SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
June 30, 1999
For the quarterly period ended. . . . . . . .. . . . . . . . . .
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from. . . . . . . .to. . . . . . . . .
1-14766
Commission file number. . . . . . . . . . . .. . . . . . . . . .
Energy East Corporation
. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .
(Exact name of registrant as specified in its charter)
New York 14-1798693
. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 12904, Albany, NY 12212-2904
. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .
(Address of principal executive offices) (Zip Code)
(518) 434-3049
Registrant's telephone number, including area code . . . . . . .
N/A
. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
The number of shares of common stock (par value $.01 per
share) outstanding as of July 31, 1999 was 114,407,028.
TABLE OF CONTENTS
PART I
Page
Item 1. Financial Statements . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(a) Liquidity and Capital Resources . . . . . 8
(b) Results of Operations . . . . . . . . . . 16
PART II
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. . . . . . . . . . . . . . . . . 18
(b) Reports on Form 8-K . . . . . . . . . . . 18
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 20
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Energy East Corporation
Consolidated Statements of Income - (Unaudited)
Three Months Six Months
Periods Ended June 30 1999 1998 1999 1998
(Thousands, except per share amounts)
Operating Revenues
Sales and Services . . . . . . . . . $507,927 $548,308 $1,162,365 $1,185,938
-------- -------- ---------- ----------
Operating Expenses
Fuel used in electricity generation. 18,272 55,080 74,756 114,172
Electricity purchased. . . . . . . . 184,871 164,355 333,665 310,566
Natural gas purchased. . . . . . . . 35,317 31,251 101,529 88,388
Other operating expenses . . . . . . 64,401 83,096 153,019 167,377
Maintenance. . . . . . . . . . . . . 19,811 27,748 45,524 59,697
Depreciation and amortization. . . . 538,473 48,405 593,805 96,782
Other taxes. . . . . . . . . . . . . 56,579 50,556 110,640 105,495
Gain on sale of generation assets. . (674,572) - (674,572) -
Writeoff of Nine Mile Point 2. . . . 69,930 - 69,930 -
------- ------- -------- --------
Total Operating Expenses. . . . . 313,082 460,491 808,296 942,477
------- ------- -------- --------
Operating Income. . . . . . . . . . . 194,845 87,817 354,069 243,461
Other (Income) and Deductions . . . . (13,678) 163 (14,360) 1,388
Interest Charges, Net . . . . . . . . 32,718 30,289 64,901 60,924
Preferred Stock Dividends of
Subsidiary.. . . . . . . . . . . . . 691 2,260 1,721 4,529
------- ------- -------- --------
Income Before Federal Income Taxes. . 175,114 55,105 301,807 176,620
Federal Income Taxes. . . . . . . . . 119,618 25,752 159,276 71,096
------- ------- -------- --------
Net Income. . . . . . . . . . . . . . $55,496 $29,353 $142,531 $105,524
======= ======= ======== ========
Earnings Per Share, basic and diluted $.48 $.23 $1.19 $.81
Dividends Paid Per Share. . . . . . . $.21 $.20 $.42 $.38
Average Shares Outstanding. . . . . . 116,623 128,699 119,763 130,746
Per share amounts and number of shares outstanding have been restated to
reflect the two-for-one common stock split effective April 1, 1999.
The notes on pages 6 and 7 are an integral part of the financial statements.
Item 1. Financial Statements (Cont'd)
Energy East Corporation
Consolidated Balance Sheets - (Unaudited)
June 30, Dec. 31,
1999 1998
(Thousands)
Assets
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . $1,291,845 $48,068
Special deposits . . . . . . . . . . . . . . . . . . . 911 4,729
Accounts receivable, net . . . . . . . . . . . . . . . 133,094 148,712
Fuel, at average cost. . . . . . . . . . . . . . . . . 9,504 44,643
Materials and supplies, at average cost. . . . . . . . 7,702 38,040
Prepayments. . . . . . . . . . . . . . . . . . . . . . 156,610 111,082
---------- ----------
Total Current Assets. . . . . . . . . . . . . . . . 1,599,666 395,274
Utility Plant, at Original Cost
Electric . . . . . . . . . . . . . . . . . . . . . . . 3,377,253 5,299,604
Natural gas. . . . . . . . . . . . . . . . . . . . . . 613,951 602,904
Common . . . . . . . . . . . . . . . . . . . . . . . . 138,771 144,043
---------- ----------
4,129,975 6,046,551
Less accumulated depreciation. . . . . . . . . . . . . 1,983,423 2,211,608
---------- ----------
Net Utility Plant in Service. . . . . . . . . . . . 2,146,552 3,834,943
Construction work in progress. . . . . . . . . . . . . 9,252 27,741
---------- ----------
Total Utility Plant . . . . . . . . . . . . . . . . 2,155,804 3,862,684
Other Property and Investments, Net . . . . . . . . . . 99,328 129,088
Regulatory and Other Assets
Regulatory assets
Unfunded future federal income taxes. . . . . . . . . 29,164 136,404
Unamortized debt expense. . . . . . . . . . . . . . . 69,320 71,530
Demand-side management program costs. . . . . . . . . 58,558 64,466
Environmental remediation costs . . . . . . . . . . . 58,800 60,600
Other . . . . . . . . . . . . . . . . . . . . . . . . 33,191 125,604
---------- ----------
Total regulatory assets . . . . . . . . . . . . . . 249,033 458,604
Other assets . . . . . . . . . . . . . . . . . . . . . 25,329 37,687
---------- ----------
Total Regulatory and Other Assets . . . . . . . . . 274,362 496,291
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . $4,129,160 $4,883,337
========== ==========
The notes on pages 6 and 7 are an integral part of the financial statements.
Item 1. Financial Statements (Cont'd)
Energy East Corporation
Consolidated Balance Sheets - (Unaudited)
June 30, Dec. 31,
Liabilities 1999 1998
(Thousands)
Current Liabilities
Current portion of long-term debt. . . . . . . . . . . $2,018 $31,077
Current portion of preferred stock of subsidiary . . . - 75,000
Commercial paper . . . . . . . . . . . . . . . . . . . - 78,300
Accounts payable and accrued liabilities . . . . . . . 117,311 116,582
Interest accrued . . . . . . . . . . . . . . . . . . . 19,017 19,556
Taxes accrued. . . . . . . . . . . . . . . . . . . . . 298,215 587
Accumulated deferred federal income tax, net . . . . . 29,391 10,029
Other. . . . . . . . . . . . . . . . . . . . . . . . . 61,835 82,143
---------- ----------
Total Current Liabilities . . . . . . . . . . . . . 527,787 413,274
Regulatory and Other Liabilities
Regulatory liabilities
Deferred income taxes . . . . . . . . . . . . . . . . 68,921 98,038
Deferred income taxes, unfunded future federal
income taxes . . . . . . . . . . . . . . . . . . . . 14,238 60,896
Other . . . . . . . . . . . . . . . . . . . . . . . . 22,968 42,182
---------- ----------
Total regulatory liabilities. . . . . . . . . . . . 106,127 201,116
Other liabilities
Deferred income taxes . . . . . . . . . . . . . . . . 215,920 765,592
Other postretirement benefits . . . . . . . . . . . . 151,862 137,681
Environmental remediation costs . . . . . . . . . . . 78,800 80,600
Other . . . . . . . . . . . . . . . . . . . . . . . . 90,687 82,028
---------- ----------
Total other liabilities . . . . . . . . . . . . . . 537,269 1,065,901
Long-term debt. . . . . . . . . . . . . . . . . . . . . 1,386,621 1,435,120
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . 2,557,804 3,115,411
Commitments . . . . . . . . . . . . . . . . . . . . . . - -
Preferred Stock of Subsidiary
Preferred stock redeemable solely at the
option of subsidiary. . . . . . . . . . . . . . . . . 10,131 29,440
Preferred stock subject to mandatory
redemption requirements . . . . . . . . . . . . . . . 25,000 25,000
Common Stock Equity
Common stock . . . . . . . . . . . . . . . . . . . . . 1,174 631
Capital in excess of par value . . . . . . . . . . . . 819,960 1,057,904
Retained earnings. . . . . . . . . . . . . . . . . . . 754,088 662,562
Treasury stock, at cost. . . . . . . . . . . . . . . . (38,997) (7,611)
---------- ----------
Total Common Stock Equity . . . . . . . . . . . . . 1,536,225 1,713,486
---------- ----------
Total Liabilities and Stockholders' Equity . . . . $4,129,160 $4,883,337
========== ==========
The notes on pages 6 and 7 are an integral part of the financial statements.
Item 1. Financial Statements (Cont'd)
Energy East Corporation
Consolidated Statements of Cash Flows - (Unaudited)
Six Months
Periods Ended June 30 1999 1998
(Thousands)
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . $142,531 $105,524
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization. . . . . . . . . . 593,805 96,782
Federal income taxes and investment tax credits
deferred, net. . . . . . . . . . . . . . . . . (444,342) (4,445)
Gain on sale of generation assets. . . . . . . . (674,572) -
Writeoff of Nine Mile Point 2. . . . . . . . . . 69,930 -
Changes in current operating assets and liabilities
Accounts receivable . . . . . . . . . . . . . . 15,618 38,121
Inventory. . . . . . . . . . . . . . . . . . . . 65,477 4,749
Prepayments. . . . . . . . . . . . . . . . . . . (45,528) (9,042)
Accounts payable and accrued liabilities . . . . 729 17,050
Taxes accrued. . . . . . . . . . . . . . . . . . 297,628 32,696
Other, net . . . . . . . . . . . . . . . . . . . . (16,629) 14,353
---------- --------
Net Cash Provided by Operating Activities . . . 4,647 295,788
---------- --------
Investing Activities
Sale of generation assets. . . . . . . . . . . . . 1,850,000 -
Utility plant additions. . . . . . . . . . . . . . (29,904) (76,303)
Other property and investments . . . . . . . . . . (10,829) 25,200
---------- --------
Net Cash Provided by (Used in)
Investing Activities. . . . . . . . . . . . . 1,809,267 (51,103)
---------- --------
Financing Activities
Repurchase of common stock . . . . . . . . . . . . (237,559) (135,359)
Treasury stock acquired, net . . . . . . . . . . . (31,386) -
Repayments of preferred stock and
first mortgage bonds . . . . . . . . . . . . . . (144,557) (30,000)
Long-term notes, net . . . . . . . . . . . . . . . (27,330) 9,580
Commercial paper, net. . . . . . . . . . . . . . . (78,300) 12,000
Dividends on common stock. . . . . . . . . . . . . (51,005) (49,432)
---------- --------
Net Cash Used in Financing Activities . . . . . (570,137) (193,211)
---------- --------
Net Increase in Cash and Cash Equivalents . . . . . 1,243,777 51,474
Cash and Cash Equivalents, Beginning of Period. . . 48,068 8,168
---------- --------
Cash and Cash Equivalents, End of Period. . . . . . $1,291,845 $59,642
========== ========
Supplemental Disclosure of Cash Flows Information
Cash paid during the period
Interest, net of amounts capitalized. . . . . . . $55,929 $52,553
Income taxes (includes $262,500 related to
gain on sale of generation assets). . . . . . . $320,422 $37,346
The notes on pages 6 and 7 are an integral part of the financial statements.
Item 1. Financial Statements (Cont'd)
Energy East Corporation
Consolidated Statements of Retained Earnings - (Unaudited)
Six Months
Periods ended June 30 1999 1998
(Thousands)
Balance, beginning of period. . . . . . . . . . $662,562 $568,844
Add net income. . . . . . . . . . . . . . . . . 142,531 105,524
Deduct dividends on common stock. . . . . . . . 51,005 49,432
-------- --------
Balance, end of period. . . . . . . . . . . . . $754,088 $624,936
======== ========
The notes on pages 6 and 7 are an integral part of the financial statements.
Item 1. Financial Statements (Cont'd)
Note 1. Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements
reflect all adjustments which are necessary, in the opinion of
management, for a fair presentation of our consolidated results for
the interim periods. All such adjustments, other than those
related to the sale of our coal-fired generation stations and the
writeoff of Nine Mile Point 2, are of a normal recurring nature.
The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
contained in our annual report for the year ended December 31,
1998. Due to the seasonal nature of our operations, financial
results for interim periods are not necessarily indicative of
trends for a 12-month period.
Note 2. Investment in Nine Mile Point nuclear generating
unit No. 2
We wrote off our entire 18% investment in Nine Mile Point 2
during the second quarter of 1999. We completed the sale of our
Homer City generation assets to Edison Mission Energy in March
1999, and the sale of our remaining coal-fired generation assets
to The AES Corporation in May 1999. The proceeds from the sale of
those assets, net of taxes and transaction costs, in excess of the
net book value, less funded deferred taxes, were used to write down
our investment in Nine Mile Point 2 by $384 million. This
treatment was in accordance with our restructuring plan approved by
the Public Service Commission of the State of New York in January
1998. We wrote down our investment an additional $104 million due
to the required writeoff of funded deferred taxes related to Nine
Mile Point 2. These writedowns are reflected in depreciation and
amortization for the second quarter of 1999.
We announced in June 1999 that we agreed to sell our 18%
interest in Nine Mile Point 2 to AmerGen Energy Company, a joint
venture of PECO Energy Company and British Energy. (See Item 2(a)
- - Energy Distribution, Nine Mile Point nuclear generating unit No.
2.) Based on the sale agreement, we wrote off $70 million, our
remaining investment in Nine Mile Point 2, in accordance with
Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of.
Note 3. Common Stock Split
In January 1999 we declared a two-for-one stock split on
common stock outstanding. Shareholders of record at the close of
business on March 12, 1999, were entitled to the shares effective
April 1, 1999. All references to shares outstanding and per share
information reflect the stock split.
Note 4. Segment Information
Selected financial information for each of our business
segments is presented in the following table. "Energy
Distribution" consists of our electricity distribution,
transmission and generation operations in New York and our natural
gas distribution, transportation and storage operations in New
York. "Other" includes our energy services businesses, natural gas
and propane air distribution operations outside of New York,
corporate assets and intersegment eliminations.
Energy
Three Months Ended Distribution Other Total
June 30, 1999
Operating Revenues $497,209 $10,718 $507,927
Net Income (Loss) $58,474 $(2,978) $55,496
June 30, 1998
Operating Revenues $540,412 $7,896 $548,308
Net Income $28,905 $448 $29,353
Six Months Ended
June 30, 1999
Operating Revenues $1,134,244 $28,121 $1,162,365
Net Income (Loss) $148,649 $(6,118) $142,531
June 30, 1998
Operating Revenues $1,167,644 $18,294 $1,185,938
Net Income (Loss) $106,650 $(1,126) $105,524
Identifiable Assets
June 30, 1999 $3,189,406 $939,754 $4,129,160
December 31, 1998 $4,807,657 $75,680 $4,883,337
Note 5. Reclassifications
Certain amounts have been reclassified on the consolidated
financial statements to conform with the 1999 presentation.
Item 2. Management's discussion and analysis of financial
condition and results of operations
(a) Liquidity and Capital Resources
Merger Agreements
Connecticut Energy Merger: On April 23, 1999, we signed a
definitive merger agreement with Connecticut Energy Corporation
(CNE) under which CNE will become one of our wholly-owned
subsidiaries. The transaction is valued at $617 million, including
the assumption of approximately $181 million of debt.
Under the agreement 50% of the common stock of CNE will be
converted into our common stock with a value of $42.00 per CNE
share, and 50% will be converted into $42.00 in cash per CNE share,
subject to restrictions on the minimum and maximum number of shares
to be issued. Shareholders will be able to specify the percentage
of the consideration they wish to receive in stock and in cash,
subject to proration. The transaction will be accounted for using
the purchase method of accounting.
The merger is subject to, among other things, the approvals of
CNE shareholders and various regulatory agencies, including the
Connecticut Department of Public Utility Control and the Securities
and Exchange Commission. We expect the transaction to close by
early 2000.
CMP Group Merger: On June 14, 1999, we signed a definitive merger
agreement with CMP Group, Inc. under which CMP Group will become
one of our wholly-owned subsidiaries. We will acquire all of the
common stock of CMP Group for $29.50 per share in cash. The
transaction has an equity market value of approximately $957
million based on approximately 32.4 million CMP Group common shares
outstanding. We will also assume approximately $271 million of CMP
Group preferred stock and long-term debt. The transaction will be
accounted for using the purchase method of accounting.
The merger is subject to, among other things, the approvals of
CMP Group shareholders and various regulatory agencies, including
the Maine Public Utilities Commission, the Securities and Exchange
Commission, the Federal Energy Regulatory Commission and the
Nuclear Regulatory Commission. We intend to register as a holding
company with the SEC under the Public Utility Holding Company Act
of 1935. We expect the transaction to close in the middle of the
year 2000.
CTG Resources Merger: On June 29, 1999, we signed a definitive
merger agreement with CTG Resources, Inc. under which CTG Resources
will become one of our wholly-owned subsidiaries. The transaction
values CTG Resources' common equity at approximately $355 million,
and we will assume approximately $220 million of CTG Resources'
long-term debt. The transaction will be accounted for using the
purchase method of accounting.
Under the agreement, 45% of the common stock of CTG Resources
will be converted into our common stock with a value of $41.00 per
CTG Resources share, and 55% will be converted into $41.00 in cash
per CTG Resources share, subject to restrictions on the minimum and
maximum number of shares to be issued. Shareholders will be able
to specify the percentage of the consideration they wish to receive
in stock and in cash, subject to proration.
The merger is subject to, among other things, the approvals of
CTG Resources shareholders and various regulatory agencies,
including the Connecticut Department of Public Utility Control and
the Securities and Exchange Commission. We expect the transaction
to close in the middle of the year 2000.
Notes Payable: We expect to issue long-term debt prior to the
closings of the merger transactions. The proceeds from the debt
issuance, along with the proceeds from the sale of our generation
assets and internally generated funds, will be used to help fund
the cash portion of the consideration and to help fund our ongoing
share repurchase program.
Energy Distribution
Sale of our Coal-fired Generation Assets: We accepted offers
totaling $1.85 billion from The AES Corporation and Edison Mission
Energy in August 1998 for our seven coal-fired stations and
associated assets and liabilities, which were placed up for auction
earlier in 1998. We completed the sale of our Homer City
generation assets to Edison Mission Energy in March 1999, and the
sale of our remaining coal-fired generation assets to AES in May
1999. (See Item 1 - Note 2 to the Consolidated Financial
Statements.)
Now that the sale of our coal-fired generation assets is
complete, approximately 60% of our power requirements will be
satisfied through generation from our nuclear and hydroelectric
stations and by purchases under long-term contracts from nonutility
generators and the New York Power Authority. For the remaining
power requirements we have assumed the risk of market prices that
are sometimes volatile, since we have capped the prices we can
charge customers.
We use electricity contracts to manage our exposure to
fluctuations in the cost of electricity. These contracts allow us
to fix margins on the majority of our retail electricity sales.
The cost or benefit of electricity contracts is included in the
cost of electricity purchased when the electricity is sold.
Nine Mile Point nuclear generating unit No. 2: We announced in
June 1999 that we agreed to sell our 18% interest in Nine Mile
Point 2 to AmerGen Energy Company, a joint venture of PECO Energy
Company and British Energy. In the same announcement, Niagara
Mohawk Power Corporation, the operator and 41% owner of Nine Mile
Point 2, announced the sale of its interest in Nine Mile Point 2 to
AmerGen. At closing, we will receive $27.9 million in proceeds
based on our 18% ownership share. (See Item 1 - Note 2 to the
Consolidated Financial Statements.) We may be entitled to
additional payments through 2012 under a financial sharing
agreement. A power purchase agreement with AmerGen requires us to
purchase 17.1% of all electricity from Nine Mile Point 2 at
negotiated prices for three years.
AmerGen will assume full responsibility for the
decommissioning of its ownership share of Nine Mile Point 2. The
decommissioning fund will be pre-funded to a fixed amount by the
sellers, with all potential costs above the fixed amount paid by
AmerGen. We expect the sale of Nine Mile Point 2 to be completed
early next year.
New York Power Pool Restructuring: The Federal Energy Regulatory
Commission issued Orders 888 and 889 in 1996 to foster the
development of competitive wholesale electricity markets by opening
up transmission services and to address the resulting stranded
costs. In subsequent orders, the FERC generally affirmed Orders
888 and 889. Various parties, including us, have appealed these
orders in the United States Court of Appeals for the D.C. Circuit.
In response to Order 888, the New York Power Pool members
submitted filings to the FERC proposing, among other things, to
restructure the power pool by establishing a New York Independent
System Operator and a New York State Reliability Council. In a
series of orders in June 1998, January 1999 and July 1999 the FERC
conditionally authorized the formation of the system operator and
reliability council and conditionally accepted the tariff and rates
applicable to transmission service, and energy, capacity and
ancillary services filed by the members. In February 1999 power
pool members also filed the necessary applications to transfer
control of transmission facilities to the system operator, which
the FERC accepted in April 1999. On July 29, 1999, the FERC
conditionally granted certain authorizations that would allow the
system operator to become operational on September 1, 1999, and
required an additional filing by the power pool members within 30
days to implement the restructuring proposal. We are currently
awaiting the FERC's acceptance of the remaining power pool member
filings. We do not expect the restructuring to have a material
adverse effect on our financial position or results of operations.
Electric Retail Access Program: Customers in certain sections of
our service territory were eligible to choose their electricity
supplier in mid-1998. All of our electricity customers were able
to choose their electricity supplier by August 1, 1999.
We are responsible for delivery of our customers' electricity
on our transmission and distribution system. Rates charged for use
of our transmission system are subject to FERC approval, while
rates for the use of our distribution system are subject to PSC
approval. The PSC approved our distribution rates in January 1998.
Our transmission rate case, which was filed with the FERC in March
1997, has not yet been approved.
On July 15, 1999, the PSC issued an Opinion and Order
Concerning Retail Access Credit and Customer Identification Issues.
This order addressed phase one unbundling issues related to our
retail access credit (the amount backed out of a customer's
transmission and distribution bill when that customer participates
in retail access), suppliers' obligations and customer
identification. As a result of the order, our retail access credit
was maintained at its current value, retail access suppliers are
responsible for energy and capacity for their own customers and we
may require a deposit from customers who are not able to provide
adequate identification. The PSC also concluded that costs for
line losses, installed reserves and most ancillary services are
being recovered through our delivery charge and are not part of the
retail access credit. We are currently developing our response to
this order and are unable to predict the effect of the order on our
financial position or results of operations.
Competitive Electric Metering: In May 1999 the PSC approved a plan
to open up to competition electric metering services for certain
customers in New York State. The services include installation and
maintenance of electric meters, meter reading and meter data
retrieval and storage. Competitive metering would initially be
available to customers with peak electricity requirements at any
given time of 50 kilowatts or more. Utilities will be required to
file unbundled metering tariffs by October 1, 1999, that identify
their metering costs as a component of existing electricity prices.
Utilities will continue their provider of last resort
responsibilities for metering. Stranded cost issues will be
handled in individual utility proceedings. We are currently unable
to predict the effect of this plan on our financial position or
results of operations.
Environmental Matters: Since we have completed the sale of our
coal-fired generation assets, we will no longer be subject to
certain regulation by the federal government and by state and local
governments with respect to certain environmental matters and
certain water quality, air quality and waste disposal requirements
applicable to the coal-fired generation assets. (See Form 10-K for
the fiscal year ended December 31, 1998, Item 1 - Business,
Environmental matters.)
Role of Natural Gas Local Distribution Companies: On November 3,
1998, the PSC issued a "Policy Statement Concerning the Future of
the Natural Gas Industry in New York State and Order Terminating
Capacity Assignment." The policy statement includes the PSC's
vision for furthering competition in the natural gas industry in
New York State. The PSC believes the most effective way to
establish a competitive gas market is for natural gas utilities to
exit the merchant function over a three to seven year period. The
PSC also established guidelines and began several proceedings
related to implementing its policy statement. We are participating
in each of the proceedings and continue to believe the competitive
marketplace should decide who will be the suppliers of natural gas.
In compliance with the PSC's Order, effective April 1, 1999,
we ceased assigning certain capacity costs to customers who switch
from fully bundled sales service to transportation service. Any
capacity costs that may be stranded as a result of terminating
capacity assignment will be recovered from all applicable
customers.
Other Matters
Year 2000 Readiness Disclosure
Many of our computer systems, which include mainframe systems
and special-purpose systems, refer to years in terms of their final
two digits only. Such systems may interpret the year 2000 as the
year 1900. If not corrected, those systems could cause us to,
among other things, experience energy delivery problems, report
inaccurate data or issue inaccurate bills.
We have been working diligently to address this problem by
reviewing all of our mainframe and special-purpose systems;
identifying potentially affected software, hardware, and date-
sensitive components, often referred to as embedded chips, of
various equipment; determining and taking appropriate corrective
action; and, when appropriate, testing our systems.
Our mainframe systems consist of the hardware and software
components of New York State Electric & Gas Corporation's
information technology systems. We believe we have identified,
taken appropriate corrective action and tested all of our mainframe
systems. We believe those systems are now able to process year
2000 and beyond transactions.
Our special-purpose systems consist of our non-information
technology systems and the information technology systems of our
subsidiaries other than NYSEG. We have identified approximately
6,000 items in our special-purpose systems that may be affected by
the Year 2000 problem. Items identified include software, hardware
and embedded chips in systems such as those that control the
acquisition and the delivery of electricity and natural gas to
customers and those in our communication systems. We believe we
have fixed, eliminated, replaced or found no problem with all of
the special-purpose items we have identified that affect our
electricity and natural gas delivery systems and our communication
systems.
Even though we believe we have taken corrective action with
respect to our own Year 2000 issues, the Year 2000 issue could
adversely affect us if there are items in our mainframe or special-
purpose systems that may be affected by the Year 2000 problem and
that we have not identified in our review of those systems. The
Year 2000 issue could also adversely affect us if third parties
such as suppliers, customers, neighboring or interconnected
utilities and other entities fail to correct any of their Year 2000
problems. We have contacted key third parties to determine the
status of their Year 2000 readiness programs. Many have responded
satisfactorily, some have not responded satisfactorily and some
have not responded at all. We are following up with key third
parties who have not responded satisfactorily or who have not
responded at all. We have developed contingency plans, some of
which are discussed below, for reasonably likely worst case
scenarios based upon an assumption that we and those third parties
will not be Year 2000 compliant.
We believe we have taken all necessary steps to address the
Year 2000 issue successfully. Through June 30, 1999, we have spent
approximately $11.6 million and expect to spend an additional $1.1
million on Year 2000 readiness including contingency plan
preparations. We believe this amount is adequate to address our
Year 2000 issues. These amounts are being expensed as incurred and
are being financed entirely with internally generated funds.
Addressing the Year 2000 issue has not caused us to delay any
significant information system projects.
As part of our normal business practice we have plans in place
for use during emergencies, some of which could arise from Year
2000 problems. We are also implementing an emergency preparedness
plan which will help us to address customer emergencies and
coordinate with other emergency service providers. Each of our 13
division offices will be open from 10:00 p.m. on December 31, 1999,
to 2:00 a.m. on January 1, 2000. NYSEG personnel will be available
to staff county emergency preparedness offices during this same
time period. Other customer contact sites will also be
established. Temporary local numbers will be established so
customers can contact us should long distance telephone service
fail. We have completed over 75 contingency plans to specifically
address reasonably likely worst case scenarios that could arise as
a result of the Year 2000 problem.
The contingency plans address, among other scenarios, the
interruption or failure of normal business activities or operations
such as a partial electrical and/or natural gas system shutdown.
If the interruption or failure is due to embedded chips in
equipment such as automatic control devices, our contingency plan
is to implement the normal system restoration procedures that we
utilize during emergencies. If the interruption or failure is due
to telecommunications not being available, we plan to use
alternative communication devices such as radio systems and
satellite phones. Another scenario addressed by our contingency
plans is the failure of our customer information system. Should
that occur, we plan to rely on customer information previously
stored and make the appropriate adjustment to each customer's next
bill after the system is restored.
We are dependent on others for our supply of natural gas. In
the event a supplier is not able to meet our needs, we plan to
purchase the needed amount of natural gas from one of our many
other suppliers on the same transmission line. Since the sale of
our coal-fired generation assets has been completed, we will be
buying from third parties, including nonutility generators and the
New York Power Authority, instead of producing the majority of the
electricity our customers need. If the electricity available in
our region is not adequate for all of the customers on our system,
we plan to operate at lower levels of power as outlined in our
established emergency procedures. Should our mainframe hardware be
disabled, we have a backup mainframe system that is capable of
operating all of our business systems. All of our contingency
plans are ready and have been tested.
The PSC issued an Order on October 30, 1998, adopting a July
1, 1999, deadline for New York utilities to complete their Year
2000 readiness programs for "mission critical" systems and for
contingency plans. Mission critical systems include those systems
that control the acquisition and the delivery of electricity and
natural gas to customers, emergency management systems and certain
electricity generation plants. We completed our Year 2000
readiness program for mission critical systems and for contingency
plans before the PSC's July 1, 1999, deadline.
Investing and Financing Activities
Investing Activities
Capital spending for the first six months of 1999 was $41
million, primarily for extension of energy distribution service and
necessary improvements to existing facilities. We estimate our
capital spending for 1999 will be about $140 million, and it is
expected to be paid for entirely with internally generated funds.
Financing Activities
On February 1, 1999, we redeemed, at par, $25 million of
NYSEG's 7.40% preferred stock and $50 million of NYSEG's adjustable
rate preferred stock.
On April 1, 1999, we purchased, at a discount, shares of the
following series of NYSEG's preferred stock: $7.2 million of
3.75%, $2.8 million of 4 1/2% (Series 1949), $1.4 million of 4.15%,
$4.8 million of 4.40%, and $3.1 million of 4.15% (Series 1954).
On April 1, 1999, the holders of a majority of the votes of
shares of NYSEG's serial preferred stock consented to increase the
amount of unsecured debt NYSEG may issue by up to an additional
$1.2 billion.
In June 1999 we redeemed, at a premium, $50 million of NYSEG's
7 5/8% Series first mortgage bonds.
We repurchased 10 million shares of our common stock during
the first six months of 1999.
Forward-looking Statements
This Form 10-Q contains certain forward-looking statements
that are based upon management s current expectations and
information that is currently available. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-
looking statements in certain circumstances. Whenever used in this
report, the words "estimate," "expect," "believe," or similar
expressions are intended to identify such forward-looking
statements.
In addition to the assumptions and other factors referred to
specifically in connection with such statements, factors that could
cause actual results to differ materially from those contemplated
in any forward-looking statements include, among others, the risk
that more Year 2000 problems may be found; the fact that despite
all of our efforts, there can be no assurances that all of our Year
2000 issues have been remedied; the fact that there can be no
assurances that all Year 2000 issues that could affect us can or
will be totally eliminated by our suppliers, customers, neighboring
or interconnected utilities and other entities; and the fact that
our assessment of the effects of Year 2000 issues are based, in
part, upon information received from our suppliers, customers,
neighboring or interconnected utilities and other entities, our
reasonable reliance upon this information and the risk that
inaccurate or incomplete information may have been supplied to us.
Some additional factors that could cause actual results to
differ materially from those contemplated in any forward-looking
statements include, among others, the deregulation and unbundling
of energy services; our ability to compete in the rapidly changing
and increasingly competitive electricity and natural gas utility
markets; our ability to control nonutility generator and other
costs; changes in fuel supply or cost and the success of our
strategies to satisfy our power requirements now that all of our
coal-fired generation assets have been sold; our ability to expand
our products and services, including our energy distribution
network in the Northeast; our ability to integrate the operations
of Connecticut Energy, CMP Group and CTG Resources with our
operations; the ability to obtain adequate and timely rate relief;
nuclear or environmental incidents; legal or administrative
proceedings; changes in the cost or availability of capital; growth
in the areas in which we are doing business; weather variations
affecting customer energy usage; and other considerations that may
be disclosed from time to time in our publicly disseminated
documents and filings. We undertake no obligation to publicly
update any forward-looking statements, whether as a result of new
information, future events or otherwise.
(b) Results of Operations
Three Months Ended June 30,
1999 1998 Change
(Thousands, except per share amounts)
Total Operating Revenues $507,927 $548,308 (7%)
Operating Income $194,845 $87,817 122%
Net Income $55,496 $29,353 89%
Average Shares Outstanding 116,623 128,699 (9%)
Earnings Per Share,
basic and diluted $.48 $.23 109%
Dividends Paid Per Share $.21 $.20 5%
Earnings per share increased 16 cents for the second quarter
of 1999, exclusive of the nonrecurring benefit from the sale of
our coal-fired generation assets and the writeoff of Nine Mile
Point 2. That increase was primarily driven by investment
income, fewer shares of common stock outstanding due to our share
repurchase program, higher retail electricity deliveries, which
were caused by warmer weather, and cost control efforts. Those
increases were partially offset by higher purchased power costs
and lower wholesale electricity deliveries due to the sale of our
coal-fired generation assets.
Six Months Ended June 30,
1999 1998 Change
(Thousands, except per share amounts)
Total Operating Revenues $1,162,365 $1,185,938 (2%)
Operating Income $354,069 $243,461 45%
Net Income $142,531 $105,524 35%
Average Shares Outstanding 119,763 130,746 (8%)
Earnings Per Share,
basic and diluted $1.19 $.81 47%
Dividends Paid Per Share $.42 $.38 11%
Earnings per share increased 26 cents for the first half of
1999, exclusive of the nonrecurring benefit from the sale of our
coal-fired generation assets and the writeoff of Nine Mile Point
2. That increase was primarily due to investment income, fewer
shares of common stock outstanding due to our share repurchase
program, higher retail electricity and natural gas deliveries,
which were caused by weather, and cost control efforts. Those
increases were partially offset by higher purchased power costs
and lower wholesale electricity deliveries due to the sale of our
generation assets and electricity price reductions provided to
customers.
Operating Results by Business Segment
Energy Distribution Three Months Ended June 30,
1999 1998 Change
(Thousands)
Retail Deliveries
Megawatt-hours 3,255 3,130 4%
Dekatherms 9,953 9,305 7%
Operating Revenues $497,209 $540,412 (8%)
Operating Expenses $295,944 $450,210 (34%)
Operating Income $201,265 $90,202 124%
Operating revenues decreased $43 million for the quarter
primarily due to lower wholesale electricity deliveries due to
the sale of our generation assets. That decrease was partially
offset by higher retail electricity deliveries caused by warmer
weather this quarter.
Operating expenses decreased $50 million after excluding the
nonrecurring benefit from the sale of our coal-fired generation
assets and the writeoff of Nine Mile Point 2. Operating expenses
were reduced primarily by lower fuel costs and cost control
efforts, partially offset by higher purchased power costs.
Six Months Ended June 30,
1999 1998 Change
(Thousands)
Retail Deliveries
Megawatt-hours 6,879 6,520 6%
Dekatherms 34,840 30,584 14%
Operating Revenues $1,134,244 $1,167,644 (3%)
Operating Expenses $770,322 $920,301 (16%)
Operating Income $363,922 $247,343 47%
Operating revenues decreased $33 million for the six months
primarily due to lower wholesale electricity deliveries due to
the sale of our generation assets, and lower retail electricity
and natural gas prices, partially offset by higher retail
electricity and natural gas deliveries caused by weather.
Operating expenses decreased $46 million for the six months
after excluding the nonrecurring benefit from the sale of our
coal-fired generation assets and the writeoff of Nine Mile Point
2. Operating expenses were reduced primarily by lower fuel costs
and cost control efforts, partially offset by higher purchased
power costs.
PART II - OTHER INFORM ATION
Item 1. Legal Proceedings
(a) By letter dated January 21, 1992, the New York State
Department of Environmental Conservation notified us that we had
been identified as a potentially responsible party at the Peter
Cooper Corporation's Landfill Site (Peter Cooper Site) in the
village of Gowanda, New York. The Peter Cooper Site is listed on
the National Priorities List and the New York State Registry.
Three other PRPs were identified in the NYSDEC letter. We
believe that remediation costs at the Peter Cooper Site might
rise to $16 million. By letter dated May 12, 1992, we notified
the NYSDEC that we believed we had no responsibility for the
alleged contamination at the Peter Cooper Site, and we declined
to conduct remediation or finance remediation costs.
On July 2, 1996, the U.S. Environmental Protection Agency
notified us of its concern regarding the stream bank erosion
along a portion of the Peter Cooper Site that is located on our
property. Without admitting to any liability or responsibility,
on October 24, 1996, we entered into an Order on Consent with the
EPA to stabilize the stream bank. This project was completed in
January 1997 at a cost of $120,000. By letter dated June 30,
1999, the EPA notified us and 18 other companies that we are PRPs
with respect to the Peter Cooper Site, and offered us the
opportunity to perform a remedial investigation and feasibility
study at the site. Although we are still evaluating the June 30
letter, we believe that the ultimate disposition of this matter
will not have a material adverse effect on our financial position
or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K
Three reports on Form 8-K, dated April 23, 1999, June 14,
1999, and June 29, 1999, were filed to report certain information
under Item 5, "Other Events."
Signature
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ENERGY EAST CORPORATION
(Registrant)
By /s/ Wesley W. von Schack
Wesley W. von Schack
Chairman and Chief Financial Officer
Date: August 10, 1999
EXHIBIT INDEX
(a)(1) The following exhibits are delivered with this report:
Exhibit No.
(A)10-37 - Employment Agreement dated April 23, 1999, for W. W.
von Schack.
(A)10-38 - Employment Agreement dated April 23, 1999, for K. M.
Jasinski.
(A)10-39 - Amended and Restated Employment Agreement dated April
23, 1999, for M. I. German.
27 - Financial Data Schedule.
(a)(2) The following exhibits are incorporated herein by
reference:
Exhibit No. Filed in As Exhibit No.
2-2 - Agreement and Plan of Merger, dated as
of April 23, 1999, by and among Connecticut
Energy Corporation, the Company and Merger
Co., as amended by the First Amendment to
Agreement and Plan of Merger, dated as of
July 15, 1999 - Registration No. 333-83437 2.1
2-3 - Agreement and Plan of Merger, dated as
of June 14, 1999, by and among CMP Group,
Inc., the Company and EE Merger Corp. -
Company's Current Report on Form 8-K
dated June 14, 1999 - File No. 1-14766 2
2-4 - Agreement and Plan of Merger, dated as of
June 29, 1999, by and among CTG Resources,
Inc., the Company and Oak Merger Co. -
Company's Current Report on Form 8-K dated
June 29, 1999 - File No. 1-14766 2
____________________________
(A) Management contract or compensatory plan or arrangement.