ML17059A820
| ML17059A820 | |
| Person / Time | |
|---|---|
| Site: | Nine Mile Point  |
| Issue date: | 12/31/1994 |
| From: | CENTRAL HUDSON GAS & ELECTRIC CORP. |
| To: | |
| Shared Package | |
| ML17059A817 | List: |
| References | |
| NUDOCS 9505240398 | |
| Download: ML17059A820 (56) | |
Text
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CENTRAL HUDSON GAS
& ELECTRIC CORPORATION 1994 ANNUAL REPORT C
9505240398 9505l5 PDR ADOCK 05000220 I
J
/
f
~ CONTENTS
- . 2
.-Chairman's Report 4
Fossil Production Portfolio & Nine Mile 2 6
Competitive Pricing 8
/Market Development 10 Workforce Development 1 1.
Fuel Ma'nagem'ent 12
. Service Enhancement 13 Officers 14 Board of Directors 15 Corporate &Stock Information 16'harts 17 Financial Section I'INANCIALHIGHLIGHTS C
Chhngp 0
(,3)%
0 1
~ 1%
1994 I
S 515,668,000 S 50,929,000
$2.68 1993 Operating Revenues Net Incomer I
Earnings Per Shore Average-Shares Outstanding Dividends Declared Per Share Total Assets-S 517,373;00
).
S 5039000 S2.68 16,725,000
'S2.045 S1,328,235',000 17,102,000 2.3%
1 5o/
S2.075 S1,309,410,000 1
4,567,693,000 t
10,104;000 (1 4)'l
-259,650 59,169 Electric Sales-
, Own Territory (kwh.)
4,704,464,000 (2.9)%
Natural Gas Firm Sales (thousands of cubic feet)
': 9,740,000 3.7%,
Electric Customer's-Own Territory (average) ',
=
259,765 Firm Gas Customers (average)
.59,f24
.4%~
/
COVER: THE THEME OF THIS ANNUALREPORT; INA COMPETITIVE BUSINESS WORLD ~.. WERE GOING TO JIE A WIIVlVER, IS EXPLAINEDIN THE CHAIRMANS REPORT TO SHAREHOLDERS ON PAGES TWO AlVDTHREE.-
1900-1 995 Keeping The Customer.ln Focus For,¹ncly-Five Years The Company's predecessor companies date back to 1850, but,Central Hudson as we know it today had its beginning on No-,
vember 12, 1900.
As a result, the-entire Central Hudson organization is proudly ob-~
serving 95 years of service to the people of the Mld-Hudson Valley.
h
5 CHAIRMAN'SREPORT
).'
he utilityiqdustry is facing many un-certainties and challenges as the
.industry moves-from a regulated environmentdo one which is market-
- driven,
. At Central
- Hudson, however, our
~ course is clear. We believe that our busi-ness has'been and will continue to be
~ customer-focused.
While the industry may be changing i
creased from $2.65 in 1993 to $2.68 in
,1994.
Dividends-paid to shareholders in-creased 2.0 percent from-$2.03 in 1993 to
$2.07 in 1994. During the last five years, the average annual increase in the dividend was 3.5 percent.
~ Book value per share ificreased from $24.65 at the end of 1993 to
$25.34 at the end and competmon
-may be
- corning, Central
'Hudson's focus will continue to be on meeting the needs of our customers and maintaining the
=
values which are~
the cornerstone of our..Company's culture.
-A, major, ele-ment of this value structure is loyalty to our-sharehold-ers, which has been period ofmany deca This year's Annual Report proyides
'shareholders with a view of what Central Hudson is doing to be competitive in a
. changing marketplace.
It is in this context that I want to comment on the financial
, results for 1994, which was a very good year forthe Company's qhareholders: -,
~
Earnings per share were $2.68 during
, 1994," unchanged from 1993. However, earnings per share from, operations In-c of-1994.
- The Company continues to be in 4'
an excellent cash position.
~ =Despite the view by the=
financial community that Overall,>I am pleased to report that
- Central Hudson remains Cnancially strong.
In facf, through aggressive refinancing ef-forts our embedded. cost ofdebt is among, the lowest in New,York,State. These efforts Combined witheffective cost controls have
. enabled the Company to maintain the '-
lowest electric prices in New York State among the investor-owned ulilitycornpa-nies.
utilities represent a greater risk than previously.,
the--
-Company's credit rahngs on its First Left, Paul J. Gancj President and ChiefOperating Offider; M g a e Bp John E.Pfirck'III,Chairnsa>i and Chief Execntive Of/ter.
r have been main-tained at "A"'by developed over a one rating agency and at. "A-" or the des.
equivalent by three other agencies.-
c'evertheless, during the year the price of our stock was adversely affected by three external fo'reel:
First, as interest, rates increased during the year, utility-dividend yields became, less'competitive. This resulted in a decline in utilitystock prices throughout the indus-
~
try.
Second, when the staff ofthe Public Ser-
'vice Commission recommended price reductions rather than price increases for two.other utility companies in New YorK State, the financial<community reacted Immediately to a perceived deterioration
, ofthe regulatory ciimafe in the'state.
Third, investors are uncertain how de-regulation and competition willaffect-the future ofthe utilllyindustry and investments.
in utilitycompanies.
Taken together, these developments re-sulted in a decline in utility stock prices, including Central Hudson's.
As.part of our response to,a changinig business environment, we.re-evaluated our fin'anclal policies and decided itwould be,'.appropriate to undertake a modest
'and gradual reduction in our dividend, payout ratio, which already is below the in-dustry average. We believe that this action willenhance shareholder value by incrdas-.
ing our financial flexibility and by increasing our equity base and cash flow.
Accordingly, in June of last year, the Board of Directors declared a dividend which was higher than the~ previous divi-dend, but the amount, ofthe Increase was lower tgan,iri recent'ears.
This repre-sented an important first step in meeting
. our'goal of leducing our payout ratio.
.I willconclude roy report. withan obser-vation about the theme of this year' Annual Report: being a winner in a,corn-petitive busines's world.
=.
Last September, at our Annual Man-agement Conference, I spoke to our entire man'agement group about emerg-
, ing issues
= such as comgettTIon = and Paul Ganci covered a wide range of opera-tional activmes.
guest speaker from Standard Poor's also addressed. the management
- group and.presented observations about
- %e indushy from the viewpoint of a rating-agency.
Ke concluded his speech with-the comment that, in an age of competi--
4on, there, would be winners and losers among utilitycompanies.
Following'his remarks, I looked at our, rnanagernent team and said, "We'e go-ing to be a winner."
Qere is no doubt in my mind that Central Hudson has the talent, the com-mitrnent and the resources to compete effectively in a highly'competmve Industry.
', I truly bhlleve that our directors, officers, management and union employees-rep-resent the best of the utility'ndustry.
Together, we will be successful in fulfilling
'ur corporate mission: to be the energy supplier of competitive choice to our cus-torners.
I Very truly yours, Chairman of the Board
.and Chief Executive Officer f.
c'y
~.
3
FOSSIL PRGDUCTIGN POPTFGLIG R NINEMILZ2 With the consumption of electricity in New. York State having leveled off and with an increase in supply, there is an excess of electric generating ca-pacity in 'the state.
As a result, the Company took a number of steps dur-
'ng 1994 to control -operating and maintenance expenses associated with Production'facilities. Among the most,significagt developments were
- the following:
~ Due to the availability of electric-ity from other electric companies at comparable or lower cost than the Company's own generation, power purchases were made, during 1994 which reduced costs by approximately
" $5,780,000.
The Company's electric energy purchases from outside sources have jumped from eight percent of to-'al electric output in 1991 to 30 percent
. in 1994.
~ The Company and Niagara Mo-hawk Power Corporation agreed to cancel a
1987 agreement which would haVe required the Company to
'urchase Niagara Mohawk's 25 p'er-cent interest (300 megawatts) in the Roseton Electric Generating Plant over a ten-year period beginning in 1995.
The cancellation of the agreement will enable the Company to avoid ap-proximately'$7. -million;per year in,.
capital expenditures, exclusive of the Company's share of additional fuel,q maintenance, operating and labor
=-costs that would have~accorrjpanied.,
th'e additional geherating 'capacity.
In.,
place of the -1987 agreement, the Company entered into an agreement for short-term power purchases in 1994<
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p~
'and 1995 from Niagara Mohawk. The Company also reserved a
modest amount of generating capacity-from Niagara Mohawk between 1998 and 2004,,if needed.
~'An agreement.was reached with the Roseton co-tenants (Niagara
, Mohawk and Consolidated Edison Company of New York) to schedule
'he operation of the plant's two 600-megawatt
'generating, units on an alternating basis'for=six months at a time. In addition, the two smallest of
- the four generating'units at the Dan-skammer Electric Generating Plant have been placed on reserve status.
With the number of generating units in service thus reduced from six to three, 40 Production employees.were'ede-
, ployed to other areas and assigned other duties to improve gas dnd elec-.
tric reliabilityand safejy
~ In addition to savings resulting from a smaller workforce, other cost reduc-tions were achieved by'stablishing a common headquarters forthe two gen-erating plants and scheduling fewer "maintenance outages.
The Company also continued'to negotiate aggres-sively the cost for work performed by contractors, seek alternate vendors, in-crease preventative maintenance to minimize major equipment failures, ana-lyze and redesign critical processes, conduct effective training programs, and Implement successful quality and work management programs.
~ The-performance of the Nine Mile 2 Nuclear Plant improved during 19)4,,
according to an evalUation made by the Institute of Nuclear Power Opera-U
(
tions (INPO). Among the improvements cited were a higher capacity factor, a lower forced outage rate and a higher level of safety awareness by the oper-ating staff at the plant.
INPO also pointed to strong management perfor-mance, which helped improve the rat-ing of the plant to the second highest achievable level. Central Hudson owns nine percent of the nuclear
- plant, which is located near Oswego, N.Y.
4 w4 Among the principal reasons the Company has been able to maintain its competitive position is the ability to control operating and maintenance expenses, especially at the Roseton Electric Generating Plant, rightforeground, and at the Danskammer Plant, shown in the background on the Hudson River.
COMPETITIVEPRICING Central Hudson will maintain its long-standing commitment to quality service and will not compete for cus-torners on price alone.
- However, there is no doubt that having com-petitive prices gives the Company an edge in the marketplace.
In the years ahead, price willcontinue to be a key factor along with quality service in maintaining customer satisfaction and loyalty.
The following pricing initiatives are helping the Company maintain an edge in an increasingly competitive market-place:
o During 1994, the Company again had the lowest electric prices forall classes of customers among the seven electric companies which serve New York State.
And the Company's electric prices con-tinue to be among the lowest in the Northeast.
o During the year, the Company introduced a new discount electric rate as part of its economic dev-elopment efforts to make the Mid-Hudson Valley an attractive lo-cation for large industrial customers to locate or expand their business operations.
~..E.' i~~
>.i
~
.a
',V Shown above is the IBMsite in East Eishkill, Dutchess County, which contains the Hudson Valley Research Park. The nezoest occupant is MiCRUS, which is ajoint z~enture between IBMand Cirrus Logic, Inc., ofCalifornia. MiCRUS qualified for the Company's nezo Economic Grozoth Incentive Rate, zohich provides discounts on electric service for a period often years.
P The Company's new Economic.'rowth Incentive Rate provides a dis-
'ount'of 25 percent f6r six y'ears
'and reduced discounts foranother fouryears for customers who take service directly at substation or transmission voltage lev-els. Existing customers who increase their-
~ electrical usage by 500 kilowatts per moth would qualify for the discount on
" the amount'of new energy used. New customers, who use at-least 500 kilowatts per month, also would qualify forthe dis-count.
o The Company continued-during 1994 to promote'he.availability'of its Economic Revitalization Rate which pro-
-vides for reduction in; electric prices.fo<
as long as five years for commercial and industrial customers which move into va-cant space in the Company's service
, area.
,. o The Public SOrvice 'ommission adopted new guidelines during 1994 which would allow Central Hudson and other electric compar1ies to negotiate individual contracts with certain large in-,
dustrial customers to provide electricity at prices lower than currently available.
= This development willhelp electric com--
panies in New York State-continue to serve large customers who might other-wise consider relo'cating or using service.
from another electric energy supplier.
With respect to,future prie'e in-
- creases, the Company's goal is to control costs and improve efficiencies ir1 order, to avoid price increases.
The last electric'rice incredses became effec=
tive in December of 1993. There were no increases during 1994 and th'ere willbe none during'1995. The Company's stra-tegic'objective is to,keep future price iqcreases below the rate. of,inflation'on an annualized basis.
As the utility business moves toward competition, large customers willhave in-creased opportunities to purchase elec-tricity and natural gas from utility
-companies and energy suppliers other than Central Hudson. These competitors may be located in New York State, in the
" Northeast or across-the country. In some instapces, smaller customers may have the same options as larger customers.
's a result, the Company's efforts to be competitive center on providing superior, customer service, keeping prices competitive and creating tion to customers; leasing an electric wa-ter heater for only $ 10.95 a month. This price includes the installation of a hlgh-efficiency 85-gallon water heater, free 24-hour service forthe lifeofthe unit, and free replacement ifever necessary.
~ An Expanded Outdoor Ughting program is providing leasing options formu-,
nicipalmes, commercial establishments, developers and residential property owners seeking dramatic, distinctive illumi-nation. An array of lamps, fixtures and poles are available to create distinctively innovative marketing pro-grams which add value to the customer and enhance-custorner satisfaction. That is accomplished by providing energy solutions to address customers'roblems and by giving customers the opportunity to choose new products and services.
Among the highlights for 1994 are the following:
~ Natural gas service was introduced for the first time to the Village and Town ofNew PaHz in Ulster County.
The availability of this clean, efficient fuel provides, cus-tomers with a competitive energy alternative, and itwill help economic develop-,
ment in this portion of the Company's service area.
The Company com-pleted the first full year of offering an, innovative op-i H
During 2994, the Company introduced natural gas to the Village and Town ofNew Paltz in Ulster County. In addition to providing New Paltz witlra competitive energy alternative, the availability ofnatural gas willhelp the economic development ofthe area. Shorvn above is New
,Paltz, with the New YorkState Thruway and thruway interclrangein the foreground and the scenic Shawangunk Mountain range on the horizon.
I 8
'* lighted areas, taking into consideration aesthetic, security and recreational con--
siderations,
~ The Company conducted a Geo-System campaign during 1S94 to promote ground source heating ai1d cooling as "the most efficient horne energy system on earth" and the best value for the cus-tomers'nergy dollar. This geothermal technology, which utilizes renewable en-ergy stored In the
- earth, is efficient, cost-competitive and reliable for a wide range of applicatio~s in the Company'-s service area.
~ The economic revitalization of the Mid-Hudson Valley and the creation and
> retention ofjobs had a high priorityduring the year. The'Company provided leader-ship in cooperative programs between
. the public and private sectors in Dutchess, Ulster and Orange Counties. A major fo-cus was on the marketing of available space formerly occupied by IBM.Atyear-end, an estimated 1,230 Jobs had been created or retained in the Company's ser-4 vice area as a result of regional revitaIiza-tion and promotional activities.
~ During the year, two major 'compa-nies qualified for the,.Company's Eco-nomic Growth Incentive Rate, which is de-scribed on pages six and seven.-
MiCRUS, a joint venture between IBM and Cirrus Logic, Inc. of California, began its semiconcfuctor manufacturing opera-tions;on January 1, 1995 at the Hudson Valley Research Park in Dutchess County.
The MiCRUS project involves the retention of 400 jobs, the creation of an estimated 300 jobs, and the retrofitting ofspace at a cost of $ 150-$ 200 million.
VAW of America, Inc., located in Ellenville in Ulster County, also qualified for the new incentive'rate as a result of ex-panding its manufacturing operations, which involves the extrusion of aluminum.
The incentive rate was a key, factor in helping VAWdecide to expand its opera-tions in the Company's service area rather than at othei plant locations in Florida and Arizona.
As part of the Compan ji's Expanded Outdoor Lighting program, the Poughkeepsie Post Office is illuminated by modern lighting to highlight the beauty of the Dutch colonial architecture. The historic post office was commissioned by Dutchess County resident Franklin D, Roosevelt during his president.
/
P 9
~, V/O3XI'OREDEVELOPMENT 5
I
, Competition'- in the utility industry'is bringing about dynamic changes in-the
= 'orkforce. AtCentral Hudson, human re-'ource strategies are being implemented to provide the, Company with a'-,
workforce which can effectively respond to customer needs, control costs and im-
,prove productivity. The followingactivities
- help demonstrate how the Company is preparing to'ompete in this new busi-ness environment:
. ~ As noted earlier in-.this report, a re-deployrnent plan was implemented for
'0 Production employees who were re-trained and reassigned to other duties in Customer Services, Operations Services
'nd in Eneigy Efficiency Services.
~through attrition, the'ompany re-duced the size of the workforce from 1,370 at the end of 1993 to -1,327 at the end of 1994, a reduction of 3.1 percent.
The Company's expectation is,to have
<1,250 employees by the end. of f997, which will be achieved through normal attrition.
o During 1.994,'Central Hudson contin-ued to use "benchmarking" techniques
to ideptify opportunities to'improve busi-ness'rocesses that will enhance the Company's abilityto meet its corporate goals and produce beneficial effects on costs, performance and quality.
During the year,- "benchrnarking" pro-cess reviews were completed in
'ustoms-Services, Gas Procure'ment &
Dispatch, and Substation Operations &:
, Maintenance.
The Customer
- Services>> process re.-
view," for
- example, compared the Company's practices with those of other leading utilitycompanies in,"the ar'eas of Meter Reading, Credit and Collections",
Service Reliability and Gas.- Emergency Response.
The results included recorn-mendation which will,enable the Company to improve its performance in the aforementioned areas, thus reducing operating costs, improving productivity and enhancing customer service.
e~n.on-going management devel-opment cind succession program is being implerriented to'help employees'dem-.
onstrate'heir
'leadejship qualities and creativity and enable them to redch their fullpotential...
~
As>an example.of the success of this effort, the Company's engineering de-veloprnent.program was recognized by the New YorkState Society of Professional'ngineers when itpresented Central Hud-son with its 1994 Professional Engineers In Industry "Professionql Development Award."
The. honor recognized 'he Company's "outstapding engineering employment practices and its comrnit-ment to engineering professionalism."
~
~ Considering that forecasts for the 1990s indicate that more than two-thirds of new workers will be women and mi-=
norities, the Company~.recognizes the Irpportance of meeting the needs ofa'di-versified, multi-cultural workforce. Ac-cordingly, the Company continually re-views its policies and programs to ensure equal employment opportunities for all employees.
~ During the year, the Company ne-gotiated a four-year labor agreement
-with Locals 320 and 2218 of the Interna-
~
tional Brotherhood of Electrical Workers which prov'ides the Company with greater flexibility to use its human re-sources in-the most effective manner to increase productivity and meet customer needs.
4>
For:many years, the cost of fuel has able. pipeline capacity to supply gas to been the largest'sin'gle cost-of providing anotherutilityfor about-Sl,million peryear service to the Company's customers.'
for a.five-year period. By 1996,.the rev-"
Consequently,,
changes in'he price. of enue from, this -arid.'ther sirnilar -
'uel have a significant effect on utility.
transactions could amount to S6 million pnces and the Company's competitive-
. ahnually, which would be used,to reduce ness.
(gas costs forthe-Company's firmgas cus-During the decade of the '-80s, the, tomers.
, Company made major capital expendi-The increase in the amount of low-.
'ures to convert generating units to burn 'ost electricity purchased from'ther avarietyoffuels.Asaresuitofthisfueldi-electric-companies has reduced th5 versification program, the Company'as
., amount of oilneeded forgeneration and
=
been able to take advantage of market also reduced -the arrioUnt of storage conditions and aggressively negotiate
'eeded forthe Company's oil supply. As the purchase. of.different fuels at corn-a result, the Company negotiated ari oil petitive prices..
'upply contract, which provides not only The fo)lowing,summarizes the steps a very favorable price but also the op-the Company~ is taking to control fuel portu'nity to purchase up.to 30% of the,
~ costs for the benefit of its customers and Company's requirements in the "spot to remain in a competitive position with market-" if a lower price is available. Thy
-. respect to-other energysuppliers;
-,Company also-will reduce-costs by re-',+
As a result ofthe Company's active
. ducing the amount of-storage under participation In two separate legal cases
'ontract.
involving-nqtural gas pipeline compa--
.o The Company is renegotiatIng a
nies; the Company's gas customers are z contract forthe delivery of natural gas for saving S4.7 million in their utility bills. The boiler fuel at Roseton which, if effected, refunds in customers'ills began during wouldreduce costs by an arpount esti-the second half of 1994 and willcontinue mated-to be S.l.3 millionannually.
~
~ through the latter part of 1995; The two
o While. the price of. coal has "re-settlements concerned numerous rate-mained relatively stable in recent years, making issues which involved Central the Company nevertheless continues to Hudson and other utility 'companies negotiate for a firm supply at the best served by the two pipeline companies..
price available while retaining the flexibil-o In order to transport natural gas to "
ity to purchase a certain amount of its its service area, the Company pays for
~
requirements in 'the "spot market." It is capacity, or space,'n various interstate noteworthy that the price of coal in 1994 pipe1ines. During the winter, the, pipeline'as lower than during 1987, when gener-
'apacity isWlly utilized. In the summer, ating units t3 arid 44iat Danskarnrner
-however, there is unused capacIty. Th'.
wege modified to burn coal
~
. Company is negotiating to use this avail-C.
~
11 v
In the years ahead, many--utility companies and energy suppliers will ~
compete'n price-alone.
Central.
Hudson, however, will remain dedi-,
cated to providing courte'ous, prompt and professional service as well as a competitive price., ~
A number of programs were un-dertaken during 1994 which help demonstrqte the Company's commit-rnent to-superior customer'service:,
,i The Company began the pro-cess of centralizing its telephone-answering, meter reading, and credit and 'collections services in order to enhance
'service to cus'tomers, re-duce costs'nd utilize human resources more efficiently. Th'e cen-tralization
<<of.these services, is
- expected to be fully implemented In 1996.
~ A more immediate -improve-ment in the telephone answering service willtake place in the'spring of 1995 with the installation of-a Voice Res'ponse Unit. This. Interactive.
voice technology will increase, the Company's capacity to handle in-coming
- calls, thus providing customers with faster access to Cus-tomer Service Representatives while at the same time increasing the Company's capability to respond to. customers during storms and
'ther qmergencies which interrupt electric service.
/..
~ Service reliability has been fur-ther improved through the rebuilding and construction of new distribution circuits, the, identification and correc-tion of potential problem areas, and
. through continued emphasis on 'the Company's.on-going p'rogram of trim-ming trees along its.rights-of-way.
~ The Company continued to test new automated meter reading tech-nology as a
means of reading hard-to-reach
- meters, reducing, the number of estimated bills an'd reduc-ing,costs.
~ ~ A number of services are avail-able to assist customers in paying their
,bills, and special'ervices are avail-The Company's-use ofIBMThink Pad pen computers was featured le IBMon the Internet as an example ofan innovative
'pplication ofmobile computer technologjj In'entral Hudson.
to improve the quality and effectiveness ofits field operations.
F 12
(
/
'ble forthe disabled and the elderly. A environmental standards. Eighteen mil-new service, called the Language
'ion dollars are being invested to-Line, enables Customer Service Repre-,reduce the level of NOx emissions and
((
sentatives to communicate over the for associated=monitonng equipment
.tele'phone with.non-English speaking atthe Roseton and Danskarnmer-Elec-customers in more than 140 lan-tric Generating Plants. The 'Company guages.
received*recognition from the scientific
~
Gas safety continues to have the community for a Vegefation Manage-highest priority, During the year, em-ment-'ontrol 'program'long its phasis
< was
- placed on providing electric transmission, rights-,of-way. This expanded training programs for em-
.innovative.prograrnbalancesconcern ployees, Improving the management for the environment and aesthetics of pipe leaks and replacing cast-iron while reducing operating and mainte-and steel pipe with plastic pipe. A nancecosts. TheCompany.expanded newly developed computer software its powe'i quality improvement services program is being used for the orderly through the establishment of a Power-and. cost-effective. replacement of Quality team.
This experienced ~team pipe, taking into coqsideration the age',
meets with -customers to review.and of the pipe, its diameter, maintenance understand their power quality prob--
and corrosion
- record, replacement
-lerns and to provide cost-effective costs, operating pressure and type of -
solutions to improve their competitive<
surrounding soil~;.
positions.
~ Meeting the needs of customers also means -mainta'lrilng appropriate
(
(
.OPPICERS s
= During the year, Benon Budziak was promoted to Vice President of Fossil Production, Ellen Ahearn was promoted fo Corporate Secretary, and(Arthur: R. Uprightwas promoted to Assistant Vice President of Cost &Rate and Financial Planning.
Mr. Budziak, who joined the Company in 1955, had been serving as Assistant Vice President of Production since 1992. Ms. Ahearn joined the Company in 1981 and had been serving as Assistant Corporate Secretary since 1992. Mr. Upright, who had been serving as Manager ofCost &Rate and Financial-Plann*ing since 1990, has been withthe Company. since 1965.
r Donna S. Doyle was named to the position ofAssistant Controller. Ms. Doyle, who has been withthe Company since 1981, continues in the position of Manager Taxes, Bud-gets and Customer Accounting.
Herbert M.,Round retired as Assistant Vice President after 39 years withthe Company.
13
3GARD GP IHRKCTGRS
}jI4j }
t~'4
}4 ii,I
}4 I 44
~5 I
I44
/
tl Front rom, froni left: Frances D. Fergusson; Richard H. Eyman; John E.,A1ack, III,Clrairinan and
.Chief ExdcuV'ive Officer,'omard C. St.John, Vice Chairman; and Jack Effron.
I Back rom, froni left: Heinz K. Fridrich Edmard F. X. Gallagher; Charles LaForge; Paul'J. Ganci,
- Presidenttatid Chief Operating Officer; Edmard P. Smyer,"and L. Wallace Cross.
Inforination aboiit the Directors is on the inside back cover.
14
\\
<<)
CORPORATE. 5. STOCK INI'GRMATIGN Annual Meeting Shareholder Information 'tock Exchange Listings <
The annual: meeIIing of First Chicago Trust Com-Common: New VokSock..-
holders of cornrnon stock 'any'ofNew York,telephone EXCIxmge--'
will be held on Tuesday,,
(800) '428-9578 between 9
April4, 1995 at.10:30 a.m. at '.m. and5p.m.weekdays.
Stock Trading Sy'mbol
, the Corporation's General CNH
'ffices, 284 South~AvenueSecurity Analysts and Insti-,
Poughkeepsie',
NewYork.<<
tutional Investors Multiple Copies of this An-
, The management wel-Steven V. Lant, Treasurer nual Report comes the personal attend-and Assistant Secretary;
'hareholders
%ho re-
~
. ance of shareholders at this rjelephone-(914) 486-5254.
ceive multiple copies ofthis meeting. A summary report
=-
=
Annual Report may, ifthey ofthe meeting willbe mailed Dividend Reinvestment Plan choose, reduce the num-to all shareholders of'record Central Hudson offers a berreceivedby calling First at a later date:
, Dividend Reinvestment Plan
~
Chicago Trust Company of under which all holders of "
New Yorkat(800) 428-9578.
Financialand common stock may rein-Statistical Report vest dividends and/or make General Counsel A
comprehepsive ten-direct cash investments to Gould &Wilkie year financial'nd statistical obtain additional'shares..AII One Chase Manhattan Plaza supplement to this Annual Re-brokerage and other fees to '
New York, N.Y. 10005
'port will, be available,to, acquire shares are paid by shareholders attending. the the Corporation.
To particl-Independent Accountants Annual Meeting. Copies may patecall Janet M. I-lorvat, Price Waterhouse, also be obtained by w{Nngor Director of Risk Man-
-1 T77Avenue ofthe Americas calling Steven V. Lant, Trea-agement
& Shareholder New York, N.Y. 10036 surer and AssLtant Secretary, Relatioris, at (914) 486-5204 284-South
- Avenue, Pough- -..or First Chicago Trust Com-
'keepsie, N.Y. 12601; telephone pany of New York at (800)
(914)48&5254.,
428-9578.-
c 1
Annual Report to the SEC; TransferAgent~&~, 'ntil'Q)
Form.10-K Registrar, Comm'on Shareholders may obtain-and Preferred Stock
'900-1995 without charge a copy.'of First Chicago Trust Corn; m'gThcc to nl Focu Fo N'.F'reYrurs Central Hudson's annual re-"
pany,of. NeW York;P.O. Box port to the
- SecurNes, and 2550,Jersey City; N.J. 07303-Exchange Commission, on 2550..
Form 10-K, by wrNng or calling
Common Stock Market Price and Dividends Paid Per Share.
SoulhAvenue,Poughkeepsie, I
l99rf 1993 N.Y., 12601; telephone (914)
'igh Lovv Dividend, H!gh Low Div{c{end'9&5757; The coPy Provided 1st Quarter S30'/,
S27'/,
S.515 S34'/4 S30'/8-
':S 50 willbe without exhibits; these 2nd Qdarter '29'/'"
25'/,
.515 34'/g 30'/g
.50
.may be Purchased for a
<<3rdQuarter
~27'/e-23, 52 35'/,,
34 -.515 specified fee. --.. -'th Quarter 26'/,
22'/8
.52
.34'-/~
28%
515 I
C 15
ELECTRIC SALES.<,
P RESIDENTIAL P COMMERCIAL P INDUSTRIAL FIRM GAS SALES Q RESIDENTIAL P COMMERCIAL P INDUSTRIAL 10 p
9'.
4 z0 3-0 1990 199 1
4 8
0 7
5 0
3 2
1
-'L 0 1991 1992 1993 1994 6,002'421'A29'417',483 BILLING,DEGREE DAYS
(
COMMON STOCK PRICES 0 HIGH 0 LOW = 0 CLOSE CI BOOK x 40 30, O 20 O
10 0
'1990 1991
'2.80 2.70 r
2.60 2.50 2AO
~ 2.30
~ 2.20 8 2.10 2.00
'190 1.80
'.70
.1990 1991 1992 1993 1994
<<90
~. 80 70 5
60 50 40 30 20 10 0
1990 1991 1992 1993 1994 CAPITALIZATIONRATIOS CI COMMON EQUITY 'p PREFERRED STOCK P LONG-TERM DEBT P SHORT-TERM DEBT 100
'OST OF LONG-TERM DEBT 9.0%
.,8.8%
8.6%
8.4%,
8:2%
8.0%
7.8%
7.6%
7.4%,
7 2%.
,7.0%
6.85-6.6% 1990 1991 1992 1993 1994 16
Table of Contents 18 Financial Highlights 19 Five-Year Summary of Operations 20 Management's Discussion and Analysis 30 Financial Indices 30 Common Stock Dividends and Price Ranges 31 Report of Independent Accountants 31 Statement of Management's Responsibility 32 Consolidated Balance Sheet 34 Consolidated Statement of Income 34 Consolidated Statement of Retained Earnings 35 Consolidated Statement of Cash Flows 36 Notes to Consolidated Financial Statements 52 Selected Quarterly Financial Data (Unaudited)
EARNINGS PER SHARE: (PAGE 24)
Earnings per share of common stock in 1994 re-mained unchanged from 1993 at $2.68. Earnings from operations, however, increased
$.03 per share in 1994 when compared to 1993 earnings from operations. The inclusion of the gain on the sale of long-term invest-ments in 1993, a non-recurring item, equalized the two years.
DiviDENDs PER SHARE: (PAGE 30)
The quarterly dividend rate was increased to $.52 per share, effective June 24, 1994. This represented an increase of 1% over the previous quarterly rate of $.515 per share. Dividends paid to shareholders in 1994 were
$2.07 per share as compared to $2.03 per share in 1993. No portion of the 1994 dividend constitutes a re-turn of capital.
ECONOMY:
While the Company continued to feel the effects of the reduction in employment by IBM in 1994, the lo-cal economy has continued to recover.
The Company's economic development efforts coupled with the State and local government efforts helped to attract over1200 valueadded jobs throughout the re-gion. Notably, a semiconductor manufacturing com-pany began operation In the Company's seivice terri-tory in 1994, adding 400 jobs.
ELECTRIC SALES: (PAGE 25)
Sales of electricity withinthe Company's service ter-ritory decreased 3% in 1994. Sales of electricity to resi-dential customers increased 1% due to the increase in usage per customer. Commercial sales increased 3%
resulting from the combined effect of a 2% increase in usage per customer and a 1% increase in the number of customers.
Electric sales to industrial customers de-creased 13% due primarilyto a 16L decline inusage by IBM.
GAS SALES: (PAGE 25)
Firm sales of natural gas increased 4% in 1994. Sales of gas to residential customers increased 3L due to an increase in usage per customer. Sales to commercial customers increased 7% resulting from the combined effect of a 5% increase in usage per customer and a 2X increase in the number of customers. Firm gas sales to industrial customers decreased 4% primarily due to the shift of two large industrial customers from firm ser-vice to gas transportation service.
RATE PRocEEDING ELEcTRic: (PAGE 21)
The Company has no pending electric rate case filed with the Public Seivice Commission and cannot predict with certainty the date of the next filing.
The last rate increase was effective November 22, 1993 which increased base rates by $5.133 million (or approximately 1.3% on an annual basis), based on a 10.6% return on common equity, an 8.5% return on total invested capital, and a resultant cash coverage oftotal interest charges during the Rate Year of 3.17 times.
RATE PRocEEDING GAs: (PAGE 22)
The Company has no pending gas rate case filed with the Public Service Commission and cannot pre-dict with certainty the date of the next filing.
In the last filing,the PSC authorized no increase in the Company's base gas rates. The Order in effect rec-ognized a $ 1.237 million revenue requirement defi-ciency, but eliminated It by applying $537,000 of previ-ously retained profits from sales of gas to interruptible customers as a rate moderator, and by imputing an in-crease of $700,000 net revenues from interruptible gas sales of the Company. 1he Order based its decision on a 10.6% return on common equity.
COMMON STOCK: (NOTE 5)
Issuances under the Automatic DMdend Reinvest-ment and Dock Purchase Plan and Customer Stock Pur-chase Plan increased the number of common shares outstanding to 17238A64. At December 31, 1994 a share of common stock was selling at $26.50 while the book value per share was $25.34. AtDecember 31, 1994 the Company's shares were held approximately 29% by indMduals registered with the Registrar and Transfer Agent, 1(K by institutional investors and 61% in street name."
FINANclNGPRoGRAM: (NoTEs 5 &. 6)
On September 1, 1994, the Company retired at maturity its $50 million principal amount, 8 1/8% Series First Mortgage Bonds. The associated cash require-ments were financed from internal funds and from net proceeds of $7.8 million realized from the issuance of 285,317 shares of common stock in 1994 through the Company's Automatic Dividend Reinvestment and Stock Purchase Plan and its Customer Stock Purchase Plan.
TAXES: (PAGE 28)
In 1994, the Company incurred $94.9 millionforoper-ating taxes levied by federal, state and local govern-ments, representing 18 cents ofevery dollar of revenues.
18
FIVE-YEAR
SUMMARY
O'F CONSOLIDATEDOPERATIONS AND SELECTED FINANCIALDATA*
(Ihousands of Dollars)
Operating Revenues Electric Gas Total..
S 411,082 104,586 515,668 S 422,925 94A48 517,373 S 427A36 96,121 523,557 S 424,121 70,615 494,736 S 433,859 69,749 503,608 Operating Expenses Operations Maintenance Depreciation and amortization...
Taxes, other than income tax.......
Federal income tax... ~ ~.~................
Total....
267,339 31,504 37,230 60,554 22,613 279,602 30,364 36,134 57,234 22A56 274A77 34A86 39,682 65,M4 28,603 274A97 32,716 40,380 66,899 28,043 283,787 34,226 39,596 66,339 25,111 442,535 442,812 449,059 419,240 425.790 Operating Income 73,133 74,561 74A98 75A96 77,818 Other Income and Deductions Allowance for equity funds used during construction Federal income tax...................
Other-net.
Total.
866 1,237 6,296 8,399 934 1,445 5,167 7,546 596 748 4A27 5,771 921 1,252 854 3,027 785 2,082 1,505 4,372 82,107 80,269 78,523 35,582 42,941 82,190 41,155 41,035 Income before Interest Charges
..~..........
7 81,532 Interest Charges 30,603 31,717 32,581 50,929 50,390 47,688 Net Income Dividends Declared on Cumulative Preferred Stock...............
Income Available for Common Stock....
Dividends Declared on Common Stock Amount Retained in the Business.............
Retained Earnings - beginning of year...
Retained Earnings - end of year.............
35,354 27,067 44,828 34A97 45,802 35,541 42,144 31,545 37,282 29,800 8,287 32,324 10,599 48,093 7A82 40,611 S
48,093 10,261 69.023 10,331 58,692 40,611 58,692 S
79,284 S
69,023 5 127 5 562 5 544 5 659 5 651 Common Stock Average shares outstanding (000s) '..
Earnings per share on average shares outstanding.......
Dividends declared per share...........
Book value per share (at year-end)
'17,102
$2.68
$2.075
$25.34 16,725
$2.68
$2.045
$24.65 15,901
$2.65
$ 1.98
$23.60 15,530
$2.40
$ 1.90
$22.84 14,850
$2.38
$ 1.82
$22.31 Total Assets Long-term Debt.
Cumulative Preferred Stock.........
Common Equity.
S1,309A10
$ 1,328,235 S1,211,276
$ 1,184,548
$ 1,134,503 389,364 391,810 441,096 416,030 407,638 81,030 81,030 81,030 81,030 81,030 436,731 417,846 378,214 360,203 333,587 This summary should be read ln conjunction with the Consolidated Financial Stafemenfs and Notes fherefo included in the Financial Section of this Annual Report.
MANAGEMENT'SDISCUSSION ANDANALYSIS OF FINANCIALCONDITIONANDRESULTS OF OPERATIONS CAPITALRESOURCES AND LIQUIDITY CONSTRUCTION PROGRAM As shown In the Consolidated Statement of Cash Flows, the cash expenditures related to the Company's construction program amounted to
$57.2 millionin 1994, a $4.1 million increase from the S53.1 millionexpended in 1993. As shown in the table below, cash construction expenditures for 1995 are estimated to be S56.6 million,a'decrease of
$600,000 compared to 1994 expenditures. Internal sources funded lKP%%d of the 1994 cash construction expenditures and are presently estimated to fund 100%%d of the forecasted cash construction expendi-tures for 1995.
Estimates of construction expenditures, internal funds, available, mandatory and optional redemp-tion of long-term securities, and working capital requirements for the five-year period 1995-1999 are set forth by year in the followingtable:
Total 32R7.
3225 32t2 322&3222 ghousonds of Doiiors)
Construction Expenditures ":
Electric Gas Common.............................
Nuclear fuel........................
Total S38.800 8,200 8,600 1 000 56,600
$37.100 8,700 8,900 5,300 60,000 S36,900 8,700 9,500 55,100 S41,300 8,900 10,000 5,700 65,900 S39,900 8200 10,700 58.800 S 194,000 42,700 47,700 12,000 296A00 Internal Funds Available:
Depreciation accruals..........
Deferred income tax - net....
Other Total 41200 14,700
~7100 63,000 43,000 14,000 8,700 65,700 44A00 1,900 9.000 55,300 45,700 47g60 221,900 1.300 1A00 33,300 9.600 10,700 45,100 56.600 59,700 300,300 Excess of Construction Expenditures over Internal Funds (6A00)
(5,700)
(200) 9,300 (900)
(3,900)
Mandatory Redemption of Long-term Securities:
Long-term debt................
Optional Redemption of Long-term Securities:
Long-term debt.......................
30,000 100 20,100 22,900 3095 Working Capital Requirements....
29.000 15.000 10.000 10,000
~
10,000 74,000 Total Cash Requirements
$25200
$39300 S 9,900
$ 19A00
$29200 S123,000
'xcluding the equity portion ofA!lowance forFunds Used During Construction (AFDC), a noncash item.
Estimates of construction expenditures are subject to continuous review and adjustment, and
. actual expenditures may vary from such estimates.
The depreciation accrual Includes depreciation on the Nine Mile2 Plant (as described in Note 2 ofthe Notes to Consolidated Financial Statements (Notes)), calculated on the remaining lifeamortiza-tion method, and the Company's Danskammer Point Steam Electric Generating Station (Danskam-mer Plant) coal reconversion investment, calculated on an assumed amortization rate of 5%.
The deferred Income tax projections are based on current federal income tax law.
Included in the construction expenditures are expen'ditures which are required to comply with the Clean AirActAmendments of 1990. The Company estimates such required expenditures willcost approximately S10.4 million.A discussion ofthe Clean AirActAmendments is included in Note 8 of the Notes.
As shown In the table above, it is presently
-. estimated that funds available from Internal sources willfinance lKP%%d ofthe Company's cash construc-tion expenditures forthe five-year period 1995-1999.
" During this same five-year period, total external financing requirements are projected to amount to
$ 123.0 million,ofwhich S22.9 millionis related to the mandatory redemption of long-term securities and S30.0 million is related to the optional redemption of long-term securities.
20
Long-term debt...........
Short-term debt...........
Preferred stock............
Common equity..........
32K liK 32i2 43.0L 47.(%
48.3%
.3 1.6 8.9 8.6 8.8 47.8 44.4 41.3 100.&o 100.P%%d 100.&o FINANCINGPROGRAM On September 1, 1994, the Company retired at maturity its 8 1/B%%d Series First Mortgage Bonds, of which S50 millionprincipal amount was issued and outstanding. The associated cash requirements were financed from internal funds and from the issuance of 285,317 additional shares of common stock during 1994 through the Company's Auto-matic Dividend Reinvestment and Stock Purchase Plan and Its Customer Stock Purchase Plan.
In 1993, the Company optionally redeemed two series of First Mortgage Bonds totaling S40 million and two series of preferred stock totaling S34.2 million.These securities were refunded with similar securities bearing lower interest or dividend rates. In March 1993, the Company issued 700,000 addi-tional shares of common stock through a public offering. These funds were used to reduce short-term debt outstanding and to fund working capital requirements.
in 1995, the Company expects to fund any external funding requirements related to its con-struction program and working capital requirements CAPITALSTRUCTURE Over the past few years, the Company has substantially increased its common equity ratio through retention ofa portion of its earnings,,offerings of its common stock to the public, and issuances of its common stock under its Automatic DMdend Reinvestment and Stock Purchase Plan and Its Customer Stock Purchase Plan. One result of these recent increases in its common equity ratio has been a significant Improvement in its interest coverage ratios (as shown under "Financial Indices" on page 30 of this report) which have also been improved by the refinancing of its debt at lower interest rates. Despite a tightening of bond rating criteria applied to the electric utilityindustry, the Company has maintained its bond ratings. The Company's bond ratings, which were recently affirmed, are "A-"or equivalent by Standard
&. Poor's Corporation, Moody's Investors Service, Inc. and Duff&Phelps Credit Rating Co., and "A by FItch Investors Service. The Company's long-term goal Is to achieve and maintain bond ratings at the "A"level.
Set forth below is certain information with respect to the Company's capital structure at the end of 1994, 1993 and 1992:
Yearwnd Ca ital Structure through issuances of common stock pursuant to its Automatic Dividend Reinvestment and Stock Purchase Plan and its Customer Stock Purchase Plan and by issuing additional debt securities. The Company continues to monitor financial markets for opportunities to refinance debt or preferred stock at lower cost.
SHORT-TERM DEBT As more fullydiscussed in Note 4 ofthe Notes, which is hereby incorporated herein by reference, the Company has a revolving credit agreement with four commercial banks for borrowing up to S50.0 millionthrough December 14, 1997. In addition, the Company continues to maintain confirmed lines of credit totaling S2.0 millionwith three regional banks.
Also, during 1994, the Company negotiated short-terrn credit agreements with four commercial banks totaling S130.0 millionIn aggregate. Authorization from the Public Service Commission ofthe State of New York (PSC) limitsthe amount the Company may have outstanding at any time under all of Its short-term borrowing arrangements to S52.0 millionin the aggregate.
RATE PROCEEDINGS The Company has no pending rate cases filed with the PSC and cannot predict with certainity the dates of its next filings. The status of the Company's most recent rate case orders Is discussed in the subcaptlons below.
Electric: On November 12, 1992, the Company filed a request with the PSC to Increase its base rates for electric service to produce additional annual net revenues of S15.728 millionbased on projected operations during the rate year comprised ofthe per-iod November 1, 1993 through October 31, 1994 (Rate Year).
By Order Determining Revenue Requirement and Rate Design (Order), issued and effective February 11, 1994, the PSC permitted the Company to increase its electric base rates by S5.133 million(or approxi-mately 1.3%%d on an'annual basis). based on a 10.6%
return on common equity, an 8.5%%d return on total invested capital, a resultant cash coverage of total Interest charges during the Rate Year of 3.17 times, a recognized revenue requirement deficiency of S14.330 millionand the use of S6 million (after-tax) of MirrorCWIP (as described In Note 1 of the Notes under the section entitled Allowance for Funds Used During Construction) as a rate moderator, which reduced such deficiency to the S5.133 million authorized Increase. The Order also directed that such rates be designed to produce such revenues for the period November 22, 1993 through Novem-ber 21, 1994.
As a result of the application of MirrorCWIP under the Order, the balance of MirrorCWIP 21
(available for utilization) on the Company's Consoli-dated Balance Sheet was reduced resulting from the application of: (1) S6.0 millionof MirrorCWIP as a rate moderator, (2) S5.2 millionof additional MirrorCWIP to offset deferred balance sheet Items, and (3)
S300,000 of MirrorCWIP to offset the revenues the Company would otherwise be entitled to collect for the period November 22, 1993 through December 20, 1993.
In addition, the PSC directed the refund (through the Company's electric fuel cost adjustment clause) to ratepayers of S3.542 millionduring the 12 months beginning December 21, 1993. This refund represents the ratepayers'ortion ofthe net proceeds received from litigationwith respect to the construction of the Nine Mile2 Plant.
Gas: On November 12, 1992, the Company filed a request with the PSC to increase its base rates for firm natural gas service to produce additional annual net revenues of S1.838 millionbased on projected operations during the Rate Year. This represented an overall increase in firmgas revenues of 2.52%.
By the Order, the PSC authorized no increase in the Company's base gas rates. The Order In effect recognized a S1.237 millionrevenue requirement deficiency, but eliminated it by applying S537,000 of previously retained profits from sales of gas to interruptible customers as a rate moderator, and by imputing an increase of S700,000 net revenues from lnterruptible gas sales of the Company. The Order also based such revenue requirement on a 10.6%
return on common equity.
OTHER DEVELOPMENTS Electric Sales to IBM:The Company's largest customer is International Business Machines Corpo-ration (IBM),which accounted for approximately 12'/0 and 14% of the Company's total electric revenues for the years ended December 31, 1994 and 1993, respectively. Published reports indicate that IBMreduced its employment worldwide by 37,000 (14%) In 1994 and 45,000 (15%) in 1993 from a total of 301,000 in 1992. Such reports indicate that IBM has reduced its employment in the Company's service territory by approximately 2,600 employees in 1994 and 8,400 employees in 1993 to remain competitive in a challenging marketplace. These reductions bring the total number employed In the Company's service territory to 10,500, as compared to the peak level of IBMemployment in excess of 30,000 fn 1985. In 1994, published reports indicated that IBMwould close Its mainframe facilityin Kingston, New York by the end of 1995 and relocate 1,500 of its workers to a similar plant in Poughkeep-sie, New York. Both facilities are in the Company's service territory. During 1993, IBMphased out its semiconductor manufacturing operations at its East Fishkill, New York facility,which is in the Company's sewlce territory. This downsizing of IBM is the main contributor to a decline of 17% in industrial and commercial electric sales and a decline of 17/o in gas sales to IBMin 1994. This is in addition to the 1993 decline in electric sales to IBMof 20%. The Company cannot assess at this time the effect, ifany, ofsuch IBMemployment reductions on the Company's future results of operations.
New Accounting Standards: The Company adopted SFAS No. 112, "Employers'ccounting for Postemployment Benefits," effective January 1, 1994.,
As discussed in Note 7 of the Notes, this new account-ing standard did not have an impact on the Company's results of operations.
The Company adopted SFAS No. 115, "Account-ing forCertain Investments in Debt and Equity Securities," effective January 1, 1994. As discussed in Note 10 ofthe Notes, the adoption of this standard resulted in the recognition ofa holding gain adjust-ment to common stock equity of S823,000 (net of tax) at December 31, 1994.
Environmental Issues: On an ongoing basis, the Company assesses environmental issues which could impact the Company and its ratepayers.
Notes 2 and 8 of the Notes, which are hereby incorporated herein by reference, discuss current environmental issues affecting the Company, including the Clean Water Actand Clean AirActAmendments of 1990, which require control of emissions from fossil-fueled electric generating units, asbestos litigation cases, and two "Citizens Suits intended to be filed against the Company by the City of Newburgh, New York after the City discovered allegedly hazardous coal-tar material on its property allegedly migrating from a former manufactured gas plant facilityofthe Company located in Newburgh, New York.
Competition:
General: Although the Company is subject to regulation by the PSC and by the Federal Energy Regulatory Commission (FERC), the Company is substantially free from direct competition at the retail level, at this time. However, the Company is subject to price competition from oil, coal, wood, solar heating sources and self-generation and from bottled gas vendors forwater heating, clothes drying, cooking, air conditioning and heating.
In regards to sales for resale to other utilitycompanies, both within and outside of New YorkState, the Company Is in competition with other investor-owned utilities and the New York Power Authority (NYPA). NYPAalso offers economic development power to industrial consumers in New YorkState, in competition with sales of electricity by the Com-pany to such consumers in its service territory. The Company is in competition with other New York investor-owned utilitieswith respect to the expan-sion of the Company's gas business to new areas.
FLirthermore, the Company is in competition for the generation of electricity with qualified cogeneration,
alternative energy, and small hydro facilities under federal and state laws, from which the Company is required to purchase power, and with other inde-pendent power producers (including other utility-owned subsidiaries), to which the Company currently has limited exposure. The enactment of the Energy Policy Actof 1992 and the FERC's rules providing openwccess to interstate pipelines will expose the electric and gas industry to additional risks and uncertainties due to the introduction of increased competition and related regulatory and legislative requirements, eroding perhaps the position of a utilityas a franchise monopoly, which is free from most forms of competition.
New York - Electric: In March of 1993, the PSC initiated a proceeding to address numerous issues related to competltlon In the energy markets in New YorkState. Two phases of this proceeding have been established to address the issues to be considered In the proceeding. The Company has been actively involved in both phases.
Phase I of such proceeding, which was com-pleted fn the summer of 1994, resulted in the approval by the PSC of "flexiblerates that would allow electric utilitycompanies to negotiate indi-vidual contracts with certain large industrial and commercial customers to provide electricity at prices lower than currently offered. Flexible rates could help utilities retain large customers in an increasingly competitive environment. Under the flexible rate guidelines, residential and small cus-tomers and utilityshareholders would share the burden of revenue losses which result from discounts to larger customers. To date, the Company has not offered such flexible rates to any of its customers.
Phase II of such proceeding, which is now underway, has an overall objective of identifying regulatory and rate-making practices that willassist in the transition to a more competitive electric industry designed to Increase efficiency in the provision of electricity while maintaining safety, environmental, affordabilityand service priority goals. To achieve this objective, Phase II willestab-lish general principles to form the basis for the development of a framework toward a more competitive electric marketplace. Phase II willalso examine issues relating to the establishment of a fullyefficient wholesale electric market, including whether divestiture of generating assets by the provider of transmission and distribution services would enhance the transition to a competitive wholesale market. Issues relating to retail competi-tion also willbe examined. By Opinion and Order issued and effective December 22, 1994, the PSC, as the first step of Phase II, issued proposed prin-cfples to guide the transition in New Yorkto competition for electric service. Among such proposed principles are the following: (1) the current industry structure, in which most power plants are veritcally integrated with natural monopoly transmission and distribution, is incompatible with effective wholesale or retail competition, and (2) utilities should have a reasonable opportunity to recover prudent and verifiable expenditures and commitments made pursuant to their legal obliga-tions, "as long as they are cooperating fn furthering all of these prfnclpfes.
The Company can make no prediction as to the outcome of Phase II of this proceeding or when Phase II willbe concluded.
New York - Natural Gas: In October 1993, the PSC initiated a proceeding to'address issues associ-ated with the restructuring of the emerging competitive natural gas market. a process which had been set in motion by Order 636 of the Federal Energy Regulatory Commission, which requires pfpeline gas suppliers to separate natural gas sales service from transportation and storage service, and which allows Local Distribution Companies (LDCs), such as the Company and other end users, open access to the interstate pipeline system forthe purpose oftransport-ing their gas from gas producing areas to the customer. This PSC proceeding examined such Issues to determine how best to Implement changes ln the services provided by the LDCs'egment of the gas industry, so that the benefits of the increased compe-tition fostered by federal actions are fullyrealized by customers. By Opinion and Order, issued and effec-tive December 20, 1994, the PSC set forth the policy framework to guide the transition of New York's gas distribution industry in the post-FERC Order 636 environment. Such PSC Order essentially extends a number ofthe FERC "unbundling" concepts, found in said Order 636 to the retail gas business. This Order Is not believed to have a material impact on the Company. As an outgrowth of this restructuring proceeding and Order, a new state-wide proceed-ing has been established by the PSC to address gas purchasing practices, gas cost recovery and gas affordabiliiy. The Company can make no prediction as to the outcome of this new state-wide proceeding or when such proceeding willbe concluded.
Company's Response:
In response to the competitive forces and potential regulatory changes which it has faced, the Company has from time to time considered, and expects to continue to consider, various strategies designed to enhance Its competitive position and to increase its abilityto adapt to any anticipated changes In its business.
The Company's goal is to be "the energy supplier of competitive choice to its customers," and it has satisfied or intends to satisfy such goal by fmplement-Ing appropriate cost-reduction measures, such as:
the cancellation of an agreement with Niagara Mohawk Power Corporation (Niagara Mohawk) to purchase the interest of Nfagara Mohawk fn the Roseton Electric Generating Station (Roseton Plant) 23
operated by the Company and in which the Company Is a cotenant; the satisfaction of a portion of its power requirements with purchases of lower-cost electricity from energy providers outside the Company's service territory; the operation of certain of its generating units on alternating six-month Intervals and/or the placement ofcertain of its generating units on "ready-reserve;" reduction of contractor costs through redeployment of its workforce; and reduction of Its workforce through attrition.
RESULTS OF OPERATIONS The followingdiscussion and analysis includes an explanation ofthe significant changes In revenues and expenses when comparing 1994 to 1993 and 1993 to 1992. Additional information relating to changes between these years Is provided in the Notes on pages 36 through 52 of this Report.
EARNINGS Earnings per share ofcommon stock are shown after provision for dividends on preferred stock and are computed on the basis ofthe average number of common shares outstanding during the year. The number of common shares, the earnings per share and the rate of return earned on average common equity are as follows:
Average shares outstanding (000s).............
17,102 16,725 15,901 Earnings per share.................
S 2.68 S 2.68 S 2.65 Return earned on common equity per books'.............
10.7%
11.1%
11 A'L
'eturn on equity forregulatory purposes differs from these figures.
Earnings per share In 1994 remained unchanged from 1993. Although earnings from normal opera-tions increased S.03 per share In 1994, such Increase was offset by the absence of the S.03 per share gain realized in 1993 from the sale of long-term invest-ments. The S.03 per share increase in earnings from operations was due primarilyto lower Interest charges on the Company's outstanding debt, resulting in large part from the payment at maturity in 1994 of S50 millionprincipal amount of 8 1/8% Series First Mortgage Bonds and the refinancing of high interest rate debt and preferred stock in 1993, and increased gas net operating revenues.
These increases were partially offset, however, by.
reduced earnings from PSC incentive programs related to fuel costs and energy efficiency programs, decreased electric net operating revenues attribut-able primarilyto decreased sales to large industrial customers, especially IBM,an increase in the number of shares ofcommon stock outstanding, and decreased earnings of non-regulated subsidary companies.
The S.03 per share increase In 1993 earnings versus 1992 earnings includes the effect of one-time items on earnings per share in both 1992 and 1993.
The effect ofthe one-time inclusion ofthe Nine Mile2 Plant net litigation proceeds (which increased 1992 earnings by S.10 per share) was partially offset by the effect ofa one-time gain from the sale of long-term Investments (which increased 1993 earnings per share by S.03). Thus, excluding these two one-time items, income from operations increased S.10 per share in 1993 as compared to 1992. The increase In earnings from operations of S.10 per share was due primarilyto hIgher electric base rates, an increase in the amortization to income of MirrorCWIP as a rate moderator, and lower interest charges on the Company's outstanding debt resulting from the additional refinancing of high interest rate debt In 1993.
These Increases were partially offset, however, by a decrease in industrial electric sales (primarily attributable to the operational cutbacks by IBM described above) and higher federal income taxes.
OPERATING REVENUES Total operating revenues decreased S1.7 million(.3%) In 1994, as compared to 1993, and S6.2 million(1.2%)
in 1993, as compared to 1992.
See the table below fordetails of the variations:
Customer sales...~...............
Sales to other utilities..........
Increase in base rates........
Fuel cost adjustment.....,....
Deferred revenues
~.~..........
Miscellaneous.....................
Total..................
S (6,105)
(831) 4,704 (7,534)
(3A05) 1328 S(11,843)
S 4,555 6234 (881) 230 810,138 Ehairh; thousands ot Doirors)
S(1,550)
S(6.155)
(831)
(2A07) 4,704 7g65 (1,300)
(4,202)
(4,286) 322 1558 326 S(1,705)
S(4411)
S(5,646) 2806 1g>28 (461)
S(1,673)
S(11,801)
(2A07) 7g65 (1,396) 1,950 (135)
S (6,184)
Variation in actual electric fuel costs from targeted amounts................................
Customer (charge) credit........
income (expense) recognized by the Company..................
$(lgb5)
$1~
$(1Nr7)
(1333) 1076 (854)
S (333)
S 269 S
(213)
The Company's base rates for electricity include an imputed amount of net revenue (gross revenues less incremental costs, principally fuel) from sales of electricity to other utilities. The PSC requires an 80%%u/20%%uo sharing between customers and the Company, respectively, of any variations from the Imputed amount, either higher or lower. The Corn-pany reflects any credits or charges to its customers resulting from these provisions through the electric fuel cost adjustment clause.
The followingtable sets forth the variation in actual net revenue realized from the amounts Imputed, the amount charged or credited to retail customers through the electric fuel cost adjustment clause, and the amount ofsuch net revenues retained by the Company and recognized in the results of operations:
J224 329 1Ri2 (ihousands or Doiiars)
Variation in actual net revenue from imputed amounts............................
S 1,123 S 889 S(3,118)
Customer (charge) credit....,
898 711 (2A94) income (expense) recognized bytheCompany..............
S 225 S178 S
(624)
SHARING ARRANGEMENTS The Company's electric fuel cost adjustment clause provides for a partial sharing of fuel cost variations, pursuant to an incentive/penalty formula.
The PSC requires a sharing between the customers and the Company of variations ln actual fuel costs from the forecasted amounts whIch have been approved by the PSC for a specific twelve-month period, whereby the Company bears 2(P%%d of the first
$ 10 millionof variation and 10% ofthe second S10 millionof variation. Anyvariations in excess of S20 millionare credited or charged, as appropriate, in total to the customers. See subcaption "Deferred Electric Fuel Costs of Note 1 ofthe Notes. The followingtable sets forth the variation in actual electric fuel costs from the targeted amounts approved by the PSC, the amount charged or credited to retail customers through the electric fuel cost adjustment clause, and the amount retained by the Company and recognized in the results of operations:
3224 le 3222 thousands of Doiiars)
Actual net revenue from interruptibie gas sales.........
Customer credit ~.....................
income recognized by the Company (includes imputed amounts)..............
SALES S3,716
$3278
$4515 1550 1,725 2.771
$2,166 S 1~
S1,744 Sales of electricity withinthe Company's service territory decreased 3%%d in each of 1994 and 1993, largely reflecting a decline in usage by IBM,as described under the above caption entitled Other Developments.
Firm sales of natural gas increased 4/o and 2%%u in 1994 and 1993, respectively. The increase In 1994 was largely attributable to an Increase ln the usage by residential and commercial customers. The 1993 increase was primarilyfrom an increase in the number of residential and commercial customers.
Prior to November 22, 1993, the treatment established by the PSC regarding net revenues from interruptible gas sales was to impute in gas base rates an annual level of S1.2 million. Firm gas custom-ers were to receive 10(% of any net revenues between S1.2 millionand S1.8 million,and any net revenues In excess of S1.8 millionwere to be shared 80%%d/20%%uo between the Company's firm gas custorn-ers and the Company, respectively.
Effective November 22, 1993, the PSC changed said treatment regarding net revenues from lnter-ruptible gas sales. The PSC increased the level of such net revenues imputed in gas base rates from S1,2 millionto S1.9 million.Also, the incentive sharing mechanism was changed from 80%/2(P%%d between the Company's gas customers and the Company to 90%%u/10%.Thlsmechanis mapplie d toal I net revenues above S1.9 millionfrom the Company's ten largest firmtransportation customers and all net revenues from all other interruptible sales and transportation customers. The described mechanism willremain in effect unless otherwise directed by the PSC.
The followingtable sets forth the actual net revenue from interruptible gas sales, the amount credited to firmgas customers, and the amount of such net revenues retained by the Company and recognized in the results of operations:
JBB 329 lRi2 thousands ot Dotars) 25
Electric Residential.
Commercial.
Industrial Residential.
Commercial.
Industrial 1
3 3
4 (13)
(13)
Gas 3224 1RQ 3
1 7
3 (4)
Changes in sales by major customer classification are set forth below:
% Increase (Decrease)
Growth in number of customers Change in average usage per customer Growth in number of customers Change in average usage per customer
% Increase (Decrease) dzm2ffaQez i%4 liK 2
3 (1) le 2
4 5
(1)
Residential electric sales: Residential electric sales are primarilyaffected by the growth in the number of customers and the change in kWh. usage per customer. Customer usage fs also sensitive to weather. Changes in these components are set forth ln the table below:
% Increase fumI.'darYaaf 12M 39K Growth in number of customers..
1 Change ln average usage per customer.................
1 2
In both 1994 and 1993, the Increased usage per customer was largely attributable to hotter summer weather as cooling degree days increased 10% over 1993 and 2NP%%d over 1992.
Commercial electric sales: The components of the changes in commercial electric sales are set forth fn the table below:
% fncrease Bimonthly billingcycle...
Calendar year.
~.
32K liK (1) 1 (3)
Firm gas sales to industrial customers decreased 4% in 1994 prfmarilydue to the shift oftwo large industrial customers from firmservice to gas transpor-tation service. Firm gas sales to fndustrial customers in 1993 remained unchanged from the 1992 level.
Gas safes - interruptibte: Interruptible gas sales increased 33% ln 1994 as compared to 1993, and decreased 37% in 1993 as compared to 1992. The 1994 increase was due primarilyto the sale of natural gas to the other cotenant ow'ners ofthe Roseton Plant for use as a boiler fuel. The 1993 decrease was due to a reduction ln the amount of natural gas sold to the other cotenants for use as a boiler fuel at the Roseton Plant, whIch was a result of lower costs of alternate fuels. In addition, Unit 2 ofthe Roseton Plant was severely damaged by a fire In March 1993 and was not returned to service until December 1993.
3224 1'rowth in number of customers..
1 2
Change in average usage per customer......~......................
2 2
Industrial electric sales: In both 1994, as com-pared to 1993, and 1993, as compared to 1992, industrial electric sales decreased 13%, due primarily to a decline in usage by IBMof 16% in 1994 and 20%
in 1993.
Gas sales - firm: The followingtables set forth customer growth, changes In customer usage and heating degree days for the residential and com-mercial classifications. Changes in residential and commercial gas sales are affected by weather conditions.
NUCLEAROPERATIONS The operations ofthe Nine Mile2 Plant, of which the Company owns a 9% Interest, have continued to Improve. The actual capacity factor for 1994 ex-ceeded the targeted capacity factor included in the Company's electric fuel adjustment clause; and the actual cost of-operation for 1994 and 1993 has approximated the amount provided for In the rate-making process.
Both of these factors contributed to a positive Impact on earnings.
The Company has continued to participate actively on the management, operations and
'accounting committees forthe Nine Mile2 Pfant and, also, on the finance committee, which deals with regulatory and budgeting Issues In an effortto produce better forecasts and control costs.
The Plant Is scheduled to commence its fourth refueling outage in April 1995, with a targeted 8May duration.
As more fullydiscussed ln Note 2 ofthe Notes, the 26
Company continues to base Its decommlsslonlng cost estimates on the 1989 decommissioning study which Is filedwith the Nuc!ear Regulatory Cornmis-sion (NRC) and which estimates are included ln the Company's rates. Niagara Mohawk has advised the Company that it intends to complete a new decom-missioning study, on behalf ofthe Nine Mile2 Plant cotenant owners, during 1995. The Company believes that decommissioning costs are likelyto be much higher than the 1989 estimates of such costs but is unable to predict the costs at this time. The Company also believes that decommissioning costs, ifhigher than currently estimated, willultimately be recovered in the rate-making process, although no such assurance can be given. When this study is completed and filedwiththe NRC, the Company willupdate its decommissioning cost estimates.
OPERATING EXPENSES Changes in operating expenses from the prior year are set forth below:
increase or (Decrease) from Prior Year 1994 1993 hmauai X
hmauai (Dollsh Thouxmds)
Operating Expenses:
Fuel and purchased electricity...............
Purchased natural ga Other expenses of operation.....,.............
Maintenance................
Nine Mile2 Plant operation and maintenance Depreciation and amortization..............
.... S(10,266) s.
6488 (8) S(10~)
(8) 12 (1,'166)
(2) 3A36 (2381) 4 1,794 2
(8) 6 773 5
871 6
698 2
86.
Taxes, other than income tax................
1,335 2
(775)
(1)
Federal income tax......
(560)
(2) 3A92 14 Total......................
S (277)
S (6247)
(1)
The most significant elements of cost are fuel and purchased electricity in the Company's electric department and purchased natural gas In the Company's gas department. Approximately 27% in 1994 and 29% in 1993 of every revenue dollar billed in the Company's electric department was ex-pended for the combined cost of fuel used In electric generation and purchased electricity. The corresponding figures ln the Company's gas department for the cost of purchased gas were 58%
and 57%, respectively.
In 1994 and 1993, the combined cost of fuel used in electric generation and purchased electric-itydecreased S10.3 million(8%) and S10.6 million (8%), respectively, resulting primarily from lower per unit costs and decreased sales of electricity.
In an effort to keep the cost of electricity at the lowest reasonable level, the Company purchases energy from other member companies ofthe New York Power Pool, whenever such energy can be purchased at a unit cost lower than the incremental cost of generating the energy in the Company's plants.
The followingtable shows the average fuel cost per kWh. forthe Company's three major generating plants during the last five years:
Average Cost (o/kWh.)
ans ammer ose on Nine ile Plant Plant Hant'.98 2.62
.53 1.95 2.67
.57 2.01
- 2.64
.60 2.25 2.43
.64 2.36 2.94 1.21 1994 1993 1992 1991 1990 16215,092 14,968,805 16,831 A06 11,640,289 11,813,255 3.63 3.79 3.59 3.50 3.37 The 1994 increase in gas purchased was due primarilyto increased sales of natural gas to the other cotenant owners for use as a boiler fuel at the Roseton Plant and increased sales of natural gas to residential and commercial customers. The de-crease in gas purchased in 1993 was due primarilyto a reduction in gas sold to the other cotenant owners for use as a boiler fuel at the Roseton Plant. The large increase fn gas purchased In 1992 was due primarily to the increased sales of natural gas to residential and commercial customers and the sale of natural gas to the other cotenant owners of the Roseton Plant for use as a boiler fuel beginning In February 1992. As discussed in Note 8 ofthe Notes, competi-tively bid contracts that the Company has in place fora majority of its gas supply willexpire in 1995 after the 1994-1995 winter heating season and are expected to be replaced with competitively bid contracts with third-party gas suppliers.
27
'he post-1%6decreaseln theaveragecost perkWh for the Nine Mlle2 Plant was prlmartty a result ofthe 1591 revaluation ofthat Plant's remaining MBTUsln the lnltlal load, os wellas lower costs associated with that Plant's tlrstreload which occurred ln January 1991.
The amount of natural gas purchased, excluding gas burned as boiler fuel at the Danskammer Plant and the Company's share of gas burned as a boiler fuel at the Roseton Plant, and the cost per Mcf.
during the last five years are set forth in the following table:
Amount of Gas
Under FERC Order 636, LDCs, such as the Com-pany, are permitted to offer their unutilized firm transportation service to others fora fee; this is known as capacity brokering. The Company filed with the PSC a capacity brokering program for Its service territory, which was approved in May 1994.
This program gives the Company an opportunity to defray some or all ofthe monthly fixed charges when Its firmtransportation capacity is not fully utilized and, as a result, reduces the costs billed to the Company's firmgas customers. The Company brokered such excess capacity at various times, during 1994.
Other expenses ofoperation increased S3.4 million(4%) ln 1994 primarilydue to higher employee wages and associated fringe benefits. The 1993 Increase of $ 1.8 million(2%) in other expenses of operation was a result of Increased costs associated with the Company's energy efficiency programs and higher employee wages.
Maintenance expenses decreased S2.4 million (8%) in 1994 due primarilyto $4.1 millionof higher costs incurred in 1993 forthe scheduled major overhauls of Units 3 and 4 at the Danskammer Plant with no comparable overhauls in 1994, These costs were partially offset by a S1.9 millionincrease fn maintenance costs related to the Company's gas transmission and distribution system in 1994. Mainte-nance costs for 1993 were stable when compared to 1992 maintenance costs.
The Company's portion of operating expenses, taxes and depreciation pertaining to the operation of the Nine Mile2 Plant are included in the Company's financial results. In 1994 and 1993, the amounts provided ln rates were approximately equal to the actual operation and maintenance expenses for the Nine Mile2 Plant.
The Company's composite rate for depreciation amounted to 3.15% in 1994, 3.17% in 1993 and 3.29%
in 1992 ofthe original cost ofaverage depreciable property. The ratio ofthe amount of accumulated depreciation to the cost of depreciable property at December 31 was 34.5% ln 1994, 32.8% in 1993 and 31.4% In 1992.
Property taxes, including school taxes, increased
$ 1.5 millionand S891,000 in 1994 and 1993, respec-tively. Nine Mile2 Plant property taxes accounted for S208,000 and S90,000, respectively, ofsuch increases.
State and local taxes levied on gross revenues decreased S406,000 and $ 1.8 millionin 1994 and 1993, respectively. In 1994, the revenue taxes decreased due to the reduced rate ofthe New York State Surcharge Tax for utilityservice from 15% to 12.5% effective June 1, 1994. The 1993 decrease was due primarilyto the inclusion In 1992 cost ofa retroactive New YorkState Gross Receipts Tax, OTHER INCOME AND INTEREST CHARGES Details ofthe AFDC are set forth below:
3224 liK 152 ghoosonds ot Dolors)
Mile2Plant............
441 S
738 S
597 Nine Iroquois Gas Pipeline interconnection.........
201 Other.............................. ~ ~
~4 Total.....................
S 1381 S 1545 S 1547 AFDC rate......................
8.50%
8.75%
6.75%
The higher AFDC rate in 1993 was due to construction expenditures being funded primarily by the higher cost of permanent capital as compared to lower cost short-term borrowings In 1992. See caption "Allowance for Funds Used During Con-struction" in Note 1 ofthe Notes for additional information.
Total interest charges (excluding AFDC) de-creased
$ 1.2 million(4%) in 1994 and $ 1.2 million(4%)
in 1993. The followingtable sets forth some ofthe pertinent data on the Company's outstanding debt:
December 31, 3224 1%
li52 (rhovsoeds of Doliors)
Long-term debt:
New debt Issued...........
S S 40,000 S 76NO Debt retired...................
50QS 40,000 569$
Outstanding at yearwnd Amount (including current portion)......... 393.853'43.897'43,618 Effective rate...............
6.71%
6.75%
7.05%
Short-term debt:
Average daily amount outstanding...............
S 16 S
330 S 12,984 Weighted average interest rate...............
6.69%
3.94%
4.48%
including debt ofsubsidiaries of$4.8 millionln 1994 and 1993 and $4.4 millionln 1992.
See Notes 4 and 6 of the Notes foradditional information.
which increased 1992 costs by S1.2 million.These two categories of taxes accounted for a substantial portion of the total changes in operating taxes.
With the enactment in August 1993 ofthe Omnibus Budget Reconciliation Actof 1993 (OBRA),
the corporate federal income tax rate increased from 34% to 35%, effective January 1, 1993. The PSC authorized deferral of the resultant increase in the corporate federal Income tax rate until Its disposition Is determined in the next rate case.
See Note 3 ofthe Notes foran additional analysis and reconciliation of the federal income tax.
28
Applicable Redemption/Payment Price
(%%u of Principal Amount)
Series of First Mort age Bonds Redemption/Payment Date July 2, 1992 July 2, 1992 August 1, 1992 August 1, 1992 September 1, 1993 November 15, 1993 September 1, 1994 Principal Amount Redeemed/Paid 100.000%%uo 102.445%%ua 102.390%%ua 104.080%
102.630X 101.230%%uo 100.000%%u 4,000,000 12,000,000 25.000,000 15,000,000 20,000,000 20,000,000 50,000,000-11% Series due 1995 93/8%%u Series due 2000 9 1/4%%uo Series due 2004 7 3/4%%u Series due 2002 7
1/B%%u Series due 1999 8 1/8% Series due 1994 Mandatory sinking fund payment.
" Payment at maturity.
Issuance and Sale:
Details of the issuances and sales in 1992 and 1993 under the Company's Medium Term Note Program under which First Mortgage Bonds and/or unsecured debt could be Issued are shown below (no issuances or sales occurred in 1994):
In an effort to reduce its cost of debt, the Company refinanced a large portion of its high interest rate debt with lower Interest rate debt during the period from December 1990 to November 1993.
Details of the 1992, 1993 and 1994 long-term debt redemptions and payments are shown below:
Redemptions and Payments:
Tranches of Medium Term Notes 7.70L due 2000 7.97%
due 2003 7.97%%u due 2003'.85%%u due 2004""
8.12%%u due 2022'.14L due 2022 6.10%%uo due 2000 6.46%
due 2003 5.38%
due 1999-First Mortgage Bonds.
- Promissory Note.
S25,000,000 8,000,000 8,000,000 15,000,000 10,000,000 10,000,000 10,000,000 10,000,000 20,000,000 Proceeds
~toCom an 99.409X 99.375%
99.375L 99.375%
99.250X 99.25(P%%d 99.460X 99.375%
99.500%%u Issuance and Sale Date June 11, 1992 June 11, 1992 June 11. 1992 July 2, 1992 August 31, 1992 August 31, 1992 August 9, 1993 August 9, 1993 October 14, 1993 The S116 millionprincipal amount of Medium Term Notes, detailed above and fn Note 6 of the Notes, was issued and sold pursuant to PSC authorization under an Order which expired as of December 31, 1994. By an Order issued and effective October 17, 1994, the PSC granted the Company authorization to issue and sell, through December 31, 1996, up to an additional S80 millionof securities. This S80 millioncan be composed of Medium Term Notes solely or a combination of Medium Term Notes and up to S40 million of common stock.
29
Selected financial indices forthe last five years are set forth in the followingtable:
Pretax coverage of total interest charges:
Including AFDC Excluding AFDC Pretax coverage oftotal interest charges and preferred stock dividends.
3.38x 3.29x 3.07x 2.70x 2 43x 3.15x 3.15x 2.95x 2.62x 2.36x 2.74x 2.65x 2.49x 2.22x 2.04x Percent of construction expenditures financed from internal funds AFDC and IvilrrorCWIP as a percentage of income available forcommon stock.
Effective tax rate 100%
1HP%%d 100%
88%
100%
16%
11%
10%
8%
9%%d 35%
35%
34%
33%
33%
COMMONSTOCK DIVIDENDS ANDPRICE RANGES The Company and its principal predecessors have paid dividends on Its common stock In each year commencing 1903, and the common stock of the Company has been listed on the New York Stock Exchange since 1945. The price ranges and the dividends paid for each quarterly period during the Company's last two fiscal years are indicated on page 15 of this Report.
On June 26, 1992 the Company increased the quarterly dividend rate to S.50 per share and on June 25, 1993 increased the quarterly diVidend rate to S.515 per share. On June 24, 1994 the quarterly dividend rate was further increased to $.52 per share. The 1994 increase in the dMdend was smaller than in recent years in order to enhance the Company's competitive position in the electric utilityIndustry. The Company presently Intends to increase future dividends by a modest amount, if and to the extent supported by sustained earnings growth, while at the same time gradually reducing the Company's payout ratio; however, any deter-mination of future dividend declaration, and the amounts and dates of such dividends, will depend on the circumstances known at the time of consideration of such declaration.
The number of registered holders ofcommon stock as of December 31, 1994 was 26,373. Of these, 26,107 were accounts in the names of individuals withtotal holdings of 5,042379 shares, or an average of 193 shares per account. The 266 other accounts, in the names of institutional or other non-individual holders, forthe most part, hold shares forthe benefit of individuals.
The Company's 4.85% Promissory Notes due December 1, 1995 contain limitations upon the right ofthe Company to declare or pay any dividend or make any other distribution on (other than dM-dends or distributions payable In common stock), or acquire, fora consideration. any shares of Its common stock unless the aggregate of all such dividends, distributions and considerations since December 31, 1964 does not exceed an amount determined by a formula. AtDecember 31, 1994, the amount of retained earnings available for diVidends on the Company's common stock under the provisions ofsaid 4.85% Promissory Notes was
$70.9 million.
30
REPORT OI'NDEPENDENT ACCOUNTANTS
@Price Woterhouse rLP To the Board of Directors and Shareholders of Central Hudson Gas &Electric Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated state-ments of income, of retained earnings and of cash flows present fairly, in all material respects, the financial position of Central Hudson Gas & Electric Corporation and Its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opin-ion on these financial statements based on our audits. We conducted our audits of these financial statements In accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstaternent. 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 esti-mates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 7 to the Consolidated Financial Statements, in 1993 the Company changed its method of accounting for postretirement benefits other than pensions to conform with Statement of Fi-nancial Accounting Standards No. 106.
New York, New York January 27, 1995 STATEMENTOI'ANAGEMENT'SRESPONSIBILITY Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Central Hudson Gas & Electric Corporation and its subsidiaries (collectively, the Company) as well as all other information contained In this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and, in some cases, reflect amounts based on the best estimates and judgements of the Company's Management, giving due consideration to materiality.
The Company maintains an adequate system of internal controls to provide reasonable assurance that among other things, transactions are executed in accordance with Management's authorization, that the consolidated financial statements are prepared In accordance with generally accepted ac-counting principles and that the assets of the Company are properly safeguarded.
The system of Internal controls is documented, evaluated and tested by the Company's Internal auditors on a continuing basis.
Due to the inherent limitations of the effectiveness of internal controls, no Internal control system can pro-vide absolute assurance that. errors will not occur. Management believes that the Company has maintained an effective system of internal control over the preparation of its financial Information includ-ing the consolidated financial statements of the Company as of December 31, 1994.
Independent accountants were engaged to audit the consolidated financial statements of the Com-pany and Issue their reports thereon. The Report of Independent Accountants, which is presented above, does not limitthe responsibility of Management for information contained in the consolidated financial statements and elsewhere in the Annual Report.
The Company's Board of Directors maintains a Committee on Audit which Is composed of Directors who are not employees of the Company. The Committee on Audit meets with Management, Its Internal Auditing Manager, and its independent accountants several times a year to discuss internal controls and accounting matters, the Company's consolidated financial statements, the scope and results of the au-dits performed by the Independent accountants and the Company's Internal Auditing Department. The independent accountants and the Company's Internal Auditing Manager have direct access to the Committee on Audit.
JOHN E. MACK, III Chairman of the Board and Chief Executive Officer JOHN F. DRAIN Vice President-Finance and Controller January 27, 1995 31
CGNSGLII3ATEDBALANCESHEET (Thousands of Dollars)
ASSETS December 31, le%
12K UtilityPlant Electric Gas Common.
Nuclear fuel
~
~.
S1,114,574 131,830 80,652 31,525 1,358,581 S1,083 491 128,093 80,485 28,199 1,320,268 Less: Accumulated depreciation Nuclear fuel amortization ..
Construction work in progress.
Other Property and Investments.
462,105 23,655 872,821 58,252 931,073 10,948 427,504 20,646 872,,1 18 42,741 914,859 8,465 Current Assets Cash Temporary cash investments Accounts receivable from customers - net of allowance for doubtful accounts;
$2.0 million in 1994 and 1993...................
Accrued unbilled utilityrevenues...
Other receivables.
Materials and supplies, at average cost:
Fuel Construction and operating..
Special deposits and prepayments 5.335 457 43,908 15.076 5,953 19,293 14,096 12,092 116,210 6,609 20,563 46,452 16,931 2,255 20,800 14,617.
11,368 139,595 Deferred Charges Deferred finance charges - Nine Mile 2 Plant (Note 1)...................
Income taxes recoverable (Note 3).
Unamortized debt expense..
Deferred energy efficiency costs (Note 1).
Deferred gas costs (Note 1)..............................................................
Deferred vacation (Note 1)
~
0ther
~
~
~
~ ~
~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~
~
~ ~ ~ ~ ~ ~ ~ ~
~ ~ ~
~ ~ ~
~ ~ ~ ~
~ ~
~ ~ ~ ~ ~
~ ~ ~ ~ ~
~
~
~
~ ~ ~ ~ ~ ~ ~
~ ~ ~
Accumulated Deferred Income Tax (Note 3);
71,904 69,331 11,072 9,583 6,983 3,888 19,789 192,550 58,629 73,049 71,121 12,707 10,316 10,239 3,643 20,246 201.321 63.995 S1,309.410 S1,328,235 The Notes to Consolidated Financial Statements are an integral part hereof.
32
LIABILITIES December 31, 3924 32RQ Capitalization Common Stock Equity Common stock, S5 par value (Note 5).
Paid-in capital (Note 5)
Retained earnings Capital stock expense Unrealized gain on investment (Note 10)
Cumulative Preferred Stock (Note 5)
Not subject to mandatory redemption.
Subject to mandatory redemption.
Long-term Debt (Note 6)
Current Liabilities Current maturities of long-term debt Notes payable
~
Accounts payable Accrued taxes and interest.
Accrued vacation (Note 1).
Customer deposits Dividends payable.
Other Deferred Credits and Other Liabilities Deferred finance charges - Nine Mlle 2 Plant (Note 1).........:.........
Income taxes refundable (Note 3).......
Accrued pension costs (Note 7)
Operating reserves...:.......
Deferred unbilled gas revenues.
Deferred gas refunds.
Deferred Nine Mile 2 Plant litigation proceeds (Note 2).~...........
~ ~. ~
Other Accumulated Deferred Income Tax (Note 3)
S 86,192 277,205 79,284 (6,773) 823 436,731 46,030 35,000 81,030 389,364 907,125 3,525 3,000 29,441 6,829 4,081 3,763 10,246 5,556 66A41 34,431 28,383 9,705 5,663 3,754 3,431 626 11,267 97,260 238,584 S
84,766 270,848 69,023 (6,791) 417,846
-46,030 35,000 81,030 391,810 890,686 51,019 28,554 6,610 3,836
'3,452 9906 4,716 108.093 40A3.1 28,935 11,733 2,346 5,814 815 3,695 3,908 97,677 231,779 Commitments and Contingencies (Notes 2 and 8)
S1,309,410 S1,328,235 The Notes to Consolidated Flnanclal Statements are an integral part hereof.
33
CONSOLIDATEDSTATEMENTOI'NCOME (Thousands of Dollars)
Year ended December 31, 32K
- 32i2, 32i2 Operating Revenues Electric Gas Total - own territory Revenues from electric sales to other utilities.....
Operating Expenses Operation:
Fuel used in electric generation.
Purchased electricity.
Purchased natural gas.
Other expenses of operation..
Maintenance..
Depreciation and amortization (Note 1).
Taxes, other than income tax Federal income tax (Note 3)..
Operating Income Other Income and Deductions Allowance for equity funds used during construction (Note 1).
Federal income tax (Note 3)
Other - net.
Income before Interest Charges Interest Charges Interest on mortgage bonds Interest on other long-term debt.
Other interest.
Allowance for borrowed funds used during construction (Note 1)
Amortization of (premium) and expense on debt - net...
Net Income Dividends Declared on Cumulative Preferred Stock....
Income Available for Common Stock.
Common Stock:
Average shares outstanding (000s)..............................
Earnings per share on average shares outstanding S400,327 104.586 Mrms 10,755 515,668 67,899 44,085 60,588 101,925 32,716 40,380 66,899 28.043 442,535 73,133 866 1,237 6.296 8,399 ITS'9,624 7,917 1,784 (515) 1,793 SK503'0,929 5,127 45,802 17,102 S2.68 S411,339 94,448
~0iT77 11,586 517,373 72,291 49,959 53,900 98,327 34,486 39,682 65,564 28.603 442.812 74,561 934 1,445 5,167 7.546 82, 07 22,390 6,487 1,204 (611) 2,247 3l.n7 50,390 5,562 44,828 16,725 S2.68 S413 443 96,121 075KB 13,993 523,557 106,970 25,835 55,066 95,916 34,226 39,596 66,339 25.111 449.059 74,498 596 748 4.427 5,771 80,269 23,207 6,286 1.954 (951) 2.085 3KSST 47,688 5,544 42,144 15,901 S2.65 CONSOLIDATEDSTATEMENTOI'ETAINEDEARNINGS Ohousands of Dollars)
Year ended December 31, Balance at beginning of year.
Net Income Dividends declared:
On cumulative preferred stock On common stock (S2.075 per share 1994; S2.045 per share 1993; S1.98 per share 1992)
Balance at end of year S 69,023 50,929 119,952 5,127 35,541 40,668 S 79,284 1223 S 58,692 50,390 109,082 5,562 34,497
~40.0 9 S 69.023 J922 S 48,093 47,688 95,781 5,544 31,545 37,089 S 58,692
'ursuant to the terms of the 4.85% promissory notes. due 1975, $70,870 is ovoitable forpayment ofd vtdends on common stock.
The Notes to Consolidated Financial Statements are an Integral part hereof.
CONSOLIDATEDSTATEMENT OP CASH PLOWS (Thousands of Dollars)
Year ended December 31, 32K 1'222 Operating Activities Net Income.
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization including nuclear fuel amortization.
Deferred income taxes, net.
Allowance for equity funds used during construction....
Nine Mile 2 Plant deferred finance charges, net............
Provisions for uncollectibles..
Accrued pension costs.
Gain on sale of long-term investment Deferred gas costs Deferred gas refunds....
Other-net......,
Changes in current assets and liabilities, net:
Accounts receivable and unbilled utilityrevenues Materials and supplies Special deposits and prepayments.
Accounts payable Accrued taxes and interest Other current liabilities Net cash provided by operating activities........
Investing Activities Additions to plant Allowance for equity funds used during construction........
Net additions to plant.
Roseton Plant restoration costs related to fire damage.....
Insurance recoveries related to Roseton Plant restoration Nine Mlle 2 Plant decommissioning trust fund Proceeds from sale of tong-term Investments Other - net Net cash used in investing activities.
Financing Activities Proceeds from issuance of:
Long-term debt.
Common stock Cumulative preferred stock...,..
Net borrowings (repayments) of short-term debt............................
Retirement and redemption of long-term debt ~..............................
Retirement and redemption of cumulative preferred stock..........
Dividends paid on cumulative preferred and common stock.......
Issuance and redemption costs Net cash used in financing activities S 50,929 44,616 12,970 (866)
(4,855) 3,306 (2,028) 3,256 2,616 4,376 (2,604) 2,028 (724) 887 219 1,396 115,522 (58,045) 866 (57,179)
(853) 4,371 (895)
(2,648)
(57,204) 230 7.783 3,000 (50,273)
(40,328)
~110
~79 698 S 50,390 43,887 15,593 (934)
(7,987) 3,431 (2,562)
(670)
(2,974) 416 3,807 (3,701) 2,623 444 668 (4,561) 7 97,877 (54,037) 934 (53,103)
(9,454) 5,936 (942) 2,212 (215)
(55,566) 41,722 30,122 35,000 (15,000)
(41,443)
(35,000)
(39,527)
~2271
~26 397 S 47,688 42,999 11,107 (596)
(9,951) 3,824 8,774 (4,103)
(127) 3,911 (10,670)
(598)
(949)
(6,725) 1,535 (1,788) 84,331 (61,721) 596 (61,125)
(917)
(671)
(62,713) 77,630 7A53 (4,000)
(57,797)
(36.691)
~2869
~16 274 Net Change in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year.........
Cash and Cash Equivalents at End of Year (21,380)
S 5,792 15,914 5,344 S 27,172 S 11,258 Supplemental Disclosure of Cash Flow Information Interest paid (net of amounts capitalized)
Federal income taxes paid.
S 28,681 12,100 S 30,287 13,000 S 30A13 11,298 The Notes. to Consolidated Financial Statements are an integral part hereof.
NOTE 1 -
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES General: The Company is subJect to regulation by the Public Service Commission ofthe State of New York (PSC) and the Federal Energy Regulatory Commission (FERC) with respect to its rates forservice and the maintenance of Its accounting records. The Company's accounting policies conform to generally accepted accounting principles as applied to regulated public utilities and are in accordance with the accounting requirements and rate-making practices of the regulatory authorities having Jurisdiction.
Certain amounts from prior years have been reclassified on the consolidated financial statements to conform with the 1994 presentation.
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. AllIntercompany balances and transactions have been eliminated.
The Company's subsidiaries are each wholly owned, and consist of landholding, cogeneration or energy management companies. The net Income ofthe Company's subsidiaries is reflected In the Consolidated Statement of Income as other non-operating income.
Summarized financial data for the Company's subsidiaries, included in the consolidated financial statements, Is as follows:
35%4 12K 32i2 (rhousands of Dollars)
Total Assets (year-end)
S20,749 S20,097 S17,651 Net Assets (year-end) 10A65 10,240 9,274 Revenues 2A17 7,368 4,753 Net Income 225 966 634 UtilityPlant: The costs of additions to utilityplant and replacements of retirement units of property are capitalized at original cost. The Company's pro rata share of the costs of Unit No. 2 ofthe Nine Mile Point Nuclear Station (Nine Mile2 Plant) are capital-ized at original cost, less the disallowed investment of S169.3 millionwhich was recorded ln 1987. Costs Include labor, materials and supplies, Indirect charges forsuch Items as transportation, certain taxes, pension and other employee benefits and an allowance for the cost of funds used during construction (AFDC). Replacement of minor Items of property is Included in maintenance expenses.
The original cost of property, together with removal cost, less salvage, Is charged to accu-mulated depreciation at such time as the property Is retired and removed from service.
Jointly Owned Facilities: The Company has a 9'/o, or 97.2 MW, undivided Interest In the 1.080 MW Nine Mile 2 Plant (see Note 2) and a 35%, or 420 MW,undivided Interest In the 1,200 MW Roseton Steam Electric Generating Plant (Roseton Plant) (see Note 8 caption Roseton Plant" ).
The Company's pro rata share ofthe investment in the Nine Mile 2 Plant and the Roseton Plant, as 36 included in its Consolidated Balance Sheet at December 31. 1994 and 1993, were:
12L4 35K (rhousands of Oollors)
Nine Mile 2 Plant Plant in service S309,893 S304 354 Construction work in progress 3,941 7,933 Accumulated depreciation (48,248)
(41,148)
Roseton Plant Plant in service S 130,310 S 122,753 Construction work in progress 3,740 1,014 Accumulated depreciation (70,525)
(62,623)
Allowance For Funds Used During Construction: The Company includes in plant costs AFDC approximately equivalent to the cost of funds used to finance construction expenditures. The concurrent credit for the amount so capitalized is reported in the Con-solidated Statement of Income as follows: the portion applicable to borrowed funds is reported as a reduction of interest charges while the portion applicable to other funds (the equity component, a noncash Item) is reported as other income. The AFDC rate was 8.5OL in 1994, 8.75% in 1993 and 6.75% in 1992.
During the construction ofthe Nine Mile2 Plant, the PSC authorized the inclusion In rate base of increasing amounts ofthe Company's investment in that Plant. The Company did not accrue AFDC on any of the Nine Mi!e 2 Plant construction work in progress (CWIP) which was included In rate base and forwhich a cash return was being allowed; however, the PSC ordered, effective January 1, 1983, that amounts be accumulated in deferred debit and credit accounts equal to the amount ofAFDC which was not being accrued on the CWIP included in rate base (MirrorCWIP). The balance in the deferred credit account Is available to reduce future revenue requirements by amortizing portions of the deferred credit to other Income or by the elimination through writingoffother deferred balances as directed by the PSC. Based on the history of cost escalation in the electric utilityIndustry and the history of the Company's rate increases, the Company expects such application ofthe deferred credit willoccur over a period substantially shorter than the lifeofthe Nine Mile2 Plant. When amounts of such deferred credit are applied In order to reduce revenue requirements, amortization Is started for a corre-sponding amount ofthe deferred debit, which amortization continues on a level basis over the remaining lifeof the Nine Mile 2 Plant resulting In recovery of such corresponding amount through rates. Deferred debit and deferred credit amounts of MirrorCWIP are identified on the Consolidated Balance Sheet as "Deferred finance charges-Nine Mile2 Plant." MirrorCWIP Is expected to be exhausted by the end of the useful lifeofthe Nine Mile2 Plant either through the amortization or write-offproce-dures described above or through the write-offofthe remaining debit and credit as directed by the PSC.
The net effect ofthis procedure Is that at the end of the amortization period for the deferred credit, the accounting and rate-making treatment willbe
the same as ifthe Nine Mile 2 Plant CWIP had not been included In rate base during the construc-tion period.
Pursuant to the PSC Order and Opinion Issued and effective April9, 1992 regarding the Company's 1990 electric rate case, the Company was authorized to offset S8.5 millionofthe deferred credit against other deferred balances and to amortize S3.0 million annually to other income beginning in May 1992.
Pursuant to the PSC's Opinion and Order Determi-ning Revenue Requirement and Rate Design, issued and effective February 11, 1994 (1993 Rate Order) the Company was authorized to offset S5.5 millionof the deferred credit against other deferred balances and to amortize $6.0 millionannually beginning in December 1993. In 1994, 1993 and 1992, the Corn-pany amortized $6.0 million, $3.3 millionand $2.1 million,respectively, of this deferred credit.
The $6.0 millionamortization of the deferred credit willbe continued until changed in a future PSC rate order. The level of the deferred debit amortization is based on the level of deferred credits that have been utilized in setting revenue requirements fora rate year. Anyamounts of deferred credits that are utilized in the period between the end of the rate year and the setting of new rates are Included in the arnortizatlon level forthe deferred debit over the then remaining life of the Nine Mlle 2 Plant. The deferred debit amorti-zation level Is currently set at S1.145 millionper year.
Depreciation and Amortization: For financial state-ment purposes, the Company's depreciation provisions are computed on the straight-line method using rates based on studies ofthe estimated useful lives and estimated net salvage of properties, with the exception ofthe Nine Mile2 Plant which Is depreciated on a remaining lifeamortization method. The year 2026, which is the year in whIch the Nine Mile2 Plant operating license expires, is used as the end date in the development ofthe remaining lifeamortization. Reference is made to the caption "Operating Expenses" in "Management's Discussion and Analysis of Financial Condition and Results of Operations forthe ratio ofthe total provision fordepreciation to the original cost of
,average depreciable property. The Company performs depreciation studies on a continuing basis and upon approval by the PSC, periodically adjusts the rates of its various classes of depreciable properly. The most recent study was performed in 1993. The provision for depreciation of transportation equipment Is charged indirectly to various asset and expense accounts.
For federal income tax purposes, the Company uses an accelerated method of depreciation and generally uses the shortest life permitted foreach class of assets.
Amortization of Nuclear Fuel: The cost ofthe Nine Mile2 Plant nuclear fuel assemblies and compo-nents Is amortized to operating expenses based on the quantity of heat produced forthe generation of electric energy. Niagara Mohawk Power Corpora-tion (Niagara Mohawk), on behalf ofthe Nine Mile 2 Plant cotenants, has entered into an agreement with the U.S. Department of Energy (DOE) for the ultimate disposal and storage of spent nuclear fuel.
The cotenants are assessed a fee for such disposal based upon the kilowatt-hours generated by the Nine Mile 2 Plant. These costs are charged to operating expense and recovered from customers through base rates or through the electric fuel cost adjustment clause described below. The Company cannot now determine whether such arrangements with the DOE willultimately provide for the satisfac-tory permanent disposal of such waste products.
Rates and Revenues: Electric and gas retail rates, including fuel and gas cost adjustment clauses, applicable to intrastate service (other than con-tractually established rates for service to municipalities and governmental bodies) are regulated by the PSC. Transmission rates, facilities charges and rates for electricity sold for resale in interstate commerce are regulated by the FERC.
Revenues are recognized on the basis of cycle billings rendered monthly or bimonthly. Estimated revenues are accrued for those customers billed bimonthly whose meters are not read in the current month.
The Company's tarifffor retail electric service Includes a fuel cost adjustment clause pursuant to which electric rates are adjusted to reflect changes In the average cost of fuels used for electric generation and In certain purchased power costs, from the average of such costs included in base rates. The Company's tarifffor gas service contains a comparable clause to adjust gas rates forchanges in the price of purchased natural gas and certain costs of manufactured gas.
Deferred Electric Fuel Costs: The provisions of the electric fuel cost adjustment clause are such that changes ln fuel costs incurred fn the current month are not billed or credited to customers until subse-quent months. Therefore, In order to match costs and revenues, the Company defers that portion of such costs incurred in the current month which willresult in a cost adjustment in subsequent months.
Pursuant to a 1985 Order ofthe PSC, the Company's electric fuel cost adjustment clause provides fora partial sharfng of variations ln fuel costs from the levels of fuel costs projected in rate pro-ceedings. The Company bears 2(Kofthe first S10 millionof variation and 10% ofthe second $ 10 million ofvariation. The partial sharing applies to variations in actual fuel costs either above or below the projected levels; accordingly, the Company's maximum annual exposure, or benefit, is $3 million,before taxes.
'sa result ofthe adoption ofthe partial sharing electric fuel adjustment clause, the PSC adopted a symmetrfcal sharfng arrangement for net revenues from sales to other utilities. Shortfalls below the targeted amount, as well as amounts above the targeted amount, willbe shared IKKby the custom-ers and 20% by the Company.
37
Reference is made to the caption "Sharing Arrangements" in "Management's Discussion and Analysis of Financial Condition and Results of Opera-tions" for results of both sharing arrangements mentioned above.
Deferred Gas Costs: In accordance with require-ments of the PSC applicable to all New YorkState regulated gas utilities, the Company defers each month any difference between the amount of gas costs incurred which Is recoverable through the gas cost adjustment clause (GAC) and GAC revenues.
The net deferral remaining at August 31 of each year Is amortized over a subsequent twelve-month period for both billingand accounting purposes. See Note 8 captions Natural Gas Supply" and "Takewr-Pay Gas Costs" as to deferral of certain contract take-or-pay costs charged by pipeline suppliers.
Energy Efficiency Programs: The PSC has required utilities to adopt comprehensive long-range plan-ning which includes demand side management and energy conservation (Energy Efliciency Program). The Company's revised 1994 Energy Efficiency Program was approved by the PSC. The Energy ENciency Program costs are deferred and amortized over either five or ten years, as directed by the PSC.
In addition to the deferral of Energy Efficiency Program costs, the Company recovers lost net revenues that result from the Program. Incentive earnings related to the achievement of energy efficiency goals are recovered through the electric fuel cost adjustment clause.
Deferred and Accrued Vacation: The Company's employees begin accruing vacation in July of each year for use In the followingyear; the monthly accrual of days is based on the number of years of service for each employee. However, for rate-making purposes, vacation pay is recognized as an allowable expense only when paid. Accordingly, the Company records a current liabilityfor earned vacation pay and an equivalent deferred charge representing the future recoverability ofthe difference between costs incurred and costs recovered in the rate-making process.
Federal Income Tax: The Company's policy with respect to accounting for federal income taxes is to reflect in income the estimated amount of income tax currently payable and to provide fordeferred taxes in accordance with generally accepted accounting principles.
Cash and Cash Equivalents: For purposes of the Consolidated Statement of Cash Flows, the Com-pany considers temporary cash investments with an original maturity of three months or less to be cash equiva! ents.
NOTE 2 - NINE MILE2 PLANT General: The Nine Mile2 Plant Is located in Oswego County, New York, and is operated by Niagara Mohawk. The Nine Mile2 Plant is owned as tenants in common by the Company (9% interest), Niagara Mohawk (41%%d interest), New YorkState Electric &Gas Corporation (18%%d interest), Long Island Ughting Company (18% interest) and Rochester Gas and Electric Corporation (14% interest), The output ofthe Nine Mile2 Plant, which has a rated net capability of 1,080 MW, Is shared and the operating expenses of the Plant are allocated to the cotenants in the same proportions as the cotenants'espective ownership interests. The Company's share of direct operating expense forthe Nine Mile2 Plant is included in the appropriate expense classifications in the accompa-nying Consolidated Statement of Income.
Under the Operating Agreement forthe opera-tion ofthe Plant entered into by the cotenants, Niagara Mohawk acts as operator ofthe Nine Mile2 Plant. and all five cotenants share certain policy, budget and managerial oversight functions. Such Operating Agreement remains in effect subject to termination on six months'otice.
Plant Litigation Settlements: In 1992, the Company recognized S2.328 millionin other income represent-ing the shareholders'ortion ofthe net proceeds from various settlement agreements regarding disputes and litigations that arose in connection with the con-struction ofthe Nine Mile2 Plant. The ratepayers'hare of the net proceeds of S3.542 millionwas refunded by the Company to its ratepayers over approximately twelve months beginning December 21, 1993.
Radioactive Waste: An agreement for interim storage ofthe Nine Mle2 Plant low-level radioactive waste has been agreed to between Niagara Mohawk and the cotenants that willprovide forthe storage ofthe Nine Mile2 Rant low-level radioactive waste at Unit No.
1 of the Nine Mile Point Nuclear Station (Nine Mile 1 Plant) until June 30, 2010. It is expected that all low-level radioactive waste stored at Nine Mile 1 Plant (owned 1$% by Niagara Mohawk) willhave been transferred to a low-level radioactive waste operat-ing facilitywithin New YorkState by this date.
Niagara Mohawk has contracted with the DOE for disposal of high-level radioactive waste (spent fuel) from the Nine Mile2 Plant (see Note 1-Summary of Significant Accounting Policies - Amortization of Nuclear Fuel ). The DOE announced in early 1990 that the schedule forstart of operations of its high-level radioactive waste repository had slipped from 2003 to no sooner than 2010. The Company has been advised by Niagara Mohawk that the Nine Mile2 Plant Spent Fuel Storage Pool has a capacity for spent fuel that Is adequate until 2014. Iffurther DOE schedule slippage should occur, facilIes that extend the on-site storage capability forspent fuel at the Nine Mile2 Plant beyond 2014 would need to be acquired.
38
Nuclear Plant Decommissioning Costs: The Compa-ny's 9% share ofcosts to decommission the Nine Mile 2 Plant, is estimated to be approximately S118.5 million (S25.1 millionin 1994 dollars). This is based on a 1989 cost estimate included in the decommissioning plan filed with the Nuclear Regulatory Commission (NRC) in 1990 and assumed that decommtssioning will begin in the year 2027.
The Company believes that decommissioning costs are likelyto be much higher than the above estimate but is unable to predict the cost at this time. Niagara Mohawk intends to complete a new decommissioning study, on behalf of all Nine Mile2 Plant cotenants, for the Nine Mile2 Plant during 1995. Untilsuch time as the new decommissioning study is completed and filed with the NRC, the Company willcontinue to base its decommissioning cost estimates on the 1989 study.
The annual decommissioning allowance re-flected in rate-making is based upon the 1989 estimate, which includes amounts for radioactive and non-radioactive dismantlernent costs and is charged to operations through depreciation charges.
The PSC authorized recovery, on an annual basis, of S212,000 for internal decommission-ing funding (I.e., funds held by the Company) and S787QN for external decommissioning funding g.e.,
funds held in trust). Total recoveries authorized by the PSC for the internal decommissioning fund from August 1988 through December 31, 1994 amounted to S1.2 million. The external decommissioning trust fund at December 31, 1994 and 1993 amounted to S4.503 millionand S3.608 million,respectively. The net earnings from Inception through December 31, 1994 amounted to S496,000. The external decommis-sioning trust fund is reflected In the Company's Consolidated Balance Sheet in Other Property and Investments." The amount ofaccumulated decom-missioning costs recovered through rates and the net earnings ofthe external decommissioning trust fund are reflected fn accumulated depreciation In the Consolidated Balance Sheet and amount to S5.7 millionand S4.6 millionat December 31. 1994 and 1993, respectively.
NRC regulations require the direct funding of eventual decommissioning costs of nuclear facilities. The Company, in 1990, established a master trust in order to comply with these NRC requirements.
Applying the NRC minimum funding guidelines established in May 1993, the Company has estimated that its share ofthe minimum funding requirements willbe approximately S39.7 millionin 1994 dollars.
The Company cannot now determine whether the decommissioning costs allowed in rates by the PSC or the estimated costs discussed above will ultimately be adequate to decommission the Nine Mile2 Plant in accordance with then existing law, regulation, technology and/or costs. The Company believes that decommissioning costs, ifhigher than currently estimated, willultimately be recovered in the rate-making process, although no such assur-ance can be given.
In response to concerns raised by the Securities and Exchange Commission, the Financial Account-ing Standards Board has agreed to review the accounting fordecommissioning to determine when a liabilityfor nuclear decommissioning should be recognized, how any such liabilityshould be mea-sured, and whether a corresponding asset is created. Ifcurrent electric utilityindustry accounting practices forsuch decommissioning are changed:
annual provisions could increase, the estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation, a regula-
, tory asset forthe difference between the amount accrued to date and the total decommissioning liabilitycould be established, and trust fund income from the externa! decommissioning trusts could be reported as investment income rather than as a reduciion to decommissioning expense.
The Company does not believe that such changes, ifrequired, would have an adverse effect on results of operations due to the belief that decommissioning costs willcontinue to be recovered in rates.
Decontamination and Decommissioning Fund: The
. Energy Policy Actof 1992, signed into law in October 1992, established a Uranium Enrichment Decontaml-nation and Decommissioning Fund (Fund) forthe decommissioning ofthe DOE's enrichment facilities Special annual assessments to utilitieswith nuclear power plants, which began in 1993 and continue until 2006, and government appropriations forsuch purpose willbe deposited into the Fund. The Energy Policy Act of 1992 also provides that such assessments shall be considered a cost of fuel and shall be recoverable ln rates.
The unamortized portion ofthe Company's share
~
of this assessment at December 31. 1994 and 1993 of approximately S664,000 and S724.000, respectively and a corresponding regulatory asset are reflected in the Consolidated Balance Sheet. Payments to the Fund are made to Niagara Mohawk by the cotenants of Nine Mile2 Plant.
NOTE 3 - FEDERAL INCOME TAX Components of Federal Income Tax: The followingIs a summary ofthe components offederal income tax as reported inthe Conscfidated Statement ofIncorre:
~I 3222 (rleusonds of Ooirors)
Charged to operating expense:
Federal income tax...............
S18,190 S14.502 S 5A67 Deferred income tax.............
9.853 14,101 19,644 income tax charged to operating expense........
28,043 28.603 25.111 Charged (credited) to other income arid deductions:
Federal income tax...........
(4,354)
(2,937) 7,789 Deferred income tax...,.....
3,117 1A92 (8537)
Income tax charged (credited) to other income and deductions (1237)
(IA45)
(748)
Total federal income tax.
S26,806 S27.158 824,363 39
Computed tax statutory rate (35% in 1994 and 1993,34% in 1992)......
Increase (decrease) to computed tax due to:
Tax depreciation............
Defened finance charge Nine Mile2 Plant.........
Defened gas costs.........
Deferred energy efficiency costs...........
Deferred OPEB expense Pension expense............
Alternative minimum tax Other...............................
Federal income tax..............
Deferred income tax............
Total federal income tax Effective tax rate...............
$27%7
$27,142 S24A97 (10,796)
(11833)
(862)
(844)
(1315)
(9597) s-(1,700) 1,149 (2386) 3,257 1.971
~935 13256 11,107
$~24 33.8%
923 713 (IA71)
(1&4)
~1,844 13,836 12.970 S26,8M 34.5%
(1,1M)
(1417)
(893)
(59) 600 11,565 15593
~27 158 35.0%
Reconciliation: The following is a reconciliation between the amount of federal income tax com-puted on fncome before taxes at the statutory rate and the amount reported in the Consolidated Statement of Income:
(ihousonds of Dolors)
Net income............................
$50.929
$50390
$47b88 Federal Income tax..............
13,836 1 155 13256 Deferred income tax............
12970
~15 93 11107 Income before taxes........
S77,735 S77$ 48 S72g51 ing ofa deferred tax lia5lityofapproximately S69.2 millionrepresenting the cumulative amount offederal income tax benefits on temporary differences which were previously flowed-through to ratepayers and in the recording ofapproximately S22.9 millionln deferred tax assets representing the cumulative amount offederal income taxes on temporary differences which were previously flowed-through to ratepayers. The Company recorded a corresponding regulatory asset and liabilityon the Consolidated Balance Sheet. The regulatory asset and regulatory liabilityrelated to SFAS 109 are adjusted quarterly and amount to S69.3 millionand S28.4 million, respectively, at December 31, 1994 and $71.1 million and $28.9 million,respectively, at December 31, 1993.
ln addition, the adoption of SFAS 109 resulted In the recording of a payable to ratepayers of approxi-rnately S8.6 million,representing excess deferred federal income tax resulting from the reduction of the corporate federal income tax rate from 46% to 34%. This excess deferred federal income tax amount was adjusted downward by approximately $2.9 millionin 1993 due to the August 1993 enactment of the Omnibus Budget Reconciliation Actof 1993 which fncreased the corporate federal income tax rate from 34% to 35%, effective January 1, 1993. The resulting net excess deferred federal Income tax will be refunded to ratepayers over the lifeofthe related depreciable assets.
The following is a summary ofthe components of accumulated deferred income taxes at December 31, 1994 and 1993, as reported In the Consolidated Balance Sheet:
Deferred Income Tax: The following Is a summary of the components ofdeferred Income tax included in the Consolidated Statement of Income (presented in accordance with APB 11, effective through 1992):
12'housonds of Dollars)
Tax depreciation............,.............
S14,605 Investment tax credit..~.......~........
(1,396)
Deferred electric fuel costs..........
(562)
Deferred gas costs.......................
1,315 Deferred energy efficienc costs 2,386 Pension expense...........................
(3,257)
Alternative minimum tax..............
(1,971)
Unbilled revenues....................~...
~
(752)
Other 739 Deferred income tax................
S11,107 Statement of Financial Accounting Standards No. 109, "Accounting for income Taxes (SFAS 109) was adopted by the Company on January 1, 1993 in accordance with provisions of a Statement of Interim Policy on Accounting and Rate-making Procedures to Implement SFAS 109 Issued by the PSC. Such adoption had no impact on either the 1994 or 1993 Consolidated Statement of Income. As set forth below, the adoption of SFAS 109 affected the Consolidated Balance Sheet only.
The adoption of SFAS 109 resulted in the record-Accumulated Deferred Income Tax Assets:
Future tax benefits on investment tax credit basis difference.............................
'Alternative minimum tax..........
Tax depreciation-Nine Mile2 Plant disallowed investment Unbilled revenues......................
Nondeductible pension expense Other.....................................
Accumulated Deferred income Tax Assets..................................
Accumulated Deferred Income Tax UabiTities:
Tax depreciation......................,
Accumulated deferred investment tax credit...........
Future revenues - recovery of plant basis differences.........
Other.
Accumulated Deferred Income Tax Uabilities..............................
32K le ahousonds ot Doiors)
S 16.829 12.989 S 17~
14~
6,155 '232 5965,952 2274 15%7 3%4 13,1N S 58829 S 63,995 24269 20327 24,933 22,201
$238,584
$231,779 S 162,734 S 152,395 31,254 32,250 40
GEMENTS NOTE 4 - SHORT-TERM BORROWING ARRAN The Company has in effect a revolving credit agreement with four commercial banks which allows itto borrow up to S50.0 millionthrough December 14, 1997 (Agreement). The Agreement gives the Company the option of borrowing at either the prime/federal funds rate, or three other money market rates ifsuch rates are lower. The Agreement also provides for the payment of an annual commitment fee of 1/16 of 1% per annum on the unborrowed amount and a facilityfee of 1/8 of 1% per annum on the total amount of the facility.
Compensating balances are not required under the Agreement. In addition, the Company continues to maintain confirmed lines of credit totaling S2.0 millionwith three regional banks. There were no outstanding loans under these Agreements at December 31, 1994 or 1993. In order to diversify Its sources of short-term financing, during 1994 the Company entered into short-term credit facilities with four commercial banks totaling S130.0 million in the aggregate. There was S3.0 millionoutstand-ing at December 31, 1994 related to these credit facilities.
Authorization from the PSC limits the amount the Company may have outstanding, at any time, under all of its short-term borrowing arrangements to S52.0 milliontn the aggregate.
NOTES-CAPITALIZATION-CAPITALSTOCK Common Stock, S5 par value; 30,000,000 shares authorized:
Paid-In Capital:
Shares O~utstandln Amount (S000)
Common Stock Paid-In Capital (S000)
January 1, 1992...............
Issued under dividend reinvestment plan.
Issued under customer stock purchase plan.
December 31, 1992.................
Issued through public offering Issued under dividend reinvestment plan.
Issued under customer stock purchase plan..
~ ~ ~
December 31, 1993 Issued under dividend reinvestment plan.
Issued under customer stock purchase plan.
December 31, 1994 15,767,657 205,950 54,962 16,028,569 700,000 185,101 39A77 16,953,147 227,772 57&5 17,238/64 S 78,838 1,030 275 80.143 3,500 926 197 84,766 1,139 287 S 86,192 S239,200 4,847 1,302 245,349 19,299 5,124 1,076 270,848 5,104 1.253 S277,205 Series Not Subject to Mandatory Redemption:
Cumulative Preferred Stock, S100 par value; 1,200,000 shares authorized:
Final Redemption Redemption Price Date 12/31/94 December 31, 1994 1993 Subject to Mandatory Redemption:
Total 4 '/2%
4.75%
4.35%
4 96%
7.72%
7.44%
6.20%
10/1/08 (a) 6.80%
10/1/27 (a)
S 107.00 106.75 102.00 101.00 101.00 101.22 70,300 20,000 60,000 60,000 130,000 120,000 460,300 200,000 150.000 350,000 810,300 70,300 20,000 60,000 60,000 130,000 120.000 460,300 200,000 150,000 350,000 810,300 (a) Cannot be redeemed prior to October l, 2003.
Reference is made to the caption "Financing Program" fn "Management's Discussion and Analysis of Financial Condition and Results of Operations for details on issuances and redemp-tions of capital stock.
The Cumulative Preferred Stock not subJect to mandatory redemption is redeemable only at the option of the Company. Upon redemption, the sum payable per share is the then current redemp-tion price plus accrued dividends thereon. In the event of an involuntary liquidation of the Corn-pany, the redemption price is S100 per share pius accrued dividends.
Expenses incurred on Issuance of capital stock are accumulated and reported as a reduction in common stock equity. These expenses are not being amortized except that as directed by the PSC, issuance and redemption costs and unamortized expenses associated with preferred stock redemptions have been deferred and are being amortized over the remaining lives of the issues subJect to mandatory redemptions.
The PSC has authorized the issuance and sale of certain debt and equity securities of the Company.
Accordingly, on November 7, 1994, the Company filed a Registration Statement with the Securities and Exchange Commission for the purposes of registering (i) Debt Securities and Common Stock, S5.00 par value, but not In excess of S80.0 millionin aggregate, and not In excess of S40.0 millionInitial offering price of such Common Stock and (ii)
Cumulative Preferred Stock, not in excess of.S25.0 million,par value S100 per share, which may be issued as Depositary Preferred Shares, each repre-senting 1/4 ofa share ofsuch Cumulative Preferred Stock, each evidenced by Depositary Receipts. As of December 31, 1994, such Registration Statement had not become effective.
NOTE 6 - CAPITALIZATION-LONG-TERM DEBT Details of long-term Scrim First Mortgage Bonds:
6.10%
(a) 7.70%
(a) 8 3/4%
7.97%
(a) 7.97%
(a) 6.46%
(a) 6 1/4%
9 1/4%
8.12%
(a) 8.14%
(a) 8 375%
debt are shown below:
hlahrifxQaim April28, 2000 June 12, 2000 May 1,2001 June 11, 2003 June 13,2003 August 11, 2003 June 1, 2007 May l. 2021 August 29, 2022 August 29, 2022 December 1, 2028 December 31,
~l (rhouso S 10,000 25,000 30,000 8,000 8,000 10,000 4,500 70,000 10,000 10,000 16,700 202,200 32K nds of Dollars)
S 10,000 25,000 30,000 8,000 8,000 10,000 4,500 70,000 10,000 10.000 16,700 202,200 Promissory Notes issued in connection with the sale by the New YorkState Energy Research and Development Authority (NYSERDA)oftax-exempt pollution control revenue bonds:
1984 Series A (7 3/8%)
1984 Series B (7 3/8%)
1985 Series A (Var. rate) 1985 Series B (Var. rate) 1987 Series A (Var. rate) 1987 Series B (Var. rate)
October 1, 2014 October 1, 2014 November 1, 2020 November l. 2020 June 1, 2027 June 1,2027 16,700 16,700 36,250 36,000 33,700 9 900 149,250 16,700 16,700 36,250 36,000 33,700 9 900 149.250 Promissory Notes (net of sinking fund requirements):
4.85%
December 1, 1995 5.38%
(a)
January 15, 1999 7.85%
(a)
July 2. 2004 Secured Notes Payable of Subsidiary Unamortized Premium (Discount) on Debt - Net Total long-term debt (a) Issued under the Company's Medium Term IVote Program.
(b) Prlnclpol amount was reclassltled to Current Maturltles ofLong-term Debt.
(b) 20.000 15 000 35,000 3,878 (964) 8389,364 2,562 20,000 15 000 37,562 3,866 (1,068) 3391.810
Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations" for details of the Company's Medium Term Note Program and for information regarding the amounts of long-term debt maturing within the next five years.
In 1994, the Company paid at maturity one series of First Mortgage Bonds totaling S50.0 million. The funds to pay these bonds were generated from internal sources.
In 1993, the Company redeemed two series of First Mortgage Bonds, totaling S40.0 million.The funds to redeem these bonds were obtained from the sale of an aggregate of S40.0 millionof Medium Term Notes, issued in several tranches.
Authorization by the PSC to issue Medium Term Notes under the Company's Medium Term Note Program expired on December 31, 1994. Ofthe S125.0 millionof Medium Term Notes authorized under such program, S116.0 millionwere issued. By Order effective October 17,1994, the PSC authorized the Company to issue and sell new debt securities and common stock totaling not more than S80.0 million in the aggregate. Such Order also authorized the issuance of up to S115.0 millionof tax exempt NYSERDA Pollution Control Revenue Bonds for the purpose of refinancing, Ifeconomical, a like amount of such bonds.
The NYSERDA Pollution Control Revenue Bonds, Series Aand B, issued in 1985 and 1987 are variable rate obligations subject to weekly repricing and investor tender. The Company has the right, exercis-able independently with respect to each series of the 1985 and 1987 NYSERDA Pollution Control Revenue Bonds, to convert the Bonds of each such series to a fixed rate for the remainder of their term.
The Company has irrevocable letters ofcredit which expire on various dates and which the Company anticipates being able to extend ifthe interest rate on the related series of NYSERDA Pollution Control Revenue Bonds is not converted to a fixed interest rate. Those letters of credit support certain payments required to be made on such Bonds. Ifthe Company were unable to extend the fetter of credit that fs related to a particular series of NYSERDA Pollution Control Revenue Bonds, that series would have to be redeemed unless a fixed rate of interest becomes effective. Payments made under the letters of credit in connection with pur-chases oftendered NYSERDA Pollution Control Revenue Bonds are repaid with the proceeds from the remarketing of such Bonds; To the extent the proceeds are not sufficient, the Company would be required to reimburse the bank that Issued the letter of credit for the amount of any resulting draw under the letter of credit by the expiration date of the letter of credit. The letter ofcredit expiration date forthe letters ofcredit supporting the 1985 NYSERDA Bonds Is November 16, 1997, and the letter of credit expiration date forthe letters of credit supporting the 1987 NYSERDA Bonds is September 16, 1997.
in its rate orders, the PSC has provided for full recovery of the interest costs on the Company's 1985 and 1987 Series Aand B Promissory Notes which were issued in connection with the sale of the NYSERDA Pollution Control Revenue Bonds. Such Bonds bear interest at variable rates set weekly.
Deferred accounting has been granted by the PSC for any variation between actual interest rates and those interest rates allowed forrat~aking purposes.
Such deferred balances, which are liabilities of S488,000 and S1.176 millionat December 31, 1994 and December 31, 1993, respectively, are to be disposed of in future rate cases.
Expenses incurred on debt Issues and any discount or premium on debt are deferred and amortized over the lives of the related Issues.
Expenses incurred on debt redemptions prior to maturity have been deferred and are generally being amortized over the shorter of the remaining lives of the related extinguished issues or the new Issues as directed by the PSC.
Certain debt agreements require the mainte-nance by the Company ofcertain financial ratios and contain other restrictive covenants.
Secured notes payable of a subsidiary ofthe Company consist of term loans to finance the installation of energy conservation equipment at various host facilities, located primarily in the North-eastern United States. The majority of such loans accrue interest at the prime lending rate. Interest and principal are amortized over the term of each respective contract. Such loans are secured princi-pally by certain power purchase agreements and project assets.
NOTE 7 - POSTEMPLOYMENT BENEFITS Retirement Income Plan: The Company has a noncontributory retirement income plan (Retfre-ment Plan) covering substantially all of its employees. The Retirement Plan provides pension benefits that are based on the employee's com-pensation and years of service. It has been the Company's practice to provide periodic updates to the benefit formula stated in the Retirement Plan.
The Company's funding policy Is to make annual contributions equal to the amount of net periodic pension cost, but not In excess of the maximum allowable tax-deductible contribution under the federal Income tax law nor less than the minimum requirement under the Employee Retire-ment Income Security Act of 1974.
Charges to expense were 73%, 71%%d and 71L of the net periodic pension costs for the years 1994, 1993 and 1992, respectively, with remaining costs allocated to capital projects. The allocation of net periodic pension costs between capital and expense follows the payroll distribution.
Net periodic pension (income) costs for 1994, 1993 and 1992 include the following components:
J224 le 3222 (Thousands of Dollars)
Service cost - benefits earned during theperiod...............
S 5,876 S 4,518
$ 4,002 Interest cost on projected benefit obligation...............
13,256 13,148 12,801 Actual return on Retirement Plan assets (6,947)
(34,022)
(21,941)
Net amortization and deferral (14,213) 13,794 6A11 Net periodic pension (income) cost.................
S (2,028)
S (2.562)
S 1,273 The followingtable sets forth the Retirement Plan's funded status at October 1, 1994 and 1993 and amounts recognized in the Company's Consolidated Balance Sheet at December 31, 1994 and 1993:
328 129 (Thousands ofMars)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $ 146,779 and $ 171389............
S 148%4
$ 173.924 Projected benefit obligation for service rendered to date............
Retirement Plan assets at market value..
Excess of Retirement Plan assets over projected benefit obligation Unrecognized net gain...................
Prior service, cost not yet recognized in net periodic pension cost.......
Unrecognized net asset being amortized over 15 years..............
Pension liabilityrecognized in the Consolidated Balance Sheet.....
$ 171,713
$211~
223376 227N8 51r663
.'(60551) 16055 (23,703) 3,789 1,157 (4N6)
(5242)
S (9,705)
S (11,733)
Retirement Plan assets consist primarilyof equities and fixed income securities. The Retirement Plan is deemed to be fullyfunded forfederal income tax purposes, therefore, the Company did not make any contributions to the Retirement Plan during 1994 or 1993.
The actuarial present value of projected benefit obligations for October 1, 1994 and 1993 was determined using a weighted average discount rate of 8.8% and 6.25%, respectively, and an assumed rate of increase in compensation of 5.5% in both years. The assumptions used In determining the funded status at October 1 are used in determining the followingyear's net periodic pension costs. The expected long-term rate of return on Retirement Plan assets used in determining the net periodic pension (income) costs was 8.5L for 1994 and 9.5%
for 1993 and 1992.
Prior to 1993, the cumulative unrecognized net gains or losses in excess of 19Ã of the greater of the market-related value of Retirement Plan assets and the projected benefit obligation were amortized over the average remaining service period of active participants. Pursuant to the PSC Statement of Policy and Order Concerning the Accounting and Rate-making Treatment for Pensions and Postretirement Benefits Other than Pensions (OPEB); Issued Septem-ber 7, 1993 (Pension and OPEB Order), effective January 1, 1993 the Company changed its account-ing to a method of amortizing each year' experience gain or loss over ten years. Such change had the effect of reducing 1993 net periodic pension costs by approximately $4.4 million.
The Company also has an Executive Deferred Compensation Plan (EDC Plan) and a Retirement Benefit Restoration Plan (RBR Plan) which were established for key executives, under which peri-odic payments willbe made to such employees upon retirement. The net periodic pension costs of the EDC Plan, which was established in 1992, amounted to approximately S304.000, S203.000 and S142,000 for 1994, 1993 and 1992, respectively. In order to recover the costs of the EDC Plan, the Company has obtained life insurance policies on the participants In such Plan, with the Company as beneficiary. The net periodic pension costs of the RBR Plan, which was established in 1993. amounted to approximately S189,000 and S44,000 in 1994 and 1993, respectively.
Pursuant to the Pension and OPEB Order, de-ferred accounting has been granted by the PSC for any variation (above or below) between actual costs ofthe Company's pension plans and those costs allowed for rate-making purposes.
Other Postretirement Benefits: The Company pro-vides certain health care and life insurance benefits for retired employees. Substantially all ofthe Company's employees may become eligible for these benefits ifthey reach retirement age while working forthe Company. These and similar benefits foractive employees are provided through insur-ance companies whose premiums are based on the benefits paid during the year. The cost of providing these benefits foractive and retired employees was S7.9 millionfor calendar year 1992. Prior to 1992, the cost of providing retirees with these benefits was not separable from the cost of providing those benefits forthe active employees. Beginning in 1992, such costs were separated. and for the period of April through December 1992, the cost ofsuch benefits for retirees amounted to S1.4 million,which Is in-cluded in the amount above. In order to recover a portion ofthe costs of these benefits, the Company requires employees who retire on or after October 1, 1994 to contribute toward the cost ofsuch benefits.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'ccounting for Post-retirement Benetits Other than Pensions" (SFAS 106).
This Statement requires that an employer's obliga-tion for postretirement benefits expected to be
4,654 The Benefit Plan's funded status reconciled with the Company's Consolidated Balance Sheet Is as follows:
December 31.
3224 3SK ghousonds of Doliors)
Accumulated postretirement benefit obligation:
Retirees...............................
Fully eligible employees Other employees..............
$(27.526)
(4,537)
(25.532)
(57,595)
$(34,642)
(6,705)
(41,249)
(82,596)
Benefit Plan assets at fairvalue...........................~....
Excess of accumulated post-retirement benefit obligation over Benefit Plan assets........
Unrecognized net (gain) loss...
Prior service cost not yet recognized ln net periodic postretirement benefit cost..
Unrecognized Transition Obligation..............................
Postretirement benefit (liability) asset recognized in the Consolidated Balance Sheet 14,051 7,710 (43~)
(14A89)
(74,886) 15,776 56,035 59,149 S (1,998)
S 39 provided to or foran employee be fullyaccrued by the date that the employee attains fulle!igibilityfor all benefits expected to be received by that employee. any beneficiaries and covered depen-dents, even ifthe employee is expected to render additional service beyond that date. Prior to adoption of SFAS 106, the Company recorded the costs ofproviding such benefits when paid.
As allowed by SFAS 106, the Company is amortizing the unfunded accumulated postretirement benefit obligation (Transition Obliga-tion) at January 1, 1993 over a 20-year period.
Net periodic postretirement benefit cost for 1994 and 1993 includes the following components:
3224 32K ghousonds oi Dollors)
Service cost - benefits attributed to the period...........
S 2,392 S 1,754 Interest cost on accumulated postretirement benefit obligation...................................
4,731 Actual return on postretirement benefit plan (Benefit Plan) assets.
(426)
Amortization of Transition Obligation..................................
3,114 3,114 Net amortization and deferral....
928 Net periodic postretlrement benefit cost................................
S 10,662 S 9.599 The accumulated postretirement benefit obligation under the Benefit Plan at December 31, 1994 and 1993 was determined using a weighted average discount rate of 8.50'/o and 6.25%, respectively and a rate of increase in future compensation levels of5.5'/ forboth periods. The expected long-term rate of return of Benefit Ran assets used in determining the net periodic postretirement benefit cost was 6.6% for 1994. There was no expected iong-term rate ofreturn on Benefit Plan assets for 1993 as funding was not expected untilthe end of 1993.
The assumed health care cost trend is 12% in the early years and trends down to an ultimate rate of 5.5% by the year 2010. A 1% increase in health care cost trend rate assumptions would produce an increase in the accumulated postretirement benefit obligation at December 31, 1994 of S7.545 million and an increase in the aggregate service and interest cost ofthe net periodic postretirement benefit cost of S1.076 million, The Company has established a qualified funding vehicle forsuch retirement benefits for collective bargaining employees and a similar vehicle for management employees in the form of qualified Voluntary Employee Beneficiary Associa-tion (VEBA)trusts. The Company funded the VEBA trusts in 1994 and 1993 with tax-deductible contribu-tions totaling S8.3 millionand S7.7 million,respectively.
In the Pension and OPEB Order, deferred accounting has been granted by the PSC for any variation (above or below) between actual OPEB costs and those allowed for rate-making purposes.
Pursuant to the 1993 Rate Order, S4.613 millionof deferred electric OPEB costs and S832,000 of deferred gas OPEB costs were offset against Mirror CWIP and other deferred gas balances, respec-tively during 1993. Pursuant to the 1993 Rate Order, an estimated annual level of OPEB costs is included in the Company's electric and gas rates, effective November 22, 1993.
Other Postemployment Benefits: The Company provides certain illness and disability-related benefits to former or inactive employees, beneficiaries and covered dependents.
The cost of providing these benefits was S146,000, S197,000 and $260,000 in 1994, 1993 and 1992, respectively. In November 1992, the Financial Accounting Standards Board (FASB) Issued SFAS No. 112, Employers'ccounting for Postemployment Benefits" (SFAS 112), which establishes accounting and reporting requirements foremployers who provide benefits to former or inactive employees after employment but before retirement. The adoption of SFAS 112 on January 1, 1994 resulted in the recording of an unfunded postemployment benefit obligation of S639,000. The unfunded postemployment benefit obligation at December 31, 1994 amounted to S514,000. In accordance with the 1993 Rate Order, the Com-pany recorded a corresponding regulatory asset representing the future recoverability of this cost.
Accordingly, the adoption of SFAS 112 did not affect the Company's financial results.
NOTE 8 - COMMITMENTSAND CONTINGENCIES Construction Program: Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" for information regarding the Company's construction program for the five-year period 1995-1999.
Roseton Plant: The Company currently has a 35L undivided interest ln the ownership and output of the 1,200 MWRoseton Plant. The Company is acting as agent for the cotenant owners with respect to operation of the Roseton Plant. Generally, the owners share the costs and expenses of the opera-tion ofthe Roseton Plant ln accordance with their respective ownership interests. The Company's share of direct operating expense forthe Roseton Plant is included in the appropriate expense classification In the accompanying Consolidated Statement of Income.
The Company, under a 1968 Agreement (Basic Agreement), has the option to purchase the inter-ests of Niagara Mohawk(25%) and of Consolidated Edison Company of New York, Inc. (Con Edison)
(40%) in the Roseton Plant in December 2004. The exercise of this option is subject to PSC approval.
However, in 1987, in order to make provision for anticipated requirements for additional generating capacity commencing in the mid-1990s, the Corn-pany and Niagara Mohawk entered into an agreement (Amendment) revtsing the Company's option in the Basic Agreement to buy Niagara Mohawk's interest in the Roseton Plant.
ByAgreement, made as ofMarch 30,1994, Niagara Mohawk and the Company terminated and cancelled the Amendment. Amotion to close the proceeding pending before the PSC to approve the Amendment was filedby Niagara Mohawk and the Company and approved by the PSC on August 18, 1994.
On March 30, 1994, Niagara Mohawk and the Company also entered into a Letter of Understand-ing which, among other things, provides for:
(1) consideration by the Company, Niagara Mohawk and Con Edison forstaggering the opera-tion ofthe two units ofthe Roseton Plant In order to take advantage of current market costs for energy and capacity; and (2) the purchase by the Company of up to 100 MWof energy and capacity during peak periods from Niagara Mohawk during the time frame May 1, 1994 through April30, 1995. During the period May 1995 through April2004, the Company may from time to time issue requests for proposals to purchase energy and capacity on the open market. Niagara Mohawk, among others. willbe requested by the Company to bid on these future purchases.
(3) Subject to regulatory approval, Niagara Mohawk and the Company Intend to enter Into agreements, which would cover (i)the purchase by the Company of the followingelectric capacity and associated energy from Niagara Mohawk ifneeded:
15 MWeach year, subJect to a reservation charge, commencing in 1998 through 2004, up to a total of 75 MW,and up to an additional 150 MWin the period 2001 through 2004 not subJect to a reservation charge; (ii)the option of Niagara Mohawk to better competitively bid prices forthe Company's long-term purchases ofcapacity and energy during the period May 1995 through April2004 as indicated in Item(2) and (iii)a revislonin the Company's )968 option to purchase Niagara Mohawk's 25% interest in the Roseton Plant in 2004 which would give Niagara Mohawk an option to retain said 25% interest.
The Company expects that the cancellation of the Amendment and the entering into of the agree-ments contemplated by the Letter of Understanding willresult in capital and operating and maintenance cost savings. The Company's option to buy Con Edison's interest in the Roseton Plant is not affected by the Amendment or the agreements contem-plated by the Letter of Understanding.
Nuclear Liabilityand Insurance: The Price-Anderson Act is a federal law which limits the public liability which can be imposed with respect to a nuclear incident at a licensed nuclear electric generating facility. Such Act also provides for assessment of owners of all licensed nuclear units in the United States for losses in excess of certain limits due to a nuclear Incident at any such licensed unit. Under the provisions of the Price-Anderson Act, the Company's potential assessment (based on its 9%
ownership interest in the Nine Mile 2 Plant and assuming that the other Nine Mile 2 Plant cotenants were to contribute their proportionate shares of the potential assessments) would be S5.67 million (subject to adjustment for Inflation) and the Com-pany could be assessed S283,500 (subject to
'djustment for inflation) In respect to an additional, surcharge, but would be limited to a maximum assessment of S900,000 in any year with respect to any nuclear incident. The public liabilityinsurance coverage of S200 millionrequired under the Prfce-Anderson Act forthe Nine Mile 2 Plant is provided through Niagara Mohawk.
The Company also carries Insurance to cover the additional costs of replacement power (under a Business Interruption and/or Extra Expense Insurance Policy) incurred by the Company ln the event of a prolonged accidental outage of the Nine Mile 2 Plant. This Insurance arrangement provides for payments of up to S284,000 per week if the Nine Mile 2 Plant experiences a continuous accidental outage which extends beyond 21 weeks. Such payments willcontinue for 52 weeks after expiration of the 21-week deductible period, and thereafter the insurer shall pay 80% ofthe weekly indemnity for a second 52-week period and 80% for a third 52-week period. Subject to certain limitations, the Company may request prepay-ment, in a lump sum amount, of the insurance payments which would otherwtse be paid to itwith respect to said third 52-week period, calculated on a net present value basis.
The Company is insured as to its respective interest in the Nine Mile2 Plant under property damage insurance provided through Niagara Mohawk. The Insurance coverage provides S500 millionof primary property damage coverage for Units 1 and 2 of the Nine Mile Point Nuclear Station and S2.25 billionof excess property damage coverage forthe Nine Mile 2 Plant. Such Insurance covers decontamination costs, debris removal and repair and/or replacement of property.
The Company intends to maintain, or cause to be maintained, insurance against such risks at the Nine Mile 2 Plant, provided such coverage can be obtained at an acceptable cost.
Natural Gas Supply: The Company presently has in place five firmcontracts (Contracts) forthe supply of an aggregate of 10241383 Mcf. of natural gas, all ofwhich are with third-parly gas suppliers (Suppliers).
'nder the Contracts, the Suppliers deliver the gas to interstate pipeline companies (Pipelines) and the Pipelines deliver the gas to the Company's gas transmission system under separate firmtransporta-tion contracts which the Company has In place with such Pipelines. In addition, the Company has interruptible transportation agreements with the Pipelines. With the exception of 20,000 Mcf. per day ofgas purchased from Canadian sources under contracts which expire in January 2012, or approxi-mately 20% oftotal gas purchases, all of the above gas supply contracts willterminate In 1995 after the 1994-1995 winter heating season. Allsuch expiring gas supply contracts are competitively bid contracts which willbe replaced before the next winter heating season with competitively bid contracts with third-parly gas suppliers.
The Company has in aggregate, gas storage capability of 39,604 Mcf. per day, under long-term contracts. The Company also has a contract forthe supply of liquefied natural gas which willremain ln effect through September 30, 1995 and willcontinue year-to-year thereafter unless either party provides written notice of cancellation. Allpipeline transporta-tion and storage contracts and associated tariffs are approved by FERC.
In addition to the above gas supply. transporta-tion, storage and liquefied natural gas supply contracts, the Company has In place an Interim contract forthe supply of up to 100,000 Mcf. per day of gas during Aprilthrough October of each year for use as boiler gas at the Roseton Plant. This interim contract expires on March 31, 1995. The Company expects to replace the interim contract with a long-term contract which willexpire in October 2006.
In April 1992, FERC Issued its final rule (Order 636) regarding the unbundling of natural gas supply services from transportation and storage services.
These changes enable the Company to arrange for its gas supply directly with producers, gas marketers or Pipelines, at its discretion, as well as arrange for transportation and gas storage services. These changes willrequire the Company to pay a share of certain transition costs incurred by the Pipelines as a result of Order 636. In Order 636, FERC stated that all prudently-Incurred transition costs may be recov-ered by the Pipelines from customers. There are four elements of these transition costs: (1) unrecovered deferred purchased gas costs, (2) gas supply realignment costs, (3) stranded facilities costs, and (4) new facilities costs.
The Company has been billed S1.950 millionof transition costs through December 31. 1994 by the Pipelines. Transition costs are currently being recov-ered through the gas cost adjustment clause. The aggregate amount that the Company willultimately be billed willdepend on the outcome of many FERC proceedings, the outcome ofwhich the Company Is not able to predict. Depending on the outcome of such proceedings, the aggregate amount ofsuch transition costs could range between S3 millionand S5 millionover the next several years. The Company expects to recover all such costs through the Company's gas cost adjustment clause.
The Company received S4.535 millionin gas supplier refunds during 1994, resulting from settle-ments approved by FERC. Gas supplier refunds are distributed to firmgas customers through the Company's gas cost adjustment clause over a subsequent twelve-month period as authorized by the PSC.
Take-or-Pay Gas Costs: In prior years, many inter-state gas pipeline companies had entered into contracts with gas producers which required the pipeline companies to pay for a minimum amount of gas whether or not the gas fs actually taken from the producer (take~r-pay costs). Pursuant to the FERC authorization, the Company's gas suppliers have included certain amounts of their take-or-pay costs in the rates charged to the Company.
The PSC in October 1988 commenced a pro-ceeding to determine, among other things, the recoverability and allocation fn gas rates of New YorkState distribution companies ofcontract take-or-pay costs charged them by pipeline suppliers. In connection with such proceeding, the PSC has issued several orders which have directed, among other things, that 65'/ of take-or-pay costs being incurred by the Company may be recovered through current rates, subject to refund. The remain-ing 35% oftake-or-pay costs are deferred with interest forsubsequent consideration by the PSC and amounted to S2.680 millionand S2.483 million,at December 31, 1994 and 1993, respectively. During 1994, the Company received and deferred S1.514 millionin gas supplier refunds related to take-or-pay costs incurred. The Company has proposed to the PSC to apply these refunds to the deferred take-or-pay costs, as noted above, but the PSC has not acted on this matter.
In the PSC proceeding, the Company has contended that there is no basis on which the responsibility for its pipeline suppliers'ake-or-pay liabilitycan be attributed to It. In addition, it is the Company's position that the PSC lacks any authority to deny the Company recovery of costs included in the FERC approved gas rates. The Company intends
to oppose any attempt by the PSC to require the Company to absorb any take-or-pay or contract reformation costs which are Included in its pipeline suppliers'ERC approved rates. The Company is unable at this time to estimate the amount of take-or-pay costs which may ultimately be included In Its pipeline suppliers'harges to itor to predict what action the PSC might take to require the Company to absorb any portion of such costs. The final amount of such costs willdepend on the FERC proceedings, the PSC proceeding and certain court litigation, the outcome ofwhich the Company is not able to predict. Depending on the outcome of such proceedings and litigation, the final amount of such conditional take-or-pay costs could be up to S6 million,which would have a material adverse effect on the Company's future earnings ifthe PSC were to require the Company to absorb a substantial portion thereof.
The PSC has recently approved certain take-or-pay cost settlements with other utilities which granted total recovery ofthe amounts reflected on their balance sheet. Ifthe cost settlements achieved by other utilities were applied to the Company, this matter would not have a material adverse effect on the Company's financial position. The Company Is currently discussing a settlement with the parties to the PSC proceeding.
Environmental Matters:
General: On an ongoing basis, the Company assesses environmental issues which could impact the Company and its ratepayers.
Clean Water Act Compliance: The Compare is a party to a proceeding before the New YorkState Department of Environmental Conservation related to the processing of permit renewal applications for the Company's generating stations under the State Pollution Discharge Elimination System. Atthis stage of the proceeding, the Company can make no determination as to the outcome of the proceeding or the impact, ifany, on the Company's financial position.
Clean AirAct Amendments: The Clean AirAct Amendments of 1990 (CAAAmendments) added several new programs which address attainment and maintenance of national ambient air quality standards. These include control of emlsslons from fossil-fueled electric power plants that affect "acid rain" and ozone.
The "acid rain" emissions reduction requirements do not affect the Company's generating plants until January 1,2000; however, the Company did comply withthe monitoring provisions program as ofJanuary 1, 1995 by installing and certifying continuous emission monitors. The Company's emlssions of nitrogen oxides are subject to additional controls effective May 31, 1995 under Title I of the CAAAmendments.
The Company estimates that the installation of continuous emissions monitors and nitrogen oxides emissions controls willcost approximately S6.2 millionfor the Danskammer Plant and S4.2 million for the Company's share of the Roseton Plant. The Northeast Ozone Transport Commission (OTC), of which New YorkState Is a member, has agreed that additional reductions of nitrogen oxides emission will be required in 1999 and, possibly, In the year 2003.
Because regulations have not yet been promul-gated by New YorkState to Implement this agreement, the specific reduction required at the Company's facilities has not been determined. The Company expects that itwillhave adequate financial resources to comply with the requirements ofthe CAAAmendments.
Former Manufactured Gas Plant Facilities: On September 15, 1994, the Company was advised by letter from the CityManager of the Cityof New-burgh, New Yorkthat contaminants (a tar-like substance), alleged to have originated from a former coal gas manufacturing facilityoperated by the Company and its predecessors, had been found during the construction ofan expansion of the Cily's sewage treatment plant. On November 28, 1994, the Company received a letter from counsel to the City, which letter purports to be a notice pursuant to the "Citizens'uit" provisions ofthe federal Resource Conservation and Recovery Act (RCRA),,that the City intends to filea citizens'uit against the Corn-pany. The letter asserts that an "imminent and substantial endangerment to health and the environment exists by virtue ofthe release of allegedly hazardous coal-tar material from the former Water Street g'as manufacturing plant site owned by the Company.
On January 10, 1995, the Company received a second letter from counsel to the City,which letter purports to be notice pursuant to said "Citizens'uit provisions of RCRA and the "Citizens'uit" provisions of the Comprehensive Environmental Response, Compensation and LiabilityAct (CERCLA) and the Emergency Planning and Community Right to Know Act (EPCRA) that the City intends to file a second Citizens'uit against the Company.
The letter received January 10, 1995 alleges that (i) the City's tests at the site revealed that such substances are known to constitute a "hazardous waste," "hazardous substance," "extremely hazard-ous substance,"
"hazardous chemical and/or "toxic chemical" as defined under RCRA, CERCLA and EPCRA, and (ii)the Company has used, stored, disposed of and/or released such substances, and operated underground storage tanks, in violation of permit, treatment, storage. disposal, monitoring,
reporting and notification requirements under RCRA, CERCLA and EPCRA.
Under RCRA, the City has a 90-day waiting period from the date of receipt of such letters, before which It can commence any such action.
and has a 60-day waiting period under CERClA and EPCRA.
The Company is conducting a study of this matter and the Company has not yet been able to determine whether itwas the generator ofthe tar-like substance in question.
Atthis time, the Company can make no predic-tion as to the outcome of this matter, however, any action by the City, ifsuccessful, could require
remedial action by the Company. The Company can make no reasonable estimate of the cost ifit were held liable to the City in this matter. However, the Company has put its insurance carriers on notice and intends to pursue reimbursement from them for the cost of any liability,but itcannot predict the extent of such reimbursement at this time.
Asbestos Utigation: Since 1987, the Company, along with many other parties, has been joined as a defendant or third-party defendant in approxi-mately 530 asbestos lawsuits commenced In New YorkState and federal courts. The plaintiffs in these lawsuits have each sought millions of dollars ln compensatory and punitive damages from all defendants. The cases were brought by or on behalf of individuals who have allegedly suffered injuryfrom exposure to asbestos, including exposure which allegedly occurred at Company facilities.
Approximately 150 of these cases have been dismissed with respect to the Company, and the Company has agreed to settle 105 ofthe cases for amounts which are not material in relation to the consolidated financial statements. Consequently, on January 1, 1995, the Company was a defendant In approximately 275 asbestos cases. Although the Company Is presently unable to assess the validityof the remaining asbestos lawsuits, and accordingly cannot determine the ultimate liabilityrelating to these cases, based on information known to the Company at this time, including its experience fn settling asbestos 'cases and In obtaining dismissais of asbestos cases, the Company believes that the cost to be incurred fn connection with the remaining lawsuits willnot have a material adverse effect on the Company's financial position.
The Company Is insured under successive comprehensive general liabilitypolicies issued by a number of Ins'urers, has put such insurers on notice of the asbestos lawsuits and has demanded reimburse-ment for its defense costs and liability.
Tax Matters:
Assessments:
The Internal Revenue Service (IRS) has completed its examination of the Company's federal income tax returns for 1987 and 1988. The IRS Agent's Report proposes adjustments which have the potential to increase the Company's tax liabilityby approximately $ 16.0 million plus interest.
Included in the proposed adjustments are signifi-cant issues related to the tax in-service date of Nine Mile 2 Plant. In May 1994, the Company, in defend-ing its position regarding Nine Mile 2 Plant and other tax matters, filed a Protest with the Appeals Office of the IRS. To the extent the IRS ls able to sustain its positions on Nine Mile2 Plant, the Company willbe required to absorb a portion ofthe resulting tax liability.Although the Company ls unable to assess its ultimate liabilityIn thIs matter, the Company believes itwould be able to recover a significant portion of any additional liabilityincluding Interest through rates. Accordingly, the Company expects that the ultimate resolution of this matter willnot have a material adverse effect on the Company's financial position.
Settlement with IRS under Actuarial Resolutions Program: In 1990, the IRS challenged the deductibil-Ityof an aggregate of $7.501 millionof contributions made to the Company's Retirement Income Plan (Plan) during the years 1986 through and including 1989. In November 1992, the Company settled this rnatter under the IRS's Actuarial Resolutions Pro-gram. Such Settlement disallowed $7.501 millionof the Coiripany's claimed deductions fortaxable years 1986 through 1989 and waived all related penalties.
In accordance withsuch Settlement, the Company withdrew the $7.501 millionof contributions in question from the Plan in December 1992. The resultant increased tax due to the loss of such deductions was $ 1.903 millionand interest on such amount was $ 1.160 million.The Company requested authorization from the PSC fordeferral accounting on such interest. Pursuant to the 1993 Rate Order, the Company was authorized to offset the deferred interest at November 30, 1993 against MirrorCWIP and other deferred balances.
In addition, the withdrawn contribution, net oftax effects, willbenefit the Company's ratepayers pursuant to such Order as follows: (1) the effect of the amortization ofa $6.526 millioncredit over a 36-month period was incorporated into electric base rates arising from such Order, and (2) $975,000 was offset against other deferred gas balances ln December 1993.
Rental Expenses and Lease Commitments: The Company has lease commitments expiring at various dates, principally for real property and data processing equipment. None ofthese leases involves any major facilities or any material noncancelable rental commitments. Although certain Items meet the criteria for recording as capital leases, such recogn! tion would have no significant effect on the consolidated financial statements. Therefore, all items are treated as operating leases.
Other Matters: The Company is involved in various other legal and administrative proceedings incidental to Its business which are in various stages. While these matters collectively involve substantial amounts, it Is the opinion ofmanagement that their uwmate resolution willnot have a material adverse effect on the Company's financial position.
Included in such proceedings was a PSC investi-gation of a November 1992 explosion ln a dwelling in Catskill, New York involving personal injuries, including the death ofan occupant, and property damage. The PSC, by Order Issued and effective January 7, 1994, approved an Agreement which provides for a program for evaluating and replacing cast Iron and unprotected steel pipeline facilwes, and foraninvestment in fourpermanent employee training centers..The Company's shareholders contributed
$500QS In 1994 toward the costs ofsuch training centers and replacement program and willcontribute
$500@30 annually in 1995 and 1996 toward the costs of such replacement program. In 1997, the Company's shareholders would contribute up to $500,000 toward
the cost of such replacement program depending on the Company's completion of certain tasks by specified dates. Two lawsuits against the Company have arisen from the November 1992 explosion in Catskill, New York. One of the lawsuits seeks recovery from the Company of compensatory and punitive damages in the sum of S4.0 million. The other lawsuit seeks an unspecified amount of compensatory and punitive damages.
In addition to the above, on February 12, 1994, a fire and an explosion destroyed a residence In the Village of Wappingers Falls, New York, in the Company's service territory. A short time later, a second explosion and fire destroyed a nearby commercial facility. The cause of these incidents was investigated by the Company and, indepen-dently, by the PSC. By Report, dated October 25, 1994, the PSC concluded that the probable cause of the Incident was an Ignition of gas that accu-mulated In each of the structures after migrating through the ground from a leak in the Company's gas main in the immediate area of the two de-stroyed buildings. The Company continues to investigate the Wappingers Falls incident and has not yet determined what caused the first explosion which destroyed the residence. The Company's investigation has produced a reconstruction of events which indicates that the first explosion was not caused by natural gas and that the force of this initial explosion, in conjunction with deep frost conditions, caused a weld in the Company's natural gas pipeline to crack. Two lawsuits have arisen from the Wapplngers Falls incfdent. One of the lawsuits seeks recovery from the Company of compensatory and punitive damages in the sum of S1.0 million. The other lawsuit seeks an unspeci-fied amount of damages against the Company.
The Company Is Investigating the above claims and presently has insufficient information on which to predict their outcome. The Company believes that It has adequate insurance to cover any compensatory damages that might be awarded.
The Company's Insurance, however, does not extend to punitive damages which, ifawarded, could have a material adverse effect on the Company's financial position. At this time, the Company can make no prediction as to any other litigation which may arise out of these incidents.
On June 22, 1994, an unregulated subsidiary of the Company sold Its interest In two limited part-nerships. In conjunction with these sales transactions, such subsidiary agreed to guarantee a third-party loan in the amount of S1.1 million which was made to the purchaser of the limited partnership interests.
1994 1993 1992
~I Gm 8P%%d 2(P%%d 82%%d 18%%d 82%%d 18%%d Gm 89%
11%%d 89%
11L 87%
13%
For the year ended December 31, 1994, the Company served an average of 259,765 electric and 59475 gas customers. Ofthe Company's total electric revenues during that period, approximately 43% was derived from residential customers, 31%
from commercial customers, 19% from Industrial customers and 7%%d from other utilities and miscella-neous sources. Of the Company's total gas revenues during that period, approximately 44%
was derived from residential customers, 31%%d from commercial customers, 4/ from industrial custom-ers, 16% from Interruptible customers and 5%%d from miscellaneous sources (including revenues from transportation of customer-owned gas).
The Company's largest customer is International Business Machines Corporation (IBM),which accounted forapproximately 12%%d of the Company's total electric revenues and approxi-mately 6%%d of Its total gas revenues for the year ended December 31, 1994. Reference Is made to Management's Discussion and Analysis of Finan-cial Condition and Results of Operations" for further information regarding IBM.
Certain additional Information regarding these segments is set forth In the followingtable. General corporate expenses, property common to both segments and depreciation of such common property have been allocated to the segments In accordance with practice established for regula-tory purposes.
NOTE 9 - DEPARTMENTALINFORMATION The Company is engaged in the electric and natural gas utilitybusinesses and serves the Mid-Hudson Valley region of New York State. Total revenues and operating income before income taxes (expressed as percentages),
derived from electric and gas operations for each of the last three years, were as follows:
Percent of Percent of Operating hiaLRmam n
50
Operating Revenues.
Operating Expenses:
Fuel and purchased electricity......
Purchased natural gas....................
Depreciation and am'ortizatfon.....
Other, excluding income tax.........
Total.
Operating Income before Income Tax..........,
Federal income tax, including deferred income tax - net...........................
Operating Income.
Construction Expenditures...............................
Identifiable Assets at December 31 Net utilityplant..
Construction work fn progress....................
Total utilityplant Materials and supplies................................
Total s ~ ~ s
~ s ~ s ~ ss ~ s
~
111,984 36597 172,057 320538 90A44 122250 35425 173,167 331942 91,883, 132,805 36,074 172301 341,180 86,256 60588 3,783 29A83 93,854 10,732 53,900 4.057 25,210 83,167 11,281 55Nr6 3522 24,180 82,768 13353 25334 S 65,110 S 49316 25442 S 66241 S 43097 21368 S 64,888 S 50,159 2.709 2,961 3,743 S
8023 S
8320 S
9.610 S
8,729 S 10,940 S 11%2
$776,169
$777944
$779291 46879
~35 24 30232 823048 812A68 809573 ML9K
&992
~31 2k S850,128
$840& 1
$841N79
$ 96452
'11373 108025 6 309 3114334 S 95,074
~71 102391
~54
$ 109,745 S 90352
~4648 95,000 6544
$ 101544 Electric Gas 3224 liK 3552 l224 35K 32t2 (rhousands ot Dollars)
S411,082 S422,925 S427A36
$ 104586 S 94A48 S 96,121
'tdentttiobte assets not nctbded herein are constdered tobe corporate assets and havenot been attocatedbetween the etectrtcand gassegments.
NOTE 10 - FINANCIALINSTRUMENTS The followingmethods and assumptions were used to estimate the fairvalue of each class of financial Instruments for which it Is practicable to estimate that value:
Cash and Temporary Cash Investments: The carrying amount approximates fairvalue because of the short maturity of those Instruments.
Cumulative Preferred Stock Subject to Mandatory Redemption: The fair value fs estimated based on the quoted market price of similar Instruments.
Cash and temporary cash investments Curnufative prefeaed stock subject to mandatory redemption................
Long-term debt (including current maturftfes).......................,......
Notes payable..
Carrying Fair
~f (rhovsonds of Domors)
S 5,792 S
5,792 (3599)
(29%0)
(392%9)
(389,957)
(39$)
(39$)
The estimated fair values of the Company's finan-cial Instruments are as follows:
Long-Term Debt: The fair value is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Com-pany fordebt of the same remaining maturities and quality.
Notes Payable: The canyfng amount approximates fair value because of the short maturity of those fnstruments.
Cash and temporary cosh investments Cumulative preferred stock subject to mandatory redemption................
Long-term debt (including current maturtfies)..............................
Cariyfng Fair hmauot (i)ro47sonds ot Doles)
S 27.172 S 27,172 (35,000)
(35575)
(442$29)
(485M) 51
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments In Debt and Equity Securities" (SFAS 115) Issued by the FASB. The adoption of SFAS 115 resulted In the recording of an unrealized net holding gain as an adjustment to common stock equity. This unrealized net holding gain represents the amount by which the market value ofan investment that the Corn-pany maintains in an insurance company exceeds its cost, net oftax effects. The investment, which Is, classified as available-for-sale under SFAS 115, had' cost and market value at December 31, 1994 of S775,000 and S2.04lmlllion, respectively, and a resulting unrealized net holding gain of S823,000.
Common stock equity willbe adjusted to reflect periodic changes In'the market value of this investment. Arealized gain or loss would be recorded in the Consolidated Statement of Income upon sale or other disposnon ofthis investment.
Addnonally, in accordance with SFAS 115, investments in debt and equity securities held In the Nine Mile2 Plant Decommissioning Trust Fund (Fund) are reported at fairvalue. Pursuant to PSC account-Ing requirements, gains or losses on Fund invest-ments are included in nuclear decommissioning trust assets and added to the accumulated decommis-sioning component of accumulated depreciation included In the Consolidated Balance Sheet.
SELECTED QUARTERLYFINANCIALDATA(UNAUDITED)
Selected financial data for each quarterly period within 1994 and 1993 are presented below:
Operating Revenues Operating Income nds ot Dolors Income Available for Common Stock Earnings Per Average Share of Common Stock O~uistaiidin Quarter Ended:
1%4 March 31.
June 30.
September 30..
December 31 129 March 31.
June 30.
September 30 December 31 S 162,836 117214 116091 119527 S 153372 117,744 120076 126,182 S28,175 14%0 17540 12,918 S26,711 17254 170M 13528 S20,785 S1.22 7gA6 15 11,152
.65.
6219
.36 S18,715 S1.15 9585
.59 9264
.55 6,965
.41 52
DIRECTORS OFFICERS L Wallace Cross Poughkeepsie, NY Former Executive Vice Prestdent and Chief Financial Officer of the Corpo-ration; retired; member of the Com-mittees on Audit and Finance '1990 Jack Effron Poughkeepsie, NY President, EFCO Products. Inc.;
Chairman of the Committee on Compensation and Succession and member of the Executive Committee and the Committee on Finance
'1987 Richard H. Eyman Salem, SC Former Senior Vice President, Brouillard Communications, DViiston of J. Walter Thompson Company; retired; Chairman ofthe Committee on Audit;member ofthe Executive Committee and the Committee on Compensation and Succession
'1984 Frances D. Fergusson Poughkeepsie, NY President, Vossar College; member ofthe Committee on Compensation and Succession
'1993 Heinz K. Fridrich Fernandina Beach, FL Courtesy Professor. University of Florida, Gainmlte, FI; Former Vice President Manufacturing, Interna-tional Business Machines Corp.;
member of the Committee on Audit
'1988 Edward F.X. Gallagher Newburgh, NY President and Owner, Gallagher Transportation Services; member of the Committee on Finance 1984 John E. Mack, III Poughkeepsie, NY Chairman of the Board and Chief Executive Officer; Chairman of the Executive and Retirement Commit-tees; member of the Committee on Finance
'1981 Howard C. St. John Glenford, NY Chairman of the Board, Ulster Savings Bank; Lawyer. Howard C. St. John &
Associates; Vice Chairman of the Board; Chairman of the Committee on Finance; member ofthe Execu-tive Committee and the Committee on Audit 1984 Edward P. Swyer Albany, NY President, The Swyer Companies; member of the Committee on Compensation and Succession and the Retirement Committee '1990
'ear joined the board OFFICERS OF THE BOARD John E. Mack, III Chairman of the Board and Chief Executive Officer;Chairman ofthe Executive and Retirement Committees Howard C. St. John Vice Chairman ofthe Board and Chair-man ofthe Committee on Finance Jack Effron Chairman of the Committee on Compensation and Succession Richard H. Eyman Chairman of the Committee on Audit John E. Mack, III Chairman of the Board and Chief Executive Officer Paul J. Gancl President and Chief Operating Officer Ronald P. Brand Vice President Engineering and Environmental Affairs Benon Budziak Vice PresIdent Product ton Joseph J. DeVirgllio,Jr.
Vice President Human Resources and Administration John F. Drain Vice President-Fence and Controller Carl E. Meyer Vice President Customer Services Allan R. Page Vice President Corporate Services Ellen Ahearn <'>
Secretary Steven V. Lant Treasurer and Assistant Secretary Arthur R. Upright Assistant Vice Presldent-Cost &Rate and Financial Planning Walter A. Bossert Assistant Secretary and Assistant Treasurer William P. Reilly <>>
Assistant Secretary and Assistant Treasurer Donna S. Doyle <>>
Assistant Controller
<'i Promoted effective April5, 1994
<>> Appointed effective July 1, 1994
<'i Appointed effective April5. 1994 Paul J. Ganci Poughkeepsie, NY President and ChIef Operating Officer; member of the Executive Committee and the Committee on Finance
'1989 Charles LaForge Rhtnebeck, NY President ofWayfarer Inns and Owner of Beekman Arms; member of the Retirement Committee '1987 AffirmativeAction Statement of Policy It is the poricy ofCentral Hudson Gas &Electric Corporation to provide equal employment opportunities for alt persons.
Central Hudson Is committed to recruit, hire, train, and promote persons in oil positions, without regard to race, sex, color, creed, religion, age. national origin, persons witha disabTily, <fisabted veteran or Vietnamera veteran status, except where sex is a bona fide occupational quarifica-tion. The Company wilbase decisions on employment so as to further the principte of equal employment opportunity. Central Hudson vnl insure that promotion decisions are in accord with principles of equal employment opportunity by Imposing only valid requirements forpromotional opportunies.
Central Hudson wgl insure that alit personnel actions such as compensation, benefits, transfers, layoffs, return from layoff, employer sponsored training, education. tuition assistance, sodat and recreational programs, willbe administered without regard to race, sex, color, creed, religion, age, national origin, <fisability,disabled veteran or Vietnar<H.ra veteran status.