-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Enzjo62fXpEbotxm62wnjxGp1kX3h9kT7QgdBeGBwle+UtQv4qzLKWy5VvHxnpRs mXGvGPFblTw8y6PyrLAEcA== 0000950123-98-002367.txt : 19980309 0000950123-98-002367.hdr.sgml : 19980309 ACCESSION NUMBER: 0000950123-98-002367 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980306 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORANGE & ROCKLAND UTILITIES INC CENTRAL INDEX KEY: 0000074778 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 131727729 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04315 FILM NUMBER: 98559052 BUSINESS ADDRESS: STREET 1: ONE BLUE HILL PLZ CITY: PEARL RIVER STATE: NY ZIP: 10965 BUSINESS PHONE: 9143526000 MAIL ADDRESS: STREET 1: ONE BLUE HILL PLAZA CITY: PEARL RIVER STATE: NY ZIP: 10965 FORMER COMPANY: FORMER CONFORMED NAME: ROCKLAND LIGHT & POWER CO DATE OF NAME CHANGE: 19681202 10-K405 1 ORANGE & ROCKLAND UTILITIES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-4315 ORANGE AND ROCKLAND UTILITIES, INC. (Exact name of registrant as specified in its charter) New York 13-1727729 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Blue Hill Plaza, Pearl River, New York 10965 (Address of principal executive offices) (Zip code) (914) 352-6000 (Registrant's telephone number, including area code) Common Stock, $5 Par Value -- New York Stock Exchange, Inc. (Securities registered pursuant to Section 12(b) of the Act) Preference Stock, No Par Value (Securities registered pursuant to Section 12(g) of the Act) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X (Continued) 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Continued from first page) ORANGE AND ROCKLAND UTILITIES, INC. (Exact name of registrant as specified in its charter) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At February 28, 1998, the approximate aggregate market value of the voting stock held by non-affiliates of the registrant was $592,748,071*. At February 28, 1998, the registrant had 13,518,690 shares of Common Stock ($5 par value) outstanding. Documents incorporated by reference: Annual Report to Shareholders for the year ended December 31, 1997 incorporated in Part I, Part II and Part IV to the extent described therein. The Company's definitive Proxy Statement in connection with the 1998 Annual Meeting of Common Shareholders incorporated in Part III to the extent described therein. * For purposes of this calculation, it is assumed that only directors and officers of the registrant are affiliates of the registrant. 3
TABLE OF CONTENTS PART I. PAGE ITEM 1. Business General Development of Business 1 Financial Information about Industry Segments 1 Narrative Description of Business: 2 Principal Business 2 Electric Operations 2 Gas Operations 10 Diversified Activities 13 Construction Program and Financing 14 Regulatory Matters 16 Utility Industry Risk Factors and Competition 18 Environmental Matters 19 Research and Development 23 Franchises 23 Employee Relations 24 ITEM 2. Properties 25 ITEM 3. Legal Proceedings 28 ITEM 4. Submission of Matters to a Vote of Security Holders 41 Executive Officers of the Registrant 42 PART II. ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters 44 ITEM 6. Selected Financial Data 44 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 45 ITEM 8. Financial Statements and Supplementary Data 45 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 45 PART III. ITEM 10. Directors and Executive Officers of the Registrant 45 ITEM 11. Executive Compensation 45 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 45 ITEM 13. Certain Relationships and Related Transactions 45 PART IV. ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 46 Signatures 55 Report of Independent Public Accountants on Financial Statement Schedules 57 Consent of Independent Public Accountants 57
4 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS: Orange and Rockland Utilities, Inc. (the "Company") is a New York corporation, with its principal office at One Blue Hill Plaza, Pearl River, New York 10965 (telephone number 914-352-6000), which was formed originally under the name Rockland Light and Power Company on May 21, 1926 through the consolidation of a company having the latter name (organized in 1899), Catskill Power Corporation and Orange County Public Service Company, Inc. Its present name was adopted on February 28, 1958, when The Orange and Rockland Electric Company was consolidated with Rockland Light and Power Company. The Company has two wholly-owned utility subsidiaries, Rockland Electric Company ("RECO"), a New Jersey corporation, and Pike County Light & Power Company ("Pike"), a Pennsylvania corporation. The Company has two wholly-owned active non-utility subsidiaries, Clove Development Corporation ("Clove"), a New York corporation and O&R Development, Inc. ("ORD"), a Delaware corporation. RECO has two wholly-owned non-utility subsidiaries, Saddle River Holdings, Corp. ("SRH") and Enserve Holdings, Inc. ("Enserve"), both Delaware corporations. Enserve has two wholly-owned non-utility subsidiaries, Palisades Energy Services, Inc. ("Palisades") and Compass Resources, Inc. ("Compass") and a wholly-owned non-utility subsidiary, NORSTAR Holdings, Inc. ("NHI"), all Delaware corporations. NHI has two wholly-owned non-utility subsidiaries, NORSTAR Management, Inc. ("NMI"), and Millbrook Holdings, Inc. ("Millbrook"), both Delaware corporations. NMI is the sole general partner of a Delaware limited partnership, NORSTAR Energy Limited Partnership ("NORSTAR Partnership"), of which NHI is the sole limited partner. The NORSTAR Partnership is the majority owner of NORSTAR Energy Pipeline Company, LLC ("NORSTAR LLC"), a Delaware limited liability company. The business of the non-utility subsidiaries are described under the subheading "Diversified Activities" in this Item 1. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS: Consolidated financial information regarding the Company's principal business segments, Electric Operations, Gas Operations and Diversified Activities is contained in Note 13 of the Notes to Consolidated Financial Statements on page 29 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. - 1 - 5 NARRATIVE DESCRIPTION OF BUSINESS: PRINCIPAL BUSINESS The Company and its utility subsidiaries supply electricity and gas to a territory covering approximately 1,350 square miles. The eastern boundary of the Company's service territory extends along the west bank of the Hudson River from a point in New Jersey six miles north of the George Washington Bridge northerly for approximately 37 miles to a point in New York a short distance north of the United States Military Academy at West Point. From the Hudson River, the Company's territory in New York State extends westward to the Delaware River, embracing all of Rockland County, most of Orange County and a part of Sullivan County. In New Jersey, RECO supplies electricity to the northern parts of Bergen and Passaic Counties and small areas in the northeastern and northwestern parts of Sussex County. Pike supplies electricity and gas to the northeastern corner of Pike County, Pennsylvania. As of December 31, 1997, the Company and its utility subsidiaries furnished electric service to approximately 269,000 customers in 96 communities with an estimated population of 681,000 and gas service to approximately 114,000 customers in 57 communities with an estimated population of 482,000. There were no significant changes in either the population of the Company's service territory or in the number of customers served in 1997. At December 31, 1996, electric service was provided to approximately 266,000 customers in 96 communities with an estimated population of 676,000 and gas service was provided to approximately 113,000 customers in 57 communities with an estimated population of 478,000. At December 31, 1997 and 1996, 95% of the Company's residential gas customers used gas as their major heating fuel. While the territory served is predominantly residential, the Company and its utility subsidiaries also serve a number of commercial and industrial customers in diversified lines of business activities from which significant electric and gas revenues are derived. No single customer accounts for more than 10% of either gas or electric revenue. The business of the Company and its utility subsidiaries is seasonal to the extent that sales of electricity are higher during the summer, mainly due to air conditioning requirements, and sales of gas are greater in the winter months, primarily as a result of heating requirements. ELECTRIC OPERATIONS Sale of Generating Assets. The electric operations of the Company and its utility subsidiaries have historically included the traditional, vertically integrated utility services of production, transmission and distribution of electricity. The Company currently supplies substantially all of the electric power needs of customers in its retail electric franchise areas in the three states in which the Company and its utility subsidiaries operate. The electricity - 2 - 6 required to supply such demand is either produced at the Company's generating plants or purchased by the Company for distribution to its customers. In addition, the Company has historically provided related utility services such as customer accounting and billing activities, meter reading and customer services. As a result of efforts at the Federal and state levels to increase competition in the electric utility industry, the nature of the Company's electric operations will change. The primary change is the planned sale by the Company of its electric production assets. On November 6, 1997, in response to the competitive initiatives undertaken by the New York State Public Commission (the "NYPSC"), the Company filed its Electric Rate and Restructuring Plan (the "Restructuring Plan") in Case 96-E-0900 with the NYPSC. The Restructuring Plan, which was subsequently approved by the NYPSC by its Orders dated November 26 and December 31, 1997, provides, among other things, for the sale by auction of all of the Company's generating assets. The NYPSC's November 26, 1997 order approving the Restructuring Plan provided that, subject to certain other conditions, the Company could participate as a bidder in the auction of its generating assets. The Company elected not to participate as a bidder in this auction, and on December 11, 1997, distributed its Preliminary Divestiture Plan to the NYPSC staff and the other parties in Case 96-E-0900. After reviewing comments submitted by the NYPSC and other parties on its Preliminary Divestiture Plan, on February 3, 1998 the Company filed its Final Divestiture Plan with the NYPSC. As a result of the foregoing, the following description of the Company's electric operations should be read in conjunction with disclosures regarding the competitive initiatives at the Federal and state level, the filings made by the Company and its utility subsidiaries regarding these initiatives, and the anticipated effect that these initiatives will have on the future operations of the Company and its utility subsidiaries. Such disclosure is contained in Item 3, Legal Proceedings, of this Form 10-K under the captions "Restructuring Litigation" and "Regulatory Matters - Competition" and in the 1997 Annual Report to Shareholders, in Note 4 and in Note 12 under the caption "Restructuring Litigation" of the Notes to Consolidated Financial Statements on pages 23 and 28, respectively, which information is incorporated by reference in this Form 10-K Annual Report. Generating Capacity and Purchased Power. As described more fully in Item 2 of this Form 10-K Annual Report under the subheading "Electric Generating Facilities," the nameplate capacity of the Company's plants provides the Company with a net generating capacity of 981 megawatts ("Mw") in the summer and 993 Mw in the winter. Additionally, the Company purchases capacity, as more fully described below, to satisfy its reserve requirements, as well as any demand in excess of its installed capacity. The electric energy which RECO and Pike distribute to their customers is supplied by the Company. The maximum - 3 - 7 historical one-hour demand for the Company and its utility subsidiaries occurred on July 15, 1997 and was 1,143 Mw. In addition to the energy produced at its generating facilities, the Company, through various transmission interconnections, purchases both capacity and energy when needed to meet load and reserve requirements and also when such power is available at a price lower than the Company's cost of production. The Company maintains transmission interconnections with Central Hudson Gas and Electric Corporation ("Central Hudson"), Public Service Electric and Gas Company ("PSE&G") and Consolidated Edison Company of New York, Inc. ("Con Ed"). Through these interconnections, and as a member of the New York Power Pool ("NYPP"), the Company can exchange power directly with the above utilities and, through the facilities of other members of the NYPP, the Company can exchange power with all members of the NYPP and with utilities in pools in neighboring states. In addition, members of the NYPP are able to coordinate inter-utility transfers of bulk power in order to achieve economy and efficiency, cooperate in long range planning of generation and transmission facilities and coordinate inter-utility operating and emergency procedures to assure reliable, adequate and economic electric service throughout the state. Through the NYPP control center, the Company is able to purchase power in order to optimize its generation-interchange mix, using the lowest cost energy available to the Company in the interconnected system. On January 31, 1997, the Company, in conjunction with the other seven member systems of the NYPP, filed tariffs with the Federal Energy Regulatory Commission ("FERC") seeking to establish an Independent System Operator ("ISO") and related institutions which would replace the NYPP. The ISO structure is intended to foster a fully competitive market in New York State by facilitating a more efficient electricity market and by providing for a visible spot energy market as well as a state-wide locational pricing mechanism and an associated transmission congestion pricing mechanism. On December 19, 1997 a supplemental filing was made with the FERC which provides for a revised governance structure with an ISO board comprised of individuals unaffiliated with the member systems or any other market participant. The contemplated ISO structure, if approved by the FERC, would provide enhanced operating efficiencies regarding the transfer of power between power producers and power purchasers. The primary economic difference between the existing NYPP structure and the ISO structure will be the move from the current cost-based rates to a market-based rate structure for pricing power transactions. Power producers seeking to sell power through the ISO would have their power dispatched based on price, with the least expensive power being dispatched first, and the price of power at any location would be the lowest price generation that is the next available for dispatch. Regional operating problems, such as load pockets and transmission constraints, would be addressed through a locational marginal pricing mechanism. While the Company and the other members of the NYPP have - 4 - 8 requested that the FERC act expeditiously on the filing, the Company cannot predict either the timetable or the outcome of this proceeding. During 1997, the Company had agreements in place for both capacity and energy purchases. Capacity purchases included an agreement with PSE&G which provided 100 Mw of winter capacity and 175 Mw of summer capacity, an agreement with the New York Power Authority ("NYPA") for 25 Mw of year-round capacity from the Blenheim-Gilboa pumped storage facility (the "Gilboa Facility") and an agreement with North American Energy Conservation, Inc. ("NAEC") which provided for 100 Mw of capacity in the winter capability period and 150 Mw during the summer capability period. With regard to energy, the Company purchased approximately 47% of its energy requirements during 1997. These purchases, which were made primarily through short-term purchase agreements and interchange agreements, were primarily economy transactions made in the interest of lowering costs to the Company's customers. This is demonstrated by the fact that the Company's installed generating capability for the 1997 summer capability period could have provided over 86% of the Company's energy requirements at the time of the Company's peak demand. The use of purchased power under these circumstances reflects the Company's policy of supplementing its electric generation with purchased power not only when needed to meet load requirements but also when such power is available at a cost lower than the cost of production. Information regarding future power supply, particularly the status of capacity purchase contracts with Independent Power Producers and Qualifying Facilities, is contained under the caption "Future Energy Supply and Demand" in this Item 1. Reference is also made to the information contained under the caption "Utility Industry Risk Factors and Competition" in this Item 1. - 5 - 9 Fuel Supply. The Company's 981 Mw summer generating nameplate capacity rating is available from the following fuel sources:
COAL, OIL OIL GAS PLANT & GAS & GAS HYDRO TURBINE TOTAL - ---------------------------------------------------------------------------------------------------------------- (MEGAWATTS) Lovett Plant Unit 3 63.0 63.0 Units 4 & 5 399.6 399.6 Hydro Plants Swinging Bridge Mongaup, Rio and Grahamsville 43.8 43.8 Gas Turbine Plants Hillburn and Shoemaker 74.0 74.0 Bowline Point Plant Units 1 & 2 400.6 400.6 ----- ----- ----- ----- ----- 463.6 399.6 43.8 74.0 981.0 ===== ===== ===== ===== =====
* For a description of the Company's generating plants, see Electric Generating Facilities" in Item 2 of this Form 10-K Annual Report. The Company's principal generating plants use natural gas, coal, or oil as their primary fuels. This tri-fuel strategy enables the Company to control, to some extent, the risks associated with one of the most volatile components of electric production costs based on relative fuel prices and fuel availability. In addition, the Company's fuel strategy has enabled it to reduce its dependence on oil through the use of coal as the primary fuel for the Lovett Plant's two largest generating units and incorporates economy power purchases from other systems when such purchases are less expensive than generation. There are, however, certain factors which affect fuel price and availability which are beyond the control of the Company. These factors include the domestic and international fuel supply situation, environmental regulations, conservation measures and the availability of alternative fuels. - 6 - 10 Electricity available for sale is provided through a mix of Company generation by various fuel types, supplemented by purchased power when such power is available at a price lower than the price of generation or is needed to meet load requirements. Details for the years 1993 through 1997 are as follows:
1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Gas 16% 23% 23% 8% 14% Coal 33 36 27 33 34 Oil 5 6 7 1 2 Hydro 4 3 3 4 3 Purchased Power 42 32 40 54 47 -- --- --- --- --- Total 100% 100% 100% 100% 100% === === === === ===
Gas - Natural gas is used as fuel for electric generation at the Company's Lovett and Bowline Point Plants and at the Hillburn and Shoemaker Gas Turbine Plants when it is available and economic. Substantially all of the gas used in electric generation is acquired through spot market purchases. During 1997, gas was the predominant fuel burned at the Bowline Point Plant. The Company expects to use natural gas in the Bowline Point Plant and the Lovett Plant during 1998, whenever such gas is more economical than alternative fuels. In 1997, the Company used 3.0 billion cubic feet ("Bcf") and 4.3 Bcf of gas at the Lovett Plant and the Bowline Point Plant, respectively. Coal - The low sulfur coal (1.0 lbs - SO2 per million British Thermal Unit ("MMBTU")) used in Lovett Plant Units 4 and 5 is supplied to the Company primarily through a long term contract with Massey Coal Sales Company, Inc. Under this contract, the Company maintains the ability to purchase alternative fuel in place of coal whenever it is in its best interest to do so. The coal burned in the Lovett Plant is low in ash (typically 8%) and high in BTU content (26 MMBTU's per ton). During 1997 coal was the predominant fuel burned at the Lovett Plant, and the Company expects it to be the predominant fuel burned during 1998. Information regarding the Company's coal supply contract is contained in Note 12 of the Notes to Consolidated Financial Statements under the caption "Coal Supply Contracts" on page 27 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. Oil - The Company has the ability to burn oil at all of the generating units at the Lovett Plant and the Bowline Point Plant. The Company purchased no oil for its Lovett Plant in 1997 and does not anticipate purchasing any significant quantity of oil for the Plant in 1998. Con Ed supplies #6 oil (0.37% maximum sulfur content by weight) to the Bowline Point Plant under a contract between it and the Company. Pursuant to that contract, Con Ed has also agreed to provide a backup oil supply for the Company's Lovett Plant under certain conditions. - 7 - 11 Hydro - Water for the operation of the Company's Mongaup River Hydro Plants is controlled by the Company through the ownership of the necessary land in fee or through easements. In the case of the Company's Grahamsville Hydro Plant, water is obtained under contract with the City of New York Board of Water Supply. This contract, which expires in 2005, entitles the Company to 8.1 Bcf of free water each year. In 1997, the total amount of water used was 19.0 Bcf. Of this total, 10.9 Bcf was billed at varying rates based on an average cost of all fuels used in power generation. Purchased Power - The Company's practice regarding purchased power is to supplement the Company's electric generation by purchasing both capacity and energy when needed to meet load and reserve requirements and also when such power is available at a price lower than the cost of production. Details regarding purchased power arrangements are contained under the captions "Generating Capacity and Purchased Power" and "Future Energy Supply and Demand" in this Item 1. Additional information regarding fuel and purchased power costs, including a description of the fuel adjustment clauses contained in the Company's tariff schedules, is contained in the 1997 Annual Report to Shareholders in the "Review of the Company's Results of Operations and Financial Condition" under the caption "Electric Energy Costs" on page 14 and in Note 1 of the Notes to Consolidated Financial Statements under the caption "Fuel Costs" on page 21, which information is incorporated by reference in this Form 10-K Annual Report. Future Energy Supply and Demand. The Company continues to be committed to meeting customer energy needs by providing reliable energy service at the lowest prudent cost and in an environmentally sound manner. The transition to a competitive business environment will affect the traditional vertically integrated utility structure and will necessitate changes in the way the Company's customers provide for their power needs. As a result, this section should be read in conjunction with the disclosures regarding competition in the electric utility industry, which can be found in this Form 10-K Annual Report in Item 1 under the captions "Sale of Generating Assets," and "Utility Industry Risk Factors and Competition" and in Item 3, Legal Proceedings, under the captions "Restructuring Litigation" and "Regulatory Matters - Competition." The Company has responded to the changes that have occurred in the utility industry and has incorporated a significant number of conservation and demand reduction alternatives as well as purchased power into its energy strategy. The Company's Demand Side Management ("DSM") program involves efforts to control electric peak demand and energy usage, and addresses the need to improve plant utilization by making customer demand more complementary, over time, to the available capacity. DSM programs are available to all market segments. Through December 31, 1997, DSM efforts have reduced the annual need for - 8 - 12 increased energy of 250,000 Mwh through programs administered by the Company and by RECO as well as through contracts with outside energy service companies pursuant to a competitive bidding program. The costs of DSM programs are recoverable on a current basis in both the New York and New Jersey service territories. Additional information regarding the recovery of DSM costs is contained under the caption "Other Utility Operating Expenses and Taxes" in the "Review of the Company's Results of Operations and Financial Condition" on page 15 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. With regard to the status of the Company's public policy programs such as DSM in the move to a competitive utility environment, the Company's Restructuring Plan, as approved by the NYPSC, provides for a nonbypassable System Benefits Charge ("SBC") which will be used to collect the costs of public policy programs. The NYPSC may appoint a state-wide third-party administrator to administer the SBC funded programs, although the establishment of such a state-wide administrator will not preempt program funding for commitments made by the Company prior to the approval of the Restructuring Plan. The Company's Supply Side Management program involves the acquisition of future increments of capacity and energy as needed to meet anticipated load and reserve requirements and, in particular, to reduce the cost of electricity to the Company's customers. With regard to future purchases of capacity, contracts are in place with the NYPA, NAEC and PSE&G. The NYPA agreement for firm purchases from the Gilboa Facility, which provides for 25 Mw of year-round capacity, will be in effect through April 2015. The agreement with NAEC will provide capacity ranging between 100 Mw and 150 Mw through October 1998, and includes an option for the Company to extend the contract through October 2001. In addition, a firm purchased power agreement with PSE&G will provide between 100 Mw and 200 Mw of capacity during the contract term which extends through October 2000. At the option of the Company, additional capacity purchases are available throughout the term of the PSE&G contract which, together with the firm contract capacity, would bring the total capacity available under the PSE&G contract to between 300 Mw and 400 Mw. Information regarding future payments under capacity purchase contracts is contained in Note 12 of the Notes to Consolidated Financial Statements under the caption "Power Purchase Agreements" on page 27 of the 1997 Annual Report to Shareholders, which information is incorporated by reference in this Form 10-K Annual Report. Regarding future purchases of energy, the Company's contract with NAEC provides for a minimum of 1.3 million megawatt hours of firm economy purchases during the winter capability periods beginning with the 1995/1996 period and ending with October 1998. In addition, the Company will continue to seek opportunities to secure economical increments of purchased power, particularly through interchange transactions, short-term firm contracts and spot purchases. - 9 - 13 During 1994 and 1995, the Company negotiated termination agreements with three independent power producers scheduled to provide capacity and energy to the Company in the late 1990's. The costs associated with the termination of these contracts have been approved for recovery by the NYPSC and the New Jersey Board of Public Utilities ("NJBPU"). Information regarding these costs is contained in the "Review of the Company's Results of Operations and Financial Condition" under the caption "Other Utility Operating Expenses and Taxes" and in Note 1 of the Notes to Consolidated Financial Statements under the caption "IPP Settlement Agreements" on pages 15 and 22 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. GAS OPERATIONS The Company distributes purchased natural gas, supplemented at times of peak load by gas produced in its propane air gas plants. As of December 31, 1997, the gas distribution system included 1,758 miles of mains. The highest historical maximum firm daily gas sendout of 206,038 thousand cubic feet ("Mcf") occurred on January 19, 1994. The maximum firm daily sendout during 1997 occurred on January 18 and amounted to 177,395 Mcf. Competitive Initiatives. As a result of initiatives at both the Federal and state level to foster competition in the gas utility industry, the nature of the gas operations of local gas distribution companies ("LDCs"), such as the Company, has undergone certain changes, and it is expected that additional changes will occur. At the Federal level, the FERC issued Order 636 in 1992, which was aimed at increasing competition on interstate natural gas pipelines. A detailed discussion of competitive initiatives at the Federal level, including the impact on the Company of FERC Order 636, is contained in Item 3, Legal Proceeding of this Form 10-K under the caption "Regulatory Matters - Competition." At the state level, the NYPSC, by its orders issued in March and September 1996, approved gas utility restructuring plans designed to open local natural gas markets to competition by allowing residential and small commercial customers of LDCs to purchase gas from a variety of sources other than the franchised local utility company. A detailed discussion of competitive initiatives at the state level is contained in Item 3, Legal Proceedings of this Form 10-K under the caption "Regulatory Matters - Competition." Accordingly, the following description of the Company's gas operations should be read in conjunction with disclosures regarding regulatory competitive initiatives contained elsewhere in this Form 10-K Annual Report. Additional disclosures are contained in the 1997 Annual Report to Shareholders as follows: in the "Review of the Company's Results of Operations and Financial Condition" on page 12 under the headings "Rate Activities, New York -Gas" and on page 14 under the heading "Gas Energy Costs," as well as in Note 12, of the Notes to Consolidated Financial Statements under - 10 - 14 the heading "Gas Supply and Storage Contracts" on page 27, which material is incorporated by reference in this Form 10-K Annual Report. Supply, Transportation and Storage. The Company has firm, long-term gas supply contracts with seven gas producers. Together these contracts account for all of the Company's firm gas requirements and include a contract with a Canadian producer which accounts for approximately 28% of firm contracted supply and expires in the year 2002. Contracts for the remaining 72% of the Company's firm gas supply have been executed with six domestic producers. Three of these contracts are scheduled to expire in 1998. Replacement gas supplies will be negotiated, consistent with the Company's firm gas requirements. The remainder have expiration dates ranging between 1999 and 2010. All of the gas supply contracts contain options for renewal and certain of the agreements contain "re-opener" provisions which allow the Company to modify price and operating terms under certain conditions. In addition to its long-term contracted supply sources, the Company purchases spot gas from producers primarily for the Company's use in electric generation. During 1997, the Company made spot purchases of approximately 13.7 million Mcf of gas or 34% of the total gas supply. To supplement purchased gas, the Company manufactures gas at its propane air gas plants located in Middletown, Orangeburg and Suffern, New York which have a combined capacity of 30,600 Mcf per day of natural gas equivalent. This capacity, together with gas purchases under contracts between the Company and its suppliers, is expected to provide adequate peak day supplies to serve existing customers. In addition to the gas supply contracts, the Company has provided for the transportation of gas through firm, long-term transportation agreements with four major pipeline companies: Tennessee Gas Pipeline Company ("Tennessee"), Columbia Gas Transmission Corporation ("Columbia"), Algonquin Gas Transmission Company ("Algonquin") and Texas Eastern Transmission Corporation ("Texas Eastern"). The transportation agreements with one of these pipelines will expire during November 2000. Transportation contracts with the other three pipeline companies have expiration dates from 2004 through 2012. The Company also has entered into interruptible transportation agreements with the same pipeline companies. All transportation contracts contain options for renewal. With regard to gas storage, the Company also has long-term gas storage contract arrangements with Tennessee, Columbia and Texas Eastern. The earliest expiration date of any of these storage contracts is 2000 and all storage contracts contain options for renewal. As noted earlier, the Company's maximum firm daily sendout of gas occurred during January 1994 and amounted to 206,038 Mcf. This compares to the maximum daily firm gas delivery capability of 225,839 - 11 - 15 Mcf which is available from the following sources: direct purchases - 118,471 Mcf; storage withdrawals - 76,768 Mcf; and Company manufactured gas - 30,600 Mcf. Additional information regarding gas supply and gas storage contracts is contained in Note 12 of the Notes to Consolidated Financial Statements under the caption "Gas Supply and Storage Contracts" on page 27 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. Transportation for Others. The Company provides firm and interruptible gas transportation services for end users in its service territory who elect to obtain their own direct gas supplies. During 1997, approximately 4.5 Bcf of gas was transported for such end users. Pipeline Capacity and Off-System Sales. As a result of the provisions of FERC Orders 636 and 63, and in conjunction with the NYPSC Order in Case 92-G-0050, the Company has marketed excess pipeline transmission capacity and has retained certain profit levels attributable to both the marketed capacity and to off-system gas sales. Information regarding these items is contained in the "Review of the Company's Results of Operations and Financial Condition" under the caption "Gas Sales and Revenues" on page 14 of the 1997 Annual Report to Shareholders, which information is incorporated by reference in this Form 10-K Annual Report. Take-or-Pay Surcharge Costs and FERC Order No. 636 Transition Costs. As a result of a 1987 FERC order, as well as other legal and regulatory actions since that time, the Company has deferred certain gas supplier take-or-pay costs. A settlement with the NYPSC in Case 88-G-062 granted the Company full recovery of its take-or-pay liability over an amortization period which extends to March 1999. In addition, certain costs incurred by gas pipeline companies in complying with FERC Order No. 636 have been approved, by the FERC, for allocation to distribution companies, including the Company. It is currently estimated that the Company's obligation related to Order No. 636 transition costs will amount to $28.6 million, of which $27.3 million has been paid through December 31, 1997. Information regarding take-or-pay charges and FERC Order No. 636 transition costs, including the recoverability of these costs under the Company's rate structure, is contained under the caption "Gas Energy Costs" in the "Review of the Company's Results of Operations and Financial Condition" and in Note 1 of the Notes to the Consolidated Financial Statements under the caption "Rate Regulation" on pages 14 and 21, respectively, of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. Reference is also made to Item 3, "Legal Proceedings," of this Form 10-K Annual Report under the caption "Regulatory Matters - Competition." - 12 - 16 DIVERSIFIED ACTIVITIES Both the Company and RECO have certain non-utility subsidiaries which, at December 31, 1997, were engaged in energy services ventures and land development. The Company's Consolidated Financial Statements, which are incorporated in this Form 10-K Annual Report by reference to the Company's 1997 Annual Report to Shareholders, include the results of operations of all diversified activities, including the activities of the gas marketing business which has been discontinued and, as such, are reported on the Company's consolidated financial statements as "Discontinued Operations." With the exception of the discontinued gas marketing operations, neither the assets of the non-regulated businesses nor the continued operation of the non-regulated business lines are material to the operations of the Company. For these reasons, the disclosure related to the Company's ongoing diversified activities, as prescribed by Regulation S-K, has, with few exceptions, been omitted from other sections of this Form 10-K Annual Report. Capital contributions to the non-utility subsidiaries by the Company and RECO are borne by the Company's shareholders. Any profits, losses, or tax savings from investments in non-utility subsidiaries accrue to such shareholders and are not included in the cost of service for ratemaking purposes. A description of the non-utility subsidiaries of the Company and RECO follows. Saddle River Holdings Corp. SRH, a wholly-owned subsidiary of RECO, was established for the purpose of investing in non-utility business ventures. NMI, an indirect subsidiary of SRH which was engaged in natural gas marketing, has discontinued all gas marketing activities and is winding-up the remaining portion of the gas marketing business. NMI is the sole general partner of NORSTAR Partnership, of which NHI is the sole limited partner and Shell NORSTAR Inc., a wholly-owned subsidiary of Shell Gas Trading Company, was a limited partner until August 20, 1997. The NORSTAR Partnership is the majority owner of NORSTAR LLC. Additional information regarding the discontinued gas marketing operations, including its effect on the Company's consolidated financial position and results of operations, is contained in the 1997 Annual Report to Shareholders in the "Review of the Company's Results of Operations and Financial Conditions" beginning on page 13 under the captions "Discontinued Operations," "Financial Performance" and "Results of Operations" which information is incorporated by reference in this Form 10-K Annual Report. Reference is also made to Note 3 of the Notes to Consolidated Financial Statements on page 23 of the 1997 Annual Report to Shareholders, which information is also incorporated by reference in this Form 10-K Annual Report. Millbrook, a subsidiary of NHI, leases approximately twelve acres of non-utility real estate in Morris County, New Jersey, pursuant to a renewable ten-year leasehold agreement. In 1997, Millbrook secured an - 13 - 17 option to purchase the leased property, or otherwise arrange for the transfer or sale of the property, including Millbrook's leasehold interest, to a third party under an arrangement that would defer payment until a third party sale is completed. Enserve Holdings, Inc. Enserve, a wholly-owned subsidiary of RECO, was formed during 1997 to hold investments in energy-related ventures. Enserve has one wholly-owned active subsidiary, Palisades, formerly a subsidiary of SRH which began active business operations during 1997. Palisades' business plan call for it to market a variety of energy services, including energy audits, performance contracting, operations contracting and energy consulting. Clove Development Corporation. Clove, a wholly-owned subsidiary of the Company, holds approximately 5,200 acres of real estate, located primarily in the Mongaup Valley region of Sullivan County, New York. Historically, Clove's revenues have been derived primarily from the sale of timber and sand, property rentals and periodic sales of land. Certain portions of Clove's property lend themselves to recreational development. Two small subdivisions have been developed and substantially sold off. A third development, Lakeside Forest at Swinging Bridge, is being marketed. O&R Development, Inc. ORD, a wholly-owned subsidiary of the Company, was established to promote industrial and corporate development within the Company's service territory by providing improved sites and buildings. ORD owns Interchange Commerce Center ("ICC Project"), a 250 acre tract of land in Orange County, New York, which is being marketed for sale. The ICC Project has governmental approvals for the development of 2.7 million square feet of light industrial, office, warehouse and retail space. Approximately 2,000 linear feet of street and utilities have been installed, and one building owned by ORD, is fully leased. Additional information regarding the non-utility subsidiaries of the Company and of RECO is contained in the 1997 Annual Report to Shareholders, which information is incorporated by reference in this Form 10-K Annual Report, as follows: in the "Review of the Company's Results of Operations and Financial Condition" beginning on page 13 under the captions "Discontinued Operations," "Financial Performance," "Results of Operations" and "Diversified Activities;" and in the Notes to Consolidated Financial Statements beginning on page 21 in Note 1 under the captions "Principles of Consolidation," in Note 3, and in Note 13. CONSTRUCTION PROGRAM AND FINANCING Construction Program. The construction expenditures, excluding allowance for funds used during construction, of the Company and its utility subsidiaries for 1998 are estimated at approximately $51.0 - 14 - 18 million, which consist primarily of routine projects for capital replacements or system betterments and do not include any additions to generating capacity. The Company's construction program is under continuous review and the estimated construction expenditures are, therefore, subject to periodic revision to reflect, among other things, changes in energy demands, economic conditions, environmental regulations, changes in the timing of construction activities, the level of internally generated funds and other modifications to the construction program. Information regarding the Company's construction program is contained under the caption "Liquidity and Capital Resources" in the "Review of the Company's Results of Operations and Financial Condition" and under the caption "Construction Program" in Note 12 of the Notes to Consolidated Financial Statements on pages 15 and 27 respectively, of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. Financing. The Company has historically used short-term borrowings in the form of commercial paper to finance construction expenditures when such expenditures exceeded internally generated funds and to finance short-term working capital requirements. Short-term borrowings undertaken for construction expenditures are periodically repaid with internally generated funds and the proceeds of long-term debt and equity offerings. At December 31, 1997, the Company and its utility subsidiaries had unsecured bank lines of credit totaling $167 million. Effective January 1, 1998, such lines were reduced to $140 million. Commercial paper borrowings, which are supported by such credit lines, amounted to $130.4 million at year end. Additional information regarding the Company's short-term debt position is contained in Note 8 of the Notes to Consolidated Financial Statements on page 25 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. The financing activities of the Company and its utility subsidiaries during 1997 consisted of the redemption of one series of preferred stock, a debt refinancing, refunding of certain debt maturities and the repurchase of Company common stock. In addition, during January 1998, the Company entered into a Credit Agreement for up to $25 million, the proceeds of which will be used to provide funds for the repurchase of Company common stock. Information regarding these activities is found in the "Review of the Company's Results of Operations and Financial Condition" under the caption "Liquidity and Capital Resources" on page 15 of the 1997 Annual Report to Shareholders as well as in Note 6, and Note 7 in the Notes to Consolidated Financial Statements beginning on page 24 of the 1997 Annual Report to Shareholders, which information is incorporated by reference in this Form 10-K Annual Report. - 15 - 19 Neither the Company nor its utility subsidiaries have any plans at the present time for additional external financing other than securities issued for debt refinancing purposes and to provide funds for the repurchase of Company common stock. It is expected that all other capital requirements will be met primarily with internally generated funds, supplemented with short-term debt as required. Information regarding certain financial statistics of the Company is contained under the caption "Financial Statistics" on page 32 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. Credit Ratings. The current ratings of the Company's principal securities and its commercial paper are as follows:
MOODY'S STANDARD DUFF AND PHELPS INVESTOR'S & POOR'S CREDIT SERVICE, INC. CORP. RATING COMPANY ------------- ----- -------------- Pollution Control Bonds A3 A- A- Unsecured Debt A3 A- A- Preferred Stock baa1 BBB+ BBB+ Commercial Paper P-2 A-2 D-1-
The Company's credit ratings are subject to periodic revision or withdrawal by the particular rating agency, and each rating should be evaluated independently of any other rating. The ratings assigned to the Company's securities by the rating agencies are not a recommendation to buy, sell or hold the Company's securities, but rather are assessments of the respective credit-worthiness of the Company's various securities by the rating agencies. REGULATORY MATTERS A description of the general character of rate regulation and its effect on the financial statements of the Company and its utility subsidiaries, including a disclosure of the Company's regulatory assets, is contained in Note 1 of the Notes to Consolidated Financial Statements under the caption "Rate Regulation" on page 21 of the 1997 Annual Report to Shareholders, which information is incorporated by reference in this Form 10-K Annual Report. State Regulation. The Company and its utility subsidiaries are subject to the jurisdiction of state commissions in their respective states of incorporation. The state commissions have the authority to regulate, among other things, rates, services, the issuance of securities and accounting and depreciation procedures. The Company is subject to the jurisdiction of the NYPSC, which covers approximately 77% of consolidated utility energy sales. RECO is subject to the jurisdiction of the NJBPU, which covers approximately 21% of consolidated utility energy sales. Pike is subject to the - 16 - 20 jurisdiction of the Pennsylvania Public Utility Commission ("PAPUC"), which covers approximately 1% of consolidated utility energy sales. Sales for resale, which are subject to regulation by the FERC, accounted for 1% of consolidated utility energy sales. Federal Regulation. The Company, pursuant to an order of the Securities and Exchange Commission, has been exempted from all of the provisions of the Public Utility Holding Company Act of 1935, except Section 9(a)(2) thereof relating to the acquisition of securities of other public utility companies. The Company and its utility subsidiaries are subject to the jurisdiction of the FERC as "public utilities". This regulation primarily relates to sales and exchanges of electricity for resale, certain transportation, sales and exchanges of natural gas under the Natural Gas Act, Company sales to its utility subsidiaries and certain other matters including accounting, recordkeeping and reporting. Other Regulation. The Company and its utility subsidiaries are also subject to regulation by various other Federal, state, county and local agencies under numerous regulations dealing with, among other things, environmental matters, energy conservation, long-range planning, fuel use, plant siting and gas pricing. Competitive Proceedings. Regulatory agencies at the Federal level as well as the three states in which the Company has retail electric and gas franchises are currently evaluating changes in regulatory and rate-making practices designed to promote increased competition consistent with safety, reliability and affordability standards. Depending on future developments in this area, the Company's market share and profit margins will become subject to competitive pressures in addition to regulatory constraints with respect to both its electric and gas operations. A discussion of the current Federal and state competitive initiatives with respect to electric and gas operations is contained in Item 3, Legal Proceedings, of this Form 10-K under the captions "Restructuring Litigation" and "Regulatory Matters - Competition." Reference is also made to the 1997 Annual Report to Shareholders in the Notes to Financial Statements on page 23 in Note 4 and on page 27 in Note 12 under the captions "Gas Supply and Storage Contracts" and "Legal Proceedings - Restructuring Litigation" which material is incorporated by reference to this Form 10-K Annual Report. Current Rate Activities. Information regarding recent electric and gas rate activities of the Company and its utility subsidiaries is contained in Item 3, Legal Proceedings, of this Form 10-K under the caption "Regulatory Matters - Rate Activities." - 17 - 21 UTILITY INDUSTRY RISK FACTORS AND COMPETITION The electric and gas utility industry is exposed to many of the general business and financial risks which affect all industries on a local, national or international level. It is also exposed to business and financial risks that are particular to the provision of utility services and to operating a business in a changing regulated environment. In particular, the industry is exposed to risks relating to, among other things, increasing competition in the wholesale power markets and a move to competition in the retail sector; uncertainties regarding the transition mechanisms, both operating and financial, as the industry moves to deregulation, including the potential for stranded, or non-recoverable costs; increases in fuel costs and uncertainties as to fuel supplies; numerous environmental restrictions, including potential liabilities for environmental matters; regulatory constraints, including the timing and adequacy of rate relief; increases in the cost of, and delays in, construction in an industry which is fixed-asset intensive; the attraction of capital in an industry which is capital intensive; the effects of energy conservation and weather related sales fluctuations, both of which have the potential of causing revenue erosion; and the requirement to provide for growth in demand for energy services. In addition, there are competitive factors present in the electric and gas industry which affect utility companies in varying degrees. Among these are the use by interruptible or dual-fuel customers of lower priced alternative fuels; the establishment of municipal distribution agencies; the ability of gas producers to sell gas directly to end users, usually through an independent gas marketer; the presence of cogenerating systems, small power producers and independent power producers; and the increasing interest in, and research on, the development of energy sources other than those now in use. In addition, regulatory agencies in the states in which the Company has retail electric and gas franchises are currently evaluating, and have implemented, changes in regulatory and ratemaking practices designed to promote increased competition. Depending on future development in this area, the Company's market share and profit margins are expected to become subject to competitive pressures in addition to regulatory constraints. As the electric and gas industries move to increased competition and potential deregulation, the Company has taken an active role in the competitive opportunities proceedings in the states in which it operates and has worked extensively with industry groups and the NYPP in designing the future framework for the utility industry. With regard to such proceedings in New York State, the NYPSC approved the Company's Restructuring Plan during 1997. The Restructuring Plan provides the framework for the transition to a competitive market for the Company's electric operations. The Restructuring Plan provides for the sale of the Company's generation assets and includes provisions for mitigating the risk of loss on the sale of such assets. - 18 - 22 As a result of the approval of the Restructuring Plan by the NYPSC, certain aspects of risk associated with the transition to a competitive electric market have been mitigated. Information regarding the competitive initiatives undertaken at the Federal and state levels with regard to the Company's electric and gas utility operations is contained in Item 3, Legal Proceedings of this Form 10-K under the captions "Restructuring Litigation" and "Regulatory Matters Competition." Reference is also made to the 1997 Annual Report to Shareholders in the Notes to Consolidated Financial Statements beginning on page 23 in Note 4 and Note 12 under the captions "Gas Supply and Storage Contracts" and "Legal Proceedings - Restructuring Litigation," which information is incorporated by reference in this Form 10-K Annual Report. The Company is committed to managing the risks which are present in the changing utility environment. Included in this strategy are the maintenance of low construction and operating budgets and avoiding external financing. The Company's tri-fuel strategy provides flexibility regarding fuel availability and pricing and the continuance of fuel clause adjustment mechanisms in the rate structures of the Company and its utility subsidiaries assures fuel cost recovery on a current basis. With regard to future power supply, the Company will continue to utilize competitive bidding procedures to mitigate the risks associated with the Company's purchase of both electric capacity and energy, particularly with regard to prudency determinations and cost recovery, and to maintain sufficient power supply to meet the growth in demand. In addition, rate procedures which are in effect for the Company's New York gas operations have the effect of mitigating certain risks related to the effect of weather on the Company's gas sales. Information concerning the gas weather normalization adjustment is contained under the caption "Gas Sales and Revenues" in the "Review of the Company's Results of Operations and Financial Condition" on page 14 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. Reference is also made to the caption "Future Energy Supply and Demand" in this Item 1. The problems associated with nuclear energy have not affected the Company as it has no operating nuclear plants nor any under construction, and has no plans for future participation in nuclear projects. ENVIRONMENTAL MATTERS The Company is subject to regulation by Federal, state, county and, to some extent, local authorities with respect to the environmental effects of its operations, including regulations relating to air and water quality, aesthetics, levels of noise, hazardous wastes, toxic substances, protection of vegetation and wildlife and limitations on - 19 - 23 land use. In connection with such regulation, various permits are required with respect to the Company's facilities. The sale by the Company of its electric generating facilities, pursuant to the Restructuring Plan, will impact the extent to which the Company remains subject to the environmental regulations discussed below. Generally, the principal environmental areas and requirements to which the Company is subject are as follows: Water Quality. The Company is required to comply with Federal and State water quality statutes and regulations, including the Federal Clean Water Act ("Clean Water Act"). The Clean Water Act requires that Company generating stations be in compliance with state issued State Pollutant Discharge Elimination System Permits ("SPDES permits"), which prescribe applicable conditions to protect water quality. Effective July 1, 1994, the State of New York Department of Environmental Conservation (the "NYSDEC") issued a new SPDES permit for the Company's Lovett Coal Ash Management Facility. The NYSDEC also has issued a SPDES permit, effective October 1, 1991 for the Company's Lovett generating station. The Lovett SPDES permit expired on October 1, 1996. Since a renewal application was filed within the statutory deadline, the expired permit remains in effect until a new permit is issued by the NYSDEC. The Bowline Point generating station currently operates under a SPDES permit which expired on October 1, 1992. This permit remains in effect since a permit renewal application was filed within the statutory deadline for renewal application. The Company is now proceeding with the State Environmental Quality Review Act ("SEQRA") process as part of the permit renewal procedure. The SEQRA process, and the resulting delay in issuance of a new permit to the Company, has had no practical impact on the operation of the Bowline Point generating station. The Company entered into a settlement with the United States Environmental Protection Agency ("EPA") and others that relieved the Company for at least 10 years from a regulatory agency requirement that, in effect, would have required that cooling towers be installed at the Bowline Point generating station. In return, the Company agreed to certain plant modifications, operating restrictions and other measures. This settlement expired in May 1991. Pursuant to an Interim Agreement between the Company, the NYSDEC and others, as well as a Consent Order, including extensions to the Consent Order, by which the Company agreed to certain operating limitations and biological monitoring requirements, the Bowline Point plant has continued to operate without cooling tower installation. The most recent extension of the Consent Order expired on February 28, 1998. The parties are currently negotiating another extension of the Consent Order. During the negotiation process, the Company will continue to abide by the operating limitations and biological monitoring requirements set forth in the Consent Order. - 20 - 24 Air Quality. Under the Federal Clean Air Act ("Clean Air Act"), the EPA has promulgated national primary and secondary air quality standards for certain pollutants, including sulfur oxides, particulate matter and nitrogen oxides. The NYSDEC has adopted, and the EPA has approved, the New York State Implementation Plan ("SIP") for the attainment, maintenance and enforcement of these standards. In order to comply with the SIP, the Company burns #6 fuel oil with a 0.37% maximum sulfur content by weight at its Lovett and Bowline Point generating stations. Pursuant to the SIP, the Company is governed by the following limitations when it is burning coal at Lovett Units 4 and 5: if one unit is burning, the Company may emit sulfur dioxide at a rate not to exceed 1.5 lb./MMBTU, and if two units are burning, the Company may emit sulfur dioxide at a rate not to exceed 1.0 lb./MMBTU per unit. The SIP provides a mechanism for air emissions fee billing pursuant to Title V of the Clean Air Act. The owners of Title V sources in New York State, which sources include the Company's Lovett and Bowline Point Plants and the Shoemaker and Hillburn Gas Turbines are required to pay an emission fee based upon actual air emissions reported to NYSDEC at a rate of approximately $28 per ton of air emissions. In 1997, the Company paid approximately $327,500 in such emission fees, approximately $25,700 of which was recovered from Con Ed pursuant to the Bowline Point Plant operating agreement. In 1998, this emission fee will be based on 1997 air emissions at a rate established by the NYSDEC not to exceed $50 per ton. The Clean Air Act Amendments of 1990 could restrict the Company's ability to meet increased electric energy demand after the year 2000 or could substantially increase the cost to meet such demand. The Company has spent approximately $28.7 million to comply with the Reasonably Available Control Technology ("RACT") Phase I emissions limitations for nitrogen oxide established by the NYSDEC to achieve ozone attainment. New York and eleven other member states of the Ozone Transport Commission have entered into a Memorandum of Understanding which calls for the states to adopt more stringent nitrogen oxide emissions limits for Phases II and III reductions. Phases II and III are to take effect in 1999 and 2003, respectively. The NYSDEC will propose regulations that will establish an annual NOx allocation program during the ozone season (May - September) to limit emissions. The Company does not anticipate incurring additional capital costs to comply with these requirements. The EPA finalized, during July 1997, new national ambient air quality standards for ozone and particulate matter. The Company will continue to assess the impact of the Clean Air Act Amendments of 1990 and new ozone and particulate matter standards on its power generating operations as additional regulations implementing these Amendments and standards are promulgated. - 21 - 25 Toxic Substances and Hazardous Wastes. The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("Superfund"), provides that both the owners and operators of facilities where releases of hazardous substances into the environment have occurred or are imminent, and the generators and transporters of hazardous substances disposed of at the facilities, are, regardless of fault, jointly and severally liable for all response, removal and remedial action costs and also for damages to natural resources. As part of its operations, the Company generates materials which are deemed to be hazardous substances under Superfund. These materials include asbestos and dielectric fluids containing polychlorinated biphenyls ("PCBs"), both of which are disposed of at licensed, off-site locations not owned by the Company. Other hazardous substances may be generated in the course of the Company's operations or may be present at Company-owned locations. The Company has, from time to time, received process or notice of claims under Superfund or similar state statutes relating to sites at which it is alleged that hazardous substances generated by the Company (and, in most instances, by a large number of other potentially responsible parties) were disposed of. Similar claims may be asserted from time to time hereafter, involving additional sites. Typically, many months, and sometimes years, are required to determine fully the probable magnitude of the cleanup costs for a site, the extent, if any, of the Company's responsibility, the number and responsibility of other parties involved, the financial ability of the other parties to pay their proportionate share of any costs, and the probable ultimate liability exposure, if any, of the Company. This process is still under way at most of the sites of which the Company has notice, and the costs at some of these sites may be substantial. The Company does not believe that certain proceedings will have a material effect on the Company, while as to others, the Company is unable at this time to estimate what, if any, costs it will incur. Information concerning certain Superfund claims involving the Company is included in Item 3, "Legal Proceedings" of this Form 10-K Annual Report. Environmental Expenditures. The Company's environmental expenditures amounted to approximately $16 million in 1997. Compliance with Federal, state and local laws and regulations which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment is not anticipated to have a material effect on the financial condition of the Company. The Company's projected environmental expenditures are under continuous review and are revised periodically to reflect changes in - 22 - 26 environmental regulations, inflation, technology and other factors which are beyond the control of the Company. Although the Company is unable to predict the ultimate impact of environmental regulations on existing or proposed facilities or on the operations of the Company, the Company believes that its expenditures for compliance with environmental regulations will be given appropriate rate treatment by the respective regulatory commissions. Information concerning environmental issues and their potential effect on the Company's operations is included in Note 12 of the Notes to Consolidated Financial Statements under the captions "Environmental Litigation" and "Environmental" beginning on page 28 of the 1997 Annual Report to Shareholders, which information is incorporated by reference in this Form 10-K Annual Report, as well as in Item 3 "Legal Proceedings" of this Form 10-K Annual Report. RESEARCH AND DEVELOPMENT The Company supports research and development agencies involved in utility research, provides funds for joint utility research projects and conducts its own internal program. Research and development expenditures amounted to approximately $2.4 million in 1997, $2.6 million in 1996 and $2.9 million in 1995. The Company provides support to national agencies such as the Electric Power Research Institute and the Gas Research Institute. At the state level, the Company supports Empire State Electric Energy Research Corporation, the New York State Energy Research and Development Authority and the New York Gas Group Research, Development and Demonstration Committee. The Company's internal research and development program includes projects which seek improvement of transmission and distribution systems, mitigation of environmental impacts of electric power generation, and enhancement of the value of electric energy for customers. Current projects include an evaluation of the performance characteristics of underground distribution cable, Year 2000 compliance solutions, alternative methods to reduce fish impingement at power plants, small business electrotechnologies studies, and submetering system development. Additional information regarding the Company's Year 2000 compliance strategy is contained on page 16 of the 1997 Annual Report to Shareholders in the "Review of the Company's Results of Operations and Financial Condition" under the caption "Year 2000 Compliance," which information is incorporated by reference in this Form 10-K Annual Report. FRANCHISES The Company and its utility subsidiaries, RECO and Pike, have municipal consents or franchises, together with their corporate or charter powers, which give each of them the right to carry on their - 23 - 27 respective operations in the territories served. The municipal consents or franchises held by the Company and its utility subsidiaries are not exclusive. In certain municipalities, the areas served by the Company, RECO and Pike are limited either by the terms of the consents or franchises or by order of the NYPSC, the NJBPU, or the PAPUC, respectively. Under the present provisions of the State laws of New York, New Jersey and Pennsylvania, no other private corporation can commence public utility operations in any part of the territories now served by the Company, RECO or Pike, respectively, without obtaining a certificate of public convenience and necessity from the applicable State utility commission. A certificate of public convenience and necessity would not be required with respect to a municipality furnishing electric or gas service within its borders under the present provisions of the State laws of New York, New Jersey or Pennsylvania. Municipal corporations, upon compliance with the State laws of New York, New Jersey or Pennsylvania, as applicable, are authorized to acquire the public utility service of any public utility company by purchase or by condemnation. The Company does not expect any municipal corporation to acquire the public utility service of the Company or its utility subsidiaries through either purchase or condemnation. The municipal consents or franchises of the Company and its utility subsidiaries are not uniform and contain, in certain instances, provisions relating to, among other things, the time of commencing operations, the furnishing of service to the particular municipality, the approval by the municipal authorities of the location and construction of distribution facilities, indemnification of the municipality against liabilities and damages in consequence of construction, and administrative matters. Such provisions are not considered by the Company to be unduly burdensome. As discussed in Item 3, Legal Proceedings, of this Form 10-K under the caption "Regulatory Matters - Competition," efforts are underway in New York, New Jersey and Pennsylvania to restructure the electric utility industry and allow customers to purchase energy and capacity from suppliers other than the Company, RECO or Pike, respectively. The Company, RECO and Pike all have proposed to open their franchise service territories to full retail competition by May 1, 1999. Unless otherwise ordered by the respective state utility commissions, the Company, RECO and Pike will remain the provider of last resort of energy and capacity and will remain the electric distribution company in their respective franchise territories. EMPLOYEE RELATIONS At December 31, 1997, the Company had 1,473 full-time employees and 36 part-time employees. The Company considers its relationship with its employees to be satisfactory. The current contract with Local 503 of the International Brotherhood of Electrical Workers ("IBEW") - 24 - 28 representing 862 production, maintenance, commercial and service employees of the Company became effective June 1, 1997 and expires June 1, 2000. This contract does not cover supervisory employees. The Company's Restructuring Plan, as approved by the NYPSC includes, among other things, the sale of the Company's electric generating assets. The Company expects that the sale of such assets will result in reductions in the Company's workforce. The Company has agreed to provide career management, outplacement services and certain benefits to affected management employees. Any changes affecting bargaining unit employees must be negotiated with the IBEW. Information regarding the separation of employees and the recovery of employee costs associated with the divestiture is included in Item 3, Legal Proceedings, of this Form 10-K under the caption "Regulatory Matters - Competition," as well as in the 1997 Annual Report to Shareholders in the "Review of the Company's Results of Operations and Financial Condition" beginning on page 16 under the caption "Other Developments - SFAS 88," which information is incorporated by reference in this Form 10-K Annual Report. The Company's utility subsidiaries, RECO and Pike, have no employees other than officers. All services are performed for the utility subsidiaries by employees of the Company pursuant to Joint Operating Agreements approved by the NJBPU and the PAPUC, through which the Company is reimbursed for these services. Several employees of the Company provide managerial and clerical services for the non-utility subsidiaries of the Company and of RECO, the cost of which are either paid directly by the subsidiaries or are reimbursed to the Company through periodic billings. In addition, the non-utility subsidiaries, at December 31, 1997, had 11 full-time employees, none of whom were participants in the Company's various employee benefit plans or were covered by the Company's contract with the IBEW. ITEM 2. PROPERTIES The Company's property consists primarily of electric generation, transmission and distribution facilities and gas distribution facilities. This property is required for the continued operation of the Company's major business segments. In addition, the Company maintains certain miscellaneous utility and non-utility property. The Company's facilities are in satisfactory condition, are suitable for the particular purpose for which they were acquired, and are adequate for the Company's present operations. Sale of Generating Assets. The Restructuring Plan, as approved by the NYPSC, provides, among other things, for the sale by auction of all of the Company's generating assets. Information regarding the Restructuring Plan, including a description of the auction process and the disposition of any gain or loss on the sale of the generating assets, is contained in Item 3, Legal Proceedings, of this Form 10-K - 25 - 29 under the captions "Restructuring Litigation" and "Regulatory Matters - Competition," and in the Company's 1997 Annual Report to Shareholders in the Notes to Consolidated Financial Statements in Note 4 and in Note 12 under the caption "Legal Proceedings Restructuring Litigation" on pages 23 and 28, respectively, which information is incorporated by reference in this Form 10-K Annual Report. Electric Generating Facilities. The Company's generating plants, all of which are located in New York State, are as follows:
MAXIMUM SUMMER PERCENT NET Mwh NET Mw OF TOTAL GENERATED PLANT NAME UNITS ENERGY SOURCE CAPACITY CAPACITY IN 1997 - ------------------------------------------------------------------------------------------------------------------ Swinging Bridge, Mongaup & Rio 8 Hydroelectric 25.8 2.6% 39,192 Grahamsville 1 Hydroelectric 18.0 1.8 117,623 Hillburn 1 Jet Fuel/Gas 37.0 3.8 1,674 Shoemaker 1 Jet Fuel/Gas 37.0 3.8 11,249 Lovett 3 Coal/Oil/Gas 462.6 47.2 2,172,765 Bowline Point 2 Oil/Gas 400.6(1) 40.8 527,096 ----- ----- --------- 981.0 100.0% 2,869,599 ===== ===== =========
(1) Company's share of maximum summer net megawatt capability. Electric Transmission and Distribution Facilities. The Company and its utility subsidiaries own, in whole or in part, and operate overhead and underground transmission and distribution facilities which include 617 circuit miles of transmission lines, 77 substations, 86,153 in-service line transformers, 4,985 pole miles of overhead distribution lines and 2,347 miles of underground distribution lines. With the exception of the Grahamsville Substation, the electric transmission and distribution facilities of the Company and its utility subsidiaries are located within the Company's New York, New Jersey and Pennsylvania service territory, which is described under the caption "Principal Business" in Item 1 of this Form 10-K. The Bowline Substation and the related transmission facilities are jointly owned by the Company and Con Ed and are operated by the Company. The Ramapo Substation and certain related transmission facilities consist of property which is either owned by the Company, owned by Con Ed or jointly owned by the Company and Con Ed and which is operated and maintained by the Company except for the 500/345 Kv section of the Ramapo substation and a 500 Kv transmission line which is operated and maintained by Con Ed. In addition, certain minor portions of substation equipment are jointly owned by the Company and major customers of the Company. Gas Facilities. The Company owns and operates three propane air gas plants at Middletown, Orangeburg and Suffern, New York, and the Company and Pike own their gas distribution systems, which are located - 26 - 30 within their gas franchise territories in New York and Pennsylvania and include 1,758 miles of mains. Miscellaneous Properties. The Company owns office buildings and operating facilities in Middletown, Spring Valley, Blooming Grove and West Nyack, New York, and other structures at different locations within the Company's service territory which are used as offices, service buildings, store houses and garages. The Company leases its corporate headquarters in Pearl River, New York, as well as office space at other locations. In addition, the Company has lease agreements covering certain of its data processing equipment, office equipment and vehicle fleet. Character of Ownership. The Company's electric and gas plants and its major electric substations are located on land owned by the Company in fee, except for the Grahamsville Plant and the Bowline Point Plant. The greater portion of the Grahamsville Plant is located on land leased from The City of New York, and the Bowline Point Plant is located on land in which the Company has a one-third undivided interest, with the remainder being owned by Con Ed. Water power and flowage rights for the operation of its Mongaup River Hydro Plants are controlled by the Company either through ownership of the necessary land in fee or through easements which are, in practically all cases, perpetual. In the case of the Grahamsville Plant, however, water is obtained under contract with the City of New York. Electric transmission facilities of the Company and its utility subsidiaries (including substations) are, with minor exceptions, located on land owned in fee or occupied pursuant to perpetual easements. Electric distribution lines and gas mains are located in, on or under public highways or private lands pursuant to lease, easement, permit, municipal consent, agreement or license, express or implied through use by the Company or its utility subsidiaries without objection by the owners. In the case of distribution lines, the Company and its utility subsidiaries own approximately 60% of the poles upon which their wires are installed and have a joint right of use in the remaining poles on which their wires are installed, which poles are owned, in most cases, by telephone companies. The Company's electric and gas plants are owned by the Company except for the gas turbines at Hillburn and Shoemaker which are leased and the Bowline Point Plant which is jointly owned with Con Ed and operated by the Company. Additional information regarding the investment in the Bowline Point Plant by the Company and Con Ed is included in Note 1 of the Notes to Consolidated Financial Statements under the caption "Jointly Owned Utility Plant" on page 22 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. - 27 - 31 Substantially all of the utility plant and other physical property of the Company's utility subsidiaries, RECO and Pike, is subject to the liens of the respective indentures securing first mortgage bonds. ITEM 3. LEGAL PROCEEDINGS RESTRUCTURING LITIGATION: The Company, the six other New York State investor-owned electric utilities, and the Energy Association of New York State filed a petition in New York State Supreme Court on September 18, 1996 challenging the NYPSC's May 20, 1996 Order in the Competitive Opportunities Proceeding (Case 94-E-0952) under Article 78 of the New York Civil Practice Law and Rules. Details concerning the Competitive Opportunities Proceeding are contained under the subheading "Regulatory Matters - - Competition" in this Item 3. In their Article 78 petition, the petitioners alleged that the Order is vague, ambiguous and procedurally defective, that the May 20, 1996 Order fails to assure the utilities a reasonable opportunity to recover strandable costs, and the NYPSC lacks the authority to order retail wheeling or divestiture. On November 26, 1996, the Supreme Court issued a ruling denying the Article 78 petition. In its ruling, the Court determined that because the Commission has not yet directed retail wheeling, generation deregulation and asset divestiture, there is no justiciable controversy regarding these issues. Despite this finding, the Court proceeded to opine that the Commission is not precluded by state or Federal law from ordering retail wheeling or generation divestiture. The Court also determined that the utilities are not entitled, as a matter of law, to recover from customers the full amount of the utilities' strandable costs. On December 24, 1996, the Energy Association and the New York utilities appealed to the Appellate Division of the Supreme Court for the Third Judicial Department from the Supreme Court's November 26, 1996 decision. On October 31, 1997, the Supreme Court of the State of New York, Appellate Division, Third Department, granted the petitioners' motion for an extension of time to perfect the appeal for a period of six months through and including March 24, 1998. The Company's Restructuring Plan requires the Company to petition the Appellate Division to withdraw its appeal. This petition must be filed "following final Commission approval of this agreement" ("i.e., when any appeals from such approval are exhausted or the time to appeal has expired"). If no party initiates an Article 78 appeal, this petition will be filed after expiration of the statute of limitations for challenging the Commission's December 31, 1997 order. The Company is unable to predict the final result of this litigation. - 28 - 32 ENVIRONMENTAL LITIGATION AND ADMINISTRATIVE PROCEEDINGS: On March 29, 1989, the New Jersey Department of Environmental Protection ("NJDEP") issued a directive under the New Jersey Spill and Control Act to various potentially responsible parties ("PRPs"), including the Company, with respect to a site formerly owned and operated by Borne Chemical Company in Elizabeth, Union County, New Jersey, ordering certain interim actions directed at both site security and the off-site removal of certain hazardous substances. Certain PRPs, including the Company, signed an administrative consent order with the NJDEP requiring them to remove and dispose of the hazardous substances located above ground at the Borne site, which removal and disposal was completed on June 22, 1992. In October 1995, the PRPs entered into an additional administrative consent order with the NJDEP which obligated the PRPs, including the Company, to perform a remedial investigation to determine what, if any, subsurface remediation at the Borne site is required. The remedial investigation is proceeding. The Company does not believe that this matter will have a material effect on the financial condition of the Company. On May 29, 1991, a group of ten electric utilities (the "Metal Bank Group") entered into an Administrative Consent Order with the United States Environmental Protection Agency ("EPA") to perform a remedial investigation and feasibility study ("RIFS") at the Cottman Avenue/Metal Bank Superfund site in Philadelphia, Pennsylvania. PCBs have been discharged at the Cottman Avenue site from an underground storage tank and the handling of transformers and other electrical equipment at the site. On May 25, 1994, the Company entered into a tolling agreement pursuant to which the Metal Bank Group reserved its right to file suit against the Company while the Metal Bank Group and the Company entered into discussions to determine the extent of the Company's involvement with the Cottman Avenue site. These discussions continue. The RIFS was completed and submitted to the EPA for determination of what remedial measures will be required at the Cottman Avenue site. The Metal Bank Group has assigned the Company with a 2.87% share although, to date, because the Company is not a member of the Group, the Company has been unable to confirm this allocation. In addition, the Company has responded to a letter from the EPA received in November 1996 requesting information and documentation concerning the Company's connection to the site. On February 10, 1998, the Company received another letter from the EPA related to this site. The letter encloses, inter alia, the Record of Decision ("ROD"), which presents the final remedial action selected for the site (estimated by the EPA to cost approximately $17.2 million on a present worth basis). The letter formally notifies the Company of its potential liability with respect to the site; formally demands reimbursement for costs paid by the EPA (with interest) in conducting and/or overseeing response actions at the site; notifies the Company of a limited period of formal negotiations for an agreement under which the Company would implement the requirements of the ROD; and includes other related documents. The EPA estimated its past costs to - 29 - 33 exceed $985,000 as of June 24, 1997, and encourages the Company to join with other PRPs to select a steering committee to negotiate with the EPA. The Company is currently reviewing the letter and ROD. The Company is unable at this time to estimate its share, if any, of past or future costs at this site. On August 2, 1994, the Company entered into a Consent Order with the New York State Department of Environmental Conservation ("DEC") in which the Company agreed to conduct a remedial investigation of certain property it owns in West Nyack, New York. Polychlorinated biphenyls ("PCBs") have been discovered at the West Nyack site. Petroleum contamination related to a leaking underground storage tank has been found as well. The Company has completed this remedial investigation. In November 1996, the Company submitted to the DEC a Feasibility Study Report which evaluates various remedial actions to eliminate the contamination discovered at the West Nyack site. On August 28, 1997, the DEC issued a Proposed Remedial Action Plan ("PRAP") which, inter alia, approved the Feasibility Study Report and proposed a remedy for clean-up of the soil contamination at the site. The DEC issued a ROD, dated October 20, 1997 which provides for the removal and off-site disposal of soils contaminated with PCBs and other petroleum-related contaminants, as well as the post-remedial monitoring of groundwater. The Company and the DEC have executed a Consent Order to implement the clean-up provided for by the ROD. The Company does not believe that this matter will have a material effect on the financial condition of the Company. The Company has identified six former Manufactured Gas Plant ("MGP") sites which were owned or operated by the Company or its predecessors. The Company may be named as a PRP for these sites under relevant environmental laws, which may require the Company to clean up these sites. To date, no claims have been asserted against the Company. The Company and the DEC have executed a Consent Order, dated as of January 8, 1996, which provides for preliminary site assessments of these six MGP sites. In November 1996, the Company submitted to the DEC, for its review and approval, a draft work plan for the preliminary site assessment of three of the MGP sites. In April 1997 the DEC approved the work plans for these three sites. Field work was subsequently completed and Preliminary Site Assessment reports for the three sites were submitted to the DEC on September 1, 1997. These reports showed varying degrees of contamination at each of the sites which will necessitate further investigation. The DEC has provided written comments on these reports, and the Company expects to conduct the further investigation in the Spring of 1998. In addition, the Company has submitted draft work plans for two additional sites to the DEC for its review and approval. The Company is unable at this time to estimate the total costs to be incurred at the six MGP sites. The Company has been named as a defendant or third-party defendant in a number of proceedings involving alleged personal injuries, primarily to construction workers, as a result of exposure to asbestos at - 30 - 34 facilities owned and operated by the Company. Discovery with regard to these cases will determine, among other things, if the plaintiffs in each of these cases worked at Company facilities. The Company anticipates that similar asbestos-related claims may be asserted against the Company from time to time in the future. However, at this time the Company does not believe that the asbestos-related lawsuits currently outstanding, nor those which may be brought in the future, will, individually or in the aggregate, have a material effect on the financial condition of the Company. Superfund and certain similar state statutes authorize various governmental authorities to issue orders compelling responsible parties to take cleanup action at sites determined to present an imminent and substantial danger to the public and to the environment because of an actual or threatened release of hazardous substances. As discussed above, the Company is a party to a number of administrative and litigation proceedings involving potential impact to the environment. Such proceedings arise out of, without limitation, the operation and maintenance of facilities for the generation, transmission and distribution of electricity and natural gas. Information regarding the Company's involvement in these various proceedings is included in Note 12 of the Notes to Consolidated Financial Statements under the caption "Environmental" on page 29 of the 1997 Annual Report to Shareholders, which information is incorporated by reference in Item 1 of this Form 10-K Annual Report, as well as under the subheading, "Environmental Matters" of this Form 10-K Annual Report. As noted above, the Company does not believe that certain proceedings will have a material effect on the Company, while as to others, the Company is unable at this time to estimate what, if any, costs it will incur. OTHER LITIGATION: On November 19, 1996, the Company was served with a Summons and Complaint in a litigation entitled Crossroads Cogeneration Corporation v. Orange and Rockland Utilities, Inc., filed in the United States District Court for the District of New Jersey. The litigation relates to a power sales agreement between the Company and Crossroads Cogeneration Corporation ("Crossroads"), which requires the Company to purchase electric capacity and associated energy from a cogeneration facility in Mahwah, New Jersey. The Complaint alleges damage claims for breach of contract, breach of the implied covenant of good faith and fair dealing and violations of the Federal Antitrust laws and seeks a declaration of Crossroads' rights under the Agreement. In February 1997 the Company filed a motion to dismiss the action, and Crossroads opposed the Company's motion and filed a cross-motion for partial summary judgment in its favor on the contract claims. By Opinion and Order dated June 30, 1997 ("Order"), the Court dismissed Crossroads' Complaint in its entirety with prejudice and dismissed Crossroads' cross-motion for partial summary judgment as moot. Crossroads filed an appeal from the Order to the United States Court of - 31 - 35 Appeals for the Third Circuit. The appeal has been fully briefed, and the Court has scheduled the appeal for disposition on April 24, 1998. The Company cannot predict the ultimate outcome of this proceeding. REGULATORY MATTERS: COMPETITION Regulatory agencies at the Federal level as well as the three states in which the Company has retail electric franchises are currently evaluating changes in regulatory and rate-making practices designed to promote increased competition consistent with safety, reliability and affordability standards. Depending on future developments in this area, the Company's market share and profit margins will become subject to competitive pressures in addition to regulatory constraints. A discussion of current Federal and state competitive initiatives follows. ELECTRIC Federal Initiative. On April 24, 1996, the FERC issued its final order (FERC Order 888) requiring electric utilities to file non-discriminatory open access transmission tariffs that would be available to wholesale sellers and buyers of electric energy. The order also provided for the recovery of related legitimate and verifiable strandable costs subject to FERC's jurisdiction. The Company's open access transmission tariff, as originally filed with the FERC on July 9, 1996 and amended through August 1997, offers transmission service and certain ancillary services to wholesale customers on a basis that is comparable to that which it provides itself. The Company is operating under the filed tariff, subject to refund, pending final FERC approval of the Company's filing. The Company participates in the wholesale electric market primarily as a buyer of energy and, as a result, Order 888 is not expected to materially impact the Company's financial condition or results of operations. On January 31, 1997, the Company, in conjunction with the other members of the NYPP, filed tariffs with the FERC seeking permission to restructure the NYPP into an ISO. On December 19, 1997, the Company and the other members of the NYPP made a supplemental filing with the FERC which provides for a revised ISO governance structure. While the Company and the other members of the NYPP have requested that the FERC act expeditiously on the filing, the Company is unable to predict either the timetable for or outcome of this regulatory proceeding. New York Competitive Opportunities Proceeding. On May 20, 1996, the NYPSC issued an order setting forth its vision and goals for the future of the electric industry in New York. The order endorsed a fundamental restructuring of the industry based on competition in the generation and energy services sectors of the industry. - 32 - 36 On November 26 and December 31, 1997, the NYPSC issued orders approving the Restructuring Plan, which had been filed on November 6, 1997 by the Company, the New York State Department of Public Service (the "Staff") and other parties in the Company's Competitive Opportunities Proceeding (Case 96-E-0900). The Restructuring Plan provides for the sale of all of the Company's generating assets (i.e., all units at the Lovett Generating Station, the Company's one-third interest in the Bowline Generating Station, as well as its hydro-electric facilities and gas turbines) and for lower electric rates. Under the terms of the Restructuring Plan, which covers a four-year period commencing with NYPSC approval, the Company has agreed to commence immediately the process of auctioning all of its generating assets. The Restructuring Plan provides that if the Company selects a winning bidder prior to May 1, 1999, the New York share of any net book gains associated with the sale are to be allocated between shareholders and customers on a 25%/75% basis, respectively, and any net book losses are to be allocated between shareholders and customers on a 5%/95% basis, respectively. If the Company selects a winning bidder on or after May 1, 1999, the New York share of the net book gains or losses associated with the sale are to be allocated between shareholders and customers on a 20%/80% basis. The Restructuring Plan further provides for a $20 million cap on the New York share of net book gains allocable to shareholders from the sale of generating assets. The NYPSC, in approving the Restructuring Plan, offered the Company the opportunity to participate as a bidder in the auction of the Company's generating assets, subject to the conditions that the auction be conducted by an independent third party and that the Company renounce the shareholders' share of any net book gain or loss from the sale provided for in the Restructuring Plan. By letter dated December 10, 1997, the Company notified the NYPSC that it had elected not to be a bidder in the auction. On December 11, 1997, in accordance with the Restructuring Plan, the Company submitted its Preliminary Divestiture Plan to the NYPSC Staff, and its Final Divestiture Plan was filed on February 4, 1998. The terms of the Restructuring Plan permit the Company to defer and recover up to $7.5 million (New York electric share) of prudent and verifiable non-officer employee costs associated with the divestiture, such as retraining, outplacement, severance, early retirement and employee retention programs. Under the terms of the Restructuring Plan, the Company will be authorized to petition the NYPSC for recovery of employee costs in excess of $7.5 million. In addition, the Restructuring Plan provides for the recovery of all prudent and verifiable costs of the sale. In addition, the terms of the Restructuring Plan permit the Company to retain all earnings up to an 11.4% return on equity and provide that earnings in excess of 11.4% are to be shared, with 75% to be used to offset NYPSC approved deferrals or otherwise inure to the Company's - 33 - 37 customers, and 25% to be retained by the Company's shareholders. The Company's existing PowerPick(TM) program, whereby customers can purchase energy (but not capacity) from suppliers other than the Company, will be expanded to all customers on May 1, 1998. The Restructuring Plan further provides that full retail access to a competitive energy and capacity market will be available for all customers by May 1, 1999. Unless otherwise ordered by the NYPSC, the Company will remain the provider of last resort. The Restructuring Plan also provides for electric price reductions of approximately $32.4 million over its four-year term and for recovery, through a Competitive Transition Charge ("CTC"), of above-market generation costs should the transfer of title to the Company's generating assets not occur before May 1, 1999. Should a CTC be required, the Company would be authorized to recover the difference between its non-variable costs of generation, including 75% of fixed production labor expenses and property taxes, and the revenues, net of fuel and variable operating and maintenance expenses, derived from the operation of the Company's generating assets in a deregulated competitive market. If title to the generating assets has not transferred as of May 1, 2000, the CTC would be modified so as to allow a maximum recovery of 65% of fixed production labor expenses and property taxes. The modified CTC would remain effective until the earlier of the date title to the generating assets is transferred or October 31, 2000. In the event title to the generating assets is not to be transferred by October 31, 2000, the Company would be authorized to petition the NYPSC for permission to continue a CTC until the date title to the generating assets is transferred. The CTC does not allow for the recovery of inflationary increases in non-fuel operating and maintenance production costs, property tax increases, wage rate increases, or increased costs associated with capital additions or changes in the costs of capital applicable to production costs. The Restructuring Plan also provides that the Company and its utility subsidiaries may apply to the appropriate regulatory authorities for permission to form a new holding company, which would be a registered holding company under the Public Utility Holding Company Act of 1935 (the "1935 Act"). The Company currently is an exempt holding company under the 1935 Act. The new holding company structure would provide for separate regulated electric distribution companies in the New York, New Jersey and Pennsylvania service territories, as well as an unregulated energy services company. The unregulated energy services company would be able to market electricity and unbundled energy services (e.g., metering) to wholesale and retail customers on a competitive basis, using the Company's name without a royalty payment. The formation of the holding company is conditioned upon shareholder and regulatory approval, including approval of the Securities and Exchange Commission, the FERC, the NYPSC, the NJBPU and the PAPUC. The Company will consider a filing for the formation of a holding company after the divestiture process is complete. - 34 - 38 The Restructuring Plan indicates that reciprocity would be required in order to implement retail access. That is, if utility generators are allowed access to the Company's retail customers, the Company shall be permitted equal access to the customers of those utilities within New York State, if it so chooses. In accordance with the settlement, the Company submitted an Unbundled Rates Filing to the NYPSC. This filing, which was made on February 17, 1998, separated the components of existing tariffs into production, transmission, distribution and customer cost categories. Additional information on the provisions of the Restructuring Plan is contained below under "Regulatory Matters: Rate Activities - New York Electric." New Jersey - Energy Master Plan. On April 30, 1997, the NJBPU issued an order "Adopting and Releasing Final Report in its Energy Master Plan Phase II Proceeding to Investigate the Future Structure of the Electric Power Industry (Docket No. EX 94120585Y)." The Order required RECO and other New Jersey investor owned electric utilities each to file unbundled rates, a stranded cost proposal and a restructuring plan by July 15, 1997. As part of its stranded cost proposal, the NJBPU has required that each utility provide a 5-10% rate reduction. RECO's filing was made on July 15, 1997. The filing includes a Restructuring Plan, a Stranded Costs Filing and an Unbundled Rates Filing. On December 8, 1997, RECO submitted an Amended and Restated Restructuring Plan and Stranded Costs Filing with the NJBPU to reflect the fact that the Company has committed to divest all its generating assets by auction. The Restructuring Plan calls for RECO to remain a regulated transmission and distribution company within a holding company structure. Standards of Conduct and Affiliate Rules have been proposed in order to promote effective competition and ensure that regulated operations do not subsidize unregulated operations. RECO has proposed to implement full retail competition (energy and capacity) for all customers by May 1, 1999, the same date approved for retail access in New York. Under this schedule, full retail access will be achieved 13 months ahead of the NJBPU's proposed phase-in schedule. With the implementation of retail competition, RECO proposes to continue to serve as the "provider of last resort" for those customers who do not choose an alternate provider or whose provider defaults. In its Stranded Costs Filing, RECO has identified two categories of potential stranded costs: generation investment and power purchase - 35 - 39 contracts with non-utility generators ("NUGS"). Divestiture of the Company's generating assets will determine their market value and the related stranded costs, if any. RECO proposes to recover its share of stranded generation investment, if any, through regulated delivery rates by means of a Market Transition Charge ("MTC"). The MTC would be in effect over a period of up to eight years, commencing May 1, 1999. Stranded NUG contract payments are proposed to be recovered over the remaining life of the contracts through a non-bypassable wires charge also assessed by the regulated delivery company. RECO has proposed to reduce its annual net revenue (revenue net of fuel, purchased power and applicable taxes) by $4.3 million, or 5.1%, effective in October 1998, to reflect identified cost reductions primarily related to the removal from rates of NUG termination costs which were fully recovered. RECO also made an Unbundled Rates Filing which separates the components of existing tariffs into production, transmission, distribution and customer cost categories. The Unbundled Rates Filing, which was updated on January 30, 1998, would serve as the basis to segregate the costs of the generation function from rates in order to facilitate customer choice. In addition, the MTC mechanism would be added to the existing rate structure to allow for recovery of stranded costs, and a non-bypassable societal benefits charge would be created as a billing mechanism for mandated public policy programs. Hearings with respect to RECO's filings are scheduled for the spring of 1998 and the NJBPU has indicated that it will rule on these filings by October 1998. RECO's filings may be accepted or significantly modified by the NJBPU before becoming effective. It is not possible to predict the outcome of the NJBPU proceeding or its effect, if any, on the Company's consolidated financial position or results of operations. Pennsylvania - Competition Legislation. On December 3, 1996, the "Electricity Generation Customer Choice and Competition Act" ("Act") was signed into law by the Governor of the Commonwealth of Pennsylvania. The Act provides for a transition of the Pennsylvania electric industry from a vertically integrated structure to a functionally separated model that permits direct access by customers to a competitive electric generation market while retaining the existing regulation and customer protections in the transmission and distribution systems. The transition plan of the Act calls for a three year phase-in of retail access with one-third of customers being phased in on each January 1st beginning in 1999. The Act also provides for the opportunity for recovery of prudent and verifiable costs resulting from the restructuring through the implementation of a Competitive Transition Charge ("CTC") for a period of up to nine years and the imposition of rate caps designed to prevent a customer's total electric costs from increasing above current levels during the transition period. In addition, the Act permits the refinancing of certain approved transition costs through the issuance of bonds - 36 - 40 secured by revenue streams guaranteed by the PAPUC. The savings associated with this financing mechanism will be used to reduce strandable costs. On September 30, 1997, in accordance with the requirements of the Act, Pike submitted its electric restructuring filing to the PAPUC. On December 15, 1997, Pike submitted an amended and restated electric restructuring filing with the PAPUC to reflect the fact that the Company has committed to divest all of its generating assets by auction. In this amended and restated filing, Pike proposed that full retail competition be implemented for all customers by May 1, 1999, the same date approved for retail access in New York. With the implementation of retail competition, Pike proposes to continue to serve as the "provider of last resort" for those consumers who do not choose an alternate provider, or whose alternate provider defaults. Pike proposed to remain a regulated transmission and distribution company within a holding company structure. On September 30, 1997, Pike also submitted proposed unbundled rates which separate the components of existing tariffs into production, transmission, distribution and customer cost categories. This filing was updated on January 30, 1998. It is expected that the PAPUC will rule on Pike's restructuring filing by July 1998. Pike's filing may be accepted or significantly modified by the PAPUC before becoming effective. It is not possible to predict the outcome of the PAPUC proceeding; however, it is not expected that this proceeding will have a material effect on the Company's consolidated financial position or results of operations. GAS Federal Initiatives. At the Federal level, the FERC issued Order 636 in 1992, which was aimed at increasing competition on interstate natural gas pipelines. As a result of FERC Order 636, the Company was required to change the way it secures gas supply and gas transportation and storage services. In addition, FERC Order 636 imposed certain contract termination and transition charges on Local Distribution Companies ("LDCs"), including the Company, while affording an opportunity to market excess pipeline capacity. Order 636 authorizes pipelines to recover certain transition costs from their customers. The Company currently estimates that its obligations for order 636 transition costs will total approximately $28.6 million. Approximately $27.3 million of these transition costs have been billed to the Company. Pursuant to a December 1994 order, the NYPSC provided a mechanism for the full recovery of FERC Order 636 transition costs. The Company is in the process of recovering these costs from its customers and believes that it will be allowed to recover all such costs by the end of the year 2000. - 37 - 41 New York. In 1996, the NYPSC approved utility restructuring plans designed to open up the local natural gas market to competition. As part of the utility restructuring, the NYPSC has required LDCs to provide firm transportation service, thereby allowing residential and small commercial customers of LDCs the ability to purchase, through aggregation groups, gas supplies from a variety of sources, other than the LDC. The NYPSC order provided a transition into the unbundled environment and allowed LDCs to require customers to take associated upstream pipeline capacity for up to three years under specified conditions. Prior to the start of the third year (by April 1, 1998) LDCs are required to demonstrate to the NYPSC their efforts taken to relieve themselves of "excess" capacity. At that time, the NYPSC is expected to address any issue of stranded costs. As the transition to a competitive retail market develops, the Company will determine what supply, transportation and storage contracts it will maintain. As the Company moves to a competitive market, traditional cost recovery may be replaced by performance or market-based mechanisms. On September 4, 1997, the NYPSC issued a "Notice Inviting Comments on Staff's Report in Case 97-G-1380, in the Matter of Issues Associated with the Future of the Natural Gas Industry and the Role of Local Gas Distribution Companies ("LDCs") ("Position Papers")." The Company is one such LDC. The primary conclusion of the Staff's Position Paper, "The Future of the Natural Gas Industry," is that over the next five years, LDCs in New York should transition out of the business of selling gas in order to encourage competition and provide gas customers with choice in the marketplace. In addition, the Position Paper identifies, discusses and requests comments on the following three impediments to LDCs terminating their gas merchant role: (1) upstream pipeline capacity held by LDCs; (2) the LDCs' supplier of last resort and obligation to serve responsibilities; and (3) system reliability and operational integrity issues. The Company filed initial comments and reply comments on the Position Paper in November and December 1997, respectively. The Company opposed the Staff's proposal to require LDCs to auction upstream capacity since it could endanger the Company's ability to maintain system reliability. The Company advocated that LDCs be allowed to establish meaningful penalty provisions to prevent diversions of gas to other markets during the winter months. Finally, the Company contended that all stranded costs related to upstream pipeline capacity and long-term gas supply contracts must be fully recoverable by LDCs. It is not possible to predict the outcome of this proceeding or its effect on the Company's consolidated financial position or results of operations. - 38 - 42 RATE ACTIVITIES GAS New York. On June 5, 1997, the NYPSC issued an Order Requiring the Filing of Proposals to Ameliorate Gas Price Volatility and Requesting Comments in Case 97-G-0600, In the Matter of the Commission's Request for Gas Distribution Companies to Reduce Gas Cost Volatility and Provide for Alternative Gas Purchasing Mechanisms. Under the Order, gas utilities in New York were required to submit proposals for fixed-price gas sales options to be available for use by all customers during the 1997-1998 heating season. The Company's proposal, as approved by the NYPSC in October 1997, provides a fixed-price commodity cost option to firm sales customers for the 1997-1998 heating season. The option is limited to ten percent of customers in each eligible customer class. The NYPSC order provided that costs associated with any variations between gas utilized by customers electing the fixed-price option and volumes locked in by the Company, to the extent prudently incurred, will be recoverable. To date, approximately 2,500 customers are participating in this program. ELECTRIC New York. On April 19, 1995, the NYPSC approved the Company's compliance filing regarding the operation of the Revenue Decoupling Mechanism ("RDM"). The filing included a proposal to eliminate the RDM Adjustment Factor of $7.7 million effective May 1, 1995, reflecting the completion of the recovery of an RDM under-collection applicable to the year 1993. This equated to a 2.3% annual reduction in revenues. On August 1, 1995, the NYPSC approved a stipulation among the parties which provided for the early implementation of the Company's proposed annual rate reduction of $6.1 million. As a result, reduced rates became effective August 1, 1995, producing a revenue reduction of approximately $3.8 million for the period August 1, 1995 to March 31, 1996. The revenue reduction was offset by the recognition of deferred revenue for 1994 and 1995 related to sharing mechanisms previously approved by the NYPSC. On May 3, 1996, the NYPSC approved, subject to modifications required by the NYPSC decision in the New York Competitive Opportunities Proceeding (as previously discussed), a Settlement Agreement ("1996 Agreement") among the Company, NYPSC Staff and other parties which resolved all remaining revenue requirement issues in the proceeding for a three-year period commencing May 1, 1996, and concluding April 30, 1999. Under the 1996 Agreement, the Company reduced its annual electric retail revenues in New York by an additional $7.75 million, or 2.3%, effective May 1, 1996. The settlement provides for several - 39 - 43 performance mechanisms related to service reliability and customer service, and the elimination of all revenue and most expense reconciliation provisions of the RDM. The 1996 Agreement provides the Company with the opportunity to retain all New York electric earnings up to a 10.9% return on equity annually for each of the next three years. Earnings in excess of 10.9% would be shared equally between customers and shareholders. The Restructuring Plan increased this earnings threshold to 11.4%. Earnings in excess of 11.4% will be shared as follows: 75% to be used to offset NYPSC-approved deferrals or otherwise inure to the benefit of customers and 25% to be credited to the Company's shareholders. The 1996 Agreement implements several competitive initiatives sought by the Company. These include price reductions, the offering of service guarantees and the introduction of PowerPick(TM) - an innovative retail access program that allows participating customers to choose their electric energy supplier. The PowerPick(TM) program was expanded as part of the Restructuring Plan. On December 1, 1997, as part of the Restructuring Plan, the Company implemented the first year of the electric rate reduction in the amount of $5.9 million. Additional rate reductions of $8.8 million in each of the next three years will be implemented as part of the Restructuring Plan. Additional information on New York electric rate activities is contained in the previous discussion of the New York Competitive Opportunities Proceeding. New Jersey. The NJBPU on January 8, 1997 approved a stipulation among New Jersey utilities, NJBPU Staff and NJ Division of Ratepayer Advocate which provides a recovery plan for costs associated with the change in accounting required by Statement of Financial Accounting Standards No. 106, "Employer Accounting for Postretirement Benefits Other Than Pensions." The approved plan provides several alternative recovery mechanisms. RECO received approval from the NJBPU on December 17, 1997 to begin amortizing these costs effective January 1, 1998. On January 23, 1997, a residential customer of RECO filed a petition with the NJBPU requesting a lowering of RECO's rates by $21.2 million, or 16%, based on financial data for the twelve months ended December 31, 1995 as adjusted. A central issue raised by the petition is whether RECO's continued purchase of all of its power supply requirement from the Company continues to be appropriate when alleged lower cost energy is available from other sources. On January 23, 1998, the NJBPU issued an Order in this proceeding which required that this petition be held in abeyance pending the outcome of RECO's unbundling, stranded cost and restructuring filings. RECO believes that this petition is without merit and intends to contest it vigorously. - 40 - 44 FORWARD-LOOKING INFORMATION The Company has made forward-looking statements in this document with respect to the financial condition, results of operations and business of the Company in the future, which involve certain risks and uncertainties. Forward-looking statements are included in Item 1 under the captions "Supply, Transportation and Storage," "Utility Industry Risk Factors and Competition" and "Franchises," and in this Item 3 under the caption "Environmental Litigation and Administrative Proceedings," as well as in statements about future performance or results, including any statements using the words "believe," "expect," "anticipate" or similar words. For all of those statements, the Company claims the protections of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) there occurring unforeseen effects of the restructuring of the Company's business pursuant to the Restructuring Plan, including but not limited to, costs or difficulties related to the sale of the Company's generating assets being greater then expected; (2) regional competitive pressure in the electric utility industry increasing significantly; (3) additional state and Federal regulatory initiatives being implemented that further increase competition, threaten cost and investment recovery or impact rate structure; and (4) the outcome of litigation being materially unfavorable to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1997. - 41 - 45 EXECUTIVE OFFICERS OF THE REGISTRANT All of the officers of the Company are appointed on an annual basis at the first Board of Directors' meeting following the annual meeting. The following list includes two Company employees who, due to the policy making functions they perform for the Company, are considered executive officers under SEC criteria, but who are not officers of the Company and who are not appointed on an annual basis.
OFFICERS, AGE, AND TITLE BUSINESS EXPERIENCE PAST FIVE YEARS - ------------------------ ----------------------------------- D. Louis Peoples, 57 Vice Chairman of the Board and Chief Vice Chairman of the Executive Officer since July 1994. Board of Directors and Executive Vice President, and a member Chief Executive Officer of the Board of Directors, Madison Gas and Electric Company, Madison, Wisconsin from 1992 to 1993. Senior Vice President, RCG/Hagler, Bailly Inc., San Francisco, California from 1991 to 1992. R. Lee Haney, 58 Senior Vice President and Chief Senior Vice President and Financial Officer since April 1996. Chief Financial Officer Vice President and Chief Financial Officer from September 1994 to April 1996. Senior Vice President - Marketing and Customer Service from January 1993 until September 1994, and Senior Vice President and Chief Financial Officer from 1990 until January 1993, San Diego Gas & Electric Company, San Diego, California. G. D. Caliendo, 57 Senior Vice President, General Counsel Senior Vice President, and Secretary since April 1996. Vice General Counsel President, General Counsel and and Secretary Secretary from March 1995 to April 1996. Senior Vice President, General Counsel and Secretary of Pennsylvania Power and Light Company, Allentown, Pennsylvania from 1989 to 1994. Robert J. Biederman, Jr., 45 Vice President since April 1990. Vice President, Operations
- 42 - 46
OFFICERS, AGE, AND TITLE BUSINESS EXPERIENCE PAST FIVE YEARS - ------------------------ ----------------------------------- Nancy M. Jakobs, 57 Vice President, Human Resources since Vice President, April 1995. Partner, Jakobs and Human Resources Associates International, New City, New York from 1991 to 1995. Robert J. McBennett, 55 Treasurer since 1984. Treasurer and Treasurer Controller from May 1995 to May 1996. Edward M. McKenna, 48 Controller since May 1996. Director, Controller Internal Audit from January 1995 to May 1996. Director, Internal Audit, American Brands from 1994 to January 1995. Senior Manager, Finance/ Operational Audits, American Brands from 1991 to 1994. George V. Bubolo, Jr., 53 Division Vice President - Engineering Division Vice President, and System Operations since March 1996. Engineering and System Director, Engineering and System Operations Operations from November 1994 until March 1996. Director, Electric Operations from 1983 until November 1994. Vincent R. Tummarello, 47 Division Vice President - Electric Division Vice President, Production since November 1994. Electric Production Director, Electric Production from April 1985 until November 1994.
- 43 - 47 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, par value $5.00 per share ("Common Stock"), is listed on the New York Stock Exchange under the ticker symbol ORU. At December 31, 1997, there were 19,682 holders of record of the Company's Common Stock. During December 1997, the Company initiated a Common Stock Repurchase Program, a description of which is included in the 1997 Annual Report to Shareholders in the "Review of the Company's Results of Operations and Financial Condition" under the caption "Liquidity and Capital Resources" on page 15 and in Note 6 of the Notes to Consolidated Financial Statements on page 24, which information is incorporated by reference in this Form 10-K Annual Report. During 1997, dividend payments were made to holders of the Company's Common Stock on February 1, May 1, August 1 and November 1. Quarterly market price and dividend information on the Company's Common Stock is as follows:
QUARTER HIGH LOW DIVIDEND ------- ---- --- -------- 1997 1 $36 7/8 $35 3/8 $.645 2 35 5/8 30 1/8 .645 3 37 5/16 32 5/16 .645 4 48 5/8 35 .645 1996 1 $37 1/8 $34 7/8 $.645 2 36 3/4 33 3/8 .645 3 37 34 3/4 .645 4 36 1/4 34 1/4 .645
Information regarding the restriction of retained earnings for dividend payments is contained in Note 5 of the Notes to Consolidated Financial Statements on page 23 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is contained under the captions "Financial Statistics - Common Stock Data," and "Financial Statistics - Selected Financial Data" on page 32 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. - 44 - 48 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is contained under the caption "Review of the Company's Results of Operations and Financial Condition" on pages 10 through 16 of the 1997 Annual Report to shareholders, which material is incorporated by reference in this Form 10-K Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary financial information required by this Item are contained on pages 17 through 30 of the 1997 Annual Report to Shareholders, which material is incorporated by reference in this Form 10-K Annual Report. Such information is listed in Item l4(a)(1) "Financial Statements" of this Form 10-K Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information required by Item 10 - Directors and Executive Officers of the Registrant is contained on page 42 of this Form 10-K Annual Report and in Section 1, "Election of Directors," of the Company's definitive Proxy Statement in connection with the 1998 Annual Meeting of Common Shareholders (the "Proxy Statement"), which material is incorporated by reference in this Form 10-K Annual Report. The information required by Item 11 Executive Compensation, Item 12 - Security Ownership of Certain Beneficial Owners and Management and Item 13 Certain Relationships and Related Transactions is contained in Section 1, "Election of Directors," of the Proxy Statement which material is incorporated by reference in this Form 10-K Annual Report. With the exception of this information, the Proxy Statement is not deemed filed as part of this Form 10-K Annual Report. - 45 - 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS The following consolidated financial statements of the Company and its subsidiaries appearing on pages 17 through 30 of the 1997 Annual Report to Shareholders are incorporated by reference in this Form 10-K Annual Report. With the exception of these consolidated financial statements and the information incorporated in Items 1, 2, 3, 5, 6, 7 and 8, herein, the 1997 Annual Report to shareholders is not deemed filed as part of this Form 10-K Annual Report. PAGE* Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 17 Consolidated Balance Sheets as of December 31, 1997 and 1996 18 Consolidated Cash Flow Statements for the years ended December 31, 1997, 1996 and 1995 20 Notes to Consolidated Financial Statements 21 Report of Independent Public Accountants 30 *Page number reference is to the 1997 Annual Report to Shareholders (a)(2) FINANCIAL STATEMENT SCHEDULES PAGE** Valuation and Qualifying Accounts and Reserves for the years ended December 31, 1997, 1996 and 1995 (Schedule II). 58 **Page number reference is to this Form 10-K Annual Report All other schedules are omitted because they are not applicable. - 46 - 50 (a)(3) EXHIBITS * 3.2 By-Laws, as amended through June 29, 1995. (Exhibit 3.2 to Form 10-Q for the period ended June 30, 1995, File No. 1-4315). * 3.4 Restated Certificate of Incorporation dated May 7, 1996. (Exhibit 3.4 to Form 10-Q for the period ended March 31, 1996, File No. 1-4315). * 4.3 Mortgage Trust Indenture of Rockland Electric Company, dated as of July 1, 1954. (Exhibit 2.16 to Registration Statement No. 2-14159). * 4.11 Mortgage Trust Indenture of Pike County Light & Power Company, dated as of July 15, 1971. (Exhibit 4.31 to Registration Statement No. 2-45632). * 4.25 Indenture between the Company and The Bank of New York as Trustee regarding unsecured debt, dated March 1, 1990. (Exhibit 4.25 to Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4315). * 4.26 First Supplemental Indenture between the Company and The Bank of New York as Trustee regarding unsecured debt, dated March 7, 1990. (Exhibit 4.26 to Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4315). * 4.27 Second Supplemental Indenture between the Company and the Bank of New York as Trustee regarding unsecured debt, dated October 15, 1992. (Exhibit 4.27 to Form 10-K for the fiscal year ended December 31, 1992, File No. 1-4315). * 4.29 Third Supplemental Indenture between the Company and The Bank of New York as Trustee regarding unsecured debt, dated as of March 1, 1993. (Exhibit 4.29 to Form 10-K for the fiscal year ended December 31, 1992, File No. 1-4315). * 4.30 Ninth Supplemental Indenture of Rockland Electric Company, dated as of March 1, 1993. (Exhibit 4.30 to Form 10-K for the fiscal year ended December 31, 1992, File No. 1-4315). * 4.31 Fourth Supplemental Indenture between the Company and the Bank of New York as Trustee regarding unsecured debt dated as of December 1, 1997. (Exhibit 4.5 to Company's Registration Statement on Form S-4, File No. 333-43953). - 47 - 51 *10.1 General Agreement: Bowline Point Generating Plant, dated as of October 10, 1969. (Exhibit 5(b) to Registration Statement No. 2-42156). *10.1A Amendment to the General Agreement: Bowline Point Generating Plant, dated May 31, 1996. (Exhibit 10.1A to Form 10-K for the fiscal year ended December 31, 1996, File No. 1-4315). *10.2 Financing Agreements, dated as of February 1, 1971. (Exhibit 5(a) to Registration Statement No. 2-42156). *10.2A Amendment to Lease Agreement effective August 1, 1996. (Exhibit 10.2A to Form 10-Q for the quarter ended March 31, 1997, File No. 1-4315). 10.3 Orange and Rockland Utilities, Inc. Eligible Employees Compensation Deferral Plan (formerly the Officers Salary Deferral Plan), as amended and restated on June 5, 1997, effective January 1, 1998. *10.7 New York Power Pool Agreement, dated July 16, 1985. (Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4315). *10.8 Agreement governing the supply of residual fuel oil by Con Edison to Bowline Point Generating Station dated August 31, 1983. (Exhibit 10.8 to Form 10-K for fiscal year ended December 31, 1991, File No. 1-4315). *10.10 PJM Facilities Agreement, dated May 1, 1970, as amended December 12, 1972. (Exhibit 10.10 to Form 10-K for the fiscal year ended December 31, 1992, File No. 1-4315). +*10.11 Officers' Supplemental Retirement Plan, as amended and restated on June 5, 1997 effective July 1, 1997. (Exhibit 10.11 to Form 10-Q for the quarter ended June 30, 1997, File No. 1-4315). +*10.12 Incentive Compensation Plan, amended January 3, 1991. (Exhibit 10.12 to Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4315). 10.13 Severance Pay Plan, as amended and restated on November 6, 1997. *10.14 Management Long-Term Disability Plan as amended January 1, 1996. (Exhibit 10.14 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). - 48 - 52 *10.17 Coal Purchase and Sale Agreement among Orange and Rockland Utilities, Inc., Rawl Sales and Processing Company, and Massey Coal Sales, Inc., dated March 9, 1984, as amended through July 1, 1991. (Exhibit 10.17 to Form 10-K for the fiscal year ended December 31, 1991, File No. 1-4315). *10.17A Seventh Amendment to the Coal Purchase and Sales Agreement among Orange and Rockland Utilities, Inc., Rawl Sales and Processing Company, and Massey Coal Sales, Inc., dated July 1, 1994. (Exhibit 10.17 to Form 10-K for the fiscal year ended December 31, 1994, File No. 1-4315). *10.17B Eighth Amendment to the Coal Purchase and Sales Agreement among Orange and Rockland Utilities, Inc., Rawl Sales and Processing Company, and Massey Coal Sales, Inc., dated July 1, 1996. (Exhibit 10.17B to Form 10-K for the fiscal year ended December 31, 1996, File No. 1-4315). +*10.20 Orange and Rockland Utilities, Inc. Post Director Service Retainer Continuation Program, as amended and restated on June 5, 1997, effective July 1, 1997. (Exhibit 10.20 to Form 10-Q for the quarter ended June 30, 1997, File No. 1-4315). +10.22 Form of Severance Agreement entered into between Orange and Rockland Utilities, Inc. and each of R. J. Biederman, Jr., effective October 29, 1997; N. M. Jakobs, effective October 27, 1997; R. J. McBennett, effective October 27, 1997; and E. M. McKenna, effective October 31, 1997. +10.22A Form of Agreement, amending Exhibit 10.22, entered into between Orange and Rockland Utilities, Inc. and each of R. J. Biederman, Jr., R. J. McBennett and E. M. McKenna, effective January 27, 1998 and N. M. Jakobs, effective January 8, 1998. +*10.26 Letter agreement dated September 29, 1994 between Orange and Rockland Utilities, Inc. and R. Lee Haney regarding participation in the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (Exhibit 10.26 to Form 10-Q for the period ended September 30, 1994, File No. 1-4315). +10.26A Agreement between Orange and Rockland Utilities, Inc. and R. Lee Haney effective July 1, 1997, amending Exhibit 10.26. - 49 - 53 +*10.27 Letter agreement dated September 29, 1994 between Orange and Rockland Utilities, Inc. and D. Louis Peoples regarding participation in the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (Exhibit 10.27 to Form 10-Q for the period ended September 30, 1994, File No. 1-4315). +10.27A Agreement between Orange and Rockland Utilities, Inc. and D. Louis Peoples effective July 1, 1997, amending Exhibit 10.27. +10.29 Orange and Rockland Utilities, Inc. Deferred Compensation Plan for Non-Employee Directors as amended and restated on February 5, 1998. +*10.30 Letter Agreement dated April 6, 1995 between Orange and Rockland Utilities, Inc. and G. D. Caliendo regarding participation in the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (Exhibit 10.30 to Form 10-Q for the period ended June 30, 1995, File No. 1-4315). +10.30A Agreement between Orange and Rockland Utilities, Inc. and G. D. Caliendo effective July 1, 1997, amending Exhibit 10.30. +*10.31 Letter Agreement dated September 21, 1995 between Orange and Rockland Utilities, Inc. and Nancy M. Jakobs regarding participation in the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (Exhibit 10.31 to Form 10-Q for the period ended September 30, 1995, File No. 1-4315). +10.31A Agreement between Orange and Rockland Utilities, Inc. and Nancy M. Jakobs effective July 1, 1997, amending Exhibit 10.31. +*10.36 Agreement dated January 22, 1996 between Orange and Rockland Utilities, Inc. and D. L. Peoples regarding change in control arrangements. (Exhibit 10.36 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +10.36A Agreement between Orange and Rockland Utilities, Inc. and D. L. Peoples dated July 23, 1997, amending Exhibit 10.36. +*10.37 Agreement dated January 21, 1996 between Orange and Rockland Utilities, Inc. and G. D. Caliendo regarding change in control arrangements. (Exhibit 10.37 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). - 50 - 54 +10.37A Agreement between Orange and Rockland Utilities, Inc. and G. D. Caliendo dated July 23, 1997, amending Exhibit 10.37. +10.37B Letter agreement between Orange and Rockland Utilities, Inc. and G. D. Caliendo dated February 25, 1998, amending Exhibits 10.30 and 10.37. +*10.38 Agreement dated January 22, 1996 between Orange and Rockland Utilities, Inc. and R. L. Haney regarding change in control arrangements. (Exhibit 10.38 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +10.38A Agreement between Orange and Rockland Utilities, Inc. and R. L. Haney dated July 23, 1997, amending Exhibit 10.38. +10.38B Letter agreement between Orange and Rockland Utilities, Inc. and R. Lee Haney dated February 25, 1998, amending Exhibits 10.26 and 10.38. +*10.40 Long-Term Performance Share Unit Plan as amended, effective July 1, 1997. (Exhibit 10.40 to Form 10-Q for the quarter ended June 30, 1997, File No. 1-4315). +*10.41 Annual Team Incentive Plan effective January 1, 1995, described on pages 9-10 of the Company's definitive proxy statement filed with the Securities and Exchange Commission on March 6, 1998 for its 1998 Annual Meeting of shareholders, which description is hereby incorporated by reference (File No. 1-4315). +*10.42 Letter Agreement dated February 16, 1995 between Orange and Rockland Utilities, Inc. and G. D. Caliendo regarding employment. (Exhibit 10.42 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +*10.43 Letter Agreement dated July 14, 1994 between Orange and Rockland Utilities, Inc. and D. L. Peoples regarding employment. (Exhibit 10.43 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +*10.44 Letter Agreement dated November 14, 1995 between Orange and Rockland Utilities, Inc. and L. S. Brodsky regarding employment. (Exhibit 10.44 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +10.44A Agreement between Orange and Rockland Utilities, Inc. and L. S. Brodsky effective July 1, 1997, amending Exhibit 10.44. - 51 - 55 +*10.45 Letter Agreement dated March 21, 1995 between Orange and Rockland Utilities, Inc. and Nancy M. Jakobs regarding employment. (Exhibit 10.45 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +*10.46 Letter Agreement dated September 2, 1994 between Orange and Rockland Utilities, Inc. and R. L. Haney regarding employment. (Exhibit 10.46 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). *10.47 Eligible Employees' Insurance Program, effective July 1, 1997. (Exhibit 10.48 to Form 10-Q for the quarter ended June 30, 1997, File No. 1-4315). +*10.48 Agreement and General Release dated August 27, 1997 between Orange and Rockland Utilities, Inc. and Larry S. Brodsky. (Exhibit 10.49 to Form 10-Q for the quarter ended September 30, 1997, File No. 1-4315). 10.49 Management Employee Transition Program, as described in correspondence to employees, dated December 11, 1997 and January 9, 1998. *10.50 Settlement Agreement (Electric Rate and Restructuring Plan) dated November 6, 1997 among the Registrant, the New York State Department of Public Service, the New York State Department of Economic Development, the National Association of Energy Service Companies, the Joint Supporters, the Industrial Energy Users Association, the Independent Power Producers of New York, Inc. and Pace Energy Project in Case 96-E-0900 - In the Matter of Orange and Rockland Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to Opinion No. 96-12. (Exhibit 99.7 to Form 10-Q for the quarter ended September 30, 1997, File No. 1-4315). 13 The Company's 1997 Annual Report to Shareholders to the extent incorporated by reference in this Form 10-K Annual Report for the fiscal year ended December 31, 1997. [Note: Except for those portions of such Annual Report expressly incorporated by reference in this Form 10-K Annual Report, such Annual Report is not deemed "filed" as part of the filing of this Form 10-K Annual Report.] *21 Subsidiaries of the Company. (Exhibit 21 to Company's Registration Statement on Form S-4, File No. 333-43953). 24 Powers of Attorney. 27 Financial Data Schedule. - 52 - 56 *99.1 Joint Cooperation Agreement between the Office of the Rockland County District Attorney and Orange and Rockland Utilities, Inc., dated November 3, 1993 (Exhibit 99.1 to Form 10-Q for the quarter ended September 30, 1993, File No. 1-4315). *99.2 NYPSC Order Adopting Terms of Settlement, Issued and Effective November 26, 1997, in Case 96-E-0900. (Exhibit 99.10 to Form 8-K dated November 25, 1997, File No. 1-4315). 99.3 NYPSC Opinion (No. 97-20) and Order Adopting Terms of Settlement, Issued and Effective December 31, 1997, in Case 96-E-0900. *99.5 Agreement Between Orange and Rockland Utilities, Inc. and Kroll Associates, Inc. dated as of November 1, 1994. (Exhibit 99.5 to Form 10-Q for the period ended September 30, 1994, File No. 1-4315). + Denotes executive compensation plans and arrangements. * Incorporated by reference to the indicated filings. The securities issued relevant to each of the following agreements were not registered with the Securities and Exchange Commission and the total amount of securities authorized under each agreement does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Therefore, as provided in Item 601 of Regulation S-K, the following agreements are not filed as exhibits. The Company agrees, however, to furnish to the Commission a copy of each agreement upon request: - First Supplemental Indenture, dated August 15, 1990, to the Indenture of Mortgage and Deed of Trust of Pike County Light & Power Company. - Indenture of Trust between NYSERDA and the Bank of New York, as Trustee, relating to the Pollution Control Revenue Bonds (Orange and Rockland Utilities, Inc. Project) dated as of August 15, 1994. - Participation Agreement between NYSERDA and Orange and Rockland Utilities, Inc., dated as of August 15, 1994. - Indenture of Trust between NYSERDA and the Bank of New York, as Trustee, relating to the Pollution Control Refunding Revenue Bonds dated as of July 1, 1995. - Participation Agreement between NYSERDA and Orange and Rockland Utilities, Inc., dated as of July 1, 1995. - 53 - 57 - Tenth Supplemental Indenture of Rockland Electric Company, dated as of February 1, 1997. (b) REPORTS ON FORM 8-K During the fourth quarter of the year ended December 31, 1997, the Company filed the following reports on Form 8-K: - Form 8-K dated December 11, 1998, reporting under Item 5, "Other Events," the approval by the NYPSC of the Company's Restructuring Plan; and under Item 7, "Financial Statements and Exhibits," three Exhibits related to such approval. - Form 8-K dated December 17, 1998, reporting under Item 5, "Other Events," the approval by the NYPSC of the Company's Common Stock Repurchase Program; and under Item 7 "Financial Statements and Exhibits" an exhibit related to such approval. - 54 - 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORANGE AND ROCKLAND UTILITIES, INC. (Registrant) By /s/ D. LOUIS PEOPLES (D. Louis Peoples Vice Chairman of the Board of Directors and Chief Executive Officer) Date: March 6, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE AND TITLE CAPACITY IN WHICH SIGNING D. LOUIS PEOPLES* Chief Executive (D. Louis Peoples, Officer, Director Vice Chairman of the Board of Directors and Chief Executive Officer) R. LEE HANEY* Chief Financial Officer (R. Lee Haney, Sr. Vice President and Chief Financial Officer) EDWARD M. McKENNA* Principal Accounting Officer (Edward M. McKenna, Controller) MICHAEL J. DEL GIUDICE* Chairman of the (Michael J. DelGiudice) Board of Directors H. KENT VANDERHOEF* Director (H. Kent Vanderhoef) RALPH M. BARUCH* Director (Ralph M. Baruch) J. FLETCHER CREAMER* Director (J. Fletcher Creamer) - 55 - 59 SIGNATURE AND TITLE CAPACITY IN WHICH SIGNING JON F. HANSON* Director (Jon F. Hanson) KENNETH D. McPHERSON* Director (Kenneth D. McPherson) ROBERT E. MULCAHY* Director (Robert E. Mulcahy) JAMES F. O'GRADY, JR.* Director (James F. O'Grady, Jr.) FREDERIC V. SALERNO* Director (Frederic V. Salerno) LINDA C. TALIAFERRO* Director (Linda C. Taliaferro) *By /s/ G. D. CALIENDO (G. D. Caliendo, Attorney-in-fact) Date: March 6, 1998 - 56 - 60 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Orange and Rockland Utilities, Inc.'s Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 5, 1998. Our audit was made for the purpose of forming an opinion on those consolidated financial statements taken as a whole. Supplemental Schedule II, Valuation and Qualifying Accounts and Reserves is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York February 5, 1998 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-25358, 33-25359 and 33-22129) and on Form S-3 (File No. 333-26337). ARTHUR ANDERSEN LLP New York, New York March 6, 1998 - 57 - 61 SCHEDULE II ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (THOUSANDS OF DOLLARS)
ADDITIONS --------- (1) (2) BALANCE BALANCE AT CHARGED TO CHARGED AT BEGINNING COSTS AND TO OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- --------- -------- -------- ---------- ------ December 31, 1997 Allowance for Uncollect- ible accounts: Customer Accounts $ 2,391 $ 2,959 $ 499 $ 3,319 $ 2,530 Other Accounts 258 259 80 339 258 ------- ------- ------- ------- ------- $ 2,649 $ 3,218 $ 579(A) $ 3,658(B) $ 2,788 ======= ======= ======= ======= ======= Reserve for Claims and Damages $ 3,843 $ 2,331 $ 84 $ 1,667(C) $ 4,591 ======= ======= ======= ======= ======= Gas Turbine Maint Reserve $ (88) $ 366 $ -- $ 382(C) $ (104) ======= ======= ======= ======= ======= December 31, 1996 Allowance for Uncollect- ible accounts: Customer Accounts $ 2,307 $ 2,508 $ 616 $ 3,040 $ 2,391 Other Accounts 169 268 197 376 258 ------- ------- ------- ------- ------- $ 2,476 $ 2,776 $ 813(A) $ 3,416(B) $ 2,649 ======= ======= ======= ======= ======= Reserve for Claims and Damages $ 3,848 $ 1,773 $ 472 $ 2,250(C) $ 3,843 ======= ======= ======= ======= ======= Gas Turbine Maint Reserve $ (202) $ 453 $ -- $ 339(C) $ (88) ======= ======= ======= ======= =======
- 58 - 62 SCHEDULE II ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (THOUSANDS OF DOLLARS)
ADDITIONS --------- (1) (2) BALANCE BALANCE AT CHARGED TO CHARGED AT BEGINNING COSTS AND TO OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- --------- -------- -------- ---------- ------ December 31, 1995 Allowance for Uncollect- ible accounts: Customer Accounts $ 2,200 $ 2,374 $ 565 $ 2,832 $ 2,307 Other Accounts 209 825 35 900 169 ------- ------- ------- ------- ------- $ 2,409 $ 3,199 $ 600(A) $ 3,732(B) $ 2,476 ======= ======= ======= ======= ======= Reserve for Claims and Damages $ 4,713 $ 720 $ 52 $ 1,637(C) $ 3,848 ======= ======= ======= ======= ======= Gas Turbine Maint Reserve $ (258) $ 622 $ -- $ 566(C) $ (202) ======= ======= ======= ======= =======
(A) Includes collection of accounts previously written off of $579 in 1997, $813 in 1996, and $600 in 1995. (B) Accounts considered uncollectible and charged off of $3,658 in 1997, $3,416 in 1996 and $3,732 in 1995. (C) Payments of damage claims of $1,667 in 1997, $2,250 in 1996 and $1,637 in 1995 and maintenance expenses of $382 in 1997, $339 in 1996 and $566 in 1995. - 59 - 63 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For Year Ended December 31, 1997 Commission File Number 1-4315 ORANGE AND ROCKLAND UTILITIES, INC. (Exact name of registrant as specified in its charter) EXHIBITS 64 ORANGE AND ROCKLAND UTILITIES, INC. INDEX OF EXHIBITS 1997 FORM 10-K * 3.2 By-Laws, as amended through June 29, 1995. (Exhibit 3.2 to Form 10-Q for the period ended June 30, 1995, File No. 1-4315). * 3.4 Restated Certificate of Incorporation dated May 7, 1996. (Exhibit 3.4 to Form 10-Q for the period ended March 31, 1996, File No. 1-4315). * 4.3 Mortgage Trust Indenture of Rockland Electric Company, dated as of July 1, 1954. (Exhibit 2.16 to Registration Statement No. 2-14159). * 4.11 Mortgage Trust Indenture of Pike County Light & Power Company, dated as of July 15, 1971. (Exhibit 4.31 to Registration Statement No. 2-45632). * 4.25 Indenture between the Company and The Bank of New York as Trustee regarding unsecured debt, dated March 1, 1990. (Exhibit 4.25 to Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4315). * 4.26 First Supplemental Indenture between the Company and The Bank of New York as Trustee regarding unsecured debt, dated March 7, 1990. (Exhibit 4.26 to Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4315). * 4.27 Second Supplemental Indenture between the Company and the Bank of New York as Trustee regarding unsecured debt, dated October 15, 1992. (Exhibit 4.27 to Form 10-K for the fiscal year ended December 31, 1992, File No. 1-4315). * 4.29 Third Supplemental Indenture between the Company and The Bank of New York as Trustee regarding unsecured debt, dated as of March 1, 1993. (Exhibit 4.29 to Form 10-K for the fiscal year ended December 31, 1992, File No. 1-4315). * 4.30 Ninth Supplemental Indenture of Rockland Electric Company, dated as of March 1, 1993. (Exhibit 4.30 to Form 10-K for the fiscal year ended December 31, 1992, File No. 1-4315). * 4.31 Fourth Supplemental Indenture between the Company and the Bank of New York as Trustee regarding unsecured debt dated as of December 1, 1997. (Exhibit 4.5 to Company's Registration Statement on Form S-4, File No. 333-43953). 65 *10.1 General Agreement: Bowline Point Generating Plant, dated as of October 10, 1969. (Exhibit 5(b) to Registration Statement No. 2-42156). *10.1A Amendment to the General Agreement: Bowline Point Generating Plant, dated May 31, 1996. (Exhibit 10.1A to Form 10-K for the fiscal year ended December 31, 1996 File No. 1-4315). *10.2 Financing Agreements, dated as of February 1, 1971. (Exhibit 5(a) to Registration Statement No. 2-42156). *10.2A Amendment to Lease Agreement effective August 1, 1996. (Exhibit 10.2A to Form 10-Q for the quarter ended March 31, 1997, File No. 1-4315). 10.3 Orange and Rockland Utilities, Inc. Eligible Employees Compensation Deferral Plan (formerly the Officers Salary Deferral Plan), as amended and restated on June 5, 1997, effective January 1, 1998. *10.7 New York Power Pool Agreement, dated July 16, 1985. (Exhibit 10.7 to Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4315). *10.8 Agreement governing the supply of residual fuel oil by Con Edison to Bowline Point Generating Station dated August 31, 1983. (Exhibit 10.8 to Form 10-K for fiscal year ended December 31, 1991, File No. 1-4315). *10.10 PJM Facilities Agreement, dated May 1, 1970, as amended December 12, 1972. (Exhibit 10.10 to Form 10-K for the fiscal year ended December 31, 1992, File No. 1-4315). +*10.11 Officers' Supplemental Retirement Plan, as amended and restated on June 5, 1997 effective July 1, 1997. (Exhibit 10.11 to Form 10-Q for the quarter ended June 30, 1997, File No. 1-4315). +*10.12 Incentive Compensation Plan, amended January 3, 1991. (Exhibit 10.12 to Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4315). 10.13 Severance Pay Plan, as amended and restated on November 6, 1997. *10.14 Management Long-Term Disability Plan as amended January 1, 1996. (Exhibit 10.14 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). 66 *10.17 Coal Purchase and Sale Agreement among Orange and Rockland Utilities, Inc., Rawl Sales and Processing Company, and Massey Coal Sales, Inc., dated March 9, 1984, as amended through July 1, 1991. (Exhibit 10.17 to Form 10-K for the fiscal year ended December 31, 1991, File No. 1-4315). *10.17A Seventh Amendment to the Coal Purchase and Sales Agreement among Orange and Rockland Utilities, Inc., Rawl Sales and Processing Company, and Massey Coal Sales, Inc., dated July 1, 1994. (Exhibit 10.17 to Form 10-K for the fiscal year ended December 31, 1994, File No. 1-4315). *10.17B Eighth Amendment to the Coal Purchase and Sales Agreement among Orange and Rockland Utilities, Inc., Rawl Sales and Processing Company, and Massey Coal Sales, Inc., dated July 1, 1996. (Exhibit 10.17B to Form 10-K for the fiscal year ended December 31, 1996, File No. 1-4315). +*10.20 Orange and Rockland Utilities, Inc. Post Director Service Retainer Continuation Program, as amended and restated on June 5, 1997, effective July 1, 1997. (Exhibit 10.20 to Form 10-Q for the quarter ended June 30, 1997, File No. 1-4315). +10.22 Form of Severance Agreement entered into between Orange and Rockland Utilities, Inc. and each of R. J. Biederman, Jr., effective October 29, 1997; N. M. Jakobs, effective October 27, 1997; R. J. McBennett, effective October 27, 1997; and E. M. McKenna, effective October 31, 1997. +10.22A Form of Agreement, amending Exhibit 10.22, entered into between Orange and Rockland Utilities, Inc. and each of R. J. Biederman, Jr., R. J. McBennett and E. M. McKenna, effective January 27, 1998 and N. M. Jakobs, effective January 8, 1998. +*10.26 Letter agreement dated September 29, 1994 between Orange and Rockland Utilities, Inc. and R. Lee Haney regarding participation in the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (Exhibit 10.26 to Form 10-Q for the period ended September 30, 1994, File No. 1-4315). +10.26A Agreement between Orange and Rockland Utilities, Inc. and R. Lee Haney effective July 1, 1997, amending Exhibit 10.26. 67 +*10.27 Letter agreement dated September 29, 1994 between Orange and Rockland Utilities, Inc. and D. Louis Peoples regarding participation in the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (Exhibit 10.27 to Form 10-Q for the period ended September 30, 1994, File No. 1-4315). +10.27A Agreement between Orange and Rockland Utilities, Inc. and D. Louis Peoples effective July 1, 1997, amending Exhibit 10.27. +10.29 Orange and Rockland Utilities, Inc. Deferred Compensation Plan for Non-Employee Directors as amended and restated on February 5, 1998. +*10.30 Letter Agreement dated April 6, 1995 between Orange and Rockland Utilities, Inc. and G. D. Caliendo regarding participation in the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (Exhibit 10.30 to Form 10-Q for the period ended June 30, 1995, File No. 1-4315). +10.30A Agreement between Orange and Rockland Utilities, Inc. and G. D. Caliendo effective July 1, 1997, amending Exhibit 10.30. +*10.31 Letter Agreement dated September 21, 1995 between Orange and Rockland Utilities, Inc. and Nancy M. Jakobs regarding participation in the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (Exhibit 10.31 to Form 10-Q for the period ended September 30, 1995, File No. 1-4315). +10.31A Agreement between Orange and Rockland Utilities, Inc. and Nancy M. Jakobs effective July 1, 1997, amending Exhibit 10.31. +*10.36 Agreement dated January 22, 1996 between Orange and Rockland Utilities, Inc. and D. L. Peoples regarding change in control arrangements. (Exhibit 10.36 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +10.36A Agreement between Orange and Rockland Utilities, Inc. and D. L. Peoples dated July 23, 1997, amending Exhibit 10.36. +*10.37 Agreement dated January 21, 1996 between Orange and Rockland Utilities, Inc. and G. D. Caliendo regarding change in control arrangements. (Exhibit 10.37 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). 68 +10.37A Agreement between Orange and Rockland Utilities, Inc. and G. D. Caliendo dated July 23, 1997, amending Exhibit 10.37. +10.37B Letter agreement between Orange and Rockland Utilities, Inc. and G. D. Caliendo dated February 25, 1998, amending Exhibits 10.30 and 10.37. +*10.38 Agreement dated January 22, 1996 between Orange and Rockland Utilities, Inc. and R. L. Haney regarding change in control arrangements. (Exhibit 10.38 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +10.38A Agreement between Orange and Rockland Utilities, Inc. and R. L. Haney dated July 23, 1997, amending Exhibit 10.38. +10.38B Letter agreement between Orange and Rockland Utilities, Inc. and R. Lee Haney dated February 25, 1998, amending Exhibits 10.26 and 10.38. +*10.40 Long-Term Performance Share Unit Plan as amended, effective July 1, 1997. (Exhibit 10.40 to Form 10-Q for the quarter ended June 30, 1997, File No. 1-4315). +*10.41 Annual Team Incentive Plan effective January 1, 1995, described on pages 9-10 of the Company's definitive proxy statement filed with the Securities and Exchange Commission on March 6, 1998 for its 1998 Annual Meeting of shareholders, which description is hereby incorporated by reference (File No. 1-4315). +*10.42 Letter Agreement dated February 16, 1995 between Orange and Rockland Utilities, Inc. and G. D. Caliendo regarding employment. (Exhibit 10.42 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +*10.43 Letter Agreement dated July 14, 1994 between Orange and Rockland Utilities, Inc. and D. L. Peoples regarding employment. (Exhibit 10.43 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +*10.44 Letter Agreement dated November 14, 1995 between Orange and Rockland Utilities, Inc. and L. S. Brodsky regarding employment. (Exhibit 10.44 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +10.44A Agreement between Orange and Rockland Utilities, Inc. and L. S. Brodsky effective July 1, 1997, amending Exhibit 10.44. 69 +*10.45 Letter Agreement dated March 21, 1995 between Orange and Rockland Utilities, Inc. and Nancy M. Jakobs regarding employment. (Exhibit 10.45 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). +*10.46 Letter Agreement dated September 2, 1994 between Orange and Rockland Utilities, Inc. and R. L. Haney regarding employment. (Exhibit 10.46 to Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4315). *10.47 Eligible Employees' Insurance Program, effective July 1, 1997. (Exhibit 10.48 to Form 10-Q for the quarter ended June 30, 1997, File No. 1-4315). +*10.48 Agreement and General Release dated August 27, 1997 between Orange and Rockland Utilities, Inc. and Larry S. Brodsky. (Exhibit 10.49 to Form 10-Q for the quarter ended September 30, 1997, File No. 1-4315). 10.49 Management Employee Transition Program, as described in correspondence to employees, dated December 11, 1997 and January 9, 1998. *10.50 Settlement Agreement (Electric Rate and Restructuring Plan) dated November 6, 1997 among the Registrant, the New York State Department of Public Service, the New York State Department of Economic Development, the National Association of Energy Service Companies, the Joint Supporters, the Industrial Energy Users Association, the Independent Power Producers of New York, Inc. and Pace Energy Project in Case 96-E-0900 - In the Matter of Orange and Rockland Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to Opinion No. 96-12. (Exhibit 99.7 to Form 10-Q for the quarter ended September 30, 1997, File No. 1-4315). 13 The Company's 1997 Annual Report to Shareholders to the extent incorporated by reference in this Form 10-K Annual Report for the fiscal year ended December 31, 1997. [Note: Except for those portions of such Annual Report expressly incorporated by reference in this Form 10-K Annual Report, such Annual Report is not deemed "filed" as part of the filing of this Form 10-K Annual Report.] *21 Subsidiaries of the Company. (Exhibit 21 to Company's Registration Statement on Form S-4, File No. 333-43953). 24 Powers of Attorney. 27 Financial Data Schedule. 70 *99.1 Joint Cooperation Agreement between the Office of the Rockland County District Attorney and Orange and Rockland Utilities, Inc., dated November 3, 1993 (Exhibit 99.1 to Form 10-Q for the quarter ended September 30, 1993, File No. 1-4315). *99.2 NYPSC Order Adopting Terms of Settlement, Issued and Effective November 26, 1997, in Case 96-E-0900. (Exhibit 99.10 to Form 8-K dated November 25, 1997, File No. 1-4315). 99.3 NYPSC Opinion (No. 97-20) and Order Adopting Terms of Settlement, Issued and Effective December 31, 1997, in Case 96-E-0900. *99.5 Agreement Between Orange and Rockland Utilities, Inc. and Kroll Associates, Inc. dated as of November 1, 1994. (Exhibit 99.5 to Form 10-Q for the period ended September 30, 1994, File No. 1-4315). + Denotes executive compensation plans and arrangements. * Incorporated by reference to the indicated filings. The securities issued relevant to each of the following agreements were not registered with the Securities and Exchange Commission and the total amount of securities authorized under each agreement does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Therefore, as provided in Item 601 of Regulation S-K, the following agreements are not filed as exhibits. The Company agrees, however, to furnish to the Commission a copy of each agreement upon request: - First Supplemental Indenture, dated August 15, 1990, to the Indenture of Mortgage and Deed of Trust of Pike County Light & Power Company. - Indenture of Trust between NYSERDA and the Bank of New York, as Trustee, relating to the Pollution Control Revenue Bonds (Orange and Rockland Utilities, Inc. Project) dated as of August 15, 1994. - Participation Agreement between NYSERDA and Orange and Rockland Utilities, Inc., dated as of August 15, 1994. - Indenture of Trust between NYSERDA and the Bank of New York, as Trustee, relating to the Pollution Control Refunding Revenue Bonds dated as of July 1, 1995. - Participation Agreement between NYSERDA and Orange and Rockland Utilities, Inc., dated as of July 1, 1995. 71 - Tenth Supplemental Indenture of Rockland Electric Company, dated as of February 1, 1997. EX-10.3 2 EMPLOYEE COMPENSATION DEFERRAL PLAN 1 EXHIBIT 10.3 ORANGE AND ROCKLAND UTILITIES, INC. ELIGIBLE EMPLOYEES' COMPENSATION DEFERRAL PLAN As Amended and Restated Effective January 1, 1998 2 ORANGE AND ROCKLAND UTILITIES, INC. ELIGIBLE EMPLOYEES' COMPENSATION DEFERRAL PLAN 1. ELIGIBILITY Each Officer of Orange and Rockland Utilities, Inc. (the "COMPANY"), or an affiliated entity which has been designated as a participating entity by the Company's Board of Directors (a "DESIGNATED AFFILIATE"), is eligible to participate in the Orange and Rockland Utilities, Inc. Eligible Employees' Compensation Deferral Plan (formerly the Orange and Rockland Utilities, Inc. Salary Deferral Plan for Officers) (the "PLAN"). In addition, each non-Officer employee of the Company or a Designated Affiliate who is in salary grade 14 or above and who is designated for participation by the Company's Vice President of Human Resources shall be eligible to participate in the Plan. Any individual who is eligible to participate hereunder shall be referred to as an "ELIGIBLE EMPLOYEE". 2. PARTICIPATION (a) Prior to December 1, 1997, or December 1 of any later calendar year, each Eligible Employee may elect to participate in the Plan by directing that all or any part of the base salary otherwise payable for services as an employee of the Company or a Designated Affiliate during the following calendar year and subsequent calendar years shall be credited to a deferred compensation account (the "PARTICIPANT'S ACCOUNT"), subject to the terms of the Plan. For purposes of this Section 2, base salary does not include any severance payments after termination of employment. Prior to December 1, 1997, or December 1 of any later calendar year, each Eligible Employee may also elect to participate in the Plan by directing that all or any part of the Orange and Rockland Utilities, Inc. Annual Team Incentive Plan ("ATIP") award otherwise payable in the following calendar year and subsequent calendar years be credited to the 3 Participant's Account, subject to the terms of the Plan. An Eligible Employee who wishes to participate in the Plan may elect the deferral of base salary, the deferral of ATIP awards, or the deferral of both. Any person who shall become an Eligible Employee during any calendar year and who was not an Eligible Employee prior to the beginning of such calendar year may elect to begin deferring all or any part of his or her base salary and ATIP awards effective as of the first day of the following calendar year, provided such deferral election is made in accordance with paragraph 2(b) below before December 1 of the year in which such person becomes an Eligible Employee. Notwithstanding the foregoing, any person who shall become an Eligible Employee during December of any calendar year and who was not an Eligible Employee prior to the beginning of such calendar year may elect to defer payment of all or any part of his or her base salary and ATIP awards effective as of the first day of the following calendar year, provided that a deferral election is made in accordance with paragraph 2(b) below by December 31 of the year in which he or she becomes an Eligible Employee. Notwithstanding the foregoing, (i) no election to defer base salary or ATIP awards shall be permitted if the combined annual amount that is deferred is less than $3,500; and (ii) no deferral election shall be effective to reduce the amount payable to an Eligible Employee below the amount that the Company is required to withhold from such Eligible Employee's base salary or ATIP award (whichever is applicable) for purposes of federal, state, and local (if any) income tax and employment tax (including Federal Insurance Contributions Act (FICA) tax) withholding. (b) An Eligible Employee shall become a participant (a "PARTICIPANT") in the Plan by filing a written deferral election and other necessary documents and agreements with the Orange and Rockland Utilities, Inc. Retirement Committee (the "COMMITTEE") -2- 4 or its designee within the time specified in paragraph 2(a). An election related to base salary otherwise payable with respect to services as an employee in a calendar year shall become irrevocable as of the last day of the calendar year preceding such calendar year. An election related to ATIP awards otherwise payable in a calendar year shall also become irrevocable as of the last day of the calendar year preceding such calendar year. An election to defer base salary shall continue in effect until a Participant ceases to be an Eligible Employee or until the Participant terminates or modifies such election by written notice filed with the Committee or its designee. Any notice of termination or modification with respect to the deferral of base salary that is received before December 1 of a calendar year shall be effective with respect to base salary payable for services in subsequent calendar years. An election to defer ATIP awards shall continue in effect until a Participant ceases to be an Eligible Employee or until the Participant terminates or modifies such election by written notice filed with the Committee or its designee. Any notice of termination or modification with respect to the deferral of ATIP awards that is received before December 1 of a calendar year shall be effective with respect to ATIP awards payable in subsequent calendar years. Amounts credited to a Participant's Account prior to the effective date of the termination or modification shall not be affected by such termination or modification and shall be distributed only in accordance with the terms of the Plan. (c) A Participant who has filed a termination of election to defer with respect to base salary and/or ATIP awards may thereafter file another written deferral election with the Committee or its designee. Any such deferral election that is received before December 1 of a calendar year shall be effective as of the first day of the following calendar year. -3- 5 3. THE PARTICIPANT'S ACCOUNT (a) All amounts deferred hereunder with respect to periods on and after January 1, 1998 shall be credited to the Participant's Account as of the last business day of the month in which such amounts would otherwise have been paid and shall be credited with a rate of return as provided in paragraphs 3(b) and 3(c). Each Participant's Account shall consist of up to two subaccounts: (i) an "INTEREST ACCOUNT", which shall consist of deferred amounts for periods prior to January 1, 1998 which were not transferred to the Investment Account at the Participant's election in accordance with paragraph 3(b), and (ii) an "INVESTMENT ACCOUNT", which shall consist of deferred amounts for periods on and after January 1, 1998, and amounts transferred from the Interest Account at the Participant's election in accordance with paragraph 3(b). These subaccounts may be further divided into additional subaccounts. The establishment and maintenance of, or credits to, the Participant's Account and any subaccounts shall not vest in the Participant or the Participant's Beneficiary any right, title, or interest in and to any specific assets of the Company. (b) Interest shall be credited on amounts in the Interest Account, commencing on the date the deferred amounts would otherwise have been paid, as follows: (i) for deferrals of one year or longer, at a rate per annum for each calendar quarter that is a rate equivalent to the Company's latest allowable rate of return in effect from time to time as set by the Department of Public Service of the State of New York (the "NEW RATE"); amounts so determined shall be compounded at the end of each calendar quarter and credited to the Interest Account; provided, however, that, with respect to any final distribution from an Interest Account that is not valued as of the close of a calendar quarter, interest shall be credited to the Interest Account as of the date of valuation for distribution, based on the daily balances of the Interest Account for such period; and (ii) for deferrals of less -4- 6 than one year, at a simple annual interest rate equal to the lesser of the Prime Rate (the base rate on corporate loans at large money center commercial banks as reported in The Wall Street Journal) for the first business day of the calendar year of the year of deferral or the New Rate as of the first business day of the calendar year of the year of deferral. Amounts credited to the Interest Account shall continue to be credited with interest until valued for purposes of distribution or transfer in accordance with the terms of this Plan. Notwithstanding the foregoing, each Participant with an Interest Account will be given a one-time opportunity to elect prior to December 1, 1997 to have the entire balance of his or her Interest Account, valued as of December 31, 1997, transferred to his or her Investment Account as of January 1, 1998. Any balances so transferred will be credited with a rate of return under paragraph 3(c) on and after January 1, 1998. (c)(1) As of the last business day of a month in which a deferred payment for periods on or after January 1, 1998 would otherwise have been paid to a Participant, the deferral shall be credited to the Participant's Investment Account. Such amount shall be credited with a deemed rate of return, in accordance with the remainder of this paragraph 3(c), from that date until the appropriate valuation date for distribution. (2) A Participant shall be given the opportunity to specify the investment funds (the "INVESTMENT FUNDS") in which his or her Investment Account shall be deemed to be invested. The Investment Funds shall be selected by the Committee, and such Investment Funds may be changed from time to time in the Committee's discretion. (3) Each Participant shall specify in the manner designated by the Committee or its designee, in whole numbers, the percentage of his or her deferrals which shall be deemed to be invested in one or more of the available Investment Funds, -5- 7 which percentage for each Investment Fund selected must be at least 10%. Such investment election shall remain in effect until changed in accordance with paragraph 3(c)(5) below. If a Participant fails to select any Investment Funds, he or she shall be deemed to have failed to make a valid deferral election with respect to any amounts which were to have been credited to the Investment Account. (4) As of the last business day of each calendar month, the Participant's Investment Account shall be credited with earnings or losses based upon the rates of return of the Investment Funds in which such Investment Account is deemed to be invested. (5) A Participant may elect to change, as of the last business day of a calendar quarter, his or her Investment Fund election with respect to subsequent deferrals; provided, however that the deemed investment percentage with respect to each Investment Fund selected must be a whole number equal to at least 10% of the amount to be deferred. Such change shall be made by giving advance notice in the manner established by the Committee, and shall be effective for any deferrals thereafter credited to the Investment Account, until another change is made in accordance with this paragraph 3(c)(5). (6) A Participant may elect to reallocate the then-current balance of the Investment Account among the then-available Investment Funds, subject to any limitations imposed by the Committee, as of the last business day of any calendar quarter. Such reallocation must be in whole percentages, and the amount allocated to any one Investment Fund selected must be at least 10% of the funds in the Participant's Investment Account as of the last business day of the calendar quarter. A Participant shall make such an election by giving notice in the manner established by the Committee or its designee. -6- 8 (7) The election among the available Investment Funds shall be the sole responsibility of each Participant. The Company, the Committee, and their delegates are not authorized to make any recommendations to any Participant with respect to such election. Each Participant assumes all risk in connection with any election of Investment Funds and the adjustment to the value of his or her Investment Account as the result of changes to the value of such Investment Funds. Neither the Company nor the Committee in any way guarantees against loss with respect to an Investment Account. (8) All payments from the Investment Account shall be recorded as having been made proportionately from each available Investment Fund in which the Investment Account is deemed to be invested at the time of payment. (d) The Participant's Account shall be 100% vested at all times. 4. DISTRIBUTION FROM THE PARTICIPANT'S ACCOUNT AFTER TERMINATION OR DEATH (a) At the time of his or her election to become a Participant in the Plan under paragraph 2(b), an Eligible Employee shall also make a written election with respect to the distribution of amounts credited to the Participant's Account (an "INITIAL ELECTION"). Such Participant's Account shall be distributed in one lump-sum payment or in some other number of ratable annual installments (not exceeding 10); provided, however, that installments will only be available if, as of the valuation date for the initial distribution, the total of the Participant's Account hereunder and any accounts maintained for the Participant under the Orange and Rockland Utilities, Inc. Long-Term Performance Share Unit Plan is greater than $25,000. The first installment (or the single lump-sum payment if the Participant has so elected) of amounts in the Participant's Account shall be paid as soon as practicable after -7- 9 (i) the first business day of the calendar year immediately following the year in which the Participant ceases to be an employee of the Company, or (ii) the first business day of such other calendar year as the Participant shall have elected. Subsequent installments of amounts in the Participant's Account shall be paid as soon as practicable after the first business day of each succeeding calendar year until the entire amount credited to the Participant's Account shall have been paid. Amounts to be paid in a calendar year shall be based upon the value of the Participant's Account as of the last business day of the preceding calendar year. The "ratable" amount distributable in any given installment shall equal the sum of the balances of the Interest Account and the Investment Account, divided by the number of installments (including the given installment) remaining to be distributed. Installments shall initially be paid from the Interest Account. When the Interest Account has a zero balance, the remaining payments shall be made from the Investment Account. Notwithstanding the provisions of this paragraph 4(a), a Participant may make such other election as shall be approved by the Committee. (b) A Participant may, while an Eligible Employee, at any time modify any Initial Election or prior modification of an election with respect to the distribution of amounts credited or to be credited to the Participant's Account. The Participant's modification may relate to distributions of amounts to be credited with respect to calendar years that commence on and after the effective date of such modification, and/or to distributions of amounts credited with respect to calendar years that commenced prior to the effective date of such modification ("PRIOR SERVICE AMOUNTS", which includes any interest and earnings); provided, however, that any modification with respect to Prior Service Amounts may only provide for the further deferral of such Prior Service Amounts. In the event that a -8- 10 Participant has made more than one modification of his or her distribution election with respect to specific amounts credited or to be credited to his or her Participant's Account, the most recent such modification shall control the distribution of such amounts. Any modification of a distribution election made prior to December 1 of a calendar year shall become effective as of such December 1 with respect to Prior Service Amounts and as of the first day of the following calendar year with respect to deferrals on and after such date. (c) If a Participant should die before payment in full of all amounts credited to the Participant's Account, the balance of the Participant's Account shall be paid to the Beneficiary in accordance with the distribution election of the Participant pursuant to paragraph 2(a) or such other election that the Participant shall have made pursuant to Section 6. Notwithstanding the foregoing, a Beneficiary who is receiving installment payments may file a written election with the Committee to have the remaining balance in the Participant's Account (or such lesser portion that is to be paid in the form of installments) distributed in the form of a cash lump sum payment, subject to a 10% penalty. Amounts shall be distributed as soon as possible after the end of the month in which the Beneficiary's written lump sum election is received, and the Participant's Account shall be valued for this purpose as of the last business day of the month which precedes the month of distribution. (d) The Company shall deduct from the distributions to be made from a Participant's Account any federal, state, or local withholding or other taxes or charges which the Company is from time to time required to deduct under applicable law. 5. IN-SERVICE WITHDRAWALS (a) Notwithstanding the provisions of paragraph 2(b) or the terms of an election made pursuant to paragraph 4(a), the Board of Directors in its sole discretion may, without penalty, -9- 11 accelerate payment of all or any portion of amounts credited to the Participant's Account (i) to the extent necessary to meet a serious financial hardship resulting from an event or events beyond the control of the Participant, or (ii) in the event of a final determination that the Participant must include all or any portion of such amounts in gross income for federal income tax purposes even though such amounts have not been distributed from the Participant's Account. A Participant who wishes to receive a withdrawal under this paragraph 5(a) shall file a written request for withdrawal with the Retirement Committee. (b) At any time prior to his or her termination of employment from the Company and all Affiliates, a Participant may elect to withdraw all or any portion of the amount credited to his or her Participant's Account, subject to a 10% withdrawal penalty. The Participant may make such an election by filing a written notice with the Committee or its designee on a form provided by the Committee or its designee, and the amount withdrawn shall be paid to the Participant in a cash lump sum payment. Upon the payment of such withdrawal, (a) an amount equal to one-tenth of the amount withdrawn shall be forfeited, (b) the Participant shall cease to participate in the Plan for the remainder of the calendar year in which the withdrawal occurs and shall be ineligible to participate during the calendar year immediately following the calendar year in which the withdrawal occurs, and (c) any deferral elections made by the Participant for such periods shall be terminated. (c) In-service withdrawals shall be made as soon as practicable following the end of the month in which the Participant's notice of withdrawal is received by the Committee (or, if later, the end of the month in which any necessary approval is granted by the Board of Directors). The amounts withdrawn under this Section 5 shall be (i) taken first from the Interest Account, and then from the Investment Account, and -10- 12 (ii) valued as of the last business day of the month prior to the date of distribution. 6. DESIGNATION OF BENEFICIARIES AND ELECTION Each Participant shall file with the Committee a written designation of one or more persons who shall be entitled to receive the amount, if any, payable from his or her Participant's Account upon the Participant's death (the "BENEFICIARY"); provided, however, that if the Participant has a spouse, the spouse shall be the Participant's Beneficiary unless the spouse consents in a notarized writing, on a form provided by or acceptable to the Committee or its designee, to the designation of the non-spouse Beneficiary. A Participant may from time to time revoke or change the Participant's Beneficiary designation by filing a new designation with the Committee, subject to the spousal consent requirements set forth in the preceding sentence. The last such Beneficiary designation received by the Committee shall be controlling; provided, however, that no designation or change or revocation thereof shall be effective unless received by the Committee prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. If no such Beneficiary designation is in effect at the time of a Participant's death, or if no designated Beneficiary survives the Participant, or if such designation conflicts with law, (i) the Participant's spouse, or, (ii) if none, the Participant's estate, shall be the Beneficiary entitled to receive the amount, if any, payable under the Plan upon the death of the Participant. If the Committee is in doubt as to the right of any person to receive such amount, the Company may retain such amount, without liability for any interest thereon, until the Committee determines the rights thereto, or the Company may pay such amount into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Company therefor. The Participant may make -11- 13 an election for distributions to the Beneficiary as shall be approved by the Committee. 7. MISCELLANEOUS (a) The right of any Participant or other person to any amount under the Plan may not be assigned, transferred, pledged, or encumbered, either voluntarily or by operation of law, except as provided in Section 5 with respect to designation of Beneficiaries or as may otherwise be required by law. If by reason of any attempted assignment, transfer, pledge, or encumbrance, or any bankruptcy or other event happening at any time, any amount payable from a Participant's Account to a Participant or the Participant's Beneficiary would be made subject to the debts or liabilities of the Participant or the Participant's Beneficiary, or would otherwise devolve upon anyone else and not be enjoyed by the Participant or the Participant's Beneficiary, the Committee may, in the Committee's sole discretion, terminate such person's interest in any such payment and direct that the same be held and applied to or for the benefit of the Participant, the Participant's Beneficiary or any other person deemed to be the natural subject of the Participant's bounty (taking into account the expressed wishes of the Participant, or, in the event of the Participant's death, those of the Participant's Beneficiary), in such manner as the Committee may deem proper. (b) All payments provided for from a Participant's Account shall be paid in cash from the general funds of the Company; provided, however, that such payments shall be reduced by the amount of any payments made to the Participant or the Participant's dependents, Beneficiaries, or estate from the trust (the "TRUST") established by the Company to assist it in making such payments. The Company shall transfer to the Trust with respect to each Participant an amount equal to the base salary deferred by that Participant under the Plan with respect to services performed on or after January 1, 1998, and an amount -12- 14 equal to the ATIP awards deferred by that Participant under the Plan with respect to awards payable after January 1, 1998, and may also transfer such other amounts at such times as it shall determine in its sole discretion. Participants shall have no right, title, or interest whatever in or to any assets of the Trust related to the Plan. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. (c) Copies of the Plan and any and all amendments thereto shall be made available to all Participants and Beneficiaries at all reasonable times at the office of the Vice president of Human Resources. (d) The Plan shall be administered by the Committee, which shall have full power, discretion, and authority to interpret, construe, and administer the Plan and any part thereof. The Committee's interpretations and constructions of the Plan, and the actions taken thereunder by the Committee, shall, except as otherwise determined by the Board of Directors of the Company, be binding and conclusive on all persons for all purposes. (e) The Board of Directors may at any time amend or terminate the Plan. No amendment or termination of the Plan shall impair the rights of any person with respect to amounts then in the Participant's Account. (f) The Company, its Officers, and its Board of Directors shall have the right to rely upon a written opinion of legal counsel, which may be independent legal counsel or legal counsel regularly employed by the Company, if any question should arise as to any distribution from a Participant's Account or any obligation under the Plan. -13- 15 (g) Each Participant in the Plan shall receive a quarterly statement indicating the amount credited to his or her Participant's Account as of the end of the preceding calendar quarter. (h) All elections, designations, requests, notices, instructions and other communications from an Eligible Employee, Participant, Beneficiary, or other person to the Committee or the Board of Directors of the Company, required or permitted under the Plan, shall be in such form as is prescribed from time to time by the Committee and shall be mailed by first class mail or delivered to such location as shall be specified by the Committee. (i) The terms of the Plan shall be binding upon the Company and its successors and assigns. (j) The Plan shall be governed by and construed in accordance with the laws of the State of New York, as from time to time in effect, and any applicable federal laws. (k) To the extent permitted by law and provided for in such other plan, any election to defer base salary and ATIP awards under the Plan shall be disregarded for the purpose of computing benefits under any employee benefit plan of the Company or a Designated Affiliate. (l) The Plan was originally effective as of December 1, 1986. This amendment and restatement is effective as of January 1, 1998, except as otherwise provided herein. 8. CHANGE IN CONTROL; POTENTIAL CHANGE IN CONTROL (a) Notwithstanding anything else herein to the contrary, in the event of the occurrence of a Change in Control or Potential Change in Control, if any, each Participant shall have the right to receive, and shall be paid, as soon as practicable after the end of the month in which such event -14- 16 occurs, a lump sum cash amount equal to the value of the Participant's Account as of the last business day of the month in which such Change of Control or Potential Change in Control occurs; and any prior election of such Participant to defer the payment of base salary and/or ATIP awards shall become null and void. (b) A "CHANGE IN CONTROL" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 20% or more of either the then-outstanding Company Common Stock, $5 par value per share (or any successor common stock) ("SHARES") or the combined voting power of the Company's then-outstanding securities; (ii) the following individuals cease for any reason to constitute a majority of the number of Directors then serving: individuals who, on April 1, 1997, constituted the Board of Directors of the Company and any new Director (other than a Director whose initial assumption of office is in connection with an actual or threatened election contest, including, but not limited to, a consent solicitation, relating to the election of Directors of the Company (as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act)) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors on April 1, 1997 or whose appointment, election or nomination for election was previously so approved; -15- 17 (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation or approve the issuance of voting securities of the Company in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 65% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 20% or more of either the then-outstanding Shares or the combined voting power of the Company's then-outstanding securities; or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 65% of the combined voting power of the voting -16- 18 securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, no "Change in Control" shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of Shares immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (c) A "POTENTIAL CHANGE IN CONTROL" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) the Company or any Person publicly announces an intention to take or to consider taking actions which if consummated, would constitute a Change in Control; (iii) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of either the then-outstanding securities; or the combined voting power of the Company's then-outstanding securities; or (iv) the Board of Directors adopts a resolution to the effect that, for purposes of any severance agreement to which the Company is a party, a Potential Change in Control has occurred. (d) "BENEFICIAL OWNER" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. -17- 19 (e) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (f) "PERSON" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. -18- EX-10.13 3 SEVERENCE PAY PLAN 1 EXHIBIT 10.13 ORANGE AND ROCKLAND UTILITIES, INC. SEVERANCE PAY PLAN AS AMENDED AND RESTATED ON NOVEMBER 6, 1997 SECTION 1. PURPOSE The purpose of the Orange and Rockland Utilities, Inc. Severance Pay Plan is to encourage salaried employees to make and continue careers with Orange and Rockland Utilities, Inc. by providing Eligible Employees with certain severance pay benefits as defined in Department of Labor Regulation Section 2510.3-2(b) and as set forth in the Plan upon such Employees' Termination Of Employment for the Company's Convenience or termination following a Change in Control of the Company. This document represents both the Plan Document and the Summary Plan Description for the Plan. As such, the Appendix contains important summary plan description information about the Plan which is required by ERISA. SECTION 2. DEFINITIONS When used herein the following terms shall have the following meanings: 2.1 "Board of Directors" means the Board of Directors of Orange and Rockland Utilities, Inc. 2.2 "Cause" means that (a) the Employee is convicted of a crime or engages in an act of moral turpitude; (b) the Employee breaches any of his or her obligations under any employment agreement governing his or her employment; (c) the Employee is grossly negligent or engages in gross misconduct while rendering services to or for the Company or any of its subsidiaries; (d) the Employee repeatedly fails to follow written Company policies or guidelines that have been expressly approved by the Company; (e) the Employee's discharge is as a result of poor or unsatisfactory performance; 2 or (f) where applicable, the Employee breaches any of his or her fiduciary duties as an officer or director of the Company or a subsidiary or affiliated company. 2.3 "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (a) (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 20% or more of either the then-outstanding Company Common Stock, $5 par value per share (or any successor common stock) ("Shares") or the combined voting power of the Company's then-outstanding securities; (ii) the following individuals cease for any reason to constitute a majority of the number of Directors then serving: individuals who, on April 1, 1997, constituted the Board of Directors of the Company and any new Director (other than a Director whose initial assumption of office is in connection with an actual or threatened election contest, including, but not limited to, a consent solicitation, relating to the election of Directors of the Company (as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act)) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors on April 1, 1997 or whose appointment, election or nomination for election was previously so approved; (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation or approve the issuance of voting securities of the Company in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted 3 into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 65% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 20% or more of either the then-outstanding Shares or the combined voting power of the Company's then-outstanding securities; or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 65% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, no "Change in Control" shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of Shares immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (b) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (c) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 4 (d) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. 2.4 "Company" means Orange and Rockland Utilities, Inc., and any subsidiary or affiliated company as may be specifically included by the Board of Directors for coverage under this Plan, and any successor thereto. 2.5 "Compensation" means an Employee's annual base salary as in effect on the last day the Employee worked for the Company or, in the case of an Involuntary Termination caused by a reduction in Compensation, the day immediately before such reduction. 2.6 "Employee" or "Eligible Employee" means any individual employed by the Company who has completed one Year of Service and who is not included in a unit of employees covered by a negotiated collective bargaining agreement. 2.7 "ERISA" means the Employee Retirement Income Security Act of 1974, as now in effect or as hereafter amended. 2.8 "Involuntary Termination" means any termination of an Employee's employment with the Company within two years after a Change in Control, either: (a) by the Company, other than for Cause, or (b) by an Employee within 180 days after any material reduction in the Employee's responsibilities, title, authority, or status, reassignment to another geographic location more than 50 miles from the Employee's place of employment, or reduction in the Employee's Compensation, but excluding in any event termination of employment by reason of retirement, death or disability. 5 2.9 "Plan" means the Orange and Rockland Utilities, Inc. Severance Pay Plan as set forth herein and as may be amended from time to time. 2.10 "Severance Period" means the period an Employee is entitled to receive bi-monthly severance payments in accordance with Section 3 of the Plan. 2.11 "Termination of Employment for the Company's Convenience" means termination of an Employee's employment by action of the Company, other than for Cause, but shall not include situations where the Employee refused a transfer or offer of employment (even if the terms and conditions of employment are not the same as the prior employment with the Company) (a) with the Company (or any of its related entities); or (b) with a buyer of stock, assets or an operation of the Company or with a resulting entity in a merger, division, consolidation or reorganization. 2.12 "Year of Service" means a period, commencing on or after the Employee's most recent date of hire by the Company, of 12 consecutive months during which the Employee was employed by the Company in a regular or part-time capacity. For the purpose of calculating an Employee's benefit payments under Section 3.1, any fraction of a month shall be credited as a full month, and any fractional Year of Service in excess of at least a full Year of Service will result in a payment under Section 3.1 on a prorated basis with respect to such fractional Year of Service (subject to the overall minimums and maximums otherwise applicable). 6 SECTION 3. SEVERANCE BENEFITS 3.1 Upon a Termination of Employment for the Company's Convenience of an Employee, and if the Employee executes an Agreement and General Release in favor of the Company in a form acceptable to the Company (including by way of illustration and not limitation, agreement not to disclose confidential information, agreement to return all property of the Company prior to leaving, agreement not to compete, and release of employment claims involving the Company and related parties, including statutory claims and protections), Employee shall be entitled to receive a severance payment or payments in an aggregate amount equal to the product obtained by multiplying (a) the Employee's Compensation, and (b) 1/52 for each week of the Employee's coverage derived from, but in no event less than the minimum nor more than the maximum set forth in, the table below (hereinafter the "Severance Period"):
If the Employee's Salary Grade Weeks of Coverage Per Year of Minimum Maximum is: Service - --------------------------------------------------------------------------------------------------- 1 - 10 1 1/2 Weeks 3 Weeks 26 Weeks - --------------------------------------------------------------------------------------------------- 11 - 17 2 1/2 Weeks 6 Weeks 40 Weeks - --------------------------------------------------------------------------------------------------- 18 or Greater 3 Weeks 8 Weeks 52 Weeks - ---------------------------------------------------------------------------------------------------
The Employee's right to receive severance pay under this Plan shall cease upon the earlier of (i) the expiration of his or her Severance Period; or (ii) such time as the Employee is employed by another employer on a full-time basis. 7 3.2 Upon an Involuntary Termination, an Employee shall be entitled to receive a severance payment in an amount equal to the product obtained by multiplying (a) the Employee's Compensation, and (b) 1/52 for each week of coverage derived from the table below: -------------------------------------------------- If the Employee's Weeks of Coverage Salary Grade is: -------------------------------------------------- 1 - 10 26 -------------------------------------------------- 11 - 17 40 -------------------------------------------------- 18 or Greater 52 -------------------------------------------------- 3.3 Notwithstanding any other provision of the Plan, the Company, by action of the General Counsel and the Vice President, Human Resources, may also award severance payments under the Plan for an Employee's termination that does not otherwise satisfy the eligibility requirements set forth or may in individual situations alter the amount, form and timing of severance payments otherwise provided. Discretionary severance payments for any Employee under this Section 3.3 shall not establish any precedent or right to payments for any other Employee, regardless of whether that Employee is similarly situated to the Employee receiving payments. 3.4 Severance payments made under the Plan are made in recognition of the permanent termination of the employment relationship between the Employee and the Company. Accordingly, such payments do not continue the employment relationship for the Severance Period or any other time period. Severance payments are not compensation for purposes of any pension or retirement program of the Company and the Severance Period is not service under such programs. However, former Employees are entitled to continue to participate in any group life, medical and dental insurance benefit plans maintained by the Company through the last day of their Severance Period under the Plan, and their participation in such plans shall continue thereafter in accordance with the terms of such plans and applicable 8 law; provided, however, that, any such benefits during the Severance Period shall cease upon the Employee's obtaining subsequent full-time employment. 3.5 Within thirty (30) calendar days of his or her termination, the Company shall pay to an Employee any accrued but unused floating holidays or vacation, in accordance with existing Company policy governing such benefits. SECTION 4. PAYMENTS 4.1 An Employee's severance payments pursuant to Section 3 shall be paid in bi-monthly installments, equal in amount to the Employee's bi-monthly rate of Compensation (or such other amount established under Section 3.3), beginning on the first regular payroll date following such termination and ending upon the expiration of the Severance Period; provided, however, that, in the event of an Employee's Involuntary Termination following a Change in Control, all payments shall be made in a single lump sum cash payment, with no reduction for acceleration of payment, within thirty (30) calendar days after such Involuntary Termination. Upon a Change in Control, the Company within thirty (30) calendar days shall pay to any former Employee whose Severance Period has not expired all pending and unpaid severance payments due under Section 3 of this Plan for which the Employee has not received payment via a lump sum cash payment with no reduction for acceleration of payment. 4.2 All severance payments provided for under this Plan shall be paid in cash from the general funds of the Company with whom the former Employee was employed; provided, however, that such payments shall be reduced by the amount of any payments made to the Employee or his or her dependents, beneficiaries or estate from any trust or special or separate fund established by the Company to assure such payments. The Company shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company shall make any investments to aid it in meeting its obligations hereunder, the Employee shall have no right, title, or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such 9 investments. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind between the Company and any persons. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company. 4.3 The Company may deduct from severance payments any federal, state or local withholding or other taxes or charges which it is required to deduct under applicable laws. SECTION 5. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN 5.1 At any time prior to the occurrence, if any, of a Change in Control, the Board of Directors shall have the power to amend, suspend or terminate this Plan in whole or in part and for any reason and in any way, including for the purpose of reducing or eliminating benefits not then in pay status or restricting eligibility criteria. 5.2 Upon the occurrence of a Change in Control, and for a period of two years thereafter, this Plan may not be amended, suspended or terminated. SECTION 6. MISCELLANEOUS 6.1 Nothing contained in the Plan shall be construed to create a contract of employment or otherwise provide any Employee the right to be retained in the employment of the Company or any of its affiliated or associated corporations or affect the right of any such employer to dismiss any Employee. 6.2 If any former Employee to whom payments under the Plan are still due and payable dies, such remaining payments will be made to the beneficiary last designated under his or her Company-provided life insurance; and, if none, to his or her surviving spouse; and, if none, to his or her estate. When a payment is due under the Plan to a former Employee or other 10 person who is unable to care for his or her affairs, unless a prior proper claim therefore has been made by a duly appointed legal representative, the payments may be made to his or her spouse, children, relative, an institution maintaining or having custody of the former Employee or other person, or any other person deemed by the Company to be the proper recipient on behalf of such former Employee or other person. Any such payment shall be in complete discharge of the liability under the Plan for payment to the former Employee or other person. 6.3 Except insofar as may otherwise be required by ERISA, no amount payable at any time under this Plan shall be subject in any manner to alienation, anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind or in any manner be subject to the debts or liabilities of any person and any attempt so to alienate or subject any such amount, whether at the time or thereafter payable, shall be void. If any person shall attempt to, or shall, alienate, sell, transfer, assign, pledge, attach, charge or otherwise encumber any amount payable under this Plan, or any part thereof, or if by reason of his or her bankruptcy or other occurrence at any time such amount would be made subject to his or her debts or liabilities or would otherwise not be enjoyed by him or her, then the Company, if it so elects, may direct that such amount be withheld and that the same amount or any part thereof be paid or applied to or for the benefit of such person, in such manner and proportion as the Company may deem proper. 6.4 The Company shall have general responsibility for the administration and interpretation of the Plan. The Vice President of Human Resources shall act on behalf of the Company in this regard as Plan Administrator, unless another Plan Administrator is appointed by action of the Board of Directors. The Plan Administrator may adopt such rules, policies and procedures as are deemed necessary for the proper administration of the Plan. The Plan Administrator shall have such discretion, power and authority as is necessary to carry out the provisions of the Plan, including but not limited to the discretion, power and authority to construe and interpret the Plan; make determinations of fact with respect to application of the Plan and claims under the Plan; decide all questions of eligibility; and determine the amount, time and manner of payment of any Plan benefits. 11 The Plan Administrator and its delegates shall discharge their duties with respect to the Plan solely in the interest of the Plan participants and shall do so with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would have in the conduct of an enterprise of a like character and with like aims. The Plan Administrator shall at all times act in accordance with the terms and conditions of the Plan, any applicable law, and any authoritative rules, regulations, or judicial decisions which govern the operation and administration of the Plan. 6.5 Participants may make a claim for Plan benefits by filing a written application for benefits with the Plan Administrator, who shall make all determinations as to the right of any Participant to receive a benefit under the Plan and the amount of such benefit. If a claim is wholly or partially denied, written notice of the decision shall be furnished by the Plan Administrator to the claimant within ninety (90) days after receipt of the claim, or, if special circumstances require an extension of time for processing the claim, within one hundred and eighty (180) days after receipt of the claim (in which case the claimant will be informed of the delay during the initial 90-day period). Such notice shall be written in a manner calculated to be understood by the claimant and shall include: (i) the specific reason or reasons for the denial; (ii) specific reference to pertinent Plan provisions on which the denial is based; (iii) an explanation of any additional material or information necessary for the claimant to perfect the claim and a statement of why such material or information is necessary; and (iv) an explanation of the Plan's appeal procedure. If the claim has not been granted and such notice is not furnished within the period of time specified above, the claim shall be deemed denied for the purpose of proceeding to appeal as described below. If a claim is denied in whole or in part, the claimant shall have the right to request a full and fair review of the denial by the Retirement Committee, or by such other committee as may be appointed by the Board of Directors to serve hereunder. Such request must be made in writing and must be delivered to the Plan Administrator within sixty (60) days of receipt of the written notice of claim denial (or within sixty (60) days of the date on 12 which such claim is deemed to be denied if notice is not received within the applicable time periods described above). In such review, the claimant or his/her duly authorized representative shall have the right to review any pertinent Plan documents and to submit any issues or comments in writing. In the sole discretion of the Retirement Committee, the Retirement Committee may arrange to meet personally with the claimant and/or the claimant's representative or have a hearing for the purpose of understanding the claimant's position and any related evidence which the claimant wishes to offer. The Retirement Committee, within sixty (60) days after receipt of the request for review, or, in special circumstances such as where the Retirement Committee in its sole discretion finds there is a need to hold a hearing, within one hundred and twenty (120) days of receipt of the request for review (in which case, notice of the delay will be given to the claimant during the initial sixty (60) day period) shall give written notice of its decision to the claimant in writing. The notice shall be written in a manner calculated to be understood by the claimant, with specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. If the claim has not been granted and the notice is not furnished within the period of time specified above, the claim shall be deemed to be denied. If a Participant does not follow the claim and appeal procedure described above, then the right to appeal benefit determinations under the Plan is waived. In addition, all determinations by and decisions under the claim and appeal procedures are binding and conclusive as to such Participants. 6.6 If any provision of the Plan is determined to be invalid or unenforceable, the remaining Plan provisions shall remain in full force and effect (subject to the amendment and termination provisions of Sections 5.1 and 5.2) and shall be interpreted and construed without reference to the invalid provisions. The captions preceding the Sections of this Plan have been 13 inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provision of this Plan. 6.7 This Plan and all rights hereunder shall be governed by and construed in accordance with the laws of the State of New York to the extent permitted by ERISA. 6.8 This Plan is effective with respect to Eligible Employees whose termination of employment with the Company occurs on or after November 6, 1997. With respect to those Employees, except for any individual agreements, this Plan constitutes the entire Company severance pay obligation, and it supersedes all other or prior separation or severance pay plans, policies or programs, oral or written. 14 APPENDIX Required Summary Plan Description Information The Orange and Rockland Utilities, Inc. Severance Pay Plan is a welfare benefit plan providing severance payments to eligible Employees. Name and Address of Plan Sponsor: Name, Address and Phone Number of Plan Administrator: Orange and Rockland Utilities, Inc. Vice President of Human Resources One Blue Hill Plaza Orange and Rockland Utilities, Inc. Pearl River, NY 10965 One Blue Hill Plaza Pearl River, NY 10965 (914) 352-6000 Employer Identification Number: Plan Number: 13-1727729 511 Agent Designated for Acceptance of Legal Plan Year: Process: Calendar Year (January 1-December 31) The Plan Administrator is the agent for service of legal process for matters concerning the Plan, at the address shown above.
Statement of ERISA Rights "As a participant in this plan you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all plan participants shall be entitled to: "Examine, without charge, at the plan administrator's office and at other specified locations, such as worksites and union halls, all plan documents, including insurance contracts, collective bargaining agreements and copies of all documents filed by the plan with the U.S. Department of Labor, such as detailed annual reports and plan descriptions." 15 "Obtain copies of all plan documents and other plan information upon written request to the plan administrator. The administrator may make a reasonable charge for the copies." "Receive a summary of the plan's annual financial report. The plan administrator is required by law to furnish each participant with a copy of this summary annual report." "In addition to creating rights for plan participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate your plan, called 'fiduciaries' of the plan, have a duty to do so prudently and in the interest of you and other plan participants and beneficiaries. No one, including your employer, your union, or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit or exercising your rights under ERISA. If your claim for a benefit is denied in whole or in part you must receive a written explanation of the reason for denial. You have the right to have the plan review and reconsider your claim. Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the plan and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the plan administrator to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the administrator. If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that plan fiduciaries misuse the plan's money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous. If you have any questions about your plan, you should contact the plan administrator. If you have any questions about this statement or about your rights under ERISA, you should contact the nearest 16 Area Office of the U.S. Labor-Management Services Administration, Department of Labor." EX-10.22 4 FORM OF SEVERENCE AGREEMENT 1 EXHIBIT 10.22 ORANGE AND ROCKLAND UTILITIES, INC. FORM OF SEVERANCE AGREEMENT THIS AGREEMENT, effective this ___th day of _______, 19__ by and between Orange and Rockland Utilities, Inc. (the "Company") and _____________________ (the "Employee"). W I T N E S S E T H T H A T WHEREAS, the Employee is an integral part of the Company's management who participates in the decision making process relative to planning and policy for the Company; and WHEREAS, on January 3, 1991 the Board of Directors of the Company determined that it would be in the best interests of the Company and its shareholders to assure continuity in the management of the Company's administration and operations in the event of a Change in Control by entering into a severance agreement with the officers of the Company; and WHEREAS, the Board of Directors of the Company approved the hiring of the Employee as ______________ of the Company on _______, 19__; and WHEREAS, the Company wishes to encourage the Employee to continue his/her services with the Company for the period during and after an actual or threatened Change in Control; and NOW THEREFORE, it is hereby agreed by and between the parties hereto as follows: 1. Definitions. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. "Board" shall mean the Board of Directors of the Company. 2 "Cause" shall mean (a) the Employee's conviction of a felony or (b) the Employee's fraud or dishonesty which has resulted or is likely to result in material economic damage to the Company, as determined in good faith by a vote of 2/3 of the non-employee directors of the Company at a meeting of the Board of Directors at which the Employee is provided an opportunity to be heard. "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company (as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act)) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved; or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation or approve the issuance of voting securities of the Company in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary 3 of the Company) pursuant to applicable stock exchange requirements, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 65% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 65% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, no "Change in Control" shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the 4 same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Good Reason" shall mean a determination by the Employee in good faith that there has been any (i) material change by the Company of the Employee's functions, duties or responsibilities which change would cause the Employee's position with the Company to become of less dignity, responsibility, importance, prestige or scope including, without limitation, the assignment to the Employee of duties and responsibilities inconsistent with his positions; (ii) assignment or reassignment by the Company of the Employee without the Employee's consent, to another place of employment more that 50 miles from the Employee's current place of employment; (iii) liquidation, dissolution, consolidation or merger of the Company that has not been approved by a majority of those members of the Board who were members of the Board prior to the Change in Control, or transfer of all or substantially all of its assets, other than a transaction or series of transactions in which the resulting or surviving transferee entity has, in the aggregate, a net worth at least equal to that of the Company and assumes this Agreement and all obligations and undertakings of the Company hereunder; or (iv) reduction in the Employee's total compensation or any component thereof; by written notice to the Company, specifying the event relied upon for such termination and given at any time within 6 months after the occurrence of such event. "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, (iii) an underwriter temporarily holding securities 5 pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 2. Term. This Agreement shall be effective as of the date above written and shall continue thereafter for a period of 24 full calendar months following the date of an occurrence of a Change in Control. 3. Severance Benefit. a. In the event of any termination of the Employee's employment hereunder at any time during the 24-month period immediately following a Change in Control (x) by the Employee for Good Reason, or (y) by the Company for any reason other than Cause, then, within 5 business days after any such termination, the Company shall pay to the Employee or the estate of the Employee as severance pay, a lump sum cash amount equal to three times the Employee's "base amount" as defined and determined under section 28OG of the Internal Revenue Code of 1986, as amended (the "Code"), less one dollar ("2.99 times the base amount"). b. For a period of 24 months (commencing with the month in which termination of employment as described in paragraph 3a above shall have occurred), the Employee shall be entitled to all benefits under the Company's welfare benefit plans as if the Employee were still employed during such period, at the same level of benefits as existed immediately prior to the Change in Control, and if and to the extent that such benefits shall not be payable or provided under any such plan, the Company shall pay or provide such benefits on an individual basis. The benefits provided in accordance with this paragraph 3b shall be secondary to any comparable benefits provided by another employer. 6 c. Notwithstanding anything else herein to the contrary, to the extent that the Employee is entitled to receive severance payments from another Company severance plan, arrangement or program, the payments to be made pursuant to paragraph 3a hereof shall be correspondingly reduced before implementation of paragraph e below, and, if necessary, the Employee shall make an appropriate refund to the Employer without interest. d. If Independent Tax Counsel shall determine that the aggregate payments made to the Employee pursuant to paragraphs 3a and b above and any other payments to the Employee from the Company which constitute "parachute payments" as defined in section 28OG of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor thereto) ("Parachute Payments") would be subject to the excise tax imposed by section 4999 of the Code (the "Excise Tax"), then the lump sum cash payment payable to the Employee under paragraph 3a above shall be reduced to an amount and to the extent necessary so that such payment would not be subject to the Excise Tax. [For Employees not fully vested in the SERP: Notwithstanding the preceding sentence, in the event of a Change in Control that occurs prior to [date fully vested in SERP], the Employee shall be entitled to all payments under paragraphs 3a and b above and any other Parachute Payments unless the total of such payments, after giving effect to the Excise Tax, is less than the amount to which the Employee would have been entitled under the preceding sentence.] For purposes of this paragraph 3e, "Independent Tax Counsel" shall mean a lawyer with expertise in the area of executive compensation tax law, who shall be selected by the Employee and shall be reasonably acceptable to the Company, and whose fees and disbursements shall be paid by the Company. e. If it is established pursuant to a final determination of a court or a final Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of this Agreement, any part of the aggregate payments 7 paid to the Employee under this Agreement constitutes an "excess parachute payment" for purposes of sections 28OG and 4999 of the Code, then the amount equal to the excess shall be deemed for all purposes to be a loan from the Company to the Employee made on the date of receipt. The Employee shall have an obligation to repay such loan to the Company within six months of demand, together with interest thereon at the lowest applicable Federal rate (as defined in section 1274(d) of the Code) from the date of the Employee's receipt until the date of such repayment. If it is determined for any reason that the amount described in paragraph a or b above in incorrectly calculated or reduced, the Company shall pay to the Employee the increased amount, if any, necessary so that, after such an adjustment, the Employee shall have received or be entitled to receive the maximum payments that he may receive without any such payment constituting an "excess parachute payment." 4. Source of Payments. All payments provided for in paragraph 3 above shall be paid in cash from the general funds of the Company; provided, however, that such payments shall be reduced by the amount of any payments made to the Employee or his or her dependents, beneficiaries or estate from any trust or special or separate fund established by the Company to assure such payments. The Company shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Company shall make any investments to aid it in meeting its obligations hereunder, the Employee shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and the Employee or any other person. To the extent that any person acquires a right to receive payments from 8 the Company such right shall be no greater than the right of an unsecured creditor of the Company. 5. Litigation Expenses; Arbitration. a. In the event of any litigation or other proceeding between the Company and the Employee with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Company shall reimburse the Employee for all reasonable costs and expenses relating to such litigation or other proceeding as they are incurred, including reasonable attorneys fees and expenses, regardless of whether such litigation results in any settlement or judgment or order in favor of any party; provided, however, that any claim or action initiated by the Employee relating to this Agreement shall have been made or brought after reasonable inquiry and shall be well grounded in fact and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. The obligation of the Company under this paragraph 5 shall survive the termination for any reason of this Agreement (whether such termination is by the Company, by the Employee, upon the expiration of this Agreement or otherwise). b. In the event of any dispute or difference between the Company and the Employee with respect to the subject matter of this Agreement and the enforcement of rights hereunder, the Employee may, in his or her sole discretion by notice to the Company, require such dispute or difference to be submitted to arbitration. The arbitrator or arbitrators shall be selected by agreement of the parties or, if they cannot agree on an arbitrator or arbitrators within 30 days after the Employee had notified the Company of his or her desire to have the question settled by arbitration, then the arbitrator or arbitrators shall be selected by the American Arbitration Association (the "AAA") in New York, New York upon the application of the Employee. The determination reached in such arbitration shall be final and binding on both 9 parties without any right of appeal or further dispute. Execution of the determination by such arbitrator may be sought in any court of competent jurisdiction. The arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence and shall interpret this Agreement as an honorable engagement and not merely as a legal obligation. Unless otherwise agreed by the parties, any such arbitration shall take place in New York, New York, and shall be conducted in accordance with the Rules of AAA. 6. Income Tax Withholding. The Company may withhold from any payments made under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 7. Entire Understanding. This Agreement contains the entire understanding between the Company and the Employee with respect to the subject matter hereof, i.e., benefits payable to the Employee upon termination of employment following a Change in Control, and supersedes any prior severance agreement between the Company and the Employee, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Employee of any kind elsewhere provided and not expressly provided for in this Agreement. 8. Severability. If, for any reason, any one or more of the provisions or part of a provision contained in this Agreement shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement not held so invalid, illegal or unenforceable, and each other provision or part of a provision shall to the full extent consistent with law continue in full force and effect. If this Agreement is held invalid or cannot be enforced, then to the full extent 10 permitted by law any prior agreement between the Company and the Employee shall be deemed reinstated as if this Agreement had not been executed. 9. Consolidation, Merger, or Sale of Assets. If the Company consolidates or merges into or with, or transfers all or substantially all of its assets to, another corporation with a net worth at least equal to that of the Company and which assumes this Agreement and all obligations and undertakings of the Company hereunder, the term "the Company," as used herein shall mean such other corporation and this Agreement shall continue in full force and effect. 10. Notices. All notices, requests, demands and other communications required or permitted hereunder shall be given in writing and shall be deemed to have been duly given if delivered or mailed, postage prepaid, first class, if to the Employee to the address shown in the personnel records of the Company and, if to the Company, as follows: Orange and Rockland Utilities, Inc. One Blue Hill Plaza Pearl River, New York 10965 Attention: Vice President and General Counsel or to such other address as either party shall have previously specified in writing to the other. 11. No Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 12. Binding Agreement. 11 This Agreement shall be binding upon, and shall inure to the benefit of, the Employee and the Company and their respective permitted successors and assigns. 13. Modification and Waiver. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement except by written instrument signed by the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 14. Headings of No Effect. The paragraph headings contained in this Agreement are included solely for convenience of reference and shall not in any way affect the meaning or interpretation of any of the provisions of this Agreement. 15. Governing Law. This Agreement and its validity, interpretation, performance, and enforcement shall be governed by the laws of the State of New York without giving effect to the choice of law provisions in effect in such State. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its officers thereunto duly authorized, and the Employee has signed this Agreement, all effective as of the date first above written. ORANGE AND ROCKLAND UTILITIES, INC. By: ________________________________ 12 [EMPLOYEE] ----------------------------------- EX-10.22A 5 FORM OF AGREEMENT, AMENDING EX-10.22 1 EXHIBIT 10.22A FORM OF AGREEMENT On this ___ day of January, 1998, Orange and Rockland Utilities, Inc. (hereinafter the "Company") and ___________ (hereinafter the "Executive") enter into this Agreement. WHEREAS, the Executive and the Company are parties to an agreement dated __________, 1997 (the "Severance Agreement") which provides the Executive with certain protective measures in the event the Executive's employment is terminated following a Change in Control, as defined in the Severance Agreement; and WHEREAS, paragraph "2" of the Severance Agreement presently provides: 2. Term. This Agreement shall be effective as of the date above written and shall continue thereafter for a period of 24 full calendar months following the date of an occurrence of a Change in Control.; and WHEREAS, this language in the Severance Agreement fails to account for the possibility that a Change in Control may take more than 24 months to consummate, which, if the Executive's employment terminates subsequent to such 24 month period, would vitiate the rights of the Executive under the Severance Agreement, a contingency that was not contemplated by the parties when they originally executed the Severance Agreement; WHEREAS, the parties now wish to amend the Severance Agreement to account for the aforementioned contingency. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Paragraph "2" of the Severance Agreement shall be amended to read as follows: 2. Term of Agreement. 2 This Agreement shall commence on the date hereof and shall continue in effect for a period of twenty-four (24) months following the date of an occurrence of a Change in Control (or, if later, twenty-four (24) months following the date of the consummation of the transaction the approval of which by the Company's shareholders constitutes a Change in Control under subsection (iii) or (iv) of the definition of "Change in Control," above) (hereinafter the "Term of this Agreement"). 2. Paragraph "3(a)" of the Severance Agreement shall be amended to read as follows: 3. Severance Benefit. a. In the event of any termination of the Employee's employment hereunder at any time during the Term of this Agreement (x) by the Employee for Good Reason, or (y) by the Company for any reason other than Cause, then, within 5 business days after any such termination, the Company shall pay to the Employee or the estate of the Employee as severance pay, a lump sum cash amount equal to three times the Employee's "base amount" as defined and determined under section 28OG of the Internal Revenue Code of 1986, as amended (the "Code"), less one dollar ("2.99 times the base amount"). 3. Except as provided above, nothing in this Agreement is intended, nor shall this Agreement be construed, to in any other way amend the Severance Agreement. ---------------------------- ---------------------------- [Executive] H. Kent Vanderhoef Chairman, Board of Directors EX-10.26A 6 AGREEMENT WITH R. LEE HANEY 1 EXHIBIT 10.26A AGREEMENT On this ___ day of July, 1997, Orange and Rockland Utilities, Inc. (hereinafter the "Company") and R. Lee Haney (hereinafter the "Executive") enter into this Agreement effective July 1, 1997. WHEREAS, the Executive and the Company are parties to a letter agreement dated September 2, 1994 and a letter agreement dated September 29, 1994 (individually and collectively the "Letter Agreement(s)"); and WHEREAS, paragraph "4" of the September 29, 1994 Letter Agreement was intended to amend the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (the "Plan") to provide for the inclusion of incentive compensation in the calculation of Executive's benefit under the Plan on an accelerated incremental basis commensurate with years of service with the Company; and WHEREAS, the Plan has recently been amended to reflect that the definition of "Compensation" under the Plan shall include all incentive compensation that an Officer was/is eligible to earn under the Company's Annual Team Incentive Plan at target, effective January 1, 1995; and WHEREAS, the Company and the Executive wish to amend the Letter Agreements so as to reflect these recent changes to the Plan. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Effective January 1, 1995, the benefit to which Executive may be entitled under the Plan, as determined under the terms and conditions of the Plan, shall be calculated to include 100% of the Annual Team Incentive Plan award that Executive is eligible to earn at target in an applicable year, in accordance with the definition of "Compensation" under Section 2(9)(B) of the Plan, as amended and restated on June 5, 1997 and effective July 1, 1997. Paragraph "4" of the September 29, 1994 Letter Agreement is hereby superseded by this paragraph. 2 2. Nothing in this Agreement is intended, nor shall this Agreement be construed, to in any way amend or limit the accelerated vesting provisions in the Letter Agreements. 3. To the extent the terms of the Letter Agreements conflict with the terms of this Agreement, the terms of this Agreement shall govern. ---------------------------- ---------------------------- R. Lee Haney James F. O'Grady, Jr. Chairman, Compensation Committee EX-10.27A 7 AGREEMENT BETWEEN O/R AND D. LOUIS PEOPLES 1 EXHIBIT 10.27A AGREEMENT On this ___ day of July, 1997, Orange and Rockland Utilities, Inc. (hereinafter the "Company") and D. Louis Peoples (hereinafter the "Executive") enter into this Agreement effective July 1, 1997. WHEREAS, the Executive and the Company are parties to a letter agreement dated July 14, 1994 and a letter agreement dated September 29, 1994 (individually and collectively the "Letter Agreement(s)"); and WHEREAS, paragraph "4" of the September 29, 1994 Letter Agreement was intended to amend the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (the "Plan") to provide for the inclusion of incentive compensation in the calculation of Executive's benefit under the Plan on an accelerated incremental basis commensurate with years of service with the Company; and WHEREAS, the Plan has recently been amended to reflect that the definition of "Compensation" under the Plan shall include all incentive compensation that an Officer was/is eligible to earn under the Company's Annual Team Incentive Plan at target, effective January 1, 1995; and WHEREAS, the Company and the Executive wish to amend the Letter Agreements so as to reflect these recent changes to the Plan. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Effective January 1, 1995, the benefit to which Executive may be entitled under the Plan, as determined under the terms and conditions of the Plan, shall be calculated to include 100% of the Annual Team Incentive Plan award that Executive is eligible to earn at target in an applicable year, in accordance with the definition of "Compensation" under Section 2(9)(B) of the Plan, as amended and restated on June 5, 1997 and effective July 1, 1997. Paragraph "4" of the September 29, 1994 Letter Agreement is hereby superseded by this paragraph. 2 2. Nothing in this Agreement is intended, nor shall this Agreement be construed, to in any way amend or limit the accelerated vesting provisions in the Letter Agreements. 3. To the extent the terms of the Letter Agreements conflict with the terms of this Agreement, the terms of this Agreement shall govern. ---------------------------- ---------------------------- D. Louis Peoples James F. O'Grady, Jr. Chairman, Compensation Committee EX-10.29 8 O & R DEFERRED COMP PLAN FOR NON-EMPLOYEE DIR'S 1 EXHIBIT 10.29 ORANGE AND ROCKLAND UTILITIES, INC. DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS As Amended and Restated Effective February 5, 1998 2 ORANGE AND ROCKLAND UTILITIES, INC. DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS 1. ELIGIBILITY Each member (a "DIRECTOR") of the Board of Directors (the "BOARD") of Orange and Rockland Utilities, Inc. (the "COMPANY") who is not a current or former employee of the Company, or of any of its subsidiaries or related entities (an "ELIGIBLE DIRECTOR"), is eligible to become a participant (a "PARTICIPANT") in the Orange and Rockland Utilities, Inc. Deferred Compensation Plan for Non-Employee Directors (the "PLAN"), as set forth herein. Each Participant in the Plan shall have his or her interest in the Plan reflected in a bookkeeping account (the "PARTICIPANT'S ACCOUNT"). 2. PARTICIPATION (a) MANDATORY DEFERRALS. Effective as of April 1, 1998, the Board may direct that a certain portion of each Eligible Director's fees (including, but not limited to, annual retainer fees, any meeting fees for services as a member of the Board and any committee thereof, any fees for serving as Chairman of the Board or as chairperson of any committee thereof, and any fees for additional services on behalf of the Board or a committee) (the "FEES") shall be automatically deferred under the Plan and credited to his or her Participant's Account. The Fees which the Board directs to be deferred on a mandatory basis shall be referred to as "MANDATORY DEFERRAL FEES". The remaining Fees, as well as any Fees received with respect to periods prior to April 1, 1998, shall be referred to as "DISCRETIONARY DEFERRAL FEES". (b) VOLUNTARY DEFERRALS. Prior to the beginning of any calendar quarter, each Eligible Director may elect to defer Discretionary Deferral Fees by directing that all or any percentage of such Discretionary Deferral Fees which would 3 otherwise have been payable currently during such upcoming calendar quarter and subsequent calendar quarters shall be credited to his or her Participant's Account, subject to the terms of the Plan. No election to defer Discretionary Deferral Fees shall be permitted if the Discretionary Deferral Fees which are deferred are less than $3,500 per calendar year. Any person who shall become an Eligible Director during any calendar quarter and who was not an Eligible Director immediately prior to the beginning of such calendar quarter may elect, within 30 calendar days after becoming an Eligible Director, to defer payment of all or any part of the Discretionary Deferral Fees for the remainder of such calendar quarter and subsequent calendar quarters. (c) An Eligible Director who elects to defer Discretionary Deferral Fees shall do so by filing a written deferral election and other necessary documents and agreements with the Secretary of the Company within the time specified in paragraph 2(b). An election to participate in the Plan, related to Discretionary Deferral Fees otherwise payable with respect to services as an Eligible Director in a given and subsequent calendar quarters, shall be irrevocable for such quarter and shall become irrevocable as of the close of the calendar quarter preceding each such subsequent calendar quarter. An election to defer Discretionary Deferral Fees shall continue in effect until a Participant ceases to be an Eligible Director, or until the Participant terminates or modifies such election by written notice executed by the Participant and filed with the Secretary of the Company. Any notice of termination or modification of an election with respect to the deferral of Discretionary Deferral Fees shall become effective as of the close of the calendar quarter in which such notice is given and only with respect to Discretionary Deferral Fees payable with respect to services in subsequent calendar quarters. Amounts credited to a Participant's Account prior to the effective date of any termination or modification of a deferral election shall -2- 4 not be affected by such termination or modification and shall be distributed only in accordance with the terms of the Plan. (d) A Participant who has filed a termination of election to defer Discretionary Deferral Fees may thereafter file another written deferral election with the Secretary of the Company, electing to voluntarily defer Discretionary Deferral Fees for any calendar quarter commencing after the filing of such election and subsequent calendar quarters during which he or she is an Eligible Director. (e) Each Eligible Director who is serving on the Board on February 5, 1998, and who has an amount credited under the Plan in connection with his or her cessation of coverage under the Orange and Rockland Utilities, Inc. Post-Director Service Retainer Continuation Program (the "SRCP") as of that date, shall have his or her Participant's Account hereunder credited as of February 5, 1998 with an amount of Phantom Share Units (as defined in paragraph 3(b)) equal in value to the amount credited from the SRCP. For purposes of converting the credited amount from the SRCP to a number of Phantom Share Units under this paragraph 2(e), the value of a Phantom Share Unit will be equal to the Fair Market Value (as defined in paragraph 3(d)(4)) of the Company's Shares (as defined in paragraph 3(a)) as of February 5, 1998. 3. THE PARTICIPANT'S ACCOUNT (a) All deferred Fees (Discretionary Deferral Fees and, effective on and after April 1, 1998, Mandatory Deferral Fees) with respect to periods of service on and after January 1, 1998 shall be credited to the Participant's Account as of the date set forth in paragraph 3(d) or 3(e)(1), as applicable. Each Participant's Account shall consist of up to three subaccounts. One subaccount, which represents deferred Fees for periods of service prior to January 1, 1998 that have not been transferred -3- 5 to the Investment Account at the Participant's election pursuant to paragraph 3(c), and which bears interest as provided in paragraph 3(c), shall be designated the "CASH ACCOUNT". A second subaccount, which (i) represents deferred Discretionary Deferral Fees for periods of service on and after January 1, 1998, amounts transferred from the Cash Account at the Participant's election pursuant to paragraph 3(c), and amounts transferred from the Phantom Share Unit Account at the Participant's election in accordance with paragraph 4(b)(3), and (ii) is credited with earnings in accordance with paragraph 3(e), shall be designated the "INVESTMENT ACCOUNT". The final subaccount, which shall be valued as if invested in shares of the Company's Common Stock, $5 par value per share ("SHARES"), as provided in paragraph 3(d), shall be designated the "PHANTOM SHARE UNIT ACCOUNT". Subaccounts may be further divided into additional subaccounts, including (but not limited to) the following: (1) Separate subaccounts will be created under the Phantom Share Unit Account to reflect: (i) Phantom Share Units attributable to deferrals of Discretionary Deferral Fees, plus additional amounts credited with respect to such deferrals in accordance with paragraph 3(d); and (ii) Phantom Share Units attributable to deferrals of Mandatory Deferral Fees on or after April 1, 1998, plus amounts credited under paragraph 2(e) as of February 5, 1998, plus additional amounts credited under paragraph 3(d) with respect to such deferrals and such amounts credited under paragraph 2(e). The amounts described in clause (i) of the preceding sentence will be recorded in a subaccount identified in this Plan as "PSU SUBACCOUNT 1", while amounts described in clause (ii) of the preceding sentence will be placed in a subaccount identified in this Plan as "PSU SUBACCOUNT 2". (2) If necessary, separate subaccounts will be created under a Participant's Investment Account to reflect: -4- 6 (i) amounts originally credited to the Investment Account pursuant to a Deferred Fee Allocation (as defined below in this paragraph 3(a)), plus amounts reallocated from PSU Subaccount 1 in accordance with paragraph 4(b)(3), plus any earnings or losses credited with respect to such amounts in accordance with paragraph 3(e)(3); and (ii) amounts reallocated to the Investment Account from PSU Subaccount 2 in accordance with paragraph 4(b)(3), plus any earnings or losses on such amounts credited with respect to such amounts in accordance with paragraph 3(e)(3). The amounts described in clause (i) of the preceding sentence will be recorded in a subaccount identified in this Plan as "INVESTMENT SUBACCOUNT 1", while amounts described in clause (ii) of the preceding sentence will be placed in a subaccount identified in this Plan as "INVESTMENT SUBACCOUNT 2". An Eligible Director's election to make deferrals under the Plan with respect to Discretionary Deferral Fees for periods of service on or after January 1, 1998 shall specify that the Discretionary Deferral Fees that he or she has deferred shall be credited (i) 100% to the Investment Account, (ii) 100% to the Phantom Share Unit Account, or (iii) 50% to the Investment Account and 50% to the Phantom Share Unit Account (the "DEFERRED FEE ALLOCATION"). An Eligible Director's Deferred Fee Allocation shall apply, in any calendar quarter in which such Deferred Fee Allocation is in effect, to deferred Discretionary Deferral Fees that are otherwise payable during the entire calendar quarter. Any modification of a Deferred Fee Allocation shall be made in a written modification notice provided for in, and shall become effective in accordance with, paragraph 2(c). All amounts deferred under paragraph 2(a), and all amounts credited to the Participant's Account under paragraph 2(e), shall be credited to the Participant's Phantom Share Unit Account. -5- 7 (b) The balance, if any, credited to a Participant's Account as of the close of business on August 14, 1996 was recorded in the Cash Account as of August 15, 1996 and shall thereafter be considered for all purposes of the Plan (except as otherwise provided in paragraphs 3(a) and 3(c)) to be a part of the Cash Account. The opening balance of the Phantom Share Unit Account as of August 15, 1996 was zero. Deferred Fees that have been credited to the Cash Account (including any interest credited under paragraph 3(c)) or the Investment Account (including any earnings credited under paragraph 3(e)) may not be reallocated or transferred to the Phantom Share Unit Account. Deferred Fees that have been credited as units denominated in Shares ("PHANTOM SHARE UNITS") in the Phantom Share Unit Account (including any additional Phantom Share Units credited under paragraph 3(d)) may not be reallocated or transferred to the Cash Account or the Investment Account, except that amounts may be reallocated from the Phantom Share Unit Account to the Investment Account pursuant to paragraph 4(b)(3). (c) Interest shall be credited on the deferred Fees credited to the Cash Account, commencing on the date such Fees would otherwise have been paid and continuing through the date of valuation for distribution or transfer, at a rate per annum equivalent to the Company's latest allowable rate of return in effect from time to time as set by the Public Service Commission of the State of New York. Amounts so determined shall be credited to the Cash Account as of the close of each calendar quarter, based on the daily balances of the Cash Account during such quarter; provided, however, that, with respect to any final distribution from a Cash Account that is not valued as of the close of a calendar quarter, interest shall be credited to the Cash Account as of the date of valuation for distribution, based upon the daily balances of the Cash Account during the period beginning on the first day of the quarter in which such valuation date occurs and ending on such valuation date. Amounts credited to the Cash Account may not be transferred to the Phantom Share -6- 8 Unit Account or the Investment Account; provided, however, that each Participant who has a balance in his or her Cash Account was given a one-time opportunity to elect to have the entire balance of his or her Cash Account, valued as of December 31, 1997, transferred to his or her Investment Account as of January 1, 1998. Any amounts so transferred have been and will continue to be credited with a rate of return in the manner described in paragraph 3(e). (d) Deferred Fees (both Mandatory Deferral Fees and Discretionary Deferral Fees) credited to a Phantom Share Unit Account shall be deemed invested in Phantom Share Units as of the date such Fees would otherwise have been paid. Such deferred Fees shall be deemed to be invested in such number of Phantom Share Units which results from dividing the dollar amount of such Fees by the Fair Market Value (as hereinafter defined) of a Share at the date such Fees would otherwise have been paid and, for purposes of such Phantom Share Unit Account, thereafter shall be reflected as a number of Phantom Share Units and not as a dollar amount. The number of Phantom Share Units credited to the Phantom Share Unit Account shall for all purposes be calculated to at least three decimal places. (1) If the Company declares and pays a dividend or distribution in the form of cash or property other than Shares in respect of Shares, then a number of additional Phantom Share Units shall be credited to the Phantom Share Unit Account as of the payment date for such dividend or distribution equal to (i) the number of Phantom Share Units credited to such Account as of the record date for such dividend or distribution, multiplied by (ii) the amount of cash plus the Fair Market Value of any property other than Shares actually paid as a dividend or distribution on each Share at such payment date, divided by (iii) the Fair Market Value of a Share at such payment date. -7- 9 (2) If the Company declares and pays a dividend or distribution in the form of additional Shares payable in respect of Shares, or there occurs a forward stock split of Shares, then a number of additional Phantom Share Units shall be credited to the Phantom Share Unit Account as of the payment date for such dividend or distribution or forward stock split equal to (i) the number of Phantom Share Units credited to such Account as of the record date for such dividend or distribution or split, multiplied by (ii) the number of additional Shares actually paid as a dividend or distribution or issued in such split on each Share. (3) The number of Phantom Share Units credited to a Phantom Share Unit Account shall be appropriately adjusted to reflect any changes in the number of outstanding Shares of stock resulting from reverse stock splits, recapitalizations, reorganizations, or other extraordinary transactions. If, as a result of a merger, consolidation, share exchange, recapitalization, reorganization, or other extraordinary transaction, Shares cease to be a class of outstanding securities, each Phantom Share Unit shall be deemed to be invested in the aggregate type and amount of consideration received for one Share in the transaction or series of transactions by which Shares ceased to be a class of outstanding securities. (4) In the case of Shares, "FAIR MARKET VALUE" as of a given date shall mean the average of the high and the low sales prices of a Share reported in the table entitled "New York Stock Exchange Composite Transactions" contained in The Wall Street Journal (or an equivalent successor table) for such date or, if no such prices were reported for such date, for the most recent trading day prior to such date for which such prices were reported. In the case of property other than Shares, "FAIR MARKET VALUE" as of a -8- 10 given date shall be determined in good faith by the Secretary of the Company. (5) In the case of Shares, "MONTHLY AVERAGE FAIR MARKET VALUE" for a given final day of a calendar month shall mean the average of the closing sales prices of a Share, as reported in the table entitled "New York Stock Exchange Composite Transactions" contained in The Wall Street Journal (or an equivalent successor table), for each business day in which Shares traded in such calendar month. (e) As of the last business day of the calendar month in which deferred Discretionary Deferral Fees for services on or after January 1, 1998 would otherwise have been paid to a Participant, the deferral shall be credited to the Participant's Investment Account to the extent elected by the Participant. Such amount shall be credited with a deemed rate of return, in accordance with the remainder of this paragraph 3(e), until the appropriate valuation date. Amounts credited to the Investment Account may not be transferred or reallocated to the Phantom Share Unit Account or the Cash Account. (1) A Participant shall be given the opportunity to specify the investment funds (the "INVESTMENT FUNDS") in which his or her Investment Account shall be deemed to be invested. The Investment Funds shall be selected by the Orange and Rockland Utilities, Inc. Retirement Committee (the "COMMITTEE"), and such Investment Funds may be changed from time to time in the Committee's discretion. (2) Each Participant shall specify in the manner designated by the Committee or its designee, in whole numbers, the percentage of his or her deferrals which shall be deemed to be invested in one or more of the available Investment Funds, which percentage for each Investment Fund selected must be at least 10%. Such investment election shall remain in effect until changed in accordance with -9- 11 paragraph 3(e)(5) below. If a Participant fails to select any Investment Funds, he or she shall be deemed to have failed to make a valid deferral election with respect to any amounts which were to have been credited to the Investment Account. (3) As of the last business day of each calendar month, the Participant's Investment Account shall be credited with earnings or losses based upon the rates of return of the Investment Funds in which such Investment Account is deemed to be invested. (4) A Participant may elect to change, as of the last business day of a calendar quarter, his or her Investment Fund election with respect to subsequent deferrals credited to the Investment Account; provided, however that the deemed investment percentage with respect to each Investment Fund selected must be a whole number equal to at least 10% of the amount to be deferred. Such change shall be made by giving notice in the manner established by the Committee or its designee, and shall be effective for any deferrals or reallocations thereafter credited to the Investment Account, until another change is made in accordance with this paragraph 3(e)(5). (5) A Participant may elect to reallocate the then-current balance of the Investment Account among the then-available Investment Funds, subject to any limitations imposed by the Committee, as of the last business day of any calendar quarter. Such reallocation must be in whole percentages, and the amount allocated to any one Investment Fund selected must be at least 10% of the funds in the Participant's Investment Account as of the last business day of the calendar quarter. A Participant shall make such an election by giving notice in the manner established by the Committee or its designee. -10- 12 (6) The election among the available Investment Funds shall be the sole responsibility of each Participant. The Company, the Committee, and their delegates are not authorized to make any recommendations to any Participant with respect to such election. Each Participant assumes all risk in connection with any election of Investment Funds and the adjustment to the value of his or her Investment Account as the result of changes to the value of such Investment Funds. Neither the Company nor the Committee in any way guarantees against loss with respect to an Investment Account. (7) All payments from the Investment Account (or, if applicable, from a subaccount under the Investment Account) shall be recorded as having been made proportionately from each available Investment Fund in which the Investment Account (or the subaccount, if applicable) is deemed to be invested at the time of payment. (f) The Participant's Account shall be 100% vested at all times. 4. POST-TERMINATION DISTRIBUTIONS FROM THE PARTICIPANT'S ACCOUNT (a) Post-termination distributions under the Plan shall be made solely in cash. In the case of such distributions relating to a Cash Account or an Investment Account (or a subaccount thereunder), cash shall be distributed based on the balance credited to such accounts (or subaccounts) as of the applicable valuation date set forth herein. In the case of such distributions relating to a subaccount under a Phantom Share Unit Account, cash shall be distributed based upon the Full Settlement Value (as hereinafter defined) of such subaccount. For purposes of the Plan, the "FULL SETTLEMENT VALUE" as of a given valuation date shall mean the number of Phantom Share Units then credited to a subaccount under the Phantom Share Unit Account (or the -11- 13 entire Phantom Share Unit Account, if applicable) multiplied by the Monthly Average Fair Market Value of a Share at that date. (b) At the time of his or her initial participation in the Plan, a Participant shall make a written election with respect to the post-termination distribution of amounts credited to the Participant's Account (an "INITIAL ELECTION"). A Participant may elect to receive such distribution in one lump-sum payment or in some other number of ratable annual installments (not exceeding 10); provided, however, that installments will only be available if, as of the valuation date for the initial distribution, the Participant's Account has a balance greater than $25,000. (1) With respect to amounts in a Participant's Cash Account, Investment Subaccount 1, and PSU Subaccount 1, the lump-sum payment or the first installment, as elected by the Participant, shall be distributed as soon as practicable after one of the following dates, as elected by the Participant: (i) the first business day of the calendar year immediately following the calendar year in which such Participant ceases to be a Director; or (ii) the first business day of such later calendar year as such Participant shall have elected. Subsequent installments, if any, shall be distributed as soon as practicable after the first business day of each succeeding calendar year until the entire amount that is subject to this paragraph 4(b)(1) shall have been distributed. Amounts to be paid shall be based upon the value of the applicable subaccount as of the last business day of the calendar year preceding the calendar year of distribution. The "ratable" amount distributable under paragraph 4(b)(1) in any given installment shall equal (i) the sum of the balances of the Cash Account and Investment Subaccount 1, plus the Full Settlement Value of PSU Subaccount 1, divided by (ii) the number of installments -12- 14 (including the given installment) remaining to be distributed. Installments subject to this paragraph 4(b)(1) shall initially be paid from the Cash Account. When the Cash Account has a zero balance, payments shall be made from Investment Subaccount 1 until it has a zero balance. Thereafter, the remaining payments shall be made from PSU Subaccount 1. (2) With respect to amounts in a Participant's Investment Subaccount 2 and PSU Subaccount 2, the lump-sum payment or the first installment, as elected by the Participant, shall be distributed as soon as practicable after one of the following dates, as elected by the Participant: (i) the first business day of the calendar month immediately following the calendar month in which such Participant ceases to be a Director (or, if later, the first business day of the calendar month following the date on which distributions with respect to the Participant's Phantom Share Account cease to be subject to liability under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")); or (ii) the first business day of such later calendar month as such Participant shall have elected. Subsequent installments, if any, shall be distributed as soon as practicable after the anniversary date of the first business day of the calendar month described in the preceding sentence, until the entire amount that is subject to this paragraph 4(b)(2) shall have been distributed. Amounts to be paid shall be based upon the value of the applicable account or subaccount as of the last business day of the calendar month preceding the calendar month of distribution. The "ratable" amount distributable under paragraph 4(b)(2) in any given installment shall equal (i) the balance of Investment Subaccount 2 plus the Full Settlement Value of PSU Subaccount 2, divided by (ii) the number of installments -13- 15 (including the given installment) remaining to be distributed. Installments subject to this paragraph 4(b)(2) shall initially be paid from Investment Subaccount 2, until it has a zero balance. Thereafter, the remaining payments shall be made from PSU Subaccount 2. (3) A Participant who has terminated service as a Director may elect to reallocate all or a portion of the amount in his or her Phantom Share Unit Account to his or her Investment Account; provided, however, that no such reallocation shall be permitted unless it would not result in liability under Section 16(b) of the Exchange Act. The effective date of the reallocation (the "REALLOCATION DATE") shall be the first business day of the second calendar month following the Participant's submission of a written reallocation election to the Secretary of the Company, or any later month designated in advance by the Participant in his or her reallocation election, so long as the Reallocation Date is after the date on which the Participant terminates service as a Director. The amount of such reallocation shall be based upon the Monthly Average Fair Market Value of the Participant's Phantom Share Unit Account as of the last business day of the calendar month preceding the Reallocation Date. If the Participant elects to reallocate a portion of his or her Phantom Share Unit Account, the Participant may designate the extent to which the distribution is made from PSU Subaccount 1 or PSU Subaccount 2. If the Participant fails to make such a designation, the Phantom Share Units in the Phantom Share Unit Account will be reallocated on a "first-in, first-out" basis. Amounts that are reallocated from the Participant's Phantom Share Account to the Participant's Investment Account shall be subject to the most recent Investment Fund election which as of the date of -14- 16 reallocation is in effect under paragraph 3(e)(5). If the Participant has no Investment Fund election in effect under paragraph 3(e)(5), he or she shall be given the opportunity in advance of the reallocation to make such election; no reallocation will be permitted absent such an election. (c) A Participant may, while a Director, at any time modify any Initial Election or prior modification of an election with respect to the distribution of amounts credited or to be credited to the Participant's Account. The Participant's modification may relate to distributions of amounts to be credited with respect to services as an Eligible Director in calendar quarters that commence after the effective date of such modification, including amounts to be credited to the Investment Account or the Phantom Share Unit Account, and/or to distributions of amounts credited with respect to services as an Eligible Director in calendar quarters that commenced prior to the effective date of such modification ("PRIOR SERVICE AMOUNTS", which includes any interest, earnings, and additional Phantom Share Units credited thereon); provided, however, that any modification with respect to Prior Service Amounts may only provide for the further deferral of such Prior Service Amounts. In the event that a Participant has made more than one modification of his or her distribution election with respect to specific amounts credited or to be credited to his or her Participant's Account, the most recent such modification shall control the distribution of such amounts. Any modification of a distribution election shall become effective as of the close of the calendar quarter in which such notice of modification is given in writing to the Secretary of the Company. (d) Notwithstanding the terms of any Initial Election or modification thereof made pursuant to paragraphs 4(b) and (c), if a Participant becomes employed by any governmental agency having jurisdiction over the activities of the Company or any of its subsidiaries, the Company shall distribute to such -15- 17 Participant, in a single lump-sum cash payment, as soon as practicable after the last day of the month in which such employment commences, the entire amount credited to the Participant's Cash Account, the entire amount credited to the Participant's Investment Account, and the Full Settlement Value of the Participant's Phantom Share Unit Account, valued in all cases as of the last business day of the month in which such employment commences. (e) If a Participant should die before payment in full of the entire amount credited to his or her Participant's Account, the Company shall distribute to such Participant's Beneficiary (as hereinafter defined in Section 6), in a single lump-sum cash payment: (1) As soon as practicable after the first business day of the calendar year immediately following the calendar year of death, the entire amount remaining credited to the Participant's Cash Account and Investment Subaccount 1, and an amount equal to the Full Settlement Value of the Participant's PSU Subaccount 1, valued in all cases as of the last business day of the calendar year in which the Participant's death occurs. (2) As soon as practicable after the first business day of the calendar month immediately following the calendar month of death, the entire amount credited to Investment Subaccount 2, and an amount equal to the Full Settlement Value of PSU Subaccount 2, valued in all cases as of the last business day of the calendar month in which the Participant's death occurs. (f) The Company shall deduct from the distributions to be made from a Participant's Account any Federal, State, or local withholding or other taxes or charges which the Company is from time to time required to deduct under applicable law. -16- 18 5. IN-SERVICE WITHDRAWALS (a) Notwithstanding the terms of any election with respect to the distribution of amounts credited to the Participant's Account or modification thereof made by a Participant hereunder, the Secretary of the Company may, in his or her sole discretion, permit the distribution without penalty, in the form of a withdrawal of all or a portion of (i) the amount credited to the Participant's Cash Account and Investment Account, and (ii) the amount equal to the Rule 16b-3 Limited Settlement Value (as defined in subsection (d) below) of the Participant's PSU Subaccount 1, if, upon the written request of the Participant or the Participant's representative to the Secretary, or following the death of the Participant upon the written request of the Participant's Beneficiary or such Beneficiary's representative to the Secretary, the Secretary determines that the Participant or Beneficiary, as the case may be, is confronted with an unforeseeable emergency. Amounts in the Participant's PSU Subaccount 1 in excess of the Rule 16b-3 Limited Settlement Value may also be withdrawn in the event of hardship, if such withdrawal as approved by the Secretary is also approved by the Compensation Committee of the Board in its sole discretion. For this purpose, an unforeseeable emergency is an unanticipated emergency caused by an event that is beyond the control of the Participant or Beneficiary and that would result in severe financial hardship to the Participant or Beneficiary if an early hardship withdrawal were not permitted. The Participant or Beneficiary shall provide to the Secretary (or to the Compensation Committee, if applicable) such evidence as the Secretary (or Compensation Committee) may require to demonstrate that such emergency exists and that financial hardship would occur if the withdrawal were not permitted. Any such withdrawal under this paragraph shall be limited to the amount necessary to meet the emergency. -17- 19 (b) At any time while a member of the Board, a Participant may elect to withdraw all or any portion of (i) the amount credited to the Participant's Cash Account and Investment Account, and (ii) the amount equal to the Rule 16b-3 Limited Settlement Value (as defined in paragraph (d) below) of the Participant's PSU Subaccount 1, subject to a 10% withdrawal penalty. Amounts in the Participant's PSU Subaccount 1 in excess of the Rule 16b-3 Limited Settlement Value may also be withdrawn subject to a 10% withdrawal penalty, if such withdrawal is approved by the Compensation Committee of the Board in its sole discretion. The Participant may make such an election by filing a written notice with the Secretary of the Company on a form provided by the Secretary of the Company, and the amount withdrawn shall be paid to the Participant in a cash lump sum payment. Upon the payment of such withdrawal, (a) an amount equal to one-tenth of the amount withdrawn shall be forfeited, (b) the Participant shall cease to be eligible to defer Discretionary Deferral Fees for the remainder of the calendar year in which the withdrawal occurs and shall be ineligible to defer Discretionary Deferral Fees during the calendar year immediately following the calendar year in which the withdrawal occurs, and (c) any deferral elections made under paragraph 2(c) by the Participant for such periods shall be terminated. (c) In-service withdrawals shall be made in cash as soon as practicable following the end of the month in which the Participant's notice of withdrawal is received by the Secretary of the Company (or, if later, the end of the month in which any necessary approval is granted by the Secretary or the Compensation Committee), and the amounts withdrawn shall be taken from the Participant's Account in the following order: (1) the Cash Account, (2) the Investment Account, and (3) PSU Subaccount 1 (to the extent available). Amounts withdrawn under this Section 5 shall be valued as of the last business day of the month prior to the date of distribution. -18- 20 (d) The "RULE 16b-3 LIMITED SETTLEMENT VALUE" as of a given valuation date shall mean the number of Phantom Share Units originally credited to a Phantom Share Unit subaccount more than six months before such valuation date plus any additional Phantom Share Units credited at any time under paragraph 3(d) in respect of such originally credited Phantom Share Units and such previously credited additional Phantom Share Units then credited to such Phantom Share Unit subaccount multiplied by the Monthly Average Fair Market Value of a Share at that date. 6. DESIGNATION OF BENEFICIARIES Each Participant may file with the Secretary of the Company a written designation of one or more persons as the beneficiary who, from and after the death of the Participant, shall have the rights of the Participant under the Plan (the "BENEFICIARY"). A Participant may at any time and from time to time revoke or change the Participant's Beneficiary designation without the consent of any previously designated Beneficiary by filing a new designation with the Secretary of the Company. The last such designation received by the Secretary of the Company shall be controlling; provided, however, that no designation or revocation or change thereof shall be effective unless received by the Secretary of the Company prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. If no such Beneficiary designation is in effect at the time of a Participant's death, or if no Beneficiary survives the Participant, or if such designation conflicts with law, the Participant's estate shall be the Beneficiary entitled to receive the amount, if any, distributable under the Plan upon the death of the Participant. If the Secretary of the Company is in doubt as to the right of any person to receive such amount, the Company may delay the distribution of such amount (which shall remain credited to the Participant's Account) until the Secretary determines the rights thereto, or the Company may distribute such amount into any New York State or Federal Court of appropriate -19- 21 jurisdiction, and such distribution shall be a complete discharge of the liability of the Company therefor. 7. MISCELLANEOUS (a) Neither a Participant nor any Beneficiary shall have the right to, directly or indirectly, alienate, assign, transfer, pledge, anticipate, or encumber (except by reason of death) any amount that is or may be distributable hereunder, nor shall any such amount be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Participant or any Beneficiary or to the debts, contracts, liabilities, engagements, or torts of the Participant or any Beneficiary or transfer by operation of law in the event of bankruptcy or insolvency of the Participant or any Beneficiary, or any legal process. (b) All distributions provided for from a Participant's Account shall be made by check from the general funds of the Company as soon as practicable after the applicable valuation date provided in the Plan; provided, however, that such distributions shall be reduced by the amount of any payments made to the Participant or his or her Beneficiary from the trust (the "TRUST") established by the Company to assist it in making such payments. The Company shall transfer to the Trust with respect to each Participant an amount equal to the amount of Discretionary Deferral Fees deferred by that Participant under the Plan with respect to services on or after January 1, 1998, and such other amounts at such other times as shall be determined by the Company in its sole discretion. No Participant or Beneficiary shall have any right, title, or interest whatever in or to any assets of the Trust. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company. -20- 22 (c) Copies of the Plan and any and all amendments thereto shall be made available to all Participants and Beneficiaries at all reasonable times at the office of the Secretary of the Company. (d) The Plan shall be administered by the Secretary of the Company who shall have full power, discretion, and authority to interpret, construe, and administer the Plan and any part thereof. The Secretary's interpretations and constructions of the Plan, and the actions taken thereunder by the Secretary, shall, except as otherwise determined by the Board, be binding and conclusive on all persons for all purposes. (e) The Board may at any time amend or terminate the Plan. No amendment or termination of the Plan shall impair the rights of any person with respect to amounts then in the Participant's Account. (f) The Company, its officers, and its Board shall have the right to rely upon a written opinion of legal counsel, which may be independent legal counsel or legal counsel regularly employed by the Company, if any question should arise as to any distribution from a Participant's Account or any obligation under the Plan. (g) Each Participant or his or her Beneficiary shall receive a quarterly statement indicating the amount credited to the Participant's Account as of the close of the preceding calendar quarter. (h) All elections, designations, requests, notices, instructions, and other communications from a Participant, Beneficiary, or other person to the Secretary of the Company required or permitted under the Plan shall be in such form as is prescribed from time to time by the Secretary and shall be mailed by first class mail or delivered to such location as shall be specified by the Secretary. -21- 23 (i) It is the intent of the Company that the crediting of Phantom Share Units to the Phantom Share Unit Account of a Participant who is then subject to Section 16 of the Exchange Act with respect to the Company shall be exempt from Section 16(b) liability under Rule 16b-3(d) under the Exchange Act (effective August 15, 1996 and as in effect thereafter), and that distributions of amounts from such a Participant's Phantom Share Unit Account shall be exempt under Rule 16b-3(e) or (f), or such other exemptions from Section 16(b) liability as may be available at the time. Accordingly, the Plan shall be construed in a manner consistent with the applicable requirements of Rule 16b-3 necessary to ensure that each such transaction is either exempt or will not result in Section 16(b) liability, and, if any provision of the Plan does not comply with any such applicable requirement, then such provision shall be construed or deemed amended to the extent necessary to conform to such applicable requirement. In furtherance thereof, any distribution with respect to a subaccount under a Participant's Phantom Share Unit Account shall be deemed to be a disposition to the Company of the Phantom Share Units earliest credited to such subaccount and not previously deemed disposed of in a prior distribution. (j) The terms of the Plan shall be binding upon the Company and its successors and assigns. (k) All disputes and controversies arising out of or relating to the Plan shall be settled exclusively by arbitration in New York, New York in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any State or Federal Court sitting in the State of New York having jurisdiction thereof. Notwithstanding any provision of the Plan to the contrary, Participants and Beneficiaries shall be entitled to seek in any State or Federal Court sitting in the State of New York having jurisdiction thereof specific performance of their respective rights to receive distributions provided for in the Plan during -22- 24 the pendency of any such dispute or controversy arising out of or relating to the Plan. (l) The Plan shall be governed by and construed in accordance with the laws of the State of New York, as from time to time in effect, without regard to the conflicts of law rules thereof, and applicable Federal law. Each Participant and his or her Beneficiary and any other person claiming from or through them irrevocably submit to the exclusive jurisdiction of any State or Federal Court sitting in the State of New York over any suit, action, or proceeding arising out of or relating to the Plan, and each such person agrees and consents that, to the extent provided for under applicable law, all service of process in any such suit, action, or proceeding in any State or Federal Court sitting in the State of New York may be made by certified or registered mail, return receipt requested, directed to him or her at the address indicated in the records of the Company, unless the Company is otherwise notified in writing of a new address, and service so made shall be complete 10 days after the same shall have been so mailed. 8. CHANGE IN CONTROL; POTENTIAL CHANGE IN CONTROL (a) A Participant shall be deemed to have irrevocably elected the distribution of his or her Participant's Account in the event of the occurrence of a Change in Control (as hereinafter defined) or a Potential Change in Control (as hereinafter defined), as specified in this paragraph 8(a). Notwithstanding anything else herein to the contrary, in the event of the occurrence of a Change in Control or a Potential Change in Control, each Participant or his or her Beneficiary shall have the right to receive, and shall be paid, as soon as practicable after such Change in Control or Potential Change in Control, a lump-sum cash distribution equal to the sum of (i) the entire unpaid balance of the Participant's Cash Account, (ii) the entire unpaid balance of the Participant's Investment Account, and (iii) the Daily-Basis Full Settlement Value (as defined in -23- 25 paragraph (f) below) of the Participant's Phantom Share Unit Account. All amounts distributed in accordance with the preceding sentence shall be based upon the subaccounts' values as of the date immediately preceding the Change in Control or the Potential Change in Control. Notwithstanding anything else herein to the contrary, Discretionary Deferral Fees which are otherwise payable to an Eligible Director in the calendar quarter in which a Change in Control or Potential Change in Control has occurred may not be deferred under the Plan, and Discretionary Deferral Fees otherwise payable in subsequent calendar quarters may not be deferred under the Plan unless an Eligible Director has filed, after the occurrence of the Change in Control or Potential Change in Control, a new election to defer Discretionary Deferral Fees in accordance with paragraph 2(c). (b) A "CHANGE IN CONTROL" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (1) any Person (as hereinafter defined) is or becomes the Beneficial Owner (as hereinafter defined), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 20% or more of either the then-outstanding Shares or the combined voting power of the Company's then-outstanding securities; (2) the following individuals cease for any reason to constitute a majority of the number of Directors then serving: individuals who, on April 1, 1997, constituted the Board and any new Director (other than a Director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the -24- 26 election of Directors of the Company (as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act)) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors on April 1, 1997 or whose appointment, election or nomination for election was previously so approved; (3) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation or approve the issuance of voting securities of the Company in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 65% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 20% or more of either the then-outstanding Shares or the -25- 27 combined voting power of the Company's then-outstanding securities; or (4) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 65% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, no "Change in Control" shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of Shares immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (c) A "POTENTIAL CHANGE IN CONTROL" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (1) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (2) the Company or any Person publicly announces an intention to take or to consider taking actions which if consummated, would constitute a Change in Control; (3) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of either the then-outstanding -26- 28 securities; or the combined voting power of the Company's then-outstanding securities; or (4) the Board adopts a resolution to the effect that, for purposes of any severance agreement to which the Company is a party, a Potential Change in Control has occurred. (d) "BENEFICIAL OWNER" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (e) "PERSON" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. (f) "DAILY-BASIS FULL SETTLEMENT VALUE" as of a given valuation date shall mean the number of Phantom Share Units then credited to the Participant's Phantom Share Unit Account multiplied by the Fair Market Value of a Share on that date. -27- EX-10.30A 9 AGREEMENT BETWEEN O & R AND G.D. CALIENDO 1 EXHIBIT 10.30A AGREEMENT On this ___ day of July, 1997, Orange and Rockland Utilities, Inc. (hereinafter the "Company") and G.D. Caliendo (hereinafter the "Executive") enter into this Agreement effective July 1, 1997. WHEREAS, the Executive and the Company are parties to a letter agreement dated February 16, 1995 and a letter agreement dated April 6, 1995 (individually and collectively the "Letter Agreement(s)"); and WHEREAS, paragraph "3" of the April 6, 1995 Letter Agreement was intended to amend the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (the "Plan") to provide for the inclusion of incentive compensation in the calculation of Executive's benefit under the Plan on an accelerated incremental basis commensurate with years of service with the Company; and WHEREAS, the Plan has recently been amended to reflect that the definition of "Compensation" under the Plan shall include all incentive compensation that an Officer was/is eligible to earn under the Company's Annual Team Incentive Plan at target, effective January 1, 1995; and WHEREAS, the Company and the Executive wish to amend the Letter Agreements so as to reflect these recent changes to the Plan. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Effective January 1, 1995, the benefit to which Executive may be entitled under the Plan, as determined under the terms and conditions of the Plan, shall be calculated to include 100% of the Annual Team Incentive Plan award that Executive is eligible to earn at target in an applicable year, in accordance with the definition of "Compensation" under Section 2(9)(B) of the Plan, as amended and restated on June 5, 1997 and effective July 1, 1997. Paragraph "3" of the April 6, 1995 Letter Agreement is hereby superseded by this paragraph. 2 2. Nothing in this Agreement is intended, nor shall this Agreement be construed, to in any way amend or limit the accelerated vesting provisions in the Letter Agreements. 3. To the extent the terms of the Letter Agreements conflict with the terms of this Agreement, the terms of this Agreement shall govern. ---------------------------- ---------------------------- G. D. Caliendo James F. O'Grady, Jr. Chairman, Compensation Committee EX-10.31A 10 AGREEMENT BETWEEN O & R AND NANCY M. JAKOBS 1 EXHIBIT 10.31A AGREEMENT On this ___ day of July, 1997, Orange and Rockland Utilities, Inc. (hereinafter the "Company") and Nancy M. Jakobs (hereinafter the "Executive") enter into this Agreement effective July 1, 1997. WHEREAS, the Executive and the Company are parties to a letter agreement dated March 21, 1995 and a letter agreement dated September 21, 1995 (individually and collectively the "Letter Agreement(s)"); and WHEREAS, paragraph "3" of the September 21, 1995 Letter Agreement was intended to amend the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (the "Plan") to provide for the inclusion of incentive compensation in the calculation of Executive's benefit under the Plan on an accelerated incremental basis commensurate with years of service with the Company; and WHEREAS, the Plan has recently been amended to reflect that the definition of "Compensation" under the Plan shall include all incentive compensation that an Officer was/is eligible to earn under the Company's Annual Team Incentive Plan at target, effective January 1, 1995; and WHEREAS, the Company and the Executive wish to amend the Letter Agreements so as to reflect these recent changes to the Plan. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Effective January 1, 1995, the benefit to which Executive may be entitled under the Plan, as determined under the terms and conditions of the Plan, shall be calculated to include 100% of the Annual Team Incentive Plan award that Executive is eligible to earn at target in an applicable year, in accordance with the definition of "Compensation" under Section 2(9)(B) of the Plan, as amended and restated on June 5, 1997 and effective July 1, 1997. Paragraph "3" of the September 21, 1995 Letter Agreement is hereby superseded by this paragraph. 2 2. Nothing in this Agreement is intended, nor shall this Agreement be construed, to in any way amend or limit the accelerated vesting provisions in the Letter Agreements. 3. To the extent the terms of the Letter Agreements conflict with the terms of this Agreement, the terms of this Agreement shall govern. ---------------------------- ---------------------------- Nancy M. Jakobs James F. O'Grady, Jr. Chairman, Compensation Committee EX-10.36A 11 AGREEMENT BETWEEN O & R AND D. L. PEOPLES 1 EXHIBIT 10.36A AGREEMENT On this ___ day of July, 1997, Orange and Rockland Utilities, Inc. (hereinafter the "Company") and D. Louis Peoples (hereinafter the "Executive") enter into this Agreement. WHEREAS, the Executive and the Company are parties to an agreement dated January 22,1996 (the "Severance Agreement"), which provides the Executive with certain protective measures in the event the Executive's employment is terminated following a Change in Control, as defined in the Severance Agreement; and WHEREAS, paragraph "6.1(B)" of the Severance Agreement presently provides: (B) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan but which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date or otherwise has not been paid, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period.; and WHEREAS, the Orange and Rockland Utilities, Inc. Long-Term Performance Share Unit Plan (the "Plan") provides in paragraph "9(a)": (a) EFFECT OF CHANGE IN CONTROL OR POTENTIAL CHANGE IN CONTROL. Other provisions of the Plan notwithstanding, upon the occurrence of a Change in Control or a Potential Change in Control during a Performance Period, all of the Target PSUs and Dividend Equivalent PSUs shall be deemed to be earned as of the date of such event. As soon as practicable after any Change in Control or Potential Change in Control, the Company shall pay to each Participant (or his or her Beneficiary) a lump-sum cash distribution equal to (i) the number of Target PSUs and Dividend Equivalent PSUs deemed earned by the Participant under this Section 9(a), multiplied by the Fair Market Value of a Share as of the date 2 immediately preceding the Change in Control or the Potential Change in Control; plus (ii) the entire unpaid balance of the Participant's Deferral Accounts as of the date immediately preceding the Change in Control or Potential Change in Control; plus (iii) the number of DSUs, including Dividend Equivalent DSUs, credited to the Participant's DSU Account as of the date of the Change in Control or the Potential Change in Control, multiplied by the Fair Market Value of a Share as of the date immediately preceding the Change in Control or the Potential Change in Control; plus (iv) if, in connection with any dividend, distribution, or forward Share split, the record date is before, but the payment date is after, the date of the distribution under this Section 9(a), the amount of cash plus the Fair Market Value of any Shares or other property payable or issuable as a dividend or distribution on each Share multiplied by the number of PSUs and DSUs settled in accordance with clauses (i) and (iii) of this sentence.; and WHEREAS, the Company and the Executive wish to amend the Severance Agreement so that it reflects the provisions of the Plan. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Paragraph "6.1(B)" of the Severance Agreement is hereby rescinded and replaced by the following revised paragraph: 6.1 . . . (B) Except with regard to the Orange and Rockland Utilities, Inc. Long-Term Performance Share Unit Plan (the "PSU Plan"), and notwithstanding any provision of any other annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan but which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date or otherwise has not been paid, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. Upon a Change in Control or Potential Change in Control, the Executive's right to receive incentive compensation awarded or allocated to the Executive under the PSU Plan shall be governed by the terms of the PSU Plan. 3 2. Except as provided above, nothing in this Agreement is intended, nor shall this Agreement be construed, to in any other way amend the Severance Agreement. ---------------------------- ---------------------------- D. Louis Peoples James F. O'Grady, Jr. Chairman, Compensation Committee EX-10.37A 12 AGREEMENT BETWEEN O & R AND G.D. CALIENDO 1 EXHIBIT 10.37A AGREEMENT On this ___ day of July, 1997, Orange and Rockland Utilities, Inc. (hereinafter the "Company") and G. D. Caliendo (hereinafter the "Executive") enter into this Agreement. WHEREAS, the Executive and the Company are parties to an agreement dated January 22,1996 (the "Severance Agreement"), which provides the Executive with certain protective measures in the event the Executive's employment is terminated following a Change in Control, as defined in the Severance Agreement; and WHEREAS, paragraph "6.1(B)" of the Severance Agreement presently provides: (B) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan but which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date or otherwise has not been paid, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period.; and WHEREAS, the Orange and Rockland Utilities, Inc. Long-Term Performance Share Unit Plan (the "Plan") provides in paragraph "9(a)": (a) EFFECT OF CHANGE IN CONTROL OR POTENTIAL CHANGE IN CONTROL. Other provisions of the Plan notwithstanding, upon the occurrence of a Change in Control or a Potential Change in Control during a Performance Period, all of the Target PSUs and Dividend Equivalent PSUs shall be deemed to be earned as of the date of such event. As soon as practicable after any Change in Control or Potential Change in Control, the Company shall pay to each Participant (or his or her Beneficiary) a lump-sum cash distribution equal to (i) the number of Target PSUs and Dividend Equivalent PSUs deemed earned by the Participant under this Section 9(a), multiplied by the Fair Market Value of a Share as of the date 2 immediately preceding the Change in Control or the Potential Change in Control; plus (ii) the entire unpaid balance of the Participant's Deferral Accounts as of the date immediately preceding the Change in Control or Potential Change in Control; plus (iii) the number of DSUs, including Dividend Equivalent DSUs, credited to the Participant's DSU Account as of the date of the Change in Control or the Potential Change in Control, multiplied by the Fair Market Value of a Share as of the date immediately preceding the Change in Control or the Potential Change in Control; plus (iv) if, in connection with any dividend, distribution, or forward Share split, the record date is before, but the payment date is after, the date of the distribution under this Section 9(a), the amount of cash plus the Fair Market Value of any Shares or other property payable or issuable as a dividend or distribution on each Share multiplied by the number of PSUs and DSUs settled in accordance with clauses (i) and (iii) of this sentence.; and WHEREAS, the Company and the Executive wish to amend the Severance Agreement so that it reflects the provisions of the Plan. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Paragraph "6.1(B)" of the Severance Agreement is hereby rescinded and replaced by the following revised paragraph: 6.1 . . . (B) Except with regard to the Orange and Rockland Utilities, Inc. Long-Term Performance Share Unit Plan (the "PSU Plan"), and notwithstanding any provision of any other annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan but which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date or otherwise has not been paid, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. Upon a Change in Control or Potential Change in Control, the Executive's right to receive incentive compensation awarded or allocated to the Executive under the PSU Plan shall be governed by the terms of the PSU Plan. 3 2. Except as provided above, nothing in this Agreement is intended, nor shall this Agreement be construed, to in any other way amend the Severance Agreement. ---------------------------- ---------------------------- G. D. Caliendo James F. O'Grady, Jr. Chairman, Compensation Committee EX-10.37B 13 LETTER AGREEMENT BETWEEN O & R AND G.D. CALIENDO 1 Exhibit 10.37B February 25, 1998 G.D. Caliendo, Esq. Vice President, General Counsel and Secretary Orange and Rockland Utilities, Inc. One Blue Hill Plaza Pearl River, NY l0965 Dear Mr. Caliendo: The purpose of this letter agreement is to amend the letter agreement (the "Prior Letter Agreement") entered into between you and Orange and Rockland Utilities, Inc. (the "Company") on April 6, 1995, as amended on July 21, 1997, and the Agreement (the "Prior Agreement") entered into between you and the Company on January 21, 1996, as amended on July 23, 1997. 1. You and the Company hereby agree that paragraph 2. of the Prior Letter Agreement is hereby amended by deleting the last sentence thereof and inserting, in lieu thereof, the following: "In order to reflect the Board's determination that it is appropriate that you accrue benefits under the Plan at an annual rate of 5% during each of the sixth through eleventh years of your employment, for each of the next four years of Service you complete under the Plan, you will receive credit under the Plan for two and one-half (2-1/2) years of Service, and for each of the next two years of Service you complete under the Plan you will receive credit under the Plan for ten (10) years of 2 G.D. Caliendo, Esq. February 25, 1998 Page 2 Service. Accordingly, if you complete a year of Service under the Plan in each year through and including the year 2000, you will then have 12-1/2 years of Service under the Plan (i.e., an aggregate accrual of 45%); if you then complete a year of Service in 2001, you will then have 15 years of Service under the Plan (i.e., an aggregate accrual of 50%), and so on through 2003 (when you will have an aggregate accrual of 60%); if you then complete a year of Service under the Plan in 2004, you will then have 30 years of Service under the Plan (i.e., an aggregate accrual of 65%); if you then complete a year of Service under the Plan in 2005, you will then have 40 years of Service under the Plan (i.e., an aggregate accrual of 70%). Thereafter, you will not be credited with additional years of Service under the Plan. Notwithstanding anything in the Plan to the contrary, for purposes of implementing the foregoing and determining your benefit under Section 6 of the Plan, fractional years of Service credited pursuant to this letter agreement shall be given effect under the Plan." 2. You and the Company hereby further agree that Section 6.l(C) of the Prior Agreement is hereby deleted and the following is hereby inserted in lieu thereof: "For purposes of the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. as Amended and Restated (the "SERP"), the Executive shall be treated as having completed a number of years of Service equal to the number of such years with 3 G.D. Caliendo, Esq. February 25, 1998 Page 3 which he would have been credited under the Letter Agreement had he remained a full time employee of the Company for thirty-six months following the Date of Termination. For purposes of the foregoing, the Letter Agreement shall mean that certain letter agreement entered into between the Executive and the Company on April 6, 1995, as amended by a letter agreement entered into between the Company and the Executive on February 25, 1998. Notwithstanding anything in the SERP to the contrary, for purposes of implementing the foregoing and determining your benefit under Section 6 of the SERP, fractional years of Service credited hereunder or pursuant to the Letter Agreement shall be given effect under the SERP. Accordingly, your years of Service under the SERP will be determined as follows: Number of Years Aggregate Year in which last year of Service Under Accrual Under of Service Completed the SERP the SERP -------------------- -------- ------- 1998 15 50 1999 17.5 55 2000 20 60 2001 30 65 2002 and thereafter 40 70" 3. You and the Company hereby further agree that Exhibit A to the Prior Agreement is hereby deleted and of no further force and effect. 4 G.D. Caliendo, Esq. February 25, 1998 Page 4 In all other respects, the Prior Letter Agreement and the Prior Agreement, each as amended hereby, shall remain in full force and effect. 5 G.D. Caliendo, Esq. February 25, 1998 Page 5 Please indicate your acceptance of this letter agreement by signing the extra copy provided and returning it to us. /s/ MICHAEL J. DEL GIUDICE Michael J. Del Giudice Chairman of the Board /s/ JAMES F. O'GRADY, JR. James F. O'Grady, Jr. Chairman, Compensation Committee of the Board I accept the foregoing letter agreement concerning my participation in the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. and evidence my acceptance by setting forth my signature this 25 day of February 1998. /s/ G. D. CALIENDO G.D. Caliendo EX-10.38A 14 AGREEMENT BETWEEN O & R AND R. L. HANEY 1 EXHIBIT 10.38A AGREEMENT On this ___ day of July, 1997, Orange and Rockland Utilities, Inc. (hereinafter the "Company") and R. Lee Haney (hereinafter the "Executive") enter into this Agreement. WHEREAS, the Executive and the Company are parties to an agreement dated January 22,1996 (the "Severance Agreement"), which provides the Executive with certain protective measures in the event the Executive's employment is terminated following a Change in Control, as defined in the Severance Agreement; and WHEREAS, paragraph "6.1(B)" of the Severance Agreement presently provides: (B) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan but which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date or otherwise has not been paid, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period.; and WHEREAS, the Orange and Rockland Utilities, Inc. Long-Term Performance Share Unit Plan (the "Plan") provides in paragraph "9(a)": (a) EFFECT OF CHANGE IN CONTROL OR POTENTIAL CHANGE IN CONTROL. Other provisions of the Plan notwithstanding, upon the occurrence of a Change in Control or a Potential Change in Control during a Performance Period, all of the Target PSUs and Dividend Equivalent PSUs shall be deemed to be earned as of the date of such event. As soon as practicable after any Change in Control or Potential Change in Control, the Company shall pay to each Participant (or his or her Beneficiary) a lump-sum cash distribution equal to (i) the number of Target PSUs and Dividend Equivalent PSUs deemed earned by the Participant under this Section 9(a), multiplied by the Fair Market Value of a Share as of the date 2 immediately preceding the Change in Control or the Potential Change in Control; plus (ii) the entire unpaid balance of the Participant's Deferral Accounts as of the date immediately preceding the Change in Control or Potential Change in Control; plus (iii) the number of DSUs, including Dividend Equivalent DSUs, credited to the Participant's DSU Account as of the date of the Change in Control or the Potential Change in Control, multiplied by the Fair Market Value of a Share as of the date immediately preceding the Change in Control or the Potential Change in Control; plus (iv) if, in connection with any dividend, distribution, or forward Share split, the record date is before, but the payment date is after, the date of the distribution under this Section 9(a), the amount of cash plus the Fair Market Value of any Shares or other property payable or issuable as a dividend or distribution on each Share multiplied by the number of PSUs and DSUs settled in accordance with clauses (i) and (iii) of this sentence.; and WHEREAS, the Company and the Executive wish to amend the Severance Agreement so that it reflects the provisions of the Plan. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Paragraph "6.1(B)" of the Severance Agreement is hereby rescinded and replaced by the following revised paragraph: 6.1 . . . (B) Except with regard to the Orange and Rockland Utilities, Inc. Long-Term Performance Share Unit Plan (the "PSU Plan"), and notwithstanding any provision of any other annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan but which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date or otherwise has not been paid, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. Upon a Change in Control or Potential Change in Control, the Executive's right to receive incentive compensation awarded or allocated to the Executive under the PSU Plan shall be governed by the terms of the PSU Plan. 3 2. Except as provided above, nothing in this Agreement is intended, nor shall this Agreement be construed, to in any other way amend the Severance Agreement. ---------------------------- ---------------------------- R. Lee Haney James F. O'Grady, Jr. Chairman, Compensation Committee EX-10.38B 15 LETTER AGREEMENT AMENDING EXHIBITS 10.26 AND 10.38 1 Exhibit 10.38B February 25, 1998 Mr. R. Lee Haney Vice President, and Chief Financial Officer Orange and Rockland Utilities, Inc. One Blue Hill Plaza Pearl River, NY l0965 Dear Mr. Haney: The purpose of this letter agreement is to amend the letter agreement (the "Prior Letter Agreement") entered into between you and Orange and Rockland Utilities, Inc. (the "Company") on September 29, 1994, as amended on July 21, 1997, and the Agreement (the "Prior Agreement") entered into between you and the Company on January 22, 1996, as amended on July 23, 1997. 1. You and the Company hereby agree that paragraph 3. of the Prior Letter Agreement is hereby amended by deleting the last sentence thereof and inserting, in lieu thereof, the following: "In order to reflect the Board's determination that it is appropriate that you accrue benefits under the Plan at an annual rate of 5% during each of the sixth through eleventh years of your employment, for each of the next four years of Service you complete under the Plan, you will receive credit under the Plan for two and one-half (2-1/2) years of Service, and for each of the next two years of Service you complete under the Plan, you will receive credit under the Plan for ten (10) years of 2 Mr. R. Lee Haney February 25, 1998 Page 2 Service. Accordingly, if you complete a year of Service under the Plan in each year through and including the year 1999, you will then have 12-1/2 years of Service under the Plan (i.e., an aggregate accrual of 45%); if you then complete a year of Service in 2000, you will then have 15 years of Service under the Plan (i.e., an aggregate accrual of 50%), and so on through 2002 (when you will have an aggregate accrual of 60%); if you then complete a year of Service under the Plan in 2003, you will then have 30 years of Service under the Plan (i.e., an aggregate accrual of 65%); if you then complete a year of Service under the Plan in 2004, you will then have 40 years of Service under the Plan (i.e., an aggregate accrual of 70%). Thereafter, you will not be credited with additional years of Service under the Plan. Notwithstanding anything in the Plan to the contrary, for purposes of implementing the foregoing and determining your benefit under Section 6 of the Plan, fractional years of Service credited pursuant to this letter agreement shall be given effect under the Plan." 2. You and the Company hereby further agree that paragraph 5. of the Prior Letter Agreement is hereby deleted and of no further force and effect. 3. You and the Company hereby further agree that Section 6.l(C) of the Prior Agreement is hereby deleted and the following is hereby inserted in lieu thereof: "For purposes of the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. as Amended and Restated (the "SERP"), the Executive shall be treated as having completed a number of years of Service equal to the number of such years with 3 Mr. R. Lee Haney February 25, 1998 Page 3 which he would have been credited under the Letter Agreement had he remained a full time employee of the Company for thirty-six months following the Date of Termination. For purposes of the foregoing, the Letter Agreement shall mean that certain letter agreement entered into between the Executive and the Company on September 29, 1994, as amended by a letter agreement entered into between the Company and the Executive on February 25, 1998. Notwithstanding anything in the SERP to the contrary, for purposes of implementing the foregoing and determining your benefit under Section 6 of the SERP, fractional years of Service credited hereunder or pursuant to the Letter Agreement shall be given effect under the SERP. Accordingly, your years of Service under the SERP will be determined as follows: Number of Years Aggregate Year in which last year of Service Under Accrual Under of Service Completed the SERP the SERP -------------------- -------- -------- 1997 15 50 1998 17.5 55 1999 20 60 2000 30 65 2001 and thereafter 40 70" 4. You and the Company hereby further agree that Exhibit A to the Prior Agreement is hereby deleted and of no further force and effect. 4 Mr. R. Lee Haney February 25, 1998 Page 4 In all other respects, the Prior Letter Agreement and the Prior Agreement, each as amended hereby, shall remain in full force and effect. 5 Mr. R. Lee Haney February 25, 1998 Page 5 Please indicate your acceptance of this letter agreement by signing the extra copy provided and returning it to us. /s/ MICHAEL J. DEL GIUDICE Michael J. Del Giudice Chairman of the Board /s/ JAMES F. O'GRADY, JR. James F. O'Grady, Jr. Chairman, Compensation Committee of the Board I accept the foregoing letter agreement concerning my participation in the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. and evidence my acceptance by setting forth my signature this 25 day of February 1998. /s/ R. LEE HANEY R. Lee Haney EX-10.44A 16 AGREEMENT AMENDING EXHIBIT 10.44 1 EXHIBIT 10.44A AGREEMENT On this ___ day of July, 1997, Orange and Rockland Utilities, Inc. (hereinafter the "Company") and Larry S. Brodsky (hereinafter the "Executive") enter into this Agreement effective July 1, 1997. WHEREAS, the Executive and the Company are parties to a letter agreement dated November 14, 1995 (hereinafter the "Letter Agreement"); and WHEREAS, the Letter Agreement provides that "[i]ncentive compensation will be included in the calculation of [the Executive's] retirement benefit [under the Plan], commencing in the first year in increments of 10% per year" (hereinafter the "Letter Agreement Representation"), with an attached "SCHEDULE OF PARTICIPATION" illustrating the incremental inclusion of incentive compensation in the calculation of the Executive's benefit under the Plan; and WHEREAS, the Letter Agreement Representation was intended to amend the Officers' Supplemental Retirement Plan of Orange and Rockland Utilities, Inc. (the "Plan") to provide for the inclusion of incentive compensation in the calculation of the Executive's benefit under the Plan on an accelerated incremental basis commensurate with years of service with the Company; and WHEREAS, the Plan has recently been amended to reflect that the definition of "Compensation" under the Plan shall include all incentive compensation that an Officer was/is eligible to earn under the Company's Annual Team Incentive Plan at target, effective January 1, 1995; and WHEREAS, the Company and the Executive wish to amend the Letter Agreement so as to reflect these recent changes to the Plan. NOW, THEREFORE, the Company and the Executive agree as follows: 2 1. Effective January 1, 1995, the benefit to which Executive may be entitled under the Plan, as determined under the terms and conditions of the Plan, shall be calculated to include 100% of the Annual Team Incentive Plan award that Executive is eligible to earn at target in an applicable year, in accordance with the definition of "Compensation" under Section 2(9)(B) of the Plan, as amended and restated on June 5, 1997 and effective July 1, 1997. The Letter Agreement Representation is hereby superseded by this paragraph. 2. Nothing in this Agreement is intended, nor shall this Agreement be construed, to in any way amend or limit the accelerated vesting provisions in the Letter Agreement. 3. To the extent the terms of the Letter Agreement conflict with the terms of this Agreement, the terms of this Agreement shall govern. ---------------------------- ---------------------------- Larry S. Brodsky James F. O'Grady, Jr. Chairman, Compensation Committee EX-10.49 17 MANAGEMENT EMPLOYEE TRANSITION PROGRAM 1 Exhibit 10.49 [ORANGE AND ROCKLAND LOGO] December 11, 1997 Dear Management Colleague: As you know, earlier today the Company submitted a Preliminary Divestiture Plan. At the same time, we mailed a letter last evening to the New York Public Service Commission declining the option to participate in the auction of our generating plants. We believe--as we have always believed--that our Electric Production Division employees are among the best in the business. It is our expectation that the successful bidder will recognize our plant employees' knowledge, experience and dedication, and will want to retain these employees who add so much to the value of the asset being purchased. While we believe that any new owner would look favorably on retaining management employees, we nonetheless recognize that there is no absolute certainty in these uncertain times. As a result, we insisted upon--and received approval by the PSC--the right to retain money from the sale of the plants exclusively for the purpose of funding employee transition costs. We did that because it's the right thing to do--for those employees who will be affected by the divestiture and for the Company. Accordingly, the Board of Directors has approved the Management Employee Transition Program described on these pages. This document is intended to help clarify some of the immediate questions that you may have. Of course, if you are offered a position and decline, you would not be eligible for the benefits described on these pages, with the exception of the retention bonus. IT'S IMPORTANT TO NOTE TWO THINGS ABOUT THIS EMPLOYEE TRANSITION PROGRAM: - -- IT APPLIES TO ELECTRIC PRODUCTION DIVISION MANAGEMENT EMPLOYEES AS OUTLINED ON THE FOLLOWING PAGES; - -- EXCEPT FOR THE RETENTION BONUS, THE PROGRAM ALSO WILL APPLY TO THOSE MANAGEMENT EMPLOYEES WHO ARE NOT IN THE ELECTRIC PRODUCTION DIVISION BUT WHO MAY SUFFER A LOSS OF EMPLOYMENT AS A RESULT OF THE SALE OF THE PLANTS. IT IS FAR TOO EARLY TO ATTEMPT TO IDENTIFY WHO THOSE EMPLOYEES MAY BE. THIS INFORMATION IS BEING PROVIDED TO ALL MANAGEMENT EMPLOYEES TO TRY TO PROVIDE YOU WITH SOME MEASURE OF PROTECTION AND COMFORT IN LIGHT OF THE POTENTIAL EFFECTS OF THE SALE. While the events unfolding at Orange and Rockland are similar to those happening at other companies throughout our industry, I know that fact doesn't make it any easier. That's why we intend to move forward through its process both quickly and prudently. Above all else, I want to emphasize that we'll provide you with accurate information regarding the divestiture as it happens. As you would expect, the rumor mill is operating overtime, and I am determined to help you sort out fact from fiction. In addition to future written communications, we have established a telephone Restructuring Plan Message Box, where you may record your questions or concerns by calling (914) 577-2121. We'll respond to questions of a general nature in Currents with frequent communication updates. Human Resources personnel will also be available at the plants periodically to answer your questions one-on-one. We'll announce when those visits will take place. I'd like every management employee to understand that we're listening to your concerns, we care very much about helping you with your career choices, and we're working very hard to ensure that each of you is fully aware of the steps the Company is taking during this significant transition period. Sincerely, /s/ Nancy Nancy Jakobs Vice President--Human Resources 2 MANAGEMENT EMPLOYEE TRANSITION PROGRAM - -------------------------------------- FOR ELECTRIC PRODUCTION DIVISION EMPLOYEES AND OTHERS WHO MAY BE AFFECTED BY THE SALE OF ORANGE AND ROCKLAND'S GENERATING ASSETS. RETENTION PROGRAM - ----------------- In an effort to meet its obligation to maintain the value of O&R's generating assets through the transfer of ownership, and to provide an incentive to remain with the Company and help us through this transitional phase, the Company will provide a retention bonus to certain management employees in the Electric Production Division. The retention bonus for which you may be eligible is based on pay grade, according to the following chart:
RETENTION BONUS PROGRAM --------------------------------------------------------------------------- GRADE LEVEL PERCENTAGE OF ANNUAL BASE PAY --------------------------------------------------------------------------- GRADE 8-10 12.5% --------------------------------------------------------------------------- GRADE 11-15 25% --------------------------------------------------------------------------- GRADE 16-18 50% ---------------------------------------------------------------------------
To be eligible to receive a retention bonus you MUST maintain your employment with the Company until the transfer of ownership to the purchaser. We believe this will likely occur in mid-1999. If you leave before ownership of O&R's generating assets is transferred to the purchaser, you do not receive any retention bonus. CAREER MANAGEMENT SERVICES - -------------------------- Career Management Services will be provided. These services may include resume preparation, interview training, job search strategies, personal marketing plan development and outplacement services, as appropriate. Starting in January 1998, Orange and Rockland will also offer Moving Forward with Change Seminars to all Electric Production employees. The Moving Forward with Change Seminars are designed to help employees understand how to manage change in their work environment. The workshop also provides information about the wide range of resources available to help respond to job/career changes. SEVERANCE PAY PLAN - ------------------ Orange and Rockland's Severance Pay Plan for Management Employees provides post-termination salary continuation for employees with at least one year of service with the Company who are involuntarily terminated for reasons other than cause. The level of benefit under the Plan depends on your pay grade and years of service, in accordance with the following chart.
SEVERANCE PAY FORMULA -------------------------------------------------------------------------------------- EMPLOYEE WEEKS OF SEVERANCE PAY MINIMUM MAXIMUM GRADE LEVEL PER EACH YEAR OF EMPLOYMENT ALLOWANCE ALLOWANCE -------------------------------------------------------------------------------------- GRADE 1-10 1 1/2 WEEKS PAY FOR EACH YEAR WORKED 3 WEEKS PAY 26 WEEKS PAY -------------------------------------------------------------------------------------- GRADE 11-17 2 1/2 WEEKS PAY FOR EACH YEAR WORKED 6 WEEKS PAY 40 WEEKS PAY -------------------------------------------------------------------------------------- GRADE 18+ 3 WEEKS PAY FOR EACH YEAR WORKED 8 WEEKS PAY 52 WEEKS PAY --------------------------------------------------------------------------------------
Medical, dental and group life insurance benefits will continue through the severance period. As an added measure of protection, if you are hired by the purchaser of the generating assets you will remain eligible, for a certain period of time, to receive a benefit under the Company's Severance Pay Plan should you be let go by the purchaser for reasons other than cause. The period during which you will remain eligible to receive severance from O&R depends on your pay grade, in accordance with the following chart. 3 CONTINUING ELIGIBILITY PERIOD EMPLOYEE GRADE LEVEL MONTHS OF PROTECTION WITH THE PURCHASER (ELIGIBILITY PERIOD) GRADE 1-7 FIRST 6 MONTHS OF EMPLOYMENT GRADE 8-10 FIRST 9 MONTHS OF EMPLOYMENT GRADE 11-18 FIRST 12 MONTHS OF EMPLOYMENT Any amounts due from O&R will be offset by any amounts you may receive from the purchaser in severance pay. SOME THINGS YOU SHOULD KNOW: - - If you are offered a job by the purchaser and refuse it, you are not entitled to severance from O&R. - - If you are not offered employment by the purchaser, severance benefits will cease at such time as you are subsequently employed elsewhere, even if your severance period has not lapsed. - - Severance benefits are contingent upon your execution of a release and waiver of claims against the Company. PENSION PROTECTION PROGRAM The objective of the proposed Pension Protection Program (the program) is to provide a retention and protection strategy for our Electric Production Division and support employees who may suffer a loss of employment as a result of the sale of the generating assets. This program allows for a 5-Year Protection Period, beginning on the date of the transfer of ownership of the plants and covers those who are at least age 50 with ten years credited service under the Employees Retirement Plan of Orange and Rockland Utilities, Inc. (the "Plan") at that time. This program provides pension protection in the event that you are not offered employment by the new owner or are involuntarily terminated by the new owner within the five years following the date of the transfer of ownership. If you are not offered employment with the new owner or if you are terminated by the new owner during your initial 60 months of work, in calculating the early retirement reduction under the Plan, the Company will add five years to your age and five years to your credited service. To determine how this may affect your early retirement calculation, see the attached table. TO SUMMARIZE, THE PENSION PROTECTION PROGRAM PROVIDES THE FOLLOWING: - - Affected employees with less than 5 years service will be vested upon the sale of the plants. - - Protection of retirement benefits under the Plan to employees who have a minimum of 10 years credited service and who are at least age 50 at the date of the close of the transfer of ownership. - - A 5-Year Protection Period which will begin at the date of the transfer of ownership. - - 5 years toward service credit and 5 years toward age for the calculation of an early retirement reduction for employees who are at least age 50 with ten years of credited service. - - An ability to elect an early retirement any time at or after age 55 with the early retirement reduction based on the protection program. - - Affected employees age 50 or above will be eligible for retirement Healthcare and Life Insurance in accordance with the terms of the existing retiree benefit program. - - If you voluntarily terminate your employment with the new owner during the 5-year protection period, you will be credited only with service through your separation date with the new owner. THE PENSION PROTECTION PROGRAM DOES NOT PROVIDE THE FOLLOWING: - - A change in minimum retirement age. You must actually attain the age of 55 to receive benefits. - - An increase in accrued benefit beyond the date of the transfer of ownership. - - A $600 monthly supplement to employees who at retirement are not actually ages 60-62. - - A 5-year pension protection benefit to employees who are under age 50 at the date of the transfer of ownership. - - Any benefit if you are involuntarily terminated for cause. THE PROGRAM IS SUBJECT TO THE REVIEW OF TAXATION AND GOVERNMENTAL AUTHORITIES. 4 PENSION PROGRAM COMPARISON: CURRENT VS. NEW PROGRAM - -----------------------
CURRENT PENSION BENEFITS PENSION PROTECTION PROGRAM (NEW) AT THE DATE ------------------------ ----------------------------------------- OF THE TRANSFER (IF EMPLOYMENT TERMINATED (IF EMPLOYEE WAS INVOLUNTARILY SEVERED FROM OF OWNERSHIP FROM O&R) O&R AS A RESULT OF ELECTRIC PRODUCTION DIVESTITURE OR FROM THE PURCHASER, WITHIN 60 MONTHS) - -------------------------------------------------------------------------------------------------------------------------------- AGE 60 AND ABOVE - Commence benefit at any time - May continue working with new employer and 10+ YEARS after age 60 with no early commence pension benefits immediately. CREDITED SERVICE retirement reduction. - You can elect to commence your benefit at any time prior to - Employees whose actual age at age 65 without reduction. commencement of benefits is - Employees whose actual age at commencement of benefit between 60-62 will collect a $600 is between 60-62 will collect a $600 a month supplement a month supplement until age 62. until age 62. - -------------------------------------------------------------------------------------------------------------------------------- AGE 55-59 - Commence benefit at age 55 or - Commence benefit at age 55 or greater with no early 10+ YEARS greater. retirement reduction. CREDITED SERVICE - Early retirement reduction of 4% - Employees whose actual age at commencement of benefits per year prior to age 60. is between 60-62 will collect a $600 a month supplement - No early retirement reduction for until age 62. 85 points. - -------------------------------------------------------------------------------------------------------------------------------- AGE 50-54 - Commence benefit at age 55 or - Commence benefit at age 55 or greater with no early 75+ POINTS greater. retirement reduction. - Early retirement reduction is 6% per year from age 65. - -------------------------------------------------------------------------------------------------------------------------------- AGE 50-54 - Commence benefit at age 55 or - Commence benefit at age 55 or greater. LESS THAN 75 POINTS greater. - Early retirement reduction is 4% per year from age 60. 10+ YEARS - Early retirement reduction is 6% CREDITED SERVICE per year from age 65. - -------------------------------------------------------------------------------------------------------------------------------- ANY AGE WITH LESS - Will not be vested in pension plan - Will be vested in pension plan and be eligible for retirement THAN 5 YEARS at age 65. OF SERVICE
5 MEMORANDUM January 9, 1998 FROM: Nancy Jakobs TO: Electric Production Division Management Employees SUBJECT: PENSION PROTECTION PROGRAM EXPANSION As you know, the Pension Protection Program announced last month was designed to provide pension protection measures for certain management Electric Production Division and support employees who may suffer a loss of employment as a result of the sale of the Company's generating assets. Today, I am pleased to report that we have expanded eligibility to include MANAGEMENT EMPLOYEES AGE 40 TO 49 WITH 20 OR MORE YEARS OF CREDITED SERVICE. The decision to include these additional Electric Production and support employees was made by senior management and approved by the Board of Directors on January 6, 1998 to recognize the contribution of the employees who are not as close to retirement age but who have devoted a major portion of their professional careers to the Company. The table below compares the current plan benefits and the protection enhancements. A second important change in the new Pension Protection Program benefits all covered employees. The years of credited service and age used to determine participation eligibility will be calculated at the end of the year in which the transfer of ownership takes place, rather than at the actual date of transfer. Transfer is expected to occur in 1999. PENSION PROGRAM COMPARISON: CURRENT VS. NEW PROGRAM
Current Pension Benefits Pension Protection Program (New) ------------------------- -------------------------------------------------------- (if employment terminated (if employee was involuntarily severed from At the End of the from O&R) O&R as a result of electric production divestiture Year of the Transfer or from the purchaser, within 60 months, for of Ownership reasons other than for cause) - ------------------------------------------------------------------------------------------------------------------- Age 40-49 - Commence benefit at age - Commence benefit at age 55 or greater. 20+ years 55 or greater. - Early retirement reduction is 4% per year from age 60. credited service - Early retirement reduction - Applies if: is 6% per year from age 65. - Employee is not offered employment with purchaser at divestiture date. - Employee is involuntarily terminated during five- year protection period.* NOTE: If employee remains employed with the purchaser beyond the protection period, his or her O&R pension reverts to the terms in the "Current Pension Benefits" column. - -------------------------------------------------------------------------------------------------------------------
*As is the case with qualified employees 50 or older, these newly qualified employees are also eligible for this enhanced pension protection if the purchaser offers, and the employee rejects, a position that would require more than a 10 percent reduction in total compensation (salary plus ATIP at target) or would require travel to a new place of employment that is 50 miles or more from his or her most recent reporting location. EX-13 18 1997 ANNUAL REPORT TO SHAREHOLDERS 1 Orange and Rockland Utilities, Inc. and Subsidiaries REVIEW OF THE COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAJOR DEVELOPMENTS -- 1997 COMPETITION Regulatory agencies at the federal level as well as in the three states in which the Company has retail electric franchises are currently evaluating changes in regulatory and rate-making practices designed to promote increased competition consistent with safety, reliability and affordability standards. Depending on future developments in this area, the Company's market share and profit margins will become subject to competitive pressures in addition to regulatory constraints. A discussion of current federal and state competitive initiatives follows. FEDERAL INITIATIVE On April 24, 1996, the Federal Energy Regulatory Commission (FERC) issued its final order (FERC Order 888) requiring electric utilities to file non-discriminatory open access transmission tariffs that would be available to wholesale sellers and buyers of electric energy. The order also provided for the recovery of related legitimate and verifiable strandable costs subject to FERC's jurisdiction. The Company's open access transmission tariff, as originally filed with the FERC on July 9, 1996 and amended through August 1997, offers transmission service and certain ancillary services to wholesale customers on a basis that is comparable to that which it provides itself. The Company is operating under the filed tariff, subject to refund, pending final FERC approval of the Company's filing. The Company participates in the wholesale electric market primarily as a buyer of energy and, as a result, Order 888 is not expected to materially impact the Company's financial condition or results of operations. On January 31, 1997, the Company, in conjunction with the other members of the New York Power Pool (NYPP), filed tariffs with the FERC seeking permission to restructure the NYPP into an Independent System Operator (ISO). On December 19, 1997, the Company and the other members of the NYPP made a supplemental filing with the FERC which provides for a revised ISO governance structure. While the Company and the other members of the NYPP have requested that the FERC act expeditiously on the filing, the Company is unable to predict either the timetable for, or outcome of, this regulatory proceeding. NEW YORK COMPETITIVE OPPORTUNITIES PROCEEDING On May 20, 1996, the New York Public Service Commission (NYPSC) issued an order setting forth its vision and goals for the future of the electric industry in New York. The order endorsed a fundamental restructuring of the industry based on competition in the generation and energy services sectors of the industry. On November 26 and December 31, 1997, the NYPSC issued orders approving an Electric Rate and Restructuring Plan (the Restructuring Plan), which had been filed on November 6, 1997 by the Company, the New York State Department of Public Service (the Staff) and other parties in the Company's Competitive Opportunities Proceeding (Case 96-E-0900). The Restructuring Plan provides for the sale of all of the Company's generating assets (i.e., all units at the Lovett Generating Station, the Company's one-third interest in the Bowline Generating Station, as well as its hydroelectric facilities and gas turbines) and for lower electric rates. Under the terms of the Restructuring Plan, which covers a four-year period commencing with NYPSC approval, the Company has agreed to immediately commence the process of auctioning all of its generating assets. The Restructuring Plan provides that if the Company selects a winning bidder prior to May 1, 1999, the New York share of any net book gains associated with the sale are to be allocated between shareholders and customers on a 25%/75% basis, respectively, and any net book losses are to be allocated between shareholders and customers on a 5%/95% basis, respectively. If the Company selects a winning bidder on or after May 1, 1999, the New York share of the net book gains or losses associated with the sale are to be allocated between shareholders and customers on a 20%/80% basis. The Restructuring Plan further provides for a $20 million cap on the New York share of net book gains allocable to shareholders from the sale of generating assets. The NYPSC, in approving the Restructuring Plan, offered 10 2 Orange and Rockland Utilities, Inc. and Subsidiaries the Company the opportunity to participate as a bidder in the auction of the Company's generating assets, subject to the conditions that the auction be conducted by an independent third party and that the Company renounce the shareholders' share of any net book gain or net book loss from the sale provided for in the Restructuring Plan. By letter dated December 10, 1997, the Company notified the NYPSC that it had elected not to be a bidder in the auction. Accordingly, the Company will be subject to the terms of the Restructuring Plan as filed on November 6, 1997. On December 11, 1997, in accordance with the Restructuring Plan, the Company submitted its Preliminary Divestiture Plan to the NYPSC Staff and filed its Final Divestiture Plan on February 4, 1998. The terms of the Restructuring Plan permit the Company to defer and recover up to $7.5 million (New York electric share) of prudent and verifiable non-officer employee costs associated with the divestiture, such as retraining, outplacement, severance, early retirement and employee retention programs. Under the terms of the Restructuring Plan, the Company will be authorized to petition the NYPSC for recovery of employee costs in excess of $7.5 million. In addition, the Restructuring Plan provides for the recovery of all costs of the sale. In addition, the terms of the Restructuring Plan permit the Company to retain all earnings up to an 11.4% return on equity and provide that earnings in excess of 11.4% are to be shared, with 75% to be used to offset NYPSC approved deferrals or otherwise inure to the Company's customers, and 25% to be retained by the Company's shareholders. The Company's existing PowerPick(TM) Program, whereby customers can purchase energy (but not capacity) from suppliers other than the Company, will be expanded to all customers on May 1, 1998. The Restructuring Plan further provides that full retail access to a competitive energy and capacity market will be available for all customers by May 1, 1999. The Restructuring Plan also provides for electric price reductions of approximately $32.4 million over its four-year term and for recovery, through a Competitive Transition Charge (CTC), of above-market generation costs should the transfer of title to the Company's generating assets not occur before May 1, 1999. Should a CTC be required, the Company would be authorized to recover the difference between its non-variable costs of generation, including 75% of fixed production labor expenses and property taxes, and the revenues, net of fuel and variable operating and maintenance expenses, derived from the operation of the Company's generating assets in a deregulated competitive market. If title to the generating assets has not transferred as of May 1, 2000, the CTC would be modified so as to allow a maximum recovery of 65% of fixed production labor expenses and property taxes. The modified CTC would remain effective until the earlier of the date title to the generating assets is transferred or October 31, 2000. In the event title to the generating assets is not to be transferred by October 31, 2000, the Company would be authorized to petition the NYPSC for permission to continue a CTC until the date title to the generating assets is transferred. The CTC does not allow for the recovery of inflationary increases in non-fuel operating and maintenance production costs, property tax increases, wage rate increases, or increased costs associated with capital additions or changes in the costs of capital applicable to production costs. The Restructuring Plan also provides that the Company and its utility subsidiaries may apply to the appropriate regulatory authorities for permission to form a new holding company, which would be a registered holding company under the Public Utility Holding Company Act of 1935 (the 1935 Act). The Company currently is an exempt holding company under the 1935 Act. The new holding company structure would provide for separate regulated electric distribution companies in the New York, New Jersey and Pennsylvania service territories, as well as an unregulated energy services company. The unregulated energy services company would be able to market electricity and unbundled energy services (e.g., metering) to wholesale and retail customers on a competitive basis, using the Company's name without a royalty payment. The formation of the holding company is conditioned upon shareholder and regulatory approval, including approval of the Securities and Exchange Commission, the FERC, the NYPSC, the New Jersey Board of Public Utilities (NJBPU) and the Pennsylvania Public Utility Commission (PPUC). The Company will consider a filing for the formation of a holding company after the divestiture process is complete. The Restructuring Plan indicates that reciprocity would be required in order to implement retail access. That is, if utility generators are allowed access to the Company's retail customers, the Company shall be permitted equal access to the customers of those utilities within New York State, if we so choose. In accordance with the settlement, the Company is required to submit an Unbundled Rates Filing to the NYPSC. This filing, which will be made no later than February 13, 1998, separates the components of existing tariffs into production, transmission, distribution and customer cost categories. Additional information on the provisions of the Restructuring Plan is contained below under "Rate Activities -- New York Electric" and "Electric Sales and Revenues." NEW JERSEY -- ENERGY MASTER PLAN On April 30, 1997, the NJBPU issued an order "Adopting and Releasing Final Report in its Energy Master Plan Phase II Proceeding to Investigate the Future Structure of the Electric Power Industry (Docket No. EX 94120585Y)." The Order required Rockland Electric Company (RECO), a wholly owned utility subsidiary of the Company, and other New Jersey investor owned electric utilities each to file unbundled rates, a stranded cost proposal and a restructuring plan by July 15, 1997. As part of its stranded cost proposal, the NJBPU has recommended that each utility provide a 5-10% rate reduction. RECO's filing was made on July 15, 1997. The filing includes a Restructuring Plan, a Stranded Costs Filing and an Unbundled Rates Filing. On December 8, 1997, RECO submitted an Amended and Restated Restructuring Plan and Stranded Costs Filing with the NJBPU to reflect the fact that the Company has committed to divest all its generating assets by auction. The Restructuring Plan calls for RECO to remain a regulated transmission and distribution company within a holding company structure. Standards of Conduct and Affiliate Rules have been proposed in order to promote effective competition and ensure that regulated operations do not subsidize unregulated operations. RECO has proposed to implement full retail competition (energy and capacity) for all customers by May 1, 1999, the same date approved for retail access in New York. Under this schedule, full retail access will be achieved 13 months ahead of the NJBPU's proposed phase-in schedule. In its Stranded Costs Filing, RECO has identified two categories of potential stranded costs: generation investment and power purchase contracts with non-utility generators (NUGS). Divestiture of the Company's generating assets will determine their market value and the related stranded costs, if any. RECO proposes to recover its share of stranded generation investment, if any, through regulated delivery rates by means of a Market Transition Charge (MTC). The MTC would be in effect over a period of up to eight years, commencing May 1, 1999. Stranded NUG contract payments are proposed to be recovered over the remaining life of the contracts through a non-bypassable wires charge also assessed by the regulated delivery company. RECO has proposed to reduce its annual net revenue (revenue net of fuel, purchased power and applicable taxes) by $4.3 million, or 5.1%, effective in October 1998. RECO also made an Unbundled Rates Filing which separates the components of existing tariffs into production, transmission, distribution and customer cost categories. The Unbundled Rates Filing, which was updated on January 30, 1998, would serve as the basis to segregate the costs of the generation function from rates in order to facilitate customer choice. In addition, the MTC mechanism would be added to the existing rate structure to allow for recovery of stranded costs, and a non-bypassable societal benefits charge would be created as a billing mechanism for mandated public policy programs. Hearings with respect to RECO's filings are scheduled for the spring of 1998 and the NJBPU has indicated that it will rule on these filings by October 1998. RECO's filings may be accepted or significantly modified by the NJBPU before becoming effective. It is not possible to predict the outcome of the NJBPU proceeding or its effect, if any, on the Company's consolidated financial position or results of operations. 11 3 Orange and Rockland Utilities, Inc. and Subsidiaries PENNSYLVANIA -- COMPETITION LEGISLATION On December 3, 1996, the "Electricity Generation Customer Choice and Competition Act" (Act) was signed into law by the Governor of the Commonwealth of Pennsylvania. The Act provides for a transition of the Pennsylvania electric industry from a vertically integrated structure to a functionally separated model that permits direct access by customers to a competitive electric generation market while retaining the existing regulation and customer protections in the transmission and distribution systems. The transition plan of the Act calls for a three-year phase-in of retail access beginning January 1, 1999, and concluding January 1, 2001. The Act also provides for the opportunity for recovery of prudent and verifiable costs resulting from the restructuring through the implementation of a Competitive Transition Charge (CTC) for a period of up to nine years and the imposition of rate caps designed to prevent a customer's total electric costs from increasing above current levels during the transition period. In addition, the Act permits the refinancing of certain approved transition costs through the issuance of bonds secured by revenue streams guaranteed by the PPUC. The savings associated with this financing mechanism will be used to reduce strandable costs. On September 30, 1997, in accordance with the requirements of the Act, Pike County Light & Power Company (Pike), a wholly owned utility subsidiary of the Company, submitted its electric restructuring filing to the PPUC. On December 15, 1997, Pike submitted an amended and restated electric restructuring filing with the PPUC to reflect the fact that the Company has committed to divest all of its generating assets by auction. In this amended and restated filing, Pike proposed that full retail competition be implemented for all customers by May 1, 1999. With the implementation of retail competition, Pike proposes to continue to serve as the "provider of last resort" for those consumers who do not choose an alternate provider, or whose alternate provider defaults. Pike proposed to remain a regulated transmission and distribution company within a holding company structure. On September 30, 1997, Pike also submitted proposed unbundled rates which separate the components of existing tariffs into production, transmission, distribution and customer cost categories. This filing was updated on January 30, 1998. It is expected that the PPUC will rule on Pike's restructuring filing by July 1998. Pike's filing may be accepted or significantly modified by the PPUC before becoming effective. It is not possible to predict the outcome of the PPUC proceeding; however, it is not expected that this proceeding will have a material effect on the Company's consolidated financial position or results of operations. RATE ACTIVITIES NEW YORK -- GAS In 1996, the NYPSC approved utility restructuring plans designed to open up the local natural gas market to competition and allow residential and small commercial users the ability to purchase gas supplies from a variety of sources, other than the franchised local distribution utility. The NYPSC orders provide for a phase-in of the new service to ease potential implementation problems and the recovery of stranded costs which are incurred over a three-year period. On June 5, 1997, the NYPSC issued an Order Requiring the Filing of Proposals to Ameliorate Gas Price Volatility and Requesting Comments in Case 97-G-0600, In the Matter of the Commission's Request for Gas Distribution Companies to Reduce Gas Cost Volatility and Provide for Alternative Gas Purchasing Mechanisms. Under the Order, gas utilities in New York were required to submit proposals for fixed-price gas sales options to be available for use by all customers during the 1997-1998 heating season. The Company's proposal, as approved by the NYPSC in October 1997 provides a fixed-price commodity cost option to firm sales customers for the 1997-1998 heating season. The option is limited to ten percent of customers in each eligible customer class. The NYPSC order provided that costs associated with any variations between gas utilized by customers electing the fixed-price option and volumes locked in by the Company, to the extent prudently incurred, will be recoverable. To date, approximately 2,500 customers are participating in this program. On September 4, 1997, the NYPSC issued a Notice Inviting Comments on Staff's Report in Case 97-G-1380, In the Matter of Issues Associated with the Future of the Natural Gas Industry and the Role of Local Gas Distribution Companies (LDCs). The Company is one such LDC. The primary conclusion of the Staff's Position Paper, "The Future of the Natural Gas Industry," is that over the next five years, LDCs in New York should transition out of the business of selling gas in order to encourage competition and provide gas customers with choice in the marketplace. In addition, the Paper identifies, discusses and requests comments on the following three impediments to LDCs terminating their gas merchant role: (1) upstream pipeline capacity held by LDCs; (2) the LDCs' supplier of last resort and obligation to serve responsibilities; and (3) system reliability and operational integrity issues. The Company filed initial comments and reply comments on the Position Paper in November and December 1997, respectively. The Company opposed Staff's proposal to require LDCs to auction upstream capacity since it would endanger the Company's ability to maintain system reliability. The Company advocated that LDCs be allowed to establish meaningful penalty provisions to prevent diversions of gas to other markets during the winter months. Finally, all stranded costs related to upstream pipeline capacity and long-term gas services must be fully recoverable by LDCs. It is not possible to predict the outcome of this proceeding or its effect on the Company's consolidated financial position or results of operations. NEW YORK -- ELECTRIC On April 19, 1995, the NYPSC approved the Company's compliance filing regarding the operation of the Revenue Decoupling Mechanism (RDM). The filing included a proposal to eliminate the RDM Adjustment Factor of $7.7 million effective May 1, 1995, reflecting the completion of the recovery of an RDM under-collection applicable to the year 1993. This equated to a 2.3% annual reduction in revenues. On August 1, 1995, the NYPSC approved a stipulation among the parties which provided for the early implementation of the Company's proposed annual rate reduction of $6.1 million. As a result, reduced rates became effective August 1, 1995, producing a revenue reduction of approximately $3.8 million for the period August 1, 1995 to March 31, 1996. The revenue reduction was offset by the recognition of deferred revenue for 1994 and 1995 related to sharing mechanisms previously approved by the NYPSC. On May 3, 1996, the NYPSC approved, subject to modifications required by the NYPSC decision in the New York Competitive Opportunities Proceeding (as previously discussed), a Settlement Agreement (1996 Agreement) among the Company, NYPSC Staff and other parties which resolved all remaining revenue requirement issues in the proceeding for a three-year period commencing May 1, 1996, and concluding April 30, 1999. Under the 1996 Agreement, the Company reduced its annual electric retail revenues in New York by an additional $7.75 million, or 2.3%, effective May 1, 1996. The settlement provides for several performance mechanisms related to service reliability and customer service, and the elimination of all revenue and most expense reconciliation provisions of the RDM. The 1996 Agreement provides the Company with the opportunity to retain all New York electric earnings up to a 10.9% return on equity annually for each of the next three years. Earnings in excess of 10.9% will be shared equally between customers and shareholders. The 1996 Agreement implements several competitive initiatives sought by the Company. These include price reductions, the offering of service guarantees and the introduction of PowerPick(TM) -- an innovative retail access program that allows participating customers to choose their electric energy supplier. The PowerPick program was expanded as part of the Restructuring Plan. On December 1, 1997, as part of the approved Restructuring Plan, the Company implemented the first year of the electric rate reduction in the amount of $5.9 million. Additional rate reductions of $8.8 million in each of the next three years will be implemented as part of this agreement. Additional information on New York electric rate activities is contained in the previous discussion of the New York Competitive Opportunities Proceeding. 12 4 Orange and Rockland Utilities, Inc. and Subsidiaries NEW JERSEY The NJBPU on January 8, 1997 approved a stipulation among New Jersey utilities, NJBPU Staff and NJ Division of Ratepayer Advocate which provides a recovery plan for costs associated with the change in accounting required by Statement of Financial Accounting Standards No. 106, "Employer Accounting for Postretirement Benefits Other Than Pensions." The approved plan provides several alternative recovery mechanisms. RECO received approval from the NJBPU on December 17, 1997 to begin amortizing these costs effective January 1, 1998. On January 23, 1997, a residential customer of RECO filed a petition with the NJBPU requesting a lowering of RECO's rates by $21.2 million, or 16%, based on financial data for the twelve months ended December 31, 1995 as adjusted. A central issue raised by the petition is whether RECO's continued purchase of all of its power supply requirement from the Company continues to be appropriate when alleged lower cost energy is available from other sources. The NJBPU indicated at its public meeting held on July 30, 1997 that this petition would be held in abeyance pending the outcome of RECO's Restructuring Plan. RECO believes that this petition is without merit and intends to contest it vigorously. DISCONTINUED OPERATIONS In August 1997, Norstar Management, Inc. (NMI), a wholly owned indirect subsidiary of the Company, sold certain of the assets of NORSTAR Energy Limited Partnership (NORSTAR), a natural gas services and marketing company of which NMI is the general partner. The assets sold consist primarily of customer contracts and accounts receivable. NMI is expected to wind up the remaining portion of NORSTAR's business in the first quarter of 1998. The Company believes all liabilities, related to NORSTAR, have been fully provided for in 1997 and that the Company's future results of operations are not expected to be affected thereby. In accordance with Accounting Principles Board Opinion No. 30, the financial results for this segment are reported as "Discontinued Operations." The total (losses)/gains related to discontinued operations were $(15,432,000), or $(1.13) per share, for 1997, $(1,844,000), or $(0.13) per share, for 1996, and $807,000, or $0.06 per share, for 1995. FINANCIAL PERFORMANCE Earnings per share from continuing operations were $3.09 for 1997, compared to $3.30 in 1996 and $2.54 in 1995. The decrease in continuing operations earnings between 1997 and 1996 was primarily the result of decreased electric and gas net revenues, increased investigation and litigation costs and increased interest charges offset by the Company's continued success in controlling operating and maintenance expenses. The increase between 1996 and 1995 was the result of higher electric and gas sales, lower customer refunds and decreased investigation and litigation costs. Consolidated earnings per share were $1.96, $3.17 and $2.60 for the years 1997, 1996 and 1995, respectively. Earnings per average common share are summarized as follows:
1997 1996 1995 - ---------------------------------------------------------------------------------------------- Utility operations $3.25 $3.39 $3.20 Events affecting the Company: Investigation & litigation costs (0.13) (0.09) (0.35) Refunds of misappropriated funds -- -- (0.14) Diversified activities (0.03) -- (0.17) - ---------------------------------------------------------------------------------------------- Earnings per share from continuing operations 3.09 3.30 2.54 Earnings per share from discontinued operations (1.13) (0.13) 0.06 - ---------------------------------------------------------------------------------------------- Consolidated earnings per share $1.96 $3.17 $2.60 - ----------------------------------------------------------------------------------------------
The earned return on common equity was 7.1% in 1997, compared to 11.3% in 1996 and 9.4% in 1995. After removing the effect of discontinued operations, the earned return on common equity was 11.2%, 12.2% and 9.2% in 1997, 1996 and 1995, respectively. Book value per share at year-end 1997 was $27.69, compared to $28.41 in 1996 and $27.82 in 1995. The dividends paid on common stock were $2.58 in 1997 and 1996, and $2.57 per share in 1995. The Company has maintained a strong capital structure: 46% long-term debt, 6% preferred stock and 48% common equity. RESULTS OF OPERATIONS The discussion which follows identifies the principal causes of the significant changes in the amounts of revenues and expenses affecting income available for common stock by comparing 1997 to 1996 and 1996 to 1995. This discussion should be read in conjunction with the Notes to Consolidated Financial Statements and other financial and statistical information contained elsewhere in this report. The following is a summary of the changes in earnings available for common stock:
Increase (Decrease) From Prior Year 1997 1996 - -------------------------------------------------------------------------------- (Millions of Dollars) Utility operations: Operating revenues $(5.6) $53.3 Energy and gas costs 3.8 35.0 - -------------------------------------------------------------------------------- Net revenues from utility operations (9.4) 18.3 Other utility operating expenses and taxes (5.7) 12.5 - -------------------------------------------------------------------------------- Operating income from utility operations (3.7) 5.8 Diversified revenues (0.5) (0.7) Diversified operating expenses and taxes 1.5 (2.0) - -------------------------------------------------------------------------------- Income from operations (5.7) 7.1 Other income and deductions 3.2 2.0 Interest charges 0.7 (1.3) - -------------------------------------------------------------------------------- Income from continuing operations (3.2) 10.4 Discontinued operations (13.6) (2.7) - -------------------------------------------------------------------------------- Net income (16.8) 7.7 Preferred dividends (0.2) (0.1) - -------------------------------------------------------------------------------- Earnings applicable to common stock $(16.6) $ 7.8 - --------------------------------------------------------------------------------
ELECTRIC OPERATING RESULTS Electric operating revenues, net of fuel and purchased power costs, decreased by 1.0%, or $3.7 million, in 1997 after increasing by 3.6%, or $12.1 million, in 1996. These changes are attributable to the following factors:
Increase (Decrease) From Prior Year 1997 1996 - ---------------------------------------------------------- (Millions of Dollars) Retail sales: Price changes $(5.7) $(13.5) Sales volume changes 6.5 6.0 - ---------------------------------------------------------- Subtotal 0.8 (7.5) Sales for resale 4.0 1.0 Other operating revenues (2.4) 23.6 - ---------------------------------------------------------- Total electric revenues 2.4 17.1 Electric energy costs 6.1 5.0 - ---------------------------------------------------------- Net electric revenues $(3.7) $ 12.1 - ----------------------------------------------------------
ELECTRIC SALES AND REVENUES Total sales of electric energy to retail customers during 1997 were 4,691,900 Mwh (megawatt hours), compared with 4,605,300 Mwh during 1996 and 4,525,600 Mwh in 1995. Revenues associated with these sales were $465.8 million, $465.0 million and $472.5 million in 1997, 1996 and 1995, respectively. Electric sales to customers for the last five years are shown in the accompanying chart. ELECTRIC SALES TO CUSTOMERS Mwh (Millions)
'93 '94 '95 '96 '97 - ---------------------------------------------------------------- 5.0 4.53 4.61 4.69 - ---------------------------------------------------------------- 4.5 4.36 4.46 - ---------------------------------------------------------------- 4.0 - ---------------------------------------------------------------- 3.5 - ---------------------------------------------------------------- 3.0 - ----------------------------------------------------------------
The changes in electric sales by class of customer from the prior year are as follows:
1997 1996 - -------------------------------------------------------------------- Residential 3.5% 2.7% Commercial (4.2)% (0.5)% Industrial 12.2% 10.0% Public street lighting (8.9)% 5.0% Sales to public authorities 43.3% (31.9)% - --------------------------------------------------------------------
Despite mild weather conditions in 1997 and 1996 when compared to 1995, customer usage increased as a result of an increase in the average Kwh used per customer and an increase in the average number of customers. Electric sales increased 1.9%, 1.7% and 1.4% in 1997, 1996 and 1995, respectively. Under the Restructuring Plan, the Company will remain a regulated transmission and distribution company that will deliver electricity to its customers and maintain reliable service. The Company will remain the "provider of last resort" for those of its customers who do not purchase electricity from other sources. 13 5 Orange and Rockland Utilities, Inc. and Subsidiaries The plan also calls for lower electric rates for all customers, with potential savings as high as 12 percent for the Company's largest industrial customers, and approximately five percent for all others. Customers will be able to select their energy provider no later than May 1998, and will have full retail choice (energy and capacity) by May 1999. The Company will continue to introduce programs which are designed to reduce peak load and encourage efficient energy usage. The Company's future electric earnings will be affected by changes in sales volumes resulting from the strength of the economy, weather conditions and conservation efforts of customers. Sales for resale increased by $4.0 million to $7.1 million in 1997 when compared to 1996, after increasing $1.0 million in 1996. Revenues from these sales are primarily a recovery of costs, under the applicable tariff regulations, and have a minimal impact on the Company's earnings. ELECTRIC ENERGY COSTS The cost of fuel used in electric generation and purchased power increased 4.7%, or $6.1 million, in 1997, after increasing 4.0%, or $5.0 million, in 1996. The components of these changes in electric energy costs are as follows:
Increase (Decrease) From Prior Year 1997 1996 - -------------------------------------------------------------------------------- (Millions of Dollars) Prices paid for fuel and purchased power $-- $1.1 Changes in Kwh generated or purchased 6.3 2.3 Deferred fuel charges (0.2) 1.6 - -------------------------------------------------------------------------------- Total $6.1 $5.0 - --------------------------------------------------------------------------------
The increase in electric energy costs in 1997 when compared to 1996 is the result of increased sales. The increase in electric energy costs in 1996 when compared to 1995 is the result of increases in the cost of fuel as well as in sales. The price paid for fuel and purchased power per kilowatt hour over the last five years is shown in the following chart: COST PER KWH Cents
'93 '94 '95 '96 '97 - ------------------------------------------------------------ 3.00 2.67 - ------------------------------------------------------------ 2.50 2.51 - ------------------------------------------------------------ 2.00 2.48 2.48 2.46 - ------------------------------------------------------------ 1.50 - ------------------------------------------------------------ 1.00 - ------------------------------------------------------------
The Company maintains an aggressive program of managing its sources of fuel and energy purchases to provide its customers with the lowest cost of energy available at any given time. Energy is purchased whenever available at a price lower than the cost of production at the Company's generating plants. The Company continues to use the least costly fuel available for generating electricity. As mentioned previously, the Company's Restructuring Plan calls for the sale of all of its generating assets. Once the sale is completed, electric energy costs will consist of purchased power costs necessary to meet the needs of customers under the "provider of last resort" clause contained in the Restructuring Plan. GAS OPERATING RESULTS Gas operating revenues, net of gas purchased for resale, decreased by 7.6%, or $5.7 million, in 1997 when compared to 1996, after increasing by 9.0%, or $6.2 million, in 1996. These changes are attributable to the following factors:
Increase (Decrease) From Prior Year 1997 1996 - ------------------------------------------------------------------ (Millions of Dollars) Sales to firm customers: Price changes $(2.0) $22.6 Sales volume changes (1.8) 3.4 - ------------------------------------------------------------------ Subtotal (3.8) 26.0 Sales to interruptible customers (1.2) 8.4 Sales for resale -- -- Other operating revenues (3.0) 1.8 - ------------------------------------------------------------------ Total gas revenues (8.0) 36.2 Gas energy costs (2.3) 30.0 - ------------------------------------------------------------------ Net gas revenues $(5.7) $ 6.2 - ------------------------------------------------------------------
GAS SALES AND REVENUES Firm gas sales amounted to 20,321 million cubic feet (Mmcf) in 1997, a decrease of 2.9% from the 20,918 Mmcf recorded in 1996. The increase in sales in 1996 was 5.5% from the 1995 level of 19,825 Mmcf. Gas revenues from firm customers were $150.1 million, $153.9 million and $128.0 million in 1997, 1996 and 1995, respectively. Gas sales to firm customers for the last five years are shown in the accompanying chart. FIRM GAS SALES Mmcf (Thousands)
'93 '94 '95 '96 '97 - -------------------------------------------------------------------------------- 25 - -------------------------------------------------------------------------------- 20 20.6 20.4 19.8 20.9 20.3 - -------------------------------------------------------------------------------- 15 - -------------------------------------------------------------------------------- 10 - --------------------------------------------------------------------------------
The changes in firm gas sales by class of customer from the prior year are as follows:
1997 1996 - --------------------------------------------------------------------- Residential (4.4)% 6.3% Commercial and industrial 1.7 % 3.3% - ---------------------------------------------------------------------
The decrease in 1997 and 1996 was primarily the result of milder weather conditions offset somewhat by increases in the average number of customers. Under the terms of the current gas rate agreement in New York, the level of firm sales is subject to a weather normalization adjustment. The Company adjusts firm gas sales revenues to the extent actual degree days vary more than plus or minus 2.2% from the degree days utilized to project sales during a heating season. Therefore, weather conditions may have an impact on gas operating results. The FERC's Order 636 required pipeline supply companies to separate or unbundle their charges for providing natural gas to the LDCs. The unbundling of charges provided the Company with the opportunity to put tariffs in place on October 1, 1996, which allowed the Company to market available pipeline capacity. As approved, the tariffs granted the Company permission to retain 15% of all revenues derived from the sale of the pipeline capacity during 1996. Additionally, as part of the Company's rate agreement in Case 92-G-0050, the Company is allowed to retain 25% of net revenues derived from the FERC's Order 63 off-system transactions. Revenues retained from Order 636 and Order 63 transactions in 1997 amounted to $0.3 million. Revenues from interruptible gas customers (customers with alternative fuel sources) decreased by 7.9% in 1997 after increasing by 124.5% in 1996 when compared to the previous year. These sales are dependent upon the availability and price competitiveness of alternative fuel sources. As a result of applicable tariff regulations, these interruptible sales do not have a substantial impact on earnings. GAS ENERGY COSTS Utility gas energy costs decreased by 2.3%, or $2.3 million, in 1997 after an increase of 42.0%, or $30.0 million, in 1996. The changes in utility gas energy costs for the years 1997 and 1996 are a result of the following:
Increase (Decrease) From Prior Year 1997 1996 - ---------------------------------------------------------------------- (Millions of Dollars) Prices paid to gas suppliers* $ 0.5 $ 15.7 Firm and interruptible Mcf sendout (5.8) 9.1 Deferred fuel charges 3.0 5.2 - ---------------------------------------------------------------------- Total $ (2.3) $ 30.0 - ----------------------------------------------------------------------
*Net of refunds received from gas suppliers. The Company continues its policy of the aggressive use of market purchases in order to provide price flexibility, while assuring an adequate supply of gas through a variety of long-term gas contracts. The price paid for purchased gas per thousand cubic feet (Mcf) over the last five years is shown in the following chart: COST PER MCF Dollars
'93 '94 '95 '96 '97 - ------------------------------------------------------------ 5 4.05 4.07 - ------------------------------------------------------------ 4 3.63 3.52 3.43 - ------------------------------------------------------------ 3 - ------------------------------------------------------------ 2 - ------------------------------------------------------------ 1 - ------------------------------------------------------------
As a result of the FERC's restructuring the gas transportation industry, to promote competition among gas suppliers and to ensure supply at the lowest reasonable costs, Order 636 authorizes pipelines to recover certain transition costs from their customers. The Company 14 6 Orange and Rockland Utilities, Inc. and Subsidiaries currently estimates that its obligations for Order 636 transition costs will total approximately $28.6 million. Approximately $27.3 million of these transition costs have been billed to the Company. On December 20, 1994, the NYPSC issued an order establishing the regulatory and rate-making policies applicable to New York gas distribution utilities resulting from FERC Order 636. The NYPSC order provides mechanisms for the full recovery of transition costs. The Company is in the process of recovering these costs from its customers and believes that it will be allowed to recover all such costs by the end of the year 2000. As previously mentioned in the New York Gas Rate Activities section, the Company submitted and received approval for a fixed-price gas option that will lock in the price that participating customers will pay for the commodity cost of gas used during the 1997-1998 heating season (December 1-April 30) regardless of changes in the market price of gas. Approximately 2,500 customers are participating. The Company has contracted to acquire such gas. To the extent actual volumes differ from the contracted volumes, the Company will refund to or collect such differences from customers through the Gas Adjustment Clause. The NYPSC, in its effort to promote competition, has required the Company to provide firm transportation service for those customers who elect to purchase their gas supply from a marketer rather than the Company. Marketers are permitted to aggregate customers and the Company is required to release interstate pipeline capacity and storage to the marketers to serve these customers until 1999. After 1999, marketers are not obligated to use capacity released by the Company to serve these customers and may use whatever capacity is available in the marketplace. As the transition to a competitive retail market develops, the Company will determine what supply capacity and storage contracts it maintains. As the Company moves to a competitive market, traditional cost recovery mechanisms may be replaced by market-based methods. OTHER UTILITY OPERATING EXPENSES AND TAXES A comparison of other operating expenses and taxes for utility operations is presented in the following table:
Increase (Decrease) From Prior Year 1997 1996 - ----------------------------------------------------------------- (Millions of Dollars) Other operating expenses $(5.8) $17.1 Maintenance (1.4) (4.6) Depreciation and amortization 3.7 (5.2) Taxes (2.2) 5.2 - ----------------------------------------------------------------- Total $(5.7) $12.5 - -----------------------------------------------------------------
The primary reason for the change in utility operating expense for 1997 and 1996 is the amortization of Independent Power Producer costs of $9.8 million in 1997 compared to the $16.2 million amortized in 1996 and the costs of Demand Side Management programs, which were $5.2 million, $4.7 million and $8.6 million in 1997, 1996 and 1995, respectively. These costs are recovered in revenues on a current basis. The remaining increase in 1996 was the result of increased transmission and distribution activities when compared to 1995. Maintenance costs decreased 3.7% in 1997 after decreasing by 11.1% in 1996. The decrease in 1997 is primarily the result of lower scheduled plant maintenance costs when compared to 1996. In 1996, the decrease is primarily the result of improvements to the Company's distribution system during the year. Depreciation and amortization expenses increased by $3.7 million in 1997 as a result of plant additions, after decreasing by $5.2 million in 1996 as a result of the 1996 New York rate decision. Taxes other than income taxes decreased $0.1 million in 1997, after increasing by $5.0 million in 1996. The 1996 increase was also a result of the 1996 New York rate decision. Federal income tax decreased by $2.1 million in 1997, after increasing $0.2 million in 1996. The changes in both years are the result of changes in pre-tax book income. For a detailed analysis of income tax components, see Note 2 of Notes to Consolidated Financial Statements. DIVERSIFIED ACTIVITIES The Company's diversified activities, at year-end, consisted of energy services and land development businesses conducted by its wholly owned non-utility subsidiaries. Revenues from diversified activities, excluding the discontinued gas marketing operations, decreased by $0.5 million in 1997, after decreasing by $0.7 million in 1996. Operating expenses incurred by the non-utility subsidiaries, increased by $1.5 million in 1997 after decreasing by $2.0 million in 1996. Earnings from diversified activities decreased by $0.6 million in 1997 after increasing by $2.4 million in 1996. The reduction in 1997 earnings is primarily related to the start-up costs for Palisades Energy Services, Inc., an indirect subsidiary of the Company. As mentioned previously, the Company has discontinued its gas marketing operations. Diversified operations in the future will focus on promoting energy services related operations. OTHER INCOME AND DEDUCTIONS AND INTEREST CHARGES Other income and deductions increased by $3.2 million in 1997 after increasing by $2.0 million in 1996. The increase in 1997 was the result of the 1996 New York rate decision offset by increased investigation charges. The increase in 1996 was enhanced by decreased investigation charges offset by the results of the 1996 New York rate decision. Interest charges increased $0.7 million in 1997 when compared to 1996, after decreasing $1.3 million in 1996. The 1997 increase is the result of increased short-term debt. The 1996 decrease is the result of refinancing certain of the Company's long-term debt issues, taking advantage of the lower interest rates available and the retirement of long-term debt issues offset by an increase in the cost of short-term debt. LIQUIDITY AND CAPITAL RESOURCES The Company's construction program is designed to maintain reliable electric and gas service, meet future customer service requirements and improve the Company's competitive position. The cash expenditures related to the construction program and other capital requirements for the years 1995-1997 were as follows:
1997 1996 1995 - ------------------------------------------------------------------------------------------------------- (Millions of Dollars) Construction expenditures $73.1 $60.9 $56.8 Retirement of long-term debt & preferred stock - net 4.6 1.6 20.8 - ------------------------------------------------------------------------------------------------------- Total $77.7 $62.5 $77.6 - -------------------------------------------------------------------------------------------------------
At December 31, 1997, the Company estimated the cost of its construction program in 1998 to be $51.0 million. It is expected that the Company's capital requirements for 1998 will be met primarily with funds from operations, supplemented by short-term borrowings. The financing activities of the Company and its utility subsidiaries during 1997 consisted of the redemption of one series of preferred stock, a refinancing, refunding of certain debt maturities and the repurchase of common stock. With regard to the preferred stock redemption, on January 6, 1997, the Company redeemed the remaining 13,896 shares of its Redeemable Preferred Stock, Series I, 8 1/8% then outstanding at $100 per share. The stock was subject to mandatory redemption on December 31, 1997. With regard to long-term debt refinancing, on February 4, 1997, RECO issued $20 million of First Mortgage 7 1/8% Bonds, Series J due February 1, 2007 (the Series J Bonds). The proceeds of the Series J Bonds, together with other RECO funds, were used to repay, on March 6, 1997, RECO's $20 million First Mortgage 9.59% Bonds, Series H. On October 1, 1997, the Company's First Mortgage Bonds, Series I, 6 1/2% (the Series I Bonds) in the principal amount of $23 million were repaid at maturity. The Series I Bonds were the final series of bonds outstanding under the Orange and Rockland Utilities, Inc. First Mortgage Indenture and the Company has canceled its First Mortgage and discharged the lien thereon. In addition, on October 15, 1997, the Company's Debentures, Series B, 6 1/2% (the Series B Debentures) in the principal amount of $55 million were repaid at maturity. Funds required for the repayment of the 15 7 Orange and Rockland Utilities, Inc. and Subsidiaries Series I Bonds and the Series B Debentures, which totaled $78 million, were provided by the issuance of promissory notes pending the issuance by the Company, on December 18, 1997, of $80 million of 6 1/2% Debentures, due 2027 (Series E) (the Series E Debentures), the proceeds of which were used to repay such promissory notes. The Series E Debentures were not registered under the Securities Act of 1933 (the 1933 Act) and were offered to qualified institutional buyers pursuant to Rule 144A of the 1933 Act. Pursuant to an agreement with the initial purchasers of the Series E Debentures, the Company in January 1998, registered the Series F Debentures under the Act. The Series F Debentures are substantially identical to the Series E Debentures and will be offered to purchasers of the Series E Debentures in exchange for the Series E Debentures. The combined amount outstanding at any time of the Series E Debentures and Series F Debentures will not exceed $80 million. During December 1997, the Company initiated a Common Stock Repurchase Program. Pursuant to an Order of the NYPSC, the Company plans to repurchase up to 700,000 shares of its common stock from time to time, but not later than December 31, 1999, in the open market or through privately negotiated transactions. Pursuant to a Credit Agreement between the Company and Mellon Bank, N.A., the funds required for the common stock repurchase will be provided by a revolving line of credit of up to $25 million which will be converted to a term loan at the completion of the common stock repurchase program. The Company's Dividend Reinvestment Plan (DRP) and its Employee Stock Purchase and Dividend Reinvestment Plan (ESPP) provide that, at the option of the Company, the common stock requirements of the plans may be satisfied by either the original issue of common stock or open market purchases. Since November 1, 1994, the requirements of both plans have been satisfied by open market purchases. The Company had the authority to issue up to 750,000 shares of its common stock under the DRP and ESPP through December 31, 1997, of which 693,000 shares were unissued at that date. The Company did not request that the NYPSC extend the authority to issue common stock to satisfy the requirements of these plans. Neither the Company nor its utility subsidiaries have any plans at the present time for additional external financing other than securities issued for debt refunding purposes and for the common stock repurchase program, as described above. Pursuant to an order of the FERC, the Company has authority to issue up to $200 million of short-term debt through September 30, 1999 and RECO has authority to issue up to $15 million of short-term debt through December 31, 1999. At December 31, 1997, the Company and its utility subsidiaries had unsecured bank lines of credit totaling $167 million. At January 1, 1998, the Company reduced such lines of credit to $140 million. The Company may borrow under the lines of credit through the issuance of promissory notes to the banks. The Company, however, primarily utilizes such lines of credit to fully support commercial paper borrowings. The aggregate amount of borrowings through the issuance of promissory notes and commercial paper cannot exceed the aggregate lines of credit. The non-utility subsidiaries of the Company and of RECO had no bank lines of credit at December 31, 1997. OTHER DEVELOPMENTS YEAR 2000 COMPLIANCE In 1996, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus, EITF Issue No. 96-14, that internal and external costs specifically associated with modifying internal-use computer software for the upcoming century date change should be charged to expense as incurred. The Company recognizes that this is one of the most critical problems facing data processing today and has taken measures to ensure that it identifies and addresses all Year 2000 compliance issues. The four major areas of concern are Mainframe Systems, Desktop Systems, Embedded Systems and Vendor Supply Chain. The Company has developed a conversion strategy and established a schedule in an effort to ensure that its Mainframe, Desktop and Embedded systems are Year 2000 compliant by the end of the first quarter of 1999. The Vendor Supply Chain issue requires that a plan be established to mitigate the risk of potential business disruptions by communicating compliance concerns to suppliers who are critical to the business. The Company is in the process of communicating its Year 2000 compliance concerns to all its key suppliers and vendors. The Company will react according to the information it receives and expects this process to continue into 1999. The Company does not expect Year 2000 compliance remediation to have a material effect on the Company's results of operations. SFAS NO. 88 The proposed sale of the Company's generating assets may result in workforce reductions. The Company plans to provide, where appropriate, termination benefits that include pension protection, severance, and outplacement services to affected employees. Statement of Financial Accounting Standards No. 88 (SFAS No. 88), "Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," applies to any employer that offers benefits to employees in connection with their termination of employment. The Restructuring Plan includes provisions to recover such costs. Therefore, they are not expected to have a material impact on the Company's results of operations. NEW FINANCIAL ACCOUNTING STANDARDS During 1997, the Financial Accounting Standards Board issued the following accounting standards: Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share;" Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income;" and Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information." Basic Earnings per Share as it relates to SFAS No. 128 would not be affected by the conversion of the Non-Redeemable $1.52 Convertible Cumulative Preference Stock, Series A. The Company has adopted these standards for the year ended December 31, 1997. Adoption of these standards had no effect on the results of operations of the Company. EFFECTS OF INFLATION The Company's utility revenues are based on rate regulation, which provides for recovery of operating costs and a return on rate base. Inflation affects the Company's construction costs, operating expenses and interest charges and can impact the Company's financial performance if rate relief is not granted on a timely basis. Financial statements, which are prepared in accordance with generally accepted accounting principles, report operating results in terms of historical costs and do not generally recognize the impact of inflation. 16 8 Orange and Rockland Utilities, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) OPERATING REVENUES: Electric (Note 1) $ 472,364 $ 473,936 $ 457,833 Gas (Note 1) 168,450 176,442 140,224 Electric sales to other utilities 7,109 3,106 2,150 - ------------------------------------------------------------------------------------------------------------------------------- Total Utility Revenues 647,923 653,484 600,207 Diversified activities 851 1,405 2,103 - ------------------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 648,774 654,889 602,310 - ------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Operations: Fuel used in electric production (Note 1) 69,261 54,917 69,042 Electricity purchased for resale (Note 1) 65,500 73,776 54,700 Gas purchased for resale (Note 1) 99,321 101,614 71,566 Other expenses of operation 143,675 147,819 132,080 Maintenance 35,285 36,652 41,190 Depreciation and amortization (Note 1) 35,861 32,272 37,524 Taxes other than income taxes 98,996 98,829 93,959 Federal income taxes (Notes 1 and 2) 23,878 26,366 26,680 - ------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 571,777 572,245 526,741 - ------------------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 76,997 82,644 75,569 - ------------------------------------------------------------------------------------------------------------------------------- OTHER INCOME AND DEDUCTIONS: Allowance for other funds used during construction 40 20 28 Investigation and litigation costs (2,761) (1,800) (7,218) Other - net 949 (2,268) (1,636) Taxes other than income taxes (270) (246) (163) Federal income taxes (Notes 1 and 2) 1,562 662 3,308 - ------------------------------------------------------------------------------------------------------------------------------- Total Other Income and Deductions (480) (3,632) (5,681) - ------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INTEREST CHARGES 76,517 79,012 69,888 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST CHARGES: Interest on long-term debt 23,215 24,221 26,620 Other interest 8,233 5,748 4,908 Amortization of debt premium and expense - net 1,521 1,462 1,394 Allowance for borrowed funds used during construction (1,390) (566) (800) - ------------------------------------------------------------------------------------------------------------------------------- Total Interest Charges 31,579 30,865 32,122 - ------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 44,938 48,147 37,766 - ------------------------------------------------------------------------------------------------------------------------------- DISCONTINUED OPERATIONS: (Note 3) Operating income (loss) - net of taxes (6,738) (1,844) 807 Estimated loss on disposal (8,694) -- -- - ------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Discontinued Operations (15,432) (1,844) 807 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME 29,506 46,303 38,573 Dividends on preferred and preference stock, at required rates 2,800 3,024 3,135 - ------------------------------------------------------------------------------------------------------------------------------- Earnings applicable to common stock $ 26,706 $ 43,279 $ 35,438 - ------------------------------------------------------------------------------------------------------------------------------- Average number of common shares outstanding (000's) 13,649 13,654 13,653 - ------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING: Continuing Operations $ 3.09 $ 3.30 $ 2.54 Discontinued Operations (0.49) (0.13) 0.06 Estimated loss on disposal (0.64) -- -- - ------------------------------------------------------------------------------------------------------------------------------- TOTAL EARNINGS PER AVERAGE COMMON SHARE OUTSTANDING $ 1.96 $ 3.17 $ 2.60 - ------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. 17
9 Orange and Rockland Utilities, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31, 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) ASSETS: UTILITY PLANT: Electric $1,047,857 $1,023,796 Gas 232,206 219,712 Common 64,570 59,589 - ----------------------------------------------------------------------------------------------------------------------- Utility Plant in Service 1,344,633 1,303,097 Less accumulated depreciation 471,865 440,333 - ----------------------------------------------------------------------------------------------------------------------- Net Utility Plant in Service 872,768 862,764 Construction work in progress 63,445 36,879 - ----------------------------------------------------------------------------------------------------------------------- Net Utility Plant (Notes 1, 7 and 12) 936,213 899,643 - ----------------------------------------------------------------------------------------------------------------------- NON-UTILITY PROPERTY: Non-utility property 11,651 17,818 Less accumulated depreciation and amortization 1,109 2,344 - ----------------------------------------------------------------------------------------------------------------------- Net Non-utility Property (Notes 1 and 7) 10,542 15,474 - ----------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents (Notes 8 and 9) 3,513 3,321 Temporary cash investments (Note 9) 518 1,289 Customer accounts receivable, less allowance for uncollectible accounts of $2,530 and $2,391, respectively 61,817 60,992 Accrued utility revenue (Note 1) 22,869 22,773 Other accounts receivable, less allowance for uncollectible accounts of $258 and $258, respectively 20,450 7,648 Materials and supplies (at average cost): Fuel for electric generation 8,875 7,201 Gas in storage 11,103 12,819 Construction and other supplies 15,291 15,575 Prepaid property taxes 21,575 20,051 Prepayments and other current assets 21,469 21,540 - ----------------------------------------------------------------------------------------------------------------------- Total Current Assets 187,480 173,209 - ----------------------------------------------------------------------------------------------------------------------- DEFERRED DEBITS: Income tax recoverable in future rates(Notes 1 and 2) 74,731 74,198 Deferred Order 636 transition costs(Note 1) 1,476 11,732 Deferred revenue taxes(Note 1) 10,923 14,271 Deferred pension and other postretirement benefits(Notes 1 and 10) 9,334 9,922 IPP settlement agreements(Note 1) 14,238 24,065 Unamortized debt expense(amortized over term of securities) 11,153 10,046 Other deferred debits 30,274 27,236 - ----------------------------------------------------------------------------------------------------------------------- Total Deferred Debits 152,129 171,470 - ----------------------------------------------------------------------------------------------------------------------- NET ASSETS OF DISCONTINUED OPERATIONS (Note 3): 1,645 6,336 - ----------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,288,009 $1,266,132 - ----------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. 18
10 Orange and Rockland Utilities, Inc. and Subsidiaries
December 31, 1997 1996 - -------------------------------------------------------------------------------------------------------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES: CAPITALIZATION: Common stock (Note 6) $ 67,945 $ 68,271 Premium on capital stock (Note 6) 132,985 133,616 Capital stock expense (6,084) (6,097) Retained earnings (Note 5) 181,473 192,060 - -------------------------------------------------------------------------------------------------------- Total Common Stock Equity 376,319 387,850 - -------------------------------------------------------------------------------------------------------- Non-redeemable preferred stock 42,844 42,844 Non-redeemable cumulative preference stock 379 397 - -------------------------------------------------------------------------------------------------------- Total Non-Redeemable Stock (Note 6) 43,223 43,241 - -------------------------------------------------------------------------------------------------------- Long-term debt (Notes 7 and 9) 356,637 281,622 - -------------------------------------------------------------------------------------------------------- Total Capitalization 776,179 712,713 - -------------------------------------------------------------------------------------------------------- NON-CURRENT LIABILITIES: Reserve for claims and damages (Note 1) 4,591 3,843 Postretirement benefits (Note 10) 15,334 15,213 Pension costs (Note 10) 43,618 37,421 Obligations under capital leases (Note 11) 1,646 -- - -------------------------------------------------------------------------------------------------------- Total Non-current Liabilities 65,189 56,477 - -------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Long-term debt and capital lease obligations due within one year (Notes 7 and 11) 209 78,203 Preferred stock to be redeemed within one year -- 1,390 Commercial paper (Notes 8 and 9) 130,400 82,370 Accounts payable 57,630 67,449 Dividends payable 637 665 Customer deposits 4,639 4,865 Accrued Federal income and other taxes 2,929 1,024 Accrued interest 6,011 7,039 Refundable gas costs (Note 1) 5,893 6,839 Refunds to customers 986 1,816 Other current liabilities 19,391 23,231 - -------------------------------------------------------------------------------------------------------- Total Current Liabilities 228,725 274,891 - -------------------------------------------------------------------------------------------------------- DEFERRED TAXES AND OTHER: Deferred Federal income taxes (Notes 1 and 2) 192,514 185,156 Deferred investment tax credits (Notes 1 and 2) 14,482 15,292 Accrued Order 636 transition costs 1,340 11,620 Accrued IPP settlement agreements (Note 1) -- 2,000 Other deferred credits 9,580 7,983 - -------------------------------------------------------------------------------------------------------- Total Deferred Taxes and Other 217,916 222,051 - -------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 12): -- -- - -------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,288,009 $ 1,266,132 - -------------------------------------------------------------------------------------------------------- 19
11 Orange and Rockland Utilities, Inc. and Subsidiaries CONSOLIDATED CASH FLOW STATEMENTS
Year Ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) CASH FLOW FROM OPERATIONS: Net income $ 29,506 $ 46,303 $ 38,573 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 35,415 33,765 37,786 Deferred Federal income taxes 7,280 5,353 8,531 Amortization of investment tax credit (810) (925) (892) Deferred and refundable fuel and gas costs (1,096) (6,371) (6,606) Allowance for funds used during construction (1,430) (586) (828) Other non-cash changes 5,021 3,759 8,682 Changes in certain current assets and liabilities: Accounts receivable, net and accrued utility revenue (13,723) (26) (3,547) Materials and supplies 326 (2,927) 4,941 Prepaid property taxes (1,524) 636 (1,360) Prepayments and other current assets 71 2,708 1,319 Accounts payable (9,819) 5,367 (1,773) Accrued Federal income and other taxes 1,905 (800) (4,125) Accrued interest (1,028) (213) (1,356) Refunds to customers (830) (12,087) 3,638 Other current liabilities (4,066) 1,478 4,822 Discontinued operations -- non-cash 4,691 3,978 (10,520) Other -- net 17,874 (2,090) (1,791) - ---------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operations 67,763 77,322 75,494 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOW FROM INVESTING ACTIVITIES: Additions to plant (73,986) (58,834) (54,203) Temporary cash investments 771 46 504 Allowance for funds used during construction 1,430 586 828 - ---------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (71,785) (58,202) (52,871) - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from: Issuance of long-term debt 100,088 26 44,048 Issuance of capital lease obligation 2,020 -- -- Retirement of: Common stock (3,012) -- -- Preference and preferred stock (1,390) (1,384) (1,384) Long-term debt (103,261) (195) (63,471) Capital lease obligations (204) (275) (518) Net borrowings (repayments) under short-term debt arrangements 48,030 21,120 31,850 Dividends on preferred and common stock (38,057) (38,280) (38,259) - ---------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities 4,214 (18,988) (27,734) - ---------------------------------------------------------------------------------------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 192 132 (5,111) Cash and Cash Equivalents at Beginning of Year 3,321 3,189 8,300 - ---------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,513 $ 3,321 $ 3,189 - ---------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest, net of amounts capitalized $ 32,313 $ 29,209 $ 30,186 Federal income taxes $ 10,000 $ 17,982 $ 15,575 - ---------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. 20
12 Orange and Rockland Utilities, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. GENERAL Orange and Rockland Utilities, Inc. (the Company) and its wholly owned utility subsidiaries, Rockland Electric Company (RECO) and Pike County Light & Power Company (Pike), are subject to regulation by the Federal Energy Regulatory Commission (FERC) and various state regulatory authorities with respect to their rates and accounting. Accounting policies conform to generally accepted accounting principles, as applied in the case of regulated public utilities, and are in accordance with the accounting requirements and rate-making practices of the regulatory authority having jurisdiction. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A description of the significant accounting policies follows. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, all subsidiaries and the Company's pro rata share of an unincorporated joint venture. All intercompany balances and transactions have been eliminated. The Company's ongoing diversified activities, at year end, consisted of energy services and land development businesses conducted by its wholly owned non-utility subsidiaries. RATE REGULATION The Company, RECO and Pike are subject to rate regulation by the New York Public Service Commission (NYPSC), the New Jersey Board of Public Utilities (NJBPU), and the Pennsylvania Public Utility Commission (PPUC), respectively, and the FERC. The consolidated financial statements of the Company are based on generally accepted accounting principles, including the provisions of Statement of Financial Accounting Standards No. 71 (SFAS No. 71), "Accounting for the Effects of Certain Types of Regulation," which gives recognition to the rate-making and accounting practices of the regulatory agencies. The principal effect of the rate-making process on the Company's consolidated financial statements is that of the timing of the recognition of incurred costs. If rate regulation provides assurance that an incurred cost will be recovered in a future period by inclusion of that cost in rates, SFAS No. 71 requires the capitalization of the cost. Regulatory assets represent probable future revenue associated with certain incurred costs, as these costs are recovered through the rate-making process. The following regulatory assets were reflected in the Consolidated Balance Sheets as of December 31, 1997 and 1996:
1997 1996 - -------------------------------------------------------------------------------- (Thousands of Dollars) Deferred Income Taxes (Note 1) $ 74,731 $ 74,198 FERC Order 636 Costs 1,476 11,732 Deferred Revenue Taxes (Note 1) 10,923 14,271 Deferred Pension and Other Postretirement Benefits (Note 10) 9,334 9,922 Gas Take-or-Pay Costs 1,473 2,117 Deferred Plant Maintenance Costs (Note 1) 4,251 4,244 Demand Side Management Costs 3,047 1,181 Deferred Fuel and Gas Costs (Note 1) (3,848) (4,943) IPP Settlement Agreements (Note 1) 14,238 24,065 Other 7,663 8,834 - -------------------------------------------------------------------------------- Total $ 123,288 $ 145,621 - --------------------------------------------------------------------------------
The Company's Restructuring Plan, as approved by the NYPSC, provides for full recovery of all regulatory assets. The Company will continue application of SFAS No. 71 for the generation portion of the business until the divestiture is complete (see Note 4). In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." This Statement imposes criteria for the continued recognition of regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. The Company adopted this standard on January 1, 1996. The adoption did not have any impact on the financial position or results of operations of the Company. UTILITY REVENUES Utility revenues are recorded on the basis of cycle billings rendered to customers monthly. Prior to the fourth quarter of 1997, the Company rendered bills to certain customers monthly and others bimonthly. Unbilled revenues are accrued at the end of each month for estimated energy usage since the last meter reading. The level of revenues from gas sales in New York is subject to a weather normalization clause that requires recovery from or refund to firm customers of shortfalls or excesses of firm net revenues during a heating season due to variation from normal weather (which is the basis for projecting base tariff requirements). FUEL COSTS The tariff schedules for electric and gas services in New York include adjustment clauses under which fuel, purchased gas and certain purchased power costs, above or below levels allowed in approved rate schedules, are billed or credited to customers up to approximately 60 days after the costs are incurred. In accordance with regulatory commission policy, such costs, along with the related income tax effects, are deferred until billed or credited to customers. A reconciliation of recoverable gas costs with billed gas revenues is done annually as of August 31, and the excess or deficiency is refunded to or recovered from customers during a subsequent twelve-month period. The NYPSC provides for a modified electric fuel adjustment clause requiring an 80%/20% sharing between customers and shareholders of variations between actual and forecasted fuel costs annually. The 20% portion of fluctuations from forecasted costs is limited to a maximum of $1,762,000 annually. The fuel costs targets are approved by the NYPSC for each calendar year following the Company's filing of forecasted fuel costs. Tariffs for electric and gas service in Pennsylvania and electric service in New Jersey contain adjustment clauses which utilize estimated prospective energy costs on an annual basis. The recovery of such estimated costs is made through equal monthly charges over the year of projection. Any over- or under-recoveries are deferred and refunded or charged to customers during the subsequent twelve-month period. 21 13 Orange and Rockland Utilities, Inc. and Subsidiaries UTILITY PLANT Utility plant is stated at original cost. The cost of additions to, and replacements of, utility plant include contracted work, direct labor and material, allocable overheads, allowance for funds used during construction and indirect charges for engineering and supervision. Replacement of minor items of property and the cost of repairs are charged to maintenance expense. At the time depreciable plant is retired or otherwise disposed of, the original cost, together with removal cost less salvage, is charged to the accumulated provision for depreciation. DEPRECIATION For financial reporting purposes, depreciation is computed on the straight-line method based on the estimated useful lives of the various classes of property. Provisions for depreciation are equivalent to the following composite rates based on the average depreciable plant balances at the beginning and end of the year:
Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Plant Classification: Electric 3.03% 2.88% 3.07% Gas 2.90% 2.91% 2.95% Common 7.21% 5.93% 6.64% - --------------------------------------------------------------------------------
The composite gas depreciation rate in 1997 and 1996 excludes the effects of adjustments provided for in a 1996 gas rate agreement with the NYPSC. JOINTLY OWNED UTILITY PLANT The Company has a one-third interest in the 1,200 megawatt Bowline Point generating facility, which it owns jointly with The Consolidated Edison Company of New York, Inc. The Company is the operator of the joint venture. Energy is allocated to the participants based on an agreement dated May 31, 1996. This agreement entitles each company to a certain amount of energy at different periods during the year. The operation and maintenance expenses of the facility are allocated to the Company on a one-third basis, except for major maintenance which is allocated based on the energy received from the plant by the partners. Under this agreement, each co-owner has an undivided interest in the facility and is responsible for its own financing. The Company's interest in this jointly owned plant consists primarily of the following:
Year Ended December 31, 1997 1996 - --------------------------------------------------------------------- (Thousands of Dollars) Electric Utility Plant in Service $103,217 $102,309 Construction Work in Progress $ 739 $ 1,317 - ---------------------------------------------------------------------
FEDERAL INCOME TAXES The Company and its subsidiaries file a consolidated federal income tax return, and income taxes are allocated based on the taxable income or loss of each company. Investment tax credits, which were available prior to the Tax Reform Act of 1986, have been fully normalized and are being amortized over the remaining useful life of the related property for financial reporting purposes. The consolidated financial statements of the Company are prepared pursuant to the provisions of Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes," which requires the asset and liability method of accounting for income taxes. SFAS No. 109 requires the recording of deferred income taxes for temporary differences that are reported in different years for financial reporting and tax purposes. The statement also requires that deferred tax liabilities or assets be adjusted for the future effects of any changes in tax laws or rates and that regulated enterprises recognize an offsetting regulatory asset or liability, as appropriate. DEFERRED REVENUE TAXES Deferred revenue taxes represent the unamortized balance of an accelerated payment of New Jersey Gross Receipts and Franchise Tax required by legislation enacted effective June 1, 1991. In accordance with an order by the NJBPU, the expenditure has been deferred and is being recovered in rates, with a carrying charge of 7.5% on the unamortized balance over a ten-year period. In addition, certain New York State revenue taxes included in rate base are deferred and amortized over a twelve-month period following payment in accordance with the requirements of the NYPSC. IPP SETTLEMENT AGREEMENTS During 1994 and 1995, the Company negotiated termination agreements with Independent Power Producers (IPP) scheduled to provide electric generating capacity and energy services to the Company in the late 1990's. At December 31, 1997, the remaining $14.2 million of termination costs associated with these settlement agreements are being recovered in rates. DEFERRED PLANT MAINTENANCE COSTS The Company utilizes a silicone injection procedure as part of its maintenance program for residential underground electric cable in order to prevent premature failures and ensure the realization of the expected useful life of the facilities. In 1992, the FERC issued an accounting order that required the cost of this procedure to be treated as maintenance expense rather than as a plant addition. The Company requested deferred accounting for these expenditures from the NYPSC and NJBPU in order to properly match the cost of the procedure with the periods benefited. In 1994, the NYPSC approved the deferred accounting request and authorized a ten-year amortization for rate purposes. On January 12, 1996, the NJBPU authorized RECO to capitalize these costs until the next base rate case. RESERVE FOR CLAIMS AND DAMAGES Costs arising from workers' compensation claims, property damage, general liability and unusual production plant repair costs are partially self-funded. Provisions for the reserves are based on experience, risk of loss and the rate-making practices of regulatory authorities. RECLASSIFICATIONS Certain amounts from prior years have been reclassified to conform with the current year presentation. NOTE 2. FEDERAL INCOME TAXES. The Internal Revenue Service (IRS) has completed its examination of the Company's tax returns for 1993 and 1994. The Company and IRS have agreed to an assessment for tax deficiency and interest, which had a minimal effect on the operating results of the Company. The components of federal income taxes are as follows:
Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------- (Thousands of Dollars) Charged to operations: Current $ 17,517 $ 21,120 $ 18,888 Deferred - net 6,482 5,374 7,914 Amortization of investment tax credit (121) (128) (122) - ------------------------------------------------------------------------------------------------- Total charged to operations 23,878 26,366 26,680 - ------------------------------------------------------------------------------------------------- Charged to other income: Current (1,671) 155 (3,160) Deferred - net 798 (21) 617 Amortization of investment tax credit (689) (796) (765) - ------------------------------------------------------------------------------------------------- Total charged to other income (1,562) (662) (3,308) - ------------------------------------------------------------------------------------------------- Total $ 22,316 $ 25,704 $ 23,372 - -------------------------------------------------------------------------------------------------
22 14 Orange and Rockland Utilities, Inc. and Subsidiaries The tax effect of temporary differences which gave rise to deferred tax assets and liabilities is as follows:
As of December 31, 1997 1996 - ------------------------------------------------------------------ (Thousands of Dollars) Liabilities: Accelerated depreciation $ 191,438 $ 188,039 Other 39,305 30,887 - ------------------------------------------------------------------ Total liabilities 230,743 218,926 - ------------------------------------------------------------------ Assets: Employee benefits (19,650) (17,136) Deferred fuel costs (442) (404) Other (18,137) (16,230) - ------------------------------------------------------------------ Total assets (38,229) (33,770) - ------------------------------------------------------------------ Net Liability $ 192,514 $ 185,156 - ------------------------------------------------------------------
Reconciliation of the difference between federal income tax expenses and the amount computed by applying the prevailing statutory income tax rate to income before income taxes is as follows:
Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------- (% of Pre-tax Income) Statutory tax rate 35% 35% 35% Changes in computed taxes resulting from: Amortization of investment tax credits (1) (1) (1) Cost of removal (1) (1) (2) Additional depreciation deducted for book purposes 3 4 5 Other (3) (3) -- - ------------------------------------------------------------------------------------------------- Effective Tax Rate 33% 34% 37% - -------------------------------------------------------------------------------------------------
NOTE 3. DISCONTINUED OPERATIONS. In August 1997, Norstar Management, Inc. (NMI), a wholly owned indirect subsidiary of the Company, sold certain of the assets of NORSTAR Energy Limited Partnership (NORSTAR), a natural gas services and marketing company of which NMI is the general partner. The assets sold consist primarily of customer contracts and accounts receivable. NMI is expected to wind up the remaining portion of the NORSTAR business in the first quarter of 1998. In accordance with Accounting Principles Board Opinion No. 30, the financial results for this segment are reported as "Discontinued Operations." The total (losses)/gains related to discontinued operations were $(15,432,000), or $(1.13) per share, for 1997, $(1,844,000), or $(0.13) per share, for 1996 and $807,000, or $0.06 per share, for 1995. The net assets of these operations at December 31, 1997 consist of cash of $1.7 million, net accounts receivable of $0.6 million, other current assets of $1.0 million offset by accounts payable of $1.7 million. NOTE 4. DIVESTITURE OF POWER PLANTS. The Company's Electric Rate and Restructuring Plan (the Restructuring Plan), which was approved by the NYPSC by its Orders dated November 26 and December 31, 1997, provides for the sale of all of the Company's electric generating assets by means of auction. On December 10, 1997, the Company notified the NYPSC that it will not participate as a bidder in the auction, and on December 11, 1997, in accordance with the Restructuring Plan, the Company submitted its Preliminary Divestiture Plan to the NYPSC staff and other parties. The Company filed its final Divestiture Plan on February 4, 1998, with final approval by the NYPSC expected in the spring of 1998. Upon receipt of NYPSC approval, bids would be solicited shortly thereafter, with a winning bidder to be selected by the end of the third quarter of 1998. Under the proposed schedule, the sale of the generating facilities is anticipated to be completed by mid-1999. The generating assets held for sale include the fossil units at the Lovett Generating Station and the Company's one-third interest in the Bowline Point Generating Station; the two gas turbine units located at Hillburn and Middletown; and the hydroelectric stations located at Mongaup, Rio, Swinging Bridge and Grahamsville. The total net book value of the plant assets at December 31, 1997 is approximately $269 million. In addition, fuel and material and supplies inventories, with a carrying value of $20 million at December 31, 1997, will be included in the sale. Under the Restructuring Plan approved by the NYPSC, the Company will remain a regulated transmission and distribution company that will deliver electricity to its customers and maintain reliable service. The Company will remain the "provider of last resort" for those of its customers who do not purchase electricity from other sources. The plan also calls for lower electric rates for all customers, with potential savings as high as 12 percent for the Company's largest industrial customers, and approximately five percent for all others. In addition, the Restructuring Plan, as approved, provides that the Company's PowerPick(TM) program, under which certain customers select an energy supplier other than the Company, will be available to all customers no later than May 1998 and all customers will have full retail choice (energy and capacity) by May 1999. Consistent with the recent interpretation by the Financial Accounting Standards Board's Emerging Issues Task Force regarding the application of SFAS No. 71, the Company will continue application of this standard to the generation portion of the business. NOTE 5. RETAINED EARNINGS. Consolidated Statements of Retained Earnings:
Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------- (Thousands of Dollars) Balance at beginning of year $ 192,060 $ 184,008 $ 183,659 Net income before dividends 29,506 46,303 38,573 - -------------------------------------------------------------------------------------- 221,566 230,311 222,232 - -------------------------------------------------------------------------------------- Less: Dividends Preferred stock 2,800 3,024 3,135 Common stock 35,229 35,227 35,089 - -------------------------------------------------------------------------------------- 38,029 38,251 38,224 - -------------------------------------------------------------------------------------- Capital stock repurchase (2,064) -- -- - -------------------------------------------------------------------------------------- Balance at end of year $ 181,473 $ 192,060 $ 184,008 - --------------------------------------------------------------------------------------
Various restrictions on the availability of retained earnings of RECO for cash dividends are contained in, or result from, covenants in indentures supplemental to that company's Mortgage Trust Indenture. Approximately $7,501,600 at December 31, 1997 and 1996 was so restricted. 23 15 [Orange and Rockland Utilities, Inc. and Subsidiaries NOTE 6. CAPITAL STOCK. The table below summarizes the changes in Capital Stock, issued and outstanding, for the years 1995, 1996 and 1997.
(B) (C) Non-Redeemable Non-Redeemable (A) Cumulative Cumulative Common Preferred Preference Capital Stock Stock Stock Stock ($5 par value) ($100 par value) (no par value) Premium Shares Amount* Shares Amount* Shares Amount* Amount* - ------------------------------------------------------------------------------------------------------------------------------------ Balance 12/31/94: 13,652,913 $ 68,265 428,443 $ 42,844 13,025 $ 424 $ 133,595 Conversions 700 3 (486) (15) 12 - ------------------------------------------------------------------------------------------------------------------------------------ Balance 12/31/95: 13,653,613 68,268 428,443 42,844 12,539 409 133,607 Conversions 508 3 (359) (12) 9 - ------------------------------------------------------------------------------------------------------------------------------------ Balance 12/31/96: 13,654,121 68,271 428,443 42,844 12,180 397 133,616 Reacquired Stock (65,900) (330) -- -- (644) Conversions 790 4 (541) (18) 13 - ------------------------------------------------------------------------------------------------------------------------------------ Balance 12/31/97: 13,589,011 $ 67,945 428,443 $ 42,844 11,639 $ 379 $ 132,985 - ------------------------------------------------------------------------------------------------------------------------------------ Shares Authorized 50,000,000 820,000 1,500,000 - ------------------------------------------------------------------------------------------------------------------------------------ *(in thousands)
(A) Pursuant to a December 1997 Order of the NYPSC, the Company has authority to repurchase up to 700,000 shares of its common stock and to issue up to $25 million of long-term debt to provide funds for the common stock repurchase. Through December 31, 1997, the Company has repurchased 65,900 shares of its common stock at an average market price of $45.69 per share. At December 31, 1997, 17,109 shares of common stock were reserved for conversion of preference stock. (B) Non-Redeemable Preferred Stock (cumulative):
Par Value Callable Shares December 31, Redemption Series Outstanding 1995, 1996 and 1997 Price Per Share - ------------------------------------------------------------------- (Thousands of Dollars) A, 4.65% 50,000 $ 5,000 $104.25 B, 4.75% 40,000 4,000 $102.00 D, 4.00% 3,443 344 $100.00 F, 4.68% 75,000 7,500 $102.00 G, 7.10% 110,000 11,000 $101.00 H, 8.08% 150,000 15,000 $102.43 - ------------------------------------------------------------------- 428,443 $42,844 - -------------------------------------------------------------------
This stock is subject to redemption, at any time, solely at the option of the Company on 30 days minimum notice upon payment of the redemption price, plus accrued and unpaid dividends to the date fixed for redemption. Furthermore, the preferred stock is superior to cumulative preference stock and common stock with respect to dividends and liquidation rights. (C) The Non-Redeemable $1.52 Convertible Cumulative Preference Stock, Series A, is redeemable at the option of the Company on 30 days minimum notice upon payment of the redemption price, plus accrued and unpaid dividends. The redemption price per share is $32.50 plus accrued and unpaid dividends to the date fixed for redemption. This stock ranks junior to cumulative preferred stock and superior to common stock as to dividends and liquidation rights. Furthermore, this stock is convertible, at the option of the shareholder, into common stock at the ratio of 1.47 shares of common stock for each share of preference stock, subject to adjustment. NOTE 7. LONG-TERM DEBT. On October 1, 1997, the Company's First Mortgage Bonds, Series I, 6 1/2% (the Series I Bonds) were redeemed at maturity. The Series I Bonds were the final series of bonds outstanding under the Orange and Rockland Utilities, Inc. First Mortgage Indenture, and the Company has canceled its First Mortgage and discharged the lien thereon. The indenture under which the Company's debentures are issued contains a covenant restricting the issuance by the Company of secured indebtedness while any securities are outstanding under the debenture indenture. Pike is required, pursuant to its First Mortgage Indenture, to make annual sinking fund payments in the amount of $9,500 on July 15 of each year, with respect to its Series "A" Bonds. The sinking fund requirements of Pike for 1997 were satisfied by the allocation of an amount of additional property and Pike expects to continue such practice in succeeding years. Details of long-term debt at December 31, 1997 and 1996 are as follows:
December 31, 1997 1996 - ----------------------------------------------------------------------------------------------------- (Thousands of Dollars) Orange and Rockland Utilities, Inc.: First Mortgage Bonds: Series I, 6 1/2% due Oct. 1, 1997 (a) $ -- $ 23,000 Promissory Notes (unsecured): 6.9% - 6.97% due through April 15, 2001 106 56 6.09% due Oct. 1, 2014 (b) 55,000 55,000 Variable due Aug. 1, 2015 (c) 44,000 44,000 Debentures: Series A, 93/8% due Mar. 15, 2000 80,000 80,000 Series B, 6 1/2% due Oct. 15, 1997 (a) -- 55,000 Series C, 6.14% due Mar. 1, 2000 20,000 20,000 Series D, 6.56% due Mar. 1, 2003 35,000 35,000 Series E/F, 6 1/2% due Dec. 1, 2027 (a) 80,000 -- Rockland Electric Company: First Mortgage Bonds: Series H, 9.59% due July 1, 2020 (d) -- 20,000 Series I, 6% due July 1, 2000 20,000 20,000 Series J, 7 1/8% due Feb. 1, 2007 (d) 20,000 -- Pike County Light & Power Company: First Mortgage Bonds: Series A, 9% due July 15, 2001 884 884 Series B, 9.95% due Aug. 15, 2020 1,800 1,800 Diversified Operations: Mortgage (secured) 8 1/2% -- 5,228 - ----------------------------------------------------------------------------------------------------- 356,790 359,968 Less: Amount due within one year 39 78,203 - ----------------------------------------------------------------------------------------------------- 356,751 281,765 Unamortized discount on long-term debt (114) (143) - ----------------------------------------------------------------------------------------------------- Total Long-Term Debt $ 356,637 $ 281,622 - -----------------------------------------------------------------------------------------------------
(a) On October 1, 1997 and October 15, 1997, the Company's Series I Bonds in the principal amount of $23 million and the Company's Debentures, Series B, 6 1/2% (the Series B Debentures) in the principal amount of $55 million, respectively, were repaid at maturity. Funds required for the repayment of the Series I Bonds and the Series B Debentures, which totaled $78 million, were provided by the issuance of promissory notes pending the issuance by the Company, on December 18, 1997, of $80 million of 6 1/2% Debentures, Series E, due December 1, 2027, the proceeds of which were used to repay such promissory notes. The Series E Debentures are not redeemable prior to their stated maturity. However, the holders may elect to have their Series E Debentures repaid on December 1, 2004, at 100% of the principal amount of such debentures. The Series E Debentures, which were not registered under the Securities Act of 1933 (the 1933 Act) in reliance upon an exemption under the 1933 Act, were issued for sale to qualified institutional buyers pursuant to Rule 144A under the 1933 Act. Pursuant to the terms of a Registration Rights Agreement, in January 1998, the Company filed a registration statement with respect to an offer to exchange the Series E Debentures for a new issue registered under the 1933 Act (the Series F Debentures) with terms substantially identical to the Series E Debentures. 24 16 Orange and Rockland Utilities, Inc. and Subsidiaries (b) The Company's $55 million Promissory Note was issued in connection with the New York State Energy Research and Development Authority (NYSERDA) variable rate Pollution Control Refunding Revenue Bonds (Orange and Rockland Utilities, Inc. Projects), 1994 Series A (1994 Bonds). Pursuant to an interest rate swap agreement, the Company pays interest at a fixed rate of 6.09% to a swap counter party and receives a variable rate of interest in return which is identical to the variable rate on the 1994 Bonds. The result is to effectively establish a fixed rate of interest on the 1994 Bonds of 6.09%. (c) The Company's $44 million Promissory Note was issued in connection with the NYSERDA's $44 million variable rate Pollution Control Refunding Bonds due August 1, 2015 (the 1995 Bonds). The average interest rate on the 1995 Bonds was 3.54% in 1997 and 3.18% in 1996. The interest rate is adjusted weekly, unless converted to a fixed rate. (d) On February 4, 1997, RECO issued $20 million of First Mortgage 7 1/8% Bonds, Series J, due February 1, 2007 (Series J Bonds). The proceeds from the issuance of the Series J Bonds, together with other RECO funds were used to repay, in March 1997, RECO's $20 million First Mortgage 9.59% Bonds, Series H. In January 1998, the Company entered into a Credit Agreement with Mellon Bank, N.A., the proceeds of which will be used to provide funds for the Company's Common Stock Repurchase Program. The Credit Agreement provides for a revolving line of credit of up to $25 million which may, at the option of the Company, be converted to a five year term loan at the completion of the Common Stock Repurchase Program. The Company intends to exercise this option. The rate of interest on each draw down under the revolving line of credit will be selected by the Company from among certain available rate options and the rate of interest on the term loan will be a fixed rate which will be set at the time of conversion to a term loan and will be based on U.S. Government treasury notes, including spread and margin. The aggregate amount of debt maturities, which will be satisfied by cash payments and sinking fund requirements (allocation of additional property) for each of the five years following 1997 is as follows: 1998 -- $49,000; 1999 -- $46,000; 2000 -- $120,037,000; 2001 -- $887,000; 2002 -- $-0-. Substantially all of the utility plant and other physical property of the Company's utility subsidiaries, RECO and Pike, are subject to the liens of the indentures securing the First Mortgage Bonds of the utility subsidiaries. NOTE 8. CASH AND SHORT-TERM DEBT. The Company considers all cash and highly liquid debt instruments purchased with a maturity date of three months or less to be cash and cash equivalents for the purposes of the Consolidated Financial Statements. At December 31, 1997, the Company and its utility subsidiaries had unsecured bank lines of credit totaling $167 million. Effective January 1, 1998, such lines of credit were reduced to $140 million. The Company may borrow under the lines of credit through the issuance of promissory notes to the banks at their prevailing interest rate for prime commercial borrowers. The Company, however, primarily utilizes such lines of credit to fully support commercial paper borrowings, which are issued through dealers at the prevailing interest rate for prime commercial paper. The aggregate amount of borrowings through the issuance of promissory notes and commercial paper cannot exceed the aggregate lines of credit. All borrowings for 1997, 1996 and 1995 had maturity dates of three months or less. Information regarding short-term borrowings during the past three years is as follows:
1997 1996 1995 - ------------------------------------------------------------------------------------------------ (Millions of Dollars) Weighted average interest rate at year-end 7.0% 6.5% 6.1% Amount outstanding at year-end $130.4 $ 82.4 $ 68.6 Average amount outstanding for the year $119.9 $ 66.6 $ 37.1 Daily weighted average interest rate during the year 5.9% 5.7% 6.1% Maximum amount outstanding at any month-end* $204.5 $ 97.5 $ 69.6 - ------------------------------------------------------------------------------------------------ *Includes $78.0 million of promissory notes as discussed in Note 7 (a).
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS. FINANCIAL ASSETS AND LIABILITIES For the Company, financial assets and liabilities consist principally of cash and cash equivalents, temporary cash investments, short-term debt, commercial paper and long-term debt. The methods and assumptions used to estimate the fair value of each class of financial assets and liabilities for which it is practicable to estimate that value are as follows: Cash equivalents and temporary cash investments: The carrying amount reasonably approximates fair value because of the short maturity of those instruments. Long-term debt: The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues. Commercial paper: The carrying amount reasonably approximates fair value because of the short maturity of those instruments.
1997 1996 - ------------------------------------------------------------------------------------------ Carrying Fair Carrying Fair Amount Amount Amount Amount - ------------------------------------------------------------------------------------------ (Thousands of Dollars) Cash and cash equivalents $ 3,513 $ 3,513 $ 3,321 $ 3,321 Temporary cash investments 518 518 1,289 1,289 Long-term debt 356,790 362,908 359,968 366,509 Commercial paper 130,400 130,400 82,370 82,370 - ------------------------------------------------------------------------------------------
OFF BALANCE SHEET AND DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes an interest rate swap derivative financial instrument. At this time, no energy derivatives for its electric and natural gas operations are in use. Information regarding the interest rate swap agreement is as follows: Swap Agreement -- In connection with the issuance of the 1994 Bonds, the Company entered into a single interest rate swap agreement during 1992. Under the terms of the interest rate swap agreement, the Company pays interest at a fixed rate of 6.09% to a swap counterparty and receives a variable rate of interest in return. The variable rate is identical to the variable rate payment on the 1994 Bonds made pursuant to an indenture of trust dated August 15, 1994. The result is to effectively fix the interest rate on the 1994 Bonds at 6.09%. There were no gains or losses due to the execution of the swap agreement. The terms and conditions of the swap agreement are specific to the financing described. As a result, no market price is available. Under certain circumstances, although none are anticipated, the agreement may be terminated. The fair value of the agreement is the amount which one counterparty may be required to pay the other upon early termination. If the agreement had been terminated on December 31, 1997, the Company would have been required to make a payment of approximately $7.4 million to the swap counterparty. 25 17 Orange and Rockland Utilities, Inc. and Subsidiaries NOTE 10. PENSION AND POSTRETIREMENT BENEFITS. PENSION BENEFITS The Company maintains a non-contributory defined benefit retirement plan, covering substantially all employees. The plan calls for benefits, based primarily on years of service and average career compensation, to be paid to eligible employees at retirement. For financial reporting purposes, pension costs are accounted for in accordance with the requirements of Statement of Financial Accounting Standards No. 87 (SFAS No. 87), "Employers' Accounting for Pensions." SFAS No. 87 results in a difference in the method of determining pension costs for financial reporting and funding purposes. Plan valuation for funding and income tax purposes is prepared on the unit credit cost method. This method makes no assumptions as to future compensation levels. In contrast, the projected unit credit cost method required for accounting purposes by SFAS No. 87 reflects assumptions as to future compensation levels. The Company's policy is to fund the pension costs determined by the unit credit cost method subject to the IRS funding limitation rules. For rate-making purposes, pension expense determined under SFAS No. 87 is reconciled with the amount provided in rates for pensions. Any difference is deferred for subsequent recovery or refund. The following table sets forth, pursuant to the requirements of SFAS No. 87, the plan's funded status and amounts recognized in the Consolidated Balance Sheets at December 31, 1997 and 1996. Plan assets are stated at fair market value and are composed primarily of common stocks and investment grade debt securities.
December 31, 1997 1996 - ----------------------------------------------------------------------------------------- (Thousands of Dollars) Actuarial present value of benefit obligations: Vested $(210,364) $(191,499) Nonvested (20,736) (15,947) - ----------------------------------------------------------------------------------------- Accumulated benefit obligation $(231,100) $(207,446) - ----------------------------------------------------------------------------------------- Projected benefit obligation $(241,787) $(216,821) Plan assets at fair market value 247,523 225,997 - ----------------------------------------------------------------------------------------- Excess of plan assets over projected benefit obligation 5,736 9,176 Unamortized net transition asset at adoption of SFAS No. 87 being amortized over 15 years (4,454) (5,568) Unrecognized prior service costs 38,581 29,485 Unrecognized net gain (69,237) (58,497) - ----------------------------------------------------------------------------------------- Accrued Pension Cost $ (29,374) $ (25,404) - -----------------------------------------------------------------------------------------
Net periodic pension expense calculated pursuant to the requirements of SFAS No. 87 for the years 1997, 1996 and 1995 includes the following components:
December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------- (Thousands of Dollars) Service cost-benefits earned during year $ 5,695 $ 5,456 $ 5,151 Interest cost on projected benefit obligation 16,686 15,135 14,996 Actual return on plan assets (33,164) (25,293) (37,863) Net deferred and capitalized 14,753 7,579 20,129 - --------------------------------------------------------------------------------------- Net Pension Expense $ 3,970 $ 2,877 $ 2,413 - ---------------------------------------------------------------------------------------
The expected long-term rate of return on plan assets, the weighted average discount rate and the annual rate of increase in future compensation assumed in determining the projected benefit obligation for 1997, 1996 and 1995 were 8.0%, 7.5% and 2.5%, respectively. In addition to the pension plan described above, the Company has an unfunded non-contributory supplemental retirement plan covering certain management employees. The cost to the Company of the supplemental plan in 1997, 1996 and 1995 was $2.1 million, $1.6 million and $0.7 million, respectively. POSTRETIREMENT BENEFITS In addition to providing pension benefits, the Company and its subsidiaries provide certain health care and life insurance benefits for retired employees. Employees retiring from the Company on or after having attained age 55 and who have rendered at least 10 years of service are entitled to postretirement health care coverage. Pursuant to the provisions of Statement of Financial Accounting Standards No. 106 (SFAS No. 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions," which established the accounting and financial reporting standards for postretirement benefits other than pensions, the Company is required to accrue the estimated future cost of postretirement health and non-pension benefits during the years that employees render the necessary service, rather than recognizing the cost of such benefits after employees have retired and when the benefits are actually paid. Deferred accounting for any difference between the expense charge required under SFAS No. 106 and the current rate allowance has been authorized by the NYPSC for the Company's New York electric and gas operations. Similar procedures have been adopted by the NJBPU and PPUC for the operations in those states. The NYPSC, NJBPU and PPUC allow the Company to recover SFAS No. 106 costs applicable to electric operations and gas operations in rates currently. In order to provide funding for active employees' postretirement benefits, the Company has established Voluntary Employees' Beneficiary Association (VEBA) trusts for collectively bargained employees and management employees. Contributions to the VEBA trusts are tax deductible, subject to limitations contained in the Internal Revenue Code. The Company's policy is to fund postretirement health and life insurance costs to the extent recoveries are realized for these costs through rates. During 1997, the Company contributed $7.4 million to the VEBA trust. Rate recoveries and billings to others totaled $6.1 million in 1997 and $5.1 million in 1996. As permitted by SFAS No. 106, the Company has elected to amortize the accumulated postretirement benefit obligation at the date of adoption of the accounting standard, January 1, 1993, over a 20-year period. This transition obligation totaled $57.2 million. The following table sets forth the plan's funded status, reconciled with amounts recognized in the Company's financial statements at December 31, 1997 and December 31, 1996:
1997 1996 - -------------------------------------------------------------------------------- (Thousands of Dollars) Accumulated postretirement benefit obligation: Fully eligible active employees $(15,336) $(13,765) Other active employees (30,312) (34,902) Retirees (34,977) (34,332) - -------------------------------------------------------------------------------- Total benefit obligation (80,625) (82,999) Plan assets at fair value 22,238 14,822 - -------------------------------------------------------------------------------- Accumulated postretirement obligation in excess of plan assets (58,387) (68,177) Unrecognized transition obligation 37,027 44,409 Prior service cost -- 2,174 Unrecognized experience net loss 6,393 6,881 - -------------------------------------------------------------------------------- Accrued Postretirement Benefit Cost $(14,967) $(14,713) - --------------------------------------------------------------------------------
26 18 Orange and Rockland Utilities, Inc. and Subsidiaries The components of net periodic postretirement benefit cost for the years ended December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995 - ------------------------------------------------------------------------------------ (Thousands of Dollars) Service cost $ 1,863 $ 2,050 $ 1,586 Interest cost 6,013 5,925 5,622 Return on plan assets (25) (546) (319) Amortization of transition obligation 2,572 2,776 2,790 Prior service cost 84 202 -- Net losses 1,011 855 529 Deferred and capitalized (881) (2,400) (3,424) - ------------------------------------------------------------------------------------ Net Expense $ 10,637 $ 8,862 $ 6,784 - ------------------------------------------------------------------------------------
The calculation of the actuarial present value of benefit obligations at December 31, 1997 assumes a discount rate of 7.5% and health care cost trend rates of 7.0% for medical costs and 9.0% for prescription drugs in 1998, decreasing through 2002 to a rate of 5.0%. If the health care trend rate assumptions were increased by 1 percent, the accumulated postretirement benefit obligation would be increased by approximately $9.3 million. The effect of this change on the sum of the service cost and interest cost would be an increase of $1.1 million. The assumed discount rate for 1996 was 7.5%, and health care cost trend rates were 7.5% for medical costs and 10% for prescription drugs in 1997, decreasing through 2002 to a rate of 5.0%. NOTE 11. LEASES. The Company maintains leases for certain property and equipment which meet the accounting criteria for capitalization. As required by Statement of Financial Accounting Standards No. 71, (SFAS No. 71), "Accounting for the Effects of Certain Types of Regulation," the Company has recorded such leases on its balance sheets. The amount of leased property included in the accompanying Consolidated Balance Sheets, and the obligation associated with such leases at December 31, 1997 is as follows:
As of December 31, 1997 - ----------------------------------------------------------------------------------------- (Thousands of Dollars) Utility plant $2,020 Less accumulated amortization 204 - ----------------------------------------------------------------------------------------- Net Assets Under Capital Leases $1,816 - ----------------------------------------------------------------------------------------- Non-current liabilities $1,646 Current liabilities 170 - ----------------------------------------------------------------------------------------- Total Liabilities $1,816 - -----------------------------------------------------------------------------------------
The Company had no capital leases at December 31, 1996. Although current rate-making practices treat all leases as operating leases, SFAS No. 71 provides that regulated utilities shall recognize as a charge against income an amount equal to the rental expense allowed for rate-making purposes. Therefore, the rental payments on these leases have no impact on the Company's Consolidated Statements of Income. The future minimum rental commitments under the Company's capital leases and non-cancellable operating leases are as follows:
Non-cancellable Capital Operating Leases Leases - -------------------------------------------------------------------------------- (Thousands of Dollars) 1998 $ 291 $ 4,600 1999 292 3,800 2000 292 3,600 2001 290 3,200 2002 290 2,100 All years thereafter 1,015 25,000 - -------------------------------------------------------------------------------- Total 2,470 $42,300 Less amount representing interest 654 N/A - -------------------------------------------------------------------------------- Present value of net minimum lease payments $ 1,816 N/A - --------------------------------------------------------------------------------
Rental expense for 1997, 1996 and 1995 was $5.8 million, $6.2 million and $6.0 million, respectively. NOTE 12. COMMITMENTS AND CONTINGENCIES. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk, as defined by Statement of Financial Accounting Standards No. 105 "Financial Instruments with Concentrations of Credit Risk," consist principally of temporary cash investments and accounts receivable. The Company places its temporary cash investments with high quality financial institutions. Concentrations of credit risk with respect to accounts receivable are limited due to the Company's large, diverse customer base within its service territory. Therefore, as of December 31, 1997, the Company had no significant concentrations of credit risk. CONSTRUCTION PROGRAM Under the construction program of the Company and its subsidiaries, it is estimated that expenditures (excluding allowance for funds used during construction) of approximately $51.0 million will be incurred during 1998. Construction expenditures, including cost of removal and salvage, amounted to $73.1 million for 1997. GAS SUPPLY AND STORAGE CONTRACTS The Company has long-term contracts for firm supply, transportation and storage of gas. The contracts contain provisions that permit the Company to extend the contracts beyond their primary term if they are still required to serve firm customers. Approximately 90 percent of the Company's existing contracts will expire between 2000 and 2004. The Company's obligations under these contracts for the five years following 1997 are as follows: 1998 -- $61,100,000; 1999 -- $61,500,000; 2000 -- $57,700,000; 2001 -- $44,600,000 and 2002 -- $39,700,000. The NYPSC, in its effort to promote competition, has required the Company to provide firm transportation service for those customers that elect to purchase their gas supply from a marketer rather than the Company. Marketers are permitted to aggregate customers and the Company is required to release interstate pipeline capacity and storage to the marketers to serve these customers until 1999. After 1999, marketers will be required to obtain their own capacity, therefore, the Company will be able to reduce its capacity and commitments. As the transition to a competitive retail market develops, the Company will determine what supply capacity and storage contracts it maintains. As the Company moves to a competitive market, traditional cost recovery mechanisms may be replaced by market-based methods. COAL SUPPLY CONTRACTS The Company has one long-term contract for the supply of coal and two long-term contracts for the transportation of coal. The Company has the right under the long-term coal purchase contract to suspend the purchase of coal if an alternative fuel source becomes less expensive. The Company's aggregate contract obligations for the supply and transportation of coal for each of the five years following 1997 is as follows: 1998 -- $32,900,000; 1999 -- $33,700,000; 2000 -- $27,600,000; 2001 -- $21,000,000; 2002 -- $21,600,000. POWER PURCHASE AGREEMENTS The Company has three long-term contracts for the purchase of electric generating capacity and energy. The contracts expire in 1998, 2000 and 2015. 27 19 Orange and Rockland Utilities, Inc. and Subsidiaries The Company's aggregate contract obligations for the purchase of electric capacity and energy for each of the five years following 1997 is as follows: 1998 -- $11,500,000; 1999 -- $3,100,000; 2000 -- $3,300,000; 2001 -- $700,000; 2002 -- $700,000. LEGAL PROCEEDINGS RESTRUCTURING LITIGATION The Company, the six other New York State investor-owned electric utilities, and the Energy Association of New York State filed a petition in New York State Supreme Court on September 18, 1996 challenging the NYPSC's May 20, 1996 Order in the Competitive Opportunities Proceeding (Case 94-E-0952) under Article 78 of the New York Civil Practice Law and Rules. In their Article 78 petition, the petitioners alleged that the Order is vague, ambiguous and procedurally defective, that the May 20, 1996 Order fails to assure the utilities a reasonable opportunity to recover strandable costs, and the NYPSC lacks the authority to order retail wheeling or divestiture. On November 26, 1996, the Supreme Court issued a ruling denying the Article 78 petition. In its ruling, the Court determined that because the Commission has not yet directed retail wheeling, generation deregulation and asset divestiture, there is no justiciable controversy regarding these issues. Despite this finding, the Court proceeded to opine that the Commission is not precluded by state or federal law from ordering retail wheeling or generation divestiture. The Court also determined that the utilities are not entitled, as a matter of law, to recover from customers the full amount of the utilities' strandable costs. On December 24, 1996, the Energy Association and the New York utilities appealed to the Appellate Division of the Supreme Court for the Third Judicial Department from the Supreme Court's November 26, 1996 decision. On October 31, 1997, the Supreme Court of the State of New York, Appellate Division, Third Department, granted the petitioners' motion for an extension of time to perfect the appeal for a period of six months, through and including March 24, 1998. The Company's Restructuring Plan approved by the NYPSC's Orders of November 26 and December 31, 1997 requires the Company to petition the Appellate Division to withdraw its appeal. This petition must be filed "following final Commission approval of this agreement" (i.e., when any appeals from such approval are exhausted or the time to appeal has expired). If no party initiates an Article 78 appeal, this petition will be filed after expiration of the statute of limitations for challenging the Commission's Final Order. The Company is unable to predict the final result of this litigation. ENVIRONMENTAL LITIGATION On March 29, 1989, the New Jersey Department of Environmental Protection (NJDEP) issued a directive under the New Jersey Spill and Control Act to various potentially responsible parties (PRPs), including the Company, with respect to a site formerly owned and operated by Borne Chemical Company in Elizabeth, Union County, New Jersey, ordering certain interim actions directed at both site security and the off-site removal of certain hazardous substances. The Company and other PRPs are currently conducting a remedial investigation to determine what, if any, subsurface remediation at the Borne site is required. The Company does not believe that this matter will have a material effect on the financial condition of the Company. On August 2, 1994, the Company entered into a Consent Order with the New York State Department of Environmental Conservation (DEC) in which the Company agreed to conduct a remedial investigation of certain property it owns in West Nyack, New York. Polychlorinated biphenyls (PCBs) have been discovered at the West Nyack site. Petroleum contamination related to a leaking underground storage tank has been found as well. The Company has completed this remedial investigation. The Company and the DEC have executed a second Consent Order to implement a Record of Decision (ROD), dated October 20, 1997 issued by the DEC. The ROD provides for the removal and off-site disposal of soils contaminated with PCBs and other petroleum-related contaminants and the post-remedial monitoring of groundwater. Deferred accounting treatment has been approved by the NYPSC and these costs are expected to be recovered in rates. The Company has identified six former Manufactured Gas Plant (MGP) sites which were owned and operated by the Company or its predecessors. The Company may be named as a potentially responsible party for these sites under relevant environmental laws, which may require the Company to clean up these sites. To date, no claims have been asserted against the Company. The Company and the DEC have executed a Consent Order dated as of January 8, 1996, which provides for preliminary site assessments of these six MGP sites. In November 1996, the Company submitted to DEC, for its review and approval, a draft work plan for the preliminary site assessment of three of the MGP sites. In April 1997, the DEC approved the work plans for these three sites. Field work was subsequently completed and Preliminary Site Assessment reports for the three sites were submitted to the DEC on September 1, 1997. These reports showed varying degrees of contamination at each of the sites which will necessitate further investigation. The DEC has provided written comments on these reports and the Company expects to conduct the further investigation in the spring of 1998. In addition, the Company has submitted draft work plans for two additional sites to the DEC for its review and approval. Although the Company is unable at this time to estimate the total costs to be incurred at the six MGP sites, deferred accounting treatment has been approved by the NYPSC and these costs are expected to be recovered in rates. On May 29, 1991, a group of ten electric utilities (Metal Bank Group) entered into an Administrative Consent Order with the United States Environmental Protection Agency (EPA) to perform a remedial investigation and feasibility study (RIFS) at the Cottman Avenue/Metal Bank Superfund site in Philadelphia, Pennsylvania. PCBs have been discharged at the Cottman Avenue site from an underground storage tank and the handling of transformers and other electrical equipment. The Company entered into a tolling agreement by which the Metal Bank Group reserved its right to file suit against the Company, and the Metal Bank Group submitted the RIFS to the EPA for determination of what remedial measures will be required at the Cottman Avenue site. The Metal Bank Group has assigned the Company with a 2.87% share although, to date, because the Company is not a member of the Group, the Company has been unable to confirm this allocation. The EPA has issued a recommended proposed remediation plan which, if approved, will cost approximately $17 million. In addition, the EPA has requested information and documentation from the Company and advised the Company of its opportunity to negotiate a settlement directly with the EPA upon its issuance of a ROD (which, to date, has not been issued). 28 20 Orange and Rockland Utilities, Inc. and Subsidiaries The Company is unable at this time to estimate the Company's share, if any, of past or future costs at this site. OTHER LITIGATION On November 19, 1996, the Company was served with a Summons and Complaint (Summons and Complaint) in a litigation entitled Crossroads Cogeneration Corporation v. Orange and Rockland Utilities, Inc., filed in the United States District Court for the District of New Jersey. The litigation relates to a certain Power Sales Agreement between the Company and Crossroads Cogeneration Corporation (Crossroads), which requires the Company to purchase electric capacity and associated energy from a cogeneration facility in Mahwah, New Jersey. The Complaint alleges damage claims for breach of contract, breach of the implied covenant of good faith and fair dealing and violations of the Federal Antitrust laws and seeks a declaration of Crossroads' rights under the Agreement. By Opinion and Order dated June 30, 1997 (Order), the Court dismissed Crossroads' Complaint in its entirety with prejudice, and Crossroads' appeal to the United States Court of Appeals for the Third Circuit is pending. The Company cannot predict the ultimate outcome of this proceeding. On February 4, 1997, the Company's subsidiary, RECO, was served with a Summons and Complaint in a litigation entitled Philip Griffin and Marjory Griffin v. Rockland Electric Company filed in the Superior Court of New Jersey, Bergen County, Law Division. The Complaint includes nine counts, eight of which claim compensatory damages of $2 million and exemplary damages of $4 million for each count, and alleges claims on behalf of property owners in Old Tappan, New Jersey related to alleged excessive noise at a substation operated by RECO in Old Tappan. Discovery is at its inception in this case. In addition, hearings are scheduled for February 1998 before the New Jersey Office of Administrative Law on two matters: (1) an administrative complaint filed by Mr. Griffin with the NJBPU; and (2) a Petition filed by RECO with the NJBPU seeking relief from a September 1996 Resolution of the Old Tappan Board of Adjustment which orders RECO to abate an alleged nuisance of excessive noise at the substation. The Company intends to pursue the proceedings before the NJBPU and to defend the court action vigorously. The Company cannot predict the outcome of either proceeding. ENVIRONMENTAL The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and certain similar state statutes authorize various governmental authorities to issue orders compelling responsible parties to take cleanup action at sites determined to present an imminent and substantial danger to the public and to the environment because of an actual or threatened release of hazardous substances. As discussed above, the Company is a party to a number of administrative and litigation proceedings involving potential impact on the environment. Such proceedings arise out of, without limitation, the operation and maintenance of facilities for the generation, transmission and distribution of electricity and natural gas. As noted above, the Company does not believe that certain proceedings will have a material effect on the Company, while as to others, the Company is unable at this time to estimate what, if any, costs it will incur. Pursuant to the Clean Air Act Amendments of 1990, which became law on November 15, 1990, a permanent nationwide reduction of 10 million tons in sulfur dioxide emissions from 1980 levels, as well as a permanent nationwide reduction of 2 million tons of nitrogen oxide emissions from 1980 levels, must be achieved by January 1, 2000. In addition, continuous emission monitoring systems were required at all affected facilities effective January 1, 1995. Pursuant to New York State attainment of ozone standards, Nitrogen Oxide (NOx) reductions were achieved effective May 31, 1995. Additional NOx reductions will be required effective May, 1999 for the annual ozone season (May-September). The Company has two base load generating stations that burn fossil fuels that will be impacted by this legislation. These generating facilities already burn low sulfur fuels, so additional capital costs are not anticipated for compliance with the sulfur dioxide emission requirements. The Company installed low nitrogen oxide burners at the Lovett Plant and made operational modifications at Bowline Plant to meet NOx reduction levels for ozone attainment. Additional emission monitoring systems were installed at both facilities. In compliance with DEC proposed regulations, effective May 1, 1999, the Company will be allocated NOx emission allowances for the annual ozone season. The Company does not anticipate incurring additional capital costs to comply with these proposed regulations. Beginning with calendar year 1994, Title V sources (Bowline and Lovett) are required to pay an emission fee. Each facility's fees are based upon actual air emissions reported to the DEC for the preceding calendar year. For 1997, the Company paid an emission rate of approximately $28 per ton based upon 1996 emissions. The emission fee will be reevaluated by New York State annually. The EPA finalized in July, 1997 new national ambient air quality standards for ozone particulate matter. The Company will continue to assess the impact of the Clean Air Act Amendments of 1990 and new ozone and particulate standards on its power generating operations as additional regulations implementing these Amendments and standards are promulgated. NOTE 13. SEGMENTS OF BUSINESS. In accordance with the requirements of Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information," the Company defines its principal business segments as utility (electric and gas) and diversified activities. The diversified segment, at year end, included energy services and land development. Total utility revenue as reported in the Consolidated Statements of Income include both sales to unaffiliated customers and intersegment sales which are billed at tariff rates. Income from operations is total revenue less operating expenses. General corporate expenses were allocated in the manner used in the rate-making process. Identifiable assets by segment are those assets that are used in the production, distribution and sales operations in each segment. Allocations were made in a manner consistent with the rate-making process. Corporate assets are principally property, cash, sundry receivables and unamortized debt expense. 29 21 Orange and Rockland Utilities, Inc. and Subsidiaries
Year Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------- (Thousands of Dollars) Operating Information: Operating revenues: Sales to unaffiliated customers: Electric $ 479,463 $ 477,032 $ 459,876 Gas 168,421 176,400 140,177 Intersegment sales: Electric 10 10 107 Gas 29 42 47 - ----------------------------------------------------------------------------------------------- Total Utility Operating Revenues 647,923 653,484 600,207 Diversified activities 851 1,405 2,103 - ----------------------------------------------------------------------------------------------- Total Operating Revenues $ 648,774 $ 654,889 $ 602,310 - ----------------------------------------------------------------------------------------------- Operating income before income taxes: Electric $ 87,430 $ 86,161 $ 85,156 Gas 15,382 22,447 17,467 Diversified activities (1,937) 402 (374) - ----------------------------------------------------------------------------------------------- Total Operating Income Before Income Taxes 100,875 109,010 102,249 - ----------------------------------------------------------------------------------------------- Income Taxes: Electric 21,837 21,585 22,406 Gas 2,491 4,879 3,859 Diversified activities (450) (98) 415 - ----------------------------------------------------------------------------------------------- Total Income Taxes 23,878 26,366 26,680 - ----------------------------------------------------------------------------------------------- Total Income From Operations $ 76,997 $ 82,644 $ 75,569 - ----------------------------------------------------------------------------------------------- Other Information: Identifiable assets: Electric $ 996,647 $ 978,952 $ 979,512 Gas 241,656 240,471 217,357 Diversified activities 13,162 24,220 26,719 - ----------------------------------------------------------------------------------------------- Total Identifiable Assets 1,251,465 1,243,643 1,223,588 Corporate assets 36,544 22,489 27,953 - ----------------------------------------------------------------------------------------------- Total Assets $ 1,288,009 $ 1,266,132 $ 1,251,541 - ----------------------------------------------------------------------------------------------- Depreciation expense: Electric $ 30,597 $ 29,430 $ 30,594 Gas 5,091 2,578 6,646 Diversified activities 173 264 284 - ----------------------------------------------------------------------------------------------- Total Depreciation Expense $ 35,861 $ 32,272 $ 37,524 - ----------------------------------------------------------------------------------------------- Additions to plants: Electric $ 48,555 $ 41,932 $ 43,225 Gas 25,257 16,766 10,894 Diversified activities 174 136 84 - ----------------------------------------------------------------------------------------------- Total Additions $ 73,986 $ 58,834 $ 54,203 - -----------------------------------------------------------------------------------------------
NOTE 14. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED).
Earnings Earnings Applicable Per Income To Average Operating From Net Common Common Revenues Operations Income Stock Share - --------------------------------------------------------------------------------------------- (Thousands of Dollars) QUARTER ENDED 1997 March 31 $185,318 $ 21,395 $ 6,916 $ 6,216 $ 0.46 June 30 137,195 13,068 (994) (1,693) (0.13) September 30 159,728 23,741 12,568 11,868 0.87 December 31 166,533 18,793 11,016 10,315 0.76 - --------------------------------------------------------------------------------------------- 1996 March 31 $187,305 $ 22,018 $ 14,555 $ 13,799 $ 1.01 June 30 152,253 17,464 6,320 5,563 0.41 September 30 160,528 26,826 18,676 17,921 1.31 December 31 154,803 16,336 6,752 5,996 0.44 - ---------------------------------------------------------------------------------------------
Quarterly results reflect the seasonal effect of electric and gas sales as well as the results of the NORSTAR discontinued operations. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ARTHUR ANDERSEN LLP To the Board of Directors and Shareholders of Orange and Rockland Utilities, Inc.: We have audited the accompanying consolidated balance sheet of Orange and Rockland Utilities, Inc. (a New York Corporation) and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Orange and Rockland Utilities, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the three years ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP New York, New York February 5, 1998 30 22 Orange and Rockland Utilities, Inc. and Subsidiaries OPERATING STATISTICS
Year Ended December 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- ELECTRIC: SALES (Mwh): Residential 1,791,676 1,731,105 1,685,110 1,660,755 1,611,602 Commercial 1,959,862 2,044,759 2,056,185 2,049,265 2,018,240 Industrial 839,851 748,484 680,678 657,142 627,944 Public Street Lighting 26,899 29,522 28,107 27,836 27,705 Public Authorities 73,647 51,392 75,506 68,972 72,037 - ------------------------------------------------------------------------------------------------------------------------------- Total Sales to Customers 4,691,935 4,605,262 4,525,586 4,463,970 4,357,528 Other Utilities for Resale 305,445 190,394 118,730 265,311 234,751 - ------------------------------------------------------------------------------------------------------------------------------- Total Sales of Electricity 4,997,380 4,795,656 4,644,316 4,729,281 4,592,279 - ------------------------------------------------------------------------------------------------------------------------------- REVENUES (000's): Residential $ 218,974 $ 209,706 $ 208,862 $ 214,439 $ 211,082 Commercial 194,102 200,281 204,240 212,214 212,240 Industrial 44,936 46,663 50,205 51,316 50,983 Public Street Lighting 5,040 4,903 4,930 4,939 4,967 Public Authorities 2,754 3,453 4,257 4,051 4,344 - ------------------------------------------------------------------------------------------------------------------------------- Total Revenues from Sales to Customers 465,806 465,006 472,494 486,959 483,616 Other Utilities for Resale 7,109 3,106 2,150 6,636 6,414 - ------------------------------------------------------------------------------------------------------------------------------- Total Revenues from Sales of Electricity 472,915 468,112 474,644 493,595 490,030 Other Electric Operating Revenues 6,558 8,930 (14,661) (14,566) (3,063) - ------------------------------------------------------------------------------------------------------------------------------- Total Electric Operating Revenues $ 479,473 $ 477,042 $ 459,983 $ 479,029 $ 486,967 - ------------------------------------------------------------------------------------------------------------------------------- GAS: SALES (Mmcf): Residential 14,997 15,685 14,759 15,164 15,323 Commercial and Industrial 5,324 5,233 5,066 5,257 5,233 - ------------------------------------------------------------------------------------------------------------------------------- Total Firm Sales 20,321 20,918 19,825 20,421 20,556 Interruptible 3,527 3,996 2,327 1,023 653 Other Utilities for Resale 3 4 4 27 8 - ------------------------------------------------------------------------------------------------------------------------------- Total Sales of Gas 23,851 24,918 22,156 21,471 21,217 - ------------------------------------------------------------------------------------------------------------------------------- REVENUES (000's): Residential $ 115,335 $ 116,981 $ 96,737 $ 112,759 $ 113,116 Commercial and Industrial 34,771 36,954 31,226 36,676 36,707 - ------------------------------------------------------------------------------------------------------------------------------- Total Revenues from Firm Sales 150,106 153,935 127,963 149,435 149,823 Interruptible 13,915 15,101 6,725 3,996 2,605 Other Utilities for Resale 75 94 59 203 105 - ------------------------------------------------------------------------------------------------------------------------------- Total Revenues from Sales of Gas 164,096 169,130 134,747 153,634 152,533 Other Gas Revenues 4,354 7,312 5,477 3,534 4,724 - ------------------------------------------------------------------------------------------------------------------------------- Total Gas Operating Revenues $ 168,450 $ 176,442 $ 140,224 $ 157,168 $ 157,257 - -------------------------------------------------------------------------------------------------------------------------------
31 23 Orange and Rockland Utilities, Inc. and Subsidiaries FINANCIAL STATISTICS
Year Ended December 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK DATA: Earnings Per Average Common Share: Continuing Operations $ 3.09 $ 3.30 $ 2.54 $ 2.45 $ 3.02 Discontinued Operations $ (1.13) $ (0.13) $ 0.06 $ 0.05 $ 0.04 - ------------------------------------------------------------------------------------------------------------------------------- Consolidated Earnings Per Average Common Share $ 1.96 $ 3.17 $ 2.60 $ 2.50 $ 3.06 - ------------------------------------------------------------------------------------------------------------------------------- Dividends Declared Per Share $ 2.58 $ 2.58 $ 2.57 $ 2.54 $ 2.49 Book Value Per Share (Year End) $ 27.69 $ 28.41 $ 27.82 $ 27.79 $ 27.79 Market Price Range Per Share: High $48 5/8 $37 1/8 $37 3/8 $41 1/4 $47 1/2 Low $30 1/8 $33 3/8 $30 7/8 $28 3/8 $38 5/8 Year End $46 9/16 $35 7/8 $35 3/4 $32 1/2 $40 5/8 Price Earnings Ratio 23.76 11.32 13.75 13.00 13.28 Dividend Payout Ratio 131.63% 81.39% 98.85% 101.60% 81.37% Common Shareholders at Year End 19,682 21,322 22,916 23,299 24,328 Average Number of Common Shares Outstanding (000's) 13,649 13,654 13,653 13,594 13,532 Total Common Shares Outstanding at Year End (000's) 13,589 13,654 13,654 13,653 13,532 Return on Average Common Equity 7.09% 11.33% 9.35% 9.01% 11.16% - ------------------------------------------------------------------------------------------------------------------------------- CAPITALIZATION DATA (000's): Common Stock Equity $ 376,319 $ 387,850 $ 379,776 $ 379,403 $ 376,044 Non-Redeemable Preferred and Preference Stock 43,223 43,241 43,253 43,268 43,287 Redeemable Preferred Stock 0 0 1,390 2,774 4,158 Long-Term Debt (includes current portion) 356,676 359,825 359,928 379,014 381,248 - ------------------------------------------------------------------------------------------------------------------------------- Total Capitalization $ 776,218 $ 790,916 $ 784,347 $ 804,459 $ 804,737 - ------------------------------------------------------------------------------------------------------------------------------- CAPITALIZATION RATIOS: Common Stock Equity 48.48% 49.04% 48.42% 47.16% 46.73% Non-Redeemable Preferred and Preference Stock 5.57% 5.47% 5.51% 5.38% 5.38% Redeemable Preferred Stock 0.00% 0.00% 0.18% 0.35% 0.52% Long-Term Debt (includes current portion) 45.95% 45.49% 45.89% 47.11% 47.37% - ------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL DATA (000's): Operating Revenues $ 648,774 $ 654,889 $ 602,310 $ 638,404 $ 645,640 Operating Expenses $ 571,777 $ 572,245 $ 526,741 $ 562,810 $ 563,066 Operating Income $ 76,997 $ 82,644 $ 75,569 $ 75,594 $ 82,574 Net Income $ 29,506 $ 46,303 $ 38,573 $ 37,217 $ 44,815 Earnings Applicable to Common Stock $ 26,706 $ 43,279 $ 35,438 $ 33,966 $ 41,451 Net Utility Plant $ 936,213 $ 899,643 $ 873,668 $ 856,289 $ 831,980 Total Assets $ 1,288,009 $ 1,266,132 $1,251,541 $1,230,726 $1,225,627 Long-Term Debt Including Redeemable Preferred Stock $ 356,676 $ 359,825 $ 361,318 $ 381,788 $ 385,406 Ratio of Long-Term Debt to Net Plant 38.1% 40.0% 41.2% 44.3% 46.0% Ratio of Accumulated Depreciation to Utility Plant in Service 35.1% 33.8% 33.3% 33.1% 31.7% - -------------------------------------------------------------------------------------------------------------------------------
CREDIT RATINGS Duff & Phelps Moody's Standard & Credit Rating Investors Poor's Company Service Corp. - ---------------------------------------------------------------------------------- Commercial paper D-1 - P-2 A-2 Pollution control bonds A - A3 A - Unsecured debt A - A3 A - Preferred debt BBB+ baa1 BBB+ - ----------------------------------------------------------------------------------
32 EX-24 19 POWERS OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and a Director of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. s/s D. Louis Peoples D. Louis Peoples Vice Chairman of the Board and Chief Executive Officer 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. s/s R. Lee Haney R. Lee Haney Senior Vice President and Chief Financial Officer 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. s/s Edward M. McKenna Edward M. McKenna Controller 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. /s/ Ralph M. Baruch Ralph M. Baruch Director 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. /s/ J. Fletcher Creamer J. Fletcher Creamer Director 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. /s/ Michael J. Del Giudice Michael J. Del Giudice Chairman of the Board of Directors 7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. s/s Jon F. Hanson Jon F. Hanson Director 8 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. s/s Kenneth D. McPherson Kenneth D. McPherson Director 9 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. s/s Robert E. Mulcahy III Robert E. Mulcahy III Director 10 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. s/s James F. O'Grady, Jr. James F. O'Grady, Jr. Director 11 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. s/s Frederic V. Salerno Frederic V. Salerno Director 12 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO her true and lawful attorney, for her and in her name, place and stead, and in her office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as she might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set her hand and seal this 5th day of March 1998. s/s Linda C. Taliaferro Linda C. Taliaferro Director 13 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a Director of Orange and Rockland Utilities, Inc., which Company proposes to file with the Securities and Exchange Commission an Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1997 pursuant to the provisions of the Securities Exchange Act of 1934, as amended, has made, constituted and appointed and by these presents does hereby make, constitute and appoint G. D. CALIENDO his true and lawful attorney, for him and in his name, place and stead, and in his office and capacity as aforesaid, to sign and file said Form 10-K and any amendments thereto, and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said G. D. CALIENDO full power and authority to do and perform each and every act as fully, to all intents and purposes, as he might or could do if personally present, hereby ratifying and confirming in all respects all that G. D. CALIENDO may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand and seal this 5th day of March 1998. s/s H. Kent Vanderhoef H. Kent Vanderhoef Director EX-27 20 FINANCIAL DATA SCHEDULE
OPUR1 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 936,213 10,542 187,480 152,129 1,645 1,288,009 67,945 126,901 181,473 376,319 0 43,223 356,637 0 0 130,400 39 0 1,646 170 379,575 1,288,009 648,774 23,878 547,899 571,777 76,997 (15,912) 61,085 31,579 29,506 2,800 26,706 35,229 23,215 67,763 1.96 0
EX-99.3 21 NYPSC OPINION AND ORDER 1 EXHIBIT 99.3 STATE OF NEW YORK PUBLIC SERVICE COMMISSION OPINION NO. 97-20 CASE 96-E-0900 - In the Matter of Orange and Rockland Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to Opinion No. 96-12. OPINION AND ORDER ADOPTING TERMS OF SETTLEMENT Issued and Effective: December 31, 1997 APPEARANCES INTRODUCTION 1 PROCEDURAL HISTORY 2 SETTLEMENT 5 PUBLIC INPUT 6 2 STANDARD TO TEST A PROPOSED SETTLEMENT 7 PRINCIPAL ISSUES 8 Corporate Structure 8 Discussion 11 Strandable Costs and the CTC 12 Discussion 15 OTHER ISSUES 16 Transition Rate Design 16 Discussion 17 Return on Equity and Revenue Sharing 18 Discussion 19 Systems Benefit Charge 19 Discussion 20 Revenue Allocation 21 Discussion 21 Retail Wheeling to Residential Customers 22 Discussion 23 Price Cap Plus Regulation 23 Sources of Funds for Rate Decrease 24 Deferrals 25 Consumer Outreach and Education 25 MISCELLANEOUS 26 FINDINGS UNDER THE STATE ENVIRONMENTAL QUALITY REVIEW ACT 28 DISCUSSION AND RECOMMENDATION 30 ORDER 31 APPENDIX FOR DEPARTMENT OF PUBLIC SERVICE STAFF: Robert Garlin & Saul Rigberg, Staff Counsel, Three Empire State Plaza, Albany, New York 12223. FOR ORANGE & ROCKLAND UTILITIES, INC.: G. D. Caliendo, Senior Vice-President and General Counsel (by John L. Carley, Senior Attorney). Nixon, Hargrave, Devans & Doyle (by Andrew Gansberg, Esq.), One Key Corp Plaza, Albany, New York 12207. 3 FOR NEW YORK STATE ELECTRIC & GAS CORPORATION: Huber, Lawrence & Abell (by William D. Booth, Attorney), 605 Third Avenue, New York, New York 10158. FOR CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.: James F. Gallagher, Attorney, 4 Irving Place, Room 1815-5, New York, New York 10003. FOR INDUSTRIAL ENERGY USERS ASSOCIATION: Birbrower, Montalbano, Condon & Frank, P.C. (by Thomas A. Condon, Attorney), 67 North Main Street, New City, New York 10956. FOR NEW YORK STATE POWER AUTHORITY: Eric J. Schmaler, Attorney, 1633 Broadway, New York, New York 10019. FOR NEW YORK STATE DEPARTMENT OF ECONOMIC DEVELOPMENT: Gloria Kavanah, Assistant Counsel, One Commerce Plaza, Albany, New York 12245. FOR NEW YORK STATE CONSUMER PROTECTION BOARD: Timothy S. Carey, Executive Director, Ann Kutter, Deputy Director (by James F. Warden, Jr., Intervenor Attorney), 5 Empire State Plaza, Albany, New York 12210. FOR PUBLIC INTEREST INTERVENORS: Melanie Pien, Counsel, Mollie Lampi, Attorney-at-Law, 122 Swan Street, Albany, New York 12210. FOR PUBLIC UTILITY LAW PROJECT OF NEW YORK, INC.: Ben Wiles, Esq., 90 State Street, Albany, New York 12207. FOR INDEPENDENT POWER PRODUCERS OF NEW YORK, INC., AND ENRON CAPITAL & TRADE RESOURCES: Read & Laniado (by Craig M. Indyke, Esq., Sam Laniado, Esq.), 25 Eagle Street, Albany, New York 12207. FOR WHEELED ELECTRIC POWER COMPANY: Joel Blau, Esq., 32 Windsor Court, Delmar, New York 12054. FOR NEW ENERGY VENTURES, INC., AND ENTEK POWER SERVICES, INC: Cohen, Dax & Koenig, P.C. (by Jeffrey C. Cohen and Richard B. Miller), 90 State Street, Albany, New York 12207. FOR THE DEPARTMENT OF LAW: Dennis Vacco, Attorney General (by Richard W. Golden, Assistant Attorney General), 120 Broadway, New York, New York 10271. FOR THE RETAIL COUNCIL OF NEW YORK: 4 Cohen, Dax and Koenig, P.C. (by Paul C. Rapp), 90 State Street, Albany, New York 12207. FOR THE NATIONAL ASSOCIATION OF ENERGY COMPANIES AND JOINT SUPPORTERS: Ruben S. Brown, M.A.L.D., 201 West 70th, Suite 41E, New York, New York 10023. STATE OF NEW YORK PUBLIC SERVICE COMMISSION COMMISSIONERS: John F. O'Mara, Chairman Maureen O. Helmer Thomas J. Dunleavy CASE 96-E-0900 -In the Matter of Orange and Rockland Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to Opinion No. 96-12. OPINION NO. 97-20 OPINION AND ORDER ADOPTING TERMS OF SETTLEMENT (Issued and Effective December 31, 1997) BY THE COMMISSION: INTRODUCTION On November 26, 1997, we issued an abbreviated order adopting the terms of a revised Settlement Agreement (Settlement) filed November 6, 1997, by nine parties to this proceeding. We found that the Settlement, which addresses the electric rates/corporate restructuring of Orange and Rockland Utilities, Inc. (O&R or the company) offers a sound regulatory framework and will produce significant customer benefits. In addition to accomplishing the divestiture of generation, the Settlement will produce an average electricity price of 6 kWh for large industrial customers, with rates for all other customers reduced in the first rate year 1.09% and another 1% effective one year later. These reductions are in addition to average rate reductions of 4% over the past two years. Further, the latter group of customers may receive additional rate reductions in the event O&R realizes a significant gain when it divests its electric generating facilities. In our November 6 order we committed to issue a more comprehensive opinion and order describing the bases for our decision and containing the final Environmental Assessment Form (EAF). This document satisfies our commitment and its issuance begins the period for filing petitions for rehearing or court review. PROCEDURAL HISTORY This proceeding's complete procedural history is presented in Judge Boschwitz' recommended decision issued July 2, 1997. In brief, in response to our expectations set forth in Cases 94-E-0952 et al., the terms of a proposed electric rate/restructuring plan (Plan) were filed by O&R, Staff, and several other sponsors on March 25, 1997. Thereafter, following educational forums, public statement hearings, and evidentiary hearings (on May 19, 20, and 22, 1997), and the 5 submission of pre- and post-hearing briefs, and replies, Judge Boschwitz recommended that the Plan be returned to the parties for modification. In his recommended decision, Judge Boschwitz commented favorably on the fact that, among other things, the Plan would: (1) Reduce the average "opportunity" price for 26 large industrial customers from 6.82/kWh to 6.0/kWh; (2) Reduce rates for all other customers by 1.09% in the first year and by 2.1% cumulatively for the following three years; (3) Establish Standards of Competitive Conduct and Guidelines to preclude inter-corporate abuses; and (4) Institute full retail access by May 1999; However, he found that a number of provisions were unfavorable to ratepayers and potential competitors of O&R, and he concluded that the unfavorable aspects of the Plan outweighed the favorable ones. Among the aspects of the Plan the Judge questioned are the following: (1) O&R was not required to divest its unregulated operations; (2) The revenue sharing trigger was increased from 10.9% to 11.5%, despite the favorable offsetting operation of the competitive transition charge (CTC); (3) The operation of the CTC tended to be anti-competitive and, moreover, lacked sufficient incentive to promote a greater emphasis on strandable cost mitigation; and (4) The CTC provided for the recovery of non-variable O&M expenses, which should have been recovered in sales. Judge Boschwitz concluded in summary that, the proponents' assertion that the . . . [Plan] complies with the dictates of the Commission, as set forth in Opinion No. 96-12, falls far short of the mark. In that Opinion, the Commission articulated unequivocally its expectation that the electric utility industry would produce more innovative rate designs, improve productivity, increase revenues and mitigate stranded costs, thereby resulting in lower electric rates and increased economic development and growth. After reciting these objectives, the Commission stated '[T]he utility filings we are directing are expected to reflect these trends.' But the [Plan] aside from meeting the mandate of unbundled rates, does not reflect an innovative rate design, nor is it likely to achieve more than token mitigation of stranded costs, to the extent they exist, since this result appears to be largely dependent on O&R earning a return on its common equity in excess of 11.5%." He thus recommended that the parties modify the Plan. 6 Exceptions to the recommended decision were filed on July 24, 1997, by Staff, O&R, DED, IEUA, Independent Power Producers of New York, Inc. and ENRON Capital and Trade Resources, jointly (IPPNY/ENRON), 15 groups denominated as Public Interest Intervenors (PII), the Consumer Protection Board (CPB), the New York Power Authority (NYPA), Wheeled Electric Power Company (WEPCO), Public Utility Law Project of New York, Inc. (PULP), the Retail Council of New York (Retail Council), and New York State Electric & Gas Corporation (NYSEG). Replies to exceptions were filed on August 18, 1997 by Staff, O&R, IPPNY/ENRON, PII, CPB, WEPCO, and PULP. At our session of September 10, 1997, we reviewed the record, the recommended decision and the exceptions thereto. We concluded that O&R's generation assets should be auctioned as soon as possible, that incentives should be developed to encourage that outcome, that the allocation of risks between ratepayers and shareholders was skewed in favor of shareholders during the term of the Plan, and that the term of the CTC should be shortened from four years. Accordingly, we returned the Plan to the parties for restructuring and modification. They, in turn, responded by filing a revised Settlement on November 6, 1997. Comments supporting the Settlement were filed on November 14, 1997 by O&R, Staff, DED and IPPNY/ENRON. Comments in opposition were filed by CPB, DOL, PULP, and Retail Council. At our session on November 25, 1997, we approved the Settlement. However, based on comments received at a public statement hearing held in New City on November 19, 1997, (see below), we offered O&R the opportunity to elect an alternative resolution to one aspect of the Settlement. After describing the salient aspects of the Settlement, we shall address the issues as developed by Judge Boschwitz with emphasis on the Settlement and the comments thereon. SETTLEMENT The Settlement spans four years starting on the effective date of the proposed rates. It provides large industrial customers the opportunity to realize an average electric price of 6/kWh. The rates for all other customers will be reduced in the first year by 1.09% and by another 1.0% one year later. In the event O&R realizes a gain on the projected divestiture of its generation assets, the customers' share of the gain will accrue first to the latter group of "all other customers," up to the equivalent of a 5.0% rate reduction. The Settlement provides that within one month after its approval, O&R will file proposed unbundled electric rates. On May 1, 1998, the opportunity to choose alternative electric energy suppliers will be offered to all customers and full retail access to a competitive energy and capacity market will become available on May 1, 1999. The Settlement further provides that "[u]ntil the wholesale energy market becomes effective and/or full retail access is implemented, energy costs will continue to be charged through the existing FAC and the fixed cost of O&R's generation and purchased power will continue to be recovered through the base rates approved as part of the [Settlement]. When wholesale competition is implemented, the FAC will reflect energy purchases at market price made by the regulated delivery function on behalf of its customers." It is intended that O&R continue as the provider of last resort; however, the parties have agreed to study whether transferral of this obligation to the market is in the public interest and will present their recommendations to us by May 1, 1999. With respect to metering, O&R will submit a proposal to us by March 1, 1999 providing for competitive metering services. Competitors will also be permitted to provide billing services. A Low-Income Customer Assistance Program costing about $400,000 will be conducted for a four-year period for approximately 400 customers in the City of Port Jervis. The 7 Program will address energy efficiency, payment patterns, and/or arrears forgiveness. Energy efficiency measures, including refrigerator replacement, will be the first priority of this program. Finally, the Settlement provides for recovery by O&R of prudent and verifiable costs, subject to certain restrictions, totalling $7.5 million for retraining, outplacement, severance, early retirement, and employee retention programs for employees, other than officers, affected by the divestiture proposal. Other significant contested aspects of the Settlement are addressed below. PUBLIC INPUT Public input on the Plan was provided through informal comments at six educational forums held prior to public statement hearings, at those hearings, and through letters, telephone calls to the Commission's opinion lines, and comments on the Commission's home page on the World Wide Web. The following views were prevalent: emission profiles of the power producers should be made public; the sources of the power should be identified in order for consumers to make informed choices; rate reductions for residential, small commercial businesses, and industry should be equitable; restructuring should focus on bills that customers receive instead of their rates; some regulatory oversight of marketers should remain; and the proposed low-income program addresses insufficiently the needs of low-income citizens. In response to anticipated interest in the Settlement filed November 6, 1997, a further public statement hearing was conducted, as noted, in New City on November 19, 1997, at which about 100 persons were in attendance. The speakers contended that O&R should not retain a share of a potential tax refund, that the rate allocation plan remained unfair, that divestiture should not be required, but that if it were, O&R should not be precluded from participating in any auction of its generating assets. We address those points relating to this proceeding in detail below. STANDARD TO TEST A PROPOSED SETTLEMENT The recommended decision addressed arguments that the absence of a full litigation record precluded evaluation of the Plan. Judge Boschwitz concluded that while the absence of a full litigation record complicated that evaluation, the nature of the issues here and the fact that many issues were resolved by the parties permitted an evaluation on the merits. NYSEG excepts, arguing that the wrong test was used to evaluate the reasonableness of the Plan, because O&R did not file a rate/restructuring proposal voluntarily, and did so only to comply with the requirements of Opinion No. 96-12. Thus, NYSEG contends that the Plan should have been evaluated in the context of that opinion and should take into account other rate/restructuring proposals, including NYSEG's. Our Settlement Guidelines establish the following standards, which we have followed herein, for assessing a proposed settlement in light of our obligation to set just and reasonable rates and a utility's burden, under the Public Service Law, of showing the reasonableness of a rate change it is proposing: a. A desirable settlement should strive for a balance among (1) protection of the ratepayers, (2) fairness to investors, and (3) the long term viability of the utility; should be consistent with sound environmental, social, and economic policies of the Agency and the State; and should produce results that were within the range of reasonable results that 8 would likely have arisen from a Commission decision in a litigated proceeding. b. In judging a settlement, the Commission shall give weight to the fact that a settlement reflects agreement by normally adversarial parties. Those guidelines will serve as the basis of our decision and, accordingly, NYSEG's exception is denied. PRINCIPAL ISSUES Corporate Structure The corporate structure contemplated in the Plan would have resulted in three or more structurally separate units, i.e., a generating company (GENCO), a regulated transmission and distribution (T&D) company, and one or more energy service companies (ESCOs). O&R's interest in its generating facilities, exclusive of its hydro and gas turbine facilities, would be transferred to a separate affiliate (the GENCO), if it was willing to pay full market price. The T&D company would provide basic energy services, although other companies, including O&R's ESCO(s), could provide metering and billing services to T&D customers. The GENCO would be precluded, except in special circumstances, from entering into bilateral contracts with the T&D company. Finally, O&R's ESCO(s) would be authorized to operate in the T&D's franchise territory and to trade on O&R's name and reputation, without payment of a royalty, as long as there was adherence to specified standards of conduct. The recommended decision criticized the corporate structure, but did not recommend divestiture of O&R's generation assets because the company cannot exercise horizontal market power and because, as O&R argued, the corporate structure was integral to the Plan. In addition, the recommended decision did not advocate divestiture of O&R's ESCO, nor would the recommended decision have limited the ESCO's operation, as WEPCO proposed, until competitor ESCOs had gained a significant foothold in O&R's service territory. However, in view of these facts, and the fact that O&R's ESCO intended to trade on the company's name and reputation, the recommended decision proposed the imposition of a royalty of at least $2 million annually, which would continue until at least 20% of the customers in O&R's service territory were served by competitor ESCOs. Staff, O&R, and WEPCO excepted. WEPCO acknowledged that a royalty would compensate ratepayers for the proposed corporate structure, but argued that it would be insufficient to assure the development of robust competition. Moreover, WEPCO maintained that a royalty would be inadequate to offset "the unique advantage that the affiliated ESCO would enjoy in the local market." At a minimum, WEPCO contended, in addition to a royalty, the ESCO(s) should be precluded from using the company's name in marketing endeavors, and also should be precluded from marketing in O&R's service territory until at least 20% of the company's customers were served by competitor ESCOs. Staff replied that consideration of a royalty should be deferred until the company applied for authorization to restructure itself. Similarly, O&R would defer consideration of a royalty until after the ESCO(s) actually traded on O&R's name and began transacting business. As noted, at our September 10, 1997, session we did not endorse the corporate structure advocated in the Plan. Consequently, in lieu of structural separation, O&R has acceded in the Settlement to commencement immediately of full divestiture by auction of all of its electric generating assets, including its hydro-electric facilities and gas turbines. The company 9 agreed to submit its divestiture plan to Staff and the other parties in this proceeding for comment within three months of our approval of the Settlement. The divestiture proposal was to, and did, identify how the generating assets will be packaged for sale; what restrictions, if any, will be placed on the capacity that any one bidder may purchase; the procedures to be followed in the sale of the generating assets, including minimum bids; and key dates and milestones to achieve the scheduled divestiture. If a winning bidder is selected prior to May 1, 1999, any gain shall be allocated between shareholders and customers on a 25%/75% basis, and any loss on a 5%/95% basis. If a winning bidder is selected thereafter, gains and losses shall be allocated between shareholders and customers on a 20%/80% basis. The gain, if any, allocable to shareholders will be capped at $20 million. Further, neither the company nor any of its affiliates are to participate in the auction. Finally, the company will not be allowed to own generation in its service territory or adjoining ones for ten years. CPB endorses the proposed corporate structure, but objects to the incentive scheme associated with the divestiture of generation assets, contending that it favors the company at ratepayers' expense. In addition, in an effort to achieve symmetry, CPB proposes that potential ratepayer losses associated with divestiture be capped at $10 million. With regard to the T&D company and the ESCO(s), the terms and conditions of their operation are not changed from the Plan. However, the Settlement provides that to the extent a royalty may be warranted, it is subsumed in the rate levels provided for. At the public statement hearing held November 19, 1997, there were objections to a provision of the Settlement that would preclude O&R from bidding in the auction. The speakers focused primarily on the impact divestiture would have on O&R's employees, though concern was also expressed about the impact divestiture would have on the tax base of municipalities in which generation facilities are located. Discussion In Opinion No. 97-16 we stated that "[D]ivestiture of generation is essential in the movement to competition, in order to avoid undue concentration of market power and the use of monopoly power on the distribution side. Divestiture of assets through an auction has the potential to result in a dynamic and aggressive generation market, and also has the advantage of establishing a clear market value for generating assets." As we indicated in Opinion No. 96-12, divestiture of generation and energy services is a clear way to allay concerns about vertical market power and avoid anti-competitive behavior (such as cross-subsidies among affiliates in both competitive and monopoly environments, and favored treatment of affiliates). Also, divestiture may foster creation of a larger number of competing generating companies and ESCOs, which can result in a dynamic and aggressive market. Thus, O&R's agreement to divestiture in the Settlement furthers our policies. The proposed mechanism for sharing gains and losses is intended to provide an incentive for O&R to divest its generating assets prior to the time full retail access is available in its service territory. That policy goal warrants a slightly disproportionate allocation of incentives between ratepayers and shareholders, since it encourages O&R to divest its generation assets prior to May 1, 1999, and thereby helps avoid the institution of the CTC. As for capping ratepayer losses, these are considered unlikely, and it is undesirable to potentially upset the Settlement by modifying this feature. With regard to the provision prohibiting O&R's participation in the auction, we stated in our November 26, 1997 order that since O&R does not possess horizontal market power, and the public interest may be enhanced by giving O&R an option 10 to bid in the auction of its generating assets, O&R could elect to do so, subject to conditions. By letter dated December 10, 1997, O&R advised that it would not participate in the auction. Regarding a royalty, we are satisfied that the concessions made by O&R in the Settlement adequately compensate ratepayers for the fact that no explicit provision has been made for a royalty, but are subsumed in the rate and restructuring proposal, and contrary to Judge Boschwitz' recommendation, no additional, explicit royalty will be required. However, we agree with Judge Boschwitz that, with the safeguards provided by the Settlement, it is unnecessary to limit the operation of O&R's ESCO(s) until competitor ESCOs have secured a significant market share. By not fettering O&R with specific market share thresholds, there is a greater likelihood that competitor ESCOs will not delay their entry and will offer increased advantages to consumers in order to secure a foothold in the company's service territory. Were O&R to be restrained in the initial stages of competitive electric markets, we fear that some of the advantages associated with deregulation would not be realized. Strandable Costs and the CTC The Plan provided O&R, during the transition period, an opportunity to recover its above-market generation costs through a wires charge (the CTC), to be effective May 1, 1999 and to operate for four years. Also, O&R was to be afforded an opportunity to recover its strandable assets including (1) assets established in accordance with prior Commission orders, policies or practices (regulatory assets), (2) net NUG purchased power costs (which are minimal and will be reconciled and passed through annually until they expire in 2008), (3) other depreciable assets related to metering and billing, and (4) above-market generation costs. The above-market generation costs, which comprised the vast majority of the projected strandable assets, were defined as the difference between the embedded fixed costs of generation, and the revenues net of fuel and variable O&M expenses, derived from the operation of O&R's fossil fuel (Bowline and Lovett) plants. Any difference, within a band of + 10% around O&R's generation costs (which costs are to be determined in the forthcoming unbundling proceeding, based on a 1996 cost of service study), was to be reflected in the CTC and was to be borne, or avoided, solely by ratepayers. Any additional difference was to be shared by O&R and all of its customers on a 10%/90% basis, with the customer share being incorporated into the CTC. These above-market costs, which are now recovered in base rates, were to be recovered beginning with the onset of full retail access and included "fixed" production costs plus allocable administrative and general costs. Increases in these costs over 1996 actual levels would not be recovered via the CTC, nor would increased costs associated with capital additions or changes in the cost of capital applicable to production costs. Upon expiration of the CTC, the fossil fuel-fired generation assets were to be subject to a one-time valuation pursuant to a procedure to be established by Staff and O&R, or, if they were unable to agree on a procedure, by us. Net gains, or losses, resulting from the valuation of these assets would be shared by shareholders and ratepayers on a 20%/80% basis. The recommended decision agreed conceptually with O&R's recovery of its strandable costs at the expiration of the four-year transition period. In addition, the recommended decision agreed that the final determination of the amount of such strandable costs should occur near the end of the transition period, as prescribed by the Plan. Those recommendations presumed that O&R over time would be able to sell increasing amounts of energy from both its Lovett and Bowline plants and, therefore, would likely have "positive" strandable costs. On the other hand, the recommended decision was highly 11 critical of the CTC, which was found to be (1) anti-competitive, because it provided for the recovery of non-variable going forward costs during the transition, and (2) adverse to ratepayers, since its operation would tend to deprive them of the benefits of competition by offsetting, in part, the rate reductions promised by the Plan. Nevertheless, because relevant accounting standards require firms in competitive environments to "write down" non-productive assets, the recommended decision made provision for accrual of the CTC on O&R's books, with deferral of its recovery until the end of the transition period, to permit O&R to set off any accruals against a possible gain on the disposition of generation assets. Staff, O&R, and CPB excepted. CPB advocated an immediate appraisal of O&R's strandable costs, which it believes is in the range of $260-$384 million, and an immediate write-off of $124 million of such costs, thereby achieving a 5% rate reduction. O&R and Staff contended that the CTC is a reasonable and measured approach to assure substantial recovery of costs that were not avoidable during the transition to competition and could not be recouped in the marketplace. O&R also argued that a period of cost recovery was necessary to permit O&R's generation plants to become more competitive. At our September 10, 1997 session, we concluded that the term of the CTC should be shortened and its sharing mechanism should be made more equitable. As revised, in the November 6 Settlement, the CTC will again become operative May 1, 1999, but only in the event O&R is unable, prior thereto, to auction its generating assets, or if O&R is delayed in transferring title. However, there is no provision for a null band, and 25% of fixed production labor expenses and property taxes would be at risk in the competitive market. If title does not transfer by May 1, 2000, 35% of those costs would be exposed to the market for recovery. If title does not pass by October 31, 2000, the CTC would expire, and O&R would be required to obtain our approval to continue a version of it until the generating assets were transferred. CPB concedes that the Settlement substantially minimizes the impact of the CTC. However, CPB argues that a CTC should be implemented only if there is a 6% overall rate reduction. Otherwise, asserts CPB, there should be no provision for the recovery of stranded costs. Discussion In Opinion No. 96-12 we stated that we were prepared to permit recovery of strandable costs but expected a balancing of ratepayer and shareholder interests. We also indicated that, in addition to achieving rate reductions, a key goal was the development of a robust competitive market. And divestiture was strongly encouraged. The Settlement accomplishes these objectives and the company's commitment to divest its generation assets will mitigate stranded costs, if any. The company's commitment to divestiture is supported by the relatively limited term of the CTC, the elimination of the null band, and the provision for certain "going forward" costs to be at risk in the event the CTC becomes operative. This aspect of the Settlement is reasonable and will serve to encourage early divestiture. Additionally, we anticipate the CTC as revised will generate less revenue than under the Plan, even if the CTC operates for the maximum 18-month period. This outcome is likely to result in a savings to ratepayers, particularly if, as we expect, they are able to purchase energy more cheaply than otherwise, and represents the equivalent of a rate reduction, which could easily approximate or exceed that which CPB seeks. Accordingly, we are satisfied that the CTC mechanism and the overall rate reduction are reasonable and in the public interest. OTHER ISSUES 12 Transition Rate Design The Settlement, like the Plan, contemplates minimal rate design changes pending the resolution of the unbundling phase of this proceeding. Specifically, O&R will phase out its mandatory time-of-use (TOU) residential rates for existing customers and will no longer add mandatory TOU residential customers. However, O&R will continue the TOU rate for those customers who elect to be served under it voluntarily. Also, O&R will eliminate the mandatory nature of its peak activated rate (PAR) for SC-9 and large industrial customers, prospectively offering the PAR on an optional basis. The recommended decision supported a transition rate design proposed by IPPNY/ENRON that would approximately halve the unit cost of electricity for residential customers, while concurrently increasing the customer charge. The recommended decision would base the new rate design on 12 months of consumption thereby increasing bills, by comparison to prior periods, in off-peak months and decreasing bills, on average, in the on-peak months. This transition rate design was endorsed because the Judge thought it would promote consumption and reduce strandable costs, and because it would generate additional annual revenues, some of which could be returned to ratepayers. O&R, Staff, CPB, and PII excepted to the recommended rate design change. Staff and O&R objected because they feared there would be customer confusion and other adverse reactions. While Staff acknowledged the correctness of the economic theory underlying the recommended rate design, it questioned whether significant additional revenues would be generated. Staff concluded that while the proposed rate design may be meritorious, its timing was inappropriate. O&R suggested we should defer the rate design issue to the unbundling phase of the proceeding. Together with CPB, it viewed the administrative burden of implementing the rate design as substantial. However, like Staff, O&R acknowledged the merit of the rate design stating "in theory, for certain customers, the transitional rate design should lead to higher sales levels which should have a positive effect on stranded cost and may well increase customer benefits under the sharing mechanism." In addition to its concerns about the administrative feasibility of the recommended rate design, CPB stated that for minimum use and near minimum use customers, it would violate the Commission's expressed desire to reduce rates for all customers. But CPB conceded that "to the extent such promotional rates are desired by consumers, the market will probably provide them in short order." PII argued on exceptions that the recommended transitional rate design sacrificed the environment for the economy and that its adoption was contrary to Public Service Law 5(2), which, it stated, compelled the preservation of environmental values and the conservation of natural resources. Discussion We are satisfied that pending the outcome of the unbundling phase, dramatic rate design changes of the type proposed by IPPNY/ENRON are unwarranted. After we have had an opportunity to examine O&R's current cost of service study, and analyze the potential cost and environmental impacts of such a shift, we will be better able to determine whether such rate design changes should be instituted by O&R in advance of the onset of full retail access and unbundling, or whether it is better left to the market to implement comparable rate designs once full retail access is implemented. Return on Equity and Revenue Sharing The Plan is predicated on a 10.4% equity return, but increases the revenue sharing trigger from 10.9% to 11.5%. The recommended decision found that (1) O&R's cost of 13 equity had not changed since the last rate decision for the company, and (2) that O&R largely would be made whole whether or not it suffered a revenue shortfall due to reduced sales, because the CTC would operate to offset the shortfall. Also, the recommended decision concluded that the T&D company would face less risk than utilities operating in a competitive environment. Thus, Judge Boschwitz recommended the 10.9% revenue sharing trigger be maintained. O&R, Staff, and CPB excepted. O&R argued that it would be at risk for inflationary increases in wages, property taxes and other expenses over the four year term of the Plan. O&R also suggested that T&D companies its size would face a greater level of risk in a deregulated environment. Staff contended that the recommended decision underestimated the risks of T&D operations because the company agreed "to lock in 1996 costs for such items as property taxes, labor, cost of money, capital additions and operating expenses." CPB maintained that the cost of equity had declined to 10.2% and that a revenue decrease of $4.14 million was warranted to reflect the difference between that return and the reported earned return on equity of 11.35% for the 12 months ended June 30, 1997. At our session of September 10, we expressed reservations about the level of the revenue sharing trigger, but indicated it might be acceptable if other aspects of the Plan were modified. The Settlement sets the sharing trigger at 11.4%, 0.1% below the Plan's threshold. O&R states that in view of the increased risks it has assumed, no reduction is warranted; however, it goes on to explain that it agreed to this modest reduction in "the interest of achieving consensus." CPB comments that this modest reduction is inadequate. It continues to press for a 10.2% equity return sharing trigger, arguing that beyond the justification previously offered for its proposed adjustment, bond yields have declined about 55 basis points since late summer and that equity costs, to the extent they tend to track bond yields, are lower too. Discussion Overall, the Settlement is significantly improved when compared to the Plan and is likely to produce greater ratepayer benefits. In these circumstances, we conclude that the revised sharing trigger need not be amended further. Systems Benefit Charge The recommended decision suggested the System Benefits Charge (SBC) revenues should amount to $3.0 million annually, rather than the $4.2 million allowed by the Commission in O&R's last electric rate case (Case 95-E-0491), or the $4.5 million advocated by PII. However, the recommended decision stated that O&R should be required to demonstrate that certain demand side management (DSM) programs being eliminated were not cost effective. CPB, PII, and O&R excepted. CPB contended that the funding level should approximate 1995 actual expenditures of $7.5 million and O&R should absorb any cost increases. According to CPB, the rate case allowance of $4.2 million should not be considered a base, because it was the result of a settlement and because the emphasis in the prior rate case was on lowering rates instead of fostering competition. PII argued that a further reduction in the SBC fund would result eventually in rate increases by reducing "the variety, flexibility, quality and quantity of SBC funded programs thus reducing consumers' choices to lower their bills . . . ." Moreover, argued PII, the rate effect of a reduction in the annual SBC allowance, from $4.2 million to $3.0 million, was insignificant compared to the long-term benefits of a vigorous SBC program. 14 Discussion In Opinion No. 96-12, we expressed our interest that an SBC be inaugurated during the transition to retail competition and that the level of SBC funding equal approximately the level of current utility expenditures. We subsequently established a general funding guideline of one mill per kWh in other utility-specific proceedings. The recommended decision, based on O&R's brief, erroneously quantified the Plan's SBC allowance at $3.0 million. The correct level is $3.3 million, which equates to about one mill per kWh. As O&R has demonstrated to our satisfaction that $1.0 million in DSM programs can properly be eliminated because these programs are not cost effective, and as the SBC allowance in the Settlement appears to be consistent with Opinion No. 96-12 and our current guidelines, the exceptions are denied. Revenue Allocation The recommended decision endorsed in concept a revenue allocation which favored certain large users. However, the recommended decision expressed concern that the revenue allocation was founded solely on a comparison of O&R's rates with national averages, and did not also compare the proposed rates to O&R's cost of service. Accordingly, the Judge recommended that O&R be required to file earlier than planned, and in advance of this decision, a new embedded cost of service study. O&R and CPB excepted. The company argued that it was unfair to other signatories for us to defer acting upon the Plan until we had examined the new cost of service study. The company noted that previous cost of service studies demonstrated that the customers receiving disproportionate rate decreases in recent years consistently have subsidized residential customers. Finally, O&R argued "[I]t makes sense to provide such benefits to those customers to whom the economic attractiveness of continuing operations in O&R's service territory will most likely be subject to continuing challenge." CPB, on the other hand, advocated an across-the-board revenue decrease, which it continues to foster, in concert with its 6% rate reduction. Discussion Based on O&R's most recent cost of service study, the projected rate of return for large users, even after considering the decrease, suggests that the Settlement's allocation of the revenue decrease is reasonable with reference to cost of service, especially considering our traditional + 15% tolerance range. Moreover, the fact that industrial class rates are not competitive with national averages further supports the Settlement's allocation. Were we to endorse an across-the-board revenue decrease, it would generate a rate reduction of only about 3% for all customers. In view of the fact that O&R's rates for residential service have been reduced, on average, about 4% in the last several years, we conclude that public policy is better served by the revised revenue allocation, which is intended to stimulate economic growth in O&R's service territory. It is important to note that the disparity in the respective rate reductions may become minimal if O&R realizes appreciable gains in the contemplated auction of its generation assets. Retail Wheeling to Residential Customers The recommended decision disagreed with PULP's argument that we lack statutory authority to mandate retail wheeling of electricity to residential customers. The recommended decision concluded that the Legislature has favored the expansion of retail wheeling and that legislative intent was controlling in this matter. Furthermore, the recommended decision concluded PULP should have established that legislative policy disfavored such expansion and that it had failed to do so. PULP denied that it bore the burden of proof and contended the burden was on the proponents of the Plan to 15 establish the statutory authority for retail wheeling. PULP also denied that legislative intent is controlling, asserting a determination of legislative intent is necessary only if it is established that the relevant statute is ambiguous. PULP went on to assert this is not the case here. PULP also contended there would have to be a demonstration that the legislature favored the introduction of retail wheeling by "administrative fiat" alone. Finally, PULP argued that while retail wheeling is authorized by statute for the natural gas industry, this fact does not lead inevitably to the conclusion that the statute intended that retail wheeling be authorized for the electric industry. And, PULP maintained that many statutory differences (not enumerated) exist between the two industries. Discussion PULP's argument is a generic one raised in this and other electric rate/restructuring proceedings, and our resolution of it in the Consolidated Edison proceeding is adopted here and requires no further elaboration. Price Cap Plus Regulation The recommended decision rejected PII's proposal to institute "price cap plus regulation" (a methodology intended to force consideration of alternatives to plant growth) of the T&D company. The recommended decision noted that PII had not established affirmatively that price cap plus regulation was necessary, because PII had not investigated O&R's transmission and distribution systems to determine whether there was sub-optimal use of those systems. The subject proposal was also found to be flawed technically. The recommended decision also rejected PII's alternate to price cap plus regulation, i.e., "the Distribution Utility Concept", which promotes the deferral of new distribution system costs. PII excepted, arguing that it need not have provided "a complete technical proposal on 'price cap plus' . . . ." Rather, PII asserted it was sufficient that it offered an alternative form of T&D regulation which better avoided adverse environmental impacts. PII claimed the lack of technical detail was an insufficient basis for rejection of the proposal. PII's primary Price Cap Plus regulation proposal does not balance relevant economic issues, and it will not be endorsed in view of its negative impact on sales growth. As for the Distribution Utility Concept, we find it is unnecessary in view of the safeguards in place to preclude O&R from expanding rate base at the expense of environmentally benign alternatives. Specifically, the Settlement requires O&R, for each major T&D upgrade (projects of $2 million or more), to first evaluate alternatives such as DSM, fuel cells, photovoltaic systems, etc. In addition, O&R has agreed to monitor the circuit peaks for any affected substation and the load on transmission and distribution facilities, and to minimize cost and environmental impacts for non-major transmission and distribution projects. Sources of Funds for Rate Decrease The recommended decision questioned the level of the overall revenue decrease and whether adequate allowance had been made for improved productivity and increased sales. The recommended decision noted that of the approximately $37 million revenue decrease, only about $5.0 million related to these factors. The remainder of the decrease was to be financed largely by the expiration of surcharges, one time refunds, and reductions in DSM and R&D expenditures. The recommended decision suggested that, based on projections of sales growth and productivity, as much as an additional $15 million could be available for ratepayers. Staff contended that the recommended decision erred by relying on gross revenues rather than net margin. Staff asserted 16 also that the recommended decision failed to account for the fact that the first two years of the Plan overlapped a prior rate settlement, wherein productivity and sales growth were accounted for. Finally, Staff criticized the recommended decision for ignoring growth in O&R's expenses. A table attached to Staff's Brief on Exceptions supports Staff's position, and, accordingly, we do not agree with the Judge's suggestion that additional sums are available to reduce rates further. In view of this fact, the fact that O&R does not possess horizontal market power now, and because our oversight of the auction will ensure that no party will exercise market power in O&R's service territory, we conclude that the Settlement results in just and reasonable rates. Deferrals CPB expressed concern about a number of deferrals or otherwise "open-ended adders" provided for in the Settlement such as deferral of $2.85 million of coal costs, potential shortfalls from time-of-use rates, deferral of $7.5 million of employee-related costs, and the deferral of storm damage costs. CPB requested that to the extent O&R is permitted to recover some or all of the deferred costs, this should occur only if rate increases do not result. The CPB's concern about a rate spike is reasonable. However, the Settlement contains no language that would limit our authority to review the deferral petitions and authorize deferral accounting for only reasonable amounts. While the Settlement would permit the company to offset regulatory assets against regulatory liabilities, including gains on the sale of generation, it is likely that the customers' share of gains from the sale of generation will more than offset any deferred debits. Consumer Outreach and Education A new provision has been added to the Settlement which provides additional funding for an informational campaign designed to aid residential and commercial customers in making informed energy choices. Also, information will be disseminated by O&R concerning environmental programs and impacts related to electric deregulation. Specifically, the company has agreed to commit "up to the equivalent of $1 million of the present value of fourth year SBC funds for the purpose of educating residential and commercial customers about electric competition." Staff is to circulate to all active parties, by December 31, 1997, a proposal for implementing the educational program which is to begin in early 1998. PULP opposes the creation of this fund, arguing that the amount at issue should instead be refunded to ratepayers. Moreover, argues PULP, as O&R acknowledges that it spends substantial amounts for consumer education, no additional expenditures are warranted. Finally, PULP contends that the benefits of competition will accrue largely to O&R's shareholders, and thus, they should shoulder the burden of any additional educational costs. PULP's contention about the beneficiaries of competition is pure surmise and discounts unreasonably the benefits ratepayers are expected to receive. Insofar as a well-orchestrated outreach and education program eases ratepayers' confusion and educates them about their options, we believe that this program is in the ratepayers' interest. MISCELLANEOUS 1. NYSEG maintains that the recommended decision should have provided guidance to the parties concerning the generation backout credit and endorsed the use of full market price of electric power supply without subsidization. The Settlement provides for the embedded cost of O&R's generation to be charged at tariff rates until the implementation of full retail access. No further action is required. 17 2. IEUA argues for a capacity pilot program. Given the swift pace of retail access for both capacity and energy, its exception is denied. 3. DED and Staff oppose the recommendation that the term of flexible rate contracts be truncated to minimize the possibility of anti-competitive outcomes. In Opinion No. 96-12, we set forth the relevant parameters for such contracts. Accordingly, their exceptions are granted. 4. PULP, while satisfied with the recommendation that rates and contracts of ESCOs be filed, excepts to the recommended decision's failure to recommend that these be reviewed by us. A related matter is PULP's objection to the recommended decision's reliance on Opinion No. 97-5 regarding the applicability of HEFPA to ESCOs. These issues have been pursued by PULP in its petition for reconsideration of Opinion No. 97-5 and elsewhere, and are resolved in Opinion No. 97-17. 5. WEPCO and IPPNY/ENRON object to the recommendation that ESCOs be required to provide, on their bills and in marketing materials, information which reveals the fuel mix and emissions characteristics of their energy supply. This matter was resolved in the Settlement, which calls for the development of a system for providing such information to customers. 6. WEPCO takes issue with the recommended decision's endorsement of the gas transfer pricing provision of the Settlement. As the cost to deliver gas is covered by the proposed gas transportation rate, this exception is denied. 7. NYPA contests the recommendation that its business customers be required to absorb O&R's stranded costs, proportionate to the fixed generation costs they currently incur, because additional cost burdens might motivate them to relocate. As O&R's system was developed to serve all of its customers, if NYPA acquires customers from O&R, they will be required to absorb a portion of O&R's resulting strandable costs. 8. NYPA raises an issue, not addressed by the parties or the recommended decision, concerning the potential for the T&D company to offer discounted services on a preferential basis, in flexible rate contracts, to O&R's GENCO customers. This issue was not raised timely in any event and is not considered further as O&R will not maintain a generation business. 9. PII excepts to the recommended decision's rejection of its proposal that ESCOs maintain an emissions portfolio standard. This exception is dismissed for the reasons offered by Judge Boschwitz in the recommended decision. 10. Staff chastises the Judge for engaging in micro-management by endorsing a $200,000 adjustment proposed by CPB relating to workers' compensation costs. We agree with Staff that adjustments of this type are subsumed in the overall revenue requirement. Moreover, at our session of December 17, we rejected a CPB petition regarding the accounting for such costs. 11. WEPCO and IPPNY/ENRON object to a recommendation that ESCOs file energy rates and customer charges with us and that, we, in turn, make such information available on a web site in a standardized format. This issue is being addressed in the farms and food processor pilot. FINDINGS UNDER THE STATE ENVIRONMENTAL QUALITY REVIEW ACT In conformance with the State Environmental Quality Review Act (SEQRA), on May 3, 1996, in Case 94-E-0952, we issued a Final Generic Environmental Impact Statement (FGEIS) which evaluated the action adopted in the generic proceeding regarding competitive opportunities for electric service. Recognizing that individual utility restructuring proposals might bring to light new concerns, we also required each utility to file an environmental assessment of its restructuring plans. O&R filed an EAF concerning the March 25 Settlement on April 4, 1997. Subsequent to filing of the EAF, PII filed a petition asking that a Supplemental Environmental Impact Statement be 18 filed. In its arguments supporting the petition, PII raised several substantive issues for SEQRA consideration. In a June 19, 1997 ruling, Chief Administrative Law Judge Lynch narrowed the issues needing further consideration in the environmental assessment and invited additional party comments on O&R's EAF. The information provided by O&R in its EAF, the parties' comments and responses, and other information were evaluated in order to determine whether the potential impacts resulting from adoption of the November 6 Settlement's terms would be within the bounds and thresholds of the FGEIS adopted in 1996. Arguably, all of the potential environmental impacts of the Settlement need not be considered, given that some result from Type II exempt rate actions. Nonetheless, the analysis examined all areas in which impacts would reasonably be expected. No impacts were found to be associated with price cap regulation or the Settlement's treatment of the CTC. Minor localized community economic impacts may occur (e.g., due to reduced tax receipts), but these would be balanced by positive effects in other localities. Of greater concern is the possible increase in air pollution that could accompany increased demand for electric energy. It is likely that increases in energy demand will result from the Settlement's decrease in (1) rates (0.42% average annual increase in demand over the 1997-2012 period), and (2) DSM expenditures (0.08% increase in demand). Each of these incremental growth rates is an upper bound. For example, it is not clear that all of the rate reductions from the Settlement should be attributed to restructuring, and the lower DSM expenditures do not consider ESCO DSM spending. We believe that actual growth rates will be substantially less than the corresponding rates in the FGEIS (1% annual incremental growth from the "high sales" scenario, and 0.29% from the "no incremental utility DSM" scenario). Because of the inherent uncertainty in forecasting future impacts, as a matter of discretion, monitoring of O&R's restructuring and environmental impacts is being implemented, and an SBC is being established. While limiting the rate decreases in the Settlement could mitigate environmental impacts, it would not be rational to do so in light of the economic benefits of the rate reductions to consumers and businesses. Rather, the mitigation methods we are adopting are sufficient. Based on these analyses, the potential environmental impacts of the Settlement are found to be within the range of thresholds and conditions set forth in the FGEIS. Therefore, no further SEQRA action is necessary. DISCUSSION AND RECOMMENDATION Our assessment of this Settlement reflects not only the diverse nature of those parties who endorse it, but also the views of other parties whose comments have been less favorable. The salient features upon which we focus are the rate plan, the impact on competition, and the amelioration of environmental concerns. The rate plan is intended to promote jobs and economic development by reducing rates for large industrial customers to a level approaching the national average. At the same time rates for other customers will also be reduced. Furthermore, the residential and small commercial reductions will be more appreciable in the event O&R realizes a significant gain when it divests its electric generating facilities. As we noted, had we apportioned the revenue reduction equally among all classes, customers other than large industrial customers would have realized a minimal gain, while the laudatory goal of promoting job growth and economic development would have been abandoned. With regard to those parties who have advocated a greater revenue reduction, we believe that by shortening the time frame for recovery by O&R of its going forward costs and by 19 reducing the costs that O&R will be permitted to recover via the CTC, we have accomplished essentially the same outcome. As for the competitive aspects of the Settlement, these are particularly favorable as O&R's customers will be able to avail themselves of full retail access sooner than the customers of any other New York utility and because O&R has now agreed to divest by auction all of its generating assets. This should contribute to the development of a robust, competitive electric generation market. The company's unbundling plan, as well as the auction plan, will be subject to our approval, and we will ensure that market power concerns are mitigated. These elements of the Settlement, together with the development of a competitive electric market will, therefore, produce just and reasonable rates that we expect will be lower than they would be otherwise. As to concerns about potential anti-competitive conduct, we are satisfied that the Standards of Competitive Conduct (Appendix H of the Settlement) and the controls on Affiliate Relations (Appendix I of the Settlement) will preclude such conduct, particularly given that we are authorized to "impose on the Delivery company remedial action for violation of standards of competitive conduct." Moreover, the Settlement acknowledges our authority to modify the standards. Finally, we are satisfied the funding of an SBC and the additional environmental protections agreed to by O&R adequately protect our environment. For the reasons stated, O&R and the supporting parties have demonstrated that the proposed rate reductions are reasonable and that the Settlement satisfies the objectives of Opinion No. 96-12 and our Settlement Guidelines. We therefore adopt the terms of the Settlement and reaffirm our Order of November 26, 1997 and our view that the development of a competitive market will produce further consumer benefits. The Commission orders: 1. The Order Adopting Terms of Settlement (issued November 26, 1997) is adopted in its entirety and is incorporated as part of this opinion and order. 2. Orange and Rockland Utilities, Inc. (O&R) shall file its specific plans for the holding company structure as soon as practicable. At least 20 days before any intermediate holding companies acquire stock of the utility, O&R shall file with the Commission a detailed description of any such intermediate holding companies, including copies of filings with the Securities and Exchange Commission relevant to such transactions. Such transactions regarding any intermediate holding companies shall be deemed approved, unless within 45 days the Commission notifies O&R that the provisions are inconsistent with the November 6 Settlement or the November 26 order in this proceeding. 3. O&R is authorized to use Account 186, Miscellaneous Deferred Debits and Account 253, Other Deferred Credits, as appropriate, to record the principal amount and any authorized carrying charge for the items included in the Electric Rate and Restructuring Plan for which deferred accounting has been approved. The amounts deferred for each of these items and their income tax effects shall be recorded in separate subaccounts so as to remain readily identifiable. O&R shall maintain proper and easily accessible documentation for each entry. The disposition or amortization for each item shall be carried out according to the terms of the Rate Settlement or as otherwise authorized by the Commission. Within 30 days of this order, the company will submit to the Director of Accounting and Finance, for his approval, the proposed journal entities to accomplish the accounting provisions of this order. 4. O&R is authorized to defer the costs it incurred to terminate its contract with the Pittston Coal Sales Corporation to the extent that such termination resulted in cost savings. Staff will report to the Commission its determination of the 20 related cost savings and a recommendation regarding the appropriate amount that would be recoverable in rates. 5. This proceeding is continued. By the Commission, (SIGNED) JOHN C. CRARY Secretary 617.20 APPENDIX State Environmental Quality Review ENVIRONMENTAL ASSESSMENT FORM PROJECT INFORMATION 1. APPLICANT/SPONSOR: Orange and Rockland Utilities, Inc. 2. PROJECT NAME: Elect.Rate/Restructuring - Case 96-E-0900 3. PROJECT LOCATION: Orange and Rockland Utilities Service Territory Municipality NA County NA 4. PRECISE LOCATION: (Street address and road intersections, prominent landmarks, etc., or provide map) NA 5. PROPOSED ACTION IS: New Expansion Modification/alteration 6. DESCRIBE PROJECT BRIEFLY: Cases 94-E-0952 & 96-E-0900 - In the matter of competitive opportunities regarding electric service, filed in Case 93-M-0229; Plans for electric rate/restructuring pursuant to Opinion No. 96-12; and the formation of a holding company pursuant to PSL, 70, 108 and 110, and certain related transactions -- Environmental Assessment Form. 7. AMOUNT OF LAND AFFECTED: NA Initially________acres Ultimately_________acres 8. WILL PROPOSED ACTION COMPLY WITH EXISTING ZONING OR OTHER EXISTING LAND USE RESTRICTIONS? NA Yes No If No, describe briefly 9. WHAT IS PRESENT LAND USE IN VICINITY OF PROJECT? NA Residential Industrial Commercial Agricultural Park/Forest/Open space Other Describe: 10. DOES ACTION INVOLVE A PERMIT APPROVAL, OR FUNDING, NOW OR ULTIMATELY FROM ANY OTHER GOVERNMENTAL AGENCY (FEDERAL, STATE OR LOCAL)? Yes No If yes, list agency(s) name and permit/approvals: NYS Public Service Commission 11. DOES ANY ASPECT OF THE ACTION HAVE A CURRENTLY VALID PERMIT OR APPROVAL? Yes No If yes, list agency(s) name and permit/approval Stationary sources owned and operated by Orange and Rockland Utilities have valid, approved certificates to operate. 12. AS A RESULT OF PROPOSED ACTION WILL EXISTING PERMIT/APPROVAL REQUIRE MODIFICATION? NA Yes No I CERTIFY THAT THE INFORMATION PROVIDED ABOVE IS TRUE TO THE BEST OF MY KNOWLEDGE Agency: NYS Department of Public Service Date: November 25, 1997 Signature: APPENDIX PART II-ENVIRONMENTAL ASSESSMENT A. DOES ACTION EXCEED ANY TYPE 1 THRESHOLD IN 6 NYCRR, PART 617.4? If yes, coordinate the review process and use the FULL EAF. Yes No B. WILL ACTION RECEIVE COORDINATED REVIEW AS PROVIDED FOR UNLISTED ACTIONS IN 6 NYCRR, PART 617.6? If No, a negative declaration may be superseded by another involved agency. NA Yes No C. COULD ACTION RESULT IN ANY ADVERSE EFFECTS ASSOCIATED WITH THE FOLLOWING: (Answers may be handwritten, if legible.) C1. Existing air quality, surface or groundwater quality or quantity, noise levels, existing traffic patterns, solid waste production or disposal, potential for erosion, drainage or flooding problems? Explain briefly: Expected impacts are within the range of thresholds and conditions set forth in the FGEIS. C2. Aesthetic, agricultural, archaeological, historic, or other natural or cultural resources; or community or neighborhood character? Explain briefly: Expected impacts are within the range of thresholds and conditions set forth in the FGEIS. 21 C3. Vegetation or fauna, fish, shellfish or wildlife species, significant habitats, or threatened or endangered species? Explain briefly: Expected impacts are within the range of thresholds and conditions set forth in the FGEIS. C4. A community's existing plans or goals as officially adopted, or a change in use or intensity of use of land or other natural resources? Explain briefly: Expected impacts are within the range of thresholds and conditions set forth in the FGEIS. C5. Growth, subsequent development, or related activities likely to be induced by the proposed action? Explain briefly: Expected impacts are within the range of thresholds and conditions set forth in the FGEIS. C6. Long term, short term, cumulative, or other effects not identified in C1-C5? Explain briefly: Expected impacts are within the range of thresholds and conditions set forth in the FGEIS. C7. Other impacts (including changes in use of either quantity or type of energy)? Explain briefly: Expected impacts are within the range of thresholds and conditions set forth in the FGEIS. D. WILL THE PROJECT HAVE AN IMPACT ON THE ENVIRONMENTAL CHARACTERISTICS THAT CAUSED THE ESTABLISHMENT OF A CRITICAL ENVIRONMENTAL AREA (CEA)? Yes No If Yes, explain briefly: E. IS THERE, OR IS THERE LIKELY TO BE, CONTROVERSY RELATED TO POTENTIAL ADVERSE ENVIRONMENTAL IMPACTS? Yes No If Yes, explain briefly: Part III - DETERMINATION OF SIGNIFICANCE (To be completed by Agency) See the attached Environmental Assessment Form Narrative. Staff recommends that the Final Generic Environmental Impact Statement (FGEIS) issued on May 3, 1996 (Case 94-E-0952), with respect to the proposed action of adopting a policy supporting increased competition in electric markets be extended in applicability, without modification or supplementation, to the approval of Consolidated Edison Company of New York, Inc.s (The Company) Agreement and Settlement on the grounds that the significance of the proposals anticipated environmental impacts will not exceed the threshold values examined in the FGEIS. Consequently, no further State Environmental Quality Review Act (SEQRA) action is necessary in approving the Proposal. Staff further recommends that a monitoring program be instituted to provide a record of changes resulting from the restructuring plans implementation to enable confirmation and/or exposition of unexpected outcomes and their significance, and to assure that specific mitigation measures are implemented as needed. NYS Department of Public Service Date November 25, 1997 Name of Lead Agency John H. Smolinsky Chief, Environmental Compliance and Operations Print or Type Name of Responsible Officer in Lead Agency Title of Responsible Officer Signature of Responsible Officer in Lead Agency Signature of Preparer (If different from responsible officer) APPENDIX ENVIRONMENTAL ASSESSMENT FORM NARRATIVE I. BACKGROUND On May 3, 1996, the Commission issued a Final Generic Environmental Impact Statement (FGEIS) in the competitive Opportunities proceeding which addressed the environmental impacts of a policy supporting increased competition in electric markets. Alternative approaches to achieving electric competition, including a no-action alternative, were studied. In Opinion No. 96-12 issued May 20, 1996, the Commission set forth its findings with respect to the FGEIS (p.76-81). The Commission determined that the likely environmental effects of a shift to a more competitive market for electricity are not fully predictable but that: In general, the proposed action will have environmental impacts that are modest or not distinguishable from those of alternative actions, including the no-action alternative... Apart from the areas of substantial concern noted below, the FGEIS did not identify reasonably likely significant adverse impacts. 22 With respect to air quality impacts related to oxides of nitrogen and sulfur, it appears likely that the retail or wholesale electric market structures would have greater impacts than the no action alternative. It appears likely that, in the absence of mitigation measures, research and development in environmental and renewables areas would lose funding if competitive restructuring moves forward. In addition, there would likely be a decrease in the amount of cost-effective energy efficiency during any transition to wholesale or retail competition... In order to address the adverse environmental effects identified above on air quality, energy efficiency, and research and development, several mitigation measures will be employed as necessary. First, a system benefits charge will be used as appropriate to fund DSM and research and a development in environmental and renewable resource areas during the transition to competition. Second, the competitive restructuring will be monitored closely to ensure that specific mitigation measures are implemented if needed. Finally, the Commission will support and assist efforts by New York State and federal agencies to ensure that adverse environmental impacts to the state's air quality from upwind sources of air contamination do not occur as a result of the movement toward competition. Notwithstanding the mitigation measures identified, the proposed action to restructure the electric industry may result in an unavoidable adverse environmental impact on air quality related to oxides of nitrogen and sulfur, loss of some DSM activity, loss of some research and development funding in the environmental and renewables areas, and displacement of workers and local economic loss where plants are closed. Nevertheless, weighing and balancing these likely environmental effects of the shift to competition in the electric industry in New York with social, economic, and other essential considerations, leads to the conclusion that implementing the proposed action toward greater competition is desirable. The Commission also recognized that individual utility proposals might bring to light new concerns. In Opinion No. 96-12, and as further clarified in Opinion No. 96-17, it required each utility to file with its restructuring plans an Environmental Assessment Form and a recommendation on further environmental review. The information to be provided was expected to assist the Commission in determining the need for additional mitigation measures with respect to company restructuring. On April 4, 1997, Orange and Rockland submitted its Environmental Assessment Form (EAF) and SEQRA recommendation in connection with the Agreement and Settlement dated March 25, 1997 in Case 96-E-0229. Staff reviewed the company's EAF and prepared a staff EAF based on the March 25, 1997 proposed settlement. The Commission considered and rejected the March 25 settlement at its session of September 10, 1997. The company, staff and interested parties subsequently negotiated a revised settlement (November 6, 1997) intended to address deficiencies in the March 25 settlement. The following document is a revised staff EAF intended to address the November 6 settlement agreement. SEQR and Commission Approval of the Orange and Rockland Restructuring Plan - Options Before the Commission 23 The FGEIS issued by the Commission in conformance with SEQRA in Case 94-E-0952 et. al. addressed the following proposed action: "adoption of a policy supporting increased competition in electric markets, including a preferred method to achieve electric competition; and regulatory and ratemaking practices that will assist in the transition to a more competitive and efficient electric industry, while maintaining safety, environmental, affordability, and service quality goals." Commission approval of Orange and Rockland's proposed restructuring plan constitutes a "subsequent proposed action". SEQRA requirements with respect to this "subsequent proposed action' allow the Commission to pursue one of the four following options: 1. No further State Environmental Quality Review (SEQR) compliance is required if a subsequent proposed action will be carried out in conformance with the conditions and thresholds established for such actions in the generic Environmental Impact Statement (EIS) or its findings statement; 2. An amended findings statement must be prepared if the subsequent proposed action was adequately addressed in the generic EIS but was not addressed or was not adequately addressed in the findings statement for the generic EIS; 3. A negative declaration must be prepared if a subsequent proposed action was not addressed or was not adequately addressed in the generic EIS and the subsequent action will not result in any significant environmental impacts; and 4. A supplement to the final generic EIS must be prepared if the subsequent proposed action was not addressed or was not adequately addressed in the generic EIS and the subsequent action may have one or more significant adverse environmental impacts. The following environmental assessment will assist in choosing the appropriate option. The assessment is based on Orange and Rockland's EAF, party comments submitted in response to Judge Lynchs June 19, 1997 ruling, and on additional analysis by Department Staff. The Assessment consists of: - Section II - summarizes pertinent aspects of Orange and Rockland and its service territory and describes the proposed settlement agreement. - Section III - summarizes the Environmental Assessment Form submitted by the Company. - Section IV - summarizes party comments on the Company's EAF. - Section V - Staff's analysis of the environmental impacts of the proposed settlement. - Section VI - recommend mitigation and monitoring plan. - Section VII - Staff's overall conclusions and recommendations. 24 II. Orange and Rockland's Settlement Agreement on Restructuring As of July 1997, the company served 197,977 customers. Its annual sales, were about 4605 GWH. Unique among New York utilities, about 40% of the company's generation comes from purchased power. The company itself owns two fossil fired baseload plants (Lovett and Bowline), combustion turbines and a number of small hydroelectric plants. The company indicates that there are two load pockets in its territory. An eastern load pocket serving 128,000 customers and a west load pocket serving 53,000 customers. Under the proposed four year settlement agreement on restructuring large industrial customers will have the opportunity to realize an average electric price of six cents per kWh. The rates of all other customers will be reduced in the first year by 1.09% and by another 1.0% effective one year later. Also, additional reductions, up to a maximum of 5%, will be available to customers who do not qualify for the large industrial rates if sufficient net gains are realized from the sale of generating plants. The cumulative customer rate reductions over the four-year period are equal to approximately $32.4 million. Once retail access begins, O&R will be allowed a reasonable opportunity to recover its investment in stranded generation assets. For each of the four rate years that the settlement is in effect, earnings on regulated electric operations in excess of 11.4% in New York will be shared with 75% of the benefits going to ratepayers and 25% to shareholders. A flexible rate tariff will be designed and filed with the Commission. It will provide for the possibility of rate discounts for commercial and industrial customers who are currently taking service and who are at serious risk of relocating or closing their facilities. Full retail access to a competitive energy and capacity market will be available on May 1, 1999, for all customers. The company will auction off all of its generating assets and restructure itself as a Registered Holding Company with structurally separate subsidiaries which may include unregulated subsidiaries as well as a regulated T&D company. Upon commencement of retail access, the T&D company will provide basic energy services, including energy, capacity, ancillary services, metering and billing within the service territory. The T&D company will be the Provider of Last Resort for all customers choosing to continue to purchase energy services from it, for those customers who do not choose an energy provider, and for those customers who purchase from other providers, but who later return as customers purchasing power from the T&D company. The parties agree to study transferring this obligation to the competitive market. The settlement includes provisions for a competitive transition charge (CTC) mechanism which would allow the company to recover a portion of its going forward costs through rates during the period, if any, between the onset of retail access (scheduled for May 1, 1999) and the divestiture of the company's generating facilities. The percentage of costs recovered is reduced if the company does not transfer title of its plants by May 1, 2000. The CTC is scheduled to end no later than October 31, 2000. The settlement includes provisions for sharing the benefits or losses of the sale of generating plants. If the company selects winning bidders prior to May 1, 1999, any gains shall be allocated between shareholders and ratepayers on a 25/75 percent basis and any losses on a 5/95 percent basis. If bidders are selected after that date, gains or losses will be shared on a 20/80 percent basis. The Performance Standards, which were agreed to in the company's recent case, will be continued. A Low Income Customer Assistance Program will be 25 conducted for a two-year period for the residents of the City of Port Jervis. The company will support the development of a pilot program that would aggregate low income customers as a single purchasing group. The company will continue to develop and implement programs and materials that will aid its customers in understanding the changes in the electric industry that are coming and the nature of the services that customers can expect to receive from O&R in the future. The settlement includes provisions for an environmental disclosure program which will provide information on the source of power offered under retail access. Public interest programs will be continued through a competitively neutral Systems Benefit Charge funded at approximately $3.2 million (about 1.0 mills/kWh), annually. III. Orange and Rockland Utilities, Inc. Environmental Assessment Form On April 4, 1997, Orange and Rockland submitted a Short Environmental Assessment Form (EAF) covering the four year restructuring settlement it had entered into on March 25, 1997. As a result of this very brief analysis (discussed below), the company concludes that the settlement agreement will have "environmental impacts that are modest or not distinguishable from those of alternative action." With regard to changes in generation, the company asserts that it has no plans to retire its Lovett or Bowline plants or to construct new generating plants during the period of the settlement. The company does not predict whether or not other parties will choose to build plants to "meet load growth or replace existing generation" (i.e., compete with O&R) but notes that any new plants will be required to undergo thorough environmental review. The company anticipates that under competition, plant dispatch will be handled by an Independent System Operator (ISO) and that "actual generation dispatch conducted in a competitive market is difficult to predict." Similarly, the company states that it cannot predict whether out-of-state imports of power to O&R's service territory will increase or decrease. The company states that under the agreement it will continue to support research and development and will spend money on Demand Side Management. The company notes that a systems benefit charge will also provide some funds for energy efficiency and public policy related programs. In the long run, it anticipates that competitive providers of cost effective energy efficiency services will enter the market place. Given the uncertainties about future loads (net of DSM), new plant construction and out-of-state purchases, the company anticipates no significant predictable impacts on air quality, water resources or land use. The company notes that any plants, new or existing, would have to comply with applicable environmental regulations and that any new steam electric power plants over 80 mw or transmission lines built in New York State would be subject to State Siting Board or Public Service Commission review and impacts would be thoroughly examined. The company anticipates that the employment and tax revenues from its existing plants will continue--although possibly at somewhat reduced (but predictable) levels. On the other hand, the company asserts that lower electric rates resulting from competition will enhance economic development and job growth in its service territory. IV. COMMENTS ON THE ORANGE AND ROCKLAND EAF On May 13, 1997, the Public Interest Intervenors (PII) moved for the Department of Public Service staff to prepare supplemental environmental impact statements (SEISs) in several restructuring cases including case 96-E-0900 - the Orange and Rockland case. At the time the petition was filed several of the 26 utilities, including Orange and Rockland, had submitted Environmental Assessment Forms for their proposed restructuring plans. In its petition PII identified a number of claimed deficiencies in the EAF's. Some were generic in nature and, in our understanding, were intended to apply to all utilities; some were specific to particular utilities. The following are the issues raised by PII which pertain, generically or specifically, to O&R. The systems benefits charge [SBC] proposed in the settlement agreement is below the thresholds and conditions established in the FGEIS and warrants additional environmental scrutiny. PII notes that the FGEIS considered using a systems benefit charge (which would pay for certain energy efficiency, low income and R&D activities not likely to be undertaken by a deregulated utility) as means of mitigating some environmental impacts. It asserts that the Commission made a decision in Opinion 96- 12 that the SBC should be funded at approximately the current levels of activity and that a SEIS is required to assess the environmental impacts of the funding level proposed in the settlement. The air quality impacts of the reduced commitment to energy efficiency should be examined. While the system benefit charge is intended to provide for energy efficiency services (beyond those arising from market forces) it is anticipated that utilities will continue to offer some DSM services. PII asserts that O&R's proposed DSM budget will be lower than in previous years as a result of the restructuring plan and that will have negative environmental impacts. Environmental Impacts associated with the elimination of the existing revenue per customer mechanism and the institution of a price cap form of regulation for the T&D company must be evaluated, PII notes that although the proposed agreement provides for transition to deregulation of generation, T&D services would remain under a traditional price cap form of regulation with a freeze in rates for the period of the agreement. PII argues that price cap regulation contains inherent incentives for a utility to increase sales and inflate rate base and that the Commission is therefore required to order an SEIS on the subject of price cap regulation. Failure to expose the utilitys fossil generating units to full market risk requires environmental review. The proposed March 25 settlement included a provision for a Competitive Transition Charge (CTC) which would allow the company to recover the "going forward" costs of its steam electric plants. This charge, which would be 27 recovered through energy, capacity or customer charges, would cover generating facility costs, such as labor, routine maintenance, and property taxes, which are not variable in the short term but which could be avoided in the long term by shutting the plant down. PII argues that by providing a mechanism for the recovery of these costs, the agreement would subsidize the operation of the company's plants, give the company an unfair price advantage when bidding energy sales to an ISO and result in those plants operating more than is economically efficient. Environmental impacts would ensue if the Orange and Rockland plants were run in lieu of other plants which are both more economically efficient and more environmentally benign. The environmental impact of new construction needed to eliminate load pockets/market power must be addressed, including the consideration of alternatives. PII notes that load pockets have been identified in several utilities service territory and that construction of new transmission facilities may be required to mitigate these load pockets. These facilities will have environmental impacts which should be evaluated in a SEIS. Chief Administrative Law Judge Lynch considered the PII petition and reply comments by staff and several other parties and recommended that "the final EAFs prepared for Commission use in the Con Edison and O&R cases consider the potential environmental effects of T&D price cap regulation for Con Edison and the recovery of non-variable generation costs in T&D rates for Con Edison and O&R" but that "in all other respects, there is no reason to commence preparation of SEISs." Nonetheless staff's analysis in Section V will address the issues raised by PII which are relevant to O&R. V. Staff Analysis The FGEIS covered the significant generic issues connected with restructuring at considerable length. The following analysis will not recapitulate the material in the FGEIS. Nor will the analysis repeat the material adequately covered in the company's EAF and summarized in section III of this memorandum. Instead this analysis will deal with issues identified by staff or by the PII comments on the Orange and Rockland EAF where it is reasonable to anticipate that unique features of the company's service territory or restructuring plan might result in environmental impacts not considered in the FGEIS or in excess of thresholds identified in the FGEIS. A. Effects of Restructuring on Overall Level of Electric Sales in Orange and Rockland's Service Territory A key determinant of the incremental environmental impacts of restructuring the electric industry in New York is the effect of restructuring on the overall level of electric sales. This section of the EAF will address the question of whether any likely effect of the Orange and Rockland restructuring plan would cause sales growth in excess of the levels contemplated in the Final Generic Environmental Impact Statement (FGEIS). 28 There appear to be three realistic ways in which restructuring could have significant impacts on electric sales. 1. Price Elasticity Effects If electric prices drop - as a result of utility rate reductions incorporated in restructuring agreements and/or as a result of competition among the utility and alternative suppliers - customers may make the economic decision to consume more electricity. This is a price elasticity effect. The FGEIS analysis included the preparation of a statewide "high sales" scenario based on estimated sales increases that could result from decreases in electric prices given the best information then available to staff economists. (FGEIS scenario - 1). Scenario 1 assumed that under the high sales assumptions used in the analysis, the compounding statewide electric sales growth would be about 2.2% per year. This scenario was compared to a FGEIS base case "evolving regulatory model" scenario. The base case assumed incremental sales growth of 1.2%. Thus the additional incremental statewide sales growth likely to result from the high sales scenario compared to the no action base case was estimated as about 1.0% a year. PROMOD simulation of comparative plant dispatching under these scenarios showed that compared to the evolving regulatory model, the high sales model would result in a 2.9% increase in SO2 emissions, a 5.5% increase in NOx and a 12% increase in CO2 by 2012. The Commission determined that, although the FGEIS showed the possibility of detrimental incremental air quality impacts "consistent with the social, economic and other considerations, from among the reasonable alternatives available" the Commission's restructuring policy "avoids or minimizes adverse environmental impacts to the maximum extent possible." Recently Staff of the Office of Regulatory Economics (ORE) of the DPS estimated a range for expected growth under a competitive environment. The new estimates use updated data, including information developed during the settlement negotiations. The ORE's forecast shows that statewide incremental sales growth under competition could be about 0.4%. Orange and Rockland is a relatively small utility and only accounts for roughly 2.4% of NYPP sales. In analyzing the significance of any potential incremental sales growth attributable to the Orange and Rockland restructuring plan it is reasonable to focus on Orange and Rockland's pro rata share of the sales growth and impacts considered in the FGEIS and ask whether Orange and Rockland's incremental sales growth due to price elasticity effects resulting from restructuring would be likely to be significantly greater than the average Statewide incremental sales growth due to restructuring. Staff of the Department's Office of Regulatory Economics projects that Orange and Rockland Sales would probably grow somewhat faster than the statewide average over the next few years due to local economic factors regardless of whether or not the company is restructured. However, there are no particular features of the proposed restructuring plan or the company's service territory which suggest that the effects of restructuring would be greater in Orange and Rockland's case than in the State as a whole. An elasticity analysis using the rate reductions in the Orange and Rockland settlement (see Attachment, Tables A and C) shows that the guaranteed rate reductions are likely to produce a 0.25% incremental annual increase in demand over the same 15 year modeling period used in the FGEIS. If the sale of generating facilities increases the rate reduction to 5% for non-large-industrial customers, the increase in 29 demand could be as much as 0.42%. 2. Price Cap Regulation of the T&D Utility While the proposed settlement provides for a transition to a more competitive market for generation, the T&D portion of Orange and Rockland would remain a regulated utility with rate of return regulation and capped prices. PII argues that price cap rate of return regulation gives the T&D utility incentives to promote sales and to build uneconomic rate base. According to PII, these incentives could result in environmental impacts which should be considered in a separate SEIS. For several years a revenue decoupling mechanism (RDM) was in effect for O&R which was intended to remove the linkage between increased sales and increased company profits. However in May of 1996, the Commission approved a return to price cap regulation for O&R. The continuation of this traditional and well understood mechanism for the regulated T&D company does not constitute a change resulting from competition or the transition plan. To the extent that prices are capped until 2002, the Company may have difficulty recovering T&D upgrade costs resulting from load growth. Furthermore, the possibility of prudence review might encourage the company to use targeted DSM as necessary as possible to avoid T&D upgrades. 3. Lower Energy Efficiency Effect For a number of years the New York Commission has encouraged utilities to promote end use energy efficiency (DSM). This encouragement has included review and approval of utility DSM plans and budgets and various incentive and cost recovery mechanisms. For all New York utilities, including Orange and Rockland, the levels of DSM expenditures and energy savings have declined drastically in recent years. Orange and Rockland's DSM expenditures peaked at $17 million in 1993 and its incremental annual DSM energy savings peaked at 41.4 GWH, also in 1993. By 1996, its DSM budget had declined to only $4.2 million and its DSM incremental energy savings goal had declined to only 11 GWH. However, the company actually achieved only 2.5 GWH of DSM savings in 1996. Staff estimates the company's incremental energy savings from DSM in 1997 will be about 1.2 GWH. No specific sum is included in the settlement for the continuation of utility DSM programs. Staff examined the possibility that DSM budget reductions could reduce the energy conservation measures taken by O&R customers and result in incremental increases in electric sales beyond the base case. In the FGEIS, the base case "evolving regulatory model" scenario and the high sales scenario (Scenario 1); included annual incremental Orange and Rockland DSM energy savings of 11 GWH for the years 1997 and beyond. In Scenario 1a in the FGEIS, staff estimated the sales and environmental impacts of halting all DSM activities. The sales and environmental impacts of the "No incremental utility DSM" scenario were shown to be much smaller than those of the "high sales scenario." The FGEIS did not consider a scenario that assumed both high sales and no incremental DSM, so staff evaluated the plausibility of a realistic combination of low Orange and Rockland DSM and high Orange and Rockland sales growth could result in sales greater than those postulated in the FGEIS "high sales scenario". Staff has reanalyzed the impact of energy efficiency programs on O&R sales growth using a value of 1.2 GWH for 1997 and 0 GWH for the years 1998 through 2012 and compared that to the DSM impact analysis underlying the FGEIS high sales scenario. We calculate that averaged over the FGEIS modeling period (1997 through 2012), the 30 elimination of all energy efficiency sales reduction after 1997 would increase sales by only 0.08% a year. As discussed in Section V.A.1, the price elasticity effects of the settlement rate reductions would increase sales by an average rate of 0.25% to 0.42% a year over the 15 year period. If the effects of no DSM are added, the likely sales increases due to the settlement are in the range of 0.33% to 0.50%. This is well below the 1.0% high sales scenario considered in the FGEIS. In fact, the settlement provides for substantial funding of energy efficiency through the SBC and we anticipate that ESCOs will offer energy conservation services, both of which will tend to reduce sales. 4. System Benefits Charge The settlement provides for an SBC funded at an average level of $3.2 million a year, of which approximately $2.9 million will be spent on energy efficiency programs. This is below the company's 1995 DSM expenditure of $6.9 million but quite close to the company's actual 1996 DSM expenditure of $3.1 million. The Commission will determine the appropriate amount of funding for the SBC in either this proceeding or a separate generic proceeding. B.Effect of Restructuring on Retirement or Construction of New Generation, Plant Dispatch or Fuel Purchase Another potential factor that could, in concept, affect New York's environment is the direct or indirect effect of the Orange and Rockland restructuring plan on the mix of fuels burned or plants run to meet electric sales in Orange and Rockland's territory. The following section will analyze whether there is any reason to believe that the Orange and Rockland plan would result in impacts that are greater than or different in nature or causation from those already addressed in the FGEIS. 1. Retirement of Orange and Rockland Generating Facilities Retirement of a major Orange and Rockland generating facility would change the mix of generation resources available in the region and thus could have a potential environmental impact. In addition, permanent retirement and decommissioning of a plant could have a variety of local fiscal, economic, employment and land use impacts. The company asserts in its EAF that it has no plans to retire any of its existing generating facilities. However, under the revised settlement, the company is required to auction off all of its generating facilities. It is conceivable that a particularly inefficient plant might receive no bids or an unacceptably low bid. It is not clear exactly what would happen in that instance. Under the revised settlement the company is required to file a divestiture plan after Commission approval of the settlement. This plan will include more detail on the process of divestiture. While unpredictable, it is possible that the divestiture of these plants could result in one or more of them being retired earlier than they would have been in the absence of competition. The FGEIS concluded that accelerated retirement of less efficient plants is an unavoidable potential consequence of a more competitive electric industry and that this would cause some local adverse impacts (including increases in unemployment and decreased tax base) which may be balanced by positive impacts elsewhere. 2. Construction of New Generating Plants In its EAF the company states that it has no plans to construct new generating facilities. Staff is not 31 aware of any reason that the proposed restructuring would result in new plant construction by O&R or other companies. In any case, under current air quality regulations (particularly the emissions offset policies for NOx) construction of new generation facilities tends to improve air quality. 3. Effect of Competitive Transition Charge (CTC) on Plant Dispatch The proposed November 6 settlement includes a provision which will allow the company to partially recover its above market generation costs through a CTC charge levied on customers participating in retail access. This charge is limited in both duration and the percentage of expenses the company may recover. If the company transfers title of its generating facilities before the scheduled May 1, 1999 onset of retail access, the CTC provisions will not go into effect. If the company transfers title of its generating facilities between May 1, 1999 and April 30, 2000, it will be allowed to recover its non-variable cost of generation in excess of market revenues from the CTC, with the exception that 25% of fixed labor costs and property taxes cannot be recovered through the CTC, but must be recovered from the market. Once title is transferred, the CTC will end. If the company transfers title of generating facilities between May 1, 2000 and October 31, 2000, it will be allowed to recover above market costs through the CTC, with the exception that 35% of fixed labor costs and property taxes must be recovered through the market. In its comments on the March 25 proposed settlement, PII contended that since potential non-regulated competitors will not receive a similar income stream, Orange and Rockland could and would offer its generation to the ISO at a subsidized and uneconomic price. This, PII asserted, could result in Orange and Rockland operating less efficient and dirtier plants than the ESCO plants which would have operated in the absence of the CTC. However, under the provisions of the proposed settlement, the company's fixed operating costs would be reconciled to a fixed target through a CTC mechanism that is indifferent to whether or not any Orange and Rockland plant operated on a given day. Since collection of these going forward costs is not dependent on operating a Orange and Rockland plant (i.e., is not marginal revenue), both Orange and Rockland and any competitors would face the same short term decision criterion. They would maximize profits (or minimize losses) on existing facilities by selling on the market whenever the clearing price equals or exceeds their marginal operating costs -- as they themselves calculate marginal costs given their best information. It is, of course, true in theory that Orange and Rockland, or any competitor, might be tempted for strategic reasons to sell at a price below true marginal costs for a period of time in an attempt to secure market share and dissuade competitors from entering the market. However, the settlement requires that, on average, Orange and Rockland's bids for its fossil fueled plants will not fall below its incremental fuel costs and variable O&M. In any event, the duration of the CTC is very limited. It may not go into effect at all, if the company's plants are transferred before May 1, 1999. Most likely the CTC will be in operation for less than a year, since the company is allowed to keep a larger percentage of any gains if it divests before May 1, 2000. The maximum duration of the CTC is 18 months - since it is scheduled to end October 31, 2000 if the company's plants are not sold by that date. Given licensing and construction lead times it is 32 virtually impossible for a new power plant to be built to compete in the company's territory before the end of the CTC. Any developer considering building such a plant would base its decisions on expected income flows in the years beyond 2000. 4. Fuel Burned by Orange and Rockland Various Orange and Rockland units have the capacity to burn either coal, oil or gas within existing air quality limits. Decisions about which fuel to burn at these facilities will continue to be based on economic considerations and unrelated to deregulation. 5. Increased Generation Outside of Orange and Rockland Service Territory As previously noted, Orange and Rockland currently purchases about 40% of its power. Some of this power comes from out-of-state generators. Depending on the location, control technology and fuel type of these generators, their operation may have positive or negative impacts on air quality in New York. Presumably relatively high levels of power purchases from out of the service territory will continue during the settlement period and perhaps during the 15 year analysis period. However, Staff cannot predict the exact level of these purchases over time or the net impact of these purchases on New York air quality. The FGEIS considered four different scenarios (Scenarios 7, 7A, 7B and 7C) which examined the environmental impacts of alternative patterns of power sales across state lines. Since O&R only comprises about 2.4% of NYPP sales, and since there is no reason to believe that the settlement would result in a disproportionate increase of power imported into O&R's territory, it is unlikely that the settlement would result in environmental impacts in excess of those already considered in the FGEIS. C. Effect of Restructuring Plan on Construction of New Transmission Facilities In its EAF, Orange and Rockland states that no new transmission facilities are required to implement the March 25 agreement. However, two small load pockets exist within the franchise in certain combinations of load and weather. Orange and Rockland's eastern load pocket serves 128,000 customers. When load exceeds 320 MW - which happened for 2100 hours during 1995 - the company must run Lovett Steam Station. For 70% of the load pocket period during 1995, 100 MW or less of Lovett capacity was required. The western load pocket serves 53,000 customers. During thunderstorms, or when load exceeds 145 MW, the company must operate its Mongaup Hydroelectric facilities and its Shoemaker Gas Turbine. According to the company this has happened approximately 600 hours a year on average for the last several years. These load pockets do not create reliability problems, but are of potential concern in a competitive environment because the owner of these facilities could exercise market power during load pocket conditions. In its petition PACE recommends that a supplemental environmental impact statement be prepared to assess the impact of transmission facilities required to alleviate these load pockets. The company states that it has considered several alternatives for the mitigation of these load pockets. In addition to reinforcing the transmission system by installing additional transformers in two substations at a cost of approximately $24 million the company has considered: - entering into capacity and energy contracts; 33 - installing new generating facilities, and - running targeted DSM programs. It has concluded that new transmission improvements are less desirable and are less cost effective than entering into bilateral contracts between owners of generation and the T&D utility, effective during the duration of a load pocket incident, which would prevent the exercise of market power. Since this contractual solution would not involve the construction of new facilities or change the dispatching of plants from the situation that would obtain in the absence of restructuring, there would be no incremental environmental impacts. The proposed settlement requires the company to file a divestiture plan which addresses market power issues. VI. Mitigation of Impacts -- Monitoring It is important to note that the FGEIS explicitly recognized that "the likely environmental effects of a shift to a more competitive market for electricity are not fully predictable due to the absence of precedence, complexity of the New York electric industry, future regulatory activities, including those of other states and the federal government, and the nature and degree of market response. The same uncertainty persists with respect to Orange and Rockland's restructuring plan. In Opinion 96-12 (Opinion and Order Regarding Competitive Opportunities for Electric Service), the Commission made certain "findings" pursuant to the State Environmental Quality Review Act. The Commission determined that "...adverse environmental impacts will be avoided or minimized to the maximum extent practicable by incorporating as conditions to the decision those mitigative measures that were identified as practicable;... These mitigation measures are: (1) monitoring environmental impacts; (2) system benefits charge; and (3) assisting efforts undertaken by other agencies to address interstate pollution transport." Staff analysis of the Orange and Rockland restructuring plan determined that its implementation would result in environmental effects which would most likely be less than the impact values assessed in the FGEIS. To address any uncertainty and to evaluate unknown outcomes, a monitoring program, as envisioned in the FGEIS should be developed. The environmental impacts which could be monitored are described in Section 6.2.3 of the Final Generic Environmental Impact Statement (FGEIS) issued May 3, 1996 in Case 94-E-0952 (Competitive Opportunities Regarding Electric Service). The FGEIS and this EAF discuss a number of environmental activities and changes that would be important to monitor during the transition to competition including: imported electricity from the midwest, SO2 and NOx emissions, retirement of Orange and Rockland power plants, in-state and out-of-state purchased generation, fuel mixture of generation, R&D related environmental impact, new electric and gas transmission line construction, acid precipitation in the Adirondacks and Catskills, mitigation of load pockets, and the operation of the CTC. The proposed environmental monitoring plan 34 currently being developed by Staff will be organized around the major environmental impacts considered in the FGEIS and this EAF, including information necessary for analysis of any restructuring environmental impacts, confirmation of expected impacts and exposition of unexpected outcomes and their significance. Staff anticipates Orange and Rockland's cooperation in the development and implementation of this monitoring plan. VII. Conclusions Staff has considered features of Orange and Rockland's territory and the proposed November 6 settlement agreement and has analyzed the potential impacts of that agreement on the environment. We have compared these likely impacts to those addressed in the FGEIS. Our analysis has been broadly framed and has looked at limiting cases in order to encompass any modifications to that agreement likely to be adopted by the Commission. In our analysis we have also considered issues raised by outside parties commenting on the Orange and Rockland EAF. We conclude that the Orange and Rockland restructuring plan would not result in significant new environmental impacts not considered in the FGEIS, nor would it result in impacts likely to be greater than those considered in the FGEIS. Therefore no SEIS is required under the provisions of SEQRA. Staff recommends that the Commission determine that no further SEQRA compliance is required with regard to the transitional restructuring plan for this company. Although no further SEQRA compliance is required the Commission should institute mechanism's for monitoring and, if indicated, mitigating some of the potential impacts of restructuring. ATTACHMENT Page 1 of 3 IMPACT OF POSSIBLE RATE DECREASES ON SALES GROWTH Several of the potential impacts of deregulation examined in the Final Generic Environmental Impact Statement (FGEIS) are a result of the increased sales that are expected to accompany deregulation. Rate reductions, which are a primary driver of the increased sales, are not considered explicitly in the FGEIS; rather it was assumed that, beginning in 1997, sales would increase by an additional 1% per year for 15 years. That is, if statewide growth without deregulation is 1.2% per year (as was assumed in the FGEIS evolving regulatory model), growth with deregulation would be 2.2%. In each of the restructuring cases, specific rate reductions are now being considered. Using price elasticity of demand, these proposed rate reductions now permit the calculation of an estimate of increased sales to be expected from restructuring. The following tables (developed by the Office of Regulatory Economics) consider both short-run elasticity (the increase in sales which occurs immediately after the rate reduction) and long-run elasticity (increases which occur in subsequent years). The first step in the calculation (Table F) is to determine the weighted average elasticities based on the elasticities for each sector (industrial, commercial and residential) and the fraction of the utility's load in each sector (sales weight). Also, the average price reduction per year is calculated based on the expected rate decrease for each sector and the sales weight. 35 Five price reduction scenarios (A through E) are considered. Scenario A uses the price reductions from the March 25 Agreement; Scenario C uses maximum price reductions from the November 6 Settlement Agreement. Tables A through E then calculate the year by year increase in sales due to competition (short-run (SR Sales), long-run (LR Sales) and total), the cumulative change in sales, and the annual average rate of sales growth (Annual Rate). Residential Delta (Res. Delta) is the possible residential rate reduction considered in the table; Percent Total Impact per Year (%TI/Yr) is the average price reduction per year from Table F; and Lambda is a parameter relating short-term and long-term elasticity. The end of the five year settlement period and the end of the 15 year modeling period are highlighted. ATTACHMENT Page 2 of 3 PRICE ELASTICITY IMPACT ORANGE AND ROCKLAND Sales ch = (price elasticity * % price ch) + lambda * (sales ch lag 1) A. %Res Delt %Tl/ Yr Lambda SR Elas. LR Elas 2.1 1.73 0.73 0.30 1.12 Year SR Sales LR Sales Total Cumulative Annu.Rate 1998 0.526 0.000 0.526 0.526 0.53 1999 0.526 0.383 0.909 1.436 0.72 2000 0.000 0.662 0.662 2.098 0.69 2001 0.000 0.482 0.482 2.579 0.64 2002 0.000 0.351 0.351 2.930 0.58 2003 0.000 0.255 0.255 3.185 0.52 2004 0.000 0.186 0.186 3.371 0.47 2005 0.000 0.135 0.135 3.506 0.43 2006 0.000 0.098 0.098 3.604 0.39 2007 0.000 0.072 0.072 3.675 0.36 2008 0.000 0.052 0.052 3.728 0.33 2009 0.000 0.038 0.038 3.765 0.31 2010 0.000 0.028 0.028 3.793 0.29 2011 0.000 0.020 0.020 3.813 0.27 2012 0.000 0.015 0.015 3.828 0.25 B. %Res Delt %Tl/ Yr Lambda SR Elas. LR Elas 4.0 2.53 0.73 0.30 1.12 Year SR Sales LR Sales Total Cumulative Annu.Rate 1998 0.770 0.000 0.770 0.770 0.77 1999 0.770 0.560 1.330 2.100 1.04 2000 0.000 0.968 0.968 3.069 1.01 2001 0.000 0.705 0.705 3.773 0.93 2002 0.000 0.513 0.513 4.286 0.84 2003 0.000 0.373 0.373 4.659 0.76 2004 0.000 0.272 0.272 4.931 0.69 2005 0.000 0.198 0.198 5.128 0.63 2006 0.000 0.144 0.144 5.272 0.57 2007 0.000 0.105 0.105 5.377 0.53 2008 0.000 0.076 0.076 5.453 0.48 2009 0.000 0.055 0.055 5.509 0.45 2010 0.000 0.040 0.040 5.549 0.42 2011 0.000 0.029 0.029 5.578 0.39 2012 0.000 0.021 0.021 5.600 0.36 C. %Res Delt %Tl/ Yr Lambda SR Elas. LR Elas 36 5.0 2.95 0.73 0.30 1.12 Year SR Sales LR Sales Total Cumulative Annu.Rate 1998 0.898 0.000 0.898 0.898 0.90 1999 0.898 0.653 1.551 2.448 1.22 2000 0.000 1.129 1.129 3.577 1.18 2001 0.000 0.821 0.821 4.398 1.08 2002 0.000 0.598 0.598 4.996 0.98 2003 0.000 0.435 0.435 5.431 0.89 2004 0.000 0.317 0.317 5.747 0.80 2005 0.000 0.230 0.230 5.978 0.73 2006 0.000 0.168 0.168 6.145 0.66 2007 0.000 0.122 0.122 6.267 0.61 2008 0.000 0.089 0.089 6.356 0.56 2009 0.000 0.065 0.065 6.421 0.52 2010 0.000 0.047 0.047 6.468 0.48 2011 0.000 0.034 0.034 6.502 0.45 2012 0.000 0.025 0.025 6.527 0.42 ATTACHMENT Page 3 of 3 ORANGE & ROCKLAND Sales ch = (price elasticity * % price ch) + lambda * (sales ch lag 1) D. %Res Delt %Tl/ Yr Lambda SR Elas. LR Elas 8.0 4.19 0.73 0.30 1.12 Year SR Sales LR Sales Total Cumulative Annu.Rate 1998 1.277 0.000 1.277 1.277 1.28 1999 1.277 0.929 2.206 3.483 1.73 2000 0.000 1.606 1.606 5.089 1.67 2001 0.000 1.168 1.168 6.257 1.53 2002 0.000 0.850 0.850 7.107 1.38 2003 0.000 0.619 0.619 7.726 1.25 2004 0.000 0.450 0.450 8.177 1.13 2005 0.000 0.328 0.328 8.504 1.03 2006 0.000 0.239 0.239 8.743 0.94 2007 0.000 0.174 0.174 8.916 0.86 2008 0.000 0.126 0.126 9.043 0.79 2009 0.000 0.092 0.092 9.135 0.73 2010 0.000 0.067 0.067 9.201 0.68 2011 0.000 0.049 0.049 9.250 0.63 2012 0.000 0.035 0.035 9.286 0.59 E. %Res Delt %Tl/ Yr Lambda SR Elas. LR Elas 10.0 5.01 0.73 0.30 1.12 Year SR Sales LR Sales Total Cumulative Annu.Rate 1998 1.527 0.000 1.527 1.527 1.53 1999 1.527 1.112 2.639 4.166 2.06 2000 0.000 1.920 1.920 6.087 1.99 2001 0.000 1.398 1.398 7.484 1.82 2002 0.000 1.017 1.017 8.501 1.65 2003 0.000 0.740 0.740 9.241 1.48 2004 0.000 0.539 0.539 9.780 1.34 2005 0.000 0.392 0.392 10.172 1.22 2006 0.000 0.285 0.285 10.457 1.11 2007 0.000 0.208 0.208 10.665 1.02 2008 0.000 0.151 0.151 10.816 0.94 2009 0.000 0.110 0.110 10.926 0.87 2010 0.000 0.080 0.080 11.006 0.81 2011 0.000 0.058 0.058 11.064 0.75 2012 0.000 0.042 0.042 11.107 0.70 37 F. LARGE SMALL RES/ WGTED PRICE IND IND/COM OTHER AVG PER YR Sales Weight 0.14 0.49 0.37 SR Price 0.43 0.31 0.25 0.30 LR Price 1.28 1.17 0.99 1.12 Price Red. A 12.00 2.10 2.10 3.49 1.73 Price Red. B 12.00 4.00 4.00 5.12 2.53 Price Red. C 12.00 5.00 5.00 5.98 2.95 Price Red. D 12.00 8.00 8.00 8.56 4.19 Price Red. E 12.00 10.00 10.00 10.28 5.01 Lambda: 0.73 -----END PRIVACY-ENHANCED MESSAGE-----