SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
June 30, 1994
For the quarterly period ended. . . . . . . .. . . . . . . . . .
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from. . . . . . . .to. . . . . . . . .
1-3103-2
Commission file number. . . . . . . . . . . .. . . . . . . . . .
New York State Electric & Gas Corporation
. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .
(Exact name of registrant as specified in its charter)
New York 15-0398550
. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 3287, Ithaca, New York 14852-3287
. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .
(Address of principal executive offices) (Zip Code)
607 347-4131
Registrant's telephone number, including area code . . . . . . .
N/A
. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
The number of shares of common stock (par value $6.66 2/3
per share) outstanding as of July 31, 1994 was 71,473,888.
TABLE OF CONTENTS
PART I
Page
Item 1. Financial Statements . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(a) Results of Operations . . . . . . . . . . 9
(b) Liquidity and Capital Resources . . . . . 14
PART II
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. . . . . . . . . . . . . . . . . 19
(b) Reports on Form 8-K . . . . . . . . . . . 19
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 21
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
New York State Electric & Gas Corporation
Consolidated Statements of Income - (Unaudited)
(Thousands, except per share amounts)
Periods Ended June 30 Three Months Six Months
1994 1993 1994 1993
Operating Revenues
Electric . . . . . . . . . . . . . . $340,899 $349,676 $765,419 $753,234
Natural gas. . . . . . . . . . . . . 47,740 38,925 188,387 157,750
------- ------- --------- ---------
Total Operating Revenues. . . . 388,639 388,601 953,806 910,984
------- ------- --------- ---------
Operating Expenses
Fuel used in electric generation . . 49,576 53,193 117,220 120,180
Electricity purchased. . . . . . . . 49,870 41,775 95,321 81,566
Natural gas purchased. . . . . . . . 27,848 17,619 108,130 85,718
Other operating expenses . . . . . . 81,705 83,577 157,699 164,540
Maintenance. . . . . . . . . . . . . 28,165 31,922 52,607 54,069
Depreciation and amortization. . . . 43,634 40,586 87,054 81,315
Federal income taxes . . . . . . . . 11,814 16,301 60,488 54,698
Other taxes. . . . . . . . . . . . . 48,243 46,979 107,513 102,356
------- ------- --------- ---------
Total Operating Expenses. . . . 340,855 331,952 786,032 744,442
------- ------- --------- ---------
Operating Income. . . . . . . . . . . 47,784 56,649 167,774 166,542
Other Income and Deductions . . . . . 10 180 (15) 129
------- ------- --------- ---------
Income Before Interest Charges. . . . 47,794 56,829 167,759 166,671
------- ------- --------- ---------
Interest Charges
Interest on long-term debt . . . . . 33,049 34,022 66,181 68,267
Other interest . . . . . . . . . . . 3,061 2,673 5,865 5,454
Allowance for borrowed funds
used during construction . . . . . (711) (1,366) (1,375) (2,589)
------- ------- --------- ---------
Interest Charges - Net. . . . . 35,399 35,329 70,671 71,132
------- ------- --------- ---------
Net Income. . . . . . . . . . . . . . 12,395 21,500 97,088 95,539
Preferred Stock Dividends . . . . . . 4,650 5,201 9,509 10,402
------- ------- --------- ---------
Earnings Available for Common Stock . $7,745 $16,299 $87,579 $85,137
======= ======= ========= =========
Earnings Per Share. . . . . . . . . . $ .11 $ .23 $1.23 $1.22
Dividends Per Share . . . . . . . . . $ .55 $ .54 $1.10 $1.08
Average Shares Outstanding. . . . . . 71,214 69,836 71,008 69,699
The notes on pages 6 through 8 are an integral part of the financial
statements.
Item 1. Financial Statements (Cont'd)
New York State Electric & Gas Corporation
Consolidated Balance Sheets - (Unaudited)
(Thousands)
June 30, Dec. 31,
1994 1993
Assets
Utility Plant, at Original Cost
Electric . . . . . . . . . . . . . . . . . . . . . . .$4,833,985 $4,777,368
Natural gas. . . . . . . . . . . . . . . . . . . . . . 393,288 381,389
Common . . . . . . . . . . . . . . . . . . . . . . . . 146,182 158,986
---------- ----------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,373,455 5,317,743
Less accumulated depreciation . . . . . . . . . . . . . 1,594,246 1,535,307
---------- ----------
Net Utility Plant in Service . . . . . . . . . . . . 3,779,209 3,782,436
Construction work in progress. . . . . . . . . . . . . 176,632 143,859
---------- ----------
Total Utility Plant. . . . . . . . . . . . . . . . . 3,955,841 3,926,295
Other Property and Investments, net . . . . . . . . . . 101,131 73,537
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . 18,185 4,264
Special deposits . . . . . . . . . . . . . . . . . . . 127,393 145,335
Accounts receivable, net . . . . . . . . . . . . . . . 169,934 181,586
Fuel, at average cost. . . . . . . . . . . . . . . . . 45,722 54,791
Materials and supplies, at average cost. . . . . . . . 48,372 48,910
Prepayments. . . . . . . . . . . . . . . . . . . . . . 30,819 30,092
Accumulated deferred federal income
tax benefits. . . . . . . . . . . . . . . . . . . . 24,139 -
---------- ----------
Total Current Assets . . . . . . . . . . . . . . . . 464,564 464,978
Deferred Charges
Unfunded future federal income taxes . . . . . . . . . 377,382 380,056
Unamortized debt expense . . . . . . . . . . . . . . . 115,042 112,059
Demand-side management program costs . . . . . . . . . 71,303 73,113
Other. . . . . . . . . . . . . . . . . . . . . . . . . 248,974 257,920
---------- ----------
Total Deferred Charges . . . . . . . . . . . . . . . 812,701 823,148
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . .$5,334,237 $5,287,958
========== ==========
The notes on pages 6 through 8 are an integral part of the financial
statements.
Item 1. Financial Statements (Cont'd)
New York State Electric & Gas Corporation
Consolidated Balance Sheets - (Unaudited)
(Thousands)
June 30, Dec. 31,
1994 1993
Capitalization and Liabilities
Capitalization
Common stock equity
Common stock . . . . . . . . . . . . . . . . . . $476,094 $470,640
Capital in excess of par value. . . . . . . . . . 839,687 824,943
Retained earnings . . . . . . . . . . . . . . . . 329,765 320,114
---------- ----------
Total common stock equity. . . . . . . . . . . . . . . 1,645,546 1,615,697
Preferred stock redeemable solely at the
option of the Company . . . . . . . . . . . . . . . 140,500 140,500
Preferred stock subject to mandatory
redemption requirements . . . . . . . . . . . . . . 125,000 125,000
Long-term debt . . . . . . . . . . . . . . . . . . . . 1,748,939 1,630,629
---------- ----------
Total Capitalization. . . . . . . . . . . . . . . 3,659,985 3,511,826
Current Liabilities
Current portion of long-term debt
and preferred stock . . . . . . . . . . . . . . . . 148,745 332,709
Notes payable. . . . . . . . . . . . . . . . . . . . . 76,100 50,200
Accounts payable and accrued liabilities . . . . . . . 95,755 111,481
Interest accrued . . . . . . . . . . . . . . . . . . . 31,198 31,348
Accumulated deferred federal income taxes. . . . . . . - 1,132
Other. . . . . . . . . . . . . . . . . . . . . . . . . 105,085 89,443
---------- ----------
Total Current Liabilities . . . . . . . . . . . . 456,883 616,313
Deferred Credits and Other Liabilities
Accumulated deferred investment tax credit . . . . . . 135,568 138,478
Excess deferred federal income taxes . . . . . . . . . 34,551 36,378
Other postretirement benefits. . . . . . . . . . . . . 43,730 28,074
Other. . . . . . . . . . . . . . . . . . . . . . . . . 153,806 127,339
---------- ----------
Total Deferred Credits. . . . . . . . . . . . . . 367,655 330,269
Accumulated Deferred Federal Income Taxes
Unfunded future federal income taxes . . . . . . . . . 377,382 380,056
Other. . . . . . . . . . . . . . . . . . . . . . . . . 437,136 416,545
---------- ----------
Total Accumulated Deferred Federal
Income Taxes . . . . . . . . . . . . . . . . . . 814,518 796,601
Commitments and Contingencies (Note 3)
Liability for environmental restoration. . . . . . . . 28,100 26,800
Other. . . . . . . . . . . . . . . . . . . . . . . . . 7,096 6,149
---------- ----------
Total Commitments and Contingencies . . . . . . . 35,196 32,949
---------- ----------
Total Capitalization and Liabilities. . . . . . .$5,334,237 $5,287,958
========== ==========
The notes on pages 6 through 8 are an integral part of the financial
statements.
Item 1. Financial Statements (Cont'd)
New York State Electric & Gas Corporation
Consolidated Statements of Cash Flows - (Unaudited)
(Thousands)
Periods Ended June 30 Six Months
1994 1993
Operating Activities
Net Income . . . . . . . . . . . . . . . . . . . . $97,088 $95,539
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . 87,054 81,315
Deferred fuel and purchased gas. . . . . . . . . 8,831 (2,401)
Federal income taxes and investment tax credits
deferred - net . . . . . . . . . . . . . . . . (14,540) 10,945
Unbilled revenue amortization. . . . . . . . . . (3,125) (3,726)
Changes in current operating assets and liabilities:
Accounts receivable excluding accounts
receivable sold. . . . . . . . . . . . . . . . 11,652 18,549
Accounts receivable sold . . . . . . . . . . . . - 13,800
Inventory. . . . . . . . . . . . . . . . . . . . 9,607 10,811
Accounts payable and accrued liabilities . . . . (15,726) (8,763)
Taxes accrued. . . . . . . . . . . . . . . . . . 21,384 13,790
Other-net. . . . . . . . . . . . . . . . . . . . . 46,290 (18,214)
------- -------
Net Cash Provided by Operating Activities . . . 248,515 211,645
------- -------
Investing Activities
Utility plant construction expenditures,
net of allowance for other funds
used during construction . . . . . . . . . . . . (114,806) (115,011)
Proceeds received from governmental and
other sources . . . . . . . . . . . . . . . . . 1,802 7,095
Expenditures for other property and investments. . (30,106) (10,496)
Funds restricted for construction expenditures . . 23,326 -
------- -------
Net Cash Used in Investing Activities . . . . . (119,784) (118,412)
------- -------
Financing Activities
Issuance of pollution control notes and
first mortgage bonds. . . . . . . . . . . . . . 201,000 49,124
Sale of common stock . . . . . . . . . . . . . . . 21,298 17,772
Pollution control notes, preferred stock, and
first mortgage bond repayments,
including premiums. . . . . . . . . . . . . . . (215,500) (161,441)
Revolving credit agreement repayment . . . . . . . (50,000) -
Changes in funds set aside for pollution
control notes, preferred stock, and first
mortgage bond repayments . . . . . . . . . . . . (8,500) 86,096
Long-term notes - net. . . . . . . . . . . . . . . (1,020) 9,993
Notes payable - net. . . . . . . . . . . . . . . . 25,900 (5,000)
Dividends on common and preferred stock. . . . . . (87,988) (85,560)
------- -------
Net Cash Used in Financing Activities . . . . . (114,810) (89,016)
------- -------
Net Increase in Cash and Cash Equivalents . . . . . 13,921 4,217
Cash and Cash Equivalents, Beginning of Period. . . 4,264 3,968
------- -------
Cash and Cash Equivalents, End of Period. . . . . . $18,185 $8,185
======= =======
Supplemental Disclosure of Cash Flows Information
Cash paid during the period
Interest, net of amounts capitalized. . . . . . . $65,748 $72,353
Income taxes. . . . . . . . . . . . . . . . . . . $40,076 $21,435
The notes on pages 6 through 8 are an integral part of the
financial statements.
Item 1. Financial Statements (Cont'd)
New York State Electric & Gas Corporation
Consolidated Statements of Retained Earnings - (Unaudited)
(Thousands)
Periods ended June 30 Six Months
1994 1993
Balance, beginning of period. . . . . . . . . . $320,114 $327,040
Add net income. . . . . . . . . . . . . . . . . 97,088 95,539
-------- --------
417,202 422,579
Deduct dividends on capital stock:
Preferred. . . . . . . . . . . . . . . . . . . 9,509 10,402
Common . . . . . . . . . . . . . . . . . . . . 77,928 75,158
-------- --------
87,437 85,560
-------- --------
Balance, end of period. . . . . . . . . . . . . $329,765 $337,019
======== ========
The notes on pages 6 through 8 are an integral part of the
financial statements.
Item 1. Financial Statements (Cont'd)
Note 1. Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements
reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of New York State Electric &
Gas Corporation's (Company) consolidated results for the interim
periods. All such adjustments are of a normal recurring nature.
The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
contained in the Company's annual report for the year ended
December 31, 1993. Due to the seasonal nature of the Company's
operations, financial results for interim periods are not neces-
sarily indicative of trends for a twelve-month period.
Note 2. Reclassification
Certain amounts have been reclassified on the consolidated
financial statements to conform to the 1994 presentation.
Note 3. Contingencies
Environmental Matters
The Company continually assesses actions that may need to be
taken to ensure compliance with changing environmental laws and
regulations. Compliance programs will increase the cost of
electric and natural gas service by requiring changes to the
Company's operations and facilities. Historically, rate recovery
has been authorized for the cost incurred for compliance with
environmental laws and regulations.
Due to existing and proposed legislation and regulations,
and legal proceedings commenced by governmental bodies and
others, the Company may also incur costs from the past disposal
of hazardous substances produced during the Company's operations
or those of its predecessors. The Company has been notified by
the U.S. Environmental Protection Agency (EPA) and the New York
State Department of Environmental Conservation (NYSDEC) that the
Company is among the potentially responsible parties (PRPs) who
may be liable to pay for costs incurred to remediate certain
hazardous substances at seven waste sites, not including the
Company's inactive gas manufacturing sites, which are discussed
below. With respect to the seven sites, five sites are included
in the New York State Registry of Inactive Hazardous Waste Sites
(New York State Registry).
Any liability may be joint and several for certain of these
sites. The ultimate cost to remediate these sites will be
dependent on such factors as the remedial action plan selected,
the extent of site contamination, and the portion attributed to
the Company. The Company has recorded a liability related to
four of these seven sites, which is reflected in the Company's
Consolidated Balance Sheets at June 30, 1994 and December 31,
1993, in the amount of $1.1 million and $1.8 million,
respectively. The Company has notified the NYSDEC that it
believes it has no responsibility at two sites and has already
incurred expenditures related to the remediation at the remaining
site. A deferred asset has also been recorded in the amount of
$2.0 million, of which $.9 million relates to costs that have
already been incurred. The Company believes it will recover
these costs, since the Public Service Commission of the State of
New York (PSC) has allowed other utilities to recover these types
of remediation costs and has allowed the Company to recover
similar costs in rates, such as investigation and cleanup costs
relating to inactive gas manufacturing sites. The estimated
liability of $1.1 million was derived by multiplying the total
estimated cost to clean up a particular site by the related
Company contribution factor. Estimates of the total cleanup
costs were determined by using information related to a
particular site, such as investigations performed to date at a
site or from the data released by a regulatory agency. In
addition, this estimate was based upon currently available facts,
existing technology, and presently enacted laws and regulations.
The contribution factor is calculated using either the Company's
percentage share of the total PRPs named, which assumes all PRPs
will contribute equally, or the Company's estimated percentage
share of the total hazardous wastes disposed of at a particular
site, or by using a 1% contribution factor for those sites at
which it believes that it has contributed a minimal amount of
hazardous wastes. The Company has notified its former and
current insurance carriers that it seeks to recover from them
certain of these cleanup costs. However, the Company is unable
to predict the amount of insurance recoveries, if any, that it
may obtain.
A number of the Company's inactive gas manufacturing sites
have been listed in the New York State Registry. In late March
1994, the Company entered into an Order on Consent with the
NYSDEC requiring the Company to investigate and, where necessary,
remediate 33 of the Company's 38 known inactive gas manufacturing
sites. The schedule for investigating and remediating these 33
sites will be determined through further negotiations with the
NYSDEC. The Company has a program to investigate and initiate
remediation at its 38 known inactive gas manufacturing sites
through the year 2000. Expenditures over this time period are
estimated at $27 million, including the impact of the Order on
Consent. This estimate was determined by using the Company's
experience and knowledge related to these sites as a result of
the investigation and remediation that the Company has performed
to date. It is based upon currently available facts, existing
technology, and presently enacted laws and regulations. This
liability to investigate and initiate remediation, as necessary,
at the known inactive gas manufacturing sites is reflected in the
Company's Consolidated Balance Sheets at June 30, 1994, and
December 31, 1993, in the amount of $27 million and $25 million,
respectively. The Company also has recorded a corresponding
deferred asset, since it expects to recover such expenditures in
rates, as the Company has previously been allowed by the PSC to
recover such costs in rates. The Company has notified its former
and current insurance carriers that it seeks to recover from them
certain of these cleanup costs. However, the Company is unable
to predict the amount of insurance recoveries, if any, that it
may obtain.
Note 4. Restructuring
In the fourth quarter of 1993, the Company recorded a $26
million restructuring charge. The corporate restructuring
reorganized the way the Company delivers services to its electric
and natural gas customers beginning in March 1994. The
restructuring reduced 1993 earnings available for common stock by
approximately $17.2 million or 25 cents per share.
During the first quarter of 1994, the restructuring resulted
in a work force reduction totaling 642 persons throughout the
organization, the elimination of customer walk-in services at 28
locations, and the closing of seven electric and natural gas
operations facilities. The closing of additional electric and
natural gas operations facilities will continue to be evaluated
in 1995.
The work force reduction of 642 employees, which was greater
than the Company's target of 600, was accomplished through a
voluntary early retirement program and an involuntary severance
program. Of the 642 employees, 384 employees accepted the early
retirement program and 258 employees were involuntarily severed.
The Company estimates the savings, excluding fringe benefits,
related to the work force reduction to be approximately $31.5
million, on an annual basis. As the work force decreased, the
Company experienced savings in line with this estimate for the
first and second quarters of 1994.
Item 2. Management's discussion and analysis of financial
condition and results of operations
(a) Results of Operations
Three months ended June 30, 1994 compared with three months ended
June 30, 1993:
1994 1993 % Change
(Thousands, except Per Share Amounts)
Operating revenues $388,639 $388,601 -%
Earnings available for
common stock $7,745 $16,299 (52%)
Average shares outstanding 71,214 69,836 2%
Earnings per share $.11 $.23 (52%)
Dividends per share $.55 $.54 2%
Operating revenues for the second quarter of 1994 were flat
compared to the second quarter of 1993. Increases in electric
and natural gas rates that became effective in September 1993,
contributed $11 million in revenues this year and the higher
prices of natural gas purchased, which are passed on to
customers, contributed $7 million. The Company's modified
revenue decoupling mechanism (RDM) (See the discussion in the
next paragraph regarding the RDM) includes revenues lost due to
demand-side management (DSM) programs. Last year, although the
Company did not have a RDM, it was allowed to record revenues
lost due to DSM programs. Revenues increased $1 million this
year as a result of the difference between the RDM, which
provided $6 million this year and the amount the Company recorded
last year for revenues lost due to DSM programs, which was $5
million. In June 1994, the Company recorded a production cost
penalty for 1993 that decreased revenues $13 million (See (b)
Liquidity and Capital Resources- Regulatory Matters-Rate
Matters). Also, revenues from DSM rewards earned this year were
$5 million lower than last year.
As part of the three year rate settlement agreement reached
by the Company with the PSC in September 1993, the Company now
has a RDM for electric sales (See Form 10-K for fiscal year ended
December 31, 1993, Item 1., Rates and regulatory matters-Rate
Matters). Since actual sales may differ significantly from
forecasted sales for numerous reasons, revenues collected may be
more or less than forecast. The modified RDM, subject to limits
defined in the Company's rate settlement agreement, allows the
Company to adjust for most of the differences between forecasted
and actual sales.
Earnings per share decreased 12 cents, or 52%, for the
second quarter of this year primarily as a result of the $13
million, or 12 cents per share, production cost penalty for 1993.
Earnings for the second quarter also reflect a charge of $3
million, or 3 cents per share, which represents the Company's
share of a voluntary early retirement program offered by
Pennsylvania Electric Company (Penelec). The Company is a joint
owner of the Homer City Generating Station with Penelec, which
operates the facility. In addition, a decrease in the DSM
rewards earned this year reduced earnings 5 cents per share.
These decreases were offset by lower maintenance costs of 8
cents per share, primarily the result of cost controls and the
work force reduction program.
The Company does not expect to earn its allowed return on
common equity in 1994, primarily as a result of the 1993
production cost penalty and the short-term impact of its start-up
diversification efforts (See (b) Liquidity and Capital Resources-
Diversification).
Six months ended June 30, 1994 compared with six months ended
June 30, 1993:
1994 1993 % Change
(Thousands, except Per Share Amounts)
Operating revenues $953,806 $910,984 5%
Earnings available for
common stock $87,579 $85,137 3%
Average shares outstanding 71,008 69,699 2%
Earnings per share $1.23 $1.22 1%
Dividends per share $1.10 $1.08 2%
Operating revenues for the first six months of 1994
increased $43 million, or 5%, compared to the same period last
year. Revenues rose $27 million because of increases in electric
and natural gas rates that became effective in September 1993,
and higher electric and natural gas retail sales in 1994 which
increased revenues $25 million. Also, revenues increased $13
million due to higher prices of natural gas purchased, which are
passed on to customers. The Company's RDM includes revenues lost
due to DSM programs. Last year, although the Company did not have
a RDM, it was allowed to record revenues lost due to DSM
programs. Revenues decreased $3 million this year as a result of
the difference between the RDM, which provided $7 million this
year and the amount the Company recorded last year for revenues
lost due to DSM programs, which was $10 million. The Company
recorded a production cost penalty for 1993 that decreased
revenues $13 million this year. Revenues from DSM incentives
earned this year were $6 million less than last year.
Earnings per share increased 1 cent, or 1%, for the first
six months of this year as compared to last year. Electric
retail sales decreased in 1993 due to the sluggish economy in the
Company's service territory. As a result of this decrease, 1993
earnings decreased by 11 cents per share. In addition, lower
maintenance costs, primarily the result of cost controls and the
work force reduction program, increased 1994 earnings by 5 cents
per share. These increases were substantially offset by the
production cost penalty for 1993 that decreased earnings this
year by 12 cents per share and a reduction in the amount of DSM
incentives earned this year, which decreased earnings by 6 cents
per share.
The Company does not expect to earn its allowed return on
common equity in 1994, primarily as a result of the 1993
production cost penalty and the short-term impact of its start-up
diversification efforts (See (b) Liquidity and Capital Resources-
Diversification).
Operating Results by Business Unit
Electric Three Months ended June 30,
1994 1993 % Change
(Thousands)
Retail sales-kilowatt-
hours(kwh) 2,981,628 2,973,406 -%
Operating revenues $340,899 $349,676 (3%)
Operating expenses $293,280 $293,177 -%
Electric operating revenues decreased $9 million, or 3%, for
the quarter ended June 30, 1994, primarily as a result of the $13
million production cost penalty for 1993. Excluding the
production cost penalty, electric revenues increased by $4
million for this quarter. An increase in rates that became
effective September 1993, contributed $9 million in revenues this
year. The Company's RDM includes revenues lost due to DSM
programs. Last year, although the Company did not have a RDM, it
was allowed to record revenues lost due to DSM programs.
Revenues increased $1 million this year as a result of the
difference between the RDM, which provided $6 million this year
and the amount the Company recorded last year for revenues lost
due to DSM programs, which was $5 million. Revenues from DSM
incentives earned this year were $5 million lower than last year.
Electric operating expenses for the quarter ended June 30,
1994, were even with last year. The total cost of electricity
purchased increased $8 million primarily due to purchases from
non-utility generators (NUGs). In addition, depreciation
increased $3 million and gross receipts taxes and local taxes
increased $2 million. These increases were partially offset by a
$4 million decrease in fuel used in electric generation. Also, a
decrease of $4 million in federal income taxes (the result of
lower pre-tax book income), cost controls, and savings related to
the work force reduction program reduced operation expenses.
Six Months ended June 30,
1994 1993 % Change
(Thousands)
Retail sales-kilowatt-
hours(kwh) 6,734,245 6,602,048 2%
Operating revenues $765,419 $753,234 2%
Operating expenses $620,889 $604,737 3%
Electric retail sales increased 2% for the first six months
of 1994 compared to the first six months of 1993 as a result of
the colder weather during the first quarter of this year.
Electric operating revenues increased $12 million, or 2%,
for the six months ended June 30, 1994, due primarily to the
increase in rates effective September 1993, which increased
revenues by $21 million, and an increase in retail sales, which
increased revenues by $13 million. The Company's RDM includes
revenues lost due to DSM programs. Last year, although the
Company did not have a RDM, it was allowed to record revenues
lost due to DSM programs. Revenues decreased $3 million this
year as a result of the difference between the RDM, which
provided $7 million this year and the amount the Company recorded
last year for revenues lost due to DSM programs, which was $10
million. The Company recorded a $13 million production cost
penalty for 1993 that decreased revenues this year. Also,
revenues from DSM incentives earned this year were $6 million
less than last year.
An increase of $16 million, or 3%, in electric operating
expenses for the six months is primarily attributable to an
increase of $14 million in electricity purchased, primarily due
to purchases from NUGs and an increase of $3 million in higher
federal income taxes, the result of higher pre-tax book income.
In addition, depreciation increased $5 million and gross receipts
taxes and local taxes increased $4 million. These increases in
operating expenses were partially offset by cost controls and
savings related to the work force reduction.
Natural Gas Three Months ended June 30,
1994 1993 % Change
(Thousands)
Deliveries-
dekatherms(dth) 9,043 9,576 (6%)
Retail sales-(dth) 4,960 5,266 (6%)
Operating revenues $47,740 $38,925 23%
Operating expenses $47,575 $38,775 23%
Natural gas deliveries and natural gas retail sales
decreased 6% in 1994 compared to 1993, primarily due to warmer
than normal weather in the second quarter.
For the quarter ended June 30, 1994, natural gas operating
revenues rose $9 million, or 23%, compared to the same quarter in
1993. Amounts collected this year from customers through the gas
adjustment clause for higher prices of natural gas purchased
increased revenues $7 million. Also, higher natural gas rates
effective in September 1993 increased revenues by $2 million.
The increase in natural gas operating expenses of $9
million, or 23%, is primarily due to an increase in natural gas
purchased of $10 million, which is attributable to higher prices
of natural gas purchased. This increase in operating expenses
was partially offset by savings related to the work force
reduction.
Six Months ended June 30,
1994 1993 % Change
(Thousands)
Deliveries-
dekatherms(dth) 35,508 34,029 4%
Retail sales-(dth) 25,677 23,684 8%
Operating revenues $188,387 $157,750 19%
Operating expenses $165,143 $139,705 18%
Natural gas deliveries increased 4% and natural gas retail
sales increased 8% for the first six months of 1994 compared to
the first six months of 1993. The 1994 increases in deliveries,
as well as retail sales, were largely because of the colder
weather in the first quarter of this year.
For the six months ended June 30, 1994, natural gas
operating revenues rose $31 million, or 19%, compared to the six
months ended June 30, 1993. The increase was primarily due to
higher retail sales, which added $12 million in revenues,
primarily the result of colder weather, and the increase in rates
in September 1993, which added $6 million. Since the Company has
a natural gas weather normalization mechanism, $2 million of
revenues was returned to customers. Amounts collected this year
from customers through the gas adjustment clause for higher
prices of natural gas purchased increased revenues $13 million.
The increase in natural gas operating expenses of $25
million, or 18%, is primarily due to an increase in natural gas
purchased of $22 million, which is attributable to an increase in
retail sales and higher prices of natural gas purchased. Higher
federal income taxes, the result of higher pre-tax book income
increased operating expenses $3 million.
(b) Liquidity and Capital Resources (See Item 1. Financial
Statements- Note 4. Restructuring)
Regulatory Matters
Rate Matters (See Form 10-K for fiscal year ended December 31,
1993, Item 1., Rates and regulatory matters-Rate Matters.)
On May 1, 1994, the Company filed with the PSC for
adjustments to the second year electric and natural gas rates in
accordance with the terms of the three-year rate settlement
agreement (Agreement)(See Form 10-Q for quarter ended March 31,
1994, Item 2., Regulatory Matters - Rate Matters). On June 14,
1994, the Company revised its filing to include updated estimates
of revenues, costs, and incentives for the first rate year. In
addition, the Company took certain voluntary actions to lower the
estimated total electric price increase to 7.8% and the natural
gas base rate increase to 1.9%. On July 26, 1994, the PSC
approved these increases, which were effective August 1, 1994.
The total electric price increase is primarily due to
increases in mandated purchases of electricity from NUGs,
increases in taxes, and sales shortfalls related to mandated
conservation programs and the weak economy in New York State.
Actual fuel, purchased power, and other costs recovered through
the Fuel Adjustment Clause could vary from estimates causing the
total electric price increase to change. The natural gas base
rate increase of 1.9% does not include changes in the cost of
natural gas from suppliers, which are collected through the Gas
Adjustment Clause.
The Agreement provides incentives (rewards or penalties) to
the Company for controlling production costs, improving customer
service, and DSM programs, which could increase the Company's
allowed return to 12.3% or decrease it to 9.95% in year one,
increase it to 13.05% or decrease it to 10.4% in year two, and
increase it to 13.25% or decrease it to 10.2% in year three. In
June 1994, the Company estimated and recorded a $13 million, or
12 cents per share, production cost penalty for 1993, which is
the maximum provided by the Agreement.
The production cost penalty is based on a comparison of the
relative changes in the Company's production costs per megawatt-
hour of retail sales from a base period (1989-1992) to 1993
versus the same comparison for a 19-company peer group, which
includes the Company. The Company calculated the penalty based
on data that was reported in the peer group's Federal Energy
Regulatory Commission Form 1 Reports, which were received in May
1994. The Company's production cost penalty for 1993 was
primarily due to a significant increase in retail sales for the
peer group as compared to the Company's retail sales. This
penalty also resulted from higher electric production cost
increases for the Company as compared to the peer group.
The Company cannot currently estimate future production cost
incentives (PCI) since the peer group data needed to calculate
the PCI is not yet available. The maximum PCI allowed by the
Agreement for 1994 is a reward or penalty of $17.5 million. The
Company's recent cost reduction efforts should help improve the
1994 PCI performance.
Flexible, Negotiable Rate Tariffs (See Form 10-K for fiscal year
ended December 31, 1993, Item 1., Rates and regulatory matters-
Rate Matters)
In July 1994, the PSC issued an opinion in its generic
proceeding to study the broad subject of flexible, competitive
rates. This opinion approved flexible rate discounts for non-
residential electric customers having competitive alternatives.
In conjunction with approving the offering of discounts, the PSC
adopted several guidelines. These guidelines reaffirm most of
the flexible pricing program the Company has been implementing.
The PSC also announced its intention to institute a second phase
of this proceeding to investigate issues associated with
regulation in a more competitive marketplace. A separate order
instituting this proceeding is expected to be issued shortly.
Diversification
Diversification will play an important role in the Company's
future. In April 1992, the PSC issued an order allowing the
Company to invest up to 5% of its consolidated capitalization
($183 million at June 30, 1994) in one or more subsidiaries that
may engage or invest in energy-related or environmental services
businesses and provide related services.
In May 1993, NGE Enterprises, Inc. (NGE), a wholly-owned
subsidiary of the Company, formed a computer software company,
EnerSoft Corporation (EnerSoft), to produce and market software
applications for the natural gas industry in the post-FERC Order
636 environment. Progress at EnerSoft has been slower than
anticipated as it is taking longer than expected to bring the
software products and services to market. As a result, NGE has
invested a greater amount in EnerSoft than originally projected
and, like most start-up companies, EnerSoft has been incurring
operating losses. It is anticipated that EnerSoft will continue
to incur operating losses in the near term.
In June 1994, NGE acquired all of the outstanding stock of
Xenergy, Inc., an energy services, information systems and
consulting company, that specializes in energy management,
conservation engineering and demand-side management.
As of August 10, 1994, the Company has invested
approximately $42 million in NGE in order to finance the
acquisition of Xenergy and for the investment in EnerSoft.
A natural gas storage project which NGE and ANR Storage,
Inc. planned to develop at a cost of approximately $44 million,
has been cancelled because NGE and ANR Storage were unable to
come to mutually acceptable terms with the owners of the caverns.
NGE continues to investigate other gas storage opportunities with
ANR Storage.
Common Stock Dividend Policy
In July 1994, the Board of Directors maintained the
quarterly common stock dividend at 55 cents per share. During
each of the past five years, the dividend had been increased 2%
in July.
Changes in the electric utility industry dictate that
companies continually review their financial policies. The
Company remains concerned about its high common stock dividend
payout ratio, particularly in light of weak earnings, increasing
competitive pressures, a sluggish economy, and rate pressures
caused primarily by NUGs. A high dividend payout reduces the
Company's financial flexibility at a time when management must
position the Company for the transition from a regulated to a
more competitive environment.
The Board of Directors will continue to review the common
stock dividend on a quarterly basis to ensure that the dividend
level is consistent with the Company's long-term best interest.
While management will continue to do all it can to improve
earnings, the common stock dividend may need to be reduced to
achieve the financial flexibility necessary for a competitive
environment.
Financing Activities
In June 1994, the Company issued a $63.5 million multi-mode
pollution control note to secure a like amount of tax-exempt
multi-mode pollution control revenue bonds (Revenue Bonds) issued
by a governmental authority. The Revenue Bonds mature on June 1,
2029, and have a structure which enables the Company to optimize
the use of short-term rates by allowing for the interest rate to
be based on a commercial paper rate, a daily rate, a weekly rate,
or an auction rate. The structure also provides flexibility to
convert the interest rate to a term rate or a fixed rate, in the
event that it is in the Company's best interest to do so. The
pollution control note bears interest at the same rate as the
Revenue Bonds. The Revenue Bonds currently bear interest at a
rate of 2.95% through December 6, 1994. The Revenue Bonds are
backed by an irrevocable letter of credit. Proceeds from the
Revenue Bonds were used to refund on July 15, 1994, $63.5 million
of one-year adjustable rate pollution control revenue bonds which
were issued in 1985. The maturity date of the Revenue Bonds can
be extended, subject to certain conditions, to a date not later
than June 1, 2034. This is similar to a $37.5 million multi-mode
pollution control note issued in the first quarter of this year
to refund a like amount of one-year adjustable rate pollution
control revenue bonds (See Form 10-Q for quarter ended March 31,
1994, Item 2., Financing Activities).
In February 1993, the Company priced $100 million of 6.05%
tax-exempt pollution control bonds, due April 1, 2034. Proceeds
from the sale were delivered in April 1994, and $60 million was
used in connection with the redemption on May 1, 1994, of $60
million of 12% pollution control bonds, due May 1, 2014. The
balance was used in connection with the redemption on July 1,
1994, of $40 million of 12.3% pollution control bonds, due July
1, 2014. The refunding of those bonds will save approximately
$5.3 million annually in interest costs.
In June 1994, the ratings on the Company's first mortgage
bonds, unsecured pollution control notes, and preferred stock
were lowered by Standard & Poor's (S&P). In June 1993, S&P had
upgraded those ratings. Subsequently, in October 1993, S&P
concluded that more stringent financial benchmarks were necessary
in their ratings evaluation of utilities to reflect increasing
competition and mounting business risk. As a result, S&P lowered
the ratings outlook for about one-third of the utility industry,
including the Company. Since then, the Company and the majority
of utilities with lowered outlooks who have gone through their
annual review by S&P have had their ratings lowered.
S&P stated that their ratings downgrade reflects concerns
about the Company's ability to achieve adequate financial
improvement in view of a deteriorating competitive position,
minimal sales growth potential, and difficulty in achieving
earnings incentive targets. Despite these concerns, S&P noted
that financial improvement is anticipated, driven by rate relief,
significant cost cutting and debt reductions tied to lower
construction spending.
Capital Expenditures
Construction expenditures for the first six months of 1994
were approximately $115 million and have been primarily for the
extension of service, improvements at existing facilities,
compliance with the Clean Air Act Amendments of 1990, and
environmental requirements.
The Company plans to develop a natural gas storage project.
This project, which will be regulated by the PSC, is expected to
cost approximately $59 million and will be used to supplement the
Company's natural gas supply. The project will consist of a
natural gas storage facility, a 20-mile pipeline and a 35-mile
pipeline. Construction of this project is now scheduled to begin
in 1995 and it is expected to be operating for the 1996-97
heating season.
PART II - OTHER INFORM ATION
Item 1. Legal Proceedings
(a) By complaint dated October 31, 1991, General Motors
Corporation (GM) commenced a lawsuit against the Company in the
U. S. District Court for the Western District of New York. GM
alleges, among other claims, that the Company violated various
federal antitrust laws in connection with billings for electric
service provided by the Company at GM's Harrison Radiator Plant
at Lockport, New York. GM's claims are for damages incurred and
to be incurred. The Company estimates that GM is claiming
approximately $8 million, after trebling. The Company believes
that it has not violated the federal antitrust laws and that this
lawsuit is without merit.
On October 5, 1993, the Magistrate to whom the case had been
referred issued a decision recommending that GM's complaint be
dismissed. On July 12, 1994, the District Judge responsible for
the case, after reviewing GM's exceptions to the decision and the
Company's reply, decided to adopt the Magistrate's recommended
decision in its entirety. GM has the right to appeal this
decision to the United States Court of Appeals for the Second
Circuit.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held
on May 13, 1994. The following matter was voted upon:
The election of four directors:
Nominees Cumulative Votes For Cumulative Votes Withheld
E. A. Gilmour 61,137,802 31,526
A. E. Kintigh 61,239,186 132,910
A. G. Marshall 60,815,981 290,295
R. A. Plane 61,232,135 125,859
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K
Reports on Forms 8-K and 8-K/A dated June 9, 1994, were
filed during the quarter to report certain information under Item
5, "Other Events."
Signature
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
NEW YORK STATE ELECTRIC & GAS CORPORATION
(Registrant)
By EVERETT A. ROBINSON
EVERETT A. ROBINSON
Vice President and Controller
(Chief Accounting Officer)
Date: August 10, 1994
EXHIBIT INDEX
(A) 10-50 --Supplemental Executive Retirement Plan Amendment
No. 10.
The Company agrees to furnish to the Commission, upon
request, a copy of the Participation Agreement dated as of June
1, 1994, between the Company and New York State Energy Research
and Development Authority relating to Pollution Control Refunding
Revenue Bonds (1994 Series C). The total amount of securities
authorized under such agreement does not exceed 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis.
(A) Management contract or compensatory plan or arrangement.