ML17056B862

Rochester Gas & Electric Corp Annual Rept 1991

ML17056B862
Person / Time
Site:	Nine Mile Point
Issue date:	12/31/1991
From:	Kober R ROCHESTER GAS & ELECTRIC CORP.
To:
Shared Package
ML17056B860	List: ML17056B861 ML17056B862 ML17056B863 ML17056B864 ML20098D326 NMP1L0667, Forwards Niagara Mohawk Power Corp Annual Rept 1991, Rochester Gas & Electric Corp Annual Rept 1991, New York State Electric & Gas Corp 1991 Annual Rept, Central Hudson 1991 Annual Rept & Lilco 1991 Annual Rept
References
NUDOCS 9205280195
Download: ML17056B862 (56)

Text

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RG&E SERvrcE AIBA/BtrsrNEss The Company supplies electric and gas service wholly withinthe State ofNew York,and is engaged in the production, transmission, distribution and sale ofthese services in a nine-county area centering around the CityofRochester.

The Company's territory, which has a population ofapproximately 920,000, is well diversified among residential, commercial and indus-trial customers. In addition to the CityofRochester, which is the third largest cityand a major industrial center in the State, itincludes a large and prosperous farming area.

Rochester CONTENTS Highlights Letter to Shareholders Customer Satisfaction and the Bottom Line Management's Discussion and Analysis New Appointment Financial Reports Directors and Oflicers l2 27 28 52 Investor Information Inside Back Cover

WHERE THE 1991 REVENUE DOLL A R CA M E FROM AND HOW IT WAS USED 45(t Residential (25'lectric, 20'as) 260 Commercial (21< Electric, 5e Gas) 18'ndustrial (17(t Electric, 1(t Gas) 8(t Other (6(t Electric, 2c Gas) 3(t Electric Sales to Other Utilities 17(t Taxes 17c Other Operations 15(t Purchased Gas 150 Wages and Benefits 11C Electric Fuel and Purchased Electricity 10'epreciation &Amortization 8e Interest 7e Dividends &Reinvested Earnings FIN ANCIAL HIGHLIGHTS I99I l990 Change FINANCIALDATA(Dollars ln thousands)

Operating revenues: Electric Gas Operating expenses Operating income Net income Earnings applicable to common stock Rate ofreturn on average common equity COMMONSTOCK DATA Weighted average number ofshares outstanding (thousands)

Per common share:

Earnings Dividends Book Value (year end)

Year-end market price OPERATING DATA SaleS (thousands)

Kilowatt-hours to customers Kilowatt-hours to other utilities Therms ofgas sold and transported Customers (year end)

Electric Gas Construction expenditures, less allowance forfunds uSed during COnStruCtiOn (thousands)

Emplo ees ear end)

$594,395

$236,496

$713,473

$ 117,418

$ 59,881

$ 53,856 9.29%

$61 7,542

$235,728

$728,51 1

$ 124,759

$ 57,997

$ 51,034 8.60%

31,794 31,293

$ 1.60

$ 1.62

$ 18.41

$23.25

$ 1.72

$ 1.56

$ 18.42

$ 19.50 6,447,377 6,368,944 1,034,370 1/16/79 470,938 460,750 331,242 264,844 328,895 261,917

$ 126,776 2,759

$ 124,057 2,755 4

2 6

(3)

(5)

(7)

(7) 4 19 I

(21) 2 (2)

ttocbester Gas anti Electric Corporation TO OUR SHAREHOLDERS Roger W. Kober Chairman ofthe Board, President and Chief Executive Ofhcer l~~

magine RG8cE receiving checks from each ofits customers with"thank you" written on the bottom. Getting 343,000 notes ofappreciation sounds unlikely, I admit. But nonetheless, that's the spirit ofour goal. To earn the appreciation ofallofour customers.

Here's the point ofallofthis. Nothing is as important to RG8cE as satisfied customers.

It's that simple. That's why 1991 saw the redoubling ofour efforts and the renewing of our commitment to achieving the highest possible levels ofcustomer satisfaction.

To accomplish that objective, we'e unveil-ing a bright vision for the future. Itincludes simplification, instillinga new feeling ofcom-petitiveness, streamlining ofoperations, and eliminating layers ofbureaucracy. And most of all, rededicating our efforts and renewing our commitment to customer satisfaction.

Allofthis is outlined in our brand new Corporate Business Plan, the culmination of more than a year ofintense study, research, discussion and debate. Specifics ofthis plan follow.But first, a look at the events ofthe past year willhelp show why this new plan is so critical to our continued success up the road.

THE STORM On Sunday, March 3, 1991, the worst natural disaster in New YorkState's history began. During this ice storm, two thirds ofour 330,000 electric customers were affected by power outages. Nearly halfofour electric dis-tribution system was damaged or destroyed.

Afterone week, we had restored power to half ofthe customers affected. Atthe end of 13 days, all were back in power.

Rochester Gas anti Electric Corporation While thestorm was the worst in our history, I believe itbrought out our best. I stand by our assessment that our people and our mutual aid crews put forth the finest restora-tion efforts on behalfof our customers.

In our self-assessment process, we felt there were some shortcomings and announced those findings at our 1991 annual meeting in May. The fullreport was released withour pledge to improve our capability for damage assessment and forproviding customer information in the form ofa new storm response plan. That plan, developed in conjunction with local oflicials and emergency planning agencies, was delivered ahead of schedule to the Public Service Commission (PSC).

RETIREMENT Another unexpected event was the retire-ment ofour former chairman and chief executive officer for health reasons. Harry G.

Saddock, who rose to the top ofthis company over his 4 I-year career, has guided RG8cE through many diAicultyears.

I have assumed the duties ofthe chairman ofthe board, president, and chiefexecutive oflicer. While Harry willbe missed, we'l benefit from his active participation on our board, just as we'e profited from his leadership in the past.

Our fuel procurement audit question was resolved in 1991. The PSC audited our fuel pur-chasing practices for the years 1978 to 1989.

Although we believe the purchases were sound and prudent, we ended lengthy pro-ceedings and negotiations by agreeing to a settlement with the PSC. This avoids litigation and we willrefund $ 10 millionto electric cus-tomers over a 12-month period beginning in 1992. The settlement reduced 1991 fourth quarter per-share earnings by 21 cents.

REVENUES AND SALES Although total revenues of$853 million reflected an increase of$22 millionover 1990, the weather, which was 8.4 percent warmer than normal, restricted growth in revenues and unit sales. Electric kilowatt-hour unit sales to customers rose slightlyin 1991 by 1.2 percent from the previous year due to a strong third quarter spurred by air condition-ing sales and the addition of2,347 new electric customers. Electric sales to other utilities were down 21.4 percent because oflower New York Power Pool requirements and a reduction in contract sales. Total therms ofnatural gas sold and transported were up 2.2 percent over 1990, but were hampered by unseasonably mild weather during the heating months. The addition of2,927 new gas customers during 1991 added to the increase in therm sales.

EARNINGS, DIVIDENDS AND STOCK PRICE Earnings per common share were

$ 1.60, down from $ 1.72 in 1990. The reported per-share earnings reflect the fuel procurement settlement write-offof21 cents in the fourth quarter. Lost revenues associated with the ice storm also reduced earnings per share by an estimated 11 cents, including carrying costs on deferred storm restoration costs.

We maintained our stated objective of achieving a common stock dividend payout of between 8.5 and 9.0 percent ofbook value. On December 19, 1991, the board ofdirectors authorized a one-and-a-half cent increase in quarterly dividends from 40.5 cents to 42 cents per common share, effective with the January 1992 payment. Our common stock hitseveral 52-week highs during the year and reached

$23.25 by year's end, up 19 percent from the 1990 year-end market price of $ 19.50.

Rochester Gas and Electric Corporation T 0 0 V R S H A R E H 0 L D E R S continued RATES In July 1991 we were authorized additional revenues in a rate proceeding before the PSC.

We were allowed an opportunity to earn an additional $33.1 millionannually in electric revenues and $ 1.1 millionin gas revenues. The PSC ruled that $4 millionofthe electric revenue authorization is subject to refund if we did not submit an acceptable interim storm emergency plan by year's end. We submitted the plan on October 30, and are confident that the plan satisfies the requirement.

In August we filed foradditional revenue increases to become effective inJuly of 1992.

We are seeking $38.2 millionin annual electric revenues and $ 15.1 millionin gas revenues. In this rate case, we are seeking fullrecovery of the estimated $36.4 millioncost ofthe ice storm to be amortized over a period ofyears.

The PSC staff an some intervenors have been critical ofour performance during the ice storm and are seeking to eliminate part or all ofthe storm cost from the case.

As I said before, I believe the physical response in the restoration ofpower was remarkable under the circumstances. However, we have no way ofpredicting the outcome ofthe treatment ofthe storm costs in the pending rate case.

I personally announced the latest rate filing to news media on August 2, 1991 because I

wanted to make our company's rededication to customer satisfaction absolutely clear. I also promised that we would attempt to minimize future rate increases by controlling as many costs as possible. Our success in meeting this goal depends on the fulfillmentofour new Corporate Business Plan, as well as on watching expenses.

ELECTRIC OPERATIONS Our power plants continued to operate at high eIIiciency levels. The Ginna nuclear power plant that supplies about halfofour electric customers'equirements operated 86 percent ofthe time in 1991, and had a capacity factor of 84 percent for the year. Both ofthose measures are above the national average forcomparable nuclear plants. Our coal-fired units once again achieved excellent operating records. Russell Station had an availability factor of90 percent and a capacity factor of62 percent. Beebee Station achieved factors of88 percent and 68 percent, respectively, all above the national average.

InJune 1991 the Nuclear Regulatory Commission (NRC) removed the Nine Mile Two nuclear power plant in which we own a 14 percent share from its watch list which cites nuclear plants that require improvement in some operating areas. The NRC concluded that the plant had demonstrated sustained improvement in performance. Also in 1991, the NRC's assessment oflicensee performance noted overall improvement.

The Nine MileTwo plant is operated by Niagara Mohawk Power Corporation. An interim operating agreement, however, has established a council composed ofRG@E and other non-operating owners to oversee man-agement ofthe plant.

GAS OPERATIONS InJune 1991 we received permission from the PSC to form a wholly-owned subsidiary that would acquire a 20 percent ownership in the Empire State Pipeline Project. This project proposes to construct a natural gas supply pipeline running between Grand Island near Niagara Falls, New York, and Syracuse, New York.

There are two petitions forrehearings placed by intervenors before the PSC. This could delay the project. More important yet is a decision pending from the Canadian National Energy Board on whether or not they will reverse an early denial to construct a pipeline extension to the Niagara River.

Rochester Gas and Electric Corporation The pipeline would offer us an alternative gas supply and could benefit gas customers by helping ensure competitive pricing. Atthe same time, an ownership in the pipeline is expected to contribute to revenues.

DEMANDSIDE MANAGEMENT We are making great progress with energy management programs that promote improved energy eAiciency on our customers'art.

Our major promotional campaign began in 1992, and includes advertising, direct mail and exhibits. These materials willprovide useful information and incentives to the resi-dential, commercial, industrial, and agricul-tural customers who can best take advantage ofthem.

These energy efficiency guidelines, called the RG&E E.Z. Saver Programs, are being intro-duced by a fictional character named E.Z.

Saver. In commercials on television and radio, newspaper ads, and in printed materials, he willbe telling customers about the programs we are making available, and how RG&E can become their partner in helping them become more energy eAicient. The success ofthese programs can delay the purchase or construc-tion ofnew, expensive energy options in the near future.

THE RG8tE CORPORATE BUSINESS PLAN In 1991 we arrived at new crossroads.

Signs were pointing to dramatic changes in the industry. Recognizing these markers, we'e prepared a new vision, set new goals, and made strategic plans to meet the future.

Our corporate vision fortomorrow is based on a proud tradition ofservice to our cus-tomers, innovation, commitment to our employees, and active participation in our community. Our firstpriorityis customer satis-faction earned by providing safe, reliable, envi-ronmentally responsible, cost-eAicient energy and service. But we need to keep working to improve our performance until itbecomes the standard ofexcellence against which other utilitieswillbe measured.

While traditions serve as our foundation, we'e poised to take advantage ofevery oppor-tunitypossible resulting from new technology, regulatory changes, and competition. These forces are transforming our industry, making itessential for RG&E to take a proactive approach. That's why we'e staying at the fore-frontofdevelopments, becoming more customer-focused, competitive, and market-driven than ever before.

How do we bring this vision to life?

Through a five-year venture concentrating on fivecritical areas: customer service, price of product, safety, employee achievement, and public acceptance. When we reach our goals in these areas, we willhave achieved our customer satisfaction goal, as well. And customer satisfaction is the only sure way to improve our financial performance.

In the followingpages, we'l describe this important new plan and how itcontributes to turning our vision into reality.

Roger W. Kober Chairman ofthe Board, President and ChiefExecutive Officer February 3, 1992

Roctsester Gas and Electric Corporation CUSTQMER SATISFAGTIQN AND THE BQTToM LINE Demand Side Management's EZ. Saver offersincentiveson energy-efficient lighting.

G&E's new Corporate Business Plan is complex, but simple in purpose.

CUSTOMER SATISFACTION is the sole purpose. While RG&.E is not unique in focusing on this purpose many companies today list customer satisfaction as paramount in their plans we may be singled out as one where senior man-agement has personally and unanimously endorsed the effort in writing.

The Plan is not one that was created overnight. The completion ofthe corporate plan document in late 1991 was the culmination ofmore than a year ofintense study, research, discussion and debate.

Nor is the Plan by any means a rigid, unbending document. As we proceed through the Plan's five-year projected time frame, we willmeasure progress often and alter our strate-gies as necessary to reach the ultimate goals.

To construct a workable plan, the company's senior management agreed to a set of shared values that willguide the overall effort. Those shared values are posted promi-nently in the planning document.

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The Savingpower analysis continues to show residential cus-tomers how they can stay cotnfortable with money-saving energy measures.

gap<'emand Side Management programs areintroduced bya fictionalcharacter named E.Z. Saver.

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I The Hyatt Regency Hotel, destined to become a dramatic landmarkin downtown Rochester, will also become energy egcient thanks to the cooperative eJJ'orts ofits owners, developer, design ftrmand RG6iE's Demand Side Management Nev Construction program.

Rochester Gas atttt Electric Corporatlott C V S T 0 M E R SATISFACTION A N D THE BOTTOM L I N E continued RG@E linemen oper live, graphicillustrationsof hazards to avoid around electric linesin the newly opened LiveLinefacility.

~ INTEGRITYWe must be honest and straightforward in our statements and actions.

~ COMPETENCEWe must fullyunderstand the consequences ofour actions.

~ SAFETYWe must protect the health and well-being ofour community and our employees.

~ ENVIRONMENTALRESPONSIBILITYWe must act to preserve the quality ofthe air, water and land that we share withour community.

~ CITIZENSHIPWe must be involved with our community and informed about local issues and concerns.

~ EFFICIENCYWe must support the wise use ofresources in our operations and in the use ofour products and services.

~ COMPLIANCEWITHLAWSANDREGULATIONSWe must act in ways that conform with public mandates as expressed in law and regulation.

There are five major components ofthe new Plan and each has a specific set ofgoals along with performance indicators. The firstobjective is CUSTOMER SERVICE, and covers the wide spectrum ofactivities that relate to our day-to-day dealings withour consumers.

I Within the objectives are strategies. With regard to customer service, the strategies include measuring our performance against certain standards. We must understand what they want; what is of most value to them and what is ofleast value. Customers should

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have a single point ofcontact when dealing with the company and, thrOugh traCking CuStOmer tranSaCtiOnS, We WillrOutinely aSSeSS Audtet)cesftotnall age how well we are doing.

We willassess performance not only with our external cus-tomers, but the internal ones as well who are served by our service departments. Promoting energy efficiency and energy-saving incen-tive programs for customers is also a strategy ofthe customer service goal.

PRICE OF PRODUCT is another objective. We want to limitthe increase in unit price ofour products and services so that our prices are less than those ofour competitors.

Strategies for this objective include better examination ofour competition and improved cost effectiveness.

SAFETY is another objective, and strategies there call for development ofannual health and safety programs for employees and improved public safety awareness.

EMPLOYEEACHIEVEMENTis an objective that has the goal ofattaining a high level ofemployee productivity, innovation and satisfaction. Strategies include reallocation of human resources to better fitsome employees'alents and skills with the job. Incentive-based compensation programs willbe created and there is a move to decrease the layers ofmanagement in the organization forbetter effectiveness. The strategies willbring

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o iso School children youth groups, firefighters, police oglcels, constrt lc-lion workers and employ-ees are some ofthe many audiences who haveseen the 45-minute LiveLine demonstration. When LiveLineis not in usefor the public, theindoor areais usedforelectric and gas training.

Rocbes(er Gas and Electric Corporal(on C V S T 0 M E R S AT I S F A C T I 0 N A N D T H E B OT T 0 M L i N E continued 10 The student-centered and teacher-empowered "InConcert with tire Environment"program, funded byRGB, allows students to examine their home energy usage and recycling practices. It provides alternative energy-saving options that not onlysaveon utilitybills, but help preserve the environ-ment as well.

more decision-making opportunities to employees and promote a stronger sense ofpar-ticipation in the management ofthe company.

PUBLICACCEPTANCE is the fifthobjective and itseeks to improve the public per-ception ofthe company. Strategies involve implementation ofnew, valuable community programs relating to our business, establishing an environmental excellence program and identifying the company's actions with the public interest.

These are the major components ofthe Business Plan. As investors you may have noticed the absence ofan objective you think should be there-FINANCIALPERFOR-MANCE.

In fact, FINANCIALPERFORMANCE is an objective and part ofthe written Plan, but itis separated from the actions in the Plan themselves. We believe ifthe five objectives are achieved, a better financial performance willfollowas a natural result.

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And, ifthe objectives are achieved, itwillalso followthat we willhave achieved our ultimate goal ofa high level ofCUSTOMER SATISFACTION.That's what the Plan is about, and that is our commitment.

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Speeding up response time throughfnster com-municntions by use of FAXmachinesinstnlledin Con)pany vehiclesis one ofthe many employee suggestionsimplem anted in l99l. Customer and Company energyfacilities nre pinpointedfrom mnps that are miles awayfrom job locations.

Rochester Gas and Electrtc Corporatlott MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS l2 he followingis Management's assessment ofsignificant factors which have affected the Company's financial condition and operating results.

MARCH 1991 ICE STORM On March 3 and 4, 1991 the Cityof Rochester, New Yorkand surrounding counties were hit by a severe ice storm which was the worst storm in the history ofthe Company's service territory. ltis estimated that storm damage to the Company's facilities and equipment caused about 206,000 ofthe Company's 330,000 electric customers to lose electric power. Company crews, in addition to crews from other utilities, worked steadily under adverse conditions to restore service to customers during the days followingthe storm. Due to the severity ofthe storm and resultant damage to Company facilities, power was not restored to all customers until March 16. Many ofthe Company's customers who use natural gas for heating their resi-dences were unable to use their gas furnaces due to the loss ofelectric power.

As a result ofthe storm, the Company also lost significant electric and gas revenues during early March. The Company estimates that the loss ofrevenues reduced earnings per common share by eleven cents ($.11), includ-ing carrying costs, for the calendar year 1991.

The Company has incurred incremental storm damage repair costs ofapproximately

$36.4 million,all ofwhich the Company believes to be prudent and, therefore, recover-able in rates and none ofwhich is reim-bursable through insurance coverage. This amount is currently reflected as a deferred debit on the Company's balance sheet. The Company estimates approximately 20 percent ofthese deferred costs are related to capital improvements, with operating and mainte-nance expenses comprising the balance.

The Company is currently seeking approval from the New York State Public Service Commission (PSC) in its pending rate case for recovery ofdeferred ice storm costs over a period ofyears. Various parties are opposing recovery ofthese costs. Additional details of this request are discussed under Rate Base and Regulatory Policies and in Note 10 ofthe Notes to Financial Statements.

NINE MILETWO The Nine MileTwo nuclear power plant was constructed and is being operated by Niagara Mohawk Power Corporation (Niagara) near Oswego, New York. The Company has a 14 percent ownership in this 1,080,000 kilowatt nuclear generating unit (the Unitor Nine MileTwo).

On March 14, 1991 the PSC issued an Order regarding a settlement agreement (the 1990 Settlement Agreement) among the Nine Mile Two Owners, the PSC Staff, and other inter-venors resolving all open ratemaking issues with respect to the construction ofthe Unit and its operation through January 19, 1990.

Under the provisions ofthe 1990 Settlement Agreement, a Nine MileTwo commercial oper-ation date ofApril5, 1988 has been recognized by the PSC with respect to the rates and accounts ofthe Company. Accordingly, final accounting entries reflecting recognition ofthe 1990 Settlement Agreement in conformity with the Uniform Systems ofAccounts ofthe PSC were made in the firstquarter of 1991 increasing electric utilityplant together with a corresponding increase in accumulated depre-ciation. The 1990 Settlement Agreement also provides that any settlement or award, in excess oflegal costs, received by the Company from litigation against contractors and suppli-ers used during the construction ofNine Mile Two, be shared equally between the Company and its electric customers. In addition, the 1990 Settlement Agreement required the

Rocbesler Gas and Electric Corporarforr Company to refund to its electric customers

$2.9 millionand such amount was applied as a credit against fuel costs incurred by these cus-tomers over essentially a three-month period beginning in May 1991.

Asupplemental agreement to the 1990 Settlement Agreement (the 1991 Supple-mental Agreement) was negotiated by the Nine MileTwo cotenants, PSC Staff, and other parties and is expected to receive final PSC approval in early 1992. The 1991 Supplemental Agreement establishes for each cotenant an allowed level ofoperating and maintenance expenses forratemaking purposes through December 31, 1992. Included are those expenses associated with the Unit's second refueling outage, scheduled to commence in late February 1992.

InJune 1991, the Nuclear Regulatory Commission (NRC) announced that Nine Mile Two had demonstrated sustained improve-ment in performance and, therefore, would no longer be listed among plants requiring close monitoring by it. Similarly, the spring 1991 NRC systematic assessment oflicensee perfor-mance (or SALP) for the Unitalso noted overall improvement in performance compared to prior assessments.

Although Niagara Mohawk is the operator ofNine MileTwo, an interim operating agree-ment provides for management oversight of the Unitby the four non-operating owners.

LIQUIDITYANDCAPITALRESOURCES Funds forconstruction expenditures and the retirement oflong-term debt were provided by cash flowfrom operations, together with external financing activity during 1991 (see Statement ofCash Flows, page 31). During 1992, additional external financing is anticipated by the Company to satisfy capital requirements including security maturities and sinking fund obligations.

CAPITALREQUIREMENTS The Company's capital program is designed to maintain reliable and safe electric and natural gas service and to meet future customer service requirements. Capital requirements for the three-year period 1989 to 1991 and the current estimate ofcapital requirements through 1994 are summarized in the table below. Capital expenditures during CAPITALREQVIREMENTS Type offacilities Electric Property:

Production Transmission and Distribution StreetLi htin andOther Subtotal Nuclear Fuel Total Electric Gas Property Common Pro ert Total Carrying Costs:

Allowance for Funds Used During Construction (AFUDC)

Deferred Financin Char es Included in Other Income Total Construction Requirements Securities Redemptions, Maturities and Sinking Fund Obli ations*

Total Capital Requirements

'Excludes prospective refinancings.

Actual Projected 1989 I990 1991 1992 1993 1994 (MillionsofDollars)

$ 48

$ 47

$ 44

$ 48

$ 48

$ 90 28 31 29 34 35 38 2

2 2

4 3

2 78 80 75 86 86 130 12 7

12 13 19 13 90 87 87 99 105 143 17 20 22 19 24 23 12 15 13 17 17 28 119 122 122 135 146 194 4

5 4

5 5

7 2

3 5

5 8

125 130 131 145 159 201 38 28 92 100 86 27

$ 163

$ 158

$223

$245

$245

$228

Rochester Gas and Electric Corporattort 14 245 245 200 r

r 150 92 '3 94 PROJECTED CAPITAL REQUIREMENTS (millions ofdollars)

HMandatory retirement olsecurities 0 carrying costs ilCash exPenditures lor construction Pnnriding funds fordebt malurities and sinkingfund obligalions is a significant Part of1992 and 1993 financing reriuiremnrts.

1991 associated with the March 1991 ice storm have been deferred, as previously discussed, and are excluded from this table.

For the period 1992 to 1994, the Company anticipates construction requirements to total approximately $500 million.Expenditures made at the Company's nuclear facilities to improve operating efficiency and reliabil-ityand to comply with regulatory requirements are a significant compo-nent ofproduction plant costs over the period. In addition to its construction expenditures, the Company has security maturities and sinking fund obligations totaling $213 millionover the three-year period 1992 to 1994 as shown by the graph to the leA. Excluded from the capital requirements table on page 13 are payments by the Company to an external nuclear decommissioning trust which payments are being recovered in rates (see Notes I and 10 ofthe Notes to Financial Statements).

The AFUDCamounts included in the table on page 13 are the financing costs associated with major projects under construction. This carrying cost becomes a part ofthe capitalized cost ofthe related project. The Company begins to earn a cash return on its investment, including this carrying cost, when the cost ofthe project is included in rate base, which generally is at the time the project enters service. In addition to AFUDC, carrying charges include the recognition of certain customer prepaid financing costs, as further discussed on page 18 under Rate Base and Regulatory Policies.

1991 Capital Requirements.

Electric production plant expenditures in 1991 included $34 millionofexpenditures made at the Company's Ginna nuclear plant and

$2 millionfor its 14 percent share ofexpendi-tures at Nine MileTwo, exclusive offuel costs.

The upgrading ofelectric distribution facilities to meet the energy requirements ofnew and existing customers required construction expenditures totaling $25 millionin 1991.

Other Electric Department capital expendi-tures during theyear included $7 millionand

$5 millionfor fuel at the Ginna nuclear plant and at Nine MileTwo, respectively.

Construction expenditures in the Gas Department totaled $22 millionin 1991, princi-pally for the replacement ofolder cast iron mains with longer-lasting and less expensive plastic and coated steel pipe, the relocation of gas mains for highway improvement, and the installation ofgas services for new load. Of particular interest in 1991 was the construc-tion ofa 5.0 mile, 24-inch gas pipeline during the year at a cost ofapproximately

$3.3 million.This pipeline was placed in service January 1992 and willimprove supply reliabilityin the northwestern quadrant ofthe Company's gas franchise area.

Capital requirements in 1991 also included sinking fund redemptions totaling $28 million,

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ofwhich $20 millionwas spent to satisfy the final sinking fund requirement ofthe Series NN.

First Mortgage Bonds. Also, a firstmortgage bond maturity and discretionary first mort-gage bond redemption totaled $64.3 million during 1991.

Projected Capital and Other Requirements. The Company has no current plans to install additional baseload generation.

The Company recently accepted bids from suppliers who wished to meet long-term Company needs for peaking generation capacity or demand-side management capacity savings. Based on a review ofthose bids and reflecting recent information con-cerning the large amount ofcapacity to be installed elsewhere in New YorkState during the next decade, the Company chose to contract forapproximately 24 megawatts of capacity savings offered by demand-side

Rochester Gas and Elecsrlc Corporasloa l5 projects. The capacity savings willbe phased in over the 1992 through 1994 period and sus-tained for 15 years. No long-term peaking contracts willbe signed as a result ofthe completed competitive bidding process. The Company expects approximately 55 mega-watts ofcapacity to be provided to the electric system by a cogenerator under contract with the Company, beginning in 1994 and continu-ing for25 years.

The Company continues to make generat-ing plant modifications and its construction program focuses on the need to serve new customers, to provide for the replacement of obsolete or ineflicient utilityproperty and to modify facilities consistent with the most current environmental and safety regulations.

Nuclear plant expenditures to meet the Company's commitment to maintain a high level ofnuclear safety and performance and to satisfy regulatory requirements and industry standards are reflected in its projected con-struction program. Construction requirements also include additional expenditures to be'ade at the Company's fossil-fueled and hydro generating plants.

Expenditures forelectric production plant in 1994 include $21 millionfor the possible replacement ofthe steam generators at the Ginna nuclear plant. During 1991, studies were initiated to determine the best steam genera-tor strategy for the remaining lifeofthe Ginna nuclear plant. These studies included various strategies such as continued repair, chemical cleaning and replacement. Portions ofthese studies are ongoing withcompletion sched-uled forearly 1992. Itis anticipated that a decision on steam generator replacement will be made followingcompletion ofthese studies.

Ifthe decision is made to replace steam gener-ators, the anticipated replacement date is 1995 or 1996 with an estimated cost of

$ 100 million.

InJune 1991 the Company received per-mission from the PSC to form a wholly-owned subsidiary which would acquire a 20 percent ownership in the Empire State Pipeline Project (Empire). Empire is proposed to be an intrastate natural gas pipeline subject to PSC regulation to be constructed between Grand Island and Syracuse, New York.The construc-tion ofEmpire was approved by the PSC in an Order issued March 1991. On October 23, 1991, however, two parties to this PSC case com-menced separate proceedings forjudicial review ofthe PSC decision certificating the project. Itis possible that these proceedings could result in delaying the commencement of construction ofthe pipeline. InJune 1991, the PSC authorized the Company to invest up to

$20 millionin Empire subject to certain condi-tions, notably that the investment not be included in rate base. The investment in Empire is excluded from the capital expendi-tures table on page 13. The construction of Empire currently hinges on a reversal ofthe Canadian National Energy Board's (CNE Board) original decision inJuly 1991 to deny a Trans Canada Pipelines Limited extension of its existing line to the Niagara River where it could be connected to Empire's proposed line.

The Company and others have applied to the CNE Board fora review ofits original decision.

Afinaldecision from the CNE Board is not expected before July 1992.

The Company's capital expenditures program is under continuous review and will be revised depending upon the progress of major construction projects, customer demand forenergy, rate relief, government mandates, and other factors. In addition to its projected construction requirements, the Company may consider, as conditions warrant, the redemption or refinancing of certain long-term securities.

ENVIRONMENTALMATTERS The production and delivery ofenergy results in the emission ofpollutants that may

Roches!er Gas anrl E!ecsric Corporaiioa 16 be harmful to the environment. In recognition ofthe Company's responsibility to preserve the quality ofthe air, water, and land itshares with the community itserves, the Company has taken a variety ofmeasures (e.g., self-auditing, recycling and waste minimization, training of employees in hazardous waste management) to reduce the potential forenvironmental damage from its energy operations and, specifically, to manage and appropriately dispose ofwastes currently being generated.

The Company, nevertheless, has been con-tacted, along with numerous others, concern-ing wastes ithas sent off-site to licensed treatment, storage and disposal sites where authorities have later questioned the handling ofsuch wastes. In such instances, the Company typicallyseeks to cooperate with those authorities and withother site users to develop cleanup programs and to fairly allocate the associated costs. None ofthese have been or are expected to be material. In other circumstances, including some where impact on Company property is alleged, ques-tions offact remain unresolved and ultimate responsibility forcleanup, ifany, has yet to be determined.

In November 1990 the Federal Clean Air ActAmendments of 1990 (Amendments) became law. The Amendments willaffect air emissions and quality control measures primarilyat the Company's fossil-fueled electric generating facilities. The Amend-ments incorporate a two-phase emission reduction program. The firstphase becomes effective in 1995, while the second phase, which contains more stringent provisions, willbecome effective in the year 2000.

The Company is not affected by the first phase ofthe Act. AClean AirActTask Force has been formed within the Company to review compliance with the second phase ofthe Amendments and has begun the process ofidentifyingthe optimum mixof control measures and/or associated technol-ogy changes that willallow the fossil fuel based portion ofthe generation system to fully comply with state and federal environmental requirements. While work has begun, the appropriate compliance control options have not as yet been determined.

LIQUIDITY,FINANCINGAND CAPITAL STRUCTURE Capital requirements in 1991 were satisfied by a combination ofinternally generated funds, the sale ofsecurities, and short-term borrowings. In addition to obtaining funds to finance a portion ofits construction require-ments, the Company entered the financial markets to refinance its First Mortgage I I ~/i96 Bonds, Series KK.This refinancing, the result of favorable market rates and security provisions which allowed early redemption, contributed to a drop in the Company's embedded cost of long-term debt from 8.6% at the end of 1990 to 8.3% at year-end 1991.

The Company projects that an average of approximately 80 percent to 85 percent ofthe funds required per year for its 1992 through 1994 construction program willbe generated internally and the balance willbe obtained through the sale ofsecurities and short-term borrowings. The Company also anticipates that the sale ofsecurities and short-term bor-rowings willbe required to satisfy security maturities and sinking fund obligations over the three years 1992 through 1994. Although the Company expects to issue securities during 1992, it is the Company's intention to utilize its credit agreements to meet any interim external financing needs prior to the issue ofsuch securities. As financial market conditions warrant, the Company may, from time to time, issue securities to permit the early redemption ofhigher-cost senior securi-ties. The Company's financing program is under continuous review and may be revised depending upon the level ofconstruction,

Rochester Gas and Electric Corporation l7 financial market conditions, rate relief, cost of capital and other factors.

Financing. Interim financing is available from certain domestic banks in the form of short-term borrowings under a $90 million revolving credit agreement which continues until December 31, 1994 and may be extended annually. Borrowings under this agreement are secured by a subordinate mortgage. In addition, the Company has a credit agreement with a domestic bank providing forup to

$20 millionofshort-term debt. Borrowings under this agreement, which can be renewed annually, are secured by the Company's accounts receivable. At December 31, 1991 the Company had $59.5 millionofsecured short-term debt outstanding.

Under provisions ofthe Company's Certificate ofincorporation, the Company may not issue unsecured debt ifimmediately after such issuance the total amount ofunsecured debt outstanding would exceed '15 percent of the Company's total secured indebtedness, capital, and surplus without the approval ofat least a majority ofthe holders ofoutstanding Preferred Stock. Under this restriction, the Company as ofDecember 31, 1991 was able to issue $5.2 millionofunsecured debt.

Additional interim financing capability remains available with secured borrowings under the Company's credit agreements, as discussed above.

On April9, 1991 the Company completed the public sale of$ 100 millionprincipal amount ofFirst Mortgage 9/4% Bonds, due 202 1, Series PP. Proceeds to the Company of approximately $98.7 million,excluding under-writingcommissions and accrued interest, were used to redeem $49.3 millionprincipal amount ofFirst Mortgage 11/4% Bonds, due 1995, Series KK,on May 15, 1991 at a redemp-tion price of 101.61 percent ofthe principal amount and to repay a portion ofthe Company's short-term debt.

On October 2, 199 I, the Company com-pleted the public sale of 100,000 shares of 7.45% Preferred Stock, Series S; 100,000 shares of7.55% Preferred Stock, Series T; and 100,000 shares of7.65% Preferred Stock, Series U (Cumulative, $ 100 par value per share).

Aggregate net proceeds to the Company of

$29.7 millionwere used to repay certain ofthe Company's outstanding short-term debt.

Effective October I, 1990, the Company's Automatic Dividend Reinvestment and Stock Purchase Plan (ADR Plan) was amended to allow shares acquired for par-ticipating share-holders to be either newly-issued shares 140%

118%

525.00 120%

$23.25

$21.50 100l/r 520.00

$>>.M

$1828

$ 1842

$18.41 purchased from the Company or outstanding shares pur-chased on the open market. For one year prior to that time, all shares for the 80%

515.00 60%

510.00 40%

20%

0%

ADR Plan had been purchased MARKEI'NDBOOK VALUE PER SHARE entirely on the open market. As STOCKYEAR END amended, the Q Book Value Plan allows the 8 Market Value k Percent ol Market Value Company the to Book Value opportunity to Tire market to brxrk ratiofor the Company's Common obtain funds to S!ock at year~rrd 1991 reas finance a portion 226 percent.

ofits capital expenditures program and to raise additional equity capital. During 1991, the Company raised a total of$ 11.3 millionto help finance its capital expenditures program by issuing approximately 572,000 new shares of Common Stock through its ADR Plan. New shares issued in 1990 and 1991 through the

Rocbesler Gas and Elecsrlc Corporalfoa is ADRPlan were purchased from the Company at a market price above the book value per share at the time ofpurchase. On page 17 is a graph which presents the Company's book value and market value per share ofcommon stockatyear-end over thepast threeyears.

- Capital Structure. Earnings were reduced by $6.6 millionin December 1991 when the Company recorded the aAer-tax effect ofa fuel audit settlement with the PSC (discussed below under New YorkState Public Service Commission). The Company's retained earn-ings at December 31, 1991 were $61.5 million, a decrease ofapproximately $ 1.0 million compared with December 31, 1990. Common equity (including retained earnings) comprised 40.7 percent ofthe Company's capitalization at December 31, 1991, with the balance being comprised of8.7 percent preferred equity and 50.6 percent long-term debt. Adding

$96.8 millionoflong-term debt due withinone year at year-end 1991 increases the long-term debt component ofcapitalization at Decem-ber 31, 1991 to 53.7 percent and conversely reduces common equity to 38.1 percent ofcap-italization. As presented, these percentages are based on the Company's capitalization inclusive ofits long-term liabilityto the United States Department ofEnergy explained in Note I ofthe Notes to Financial Statements. It is the Company's long-term objective to move to a less leveraged capital structure and to increase the common equity percentage of capitalization toward the 45 percent range. To improve its capital structure, the Company will consider the redemption ofhigh-cost senior securities and the issuance ofnew shares of common stock.

RATE BASE AND REGULATORYPOLICIES The Company is subject to regulation of rates, service, and sale ofsecurities, among other matters, by the PSC. The Company was granted authority to increase its rates for electric and gas service effective July 1991.

These new rates were based on a forecasted test year for the twelve months ending June 30, 1992. The Company has filed a request with the PSC to increase base rates forelectric and gas service effective July 1992. In its rate filing,the Company is seeking fullrecovery ofcosts incurred as a result ofthe March 1991 ice storm discussed on page 12. Other parties in the rate proceedings have proposed various disallowances ofthese costs. Afinal decision from the PSC is not expected before June 1992; and, the Company is unable to predict what action the PSC may ultimately take regarding the Company's rate request, including the recovery ofstorm-related costs.

New YorkState Public Service Commission (PSC). Recent PSC rate decisions and the Company's pending rate requests are summarized in the table on page 19. Despite a lower authorized return on common equity than that previously allowed, the PSC concluded that the July 1991 rate increases should, for the twelve months ending June 1992, allow the Company to achieve approximately a 2.58 times pretax interest coverage, exclusive ofAFUDCand the.

amortization ofdeferred Nine MileTwo customer prepaid financing costs (see follow-ing paragraph). In addition to the amounts indicated in the table on page 19, the July 1991 PSC rate order authorized the amortization of certain non-cash rate moderators (primarily deferred Nine MileTwo customer prepaid financing costs and unbilled gas revenues) totaling $4.0 millionin the Electric Department and $3.5 millionin the Gas Department. The July 1991 rate order also provided that

$4.0 millionofallowed electric revenue increases be subject to refund to customers if the Company did not submit an acceptable interim storm emergency plan byJuly I, 1991 and complete its finalstorm plan update by December 31, 1991 consistent with a PSC review ofthe Company's response to the

Rocbesrer Gas and Elecrrfc Corporasfon RATE INCREASES Granted Class of Service Effeclive Dateof increase Amount ofincrease (Annual Basis)

(000's)

Percent increase Rate Base Authorized Rate ofReturn on Equity Electric Gas January4,1988 July 26, 1988 July 12, 1990 July 1, 1991 July 26, 1988 July 12, 1990 Jul 1,1991

$ 2,413*

36,059 33,133 4,250 1,148 0.5%

6.6 5.5 1.7 0.4 10.4896 13.20%

10.39**

13 40 9.91 12.10 9.66 11.70 10.39**

13 40 9.91 12.10 9.66 11.70

'Second step increase allowed.

"Beginning August l, l989, the authorized rate ofretum on rate base was l046S6.

Pending Class of Service Dateofftling Amount of increase'Annual Basis)

(00(rs)

Percent increase'ate Base Requested Rate of Return on Equity Electric Gas

'As amended.

August 2, 1991 August 2, 1991

$38,162 15,124 6.1%

10.01%

12.50%

5.0 10.01 12.50 March 1991 ice storm. On June 28, 1991, the Company submitted an interim storm emer-gency plan to the PSC. On October 30, 1991, the Company forwarded the PSC a copy ofits updated storm plan and a minor revision was forwarded in December 1991. Final approval of the plan is pending. While the Company believes that plan substantially satisfies the PSC requirement for a final storm plan, no assurance can be given since such plan is subject to further revision resulting from the Company's own and PSC review.

In a series ofrate orders preceding the commercial operation ofNine MileTwo, the Company was allowed to include certain Nine MileTwo plant costs in rate base prior to com-mercial operation. AFUDCwas not accrued on these amounts. Instead, the Company accu-mulated a similarlycalculated amount until commercial operation and recorded iton the Balance Sheet as a deferred credit (liability),

with an equivalent amount recorded as a deferred debit (asset). The deferred credit rep-resents customer prepaid financing costs, while the deferred debit represents financing costs (or AFUDC).The latter is expected to be recovered over the lifeofthe facilitythrough amortization ifthe PSC chooses to utilize these prepaid financing costs to moderate customer rates. For the rate year beginning July 1991, the Company started amortizing

$2.5 millionofthese deferred credits to Other Income as permitted by the PSC's June 1991 rate order. Amortization ofthese deferred credits to Other Income has aggregated

$ 18.9 millionthrough December 31, 1991. The June 1991 rate order also authorized the Company to write off$6.3 millionofdeferred and other expenses as an offset to these deferred credit balances. Ifnotused by mid-1994 as non-cash earnings for rate modera-tion purposes, both the remaining deferred credit and deferred debit balances (estimated to be $24 millionat June 30, 1992) would be eliminated by offset. In its 1991 rate filing(see followingparagraph), the Company has proposed to amortize an additional

$8.3 millionofsuch deferred credits over the rate year ending June 30, 1993.

In August 1991 the Company filed rate requests with the PSC as summarized under the heading "Pending" in the table above. The higher rates have been requested to cover those increases in capital and operating costs projected for the rate year ending June 30, 1993 that are neither adequately provided for

Rochester Gas and Electric Corporation 20 in present rates nor expected to be offset by increased revenues from sales. A PSC decision on this filingis not expected before June 1992.

In its August 1991 rate filingand in a separate petition to the PSC on August 8, 1991, the Company is seeking fullrecovery ofcosts incurred as a result ofthe March 1991 ice storm (see March 1991 Ice Storm, page 12).

Storm damage repair costs of$36.4 million have been reflected under deferred debits on the Company's December 31, 1991 balance sheet and a portion ofsuch amount (estimated at 20 percent) is expected to be capitalized as plant additions. The Company has requested recovery ofdeferred storm-related costs other than capital additions over a period of 25 years, with carrying charges. The staff othe PSC and intervenors have been criticalofthe Company's performance during the ice storm.

The PSC is currently reviewing the Company's request for recovery ofstorm-related costs, as well as the Company's performance during the storm. The Company believes the storm damage repair costs to be prudent and, there-fore, recoverable in rates, but itcannot predict to what extent the recovery ofsuch costs may be affected by the PSC's pending review ofthe Company's action in response to the storm.

Additional information about the March 1991 ice storm may be found in Note 10 ofthe Notes to Financial Statements.

In November 1991 the PSC issued an order accepting an agreement between the Company and the Staffofthe PSC relating to the Company's fuel procurement practices.

Under the agreement, the Company willrefund

$ 10 millionto its electric customers through adjustments on their energy bills over a twelve-month period beginning inJanuary 1992. The Company recognized the settlement agreement in December 1991 and accordingly recorded a $6.6 millionnet-of-tax reduction to net income, thereby reducing earnings per share by approximately $.21 for the fourth quarter of 1991. The Company has agreed to certain changes in its fuel procurement prac-tices, the costs ofwhich willbe deferred pending PSC review. The Company believes its fuel procurement operations to be sound and prudent at the time when the decisions were made. The Company, however, would likely have faced years oftime-consuming expen-sive litigationwith the PSC and in court to resolve differingviews, withno assurance that its views would prevail.

Approval by the PSC ofthe 1990 Settlement Agreement, which is discussed under the heading Nine MileTwo, resolves all open ratemaking issues with respect to the con-struction ofNine MileTwo and its operation through January 19, 1990. Currently pending before the PSC is approval ofthe 1991 Supplemental Agreement, which establishes for Nine MileTwo an allowed level ofoperating and maintenance expenses forratemaking purposes through December 31, 1992 (see page 13).

RESULTS OF OPERATIONS The followingfinancial review identifies the causes ofsignificant changes in the amounts ofrevenues and expenses, compar-ing 1991 to 1990 and 1990 to 1989. The Notes to Financial Statements on pages 32 to 45 of this report contain additional information.

OPERATING REVENUES ANDSALES Following a two percent decline in 1990, operating revenues in 1991 were up three per-cent compared witha year earlier. Increased revenues from the sale ofenergy to retail electric customers more than offset a decline in gas revenues and electric revenues from the sale ofenergy to other electric utilities. Rate increases pushed electric retail revenues higher in 1991, while a rate increase to gas cus-tomers was more than offset by the weather effect on gas revenues. Details ofthe revenue changes are presented in the table on page 21.

Rocbrsrer Gas and Electric Corporation OPERATING REVENUES Increase or(Decrease) from Prior Year trhousands ol'Dollars)

Electric Department I99I I990 Gas Department 199 I 1990 Customer Revenues (Estimated) from:

Rate Increases Unbilled Revenues, Net Fuel Clause Adjustments Weather Effects (Heating)

Customer Consumption Transportation Gas, Net Effect Other

$ 33,666 (9I894) 2,236 (204) 7,197 3,999

$ 15,452 (I3,956)

(378)

(1,233) 5,202 3,747

$ 3,106 7,557 (4,052)

(3,333)

(3,181)

(4,036) 3,171 l,644 (22,458)

(298)

(I7,29 I) 4,469 (334) 6,191 Total Change in Customer Revenues Electric Sales to Other Utilities 37,000 (13,853) 8,834 4,437 (768)

(28,077)

Total Change in Operating Revenues

$ 23,147

$ 13,271

$ (768)

$(28,077)

Unbilled revenues are the estimated revenues attributable to energy which has been delivered to customers but forwhich the metered amount has not been read and recorded on the Company's books. Such revenues do not enhance the Company's cash position. Approximately $42 millionassoci-ated with a 1988 change in accounting to rec-ognize unbilled revenues was amortized to income during the period July 1988 to July 1990. An additional $ 1.5 millionwas amortized to income over the twelve-month period ending June 199 1. The remaining $3.5 million balance ofgas unbilled revenues associated with this change in accounting is being amor-tized to income over the rate year commenc-ingJuly 1991. The Company also records monthly accruals for unbilled revenues. The Company's Statement ofIncome reflects net unbilled revenues of$4 1.4 millionin 1989,

$5.0 millionin 1990, and $2.6 millionin 1991.

Primarily as a result ofthe seasonal nature of gas revenues, unbilled revenues willnormally be near their maximum around January and at their minimum near the end ofJune.

The Company's fuel clause provisions currently provide that customers and share-holders willshare, generally on an 80%/209'asis, respectively, the benefits and detriments realized from actual electric fuel costs, genera-tion mix, sales ofgas to dual-fuel customers and sales ofelectricity to other utilities compared with PSC-approved forecast amounts. As a result ofthese sharing arrange-ments, discussed further in Note 1 ofthe Notes to Financial Statements, pretax earnings were increased $2.6 millionin 1990 and increased

$2.4 millionin 1991, primarilyreflecting actual experience in both electric fuel costs and gen-eration mix compared with rate assumptions.

ln addition, beginning in September 1990, fuel clause revenues include the recovery of margins (revenues less incremental cost of fuel) not currently provided for in base rates and which are not collected due to the imple-mentation ofthe Company's energy efficiency programs (discussed below in this section).

The effect ofweather variations on operat-ing revenues is most measurable in the Gas Department, where revenues from space heating customers comprise about 85 percent oftotal gas operating revenues. As displayed by the graph to the left on page 22, the Company's service area experienced unsea-sonably mild weather during the 1990 heating months, and this pattern continued into 1991.

Aside from 1990s firstquarter, the firstquarter of 1991 had the fewest degree days since 1983, and on a calendar month heating degree day basis, the second quarter of 1991 was 26.4 percent warmer than the comparable period a year earlier. Warmer-than-normal weather, which contributed to lower earnings earlier in the year, worked in the Company's

Rochester Gas and Electric Corporation 22 69 0

(Normal)

.3

-200

-1,000 89 90 91 89 90 91 DEGREE DAY VARIATIONSFROM NORMAL Q Cooling Dcgrce Days'May-Sept.l Q Heating Degree Days'an.-Dec.)

Normal Heating degree days 6,713 Cooling degree days 531

'ach degreeof mean daily temperature above 65 degrees is considered to be one cooling degree day; below 65 degrees is considered lo be one heating degree day.

favor in the third quarter of 1991 when hot, dry conditions led to increased kilowatt-hour sales ofelectricity to meet the demand for air condi-tioning usage. Overall, 1991 was 8.4 percent warmer than normal but 3.7 percent cooler than 1990. This continues a trend established in 1990, when the weather was I 1.8 percent warmer than normal and 16.7 percent warmer than 1989.

Kilowatt-hoursales ofenergy to retail customers continued to grow in 199 I, up one percent over 1990, as indicated by the graph to the lower right. Excluding the effects ofthe March 1991 ice storm, these sales would have been stronger.

During 1991, an increase in sales to resi-dential and commercial customers more than offset a decline in sales to industrial customers. Industrial sales were down as certain local manufacturing companies felt the constraints ofthe national economy. Aftera relatively cool summer in 1990, warmer weather during the 1991 summer months boosted electric energy sales forair conditioning usage. Electric energy sales in 1991 were also boosted by the impact ofover 2,300 new cus-tomers added during the year.

Like many other electric utilities, the Company is encouraging energy eAiciency through demand side manage-ment (DSM) programs. Objectives ofthe DSM programs include increasing the efficiency with which electricity is used and shifting electric load from peak to non-peak times, thus helping to save energy and delay the need to add new generating capacity. DSM programs include rebates forenergy-efficient equipment, audits which focus on potential techniques for saving energy, consumer infor-mation and outreach, and design assistance to encourage energy-efficient new construction.

In general, the Company is being allowed to amortize major DSM program expenditures 7f91 7,685 8,000 7,482 2,000 ELECTRIC MARKET PROFILE (thousands ofmwh sold) ilother Utilities Q Other Q Industrial Q Conunercial Q Residential Eleclric energy sales nflect a welt-balanced sales mix.

over a five-year period. Asmall incentive allowance (award) ofapproximately $367,000 was provided for in the Company's)une 1991 rate decision based on the Company's DSM performance through December 31, 1990. The reduction in margins (revenues less incremen-tal cost offuel) resulting from the implementa-tion ofDSM projects is estimated and recovered in rates.

Fluctuations in revenues from electric sales to other utilities are generally related to the Company's customer energy requirements, New York Power Pool energy market and transmission conditions and the availabilityof electric generation from Company facilities.

Compared with 1989, electric energy sales to other utilities in 1990 also reflect the impact of higher contract sales ofenergy. Adecline in these contract sales, together with generally lower New York Power Pool requirements, led to lower kilowatt-hour sales to other

~

utilities in 1991.

The trans-portation ofgas for large-volume customers who are able to pur-chase natural gas from sources other than the Com-pany remains an important com-ponent ofthe 0

Company's mar-keting mix.

Company facili-ties are used to transport this gas, which amounted to 10.9 million

Rochester Gns nnd Electric Corporntton 23 461 471 dekatherms in 1991 and 9.9 milliondeka-therms in 1990. These purchases have caused decreases in customer revenues, as shown in the table on page 21, withoffsetting decreases in fuel expenses, but do not adversely affect earnings because transportation customers are billed at rates which, except for the cost ofgas, approximate the rates charged the Company's other gas service customers. Gas supplies transported in this manner are not included in Company therm sales, depressing reported gas sales to non-residential customers.

Afterfalling 12.7 percent in 1990, total therms ofgas sold and transported, including unbilled sales, increased 2.2 percent as shown by the graph to the left. These fluctuations reflect, primarily,.

the effect ofweather variations on therm 89 90 91 sales to customers with space heating. If QAs MARKETPRoplLE adjusted fornormal weather conditions fm"'""ftherm>><<do<<and the March 1991 ice storm, residential transyortedl gas sales would have declined about one percent in 1991 over 1990, while nonresi-dential sales, including gas transported, 0 Residential in 1991 would have decreased by The Comyany's gas approximately 2.2 percent compared marh I yroPle retleeis a balanced mix beiroeerr with a year earlier. The average use per residential gas spaceheating customer, when adjusted fornormal weather conditions, was down in 1991; but, the effects ofthis decline were moderated by a growth in cus-OPERATING EXPENSES Increase or(Decrease)Pom Prior Year (rhousands ofDollars) tomers. Total therms ofgas transported increased in 1991, primarilyas a result of higher sales to certain large industrial and municipal transportation customers.

Increases in "Other" customer revenues shown in the table on page 21 forboth com-parison periods is largely the result ofrevenues associated with New YorkState taxes enacted in 1990 and 1991 (see Taxes Charged to Operating Expenses), increased miscellaneous gas revenues, and, for 1990, the effect ofmore customer consumption (billing)days compared witha year earlier.

OPERATING EXPENSES Compared witha year earlier, operating expenses climbed a modest two percent in 1991 after remaining nearly flat in 1990. A significant share ofthe increase in 1991 oper-ating expenses over 1990 resulted from higher local, state and other taxes. Asummary ofthe change in operating expenses for the 1991 and 1990 comparison periods is presented in the table below. Non-fuel pretax operating expenses estimated by the Company to be approximately $29 millionand which were associated with a severe ice storm during 1991 are being deferred pending the PSC's review of the recovery ofstorm-related costs (see New.

YorkState Public Service Commission).

Energy Costs-Electric. For the 1991 comparison period, less generation from the Company's fossil-fueled units was largely responsible for the decrease in fuel expenses 199I l990 Fuel forElectric Generation Purchased Electricity Gas Purchased for Resale Other Operation Maintenance Depreciation Amortization ofOther Plant Taxes Charged to Operating Expenses Local, State and Other Taxes Federal Income Tax Total Change in Operating Expenses 547 (5/81)

(20, I I I) 20,830 (1,925) 7,783 (5,079)

$ (11815)

(6,581)

(2,733) 13,846 3,024 8,346 (1,932) 12,614 (231) 5,694 (3349)

S 15,038 (991)

Rochester Gas and E/eetrlc Corporation 75 89 90 91

'OURCES OF ELECTRIC GENERATION BY FUELTYPE tycrccnt) 0 Purchased Power Oother (Oil,Gas, Hydro)

OCoal 0 Nuclear

¹t having lo nlyon one type offuel provides lhe Company ivilhmore reliable energy supplies.

forelectric generation. In addition, lower nuclear fuel costs during 1991 contributed to a drop in fuel expenses. Likewise, an electric generation mix favoring less expensive nuclear fuel, compared with the cost ofcoal or oil,kept the increase in fuel expenses relatively

'ess than the increase in electric genera-tion for the 1990 comparison period. To the left is a graph which presents the Company's electric generation mix by fuel type.

Average rates forpurchased electric-itydeclined in 1991, after increasing during 1990. These lower average rates, in addition to a drop in kilowatt-hours purchased, also contributed to a lower purchased electricity expense in 1991.

The decrease in purchased electricity expense for the 1990 comparison period resulted from fewer kilowatt-hours being purchased.

Energy Costs and SupplyGas.

The Company has renegotiated its contract with CNG Transmission Corporation (CNG), such that CNG is to provide a combination ofunbundled services (storage and transmission of Company-purchased gas) forapproxi-mately 20% ofthe Company's annual gas purchases, and bundled sales services (including gas supply, storage and trans-mission) for the remainder ofthe Company's annual supplies not otherwise pur-chased for transport to the Company via the proposed Empire project (see Projected Capital and Other Requirements). The Company began receiving service under this new contract on July I, 1991, fora period often years. The Company further expects that itwill annually purchase a quantity ofgas equal to 25% ofthe CNG bundled sales service gas supply from other sources under short-term contracts when: I) those supplies are available at prices lower than CNG's commodity price These lower average rates were partially ofset by an increase in the volume ofgas purchased for resale, in con-trast to 1990 when lower volumes ofgas purchased led to a drop in the cost ofgas purchased for resale. The average rate for gas purchased for resale in 1990 was slightly higher than in 1989.

40 20 10 47 48 89 90 91 GAS SUPPLY FOR DISTRIBUTION 0nitlions ofdckalhcnns) 0 Transportation gas 0 Gas purchased on spot market 0 Gas purchased under firmcontract Gas purchased on the spot market is expected to continue to be a part ofthe Company's total gas supply.

and 2) the acquisition ofthose short-term supplies would not jeopardize the reliabilityof the Company's long-term supply or unduly increase its cost. Sources ofgas supplied to the Company over the past three years are pre-sented by the graph below. Vnder its contract with CNG, the Company has obtained rights to 4.2 milliondekatherms ofCNG storage capacity. With underground natural gas storage capability, the Company willbe in a better position to take advantage ofoff-peak season purchases ofgas and enhance its supply reliability.Also, in connection with the Empire project, additional transportation agreements have been entered into with pipelines upstream ofEmpire that permit the Company to directly access V.S. and Canadian natural gas supplies and storage facilities once Empire becomes operational.

Compared with a year earlier, the average rate for gas pur-chased for resale in 1991 declined.

54

Rochester Gas and Electric Corporation 25 Operating Expenses, Excluding Fuel, Other operation expenses rose over both comparison periods, as shown in the table on page 23; however, the increase in these costs for the 1991 comparison period was lower by

$7 million.Both the 1991 and 1990 compari-son periods reflect higher payroll costs. In 1991, these costs were partially offset by lower payments forexternal contractor and consult-ing services. Increasing other operation expenses in 1991 by $5.9 millionwere higher transmission wheeling charges on purchased electricity and increased NRC and PSC regula-tory assessments.

Compared with a year earlier, other operation expenses in 1990 reflect about $3.8 millon ofexpense associated with the effects ofaccounting procedures to recognize certain deferred Nine MileTwo revenues and expenses. The 1990 comparison period also reflects additional expense of

$5.6 millionassociated with the Company's share ofNine MileTwo operation expenses.

Compared with 1990, these Nine MileTwo costs were down slightly in 1991.

The Company willbe adopting new accounting principles for financial reporting purposes effective the firstquarter of 1992 as set forth in a Statement ofFinancial Accounting Standards entitled "Accounting for Postretirement Benefits Other Than Pensions" (SFAS-106) which was issued by the Financial Accounting Standards Board (FASB) in December 1990. Among other things, SFAS-106 requires accrual accounting for postretirement benefits other than pensions.

The Company had recorded the cost ofsuch benefits on a current basis. In conformity with the accounting principles set forth in SFAS-106, the Company willbegin to recog-nize a portion ofthe actuarial present value of the estimated benefits to be paid to active employees after they retire. In addition, the Company has estimated the actuarial present value ofits accrued liabilityforpostretirement benefits for past years ofemployment for both current employees and current retirees and willamortize that liabilityover a twenty-year period. Adoption by the Company ofSFAS-106 willincrease the Company's annual expense for postretirement benefits, but the impact on the Company's expenses is moderated by the defined-dollar nature ofits benefits. The initial incremental cost under SFAS-106 at the time ofits adoption is estimated to be $4.3 million pretax, and recognition ofthese costs through July I, 1992 was included in the Company's June 1991 rate decision.

Maintenance expense was up in 1991 primarilyas a result ofincreased activityasso-ciated with electric production facilities at the Ginna nuclear plant and electric distribution facilities. Following the additional expense associated with an intensive ten-year inspec-tion at the Company's Ginna nuclear plant a year earlier, maintenance expense declined in 1990.

Depreciation increased in both compari-son periods primarilydue to increases in depreciable plant. In addition, depreciation expense includes an accrual for future nuclear plant decommissioning expenses; and, an increase ofapproximately $3 millionin such accrued expense contributed to higher depre-ciation expense foreach ofthe comparison periods. Amortization expense was reduced as a result ofa reduction in the amortization of the Sterling project property loss.

Taxes Charged to Operating Expenses.

The increase in local, state and other taxes for both comparison periods resulted from increases in revenue taxes which were impacted by a one-half'percent increase in the New York State gross revenue tax beginning in July 199 I, retroactive to January I, 1991 and a New YorkState 15 percent surtax on gross receipts beginning inJuly 1990, retroactive to January I, 1990. Also, higher assessments and tax rates on property increased these taxes.

kochester Gas and Electric Corporation 26 In December 1987, the FASB issued a Statement ofFinancial Accounting Standards entitled "Accounting for Income Taxes" (SFAS-96). Among other things, SFAS-96 requires the Company to adjust certain ofits deferred tax assets and liabilities to reflect periodic changes in tax rates. In addition, the Company may also be required to provide deferred taxes for the effect oftax benefits pre-viously flowed through to the Income Statement. SFAS-96 is currently not required to be adopted by the Company. An exposure draft which presents a comprehensive accounting standard builtlargely on the existing SFAS-96, but which has been modified in many respects, was issued by the FASB in July 1991 and, ifultimately adopted, would supersede SFAS-96. This exposure draft con-tinues to be deliberated by the FASB. Since the Company's deferred taxes have been adjusted for regulatory purposes to the current statu-tory rate where permissible, the impact of either SFAS-96 or the accounting require-ments contained in the exposure draft is believed to be immaterial. See Note 2 ofthe Notes to Financial Statements foran analysis offederal income taxes.

OTHER STATEMENTOF INCOMEITEMS Recognition ofthe 1991 PSC order relating to the Company's fuel procurement practices (see page 20) is recorded under the caption "Other Income and Deductions" on the Statement ofIncome. Also reported under this caption is the Company's 1989 writeoffof additional disallowed Nine MileTwo plant costs.

AFUDCvariances are generally related to the amount ofutilityplant under construction and not included in rate base. AFUDClevels also reflect decreases in the gross rate to 7.10 percent effective July 1991 from earlier rates of8.60 percent, 9.60 percent and 10.25 percent.

Other Income includes $4.8 millionofnon-cash earnings in 1991 and $3.3 millionin 1990 associated with the amortization ofcustomer prepaid Nine Mile Two financing 9.0 costs which had been deferred, as discussed under the heading New YorkState Public Service Com-mission (PSC).

The fluctuation in Other Income for the 1990 com-parison period primarilyreflects a decrease in 8.0 interest income received from temporary cash investments.

Both manda-tory and optional redemptions of certain higher-cost firstmortgage bonds have helped to reduce long-term debt expense interest over the three-year period 1989-1991, despite the issuance ofadditional long-term debt in 1991.

Agraph ofthe Company's embedded cost of long-term debt is presented above.

8.8 8.6 8.2 89 90 91 EMBEDDED COST OF LONG-TERMDEBT YEAR END (yereent)

The rejinancing of high~t bonds helped to reduce the embedded cost oflong.term debt in 1991 EARNINGS/

SUMMARY

Presented on page 27 is a table which sum-marizes the Company's Common Stock earnings in total and on a per-share basis as reported and as modified to exclude disal-lowed Nine MileTwo costs written offin 1989.

As previously explained, Common Stock earnings per share in 1991 were reduced by an estimated $.11 as a result ofthe March ice storm and by $.21 per share in the fourth quarter when the Company recorded the

Rochester Gas aml Electric Corporation 27 effects ofthe fuel procurement settlement approved by the PSC. Future earnings may be affected by the outcome ofthe PSC's review of the Company's request to recover deferred storm-related costs associated with the March 1991 ice storm, as discussed on page 20.

In December 1990 the Company announced a quarterly dividend increase from

$.39 to $.405 per share ofCommon Stock payable inJanuary 1991. Subsequently, on December 18, 1991 the Company announced a new quarterly dividend rate off.42 per share payable inJanuary 1992. The Company's Certificate ofIncorporation provides for the payment ofdividends on Common Stock out ofthe surplus net profits (retained earnings) ofthe Company. Accordingly, dividend payments are dependent on future earnings, in addition to financial requirements and other factors.

EARNINGS

SUMMARY

Earnings IThousands ofDollars)

Shares'thousands)

Earnings per Share 1991 As Reported 1990 As Reported 1989 As Reported Excluding Nine MileTwo Write-OffAdjustment

'tveighted average shares outstanding.

'Reported earnings modified to exclude disallowed Nine MileTwocosts written otrin l989.

$ 51,034

$ 53,856

$ 65,419 66,819'1,794

$ 1.60 31/93

$ 1.72 31,090

$2.10 31,090

$2.15 BOARD APPOINTMENT Atthe 1991 annual meeting ofshareholders in May, Allan E. Dugan was elected to the board ofdirectors. He is senior vice president, corpo-rate strategic services, ofXerox Corporation.

Mr. Dugan replaced Mr.E. Kent Damon, former vice president and secretary ofXerox Corporation, who retired from the board after 19 years ofservice as a director.

Rocbesser Gas and Elecsrlc Corporailon FINANCIAL REPORTS 28 TABLEOF CONTENTS Statement ofincome Statement ofRetained Earnings Balance Sheet Statement ofCash Flows Notes to Financial Statements Report ofindependent Accountants Report ofManagement Interim Financial Data Common Stock and Dividends Selected Financial Data Electric Department Statistics Gas Department Statistics PAGE 29 29 30 31 32-45 47 48-49 50

Rochester Gas and Electric Corporation STATEMENT OF INCOME 29 fihousands ofDollars)

Year Ended December 31 1991 1990 1989 OPERATING REVENUES Electric

~

Gas

$588,930

$551,930

$543,096 235,728 236,496 264,573 Electric sales to other utilities Total Operatin Revenues OPERATING EXPENSES Fuel Expenses Fuel forelectric generation Purchased electricity Gas purchased forresale Total Fuel Ex enses 0 eratin Revenues Less Fuel enses Other Operating Expenses Operations excluding fuel expenses Maintenance Depreciation and amortization Taxes-'local, state and other

'ederal income tax TotalOtherO eratin Ex enses 0 eratin Income OTHER INCOMEANDDEDUCTIONS Allowance forother funds used during construction Federal income tax Fuel audit disallowance Disallowed project costs

, Other,net Total Other Income and Deductions Income Be oreIntcrest Char cs INTEREST CHARGES Long term debt Other,net Allowance forborrowed funds used durin construction 824,658 28,612 853,270 65,105 27,683 129,779 222,567 630,703 208,440 65,415 84,181 I 13,649 34",259 505,944 124,759 675 4,580 (10,000) 6,078 1,333 126,092 63,918 7,082 (2,905) 788,426 42/65 830,891 76,420 34/64 132,512 243,196 587,695 194,594 62,391

'7,767 101,035 34,490 470,277 117,418 2,689 2,459 4,062 9/10 126,628 64,873 4,593 (2,719) 807,669 38,028 845,697 75,873 39,645 152,623 268,141 577,556 1.73,764 64,316 75,063 95,341 37,839 446/23 131/33 2,261 1,439 (2,100) 8,328 9,928 141,161 6s,62s 3,115 (2,026)

Total Interest Char es Net Income Dividends on Pre erred Stock Earnin s A llcablc to Common Stock 66,747 68,095 69,717 71,444 6,025 57,997 6,963 59,881 6,025

$ 51,034

$ 53,856

$ 65,4 I9 1Veighted Average Number ofSharesfor Period (000's)

Earnings per Common Share 31,794

$ 1.60 31,293

$ 1.72 31,090

$2.10 STATEMENT OF RETAINED EARNINGS rrhousands ofDollars)

Year Ended December 3I 1991 1990 1989 Balance at Beginning ofPcrlod Add Net Income 57,997 59,881 71,444 62,542

$ 57,983

'39,710

- Total Deduct Dividends declared on capital stock Cumulative preferred stock Common stock Total 120,539 6,963 52,061 59,024 117,864 6,025 49397 55/22 111,154 6,025 47,146 53,171 Balance at End o Period The accompany! ng notes are an integral part ofthe tlnancial statements.

$ 61,515

$ 62,542

$ 57,983

Rochester Gas and Elccrrfc Corporation BALANCE SHEET 30 frhousands ofDollars)

ASSErS UtilityPlant Electric Gas Common Nuclear fuel Less: Accumulated depreciation Nuclear fuel amortization Constructionworkin ro ress Net Utilit Plant Current Assets Cash and cash equivalents

, Accounts receivable, net ofallowance fordoubtful accounts:

1991-$ 411; 1990-$ 591-Unbilled revenue receivable.

Materials and supplies, at average cost Fossil fuel Construction and other supplies Gas stored underground Pre a

ents l Total Current Assets Deferred Debits Unamortized debt expense Deferred finance charges-Nine Mileproject Deferred ice storm charges Other Total Deferred Debits Total Assets CAPrTAuzATtoNANnLIABtuTIEs Capftafization Long term debt-mortgage bonds

-promissory notes

. Preferred stock redeemable at option ofCompany Preferred stocksubject to mandatory redemption Common shareholders'quity Common stock Retained eamin s

Total Common Shareholders' uit Total Ca italization Lon TermLfablli -De artmento Ene Current Lfabillties Long ter'm debt due withinone year Short term debt Accounts payable Dividends payable

'axes accrued Interest accrued Pension costs accrued Other Total Current Liabilities Deferred Credits and Other Lfabilltfes Accumulated. deferred income taxes Deferred finance charges-Nine Mileproject Other Total Deferred Credits and Other Liabilities Commitments and Other Matters(Note I0),

Total Capitalization and Liabilities The accompanying notes are an integral part ofthe Enanclal statements.

At December 3l 1991

$2,122,248 320,385 116,858 147,063 2,706g554 1,067,471 111,178 1,527,905 76,848 1,604,753 1,488 84,053 55,921 10,766 12,539 7,057 17,185 189,009 9,611

~

25,586 36,431 88,406 160,034

$ 1,953,796 530,422 141,900 67,000 60,000 529@39 61,515 590,854 1890,176 63,626 96,750 59,500 53,983 15,555 12,050 16@13 13,515 13,450 281,116 162,955 25,586 30,337 218,878

$ 1,953,796 l990

$ 1,674,307 304,308 104,460 227,219 2/10,294 628,571 184,423 I,497300 82,663 1,579,963 544 79,280 49,172 18/72 12>24 16,553 176,045 8,943 35,578 63,930 108,451

$ 1,864,459 579,712 141,900 67,000 30,000 516/88 62,542 578,930 1,397,542 59,989 40,250 42,400 47,069 14,235 10,606 14,591 5,780 14,569 189,500 153,874 35,578 27,976 217,428

$ 1,864,459

Rochester Gas and Electric Corporation

'TATEMENT OF CASH FLOWS frhousands ofDollars)

Year Ended December 3) l99 I l990 l989 CASH FLOW FROM OPERATIONS Net income Adjustments to reconcile netincome to net cash provided from operating activities:

Depreciation and amortization Amortization ofnuclear fuel Deferred fuel-electric Deferred income taxes Allowance for funds used during construction Disallowed project costs-Nine'Mile plant Unbilled revenue, net Ice storm costs deferred Decommissioning fund Changes in certain current assets and liabilities:

Accounts receivable Materials and supplies-fossil fuel

-construction and other supplies Taxes accrued Accounts payable, Interest accrued Other current assets and! iabilities, net Other,net Total 0 eratin CASH FLOW FROM INVESTINGACTIVITIES

~

UtilityPlant

'lantadditions Nuclear fuel additions Less: Allowance forfunds used durin construction Additions to UtilityPlant Sterling project property loss Other,net Total Investin CASH FLOW FROM FINANCINGACTIVITIES Pro ceedsPomt Sale ofcommon stock

~ Sale ofpreferred stock Sale oflong term debt, mortgage bonds Short term borrowings

~

Retirement oflong term debt Capital stock expense Discount and expense ofissuing long term debt Dividends paid on preferred and common stock Other, net Total Financin 57,997 84,181 23,606 4,122 9,124 (3,580)

(8,931)

(36,431)

(15,581)

(4,773) 7,506 (315) 1,444 6,914 1,722 7,143 (14,701)

$ 119,447

$ (1 14,579)

(13,058) 3,580 (124,057)

(685)

$ (124,742) 13,446 30,000 100,000 17,100 (92,334)

(495)

(3,310)

(57,704)

(464) 6,239 59,881 77,767 25,573 (477) 16,682 (5,408)

(2,818)

(3,640) 1,519 (5,183)

(1,246)

(2,805)

(6,077)

(690)

(1,906) 920

$ 152,092

$(123,887)

(82-97) 5,408 (126,776)

(98)

$(126,874) 3,058 42,400

'28,000)

(230)

(54,787)

"908

$ (36,651) 71,444 75,063 21,923 (3,287) 19,847 (4/87) 2,100 (37,542)

(17,071)

(4,869)

(1,800) 7,419 13,802 (371)

(3,542) 1,071

$ 139,900

.$ (112,034)

(12,901) 4,287 (120,648)

(1,604) 683

$(121,569)

.8,761 (37,833)

(108)

(237)

'(52,525) 244.

$ (81,698)

Increase (decrease) in cash and cash equivalents Cash and cash equivalents at be innin of ear 944

$ (11,433) 544

~

11,977

$ (63/67) 75,344 Cashandcashe uivalentsatendof ear 1,488 544 11,977 S U P P L E M E N T A L D I S C L0 S U R'E 0 F C A S H F L0 Vf I N F 0 R M AT I 0 N irhousands ofDollars)

CASH PAIDDURINGTHEYEAR interest paid (net ofcapitalized amount)

Income taxes aid Year Ended December 31 199 I 63,848 20,399

)990 64,851 17,516

)989 67,716 10,996 The accompanying notes are an integral part ofthe Iinanciarstatements.

Rochester Gas and Electric Corporation NOTES TO FINANCIAL STATEMENTS 32 NOTE 1.

SUMMARY

OF ACCOUNTINGPRINCIPLES GENERAL The Company is subject to regulation by the Public Service Commission ofthe State ofNew York IPSC) under New Yorkstatutes and by'he Federal Energy Regulatory Commission (FERC) as a licensee and public utilityunder the Federal Power Act. The Company's accounting policies conform to gener-allyaccepted accounting principles as applied to New YorkState public utilities giving effect to the rate-making and accounting practices and policies ofthe PSC.

InJune 1988, the Board ofDirectors authorized the creation ofUtilicom,Inc. as a whollyowned subsidiary. Utilicomdevelops and markets computer software to assist customers in complying with state and federal environmental and safety regulations. The subsidiary activityhas to date remained insignificant to the Company's financial position and results ofoperation.

Adescription ofthe Company's principal accounting policies follows.

RATES ANDREVENUE Revenue is recorded on the basis ofmeters read. In addition, beginning inJuly 1988, as part ofa PSC rate decision, the Company commenced recording an estimate ofunbilled revenue forservice rendered subsequent to the meter-read date through the end ofthe accounting period. Pursuant to the 1988, 1990 and 1991 rate orders, $2.2 million,$ 13.8 millionand $20.5 millionwas amortized to earnings in lieu ofcash rate reliefin 1991, 1990 and 1989, respectively. Approximately $2.4 millionwill be similarlyamortized subsequent to 1991.

Tariffs forelectric and gas service include fuel cost adjustment clauses which adjust the rates monthly to reflect changes in the actual average cost offuels. The electric fuel adjustment provides that ratepayers and the Company willshare the effects ofany variation from forecast monthly unit fuel costs on an 8096/2096 basis up to a $2.6 millioncumulative, after-tax, annual gain or loss to the Company. ThereaAer, 100 percent ofadditional fuel clause adjustment amounts are assigned to cus-tomers. The electric fuel cost adjustment also provides that any variation from forecast net revenues on sales to electric utilities be shared on the same 8096/2096 basis.

In addition, there is a similar 8096/2096 sharing process ofvariances from forecasted margins derived from sales and the transportation ofprivately owned gas to large customers that can use alternate fuels.

In December 1991, the Company recognized a non-cash charge against earnings of$ 10 millionfor refunds to be made to cuStomers in connection with a PSC fuel procurement audit, This refund will occur in 1992.

DEFERRED FUEL COSTS The Company practices fuel cost deferral accounting as prescribed by, the PSC under the electric and gas cost adjustment clauses included in the tariffschedules ofthe Company. Areconciliation of recoverable gas costs with gas revenues is done annually as ofAugust 31,and the excess or deficiency is refunded to or recovered from the customers during a subsequent twelve-month period beginning in December. These deferred fuel costs are reflected as a component ofunbilled revenues.

tt UTILITYPLANT, DEPRECIATION ANDAMORTIZATION The cost ofadditions to utilityplant and replacement ofretirement units ofproperty is capitalized.

Cost includes labor, material, and similar items, as well as-indirect charges such as engineering and supervision, and is recorded at original cost. The Company capitalizes an allowance for funds used during construction approximately equivalent, to the cost ofcapital devoted to plant under const'ruc-tion that is not included in its rate base. Replacement ofminor items ofproperty is included in mainte-nance expenses. Costs ofdepreciable units ofplant retired are eliminated from utilityplant accounts, and such costs, plus removal expenses, less salvage, are charged to the accumulatt;d depreciation reserve.

Rocbes(er Gas and Elec(r(c Corpora((on 33 Depreciation in the. financial statements is provided on a straight-line basis at rates based on the estimated useful lives ofproperty, which have resulted in provisions of3.3%,3.5% and 3.4% per annum ofaverage depreciable property in 1991, 1990 and 1989, respectively. Amortization includes

$.3 millionin 1991, $2.2 millionin 1990 and $7.3 millionin 1989 related to the Sterling project property loss; NUCLEARFUEL DISPOSAL COSTS The Nuclear Waste Policy Act (Act) of1982, as amended, requires the United States Department of Energy (DOE) to establish a nuclear waste disposal site and to take title to nuclear waste. Apermanent DOE high-level nuclear waste repository is not expected to be operational before the year 2010. The DOE is pursuing efforts to establish a monitored retrievable interim storage facilitywhich may allow it to take title to and possession ofnuclear waste prior to the establishment ofa permanent repository.

The Actprovides for a determiriation ofthe fees collectible by the DOE for the disposal ofnuclear fuel irradiated prior to April7, 1983 and for three payment options. The option ofa single payment to be made at any time prior to the firstdelivery offuel to the DOE was selected inJune 1985. The Company estimates the fees, including accrued interest, owed to the DOE to be $63.6 millionat December 31, 1991. The Company is allowed by the PSC to recover in rates these costs. The estimated fees are

,classified as a long-term liabilityand interest is-accrtted at the current three-month Treasury billrate, adjusted quarterly. The Act also requires the DOE to provide for the disposal ofnuclear fuel irradiated after April6, 1983, fora charge ofone mill($.001) per KWHgenerated at nuclear plants. This charge is currently being collected from customers and paid to the DOE pursuant to PSC authorization. The Company expects to utilizeon-site storage forall spent or retired nuclear fuel assemblies until an interim or permanent nuclear disposal facilityis operational.

NUCLEARDECOMMISSIONINGCOSTS Decommissioning costs (costs to take the plant out ofserviCe in the future) forthe Company's'inna Nuclear Plant are estimated to be approximately $ 134.7 million,and those for the Company's 14% share ofUnit2's decommissioning costs are estimated to be approximately

$30.6 million (1991 dollars). Through December 31, 199 I, the Company has accrued and recovered in rates $42.8 millionfor this purpose and is currently accruing fordecommissioning costs at a rate ofapproximately $ 10.1 millionper year based on the use ofa combination ofinternal and external sinking funds. (See Note 10.)

The decommissioning costs, which form the basis forcurrent accruals, were'derived from the record ofthe Company's prior rat'e proceeding (PSC Opinion 91-13, issued June 1991).

ALLOWANCEFOR FUNDS USED DURING CONSTRUCTION The Company capitalizes an Allowance for Funds Used During Construction (AFUDC) based upon

'he cost ofborrowed funds forconstruction purposeS, and a.reasonable rate upon the Company's other

, funds when so used. AFUDC is segregated into two components and classified in the Statement of Income as Allowance for Borrowed Funds Used During Construction, an offset to Interest Charges, and Allowance forOther Funds used During Construction, a part ofOther Income, The gross rates approved by the PSC forpurposes ofcomputing AFUDCwere: 7.1% effective July I, 19918.6% effective February I, 1991 through June 30, 1991; 9.6% effective July I, 1990 through January 31, 1991; and 10 25% effective January I, 1988 through June 30, 1990.

(Note l convnucdonpagcAJ

Rochester Gas and Eleetrlo Corporation NOTES TO FINANCIAL STATEMENTS 34 (conunuedfempago33)

Effective July 16, 1984, pursuant to PSC authorization, the Company discontinued accruing AFVDC on $50 milltonofconstruction work in progress related to its investment in Unit2 forwhich a cash return was being allowed through its inclusion in rate base. Ariadditional $ 150 millionand

$230 millionwere included in rate base, effective July 9, 1985 and July 14, 1986, respectively, as autho-rized by the PSC, and AFUDCaccruals were likewise discontinued. The PSC also ordered in 1984 that amounts be accumulated in deferred debit and credit accounts equal to the amount ofAFUDCwhich was no longer accrued. The balance in the deferred credit account would be available to reduce future revenue requirements over a period substantially shorter than the lifeofUnit2, and the balance in the deferred debit account would then be collected from customers over a longer period oftime. In July 1988, in accordance with PSC Opinion 88-21, the Company eliminated by offset one-halfof the deferred debit and credit balances in connection with the unused portion,ofcustomer prepaid financing costs associated with Unit2, reducing the cumulative balance to $44.7 million.The balances of$25 6 millionat December 31, 1991, ifnot used by mid-1994, may be offset against each other pursuant to PSC directives. In connection with the Company's 1991 rate case decision, $2.5 millionwill be amortized through the Statement ofIncome during theyear commencing July I, 1991.

FEDERALINCOMETAX For income tax purposes, depreciation is computed using the most liberal methods permitted. The resulting tax reductions are offset by provisions fordeferred income taxes only to the extent ordered or permitted by regulator'y authorities. The cumulative balance oftax deductions not offset by provisions fordeferred income taxes through 1991 is approximately $415 million.

The Company uses the separate-period approach in calculating the interim quarterly tax provision.

SFAS-96, Accounting for Income Taxes (as amended by SFAS-108), has not yet been adopted by the Company. SFAS-96 requires adoption in calendar year 1993 and also requires that a deferred tax liabil-ityor asset, be adjusted in the period ofenactment for the effect ofchanges in tax laws or rates. The Company presently believes the impact forSFAS-96 to be immaterial.

RETIREMENTHEALTHCARE AND LIFE INSURANCE BENEFITS The Company provides certain health care and lifeinsurance benefits for retired employees and health care coverage forsurviving spouses ofretirees. Substantially all ofthe Company's employees may become eligible for these benefits ifthey reach retirement age while working for the Company.

These and similar benefits foractive employees are provided through insurance policies whose premiums are based upon the experience ofbenefits actually paid. The Company recognizes the costs ofproviding these benefits as a current expense, In December 1990, the FASB issued SFAS-106 entitled "Accounting for Postretirement Benefits Other than Pensions" effective forfiscal years beginning after December 15, 1992. Among other things, SFAS-106 requires accrual accounting by employers forpostretirement benefits other than pensions reflecting currently earned benefits. The Company willadopt this accounting practice in the first quarter of 1992.

d'ARNINGS PER SHARE Earnings applicable to each share ofcommon stock are based on the weighted average number of shares outstanding during the respective years.

Rochester Gas and Elecrrfc Corporation 35 NOTE 2. FEDERALINCOMETAXES I989 The provision forFederal income taxes is distributed between operating expense and other income based upon the treatment ofthe various components ofthe provision in the rate-making process. The followingis a summary ofincome tax expense forthe three most recent years.

ahousands ofDollars) 1991 l990 Charged to operating expense:

Current Deferred

$28,766 5,493

$20,660 13,830

$20,509 17+30 Total 34+59 34,490 37,839 Charged (Credited) to other income:

Current (SP,11)

'5/11)

Deferred 3,631 2,852 (3,956) 2,517 Total (4,580)

(2,459)

(1,439)

Total Federal income tax expense

$29,679

$32,031

$36,400

- The followingis a reconciliation ofthe difference between the amount ofFederal income tax expense reported in the Statement ofincome and the amount computed by multiplyingthe income by the statutory tax rate.

(Thousands ofDollars) l990 l989 1991 Net Income, Add: Federal income tax ex ense Isol'retax Amount Income

$57,997 29,679 98of Pretax Amount Income

$59,881 32,031 98of Pretax Amount Income

$ 71,444 36,400 income before Federal income tax Computed tax expense Increases (decreases) in tax resulting from:

Difference between tax depreciation and.

amount deferred Investment tax credit Miscellaneous items, net Total Federal income tax expense 4,127 4.5 3,646 X4 (2,752)

(3.0)

(2,853)

(2.6)

(594)

(0.7)

(1,060)

(1.0) 5,606 6.4 (2,432)

(2.8)

(3,305)

(3.7)

$29,679 33.9

$32,031 34.8

$ 36,400 33.8

$87,676

$91,912

$ 107,844

$29,810 34.0

$31,250 34.0

$ 36,667 34.0 Asummary ofthe deferred amounts charged or (credited) to income is as follows:

IThousands ofDo)lars)

I99I I990 1989 Investment tax credit Depreciation Fuelcosts Sterling abandonment Deferred ice storm charges Accrued revenue Disallowed project c'osts Alternative MinimumTax Revenues Deferred-Nine MileTwo Pension Other items Total

$ (2,414) 22,906 1,180 P96) 1,596 (2,475) 1,028 (2,729)

(1,614)

$ (4,235) 24,158 205 512 9,666 (353)

(13,768)

(2,413)

(2,721)

(1,927)

$ 9,124

$ 16,682

$ (1,448)

, 25,473 338 (3,179) 4,416 (1,077)'5,01 6)

~ 4,604 (898)

(3/66)

$ 19,847

Rochester Gas and Electric Corporation NOTES TO FINANCIAL STATEMENTS 36 NOTE 3. PENSION PLANANDOTHER RETIREMENTBENEFITS The Company has a defined benefit pension plan covering substantially allofits employees. The benefits are based on years ofservice and the employee's compensation during the last three years of employment. The Company's funding policy is to contribute annually an amount consistent with the requirements, ofthe Employ(se Retirement Income Security Act. These contributions are intended to provide forbenefits attributed to service to date and forthose expected to be earned in the future.

The plan's funded status and amounts recognized on the Company's balance sheet are as follows:

(Millions) 1991 1990 Accumulated benefit obligatiort, including vested benefits of $237.4 in 1991 and $207.1 in 1990 251.9'219.7'rojected benefitobligation for service rendered to date

$359.7" 311.9'ess-Plan assets at fairvalue, primaril listed stocks and bonds 433.3 357.1 Unrecognized netgaln frompast experience diferent from that assumed and effects of changes in assumptions Less-Prior service cost not yet recognized in net periodic pension cost Less-Unreco nized net obli ation at December 31 Pension iiabilit recognized on the balance sheet

'Actuarial present value (73.6)

(45.2) 98.0 62,7 5.5 5.8 5.4 5.9

$ 13.5 5.8 Net pension cost included the followingcomponents:

(Millions) 1991 1990 1989 Service cost-.benefits earned during theperiod 7.1 7.3 6.4 Interest'cost on projected benefit obligation 26.4.

25,3 23.7 Actual return on plan assets (58.6)

(9.0)

(63.5)

Net amortization and defenal 33.1

'15.1) 43.1 Net periodic pension cost 8.0 8.5 9.7 The projected benefit obligation at December 31, 1991 and 1990 assumed discount rates of 7Mpercent and 8t/, percent, respectively, and a long-term rate ofincrease in future compensation levels of6/a percent and 7 pt rcent,respectively The assumed long-term rate ofreturn on plan assets at December 31, 1991 and 1990 was 8r/a percent. The unrecognized net obligation is being amortized over 15 years beginning January 1986.

In addition to providing pension benefits, the Company provides certain health care and life insurance benefits. forretired employees and health care coverage forsurviving spouses ofretirees (see Note I),The cost ofproviding these benefits was approximately $3 0 millionin 1991, $2 5 millionin 1990, and $2.2 millionin 1989.

During the first quarter of 1992, the Company willadopt SFAS-106 "Accounting for Postretirement Benefits Other'han Pensions". The Company estimates that the net periodic cost forpostretirement benefits at the time ofadoption willbe approximately $6.6 millionbased on accrual accounting required by SFAS-106.'fhe net periodic cost includes approximately $2.2 millionamortization ofthe unrecognized transition obligation(the accumulated postretirement benefit obligation at adoption),

currently estimated at $45 millionand to be amortized over twentyyears. In accordance with its latest rate proceeding (PSC Opinion 91-13), the Company has been provided revenues in rates equal to the expenses to be accrued.

NOTE 4. DEPARTMENTALFINANCIALINFORMATION The Company's records are maintained by operating departments, in accordance with PSC accounting policies, giving effect to the rate-making process. The followingis the operating data for each ofthe Company's departments, and no interdepartmental, adjustments are required to arrive at the operating data includedin the Statement ofincome.

Rochester Gas and Electrtc Corporation 37 (Thousands ofDollars) 199 I t990 l989 ELECTRIC Operating Information Operating revenues

$ 617,542 Operating expenses, excluding provision forincome taxes 478,101

$ 594395 464,478

$ 581,124

~

445,539 Pretax operating income Provision forincome taxes 139,441 129,917 31890

'0,670 135,585 29,887 Net operatin income Other information

Depreciation and amortization Nuclear fuel amortization Capital expenditures Investment Information Identifiable assets (a) 108,051 72,746 23,606

$ '7r294

$ 1,607,210 99,247 67/02 25,573 101,024

$ 1,557,176 105,698 65,287 21,923 98,646

$ 1,522334 GAS Operating Information Operating revenues Operating expenses, excludin provision forincome taxes Pretax operating income Provision forincome taxes Net operatin income

$ 235,728 216,151 19,577 2,869 16,708

$ 236,496 214,505 21,991 3,820

$ 264,573 231,086 33,487 7,952 18,171

'25,535 Other Information Depreciation and amortization Capital expenditures Investment Information Identifiable assets (a)

(a) Excludes cash, unamortized debt expense and other ~ommonltems.

11,435 26,763 325,451 10,465 25,752

$ 291,088 9,776 22,002 284,511 NoTE 5. JoINTLY-OwNEDFAGILITIEs Nine hlile Point Nuclear Unit No.2 The followingtable sets forth the jointly-owned electric generating facilities in which the Company is participating. Both Oswego Unit No. 6 and Nine. MilePoint Nuclear Plant Unit No. 2 have been con-structed and are operated by Niagara Mohawk Power Corporation. Each participant must provide its own financing forany additions to the fa'cilities. The Company's share ofdirect expenses associated with these two units is included in the appropriate operating expenses in the Statement ofincome.

Various modifications willbe made throughout the lives ofthese plants to increase operating efficiency or reliability,and to satisfy changing environmental and safety regulations.

Oswego UnitNo.6 Net megawatt capacity RG&E's share-megawatts

-percent Year ofCompletion Plant in Service Balance 12/31/91 Accumulated Provision for Depreciation 12/31/91 Plant Under Construction 12/31/91 850 204 24 1980

$95.5

$28.6

$ 3.0 (htillionsofDollars) 1,080 151 14 1988

$868.2

$420.8 9.7 The Plant in Service and Accumulated Provision for Depreciation balances forNine MilePoint Nuclear Unit No. 2 shown above have been increased by disallowed costs of$374.3 million.Such costs, net of income tax effects, Were previously written offin 1987 and 1989.

Rocbesrer Gas and Elecrrlc Corporarlon NOTES TO FINANCIAL STATEMENTS 38 NOTE 6. LONG TERM DEBT FIRST MORTGAGE BONDS Series Due

, trhousands)

Frtnci at Amount December 3I 199I I990 41/2 4/I 5.3 6~/i 6,7 8"

9'/i 9'/i 8'/i 91/1 6'/i 10.95 12'/<

13'/i 1 1 '/i 8.6 Sr/i 11'/i 8'/i 9i/i Nov. 15, 1991 Sept. 15, 1994 May 1, 1996 Sept. 15, 199?

July 1, 1998 Aug 15 1999 Sept. 1, 2000 June 15, 2006 Sept. 15,2007 Dec. 1,2003 Aug. 1,2009 Feb. 15,2005 May 15,2012 June 15, 1999 May 15, 1995 Aug. 1, 1993 May 1,1992 June 15, 1993 Dec. 1,2028 Apr. 1,2021 T

$ 15,000 U

16,000 16,000 18,000 18,000 W

20,000 20,000 X

30,000 30,000 Y

30,000 30,000 z

30,000.

'0,000 BB 50,000 50,000 CC

'0,000 50,000 DD 40,000 40,000 EE 10,000 10,000 FF 27,500 33,000 HH 10,500'0,500 JJ 20,000-22,500 KK 49334 LL 75,000 75,000 MM 75,000 75,000 NN 20,000 OO 25,500 25,500 PP 100 000 Net bond (discount) premium Less:Duewithinone ear Total 627,500 (328) 96,750

$530,422 619,834 128 40,250

$579,712 The First Mortgage provides security for the bonds through a firstlien on substantially all the property owned by the Company (except cash and accounts receivable).

Sinking and improvement fund requirements aggregate $333,540 per annum under the First Mortgage, excluding mandatory sinking funds ofindividual series. Such requirements may be met by certification ofadditional property or by depositing cash with the Trustee. The 1990 and 1991 require-ments were met bycertification ofadditional property.

The Series EE, Series HH and Series OO First Mortgage Bonds equal the principal amount ofand provide forall payments ofprincipal, premium and interest corresponding to the Pollution Control Revenue Bonds, Series A, Series B and Series C, respectively (Rochester Gas and Electric Corporation Projects) issued by the New YorkState Energy Research and Development Authoritythrough a partici-pation agreement with the Company. The Series EE Bonds are subject to a mandatory sinking fund beginning August 1,2000 and each August I thereafter. Nine annual deposits aggregating $3.2 million willbe made to the sinking fund, with the balance of$6.8 millionprincipal amount ofthe bonds becoming due August 1,2009.

The Series FF First Mortgage Bonds are subject to a mandatory sinking fund of$2.75 million annually which began on February=-15, 1986 and willcontinue each February 15, with the noncumula-tiVeoption to double the payment in any year up to a maximum of5 years. Annually, since 1988, the Company exercised this option and redeemed an additional $2.75 millionofSeries FF Bonds in each year and the Company expects to exercise this option to redeem an additional $2.75 millionin February 1992. On February 18, 1992 the Company willexercise its option to redeem $ 16.5 millionprin-cipal amount ofthese bonds at a price of 105.4896.

Rochester Gas and bTectrfc Corporation 39 The Series JJ First Mortgage Bonds are subject to a mandatory sinking fund of$2.5 millionannually, which began on June 15, 1990, and willcontinue each June 15 thereafter.

The Series LLand MMFirst Mortgage Bonds are not redeemable prior to maturity.

Sinking fund requirements and bond maturities for the next fiveyears are:

fThousands) l993 l994 r '

995 l996 1992 Series FF Series JJ Series MM Series LL Series U Series V

$ 19/50',500 75,000

$ 2,750

$ 2,750 2,500

~

2,500 75,000 16,000

$ 2,750 2,500

$ 2,500 18,000

$96,750'80,250

$21/50

$ 5350

$20,500

'ncludes p)armed redemption of5) 65 millionofSeries FF on February l8, l992.

PROMISSORY NOTES issued l99i IThousands)

December 3l l990 November 15, 1984 December 5, 1985 Jul 22,1987 Total October 1,2014 November 15,2015 Jul 15,2027

$ 51,700 40,200 50,000

$ 141,900

$ 51,700 40/00 50,000

$ 141,900 The Company is obligated to make payments ofprincipal, premium and interest on each Promissory Note which correspond to the payments ofprincipal, premium, ifany, and interest on certain Pollution Control Revenue Bonds issued by the New YorkState Energy Research and

. Development Authority(NYSERDA) as described below. These obligations are supported by certain Bank Letters ofCredit discussed below. Anyamounts advanced under such Letters ofCredit must be repaid, with interest, by the Company.

The $51.7 millionPromissory Note was issued in connection with NYSERDA's Floating Rate r MonthlyDemand Pollution Control Revenue Bonds (Roche'ster Gas and Electric Corporation Project),

Series 1984. This obligation is supported by an irrevocable Letter ofCredit expiring October 15, 1994.

The interest rate on this note foreach monthly interest payment period willbe based on the evaluation ofthe yields ofshort term tax-exempt securities at par having the same credit rating as said Series 1984 Bonds. The average interest rate was 4 3296 for 1991,5 5596 for 1990 and 61496 for 1989. The interest rate willbe adjusted monthly unless converted to a fixed rate.

The $40.2 millionPromissory Note was issued in connection with NYSERDA's Adjustable Rate Pollution Control Revenue Bonds (Rochester Gas and Electric Corporation Project), Series 1985. This obligation is supported by an irrevocable Letter ofCredit expiring November 30, 1994. The annual interest rate was adjusted to 5.90% efective November 15, 1988, to 6.15% effective November 15, 1989,

, to 5.70% effective November 15,.1990 and to 4.5096 effective November 15, 1991. The interest rate will be adjusted annually unless converted to a fixed rate.

The $50.0 millionPromissory Note was issued in connection with NYSERDA's Adjustable Rate Pollution Control Revenue Bonds (Rochester Gas and Electric Corporation Project), Series.1987. This obligation is supported by an irrevocable Letter ofCredit expiring July 31, 1994. This Promissory Note bore interest at 5r/s% per annum through July 14, 1990. The annual interest rate was adjusted to 6.30%

effective July 15, 1990 and to 5.50% effective July 15, 1991. The interest rate willbe adjusted annually'nless converted to a fixed rate.

r

Rochester Gas and Electric Corporation NOTES TO FINANCIAL STATEMENTS 40 NOTE 7. PREFERRED ANDPREFERENCE STOCK Type, byorder ofSeniority Preferred Stock (cumulatIve)

Preferred Stock (cumutative)

Preference Stock

'See below fo'rmandatoryredemption requirements Par Value

$ 100 25 I

Shares Authorized 2,000,000 4,000,000 5,000,000 Shares Outstanding 1370,000'ptional Redemption (per share) a No shares ofpreferred or preference stock are reserved for employees, or foroptions, warrants, conver-sions, or otheoights.

A. Preferred Stock, not subject to mandatory redemption;,

Shares (Thousands)

Outstanding December 31 Series December 31,1991-1991 1990

$ 12,000 8,000 6,000 5,000 6,000 10,000 20,000 120,000 80,000 60,000 50,000 60,000" 100,000 200,000 F

$ 12,000 4.10 H

8,000 4'/<

I 6,000 4.10 j

5,000 4.95 K.

6,000 4.55 M

10,000 7.50 N

20,000

$ 105 101 101 102.5 102 101 102 Total 670,000

$67,000

$67,000

<<Maybe redeemed at any time at the option ofthe companyon 30daysminimunt notice, plus accrued dividendsln allcases B. Preferred Stock, subject to mandatory redemption:

Shares Outstanding Series December 3), l991 (Thousands)

December 31 1991 1990 Optional Redemption (per share) 8.25 7.45 7.55 7.65 R

s T

U 300,000 100,000 100,000 100,000

$30,000 10,000 10,000 10,000

$3,0,000

$ 108.25 Before 3/I/92+

Not applicable Not applicable Not applicable Total

+Thereatter at lesser rates 600,000

$60,000-

$30,000 MANDATORYREDEMPTION PROVISIONS In the event the Company should be in arrears in the sinking fund requirement, the Company md@

not redeem or pay dividends on any stock subordinate to the Preferred Stock.

Series R. Mandatory redemption of60,000 shares per year at $ 100 per share commences on March I, 1993 for Series R and on each March I thereafter, so long as any shares remain outstanding..

In addition, the Company has the non-cumulative right to redeem up to an additional 60,000 shares on the same terms and dates applicable to the mandatory sinking fund redemptions.

Sexes S, Series T, Series U. Allofthe shares are subject to redemption pursuant to mandatory sinking funds on September I, 1997 in the case ofSeries S; September I, 1998 in the case ofSeries T; and September I, 1999 in the case ofSeries U; in each case at $ 100 per share.

Rochester Gas and Electr(c Corporattorr

~

41 NOTE 8. COMMONSTOCK AtDecember 31, 1991, there were 50,000,000 shares of$5 par value Common Stock authorized, of which 32,101,139 were outstanding. No shares ofCommon Stock are reserved foroptions, warrants, conversions, or other rights. There were 793,503 shares ofCommon Stock reserved and unissued for shareholders under the Automatic Dividend Reinvestment and Stock Purchase Plan and 163,326 shares reserved and unissued foremployees under the RG&ESavings Plus Plan.

COMMONSTOCK:

Balance,January1,1989

'utomatic Dividend Reinvestment and Stock Purchase Plan Capital Stock Expense Balance, December 31, 1989 Automatic Dividend Reinvestment and Stock Purchase Plan Savings Plus Plan Capital Stock Expense Balance, December 31, 1990 Automatic Dividend Reinvestment and Stock Purchase Plan Savings Plus Plan Ca ital Stock Expense Balance, December 31, 1991 Per Share 17.288-20.913 18.600-19288 18.625-

• 19.750 18.750-23.i63 19.375" 23.563 Shares Outstanding 30,785,811 472,157 31/57,968 134,828 28,472 31,421/68 571,669 108202 32,101,139 Amount rthousands)

$504,907 S

8,761 (108)

$513,560 2513 545 (230)

$516388 11,252 2,194 (495)

$529,339 NOTE 9. SHORT TERM DEBT.

AtDecember 31, 1991 and December 31, 1990, the Company had short term debt outstanding of

$59.5 millionand $42.4 million,respectively. The weighted average interest rate on short term debt outstanding at year end 1991 was 5.0996 and was 6.4396 forborrowings during the year. For 1990, the weighted average interest rate on short term debt outstanding at year end was 8.8596 and was 85496 forborrowings during the year.

On December I, 1988 the Company renewed its $90 millionrevolving credit facilityfora period of threeyears. The commitment termination date has been extended to December 31, 1994. Commitment fees related to this facilityamounted to $ 149,000 in 1991, $ 164,000 in 1990 and $ 168,000 in 1989.

The Company's Charter provides that unsecured debt may not exceed 15 percent ofthe Company's total capitalization (excluding unsecured debt). As ofDecember 31, 1991, the Company would be able to incur $5.2 millionofunsecured debt under this provision. In order to be able to use its revolving credit agreement, the Company has created a subordinate mortgage which secures borrowings under its revolving credit agreement that might otherwise be restricted by this provision ofthe Company's Charter.

. In addition, since June 1990 the Company has had a credit agreement with a domestic bank provid-ing forup to $20 millionofshort term debt. Borrowings under this agreement, which has been extended to December 31, 1992, are secured by the Company's accounts receivable.

NOTE IO. COMMITMENTSAND OTHER MATI'ERS CAPITALEXPENDITVRES The Company's 1992 construction expenditures program is currently estimated at $ 145 million, including $ 10 millionofcarrying charges. The Company has entered into certain commitments for purchase ofmaterials and equipment in connection with that program.

(Note t0 eontlnuodon page 42)

Rochester Gas and Eleetrlo Corporatton NOTES TO FINANCIAL STATEMENTS 42 (continuedJrom page 4ti SEVERE ICE STORM ANDSTORM PLAN In its filingfornew electric rates in August 1991 and in a separate petition to the PSC, the Com-

'any is seeking fullrecovery ofcosts itincurred as a result ofthe March 1991 ice storm. Through December 31, 1991, the Company incurred incremental storm damage repair costs ofapproximately

$36.4 million,none ofwhich are reimbursable through insurance coverage. That amount is reflected on the balance sheet under deferred debits and a portion ofsuch arriount (estimated at 20%) is expected to be capitalized as plant additions. The Company has requested recovery ofdeferred storm-related costs, other than capital additions, over a period of25 years. That request is under review in the Company's pending rate cases where Staffofthe PSC and intervenors are urging various disallow-ances ofthe Company's storm damage repair costs. The Company believes those costs to be prudent and, therefore, recoverable in rates, but itcannot predict what action the PSC may ultimately take regarding the Company.'s rate request, including the recovery ofstorm-related costs.

The Company in 1991 upgraded its procedures forresponding to storm emergencies and included them in the Company's storm emergency plan. The plan, which reflects improvements stemming from both the Company's self assessment and a reportprepared by the staffofthe PSC, was filed with the

= PSC in 1991. The electric rates authorized for the Company in the PSC's June 1991 rate order are subject to a refund of$4 millioncontingent upon the filingwiththe PSC ofa revised storm emergency plan. The Company believes its plan satisfies PSC requirements, but the plan is subject to further revision result-ing from the Company's own and PSC review.

The Company has resolved substantially all ofthe claims fordamages resulting from the ice storm and storm restoration eflorts and believes that the amount required to satisfy all such claims willnot be material.

NVCLEAR"RELATEDMATI'ERS

'Decommissioning Aust. Under accounting procedures approved by the PSC, the Company has been collecting in its electric rates amounts forthe eventual decommissioning ofits Ginna Plarit and forits 14% share ofthe decommissioning ofNine MileTwo. The Company has collected approximately

$42.8 millionthrough December 31, 1991.

InJune 1988, the NRC issued new regulations establishing criteria forvarious facets ofdecommis-sioning including acceptable alternative methods, planning, funding and environmental review. The

~

NRC regulations establish a minimum external funding level determined by formula. The NRC minimum represents only the cost ofremoving the radioactive plant structures. The Company's depre-'iation rates reflect a 5% cost ofremoval factor forGinna non-radioactive plant structur'es; however, they do not currently reflect a cost ofremoval factor for the Company's 14% share ofNine MileTwo non-radioactive plant structures. Since March 1990, the Company has deposited $ 18.5 millionto external decommissioning trust funds. InJuly 1990, the Company, in compliance with the NRC regula-tions, submitted a funding plan to the NRC.

In connection withthe Company's rate case completed inJune 1991, the PSC approved the collec-tion during the rate year ending June 30,1992 ofan aggregate $ 10.1 millionfordecommissioning, covering both nuclear units. The amount allow'ed in rates is based on estimated ultimate decommis-sioning costs of$ 134.7 millionforGinna and $30.6 millionfor the Company's 14% share ofNine Mile Two (1991 dollars). The Company intends to fund the external decommissioning trust in the amount of the NRC minimum funding requirement. The difference between the amount to be collected and the NRC minimum willbe held in an internal reserve.

In August 1991, the NRC approved the Company's application foran amendment to the Ginna Nuclear Plant operating license extending the license expiration date from April25,2006 to Septem-ber 18,2009, As a result, the annual expense accrual required to fullyfund the external decommis-sioning trust funds willbe reduced by approximately $ 1.4 millioneach year commencing with the rate year beginning July I, 1992.

insurance Program. The Price-Anderson Act establishes a federal program, providing indemni-fication and insurance against public liability,applicable in the event ofa nuclear accident at a licensed U.S. reactor. Amendments to the Actin 1988 increased the public liabilitylimitto approximately

Rochester Gas and Eleclrlc Corporallon 43

$7.4 billion,expanded coverage to include precautionary evacuations and extended the Act's effective-ness until the year 2002. Under the program, claims would firstbe met by insurance which licensees are required to carry in the maximum amount available (currently $200 million).Ifclaims exceed that amount, licensees are subject to a retrospectiveassessment up to $63 millionper licensed facilityfor each nuclear incident, payable at a rate not to exceed $ 10 millionper year. Those assessments are subject to periodic infiation-indexing and to a 5% surcharge iffunds prove insuficient to pay claims.

The Company's interests in two nuclear units could thus expose itto a current potential payment for each accident of$718 millionthrough retrospective assessments of$ 114 millionper year in the event ofa sufiiciently seriou nuclear accident at its own or another U S. commercial nuclear reactor.

Beginning in 1988, coverage forclaims alleging radiation-induced injuries to some workers at nuclear reactor sites was removed from the nuclear liabilityinsurance policies purchased by tfie Company. Coverage forworkers firstetigaged in nuclear-related employment at a nuclear site prior to 1988 continues to be provided under then-existing nuclear liabilityinsurance policies. Those workers firstemployed at a nuclear facilityin 1988 or later are covered under a separate, industry-wide insur-ance prograin. That program contains a retrospective premium assessment feature whereby partici-pants in the program can be assessed to pay incurred losses that exceed the program's reserves. Under

'he plan as currently established, the Company could be assessed a maximum of$3.2 millionover the lifeofthe insurance coverage.

The Company is a member ofNuclear Electric Insurance Limited, which provides insurance coverage for the cost ofreplacement power during certain prolonged accidental outages ofnuclear generating units and coverage forproperty losses in excess of$500 millionat nuclear generating units.

As ofDecember 31, 1991, the Company is purchasing a weekly indemnity limitof$3.5 millionin the NEILI replacement power expense program and fullpolicylimitsof$ 1.25 billionin the NEIL11 Property Insurance Program. Coverage under the Property. Insurance Program includes the shortfall in the NRC required external trust fund resulting from the premature decommissioning ofa nuclear power plant followingan'accident withproperty damage in excess of$500 million.The Company currently has des-ignated $ 167 millionas a sublimit for this coverage at the Ginna Nuclear Power Plant. The owners at Nine MileTwo have selected the maximum available sublimit of$200 million.Ifan insuring program's losses exceeded its other resources available to pay claims, theCompany could be subject to maximum assessments in any one policyyear ofapproximately $5.3 millionand $6.9 millionin the event oflosses under the replacement power and property damage coverages, respectively.

ENVIRONMENTALMATTERS In 1985, the New YorkState Department ofEnvironmental Conservation (NYSDEC) identified property in the vicinityofthe Lower Falls ofthe Genesee River in Rochester as an inactive hazardous waste disposal site (the Site). The Company owns, and was the priorowner or operator of, a number of locations within the Site. In mid-1991 NYSDEC advised the Company that itdelisted the Site, i.e.,

removed itfrom its Registry of Inactive Hazardous Waste Sites. The effect ofdelisting is to terminate the Company's status as a potentially responsible party forthe Site, to discontinue the pending NYSDEC review ofa jointCompany/City ofRochester proposal fora limited further investigation ofthe Site, and to defer (and perhaps end) the prospect ofSite remedial action and any Company sharing of

'the cost thereof. However, NYSDEC also stated its intention to consider listing individual coal gasifi-

. cation sites within the larger, original site once the State ofNew Yorkadopts new federal procedures under which such individual sites willbe compared to new hazardous waste criteria. The Company and its predecessors formerlyowned and operated coal gasification facilities within the Site and, in September 1991, the Company voluntarilyinitiated a study o'fsubsurface conditions in the vicinityof those retired facilities. The Company is unable to predict what further listing action NYSDEC-may take, but regards the delisting as a positive development.

Atanother location along the River where the Company owns property, a boring taken in Fall 1988 for a sewer system project showed a layer containing a black viscous material. The material does not appear to be linked to the Site. The Company undertook an investigation to determine the extent of contamination. The study found that some soil and ground water contamination existed on-site, but there was no evidence that the contamination had migrated of-site. The matter was reported to the NYSDEC and, in September 1990, the Company also provided the agency with a risk assessment for its

[Note locontinuedon page 44l

Rochester Gas and Electric Corpora(lan NOTES TO FINANCIAL STATEMENTS 44 (cont(nuedftom page 43) review. Ifthe NYSDEC requires remediation ofthis location, the Company may be fullyor partially responsible for the costs ofinvestigation and any site reme'diation. The Company cannot at this time predict what may result from the NYSDEC review ofinformation on the material from the boring, what future studies may be performed, what remediation measures may be directed and what share ofany such activities the Company may be asked to assume.

On a portion ofthe Company's property in the Site, and elsewhere in the general area,'he County of Monroe has installed and operates sewer lines. During sewer installation, the County constructed over Company property, pursuant to an easement the Company granted the County, certain retention ponds which were reportedly used to recover from the sewer construction area certain fossil-fuel-based materials t'the materials" ) found there. InJuly 1989, the Company received a letter from the County asserting that activities ofthe Company left the County unable to effect a regulatorily-approved closure ofthe retention pond area. The County's letter takes the position that itintends to seek reimbursement forits additional costs in recovering the materials once the NYSDEC identifies the generator thereof and that any further cleanup action which the NYSDEC may require at the retehtion pond site is the Company's responsibility. In the course ofdiscussions over this matter, the County has claimed, with-out offering any evidence, that the Company was the original generator ofthe materials. Itasserts that itwillhold the Company liable forall County costs-presently estimated at $ 1.5 million-associated both with the materials'xcavation, treatment and disposal and witheffecting a regulatorily-approved closure ofthe retention pond area. The Company could incur costs as yet undetermined ifitwere to be found liable forsuch closure and materials handling, although provisions ofthe easement afford the Company rights which may serve to ofset all or a portion ofany such County claim.

In the letter announcing the Site delisting, NYSDEC indicated an intention to pursue appropriate closure ofthe County's former retention pond area, suggesting that it may be treated as a separate hazardous waste site, The Company is unable to assess what implications the NYSDEC letter may have

'or the County's claim against it.'AS COST RECOVERY

/

Throughout the late 1970's and early 1980's, many interstate natural gas pipelines signed long-term gas sales contracts with producers under which the pipelines were obligated to take delivery ofa specified percentage ofmaximum contract volumes ofnatural gas or, ifsuch quantities were not taken, to p'ay for them ("take-or-pay"). As a result ofreduced demand, many pipelines subsequently experi-

. enced a significant reduction in sales, leading to substantial take-or-pay liabilityto their producers. The t:ERC has adopted an approach which requires pipelines to absorb substantial portions oftheir take-or-pay costs and requires the pipelines'ustomers to develop consensus methodologies to allocate the remaining costs among customers. These are beingdeveloped in individual pipeline rate cases at this time.

The PSC instituted a proceeding in October 1988 to determine the extent to which the gas distribu-tion companies in New YorkState would be permitted to recover in rates the take-or-pay costs imposed upon them. That proceeding is ongoing, and the issues raised include the legal authority of the PSC to deny recovery ofsuch costs. However, in October 1989 the PSC approved a settlement between the Staffofthe PSC an'd the Company providing forthe Company to recover in rates 8759'o of the first $ 12 millionofthe pipeline take-or-pay costs imposed upon it.The recovery ofany take-or-pay costs incurred in excess of$ 12 millionwould be subject to future determination.

In addition, the FERC is in the process ofdeveloping policies and rules which willenable natural gas purchasers, such as the Company, to choose their gas suppliers and receive non-discriminatory services from the interstate pipelines. Amajor component ofthis policydirection permits natural gas purchasers to convert their purchase contracts with interstate pipelines into transportation contracts.

These conversions w'illrequire the pipelines to reduce their'purchase commitments to natural gas pro-ducers. The costs ofsuch reductions willbe allocated among the pipelines'ustomers. The allocation methodologies are being developed in individual rate cases at this time.

The Company is presently unable to estimate the amount oftake-or-pay or transition costs which may ultimately be included in its pipeline suppliers'harges to it. As ofDecember 31, 1991 the Company had been billed for$ 10.8 millionoftake-or-pay costs and has thus far recovered $7.4 millionfrom its customers.

Rochester Gas and Elee<rre Corporaslon 45 OTHER MATTERS The Company has a contract with the DOE fornuclear fuel enrichment services which assures pro-vision of70% ofthe Ginna Nuclear Plant's requirements throughout its service lifeor 30 years,

, whichever is less. No payment obligation accrues unless such enrichment services are needed.

Annually, the Company is permitted to decline DOE-furnished enrichment for a future year upon giving

'en years'otice. Consistent with that provision, the Company has terminated its commitment to DOE forthe years 2000 and 2001. The Company has secured the remaining 30% ofits Ginna requirements forthe reload years 1992 through 1995 under different arrangements with DOE. The Company plans to meet its enrichment requirements foryears beyond those already committed by making further arrangements with DOE or by contracting with third parties. The cost ofDOE enrichment services utilized for the next seven reload years (priced at the most current rate) ranges from $4 millionto

$7 millionper year.

ln late 1986 and early 1987, the Secretary ofthe Company corresponded withattorneys who were threatening to bring a shareholders'erivative action on behalfof the Company against officers and directors responsible forCompany activities related to the Company's participation in Nine MilePoint Unit2. Neither the directors nor Company oflicers have received further communications from this party on this matter in the intervening fiveyears. The same attorneys commenced a stockholder derivative suit in federal district court againstdirectors and oflicers ofNiagara alleging certain claims regarding Unit 2 and, when that suit was dismissed, commenced a similar suit in October 1990 against the same defendants in State Supreme Court, Onondaga County. On July 12, 1991, the judge hearing the latter suit approved a settlement from which no party has appealed. The Company is unable to predict whether the threats received by itwilllead to litigationsimilar to that in which Niagara was involved.

REPORT OF INDEPENDENT ACCOUNTANTS Price P~aterhouse 1900 Uncoln First Tower Rochester, New York 14604 January 27, 1992 To the Shareholders and Board ofDirectors of

'ochester Gas and Electric Corporation in ouropinion, the accompanying balance sheets and the related statements ofincome, retained earnings and cash flows present fairly,in all material respects, the financial position ofRochester Gas and Electric Corporation at December 31, 1991 and 1990, and the results ofits operations and its cash flows foreach ofthe three years in the period ended December 31, 1991, in conformity withgenerally accepted accounting principles. These financial statements are the responsibility ofthe Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits ofthese statements in accordance withgenerally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial.statement presentation. We believe thatour'audits provide a reasonable basis for the opinion expressed above.

Rochester Gas and Elecrrrc corporation REPORT OF MANAGEMENT 46 The management ofRochester Gas and Electric Corporation has prepared and is responsible for the financial statements and related financial information contained in this Annual Report.

Management uses its best judgements and estimates to ensure that the financial statements reflect fairlythe financial position, results ofoperations and cash fiows ofthe Company in accordance with generally accepted accounting principles. Management maiptains a system ofinternal accounting controls over the preparation ofits financial statements designed tb provide reasonable assurance as to the integrityand reliabilityofthe financial records.

This system ofinternal control includes documented policies and guidelines and periodicevalua-tion and testing by the internal audit department.

The Company's financial statements have been examined by Price Waterhouse, independent accountants, in accordance withgenerally accepted auditing standards. Their examination includes a review ofthe Company's system ofinternal accounting control and such tests and other procedures, necessary to express an opinion as to whether the Company's financial statements are presented fairly in all material respects in conformity withgenerally accepted accounting principles. The report ofPrice Vtfaterhouse is presented on page 45.

The AuditCommittee ofthe Board ofDirectors is responsible forreviewing and monitoring the Company's financial reporting and accounting practices. The AuditCommittee meets regularly with management and the independent accountants to review auditing, internal control and financial reporting matters. The independent accountants have direct access to the AuditCommittee, without management present, to discuss the results oftheir examinations and their opinions on the adequacy ofinternal accounting controls and the quality offinancial reporting.

Management believes that, at December 31, 1991, the Company maintained an effective system of

'nternal control over the preparation ofits published financial statements.

8!4u Roger W. Kober Chairman ofthe Board, President and ChiefExecutive Officer Robert C. Henderson d

Senior Vice President, Controller and ChiefFinancial Oflicer January 27, 1992

'INTERIM FINANCIAL DATA In the opinion ofthe Company, the followingquarterly information includes all adjustments, consisting ofnormal recurring adjustments, necessary fora fairstatement ofthe results ofoperations forsuch periods. The variations in operations reported on a quarterly basis are a result ofthe seasonal nature ofthe Company's business and the availabilityofsurplus electricity.

tThousands)

Quarter Ended December 31, 1991'eptember 30, 1991 June 30, 1991 March 31, 1991 December 31, 1990 September 30, 1990 June 30, 1990 March 31, 1990 December 31, 1989 September 30, 1989 June 30, 1989 March 31, 1989 Operating RevenUes

$229831 195,629 182,637 245,673

$ 220/60 187,508 182,216 240,807

$ 233,001 183209 184,553 244,933 Operating Income

$38,578 31,752 17,230 37,198

$ 32,878 30/18 16,541 37,781

$ 37,991 31,698 18,579 42,965

'Includes recognition ofs6.6 millionnerf.tax fuel audit disallowance Iret Income

$ 14,911 17/62 1,538 24+86

$ 18,136 15,593 2,068 24,084

$ 21,627 18,420 3/82 28,114 Earnings on Common Stock

$ 12,467 15,756 32 22,780

$ 16,630 14,087 562 22,578

$ 20,121 16,914 1,776 26,608 Earnings per Common Share (in do!lars)

$.38

,49'72

$.53

.45

.01

.72

$.64

.54

.05

.86

I Rochester Gas and Etectrtc Corpora(Ion COMMON STOCK AND DIVIDENDS 47 Earnin s 1991 1990 1989 Shares 1991 1990 1989 Earnings per weighted average share

$ 1.60 Number ofshares (000's)

$ 1.72

$2. IO Weighted average 31,794 3 I,293 3 l,090 Actual number at December 3 I -

32,101 31,42 I 31,258 TAXSTATUS OF CASIrDIVIDENDS Cash dividends paid in 1991, 1990 and 1989 were100 percent taxable for Federal income tax purposes.

DIVIDENDPOLICY The Company has paid cash dividends quarterly on its Common Stock without interruption since itbecame publiclyheld in 1949. The Company intends to strive to achieve a common stock dividend payout equal to 8.5 to 9.0 percent ofcommon stock book value. However, the level of future cash dividend payments willbe dependent upon the Company's fttture earnings, its financial requirements and other factors. The Company's Certificate ofincorporation provides for the payment ofdividends on Common Stock out ofthe surplus net profits (retained earnings) of the Company.

Quarterly dividends on Common Stock are generally paid on the twenty-fifthday ofJanuary, April,July and October'. InJanuary 1992, the Company paid a cash dividend of$.42 per share on its Common Stock, up $.015 from the prior quarterly dividend payment of$.405. The January 1992 dividend payment is equivalent to $ 1.68 on an annual basis.

COMMONSTOCK TRADING Shares ofthe Company's Common Stock are traded on'the New YorkStock Exchange under the symbol "RGS".

1989 RANGE OF COMMON STOCK PRICE (tn Dollars) 1990 RANGE GF COMMONSTOCK PRICE (ln Dollars) 1991 RANGE OF COMMON STOCK PRICE (fn Dollars)

~

24 21 20 20.88 2128 22.13 24 23 21.75 21 20 19.88 20t)0 19.25 24 22 20.75 20.88 20.50 20 23.88 20.13 16 15 17.00 17.00 19 18.25 18 19.13 19.50 19 18 17 16 15 19.50 17.50 16.88 17.88 19 18 17.75 17 16 15 19.00 19.00 1st 2nd 3rd 4th Quarter DIVIDENDSPAID PER SHARE,

'1989 PER QUARTER (ln Dollars) 0.375 0375 0375 0375 1st. 2nd 3rd 4th I

Quarter DIVIDENDSPAID PER SHARE, 1990 PER QUARTER (ln Dollars) 039 0.39 039 039 1st 2nd 3rd 4th Quarter DIVIDENDSPAID PER SHARE, 1991 PER QUARTER (ln Dollats) 0.405 0.405 OA05 0.405

Roebesrer

<<7as and Eleerrlc Corporarlon SELECTED FINANCIAL DATA (thousands ofDollars)

Year Ended December3l 1991 l990 f989 f988 f987 I986

SUMMARY

OF OPERATIONS Operating Revenues Electric Gas

$588,930 235,728

$551,930 236,496

'543,096

$514,637

$ 489/66 264,573 '31217 218,408

$463,841 257,982 Electric sales to other utilities TotalO eratin Revenues 824,658

~ 28,612 853,270 788,426 42,465 830,891 807,669 38,028 845,697 745,854 707.774 29,966 26315 775,820 733,989.

721,823 20,465 742,288 Operating Expenses FuelExpenses Electric fuels Purchased electricity Gas urchased forresale Total Fuel Ex enses 65,105 27,683 129, 779 222,567 243,196 268,141 76,420 75,873 34/64 39,645 132,512 152,623 65,787 61,443 302.99 26,467 129,596 124,086 225,682 211,996 49,531 30,144 557,198 236,873 Operating Revenues Less Fuel Expenses.

Other Operating Expenses Operations excluding fuel expenses Maintenance Depreciation and Amortization Taxes-local, state and other Federal income tax-current, I

-deferred 208,440 65,415 84,181 1 13,649 28,766 5,493 "194,594 62,391 77,767 101,035 20,661 13,829 173,764 64,316 75,063 95,341 20,509 17,330 630,703 587,695 577/56 550,138 159,689 52,575 69,703 88,635 20,363 20,299 159,170 46,124 55,530 82,869 32,781 23,144 148340 44,767

~ 52,072 84,590 22,521 37,304 521,993 505,415 TotalOtherO eratin Ex enses 505,944 470377 446323 411,264 399,618 389,594 0 eratin Income 124,759 117,418 131,233 138,874 122375 115,821 Otherlncome and Deductions Allowance forother funds used during construction 675 Federal income tax 4,580 Fuel audit disallowance (10,000)

Disallowed project costs Other,net 6,078 2,689 2,459 4,062 2361 1,439 (2,100) 8/28 2,047 1,683 6,901 5,030 17,520 (55,860) 8,831 37,828 13,880 6,725 Total Other Income and Deductions 1,333 9,210 9,928

~

10,631 (24,479) 53,433 Income be ore Interest Cha es 126,092 126,628 141,161 149,505 97,896 169,254 Interest Charges Long term debt Short term debt Other,net Allowance forborrowed funds used during construction 63,918 2,623 4,459 (2,905) 64,873 1,070 3,523 68,628 3,115 (2,719)

(2,026) 72470 73,489 129 2,898 2,685 (1,777)

(2,696) 74,571 "

68 2,074 (I 1,978)

Totallnterest Char es 68,095 66,747 69,717 73,391, 73,607 64,735 Incomepom Continuing Operations, Before Cumulative EffectofAccounting Change Cumulative EffectforYears Prior to 1987 of Accountin Chan e orDlsallowed Costs 57,997 59,881 71,444 I

76,114 24,289 (193,000) 104,519 Net income(Loss) 57,997 Dividends on Preferred Stock, at re ulred rates 6,963 Earnings(Loss) Applicable to Common Stock

$ 51,034 59,881 6,025

$ 53,856 71,444 6,025

$ 65,419 76,114 (168,711) 7,348 8,147

$ 68,766

$ (176,858) 104,519 8,058

$ 96,461 Weighted Average Number ofShares Outstanding ln Each Period (000's)

Earnings(Loss) per Common Share-Total Earnings per Common Share-Continuing Operations 31,794

$ 1.60

$ 1.60 31/93

$ 1.72

$ 1.72 31,090

$2.10

$2.10

$2.25

$ 0.54

$3.33 30,513 29,728 28,927

$2.25

$ (5.95),

$3.33 Cash Dividends Paid per Common Share

$ 1.62

$ 1.56

$ 1.50

$ 1.50

$2.025

$2.20

Rochester Gas and Electric Corporal(on 49 CONDENSED BALANCESHEET (thousands ofDollars)

At December 31 1991 1990 1989 1988 1987 1986 ASSETS UtilityPlant Less: Accumulated depreciation and amortization Construction work in ro ress

$2,706,554 1,178,649 1,527,905 76,848

$2$ 10$ 94 812,994 1,497,300 82,663

$2/08,158 730,621 1,477,537 68,784

$2,122,922 653,876 1,469,046 41,044

$ 1,559,848 586,840 973,008 501,738

$ 1,531,019 571,022 959,997 768,905 Net utilityplant Current Assets De erred Debits 1,604,753 189,009 160,034 1,579,963 176,045 108,451 1,546/21.

1,510,090 190/21 213,626 102,729 102,015 1,474,746 184,472 131,526 1,728,902 141,344 114,340.

Total Assets

$ 1,953,796

$ 1,864,459

$ 1,839,371

$ 1,825,731

$ 1,790,744

$ 1,984,586 CAPITAUZATIONANDLIABILITIES Capitalization Long term debt Preferred stock redeemable at option ofCompany Preferred stock subject to mandatory redemption Common shareholders'equity Common stock Retained eamiri s 672,322 67,000 60,000 529,339 61,515 721,612 67,000 30,000 516/88 62,542 67,000 30,000 513,560 57,983 67,000 30,000 504,907 39,710 67,000 67,000 50,797 43,485 494,018 17,617 479,704 249,505 764,627 792,976 845,326 773,082 Total common shareholders' uit Total Ca italization 590,854 1,390,176 578,930 1$ 97,542 571,543 1,433,170 544,617 1,434,593 1,474,758 1,612,776 511,635, 729209 Long Term Liability-Department ofEnergy Current Liabilities De erred Credits and Other Liabilities 63,626 281,116 218,878 59,989 189,500 217,428 55,502 138,983 211,716 51,016 128,546 211,576 47,773 90,667 177,546 44,950 118,470 208,390 Total Capitalization and Liabilities

$ 1,953,796

$ 1,864,459

$ 1,839,371

$ 1,825,731

$ 1,790,744

$ 1,984,586 FINANCIALDATA Capitalization Ratios(a) (percent)

Long term debt Preferred stock, Common shareholders'e uit Total At December 31 1991 50.6 8.7 40.7 100.0 1990 53.6 6.7 39.7 100.0 1989 55.1 6.5 38.4 100.0 1988 56.8 6.5 36.7 100.0 1987 58,7 7.7 33.6 100.0 1986 49.3 6.7 44.0 100.0 Book Valueper Common Share-Year End Rate ofReturn on Average Common Equity (percent)

Embedded Cost ofSenior Capital (percent)

Long term debt Preferred stock Effective Federal Income TaxRate(percent)

Depreciation Rate (percent)-Electric

-Gas Interest Coverages(b)(c)

Before federal income taxes (incld. AFUDC)

(excld. AFUDC)

Afterfederal income taxes (incld. AFUDC)

(excld. AFUDC)

$ 18.41 8.60 8.32 6.97 33.9 3.05 2.94 2.38 2.33 1.91 1.86

$ 18.42 9.29 8.59 6.72 34.8 3.33 2.94 2.32 2.25 1.86 1.78

$ 18.28

$ 17.69 8.74 6.72 33.8 3.25 2.96 2.53 2.47 2.02 1.96 8.71 6.72 33.9 3.56 2.96 2.53 2.48 2.01 1.96 11,56 (b) 12.68

$ 16.98

$24.93 2.55 2.45 1.93 1.83 2.96 2.38 236 1.78 12.45 (b) 13.38 8.90 936 7.09 7.20 61.3 30.5 3.50 3.50 2.98 2.99 (a) Includes Company's long term liabilityto the Department of'Energy. Excludes amounts due orredeemable withinone year.

(b)Excludes disallowed Nine MileTwoplant costs written offin 1989 and 1987.

(c)AFUDCincluded fn interest coverages for 1986 has not been restated to reflect the disallowance ofcertain Nine MileTwoplant costs recognized by the Company ln 1987.The recognition by the Company in 1991 ofa fuel procurement audit approved by the New YorkState publfc Servtce Commlsslonhas been excluded from1991 coverages.

Rocbeuer Gas and Electrte Corporailon ELECTRIC DEPARTMENT STATISTICS 50 Year Ended December 3l 199l l990 l989 l988 l987 l986 Electric Revenue (000's)

Residential Commercial Industrial Other (Includes Unbilled Revenue)

$212,327 181,561 141,001 54,041

.$ 197,612 165,445 130,012 58,861

$ 191,732

'55,076 124,634 71,654

$ 188,451

$ 178,933 149,663 146,138 120,490 ', 118,479 56,033 45,816

'166,664 137,077 116,321 43,779 Electric revenue from our customers Other electric utilities Total electric revenue Electric Expense (000's)

Fuel used in electric generation Purchased electricity Other operation Maintenance Depreciation and Amortization Taxes-local, state and other Total electric ex ense 588,930 28,612 617,542 65,105 27,683 168,610 57,032 72,746 86,925 478,101 551,930 42,465 594395 76,420 34>64 155289 53,880 67/02 77323 464,478 543,096 38,028 581,124 75,873 39,645 137,458 55,915 65,287 71,361 445,539 514,637 29,966 544,603 65,787 30,299 124,871 44,060 60,444 66,426 391,887

,489,366

" 26,215 515,581 61,443 26,467 126/20 37,641 46,776 61,504 360,151 463,841 20,465 484,306 49,531 30,144 113,497 36,573 43,753 61,314 334,812 Operating Income before Federal Income Tax Federal income tax 139,44 1 31,390~

~ 129,917 30,670 135,'585 29,887 152,716 34,093 155,430 149,494 48,788 52,051 Operating Incomefrom Electnc 0 erattons (000's)

Electric Operating Ratio%

Electric Sales-KWH (000's)

Residential Commercial Industrial Other Total billed Unbilled sales Total customer sales Other electric utilities Total electric sales Electric Customers at December 31 Residential Commercial

, Industrial Other Total electric customers ElectricityGenerated and Purchased-KWH (000's)

Fossil Nuclear Hydro Pumped storage Less energy forpumping Other Total generated-Net Purchased Total electric ener System Net Capability-KIVat December 3I Fossil

'uclear Hydro Other Purchased Totals stemnetca abilit Net Peak Load-KIV Annual Load Factor-Net 96

~

$ 108,051 51.6 2,085,429 1,928,730 1,91 7,796 50.7,765 6,439,720 7,657 6,447,377 1,034,370 7,481,747,,

298,440 28,856 1,388 2,558 331,242 2,146,664 4,391,480 174+39 240,206 (364,520) 1,269 6,589@38 1,451+08 8,040,546 541,000

'22,000 47,000 29,000 354,000 1,593,000 1,297,000 61.7

$ 99347 53.8 2,075,072 1,897,583 1,931,633 490,077 6394365 (25,421) 6,368,944 I,316+79 7,685323 296,110 28,804 1,428 2,553 328,895 2,505,1 10 4,016,721 244,539 269,966 (405,966) 20,408 6,650,778 1,498,089 8,148,867 541,000 621,000 47,000 29,000 356,000 1,594,000 1/08,000 64.6

$ 105,698 53.2 2,072,047 1,832,521 1,906,429 491,905 6,302,902 33,406 6,336,308 1,255,282 7,591,590 293,418 28,386 1,422 2,512 325,738 2,578,006 3,659,185 175,085 290,582 (429,895) 54,893 6,327,856 1,757,413 8,085,269 541,000 621,000 47,000 29,000 369,000 1,607,000 1349,000 62.4

$ 1 8,623 48.7 2,051,808 1,792,162 1,869,417 483,730 6,1 97,1 I7 6,1 97,1 I 7 1,149,900 7347,017

- 290,037 27,888 1,392 2,326 321,643 2,214,588 3,884,884 169,002 292305 (430,401)

',195 6,132,573 1,705,755 7,838,328 541,000 621,000 47,000 29,000 360,000 1,598,000 1275,000 59.7

$ 106,642 48.9 1,970345 1,732,939 1,782/23 463356 5,948,763 5,948,763 1,047,654 6,996,417 285,988 27/83 I/81 2,281 317,033 1,877,922 3,793,021 223,958 246,925 (387,546) 4,554 5,758,834 1,703,4 I I 7,462345 541,000 470,000 47,000 29,000 363,000 1,450,000 1305,000 60.8

$ 97,443 474 1,890,293 1,657,606 1,775,722 452,756 5,776@77 5,776,377 925,318 6,701,695 281,630" 26,865'/68 2,266 312,129 1,491,167 3,603,116 235,175 237,663 (353,735) 1,850 5/15,236 1,945,586 7,160,822 510,000 470,000 47,000 29,000

, 356,000 1,412,000 1,100,000 r 64.7

Rochester Gas and EIecrrtc Corporarton GAS DEPARTMENT STATISTICS 51 Year Ended December 3t l99l l990 1989 l988 l987

'1 986 Gas Revenue (000's)

Residential 6,354 Residential spaceheating 157,458 Commercial 40,196 Industrial 6,761 Munici al and other (Includes Unbilled Revenue) 24,959 6,508 159,501 43,534 9,674 17,279

$ ',770 165,832 46,897 9,371'5,703 6,439 150,383 44,781 9,859 19,755 6,436 138,552 43,311 10,842 19,267 7,694 156,120 52,653 28,800 12,715 Total asrevenue.

Gas Expense (000's)

Gaspurchased forlesale Other operation Maintenance

~

Depreciation Taxes-local, state and other Total asex ense 235,728 129,779 39,830 8,383 11,435 26,724 216,151 236,496 132,512 39,307 8,510 10,465 23,711 214,505 264,573 152,623 36,306 8,401 9,776 23,980 231,086 231$ I'7 129,596 34,818 8,515 97.59 22/09 204/97 218,408 124,086 32,850 8,483 8,754 21,365 195,538 257,982 157,198 34,843 8,194 8/19 23,276 231,830 OperatinglncomebeforeFederal Income Tax 19,577 Federal income tax 2,869 21,991 3,820 33,487 7,952 26,820 6,569 22,870, 7,137 26,152 7,774 0 eratin Income om Gas 0 eratlons(000's)

$ 16,708 18,171

$ 25,535

$ 20,251 15,733

$ 18/78 Gas Operating Ratio 96 Gas Sales-Therms (000's)

Residential Residential spaceheating Commercial Industrial Munici al Total billed Unbilled sales 75.5 9,068 253,655 71,509

" 13,000 10,580 357,812 3,291 76.3 9,644 262,458

'7,617 18,536 13,350 381,605 (22,840) 74.6 10,321 277,267 84,152 17,873 12,319 401,932 20320 74.8 10/74 267,697

" 86,413 20,174 15,514 400,172 75.7 10,255 244,655 83,167 22,033 17,985 378,095 77.6 11,382 253,101 92,864 56,621 23,405 437/73 Total gas sales 361,103 Trans ortatlon ofcustomer-owned as 109,835 358,765 101,985 422,252 105,303 400,172 83,594 378,095 67,496 437/73 24,589 Total assold and trans orted Gas Customers at December 3I Residential Residential spaceheating Commercial Industrial Municipal Trans ortation Total as customers 470,938 21,448 222,918 18,151 921 983 423 264,844 460,750

~

22,410 219,242 17,920 960 984 401 261,917 527,555 23,321 215,120 17,677 1,095 1,067 367 258,647 483,766 24,139 210,710 17,213 1,042 1,039 270 254,413 445,591 24,834 206,458 16,771 1,035 1,026 147 250,271 461,962 25,865 201/27 16/30 1,015 I,(I09 46

'245,492 Gas-Therms (000's)

Purchased forresale

,Gas storage, net Other'84,643 39,859 1,140 366,684 2,525 426,941 1,764 408,044 1,967 381,632 439,381 2,317 5,996 Total as available 425,642 3692.09 428,705 410,011 383,949 445,377 Cost ofgas per therm (excluding gas storage, net) 33.43t',

3603tI TotalDail Ca acl

-ThermsatDecember31 4,485,000 4,485,000 35.74/

4,485,000 31.76tI 4,485,000 32.514 4,485,000 35.824 4,485,000 Maximum daily throughput-Therms Degree Days (Calendar Month)

For the period Percent colder (warmer) than normal 6,146 (8.4) 5,924 (I 1.8) 3g539g260 3 539 820 3,719,050 7,109 5.9 3,744,500 6,862

- 1.6 3,443,240 6,423 (4.3) 3,499,640 6,621 (1.4)

'Method tordetermining dailycapacity, based ort current network analysis, reilects the maximum demand which the transmlsslon system can accept without a deiidency.

Rochester Gas and Eleclrfc Corporation BOARD OF DIRECTORS (asofFebruaryl,1992) 52 Theodore J. A/tier Former Chairman ofthe Board and ChiefExectltive Oflicer,"

Altier8t Sons Shoes, Inc.

Kelth 1V.Amish Former Vice Chairman ofthe Board, Rochester Gas and Electric Corporation IV////amBalderston///

Vice Chairman, Chase Lincoln First Bank, N.A.

and Executive Vice President, The Chase Manhattan Corporation Paul IV.Brlggs Chairman ofthe Executive and Finance Committee, Rochester Gas and Electric Corporation AllanE. Dugan Senior Vice President,

, Corporate Strategic Services, Xerox Corporation Natacha P. Dykman Former Chairman ofthe Board ofTrustees, Center forGovernmental Research, Inc.

IVill/amF. Fowble Senior Vice President and Executive Vice President, Imaging-,

Eastman Kodak Company r

RogerIV.Kober Chairman ofthe Board, President

~

and ChiefExecutive O/ftcer, Rochester Gas and Electric Corporation Theodore LLevinson Former President and Chief ExecutiVe OIIIcer, Star Supermarkets, Inc.

Constance MMitchell.

Former Program Director, Industrial Management Council of Rochester, New York, Inc.

Cornel/us J. Murphy

. Senior Vice President, Goodrich Ec Sherwood Company ArthurM.Richardson President,

'ichardsonCapital'Corporation M,Richard Rose President, Rochester Institute ofTechnology HanyG.Saddock Former Chairman ofthe Board and ChiefExecutive Oflicer,

'ochester Gas and Electric Corporation 1VilliamG. vonBerg Executive Director, Executive Service Corps of Rochester, Inc.

COMMITTEESOF THE BOARDOF DIRECTORS ExscvTlvs ANO FINANce Keith W, Amish WilliamBalderston III Paul W.

Briggs'oger tN. Kober

'ornelius J. Murphy Arthur M. Richardson

• Harry G. Saddock

~

WilliamG. vonBerg

'Chairman

,AvoIT Paul W. Briggs Allan E, Dugan Natacha P. Dykman WilliamF.Fowble Theodore LLevinson Constance M. Mitchell M. Richard Rose William G.vonBerg'ohthtrrTKE oN MANAGKMfNT WilliamBalderston lil Paul W. Briggs*

WilliamF, Fowble Cornelius J. Murphy M.RichardRose WilliamG. vonBerg NOMINATING Theodo're J. Altfer WilliamBa!derston III Natacha P. Dykman Constance M.Mitchell

. ArthurM.Richardson' HarryG.Saddock

- 0 F F I C E=R S (as ofFebruary I, 1992)

Roger, IV.Kober Chairman ofthe Board, President and ChiefExecutive Oflicer Age 58, Years ofService,'26 Robert C Henderson Senior Vice President, Controller and ChiefFinancial 0/licer Age 5l, Years ofService,28 DavidKLanlak Senior Vice President, Gas, Electric, Distribution and Customer Services Age 56, Years ofService,37 Robert E. Smith Senior Vice President, Production and Engineering Age 54, Years ofService,32 Printed on recycled paper. f 4 mr'avid C Hei/igman Vice President, Secretary and Treasurer Age51, YearsofService,28 Robert C Mecredy Vice President, Ginna Nuclear Production.

Age 46, Years ofService,20 1ViipedJ. Schrouder, Jr.

Vice President',

Employee Relations, Public Affairsand Materials Management

~

Age 50, Years ofService,29 DanielJ. Baler.

Assistant Controller Age 45, Years ofService,8 John M.Kuebel Auditor Age 56, Years ofService,27 AlanA.Lohrmann Assistant Treasurer Age 52, Years ofService,30 Thomas S. Richards General Counsel Age 48, Years of Service'Appointed General Counsel effective October I, l99l

Rochester Gas anti Electric Corporation IN VESTOR INFORMATION Requests forInformation Investors and security analysts seeking information about the Company should contact David C.

Heiligman, Vice President, Secretary and Treasurer.

Form iO-KAnnualReport Shareholders may obtain a copy of the Company's 1991 annual report on Form IO-K,as filedwith the Securities and Exchange Commis-sion, without charge, by writingto the Secretary.

Shareholder Services Shareholders withquestions about dividend payments, address changes, missing certificates, ownership changes and other account informa-tion should contact our transfer agent.

DiMdendPayment Dates RG8~E's Board ofDirectors meets quarterly to consider the payment of dividends. Dividends on Common Stock are normally paid on or about the 25th ofjanuary, April,July and October. Dividends on the Preferred Stocks are payable, as declared, on or about the 1st ofMarch, june, September and December.

Dividend Direct Deposit Shareholders can elect to have their quarterly cash dividends electroni-cally deposited into their personal bank accounts. Deposits are made on the date the dividend is payable. If you would like to take advantage of this service, contact our transfer agent.

Dividend Reinvestment Common Stock shareholders who wish to acquire additional shares free ofbrokerage commissions or service charges are invited tojoin RG &,E's Automatic Dividend Reinvestment and Stock Purchase Plan. Under the plan, shareholders authorize an inde-pendent agent to purchase shares of RGS.E Common Stock with their cash dividends. Shareholders may also participate in the plan by making optional cash payments, even ifthey decide not to reinvest their dividends.

For further information, contact our transfer agent.

Duplicate Mailings Shareholders with more than one account generally receive duplicate mailings ofannual and other reports.

To eliminate additional mailings, write to our transfer agent. Enclose labels or label information, where possible. Separate dividend checks and proxy material willcontinue to be sent foreach account ofrecord.

Stock Qstings RG@E's Common Stock is listed on the New YorkStock Exchange and is identified by the stock symbol RGS.

The Preferred Stock issues are traded on the over-the-counter market.

Corporate Offtice Rochester Gas and Electric Corporation 89 EastAvenue Rochester, NY 14649 (716) 546-2700 AgentforAutomatic Dividend Reinvestment and Stock Purchase Plan The First National Bank ofBoston Dividend Reinvestment Unit MailStop: 45-01-06 P.O. Box 1681 Boston, MA02105-1681 (800) 442-2001 (outside Massachusetts)

(800) 827-1446 (in Massachusetts)

Transfer Agent and Registrar The First National Bank ofBoston Shareholder Services Division MailStop: 45-02-09 P.O. Box 644 Boston, MA02102-0644 (800) 442-2001 (outside Massachusetts)

(800) 827-1446 (in Massachusetts)

First Mortgage Bond Trustee and Paying Agent Bankers Trust Company Attn: Security Holder Relations P.O. Box 9006 Church Street Station New York, NY 10249 (212) 250-6000

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