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 September 30, 1999 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 Identification No.) incorporation or organization) 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 October 31, 1999, was 64,508,477. All shares are owned by Energy East Corporation. 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 . . . . . . . . . 8 (b) Liquidity and Capital Resources . . . . 8 PART II Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 13 Item 5. Other Information . . . . . . . . . . . . . . . . 13 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. . . . . . . . . . . . . . . . 13 (b) Reports on Form 8-K . . . . . . . . . . 13 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . 15 PART I - FINANCIAL INFORMATION Item 1. Financial Statements New York State Electric & Gas Corporation Statements of Income - (Unaudited) Three Months Nine Months Periods Ended September 30 1999 1998 1999 1998 (Thousands) Operating Revenues Electric . . . . . . . . . . . . . . $518,400 $407,740 $1,336,331 $1,318,096 Natural gas. . . . . . . . . . . . . 40,558 37,576 230,744 213,755 -------- -------- --------- --------- Total Operating Revenues. . . . . 558,958 445,316 1,567,075 1,531,851 -------- -------- --------- --------- Operating Expenses Electricity purchased and fuel used in generation . . . . . . . . 281,891 152,304 598,985 521,227 Natural gas purchased. . . . . . . . 26,162 23,537 113,794 111,925 Other operating expenses . . . . . . 64,726 73,077 185,777 213,636 Maintenance. . . . . . . . . . . . . 20,160 17,795 54,529 70,445 Depreciation and amortization. . . . 27,719 28,573 590,747 113,211 Other taxes. . . . . . . . . . . . . 40,835 46,418 140,645 147,318 Gain on sale of generation assets. . - - (674,572) - Writeoff of Nine Mile Point 2. . . . - - 69,930 - -------- -------- --------- --------- Total Operating Expenses. . . . . 461,493 341,704 1,079,835 1,177,762 -------- -------- --------- --------- Operating Income. . . . . . . . . . . 97,465 103,612 487,240 354,089 Interest Charges, Net . . . . . . . . 37,062 29,585 97,960 89,851 Other (Income) and Deductions . . . . (155) 2,765 (2,391) 6,193 -------- -------- --------- --------- Income Before Federal Income Taxes. . 60,558 71,262 391,671 258,045 Federal Income Taxes. . . . . . . . . 23,182 29,460 212,760 101,637 -------- -------- --------- --------- Net Income. . . . . . . . . . . . . . 37,376 41,802 178,911 156,408 Preferred Stock Dividends . . . . . . 493 2,351 2,214 6,880 -------- -------- --------- --------- Earnings Available for Common Stock . $36,883 $39,451 $176,697 $149,528 ======== ======== ========= ========= The notes on pages 6 and 7 are an integral part of the financial statements. Item 1. Financial Statements (Cont'd) New York State Electric & Gas Corporation Balance Sheets - (Unaudited) Sep. 30, Dec. 31, 1999 1998 (Thousands) Assets Current Assets Cash and cash equivalents. . . . . . . . . . . . . . . $162,047 $12,149 Special deposits . . . . . . . . . . . . . . . . . . . 1,193 4,729 Accounts receivable, net . . . . . . . . . . . . . . . 129,585 113,553 Loan receivable, affiliated company. . . . . . . . . . 153,645 134,443 Fuel, at average cost. . . . . . . . . . . . . . . . . 21,418 20,200 Materials and supplies, at average cost. . . . . . . . 8,143 8,292 Prepayments. . . . . . . . . . . . . . . . . . . . . . 167,707 102,691 ---------- ---------- Total Current Assets. . . . . . . . . . . . . . . . 643,738 396,057 Utility Plant, at Original Cost Electric . . . . . . . . . . . . . . . . . . . . . . . 3,384,189 3,361,747 Natural gas. . . . . . . . . . . . . . . . . . . . . . 617,287 602,737 Common . . . . . . . . . . . . . . . . . . . . . . . . 139,912 144,043 ---------- ---------- 4,141,388 4,108,527 Less accumulated depreciation. . . . . . . . . . . . . 2,007,539 1,362,501 ---------- ---------- Net Utility Plant in Service . . . . . . . . . . . . 2,133,849 2,746,026 Construction work in progress. . . . . . . . . . . . . 8,738 27,741 ---------- ---------- Total Utility Plant . . . . . . . . . . . . . . . . 2,142,587 2,773,767 Other Property and Investments, Net . . . . . . . . . . 65,144 62,136 Regulatory and Other Assets Regulatory assets Unfunded future federal income taxes. . . . . . . . . 28,750 136,404 Unamortized loss on debt . . . . . . . . . . . . . . 68,074 71,530 Demand-side management program costs. . . . . . . . . 55,603 64,466 Environmental remediation costs . . . . . . . . . . . 59,100 60,600 Other . . . . . . . . . . . . . . . . . . . . . . . . 29,062 125,693 ---------- ---------- Total regulatory assets. . . . . . . . . . . . . . . . 240,589 458,693 Other assets . . . . . . . . . . . . . . . . . . . . . 24,804 27,359 ---------- ---------- Total Regulatory and Other Assets . . . . . . . . . 265,393 486,052 ---------- ---------- Total Assets. . . . . . . . . . . . . . . . . . . . $3,116,862 $3,718,012 ========== ========== The notes on pages 6 and 7 are an integral part of the financial statements. Item 1. Financial Statements (Cont'd) New York State Electric & Gas Corporation Balance Sheets - (Unaudited) Sep. 30, Dec. 31, 1999 1998 Liabilities (Thousands) Current Liabilities Current portion of long-term debt. . . . . . . . . . . $486 $2,604 Current portion of preferred stock . . . . . . . . . . - 75,000 Commercial paper . . . . . . . . . . . . . . . . . . . - 78,300 Accounts payable and accrued liabilities . . . . . . . 104,486 101,511 Interest accrued . . . . . . . . . . . . . . . . . . . 33,925 19,556 Taxes accrued. . . . . . . . . . . . . . . . . . . . . 183,764 701 Accumulated deferred federal income taxes, net . . . . 35,977 44,274 Other. . . . . . . . . . . . . . . . . . . . . . . . . 76,653 76,302 ---------- ---------- Total Current Liabilities . . . . . . . . . . . . . 435,291 398,248 Regulatory and Other Liabilities Regulatory liabilities Deferred income taxes . . . . . . . . . . . . . . . . 66,292 98,038 Deferred income taxes, unfunded future federal income taxes. . . . . . . . . . . . . . . . . . . . 14,073 60,896 Other . . . . . . . . . . . . . . . . . . . . . . . . 22,434 42,182 ---------- ---------- Total regulatory liabilities . . . . . . . . . . . . . 102,799 201,116 Other liabilities Deferred income taxes . . . . . . . . . . . . . . . . 215,931 432,968 Other postretirement benefits . . . . . . . . . . . . 156,858 137,681 Environmental remediation costs . . . . . . . . . . . 79,100 80,600 Other . . . . . . . . . . . . . . . . . . . . . . . . 93,709 81,540 ---------- ---------- Total other liabilities. . . . . . . . . . . . . . . . 545,598 732,789 Long-term debt. . . . . . . . . . . . . . . . . . . . . 1,363,852 1,412,157 ---------- ---------- Total Liabilities . . . . . . . . . . . . . . . . . 2,447,540 2,744,310 Commitments . . . . . . . . . . . . . . . . . . . . . . - - Preferred Stock Preferred stock redeemable solely at the company's option. . . . . . . . . . . . . . . . . . . 10,131 29,440 Preferred stock subject to mandatory redemption requirements . . . . . . . . . . . . . . . 25,000 25,000 Common Stock Equity Common stock . . . . . . . . . . . . . . . . . . . . . 430,057 430,057 Capital in excess of par value . . . . . . . . . . . . 170,480 430,329 Retained earnings. . . . . . . . . . . . . . . . . . . 33,654 58,876 ---------- ---------- Total Common Stock Equity . . . . . . . . . . . . . 634,191 919,262 ---------- ---------- Total Liabilities and Stockholder's Equity . . . . $3,116,862 $3,718,012 ========== ========== The notes on pages 6 and 7 are an integral part of the financial statements. Item 1. Financial Statements (Cont'd) New York State Electric & Gas Corporation Statements of Cash Flows - (Unaudited) Nine Months Periods Ended September 30 1999 1998 (Thousands) Operating Activities Net income . . . . . . . . . . . . . . . . . . . . $178,911 $156,408 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization. . . . . . . . . . 590,747 113,211 Federal income taxes and investment tax credits deferred, net. . . . . . . . . . . . . . . . . 123,540 (936) Gain on sale of affiliate's generation assets. . (674,572) - Writeoff of Nine Mile Point 2. . . . . . . . . . 69,930 - Changes in current operating assets and liabilities Accounts receivable . . . . . . . . . . . . . . (16,032) 101,269 Loan receivable, affiliated company. . . . . . . (19,202) (132,516) Inventory. . . . . . . . . . . . . . . . . . . . (1,069) 50,700 Prepayments. . . . . . . . . . . . . . . . . . . (65,016) (30,555) Accounts payable and accrued liabilities . . . . 2,975 11,500 Taxes accrued. . . . . . . . . . . . . . . . . . 183,063 36,163 Interest accrued . . . . . . . . . . . . . . . . 14,369 14,862 Other, net . . . . . . . . . . . . . . . . . . . . (23,254) 79,492 -------- -------- Net Cash Provided by Operating Activities . . . 364,390 399,598 -------- -------- Investing Activities Sale of affiliate's generation assets. . . . . . . 518,969 - Utility plant additions. . . . . . . . . . . . . . (46,064) (94,338) Other property and investments . . . . . . . . . . - 25,670 -------- -------- Net Cash Provided by (Used in) Investing Activities. . . . . . . . . . . . . 472,905 (68,668) -------- -------- Financing Activities Capital distribution to parent . . . . . . . . . . (289,000) - Repurchase of common stock . . . . . . . . . . . . - (114,023) Repayments of preferred stock and first mortgage bonds, including net premiums . . . . . (144,557) (60,600) Long-term notes, net . . . . . . . . . . . . . . . - 1,465 Commercial paper, net. . . . . . . . . . . . . . . (78,300) 1,900 Dividends on common and preferred stock. . . . . . (175,540) (165,033) -------- -------- Net Cash Used in Financing Activities . . . . . (687,397) (336,291) -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents. . . . . . . . . . . . . . . . . 149,898 (5,361) Cash and Cash Equivalents, Beginning of Period. . . 12,149 8,168 -------- -------- Cash and Cash Equivalents, End of Period. . . . . . $162,047 $2,807 ======== ======== Supplemental Disclosure of Cash Flows Information Cash paid during the period Interest, net of amounts capitalized. . . . . . . $58,699 $62,179 Income taxes (including $400,537 related to gain on sale of affiliate's generation assets). $460,931 $62,349 The notes on pages 6 and 7 are an integral part of the financial statements. Item 1. Financial Statements (Cont'd) New York State Electric & Gas Corporation Statements of Retained Earnings - (Unaudited) Nine Months Periods ended September 30 1999 1998 (Thousands) Balance, beginning of period. . . . . . . . . . $58,876 $568,844 Add net income. . . . . . . . . . . . . . . . . 178,911 156,408 -------- -------- 237,787 725,252 Deduct dividends on capital stock Preferred. . . . . . . . . . . . . . . . . . . 2,214 6,880 Common . . . . . . . . . . . . . . . . . . . . 173,326 158,153 -------- -------- 175,540 165,033 Deduct Transfer of NGE Generation, Inc. and XENERGY Enterprises, Inc. to parent. . . . . . . . . 28,593 517,341 -------- -------- Balance, end of period. . . . . . . . . . . . . $33,654 $42,878 ======== ======== The notes on pages 6 and 7 are an integral part of the financial statements. Item 1. Financial Statements (Cont'd) Note 1. Unaudited Financial Statements The accompanying unaudited financial statements reflect all adjustments which are necessary, in the opinion of management, for a fair presentation of New York State Electric & Gas Corporation's (company) results for the interim periods. All such adjustments, other than those related to the sale of an affiliate's coal-fired generation assets and the writeoff of Nine Mile Point 2, are of a normal recurring nature. The company's 1998 consolidated financial statements exclude NGE Generation, Inc. and XENERGY Enterprises, Inc. beginning May 1, 1998, the effective date of the reorganization into a holding company structure, and exclude Somerset Railroad Corporation beginning July 1, 1998, the effective date of its transfer to NGE Generation. The unaudited financial statements should be read in conjunction with the consolidated financial statements and notes contained in the company's Form 10-K for the year ended December 31, 1998. Due to the seasonal nature of the company's operations, financial results for interim periods are not neces- sarily indicative of trends for a 12-month period. Note 2. Investment in Nine Mile Point nuclear generating unit No. 2 The company wrote off its entire 18% investment in Nine Mile Point 2 during the second quarter of 1999. An affiliate completed the sale of its interest in the Homer City generation assets to Edison Mission Energy in March 1999, and the sale of its remaining coal-fired generation assets to The AES Corporation in May 1999. The proceeds from the sale of those assets, net of taxes and transaction costs, in excess of the net book value, less funded deferred taxes, were used to write down the company's 18% investment in Nine Mile Point 2 by $384 million. This treatment is in accordance with the company's restructuring plan approved by the Public Service Commission of the State of New York in January 1998. The company wrote down its investment an additional $104 million due to the required writeoff of funded deferred taxes related to Nine Mile Point 2. These writedowns are reflected in depreciation and amortization for the second quarter of 1999. The company announced in June 1999 that it has agreed to sell its 18% interest in Nine Mile Point 2 to AmerGen Energy Company, a joint venture of PECO Energy Company and British Energy. (See Item 2(b) - Electric Business, Nine Mile Point nuclear generating unit No. 2.) Based on the sale agreement, the company wrote off $70 million, its remaining investment in Nine Mile Point 2 after the writedowns discussed above, in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of. Note 3. Segment Information Selected financial information for the company's two business segments is presented in the following table. The electric business segment consists of electricity generation, transmission and distribution operations. The natural gas business segment consists of natural gas distribution, transportation and storage operations. Three Months Ended Electric Natural Gas Total September 30, 1999 Operating Revenues $518,400 $40,558 $558,958 Net Income (Loss) $46,089 $(8,713) $37,376 September 30, 1998 Operating Revenues $407,740 $37,576 $445,316 Net Income (Loss) $52,338 $(10,536) $41,802 Nine Months Ended September 30, 1999 Operating Revenues $1,336,331 $230,744 $1,567,075 Net Income $160,961 $17,950 $178,911 September 30, 1998 Operating Revenues $1,318,096 $213,755 $1,531,851 Net Income $152,883 $5,596 $158,479 (1) Identifiable Assets September 30, 1999 $1,871,035 $506,521 $2,377,556 (2) December 31, 1998 $2,565,977 $497,750 $3,063,727 (2) (1) Net Income for the nine months ended September 30, 1998, excludes a net loss from a subsidiary that was transferred to the company's parent as part of the reorganization into a holding company structure effective May 1, 1998. (2) Identifiable Assets exclude corporate assets of $739,306 for September 30, 1999, and $654,285 for December 31, 1998. Note 4. Reclassifications Certain amounts have been reclassified on the financial statements to conform with the 1999 presentation. Item 2. Management's discussion and analysis of financial condition and results of operations (a) Results of Operations Earnings Third quarter earnings decreased primarily due to electricity price reductions given to retail customers and higher electricity purchased power costs, offset by higher transmission wheeling revenue, cost control efforts and higher retail deliveries caused by economic development and increased cooling load. Earnings increased for the nine months primarily due to cost control efforts and higher retail electric and natural gas deliveries caused by economic development and weather, offset by price reductions given to customers, after excluding the nonrecurring benefit from the sale of an affiliate's coal-fired generation assets, the writeoff of Nine Mile Point 2 and the effect of transferring wholesale electricity activity to an affiliate due to the reorganization into a holding company structure in May 1998. Operating Results for the Electric Business Electric operating revenues for the third quarter increased due to higher wholesale deliveries, higher transmission wheeling revenue, and higher retail deliveries caused by economic development and increased cooling load, partially offset by price reductions given to retail customers. Electric operating expenses increased for the quarter primarily due to higher purchased power costs, partially offset by cost control efforts. Electric operating revenues increased for the nine months due to higher retail deliveries caused by economic development and weather and higher transmission wheeling revenues, partially offset by price reductions given to retail customers, after excluding the effects of transferring wholesale activity to an affiliate in May 1998. Electric operating expenses increased for the nine months primarily due to higher purchased power costs, partially offset by cost control efforts, after excluding the nonrecurring benefit from the sale of an affiliate's coal-fired generation assets, the writeoff of Nine Mile Point 2 and the effect of transferring wholesale activity to an affiliate in May 1998. Operating Results for the Natural Gas Business Natural gas operating revenues for the third quarter increased primarily due to wholesale sales. A higher volume of wholesale natural gas purchases was offset by cost control efforts. Natural gas operating revenues increased for the nine months primarily due to higher retail deliveries due to a milder-than- normal winter last year and wholesale sales. Operating expenses decreased for the nine months primarily due to cost control efforts, partially offset by a higher volume of wholesale natural gas purchases. A higher volume of retail natural gas purchases was offset by lower retail purchased gas costs. (b) Liquidity and Capital Resources (See the company's Form 10-Q for the quarter ended June 30, 1999, Item 2(b) - Liquidity and Capital Resources - Electric Business and Natural Gas Business.) Electric Business Nine Mile Point nuclear generating unit No. 2: The company announced in June 1999 that it has agreed to sell its 18% interest in Nine Mile Point 2 to AmerGen Energy Company, a joint venture of PECO Energy Company and British Energy. In the same announcement, Niagara Mohawk Power Corporation announced the sale of Nine Mile Point 1 and its 41% interest in Nine Mile Point 2 to AmerGen. At closing, the company will receive $27.9 million in proceeds based on its 18% ownership share. (See Item 1 - Note 2 to the Financial Statements.) The company may be entitled to additional payments through 2012 under a financial sharing agreement. A power purchase agreement with AmerGen requires the company to purchase 17.1% of all electricity from Nine Mile Point 2 at negotiated prices for three years. AmerGen will assume full responsibility for the decommissioning of its ownership share of Nine Mile Point 2. The decommissioning fund will be pre-funded to a fixed amount by the sellers, with all potential costs above the fixed amount paid by AmerGen. The company expects the sale of Nine Mile Point 2 to be completed in the second quarter of 2000. Rochester Gas & Electric Corporation, a Nine Mile Point 2 cotenant, has expressed interest in possibly exercising its right of first refusal on the sale of the plant. The company cannot predict the likelihood of this event or its impact on the sale of Nine Mile Point 2. Issues have been raised recently regarding worsening performance at the Nine Mile Point units, which are operated by Niagara Mohawk. On September 30, 1999, the Nuclear Regulatory Commission issued a Plant Performance Review on the Nine Mile Point units. The NRC stated that it will increase its scrutiny of the operation of the Nine Mile Point nuclear units over the next six months as a result of the worsening performance of those units and weaknesses in areas such as plant maintenance, work planning and scheduling, and engineering support. Niagara Mohawk has announced that significant management changes will be made at Nine Mile Point, including the hiring of PECO Energy for managerial advice, because performance of the units has not reached expected levels. The company supports these efforts to improve performance at Nine Mile Point 2 and continues to believe that the sale of the plants to AmerGen, a proven operator of nuclear plants, is in the best interests of customers and the company's shareholder. If the operating performance of Nine Mile Point 2 continues to deteriorate and it becomes apparent that significant expenditures would be required to improve performance, the company intends to take whatever actions it believes are appropriate to protect the interests of customers and its shareholder, including support for the potential shutdown of the unit. New York Power Pool Restructuring: The Federal Energy Regulatory Commission issued Orders 888 and 889 in 1996 to foster the development of competitive wholesale electricity markets by opening up transmission services and to address the resulting stranded costs. In subsequent orders, the FERC generally affirmed Orders 888 and 889. Various parties, including the company, have appealed these orders in the United States Court of Appeals for the D.C. Circuit. In response to Order 888, the New York Power Pool members submitted filings to the FERC proposing, among other things, to restructure the power pool by establishing a New York Independent System Operator and a New York State Reliability Council. In a series of orders in 1998 and 1999 the FERC conditionally authorized the formation of the system operator and reliability council and conditionally accepted the tariffs and rates applicable to transmission service, and the formation of energy and ancillary services markets administered by the system operator. Each of New York's major transmission owners is expected to turn over certain operational control over the power system to the system operator. The system operator is anticipated to begin operating on November 18, 1999. The system operator's staff has completed final market testing of software and market mechanisms. The company does not expect the restructuring to have a material adverse effect on its financial position or results of operations. Electric Restructuring Plan: The company's restructuring plan, which included a five-year electric price cap, was approved by the PSC, with minor modifications, in January 1998. The company submitted a tariff filing in compliance with the restructuring plan in January 1999. On July 15, 1999, and September 17, 1999, the PSC issued orders relating to the compliance filing. Those orders addressed issues related to the company's retail access credit (the amount backed out of a customer's bill when that customer participates in retail access), suppliers' obligations and customer identification. As a result of the orders, the company's retail access credit was maintained at its current value, it was determined that retail access suppliers are responsible for energy, capacity and some ancillary services for their own customers and the company may require a deposit from customers who fail to provide adequate identification. The PSC also concluded that costs for line losses, installed reserves and certain ancillary services are being recovered through the company's delivery charge and are not part of the retail access credit. The company submitted filings in compliance with the orders on July 29, 1999, and October 7, 1999. The company is currently unable to predict the effect of the orders on its financial position or results of operations. Competitive Electric Metering: On June 16, 1999, the PSC issued an Order Providing for Competitive Metering, which calls for opening up competition for electric metering services among certain customers in New York State. The services include installation and maintenance of electric meters, meter reading and meter data retrieval and storage. Competitive metering would initially be available to eligible customers with electricity requirements of 50 kilowatts or more. Utilities were initially required to file unbundled metering tariffs by October 1, 1999, to identify their metering costs as a component of existing electricity prices. The company, along with three other utility companies in New York State, filed a petition for rehearing on this order in July 1999. The petition for rehearing was denied in September 1999. The company filed its tariffs on November 1, 1999, to become effective on December 1, 1999, for customers who choose competitive metering providers. PSC Staff and interested parties are collaborating to develop procedures for implementing competitive metering. Utilities will continue their provider of last resort responsibilities for metering. Stranded cost issues will be handled in individual utility proceedings. The company is currently unable to predict the effect of this order on its financial position or results of operations. Auction of NUG Contract Rights: The company continues to seek ways to provide relief to its customers from the onerous nonutility generator (NUG) contracts it was ordered to sign by the PSC. On November 4, 1999, the company announced that it intends to sell - through competitive bidding - 470 megawatts (mw) of natural gas- fired energy and generating capacity under three of its power purchase agreements with NUGs. The contracts are with Saranac Power Partners (240 mw) in Plattsburgh, Lockport Energy Associates (175 mw) in Lockport and Indeck Energy Services of Silver Springs (55 mw). The agreements expire on June 21, 2009, October 8, 2007, and April 11, 2006, respectively. Over the remaining terms of the contracts it is estimated that the company's customers will pay over $2 billion dollars above the competitive market price. The sale, expected to be completed March 1, 2000, will be conditioned on obtaining satisfactory regulatory approval. Other Matters Year 2000 Readiness Disclosure Many of the company's computer systems, which include mainframe systems and special-purpose systems, refer to years in terms of their final two digits only. Such systems may interpret the year 2000 as the year 1900. If not corrected, those systems could cause the company to, among other things, experience energy delivery problems, report inaccurate data or issue inaccurate bills. The company has been working diligently to address this problem by reviewing all of its mainframe and special-purpose systems; identifying potentially affected software, hardware, and date-sensitive components, often referred to as embedded chips, of various equipment; determining and taking appropriate corrective action; and, when appropriate, testing its systems. The company's mainframe systems consist of the hardware and software components of its information technology systems. The company believes it has identified, taken appropriate corrective action and tested all of its mainframe systems. The company believes those systems are now able to process year 2000 and beyond transactions. The company's special-purpose systems consist of its non- information technology systems. The company has identified over 5,000 items in its special-purpose systems that may be affected by the Year 2000 problem. Items identified include software, hardware and embedded chips in systems such as those that control the acquisition and the delivery of electricity and natural gas to customers and those in its communication systems. The company believes it has fixed, eliminated, replaced or found no problem with all of the special-purpose items it has identified that affect its electricity and natural gas delivery systems and its communication systems. Even though the company believes it has taken corrective action with respect to its own Year 2000 issues, the Year 2000 issue could adversely affect it if there are items in its mainframe or special-purpose systems that may be affected by the Year 2000 problem and that it has not identified in its review of those systems. The Year 2000 issue could also adversely affect the company if third parties such as suppliers, customers, neighboring or interconnected utilities and other entities fail to correct any of their Year 2000 problems. The company has contacted key third parties to determine the status of their Year 2000 readiness programs. The company is following up with key third parties who have not completed their Year 2000 readiness programs. The company has developed contingency plans, some of which are discussed below, for reasonably likely worst case scenarios based upon an assumption that it and the key third parties contacted will not be Year 2000 compliant. The company believes it has taken all necessary steps to address the Year 2000 issue successfully. Through September 30, 1999, the company has spent approximately $11.8 million and expects to spend an additional $0.9 million on Year 2000 readiness including contingency plan preparations. The company believes this amount is adequate to address its Year 2000 issues. These amounts are being expensed as incurred and are being financed entirely with internally generated funds. Addressing the Year 2000 issue has not caused the company to delay any significant information system projects. As part of its normal business practice the company has plans in place for use during emergencies, some of which could arise from Year 2000 problems. The company is also implementing an emergency preparedness plan which will help it to address customer emergencies and coordinate with other emergency service providers. Each of the company's 13 division offices will be open from 10:00 p.m. on December 31, 1999, to 2:00 a.m. on January 1, 2000. The company's personnel will be available to staff county emergency preparedness offices during this same time period. Other customer contact sites will also be established. Temporary local numbers will be established so customers can contact the company should long distance telephone service fail. The company has completed over 75 contingency plans to specifically address reasonably likely worst case scenarios that could arise as a result of the Year 2000 problem. Certain company personnel have been designated to work from 10:00 p.m. on December 31, 1999, to 2:00 a.m. on January 1, 2000, and have been trained to execute the contingency plans. Each plan is ready and has been tested. In addition, an integrated system-wide test of the plans was successfully conducted using the designated personnel. The contingency plans address, among other scenarios, the interruption or failure of normal business activities or operations such as a partial electrical and/or natural gas system shutdown. If the interruption or failure is due to embedded chips in equipment such as automatic control devices, the company's contingency plan is to implement its normal system restoration procedures that it utilizes during emergencies. If the interruption or failure is due to telecommunications not being available, the company plans to use alternative communication devices such as radio systems and satellite phones. Another scenario addressed by the company's contingency plans is the failure of its customer information system. Should that occur, the company plans to rely on customer information previously stored and make the appropriate adjustment to each customer's next bill after the system is restored. The company is dependent on others for its supply of natural gas. In the event a supplier is not able to meet the company's needs, it plans to purchase the needed amount of natural gas from one of its many other suppliers on the same transmission line. Since the sale of its affiliate's coal-fired generation assets has been completed, the company will be buying from third parties, including nonutility generators and the New York Power Authority, the majority of the electricity its customers need. If the electricity available in its region is not adequate for all of the customers on its system, the company plans to operate at lower levels of power as outlined in its established emergency procedures. Should its mainframe hardware be disabled, it has a backup mainframe system that is capable of operating all of its business systems. The PSC issued an Order on October 30, 1998, adopting a July 1, 1999, deadline for New York utilities to complete their Year 2000 readiness programs for "mission critical" systems and for contingency plans. Mission critical systems include those systems that control the acquisition and the delivery of electricity and natural gas to customers, emergency management systems and certain electricity generation plants. The company completed its Year 2000 readiness program for mission critical systems and for contingency plans before the PSC's July 1, 1999, deadline. Investing and Financing Activities Investing Activities Capital spending for the first nine months of 1999 was $46 million, primarily for the extension of service and necessary improvements to existing facilities. The company's capital spending for 1999 is estimated to be about $75 million, and is expected to be paid for entirely with internally generated funds. Financing Activities On February 1, 1999, the company redeemed, at par, $25 million of 7.40% Series preferred stock and $50 million of adjustable rate preferred stock. On April 1, 1999, the company purchased, at a discount, shares of the following series of preferred stock: $7.2 million of 3.75%, $2.8 million of 4 1/2% (Series 1949), $1.4 million of 4.15%, $4.8 million of 4.40%, and $3.1 million of 4.15% (Series 1954). On April 1, 1999, the holders of a majority of the votes of shares of the company's serial preferred stock consented to increase the amount of unsecured debt the company may issue by up to an additional $1.2 billion. In June 1999 the company redeemed, at a premium, $50 million of 7 5/8% Series first mortgage bonds. In November 1999 the company agreed to purchase, on the open market, at premiums, $77 million of 9 7/8% Series first mortgage bonds due May 1, 2020, and $77 million of 9 7/8% Series first mortgage bonds due November 1, 2020. Those purchases will be financed with Floating-rate Unsecured Notes. The company will incur a $27 million charge in the fourth quarter of 1999 as a result of the purchase of the bonds. The company plans to redeem, at a premium, $25 million of 6.30% Series preferred stock in December 1999. Forward-looking Statements This Form 10-Q contains certain forward-looking statements that are based upon management s current expectations and information that is currently available. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward- looking statements in certain circumstances. Whenever used in this report, the words "estimate," "expect," "believe," or similar expressions are intended to identify such forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the risk that more Year 2000 problems may be found; the fact that despite all of the company's efforts, there can be no assurances that all of its Year 2000 issues have been remedied; the fact that there can be no assurances that all Year 2000 issues that could affect the company can or will be totally eliminated by its suppliers, customers, neighboring or interconnected utilities and other entities; and the fact that its assessment of the effects of Year 2000 issues are based, in part, upon information received from its suppliers, customers, neighboring or interconnected utilities and other entities, its reasonable reliance upon this information and the risk that inaccurate or incomplete information may have been supplied to it. Some additional factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the deregulation and unbundling of energy services; the company's ability to compete in the rapidly changing and increasingly competitive electricity and natural gas utility markets; its ability to control nonutility generator and other costs; changes in fuel supply or cost and the success of its strategies to satisfy its power requirements now that all of its affiliate's coal-fired generation assets have been sold; the ability to obtain adequate and timely rate relief; nuclear or environmental incidents; legal or administrative proceedings; changes in the cost or availability of capital; growth in the areas in which it is doing business; weather variations affecting customer energy usage; and other considerations that may be disclosed from time to time in its publicly disseminated documents and filings. The company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. PART II - OTHER INFORMATION Item 1. Legal Proceedings (a) By letter dated January 21, 1992, the New York State Department of Environmental Conservation notified the company that it had been identified as a potentially responsible party at the Peter Cooper Corporation's Landfill Site (Peter Cooper Site) in the village of Gowanda, New York. The Peter Cooper Site is listed on the National Priorities List and the New York State Registry. Three other PRPs were identified in the NYSDEC letter. The company believes that remediation costs at the Peter Cooper Site might rise to $16 million. By letter dated May 12, 1992, the company notified the NYSDEC that it believed it had no responsibility for the alleged contamination at the Peter Cooper Site, and declined to conduct remediation or finance remediation costs. On July 2, 1996, the U.S. Environmental Protection Agency notified the company of its concern regarding the stream bank erosion along a portion of the Peter Cooper Site that is located on the company's property. Without admitting to any liability or responsibility, on October 24, 1996, the company entered into an Order on Consent with the EPA to stabilize the stream bank. This project was completed in January 1997 at a cost of $120,000. By letter dated June 30, 1999, the EPA notified the company and 18 other companies that they are PRPs with respect to the Peter Cooper Site, and offered them the opportunity to perform a remedial investigation and feasibility study at the site. Along with approximately 12 other companies, the company indicated to the EPA its willingness to consider performing the study for a portion of the Peter Cooper site. Although the company is still discussing the possibility of performing the study with the EPA and the other parties, it believes that the ultimate disposition of this matter will not have a material adverse effect on its financial position or results of operations. Item 5. Other Information The company received a letter dated October 12, 1999, from the Office of the Attorney General of New York State alleging that the company may have constructed and operated major modifications to certain emission sources at the Goudey and Greenidge generating stations, which it formerly owned, without obtaining the required prevention of significant deterioration of new source review pre- construction permits. The Goudey and Greenidge plants were sold to AES in May 1999. The letter requested that the company and AES provide the Attorney General's Office with a large number of documents relating to this allegation. The company is reviewing its files for documents relating to the Attorney General's request. The company believes it has complied with the applicable rules and regulations and there is no basis for the Attorney General's allegation. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - See Exhibit Index. (b) Reports on Form 8-K A report on Form 8-K dated September 30, 1999, was filed 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 /s/Sherwood J. Rafferty Sherwood J. Rafferty Senior Vice President and Chief Financial Officer Date: November 12, 1999 EXHIBIT INDEX (a) The following exhibits are delivered with this report: Exhibit No. (A)10-40 - Amended and Restated Annual Executive Incentive Plan. 27 - Financial Data Schedule. _______________________________ (A) Management contract or compensatory plan or arrangement.