ML17059C115

Nyseg 1997 Annual Rept

ML17059C115
Person / Time
Site:	Nine Mile Point
Issue date:	12/31/1997
From:	Von Schack W NEW YORK STATE ELECTRIC & GAS CORP.
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ML17059C114	List: ML17059C113 ML17059C115 ML17059C116 ML18041A064
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pcs Qg SN)aa NYSEG is dedicated to helping companies and people shape their energy environments in ways that improve the efficiency and quality of their businesses and lives.

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NYSEG is a market-driven energy company.

We supply, market and deliver safe, reliable energy throughout more than one-third of New York State. Our natural gas business is entrepreneurial and growing. Our electric business is poised to compete in the new energy market.

We are active and successful in the Northeast and Mid-Atlanticwholesale electricity markets.

Through XENERGY, we are a recognized leader in energy services across the country.

NYSEG has one priority:to achieve superior customer satisfaction by offering competitive, custom solutions to meet our customers'nergy needs.

Ef4xBDc4 QKORK9 Customer Service and Energy Delivery: Meeting the energy needs of 811,000 electricity and 241,000 natural gas customers, we stand by our 145-year reputation for safe, reliable energy. Our experienced people meet customers'eeds quickly and effectively and, as a result, we have the lowest customer complaint rate of any energy utilityin the state.

Generation: Our electric generating system, fueled primarily with coal, is consistently rated among the most efficient in the nation. The system includes the state's only two scrubbers to control sulfur dioxide emissions. We generated 17 million megawatt-hours of electricity for retail and wholesale customers in 1997.

Natural Gas: Our natural gas business offers some of the most competitive prices in the Northeast. We have increased our customer base and profit every year since 1992. Ours is the fastest-growing natural gas business in New York State and one of the fastest-growing in the Northeast. We added 10 new franchises and delivered 59 million dekatherms of

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FINANCIAL HIGHLIGHTS Per Common Share Earnings Market Value (Year end)

Book Value (Year end)

Dividends

$2.57

$35.50

$26.71

$1.40 1996

$2.37

$21.63

$25.41

$ 1.40

% Change

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Other Common Stock Information Common Stock Price Range Return on Average Common Equity Average Common Shares Outstanding (Thousands)

Operating Results (Thousands)

Total Operating Revenues Total Operating Expenses Net Income Earnings Available for Common Stock Retail Deliveries-Megawatt-hours Retail Deliveries-Dekatherms

$20'/i-35'/i 99%

68,153

$2,129,989

$1,687,321

$184,553

$175,211 13,238 59,324

$20Ye-26/s 9.6%

71,127

$2,067,532

$1,609,989

$178,241

$168,711 13,216 61,542 3

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At December 31 Total Assets (Thousands)

$5,028,681

$5,059,681 a

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40x Earnings (per share)

$2.57

'97

$2.37

'96

'95

'94

&2.37

$2.08

'93 Contents 1

Financial Highlights 2

Letter to Shareholders 4

1997 Highlights 8

Financial Review

LETTER TO SHAREHOLDERS Dear Shareholder.

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2 1997 zvas a year ofsolid reszdts for NYSEGfinancially, operationally and strategically. Earnings for-1997 were $2.57 per share, a consiclerable increase over last year's 82.37 per share. Equally important, we are at the threshold of a restructured New York State electricity market, and we are ready to compete.

NYSEG's restrzzctzzring plan, which was approved by the Public Service Coznznission ofthe State ofNezv Yorl: izzJanuary>1998, willredzzce electricity prices, promote economic developnzent and enable all NYSEG electricity cllsto17zers to begin choosing their electricity supplier by Azzgzzst 1, 1999.

Highlights of the plan include:

Eliminating a previously-approved 7% increase in electricity prices; and Reducing prices 5% in each of the next five years for eligible customers who are heavy users of electricity, and capping overall average prices for all other customers for four years and cutting their prices an additional 5% at the beginning of the fifth year.

labile the restrzzctzzriizg plan willdeliver price relief, the problenzs of governznent-mandated expenses for taxes and onerozzs nonzztility generator power reznain. Those two items together account for more than 34 cents oF every electric revenue dollar and must be reduced to make our energy prices more competitive. We are in litigation over our two largest nonutility generator contracts to obtain additional price relief for our customers.

This plan also callsfor the formation ofa hokling company to provide organizational flexibilityto take advantage ofnew opportunities izz a conzpetitive znarket and build a stronger NYSEG -Subsidiaries will include companies engaged in the delivery of electricity and natural gas, power generation and energy services. As part of this process, NYSEG will auction its seven coal-fired generating stations and put up for sale its 18% interest in the Nine Mile Point 2 nuclear generating station.

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ning fror a vertically integrated electric and natural gas utilityin New York State to a regional energy company serving the Northeast."

We have alremly densonstrated our ability to succeed in a competitive natural gas snasket with some ofthe lowest prices in the Northeast. Our natural gas business is growing through franchise expansion within the state and strategic initiatives outside the state. We are particularly optimistic about our agreement with Central Maine Power to form a jointly-owned natural gas distribution company to serve Maine and New Hampshire customers by the end of 1998. Our expertise in developing new markets and similar demographics, geography, customer mix and climate make this an excellent strategic fit.

An essential elensent ofous business stmtegy is having our customers associate NYSLG with superior customer satisfaction. We have the lowest customer complaint rate in the state, and we consistently receive high marks for service reliability. Our customer satisfaction survey results demonstrate that we are providing superior service and reliability. We also have a proud history of fulfilling our duties faithfully and being a leading corporate citizen. Our programs in the areas of economic development, community support, low-income assistance and volunteerism demonstrate our commitment to the communities we serve.

The restructuring ofthe electric utilityindustry is nsassive and comply and willtake years to sort out. It is nearly three times the size of the telecomnninications industry restructuring that has been underway for a number of years. As managers of this enterprise, we must deal with increased uncertainty and business risk. On the other hand, industry restructuring will also present opportunities. We are taking a fresh look at the way we do things.

The old paradigms no longer work and energy companies must map out new strategies to enhance shareholder value over the long term. Some companies will focus on a specific segment of the energy business, such as energy distribution, commodity supply or energy services, while others will pursue an integrated strategy.

NYSLGis transitionbsgfs om a vertically integrated electric and natuml gas utilityin New York State to a regional energy company serving the Northeast. We will consider all opportunities that allow us to intelligently manage and grow our business and that create value for our shareholders over the long term. We are taking actions today in the areas of customer service, price and growth that will favorably position NYSEG for the emerging energy market of tomorrow. Our vision is to help companies and people shape their energy environments in ways that improve the efficiency and quality of their businesses and lives. We believe this vision transcends the changes that are coming, and we look forward to further progress in 1998.

Allofour people deserve recognition for their outstanding contributions to our perforsnance As 1997. On behalf of the board of directors, I thank them and you, our shareholders, for your continued support.

Wesley W. von Schack Chairman, President and Chief Executive Officer JANUAI(Y 29, 1998 3

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1997 HIGHLIGHTS n

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0>r 0) 0 V) z "As a result of working with XENERGY to aggregate load and collectively buy electricity, we believe our member compa.

nies willbe best positioned for significant compet-itive advantages in the new electricity market in Massachusetts."

Christopher Anderson, Vice President &

General Counsel Massachusetts High Technology Council lee know bow to contpete and oQer attractive prices. Our natural gas busi-ness has prospered in a competitive market. We successfully compete for large customers every day, and in the last two years ltave added 19 new franchises, making us one of the fastest-growing natural gas companies in the Northeast. Every year since 1992 we have increased our customer base and profit. With our expert assistance, our commercial and industrial customers can tailor their natural gas service from a host of pricing and delivery options.

lee are preparerl to bring contpetttion to our connnttnities. Our restructuring plan willcut electricity prices for all customers and promote economic development in New York State. It will enable all of our electricity customers to choose their electricity supplier by August 1, 1999 one of the most aggressive schedules in the country.

With all of the changes that are com-ing, we remain committed to superior customer service, safe and reliable power delivery, and helping our customers use energy to improve the quality of their lives 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> a day, every day.

lee are managing costs. Since 1991, our operating and maintenance costs have been relatively flat, and we expect that trend to continue. We have reduced capital spending. Our challenges continue to be taxes and the cost of NUG power that together account for more than 34 cents of every dollar from our electricity customers.

We are in litigation over our two largest NUG contracts to obtain additional price relief for our customers. In 1998 we willcon-tinue our efforts to further reduce the onerous burden of NUG power and the state gross receipts tax, while encouraging the passage of securitization legislation.

Ottr natural gas business is entrepre-neurial and growing. Two significant accomplishments in 1997 stand out:

n We signed an agreement with Central Maine Power to create a new natural gas distribution company to serve Maine and New I-Iampshire cus-tomers. This new company will bring clean, econoinical natural gas to communities where it has never been available before.

We are managing our costs, and we are working to reduce the onerous burden of MUG power and taxes.

We are implementing strategies for profitable growth in both our electric and natural gas businesses.

"By consolidating our electricity bills from 22 plants in nine states, NYSEG's Energypoint2000 services give us the kind of infor-mation we need to benefit in a competitive market.

t It puts OSRAM SYLVANIAin an advantageous position for pur-chasing electricity."

Tom Shields Manager-Corporate Purchasing OSRAM S YLVANIA

Products, Inc.

o We expanded our Seneca Lake Storage Project, the first high-deliver-ability natural gas storage facility in the Northeast. Now, in addition to being a key s'upply source for commu-nities in the heart of our service area, we can sell storage capacity in inter-state markets.

Our economic <levelopn>entprofes-sionals Leep on rvb>ning. After a big year in 1996 when we played an integral role in bringing Guardian Industries to Geneva, we were a key player in Corning, Inc.'s decision to build a new multi-milliondollar facility near Corning for its Photonics Tech-nologies Division. Marine Midland Bank brought its mortgage processing business to the Buffalo suburbs; GEC Alsthom selected Hornell over sites in Georgia and Virginia for its rail car manufacturing business; and Thomas and Betts, a high-tech connector manufacturer, chose to expand its LRC Electronics plant near Elmira rather than consolidate opera-tions in South Carolina, Arkansas or Mexico. In all, we helped 48 compa-nies with expansions or relocations in 1997, securing more than $230 million of capital investment.

Our energy services covrpany is turning bearls. XENERGY, Inc., our energy services company, was chosen in 1997 to serve as the agent to pur-chase electricity for the Massachusetts High Technology Council, Inc. and was awarded a 10-year contract to help the federal government save energy at facilities across the nation.

XENERGY was also chosen as the exclusive agent to buy electricity for the newly-formed California Electricity Aggregation Group. These successes demonstrate the confidence that cus-tomers have in XENERGY's ability to deliver value in a competitive market.

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"NYSEG was extremely helpful in getting our 1,000-head dairy farm up and run-ning. Their people worked closely with us to make sure that efficient and effective heat-ing, lighting and ven-tilating systems would make us as productive as possible."

Rocky Giroux, owner Adirondack Farms

We are working tirelessly to anticipate, understand and meet our customers'eeds, and we are succeeding.

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z Satisfying cttstomers starts with superior cttstomer service. Thanks to the tireless efforts of our skilled front-line people across the state, our customer satisfaction survey results demonstrate we are providing superior service and reliability. We also enjoy the lowest customer com-plaint riitc of any energy utility in Ncw York State, and we have a 99.9%

success rate in meeting or exceeding our service guarantees.

lee are raising tbe custoiner satisfaction bar to new heights.

We are continuing to improve our customer service skills by fine-tuning our customer call center, which we expect will handle two million calls each year when our customers can begin choosing their electricity suppli-er. For example, an automated system now directs calls, freeing up our people to spend more time with customers al atten-who need person tion. We are offering customers more billing options, such as providing meter reads to us via the Internet, and we conduct full-scale drills to further improve our recog-r nized expertise in assessing damage and getting the lights back on promptly after storms.

Our connnitment to our comsnunities bas never been stronger. We inspire students through our educational services program, including our nationally-recognized mentoring program in western New York. We lend support to many insti-tutions of higher learning. And our employees volunteer tens of thousands Purple ribbons became the symbol of appreciation for NYSEG's superior efforts in restoring electricity to north-ern New York in January 1998 fol-lowing one of the most devastating ice storms ever to hit the region.

On their own, customers placed ribbons on front doors, mail boxes and trees to show their gratitude to our people.

"We are very pleased with NYSEG and its contractors. Half of our buildings are now heated with natural gas and that means reduced operating costs. We are now able to focus even more of our resources on our academic mission and people."

Ken Wing, President SUNY Cob!eskill

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.'~4)'gp)gjgi- ~jj!'!,"i Through the Community Watch Program NYSEG people work with community agen-cies to report emergencies and suspicious or unsafe situations.

0 of hours to many deserving organiza-tions from volunteer fire departments to food pantries.

lee pttt ortr eyes and ears to good use wlafie on tbejob. Through our Community Watch prognm, einployces use their knowledge of the communi-ties where they work to assist police and fire departments and other municipal agencies by reporting suspicious or unsafe activities, vehicle accidents, fires and other situations.

Our statewide involvement with the New York State Departn>ent of Trans-portation's Adopt-A-I.Iiglavay program also reflects our volunteer spirit.

1V/~e>r it contes to safety, tee go the extra mile. Wc take a broad view of our responsibility for providing natunl gas safety training in new and existing service areas.

We offer a comprehensive safety training program for emergency response personnel, gas code enforcement agencies and large users of natural gas. We also offer live line electric safety programs to fire and police departments and other public safety agencies. Our community and internal tnining efforts help ensure safe and reliable energy delivery in the commu-nities we serve, but most importantly, they help ensure the safety of the people we serve.

Our job goes far beyond keeping the electricity and natural gas flowing.

"Securing natural gas service was extremely important to our future. NYSEG presented us with a straightforward appraisal and was truly dedicated to working with us to make the project go smoothly."

Andrew Abdallah, Supervisor Town of Plat tsburgh 0

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Z NYSEG's educa-tional services program and support oi community organizations such as the Broome County Urban League inspire students.

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FINANCIAL REVIEW Contents O

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Q9 6) 89 QO 83 ABO ~ Accumulated Benefit Obligation AFDC ~ Allowance for Funds used During Construction AMT~ Alternativo Minimum Tax APBO ~ Accumulated Postretirement Benefit Obligation FASB ~ Financial Accounting Standards Board FERC ~ Foderal Energy Rogulatory Commission ISO ~ Independent System Operator ITC ~ Investm ont Tax Credit

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(kucz8te(eeUthsm RGKSSM~IMMKi5R NGE ~ NGE Entorprises, Inc.

NMP2 ~ Nine Milo Point nuclear generating unit No. 2 NRC ~ Nuclear Regulatory Commission NUG ~ Nonutility Genorator PBO ~ Projected Benefit Obligation PRP ~ Potentially Responsible Party PSC ~ Public Service Commission of the State of New York SEC ~ Securitios and Exchange Commission DSM ~ Demand. Side Managemont EPA ~ U. S.

Environmental Protection Agency LDC ~ Local Distribution Company NEIL ~ Nuclear Electric Insurance Limited NYPP ~ New York Power Pool NYSDEC ~ New York State Department of Environmental Conservation SRC ~ Somerset Railroad Corporation

/o MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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COMPETITIVE CONDITIONS A major focus of the company during 1997 was the restructuring of the electric utilityindustry.

The transition to a competitive electricity market and other significant changes willshape the future of the company's electric, natural gas and energy services businesses and provide a base for increasing shareholder value.

Electric industry o The PSC issued an Order in its Competitive Opportunities Proceeding in May 1996, increasing the pace of change for the state's electric industry. The overall objective of this proceeding, which began in August 1994, was to identify regulatory and ratemaking practices to guide the transition to a more competitive electric industry. The company filed its proposed restructuring plan with the PSC in October 1997.

Restructurhig P1an: The PSC approved the company's restructuring plan, with minor modifications, in January 1998. It willsave customers an estimated

$725 million by the end of the settlement period.

It willeliminate a 7% increase in electricity prices previously approved by the PSC. Prices will be reduced 5% in each of the next five years for eligible industrial, commercial and public author-ity customers who are heavy users of electricity. The plan will cap overall average prices for all other customers for four years and reduce their prices an additional 5% at the beginning of the fifth year. All of the company's retail customers will be able to begin choosing their electricity supplier by August 1, 1999 Complaint Rates (per 100,000 customers) 7.7 0

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V) z The restructuring plan allows for the formation of a holding company, provides for the auction of the company's seven coal-fired generating stations and completion of the auction transactions by August 1, 1999, and allows the company to put up for sale its 18% interest in NMP2. The restructuring plan also provides a reasonable opportunity for the company to recover all prudently incurred investments made in the past.

The company believes that under the restructuring plan its electric and natural gas delivery business will continue to meet the criteria of Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation. Upon the PSC's approval of the company's restructuring plan in January 1998 the company's coal-fired generation business discontinued application of Statement 71 and applied Statement of Financial Accounting Standards No. 101, Regulated Enterprises Accounting for the Discontinuation of Application of FASH Statement No. 71. The application of Statement 101 to that business did not affect the company's financial position or results of operations because any above-market generation costs will be recovered by the regulated electric and natural gas delivery business.

Flowing Coinpany Structure: Subject to the receipt of necessary approvals, the company will form a holding company. Subsidiaries under the holding company will include an electric and natural gas delivery company, a generation company and an energy services company. The electric and natural gas delivery company will be a regulated utilitytransmitting and delivering electricity, transporting and delivering natural gas, and generating electricity from its nuclear and hydroelectric stations. The generation company will produce electricity from its coal-fired stations.

The energy services company will conduct activities such as providing energy, financial and environmental services.

Applications for the necessary approvals for the formation of a holding company were made to the FERC, the SEC and the NRC. The FERC approved the company's application in December 1997.

The SEC and the NRC applications are expected to be approved in early 1998.

At the 1998 Annual Meeting, shareholders willvote on a plan of share exchange, pursuant to which, and subject to any rights of holders of the company's common stock to exercise their appraisal rights, all of the outstanding sltares of the company's common stock will be exchanged on a share-for-share basis for the common stock of the holding company.

Genemtion Business: The company will transfer its seven coal-fired generating stations to its generation subsidiary, and after that will conduct an auction of those plants. A company affiliate can participate as a bidder on some or all of the coal-fired plants. Any shortfall between the auc-tion proceeds, net of taxes, and the book value of the plants will be recovered by the regulated portion of the company through a nonbypassable competitive transition charge.

Petition to the IL'RC on NUGs: The company continues to seek ways to terminate or renegotiate

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existing onerous NUG contracts that it was ordered to sign, and thus reduce its NUG overpayment burdens:-NUG power purchases, including termination costs, totaled $324 million in 1997, and the company estimates that those purchases will total $340 million in 1998, $348 million in 1999 and

$356 million in 2000.

The company petitioned the FERC in February 1995, asking for relief from ltaving to pay approximately S2 billion more than its avoided costs for power purchased over the term of two NUG contracts. The FERC denied that petition in April 1995 and denied the company's subsequent request for a rehearing. The company believes that the overpayments under the two contracts violate the Public UtilityRegulatory Policies Act of 1978.

The company petitioned the United States Court of Appeals for the District of Columbia in June 1995 to review the FERC's decision. The Court of Appeals issued a decision in July 1997 stating that it lacks jurisdiction to rule on the company's appeal of the FERC's refusal to modify the power purchase contracts. The Court of Appeals said the company may pursue its claim in the United States District Court.

The company commenced an action in the United States District Court for the Northern District of New York in August 1997. The complaint asks the District Court to either reform the two NUG contracts by reducing the price the company must pay for electricity under the two contracts, or send the matter back to the FERC or to the PSC with direction that they modify such contracts.

The complaint also seeks restitution of all monies paid above the company's avoided costs.

EERC Orders 888 and 889: The FERC issued Orders 888 and 889 in April 1996, adopting final rules to facilitate the development of competitive wholesale electricity markets by opening up transmission services and to address the resulting stranded costs. In subsequent orders the FERC generally affirmed Orders 888 and 889. Various parties, including the company, have filed petitions for review of these orders with the United States Courts of Appeals in various circuits.

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1997 Sources of Electricity Generation and Purchases (n1egawatt-hours)

Hydro 1%

Nucloar 6%

Purchased power-othor 17%

Coal 60%

Poroheeed power-NGGe 16%

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0) 0 V) z In Order 888 the FERC directed all public utilities to file a compliance open-access transmission tariffon or before July 9, 1996. In Order 888-A the FERC directed all public utilities to file a revised compliance tariffby July 14, 1997. The FERC has approved the company's transmission tariffs.

Under the compliance tariff, the company must offer transmission service to its wholesale customers on terms comparable to those it applies to itselF, and offer and/or provide certain ancillary services.

The FERC accepted, in February 1997, a compliance filing of the New York Power Pool, of which the company is a member, in response to Order 888. NYPP members submitted additional filings to the FERC in 1997 proposing the restructuring of the NYPP by establishing an ISO, a Power Exchange and a New York State Reliability Council. NYPP members have requested FERC approval of the proposed market structure by March 1998 so that an ISO can be in place by the end ofJune 1998. The company is unable to predict the outcome of these filings and their ultimate effect on the company's financial position or results of operations.

Natural Gas Industry o The company's natural gas business continues to grow and build on its successes of recent years. During 1997 the company added new franchises, completed thc expansion of its Seneca Lake Storage Project and signed an agreement with Central Maine Power, Company to form a jointly-owned natural gas distribution company to serve Maine and New Hampshire customers by the end of 1998.

¹w Iranchises: The company is moving forward with its plans to increase its natural gas business through the expansion of natural gas service in existing franchise areas and the acquisition of new franchises. A total oF 10 new franchises were approved by the PSC during 1997. The company began construction of a 14-mile natural gas pipeline in September 1997 to extend service into Lewis County, New York. The company began serving four large customers in December 1997.

The company is also expanding its distribution systems in Cobleskill and the Plattsburgh area,-

building from two large pipelines completed in December 1996.

Seneca Lake Storage Project: The company's Seneca Lake Storage Project, consisting of a natural gas storage cavern, a compressor station and two natural gas transmission pipelines, began service in December 1996. The facility is located north of Watkins Glen on the west side of Seneca Lake.

The project's primary purposes are to ensure an adequate natural gas supply to customers and to support economic growth in southern and central New York. The project has also allowed the company to increase supply flexibilityand retire two inefficient and expensive propane plants, and will eventually reduce pipeline demand charges.

The company received approval from the PSC in May 1997 for an expansion of the project's compressor station. The expansion, which increased the cavern's working gas storage capacity from 800 million to 1.45 billion cubic feet oF natural gas and the compressor station's deliverability from 80,000 to 145,000 dekatherms per day, willallow for growth in the company's wholesale natural gas business through the sale of storage capacity. The FERC, in October 1997, approved the company's January 1997 application to provide short-term firm and interruptible storage service in interstate commerce at market-based rates. The expansion began commercial operation on November 1, 1997.

Joint Venture with Central Maine Power Company: The company and CMP signed an agreement'=

in November 1997 to form a jointly-owned company to distribute natural gas to Maine and New Hampshire customers in. areas not currently served by a natural gas utility. The company antici-pates that construction will begin in the summer of 1998, with initial service to customers by the

end of 1998. Various regulatory approvals are required before the joint venture can operate a new gas distribution service. The opportunity for new retail distribution of natural gas also depends on other parties'nvolvement.

Either of two new natural gas pipelines from Canada, the proposals for which are currently under federal and state regulatory review, must be completed.

Role ofLocal Distribution Coo>pmiies: The PSC Staff issued for comment in September 1997 its position paper regarding the role of natural gas local distribution companies in the sale of natural gas in New York State. The PSC Staff recommends five years for LDCs to transition from being both sellers and distributors of natural gas to being only distributors. The company filed comments in November 1997 opposing the PSC Staffs position. Reply comments to the positions of other parties were filed in December 1997. Further proceedings are at the discretion of the PSC.

ACCOUNTING ISSUES Statement 71: During 1997 the FASB's Emerging Issues Task Force issued guidance related to the continued application of Statement 71 during the electric utility industry's transition to competition.

Accordingly, upon PSC approval of the company's restructuring plan in January 1998, the compa-ny's coal-fired generation business discontinued application of Statement 71 and applied Statement 101. The application of Statement 101 to that business did not affect the company's financial posi-tion or results of operations because any above-market generation costs will be recovered by the regulated portion of the company.

Although the company-believes it will continue to meet the criteria of Statement 71 for its regulated operations, it cannot predict what effect a competitive market or future PSC actions will have on its ability to continue to do so. Ifthe company could no longer meet the criteria of Statement 71 for all or a separable part of its regulated business, the company may have to record as expense or revenue certain regulatory assets and regulatory liabilities and may have to record as a loss the amount for power purchase contracts with NUGs that is above the estimated competitive market price of power. These items are currently recovered in rates.

The company had $581 million and $604 million, respectively, of regulatory assets, and $261 mil-lion and $269 million, respectively, of regulatory liabilities on its balance sheets at December 31, 1997 and 1996. The company also had power purchase contracts with NUGs that, on a present value basis, are more than $1.5 billion above the estimated competitive market price of power at December 31, 1997.

Statement 130: The FASH issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, in June 1997. Statement 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements.

Comprehensive income includes charges or credits to equity tltat are not the result of transactions with owners. The company will adopt Statement 130 in the first quarter of 1998. This adoption is not expected to have a material effect on the company's financial position or results of operations.

ENERGY SERVICES The company makes investments through its subsidiary, NGE Enterprises, Inc., in providers of

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energy, financial and environmental services.

XENERGY, Inc. is an energy services, information systems and energy consulting company serving utilities, governmental agencies and end-use energy consumers.

XENERGY's 1997 revenues were comparable to revenues for 1996, and are expected to grow in 1998.

II XENERGY has been successful in securing customers under pilot programs for retail electricity competition. Building on the experience it has gained through participation in such programs in Massachusetts and New Hampshire since 1996, and its leadership in the energy management

business, XENERGY has been named buyer's agent for two aggregation groups that will begin purchasing electricity in competitive markets in'998. XENERGY believes that its role as a buyer' agent for these aggregated groups will be a model for the way companies will buy lower-cost power in a restructured electricity market.

During 1996 it was determined that EnerSoft Corporation, a computer software and real-time information and trading systems company, no longer fit the company's strategic focus. As a result, the company took a $ 10 million (14 cents per share) charge against earnings in 1996 to write down NGE's investment in EnerSoft, and exited tliat business in December 1996.

The company's net investment in NGE was $20 million, $ 17 million and $34 million as oF December 31, 1997, 1996 and 1995, respectively. Net losses related to NGE were $4 million,

$21 million and $12 million for the years ended December 31, 1997, 1996 and 1995, respectively.

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V) z RATE MATTERS Electric Rate Settlement o The company's restructuring plan, with minor modifications, was approved by the PSC in January 1998, and is effective for a five-year period. (See Restructuring Plan.) The restructuring plan supersedes the company's previous three-year electric rate settlement agreement, which was to expire on July 31, 1998.

The restructuring plan, in addition to the key elements described earlier, includes a 12% return on equity cap and a 9% floor, exclusive of any common stock repurchascs, during each of the five years of the restructuring plan and the ability to accelerate dcprcciation and amortization of certain assets.

Customers will receive any net savings realized from sccuritization legislation, reductions in the gross receipts tax and 80% of NUG contract cost savings that result from contract termination or restructuring. There willbe no fuel adjustment clause, no sharing of flexible rate discounts and only a limited opportunity for uncontrollable cost recovery for the next five years.

Average Electric Retail Prices (per kilowatt-hour) 12C 1OC

'89

'91

'93

'95

'97 C3 NUGs

~ State and local taxes

~ Base price

Natural Gas Rate Settlement

~ The company's natural gas rate settlement agreement, which was authorized by the PSC in December 1995, freezes natural gas prices from December 15, 1995, until July 31, 1998. The company is currently negotiating with the PSC Staff and others to set rates for the next four years.

An earnings sharing mechanism in the natural gas agreement provides that the average of the earned equity returns, exclusive of service quality awards or penalties, will be determined for the three years, and half of the three-year average of net earnings in excess of 14%, ifany, will be reserved for customers.

The natural gas agreement eliminated, effective August 1, 1995, the gas adjustment clause and the weather normalization clause, which were used to collect from, or refund to, customers, amounts resulting from cltanges in the cost of purchased natural gas and the effect of unusually warm or cold weather on natural gas sales. The company uses risk management techniques such as natural gas future and option contracts to manage the company's exposure to fluctuations in natural gas commodity prices. Such contracts allow the company to fix margins on sales of natural gas generally forecasted to occur over the next 18 months. The cost or benefit of natural gas future and option contracts is included in the commodity cost when the related sales commitments are fulfilled. Gains and losses resulting from the use of those contracts for 1997 and 1996 were not material to the company's financial position or results of operations. The company does not hold or issue financial instruinents for trading or speculative purposes.

ENVIRONMENTALMATTERS The company continually assesses actions needed to comply with changing environmental laws and regulations. Any additional compliance programs will require changes in the company's operations and facilities and may increase the cost oF electric and natural gas service.

'he Clean AirAct Amendments of 1990 limit emissions of sulfur dioxide and nitrogen oxides and require emissions monitoring. The EPA allocates annual sulfur dioxide allowances to each of the company's coal-fired generating stations based on statutory emissions limits. A sulfur dioxide allowance represents an authorization to emit one ton of sulfur dioxide during or after a specified calendar year.

The company estimates that it will have sulfur dioxide allowances in excess of the affected coal-fired generating stations'ctual emissions during Phase I, which began in January 1995. The company's present strategy is to bank excess sulfur dioxide allowances for use in later years. It is estimated that the company will meet Phase II, which begins January 1, 2000, emissions require-ments through the year 2004, by using sulfur dioxide allowances banked during Phase I together with the company's Pltase II annual sulfur dioxide allowances. This strategy could be modified due to changes in market or business conditions, or the outcome of the company's auction of its coal-fired generating stations.

Capital Expenditures (millions)

'97

$ 124

$215

'99

'94

$248

&268

'93 16 0a C

0)

C) 0 V) z INVESTING AND FINANCINGACTIVITIES Investing Activities o Capital expenditures for the company's electric and natural gas businesses, including nuclear fuel and AFDC, totaled $124 million in 1997, $215 million in 1996 and $164 million in 1995. Expenditures in those three years, which werc financed entirely with internally generated funds, were primarily for the extension of service, the Seneca Lake Storage Project, necessary improvements to existing facilities and compliance with environmental requirements.

Capital expenditures, including nuclear fuel and AFDC, projected for 1998, 1999 and 2000 are

$ 134 million,.$152 million and 8146 million, respectively, and are expected to be financed entirely with internally generated funds.

In accordance'with the terms of certain benefit trust agreements, the company deposited

$52 million into external trust funds in July 1997. Those agreements cover employee severance agreements, certain employee and director retirement plans and certain other employee and director plans. The obligation to make such deposits arose as a result of an unsolicited tender offer to acquire the company. The company will be able, to withdraw the funds by the end of the third quarter of 1998.

Financing Activities ~ The company's current capital structure provides it with the flexibility rcquircd to compete in a competitive energy market.

In June 1997 the company completed a four million share common stock repurchase program that was initiated in September 1996. Common stock equity was reduced by $47 million and 840 million in 1997 and 1996, respectively, as a result of those repurchases.

The company's other financing-related activities during 1997 consisted of:

The repayment, at maturity, of 825 million of 5 5/8% Series first mortgage bonds on January 1, 1997.

~

The redemption, at par, of the remaining $23 million of 9 7/8% Series first mortgage bonds, due February 1, 2020, pursuant to a sinking fund provision in the company's mortgage indenture.

The repayment, at maturity, of $25 million of 6 1/4% Series first mortgage bonds on September 1, 1997.

The repayment of approximately $71 million of commercial paper.

The company uses short-term, unsecured notes, usually commercial paper, to finance certain refundings and for other corporate purposes. There was $58 million and $ 129 million of commer-cial paper outstanding at December 31, 1997 and 1996, respectively, at weighted average interest rates of 6.3% and 5.8%, respectively.

The company also has a revolving credit agreement with certain banks that provides for borrowing up to $200 million until December 31, 2001. There were no amounts outstanding under this agreement during 1997 or 1996.

FORWARD-LOOKING STATEMENTS This Annual Report to Shareholders contains certain forward-looking statements that are based upon management's current expectations and information currently available and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.

Whenever used in this report, the words "anticipate," "believe," "estimate,"

"expect," "project," or similar expressions are intended to identify forward-looking.statements.

In addition to the assumptions and other factors referred to specifically in connection with such state-ments, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, regulatory developments; the rapidly changing and increasingly competitive electric and natural gas utility markets; the ability to obtain adequate and timely rate relief; cost recovery, including the potential effect of stranded costs; legal or admin-istrative proceedings; business conditions; technological developments; changes in the cost or availability of capital; labor developments; nuclear or environmental incidents; factors affecting the utility industry in general, such as deregulation and unbundling of energy services; weather condi-tions; changes in fuel supply or cost; and other considerations that may be disclosed from time to time in the company's publicly disseminated documents and filings. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

COMPUTER SOFTWARE CHANGES FOR THE YEAR 2000 Many of the company's computer systems must be modified due to certain programming limitations in recognizing dates beyond the year 1999. The company is addressing this issue to ensure the availability and integrity of its financial systems and the reliability of its operating systems. The company has established a process for evaluating and, where necessary, correcting any programming limitations. Costs associated with this process are estimated to total 813 million, of which $4 million had been incurred through December 31, 1997. It is expected that the process will be completed by June 1999. The company believes its process willproperly address this issue and prevent any adverse financial or operational effects.

~

0

~ -

~

1996 1995 1997 1996 over over 1996 1995 Change Change IThousands. except per share amounts)

Total Operating Revenues Operating Income Earnings Available for Common Stock Average Shares Outstanding Earnings Per Share Earnings Per Share Excluding Certain Charges Oividends Per Share

$2,129,989

$442,668

$175,211 68,153

$2.57

$2.81

$1.40

$2,067,532

$457,543

$168,711 71,127

$2.37

$2.51

$ 1 40

$2,017,228

$472,144

$177,969 71,503

$2.49

$2.49

$ 1.40 3%

(3%)

4%

(4%)

8%

12 2%

(3%)

(5%)

(1%)

(5oio) 1%

18 oa K

pcc ct r

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EARNINGS PER SHARE Earnings per share for 1997 were 20 cents higher than for 1996. An increase in electric wholesale deliveries added 16 cents, lower costs of natural gas purcltased added 15 cents and a reduction in the number of common shares outstanding added 11 cents to earnings per sllare in 1997. In 1996 a charge of 14i cents per sltare was recorded by NGE Enterprises, Inc. to write down an investment in EnerSoft Corporation. Those increases were partially offset by a cllarge in 1997 of 24 cents per share for fees related to an unsolicited tender offer, and the price of NUG power that decreased earnings 13 cents per sharc.

Earnings per share for 1996 were 12 cents lower than 1995 earnings per sharc. Without a charge of 14 cents per share to write down an investment in EnerSoft Corporation, 1996 earnings per share would have been two cents higher than the prior year. Higher electric and natural gas retail deliveries, mainly due to a combination of cold weather in the first quarter of 1996 and additional customers, added five cents per share to earnings. Lower intcrcst clrargcs in 1996 added nine cents per share to earnings and a reduction in preferred stock dividends, primarily due to the redemption 1997 Revenue Dollar Where it went Taxes Purchased electricity NDGs Other matorials and sorvicos Fuel Employoo wagos and benefits Depreciation and amortization Purchased gas Intorost to bondholdors, otc.

Dividends-common stock Retained in the business Purchasod electricity - other 4e 4'

2'1

'14 16C I

15ta

of $ 100 million of 8.95% preferred stock, net of related interest expense on commercial paper, added 10 cents per share to earnings. Earnings per share were reduced 15 cents primarily due to increases in mandated purchases of power from NUGs. I-Iigher operating costs further decreased earnings six cents per share.

INTEREST EXPENSE Interest expense, before the reduction for allowance for borrowed funds used during construction, decreased

$ 1 million in 1997 and $6 million in 1996. Both decreases were primarily the result of the retirement oF certain issues of long-term debt.

OPERATING RESULTS FOR THE ELECTRIC BUSINESS SEGMENT 1996 1995 1997 1996 over over 1996 1995 Change Change (Thousands)

Retail Deliveries Megawatt-hours Operating Revenues Operating Expenses Operating income 13,238

$1,792,164

$1,411,820

$380,344 13,216

$1,723,147

$1,322,885

$400,262 13,093

$ 1,708,297

$ 1,286,969

$421,328 4%

(5%)

1%

1'%

(5%)

Electric retail deliveries were flat for 1997 compared to 1996.

Electric retail deliveries increased in 1996 primarily because of cold weather in the first quarter and additional customers.

Operating Revenues:

Electric operating revenues for 1997 increased

$69 million over 1996 due to a $70 million increase in wholesale deliveries.

The $ 15 million increase in electric operating revenues for 1996 was primarily due to higher retail deliveries, which added

$ 14 million to revenues. An increase in wholesale deliveries added

$ 12 million to revenues and cleanges in prices effective August 1995, net of the effect of eliminating the fuel adjustment clause, added

$6 million to revenues. Those increases were partially offset by an increase in regulatory deferrals of $21 million.

Operatb>g Expenses:

Electric operating expenses increased

$89 million in 1997 primarily due to a $49 million increase in electricity purchased, due to purchases for wholesale deliveries and the price of NUG power, a $ 19 million increase in operating costs, primarily due to fees related to an unsolicited tender offer, and an $ 11 million increase in fuel costs, due to increased electric generation.

Electric operating expenses rose $36 million in 1996. Electricity purchases, mostly required purchases from NUGs, increased operating expenses

$42 million. That increase was partially offset by an $8 million decrease in fuel used in electric generation.

19 0

CC 0

V) z

OPERATING RESULTS FOR THE NATURALGAS BUSINESS SEGMENT tthousands)

Retail Oeliveries Oekatherms Operating Revenues Operating Expenses Operating Income 59,324

$337,825

$275,501

$62,324 1996 61,542

$344,385

$287,104

$57,281 1995 58,535

$308,931

$258,115

$50,816 1997 1996 over over 1996 1995 Change Change (4%)

~

5%

(2%)

11%

(4%)

11%

9%

13%

Natural gas deliveries decreased in 1997 primarily due to one low-margin customer that closed its cogeneration plant. Excluding the loss of that customer, natural gas deliveries increased 2%.

Natural gas deliveries increased in 1996 due to a combination of cold weather in the first quarter and additional customers.

-20 0a o:

C C

r0) 0)

0 N

z Operating Revenrres: The $7 million decrease in natural gas operating revenues for 1997 was primarily due to lower retail deliveries that reduced revenues

$12 million and a $3 million decrease in other revenues. Those decreases were partially offset by a more favorable sales mix that added

$9 million to revenues.

Natural gas operating revenues for 1996 increased

$35 million over 1995 revenues. A change in rate structure effective December 1995 and changes in rates effective August 1995 added

$20 million to revenues. Higher retail deliveries added

$9 million to revenues and an increase in transportation of customer-owned gas added

$4 million to revenues for the year.

Operating lwpenses: Natural gas operating expenses decreased

$ 12 million in 1997 due to a decrease in the cost of natural gas purchased of $ 16 million, partially offset by an increase in operating costs of $3 million that was primarily for fees related to an unsolicited tender offer.

Comparing 1996 to 1995, natural gas operating expenses rose $29 million. An increase in natural gas purchased, due to higher commoclity costs and higher deliveries, added

$23 million and an increase in certain operating costs added

$5 million to expenses.

CONSOLIDATED STATEMENTS Or INCOME Year Ended December 31 (Thousands, except per share amounts)

Operating Revenues Electric Natural gas Total Operating Revenues Operating Expenses Fuel used in electric generation Electricity purchased Natural gas purchased Other operating expenses Maintenance Depreciation and amortization Other taxes Total Operating Expenses Operating Income Interest Charges, Net Other Income and Deductions Income Before Federal Income Taxes Federal Income Taxes Net Income Preferred Stock Dividends S1,792,164 337,825 2.129,989 233,180 409,883 164,661 364,219 110,373 198,559 206,446 1,687,321 442,668 123,199 17,203 302,266 117,713 184,553 9,342 1996

$1,723,147 344,385 2,067,532 222,102 360,753 180,866 342,455 107,697 189,401 206,715 1,609,989 457,543 122,729 48,630 286,184 107,943 178,241 9,530 1995

$ 1,708,297 308,931 2,017,228 229,759 318,440 157,476 326.922 116,807 184,770 210,910 1,545,084 472,144 129,567 30,023 312,554 115,864 196,690 18,721 Earnings Available for Common Stock Earnings Per Share Average Shares Outstanding

$175,211

$2.57 68,153 The notes on pages 26 through 38 are an integral part of the financial statements.

$ 168,711

$2.37

$177,969

$2.49

71,127, 71,503

'21 0Q K

o Cr 0) to ro z

CONSOLIDATED BALANCE SHEETS 22 December 31 IThousaads)

Assets Current Assets Cash and cash equivalents Special deposits Accounts receivable, net Fuel, at average cost Materials and supplies, at average cost Prepayments Accumulated deferred federal income tax benefits, net Total Current Assets UtilityPlant, at Original Cost Electric Natural gas Common Less accumulated depreciation Net UtilityPlant in Service Construction work in progress Total UtilityPlant Other Property and Investments, Net Regulatory and Other Assets Regulatory assets Unfunded future federal income taxes Environmental remediation costs Unamortized debt expense Demand-side management program costs Other Total regulatory assets Other assets Total Regulatory and Other Assets Total Assets S8,168 3,170 189,008 43,706 41,56'I 68,452 2.148 356,213 5,234,725 576,683 152.034 5,963,442 2,093,274 3,870,168 52,104 3,922,272 143,449 243,129 82,900 76,418 64,466 113,637 580,550 26,197 606,747 S5,028,681 1996

$8,253 31,364 189,043 36,472 43,044 47,169 3,424 358,769 5,177,365 529,023 151,290 5,857,678 1,933,599 3,924,079 58,285 3.982,364 99,221 269,767 32,100 80,745 71,425 149,561 603,598 15,729 619,327

$5,059,681 The notes on pages 26 through 38 are an integral part of the financial statements.

CONSOLIDATED BALANCE SIIEETS December 31 lrhousands)

Liabilities Current Liabilities Current portion of long-term debt Commercial paper Accounts payable and accrued liabilities Interest accrued Taxes accrued Other Total Current Liabilities Regulatory.and Other Liabilities Regulatory liabilities Deferred income taxes - unfunded future federal income taxes Oeferred income taxes Other Total regulatory liabilities Other liabilities Deferred income taxes Other postretirement benefits Environmental remediation costs Other Total other liabilities Total Liabilities Commitments Preferred Stock Redeemable Solely at the Option of the Company Preferred Stock Subject to Mandatory Redemption Requirements Common Stock Equity Common stock ($6.66 2/3 par value, 90,000 shares authorized and 67,508 and 69,670 shares outstanding at December 31, 1997 and 1996, respectively)

Capital in excess of par value Retained earnings Treasury stock, at cost (1,829 shares)

Total Common Stock Equity Total Liabilities and Stockholders'quity The notes on pages 26 through 38 are an integral part of the financial statements.

$38,240 58,000 124,981 20,500 6,146 79,631 327,498 99,126 81,986 79,709 260,821 753,722 117,760 82,900 73,021 1,027,403 1,450,224 3,065,946 134,440 25,000 462,250 811,648 568,844 (39,447) 1,803,295

$5,028,681 1996

$83,488 129,300 121,123 22,195 71,324 427,430 109,065-94,004 65,471 268,540 751,553 95,195 32,100 74,627 953,475 1,480,814 3,130,259 134,440 25,000

, 464,469 816,384 489,129 1,769,982

$5,059,681 l0 n

0n Cln ~

K 23 R-K 0) 0)

T to Vl Z

CONSOLIDATED STATEMENTS OF CASH PLOWS 0

K 8

C C

r0) 0)

-0 ro z

Year Ended December 31 IThousands)

Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization Deferred fuel and purchased gas Federal income taxes and investment tax credits deferred, net Changes in current operating assets and liabilities Accounts receivable Inventory Accounts payable and accrued liabilities Other, net Net Cash Provided by Operating Activities Investing Activities Utilityplant capital expenditures Proceeds from governmental and other sources Expenditures for other property and investments Net Cash Used in Investing Activities Financing Activities Issuance of pollution control notes Repurchase of common stock Treasury stock acquired, net Repayments of first mortgage bonds and preferred stock, including net premiums Changes in funds set aside for first mortgage bond repayments Long-term notes, net Commercial paper, net Dividends on common and preferred stock Net Cash Used in Financing Activities Net Decrease in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year The notes on pages 26 through 38 are an integral part of the financial statements.

$184,553 198,559 1.313 5,884 35 (5,751) 3,858 67,792 456,243 (123,768) 1,443 (57,803)

(180,128)

(7,245)

(39,447)

(73,000) 25,000 (5,203)

(71,300)

(105,005)

(276,200)

(85) 8,253

$8,168 1996

$ 178,241 189,401 1,066 28,928 6,791 (1,025) 3,486 52,144 459,032 (214,373) 2,977 (916)

(212,312)

(40,198)

(171,478)

(25,000)

(2,581) 100,680 (111,323)

(249,900)

(3,180) 11,433

$8,253 1995

$ 196,690 184,770 15,022 52,362 (40,169) 19,286 10,281 14,913 453,155 (163,401) 5,621 (3,145)

(160,925) 37,000 (92,395)

(5,504)

(123,280)

(118,940)

(303,119)

(10,889) 22,322

$11,433

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY I

tThousands, except per share amounts)

Common Stock Outstanding Capital in

$6.6653 Par Value Excess of Shares Amount Par Value Retained Treasury Earnings Stock Total Balance, January 1, 1995 71,503

$476,686

$841,624

$346,547

$1,664,857 Net income Cash dividends declared Preferred stock (at serial rates)

Redeemable

- optional

- mandatory Common stock ($1.40 per share)

Amortization of capital stock issue expense 818 196,690 (8,196)

(10,525)

(100,104) 196,690 (8,196)

(10,525)

(100,104) 818 Balance, December 31, 1995 71,503 476,686 842,442 424,412 1,743,540 Net income Cash dividends declared Preferred stock (at serial rates)

Redeemable

- optional

- mandatory Common stock ($1.40 per share)

Common stock repurchase Premium paid on preferred stock redemption, net Amortization of capital stock issue expense (1,833)

(12,217)

(27,981) 1,923 178,241 (7,955)

. (1,575)

(99,611)

(4,383) 178,241 (7,955)

(1,575)

(99,611)

(40,198)

(4,383) 1,923 4

4 4

4c 4

25 Balance, December 31, 1996 Net income Cash dividends declared Preferred stock (at serial rates)

Redeemable

- optional

- mandatory Common stock ($1.40 per share)

Common stock repurchase Treasury stock acquired, net Amortization of capital stock issue expense 69,670 (333)

(1,829)

(2,219)

(5,026) 56 (7,767)

(1,575)

(95,496) 234 464,469 816,384 489,129 184,553

$(39,447) 1,769,982 184,553 (7,767)

(1,575)

(95,496)

(7,245)

(39,391) 234 0a

'rc rm 6

V) z Balance, December 31, 1997 67,508

$462,250

$811,648

$568,844

$(39,447)

$1,803,295 The notes on pages 26 through 38 are an integral part of the financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26 0a K

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T 0

CO Principles of consolidation o The consolidated financial statements include the company's subsidiaries, Somerset Railroad Corporation and NGE Enterprises, Inc.

Utilityplant o The cost of repairs and minor replacements is charged to the appropriate operating expense accounts. The cost of renewals and betterments, including indirect costs, is capitalized.

The original cost of utilityplant retired or otherwise disposed of and the cost of removal less salvage are charged to accumulated depreciation.

Depreciation and amortization

~ Depreciation expense is determined using straight-line rates, based on the average service lives of groups of depreciable property in service. Depreciation accruals were equivalent to 3.5% of average depreciable property for 1997, 1996 and 1995.

Amortization expense includes the amortization of certain regulatory assets authorized by the PSC.

Accounts receivable o The company has an agreement that expires in November 2001 to sell, with limited recourse, undivided percentage interests in certain of its accounts receivable from cus-tomers. The agreement allows the company to receive up to $ 152 million from the sale of such interests. At December 31, 19/7 and 1996, accounts receivable on the consolidated balance sheets are shown nct of $ 152 million of interests in accounts receivable sold. All fees associated with the program are included in other income and deductions on the consolidated statements of income and amounted to approximately $9 million in 1997 and 1996, and $ 10 million in 1995. Accounts receivable on the consolidated balance sheets are also shown net of an allowance for doubtful accounts of $7 million at December 31, 1997 and 1996. Bad debt expense was $17 million,

$ 19 million and $ 18 million in 1997, 1996 and 1995, respectively.

Income taxes o The company files a consolidated federal income tax return with SRC and NGE.

Deferred income taxes are provided on all temporary differences between financial statement basis and taxable income in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Investinent tax credits, which reduce federal income taxes currently payable, were deferred and are being amortized over the estimated lives of the applicable properties.

Utilityoperations o The company had been accounting for the economic effects of regulation on all of its utilityoperations in accordance with Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation. During 1997 the FASH's Emerging Issues Task Force issued guidance related to the continued application of Statement 71.

during the electric utility industry's transition to competition. Accordingly, upon PSC approval of the company's restructuring plan in January 1998, the company's coal-fired generation business discontinued application of Statement 71 and applied Statement of Financial Accounting Standards No. 101, Regulated Enterprises Accounting for the Discontinuation of Application of FASB Statement 71. The application of Statement 101 to that business did not affect the company's financial position or results of operations because any above-market generation costs will be recovered by the regulated electric and natural gas delivery business.

0

Regulatory assets and liabilities o Pursuant to Statement 71, the company capitalizes, as regulatory assets, incurred costs that are probable of recovery in future electric and natural gas rates. The company also records as regulatory liabilities, obligations to customers to refund previ-ously collected revenue or to spend revenue collected from customers on future costs. In accor-dance with the company's restructuring plan and current natural gas rate settlement agreement, the company is no longer deferring most costs tlaat were previously subject to deferral accounting.

The company's regulatory assets and liabilities consisted of the following:

December 31 (Thousands)

Unfunded future federal income taxes Deferred income taxes-unfunded future federal income taxes Environmental remediation costs Deferred income taxes Unamortized debt expense DSM program costs MUG termination agreements Other postretirement benefits Other Total Assets

$243,129 82,900 76,418 64,466 44,579 14,494 54,564

$580,550 Liabilities

$99,126 81,986 79,709

$260,821 1996 Assets

$269,767 32,100 80,745 71,425 43,991 18,417 87,153

$603,598 1996 Liabilities

$109,065 94,004 65,471

$268,540 Unfunded future federal income taxes and deferred income taxes are amortized as the related temporary differences reverse. Unamortized debt expense is amortized over the lives of the related debt issues.

DSM program costs, other regulatory assets and other regulatory liabilities are amor-tized over various periods in accordance with the company's restructuring plan and current natural gas rate settlement agreement.

The company is earning a return on all regulatory assets for which the company has spent funds.

The company's restructuring plan provides that any above-market generation costs will be transferred to the regulated electric and natural gas delivery business and recovered through a nonbypassable competitive transition charge. The regulatory assets and regulatory liabilities of the coal-fired generation business will be recovered by the regulated electric and natural gas delivery business. Ifthe company could no longer meet the criteria of Statement 71 for all or a separable part of its electric and natural gas delivery business, the company may have to record as expense or revenue certain of its regulatory assets and regulatory liabilities and may have to record as a loss the amount for power purchase contracts with NUGs that is above the estimated competitive market price of power. These items are currently recovered in rates.

Consolidated Statements of Cash Flows o The company considers all highly liquid investments with a maturity or put date of three months or less when acquired to be cash equivalents. Those investments are included in cash and cash equivalents on the consolidated balance sheets.

Total income taxes paid were $ 111 million, $98 million and $55 million for the years ended December 31, 1997, 1996 and 1995, respectively.

Interest paid, net of amounts capitalized, was $ 107 million, $ 112 million and $ 118 million for the years ended December 31, 1997, 1996 and 1995, respectively.

27 0a CC P

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Risk management o The company uses risk management techniques such as natural gas future and option contracts to manage the company's exposure to fluctuations in natural gas commodity prices. Such contracts allow the company to fix margins on sales of natural gas generally forecast-ed to occur over the next 18 months. The cost or benefit of natural gas future and option contracts is included in the commodity cost when the related sales commitments are fulfilled. Gains and losses resulting from the use of those contracts for 1997 and 1996 were not material to the compa-ny's financial position or results of operations. The company does not hold or issue financial instruments for trading or speculative purposes.

Stock-based compensation o The company accounts for its stock-based compensation plans in accordance with Accounting Principles Hoard Opinion No. 25, Accounting for Stock Issued to Employees, as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Total stock-based compensation cost recognized in the income state-ment for the year ended December 31, 1997, in accordance with Opinion 25, was the same as ifthe company accounted for its plans in accordance with Statement 123.

Estimates o Preparation oF the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

28 3.

Reclassifications o Certain amounts have been reclassified on the consolidated financial statements to conform with the 1997 presentation.

Year ended December 31 tThou sands)

Current Deferred, net Accelerated depreciation AMTcredit Miscellaneous ITC Total

$111,829 29,070 (5)

(18,125)

(5,056)

$117,713 1996

$79,015 52,572 310 (17,617)

(6,337)

$107,943 1995

$63,502 55,493 18,009 (14,926)

(6,214)

$115,864 The company's effective tax rate differed from the statutory rate of 35% due to the following:

Year ended December 31 trhousonds)

Tax expense at statutory rate Depreciation not normalized ITC amortization Research & Development credit Other, net Total

$105,792 16,854 (6359) 1,239 187

$117,713 1996

$100,165 20,542 (6,337) 83 (6,510)

$ 107,943 1995

$109,396 19,774 (6,214)

(5,547)

(1,545)

$115,864

The company's deferred tax assets and liabilities consisted of the following:

December 31 Phousands)

Current Deferred Tax Assets Noncurrent Deferred Taxes Depreciation Unfunded future federal income taxes Accumulated deferred ITC Future income tax benefit-ITC Other Total Noncurrent Deferred Tax Liabilities Valuation Allowance Less amounts classified as regulatory liabilities Deferred income taxes unfunded future federal income taxes Deferred income taxes Noncurrent Deferred Income Taxes

$2,148

$775,943 99,126 114,640 (40,087)

(16,399) 933,223 1,611 99,126 81,986

$753,722 1996

$3,424

$761,794 109,065 119,696 (41,847) 4,529 953,237 1,385 109,065 94,004

$751,553

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The company has a revolving credit agreement with certain banks that provides for borrowing up to $200 million through December 31, 2001. The revolving credit agreement does not require com-pensating balances. The company had no outstanding loans under the revolving credit agreement at December 31, 1997 or 1996. At the option of the company, the interest rate on borrowings is related to the prime rate, the London Interbank Offered Rate or the interest rate applicable to cer-tain certificates of deposit. The agreement also provides for the payment of a commitment fee that can fluctuate from.10% to.25% depending on the credit ratings of the company's first mortgage bonds. The commitment fee was.125% at December 31, 1997, 1996 and 1995.

The company uses short-term unsecured notes, usually commercial paper, to finance certain refundings and for other corporate purposes.

The weighted average interest rates on commercial paper balances at December 31, 1997, 1996 and 1995 were 6.3%, 5.8% and 6.1%, respectively.

29

-0 K

0) 0I z

The company makes investments through its subsidiary, NGE Enterprises, Inc., in providers of energy, financial and environmental services.

The company's net investment in NGE was $20 million, $ 17 million and $34 million as of December 31, 1997, 1996 and 1995, respectively, the majority of which is included in other property and investments, net on the consolidated balance sheets.

Net losses related to NGE of $4 million,

$21 million and $ 12 million for the years ended December 31, 1997, 1996 and 1995, respectively, are included in other income and deductions on the consolidated statements of income.

8

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At December 31, 1997 and 1996, long-term debt was:

Maturity Oates Interest Rates Amount 1996 IThousaudsl First mortgage bonds (1)

Pollution control notes (2)

Long-term notes Various long-term notes Obligations under capital leases Unamortized premium and discount on debt, net 1998 to 2023 6 1/2% to 9 7/8%

2006 to 2034 3.65% to 6.15%

12/31/00

$830,000 613,000 28,000 12,569 12,269 (7,374)

$903,000 613,000 29,900 15,809 10,699 (8,106)

Less debt due within one year included in current liabilities Total 1,488,464 38,240

$1,450,224 1,564,302 83,488

$ 1,480,814 At December 31, 1997, long-term debt and capital lease payments that will become due during the next five years are:

1998 (Thousands)

$38,240 1999

$4,754 2000

$30,049 2001

$51,766 2002

$ 151,462 30 0a Iu P

0 Z

(1) The company's first mortgage bond indenture constitutes a direct first mortgage lien on substantially all utilityplant. The mortgage also provides for a sinking and improvement fund.

This provision requires the company to make an annual cash deposit with the Trustee equivalent to 1% of the principal amount of all bonds delivered and authenticated by the Trustee prior to January 1 of that year (excluding any bonds issued on the basis of the retirement of bonds). The company satisfied the requirement by depositing $23 million in cash in 1997. The funds were used to redeem, at par, $23 million of 9 7/8% Series first mortgage bonds, due Pebruary 2020, in Pebruary 1997.

(2) Pixed-rate pollution control notes totaling $306 million were issued to secure the same amount of tax-exempt pollution control revenue bonds issued by a governmental authority. The interest ntes range from 5.70% to 6.15%.

Adjustable-rate pollution control notes totaling $ 132 million were issued to secure the same amount of tax-exempt adjustable-rate pollution control revenue bonds (Adjustable-rate Revenue Bonds) issued by a governmental authority. The Adjustable-rate Revenue Bonds bear interest at rates nnging from 3.65% to 3.80% through dates preceding various annual interest rate adjustment dates. On the annual interest rate adjustment dates the interest rates willbe adjusted, or at the option of the company, subject to certain conditions, a fixed nte of interest may become effective.

Bond owners may elect, subject to certain conditions, to Itave their Adjustable-ntc Revenue Bonds purchased by the Trustee.

Multi-mode pollution control notes totaling $175 million were issued to secure the same amount of tax-exempt multi-mode pollution control refunding revenue bonds (Multi-mode Revenue Bonds) issued by a governmental authority. The Multi-mode Revenue Bonds have a structure that allows the interest rates to be based on a daily rate, a weekly rate, a commercial paper rate, an auction rate, a term rate or a fixed rate. Bond owners may elect, while the Multi-mode Revenue Bonds bear interest at a daily or weekly rate, to have their bonds purchased by the Registrar and Paying

Agent. The maturity dates of the Multi-mode Revenue Bonds are February 1, 2029, June 1, 2029, and October 1, 2029, and can be extended subject to certain conditions. At December 31, 1997, the interest rate for the multi-mode pollution control notes was at the daily rate. The weighted average interest rate for all three series was 3.42%, excluding letter of credit fees, for the year ended December 31, 1997.

The company has irrevocable letters of credit that support certain payments required to be made on the Adjustable-rate Revenue Bonds and Multi-mode Revenue Bonds, and tlaat expire on various dates. Ifthe company is unable to extend the letter of credit tlaat is related to a particular series of Adjustable-rate Revenue Bonds, that series will have to be redeemed unless a fixed rate of interest becomes effective. Multi-mode Revenue Bonds are subject to mandatory purchase upon any change in the interest rate mode and in certain other circumstances.

Payments made under the letters of credit in connection with purclzases of Adjustable-rate Revenue Bonds and Multi-mode Revenue Bonds are repaid with the proceeds from the remarketing of those Bonds. To the extent the proceeds are not sufficient, the company is required to reimburse the bank that issued the letter of credit.

At December 31, 1997 and 1996, serial cumulative preferred stock was:

Par Value Per Share Redeemable Prior to Per Share

$ 104.00 103.75 101.00 102.00 102.00 102.00 26.85 25.00 27.50 25.00 12/1/98 Thereafter 12/1/98 Thereafter Adjustable Rate (3) 25 Series (Thousands)

Redeemable solely at the option of the company:

3 75%

$ 100 4 1/2% (1949) 100 415 100 4.40%

100 4.15% (1954) 100 6.48%

100 7 40% (2) 25 Shares Authorized and Outstanding (1) 150,000 40,000 14,000 55,200 35,200 300,000 1,000,000 2,000,000

$15,000 4,000 1,400 5,520 3,520 30,000 25,000 50,000 Amount 1996

$ 15,000 4,000 1,400 5,520 3,520 30,000 25,000 50,000 31 0a o."

C

~ 4 0) 0)

0 V) z Total Subject to mandatory redemption requirements:

6.30% (4) 100 1/1/99 103.15 250,000

$134,440

$25,000

$134,440

$25,000 At December 31, 1997, there were no preferred stock redemptions or annual redeemable preferred stock sinking fund requirements for the next five years.

(1) At December 31, 1997, there were 1,610,600 slaares of $ 100 par value preferred stock, 7,800,000 shares of $25 par value preferred stock and 1,000,000 shares of $ 100 par value preference stock authorized but unissued.

(2) The company is restricted in its ability to redeem this Series prior to December 1, 1998.

(3) The payment on this Series, for April 1, 1998, is at an annual rate of 5.03% and subsequent payments can vary from an annual rate of 4% to 10o/o, based on a formula included in the company's Certificate of Incorporation. The company is restricted in its ability to redeem this Series'prior t6 December 1, 1998.

(4) On January 1 of each year from 2004 through 2008, the company must redeem 12,500 shares at par, and on January 1, 2009, the company must redeem the balance of the shares at par. This Series is redeemable at the option of the company at $103.15 per share prior to January 1, 1999.

The $103.15 price will be reduced annually by 63 cents for the years ending 1999 through 2002; thereafter, the redemption price is $ 100.00. The company is restricted in its ability to redeem this Series prior to January 1, 2004.

Dividend Limitations: Common stock dividends are limited ifcommon stock equity falls below 25% of total capitalization, as defined in the company's Certificate of Incorporation.

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MM Pensions o The company has a noncontributory retirement annuity plan that covers substantially all employees.

Benefits are based principally on the employee's length of service and compensation for the five highest paid consecutive years during the last 10 years of service. It is the company's policy to fund pension costs accrued each year to the extent deductible for federal income tax purposes.

Net pension benefit included the following components:

Year ended December 31 1996 1995 32 K

K M

0 V) z (Thousands)

Service cost: Benefits earned during the year Interest cost on PBO Actual return on plan assets Net amortization and deferral Net pension benefit The funded status of the plan was:

December 31 (Thousands)

Actuarial present value of ABO Vested Nonvested Total Fair value of plan assets Actuarial present value of PBO Plan assets in excess of PBO Unrecognized net transition asset Unrecognized net gain Unrecognized prior service cost Net pension asset Assumptions used to determine actuarial valuations Discount rate used to determine PBO Rate of compensation increase used to determine PBO Long-term rate of return on plan assets for net pension benefit

$19,317 50,951 (213,382) 116,389

$(26,725)

$18,593 46,070 (138,957) 58,162

$(16,132)

$513,431 101,181

$614,612 S(1,176,184) 746,008 (430,176) 44,660 372,046 (28,307)

S(41,777) 7.0 4 25%

85%

$16,391 45,400 (185,816) 111,209

$(12,816) 1996

$472,786 52,272

$525,058

$(995,795) 679,778 (316,017) 51,898 275,531 (26,464)

$(15,052) 7 25oio 4.75%

8.0%

Plan assets primarily consist of domestic and international equity securities; U.S. agency, corporate and Treasury bonds; and cash equivalents.

Postretirement benefits other than pensions o The company I)as postretirement benefit plans, such as a comprehensive health insurance plan and a prescription drug plan, that provide certain benefits for retired employees and their dependents.

Substantially all of the company's employees who retire under the company's pension plan may become eligible for those benefits at retirement.

The postretirement benefit plans were unfunded as of December 31, 1997 and 1996.

The net periodic postretirement benefits cost other than pensions (below) recognized on the income statements for 1997, 1996 and 1995 represent the portion of costs related to Statement of Financial Accounting Standards No. 106, Employers'ccounting for Postretirement Benefits Other Than Pensions, tl)at the company i)as been allowed to collect from its customers. The company has deferred

$ 14 million and $18 million of Statement 106 costs as of December 31, 1997 and 1996, respectively. The company expects to recover any deferred Statement 106 amounts by the year 2000.

I Net postretirement benefits cost other titan pensions included the following components:

Year ended December 31 1996 1995 (Thousands)

Service cost: Benefits accumulated during the year Interest cost on APBO Amortization of transition obligation over 20 years Amortization of gain Deferral for future recovery Net periodic postretirement benefits cost

$7,010 17,075 10330 (3,565)

(11,766)

$19,084

$6,436 15,795 10,330 (3,246)

(8,950)

$20,365

$5,412 15,228 10,330 (4,575)

(7.742)

$18,653 December 31 (Thousands)

APBO Retired employees Fully eligible active plan participants Other active plan employees

$103,762 22,693 132,429 1996

$ 103,912 15,259 107,022 The status of the plans for postretirement benefits other tl)an pensions, as reflected in the company's consolidated balance sheets, was as follows:

I

,0 02 33 K

P 0

2 Total APBO Less unrecognized transition obligation Less unrecognized net gain Accrued postretirement liability 258,884 154,948 (13,824)

$117,760 226,193 165,278 (34,280)

$95,195 An 8.0% annual rate of increase in the per capita costs of covered health care benefits was assumed for 1998, gradually decreasing to 5% by the year 2003. Increasing the assumed health care cost trend rates by 1% in each year would increase the APBO as ofJanuary 1, 1998, by $42 million and increase the aggregate of the service cost and interest cost components of the net postretirement benefits cost for 1997 by $5 million. Discount rates of 7.0o/o and 7.25% were used to determine the APBO in 1997 and 1996, respectively.

0 0ao CI P

0 V) 2 Nine Mile Point unit 2 o The company lns an undivided 18% interest in the output and costs of NMP2, which is operated by Niagara Molnwk Power Corporation. Ownership of NMP2 is slnred with Niagara Molnwk 41%, Long Island Lighting Company 18%, Rochester Gas and Electric Corporation 14% and Central I-Iudson Gas & Electric Corporation 90/0. The company's slnre of the rated capability is 207 megawatts. The company's share of net utility plant investment, excluding nuclear fuel, was approximately $591 million and $610 million, at December 31, 1997 and 1996, respectively. The accumulated provision for depreciation was approximately $162 million and

$ 144 million, at December 31, 1997 and 1996, respectively. The company's slnre of operating expenses is included in the consolidated statements of income.

As part of its restructuring plan, the company will put up for sale its 18% interest in NMP2.

Nuclear insurance o Niagani Molnwk maintains public liabilityand property insurance for NMP2.

The company reimburses Niagara Mohawk for its 18% share of those costs.

The public liabilitylimitfor a nuclear incident is approximately $8.3 billion. Should losses stem-ming from a nuclear incident exceed the commercially available public liability insurance, each liccnsce of a nuclear facility would be liable for up to $76 million per incident, payable at a rate not to exceed

$ 10 million per year. The company's maximum liabilityfor its 18% interest in NMP2 would be approximately $ 14 million per incident. The $76 million assessment is subject to periodic inflation indexing and a 5% surclnrge should funds prove insufficient to pay claims associated with a nuclear incident. The Price-Anderson Act also requires indemnification for precautionary evacuations whether or not a nuclear incident actually occurs.

Niagara Mohawk lns procured property insurance for NMP2 aggregating approximately $2.8 billion through the Nuclear Insurance Pools and the NEIL. In addition, the company lns purclnsed NEIL insurance coverage for the extra expense tint would be incurred by purclnsing replacement power during prolonged accidental outages. Under NEIL programs, should losses resulting from an incident at a member facility excccd the accumulated reserves of NEIL, each member, including the company, would be liable for its share of the deficiency. The company's maximum liability per incident under the property damage and replacement power coverages is approximately $2 million.

Nuclear plant decommissioning costs o Based on the results of a 1995 decommissioning study, the company's 18% share oF the cost to decommission NMP2 is $ 155 million in 1998 dollars

($422 million in 2026 when NMP2's operating licerise willexpire). The estimated annual contribution rieeded to cover the company's slnre of costs as outlined in the study is approximately $4 million.

The company's estimated liabilityfor decommissioning NMP2 using the NRC's minimum funding requirement is approximately $83 million in 1998 dollars. The company's electric rates currently include an annual allowance for decommissioning of $2 million in 1998, which approximates the NRC's minimum funding requirement, and $4 million in subsequent years. Decommissioning costs are charged to depreciation and amortization expense and are recovered over the expected life of the plant. In its restructuring plan, approved by the PSC in January 1998, the company used the 1995 decommissioning study as a basis for calculating the amount of decommissioning costs.

The company has established a Qualified Fund under applicable provisions of the federal tax law to comply with NRC funding regulations. The balance in the fund, including reinvested earnings, was approximately $ 13 million and $11 million at December 31, 1997 and 1996, respectively. Those amounts are included on the consolidated balance sheets in other property and investments, net. The related liabilityfor decommissioning is included in other liabilities other. At December 31, 1997, the external trust fund investments were classified as available-for-sale, and their carrying value approximated fair value.

In 1996 the Financial Accounting Standards Board issued an exposure draft, Accounting for Certain Liabilities Relatecl to Closure and Removal of Long-Lived Assets. The exposure drpft proposes that companies recognize the present value of estimated decommissioning costs. Iftlie final statement includes that requirement, the estimated liabilitythe company would have to recognize on its bal-ance sheet related to decommissioning NMP2 is approximately $80 million, based-on the 1995 decommissioning study.

Homer City o The company has an undivided 50% interest in the output and costs of the I-Iomer City Generating Station, which comprises three generating units. The station is owned with Pennsylvania Electric Company and is operated by its affiliate, GPU Generation, Inc. The company's share of the rated capability is 953 megawatts, and its net utility plant investment was approximately $262 million and $269 million at December 31, 1997 and 1996, respectively. The accumulated provision for depreciation was approximately $ 190 million and $181 million, at December 31, 1997 and 1996, respectively. The company's share of operating expenses is included in the consolidated statements of income.

GPU, Inc., the parent company of GPU Generation, announced in October 1997 that they will sell their non-nuclear generating stations, including their 50% interest in Homer City. The company's restructuring plan calls for the company to auction its coal-fired generating stations, including its 50% interest in I-Iomer City, and completion of the auction transactions by August 1, 1999. The company does not expect these transactions to have an adverse effect on its financial position or results of operations.

35 3.

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Capital expenditures o The company has commitments in connection with its capital expenditure program and estimates that expenditures, including nuclear fuel and AFDC, for 1998, 1999 and 2000 will approximate

$134 million, $ 152 million and $ 146 million, respectively, and are expected to be financed entirely with internally generated funds. The program is subject to periodic review and revision. Capital expenditures will be primarily for the extension of service, necessary improvements to existing facilities and compliance with environmental requirements.

Nonutility generator power purchase contracts o During 1997, 1996 and 1995 the company cxpensed approximately $324 million, $320 million and $284 million, respectively, for NUG power, including termination costs. The company estimates that NUG power purchases, including termination costs, willtotal $340 million in 1998, $348 million in 1999 and $356 million in 2000.

The company has been notified by the EPA and the NYSDEC, as appropriate, that it is among the PRPs who may be liable to pay for costs incurred to remediate certain hazardous substances at nine waste sites, not including the company's inactive gas manufacturing sites, which are discussed below. With respect to the nine sites, six sites are included in the New York State Registry of Inactive Hazardous Waste Sites and two of the sites are also included on the National Priorities list.

36 0a K

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Any liabilitymay be joint and several for certain of those sites. The company has recorded an estimated liabilityof $ 1 million related to six of the nine sites, which is reflected in the company's consolidated balance sheets at December 31, 1997. The ultimate cost to remediate the sites may be significantly more than the estiinated amount and will depend on such factors as the remedial action plan selected, the extent of site contamination and the portion attributed to the company.

The company ltas a program to investigate and perform necessary remediation at its known inactive gas manufacturing sites. In March 1994 and October 1996 the company entered into Orders on Consent with the NYSDEC requiring the company to investigate and, where necessary, remediate 34 of the company's 38 known inactive gas manufacturing sites. With respect to the 38 sites, eight sites are included in the New York State Registry.

The company's estimate for all costs related to investigation and remediation of the 38 sites is a range of $81 million to $ 182 million at December 31, 1997.

That estimate is based on both known and potential site conditions and multiple remediation alternatives for each of the sites.

The estimate has not been discounted and is based on costs in 1996 dollars that the company expects to incur through the year 2017. The estimate could change materially, based on facts and circumstances derived from site investigations, changes in required remedial action, changes in technology relating to remedial alternatives and changes to current laws and regulations.

The liabilityto investigate and perform remediation, as necessary, at the known inactive gas manufacturing sites, is reflected in the company's consolidated balance sheets at December 31, 1997 and 1996, in the amount of $81 million and $31 million, respectively. The company has recorded a

corresponding regulatory asset, since it expects to recover such expenditures in rates. The company has notified and entered into negotiations with its former and current insurance carriers so that it may recover from them certain of the cleanup costs. The company is unable to predict the amount of insurance recoveries, ifany, that it may obtain.

A Certain of the company's financial instruments had carrying amounts and estimated fair values, based on the quoted market prices for the same or similar issues of the same remaining maturities, as follows:

December 31 IThousands)

Other investments external trust funds Preferred stock subject to mandatory redemption requirements First mortgage bonds Pollution control notes Carrying Amount

$53,049

$25,000

$822,626

$613,000 Estimated Fair Value

$53,708

$24,315

$882,616

$625,149 1996 Carrying Amount

$25,000

$894,894

$613,000 1996 Estimated Fair Value

$22,531

$938,873

$623,666 The carrying amount for the following items approximates estimated fair value because of the short maturity, within one year, of those instruments: cash and cash equivalents, commercial paper and interest accrued.

95

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Certain information pertaining to the electric and natural gas operations of the company follows:

(Thousands)

Operating Revenues Income Depreciation and amortization Capital expenditures Identifiable assets"

$1,792,164

$380,344

$183304

$78,667

$4,273,100 Electric 1996

$1,723,147

$400,262

$176,906

$132,190

$4,376,814 1995

$ 1,708,297

$421,328

$ 172,831

$ 119,159

$4,525,541

$337,825

$62,324

$15,255

$45,240

$588,773 Natural Gas 1996

$344,385

$57,281

$ 12,495

$82,625

$550,196 1995

$308,931

$50,816

$ 11,939

$45,142

$493,537

" Assets used in electric, natural gas and energy services operations not included above were S166,808, S132,671 and S95,253 at December 31, 1997, 1996 and 1995, respectively. They consist primarily of cash and cash equivalents, special deposits, prepayments and subsidiaries'ssets.

Special deposits include restricted funds tleat are set aside for preferred stock and long-term debt redemptions. The carrying amount approximates fair value because the special deposits have been invested in securities with a short-term maturity, within one year.

37 0Q o:

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Quarter ended IThonsands, except per share amounts)

March 31 June 30 Sep. 30 Dec. 31 Operating revenues Operating income Net income Earnings available for common stock Earnings per share Dividends per share Average shares outstanding Common stock price"'igh Low

$588,137

$167,527

$81,977

$79,662

$1.15

$.35 69,353

$24.50

$21.25 S470,370

$82,743

$26,275

$23,923

$.35

$.35 68,279

$22.50

$20.63

$492,829

$80,826

$28,277 u'25,929"'38(a

$.35 67,503

$27.19

$20.81

$578,653

$111,572

$48,024

$45,697

$.68 S.35 67,504

$35.75

$25.75 1996 1996 1996 1996 38 0a K

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Z Operating revenues Operating income Net income Earnings available for common stock Earnings per share Dividends per share Average shares outstanding Common stock price" High Low

$622,056

$ 196,353

$98,676

$96,343

$1.35

$.35 71,503

$26.38

$21.88

$454,667

$74,924 SZ0,88Z

$18,496

$.26

$.35 71,503

$24.50

$22.00

$457,986

$74,285

$11,052tn

$8,616m

$ ]Ztn

$.35 71,416

$24.88

$21.13

$532,823

$111,981

$47,631

$45,256

$.65

$.35 70,096

$22.63

$20.38

"'ncludes the effect of fees related to an unsolicited tender offer that decreased net income and earnings available for common stock by $ 17 million and decreased earnings per share by 24 cents.

"Includes the effect of the writedown of the investment in EnerSoft Corporation that decreased net income and earnings available for common stock by

$10 millionand decreased earnings per share by 14 cents.

"The company's common stock is listed on the New York Stock Exchange. The number of shareholders of record at Oecember 31, 1997, was 38,238.

REPORT OF MANAGEMENT The company's management is responsible for the preparation, integrity and reliability of the consolidated financial statements, notes and other information in this annual report. The consoli-dated financial statements have been prepared in accordance with generally accepted accounting principles and include estimates that are based upon management's judgment and the best avail-able information. Other financial information contained in this report was prepared on a basis consistent with tltat of the consolidated financial statements.

The company maintains a system of internal controls designed to provide reasonable assurance to the company's management and board of directors regarding the preparation of reliable pub-lished financial statements and the safeguarding of assets against loss or unauthorized use. The system contains self-monitoring mechanisms and actions are taken to correct deficiencies as they are identified. Even an effective internal control system, no matter how well designed, has inherent limitations, including the possibility of the circumvention or overriding of controls, and therefore can provide only reasonable assurance with respect to financial statement preparation and the safeguarding of assets.

Further, because of changes in conditions, internal control system effectiveness may vary over time.

The company maintains an internal audit department that independently assesses the effectiveness of the internal controls. In addition, the company's independent accountants, Coopers R Lybrand L.L.P., have considered the company's internal control structure to the extent they considered necessary in expressing an opinion on the consolidated financial statements.

Management is responsive to the recommendations of its internal audit department and the independent accoun-tants concerning internal controls and corrective measures are taken when considered appropriate.

The board of directors oversees the company's financial reporting through its audit committee. The committee, which is comprised entirely of outside directors, meets regularly with management, the internal auditor and the independent accountants to discuss auditing, internal control and financial reporting matters. Both the internal auditor and independent accountants have direct access to the audit committee, independent of management.

The company assessed its internal control system as of December 31, 1997, in relation to criteria for effective internal control over financial reporting and the safeguarding of assets described in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the company believes that, as of December 31, 1997, its system of internal control over financial reporting and over the safeguarding of assets against loss or unauthorized use met those criteria.

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Sherwood J. Rafferty Senior Vice President and Chief Financial Officer Gary J. Turton Vice President and Controller Chief Accounting Officer

REPORT OF INDEPENDENT ACCOUNTANTS Coo ers 8Ly rand To the Shareholders and Hoard of Directors, New York State Electric R Gas Corporation and Subsidiaries Ithaca, New York We ltave audited the accompanying consolidated balance sheets of New York State Electric K. Gas Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in common stock equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the company's management.

Our responsibility is to express an opinion on these financial statements based on our audits.

40 0a K

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We conducted our audits in accordance with generally accepted auditing standards.

Those stan-dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits pro-vide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of New York State Electric & Gas Corporation and Subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.

New York, New York January 30, 1998

GLOSSARY Above-market costs o costs, such as amounts for power purchase contracts with NUGs, that are greater than the market price.

Allowance for funds used during construction o the cost of money used to finance a project that is added to construction costs and recovered over the life of the asset..

Allowed return on common stock equity o the cost of common stock equity as determined by the PSC.

Book value per share o common stock equity divided by the number of common shares outstanding at the end of the period.

British thermal unit o the quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit at sea level.

Common stock equity o the value of common stockholders'nvestment in a company including retained earnings.

Dekatherm o a measure of heating value equal to one million British thermal units. One dekatherm equals approximately 1,000 cubic feet of natural gas (one mcf).

Demand-side management o the planning and implementation of programs designed to help electricity customers conserve energy.

Earnings available for common stock o net income less preferred stock dividends.

Earnings per share o earnings available for common stock for a given period divided by the average number of shares outstanding for the period.

Embedded cost of long-term debt o the weighted average interest rate on long-term debt outstanding.

Net income o income after all revenues and expenses are recognized but before preferred dividends are recognized.

Nonutility generator o a nontraditional power generator tltat is also known as an independent pomer producer.

Price/earnings ratio o the market price of common stock divided by its earnings per share.

Retained earnings o the portion of earnings that has been reinvested in the business and not paid out as dividends.

Return on common stock equity o the rate of return actually earned on common stock equity calculated by dividing earnings for common stock by average common stock equity.

Securitization legislation o a law that mould allow utilities to refinance certain expenses at a lower cost.

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2 Transportation gas o natural gas purchased directly from a supplier by an end user and transported, for a fee, by a local distribution company, such as the company.

Watt o one ampere of electric current under one volt of pressure (one kilowatt is 1,000 watts, one kilowatt-hour is one kilowatt used for one hour and one megawatt is 1,000 kilowatts or one million watts).

SELECTED FINANCIAL DATA (Thousands, except per share amounts)

Operating Revenues Electric Natural gas

$1,792,164 337,825 1996

$ 1,723,147 344,385 1995

$1,708,297 308,931 1994

$1,600,075 298,780 1993

$1,527,362 272,787 1992

$1,451,525 240,164 Total Operating Revenues 2,129,989 2,067,532 2,017,228 1,898,855 1,800,149 1,691,689 Operating Expenses Fuel used in electric generation Electricity purchased Natural gas purchased Other operating expenses Restructuring expenses Maintenance Depreciation and amortization Other taxes 233,180 409,883 164,661 364,219 110,373 198,559 206,446 222,102 360,753 180,866 342,455 107,697 189,401 206,715 229,759 318,440 157,476 326,922 116,807 184,770 210,910 231,648 242,352 161,627 328,961 106,637

'78,326 210,729 245,283 161,967 141,635 349,177 26,000 111,757 164,568 204,962 262,531 95,026 126,815 318,680 102,500 158,977 200,941 42

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Total Operating Expenses Operating Income Interest Charges, Net Other Income and Deductions Income Before Federal Income Taxes Federal Income Taxes Net Income Preferred Stock Dividends Earnings Available for Common Stock Common Stock Dividends Retained Earnings Increase (Decrease)

Average Number of Shares of Common Stock Outstanding Earnings Per Share Dividends Paid Per Share 1,687,321 442,668 123,199 17,203 302,266 117,713 184,553 u',342 175,211u'5,496

$79,715 68,153 2.57n'1.40 286,184 312,554 290,106 251,778 273,244 107,943 115,864 102,461 85,750 89,276 178,241m 196,690 187,645m 166,028" 183,968 9,530 18,721 18,947 20,638 20,995 168,711m 99,611 177,969 168,698m 145,390'"

162,973 100,104 142,265 152,316 144,621

$64,717

$77,865

$26,433

($6,926)

$18,352 71,127

$2.37m

$ 1AO 71,503

$2.49

$ 1AO 71,254 69,990 67,972

$2.37m,$ 2.08<<

$2.40

$2.00

$2.18

$2.14 1,609,989 1,545,084 1,460,280 1,405,349 1,265,470 457,543 472,144 438,575 394,800 426,219 122,729 129,567 136,092 141,099 151,831 48,630 30,023 12,377 1,923 1,144 Book Value Per Share of Common Stock (Year End)

Capital Expenditures Total Assets Long-term Obligations, Capital Leases and Redeemable Preferred Stock S26.71

$123,907

$5,028,681

$25.41

$214,815

$5,059,681

$24.38

$164,301

$5,114,331

$23.28

$248,221

$5,230,685

$22.89

$267,838

$5,287,958

$22.85

$245,939

$5.077,916

$1,475,224

$1,505,814

$1,606,448

$ 1,776,081

$1,755,629

$ 1,883,927

'" Includes the effect of fees related to an unsolicited tender offer that decreased net income and earnings available for common stock by S17 million and decreased earnings per share by 24 cents.

er Includes the effect of the writedown of the investment in EnerSoft Corporation that decreased not income and earnings available for common stock by S10 millionand decreased earnings per share by14 cents.

"Includes the effect of the 1993 production cost penalty that decreased net income and earnings availabla for common stock by S8 million and decreased earnings per share by 12 cents.

<< Includes the effect of restructuring expenses that decreased nat income and earnings availabfe for common stock by S17 million and decreased earnings par share by 25 cents.

P FINANCIAL STATISTICS Financial Statistics Return on average common stock equity percent Mortgage bond interest-times earned Interest charges and preferred dividends times earned Market value per share of common stock (Year end)

Dividend payout ratio (Percent)

Price earnings ratio (Year end)

Property, Plant and Equipment (includes construction work in progress) (Thousands)

Electric Natural gas Common 9.9 4.4 2.3

$35.50 54.5 13.8

$5,267,080 586,144 162,322 1996 4.1 2.3

$21,63 59.1 9.1

$5,208,307 544,898 162,758 1995 10.4 4.0 2.2

$25.88 56.2 10.4,

$5,125,336 472,056 157,823 1994 10.3 3.5 2.1

$ 19.00 84.4 8.0

$5,027,137 431,202 171,639 1993 9.1 3.0

$30.75 104.8 14.8

$4,887,125 393,945 180,532 1992 10.6 3.1 1.9

$32.50 89.2 13.5

$4,694,073 361,630 205,345 Total Accumulated Depreciation

$6,015,546

$2,093,274

$5,915,963

$5,755,215

$5,629,978

$5,461,602

$5,261,048

$ 1,933,599

$ 1,791,625

$ 1,642,653

$ 1,541,456

$1,427,793 Number of Shareholders of Record Common stock Preferred stock 38g38 1,068 45,608 1,211 50,576 1,297 56,279 1,329 58,990 3,632 61,183 3,829

ELECTRIC AND NATURAL GAS DELIVERIES S TATISTICS trhousands)

Electric Deliveries (Megawatt-hours)

Residential Commercial Industrial Other Total Retail Wholesale Total Electric Deliveries 5,267 3,495 3,065 1,411 13,238 10,406 23,644 1996 5,393 3,430 2,992 1,401 13,216 7,914 21,130 1995 5,286 3,405 3,010 1,392 13,093 7,636 20,729 1994 5,399 3,315 2,997 1,437 13,148 6,827 19,975 1993 5,423 3,298 2,950 1,417 13,088 6,233 19,321 1992 5,472 3,283 3,082 1,457 13,294 6,003 19,297 Electric Revenues Residential Commercial Industrial Other Total Retail

$728,776 403,480 243,850 157,537 1,533,643

$744,439 400,841 242,792 158,377 1,546,449

$725,299 395,076 247,576 158,568 1,526,519

$679,124 366,854 245,218 153,888 1,445,084

$635,155

$601,042 333,674 314,272 228,215 225,832 138,320 133,819 1,335,364 1,274,965 Wholesale Other 232,138 26,383 162,232 14,466 150,444 31,334 141,902 13,089 147,175 44,823 143,414 33,146 Total Electric Revenues

$'I,792,164

$ 1,723,147

$1,708,297

$ 1,600,075

$ 'I,527,362

$ 1,451,525 Natural Gas Deliveries (Oekatherms)

Residential Commercial Industrial Other Transportation of customer-owned natural gas Total Retail Wholesale Total Natural Gas Deliveries 24,357 10,178 2,409 2,735 19,645 59,324 3,027 62,351 25,470 10,146 2,726 2,230 20,970 61,542 4,056 65,598 23,512 10,540 2,587 2,463 19,433 58,535 4,754 63,289 24,662 10,611 2,180 2,038 19,133 58,624 58,624 25,080 10,640 1,820 1,805 18,701 58,046 58,046 24,913 10,796 1,689 1,959 17,009 56,366 56,366 Natural Gas Revenues Residential Commercial Industrial

. Other Transportation of customer-owned natural gas

$190,564 83,091 13,044 17,839 21,949

$ 198,338 83,393 14,509 15,697 17,476

$181,697 75,178 11,310 14,584 13,718

$ 185,073 72,360 11,542 12,997 12,791

$170,734 66,648 9,602 10,943 12,091

$152,325 59,939 8,092 10,762 11,639 Total Retail Wholesale Other Total Natural Gas Revenues 326,487 9,114 2,224

$337,825 329,413 10,444 4,528

$344,385 296,487 8,771 3,673

$308,931 294,763 4,017

$298,780 270,018 242,757 2,769 (2,593)

$272,787

$240,164

ELECTRIC GENERATION STATISTICS System Capability (Megawatts)

Coal Nuclear Hydro Internal combustion Total Generating Capability N

2,277 207 66 7

2,557 1996 2,236 206 62 7

2,511 1995 2,226 206 61 7

2,500 1994 2,278 189 69 7

2,543 1993 2,394 189 67 7

2,657 1992 2,415 188 70 8

2,681 Purchased Power-NUGs Other Less: Firm sales 551 594 (625) 599

~

591 (607) 595 517 (118) 594 362 514 486 (367)

'311) 347 489

'8)

Total System Capability System Capability (Percent)

Coal Nuclear Hydro Total Generating Capability Purchased Power-NUGs Other Less: Firm sales Total System Capability Megawatt-Hour (mwh) Production, Net (Thousands)

Generated Coal Nuclear Hydro Total Generated 3,077 74 7

2 83 18 19 (20) 100 14,985 1,598 313 16,896 3,094 72 7

2 81 20 19 (20) 100 14,195 1,566 309 16,070 3,494 63---

6 2

71 17 15 (3) 100 14,296 1,306 240 15,842 3,284 69 6

2 77 18 16 (11) 100 14,338 1,509 321 16,168 3,194 75 6

2 83 12 15 (10) 100 15,131 1,295 309 16,735 3,509 69 5

2 76 10 14 100 16,709 922 301 17,932 45 R

Purchased Power-NUGs Other, net Total 4,051 4,156 25,103 4,235 2,386 22,691 4,413 2,004 22,259 3,601 1,714 21,483 2,472 1,260 1,695 1,625 20,902 20,817 Production Expenses (Thousands)

Generated Purchased Power-NUGs Other Total

$327,042 323,959 85,924

$736,925

$335,706

$339,546

$371,891

$375,209

$322,233 319,958 40,795 137,791 71,260 24,176 23,766 283,913 34,527 214,010 28,342

$682,986

$654,146

$581,898

$533,858

$470,235

BOARD OF DIRECTORS Richard Aurelio o a director since April 1997, is Senior Advisor to the Chairman and Chief Executive Officer of Time Warner, Inc. and President of NY1 Net, both in New York, New York.

He was President of Time Warner New York City Cable Group from 1989 to 1996. Prior,to that he served as deputy mayor of New York City.

James A. Carrigg o a director since 1983, is a director of Security Mutual Life Insurance Company of New York and a trustee of Dr. G. Clifford & Florence B. Decker Foundation, both in Binghamton, New York. He was Chairman, President and Chief Executive Officer of the corpora-tion from 1991 until September 1996, and was Chairman and Chief Executive Officer of the corpo-ration from 1988 through 1990.

Alison P. Casarett o a director since 1979, is Dean Emeritus at Cornell University in Ithaca, New York. She is Emeritus Professor of Radiation Biology at the New York State College of Veterinary Medicine of Cornell University. She was Special Assistant to the President of Cornell University from 1993 to 1995. Prior to that shc was Dean of The Graduate School at Cornell University.

Joseph J. Castiglia o a director since 1995, is Chairman of the AAAWestern and Central New York and the Catholic Health System of Western New York, both in Buffalo, New York. Hc rvas Vice Chairman, President and Chief Executive Officer of Pratt

~% Lambert United, Inc. in Buffalo, New York.

0 Cl C

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Lois B. DeFleur o a director since 1995, is President of the State University of New York at Binghamton in Binghamton, New York. She is Vice Chairperson of the American Council on Education in Washington, D.C.

Everett A. Gllmour o a director since 1980, is Chairmari of the Board of The National Bank and Trust Company of Norwich and N.B.T. Bancorp, Inc., both in Norwich, New York.

Paul L. Gioia o a director since 1991, is of counsel at LeBoeuf, Lamb, Greene K MacRae, attorneys-at-law in Albany, New York. He was a Senior Vice Prcsidcnt of First Albany Corporation from 1987 to 1993. Prior to that he was Chairman of the Public Service Commission of the State of New York.

John M. Keeler o a director since 1989, is Managing Partner of Hinman, Howard & Kattell, attor-neys-at-law in Binghamton, New York. He is Chairman of The Stuart and Willma Hoyt Foundation and a director of the Harriet L. Dickenson Foundation, both in Binghamton, Ncw York.

Allen E. Kintlgh o a director since 1987, is President of Royal Equipment, Inc. in Houston, Texas.

He was President and Chief Operating Officer of the corporation from 1988 through 1990.

Ben E. Lynch o a director since 1987, is President of Winchester Optical Company in Elmira, New York. He was Chairman of the Arnot-Ogden Medical Center in Elmira, New York, and President of Horsehcads Board of Education in Horseheads, New York.

Alton G. Marshall o a director since 1971, is President of Alton G. Marshall Associates, Inc., a real estate investment company in New York, New York. I.Ie is also Governor of The Real Estate Board of New York, Inc. in New York, New York.

Walter G. Rich o a director since April 1997, is President, Chief Executive Officer and a director of Delaware Otsego Corporation in Cooperstown, New York, and its subsidiary, The New York, Susquehanna K Western Railway Corporation. He is a member of the New York State Public Transportation Safety Board, appointed by the Governor.

I'

BOARD OF DIRECTORS Wesley W. von Schack a director since 1996, is Chairman, President and Chief Executive Officer of the corporation. I-Ie is a director of Mellon Bank Corporation and Mellon Bank, N.A. in Pittsburgh, Pennsylvania; RMI Titanium Company in Niles, Ohio; AEGIS Insurance Services, Inc. in Jersey City, New Jersey; the Business Council of New York State in Albany, New York; and Peconic Land Trust, Inc. on Long Island, New York. He was Chairman, President, Chief Executive Officer and a director of DQE, Inc. and Duquesne Light Company prior to August 1996.

Committees (Chairperson listed first)

Audit: Lynch, Castiglia, DeFleur, Keeler Corporate Developtnent: Gioia, Aurelio, Carrigg, Castiglia, von Schack Corporate Responsibility: Casarett, Keeler, Kintigh, Rich Zvectttive: Carrigg, Gilmour, Gioia, Marshall, von Schack Executive Compensation anrl StIccesslou: Gilmour, Casarett, Lynch, Marshall Nontinntlng: Marshall, Casarett, DeFleur, Gilmour EXECUTIVE OFFICERS Ages and years of service as ofJanuary 1, 1998, in parentheses Wesley W. von Schack o (53, 1) Chairman, President and Chief Executive Officer Michael I. German o (47, 3) Executive Vice President Gerald E. Putman

~ (47, 27) Senior Vice President - Economic Development and Public Policy Sherwood J. Rafferty

~ (50, 17) Senior Vice President and Chief Financial Officer Jeffrey K. Smith o (49, 27) Senior Vice President - Corporate Development Ralph R. Tedesco o (44, 19) Senior Vice President - Customer Service Business Unit Daniel W. Parley

~ (42, 16) Vice President and Secretary Gary L. Slckles

~ (48, 23) Vice President - Generation Gary J. Turton o (50, 25) Vice President and Controller Denls E. Wlckham o (48, 25) Vice President - Electric Resource Planning Rodert D. Kump o (36, 11) Treasurer 0

Q.

CC 8C r0) 0 UJ V) z XENERGY, Ixc.

Kellogg L. Warner o (42, 9) President and Chief Executive Officer, and President of NGE Enterprises, Inc.

Jack H. Roskoz o (59, 35) Executive Vice President, retired January 1, 1998. His valuable contributions to the company are sincerely appreciated.

SHAREHOLDER INFORMATION Shareholder Services o Shareholder Services representatives are available between 8 a.m.

and 4:30 p.m. (Eastern Time) on regular business days at 1-800-225-5643. Or you may write to:

New York State Electric 8c Gas Corporation Attention: Shareholder Services P.O. Box 3200 Ithaca, NY 14852-3200 Please contact NYSEG Shareholder Services with questions regarding:

~ our dividend reinvestment and stock purchase plan

~ dividend payments or lost dividend checks

~ direct deposit of dividends o replacement of lost certificates o a change of address o annual report requests o our annual meeting of shareholders The Shareholder Connection o 1-800-226-5643 NYSEG investor information is at your fingertips.

This service provides quick access to the common stock closing price as well as timely dividend and news release information 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> a day, seven days a week.

Transfer Agent and Registrar o To present certificates for transfer (certified or registered mail is recommended) or for stock transfer instructions, write to:

ChaseMellon Shareholder Services Customer Service P.O. I3ox 590 Ridgefield Park, NJ 07660 Internet Address

~ http://www.nyseg.corn NYSEG information, including financial documents and news releases, is available at our Web site.

Shareholders may also obtain a free copy of Form 10-K, which is filed each year with the Securities and Exchange Commission, by contacting Shareholder Services at the telephone number or address above.

Trading Symbol o NGE is the trading symbol for NYSEG common stock listed on the New York Stock Exchange.

Annual Meeting

~ Formal notices of the meeting, a proxy statement and form of proxy will be mailed to shareholders in March.

O'lectric 0 Natural Gas 0

Electric Sc Natural Gas

Q~

Qp New York State Electric & Gas Corporation Ithaca-Dryden Road P.O. Box 3287 Ithaca, NY 14852-3287 BULKRATE U.S. POSTAGE PAID New York State Electric & Gas Corporation http:I/www.nyseg.corn E

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('b ARY K HCGLON New York State Electric & Gas Corporation is an equal opportunity employer.

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