner are not included in Company therm sales, depressing reported gas
sales to non-residential customers.
Therms of gas sold and transported were down 12.1 percent in 1998, after
declining four percent in 1997. These changes reflect, primarily, the effect of
weather variations on therm sales to customers with spaceheating. If adjusted
for normal weather conditions, residential gas sales would have decreased about
1.5 percent in 1998 over 1997, while non-residential sales, including gas
transported, would have increased approximately two percent in 1998. The
average use per residential gas customer, when adjusted for normal weather
conditions, showed a modest decrease in 1998 and 1997.
FOSSIL UNIT STATUS. On January 21, 1998, the Company announced the
retirement of Beebee Station by mid-1999. Factors such as the plant's age, 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 Competitive Opportunities Settlement
provides that all prudently incurred incremental costs associated with the
retirement and decommissioning of the plant are recoverable through the
Company's distribution access rates. The electric capacity and energy currently
provided by the plant are expected to be replaced in the energy markets as
needed.
<PAGE>
41
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 was included in the bidding process
for the sale of 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 continued into January 1999. The
Company cannot predict whether Oswego 6 will be sold or at what price. Under the
terms of the Competitive Opportunities Settlement, a gain for RG&E on such sale
would be shared between RG&E and its customers. With regard to a loss on such
sale, the Settlement acknowledges an intent that RG&E will be permitted to
recover such losses through distribution rates during the term of the
Settlement. Future rate treatment is to be consistent with the principle that
RG&E is to have a reasonable opportunity to recover such costs. The electric
capacity and energy currently provided by the plant are expected to be replaced
in the energy markets as needed. The book value of the Company's interest in
Oswego 6 at December 31, 1998 was $53.8 million.
OPERATING EXPENSES - SUMMARY. Changes in fuel expenses for both comparison
periods reflect primarily the availability of Company generating facilities,
variations in sales of energy, and weather effects on gas purchased for resale
during the heating season. For the 1998 comparison period, fuel expenses also
reflect unregulated operations. Non-fuel operating expense was down in 1998
reflecting lower federal income taxes and a drop in other operating expenses
(see Operations, excluding Fuel Expenses), partially offset by recognition of
unregulated non-fuel operating expense. For 1997, compared to a year earlier,
non-fuel operating expense was up due to higher depreciation expense, partially
offset by lower local and State taxes.
Unregulated Operating Expenses. Unregulated fuel expenses in 1998 as shown on
the Income Statement reflect mainly the cost of purchased fuel for Griffith
operations since its acquisition by Energetix. Unregulated non-fuel operating
expenses reflect primarily payroll expenses, fleet expenses for Griffith, and
general and administrative expenses.
Regulated Operating Expenses
Energy Costs - Electric. Higher fuel expense for electric generation in
both comparison periods reflects increased generation to support higher electric
sales. For the 1998 comparison period, increased fuel expense also reflects
relatively more generation from the Company's costlier fossil-fueled units. A
fuel cost adjustment clause was eliminated effective July 1, 1996. Company
shareholders are assuming the full benefits and detriments realized from actual
electric fuel costs and generation mix compared with PSC-approved forecast
amounts.
RG&E normally purchases electric power to supplement its own generation
when needed to meet load or reserve requirements, and when such power is
available at a cost lower than the Company's production cost. Increased
availability and efficiencies following the 1996 installation of new steam
<PAGE>
42
generators at the Ginna nuclear plant resulted in lower kilowatt-hour purchases
of electricity in 1997 which led to a decline in purchased electric power
expense. In 1998, purchased electric expense also decreased reflecting greater
availability of the Company's generating facilities.
Energy Management and Costs - Gas. RG&E acquires gas supply and
transportation capacity based on its requirements to meet peak loads which occur
in the winter months. RG&E is committed to transportation capacity on the
Empire State Pipeline (Empire) and the CNG Transmission Corporation (CNG)
pipeline systems, as well as to upstream pipeline transportation and storage
services. The combined CNG and Empire transportation capacity is adequate to
meet RG&E's current requirements.
For the 1998 and 1997 comparison periods, gas purchased for resale expense
declined driven by a reduced volume of purchased gas resulting from a warmer
heating season.
Operations Excluding Fuel Expenses. For the 1998 comparison period,
operations less fuel expenses declined, reflecting decreased expense of $5.3
million associated with uncollectible accounts and a $7.9 million drop in
welfare expenses due to the performance of pension assets (see Note 3 to the
Notes to Financial Statements). Partially offsetting these lower costs were
increased payroll costs of $2.2 million. For the 1997 comparison period, the
increase in operations excluding fuel expenses reflects mainly higher outside
services expenses ($6.1 million), recognition of obsolete and unproductive
materials inventory ($3.0 million), and storm costs ($1.7 million) partially
offset by $3.9 million of lower payroll costs and decreased expense of $2.0
million associated with uncollectible accounts. The recognition of obsolete
materials was driven by the planned relocation of the Company's warehouse. The
decrease in the uncollectible accounts expense is driven by the increased level
of collection activity in the last two years.
For the 1997 comparison period, the increase in depreciation and
amortization expense reflects primarily results from depreciation of the Ginna
nuclear plant steam generators, which were replaced in 1996 and recovery of
increased nuclear decommissioning expense of approximately $3.2 million per
quarter beginning July 1, 1996. The higher decommissioning expense reflects an
increase in the estimated cost of decommissioning as recognized in rates for
Ginna Station and Nine Mile Two. Depreciation and amortization expense in 1998
includes $1.1 million for unregulated operations, but remained relatively flat
compared to 1997 due to the completion of depreciation expense on certain fully
depreciated computer equipment.
Taxes Charged To Operating Expenses. Local, State and other taxes declined
in 1998 reflecting mainly lower State revenue taxes due to decreased revenues.
This decline was partially offset by an additional $1.5 million of local and
State taxes associated with unregulated operations. The decrease in local and
State taxes for 1997 reflects mainly lower property taxes due to decreases in
assessments and/or rates and lower state revenue taxes due to decreases in
revenues and the New York State revenue tax surcharge rate.
The decrease in federal income tax in 1998 reflects decreased earnings and
in 1997 reflects mainly the reversal of a prior provision for the in-service
date of Nine Mile Two as a result of an agreement reached with the Internal
Revenue Service.
Other Statement of Income Items. For the 1998 comparison period, the
variation in non-operating federal income tax reflects variances in non-
operating earnings before federal income taxes, as well as a $1.7 million
reserve for deferred taxes subsequent to a review of the historic balances.
<PAGE>
43
The change in Other Income and Deductions, Other-net in 1998 reflects the
recognition of income due to the reversal of certain deferred credits in
accordance with the Competitive Opportunities Settlement. In prior years, the
PSC had required the Company to establish deferred credits to account for
certain pension and other post-employment benefit charges and Nine Mile Two
operating and maintenance expenses. In 1998, these deferred credits totaling
$17.4 million were eliminated consistent with the terms of the Settlement and
discussions with the PSC. An amount of $8.8 million associated with certain
pension charges was reflected on the Company's books in the first quarter of
1998, after the Company received the written order associated with the
Competitive Opportunities Settlement. An amount of $6.0 million associated with
certain Nine Mile Two operating and maintenance expenses was reflected ratably
over each of the four quarters of 1998, consistent with Nine Mile Two accounting
practices. The remainder associated with certain other post-employment benefits
was reflected in the second quarter of 1998, after the Company had concluded
discussions with the PSC. The Company does not have any deferred credits which
are subject to PSC Orders which would permit the recognition of any significant
credits to income in the future. This income was partially offset by expenses
associated with the gas interim settlement agreement. Other (Income) and
Deductions, Other--net changed in 1997 due mainly to recognition of expense
associated with management performance awards and the Company's Performance
Stock Option Plan.
Both mandatory redemptions and the optional redemptions of certain higher-
cost long-term debt have helped to reduce long-term debt interest expense over
the three-year period 1996-1998. Other interest decreased in 1998 due to lower
miscellaneous interest charges on pension and other post-employment benefits.
This decline was partially offset by an additional $1.0 million of interest
expense associated with unregulated operations. Compared to the prior year,
the average RG&E short-term debt outstanding was up in 1998 and nearly unchanged
in 1997.
The mandatory redemption of the Company's 7.55% Preferred Stock, Series T,
caused Preferred Stock dividends to decrease in 1998. Preferred Stock dividends
also decreased in 1997 due to the Company's discretionary redemption in April
1997 of its 7.50% Preferred Stock, Series N and the mandatory sinking fund
redemption of its 7.45% Preferred Stock, Series S in September.
DIVIDEND POLICY. 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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company is exposed to interest rate and commodity price risks.
The interest rate risk relates to new debt financing needed to fund capital
requirements, including maturing debt securities, and to variable rate debt.
The Company manages its interest rate risk through the issuance of fixed -rate
debt with varying maturities and through economic refundings of debt through
optional redemptions. A portion of the Company's long-term debt consists of
long-term Promissory Notes, the interest component of which resets on a periodic
basis reflecting current market conditions. The Company was not participating
in any derivative financial instruments for managing interest rate risks as of
December 31, 1998 or December 31, 1997.
<PAGE>
44
The commodity price risk relates to natural gas in storage and other
petroleum-related products used for resale to customers. The Company primarily
enters into forward contracts for natural gas through its gas broker. In
addition, Griffith enters into various exchange-traded futures and option
contracts and over-the-counter contracts with third parties. The commodity
instruments are designated at the inception as a hedge where there is a direct
relationship to the price risk associated with the Company's inventory or future
purchases and sales of commodities used in the Company's operations. At
December 31, 1998 and 1997 neither the fair value of the contracts outstanding
nor potential, near-term contract losses from reasonably possible near-term
changes in market prices were material to the financial position, results of
operations or liquidity of the Company.
For information about the Company's primary market risks associated with
activities in derivative financial instruments, other financial instruments and
derivative commodity instruments, see "Financial/Commodity Instruments" in Note
1 of the Notes to Financial Statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
A. FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Statement of Income for each of the three years ended December
31, 1998.
Consolidated Statement of Retained Earnings for each of the three years
ended December 31, 1998.
Consolidated Balance sheet at December 31, 1998 and 1997.
Consolidated Statement of Cash Flows for each of the three years ended
December 31, 1998.
Notes to Consolidated Financial Statements.
Financial Statement Schedules:
The following Financial Statement Schedule is submitted as part of Item 14,
Exhibits, Financial Statement Schedules and Reports on Form 8-K, of this
Report. (All other Financial Statement Schedules are omitted because they
are not applicable, or the required information appears in the Financial
Statements or the Notes thereto.)
Schedule II - Valuation and Qualifying Accounts.
B. SUPPLEMENTARY DATA
Interim Financial Data.
<PAGE>
45
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Rochester Gas and Electric Corporation
In our opinion, the consolidated financial statements listed under Item 8A
in the index appearing on the preceding page present fairly, in all material
respects, the financial position of Rochester Gas and Electric Corporation and
its subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Rochester, New York
January 20, 1999
<PAGE>
46
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(Thousands of Dollars) Year Ended December 31 1998 1997* 1996*
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Electric $687,970 $700,329 $707,768
Gas 275,177 336,309 346,279
Other 71,215 - -
------------- ------------ ------------
Total Operating Revenues 1,034,362 1,036,638 1,054,047
------------- ------------ ------------
Operating Expenses
Fuel Expenses
Fuel for electric generation 53,954 47,665 40,938
Purchased electricity 27,024 28,347 46,484
Gas purchased for resale 155,497 196,579 202,297
Unregulated fuel expenses 60,001 - -
------------- ------------ ------------
Total Fuel Expenses 296,476 272,591 289,719
------------- ------------ ------------
Operating Revenues Less Fuel Expenses 737,886 764,047 764,328
Other Operating Expenses
Operations and maintenance excluding fuel expenses 301,625 315,109 313,157
Unregulated operating and maintenance expenses excluding fuel 13,257 - -
Depreciation and amortization 116,122 116,522 105,614
Taxes - local, state and other 118,337 121,796 126,868
Federal income tax 61,385 65,279 69,501
------------- ------------ ------------
Total Other Operating Expenses 610,726 618,706 615,140
------------- ------------ ------------
Operating Income 127,160 145,341 149,188
Other (Income) and Deductions
Allowance for other funds used during construction (408) (351) (684)
Federal income tax 516 (3,704) (3,450)
Other, net (13,181) 3,308 (712)
------------- ------------ ------------
Total Other (Income) and Deductions (13,073) (747) (4,846)
Interest Charges
Long term debt 42,590 44,615 48,618
Other, net 4,158 6,676 9,328
Allowance for borrowed funds used during construction (653) (563) (1,423)
------------- ------------ ------------
Total Interest Charges 46,095 50,728 56,523
------------- ------------ ------------
Net Income 94,138 95,360 97,511
------------- ------------ ------------
Dividends on Preferred Stock 4,842 5,805 7,465
------------- ------------ ------------
Earnings Applicable to Common Stock $89,296 $89,555 $90,046
------------- ------------ ------------
Earnings per Common Share - Basic $2.32 $2.30 $2.32
Earnings per Common Share - Diluted $2.31 $2.30 $2.32
============= ============ ============
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
<TABLE>
<CAPTION>
(Thousands of Dollars) Year Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Period $109,313 $90,540 $70,330
Add
Net Income 94,138 95,360 97,511
Adjustment Associated with Stock Options Exercised (72) - -
Adjustment Associated with Stock Redemptions (126) (846) -
------------- ------------ ------------
Total 203,253 185,054 167,841
------------- ------------ ------------
Deduct
Dividends declared on capital stock
Cumulative preferred stock - at required rates 4,842 5,805 7,465
Common Stock 68,927 69,936 69,836
------------- ------------ ------------
Total 73,769 75,741 77,301
------------- ------------ ------------
Balance at End of Period $129,484 $109,313 $90,540
============= ============ ============
Cash Dividends Declared per Common Share $1.80 $1.80 $1.80
============= ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
* Reclassified for comparative purposes.
<PAGE>
47
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Thousands of Dollars) At December 31 1998 1997*
<S> <C> <C>
Assets
Utility Plant
Electric $2,477,077 $2,439,108
Gas 435,318 416,989
Common 158,038 134,938
Nuclear fuel 256,562 243,042
------------ ------------
3,326,995 3,234,077
Less: Accumulated depreciation 1,640,645 1,510,074
Nuclear fuel amortization 222,830 204,294
------------ ------------
1,463,520 1,519,709
Construction work in progress 98,554 74,018
------------ ------------
Net Utility Plant 1,562,074 1,593,727
------------ ------------
Current Assets
Cash and cash equivalents 6,523 25,405
Accounts receivable, net of allowance for doubtful accounts:
1998 - $ 26,554; 1997 - $ 26,926 89,291 104,781
Unbilled revenue receivable 37,922 48,438
Materials, supplies and fuels 43,024 39,929
Prepayments 25,950 23,818
Other current assets 253 -
------------ ------------
Total Current Assets 202,963 242,371
------------ ------------
Intangible Assets
Goodwill 14,681 -
Other Intangible assets 6,381 -
------------ ------------
Total Intangible Assets 21,062 -
------------ ------------
Deferred Debits and Other Assets
Nuclear generating plant decommissioning fund 183,502 132,540
Nine Mile Two deferred costs 29,258 30,309
Unamortized debt expense 17,241 16,943
Other deferred debits 18,531 20,411
Regulatory assets 416,320 231,988
Other assets 1,984 -
------------ ------------
Total Deferred Debits and Other Assets 666,836 432,191
------------ ------------
Total Assets $2,452,935 $2,268,289
============ ============
Capitalization and Liabilities
Capitalization
Long term debt - mortgage bonds $510,002 $485,434
- promissory notes 248,224 101,900
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 ($5 par, 38,885,813 shares at
December 31, 1998 and 38,862,347 shares
at December 31, 1997) 699,730 699,031
Retained earnings 129,484 109,313
------------ ------------
829,214 808,344
Less: Treasury stock at cost (1,507,000 shares) 46,433 -
------------ ------------
Total Common Shareholders' Equity 782,781 808,344
------------ ------------
Total Capitalization 1,613,007 1,477,678
------------ ------------
Long Term Liabilities
Nuclear waste disposal 87,566 83,261
Uranium enrichment decommissioning 12,197 13,465
Site remediation 24,157 13,626
------------ ------------
Total Long Term Liabilities 123,920 110,352
------------ ------------
Current Liabilities
Long term debt due within one year 427 30,000
Preferred stock redeemable within one year 10,000 10,000
Short term debt 57,000 20,000
Accounts payable 52,454 53,195
Dividends payable 17,937 18,791
Equal payment plan 11,025 8,935
Other 34,526 34,770
------------ ------------
Total Current Liabilities 183,369 175,691
------------ ------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 326,972 344,969
Pension costs accrued 58,677 67,361
Kamine deferred costs 65,799 -
Post employment benefits internal reserve 42,909 32,190
Other 38,282 60,048
------------ ------------
Total Deferred Credits and Other Liabilities 532,639 504,568
------------ ------------
Commitments and Other Matters
------------ ------------
Total Capitalization and Liabilities $2,452,935 $2,268,289
============ ============
</TABLE>
* Reclassified for comparative purposes.
The accompanying notes are an integral part of the financial statements.
<PAGE>
48
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Thousands of Dollars) Year Ended December 31 1998 1997* 1996*
<S> <C> <C> <C>
CASH FLOW FROM OPERATIONS
Net income $ 94,138 $ 95,360 $ 97,511
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization 134,259 133,942 121,824
Deferred fuel (3,565) 489 (6,501)
Deferred income taxes (9,141) (10,064) 6,391
Allowance for funds used during construction (1,061) (914) (2,107)
Unbilled revenue, net 10,516 4,823 10,908
Stock option plan, net 99 2,399 -
Nuclear generating plant decommissioning fund (20,827) (20,331) (11,732)
Payment to Kamine (17,790) - -
Pension costs accrued (15,818) (3,398) (2,494)
Post employment benefit internal reserve 10,719 6,189 6,626
Provision for doubtful accounts (372) 5,078 4,987
Changes in certain current assets and liabilities:
Accounts receivable 27,549 3,049 3,228
Materials, supplies and fuels 141 (41) (1,238)
Taxes accrued (1,448) 347 (13,944)
Payroll accrued 54 433 17
Accounts payable (7,031) 3,733 (3,116)
Other current assets and liabilities, net (817) 6,911 (5,203)
Other, net (4,699) 6,847 (3,931)
------------- ------------- -------------
Total Operating 194,906 234,852 201,226
============= ============= =============
CASH FLOW FROM INVESTING ACTIVITIES
Net additions to utility plant (129,286) (84,068) (114,274)
Acquisition, net of cash (30,977) - -
Other, net 484 (1) 9,204
------------- ------------- -------------
Total Investing (159,779) (84,069) (105,070)
============= ============= =============
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from:
Sale/Issuance of common stock 586 272 8,612
Issuance of long term debt 99,422 101,900 -
Short term borrowings, net 30,500 6,000 14,000
Retirement of long term debt (55,500) (151,568) (67,332)
Retirement of preferred stock (10,000) (30,000) -
Dividends paid on preferred stock (5,031) (6,366) (7,465)
Dividends paid on common stock (69,592) (69,933) (69,657)
Payment for treasury stock (46,433) - -
Equal payment plan 2,090 3,385 4,273
Other, net (51) (369) (1,407)
------------- ------------- -------------
Total Financing (54,009) (146,679) (118,976)
------------- ------------- -------------
Increase (Decrease) in cash and cash equivalents $ (18,882) $ 4,104 $ (22,820)
Cash and cash equivalents at beginning of year $ 25,405 $ 21,301 $ 44,121
------------- ------------- -------------
Cash and cash equivalents at end of year $ 6,523 $ 25,405 $ 21,301
============= ============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(Thousands of Dollars) Year Ended December 31 1998 1997 1996
<S> <C> <C> <C>
Cash Paid During the Year
Interest paid (net of capitalized amount) $ 43,793 $ 50,681 $ 55,545
Income taxes paid $ 75,600 $ 70,500 $ 76,890
============= ============= =============
</TABLE>
* Reclassified for comparative purposes.
The accompanying notes are an integral part of the financial statements.
<PAGE>
49
NOTES TO FINANCIAL STATEMENTS
Note 1. SUMMARY OF ACCOUNTING PRINCIPLES
GENERAL. The Company supplies regulated electric and gas services wholly
within the State of New York. The unregulated portion of the Company provides
products and services as discussed in Note 4. The Company is subject to
regulation by the Public Service Commission of the State of New York (PSC) under
New York statutes and by the Federal Energy Regulatory Commission (FERC) as a
licensee and public utility under the Federal Power Act. The Company's
accounting policies conform to generally accepted accounting principles as
applied to New York State public utilities giving effect to the ratemaking and
accounting practices and policies of the PSC.
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.
A description of the Company's principal accounting policies follows.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries Energetix and
Energyline. All intercompany balances and transactions have been eliminated.
Energetix financial statements are consolidated with its wholly-owned subsidiary
Griffith.
Energyline was formed as a gas pipeline corporation to fund the Company's
investment in the Empire State Pipeline project. In late 1996, Energyline sold
its investment in the Empire State Pipeline.
During the second quarter of 1998, the Company formed a new unregulated
subsidiary, RGS Development Corporation ("RGS Development"). RGS Development
was formed to pursue unregulated business opportunities in the energy
marketplace. Through December 31, 1998, RGS Development operations have not
been material to the Company's results of operation or its financial condition.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill presented on the
consolidated balance sheet, represents the excess of cost over the net tangible
and identifiable intangible assets of acquired businesses. It is stated at cost
and is amortized, principally on a straight-line basis, over the estimated
future periods to be benefited (20 years). On an annual basis the Company
reviews the recoverability of goodwill based primarily upon an analysis of
undiscounted cash flows from the acquired businesses. Other intangible assets
include dealer improvements and are being amortized over varying periods.
Accumulated amortization amounted to $0.7 million at December 31, 1998.
ACQUISITIONS. In August 1998, Energetix announced the acquisition of
Griffith Oil, Co., Inc. ("Griffith"), for $31.5 million. Griffith sells oil,
propane, electricity, gasoline, natural gas and other services offered by
Energetix to its existing customers. The acquisition was accounted for as a
purchase resulting in goodwill as reflected on the consolidated financial
statements. The principal assets acquired were vehicles, tanks, pumps,
buildings and commodity inventory.
RATES AND REVENUE. Revenue is recorded on the basis of meters read. In
addition, the Company records an estimate of unbilled revenue for service
<PAGE>
50
rendered subsequent to the meter-read date through the end of the accounting
period.
Through June 30, 1996, tariffs for electric service included fuel cost
adjustment clauses which adjusted the rates monthly to reflect changes in the
actual average cost of fuels. Beginning July 1, 1996, the electric fuel
adjustment clause was eliminated in connection with a rate settlement agreement
with the PSC.
The Company continues to use gas cost deferral accounting. A reconciliation
of recoverable gas costs with gas revenues is done annually as of August 31, and
the excess or deficiency is refunded to or recovered from the customers during a
subsequent period.
UTILITY PLANT, DEPRECIATION AND AMORTIZATION. The cost of additions to
utility plant and replacement of retirement units of property is capitalized.
Cost includes labor, material, and similar items, as well as indirect charges
such as engineering and supervision, and is recorded at original cost. The
Company capitalizes an Allowance for Funds Used During Construction (AFUDC)
approximately equivalent to the cost of capital devoted to plant under
construction that is not included in its rate base. AFUDC is segregated into
two components and classified in the Consolidated Statement of Income as
Allowance for Borrowed Funds Used During Construction, an offset to Interest
Charges, and Allowance for Other Funds Used During Construction, a part of Other
Income. The rate approved by the PSC for purposes of computing AFUDC was 5.0%
during the three-year period ended December 31, 1998. Replacement of minor
items of property is included in maintenance expenses. Costs of depreciable
units of plant retired are eliminated from utility plant accounts, and such
costs, plus removal expenses, less salvage, are charged to the accumulated
depreciation reserve.
Depreciation in the financial statements is provided on a straight-line
basis at rates based on the estimated useful lives of property, which have
resulted in an annual regulated depreciation provision of 3.2% in the three-year
period ended December 31, 1998. The annual depreciation provision of Energetix
is 8.0% for 1998.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of cash and
short-term commercial paper. These investments have original maturity not
exceeding three months. Such investments are stated at cost, which approximates
fair value, and are considered cash equivalents for financial statement
purposes.
INVESTMENTS IN DEBT AND EQUITY SECURITIES. The Company's accounting
policy, as prescribed by the PSC, with respect to its nuclear decommissioning
trusts is to reflect the trusts' assets at market value and reflect unrealized
gains and losses as a change in the corresponding accrued decommissioning
liability. The Company has no other debt or equity securities.
FINANCIAL/COMMODITY INSTRUMENTS. The Company periodically enters into
agreements to minimize price risks for natural gas in storage. Gains or losses
resulting from these agreements are deferred until the corresponding gas is
withdrawn from storage and delivered to customers. The Company primarily enters
into forward contracts for natural gas through its gas broker.
Griffith is in the business of purchasing various petroleum-related
commodities for resale to its customers. In order to manage the risk associated
with market price fluctuations Griffith enters into various exchange-traded
futures and option contracts and over-the-counter contracts with third parties.
The commodity instruments are designated at the inception as a hedge where there
is a direct relationship to the price risk associated with the company's
inventory or future purchases and sales of commodities used in the company's
<PAGE>
51
operation. These contracts are closely monitored on a daily basis to manage the
price risk associated with the company's inventory and future product
commitments. All hedge contracts are accounted for under the deferral method
with gains and losses from the hedging activity included in the cost of sales as
inventories are sold or as the hedge transaction occurs. Commodity instruments
not designated as effective hedges are marked to market at the end of the
reporting period, with the resulting gains or losses recognized in cost of
sales. As of December 31, 1998 the Company had net deferred gains on open hedge
contracts of $0.7 million.
RESEARCH AND DEVELOPMENT COSTS. Research and Development costs were
charged to expense as incurred. Expenditures for the years 1998, 1997, and 1996
were $3.4 million,$4.5 million and $4.9 million respectively.
ENVIRONMENTAL REMEDIATION COSTS. The Company accrues for losses associated
with environmental remediation obligations when such losses are probable and
reasonably estimable. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion of the
remedial feasibility study.
Such accruals are adjusted as further information develops or circumstances
change. Costs of future expenditures for environmental remediation obligations
are not discounted to their present value.
MATERIALS, SUPPLIES AND FUELS. Materials and supplies inventories are
valued at the lower of cost or market using the first-in, first-out method.
Regulated fuel inventories are valued at average cost. Griffith fuel
inventories are valued at the lower of cost or market, using the first-in,
first-out method.
STOCK-BASED COMPENSATION. Financial Accounting Standards Board Statement
No. 123 (SFAS-123), Accounting for Stock-Based Compensation, was adopted by the
Company in the first quarter of 1996. It recommends the use of a fair value
based method of accounting for compensation costs associated with stock-based
compensation. The Company currently has Stock Appreciation Rights plans
covering certain employees and directors. For these plans, the Company's
accounting policy has been to use a fair value method of computing periodic
compensation expense. SFAS-123 was applied to the valuation of the 1996
Performance Stock Option Plan (PSOP), which became effective on January 22,
1997. The aggregate amount charged to expense as a result of these plans for
the years 1998, 1997 and 1996 approximates $5.9 million, $8.2 million and $1.0
million respectively. Additional information on the PSOP is included in Note 8.
EARNINGS PER SHARE. SFAS-128, Earnings Per Share, was adopted by the
Company in the fourth quarter of 1997. This statement replaces the presentation
of primary Earnings Per Share with Basic Earnings Per Share, and also requires
presentation of Diluted Earnings Per Share. Basic Earnings Per Share (EPS) is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company.
<PAGE>
52
The following table illustrates the calculation of both Basic and Diluted EPS
for the year ended December 31,:
1998 1997
---- ----
(thousands of dollars except per share amounts)
Basic EPS:
- ----------
Net Income $94,138 $95,360
Less:
Preferred Stock Dividends (4,842) (5,805)
------- -------
Income available to
Common Shareholders 89,296 89,555
Shares 38,462 38,853
Per-Share Amount $ 2.32 $ 2.30
======= =======
Diluted EPS:
- ------------
Effect of Dilutive Securities
Stock Option Plan 138 56
------ -----
Income available to
Common Shareholders plus
assumed conversions $89,296 $89,555
Shares 38,600 38,909
------- -------
Per-Share Amount $2.31 $2.30
===== =====
There were no dilutive shares in 1996.
COMPREHENSIVE INCOME. There were no items of comprehensive income during
the year ended December 31, 1998; therefore, net income is equivalent to total
comprehensive income.
NEW ACCOUNTING PRONOUNCEMENTS. Financial Accounting Standards Board
Statement No. 131 (SFAS-131), Disclosures about Segments of an Enterprise and
Related Information, was adopted by the Company in 1998. SFAS-131 supersedes
SFAS-14, Financial Reporting for Segments of a Business Enterprise. The
adoption of SFAS-131 did not affect the Company's operating results. Note 4
contains specific information and disclosures related to the Company's Regulated
Electric, Regulated Gas and Unregulated segments.
RECLASSIFICATIONS. Certain amounts in the prior years' financial
statements were reclassified to conform with current year presentation.
<PAGE>
53
Note 2. FEDERAL INCOME TAXES
The provision for federal income taxes is distributed between operating
expense and other income based upon the treatment of the various components of
the provision in the rate-making process. The following is a summary of income
tax expense for the three most recent years.
(Thousands of Dollars)
1998 1997 1996
Charged (Credited) to operating expense:
Current $70,541 $69,812 $65,757
Deferred (9,156) (4,533) 3,744
------- ------- -------
Total 61,385 65,279 69,501
Charged (Credited) to other income:
Current (1,614) 1,828 (6,097)
Deferred 4,562 (3,100) 5,079
Deferred investment tax credit (2,432) (2,432) (2,432)
------- ------- -------
Total 516 (3,704) (3,450)
Total federal income tax expense $61,901 $61,575 $66,051
The following is a reconciliation of the difference between the amount of
federal income tax expense reported in the Consolidated Statement of Income and
the amount computed at the statutory tax rate of 35%.
(Thousands of Dollars)
1998 1997 1996
Net Income $ 94,138 $ 95,360 $ 97,511
Add: federal income tax expense 61,901 61,575 66,051
-------- -------- --------
Income before federal income tax $156,039 $156,935 $163,562
Computed tax expense at statutory tax rate $ 54,614 $ 54,927 $ 57,247
Increases (decreases) in tax resulting from:
Difference between tax depreciation
and amount deferred 9,366 10,772 10,796
Deferred investment tax credit (2,432) (2,432) (2,432)
Miscellaneous items, net 353 (1,692) 440
Total federal income tax expense $ 61,901 $ 61,575 $ 66,051
A summary of the components of the net deferred tax liability is as follows:
(Thousands of Dollars)
1998 1997 1996
Nuclear decommissioning $(24,849) $(20,807) $(17,880)
Accelerated depreciation 214,521 216,704 213,907
Deferred investment tax credit 25,768 27,981 29,562
Depreciation previously flowed through 146,953 157,538 169,562
Pension (20,161) (23,166) (24,570)
Other (15,260) (13,281) (553)
-------- -------- --------
Total $326,972 $344,969 $370,028
<PAGE>
54
SFAS-109 "Accounting for Income Taxes" requires that a deferred tax
liability must be recognized on the balance sheet for tax differences previously
flowed through to customers. Substantially all of these flow-through
adjustments relate to property, plant and equipment and related investment tax
credits and will be amortized consistent with the depreciation of these
accounts. The net amount of the additional liability at December 31, 1998 and
1997 was $148 million and $160 million, respectively. In conjunction with the
recognition of this liability, a corresponding regulatory asset was also
recognized.
Note 3: Pension and Other Postretirement Benefit Plans
The following table shows reconciliations of the domestic pension plan and other
postretirement plan benefits as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(Millions)
Pension Benefits Other Benefits
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 499.3 $ 480.2 $ 89.0 $ 79.1
Service cost 7.0 6.2 1.1 0.9
Interest cost 32.9 33.1 6.0 5.8
Plan Amendments 0.0 0.0 4.3 0.0
Actuarial loss 10.6 13.1 2.7 7.2
Benefits paid (33.0) (33.3) (4.1) (4.0)
------- ------- ------ ------
Benefit obligation at end of year $ 516.8 $ 499.3 $ 99.0 $ 89.0
Change in plan assets
- ---------------------
Fair value of plan assets at beginning of year $ 638.4 $ 567.1 $ 0.0 $ 0.0
Actual return on plan assets 100.0 104.0 0.0 0.0
Company contribution 0.9 0.5 4.1 4.0
Benefits paid (32.9) (33.2) (4.1) (4.0)
------- ------- ------ ------
Fair value of plan assets at end of year $ 706.4 $ 638.4 $ 0.0 $ 0.0
======= ======= ====== ======
Funded status $ 189.5 $ 139.1 $(99.0) $(89.0)
Unrecognized actuarial loss (259.4) (219.0) 11.2 8.4
Unrecognized prior service cost 9.9 10.7 12.6 8.9
Unrecognized net transition obligation (asset) 1.3 1.8 32.3 39.5
------- ------- ------ ------
Accrued benefit cost $ (58.7) $ (67.4) $(42.9) $(32.2)
======= ======= ====== ======
Weighted-average assumptions as of
December 31
- -----------
Discount rate 6.50% 6.75% 6.50% 6.75%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 5.00% 5.00%
</TABLE>
<TABLE>
<CAPTION>
(Millions)
Pension Benefits Other Benefits
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost
- ---------------------------------------
Service cost $ 7.0 $ 6.2 $ 7.4 $ 1.1 $ 0.9 $ 1.0
Interest cost 32.9 33.1 33.4 6.0 5.8 5.4
Expected return on plan assets (44.8) (39.6) (37.2) 0.0 0.0 0.0
Unrecognized transition obligation 0.5 0.5 0.5 2.8 2.9 2.8
Amortization of prior service 0.9 0.9 0.9 0.6 0.6 0.5
Recognized actuarial loss (4.3) (3.1) (6.0) 0.0 0.0 0.9
------ ------ ------ ----- ----- -----
Net periodic (benefit) cost $ (7.8) $ (2.0) $ (1.0) $10.5 $10.2 $10.6
====== ====== ====== ===== ===== =====
</TABLE>
<PAGE>
55
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits on a defined dollar basis. In 1998, the health
care benefit consists of a contribution of up to $210 per retiree per month
towards the cost of a group health policy provided by the Company. The life
insurance benefit consists of a Basic Group Life benefit, covering substantially
all employees, providing a death benefit equal to one-half of the retiree's
final pay. Effective January 1999, the Company amended the health care plan
increasing the contribution to up $220 per retiree per month.
In addition to the above plans, employees are eligible to contribute to a 401(k)
plan. The Company matches a portion of these contributions. Contributions
charged to income for this plan for 1998, 1997, and 1996 were $2.5 million, $2.3
million, and $2.3 million, respectively.
Note 4. OPERATING SEGMENT FINANCIAL INFORMATION
Under SFAS-131, information pertaining to operating segments is required to
be reported. The prior years' segment results were not restated as the Company
previously reported Electric and Gas segments and the unregulated segment was
formed in 1998. Generally, operating segments are components of an enterprise
that engage in business activities from which revenues may be earned and for
which expenses are incurred, whose results are reviewed for purposes of resource
allocation and performance evaluation, and for which discrete financial
information is available. Upon adoption of SFAS-131, the Company identified
three operating segments, driven by the types of products and services offered
and regulatory environment under which the Company primarily operates. The
three segments are Regulated Electric, Regulated Gas, and Unregulated. The
Regulated segments' financial records are maintained in accordance with
generally accepted accounting principles (GAAP) and Public Service Commission
(PSC) accounting policies. The Unregulated segment's financial records are
maintained in accordance with GAAP.
During the reported periods, all revenues are from United States sources
except for $1.2 million from Canada, and all assets are located in the United
States. No single customer represents more than 10% of the overall Company
revenue.
The Regulated Electric segment supplies electric distribution services
wholly within New York State. It produces electricity, and distributes and
sells electricity to retail customers within a franchise area centering about
the City of Rochester. It also sells electricity on a wholesale basis to other
electric utilities throughout the Northeast and to energy marketers who resell
that electricity to retail customers.
The Regulated Gas segment supplies gas services wholly within New York
State. Gas is purchased and distributed to retail customers and distributed on
behalf of other large or aggregated customers who purchase their own gas supply.
The Unregulated segment includes Energetix and RGS Development Corporation,
both unregulated subsidiaries of the Company formed in 1998. In August, 1998,
Energetix acquired Griffith Oil Inc., the second largest propane and oil
distribution company in New York State. Energetix brings energy products and
services to the marketplace both within and outside of the Company's regulated
franchise area. These energy products and services include appliance warranty
and repair, electricity, gasoline, natural gas, oil, and propane. RGS
Development Corporation was formed to pursue unregulated business opportunities
in the energy marketplace.
<PAGE>
56
<TABLE>
<CAPTION>
(thousands of dollars)
Regulated Electric 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Profit $ 93,762 $ 82,765 $ 83,528
Revenues from External Customers $ 687,100 $ 700,329 $ 707,768
Revenues from Intersegment Transactions $ 8,984 $ - $ -
Interest Revenue $ 1,694 $ 3,379 $ 1,455
Depreciation and Amortization $ 102,123 $ 103,395 $ 92,615
Regulatory Amortization $ 15,080 $ 23,409 $ 23,743
Nuclear Fuel Amortization $ 18,138 $ 17,419 $ 16,209
Interest Expense $ 36,122 $ 40,583 $ 45,218
Income Tax Expense $ 62,900 $ 58,682 $ 58,950
Capital Expenditures, net $ 96,206 $ 58,522 $ 95,334
Total Identifiable Assets $1,941,622 $1,783,825 $1,877,224
<CAPTION>
Regulated Gas 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Profit $ 3,610 $ 12,595 $ 13,983
Revenues from External Customers $ 274,540 $ 336,309 $ 346,279
Revenues from Intersegment Transactions $ 72 $ - $ -
Interest Revenue $ 424 $ 845 $ 364
Depreciation and Amortization $ 12,867 $ 13,127 $ 12,999
Regulatory Amortization $ 1,461 $ 1,337 $ 1,677
Interest Expense $ 9,030 $ 10,145 $ 11,305
Income Tax Expense $ 504 $ 2,893 $ 7,101
Capital Expenditures, net $ 28,075 $ 25,546 $ 18,940
Total Identifiable Assets $ 433,029 $ 441,849 $ 447,865
<CAPTION>
Unregulated 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(Loss) $ (3,234) $ - $ -
Revenues from External Customers $ 81,778 $ - $ -
Interest Revenue $ 158 $ - $ -
Depreciation and Amortization $ 854 $ - $ -
Goodwill Amortization $ 278 $ - $ -
Interest Expense $ 943 $ - $ -
Income Tax Benefit $ (1,503) $ - $ -
Capital Expenditures, net $ 5,005 $ - $ -
Total Assets $ 59,946 $ - $ -
</TABLE>
There are intersegment transactions which occur between the Regulated
segments and the Unregulated segment. These transactions are governed by
guidelines established in the Competitive Opportunities Settlement and other PSC
proceedings. The Unregulated segment is charged for the provision of services
and for an allocation of other corporate costs by the Regulated Segments on a
fully loaded cost basis. The Unregulated segment buys electricity from the
Regulated Electric segment at rates established through PSC proceedings. The
Unregulated segment also pays the Regulated segments for electric and gas
distribution services at rates established through PSC proceedings. The total
amount of the revenues identified by operating segment do not equal the total
<PAGE>
57
Company consolidated amounts as shown in the Consolidated Statement of Income.
This is due to the elimination of certain intersegment revenues during
consolidation. The total assets identified by operating segment do not equal
the total Company consolidated amounts as shown in the Consolidated Balance
Sheet. This is due to the elimination of certain intersegment transactions
during consolidation, and certain common assets unidentifiable by segment. A
reconciliation follows:
<TABLE>
<CAPTION>
Revenues 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Regulated Electric $ 687,100 $ 700,329 $ 707,768
Regulated Gas 274,540 336,309 346,279
Unregulated 81,778 - -
---------- ---------- ----------
Total $1,043,418 $1,036,638 $1,054,047
Reported on Consolidated Income Statement 1,034,362 1,036,638 1,054,047
---------- ---------- ----------
Difference to reconcile $ 9,056 $ - $ -
Intersegment Revenues
Regulated Electric from Unregulated $ 8,984 $ - $ -
Regulated Gas from Unregulated 72 - -
---------- ---------- ----------
Total Intersegment $ 9,056 $ - $ -
Assets
Regulated Electric $1,941,622 $1,783,825 $1,877,224
Regulated Gas 433,029 441,849 447,865
Unregulated 59,946 - -
Cash and Cash Equivalents,
Regulated Operations 5,375 25,405 21,301
Unamortized Debt Expense 17,241 16,944 14,820
Investment in Subsidiaries 11,202 - -
Other 266 266 266
Intersegment eliminations (15,746) - -
---------- ---------- ----------
Total Assets $2,452,935 $2,268,289 $2,361,476
</TABLE>
Note 5. JOINTLY-OWNED FACILITIES
The following table sets forth the jointly-owned electric generating
facilities in which the Company is participating. Both Oswego Unit No. 6 and
Nine Mile Point Nuclear Plant Unit No. 2 have been constructed and are operated
by Niagara Mohawk Power Corporation. Each participant must provide its own
financing for any additions to the facilities. The Company's share of direct
expenses associated with these two units is included in the appropriate
operating expenses in the Consolidated Statement of Income. Various
modifications will be made throughout the lives of these plants to increase
operating efficiency or reliability, and to satisfy changing environmental and
safety regulations.
<PAGE>
58
<TABLE>
<CAPTION>
Oswego Nine Mile Point
Unit No. 6 Nuclear Unit No.2
---------- -----------------
<S> <C> <C>
Net megawatt capability (summer) 788 1,128
RG&E's share - megawatts 189 158
- percent 24 14
Year of completion 1980 1988
<CAPTION>
(Millions of Dollars)
at December 31, 1998
--------------------------
<S> <C> <C>
Plant In Service Balance $ 99.6 $881.8
Accumulated Provision For Depreciation $ 43.6 $490.9
Plant Under Construction $ 0.0 $ 0.7
</TABLE>
The Plant in Service and Accumulated Provision for Depreciation balances
for Nine Mile Point Nuclear Unit No. 2 shown above include disallowed costs of
$374.3 million. Such costs, net of income tax effects, were previously written
off in 1987 and 1989.
Note 6. LONG-TERM DEBT
FIRST MORTGAGE BONDS
<TABLE>
<CAPTION>
(Thousands of Dollars)
Principal Amount
December 31
% Series Due 1998 1997
- ----- ------ --- -------- --------
<S> <C> <C> <C> <C>
6.7 X July 1, 1998 $ - $ 30,000
8 3/8 OO/(a)/ Dec. 1, 2028 - 25,500
9 3/8 PP Apr. 1, 2021 100,000 100,000
8 1/4 QQ/(b)/ Mar. 15, 2002 100,000 100,000
6.35 RR/(a)/ May 15, 2032 10,500 10,500
6.50 SS/(a)/ May 15, 2032 50,000 50,000
7.00 /(b)/(c)/ Jan. 14, 2000 30,000 30,000
7.15 /(b)/(c)/ Feb. 10, 2003 39,000 39,000
7.13 /(b)/(c)/ Mar. 3, 2003 1,000 1,000
7.64 /(c)/ Mar. 15, 2023 33,000 33,000
7.66 /(c)/ Mar. 15, 2023 5,000 5,000
7.67 /(c)/ Mar. 15, 2023 12,000 12,000
6.375 /(b)/(c)/ July 30, 2003 40,000 40,000
7.45 /(c)/ July 30, 2023 40,000 40,000
5.84 /(b)/(d)/ Dec. 22, 2008 50,000 -
-------- --------
$510,500 $516,000
Net bond discount (498) (566)
Less: Due within one year - 30,000
-------- --------
Total $510,002 $485,434
======== ========
</TABLE>
<PAGE>
59
(a) The Series OO, Series RR and Series SS First Mortgage Bonds equal the
principal amount of and provide for all payments of principal, premium and
interest corresponding to the Pollution Control Revenue Bonds, Series C, and
Pollution Control Refunding Revenue Bonds, Series 1992 A, Series 1992 B
(Rochester Gas and Electric Corporation Projects), respectively, issued by
the New York State Energy Research and Development Authority (NYSERDA)
through a participation agreement with the Company. Payments of the
principal of, and interest on the Series 1992 A and Series 1992 B Bonds are
guaranteed under a Bond Insurance Policy by MBIA Insurance Corporation.
(b) The Series QQ First Mortgage Bonds and the 7%, 7.15%, 7.13%, 6.375% and
5.84% medium-term notes described below are generally not redeemable prior
to maturity.
(c) In 1993 the Company issued $200 million under a medium-term note program
entitled "First Mortgage Bonds, Designated Secured Medium-Term Notes, Series
A" with maturities that range from seven years to thirty years.
(d) In 1998 the Company issued $50 million under a medium-term note program
entitled "First Mortgage Bonds, Designated Secured Medium-Term Notes, Series
B" with maturities that range from seven years to thirty years.
The First Mortgage provides security for the bonds through a first lien on
substantially all the property owned by the Company (except cash and accounts
receivable).
Sinking and improvement fund requirements aggregate $333,540 per annum
under the First Mortgage, excluding mandatory sinking funds of individual
series. Such requirements may be met by certification of additional property or
by depositing cash with the Trustee. The 1997 and 1996 requirements were met
with funds deposited with the Trustee, and these funds were used for redemption
of outstanding bonds of Series Y.
On December 1, 1998 the Company redeemed all its outstanding First Mortgage
8 3/8% Bonds, due December 1, 2028, Series OO.
Sinking fund requirements and bond maturities for the next five years are:
<TABLE>
<CAPTION>
(Thousands of Dollars)
1999 2000 2001 2002 2003
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
7% Series $30,000
Series QQ $100,000
7.15% Series $ 39,000
7.13% Series $ 1,000
6.375% Series $ 40,000
---- ------- ---- -------- --------
$ - $30,000 $ - $100,000 $ 80,000
</TABLE>
<PAGE>
60
PROMISSORY NOTES AND OTHER
<TABLE>
<CAPTION>
(Thousands of Dollars)
December 31
Issued Due 1998 1997
- ------ --- ---- ----
<S> <C> <C> <C>
September 2, 1998(/e/) September 1, 2033 $ 25,500 $ -
August 19, 1997(/f/) August 1, 2032 101,900 101,900
August 3, 1998(/g/) August 3, 2005 24,563 -
December 1, 1998(/h/) March 31, 2014 94,761 -
Other Long Term Debt of Subsidiaries(/i/) 1,500 -
-------- --------
Total $248,224 $101,900
======== ========
</TABLE>
(e) The $25.5 million Promissory Note was issued in connection with NYSERDA's
5.95% Pollution Control Revenue Bonds (Rochester Gas and Electric
Corporation Project), 1998 Series A. Payment of the principal of, and
interest on the Series A Bonds is guaranteed under a Bond Insurance Policy
by MBIA Insurance Corporation.
(f) Multi-mode pollution control notes totaling the principal amount of $101.9
million were issued in connection with NYSERDA's Pollution Control Revenue
Bonds (Rochester Gas and Electric Corporation Project), $34,000,000 1997
Series A, $34,000,000 1997 Series B and $33,900,000 1997 Series C. The
Multi-mode Revenue Bonds have a structure that enables the Company to
optimize the use of short-term rates by allowing for the interest rates to
be based on a daily rate, a weekly rate, a commercial paper rate, an
auction rate or a multi-year fixed rate. Payment of the principal of, and
interest on the Multi-mode Revenue Bonds is guaranteed under Bond Insurance
Policies by MBIA Insurance Corporation. At December 31, 1998 and December
31, 1997, the Multi-mode Revenue Bonds bore interest at the weekly rate and
the average annual interest rate for all three series was 3.21% and 3.65%,
respectively.
The Company is obligated to make payments of principal, premium and interest
on each Promissory Note which corresponds to the payments of principal, premium,
if any, and interest on certain Pollution Control Revenue Bonds issued by
NYSERDA as described above.
(g) The $24.6 million Promissory Note was issued in connection with the
acquisition of Griffith Oil, Inc. by Energetix and is secured by a pledge
of the stock of Griffith Oil, Inc. The Company has made a financial
guarantee on behalf of Energetix which obligates the Company in the event
of a default by Energetix in payments under the Note. Payments of
principal are made in seven annual installments and interest for the first
three years accrues at the rate of 7% per year and thereafter at rates
varying between 7%-8 1/2% per year.
(h) The Promissory Note was issued in connection with the Kamine Global
Settlement Agreement (See Note 10.) The Promissory Note is secured by a
mortgage, the lien for which is subordinate to the lien of the First
Mortgage. The $94.8 million liability represents the present value at
December 31, 1998 of future obligations under the Note assuming a discount
rate of 7.5 percent. This balance will decrease as payments are made over
the term of the Note. During 1998 the Company made payments totaling $7.8
million. In 1999 the Company expects to make payments totaling $9.6
million and thereafter, payments totaling $10.6 million per year.
<PAGE>
61
(i) Represents mainly promissory notes under various distribution seller
agreements of Energetix aggregating $1,927 less $427 due within one year.
Based on an estimated borrowing rate at year-end 1998 of 5.84% for long-
term debt with similar terms and average maturities (12 years), the fair value
of the Company's long-term debt outstanding (including Promissory Notes as
described above) is approximately $844 million at December 31, 1998.
Based on an estimated borrowing rate at year-end 1997 of 6.62% for long-
term debt with similar terms and average maturities (13 years), the fair value
of the Company's long-term debt outstanding (including Promissory Notes as
described above) is approximately $655 million at December 31, 1997.
Note 7. PREFERRED AND PREFERENCE STOCK
<TABLE>
<CAPTION>
Par Shares Shares
Type by Order of Seniority Value Authorized Outstanding
- -------------------------- ----- ---------- ------------
<S> <C> <C> <C>
Preferred Stock (cumulative) $100 2,000,000 820,000*
Preferred Stock (cumulative) 25 4,000,000 -
Preference Stock 1 5,000,000 -
</TABLE>
* See below for mandatory redemption requirements.
No shares of preferred or preference stock are reserved for employees, or
for options, warrants, conversions, or other rights.
A. PREFERRED STOCK, NOT SUBJECT TO MANDATORY REDEMPTION:
<TABLE>
<CAPTION>
Shares (Thousands) Optional
Outstanding December 31, Redemption
% Series December 31, 1998 1998 1997 (per share) #
- ----- ------ ----------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
4 F 120,000 $12,000 $12,000 $105
4.10 H 80,000 8,000 8,000 101
4 3/4 I 60,000 6,000 6,000 101
4.10 J 50,000 5,000 5,000 102.5
4.95 K 60,000 6,000 6,000 102
4.55 M 100,000 10,000 10,000 101
------- ------- -------
Total 470,000 $47,000 $47,000
======= ======= =======
</TABLE>
# May be redeemed at any time at the option of the Company on 30 days minimum
notice, plus accrued dividends in all cases.
<PAGE>
62
B. PREFERRED STOCK, SUBJECT TO MANDATORY REDEMPTION:
<TABLE>
<CAPTION>
Shares (Thousands) Optional
Outstanding December 31, Redemption
% Series December 31, 1998 1998 1997 (per share)
- ----- ------ ----------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
7.55 T - $ - $10,000 Not applicable
7.65 U 100,000 10,000 10,000 Not applicable
6.60 V 250,000 25,000 25,000 Not Before 3/1/04+
------- ------- -------
Total 350,000 $35,000 $45,000
Less: Due within one year 100,000 10,000 10,000
------- ------- -------
Total 250,000 $25,000 $35,000
======= ======= =======
</TABLE>
+ Thereafter at $100.00
MANDATORY REDEMPTION PROVISIONS
In the event the Company should be in arrears in the sinking fund
requirement, the Company may not redeem or pay dividends on any stock
subordinate to the Preferred Stock.
Series U. All of the shares are subject to redemption pursuant to
mandatory sinking funds on September 1, 1999 at $100 per share.
Series V. The Series V is subject to a mandatory sinking fund sufficient
to redeem on each March 1 beginning in 2004 to and including 2008, 12,500 shares
at $100 per share and on March 1, 2009, the balance of the outstanding shares.
The Company has the option to redeem up to an additional 12,500 shares on the
same terms and dates as applicable to the mandatory sinking fund.
Based on an estimated dividend rate at year-end 1998 of 4.75% for Preferred
Stock, subject to mandatory redemption, with similar terms and average
maturities (6.61 years), the fair value of the Company's Preferred Stock,
subject to mandatory redemption, is approximately $39 million at December 31,
1998.
Based on an estimated dividend rate at year-end 1997 of 5.67% for Preferred
Stock, subject to mandatory redemption, with similar terms and average
maturities (5.92 years), the fair value of the Company's Preferred Stock,
subject to mandatory redemption, is approximately $48 million at December 31,
1997.
<PAGE>
63
Note 8. COMMON STOCK AND STOCK OPTIONS
REPURCHASE PLAN
In December 1997, the Board of Directors of the Company authorized the
repurchase of up to 4.5 million shares of the Company's Common Stock on the open
market. A total of 1,507,000 of the shares were purchased in 1998.
<TABLE>
<CAPTION>
Shares Amount
Outstanding (Thousands)
----------- -----------
<S> <C> <C>
Balance, December 31, 1997 0 $0
Reacquired through Repurchase Plan (1,507,000) (46,433)
----------- --------
Balance, December 31, 1998 (1,507,000) $(46,433)
</TABLE>
COMMON STOCK
At December 31, 1998, there were 50,000,000 shares of $5 par value Common
Stock authorized, of which 37,378,813 were outstanding. No shares of Common
Stock are reserved for warrants, conversions, or other rights. There were
1,965,651 shares of Common Stock reserved for employees under the 1996
Performance Stock Option Plan, as further described below. There were 1,026,840
shares of Common Stock reserved and unissued for shareholders under the
Automatic Dividend Reinvestment and Stock Purchase Plan and 129,664 shares
reserved and unissued for employees under the RG&E Savings Plus Plan.
<TABLE>
<CAPTION>
Shares Amount
Outstanding (Thousands)
----------- -----------
<S> <C> <C>
Balance, December 31, 1995 38,453,163 $687,518
Shares Issued through Stock Plans 398,301 8,612
Decrease (Increase) in Capital
Stock Expense ( 111)
---------- --------
Balance, December 31, 1996 38,851,464 $696,019
Shares Issued through Stock Plans 10,883 272
Additional Paid in Capital 2,399
Decrease (Increase) in Capital
Stock Expense 341
---------- --------
Balance, December 31, 1997 38,862,347 699,031
Shares Issued through Stock Plans 23,466 586
Additional Paid in Capital 99
Repurchase Plan (1,507,000) (46,433)
Decrease (Increase) in Capital
Stock Expense 14
---------- --------
Balance, December 31, 1998 37,378,813 $653,297
</TABLE>
<PAGE>
64
PERFORMANCE STOCK OPTION PLAN
The Company has a Performance Stock Option Plan which provides for the
granting of options to purchase up to 2,000,000 authorized but unissued shares
or treasury shares of $5 par value Common Stock to executive officers and other
key employees. No participant shall be granted options for more than 200,000
shares of Common Stock during any calendar year. The options would be
exercisable for a period to be determined by the Committee on Management of the
Board of Directors (the Committee). The Committee grants the right to receive a
cash payment upon any exercise of an option equal to the quarterly dividend
payment per share of Common Stock paid from the date the option was granted to
the date of exercise.
In 1998, the Board of Directors granted 27,984 options at an exercise price
of $33.9065 per share and 15,157 options at an exercise price of $31.0005 per
share. These options are vested at 25% when the stock closes at $35 per share,
50% at $40 per share, 75% at $45 per share and 100% at $50 per share. These
options are exercisable for a period of 10 years. The weighted average grant
date option fair value is $5.56. The weighted average contractual remaining
life at December 31, 1998 is 9.10 years.
In 1997, the Board of Directors granted 504,700 options at an exercise
price of $19.0625 per share. These options are vested at 50% when the stock
closes at $25 per share, 75% at $30 per share and 100% at $35 per share. Also
in 1997, the Board of Directors granted 50,159 options at an exercise price of
$24.75 per share. These options are vested at 25% when the stock closes at $25
per share, 50% at $30 per share, 75% at $35 per share and 100% at $40 per share.
These options are exercisable for a period of 10 years. The weighted average
grant date option fair value is $4.60. The weighted average contractual
remaining life at December 31, 1998 is 8.13 years.
In order for the options to become vested, the closing prices must be
sustained at or above the levels indicated above for a minimum of five
consecutive trading days.
Since the Company adopted SFAS-123, compensation expense associated with
the options granted is reflected in 1997 and 1998 net income. The compensation
expense recorded was $2,399,000 in 1997 and $239,800 in 1998. The compensation
expense was calculated using the shorter of the anticipated or actual vesting
period. In applying SFAS-123, the fair value of each option granted is
estimated on the date of the grant using the Black-Scholes option pricing model
with the following assumptions: risk-free rate of return ranging between 6.39%
and 6.56% for 1997 and 5.54% to 5.65% for 1998, expected dividend yield of 0%
for 1997 and 1998, and expected stock volatility of 17% for 1997 and 1998.
A summary of the Company's stock option activity is presented below:
<PAGE>
65
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Options granted 1997 554,859 $19.577
Options exercised (10,883) $19.063
---------
Outstanding at 12/31/97 543,976 $19.587
Vested at 12/31/97 392,722 $19.426
Available for future grant at 12/31/97 1,445,141
Options granted 1998 43,141 $32.886
Options exercised (23,466) $19.063
---------
Outstanding at 12/31/98 563,651 $20.627
Vested at 12/31/98 369,255 $19.449
Available for future grant at 12/31/98 1,402,000
</TABLE>
Note 9. SHORT-TERM DEBT
On December 31, 1998, the Company and its subsidiary, Energetix had short-
term debt outstanding of $50.5 million and $6.5 million, respectively. At
December 31, 1997 the Company had short-term debt outstanding of $20.0 million.
At no time during 1997 did Energetix have any short-term debt outstanding. The
weighted average interest rates on short-term debt outstanding at year-end 1998
for the Company and Energetix were 5.81% and 6.66%, respectively. The weighted
average interest rates for borrowings during the year were 5.51% and 6.31%,
respectively. The weighted average interest rate on short-term debt borrowed
during 1997 for the Company was 6.07%.
The Company's $90 million revolving credit agreement currently terminates
on December 31, 2001. Commitment fees related to this facility amounted to
$97,705 in 1998 and $113,000 in 1997 and 1996. At the time of acquisition of
Griffith Oil Co., Inc. by Energetix, Griffith secured a $15 million revolving
credit agreement. Borrowings under this agreement are secured by personal
property of Griffith. Energetix has made a financial guarantee on behalf of
Griffith which obligates Energetix in the event of a Griffith default.
The Company's Charter provides that the Company may not issue unsecured
debt if immediately after such issuance the total amount of unsecured debt
outstanding would exceed 15 percent of the Company's total secured indebtedness,
capital, and surplus without the approval of at least a majority of the holders
of outstanding Preferred Stock. As of December 31, 1998, the Company would be
able to incur approximately $93.8 million of additional unsecured debt under
this provision. The Company has unsecured lines of credit totaling $47 million
available from several banks, at their discretion.
In order to be able to use its $90 million revolving credit agreement, the
Company has created a subordinate mortgage which secures borrowings under its
revolving credit agreement that might otherwise be restricted by this provision
of the Company's Charter. In addition, the Company has a Loan and Security
Agreement to provide for borrowings up to $30 million as needed from time to
time for other working capital needs. Borrowings under this agreement, which
can be renewed annually, are secured by a lien on the Company's accounts
receivable.
<PAGE>
66
Note 10. COMMITMENTS AND OTHER MATTERS
REGULATORY ASSETS
With PSC approval the Company has deferred certain costs rather than
recognize them on its books when incurred. Such deferred costs are then
recognized as expenses when they are included in rates and recovered from
customers. Such deferral accounting is permitted by SFAS-71. These deferred
costs are shown as Regulatory Assets on the Company's Balance Sheet. Such cost
deferral is appropriate under traditional regulated cost-of-service rate
setting, where all prudently incurred costs are recovered through rates. In a
purely competitive pricing environment, such costs might not have been incurred
and could not have been deferred. Accordingly, if the Company's rate setting
was changed from a cost-of-service approach, and it was no longer allowed to
defer these costs under SFAS-71, these assets would be adjusted for any
impairment to recovery (pursuant to SFAS-121). In certain cases, the entire
amount could be written off.
SFAS-121 requires write-down of assets whenever events or circumstances
occur which indicate that the carrying amount of a long-lived asset may not be
fully recoverable.
Below is a summarization of the Regulatory Assets as of December 31, 1998
and 1997:
Millions of Dollars
1998 1997
---- ----
Income Taxes $147.6 $159.6
Kamine 192.8 -
Uranium Enrichment Decommissioning Deferral 15.1 16.4
Deferred Ice Storm Charges 8.9 11.5
Deferred Environmental SIR costs 20.9 12.4
Labor Day 1998 Storm Costs 7.2 -
Gas Deferred Fuel 10.7 7.1
Other, net 13.1 25.0
------ ------
Total - Regulatory Assets $416.3 $232.0
====== ======
- - Income Taxes: This amount represents the unrecovered portion of tax
benefits from accelerated depreciation and other timing differences which
were used to reduce tax expense in past years. The recovery of this
deferral is anticipated over the remaining life of the related property,
which varies from one to thirty years, when the effect of the past
deductions reverses in future years.
- - Kamine: This amount results from a settlement resolving all litigation,
releasing all claims and terminating all electricity purchase obligations
under a power purchase agreement.
- - Uranium Enrichment Decommissioning Deferral: The Energy Policy Act of 1992
requires utilities to contribute such amounts based on the amount of
uranium enriched by the United States Department of Energy (DOE) for each
<PAGE>
67
utility. This amount is mandated to be paid to DOE through the year 2007.
The recovery of these costs is through base rates of fuel.
- - Deferred Ice Storm Charges: These costs result from the non-capital storm
damage repair costs following the March 1991 ice storm. The recovery of
these costs has been approved by the PSC through the year 2002.
- - Deferred Environmental Site Investigation/Remediation Costs: These costs
represent the Company's share of the estimated costs to investigate and
perform certain remediation activities at both Company-owned and non-owned
sites with which it may be associated. The Company has recorded a
regulatory asset representing the remediation obligations to be recovered
from ratepayers, subject to the terms of the Competitive Opportunities
Settlement.
- - Labor Day 1998 Storm Costs: These costs result from a 1998 Labor Day storm.
Under the Competitive Opportunities Settlement, the Company is entitled to
defer, for later recovery in rates, certain costs, including those caused
by "catastrophic events", when any single event results in costs exceeding
$2.5 million. The Company has filed a petition with the PSC notifying them
of the deferral of these storm costs.
- - Gas Deferred Fuel: These costs result from a PSC-approved annual
reconciliation of recoverable gas costs with gas revenues in which the
excess or deficiency is refunded to or recovered from customers during a
subsequent period.
In a competitive electric market, strandable assets would arise when
investments are made in facilities, or costs are incurred to service customers,
and such costs are not fully recoverable in market-based rates. Examples
include purchase power contracts or high cost generating assets. Estimates of
strandable assets are highly sensitive to the competitive wholesale market price
assumed in the estimation. The amount of potentially strandable assets at
December 31, 1998 depends on market prices and the competitive market in New
York State which is still under development and subject to continuing changes
which are not yet determinable, but could be significant. Strandable assets, if
any, could be written down for impairment of recovery in the same manner as
deferred costs discussed above.
In a competitive natural gas market, strandable assets would arise where
customers migrate away from dependence on the Company for full service, leaving
the Company with surplus pipeline and storage capacity, as well as natural gas
supplies, under contract. The Company has been restructuring its
transportation, storage and supply portfolio to reduce its potential exposure to
strandable assets. Regulatory developments discussed under "Gas Cost Recovery"
below, may affect this exposure; but whether and to what extent there may be an
impact on the level and recoverability of strandable assets cannot be determined
at this time.
At December 31, 1998 the Company believes that its regulatory and
strandable assets, if any, are not impaired and are probable of recovery. The
settlement approved in the Competitive Opportunities proceeding (Competitive
Opportunities Settlement) does not impair the opportunity of the Company to
recover its investment in these assets. However, the PSC issued an Opinion and
Order Instituting Further Inquiry on March 20, 1998 to address issues
surrounding nuclear generation. The ultimate determination in this proceeding
could have an impact on strandable assets and the recovery of nuclear costs.
The initial meeting in this Inquiry was held in January 1999 and such a
determination is unlikely before year-end.
<PAGE>
68
CAPITAL EXPENDITURES
The Company's 1999 construction expenditures program is currently estimated
at $114 million. The Company has entered into certain commitments for purchase
of materials and equipment in connection with that program.
NUCLEAR-RELATED MATTERS
DECOMMISSIONING TRUST. The Company is collecting amounts in its electric
rates for the eventual decommissioning of its Ginna Plant and for its 14% share
of the decommissioning of Nine Mile Two. The operating licenses for these
plants expire in 2009 and 2026, respectively.
Under accounting procedures approved by the PSC, the Company has collected
decommissioning costs of approximately $138.3 million through December 31, 1998
and is authorized to collect approximately $22 million annually through June 30,
2002 for decommissioning, covering both nuclear units. The amount allowed in
rates is based on estimated ultimate decommissioning costs of $296.3 million for
Ginna and $112.8 million for the Company's 14% share of Nine Mile Two (1995
dollars). These estimates are based on site specific cost studies for each
plant completed in 1995. Site specific studies of the anticipated costs of
actual decommissioning are required to be submitted to the NRC at least five
years prior to the expiration of the license.
The NRC requires reactor licensees to submit funding plans that establish
minimum NRC external funding levels for reactor decommissioning. The Company's
plan, filed in 1990, consists of an external decommissioning trust fund covering
both its Ginna Plant and its Nine Mile Two share. Since 1990, the Company has
contributed $107.3 million to this fund and, including realized and unrealized
investment returns, the fund has a balance of $183.5 million as of December 31,
1998. The amount attributed to the allowance for removal of non-contaminated
structures is being held in an internal reserve. The internal reserve balance
as of December 31, 1998 is $31.0 million.
The 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.
The PSC in August 1997 issued for comment a report by its staff proposing
norms by which nuclear plants in the state would relate to the competitive
electricity market following the period covered by electric utility
restructuring agreements then pending before the PSC. Among other things, the
report envisioned the sale of these plants at auction, but with the selling
utilities remaining responsible for ultimate decommissioning as well as for
disposal of certain spent fuel. Recognizing that bidders may not be attracted
to certain units -- which could include both the Company's Ginna plant and the
Nine Mile Two plant in which it has a 14% interest, the report contemplated
their early shutdown unless they could compete with other forms of generation.
In Fall 1997, the Company and others commented on these and other facets of the
report. On March 20, 1998 the PSC issued an Opinion and Order Instituting
Further Inquiry. In December 1998 the PSC issued a Notice of Collaborative
Conference to further
<PAGE>
69
examine the future treatment of nuclear generation. The
initial collaborative conference in this proceeding will be held in January,
1999.
The Staff of the Financial Accounting Standards Board is studying the
recognition, measurement and classification of certain liabilities related to
the closure or removal of long lived assets. This could affect the accounting
for the decommissioning costs of the Company's nuclear generating stations. If
current accounting practices for such costs were changed, the annual provisions
for decommissioning costs could increase, the estimated cost for decommissioning
could be reclassified as a liability rather than as accumulated depreciation,
the liability accounts and corresponding plant asset accounts could be increased
and trust fund income from the external decommissioning trusts could be reported
as investment income rather than as a reduction to decommissioning expense.
If annual decommissioning costs increased, the Company would expect to
defer the effects of such costs pending disposition by the PSC.
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.
The assessments for Ginna and the Company's share of Nine Mile Two are
estimated to total $22.1 million, excluding inflation and interest. Installments
aggregating approximately $11.2 million have been paid through 1998. A
liability has been recognized on the financial statements along with a
corresponding regulatory asset. For the two facilities the Company's liability
at December 31, 1998 is $13.9 million ($12.2 million as a long-term liability
and $1.7 million as a current liability). The Company is recovering costs
through base rates of fuel.
NUCLEAR FUEL DISPOSAL COSTS. The Nuclear Waste Policy Act (Nuclear Waste
Act) of 1982, as amended, requires the DOE to establish a nuclear waste disposal
site and to take title to nuclear waste. A permanent DOE high-level nuclear
waste repository is not expected to be operational before the year 2010. In
December 1996 the DOE notified the Company that the DOE will not start
acceptance of Ginna spent fuel in 1998. The Nuclear Waste Act provides for a
determination of the fees collectible by the DOE for the disposal of nuclear
fuel irradiated prior to April 7, 1983 and for three payment options. The
option of a single payment to be made at any time prior to the first delivery of
fuel to the DOE was selected by the Company in June 1985. The Company estimates
the fees, including accrued interest, owed to the DOE to be $87.6 million at
December 31, 1998. The
<PAGE>
70
Company is allowed by the PSC to recover these costs in rates. The estimated
fees are classified as a long-term liability and interest is accrued at the
current three-month Treasury bill rate, adjusted quarterly. The Nuclear Waste
Act also requires the DOE to provide for the disposal of nuclear fuel irradiated
after April 6, 1983, for a charge of approximately one mill ($.001) per KWH of
nuclear energy generated and sold. This charge (approximately $4.7 million per
year) is currently being collected from customers and paid to the DOE pursuant
to PSC authorization. The Company expects to utilize on-site storage for all
spent or retired nuclear fuel assemblies until an interim or permanent nuclear
disposal facility is operational.
There are presently no facilities in operation in the United States
available for the reprocessing of spent nuclear fuel from utility companies. In
the Company's determination of nuclear fuel costs it has taken into account that
nuclear fuel would not be reprocessed and has provided for disposal costs in
accordance with the Nuclear Waste Act. In November 1998 the Company completed
installation of seven high-capacity spent fuel racks in the spent fuel pool.
This will allow interim storage capacity of all spent fuel discharged from the
Ginna Plant through the end of its Operating License in the year 2009.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws and regulations
dealing with air and water quality and other environmental matters.
Environmental matters may expose the Company to potential liabilities which, in
certain instances, may be imposed without regard to fault or historical
activities which were lawful at the time they occurred. The Company continually
monitors its activities in order to determine the impact of its activities on
the environment and to ensure compliance with various environmental laws. The
Company has recorded a total liability of approximately $24.2 million in
connection with Site Investigation and/or Remediation (SIR) efforts where
disposal of certain waste products may have occurred. Estimates of the SIR costs
for each of these sites range from preliminary to highly refined. The Company
expects to pay these SIR costs over the next ten years. These estimates could
change materially, based on facts and circumstances derived from site
investigations, changes in required remedial action, changes in technology
relating to remedial alternatives and changes to current laws and regulations.
Liability may be joint and several for certain of these sites. There may be
additional costs with respect to these and possibly other sites, the materiality
of which is not presently determinable.
COMPANY-OWNED ELECTRIC AND GAS WASTE SITE ACTIVITIES. The Company is
conducting proactive SIR efforts at seven Company-owned sites where past waste
handling and disposal may have occurred. Remediation activities at five 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 has recorded a
liability of approximately $21.6 million for SIR efforts at the seven Company-
owned sites in the Rochester, NY area.
SUPERFUND AND NON-OWNED OTHER SITES. The Company has been or may be
associated as a potentially responsible party at eight sites not owned by it and
has recorded estimated liabilities of approximately $.8 million in connection
with SIR efforts at these sites. The Company has signed orders on consent for
five of these sites.
GRIFFITH FACILITIES. The Company's subsidiary, Energetix, recently
acquired Griffith Oil, Inc. A review and audit was conducted of all Griffith
facilities by a nationally recognized engineering firm 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 New
York
<PAGE>
71
State Department of Environmental Conservation (NYSDEC) spill numbers were
assigned. These sites are currently undergoing evaluation and remediation
planning for corrective action. Using historical NYSDEC remedial actions as a
guide, Energetix estimates the accrual of aggregate cleanup costs over a five-
year period for all 43 sites approximates $1.8 million.
GAS COST RECOVERY
The Company 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, 1998, thereby avoiding
negative financial impacts for that period. In July, the Company entered into
an agreement with Dynegy Marketing and Trade to provide assistance 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 that result from the migration of customers to
other gas suppliers under the Interim Settlement Agreement may be subject to
revision 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 distribution
system, will remain frozen for all customers at their current level (which were
fixed at the July 1994 level pursuant to the 1995 Settlement that expired on
October 31, 1998), 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.
LITIGATION
SPENT NUCLEAR FUEL LITIGATION. The federal Nuclear Waste Act obligated
DOE to accept for disposal spent nuclear fuel (SNF) from utilities' powerplants
by January 31, 1998 (statutory deadline). Since the mid-1980s, the Company and
other nuclear plant owners and operators have paid substantial fees to DOE to
fund that obligation (Nuclear Waste Fund). That DOE would not meet its
obligation was evident well prior to 1998; DOE admitted as much as the statutory
deadline approached.
In 1994, Northern States Power Company and other owners of nuclear plants
filed suit against DOE and the federal government in the U.S. Court of Appeals
for the District of Columbia Circuit (Court) seeking a declaration that DOE's
course of action was in violation of its statutory obligation and requesting
<PAGE>
72
other relief. In 1996, the Court upheld the utilities' position that DOE is
obligated to accept and dispose of the utilities' SNF by the statutory deadline.
The Court rejected the DOE contention that it could defer the disposal until the
availability of a suitable SNF repository, but stopped short of providing the
utilities a remedy since DOE had not yet defaulted.
In late 1996, DOE invited nuclear utilities' views on how its anticipated
inability to meet the statutory deadline could "best be accommodated." The
Company and a number of other parties responded to that invitation.
By a Joint Petition for Review, the Company and other nuclear utilities
petitioned the Court in January 1997 for a declaration that the Petitioners were
relieved of the obligation to pay fees into the Nuclear Waste Fund, and were
authorized to place those fees into escrow until DOE commences disposing of SNF.
The petition further requested that DOE be ordered to develop a program that
would enable it to begin acceptance of SNF by the statutory deadline. In
November 1997, the Court held that DOE could not delay acceptance on grounds
that it lacked an SNF repository, and that the utilities had a "clear right to
relief". Rather than grant funding relief and order the DOE to move SNF,
however, the Court referred the utilities to their contractual remedies against
DOE. State agencies, municipal governments and DOE sought review of this
decision, but the U.S. Supreme Court declined in November 1998 to hear the case.
The Company, joined by several other nuclear utilities, in July 1998 initiated a
further effort to have the Court provide a suitable remedy under its "original
and exclusive" jurisdiction over matters arising under the Nuclear Waste Act.
The Court has yet to rule on that request.
DOE's failure to meet its statutory deadline has given rise to numerous other
lawsuits. For example, several plant operators brought suit against DOE in the
U.S. Court of Federal Claims. In decisions issued in October and November 1998,
that court held that DOE had breached its contractual obligations. It denied
most portions of DOE motions to dismiss the operators', claims and granted the
operators' summary judgment on DOE contract liability.
It is not possible to predict the future course of this obligation or the
resolution of the spent nuclear fuel movement and storage concern that underlies
it. The current court rulings on the DOE's default in meeting its obligation to
remove SNF by the statutory deadline, and on its contractual liability therefor,
have been promising. The current court rulings appear to have prompted greater
DOE effort to complete site investigations at its Yucca Mountain, NV, site for
SNF disposal and to focus greater Congressional attention on the
inappropriateness of continuing to house SNF around the nation at short-term SNF
facilities of nuclear powerplants. These developments have not yet led,
however, either to a firm schedule for DOE's movement of SNF from plant
facilities to a permanent repository or to the authorization of plant owners and
operators to withhold their Nuclear Waste Fund payments to DOE until that
schedule is established. The Company and other nuclear utilities continue to
work toward those objectives.
LITIGATION WITH CO-GENERATOR. On December 1, 1998 the Company completed the
closing under its Global Settlement Agreement with General Electric Capital
Corporation (GECC), Kamine/Besicorp Allegany L.P. (Kamine) and other Kamine
affiliates. In connection with the closing the Company paid $10 million and
gave a promissory note in the aggregate amount of $168 million payable to GECC.
The promissory note is secured by a general mortgage on the Company's property
which mortgage is subject and subordinate to the Company's First Mortgage. The
mortgage is not recorded but may be recorded in the event of default. In
addition the Company purchased the gas-fired generation facility rated at 65Mw
for $15 million. The Global Settlement was approved by the PSC which authorized
the Company to recover the payments in rates.
<PAGE>
73
OTHER MATTERS
OTHER STATEMENT OF INCOME ITEMS. The change in Other Income and
Deductions, Other-net in 1998 reflects the recognition of income due to the
reversal of certain deferred credits in accordance with the Competitive
Opportunities Settlement. In prior years, the PSC had required the Company to
establish deferred credits to account for certain pension and other post-
employment benefit charges and Nine Mile Two operating and maintenance expenses.
In 1998, these deferred credits totaling $17.4 million were eliminated
consistent with the terms of the Settlement and discussions with the PSC. An
amount of $8.8 million associated with certain pension charges was reflected on
the Company's books in the first quarter of 1998, after the Company received the
written order associated with the Competitive Opportunities Settlement. An
amount of $6.0 million associated with certain Nine Mile Two operating and
maintenance expenses was reflected ratably over each of the four quarters of
1998, consistent with Nine Mile Two accounting practices. The remainder
associated with certain other post-employment benefits was reflected in the
second quarter of 1998, after the Company had concluded discussions with the
PSC. The Company does not have any deferred credits which are subject to PSC
Orders which would permit the recognition of any significant credits to income
in the future. This income was partially offset by expenses associated with the
gas interim settlement agreement.
EITF ISSUE 97-4 - DEREGULATION OF THE PRICING OF ELECTRICITY. In July
1997, the Financial Accounting Standards Board's Emerging Issues Task Force
(EITF) reached a consensus on accounting rules for utilities' transition plans
for moving to more competitive environments and provided guidance on when
utilities with transition plans will need to discontinue the application of
SFAS-71, "Accounting for the Effects of Certain Types of Regulation".
The major EITF consensus was that the application of SFAS-71 to a segment
(e.g. generation) which is subject to a deregulation transition plan should
cease when the legislation or enabling rate order contains sufficient detail for
the utility to reasonably determine what the transition plan will entail. The
EITF also concluded that a decision to continue to carry some or all of the
regulatory assets (including stranded costs) and liabilities of the separable
portion of the business that is discontinuing the application of SFAS-71 should
be determined on the basis of where the regulated cash flows to realize and
settle them will be derived. If a transition plan provides for a non-bypassable
fee for the recovery of stranded costs, there may not be any significant write-
off if SFAS-71 is discontinued for a segment.
The Company's application of the EITF 97-4 consensus has not affected its
financial position or results of operations because any above-market generation
costs, regulatory assets and regulatory liabilities associated with the
generation portion of its business will be recovered by the regulated portion of
the Company through its distribution rates, given the Settlement provisions.
The Settlement provides for recovery of all prudently incurred sunk costs (all
investment in electric plant and electric regulatory assets) as of March 1, 1997
by inclusion in rates charged pursuant to the Company's distribution access
tariff. The Settlement also states that "the Parties intend that the provisions
of this Settlement will allow the Company to continue to recover such costs,
during the term of the Settlement, under SFAS-71", and that "such treatment
shall be consistent with the principle that the Company shall have a reasonable
opportunity beyond July 1, 2002 to recover all such costs". The fixed portion of
the non-nuclear generation to-go costs after July 1, 1999 and the variable
portion of the non-nuclear generation to-go costs after July 1, 1998 are subject
to market forces and would no longer be able to apply SFAS-71. The Company's
net investment at December 31, 1998 in nuclear generating assets is $666.9
million and in non-nuclear generating assets is $117.9 million.
<PAGE>
74
LEASE AGREEMENTS. The Company, including Energetix, leases 15 properties
for administrative offices, operating activities and vehicles. The total lease
expense charged to operations was $4.8 million, $4.2 million and $3.9 million in
1998, 1997 and 1996, respectively. For the years 1999, 2000, 2001, 2002 and
2003 the estimated lease expense charged to operations will be $5.2 million,
$3.4 million, $3.3 million, $2.9 million and $2.8 million, respectively.
Commitments under capital leases were not significant to the accompanying
financial statements.
GAS PURCHASE COMMITMENTS. Energetix has entered into natural gas purchase
commitments with numerous gas suppliers. These commitments support a fixed
price offering to retail gas customers.
INTERIM FINANCIAL DATA
In the opinion of the Company, the following quarterly information includes
all adjustments, consisting of normal recurring adjustments, necessary for a
fair statement of the results of operations for such periods. The variations in
operations reported on a quarterly basis are a result of the seasonal nature of
the Company's business and the availability of surplus electricity. The sum of
the quarterly earnings per share may not equal the fiscal year earnings per
share due to rounding.
<TABLE>
<CAPTION>
(Thousands of Dollars)
Earnings Per
Common Share
Operating Operating Net Earnings on (in dollars)
Quarter Ended Revenues Income Income Common Stock Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998 $287,106 $22,345 $15,015 $14,088 $ .37 $ .37
September 30, 1998 253,606 34,444 25,213 23,908 .62 .62
June 30, 1998/1/ 211,134 22,203 15,655 14,350 .37 .37
March 31, 1998/1/ 282,516 48,168 38,255 36,950 .95 .95
December 31, 1997 $271,039 $24,406 $14,031 $12,726 $ .32 $ .32
September 30, 1997 221,335 34,616 21,724 20,419 .52 .52
June 30, 1997 229,419 31,125 18,172 16,681 .42 .42
March 31, 1997 314,845 55,194 41,433 39,729 1.02 1.02
December 31, 1996/1/ $274,431 $33,048 $22,228 $20,362 $ .52 $ .52
September 30, 1996 234,843 36,159 21,062 19,196 .49 .49
June 30, 1996 235,577 23,115 11,732 9,866 .25 .25
March 31, 1996 309,195 56,866 42,489 40,623 1.05 1.05
</TABLE>
/1/ Reclassified for comparative purposes.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
75
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K relating to directors who
are nominees for election as directors at the Company's Annual Meeting of
Shareholders to be held on April 29, 1999, will be set forth under the heading
"Election of Directors" in the Company's Definitive Proxy Statement for such
Annual Meeting of Shareholders.
The information required by Item 10 of Form 10-K with respect to executive
officers is, pursuant to instruction 3 of paragraph (b) of Item 401 of
Regulation S-K, set forth in Part I as Item 4-A of this Form 10-K under the
heading "Executive Officers of the Registrant".
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K will be set forth under
the headings "Report of the Committee on Management on Executive Compensation",
"Executive Compensation" and "Pension Plan Table" in the Company's Definitive
Proxy Statement for the Annual Meeting of Shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K will be set forth under
the headings "General" and "Security Ownership of Management" in the Company's
Definitive Proxy Statement for the Annual Meeting of Shareholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K will be set forth under
the heading "Election of Directors" in the Company's Definitive Proxy Statement
for the Annual Meeting of Shareholders.
Pursuant to General Instruction G(3) to Form 10-K, Items 10 through 13 have
not been answered because, within 120 days after the close of its fiscal year,
the Registrant will file with the Commission a definitive proxy statement
pursuant to Regulation 14A which involves the election of directors.
Registrant's definitive proxy statement dated March 8, 1999 will be filed with
the Securities and Exchange Commission prior to April 30, 1999. The information
required in Items 10 through 13 under the headings set forth above is
incorporated by reference herein by this reference thereto. Except as
specifically referenced herein the proxy statement in connection with the annual
meeting of shareholders to be held April 29, 1999 is not deemed to be filed as
part of this Report.
<PAGE>
76
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements listed below are shown under Item 8 of this
Report.
Report of Independent Accountants.
Consolidated Statement of Income for each of the three years ended
December 31, 1998.
Consolidated Statement of Retained Earnings for each of the three
years ended December 31, 1998.
Consolidated Balance sheet at December 31, 1998 and 1997.
Consolidated Statement of Cash Flows for each of the three years
ended December 31, 1998.
Notes to Consolidated Financial Statements.
(a) 2. Financial Statement Schedules - Included in Item 14 herein:
For each of the three years ended December 31, 1998.
Schedule II - Valuation and Qualifying Accounts.
(a) 3. Exhibits - See List of Exhibits.
(b) Reports on Form 8-K
None
<PAGE>
77
ROCHESTER GAS AND ELECTRIC CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Thousands of Dollars)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Additions
---------
Balance at Charged to Charged Balance
Beginning Costs and To Other at End
Descriptions of Period Expenses Accounts Deductions of Period
- ------------ ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Reserves for:
Uncollectible accounts $11,950 $4,987 $565 $17,502
Materials and supplies
obsolescence 736 (375) 361
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Additions
---------
Balance at Charged to Charged Balance
Beginning Costs and To Other at End
Descriptions of Period Expenses Accounts Deductions of Period
- ------------ ---------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Reserves for:
Uncollectible accounts $17,502 $5,078 $4,346 $26,926
Materials and supplies
obsolescence 361 2,839 3,200
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Additions
---------
Balance at Charged to Charged Balance
Beginning Costs and To Other at End
Descriptions of Period Expenses Accounts Deductions of Period
- ------------ ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Reserves for:
Uncollectible accounts $26,926 $861 $507 $1,740 $26,554
Materials and supplies
obsolescence 3,200 1,010 2,190
</TABLE>
Beginning in 1992 the Company no longer charges uncollectible expenses
through the uncollectible reserve. The 1998 reserves for uncollectibles
includes Energetix. The total amount written off directly to expense in 1996
was $15,039, in 1997 was $12,912 and in 1998 was $11,838. In 1997, the amounts
charged to other accounts represent a true-up of writeoff amounts during the
implementation of a new customer information system ($3.0 million) and the
forgiveness of late payment amounts which had previously been reflected as
revenue ($1.3 million). In 1996, the entire amount charged to other accounts is
attributable to forgiveness of late payment amounts. In 1998, the amount
charged to other accounts reflects consolidation of Energetix/Griffith reserve
for uncollectibles ($0.3 million) and forgiveness of late payments ($0.2
million). The deductions in 1998 represent true-ups of the estimated reserve
required for uncollectibles. The deductions in the materials and supplies
reserve in 1998 represent actual writeoffs of obsolete material.
<PAGE>
78
LIST OF EXHIBITS
Exhibit 3-1* Restated Certificate of Incorporation of Rochester Gas and
Electric Corporation under Section 807 of the Business
Corporation Law filed with the Secretary of State of the State of
New York on June 23, 1992. (Filed in Registration No. 33-49805
as Exhibit 4-5 in July 1993)
Exhibit 3-2* Certificate of Amendment of the Certificate of Incorporation of
Rochester Gas and Electric Corporation Under Section 805 of the
Business Corporation Law filed with the Secretary of State of the
State of New York on March 18, 1994. (Filed as Exhibit 4 in May
1994 on Form 10-Q for the quarter ended March 31, 1994, SEC File
No. 1-672.)
Exhibit 3-3 By-Laws of the Company, as amended to date.
Exhibit 4-1* Restated Certificate of Incorporation of Rochester Gas and
Electric Corporation under Section 807 of the Business
Corporation Law filed with the Secretary of State of the State of
New York on June 23, 1992. (Filed in Registration No. 33-49805
as Exhibit 4-5 in July 1993)
Exhibit 4-2* Certificate of Amendment of the Certificate of Incorporation of
Rochester Gas and Electric Corporation Under Section 805 of the
Business Corporation Law filed with the Secretary of State of the
State of New York on March 18, 1994. (Filed as Exhibit 4 in May
1994 on Form 10-Q for the quarter ended March 31, 1994, SEC File
No. 1-672.)
Exhibit 4-3* By-Laws of the Company, as amended to date. (Filed as Exhibit 3-3
in February 1999 on Form 10-K for the year ended December 31,
1998, SEC File No. 1-672)
Exhibit 4-4* General Mortgage to Bankers Trust Company, as Trustee, dated
September 1, 1918, and supplements thereto, dated March 1, 1921,
October 23, 1928, August 1, 1932 and May 1, 1940. (Filed as
Exhibit 4-2 in February 1991 on Form 10-K for the year ended
December 31, 1990, SEC File No. 1-672)
Exhibit 4-5* Supplemental Indenture, dated as of March 1, 1983 between the
Company and Bankers Trust Company, as Trustee (Filed as Exhibit
4-1 on Form 8-K dated July 15, 1993, SEC File No. 1-672)
Exhibit 10-1* Basic Agreement dated as of September 22, 1975 among the Company,
Niagara Mohawk Power Corporation, Long Island Lighting Company,
New York State Electric & Gas Corporation and Central Hudson Gas
& Electric Corporation. (Filed in Registration No. 2-54547, as
Exhibit 5-P in October 1975.)
Exhibit 10-2* Letter amendment modifying Basic Agreement dated September 22,
1975 among the Company, Central Hudson Gas & Electric
Corporation, Orange and Rockland Utilities, Inc. and Niagara
Mohawk Power Corporation. (Filed in Registration No. 2-56351, as
Exhibit 5-R in June 1976.)
<PAGE>
79
Exhibit 10-3* Agreement dated September 25, 1984 between the Company and the
United States Department of Energy, as amended. (Filed as
Exhibit 10-3 in February 1995 on Form 10-K for the year ended
December 31, 1994, SEC File No. 1-672)
Exhibit 10-4* Agreement dated February 5, 1980 between the Company and the
Power Authority of the State of New York. (Filed as Exhibit 10-
10 in February 1990 on Form 10-K for the year ended December 31,
1989, SEC File No. 1-6722)
Exhibit 10-5* Agreement dated March 9, 1990 between the Company and Mellon
Bank, N.A. (Filed as Exhibit 10-1 in May 1990 on Form 10-Q for
the quarter ended March 31, 1990, SEC File No. 1-672)
Exhibit 10-6* Basic Agreement dated September 22, 1975 as amended and
supplemented between the Company and Niagara Mohawk Power
Corporation. (Filed as Exhibit 10-11 in February 1993 on Form
10-K for the year ended December 31, 1992, SEC File No. 1-672)
Exhibit 10-7* Operating Agreement effective January 1, 1993 among the owners of
the Nine Mile Point Nuclear Plant Unit No. 2. (Filed as Exhibit
10-12 in February 1993 on Form 10-K for the year ended December
31, 1992, SEC File No. 1-672)
Exhibit 10-8* (A) Rochester Gas and Electric Corporation Deferred Compensation
Plan. (Filed as Exhibit 10-14 in February 1994 on Form 10-K
for the year ended December 31, 1993, SEC File No. 1-672)
Exhibit 10-9* (A) Rochester Gas and Electric Corporation Long Term Incentive
Plan, Restatement of January 1, 1994. (Filed as Exhibit 10-
10 in February 1995 on Form 10-K for the year ended December
31, 1994, SEC File No. 1-672)
Exhibit 10-10* (A) Rochester Gas and Electric Corporation Deferred Stock Unit
Plan for Non-Employee Directors, effective as of December
31, 1995. (Filed as Exhibit 10-1 in May 1996 on Form 10-Q
for the quarter ended March 31, 1996, SEC File No. 1-672)
Exhibit 10-11* (A) Rochester Gas and Electric Corporation Executive Incentive
Plan, Restatement of January 1, 1995. (Filed as Exhibit 10-
11 in February 1996 on Form 10-K for the year ended December
31, 1995, SEC File No. 1-672)
Exhibit 10-12* (A) RG&E Unfunded Retirement Income Plan Restatement as of July
1, 1995. (Filed as Exhibit 10-12 in February 1996 on Form
10-K for the year ended December 31, 1995, SEC File No.
1-672)
Exhibit 10-13 (A) Agreement dated January 1, 1999 between the Company and
Thomas S. Richards, Chairman of the Board, President and
Chief Executive Officer.
Exhibit 10-14 (A) Agreement dated January 1, 1999 between the Company and Paul
C. Wilkens, Senior Vice President, Generation.
<PAGE>
80
Exhibit 10-15 (A) Agreement dated January 1, 1999 between the Company and J.
Burt Stokes, Senior Vice President, Corporate Services and
Chief Financial Officer.
Exhibit 10-16 (A) Agreement dated January 26, 1999 between the Company and
Michael J. Bovalino, President, Energetix, Inc.
Exhibit 10-17* Amended and Restated Settlement Agreement dated October 23,
1997 between the Company the Staff of the New York Public
Service Commission (PSC), and certain other parties (Filed
as Exhibit 10-4 on Form 10-Q for the quarter ended September
30, 1997, SEC File No. 1-672) as amended pursuant to an
order of the PSC issued January 14, 1998 (excluding
Appendices). (Filed as Exhibit 10-18 in February 1998 on
Form 10-K for the year ended December 31, 1997, SEC File No.
1-672)
Exhibit 10-18* (A) Form of Rochester Gas and Electric Corporation 1996
Performance Stock Option Plan Agreement. (Filed as Exhibit
10-1 in November 1997 on Form 10-Q for the quarter ended
September 30, 1997, SEC File No. 1-672)
Exhibit 10-19 (A) Agreement, dated January 18, 1999, between the Company and
Michael T. Tomaino, Senior Vice President and General
Counsel.
Exhibit 10-20* Agreement dated as of September 23,1997 between the Company
and International Business Machines Corporation. (Filed as
Exhibit 10-3 in November 1997 on Form 10-Q for the quarter
ended September 30, 1997, SEC File No. 1-672)
Exhibit 10-21 Global Settlement Agreement as amended October 29, 1998
between the Company, General Electric Capital Corporation
and Kamine/Besicorp Allegany L.P. and other Kamine
affiliates.
Exhibit 23 Consent of PricewaterhouseCoopers LLP, independent
accountants
Exhibit 27 Financial Data Schedule, pursuant to Item 601(c) of
Regulation S-K.
* Incorporated by reference.
(A) Denotes executive compensation plans and arrangements.
The Company agrees to furnish to the Commission, upon request, a copy of
all agreements or instruments defining the rights of holders of debt which do
not exceed 10% of the total assets with respect to each issue, including the
Supplemental Indentures under the General Mortgage and credit agreements in
connection with promissory notes as set forth in Note 6 of the Notes to
Financial Statements.
<PAGE>
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROCHESTER GAS AND ELECTRIC CORPORATION
By: /S/ THOMAS S. RICHARDS
------------------------------
Thomas S. Richards
Chairman of the Board,
President and
Chief Executive Officer
DATE: February 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
Principal Executive Officer:
/S/ THOMAS S. RICHARDS Chairman of the Board, February 19, 1999
- ---------------------------- President and
(Thomas S. Richards) Chief Executive Officer
Principal Financial Officer:
/S/ J. B. STOKES Senior Vice President February 19, 1999
- ---------------------------- Corporate Services and
(J. Burt Stokes) Chief Financial Officer
Principal Accounting Officer:
/S/ WILLIAM J. REDDY Controller February 19, 1999
- ----------------------------
(William J. Reddy)
<PAGE>
82
SIGNATURE TITLE DATE
- --------- ----- ----
Directors:
/S/ ANGELO J. CHIARELLA Director February 19, 1999
- ---------------------------
(Angelo J. Chiarella)
/S/ ALLAN E. DUGAN Director February 19, 1999
- ---------------------------
(Allan E. Dugan)
/S/ MARK B. GRIER Director February 19, 1999
- ----------------------------
(Mark B. Grier)
/S/ SUSAN R. HOLLIDAY Director February 19, 1999
- ---------------------------
(Susan R. Holliday)
/S/ JAY T. HOLMES Director February 19, 1999
- ---------------------------
(Jay T. Holmes)
/S/ SAMUEL T. HUBBARD,JR Director February 19, 1999
- ---------------------------
(Samuel T. Hubbard,Jr.)
/S/CLEVE L. KILLINGSWORTH,JR. Director February 19, 1999
- -----------------------------
(Cleve L. Killingsworth,Jr.)
/S/ ROGER W. KOBER Director February 19, 1999
- ---------------------------
(Roger W. Kober)
/S/ CONSTANCE M. MITCHELL Director February 19, 1999
- ---------------------------
(Constance M. Mitchell)
/S/ CORNELIUS J. MURPHY Director February 19, 1999
- ---------------------------
(Cornelius J. Murphy)
/S/ CHARLES I. PLOSSER Director February 19, 1999
- ---------------------------
(Charles I. Plosser)
/S/ THOMAS S. RICHARDS Director February 19, 1999
- ---------------------------
(Thomas S. Richards)
<PAGE>
Exhibit 3-3
ROCHESTER GAS AND ELECTRIC CORPORATION
BYLAWS
ARTICLE I
---------
SHAREHOLDERS
------------
Section 1.1 Annual Meeting An annual meeting of shareholders for the
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election of directors and the transaction of other business shall be held on
such date and at such time as may be fixed by the Board of Directors not less
than ten days prior thereto.
Section 1.2 Special Meetings Special meetings of the shareholders may
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be called by the Chairman of the Board of Directors or by the President, and
shall be called by the Chairman of the Board or by the Secretary at the request
in writing of a majority of the Board of Directors. Such meetings shall be held
at such time as may be fixed in the call and stated in the notice of meeting.
Any such written request shall state the purpose or purposes of the proposed
meeting.
Section 1.3 Place of Meetings Meetings of shareholders shall be held
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at such place, within or without the State of New York, as may be fixed in the
notice of meeting. Unless otherwise provided by action of the Board of
Directors, all meetings of shareholders shall be held at the principal office of
the Corporation in Rochester, New York.
Section 1.4 Notice of Meetings Notice of each meeting of shareholders
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shall be in writing and shall state the place, date and hour of the meeting and
the purpose or purposes for which the meeting is called. The notice of a
special meeting shall also state that it is being issued by or at the direction
of the person or persons calling the meeting.
A copy of the notice of any meeting shall be given, personally or by
mail, not less than ten or more than sixty days before the date of the meeting,
to each shareholder entitled to vote at such meeting. If mailed, such notice is
given when deposited in the United States mail, with postage prepaid, directed
to the shareholder at his address as it appears on the record of shareholders,
or, if he shall have filed with the Secretary of the Corporation a written
request that notices to him be mailed to some other address, then directed to
him at such other address.
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When a meeting is adjourned to another time or place, it shall not be
necessary to give any notice of the adjourned meeting if the time and place to
which the meeting is adjourned are announced at the meeting at which the
adjournment is taken, and at the adjourned meeting any business may be
transacted that might have been transacted on the original date of the meeting.
However, if after the adjournment the Board of Directors fixes a new record date
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each shareholder of record on the new record date entitled to notice under the
preceding paragraphs of this Section 1.4.
Section 1.5 Inspectors of Election The Board of Directors, in advance
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of any shareholders' meeting, may appoint one or more inspectors to act at the
meeting or any adjournment thereof. If inspectors are not so appointed, the
person presiding at a shareholders' meeting may, and on the request of any
shareholder entitled to vote thereat shall, appoint two inspectors. In case any
person appointed fails to appear or act, the vacancy may be filled by
appointment made by the Board in advance of the meeting or at the meeting by the
person presiding thereat. Each inspector, before entering upon the discharge of
his duties, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability.
The inspectors shall determine the number of shares outstanding and
the voting power of each, the shares represented at the meeting, the existence
of a quorum, and the validity and effect of proxies, and shall receive votes,
ballots or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all shareholders. On request of the person
presiding at the meeting or any shareholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, question or matter
determined by them and execute a certificate of any fact found by them. Any
report or certificate made by them shall be prima facie evidence of the facts
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stated and of the vote as certified by them.
Section 1.6 List of Shareholders at Meetings A list of shareholders
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as of the record date, certified by the Secretary or any Assistant Secretary or
by a transfer agent, shall be produced at any meeting of shareholders upon the
request thereat or prior thereto of any shareholder. If the right to vote at
any meeting is challenged, the inspectors of election, or person presiding
thereat, shall require such list of shareholders to be produced
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as evidence of the right of the persons challenged to vote at such meeting, and
all persons who appear from such list to be shareholders entitled to vote
thereat may vote at such meeting.
Section 1.7 Qualification of Voters Each shareholder of record of
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Common Stock of the Corporation shall be entitled at each meeting of
shareholders to one vote for each share of Common Stock standing in his name on
the record of shareholders at the record date.
Section 1.8 Quorum of Shareholders The holders of a majority of the
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shares entitled to vote thereat shall constitute a quorum at a meeting of
shareholders for the transaction of any business.
When a quorum is once present to organize a meeting, it is not broken
by the subsequent withdrawal of any shareholders.
The shareholders present, in person or by proxy, and entitled to vote
may, by a majority of votes cast, adjourn the meeting despite the absence of a
quorum.
Section 1.9 Vote of Shareholders Directors shall, except as otherwise
--------------------------------
required by law, be elected by a plurality of the votes cast at a meeting of
shareholders by the holder of shares entitled to vote in the election.
Whenever any corporate action, other than the election of directors,
is to be taken by vote of the shareholders, it shall, except as otherwise
required by law, be authorized by a majority of the votes cast at a meeting of
shareholders by the holders of shares entitled to vote thereon.
Section 1.10 Proxies Each shareholder entitled to vote at a meeting
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of shareholders or to express consent or dissent without a meeting may authorize
another person or persons to act for him by proxy.
Each proxy must be signed by the shareholder or his attorney-in-fact.
No proxy shall be valid after the expiration of eleven months from the date
thereof unless otherwise provided in the proxy. Each proxy shall be revocable
at the pleasure of the shareholder executing it, except as otherwise provided by
law.
The authority of the holder of a proxy to act shall not be revoked by
the incompetence or death of the shareholder who executed the proxy unless,
before the authority is exercised, written notice of an adjudication of such
incompetence or of such
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death is received by the Secretary or any Assistant Secretary.
Section 1.11 Fixing Record Date For the purpose of determining the
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shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividend or the allotment of any rights, or for the
purpose of any other action, the Board of Directors may fix, in advance, a date
as the record date for any such determination of shareholders. Such date shall
not be more than sixty or less than ten days before the date of such meeting,
nor more than sixty days prior to any other action.
When a determination of shareholders of record entitled to notice of
or to vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment thereof, unless the
Board of Directors fixes a new record date for the adjourned meeting.
ARTICLE II
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BOARD OF DIRECTORS
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Section 2.1 Power of Board and Qualification of Directors The
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business of the Corporation shall be managed by the Board of Directors, each of
whom shall be at least twenty-one years of age.
Section 2.2 Number of Directors The number of directors shall be
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fixed from time to time by the majority vote of the entire Board of Directors,
but in no event shall be less than nine (9) nor greater than eighteen (18)
directors. No decrease in the number of directors shall shorten the term of any
incumbent director. Any newly created directorships or any decrease in
directorships shall be so apportioned among the classes as to make all classes
as nearly equal in number as possible. If the number of directors is increased
by the Board and any newly created directorships are filled by the Board,
additional directors in each class will serve until the next annual meeting of
shareholders and thereafter until their successors shall be elected and shall
qualify, which election shall be conducted in accordance with the provisions of
these Bylaws applicable to the election of the initial classified board.
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Section 2.3 Election and Term of Directors Directors shall be elected
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at each annual meeting of the shareholders, or, if no such election shall be
held, at a meeting called and held in accordance with the statutes of the State
of New York. Each director shall be elected to hold office until the expiration
of the term for which he is elected, and thereafter until a successor shall be
elected and shall qualify. The directors shall be divided, with respect to the
terms for which they severally hold office, into three classes, hereby
designated as Class I, Class II and Class III. Each class shall have at least
three directors and the three classes shall be as nearly equal in number as
possible. The initial terms of office of the Class I, Class II and Class III
directors, elected at the 1992 annual meeting of shareholders, shall expire at
the next succeeding annual meeting of shareholders, the second succeeding annual
meeting of shareholders and the third succeeding annual meeting of shareholders,
respectively. At each annual meeting of shareholders after 1992, the successors
of the class of directors whose term expires at that meeting shall be elected to
hold office for a term expiring at the annual meeting of shareholders to be held
in the third year following the year of their election. The foregoing
provisions shall not apply to directors elected by holders of Preferred Stock in
the event they become entitled to exercise their special rights to elect a
majority of the Board of Directors pursuant to Article VIII of the Restated
Certificate of Incorporation. In such case, the remaining directors to be
elected by the holders of Common Stock shall be elected in the same manner as
the initial classified board. After the termination of such special rights, the
election of directors by holders of Common Stock will be conducted in accordance
with the provisions applicable to the election of the initial classified board
set forth above.
Section 2.4 Quorum of the Board; Action by the Board One-third of the
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entire Board of Directors shall constitute a quorum for the transaction of
business and, except as otherwise provided in these Bylaws, the vote of a
majority of the directors present at the time of such vote, if a quorum is then
present, shall be the act of the Board.
Section 2.5 Meetings of the Board An annual meeting of the Board of
---------------------------------
Directors shall be held in each year directly after adjournment of the annual
shareholders' meeting. Regular meetings of the Board may be held at such times
as may from time to time be fixed by resolution of the Board. Special meetings
of the Board may be held at any time upon the call of the Chairman of the Board
of Directors, the President or any two directors.
Meetings of the Board of Directors may be held at such
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place, within or without the State of New York, as from time to time may be
fixed by resolution of the Board for annual and regular meetings and in the
notice of meeting for special meetings. If no place is so fixed, meetings of the
Board shall be held at the principal office of the Corporation in Rochester, New
York.
No notice need be given of annual or regular meetings of the Board of
Directors. Notice of each special meeting of the Board shall be given by oral,
telegraphic or written notice, duly given or sent or mailed to each director not
less than one day before such meetings.
Notice of a meeting of the Board of Directors need not be given to any
director who submits a signed waiver of notice whether before or after the
meeting, or who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to him.
A notice, or waiver of notice, need not specify the purpose of any
meeting of the Board of Directors.
A majority of the directors present, whether or not a quorum is
present, may adjourn any meeting to another time and place. Notice of any
adjournment of a meeting to another time or place shall be given, in the manner
described above, to the directors who were not present at the time of the
adjournment and, unless such time and place are announced at the meeting, to the
other directors.
Section 2.6 Resignations Any director of the Corporation may resign
------------------------
at any time by giving written notice to the Board of Directors or to the
Chairman of the Board of Directors or to the President or to the Secretary of
the Corporation. Such resignation shall take effect at the time specified
therein; and unless otherwise specified therein the acceptance of such
resignation shall not be necessary to make it effective.
Section 2.7 Removal of Directors Any of the directors may be removed
--------------------------------
from office, for cause only, by action of the Board of Directors or by vote of
the shareholders.
Section 2.8 Newly Created Directorships and Vacancies Newly created
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directorships resulting from an increase in the number of directors and
vacancies occurring in the Board of Directors for any reason may be filled by
vote of a majority of the directors then in office, although less than a quorum
exists. A director elected to fill a vacancy shall be elected to hold
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office until the next annual meeting of the shareholders and thereafter until a
successor shall be elected and shall qualify.
Section 2.9 Nominations Except as otherwise provided under Article
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VIII of the Restated Certificate of Incorporation relating to the rights of any
class or series of Preferred Stock to elect directors under specified
circumstances, nominations for the election of directors may be made by the
Board of Directors or a committee appointed by the Board of Directors or by any
shareholder entitled to vote in the election of directors generally. However,
any shareholder entitled to vote in the election of directors generally may
nominate one or more persons for election as a director at a meeting only if
written notice of such shareholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Corporation not later than (i)
with respect to an election to be held at an annual meeting of shareholders,
ninety (90) days in advance of such meeting, and (ii) with respect to an
election to be held at a special meeting of shareholders for the election of
directors, the close of business on the tenth day following the date on which
notice of such meeting is first given to shareholders. Each such notice shall
set forth: (a) the name and address of the shareholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the shareholder is a holder of record of stock of the Company entitled to
vote at such meeting and intends to appear in person or by proxy at the meeting
to nominate the person or persons specified in the notice; (c) a description of
all arrangements or understandings between the shareholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the shareholder; (d) such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission, had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (e) the consent of each
nominee to serve as a director of the Company if so elected. The chairman of
the meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure.
Section 2.10 Notice of Shareholder Business At an annual meeting of
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the shareholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors,
(b) otherwise properly brought before the meeting by or at the
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direction of the Board of Directors, or (c) otherwise properly brought before
the meeting by a shareholder. For business to be properly brought before an
annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation, not less than ninety (90) days
prior to the meeting. A shareholder's notice to the Secretary shall set forth as
to each matter the shareholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Corporation's books, of the
shareholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the shareholder, and (d) any
material interest of the shareholder in such business. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 2.10.
The chairman of an annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
Section 2.11 Executive and Finance Committee and Other Committees of
--------------------------------------------------------------------
the Board of Directors The Board of Directors, by resolution adopted by a
- ----------------------
majority of the entire Board, shall designate from among its members an
Executive and Finance Committee consisting of three or more directors, and which
shall have all the authority of the Board, except that no such Committee shall
have authority as to the following matters:
(a) The submission to shareholders of any action that needs
shareholders' approval;
(b) The filling of vacancies in the Board or in the Executive and
Finance Committee;
(c) The fixing of compensation of the directors for serving on the
Board or on the Executive and Finance Committee;
(d) The amendment or repeal of the Bylaws, or the adoption of new
Bylaws;
(e) The amendment or repeal of any resolution of the
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Board which, by its terms, shall not be so amendable or repealable;
(f) The declaration of dividends.
The Board of Directors may designate one or more directors as
alternate members of the Executive and Finance Committee, who may replace any
absent member or members at any meeting of such Committee.
A majority of the entire authorized number of members of the Executive
and Finance Committee or any other Committee authorized by the Board of
Directors shall constitute a quorum for the transaction of business and, except
as otherwise provided in these Bylaws, the vote of a majority of the members
present at the time of such vote, if a quorum is present at such time, shall be
the act of such Committee.
The Executive and Finance Committee shall serve at the pleasure of the
Board of Directors.
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The Executive and Finance Committee shall cause to be kept regular
minutes of its proceedings, which may be transcribed in the regular minute book
of the Corporation, and all such proceedings shall be reported to the Board of
Directors at its next succeeding meeting, and shall be subject to revision or
alteration by the Board, provided that no rights of third persons shall be
affected by such revision or alteration. The Executive and Finance Committee
may, from time to time, subject to the approval of the Board of Directors,
prescribe rules and regulations for the calling and conduct of meetings of the
Committee, and other matters relating to its procedure and the exercise of its
powers.
The Board of Directors by resolution adopted by a majority of the
entire Board may designate from among its members other committees, each to
consist of at least three directors, and each of which committees shall have
authority only to the extent provided in such resolution. The Board may by
resolution designate directors to act as alternate members of a committee to
replace absent members at meetings of the committee. Such committees shall
serve at the pleasure of the Board of Directors.
Section 2.12 Action Without a Meeting Any action required or
-------------------------------------
permitted to be taken by the Board of Directors or any Committee thereof may be
taken without a meeting if all members of the Board or the Committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and written consents thereto shall be filed with the minutes of the proceedings
of the Board or Committee.
Section 2.13 Participation in Board Meetings by Conference Telephone
--------------------------------------------------------------------
Any one or more members of the Board of Directors or any committee thereof may
participate in a meeting of such Board or committee by means of a conference
telephone or similar communications equipment allowing all persons participating
in the meeting to hear each other at the same time. Participation by such means
shall constitute presence in person at a meeting.
Section 2.14 Compensation of Directors The Board of Directors shall
--------------------------------------
have authority to fix the compensation of directors for services in any
capacity.
Section 2.15 Interest of Director in a Transaction Unless shown to be
--------------------------------------------------
unfair and unreasonable as to the Corporation at the time it is approved by the
Board of Directors, a committee of such Board or the shareholders, no contract
or other transaction between the Corporation and one or more of its directors,
or between the Corporation and any other corporation,
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firm, association or other entity in which one or more of the directors are
directors or officers, or are financially interested, shall be either void or
voidable irrespective of whether such interested director or directors are
present at the meeting of the Board of Directors or of a committee thereof,
which approves such contract or transaction and irrespective of whether his or
their votes are counted for such purpose. Any such contract or transaction may
be conclusively approved as fair and reasonable by:
(a) the Board of Directors, or a duly empowered committee thereof, by
a vote sufficient for such purpose without counting the vote or votes
of such interested director or directors (and he or they may not be
counted in determining the presence of a quorum at the meeting which
approves such contract or transaction), if the fact of such common
directorship, officership or financial interest is disclosed or known
to the Board or committee (as the case may be); or
(b) the shareholders entitled to vote for the election of directors,
if such common directorship, officership or financial interest is
disclosed or known to such shareholders.
Section 2.16 Loans to Directors A loan shall not be made by the
-------------------------------
Corporation to any director unless it is authorized by vote of the shareholders.
For this purpose, the shares of the director who would be the borrower shall not
be shares entitled to vote.
Section 2.17 Indemnification of Directors and Officers (a) To the
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full extent authorized by law, the Corporation shall indemnify any person, made
or threatened to be made, a party in any civil or criminal action or proceeding
by reason of the fact that he, his testator or intestate, is or was a director
or officer of the Corporation or any subsidiary of the Corporation, or is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise.
(b) Except as prohibited by law or as provided in paragraph (c)
below, in addition to the rights granted in paragraph (a), every person shall be
entitled as of right to be indemnified by the Corporation against all expenses
and any liability paid or incurred by such person in connection with any actual
or threatened claim, action, suit or proceeding, civil, criminal,
administrative, investigative or other, whether brought by or in the right of
the Corporation or otherwise, in which he
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or she may be involved as a party or otherwise, by reason of such person being
or having been a director or officer of the Corporation or by reason of the fact
that such person is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary or other representative of another
corporation, partnership, joint venture, trust, employee benefit plan or other
entity (any such actual or threatened claim, action, suit or proceeding
hereinafter being referred to as an "action"). Such indemnification shall
include advances of any expense incurred by such person in connection with an
action prior to final disposition of such action to the maximum extent not
prohibited by the provisions of any applicable statute. As used herein,
"expense" shall include, without limitation, costs of investigation, including
experts, the costs of defense of actions and appeals therefrom and fees and
expenses of counsel selected by such person, and "liability" shall include
amounts of judgments, excise taxes, fines and penalties, amounts paid in
settlement (provided the Corporation shall have consented to such settlement,
which consent shall not be unreasonably withheld by it), and any other amounts
which the person may be obligated to pay as a result of any action.
(c) No right of indemnification under paragraph (b) shall exist for
any person unless it is determined by a court or, if not finally adjudicated by
a court, by the Board of Directors that such person did not act in bad faith or
with an active and deliberate dishonesty and which was material to the action,
or that he or she did not personally gain in fact a financial profit or other
economic advantage to which he or she was not legally entitled. In making such
a determination, the Board of Directors may act by a quorum consisting of
directors who are not parties to such action or, if such a quorum is not
obtainable or, if obtainable, such quorum is unable to make such a finding and
directs, (i) by the Board of Directors upon having received the opinion in
writing of independent legal counsel that indemnification is proper because the
standard of conduct set forth herein has been met or (ii) by the shareholders
entitled to vote in the election of directors upon a finding that such standard
has been met. Indemnification amounts shall be advanced or promptly reimbursed
by the Corporation under paragraph (b) in advance of the final disposition of
such action or proceeding and prior to the determination to be made under this
paragraph (c), subject to the obligation of the person indemnified to repay the
Corporation if, and upon a determination that, such person acted or benefited as
specified above. If indemnification is denied because of a finding by the Board
in the absence of a judgment or other final adjudication, such action by the
Board will in no way affect the right of the person seeking such indemnification
to make application therefor in any court having jurisdiction
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thereof; in such action or proceeding the issue will be whether the director or
officer met the standard of conduct set forth in this paragraph (c), not whether
the finding of the Board that he did not was correct, and the determination of
such issue will not be affected by the Board's finding. If the judgment or other
final adjudication in such action or proceeding establishes that the director or
officer met such standard, the Board shall then find such standard to have been
met and shall grant such indemnification, and also shall grant, to the person
entitled to such indemnification, indemnification of the expenses incurred by
such person in the action or proceeding resulting in the judgment or other final
adjudication that such standard of conduct was met.
(d) The right of indemnification provided for herein shall not be
deemed exclusive of any other rights to which those seeking indemnification
hereunder may be entitled under applicable law, by agreement or otherwise, and
the provisions hereof shall inure to the benefit of the heirs and legal
representatives of persons entitled to indemnification hereunder and shall be
applicable to actions commenced before or after the adoption hereof, whether
arising from acts or omissions occurring before or after the adoption hereof.
The Corporation is authorized to enter into agreements with any of its directors
or officers extending rights to indemnification and advancement of expenses to
such person to the full extent permitted by law, but the failure to enter into
any such agreement shall not affect or limit the rights of such person pursuant
to this bylaw.
(e) This provision shall be deemed to constitute a right of the
persons entitled to indemnification and may not, without the consent of such
person, be amended or repealed to have effect with respect to any event, act or
omission occurring or allegedly occurring prior to the end of the term of office
he or she is serving when such amendment or repeal is adopted.
ARTICLE III
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OFFICERS
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Section 3.1 Officers The Board of Directors, as soon as may be
--------------------
practicable after the annual election of directors, shall elect a Chairman of
the Board of Directors, a President, one or more Vice Presidents (one or more of
whom may be designated Executive Vice Presidents or Senior Vice Presidents), a
Controller, one or more Assistant Controllers, an Auditor, a Secretary, one or
more Assistant Secretaries, a Treasurer, and
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one or more Assistant Treasurers. From time to time the Board may elect, or the
Board or the Chairman of the Board upon subsequent ratification by the Board may
appoint such other officers as may be determined to be appropriate. The Chairman
of the Board and the President shall be members of the Board of Directors. Any
two or more offices may be held by the same person, except the offices of
President and Secretary.
Section 3.2 Term of Office and Removal Each officer shall hold office
--------------------------------------
for the term for which he is elected or appointed, and until his successor has
been elected or appointed and qualified. Unless otherwise provided in the
resolution of the Board of Directors electing or appointing an officer, the term
of office of each officer shall extend to and expire at the meeting of the Board
following the next annual meeting of shareholders. Any officer may be removed
by the Board, with or without cause, at any time. Removal of an officer without
cause shall be without prejudice to his contract rights, if any, but his
election or appointment as an officer shall not of itself create contract
rights.
Section 3.3 Powers and Duties The officers of the Corporation shall
-----------------------------
each have such powers and authority and perform such duties in the management of
the property and affairs of the Corporation, as from time to time may be
prescribed by the Board of Directors and, to the extent not so prescribed, they
shall each have such powers and authority and perform such duties in the
management of the property and affairs of the Corporation, subject to the
control of the Board, as generally pertain to their respective offices.
Without limitation of the foregoing:
(a) Chairman of the Board of Directors The Chairman of the Board of
---------------------------------------
Directors shall be the chief executive officer of the Corporation. He
shall preside at all meetings of the Board and of the shareholders.
He shall ex officio be a member of the Executive and Finance
Committee.
(b) President The President shall be charged with the responsibility
--------------
for the direction and supervision of the business and affairs of the
Corporation subject only to the supervision of the Board of Directors,
the Executive and Finance Committee and the Chairman of the Board. In
the absence of the Chairman of the Board, he shall preside at all
meetings of the Board and of the shareholders. In the event of the
death, resignation, removal, disability or absence of the Chairman of
the
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Board, the President shall possess the powers and perform the duties
of the Chairman of the Board. The President shall ex officio be a
member of the Executive and Finance Committee.
(c) Vice Presidents The Executive Vice President and Senior Vice
--------------------
Presidents (if such there be) and other Vice Presidents shall have
such powers and duties as usually pertain to their respective offices,
except as otherwise directed by the Board of Directors or by the
Executive and Finance Committee, and shall also have such powers and
duties as may from time to time be conferred upon them by the Board of
Directors, the Executive and Finance Committee, the Chairman of the
Board, or the President. In the absence of the President, the
Executive Vice President, the Senior Vice Presidents or one of the
Vice Presidents designated by the Board of Directors or by the
Chairman of the Board or by the President shall have all the powers
and perform all the duties of the President.
(d) Secretary The Secretary shall issue notices of all meetings of
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shareholders and directors where notices of such meetings are required
by law or these Bylaws, and shall keep the minutes of such meetings.
He shall attend and keep the minutes of all meetings of the
shareholders, Board of Directors and Executive and Finance Committee.
He shall sign such instruments and attest such documents as require
his signature or attestation and affix the corporate seal thereto
where appropriate. Assistant Secretaries shall assist the Secretary
in the performance of his powers and duties and in his absence
exercise such powers and duties.
(e) Treasurer The Treasurer shall have custody of the corporate
--------------
funds and securities and shall deposit all monies and other financial
instruments in the name of the Corporation or such other name as the
Board of Directors may designate. He shall disburse the funds of the
Corporation as appropriate and Assistant Treasurers shall assist the
Treasurer in the performance of his powers and duties and in his
absence exercise such powers and duties.
(f) Controller The Controller of the Corporation shall have full
---------------
control of the books of account of the Corporation and keep true and
accurate record of all property owned by it, of its contracts, debts,
and of its revenues and expenses, and shall keep all accounting
records of the Corporation other than those relating to the deposit
and custody of monies and securities which shall be kept by the
Treasurer. The
15
<PAGE>
Controller shall make reports to the Chairman of the Board of
Directors, the President, and as required to the Board of Directors
or, when appropriate, to others relating to the financial condition of
the Corporation. Assistant Controllers shall assist the Controller in
the performance of his powers and duties and in his absence exercise
such powers and duties.
(g) Auditor The Auditor shall have access to all books, records,
------------
contracts, securities and materials of the Corporation for the purpose
of audit and shall exercise general supervision over the operation of
the Auditing Department. The Auditor and each member of his
department shall have no authority to make or order to be made any
entry in the Corporation's books of account nor to sign checks or
exercise any of the duties of the Treasurer. The Auditor shall be
responsible to the Controller or the President of the Corporation and
shall report to the Board of Directors when directed to do so or when
in his opinion such a report is necessary.
ARTICLE IV
----------
SHARE CERTIFICATE AND LOSS THEREOF - TRANSFER OF SHARES
-------------------------------------------------------
Section 4.1 Form of Share Certificates The shares of the Corporation
--------------------------------------
shall be represented by certificates, in such forms as the Board of Directors
may from time to time prescribe, signed by the Chairman of the Board, or the
President, or a Vice President and the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer, and may be sealed with the seal of the
Corporation or a facsimile thereof. The signatures of the officers upon a
certificate may be facsimiles if the certificate is countersigned by a transfer
agent or registered by a registrar other than the Corporation or its employee.
In case any officer who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer before such certificate
is issued, it may be issued by the Corporation with the same effect as if he
were such officer at the date of issue.
Each certificate representing shares shall, when issued, state upon
the face thereof:
(a) That the Corporation is formed under the laws of the State of New
York;
16
<PAGE>
(b) The name of the person or persons to whom issued; and
(c) The number, class and series, if any, of shares which such
certificate represents.
Section 4.2 Lost, Stolen or Destroyed Share Certificates No
--------------------------------------------------------
certificate or certificates for shares of the Corporation shall be issued in
place of any certificate alleged to have been lost, stolen or destroyed, except
upon production of such evidence of the loss, theft or destruction, and upon
such indemnification and payment of costs of the Corporation and its agent to
such extent and in such manner as the Board of Directors may from time to time
prescribe.
Section 4.3 Transfer of Shares Shares of the Corporation shall be
------------------------------
transferable on the books of the Corporation by the registered holder thereof in
person or by his duly authorized attorney, by delivery for cancellation of a
certificate or certificates for the same number of shares, with proper
indorsement consisting of either a written assignment of the certificate or a
power of attorney to sell, assign or transfer the same or the shares represented
thereby, signed by the person appearing by the certificate to be the owner of
the shares represented thereby, either written thereon or attached thereto, with
such proof of the authenticity of the signature as the Corporation or its agents
may reasonably require. Such indorsement may be either in blank or to a
specified person, and shall have affixed thereto all stock transfer stamps
required by law.
ARTICLE V
---------
OTHER MATTERS
-------------
Section 5.1 Records The Corporation shall keep (a) correct and
-------------------
complete books and records of account; (b) minutes of the proceedings of the
shareholders, Board of Directors and any committees of the Board; and (c) a
current list of the directors and officers and their resident addresses.
The Corporation shall also keep at its office in the State of New York
or at the office of its transfer agent, if any, a record containing the names
and addresses of all shareholders, the number and class of shares held by each
and the dates when they respectively became the owners of record thereof.
17
<PAGE>
Section 5.2 Checks and Similar Instruments All checks and drafts on
------------------------------------------
the Corporation's bank accounts and all bills of exchange and promissory notes
and all acceptances, obligations and other instruments, for the payment of
money, shall be signed by the Treasurer (by facsimile or otherwise) on behalf of
the Corporation or by such officer or officers or person or persons as shall be
thereunto authorized from time to time by the Board of Directors or designated
by the Treasurer.
Section 5.3 Stock of Other Corporations The Board of Directors shall
---------------------------------------
have the right to authorize any officer or other person on behalf of the
Corporation to attend, act and vote at meetings of the shareholders of any
corporation in which the Corporation shall hold shares, and to exercise thereat
any and all the rights and powers incident to the ownership of such shares and
to execute waivers of notice of such meetings and calls therefor; and authority
may be given to exercise the same either on one or more designated occasions, or
generally on all occasions until revoked by the Board. In the event that the
Board shall fail to give such authority, such authority may be exercised by the
President in person or by proxy appointed by him on behalf of the Corporation.
Section 5.4 Corporate Seal The corporate seal shall have inscribed
--------------------------
thereon the name of the Corporation and such other appropriate legend as the
Board of Directors may from time to time determine. In lieu of the corporate
seal, when so authorized by the Board, a facsimile thereof may be affixed or
impressed or reproduced in any other manner.
Section 5.5 Fiscal Year The fiscal year of the Corporation shall be
-----------------------
the calendar year.
Section 5.6 Amendments Except as otherwise provided by these Bylaws
----------------------
and the Restated Certificate of Incorporation, the Bylaws of the Corporation may
be amended, repealed or adopted by vote of the holders of record of the shares
at the time entitled to vote in the election of any directors; provided that
Section 1.2 of Article I, Sections 2.2, 2.3, 2.7, 2.8, 2.9 and 2.10 of Article
II (as amended) and Section 5.6 of Article V of the Bylaws shall not be altered,
amended or repealed and no provision inconsistent therewith shall be adopted
without the affirmative vote of the holders of at least seventy-five percent
(75%) of the outstanding shares entitled to vote in the election of directors,
voting together as a single class. Except as otherwise provided above, Bylaws
may also be amended, repealed, or adopted by the Board of Directors, but any
Bylaw adopted by the Board may be amended or repealed by the shareholders
entitled to vote thereon
18
<PAGE>
as hereinabove provided.
If any Bylaw regulating an impending election of directors is adopted,
amended or repealed by the Board of Directors, there shall be set forth in the
notice of the next meeting of shareholders for the election of directors the
Bylaws so adopted, amended or repealed, together with a concise statement of the
change made.
19
<PAGE>
Adopted: March 24, 1965
Amended: May 17, 1967, effective July 1, 1967:
Section 1.2, Section 3.3 paragraphs (a), (b), (c), (f)
Amended and effective: May 15, 1968:
Section 1.2, Section 3.3 paragraphs (a), (b), (c), (f)
Amended and effective: February 17, 1971:
Section 2.9, paragraph (a) and last paragraph
Amended and effective: June 21, 1972:
Section 2.13, Section 4.1 (subparagraph (d) eliminated)
Amended and effective: October 16, 1974:
Section 2.4, Section 2.9, Section 2.10 adopted,
Sections 2.10, 2.11, 2.12 and 2.13 renumbered
Amended and effective: August 20, 1975:
Section 2.11 adopted,
Sections 2.11, 2.12, 2.13 and 2.14 renumbered
Amended and effective: October 15, 1986:
Section 2.15, existing paragraph lettered (a) and
paragraphs (b), (c), (d) and (e) added
Amended and effective: May 20, 1987:
Section 2.2
Amended and effective: June 19, 1991:
Section 3.3, paragraphs (a), (b), (c)
Amended and effective: May 20, 1992:
Sections 1.2, 2.2, 2.3, 2.7, 2.8, 5.6
Section 2.9, Section 2.10 adopted,
Sections 2.9, 2.10, 2.11, 2.12, 2.13, 2.14, 2.15
renumbered
Amended and effective: December 15, 1993:
Sections 1.1, 3.1, 3.3 paragraphs (c), (e),
and (f), 5.1, 5.2
Amended and effective: March 20, 1996:
Section 3.3 paragraphs (a), (b), (c)
Amended and effective: December 16, 1998:
Section 1.4, Section 1.11
8-BYLAWS
20
<PAGE>
Exhibit 10-13
ROCHESTER GAS AND ELECTRIC CORPORATION
SEVERANCE AGREEMENT
This Severance Agreement is made, effective as of January 1, 1999,
----------------
by and between Rochester Gas and Electric Corporation, a New York corporation
having its principal place of business in Rochester, New York (the "Company"),
and Thomas S. Richards, an individual currently residing in Rochester, New York
(the "Employee").
1. Purposes. The Company's Board of Directors considers the
creation and retention of a sound and vital management team to be essential to
protecting and enhancing the best interests of the Company, its customers and
its shareowners. In this connection, the Company recognizes that if the
possibility of a Change of Control arises, the uncertainty and discomfort it may
raise could result in the departure or distraction of management personnel
during the period leading up to and during a possible Change of Control to the
detriment of the Company, its customers and its shareowners. Furthermore, in
addition to their regular duties management will be called upon during this
period to assist in the assessment of third party proposals, to advise the Board
as to whether such proposals would be in the best interests of the Company, its
customers and its shareowners and to take such other action as the Board may
determine appropriate. Accordingly, to assure the Company that it will have the
continued dedication of the Employee and the availability of his advice and
counsel notwithstanding the possibility, threat or occurrence of a bid to take
over control of the Company, and to induce the Employee to remain in the employ
of the Company, the Board has determined that it is in the Company's best
interests to provide the Employee with certain benefits in the event of the
Employee's termination of employment under the terms and conditions below.
2. Employee's Services During Attempted or Actual Change of
Control. In the event a third party takes any steps designed to effect a
Change of Control, the Employee agrees not to effect a Voluntary Termination,
and to render the services contemplated in paragraph 1, until the third party
has abandoned or terminated efforts to effect a Change of Control or until three
months after an actual Change of Control has occurred.
3. Payment of Severance Amount. In the event of an Involuntary
Termination of the Employee's employment by the Company or any subsidiary or
successor of the Company occurring within three years after a Change of Control,
then the Company shall pay the Employee a lump sum amount equal to the Severance
Amount, payable within 15 business days after the Termination Date, plus such
other benefits as may be provided in subsequent provisions of this Agreement.
4. Definitions. All the terms defined in this paragraph 4 shall
have the meanings given below throughout this Agreement.
(a) "Annual Salary" shall, as determined on the Termination
Date, be equal to the greater of:
<PAGE>
-2-
i) the highest annual compensation (including base
salary and bonus) paid or payable to the Employee with respect to any twelve
(12) consecutive month period, as selected by the Employee, during the three
years ending with the Termination Date, or
ii) the Employee's annual salary plus bonus on the
Termination Date.
"Bonus" for the purpose of this definition of Annual Salary shall mean the
Executive Incentive Plan (EIP) bonus for the Employee's final year or the
average of the bonuses for the three years prior to the Termination Date,
whichever is greater.
(b) "Change in Duties" shall mean any one or more of the
following:
i) a significant change in the nature or scope of the
Employee's authorities or duties from those applicable to her/him immediately
prior to the date on which a Change of Control occurs;
ii) a reduction in the Employee's Annual Salary from
that provided to her/him immediately prior to the date on which a Change of
Control occurs;
iii) a diminution in the Employee's eligibility to
participate in bonus, incentive award and other compensation plans which provide
opportunities to receive compensation, from the greater of:
the opportunities provided by the Company (including its
subsidiaries) for executives with comparable duties; or
the opportunities under any such plans under which she/he
was participating immediately prior to the date on which
a Change of Control occurs;
iv) a diminution in employee benefits (including but not
limited to medical, dental, life insurance and long-term disability plans) and
perquisites applicable to the Employee, from the greater of:
the employee benefits and perquisites provided by the
Company (including its subsidiaries), to executives with
comparable duties; or
the employee benefits and perquisites to which the
Employee was entitled immediately prior to the date on
which a Change of Control occurs;
v) a change in the location of the Employee's principal
place of employment by the Company (including its subsidiaries) by more than
fifty miles from the
<PAGE>
-3-
location where she/he was principally employed immediately prior to the date on
which a Change of Control occurs; or
vi) a reasonable determination by the Employee that, as
a result of a Change of Control and a change in circumstances thereafter
significantly affecting her/his position, she/he is unable to exercise the
authorities, powers, functions or duties attached to her/ his position
immediately prior to the date on which a Change of Control occurs.
(c) a "Change of Control" shall be deemed to have occurred if:
i) any "person," including a "group" as determined in
accordance with Section 13(d)(3) of the Securities Exchange Act of 1934 (the
"Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined voting
power of the Company's then outstanding Voting Securities;
ii) as a result of, or in connection with, any tender
offer or exchange offer, merger or other business combination, sale of assets
or contested election, or any combination of the foregoing transactions (a
"Transaction"), the persons who were directors of the Company before the
transaction shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company;
iii) the Company is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 50 percent
of the outstanding Voting Securities of the surviving or resulting corporation
(or ultimate parent of such surviving or resulting corporation) shall then be
owned in the aggregate by the stockholders of the Company immediately prior to
such merger or consolidation, other than (x) affiliates within the meaning of
the Exchange Act or (y) any party to the merger or consolidation;
iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of the Company representing 20
percent or more of the combined voting power of the Company's then outstanding
Voting Securities; or
v) the Company transfers substantially all of its
assets to another corporation which is not a wholly-owned subsidiary of the
Company.
(d) "Involuntary Termination" shall mean any termination which:
i) does not result from a resignation by the Employee
(other than a resignation pursuant to clause ii of this subparagraph (d)), or
ii) results from a resignation following any Change
in Duties; provided, however, the term "Involuntary Termination" shall not
include:
x. a Termination for Cause, or
<PAGE>
-4-
y. any termination as a result of death,
disability, or normal retirement pursuant to a retirement plan to which the
Employee was subject prior to any Change of Control.
(e) "Severance Amount" is equal to three (3) times the
Employee's Annual Salary, i.e. for a period of 36 months.
(f) "Termination for Cause" shall mean only a termination as
a result of fraud, misappropriation of, or intentional material damage to, the
property or business of the Company (including its subsidiaries), or commission
of a felony by the Employee.
(g) "Voluntary Termination" shall mean any termination, which
is not:
i) an Involuntary Termination;
ii) a Termination for Cause; or
iii) the result of death, disability, or normal
retirement pursuant to a retirement plan to which the Employee was subject prior
to any Change of Control.
(h) "Voting Securities" shall mean any securities which
ordinarily possess the power to vote in the election of directors without the
happening of any pre-condition or contingency.
(i) "Termination Date" shall mean the date on which the
Employee's employment terminates.
5. Additional Payment for Excise Tax on Golden Parachute Payment.
It is anticipated that the payments to be made and benefits to be provided to
the Employee under this Agreement and other agreements (collectively, the
"Change of Control Amounts") may become subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or
any similar tax that may hereafter be imposed), on account of "excess parachute
payments" as defined in Section 280G of the Code. In the event such excise tax
is payable, the Company shall pay to the Employee, in addition to the amounts
payable pursuant to paragraph 3 of this Agreement and any other Change of
Control Amounts, an additional amount which, together with any federal, state or
local excise or income taxes payable by the Employee on such additional amount,
will provide the Employee with a sum on a net after-tax basis equal to the
amounts he would have received if the excise tax were not applicable to the
Change of Control Amounts. The determination of the amount to be paid hereunder
shall be made at the expense of the Company by the independent certified public
accounting firm acting as auditors for the Company on the date of a Change of
Control (or another accounting firm designated by that firm).
<PAGE>
-5-
6. Other Benefits.
(a) Health and Death Benefits. From the date benefits become payable
-------------------------
under paragraph 3 through the end of the number of months used in determining
the Employee's Severance Amount in paragraph 4(e), the Company shall continue to
provide the Employee with life, accident, death and health insurance plans and
benefits to the same extent such benefits are provided during this period to
active employees holding positions equivalent to the position of the Employee
immediately prior to his termination. The Company's share of the cost of
providing such benefits shall be the same as its share of the benefit costs for
providing such benefits to other employees holding positions equivalent to the
position the Employee held immediately prior to his termination.
(b) Outplacement and Relocation. The Company shall also reimburse
---------------------------
the Employee the aggregate expenses the Employee incurs for outplacement
assistance or relocation expenses in order to pursue other business
opportunities within two (2) years of the Termination Date which are not
reimbursed by another employer.
(c) Pension. To the extent that any Company supplemental executive
-------
retirement plan benefit formula(s) takes into account service, age and annual
compensation, the Employee shall be given credit under the formula(s) for (i)
the same number of months used in determining the Employee's Severance Amount in
paragraph 4(e), and (ii) annual compensation increases equal to the highest base
salary increases received by the Employee in the three years prior to the
Termination Date and bonus payouts at target.
(d) Benefits of General Applicability. The Employee shall remain
---------------------------------
eligible to receive other Company benefits that apply by their terms to persons
who terminate employment with the Company.
(e) Incentive Compensation. Any awards previously made shall vest on
----------------------
the Termination Date and be computed and paid notwithstanding any contrary plan
provisions provided that, if the plan providing for any such award stipulates an
earlier date for vesting, such provision shall control.
7. Legal Fees. The Company shall pay all legal fees and
expenses the Employee may incur as a result of any litigation brought to enforce
or interpret any provision of this Agreement, regardless of outcome.
8. Obligations of Employee. Employee agrees that upon
termination of employment he will turn over to the Company all materials and
documents, whether written or electronic, that pertain to the operation,
products, services, processes, plans, business or customers of the Company.
Employee also agrees not to disclose to any person any confidential information
of the Company. If the Employee fails to return materials required to be
returned or discloses confidential information of the Company to any person, all
payments and benefits still remaining to be paid or offered to the Employee
under this Agreement shall be forfeited.
<PAGE>
-6-
9. Notices. Notices and all other communications under this
Agreement shall be in writing and shall be deemed given when personally
delivered or when mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Company, to:
Rochester Gas and Electric Corporation
89 East Avenue
Rochester, New York 14649-0001
ATTENTION: Group Manager, Human Resource Services
If to the Employee, to:
Thomas S. Richards
57 Dorchester Road
Rochester, New York 14610
or to such other address as either party may furnish to the other in writing,
except that a notice of a change of address shall be effective only upon
receipt.
10. Applicable Law. This contract is entered into under, and
shall be governed for all purposes by, the laws of the State of New York.
11. Severability. If a court of competent jurisdiction
determines that any provision of this Agreement is invalid or unenforceable,
then the invalidity or unenforceability of that provision shall not affect the
validity or enforceability of any other provision of this Agreement and all
other provisions shall remain in full force and effect.
12. Withholding of Taxes. The Company shall withhold from any
benefits payable under this Agreement all Federal, state, city or other taxes as
may be required pursuant to any law, governmental regulation or ruling.
13. Not an Employment Agreement. Nothing in this Agreement shall
give the Employee any rights (or impose any obligations to continued employment
by the Company or any subsidiary or successor of the Company), nor shall it give
the Company any rights (or impose any obligations) for the continued performance
of duties by the Employee for the Company or any subsidiary or successor of the
Company.
14. No Assignment. The Employee's right to receive payments or
benefits under this Agreement shall not be assignable or transferable, whether
by pledge, creation of a security interest or otherwise, other than a transfer
by will or by the laws of descent or distribution. In the event of any
attempted assignment or transfer contrary to this paragraph, the Company shall
have no liability to pay any amount so attempted to be assigned or transferred.
This Agreement shall inure to the benefit of and be enforceable by the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and
<PAGE>
-7-
legatees.
15. Successors. This Agreement shall be binding upon and inure
to the benefit of the Company, its successors and assigns (including, without
limitation, any company into or with which the Company may merge or
consolidate). The Company agrees that it will not effect the sale or other
disposition of all or substantially all of its assets unless either (i) the
person or entity acquiring the assets or a substantial portion of the assets
shall expressly assume by an instrument in writing all duties and obligations of
the Company under this Agreement, or (ii) the Company shall provide, through the
establishment of a separate reserve for the payment in full of all amounts which
are, or may reasonably be expected to become, payable to the Employee under this
Agreement.
16. Other Benefits and Compensation. The compensation and
benefits provided hereunder shall not limit or reduce compensation or benefits
otherwise payable to Employee pursuant to arrangements between Employee and the
Company, unless specific reference to any such reduction or limit is made
herein. It is not intended that this Agreement constitute a waiver of rights
under federal, state or local law, including, without limitation, Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act and the
Employee Retirement Income Security Act of 1974.
17. Payment Obligations Absolute. The Company's obligation to
pay the Employee the compensation and to make the arrangements provided herein
shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right that the Company may have against him or
anyone else. All amounts payable by the Company hereunder shall be paid without
notice or demand. Each and every payment made hereunder by the Company shall be
final and the Company will not seek to recover all or any part of such payment
from the Employee or from whosoever may be entitled thereto, for any reason
whatsoever.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of January 20, 1999 .
-------------------------------------
ROCHESTER GAS AND ELECTRIC
CORPORATION
By: s/ J. B. Stokes
------------------------------
s/ Thomas S. Richards J. Burt Stokes
- ------------------------------
Employee Its: Senior Vice President, Corporate
Services and Chief Financial Officer
<PAGE>
Exhibit 10-14
ROCHESTER GAS AND ELECTRIC CORPORATION
SEVERANCE AGREEMENT
This Severance Agreement is made, effective as of January 1, 1999,
---------------
by and between Rochester Gas and Electric Corporation, a New York corporation
having its principal place of business in Rochester, New York (the "Company"),
and Paul C. Wilkens, an individual currently residing in Pittsford, New York
(the "Employee").
1. Purposes. The Company's Board of Directors considers the
creation and retention of a sound and vital management team to be essential to
protecting and enhancing the best interests of the Company, its customers and
its shareowners. In this connection, the Company recognizes that if the
possibility of a Change of Control arises, the uncertainty and discomfort it may
raise could result in the departure or distraction of management personnel
during the period leading up to and during a possible Change of Control to the
detriment of the Company, its customers and its shareowners. Furthermore, in
addition to their regular duties management will be called upon during this
period to assist in the assessment of third party proposals, to advise the Board
as to whether such proposals would be in the best interests of the Company, its
customers and its shareowners and to take such other action as the Board may
determine appropriate. Accordingly, to assure the Company that it will have the
continued dedication of the Employee and the availability of his advice and
counsel notwithstanding the possibility, threat or occurrence of a bid to take
over control of the Company, and to induce the Employee to remain in the employ
of the Company, the Board has determined that it is in the Company's best
interests to provide the Employee with certain benefits in the event of the
Employee's termination of employment under the terms and conditions below.
2. Employee's Services During Attempted or Actual Change of
Control. In the event a third party takes any steps designed to effect a
Change of Control, the Employee agrees not to effect a Voluntary Termination,
and to render the services contemplated in paragraph 1, until the third party
has abandoned or terminated efforts to effect a Change of Control or until three
months after an actual Change of Control has occurred.
3. Payment of Severance Amount. In the event of an Involuntary
Termination of the Employee's employment by the Company or any subsidiary or
successor of the Company occurring within three years after a Change of Control,
then the Company shall pay the Employee a lump sum amount equal to the Severance
Amount, payable within 15 business days after the Termination Date, plus such
other benefits as may be provided in subsequent provisions of this Agreement.
4. Definitions. All the terms defined in this paragraph 4 shall
have the meanings given below throughout this Agreement.
(a) "Annual Salary" shall, as determined on the Termination
Date, be equal to the greater of:
<PAGE>
-2-
i) the highest annual compensation (including base
salary and bonus) paid or payable to the Employee with respect to any twelve
(12) consecutive month period, as selected by the Employee, during the three
years ending with the Termination Date, or
ii) the Employee's annual salary plus bonus on the
Termination Date.
"Bonus" for the purpose of this definition of Annual Salary shall mean the
Executive Incentive Plan (EIP) bonus for the Employee's final year or the
average of the bonuses for the three years prior to the Termination Date,
whichever is greater.
(b) "Change in Duties" shall mean any one or more of the
following:
i) a significant change in the nature or scope of
the Employee's authorities or duties from those applicable to her/him
immediately prior to the date on which a Change of Control occurs;
ii) a reduction in the Employee's Annual Salary from that
provided to her/him immediately prior to the date on which a Change of
Control occurs;
iii) a diminution in the Employee's eligibility to
participate in bonus, incentive award and other compensation plans which provide
opportunities to receive compensation, from the greater of:
the opportunities provided by the Company (including its
subsidiaries) for executives with comparable duties; or
the opportunities under any such plans under which she/he
was participating immediately prior to the date on which
a Change of Control occurs;
iv) a diminution in employee benefits (including
but not limited to medical, dental, life insurance and long-term disability
plans) and perquisites applicable to the Employee, from the greater of:
the employee benefits and perquisites provided by the
Company (including its subsidiaries), to executives with
comparable duties; or
the employee benefits and perquisites to which the
Employee was entitled immediately prior to the date on
which a Change of Control occurs;
v) a change in the location of the Employee's principal
place of employment by the Company (including its subsidiaries) by more than
fifty miles from the
<PAGE>
-3-
location where she/he was principally employed immediately prior
to the date on which a Change of Control occurs; or
vi) a reasonable determination by the Employee
that, as a result of a Change of Control and a change in circumstances
thereafter significantly affecting her/his position, she/he is unable to
exercise the authorities, powers, functions or duties attached to her/his
position immediately prior to the date on which a Change of Control occurs.
(c) a "Change of Control" shall be deemed to have occurred if:
i) any "person," including a "group" as determined
in accordance with Section 13(d)(3) of the Securities Exchange Act of 1934 (the
"Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined voting
power of the Company's then outstanding Voting Securities;
ii) as a result of, or in connection with, any tender
offer or exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions (a
"Transaction"), the persons who were directors of the Company before the
transaction shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company;
iii) the Company is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 50 percent
of the outstanding Voting Securities of the surviving or resulting corporation
(or ultimate parent of such surviving or resulting corporation) shall then be
owned in the aggregate by the stockholders of the Company immediately prior to
such merger or consolidation, other than (x) affiliates within the meaning of
the Exchange Act or (y) any party to the merger or consolidation;
iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of the Company representing 20
percent or more of the combined voting power of the Company's then outstanding
Voting Securities; or
v) the Company transfers substantially all of its
assets to another corporation which is not a wholly-owned subsidiary of the
Company.
(d) "Involuntary Termination" shall mean any termination
which:
i) does not result from a resignation by the
Employee (other than a resignation pursuant to clause ii of this subparagraph
(d)), or
ii) results from a resignation following any Change in
Duties; provided, however, the term "Involuntary Termination" shall not include:
x. a Termination for Cause, or
<PAGE>
-4-
y. any termination as a result of death, disability,
or normal retirement pursuant to a retirement plan to which the
Employee was subject prior to any Change of Control.
(e) "Severance Amount" is equal to three (3) times the
Employee's Annual Salary, i.e. for a period of 36 months.
(f) "Termination for Cause" shall mean only a termination as
a result of fraud, misappropriation of, or intentional material damage to, the
property or business of the Company (including its subsidiaries), or commission
of a felony by the Employee.
(g) "Voluntary Termination" shall mean any termination, which
is not:
i) an Involuntary Termination;
ii) a Termination for Cause; or
iii) the result of death, disability, or normal
retirement pursuant to a retirement plan to which the Employee was subject prior
to any Change of Control.
(h) "Voting Securities" shall mean any securities which
ordinarily possess the power to vote in the election of directors without the
happening of any pre-condition or contingency.
(i) "Termination Date" shall mean the date on which the
Employee's employment terminates.
5. Additional Payment for Excise Tax on Golden Parachute Payment.
It is anticipated that the payments to be made and benefits to be provided to
the Employee under this Agreement and other agreements (collectively, the
"Change of Control Amounts") may become subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or
any similar tax that may hereafter be imposed), on account of "excess parachute
payments" as defined in Section 280G of the Code. In the event such excise tax
is payable, the Company shall pay to the Employee, in addition to the amounts
payable pursuant to paragraph 3 of this Agreement and any other Change of
Control Amounts, an additional amount which, together with any federal, state or
local excise or income taxes payable by the Employee on such additional amount,
will provide the Employee with a sum on a net after-tax basis equal to the
amounts he would have received if the excise tax were not applicable to the
Change of Control Amounts. The determination of the amount to be paid hereunder
shall be made at the expense of the Company by the independent certified public
accounting firm acting as auditors for the Company on the date of a Change of
Control (or another accounting firm designated by that firm).
<PAGE>
-5-
6. Other Benefits.
(a) Health and Death Benefits. From the date benefits
-------------------------
become payable under paragraph 3 through the end of the number of months used
in determining the Employee's Severance Amount in paragraph 4(e), the Company
shall continue to provide the Employee with life, accident, death and health
insurance plans and benefits to the same extent such benefits are provided
during this period to active employees holding positions equivalent to the
position of the Employee immediately prior to his termination. The Company's
share of the cost of providing such benefits shall be the same as its share of
the benefit costs for providing such benefits to other employees holding
positions equivalent to the position the Employee held immediately prior to his
termination.
(b) Outplacement and Relocation. The Company shall also
---------------------------
reimburse the Employee the aggregate expenses the Employee incurs for
outplacement assistance or relocation expenses in order to pursue other business
opportunities within two (2) years of the Termination Date which are not
reimbursed by another employer.
(c) Pension. To the extent that any Company supplemental
-------
executive retirement plan benefit formula(s) takes into account service, age and
annual compensation, the Employee shall be given credit under the formula(s) for
(i) the same number of months used in determining the Employee's Severance
Amount in paragraph 4(e), and (ii) annual compensation increases equal to the
highest base salary increases received by the Employee in the three years prior
to the Termination Date and bonus payouts at target.
(d) Benefits of General Applicability. The Employee shall
---------------------------------
remain eligible to receive other Company benefits that apply by their terms to
persons who terminate employment with the Company.
(e) Incentive Compensation. Any awards previously made shall
----------------------
vest on the Termination Date and be computed and paid notwithstanding any
contrary plan provisions provided that, if the plan providing for any such award
stipulates an earlier date for vesting, such provision shall control.
7. Legal Fees. The Company shall pay all legal fees and
expenses the Employee may incur as a result of any litigation brought to enforce
or interpret any provision of this Agreement, regardless of outcome.
8. Obligations of Employee. Employee agrees that upon
termination of employment he will turn over to the Company all materials and
documents, whether written or electronic, that pertain to the operation,
products, services, processes, plans, business or customers of the Company.
Employee also agrees not to disclose to any person any confidential information
of the Company. If the Employee fails to return materials required to be
returned or discloses confidential information of the Company to any person, all
payments and benefits still remaining to be paid or offered to the Employee
under this Agreement shall be forfeited.
<PAGE>
-6-
9. Notices. Notices and all other communications under this
Agreement shall be in writing and shall be deemed given when personally
delivered or when mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Company, to:
Rochester Gas and Electric Corporation
89 East Avenue
Rochester, New York 14649-0001
ATTENTION: Group Manager, Human Resource Services
If to the Employee, to:
Paul C. Wilkens
4 Rustic Pines
Pittsford, New York 14534
or to such other address as either party may furnish to the other in writing,
except that a notice of a change of address shall be effective only upon
receipt.
10. Applicable Law. This contract is entered into under, and
shall be governed for all purposes by, the laws of the State of New York.
11. Severability. If a court of competent jurisdiction
determines that any provision of this Agreement is invalid or unenforceable,
then the invalidity or unenforceability of that provision shall not affect the
validity or enforceability of any other provision of this Agreement and all
other provisions shall remain in full force and effect.
12. Withholding of Taxes. The Company shall withhold from any
benefits payable under this Agreement all Federal, state, city or other taxes as
may be required pursuant to any law, governmental regulation or ruling.
13. Not an Employment Agreement. Nothing in this Agreement shall
give the Employee any rights (or impose any obligations to continued employment
by the Company or any subsidiary or successor of the Company), nor shall it give
the Company any rights (or impose any obligations) for the continued performance
of duties by the Employee for the Company or any subsidiary or successor of the
Company.
14. No Assignment. The Employee's right to receive payments or
benefits under this Agreement shall not be assignable or transferable, whether
by pledge, creation of a security interest or otherwise, other than a transfer
by will or by the laws of descent or distribution. In the event of any
attempted assignment or transfer contrary to this paragraph, the Company shall
have no liability to pay any amount so attempted to be assigned or transferred.
This Agreement shall inure to the benefit of and be enforceable by the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and
<PAGE>
-7-
legatees.
15. Successors. This Agreement shall be binding upon and inure
to the benefit of the Company, its successors and assigns (including, without
limitation, any company into or with which the Company may merge or
consolidate). The Company agrees that it will not effect the sale or other
disposition of all or substantially all of its assets unless either (i) the
person or entity acquiring the assets or a substantial portion of the assets
shall expressly assume by an instrument in writing all duties and obligations of
the Company under this Agreement, or (ii) the Company shall provide, through the
establishment of a separate reserve for the payment in full of all amounts which
are, or may reasonably be expected to become, payable to the Employee under this
Agreement.
16. Other Benefits and Compensation. The compensation and
benefits provided hereunder shall not limit or reduce compensation or benefits
otherwise payable to Employee pursuant to arrangements between Employee and the
Company, unless specific reference to any such reduction or limit is made
herein. It is not intended that this Agreement constitute a waiver of rights
under federal, state or local law, including, without limitation, Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act and the
Employee Retirement Income Security Act of 1974.
17. Payment Obligations Absolute. The Company's obligation to
pay the Employee the compensation and to make the arrangements provided herein
shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right that the Company may have against him or
anyone else. All amounts payable by the Company hereunder shall be paid without
notice or demand. Each and every payment made hereunder by the Company shall be
final and the Company will not seek to recover all or any part of such payment
from the Employee or from whosoever may be entitled thereto, for any reason
whatsoever.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of January 20, 1999 .
----------------------------------
ROCHESTER GAS AND ELECTRIC
CORPORATION
By: s/ Thomas S. Richards
------------------------------------
s/ P. C. Wilkens Thomas S. Richards
- --------------------------
Employee Its: Chairman of the Board, President and
Chief Executive Officer
<PAGE>
Exhibit 10-15
ROCHESTER GAS AND ELECTRIC CORPORATION
SEVERANCE AGREEMENT
This Severance Agreement is made, effective as of January 1, 1999,
---------------
by and between Rochester Gas and Electric Corporation, a New York corporation
having its principal place of business in Rochester, New York (the "Company"),
and J. Burt Stokes, an individual currently residing in Pittsford, New York (the
"Employee").
1. Purposes. The Company's Board of Directors considers the
creation and retention of a sound and vital management team to be essential to
protecting and enhancing the best interests of the Company, its customers and
its shareowners. In this connection, the Company recognizes that if the
possibility of a Change of Control arises, the uncertainty and discomfort it may
raise could result in the departure or distraction of management personnel
during the period leading up to and during a possible Change of Control to the
detriment of the Company, its customers and its shareowners. Furthermore, in
addition to their regular duties management will be called upon during this
period to assist in the assessment of third party proposals, to advise the Board
as to whether such proposals would be in the best interests of the Company, its
customers and its shareowners and to take such other action as the Board may
determine appropriate. Accordingly, to assure the Company that it will have the
continued dedication of the Employee and the availability of his advice and
counsel notwithstanding the possibility, threat or occurrence of a bid to take
over control of the Company, and to induce the Employee to remain in the employ
of the Company, the Board has determined that it is in the Company's best
interests to provide the Employee with certain benefits in the event of the
Employee's termination of employment under the terms and conditions below.
2. Employee's Services During Attempted or Actual Change of
Control. In the event a third party takes any steps designed to effect a
Change of Control, the Employee agrees not to effect a Voluntary Termination,
and to render the services contemplated in paragraph 1, until the third party
has abandoned or terminated efforts to effect a Change of Control or until three
months after an actual Change of Control has occurred.
3. Payment of Severance Amount. In the event of an Involuntary
Termination of the Employee's employment by the Company or any subsidiary or
successor of the Company occurring within three years after a Change of Control,
then the Company shall pay the Employee a lump sum amount equal to the Severance
Amount, payable within 15 business days after the Termination Date, plus such
other benefits as may be provided in subsequent provisions of this Agreement.
4. Definitions. All the terms defined in this paragraph 4 shall
have the meanings given below throughout this Agreement.
(a) "Annual Salary" shall, as determined on the Termination
Date, be equal to the greater of:
<PAGE>
-2-
i) the highest annual compensation (including base
salary and bonus) paid or payable to the Employee with respect to any twelve
(12) consecutive month period, as selected by the Employee, during the three
years ending with the Termination Date, or
ii) the Employee's annual salary plus bonus on the
Termination Date.
"Bonus" for the purpose of this definition of Annual Salary shall mean the
Executive Incentive Plan (EIP) bonus for the Employee's final year or the
average of the bonuses for the three years prior to the Termination Date,
whichever is greater.
(b) "Change in Duties" shall mean any one or more of the
following:
i) a significant change in the nature or scope of the
Employee's authorities or duties from those applicable to her/him immediately
prior to the date on which a Change of Control occurs;
ii) a reduction in the Employee's Annual Salary from
that provided to her/him immediately prior to the date on which a Change of
Control occurs;
iii) a diminution in the Employee's eligibility to
participate in bonus, incentive award and other compensation plans which provide
opportunities to receive compensation, from the greater of:
the opportunities provided by the Company (including its
subsidiaries) for executives with comparable duties; or
the opportunities under any such plans under which she/he
was participating immediately prior to the date on which
a Change of Control occurs;
iv) a diminution in employee benefits (including but not
limited to medical, dental, life insurance and long-term disability plans) and
perquisites applicable to the Employee, from the greater of:
the employee benefits and perquisites provided by the
Company (including its subsidiaries), to executives with
comparable duties; or
the employee benefits and perquisites to which the
Employee was entitled immediately prior to the date on
which a Change of Control occurs;
v) a change in the location of the Employee's principal
place of employment by the Company (including its subsidiaries) by more than
fifty miles from the
<PAGE>
-3-
location where she/he was principally employed immediately prior to the date
on which a Change of Control occurs; or
vi) a reasonable determination by the Employee that,
as a result of a Change of Control and a change in circumstances thereafter
significantly affecting her/his position, she/he is unable to exercise the
authorities, powers, functions or duties attached to her/ his position
immediately prior to the date on which a Change of Control occurs.
(c) a "Change of Control" shall be deemed to have occurred if:
i) any "person," including a "group" as determined in
accordance with Section 13(d)(3) of the Securities Exchange Act of 1934 (the
"Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined voting
power of the Company's then outstanding Voting Securities;
ii) as a result of, or in connection with, any tender
offer or exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions (a
"Transaction"), the persons who were directors of the Company before the
transaction shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company;
iii) the Company is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 50 percent
of the outstanding Voting Securities of the surviving or resulting corporation
(or ultimate parent of such surviving or resulting corporation) shall then be
owned in the aggregate by the stockholders of the Company immediately prior to
such merger or consolidation, other than (x) affiliates within the meaning of
the Exchange Act or (y) any party to the merger or consolidation;
iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of the Company representing 20
percent or more of the combined voting power of the Company's then outstanding
Voting Securities; or
v) the Company transfers substantially all of its
assets to another corporation which is not a wholly-owned subsidiary of the
Company.
(d) "Involuntary Termination" shall mean any termination which:
i) does not result from a resignation by the Employee
(other than a resignation pursuant to clause ii of this subparagraph (d)), or
ii) results from a resignation following any Change in
Duties; provided, however, the term "Involuntary Termination" shall not include:
x. a Termination for Cause, or
<PAGE>
-4-
y. any termination as a result of death,
disability, or normal retirement pursuant to a retirement plan to which the
Employee was subject prior to any Change of Control.
(e) "Severance Amount" is equal to three (3) times the
Employee's Annual Salary, i.e. for a period of 36 months.
(f) "Termination for Cause" shall mean only a termination as
a result of fraud, misappropriation of, or intentional material damage to, the
property or business of the Company (including its subsidiaries), or commission
of a felony by the Employee.
(g) "Voluntary Termination" shall mean any termination, which
is not:
i) an Involuntary Termination;
ii) a Termination for Cause; or
iii) the result of death, disability, or normal
retirement pursuant to a retirement plan to which the Employee was subject prior
to any Change of Control.
(h) "Voting Securities" shall mean any securities which
ordinarily possess the power to vote in the election of directors without the
happening of any pre-condition or contingency.
(i) "Termination Date" shall mean the date on which the
Employee's employment terminates.
5. Additional Payment for Excise Tax on Golden Parachute Payment.
It is anticipated that the payments to be made and benefits to be provided to
the Employee under this Agreement and other agreements (collectively, the
"Change of Control Amounts") may become subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or
any similar tax that may hereafter be imposed), on account of "excess parachute
payments" as defined in Section 280G of the Code. In the event such excise tax
is payable, the Company shall pay to the Employee, in addition to the amounts
payable pursuant to paragraph 3 of this Agreement and any other Change of
Control Amounts, an additional amount which, together with any federal, state or
local excise or income taxes payable by the Employee on such additional amount,
will provide the Employee with a sum on a net after-tax basis equal to the
amounts he would have received if the excise tax were not applicable to the
Change of Control Amounts. The determination of the amount to be paid hereunder
shall be made at the expense of the Company by the independent certified public
accounting firm acting as auditors for the Company on the date of a Change of
Control (or another accounting firm designated by that firm).
<PAGE>
-5-
6. Other Benefits.
(a) Health and Death Benefits. From the date benefits become payable
-------------------------
under paragraph 3 through the end of the number of months used in determining
the Employee's Severance Amount in paragraph 4(e), the Company shall continue to
provide the Employee with life, accident, death and health insurance plans and
benefits to the same extent such benefits are provided during this period to
active employees holding positions equivalent to the position of the Employee
immediately prior to his termination. The Company's share of the cost of
providing such benefits shall be the same as its share of the benefit costs for
providing such benefits to other employees holding positions equivalent to the
position the Employee held immediately prior to his termination.
(b) Outplacement and Relocation. The Company shall also reimburse
---------------------------
the Employee the aggregate expenses the Employee incurs for outplacement
assistance or relocation expenses in order to pursue other business
opportunities within two (2) years of the Termination Date which are not
reimbursed by another employer.
(c) Pension. To the extent that any Company supplemental executive
-------
retirement plan benefit formula(s) takes into account service, age and annual
compensation, the Employee shall be given credit under the formula(s) for (i)
the same number of months used in determining the Employee's Severance Amount in
paragraph 4(e), and (ii) annual compensation increases equal to the highest base
salary increases received by the Employee in the three years prior to the
Termination Date and bonus payouts at target.
(d) Benefits of General Applicability. The Employee shall remain
---------------------------------
eligible to receive other Company benefits that apply by their terms to persons
who terminate employment with the Company.
(e) Incentive Compensation. Any awards previously made shall vest on
----------------------
the Termination Date and be computed and paid notwithstanding any contrary plan
provisions provided that, if the plan providing for any such award stipulates an
earlier date for vesting, such provision shall control.
7. Legal Fees. The Company shall pay all legal fees and
expenses the Employee may incur as a result of any litigation brought to enforce
or interpret any provision of this Agreement, regardless of outcome.
8. Obligations of Employee. Employee agrees that upon
termination of employment he will turn over to the Company all materials and
documents, whether written or electronic, that pertain to the operation,
products, services, processes, plans, business or customers of the Company.
Employee also agrees not to disclose to any person any confidential information
of the Company. If the Employee fails to return materials required to be
returned or discloses confidential information of the Company to any person, all
payments and benefits still remaining to be paid or offered to the Employee
under this Agreement shall be forfeited.
<PAGE>
-6-
9. Notices. Notices and all other communications under this
Agreement shall be in writing and shall be deemed given when personally
delivered or when mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Company, to:
Rochester Gas and Electric Corporation
89 East Avenue
Rochester, New York 14649-0001
ATTENTION: Group Manager, Human Resource Services
If to the Employee, to:
J. Burt Stokes
20 Summit Oaks
Pittsford, New York 14534
or to such other address as either party may furnish to the other in writing,
except that a notice of a change of address shall be effective only upon
receipt.
10. Applicable Law. This contract is entered into under, and
shall be governed for all purposes by, the laws of the State of New York.
11. Severability. If a court of competent jurisdiction
determines that any provision of this Agreement is invalid or unenforceable,
then the invalidity or unenforceability f that provision shall not affect the
validity or enforceability of any other provision of this Agreement and all
other provisions shall remain in full force and effect.
12. Withholding of Taxes. The Company shall withhold from any
benefits payable under this Agreement all Federal, state, city or other taxes as
may be required pursuant to any law, governmental regulation or ruling.
13. Not an Employment Agreement. Nothing in this Agreement shall
give the Employee any rights (or impose any obligations to continued employment
by the Company or any subsidiary or successor of the Company), nor shall it give
the Company any rights (or impose any obligations) for the continued performance
of duties by the Employee for the Company or any subsidiary or successor of the
Company.
14. No Assignment. The Employee's right to receive payments or
benefits under this Agreement shall not be assignable or transferable, whether
by pledge, creation of a security interest or otherwise, other than a transfer
by will or by the laws of descent or distribution. In the event of any
attempted assignment or transfer contrary to this paragraph, the Company shall
have no liability to pay any amount so attempted to be assigned or transferred.
This Agreement shall inure to the benefit of and be enforceable by the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and
<PAGE>
-7-
legatees.
15. Successors. This Agreement shall be binding upon and inure
to the benefit of the Company, its successors and assigns (including, without
limitation, any company into or with which the Company may merge or
consolidate). The Company agrees that it will not effect the sale or other
disposition of all or substantially all of its assets unless either (i) the
person or entity acquiring the assets or a substantial portion of the assets
shall expressly assume by an instrument in writing all duties and obligations of
the Company under this Agreement, or (ii) the Company shall provide, through the
establishment of a separate reserve for the payment in full of all amounts which
are, or may reasonably be expected to become, payable to the Employee under this
Agreement.
16. Other Benefits and Compensation. The compensation and
benefits provided hereunder shall not limit or reduce compensation or benefits
otherwise payable to Employee pursuant to arrangements between Employee and the
Company, unless specific reference to any such reduction or limit is made
herein. It is not intended that this Agreement constitute a waiver of rights
under federal, state or local law, including, without limitation, Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act and the
Employee Retirement Income Security Act of 1974.
17. Payment Obligations Absolute. The Company's obligation to
pay the Employee the compensation and to make the arrangements provided herein
shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right that the Company may have against him or
anyone else. All amounts payable by the Company hereunder shall be paid without
notice or demand. Each and every payment made hereunder by the Company shall be
final and the Company will not seek to recover all or any part of such payment
from the Employee or from whosoever may be entitled thereto, for any reason
whatsoever.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of January 20, 1999 .
--------------------------------
ROCHESTER GAS AND ELECTRIC
CORPORATION
By: s/ Thomas S. Richards
------------------------------------
s/ J. B. Stokes Thomas S. Richards
- ----------------------------
Employee Its: Chairman of the Board, President and
Chief Executive Officer
<PAGE>
Exhibit 10-16
ROCHESTER GAS AND ELECTRIC CORPORATION
SEVERANCE AGREEMENT
This Severance Agreement is made, effective as of 1/26/99, by and
-------
between Rochester Gas and Electric Corporation, a New York corporation having
its principal place of business in Rochester, New York (the "Company"), and
Michael J. Bovalino, an individual currently residing in Honeoye, New York
(the "Employee").
1. Purposes. The Company's Board of Directors considers the
creation and retention of a sound and vital management team to be essential to
protecting and enhancing the best interests of the Company, its customers and
its shareowners. In this connection, the Company recognizes that if the
possibility of a Change of Control arises, the uncertainty and discomfort it may
raise could result in the departure or distraction of management personnel
during the period leading up to and during a possible Change of Control to the
detriment of the Company, its customers and its shareowners. Furthermore, in
addition to their regular duties management will be called upon during this
period to assist in the assessment of third party proposals, to advise the Board
as to whether such proposals would be in the best interests of the Company, its
customers and its shareowners and to take such other action as the Board may
determine appropriate. Accordingly, to assure the Company that it will have the
continued dedication of the Employee and the availability of his advice and
counsel notwithstanding the possibility, threat or occurrence of a bid to take
over control of the Company, and to induce the Employee to remain in the employ
of the Company, the Board has determined that it is in the Company's best
interests to provide the Employee with certain benefits in the event of the
Employee's termination of employment under the terms and conditions below.
2. Employee's Services During Attempted or Actual Change of
Control. In the event a third party takes any steps designed to effect a
Change of Control, the Employee agrees not to effect a Voluntary Termination,
and to render the services contemplated in paragraph 1, until the third party
has abandoned or terminated efforts to effect a Change of Control or until three
months after an actual Change of Control has occurred.
3. Payment of Severance Amount. In the event of an Involuntary
Termination of the Employee's employment by the Company or any subsidiary or
successor of the Company occurring within three years after a Change of Control,
then the Company shall pay the Employee a lump sum amount equal to the Severance
Amount, payable within 15 business days after the Termination Date, plus such
other benefits as may be provided in subsequent provisions of this Agreement.
4. Definitions. All the terms defined in this paragraph 4 shall
have the meanings given below throughout this Agreement.
(a) "Annual Salary" shall, as determined on the Termination
Date, be equal to the greater of:
<PAGE>
-2-
i) the highest annual compensation (including base
salary and bonus) paid or payable to the Employee with respect to any twelve
(12) consecutive month period, as selected by the Employee, during the three
years ending with the Termination Date, or
ii) the Employee's annual salary plus bonus on the
Termination Date.
"Bonus" for the purpose of this definition of Annual Salary shall mean the
Executive Incentive Plan (EIP) bonus for the Employee's final year or the
average of the bonuses for the three years prior to the Termination Date,
whichever is greater.
(b) "Change in Duties" shall mean any one or more of the
following:
i) a significant change in the nature or scope of
the Employee's authorities or duties from those applicable to her/him
immediately prior to the date on which a Change of Control occurs;
ii) a reduction in the Employee's Annual Salary
from that provided to her/him immediately prior to the date on which a Change of
Control occurs;
iii) a diminution in the Employee's eligibility to
participate in bonus, incentive award and other compensation plans which provide
opportunities to receive compensation, from the greater of:
the opportunities provided by the Company (including its
subsidiaries) for executives with comparable duties; or
the opportunities under any such plans under which she/he
was participating immediately prior to the date on which
a Change of Control occurs;
iv) a diminution in employee benefits (including but not
limited to medical, dental, life insurance and long-term disability plans) and
perquisites applicable to the Employee, from the greater of:
the employee benefits and perquisites provided by the
Company (including its subsidiaries), to executives with
comparable duties; or
the employee benefits and perquisites to which the
Employee was entitled immediately prior to the date on
which a Change of Control occurs;
v) a change in the location of the Employee's principal
place of employment by the Company (including its subsidiaries) by more than
fifty miles from the
<PAGE>
-3-
location where she/he was principally employed immediately prior to the date
on which a Change of Control occurs; or
vi) a reasonable determination by the Employee that, as
a result of a Change of Control and a change in circumstances thereafter
significantly affecting her/his position, she/he is unable to exercise the
authorities, powers, functions or duties attached to her/ his position
immediately prior to the date on which a Change of Control occurs.
(c) a "Change of Control" shall be deemed to have occurred if:
i) any "person," including a "group" as determined
in accordance with Section 13(d)(3) of the Securities Exchange Act of 1934 (the
"Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined voting
power of the Company's then outstanding Voting Securities;
ii) as a result of, or in connection with, any tender
offer or exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions (a
"Transaction"), the persons who were directors of the Company before the
transaction shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company;
iii) the Company is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 50 percent
of the outstanding Voting Securities of the surviving or resulting corporation
(or ultimate parent of such surviving or resulting corporation) shall then be
owned in the aggregate by the stockholders of the Company immediately prior to
such merger or consolidation, other than (x) affiliates within the meaning of
the Exchange Act or (y) any party to the merger or consolidation;
iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of the Company representing 20
percent or more of the combined voting power of the Company's then outstanding
Voting Securities; or
v) the Company transfers substantially all of its
assets to another corporation which is not a wholly-owned subsidiary of the
Company.
(d) "Involuntary Termination" shall mean any termination which:
i) does not result from a resignation by the Employee
(other than a resignation pursuant to clause ii of this subparagraph (d)), or
ii) results from a resignation following any Change in
Duties; provided, however, the term "Involuntary Termination" shall not include:
x. a Termination for Cause, or
<PAGE>
-4-
y. any termination as a result of death,
disability, or normal retirement pursuant to a retirement plan to which the
Employee was subject prior to any Change of Control.
(e) "Severance Amount" is equal to three (3) times the
Employee's Annual Salary, i.e. for a period of 36 months.
(f) "Termination for Cause" shall mean only a termination as
a result of fraud, misappropriation of, or intentional material damage to, the
property or business of the Company (including its subsidiaries), or commission
of a felony by the Employee.
(g) "Voluntary Termination" shall mean any termination, which
is not:
i) an Involuntary Termination;
ii) a Termination for Cause; or
iii) the result of death, disability, or normal
retirement pursuant to a retirement plan to which the Employee was subject prior
to any Change of Control.
(h) "Voting Securities" shall mean any securities which
ordinarily possess the power to vote in the election of directors without the
happening of any pre-condition or contingency.
(i) "Termination Date" shall mean the date on which the
Employee's employment terminates.
5. Additional Payment for Excise Tax on Golden Parachute Payment.
It is anticipated that the payments to be made and benefits to be provided to
the Employee under this Agreement and other agreements (collectively, the
"Change of Control Amounts") may become subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or
any similar tax that may hereafter be imposed), on account of "excess parachute
payments" as defined in Section 280G of the Code. In the event such excise tax
is payable, the Company shall pay to the Employee, in addition to the amounts
payable pursuant to paragraph 3 of this Agreement and any other Change of
Control Amounts, an additional amount which, together with any federal, state or
local excise or income taxes payable by the Employee on such additional amount,
will provide the Employee with a sum on a net after-tax basis equal to the
amounts he would have received if the excise tax were not applicable to the
Change of Control Amounts. The determination of the amount to be paid hereunder
shall be made at the expense of the Company by the independent certified public
accounting firm acting as auditors for the Company on the date of a Change of
Control (or another accounting firm designated by that firm).
<PAGE>
-5-
6. Other Benefits.
(a) Health and Death Benefits. From the date benefits become payable
-------------------------
under paragraph 3 through the end of the number of months used in determining
the Employee's Severance Amount in paragraph 4(e), the Company shall continue to
provide the Employee with life, accident, death and health insurance plans and
benefits to the same extent such benefits are provided during this period to
active employees holding positions equivalent to the position of the Employee
immediately prior to his termination. The Company's share of the cost of
providing such benefits shall be the same as its share of the benefit costs for
providing such benefits to other employees holding positions equivalent to the
position the Employee held immediately prior to his termination.
(b) Outplacement and Relocation. The Company shall also reimburse
---------------------------
the Employee the aggregate expenses the Employee incurs for outplacement
assistance or relocation expenses in order to pursue other business
opportunities within two (2) years of the Termination Date which are not
reimbursed by another employer.
(c) Pension. To the extent that any Company supplemental executive
-------
retirement plan benefit formula(s) takes into account service, age and annual
compensation, the Employee shall be given credit under the formula(s) for (i)
the same number of months used in determining the Employee's Severance Amount in
paragraph 4(e), and (ii) annual compensation increases equal to the highest base
salary increases received by the Employee in the three years prior to the
Termination Date and bonus payouts at target.
(d) Benefits of General Applicability. The Employee shall remain
---------------------------------
eligible to receive other Company benefits that apply by their terms to persons
who terminate employment with the Company.
(e) Incentive Compensation. Any awards previously made shall vest on
----------------------
the Termination Date and be computed and paid notwithstanding any contrary plan
provisions provided that, if the plan providing for any such award stipulates an
earlier date for vesting, such provision shall control.
7. Legal Fees. The Company shall pay all legal fees and
expenses the Employee may incur as a result of any litigation brought to enforce
or interpret any provision of this Agreement, regardless of outcome.
8. Obligations of Employee. Employee agrees that upon
termination of employment he will turn over to the Company all materials and
documents, whether written or electronic, that pertain to the operation,
products, services, processes, plans, business or customers of the Company.
Employee also agrees not to disclose to any person any confidential information
of the Company. If the Employee fails to return materials required to be
returned or discloses confidential information of the Company to any person, all
payments and benefits still remaining to be paid or offered to the Employee
under this Agreement shall be forfeited.
<PAGE>
-6-
9. Notices. Notices and all other communications under this
Agreement shall be in writing and shall be deemed given when personally
delivered or when mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Company, to:
Rochester Gas and Electric Corporation
89 East Avenue
Rochester, New York 14649-0001
ATTENTION: Group Manager, Human Resource Services
If to the Employee, to:
Michael J. Bovalino
421 East Lake Road
Honeoye, New York 14471
or to such other address as either party may furnish to the other in writing,
except that a notice of a change of address shall be effective only upon
receipt.
10. Applicable Law. This contract is entered into under, and
shall be governed for all purposes by, the laws of the State of New York.
11. Severability. If a court of competent jurisdiction
determines that any provision of this Agreement is invalid or unenforceable,
then the invalidity or unenforceability of that provision shall not affect the
validity or enforceability of any other provision of this Agreement and all
other provisions shall remain in full force and effect.
12. Withholding of Taxes. The Company shall withhold from any
benefits payable under this Agreement all Federal, state, city or other taxes as
may be required pursuant to any law, governmental regulation or ruling.
13. Not an Employment Agreement. Nothing in this Agreement shall
give the Employee any rights (or impose any obligations to continued employment
by the Company or any subsidiary or successor of the Company), nor shall it give
the Company any rights (or impose any obligations) for the continued performance
of duties by the Employee for the Company or any subsidiary or successor of the
Company.
14. No Assignment. The Employee's right to receive payments or
benefits under this Agreement shall not be assignable or transferable, whether
by pledge, creation of a security interest or otherwise, other than a transfer
by will or by the laws of descent or distribution. In the event of any
attempted assignment or transfer contrary to this paragraph, the Company shall
have no liability to pay any amount so attempted to be assigned or transferred.
This Agreement shall inure to the benefit of and be enforceable by the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and
<PAGE>
-7-
legatees.
15. Successors. This Agreement shall be binding upon and inure
to the benefit of the Company, its successors and assigns (including, without
limitation, any company into or with which the Company may merge or
consolidate). The Company agrees that it will not effect the sale or other
disposition of all or substantially all of its assets unless either (i) the
person or entity acquiring the assets or a substantial portion of the assets
shall expressly assume by an instrument in writing all duties and obligations of
the Company under this Agreement, or (ii) the Company shall provide, through the
establishment of a separate reserve for the payment in full of all amounts which
are, or may reasonably be expected to become, payable to the Employee under this
Agreement.
16. Other Benefits and Compensation. The compensation and
benefits provided hereunder shall not limit or reduce compensation or benefits
otherwise payable to Employee pursuant to arrangements between Employee and the
Company, unless specific reference to any such reduction or limit is made
herein. It is not intended that this Agreement constitute a waiver of rights
under federal, state or local law, including, without limitation, Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act and the
Employee Retirement Income Security Act of 1974.
17. Payment Obligations Absolute. The Company's obligation to
pay the Employee the compensation and to make the arrangements provided herein
shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right that the Company may have against him or
anyone else. All amounts payable by the Company hereunder shall be paid without
notice or demand. Each and every payment made hereunder by the Company shall be
final and the Company will not seek to recover all or any part of such payment
from the Employee or from whosoever may be entitled thereto, for any reason
whatsoever.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of 1/26/99 .
------------------------------------
ROCHESTER GAS AND ELECTRIC
CORPORATION
By: s/ Thomas S. Richards
------------------------------------
s/ Michael J. Bovalino Thomas S. Richards
- -----------------------------
Employee Its: Chairman of the Board, President and
Chief Executive Officer
<PAGE>
Exhibit 10-19
ROCHESTER GAS AND ELECTRIC CORPORATION
SEVERANCE AGREEMENT
This Severance Agreement is made, effective as of January 18, 1999,
-----------------
by and between Rochester Gas and Electric Corporation, a New York corporation
having its principal place of business in Rochester, New York (the "Company"),
and Michael T. Tomaino, an individual currently residing in Honeoye Falls, New
York (the "Employee").
1. Purposes. The Company's Board of Directors considers the
creation and retention of a sound and vital management team to be essential to
protecting and enhancing the best interests of the Company, its customers and
its shareowners. In this connection, the Company recognizes that if the
possibility of a Change of Control arises, the uncertainty and discomfort it may
raise could result in the departure or distraction of management personnel
during the period leading up to and during a possible Change of Control to the
detriment of the Company, its customers and its shareowners. Furthermore, in
addition to their regular duties management will be called upon during this
period to assist in the assessment of third party proposals, to advise the Board
as to whether such proposals would be in the best interests of the Company, its
customers and its shareowners and to take such other action as the Board may
determine appropriate. Accordingly, to assure the Company that it will have the
continued dedication of the Employee and the availability of his advice and
counsel notwithstanding the possibility, threat or occurrence of a bid to take
over control of the Company, and to induce the Employee to remain in the employ
of the Company, the Board has determined that it is in the Company's best
interests to provide the Employee with certain benefits in the event of the
Employee's termination of employment under the terms and conditions below.
2. Employee's Services During Attempted or Actual Change of
Control. In the event a third party takes any steps designed to effect a
Change of Control, the Employee agrees not to effect a Voluntary Termination,
and to render the services contemplated in paragraph 1, until the third party
has abandoned or terminated efforts to effect a Change of Control or until three
months after an actual Change of Control has occurred.
3. Payment of Severance Amount. In the event of an Involuntary
Termination of the Employee's employment by the Company or any subsidiary or
successor of the Company occurring within three years after a Change of Control,
then the Company shall pay the Employee a lump sum amount equal to the Severance
Amount, payable within 15 business days after the Termination Date, plus such
other benefits as may be provided in subsequent provisions of this Agreement.
4. Definitions. All the terms defined in this paragraph 4 shall
have the meanings given below throughout this Agreement.
(a) "Annual Salary" shall, as determined on the Termination
Date, be equal to the greater of:
<PAGE>
-2-
i) the highest annual compensation (including base
salary and bonus) paid or payable to the Employee with respect to any twelve
(12) consecutive month period, as selected by the Employee, during the three
years ending with the Termination Date, or
ii) the Employee's annual salary plus bonus on the
Termination Date.
"Bonus" for the purpose of this definition of Annual Salary shall mean the
Executive Incentive Plan (EIP) bonus for the Employee's final year or the
average of the bonuses for the three years prior to the Termination Date,
whichever is greater.
(b) "Change in Duties" shall mean any one or more of the
following:
i) a significant change in the nature or scope of the
Employee's authorities or duties from those applicable to her/him immediately
prior to the date on which a Change of Control occurs;
ii) a reduction in the Employee's Annual Salary from that
provided to her/him immediately prior to the date on which a Change of Control
occurs;
iii) a diminution in the Employee's eligibility to
participate in bonus, incentive award and other compensation plans which provide
opportunities to receive compensation, from the greater of:
the opportunities provided by the Company (including its
subsidiaries) for executives with comparable duties; or
the opportunities under any such plans under which she/he
was participating immediately prior to the date on which
a Change of Control occurs;
iv) a diminution in employee benefits (including but not
limited to medical, dental, life insurance and long-term disability plans) and
perquisites applicable to the Employee, from the greater of:
the employee benefits and perquisites provided by the
Company (including its subsidiaries), to executives with
comparable duties; or
the employee benefits and perquisites to which the
Employee was entitled immediately prior to the date on
which a Change of Control occurs;
v) a change in the location of the Employee's principal
place of employment by the Company (including its subsidiaries) by more than
fifty miles from the
<PAGE>
-3-
location where she/he was principally employed immediately prior to the date
on which a Change of Control occurs; or
vi) a reasonable determination by the Employee that, as
a result of a Change of Control and a change in circumstances thereafter
significantly affecting her/his position, she/he is unable to exercise the
authorities, powers, functions or duties attached to her/ his position
immediately prior to the date on which a Change of Control occurs.
(c) a "Change of Control" shall be deemed to have occurred if:
i) any "person," including a "group" as determined
in accordance with Section 13(d)(3) of the Securities Exchange Act of 1934 (the
"Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined voting
power of the Company's then outstanding Voting Securities;
ii) as a result of, or in connection with, any tender
offer or exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions (a
"Transaction"), the persons who were directors of the Company before the
transaction shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company;
iii) the Company is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 50 percent
of the outstanding Voting Securities of the surviving or resulting corporation
(or ultimate parent of such surviving or resulting corporation) shall then be
owned in the aggregate by the stockholders of the Company immediately prior to
such merger or consolidation, other than (x) affiliates within the meaning of
the Exchange Act or (y) any party to the merger or consolidation;
iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of the Company representing 20
percent or more of the combined voting power of the Company's then outstanding
Voting Securities; or
v) the Company transfers substantially all of its
assets to another corporation which is not a wholly-owned subsidiary of the
Company.
(d) "Involuntary Termination" shall mean any termination
which:
i) does not result from a resignation by the Employee
(other than a resignation pursuant to clause ii of this subparagraph (d)), or
ii) results from a resignation following any Change
in Duties; provided, however, the term "Involuntary Termination" shall not
include:
x. a Termination for Cause, or
<PAGE>
-4-
y. any termination as a result of death,
disability, or normal retirement pursuant to a retirement plan to which the
Employee was subject prior to any Change of Control.
(e) "Severance Amount" is equal to three (3) times the
Employee's Annual Salary, i.e. for a period of 36 months.
(f) "Termination for Cause" shall mean only a termination as
a result of fraud, misappropriation of, or intentional material damage to, the
property or business of the Company (including its subsidiaries), or commission
of a felony by the Employee.
(g) "Voluntary Termination" shall mean any termination, which
is not:
i) an Involuntary Termination;
ii) a Termination for Cause; or
iii) the result of death, disability, or normal
retirement pursuant to a retirement plan to which the Employee was subject prior
to any Change of Control.
(h) "Voting Securities" shall mean any securities which
ordinarily possess the power to vote in the election of directors without the
happening of any pre-condition or contingency.
(i) "Termination Date" shall mean the date on which the
Employee's employment terminates.
5. Additional Payment for Excise Tax on Golden Parachute Payment.
It is anticipated that the payments to be made and benefits to be provided to
the Employee under this Agreement and other agreements (collectively, the
"Change of Control Amounts") may become subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or
any similar tax that may hereafter be imposed), on account of "excess parachute
payments" as defined in Section 280G of the Code. In the event such excise tax
is payable, the Company shall pay to the Employee, in addition to the amounts
payable pursuant to paragraph 3 of this Agreement and any other Change of
Control Amounts, an additional amount which, together with any federal, state or
local excise or income taxes payable by the Employee on such additional amount,
will provide the Employee with a sum on a net after-tax basis equal to the
amounts he would have received if the excise tax were not applicable to the
Change of Control Amounts. The determination of the amount to be paid hereunder
shall be made at the expense of the Company by the independent certified public
accounting firm acting as auditors for the Company on the date of a Change of
Control (or another accounting firm designated by that firm).
<PAGE>
-5-
6. Other Benefits.
(a) Health and Death Benefits. From the date benefits become payable
-------------------------
under paragraph 3 through the end of the number of months used in determining
the Employee's Severance Amount in paragraph 4(e), the Company shall continue to
provide the Employee with life, accident, death and health insurance plans and
benefits to the same extent such benefits are provided during this period to
active employees holding positions equivalent to the position of the Employee
immediately prior to his termination. The Company's share of the cost of
providing such benefits shall be the same as its share of the benefit costs for
providing such benefits to other employees holding positions equivalent to the
position the Employee held immediately prior to his termination.
(b) Outplacement and Relocation. The Company shall also reimburse
---------------------------
the Employee the aggregate expenses the Employee incurs for outplacement
assistance or relocation expenses in order to pursue other business
opportunities within two (2) years of the Termination Date which are not
reimbursed by another employer.
(c) Pension. To the extent that any Company supplemental executive
-------
retirement plan benefit formula(s) takes into account service, age and annual
compensation, the Employee shall be given credit under the formula(s) for (i)
the same number of months used in determining the Employee's Severance Amount in
paragraph 4(e), and (ii) annual compensation increases equal to the highest base
salary increases received by the Employee in the three years prior to the
Termination Date and bonus payouts at target.
(d) Benefits of General Applicability. The Employee shall remain
---------------------------------
eligible to receive other Company benefits that apply by their terms to persons
who terminate employment with the Company.
(e) Incentive Compensation. Any awards previously made shall vest on
----------------------
the Termination Date and be computed and paid notwithstanding any contrary plan
provisions provided that, if the plan providing for any such award stipulates an
earlier date for vesting, such provision shall control.
7. Legal Fees. The Company shall pay all legal fees and
expenses the Employee may incur as a result of any litigation brought to enforce
or interpret any provision of this Agreement, regardless of outcome.
8. Obligations of Employee. Employee agrees that upon
termination of employment he will turn over to the Company all materials and
documents, whether written or electronic, that pertain to the operation,
products, services, processes, plans, business or customers of the Company.
Employee also agrees not to disclose to any person any confidential information
of the Company. If the Employee fails to return materials required to be
returned or discloses confidential information of the Company to any person, all
payments and benefits still remaining to be paid or offered to the Employee
under this Agreement shall be forfeited.
<PAGE>
-6-
9. Notices. Notices and all other communications under this
Agreement shall be in writing and shall be deemed given when personally
delivered or when mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Company, to:
Rochester Gas and Electric Corporation
89 East Avenue
Rochester, New York 14649-0001
ATTENTION: Group Manager, Human Resource Services
If to the Employee, to:
Michael T. Tomaino
135 Taylor Road
Honeoye Falls, New York 14472
or to such other address as either party may furnish to the other in writing,
except that a notice of a change of address shall be effective only upon
receipt.
10. Applicable Law. This contract is entered into under, and
shall be governed for all purposes by, the laws of the State of New York.
11. Severability. If a court of competent jurisdiction
determines that any provision of this Agreement is invalid or unenforceable,
then the invalidity or unenforceability of that provision shall not affect the
validity or enforceability of any other provision of this Agreement and all
other provisions shall remain in full force and effect.
12. Withholding of Taxes. The Company shall withhold from any
benefits payable under this Agreement all Federal, state, city or other taxes as
may be required pursuant to any law, governmental regulation or ruling.
13. Not an Employment Agreement. Nothing in this Agreement shall
give the Employee any rights (or impose any obligations to continued employment
by the Company or any subsidiary or successor of the Company), nor shall it give
the Company any rights (or impose any obligations) for the continued performance
of duties by the Employee for the Company or any subsidiary or successor of the
Company.
14. No Assignment. The Employee's right to receive payments or
benefits under this Agreement shall not be assignable or transferable, whether
by pledge, creation of a security interest or otherwise, other than a transfer
by will or by the laws of descent or distribution. In the event of any
attempted assignment or transfer contrary to this paragraph, the Company shall
have no liability to pay any amount so attempted to be assigned or transferred.
This Agreement shall inure to the benefit of and be enforceable by the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and
<PAGE>
-7-
legatees.
15. Successors. This Agreement shall be binding upon and inure
to the benefit of the Company, its successors and assigns (including, without
limitation, any company into or with which the Company may merge or
consolidate). The Company agrees that it will not effect the sale or other
disposition of all or substantially all of its assets unless either (i) the
person or entity acquiring the assets or a substantial portion of the assets
shall expressly assume by an instrument in writing all duties and obligations of
the Company under this Agreement, or (ii) the Company shall provide, through the
establishment of a separate reserve for the payment in full of all amounts which
are, or may reasonably be expected to become, payable to the Employee under this
Agreement.
16. Other Benefits and Compensation. The compensation and
benefits provided hereunder shall not limit or reduce compensation or benefits
otherwise payable to Employee pursuant to arrangements between Employee and the
Company, unless specific reference to any such reduction or limit is made
herein. It is not intended that this Agreement constitute a waiver of rights
under federal, state or local law, including, without limitation, Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act and the
Employee Retirement Income Security Act of 1974.
17. Payment Obligations Absolute. The Company's obligation to
pay the Employee the compensation and to make the arrangements provided herein
shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right that the Company may have against him or
anyone else. All amounts payable by the Company hereunder shall be paid without
notice or demand. Each and every payment made hereunder by the Company shall be
final and the Company will not seek to recover all or any part of such payment
from the Employee or from whosoever may be entitled thereto, for any reason
whatsoever.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of January 18, 1999.
-----------------
ROCHESTER GAS AND ELECTRIC
CORPORATION
By: s/ Thomas S. Richards
----------------------------------
s/ M. T. Tomaino Thomas S. Richards
- --------------------------
Employee Its: Chairman of the Board, President and
Chief Executive Officer
<PAGE>
Exhibit 10-21
AGREEMENT AMENDING GLOBAL SETTLEMENT AGREEMENT
--------- -------- ------ ---------- ---------
Agreement entered into as of this 29th day of October, 1998, by and among
-------------------------------------------------------------------------
Rochester Gas and Electric Corporation, a New York corporation ("RG&E"), General
Electric Capital Corporation, a New York corporation ("GE Capital"),
Kamine/Besicorp Allegany L.P., a Delaware limited partnership as debtor and
debtor in possession ("Debtor") and the other entities listed on the signature
page hereof ("Kamine Affiliates"), embodying an amendment to that certain Global
Settlement Agreement made and dated as of January 15, 1998, among the parties
hereto other than Besicorp Group Inc.(the "Global Settlement Agreement").
WITNESSETH
----------
WHEREAS, the parties hereto other than Besicorp Group Inc. ("BGI") are
parties to the Global Settlement Agreement/1/, a copy of which (without
exhibits) is annexed hereto as Exhibit A; and
WHEREAS, BGI desires to become a party to the Global Settlement
Agreement on the same terms and subject to the same conditions as the Kamine
Affiliates, except as to a claim that BGI has asserted against the Debtor as an
expense of administration claim in the amount of $352,700 (the "BGI Claim")
which claim is disputed and is to be resolved by the Bankruptcy Court; and
WHEREAS, the parties hereto other than BGI have agreed to amend the
Global Settlement Agreement to add BGI as a party thereto upon the terms and
subject to the conditions set forth below and upon no other terms and
conditions.
NOW, THEREFORE, for and in consideration of the foregoing recitals
which are
- -----------------
/1/Capitalized terms that are used and that are not defined herein shall have
the same meanings herein that they have in the Global settlement Agreement.
<PAGE>
incorporated in and are a part of this Agreement, and the mutual
promises and covenants herein contained and contained in the Global Settlement
Agreement, and in consideration of the agreement of BGI to withdraw its
objections to the Plan and the approval of the Global Settlement Agreement and
the Ammerlaan Settlement Agreement (each as modified to include BGI as a party
thereto), IT IS HEREBY AGREED by and among the parties hereto as follows;
1. The Global Settlement Agreement is hereby amended to include BGI
as a party thereto and the definition of the term "Kamine Affiliate" as
used therein shall include BGI unless otherwise specified herein.
2. Section 4(b) of the Global Settlement Agreement is hereby amended to
read as follows:
"Effective on the Effective Date, each party hereto other than
Debtor, GE Capital and BGI (the latter solely with respect to the
BGI Claim) hereby waives and relinquishes any and all Claims against
Debtor, the Estate of Debtor or property of Estate of Debtor,
including Claims arising from or related to the PPA, the Facility
and the Greenhouse, but excluding the
2
<PAGE>
BGI Claim and each Kamine Affiliate other than BGI (solely with
respect to the BGI claim) agrees that it shall not receive or retain
any distribution or property under the Plan."
3. Section 8(a) of the Global Settlement Agreement is hereby amended
so that the first two lines thereof shall read as follows.
"Except for (i) obligations pursuant to this Settlement Agreement
and (ii) the claims of BGI against KBALP incorporated in the BGI
Claim (which Claim shall be preserved to BGI), on the Effective
Date, each of RG&E, ***"
4. Section 8(b) of the Global Settlement Agreement is hereby amended
to insert the phrase "other than with respect to the BGI Claim" immediately
after the third word of the sixth line thereof and after the word Estate in
the last line.
5. Section 16 of the Global Settlement Agreement is hereby amended to
delete the references to Paul S. Hollander, Esq. and Stephen Nachimson, Esq.
on page 31 thereof and to insert in their place the name of A. Mitchell
Greene, Esq. and the firm of Robinson Brog Leinwand Greene Genovese & Gluck
P.C., 1345 Avenue of the Americas, New York, New York 10105-0143, Fax No.
(212) 956-2164.
3
<PAGE>
6. The signature pages of the Global Settlement Agreement shall be
amended in order to provide for the execution of the Global Settlement
Agreement by Besicorp Group, Inc. with the signature to be acknowledged by a
notary public.
7. The parties hereto agree, ratify and confirm that, except as
specifically provided herein, all other provisions of the Global Settlement
Agreement shall be and remain in fuIl force and effect in accordance with
their respective terms. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed
to be an original and all of which counterparts, taken together, shall
constitute but one and the same instrument.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered by their duly authorized officers as of the day and
year first above written.
Dated: November 3 1998 "RG&E"
------
ROCHESTER GAS AND ELECTRIC CORPORATION
By: s/ Michael T. Tomaino
---------------------
Name: Michael T. Tomaino
Its: Senior Vice President and General Counsel
Dated: October 28, 1998 "GE Capital"
--- ----------
GENERAL ELECTRIC CAPITAL CORPORATION
By: s/ William D. Strittmatter
--------------------------
Name: William D. Strittmatter
Its: Vice President
Dated: October 28, 1998 "DEBTOR"
---- ------
KAMINE/BESICORP ALLEGANY L.P.
By: KAMINE Allegany COGEN CO., INC.
Its: Managing Partner
By: s/ William D. Strittmatter
--------------------------
Name: William D. Strittmatter
Its: President
"KAMINE AFFILIATES"
-------------------
5
<PAGE>
Dated: October 28, 1998
---
KAMINE ALLEGANY COGEN CO., INC.
By: s/ William D. Strittmatter
--------------------------
Name William D. Strittmatter
Its: President
Dated: October 28, 1998
----
BETA ALLEGANY INC.
By: s/ William D. Strittmatter
---------------------------
Name: William D Strittmatter
Its: President
Dated: October 28, 1998
----
KAMINE DEVELOPMENT, L.P
By: Kamine Allegany Cogen Co., Inc.
Its: General Partner
By: s/ William D. Strittmatter
---------------------------
Name: William D. Strittmatter
Its: President
Dated: October 1998
---
KAMINE DEVELOPMENT CORP.
By: s/ Harold N. Kamine
--------------------
Name: Harold N. Kamine
Its: President
Dated: October 30, 1998
---
BESICORP GROUP, INC.
By: s/ Michael Daley, E.V.P.
-------------------------
Name: Michael Daley
Its: Executive Vice-Pres / CFO
6
<PAGE>
STATE OF NEW YORK )
:
COUNTY OF MONROE )
On the 3rd day of November in the year 1998 before me personally came
MICHAEL T. TOMAINO to me known, who, being by me duly sworn, did depose and say
that he resides in Honeoye, New York, that he is the Senior Vice President and
General Counsel of ROCHESTER GAS AND ELECTRIC CORPORATION, the corporation
described in and which executed the above instrument; that he knows the seal of
said corporation; and that he signed his name thereto by order of the board of
directors of said corporation.
s/Christina K. Sardou
---------------------
Notary Public
CHRISTINA K. SARDOU
Notary Public, State of New York
Registration No. 01SA6015061
Genesee County
Commission Expires October 19, 2000
7
<PAGE>
STATE OF CONNECTICUT )
: SS.:
COUNTY OF FAIRFIELD )
On the 28th day of October in the year 1998 before me personally came
WILLIAM D. STRITTMATTER to me known, who, being by me duly sworn, did depose and
say that he resides in Fairfield, Ct; that he is the President of Kamine
Allegany Cogen Co. Inc., a New York corporation, the managing general partner of
Kamine/Besicorp Allegany L.P. and of Kamine Development, L.P., partnerships
described in and which executed the above instrument; that he knows the seal of
said corporation; and that he signed his name thereto by order of the board of
directors of Kamine Allegany Cogen Co., Inc.
s/Marylena Antonelli
--------------------
Notary Public
MARYLENA ANTONELLI
NOTARY PUBLIC
MY COMMISSION EXPIRES MAY 31, 2001
8
<PAGE>
STATE OF CONNECTICUT )
: SS.:
COUNTY OF FAIRFIELD )
On the 28th day of October in the year 1998 before me personally came
WILLIAM D. STRITTMATTER, to me known, who, being by me duly sworn, did depose
and say that he resides in Fairfield, Ct., that he is a Vice President of
General Electric Capital Corporation, the corporation described in and which
executed the above instrument; that he knows the seal of said corporation; and
that he signed his name thereto by order of the board of directors of said
corporation.
s/Marylena Antonelli
--------------------
Notary Public
MARYLENA ANTONELLI
NOTARY PUBLIC
MY COMMISSION EXPIRES MAY 31, 2001
9
<PAGE>
STATE OF CONNECTICUT )
: SS.:
COUNTY OF FAIRFIELD )
On the 28th day of October in the year 1998 before me personally came
WILLIAM D. STRITTMATTER to me known, who, being by me duly sworn, did depose and
say that he resides in that he resides in Fairfield, Ct.; and that he is the
President of each of Kamine Allegany Cogen Co., Inc.; and Beta Allegany Inc.
corporations described in and which executed the above instrument; that he knows
the seal of said corporations; and that he signed his name thereto by order of
the board of directors of said corporations.
/s/Marylena Antonelli
---------------------
Notary Public
MARYLENA ANTONELLI
NOTARY PUBLIC
MY COMMISSION EXPIRES MAY 31, 2001
10
<PAGE>
STATE OF NEW JERSEY )
: SS.:
COUNTY OF SOMERSET )
On the 2nd day of November in the year 1998 before me personally came
Harold N. Kamine to me known, who, being by me duly sworn, did depose and say
that he resides in Lewsbury, New Jersey; that he is the President of Kamine
--------------------
Development Corp., the corporation described in and which executed the above
instrument; that he knows the seal of said corporation; and that he signed his
name thereto by order of the board of directors of said corporation.
s/Barbara Perrette
------------------
Notary Public
BARBARA PERRETTE
Notary Public of New Jersey
Commission Expires 9/11/2002
11
<PAGE>
STATE OF NEW YORK )
: SS.:
COUNTY OF ULSTER )
On the 30th day of October in the year 1998 before me personally came
MICHAEL DALEY, to me known, who, being by me duly sworn, did depose and say that
he resides at c/o BESICORP GROUP, INC., 1151 Flatbush Road, Kingston, N.Y., that
he is the Executive Vice President/CFO Besicorp Group, Inc., the corporation
described in and which executed the above instrument; that he knows the seal of
said corporation; and that he signed his name thereto by order of the board of
directors of said corporation.
s/Terri A. Nickolich
--------------------
Notary Public
TERRI A. NICKOLICH
Notary Public, State of New York
Resident in and for Ulster County
Commission Expires 5/31/2000
12
<PAGE>
Global Settlement Agreement
Settlement Agreement made and dated as of January 15, 1998, by and
among Rochester Gas and Electric Corporation, a New York corporation ("RG&E"),
General Electric Capital Corporation, a New York corporation ("GE Capital"),
Kamine/Besicorp Allegany L.P., a Delaware limited partnership as debtor and
debtor-in-possession ("Debtor") and the other entities listed on the signature
page hereof ("Kamine Affiliates"), embodying a global settlement of various
claims among the parties and the agreement of the parties to be implemented by a
Chapter 11 plan of liquidation to be proposed jointly by GE Capital and the
Debtor ("Plan")
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Debtor is the beneficial owner and operator of (i) a natural
gas fired electric generating facility located in the Town of Hume, New York
(the "Facility") which may be operated in conjunction with a 15-acre greenhouse
facility and related personal property ("Greenhouse"), as described in that
certain Ground Lease between Debtor and Allegany Greenhouse Inc., dated as of
June 1, 1993; and (ii) a water distillation plant and related equipment located
near the Facility; and
<PAGE>
WHEREAS, RG&E entered into a Power Purchase Agreement dated July 20,
1990, with Debtor's predecessor-in-interest; and
WHEREAS, said Power Purchase Agreement, as amended on or as of
December 14, 1990 and June 30, 1993 ("PPA"), was duly assigned to and assumed by
Debtor by an Assignment and Assumption Agreement dated August 25, 1992; and
WHEREAS, on or about June 30, 1993, GE Capital and RG&E entered into a
certain Consent and Agreement of said date (the "Consent Agreement"); and
WHEREAS, disputes exist among RG&E, GE Capital and Debtor regarding
the rights and obligations of the parties under the PPA and the Consent
Agreement; and
WHEREAS, in September, 1994, RG&E commenced a state court civil action
to declare the PPA unenforceable, as against Debtor and Kamine Affiliates in New
York State Supreme Court, Monroe County, Index No. 8174-94 (the "NYS Action");
and
WHEREAS, on or about January 27, 1995, Debtor commenced an antitrust
action against RG&E in the United States District Court for the Western District
of New York, 95-CV-6405-L (the "WDNY Action"); and
WHEREAS, on November 13, 1995 (the "Filing Date"), Debtor filed a
voluntary petition for relief under Chapter
2
<PAGE>
11 of Title 11, United States Code ("Bankruptcy Code") in the United States
Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"), which
case is pending as case No. 95-28703 (WFT) (the "Chapter 11 Case"); and
WHEREAS, on the Filing Date, Debtor commenced an adversary proceeding
against RG&E in the Bankruptcy Court ( A.P. No. 95-2909) (the "Adversary
Proceeding") by filing a complaint with the Clerk of the Bankruptcy Court; and
WHEREAS, on November 20, 1995, GE Capital moved to intervene in the
Adversary Proceeding as a party-plaintiff, which motion was granted by order
dated December 7, 1995; and
WHEREAS, on or about August 13, 1996, Debtor and GE Capital commenced
a second adversary proceeding against RG&E in the Bankruptcy Court (A.P. No. 96-
2559) (the "Second Adversary Proceeding") by filing a complaint (the Adversary
Proceeding and the Second Adversary Proceeding are sometimes collectively
referred to as the "Adversary Proceedings"); and
WHEREAS, the Facility has not produced electricity since mid-February,
1996; and
WHEREAS, as of the Filing Date, GE Capital was owed and has filed a
Secured Proof of Claim for the approximate amount of $91,644,771.41, which
indebtedness was
3
<PAGE>
secured by a lien upon and security interest against all or substantially all of
the assets and property of Debtor; and
WHEREAS, GE Capital has made loans (the "DIP Loans") to Debtor under a
Debtor-in-Possession Credit Agreement during the Chapter 11 Case in order to
permit Debtor to meet the costs and expenses of administration, including those
relating to maintenance of the Facility; and
WHEREAS, the Bankruptcy Court has entered Orders approving DIP Loans
duly made by GE Capital to Debtor with an unpaid balance in the approximate
amount of 36,600,000 as of March 31, 1998; and
WHEREAS, on or about June 26, 1997, Defendants in the NYS Action filed
a Joint Notice of Removal of Action Under 28 U.S.C. (S) 1441 (b) (Federal
Question) and the NYS Action is now pending in the United States District Court
for the Western District of New York, 97-CV-6299-L; and
WHEREAS, on or about July 3, 1997, GE Capital commenced an antitrust
action against RG&E in the United States District Court for the Western District
of New York, No. 97-CV-6307-T (the "GE Capital Antitrust Action"); and
WHEREAS, the New York State Public Service Commission ("PSC")
instituted a proceeding to investigate whether the Debtor had complied with
certain legal
4
<PAGE>
requirements relating to cogeneration facilities, Case No. 95-E-0447 (the "PSC
Proceeding"); and
WHEREAS, GE Capital and RG&E have had a series of meetings to discuss
and negotiate a global settlement of all matters in dispute by and among GE
Capital, RG&E, Debtor and the Kamine Affiliates; and
WHEREAS, the purpose of this agreement is, among other things, to
compromise, settle and resolve all disputes and claims by and among RG&E, GE
Capital, Debtor, the Estate of Debtor and Kamine Affiliates, including claims in
respect of the PPA, the Consent Agreement, the Facility, the Case and the
Adversary Proceedings, the NYS Action, the WDNY Action, the PSC Proceeding and
the GE Capital Antitrust Action and, in doing so, to provide for the release and
discharge of all such claims and resolve all such disputes amicably and without
further cost, expense or risk to the parties, all on the terms and subject to
conditions set forth below; and
WHEREAS, the parties hereto have agreed to the essential terms of an
asset sale pursuant to the Plan and as set forth in an Acquisition Term Sheet, a
copy of which is annexed hereto as Exhibit 1, in which (i) RG&E would purchase
the Purchased Assets (as hereinafter defined) for a cash price of $15 million or
such higher amount as RG&E may
5
<PAGE>
bid for the Purchased Assets or (ii) another entity may purchase the Purchased
Assets for an amount in excess of RG&E's bid based upon a bid that conforms to
the alternative bidding procedures specified in section 12 of the Acquisition
Term Sheet (a "Competitive Bid"), as may be approved by the Bankruptcy Court, in
any case with such purchase price to be paid to GE Capital; and
WHEREAS, RG&E and GE Capital have agreed to a payment plan in the form
annexed hereto as Exhibit 2-A ("Payment Plan") to be evidenced by a promissory
note payable to the order of GE Capital in the form annexed hereto as Exhibit
2-B (the "RG&E Note"), in full settlement and final satisfaction of RG&E's
obligations under the PPA and the Consent Agreement;/1/ and
WHEREAS, Debtor desires to fully and finally resolve and settle any
and all claims of creditors against the Estate of Debtor pursuant to a Plan; and
WHEREAS, the parties hereto acknowledge it will be beneficial to them
and to all other creditors of the Estate
/1/ In the event there is a successful Competitive Bid, then the difference
between (i) the successful Competitive Bid and (ii) the sum of $15 million plus
interest on $15 million from July 1, 1998 through the Effective Date (as
hereinafter defined) calculated at the annual rate of 7%, shall be applied first
to reduce the $10 million cash payment due on the Effective Date, and then to
payments on the RG&E Note in direct order of maturity.
6
<PAGE>
of Debtor and other parties in interest to permit the consummation of the
transactions contemplated herein and in the Acquisition Term Sheet upon the
terms and subject to conditions set forth below, and upon no other terms and
conditions.
NOW, THEREFORE, for and in consideration of the foregoing recitals
which are incorporated in and a part of this Settlement Agreement, and the
mutual promises and covenants herein contained, IT IS HEREBY AGREED by and among
the parties hereto that:
1. Pending Legal Proceedings.
------- ----- -----------
(a) As among the parties hereto, the NYS Action, the WDNY
Action, the Adversary Proceedings and the GE Capital Antitrust Action
(collectively "Pending Legal Proceedings") and the PSC Proceeding shall be
deemed still subject to the approval of the respective courts in which each such
proceeding is pending or the PSC. Each party shall use reasonable best efforts
(without incurring any significant expenses to do so) to achieve a stay of the
Pending Legal Proceedings, any other pending litigation and regulatory
proceedings, with such stays to remain in effect until the earlier of the
Effective Date (as hereinafter defined in Section 9(d)) or the date of
termination of this Settlement Agreement.
7
<PAGE>
(b) The parties hereto shall refrain from commencing any new
litigation or regulatory proceeding, the outcome of which could have a
materially adverse effect on (i) the PPA, (ii) the Consent Agreement, or (iii)
this Settlement Agreement, or rights or obligations hereunder or thereunder;
provided, however, the obligations of the parties pursuant to this paragraph
- --------- -------
shall be subject to the condition that no party shall be required to take any
action or suffer any inaction that would lead to forfeiture, loss of rights, or
otherwise cause a material adverse impact on such party with respect to any such
litigation or regulatory proceeding.
(c) Upon the occurrence of the Effective Date, each of RG&E, GE
Capital, Debtor and Kamine Affiliates shall, to the extent they are a party
thereto, dismiss, with prejudice and without costs or attorneys' fees, the
Pending Legal Proceedings and, in furtherance thereof, agrees to the immediate
and concurrent execution of Stipulations of Discontinuance in the forms annexed
hereto as Exhibits 3, 4, 5, 6/2/ and 7, which Stipulations shall be held in
escrow by Weil, Gotshal & Manges LLP and shall not be released from
- -----------------
/2/ RG&E shall use reasonable best efforts to obtain from Allegany Cogeneration,
Inc. a stipulation of discontinuance in the form of Exhibit 6 in respect of the
NYS Action.
8
<PAGE>
escrow or become effective, binding or enforceable unless and until the
Effective Date occurs or this Settlement Agreement is terminated in accordance
with its terms, and in the latter case such Stipulations shall be returned to
the respective plaintiff in the action relating to each such Stipulation.
2. Termination of PPA and Consent Agreement.
----------- -- --- --- ------- ---------
(a) On the occurrence of the Effective Date, the PPA shall be
terminated and of no further force or effect and all rights, powers, benefits,
duties and obligations of RG&E and Debtor under the PPA shall be terminated,
released and discharged.
(b) On the occurrence of the Effective Date, the Consent Agreement
shall be terminated and of no further force and effect and all rights, powers,
benefits, duties and obligations of RG&E or GE Capital under the Consent
Agreement shall be terminated, released and discharged.
3. Asset Sale and Transfers.
----- ---- --- ---------
(a) On the Effective Date, Debtor shall sell, assign, convey and
transfer to RG&E, or to such entity as RG&E shall designate as purchaser
("Purchaser"), unless there is a successful Competitive Bid by an entity other
than RG&E or its designee, all of Debtor's right, title and interest in (i) the
Facility and the Facility Property (as
9
<PAGE>
defined in the Acquisition Term Sheet), (ii) certain contracts that are not
executory contracts (as that term is used in section 365 of the Bankruptcy Code)
related thereto which shall be designated in a Schedule of Contracts to be
furnished to GE Capital on or before April 30, 1998, and (iii) certain executory
contracts related thereto which shall be designated in a Schedule of Executory
Contracts to be furnished to GE Capital on or before April 30, 1998
(collectively, the contracts listed in the Schedules of Contracts and Executory
Contracts and the Facility and Facility Property, the "Purchased Assets") .
Neither the Schedule of Contracts nor the Schedule of Executory Contracts shall
include thereon any contract that is described as an Excluded Asset in Section 4
of the Acquisition Term Sheet.
(b) The Purchased Assets shall be conveyed free and clear of any
and all liens and encumbrances as well as Claims (as defined in Code (S)
101(5)), liabilities or legal obligations accrued up to the Effective Date and
that could necessitate payment by Purchaser or otherwise impair utilization of
the Purchased Assets. RG&E shall in no event assume or be liable for any such
Claim, liability or legal obligation.
10
<PAGE>
(c) On the Effective Date, unless the Purchased Assets shall be
purchased by another entity that is not affiliated with RG&E, RG&E shall pay
(which payment may be made on RG&E's behalf by Purchaser) to GE Capital, by wire
transfer of immediately available funds, an amount equal to the purchase price
described in the Acquisition Term Sheet, which amount shall be applied by GE
Capital in partial satisfaction of Debtor's DIP Loan balance.
(d) On the Effective Date, Debtor and Kamine Affiliates shall
assign, transfer and convey to GE Capital (or its designee) all of their
respective right, title and interest in (i) the Greenhouse, (ii) that certain
Loan and Security Agreement, dated as of June 1, 1993, by and among Debtor,
Kamine Development Corp., Besicorp Group, Inc. ("BGI"), Allegany Greenhouse Inc.
("AGI") and IDA (as hereinafter defined), the Term Bond issued by AGI pursuant
thereto, and all related documents and instruments (collectively, the
"Greenhouse Mortgage Instruments") and (iii) all interests, rights, privileges,
claims, counterclaims, actions, causes of action and defenses of the Debtor
against AGI and, to the extent that the claims of Ammerlaan Agro-Projecten B.V.
("Ammerlaan") against the Debtor and the Greenhouse have not been compromised
and settled by a definitive written agreement in form and substance
11
<PAGE>
satisfactory to Debtor and GE Capital ("Ammerlaan Settlement Agreement"),
Ammerlaan, including those arising under or relating to the Greenhouse and the
Greenhouse Mortgage instruments.
(e) On the Effective Date, GE Capital shall fund an escrow
account to be established by Debtor, on terms and conditions satisfactory to GE
Capital, Debtor, the Creditors' Committee and the Bankruptcy Court, with funds
in an amount sufficient to pay Debtor's obligations under the Plan, including
costs and expenses of administration that may be or have been incurred in the
Chapter 1 Case and statutory fees owing to the U.S. Trustee, when such
obligations become due and owing. None of GE Capital, RG&E or Kamine Affiliates
shall assume or be liable for any obligations under the Plan, except as
otherwise expressly provided herein or in the Acquistion Term Sheet
4. Parties to Cooperate with Asset Sale and
------- -- --------- ---- ----- ---- ---
Transfers and Support the Plan.
--------- --- ------- --- -----
(a) Each party hereto agrees to fully cooperate with each other
party, and to make reasonable best efforts to facilitate and further the
negotiation, documentation and implementation of the transactions contemplated
hereby and by the Acquisition Term Sheet and the Plan
12
<PAGE>
(b) Effective on the Effective Date, each party hereto other than
Debtor and GE Capital hereby waives and relinquishes any and all Claims against
Debtor, the Estate of Debtor or property of Estate of Debtor, including Claims
arising from or related to the PPA, the Facility and the Greenhouse, and each
Kamine Affiliate agrees that it shall not receive or retain any distribution or
property under the Plan.
(c) Each party hereto other than Debtor hereby agrees to vote to
accept the Plan. Each party hereto hereby agrees to support confirmation and
consummation of the Plan and to make reasonable best efforts to implement and
effectuate those results.
5. Consent to Asset Sale and Settlement Agreement.
------- -- ----- ---- --- --------------------
(a) Debtor and Kamine Affiliates agree that the proposed sale of
the Purchased Assets in accordance with the terms set forth in the Acquisition
Term Sheet, to be implemented by the Plan, is in the best interests of Debtor's
creditors and other parties in interest, Debtor agrees that the sale or other
disposition of the Greenhouse and other assets of the Debtor in accordance with
the Plan is also in the best interests of the Debtor and its estate and Debtor
therefore agrees to be, become and remain a
13
<PAGE>
co-proponent of, and to support the Plan. Debtor and Kamine Affiliates agree to
support any future application for authority to implement and effectuate the
transactions contemplated hereby and by the Acquisition Term Sheet and the Plan.
(b) The parties hereto acknowledge their intent to cooperate
with each other in their efforts to resolve their disputes with the other
parties in interest.
6. Non-Interference.
----------------
(a) Unless or until a party is in material breach of this
Settlement Agreement, (i) each Kamine Affiliate and Debtor agrees it will
cooperate with GE Capital and RG&E to complete a sale of the Purchased Assets
and the disposition of all other assets of Debtor as contemplated hereby and by
the Acquisition Term Sheet and the Plan; and (ii) the parties hereto agree they
will take no action in the Bankruptcy Court to oppose confirmation and
consummation of the Plan.
(b) In the event the Effective Date has not occurred prior to
August 31, 1998, RG&E, Debtor and GE Capital agree to meet and negotiate in good
faith in respect to revising the manner and/or timing of the transactions
contemplated hereby and by the Acquisition Term Sheet and the Plan. To the
extent requested jointly by GE Capital and
14
<PAGE>
RG&E, each of the other parties hereto agrees to consent to any commercially
reasonable proposal for revising the manner and/or timing such transactions,
including any request or requests for one or more extensions of time to complete
confirmation and consummation of the Plan and the transactions contemplated
hereby, by the Acquisition Term Sheet and the Plan for a period ending on or
prior to December 31, 1998; provided, however, the Kamine Affiliates shall not
-------- -------
be requested to consent to any such proposal if it deprives them of the benefits
of Sections 1(a), 1(b) and 8(a) of this Settlement Agreement or imposes upon
them any significant expense.
7. Payments by RG&E to GE Capital.
-------- -- ---- -- -- -------
(a) On the Effective-Date, and in accordance with the Plan, RG&E
shall make a payment of $10 million/3/ to GE Capital and shall execute and
deliver to GE Capital the RG&E Note payable to the order of GE Capital
evidencing the Payment Plan providing for 64 payments to GE Capital in the
aggregate amount of $168.35 million, commencing on June 30, 1998 with a payment
of $3.5 million; continuing on September 30, 1998 through and including the last
business day of June, 1999, with four (4) quarterly payments each of $2.125
- -----------------
/3/ See note 1 supra.
-----
15
<PAGE>
million; and continuing on the last business day of September, 1999 and on the
last business day of each calendar quarter following the quarter ending
September 30, 1999 through and including March 31, 2014 with fifty-nine (59)
quarterly payments each of $2.65 million, by wire transfer of immediately
available funds to such bank accounts and in such amounts as shall be designated
in advance of the Effective Date by GE Capital. If RG&E is the purchaser of the
Purchased Assets and the Effective Date occurs after June 30, 1998, RG&E shall
pay interest from July 1 1998 on the purchase price for the Purchased Assets at
the annual rate of 7% to and excluding the Effective Date, such accrued interest
payment to be made on the Effective Date.
(b) RG&E shall have the right to prepay the entire outstanding
balance of all payments required to be made under the Payment Plan by paying to
GE Capital on the prepayment date an amount equal to the present value of such
payments. In the event such prepayment is financed in full by securitization of
a portion of RG&E assets related to stranded costs in a registered public
offering or private placement pursuant to enabling legislation of the New York
State Legislature or by executive or administrative order ("Securitization"),
the discount rate shall be 7.l0% per
16
<PAGE>
annum; in all other instances, the discount rate shall be 7.0% per annum. Any
such prepayment shall be made by wire transfer to the account specified pursuant
to Section 7 (a). At least ten business days prior to any prepayment, RG&E shall
give GE Capital notice of the intended prepayment, the amount and date thereof,
and identify the scheduled payments which are to be prepaid; and upon delivery
of such notice, RG&E shall be unconditionally bound to effect such prepayment on
the date specified therein.
8. Agreement to Release.
--------- -- -------
(a) Except for obligations pursuant to this Settlement Agreement,
on the Effective Date, each of RG&E, GE Capital, Debtor and each Kamine
Affiliate shall mutually release, acquit and forever discharge each other and
its respective past or present officers, directors, partners, employees, agents
and attorneys (other than those persons that acted or were in such capacities
with respect to BGI) from any and all manner of Claims, claims or causes of
action with respect to any and all actions or inactions, however described,
whether in law or equity, whether known or unknown, that any party has or may
have against any othet party as of the Effective Date, for or by reason of any
cause, matter or thing whatsoever, to the extent, and only to the extent,
related to or in respect of Debtor, the
17
<PAGE>
purchased Assets, the PPA, the Consent Agreement, the Pending Legal proceedings,
the PSC Proceeding or any transaction relating to any of the foregoing. Such
general releases shall be in the form of Exhibits 8, 9, 10 and 11 annexed
hereto.
(b) Upon Bankruptcy Court approval of this Settlement Agreement
and confirmation of the Plan and effective on the Effective
Date, each Kamine Affiliate and RG&E shall waive and release
all respective obligations and indebtedness of the Estate of
Debtor to such Kamine Affiliate and RG&E, and each Kamine
Affiliate and RG&E shall have agreed that any and all Claims
held by such Kamine Affiliate and RG&E against the Estate or
property of the Estate shall be disallowed and expunged.
9. Conditions to Closing.
---------- -- -------
(a) The obligations of the parties hereto to consummate the
transactions contemplated hereby shall be subject to the satisfaction or waiver
of each of the following conditions (the "Closing Conditions")
(i) Entry of a Final Order (as defined herein) (which may be
the Confirmation Order) by the Bankruptcy Court approving this
Settlement Agreement, including the
18
<PAGE>
compromise and settlement of the Pending Legal Proceedings;
(ii) the satisfaction or waiver of each of the Closing
Conditions set forth in the Acquisition Term Sheet and entry of a
Final Order by the Bankruptcy Court (which may be the Confirmation
Order) approving the sale of the Purchased Assets pursuant to the
Acquisition Term Sheet and the Plan;
(iii) entry of a Final Order by the Bankruptcy Court
confirming the Plan (the "Confirmation Order");
(iv) the release from escrow at the closing (for the purpose
of filing the same with the applicable court) of Stipulations of
Discontinuance in the form of Exhibits 3, 4, 5, 6, and 7 annexed
hereto dismissing, with prejudice and on the merits, all Pending
Legal Proceedings;
(v) entry of a Final Order or Orders by the New York State
Public Service Commission ("PSC") approving this Settlement
Agreement and the recovery of the associated cost and such other
transactions subject to PSC
19
<PAGE>
jurisdiction as are required to implement this Settlement
Agreement or the transactions contemplated herein, coupled with a
finding of the prudence as to RG&E's entry into and performance of
this Settlement Agreement;
(vi) entry of a Final Order or Orders by the PSC approving the
Amended and Restated Settlement Agreement dated October 23, 1997
in Case 96-E-0898, the so-called Competitive Opportunities
Proceeding, providing for a recovery of the costs associated with
this Settlement Agreement and related transactions in rates for
electric service to RG&E customers in form acceptable to RG&E;
(vii) the execution and delivery in escrow, pending the
closing contemplated by this Settlement Agreement, by Debtor, GE
Capital, Kamine Affiliates and RG&E of Releases in the form of
Exhibits 9, 10, 11 and 12 annexed hereto;
(viii) entry of Final Orders (which may be the
Confirmation Order) as shall be required to enable the Debtor to
assume, assign and/or convey to GE Capital or its
20
<PAGE>
designee(s), all of Debtor's interest in the Greenhouse;
(ix) all conditions to the effective date of the Plan have
been met or waived by the party or parties entitled to grant any
such waiver;
(x) such approvals, consents and agreements of the Allegany
County Industrial Development Agency ("IDA") as are required to
effectuate the transactions contemplated herein, in the
Acquisition Term Sheet and in the Plan, including those that would
enable RG&E or another purchaser of the Purchased Assets (and GE
Capital or its designee(s) with reference to the Greenhouse) to
use, occupy, operate and enjoy the benefits of ownership of such
assets in the same manner and for the same term as that to which
Debtor is entitled, assuming no default or event of default had
occurred prior to the date hereof; and
(xi) the execution and delivery in escrow, by RG&E, pending the
closing contemplated by this Settlement Agreement, of the
21
<PAGE>
RG&E Note in form identical to Exhibit 2-B hereto.
b) As used herein, "Final Order" means an order from which the time to
appeal, petition for certiorari or move for reargument or rehearing has expired
----------
and as to which no appeal, petition for certiorari or move for reargument or
----------
rehearing shall then be pending or as to which any right to appeal, petition for
certiorari or motion for reargument or rehearing shall have been waived in
- ----------
writing in form and substance satisfactory to each of the parties or, in the
event that an appeal, petition for certiorari or motion for reargument or
----------
rehearing has been sought, such order shall have been affirmed by the highest
court to which such order was appealed, certiorari has been denied, or
----------
reargument or rehearing denied, and the time to take any further appeal,
petition for certiorari or move for reargument or rehearing shall have expired;
----------
provided, however, that RG&E and GE Capital shall have the sole and absolute
- -----------------
right to jointly waive the requirement as to the finality of the orders
contemplated by clauses (i), (ii) and (iii), and the requirements of clauses
(iv), (ix) and (x) of Section 9 (a), RG&E shall have the sole and absolute right
to waive the requirement of the Final Orders contemplated by clauses (v) and
(vi) thereof, and GE Capital shall have the
22
<PAGE>
sole and absolute right to waive the requirements of clause (viii) and (xi).
(c) The parties hereto agree to use prompt and reasonable best efforts
to obtain satisfaction of the Closing Conditions; provided, however, that any
--------- -------
further condition imposed by the PSC upon RG&E or the transactions contemplated
by this Settlement Agreement shall be subject to evaluation by RG&E in its sole
and absolute discretion.
(d) The simultaneous closing of all of the transactions contemplated
hereby and by the Acquisition Term Sheet and the Plan shall occur within five
business days following the date upon which the last Closing Condition is
satisfied or waived (such closing date, the "Effective Date") . The closing
shall be held at the offices of Nixon, Hargrave, Devans & Doyle LLP, 437 Madison
Avenue, New York, New York or at such other location as to which the parties may
agree.
10. Cooperation with respect to Bankruptcy Court Approvals.
----------- ---- ------- -- ---------- ----- ---------
(a) The parties hereto shall use reasonable best efforts to seek and
obtain approval of the Bankruptcy Court of this Settlement Agreement and the
Acquisition Term Sheet, together with all requisite documents and instruments
23
<PAGE>
hereby contemplated and all of the transactions contemplated herein or therein.
(b) The parties hereto shall cooperate with each other in preparing
and filing any and all submissions to the Bankruptcy Court, other courts or to
regulatory agencies in respect of this Settlement Agreement.
11. Events of Termination.
------ -- -----------
This Settlement Agreement shall be terminated, and the transactions
contemplated hereby shall be abandoned:
(a) by the joint written consent of RG&E and GE Capital; or
(b) by RG&E or GE Capital, if there is a breach in any material
respect of any of the terms of this Settlement Agreement by another party and
such breach is not cured within fifteen (15) days after notice of such breach is
given to the party(ies) alleged to have breached; or
(c) on the occurrence of August 31, 1998 without the occurrence of the
Effective Date, unless, upon joint written consent only of RG&E, Debtor and GE
Capital, such date is extended to a date not later than December 31, 1998; or
(d) on the occurrence of December 31, 1998 without the occurrence of
the Effective Date.
24
<PAGE>
(e) by the Kamine Affiliates, if the obligations incorporated in
Sections 1(a), 1(b) and 8(a) of this Settlement Agreement for their benefit are
breached in a material respect.
12. Reservation of Rights.
----------- -- ------
This Settlement Agreement is entered into for purposes of consensually
resolving and settling certain disputed matters without further cost, expense or
risk to any party hereto; neither this Settlement Agreement nor any documents
related to or arising out of this Settlement Agreement (including without
limitation documents which may be submitted to the Bankruptcy Court, the PSC,
the IDA or any other court or agency) may be used, admitted into evidence at any
trial, hearing or proceeding to the prejudice of any party hereto, except to
enforce any provision of this Settlement Agreement. In the event this
Settlement Agreement is terminated in accordance with its terms without the
occurrence of the Effective Date, each of the parties hereto expressly reserves
all its respective rights at law and equity with respect to any claims,
defenses, setoffs, counterclaims and cross-claims, that each such party may have
against any other party.
25
<PAGE>
13. Bankruptcy Court Approval.
---------- ----- --------
This Settlement Agreement is made, in part, pursuant to
Rule 9019, Fed. R. Bankr. P. and is subject to, and conditioned upon, approval
by the Bankruptcy Court. This Settlement Agreement shall have no force or effect
and, except for Sections 1(a), 1(b), 4(a), 6 10, 11, 12, 13, 14, 15, 16(a), and
17 through 22, inclusive hereof, shall not be binding on the parties hereto
unless and until the compromise and settlement herein has been approved by a
Final Order of the Bankruptcy Court. The parties hereto shall exercise their
respective reasonable best efforts to obtain from the Bankruptcy Court an order
that approves such compromise and settlement.
14. Corporate Action; RG&E Representations.
--------- ------- ---- ---------------
(a) Each party hereto has obtained the requisite internal
approval(s) of this Settlement Agreement and the transactions contemplated
herein.
(b) RG&E represents and warrants that on and as of the
Effective date:
(i) RG&E will have full corporate power and authority to
execute and deliver the RG&E Note and to perform and observe the
provisions of the RG&E Note.
26
<PAGE>
(ii) The execution, delivery and performance by RG&E of the
RG&E Note will have been duly authorized by all necessary
corporate action, and will not contravene any law or any
contractual restriction binding on or affecting RG&E or its
assets.
(iii) No authorization or approval or other action by, and
no notice to or filing with, any governmental authority or
regulatory body will be required for the due execution, delivery
and performance by RG&E of the RG&E Note.
(iv) The RG&E Note will be identical in form to Exhibit
2-B hereto and will be the legal, valid and binding obligation of
the RG&E, enforceable against the Obligor in accordance with its
terms.
(v) There will be no pending or threatened action or
proceeding affecting RG&E before any court, governmental agency
or arbitrator which will purport to affect the legality, validity
or enforceability of the RG&E Note.
15. Consideration; Informed Decision by Parties.
-------------- -------- -------- -- -------
This Settlement Agreement is entered into without force or
duress, in the free will of each party hereto and each acknowledges that the
settlement described
27
<PAGE>
herein constitutes full and adequate consideration for its entering into this
Settlement Agreement and for the execution and delivery of the Releases and
other documents referred to in this Settlement Agreement. Each party hereto has
consulted with counsel regarding the transactions contemplated by this
Settlement Agreement and has resolved with counsel any questions it may have as
to the meaning, effect or interpretation of this Settlement Agreement and the
execution and delivery of the Settlement Agreement. The decision of each party
hereto to enter into this Settlement Agreement and the execution and delivery of
documents applicable to the Settlement Agreement is a fully informed decision,
and each is aware of all legal and other ramifications of such decision.
16. General Provisions.
------- ----------
(a) All references in this Settlement Agreement to sections,
captions, titles or articles refer only to sections, captions, titles or
articles in this Settlement Agreement and to no other document, unless expressly
stated otherwise, and shall not be deemed for any purpose to modify, explain or
aid in construction or interpretation of any of the terms or provisions of this
Settlement Agreement.
28
<PAGE>
(b) Each party hereto agrees to perform such other and
further acts and to execute such other and further documents as may be
reasonably necessary to carry out the provisions or purposes of this Settlement
Agreement. Each party agrees that it will not take any action which wouinterfere
with the performance of this Settlement Agreement by any other party or which
would adversely affect any of the rights provided for herein.
(c) All notices required or permitted to be given hereunder
shall be in writing and shall be deemed given when sent via facsimile (with hard
copy to follow by mail), delivered personally on the day following deposit in a
nationally known overnight/delivery service addressed as follows:
If to GE Capital:
General Electric Capital Corporation
120 Long Ridge Road, Third Floor
Stamford, CT 06927
Attn: William D. Strittmatter
FAX (203) 961-5776
with copies to:
Arthur A. Cohen
General Electric Capital Corporation
120 Long Ridge Road, Third Floor
Stamford, CT 06927
FAX (203) 357-6632
and
29
<PAGE>
Alan B. Miller, Esq.
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
FAX (212) 735-4965
If to RG&E:
Rochester Gas & Electric Corporation
89 East Avenue
Rochester, New York 14649
Attn: Michael T. Tomaino
FAX (716) 724-8285
with copies to:
William S. Thomas, Jr., Esq.
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P.O. Box 1051
Rochester, New York 14603
FAX (716) 263-1600
If to Debtor:
Kamine BesicorplAllegany L.P.
1545 Route 206
Suite 300
Bedminster, New Jersey 07921
Attn: Mark Slifkin
with copies to:
Kelley Drye & Warren LLP
101 Park Avenue
New York, New 10178
FAX (212) 808-7897
Attn: Alan Epstein, Esq. Mark Bane, Esq.
If to Kamine Affiliates:
Kamine Development Corp.
1545 Route 206, Suite 300
Bedminster, NJ 07921-2567
Attn: President
FAX (908) 719-2211
30
<PAGE>
with a copy to:
Paul S. Hollander, Esq.
Okin, Hollander & DeLuca,LLP
One Park Plaza
Fort Lee, NJ 07024
FAX (201) 947-2663
17. Entire Agreement.
------ ---------
This Settlement Agreement and any and all agreements ancillary
hereto represent the entire agreement between the parties hereto, and supersede
all prior agreements and understandings with respect to the subject matter
hereof, whether written or oral. This Settlement Agreement and any and all
agreements ancillary thereto have been fully negotiated by all parties.
Accordingly, no prior drafts, memoranda or term sheet prepared by any party
shall be used to construe or interpret any provision hereof or of any related
document.
18. Submission to Jurisdiction.
---------- -- ------------
Without prejudice to their respective positions and decisions
previously entered in the Pending Legal Proceedings regarding jurisdiction and
venue, each party hereto consents to the exclusive jurisdiction and venue of the
Bankruptcy Court over any action or proceeding arising out of or relating to
this Settlement Agreement, and
31
<PAGE>
otherwise arising out of or relating to the transactions contemplated hereby,
and, further, each party (i) agrees that all claims in respect of such action or
proceeding may be heard and determined to Final Order or Final Judgment by the
Bankruptcy Court, and (ii) hereby waives any objection on the basis of forum non
----- ---
conveniens to such action or proceeding.
- ----------
19. Governing Law.
-------------
This Settlement Agreement shall be governed and construed in
accordance with the laws of the State of New York without regard to its
principles of conflict of laws.
20. Waiver of Provisions.
------ -- ----------
No delay or failure on the part of any of the parties
hereto to exercise any rights under the terms of this Settlement Agreement shall
waive, exhaust, or impair such party's ability to thereafter exercise such
rights or any other rights given hereunder.
21. Amendments.
----------
This Settlement Agreement may not be altered, amended or
modified in any way whatsoever except by a writing duly executed by all of the
signatories to this Settlement Agreement.
32
<PAGE>
22. Counterparts.
------------
This Settlement Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which counterparts of this Settlement Agreement, taken
together, shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Settlement Agreement to
be executed and delivered by their duly authorized officers as of the day and
year first above written.
33
<PAGE>
Dated: May , 1998 RG&E
--- ----
ROCHESTER GAS AND ELECTRIC CORPORATION
By:
-----------------------
Name: Michael T. Tomaino
Its: Senior Vice President
and General Counsel
Dated: May , 1998 "GE Capital"
--- -- -------
GENERAL ELECTRIC CAPITAL CORPORATION
By:
-----------------------
Name: William D. Strittmatter
Its: Vice President
Dated: May , l998 "DEBTOR"
--- --------
KAMINE/BESICORP Allegany L.P.
By: KAMINE Allegany COGEN CO., INC.
Its: Managing Partner
By:
-----------------------
Name: William D. Strittmatter
Its: President
<PAGE>
"KAMINE AFFILIATES
------ ----------
Dated: May , 1998 KAMINE ALLEGANY COGEN CO., INC.
---
By:
Name: William D. Strittmatter
Its: President
Dated: May , 1998 BETA ALLEGANY INC.
---
By:
-----------------------
Name: William D. Strittmatter
Its: President
Dated: May , 1998 KAMINE DEVELOPMENT, L.P.
---
By: Kamine Allegany Cogen Co., Inc.
Its: General Partner
By:
-----------------------
Name: William D. Strittmatter
Its: President
Dated: June , 1998 KAMINE DEVELOPMENT CORP.
---
By:
-----------------------
Name: Harold N. Kamine
Its: President
<PAGE>
STATE OF NEW YORK )
: SS.:
COUNTY OF MONROE )
On the _____ day of May in the year 1998 before me personally came MICHAEL T.
TOMAINO to me known, who, being by me duly sworn, did depose and say that he
resides in Honeoye, New York, that he is the Senior Vice President and General
Counsel of ROCHESTER GAS AND ELECTRIC CORPORATION, the corporation described in
and which executed the above instrument; that she knows the seal of said
corporation; and that she signed her name thereto by order of the board of
directors of said corporation.
______________________
Notary Public
<PAGE>
STATE OF CONNECTICUT )
: SS.:
COUNTY OF FAIRFIELD )
On the _____ day of May in the year 1998 before me personally came
WILLIAM D. STRITTMATTER to me known, who, being by me duly sworn, did depose and
say that he resides in Fairfield Ct; that he is the President of Kamine Allegany
Cogen Co. Inc., a New York corporation, the managing general partner of
Kamine/Besicorp Allegany L.P. and of Kamine Development, L.P., partnerships
described in and which executed the above instrument; that he knows the seal of
said corporation; and that he signed his name thereto by order of the board of
directors of Kamine Allegany Cogen Co., Inc.
______________________
Notary Public
<PAGE>
STATE OF CONNECTICUT )
: SS.:
COUNTY OF FAIRFIELD )
On the _____ day of May in the year 1998 before me personally came
WILLIAM D. STRITTMATTER, to me known, who, being by me duly sworn, did depose
and say that he resides in Fairfield, Ct., that he is a Vice President of
General Electric Capital Corporation, the corporation described in and which
executed the above instrument; that he knows the seal of said corporation; and
that he signed his name thereto by order of the board of directors of said
corporation.
______________________
Notary Public
<PAGE>
STATE OF CONNECTICUT )
: SS.:
COUNTY OF FAIRFIELD )
On the _____ day of May in the year 1998 before me personally came
WILLIAM D. STRITTMATTER to me known, who, being by me duly sworn, did depose and
say that he resides in that he resides in Fairfield, Ct.; and that he is the
President of each of Kamine Allegany Cogen Co., Inc.; and Beta Allegany Inc.
corporations described in and which executed the above instrument; that he knows
the seal of said corporations; and that he signed his name thereto by order of
the board of directors of said corporations.
______________________
Notary Public
<PAGE>
STATE OF NEW JERSEY )
: SS.:
COUNTY OF SOMERSET )
On the _____ day of June in the year 1998 before me personally came
Harold N. Kamine to me known, who, being by me duly sworn, did depose and say
that he resides in __________________________________ that he is the President
of Kamine Development Corp., the corporation described in and which executed the
above instrument; that he knows the seal of said corporation; and that he signed
his name thereto by order of the board of directors of said corporation.
______________________
Notary Public
<PAGE>
EXHIBIT SCHEDULE
------- --------
1 Acquisition Term Sheet
2-A RG&E/GE Capital Payment Plan
2-B RG&E Note
3 Stipulation, Adversary Proceeding
4 Stipulation, Second Adversary Proceeding
S Stipulation, KBALP Antitrust Action
6 Stipulations, WDNY Action
7 Stipulation, GE Capital Antitrust Action
8 Release, RG&E
9 Release, GE Capital
10 Release, Debtor
11 Release, Kamine Affiliates
<PAGE>
Acquisition Term Sheet
Subject to the terms and conditions herein and in the Global Settlement
Agreement, to which this is an Exhibit:
(1) On the Effective Date,/1/ Debtor shall sell, assign, convey and
transfer to RG&E, all of Debtor's right, title and interest in the Purchased
Assets, which shall by order of the Bankruptcy Court be free and clear of all
liens, encumbrances or other Claims under Code (S) 363(f). In furtherance
thereof, Debtor shall move or incorporate in the Plan the assumption and
assignment to RG&E as of the Effective Date of the Plan (or to any other
qualified assignee that RG&E may designate and, if so designated, such entity
shall be known as RG&E for purposes of designating the entity to which property
will be transferred, effective from and after such assumption and assignment)
all of Debtor's right, title and interest in the contracts identified by RG&E as
part of the Purchased Assets, such contracts to be designated in a Schedule of
Executory Contracts to be furnished to GE Capital prior to April 30, 1998, if
and to the extent they are executory contracts
- -----------------
/1/ Capitalized terms shall have the same meanings in this Term Sheet that they
have in the Global Settlement Agreement unless otherwise defined herein.
<PAGE>
pursuant to Code (S) 365(a). Prior to April 30, 1998, RG&E shall also designate
and furnish to GE Capital a schedule of contracts that are not executory (as
that term is used in section 365 of the Bankruptcy Code) which shall be
designated a Schedule of Contracts. If within seven (7) business days of receipt
of said Schedules, GE Capital has not objected, then the Schedules shall be
deemed accepted. However, if GE Capital objects, then RG&E and GE Capital shall
meet and negotiate in good faith to reach a commercially reasonable solution to
such objection, provided, however, in respect of any solution none of RG&E, GE
-----------------
Capital or Kamine Affiliates shall be obligated to incur any significant
additional expense.
(2) The Purchase Price shall be $15 million plus interest at the
annual rate of 7% from July 1, 1998 or such higher amount as RG&E may bid
pursuant to the procedures described in paragraph 12 hereof, payable at closing,
by wire transfer to such bank accounts and in such amounts as shall be
designated in advance of the Effective Date by GE Capital.
(3) On the terms and subject to conditions of this Acquisition Term
Sheet, on the Effective Date, Debtor shall sell, assign, convey and transfer to
RG&E, all its right, title and interest in the following personal property
2
<PAGE>
on an "AS IS, WHERE IS" basis, except as expressly otherwise provided elsewhere
in this Agreement (collectively, the "Facility Property"):
-------------------
All tangible and intangible personal property which is
owned by Debtor or any of the Kamine Affiliates, located on
or in or used in connection with the ownership, operation
and maintenance of the Facility or the business conducted
thereon and all such personal property owned by Debtor or
acquired for installation or use in connection therewith,
wherever located, including, without limitation: (a) all
equipment; (b) all inventory; (c) all security deposits; (d)
all warranties or service contracts and other agreements
relating thereto; (e) office furnishings and supplies; (f)
all intangible property to the extent transferrable by the
Debtor with or without Bankruptcy Court approval; (g)
laboratory and testing records; (h) all licenses and permits
to the extent transferrable by the Debtor with or without
Bankruptcy Court approval, if applicable and required by
law; (i) all utility, security and other deposits and
reserve accounts made (and any refunds thereof) as security
for the fulfillment of any obligation of Debtor; (j) all
books, records, files, reports, budgets, correspondence,
manuals, promotional materials, software and intellectual
property rights related to the use, development, operation,
management, service, maintenance and leasing of the
Facility; (k) all construction contracts and construction
guaranties, if any, and other assurances of performance; (1)
all telephone numbers and directory advertising agreements
related to or used in connection with the Facility; and (m)
all drawings, plans,
3
<PAGE>
specifications, diagrams, reports, any other architectural
or engineering work product related to the Facility.
(4) It is expressly agreed and understood that certain properties and
assets of Debtor or in which Debtor has an interest, including the Greenhouse,
the water distillation plant and all equipment used in connection therewith, and
various executory contracts, including Debtor's natural gas agreement, Debtor's
natural gas transportation agreements, the ISDA Master Agreement (Project Swap
Agreement), dated as of August 6, 1993, between Debtor and GE Capital, the
Operation and Maintenance Agreement dated as of March 1, 1993, and amended,
between Debtor and Stewart & Stevenson Operations, Inc. and all matured and
unmatured claims and causes of action of Debtor's Estate against (a) Kamine
Affiliates, AGI, BGI, Ammerlaan or GE Capital, (b) one or more of Debtor's,
Kamine Affiliates' or BGI's past or present agents, officers, directors,
partners or employees or (c) any other person or entity constituting avoidance
claims that may be asserted under or pursuant to subchapter III of Chapter 5 of
the Bankruptcy Code (collectively, the "Excluded Assets") shall not be sold or
assigned to RG&E, and shall be retained or released by Debtor or disposed of to
others on or after the Effective Date, as provided in the Global Settlement
4
<PAGE>
Agreement and the Plan, Prior to April 30, 1998, RG&E and GE Capital shall agree
on a Schedule of Excluded Assets.
(5) The tangible assets included in the Purchased Assets shall be
purchased "AS IS" and "WHERE IS", but RG&E shall have inspected and examined
those assets to determine their condition and to ensure that the Purchased
Assets are adequate and suitable in accordance with general industry practices
for the purpose currently used and intended to be used. RG&E shall have
completed any such inspection, examination or due diligence by not later than
5:00 P.M. (EDT) on April 30, 1998 (the "Due Diligence Date"). If by the Due
Diligence Date, GE Capital and the Debtor shall not have received written notice
of any deficiency, then RG&E shall be deemed to be satisfied with its
inspection, examination and due diligence findings. However, if GE Capital and
the Debtor by such time shall have received a written notice of deficiency, then
RG&E and GE Capital shall meet and negotiate in good faith to reach a
commercially reasonable solution to such deficiency. Debtor shall use its
reasonable best efforts to maintain, or cause to be maintained, the Purchased
Assets in their condition as of the execution and delivery of this Settlement
Agreement, ordinary wear and tear and any effect resulting from the operation of
the Facility at the request of RG&E excepted.
5
<PAGE>
(6) Each of Debtor and Kamine Affiliates covenants it will promptly
furnish, or cause to be furnished, to RG&E and its representatives all data and
information relating to the Purchased Assets that may be reasonably requested
through the Effective Date. Debtor shall, through the Effective Date upon the
reasonable request of RG&E afford RG&E reasonable access to the Facility and the
Facility Property. Debtor shall, through the Effective Date upon the reasonable
request of RG&E, cooperate, consult with and assist RG&E and its representatives
with respect to any inspection, examination or review of the Purchased Assets.
At the request of RG&E and upon at least one business day advance notice,
through the Effective Date the Debtor will from time to time give or cause to be
given to RG&E and its representatives (a) access during normal business hours to
all of the Purchased Assets and related operations and (b) all information
concerning the Purchased Assets as RG&E may reasonably request.
(7) At closing, Debtor shall execute or use its reasonable best
efforts to obtain (as applicable), any written consents, approvals,
authorizations, assignments, deeds, bills of sale or other instruments of
conveyance (collectively "Consents and Instruments of Transfer") in
6
<PAGE>
form reasonably satisfactory to RG&E, to transfer to RG&E, and vest in RG&E good
and marketable title to all of the Debtor's right, title and interest in and to
the Purchased Assets, which shall by order of the Bankruptcy Court be free and
clear of liens, encumbrances or other Claims under Code (S) 363(f), and to
substitute RG&E as lessee of any Purchased Assets under lease to Debtor. It is
expressly understood and agreed that to the extent RG&E or its designee becomes
the owner, lessee or entity entitled to become the owner of the real property on
which the Greenhouse is situated under an installment sale agreement or other
agreement with the IDA, RG&E or such designee as owner of the real property
shall at the election of GE Capital subdivide and convey such real property or
(as lessee of the real property) shall enter into a lease thereof for a term to
be mutually agreed upon at a nominal rental, as applicable, for the benefit of
GE Capital and/or its designee-owner of the Greenhouse.
To the extent that RG&E reasonably determines, before or after the
closing, that any additional Consents and Instruments of Transfer are necessary
in order to vest all of Debtor's right, title and interest in the Purchased
Assets in RG&E, Debtor shall execute or use its reasonable best efforts to
obtain any such Consent or Instrument of Transfer. Such Consents and Instruments
of Transfer may not
7
<PAGE>
require any change in the terms and conditions of the Global Settlement
Agreement unless consented to by the parties. GE Capital and the Kamine
Affiliates shall use their respective reasonable best efforts (without incurring
any significant expenses to do so) to assist the Debtor in respect of the
performance of its obligations pursuant to paragraph 7 hereof.
(8) It is expressly agreed and understood that, RG&E shall not
assume, pay or discharge, or in any respect be liable for any liability,
obligation, commitment or expense of Debtor or of any Kamine Affiliate
attributable to the Purchased Assets including any federal, state or local sales
taxes, accrued up to closing or relating to the transfer of the Purchased
Assets. At or after the closing, at the request of RG&E and upon five business
days advance notice, GE Capital shall execute and deliver UCC-3 termination
statements and discharges and/or releases of liens of mortgages and other
instruments and documents, in form and substance satisfactory to RG&E and its
counsel evidencing the release, discharge and termination of all liens or
encumbrances held by GE Capital on the Purchased Assets. Debtor has paid or will
pay all taxes, levies and assessments required to be paid by Debtor as of the
Effective Date, the non-payment of which would result in the
8
<PAGE>
imposition of a lien or a charge against the Purchased Assets or RG&E as owner
of the Purchased Assets.
(9) Any item of Purchased Assets which includes a written or oral
obligation which arises or accrues after the Effective Date shall be set forth
on a separate schedule prior to closing. RG&E shall in no event assume or be
liable for any Claim, liability or legal obligation which accrues on or prior to
the Effective Date not specifically assumed in writing.
(10) Conditions To Closing.
The obligation of the parties hereto to the transactions
contemplated hereby shall be the satisfaction or waiver of each of
the conditions (the "Closing Conditions")
(i) the satisfaction or waiver of each of the Closing
Conditions set forth in the Global Settlement Agreement;
(ii) all of the Purchased Assets are owned by Debtor in fee
simple or are subject to an installment sale agreement with the IDA,
except for that which is leased to Debtor; and either any and all
rights of third parties to the Purchased Assets that are owned by
Debtor shall
9
<PAGE>
have been terminated or, in the case of the IDA, it has agreed to
amend the installment sale agreement with the Debtor to reflect terms
acceptable to RG&E and consented to the assignment of such agreement,
as amended, to RG&E;
(iii) absence of any material change in the condition of the
Purchased Assets (ordinary wear and tear from April 30, 1998 and
any effect from the operation of this facility prior to the Effective
Date at the request of RG&E excepted), including without limitation
any damage, destruction or loss, whether or not covered by insurance,
which has or will have a materially adverse effect on the Purchased
Assets; and
(iv) Debtor shall have delivered to RG&E the Consents and
Instruments of Transfer in form and substance reasonably satisfactory
to RG&E; and
The simultaneous closing of the transactions contemplated hereby and
by the Global Settlement Agreement and the Plan shall occur within five (5)
business days
10
<PAGE>
following the date on which the last Closing Condition is satisfied or waived
(the date of such closing being the "Effective Date") . The closing shall be at
the offices of Nixon, Hargrave, Devans & Doyle LLP, 437 Madison Avenue, New
York, New York or such other location as the parties may agree. Until closing,
Debtor shall bear the risk of loss from any damage or destruction of the
Purchased Assets.
(11) Related Transactions.
(a) Debtor shall convey its interest in the Greenhouse and all
equipment used in connection therewith to GE Capital or its designee. In
addition to the matters covered by the second sentence of Section 7 hereof, RG&E
shall in good faith provide GE Capital or its designee with such easements,
rights of way, permit rights, rights to water supply or other similar rights as
are reasonably necessary to have access to and operate the Greenhouse.
(b) Following the Effective Date, RG&E as the owner of the
Facility, shall have no obligation to supply thermal energy to the Greenhouse or
to operate the Facility; and nothing herein shall be deemed to be an implied
commitment to operate the Facility unless RG&E as owner, in its sole and
absolute discretion, from time to time, elects to do so.
11
<PAGE>
(c) Debtor may store the water distillation equipment at or
adjacent to the Facility without expense for 90 days following the Effective
Date. Such water distillation equipment shall be removed from the Facility
premises within 90 days following the Effective Date.
(12) Alternative Bidding Procedures.
The sale of the purchased Assets is subject to any Competitive Bid
made at or prior to the commencement of the hearing to consider approval of the
Disclosure Statement (the "Hearing"). Any such Competitive Bid must contain the
terms set forth in the Acquisition Term Sheet, with the exception of the terms
relating to the purchase price to be paid; must be in writing; and shall be
received by GE Capital and Debtor not later than the third business day
preceding the commencement of the Hearing.
Debtor shall not recommend a Competitive Bid unless. (a) the value of
the Competitive Bid is at least $1 million in excess of the Purchase Price; (b)
the competing bidder makes a deposit with Debtor of at least $1,600,000 upon
submission of a Competing Bid; (c) the Competitive Bid is accompanied by recent,
written financial statements or other financial disclosure which demonstrates
the capability and financial wherewithal of the competing bidder to close and
consummate the Competitive Bid; and (d) the transaction
12
<PAGE>
is not subject to or conditioned upon the obtaining of financing.
In the event a Competitive Bid is timely made which Debtor and GE
Capital jointly determine to be a higher and better offer, RG&E may improve its
initial bid at any time prior to the conclusion of the Hearing so as to match
the Competitive Bid. If so matched, then additional bidding procedures that are
not inconsistent with the foregoing may be determined by the Bankruptcy Court at
or before the Hearing.
In the event there is a successful Competitive Bid, then the
difference (i) between the successful higher bid and (ii) $15 million plus
interest on $15 million from July 1, 1998 to the Effective Date calculated at
the annual rate of 7%, shall be applied first to reduce the $10 million cash
payment dueon the Effective Date, and then to payments in the Payment Plan in
direct order of maturity.
13
<PAGE>
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Forms S-3 (File Nos.
33-60753 and 33-49805) and in the Registration Statement on Form S-8 (File No.
333-22139) of Rochester Gas and Electric Corporation of our report dated January
20, 1999 appearing in Item 8A of the Rochester Gas and Electric Corporation
Annual Report on Form 10-K for the year ended December 31, 1998.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Rochester, New York
February 19, 1999
<TABLE> <S> <C>
<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
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,562,074
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 202,963
<TOTAL-DEFERRED-CHARGES> 666,836
<OTHER-ASSETS> 21,062
<TOTAL-ASSETS> 2,452,935
<COMMON> 194,429
<CAPITAL-SURPLUS-PAID-IN> 458,868
<RETAINED-EARNINGS> 129,484
<TOTAL-COMMON-STOCKHOLDERS-EQ> 782,781
25,000
47,000
<LONG-TERM-DEBT-NET> 510,002
<SHORT-TERM-NOTES> 57,000
<LONG-TERM-NOTES-PAYABLE> 248,224
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 427
10,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 772,501
<TOT-CAPITALIZATION-AND-LIAB> 2,452,935
<GROSS-OPERATING-REVENUE> 1,034,362
<INCOME-TAX-EXPENSE> 61,901
<OTHER-OPERATING-EXPENSES> 845,817
<TOTAL-OPERATING-EXPENSES> 907,202
<OPERATING-INCOME-LOSS> 127,160
<OTHER-INCOME-NET> 13,589
<INCOME-BEFORE-INTEREST-EXPEN> 140,233
<TOTAL-INTEREST-EXPENSE> 46,095
<NET-INCOME> 94,138
4,842
<EARNINGS-AVAILABLE-FOR-COMM> 89,296
<COMMON-STOCK-DIVIDENDS> 68,927
<TOTAL-INTEREST-ON-BONDS> 38,776<F1>
<CASH-FLOW-OPERATIONS> 194,906
<EPS-PRIMARY> 2.32
<EPS-DILUTED> 2.31
<FN>
<F1>Principal amount of bonds outstanding at December 31 multiplied by annual
interest rates for each issue.
</FN>
</TABLE>
