ML17261A110

Annual Rept 1978.

ML17261A110
Person / Time
Site:	Ginna
Issue date:	12/31/1978
From:	ROCHESTER GAS & ELECTRIC CORP.
To:
References
NUDOCS 7904090169
Download: ML17261A110 (66)

Text

Annual Report. Contents Shareholder Inquiries for year ended Highlights 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. Caplc, Gas Operations 6 Secretary and Treasurer at the Company.

Research and Development 6 The Company will provide, without charge, a copy of the Annual Rcport on Form10-K filed with the The Rising Cost of Doing Business 8 Securities and Exchange Commission with respect Financial Statements 14 to fiscal year 1970, upon written request of any Management's Discussion and Analysis shareholder addressed lo the Secretary.

of the Summary of Operations 22 Financial and Statistical Information 23 Directors 28 Officers (inside back cover)

Principal 0 (gee 89 East Avenue Rochester, New York 14649 (716) 546-2700 Financial Contact Paul W. Briggs President Annual Meeting May 16, 1979 At Rochester, New York New York Stock Excltange Symbol Rochester Cas 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 East Avenue Rochester, New York 14630 Co-transfer Agent Morgan Guaranty Trust Company of New York a'cs-2@0 30 West Broadway New York, New York10015 Co-registrar t P After-~

The Chase Manhattan Bank, NA.

One Chase Manhattan Plaza New York, New York10015 oqtevoveiP Agent for Automatic Dividend Reinvestment Plan Lincoln First Bank, N.A.

Automatic Dividend Reinvestment Service Post Office Box 1507 Rochester, New York 14603 Bond Trustee and Paying Agent Bankers Trust Company Post Office Box 310 Church Street Station New York, New York10015 V9040901(o't

Highlights 1978 1977  % Change Common Stock Earnings per weighted average share . $ 2A6 $ 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 y2 17r/s 20% 17s/s 2nd quarter 18t/s 17s/s 20s/s 18 3rd quarter . 19'/s 18 21'/4 19'/s 4th quarter......., .. 18'/4 1GYz 21 /s Cash dividends paid (100/s 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 4,938,3G2 3 Revenue (000's) $ 202,631 $ 179,940 13 Electricity to other utilities Kilowatt-hours (000's) . 1,445,391 1,453,590 Revenue (000's) $ 28,G7G $ 2G,403 Gas Therms (000's) 433024 420,438 3 Revenue (000's) $ 118531 $ 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 37,541 34,548 9 Total operating expenses $ 319,699 $ 28G,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) $ 810,01G $ 722,780 12 Number of Employees 2,622 2,624 Note: The 20th annual stock dividend was paid February 23, 1979 at the rate ol three percent.

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 RG8tE 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 growth in New York State.

million in new capital. In December 1978 RG5E 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 new 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 Francis E. Drake, fr.

Chairman of the Board and companies in New York State to join in common Chief Executive Officer 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 RGRE customers President alone through the year 1998 would approach $ I 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 RG&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 in 1979. Gas supplies are sufficient and we will continue to expand gas

To Shareholders:

After a disappointing year in 1977, common 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 n r

share; a substantial improvement, especially since there were 1.3 million additional shares outstanding tt 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 can be taken from the State government's more serious efforts to retain and attract business and industry. Keith W. Amish Francis F, Drake, /r. 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 February1979. 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 over 1977, or 19.4 percent.

totaled $ 28.7 million. The gain resulted from a Capital expenditures for 1978 were $ 112.6 sustained strong market for RG8r E'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 an 11 percent increase over 1977. 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 Generation Siting and the Envi-470,000 kilowatts following the May1978 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 May 1978 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

$ 31 9.7 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

Electric Kilowatt-Hour Sales Gas Operations Research and Development to our Customers by Classes Supply Adequate RG&E's supply of In1978 RC&E invested $ 2.8 million in m illions Total Electric KWH Sales natural gas, under contract with research and development projects.

1500 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 Ide 1977 4938 liquefied natural gas (LNG) from research organizations as well as the 1976 4806 Algeria to our supplier continue on research arm of New York State 1975 4521 schedule, adding 15 percent to the utilities, known by the acronym 1974 4408 1973 4540 supplier's capacity. This, combined ESEERCO. One such ESEERCO L 1972 1971 4292 3982 with increasing yields from the program helps support the nuclear fusion experiments at the University 1970 3802 supplier's Louisiana offshore wells, 1969 3578 provides assurances for adequate gas of Rochester. The New York State volumes in meeting existing and Energy Research and Development projected demands. Authority directly assessed RG&E

$ 600,000 for state government spon-New Gas Service RG&E installed sored research and development iU more than 1300 gas service lines to projects.

new residential, commercial and The other half of the research and us industrial customers in 1978. Including development funds was allocated to heating system conversions, more 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 U UL U This expansion followed Public number of residential gas furnaces Service Commission approval in 1977 have been modified 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 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 RC8 E. The research on a novel 1978 433 1977 420 backhoe safety shutoff system that 1976 468 Therm Billing Liquefied natural gas will prevent accidental damage to 1975 424 underground cable and pipeline has 1974 454 (LNG) has a higher heat value (BTU's 1973 435 per cubic foot) than the domestic gas produced a prototype that will be 1972 469 we have previously received. When field-tested this year. In another 1971 442 1970 425 LNG is mixed with domestic gas, as in research area under RG8 E coordina-1969 403 the supplier's delivery to RG8 E, the tion, data collected from several LI' thermal value varies. For this reason, utilities were analyzed to determine RG&E has changed its gas billing from spawning habits of fish along the meicral~ hundreds of cubic feet to therms, one southern shoreline of Lake Ontario. In therm being one hundred thousand all, RG&E directly supported more BTU's. Starting in May 1979, a gas than 40 research and development LL JU' customer's bill will be calculated projects in 1978.

according to the average heat value 50 (therms) used during the billing Management Appointment In us ial month. While this new system should Joseph J. Hartman was IJ 'iIJUU have no effect on the amount of the customer's bill, it ensures that the elected to the position of Vice President, Cas Other t Company's gas revenues will more 0

and Transportation by 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 December 1, 1978. He succeeded Elvin A. Skibinski who retired after 33 years of service.

Mr. Hartman joined RC&E in1946 as a RC&E engineers designed an uncommon type ol gas pipeline support in this bridge that co-op student in the Gas Department.

crosses the Barge Canal. The support cables are /%4~i He held a series of engineering posi-underneath the pipe instead ol above. tions in the Gas Department until N 1974 when he was appointed Superin-tendent of General Maintenance.

Folfowing a major redesign ol 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 ln 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.

RGAE 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 transformer replaced a unit that remarkable 98 percent availability. For tion facilities in the Genesee District, failedinservicein 7978. Itis oneoltwo 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 RCg E system.

For further reliability, the original rotor facilities in meeting sustained growth has been rebuilt with the improved in its area. A new 12.5 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

In the Laboratory for Laser Energetics ol tf>e College ol Engineering and Applied Science at the University of Rochester, experiments are conducted in an attempt to ltarness thermal energy from nuclear fusion.

Powerful laser beams are focused through mirrors and converge on a minute hydrogen pellet inside a target clamber (photo inset). The project is supportedin part by RG&E, and the experiment may one day lead to a virtually inexhaustible source ol therntaf energy lor the generation ol electricity.

Some Plain Talk i.. t~,

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The cost of living has gone up dr'astically over the On the subject of rising costs, pressure groups and years, and we know it willcontinue 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 inflationary 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 efforts 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 point 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 portray, 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 affected most RG&E customers? Based on wage figures published by the New York State Depart-ment of Labor, our records show that in 19'70 the gpical 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, tlie cost of coal per ton more than doubled while oil and natural gas had tripled in

~oaolA cost. Nuclear fuel, processed and ready for use in a power ABC plant, had a fourfold cost increase, yet it still remains the Pay to the order ot Date 1978 most economical fuel for electric generation as seen in the JOtN PUSUD accompanying chart that compares fuel cost on a BTU or Q. 55555 ROCHESTER,raY. heat value basis.

Fuel Expense (Fuel costs per million BTU's)

Tax 26.7% Ga 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 .50 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 Nuclear 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 Oil 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 set iously 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 enacted by the federal and state The plight 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 industry, whether it be a regulated C' natural monopoly or not. Recognizing this social problem, '

we at RG&E have expressed our support for an energy , nfl

'

stamp program and have even offered to help develop such plan. But, so far, the authorities have not accepted tPhe oEer. 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 mi 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 for their eR'orts.

The ratio of RG&E customers to employees in 1970 itlp was 168 to one. In 1978 there were 186 customers for each pd RG&E employee. This means that our employees have

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

o RG&E willcontinue to exercise control of wage and

~Cp benefit expenses, and we are observing the current volun-o~

tary anti-infiationary guidelines.

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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 gl tax, "hidden" taxes in the customer bills account for more i than 15 cents of every dollar the customer pays to RG&E. r i 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 197ti Customer Bill 22.5%

SK~W

~ a rvauc Tax is another example of expense where RG&E can exercise little or no control. Of course, it could be pointed 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 miscellaneous materials and services. Among other items pay high tax rates on infiated values. The eB'ect is cumulative. this category includes fees assessed by regulatory agencies, expenses for regulatory compliance, legal counsel, and building and grounds maintenance. Here, too, there is really little choice. We do, however, request bids where we can and look for the best price in the marketplace.

D O P

~ D 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 RG&E 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%%d 10

Average Annual Use Per Residential Electric Customer Average Annual Use Per Residential Space Heating Gas Customer Kilowatt Hours Therms'666 6112 6166

$ 371 SSS7 1767 1776 1777 7653 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 0 Earnings per Common Share 0 Cash Dividends per Common Share 2. 26 (Adjusted for Stock Dividends) 2.12 2.12 23>3 1.81 ts9 1.1S 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 12

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 L .0 little control.

w 0 D D Gas and electric companies constitute the most y 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 R G&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 infiation 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 maintaining 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 in Millions oi Dollars, Millions Excluding Allowance ior funds Used During company business, is high, and it continues to go higher,

$ 120 lrrs driven by unbalanced federal and state budgets. Most of Construction 100 the cost is in fuels, taxes, capital expenditures and the cost 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 beneficial. 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 "pro5t" is nothing more than the amount that the New York State Public Service Commis-sion (PSC) allows us to pay for the I money we have to borrow to build the facilities needed to serve customers. Put another way, we are allowed to earn a "rate 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 cost of money in interest and share-holder dividends we would not be able to raise the capital necessary to continue

SCAM ROCHESTER GAS AND ELECTRIC CORPORATION Year Ended December 31 Statement of Income (rho ndsofool4 ) 1978 1977 Operating Revenues (Note1)

Electric .. $ 202,631 $ 179,940 Gas 118,531 105,797 Steam 19,110 19,004 340,272 304,741 Electric sales to other utilities ,

28,G76 26,403 Total Operating Revenues 3G8,948 331,144 Operating Expenses (Note1)

Operation Electric and steam fuels . 58,140 5G,993 Purchased electricity . 19,337 13,G35 Purchased natural gas 71,109 62,086 Other .. 65,685 62,494 Maintenance 26,24G 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) 5,875 2,897 Total Operating Expenses 319,699 28G,3G7 Operating Income 49,249 44,777 Other Income and Deductions Allowance for other funds used during construction (Note 1) 8,705 6,473 Other-net 4,418 1,310 Total Other Income and Deductions 13123 7,783 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 41G 494 Allowance for borrowed funds used during construction (Note 1) (4,812) (4,844)

Total Interest Charges . 22,786 19,511 Net Income 39,586 33,049 Dividends on Preferred and Preference Stock, at required rates S,G78 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) $ 2.4G $ 2.12 Cash Dividends per Common Share, adjusted for stock dividends (Note 1) $ 1;41 $ 1.29 Statement Of Retained EarningS tr~~~..io.i~>> 1978 1977 Balance at beginning of period $ 70,819 $ 67,812 Add Net income 39/86 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) 19,269 16,009 Stock (Note 4) 8,120 6,820 Total 33,0G7 30,042 Balance at end of period $ 77,338 $ 70,819

Source of 1978 Revenue Dollar Use of 1978 Revenue Dollar in Cents in Cents Electric Revenue Gas Revenue Cost of fuels 40st Purchased rlecrric g Purchased Steam rvefs lfecvicisy 19e 6st Depreciation 554 324 Taxes 154 44 ssa Interest on Bonds & Notes Misc. Materials Dividends

& Services (Com. Sst & Pfd. 2a)

Electric Sales Steam to Other Utilities Revenue Wages

& Benefits Reinvested Earnings Capitalization in Millions of Dollars 400 350 212A 250

~2VA 2VA A 211.1 121.1 150 112.$

ssay 220 esAI 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 4 long-Term oebf 4 common sharehofders'qvisy 4 prefeved rquisy 13

RES ROCHESTER GAS AND ELECTRIC CORPORATION At December 31 Balance Sheet (rho sa ckofoolh s) 1978 1977 ASSETS UtilityPlant, at original cost (Note1)

Electric .. $ 669,104 $ G09,387 Gas 171,120 1G2,946 Steam . 17,735 17,442 857,959 789,775 Less-Accumulated depreciation and amortization 2G1,477 229,122 59G,482 560,653 Construction work in progress 213,534 162,127 Net UtilityPlant 810,016 722,780 Investment in subsidiary, at equity 1,996 1,947 Current Assets Cash (Note 5) 11I777 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,G43 9,724 Prepayments 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 G,338 Other (Note 4) . 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 . 67,000 67,000 Preference stock 28,000 28,000 Common shareholders'quity Common stock 246,938 212,533 Retained earnings 77,338 70,819 Total common shareholders'quity . 324,276 283,352 Total Capitalization 803,579 739,374 Current Liabilities Short-term debt (Note 5) 9,000 Long-term debt due within one year 16,G77 Accounts payable . 29,021 18,635 Taxes accrued, including income taxes . 11,335 4,610 Interest accrued 7,6G7 7,355 Payroll accrued . 2,596 2,388 Other .. 1,0G6 825 Total Current Liabilities G8,3G2 42,813 Deferred Credits and Other Liabilities Accumulated deferred income taxes (Notes 1 and 3) 18,394 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

LK~iiP ROCHESTER GAS AND ELECTRIC CORPORATION Year Ended December 31 Statement Of ChangeS in FinanCial POSitiOn <<rh sa dso<<Do!4 s) 1978 1977 Sources of Funds Operations Net income $ 39,58G $ 33,049 Principal non-cash charges (credits) to income Depreciation 22,206 21,053 Amortization of nuclear fuel 15,746 14,386 Deferred fuel costs 97G (2,886)

Deferred income taxes-net 3,161 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 67,186 102,579 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 $ 136/48 $ 160,296 Changes in Components of Working Capital Increase (decrease) in current assets Cash $ 5,1 GO $ 188 Accounts receivable 1+68 (3,474)

Materials and supplies Fossil fuel .. 1,88G (49)

Construction and other supplies (81) 351 Prepayments . 233 281 Total 8,5G6 (2,703)

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

Accounts payable 10,386 482 Taxes . G,725 1,651 Accrued interest and payroll 520 1,234 Long-term debt due within one year 1G,677 (G,000)

Other-net 241 (155)

Total 34+49 (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 reflect the costs of permanent storage of spent nuclear fuel.

Service Commission of the State of New York (PSC) with Prior years'uclear fuel cost computations anticipated spent respect to its rates for service and the maintenance of its nuclear fuel would be reprocessed. Cumulative prior years'uel accounting records. The Company's accounting policies expenses would have been increased by approximately S8.0 conform to generally accepted accounting principles as applied million if they had been determined on the basis of current cost to New York State public utilities giving effect to the estimates for permanent storage of spent nuclear fuel, rather rate-making and accounting practices and policies of the PSC.

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 UtilityPlant 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 Allowance for Funds Used During Construction. The items of property is included in maintenance expenses. Costs of depreciable units of plant retired are eliminated from utility Company capitalizes an Allowance for Funds Used During Construction (AFDC) based upon the net cost of borrowed plant accounts, and such costs, plus removal expenses, less funds for construction purposes and a reasonable rate upon salvage, are charged to accumulated depreciation and amortization. the Company's other funds when so used. The rate used for this purpose was Bs/4%, which became effective in May1976.

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% 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 ~6 at an average reduced rate of 6.85%, which is net of the Fossil Point Nuclear Slerling income tax effect of the interest portion of AFDC.

Unit ¹6rlr 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.

RGB 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 p uliioos of Dollars) rates from time to time to reflect changes in the average costs Total estimated project costs $ 252.60< $ 1,441 4 $ 1,354.7r$ r RG&E's share . 60.6 201.8 379.3 of fuels used in electric and steam generation from the average RGg E's actual cost of such fuels during the base period. Tariffs for gas service 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.

O'To 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 Gas and Electric Corporation.

the electric, gas and steam cost adjustment clauses included in Construction 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 rtrTorat project costs incfude $ 8.$ million for oil handling facilities, of which RG& E billed to customers. A reconciliation of recoverable gas costs has not agreed upon the percentage participation, and 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 rpTotat project costs incfude $ 89.4 million for the initial nuclear fuel loading and excludes common (aciliiies. customers during a subsequent twelve month period.

rprorat 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% 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 the1,250,000 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 of 1978 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 (thovsandsot oollarsi 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.

Electric Gas Total Operating information-1978 Operating revenues $ 231,307 $ 118,531 $ 19,110 $ 3G8,948 Operating expenses, excluding provision for income taxes 181,428 107,873 19,357 308,658 Pretax operating income 49,879 10,658 (247) 60,290 Provision for income taxes .. 9,244 1,966 (1G9) 11,041 Net operating income $ 40,635 $ 8,692 $ (78) 49,249 Other income-net . 13123 Interest charges . 22,786 Net income per statement of income $ 39+86 Other information Depreciation $ 16,984 $ 4,641 $ 581 $ 22,206 Nuclear fuel amortization 15,74G 15,746 Capital expenditures... 100,194 11,903 455 112,552 Investment information-December 31, 1978 Identifiable assets .. $ 711,91 7 $ 146,299 $ 15,716 $ 873,932 Assets utilized for overall Company operations (a) 19,454 Total assets per balance sheet..... $ 893,386 Operating information-1977 Operating revenues $ 206,343 $ 105,797 $ 19,004 $ 331,144 Operating expenses, excluding provision for income taxes 165,858 97,465 19,186 282,509 Pretax operating income .. 40,485 8,332 (182) 48,635 Provision for income taxes . 4,041 147 (330) 3,858 Net operating income $ 36,444 $ 8,185 $ 148 44,777 Other income-net . 7,783 Interest charges 19,511 Net income per statement of income $ 33,049 Other information Depreciation $ 15,333 $ 5,1 40 $ 580 $ 21,053 Nuclear fuel amortization 14,386 14,386 Capital expenditures .. 90,722 6,943 426 98,091 Investment in(ormation-December 31, 1977 Identifiable assets .. $ 626,464 $ 141,130 $ 16,619 $ 784,213 Assets utilized for overall Company operations (a) 14,161 Total assets per balance sheet $ 798,374 (a) Consists primarily of cash, prepayments and unamortized debt expense.

Note 3. Federal Income Tax Provision tshousandsof Dollars)

The 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 9i of Prelax Pretax Amount Income Amount Income Net income $ 39,586 $ 33,049 Federal income tax Current . 5,1 66 961 De(erred 5,875 2,897 Charged to operating expense 11,041 3,858 Amorl. o( 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 48.0 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) (20.6) (7,765) (22.0)

Investment lax 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) 2133 4.7 Miscellaneous items, net 237 .5 146 .4 Actual Federal income tax expense $ 5,826 12.8 $ 2,176 6.2 A summary of the deferred amounts charged or (credited) to income is as follows:

1978 1977 Investment tax credit $ 6,G29 $ 2,003 Class li(e depreciation . 1,763 1,379 Fuel costs....................... (469) 1,386 Nuclear (uel amortization (142) (362)

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

Fossil plant abandonment costs 2,160 765 KV Transmission system abandonment costs 850 Other . (481) (545)

$ 3,161 $ 2,G75 Note 4. Capitalization Bond premium applicable to the years 1977 and 1978 is $ 677,702 Long-Term Debt (thousands) and $ 635,GG7, respectively.

Principal Amount Sinking and improvement fund requirements aggregate First Mortgag e Bonds December 31, Scrics Due 1978 1977 $ 333,540 per annum. Such requirements may be met by 3 L Mar.1,1979... $ 16,677 $ 16,677 certification of additional property or by depositing cash with 2s/i M Aug.15,1980 .. 12,000 12,000 the Trustee. The 1977 and 1978 requirements were met by 3% N lune1,1982... G,000 G,000 certification of additional property.

3% 0 Mar.1,1985... 10,000 10,000 4% R Iuly1,1987... 15,000 15,000 5 5 Oct.15,1989 .. 12,000 12,000 Capital Stock 4Yi T Nov.15,1991 .. 15,000 15,000 Pre(erred Stock (cumulative)-Par value $ 100; 2,000,000 shares 4sjs U Sept.15,1994 .. 16,000 16,000 authorized:

5.3 V May 1,1996... 18,000 18,000 Sept. 15, 1997 ..

6Yi W 20,000 20,000 IThousands)

Shares December 31, Redemption 6.7 X luly1,1998... 30,000 30,000 scrlcs 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 9Ys Z Sept. 1, 2000 30,000 30,000 4.10 H 80,000 8,000 8,000 101 At any time 10s/i AA Aug. 1, 1983 29,667 29,GG7 4'/i I 60,000 6,000 6,000 101 At any time BB lune15,2006 .. 50,000 50,000 4.10 I 50,000 5,000 5,000 102.50 At any time 9')e 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 Be(ore 6/1/79 Less: Series L due in 1979 1G,G77 11 0 (b)

Total Long-Term Debt .. $ 383,G67 $ 3G0,344 670,000 $ 67,000 $ G7,000

(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 PayabIe 7.00% $ 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 October 1, 1985 all of the outstanding 7.6% Series A preference interest rates during the period:

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 ~

11,1 48 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....... 20.00 340,984 6,820 The Company's capital expenditures program involves an SaIe of Stock........... 21.00 1,000,000 21,000 estimated expenditure of $115 million, not including allowance TRASOP>> 20.91 24,300 508 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% 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 Act Stock Ownership Ptan 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 completion 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 Company 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 Form10-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 pIus 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 larrd) 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.

Quarter Ended (Thousands)

Dec. 31, Sept. 30, lune 30, Mar. 31, 1978 1978 1978 1978 Operating revenues .. $ 92,312 $ 73,665 $ 86,942 $ 116,029 Operating income... 8,466 9,527 12,009 19,247 Net income....... 7,088 G,596 9,909 15,993 Earnings on common stock......... 5,669 5,1 75 8,490 14,574 Earnings per common share (in dollars) .38 .37 .63 Dec. 31, Seph 30, lune 30, Mar. 31, 1977 1977 1977 1977 Operating revenues .. $ 84,458 $ 67,199 $ 74,138 $ 105,349 Operating income... 9,395 7,479 10,62G 17,277 Net income....... G,444 4,61 9 7,775 14,211 Earnings on common stock......... 4,657 3,044 6,200 12,63G Earnings per common share (ln dollars) .35 .24 .51

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 Department Gas 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 G,446 410 5,582 12,475 (23) 1,824 Weather Effects . 221 (82) 3,259 (1,1 44) 3G7 (198)

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

Other 358 137 1,627* (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 . $ 24,9G4 $ 17,52G $ 12,734 $ 4,770 $ G21

'Reflects a one-time $ 10 gas heating bill credit in tne aggregate amount of approximately $ 1.6 million that was applied to residential customers in February 1977. The credit was made by the 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 severe weather conditions in Ianuary 1977 and, in some cases, with reduced income due to plant shutdowns forced by natural gas cur tailments.

Revenues from electric sales to other utilities increased in both1978 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 Ginna 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 (Decrease) (rom Prior Year principally due to higher gross income taxes based on lrhousands or 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 (4,5GO) and increased property tax rates.

Purchased Natural Cas 9,023 5,894 Other Operation .. 3,1 91 4,817 Total Federal income taxes increased $ 3.7 million in 1978 Maintenance . 3,874 2,16G after declining $ 1.8 million in 1977. 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 Note1 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 December1978, September1977 and June1976.

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 in1978 due to the refunding in December1977 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.

RKP ROCHESTER GAS AND ELECTRIC CORPORATION Year Ended December 31 Summary Of OPeratiOnS tthowanCkofnotlara) 1978 1977 1976 1975 1974a 1973 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 1G,321 10,014 340,272 304,741 289,968 246,444 219,344 191,159 Electric sales to other utilities . 28,G76 26,403 18,259 25,49G 14,697 21,112 Total Operating Revenues 368,948 331,144 308,227 271,940 234,041 212,271 Operating Expenses Operation Electric and steam fuels... 58,140 5G,993 46,361 4G,268 36,693 25,612 Purchased electricity . 19,337 13,G35 18,195 12,212 12,070 8,841 Purchased natural gas 71,109 G2,086 56,192 42,247 37,342 29,923 Other .. 65,G85 G2,494 57,G77 50,G29 44,35G 40,999 Maintenance 26,246 22 372 20,206 19,700 17,966 15,888 Depreciation 22,206 21,053 18,G21 17,414 1G,491 15,145 Taxes-local, state and other 45,935 43,876 40,502 36,157 32,410 29,993 Federal income tax-current 5,16G 9G1 (291) 4,162 (3,126) 6,724

-deferred . 5,875 2,897 5,G56 1 133 4,277 915 Total Operating Expenses 319,G99 28G,367 2G3,119 229,922 198,479 174,040 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 G,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 5,806 2,847 1,798 989 Income before Interest Charges 62+72 52,560 50,914 44,8GS 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 1,5G8 ',255 1,246 Other-net . 41G 494 24G 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 S,G78 G,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,G28 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.

23

S~~~

tCL~~~ ROCHESTER GAS AND ELECTRIC CORPORATION At December 31 Condensed Balance Sheet tth~ d ofoot4rs) 1978 1977 1976 1975 1974 1973 ASSETS UtilityPlant, at original cost $ 857,959 $ 789,775 $ 727,687 $ 693,404 $ 659,308 $ 618,891 Less-Accumulated depreciation and amortization 2G1,477 229,122 198,778 185,455 167,645 150,GOO 596,482 560,653 528,909 507,949 491,663 4G8,291 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 Investmcnt in Subsidiary, at equity 1,99G 1,947 1,911 1,871 1,834 Current Assets 66,953 58/87 61,090 53,796 52,G78 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 $ 53G,689 CAPITALIZATIONAND LIABILITIES Capitalization Long-term debt .. $ 384,303 $ 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 24G,938 212,533 181,301 173,586 154,758 148,566 Retained earnings . 77+38 70,819 67,812 60,502 53,5GB 52,184 Total common shareholders'quity . 324,276 283,352 249,113 234,088 208,326 200,750 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 1974 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 Sharc 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 6.2 10.6 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

~?~ 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,G76 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)

Fuelused in electric generation 45,093 44,010 34,247 33,442 25,739 19,461 Purchased electricity 19/37 13,635 18,195 12,212 12,070 8,841 Other operation 47,G02 45,011 40,930 35,662 32,177 28,378 Maintenance 19,305 16,339 14,796 14,282 12,390 11,029 Depreciation 1G,983 15,333 13,865 12I731 11,977 11,026 Taxes-local, state and other 33,108 31,530 28,543 25/69 22;784 21,281 Electric revenue deductions 181+28 165,858 150,576 133,698 117,137 100,016 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,G35 $ 36,444 $ 35,139 $ 33,358 $ 25,553 $ 30,373 Electric Operating Ratio  %%d 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 1,3GG,094 1,294,816 1,226,333 1,261,697 Industrial . 1,517,988 1,431,855 1,384,235 1,284,940 1,346,116 1,424,639 Other . 465,373 454,059 437,097 411,122 379,379 385,243 Electric sales to our customers 5,102,923 4,938,362 4,805,740 4,521,299 4,408,163 4,539,955 Other electric utilities .. 1,445,391 1,453,590 1,187,942 1,864,050 1,182,902 2,269,G86 Total electric sales 6,548,314 6,391,952 5,993,682 6,385,349 5,591,065 6,809,641 Electric Customers at December 31 Resid ential 251,645 250,121 249,177 246,G13 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 1,360 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 1,8G9,079 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 2G5,401 234,5G8 243,582 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 . 1,08G 850 2,797 2,198 12,80G 8,776 Total generated-Net 5/69,156 5,423,495 4,319,1 38 4,976,779 4,227,3G6 5,488,440 Purchased 1,579,8G3 1,400,505 2,10G,904 1,888,091 1,836,911 1,709,420 Total electric energy 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 .. 25p561 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) 21,139,14G 23,862,599 21,822,976 18,388,874 20,911,993 20,331,338

-Cents per million BTU....... 144.27 13G.92 137.42 142.18 117.05 62.12 Nuclear-Total BTU (million) 35,812,171 37,822,209 23,837,620 33,1 28,471 22,909,968 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 35G,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  % G3.9 G2.0 63.8 G1.7 63.3 61.0 25

PK4S ROCHESTER GAS AND ELECTRIC CORPORATION Year Ended December 31 Gas Department 1978 1977 1976 1975 1974 1973 Gas Revenue (000's)

Residential $ 5,096 $ 4,828 $ 4,426 $ 3,964 $ 3,809 $ 3,627 Residential spaceheating . 74,425 66,900 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 3,170 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 62,086 56,192 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+45 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 BG,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 433,324 420,438 467,831 424,234 453,687 434,833 Gas Customers at December 31 Residential . 38,0 I3 39,977 40,892 41,437 42,884 45,958 Residential spaceheating . 154,366 152,856 153,583 153,848 151,154 144,847 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 . 15.26c 14.43'1.37'0.19'.49'.13'otal 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 G,905 6,211 G,808 5,883 Percent (warmer) colder than normal 4.5 (0.1) 1.6 (7.2) 1.3 (12.2)

a~%~

tCL4'R'OCHESTER GAS AND ELECTRIC CORPORATION Year Ended December 31 Steam Oepartment 1978 1971 1976 1975 1974 1973 Steam Revenue (000's)

Commercial .. $ 6,087 $ 6,352 $ 6,401 $ 5,668 $ 5,419 $ 3,668 Industrial . 10,732 10,455 9,799 9,862 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 1,82G 1,657 687 1,201 Maintenance 1.173 955 900 918 819 816 Depreciation . 581 580 5G2 546 536 504 Taxes-local, state and other . 2,282 2,257 2,230 2,073 1,689 1,431 Steam revenue deductions 19,35G 19,186 17,632 18,020 14,685 10,103 Operating Income before Federal Income Tax . (246) (182) 751 (683) 1,636 (89)

Federal income tax (1GB) (330) 51 (688) 363 (43G)

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 . 898,904 933,609 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 2,13G,794 Municipal 346,031 334,645 367,553 325,727 334,463 318,323 Total steam sales 2,963/00 2,950,287 3,147,359 3,145,453 3,622,422 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 339 360 380 389 401 410 Steam Produced-lbs. (000's)

Produced by steam department......... 1,353,053 1,194,132 1,408,029 1,387,363 1,532,246 1,442,472 By-product steam from electric department . 1,987,638 2,133,853 2,193,283 2,344,693 2,588,1 20 2,613,321 Total steam produced 3,340,G91 3,327,985 3,601,312 3,732,056 4,'I20,366 4,055,793 Steam Department Fuel Total BTU (million) 5,705,943 5,548,290 6,022,360 6,230,767 G,807,500 6,849,830 Cents per million BTU 226.21 232.60 203.35 203.08 196.31 89.80 Rate Increases Granted Amount of Rate of Rale of Pending Requests Increase Relurn on Relurn on Class of Fffcclive (Annual Basis) Percent Rate Base Equity Class of Amount Service Dale of Increase (000's) Increase Aulhorized Aulhorizcd Service Dale of 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

'6.0 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 10,186 5.8 9.31 12.80 February 18, 1978 3,000 1.6 9.31 12.80 Gas April 28, 1972 3,67G 6.8 7.77 12.00 October 23, 1974 4,854 7.6 8.42 12.09 April 20, 197G 4,983 6.3 9.35 13.50 November 11, 1977 2,536 2.4 9.31 12.80 February 2, 1978 G78 9.31 12.80 Steam May11,1972 897 11.4 G.48 November 12, 1973 500 5.1 7.25 April 15, 1975 2,475 12.0 8.69 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 Cas and Electric Corporation E. Kent Damontf Walter A. Fallon Vice President and Secretary, Chairman ol the Board and Chief Executive Officer, Paul W. Briggs* Xerox Corporation Eastman Kodak Company President, Rochester Cas and Electric Corporation Francis E. Drake, Jr.* Ernest J. Howe*tg Chairman ol thc Board and Chief Executive Oflicer, Chairman ol the Executive and Finance Committee, John D. Cockcroft* Rochester Cas and Electric Corporation Rochester Cas 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 Committee of the Board of Directors

Officers Francis E. Drake, Jr.

Chairman ol thc Board and Chief Executive Officer Agc 63, Years of Service, 41 Paul W. Briggs President Agc56, YearsolService,33 Keith W. Amish Executive Vice President Agc55, YearsofServicc,31 Joseph J. Hartman Vice President, Cas and Transportation Age54, Years ofScrvicc,32 John L. Kennedy Vice President, RatcS and Covcrnmcntal Affairs Age 60, Years of Service, 38 John E. Maier Vice President, Employee Relations Agc51, Years ol5ervice,31 Richard J. Rudman Vice President, Electric Transmission and Distribution Age 51, Years ol Service, 33 I Harry G. Saddock Vice Prcsidenr, Electric System Planning and Operation Age 49, Years ol Service, 28 Mario Silvestrone i/ Vice President, Consumer Services, Corporate Communications and Purchasing Agc55, Years of service,28 leon D. White, Jr.

Vice President, Electric and Stcam Prodcctfon Age 59, Years ol Service, 41 Dean W. Caple Secretary and Treasurer Age55, Years of service,30 Francis A. Sullivan, Jr.

Controller Age55, Years of Service,28 Robert W. Ball Assistant Treasurer Age 62, Years olservice,40 David C. Heiligman Assistant Secretary Age 38, Years ol service, 15 Robert C. Henderson Assistant Conrroller Age38, Years of Service, 1S Stephen Kowba Assistant Controller Age59, Years of service,28 John M. Kuebel Auditor Age 43, Years of service, 14 Daniel G. Kennedy* Edward J. Nelson Partner, Former President, Nixon, Hargrave, Dcvans tt Doyle Rochester Cas and Electric Corporarion A. J. McMullen William S. Vaughn*tg Chairman ol the Executive Comminee, 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 Chicl Executive Oificer, Rochester Institute ol Technology Sybron Corporation tMember of the Salary Review Committee of the Board of Directors

Rochester Gas and Electric Corporation 89 fast Avenue Rochester, New York 14649 MOTICE THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY, BRANCH 016. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

RECORDS FACILITYBRANCH

Contents Highlights 1 Letter to Shareholders 2 RGGE People 4 Electric and Gas Operations 10 Management Changes 13 Financial Statements 14 Management's Discussion and Analysis 27 Financial and Statistical Information 28 Directors and 05cers 33 About the Cover During 1980 RGGE ran an advertising campaign to inform customers and the community about some of the work that goes on and about the people who do the work Six employees representing a cross.

section of RGGE operations and services were chosen as subjects for the television spot announcements and the print advertise.

ments, Ho one wrote words for them to say.

The words are their own, and they are presented in this report.

RG&E Service Area/Business The Company supplies electric, gas and steam service wholly within the State of Hew York, and is engaged in the production, transmission, distribution and sale of these seniices in a nine county area centering around the City of Rochester.

The Company's temtory, which has a population of approximately 880,000, is well diversified among residential, commercial and industrial consumers.

In addition to the City of Rochester, which is the third largest city and a major industrial center in the State, it includes a large and prosperous farming area.

RG&E People.

Your Neighbors

'I oothejob.

MOTICE THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL. THEY HAVE BEEN CHARGED TO YOU FOR A Lltp1ITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVAL OF ANY ~

PAGE(sj FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

Docket ~ 60 R4 C0el> + 8 ja<>>>>'>

DEADLINE RETURN DATE Date~a) - )af Document.

fifUUUT DR Y iff fif R if lgefuD + f I Dr" 7A

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,uttut) mllUITRIt 00KH':il.[ <DID RECORDS FACILITYBRANCH 8 >04~30313

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To Shareholders:

~

On October 1, 1980, Francis E. Drake, Jr. growth resulting from increased unit Eastman Kodak Company has retired at the normal retirement age of sa! es of electricity and gas was smalL announced plans for a sizeable expan-65 after a 43 year career with RGGE, the When adjusted for the influences of rate sion in the Rochester area. Some other last13 years of which he served as chief increases, fuel adjustments and weather, industries and businesses have expressed executive officer. Paul W. Briggs was "real" growth in customer revenues was intentions to expand, and several large elected to succeed Mr. Drake as chairman less than one percent over 1979. renovation and construction projects are of the board and chief executive officer. However, revenues from electric sales to underway in metropo!itan Rochester.

Keith W. Amish, former executive vice. other utilities through the New York In1980, Rochester area companies president, was elected to replace Power Pool increased 40 percent over added nearly 6,000 new jobs twice as Mr. Biiggs as president, and became 1979. Shareholders and customers alike many as the year before. More than $ 537 chief operating officer. Leon D. White, Jr. benefit from these sales which are made millionwas spent in plant expansion, succeeded Mr. Amish as executive vice- mainly from our coal. fired generating $ 213 million more than was spent by president with responsibility for units. There is a strong demand for coal- business and industry in 1979. The operations. fired generation as downstate utilities economic stabi! ity in our service area In bringing about what we consider to be reduce generation from their more presents strong resistance to the type of an innovative management structure, we expensive oil.fired units. erosion that is being felt in other parts of established two senior vice. president Expenses increased in 1980 and inflation the State and we remain optimistic about positions to complete a five member, continues to be a major contributing the economic future of our locale.

senior management team to address the factor. Operating expenses rose 21 In August1980 we petitioned the New complex decisions that have to be made percent over1979. The cost of fuels York State Public Seniice Commission in the utilitybusiness today. Harry G. again rose dramatically and now con. (PSC) for electric, gas and steam rate Saddock was elected senior vice. sumes almost half of each RGGE increases. The request followed closely president, finance and rates, and Mario revenue dollar. The cost of fossil fuels on the heels of $48 million in rate Silvestrone was elected senior vice. alone went up 45 percent in 1980. The increases granted a month earlier in July.

president, general services. Consolidation tremendous upsurge in interest costs Unrelenting inflation, coupled with the of these two areas of RGGE's operations made the heavy financing requirements lengthy11 month rate hearing process, under senior vie+presidents is intended in our highly capital. intensive business make rate increase requests virtually an to allow for broader management even more burdensome. Total interest annual requirement. It is also essential influence and participation in the policy charges, excluding allowance for for us to phase rate increase requests decision making processes and to borrowed funds used during construc- with the PSC policy of basing them solely reinforce management communication tion, rose 17 percent while preferred on forecast data for a one-year test channels in the Company. stock dividends went up 34 percent. period. The July1980 rate increases, for Several promotions and reassignments These costs, like taxes, are expenses example, were based on forecasts for a have been made among other officers of over which we have little control. Where 12.month period running through July the Company, and they are detailed on we can exert some degree of control 1981. The rate increases we are now over costs, we economize. But, despite seeking will be decided for the period page 13 of this report These changes were made primarily to offer advanced the problems with costs, we think we from August1981 through July1982.

cross-training in critical executive have been able to achieve a temporary workable balance among the financial In the current rate case, we are seeking positions. We view our redesign of senior new rates that would produce an addi.

management structure as a timely step pressures, customer requirements and the reasonable expectations of share. tional %1.9 million in annual electric as we move into this decade. revenues, $ 7.8 million in gas revenues holders.

Common stock earnings in 1980 and S3.6 million in steam revenues. In increased $ 1.8 million, or five percent The minimal growth in RGGE's 1980 January1981 we requested a temporary over 1979. Earnings per share of energy sales reflected the severity of the increase in electric and gas rates pending common stock rose a modest one recession seen in the first half of the year, the July1981 decision. We also asked percent, going from ~2.08 to $2.10. The things looked a little better during the that the steam rate increase be put into 1980 per.share earnings reflect the second half. With regard to growth, we effect immediately. The move was addition of some 657,000 weighted remain confident about the overall necessitated by soaring interest rates, average shares of common stock economic climate in our service territory. higher costs and a need to protect the Monroe County, where most of our Company's security ratings. The steam Total customer revenues for 1980, customers are located, is considered rates were approved and made effective excluding electric sales to other utilities, one of the strongest centers of economic showed a significant18 percent increase February18. The decision on the growth in New York State. While that temporary electric and gas rates was over the previous year. However, revenue growth doesn't compare with the healthy pending at the time this report went advances seen in the 60's, it is still very to press.

good as measured against other parts of the State and the Northeast in general.

Annual Report 1980 Highlights for the Year Ended December 31 1980 1979 X Change Gse of 1980 Revenue Dollar Sales, Revenues and Earnings (Thousands, Except Per Share Amounts) t)n Cents)

Electricity to customers y4 Kilowatt-hours . 5,186,423 5,163,520 Revenue $ 245,005 $ 219,373 ,

12 Electricity to other utilities Kilowatt.hours . 1,620,929 1,526,925 6 Revenue $ 52,786 $ 37,804 40 I Gas I

I Therms . 434,492 426,743 2 I $ 181,046 I Revenue $ 140,527 29 I

I I Steam I Pounds . 2,413,879 2,792,170 (14)

Revenue $ 23,589 $ 19,988 18 Total operating revenues .. $ 502,426 $ 417,692 20 Total operating expenses .. $ 442,894 $ 365,570 21 Operating income $ 59,532 $ 52,122 14 Net income $ 43,652 $ 39,565 10 Earnings applicable to common stock . $ 34,725 $ 32,920 Weighted average number of common stock shares outstanding .. 16,472 15,815 Earnings per common share......... $ 2.10 $ 2.08 Cash dividends per common share, adjusted for stock dividends........ $ 1.48 $ 1.41 Stock dividend paid (See Note) ....... 3% 3%

UtilityPlant (Thousands)

Capital expenditures, less allowance for funds used during construction .. $ 87,742 $ 111,427 (21)

Earnings and Dividends Per Common Share th Do)hts)

Net utilityplant at December 31....... $ 950,474 $ 893,531 6 D Earnings por Common Shore Number of Customers at December 31 (Adjutted for Stock Ohtdenrb)

D Cosh DMdencb per Common Shore Electric 285,470 282,099 1 (Adjusted for Stock DMdencb) Gas 213,157 209,642 2 Steam 271 318 (15)

Number of Common Stock 2,11 Shareholders at December 31 .. 50,416 48,543 4 Number of Employees at December 31 . 2,691 2,661 1 Note: The 22nd annual stock dividend was paid February 25, 1981 at the rate of three percent.

40 r Qoo9 1976 1977 1978 1979 1916 e~

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REIitlllNBRIIIIOCKET FILE CQPII 8 X04330313

RG&E People 1

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1 P r,

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az608m Lucy White Telephone Setvlce Representative "Every time I say'good morning' stack up as the 34 service represen.

have to be ready to help somebody tatives try to give the caller a with whatever's on their mind." complete answer.

It's Lucy's job to help the customer "Everyday we answer a lot of phone personally where she can or to get calls. We try to pick up each one the caller to the right party for within six rings, but sometimes we assistance or an answer. fall behind."

Lucy and other telephone service Lucy says that the hardest calls she representatives are in direct contact gets are the high bill complaints. She with RGGE's computer system tries to help the customer understand through display consoles. Account how the rising cost of energy forces information on any of RGGEs half- the bills up even when people million customers is available in conserve.

seconds. Still, on busy days, calls "Atthe end of the day I'm tired. But I RGGE's Telephone Service Center I love people and I love helping them."

answers nearly a half. million calls a 'r year. Lucy White gets all kinds of calls: service transfers, new customer connections, power outages, gas leaks, complaints and requests for information. 1

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~ ~

As part of the rate case, we are trying to effects of inflation. Although our share of off; we had not had a gas rate increase recover expenses connected with the that plant is only14 percent, the cost since 1949 or an electric increase since Sterling nuclear power plant proposal. increases will continue to exert pressure 1958, and regulatory bodies were We had to terminate that project in on our capital requirements for several reasonable in their requirements and January 1980 after the State reversed its years. Now scheduled for late 1986 supportive in their rulings.

earlier certification for construction of operation, the Nine Mile plant will add That was the year 1967. Alltoo familiar the 1,150 megawatt facility.We are asking the PSC for permission to amortize the expenditures over a five.year period.

'n 152,000 kilowatts of base load capacity our system.

are the burdensome problems of the following years: double digit inflation, In April 1980 we asked the PSC for skyrocketing fuel costs, a succession of In January1981 the PSC issued its order permission to acquire Pavilion Natural necessary rate increases, a virtual stand.

covering the first phase of the Sterling Gas Company. That approval was still in the crucial nuclear power option, hearings. It ruled that costs incurred granted early in 1981 and the acquisition public skepticism, mounting regulation through Januaiy1978 were prudent. took effect February 28 this year. The and a crop of anti-utility pressure groups Complete details of the case may be purchase has added 10,000 gas claiming to work in the public interest.

found in this report under Notes to customers in the southwest portion of Frank Drake met the challenges and Financial Statements. our system and is expected to produce issues hearn and, in our judgment, additional annual gas revenues of 410 One of our main concerns today is the million. brought RGGE through an extremely delay in the construction of Niagara difficultperiod, maintaining our financial Mohawk Power Corporation's Nine Mile In noting the complexities of the utility integrity and traditionally high levels of Point ~2 nuclear power plant at Oswego, business, we commend Francis E service to the customers and community.

New York Previously scheduled for Drake, Jr. for his immense contributions His responsibilities were heavy and operation in 1984, construction of the to RGGE and the industry over his demanded the superior leadership ability 1,084 megawatt plant has been set back 43-year career with the Company. he possesses.

due to a number of factors, including Mr. Drake became chief executive office The turbulent period for RGGE and the technical reassessments, regulatory in 1967. Inflation had not yet begun its utilityindustry is far from over. We have matters and a decline in electric load upward spiral; we planned, licensed and every confidence, though, that our team growth. The estimated total cost of the built a nuclear power plant without of RGGE people is up to the challenges plant has risen substantially as a result of harassment, delay or unnecessary high and geared to meet the future. We expect the delays and the cumulative adverse costs; the Oil Embargo was still six years to maintain a solid, progressive operation.

And, in regard to employees, the theme Paul W. Bnggs, lett, Keith W. Amish of this annual report focuses on the thoughts of a representative sample of our RGGE people. Six employees were featured in a television and print media advertising campaign to show our customers and the community the caliber of people we have and what those people think of their jobs. The words of these employees are their own. We hope you'l take the time to share their thoughts in the following pages.

Paul W. Btiggs Chairman of the Board and Chief Executive OAicer Keith W. Amish President and Chief Operating Officer March 18,1981

'%8ha5mRoaaeCxxia g') C))Q~QiQ . ) i Qg+QO]j'QQ~

R Rz9 0 Dennis Rose Customer Service Representative 0

"When a customer comes in, I may "Every person is a special individual not have all the answers all the time, with a special problem, and you treat but I always give him an honest them accordingly."

answer." With inflation taking away from every-Dennis Rose sees or talks to more one's income, a lot of customers than 20 customers a day. Some come to Dennis to work out special conversations take as little as 20 bill.paying arrangements. Others minutes, others may run several may want information on how to use hours. energy more elflciently and cut down on their bills. Dennis and the other customer service representatives bend over backwards to help where they can. It's their job to listen and to help.

"I really feel good being able to say

'We'l be able to work something out.'hen a customer is sincerely "It's nice to see them go out not trying to pay the bill but is having happy all the time but under-a hard time, we knock ourselves out standing."

to make it easier for him or her to work out special plans, to provide whatever help is needed."

High energy bills don't make anyone happy, not even RGGE employees, like Dennis, who pay the full price on their own bills.

%47GiEDKE0MHlcK65KKGfgQ NzeRarn Qog@Cn54ooO:mBdP Ed Flanigan Gas Construction and Maintenance Foreman "It's our responsibility to make sure RGGE tells its customers not to take the gas keeps flowing and that any chances. They'e told that ifthey service for customers is not think they smell gas they should get interrupted." out of the house and call RGB'Part When Ed and his crew are working of my job is to repair leaks or on a gas line the gas is still flowing. replace old pipe with plastic or Maintaining a gas system is a tough, wrapped steel. In the case of a Grade critical, often hazardous job. But One [high priorityj situation, my men that's what Ed Flanigan has been and I willwork all night ifwe have to, doing for 33 years. to get the job done right."

"Everyday RGGE makes routine surveys throughout our service area.

We'e able to detect even small Q/

amounts of gas escaping into the air."

RGGE gas maintenance people monitor the gas distribution system it on a continuous basis. Any problems that are found are taken care of I wI immediately. I "Ifa customer smells gas we get there fast to make sure there's no physical danger. Safety is our number one concern."

'%%reMs CKEigQMGilBS GOKl GKCP Jack Davis Power Controller "The Power Control Center is the t ~+

heart of RGGE's electrical system.

The map and computers help monitor the status of power plants, transmission lines, every major facility in the Rochester area.

"Ifsomething goes wrong say a power plant goes out of service our job is to prevent brownouts and service interruptions either by calling for more power from RGGE plants or bringing it in from elsewhere."

"We'e linked with the New York reserve is shrinking and New York Power Pool. Every five minutes we State officials have made the decision get a complete update on how much to build fewer new power plants than power is being produced, how much utilities throughout the State feel is available to us, and what it would they need.

cost. It's the power controller's job to "I have to wonder about what's going decide when to bring in electricity to happen five or ten years from now.

from the Power Pool reserve. Is there going to be enough "Right now the Power Pool has electricity for peak demand periods?

enough reserve electricity to protect Is the State taking too much of a

'- c-el our customers against brownouts risk? I'm concerned. I think it's some.

and major service interruptions ifwe thing everyone should think about."

have a problem in our own system."

The question being debated is whether there will be enough electricity through the 1980's. The

%0rj:KLIEGGis ~~

RDM~. ~~coaiQxzzEsfRIhF Walt Rogalski Troubleinan First Chss "It's my job to restore power as "We work under a buddy system.

quickly, safely and dependably as I We all depend on each other and possibly can. I know how much know how critical it is to do the job depends on it" right. It makes me proud to be part of E!ectiicity is as vital to modem life as a team like this."

water. RGGE troublemen, the first-line emergency team, make sure that whatever happens to interrupt electrical service is dealt with immediately. They'e specialists in solving the tough ones.

"I always take that extra few minutes to test, check, and recheck I have too much respect for electricity to tiy to take shortcuts." "I get a lot of satisfaction getting power restored as fast as possible. I think people know the job we do is critical. It's got its hazards, and they appreciate our efforts. That gives us a good feeling."

Working conditions for RGBE troublemen are generally harsh and often hazardous. They work in traffic, high on a pole or under the street, in subzero weather or sudden storms, and they work with high. voltage electric energy.

'%Sxi6ElhsQhsltQmc0 m Qn(Qqpx5cm~

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Wes Backus Operations Supervisor, Ginna Nuclear Power Plant "I think some people have wrong "Nuclear power plants such as Ginna ideas about nuclear power. It's a contain many safeguards that make tough subject to understand, but I the possibility of radiation leakage really believe the more they know extremely remote. At the slightest about it, the more comfortable they' indication of danger, we have the feel." ability to shut down the plant The nuclear industry has the best immediately.

safety record of any indus+. One "I understand nuclear power and I of Wes Backus'obs is to help make feel it's safe. In fact I moved my family sure every single safety procedure is from Bergen to about two miles from strictly followed at all times. Ginna to be closer to my work, and "In a very practical sense there just I'm still glad I did."

aren't a lot of alternatives to nuclear power available to us right now. I don't like the idea of us having to depend on foreign countries for our energy."

1980 Operations Electric Operations producing additional revenues for the Sales Total kilowatt.hour sales of elec. Company and a saving for our own tricity to customers were up only a frac- customers.

tion of a percent from 1979 due primarily Ginna Nuclear Power The Ginna to the recession and customer conserva. nuclear power plant continues to prove tion measures. Industrial kilowatt.hour itself as one of the finest operating plants electric sales were off nine tenths of one in the nation. During 1980, despite two percent reflecting the slow economy planned outages, the 470,000.kilowatt and reversing a trend seen over the last plant achieved a notable 76 percent several years when industrial sales led all availability and did not experience a classes of electric customers in growth. single forced outage. In 1980 the plant's Kilowatt.hour electric sales to residential eHicient operation saved customers customers were up 1.2 percent from 432.4 million in fuel costs when com-1979, and commercial kilowatt hour pared with an equivalent amount of coal.

electric sales rose 1.4 percent. Very fired energy. When compared with what moderate electric load growth is it would have cost to produce the energy projected for 1981. with oil as a fuel, the plant saved $84.4 One notable bright area in electric sales million in 1980.

for 1980 was the sharp 40 percent The Gnderground Connection Deliver-increase in revenues from electric sales ing 34,500 volts of electricity is not a to other utilities the sale of excess particularly big job for a power company power to other companies through the like RGGE; but when that power is New York Power Pool. These sales are The six.ton power able as it needed 1000 feet below the earth's sur. enters the mine.

made possible mainly through the excel. face the project takes on a different lent availability of our Ginna nuclear complexion.

power plant which can produce more than half of the total electric energy International Salt Company wanted to requirements of our system. We reserve upgrade electric service in its salt mine the full economy of the relatively inex- near Retsof, New York, 30 miles south.

pensive nuclear. generated power for our west of Rochester. With almost17 square own customers while making excess miles of excavation 1000 feet below power from our coal- and oil fired gener. ground, the 85.yearold salt mine is the ating units available for sale to other largest in the free world. Electricity pro utilities. Revenues from these outside vides power for the mining operations, sales benefit both shareholders and and proper voltage was needed to work customers. the rich salt vein that geologists say extends as far west as Michigan.

Oswego ¹6 Niagara Mohawk Power Corporation's Oswego ¹6 oil-fired power The complicated project took three plant went into commercial operation in years to complete, and RGGE's people July1980. Under a joint.ownership played a big part. A borehole was sunk agreement RGGE owns 24 percent of 1000 feet down. Following elaborate the plant's capacity, or 204,000 kilowatts. preparations below ground, a six.ton, 34,500 volt power cable was fed down Construction began on the Oswego <<6 the hole to connect the surface switch-plant prior to the 1973 Arab Oil Embargo gear with the mine substation.

that spurred the dramatic rise in oil It's rare that you hear of a company drill.

prices. This plant is a highly eHicient oil.

fired unit and the availability of its power ing for electricity, but, with RGGEs is important to RGGE, particularly as assistance, this first underground con.

replacement power when the Ginna nection of its kind in America was made, nuclear power plant is out of service for and RGGE is providing the power.

annual refueling, maintenance and Gas Operations inspection periods. At other times we sell Sales Sales of natural gas in therms our share of the energy to other utilities, increased only1.8 percent in 1980.

Although there was an addition of 6,427 residential gas space heating customers during the year, residential gas sales in 10

therms declined by 2.7 percent from the previous year. It is apparent that the cost effectiveness of energy. efficient mea.

sures that RGGE has traditionally promoted continues to hit home to the consumer. Efficiency and conservation measures undertaken by customers This gigantic wheel was part of a lifton an early shaft have been offsetting any significant at an international Salt Company mine that was worked from 1906 until the 30's. The relic was brought back into service growth in gas sales that might otherwise to help thread a 34,500 volt electric cable down to a mine be anticipated. In fact, since 1972, the substation 1,000 feet below the ground. average gas consumption by residential space heating customers has dropped by 24 percent. However, gas sales in therms to industrial customers rose 14.9 percent over 1979 and are expected to continue to rise at a healthy pace as companies shift oil loads to natural gas.

Commercial customer gas sales went up 2.5 percent, mainly due to the addition of commercial space heating loads. In1981 it is estimated that 5,500 residential gas space heating customers will be added to the system, with gas maintaining its decisive cost advantages over heating oil. Ten thousand gas customers have been added to the RGGE system through the acquisition of Pavilion Natural Gas Company in February 1981. RGBEs gas supply is adequate to meet all projected requirements.

A Light Approach Fiberoptics the method for transmitting signals and data without the use of metal cables is coming into its own as an advanced technology; and RGGE is already Electricians install an electrical grounding grid surrounding involved.

the mine level portion of the underground substation.

The initial application will involve light-wave communication for the telemeter-ing of natural gas deliveries from RGGEs supplier where volumes run more than 40 billion cubic feet a year. The fiberoptic Left: This burst of light telemetering unit is virtually immune from a time. exposed photo from interference common in existing of a fiberoptic cable metallic cables.

shows light as the transmission medium. Gas telemetering is only the first of several applications for fiberoptics Right: The fiberoptic envisioned by RGB'uture possible telemetering console is adjusted by an RGGE applications for fiberoptic technology technician. include power transmission telemetry, power system control and audio tone communications that presently rely on conventional wire. cable transmission.

11

Research and Development In 1980, RGGE spent ~5.6 million on research and development. Of that amount, $ 1.8 million went into RGGEs own research and development pro.

grams where two in particular paid hand-some dividends in 1980 at the Ginna nuclear power plant.

One of the early nuclear power plants in this country, completed in1969, Ginna Station continues to perform remarkably welL There has, however, been some concern with indications of corrosion in the steam generators of such plants-the two units that transfer the heat from the primaiy nuclear fission loop and produce the steam to drive the 470.

megawatt turbine generator. Continuing unabated, corrosive action could ulti-mately result in a costly shutdown and equipment replacement.

RGGE had been studying the problem for years, and in the regular spring shut-down for refueling in 1980 an RGGE-developed process for flushing the steam generators of corrosive materials was used.

Encouraging results were noted when the plant was inspected in November.

It appears that the degree of corrosion has been significantly reduced. Only three generator tubes showed damage, An RGGE employee trains in the whereas 31 had to be plugged in early Company's steam generator mock.up 1980. This RGGE process will be used for the job of placing metal sleeves during each refueling shutdown, possibly on worn generator tubes.

eliminating an expensive repair project in the years to come.

Complementing the breakthrough in steam generator cleaning, RGGE is experimenting with a process that is expected to allow repair of damaged tubes in the steam generator without the permanent loss of the tube's function that now results from plugging. The new sleeving process inserts a bimetallic tube sleeve up into and above the damaged portion of a tube. This is expected to maintain steam generator integrity and result in years of continued service.

Thus RGGEs own research and devel-opment program will be paying big divi.

dends for shareholders and customers, just as itdid a fewyears ago when RGGE developed the multi.frequency eddy current testing system that streamlined steam generator tube testing.

12

Statement of Income RRS and Elcctrio Oorporrrtion (Thousands of Dollars) Year'Ended December 31 1980 1979 1978 Operating Revenues (Note 1)

Electric . S 245,005 $ 219,373 $ 202,631 Gas ..................... 181,046 140,527 118,531 Steam 23,589 19,988 19,110 449,640 379,888 340,272 Electric sales to other utilities 52,786 37,804 28,676 Total Operating Revenues 502,426 417,692 368,948 Operating Expenses (Note 1)

Operation Electric and steam fuels 86,622 62,109 56,426 Purchased electricity. 23,796 31,937 19,337 Deferred fuel-electric and steam (6,911) (1,038) 1,714 Purchased natural gas . 127,759 89,804 71,109 Other . 81,960 72,264 65,685 Naintenance 32,048 30,129 26,246 Depreciation 27,800 23,703 22,206 Taxes-local, state and other 56,984 49,916 45,935 Federal income tax-current (Note 2) 393 (36) 5,166

-deferred (Note 2) 12,443 6,782 5,875 Total Operating Expenses 442,894 365,570 319,699 Operating Income 59,532 52,122 49,249 Other Income and Deductions Allowance for other funds used during construction (Note 1) 1 1,710 11,439 8,705 Other,net . 4,772 3,774 4,418 Total Other Income and Deductions 16,482 15,213 13,123 Income before Interest Charges. 76,014 67,335 62,372 Interest Charges lang term debt 34,129 29,084 25,594 Short term debt. 4,298 4,016 1,588 Other, net 755 441 416 Allowance for borrowed funds used during construction (Note 1) .. (6,820) (5,771) (4,812)

Total Interest Charges 32, 362 27,770 22,786 Net Income 43,652 39,565 39,586 Dividends on Preferred and Preference Stock, at required rates 8,927 6,645 5,678 Earnings Applicable to Common Stock S 34,725 S 32,920 ~ 33,908 Weighted average number of shares outstanding in each period, adjusted for stock dividends (000's) . 16,472 15,815 14,613 S2.10 $ 2.32 Earnings per Common Share (Note I) . ~2.08 Cash Dividends per Common Share, adjusted for stock dividends (Note 1) .. S1.48 Statement of Retained Earnings

( ITtousands of Dollars) Year Ended December 31 1980 1979 1978 Balance at beginning of period 80,155 $ 77,338 4 70,819 Add'et income 43,652 39,565 39,586 Total 123,807 116,903 110,405 Deduct Dividends on capital stock Cumulative preferred stock, at required rates (Notes 5 and 6) .. 6,799 4,517 3,550 Preference stock (Notes 5 and 6) 2,128 2,128 2,128 Common stock Cash (Note 1) 23,910 22,148 19,269 Stock (Note 5) 7,000 7,955 8,120 Total 39,837 36,748 33,067 Balance at end of period 83,970 4 80,155 S 77,338 14

Management Changes Robert C. Henderson, former assistant (Effective October 1, 1980) controller, was elected vice-president, Leon D. White, Jr., formerly vice. rates, effective December 1, 1980, president, electric and steam production, replacing John L Kennedy who retired was elected executive vice. president of after 40 years of service. Mr. Henderson the Company, with responsibility for joined the Company in 1963 as an operations. Mr. White joined RGGE in accountant. He has an M.BA. from the 1937 and has served in a number of University of Rochester.

electric and steam management posi ~

Director Changes tions over his 43-year career. In January 1981, the board of directors Harry G. Saddock was elected to the elected Constance M. Mitchell, Comelius position of senior vice president, finance J. Murphy and Leon D. White, Jr. as and rates. Previously he was vice. directors of the Company.

president, electnic system planning and Mrs. Mitchell has been active in the Harry G. Saddock Davkl C. Heiligman Robert C, Henderso operation. Mr. Saddock, a licensed pro- Rochester social, civic and political fessional engineer, joined the Company community for more than 25 years. She in 1950 and progressed through a num. is community relations coordinator for ber of management positions in the the Program to Interest Students in electric and electric system planning Science and Math sponsored by the departments. Industrial Management Council of Maiio Silvestrone was elected senior Rochester, New York, Inc.

vice president, general services. In addi- Mr. Murphy is a group vice. president of tion to his previous responsibilities as Eastman Kodak Company and general vice president, consumer services, public manager of the International Photo.

affairs and purchasing, he is administer- graphic Division.

ing employee relations and information systems. Mr. Silvestrone had served in Mr. White is RGGE's executive vice-various management positions in the president.

marketing and sales departments since Mrs. Mitchell, Messrs. Murphy and joining the Company in 1950. He is a White replaced retiring board members DavklK. Laniak Leon D. White. Jr. John E. Arthur licensed professional engineer and holds Ernest J. Howe and Edward J. Nelson, an MBA. from the Univeisityof Rochester. former presidents of Rochester Gas and John E Arthur was named vice.presi- Electric Corporation, and William S.

dent, engineering and chief engineer. Mr. Vaughn, former chairman of the board Arthur, whose former position was chief of Eastman Kodak Company.

engineer, has been with RGGE since 1955 and is a licensed professional engineer.

David K. Laniak became vice-president, electric system planning and operation, where he was previously superintendent.

Mr. Laniak came to the Company in 1954 and held a number of positions in the electric meter department before

}

moving to system planning.

John E. Maier, former vice. president, c onstance M. Mitchetl Comehus J.Murphy John E. Maier employee relations, was elected vice.

president, electric and steam production.

Mr. Maier join~RGGE in 1947 and has an M.BA. from the University of Rochester.

David C. Heiligman was elected treasurer while retaining his former position of assistant secretary. He joined the Company as an accountant in 1963 and has an M.BA. from the University of Leon D. White, Jr.

Rochester.

13

Statement of Changes in Financial Position RES and Electric Corporation (ihousands of Dollars) Year Ended December 31 1980 1979 1978 Sources of Funds Operations Net income . S 43,652 S 39,565 S 39,586 Principal noncash charges (credits) to income Depreciation 27,800 23,703 22@06 Amoritzation of nuclear fuel 20,789 17,126 15,746 Deferred fuel cost (4,813) (4,755) 976 Deferred income taxes, net 6,927 2,596 3,161 Allowance for funds used during construction (18,530) (17,210) (13,517)

Other, net 2,452 1,963 1,204

,

Total from Operations 78,277 62,988 69,362 Financing Sale of long term debt 55,000 10,000 40,000 Sale of common stock 25,257 6,083 27,186

~s Sale of preferred stock from short term debt, net Total from Financing 25,000 105.257 25,000 50,000 91,083 67,186 Total Sources of Funds... S 183,534 S154,071 S136,548 Gses of Funds Gtilityplant Plant additions. S 97,600 S109,656 S105,191 Nuclear fuel additions . 8,672 18,981 20,878 Less: Allowance for funds used during construction . 18,530 17,210 13,517 Net Additions to GtilityPhnt . 87,742 111,427 112,552 Dividends on preferred stock 6,799 4,517 3,550 Dividends on preference stock 2,128 2,128 2,128 Dividends on common stock 23,910 22,148 19,269 Reduction of short term debt, net . 24,700 9,000 Retirement of long term debt 12,000 16,677 Capital stock expense 1,343 544 902 Discount and expense of issuing long term debt. 858 635 490 Other, net . 3,896 (683) (2,037) increase (decrease) in working capital (excluding short term debt) 32,158 1,355 (25,983)

Total Gses of Funds S 183,534 S 154,071 S 136,548 Changes in Components of Working Capital Increase (decrease) in current assets Cash S 1,300 (8,852) 5,160 Accounts receivable, net. 17,974 5,985 1,368 Materials and supplies Fossil fuel 6,274 (56) 1,886 Construction and other supplies 1,470 1,117 (81)

Prepayments 59 90 233 Total. 27,077 (1,716) 8,566 Increase (decrease) in current liabilities (excluding short term debt)

Accounts payable 749 3,207 10386 Taxes 1,745 (2,881) 6,725 Accrued interest and payroll . 1,574 1,113 520 Long term debt due within one year (12,000) (4,677) 16,677 Other, net 2,851 167 241 Total. (5,081) (3,071) 34,549 Increase (decrease) in working capital (excluding short term debt) .. S 32,158 S (25,983) 16

Balance Sheet (Thousands of Dollars) At December 31 1980 1979 ASSETS UtilityPlant, at original cost (Note 1)

Electric 849,946 S728,686 Gas 193,863 182,046 Steam. 18,190 18,064 1,061,999 928,796 Less: Accumulated depreciation and amortization 337,215 295,328 724,784 633,468 Construction work in progress 225,690 260,063 Net UtilityPlant 950.474 893,531 Investment in Subsidiary, at equity . 1,968 2,062 Current Assets Cash 4,225 2,925 Accounts receivable, net of allowance for doubtful accounts: 1980-$ 1,387; 1979-$ 1,247 . 55,659 37,685 Materials and supplies, at average cost Fossil fuel 18,891 12,617 Construction and other supplies 12,230 10,760 P repayments 1,309 1,250 Total Current Assets 92,314 65,237 Deferred Debits Unamortized debt expense .. 4,511 3,917 Deferred fuel cost (Note 1) 14,697 10,092 Other 11,416 8,011 Total Deferred Debits 30,624 22,020 Total Assets . S 1,075,380 $ 82,850 CAPITAUZATIONAND LIABILITIES Capitalization Long term debt(Note 4) . 437,124 '382,162 Preferred stock redeemable at option of Company(Note 5) 67,000 67,000 Preferred stock subject to mandatory redemption (Note 6) . 50,000 25,000 Preference stock subject to mandatory redemption (Note 6) 28,000 28,000 Common shareholders'quity Common stock (Note 5) 291,346 260,432 Retained earnings 83,970 80,155 Total Common Shareholders'quity. 375,316 340,587 Total Capitalization. 957,440 842,749 Current Liabi!ities Short term debt (Note 7) . 25,300 50,000 Long term debt due within one year 12,000 Accounts payable 32,977 32,228 Taxes accrued, including income taxes . 10.199 8,454 interest accrued . 9,959 8,427 Payroll accrued . 2,991 2,949 Other 4,084 1,233 Total Current Liabilities 85,510 115,291 Deferred Credits and Other Uabilities Accumulated deferred income taxes (Notes 1 and 2) 28,070 20,502 Other 4,360 4,308 Total Deferred Credits and Other Liabilities 32,430 24,810 Commitments and Other Matters (Note 9)

Total Capitalization and Liabilities .. S 1,075,380 $ 982,850 15

'

Notes to Financial Statements Note 1. Summary of Accounting Policies General. The Company is subject to regulation by the Public Allowance for Funds Gsed During Construction. The Company Service Commission of the State of New York (PSC) under New capitalizes an Allowance for Funds Gsed During Construction York statutes and by the Federal Energy Regulatory Commission (AFDC) based upon the net cost of borrowed funds for construction (FERC) as a licensee and public utilityunder the Federal Power purposes and a reasonable rate upon the Company's other funds Act. Ihe Company's accounting policies conform to generally when so used. The rates used for this purpose were 10.5X, 9.5X accepted accounting principles as applied to New York State and 8.75X in 1980, 1979 and 1978, respectively. As of January public utilities giving effect to the rate-maMng and accounting 1981, the rate is 113X. In accordance with an order issued by the practices and policies of the PSC. FERC, AFDC is segregated into two components and classified in A description of the Company's principal accounting policies the Statement of Income as Allowance for Borrowed Funds Gsed follows. During Construction, an offset to Interest Charges, and Allowance for Other Funds Gsed During Construction, a part of Other Income.

GtilityPlant and Depreciation. The cost of additions to utilityplant and rephcement of retirement units of property is capitalized. Cost Since December 1977, the Company has computed AFDC on its indudes labor, material, and simihr items as well as indirect share of the Niagara Mohawk Power Corporation Nne Nile Point charges for engineering, supervision, etc. The Company capitalizes Nuclear Gnit <<2 and Oswego Fossil Gnit."6, until its July 1980 in.

an allowance for funds used during construction approximately service date, at an average reduced rate which is net of the income equivalent to the cost of capital devoted to phnt under construction. tax effect of the interest portion of AFDC. Snce May 1979, this Replacement of minor items of property is included in maintenance treatment has also been applied to the Company's investment in expenses. Costs of depreciable units of plant retired are eliminated its Sterling nuclear unit. The rates for 1980, 1979 and 1978 were from utilityplant accounts, and such costs, plus removal expenses, 8.0X, 7.51X and 6.85X, respectively.

less salvage, are charged to accumuhted depreciation and Rates and Revenue. Revenue is recorded on the basis of meters amortization. read during the calendar year.

Depreciation in the financial statements is provided on a straight Tariffs for electric and steam service include fuel cost adjustment line basis at rates based on the estimated useful lives of property, clauses, which serve to adjust electric and steam rates monthly to which have resulted in provisions of 3.1X per annum of average reflect changes in the average cost of fuels used in electric and depreciable property in 1980, 1979 and 1978. steam generation from the average cost of such fuels during the Nuclear Fuel and Decommissioning Costs. 'Ihe cost of nuclear base period. Tariffs for gas service contain a comparable chuse to fuel and estimated permanent storage costs of spent nuclear fuel adjust gas rates for changes in the price of purchased natural gas.

are charged to operating expense on the basis of the thermal Deferred Fuel Costs. Fuel costs which are recoverable under the output of the reactor. These costs are charged to customers electric, gas and steam cost adjustment chuses included in the through base rates and the fuel cost adjustment clause. tariff schedules of the Company are deferred until they are billed Due to a Federal government policy adopted in 1977, the Company to customers. A reconciliation of recoverable gas costs with billed changed its nuclear fuel cost computation to reflect the costs of gas revenues is done annually as of August 31, and the excess or permanent storage of spent nuclear fuel. Prior years'uclear fuel deficiency is refunded to or recovered from the customers during cost computations had anticipated that spent nuclear fuel would a subsequent twelve month period.

be reprocessed. Cumulative prior years'uel expenses would have Federal Income Tax. For income tax purposes, depreciation is been increased by approximately SI5.9 million ifthey had been computed using the most liberal methods permitted. In addition, determined on the basis of current cost estimates for permanent certain costs capitalized for financial reporting purposes are storage of spent nuclear fuel, rather than on an estimated amount deducted currently for income tax purposes. The resulting tax for reprocessing. In the Company's most recently concluded reductions are offset by provisions for deferred income taxes only electric rate filing, the PSC permitted the amortization and recovery to the extent ordered or permitted by regulatory authorities.

of approximately $ 12 million of such additional costs through rates The I OX investment tax credit rate, which had been scheduled to over a 10 year period, commencing in August 1980.

return to 4X in 1981, has been made permanent by the Revenue Decommissioning costs (costs to take the plant out of service in Act of 1978. The prior rate of 4X is applied to reduce the current the future) for the Company's Ginna nuclear power plant are tax provision while, as recommended by the PSC, normalized tax estimated by the Company to be $37 million in 1979 dollars with accounting is followed in the application of the remaining 6X.

decommissioning expected to commence in the year 2006. In The Company uses the separate period approach in calculating August 1980, the Company began accruing these costs over the the interim quarterly tax provision.

remaining life of the facilityat an initial rate of $3.1 million per year.

These accruals are included in base rates pursuant to the PSC Pension Plan. The Company's retirement plan is noncontributory order referred to previously. and covers all regular employees. Expenditures made by the Company to the retirement phn for the years 1980, 1979 and 1978 were $ 11.4 million, ~10.6 million and S.9 million, respectively, which includes amortization for: past service costs over 40 years, changes in the plan over 30 years, and experience gains or losses over 15 years. The actuarial methods and the accounting policy 17

used to determine Company expenditures were the same each the present value of plan benefits reflects an increase in benefits to year. A comparison of accumulated plan benefits and plan net retired participants and a change in actuarial assumptions assets is presented below. (Thousands) regarding the provision for anciihry benefits and the application of January 1 the ERISA maximum to all benefits.

1980 (a) 1979 Earnings and Dividends Per Share. Earnings applicable to each Actuarial present value of accumuhted share of common stock are based on the weighted average phn benefits: number of shares outstanding during the respective years, adjusted Vested S107,486 S 99gZO for stock dividends. Assuming the 1,500,000 shares of common Nonvested 8,885 1,677 stock issued on November 19, 1980 were outstanding at the SI 16,371 SI 00,897 beginning of 1980 and the proceeds were applied to reduce the Market value of assets available for benefits .. S 94,499 S 80,082 short term debt, the earnings per share for 1980 would have been

~2.02, compared with the reported amount of 0.10. Cash (a) Most rearit avaihble data dividends per share, as shown on page 14, are based on the shares Ihe actuarially assumed rate of return on the plan investments, outstanding at the time dividends are paid, adjusted for stock used in determining the actuarial present value of accumulated dividends. Cash dividends per share at the rates declared in each plan benefits, was 6X for all years shown. The increase in 1980 of period were $ 1.49 for 1980, ~1.46 for 1979 and 41.42 for 1978.

Note 2. Federal Income Taxes (Thousands of Dollars) 1980 1979 1978

'The provision for Federal income taxes is distributed between Charged to operating expense operating expense and other income based upon the treatment of Current 393 S (36) S 5,166 the various components of the provision in the rate making Deferred ................. 12343 6,782 5,875 process. At right is a summary of income tax expense for the three Total............. 1?836 6,746 11,041 most recent years. Credited to other income:

Current (393) (321) (2&1)

The following is a recondliation of the difference between the Deferred ............. (5,516) (4,186) (? 714)

Total .. (5,909) (4,507) (5,215) amount of Federal income tax expense reported in the Statement of Income and the amount computed by mu!Iiplying the income TotaIFederalincometaxexpense .. S 6,927 S 2~9 S 5926 before tax by the statutory tax rate.

1980 1979 1978

%of %of %of Pretax Pretax Pretax Amount income Amount Income Amount Income Net income ~43,652 S39,565 $39,586 Add: Federal income tax expense . 6,927 2,239 5,826 income before Federal income tax. S50,579 S45,412 Computed tax expense S23,266 46.0 S19,230 46.0 S21,797 4IM Increases (decreases) in tax resulting from:

Excess of tax depredation less amount deferred (4,501) (8.9) (4,145) (9.9) (3,525) (7.8)

Expenses capitalized for Iinanchl reporting purposes, induding interest, payroll and use tax, etc. (11,232) (22.2) (10,763) (25.7) (9,361) (20.6)

Investment tax credit (458) (9) (579) (14) (4,955) (10.9) propertytaxes onbasis of date of taxable status (1,310) (2.6) (698) (1.7) 2?A .5 Revenue taxes (deducted when paid) . 866 1.7 381 .9 2,133 4.7 Miscellaneous items, net . 296 .6 (1,187) (2.8) (487) (1.1)

Total Federal Income tax expense S 6,927 13.7 S 2,239 5.4 S 5,826 I? 8 Asummary of the deferred amounts charged or (credited) to income is as foihws:

1980 1979 1978 Investment tax credit S (458) (222) s 6,629 Class life depredation 2,446 ?076 1,763 Fuel costs ............... 2,195  ? 108 (469)

Nuclear fuel storage costs. (2,808) (2,672) (4,989)

Sterling abandonment 4,656 Other . 896 1,306 227 Total S 6,927 S 2,596 S 3,161 At December 31, 1980, the Company had approximately $21.6 1986-S12,490,000; and 1987-S8,142,000. For tax purposes, the million of investment tax credits for both financial reporting and tax Company has a net operating loss carryforward of $ 11,966,000 purposes that are available to be camed forward. Such credits, if avaihb! e through 1987, arising primarily from the abandonment of not utilized beforehand, willexpire as follows: 1985-$ 938,000; the Sterling nuclear plant.

18

Note 3. Oepartrnental Financial Information (Thousands of Dollars)

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

Electric Gas Steam Total Operating information - 1980 Operating revenues. S297,791 S181,046 S23,589 S 502,426 Operating expenses, exduding provision for income taxes 237,142 170,546 22370 430,058 Pretax operating income. 60,649 10,500 1319 72,368 Provision for income taxes 11,169 1310 357 12,836 Net operating income . s 49,480 S 9,190 S 862 59,532 Other income. net . 16,482 Interest charges. 32362 Net income per statement of income. 43,652 Other information Depredation . S 21,859 s 5837 604 S 27,800 Nuclear fuel amortization . S 20,789 20,789 Capital expenditures . S 75,080 s>>,966 696 S 87,742 Investment information - December 31, 1980 Identifiable assets . S870,603 S1 76335 S16,439 S1,063/77 Assets utilized for overall Company operations (a) . 12,003 Total assets per balance sheet S1,075,380 Operating information - 1979 Operating revenues. ~257,177 >140,527 SI9,988 S417,692 Operating expenses, exduding provision for income taxes . 209~ 129,645 19,896 358,824 Pretax operating income. 47,894 10,882 92 58,868 Provision for income taxes 5,600 1314 (168) 6,746 Net operating income .. ~ 42294 > 9~ S 260 52,122 Other income, net . 15313 interest charges. 27,770 Net income per statement of income. s 39,565 Other information Depredation . S 18,224 4g$ 8 591 23,703 Nuclear fuel amortization . S 17,126 17,126 Capital expenditures ......................... S 97,577 S I3Sl34 416 >> 1,427 Investment information - December 31, 1979 klentifiable assets . S789432 $ 166,274 sI6,415 S 972,521 Assets utilized for overall Company operations (a) . 10,329 Total assets per balance sheet S 982850 Operating information - 1978 Operating revenues. S231307 S>>8,531 S19,>>0 S368,948 Operating expenses, exduding provision for income taxes . 181,428 107,873 19357 308,658 Pretax operating income. 49@79 10,658 (247) 60390 Povtsion for income taxes 9,244 1,966 (169) 11,041 Net operating income S 40,635 S 8,692 S (78) 49,249 Other income, net . 13,123 Interest charges. 22,786 Net income per statement of income. s 39,586 Other information Depreciation . s le,984 581 s 22,206 Nudear fuel amoization . S 15,746 S 15,746 Capita! expenditures . Sioo,i94 S>>,903 455 S112,552 investment information - December 31, 1978 Ident Table assets . S711,917 sI46&9 S15,716 S873,932 Assets utilized for overall Company operations (a) 19,454 Total assets per balance sheet S893~

(a) Consists primarily of cash, prepayments and unamortized debt expense.

Note 4. Long Term Debt (Thousands)

Principal Amount First Mortgage Bonds December 31 Senes Due 1980 1979 Sinking and improvement fund requirements aggregate S333,540 2Y4 M Aug. 15, 1980 ... S 12,000 3Ys H June 1,1982.... S 6,O0O 6,000 per annum. Such requirements may be met by certification of 3Ys 0 Mar.1,1985 .... 10,000 10,000 additional property or by depositing cash with the Trustee. The 4~8 R July 1, 1987..... 15,000 15,000 1980 and 1979 requirements were met by certification of 5 S Oct.15,1989 ... 12,000 12,000 additional property.

4'/z T Nov.15,1991 ... 15,000 15,000 4Ye (1 Sept. 15, 1994... 16,000 16,000 The Series EE First Mortgage Bonds equal the principal amount 5.3 V May1,1996..... 18,000 18,000 of and provide for all payments of principal, premium and interest 6'/i W Sept. 15, 1997... 20,000 20,000 corresponding to the Pollution Control Revenue Bonds, Series A 6.7 X July 1, 1998..... 30,000 30,000 8 Y Aug. 15, 1999 ... 30,000 30,000 (Rochester Gas and Electric Corporation Projects) issued by the 9Ye Z Sept. 1, 2000.... 30,000 30,000 New York State Energy Research and Development Authority 10N AA Aug. 1, 1983 .... 29,667 29,667 through a participation agreement with the Company. The Series 9i/4. BB June 15,2006... 50,000 50,000 EE bonds are subject to a mandatory sinking fund beginning 8% CC Sept. 15, 2007... 50,000 50,000 9'/z DD Dec. 1 2003 .... 40,000 40,000 August 1, 2000 and each August 1 thereafter. Nine annual

~

6'h EE Aug. 1,2009 .... 10,000 10,000 deposits aggregating ~3.2 million will be made to the sinking fund, 10.95 FF Feb. 15. 2005 ... 55.000 with the balance of R.8 million principal amount of the bonds 436,667 393,667 becoming due August 1, 2009.

Add: Bond premium, net of discount .. 457 495 The Series FF bonds are subject to a mandatory sinking fund of Less:Duewithinoneyear ........... 12,000 ~2.8 million annually beginning February 15, 1986 and each Total Long Term Debt... S437,124 S382,162 February 15 thereafter, with the noncumulative option to double the payment in any year up to a maximum of 5 years.

The Mortgage provides security for the bonds through a first lien The Company's maturities for the next five years are 8 million in on substantially all the property owned by the Company (except 1982 for Series N, $29.7 million in 1983 for Series AAand 410 cash and accounts receivable). million in 1985 for Series O.

Note 5. Capital Stock Preferred Stock, not subject to mandatory redemption:

Type, by Order Par Shares Shares (Thousands) of Seniori Value Authorized Outstandin Shares December 31 Redemption Preferred Stock Series Outstandin 1980 1979 ( r share) (b)

(cumuhtive) ........... 4100 2,000,000 1,170,000 (a) 4 F 120,000 S12,000 S12,000 105 At any time Preferred Stock 4.10 H 80,000 8,000 8,000 101 At anytime (cumuhtive) ........... 25 4Y i 6O',OOO 6,000 6,000 101 At anytime Preference Stock 1 4.10 J 50,000 5,000 5,000 102.5 At anytime Common Stock .......... 5 4.95 K 60,000 6,000 6,000 102 At anytime (a) See Note 6 for mandatory redemption. 4.55 M 100,000 10,000 10,000 101 At anytime 7.50 H 200,000 20,000 20,000 106 Before 6/1/82 (b) Redeemable at the option of the Company on 30 days minimum notice, p!us accrued dMdends in ail cases. 670,000 $ 67,000 S67,000 (Thousands)

Common Stock: Per Share Shares Amount Outstanding, January 1, 1978 . 1? 889,631 3X Stock Dividend S2L00 386,689 8,120 Sale d Stock 18.75 1g50,000 23,438 Automatic Dividend Reinvestment Phn . 17.19-19.25 206,427 3,749 Capital Stock Expense (902)

Outstanding, December 31, 1978. 14,732,747 246,938 3% Stock Dividend 18.00 441,983 7,955 Automatic Dividend Reinvestment Phn . 1481-1725 309,747 4,967 15.86 70/84 1,116

~p'apital Stock Expense (544)

Outstanding, December 31, 1979. 15,554381 260,432 3% Stock Dividend 15.00 466,646 7,000 Sale of Stock 13.25 1,500,000 19,875 Automatic DMdend Reinvestment Phn 1350-14.25 388,038 5~2 Capital Stock Expense (1,343)

Outstanding, December 31 1980 .

~ 17,909,545 S291~6

'Tax Reduction Act Stock Ownership Plan At December 31, 1980 there were 318,01 2 shares of common preference stock are reserved for oHicers or employees, or for stock reserved and unissued under the Automatic Dividend options, warrants, conversions, or other rights.

Reinvestment Plan. No other shares of common, preferred or 20

Note 6. Preferred and Preference Stock Subject to Mandatory Redemption The Company is obligated to redeem shares of preferred stock The Company's maximum redemption requirements through as follows: 1985are as follows:

(Thousands)

(Thousands)

Shares December 31 Redemption Redemption Series Value 1985 1984 Series Outstandin 1980 1979 ( r share)

Preferred Stock Preferred P S100 0 8,125 S8,125 P 250,000 S25,000 ~25,000 108.60 Before 9/1/84 (a) Preferred Q 100 8,125 1084 Q 250000 25,000 110.84 Before 9/1/85 (a) Preference A 100 28,000 500,000 450,000 $25,000 ~44350 S8,125 Preference Stock in arrears in the sinking fund requirement, the Company may not redeem 7.6 A 280,000 $ 28,000 ~28,000 (b) or pay dividends on any stock subordinate to the pmferied stock (a) Commencing on September 1, 1984 for Series P and on September 1, (b) During January 1985, the Company must offer to purchase on October 1985 for Series Q and on each September 1, thereafter, the Company 1, 1985 ail of the outstanding 7.6% Series A Preference Stock at a price of must redeem 8,125 shares at 4100 per share by means of a sinking fund SI00 per share. The shares remaining outstanding after such offer are provision with the noncumulative option to redeem not more than 8,125 caihble at $ 100 per share at the option of the Company at any time after additional shares on the same terms. In the event the Company should be December 20, 1987.

Note 7. Short Term Debt At December 31, 1980 and 1979, the Company had short term The Company had established bank lines of credit totaling notes outstanding of $ 10 million and $25 million, respectively, and ~80 million at the end of the year. Since January 1,1979, the commercial paper outstanding of 4153 million and $25 million, Company has maintained its lines of credit by payment of commit.

respectively. The weighted average interest rates for 1980 were ment fees based on a percentage of floating prime rates. Prior to 14.53X for short term notes and 12.24X for commercial pa per, that date, the lines of credit were maintained through the use of and for 1979 were 13.75X for short term notes and 11.50X for compensating balance arrangements. Commitment fees paid in commercial paper. 1980 and 1979 were 4552/96 and $280178, respectively.

Note 8. jointly&wned Facilities The fo!lowing table sets forth the jointlyawned electric generating The Company's share of direct expenses associated with the projects in which the Company is partidpating. Each participant Oswego unit is included in the appropriate operating expenses must provide its own financing for the Nne Mile Point unit in the in the Statement of Income.

process of construction and for any additions to the Oswego unit.

Oswego Hineivtile Fossil Point Nuclear Gnit <<6 Gnit <<2 (I) (2) (3) (1) (3)

(1) Constructed and operated by Yiagara ivtohavA< Power Corpomtion.

Net megawatt capacity ...... 850 1,084 RGGEs share - megawatts... 204 152 (2) inaccordance with an order issued by the PSC, the Company deferred

- percent ..... 24 14 ail income and expenses associated with this unit until the plant was added Year of completion.......... 1980 1986 to rate base in July 1980 for mte making purposes.

(Millions of Dollars) (3) Construction costs exclude allowance for funds used during construction Total estimated project costs........... s24162 (5) and certain overhead costs to be capitalized.

RGGEs share. 3523 RGGEs actual construction costs - 1979 S 10.0 S 23.7 (4) it is anticipated that modifications willbe made to the existing plant to increase opemting eHidency or reliability. Costs associated with these

-1980 6.0 18.8 modifications are not included.

Expended by RGGE in prior years...... 45.5 70.5 S 61.5(4) 4113.0 (5) lhe present cost estimate excludes common facilities, but includes

$ 116.2 million for initial nuclear fuel loading.

Accumulated depredation (Commenced in 1980) .. s (1.2)

Note 9. Commitments and Other Matters The Company's capital expenditures program involves an In the mid 1970's, the Companyand three other New York State estimated expenditure of 4131.1 million in 1981, not including utilities agreed to share in the cost of a proposed nuclear. powered allowance for funds used during construction, and the Company electric generating plant which the Company would license, build, has enteml into certain commitments for purchase of materials and operate for the group at Sterling, Cayuga County, New York and equipment in connection with such program. Output of the plant was to have been shared in the same Operations of the Company's generating stations are subject to proportions; the Company's share was 28K Although state and various Federal, state and local environmental standards. federal authorizations for construction were obtained, the State siting agency ultimately revoked its authorization and the federal Under the Clean Water Act, the Company has obtained permits to construction permit was also withdrawn. The participating utilities discharge pollutants into the water bodies adjoining its facilities. elected not to appeal those decisions, but to terminate the project The United States Environmental Protection Agency(EPA) issued At December 31, 1980, the Company's net investment in the plant National Pollutant Discharge Elimination System permits for all is summarized as follows (in thousands of dollars):

the Company's major generating facilities, but a number of Construction costs $ 37,300 conditions relating to thermal and chemical discharge limitations were contested by the Company in adjudicatory hearing requests Less: Estimated tax effect of abandonment ............ . 11,800 submitted to EPA. The Company, the New York State Department $ m,m of Environmental Conservation "NYSDEC'which became a party The Company's share of the estimated contract termination costs to the adjudicatory hearings) and EPA have settled the hearing would be S7 million, prior to tax savings.

requests as described be! ow.

The Company has reached agreement with the regulatory The Company and the three other utilities participating in the agencies on non thermal eNuent limitations and final permits Sterling project have petitioned the PSC for permission to amortize containing these agreed limitations have been issued and are now their investment in the plant as a cost of service over a period of continuing in effect, pending final action by NYSDEC on applica- time to be determined in each participant's currently pending rate tions to renew these permits. Construction of treatment facilities case. Proceedings were commenced by the PSC in 1980 to required for Company compliance with permit limitations at two of examine the costs incurred by the petitioners, to determine their the Company's generating stations was completed in 1980. prudence and to decide the request for amortization of the Construction costs of these two facilities totaled S11.9 million. extraordinary property loss in rates. The proceeding was initially divided into two phases: Phase I to resolve certain general The Company has pursued resolution of the contested thermal principles and phase II to conduct a more detailed examination of limitations by submitting demonstrations in an effort to justify less individual cost items. A Phase I-Awas later added by the Commis.

stringent limitations for three generating stations. The thermal sion to consider a proposal that the participants not recover conditions of the permits remain stayed pending resolution of the through rates the carrying charges on the unamortized investment thermal issues either through regulatory agencies'pproval of the and to consider "any other issue of ultimate responsibility for demonstrations and less stringent thermal limitations or, in the Sterling costs". Phase I was concluded with an Opinion and Order absence of such approval, through the resumption of the dated January 6, 1981, which provided, in part, that the categories adjudicatory hearing process. If the demonstrations and less ofexpenditures incurred for the project up to January11, 1978 stringent thermal limitations are not approved for any of the three were prudent in principle. As a result, Phase II of the proceedings facilities, the Company could be required to install cooling towers has been expanded to conduct an examination of the prudence of which would involve capital expenditures estimated at R7 million categories of expenditure after January 11, 1978, along with a plus significant operating and maintenance expenses. more detailed examination of individual cost items. The Opinion, The National Pollutant Discharge Elimination System permits however, did state that with regard to the prudence of categories of issued in 1978 expired on March 30, 1980. The Company applied expenditures between Januaiy11 and May 4, 1978, the PSC Staff to NYSDEC for renewal of these permits. NYSDEC has extended and intervenors will have the burden of going forward in showing the Company's edsting permits until final action is taken on the any category to be imprudent. The Company believes that all of pending renewal applications. the expenditures incurred on the Sterling project have been The Company believes that additional expenditures and costs reasonable and prudent, and therefore will ultimately be recovered made necessary by environmental regulations will be fully through rates.'The Company also believes that decisions of the allowable for rate making purposes. PSC support the Company's request for an appropriate canying charge on the unamortized investment.

The utilities participating in the Sterling project received an order dated February 19, 1980 from the PSC, in which it was ordered

"(T)hat the petitioners be allowed to continue, until such time as amortization commences to be recovered in rates, to accrue and accumulate an allowance for funds used during construction with respect to project costs." The investment of $373 million

mentioned above includes S2.5 million in AFDC accrued during dischimed any obligation for the payment of any punitive damages 1980 pursuant to this order. With respect to a similar continuation which may be assessed against the Company. There is precedent of AFDC under the accounting procedures prescribed by the in New York State that it is contrary to public policy for an insurance FERC, authorization by the FERC is necessary. Such action was carrier to pay punitive damages assessed against its insured, but it requested on March 7, 1980. I1ie FERC has not acted on the is unclear whether that precedent would apply to the nuclear matter. Ifthe FERC does not authorize continuation of accrual and liabilityinsurance involved in these actions. The Company intends accumuhtion of AFDC on the Sterling project and ifalternative to contest the disclaimer of coverage for punitive damages.

regulatory relief equivalent thereto is not granted by the FERC, An additional legal action has been brought by the plaintiffs in then the participants will not be permitted to include in financial those actions. T1iis action seeks to recover ~10 million in reports, based on the FERC System of Accounts, the AFDC compensatory damages and S13 million in punitive damages for accrued on their investment subsequent to the effective date of the various alleged wrongs arising out of a Company interoffice discontinuance of the project. However, on the basis of the PSC memorandum advising its facilitysupervisors that none of the order of February 19, 1980, the participants would continue to plaintiffs should be permitted on the Company's property. These accrue and accumulate such AFDC for PSC reguhtoiy purposes claims are not covered by insurance, and the Company will and for purposes of financial reports based on PSC accounting. defend them vigorously.

Legal actions have been instituted against the Company seeking On January 19, 1981, the PSC approved the merger of the

$34.5 million in compensatory and W million in punitive damages Company and Pavilion Natural Gas Company (Pavilion). It is for alleged personal injuries as a result of exposure to radiation at expected that the merger will take place on February 28, 1981, at the Company's Ginna nuclear power plant in 1974. The Company which time the Company will issue up to 98,006 additional has not completed its investigation of the plaintiffs'llegations and shares of common stock in exchange for the common stock of it cannot now predict the outcome of these actions, nor can it Pavilion. The merger will be accounted for as a pooling of interests.

predict whether any additional similar actions might be corn. Had the merger occurred in 1980, the effects on reported menced. Based, however, on its investigation to date, the Company operating revenues, net income and earnings per share would does not believe the phintiffs will prevail on the merits, and it have been immaterial.

intends to contest these claims vigorously.

The Company is fullyinsured for the total compensatory damages that are sought in these actions, and its insurer has advised the Company that it willfullydefend all claims. However, the insurer has Report of Independent Accountants To the Shareholders and Board of Directors of Rochester Gas and Electric Corporation In our opinion, the accompanying bahnce sheets and the related statements of income, retained earnings, and of changes in financial position appearing on pages 14 through 16 present fairly the fiinancial'position of Rochester Gas and Hectric Corporation at December 31, 1980 and 1979, and the results of its operations and the changes in its financial position for each of the three years in the period ended December 31, 1980, in conformity with generally accepted accounting principles consistently applied. Our examinations of these statements were made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

1900 Lincoln First Tower Rochester, New York 14604 January 30, 1981

Supplemental Information Concerning the Effects of Inflation The estimates of the effect of inflation on the operations of the Other Items. As allowed by FASB Statement No. 33, items in the Company, as set forth below, were prepared on bases prescribed income statement, other than depreciation expense, were not by the Financial Accounting Standards Board (FASB) Statement adjusted. The cost of fuel used in electri production and the cost No. 33, "Financial Reporting and Changing Prices." This of gas sold were not adjusted because the effect on earnings was statement requires adjustments to historical costs to estimate the not material due to the relatively short turnover period between effects that general inflation (Constant Dollar) and changes in the incurrence of these costs and their recovery through the fuel specific prices (Current Cost) have had on the Company's results adjustment clause.

of operations. These data are not intended as substitutes for Ihe regulatoiy process limits the amount of depreciation expense earnings reported on a historical cost basis. They offer some induded in the Company's revenue allowance and limits utility perspective of the approximate effects of inflation rather than a plant in rate base to original cost Such amounts produce cash precise measurement of these effects. flows which are inadequate to replace such property in the future UtilityPlant. Estimated utilityplant, primarily consisting of plant in or preserve the purchasing power of common equity capital service and construction work in progress, was determined for previously invested. While this effect is partially mitigated by the constant dollars by applying the Consumer Price Index for All benefit derived form having long term debt, the Company has a Urban Consumers (CPI.U) to the historical cost of utilityplant. Ihe net purchasing power loss which is experienced by the common current cost estimates were measured by applying the Handy. stock shareholder and can only be overcome as a result of Whitman Index of Public UtilityConstruction Costs to the adequate rate relief. However, the Company expects that it willbe historical cost of utilityplant. Current cost is an estimate of the cost able to establish rates which willcover the increased costs of new of currently replacing existing plant. The resulting adjusted data plant when such costs are incurred.

for plant under either of the above methods is not necessarily Federal income tax policy ignores the effects of inflation in indicative of the Company's future capital requirements because measuring taxable income. Higher depreciation expense under the actual replacement of existing plant willtake place over many constant dollar and current cost accounting is not tax deductible.

years and is not likely to be a reproduction of presently existing Therefore, the Company's effective Federal income tax rate, when plant.

adjusted for inflation, is 48.8 percent under constant dollar and Ihe difference between current cost and the constant dollar data 86.4 percent under current cost for 1980, each of which exceeds results from specific prices of plant increasing at a rate different its reported effective tax rate of 22.7 percent.

from the rate of general inflation.

The erosion of shareholders'quity due to changing prices is Accumulated Depreciation. Ihe accumulated provision for summarized in terms of general inflation and in terms of changes depreciation for constant dollars and current cost was developed in specific prices, as follows:

by applying, for each class of plant, the same percentage ln Terms of In Terms of relationship that existed between gross plant and accumulated General Changes in provision for depreciation on a historical basis to the respective In Thousands of Average 1980 Dollars Inflation Specific Prices adjusted plant data. Increase in provision for depreciation 430,192 '41,635 Depreciation Expense. Depreciation expense for both methods Increase in general price level less was determined by applying the Company's depreciation rates to increase in specific prices ....... 39,624 the respective indexed plant amounts. Reduction of utilityplant to net recoverable cost............ 78,181 27,114 Reduction of UtilityPlant to Net Recoverable Cost. Gain from the decline in purchasing 1he regulatory process limits the Company to the recovery of the power of net amounts owed ..... (66,725) (66,725) historical cost of service in its rates.'Iherefore, any excess of the Total erosion of due to inflation......

shareholders'quity value of utiTity plant under constant dollars or current cost must be >41,&$ 8 ~41,648 reduced to the net recoverable cost, which is historical cost. Ihe amount of this excess that accrued as a result of inflation in the current year must be reduced to net recoverable cost.

Gain From the Decline of Purchasing Power of Net Amounts Owed.

The Company, by holding assets such as receivables, prepay.

ments, and inventory, suffers a loss of purchasing power during periods of inflation because the amount of cash received in the future for these items will purchase less. Conversely, by holding monetary liabilities, primarily long term debt, the Company benefits because the payment in the future willbe made with nominal dollars having less purchasing power. The Company has significant amounts of long term debt outstanding which will be paid back in dollars having less purchasing power and, therefore, for purposes of these calculations, has a net gain from holding monetary liabilities in excess of monetary assets.

Statement of Income from Continuing Operations Adjusted for Changing Prices Constant Dolhr Current Cost Historical Average Average (Thousands of Dollars) For the Year Ended December 31, 1980 Cost 1980 Dolhis 1980 Dollars Operating revenues ~502,426 ~502,426 4502,426 Operating expense 313,226 313,226 313,226 Maintenance expense 32,048 32,048 32,048 Depreciation expense 27,800 57,992 69,435 Tax expense local, state and other. 56,984 56,984 56,984 Income tax expense . 12,836 12,836 12,836 Interest expense 39,182 39,182 39,182 Other income and deductions net . (23,302) (23,302) (23,302) 458,774 488,966 500,409 Net income 43,652 13,460 2,017 Dividends on preferred and preference stock 8,927 8,927 8,927 Earnings (loss) applicable to common stock ~ 34,725 ~ 4,533" ~ (6,910)

Change in net assets during 1980 due to increase in specific prices ~193,984" Less: Increase in general price level .. 233,608 Net change during 1980. (39,624)

Reduction of utilityplant to net recoverable cost ~(78,181) (27,114)

Gain from decline in purchasing power of net amounts owed S 66,725 $ 66,725

'Earnings applicable to common stock on a constant dolhr basis would have been a loss of S73,648 ifthe reduction of utilityphnt to net recoverable cost had been inctudei "AtDecember 31, 1980, current cost of utilityproperty net of accumulated depredation was S2,10? 868, while rehted historical cost or net recoverable cost was S950,474.

Five. Year Comparison of Selected Financial Data Adjusted for Changing Prices (In Thousands of Average 1980 Doihis) Year Ended December 31 1980 1979 1978 1977 1976 Operating revenues As reported. $502,426 $ 417,692 $ 368,948 $331,144 $308,227 In average 1980dollars . 502,426 474371 466,189 450,465 446@42 Historical cost information adjusted for general inflation Earnings applicable to common 4,533 10,279 per common share, adjusted for stock stock'arnings dividends'et

$ .28 ~.65 assets at yearend at net recoverable cost 358,613 365,772 Current cost information Loss applicable to common stock'. (6,910) (3,080)

Loss per common share, adjusted for stock dividends'.......... ~(19)

Excess of increase in general price level over increase in speciTic prices after reduction to net recoverable cost 66,738 80,450 Net assets at yearcnd at net recoverable cost 358,613 365,772 General information Gain from decline in purchasing power of net amounts owed..... 66,725 73,855 Cash dividends per common share, adjusted for stock dividends As reported. S 1.41 S 1.22 > 1.13 In average 1980 dollars 1.60 1.68 1.66 1.64 Market price per common share atyearwnd As reported. ~12.25 ~14.88 $ 18.00 ~21.13 $ 19.88 In December 1980 dollars . 12.25 16.72 22.92 29.33 29.46 Average consumer price index 246.9 217.4 195.4 181.5 170.5 December consumer price index 258.4 229.9 202.9 186.1 174.3

'Excludes the reduction of utilityphnt to net recoverable cost.

Interim Financial Data $ KS and Bectrto Corporation In the opinion of the Company, the following quarterly information quarterly basis are a result of the seasonal nature of the Company's includes all adjustments, consisting of normal recumng adjust. business and the availability of the Company's Ginna nuclear plant.

ments, necessary for a fair statement of the results of operations Earnings per common share have been adjusted for stock for such periods. The variations in operations reported on a dividends.

(Thousands) Eamin Per Operating Operating Net EamingsOn CommonFhare Revenues Income Income Common Stock (in dollars)

December 31, 1980 $ 141,344 812,774 S 8,159 s 5,525 S .32 September 30, 1980 102,130 14,268 9,335 6,956 .42 June30.1980 . 105,395 12,233 9,141 7,184 .44 March 31, 1980 . 153,557 20,257 17,017 15,060 .93 December 31, 1979 108,243 11,279 7,194 5,237 32 September 30, 1979 83,010 8,244 5,211 3,362 .21 June 30, 1979 105,766 14,265 10,939 9,520 .60 March 31, 1979 . 120,673 18,334 16,220 14,801 December 31, 1978 92312 8,466 7,088 5,669 36 September 30, 1978 73,665 9,527 6,596 5,175 35 June 30, 1978 86,942 12,009 9,909 8,490 .59 March31,1978 . 116,029 19,247 15,993 14,574 1.03 Common Stock and Dividends 1980 1979 1978 Earnings per weighted average share ........... 2.10 $ 2.08 $ 232 Number of shares (000's)

Weighted average 16,472 15,815 14,613 Pro forma weighted average after stock dividend paid in following year (See below)... 16,966 16,289 15,051 Actual number at December 31.............. 17,910 15,555 14,733 Number of shareholders. 50,416 48,543 48,148 Price range (Sales on Hew York Stock Exchange) . High Low High Low High Low 1st quarter 2nd quarter .

3rd quarter .

15>/4 15'/4 14s/4 11'/4 11%

13s/4.

17'5%

18%

17 1P/4 16 21 r/t 18/s 19/e 17'/e 17s/s 18 4th quarter. 13r/s 11'h 16 14r/t 18M 16th Cash dividends paid 1st quarter S.37 $ 36 2nd quarter . .37 36 .35 3rd quarter . .37 37 36 4th quarter .. .38 37 36 Stock dividend paid (See below) ............... 3% 3% 3X The 22nd annual stock dividend was paid by the Company on dependent upon the Company's future earnings, its financial February 25, 1981 at the rate of 3%. The foregoing Common Stock requirements and other factors.

prices have not been adjusted for subsequent 3% stock dividends In the event the Company should be in arrears in the redemption paid in February 1978, 1979, 1980 and 1981. of its Series P or Series Q Preferred Stock pursuant to the sinking The Company has paid cash dividends quarterly on its Common fund provision of such series, the Compan'y may not purchase Stock without interruption since it became publicly held in 1949. or otherwise acquire for value, or pay dividends on, any shares The Company intends to continue the practice of paying cash of its Common Stock diVidends quarterly and willconsider the payment of a stock For the years 1978 and 1979 cash diVidends paid were 100K diVidend annually, although there can be no assurance as to the taxable for Federal income tax purposes. The Company estimates declaration of future dividends since they necessarily will be that cash dividends paid during 1980 will be 100X nontaxable.

26

Management's Discussion and Analysis of Financial Condition and Results of Operations During the three years 1978 through 1980, the Company has generate appropriate amounts of cash to finance its growing experienced the effects of high inflation, record setting interest construction program and have restricted its ability to secure rates, and imperfections inherent in the regulatory rate making financing at advantageous rates. These policies, together with the process. Their impact is evident throughout the statements of effects of inflation and the high costs of borrowing, have required income and balance sheets shown on pages 14 and 15. The effects the Company to become more aggressive in seeking approvals of inflation are further set forth in the supplemental information on for rate increases. I)tis is evidenced by the short period of time pages 24 and 25. Although the Company is not convinced these between the July 18, 1980 PSC decision in the last proceeding and trends are permanent, there has been a gradual erosion of the long the August 27, 1980 filing of the Company's current proceeding.

term fundamental financial strength of the Company which histori. ln Januaiy1981 it became clear that the Company had under.

cally has provided a certain degree of flexibilityin long term plan. estimated the duration and magnitude of the current downturn in ning. Ihis loss of flexibilitybecomes apparent through the reduction the business cycle as reflected in its projection of rate year in cash flow as a result of the increases in such working capital financing costs in the current rate proceeding. Thus, the Company items as accounts receivable and fuel inventories. amended its initial permanent request to reflect an increase in the lhe Company's financial flexibilityhas also been constrained by requested rate of return on rate base from 10.95% to 11.35%. Also, the necessity to commit to major construction projects to meet the Company applied for temporaiy electric and gas rate increases, the anticipated energy needs of our customers. Planned increases to be effective on or about March 1, 1981, of approximately $30 in electric generating ca pacity require long term capital commit. million and $ 5 million, respectively, based on forecasted sales ments, such as Nine Mile Point Gnit 2, a nuclear unit being built by volumes for the twelve months ended July 31, 1982. The Company Niagara Mohawk Power Corporation in which the Company has a has presented evidence in the proceeding that, ifthe temporary 14X interest, now scheduled for commercial operation in late rate increases are not permitted, the Company will face a serious 1986. Also, a significant portion of the Company's capital expendi. risk of having the rating of its iirst mortgage bonds lowered when it ture program is comprised of government mandated modifications next sells such bonds. The Company's request for an 18K increase and additions to existing plant and equipment. in steam rates ($3.6 million per year) was approved by the PSC and the rates became effective February 18, 1981. Ihe Company is At present, the Company anticipates that 30X to 40K of the addi. unable to predict the amount of the pending increases, ifany, that tional funds it requires will be generated internally. The balance will be allowed by the PSC.

will have to be obtained through the sale of securities and short term borrowing. The Company's ability to obtain financing Ihe following financial review identifles the causes of significant depends on receiving regulatory approvals for rate increases changes in the amounts of revenues and expenses, comparing adequate to maintain the Company's financial soundness. 1980 to 1979 and 1979 to 1978. The Notes to Financial Statements on pages 17 to 23 of this report contain additional related Regulatory policies regarding both cash flow items and rates of information.

earnings have restricted the Company's ability to internally Changes In Operating Revenues Increase or (Decrease) from Prior Year Electric Department Gas Department Steam Depart'ment (Ihousands of Dollars) 1980 1979 1980 1979 1980 1979 Customer Revenues (Estimated) from:

Rate Inaeases . $ 21,878 $ 10,464 $ 8,232 $ 1,946 $ 2,316 $

Fuel Cost Adjustment . 2,317 2,764 30,436 20,986 3,441 1,757 Weather Effects . (27) (61) (1,452) (735) (279) (24)

Customer Consumption. 607 2,842 2,671 (526) (2,042) (1,013)

Other 857 733 632 325 165 158 Total Change in Customer Revenues... 25,632 16,742 40,519 21,996 3,601 878 Electric Sales to Other Gtilities . 14,982 9,128 TotalChangeinOperating Revenues. $ 40,614 $25,870 $ 40,519 $ 21,996 $ 3,601 $ 878 Revenues from electric sales to other utiTities increased in both Purchased electricity expense decreased in 1980 due mainly to the 1980 and 1979. Fluctuations in electric sales to other utilities, and high 76% availability of the Ginna nuclear power plant and an in purchased electricity discussed below, generally are related to increase in system net generating capacity occasioned by the the avaihbility of electric generation from the Ginna nuclear plant. start up of Oswego Gnit 6. Purchased electricity increased in 1979 due to both higher costs and higher kilowatt.hour purchases.

Changes In Operation and Maintenance Expenses Purchased natural gas expense increased in 1980 and 1979 as a Increase or (Decrease) from Prior Year result of higher pipeline rates and in 1980 also increased due to a (Thousands of Dollars) 1980 1979 modest increase in consumption in the nonresidential sector.

Electric and Steam Fuels .. $ 18,640 $ 2,931 Purchased Bectricity..... (8,141) 12,600 Other operation expense increased in 1980 and in 1979 largely Purchased Natural Gas ... 37,955 18,695 as a result of higher wages and employee benefit costs.

Other Operation. 9,696 6,579 Taxes local, state and other increased in 1980 and in 1979 Mantenance 1,919 3,883 principally due to the increased gross income tax rate and Total Change In Operation and increased revenues. The 1980 increase also reflects taxes on Maintenance Expense....... $ 60,069 $ 44,688 Oswego Gnit 6 which were capitalized during its construction and are now being expensed. Changes in Federal income taxes are Ihe 1980 increase in electric and steam fuels expense was mainly explained in Note 2 to the Notes to Financial Statements.

due to an increase in electricity generated in 1980 and an increased fuel cost per kilowatt.hour generated.

27

The 1980 increase in allowance for funds used during construction Interest on long term debt increased in 1980 and in 1979 as a of $ 13 million was due to the increased rates applied during the result of additional bonds issued in February and May 1980, period, the effect of which was reduced by lower utilityplant August 1979 and December 1978. Short term interest rates and expenditures and by the transfer of the Company's share of the borrowing levels for 1980 and 1979 were approximately equal.'The Oswego Unit 6 oil-fired generating p!ant from construction work S2.4 million increase in the 1979 interest on short term debt in progress to utiTity plant. The 1979 increase of ~3.7 million in resulted from higher interest rates and an increase of $ 14.6 million allowance for funds used during construction was due to increased in the average amount of short term debt outstanding.

rates applied during the period and to increased utilityplant DMdends on preferred and preference stock increased ~2.3 million expenditures. in 1980 and ~1.0 million in 1979 because of additional preferred stock issued in August 1980 and July 1979.

Selected Financial Data Summaiy of Operations (Thousands of Dollars)

Year Ended Deceinber 31 1980 1979 1978 1977 1976 1975 Operating Revenues Electric . S245,005 $ 219@73 $ 202,631 $ 179,940 $ 170,558 $ 146,629 Gas 181,046 140,527 118,531 105,797 101,027 82,478 Steam 23,589 19,988 19,110 19,004 18&3 17/37 449,640 379,888 340,272 304,741 289,968 246,444 Electric sales to other utilities .. 52,786 37,804 28,676 26,403 18,259 25,496 Total Operating Revenues 502,426 417,692 368,948 331,144 308,227 271,940 Operating Expenses Operation Electric and steam fuels ...... 79,711 61,071 58,140 56,993 46361 46,268 Purchased eiectricity......... 23,796 31,937 19/37 13,635 18,195 12312 Purchased natural gas ....... 127,759 89,804 71,109 62,086 56,192 42,247 Other . 81,960 72,264 65,685 62,494 57,677 50,629 Maintenance 32,048 30,129 26/46 22372 20/06 19,700 Depreciation 27,800 23,703 22/06 21,053 18,621 17,414 Taxes-local, state and other.... 56,984 49,916 45,935 43,876 40,502 36,157 Federal income tax current.... 393 (36) 5,166 961 (291) 4,162 deferred... 12,443 6,782 5,875 2,897 5,656 1,133 Total Operating Expenses 442,894 365,570 319,699 286 f67 263,119 229,922 Operating Income 59,532 52,122 49,249 44,777 45,108 42,018 Other Income and Deductions Allowance for other funds used during construction . 11,710 11,439 8,705 6,473 4,678 2310 Other, net . 4,772 3,774 4,418 1310 1,128 537 Total Other Income and Deductions .... 16,482 15,213 13,123 7,783 5,806 2,847 Income before Interest Charges... 76,014 67335 62/72 52560 50,914 44,865 Interest Charges Longtermdebt 34,129 29,084 25,594 22,542 19@78 16,963 Shortterm debt.

Other, net .

4.298 755

-

4,016 441 1~416 1+19 494 1,054 246 1,568 1~7 Allowance for borrowed funds used during construction . (6,820) (5,771) (4,812) (4,844) (2,853) (1,264)

Total Interest Charges .. 32,362 27,770 22,786 19,511 17,825 18,494 Net Income 43,652 39,565 39,586 33,049 33,089 26,371 Dividends on Preferred and Preference Stock, at required rates . 8,927 6,645 5,678 6,512 6,245 4,054 Earnings Applicable to Common Stock ...... S 34,725 $ 32,920 $ 33,908 4 26,537 4 26,844 S 22,317 Weighted average number ofshares outstanding in each period, adjusted for stock dividends (000's) . 16,472 15,815 14,613 13,234 12,713 11,656 Earnings per Common Share ............... $ 2.10 S2.08 >2.32 ~2.00 ~2.11 ~1.91 Cash Dividends per Common Share. adjusted for stock dividends . s 1.48 SI.41 SI.22 $ 1.08

Selected Financial Data (Continued)

Condensed Balance Sheet (Thousands of Do!lars)

At December 31 1980 1979 1978 f977 1976 f975 ASSETS GtilityPlant, at original cost............ S1,061,999 $ 928,796 $ 857,959 $ 789,775 $ 727,687 $ 693,404 Less Accumulated depreciation and amortization . 337,215 295/28 261,477 229,122 198,778 185,455 724,784 633,468 596,482 560,653 528,909 507,949 Construction work in progress... 225,690 260,063 213,534 162,127 120,702 79,381 Net utilityplant . 950,474 893,531 810,016 722,780 649,611 587,330 Investment in Subsidiary, at equity .. 1,968 2,062 1,996 1,947 1,911 1,871 Current Assets 92,314 65~7 66,953 58387 61,090 53,796 Deferred Debits 30,624 22,020 14,421 15,260 8,151 7,450 Total Assets . S1,075,380 $ 982,850 $ 893~6 $ 798,374 $ 720,763 $ 650,447 CAPITALIZATIONAND LIABILITIES Capitalization Long term debt 437,124 $ 382,162 $384 f03 $ 361,022 S311 f95 $ 267,314 Preferred stock subject to mandatory redemption 50,000 25,000 Preferred stock redeemable at option of Company 67,000 67,000 67,000 67,000 92,000 89,000 Preference stock subject to mandatory redemption 28,000 28,000 28,000 28,000 Common shareholders'quity Common stock. 291,346 260,432 246,938 212,533 181/01 173,586 Retained earnings 83,970 80,155 77/38 70,819 67,812 60,502 Total common shareholders'quity... 375,316 340,587 324,276 283/52 249,113 234,088 Total Capitalization ........... 957,440 842,749 803,579 739@74 652,508 590,402 Current Uabilities 85,510 115,291 68/62 42,813 54,652 51,712 Deferred Credits and Other Liabilities .. 32,430 24,810 21,445 16,187 13,603 8,333 Total Capitalization and Liabilities... $ 1,075,380 $ 982,850 $ 893,386 $ 798,374 $ 720,763 S650,447 Financial Data At December 31 1980 f979 1978 1977 f976 f975 Capitalization Ratios (percent)

Longtermdebt 45.7 45.4 47.8 48.8 47.7 45.3 Preferred and preference stock .. 15.1 14.2 11.8 12.9 14.1 15.1 Common shareholders'quity... 39.2 40.4 40.4 383 38.2 39.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 Book Value per Common Share Adjusted for StockDividends YearEnd............... S20.96 $ 21.26 $ 20.75 $ 20.12 $ 19.47 $ 18.56 Rate of Return On Average Common Equity-Year End (percent) 9.86 9.85 11.22 10.02 11.16 '0.18 Effective Federal Income Tax Rate (percent) ... 13.7 5.4 12.8 6.2 I 0.6 14.4 Depreciation Rate Electric ................ 3.09 3.10 3.09 3.00 2.90 2.79 Gas ................... 2.86 2.79 2.79 2.67 2.63 2.60 Interest Coverages Before federal income taxes (incld. AFDC)... 2.33 2.25 2.65 2.45 2.79 2.56 (excld. AFDC)... 1.86 1.73 2.16 1.98 2.43 2.38 After federal income taxes (inckl AFDC)..... 2.11 2.18 2.43 2.36 2.60 2.33 (excld. AFDC) .... 1.64 1.67 1.94 1.89 2.24 2.15 29

Electric Department Year Ended December 31 1980 1979 1978 1977 1976 1975 Electric Revenue (000's)

Residential. S 88,083 4 78,140 ~72,854 > 64,986 4 61,498 S 53,904 Commercial . 70,407 63,104 58,985 53,520 50,791 43,884 industrial 60,373 54,404 48,792 41,783 39,402 33,244 Other . 26,142 23,725 22,000 19,651 18,867 15,597 Hectric revenue from our customers .. 245,005 219,373 202,631 179,940 170,558 146,629 Other electric utilities 52,786 37,804 28,676 26,403 18,259 25,496 Total electric revenue 297,791 257,177 231.307 206,343 188,817 172,125 Electric Expense (000's)

Fuel used in electric generation .. 63,430 46,999 45,093 44,010 34,247 33,442 Purchased electricity. 23,796 31,937 19,337 13,635 18,195 12,212 Other operation. 64,139 54,277 47,602 45,011 40,930 35,662 Maintenance 24,404 22,675 19,305 16,339 14,796 14,282 Depreciation . 21,859 18,223 16,983 15,333 13,865 12,731 Taxes local, state and other.... 39,514 35,172 33,108 31,530 28,543 25,369 Hectric revenue deductions . 237,142 209,283 181.428 165,858 150,576 133,698 Operating Income before Federal Income Tax..... 60,649 47,894 49,879 40,485 38,241 38,427 Federal income tax includin ulato allowance 11,169 5,600 9,244 4,041 3,102 5,069 0 eratfn Income from Electric 0 erations (000's) S 49,480 0 4?294 ~ 40,635 > 36,444 4 35,139 4 33,358 Electric Operating Ratio% . 59.0 60.6 57.7 57.3 55.5 Electric Sales-KWH (000's)

Residential . 1,730,213 1,710,090 1,701,938 1,660,425 1,618,314 1,530,421 Commercial 1,424,283 1,404,931 1,417,624 1,392,023 1,366,094 1,294,816 Industrial . 1,564,952 1,579,364 1,51 7,988 1,431,855 1,384,235 1,284,940 Other 466,975 469,135 465,373 454,059 437,097 411.122 Hectric sales to our customers 5,186.423 5,163,520 5,102,923 4,938,362 4,805,740 4,521,299 Other electric utilities 1,620.929 1,526,925 1,445,391 1,453,590 1,187,942 1,864,050 Total electric sales . 6,807,352 6,690,445 6,548,314 6,391,952 5,993,682 6,385.349 Electric Customers at December 31 Residential . 257,227 254,097 251,645 250,121 249,177 246,613 Commercial 24,524 24,234 24,137 24,023 23,983 23,874 industrial . 1,388 1,394 1,348 1,353 1,371 1,380 Other 2,331 2,374 2,423 2,328 2,271 2,305 Total electric customers 285,470 28? 099 279,553 277,825 276,802 274,172 Electricity Generated and Purchased KWH (000's)

Fossil . 1,956,599 2,025,645 2,272,182 2,060,186 1,731,723 2,301,288',081,572 Nuclear . 2,945,721 3,206,313 3,018,305 2,040,746 3,026,894 Hydro. 179,335 210,353 192,278 22? 391 277,010 265,401 Pumped storage 122,809 151,911 133,287 193,340 118,716 98,743 Less energy for pumping . (191,044) (217,758) (189,453) (283,573) (180,317) (148,180)

Other 9,389 "17,257 1,086 850 2,797 2,198 Total generated Net 5,503,349 5,064,083 5,369,156 5,423,495 4,319,138 4,976,779 Purchased 1,758,608 2,051,568 1,579,863 1,400,505 2,106,904 1,888,091

,.Total electric ener 7,261,957 7,115,651 6,949,019 6,824,000 6,426,042 6,864,870 Electric Generation Costs (000's)

Fossil . S62,554 S42,116 $38,995 $40,557 S36,901 $ 33,120 Nuclear 39,713 29,943 25,561 22,330 13,485 14,191 1,355 1,233 1,229 1,132 973 1,030 Other . 518 813 57 44 118 63 Hectric Department Fuel Fossil - Total BTG (million) . 24,610,400 20,874,198 21,139,146 23,862,599 21,822,976 18@88,874

- CentspermillionBTG .. 205.31 152.18 144.27 136.92 137.42 142.18 Nuclear - Total BTG (million)..... .. 33,878,804 31,897,513 35,812,171 37,822,209 23,837,620 33,128,471

- Cents r million BTG .. 61.36 53.81 43.97 38.04 25.69 22.91 System Net Capability KW at December 31 Fossil . 637,000 443,000 443,000 443,000 452,000 45?000 Nuclear 470,000 470,000 470,000 470,000 470,000 470,000 47,000 47,000 47,000 47,000 47,000 47,000 Other . 29,000 29,000 29,000 29,000 29,000 29,000 Purchased 357,000 359,000 339,000 338,000 342,000 356,000 Total s tern net ca bili 1,540,000 1,348,000 1,328,000 1,327,000 1,340,000 1,354,000 Net Peak Load-KW . 1,003,000 950,000 983,000 987,000 934,000 925,000 Annual Load Factor Net% ................... 64.0 67.1 63.9 62.0 63.8 61.7

'Exdudes 79,274,000 IOVH of test period generation at Oswego Gnit 6.

30

'Gas Department RL~~ii and Hect'orpomthn Year Ended December 31 ]980 1979 1978 1977 1976 1975 Gas Revenue (000's)

Residential. S 6,444 5,553 ~ 5,096 4 4,828 4,426 3,964 Residential spaceheating . 105,371 85,269 74,425 66,900 63,974 52,584 Commercial 33,879 25,653 20,535 18,057 16,848 13,593 Industrial . 27,379 18,657 13,891 12,014 11,900 9,167 Municipal and other 7,973 5,395 4,584 3,998 3,879 3,170 Total gas revenue 181,046 140,527 118,531 105,797 101,027 82,478 Gas Expense (000's)

Purchased natural gas 127,759 89,804 71,109 62,086 56,192 42,247 Other operation. 16,546 16,519 15,810 15,072 14,921 ]33]0 Maintenance ....... 6.309 6,246 5,768 5,078 4,510 4,500 Depreciation 5,338 4,889 4,641 5,140 4,194 4,137 Taxes local, state and other .. 14,594 12,187 10,545 10,089 9,729 8,715 Gas revenue deductions 170,546 129,645 107,873 97,465 89,546 72,909 Operating Income before Federal Income Tax... 10,500 10,882 10,658 8,332 11,481 9,569 Federal income tax . 1,310 1,314 1,966 147 2,212 914 Operating Income from Gas Operations (000's) S 9,190 9,568 8,692 8,185 9,269 8,655 Gas Operating Ratio% 83.2 78.2 77.7 74.9 72.8 Gas Sales- Therms (000's)

Residential . 13,257 13,149 13,465 13,833 14,404 14,328 Residential spaceheating 240,273 247/89 255,951 252,923 275,582 249,224 Commercial . 85,291 83,248 82,451 77,751 86,400 78,217 Industrial 75,829 65,995 63,709 59,956 72,847 65,760 Municipal. 19,842 16,962 17,748 15,975 18,598 16,705 Total gas sales. 434,492 426,743 433,324 420,438 467,831 424,234 Gas Customers at December 31 Residential.......... 32,479 35,258 38,013 39,977 40,892 41,437 Residential spaceheating 165,556 159,916 154/66 152,856 153,583 153,848 Commercial . 13,281 12,600 12,092 11,268 11,475 11,390 Industrial 846 82] 759 746 757 756 Municipal. 995 1,047 1,084 989 936 957 Total gas customers 213,157 209,642 206/14 205,836 207,643 208~8 Gas- Therms (000's)

Purchased for reforming and mixing .. 9,830 23,160 Purchased for resale 458,697 436,956 449,904 428,811 478,935 421,252 Other. 18,392 16,388 13,178 10,123 7,911 7,019 Total gas available. 3,660,000'0.1 477,089 453~ 463,082 438,934 496,676 451,431 Cost of gas per therm . 26.34C 20.63C 15.26C ]4.43C 11.37C 10.19C Total Daily Capacity Therms at December 31 Mixed gas 269,000 Straight natural gas. 3,660,000 4,164,000 4,164,000 4,164,000 4,164,000 3,895,000 Total daily capacity 4,164,000 4,164,000 4,164,000 4,164,000 4,164,000 Maximum daily sendout Therms ............... 3,274,740 3,380,670 3,183,678 3,578,468 3,497,861 3,041,070 Degree Days (Customer Billing)

For the period....................... 6,833 6,981 7,021 6,726 6,905 6,211 Percent (warmer) colder than normal ........... 1.4 43 4.5 (0.1) ].6 (72)

'Hew method for determining daily capacity, based on current network analysis, reflects the maximum demand which the transmission system can accept without a ddiciency.

31

Steam Department Year Ended December 31 1980 1979 1978 1977 1976 1975 Steam Revenue (000's)

Commercial S 6,915 $ 5,873 S 6,087 S 6 f52 S 6,401 S 5,668 lndustrial . 1,4,222 11,833 10,732 10,455 9,799 9,862 Municipal and other 2,452 2,282 2,291 2,197 2,183 1,807 Total steam revenue 23,589 19,988 19,110 19,004 18,383 17,337 Steam Expense (000's)

Fuel used in steam generation .. 16,281 14,072 13,047 12,983 12,114 12,826 Other operation. 1,275 1,468 2,273 2,411 1,826 1,657 Maintenance 1,335 1,208 1,173 955 900 918 Depreciation . 603 591 581 580 562 546 Taxes local, state and other... 2,876 2/57 2382 2,257 2,230 2,073 Steam revenue deductions. 22,370 19,896 19/56 19,186 17,632 18,020 Operating Income before Federal Income Tax .. 1,219 92 (246) (182) 751 (683)

Federal income tax 357 (168) (168) (330) 51 (688)

Operating Income from Steam Operations (000's) .. S 862 260 S (78) S 148 S 700 S 5 Steam Operating Ratio%. 80.1 83.8 863 86.0 80.7 Steam Sales-Lbs. (000's)

Commercial 678,225 789/64 898,904 933,609 1,041,415 980,324 Industrial 1,487,176 1,682,780 1,718,565 1,682,033 1,738,391 1,839,402 Municipal 248,478 320,026 346,031 334,645 367,553 325,727 Total steam sales 2,413,879 2,792,170 2,963,500 2,950,287 3,147,359 3,145,453 Steam Customers at December 31 Commercial 186 221 238 254 271 281 Industrial . 61 70 70 74 77 77 Municipal. 24 27 31 32 32 31 Total steam customers . 271 318 339 360 380 Steam Produced - Lbs. (000's)

Produced by steam department........... 1,376,153 1,391345 1 353,053 1,194,132 1,408,029 1P87W3 By.product steam from electric department . 1,395,995 1,736,744 1,987,638 2,133,853 2,193,283 2~4,693 Total steam produced. 2,772,148 3,127,989 3,340,691 3,327,985 3,601,312 3,732,056 Steam Department Fuel Total BTG (million) 4,658,641 5378,454 5,705,943 5,548,290 6,022,360 6,230,767 Cents per million BTG . 357.43 271.28 226.21 232.60 203.35 203.08 Rate Increases Granted Amount of Pending Requests Authorized Increase Class of Effective (Annual Basis) Percent Class of Amount Savice Date of Increase (0(Xys) Increase Rate Base ul SeNice Date of Filing (Ops) Percent Electric April 20, 1976 Sl 1,002 7.9% 9.35% I3.50% Electric'ugust 27, 1980 S61,900 I9.1%

Hovember 11,1977 IO,I86 5.8 9.31 I? 80 Gas" August 27, 1980 7/$ 0 3.0 february 18, 1978 3,000 1.6 9.31 12.80 'On January 16, 1981, the Company filed a request for permission to lvtay 2, 1979 17,699 8.2 9.89 13AO adopt temporary rate increases for electric and gas service. This request July 26, 1980 38,400 15.9 10.32 13.80 would Increase 1981 electric revenues by approximately SI2 millionand Gas April 20, 1976 4,983 6.3 9.35 13.50 1981 gas revenues by approximately S1.7 million.

Hovember11,1977 2,536 2.4 9.31 12.80 February 2, 1978 678 .6 9.31 12.80 hhy 2, 1979 8,109 6.6 9.89 13.40 July 26, 1980 9,640 5.1 10.32 13.80 Steam April 15, 1975 2,475 12.0 December 15, 1979 2,895 15.0 February 18, 1981 3,550 18.2 32

Directors Theodore J. Altier J. Wallace EIy*t Comelius J. Murphy of the Board and Treasurer, J'hairman Chairman of the Board, Group Vice President and General Manager, AMer 6 Sons Shoes, Inc. Security New York State Corporation Eastman Kodak Company Keith W. Brig Walter A. Fallon/ William G. vonBerg'trav'hairman and Chief Operating Officer, Amish'resident Chairman of the Board and of the Board and Rochester Gas and Electric Corporation Chief Executive Officer, Chief Executive Officer, Paul W. Eastman Kodak Company Sybron Corporation of the Board and g'v'hairman Daniel G. Kennedy'etired Leon D. White, Jr.

Chief Executive Officer, Partner, Executive Vice President, Rochester Gas and Electric Corporation Nixon, Margrave, Devans 6 Doyle Rochester Gas and Electric Corporation Wilmot R Ciaigf Theodore L Levinsonf Former airman of the Board, President and Chief Executive Officer, 'Member of the Executive and Finance LIncoln First Banks Inc. Star Supamarkets, Inc. Committee of the Board of Directors E. Kent Paul A. Micr member of the Audit Committee of the Board Damon'trav'icePresident and Secretary, of Directors Pmfessor, member of the Sahry Review Committee of Xerox Corporation Francis E. Drake, Jr.'t4 Chairman of the Executive Constance ¹ Rochester Institute of Technology Mitchell Community Relations Coordinator, the Board of Directors v'Member of the Nominating Committee of the Board of Directors and Finance Committee, Industria! Management Council Rochester Gas and Electric Corporation of Rochester, New York, Inc.

Officers Paul W. Briggs Joseph J. Hartman Dean W. Caple Chairman of the Board and Vice. President, Gas and Transportation Secretary Chief Executive OIficer Age 56, Years of Service, 34 Age 57, Years of Savice,32 Age 58, Years of Service, 35 Robert C Henderson David C. Heiligman Kelth W. Amish Vice President, Rates Treasurer and Assistant Seaetary President and Chief Operating Officer Age 40, Years of Savice, 17 Age 40, Years of Savice, 17 Age 57, Years of Savice,33 David K. Laniak Francis A. Sullivan, Jr.

Leon D. White, Jr. Vice President, Eiectric System Phnning and Controller Executive Vicepresident Operation Age 57, Years of Savice,30 Age 61, Years of Service,43 Age 45, Years of Savice, 26 Robert W. Ball Hany G. Saddock John E Maier Assistant Treasurer Senior Vice President, Finance and Rates Vicepresident, Ehctric and Steam Production Age 64, Years of Savlce,42 Age 51, Years of Service, 30 Age 53, Years of Service,33 Stephen Kowba Marlo Silvestrone Richard J. Rudman Assistant Controller Senior Vice President, General Services Age 57, Years of Service,30 John E Arthur Vice President, Electric Transmission and Distribution Age 53, Years of Savlce,35 John Auditor

¹ Age 61, Years of Savioe, 30 Kuebel Vice President and Chief Engineer Age 45, Years of Service, 16 Age 51, Years of Savice, 25 Shareholder Inquiries Communications regarding stock transfer Financial Contact Co-transfer Agent requirements, lost certificates or dividend Many G. Saddock Morgan Guaranty Trust Company of New York payments may be directed to Lincoln First Senior Vice President, Finance and Rates 30 West Broadway Bank, NA. Annual Meeting New York, New York 10015 Other inquiries should be directed to May 20, 1981 Co registrar D.W. Caple, Secretary at the Company. At Rochester, New York The Chase Manhattan Bank, NA New York Stock Exchange Symbol One Chase Manhattan Phza The Company willprovide, without charge, Rochester Gas and Electric Corporation New York, New York10015 a copy of the Annual Report on Form 10.K Common Stock-RGS Agent for Automatic Dividend filed with the Securities and Exchange Reinvestment Plan Commission with respect to fiscal year Transfer and Dividend Disbursing Agent Lincoln First Bank, NA.

LIncoln First Bank, NA, 1980, uponwrittenrequestofany Stock Transfer Department Automatic Dividend Reinvestment Savice shareholder addressed to the Secretary. Post Office Box 1507 Post Office Box 1250 Rochester, Nev York 14603 Rochester, New York 14603 Principal Orrce Bond Trustee and Paying Agent 89 East Avenue Registrar Bankers Trust Company Rochester, Nev York 14649 Security Tiust Company of Rochester Post Office Box 318 (716) 546-2700 One East Avenue Church Street Station Rochester, New York 14638 Nev Yok, New York 10015 33

Bulk RaYe US Postage Rochester Gas and Hectric Corporation Paid P= - = 89EastAvenue g Rochester, NY ~

Rochester, New York 14649  : U S- 'NUCLEAR REGULATORY Permit No. 709 COltTS.")i{f9'IRECTOR

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