ML17244A485

Annual Financial Rept 1978.

ML17244A485
Person / Time
Site:	Ginna
Issue date:	03/15/1979
From:	ROCHESTER GAS & ELECTRIC CORP.
To:
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ML17244A486	List: ML17244A485 ML17261A113
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NUDOCS 7905030359
Download: ML17244A485 (33)

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Annual Report Contents Shareholder Inquiries for year ended Highligllts 2 Communications regarding stock transfer requirements, lost certificates or dividend payments December 31, 1978 Letter to Shareholders 3 may be directed to Lincoln First Bank, N.A.

Electric Operations 5 Other inquiries should be directed to D. W. Caple, Gas Operations 6 Secretary and Treasurer at the Company.

Research and Development 6 The Company will provide, without charge, a copy The Rising Cost of Doing Business 8 of the Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect Financial Statements 14 to fiscal year 1978, upon written request of any Management's Discussion and Analysis shareholder addressed to the Secretary.

of the Summary of Operations 22 Financial and Statistical Information 23 Directors 2B Officers (Inside back coverj Principal Office B9 East Avenue Rochester, New York14649 r (716) 546-2700 Financial Contact Paul W. Briggs President Annual Meeting May1G,1979 At Rochester, Nevv York New York Stock Exchange Symbol Rochester Gas and Electric Corporation Common Stock-RCS Transfer and Dividend Disbursing Agent Lincoln First Bank, N.A.

Stock Transfer Department Post Office Box 1250 Rochester, New York 14603 Registrar Security Trust Company of Rochester One Easl Avenue Rochester, New York 1463B Co.transfer Agent Morgan Guaranty Trust Company of Nmv York 30 West Broadway New York, New York10015 Co.registrar The Chase Manhattan Bank, N.A.

One Chase fvtanhattan Plaza New York, New York 10015 Agent for Automatic Dividend Reinvestment Plan Lincoln First Bank, N.A.

Automatic Dividend Reinvestment Service Post Office Box 1507 Rochester, New York 14G03 Bond Trustee and Paying Agent Bankers Trust Company Post Office Box 310 Church Street Station New York, New York100t5

Highlights 1978 1977  % Change Common Stock Earnings per weighted average share . $ 2.46 $ 2.12 Number of shares (000's)

Weighted average . 13,774 12,474 10 Pro forma weighted average after stock dividend paid in following year (See Note) 14,187 12,848 10 Actual number at December 31 .. 14,733 12,890 14 Number of shareholders 48,148 44,135 9 Price range (Sales on New York Stock Exchange) High Low High Low 1st quarter . 21 Y> 17>/s 20>is 17s/s 2nd quarter 18Ys 17srs 20Ys 18 3rd quarter . 19Ys 18 21 >/s 19>/s 4th quarter . 18>/> 16Ys 21>/s Cash dividends paid (100% taxable) 19'.32 1st quarter . $ .35 2nd quarter .35 .32 3rd quarter . .3G .35 4th quarter . .36 .35 Stock dividend paid (See Note) . 3% 3%

Sales and Revenues Electricity to customers Kilowatt-hours (000's) . 5,102,923 4,938,362 3 Revenue (000's) $ 202,G31 $ 179,940 13 Electricity to other utilities Kilowatt-hours (000's) . 1,445391 1,453,590 (1)

Revenue (000's) . $ 28,676 $ 26,403 9 Gas Therms (000's) 433,324 420,438 3 Revenue (000's) . $ 118,531 $ 105,797 12 Steam Pounds (000's) 2,963,500 2,950,287 Revenue (000's) . $ 19,110 $ 19,004 Total revenues $ 368,948 $ 331,144 Operating Expenses (000's)

Electric and steam fuels $ 58,140 $ 56,993 2 Purchased electricity 19,337 13,635 42 Purchased natural gas.............; . 71,109 62,086 15 Wages and benefits 54,390 50,318 8 Depreciation 22,206 21,053 5 Taxes-local, state and other .. 45,935 43,876 5 Federal income taxes charged to operations 11,041 3,858 186 Other expenses 37+41 34,548 9 Total operating expenses $ 319,699 $ 286,3G7 12 Capital Expenditures, less allowance for funds used during construction (000's) . $ 112,552 $ 98,091 15 Net UtilityPlant at December 31 (000's) . $ 810,016 $ 722,780 12 Number of Employees 2,622 2,624 Note: Thc 20tl> annual stock dividend was paid february 23, 1979 at thc rate ol three pcrccnt.

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After a disappointing year in 1977, common

-g stock earnings in 1978 rebounded to $ 2.46 per share. This represents an increase of 34 cents, or 16 percent more than the 1977 earnings of $ 2.12 per share; a substantial improvement, especially since there were 1.3 million additional shares outstanding during 1978.

Earnings continue to be affected by the weak economy of the State, by inadequate rate relief, and by increasing costs, including those due to inflation and government regulation. Although earnings have improved, they are not at the level we believe they should be. On the plus side, some encouragement K,'eith can be taken from the State government's more serious efforts to retain and attract business and industry. W. Amish Francis E. Drake, lr. Paul W. Briggs Dividends paid per common share for the year totaled $ 1.41, 12 cents more than the $ 1.29 paid gas, went up 12.0 percent, an increase of $ 15.9 the previous year. Additionally, a three percent million. Employee wages and benefits expense common stock dividend was paid in February 1979. increased 8.1 percent, or $ 4.1 million over 1977. The This is the 20th consecutive year in which a stock total number of employees, 2622, was reduced by dividend has been paid. two over the year while the number of customers Total customer revenues for 1978 were $ 340.3 continued to increase, resulting in improved million, a 12 percent increase over 1977 customer productivity. Employee overtime was kept to a revenues of $ 304.7 million. Revenue from electric minimum. Taxes, including Federal income tax, sales to other utilities rose 8.6 percent in 1978 and increased $ 9.2 million over1977, or19.4 percent.

totaled $ 28.7 million. The gain resulted from a Capital expenditures for 1978 were $ 112.6 sustained strong market for RCRE's coal-fired elec- million, excluding Allowance for Funds Used tricity through the New York Power Pool to utilities During Construction (AFDC). This was 15 percent that would otherwise have to rely on the more more than the 1977 capital expenditure of $ 98.1 expensive oil-fired electric generation. These sales million.

brought total revenues for the year to $ 369.0 million, A total of $ 38.7 million was required during an11 percent increase over1977. 1978 for additional electric generating capacity. This Kilowatt-hour sales of electricity to customers included $ 3.6 million capital investment in our increased 3.3 percent for the year. Industrial kilo- proposed Sterling nuclear power plant project, watt-hour sales led gains with a six percent increase $ 12.2 million for a 24 percent share of Niagara over 1977, a relatively strong growth. Residential Mohawk Power Corporation's Oswego ~6 oil-fired kilowatt-hour sales increased 2.5 percent. plant, and $ 22.9 million for 14 percent of its Nine Natural gas sales in therms were up 3.1 percent Mile Point ~2 nuclear plant. The Niagara Mohawk over 1977. The gain is attributed primarily to colder plants have been rescheduled to be operational in than normal weather and the addition of more than 1980 and 1984 respectively. These later operational 2200 gas space heating customers following the dates will not affect the Company's ability to meet 1977 lifting of a New York State Public Service projected increased customer electric demand Commission (PSC) prohibition on additional gas unless we should experience an increase in the service. present growth rate of electric use.

The performance of the Ginna nuclear power Plans for a proposed 1,150,000 kilowatt nuclear plant was excellent. The plant was available 81 power plant at Sterling, New York await reinstate-percent of the time during the year and had ment of a certification from the New York State regained its maximum dependable capacity of Board on Electric Ceneration Siting and the Envi-470,000 kilowatts following the May 1978 installation ronment. In January 1978 this Board granted a of a new turbine rotor. Thus the nuclear power plant construction certificate for the Sterling plant with an economically provided 60 percent of the electricity operational target for the year 1986. The Board on our own system and, when compared with an suspended the certificate in May1978 and equivalent amount of energy generated by a coal- requested further proof of "need" for the unit.

fired plant, saved our customers $ 32 million in fuel Based on updated load growth projections that costs for the year. . showed lower electric load growth in the State as a Operating expenses rose 11.6 percent, going to whole, the Siting Board felt there was a question as

$ 319.7 million in 1978 from $ 286.4 million in 1977. to the necessity for the unit in the time frame origi-Fuel expense, including purchased electricity and nally requested. The four partners in the Sterling

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s project subsequently advised the Siting Board that space heating service while balancing known the operational date for the plant could be supply with anticipated demand. Total kilowatt- ~

extended to 1988 if the updated growth estimates hour sales of electricity to customers are projected proved to be accurate. to increase 3.1 percent. Our service area is expected RG8 E continues to pursue the authorization for to realize this growth despite the adverse economic timely construction of the Sterling plant based on . factors that have significantly diminished load state-wide needs as well as customer needs on the growth in other areas of the State.

Rochester system. Although construction cost esti- Expenses will continue to increase, with taxes mates in an inflationary economy have greatly estimated to go up by 7.7 percent. Capital expendi-appreciated due to the delays in completion date of tures will go up to $ 115 million, excluding AFDC.

the project, it is our opinion that this plant repre- Although we retain a markedly positive view of sents the best and most economic option for the future in our service area, efforts to improve meeting electric energy demands in New York State performance as a utility are regularly hampered by and the Rochester system. events and circumstances largely outside our We petitioned the PSC in May 1978 for rate control. The costs associated with virtually every increases amounting to a total of $ 48.7 million in segment of our business continue to rise, and infla-additional revenue, consisting of an 8.9 percent gas tionary pressures will undoubtedly necessitate rate increase and a 17.8 percent increase in electric further increases in our rates for natural gas and rates. The proceeding is in its final stages and the electricity.

PSC decision is expected to be rendered in late The cost problems are compounded by a regu-April with the new rates to take effect in May. latory environment that frustrates our attempts to The September 1978 sale of an additional build the generating capacity that will be required if 1,250,000 shares of common stock realized $ 23.4 there is to be economic giowth in New York State.

million in new capital. In December 1978 RGB E Along with increased taxes, the burdens of exces-completed the private placement with institutional sive regulation and extraordinary regulatory delays investors of $ 40 million in first mortgage bonds at are passed on to our customers as increased prices, 9.5 percent interest. and this further compounds the problems faced by More than 18 percent of holders of common businesses and consumers within our service area.

stock are now participating in the Company's Auto- These problems are so important that we have matic Dividend Reinvestment Plan as compared taken the unusual step of preparing a special with 11 percent when the Plan was initiated in 1974. section to this report that can be found on page During 1978, they invested more than $ 3.7 million in eight. We hope you will take the time to read it.

206,427 riew shares of common stock.

We have consistently expressed support for the creation of Empire State Power Resources, Inc.

(ESPRI). This plan would have allowed power

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Francis E. Drake, lr.

Chairman ol the Board and companies in New York State to join in common Chief Executive Ollicer power plant licensing, financing and plant opera-tion, yet sustain the autonomy of the companies.

The plan would have benefited customers through lower generating costs than would otherwise be Paul W. Briggs possible. The projected savings to RG8 E customers President alone through the year 1998 would approach $ 1 billion. In February 1979, after five years of lengthy deliberations, the PSC took an informal poll that indicated that the proposal would be disapproved.

We are still awaiting the formal decision. The Keith W. Amish Executive Vice President verdict is very disappointing, and the higher costs it will produce for the long-suffering consumers cannot be justified, in our opinion.

Once again, the PSC reported that RGB E had March 15, 1979 the lowest number of customer complaints per capita of any power company in New York State.

These figures are supported by our own consumer surveys that show customers give the Company very high marks for the quality and reliability of its service. The credit goes to our fine employees.

We anticipate modest increases in demand for both electricity and natural gas in1979. Gas supplies are sufficient and we will continue to expand gas

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tM~~ lv r h Following a major redesign of blade configuration, this new, 80-ton low pressure turbine rotor was installed at the Cinna nuclear Electric Operations power plant. of the Hojack Line railroad to meet growth in that outlying district.

Generation Over the past few years, three incidents of blade failures in one Streetlighting modernization of the rows of a low pressure turbine plant as a spare to significantly reduce programs in 1978 resulted in more rotor at the Ginna nuclear power shutdown time in the event of any than 2000 older incandescent lamps plant had reduced plant availability- future, unforeseen rotor problem. being replaced with high pressure the percentage of time the plant is in Distribution In the Rochester vicinity, sodium units in the northern part of service. In 1976, for example, the a substation was constructed to meet the City of Rochester. This project, plant's availability was only 58 electric demand at the new manufac- paid for by the City, increases lighting percent. A temporary modification to turing plant at Rochester Products, efficiency and enhances public safety.

the turbine following the third blade Fuel Systems Division of General A streetlighting modernization failure allowed continued plant Motors. An additional overhead trans- program was completed in the Village operation, but only at 86 percent of mission line was constructed to the of Mt. Morris, and another is capacity. Xerox Corporation facility in Webster underway in the Village of Webster.

RG8t E worked with the manufacturer providing greater capacity for Xerox Electric and gas facility relocation on in redesigning blades for a new and other area customers. As part of public property became a larger-than-turbine rotor to solve the problem. the115 KV transmission construction normal undertaking in 1978 due to the The new rotor was installed in May project in the Rochester area, a major extensive activity in road construction 1978 and it has performed very well. circuit was reconstructed in western and highway improvement. The $ 7 The plant is once again operating Monroe County that increased million expense for this work must economically and efficiently at full capacity to suburban customers in the ultimately be borne by the Company's capacity, providing more than half of Town of Gates, including the customers since there is only occa-the electricity for the Company's expanding Apparatus Division of sional and very minor reimbursement system. During the seven-month Eastman Kodak Company located from government agencies that order period from the time the rotor was there. the relocations.

replaced to the end of the year, the RG8 E continued its construction Ginna nuclear power plant recorded a program extending 34.5 KV distribu- This electric translormer replaced a unit that remarkable 98 percent availability. For tion facilities in the Genesee District, lai led in service in 1978. It is one ol two the entire year, the plant's availability south of Rochester. The Canandaigua- transformers at an interconnection that reduces 345,000 volts to 115,000 volts for transmission in was a noteworthy 81 percent. Finger Lakes District expanded 115 KV the RG&E system.

For further reliability, the original rotor facilities in meeting sustained growth has been rebuilt with the improved in its area. A new12.5 KV service was blades and was replaced in the installed at the recently completed second low pressure turbine unit Voplex plant in Canandaigua.

during the 1979 annual refueling, In the Lakeshore District to the east, maintenance and inspection shut- plans call for the construction of a down. The displaced rotor will be 115 KV transmission line along the rebuilt and kept at the nuclear power recently acquired right-of-way section

Electric Kilowatt-Hour Sales Gas Operations Research and Development, to our C ustomers by Classes m illions Total Electric Supply Adequate RC&E's supply of In 1978 RC &E invested $ 2.8 milliorrin KWH Sales natural gas, under contract with research and development projects.

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In Millions Consolidated Gas Supply Corpora- Half of that amount was directed to Year Total tion, remains adequate. Deliveries of nation-wide utility industry supported 1978 5103 eside 1977 4938 liquefied natural gas (LNC) from research organizations as well as the 1976 4806 Algeria to our supplier continue on research arm of New York State 1975 4521 schedule, adding15 percent to the utilities, known by the acronym 1974 4408 0

1973 4540 supplier's capacity. This, combined ESEERCO. One such ESEERCO Udd LJ 1972 4292 with increasing yields from the program helps support the nuclear 1971 1970 3982 supplier's Louisiana offshore wells, fusion experiments at the University 3802 1969 3578 provides assurances for adequate gas of Rochester. The New York State

","0 L'2~8 aa OO volumes in meeting existing and Energy Research and Development projected demands. Authority directly assessed RC&E

$ G00,000 for state government spon-New Gas Service RC&E installed sored research and development

, LJ LJ more than 1300 gas service lines to projects.

new residential, commercial and The other half of the research and industrial customers in 1978. Including 0 OQ us heating system conversions, more development funds was allocated to Company-sponsored and -coordi-than 2200 gas space heating nated projects such as the gas furnace customers were added during 1978. demonstration program in which a

,. LILJUU This expansion followed Public Service Commission approval in 1977 number of residential gas furnaces have been modifie'd for test purposes of the Company's petition to lift the in an attempt to improve efficiencies.

1969 70 71 72 73 74 75 76 77 78 prohibition on accepting new or addi- So far, an average gas saving of 17 tional gas service. The additional percent has been achieved in the test services have helped slow the decline homes while maintaining comfortable in total gas deliveries seen over the heating levels.

last several years that resulted from Gas Therm Sales customer attrition and conservation. A broad, national program to to our Customers by Classes RG&E estimates that more than 3400 encourage development of nuclear m illions Total Cas space heating customers will be steam generation equipment and Therm Sales added in 1979 including new homes, maintenance improvements was In Millions 'commercial establishments and initiated in 1978 and is co-sponsored Year Total heating system conversions. by RG&E. The research on a novel 1978 433 1977 420 backhoe safety shutoff system that 150 1976 468 Therm Billing Liquefied natural gas will prevent accidental damage to 1975 424 underground cable and pipeline has 100 1974 454 (LNG) has a higher heat value (BTU's per cubic foot) than the domestic gas produced a prototype that will be

~ 1973 1972 1971 435 469 442 we have previously received. When field-tested this year. In another 1970 425 LNG is mixed with domestic gas, as in research area under RG&E coordina-1969 403 the supplier's delivery to RG&E, the tion, data collected from several U thermal value varies. For this reason, utilities were analyzed to determine RGB E has changed its gas billing from spawning habits of fish along the hundreds of cubic feet to therms, one southern shoreline of Lake Ontario. In Cost mescal therm being one hundred thousand all, RG&E directly supported more BTU's. Starting in May 1979, a gas than 40 research and development UL" J L'LILI customer's bill will be calculated projects in 1978.

according to the average heat value (therms) used during the billing Management Appointment ln us ial month. While this new system should Joseph J. Hartman was have no effect on the amount of the elected to the position U LIU customer's bill, it ensures that the of Vice President, Gas Other Company's gas revenues will more and Transportation by 0

accurately reflect the heat value of the the board of directors 196 9 70 71 72 73 74 75 76 77 78 gas sold. effective December1, 1978. He succeeded Elvin A. Skibinski who retired after 33 years of service.

Mr. Hartman joined RG&E in194G as a RC&E engineers designed an uncommon type co-op student in the Gas Department.

ol gas pipeline support in this bridge that crosses the Oarge Canal. The support cables are He held a series of engineering posi-underneaih the pipe insiead of above. tions in the Gas Department until 1974 when he was appointed Superin-tendent of General Maintenance.

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the Laboratory for Laser Energetics of the College ol t Engineering and Applied Science T

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experiments are conductedin an attempt to harness thermal mP4.

energy from nuclear lusion.

Povverlul laser beams are focused through mirrors and converge on a minute hydrogen pellet inside a target chamber (photo inset). The project is supportedin part by RC&E, and the experiment may one day lead to a virtually inexhaustible source ol tl>ennal energy for the generation of electricity.

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Th'e cost of living has gone up drastically over the On the subject of rising costs, pressure groups and

.years, and we know it will continue to rise untfl inflation, consumer activists often suggest that utilities, like RG&E, at least, is brought under control. But, it's not just the cost should hold the line on "their" rising costs and maintain of living that's gone up, it's the cost of doing business, too. existing rates or even lower them by reducing "profits."

The i ationary economy has adversely affected business Well, the fact is, RG&E has no control over most of the and industry as well as the individual. Despite eff'orts to costs that comprise the rates. And as for "profits," there minimize expenses, the rising cost of doing business has really aren't any profits in a strict sense of the word as affected RG&E, particularly on costs over which the we'l int out later. Let's take a look at the costs in Company can exert little or no control. RG&E's business.

This special section of the 1978 annual report is intended to rtray, in plain talk, the rising costs and their effect on RG&E, its customers and shareholders.

Before getting into specifics on the cost increases, let's take a look at the overall impact on RG&E customers in general. From 1970 to 1978 the cost of electricity to RG&E customers had risen 84.5 percent, and the cost of gas went up 109 percent. How has the higher cost of electricity and gas aff'ected most RG&E customers? Based on wage figures published by the New York State Depart-ment of Labor, our records show that in 19/0 the qrpical Rochester production worker paid 1.6 percent of his or Fuel expense consumes the largest portion of the revenue dollar. Today 40 cents of each revenue dollar go to pay for the fuels used in the generation of electricity, Gross Pay 1978 Electricity 1.7%

steam, and for the cost of natural gas. Over a nine-year period through the end of 1978, the cost of coal per ton more than doubled while oil and natural gas had tripled in

~ONCLldi 5 cost. Nuclear fuel, processed and ready for use in a power Qjlgt~. plant, had a fourfold cost increase, yet it still remains the Oate l918 most economical fuel for electric generation as seen in the

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sssss accompanying chart that compares fuel cost on a BTU or heat value basis.

Fuel Expense (Fuel costs per million BFU's)

Tax 26.79'a 3.0%

her gross income for electricity. In 1978, despite more than a ten percent increase in electric use by the average residential customer, the same worker still paid just 1.7 percent of gross pay for electricity. Ifthat worker was a gas space heating customer, he or she paid 3.1 percent of na gross income for gas in 1970, and only 3.0 percent in 1978. In the meantime the tax bite (property, income, 1970 78 70 78 70 78 70 78 social security and sales) out of that same gross pay went Coal Oil Gas Nudear from 23.9 to 26.7 percent.

Most pay has kept pace with the inflationary impact The market price of fuels is beyond the influence of on prices. Even though more actual dollars are needed to RG&E's prudent and aggressive purchasing procedures.

pay for electricity and gas, these forms of energy absorb Rising inflation gradually boosted fuel prices. The single about the same amount of gross income as they did nearly most devastating factor, though, was the 1973 Arab Ofl ten years ago. The problem is that government taxes are Embargo that not only caused the price of oil to double in taking greater amounts of the devalued gross paycheck a year, but also illustrated that the United States had dollars. become dangerously dependent on foreign oil sources.

We'e certainly not saying that all of our customers This dependence, combined with the rapid cost increases, have incomes that have kept pace with escalating inflation. produced trade deficits that have seriously eroded the The senior citizen, for example, on low, fixed income is value of the American dollar and have helped promote having an extremely difficult time meeting the continually uncontrolled inflation. It's a serious situation and one that increasing costs of all essentials for living, including heat is increasingly agitated by a glut of self-defeating laws, and electricity. regulations and taxes enact by the federal and state The phght of a senior citizen in the situation governments.

described above is a very complex social problem that stems from rampant inflation. And, as a social problem, it is one that should not be placed upon any one segment of the economy or any one mdustry, whether it be a regulated natural monopoly or not. Recognizing this social problem, we at RG&E have expressed our support for an energy stamp program and have even offered to help develop such a plan. But, so far, the authorities have not accepted the offer. Further, we have contended that residential'heat and electricity are just as essential to our customers as food, and should be tax-exempt. In that regard, the State did reduce sales tax on electricity and gas by one percent in 1978.

More importantly, RG&E employees are qualified; dedi-cated and productive people who are entitled to fair return ~

>p for their efforts.

The ratio of RG&E customers to employees in 1970 pto was 168 to one. In 1978 there were 186 customers for each

, "pC~ ~4'pQ RG&E employee. This means that our employees have

'~P increased their productivity as their contribution in the struggle against inflation. Productive, competent go employees provide for the best interest of the shareholder and the customer.

0 RG&E willcontinue to exercise control of wage and

~Cp benefit expenses, and we are observing the current volun-ao tary anti-mflationary guidelines.

.oo RG&E's tax expense has tripled since 1970 going from $ 19 million to $ 57 million in 1978. And, the 1978 figure doesn't even include the $ 15.5 million in sales tax RG&E had to collect from customers in their bills for the State and local governments. Aside from the visible sales tax, "hidden" taxes in the customer bills account for more than 15 cents of every dollar the customer pays to RG&E.

When sales taxes are included, the typical residential customer's bill is more than 22 percent tax. And that's a cost of government, not of energy.

Tax Portion of 1978 Customer Bill 22.5%

don 4 RNUC loocsrot,le Tax is another example of expense where RG&E can o exercise little or no control. Of course, it could be pointed d out that property taxes do mount up as we expand facili-ties such as substations, transformers and power lines. But, even here there is no option. We are obligated to meet growth, and are required by PSC law to serve the instant energy demands of customers regardless of the amounts In addition to the expenses just discussed, seven called for. And just like every other property owner, we percent of the 1978 revenue dollar was used to pay for pay high tax rates on inflated values. The effect is miscellaneous materials and services. Among other items cumulative. Cl this category includes fees assessed by regulatory agencies, expenses for regulatory compliance, legal counsel, and building and grounds maintenance. Here, too, there is really httle choice. We do, however, request bids where we can and look for the best price in the marketplace.

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30/40/50 MVA Electric Transformer Expense for employee wages and benefits has increased 80 percent since 1970, a relatively small increase compared to other items mentioned. This is an area where RGKE may and does exercise control-reasonable control.

And it has to be reasonable ifthe Company is to retain competent personnel and remain competitive in the labor and professional employment market. Let's face it, we'e in a highly complex, technical business. Low or inade- 1970-$ 127,500 1978-$ 278,000 quate wages would produce nothing but a false economy. Percentage increase-118.0%

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to serve customers. So, when it comes right down to it, RG&E's "profit," or the interest cost of money, is a cost of doing busmess, and it's certainly one over which we have h .0 little control.

Gas and electric companies constitute the most capital-intensive industry in the entire economy. The average manufacturing concern, for example, invests 75 cents in plant for each dollar of gross income while RG&E has had to invest more than three dollars for each gross income dollar. Large amounts of money are required RG&E has a responsibility to supply electricity, gas to pay for facility expansion, improvement and replace- and steam to its customers at the most economical prices.

ment. Prices for materials and labor have gone up, and so But, try as we may, we have little control over most of the has the cost of borrowing the money to finance the new expenses incurred in fulfillingthis responsibility. We have facilities. For the most part, these costs cannot be consistently applied sound management policies and prin-controlled by us. Just as inflation has driven up costs in the ciples in attempting to minimize the amount of rate markets where people shop, it has also affected the increases while mamtaining the Company as a sound markets where utihties purchase their hardware and investment and reliable supplier. It's very discomforting to money. realize that uncontrollable costs have accounted for more than 80 percent of customer cost increase since 1970!

The cost of doing business, especially power Annual Capital Expenditures ln Millions ol Dollars, Millions Excluding Allowance for funds Used During company business, is high, and it continues to go higher, 6120 Construction 1 isa driven by unbalanced federal and state budgets. Most of 100 ss 1 the cost is in fuels, taxes, capital expenditures and the cost sro 80 of money. And, part of the cost is a result of heavy regula-60 tion by all layers of government. We are not saying that 40 regulation is unnecessary. Some of it is beneficia. But, like 20 everything else, regulation has a price.

0 Since 1970, RG&E's spending for capital improve-1970 71 72 73 74 75 76 77 78 ments just to comply with regulatory requirements and laws approaches $ 100 million. This expense amounts to almost a $ 20 million annual cost to customers. To this we In 1978, $ 112 million were needed to cover the cost can add at least another $ 10 million a year in operational of new facilities required to serve customers. Although 40 expense to comply with various other federal and state percent of that capital was raised internally, the rest had to regulatory requirements. Thus, a very conservative esti-come from a highly competitive money market. There is mate of the annual cost of government regulation to our no alternative. Regardless of market conditions we cannot customers is $ 30 million, a very real part of the rising cost and would not elect to ignore necessary additions to serve of energy.

customer energy needs. To compromise on improvements We have taken this opportunity to present a story to and replacements that protect the energy systems is to you our shareholders, and hopefully to many of our gamble on efficient and reliable service to our customers, customers. It is not a unique story because each of you is and we won't do that. experiencing the same pressures, the same cost increases, Cost of capital is a major area where we can exercise the same inflation, over-regulation and taxes. But, because little or no control other than continuing to employ effi- utilities are sometimes regarded by the uninformed as cient methods for raising funds in the capital marketplace unaffected by such pressures, where costs are rising rapidly. In March 1979, for we thought it important to example, we had to replace a maturing $ 16.7 million three spell out how these same percent interest bond with short-term notes at more than factors, over which we 11 percent interest. have little or no control, Although this may seem a little are driving up the abso-strange at first, RG&E's "profits" are actu- lute cost of energy.

ally an expense. Our "profit" is nothing more than the amount that the New York State Public Service Commis-sion (PSC) allows us to pay for the money we have to borrow to build the facilities needed to serve customers. Put another way, we are allowed to earn a 'Sate of return" on the capital invested in plant used to serve the public.

The rates of return are set by the PSC, but are in no way guaranteed. Without the ability to. P ay the costof money in interest and share-holder dividends we would not be able to raise the capital necessary to continue

Average Annual Use Per Residential Electric Customer Average Annual Use Per Residential Space Heating lGas Customer Ki jowatt Hours Therms'101 S12 1100 1'lu 1101 1417 1717 1774 1727 l411 1969 70 71 72 73 74 75 76 77 78 1969 70 71 72 73 74 75 76 77 78

'Adjusted for normalized weather by degree days.

Earnings and Dividends Per Common Share in Dollars D Earnings per Common Share D Cash Dividends per Common Share 2.24 (Adj usted for Stock Dividends) 2.12 2.12 1.04 1.$ $

1.1$

1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 12

Source of 1978 Revenue Dollar Use of 1978 Revenue Dollar in Cents in Cents Electric Revenue Gas Revenue Cost of Fuels 40)l Pl)fels)sed llecstlc st nrrcisesed Oes Steam Fuels llecuicir y 194 64 Depreciation 55)t 324 Taxes 144 154 44 Interest on Bonds & Notes Misc. Materials Dividends

& Services (Com. 54 & Pfd. 24)

Electric Sales Steam to Other Utilities Revenue Wages

& Benefits Rein vested Earnings Capitalization in Millions of Dollars 350 2))A 250 j,

150 1)5.1 1969 1970 1971 1972 1973 1974 1975 1976 1977 1970 a tong-Term r)ebs a Common Srs)relrorders'quisy a yrererred Equisy 13

HEI ROCHESTER GAS AND ELECTRIC CORPORATION Year Ended Oqcember 3'I e

Statement of Income tn .~~.to~4 I 1978 1)77 Operating Revenues (Note1)

Electric . $ 202,G31 $ 179,940 Gas 110,531 105,797 Steam 19,110 19,004 340,272 304,741 Electric sales to other utilities . 20,676 26,403 Total Operating Revenues . 360,940 331,144 Operating Expenses (Note1)

Operation Electric and steam fuels . 50,140 56,993 Purchased electricity 19,337 13,635 Purchased natural gas .. 71,109 G2,086 Other . 65,605 62,494 Maintenance 26,246 22.372 Depreciation 22,206 21,053 Taxes-local, state and other .. 45,935 43,876 Federal income tax-current (Note 3) . 5,166 961

-deferred (Note 3) .. 5,075 2,897 Total Operating Expenses 319,699 286,367 Operating Income 49,249 44,777 Other Income and Deductions Allowance for other funds used during construction (Note 1) 0,705 G,473 Other-net .. 4,410 1,310 Total Other Income and Deductions 13.123 7,703 Income before Interest Charges 62,372 52,560 Interest Charges Long-term debt. 25,594 22,542 Short-term debt 1,588 1,319 Other-net . 416 494 Allowance for borrowed funds used during construction (Note 1) . (4,012) (4 844)

Total Interest Charges 22,78G 19,511 Net Income 39,506 33,049 Dividends on Preferred and Preference Stock, at required rates 5,678 6,512 Earnings Applicable to Common Stock $ 33,908 $ 26,537 Weighted average number of shares outstanding in each period, adjusted for stock dividends (000's) .. 13,774 12,474 Earnings per Common Share (Note 1) $ 2.46 $ 2.12 Cash Dividends per Common Share, adjusted for stock dividends (Note1) $ 1.41 $ 1.29 Statement of Retained Earnings It~ ~.ro.i~ I 1978 Balance at beginning of period $ 70,019 $ 67,012 Add Net income 39/06 33,049 Total 110,405 100,861 Deduct Issuance costs of preferred stock (Note 4) . 701 Dividends on capital stock Cumulative preferred stock, at required rates (Note 4) . 3,550 6,453 Preference stock (Note 4) 2,128 59 Common stock Cash (Note 1) . 19,2G9 16,009 Stock (Note 4) 8,120 6,820 Total 33,067 30,042 Balance at end of period $ 77,330 $ 70,019

ÃkL~~~ ROCHESTER GAS AND ELECI'RIC CORPORATION At December 31 SalanCe Sheet trho dkofoolla 0 1978 ASSETS UtilityPlant, at original cost (Note 1)

Electric $ 669,104 $ 609,387 Cas 171,120 162,946 .

Steam 17,735 17,442 857,959 789,775 Less-Accumulated depreciation and amortization 261,477 229,122 59G,482 5G0,653 Construction work in progress 213,534 162,127 Net Utility Plant 810,016 722,780 Investment in subsidiary, at equity 1,99G 1,947 Current Assets Cash (Note 5)... 11,777 6,617 Accounts receivable 31,700 30,332 Materials and supplies, at average cost Fossil fuel .. 12,G73 10,787 Construction and other supplies 9,643 9,724 Pre payments 1,1 GO 927 Total Current Assets 6G,953 58,387 Deferred Debits Unamortized debt expense . 3,G20 3,348 Deferred fuel cost (Note 1) . 5,362 6,338 Other(Note4) .. 5,439 5,574 Total Deferred Debits . 14,421 15,260 Total Assets $ 893,386 $ 798,374 CAPITALIZATIONAND LIABILITIES Capitalization (Note 4)

Long-term debt .. $ 384,303 $ 3G1,022 Preferred stock G7,000 67,000 Preference stock . 28,000 28,000 Common shareholders'quity Common stock 24G,938 212,533 Retained earnings........... 77,338 70,819 Total common shareholders'quity 324,27G 283,352 Total Capitalization 803,579 739,374 Current Liabilities Short-term debt (Note 5) 9,000 Long-term debt due within one year . 16,677 Accounts payable .. 29,021 18,635 Taxes accrued, including income taxes 11,335 4,G10 Interest accrued 7,G67 7,355 Payroll accrued . 2,59G 2,388 Other 1,06G 825 Total Current Liabilities 68,362 42,813 Deferred Credits and Other Liabilities Accumulated deferred income taxes (Notes 1 and 3) 18+94 15,233 Other 3,051 954 Total Deferred Credits and Other Liabilities .. 21,445 16,187 Commitments and Other Matters (Note 6)

Total Capitalization and Liabilities $ 893,386 $ 798,374

RES ROCHESTER GAS AND ELECTRIC CORPORATION Year Ended December'31 Statement of Changes in Financial Position tthousa d oIoolh ) 1978 1977 Sources of Funds Operations Net income $ 39+86 $ 33,049 Principal non-cash charges (credits) to income Depreciation 22,20G 21,053 Amortization of nuclear fuel 15,746 14,386 Deferred fuel costs 976 (2,886)

Deferred income taxes-net 3,1G1 2,675 Allowance for funds used during construction (13,517) (11,317)

Other-net 1,204 757 Total from Operations 69,362 57,717 Financing Sale of long-term debt . 40,000 50,000 Sale of common stock 27,186 24,579 Sale of preference stock 28,000 Total from Financing 67,18G 102,579 Total Sources of Funds $ 136,548 $ 160,296 Uses of Funds Utilityplant Plant additions . $ 105,191 $ 94,958 Nuclear fuel additions 20,878 14,450 Less: allowance for funds used during construction 13,517 11.317 Net Additions to Utility Plant 112,552 98,091 Dividends on preferred stock 3,550 6,453 Dividends on preference stock 2,128 59 Dividends on common stock .. 19,269 16,009 Reduction of short-term debt-net 9,000 9,051 Retirement of long-term debt 16,677 333 Redemption of preferred stock, including call premium 27,750 Capital stock expense 902 167 Expense of issuing long-term debt 490 892 Other-net (2,037) 1,406 Increase (decrease) in working capital (excluding short-term debt) (25,983) 85 Total Uses of Funds . $ 136,548 $ 160,296 Changes in Components of Working Capital Increase (decrease) in current assets Cash $ 5 1GO $ 188 Accounts receivable .... 1,368 (3,474)

Materials and supplies Fossil fuel . 1,886 (49)

Construction and other supplies .. (81) 351 Prepayments 233 281 Total 8,566 (2,703)

Increase (decrease) in current liabilities (excluding short-term debt)

Accounts payable 10,38G 482 Taxes G,725 1,651 Accrued interest and payroll 520 1,234 Long-term debt due within one year 1G,G77 (6,000)

Other-net 241 (155)

Total 34,549 (2,788)

Increase (decrease) in Working Capital excluding short-term debt $ (25,983) 85

Notes to Financial Statements Note 1. Summary of Accounting Policies Due to a Federal government policy adopted in 1977, the General. The Company is subject to regulation by the Public Company has changed its nuclear fuel cost computation to Service Commission of the State of New York (PSC) with reflect the costs of permanent storage of spent nuclear fuel.

Prior years'uclear fuel cost computations anticipated spent respect to its rates for service and the maintenance of its accounting records. The Company's accounting policies nuclear fuel would be reprocessed. Cumulative prior years'uel conform to generally accepted accounting principles as applied expenses would have been increased by approximately $ 8.0 to New York State public utilities giving effect to the million if they had been determined on the basis of current cost rate-making and accounting practices and policies of the PSC. estimates for permanent storage of spent nuclear fuel, rather than on an estimated amount for reprocessing. If the A description of the Company's principal accounting policies government's permanent storage policy is continued, the follows. Company believes that such amount will be fully allowable for Utility Plant and Depreciation. The cost of additions to utility rate-making purposes.

plant and replacement of retirement units of property is Decommissioning costs (costs to take the plant out of service in capitalized. Cost includes labor, material, and similar items as the future) for the Company's Ginna nuclear power plant well as indirect charges for engineering, supervision, etc. The cannot be estimated at this time. The Company believes that Company capitalizes an allowance for funds used during the costs of decommissioning will be fully allowable for construction approximately equivalent to the cost of capital rate-making purposes.

devoted to plant under construction. Replacement of minor items of property is included in maintenance expenses. Costs Allowance for Funds Used During Construction. The of depreciable units of plant retired are eliminated from utility Company capitalizes an Allowance for Funds Used During plant accounts, and such costs, plus removal expenses, less Construction (AFDC) based upon the net cost of borrowed salvage, are charged to accumulated depreciation and funds for construction purposes and a reasonable rate upon amortization. the Company's other funds when so used. The rate used for this purpose was 8'/a%, which became effective in May 1976.

Depreciation in the financial statements is provided on a In accordance with the order issued by the Federal Energy straight-line basis at rates based on the estimated useful lives of Regulatory Commission, AFDC is segregated into two property, which have resulted in provisions of 3.0'nd 3.1 /o component parts and classified in the Statement of Income to per annum, of average depreciable property in 1977 and 1978, disclose an Allowance for Borrowed Funds Used During respectively. Construction as a credit to Interest Charges and an Allowance Jointly-Owned Facilities. The following table sets forth the for Other Funds Used During Construction as a part of Other major electric generation projects currently planned which will Income.

add to the Company's present generating capability. Each In December 1977, the Company began computing AFDC on its participant must provide its own financing for these projects. share of Nine Mile Point Nuclear Unit ~2 and Oswego Fossil Oswego Nine Mile Unit O6 at an average reduced rate of 6.85%%d, which is net of the Fossil Point Nuclear Slcrling income tax effect of the interest portion of AFDC.

Unit ¹6$ Unit ¹2$ Nuclear Estimated year of completion 1980 1984 1988 Rates and Revenue. Revenue is recorded on the basis of meters Net megawatt capability 850 1084 1150 read during the calendar year.

RG&E's share-megawatts 204 150 322 Tariffs for electric and steam service include fuel cost

-percent ... 24 14 28 adjustment clauses which serve to adjust electric and steam iMiliionsol Dollars)

Total estimated project costs0a .... $ 252.60a $ 1,441.4i$ l $ 1,354.70s rates from time to time to reflect changes in the average costs RG&E's share.............. 60.6 201.8 379.3 of fuels used in electric and steam generation from the average cost of such fuels during the base period. Tariffs for gas service RG&E's actual construction costs-1977..... 10.0 21.7 3.5 contain a comparable clause to adjust gas rates for changes in

-1978..... 12.2 22.9 3.5 the price of purchased natural gas.

eTo be constructed and operated by Niagara Mohawk Power Corporation. Deferred Fuel Costs. Fuel costs which are recoverable under To be constructed and operated by Rochester Cas end Electric Corporation.

the electric, gas and steam cost adjustment clauses included in Construcdon costs exclude allowance for funds used during construction and certain overhead costs to be capitalized. the tariff schedules of the Company are deferred until they are Total project costs include $8.5 million (or oil handling facililics, of which RC& E billed to customers. A reconciliation of recoverable gas costs has not agreed upon the percentage participation, end excludes common with billed gas revenues is done annually as of August 31, and facilities.

the excess or deficiency is refunded to or recovered from the Total project costs include $ 89A million for the initial nuclear fuel loading and excludes common facilitics. customers during a subsequent twelve month period.

Total project costs include $ 114.7 million for the initial nuclear fuel loading.

Federal Incorhe Tax. For income tax purposes, depreciation is computed using the most liberal methods permitted. In Nuclear Fuel and Decommissioning Costs. The cost of nuclear addition, certain costs capitalized for financial reporting fuel and estimated permanent storage costs are charged to purposes are deducted currently for income tax purposes. The operating expense on the basis of the thermal output of the resulting tax reductions are offset by provisions for deferred reactor. These costs are charged to customers through base income taxes only to the extent ordered or permitted by rates and through the fuel cost adjustment clause. regulatory authorities.

The 10% investment tax credit rate, which had been scheduled computed value of vested benefits at December 31, 1978 to return to 4% in 1981, has been made permanent by the exceeds the assets in the plan by approximately $ 15 million.

Revenue Act of 1978. The prior rate of 4%%d is applied to reduce Earnings and Dividends Per Share. Earnings applicable to each the current tax provision while, as recommended by the PSC, share of common stock are based on the weighted average normalized tax accounting is followed in the application of the number of shares outstanding during the respective years, remaining 6%. adjusted for stock dividends. Assuming the 1,250,000 shares of The Company uses the separate period approach in calculating common stock issued on September 27,1978 were outstanding the interim quarterly tax provision. at the beginning of1978 and the proceeds were applied to reduce the short term debt, the earnings per share for 1978 Pension Plan. The Company's retirement plan is would have been $ 2.36. Cash dividends per share are based noncontributory and covers all regular employees. Current on the shares outstanding at the time dividends are paid, service costs are funded annually. Past service costs are being adjusted for stock dividends. Cash dividends per share at the amortized over a 40 year period.

rates declared in each period amount to $ 1.34 for 1977 and Retirement plan expenditures for the years 1977 and 1978 were $ 1.42 for 1978.

$ 9.2 million and $ 9.9 million, respectively. The actuarially Note 2. Departmental Financial Information pho~nch of oolfacs)

The Company's records are maintained by operating departments, in accordance with PSC accounting policies, giving effect to the rate-making process. The following is the operating data for each of the Company's departments and no interdepartmental adjustments are required to arrive at the operating data included in the Statement of Income.

Electcic Gas Total Operating information-1978 Operating revenues $ 231,307 $ 118,531 $ 19,110 $ 368,948 Operating expenses, excluding provision for income taxes 181,428 107,873 19,357 308,658 Prctax operating income 49,879 10,G58 (247) 60,290 Provision for income taxes................... 9,244 1,96G (1G9) 11,041 Nct operating income $ 40,635 $ 8,692 $ (78) 49,249 Other incomc-nct 1 3c1 23 Interest charges 22,786 Nct income pcr statement of income . $ 39,586 Other information Depreciation $ 16,984 $ 4,641 $ 581 $ 22,206 Nuclear fuel amortization 15,746 15,746 Capital expenditures 100,194 11,903 455 112,552 Investment information-December 31,1978 Identifiable assets................... $ 711,91 7 $ 146,299 $ 15,71 G $ 873,932 Assets utilized for overall Company operations (a) 19,454 Total assets pcr balance sheet .. $ 893,386 Operating information-1977 Operating revenues $ 206,343 $ 105,797 $ 19,004 $ 331,144 Operating cxpcnscs, excluding provision for income taxes 165,858 97,465 19,186 282,509 Prctax operating income .. 40,485 8/32 (182) 48,635 Provision for income taxes................... 4,041 147 (330) 3,858 Nct operating income $ 36,444 $ 8,1 85 $ 148 44,777 Other incomc-nct 7,783 Interest charges 19,511 Nct income pcr statement of income . $ 33,049 Other information Depreciation $ 15,333 $ 5,140 $ 580 $ 21,053 Nuclear fuel amortization 14,386 14,386 Capital expenditures 90,722 6,943 426 98,09I Investment information-December 31, 1977 IdcntiflabIc assets . $ 626,464 $ 141,130 $ 16,619 $ 784,213 Assets utilized for overall Company operations (a) 14,161 Total assets pcr balance sheet . $ 798,374 (a) Consists primarily of cash, prcpaymcnts and unamortized debt expense.

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Npte 3. Federal Income Tax Provision (Thnusa'mnfoottars)

Th'e following is a reconciliation for the years 1977 and 1978 of the difference between the amount of Federal income tax expense reported in the Statement of Income and the amount computed by multiplying the income before tax by the statutory tax rate.

1978 1977

% of  % of Prelax Pretax Amount Income Amount Income Net income $ 39,586 $ 33,049 Federal income tax Current 5,166 961 Deferred . 5,875 2,897 Charged to operating expense . 11,041 3,858 Amort. of deferred investment tax credit .. (513) (222)

AFDC net of tax rate difference (2,201)

Other....................., (2,501) (1,460)

Included in Other Income... (5,215) (1,682)

Actual Federal income tax expense 5,826 2,1 76 Income before Federal income tax $ 45,412 $ 35,225 Computed tax expense . $ 21,797 48.0 $ 16,908 Increases (reductions) in tax resulting from:

Excess of tax depreciation less amount deferred (3,525) (7.8) (3,580) (10.2)

Expenses capitalized for financial statements including interest, payroll and use tax, etc. (9,3G1) (20.G) (7,765) (22.0)

Investment tax credit . (4,955) (10.9) (2,624) (7.4)

Property taxes on basis of date of taxable status 224 .5 (254) (7)

Cost of removal, less net amount deferred . (724) (1 6) (655) (1.9)

Revenue taxes (deducted when paid) 2.133 4.7 Miscellaneous items, net . 237 .5 146 4 Actual Federal income tax expense . $ 5,826 12.8 $ 2,1 76 G.2 A summary of the deferred amounts charged or (credited) to income is as follows:

1978 1977 Investment tax credit $ G,629 $ 2,003 Class life depreciation 1,7G3 1,379 Fuel costs (469) 1,386 Nuclear fuel amortization............. (142) (362)

Nuclear fuel storage costs (4,989) (3,346)

Fossil plant abandonment costs 2,160 7GS KV Transmission system abandonment costs 850 OII)er......................... (481) (545)

$ 3,161 $ 2,675 Note 4. Capitalization Bond premium applicable to the years 1977 and 1978 is $ 677,702 Long-Term Debt (Thousands) and $ 635,667, respectively.

Principal Amount Sinking and improvement fund requirements aggregate First Mortgage Bonds December 31, Sertes Due 1978 1977 $ 333,540 per annum. Such requirements may be met by 3 L Mar. 1, 1979... $ 16,G77 $ 16,G77 certification of additional property or by depositing cash with 2s/e M Aug. 15, 1980 .. 12,000 12,000 the Trustee. The 1977 and 1978 requirements were met by 3)S N June 1, 1982... 6,000 6,000 certification of additional property.

3Ye 0 Mar. 1, 1985... 10,000 10,000 4Ye R July1,1987... 15,000 15,000 5 S Oct.15,1989 .. 12,000 12,000 Capital Stock.

4ya T Nov.15,1991 .. 15,000 15,000 Preferred Stock (cumulative)-Par value $ 100; 2,000,000 shares 4Ye U Sept. 15, 1994 .. 1G,000 16,000 5.3 V May 1, 1996... 18,000 18,000 authorized:

6 ye W Sept. 15, 1997 .. 20,000 20,000 (Thousarxh)

Shares December 31, Redemption 6.7 X July1,1998... 30,000 30,000 Series Outstanding 1978 1977 (per share) (a) 8 Y Aug. 15,1999 .. 30,000 30,000 4 F 120,000 $ 12,000 $ 12,000 105 At any time 9Ye Z Sept. 1, 2000 30,000 30,000 4.10 H 80,000 8,000 8,000 101 At any time 10'/a AA Aug. 1, 1983 29,G67 29,667 4'/a I G0,000 6,000 6,000 101 At any time 9Y< BB June 1S,200G .. 50,000 50,000 4.10 50,000 5,000 5,000 102.50 At any time BYe CC Sept. 15, 2007 .. 50,000 50,000 4.95 K 60,000 6,000 6,000 102 At any time 9Yi DD Dec. 1, 2003 40,000 4.55 M 100,000 10,000 10,000 102 Before 3/1/80 400,344 360,344 7.50 N 200,000 20,000 20,000 108 Before 6/1/79 Less: Series L due in 1979 16,G77 11 0 (b)

Total Long-Term Debt . $ 383,6G7 $ 3G0,344 670,000 $ 67,000 $ 67,000 19

(a) Redeemable at the option of the Company on 30 Company also issueS commercial paper at various discount notice, plus accrued dividends in all cases. rates, usually maturing within 30-45 days.

days'inimum (b) Called for redemption on December 20,1977. The issuance Balances and average interest rates of short-term borrowings as costs related to Series 0 were charged to retained earnings, and of December 31 for the years indicated were as follows:

the call premium of $ 2,750,000 related to this series was 1978 1977 reported as other deferred debits and, beginning in January Rates Amount Rates Amount 1978, is being amortized in accordance with an order from the (Thousands) (Thousands)

PSC. Outstanding short-term debt and average The Company's Certificate of Incorporation was amended on interest rate at end of June 1, 1977 to authorize 4,000,000 additional shares of period:

cumulative preferred stock, having a par value of $ 25 per share. Notes Payable 7.00K $ 7,000 None of this preferred stock has been issued. Commercial Paper . 6.63 2,000 Maximum short-term Preference Stock-Par value $ 1; 5,000,000 shares authorized: debt outstanding during the period:

(thousands)

Shares December 31, Notes Payable $ 15,500 25,000 Series Outstanding 1978 1977 Issued Commercial Paper . 15,900 26,500 7.6 A 280,000 $ 28,000 $ 28,000 12/20/77 Weighted average During January 1985, the Company must offer to purchase on short-term debt and interest rates during October 1,1985 all of the outstanding 7.6% Series A preference die per lock stock at a price of $ 100 per share. The shares remaining Notes Payable 8.82% 7,769 6.42 10,960 outstanding after such offer are callable at $ 100 per share at the Commercial Paper . 7.84 9,450 5.35 11,148 option of the Company at any time after December 20, 1987.

The above averages were based upon the daily balances and Preference stock is subordinate to preferred stock but is senior interest rates in effect for the periods during which short-term to common stock. borrowings were outstanding and before giving effect to the additional interest cost resulting from compensating balances.

Common Stock-Par value $ 5; 25,000,000 shares authorized:

Per (Thousands)

Share Shares Amount Outstanding, December 31, 1976 11,366,111 $ 181,301 Note 6. Commitments and Other Matters 3% Stock Dividend Sale of Stock...........

20.00 21.00 340,984 1,000,000 6,820 21,000 The Company's capital expenditures program involves an TRASOP4 20.91 24,300 508 estimated expenditure of $ 115 million, not including allowance Automatic Dividend 18.31- for funds used during construction, in 1979 and the Company Reinvestment Plan...... 20.94 158,236 3,071 has entered into certain commitments for purchase of materials Capital Stock Expense (167) and equipment in connection with such program.

Outstanding, December 31, 1977 12,889,631 212,533 3'X Stock Dividend Sale of Stock...........

....... 21.00 18.75 386,689 1,250,000 8,120 23,438 Operations of the Company's generating stations are subject to various Federal, state and local environmental standards.

Automatic Dividend 17.19- Under the Clean Water Act, the Company is required to obtain Reinvestment Plan...... 19.25 206,427 3,749 permits to discharge pollutants into the waters of the United Capital Stock Expense (902) States. The United States Environmental Protection Agency Outstanding, December 31, 1978 14,732,747 $ 246,938 (EPA) issued National Pollutant Discharge Elimination System

'Tax Reduction Aci Stock Ownership Plan permits for all the Company's major generating facilities, but a number of conditions relating to thermal and chemical The Company's Certificate of Incorporation was amended on discharge limitations were contested by the Company in June 1, 1977 to authorize an additional 10,000,000 shares of adjudicatory hearing requests submitted to EPA. The Company, common stock, par value $ 5 per share. the New York State Department of Environmental Conservation At December 31, 1978 there were 415,797 shares of common (which became a party to the adjudicatory hearings) and EPA stock reserved and unissued under the Automatic Dividend have settled the hearing requests as described below.

Reinvestment Plan. No other shares of common, preferred or The Company has reached agreement with the regulatory preference stock are reserved for officers and employees or for agencies on non-thermal effluent limitations and final permits options, warrants, conversions, and other rights. containing these agreed limitations have been issued and are Note 5. Cash and Short-Term Debt now in effect. Construction of treatment facilities is required to enable Company compliance with permit limitations for two of At December 31, 1978, the Company had $ 7 million in the Company's generating stations. Pending completioft of temporary cash investments. these facilities, the regulatory agencies have agreed in an Under informal agreements with certain banks, the Company is Enforcement Compliance Schedule Letter to exercise their expected to maintain an average compensating balance of 10 prosecutorial discretion to refrain from prosecuting the percent of the lines of credit plus an additional 10 percent of the Company for violation of certain effluent limitation deadlines principal amount of each borrowing. Under the agreements, contained in the Clean Water Act so long as the Company withdrawal of the compensating balances is not legally adheres to a specified construction schedule for the facilities.

restricted, and at December 31,1978 the balances amounted to Construction of these treatment facilities is expected to require

$ 4.4 million. Bank lines of credit aggregated $ 64 million and capital expenditures estimated at $ 10.5 million over the next borrowings are at current floating prime interest rates. The two years.

20

\

The Comparty has pursued resolution of the contested thermal Note 8. Replacement Cost Information (Unaudited) limitations by submitting demonstrations in an effort to justify The impact of the rate of inflation experienced in recent years less stringent limitations for three generating stations. The has resulted in replacement costs of productive capacity greater thermal conditions of the permits remain stayed pending than the historical costs of such assets reported in the resolution of the thermal issues either through regulatory Company's financial statements. In compliance with reporting agencies'pproval of the demonstrations and less stringent requirements, estimated replacement cost information is thermal limitations or, in the absence of such approval, through disclosed in the Company's annual report to the Securities and the resumption of the adjudicatory hearing process. If the Exchange Commission on Form 10-K.

demonstrations and less stringent thermal limitations are not approved for any of the three facilities, the Company could be required to install cooling towers which would involve capital expenditures estimated at $ 53 million plus significant operating and maintenance expenses. Report of Independent Accountants The Company believes that additional expenditures and costs To the Shareholders and Board of Directors of Rochester Gas made necessary by environmental regulations will be fully and Electric Corporation allowable for rate-making purposes.

In our opinion, the accompanying balance sheets and the Through December 31, 1978, the Company has expended related statements of income, retained earnings, and of changes approximately $ 28.4 million (excluding land) with respect to its in financial position appearing on pages 14 through 16 present interest in the Sterling nuclear plant. The Company estimates fairly the financial position of Rochester Gas and Electric that if it were required to cancel all existing contracts relating to Corporation at December 31, 1978 and 1977, and the results of the construction of this project, it could incur up to $ 6 million in its operations and the changes in its financial position for the cancellation charges. The Company believes that, if it were years then ended, in conformity with generally accepted required to cancel the project, the PSC would permit it to accounting principles consistently applied. Our examinations of amortize all expenditures involved over a period of several these statements were made in accordance with generally years and to recover those expenditures through rate relief. accepted auditing standards and accordingly included such On December 1,1978, the PSC ruled that the case involving the tests of the accounting records and such other auditing 765 KV transmission facility that the Company had planned to procedures as we considered necessary in the circumstances.

construct be dismissed. The Company has petitioned the PSC requesting the amortization of the $ 2.1 million in expenditures for the line over a 3 year period, and to allow the Company to recover the unamortized costs through rate relief. 1900 Lincoln First Tower Rochester, New York 14604 January 26, 1979 Note 7. Interim Financial Information (Unaudited)

In the opinion of the Company, the following quarterly information includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results of operations for such periods. The variations in operations reported on a quarterly basis are a result of the seasonal nature of the Company's business and the availability of the Company's Ginna nuclear plant. Earnings per common share have been adjusted for stock dividends.

Quaner Ended (Thousands)

Dec. 3 I, Sept. 30, June 30, Mar. 31, 1978 1978 1978 1978 Operating revenues .. $ 92,312 $ 73,6G5 $ 8G,942 $ 116,029 Operating income... 8,4G6 9,527 12,009 19,247 Net income....... 7,088 6,596 9,909 15,993 Earnings on common stock......... 5,669 5,1 75 8,490 14,574 Earnings per common share (in dollars) .37 Dec. 3h Sept. 30, tune 30, Mar. 31, 1977 1977 1977 1977 Operating revenues .. $ 84,458 $ 67,199 $ 74,138 $ 105,349 Operating income... 9,395 7,479 10,626 17,277 Net income....... 6,444 4,61 9 7,775 14,211 Earnings on common stock......... 4,657 3,044 6,200 12,G36 Earnings per common share (in dollars) .35 .24 .51 1.04

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Management's Discussion and Analysis of the Summary of Operations The following financial review explains significant changes in the amounts of revenues and expenses between 1978/1977 and between1977/1976. The Notes to Financial Statements on page17 of this report contain additional related information.

Operating Revenues Changes in Operating Revenues Increase or (Decrease) from Prior Year (Thousands of Dollars)

Electric Dcpartmcnt Cas Department Steam Department 1978 1977 1978 1977 1978 1977 Customer Revenues (Estimated) from:

Rate Increases .. $ 12,181 $ 5,312 $ 2,555 $ 2,683 $ $

Fuel Cost Adjustment 6,446 410 5,582 12,475 (23) 1,824 Weather Effects............ 221 (82) 3,259 (1,1 44) 367 (198)

Customer Sales . 3,485 3,G05 (289) (7,631) (314) (997)

Other.... 358 137 1,6274 (1,613)* 76 (8)

Total Change in Customer Revenues 22,691 9,382 12,734 4,770 106 621 Electric Sales to Other Utilities . 2,273 8,1 44 Total Change in Operating Revenues $ 24,964 $ 17,526 $ 1 2,734 $ 4,770 $ 106 .

$ G21

'Reflects a one-time sto gas heating bill credit in tne aggregate amount of approximately $ 1.6 miltion that was applied to residential customers in February 1977. The credit was made by thc Company on its own initiative in order to alleviate the economic burden to customers who were faced with record high gas heating bills caused by the scvcrc weather conditions in Ianuary 1977 and, in some cases, with reduced income due to plant shutdowns forced by natural gas cur tailmcnts.

Revenues from electric sales to other utilities increased in both 1978 and 1977. Fluctuations in electric sales to other utilities and in purchased electricity discussed under Operating Expenses below generally are related to the output and availability of electric generation from the Cinna nuclear plant.

Operating Expenses Changes in Taxes Changes in Operation and Maintenance Expenses Taxes-local, state and other increased $ 2.1 million in 1978 Increase or (Decrcasc) from Prior Year principally due to higher gross income taxes based on (thousands of Dottar0 increased revenues. The 1977 increase of $ 3.4 million was 1978 1977 also due to higher gross income taxes as well as higher Electric and Steam Fuels $ 1,147 $ 10,632 property taxes resulting from the addition of new plant Purchased Electricity 5,702 (4,5 GO) and increased property tax rates.

Purchased Natural Cas 9,023 5,894 Other Operation .. 3,191 4,81 7 Total Federal income taxes increased $ 3.7 million in 1978 Maintenance 3,874 2,1G6 after declining $ 1.8 million in1977. See Note 3 to the Total Change in Operation and Notes to Financial Statements for a detailed analysis.

Maintenance Expense $ 22,937 $ 18,949 Other Statement of Income Items The increase in allowance for funds used during The 1977 increase in electric and steam fuels expense was construction of $ 2.2 million in 1978 and $ 3.8 million in mainly due to an increase in electricity generated in 1977 1977 was due to increases in utility plant expenditures in and an increased fuel cost per kilowatt-hour generated by both periods. See Note 1 to the Notes to Financial nuclear fuel. Purchased electricity expense increased in Statements.

1978 due to both higher costs and higher kilowatt-hour purchases while the decrease in 1977 reflected mainly Other-other income and deductions increased $ 3.1 decreased purchases netted against a relatively modest million during 1978 principally due to added increase in the cost per kilowatt-hour. non-operating Federal income tax credits.

Purchased natural gas expense increased in both 1978 and Interest on long term debt increased $ 3.1 million in 1978 1977 as a result of higher pipeline rates and increased and $ 3.2 million in 1977 as a result of additional bonds consumption due to colder weather in 1978. issued in December 1978, September 1977 and June 1976.

The increase in maintenance expense of $ 3.9 million in Dividends on preferred and preference stock decreased 1978 and $ 2.2 million in 1977 reflects increases in the cost $ .8 million in 1978 due to the refunding in December 1977 of labor and material to repair and maintain existing of a series of preferred stock with the proceeds from the facilities, and increased activity in the repair and upkeep sale of a series of preference stock having a lower of transmission and distribution facilities. dividend rate.

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R~' .ROCAESTER I"AS AND ELECTRIC CORPORATION Year Ended December 31 Summary Of OperatiOnS p~ .~ .Io.tu I 1978 1977 197G 1975 1974'973 Operating Revenues Electric $ 202,631 $ 179,940 $ 170,558 $ 146,629 $ 127,560 $ 116,512 Gas 118,531 105,797 101,027 82,478 75,463 64,633 Steam . 19,110 19,004 18,383 17,337 16,321 10,014 340,272 304,741 289,9G8 246,444 219,344 191,159 Electric sales to other utilities 28,676 2G,403 18,259 25,496 14,697 21,112 Total Operating Revenues 3G8,948 331,144 308,227 271,940 234,041 212,271 Operating Expenses Operation Electric and steam fuels .. 58,140 5G,993 46,3G1 46,268 36,G93 25,612 Purchased electricity . 19,337 13,635 18,195 12 212 12,070 8,841 Purchased natural gas 71,109 62,086 56,192 42,247 37,342 29,923 Other .. 65,685 62,494 57,677 50,G29 44,356 40,999 Maintenance 26,24G 22 372 20,206 19,700 17,966 15,888 Depreciation 22,20G 21,053 18,621 17,414 16,491 15,145 Taxes-local, state and other . 45,935 43,87G 40,502 36,157 32,410 29,993 Federal income tax-current . 5,166 961 (291) 4,162 (3,126) 6,724

-deferred . 5,875 2,897 5,65G 1.133 4,277 915 Total Operating Expenses 319,G99 286,367 263,119 229,922 198,479 174,040 Operating Income 49,249 44,777 45,108 42,018 35,562 38,231 Other Income and Deductions Allowance for other funds used during construction 8,705 6,473 4,G78 2,310 1,128 274 Other-net 4,418 1,310 1,128 537 670 715 Total Other Income and Deductions 13,123 7,783 5,80G 2,847 1,798 989 Income before Interest Charges 62,372 52,5GO 50,914 44,865 37,360 39,220 Interest Charges Long-term debt. 25+94 22,542 19,378 16,963 14,965 13,738 Short-term debt 1+88 1,319 1,054 1,568 ',255 1,246 Other-net . 41G 494 246 1,227 210 103 Allowance for borrowed funds used during construction (4,812) (4,844) (2,853) (1,264) (613) (173)

Total Interest Charges 22,786 19,511 17,825 18,494 16,817 14,914 Net Income 39,586 33,049 33,089 26,371 20,543 24,306 Dividends on Preferred and Preference Stock, at required rates 5,G78 6,512 G,245 4,054 3,550 3,550 Earnings Applicable to Common Stock $ 33,908 $ 26,537 $ 26,844 $ 22,317 $ 16,993 $ 20,756 Weighted average number of shares outstanding in each period, adjusted for stock dividends (000's) 13,774 12,474 11,983 10,987 10,628 9,753 Earnings per Common Share............ $ 2.4G $ 2.12 $ 2.24 $ 2.03 $ 1.59 $ 2.12 Cash Dividends per Common Share, adjusted for stock dividends $ 1.41 $ 1.29 $ 1.20 $ 1.15 $ 1.09 $ 1.04

• In1974, the Company began deferring a portion of increased fuel costs to the period in which the related revenues were recorded.

RKS ROCHESTER GAS AND ELECTRIC CORPORATION At December 31 COndenSed BalanCe Sheet trhousa d ofool4 I 1978 1977 1976 1975 1974 ASSETS UtilityPlant, at original cost . $ 857,959 $ 789,775 $ 727,687 $ 693,404 $ 659,308 $ 618,891 Less-Accumulated depreciation and, amortization . 261,477 229,122 198,778 185,455 167,645 150,600 59G,482 5G0,653 528,909 507,949 491,663 468,291 Construction work in progress 213,534 162,127 120,702 79,381 39,324 24,542 Net utility plant . 810,01G 722,780 649,611 587,330 530,987 492,833 Investment in Subsidiary, at equity 1,996 1,947 1,911 1,871 1,834 Current Assets. 66,953 58,387 61,090 53,796 52,678 38,982 Deferred Debits 14,421 15,260 8,151 7,450 8,213 4,874 Total Assets $ 893,386 $ 798,374 $ 720,763 $ 650,447 $ 593,712 $ 536,689 CAPITALIZATIONAND LIABILITIES Capitalization Long-term debt .. $ 384/03 $ 361,022 $ 311,395 $ 267,314 $ 267,348 $ 237,382 Preferred stock 67,000 67,000 92,000 89,000 67,000 67,000 Preference stock . 28,000 28,000 Common shareholders'quity Common stock 246,938 212,533 181,301 173,586 154,758 148,566 Retained earnings . 77+38 70,819 67,812 60,502 53,568 52,184 Total common shareholders'quity . 324,276 283/52 249,113 234,088 208,326 200,750 Total Capitalization 803,579 739,374 652,508 590,402 542,674 505,132 Current Liabilities 68,362 42,813 54,652 51,712 43,952 29,091 Deferred Credits and Other Liabilities . 21,445 16,187 13,603 8,333 7,086 2,466 Total Capitalization and Liabilities $ 893,386 $ 798,374 $ 720,763 $ 650,447 $ 593,712 $ 536,689 At December 31 Financial Data 1978 1977 1976 1975 1914 1973 Capitalization Ratios (percent)

Long-term debt 47.8 48.8 47.7 45.3 49.3 47.0 Preferred and preference stock 11.8 12.9 14.1 15.1 12.3 13.3 Common shareholders'quity . 40.4 38.3 38.2 39.6 38.4 39.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 Book Value per Common Share Adjusted for Stock Dividends-Year End $ 22.01 $ 21.34 $ 20.89 $ 19.69 $ 19.55 $ 18.91 Internal Generation of Funds (percent) 39.5 35.9 44.6 42.5 42.3 89.8 Rate of Return On Average Common Equity-Year End (percent) . 11.22 10.02 11.16 10.18 8.44 ,11.35 Effective Federal Income Tax Rate (percent) 12.8 14.4 1.7 22.9 Depreciation Rate-Electric 3.09 3.00 2.90 2.79 2.79 2.71

-Gas 2.79 2.67 2.63 2.60 2.60 2.48 Interest Coverages Before federal income taxes (incld. AFDC) .. 2.65 2.45 2.79 2.56 2.20 3.09 (excld. AFDC) .. 2.16 1.98 2.43 2.38 2.10 3.04 After federal income taxes (incld. AFDC)... 2.43 2.36 2.60 2.33 2.18 2.61 (excld. AFDC)... 1.94 1.89 2.24 2.15 2.08 2.58 24

RES ROCHESTER GAS AND ELECTRIC CORPORATION Year Ended December 31 Electric Department 1978 1977 1976 1975 1974 1973 Electric Revenue (000's)

Residential . $ 72,854 $ 64,986 $ 61,498 $ 53,904 $ 45,354 $ 42,125 Commercial 58,985 53,520 50,791 43,884 37,908 34,387 Industrial .. 48,792 41,783 39,402 33,244 30,858 27,597 Other .. 22,000 19,651 18,867 15,597 13,440 12,403 Electric revenue from our customers 202,631 179,940 170,558 146,629 127,560 116,512 Other electric utilities . 28,676 26,403 18,259 25,496 14,697 21,112 Total electric revenue 231,307 206,343 188,817 172,125 142,257 137,624 Electric Expense (000's)

Fuel used in electric generation 45,093 44,010 34,247 33,442 25,739 19,461 Purchased electricity 19+37 13,G35 18,195 12,212 12,070 8,841 Other operation . 47,602 45,011 40,930 35,662 32,177 28,378 Maintenance 19/05 16,339 14,796 14,282 12,390 11,029 Depreciation 16,983 15,333 13,865 12 731 11,977 11,026 Taxes-local, state and other 33,108 31,530 28,543 25369 22,784 21,281 Electric revenue deductions 181,428 165,858 150,576 133,698 117.137 100,016 Operating Income before Federal Income Tax . 49,879 40,485 38,241 38,427 25,120 37,608 Federal income tax 9,244 4,041 3,102 5,069 (433) 7,235 Operatin Income from Electric Operations 000's $ 40,635 $ 36,444 $ 35,139 $ 33,358 $ 25,553 $ 30,373 Electric Operating Ratio % 56.8 57.7 57.3 55.5 57.9 49.2 Electric Sales-KWH (000's)

Residential . 1,701,938 1,660,425 1,618,314 1,530,421 1,456,335 1,468,376 Commercial .. 1,417,624 1,392,023 1,366,094 1,294,81G 1,226,333 1,261,697 Industrial .. 1+17,988 1,431,855 1,384,235 1,284,940 1,346,116 1,424,639 Other . 465+73 454,059 437,097 411,122 379,379 385,243 Electric sales to our customers 5,102,923 4,9383 G2 4,805,740 4/21,299 4,408,163 4,539,955 Other electric utilities 1,445+91 1,453,590 1,187,942 1,864,050 1,182,902 2,269,686 Total electric sales 6+48+14 6,391,952 5,993,682 6,385,349 5,591,0G5 6,809,641 Electric Customers at December 31 Residential 251,645 250,121 249,177 24G,613 244,063 241,032 Commercial .. 24,137 24,023 23,983 23,874 23,827 23,436 Industrial . 1,348 1,353 1 371 1,380 1,365 1,3GO Other . 2,423 2,328 2 271 2,305 2,316 1,995 Total electric customers 279,553 277,825 276,802 274,172 271,571 267,823 Electricity Generated and Purchased-KWH (000's)

Fossil 2,025,645 2,272,182 2,060,186 1,731,723 1,961,453 1,869,079 Nuclear 3,206,313 3,018,305 2,040,746 3,026,894 2,079,539 3,395,564 Hydro . 192,278 222,391 277,010 265,401 234'8 243'2 Pumped storage . 133,287 193,340 118,716 98,743 131,311 57,801 Less energy for pumping (189,453) (283,573) (180,317) (148,180) (192,311) (86/62)

Other . 1,086 850 2,797 2,198 12,806 8,776 Total generated-Net 5,369,156 5,423,495 4,319,138 4,976,779 4,227,366 5,488,440 Purchased 1+79,863 1,400,505 2,106,904 1,888,091 1,836,911 1,709,420 Total electric ener y 6,949,019 6,824,000 6,426,042 6,864,870 6,064,277 7,197,860 Electric Generation Costs (000's)

Fossil $ 38,995 $ 40,557 $ 36,901 $ 33,120 $ 30,361 $ 18,099 Nuclear 25,561 22,330 13,485 14,191 7,980 10,368 Hydro . 1,229 1132 973 1,030 1,085 1,083 Other . 57 44 118 63 321 123 Electric Department Fuel Fossil -Total BTU (million) 21,139,146 23,862,599 21,822,976 18,388,874 20,911,993 20,331,338

-Cents per million BTU Nuclear-Total BTU (million)

........ 144.27 35,812,171 136.92 37,822,209 137.42 23,837,620 142.18 33,128,471 117.05 22,909,968 62.12 36,683,359

-Cents per million BTU ........ 43.97 38.04 25.69 22.91 11.28 18.62 System Net Capability-KW at December 31 Fossil 443,000 443,000 452,000 452,000 452,000 457,000 Nuclear 470,000 470,000 470,000 470,000 470,000 420,000 Hydro . 47,000 47,000 47,000 47,000 47,000 53,100 Other . 29,000 29,000 29,000 29,000 29,000 42,500 Purchased 339,000 338,000 342,000 356,000 347,000 352,000 Total system net capability 1,328,000 1,327,000 1,340,000 1,354,000 1,345,000 1,324,600 Net Peak Load-KW .. 983,000 987,000 934,000 925,000 880,000 922,000 Annual Load Factor-Net % 63.9 62.0 63.8 61.7 G3.3 G1.0 25

tCL~~iiR ROCHESTER GAS AND ELECTRIC CORPORATION Year Ended December.31 Gas Department 1978 1977 1976 1975 1974 1973 Gas Revenue (000's)

Residential $ 5,09G $ 4,828 $ 4,426 $ 3,964 $ 3,809 $ 3,627 Residential spaceheating 74,425 G6,900 63,974 52,584 47,758 40,453 Commercial 20,535 18,057 16,848 13,593 12,533 10,433 Industrial . 13,891 12,014 11,900 9,167 8,583 7,648 Municipal and other . 4,584 3,998 3,879 3,1 70 2,780 2,472 Total gas revenue 118,531 105,797 101,027 82,478 75,463 64,633 Gas Expense (000's)

Purchased natural gas 71,109 G2,086 5G,192 42,247 37,342 29,923 Other operation . 15,810 15,072 14,921 13,310 11,492 11,420 Maintenance 5,768 5,078 4,510 4,500 4,757 4,043 Depreciation . 4,641 5,140 4,194 4,137 3,978 3,615 Taxes-local, state and other 10,545 10,089 9,729 8,715 7,937 7,281 Gas revenue deductions 107,873 97,465 89,546 72,909 65,506 56,282 Operating Income before Federal Income Tax. 10,658 8,332 11,481 9,569 9,957 8,351 Federal income tax 1,966 147 2,212 914 1,221 840 Operating Income from Gas Operations (000's) $ 8,692 $ 8,185 $ 9,269 $ 8,655 $ 8,736 $ 7,511 Gas Operating Ratio  % 78.2 77.7 74.9 72.8 71.0 70.2 Gas Sales-Therms (000's)

Residential 13,465 13,833 14,404 14,328 14,903 15,141 Residential spaceheating . 255,951 252,923 275,582 249,224 263,290 245,368 Commercial .. 82,451 77,751 86,400 78,217 84,872 79,039 Industrial 63,709 59,956 72,847 65,760 73,926 78,137 Municipal 17,748 15,975 18,598 16,705 16,696 17,148 Total gas sales 433324 420,438 467,831 424,234 453,687 434,833 Gas Customers at December 31 Residential 38,0 I3 39,977 40,892 41,437 42,884 45,958 Residential spaceheating . 154/66 152,856 153,583 153,848 151,154 144,847 Commercial .. 12,092 11,268 11,475 11,390 11,478 11,303 Industrial 759 746 757 756 767 762 Municipal 1,084 989 936 957 1,024 865 Total gas customers . 206+14 205,836 207,643 208,388 207,307 203,735 Gas-Therms (000's)

Purchased for reforming and mixing 9,830 23,160 31,518 30,834 Purchased for resale 449,904 428,811 478,935 421,252 438,494 422,718 Other . 13,178 10,123 7,911 7,019 7,063 6,535 Total gas available 463,082 438,934 496,676 451,431 477,075 460,087 Cost of gas per therm 15.26e 14.43< 11.37< 10.19< 8.49< 7.13<

Total Daily Capacity-Therms at December 31 Mixed gas . 269,000 410,844 410,844 Straight natural gas 4,164,000 4,164,000 4,164,000 3,895,000 3,871,448 3,762,672 Total daily capacity 4,164,000 4,164,000 4,164,000 4,164,000 4,282,292 4,173,516 Maximum daily sendout-Therms 3,183,678 3,578,468 3,497,861 3,041,070 3,192,631 2,985,392 Degree Days (Customer Billing)

For the period. 7,021 6,726 6,905 6,211 6,808 5,883 Percent (warmer) colder than normal 4.5 (0.1) 1.6 (7.2) 1.3 (12.2)

%Sic ROCHESTER GAS AND ELECTRIC CORPORATION Year Ended December 31 St'earn 0'epartment 1978 1977 197G 1975 1974 1973 Steam Revenue (000's)

Commercial $ 6,087 $ 6,352 $ 6,401 $ 5,668 $ 5,419 $ 3,6G8 Industrial .. 10,732 10,455 9,799 9,8G2 9,396 5,470 Municipal and other 2,291 2,197 2,183 1,807 1,506 876 Total steam revenue 19,110 19,004 18,383 17,337 16,321 10,014 Steam Expense (000's)

Fuel used in steam generation 13,047 12,983 12,114 12,826 10,954 6,151 Other operation .. 2 273 2,411 1,826 1,657 687 1,201 Maintenance 1.173 955 900 918 819 816 Depreciation 581 580 562 546 536 504 Taxes-local, state and other .. 2,282 2,257 2,230 2,073 1,689 1,431 Steam revenue deductions 19,356 19,18G 17,632 18,020 14,685 10,103 Operating Income before Federal Income Tax . (246) (182) 751 (683) 1,636 (89)

Federal income tax (168) (330) 51 (G88) 363 (436)

Operating Income from Steam Operations (000's) . $ (78) $ 148 $ 700 $ 5 $ 1,273 $ 347 Steam Operating Ratio  % 86.3 86.0 80.7 88.8 76.3 81.6 Steam Sales-Lbs. (000's)

Commercial 898,904 933,G09 1,041,415 980,324 1,160,122 1,268,917 Industrial .. 1,718+65 1,682,033 1,738,391 1,839,402 2,127,837 2,136,794 Municipal 34G,031 334,G45 367,553 325,727 334,463 318,323 Total steam sales 2,963/00 2,950,287 3,147359 3,145,453 3,G22,422 3,724,034 Steam Customers at December 31 Commercial 238 254 271 281 292 302 Industrial .. 70 74 77 77 78 78 Municipal 31 32 32 31 31 30 Total steam customers 339 360 380 401 410 Steam Produced-Lbs. (000's)

Produced by steam department........ 1+53,053 1,194,132 1,408,029 1,387,3G3 1,532,24G 1,442,472 By-product steam from electric department 1,987,G38 2,133,853 2,193,283 2,344,G93 2,588,120 2,613,321 Total steam produced 3+40,691 3,327,985 3,601,312 3,732,05G 4,120,3GG 4,0SS,793 Steam Department Fuel Total BTU (million) 5,705,943 5,548,290 6,022,360 6,230,767 6,807,500 6,849,830 Cents per million BTU 226.21 232.GO 203.35 203.08 196.31 89.80 Rate Increases Granted Amount of Rale of Rate ol Pending Requests Increase Rclurn on Relurn on Class of Effective (Annual Basis) Percent Rate Base Equity Class ol Amount Service Dale ol increase (000's) Increase Authorized Authorized Service Date ol filing (000's) Percent Electric October 25,1972 $ 10,154 11.5% 7.96% 12.00% Electric May 26,1978 $ 37,946 17.8%

October 23, 1974 17,992 1G.O 8.83 13.19 Gas May 26, 1978 10,789 8.9 April 20, 1976 11,002 7.9 9.35 13.50 November 11, 1977 10,1 BG 5.8 9.31 12.80 February 18, 1978 3,000 1.6 9.31 12.80 Gas April 28, 1972 3,67G G.8 7.77 12.00 October 23, 1974 4,854 7.G 8.42 12.09 April 20, 1976 4,983 6.3 9.35 13.50 November 11, 1977 2,536 2.4 9.31 12.80 February 2, 1978 678 .6 9.31 12.80 Steam May11,1972 897 11.4 6AB November 12, 1973 500 5.1 7.25 April 15, 1975 2,475 12.0 8.G9 27

Directors Wilmot R. Craig], J. Wallace Ely*t Former Chairman ol the Board, Chairman ol the Board, Keith W. Amish* Lincoln First Banks Inc. Security New York State Corporation Executive Vice President, Rochester Gas and Electric Corporation E. Kent Damontg Walter A. Fallon Vice President and Secretary, Chairman ol the Board and Chiel Executive Officer, Paul W. Briggs* Xerox Corporation Eastman Kodak Company President, Rochester Gas and Electric Corporation Francis E. Drake, Jr.* Ernest J. Howe*tf Chairman ol tht! Board and Chiel Executive Officer, Chairman of the Executiveand Finance Committee, John D. Cockcroft* Rochester Gas and Electric Corporation Rochester Gas and Electric Corporation Former Chairman ol the Board, The R. T. French Company

'Member of the Executive and finance Committee of the Board of Directors tMember of the Audit Commhtee of th>> Board of Dirc<tort

a) og

")

Officers Francis E. Drake, Jr.

Chairman ol the Board and Chiel Executive Oificer

,V Age 63, Years of Service, 41 Paul W. Briggs President Age 56, Years ol Service, 33 Keith W. Amish Executive Vice President Age 55, Years of Service,31 Joseph J. Hartman Vice President, Cas and Transportatfon Age 54, Years o! Service, 32 John L. Kennedy Vice President, Rates and Covernmcntal Affairs Age 60, Years ol Service, 38 John E. Maier Vice President, Employee Relations Age 51, Years ol Service, 31 Richard J. Rudman Vice President, Electric Transmission and r Distribution f Age 51, Years olService,33 Harry C. Saddock Vice President, Eiectn'c System Planning and gg) Operation Age 49, Years ol Service, 28 Mario Silvestrone Vice President, Consumer Services, Corporate Communications and Purchasing Age 55, Years ol Ser vice, 28 Leon D. White, Jr.

Vice President, Electric and Steam Proddction Age59, Years olscrvice,41 Dean W. Caple Secretary and Treasurer Age 55, Years ol Service,30 Francis A. Sullivan, Jr.

Controller Age 55, Years ol Service, 28 Robert W. Ball Assistant Treasurer Age 62, Years ol Service,40 David C. Heiligman Assistant Secretary Age 38, Years of Service, 15 Robert C. Henderson Assistant Controller Age 38, Years of Service, 1S Stephen Kowba Assistant Controller Age59, Years olservice,28 John M. Kuebel Auditor Age43, YcarsolService,14

,Daniel C. Kennedy* Edward J. Nelson Partner, Former President, Nixon, Hargrave, Devans 8 Doyle Rochester Cas and Electric Corporation A. J. McMullen William S. Vaughn*tg Chairman of the Executive Commiuee, Carlock Inc., Former Chairman ol the Board, and Director ol the parent company, Colt Industries, Inc. Eastman Kodak Company Paul A. Miller William G. vonBergt Former President, Chairman ol the Board and Chief Executive Officer, Rochcstcr Institute ol Technology Sybron Corporation tMember ot the Safary Review Committee of the Board of Directors

Rochester Gas and Electric Corporation 89 East Avenue Rochester, New York 14649

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OSWEGO ORLEANS r Rochester I WAYNE NIAGARA rr ONROE I r ONONDAGA GENESEE CAYUGA ONTAIIIO CahandaiIIva WYOMING YATES ERIE LIVINGSTON SENECA TOMPKINS ALLEGANY s SCHUYLER CHAUTAUQUA CATTARAUGUS STEUBEN CHEMUNG TIOGA

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OSWEGO I

ORLEANS I Rochester I WAYNE NIAGARA ONROE ONONDAGA GENESEE I CAYUGA ONTARIO WYOMING YATES ERIE LIVINGSTON SENECA TOMPKINS ALLEGANY SCHUYLER CHAUTAUOUA CATTARAUGUS STEUBEN CHEMUNG TIOGA 4

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Rochester Gas and Electric Corporation Annual Report 1978 I I I P gal WBg

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