SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- -------------
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ------------- -------------------------------------- ------------------
0-30338 RGS Energy Group, Inc. 16-1558410
(Incorporated in New York)
Rochester, NY 14649
Telephone (585) 771-4444
1-672 Rochester Gas and Electric Corporation 16-0612110
(Incorporated in New York)
Rochester, NY 14649
Telephone (585) 546-2700
Indicate by check mark whether each 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
--- ---
As of the close of business on April 30, 2002, (i) RGS Energy Group, Inc.
("RGS") had outstanding 34,682,755 shares of Common Stock ($.01 par value),and
(ii) all of the outstanding shares of Common Stock ($5 par value) of Rochester
Gas and Electric Corporation ("RG&E") were held by RGS.
RG&E meets the conditions set forth in General Instructions (H)(1)(a) and (b)
of Form 10-Q and is therefore filing this form with the reduced disclosure
format pursuant to General Instruction (H)(2).
INDEX
Page No.
PART I - FINANCIAL INFORMATION
RGS Energy Group, Inc.
Consolidated Balance Sheet - March 31, 2002 and
December 31, 2001.................................................... 1 - 2
Consolidated Statement of Income - Three Months Ended
March 31, 2002 and 2001.............................................. 3
Consolidated Statement of Cash Flows - Three Months
Ended March 31, 2002 and 2001........................................ 4
Rochester Gas and Electric Corporation
Balance Sheet - March 31, 2002 and December 31, 2001................. 5 - 6
Statement of Income - Three Months Ended
March 31, 2002 and 2001.............................................. 7
Statement of Cash Flows - Three Months Ended
March 31, 2002 and 2001.............................................. 8
Notes to Financial Statements......................................... 9 - 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................13 - 19
Quantitative and Qualitative Disclosures About
Market Risk........................................................... 19
PART II - OTHER INFORMATION
Legal Proceedings..................................................... 19
Exhibits and Reports on Form 8-K...................................... 19
Signatures............................................................ 20
Filing Format
This Quarterly report on Form 10-Q is a combined quarterly report being filed by
two different registrants: RGS and RG&E. RGS is the holding company for RG&E.
Except where the content clearly indicates otherwise, any references in this
report to "RGS" include all subsidiaries of RGS including RG&E. RG&E makes no
representation as to the information contained in this report in relation to RGS
and its subsidiaries other than RG&E.
Abbreviations and Glossary
- --------------------------
Annual Report The RGS and RG&E Combined Annual Report on Form 10-K for the
period ended December 31, 2001
Company or RGS RGS Energy Group, Inc., a holding company formed August 2,
1999, which is the parent company of RG&E, RGS Development
and Energetix
Electric Settlement Competitive Opportunities Case Settlement among RG&E, the
PSC Staff and other parties which provides the framework for
the development of competition in the electric energy
marketplace through June 30, 2002
Energetix Energetix, Inc., a wholly-owned subsidiary of RGS
Energy Choice A competitive electric retail access program of RG&E which
was phased-in during the term of the Electric Settlement
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Ginna Plant Ginna Nuclear Plant which is wholly owned by RG&E
Griffith Griffith Oil Company Inc., an oil, gasoline and propane
distribution company acquired by Energetix in 1998
Nine Mile Two Nine Mile Point Nuclear Plant Unit No. 2 of which RG&E owned
a 14% share until November 7, 2001
NRC Nuclear Regulatory Commission
NYISO New York Independent System Operator
NYPA New York Power Authority
NYSDEC New York State Department of Environmental Conservation
PSC New York State Public Service Commission
Regulatory Assets Deferred costs whose classification as an asset on the
balance sheet is permitted by SFAS 71, Accounting for the
Effects of Certain Types of Regulation
RG&E Rochester Gas and Electric Corporation, a wholly-owned
regulated electric and gas subsidiary of RGS
RGS Development RGS Development Corporation, a wholly-owned subsidiary of
RGS
RTO Regional Transmission Organization
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
1
Part 1. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
RGS ENERGY GROUP, INC.
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
March 31, December 31,
2002 2001
Assets
- -----------------------------------------------------------------------------------------------------------------------------
Utility Plant
Electric $1,646,649 $1,637,890
Gas 501,040 496,594
Common 190,385 186,980
Nuclear 236,585 224,915
---------- ----------
2,574,659 2,546,379
Less: Accumulated depreciation 1,286,334 1,259,188
Nuclear fuel amortization 208,400 205,118
---------- ----------
1,079,925 1,082,073
Construction work in progress 150,182 143,906
---------- ----------
Net Utility Plant 1,230,107 1,225,979
---------- ----------
Current Assets
Cash and cash equivalents 13,557 28,270
Accounts receivable, net of allowance for doubtful accounts:
2002 - $30,446; 2001 - $30,246 116,389 93,620
Notes receivable 50,864 51,261
Unbilled revenue receivable 59,900 59,120
Fuels 18,590 61,196
Materials and supplies 6,914 5,244
Prepayments 48,492 36,124
Other current assets 5,770 4,548
---------- ----------
Total Current Assets 320,476 339,383
---------- ----------
Intangible Assets
Goodwill, net 18,468 13,673
Other intangible assets, net 19,156 19,836
---------- ----------
Total Intangible Assets 37,624 33,509
---------- ----------
Deferred Debits and Other Assets
Nuclear generating plant decommissioning fund 229,367 221,740
Nine Mile Two deferred costs 25,841 26,104
Unamortized debt expense 22,151 22,620
Regulatory assets 335,497 336,765
Regulatory assets - Nine Mile Two 308,551 301,117
Other 6,694 3,938
---------- ----------
Total Deferred Debits and Other Assets 928,101 912,284
---------- ----------
Total Assets $2,516,308 $2,511,155
---------- ----------
The accompanying notes are an integral part of the financial statements.
2
RGS ENERGY GROUP, INC.
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
March 31, December 31,
2002 2001
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Capitalization
Long term debt - mortgage bonds $ 579,798 $ 579,773
- promissory notes 208,971 207,470
Preferred stock redeemable at option of RG&E 47,000 47,000
Preferred stock subject to mandatory redemption 25,000 25,000
Common shareholder's equity
Common Stock
Authorized 100,000,000 shares; 39,056,021 shares issued at
March 31, 2002 and 39,042,842 shares issued at December 31, 2001 708,756 708,364
Retained earnings 195,906 187,480
---------- ----------
904,662 895,844
Less: Treasury stock at cost (4,379,300 shares at March 31, 2002
and at December 31, 2001) 117,238 117,238
---------- ----------
Total Common Shareholder's Equity 787,424 778,606
---------- ----------
Total Capitalization 1,648,193 1,637,849
---------- ----------
Long Term Liabilities
Nuclear waste disposal 101,562 101,269
Uranium enrichment decommissioning 8,540 8,079
Other promissory notes 25,445 22,574
Site remediation 24,178 24,257
---------- ----------
Total Long Term Liabilities 159,725 156,179
---------- ----------
Current Liabilities
Long term debt due within one year 12,337 112,324
Short term debt 59,500 --
Accounts payable 92,433 88,484
Dividends payable 16,530 16,524
Equal payment plan 5,418 12,838
Accrued taxes 27,474 5,030
Accrued interest 15,171 12,768
Derivatives 4,996 18,287
Other 34,587 33,178
---------- ----------
Total Current Liabilities 268,446 299,433
---------- ----------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 265,378 246,481
Kamine deferred credit 43,809 45,393
Post employment benefits 61,553 60,238
Electric Settlement - excess earnings reserve 26,117 26,117
Other 43,087 39,465
---------- ----------
Total Deferred Credits and Other Liabilities 439,944 417,694
---------- ----------
Total Capitalization and Liabilities $2,516,308 $2,511,155
---------- ----------
The accompanying notes are an integral part of the financial statements.
3
RGS Energy Group Inc.
Consolidated Statement of Income
(Thousands of dollars)
(Unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31,
2002 2001
-------- ---------
OPERATING REVENUES
Electric $170,814 $190,756
Gas 126,003 166,425
Liquid fuels and other 82,316 150,598
-------- --------
Total Operating Revenues 379,133 507,779
OPERATING EXPENSES
Fuel Expenses
Fuel for electric generation 11,977 12,549
Purchased electricity 32,540 21,511
Gas purchased for resale 77,287 113,486
Unregulated fuel expenses 65,742 129,758
-------- --------
Total Fuel Expenses 187,546 277,304
-------- --------
Operating Revenues Less Fuel Expenses 191,587 230,475
Other Operating Expenses
Operations and maintenance excluding fuel 74,616 66,269
Unregulated operating and maintenance expenses excluding fuel 9,355 11,773
Depreciation and amortization 26,866 30,487
Taxes - state, local and other 27,079 27,676
Income taxes 15,972 30,649
-------- --------
Total Other Operating Expenses 153,888 166,854
-------- --------
Operating Income 37,699 63,621
OTHER (INCOME) AND DEDUCTIONS
Allowance for other funds used during construction (404) (238)
Income taxes 486 (1,392)
RGS/Energy East Merger Expenses 263 3,407
Other - net (2,548) (120)
-------- --------
Total Other (Income) and Deductions (2,203) 1,657
INTEREST CHARGES
Long term debt 14,661 14,157
Other - net 854 1,886
Allowance for borrowed funds used during construction (646) (382)
-------- --------
Total Interest Charges 14,869 15,661
-------- --------
Net Income 25,033 46,303
-------- --------
Preferred Stock Dividend Requirements 925 925
-------- --------
Net Income Applicable to Common Stock $24,108 $45,378
-------- --------
Average Number of Common Shares (000's)
Common Stock 34,673 34,577
Common Stock and Equivalents 35,026 34,879
Earnings per Common Share - Basic $0.70 $1.31
Earnings per Common Share - Diluted $0.69 $1.30
Cash Dividends Paid per Common Share $0.45 $0.45
The accompanying notes are an integral part of the financial statements.
4
RGS ENERGY GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
Three Months Ended
March 31,
- ------------------------------------------------------------------------------------------------------------------------------
2002 2001
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 25,033 $ 46,303
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation & amortization 24,670 35,230
Deferred fuel 5,808 10,791
Deferred income taxes 2,271 (81)
Unbilled revenue (780) 7,554
Post employment benefit/pension costs 1,094 869
Other (3,133) (522)
Changes in certain current assets and liabilities; net of assets
acquired and liabilities assumed in acquisitions and sold in dispositions:
Accounts receivable (22,572) (24,074)
Materials, supplies and fuels 28,093 33,821
Taxes accrued 22,444 27,505
Accounts payable 3,949 (21,752)
Other current assets and liabilities (17,780) (7,488)
Other 13,547 2,716
--------- --------
Total Operating 82,644 110,872
--------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Net additions to utility plant (34,869) (32,438)
Nuclear generating plant decommissioning fund (4,312) (5,136)
Other, net -- (1,723)
--------- --------
Total Investing (39,181) (39,297)
--------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Redemption of long term debt (100,000) --
Sale/Issuance of common stock 392 --
Repayment of promissory notes (1,584) (990)
Short term borrowings, net 59,500 (45,500)
Payments of dividends on preferred stock (925) (925)
Payments of dividends on common stock (15,599) (15,560)
Other, net 40 (1,895)
--------- --------
Total Financing (58,176) (64,870)
--------- --------
Change in cash and cash equivalents (14,713) 6,705
Cash and cash equivalents at beginning of period 28,270 16,258
--------- --------
Cash and cash equivalents at end of period $ 13,557 $ 22,963
--------- --------
The accompanying notes are an integral part of the financial statements.
5
ROCHESTER GAS AND ELECTRIC CORPORATION
BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
March 31, December 31,
2002 2001
Assets
- ----------------------------------------------------------------------------------------------------------------
Utility Plant
Electric $ 1,646,649 $ 1,637,890
Gas 501,040 496,594
Common 136,854 133,825
Nuclear 236,585 224,915
----------- -----------
2,521,128 2,493,224
Less: Accumulated depreciation 1,275,114 1,249,165
Nuclear fuel amortization 208,400 205,118
----------- -----------
1,037,614 1,038,941
Construction work in progress 147,986 141,591
----------- -----------
Net Utility Plant 1,185,600 1,180,532
----------- -----------
Current Assets
Cash and cash equivalents 7,486 20,631
Accounts receivable, net of allowance for doubtful accounts:
2002 - $29,482; 2001 - $29,482 87,995 72,321
Notes receivable 50,484 50,484
Affiliate receivable 62,437 78,799
Unbilled revenue receivable 51,168 50,787
Fuels 10,462 44,147
Materials and supplies 6,914 5,244
Prepayments 46,643 34,806
Other current assets 3,458 3,731
----------- -----------
Total Current Assets 327,047 360,950
----------- -----------
Deferred Debits and Other Assets
Nuclear generating plant decommissioning fund 229,367 221,740
Nine Mile Two deferred costs 25,841 26,104
Unamortized debt expense 22,151 22,620
Regulatory assets 335,497 336,765
Regulatory assets - Nine Mile Two 308,551 301,117
Other 5,560 2,930
----------- -----------
Total Deferred Debits and Other Assets 926,967 911,276
----------- -----------
Total Assets $ 2,439,614 $ 2,452,758
----------- -----------
The accompanying notes are an integral part of the financial statements.
6
ROCHESTER GAS AND ELECTRIC CORPORATION
BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
March 31, December 31,
2002 2001
Capitalization and Liabilities
- ----------------------------------------------------------------------------------------------------------------
Capitalization
Long term debt - mortgage bonds $ 579,798 $ 579,773
- promissory notes 208,971 207,470
Preferred stock redeemable at option of RG&E 47,000 47,000
Preferred stock subject to mandatory redemption 25,000 25,000
Common shareholder's equity
Authorized 50,000,000 shares; 38,885,813 shares issued at
March 31, 2002 and at December 31, 2001 700,318 700,318
Retained earnings 178,253 174,054
----------- -----------
878,571 874,372
Less: Treasury stock at cost (4,379,300 shares at March 31, 2002
and at December 31, 2001) 117,238 117,238
----------- -----------
Total Common Shareholder's Equity 761,333 757,134
----------- -----------
Total Capitalization 1,622,102 1,616,377
----------- -----------
Long Term Liabilities
Nuclear waste disposal 101,562 101,269
Uranium enrichment decommissioning 8,540 8,079
Site remediation 22,357 22,356
----------- -----------
Total Long Term Liabilities 132,459 131,704
----------- -----------
Current Liabilities
Long term debt due within one year 4,469 104,387
Short term debt 59,500 --
Accounts payable 72,555 75,885
Affiliate payable 31,977 26,871
Dividends payable to parent 16,530 16,524
Equal payment plan 3,565 12,838
Accrued taxes 23,218 4,381
Accrued interest 14,465 12,338
Derivatives 4,996 18,287
Other 21,843 20,256
----------- -----------
Total Current Liabilities 253,118 291,767
----------- -----------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 257,641 242,398
Kamine deferred credit 43,809 45,393
Post employment benefits 61,553 60,238
Electric Settlement - excess earnings reserve 26,117 26,117
Other 42,815 38,764
----------- -----------
Total Deferred Credits and Other Liabilities 431,935 412,910
----------- -----------
Total Capitalization and Liabilities $ 2,439,614 $ 2,452,758
----------- -----------
The accompanying notes are an integral part of the financial statements.
7
Rochester Gas and Electric Corporation
Statement of Income
(Thousands of dollars)
(Unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31,
2002 2001
-------- --------
OPERATING REVENUES
Electric $168,957 $189,060
Gas 109,333 141,107
-------- --------
Total Operating Revenues 278,290 330,167
OPERATING EXPENSES
Fuel Expenses
Fuel for electric generation 11,977 12,549
Purchased electricity 32,063 20,793
Gas purchased for resale 63,930 89,428
-------- --------
Total Fuel Expenses 107,970 122,770
-------- --------
Operating Revenues Less Fuel Expenses 170,320 207,397
Other Operating Expenses
Operations and maintenance excluding fuel 74,616 66,269
Depreciation and amortization 24,968 28,379
Taxes - state, local and other 25,495 26,023
Income taxes 12,136 27,533
-------- --------
Total Other Operating Expenses 137,215 148,204
-------- --------
Operating Income 33,105 59,193
OTHER (INCOME) AND DEDUCTIONS
Allowance for other funds used during construction (404) (238)
Income taxes 1,075 (1,571)
RGS/Energy East Merger Expenses 256 3,311
Other - net (2,834) 280
-------- --------
Total Other (Income) and Deductions (1,907) 1,782
INTEREST CHARGES
Long term debt 14,076 13,850
Other - net 854 1,055
Allowance for borrowed funds used during construction (646) (382)
-------- --------
Total Interest Charges 14,284 14,523
-------- --------
Net Income 20,728 42,888
-------- --------
Dividends on Preferred Stock 925 925
-------- --------
Net Income Applicable to Common Stock $ 19,803 $ 41,963
-------- --------
The accompanying notes are an integral part of the financial statements.
8
ROCHESTER GAS AND ELECTRIC CORPORATION
STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
Three Months Ended
March 31,
- --------------------------------------------------------------------------------------------------------------------
2002 2001
-------- ---------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 20,728 $ 42,888
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation & amortization 27,587 32,839
Deferred fuel 5,808 10,791
Deferred income taxes (1,383) (193)
Unbilled revenue (381) 12,440
Post employment benefit/pension costs 1,094 869
Other (3,333) (620)
Changes in certain current assets and liabilities; net of assets
and liabilities related to disposition of assets:
Accounts receivable 688 (17,514)
Materials, supplies and fuels 19,172 28,515
Taxes accrued 18,837 25,399
Accounts payable 1,776 (14,267)
Other current assets and liabilities, net (17,581) (8,530)
Other 11,189 1,533
--------- --------
Total Operating 84,201 114,150
--------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Net additions to utility plant (34,613) (31,095)
Nuclear generating plant decommissioning fund (4,312) (5,136)
--------- --------
Total Investing (38,925) (36,231)
--------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Redemption of long term debt (100,000) --
Repayment of promissory notes (1,584) (990)
Short term borrowings, net 59,500 (40,000)
Payments of dividends on preferred stock (925) (925)
Payments of dividends on common stock (15,599) (15,560)
Other, net 187 (12,177)
--------- --------
Total Financing (58,421) (69,652)
--------- --------
Change in cash and cash equivalents (13,145) 8,267
Cash and cash equivalents at beginning of period 20,631 4,851
--------- --------
Cash and cash equivalents at end of period $ 7,486 $ 13,118
--------- --------
The accompanying notes are an integral part of the financial statements.
9
RGS ENERGY GROUP, INC.
ROCHESTER GAS AND ELECTRIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1. SUMMARY OF ACCOUNTING PRINCIPLES
- ------------------------------------------
Basis of Presentation
- ---------------------
This is a combined report of RGS and RG&E. The Notes to Financial
Statements apply to both RGS and RG&E. RGS's Consolidated Financial Statements
include the accounts of RGS and its wholly-owned subsidiaries, including RG&E
and two non-utility subsidiaries, Energetix and RGS Development. RGS and RG&E,
in the opinion of management, have included adjustments (which include normal
recurring adjustments) which are necessary for the fair statement of the results
of operations for the interim periods presented. The consolidated financial
statements for 2002 are subject to adjustment at the end of the year when they
will be audited by independent accountants.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Moreover, the results for these interim periods are not
necessarily indicative of results to be expected for the year, due to seasonal,
operating and other factors. These financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Annual Report.
Reclassifications
- -----------------
Certain amounts in the prior years' financial statements were reclassified
to conform to current year presentation.
Merger Agreement
- ----------------
On February 20, 2001, RGS and Energy East announced that they had entered
into the Merger Agreement pursuant to which RGS will be merged with and into
Merger Sub, a wholly-owned subsidiary of Energy East. As a result of the
Merger, RGS will become a wholly-owned subsidiary of Energy East. In connection
with the Merger, all of the outstanding common stock of RGS will be exchanged
for a combination of cash and Energy East common stock valued at approximately
$1.4 billion in the aggregate. Energy East will also assume approximately $1.0
billion of RGS debt.
Under the Merger Agreement, subject to possible adjustments for tax
reasons, 45% of RGS common stock outstanding will be converted into a number of
shares of Energy East common stock with a value of $39.50 per RGS share, subject
to restrictions on the maximum and minimum number of shares of Energy East
common stock to be issued, and 55% of RGS common stock outstanding will be
converted into $39.50 in cash per RGS share. RGS shareholders will be able to
specify the percentage of the merger consideration they wish to receive in
shares of Energy East common stock and in cash, subject to proration.
At the 2001 Annual Meetings of RGS and Energy East, the shareholders of
RGS approved and adopted the Merger Agreement and the shareholders of Energy
East approved the issuance of Energy East shares in connection with the Merger.
All regulatory applications required in connection with the Merger have been
filed. All related regulatory approvals have been received other than the
approval of the SEC. RGS and Energy East anticipate that the Merger will be
consummated in the second quarter of 2002.
Goodwill and Intangible Assets
- ------------------------------
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). The Company has adopted the provisions of SFAS 142,
effective as of January 1, 2002. In accordance with this statement, the Company
no longer amortizes goodwill. In addition, any goodwill or intangible assets
determined to have an indefinite life that are acquired in a business
combination accounted for as a purchase will not be amortized but will be
evaluated for impairment. In accordance with the provisions of SFAS 142, the
Company will complete the first step of the impairment test with respect to the
goodwill that exists on the Company's balance sheet at the date of its adoption
by no later than June 30, 2002.
10
The following table reflects consolidated results adjusted as though the
adoption of SFAS 142 occurred at the beginning of the three-month period ended
March 31, 2001:
(millions of dollars, except per share amounts) For the Three Months Ended
March 31, 2002 March 31, 2001
-------------- --------------
Reported net income applicable to common stock $24.1 $45.4
Add back: goodwill amortization -- 0.4
----- -----
Adjusted net income applicable to common stock $24.1 $45.8
Basic earnings per share
- ------------------------
Reported earnings per common share $0.70 $1.31
Add back: goodwill amortization -- 0.01
----- -----
Adjusted earnings per common share $0.70 $1.32
Fully diluted earnings per share
- ---------------------------------
Report earnings per common share $0.69 $1.30
Add back: goodwill amortization -- 0.01
----- -----
Adjusted earnings per common share $0.69 $1.31
Amortization expense of intangibles under SFAS 142 for the three months
ended March 31, 2002 was $0.7 million. Estimated intangible amortization
expense for each of the next five succeeding fiscal years is as follows:
Year ending December 31,
(millions of dollars)
2002 $ 2.2
2003 2.1
2004 2.0
2005 2.0
2006 1.9
Intangible assets that will continue to be amortized consist of the following:
March 31, 2002 December 31, 2001
-------------- -----------------
Customer Lists $15.9 $16.2
Other 8.2 7.1
Less: accumulated amortization 4.9 3.5
----- -----
Amortized intangibles, net $19.2 $19.8
RG&E has no goodwill or intangible assets acquired in purchase business
combinations.
Accounting For Asset Retirement Obligations
- -------------------------------------------
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is adjusted to its present value each period and the
capitalized cost is depreciated over the useful life of the related asset. When
the liability is settled, the entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. SFAS 143 required
that the Company adopt this standard by January 1, 2003, with earlier
application encouraged. Management is currently evaluating the provisions of
SFAS 143 regarding the impact on the financial condition and results of
operations of the Company.
11
The following matters supplement the information contained in Notes 2, 3 & 12 to
the Financial Statements included in the Annual Report and should be read in
conjunction with the material contained in those Notes.
Note 2. NUCLEAR-RELATED MATTERS
- ---------------------------------
Nine Mile Nuclear Plants
- ------------------------
On November 7, 2001, RG&E, Niagara Mohawk Power Corporation, Central Hudson
Gas & Electric Corporation and New York State Electric and Gas Corporation
("NYSEG") sold their ownership interests in Nine Mile Two (and in the case of
Niagara Mohawk, Nine Mile One) to Constellation Nuclear, L.L.C. ("Constellation
Nuclear"). For further discussion and details on this transaction, see the
discussion in Note 2 to the Financial Statements in the Annual Report under the
heading "Sale of Interest in Nine Mile Two".
Note 3. REGULATORY MATTERS
- ----------------------------
Regulatory Assets
- -----------------
Below is a summary of RG&E's regulatory assets as of March 31, 2002 and
December 31, 2001.
Millions of Dollars
March 31, 2002 December 31, 2001
-------------- ------------------
Nine Mile Two $308.6 $301.1
Kamine Settlement 167.6 169.8
Income Taxes 54.3 52.5
Oswego Plant Sale 71.3 72.3
Deferred Environmental SIR Costs 12.3 12.6
Uranium Enrichment Decommissioning Deferral 11.2 11.2
Labor Day 1998 Storm Costs 10.4 10.1
Other, Net 8.3 8.3
------ ------
Total - Regulatory Assets $644.0 $637.9
====== ======
See Note 3 to the Financial Statements in the Annual Report for a
description of the regulatory assets shown above.
12
Note 4. OPERATING SEGMENT FINANCIAL INFORMATION
- ------------------------------------------------
The Company has 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 accounting principles generally accepted in the United States of
America ("GAAP") and PSC accounting policies. The Unregulated segment's
financial records are maintained in accordance with GAAP.
For the Three Months Ended March 31,
Regulated Regulated
Electric Gas Unregulated
------------------ ------------------- ------------------
(thousands of dollars) 2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
Operating Income $ 18,678 $ 42,306 $ 14,427 $ 16,887 $ 4,594 $ 4,422
Revenues - External Customers 141,044 161,759 102,689 131,447 135,400 214,573
Revenues - Intersegment Transactions 27,913 27,301 6,644 9,660 -- --
The operations of RGS Development are included in Other (Income) and
Deductions in the RGS Consolidated Statement of Income. The total amount of the
revenues identified by operating segment do not equal the consolidated revenues
as shown in the RGS Consolidated Statement of Income. This is due to the
elimination of certain intersegment revenues during consolidation. A
reconciliation follows:
For the Three Months
Ended March 31,
(thousands of dollars)
Revenues 2002 2001
- -------- -------- --------
Regulated Electric $168,957 $189,060
Regulated Gas 109,333 141,107
Unregulated 135,400 214,573
-------- --------
Total 413,690 544,740
Reported on Consolidated
Income Statement 379,133 507,779
-------- --------
Difference to reconcile $ 34,557 $ 36,961
======== ========
Intersegment Revenues
Regulated Electric from Unregulated 27,913 27,301
Regulated Gas from Unregulated 6,644 9,660
-------- --------
Total Intersegment $ 34,557 $ 36,961
======== ========
Note 5. COMMITMENTS AND OTHER MATTERS
- --------------------------------------
ENVIRONMENTAL MATTERS
- ---------------------
For a discussion on the environmental matters relating to the Company, see
the discussion in Note 11 to the Financial Statements in the Annual Report under
the heading "Environmental Matters".
SUBSEQUENT EVENTS
- -----------------
On April 12, 2002, Constellation Nuclear prepaid the principal balance of
its promissory note payable to RG&E in the sum of $50.5 million plus $2.4
million of accrued interest. RG&E received this five-year note receivable as a
result of the sale of Nine Mile Two to Constellation Nuclear (for further
discussion and details on this transaction, see Note 2. Nuclear-Related Matters,
under the heading "Sale of Interest in Nine Mile Two" in the Annual Report). As
a result of this prepayment, the entire balance of the note receivable has been
classified as current in the accompanying financial statements.
13
ITEM 2. 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 RGS and its
subsidiaries over the past three month period. The Consolidated Financial
Statements and the Notes thereto contain additional data. For the quarter ended
March 31, 2002, 44.6% of the Company's operating revenues were derived from
regulated electric service, 28.8% were derived from regulated natural gas
service, and 26.6% were derived from unregulated businesses.
Forward Looking Statements
- --------------------------
The discussion presented below contains statements that are not historic
fact and which can be classified as forward looking. These statements can be
identified by the use of certain words that suggest forward looking information,
such as "believes," "will," "expects," "projects," "estimates" and
"anticipates". They can also be identified by the use of words that 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 effect on whether the forward
looking statements ultimately prove to be accurate include:
(1) uncertainties related to the regulatory treatment of RG&E's nuclear
generation;
(2) any state or federal legislative or regulatory initiatives (including the
results of negotiations between RG&E and other parties including the PSC
Staff) 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;
(3) any changes in the ability of RG&E to recover environmental compliance
costs through increased rates;
(4) the determination in the nuclear generation proceeding initiated by the
PSC, including any changes in the regulatory status of nuclear generating
facilities and their related costs, including recovery of costs related to
spent fuel and decommissioning;
(5) fluctuations in energy supply and demand and market prices for energy,
capacity and ancillary services;
(6) any changes in the rate of industrial, commercial and residential growth
in RG&E's and RGS's service
territories;
(7) the development of any new technologies, as well as regulatory policies,
which allow customers to generate their own energy or produce lower cost
energy;
(8) any unusual or extreme weather or other natural phenomena;
(9) the timing and extent of changes in commodity prices and interest rates;
(10) the ability of RGS to manage profitably new unregulated operations;
(11) certain unknowable risks involved in operating unregulated businesses in
new territories and new industries;
(12) risks associated with the proposed merger of RGS with and into the Merger
Sub, that will be a wholly-owned subsidiary of Energy East at the effective
time of the merger, and if the merger is completed, the integration of RGS
and Energy East;
(13) any other considerations that may be disclosed from time to time in the
publicly disseminated documents and filings of RGS and RG&E; and
14
(14) uncertainties related to the outcome of RG&E's pending PSC rate
proceeding.
RGS ENERGY GROUP, INC.
- ----------------------
RGS is a holding company and not an operating entity. RGS's operations are
being conducted through its subsidiaries which include RG&E and two unregulated
subsidiaries - Energetix and RGS Development. RG&E offers regulated electric and
natural gas utility service in its franchise territory. Energetix provides
energy products and services throughout upstate New York. RGS Development
offers energy systems development and management services. As of March 31,
2002, RGS had invested $72.3 million (including loans and loan guarantees) in
Energetix and $1.6 million in RGS Development, against an aggregate maximum of
$100.0 million for unregulated operations permitted by the Electric Settlement.
Merger Agreement
- -----------------
On February 20, 2001, RGS and Energy East announced that they had entered
into the Merger Agreement pursuant to which RGS will be merged with and into
Merger Sub, a wholly-owned subsidiary of Energy East. As a result of the
Merger, RGS will become a wholly-owned subsidiary of Energy East. In connection
with the Merger, all of the outstanding common stock of RGS will be exchanged
for a combination of cash and Energy East common stock valued at approximately
$1.4 billion in the aggregate. Energy East will also assume approximately $1.0
billion of RGS debt.
Under the Merger Agreement, subject to possible adjustments for tax
reasons, 45% of RGS common stock outstanding will be converted into a number of
shares of Energy East common stock with a value of $39.50 per RGS share, subject
to restrictions on the maximum and minimum number of shares of Energy East
common stock to be issued, and 55% of RGS common stock outstanding will be
converted into $39.50 in cash per RGS share. RGS shareholders will be able to
specify the percentage of the merger consideration they wish to receive in
shares of Energy East common stock and in cash, subject to proration.
At the 2001 Annual Meetings of RGS and Energy East, the shareholders of
RGS approved and adopted the Merger Agreement and the shareholders of Energy
East approved the issuance of Energy East shares in connection with the Merger.
All regulatory applications required in connection with the Merger have been
filed. All related regulatory approvals have been received other than the
approval of the SEC. RGS and Energy East anticipate that the Merger will be
consummated in the second quarter of 2002.
ROCHESTER GAS AND ELECTRIC CORPORATION
--------------------------------------
RGS's regulated energy business is conducted through RG&E. RG&E was
incorporated in 1904 in the State of New York and is engaged in the business of
generating, purchasing, transmitting and distributing electricity, and
purchasing, transporting and distributing natural gas. RG&E produces and
distributes electricity and distributes natural gas in parts of nine counties
including and surrounding the City of Rochester.
RG&E supplies regulated electric and gas service within a 2,700-square-mile
service territory with a population of approximately one million people. The
service territory 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, the service
territory includes a substantial suburban area with a large and prosperous
farming area.
REGULATED ELECTRIC
- ------------------
PSC Electric Settlement
- -----------------------
The Annual Report contains a description of an agreement among RG&E, the
PSC Staff and several other parties which was approved by the PSC in November
1997 the ("Electric Settlement") that sets the framework for the introduction
and development of open competition in the electric energy marketplace and lasts
through June 30, 2002. For further discussion, see "PSC Electric Settlement" in
Item 7 in the Annual Report, Management's Discussion and Analysis of Financial
Condition and Results of Operation, under the heading "Rochester Gas and
Electric Corporation".
15
FERC Electric Restructuring Order No. 2000.
- -------------------------------------------
FERC has launched a series of new initiatives relating to market structures.
FERC will be issuing a Notice of Proposed Rulemaking ("NOPR") on generation
interconnection procedures including pricing, probably in the second quarter of
2002. FERC is also preparing to issue a NOPR related to standard market design
for the wholesale electric market. Another part of the same docket relates to
the creation of a national business standards organization. There are currently
discussions underway related to the creation of the wholesale electric quadrant
of that organization. RG&E cannot predict what effect the ultimate action by
FERC with respect to these Rules will have on its future operations or financial
condition.
For further discussion regarding FERC Electric Restructuring Order No. 2000,
see Item 1 of the Annual Report under the heading "Regulatory Matters".
2002 Electric and Gas Rate Proposal
- -----------------------------------
On February 15, 2002, RG&E filed a request with the PSC for new electric
and gas rate tariffs to go into effect in January 2003. This action may or may
not result in a PSC order prior to June 30, 2002, the date through which the
Electric Settlement applies. If not, the Company's current base tariff rates
for electric and gas service will likely remain in effect beyond that date until
a new order is issued by the PSC. Under certain circumstances, however, new
rates could be implemented in such a way as to make their impact effective as of
July 1, 2002. RG&E, the Staff of the PSC and other parties have been engaged in
settlement negotiations regarding this proposal; but the outcome of such
negotiations cannot be predicted. For details on this proposal, see Item 7 in
the Annual Report, Management's Discussion and Analysis of Financial Condition
and Results of Operations, under the heading "2002 Electric and Gas Rate
Proposal".
REGULATED GAS
- -------------
For discussion of the regulatory matters effecting RG&E related to the sale
and distribution of natural gas, see "Regulated Gas Operations" in Item 1 of the
Annual Report under the heading "Regulatory Matters".
UNREGULATED SUBSIDIARIES
------------------------
Energetix
- ---------
Energetix, formed in January 1998, markets electricity, natural gas, oil,
gasoline, and propane fuel energy services throughout upstate and central New
York. Energetix has approximately 88,000 customers for natural gas and
electricity service.
Griffith and Burnwell, Energetix's liquid-fuels subsidiaries, give
Energetix access to over 123,000 customers, approximately 100,000 of whom are
outside of RG&E's regulated franchise territory.
Additional information on Energetix's operations (including Griffith) is
presented under the headings "Operating Revenues, Sales and Unregulated Gross
Margins", and "Operating Expenses".
RGS Development Corporation
- ---------------------------
In 1998, the Company formed RGS Development to pursue unregulated business
opportunities in the energy marketplace. Through March 31, 2002, RGS
Development's operations have not been material to RGS's results of operations
or its financial condition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
Regulatory Assets
- -----------------
With PSC approval, RG&E has deferred certain costs rather than recognizing
them on its statement of income 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: Accounting for the
Effects of Certain Types of Regulation. These deferred costs are shown as
Regulatory Assets on the Company's and RG&E's Balance Sheets and a summary of
such Regulatory Assets is presented in Note 3 of the Notes to Financial
Statements.
16
In competitive electric and gas markets, 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. Estimates of
strandable assets are highly sensitive to the competitive wholesale market price
of electricity assumed in the estimation. In a competitive natural gas market,
strandable assets would arise where customers migrate away from dependence on
RG&E for full service gas supply, leaving RG&E with surplus pipeline and storage
capacity as well as natural gas supplies under contract. For a discussion of
strandable assets, see Note 3 of the Financial Statements in the Annual Report
under the heading "Regulatory Assets".
RG&E believes that its regulatory assets at March 31, 2002 are probable of
recovery except as described in Note 3 of the Financial Statements in the Annual
Report under the heading "Regulatory Assets". The Electric Settlement does not
impair the opportunity of RG&E to recover its investment in these assets.
Excess Earnings Reserve
- -----------------------
The current PSC Electric Settlement includes a Return on Equity Test as
described in Note 3 of the Financial Statements in the Annual Report under the
heading "PSC Electric Settlement". As of March 31, 2002, RG&E has estimated
and reflected on its balance sheet an earnings reserve of $26.1 million. The
final calculation of the regulatory electric earnings giving rise to the excess
earnings amount will be subject to approval by the PSC. RG&E is unable to
predict the PSC's ultimate determination of excess regulatory earnings under the
Electric Settlement.
Recently Issued Accounting Pronouncements
- -----------------------------------------
Information regarding recently issued accounting pronouncements by the FASB
can be found in Note 1 of the Financial Statements in the Annual Report.
Application of Critical Accounting Policies
- -------------------------------------------
The key accounting policies followed by the Company are identified and
described in Note 1 of the Notes to Financial Statements in the Annual Report.
LIQUIDITY, CAPITAL AND FINANCING
- --------------------------------
Liquidity and Capital Resources
- -------------------------------
During the first three months of 2002, RGS's and RG&E's cash flow from
operations and short term borrowings provided the funds for utility plant
construction expenditures, the payment of dividends and the redemption of $100
million of 8-1/4% First Mortgage Bonds on March 15, 2002. Subsequently, on
April 12, 2002, Constellation Nuclear prepaid RG&E's promissory note receivable
of $52.9 million, including principal and accrued interest. The proceeds
received by RG&E were used to pay off short-term debt outstanding. Capital
requirements of the Company for the remaining nine months of 2002 are
anticipated to be satisfied from the combination of internally generated funds,
short-term credit agreements providing an aggregate borrowing capacity of $155.0
million, and long term financing, if necessary.
Capital and Other Requirements
- ------------------------------
RGS's and RG&E's capital requirements are primarily due to expenditures for
energy delivery, including electric transmission and distribution facilities and
gas mains and services as well as nuclear fuel, electric production, and the
repayment of existing debt.
Construction requirements for the Company in 2002 are estimated to be
$152.0 million. RG&E's portion of total estimated construction requirements is
$148.0 million. Approximately $23.7 million had been expended for construction
as of March 31, 2002, reflecting primarily RG&E's expenditures for the upgrading
of electric transmission and distribution facilities, and gas mains.
Financing
- ---------
RG&E generally borrows under its short term credit agreements to meet any
interim external financing needs prior to issuing long-term debt securities.
RG&E's senior secured debt rating was recently downgraded to BBB+ by Standard
and Poor's and to Baa1 by Moody's. RG&E does not believe that such rating
actions will have any effect on its ability to access funds in the capital
markets; however, such downgrading may slightly
17
increase the interest rate that RG&E must pay on borrowed funds. For information
with respect to RGS's and RG&E's short-term borrowing arrangements and
limitations, see Item 8 of the Annual Report under Note 9 of the Notes to
Financial Statements.
EARNINGS SUMMARY
- -----------------
RGS:
- ----
RGS reported earnings of $0.70 per common share for the first quarter ended
March 31, 2002, compared to $1.31 per common share for the same period in 2001.
First quarter 2002 earnings were lower than a year ago due primarily to the
warmer weather than the same period in 2001, continued weak economic conditions,
lower market prices for electricity sold into the wholesale market compared to a
year ago, and rate reductions that were put into effect in the second half of
2001 for electric and gas customers. Despite the effects of warmer weather on
revenues, pretax earnings of RGS's unregulated subsidiary Energetix were up $0.8
million in the first quarter of 2002 compared to the same period a year ago.
RG&E:
- -----
RG&E earnings in the first quarter of 2002 were $22.2 million lower than in
the first quarter of 2001, driven by the effect of warmer weather on electric
and gas energy sales, a 3.9% rate reduction under the Electric Settlement that
took effect in July 2001 and reduced revenue from lower-priced wholesale power
sales. The difference in electric wholesale market prices had a greater effect
on a quarterly comparison because of the unusually high wholesale prices during
the first quarter of 2001. Replacement power costs were higher than in 2001
because of the scheduled refueling outage at the Ginna Plant that began on March
18 and was successfully completed on April 19, 2002.
Results of Operations
- ---------------------
The following financial review identifies the causes of significant
changes in the amounts of revenues and expenses for RGS and RG&E, comparing the
three-month period ended March 31, 2002 to the three-month period ended March
31, 2001. The operating results of the regulated business reflect RG&E's
electric and gas sales and services, and the operating results of the
unregulated business reflect Energetix's operations.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31,
- ---------------------------------------------------------------------------
2001:
- -----
OPERATING REVENUES, SALES AND UNREGULATED GROSS MARGINS
- -------------------------------------------------------
Regulated Electric
- ------------------
Regulated electric revenues decreased by $20.1 million when compared to the
same quarter last year. This decrease is primarily attributable to a decrease
of $15.6 million in electric sales to other utilities, which is a reflection of
lower market prices. Electric revenues from regulated retail operations and
energy service companies also decreased by $4.5 million from the first quarter
of 2001, driven down by lower retail electric base rates that became effective
in July 2001, decreased electric usage due to weather effects, and the effect of
a continuing weak economy. This decrease was partially offset by a $2.3 million
adjustment to revenues related to terminated and expired contracts with Enron.
RG&E's electric revenues include $27.9 million in the first quarter of 2002, and
$27.3 in the first quarter of 2001, related to energy sales to Energetix (see
Note 4 above for further detail).
Regulated Gas
- -------------
Gas revenues were down $31.8 million for RG&E in the first quarter of 2002
compared to the same period in 2001, reflecting a change in the gas rate
structure that was implemented in September 2001, as well as a decrease in the
usage of natural gas in the first quarter of 2002 due primarily to warmer
weather. The weather was 15.7% warmer than normal and 13.1% warmer than the
first quarter last year. RG&E's gas revenues include $6.6 million in the first
quarter of 2002, and $9.7 in the first quarter of 2001, related to therm sales
to Energetix (see Note 4 above for further detail).
18
Unregulated
- -----------
Energetix's unconsolidated operating revenues were down $79.2 million in
the first quarter of 2002 compared to the first quarter of 2001. This decrease
is heavily influenced by lower commodity costs than those from a year ago, and
lower demand for heating products due to the warmer weather experienced in the
first quarter of 2002. Gross margins on liquid fuels were down $4.0 million for
the first quarter of 2002 due to reduced volumes of heating products sold. This
decrease was partially offset by a $2.1 million increase in the margins on
natural gas, as Energetix benefited from lower commodity costs.
OPERATING EXPENSES
- ------------------
Regulated
- ----------
Purchased electricity expense for RG&E was up $11.3 million for the
quarter. This increase was due to $7.7 million for purchased power pursuant to
a long-term agreement entered in connection with the sale by RG&E of its 14%
interest in Nine Mile Two in November 2001 and $3.75 million in the first
quarter for the replacement power that was needed during the refueling of the
Ginna Plant between March 18, 2002 and April 19, 2002. There was no refueling
outage at that facility in 2001. The cost of gas purchased for resale decreased
by $25.5 million in the first quarter of 2002, driven mainly by a decrease in
the volume of gas purchased, and a lower average commodity cost for gas quarter.
Non-fuel regulated operating and maintenance expenses in the first quarter
of 2002 are up $8.3 million from those experienced in the same period in 2001.
This increase was primarily due to a $7.4 million increase in a regulatory asset
amortization associated with the sale of Nine Mile Two, and lower insurance
distributions received compared to 2001. The Nine Mile Two related cost
increases were offset by lower operating expenses, depreciation, and other
expenses in the first quarter of 2002.
Unregulated
- -----------
Unregulated non-fuel operating and maintenance expenses decreased $2.4
million for the first quarter compared to a year ago due to lower product
volumes sold and expense control initiatives.
Income Taxes
- ------------
The difference in income tax expense for RGS and RG&E is attributable
mainly to lower 2002 pretax earnings.
OTHER STATEMENT OF INCOME ITEMS
- -------------------------------
Interest income was up $1.6 million for the first quarter of 2002 over the
same period last year primarily due to the interest accrued on the promissory
note that was received as part of the consideration for the sale of the Nine
Mile Two generating facility. This note plus accrued interest was prepaid by
Constellation Nuclear on April 12, 2002. In addition, there was also $1.5
million expense recorded in the first quarter of 2001 for performance stock
option plans that was not recorded in 2002.
Dividends
- ---------
On March 13, 2002, the Board of Directors of RGS authorized a common stock
dividend of $.45 per share, which was paid on April 25, 2002 to shareholders of
record on April 2, 2002. Also on March 13, 2002, the Board of Directors of RG&E
declared dividends on its Preferred Stock at the regular rates per share payable
on June 1, 2002 to stockholders of record on May 1, 2002.
The ability of RGS to pay common stock dividends is governed by the ability
of RGS's subsidiaries to pay dividends to RGS. Because RG&E is by far the
largest of RGS's subsidiaries, it is expected that for the foreseeable future
the funds required by RGS to enable it to pay dividends will be derived
predominantly from the dividends paid to RGS by RG&E. In the future, dividends
from subsidiaries other than RG&E may also contribute to RGS's ability to pay
dividends. RG&E's ability to make dividend payments to RGS will depend upon the
availability of retained earnings and the needs of its utility business. RG&E's
Certificate of Incorporation provides for the payment of dividends on its common
stock out of the surplus net profits (retained earnings) of RG&E. In addition,
pursuant to the PSC order approving the formation of RGS, RG&E may pay dividends
to RGS of no more than 100% of RG&E's net income calculated on a two-year
rolling
19
basis. The calculation of net income for this purpose excludes non-cash
charges to income resulting from accounting changes or certain PSC required
charges as well as charges that may arise from significant unanticipated events.
This condition does not apply to dividends that would be used to fund the
remaining portion of RG&E's $100 million authorization for unregulated
operations (approximately $26.1 million at March 31, 2002).
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
RG&E is exposed to interest rate and commodity price risk, as described in
Item 7A in the Annual Report, Quantitative and Qualitative Disclosures about
Market Risk.
As of December 31, 2001, RG&E was a party to several natural gas and
electric derivative contracts with Enron Power Marketing Corporation and its
subsidiary, Enron on Line. These contracts hedged the Company's risk to
fluctuations in the market prices of natural gas and electricity and extended
through August 2003 with laddered expirations. The contracts received hedge
accounting treatment under SFAS 133. As a result of Enron Inc.'s Chapter 11
Bankruptcy filing on December 2, 2001, the Company's derivative contracts with
Enron were deemed ineffective. In compliance with SFAS 133, the company
determined the market value of the contracts to be ($4.9 million) as of the
ineffectiveness date and ($3.8 million) at December 31, 2001. The latter amount
is reflected as a liability on the Company's balance sheet at December 31, 2001.
Responding to favorable market prices, on March 22, 2002 the Company exercised
its right to terminate certain of the open Enron contracts early. Scheduled
contract expirations and the early terminations resulted in the recognition of
$2.3 million of miscellaneous revenue during the quarter ending March 31, 2002.
Additionally, purchased power expenses for the quarter included $1.2 million of
expense associated with expiring Enron contracts. A $3.3 million asset remains
on the Company's books at March 31, 2002, which represents the initial market
valuation of the Enron contracts at the ineffectiveness date, less the initial
market value of contracts which expired through March,2002. This $3.3 million
amount will be charged against miscellaneous revenue according to the dates on
which the now terminated contracts would have originally expired. These dates
extend through August 2003. The Company valued the Enron contracts and values
all derivative contracts by market price quotes. For thinly traded contracts
with potentially wide bid-ask spreads, the average of quoted prices is used to
determine market value.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
Reference is made to Notes 2, 3 and 5 of the Notes to Financial
Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K:
RGS Energy Group, Inc.
Rochester Gas and Electric Corporation
A report was filed March 6, 2002, including under Item 5, Other Events, that the
PSC has issued an order approving the January 15, 2002 Joint Proposal of RGS,
Energy East, NYSEG and the PSC Staff. Among other things, this Joint Proposal
included the approval of the proposed merger between RGS and Energy East.
20
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each of
the Registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RGS ENERGY GROUP, INC.
----------------------
(Registrant)
Date: May 14, 2002 By /s/ Mark Keogh
------------------------------------
Mark Keogh
Treasurer
Date: May 14, 2002 By /s/ William J. Reddy
-----------------------------------
William J. Reddy
Controller
ROCHESTER GAS AND ELECTRIC CORPORATION
--------------------------------------
(Registrant)
Date: May 14, 2002 By /s/ Mark Keogh
------------------------------------
Mark Keogh
Vice President and Treasurer
Date: May 14, 2002 By /s/ William J. Reddy
------------------------------------
William J. Reddy
Vice President and Controller