ML17059C113: Difference between revisions

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PowerPurchaseAgreement.ThecourtdeniedthatmotionandKamineappealed.AfterargumentofthatappealKaminefiledforprotectionundertheBankruptcylawsand.senttotheAppellateDivisionanoticethatallfurtherproceedingswerestayed.Inaddition,KaminehasfiledarelatedcomplaintintheUnitedStatesDistrictCourtfortheWesternDistrictofNewYorkallegingthattheconductwhichisthesubjectoftheStatecourtactionviolatesthefederalantitrustlaws.Thecomplaintseeksdamagesintheamountof$420,000,000,whentrebeled,aswellaspreliminaryandpermanentinjunctions.Subsequently,Kaminefiledamotionforapreliminhryinjunctioninthe.federal.actiontognjointheCompanyfromrefusihgtoacceptandpurchaseelectricpowerfromKamineandenjoiningtheCompanyfromterminatingduringthependencyofthislawsuititsperformanceunderthecontract.InNovember1995,theCourtissuedadecisiondenyingKamine'smotionforapreliminaryinjunction,finding,amongotherthings,thatKamirlehadnotestablishedthenecessarylikelihoodofsuccessonthemeritsofitsaction.Kaminefiledanoticebfappealfromthat.decisionbuthassubsequentlyannouncedthatitiswithdrawingthatappeal.During1995thePSCinvitedtheCompanytofileapytitionrequesting,amongotherthings,thatthe.Commissioncommenceaninvestigationtodeteiminewhetheratthetimeofclaimedcommercialopera-tiontheHume.plantwasacogenerationfacilityunde?NewYorklawasrequiredbythePowerPurchaseAgreement.TheCorn/anyfiledsuchapetitionandKaminefiledpapersinopposition.IDuring1995KaminefiledapetitionbeforetheFERCtowaivecertainrequirementsforfederalQualifiedFacilitystatusfor1994.TheCompanyandthePSCfiledinoppositiontotherequest.SubsequentlyFERCissuedanordergrantingthewaiverrequestandtheCompany'smotionforrehearingwasdenied.TheCompanyfiledapetitionforreviewwiththeU.S.CourtofAppealsfortheDistrictofColumbiaCircuitbutthatcourtdeniedtherequestforreview.InNovember1995KaminefiledinNewark,NewJerseyforprotectionundertheBankruptcylawsandfiledacomplaintinanadve'rsaryproceedingseeking,amongotherthings,specificperformanceoftheAgreembnt.KaminefiledamotiontocompeltheCompanytopay.whatwouldbedueunderKamine'sviewofthet0rmsoftheAgreementduringthependencyoftheAdversaryProceeding.Afterhearing,'theBankruptcyCourtdeniedthatmotion.TheCourtalsodeniedvariousmotionsmadebytheCompanytochangethevenueoftheproceedingstoNewYorkStateandtolifttheautomaticstayofthependingNew'orkStateaction.OnappealtheBankruptcyCourtwasreversedandthecasesentbacktotheBankruptcy.'ourttodecidewherethecontractissuesintheAdversaryProceedingshouldbeadjudicated.AsofJune16,1997,theCompanyfiledaSecbndAmendedComplaintintheStateCourtactionassertingadditional'claimsbasedonsubsequentoccurrences.OnMarch19,1997,theBankruptcyCourtstayed.thi.'AdversaryProceedingpendingresolutionofthecontractissuesintheNewYorkStatecourttrial.Kaminehasindicateditwillnotappealthisaction.OnJune26,1997,thedefendantsfiledaJointNoticeofRemovalofAction,removingtheactiontotheUnitedStatesDistrictCourtfortheWesternDistrictofNewYork.Therehavebeennofurtherproceedingstodate.NumerousotherproceduralmotionshavebeenpresentedintheBankruptcyCourt;someofwhichmayno&becon'sideredbytheNewYorkStatecourt.Whiletheseproceedingsarepending,theCompany'ouldpayapproximatelytwocentsperkilowatthourwhentheplantoperates:Itisnotoperatingatthepresenttime.GeneralElectricCapitalCorporationLawsuit.OnJuly3,1997,GeneralElectricCapitalCorporation(GECC)filedacomplaintagainsttheCompanyintheUnitedStatesDistrictCourtfortheWesternDistrictofNewYorkinconnectionwiththeKamineprojectinHume,NewYork,forwhichGECCprovidedfinancing.ThecomplaintassertsthattheCompanyviolatedtheantitrustlawsinitsd'ealingswithKamine'andseeksinjunctiverelief,trebledamagesandallegedactualdamagesofnotlessthan$100,000,000.TheclaimsmadeinthecomplaintfiledaresubstantiallysimilartotheclaimsmadebyKamineinthesame'ourtunderKamine'sversionofthetermsofthePowerPurchase'AgreeinentfortheHumeproject..ThecourtdeniedKamine'smotionforapreliminaryinjunctionongroundswhichincludedKamine'sfailuretoestablishalikelihoodofsuccess,onthemeritsofitsclaims.KaminehadfiledanoticeofappealfromadecisiondenyingKamine'smotionforapreliminaryinjunction.Kaminesubsequentlywithdrewtheappeal.TheCompanybelievesthecomplaintbyGECCisalsowithoutmeritandintendstodefendtheactidn.
PowerPurchaseAgreement.ThecourtdeniedthatmotionandKamineappealed.AfterargumentofthatappealKaminefiledforprotectionundertheBankruptcylawsand.senttotheAppellateDivisionanoticethatallfurtherproceedingswerestayed.Inaddition,KaminehasfiledarelatedcomplaintintheUnitedStatesDistrictCourtfortheWesternDistrictofNewYorkallegingthattheconductwhichisthesubjectoftheStatecourtactionviolatesthefederalantitrustlaws.Thecomplaintseeksdamagesintheamountof$420,000,000,whentrebeled,aswellaspreliminaryandpermanentinjunctions.Subsequently,Kaminefiledamotionforapreliminhryinjunctioninthe.federal.actiontognjointheCompanyfromrefusihgtoacceptandpurchaseelectricpowerfromKamineandenjoiningtheCompanyfromterminatingduringthependencyofthislawsuititsperformanceunderthecontract.InNovember1995,theCourtissuedadecisiondenyingKamine'smotionforapreliminaryinjunction,finding,amongotherthings,thatKamirlehadnotestablishedthenecessarylikelihoodofsuccessonthemeritsofitsaction.Kaminefiledanoticebfappealfromthat.decisionbuthassubsequentlyannouncedthatitiswithdrawingthatappeal.During1995thePSCinvitedtheCompanytofileapytitionrequesting,amongotherthings,thatthe.Commissioncommenceaninvestigationtodeteiminewhetheratthetimeofclaimedcommercialopera-tiontheHume.plantwasacogenerationfacilityunde?NewYorklawasrequiredbythePowerPurchaseAgreement.TheCorn/anyfiledsuchapetitionandKaminefiledpapersinopposition.IDuring1995KaminefiledapetitionbeforetheFERCtowaivecertainrequirementsforfederalQualifiedFacilitystatusfor1994.TheCompanyandthePSCfiledinoppositiontotherequest.SubsequentlyFERCissuedanordergrantingthewaiverrequestandtheCompany'smotionforrehearingwasdenied.TheCompanyfiledapetitionforreviewwiththeU.S.CourtofAppealsfortheDistrictofColumbiaCircuitbutthatcourtdeniedtherequestforreview.InNovember1995KaminefiledinNewark,NewJerseyforprotectionundertheBankruptcylawsandfiledacomplaintinanadve'rsaryproceedingseeking,amongotherthings,specificperformanceoftheAgreembnt.KaminefiledamotiontocompeltheCompanytopay.whatwouldbedueunderKamine'sviewofthet0rmsoftheAgreementduringthependencyoftheAdversaryProceeding.Afterhearing,'theBankruptcyCourtdeniedthatmotion.TheCourtalsodeniedvariousmotionsmadebytheCompanytochangethevenueoftheproceedingstoNewYorkStateandtolifttheautomaticstayofthependingNew'orkStateaction.OnappealtheBankruptcyCourtwasreversedandthecasesentbacktotheBankruptcy.'ourttodecidewherethecontractissuesintheAdversaryProceedingshouldbeadjudicated.AsofJune16,1997,theCompanyfiledaSecbndAmendedComplaintintheStateCourtactionassertingadditional'claimsbasedonsubsequentoccurrences.OnMarch19,1997,theBankruptcyCourtstayed.thi.'AdversaryProceedingpendingresolutionofthecontractissuesintheNewYorkStatecourttrial.Kaminehasindicateditwillnotappealthisaction.OnJune26,1997,thedefendantsfiledaJointNoticeofRemovalofAction,removingtheactiontotheUnitedStatesDistrictCourtfortheWesternDistrictofNewYork.Therehavebeennofurtherproceedingstodate.NumerousotherproceduralmotionshavebeenpresentedintheBankruptcyCourt;someofwhichmayno&becon'sideredbytheNewYorkStatecourt.Whiletheseproceedingsarepending,theCompany'ouldpayapproximatelytwocentsperkilowatthourwhentheplantoperates:Itisnotoperatingatthepresenttime.GeneralElectricCapitalCorporationLawsuit.OnJuly3,1997,GeneralElectricCapitalCorporation(GECC)filedacomplaintagainsttheCompanyintheUnitedStatesDistrictCourtfortheWesternDistrictofNewYorkinconnectionwiththeKamineprojectinHume,NewYork,forwhichGECCprovidedfinancing.ThecomplaintassertsthattheCompanyviolatedtheantitrustlawsinitsd'ealingswithKamine'andseeksinjunctiverelief,trebledamagesandallegedactualdamagesofnotlessthan$100,000,000.TheclaimsmadeinthecomplaintfiledaresubstantiallysimilartotheclaimsmadebyKamineinthesame'ourtunderKamine'sversionofthetermsofthePowerPurchase'AgreeinentfortheHumeproject..ThecourtdeniedKamine'smotionforapreliminaryinjunctionongroundswhichincludedKamine'sfailuretoestablishalikelihoodofsuccess,onthemeritsofitsclaims.KaminehadfiledanoticeofappealfromadecisiondenyingKamine'smotionforapreliminaryinjunction.Kaminesubsequentlywithdrewtheappeal.TheCompanybelievesthecomplaintbyGECCisalsowithoutmeritandintendstodefendtheactidn.
Epo(rofAXBr(agpBlerir~'LY7Theman'agementofRochesterGasandElectricCorporationhaspreparedandisresponsiblefortheconsolidatedfinancialstatementsandrelatedfinancialinformationcontainedinthisAnnualReport.Managemen'tusesitsbestjudgementsandestimatestoerisurethatthefinancialstatementsreflectfairlythefinancialposition,resultsofoperationsandcashflowsoftheCompanyinaccor-'ancewithgenerallyacceptedaccountingprinciples.Managementmaintainsasystemofinternalaccouritingcontrolsoverthepreparationof'itsfinancialstatementsdesignedtoprovidereasonableassuranceastotheintegrityandreliabilityofthefinancial'records.Thissystemofinternalcontrolincludesdocumented,policiesandguidelinesandperiodicevalua-tionandtestingbythe,inteinalauditdepartmerit.TheCompany'sfinancialstatements.havebeen,examinedbyI'riceWaterhouseLLP,independentaccountants,inaccordancewithgenerally.acceptedauditingstandards.TheirexaminationincludesareviewoftheCompany'ssystemofinternalaccountingcontrolandsuchtestsandotherproceduresnecessarytoexpressanopinionastowhethertheCompany'sfinancialstatementsarepresented.fairlyinallmaterialrespectsinconformitywithgenerallyacceptedaccountingprinciplesThereportof-PriceWaterhouseLLPispresented'onpage36.TheAuditCommitteeoftheBoardofDirectorsis',responsibleforreviewingandmonitoringtheCompany'sfinancialreportingandaccountingpractices.TheAuditCommitfeemeets,regularlywithmanagementandtheindependentaccountantstoreviewauditing,internalcontrolandfinancial,"'reportingmatters.,TheindependentaccountantshavedirectaccesstotheAuditCommittee,withoutmanagementpresent,todiscusstheresultsoftheirexaminationsandtheiropinionsontheadequacyofinternalaccountingcontrolsandthequalityoffinancialreporting..Managementbelievesthat,atDecember31,1997,theCompanymaintainedaneffectivesystemofinternalcontroloverthepreparationofitspublishedfinancialstatements.rChairmanoftheBoard,-PresidentandSeniorVicePresident,CorporateServicesandChiefExecutiveOfficerChiefFinancialOfficerrrJanuary23,1998rnterimFinanci~/Dita-.IntheopinionoftheCompa'ny,thefollowingquarterlyinformationincludesalladjustments,consisting,ofnormalrecurringadjustments,necessaryforafairstatementoftheresultsofoperationsforsuchperiods.,Thevariationkinoperationsreportedonaquarterlybasisarearesultofthesea'sonalnatureoftheCompany'sbusinessandtheavailabilityofsurplus'electricity.Thesumo$thequarterlyearningspersharemaynotequalthefiscalyear'arningspershareduetorounding.t(ThousandsofDollars)aOperating.OperatingNetEarningsonQuarterEnded-RevenuesIncoineIncomeCommonStockEarningsperCommonShare.(indollars)Basic,DilutedRorhtrtrrGarartdBatt(toCorporattortDecember31,1997September30,1997June30,1997'.March31,1997December31,1996'September30,1996June30,1996March31,1996December31,1995t~September30,1995June30,1995March31,1995.-$271,039221,335229,419314,845$274,431234,843235,577309,195'270,518245,145219,546281,119'Reclassifiedforcomparativepurposes.'Includesrecogriitionof$28.7millionnet-of.taxII$24,40634,616'1,12555,194$33,04836,15923,11$56,866$32,32441(73829,45446,557$14,03121,72418,17241,433$22,22821,06211,73242,489$(387)26,9341,4,86130,&gassettlementadjustment.$12,72620,41916,68139,729$20,36219,1969,866.40,623$(2,253)25,06812,99528,653$0.320.520.421.02$0.520.49~0.251.05$(0.05)0.650.340.75'h$0.32.0.520.421.02$0.520.490.25~1.05$(0.05>'.0..0.7>.82 ImmOllEOC2B2V2OilgEarnings/Dividends,.Earningspershare-basic-.dilutedDividendspaidershare$2.30$2.32$1.69$2.30$2.32$1.69$1.80$1.80$1.80Numbeiofshares(000's)Weightedaverage-basic38I853-diluted38,909ActualnumberatDecember3138,862NumberofshareholdersatDecember31.31,33738,76238,76238,11338,11338,85138,453.,33,67535,356199719961995Shares/Shareholders'9971996'995TAxSTATUsQFCAsHDlvlDENDs.Cashdividendspaidin1997,1996and1995were100percenttaxableforfederalincometaxpurposes.DIVIDENDPOLICY.TheCompanyhaspaidcashdividendsquarterlyonitsCommonStockwithoutinterruptionsinceitbecamepubliclyheldin1949.TheleveloffuturecashdividendpaymentswillbedependentupontheCompany'sfutureearnings,itsfinancialrequirementsandotherfactors.TheCompany'sCertificateofIncorporationprovidesforthepaymentofdividends-onCommonStockoutofthesurplusnetprofits(retainedearnings)oftheCompany.QuarterlydividendsonCommonStockaregenerallypaidonthetwenty-fifthdayofJanuary,April,JulyandOctober.InJanuary1998,theCompanypaidacashdividendof$.45pershareonitsCommonStock.TheJanuary1998dividendpaymentisequivalentto$1.80onanannualbasis.CQMMQNSTocKTRADING.Sharesofthe.Company'sCommonStockaretradedontheNewYorkStockExchangeunderthesymbol"RGS."19971996'995CommonStock-PriceRangeHigh1stquarter2ndquarter"3rdquarter4thquarterLow,1stquarter2ndquarter3rdquarter'thquarterAtDecerrrber3120Ya21Yic24'c/sc34i/a18Ya1820i/a23Yi3423i!i21Na21s/s19i/a21i/i19Ns1817Ns19N2322Na24N24N20Ns20Ns2022s/s22i/a63 electea'Financial'Data(ThousandsofDollars)YearEndedDecember311997-1996'995'994'993'992ConsolidatedSummaryofOperationsOperatingRevenuesElectricGasElectricsalestootherutilitiesTotalOperatingRevenues'peratingExperrsesFuelExpensesFuelforelectricgenerationPurchasedelectricityGaspurchasedforresaleTotalFuelExpensesOperatingRevenuesLessFuelExpensesOtherOperatingExpensesOperationsexcludingfuelexpensesMaintenanceDepreciationandamortizationTaxes-local,stateandotherFederalincometax-current-deferredTotalOtherOperatingExpensesOperatingIncoureOther(Income)aridDeductionsAllowancefor,otherfundsusedduringconstructionFederalincometaxRegulatorydisallowancesPensionplancurtailmentOther,netTotalOther(income)andDeductionsInterestChargesLongtermdebtShorttermdebtOther,netAllowanceforborrowedfundsusedduringconstructionTotalInterestCharges"NetIncomeDividendsonPreferredStockat.RequiredRatesEarningsAlicabletoCoumronStockEarningsperCouunonShare-BasicEar7ungserCoumronShare-DiluteriCashDividendsDeclarederComuronShare'Reclassifiedforcomparativepurposes.$679,473336,3091,015,78220,8561,036,63847,66528,347196,579272,591764,047268,47446,635,116,522121,79669,812(4,533)618,706<145,341(351)(3,704)3,308(747)44,615476,629(563)5.0,72895,3605,805$89,555$2.30$2'.30$1.80$690,883346,2791,037,16216,8851,054,04740,93846,484202,297289,719764,328266,09447,063105,614126,86865,7573,744615,140149,188(684)(3,450)(712)(4,846)48,618219,307(1,423)56,52397,5117,465$90,046$2.32$2.32$1.80$696,582293,863990,44525,8831,016,32844719954,167167,762266,119750,209259,20749,22691,593133,89565,368847600,136150,073(585)(16,948)2668669,631~18,96453,0263988,658(2,901),59,18171,9287,465$64,463$1.69$1.69$1.80$658,148326,061984,20916,6051,000,814$638,955293,708932,66316,361949,024.276,353724,461241,67255,06987,461129,77835,65825,587575,225,1491236244,318704,706240,34261,69384,177,126,89233,45315,877562,434142,272(396)(16,259)60033,679(923)16,701(153)(9,827)1,9538,1792,1132,26553,6061,8084,758(2,012)58,16074,37556,4511,4875,2200,714)61,44478,5637,369$67,006$1.79$1.797,300$71,263$2.00$2.00$1.77$1.7344,961.45,87137,00231,563194,390166,884$608,26>261,724869,99125,541895,53248,37629,706141,291219,373676,159226,62462,72085,028124,25236,1017490542,215133,944(164)(4,18,2(6,155)(2,299)60,8101,9505,228(2,184)65,80470,4398,290$62,249$1.86$1.86$1.69R0ehesterGasandElectric CondensedConsolidatedBalanceSheet(ThousandsofDollars)AtDecember31'9971996TS95*'.1994"1993*1992'ssetsUtilityPlantLess:A'ccumulateddepreciationand'mortization\ConstructionworkinprogressNetutilityplantCurrentAssets,InvestmentinEnrpireDeferredDebitsTotalAssets$3,234,0771,714,3681/519,70974,0181,593,727242,371,.432,191$2,268,2891,569,0781,590,68169,7111,518,8781,549,225121,7251,660,3921,670,950250,461292,59638,879450,623..453,72652,361,476$2,456,151,$3,159,759$3,068,103$2,981,1511,423,098-1,558,053128,8601,686,913236,51938,560484,962$2,446,954$2,890,7991,335,083$2,798,5811,253,1171,545,46483,834',555,716112,75011668,466248,589~38,560488527J,629,298"209,6219,846181,434$2,444,142$2,030,199CapitalizationanftliatfititiesCapitalizationLongtermdebtPreferredstockredeemableatoptionofCompany,PreferredstoclcsubjecttomandatoryredemptionCommonshareholders''quity:CommonstockRetainedearningsTotalcommonshareholders'quityTotalCapitalizationLongTennLiabilities(DepartnrentofEnergy)CurrentLiabilities,DeferredCreditsanrlOtherLiabilitiesTotalCapitalizationandLiabilities'587,334"47,00035,000699,031109,313$646,95467,000i45,000696,01990,54096,726189,317504,56893,752158,217563,994$2,268,289$2,361,476808,344786,5591,477,6781,545,513,$716,23267,00055,000687/51870,330757,848',596,08090,8871824338586,846$2,456,151$735,178$.747,631,67,00055,00067,00042,000$6S8,88067,00054,000670,56974,566652,17275,126591,53266,968745,135727,298658,5001,602,3131,583,929.',438,38087,82689,804.94/602181,327234,530267,276575,488'35,879229,941.$2;446,954$2,444,'142-$2,030,199'Redassihedforcomparativepurposes.FinancialOata-AtDecember3119971996'995199419931992CapitalizationRatios(a)(percent),''ongterindebtPreferredstockCommonshareholders'quity-TotalBookValueperCofnnlonShare-YearEndRateofRetunronAverageCornnronEquity(b)(percent)EmbeddedCost.ofSeniorCapital(percent)LongtermdebtPreferredstockEffectiveFederalInconreTaxRate,(percent)DepreciationRate(percent)-Electric-GasInterestCoveragesBeforefederalincometaxes(incld.AFUDC)(excld.AFUDC)Afterfedtsralincometaxes(incld.AFUDC)(excld.AFUDC)InterestCoveragesExclutling'on-RecurringItems(c)'eforefederalincometaxes(incld.AFUDC)(excld.AFUDC)Afterfederalincometaxes(incld.AFUDC)(excld.AFUDC)43.05.251.8100.0$20.80,11.00''.325.80'9.23.122.604.064.042.862.844.064;042.862.8444.76.948.4100.0$20.2411.417336.26"40.42.992.603,823.792.68'2.653.823.79.2.682.6547.47.345:3100.0$19.718.377.38'=6.2640.72.762.592.952.902.162.103.6(83.612.622.5748.27.344.5100.0$19.788.927:4062637.72.692.62/2.982.942.24.2.203.55%512.612.57-49.4'.'.644.0100.0$19.70,10.257.366.69"'33.52.622.(302.872.842.242.213.033.002.352.3248.28.043.8100.0$18.929.94~7.916.9835.92.692.782.62"'.582/042.002.742.702:122.08(a)Indudescompany'slongteanliabilitytotheDepartmentofEnergy(DOE)lornudearwastedisposal.ExdudesDOElongtermliabilityforuraniumenrichmentdecommissioningandamountsdueorredeemablewithinone>m.(b)Thereturnonaveragecommonequityfor1995excludingeflectsolthe1995GasSettlementlsI2.IN6.TherateofreturnonaeragemmmonequityexcludingeffectsofretirementenhancementprogramsremgrrizedbytheCompanyIn1994and1993is11.9'ndI1.2N6,respectively.~(c)RemgnitlonbytheCorppanyIn1992ofdisallowedicestormmstsasapprondbysshePSChasbeenexdudedlrom1992coverages.Comragesfo?1994and1993exdudetheeffectsolretirementenhancenientprogramsrecognizedbytheCompanyduringeach)varandcertaingaspurchaseunderchargeswittenoffin1994and1993.CoveragesIn199Sexcludetheeconomiceffectofthe199SGasSettlement($44.2million,pretax).1865  
Epo(rofAXBr(agpBlerir~'LY7Theman'agementofRochesterGasandElectricCorporationhaspreparedandisresponsiblefortheconsolidatedfinancialstatementsandrelatedfinancialinformationcontainedinthisAnnualReport.Managemen'tusesitsbestjudgementsandestimatestoerisurethatthefinancialstatementsreflectfairlythefinancialposition,resultsofoperationsandcashflowsoftheCompanyinaccor-'ancewithgenerallyacceptedaccountingprinciples.Managementmaintainsasystemofinternalaccouritingcontrolsoverthepreparationof'itsfinancialstatementsdesignedtoprovidereasonableassuranceastotheintegrityandreliabilityofthefinancial'records.Thissystemofinternalcontrolincludesdocumented,policiesandguidelinesandperiodicevalua-tionandtestingbythe,inteinalauditdepartmerit.TheCompany'sfinancialstatements.havebeen,examinedbyI'riceWaterhouseLLP,independentaccountants,inaccordancewithgenerally.acceptedauditingstandards.TheirexaminationincludesareviewoftheCompany'ssystemofinternalaccountingcontrolandsuchtestsandotherproceduresnecessarytoexpressanopinionastowhethertheCompany'sfinancialstatementsarepresented.fairlyinallmaterialrespectsinconformitywithgenerallyacceptedaccountingprinciplesThereportof-PriceWaterhouseLLPispresented'onpage36.TheAuditCommitteeoftheBoardofDirectorsis',responsibleforreviewingandmonitoringtheCompany'sfinancialreportingandaccountingpractices.TheAuditCommitfeemeets,regularlywithmanagementandtheindependentaccountantstoreviewauditing,internalcontrolandfinancial,"'reportingmatters.,TheindependentaccountantshavedirectaccesstotheAuditCommittee,withoutmanagementpresent,todiscusstheresultsoftheirexaminationsandtheiropinionsontheadequacyofinternalaccountingcontrolsandthequalityoffinancialreporting..Managementbelievesthat,atDecember31,1997,theCompanymaintainedaneffectivesystemofinternalcontroloverthepreparationofitspublishedfinancialstatements.rChairmanoftheBoard,-PresidentandSeniorVicePresident,CorporateServicesandChiefExecutiveOfficerChiefFinancialOfficerrrJanuary23,1998rnterimFinanci~/Dita-.IntheopinionoftheCompa'ny,thefollowingquarterlyinformationincludesalladjustments,consisting,ofnormalrecurringadjustments,necessaryforafairstatementoftheresultsofoperationsforsuchperiods.,Thevariationkinoperationsreportedonaquarterlybasisarearesultofthesea'sonalnatureoftheCompany'sbusinessandtheavailabilityofsurplus'electricity.Thesumo$thequarterlyearningspersharemaynotequalthefiscalyear'arningspershareduetorounding.t(ThousandsofDollars)aOperating.OperatingNetEarningsonQuarterEnded-RevenuesIncoineIncomeCommonStockEarningsperCommonShare.(indollars)Basic,DilutedRorhtrtrrGarartdBatt(toCorporattortDecember31,1997September30,1997June30,1997'.March31,1997December31,1996'September30,1996June30,1996March31,1996December31,1995t~September30,1995June30,1995March31,1995.-$271,039221,335229,419314,845$274,431234,843235,577309,195'270,518245,145219,546281,119'Reclassifiedforcomparativepurposes.'Includesrecogriitionof$28.7millionnet-of.taxII$24,40634,616'1,12555,194$33,04836,15923,11$56,866$32,32441(73829,45446,557$14,03121,72418,17241,433$22,22821,06211,73242,489$(387)26,9341,4,86130,&gassettlementadjustment.$12,72620,41916,68139,729$20,36219,1969,866.40,623$(2,253)25,06812,99528,653$0.320.520.421.02$0.520.49~0.251.05$(0.05)0.650.340.75'h$0.32.0.520.421.02$0.520.490.25~1.05$(0.05>'.0..0.7>.82 ImmOllEOC2B2V2OilgEarnings/Dividends,.Earningspershare-basic-.dilutedDividendspaidershare$2.30$2.32$1.69$2.30$2.32$1.69$1.80$1.80$1.80Numbeiofshares(000's)Weightedaverage-basic38I853-diluted38,909ActualnumberatDecember3138,862NumberofshareholdersatDecember31.31,33738,76238,76238,11338,11338,85138,453.,33,67535,356199719961995Shares/Shareholders'9971996'995TAxSTATUsQFCAsHDlvlDENDs.Cashdividendspaidin1997,1996and1995were100percenttaxableforfederalincometaxpurposes.DIVIDENDPOLICY.TheCompanyhaspaidcashdividendsquarterlyonitsCommonStockwithoutinterruptionsinceitbecamepubliclyheldin1949.TheleveloffuturecashdividendpaymentswillbedependentupontheCompany'sfutureearnings,itsfinancialrequirementsandotherfactors.TheCompany'sCertificateofIncorporationprovidesforthepaymentofdividends-onCommonStockoutofthesurplusnetprofits(retainedearnings)oftheCompany.QuarterlydividendsonCommonStockaregenerallypaidonthetwenty-fifthdayofJanuary,April,JulyandOctober.InJanuary1998,theCompanypaidacashdividendof$.45pershareonitsCommonStock.TheJanuary1998dividendpaymentisequivalentto$1.80onanannualbasis.CQMMQNSTocKTRADING.Sharesofthe.Company'sCommonStockaretradedontheNewYorkStockExchangeunderthesymbol"RGS."19971996'995CommonStock-PriceRangeHigh1stquarter2ndquarter"3rdquarter4thquarterLow,1stquarter2ndquarter3rdquarter'thquarterAtDecerrrber3120Ya21Yic24'c/sc34i/a18Ya1820i/a23Yi3423i!i21Na21s/s19i/a21i/i19Ns1817Ns19N2322Na24N24N20Ns20Ns2022s/s22i/a63 electea'Financial'Data(ThousandsofDollars)YearEndedDecember311997-1996'995'994'993'992ConsolidatedSummaryofOperationsOperatingRevenuesElectricGasElectricsalestootherutilitiesTotalOperatingRevenues'peratingExperrsesFuelExpensesFuelforelectricgenerationPurchasedelectricityGaspurchasedforresaleTotalFuelExpensesOperatingRevenuesLessFuelExpensesOtherOperatingExpensesOperationsexcludingfuelexpensesMaintenanceDepreciationandamortizationTaxes-local,stateandotherFederalincometax-current-deferredTotalOtherOperatingExpensesOperatingIncoureOther(Income)aridDeductionsAllowancefor,otherfundsusedduringconstructionFederalincometaxRegulatorydisallowancesPensionplancurtailmentOther,netTotalOther(income)andDeductionsInterestChargesLongtermdebtShorttermdebtOther,netAllowanceforborrowedfundsusedduringconstructionTotalInterestCharges"NetIncomeDividendsonPreferredStockat.RequiredRatesEarningsAlicabletoCoumronStockEarningsperCouunonShare-BasicEar7ungserCoumronShare-DiluteriCashDividendsDeclarederComuronShare'Reclassifiedforcomparativepurposes.$679,473336,3091,015,78220,8561,036,63847,66528,347196,579272,591764,047268,47446,635,116,522121,79669,812(4,533)618,706<145,341(351)(3,704)3,308(747)44,615476,629(563)5.0,72895,3605,805$89,555$2.30$2'.30$1.80$690,883346,2791,037,16216,8851,054,04740,93846,484202,297289,719764,328266,09447,063105,614126,86865,7573,744615,140149,188(684)(3,450)(712)(4,846)48,618219,307(1,423)56,52397,5117,465$90,046$2.32$2.32$1.80$696,582293,863990,44525,8831,016,32844719954,167167,762266,119750,209259,20749,22691,593133,89565,368847600,136150,073(585)(16,948)2668669,631~18,96453,0263988,658(2,901),59,18171,9287,465$64,463$1.69$1.69$1.80$658,148326,061984,20916,6051,000,814$638,955293,708932,66316,361949,024.276,353724,461241,67255,06987,461129,77835,65825,587575,225,1491236244,318704,706240,34261,69384,177,126,89233,45315,877562,434142,272(396)(16,259)60033,679(923)16,701(153)(9,827)1,9538,1792,1132,26553,6061,8084,758(2,012)58,16074,37556,4511,4875,2200,714)61,44478,5637,369$67,006$1.79$1.797,300$71,263$2.00$2.00$1.77$1.7344,961.45,87137,00231,563194,390166,884$608,26>261,724869,99125,541895,53248,37629,706141,291219,373676,159226,62462,72085,028124,25236,1017490542,215133,944(164)(4,18,2(6,155)(2,299)60,8101,9505,228(2,184)65,80470,4398,290$62,249$1.86$1.86$1.69R0ehesterGasandElectric CondensedConsolidatedBalanceSheet(ThousandsofDollars)AtDecember31'9971996TS95*'.1994"1993*1992'ssetsUtilityPlantLess:A'ccumulateddepreciationand'mortization\ConstructionworkinprogressNetutilityplantCurrentAssets,InvestmentinEnrpireDeferredDebitsTotalAssets$3,234,0771,714,3681/519,70974,0181,593,727242,371,.432,191$2,268,2891,569,0781,590,68169,7111,518,8781,549,225121,7251,660,3921,670,950250,461292,59638,879450,623..453,72652,361,476$2,456,151,$3,159,759$3,068,103$2,981,1511,423,098-1,558,053128,8601,686,913236,51938,560484,962$2,446,954$2,890,7991,335,083$2,798,5811,253,1171,545,46483,834',555,716112,75011668,466248,589~38,560488527J,629,298"209,6219,846181,434$2,444,142$2,030,199CapitalizationanftliatfititiesCapitalizationLongtermdebtPreferredstockredeemableatoptionofCompany,PreferredstoclcsubjecttomandatoryredemptionCommonshareholders''quity:CommonstockRetainedearningsTotalcommonshareholders'quityTotalCapitalizationLongTennLiabilities(DepartnrentofEnergy)CurrentLiabilities,DeferredCreditsanrlOtherLiabilitiesTotalCapitalizationandLiabilities'587,334"47,00035,000699,031109,313$646,95467,000i45,000696,01990,54096,726189,317504,56893,752158,217563,994$2,268,289$2,361,476808,344786,5591,477,6781,545,513,$716,23267,00055,000687/51870,330757,848',596,08090,8871824338586,846$2,456,151$735,178$.747,631,67,00055,00067,00042,000$6S8,88067,00054,000670,56974,566652,17275,126591,53266,968745,135727,298658,5001,602,3131,583,929.',438,38087,82689,804.94/602181,327234,530267,276575,488'35,879229,941.$2;446,954$2,444,'142-$2,030,199'Redassihedforcomparativepurposes.FinancialOata-AtDecember3119971996'995199419931992CapitalizationRatios(a)(percent),''ongterindebtPreferredstockCommonshareholders'quity-TotalBookValueperCofnnlonShare-YearEndRateofRetunronAverageCornnronEquity(b)(percent)EmbeddedCost.ofSeniorCapital(percent)LongtermdebtPreferredstockEffectiveFederalInconreTaxRate,(percent)DepreciationRate(percent)-Electric-GasInterestCoveragesBeforefederalincometaxes(incld.AFUDC)(excld.AFUDC)Afterfedtsralincometaxes(incld.AFUDC)(excld.AFUDC)InterestCoveragesExclutling'on-RecurringItems(c)'eforefederalincometaxes(incld.AFUDC)(excld.AFUDC)Afterfederalincometaxes(incld.AFUDC)(excld.AFUDC)43.05.251.8100.0$20.80,11.00''.325.80'9.23.122.604.064.042.862.844.064;042.862.8444.76.948.4100.0$20.2411.417336.26"40.42.992.603,823.792.68'2.653.823.79.2.682.6547.47.345:3100.0$19.718.377.38'=6.2640.72.762.592.952.902.162.103.6(83.612.622.5748.27.344.5100.0$19.788.927:4062637.72.692.62/2.982.942.24.2.203.55%512.612.57-49.4'.'.644.0100.0$19.70,10.257.366.69"'33.52.622.(302.872.842.242.213.033.002.352.3248.28.043.8100.0$18.929.94~7.916.9835.92.692.782.62"'.582/042.002.742.702:122.08(a)Indudescompany'slongteanliabilitytotheDepartmentofEnergy(DOE)lornudearwastedisposal.ExdudesDOElongtermliabilityforuraniumenrichmentdecommissioningandamountsdueorredeemablewithinone>m.(b)Thereturnonaveragecommonequityfor1995excludingeflectsolthe1995GasSettlementlsI2.IN6.TherateofreturnonaeragemmmonequityexcludingeffectsofretirementenhancementprogramsremgrrizedbytheCompanyIn1994and1993is11.9'ndI1.2N6,respectively.~(c)RemgnitlonbytheCorppanyIn1992ofdisallowedicestormmstsasapprondbysshePSChasbeenexdudedlrom1992coverages.Comragesfo?1994and1993exdudetheeffectsolretirementenhancenientprogramsrecognizedbytheCompanyduringeach)varandcertaingaspurchaseunderchargeswittenoffin1994and1993.CoveragesIn199Sexcludetheeconomiceffectofthe199SGasSettlement($44.2million,pretax).1865  
~/~/eerr'lc'eppr'rmeEl8;,Sr2rlgrlcpYearEndedDecember3119971996"1g9591994;i1993'1992/Rochrstrrasan(tHcctricrporattonElectricRevenue(000's)-ResidentialCommercialIndustrial-MunicipalandotherElectricrevenuefromourcustomersOtherelectricutilitiesTotalelectricrevenueElectricExpense(000's)FuelusedinelectricgenerationPurchasedelectricity,OtheroperationMaintenanceDepreciationandamortizationTaxes-.local,stateandotherTotalelectricexpenseOperatingInconlebeforeFederalgncoineTaxFederalincometaxOperatingIncomefronlElectricOperations(000's)ElectricOperatingRatio%electricSales-KWH(000's)ResidentialCommercialIndustrialMunicipalandotherTotalcustomersalesOtherelectricutilitiesTotalelectricsales'lectricCustomersatDecember31ResidentialCommercialIndustrialMunicipalandotherTotalelectriccustomers/ElectricityGeneratedand.Purchased-KWH(000's),FossilNuclearHydroPumpedstorageLessenergyforpumpingOtherTotalgenerated-netPurchasedTotalelectricenergy'ystemNetCapability-KWatDecelnber31FossilNuclear-HydroOther~PurchasedTotalsystemnetcapabilityNetPeakLoad-KWAnnualLoadFactor-Net%*Reclassifiedforcomparativepurposes.$252,464210,643144,30572,061,$254,885215,763153,337.66,89847,66528,347205,05841,217~103,39591,11140,93846,484204,74641,42992,61595,010516,793521,222183,53661,837186,546'1,901$121,699$124,64546.02,139,064',118,9912,010,613537,0516,805,7191,218,79447.1"2,132,9022,061,6252,010,963520,8856,726,375994,8428,024,5137,721,217-308,90930,940,1,3002,824'07,18130,6201,3252,688343,973341,8411,664,9145,119,544227I867238(900(358,350)8906,893,7651,301,6361,512,5134,094,272248,990246,726(370,097)9365,733,3402,437,4338,195,4018,170,773526,000638,00047,00028,000375,000529,000638,00047,00028,000375,0001,614,0001,617,0001/4217000411305700056.1'L9679,473690,88320,856i16,S85700,329707,768$256,294215,696157c46467,128696,58225,883722;465$243,961$234,866206,545'96,100150,372148,08457,27059,905658,148638,95516,60516,361674,753655,31644,19054,167199,52444;03278,812102,380.523,10544,96137,002192,36047,29575,21197,919494,74845,871,'31,563192,74952,46472,32696,043491,016199,360180,00559,500,52,842164,)0043,8455139,8605127,1635120,45547.3I2,144,7182,064,8131,964I975531,3116,705,8171,484,19647.72,117,168',028,6111,860I833513,6756,520,2871,021,73349.22,123,277,1,986,1001,892,700504,9876,507,0644743,5888,190,0137,542,0207,250,652306,60130,4261,3472,711304,494302,21929,98429,6351,361.1,3822,670-2,638=,341,085338,509335,8741,631,9334,645,646171,886237,904(361,144)1,5656,327,7902,343,4841,478,12047527;178218,129247,5501(371,383)1,2456,100,8391,998,8821,520,9364,495,457199,239233,477(355,725)2,5596,095,9431,646,2448,671,2748,099,7217,742,187529,000640,00047,00028,000375,000532,000617,00047,00029,000375,000541,000620,00047,000'29,000~347,000"1,619,0001,600,0001,584,(O)1,425,000.1,374,0001,'333,00057.658.8,59.1$222,21187,262141,50757;288608,26725,541~633,808r48,37629,706183;118w53,71473,21394,841482;968150,84038,046$112,79449.72,084,7051938(1731,929,720503,3886,455,91,062,7.7,518,724300,34429,3391,3862,605333;6742;197,7574,191,035278,318226,391"(344,2458116,550,0671,389,8757,939,942~541,000617,00047,00029,000348,0001,582,1,252)62.~(BB 4asDepart'mentStatisticsYearEndedDecember31.19971996'995'.1994'993'992GasRevenue(000's)Residential~.ResidentialspaceheatingCommercialIndustrialMunicipalandotherTotalgasrevenueIGasExpense(000's)GaspurchasedforresaleOtheroperationMaintenanceDepreciationTaxes-lo'cal,stateandother~Totalgasexpense,OperatingInconiebeforeFederalIncomeTax,FederalincometaxOperatingIncomefromGasOperations(000's)GasOperatingRatio%,GasSales-Therins(000's)'ResidentialResidentialspaceheatingCommercial.IndustrialMunicipalTot'algassalesTransportationofcustomer-ownedgasTotalgassoldandtransportedGasCustoniersatDe'cember31'esidentialResidentialspaceheating-CommercialIndustrialMunicipal-TransportationTotalgascustomersGas-Z7iernis(000's)PurchaseriforresaleGasfromstorage-.Other"TotalgasavailableCostofgasperthermTotalDailyCapacity-ThernrsatDecember31'",Maximumdailythroughput-ThermsDegreeDays(CalendarMonth)'Fortheperiod.Percent-colder(warmer)thannormal"$5,852249,10151,8935,80023,663336,309196,57963,4165,41813,12730,685.309,225.27,0843,442$.23,642,78.95,773285,39565,6757,8287,331372,002166,060538,06216,265243,26419,118829*1,117836281,429274,430104i317=1,410380,15751.70e4,380,00047114,2906,9212.8$'6,010246,94552,0736,17535,076346,279$4,081230,93451,1176,6861,045293,863202,29761,3485,63412,99931,858314,136167,76259,6845,194'2,78131,514276,93532,143-7,60016,928',715$24,54377.86,455299,08570,5439,3348,086393,503167,779$10,21379.27,167280,76368,3809,5608,219'374,089146,149561,2823520,23816,718240,68519,045857961744-17,443238,26718,978879981655~.279,010277,203279,353122,8431,082237,728.152,8521,800403,278392,38052.30e45.80e4,480,0005,230,000.4,022,600'3,980,0006,9986,5353.9'3.0)$5,935215,97449,1157,088,47,949326,061194,39049,3127,77412,25031859295,58530,4768,403$22,07377.16,535283,03972,410-11,'42010,230,383,634136,372520,00617,836235,31318,742'05988'58274,342262,267134,8022,959'00,02850.00eS,625,0004,735,6906,699'0.6)$5,526201,12946;3216,36834,364$6,456186,71044,3956,28417,879'293,708261,724166,88447,5939,22911,85130,849~141,29143,5069,00611,81529,411266,406235,02927,3025,48526,6955;545$21,817$21,15076.2',871295,09378,88712,03012,18874.148,780287,62378,99612,43811,410405,069399,247124,436126,140529,505525,38718,389231,93718,6369241,001466271,35319,114228,096~18,37893281,010424267,954347,77876,3781,039360,49353,7571,061425,195415,31136.79e35.35e3,864',8507,044443,768,4706,9813.45,625,0004,485,000~4'Reclassifiedforcomparativepurposes."Methodfordeterminingdailycapacity,basionsystemscanacceptwithoutadehcieetworkanaiysisedoncurrentnncy.s,reilectsthemaximumdemandwhichthetransmis-874 WnvesrorrnyormartonI'4BusinessandFinancialinformation'.RGREbusinessandfinancial.informationisavailable'aroundthe,clockbyphoneandotitheInternet.RGREbyPhoneShareholderscanaccessRGRE-fromanywhereintheUnitedStatesorCanada,bycallingourautomatedinvestorcommuni-cationssystemat(800).724-8833."Youwillbegreetedwithabriefmessage,thengivenamenuofoptions.Amongotherthings,youcanchoosetohearRGRE'squarterlyeainingsannouncementorrequestacopy,includingfinancialstatements,byfaxormail.RGREontheIntentet>YDLIcanvisitRGREonlineathttp://wwwige.corn.Ourwebsitefeaturesthelatestnewsandfinancialinformationincluding.quarterlydivi'dendandearningsannouncements,financialstatements,consumerandproductinformation.-RG8rEfinancialresultswill,typicallybereleasedjustpriortothedividendpaymentdateeach,quarter.SecttrltyAnalystContactSecurityanalystsandothersreque'stinginformationaboutRGREshouldcontactThomasE..Newberry,DirectorofInvestorRelationsat(716)724-8091.rRG&Ewishestothankallofthosecontributors"whoandinformative/givingoftheirtime~,ondexpertise,providingtheirphotosforindusfon.CorporateAddressRochesterGasand.ElectricCorporation89EastAvenue--Rochester,NewYork14649(716)546-2700-ShareholderServicesShareholderswithquestionsaboutdividendpayments,addresschanges,missingcertificates,ownershipchangesandother'ccountinformationshould'contactourstocktransferagent:StockTransferAgentBankBoston,N.A.c(oBostonEquiServeP.O.Box8040Boston,MA02266-8040(800)736-3001.TnlecotsttnttnicattonDevtcefortheDeaf(TDD)(800)952-9245Dividends,Dlvl<lendPayntentDatesRGRE'sBoardofDirectorsmeets'quarterly'toconsider'thepaymentofdividends.Dividendson'CommonStockarenormallypaidonoraboutthe,25thofJanuary,April,JulyandOctober.DividendsonthePreferredStocksarepayable,asdeclared,onoraboutthe1stofMarch,June,SeptemberandDecember.DlvldendDirectDepositShareholderscanelecttohavetheirquarterlycashdividendselectronicallydepositedintotheirpersonal.bankaccounts.Depositsaremadeonthe'datethedivide'ndispayable.Ifyouwouldliketo~takeadvantageofthisservice,cantactourstockt'ransferagent.wentovtoftheirwaytobesoaccommodotinglendingtheirartifactsforphotography,dndrDlvtdendRelnvestntent'GgtEoffersadividendreinvestmentplanas,aservicetoCommonStockshareholderswhowishtopurchaseadditionalshares.Inadditiontofullorpartialreinvestmentofdividends,theplangivesshareholderstheopportunitytomakedirectcashInvestmentsrangingfrom$50to$5,000asoftenasonceamonth.'orfurtherinformation,contact~ourstocktransferagent.FirstNorlgageBondlrusteeBankersTrustCompanyc/oBTServicesTennesseeInc.~SecuritiesPaymentUnit',P.O.Box291207-Nashville,TN-37229-1207(800)735-7777-AnnualtjfeettngRGRE's1998annualmeetingofshareholderswillbeheldattheRochesterRiversideConventionCenteronWednesday,April15,1998at11am.,StocktjstingsRGRE'sCommonStoclcislisted,ontheNewYorkStockExchangeandisidentifiedby.thestocksymbolRGS.ThePreferredStockissuesaretradedontheover-the-countermarket..FormlgrKAnnualReportSharehoIdersmayobtainacopyoftheCompany's1997annualreportonForm10-K,asfiledwiththeSecuritiesandExchangeCommission,withoutcharge,bycalling(800)724-8833orwritingtoInvestorServices.~ITheinformolarchlvistsofRG&EDickBiedenbach,GinnaKimMagnvson,GinnaRickMeier,CorporateCommunicotions-"BillMeyers,OperationsDonSchlegel,Op'erotions,PaulSissonrLaborousry&InspectionServices<OperationsBettyWeis,MarketingJimWhite,OperationsSteveWright,OperationsLeaZimmermon,EmpbyeeEmeritusandformerRG&EKibette-,Pn'voteCollectorsondOurFriendsIntheCommunity:rDickBowman,Webster,NY:glassinsvbtorcollectionJohnA.o'ndJeonneWenrich,Avon,NY:KerosenelampondlightbulbcollectionDanielM.Barber,DepvtyDirector,Collections;EugeneLtmberger,CuratorofHistoryChairmonondStephenFentreis,Director,StrasenbvrghPlanetarium;theRochesterMuseum&ScienceCentermonHouse,internationalrahondFilmTheGeorgeEastMuseumofPhotogpyBavsch&LombCorporationXerox'orpprationOuropologiestooilthosewhoheededthecoilandcontributeditemsbutwereleftoutduerspocelimitations.yPrincipalPhotogrophy:KenRiemer'8 0270l78ctofg2ll2c8fgBoardAppointmentsMarkB.DrierMarkB.GrierisExecutiveVicePresidentforfinancialmanagementofthePrudentialInsuranceCompanyofAmerica.SusanR.HollldaySusanR.HollidayisPresidentandpublisheroftheRochesterBusinessJourna,aweeklybusinessnewspaper.BoardofDirectors(asofJanuary1,1998)WilliamBalderstonIII'gjFormerExecutiveVicePresident,TheChaseManhattanCorporationAngeloJ.ChlarellatJVicePresident,RochesterMidtown,L.L.C.AllanE.Dugan"gSeniorVicePresident,CorporateStrategicServices,XeroxCorporationMarkB.GrlerExecutiveVicePresident,FinancialManagement,ThePrudentialInsuranceCompanyofAmericaSusanR.HollldayPresidentandPublisher,RochesterBusinessJournalJayT.Holmes"JAttorneyandCommercialArbitratorSamuelT,Hubbard,Jr.t0PresidentandChiefExecutiveOfficer,TheAilingandCoryCompanyRogerW.Kober'ormerChairmanoftheBoardandChiefExecutiveOfficer,RochesterGasandElectricCorporationConstanceM.Mitchellt/FormerProgramDirector,IndustrialManagementCouncilofRochester,NewYork,Inc.CorneliusJ.Murphy"4SeniorVicePresident,GoodrichgtSherwoodCompanyCharlesI.PlossergDeanandJohnM.OlinDistinguishedProfessorofEconomicsandPublicPolicyoftheWilliamE.SimonGraduateSchoolofBusinessAdministration,UniversityofRochesterThomasS.Richards'hairmanoftheBoard,PresidentandChiefExecutiveOfficer,RochesterGasandElectricCorporation*MemberofExecutiveandFinanceCommitteetMemberofAuditCommitteeIMemberofCommitteeonManagement/hfemberofCommitteeonDirectorsOfficers(asofJanuary1,1998)ThomasS.RichardsChairmanoftheBoard,PresidentandChiefExecutiveOfficerAge54,YearsofService,6RobertE.SmithSeniorVicePresident,EnergyOperationsAge60,YearsofService,38J.BurtStokesSeniorVicePresident,CorporateServicesandChiefFinancialOfficerAge54,YearsofService,2MichaelT.TomainoSeniorVicePresidentandGeneralCounselAge60,YearsofService,0'atrfdC.HeillgmanVicePresidentandCorporateSecretaryAge57,YearsofService,34RobertC.MecredyVicePresident,NuclearOperationsAge52,YearsofService,26WilliamJ.ReddyControllerAge50,YearsofService,30MarkKeoghTreasurerAge52,YearsofService,26JessicaS.RalnesAuditorAge40,YearsofService,2ENERGETIX,Inc.MichaelJ.BotralinoPresidentAge42,YearsofService,IJohnA.HamiltonVicePresident,Operations'ge43,YearsofService,0'*WlllredJ.Schrouder,Jr.VicePresident,SalesAge56,YearsofService,35'ppointedSeniorVicePresidentandGeneralCounsel,effectiveOctober1,1997-EmployedMay19,1997  
~/~/eerr'lc'eppr'rmeEl8;,Sr2rlgrlcpYearEndedDecember3119971996"1g9591994;i1993'1992/Rochrstrrasan(tHcctricrporattonElectricRevenue(000's)-ResidentialCommercialIndustrial-MunicipalandotherElectricrevenuefromourcustomersOtherelectricutilitiesTotalelectricrevenueElectricExpense(000's)FuelusedinelectricgenerationPurchasedelectricity,OtheroperationMaintenanceDepreciationandamortizationTaxes-.local,stateandotherTotalelectricexpenseOperatingInconlebeforeFederalgncoineTaxFederalincometaxOperatingIncomefronlElectricOperations(000's)ElectricOperatingRatio%electricSales-KWH(000's)ResidentialCommercialIndustrialMunicipalandotherTotalcustomersalesOtherelectricutilitiesTotalelectricsales'lectricCustomersatDecember31ResidentialCommercialIndustrialMunicipalandotherTotalelectriccustomers/ElectricityGeneratedand.Purchased-KWH(000's),FossilNuclearHydroPumpedstorageLessenergyforpumpingOtherTotalgenerated-netPurchasedTotalelectricenergy'ystemNetCapability-KWatDecelnber31FossilNuclear-HydroOther~PurchasedTotalsystemnetcapabilityNetPeakLoad-KWAnnualLoadFactor-Net%*Reclassifiedforcomparativepurposes.$252,464210,643144,30572,061,$254,885215,763153,337.66,89847,66528,347205,05841,217~103,39591,11140,93846,484204,74641,42992,61595,010516,793521,222183,53661,837186,546'1,901$121,699$124,64546.02,139,064',118,9912,010,613537,0516,805,7191,218,79447.1"2,132,9022,061,6252,010,963520,8856,726,375994,8428,024,5137,721,217-308,90930,940,1,3002,824'07,18130,6201,3252,688343,973341,8411,664,9145,119,544227I867238(900(358,350)8906,893,7651,301,6361,512,5134,094,272248,990246,726(370,097)9365,733,3402,437,4338,195,4018,170,773526,000638,00047,00028,000375,000529,000638,00047,00028,000375,0001,614,0001,617,0001/4217000411305700056.1'L9679,473690,88320,856i16,S85700,329707,768$256,294215,696157c46467,128696,58225,883722;465$243,961$234,866206,545'96,100150,372148,08457,27059,905658,148638,95516,60516,361674,753655,31644,19054,167199,52444;03278,812102,380.523,10544,96137,002192,36047,29575,21197,919494,74845,871,'31,563192,74952,46472,32696,043491,016199,360180,00559,500,52,842164,)0043,8455139,8605127,1635120,45547.3I2,144,7182,064,8131,964I975531,3116,705,8171,484,19647.72,117,168',028,6111,860I833513,6756,520,2871,021,73349.22,123,277,1,986,1001,892,700504,9876,507,0644743,5888,190,0137,542,0207,250,652306,60130,4261,3472,711304,494302,21929,98429,6351,361.1,3822,670-2,638=,341,085338,509335,8741,631,9334,645,646171,886237,904(361,144)1,5656,327,7902,343,4841,478,12047527;178218,129247,5501(371,383)1,2456,100,8391,998,8821,520,9364,495,457199,239233,477(355,725)2,5596,095,9431,646,2448,671,2748,099,7217,742,187529,000640,00047,00028,000375,000532,000617,00047,00029,000375,000541,000620,00047,000'29,000~347,000"1,619,0001,600,0001,584,(O)1,425,000.1,374,0001,'333,00057.658.8,59.1$222,21187,262141,50757;288608,26725,541~633,808r48,37629,706183;118w53,71473,21394,841482;968150,84038,046$112,79449.72,084,7051938(1731,929,720503,3886,455,91,062,7.7,518,724300,34429,3391,3862,605333;6742;197,7574,191,035278,318226,391"(344,2458116,550,0671,389,8757,939,942~541,000617,00047,00029,000348,0001,582,1,252)62.~(BB 4asDepart'mentStatisticsYearEndedDecember31.19971996'995'.1994'993'992GasRevenue(000's)Residential~.ResidentialspaceheatingCommercialIndustrialMunicipalandotherTotalgasrevenueIGasExpense(000's)GaspurchasedforresaleOtheroperationMaintenanceDepreciationTaxes-lo'cal,stateandother~Totalgasexpense,OperatingInconiebeforeFederalIncomeTax,FederalincometaxOperatingIncomefromGasOperations(000's)GasOperatingRatio%,GasSales-Therins(000's)'ResidentialResidentialspaceheatingCommercial.IndustrialMunicipalTot'algassalesTransportationofcustomer-ownedgasTotalgassoldandtransportedGasCustoniersatDe'cember31'esidentialResidentialspaceheating-CommercialIndustrialMunicipal-TransportationTotalgascustomersGas-Z7iernis(000's)PurchaseriforresaleGasfromstorage-.Other"TotalgasavailableCostofgasperthermTotalDailyCapacity-ThernrsatDecember31'",Maximumdailythroughput-ThermsDegreeDays(CalendarMonth)'Fortheperiod.Percent-colder(warmer)thannormal"$5,852249,10151,8935,80023,663336,309196,57963,4165,41813,12730,685.309,225.27,0843,442$.23,642,78.95,773285,39565,6757,8287,331372,002166,060538,06216,265243,26419,118829*1,117836281,429274,430104i317=1,410380,15751.70e4,380,00047114,2906,9212.8$'6,010246,94552,0736,17535,076346,279$4,081230,93451,1176,6861,045293,863202,29761,3485,63412,99931,858314,136167,76259,6845,194'2,78131,514276,93532,143-7,60016,928',715$24,54377.86,455299,08570,5439,3348,086393,503167,779$10,21379.27,167280,76368,3809,5608,219'374,089146,149561,2823520,23816,718240,68519,045857961744-17,443238,26718,978879981655~.279,010277,203279,353122,8431,082237,728.152,8521,800403,278392,38052.30e45.80e4,480,0005,230,000.4,022,600'3,980,0006,9986,5353.9'3.0)$5,935215,97449,1157,088,47,949326,061194,39049,3127,77412,25031859295,58530,4768,403$22,07377.16,535283,03972,410-11,'42010,230,383,634136,372520,00617,836235,31318,742'05988'58274,342262,267134,8022,959'00,02850.00eS,625,0004,735,6906,699'0.6)$5,526201,12946;3216,36834,364$6,456186,71044,3956,28417,879'293,708261,724166,88447,5939,22911,85130,849~141,29143,5069,00611,81529,411266,406235,02927,3025,48526,6955;545$21,817$21,15076.2',871295,09378,88712,03012,18874.148,780287,62378,99612,43811,410405,069399,247124,436126,140529,505525,38718,389231,93718,6369241,001466271,35319,114228,096~18,37893281,010424267,954347,77876,3781,039360,49353,7571,061425,195415,31136.79e35.35e3,864',8507,044443,768,4706,9813.45,625,0004,485,000~4'Reclassifiedforcomparativepurposes."Methodfordeterminingdailycapacity,basionsystemscanacceptwithoutadehcieetworkanaiysisedoncurrentnncy.s,reilectsthemaximumdemandwhichthetransmis-874 WnvesrorrnyormartonI'4BusinessandFinancialinformation'.RGREbusinessandfinancial.informationisavailable'aroundthe,clockbyphoneandotitheInternet.RGREbyPhoneShareholderscanaccessRGRE-fromanywhereintheUnitedStatesorCanada,bycallingourautomatedinvestorcommuni-cationssystemat(800).724-8833."Youwillbegreetedwithabriefmessage,thengivenamenuofoptions.Amongotherthings,youcanchoosetohearRGRE'squarterlyeainingsannouncementorrequestacopy,includingfinancialstatements,byfaxormail.RGREontheIntentet>YDLIcanvisitRGREonlineathttp://wwwige.corn.Ourwebsitefeaturesthelatestnewsandfinancialinformationincluding.quarterlydivi'dendandearningsannouncements,financialstatements,consumerandproductinformation.-RG8rEfinancialresultswill,typicallybereleasedjustpriortothedividendpaymentdateeach,quarter.SecttrltyAnalystContactSecurityanalystsandothersreque'stinginformationaboutRGREshouldcontactThomasE..Newberry,DirectorofInvestorRelationsat(716)724-8091.rRG&Ewishestothankallofthosecontributors"whoandinformative/givingoftheirtime~,ondexpertise,providingtheirphotosforindusfon.CorporateAddressRochesterGasand.ElectricCorporation89EastAvenue--Rochester,NewYork14649(716)546-2700-ShareholderServicesShareholderswithquestionsaboutdividendpayments,addresschanges,missingcertificates,ownershipchangesandother'ccountinformationshould'contactourstocktransferagent:StockTransferAgentBankBoston,N.A.c(oBostonEquiServeP.O.Box8040Boston,MA02266-8040(800)736-3001.TnlecotsttnttnicattonDevtcefortheDeaf(TDD)(800)952-9245Dividends,Dlvl<lendPayntentDatesRGRE'sBoardofDirectorsmeets'quarterly'toconsider'thepaymentofdividends.Dividendson'CommonStockarenormallypaidonoraboutthe,25thofJanuary,April,JulyandOctober.DividendsonthePreferredStocksarepayable,asdeclared,onoraboutthe1stofMarch,June,SeptemberandDecember.DlvldendDirectDepositShareholderscanelecttohavetheirquarterlycashdividendselectronicallydepositedintotheirpersonal.bankaccounts.Depositsaremadeonthe'datethedivide'ndispayable.Ifyouwouldliketo~takeadvantageofthisservice,cantactourstockt'ransferagent.wentovtoftheirwaytobesoaccommodotinglendingtheirartifactsforphotography,dndrDlvtdendRelnvestntent'GgtEoffersadividendreinvestmentplanas,aservicetoCommonStockshareholderswhowishtopurchaseadditionalshares.Inadditiontofullorpartialreinvestmentofdividends,theplangivesshareholderstheopportunitytomakedirectcashInvestmentsrangingfrom$50to$5,000asoftenasonceamonth.'orfurtherinformation,contact~ourstocktransferagent.FirstNorlgageBondlrusteeBankersTrustCompanyc/oBTServicesTennesseeInc.~SecuritiesPaymentUnit',P.O.Box291207-Nashville,TN-37229-1207(800)735-7777-AnnualtjfeettngRGRE's1998annualmeetingofshareholderswillbeheldattheRochesterRiversideConventionCenteronWednesday,April15,1998at11am.,StocktjstingsRGRE'sCommonStoclcislisted,ontheNewYorkStockExchangeandisidentifiedby.thestocksymbolRGS.ThePreferredStockissuesaretradedontheover-the-countermarket..FormlgrKAnnualReportSharehoIdersmayobtainacopyoftheCompany's1997annualreportonForm10-K,asfiledwiththeSecuritiesandExchangeCommission,withoutcharge,bycalling(800)724-8833orwritingtoInvestorServices.~ITheinformolarchlvistsofRG&EDickBiedenbach,GinnaKimMagnvson,GinnaRickMeier,CorporateCommunicotions-"BillMeyers,OperationsDonSchlegel,Op'erotions,PaulSissonrLaborousry&InspectionServices<OperationsBettyWeis,MarketingJimWhite,OperationsSteveWright,OperationsLeaZimmermon,EmpbyeeEmeritusandformerRG&EKibette-,Pn'voteCollectorsondOurFriendsIntheCommunity:rDickBowman,Webster,NY:glassinsvbtorcollectionJohnA.o'ndJeonneWenrich,Avon,NY:KerosenelampondlightbulbcollectionDanielM.Barber,DepvtyDirector,Collections;EugeneLtmberger,CuratorofHistoryChairmonondStephenFentreis,Director,StrasenbvrghPlanetarium;theRochesterMuseum&ScienceCentermonHouse,internationalrahondFilmTheGeorgeEastMuseumofPhotogpyBavsch&LombCorporationXerox'orpprationOuropologiestooilthosewhoheededthecoilandcontributeditemsbutwereleftoutduerspocelimitations.yPrincipalPhotogrophy:KenRiemer'8 0270l78ctofg2ll2c8fgBoardAppointmentsMarkB.DrierMarkB.GrierisExecutiveVicePresidentforfinancialmanagementofthePrudentialInsuranceCompanyofAmerica.SusanR.HollldaySusanR.HollidayisPresidentandpublisheroftheRochesterBusinessJourna,aweeklybusinessnewspaper.BoardofDirectors(asofJanuary1,1998)WilliamBalderstonIII'gjFormerExecutiveVicePresident,TheChaseManhattanCorporationAngeloJ.ChlarellatJVicePresident,RochesterMidtown,L.L.C.AllanE.Dugan"gSeniorVicePresident,CorporateStrategicServices,XeroxCorporationMarkB.GrlerExecutiveVicePresident,FinancialManagement,ThePrudentialInsuranceCompanyofAmericaSusanR.HollldayPresidentandPublisher,RochesterBusinessJournalJayT.Holmes"JAttorneyandCommercialArbitratorSamuelT,Hubbard,Jr.t0PresidentandChiefExecutiveOfficer,TheAilingandCoryCompanyRogerW.Kober'ormerChairmanoftheBoardandChiefExecutiveOfficer,RochesterGasandElectricCorporationConstanceM.Mitchellt/FormerProgramDirector,IndustrialManagementCouncilofRochester,NewYork,Inc.CorneliusJ.Murphy"4SeniorVicePresident,GoodrichgtSherwoodCompanyCharlesI.PlossergDeanandJohnM.OlinDistinguishedProfessorofEconomicsandPublicPolicyoftheWilliamE.SimonGraduateSchoolofBusinessAdministration,UniversityofRochesterThomasS.Richards'hairmanoftheBoard,PresidentandChiefExecutiveOfficer,RochesterGasandElectricCorporation*MemberofExecutiveandFinanceCommitteetMemberofAuditCommitteeIMemberofCommitteeonManagement/hfemberofCommitteeonDirectorsOfficers(asofJanuary1,1998)ThomasS.RichardsChairmanoftheBoard,PresidentandChiefExecutiveOfficerAge54,YearsofService,6RobertE.SmithSeniorVicePresident,EnergyOperationsAge60,YearsofService,38J.BurtStokesSeniorVicePresident,CorporateServicesandChiefFinancialOfficerAge54,YearsofService,2MichaelT.TomainoSeniorVicePresidentandGeneralCounselAge60,YearsofService,0'atrfdC.HeillgmanVicePresidentandCorporateSecretaryAge57,YearsofService,34RobertC.MecredyVicePresident,NuclearOperationsAge52,YearsofService,26WilliamJ.ReddyControllerAge50,YearsofService,30MarkKeoghTreasurerAge52,YearsofService,26JessicaS.RalnesAuditorAge40,YearsofService,2ENERGETIX,Inc.MichaelJ.BotralinoPresidentAge42,YearsofService,IJohnA.HamiltonVicePresident,Operations'ge43,YearsofService,0'*WlllredJ.Schrouder,Jr.VicePresident,SalesAge56,YearsofService,35'ppointedSeniorVicePresidentandGeneralCounsel,effectiveOctober1,1997-EmployedMay19,1997}}
 
}}

Revision as of 22:45, 18 May 2018

Rg&E Annual 1997 Rept.
ML17059C113
Person / Time
Site: Nine Mile Point  Constellation icon.png
Issue date: 12/31/1997
From: RICHARDS T S, STOKES J B
ROCHESTER GAS & ELECTRIC CORP.
To:
Shared Package
ML17059C114 List:
References
NUDOCS 9807070348
Download: ML17059C113 (74)
v • d • e


Text

"rpSRRVgCggg'f'fHEBEG"G'I~1f~1H')t')%'i.,II'>'.t~,,~<J)p'))4/l~l)I~~y~~~~~~ll~)I"~"GaseElectricSerVice+cansComfortoEconomyoConvenienceSatisfactionpitaka CfRochesterGasandElectricCorporationANNUAL/QQPREPOR'r/a~&ggfEHljmllg~pn~(r.II"Y((/'];)'.I(l.rC-y/IN9807070348980630PDRADOCK05000220PDRLlT'~avxtc~Pl1"rro~~tJti"KYY'>~A>>~'-J.>/bi>':EIt'.lpflWT~I0i I~8ESar'viceArena/SupinelyRochester

~~~~~~r~~'I~~i8~~~e~~~~~~t~~I~jgsourceof1997revenueDollar'seof1997revenueDollar'urchasedGas-19cResidential-49e(25eElectric,24eGas)Commerdal-25e(20cHectdc,SeGas)Industrial-15e(14eHectric,leGas)Other-9e(7cHectric,2eGas)SalestoOtherUtilities~~~~(2eHectrlc)Taxes-18eOtherOperations-18eWagesgrBenefits-13cDepreciationStAmortlration-IleDistdends8.ReinmstedEamis-9cHectricfuelSrI'ur.chasedHectridty-7eInterest-Se 19971996ChangeFinanCialData(DollarslnThousands)Operatingrevenues:ElectricGasOperatingexpensesOperatingincomeNetincomeEarningsapplicabletocommonstockRateofreturnonaveragecommonequityCommonStockDataWeightedaveragenumberofsharesOutStanding(thousands)-Basic-DilutedPercommonshare:Earnings-BasicEarnings-DilutedDividendsPaidBookValue(yearend)Year-endmarketpriceNumberofCommonStockShareholdersatDecember31OperatingDataSales(thousands)Kilowatt-hourstocustomersKilowatt-hourstootherutilitiesThermsofgassoldandtransportedConstructionexpenditures,lessallowancefOrfundSuSedduringCOnStruCtiOn(thousands)Employees(yearend)$700,329$336,309$891,297$145,341$95,360$89,55511.00%38,85338,909$2.30$2.30$1.80$20.80$34.00313376,805,7191,218,794538,062$84,0681,958$707,768$346,279$904,859$149,188$97,511$90,04611.41%38,76238,762$2.32$2.32$1.80$20.24$19.1333,6756,726,375994,842561,282$114,2741,960(1)(3)(1)(3)(2)(1)(4)(1)(1)378(7)123(4)(26)'P.,j$)ljtu"ititt9$L..==~+~rIr"gW=..-..-~EarlyRochesterRoitwoyoedUghtcrewoothejob.0~r~4 syourCompanyentersits150thyearofservicetoourcustomers,IamprivilegedtobeginmyserviceasChairmanandChiefExecutive05cer,Iamhonoredbythecon6dencethattheBoardhasexpressedinmeandcommittedtocontinuetoearnthatconfidence.Ihavetheoppor-tunityinmyfirstannualreporttoyoutodiscusswhatwasamosteventfulyearand,inmanyrespects,aturningpointinthehistoryoftheCompany.Deregulation-TheLongerTennGoodNewsSurelythemostsignificantamongthemanyeventshastobetheregulatoryapprovalofournegotiatedsettlementagreementthatspellsoutjusthowwewillmakethetransitiontocompetitionoverthenextfiveyears.Theagreementisacomprehensiveplanthatwillfundamentallychangethewayelec-tricityispricedanddeliveredtoourcustomers.Overafive-yearphase-instartingnextsummer,thetermsoftheagreementwilllowerelectricratesforcustomers,bolstereconomic'~'/~derldevelopmentandjobgrowth,andbeginthetransitiontoacompetitiveelectricmarket.RGREisevolvingintoseveralregulatedbusinesssegments;ageneratingsegment,adistributionsegment,andacustomerservicessegment.Inaddition,wehaves<<<C+,,,EST1834j,.',iv)';;y/ffe$a~dgtpgjkj)(~IOjjOformedaseparate,unregulatedenergyservicessubsidiarycalledENERGETIX,andsymbolizedbythisexclamationpointI,thatwillcompetewithothersimilarcompanies.Underoursettlementagreement:1.Residentialelectricpriceswillcontinuetobereducedanaverageof10percentfrom1996throughtheyear2002.2.Ratesforcommercialandindustrialcustomers-thearea'smajoremployers-willcontinuetobereducedanaverageof15percentfrom1996through2002.3.Residentialcustomerswillnotpayforthereductionsforbusinesscustomers.4.Customers'lectricdemandwillbeincreasinglyopentocompetingelectricprovidersoverafour-yearphase-inperiodwhere,by2001,allofRGRE'selectricloadwillbeavailableforcompe-tition.Wecannotpredicthowrapidlypotentialcompetitorswillwanttoenterthelocalmarket.However,astheyarrive,wewilldelivertheirenergytocustomersatratesspecifiedinournewdistributiontariff.Lf.i'.)HobbsKeroseneLampcirca1870CourtesyofJeanneWenrich.

OneofthefirstpairsofeyeglassesmanufacturedbyBausch&Lotnb,c.1900.CourtesyofBausch8tombCorp.5.Throughoutthisperiodoftimewewillcontinuetoretainourobligationtoprovideregulatedervicestoallcustomerswhocannotordonotooseanothersupplier.Weprovidevitalervicesthatmustbeavailable,irrespectiveofthepaceofthedevelopmentofacompetitivesupplysystem.6.RGREwillmaintainandevenimproveitshighlevelsofenergyreliability,systemmaintenanceandemergencyresponse.7.Allofourgenerationwillinitiallyremainaspartoftheregulatedsystem.Althoughwearenotrequiredtodivestourfossil-fueledelectricgeneration,itwillhavetocompeteinthewhole-salemarketplacetorecoveritsongoingcosts.OurnucleargenerationwillremainpartoftheregulatedsystemwhileweworkwiththeotherutilitiesandthePublicServiceCommissiontoarriveatastatewidedeterminationoftheroleitwillplayinthenewsystem.S.TheagreementgivesRGREtheopportunitytorecoverpastinvestmentswhichwereapprovedbystateregulatorstomeetourcustomers'nergyrequirements,butmaynolongerbeeconomi-callycompetitiveinthenewunregulatedmarket-place.Thesearethesocalled"strandedcosts."9.Last,andcertainlynotleast,westruckanagree-mentthatoffersfairnesstoyou,ourshareholders.Wewillhavetheopportunitytoachievearateofreturnonequityof11.5%,andtheopportunitytoshareanyearningsabovethatlevelwithcustomers.TheChallengesandOpportunitiesToimplementthesettlementandsecureRGRE'splaceinthederegulatedgasandelectricbusiness,wemust:~Keepthelightsonandthegasflowingforeveryoneforlowercost.~Createthesystemsandfacilitiesforanewcompetitivesystem.~Developaprofitable,growingunregulatedenergybusiness.~Maintainourfinancialperformance.~Balancethemall.Thekeyfortheimmediatefutureisbalance.Unlikeotherindustriesthathavegonethroughderegulationandrestructuring,wecannotabandontheoldobligationstopursuenewopportunity.Forsometimewewillberunningtwosystems;atraditionalregulatedsystemonwhichpeoplecandependandacompetitivesystemthatwilldevelopatanuncertainpace.Certainlythisbalanceisachallenge,butitisalsofullofopportunity.Webelievethatweareuptoitandthatourrecentperformanceprovesit,Glassinsulators;CobaltblueporcelainmadebyVictorInsulator,Vic.1945;HemingwayPetticoat,1893;tallTatunrNo.l,c.1920;Hemingway"MickeyMouse"c.1900CourtesyofDickBowman.OriginalKodakCamera.CourtesyofGeorgeEastmanHouse.

nti!feI'r.>Ene~retfxIsaidwehaveformedENERGETIIXtocompeteheadtoheadwithotherenergyprovidersintheopenmarketplace.ThisisperhapsthemoststrikindeartureWehavebeenabletomaintainourfinancialperformance,despitedecreasedrevenuesresultingfromratereductions,becauseofthecontinuedoutstandingperformancebyourfineemployees.Despiteasubstantialdeclineintheworkforcethroughearlyretirementprogramsoverthelastseveralyears,theyhaveimprovedourperformanceandreducedouroperatingcosts.AnothermajordecisionreachedbytheBoardwastorepurchaseupto4.5millionsharesofourcom-monstockoverthenextthreeyears.Thereductionofoutstandingshareswillincreasethevalueofremainingshares,eliminatetheneedandcostofpayingoutadividendonthoserepurchasedsharesandwilllikelyreduceouroverallcostofcapital.AndtheMarketPerformanceShowstheResultsIn1997therewasasubstantialimprovementofourcommonstockmarketperformance.Thestockpriwentfrom$19.125pershareto$34byyear'senThatresultedinatotalannualrateofreturn,incingdividends,of92percent,thebestperformanceamongthe93investor-ownedelectricutilitiesthatcomprisetheEdisonElectricInstituteIndex.Whilewehesitatetoclaimcompletecreditfortheimprove-mentthatisinfluencedbymanyforcesinthemarketplace,webelieveourfinancialperformanceandbalancedcompetitivesettlementagreementplayedarole.Thesefactorsallowedustoannounceplansforthestockrepurchaseprogramandmaintaintheannualdividendwhichaddstrengthtothefoundationwearebuildinginthemarketplace.EarningsandDividends-TheShorterTermGoodNewsAswehavealreadyannounced,yourBoardofDirectorsvotedinDecembertoretainthecurrentdividendof$1.80ayear.WhilethecontinuationofthedividendwillbereviewedeachquarterbytheBoard,thisactionmadeaforcefulstatementinlightofsomefinancialcommunityspeculationthatRGREmighthavetofollowsomeotherutilitiesandreduceitsdividend.LeadershipOneofthereasonsRGREhasbeenaroundsolongwithsuperiorreliability,serviceandastrongcommunitypresencehasbeenthepeoplewhohaveledthecompanyasCEO.ThelistofRGRETheCopierModelA,thefirstconuner-cialxerographicprocess,wasamrouncedin1949.Thismamialdeviceprovidedtheknowledgeandrevenueswithwlrichtodevelopautomaticxerography.'1CourtesyofXeroxCorporotion.c1848RochesterGosUgiformed.1834Rochester,NYfounded.NamedoherNothoniolRochester.~lgPfromourtraditionalwayofdoingbusiness.OursettlementagreementallowsENERGETIXtocompetebothinandoutsideRochesterGasLightofourserviceterritorywhileCompany'sfirstcustomersidentifyingitselfasanarelenstreetlampsandRGREsubsidiary.Weexpectlightingfor80homesandENERGETIIXnotjuSttObusinessesnearitsMumfordreplacethetraditionalretail(Andrews)Streetgasplant.utilityserviceinthesaleofTheOsbunihome(above)electricityandgas,buttowasthefirsthomeininDecentber1848relatedProductsandservices.ENERGETllXpresentsourgreatestopportunityforgrowth.Thisissomethingaboutwhichyoucanexpecttohearmorethroughout,thecomingyear.

executivesoverthelast150yearsislonganddistinguished.recentlyaddedtothatlistisRogerKober.Rogerretiredthisyearafter32yearswiththecompany,risingthroughtheranksinavarietyofpositionsandresponsibilities.Hebecamechairman,presidentandCEOin1992andledthecompanythroughtherestructuringnecessarytopositionitselftocompeteinaless-regu-latedfuture.IndollarsanddeedsheenhancedRGRE'scommit-menttothecommunity.Becauseofhisforesightandleadershipwearepoisedtosucceedinachangingworld.Althoughretired,we'lstillhavethebenefitofRoger'sadviceandcounselasamemberofourBoardofDirectors.~hu'p~~150Years-JustthebeginningThisyear,1998,theyearinwhichthewaywedobusinessbeginstakingadramaticdeparturefromthepast,comesexactly150yearsafterwefirstwentintobusiness.Itwas1848whenRochesterGasLightCompanyfirstsentmanufacturedgastostreetlightsandafewdozenhomesandbusinessesindowntownRochester-thenaflourmillingboomtownof32,000peopleclusteredalongthepowerfulfallsonGeneseeRiver.We'ebeenapartoftommunityjustaboutaslongasit'sbeenaround.ghoutourhistorywehavehadmuchtobethank-or;nottheleastofwhichismanyloyalandsupport-ivecustomers,employeesandstockholders.Weneedtopausetothankthem,evenaswelooktothefuture.Whilewewillbeadifferentcompanyinmanyrespects,weintendtohonorourpastandbuildonthestrengththatourhistoryhasprovided.Weinviteyoutoreviewsomeofthehistoryinthepagesthatfollow.Thelast150yearshavebeenimportant,butweseethemas"JusttheBeginning."IIIIIIIIIII'I,IrIlllI~Jr5ThomasS.RichardsChairnianoftheBoard,PresidentandChiefExecutiveOfficerJanuary30,1998z.QClai"cs=ana~gp,R,wc185.hnJacobBauschopensalittleeyeglassshopinRochester'sReynoldsArcadebuilding.1855HenryLombpartnerswithBousch-Bovsch&Lomb.1859CharlesDarwinpublishes1861TheOriginofSpecies.Ft.SumterisfiredvponCivilWar.Rochesterhas2,413gascustomersand657streetlamps.

WoodenpipeswrappedinCivilWarblanketsandsoakedinpitchwasRG&E'sfirstattempttotransportnaturalgastoRochester.Tliepipesleaked,andtheprojectfailed.Todaythousandsofmilesofsteelandplasticpipedelivergastoourcustoniers.r)lr'"-"IiRGREHistoryheyearof1848wasastirringoneintheyoungcityofRochester,NewYork,ThebustlingtownontheGeneseeRiverandtheErieCanalhadalreadybecometheforemostHourmillingcenterinthecountry.Ithadapopulationof32,000,wasabusycanalportandg$>>y>>waslocatedontworail-roads.Conversionfromwhaleoiltogasstreetlampshadbegun.-TheRG&EStoryTheRG&Eblacksmithshopwasimportanttooperationsintheearlydays.J>I's.cINaturalgastablelamp,c.1890-1910,collectionoftheRochesterMuseuni&ScienceCenter..alLGAs.-1JL'f'r"Customerservicefieldrepresentativesoftheearlydaysreadyfortheirrounds.TheCentralOilgasStove,patentedin1891,fromthecollectionoftlieRocliesterMuseum&ScienceCenter.sr1863PresidentAbrahamLincoln1865delivershisGettysburgAddress.7heCivilsandtGeneseeRiverfloodsitsdousingdowntownRocheandthegasplantsandrn

,jIIPIIfnIIfNtEarlyGeneralElectnccrankkeycurveddrawingVoltmeter.Smith'sArcadecornerofWestMainCkExchangeStreetsin1877.stts~~>>~~I'-.Earlykerosenetableandstreetlamps.TheftrstGasPlantattheintersectionofMumfordStreet(nowAndrewsStreet)andtheGeneseeRiverin1848.TheCompanyhad150customersatthetinte.Currently,wehave280,000gascustoniers.:II1886ITarasabyproductisfirstsoldtocustomersandtheCompanyincreasesitsstockdividendforthefirsttime.1870Anattempttobringnaturalgasviawoodenpipes28milesfromneighboringWestBloomfieldfails.1872CitizensGasCompanyisformedatEastStationonthebanksoftheGeneseeRiver.1876PhiladelphiaCentennialExpo.-promotesgasforcookingversusoil,coalandwood,Rochester'sgascompaniesfollow.7 1879ThomasEdisoninventstheincandescentlightbulb.1879ElectricitycomestoRochesterasRochesterElectricUghtCo.AdynamopowerstenarofightstreetlampsandlightingforReynoldsArcadeBuilding.1880MunicipalGaslightCo.isformed.1880RochesterbankclerkGeorgeEastmangetsaU.S.patentonaplatecoatingmachine.1881fff,;>>EhTt~,r1leRochester'sfirstinovietheatre,1889RGBc.EHistoryhedawnofthe"Elect'ge"comestoRoche'..TheGeneseeRiverprovid-edthefirststepinthegenera-tionofelectricitybyfurnishingthewaterpowertoanimatethefirstgenerators.Itwasthecatalystforindus-trialadvancesandmodernlife.TheBrushUghtCo.isformedonddistributesalternatingcurrentoverseveralmilesofwiretoRochesterfactories.1881Electricstreetlampsbegintorepbce905astheBrushCo.setsvphydroplantatUpperFalbontheGeneseetopowerstreetlights.1881GeorgeEastmanestablishestheEastmanDryPlateCo.onStateSl.inRochester.)886EdisonElectricilluminatingCompanyopensasteomandelectricpbntdowntownatthecurrentWorMemorialSite.ThefirsttelephonecompanysetsvpinRochester.RochesterRaihvay&LightCompanyoriginalhydroplant,Station4-1880.>>>>Ifomson/G.E.WaffhourMeter-1888vughtt'>>iti>>~l)T>>>>g>>>>>>l:>>Inviv!uiri'iinW'e~>(a>>z>>(r1887incandescentbmpsbegintoreplacearclights.1888Ayovngman,ThomosH.Yawger,takesojobwithEdisonElectricotthesteampbntwhereheworked12hourso'doy,7daysaweek.TrustedtoolsofdietradeusedbytheElectricalStandardsLab.TheseWeston1888VoltmeterandMillivoltmetersstilloperatetodaywithinmanufacturedspecificationsof.5%accuracy.p>>lj1888EdisonElectricilluminatingbecomesthefirsttometerelectricvse.GeorgeEastmonmarketshisfirstrollfilmcameraondcallsitKodak.1889RochesterGosUghtCo.,CitizensGasandMunicipalGascombineasRochesterGasCo.1891ElectriclightsareinstalledoBausch8lomb'smanufacturingcomplexonSt.PaulStreet.

Anemployeedeliveringntetersintheearly1900'sRGsc.EHistoryheformationofRochesterRailwayRLightCo.markedtherealbeginningofRGB.Forthefirsttimeasingleorganiza-tionhadtheresponsibilityofsupplyingthewholecommunitywithelectricity,gasandsteamr~,testonVoltmeter-1888.eh'/sJ/r/*1AnearlyRochesterRailway&LightCo.gasdepartmentcrewinstallsgaspipelinewithitsmanuallydrawnequipntentcart.A1909,"Judd"electriclaundryntachine,oneofthenew-fangledapplianceswhichsavedtimeandfnfadehomelifeeasier.CollectionoftheRochesterMuseum&ScienceCenter.iftfCetrrs7)e~A",~ggg~rurss>trDeliveryofcokeintheearly1900'sTypeKPotentiometer&AnfmeterfromthetunfofthecenturyusedbytheElectricalStandards,,IRQggy-"~!!IVReadyforduty.RG&EemployeesposetvithtlieirimpressivefleetofvehiclesattheAndrewsStreetfacility-1932.19.RGrEinstalb97cokeovensatoldEastStationandproducesdryquenchedcokeforresafe-thefirsttodosointheU.S.1929StockMarketcrashes.1930RG8Ehas114,000elec-triccustomers,103,000gascustomersand349steamcustomers.1935Thefirstof8steamboilersgoesonlineat"lheOldHouse,"onedaytobecalled8eebeeStation.11 DDD~uskoelrlCStsrorstnQ~Arov~Aloil.i/Il'p'ljrooo~~~oololt,~s31~illW~,l'0orrowrv1AooooWorow~oIIAOj~oAH*ow\pc,*StangthesteampressuremetersattheBoosterHouseStationWhatOnePoundofFatWillDoSaveeverydropoffatyoucanspareandturnitovertoyourbutchertobepassedalongforconversionintoexplosivesthatwilldefeattheenemyandintomedicinethatwillsavelives.Eachpoundoffatwillmakeenoughsmallpoxinoculationstoimmunize98soldiers...orproduce8cello.phanegasmasks...orprovide10roundsofammunitionfora50-calibremachinegun.RccjorrrtltOASrreLCclttjcecole~ooAtr~aa~.~o~r~~~roRCCororsrrrorjrsolortjoo~/rtooorrjlc~~-"rr~".<<~~4~CliartermeinbersfromthefirstmeetingofthePioneersClubheldattheRochesterClubonApril27,1938.ReprintedfromRG&EMonthlyMessenger,November1943.1936ThomasYawgerpvbIishesahistoryofthedevelopmentofelectricutiIities,o1940RG8Ehas139,00electriccustomers,113,00gascustomersand242steamcustomers.1941December7PearlHarborattacked-U,S.declareswarwithJapan.It[electricityJliftedtheburdensofmillionsofpeopleandgavenelvandvitalimpetustoindustrialprogress."-ThomasYawgerAj~lt~~ElectricalStandardsLabrunningtestsinthe1930'swithequipmentfeaturedonthesepages.1945VJDoy-TheWarisoverondRGSEpipesinnoturalgastosvpportPost-Wargrowth.1946ENIAC,thefirstelectroniccomputer,goesintoserviceattheUniversityofPennsylvania.1947Rochester'sHaloidCo.purchasesrightstoChesterCarlson'sxerographicprocess.1948Ontheoccasionc'sCentennial,thefirstot4coaWiredelectricunitsgoesonlineatRussellStation.

I'/'pt'homasEdison,afoundingfatlieroftheElectricAge.CharlesEdiSoli,Soliofthefamousinventor,inspectsoneofthefirstBi-polarDirectCurrentGenerators.Installedin1888bytheRochesterElectricLightCo.intheOldHydroStationatUpperFalls,itwasinserviceformorethan50yearsuntilitwasretiredandmovedtoanRGkEopera-tionscenterfordisplay.HYLOEcononeorcorbonfiWestonHookEye-Eorly1880's,carbonfiloment.Ical1900's,ents.Edison1879RepticaoffirstworivnglightSv'Ib,corbonizedpoperfilament.RRLC(RochesterRailwayandUghtCompany)Edison1903.1907,corbonfiIoment.Bernstein-Eorly1890's,corbonfilamentI'I'I>>SterlingSpecialSpiralearly1900's,carbonfiloment.G,E.EdisonMAZDAbegon19)1,Firstdvctile,"drawn'ungstenfi'lament.TontolvrnFilomenti9061913.MazdaWorkfWorIISktckovtbegan1913,Svtb)9)t2,194$slngktcoiltvtgsn)n,usedtodimlylightcriticolpossogewoys."Modern'ungstenCoiledCoilfiloment~began1936topresent,OriginalBrushLightCompanyplant,1881-1886.NokvknownasStation5.NationalMazdaLightdisplay-1930'sCourtesyJohnA.WenrichesterRailwayCo.1892electrifiesitslinesandEastmanDryPlateCo.becomesknownasEastmanKodakCo.stes>tyrKj3%v>>tj9J~>>ryfotSarhtv)rn>>'tTteevoietioaeliaorettot)ettat)erwattbeganwiththefirstcrudefilamentofcarbonizedpaper.Filamentsofcarbonizedbamboo,squirtedcelluloseandGeneralElectric'sMetallizedCarbon("GEM"),lightedtheearlydaysofelectriclight.PressedanddrawnTiingstenfilamentsreplacedTantalum,andlater,withGL'sinnovationofductileTimgsten,higherefficiencycoiledftlatnentbulbswerepossible.Today'sHigh-Energyefficientbulbscanlastupto10timeslongeranduse75%lesselec-tricityoverthoseofjustafelvyearsago.189Avgust4-RochesterElectriclight,BrushElectricandEdisonilluminatingmergetobecomeRochesterGasandElectric.CourtesyjohnA,Wenrich 1892October4-CitizensUght&PowerCo.isformedatBrown'sRace,tobecomeStotionNo.3alHighFalls.1893July23-CentralUght8,PowerCo.isformedtopowersomedowntownbuildings.4I,5¹IIvIcc1"rsWestinghouseElectricAnvneter-1913.01903RochesterUght&PowerCo.isformedinJanvoryandabsorbsCentrol.1903WilbvrandOrvilleWrightinventandtestthefirstworkableoirplaneatKittyHawk.ARochesterRailwayandLightrepresentativewakesahousecall.c?~~x'4'904June-RochesterUght&PowerisabsorbedbyRG&EandrenamedasRochesterRailway&LightCo.1908t~IuIIITIntI~~II~~HenryFordproducesthefirstModelTinDetroit,Michigan.1910RG&Ehas9,000eleotriccustomers,52,000goscustomersond19steomcustomers.Station5waterwheel-1905.P,I~r*45q1916HydroStation¹5upgradesandgoesonlinewith44,000kilowattsofpower.19174"IIIIIt~4>,IPpyTheUnitedStotesentersTheGreatWar,1918TheArmisticesignedendingWorldWarI.~15~5eII~~SCIIVICCSclrVICCSSSVICC~AIHFolmerFactographmeterreadingcamerausedbyPowerBillingfrom1915.Speciallydesignedtoovercometheerrorsofthepadandpencil.ManufacturedinRochester,MY.1919Railwayoperationsplitsoff1920ondRG&ECorporationisformed.RG8Ehas35,000electriccustomers,81,000gascustomersand81steamcustomers.1925RG&Ebuildsa12&tool.highdamontheGenesee,creatinghydroelectricpotentialandLakeRushford.1925RG&EbvildsitteheadquartersatstAve.10 RGB:EHistoryompanyprosperityisaforerunnerofcommunitygrowth.R68iEhasanessentialfunctionintheproductionoftheproductsthatbringRochesterfameinindustry.TodaywearethelargestindustrialbaseinNewYorkState.Earlytestingequipment;HotStick,FisherCableTestingSetandportableG.E.Voltmeter.II~I:IIII~II>>>>>>1>>sly>>~*+>>%'+I~>>ill-IIIggCNfIsrarstsssI>>JTi~trI>>Oll>>>>>>14>>>>+>>>>tugRochester'sFourConfersyearsago.>>II1'elebrating100yearsin1948,completewithcakeandthedancingRG&EKiloettes.)'I1lf'>>s'>>'J,'~p.,>>>>Station3Iiydroplant',>'urbines.>>\nI~f)-eKoreanWarbegins.RG&Ehas1952168,000electriccustomers,135,000gascustomersand518steomcustomers.195anvfactvredgasbegins1950RG&E'slastcokeovenistophaseovtinfavorofshutdownonAugust6.naturalgas.1953KoreanWarends.Bausch&LombwidensscreenswiththeintroductionofCinemascopelens.13 RGBc.EHistoryI.Checkingacircuitmapinelectriclineoperations.8aEICaSheendofanera,thebeginningofanew,Withmoregasandelectriccustomersthanever,RG8iEexpandsitsfacilitiesandservicesintonewterritory,developsnewtechnologiesandenterstheNuclearAgeasthecomputerrevolutiondawns.RG8iEisinthe"fastlane."Expandinggasservice,$Volcott,NY-1963...-at'i/i1954ThomasYawgerdiesasanoctiveRGlkEemployeewith66yearsofservice.TheRG&EBigBandstillswingstoday,atcommunityevents.I":jtj'aterheaterinstalledinLakeOntario-RussellStation.1954rizrt'iI.&g',Trackingwindstormdamage,1961956fastunitofRussellStationgoesonline275,000kilowottstotal.1959An84,000kiiowottefectricgeneratingunitgoesonfineot8eebeeStotion.Tlie"GreatBlackout,"doyourememberwhereyouwere?SIIgyygrsllillCa~tScBLACKOVT"8))BC)TjhjIIrthtlrll+jjjf4Q~'-.ynl=-;-R~1960RGSEhas202,000electric1961HaioidCo.becomesXeroxcustomersand157,000Corp.FirstU,S.troopssentgascustomers.toVietnam.1965November9-8lackoutaffects80,000squaremilesofnortheastUnitedStates.1966BrookwoodSc.InformationCenteropenstointroducepeopletotheadvantagesofnvdearpower.14

'Onestopshoppingfortheconveniencesofmodernlife-atoneofthetnanyRG&Eappliancecentersfromthe1950's.IrILispectingthegaugesatStation5.I~\wIttIIII'lwalttRussellStation/stEarlypnesinariccablecutter,usedbylinemen.Pl/s'I'ttGlasslightningresistor,circa.!u196irmaStation470,000kilowattsonline,onscheduleandonbudgetotacostof$88million.1970RG8Ehas254,000electric1971customersond196,000gascustomers.TheCleanAirActplacesheavydemandonoilandnaturalgoslucisfore'lectricgeneration.1973RGBEinstogsa244nchgasmaintoinueosereliabilitybetweeneastandwestsectors.

ServiceSolutionsSatisfactionthepreviouspageshaveshown,wehavedeeprootsintheRochestercommunityandachartercommitmentasoneofitsfoundingcontributors.Wesupportandserveitspeople,ourcustomers.RGBispoisedforsweepingchange,andhasanticipatedandembracedthefuturebyleadingthewaywithitsderegulationagreementwhichthePSCrecentlyapproved,We'ereadyforcompetition.AndatRGBwe'esayingthatthefirst150yearsisjustthebeginning.nIIQNgm=pl=eR<MssRO'uturistictecluiologyinremotemeterreadingdevices:ENSCAN,andtheItronMERLINunits;convenience,accuracyandefficiency.One-of-a-landtechnologyisfeatriredintheEnergyControlCenterat1VestAvenue.Precisemonitoringofgasandelectricoperations24lioursadayallowsthemostrapidandefficientenergyserviceresponseinutilityhistory.LS1!/jcPnrRGd'cEsponsorshipoftheRochesterMusetim&ScienceCenter'sChallengerSpaceCenterExhibitbenefitsthecommunityatlarge.1973Heavyoildemandcorn.binedwiththeArabOilEmbargocreatestheenergycrisisofthe70s.1975VietnamWarends.1983RGBEestablishesTheCommunityHeatingFundwiththeAmericanRedCross.1985Withdeciinin8Egoesoutofthesteamheatingbuimess.18

~\~,¹e/sSg~~j9/E2/I'Thehistory-making,unprecedentedprocessofremovalandreplacementofanuclearsteamgeneratorthroughthetopofthecoirtainmentdomeatGinna.fa)ster~i't.=y5/Q\)Irrrrr~l~rrrrt~trNewinfraredcoalthawingshedteclmologyatRussellStatioii.'.cgKsStation5automationinakeshydrofunctionseasier,saferandinoreefficientwiththenewMasterControllerConsole.IrsrToday'scomputerizedFlectricalStandardsLabequipinentfeaturesfiillyautomatedcalibrationandremotesitemeasure-ment.Itis10,000timesinoreaccuratethantlieanalogmeterssliownthroughoutthesepages.State-of-the-artCustomerTelephoneServiceDept.handlesoveramillioncallsannually.1991eworsticestorminNYhistory.Twothirdsofcustomerswithoutelectric.75%ofservicebackin7days,100%backin13days.'992Settingtheedgeforcompeti-1996tion,RG&E'scorporatebusi.nessplanaimstobreaktheutilitymentalitymode.RGBErep'lacesthesteamgeneratorsintheGinnaplantontimeandunderbudget.1997DeregulationplanapprovedbyPSC.RG8Ehas342,000electricand280,000gascustomers.TheBeginning.

(f,~pgs+o~~f'/,(/j,)l~ff(I,xvwssX~p'p!II.."9.~uiaI1It/i~~A~.'~oa~'!'hi~~4 0e2TI'Ag8B?8llrgDl/Cll+SlOBBBQABBE'lgOFFINANCIALCONDITIONANDRESULTSOFOPERATIONShefollowingisManagement'sassessmentofcertainsignificantfactorsaffectingthefinancialconditionandoperatingresultsoftheCompany.Thisassessmentcontainsforward-lookingstatementswhicharesubjecttovariousrisksanduncertainties.TheCompany'sactualresultscoulddifferfromthoseanticipatedinsuchforward-lookingstatementsasaresultofnumerousfactorswhichmaybebeyondtheCompany'scontrolbyreasonoffactorssuchaselectricandgasutilityrestructuring,futureeconomicconditions,anddevelopmentsinthelegislative,regulatoryandcompetitiveenvironmentsinwhichtheCompanyoperates.Shownbelowisalistingoftheprincipalitemsdiscussed.EarningsSummary.Competition.PSCCompetitiveOpportunitiesCaseSettlementBusinessandFinancialStrategyPSCPositionPaperonNuclearGenerationFERCOpenTransmissionOrdersGasRestructuringandPSCNegotiationsProspectiveI'inancialPositionRatesandRegulatoryMatters~1996ElectricRateSettlement1995GasSettlementFlexiblePricingTariffLiquidityandCapitalResourcesCapitalandOtherRequirementsRedemptionofSecuritiesFinancingResultsofOperations.OperatingRevenuesandSalesFossilUnitRatingsandStatusOperatingExpensesDividendPolicy.Page19.Page20.Page27.Page28.Page31.Page35EarningsSummaryDespiteratereductionsinJuly1996and1997,earningsapplicabletoCommonStockwerenearlyunchangedin1997due,inpart,totheincreasedavailabilityoftheCompany'sGinnanucleargeneratingfacilityfollowingthe1996refuelingandsteamgeneratorreplacementoutage.IncreasedCompanygenerationallowedtheCompanytoreducepurchasedelectricexpense,whileincreasingavailablepowerforcustomerconsumptionandresale.Adecreaseinfinancingcostsasaresultofdiscretionaryredemptionsandrefinancingactivitiesduringtheyearalsohelpedtoincreaseearnings.Inadditiontoratereductions,offsettingagainin1997earningswereawarmerheatingseasonduringthefirstquarteroftheyearcoupledwithacoolersummerwhichaffectedairconditioningload.Basicanddilutiveearningspershareof$2.30in1997aredowntwocentscomparedtoayearago.InFebruary1997,theFinancialAccountingStandardsBoardissuedStatementofFinancialAccountingStandardsNo.128("SFAS-128"),"EarningsperShare,"whichchangesthemethodologyofcalculatingearningspershare.TheCompanyadoptedSFASNo.128duringthefourthquarterof1997.Theimpactonearningspershareforpriorperiodsisnotmaterial.AdiscussionofthecalculationofearningspershareispresentedinNote1totheNotestoFinancialStatements.

RochesterGasandHectrlcCorporationBasicanddilutiveearningspershareof$1.69reportedin1995reflectapretaxreductionof$44.2million,or$.75persharenet-of-tax,inconnectionwithanegotiatedsettlement(see1995GasSettlementdiscussedbelow)reachedbetweentheCompany,StaffoftheNewYorkStatePublicServiceCommission(PSC)andotherpartiesresolvingvariousproceedingstoreviewissuesaffectingtheCompany'sgascosts.Theimpactofdevelopingcompetitionintheenergymarketplacewillaffectfutureearnings.TheCompetitiveOpportunitiesCaseSettlement(the"Settlement",seedescriptionbelow)allowsforaphase-intoopenelectricmarketswhileloweringcustomerpricesandestablishinganopportunityforcompetitivereturnsonshareholderinvestments.ThenatureandmagnitudeofthepotentialimpactoftheSettlementonthebusinessoftheCompanywilldependontheavailabilityofqualifiedenergysuppliers,thedegreeofcustomerparticipationandultimateselectionofanalternativeenergysupplier,theCompany'sabilitytobecompetitivebycontrollingitsoperatingexpenses,andtheCompany'sultimatesuccessindevelopmentofitsunregulatedbusinessopportunitiesaspermittedundertheSettlement.Futureearningswillalsobeaffected,inpart,bytheCompany'sdegreeofsuccessinremarketingitsexcessgascapacityassetunderthetermsofthe1995GasSettlementandincontrollingitslocalgasdistributioncosts.TheCompanybelievesitwillbesuccessfulinmeetingthe1995GasSettlementtargetsovertheremainingyearoftheSettlementperiod,althoughnoassurancemaybegiven.CompetitionOVERVIEW.During1996and1997,theCompany,theStaffofthePSC,andseveralotherpartiesnegotiatedanagreementwhichwasapprovedbythePSCinNovember1997.Thisagreementsetstheframeworkfortheintroductionanddevelopmentofopencompetitionintheelectricenergymarketplaceandlaststhroughtheyear2002.Overthistime,thewayelectricityisdeliveredtocustomerswillfundamentallychange.Inphases,theCompanywillopenitselectricsystemtoothersuppliers.ThesystemwillbefullyopentocompetitorsbyJulyof2001.Thesesupplierswillcompetetopackageandsellenergyandrelatedservicestocustomers.TheCompanyanditssubsidiarieswillbeamongthesupplierchoices.CompetingsupplierswillpaytheCompanyafeetouseitselectricdistributionsystemandtheCompanywillremainresponsibleformaintainingitandrespondingtomostemergencies.PSCCOMPETITIVEOPPORTUNITIESCASESETTLEMENT.Throughits"CompetitiveOpportunitiesProceeding,"thePSChasembarkedonafundamentalrestructuringoftheelectricutilityindustryintheState.Amongotherelements,thePSC'sgoalsincludedlowerratesforconsumersandincreasedcustomerchoiceinobtainingelectricityandotherenergyservices.TheCompany'sproceedingwascompletedonNovember26,1997withthePSCapprovalofaSettlementAgreementamongtheCompany,thePSCStaffandotherparties.ThePSC'sNovember26,1997orderofapprovalwasconfirmedbyafullOpinionandOrder(No.98-1)issuedJanuary14,1998.Summary.TheSettlementprovidesforatransitiontocompetitionduringitsfive-yearter(July1,1997throughJune30,2002)andestablishestheCompany'selectricratesforeachannualperiod.ARetailAccessProgramwillbephasedin,allowingcustomerstopurchaseelectricity,andlaterelectricityandcapacitycommitments,fromsourcesotherthanthe20 Company.TheCompanywillbeprovidedareasonableopportunitytorecoverprudentlyincurredcosts,includingthosepertainingtogenerationandpurchasedpower.TheSettlementalsorequirestheCompanytofunctionallyseparateitscomponentoperations:distribution,generation,andretailing.Anyunregulatedretailoperationsmustbestructurallyseparatefromtheregulatedutilityfunctionsbutmaybefundedwithupto$100million.Inaddition,theCompanywouldhavetheoptionafterreceivingthenecessaryregulatoryapprovalstoestablishaholdingcompanystructure.AlthoughtheSettlementprovidesincentivesforthesaleofgeneratingassets,itrequiresneitherdivestitureofgeneratingorotherassets,norwriteoffof"strandedcosts"(theabove-marketcosts,presumedtoresultfromcompetition).TheCompanybelievesthattheSettlementwillnotadverselyaffectitseligibilitytocontinuetoapplyStatementofFinancialAccountingStandardsNo.71("SFAS-71"),withtheexceptionofcertain"to-gocosts"associatedwithnon-nucleargeneration.If,contrarytotheCompany'sview,sucheligibilitywereadverselyaffected,amaterialwrite-downofassets,theamountofwhichisnotpresentlydeterminable,couldberequired.RatePlan.OverthefiveyeartermoftheSettlement,thecumulativeratereductionswillbeasfollows:RateYear1:$3.5million;RateYear2:$12.8million;RateYear3:$27.6million;RateYear4:$39.5million;andRateYear5:$64.6million.TheRatePlanpermitstheCompanytooffsetagainsttheforegoingtotalreductionscertaininflation-relatedexpenses,andcertainamountsrelatedtoapowerpurchaseagreementwithKamine/BesicorpAlleganyL.P.(Kamine),includingseven-eighthsofanydifferencebetweenKaminecostscurrentlyincludedinratesandanyincreasedamountresultingfromenforcementofsuchagreementwithanybalancenotrecoveredduringthetermoftheSettlementsubjecttodeferralforrecoveryaftersuchterm.Theagreementissubjecttolitigation,asdiscussedinNote10oftheNotestoFinancialStatements.IntheeventofasettlementoftheKaminematter,theSettlementpermitstheCompanytooffsetagainstratereductions,thefollowingamounts:RateYear2,$3.5million;RateYear3,$8.4million;RateYear4andcontinuinguntilSettlementpaymentsarecompleteorJuly1,2002,whicheverislater,$10.5million.IntheeventthattheCompanyearnsareturnoncommonequityinexcessofaneffectiverateof11.50percentovertheentirefive-yeartermoftheSettlement,50percentofsuchexcesswillbeusedtowritedowndeferredcostsaccumulatedduringtheterm.Theother50percentoftheexcesswillbeusedtowritedownaccumulateddeferralsorinvestmentinelectricplantorRegulatoryAssets(whicharedeferredcostswhoseclassificationasanassetonthebalancesheetispermittedbySFAS-71).Ifcertainextraordinaryeventsoccur,includingarateofreturnoncommonequitybelow8.5percentorabove14.5percent,orapretaxinterestcoveragebelow2.5times,theneithertheCompanyoranyotherpartytotheSettlementwouldhavetherighttopetitionthePSCforreviewoftheSettlementandappropriateremedialaction.RetailAccess.RGRE'sEnergyChoiceProgramwillbeavailabletoallofitscustomers,withoutregardtocustomerclass,onanequalbasisuptocertainusagecaps.OnJuly1,1998,customerswhoseelectricloadsrepresentapproximately10percentoftheCompany'stotalannualretailsaleswillbeeligibletopurchaseelectricity(butnotcapacitycommitments)fromalternativesuppliers.OnJuly1,1999,customerswith20percentoftotalsaleswillbeeligibleandasofJuly1,2000,30percentoftotalsaleswillbeeligible.AsofJuly1,2001,allretailcustomerswillbeeligibletopurchaseenergyandcapacityfromalternativesuppliers.21 RochrsttrGasandKlcrtrloCorporationDuringtheinitial,energyonlystageoftheRetailAccessProgram,theCompany'sdistributionratewillbesetbydeducting2.3centsperkilowatthour("KWH")fromitsfullservice("bundled")ratesandLoadServingEntitiesactingasretailersintheCompany'sserviceareawillbeentitledtopurchaseelectricityfromtheCompanyatarateof1.9centsperKWH.Duringtheenergyandcapacitystage,theratewillgenerallyequalthebundledratelessthecostoftheelectriccommodityandtheCompany'snon-nucleargeneratingcapacity.Thesecommodityandcapacitycosts,generallyreferredtoas"contestablecosts,"areestimatedtobe3.2centsperKWH,inclusiveofgrossreceiptstaxes.GeneratingAssets.TheCompanywillnotberequiredtodivestanyofitsgenerationfacilities.TotheextentthattheCompanysellsanygeneratingassetsduringthetermoftheSettlement,gainsonsuchsaleswillbesharedbetweentheCompanyandcustomers.Withregardtolossesonsuchsales,theSettlementacknowledgesanintentthattheCompanywillbepermittedtorecoversuchlossesthroughdistributionratesduringthetermoftheSettlement.FutureratetreatmentistobeconsistentwiththeprinciplethattheCompanyistohaveareasonableopportunitytorecoversuchcosts."To-gocosts"oftheCompany'snon-nuclearresources(i.e.,capitalcostsincurredafterFebruary28,1997,operationandmaintenanceexpenses,andproperty,payrollandothertaxes)aretoberecoveredthroughthedistributionaccesstariff.Thefixedportionofto-gocostswouldberecoveredinfullthroughthedistributionaccesstariffuntilJuly1,1999andsubjecttothemarketthereafterinaccordancewiththephase-inschedulefortheRetailAccessProgramdescribedabove.Thevariableportionofnon-nuclearto-gocostswouldalsobesubjecttothemarketinaccordancewiththephase-inScheduledescribedabove.UponextensionofeligibilityfortheRetailAccessProgramtoallretailcustomersonJuly1,2001,theCompanywouldbeauthorizedtomodifyitsdistributionaccessrates,soastoholdconstantthedegreetowhichitsto-gocostsareatriskforrecoverythroughthemarket.Thus,whiletherecoveryofnon-nuclearto-gocostswouldcontinuetobethroughthemarket,recoveryofnuclearcostswouldremainrecoverablethroughregulatedrates.NochangeinsuchtreatmentofnuclearfacilitieswouldbeimplementedpriortothePSC'sresolutionoftheissuesraisedinitsStaffReportonnucleargeneration(seePSCPosition'PaperonNuclearGeneration).ShutdownanddecommissioningcostswouldberecoveredduringthetermoftheSettlementinamannerconsistentwithpastratemakingtreatment.PilotProgram.ConsistentwithaPSCorderissuedJune23,1997inaseparateproceedinginvolvingestablishmentofpilotprogramsforfarmersandfoodprocessors,theSettlementprovidesthattheCompany'sRetailAccessProgramwillcommenceonFebruary1,1998forthosegroupswithintheCompany'sservicearea.TariffFiling.OnDecember1,1997,theCompanysubmittedtothePSCitsproposedtariffsandaDistributionOperatingAgreementtoestablish"EnergyChoice",theCompany'sproposedretailaccessprogramtoimplementthetermsoftheSettlement.InanorderissuedJanuary21,1998,thePSCapprovedcertainprovisionsoftheDecember1,1997tarifffilingandrequiredtheCompanytoreviseothers.InlateJanuary1998theCompanyfiledrevisionstothetarifftoincorporatethechangesrequiredbythePSC'8order.Miscellaneous.AfterapprovaloftheSettlementbecomesfinalandnon-appealable,theCompanywillwithdrawlegalappealswhichchallengevariousPSCOrdersregardingthePSCCompetitiveOpportunitiesProceeding,establishmentofapilotprogrampursuanttothoseproceedings,andcertainprovisionsofthe1996ElectricRateSettlement.22 ThepresentSettlementsupersedesthe1996RateSettlement.Variousincentiveandpenaltyprovisionsinthe1996ElectricRateSettlementareeliminated.BUSINESSANDFINANCIALSTRATEGY:THECOMPANY'SRESPONSE.UnderthetermsoftheSettlement,theCompanywillfunctionallyseparateitsgeneration,distribution,andregulatedenergyservicesbusinesses.AspermittedbytheSettlement,theCompanyhasestablishedaseparateunregulatedsubsidiarycalledEnergetixwhichwillbeabletocompeteforenergy,energyservicesandproductsbothinandoutsidetheCompany'sexistingfranchiseserviceterritory.TheCompanyhasalsodevelopedanintegratedfinancialstrategywhichincludesnewbusinessdevelopmentinitiativesandaCommonStocksharerepurchaseprogram.EnergyChoice.WithintheframeworkoftheEnergyChoiceProgram,theCompanywillunbundletraditionalutilityservices.RetailelectriccustomersintheCompany'sserviceterritorywillhavetheopportunitytopurchaseenergy,capacity,andretailingservicesfromcompetitiveenergyservicecompanies,referredtoasLoadServingEntities(LSEs).Theymayalsocontinuetopurchasefully-bundledelectricservicefromtheCompanyunderexistingretailtariffs.VGeneralStructure:EnergyChoiceadoptsthe"single-retailer"modelfortherelationshipbetweenRGRE,theLSEs,andretailcustomers.Underthe"single-retailer"modeltheregulatedutility'scustomeristheLSE,whosecustomersaretheretailcustomers.Therelationshipbetweentheregulatedutilityandretailcustomersissubstantiallyeliminated.TheLSEassumesresponsibilityforprovidingitsretailcustomerswithbundledenergyanddeliveryservices,andforvirtuallyallrelatedretailingfunctions,includingdirectcontactandcommunicationswithretailcustomers.Withtheexceptionoftransmissionanddistributionservice,theLSEwillprocureforitscustomers,orwillitselfcreateandprovidethemwith,allnecessarycomponentsoffullybundledserviceonacompetitivebasis.ThroughoutthetermoftheSettlement,RGREwillcontinuetoprovideregulatedandfullybundledelectricserviceunderitsretailservicetarifftocustomerswhochoosetocontinuewithorreturntosuchservice,andtocustomerstowhomnocompetitivealternativeisoffered.Untilthedevelopmentofawholesalemarketforgeneratingcapacity,therewillbenosuitablemechanismforthereallocation,fromtheregulatedutilitytotheLSE,ofresponsibilityforensuringadequateinstalledreservecapacity.Accordingly,duringtheinitial"EnergyOnly"stageoftheEnergyChoiceProgramOuly1,1998toJuly1,1999),LSEswillbeabletochoosetheirownsourcesofenergysupply,whileRGREwillprovidetoLSEs,andwillbecompensatedfor,thegeneratingcapacity(installedreserve)neededtoservetheirretailcustomersreliably.Duringthe"EnergyandCapacity"stagecommencingJuly1,1999,theLSEswillbeabletoselect,andwillberesponsibleforprocuring,generatingcapacity,aswellasenergy,toservetheloadsoftheirretailcustomers,anddistributionchargeswillbeaccordinglyreducedashereinafterdescribed.IfbyJuly1,1998thereisnotafunctioningStatewideenergyandcapacitymarket(seediscussionunderFERCOpenTransmissionOrders),theCompanymaypetitionthePSCfordeferralofthescheduledcommencementoftheEnergyandCapacitystage.VSummary:TheavailabilityofLSEstoserveeligiblecustomersandhowquicklytheydecidetobecomeinvolvedcannotbedetermined.Likewise,theCompanyisnotabletopredict23 RochcstcsGasandElccutcCorporanonthenumberofcustomersthatmaychosetonolongerbeservedundertheCompany'sregulatedtariffs.TheproposedtariffsforEnergyChoiceasfiledbytheCompanyareexpectedtobecomeeffectiveFebruary1,1998forthepilotprogram.ThePSChasnotsetadecision-makingdateforthefull-scaleprogram.TheCompanyisunabletopredictwhatfinalrulesorregulationswillultimatelybeadoptedbythePSCforthisprogram.UnregulatedEnergyServicesCompany.ItispartoftheCompany'sfinancialstrategytostimulategrowthbyenteringintounregulatedbusinesses.ThefirststepinthisdirectionwastheformationandoperationofEnergetixeffectiveJanuary1,1998.EnergetixisanunregulatedsubsidiaryoftheCompanythatwillbringenergyproductsandservicestothemarketplacebothwithinandoutsidetheCompany'sfranchisearea.TheSettlementapprovedbythePSCinNovemberallowsfortheinvestmentofupto$100millioninunregulatedbusinessesduringthenextfiveyears.During1998,theCompanyexpectstodeterminetheactualleveloftheinitialinvestmentstobemadeinunregulatedbusinessopportunities.OnJuly1,1997theCompanyandEnergetixfiledwiththeFederalEnergyRegulatoryCommission(FERC)seekingauthorizationtoengageinthewholesalesaleofelectricenergyandcapacityatmarket-basedrates.TheseapplicationswereacceptedbyFERConSeptember12,1997.TheCompanymustseekseparateauthorizationinordertosellelectricenergytoEnergetixatmarket-basedrates.StockRepurchasePlan,InDecember1997theCompany'sBoardofDirectorsapprovedaStockRepurchasePlan.Thisplan,whichissubjecttoapprovalbythePSC,providesfortherepurchaseoverthenextthreeyearsofupto4.5millionsharesofCommonStock,representingapproximately11.5percentoftheCompany'soutstandingsharesofCommonStockatDecember31,1997.TheCompanyexpectsaPSCdecisioninearly1998.NuclearOperatingCompany.InOctober1996,theCompanyandNiagaraMohawkPowerCorporation(Niagara)announcedplanstoestablishanuclearoperatingcompanytobeknownastheNewYorkNuclearOperatingCompany(NYNOC).SincethattimeNYNOChasbeenorganizedasaNewYorkLimitedLiabilityCompanyandtheConsolidatedEdisonCompanyofNewYorkandNewYorkPowerAuthorityhaveannouncedtheirdesiretomoveforwardwiththeCompanyandNiagarawithplanstoimplementNYNOC.ItisenvisionedthatNYNOCwouldeventuallyassumeresponsibilityforoperationofallthenuclearplantsinNewYorkState,includingtheCompany'stotallyownedGinnaNuclearPlantandjointlyownedNineMileTwo.TheCompanybelievesthatNYNOCcouldcontributetomaintainingahighlevelofoperationalperformance,contributetocontinuedsatisfactoryNuclearRegulatoryCommission(NRC)compliance,provideopportunitiesforcontinuedcostreductionandprovidethebasisforsatisfactoryeconomicregulationbythePSC.VariousgroupsarenowinvolvedinthedetailedstudiesandanalysesrequiredbeforeadefinitivedecisiontoproceedwithNYNOCcanbemade.TheorganizingutilitieshavesubmittedcommentsonthePSCStaffpositionpaperonnucleargeneration(discussedbelowundertheheadingPSCPositionPaperonNuclearGeneration)notingthattheStaffproposalwouldnullifythepotentialbenefitsofNYNOC.PSCPOSITIONPAPERONNUCLEARGENERATION.OnAugust27,1997,thePSCrequestedcommentsfrominterestedpartiesonaPSCStaffpositionpaperconcerningthetreatmentofnucleargenerationafteratransitionperiod.TheStaffpaperconcludesthat(1)nucleargenerationshouldoperateonacompetitivebasis,(2)sale24 ofgenerationplantsatauctiontothirdpartiesisthepreferredmeansofdeterminingmarketvalueandoffersthegreatestpotentialformitigationofstrandedcostsandtheeliminationofanti-competitivesubsidies,and(3)wherethirdpartysalesarenotfeasible,"to-go"costs(fuel,laborandotheroperatingcosts,prospectivecapitaladditions,propertytaxesandinsurance)mustberecoveredinthewholesalemarketpriceofpower.OnOctober15,1997,theCompanyandfourotherutilitiesjointlyrespondedtothePSC.TheutilitiesbelievethattheinherentoperatingcharacteristicsofnucleargenerationandtheimplicationsofNRCregulationrequirethatnuclearplantshaveaccesstoanadequaterevenuestreamandthatsuchplantsshouldbetreatedfordispatchpurposesasbaseload,mustrununits.TheutilitiesurgethePSCtoadoptaprocessthatwouldenableallpartiestofullydevelopthenecessaryfactsandanalysesandtoinvitetheNRCtoparticipateinaddressingthefutureofnucleargenerationinNewYorkState.Certainotherpartieshavefiledcommentsonthepositionpaper,someofwhichopposefullrecoveryof"strandedcosts"thatcouldresultfromsalesofplantsatlessthanbookcosts.TheCompanyisunabletopredicttheoutcomeofthePSC'sconsideration.FERCOPENTRANSMISSIONORDERSANDCOMPANYFILINGS.Inearly1996FERCissuednewrulestofacilitatethedevelopmentofcompetitivewholesalemarketsbyrequiringelectricutilitiestooffer"open-access"transmissionserviceonanon-discriminatorybasisintariffs.TheCompanyfileditsrequiredtransmissionservicetariffonJuly9,1996.Thenewtariffwouldapplytowholesalepurchasesandsalesmadebythel'lIll(I/ijgi25 RecharterGarandHcctrlcCorporationCompanyandthefinancialimpactwilldependonprevailingenergypricesinthewholesalemarket.Thenear-termimpactsofthistariffarenotexpectedtobesignificant.OnMarch6,1997,theCompanyreachedasettlementinprinciplewiththeotherpartiesrespectingrateissues.FERCapprovalofthesettlementwasgrantedonJune25,1997.OnJanuary31,1997,theutilitiesfileda"ComprehensiveProposalToRestructuretheNewYorkWholesaleElectricMarket"withtheFERC.Asproposed,theexistingNewYorkPowerPool(NYPP)willbedissolvedandanindependentsystemoperator(ISO)willadministerastate-wideopenaccesstariffandprovidefortheshort-termreliableoperationofthebulkpowersysteminthestate.InadditiontoproposingaFERC-endorsedISO,theproposalcallsforcreationofaNewYorkPowerExchangeandaNewYorkStateReliabilityCouncil.AnadditionalsupplementalfilingwithI'ERCwasmadeonDecember19,1997whichlaysoutaspecifictimeframefortheimplementationofacompetitivewholesaleelectricitymarketinNewYorkState.TheutilitieshaverequestedFERCapprovaloftheirrestructuringplannolaterthanMarch31,1998,whichwouldallowtheISOtobeoperationalbyJune30,1998.ThetimetableforretailcompetitionwillbedeterminedforeachutilityinaccordancewithindividualsettlementsintheCompetitiveOpportunitiesProceeding.SignificantchangestopricingproceduresnowineffectwithinNYPPareexpected,butitisunclearwhateffectthesechangesmayhaveonceotherregulatorychangesinNewYorkStateareimplemented.Atthepresenttime,theCompanycannotpredictwhateffectsregulationsultimatelyadoptedbyFERCwillhave,ifany,onfutureoperationsorthefinancialconditionoftheCompany.GASRESTRUCTURINGANDPSCNEGOTIATIONS.InMarch1996thePSCissuedanOrderandapprovedutilityrestructuringplansdesignedtoopenupthelocalnaturalgasmarkettocompetitionandtherebyallowresidential,smallbusinessandcommercial/industrialusersthesameabilitytopurchasetheirgassuppliesfromavarietyofsources,otherthanthelocalutility,thatlargerindustrialcustomersalreadyhave.Duringathree-yearphase-inperiodtheState'sgasutilitieswouldbepermittedtorequirecustomersconvertingfromsalesservicetotakeassociatedpipelinecapacityforwhichtheutilitieshadoriginallycontracted.ThePSChasindicatedthatitwilladdresstheissueofhowthecostsofsuchcapacitywouldberecoveredafterthethree-yearperiodduringthethirdyearofthephase-inperiod.ThePSCStaffhasrecentlyissuedapositionpaperonTheFutureoftheNaturalGasIndustryinwhichtheStaffproposesthatlocaldistributioncompanies(suchastheCompany)exitthemerchantfunctioninfiveyears.TreatmentofexistingpipelinecapacitycontractsandProviderofLastResortresponsibilitiesaresubstantialissuestobeworkedoutbetweenthePSC,thelocalgasdistributioncompaniesandotherstakeholders.SeeNote10oftheNotestoFinancialStatementsforfurtherinformationaboutthePSCgasrestructuringproceedingsandthePSCStaffpositionpaper.GascustomershavehadachoiceofsupplierssinceNovember1,1996.Underseparatetransportationtariffs,theCompanydistributesthegasandchargesforthedistributionaswellasassociatedservices.TheCompanybelievesitspositioninthemarketissuchthatitwillmaintainitsdistributionsystemmargins.Underaphase-inlimitation,lossofgascommoditysalesmaybelimitedtofivepercentoftheCompany'sannualgasvolumethefirstyear,andthenfiveadditionalpercentforeachofthefollowingtwoyears.Thephase-inwillberevieweasexperienceisgainedwiththeprogram.TheCompanyanticipatesthattheuseof2B transportationgasservicewillincrease.ThroughDecember31,1997,150customerswerebeingservedunderthisservice.InJuly1997,theCompanycommencednegotiationswiththePSCStaffandotherpartieswiththeobjectiveofdevelopingamulti-yearsettlementofissuespertainingtotheCompany'sgasbusinessthatwouldtakeeffectuponexpirationofthecurrent1995GasSettlement(seeRatesandRegulatoryMatters)onJune30,1998.AfurtherobjectiveofthesenegotiationsistomaximizetheefficienciesoftheentirebusinessbystructuringasettlementthatwillbeasconsistentaspossiblewiththeprovisionsoftheSettlementintheCompetitiveOpportunitiesProceeding,asdiscussedearlier.Negotiationsareatanearlystage;accordingly,theCompanycanmakenopredictionastotheiroutcome.COMPETITIONANDTHECOMPANY'SPROSPECTIVEFINANCIALPOSITION.WithPSCapproval,theCompanyhasdeferredcertaincostsratherthanrecognizethemonitsbookswhenincurred.Suchdeferredcostsarethenrecognizedasexpenseswhentheyareincludedinratesandrecoveredfromcustomers.SuchdeferralaccountingispermittedbySFAS-71.ThesedeferredcostsareshownasRegulatoryAssetsontheCompany'sBalanceSheetandadiscussionandsummarizationofsuchRegulatoryAssetsispresentedinNote10oftheNotestoFinancialStatements.paletot'yAsseg-Inacompetitiveelectricmarket,strandableassetswouldarisewheninvestmentsaremadeinfacilities,orcostsareincurredtoservicecustomers,andsuchcostsarenotfullyrecoverableinmarket-basedrates.Estimatesofsuchstrandableassetsarehighlysensitivetothecompetitivewholesalemarketpriceassumedintheestimation.InaEndofPeriod(millionsofdollars)311284competitivenaturalgasmarket,strandableassetswouldarisewherecustomersmigrateawayfromdependenceontheCompanyforfullservice,leavingtheCompanywith419971996surpluspipelineandstoragecapacity,aswellasnaturalgassupplies,undercontract.AdiscussionofstrandableassetsI,$ispresentedinNote10oftheNotestoFinancialStatements.1995AtDecember31,1997theCompanybelievesthatitsregulatoryandstrandableassets,ifany,arenotimpairedandareprobableofrecovery.TheSettlementintheCompetitiveOpportunitiesProceedingdoesnotimpairtheopportunityoftheCompanytorecoveritsinvestmentintheseassets.However,thePSChaspublishedaStaffpapertoaddressissuessurroundingnucleargeneration,includingthedeterminationoffairmarketvalueforfacilitiesafterafiveyearrestructuringtransitionperiod.ItappearsthatthePSCmayseektoapplysimilarprinciplestoothertypesofgeneratingfacilities.Adeterminationinthisproceedingcouldhaveanimpactonstrandableassets.RatesandRegulatoryMatters1996ELECTRICRATESETI'LEMENTThePSCapprovedaSettlementAgreement(1996RateSettlement)amongtheCompany,PSCStaffandseveralotherpartieswhichsetratesforathree-yearperiodcommencingJuly1,1996.

RoeherterGerendElectricCorporrtlonTheCompetitiveOpportunitiesSettlement(Settlement)supersedesthe1996RateSettlement.AratereductionforthefirstrateyearundertheSettlementof0.5percent($3.5million)commencingJuly1,1997isequaltothepreviouslyapprovedplannedreductionunderthe1996RateSettlement.AfterapprovaloftheSettlementbecomesfinalandnon-appealable,theCompanywillterminateitspetitionseekingjudicialreviewofthe1996RateSettlement.1995GASSETTLEMENTInOctoberof1995,asettlementofvariousgasrateandmanagementissueswasfinalized(the1995GasSettlement).ThissettlementaffectstheratetreatmentofvariousgascoststhroughOctober31,1998.Highlightsofthe1995GasSettlementare:VTheCompanywillforego,forthreeyearsendinginmid-1998,gasrateincreasesexclusiveofthecostofnaturalgasandcertaincostincreasesimposedbyinterstatepipelines.VTheCompanyhasagreednottochargecustomersforpipelinecapacitycostsin1996,1997and1998of$22.5million,$24.5million,and$27.2million,respectively.TheCompanymaysellitsexcesstransportationcapacityinthemarketunderFERCrules.YTheCompanyagreedtowriteoffexcessgaspipelinecapacityandothercostsincurredthrough1995.Theeconomiceffectofthe1995GasSettlementontheCompany's1995resultsofoperationswastoreduceearningsby$.75pershare.TheCompanyhasenteredintoseveralagreementstohelpmanageitspipelinecapacitycostsandhassuccessfullymetsettlementtargetsforcapacityremarketingforthetwelvemonths'eriodsendingOctober31,1997andOctober31,1996,'therebyavoidingnegativefinancialimpactsforthoseperiods.TheCompanybelievesthatitwillalsobesuccessfulinmeetingtheSettlementtargetsintheremainingyearoftheSettlementperiod,althoughnoassurancemaybegiven.FLEXIBLEPRICINGTARIFF.Underitsflexiblepricingtariffformajorindustrialandcommercialelectriccustomers,theCompanymaynegotiatecompetitiveelectricratesatdiscountpricestocompetewithalternativepowersources,suchascustomer-ownedgenerationfacilities.PursuanttothetermsoftheSettlementundertheCompetitiveOpportunitiesProceeding,theCompanywillabsorb,asithasdonesincetheinceptionoftheserates,thedifferencebetweenthediscountedratespaidundertheseindividualcontractsandtheratesthatwouldotherwiseapply.Approximately27percentofallelectricsales(KWHs)tocustomersaremadeunderlong-termcontracts,primarilytolargeindustrialcustomers.Thesecontractsrepresentapproximately42percentoftheCompany'srevenuesfromitscommercialandindustrialcustomers.TheCompanyhasnotexperiencedanysignificantcustomerlossduetocompetitivealternativearrangements.CertainprovisionsofaflexibleratecontractwiththeUniversityofRochesterhavebeenchallengedbytheAntitrustDivisionoftheUnitedStatesDepartmentofJusticeasdiscussedinNote10totheFinancialStatementsundertheheadingLitigation.LiquidityandCapitalResourcesCashflow,mainlyfromoperations,providedthefundsforconstructionexpenditures,debtreductions,redemptionofPreferredStockandthepaymentofdividendsduring1997(seeConsolidatedStatementofCashFlows).Qr CAPITALANDOTHERREQUIREMENTS.TheCompany'scapitalrequirementsrelateprimarilytoexpendituresforenergydelivery,includingelectrictransmissionanddistributionfacilitiesandgasmainsandservicesaswellasnuclearfuel,electricproductionandtherepaymentofexistingdebt.In1996theCompanycompletedreplacementofthetwosteamgeneratorsattheGinnaNuclearPlantwhichresultedinimprovedplantefficiency.TheCompanyspentapproximately$46milliononthisprojectin1996and$29millionin1995.TheCompanyhasnoplanstoinstalladditionalbaseloadgeneration.PurchasedPowerRequirement.UnderfederalandNewYorkStatelawsandregulations,theCompanyisrequiredtopurchasetheelectricaloutputofunregulatedcogenerationfacilitieswhichmeetcertaincriteria(QualifyingFacilities).TheCompanywascompelledbyregulatorstoenterintoacontractwithKamineforapproximately55megawattsofcapacity,thecircumstancesofwhicharediscussedinNote10oftheNotestoFinancialStatements.TheCompanyhasnootherlong-termobligationstopurchaseenergyfromQualifyingFacilities.Year2000ComputerIssues.Astheyear2000approachesmanycompaniesfaceapotentiallyseriousinformationsystems(computer)problembecausemostsoftwareapplicationandoperationalprogramswritteninthepastwillnotproperlyrecognizecalendardatesbeginningwiththeyear2000.Atthistime,theCompanybelievesthattheproblemisbeingaddressedproperlytopreventanyadverseoperationalorfinancialimpacts,TheCompanybelievesitwillincurapproximately$15millionofcoststhroughJanuary1,2000,associatedwithmakingthenecessarymodificationsidentifiedtodate.Totalcostsincurredin1997wereapproximately$1.4million.EnvironmentalIssues.Theproductionanddeliveryofenergyarenecessarilyaccompaniedbythereleaseofby-productssubjecttoenvironmentalcontrols.TheCompanyhastakenavarietyofmeasures(e.g,,self-auditing,recyclingandwasteminimization,trainingofemployeesinhazardouswastemanagement)toreducethepotentialforadverseenvironmentaleffectsfromitsenergyoperations.AmoredetaileddiscussionconcerningtheCompany'senvironmentalmatters,includingadiscussionofthefederalCleanAirActAmendments,canbefoundinNote10oftheNotestoFinancialStatements.REDEMPTIONOFSECURITIES.Inadditiontofirstmortgagebondmaturitiesandmandatorysinkingfundobligationsoverthepastthreeyears,discretionaryredemptionofsecuritiestotaled$1millionin1995,$49millionin1996,andapproximately$152millionin1997.Includedindiscretionaryredemptionsfor1997werenearly$102millionoftax-exemptsecuritieswhichwererefinancedwithnewmulti-modetax-exemptbondsasdiscussedunderFinancing.CapitalRequirements-Summary.Capitalrequirementsforthethree-yearperiod1995to1997andthecurrentestimateofcapitalrequirementsthrough2000aresummarizedintheCapitalRequirementstable.TheCompany'scapitalexpendituresprogramisundercontinuousreviewandcouldberevisedforanynumberofissues.TheCompanyalsomayconsider,asconditionswarrant,theredemptionorrefinancingofcertainoutstandinglong-termsecurities.

CAPITALREQUIREMENTSTypeofFacilitiesActual1995199619971998(MillionsofDollars)Projected19992000ElectricPropertyProductionEnergyDeliverySubtotalNuclearI'uelTotalElectricGasPropertyCommonPropertyTotalCarryingCostsAllowanceforFundsUsedDuringConstructionTotalConstructionRequirementsSecuritiesRedemptions,MaturitiesandSinkingFundObligations*TotalCapitalRequirements*Excludesprospectiverefinancings.$48$57252373801716909614174610811932111121167$112$188$9283719562298788182$270$19436215772324124112540$165$17$13322849411627656817181861009211101931030$111$123RochesterGasandHectrlcCorporationFINANCING.Capitalrequirementsin1997,includingthediscretionaryredemptionof$49.7millionofsecurities,weresatisfiedprimarilywithinternallygeneratedfunds.Inaddition,theCompanyatitsoptionrefinanced$101.9millionofoutstandingtax-exemptsecuritieswiththeproceedsfromthesaleonAugust19,1997of$101.9millionofNewYorkStateEnergyResearchandDevelopmentAuthority(NYSERDA)multi-modetax-exemptbondsdueAugust1,2032.Interestratesonthesebondsmaybesetweeklyormaybesetforvaryingperiodsbasedonmarketconditionsatthetime.Theweightedaverageinterestrateonthesebondswas3.65percentfor1997.OnSeptember16,1997,theCompanycompletedarrangementsforthedeliveryinSeptember1998of$25.5millionof5.95%NYSERDAtax-exemptbondsdueSeptember1,2033.Proceedswillbeusedtoredeemanissueoftax-exemptfirstmortgagebondswhichisnotredeemableuntilDecember1998.UndertheCompany'sPerformanceStockOptionPlan,optionsfor403,605sharesofCommonStockbecameexercisableduetoCommonStockmarketpriceperformanceduring1997.During1997,CommonStocksharesoutstandingincreasedby10,883sharesasaresultofthoseoptionswhichwereactuallyexercisedduringtheyear.TheseweretheonlysharesofCommonStockissuedbytheCompanyduring1997.TheCompanyforeseesmodestnear-termfinancingrequirements.Withanincreasinglycompetitiveenvironment,theCompanybelievesmaintainingahighdegreeoffinancialflexibilityiscritical.Inthisregard,theCompany'slong-termobjectiveistocontrolcapitalexpenditures.Moreover,in1998theCompanymaybeginfundingastockrepurchaseprogramandinvestmentsinunregulatedbusinessesasdiscussedunderCompetition.Capitalandothercashrequirementsduring1998areanticipatedtobesatisfiedprimarilyfromacombinationofinternallygeneratedfundsandtheuseofshort-termcredit arrangements.TheCompanymayrefinancematuringlong-termdebtandPreferredStockobligationsduring1998dependingonprevailingfinancialmarketconditions.TheCompanyanticipatesutilizingitscreditagreementsandunsecuredlinesofcredittomeetanyinterimexternalfinancingneedspriortoissuinganylong-termsecurities.Forinformationwithrespecttoshort-termborrowingarrangementsandlimitations,seeNote9oftheNotestoFinancialStatements.Asfinancialmarketconditionswarrant,theCompanymayalso,fromtimetotime,redeemhighercostseniorsecurities.ResultsofOperationsThefollowingfinancialreviewidentifiesthecausesofsignificantchangesintheamountsofrevenuesandexpenses,comparing1997to1996and1996to1995.TheNotestoFinancialStatementscontainadditionalinformation.OPERATINGREVENUESANDSALES.Operatingrevenuesin1997werelowerthan1996withtheeffectofelectricbaseratedecreasesinJuly1996and1997andlowerthermsalesofgasduetomilderweatherthanlastyearpartiallyoffsetbyhighercustomerelectrickilowatt-hoursalesresultingfromincreasedcustomersandhigherelectricsalestootherutilities.Despiteloweroperatingrevenues,operatingrevenueslessfuelexpenseswerenearlyunchangedreflectingprimarilyadeclineinpurchasedelectricityexpenseasaresultofincreasedavailabilityoftheCompany'sgeneratingfacilities.TheeffectofweathervariationsonoperatingrevenuesismostmeasurableintheGasDepartment,whererevenuesfromspaceheatingcustomerscompriseabout90to95percentoftotalgasoperatingrevenues.Comparedtoayearearlier,weatherintheCompany'sserviceareawas9.0percentwarmerduringthefirstthreemonthsof1997and1.1percentwarmerfortheentireyearonacalendarmonthheatingdegreedaybasis.Incontrast,weatherduring1996was7.1percentcolderthan1995onacalendarmonthheatingdegreedaybasis.WitheliminationofaweathernormalizationclauseintheCompany'sgastariffeffectiveNovember1,1995,abnormalweathervariationsmayhaveamorepronouncedeffectongasrevenues.Coolerthannormalsummerweatherduring1997and1996hamperedthedemandforairconditioningusage,ecteicSaleswithamorepronouncedeffectin1997withthe1997(thousandsofmNth)weatherbeingapproximately27percentcoolerthan1996.Comparedwithayearearlier,kilowatt-hoursalesofenergytoretailcustomerswereup1.2percentin1997,followinga0.3percentincreasein1996.Salestocommercialcustomersachievedthelargestgainin1997.Salestoindustrialcustomersledtheincreasein1996comparedtoayearearlierandweredrivenbyonelargeindustrialcustomerwhopurchasedmoreelectricpoweras199519961997analternativetopowerproducedatitsownplant.Decreasedelectricdemandforairconditioningusagecausedbycoolersummerweatherhadanimpactonkilowatt-hoursalesin1996and1997.FluctuationsinrevenuesfromelectricsalestootherutilitiesaregenerallyrelatedtotheCompany'scustomerenergyrequirements,thewholesaleenergymarket, availabilityoftransmission,andtheavailabilityofelectricgenerationfromCompanyfacilities.Revenuesfromelectricsalestootherutilitiesrosein1997duetoincreasedsalesresultingfromgreateravailabilityofourcombinednuclearandfossilgeneration,afavorablewholesalemarketinthesecondhalfoftheyear,andincreasedmarketingofavailablecapacity.Incontrastto1997,revenuesfromsalestootherelectricutilitiesdeclinedin1996reflectingdecreasedkilowatt-hoursalestosuchutilitiesandlessgenerationfromtheCompany'sGinnaNuclearPlant.Thetransportationofgasforlarge-volumecustomerswhoareabletopurchasenaturalgasfromsourcesotherthantheCompanyisanimportantcomponentoftheCompany'smarketingmix.Companyfacilitiesareusedtodistributethisgas,whichamountedto16.6milliondekathermsin1997and16.8milliondekathermsin1996.ThesepurchasesbyeligiblecustomershavecauseddecreasesinCompanyrevenues,withoffsettingdecreasesinpurchasedgasexpensesand,ingeneral,donotadverselyaffectearningsbecausetransportationcustomersarebilledatrateswhich,exceptforthecostofbuyingandtransportinggastotheCompany'scitygate,approximatetherateschargedtheCompany'sretailgasservicecustomers.GassuppliestransportedinthismannerarenotincludedinCompanythermsales,depressingreportedgassalestonon-residentialcustomers.@Sold'Tmngpoeted'millionsoftherms)561538520asiaa++'rrtrrY.'99519961997Thermsofgassoldandtransportedweredown4.1percentin1997,afterincreasingnearlyeightpercentin1996.Thesechangesreflect,primarily,theeffectofweathervariationsonthermsalestocustomerswithspaceheating.Ifadjustedfornormalweatherconditions,residentialgassaleswouldhavedecreasedabout1.5percentin1997over1996,whilenon-residentialsales,includinggastransported,wouldhaveincreasedapproximatelytwopercentin1997.Theaverageuseperresidentialgascustomer,whenadjustedfornormalweatherconditions,showedamodestdecreasein1996and1997.FOSSILUNITRATINGSANDSTATUS.SeveraloftheCompany'sfossil-fueledgeneratingunitshavebeentemporarilyderatedsinceFebruary1997tomaintainacceptableopacitylevelswhiletheCompanyinvestigatesadditionalengineeringsolutionstoaddresstheopacityoftheUnits'missions(seeNote10oftheNotestoFinancialStatementsundertheheading"EnvironmentalMatters,OpacityIssue").Thefinancialimpactofthederatingsincludesthelostopportunityassociatedwithenergysalesand,attimes,theneedtomakeadditionalpurchasestomeetsystemrequirements.Whilethederatingshavedecreasedearnings,andwillcontinuetodoso,theamountisnotexpectedtobematerial.TheNYPPisintheprocessofevaluatingnewrulesforitssystemloadregulation.OpacitylimitationsareexpectedtoreducetheabilityoftheCompanytoreacttochangesinloadandRochesterGasanctBectrlcCorporatton32 providesystemloadregulationserviceswhencalleduponbytheNYPP,resultinginadditionalcosts.DependingonthenewNYPPrequirements,andwhetherthederatingsremainineffect,therevisedrulescouldresultintheCompanyhavingtopurchaseadditionalregulationserviceswhichmaycostbetween$500,000and$2,500,000annually.TheCompanyintendstomakea$2.7millioncapitalupgradetotheprecipitatorofoneofitsfossil-fueledgeneratingunitswhichisexpectedtoremoveasubstantialportionoftheopacityexceedancewhichledtothederating.OnJanuary21,1998theCompanydecidedtoretireBeebeeStationbymid-1999.Factorssuchastheplant'sage,locationinanareanolongerconsistentwiththesurroundingdevelopment,lackofarail/coaldeliverysystemandmorestringentcleanairregulationsmadetheplantuneconomicalinthedevelopingcompetitivegenerationbusiness.TheretirementofBeebeeStationisnotexpectedtohaveamaterialeffectontheCompany'sfinancialpositionorresultsofoperations.Theplantwillbefullydepreciatedatthetimeofretirement.TheSettlementprovidesthatallprudentlyincurredincrementalcostsassociatedwiththeshutdownanddecommisioningoftheplantarerecoverablethroughtheCompany'sdistributionaccesstariff.Theelectriccapabilityandenergycurrentlyprovidedbytheplantisexpectedtobereplacedbypurchasedpowerasneeded.OnDecember1,1997Niagaraannouncedaplantosellitsfossil-fueledandhydroelectricgeneratingstationsbyauctionin1998.ThisplanwasagreedtoaspartofNiagara'sPowerChoiceSettlementcurrentlyunderreviewbythePSC.TheCompanyintendstoincludeits24percentshareoftheOswegoSteamStationUnit6(Oswego6)forsaleaspartofNiagara'sauction.AnygainsorlossesrealizedbytheCompanyfromthesaleofitsshareofOswego6wouldbetreatedinaccordancewiththetermsoftheSettlementundertheCompetitiveOpportunitiesProceeding.OPERATINGEXPENSES.EnergyCosts-Electric.Higherfuelexpenseforelectricgenerationin1997comparedwithayearearlierreflectsincreasedgenerationfrombothfossilandnuclear-fueledplants.TotalCompanyelectricgenerationwasupapproximately21percentin1997over1996.Forthe1996comparisonperiod,lowerelectricfuelcostsresultedfromlesselectricgeneration.ThefuelcostadjustmentclausehasbeeneliminatedeffectiveJuly1,1996.CompanyshareholderswillassumethefullbenefitsanddetrimentsrealizedfromactualelectricfuelcostsandgenerationmixcomparedwithPSC-approvedforecastamounts.TheCompanynormallypurchaseselectricpowertosupplementitsowngenerationwhenneededtomeetloadorreserverequirements,andwhensuchpowerisavailableatacostlowerthantheCompany'sproductioncost.Increasedavailabilityandefficienciesfollowingthe1996installationofnewsteamgeneratorsattheGinnanuclearplantresultedinlowerkilowatt-hourpurchasesofelectricityin1997whichledtoadeclineinpurchasedelectricpowerexpense.Despiteanincreaseinkilowatt-hourspurchasedin1996,electricpurchasedpowerexpensewasalsodownin1996reflecting,inpart,lowerpurchasesfromthehigher-costKaminefacilityasdiscussedbelow.UnderacontractwithKamine,theCompanyhasbeenrequiredtopurchaseunneededenergyatuneconomicalrates(seeNote10oftheNotestoFinancialStatements).The33 RochesterGatandBcctricCorporationCompanypurchased337thousandmegawatt-hoursofenergyfromKamineatatotalpriceof$16.6millionin1995.TheKaminefacilityhasbeenoutofservicesincethemiddleofFebruary1996whichhelpedtolowertheunitcostforpurchasedelectricityin1996comparedto1995.EnergyManagementandCosts-Gas.TheCompanyacquiresgassupplyandtransportationcapacitybasedonitsrequirementstomeetpeakloadswhichoccurinthewintermonths.TheCompanyiscommittedtotransportationcapacityontheEmpireStatePipeline(Empire)andtheCNGTransmissionCorporation(CNG)pipelinesystems,aswellastoupstreampipelinetransportationandstorageservices.ThecombinedCNGandEmpiretransportationcapacityisadequatetomeettheCompany'scurrentrequirements.Forthe1997comparisonperiod,gaspurchasedforresaleexpensedeclineddrivenbyareducedvolumeofpurchasedgasresultingfromawarmerheatingseason.Highercommoditycostsandincreasedvolumesofpurchasedgascausedanincreaseingaspurchasedforresaleexpensein1996comparedto1995.OperationsExcludingFuelExpenses.Forthe1997comparisonperiod,theincreaseinoperationsexcludingfuelexpensesreflectsmainlyhigheroutsideservicesexpenses,recognitionofobsoleteandunproductivematerialsinventory,stormcosts,andregulatorycompliancecostspartiallyoffsetbylowerpayrollcostsanddecreasedexpenseassociatedwithuncollectibleaccounts.Forthe1996comparisonperiod,theincreaseinoperationsexcludingfuelexpensesreflectsmainlyhigherpayrollcostsandanincreaseinamortizationexpensebeginningJuly1,1996forcustomerinformationsystemenhancements.HigherpayrollcostsforthisperiodreflectsamortizationofadditionalearlyretirementcostsforprogramsconcludedinOctober1994andgreateremployeeredeployment/outplacementcosts.Anadditionalexpenseaccrualfordoubtfulaccountsincreasedoperatingexpensesby$15.0millionin1995.TheCompanyiscontinuingtotakeaggressivestepstoimproveitscollectionefforts.Uncollectibleexpensein1997was$18million,comparedwith$20millionin1996.In1995,uncollectibleexpensewas$23million.Forbothcomparisonperiods,theincreaseindepreciationexpensereflectsprimarilyresultsfromdepreciationofthenewGinnanuclearplantsteamgenerators(approximately$800,000additionalexpensepermonth)andrecoveryofincreasednucleardecommissioningexpenseofapproximately$3.2millionperquarterbeginningJuly1,1996.TaxesChargedToOperatingExpenses.Local,stateandothertaxesdecreasedin1997reflectingmainlylowerpropertytaxesduetodecreasesinassessmentsand/orratesandlowerrevenuetaxesduetodecreasesinrevenuesandtheNewYorkStaterevenuetaxsurchargerate.Thedecreaseinthesetaxesfor1996reflectsmainlylowerpropertytaxesduetodecreasesinassessments.Thedecreaseinfederalincometaxin1997reflectsmainlythereversalofapriorprovisionforthein-servicedateofNineMileTwoasaresultofanagreementreachedwiththeInternalRevenueService.OtherStatementofIncomeItems.Forthe1996comparisonperiod,thevariationinnon-operatingfederalincometaxreflectsmainlyaccountingadjustmentsrelatedtoregulatorydisallowances.RecordedunderthecaptionOtherIncomeandDeductionsistherecognitionofregulatorydisallowancesinconnectionwiththe1995GasSettlement(seeRatesandRegulatoryMatters).

Other(Income)andDeductions,Other-netdecreasedin1997duemainlytorecognitionofexpenseassociatedwithmanagementperformanceawardsandtheCompany'sPerformanceStockOptionPlan.Forthe1996comparisonperiod,Other(Income)andDeductions,Other-netincreasedmainlyduetotheeliminationin1996oftwoaccruedexpensesin1995relatedtodepreciationexpensefortheEmpireStatePipelineandamortizationofcertainemployeeearlyretirementcosts.Bothmandatoryredemptionsandtheoptionalredemptionsofcertainhigher-costlong-termdebthavehelpedtoreducelong-termdebtinterestexpenseoverthethree-yearperiod1995-1997.Comparedtotheprioryear,theaverageshort-termdebtoutstandingwasupslightlyin1997followingadecreasein1996.PreferredStockdividendsdecreasedin1997duetotheCompany'sdiscretionaryredemptioninAprilofits7.50%PreferredStocl',SeriesNandthemandatorysinkingfundredemptionofits7.45%PreferredStock,SeriesSinSeptember.DividendPolicy.TheleveloffuturecashdividendpaymentsonCommonStockwillbedependentupontheCompany'sfutureearnings,itsfinancialrequirements,andotherfactors.TheCompany'sCertificateofIncorporationprovidesforthepaymentofdividendsonCommonStockoutofthesurplusnetprofits(retainedearnings)oftheCompany.2C8f'2lllmal/lgInOctober1997,MichaelT.TomainojoinedtheCompanyasSeniorVicePresidentandGeneralCounsel.Mr.TomainowasformerlyVicePresident,GeneralCounselandSecretaryatGouldPumps,Inc.PriortothathewasapartneratthelawfirmofNixon,Hargrave,DevansandDoyle,wherehespecializedintelecommunicationandutilitylawandgeneralcivillitigation.MichaelT.Tomaino~1i(/gll~-~)InApril1997,WilliamJ.ReddywasnamedControlleroftheCompanywithresponsibilityforCorporateAccountingServicesandRegulatoryAffairs.Mr.ReddywaspreviouslyGroupManager,PublicAffairsServices.Wi%I'amLReddy35 MBBnCEBl+ZpoltgReportofIndependentAccountants..36ReportofManagement~...,~....~.62StatementofIncome...~...~...~.37InterimFinancialData........~.~.62StatementofRetainedEarnings.~...37CommonStockandDividends..~.~.63BalanceSheet..38SelectedFinancialData...........64StatementofCashFlows..........39ElectricDepartmentStatistics.......66NotestoFinancialStatements.......40GasDepartmentStatistics..........67GEElllEEQIE-GONE-(l92-'s"~portofIndependentAccountantsPriceWaterhouseceo1100BauschRLombPlaceRochester,NewYork14604-2705January23,1998TotheShareholdersandBoardofDirectorsofRochesterGasandElectricCorporationInouropinion,theaccompanyingconsolidatedbalancesheetsandtherelatedconsolidatedstatementsofincome,retainedearningsandcashflowspresentfairly,inallmaterialrespects,thefinancialpositionofRochesterGasandElectricCorporationanditssubsidiariesatDecember31,1997and1996,andtheresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,1997inconformitywithgenerallyacceptedaccountingprinciples.ThesefinancialstatementsaretheresponsibilityoftheCompany'smanagement;ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.Weconductedourauditsofthesestatementsinaccordancewithgenerallyacceptedauditingstandardswhichrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,andevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisfortheopinionexpressedabove.1/~//

'l+02Bf8t2t8mellf0PlColM(ThousandsofDollars)OperatingRevenuesElectricGasYearEndedDecember311997$679,473336,3091996$690,883346;2791995$696,582293,863ElectricsalestootherutilitiesTotalOperatingRevenuesOperatingExpensesFuelExpensesFuelforelectricgenerationPurchasedelectncityGaspurchasedforresaleTotalFuelExpensesOperatingRevenuesLessFuelExpensesOtherOperatingExpenses.0erationsexcludingfuelexpensesaintenanceDepreciationan'damortizationTaxes-local,stateandotherFederalincometaxTotalOtherOperatingExpensesOperatinghrconfeOther(Income)andDeductionsAllow'ancefor'therfundsusedduringconstructionFederalincometaxRegulatorydisallowancesOther,netTotalOther(Incomts)andDeductionsInterestChargesLongtermdebtOther,netAllowanceforborrowedfundsusedduringconstructionTotalInterestChargesNetInconreDividendsonPreferredStockEarningsApplicabletoCo>mnonStockEarningsperConunonShare-BasicEarningsperConunonShare-.Diluted170)5,78220,856.1,036,63847,66528,347196,579272,591'64,047268,47446,635'116,522121,796t65,27%618,706.145,341-(351)(3,704)3,308(747)44,6156,676(563)50,72895,360~5,805$89,555$2.30$2.301,037,162,16,8851,054,04740,93846,484202,297289,719764,328.266,094'7,063105,614126,86869,501615,140149,188(684)(3,450)(712)(4,846)48,6189,328(1,423)56952397,5117,465$90,046$2.32$2.32990,44525,8831,016,32844,19054,167167;762266,119750,209259,20749,22691,593133,89566,215600,136150,073(585)(16,948)26,8669,63118,96453,0269,056(2,901)59,18171,9287,46564,463$1.69$'.69neosatetat@ment0eternearn~nS(ThousandsofDollars)I'earEndedDecember3119971996,1995BalanceatBeginningofPer(odAddNetIncomeAdjustmentA~sociatedwithStockRedemptionTotalDeductDividendsdeclaredoncapitalstockCumulativepreferredstock-atrequiredratesCommonstockTotalBalanceatEndofPeriodCashDividendsDeclaredperCommonShareTheaccompanyingnotesareaninteyafpartofthefinandalstatements.$90,540'5,360(846)185,0545,80569,93675,741$109,313$1.80$70,330,97,511167,8417,46569,83677,301$90,540$1.80$74,S6671,9289146,4947,46568,69976,164$70,330$1.8037 Rochc$tcrG0$0ndElectricCorporruon4rnsoliChtedSeleniteMeet(thousandsofDollars)AssetsUtility'PlantElectricGasCommonNuclearfuel-.Less:Accumulateddepreciation.Nuclearfuelamo~tizationConstructionworkinprogressNetUtilityPlantCurrentAssetsCashandcashequivalentsAccountsreceivable,netofallowancefordoubtfulaccounts:1997-$26,926;1996-$17,502UnbilledrevenuereceivableMaterials,supplies'andfuelsPrepayments,TotalCurrentAssetsDeferredDebits'NucleargeneratingplantdecommissioningfundNinehjifeTwodeferredcostsUnamortizeddebtexpenseOtherdeferreddebitsRegulatoryassets,TotalDeferredDebits,TotalAssetsCapttallzatlenandLiabilitiesCapitalization~Longtermdebt-mortgagebonds-promissory.notesPreferredstockredeemableatoptionofCompanyPreferredstocksubjecttomandatoryredemptionCommonshareholders'quity:CommonstockRetainedearnings,.~TotalCommonShareholders'quityTotalCapitalizationLongTennLiabilities(DepartnrentofEnergy)NuclearwastedisposalUraniumenrichmentdecommissioningTotalLongTermLiabilitiesCurrentLiabilitiesLongtermdebtduewithinoneyearPreferredstockredeemablewithmoneyearShorttermdebt.AccountspayableDividendspayableTaxesaccrued-InterestaccruedOtherTotalCurrentLiabilitiesDeferredCreditsaudOtherLiabilities,Accumulateddeferred'incometaxesPensioncostsaccruedOtherTotalDeferredCreditsandOtherLiabilitiesConnnltnrentsandOtherMattersTotalCapitalizationandLiabilitiesTheaccompanyingnotesareanintegralpartofthefinancialstatements.AtDecember311997$2,439,108416,989134,938'43,0423,234,0771,510,074204,2941,519,70974,0181,593,72725,405104,78148,43839,92923,818242,371132,54030,30916,94320,411231,988432,191$2,268,289$485,434~101,90047,00035,000699,031109,313808,3441,477,6787'3,26113,46596,72630,00010,00020,00053,19518,7915,0418,59333,697189,317344,96967,36192,238504,568$2,268,2891996$2,413,881;391,231129,946224,7013,159,7591,381,908187,1701,590.68169,711'1,660,39221,301112,90853,26139,88823,103250,461"91,195-31,36014,82028,759284,489450,623$2,361,47$555,054,91,67,00,45,000696,01990,540786,5591,545,51379,05714,695'93,752"-20,00010,00014,00049,46219,3494,69410,31730,395158,217,370,02869,806124,160563,994$2,361,476-~38 nsolidatedStatementofCorkFlows(ThousandsofDollars)YearEndedDecember31199719961995CashFlowfromOperationsNetinconreAdinstnrentstoreconcilenetinconretonetcastsprovidedfrontoperatingactivities:DepreciationandamortizationDeferredfuelDeferredincometaxesAllowanceforfundsusedduringconstructionUnbilledrevenue,netIStockoptionplanNucleargeneratingplantdecommissioningfundPensioncostsaccruedPostemploymentbenefitinternalreserveRegulatorydisallowanceProvisionfordoubtfulaccountsChangesincertaincurrentassetsandliabilities:.AccountsreceivableMaterials,suppliesandfuelsTaxesaccruedAccountspayableOthercurrentassetsandliabilities,netOther,net\Total0cratingCashFlowfromInvestingActivitiesNetadditionstoutilityplantOther,netTotalInvesting$95,360'133,942489(10,064)(914)4,8232,399(20,331)(3,398)6,1895,0783,049(41)34737337,3446,847234,852(84,06)(5)(85,069)121,824(6,5f)1)6,391(2,107)10I908(11,732)(2,494)6I6264,9873I228(1,238)(13,944)(3,116)(5,186)(3,931)201,226109,5753,432(8,047)(3,486)(9,899)(8,837)6,2804,63626,86614,893(25,599)6,837"15,1679,6449,63928,762251,791(114,274)9,204(109,547)11,124(105,070)(98,423)$97,511$71,928CashFlowfromFinancingActivitiesProceedsfront:Sale/IssuanceofcommonstockIssuanceoflongtermdebtShorttermborrowings,netRetirementoflongtenndebtRetirenfentofpreferredstockDividendspairionpreferredstockDividendspaidoncoin!nonstockOther,netTotalFinancingIncrease(Decrease)incashandcashequivalents~CashandcashequivalentsatbeginningofyearCashandcasheuivalentsatendofear272101,9006,000(151,568)(30,000)(6,366)(69,933)3,016(146,679)$4,104$21,301$25,405,8,61214,000(67,332)(7,465)(69,657)2,866(118,976)$(22,820)$44,121521,30117,074(51,600)(1,000)(7,465)'68,347)(719)(112,057)$41,311$2,810$44,121P~uppkmentalDisclogureofCaskFlowinformation(ThousandsofDollars)CashPaidDuringtheYearInterestpaid(netofcapitalizedatnonnt)IncometaxespaidYearEndedDecember31199719961995Theaccompanyingnotesareanintegralpartofthefinandalstatements.39

'~oi'egToFinancialStatementSRochesterGasandHectrlcCofpofatioflSurnrnarfofAccounringprinciplesGENERAL.TheCompanysupplieselectricandgasserviceswhollywithintheStateof¹wYork.ItproducesanddistributeselectricityanddistributesgasinpartsofninecountiescenteringabouttheCityofRochester.TheCompanyissubjecttoregulationbythePublicServiceCommissionofth'eStateofNewYork(PSC)underNewYorkstatutesandbythePederalEnergyRegulatoryCommission(FERC)asalicenseeandpublicutilityundertheFederalPowerAct.TheCompany'saccountingpoliciesconformtogenerallyaccepfedaccountingprinciplesasappliedtoNewYorkStatepublicutilitiesgivingeffecttotheratemakingandaccountingpracticesandpolicies.ofthePSC.Theprepar'ationoffinancialstatementsrequiresmanagement.tomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthose.e'stimates.AdescriptionoftheCompany.'sprincipalaccountingpoliciesfollows.PRINCIPLESOFCONSOLIDATION.'heconsolidatedfifiancialstatementsincludetheaccou'ntsoftheCompanyanditswholly-ownedsubsidiariesRoxdel(nowuEnergetixn)andEnergyline.Allintercompanybalancesandtransactionshavebeeneliminated.EnergylinewasformedasagaspipeliiiecorporationtofundtheCompany'sinvestmentintheEmpireStatePipelineproject.Inlate1996,EnergylinesolditsinvestmentintheEmpireStatePipeline.llTheRoxdel(nowuEnergetixn)activityisinsignificanttotheCompany's.financialpositionandresultsofoperation.RATESANDREVENUE.Revenueisrecordedonthebasisofmetersread.Inaddition,theCompan'yrecordsanestimateofunbilledrevenueforservicerenderedsubsequenttothemeter-readdatethroughtheendoftheaCcoun'tingperiod.ThroughJune30;1996,tariffsforelectricserviceincludedfuelcostadjustmentclauseswhichadjustedtheratesmonthlytoreflectchangesintheactualaveragecostoffuels.BeginningJuly1,1996,theelectricfueladjustmentclausewaseliminatedinconnectionwitharatesettlementagree-mentwiththePSC.Inprioryears,retailcustomerswhousedgasforspaceheatingwereSubjecttoaweathernormaliza--tionadjustinenttoreflecttheimpactofvariatioqsfiomnormalweatheronabillingmonthbasisforthemonthsofOctoberthroughMay,inclusive.OnJanuary25,1995,theCompanysuspendedtheweathernormalizationadjustmentinanefforttomitigatehighbillingsduetothewarmweather,andthesuspensionbecamepermanent.Thisdecreased1995pre-taxearningsfromgasoperationsby$5.8million.TheCompanycontinuestousegascostdeferralaccounting,AreconciliationofrecoverablegascostswithgasrevenuesisdoneannuallyasofAugust31,andtheexcessordeficiencyisrefundedtoorrecoveredfromthe,customersduringasubsequentperiod.UTILITYPLANTrDEPRECIATIONANDAMORTIZATION.Thecostofadditionstoutilityplantandreplacementofretirementunitsofpropertyiscapital-ized.Costincludeslabor,material,andsimilaritems,aswellasindirectchargessuchasengineeringandsupervision,andisrecordedatoriginalcost.TheCompanycapitalizesanAllowanceforFundsUsedDuringConstruction(AFUDC)approximatelyequivalenttothecostofcapitaldevotedtoplanturIderconstructionthatisnotincludedinitsratebase.AFUDCissegregatedintotwocomponents~-andclassifiedintheConsolidatedStatementofIncomeasAllowanceforBorrowedFundsUsed DuringConstruction,anoffsettoInterestCharges,andAllowanceforOtherFundsUsedDuringConstruction,apartof'OtherIncome.TherateapprovedbythePSCforpurposesofcomputing'AFUDCwas5.0%duringthethree-yearperiodendedDecember31;1997.Replacementofminor~*.itemsofpropertyisincludedinmaintenanceexpenses.Costsofdepreciableunitsofplantretiredareeliminatedfromutilityplantaccounts,aridsuchcosts,plusremovalexpenses,lesssalvage,are-chargedtotheaccumulateddepreciationreserve.CASHANDCASHEQUIVALENTS.Cashandcash'quivalentsconsistofcashandshort-termcommercialpaper.,Theseinvestments.hav'eoriginalmaturi'tynotexceedingthreemonths.Suchinvestmentsarestatedatcost,which.approximatesfairvalue,andareconsideredcashequivalentsforfinancialstatementpilrposes.INVESIMENISINDEBTANDEQUITYSECURITIES..'fheCompany'saccountingpolicy,as.presciibedbythePSC,withrespecttoitsnucleardecommis-siohingtrustsistoreflectthetrusts'ssetsatmarketvalueandreflectunrealizedgainsandlossesasachangeinthecorrespondingaccrueddecommissioningliability.GASSUPPLY.-TheCompany,periodicallyentersintoagreementstominimizeprice'risksfornaturalgasin.storage.Gainsorlossesresultingfromtheseagreementsaredeferred,untilthecorrespondinggasiswithdrawnfromstorageanddeliveredto'ustomers.~RESEARCHANDDEVELOPMENTCOST.1ResearchandDevelopmentcostswerechargedtoexpenseas'incurred.Expendituresforthygears1997,1996,and1995were$4.5million,$4.9millionand$5.2millionrespectively.ENVIRONMENTALREMEDIATIONCOSIS.TheCompanyaccruesfo~lossesassociatedwithenvironmentalremediationobligationswhen,suchlossesareprobableandreasonablyestimable.Accrualsforestimatedlossesfromenvironmentalremediationobligationsgenerally.are'recognizednolaterthancompletionoftheremedialfeasibilitystudy..SuchaccrualsareadjustedasfurtherinformationdevelopsorcircumstanceschangersCostsoffuture-expenditures.forenvironmentalremediationobligationsarenotdiscountedtotheirpresentvalue.r,MATERIALS,SUPPLIESANDFUELS.Materialsandsuppliesinventoriesarevaluedatthelowerofcostormarketusingthefirst-in,first-outmethod.Fuelinventoriesarevaluedataverage'cost.TheCompanyperiodicallyentersintoagreementsto.minimizepricerisksfornaturalgasinstorage.Gainsorlossesresultingfromtheseagreementsaredeferreduntilthecorrespondinggasiswithdrawnfromstorageand'deliveredtocustomers..STOCK-BASED'COMPENSATION;,/FinancialAccountingStandardsBoardStatementNo.123(SFAS-)23),Accountingfor.Stock-BasedCompensation,wasadoptedbytheCompanyinthefirstquarterof1996:Itrecommendstheuseofa'airvaluebasedmethodofaccountingforcompensation.costsassociatedwithstock-basedcompensa-'tion.TheCompanycurrentlyhasStockAppreciationRightsplanscoveringcertainemployeesanddirectors.Fortheseplans,theCompany'saccountingpolicyhasbeentouseafairvaluemethodofcomputingperiodiccompensationexpense.SFAS-123wasappliedtothevaluationofthe1996PerformanceStockOptionPlan(PSOP),whichbecameeffectiveonJanuary22,'1997.Theaggregateamountchargedtoexpenseasaresultoftheseplansapproximates$1.0millionannuallyin1996and1995,andapproximates$8.2millionin1997.AdditionalinformationonthePSOPisincludgdinNote8.RECLASSIFICATIONS.ICertainamountsintheprioryears'inancial.statementswerereclassifiedtoconformwithcurrentyearpresentation.(Volt'Inmtinucdonpage42)

(conrinnadfrnmpn,ra41)EARNINGSPERSHARE.ISEAS-128,EarningsPerShare,wasadoptedbytheCompanyinthefourthquarterof1997.ThisstatementreplacesthepresentationofprimaryEarningsPerSharewithBasicEarningsPerShare,andalsorequirespresentationofDilutedEarningsPerShare.BasicEarningsPerShare(EPS)iscomputedbydividingincomeavailabletocommonshareholdersbytheweightedaveragenumberofcommonsharesoutstandingfortheperiod.DilutedEPSreflectsthepotentialdilutionthatcouldoccurifsecuritiesorothercontractstoissuecommonstockwereexercisedorconvertedintocommonstockorresultedintheissuanceofcommonstockthatthensharedintheearningsoftheCompany.ThefollowingtableillustratesthecalculationofbothBasicandDilutedEPSfortheyearendedDecember31,1997.BasicEPS:NetIncomeLess:PreferredStockDividendsIncomeavailabletoCommonShareholdersDilutedEPS:EffectofDilutiveSecuritiesStockOptionPlanIncomeavailabletoCommonShareholdersplusassumedconversionsIncome(Numerator)$95,360(5,805)89,555$89,555Shares(Oenominator)38,85338,909Per-ShareAmount$2.3052.3DAstherewerenodilutivesharesinprioryears,basicanddilutiveearningspersharewerethesamefor1996and1995.I)LI(ai.'~I')i-,I'4E(ochattat(iaaantiE1((tric(*erporat)ottt'aia332)

Federa1IncoineTaxes4The'piovisionforfederalincometaxesisdistributedbetweenoperatingexpenseandotherincomebaseduponthetreatmentofthevariouscomponentsoftheprovisionintherate-makingprocess.Thefollowingisasummaryofincometaxexpenseforthethreemostrecentyears.(ThousandsofDollars)Charged(Credited)tooperatingexpense:CurrentDeferred-Total.Charged(Credited)to.otherincome:CurrentDeferredDeferredinvestmenttaxcreditTotalTotalFederalincometaxexpense.1997$69,812(4,533)65,2791,828(3,100)(2,432)(3,704)$61,5751996$65,7573,74469,501(6,097)5,079(2,432)(3,450)$66,0511995$65,36884766,215(9,996)(4,520)~.(2,432)(16,948)$49,267ThefollowingisareconciliationofthedifferencebetweentheamountoffederalincometaxexpensereportedintheConsolidatedStatementofIncomeandtheamount.computedbymultiplyingthe'ncomebythestatutorytaxrateof35%.(ThousandsofDollars)1997.19961995NetIncomeAdd:FederalincometaxexpenseIncomebeforeFederalincometaxComputedtaxexpenseatstatutorytaxrateIncreases(decrease)intaxresultingfrom:DifferencebetweentaxdepreciationandamountdeferredDeferredinvestmenttaxcreditMiscellaneousitems,net.TotalFederalincometaxexpenseIAsummaryofthecomponentsofthenetdeferredtax(ThousandsofDollars)NucleardecommissioningAccelerateddepreciationDeferredinvestmenttaxcreditDepreciationpreviouslyflowedthroughPensionOtherTotal$95,360~61,575$156,935$54,927107772(2,432)(1,692)$61,575liabilityisasfollows:1997$(20,807)216,70427,981157,538(23,166)(13,281)$344,969$97,51166,051$163,562$57,24710,796(2,432)440$66,0511996$(17,880)213,90729,562169,562(24,570)(553)$370,028$71,92849267$121,195$,42,4187,197(2,432)2,084$49,2671995$(14,797)197,95231,143-183,077(24,241)4,518$377,652SFAS-109"AccountingforIncomeTaxes"requiresthatadeferredtaxliabilitymustberecognizedonthebalancesheetfortaxdifferencespreviouslyflowedthroughtocustomers.Substantiallyalloftheseflow-throughadjustmentsrelatefoproperty,plantandequipmentandrelatedinvestmenttaxcreditsandwillbeamortizedconsistentwiththedepreciationoftheseaccounts.ThenetamountoftheadditionalliabilityatDecember31,1997and1996was$160millionand$175million,respectively.Inconjunctionwiththerecognitionofthisliability,acorrespondingregulatoryassetwasalsorecognized.43 PensionPlanandOtherPostemplopnentBenefitsTheCompanyhasadefinedbenefitpensionplancoveringsubstantiallyallofitsemployees.Thebenefitsarebasedonyearsofserviceandthe'employee'scompensation.TheCompany'sfundingpolicyisto,contributeannuallyanamountconsistentwiththerequirementsoftheEmployeeRetirementIncomeSecurityActarrdtheInternalRevenueCode.Thesecontributionsareintendedtoprovideforbenefitsattributedtoservicetodateandforthoseexpectedtobeearnedinthefuturq.Theplan'sfundedstatusandamountsrecognizedontheCompan)i'sbalancesheetareasfollows:(Millions)19971996'Accumulatedbenefitobligation,includingvestedbenefitsof$384.7in1997and$314.6in1996ProjectedbenefitobligationforservicerenderedtodateLess-Planassetsatfairvalue,primarilylistedstocksandbondsPlanassetsinexcessofprojectedbenefitsUnrecognizednetloss(gain)frompastexperiencedifferentfromthatassumedandeffectsofchangesinassumptions'riorservicecostnotyetrecognizedinnetperiodicpensioncostUnrecognizednetobligationatDecember31Pensioncostsaccrued'Actuarialpresentvalue.Netpensioncostincludedthefollowingcomponents(219.0)10.71.8$(67.4)(170.7)11.62.4$(69.8)$(404.0)*$(392.6)*$(499.3)'(480.2)'38.4567.1139.1,86.9"(Millions)199719961995Servicecost-benefitsearnedduringtheperiodInterestcoston-projectedbenefitobligationActualreturnonplanasSetsNetamortizationanddeferralNetperiodicpension(credit)cost$6.233.0(104.3)63.1$(20)$7.433.4(80.8)39.0.$(1.0)$6.035.4(101.1)'56.1$(3.6)TheprojectedbenefitobligationatDecember31,1997andDecember31;1996assumeddiscountratesof6.75%and7.25%,respectiVely,andalong-termrateofincreaseinfuturecompensationlevelsof5.00%.Theassumedlong-termrateofreturnonplanassetswas8.50%.Theunrecognizednetobligationlsbeingamortizedover15yearsbeginningJanuary1986.Inadditiontoprovidingpensionbenefits,theCompanyprovidescertainhealthcareandlifeinsurancebenefitstoretiredemployeesandhealthcarecoverageforsurvivingspousesofretirees.SubstantiallyalloftheCompany'semployeesareeligibleprovidedthattheyretireasemployeesoftheCompany.In1997,thehealthcarebenefitconsistedofacontributionofupto$200perretireepermonthtowardsthecostofagrouphealthpolicyprovidedbytheCompany;Thelifeinsurance-benefitconsist'sofaBasicGroupLifebenefit,coveringsubstantiallyallemployees,providingadeathbenefitequal'toone-halfoftheretiree's'finalpay.Inaddition,certainemployeesandretirees,employedbytheCompanyatDecember31,1982,areentitledtoaSpecialGroupLifebenefitprovid-ingadeathbenefitequaltotheemployee'sDecember31,1982pay.SFAS-106,"AccountingforPostretirementBenefitsOtherthanPensions",allowstheCompanyto'mortizetheinitialunrecognized,unfundedAccumulatedPostretirementBenefitObligationatJanuary1992estimated.at$56millionovertwentyyears.TheCompanyintendstocontinuefundingthesebenefitsasthebenefitbecomesdue.'RochesterGasandBectrtcCoqeratton Theplan'sfundedstatusreconciledwiththeCompany'sbalancesheetisasfollows:{Millions)1997f996Accumulatedpostretirementbenefitobligation;RetiredemployeesActiveemployees~'Less-PlanassetsatfairvalueAccumulatedpostretirementbenefitobligation(inexcessof).lessthanfairvalueofassetsUnrecognizednetloss(gain)frompastexperiencedifferentfromthatassumedandeffectsofchangesinassumptionsPriorservicecostnotyetrecognizedinnetperiodicpensioncostUnrecognizednetobligationatDecember31Accruedpostretirementbenefitcost$(73.9j(15.1)$(89.0)0.0I(89.0)8.48.939.5$(32.2)$(65.6)(13.5)$(79.1)0.0(79.1)3.77.142.3$(26.0)Netperiodic'postretirementbenefitcostincludedthefollowingcomponentsi(Millions)~19971996Servicecost-benefitattributedtotheperiodInterestcostonaccumulatedpostretirementbenefitobligationActualreturnonplanassetsNetamortizationanddeferralNetperiodicpostretirementbenefitcast$0.95.80.03.5$10.2$1.05.40.04.2$10.6TheAccumulatedPostretirementBenefitObligationatDecember31,1997and1996assumed'iscountratesof6.7$%and7.25%,respectively,andlong-termrateofincreaseinfuturecompensationlevelsof5.00%.SFAS-112,"Employers'ccountingforPostemploymentBenefits",requirestheCompanytorecognizetheobligatiohtoprovidepostemploymentbenefitstoformerorinactiveemployeesafteremploymentbptbeforeretirement.TheCompanyhasbeenallowedtorecoverthiscostinrates.C.Q0t 1995ELECTRICOperallngInfornratlonOperatin'grevenuesOperatingexpenses,excludingproPretaxoperatingincom'eProvision.forincometaxesNetopeiatingincomeOlberInformalton'epreciationandamortizationNuclearfuelamortizationCapitalexpenditures'IneeslmentInformationIdentifiableassets(a)Ghs$700,329$707,768'$722,465visionforincometaxes516,793521,222523,1051837536-186,546'99,36061,837'1,901-59,500$121,699$139,860$124,645'103,395,$17,419$58,522181,783,826$78,812$17,982$93,634$92,615'16,'209$95',33431,913,762$1,877,224cDeparbnentalI'inandalInformationTheCompany'srecordsaremaintainedbyopeiatingdepaitments,inaccordancewithPSCaccountingpolicies.Thefollowingistheoperatingdatafor,eachoftheCompany'sdepartments,andnointerdepartmentaladjustmentsarerequiredtoarriveattheoperatingdataincludedinthe.ConsolidatedStatementofIncome.(ThousandsofDollars)19971996,270843,442,OperatingInformallonOperatingrevenues..$Operatingexpenses,excludingprovisionforincometaxesPretaxoperatingincomeProvisionforincometaxesNetoperatingincome$OtherInformaltonDepreciationandamortization$13,127Capitalexpenditures$25,546lneeslmentInformationIdentifiableassets(a)$441,849$346,279314,13632,1437,60024,543'$12,999$18,940$'.447,865$293,863276,93516,928-6,715$10,213$12,781$15,9133477,768(s)Excludescesll,uaamommddealuseedcnndolheecommonllama..Jointly-(honedI'adlitiesThefollowing'tablesetsforththejointly-ownedelectricgeneratingfacilitiesinwhichtheCompanyisparticipating.BothOswegoUnitNo;6andNineMilePoint,NuclearPlantUnitNo.2havebeencon-.structedandareoperatedbyNiagaraMohawkPowerCorporation.Eachparticipantmustprovideitsownfinancingforanyadditionstothefacilities.TheCompany'sshareofdirectexpensesassociatedwiththesetwounitsisincludedintheappropriateoperatingexpensesintheConsolidatedStatementofIncome.Variousmodificationswillbemadethroughoutthelivesoftheseplantstoincreaseoper-atingefficiency-orreliability,.andtosatisfychangingenvironmentalandsafetyregulations..sOswegoUnitNo.6NineMilePointNuclearUnitNo.2.~Rochestet.G83atiltHcctrtc'CorporationfNetmegawattcapability(summer),.7881,128RGRgsshare-megawatts'189.$58-percent,"--;.-24,.14Yearofcompletion1980988MillionsofDollarsatDecember31~1997PlantInServiceBalance$98.9,'879.3'ccumulatedProvisionForDepreciation$41.4$478.7PlantUnderCpnstruction$0.6$3.3ThePlantinServiceandAccumulatedProvisionforDepreciationbalancesforNineMilePoint-NuclearUnitNo.2shownaboveincludedisallowedcostsof$374.3million.Suchcosts,netofincometaxeffects,werepreviously'rittenoffin1987and1989:,s49 I*Long-TennDebtIRSr8ORTCulrIE80'(ISeriesDue(ThousandsofDollars)PrincipalAmount'ecember3119971996WXYEE,.-Oo(a)'P.QQ(b)RR(a)SS(a)(0IcI0)(c),/6/46.78.006'/a~~8'/e9N,8'/4-6.356.507.007.15'137;647.667.676.3757.458Netbonddiscount.Less:DuewithinoneyearTotalSept.15,1997July1,1998.,Aug.15,1999-Aug.1,2009Dec.-1,2028,Apr.1,2021Mar.15,'2002May15,2032May15,2032Jan.14,2000.Feb.10,2003Mar.3,2003Mar.15,2023Mar.15,2023Mar.15,2023July30,2003July30,2023'$304000*'5,500100,000100,00010,50050,00030,00039,0001,00033,0005(0012,00040,00040,000$516,000~(566)30,000$485,434$20,00030,000~~29,66810,00025,500100,000100,00010,50050,00030,00039,0001,00033,0005,00012,00040,00040,000$575,668.(614)20,000$555,054(a)TheSeries00,SeriesRRandSeriesSSFiis'tMortgageBondsequaltheprincipalamountofandprovideforallpaymentsofprincipal,premiumandInterestcorrespondingtothePollutionControlRevenueBonds,SeriesC,andPollutionControlRefundingRevenueBonds,Series1992A,Series1992B(RochesterGasandElectricCorporationProjects),respectively,issuedbytheNewYorkStateEnergy.ResearchandDevelopmentAuthority(NYSERDA)throughaparticipationagreementwiththeCompany.Paymentsoftheprincipalof,andinterestontheSeries1992AandSeries1992BBondsarpguaranteedunderaBondInsurancePolicybyMBIAInsuranceCorporation.(b)TheSeriesQQFirstMortgageBondsandthe7%~7.15%,7.13%and6.375%medium-termnotesdescribedbelowaregenerallynotredeemablepriortomaturity.'c)In1993theCompanyissued$200millionunderamedium-termnoteprogramentitled"FirstMortgageBonds,DesignatedSecuredMedium-TermNotes,Seri(,sAn'withmaturitiesthatrangefromsevenyearstothirtyyears.TheFirstMortgageprovidessecurityforthebondsthroughafirstlienonsubstantiallyallthepropertyownedbytheCompany(exceptcashandaccountsreceivable).Sinkingandimprovementfundrequirementsaggregate$333,540perannumundertheFirstMortgage,-excludingmandatorysinkingfundsofindividualseries.SuchrequirementsmaybemetbycertificationofadditionalpropertyorbydepositingcashwiththeTrustee.The1997and1996requirementsweremetwithfundsdepositedwiththeTrustee,andthesefundswereusedforredemp-tionofoutstandingbondsofSeriesY,OnMay1,1997theCompanyredeemedallitsoutstandingFirstIMortgage8%Bonds,SeriesY,dueAugust15,1999andallitsoutstandingFirstMortgage6N%Bonds,SeriesW,dueSeptember15,1997.OnOctober15,1997,theCompanyredeemedallitsoutstandingFirstMortgage'6/ao/oBonds,SeriesEE.II47frroro6rontinunfonpago48) t(continuedfrompage47)PSinkingfundrequirementsandbondmaturitiesforthenextfiveyearsare:PhousandsofDollars)SeriesX7%SeriesSeriesQQ1998$30,000$30,00019992000$30,000$30,0002001$100,000$100,000I')ro.triggerhornIssuedDue(ThousandsofDollars)~December3119973996November15,1984(d),December5,1985(e)August19,1997(f)TotalOctober1,2014November15,2015August1,2032101,900.$101,900$51970040,20P$91,900'(d)The$51.7millionPromissoryNotewasissuedinconnectionwithNYSERDA'sFloatingRateMonthlyDemandPollutionControl'RevenueBonds(RochesterGasandElectricCorporationProject),Series1984.OnOctober1,1997,theCompanyredeemedalltheoutstandingSeries1984Bonds.Theaverageinterestratewas3.43%throughSeptember301997,3.38%for1996and3.68%for1995.(e)The$40.2millionPromissoryNotewasissuedinconnectionwith'NYSERDA'sAdjustableRatePollutionControlRevenueBonds(RochesterGasandelectricCorporationProject),Series1985."OnNovember15,1997theCdmpanyredeemedalltheoutstandingSeries1985Bonds.Theannual-interestratewasadjustedto3.60~/oeffectiveNovember15,1996andtq3.75%effective"November15,1995.(f)Multi-modepollutioncontrol'notestotalingtheprincipalamountof$101.9millionwereissuedin-connectionwithNYSERDA'sPollutionControlRevenueBonds(RochesterGasandElectricCorporationProject),$34;000,0001997SeriesA,$34,000,0001997SeriesBand$33,900,0001997SeriesC.TheMulti-modeRevenueBondshaveastructurethatenablestheCompanytooptimizetheuseofshort-term'ratesbyallowingfortheinterestratestobebasedonadailyrate,aweeklyrate,acommercialpaperrate,anauctionrateoramulti-yearfixedrate.Paymentoftheprincipalof,andinterestontheMulti-modeRevenueBondsisguaranteedunderBondInsurancePoliciesbyMBIAInsuranceCorporation.AtDecember31,1997,theMulti-modeRevenut;Bondsboreinterestattheweeklyrateandtheaverageannualinterestrateforallthreeserieswas3:65%.4TheCompanyisfobligatedtomakepaymentsofprincipal,premiumandinterestoneachPromissoryNotewhichcorrespondtothepaymentsofprincipal,premium,ifany,'andinterestoncertainPollution.ControlRevenueBondsissuedbyNYSERDAasdescribedabove.Basedonanestimatedborrowingrateatyear-end1997of6.62%forlong-termdebtwithsimilartermsandaveragematurities(13tyears),thefairvalueoftheCompany'slong-termdebtoutstanding(includingPromissoryNotesasdescribedabove)isapproximately$655millionatDecember31,1997.Basedonanesfimatedborrowingrateatyear-end1996of7.30%forlong-termdebtwithsimilartermsandaveragematurities(13years),thefairvalueoftheCompany'slong-termdebtoutstanding-(includingPromissoryNotesasdescribedabove)isapproximately$670millionatDecember31,1996.OnSeptember16,1997,theCompanycompletedarrangementsforthedeliveryinSeptember1998of$25.5millionof5.95%NYSERDAtax-exemptbondsdueSeptember1,2033.Proceedsare~expectedtobeusedtoredeemtheSeriesOO,tax-exempt,firstmortgagebondswhicharenotredeemableuntilDecember1998.iRocherterG0$0ndHectrtc'orporatronR8 IIPreferredandPreferenceStockType,byOrderofSeniorityPreferredStock(cumulative)PreferredStock(cumulative)PreferenceStockSharesAuthorizedParValueSharesOutstanding920,000',000,0004,000,0005,000,000$100~251irements.'SeebelowformandatoryredemptionrequNosharesofpreferredorpreferencestock'arereservedforemployees,oiforoptions,warrants,conversions,orotherrights,A.PreferredStock,notsubjectto,mandatoryredemption:,:$12,0008,0006,000',0006,00010,000$47,000F-'HIJK.MN44.104Y54.104.954.55'.50Total120,00080,000'0,00050,00060,000100,00P$12,0008,0006,0005,0006,000.10,00020,000~$67,000470,000IShares'--(Ihousands)'OutstandingDecember31'SeriesDecember31,1997.1997=~1996OptionalRedemption(pershare)P$105101101102.5102.101102ffMayberedeemedatanytimeattheoptionoftheCompanyon,30daysminimumnotice,plusaccrueddividendsinallcases.TheSeriesNwereredeemedonApril22,'1997.IB.PreferredStock,subjecttomandatoryredemption:~'4Shares.phousnds),OpgonaiOutstandingDecember31,RedemptionSeries'ecember31,1997.19971996'pershare)7.457.557.656.60ST"UVNotapplicableNotapplicable,NotapplicableNotBefore3/1/04+,5$10,00010,00025,000$45,00010,000.535,000$10,000'Q0()010,00025,000$55,00010,000$45,000100,000100,000250,000450,000100,000350,000To,talLess:Du'ewithinoneyearTotal+Thereafterat$100.00k'I/MANDATORYREDEMPITONPROVISIONSIntheeventtheCompanyshouldbeinarrearsinthesinkingfundrequirement,theCompanymaynotredeemorpaydividendsonanystocksubordinatetothePreferredStock.-SeriesT,SeriesU.AllofthesharesaresubjecttoredemptionpursuanttomandatorysinkingfundsonSeptember'1,1998inthecaseofSeriesTandSeptember1,1999inthecaseofSeriesU;ineachcaseat$'l00pershare.SeriesV.TheSeriesVissubjecttoamandatorysinkingfundsufficienttoredeemoneachMarch1,beginningin2004toandincluding2008;12,500sharesat$100p'erishareandon.March1,2009,thebalanceoftheoutstanding'shares.TheCompanyhastheoption,toredeemuptoan.additional12,500sharesonthesametermsanddatesasapplicabletothemandatorysinkingfund..Basedonanestimateddividendrateatyear-end1997of5.67%forPreferredStock,subjecttomttndatoryredemption,withsimilartermsandaveragematurities(5.92years),thefairvalueoftheCompany'sPreferredStctck,subjecttomandatoryredemption,isapproximately$48millionatDecember31,1997.-Basedonanestimateddividendrateatyear-end1996of6,50%forPreferredStock,subjecttomandatoryredemption,withsimilartermsandaveragematurities(5.66years),thefairvalueofthe'ompany'sPreferredStock,subjectto~andatoryredemption,isapproximately$57'millionatDecember31,1996.'9 CommonStockandStock.OptionsIn.December1997,theBoard.ofDirectorsoftheCompanyauthorizedtherepurchaseofupto".~4.5millionsharesoftheCompany'sCommonStockontheopenmarket.Noneofthe'shareswerepur;chasedpriortoyearend.AtDecember31,1997,therewere50,000,000sharesof$5pa'rvalueCommonStockauthorized,of,which38,862,347wereoutstanding.NosharesofCommonStockarereservedforwarrants,conversions',orotherrights.Therewere1,445,141sharesofCommronStockreservedforemployeesun'derthe1996*-PeifoirmanceStockOptionPlan,a'sfurtherdescribedbelow.Therewere1,026,840sharesofCommonStockreservedandunissuedforshareholdersundertheAutomaticDividendReinvestmentandStockPurchasePlanand129,664sharesreservedandunissuedforemployeesundertheRGRESavingsPlusPlan.C0.1iruozvSTOCA'Shares'AmountOutstanding'Thousands)Balance,January1,1995,SharesIssuedthroughStockPlansDecrease(Increase)mCapitalStockExpenseBalance,December31,1995SharesIssuedthroughStockPlans.Decrease(Increase)mCapitalStockExpenseBalance,December31,1996SharesIssuedthroughStockPlansAdditionalPaidinCapital'ecrease(Increase)inCapitalStockExpenseBalance,December31,199737,669,963783,20038,453,163398,30138,851,46410,88338,862,347$670,56917,074(125)$687,5188,612(111)$696,0192722,3993415699,031PERFORMANCESTOCKOPTIONPLANEffectiveJanuary22;1997,"the'CompanyadoptedaPerformanceStockOptionPlanwhichprovidesforthegrantingofoptionstopurchaseupto2,000,000authorizedbutunissuedsharesortreasuryshares,of$5parvalueCommonStocktoexecutiveofficersandotherkeyemployees.Aoparticipant.shallbegrantedoptionsformorethan200,000sharesofCommonStockduringanycalendaryear.TheoptionswouldbeexercisableforaperiodtobedeterminedbytheCommitteeonManagement(theCommittee).TheCommitteemayinitssolediscretiongranttheright'toreceiveacashpaymentuponanyexerciseof.anoptionequaltothequarterlydividendpaymentpershareofCommonStockpaidfromthedatethe"'ptionwasgrantedtothedateofexercise.'n1997,theBoardofDirectors-granted504,700optionsatanexeicisepriceof519.0625pershare.Theseoptionsarevestedat50o/owhenthestockclosesat$25pershare,75%at$30pershareand100%at$35pershare.Alsoin19r)7,theBoardofDirectorsgranted50,159optionsatanexercisepriceof$24.75pershare.,Theseoptionsareve'stedat25%whenthestockclosesat$25pershare,50o(oat$30persh'are,'75o/oat$35pershareand100%at$40pershare.Inorderfortheoptionstobecomevested,theclosingpricesmustbesustainedatorabovethelevelsindicatedabovefor"aminimumoffiveconsecutivetradingdays.-.SincetheCompanyadoptedFAS123,compensationexpenseassociatedwiththeoptionsgrantedisreflectedin1997netincome.Forcalendar1997,thecompensationexpenserecordedwas$2.4million.InapplyingFAS123,thefairvalueofeachoptiongrantedisestimatedonthedateofthegrantusingtheBlackScholesoptionpricingmodelwith-thefollowingassumptions:risk-freerateofreturnrangingbetween6.39o/oand6.56%,expecteddividendyieldof9.44%,andexpectedstockvolatilityof17%.AsummaryoftheCoinpany'sstockoptionactivityispresentedbelow:rWeghted4*.-OptionsAveragePricel4xhc5t48G85BndElectricCorporation4r'ptionsgranted1997OptionsexercisedOutstandingat12/31/97,Vested,at12/31/97Availableforfuturegrantat12/31/97554,859(10,883)543,976392,7221,446,141$19.57$19.06$19.587$19.426J50 IShort-TennDebtOnDecember31,1997,theCompanyhadshort-termdebtoutstandingof$20.0million.AtDecember~31,1996theCompanyhadshort-termdebtoutstandingof$14.0million.Theweightedaverageinterestrate'in1997onshort-termdebtoutstandingatyearendwas6:64%.andwas6.07%for.borrowingsduiingtheyear..Theweightedaverageinterestrateonshort-term,debtborrowedduring1996was5.86%.InDecember1997theCompany's$90millionrevolvingcreditagreementwasamendedextendingitstermtofiveyears,terminatingDecember31;2002.Commitment'feesrelatedtothisfacilityamountedto$113,000in1997and1996,and$165,000in1995.TheCompany'sCharterprovidesthattheCompanymaynotiss'ueunsecureddebtifimmediatelyaftersuchissuancethetotalamountofunsecureddebtoutstandingwouldexceed15percentof'theCompany'stotalsecuredindebtedness,capital,andsurpluswithouttheapprovalofatleastamajorityoftheholdersofoutstandingPreferredStock.AsofDecember31,1997,theCompanywouldbeabletoincurapproxi-mately$103.8millionofadditionalunsecureddebtunderthisprovision-.TheCompanyhasunsecured.'inesofcredittotaling$27millionavailablefromseveralbanks,attheiidiscretion.Inordertobeabletouseits$90millionrevolvingcreditag'reement,theCompanyhascreatedasubor-dinatemortgagewhichsecuresbopowingsunderitsrevolvingcreditagreementthatmightotherwisebe~restrictedbythisprovisionoftheCompany'sCharter.Inaddition,theCompanyhasaLoanandSecurityAgreementtoprovideforborrowingsupto$10millionfortheexclusivepurposeoffinancingFederalEnergyRegulatoryCommissionOrder636transitioncosts(636Notes)andupto$30millionasneededfromtimetotimeforotherworkingcapitalneeds.Borrowingsunderthisagreement,whichcanberenewedannually,aresecuredbyalienontheCompany'saccountsre'ceivable.AtDecember31,1997,borrowingsoutstandingwere$4.34millionof636Notes(recordedontheBalanceSheetasaliabilityunderDeferredCreditsandOtherLiabilities)".\Commi*nentsandOtherMattersCOMPETITIONOverview.ThePSC,throughitsCompetitive'OpportunitiesProceeding,hasembarkedonafundamen-talrestructuringoftheelectricutilityindust'ryinthestate.Amongotherelements,thePSC'sgoalsincludedlowerratesforconsumerkandincreasedcustomerchoiceinobtainingelectricityandotherenergyservices.During1996and1997,theCompany,theStaffofthePSC,andseveralotherpartiesnego-tiatedaSettlementAgreement(the"Settlement")whichwasapprovedbythePSCinNovember1997.TheSettlementsetstheframeworkforthe,introductionanddevelopmentofopencompetitionintheelectriceneigymarketplace.PSCCompetitiveOpportunitiesCaseSettlement,TheSettlementprovidesforatransitiontocompe-titionduringitsfiveyearterm(july1,1997toJune30,2002)andestablishestheCompany'selectricratesforeachannualperiod.ARetailAccessProgramwillbephasedin,allowingcustomerstopurchaseelectric-ity,andlaterelectricityandCapacitycommitments,fromsourcesotherthantheCompany.TheCompany.,willbegivenareasonableopportunitytorecoverprudentlyincurredcosts,includingtheepertainingtogenerationandpurchasedpower.TheSettlementalsorequirestheCompanytofunctionallyseparateitscomponentoperations:distribution,generation,andretailing.Anyunregulatedretailoperationsmustbestructurallyseparatefromtheregulatedutilityfunctionsbutmaybefundedwithupto$100million.AlthoughtheSettlementprovidesincentivesforthesaleofgeneratingassets,itrequiresneitherdivestitureofgeneratingorotherassetsnorwriteoffofstrandedcosts.TheCompanybelieyesthattheSettlement.willnotadverselyaffectitseligibilitytocontinuetoapplySFAS-71withtheexceptionofcertainto-gocostsassociatedwithnon-nuclear,generation.If,contrarytotheCompany'sview,sucheligibilitywereadverselyaffected,a.materialwrite-downofassets,theamountofwhichisnotpresentlydeterminable,",couldberequired.~RatePlan.OverthefivyeartermoftheSettlement,cumulativeratereductionswillbe:RateYear1:$3.5million;RateYear2:$12.8million;RateYear3:$27.6million;RateYear4:$39.5million;andRate'ear5:$64.6million.TheRatePlanpermitstheCompanytooffsetagainsttheforegoingreductionscertaininflation-relatedexpensesandcertainamountsrelatedtoapurchasepopoveragreementwith.Kamine.IntheeventthattheCompanyearnsareturnoncommonequityinexcessof11.50/0overtheentirefiveyeartermoftheSettlement,500/0ofsuchexcesswillbeusedtowritedowndeferredcostsaccu-mulatedduringtheterm,and50%>villbeusedtowritedownaccumulateddeferralsorinvestmentin-electricplantorregulatoryassets.51(Noti10continuedonpage52)

~(<oniinuedfrompage51),lbxhcstcrGasandElectricCorpontlonIIRetailAccess.TlieCompany'sEnergyChoiceProgramwillbhavailabletoallofitscustomersonanequalbasisuptocertainusagecaps.OnJuly1,1998,customerswhoseelectricloadsrepresentapproxi-mately10%oftheCompany'stotalannualretailsaleswillbeeligibletopurchaseelectricity(butnotcapacitycommitments)fromalternativesuppliers.OnJuly1,1999,thepercentoftotalsalesmovesto20%,andcustomerswouldpurchasebothelectricityandcapacity'commitments.OnJuly1,2000,the'ercentmovesto30%,andonJuly1,2001,allretailcustomerswillbeeligibletopurchaseenergyandlcapacityfromalternativesuppliers.Duringtheinitial,energyonlystageoftheRetailAccessProgram,theCompany'sdistributionratewillbesetbydeducting2.3centspejkilowatthour("KWH")fromitsfullservice(."bundled")ratesandLoad,ServingEntitiesactingasretailersintheCompany'sserviceareawillbeentitledtopurchaseelectricityfromtheCompanyatarateof1.9centsperKWH.Duringtheenergyandcapacitystage,theratewillgen-erallyequalthebundledratelessthecostoftheelectriccommodityandtheCompany'snon-nucleargen-eratingcapacity.Thesecommodityandcapacitycosts,generallyreferredtoas"contestablecosts,"are,estimatedtobe3.2centsperKWH,inclusiveofgrossreceiptstaxes.GeneratingAssets.TheCompanywillnotberequiredtodivestanyofitsgenerationfacilities.TotheextentthattheCompanysellsanygeneratingassetsduringthetermoftheSettlement,gairison>uchsaleswillbesharedbetweentheCompanyandcustomers.Withregardtolossesonsuchsales,theSettlementacknowledgesanintentthattheCompanywillbepermittedtorecoversuchlossesthroughdistribution'atesduringthetermoftheSettlement:Futureratetreatmentis'tobeconsistentwiththepiinciplethattheCorn/anyistohaveareasonableopportunitytorecoversuchcosts..~"To-gocosts".oftheCompany'snon-nuclearresources(i.e.,capitalcostsincurredafterFebruary28,1997,operationandmaintenanceexpenses,andproperty,payrollandothertaxes)aretobeinitiallyrecoveredthroughdistributionrates.Thefixedportionofto-gocostswouldberecoveredinfulluntilJuly1,1999,andbesubjecttothemarketthereafterinaccordancewiththephase-inschedulefortheRetailAccessprogram.Thevariableportio'nofnon-nuclearto-gocostswouldalsobesubjecttothemarketinaccordancewiththephase-inschedule.UndertheSettlement,nuclearcostswouldremainrecoverablethroughregulatedrates.Miscellaneous.ThepresentSettlementsupersedesthe1996RateSettlement.Variousincentiveand~penaltyprovisionsinthe1996RateSettlementareeliminated.EITFIssue97~DeregulationofthePricingofElectricity.InJuly,1997,theFinancialAccountingStandardsBoard'sEmergingIssuesTaskForce(EITF)reachedaconsensusonaccountingrulesforutilities'ransitionplansformovingtomorecompetitiveenvironmentsandprovided'guidanceonwhenutilitieswithtransitionplanswillneedtodiscontinuetheapplicationofSFAS-71,"AccountingfortheEffectsofCertainTypesofRegulation".iPThemajorEITFconsensuswasthattheapplicationofSFAS-71toasegment(e.g.generation)whichissubjecttoaderegulationtransitionplanshouldceasewhenthelegislationorenablingrate,ordercontainssufficientdetailfortlieutilitytoreasonablydeterminewhatthetransitionplanwillentail.TheEITFalsoconcludedthatadecisiontocontinuetocarrysomeoralloftheregulatoryassets(includingstrandedcosts)andliabilitiesoftheseparableportionofthebusinessthatisdiscontinuingtheapplicationofSFAS-71shouldbedeterminedonthebasisofwheretheregulatedcashflowstorealizeandsettlethemwillbederived.Ifatransitionplanprovidesforanon-bypassableSeefortherecoveryofstrandedcosts,theremaynotbeanysignificantwrite-offifSFAS-711sdiscontinuedforasegment.TheCompany'sapplicationoftheEITF97-4consensushasnotaffecteditsfinancialpositionorresultsofoperationsbecauseanyabove-marketgenerationcosts,regulatoryassetsandregulatoryliabilitiesassoci-atedwiththegenerationportionofitsbusinesswillberecoveredbytheregulatedportionoftheCompanythroughitsdistributionrates,giventheSettlementprovisions.TheSettlementprovidesforrecoveryofallprudentlyincurredsunkcosts(allinvestmentinelectricplantandelectricregulatoryassets)asofMarch1,1997byinclusioninrateschargedpursuanttotheCompany'sdistributionaccesstariff.TheSettlementalsostatesthat"thePartiesintendthattheprovisionsofthisSettlementwillallowthe'ompanytocontinuetorecoversuchcosts,duringthetermoftheSettlement,underSFAS-71",andthat"suchtreatmentshallbeconsistentwiththeprinciplethattheCompanyshallhaveareasonableopportu-nitybeyondJuly1,2002torecoverallsuchcosts".Asnoted.previously,thefixedportionofthenon-nucleargenerationto-gocostsafterJuly1,1999andthevariableportionofthenon-nucleargenerationto-gocostsafterJuly1,1998aresubjecttOmarketforcesandwouldnolongerbeabletoapply'SFAS-7$.TheCompany'snetinvestmentatDecember'31,.1997innucleargeneratingassetsis$698.4millionand'on-nucleargeneratingassetsis$122.0million.52' 1hREGULATORYANDSTRANDAHLEASSETSWithPSCapprovaltheCompany'hasdeferredcertaincostsratherthanrecognizethemonitsbookswhenincurred.Suchdeferredcosfsaretherirecognizedasexpenseswhentheyareincludedinratesandrecoveredfromcustomers.Suchdeferralaccountingis'permittedbySFAS-71.IhesedefeiredcostsareshownasRegulatoryAssetsontheCompany's'BalanceSheet.Su'chcostdeferralisappropriateundertraditionalregulatedcost-'of-serviceratesetting,whereall'prudently,incurredcostsarerecoveredthroughrates.Ina,purelycompetitivepricingenvironment,suchcostsmightnothavebeenincurredandcouldnothavebeendeferred.Accordingly,iftheCompany'sTatesettingwaschangedfromacost-of-serviceapproach,anditwasnolongerallowedtodeferthesecostsunderSFAS-71,theseassetswouldbeadjustedforanyimpairmenttorecovery(pursuanttoSFAS-121).Incertaincases,thettntire'amountcouldbe.writtenoff.SFAS-121requireswrite-downofassetswhenevereventsorcircumstancesoccurwhichindicatethatthe,=carryingamountofalong-livedassetmaynotbefullyrecoverable.'elow'sa,summ'arization.qftheRegulatoryAssetsasofDecember31,1997aiid1996:(MillionsofDollars)'.19971996-IncomeTaxesUraniumEnrichmentI)ecommissioningDeferral,DeferredIceStormCharges-FERC636TransitionCosts'emandSideManagementCostsDeferred-GasDeferredFuelOther,netTotal=RegulatoryAssets$159.616.411.5",11.04,41/722.0$232.0$174.617.714,032.38.47729.8$284.5'tncomeTaxes:Thisamountrepresentstheunrecovefedportionoftaxbenefitsfromaccelerateddepre-ciationandothertiming,differenceswhichwereusedtoreducetaxexpenseinpastyears.Therecoveryofthisdeferral.isanticipatedovertheremaininglifeoftherelatedpropertywhentheeffectofthepast'eductionsreversesinfutureyears.VUranium.EnrichmentDecommissioningDeferral:TheEnergyPolicyActof1992requiresutilitiestocontributesuchamountsbasedontheamountofuraniumenrichedbyDOEforeachutility.ThisamountismandatedtobepaidtoDOEthroughtheyear'007.Therecoveryofthesecostsisthroughbaseratesoffuel.VDeferredIceStormCharges:Thesecostsresultfromthenon-capitalstormdamagerepaircostsfollow-"ingtheMarch1991ice-storm.Therecoveryofthesecostshasbeen.approvedbythePSCthroughtheyear2007,.VFERC636TransitionCosts:ThesecostsarepayabletogassupplyandpipelinecompanieswhicharepassingvariousrestructuringandothertransitioncostsontotheCompany,asorderedbyFERC.ThemajorityofthesecostswillberecoveredthroughtheCompany'sgascostadjustmentbytheyear2000.VDemandSideManagementCostsDeferred:ThesecostsareDemandSideManagementcostswhich'refatetoprogramsinitiat'edtoincreaseefficiencywithwhichelectricityisused.Thesecostsarerecover-ablebytheCompany,through'heyear2002.~~VGasDeferredFuel:ThesecostsresultfroniaPSC-approvedannualreconciliationofrecoverablegas.,costswithgasrevenuesinwhichtheexcessordeficiencyisrefundedto.orrecoveredfromcustomers"-duringasubsequentperiod.InaCompetitiveelectricmarket,strandableassetswouldarisewheninvestmentsaiemadeinfacilities,-oicosts,aieincurredtoservicecustomers,andsuchcostsarenot.fullyrecoverableinmarket-basedrates.Examplesincludepurchasepowercontracts(e.g.,theKamine/BesicorpAlleganyL.P.'contract),orhighcostgeneratingassets.Estimatesofstrandableassetsarehighlysensitivetothecompetitivewholesalemarketpiiceassumedintheestiination.TheamountofpotentiallystrandableassetsatDecember31,1997dependsonmarketpricesandthecompetitivemarketinNewYorkStatewhichisstill'underdevelopment.'ndsubjecttocontinuingchangeswhicharenotyetdeterminable,'utcouldbesignifican't.Strandableassets,ifany,couldbewrittendownforimpairmentofrecoveryinthesamemannerasdeferredcosts-'discussedabove.Inacompetitivenaturalgasmarket;strandableassetswouldarisewherecustomersmigrateawayfromdependenceontheCompanyforfullservice,leavingtheCompanywithsurpluspipelineandstorage'capacity,aswellasnaturalgassupplies,undercontract:TheCompanyhasbeenrestructuringitstrans-portation,storageandsupplyportfoliotoieduceitspotentialexposuretostrandableassets.RegulatoryP'otelocontinuedonpage54)63 (continurdfrompago53)RochesterGasandBearicpxpceationdevelopmentsdiscussedunder"GasRestructuringProceeding,"below,mayaffectthisexposure;butwhetherandtowhatextenttheremaybeanimpactonthelevelandrecoverabilityofstrandableassetscannotbedeterminedatthistime.AtDecember.31,1997theCompanybelievesthatitsregulatoryandstrandableassets,ifany,arenotimpairedandareprobableof'recovery.ThesettlementapprovedintheCompetitiveOpportunitiespro-ceedingdoesnotimpairtheopportunityoftheCompanytore'coveritsinvestmentintheseassets.However,thePSChaspublishedaStaffpapertoaddressissuessurroundingnucleargeneration,includingthedeterminationoffairmarketvalueforfacilitiesafterafiveyearrestructuringtransition-period.ItappearsthatthePSCmayseektoapplysimilarprinciplestoothertypesofgeneratingfacilities.-Adeterminationinthisproceedingcouldhaveanimpactonstrandableassets.CAPITALEXPENDITURESTheCompany's1998constructionexpendituresprogramiscurrentlyestimatedat$124million.TheCompanyhasenteredjntocertaincommitmentsforpurchaseofmaterialsandequipment,inconnection.withthatprogram.NUCLEAR-RELATEDMATTERSDecommissioningTrust.TheCompanyiscollectingamountsinitselectricratesfortheeventualdecommissioningof-itsGinnaPlantandforits14%shareofthedecommissioriingofNineMileTwo.Theoperatinglicensesfortheseplantsexpirein2009and2026,respectively.,UnderaccountingproceduresapprovedbythePSC,theCompanyhascollecteddecommissioningcostsofapproximately$116.1millionthroughDecember31,1997andisauthorizedtocollectapproximately$22millionannuallythroughJune30,2002fordecommissioning,coveringbothnuclearunits.The'amountallowedinratesisbasedonestimatedultimatedecommisSioningcostsof$296.3millionforGinnaand$112.8millionfortheCompany's14%shareofNineMileT~'vo(1995dollars).Theseestimatesarebasedonsitespecificcoststudiesforeachplantcompletedin1995.Sitespecificstudiesoftheantici-patedcostsofactualdecommissioningarerequiredtobesubmittedtotheNRCatleastfiveyearspriortotheexpirationofthelicense.~.</The,NRCrequiresreactorlicenseestosubmitfundingplansthatestablishminimumNRCexternalfundinglevelsforreactordecommissioning.TheCompany'splan,filedin1990,consistsofanexternaldecommissioningtrustfundcoveringbothitsGinnaPlaritanditsNineMileTwoshaie.Since1990,the'ompanyhascontributed$86.4milliontothisfuhdand,includingrealizedandunrealizedinvestment.returns,thefundhasabalanceof$132.5millionasofDecember31,1997,.Theamountattributedtotheallowanceforremovalofnon-contaminatedstructuresisbeingheldinaninternalreserve.TheinternalreservebalanceasofDecember31,1997is$29.7million..TheNRCiscurrentlyconsideringproposalswhichm'ayimpactfinancialfundingrequirementsfordecommissioningofnuclearpowerplants.UndercurrentNRCregulationselectricutilitiesprovidefordecommissioningfundsannuallyovertheestimatedlifeofaplant.Ifstateregulatoryauthoritiesweretoadoptaprogramtoremoveelectricgeneration(includingnuclearplants)fromcost-basedrateregulation,anactionwhichtheNewYorkPSCiscurrentlyconsidering,suchplantswouldoperateinacompetitiveelectricmarketandwouldhavenoassuredsourceofrevenuefromenergysales.Undercurrentregulations,theNRCcanrequiretheownersofnuc/earplantslackingsuchassuredrevenuestreams,toprovideassur-ancethatthefullestimatedcostofdecommissioningwillultimatelybeavailablethroughsomeguarante'emechanism.'TheNRCisseekingpubjiccommentonanumberofquestions,,includingthelikelytimetableforutilityrestructuriIigandderegulationandtowhatextentcostswillberecoverableifalargebaseloadplantisdeemedtobenon-competitivebecauseofhighconstructioncostsandwhatfundingsourceswillbeusedtoshutdownaplantprematurelyandsafely.-TheNRChasreleasedforcommentsanoticeofproposedrulemaking(NOPR)modifyingcertainaspectsofthefinancialassurancerequirementsfordecommissioningnuclearpowerreactors.TheNOPRincludes,amongotherthings,changestothedefinitionof"electricutility"forthepurposesofprovidingfinancialassurancefordecommissioningaswellasnewreportingrequirementsiegardingeachlicerisee'sprogressonexternalfunding.TheCompanydoesnotanticipateamaterialimpactfromtheapplicationoftheserulesintheirproposedform;howeveritcannotpredicttheimpactoftheserulesasresolutionofstrandedassetissuesproceedinNewYork.ThePSCinAugust1997issuedforcommentareportbyitsstaffproposingnormsbywhichnuclearplantsinthestatewouldrelatetothecompetitiveelectricitymarketfollowingtheperiodcoveredby~electric'utilityrestructuringagreementsthenpendingbeforethePSC.Amongotherthings,thereport/54

'envisionedtliesaleoftheseplantsatauction,butwiththesellingutilitiesremainingiesponsiblefor.'ltimatedecommissioningaswellasfordisposalofcertainspentfuel.Recognizingthatbiddersmaynot'eattractedtocertainunits-whichcouldincludeboththe'Company'sGinnaplanfandtheNineMileTwoplantinwhichithasa14%interest,thereportcontemplatedtheirearlyshutdownunlesstheycouldcompetewithotherformsofgeneration.InFall1997,theCompanyandotherscommentedontheseandotherfacetsofthereport.Throughmid-January1998,thePSChadtakennoactiononthereportandcomm'ents..TheStaffoftheFinancialAccountingStandardsBoardarestudyingtherecognition,measurementandclassificationofdecommissioningcostsfornucleaigeneratingstationsinthefinancialstatementsofelectricutilities.Ifcurrentaccountingpracticesforsuchcostswerechanged,theannualprovisionsfordecommissioningcostscouldincrease,theestimatedcostfordecommissioningcouldbereclassifiedasaliabilityratherthanasaccumulateddepreciation',theliabilityaccouritsandcorrespondingplantassetaccountscouldbeincreasedandtrustfundincomefromtheexternaldecommissioningtrustscouldbereportedasinvestmentincomeratherthanasareductiontodecommissionihgexpense.'Ifannualdecommissioningcosts'ncreased,theCompanywouldexpecttodefertheeffectsofsuchcostspendingdispositionbythePSC.UraniumEnrichmentDeconfaminationandDecommissioningFund.UndeitheNationalEnergyAct,utilitieswithnucleargeneratingfacilitiesareassessedanannualfeepayabjeover15yearsforthedecommissioningoffederallyowneduraniumenrichmentfacilities.TheassessmentsfoiGinnaandtheCompany'sshareofNineMile'Avoareestimatedtototal$22.1million,excludinginflationandinterest.Installmentsaggregatingapproximately$9.4millionhaveIIeenpaidthrough1997.Aliabilityhasbeenrecognizedonthefinancialstatementsalongwithacorrespondingregulatoryasset.Forthetwofacilities'heCompany'sliabilityatDecember31,1997is$15.1million($13.4millionasalong-termliabilityand$1.7millionasacurrentliability).TheCompapyisrecoveringcoststhroughbaseratesoffuel.lnJuly1996,th6CompanyjoinedotherutilitiesinacivilactionagainsttheU.S.DepaItmentofEnergy'DOE),concerningtheseassessments.AfterafavorableinitialdecisioninaParallelcase,theCourtofAppeals~for.theFederalCircuitinMay1997reyeisedthelower,courtandheldthatthefederalgovernmentcouldassesslicenseesfortheclean-upofthesefederalfacilities.InJanuary1998,theU.S.SupremeCourtrefused'.tohearthecase,effectivelyupholdingthedismissaloftheutilityclaiins.NuclearFuelDisposalCosts.TheNuclearWastePolicyAct(NuclearWasteAct)of1982,asamended,requirestheDOEtoestablishanuclearwastedisposalsiteand,totaketitletonuclearwaste.ApermanentDOEhigh-levelnuclearwasterepositoryisnotexpectedtobooperationalbeforetheyear2010.TheDOF,isproposin'gtoestablishaninterimstoragefacilitywhichmayallowittotaketitletoandpossessionofnuclearwastepi'iortotheestablishmentofapermanentrepository.In'December1996.theDOEnotifiedtheCompanythattheDOEwillnotstartacceptanceofGinnaspentfuelin1998.InJanuary1997theDOEreleasedadraftrequestforproposaloutliningaprocessforprivatefifmstoacceptan'dtransportwastefromreactorsuntilafederalfacilityisoperational.TheNuclearWasteActprovidesforadetermina-tionofthefeescollectiblebytheDOEforthedisposalofnuclearfuelirradiatedpriortoApril7,1983andforthreepaym'entoptions.Theoptionofasinglepaymenttobemadeatanytimepriorto'tilefirstdeliveryoffueltotheDOEwasselectedbytheCompanyinJune1985.TheCompanyestimatesthefees,includingaccruedinterest,owedtotheDOEtobe$833millionat.December31,1997.TheCompanyis.allowedbythePSCtorecovertheseco'stsinrates.Theestimatedfeesareclassifiedasalong-termliabilityandinterestisaccruedatthecurrentthree-monthTreasurybillrate,adjustedquarterly.TheNuclearWasteActalsorequirestheDOEtoprovideforthedisposalofnuclearfuelirradiatedafterApril6,1983,fo'rachargeofappioximatelyonemill($.001)perKWHofnuclearenergygeneratedandsold.Thischarge(approximately$3.6millionperyear)iscurrentlybeing'collectedfromcustomersandpaidtotheDOEpursuanttoPSCauthorization.TheCompanyexpectstoutilizeop-sitestorageforallspentorretirednuclearfuelassembliesuntilaninterimorpermanentnucleardisposalfacilityisoperational.TherearepresentlynofacilitiesinoperationintheUnitedStatesavailableforthereprocessingofspentnuclearfuelfromutilitycompanies.IntheCompany'sdetermination'ofnuclearfuelcostsithastakenintoaccountthatnuclearfuelwouldnotbereprocessedandhas'providedfordisposal'costsinaccordancewiththeNuclearWasteAct.TheCompanyhascompletedaconceptualstudyofalternativestoincreasethecapacityfortheinterimstorageofspentnuclearfuelattheGinnaPlant.Thepreferred-alternative,basedoncostandsafetycriteria,.istoihstallhigh-capacityspentfuelracksintheexistingareaofthespegtfuelpool.Theadditionalstoragecapacity,scheduledtobeimplementedpriortoSeptember2000,wouldallowinterimst'o'rageofallspent.fueldischargedfromtheGinnaPlantthroughtheendofitsOperatingLicenseintheyear2009.+tote10continuedonpage56)

'ENVIRONMENTALMATTEI5,\pnsms5)Thefollowingtableslistvarioussiteswherepastwastehandlinganddisposalhasormayhaveoccurredthatarediscussedbelow:SiteNameLocation,EstimatedCompanyCost.-l4xhesterGasandHcctdcCorpontlonJI1.'ltimatecostshavenotbeendetermined.TheCompanyhasincurredaggregatecostsforthesesitesthroughDecember31,199'7oflessthan$1.0million.lIJ58'TableI-Conrpany-OwnedSites:WestStation*Rochester,NY"'ltimatecostshaveriotbeenEastStation.-Rochester,NY.'etermined.TheCompanyhasFrontStreet'ochester,NYinc'urredaregatecostsforthese*,BrewerStre'etRochester,NYsitesthroughDecember31,1997BrooksAvenue-Rochester,NY,of$4.3million.-Canandaiguaanandaigua,NY-'Voluntaryagreementsigned::TableII-SuperfundandNon-OwnedOtherSites:QuantaResources','yracuse,NY,FrontierChenlical-Pendleton*Pendleton,NYMaxeyFlats*'orehead,KY.MexicoMilkMexico,NYByronBarrelandDrumergen,NYFultonTerminals',IOswego,NYPASofOswego',Oswego,NY"Ordersonconsentsigned.Company-OwnedWasteSite,Activities.Aspartofitscommitmenttoenvironmentalexcellence,theCompanyisconductingproactiveSiteInvestigationand/orRemediation(SIR)effortsatsixCompany-ownedsiteswherepastwastehandlinganddisposalmayhaveoccurred.Remediationactivitiesatfourofthesesitesareinvariousstages'of,planningorcompletionandtheCompanyisconductinga'programtorestoretheothertwosites.TheCompanyhasfecordedatotalliabilityofapproximately$13.6million,$12.8millionofwhichitanticipatesspendingonSIReffortsat.thesixCompany-ownedsiteslistedin'ableIabove.Concurrently,theCompanyrecordedasimilaramountinitsRegulatoryAssets.Inmid-1995,theNewYorkStateDepartmentofEnviroqmentalConservation(NYSDEC)developedalistingofsitescalled"-TheHazardousSubstanceSiteInventory".Under'currentNewYorkStatelaw,unlessasite,ttIhichisdeterminedtoposeapublichealthorenvironmentalrisk,containshazardouswastes,State."Superfund"moniescannotbeusedtoassistinthe,cleanup.The'Statewantedtohavesomesenseofthescaleofthisproblembeforethelegislatureconsideredotheravenuesoflegaland'financialredressthan,thosecurrentlyavailable.TheNYSDEC's"HazardousSubstanceWasteDisposalSiteStudy"wasdevelopedtoassessthenumberofandcosttoremediatesiteswherehazardouschemicals,butnothazardouswastesarepresent.OfthesixCompany-ownedsiteslistedinTableIabove,threearelisted,inthisinventory.Theseare-EastStatiqn,FrontStreetandBrooksAvenue.Inadditiontothesethreesites,thyinventoryincludesAmbroseYardandLindbergHeatTreating.TheCompanydoesnotbelievethatadditionalSIR,porkforwhichtheCompanyisresponsibleisrequiredateithersite,howevertheCompanyisunabletopredictwhatactionwillbenecessitatedasa'resultofthelisting.TheCompanyanditspredecessorsformerlyowneda'ndoperatedthreemanufacturedgasfacilities,tntheRochesterarea:TheyareincludedinTableI.Cleanupactivitieswhichwerepreviouslysuspended,.~-,resumed.onaportionoftheWestStationsiteandwereconcludedinJulyltt96underayoluntaryagree-mentwith'theNYSDEC.TheCompanyreceivedreleasefromfutureliabilityandacovenantnottosuefromtheNYSDECforthiswork.Thereremainotherportionsof.theprbpertywhereadditiorial,remedial:workisexpected;however,onlyapreliminaryscopeandschedulehavebeendetermined.Atthesecondof*thethreemanufacturedgasplantsitesknownasEastltation,aninterimremedialactionwasundertaken'nlate1993.Groundwatermonitoringwellsweiealsoinstalledtoassessthequalityofthegroundwateratthislocation.TheCompanyhasinformedtheNYSDECoftheresultsofthesamplestaken.Subsequentdataevaluationindicateawiderarrayofpotentialsourcesofcoalgassificationrelatedmaterialsthanprevi-ouslythoughtsuggestingsignificantremedialworkmayberequired.AtthethirdRochesterareapropertyownedbytheCompany(FrontStreet)wheregasmanufacturing',tookplace,aboringplacedintheFallof1988fora.sewersystemptojectshowedalayercontainingablack;viscousmaterial.Thestudyofthelayerfoundthatsomeofthesoilandgroundwater-on-sitehadbeen'dverselyimpacted.ThematterwasreportedtotheNYSDEGand,inSeptember1990,theCompanyalsoprovidedtheaI;encywithariskassessment.ThereportoftheresultsofthisstudyandtheNYSDFC'sresponsetotherecommendationsmadethereinwillinfluencethefutureremediationcosts.TheCompany hassignedavoluntaryagreementtoperformlimited,additional,investigationatthesitetodeterminewhethercertainremedialactionsarenecessarypriortodevelopment.AnotherpropertyownedbytheCompanywheregasmanufacturingtookplaceislocatedin"Canandaigua,NewYork.Limitedinvestigativeworkperformedthereduringthesummerof1995has,sliownevidenceofboth.theformergasmanufpcturingoperationsandleakagefromfueltanks.The...NYSDECwasinformed;thefueltanksremoved;andadditionalinvestigativeworkcontinues.TheSIRcosts-associatedwiththe~eactionsareincludedinTableI.TheNYSDEChasnottakenanyactionagainsttheCompanyasaresultofthesefindings.OnanotherportionoftheCompany'sproperty(BrewerStreet),theCountyofMonroehasinstalledandoperatessewerlines.Duringsewerinstallation,theCountyconstructedoverCompanyproperty=certainretentionpondswhichreportedlyreceivedfrom'thesewerconstructionareacertainfossil-fuel-basedmaterials(thematerials)foundthere.InJuly1989,theCompanyreceivedaletterfromtheCounty,"assertingthatactivitiesoftheCompanylefttheCountyunabletoeffectaregulatorily-approvedclosureof'.theretentionpondarea.TheCounty'slettertakesthepositionthatitintendstoseekreimbursementforitsadditionalcostsincurredwithrespecttothematerialsoncetheNYSDECidentifiesthegenerator'hereofandthatanyfurthercleanupactionwpichtheNYSDECmayrequireattheretentionpondsiteistheCompany'sresponsibility.InaNovember1997letter,the,CountyhasclaimedthattheCompanywas'heoriginalgeneratorofthematerials.Itassertsthatitwillh'oldtheCompanyliable.for50%ofallCountycosts-presentlyestimatedatatotalofapproximately$5million-associatedbothwith'themate-"rials'xcavation,treatmentanddisposalandwitlieffectingaregulatorify-approvedclosureofthereten-tionpondarea.TheCompanycouldincurcostsasyetundeterminedifitweretobefoundliableforsuch*closureandmaterialshandling,althoughprovisionsofan,existingeasemeritaffordtheCompanyrightswhichmayservetooffsetall'oraportionofanysuchCountyclaim.Todate,theCompanyhasagreedtopaya20%shareoftheCounty's1995investigationofthisarea,whichisestimatedtocostnomore-than$150,000,butnocommitmenthasbeenmadetowardanysubsequentinvestigationsorremedialmeasureswhichmaybe,recommendedbytheinvestigations.MonitoringwellsinstalledatanotherCompanyfacility(BrooksAvenue)in1989revealedthatanunde-terminedamountofleadedgasolinehadreachedthegroundwater.TheCompanyhascontinuedtomonitorfreeproductlevelsinthewells,andhasbegunamodest'freeproductrecoveryproject.Itisesti-matedthatfurtherinvestigativeworkintothisproblemmay.costupto$100,0PO.awhilethecostofcor'rec-tiveactionscannotbedetermineduntilinvestigatiohsarecompleted,preliminaryestimatesarenot-,expectedtoexceed$500,000.SuperfundandNon-OwnedOtherSites.TheCompanyhasbeenormaybeassociatedasapotentiallyresponsibleparty(PRP)atsevensitesnotownedbyit.TheCompanyhassignedordersonconsentfor-five,ofthesesitesandrecordedestimatedliabilitiestotalingapproximately$.8million.IInonesite,knownastheQuantaResourcesSite,theCompanysignedaconsent'orderwiththeEnvironmentalProtectionAgency(EPA)andpaidits$27,500shareofremedialcost.TheCompanywasagaincontactedbyEPAinlateAugust,1996.TheEPAinformedtheCompanythatitbelievedcertainaddi-tionalworkwasrequired,includingastudytodeterminetheextenttowhichadditionalremovalofwaste~materialswasrequired.TheEPA'slistofPRPshadgrowntoabout80:TheCompany,alongwithmostofthosePRPs,hasagreed(throughan'AdministrativeOrderonConsenf)toconducttherequiredstudy..TheCompanyanticipatesitsobligation-throughthisphasewillbe'lessthan,$10,000.OnMay12,1997,theCompanysignedanAdministrativeOrderonConsentwiththeNYSDEC.Thisagreementserved-toobligatetherespectivepartiestopayNYSDEC'spastcostsattheSite,theCompany'sshareofwhichwasdeterminedtobe$1,500.Thereisas'yet,noinformationonwhichtodeterminethecosttodesignandcondu'ctatthesiteanyremedialmeasureswhichfederalorStateauthoritiesmayrequire,"theCompanydoesnotexpectitsadditionalcoststoexceed,$150,000.OnMay21,,1993,theCompanywasnotifiedbyNYSDECthatitwasconsideredaPRPfortheFrontier,Ch'emicalPendletonSqperfundSitelocatedinPendleton,NY.TheCompanyhassigned,alongwithotherparticipatingparties,anAdministrativeOrderonConsentwithNYSDEC.TheOrderonConsentobligatesthepartiestoimplementaworkplanangremediatethesite.ThePRPshavenegotiateda'wdrkplanfor,.siteremediationandhav'eretainedaconsultingfirmtoimplementtheworkplan.PreliminaryestimatesindicatetheCompany'sshareofadditionalsiteremediationcostsarenotexpectedtoexceed$350,000.-TheCompanyisparticipatingwiththegrouptoallocatecostsamongthePRPs.Subsequentworkhasindi-catedthatthefinalcostislikelytobelower.TheCompanyisinvolvedintheinvestigationandcleanupoftheMaxeyFlatsNuclearDisposalSiteinMorehead,'Kentuckyandhassignedvariousconsentorderstothateffect.TheCompanyhascontributed,toastudyof-thhsiteandestimatesthatitsshareoftheadditionalcostsofinvestigationandremediationis,notexpectedtoexceed$250,000.p'oee10continuedonpage58)57 (mnttnurdfrompart57)RochestrrGttjrtdHCCt!ICCoqorttlortJpTheCompanyhasbeennamedasaPRPatthreeothersitesandhasbeenassociatedwithtanothersiteforwhichtheCompany'sshareoftotaladditionalprojectedcostsisnotexpectedtoex'ceed$71,000.ActualCompanyexpendituresforthesesitesaredependentuponthetotalcostofinvestigationandreme-diationandtheultimatedeterminationoftheCompany'sshareofresponsibilityforsuchcostsas'wellas~thefinancialviabilityofotheridentifiedresponsibleparties.FederalCleanAirActA'mendments.TheCompanyisdevelopingstrategiesresponsivetothefederalcleanairactamendmentsof1990(Amendments)whichwillprimarilyaffectairemissionsfromthe-,Company'sfossil-fueledgeneratingfacilities.'hestrategybeingdevelopedisacombinationofhardwaresolutionswhichhaveacapitalandoperationandmaititenance(ORM)componentandallowancetradingsolutionswhichhavestrictlyanORMimpact.ThemostrecentstrategicdevelopmentsstillenvisionthiscombinafionofeffortsasthemostcosteffectivemeansofproceedingalthoughStatelegislativeactivitycouldimpacttheCompany'sabilitytorelyupontheemissionallowancemarkettomeetsomeofitsenvironmentalcommitments.TheCompanycannotpredicttheoutcomeoftheseproceedingsintheLegislatureand,asaresult,theCompany'sprojectionsarebasedsolelyonthecombination.strategy.,Arangeofcapitalcostsbetween$2.9and$3.5millionhasbeenestimatedfortheimplementationofseveralpotentialalterationsformeetingtheforeseeablenitrogenoxide,opacityandsulfurdioxiderequirementsoftheAmendments,aswellas$$.0to$1.5millionperyearinoperatingexpenses.Thesecapitalcostswouldbeincurredbetween1998and2000.TheORMexpenseswouldbefortheyear1999.Fortheyear2000andbeyon'd,theCompanyestimatesthattheannualoperatingexpenseswouldrisetobetween$2.4millionand$3.7million.Anyadditionalpost/000capitalcosts,andoperatingexpensecannotbepredicteduntilresolutionofStateandfederallegislativeactivityenablesthe"Companytohnalizeitscompliancestrategy.OpacityIssue.InMay1997,the,CompanycommencednegotiationswiththeNYSDECtoresolvealit!-gationsofpastopacityviolationsattheCompany'sBeebeeandRussellStations.TheopacitystandardisaregulationwhichlimitsthedensityofthesmokeemittedfromtheStations'mokestacks.TheCompany!believesthatitwillreachanagreementwithNYSDEConthisissueandthattheamountofanycivilpenaltywilllikelyincludebothcashandenvironmentalbenefitprojectcomponentswhich,intheaggre-gate,will'notbematerial.Inaddition,theStationshavebeentemporaiilyderatedsinceFebruary1997to~maintainacceptableopacitylevelswhiletheCompanyinvestigatesadditional'engineeringsolutionstoaddressopacityemissions.ThefinanCialimpactofthederatingsincludesthelostopportunityassociatedwithenergysa/esand;attimes,theneedtomakeadditionalpurchasestomeetsystemrequirements.Whilethederatingshavedecreasedearnings,andwillcontinuetodoso,th'eCompanydoesnotexpect.theamounttobematerial.Finally,theNewYoikPowerPool(NYPP)-isintheprocessofevaluatingnewrulesforitysystemloadregulation.ThecurrentStationderatingsforopacityreasonswouldreducetheabilityoftheCompanytoreacttochangesinloadandprovideregulationserviceswhencalleduponbytheNYPP,resultinginadditionalcosts.DependingonthenewNYPPrequirements,andwhethertheder-atingsremainineffect,therevisedrulescouldresultintheCompanyhavingtopurchaseadditionalregu-lationserviceswhichmaycostbetween$500,000and$2,500,000.annually.GAsCosrREcovERP"GasRestructuringProceeding,InthePSC'sProceedingonRestructuringtheEmergingCompetitiveNaturalGasMarket,thePSCestablishedathree-yearperiod(endingMarch28,1999)duringwhichthe'State'slocaldistributioncompanies(LDCs)wouldbepermittedtorequirecustomersconvertingfromsales.servicetotakeassociatedpipelinecapacityforwhichtheLDCshadoriginallycontracted.'Priortothebeginningofthe'thirdyear,theLDCswouldberequiredtodemonstratetheireffortstodisposeof"excess"capacity.OnSeptember4,1997,thePSCissuedanOrderclarifyingtheMarch28,1996Order.TheSeptembei4Orderrequires,amongotherthings,thattheLDCs(a)assessstrandablecosts;P)evaluateandpursueoptionstoaddressstrandablecosts,includingexplorationofalternativeusesandquantifica-tionofmarketvaluesforthecapacitythatcouldbestrandedbyconvertingcustomers(c)actively,encour-agecompetitionincludingcollaborationwithmarketerstoexpandthenumberofcustomerstakingtransportationservicefromtheLDCandtoprovidecustomereducation;and(d)totheextentLDCscannotshedalltheircapacityascontractsexpire,tocontinuetoseeklowercostoptionsandmoreflexibil-ityandshortercontractterms,wherecost-effective.LDCsarerequiredtofileplansaddressingtheforego-ingissuesbyApril1,1998rPursuanttothePSC'sorders,thecostofcapacitydefinedas"excess"maynotbefullyrecoverableinrates.Accordingly,theCompany's~bilitytoavoidabsorbingthiscostwilldependonthesuccessofremarketingandportfoliostructuringefforts'and,ifsuch'effortsdonot~resultinelimi-natingall"excess"capacity,onasatisfactoryexplanationastowhyallsuchca'pacitycouldnotbeelimi-nated.TheCompanyisengagedinnegotiationswiththeStaffofthePSCandotherpartiestoaddiessP58

-theseandotherissuesrelatedtothefutureprovisionofgasservice.Atthistime,noassessmentofthe.potentialimpactoftheserequirementsontheCompanycanbemade.OnSeptember4,1997,thePSCalsoissuedforcommentaStaffpositionpaperwhichproposesthat,LDCsexittheirmerchantfunction,i.e.,ceasetosupplythenaturalgascommodity=totheirexistingcus-tomers,withinfiveyearsandthattheyeliminateorrestructuretransportationandstoragecapacitycon-tractsextending.beyondfiveyearssoastoeliminateobligationsbeyondthatpoint,exceptwherecapacityisrequiredtofulfilloperationalrequirementsortheLDC'sobligationsasthe"supplieroflastresort"tocustomershavingnocompetitivealternative.IfadoptedbythePSC,theStaffproposalcouldrequiretheCompanytoremarketmorecapacityandtodosomorerapidlythancurrentlycontemplated.ThecommentperiodconcludedonDecember20,1997,andnopredictioncan6emadeastowhethertheStaffproposalwillbeadoptedor;ifso,theextentofitspotentialimpa'ctontheCompany.,1995GasSettlement.TheCompanyhasenteredintoseveralagreementstohelpmanageitspipelinecapacitycostsandhassuccessfullymetSettlementtargetsfor'capacityremarketingforthetwelvemonthsendingOctober31,1997,therebyayoidin'gnegativefinancialimpactsforthatperiod.The,Company,believesthatitwillalsobesuccessfulinmeetingtheSettlementtargetsintheremainingyearof'the'ettlementperiod,althoughnoassurancemaybegiven.TheFERCapprovedachangeinratedesignfortheGreatLakesGasTransmissionLimitedPartnership(GreatLakes)onwhichtheCompanyholdstransportationcapacity.Thischangeresultedinaretroactive-.surchargebyGreatLakestotheCompanyintheamountofapproximately$8million,'includinginteryt.'Underthetermsofthe1995GasSettlement,theCompanymayrecoverapproximatelyone-halfofthesurchargeinrateschargedtocustomers;buttheremaindermaynotbepassedthroughandhasbeenpre-~viouslyreserved.TheCompany,which,paidtlieGreatLakesassessmentunderprotest,vigorouslycon-testeditbefore.theFERC,butonApril25,1996,theFERCuphelrlthis,determinationthatthechargetotheCompanyisproper.TheCompany'spetitiontotheU.S.CourtofAppealswasdeniedonJanuary16;1998.TheCompanyisevaluatingitsnextsteps.LEASEAGREEMENIS'TheCompanyleasesfivepropertiesforadministrativeofficesandoperatingactivities.Thetotalleaseexpensechargedtooperationswas$4.2million,$3.9millionand$2.4millionin1997,3996and1995respectively.Fortheyears1998,199$,2000,2001and2002theestimatedleaseexpensechargedtoopera-tionswillbe$4.1million,$2.4million,$2.4million,$2.4millionand$2.4,million,respectively;Commitmentsundercapitalleaseswerenot.significanttothe'accompanyingfinancialstatements.LITIGATIONSpentNuclearFuelLitigation.TheNuclearWasteAct(Act)obligatestheDOEtoacceptfordisposalspentnuclear'fuel(SNF),startingin1998.Sincethemid-1980s'theCompanyandother,nuclearplant'ownersandoperatorshavepaidsubstantialfeestotheDOEtofunditsobligationsundertheNuclearWasteAct.DOEhasindicatedthatitwillnotbeinapositiontoacceptSNFin1998.In1994,NorthernStatesPowerCompanyandotherownersandoperatorsofnuclearpowerplantsfiledsuitagainstDOEand-theU.S.intheU.S.Court'ofAppealsfortheDistrictofColumbiaCircuitseekingadeclarationthatDOE'scourseofaction.wasinviolatiorrof.itsobligationsundertheAct,andreq'uestingotherrelief.InaJuly1996decision,thecourtupheldtheutilities'ositionthatDOEisobligatedtoacceptanddisposeoftheutilities'NFbeginningnotlaterthanJanuary31,1998.DOEhadcontendedineffectthatitcoulddeferthedisposaluntil'theavailabilityofasuitableSNFrepository.ThecourtrejectedthisDOEreadingoftheNuclearWasteAct,butstoppedshortofprovidingtheutilitiesaremedy'sinceDOEhasnotyet'defaultedonitsobligations.ByletterdatedDecember17,1996,DOEinvitedthepartiesto.theproceeding-toprovidewrittencommentsonhowDOE'santicipatedinabilitytomeetitsJanuary31,1998obligationtobeginacceptingSNFcould"bestbeaccommodated".TheCompanyandanumberofotherpartiesrespondedtothatinvitation.ByJointPetitionforReview,datedJanuary31,1997,theCompanyandanumberofothernuclearutilitiespetitionedtheUnitedStatesCourtofAppealsfortheDistrictof,ColumbiaCircuitforadeclarationthat,thePetitionerswererelievedoftheobligationtopayfeesinto.the.NuclearWasteFund,andauthorizedtoplacethosefeesintoescrowwhenanduntilDOEcommencesdis-posingofSNF.ThePetitionfurtherrequestedthatDOEbeorderedtodevelopaprogramthatwouldnenableittobeginacceptanceofSNFbyJanuary31,1998.ByOrderdatedNovember14,1997,theD.C.-CircuitheldthatDOEcouldnotexercisedelayinacceptingfuelongroundsthatitlackedanSNEreposi-to'ry,andthattheutilitieshada",clearright'torelief".RatherthangrantfundingreliefandordertheDOEtomovefuel,however,theC;ourtreferredtheutilitiestotheremediessetforthintheircontractswiththeDOE.TheCompanyispursuingsuchremedies.IN(Ãoto10continuedonpaso60)59 (mntinurdfrompages9)RocheaterGatandBectrlcCorporattonBOaeDepartment,ofJusticeLawsuit.,OnJune24,.1997,theAntitrustDivisionoftheUnitedStatesDepartmentofJusticefiledacivilcomplaintagainst.theCompanyintheUnitedStatesDistrictCourtfortheWesternDistrictofNewYork.ThecomplaintfollowsaCivilInvestigativeDemandinvestigation.That~investigationincluded,abroadlookattheCompany'sactivitiesintheelectricpowerindustryincluding~initially,theCompany'spayerpurchaseagreementwithanindependentpowerproducer.Theinvestiga-tionthenfocusedprimarilyupontheflexibleratelongtermcontractsenteredbetweentheCompanyandanumber'ofitslargecustomersunderatariffapprovedbythePSC.ThetariffandthePSCpoliciesitimplementedrecognizedthatiflargecustomerstook.theirelectricalloadoffthesystem,theratesfor.remainingcustomerswouldhavetoincreasetocoverthefixed'costsofoperation.TheDivisioninitscomplainthaschallengedoiilycertainprovisionsofoneflexibleratecontract,.thecontractwiththeUniversityofRochester.TheComplaintallegesthatthoseprovisions.inthatcontract~violateSection1oftheShermanActbyrestrictingthecustomer'srighttocompetewiththeCompanyinthesaleofelectricityandseeksaninjunctionprohibitingtheCompanyfromenforcingthatcontractandfromenteringotheragreem'entsthatlimitcompetitioninthesaleofelectricitytoother,customers,TheCompanyiielievesthattheinvestigationandtheComplaintreflectthedesirebytheAntitrustDivisiontobecomeinvolvedinthederegulationofelectricutilities,butthattheproperwaytodo.thatisintheproceedingsbeforethePSCintheCompetitiveOpportunitiesCase.OnSeptember3,1997,theCompanyfileditsanswerwhichdeniedthematerialallegationsoftheComplaint.Atthesametime,the,CompanyfiledaMotionforSummaryJudgmentaskingtheCourtto.dismisstheactionwithprejudiceonthegroundsthattheCompany'sactionsareimmunefromantitrust,liabilityundertheStateactionexemption,thatthe'Company'sactionsdidnotinjurecompetitionandthattheDepartmentofJustice'sclaimsarespeculative.OnNovember3,1997,thhDepartmentofJusticefileditsoppositiontotheCompany'sMotionforSummaryJudgmentandfileditsownMotionforSummaryJudgement.TheCompany's'responsetotheJusticeDepartmentmotionwasfiledonDecember5,1997.*TheseMotionsforSuminaryJudgmentwerearguedonDecember19,1997.InCourt,thepartiesagreedtoaresolutionofthedispute,suggestedbytheJudgewhich,inthecompany'sopinion,wouldnothaveanymaterialeffect,onitscontractwiththeUniversity.TheAntitrustDivisionhowever,hasexpresseditsunwillingnesstoagreetoaConsentDecreebasedontheagreementreachedincourtandthematterisstillpe'nding.LitigationwithCo-Generator.UnderfederalandNewYorkStatelawsandregulations,theCompanyisrequiredtopurchasetheelectricaloutputofunregulatedcogenerationfacilitieswhichmeetcertairicriteria(QualifyingFacilities).Underthesestatutes,'utilityisrequiredtopayforelectricityfromQualifyingFacilitiesataratethatequalsthecosttotheutilityofpoweritwouldotherwiseproduceitselforpurchasefromothersources(AvoidedCost).Withtheexceptionofonecontractwhichthe~-CompanywascompelledbyregulatorstoenterintowithKamine/BesicorpAlleganyLJ.(Kamine)for:,.approximately55megawattsofcapacity,theCompanyhasnolong-termobligationstopurchaseenergyfromQualifyingFacilities,-UiiderStatelawandregulatoryrequirementsineffectatthetim'ethecontr'actwithKaminewasnegoti-ated,theCompanywasrequiredtoagieetopayKamineapriceforpowerthatissubstantiallygreaterthanthe-Company'sowncostofproductionandotherpurchases.SincethattimetheState"six-centnlawman-datingaminimumpricehigherthantheCompany'sowncostshasbeenrepealedandPSCestimateseffuturecbstsonwhichthecontractwasbasedhavedeclineddramatically.InSeptember1994,theCompanycommencedalawsuitinNewYorkStateS'upremeCourt,Monroe.County,seekingtovoidor,alternatively,toreformaPowerPurchaseAgreementwithKamineforthepuichaseoftheelectricaloutputofacogenerationfacilityintheTownofHume,AlleganyCounty,NewYorl,foratermof25years.Thecontractwasnegotiatedpursuant'tothespecificpricing,requirementofaStatestatutethat.waslaterrepealed,as>veilasestimatesofAvoidedCostsbythePSCthatsubsequentlyweredrasticallyreduced.Asaresult,thecontractrequirestheCompanytopaypricesforKamine'selectri--caloutputtliatdramaticallyexceedcurrentAvoidedCostsandcurrentprojectionsofAvoidedCosts.The.Company'slawsuitseekstoavoidpaymentstoKaminethatexceedactualandcurrentlyprojectedAvoidedCosts.KamineansweredtheCompany'scomplaint,seekingtoforcetheCompanytotakeandpayforpoweratthehigherratescalledforinthecontractandclaimingdamagesin.anunspecifiedamountallegedtohave'beencausedbytheCompany'sconduct.TheCompanyreceivedtestgeneiationfromthe~Kaminefacilityduringthelastquarterof1994.Kaminecontendsthatthefacilitywentintocommercial~'perationinDecember1994andthattheCompanyisobligatedtopay,thefullcontractrateforit.The'Companydisputesthiscontentionandrefusestopaythefullcontractrate:Duiing1995Kaminefileda'otionforSummaryJudgmentdismissingtheCompany'scomplaintanddiiectingittoperformthe~'e\

PowerPurchaseAgreement.ThecourtdeniedthatmotionandKamineappealed.AfterargumentofthatappealKaminefiledforprotectionundertheBankruptcylawsand.senttotheAppellateDivisionanoticethatallfurtherproceedingswerestayed.Inaddition,KaminehasfiledarelatedcomplaintintheUnitedStatesDistrictCourtfortheWesternDistrictofNewYorkallegingthattheconductwhichisthesubjectoftheStatecourtactionviolatesthefederalantitrustlaws.Thecomplaintseeksdamagesintheamountof$420,000,000,whentrebeled,aswellaspreliminaryandpermanentinjunctions.Subsequently,Kaminefiledamotionforapreliminhryinjunctioninthe.federal.actiontognjointheCompanyfromrefusihgtoacceptandpurchaseelectricpowerfromKamineandenjoiningtheCompanyfromterminatingduringthependencyofthislawsuititsperformanceunderthecontract.InNovember1995,theCourtissuedadecisiondenyingKamine'smotionforapreliminaryinjunction,finding,amongotherthings,thatKamirlehadnotestablishedthenecessarylikelihoodofsuccessonthemeritsofitsaction.Kaminefiledanoticebfappealfromthat.decisionbuthassubsequentlyannouncedthatitiswithdrawingthatappeal.During1995thePSCinvitedtheCompanytofileapytitionrequesting,amongotherthings,thatthe.Commissioncommenceaninvestigationtodeteiminewhetheratthetimeofclaimedcommercialopera-tiontheHume.plantwasacogenerationfacilityunde?NewYorklawasrequiredbythePowerPurchaseAgreement.TheCorn/anyfiledsuchapetitionandKaminefiledpapersinopposition.IDuring1995KaminefiledapetitionbeforetheFERCtowaivecertainrequirementsforfederalQualifiedFacilitystatusfor1994.TheCompanyandthePSCfiledinoppositiontotherequest.SubsequentlyFERCissuedanordergrantingthewaiverrequestandtheCompany'smotionforrehearingwasdenied.TheCompanyfiledapetitionforreviewwiththeU.S.CourtofAppealsfortheDistrictofColumbiaCircuitbutthatcourtdeniedtherequestforreview.InNovember1995KaminefiledinNewark,NewJerseyforprotectionundertheBankruptcylawsandfiledacomplaintinanadve'rsaryproceedingseeking,amongotherthings,specificperformanceoftheAgreembnt.KaminefiledamotiontocompeltheCompanytopay.whatwouldbedueunderKamine'sviewofthet0rmsoftheAgreementduringthependencyoftheAdversaryProceeding.Afterhearing,'theBankruptcyCourtdeniedthatmotion.TheCourtalsodeniedvariousmotionsmadebytheCompanytochangethevenueoftheproceedingstoNewYorkStateandtolifttheautomaticstayofthependingNew'orkStateaction.OnappealtheBankruptcyCourtwasreversedandthecasesentbacktotheBankruptcy.'ourttodecidewherethecontractissuesintheAdversaryProceedingshouldbeadjudicated.AsofJune16,1997,theCompanyfiledaSecbndAmendedComplaintintheStateCourtactionassertingadditional'claimsbasedonsubsequentoccurrences.OnMarch19,1997,theBankruptcyCourtstayed.thi.'AdversaryProceedingpendingresolutionofthecontractissuesintheNewYorkStatecourttrial.Kaminehasindicateditwillnotappealthisaction.OnJune26,1997,thedefendantsfiledaJointNoticeofRemovalofAction,removingtheactiontotheUnitedStatesDistrictCourtfortheWesternDistrictofNewYork.Therehavebeennofurtherproceedingstodate.NumerousotherproceduralmotionshavebeenpresentedintheBankruptcyCourt;someofwhichmayno&becon'sideredbytheNewYorkStatecourt.Whiletheseproceedingsarepending,theCompany'ouldpayapproximatelytwocentsperkilowatthourwhentheplantoperates:Itisnotoperatingatthepresenttime.GeneralElectricCapitalCorporationLawsuit.OnJuly3,1997,GeneralElectricCapitalCorporation(GECC)filedacomplaintagainsttheCompanyintheUnitedStatesDistrictCourtfortheWesternDistrictofNewYorkinconnectionwiththeKamineprojectinHume,NewYork,forwhichGECCprovidedfinancing.ThecomplaintassertsthattheCompanyviolatedtheantitrustlawsinitsd'ealingswithKamine'andseeksinjunctiverelief,trebledamagesandallegedactualdamagesofnotlessthan$100,000,000.TheclaimsmadeinthecomplaintfiledaresubstantiallysimilartotheclaimsmadebyKamineinthesame'ourtunderKamine'sversionofthetermsofthePowerPurchase'AgreeinentfortheHumeproject..ThecourtdeniedKamine'smotionforapreliminaryinjunctionongroundswhichincludedKamine'sfailuretoestablishalikelihoodofsuccess,onthemeritsofitsclaims.KaminehadfiledanoticeofappealfromadecisiondenyingKamine'smotionforapreliminaryinjunction.Kaminesubsequentlywithdrewtheappeal.TheCompanybelievesthecomplaintbyGECCisalsowithoutmeritandintendstodefendtheactidn.

Epo(rofAXBr(agpBlerir~'LY7Theman'agementofRochesterGasandElectricCorporationhaspreparedandisresponsiblefortheconsolidatedfinancialstatementsandrelatedfinancialinformationcontainedinthisAnnualReport.Managemen'tusesitsbestjudgementsandestimatestoerisurethatthefinancialstatementsreflectfairlythefinancialposition,resultsofoperationsandcashflowsoftheCompanyinaccor-'ancewithgenerallyacceptedaccountingprinciples.Managementmaintainsasystemofinternalaccouritingcontrolsoverthepreparationof'itsfinancialstatementsdesignedtoprovidereasonableassuranceastotheintegrityandreliabilityofthefinancial'records.Thissystemofinternalcontrolincludesdocumented,policiesandguidelinesandperiodicevalua-tionandtestingbythe,inteinalauditdepartmerit.TheCompany'sfinancialstatements.havebeen,examinedbyI'riceWaterhouseLLP,independentaccountants,inaccordancewithgenerally.acceptedauditingstandards.TheirexaminationincludesareviewoftheCompany'ssystemofinternalaccountingcontrolandsuchtestsandotherproceduresnecessarytoexpressanopinionastowhethertheCompany'sfinancialstatementsarepresented.fairlyinallmaterialrespectsinconformitywithgenerallyacceptedaccountingprinciplesThereportof-PriceWaterhouseLLPispresented'onpage36.TheAuditCommitteeoftheBoardofDirectorsis',responsibleforreviewingandmonitoringtheCompany'sfinancialreportingandaccountingpractices.TheAuditCommitfeemeets,regularlywithmanagementandtheindependentaccountantstoreviewauditing,internalcontrolandfinancial,"'reportingmatters.,TheindependentaccountantshavedirectaccesstotheAuditCommittee,withoutmanagementpresent,todiscusstheresultsoftheirexaminationsandtheiropinionsontheadequacyofinternalaccountingcontrolsandthequalityoffinancialreporting..Managementbelievesthat,atDecember31,1997,theCompanymaintainedaneffectivesystemofinternalcontroloverthepreparationofitspublishedfinancialstatements.rChairmanoftheBoard,-PresidentandSeniorVicePresident,CorporateServicesandChiefExecutiveOfficerChiefFinancialOfficerrrJanuary23,1998rnterimFinanci~/Dita-.IntheopinionoftheCompa'ny,thefollowingquarterlyinformationincludesalladjustments,consisting,ofnormalrecurringadjustments,necessaryforafairstatementoftheresultsofoperationsforsuchperiods.,Thevariationkinoperationsreportedonaquarterlybasisarearesultofthesea'sonalnatureoftheCompany'sbusinessandtheavailabilityofsurplus'electricity.Thesumo$thequarterlyearningspersharemaynotequalthefiscalyear'arningspershareduetorounding.t(ThousandsofDollars)aOperating.OperatingNetEarningsonQuarterEnded-RevenuesIncoineIncomeCommonStockEarningsperCommonShare.(indollars)Basic,DilutedRorhtrtrrGarartdBatt(toCorporattortDecember31,1997September30,1997June30,1997'.March31,1997December31,1996'September30,1996June30,1996March31,1996December31,1995t~September30,1995June30,1995March31,1995.-$271,039221,335229,419314,845$274,431234,843235,577309,195'270,518245,145219,546281,119'Reclassifiedforcomparativepurposes.'Includesrecogriitionof$28.7millionnet-of.taxII$24,40634,616'1,12555,194$33,04836,15923,11$56,866$32,32441(73829,45446,557$14,03121,72418,17241,433$22,22821,06211,73242,489$(387)26,9341,4,86130,&gassettlementadjustment.$12,72620,41916,68139,729$20,36219,1969,866.40,623$(2,253)25,06812,99528,653$0.320.520.421.02$0.520.49~0.251.05$(0.05)0.650.340.75'h$0.32.0.520.421.02$0.520.490.25~1.05$(0.05>'.0..0.7>.82 ImmOllEOC2B2V2OilgEarnings/Dividends,.Earningspershare-basic-.dilutedDividendspaidershare$2.30$2.32$1.69$2.30$2.32$1.69$1.80$1.80$1.80Numbeiofshares(000's)Weightedaverage-basic38I853-diluted38,909ActualnumberatDecember3138,862NumberofshareholdersatDecember31.31,33738,76238,76238,11338,11338,85138,453.,33,67535,356199719961995Shares/Shareholders'9971996'995TAxSTATUsQFCAsHDlvlDENDs.Cashdividendspaidin1997,1996and1995were100percenttaxableforfederalincometaxpurposes.DIVIDENDPOLICY.TheCompanyhaspaidcashdividendsquarterlyonitsCommonStockwithoutinterruptionsinceitbecamepubliclyheldin1949.TheleveloffuturecashdividendpaymentswillbedependentupontheCompany'sfutureearnings,itsfinancialrequirementsandotherfactors.TheCompany'sCertificateofIncorporationprovidesforthepaymentofdividends-onCommonStockoutofthesurplusnetprofits(retainedearnings)oftheCompany.QuarterlydividendsonCommonStockaregenerallypaidonthetwenty-fifthdayofJanuary,April,JulyandOctober.InJanuary1998,theCompanypaidacashdividendof$.45pershareonitsCommonStock.TheJanuary1998dividendpaymentisequivalentto$1.80onanannualbasis.CQMMQNSTocKTRADING.Sharesofthe.Company'sCommonStockaretradedontheNewYorkStockExchangeunderthesymbol"RGS."19971996'995CommonStock-PriceRangeHigh1stquarter2ndquarter"3rdquarter4thquarterLow,1stquarter2ndquarter3rdquarter'thquarterAtDecerrrber3120Ya21Yic24'c/sc34i/a18Ya1820i/a23Yi3423i!i21Na21s/s19i/a21i/i19Ns1817Ns19N2322Na24N24N20Ns20Ns2022s/s22i/a63 electea'Financial'Data(ThousandsofDollars)YearEndedDecember311997-1996'995'994'993'992ConsolidatedSummaryofOperationsOperatingRevenuesElectricGasElectricsalestootherutilitiesTotalOperatingRevenues'peratingExperrsesFuelExpensesFuelforelectricgenerationPurchasedelectricityGaspurchasedforresaleTotalFuelExpensesOperatingRevenuesLessFuelExpensesOtherOperatingExpensesOperationsexcludingfuelexpensesMaintenanceDepreciationandamortizationTaxes-local,stateandotherFederalincometax-current-deferredTotalOtherOperatingExpensesOperatingIncoureOther(Income)aridDeductionsAllowancefor,otherfundsusedduringconstructionFederalincometaxRegulatorydisallowancesPensionplancurtailmentOther,netTotalOther(income)andDeductionsInterestChargesLongtermdebtShorttermdebtOther,netAllowanceforborrowedfundsusedduringconstructionTotalInterestCharges"NetIncomeDividendsonPreferredStockat.RequiredRatesEarningsAlicabletoCoumronStockEarningsperCouunonShare-BasicEar7ungserCoumronShare-DiluteriCashDividendsDeclarederComuronShare'Reclassifiedforcomparativepurposes.$679,473336,3091,015,78220,8561,036,63847,66528,347196,579272,591764,047268,47446,635,116,522121,79669,812(4,533)618,706<145,341(351)(3,704)3,308(747)44,615476,629(563)5.0,72895,3605,805$89,555$2.30$2'.30$1.80$690,883346,2791,037,16216,8851,054,04740,93846,484202,297289,719764,328266,09447,063105,614126,86865,7573,744615,140149,188(684)(3,450)(712)(4,846)48,618219,307(1,423)56,52397,5117,465$90,046$2.32$2.32$1.80$696,582293,863990,44525,8831,016,32844719954,167167,762266,119750,209259,20749,22691,593133,89565,368847600,136150,073(585)(16,948)2668669,631~18,96453,0263988,658(2,901),59,18171,9287,465$64,463$1.69$1.69$1.80$658,148326,061984,20916,6051,000,814$638,955293,708932,66316,361949,024.276,353724,461241,67255,06987,461129,77835,65825,587575,225,1491236244,318704,706240,34261,69384,177,126,89233,45315,877562,434142,272(396)(16,259)60033,679(923)16,701(153)(9,827)1,9538,1792,1132,26553,6061,8084,758(2,012)58,16074,37556,4511,4875,2200,714)61,44478,5637,369$67,006$1.79$1.797,300$71,263$2.00$2.00$1.77$1.7344,961.45,87137,00231,563194,390166,884$608,26>261,724869,99125,541895,53248,37629,706141,291219,373676,159226,62462,72085,028124,25236,1017490542,215133,944(164)(4,18,2(6,155)(2,299)60,8101,9505,228(2,184)65,80470,4398,290$62,249$1.86$1.86$1.69R0ehesterGasandElectric CondensedConsolidatedBalanceSheet(ThousandsofDollars)AtDecember31'9971996TS95*'.1994"1993*1992'ssetsUtilityPlantLess:A'ccumulateddepreciationand'mortization\ConstructionworkinprogressNetutilityplantCurrentAssets,InvestmentinEnrpireDeferredDebitsTotalAssets$3,234,0771,714,3681/519,70974,0181,593,727242,371,.432,191$2,268,2891,569,0781,590,68169,7111,518,8781,549,225121,7251,660,3921,670,950250,461292,59638,879450,623..453,72652,361,476$2,456,151,$3,159,759$3,068,103$2,981,1511,423,098-1,558,053128,8601,686,913236,51938,560484,962$2,446,954$2,890,7991,335,083$2,798,5811,253,1171,545,46483,834',555,716112,75011668,466248,589~38,560488527J,629,298"209,6219,846181,434$2,444,142$2,030,199CapitalizationanftliatfititiesCapitalizationLongtermdebtPreferredstockredeemableatoptionofCompany,PreferredstoclcsubjecttomandatoryredemptionCommonshareholdersquity:CommonstockRetainedearningsTotalcommonshareholders'quityTotalCapitalizationLongTennLiabilities(DepartnrentofEnergy)CurrentLiabilities,DeferredCreditsanrlOtherLiabilitiesTotalCapitalizationandLiabilities'587,334"47,00035,000699,031109,313$646,95467,000i45,000696,01990,54096,726189,317504,56893,752158,217563,994$2,268,289$2,361,476808,344786,5591,477,6781,545,513,$716,23267,00055,000687/51870,330757,848',596,08090,8871824338586,846$2,456,151$735,178$.747,631,67,00055,00067,00042,000$6S8,88067,00054,000670,56974,566652,17275,126591,53266,968745,135727,298658,5001,602,3131,583,929.',438,38087,82689,804.94/602181,327234,530267,276575,488'35,879229,941.$2;446,954$2,444,'142-$2,030,199'Redassihedforcomparativepurposes.FinancialOata-AtDecember3119971996'995199419931992CapitalizationRatios(a)(percent),ongterindebtPreferredstockCommonshareholders'quity-TotalBookValueperCofnnlonShare-YearEndRateofRetunronAverageCornnronEquity(b)(percent)EmbeddedCost.ofSeniorCapital(percent)LongtermdebtPreferredstockEffectiveFederalInconreTaxRate,(percent)DepreciationRate(percent)-Electric-GasInterestCoveragesBeforefederalincometaxes(incld.AFUDC)(excld.AFUDC)Afterfedtsralincometaxes(incld.AFUDC)(excld.AFUDC)InterestCoveragesExclutling'on-RecurringItems(c)'eforefederalincometaxes(incld.AFUDC)(excld.AFUDC)Afterfederalincometaxes(incld.AFUDC)(excld.AFUDC)43.05.251.8100.0$20.80,11.00.325.80'9.23.122.604.064.042.862.844.064;042.862.8444.76.948.4100.0$20.2411.417336.26"40.42.992.603,823.792.68'2.653.823.79.2.682.6547.47.345:3100.0$19.718.377.38'=6.2640.72.762.592.952.902.162.103.6(83.612.622.5748.27.344.5100.0$19.788.927:4062637.72.692.62/2.982.942.24.2.203.55%512.612.57-49.4'.'.644.0100.0$19.70,10.257.366.69"'33.52.622.(302.872.842.242.213.033.002.352.3248.28.043.8100.0$18.929.94~7.916.9835.92.692.782.62"'.582/042.002.742.702:122.08(a)Indudescompany'slongteanliabilitytotheDepartmentofEnergy(DOE)lornudearwastedisposal.ExdudesDOElongtermliabilityforuraniumenrichmentdecommissioningandamountsdueorredeemablewithinone>m.(b)Thereturnonaveragecommonequityfor1995excludingeflectsolthe1995GasSettlementlsI2.IN6.TherateofreturnonaeragemmmonequityexcludingeffectsofretirementenhancementprogramsremgrrizedbytheCompanyIn1994and1993is11.9'ndI1.2N6,respectively.~(c)RemgnitlonbytheCorppanyIn1992ofdisallowedicestormmstsasapprondbysshePSChasbeenexdudedlrom1992coverages.Comragesfo?1994and1993exdudetheeffectsolretirementenhancenientprogramsrecognizedbytheCompanyduringeach)varandcertaingaspurchaseunderchargeswittenoffin1994and1993.CoveragesIn199Sexcludetheeconomiceffectofthe199SGasSettlement($44.2million,pretax).1865

~/~/eerr'lc'eppr'rmeEl8;,Sr2rlgrlcpYearEndedDecember3119971996"1g9591994;i1993'1992/Rochrstrrasan(tHcctricrporattonElectricRevenue(000's)-ResidentialCommercialIndustrial-MunicipalandotherElectricrevenuefromourcustomersOtherelectricutilitiesTotalelectricrevenueElectricExpense(000's)FuelusedinelectricgenerationPurchasedelectricity,OtheroperationMaintenanceDepreciationandamortizationTaxes-.local,stateandotherTotalelectricexpenseOperatingInconlebeforeFederalgncoineTaxFederalincometaxOperatingIncomefronlElectricOperations(000's)ElectricOperatingRatio%electricSales-KWH(000's)ResidentialCommercialIndustrialMunicipalandotherTotalcustomersalesOtherelectricutilitiesTotalelectricsales'lectricCustomersatDecember31ResidentialCommercialIndustrialMunicipalandotherTotalelectriccustomers/ElectricityGeneratedand.Purchased-KWH(000's),FossilNuclearHydroPumpedstorageLessenergyforpumpingOtherTotalgenerated-netPurchasedTotalelectricenergy'ystemNetCapability-KWatDecelnber31FossilNuclear-HydroOther~PurchasedTotalsystemnetcapabilityNetPeakLoad-KWAnnualLoadFactor-Net%*Reclassifiedforcomparativepurposes.$252,464210,643144,30572,061,$254,885215,763153,337.66,89847,66528,347205,05841,217~103,39591,11140,93846,484204,74641,42992,61595,010516,793521,222183,53661,837186,546'1,901$121,699$124,64546.02,139,064',118,9912,010,613537,0516,805,7191,218,79447.1"2,132,9022,061,6252,010,963520,8856,726,375994,8428,024,5137,721,217-308,90930,940,1,3002,824'07,18130,6201,3252,688343,973341,8411,664,9145,119,544227I867238(900(358,350)8906,893,7651,301,6361,512,5134,094,272248,990246,726(370,097)9365,733,3402,437,4338,195,4018,170,773526,000638,00047,00028,000375,000529,000638,00047,00028,000375,0001,614,0001,617,0001/4217000411305700056.1'L9679,473690,88320,856i16,S85700,329707,768$256,294215,696157c46467,128696,58225,883722;465$243,961$234,866206,545'96,100150,372148,08457,27059,905658,148638,95516,60516,361674,753655,31644,19054,167199,52444;03278,812102,380.523,10544,96137,002192,36047,29575,21197,919494,74845,871,'31,563192,74952,46472,32696,043491,016199,360180,00559,500,52,842164,)0043,8455139,8605127,1635120,45547.3I2,144,7182,064,8131,964I975531,3116,705,8171,484,19647.72,117,168',028,6111,860I833513,6756,520,2871,021,73349.22,123,277,1,986,1001,892,700504,9876,507,0644743,5888,190,0137,542,0207,250,652306,60130,4261,3472,711304,494302,21929,98429,6351,361.1,3822,670-2,638=,341,085338,509335,8741,631,9334,645,646171,886237,904(361,144)1,5656,327,7902,343,4841,478,12047527;178218,129247,5501(371,383)1,2456,100,8391,998,8821,520,9364,495,457199,239233,477(355,725)2,5596,095,9431,646,2448,671,2748,099,7217,742,187529,000640,00047,00028,000375,000532,000617,00047,00029,000375,000541,000620,00047,000'29,000~347,000"1,619,0001,600,0001,584,(O)1,425,000.1,374,0001,'333,00057.658.8,59.1$222,21187,262141,50757;288608,26725,541~633,808r48,37629,706183;118w53,71473,21394,841482;968150,84038,046$112,79449.72,084,7051938(1731,929,720503,3886,455,91,062,7.7,518,724300,34429,3391,3862,605333;6742;197,7574,191,035278,318226,391"(344,2458116,550,0671,389,8757,939,942~541,000617,00047,00029,000348,0001,582,1,252)62.~(BB 4asDepart'mentStatisticsYearEndedDecember31.19971996'995'.1994'993'992GasRevenue(000's)Residential~.ResidentialspaceheatingCommercialIndustrialMunicipalandotherTotalgasrevenueIGasExpense(000's)GaspurchasedforresaleOtheroperationMaintenanceDepreciationTaxes-lo'cal,stateandother~Totalgasexpense,OperatingInconiebeforeFederalIncomeTax,FederalincometaxOperatingIncomefromGasOperations(000's)GasOperatingRatio%,GasSales-Therins(000's)'ResidentialResidentialspaceheatingCommercial.IndustrialMunicipalTot'algassalesTransportationofcustomer-ownedgasTotalgassoldandtransportedGasCustoniersatDe'cember31'esidentialResidentialspaceheating-CommercialIndustrialMunicipal-TransportationTotalgascustomersGas-Z7iernis(000's)PurchaseriforresaleGasfromstorage-.Other"TotalgasavailableCostofgasperthermTotalDailyCapacity-ThernrsatDecember31'",Maximumdailythroughput-ThermsDegreeDays(CalendarMonth)'Fortheperiod.Percent-colder(warmer)thannormal"$5,852249,10151,8935,80023,663336,309196,57963,4165,41813,12730,685.309,225.27,0843,442$.23,642,78.95,773285,39565,6757,8287,331372,002166,060538,06216,265243,26419,118829*1,117836281,429274,430104i317=1,410380,15751.70e4,380,00047114,2906,9212.8$'6,010246,94552,0736,17535,076346,279$4,081230,93451,1176,6861,045293,863202,29761,3485,63412,99931,858314,136167,76259,6845,194'2,78131,514276,93532,143-7,60016,928',715$24,54377.86,455299,08570,5439,3348,086393,503167,779$10,21379.27,167280,76368,3809,5608,219'374,089146,149561,2823520,23816,718240,68519,045857961744-17,443238,26718,978879981655~.279,010277,203279,353122,8431,082237,728.152,8521,800403,278392,38052.30e45.80e4,480,0005,230,000.4,022,600'3,980,0006,9986,5353.9'3.0)$5,935215,97449,1157,088,47,949326,061194,39049,3127,77412,25031859295,58530,4768,403$22,07377.16,535283,03972,410-11,'42010,230,383,634136,372520,00617,836235,31318,742'05988'58274,342262,267134,8022,959'00,02850.00eS,625,0004,735,6906,699'0.6)$5,526201,12946;3216,36834,364$6,456186,71044,3956,28417,879'293,708261,724166,88447,5939,22911,85130,849~141,29143,5069,00611,81529,411266,406235,02927,3025,48526,6955;545$21,817$21,15076.2',871295,09378,88712,03012,18874.148,780287,62378,99612,43811,410405,069399,247124,436126,140529,505525,38718,389231,93718,6369241,001466271,35319,114228,096~18,37893281,010424267,954347,77876,3781,039360,49353,7571,061425,195415,31136.79e35.35e3,864',8507,044443,768,4706,9813.45,625,0004,485,000~4'Reclassifiedforcomparativepurposes."Methodfordeterminingdailycapacity,basionsystemscanacceptwithoutadehcieetworkanaiysisedoncurrentnncy.s,reilectsthemaximumdemandwhichthetransmis-874 WnvesrorrnyormartonI'4BusinessandFinancialinformation'.RGREbusinessandfinancial.informationisavailable'aroundthe,clockbyphoneandotitheInternet.RGREbyPhoneShareholderscanaccessRGRE-fromanywhereintheUnitedStatesorCanada,bycallingourautomatedinvestorcommuni-cationssystemat(800).724-8833."Youwillbegreetedwithabriefmessage,thengivenamenuofoptions.Amongotherthings,youcanchoosetohearRGRE'squarterlyeainingsannouncementorrequestacopy,includingfinancialstatements,byfaxormail.RGREontheIntentet>YDLIcanvisitRGREonlineathttp://wwwige.corn.Ourwebsitefeaturesthelatestnewsandfinancialinformationincluding.quarterlydivi'dendandearningsannouncements,financialstatements,consumerandproductinformation.-RG8rEfinancialresultswill,typicallybereleasedjustpriortothedividendpaymentdateeach,quarter.SecttrltyAnalystContactSecurityanalystsandothersreque'stinginformationaboutRGREshouldcontactThomasE..Newberry,DirectorofInvestorRelationsat(716)724-8091.rRG&Ewishestothankallofthosecontributors"whoandinformative/givingoftheirtime~,ondexpertise,providingtheirphotosforindusfon.CorporateAddressRochesterGasand.ElectricCorporation89EastAvenue--Rochester,NewYork14649(716)546-2700-ShareholderServicesShareholderswithquestionsaboutdividendpayments,addresschanges,missingcertificates,ownershipchangesandother'ccountinformationshould'contactourstocktransferagent:StockTransferAgentBankBoston,N.A.c(oBostonEquiServeP.O.Box8040Boston,MA02266-8040(800)736-3001.TnlecotsttnttnicattonDevtcefortheDeaf(TDD)(800)952-9245Dividends,Dlvl<lendPayntentDatesRGRE'sBoardofDirectorsmeets'quarterly'toconsider'thepaymentofdividends.Dividendson'CommonStockarenormallypaidonoraboutthe,25thofJanuary,April,JulyandOctober.DividendsonthePreferredStocksarepayable,asdeclared,onoraboutthe1stofMarch,June,SeptemberandDecember.DlvldendDirectDepositShareholderscanelecttohavetheirquarterlycashdividendselectronicallydepositedintotheirpersonal.bankaccounts.Depositsaremadeonthe'datethedivide'ndispayable.Ifyouwouldliketo~takeadvantageofthisservice,cantactourstockt'ransferagent.wentovtoftheirwaytobesoaccommodotinglendingtheirartifactsforphotography,dndrDlvtdendRelnvestntent'GgtEoffersadividendreinvestmentplanas,aservicetoCommonStockshareholderswhowishtopurchaseadditionalshares.Inadditiontofullorpartialreinvestmentofdividends,theplangivesshareholderstheopportunitytomakedirectcashInvestmentsrangingfrom$50to$5,000asoftenasonceamonth.'orfurtherinformation,contact~ourstocktransferagent.FirstNorlgageBondlrusteeBankersTrustCompanyc/oBTServicesTennesseeInc.~SecuritiesPaymentUnit',P.O.Box291207-Nashville,TN-37229-1207(800)735-7777-AnnualtjfeettngRGRE's1998annualmeetingofshareholderswillbeheldattheRochesterRiversideConventionCenteronWednesday,April15,1998at11am.,StocktjstingsRGRE'sCommonStoclcislisted,ontheNewYorkStockExchangeandisidentifiedby.thestocksymbolRGS.ThePreferredStockissuesaretradedontheover-the-countermarket..FormlgrKAnnualReportSharehoIdersmayobtainacopyoftheCompany's1997annualreportonForm10-K,asfiledwiththeSecuritiesandExchangeCommission,withoutcharge,bycalling(800)724-8833orwritingtoInvestorServices.~ITheinformolarchlvistsofRG&EDickBiedenbach,GinnaKimMagnvson,GinnaRickMeier,CorporateCommunicotions-"BillMeyers,OperationsDonSchlegel,Op'erotions,PaulSissonrLaborousry&InspectionServices<OperationsBettyWeis,MarketingJimWhite,OperationsSteveWright,OperationsLeaZimmermon,EmpbyeeEmeritusandformerRG&EKibette-,Pn'voteCollectorsondOurFriendsIntheCommunity:rDickBowman,Webster,NY:glassinsvbtorcollectionJohnA.o'ndJeonneWenrich,Avon,NY:KerosenelampondlightbulbcollectionDanielM.Barber,DepvtyDirector,Collections;EugeneLtmberger,CuratorofHistoryChairmonondStephenFentreis,Director,StrasenbvrghPlanetarium;theRochesterMuseum&ScienceCentermonHouse,internationalrahondFilmTheGeorgeEastMuseumofPhotogpyBavsch&LombCorporationXerox'orpprationOuropologiestooilthosewhoheededthecoilandcontributeditemsbutwereleftoutduerspocelimitations.yPrincipalPhotogrophy:KenRiemer'8 0270l78ctofg2ll2c8fgBoardAppointmentsMarkB.DrierMarkB.GrierisExecutiveVicePresidentforfinancialmanagementofthePrudentialInsuranceCompanyofAmerica.SusanR.HollldaySusanR.HollidayisPresidentandpublisheroftheRochesterBusinessJourna,aweeklybusinessnewspaper.BoardofDirectors(asofJanuary1,1998)WilliamBalderstonIII'gjFormerExecutiveVicePresident,TheChaseManhattanCorporationAngeloJ.ChlarellatJVicePresident,RochesterMidtown,L.L.C.AllanE.Dugan"gSeniorVicePresident,CorporateStrategicServices,XeroxCorporationMarkB.GrlerExecutiveVicePresident,FinancialManagement,ThePrudentialInsuranceCompanyofAmericaSusanR.HollldayPresidentandPublisher,RochesterBusinessJournalJayT.Holmes"JAttorneyandCommercialArbitratorSamuelT,Hubbard,Jr.t0PresidentandChiefExecutiveOfficer,TheAilingandCoryCompanyRogerW.Kober'ormerChairmanoftheBoardandChiefExecutiveOfficer,RochesterGasandElectricCorporationConstanceM.Mitchellt/FormerProgramDirector,IndustrialManagementCouncilofRochester,NewYork,Inc.CorneliusJ.Murphy"4SeniorVicePresident,GoodrichgtSherwoodCompanyCharlesI.PlossergDeanandJohnM.OlinDistinguishedProfessorofEconomicsandPublicPolicyoftheWilliamE.SimonGraduateSchoolofBusinessAdministration,UniversityofRochesterThomasS.Richards'hairmanoftheBoard,PresidentandChiefExecutiveOfficer,RochesterGasandElectricCorporation*MemberofExecutiveandFinanceCommitteetMemberofAuditCommitteeIMemberofCommitteeonManagement/hfemberofCommitteeonDirectorsOfficers(asofJanuary1,1998)ThomasS.RichardsChairmanoftheBoard,PresidentandChiefExecutiveOfficerAge54,YearsofService,6RobertE.SmithSeniorVicePresident,EnergyOperationsAge60,YearsofService,38J.BurtStokesSeniorVicePresident,CorporateServicesandChiefFinancialOfficerAge54,YearsofService,2MichaelT.TomainoSeniorVicePresidentandGeneralCounselAge60,YearsofService,0'atrfdC.HeillgmanVicePresidentandCorporateSecretaryAge57,YearsofService,34RobertC.MecredyVicePresident,NuclearOperationsAge52,YearsofService,26WilliamJ.ReddyControllerAge50,YearsofService,30MarkKeoghTreasurerAge52,YearsofService,26JessicaS.RalnesAuditorAge40,YearsofService,2ENERGETIX,Inc.MichaelJ.BotralinoPresidentAge42,YearsofService,IJohnA.HamiltonVicePresident,Operations'ge43,YearsofService,0'*WlllredJ.Schrouder,Jr.VicePresident,SalesAge56,YearsofService,35'ppointedSeniorVicePresidentandGeneralCounsel,effectiveOctober1,1997-EmployedMay19,1997

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