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, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-672
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Rochester Gas and Electric Corporation
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(Exact name of registrant as specified in its charter)
New York 16-0612110
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 East Avenue, Rochester, NY 14649
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716) 546-2700
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N/A
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $5 par value, at April 30, 1998: 38,864,047
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INDEX
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheet - March 31,1998 and
December 31, 1997......................................... 1 - 2
Consolidated Statement of Income - Three Months Ended
March 31, 1998 and 1997.................................. 3
Consolidated Statement of Cash Flows - Three Months
Ended March 31, 1998 and 1997............................. 4
Notes to Financial Statements.............................. 5 - 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7 - 15
PART II - OTHER INFORMATION
Legal Proceedings.......................................... 16
Submission of Matters to a Vote of Security Holders........ 16
Exhibits and Reports on Form 8-K........................... 16
Signatures................................................. 17
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
March 31, December 31,
Assets 1998 1997
(Unaudited)
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Utility Plant
Electric $2,463,381 $2,439,108
Gas 425,511 416,989
Common 136,260 134,938
Nuclear fuel 246,754 243,042
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3,271,906 3,234,077
Less: Accumulated depreciation 1,547,127 1,510,074
Nuclear fuel amortization 208,995 204,294
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1,515,784 1,519,709
Construction work in progress 48,784 74,018
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Net Utility Plant 1,564,568 1,593,727
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Current Assets
Cash and cash equivalents 68,465 25,405
Accounts receivable, net of allowance for
doubtful accounts: 1998 - $27,187, 1997 - $26,926 136,934 104,781
Unbilled revenue receivable 40,677 48,438
Materials, supplies and fuels, at average cost 20,147 39,929
Prepayments 32,171 23,818
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Total Current Assets 298,394 242,371
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Deferred Debits
Nuclear generating plant decommissioning fund 149,669 132,540
Nine Mile Two deferred costs 30,046 30,309
Unamortized debt expense 16,412 16,943
Other deferred debits 26,124 20,411
Regulatory assets 212,058 231,988
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Total Deferred Debits 434,309 432,191
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Total Assets $2,297,271 $2,268,289
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1
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
March 31, December 31,
Capitalization and Liabilities 1998 1997
(Unaudited)
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Capitalization
Long term debt - mortgage bonds $ 485,451 $ 485,434
- promissory notes 101,900 101,900
Preferred stock redeemable at option of Company 47,000 47,000
Preferred stock subject to mandatory redemption 35,000 35,000
Common shareholders' equity:
Common Stock
Authorized 50,000,000 shares; 38,864,047
shares outstanding at March 31, 1998
and 38,862,347 shares outstanding at
December 31, 1997. 699,255 699,031
Retained earnings 128,763 109,313
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Total common shareholders' equity 828,018 808,344
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Total Capitalization 1,497,369 1,477,678
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Long Term Liabilities (Department of Energy)
Nuclear waste disposal 84,392 83,261
Uranium enrichment decommissioning 13,475 13,465
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Total Long Term Liabilities 97,867 96,726
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Current Liabilities
Long term debt due within one year 30,000 30,000
Preferred stock redeemable within one year 10,000 10,000
Short term debt 0 20,000
Accounts payable 45,325 53,195
Dividends payable 18,793 18,791
Taxes accrued 10,020 5,041
Interest accrued 13,351 8,593
Other 89,146 43,697
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Total Current Liabilities 216,635 189,317
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Deferred Credits and Other Liabilities
Accumulated deferred income taxes 326,630 344,969
Pension costs accrued 71,239 67,361
Other 87,531 92,238
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Total Deferred Credits and Other Liabilities 485,400 504,568
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Commitments and Other Matters -- --
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Total Capitalization and Liabilities $2,297,271 $2,268,289
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2
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
For the Three Months Ended
March 31,
1998 1997
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Operating Revenues
Electric $161,821 $174,063
Gas 113,515 136,993
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275,336 311,056
Electric sales to other utilities 7,180 3,789
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Total Operating Revenues 282,516 314,845
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Fuel Expenses
Fuel for electric generation 11,799 10,832
Purchased electricity 5,444 4,884
Gas purchased for resale 61,663 79,355
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Total Fuel Expenses 78,906 95,071
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Operating Revenue less Fuel Expenses 203,610 219,774
Other Operating Expenses
Operations excluding fuel expenses 59,794 64,194
Maintenance 9,515 11,530
Depreciation and amortization 29,182 29,212
Taxes--local, state and other 32,530 34,967
Federal income tax 23,679 24,677
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Total Other Operating Expenses 154,700 164,580
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Operating Income 48,910 55,194
Other (Income) and Deductions
Allowance for other funds
used during construction (93) (71)
Federal income tax 449 (763)
Other--net (1,134) 1,184
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Total Other (Income) and Deductions (778) 350
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Income before Interest Charges 49,688 54,844
Interest Charges
Long term debt 10,784 11,853
Other--net 799 1,672
Allowance for borrowed funds
used during construction (150) (114)
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Total Interest Charges 11,433 13,411
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Net Income 38,255 41,433
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Dividends on Preferred Stock 1,305 1,704
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Earnings Applicable to Common Stock $ 36,950 $ 39,729
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Average Number of Common Shares (000's)
Common Stock 38,863 38,851
Common Stock and Equivalents 39,014 38,851
Earnings per Common Shares--Basic $0.95 $1.02
Earnings per Common Shares--Diluted $0.95 $1.02
Cash Dividends Paid per Common Share $0.45 $0.45
3
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
(Thousands of Dollars) March 31,
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1998 1997
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CASH FLOW FROM OPERATING ACTIVITIES $ 38,255 $ 41,433
Net income
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 33,869 34,047
Deferred fuel 13,443 14,165
Deferred income taxes (16,281) (10,356)
Allowance for funds used during construction (243) (185)
Unbilled revenue, net 7,761 7,197
Nuclear generating plant decommissioning fund (5,227) (5,031)
Pension costs accrued (3,246) (1,417)
Post employment benefit 2,125 2,580
Changes in certain current assets and liabilities:
Accounts receivable (32,153) (26,168)
Materials, supplies and fuels 19,782 22,294
Taxes accrued 4,979 35,845
Accounts payable (7,870) (7,975)
Other current assets and liabilities, net 29,180 (5,434)
Other, net 256 11,240
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Total Operating 84,630 112,235
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CASH FLOW FROM INVESTING ACTIVITIES
Net additions to utility plant (15,475) (12,006)
Other, net (7) --
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Total Investing (15,482) (12,006)
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CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from:
Sale/issuance of common stock 42 --
Short term borrowings (20,000) (14,000)
Dividends paid on preferred stock (1,305) (1,866)
Dividends paid on common stock (17,488) (17,483)
Other, net 12,663 (1,900)
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Total Financing (26,088) (35,249)
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Increase in cash and cash equivalents 43,060 64,980
Cash and cash equivalents at beginning of period 25,405 21,301
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Cash and cash equivalents at end of period $68,465 $86,281
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Three Months Ended
(Thousands of Dollars) March 31,
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1998 1997
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Cash Paid During the Period
Interest paid (net of capitalized amount) $ 6,293 $ 8,870
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Income tax paid $ 4,660 --
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4
ROCHESTER GAS AND ELECTRIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1: GENERAL
The Company, in the opinion of management, has included adjustments (which
include normal recurring adjustments) necessary for the fair statement of the
results of operations for the interim periods presented. The consolidated
financial statements for 1998 are subject to adjustment at the end of the year
when they will be audited by independent accountants. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
results for these interim periods are not necessarily indicative of results to
be expected for the year, due to seasonal, operating, and other factors. These
financial statements should be read in conjunction with the financial statements
and notes thereto contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
Note 2. COMMITMENTS AND OTHER MATTERS
The following matters supplement the information contained in Note 10 to the
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 and should be read in conjunction with the
material contained in that Note.
LITIGATION
PSC Competitive Opportunities Case Settlement. In an Opinion issued
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January 14, 1998 the PSC confirmed its November 1997 approval of the Company's
Settlement Agreement (the "Settlement"). The Company is in the process of
implementing the Settlement. Several parties to the settlement negotiations
have petitioned for rehearing and another has commenced an action for
declaratory and injunctive relief as to certain portions of the Settlement and
the PSC's approval of it. The Company has responded to the petitions for
rehearing and will oppose the action for declaratory and injunctive relief. At
this time, the Company is unable to predict the outcome of these challenges.
Litigation with Co-Generator. With respect to the litigation previously
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described in the Company's 1997 Annual Report on Form 10-K relating to the Power
Purchase Agreement ("PPA") with Kamine/Besicorp Allegany L.P. and the related
antitrust litigation brought against the Company by General Electric Capital
Corporation, a tentative settlement agreement has been reached under which all
such litigation would be dismissed and the PPA would be terminated.
The terms of the tentative settlement must be finalized in a Global
Settlement Agreement and receive the approval of the New York Public Service
Commission ("PSC")and the U.S. Bankruptcy Court in Newark, N.J. where Kamine is
currently a debtor in a Chapter 11 case. The Company has offered as part of the
settlement to purchase the 65-megawatt, gas-fired plant, which will be sold in
the bankruptcy proceeding.
The Company does not expect the terms of the settlement to have any
material effect on its earnings. The PSC Settlement Agreement contains
provisions which would accommodate the tentative settlement and, assuming
approval of the settlement by the PSC, its overall cost is expected to be
recovered in the rates for utility service.
5
Department of Justice Lawsuit. On February 20, 1998, the Company and the
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Department of Justice entered into a stipulation agreeing to a Consent Judgement
in the civil litigation brought against the Company by the Antitrust Division of
the Department of Justice. On March 19, 1998, the Department of Justice filed
the Competitive Impact Statement relating to this litigation and notified the
Court that it was being sent along with the Consent Judgement for publication in
compliance with the Antitrust Procedures and Penalties Act, 15 U.S.C. (S) 16(b).
Publication of the Competitive Impact Statement on March 30, 1998 has triggered
a 60-day public comment period, after which the Consent Judgement may be signed
by the Court unless the Department of Justice withdraws its consent. By the
terms of the Consent Judgement, the Company shall not enforce the challenged
provision in the contract with the University of Rochester or include any such
provision in any other flexible rate contract, nor will it enter into or enforce
a covenant or agreement not to compete in the sale of electricity with any
competitor or potential competitor in the retail sale of electricity. Agreements
not to compete that are reasonably ancillary to certain agreements will not be
interpreted as a violation of the Consent Judgement. The types of agreements
excluded from the injunction against covenants not to compete include employment
contracts, personal service contracts, agreements regarding the sale or purchase
of a business, joint ventures or partnerships, retail marketing agreements,
consulting agreements, and portfolio management contracts. Nothing in the
Consent Judgement prohibits the Company from engaging in any conduct which is
exempt from or immune under the antitrust laws. The Consent Judgement has a
ten-year term, but may be terminated sooner if the Company can demonstrate that
competitors have achieved a certain level of sales in the market for non-
residential retail sales of electricity made at unregulated prices in Monroe
County. In addition, the Company agreed to maintain an antitrust compliance
program.
ENVIRONMENTAL MATTERS
Opacity Issue. The negotiations with the New York State Department of
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Environmental Conservation to resolve allegations of past opacity violations at
the Company's Beebee and Russell Stations has resulted in a Stipulation and
Order resolving the matter, which was entered in New York State Supreme Court on
March 18, 1998. The Stipulation and Order requires payment of a $400,000 civil
penalty, implementation of an environmental benefit project valued at $700,000,
and the completion of specified engineering work at the Stations. Opacity
violations occurring after entry of the Stipulation and Order are subject to
automatic stipulated penalties which will not be significant. The derating of
the Stations has been reduced as a result of system upgrades which are expected
to be completed in May 1998.
NUCLEAR-RELATED MATTERS
Uranium Enrichment Decontamination and Decommissioning Fund. The litigation
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by a group of utilities against the Department of Energy(DOE) concerning the
right of DOE to assess utilities for decommissioning costs, which was decided
against the utilities in the Court of Appeals for the Federal Circuit, is still
awaiting a decision by the United States Supreme Court on whether it will review
the Court of Appeals decision.
Decommissioning Costs. The Nuclear Regulatory Commission (NRC) has issued a
----------------------
policy statement relating to industry restructuring which addresses, in part,
the prospects of joint and several liability of co-owners for nuclear
decommissioning costs, such as co-owners of Nine mile Two. The NRC recognizes
that co-owners generally divide costs and output from their facilities by using
a contractually-defined, pro rata share standard. The NRC has implicitly
accepted this practice in the past and believes that it should continue to be
the operative practice, but reserves the right, in highly unusual situations
where adequate protection of public health and safety would be compromised if
such action were not taken, to consider imposing joint and several liability on
co-owners when one or more co-owners have defaulted.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is Management's assessment of certain significant factors
affecting the financial condition and operating results of the Company. This
assessment contains statements which are not historical fact and which can be
classified as forward looking. These statements can be identified by the use of
certain words which suggest forward looking information such as "believes",
"expects", "projects", "estimates" and "anticipates" or, words which relate to
future goals or strategies. In addition to the assumptions and other factors
referred to specifically in connection with such statements, some of the factors
that could make a significant difference in the forward-looking statements
include: state and federal legislative and regulatory initiatives that affect
cost and investment recovery, have an impact on rate structures, and affect the
speed and degree to which competition enters the electric and natural gas
industries; recoverability of environmental compliance costs and nuclear
decommissioning costs through rates; industrial, commercial and residential
growth in the service territories; technological developments; the weather and
other natural phenomena; growth in opportunities for the Company's unregulated
subsidiary operations; the timing and extent of changes in commodity prices and
interest rates; and other considerations that may be disclosed from time to time
in the Company's publicly disseminated documents and filings.
Shown below is a listing of the principal items discussed.
Earnings Summary Page 7
Competition Page 8
PSC Competitive Opportunities Case Settlement
Business and Financial Strategy
PSC Proceeding on Nuclear Generation
FERC Open Transmission Orders and Company filings
PSC Gas Restructuring Proceeding
Rates and Regulatory Matters Page 13
1996 Electric Rate Settlement
1995 Gas Settlement
Flexible Pricing Tariff
Liquidity and Capital Resources Page 13
Capital and Other Requirements
Financing
Fossil Unit Ratings and Status
Results of Operations Page 15
Dividend Policy Page 15
EARNINGS SUMMARY
Basic and diluted earnings per common share for the three months ended
March 31, 1998 were $.95 compared to $1.02 for the same period a year ago. The
seven-cent per share decrease was primarily due to the mild winter weather
partially offset by decreases in total expenses. Retail electric sales were
down 5.6% for the quarter compared to last year. Gas sales were down 11.2% in
the same comparison periods. Temperatures in the first quarter were 13.6%
warmer than in 1997 on a heating-degree day basis.
7
The impact of developing competition in the energy marketplace may affect
future earnings. The Settlement allows for a phase-in to open electric markets
while lowering customer prices and establishing an opportunity for competitive
returns on shareholder investments. The nature and magnitude of the potential
impact of the Competitive Opportunities Settlement on the Company will depend on
several factors, the availability of qualified energy suppliers in the Company's
service territory, the degree of customer participation and ultimate selection
of an alternative energy supplier, the Company's ability to be competitive by
controlling its operating expenses, and the Company's ultimate success in the
development of its unregulated business opportunities as permitted under the
Settlement.
Future earnings will also be affected, in part, by the Company's degree of
success in remarketing its excess gas capacity as set under the terms of the
1995 Gas Settlement and in controlling its local gas distribution costs. The
Company believes it will be successful in meeting the 1995 Gas Settlement
targets over the remaining period of the Settlement, although no assurance may
be given.
COMPETITION
See the Company's Form 10-K for the fiscal year ended December 31, 1997,
Item 8.- Note 10 of the Notes to Financial Statements for a discussion of
regulatory and strandable assets and related accounting issues.
OVERVIEW. The PSC, through its Competitive Opportunities Proceeding, has
embarked on a fundamental restructuring of the electric utility industry in the
state. Among other elements, the PSC's goals included lower rates for consumers
and increased customer choice in obtaining electricity and other energy
services. During 1996 and 1997, the Company, the Staff of the PSC, and several
other parties negotiated a Settlement Agreement (the "Settlement") which was
approved by the PSC in November 1997. The Settlement sets the framework for the
introduction and development of open competition in the electric energy
marketplace.
PSC COMPETITIVE OPPORTUNITIES CASE SETTLEMENT. The Settlement provides for
a transition to competition during its five year term (July 1, 1997 to June 30,
2002) and establishes the Company's electric rates for each annual period. A
Retail Access Program will be phased in, allowing customers to purchase
electricity, and later electricity and capacity commitments, from sources other
than the Company. The Company will be given a reasonable opportunity to
recover prudently incurred costs, including those pertaining to generation and
purchased power. The Settlement also requires the Company to functionally
separate its component operations: distribution, generation, and retailing. Any
unregulated retail operations must be structurally separate from the regulated
utility functions but may be funded with up to $100 million. Although the
Settlement provides incentives for the sale of generating assets, it requires
neither divestiture of generating or other assets nor write off of stranded
costs. The Company believes that the Settlement will not adversely affect its
eligibility to continue to apply SFAS-71- "Accounting for the Effects of Certain
Types of Regulation", with the exception of certain to-go costs associated with
non-nuclear generation. If, contrary to the Company's view, such eligibility
were adversely affected, a material write-down of assets, the amount of which is
not presently determinable, could be required.
Rate Plan. Over the five year term of the Settlement, cumulative rate
reductions will be: Rate Year 1: $3.5 million; Rate Year 2: $12.8 million; Rate
Year 3: $27.6 million; Rate Year 4: $39.5 million; and Rate Year 5: $64.6
million. The Rate Plan permits the Company to offset against the foregoing
8
reductions certain inflation-related expenses and certain amounts related to a
purchase power agreement with Kamine. In the event that the Company earns a
return on common equity in excess of 11.50% over the entire five year term of
the Settlement, 50% of such excess will be used to write down deferred costs
accumulated during the term, and 50% will be used to write down accumulated
deferrals or investment in electric plant or regulatory assets.
Retail Access. The Company's Energy Choice Program began with the filing
of a new tariff titled PSC No-15 Electric Distribution Service on December 1,
1997. The Distribution Tariff establishes the rates, rules and policies that
govern the distribution, transmission, and sale of related electric services to
unregulated load-serving entities ("LSEs" or "Distribution Customers").
The PSC approved the Distribution Tariff on January 21, 1998 for the Pilot
Program for Farmers and Food Processors (the Dairylea Pilot Program) which
commenced on February 1, 1998 and concludes on January 31, 2000. The Company
also submitted an Operating Agreement and a Customer Manual. The Operating
Agreement is the legal document that will be signed by LSEs and the Company, and
the Customer Manual is the day to day operating guide developed for use by the
LSEs.
Three LSEs, Energetix, New Energy Ventures and NORESCO, have executed the
Company's Operating Agreement under the Dairylea Pilot Program and have begun
offering unregulated retail services to eligible farmers and food processors.
By an order issued April 10, 1998, the PSC approved the Distribution Tariff
for the permanent retail access program. The Company's full Retail Access
Program, available to all its customers, begins on July 1, 1998 and is phased-in
annually subject to certain usage limits under the Company's Competitive
Opportunities Settlement. During the first year of the program customers whose
electric loads represent approximately 10% of the Company's total annual retail
sales will be eligible to purchase electricity from qualified LSEs. On July 1,
1999, the percent of total sales increases to 20%, and customers would purchase
both electricity and capacity commitments. On July 1, 2000, the percent moves to
30%, and on July 1, 2001, all retail customers will be eligible to purchase
energy and capacity from alternative suppliers.
During the energy only stage of Retail Access, beginning July 1, 1998, the
Company's distribution rate will be set by deducting 2.3 cents per kilowatt hour
(kWh) from its full service (bundled) rates and LSEs will be entitled to
purchase electricity from the Company at a rate of 1.9 cents per kWh. During
the energy and capacity stage, beginning July 1, 1999, the deduction from full
service rates will become 3.2 cents per kWh.
Generating Assets. The Company will not be required to divest any of its
generation facilities. To the extent that the Company sells any generating
assets during the term of the Settlement, gains on such sales will be shared
between the Company and customers. With regard to losses on such sales, the
Settlement acknowledges an intent that the Company will be permitted to recover
such losses through distribution rates during the term of the Settlement.
Future rate treatment is to be consistent with the principle that the Company is
to have a reasonable opportunity to recover such costs.
Although the Company is not obligated to divest its interest in jointly-
owned facilities, Niagara Mohawk Power Corporation has agreed in a separate
settlement to divest all of its non-nuclear generation, including its 76 percent
interest in the Oswego 6 oil-fired generating facility, the remainder of which
is owned by the Company. The Company has concluded that it is in its best
interest to include its minority interest in Oswego 6 in the sale being
conducted by Niagara Mohawk . Gains or losses on the sale will be subject to
the foregoing treatment under the Settlement.
"To-go costs" of the Company's non-nuclear resources (i.e., capital costs
incurred after February 28, 1997, operation and maintenance expenses, and
property, payroll and other taxes) are to be initially recovered through
distribution rates. The fixed portion of to-go costs would be recovered in full
until July 1, 1999, and be subject to the market thereafter in accordance with
the phase-in schedule for the Retail Access program. The variable portion of
non-nuclear to-go costs would also be subject to the market in accordance with
9
the phase-in schedule. Under the Settlement, nuclear costs would remain
recoverable through regulated rates.
Miscellaneous. The present Settlement supersedes the 1996 Rate
Settlement. Various incentive and penalty provisions in the 1996 Rate
Settlement are eliminated.
BUSINESS AND FINANCIAL STRATEGY. Under the terms of the Settlement, the
Company is functionally separating its generation, distribution, and regulated
energy services businesses. As permitted by the Settlement, the Company has
established a separate unregulated subsidiary called Energetix which will be
able to compete for energy, energy services and products both in and outside the
Company's existing franchise service territory. Energetix is expected to move
its operations into a separate facility by June 30, 1998. The Company has also
developed an integrated financial strategy which includes new business
development initiatives and a Common Stock share repurchase program. See the
Company's 1997 Form 10-K, Item 7.- "Competition" under "Nuclear Operating
Company" for a discussion of organizing utilities' plans to establish a New York
Nuclear Operating Company.
Energy Choice. Within the framework of the Energy Choice Program, the
Company will unbundle traditional utility services. Retail electric customers
in the Company's service territory will have the opportunity to purchase energy,
capacity, and retailing services from competitive energy service companies,
referred to as distribution customers. They may also continue to purchase fully-
bundled electric service from the Company under existing retail tariffs.
General Structure. Energy Choice adopts the "single-retailer" model for
the relationship between RG&E, the distribution customers, and retail customers.
Under the "single-retailer" model the regulated utility's customer is the
distribution customer, whose customers are the retail customers. A distribution
customer purchases delivery services from RG&E, and bundles those services with
energy and retailing and any other products or services they wish to sell, to
meet the needs of their own retail customers. The relationship between the
regulated utility and retail customers is substantially eliminated. The
distribution customer assumes responsibility for providing its retail customers
with bundled energy and delivery services, and for virtually all related
retailing functions, including direct contact and communications with retail
customers. With the exception of transmission and distribution service, the
distribution customer will procure for its customers, or will itself create and
provide them with, all necessary components of fully bundled service on a
competitive basis.
Throughout the term of the Settlement, RG&E will continue to provide
regulated and fully bundled electric service under its retail service tariff to
customers who choose to continue with or return to such service, and to
customers to whom no competitive alternative is offered.
Until the development of a wholesale market for generating capacity, there
will be no suitable mechanism for the reallocation, from the regulated utility
to the distribution customer, of responsibility for ensuring adequate installed
reserve capacity. Accordingly, during the initial "Energy Only" stage of the
Energy Choice Program (July 1, 1998 to July 1, 1999), distribution customers
will be able to choose their own sources of energy supply, while RG&E will
provide to distribution customers, and will be compensated for, the generating
capacity (installed reserve) needed to serve their retail customers reliably.
During the "Energy and Capacity" stage commencing July 1, 1999, the distribution
customers will be able to select, and will be responsible for procuring,
generating capacity, as well as energy, to serve the loads of their retail
customers, and distribution charges will be accordingly reduced as hereinafter
described. If by July 1, 1998 there is not a functioning Statewide energy and
capacity market (see discussion under FERC Open Transmission Orders), the
Company may petition the PSC for deferral of the scheduled commencement of the
Energy and Capacity stage.
10
Summary. The PSC has approved both the pilot program and full-scale retail
access tariffs proposed by RG&E, subject to modifications that will not
substantially change either program. The availability of distribution customers
to serve eligible customers and how quickly they decide to become involved
cannot be determined. Likewise, the Company is not able to predict the number of
customers that may choose to no longer be served under the Company's regulated
tariffs. Three distribution customers have been qualified by RG&E to serve
retail customers under this program. As of March 31, 1998 all 3,413 kWh sales
of electricity to distribution customers were made on a full-requirements basis
which include both delivery services and energy.
Unregulated Energy Services Company. It is part of the Company's financial
strategy to stimulate growth by entering into unregulated businesses. The first
step in this direction was the formation and operation of Energetix effective
January 1, 1998. Energetix is an unregulated subsidiary of the Company that will
bring energy products and services to the marketplace both within and outside
the Company's franchise area.
In April the Company announced that Energetix had agreed to acquire
Griffith Energy, the second largest oil and propane distribution Company in New
York State. Griffith has approximately 350 employees and operates 16 customer
service centers. Griffith will give Energetix access to 65,000 new customers.
The acquisition (a cash transaction which will be financed as an installment
sale over a number of years) is expected to be completed later this year.
Energetix also announced an alliance with the Greater Rochester Metro
Chamber of Commerce to offer discounts on energy to the Chamber's 3,400 members.
In June, Energetix plans to launch ServiceCare, an appliance service program.
Energetix intends to market electricity, natural gas, oil and propane fuel
energy services mainly over an area extending in a 150-mile radius of Rochester.
The Settlement approved by the PSC in November allows for the investment of
up to $100 million in unregulated businesses during the next five years. During
1998, the Company expects to determine the actual level of the initial
investments to be made in unregulated business opportunities.
On July 1, 1997 the Company and Energetix filed with the Federal Energy
Regulatory Commission (FERC) seeking authorization to engage in the wholesale
sale of electric energy and capacity at market-based rates. These applications
were accepted by FERC on September 12, 1997. The Company must seek separate
authorization in order to sell electric energy to Energetix at market-based
rates.
Stock Repurchase Plan. By order issued April 24, 1998 the PSC approved a
Stock Repurchase Plan providing for the repurchase of Common Stock having an
aggregate market value of not to exceed $145,000,000. The Company expects to
begin the repurchasing program in the second quarter of 1998.
PSC PROCEEDING ON NUCLEAR GENERATION. On March 20, 1998, the PSC
initiated a proceeding to examine a number of issues raised by the Staff
position paper on nuclear generation and the comments received in response to
it. In reviewing the Staff paper and parties' comments, the PSC (a) adopted as
a rebuttable presumption the premise that nuclear power should be priced on a
market basis to the same degree as power from other sources, with parties
challenging that premise having to bear a substantial burden of persuasion, (b)
characterized the proposals in the Staff paper as by and large consistent in
concept with the PSC's goal of a competitive, market-based electricity industry,
(c) questioned Staff's position that would leave funding and other
decommissioning responsibilities with the sellers of nuclear power interests and
(d) indicated interest in the potential for the New York Nuclear Operating
Company (NYNOC) (see the Company's 1997 Form 10-K, Item 7, under Competition
Nuclear Operating Company) to benefit customers through efficiency gains and
11
directed pursuit of that matter in this nuclear generating proceeding or
separately upon the filing of a formal NYNOC proposal. The Company's strandable
assets in nuclear plant could be impacted by the outcome of this proceeding.
The proceeding is intended to be completed by the second quarter of 1999.
FERC OPEN TRANSMISSION ORDERS AND COMPANY FILINGS. On January 31, 1997, the New
York electric utilities filed a "Comprehensive Proposal To Restructure the New
York Wholesale Electric Market" with the FERC. As proposed, the existing New
York Power Pool (NYPP) will be dissolved and an independent system operator
(ISO) will administer a state-wide open access tariff and provide for the short-
term reliable operation of the bulk power system in the state. In addition to
proposing a FERC-endorsed ISO, the proposal calls for creation of a New York
Power Exchange and a New York State Reliability Council. An additional
supplemental filing with FERC was made on December 19,1997 which lays out a
specific timeframe for the implementation of a competitive wholesale electricity
market in New York State. The utilities had requested FERC approval of the
restructuring plan no later than March 31, 1998, in order to establish an
operating ISO by June 30, 1998. Several parties have filed protests and requests
for clarification of the Utilities' supplemental filing. The NYPP members have
responded to these filings. At this time there is no formal timetable for
action by FERC. A technical conference to explore issues related to ISO
proposals was held by FERC on April 14 and 15, 1998, but no actions were taken
as a result of the conference. The timetable for retail competition in New York
State has been established for individual utilities in settlements in the
Competitive Opportunities Proceeding. If FERC action on the ISO proposal is
delayed for a significant period, the Company's schedule for retail market
implementation could be affected. Any request to delay full implementation of
capacity and energy competition beyond July of 1999 based on a delayed FERC
approval of the ISO would require PSC approval.
Significant changes to pricing procedures now in effect within NYPP are
expected, but it is unclear what effect these changes may have once other
regulatory changes in New York State are implemented. At the present time, the
Company cannot predict what effects regulations ultimately adopted by FERC will
have, if any, on future operations or the financial condition of the Company.
PSC GAS RESTRUCTURING PROCEEDING. On April 1, 1998, the Company filed
its Plans for Addressing Natural Gas Capacity Issues, as required by the PSC's
September 4, 1997 Order in the Proceeding on Restructuring the Energy
Competitive National Gas Industry. In its Plans, the Company proposes that the
PSC deal with transportation and storage capacity issues on a utility-by-utility
basis, subject to certain principles that should apply to all. These general
principles include: ensuring reliability; allowing the utility a fair
opportunity to recover the prudently incurred costs of upstream capacity and the
costs of implementing an unbundled transportation system; not making utilities
responsible for promoting competitor's interests; and eliminating unnecessary
and unfair cost burdens from governmental social programs. Based on the
assumption that the PSC will continue movement toward gas retail access, the
Company proposes that the "single-retailer" model incorporated in the electric
Competitive Opportunities Settlement (see preceding discussion) be used for gas
as well. The Company believes that it must retain some level of capacity to
serve customers who do not leave the system and to provide necessary balancing
for the system. Further, the Company's Plans include efforts to renegotiate
existing capacity contracts to reduce current obligations and to realign them
with system needs. The Company's Plan also include providing appropriate
methods to prevent the Company and its remaining customers from bearing the
costs caused by the departure of other customers. These methods include
mandatory capacity assignment and establishment of a surcharge for departing
customers. Finally, the Company has proposed the use of portfolio management as
a means of managing capacity assets with the
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objective of mitigating strandable costs. At this time the Company cannot
predict what action the PSC will take in this matter.
On April 3, 1998, the PSC issued an Order denying the Company's Petition
to defer, for subsequent recovery, costs associated with the implementation of
PSC-related required measures intended to further competition in the gas market.
Under the Order, the Company would be precluded from recovering approximately
$1.20 million incurred in 1996 and $.86 million incurred in 1997. On May 4,
1998 the Company filed a Petition for reconsideration of the PSC's decision.
RATES AND REGULATORY MATTERS
1996 ELECTRIC RATE SETTLEMENT. The PSC approved a Settlement Agreement
(1996 Rate Settlement) among the Company, PSC Staff and several other parties
which set rates for a three-year period, ending June 30, 1999. The Competitive
Opportunities Settlement (Settlement) discussed earlier supersedes the 1996 Rate
Settlement. After approval of the Settlement becomes final and non-appealable
the Company will terminate its petition seeking judicial review of the 1996 Rate
Settlement.
1995 GAS SETTLEMENT. The 1995 Gas Settlement affects the rate treatment
of various gas costs through October 31, 1998. For further information with
respect to the 1995 Gas Settlement see the Company's 1997 Form 10-K, Item 7
under Rates and Regulatory Matters.
FLEXIBLE PRICING TARIFF. Under its flexible pricing tariff for major
industrial and commercial electric customers, the Company may negotiate
competitive electric rates at discount prices to compete with alternative power
sources, such as customer-owned generation facilities. For further information
with respect to the flexible pricing tariff see the Company's 1997 Form 10-K,
Item 7 under Rates and Regulatory Matters.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 1998 cash flow from operations (see
Consolidated Statement of Cash Flows), provided the funds for construction
expenditures and the payment of dividends and short-term debt. At March 31,
1998 the Company had cash and cash equivalents of $68.5 million. Capital
requirements during 1998 are anticipated to be satisfied primarily from the
combination of internally generated funds and the use of short-term credit
arrangements.
CAPITAL AND OTHER REQUIREMENTS. The Company's capital requirements
relate primarily to expenditures for energy delivery, including electric
transmission and distribution facilities and gas mains and services as well as
nuclear fuel, electric production and the repayment of existing debt. The
Company has no plans to install additional baseload generation.
Total 1998 capital requirements are currently estimated at $165 million,
of which $125 million is for construction and $40 million is for the redemption
of maturing securities and sinking fund obligations. Approximately $16 million
had been expended for construction as of March 31, 1998, reflecting primarily
expenditures for nuclear fuel and upgrading electric transmission and
distribution facilities and gas mains.
Purchased Power Requirement. Under federal and New York State laws
13
and regulations, the Company is required to purchase the electrical output of
unregulated cogeneration facilities which meet certain criteria (Qualifying
Facilities). The Company was compelled by regulators to enter into a contract
with Kamine for approximately 55 megawatts of capacity. In February, 1998 a
tentative agreement was reached under which the Company would purchase the 65-
megawatt, gas-fired plant, the Kamine contract would be terminated and related
litigation would be dismissed . The circumstances regarding the Kamine contract,
related litigation and the tentative settlement are discussed in this report
under Note 2 of the Notes to Financial Statements and in the Company's 1997 Form
10-K under Item 8, Note 10 of the Notes to Financial Statements. The Company has
no other long-term obligations to purchase energy from Qualifying Facilities.
Year 2000 Computer Issues. As the year 2000 approaches many companies face
a potentially serious information and operational systems (computer and
processor-based devices) problem because many software applications and embedded
systems programs created in the past will not properly recognize calendar dates
beginning with the year 2000. At this time the Company believes that the problem
is being addressed properly, and has begun an extensive program to identify
devices and software applications which must be replaced or altered in order to
prevent any adverse operational or financial impacts. The Company believes it
will incur approximately $15 million of costs through January 1, 2000,
associated with making the necessary modifications identified to date.
FINANCING. The Company had no long-term financing during the first quarter
of 1998. (See Form 10-K for the fiscal year ended December 31, 1997, Item 8.
Note 9. Short-Term Debt, regarding the Company's short-term borrowing
arrangements.)
FOSSIL UNIT RATINGS AND STATUS. Several of the Company's fossil-fueled
generating units have been derated since February 1997 to maintain acceptable
opacity levels while the Company investigated additional engineering solutions
to address the opacity of the Units' emissions ( see Note 2 of the Notes to
Financial Statements under the heading "Environmental Matters, Opacity Issue").
The derating of the units has been reduced as a result of system upgrades which
are expected to be completed in May 1998. The financial impact of the deratings
included the lost opportunity associated with energy sales and, at times, the
need to make additional purchases to meet system requirements. While the
deratings have decreased earnings, the amount has not been nor is it expected to
be significant.
On January 21, 1998 the Company decided to retire Beebee Station by mid-
1999. Factors such as the plant's age, location in an area no longer consistent
with the surrounding development, lack of a rail/coal delivery system and more
stringent clean air regulations made the plant uneconomical in the developing
competitive generation business. The retirement of Beebee Station is not
expected to have a material effect on the Company's financial position or
results of operations. The plant will be fully depreciated at the time of
retirement. The Settlement provides that all prudently incurred incremental
costs associated with the shut down and decommissioning of the plant are
recoverable through the Company's distribution access tariff. The electric
capability and energy currently provided by the plant is expected to be replaced
by purchased power as needed.
On December 1, 1997 Niagara announced a plan to sell its fossil-fueled and
hydroelectric generating stations by auction in 1998. This plan was agreed to as
part of Niagara's PowerChoice Settlement with the PSC. The Company intends to
include its 24 percent share of the Oswego Steam Station Unit 6 (Oswego 6) for
sale as part of Niagara's auction. Any gains or losses
14
realized by the Company from the sale of its share of Oswego 6 would be treated
in accordance with the terms of the Settlement under the Competitive
Opportunities Proceeding.
RESULTS OF OPERATIONS
The following financial review identifies the causes of significant
changes in the amounts of revenues and expenses, comparing the three-month
period ended March 31, 1998 to the three-month period ended March 31, 1997.
OPERATING REVENUES AND SALES. Total Company revenues for the first three
months of 1998 were $32.3 million or 10% below the first three months of 1997.
Primary factors were lower kWh sales of electricity and lower therm sales of gas
due to this year's markedly milder winter season partially offset by higher
electric sales to other utilities.
FUEL EXPENSES. The fuel expenses decrease in the first quarter of 1998 was
driven by a decrease in gas purchased for resale expense due to reduced volume
from a warmer heating season. The purchased gas expense was partially offset by
higher electric fuel costs for electric generation to support the higher
electric sales to other utilities.
OPERATIONS EXCLUDING FUEL EXPENSES AND MAINTENANCE EXPENSES. The decreases
in operations excluding fuel and maintenance expenses reflect mainly rebates on
insurance policies, a decreased expense associated with uncollectible accounts
in the first quarter of 1998 and higher expenses incurred in the first quarter
of 1997 as a result of wind storms.
TAXES. The decrease in local, state and other taxes reflects mainly lower
revenue taxes due to decreased revenues and lower property taxes due to
decreased rates and/or assessments.
Federal Income tax was essentially flat despite lower taxable income in
the first quarter of 1998 compared to a year ago, due to the 1997 reversal of a
prior provision for the in-service date of Nine Mile Two as a result of an
agreement reached with the Internal Revenue Service.
OTHER STATEMENT OF INCOME ITEMS. The decrease in Other Income and Deductions,
Other-net reflects mainly accounting adjustments relating to the elimination of
Nine Mile Two O&M expense deferral mechanism which is no longer required under
the Competitive Opportunities Settlement. Interest charges decreased due to
refinancings and the early redemption of long-term debt in 1997 as well as a
lower miscellaneous interest charges on pension and other post-employment
benefits.
DIVIDEND POLICY
On March 18, 1998, the Board of Directors authorized a common stock
dividend of $.45 per share, which was paid on April 25, 1998 to shareholders of
record on April 2, 1998. The level of future cash dividend payments on Common
Stock will be dependent upon the Company's future earnings, its financial
requirements, and other factors. The Company's Certificate of Incorporation
provides for the payment of dividends on Common Stock out of the surplus net
profits (retained earnings) of the Company.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information on Legal Proceedings reference is made to Note 2 of the Notes
to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders was held on April 15, 1998.
(b) Susan R. Holliday was elected for a two year term expiring at the Annual
Meeting of Shareholders in 2000. The following Directors were elected for
three year terms expiring at the Annual Meeting of Shareholders in 2001:
Angelo J. Chiarella, Mark B. Grier, Jay T. Holmes and Cornelius J. Murphy.
The following Directors elected at previous Annual Meetings continue as
members of the Board: Samuel T. Hubbard, Jr., Roger W. Kober, Constance M.
Mitchell, Allan E. Dugan, Charles I. Plosser and Thomas S. Richards.
(c) The nominees for election as directors were elected by the
following vote:
Shares Shares
For Withheld
---------- --------
Susan R. Holliday 33,357,299 454,662
Angelo J. Chiarella 33,360,745 451,216
Mark B. Grier 33,217,994 593,967
Jay T. Holmes 33,352,276 459,685
Cornelius J. Murphy 33,344,173 467,788
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index below.
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated February 12, 1998, reporting under
Item 5, Other Events, a tentative settlement agreement with respect to a Power
Purchase Agreement between the Company and Kamine/Besicorp Allegany L.P.
EXHIBIT INDEX
Exhibit 10 (A) Change of Control Agreement dated as of March 1, 1998 between
the Company and Paul C. Wilkens.
Exhibit 27 Financial Data Schedule pursuant to Item 601 (c) of
Regulation S-K.
(A) Denotes executive compensation plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROCHESTER GAS AND ELECTRIC CORPORATION
--------------------------------------
(Registrant)
Date: May 8, 1998 By /s/ J.B. STOKES
--------------------------------------
J. Burt Stokes
Senior Vice President, Corporate Services
and Chief Financial Officer
Date: May 8, 1998 By /s/ WILLIAM J. REDDY
--------------------------------------
William J. Reddy
Controller
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