SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
September 30, 1999
For the quarterly period ended. . . . . . . .. . . . . . . . . .
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from. . . . . . . .to. . . . . . . . .
1-14766
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 October 31, 1999, was 112,389,228.
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 5. Other Information. . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. . . . . . . . . . . . . . . . . 19
(b) Reports on Form 8-K . . . . . . . . . . . 19
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 21
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Energy East Corporation
Consolidated Statements of Income - (Unaudited)
Three Months Nine Months
Periods Ended September 30 1999 1998 1999 1998
(Thousands, except per share amounts)
Operating Revenues
Sales and Services . . . . . . . . . $571,020 $698,705 $1,733,385 $1,884,643
Operating Expenses
Electricity purchased and fuel
used in generation . . . . . . . . 283,883 338,577 692,304 763,315
Natural gas purchased. . . . . . . . 27,939 23,536 129,468 111,924
Other operating expenses . . . . . . 70,931 95,089 223,950 262,467
Maintenance. . . . . . . . . . . . . 20,160 25,467 65,683 85,164
Depreciation and amortization. . . . 28,668 45,889 622,473 142,671
Other taxes. . . . . . . . . . . . . 41,399 53,121 152,039 158,616
Gain on sale of generation assets. . - - (674,572) -
Writeoff of Nine Mile Point 2. . . . - - 69,930 -
------- ------- --------- ---------
Total Operating Expenses. . . . . 472,980 581,679 1,281,275 1,524,157
------- ------- --------- ---------
Operating Income. . . . . . . . . . . 98,040 117,026 452,110 360,486
Other (Income) and Deductions . . . . (15,706) 4,248 (30,065) 5,635
Interest Charges, Net . . . . . . . . 37,397 30,481 102,298 91,405
Preferred Stock Dividends of
Subsidiary.. . . . . . . . . . . . . 493 2,351 2,214 6,880
------- ------- -------- --------
Income Before Federal Income Taxes. . 75,856 79,946 377,663 256,566
Federal Income Taxes. . . . . . . . . 28,975 34,896 188,251 105,992
------- ------- -------- --------
Net Income. . . . . . . . . . . . . . $46,881 $45,050 $189,412 $150,574
======= ======= ======== ========
Earnings Per Share, basic and diluted $.41 $.35 $1.61 $1.16
Dividends Paid Per Share. . . . . . . $.21 $.20 $.63 $.58
Average Shares Outstanding. . . . . . 114,204 127,335 117,890 129,597
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)
Sep. 30, Dec. 31,
1999 1998
(Thousands)
Assets
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . .$1,166,241 $48,068
Special deposits . . . . . . . . . . . . . . . . . . . 1,193 4,729
Accounts receivable, net . . . . . . . . . . . . . . . 121,977 148,712
Fuel, at average cost. . . . . . . . . . . . . . . . . 21,418 44,643
Materials and supplies, at average cost. . . . . . . . 8,197 38,040
Prepayments. . . . . . . . . . . . . . . . . . . . . . 171,227 111,082
---------- ----------
Total Current Assets. . . . . . . . . . . . . . . . 1,490,253 395,274
Utility Plant, at Original Cost
Electric . . . . . . . . . . . . . . . . . . . . . . . 3,384,189 5,299,604
Natural gas . . . . . . . . . . . . . . . . . . . . . . 620,134 602,904
Common . . . . . . . . . . . . . . . . . . . . . . . . 139,912 144,043
---------- ----------
4,144,235 6,046,551
Less accumulated depreciation. . . . . . . . . . . . . 2,008,301 2,211,608
---------- ----------
Net Utility Plant in Service . . . . . . . . . . . . 2,135,934 3,834,943
Construction work in progress . . . . . . . . . . . . . 9,889 27,741
---------- ----------
Total Utility Plant. . . . . . . . . . . . . . . . . 2,145,823 3,862,684
Other Property and Investments, Net . . . . . . . . . . 112,100 129,088
Regulatory and Other Assets
Regulatory assets
Unfunded future federal income taxes. . . . . . . . . 28,750 136,404
Unamortized loss on debt . . . . . . . . . . . . . . 68,074 71,530
Demand-side management program costs. . . . . . . . . 55,603 64,466
Environmental remediation costs . . . . . . . . . . . 59,100 60,600
Other . . . . . . . . . . . . . . . . . . . . . . . . 29,069 125,604
---------- ----------
Total regulatory assets. . . . . . . . . . . . . . . . 240,596 458,604
Other assets . . . . . . . . . . . . . . . . . . . . . 24,804 37,687
---------- ----------
Total Regulatory and Other Assets . . . . . . . . . 265,400 496,291
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . .$4,013,576 $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)
Sep. 30, Dec. 31,
Liabilities 1999 1998
(Thousands)
Current Liabilities
Current portion of long-term debt. . . . . . . . . . . $1,687 $31,077
Current portion of preferred stock of subsidiary . . . - 75,000
Commercial paper . . . . . . . . . . . . . . . . . . . - 78,300
Accounts payable and accrued liabilities . . . . . . . 107,886 116,582
Interest accrued . . . . . . . . . . . . . . . . . . . 33,925 19,556
Taxes accrued. . . . . . . . . . . . . . . . . . . . . 184,139 587
Accumulated deferred federal income tax, net . . . . . 35,592 10,029
Other. . . . . . . . . . . . . . . . . . . . . . . . . 86,067 82,143
---------- ----------
Total Current Liabilities . . . . . . . . . . . . . 449,296 413,274
Regulatory and Other Liabilities
Regulatory liabilities
Deferred income taxes . . . . . . . . . . . . . . . . 66,292 98,038
Deferred income taxes, unfunded future federal
income taxes . . . . . . . . . . . . . . . . . . . . 14,073 60,896
Other . . . . . . . . . . . . . . . . . . . . . . . . 22,434 42,182
---------- ----------
Total regulatory liabilities . . . . . . . . . . . . . 102,799 201,116
Other liabilities
Deferred income taxes . . . . . . . . . . . . . . . . 217,177 765,592
Other postretirement benefits . . . . . . . . . . . . 156,858 137,681
Environmental remediation costs . . . . . . . . . . . 79,100 80,600
Other . . . . . . . . . . . . . . . . . . . . . . . . 95,602 82,028
---------- ----------
Total other liabilities. . . . . . . . . . . . . . . . 548,737 1,065,901
Long-term debt. . . . . . . . . . . . . . . . . . . . . 1,387,407 1,435,120
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . 2,488,239 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 . . . . . . . . . . . . . . . . . . . . . 1,147 631
Capital in excess of par value . . . . . . . . . . . . 751,173 1,057,904
Retained earnings. . . . . . . . . . . . . . . . . . . 776,883 662,562
Treasury stock, at cost. . . . . . . . . . . . . . . . (38,997) (7,611)
---------- ----------
Total Common Stock Equity . . . . . . . . . . . . . 1,490,206 1,713,486
---------- ----------
Total Liabilities and Stockholders' Equity . . . .$4,013,576 $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)
Nine Months
Periods Ended September 30 1999 1998
(Thousands)
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . $189,412 $150,574
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization. . . . . . . . . . 622,473 142,671
Federal income taxes and investment tax credits
deferred, net. . . . . . . . . . . . . . . . . (440,208) 2,414
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 . . . . . . . . . . . . . . 26,735 55,249
Inventory. . . . . . . . . . . . . . . . . . . . 53,068 960
Prepayments. . . . . . . . . . . . . . . . . . . (60,145) (41,015)
Accounts payable and accrued liabilities . . . . (8,696) (1,641)
Taxes accrued. . . . . . . . . . . . . . . . . . 183,552 35,994
Interest accrued . . . . . . . . . . . . . . . . 14,369 14,862
Other, net . . . . . . . . . . . . . . . . . . . . 15,705 35,923
---------- --------
Net Cash (Used in) Provided by
Operating Activities. . . . . . . . . . . . . (8,377) 395,991
---------- --------
Investing Activities
Sale of generation assets. . . . . . . . . . . . . 1,850,000 -
Utility plant additions. . . . . . . . . . . . . . (46,689) (100,073)
Other property and investments . . . . . . . . . . (13,383) 24,934
---------- --------
Net Cash Provided by (Used in)
Investing Activities. . . . . . . . . . . . . 1,789,928 (75,139)
---------- --------
Financing Activities
Repurchase of common stock . . . . . . . . . . . . (306,772) (166,595)
Treasury stock acquired, net . . . . . . . . . . . (31,386) -
Repayments of preferred stock of subsidiary and
first mortgage bonds, including net premiums . . (144,557) (60,600)
Long-term notes, net . . . . . . . . . . . . . . . (27,272) 7,201
Commercial paper, net. . . . . . . . . . . . . . . (78,300) 1,900
Dividends on common stock. . . . . . . . . . . . . (75,091) (74,974)
---------- --------
Net Cash Used in Financing Activities . . . . . (663,378) (293,068)
---------- --------
Net Increase in Cash and Cash Equivalents . . . . . 1,118,173 27,784
Cash and Cash Equivalents, Beginning of Period. . . 48,068 8,168
---------- --------
Cash and Cash Equivalents, End of Period. . . . . . $1,166,241 $35,952
========== ========
Supplemental Disclosure of Cash Flows Information
Cash paid during the period
Interest, net of amounts capitalized. . . . . . . $63,226 $62,777
Income taxes (includes $400,537 related to
gain on sale of generation assets). . . . . . . $460,931 $62,349
The notes on pages 6 and 7 are an integral part of the financial statements.
Item 1. Financial Statements (Cont'd)
Energy East Corporation
Consolidated Statements of Retained Earnings - (Unaudited)
Nine Months
Periods ended September 30 1999 1998
(Thousands)
Balance, beginning of period. . . . . . . . . . $662,562 $568,844
Add net income. . . . . . . . . . . . . . . . . 189,412 150,574
Deduct dividends on common stock. . . . . . . . 75,091 74,974
-------- --------
Balance, end of period. . . . . . . . . . . . . $776,883 $644,444
======== ========
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 the company's consolidated
results for the interim periods. All such adjustments, other than
those related to the sale of the company's coal-fired generation
assets and the writeoff of Nine Mile Point 2, are of a normal
recurring nature. These financial statements consolidate the
company's majority-owned subsidiaries after eliminating all
intercompany transactions. The unaudited consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes contained in the company's annual
report for the year ended December 31, 1998. Due to the seasonal
nature of the company's 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
The company wrote off its entire 18% investment in Nine Mile
Point 2 during the second quarter of 1999. The company completed
the sale of its interest in the Homer City generation assets to
Edison Mission Energy in March 1999, and the sale of its remaining
coal-fired generation assets to The AES Corporation in May 1999.
The proceeds from the sale of those assets, net of taxes and
transaction costs, in excess of the net book value, less funded
deferred taxes, were used to write down the company's 18%
investment in Nine Mile Point 2 by $384 million. This treatment is
in accordance with the company's restructuring plan approved by the
Public Service Commission of the State of New York in January 1998.
The company wrote down its investment an additional $104 million
due to the required writeoff of funded deferred taxes related to
Nine Mile Point 2. These writedowns are reflected in depreciation
and amortization for the second quarter of 1999.
The company announced in June 1999 that it has agreed to sell
its 18% interest in Nine Mile Point 2 to AmerGen Energy Company, a
joint venture of PECO Energy Company and British Energy. (See Item
2(a) - Energy Distribution, Nine Mile Point nuclear generating unit
No. 2.) Based on the sale agreement, the company wrote off $70
million, its remaining investment in Nine Mile Point 2 after the
writedowns discussed above, in accordance with Statement of
Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of.
Note 3. Common Stock Split
In January 1999 the company 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 the company's
business segments is presented in the following table. The
company's "Energy Distribution" segment consists of its electricity
distribution, transmission and generation operations and its
natural gas distribution, transportation and storage operations in
New York. "Other" includes the company's 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
September 30, 1999
Operating Revenues $558,958 $12,062 $571,020
Net Income $36,884 $9,997 $46,881
September 30, 1998
Operating Revenues $692,231 $6,474 $698,705
Net Income (Loss) $47,017 $(1,967) $45,050
Nine Months Ended
September 30, 1999
Operating Revenues $1,693,202 $40,183 $1,733,385
Net Income $185,533 $3,879 $189,412
September 30, 1998
Operating Revenues $1,859,875 $24,768 $1,884,643
Net Income (Loss) $153,667 $(3,093) $150,574
Identifiable Assets
September 30, 1999 $3,116,862 $896,714 $4,013,576
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
(See the company's Form 10-Q for the quarter ended June 30, 1999,
Item 2(a) - Liquidity and Capital Resources - Energy Distribution.)
Merger Agreements
The company has entered into merger agreements with four other
companies in the Northeast under which each will become a wholly-
owned subsidiary of the company. All four transactions will be
accounted for using the purchase method.
Connecticut Energy Merger: On April 23, 1999, the company signed a
definitive merger agreement with Connecticut Energy Corporation
(CNE). 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 the company's 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 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. On September 14, 1999, the CNE
shareholders approved the merger agreement. Filings with the
Connecticut DPUC and the SEC have been made. The company expects
the transaction to close early in the first quarter of 2000.
CMP Group Merger: On June 14, 1999, the company signed a
definitive merger agreement with CMP Group, Inc. The company 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. The company will also assume
approximately $271 million of CMP Group preferred stock and long-
term debt.
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. The company intends to register as
a holding company with the SEC under the Public Utility Holding
Company Act of 1935. On October 7, 1999, the CMP Group
shareholders approved the merger agreement. Filings with the Maine
PUC, the SEC, the FERC and the NRC have been made. The company
expects the transaction to close by the end of the second quarter
of 2000.
CTG Resources Merger: On June 29, 1999, the company signed a
definitive merger agreement with CTG Resources, Inc. The
transaction values CTG Resources' common equity at approximately
$355 million, and the company will assume approximately $220
million of CTG Resources' long-term debt.
Under the agreement, 45% of the common stock of CTG Resources
will be converted into the company's 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 SEC. On October 18, 1999, the CTG Resources shareholders
approved the merger agreement. Filings with the Connecticut DPUC
and the SEC have been made. The company expects the transaction to
close by the end of the second quarter of 2000.
Berkshire Energy Resources Merger: On November 9, 1999, the
company signed a definitive merger agreement with Berkshire Energy
Resources (Berkshire). The company will acquire all of the common
stock of Berkshire for $38.00 per share in cash. The transaction
has an equity market value of approximately $96 million based on
approximately 2.5 million Berkshire common shares outstanding. The
company will also assume approximately $40 million of Berkshire
preferred stock and long-term debt.
The merger is subject to, among other things, the approvals of
Berkshire shareholders and the SEC. The company expects the
transaction to close by the end of the second quarter of 2000.
Notes Payable: The company expects 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 its
generation assets and internally generated funds, will be used to
help fund the cash portion of the consideration and to help fund
the company's ongoing share repurchase program.
Energy Distribution
Nine Mile Point nuclear generating unit No. 2: The company
announced in June 1999 that it has agreed to sell its 18% interest
in Nine Mile Point 2 to AmerGen Energy Company, a joint venture of
PECO Energy Company and British Energy. In the same announcement,
Niagara Mohawk Power Corporation announced the sale of Nine Mile
Point 1 and its 41% interest in Nine Mile Point 2 to AmerGen. At
closing, the company will receive $27.9 million in proceeds based
on its 18% ownership share. (See Item 1 - Note 2 to the
Consolidated Financial Statements.) The company may be entitled to
additional payments through 2012 under a financial sharing
agreement. A power purchase agreement with AmerGen requires the
company to purchase 17.1% of all electricity from Nine Mile Point 2
at negotiated prices for three years.
AmerGen will assume full responsibility for the
decommissioning of its ownership share of Nine Mile Point 2. The
decommissioning fund will be pre-funded to a fixed amount by the
sellers, with all potential costs above the fixed amount paid by
AmerGen. The company expects the sale of Nine Mile Point 2 to be
completed in the second quarter of 2000.
Rochester Gas & Electric Corporation, a Nine Mile Point 2
cotenant, has expressed interest in possibly exercising its right
of first refusal on the sale of the plant. The company cannot
predict the likelihood of this event or its impact on the sale of
Nine Mile Point 2.
Issues have been raised recently regarding worsening
performance at the Nine Mile Point units, which are operated by
Niagara Mohawk. On September 30, 1999, the Nuclear Regulatory
Commission issued a Plant Performance Review on the Nine Mile Point
units. The NRC stated that it will increase its scrutiny of the
operation of the Nine Mile Point nuclear units over the next six
months as a result of the worsening performance of those units and
weaknesses in areas such as plant maintenance, work planning and
scheduling, and engineering support.
Niagara Mohawk has announced that significant management
changes will be made at Nine Mile Point, including the hiring of
PECO Energy for managerial advice, because performance of the units
has not reached expected levels. The company supports these
efforts to improve performance at Nine Mile Point 2 and continues
to believe that the sale of the plants to AmerGen, a proven
operator of nuclear plants, is in the best interests of customers
and the company's shareholders. If the operating performance of
Nine Mile Point 2 continues to deteriorate and it becomes apparent
that significant expenditures would be required to improve
performance, the company intends to take whatever actions it
believes are appropriate to protect the interests of customers and
shareholders, including support for the potential shutdown of the
unit.
New York Power Pool Restructuring: The Federal Energy Regulatory
Commission issued Orders 888 and 889 in 1996 to foster the
development of competitive wholesale electricity markets by opening
up transmission services and to address the resulting stranded
costs. In subsequent orders, the FERC generally affirmed Orders
888 and 889. Various parties, including the company, have appealed
these orders in the United States Court of Appeals for the D.C.
Circuit.
In response to Order 888, the New York Power Pool members
submitted filings to the FERC proposing, among other things, to
restructure the power pool by establishing a New York Independent
System Operator and a New York State Reliability Council. In a
series of orders in 1998 and 1999 the FERC conditionally authorized
the formation of the system operator and reliability council and
conditionally accepted the tariffs and rates applicable to
transmission service, and the formation of energy and ancillary
services markets administered by the system operator. Each of New
York's major transmission owners is expected to turn over certain
operational control over the power system to the system operator.
The system operator is anticipated to begin operating on November
18, 1999. The system operator's staff has completed final market
testing of software and market mechanisms. The company does not
expect the restructuring to have a material adverse effect on its
financial position or results of operations.
Electric Restructuring Plan: The company's restructuring plan,
which included a five-year electric price cap, was approved by the
PSC, with minor modifications, in January 1998.
The company submitted a tariff filing in compliance with the
restructuring plan in January 1999. On July 15, 1999, and
September 17, 1999, the PSC issued orders relating to the
compliance filing. Those orders addressed issues related to the
company's retail access credit (the amount backed out of a
customer's bill when that customer participates in retail access),
suppliers' obligations and customer identification.
As a result of the orders, the company's retail access credit
was maintained at its current value, it was determined that retail
access suppliers are responsible for energy, capacity and some
ancillary services for their own customers and the company may
require a deposit from customers who fail to provide adequate
identification. The PSC also concluded that costs for line losses,
installed reserves and certain ancillary services are being
recovered through the company's delivery charge and are not part of
the retail access credit. The company submitted filings in
compliance with the orders on July 29, 1999, and October 7, 1999.
The company is currently unable to predict the effect of the orders
on its financial position or results of operations.
Competitive Electric Metering: On June 16, 1999, the PSC issued an
Order Providing for Competitive Metering, which calls for opening
up competition for electric metering services among certain
customers in New York State. The services include installation and
maintenance of electric meters, meter reading and meter data
retrieval and storage. Competitive metering would initially be
available to eligible customers with electricity requirements of 50
kilowatts or more.
Utilities were initially required to file unbundled metering
tariffs by October 1, 1999, to identify their metering costs as a
component of existing electricity prices. The company, along with
three other utility companies in New York State, filed a petition
for rehearing on this order in July 1999. The petition for
rehearing was denied in September 1999. The company filed its
tariffs on November 1, 1999, to become effective on December 1,
1999, for customers who choose competitive metering providers. PSC
Staff and interested parties are collaborating to develop
procedures for implementing competitive metering.
Utilities will continue their provider of last resort
responsibilities for metering. Stranded cost issues will be
handled in individual utility proceedings. The company is
currently unable to predict the effect of this order on its
financial position or results of operations.
Auction of NUG Contract Rights: The company continues to seek ways
to provide relief to its customers from the onerous nonutility
generator (NUG) contracts it was ordered to sign by the PSC. On
November 4, 1999, the company announced that it intends to sell -
through competitive bidding - 470 megawatts (mw) of natural gas-
fired energy and generating capacity under three of NYSEG's power
purchase agreements with NUGs.
The contracts are with Saranac Power Partners (240 mw) in
Plattsburgh, Lockport Energy Associates (175 mw) in Lockport and
Indeck Energy Services of Silver Springs (55 mw). The agreements
expire on June 21, 2009, October 8, 2007, and April 11, 2006,
respectively. Over the remaining terms of the contracts it is
estimated that NYSEG's customers will pay over $2 billion dollars
above the competitive market price. The sale, expected to be
completed March 1, 2000, will be conditioned on obtaining
satisfactory regulatory approval.
Other Matters
Year 2000 Readiness Disclosure
Many of the company's computer systems, which include
mainframe systems and special-purpose systems, refer to years in
terms of their final two digits only. Such systems may interpret
the year 2000 as the year 1900. If not corrected, those systems
could cause the company to, among other things, experience energy
delivery problems, report inaccurate data or issue inaccurate
bills.
The company has been working diligently to address this
problem by reviewing all of its mainframe and special-purpose
systems; identifying potentially affected software, hardware, and
date-sensitive components, often referred to as embedded chips, of
various equipment; determining and taking appropriate corrective
action; and, when appropriate, testing its systems.
The company's mainframe systems consist of the hardware and
software components of New York State Electric & Gas Corporation's
information technology systems. The company believes it has
identified, taken appropriate corrective action and tested all of
its mainframe systems. The company believes those systems are now
able to process year 2000 and beyond transactions.
The company's special-purpose systems consist of its non-
information technology systems and the information technology
systems of its subsidiaries other than NYSEG. The company has
identified approximately 6,000 items in its special-purpose systems
that may be affected by the Year 2000 problem. Items identified
include software, hardware and embedded chips in systems such as
those that control the acquisition and the delivery of electricity
and natural gas to customers and those in its communication
systems. The company believes it has fixed, eliminated, replaced
or found no problem with all of the special-purpose items it has
identified that affect its electricity and natural gas delivery
systems and its communication systems.
Even though the company believes it has taken corrective
action with respect to its own Year 2000 issues, the Year 2000
issue could adversely affect it if there are items in its mainframe
or special-purpose systems that may be affected by the Year 2000
problem and that it has not identified in its review of those
systems. The Year 2000 issue could also adversely affect the
company if third parties such as suppliers, customers, neighboring
or interconnected utilities and other entities fail to correct any
of their Year 2000 problems. The company has contacted key third
parties to determine the status of their Year 2000 readiness
programs. The company is following up with key third parties who
have not completed their Year 2000 readiness programs. The company
has developed contingency plans, some of which are discussed below,
for reasonably likely worst case scenarios based upon an assumption
that it and the key third parties contacted will not be Year 2000
compliant.
The company believes it has taken all necessary steps to
address the Year 2000 issue successfully. Through September 30,
1999, the company has spent approximately $11.8 million and expects
to spend an additional $0.9 million on Year 2000 readiness
including contingency plan preparations. The company believes this
amount is adequate to address its Year 2000 issues. These amounts
are being expensed as incurred and are being financed entirely with
internally generated funds. Addressing the Year 2000 issue has not
caused the company to delay any significant information system
projects.
As part of its normal business practice the company has plans
in place for use during emergencies, some of which could arise from
Year 2000 problems. The company is also implementing an emergency
preparedness plan which will help it to address customer
emergencies and coordinate with other emergency service providers.
Each of the company's 13 division offices will be open from 10:00
p.m. on December 31, 1999, to 2:00 a.m. on January 1, 2000. 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 the company should long
distance telephone service fail. The company has completed over 75
contingency plans to specifically address reasonably likely worst
case scenarios that could arise as a result of the Year 2000
problem. Certain NYSEG personnel have been designated to work from
10:00 p.m. on December 31, 1999, to 2:00 a.m. on January 1, 2000,
and have been trained to execute the contingency plans. Each plan
is ready and has been tested. In addition, an integrated system-
wide test of the plans was successfully conducted using the
designated personnel.
The contingency plans address, among other scenarios, the
interruption or failure of normal business activities or operations
such as a partial electrical and/or natural gas system shutdown.
If the interruption or failure is due to embedded chips in
equipment such as automatic control devices, the company's
contingency plan is to implement the normal system restoration
procedures that it utilizes during emergencies. If the
interruption or failure is due to telecommunications not being
available, the company plans to use alternative communication
devices such as radio systems and satellite phones. Another
scenario addressed by the company's contingency plans is the
failure of its customer information system. Should that occur, the
company plans to rely on customer information previously stored and
make the appropriate adjustment to each customer's next bill after
the system is restored.
The company is dependent on others for its supply of natural
gas. In the event a supplier is not able to meet the company's
needs, it plans to purchase the needed amount of natural gas from
one of its many other suppliers on the same transmission line.
Since the sale of its coal-fired generation assets has been
completed, the company will be buying from third parties, including
nonutility generators and the New York Power Authority, instead of
producing the majority of the electricity its customers need. If
the electricity available in its region is not adequate for all of
the customers on its system, the company plans to operate at lower
levels of power as outlined in its established emergency
procedures. Should its mainframe hardware be disabled, it has a
backup mainframe system that is capable of operating all of its
business systems.
The PSC issued an Order on October 30, 1998, adopting a July
1, 1999, deadline for New York utilities to complete their Year
2000 readiness programs for "mission critical" systems and for
contingency plans. Mission critical systems include those systems
that control the acquisition and the delivery of electricity and
natural gas to customers, emergency management systems and certain
electricity generation plants. The company completed its Year 2000
readiness program for mission critical systems and for contingency
plans before the PSC's July 1, 1999, deadline.
Investing and Financing Activities
Investing Activities
Capital spending for the first nine months of 1999 was $60
million, primarily for extension of energy distribution service and
necessary improvements to existing facilities. The company's
capital spending for 1999 is estimated to be about $100 million,
and is expected to be paid for entirely with internally generated
funds.
Financing Activities
On February 1, 1999, the company redeemed, at par, $25 million
of NYSEG's 7.40% Series preferred stock and $50 million of NYSEG's
adjustable rate preferred stock.
On April 1, 1999, the company 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 the company redeemed, at a premium, $50 million
of NYSEG's 7 5/8% Series first mortgage bonds.
The company repurchased 12.7 million shares of its common
stock during the nine months ended September 30, 1999.
In November 1999 the company agreed to purchase, on the open
market, at premiums, $77 million of NYSEG's 9 7/8% Series first
mortgage bonds due May 1, 2020, and $77 million of NYSEG's 9 7/8%
Series first mortgage bonds due November 1, 2020. Those purchases
will be financed with the issuance of Floating-rate Unsecured
Notes. The company will incur a $27 million charge in the fourth
quarter of 1999 as a result of the purchase of the bonds.
The company plans to redeem, at a premium, $25 million of
NYSEG's 6.30% Series preferred stock in December 1999.
Forward-looking Statements
This Form 10-Q contains certain forward-looking statements
that are based upon management s current expectations and
information that is currently available. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-
looking statements in certain circumstances. Whenever used in this
report, the words "estimate," "expect," "believe," or similar
expressions are intended to identify such forward-looking
statements.
In addition to the assumptions and other factors referred to
specifically in connection with such statements, factors that could
cause actual results to differ materially from those contemplated
in any forward-looking statements include, among others, the risk
that more Year 2000 problems may be found; the fact that despite
all of the company's efforts, there can be no assurances that all
of its Year 2000 issues have been remedied; the fact that there can
be no assurances that all Year 2000 issues that could affect the
company can or will be totally eliminated by its suppliers,
customers, neighboring or interconnected utilities and other
entities; and the fact that its assessment of the effects of Year
2000 issues are based, in part, upon information received from its
suppliers, customers, neighboring or interconnected utilities and
other entities, its reasonable reliance upon this information and
the risk that inaccurate or incomplete information may have been
supplied to it.
Some additional factors that could cause actual results to
differ materially from those contemplated in any forward-looking
statements include, among others, the deregulation and unbundling
of energy services; the company's ability to compete in the rapidly
changing and increasingly competitive electricity and natural gas
utility markets; its ability to control nonutility generator and
other costs; changes in fuel supply or cost and the success of its
strategies to satisfy its power requirements now that all of its
coal-fired generation assets have been sold; its ability to expand
its products and services, including its energy distribution
network in the Northeast; its ability to integrate the operations
of Connecticut Energy, CMP Group and CTG Resources with its
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 it is doing business; weather variations
affecting customer energy usage; and other considerations that may
be disclosed from time to time in its publicly disseminated
documents and filings. The company undertakes no obligation to
publicly update any forward-looking statements, whether as a result
of new information, future events or otherwise.
(b) Results of Operations
Three Months Ended September 30,
1999 1998 Change
(Thousands, except per share amounts)
Operating Revenues $571,020 $698,705 (18%)
Operating Income $98,040 $117,026 (16%)
Net Income $46,881 $45,050 4%
Average Common
Shares Outstanding 114,204 127,335 (10%)
Earnings Per Share,
basic and diluted $.41 $.35 17%
Dividends Paid Per Share $.21 $.20 5%
The company's earnings per share increased six cents for the
third quarter of 1999, the first quarter that fully reflects the
sale of its coal-fired generation assets. Without the plants,
there was less power to sell, and consequently lower wholesale
electricity revenues. The company also had to purchase more
electricity to meet retail customers' needs. The company has
realized interest income on the net proceeds from the sale.
The combined effect of those items was lower operating
revenues and operating income, but higher net income for the
quarter. Higher retail electricity deliveries driven by economic
development and increased cooling load, higher transmission
wheeling revenues, cost control efforts and fewer shares
outstanding due to the share repurchase program added to earnings
per share for the quarter. Those increases were partially offset
by electricity price reductions given to customers.
Nine Months Ended September 30,
1999 1998 Change
(Thousands, except per share amounts)
Operating Revenues $1,733,385 $1,884,643 (8%)
Operating Income $452,110 $360,486 25%
Net Income $189,412 $150,574 26%
Average Common
Shares Outstanding 117,890 129,597 (9%)
Earnings Per Share,
basic and diluted $1.61 $1.16 39%
Dividends Paid Per Share $.63 $.58 9%
Earnings per share for the nine months increased $.45,
including $.12 for the nonrecurring benefit from the sale of the
company's coal-fired generation assets and the writeoff of Nine
Mile Point 2. The company had less power to sell without the
plants, resulting in lower wholesale electricity revenues for the
nine months, and also had to purchase more electricity to meet
retail customers' needs.
Earnings per share increased for the nine months primarily
due to interest income realized on the net proceeds from the sale
of the generation assets, fewer shares outstanding due to the
share repurchase program, higher transmission wheeling revenues,
cost control efforts and higher retail electricity and natural
gas deliveries caused by economic development and weather. Those
increases were partially offset by electricity price reductions
given to customers.
Operating Results by Business Segment
Energy Distribution Three Months Ended September 30,
1999 1998 Change
(Thousands)
Retail Deliveries
Megawatt-hours 3,512 3,432 2%
Dekatherms 7,047 6,794 4%
Operating Revenues $558,958 $692,231 (19%)
Operating Expenses $461,493 $572,201 (19%)
Operating Income $97,465 $120,030 (19%)
Operating revenues decreased $133 million for the third
quarter, the first quarter that fully reflects the sale of the
generation assets. That decrease is primarily due to lower
wholesale electricity deliveries because without its plants the
company had less power to sell. Electricity price reductions
given to customers also reduced revenues. Those decreases were
partially offset by higher retail electricity deliveries, driven
by economic development and increased cooling load, and higher
transmission wheeling revenue.
Operating expenses decreased $111 million for the quarter
primarily due to lower fuel and other costs associated with the
generation assets that were sold and cost control efforts. Those
decreases were partially offset by increased purchases of
electricity to meet retail customers' needs.
Nine Months Ended September 30,
1999 1998 Change
(Thousands)
Retail Deliveries
Megawatt-hours 10,391 9,952 4%
Dekatherms 41,887 37,378 12%
Operating Revenues $1,693,202 $1,859,875 (9%)
Operating Expenses $1,231,815 $1,492,502 (17%)
Operating Income $461,387 $367,373 26%
Operating revenues for the nine months decreased $167
million primarily due to lower wholesale electricity deliveries
because without its coal-fired plants the company had less power
to sell. Electricity price reductions given to customers and
lower natural gas prices also reduced revenues. Those decreases
were partially offset by higher transmission wheeling revenues
and higher retail electricity and natural gas deliveries caused
by economic development and weather.
Operating expenses decreased $157 million for the nine
months after excluding the nonrecurring benefit from the sale of
the company's coal-fired generation assets and the writeoff of
Nine Mile Point 2. That decrease was primarily due to lower fuel
and other costs associated with the generation assets that were
sold and cost control efforts. Those decreases were partially
offset by increased purchases of electricity to meet retail
customers' needs.
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 the company
that it had been identified as a potentially responsible party at
the Peter Cooper Corporation's Landfill Site (Peter Cooper Site)
in the village of Gowanda, New York. The Peter Cooper Site is
listed on the National Priorities List and the New York State
Registry. Three other PRPs were identified in the NYSDEC letter.
The company believes that remediation costs at the Peter Cooper
Site might rise to $16 million. By letter dated May 12, 1992,
the company notified the NYSDEC that it believed it had no
responsibility for the alleged contamination at the Peter Cooper
Site, and declined to conduct remediation or finance remediation
costs.
On July 2, 1996, the U.S. Environmental Protection Agency
notified the company of its concern regarding the stream bank
erosion along a portion of the Peter Cooper Site that is located
on the company's property. Without admitting to any liability or
responsibility, on October 24, 1996, the company entered into an
Order on Consent with the EPA to stabilize the stream bank. This
project was completed in January 1997 at a cost of $120,000. By
letter dated June 30, 1999, the EPA notified the company and 18
other companies that they are PRPs with respect to the Peter
Cooper Site, and offered them the opportunity to perform a
remedial investigation and feasibility study at the site. Along
with approximately 12 other companies, the company indicated to
the EPA its willingness to consider performing the study for a
portion of the Peter Cooper site. Although the company is still
discussing the possibility of performing the study with the EPA
and the other parties, it believes that the ultimate disposition
of this matter will not have a material adverse effect on its
financial position or results of operations.
Item 5. Other Information
The company received a letter dated October 12, 1999, from
the Office of the Attorney General of New York State alleging
that the company may have constructed and operated major
modifications to certain emission sources at the Goudey and
Greenidge generating stations, which it formerly owned, without
obtaining the required prevention of significant deterioration of
new source review pre-construction permits. The Goudey and
Greenidge plants were sold to AES in May 1999. The letter
requested that the company and AES provide the Attorney General's
Office with a large number of documents relating to this
allegation.
The company is reviewing its files for documents relating to
the Attorney General's request. The company believes it has
complied with the applicable rules and regulations and there is
no basis for the Attorney General's allegation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
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: November 12, 1999
EXHIBIT INDEX
(a) The following exhibits are delivered with this report:
Exhibit No.
2 - Agreement and Plan of Merger, dated as of November 9,
1999, by and among Berkshire Energy Resources, Energy
East Corporation and Mountain Merger LLC.
(A)10-40 - Annual Executive Incentive Plan.
27 - Financial Data Schedule.
99 - Press Release, dated November 10, 1999, relating to
Energy East Corporation's acquisition of Berkshire
Energy Resources.
________________________________
(A) Management contract or compensatory plan or arrangement.