ML17059C113

Rg&E Annual 1997 Rept.

ML17059C113
Person / Time
Site:	Nine Mile Point
Issue date:	12/31/1997
From:	RICHARDS T S, STOKES J B ROCHESTER GAS & ELECTRIC CORP.
To:
Shared Package
ML17059C114	List: ML17059C113 ML17059C115 ML17059C116 ML18041A064
References
NUDOCS 9807070348
Download: ML17059C113 (74)

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"rpSRRVgCggg'f'fHEBEG"G'I~1f~1H')t')%'i.,II'>'.t~,,~<J)p'))4/l~l)I~~y~~~~~~ll~)I"~"GaseElectricSerVice+cansComfortoEconomyoConvenience Satisfaction pitaka CfRochester GasandElectricCorporation ANNUAL/QQPREPOR'r

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.>/bi>':EIt'.lpflWT~I0i I~8ESar'viceArena/Supinely Rochester

~~~~~~r~~'I~~i8~~~e~~~~~~t~~I~jgsourceof1997revenueDollar'se of1997revenueDollar'urchased Gas-19cResidential

-49e(25eElectric, 24eGas)Commerdal

-25e(20cHectdc,SeGas)Industrial

-15e(14eHectric,leGas)Other-9e(7cHectric,2eGas)SalestoOtherUtilities

~~~~(2eHectrlc)Taxes-18eOtherOperations-18e WagesgrBenefits-13cDepreciation StAmortlration

-IleDistdends 8.Reinmsted Eamis-9cHectricfuelSrI'ur.chasedHectridty-7e Interest-Se 19971996ChangeFinanCial Data(DollarslnThousands)

Operating revenues:

ElectricGasOperating expensesOperating incomeNetincomeEarningsapplicable tocommonstockRateofreturnonaveragecommonequityCommonStockDataWeightedaveragenumberofsharesOutStanding (thousands)

-Basic-DilutedPercommonshare:Earnings-BasicEarnings-DilutedDividends PaidBookValue(yearend)Year-endmarketpriceNumberofCommonStockShareholders atDecember31Operating DataSales(thousands)

Kilowatt-hours tocustomers Kilowatt-hours tootherutilities Thermsofgassoldandtransported Construction expenditures, lessallowance fOrfundSuSedduringCOnStruCtiOn (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$34.00313376,805,719 1,218,794 538,062$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$19.1333,6756,726,375 994,842561,282$114,2741,960(1)(3)(1)(3)(2)(1)(4)(1)(1)378(7)123(4)(26)'P.,j$)ljtu"ititt9$L..==~+~rIr"gW=..-..-~EarlyRochester RoitwoyoedUghtcrewoothejob.0~r~4 syourCompanyentersits150thyearofservicetoourcustomers, Iamprivileged tobeginmyserviceasChairmanandChiefExecutive 05cer,Iamhonoredbythecon6dence thattheBoardhasexpressed inmeandcommitted tocontinuetoearnthatconfidence.

Ihavetheoppor-tunityinmyfirstannualreporttoyoutodiscusswhatwasamosteventfulyearand,inmanyrespects, aturningpointinthehistoryoftheCompany.Deregulation-TheLongerTennGoodNewsSurelythemostsignificant amongthemanyeventshastobetheregulatory approvalofournegotiated settlement agreement thatspellsoutjusthowwewillmakethetransition tocompetition overthenextfiveyears.Theagreement isacomprehensive planthatwillfundamentally changethewayelec-tricityispricedanddelivered toourcustomers.

Overafive-year phase-instartingnextsummer,thetermsoftheagreement willlowerelectricratesforcustomers, bolstereconomic'~'/~derldevelopment andjobgrowth,andbeginthetransition toacompetitive electricmarket.RGREisevolvingintoseveralregulated businesssegments; agenerating segment,adistribution segment,andacustomerservicessegment.Inaddition, wehaves<<<C+,,,EST1834j,.',iv)';;

y/ffe$a~dgtpgjkj)(

~IOjjOformedaseparate, unregulated energyservicessubsidiary calledENERGETIX, andsymbolized bythisexclamation pointI,thatwillcompetewithothersimilarcompanies.

Underoursettlement agreement:

1.Residential electricpriceswillcontinuetobereducedanaverageof10percentfrom1996throughtheyear2002.2.Ratesforcommercial andindustrial customers-thearea'smajoremployers

-willcontinuetobereducedanaverageof15percentfrom1996through2002.3.Residential customers willnotpayforthereductions forbusinesscustomers.

4.Customers'lectric demandwillbeincreasingly opentocompeting electricproviders overafour-year phase-inperiodwhere,by2001,allofRGRE'selectricloadwillbeavailable forcompe-tition.Wecannotpredicthowrapidlypotential competitors willwanttoenterthelocalmarket.However,astheyarrive,wewilldelivertheirenergytocustomers atratesspecified inournewdistribution tariff.Lf.i'.)HobbsKeroseneLampcirca1870CourtesyofJeanneWenrich.

Oneofthefirstpairsofeyeglassesmanufactured byBausch&Lotnb,c.1900.CourtesyofBausch8tombCorp.5.Throughout thisperiodoftimewewillcontinuetoretainourobligation toprovideregulated ervicestoallcustomers whocannotordonotooseanothersupplier.

Weprovidevitalervicesthatmustbeavailable, irrespective ofthepaceofthedevelopment ofacompetitive supplysystem.6.RGREwillmaintainandevenimproveitshighlevelsofenergyreliability, systemmaintenance andemergency response.

7.Allofourgeneration willinitially remainaspartoftheregulated system.Althoughwearenotrequiredtodivestourfossil-fueled electricgeneration, itwillhavetocompeteinthewhole-salemarketplace torecoveritsongoingcosts.Ournucleargeneration willremainpartoftheregulated systemwhileweworkwiththeotherutilities andthePublicServiceCommission toarriveatastatewide determination oftheroleitwillplayinthenewsystem.S.Theagreement givesRGREtheopportunity torecoverpastinvestments whichwereapprovedbystateregulators tomeetourcustomers'nergy requirements, butmaynolongerbeeconomi-callycompetitive inthenewunregulated market-place.Thesearethesocalled"stranded costs."9.Last,andcertainly notleast,westruckanagree-mentthatoffersfairnesstoyou,ourshareholders.

Wewillhavetheopportunity toachievearateofreturnonequityof11.5%,andtheopportunity toshareanyearningsabovethatlevelwithcustomers.

TheChallenges andOpportunities Toimplement thesettlement andsecureRGRE'splaceinthederegulated gasandelectricbusiness, wemust:~Keepthelightsonandthegasflowingforeveryoneforlowercost.~Createthesystemsandfacilities foranewcompetitive system.~Developaprofitable, growingunregulated energybusiness.

~Maintainourfinancial performance.

~Balancethemall.Thekeyfortheimmediate futureisbalance.Unlikeotherindustries thathavegonethroughderegulation andrestructuring, wecannotabandontheoldobligations topursuenewopportunity.

Forsometimewewillberunningtwosystems;atraditional regulated systemonwhichpeoplecandependandacompetitive systemthatwilldevelopatanuncertain pace.Certainly thisbalanceisachallenge, butitisalsofullofopportunity.

Webelievethatweareuptoitandthatourrecentperformance provesit,Glassinsulators; Cobaltblueporcelain madebyVictorInsulator, Vic.1945;Hemingway Petticoat, 1893;tallTatunrNo.l,c.1920;Hemingway "MickeyMouse"c.1900CourtesyofDickBowman.OriginalKodakCamera.CourtesyofGeorgeEastmanHouse.

nti!feI'r.>Ene~retfx IsaidwehaveformedENERGETIIX tocompeteheadtoheadwithotherenergyproviders intheopenmarketplace.

ThisisperhapsthemoststrikindeartureWehavebeenabletomaintainourfinancial performance, despitedecreased revenuesresulting fromratereductions, becauseofthecontinued outstanding performance byourfineemployees.

Despiteasubstantial declineintheworkforce throughearlyretirement programsoverthelastseveralyears,theyhaveimprovedourperformance andreducedouroperating costs.AnothermajordecisionreachedbytheBoardwastorepurchase upto4.5millionsharesofourcom-monstockoverthenextthreeyears.Thereduction ofoutstanding shareswillincreasethevalueofremaining shares,eliminate theneedandcostofpayingoutadividendonthoserepurchased sharesandwilllikelyreduceouroverallcostofcapital.AndtheMarketPerformance ShowstheResultsIn1997therewasasubstantial improvement ofourcommonstockmarketperformance.

Thestockpriwentfrom$19.125pershareto$34byyear'senThatresultedinatotalannualrateofreturn,incingdividends, of92percent,thebestperformance amongthe93investor-owned electricutilities thatcomprisetheEdisonElectricInstitute Index.Whilewehesitatetoclaimcompletecreditfortheimprove-mentthatisinfluenced bymanyforcesinthemarketplace, webelieveourfinancial performance andbalancedcompetitive settlement agreement playedarole.Thesefactorsallowedustoannounceplansforthestockrepurchase programandmaintaintheannualdividendwhichaddstrengthtothefoundation wearebuildinginthemarketplace.

EarningsandDividends-TheShorterTermGoodNewsAswehavealreadyannounced, yourBoardofDirectors votedinDecembertoretainthecurrentdividendof$1.80ayear.Whilethecontinuation ofthedividendwillbereviewedeachquarterbytheBoard,thisactionmadeaforcefulstatement inlightofsomefinancial community speculation thatRGREmighthavetofollowsomeotherutilities andreduceitsdividend.

Leadership OneofthereasonsRGREhasbeenaroundsolongwithsuperiorreliability, serviceandastrongcommunity presencehasbeenthepeoplewhohaveledthecompanyasCEO.ThelistofRGRETheCopierModelA,thefirstconuner-cialxerographic process,wasamrounced in1949.Thismamialdeviceprovidedtheknowledge andrevenueswithwlrichtodevelopautomatic xerography.

'1CourtesyofXeroxCorporotion.

c1848Rochester GosUgiformed.1834Rochester, NYfounded.NamedoherNothoniol Rochester.

~lgPfromourtraditional wayofdoingbusiness.

Oursettlement agreement allowsENERGETIX tocompetebothinandoutsideRochester GasLightofourserviceterritory whileCompany's firstcustomers identifying itselfasanarelenstreetlampsandRGREsubsidiary.

Weexpectlightingfor80homesandENERGETIIX notjuSttObusinesses nearitsMumfordreplacethetraditional retail(Andrews)

Streetgasplant.utilityserviceinthesaleofTheOsbunihome(above)electricity andgas,buttowasthefirsthomeininDecentber 1848relatedProductsandservices.

ENERGETllX presentsourgreatestopportunity forgrowth.Thisissomething aboutwhichyoucanexpecttohearmorethroughout, thecomingyear.

executives overthelast150yearsislonganddistinguished.

recentlyaddedtothatlistisRogerKober.Rogerretiredthisyearafter32yearswiththecompany,risingthroughtheranksinavarietyofpositions andresponsibilities.

Hebecamechairman, president andCEOin1992andledthecompanythroughtherestructuring necessary topositionitselftocompeteinaless-regu-latedfuture.IndollarsanddeedsheenhancedRGRE'scommit-menttothecommunity.

Becauseofhisforesight andleadership wearepoisedtosucceedinachangingworld.Althoughretired,we'lstillhavethebenefitofRoger'sadviceandcounselasamemberofourBoardofDirectors.

~hu'p~~150Years-Justthebeginning Thisyear,1998,theyearinwhichthewaywedobusinessbeginstakingadramaticdeparture fromthepast,comesexactly150yearsafterwefirstwentintobusiness.

Itwas1848whenRochester GasLightCompanyfirstsentmanufactured gastostreetlights andafewdozenhomesandbusinesses indowntownRochester

-thenaflourmillingboomtownof32,000peopleclustered alongthepowerfulfallsonGeneseeRiver.We'ebeenapartoftommunityjustaboutaslongasit'sbeenaround.ghoutourhistorywehavehadmuchtobethank-or;nottheleastofwhichismanyloyalandsupport-ivecustomers, employees andstockholders.

Weneedtopausetothankthem,evenaswelooktothefuture.Whilewewillbeadifferent companyinmanyrespects, weintendtohonorourpastandbuildonthestrengththatourhistoryhasprovided.

Weinviteyoutoreviewsomeofthehistoryinthepagesthatfollow.Thelast150yearshavebeenimportant, butweseethemas"JusttheBeginning."

IIIIIIIIIII'I,IrIlllI~Jr5ThomasS.RichardsChairnian oftheBoard,President andChiefExecutive OfficerJanuary30,1998z.QClai"cs=ana~gp,R,wc185.hnJacobBauschopensalittleeyeglassshopinRochester's ReynoldsArcadebuilding.

1855HenryLombpartnerswithBousch-Bovsch&Lomb.1859CharlesDarwinpublishes 1861TheOriginofSpecies.Ft.SumterisfiredvponCivilWar.Rochester has2,413gascustomers and657streetlamps.

WoodenpipeswrappedinCivilWarblanketsandsoakedinpitchwasRG&E'sfirstattempttotransport naturalgastoRochester.

Tliepipesleaked,andtheprojectfailed.Todaythousands ofmilesofsteelandplasticpipedelivergastoourcustoniers.

r)lr'"-"IiRGREHistoryheyearof1848wasastirringoneintheyoungcityofRochester, NewYork,ThebustlingtownontheGeneseeRiverandtheErieCanalhadalreadybecometheforemostHourmillingcenterinthecountry.Ithadapopulation of32,000,wasabusycanalportandg$>>y>>waslocatedontworail-roads.Conversion fromwhaleoiltogasstreetlampshadbegun.-TheRG&EStoryTheRG&Eblacksmith shopwasimportant tooperations intheearlydays.J>I's.cINaturalgastablelamp,c.1890-1910, collection oftheRochester Museuni&ScienceCenter..alLGAs.-1JL'f'r"Customerservicefieldrepresentatives oftheearlydaysreadyfortheirrounds.TheCentralOilgasStove,patentedin1891,fromthecollection oftlieRocliester Museum&ScienceCenter.sr1863President AbrahamLincoln1865delivershisGettysburg Address.7heCivilsandtGeneseeRiverfloodsitsdousingdowntownRocheandthegasplantsandrn

,jIIPIIfnIIfNtEarlyGeneralElectnccrankkeycurveddrawingVoltmeter.

Smith'sArcadecornerofWestMainCkExchangeStreetsin1877.stts~~>>~~I'-.Earlykerosenetableandstreetlamps.TheftrstGasPlantattheintersection ofMumfordStreet(nowAndrewsStreet)andtheGeneseeRiverin1848.TheCompanyhad150customers atthetinte.Currently, wehave280,000gascustoniers.

II1886ITarasabyproduct isfirstsoldtocustomers andtheCompanyincreases itsstockdividendforthefirsttime.1870Anattempttobringnaturalgasviawoodenpipes28milesfromneighboring WestBloomfield fails.1872CitizensGasCompanyisformedatEastStationonthebanksoftheGeneseeRiver.1876Philadelphia Centennial Expo.-promotesgasforcookingversusoil,coalandwood,Rochester's gascompanies follow.7 1879ThomasEdisoninventstheincandescent lightbulb.1879Electricity comestoRochester asRochester ElectricUghtCo.AdynamopowerstenarofightstreetlampsandlightingforReynoldsArcadeBuilding.

1880Municipal GaslightCo.isformed.1880Rochester bankclerkGeorgeEastmangetsaU.S.patentonaplatecoatingmachine.1881fff,;>>EhTt~,r1leRochester's firstinovietheatre,1889RGBc.EHistoryhedawnofthe"Elect'ge"comestoRoche'..TheGeneseeRiverprovid-edthefirststepinthegenera-tionofelectricity byfurnishing thewaterpowertoanimatethefirstgenerators.

Itwasthecatalystforindus-trialadvancesandmodernlife.TheBrushUghtCo.isformedonddistributes alternating currentoverseveralmilesofwiretoRochester factories.

1881Electricstreetlampsbegintorepbce905astheBrushCo.setsvphydroplant atUpperFalbontheGeneseetopowerstreetlights.

1881GeorgeEastmanestablishes theEastmanDryPlateCo.onStateSl.inRochester.

)886EdisonElectricilluminating CompanyopensasteomandelectricpbntdowntownatthecurrentWorMemorialSite.Thefirsttelephone companysetsvpinRochester.

Rochester Raihvay&LightCompanyoriginalhydroplant,Station4-1880.>>>>Ifomson/G.E.

WaffhourMeter-1888vughtt'>>iti>>~l)T>>>>g>>>>>>l:>>I nviv!uiri'iinW'e~>(a>>z>>(r1887incandescent bmpsbegintoreplacearclights.1888Ayovngman,ThomosH.Yawger,takesojobwithEdisonElectricotthesteampbntwhereheworked12hourso'doy,7daysaweek.TrustedtoolsofdietradeusedbytheElectrical Standards Lab.TheseWeston1888Voltmeter andMillivolt metersstilloperatetodaywithinmanufactured specifications of.5%accuracy.

p>>lj1888EdisonElectricilluminating becomesthefirsttometerelectricvse.GeorgeEastmonmarketshisfirstrollfilmcameraondcallsitKodak.1889Rochester GosUghtCo.,CitizensGasandMunicipal GascombineasRochester GasCo.1891Electriclightsareinstalled oBausch8lomb'smanufacturing complexonSt.PaulStreet.

Anemployeedelivering ntetersintheearly1900'sRGsc.EHistoryheformation ofRochester RailwayRLightCo.markedtherealbeginning ofRGB.Forthefirsttimeasingleorganiza-tionhadtheresponsibility ofsupplying thewholecommunity withelectricity, gasandsteamr~,testonVoltmeter

-1888.eh'/sJ/r/*1AnearlyRochester Railway&LightCo.gasdepartment crewinstallsgaspipelinewithitsmanuallydrawnequipntent cart.A1909,"Judd"electriclaundryntachine, oneofthenew-fangled appliances whichsavedtimeandfnfadehomelifeeasier.Collection oftheRochester Museum&ScienceCenter.iftfCetrrs7)e~A",~ggg~rurss>trDeliveryofcokeintheearly1900'sTypeKPotentiometer

&AnfmeterfromthetunfofthecenturyusedbytheElectrical Standards,

,IRQggy-"~!!IVReadyforduty.RG&Eemployees posetvithtlieirimpressive fleetofvehiclesattheAndrewsStreetfacility-1932.19.RGrEinstalb97cokeovensatoldEastStationandproducesdryquenchedcokeforresafe-thefirsttodosointheU.S.1929StockMarketcrashes.1930RG8Ehas114,000elec-triccustomers, 103,000gascustomers and349steamcustomers.

1935Thefirstof8steamboilersgoesonlineat"lheOldHouse,"onedaytobecalled8eebeeStation.11 DDD~uskoelrlCStsrorstn Q~Arov~Aloil.i/Il'p'ljrooo~~~oololt,~s31~illW~,l'0orrowrv1AooooWorow~oIIAOj~oAH*ow\pc,*StangthesteampressuremetersattheBoosterHouseStationWhatOnePoundofFatWillDoSaveeverydropoffatyoucanspareandturnitovertoyourbutchertobepassedalongforconversion intoexplosives thatwilldefeattheenemyandintomedicinethatwillsavelives.Eachpoundoffatwillmakeenoughsmallpoxinoculations toimmunize98soldiers...or produce8cello.phanegasmasks...or provide10roundsofammunition fora50-calibre machinegun.Rccjorrrtlt OASrreLCclttjcecole~ooAtr~aa~.~o~r~~~roRCCororsrrrorjrsolortjoo~/rtooorrjlc~~-"rr~".<<~~4~CliartermeinbersfromthefirstmeetingofthePioneersClubheldattheRochester ClubonApril27,1938.Reprinted fromRG&EMonthlyMessenger, November1943.1936ThomasYawgerpvbIishes ahistoryofthedevelopment ofelectricutiIities, o1940RG8Ehas139,00electriccustomers, 113,00gascustomers and242steamcustomers.

1941December7PearlHarborattacked-U,S.declareswarwithJapan.It[electricity Jliftedtheburdensofmillionsofpeopleandgavenelvandvitalimpetustoindustrial progress."

-ThomasYawgerAj~lt~~Electrical Standards Labrunningtestsinthe1930'swithequipment featuredonthesepages.1945VJDoy-TheWarisoverondRGSEpipesinnoturalgastosvpportPost-Wargrowth.1946ENIAC,thefirstelectronic

computer, goesintoserviceattheUniversity ofPennsylvania.

1947Rochester's HaloidCo.purchases rightstoChesterCarlson's xerographic process.1948Ontheoccasionc'sCentennial, thefirstot4coaWiredelectricunitsgoesonlineatRussellStation.

I'/'pt'homas Edison,afoundingfatlieroftheElectricAge.CharlesEdiSoli,Soliofthefamousinventor, inspectsoneofthefirstBi-polarDirectCurrentGenerators.

Installed in1888bytheRochester ElectricLightCo.intheOldHydroStationatUpperFalls,itwasinserviceformorethan50yearsuntilitwasretiredandmovedtoanRGkEopera-tionscenterfordisplay.HYLOEcononeorcorbonfiWestonHookEye-Eorly1880's,carbonfiloment.

Ical1900's,ents.Edison1879RepticaoffirstworivnglightSv'Ib,corbonized poperfilament.

RRLC(Rochester RailwayandUghtCompany)Edison1903.1907,corbonfiIoment.

Bernstein

-Eorly1890's,corbonfilamentI'I'I>>SterlingSpecialSpiralearly1900's,carbonfiloment.

G,E.EdisonMAZDAbegon19)1,Firstdvctile,"drawn'ungsten fi'lament.

Tontolvrn Filomenti9061913.MazdaWorkfWorIISktckovtbegan1913,Svtb)9)t2,194$

slngktcoiltvtgsn)n,usedtodimlylightcriticolpossogewoys.

"Modern'ungsten CoiledCoilfiloment~began1936topresent,OriginalBrushLightCompanyplant,1881-1886.

NokvknownasStation5.NationalMazdaLightdisplay-1930'sCourtesyJohnA.WenrichesterRailwayCo.1892electrifies itslinesandEastmanDryPlateCo.becomesknownasEastmanKodakCo.stes>tyrKj3%v>>tj9J~>>ryfotSarhtv)rn>>'tTteevoietioa eliaorettot)etta t)erwattbeganwiththefirstcrudefilamentofcarbonized paper.Filaments ofcarbonized bamboo,squirtedcellulose andGeneralElectric's Metallized Carbon("GEM"),lightedtheearlydaysofelectriclight.PressedanddrawnTiingsten filaments replacedTantalum, andlater,withGL'sinnovation ofductileTimgsten, higherefficiency coiledftlatnent bulbswerepossible.

Today'sHigh-Energy efficient bulbscanlastupto10timeslongeranduse75%lesselec-tricityoverthoseofjustafelvyearsago.189Avgust4-Rochester Electriclight,BrushElectricandEdisonilluminating mergetobecomeRochester GasandElectric.

CourtesyjohnA,Wenrich 1892October4-CitizensUght&PowerCo.isformedatBrown'sRace,tobecomeStotionNo.3alHighFalls.1893July23-CentralUght8,PowerCo.isformedtopowersomedowntownbuildings.

4I,5¹IIvIcc 1"rsWestinghouse ElectricAnvneter-1913.01903Rochester Ught&PowerCo.isformedinJanvoryandabsorbsCentrol.1903WilbvrandOrvilleWrightinventandtestthefirstworkableoirplaneatKittyHawk.ARochester RailwayandLightrepresentative wakesahousecall.c?~~x'4'904June-Rochester Ught&PowerisabsorbedbyRG&EandrenamedasRochester Railway&LightCo.1908t~IuIIITIntI~~II~~HenryFordproducesthefirstModelTinDetroit,Michigan.

1910RG&Ehas9,000eleotriccustomers, 52,000goscustomers ond19steomcustomers.

Station5waterwheel-1905.P,I~r*45q1916HydroStation¹5upgradesandgoesonlinewith44,000kilowatts ofpower.19174"IIIIIt~4>,IPpyTheUnitedStotesentersTheGreatWar,1918TheArmistice signedendingWorldWarI.~15~5eII~~SCIIVICCSclrVICCSSSVICC~AIHFolmerFactograph meterreadingcamerausedbyPowerBillingfrom1915.Specially designedtoovercometheerrorsofthepadandpencil.Manufactured inRochester, MY.1919Railwayoperation splitsoff1920ondRG&ECorporation isformed.RG8Ehas35,000electriccustomers, 81,000gascustomers and81steamcustomers.

1925RG&Ebuildsa12&tool.highdamontheGenesee,creatinghydroelectric potential andLakeRushford.

1925RG&Ebvildsitteheadquarters atstAve.10 RGB:EHistoryompanyprosperity isaforerunner ofcommunity growth.R68iEhasanessential functionintheproduction oftheproductsthatbringRochester fameinindustry.

Todaywearethelargestindustrial baseinNewYorkState.Earlytestingequipment; HotStick,FisherCableTestingSetandportableG.E.Voltmeter.

II~I:IIII~II>>>>>>1>>sly>>~*+>>%'+I~>>ill-IIIggCNfIsra rstsssI>>JTi~trI>>Oll>>>>>>14>>>>+>>>>tug Rochester's FourConfersyearsago.>>II1'elebrating 100yearsin1948,completewithcakeandthedancingRG&EKiloettes.

)'I1lf'>>s'>>'J,'~p.,>>>>Station3Iiydroplant',>'urbines.

>>\nI~f)-eKoreanWarbegins.RG&Ehas1952168,000electriccustomers, 135,000gascustomers and518steomcustomers.

195anvfactvred gasbegins1950RG&E'slastcokeovenistophaseovtinfavorofshutdownonAugust6.naturalgas.1953KoreanWarends.Bausch&Lombwidensscreenswiththeintroduction ofCinemascope lens.13 RGBc.EHistoryI.Checkingacircuitmapinelectriclineoperations.

8aEICaSheendofanera,thebeginning ofanew,Withmoregasandelectriccustomers thanever,RG8iEexpandsitsfacilities andservicesintonewterritory, developsnewtechnologies andenterstheNuclearAgeasthecomputerrevolution dawns.RG8iEisinthe"fastlane."Expanding gasservice,$Volcott,NY-1963...-at'i/i1954ThomasYawgerdiesasanoctiveRGlkEemployeewith66yearsofservice.TheRG&EBigBandstillswingstoday,atcommunity events.I":jtj'aterheaterinstalled inLakeOntario-RussellStation.1954rizrt'iI.&g',

Trackingwindstormdamage,1961956fastunitofRussellStationgoesonline275,000kilowotts total.1959An84,000kiiowott efectricgenerating unitgoesonfineot8eebeeStotion.Tlie"GreatBlackout,"

doyourememberwhereyouwere?SIIgyygrsllill Ca~tScBLACKOVT"8))BC)TjhjIIrthtlrll+jjj f4Q~'-.ynl=-;-R~1960RGSEhas202,000electric 1961HaioidCo.becomesXerox customers and157,000Corp.FirstU,S.troopssentgascustomers.

toVietnam.1965November9-8lackoutaffects80,000squaremilesofnortheastUnitedStates.1966Brookwood Sc.Information Centeropenstointroduce peopletotheadvantages ofnvdearpower.14

'Onestopshoppingfortheconveniences ofmodernlife-atoneofthetnanyRG&Eappliance centersfromthe1950's.IrILispecting thegaugesatStation5.I~\wIttIIII'lwalttRussellStation/stEarlypnesinaric cablecutter,usedbylinemen.Pl/s'I'ttGlasslightning

resistor, circa.!u196irmaStation470,000kilowatts online,onscheduleandonbudgetotacostof$88million.1970RG8Ehas254,000electric1971customers ond196,000gascustomers.

TheCleanAirActplacesheavydemandonoilandnaturalgoslucisfore'lectric generation.

1973RGBEinstogsa244nchgasmaintoinueosereliability betweeneastandwestsectors.

ServiceSolutions Satisfaction thepreviouspageshaveshown,wehavedeeprootsintheRochester community andachartercommitment asoneofitsfoundingcontributors.

Wesupportandserveitspeople,ourcustomers.

RGBispoisedforsweepingchange,andhasanticipated andembracedthefuturebyleadingthewaywithitsderegulation agreement whichthePSCrecentlyapproved, We'ereadyforcompetition.

AndatRGBwe'esayingthatthefirst150yearsisjustthebeginning.

nIIQNgm=pl=eR<MssRO'uturistic tecluiolog yinremotemeterreadingdevices:ENSCAN,andtheItronMERLINunits;convenience, accuracyandefficiency.

One-of-a-land technolog yisfeatrired intheEnergyControlCenterat1VestAvenue.Precisemonitoring ofgasandelectricoperations 24lioursadayallowsthemostrapidandefficient energyserviceresponseinutilityhistory.LS1!/jcPnrRGd'cEsponsorship oftheRochester Musetim&ScienceCenter'sChallenger SpaceCenterExhibitbenefitsthecommunity atlarge.1973Heavyoildemandcorn.binedwiththeArabOilEmbargocreatestheenergycrisisofthe70s.1975VietnamWarends.1983RGBEestablishes TheCommunity HeatingFundwiththeAmericanRedCross.1985Withdeciinin8Egoesoutofthesteamheatingbuimess.18

~\~,¹e/sSg~~j9/E2/I'Thehistory-making, unprecedented processofremovalandreplacement ofanuclearsteamgenerator throughthetopofthecoirtainment domeatGinna.fa)ster~i't.=y5/Q\)Irrrrr~l~rrrrt~trNewinfraredcoalthawingshedteclmology atRussellStatioii.

'.cgKsStation5automation inakeshydrofunctions easier,saferandinoreefficient withthenewMasterController Console.IrsrToday'scomputerized Flectrical Standards Labequipinent featuresfiillyautomated calibration andremotesitemeasure-ment.Itis10,000timesinoreaccuratethantlieanalogmeterssliownthroughout thesepages.State-of-the-art CustomerTelephone ServiceDept.handlesoveramillioncallsannually.

1991eworsticestorminNYhistory.Twothirdsofcustomers withoutelectric.

75%ofservicebackin7days,100%backin13days.'992Settingtheedgeforcompeti-1996tion,RG&E'scorporate busi.nessplanaimstobreaktheutilitymentality mode.RGBErep'laces thesteamgenerators intheGinnaplantontimeandunderbudget.1997Deregulation planapprovedbyPSC.RG8Ehas342,000electricand280,000gascustomers.

TheBeginning.

(f,~pgs+o~~f'/,(/j,)l~ff(I,xvwssX~p'p!II.."9.~uia I1It/i~~A~.'~oa~'!'hi~~4 0e2TI'Ag8B?8llrg Dl/Cll+SlOB BBQABBE'lgOFFINANCIAL CONDITION ANDRESULTSOFOPERATIONS hefollowing isManagement's assessment ofcertainsignificant factorsaffecting thefinancial condition andoperating resultsoftheCompany.Thisassessment containsforward-looking statements whicharesubjecttovariousrisksanduncertainties.

TheCompany's actualresultscoulddifferfromthoseanticipated insuchforward-looking statements asaresultofnumerousfactorswhichmaybebeyondtheCompany's controlbyreasonoffactorssuchaselectricandgasutilityrestructuring, futureeconomicconditions, anddevelopments inthelegislative, regulatory andcompetitive environments inwhichtheCompanyoperates.

Shownbelowisalistingoftheprincipal itemsdiscussed.

EarningsSummary.Competition

.PSCCompetitive Opportunities CaseSettlement BusinessandFinancial StrategyPSCPositionPaperonNuclearGeneration FERCOpenTransmission OrdersGasRestructuring andPSCNegotiations Prospective I'inancial PositionRatesandRegulatory Matters~1996ElectricRateSettlement 1995GasSettlement FlexiblePricingTariffLiquidity andCapitalResources CapitalandOtherRequirements Redemption ofSecurities Financing ResultsofOperations

.Operating RevenuesandSalesFossilUnitRatingsandStatusOperating ExpensesDividendPolicy.Page19.Page20.Page27.Page28.Page31.Page35EarningsSummaryDespiteratereductions inJuly1996and1997,earningsapplicable toCommonStockwerenearlyunchanged in1997due,inpart,totheincreased availability oftheCompany's Ginnanucleargenerating facilityfollowing the1996refueling andsteamgenerator replacement outage.Increased Companygeneration allowedtheCompanytoreducepurchased electricexpense,whileincreasing available powerforcustomerconsumption andresale.Adecreaseinfinancing costsasaresultofdiscretionary redemptions andrefinancing activities duringtheyearalsohelpedtoincreaseearnings.

Inadditiontoratereductions, offsetting againin1997earningswereawarmerheatingseasonduringthefirstquarteroftheyearcoupledwithacoolersummerwhichaffectedairconditioning load.Basicanddilutiveearningspershareof$2.30in1997aredowntwocentscomparedtoayearago.InFebruary1997,theFinancial Accounting Standards BoardissuedStatement ofFinancial Accounting Standards No.128("SFAS-128"),

"Earnings perShare,"whichchangesthemethodology ofcalculating earningspershare.TheCompanyadoptedSFASNo.128duringthefourthquarterof1997.Theimpactonearningspershareforpriorperiodsisnotmaterial.

Adiscussion ofthecalculation ofearningspershareispresented inNote1totheNotestoFinancial Statements.

Rochester GasandHectrlcCorporation Basicanddilutiveearningspershareof$1.69reportedin1995reflectapretaxreduction of$44.2million,or$.75persharenet-of-tax, inconnection withanegotiated settlement (see1995GasSettlement discussed below)reachedbetweentheCompany,StaffoftheNewYorkStatePublicServiceCommission (PSC)andotherpartiesresolving variousproceedings toreviewissuesaffecting theCompany's gascosts.Theimpactofdeveloping competition intheenergymarketplace willaffectfutureearnings.

TheCompetitive Opportunities CaseSettlement (the"Settlement",

seedescription below)allowsforaphase-intoopenelectricmarketswhileloweringcustomerpricesandestablishing anopportunity forcompetitive returnsonshareholder investments.

Thenatureandmagnitude ofthepotential impactoftheSettlement onthebusinessoftheCompanywilldependontheavailability ofqualified energysuppliers, thedegreeofcustomerparticipation andultimateselection ofanalternative energysupplier, theCompany's abilitytobecompetitive bycontrolling itsoperating

expenses, andtheCompany's ultimatesuccessindevelopment ofitsunregulated businessopportunities aspermitted undertheSettlement.

Futureearningswillalsobeaffected, inpart,bytheCompany's degreeofsuccessinremarketing itsexcessgascapacityassetunderthetermsofthe1995GasSettlement andincontrolling itslocalgasdistribution costs.TheCompanybelievesitwillbesuccessful inmeetingthe1995GasSettlement targetsovertheremaining yearoftheSettlement period,althoughnoassurance maybegiven.Competition OVERVIEW.

During1996and1997,theCompany,theStaffofthePSC,andseveralotherpartiesnegotiated anagreement whichwasapprovedbythePSCinNovember1997.Thisagreement setstheframework fortheintroduction anddevelopment ofopencompetition intheelectricenergymarketplace andlaststhroughtheyear2002.Overthistime,thewayelectricity isdelivered tocustomers willfundamentally change.Inphases,theCompanywillopenitselectricsystemtoothersuppliers.

Thesystemwillbefullyopentocompetitors byJulyof2001.Thesesuppliers willcompetetopackageandsellenergyandrelatedservicestocustomers.

TheCompanyanditssubsidiaries willbeamongthesupplierchoices.Competing suppliers willpaytheCompanyafeetouseitselectricdistribution systemandtheCompanywillremainresponsible formaintaining itandresponding tomostemergencies.

PSCCOMPETITIVE OPPORTUNITIES CASESETTLEMENT.

Throughits"Competitive Opportunities Proceeding,"

thePSChasembarkedonafundamental restructuring oftheelectricutilityindustryintheState.Amongotherelements, thePSC'sgoalsincludedlowerratesforconsumers andincreased customerchoiceinobtaining electricity andotherenergyservices.

TheCompany's proceeding wascompleted onNovember26,1997withthePSCapprovalofaSettlement Agreement amongtheCompany,thePSCStaffandotherparties.ThePSC'sNovember26,1997orderofapprovalwasconfirmed byafullOpinionandOrder(No.98-1)issuedJanuary14,1998.Summary.TheSettlement providesforatransition tocompetition duringitsfive-year ter(July1,1997throughJune30,2002)andestablishes theCompany's electricratesforeachannualperiod.ARetailAccessProgramwillbephasedin,allowingcustomers topurchaseelectricity, andlaterelectricity andcapacitycommitments, fromsourcesotherthanthe20 Company.TheCompanywillbeprovidedareasonable opportunity torecoverprudently incurredcosts,including thosepertaining togeneration andpurchased power.TheSettlement alsorequirestheCompanytofunctionally separateitscomponent operations:

distribution, generation, andretailing.

Anyunregulated retailoperations mustbestructurally separatefromtheregulated utilityfunctions butmaybefundedwithupto$100million.Inaddition, theCompanywouldhavetheoptionafterreceiving thenecessary regulatory approvals toestablish aholdingcompanystructure.

AlthoughtheSettlement providesincentives forthesaleofgenerating assets,itrequiresneitherdivestiture ofgenerating orotherassets,norwriteoffof"stranded costs"(theabove-market costs,presumedtoresultfromcompetition).

TheCompanybelievesthattheSettlement willnotadversely affectitseligibility tocontinuetoapplyStatement ofFinancial Accounting Standards No.71("SFAS-71"),

withtheexception ofcertain"to-gocosts"associated withnon-nuclear generation.

If,contrarytotheCompany's view,sucheligibility wereadversely

affected, amaterialwrite-down ofassets,theamountofwhichisnotpresently determinable, couldberequired.

RatePlan.OverthefiveyeartermoftheSettlement, thecumulative ratereductions willbeasfollows:RateYear1:$3.5million;RateYear2:$12.8million;RateYear3:$27.6million;RateYear4:$39.5million;andRateYear5:$64.6million.

TheRatePlanpermitstheCompanytooffsetagainsttheforegoing totalreductions certaininflation-related

expenses, andcertainamountsrelatedtoapowerpurchaseagreement withKamine/Besicorp AlleganyL.P.(Kamine),

including seven-eighths ofanydifference betweenKaminecostscurrently includedinratesandanyincreased amountresulting fromenforcement ofsuchagreement withanybalancenotrecovered duringthetermoftheSettlement subjecttodeferralforrecoveryaftersuchterm.Theagreement issubjecttolitigation, asdiscussed inNote10oftheNotestoFinancial Statements.

Intheeventofasettlement oftheKaminematter,theSettlement permitstheCompanytooffsetagainstratereductions, thefollowing amounts:RateYear2,$3.5million;RateYear3,$8.4million;RateYear4andcontinuing untilSettlement paymentsarecompleteorJuly1,2002,whichever islater,$10.5million.IntheeventthattheCompanyearnsareturnoncommonequityinexcessofaneffective rateof11.50percentovertheentirefive-year termoftheSettlement, 50percentofsuchexcesswillbeusedtowritedowndeferredcostsaccumulated duringtheterm.Theother50percentoftheexcesswillbeusedtowritedownaccumulated deferrals orinvestment inelectricplantorRegulatory Assets(whicharedeferredcostswhoseclassification asanassetonthebalancesheetispermitted bySFAS-71).

Ifcertainextraordinary eventsoccur,including arateofreturnoncommonequitybelow8.5percentorabove14.5percent,orapretaxinterestcoveragebelow2.5times,theneithertheCompanyoranyotherpartytotheSettlement wouldhavetherighttopetitionthePSCforreviewoftheSettlement andappropriate remedialaction.RetailAccess.RGRE'sEnergyChoiceProgramwillbeavailable toallofitscustomers, withoutregardtocustomerclass,onanequalbasisuptocertainusagecaps.OnJuly1,1998,customers whoseelectricloadsrepresent approximately 10percentoftheCompany's totalannualretailsaleswillbeeligibletopurchaseelectricity (butnotcapacitycommitments) fromalternative suppliers.

OnJuly1,1999,customers with20percentoftotalsaleswillbeeligibleandasofJuly1,2000,30percentoftotalsaleswillbeeligible.

AsofJuly1,2001,allretailcustomers willbeeligibletopurchaseenergyandcapacityfromalternative suppliers.

21 Rochrsttr GasandKlcrtrloCorporation Duringtheinitial,energyonlystageoftheRetailAccessProgram,theCompany's distribution ratewillbesetbydeducting 2.3centsperkilowatthour("KWH")fromitsfullservice("bundled")ratesandLoadServingEntitiesactingasretailers intheCompany's serviceareawillbeentitledtopurchaseelectricity fromtheCompanyatarateof1.9centsperKWH.Duringtheenergyandcapacitystage,theratewillgenerally equalthebundledratelessthecostoftheelectriccommodity andtheCompany's non-nuclear generating capacity.

Thesecommodity andcapacitycosts,generally referredtoas"contestable costs,"areestimated tobe3.2centsperKWH,inclusive ofgrossreceiptstaxes.Generating Assets.TheCompanywillnotberequiredtodivestanyofitsgeneration facilities.

TotheextentthattheCompanysellsanygenerating assetsduringthetermoftheSettlement, gainsonsuchsaleswillbesharedbetweentheCompanyandcustomers.

Withregardtolossesonsuchsales,theSettlement acknowledges anintentthattheCompanywillbepermitted torecoversuchlossesthroughdistribution ratesduringthetermoftheSettlement.

Futureratetreatment istobeconsistent withtheprinciple thattheCompanyistohaveareasonable opportunity torecoversuchcosts."To-gocosts"oftheCompany's non-nuclear resources (i.e.,capitalcostsincurredafterFebruary28,1997,operation andmaintenance

expenses, andproperty, payrollandothertaxes)aretoberecovered throughthedistribution accesstariff.Thefixedportionofto-gocostswouldberecovered infullthroughthedistribution accesstariffuntilJuly1,1999andsubjecttothemarketthereafter inaccordance withthephase-inschedulefortheRetailAccessProgramdescribed above.Thevariableportionofnon-nuclear to-gocostswouldalsobesubjecttothemarketinaccordance withthephase-inScheduledescribed above.Uponextension ofeligibility fortheRetailAccessProgramtoallretailcustomers onJuly1,2001,theCompanywouldbeauthorized tomodifyitsdistribution accessrates,soastoholdconstantthedegreetowhichitsto-gocostsareatriskforrecoverythroughthemarket.Thus,whiletherecoveryofnon-nuclear to-gocostswouldcontinuetobethroughthemarket,recoveryofnuclearcostswouldremainrecoverable throughregulated rates.Nochangeinsuchtreatment ofnuclearfacilities wouldbeimplemented priortothePSC'sresolution oftheissuesraisedinitsStaffReportonnucleargeneration (seePSCPosition'Paper onNuclearGeneration).

Shutdownanddecommissioning costswouldberecovered duringthetermoftheSettlement inamannerconsistent withpastratemaking treatment.

PilotProgram.Consistent withaPSCorderissuedJune23,1997inaseparateproceeding involving establishment ofpilotprogramsforfarmersandfoodprocessors, theSettlement providesthattheCompany's RetailAccessProgramwillcommenceonFebruary1,1998forthosegroupswithintheCompany's servicearea.TariffFiling.OnDecember1,1997,theCompanysubmitted tothePSCitsproposedtariffsandaDistribution Operating Agreement toestablish "EnergyChoice",theCompany's proposedretailaccessprogramtoimplement thetermsoftheSettlement.

InanorderissuedJanuary21,1998,thePSCapprovedcertainprovisions oftheDecember1,1997tarifffilingandrequiredtheCompanytoreviseothers.InlateJanuary1998theCompanyfiledrevisions tothetarifftoincorporate thechangesrequiredbythePSC'8order.Miscellaneous.

AfterapprovaloftheSettlement becomesfinalandnon-appealable, theCompanywillwithdrawlegalappealswhichchallenge variousPSCOrdersregarding thePSCCompetitive Opportunities Proceeding, establishment ofapilotprogrampursuanttothoseproceedings, andcertainprovisions ofthe1996ElectricRateSettlement.

22 ThepresentSettlement supersedes the1996RateSettlement.

Variousincentive andpenaltyprovisions inthe1996ElectricRateSettlement areeliminated.

BUSINESSANDFINANCIAL STRATEGY:

THECOMPANY'S RESPONSE.

UnderthetermsoftheSettlement, theCompanywillfunctionally separateitsgeneration, distribution, andregulated energyservicesbusinesses.

Aspermitted bytheSettlement, theCompanyhasestablished aseparateunregulated subsidiary calledEnergetix whichwillbeabletocompeteforenergy,energyservicesandproductsbothinandoutsidetheCompany's existingfranchise serviceterritory.

TheCompanyhasalsodeveloped anintegrated financial strategywhichincludesnewbusinessdevelopment initiatives andaCommonStocksharerepurchase program.EnergyChoice.Withintheframework oftheEnergyChoiceProgram,theCompanywillunbundletraditional utilityservices.

Retailelectriccustomers intheCompany's serviceterritory willhavetheopportunity topurchaseenergy,capacity, andretailing servicesfromcompetitive energyservicecompanies, referredtoasLoadServingEntities(LSEs).Theymayalsocontinuetopurchasefully-bundled electricservicefromtheCompanyunderexistingretailtariffs.VGeneralStructure:

EnergyChoiceadoptsthe"single-retailer" modelfortherelationship betweenRGRE,theLSEs,andretailcustomers.

Underthe"single-retailer" modeltheregulated utility's customeristheLSE,whosecustomers aretheretailcustomers.

Therelationship betweentheregulated utilityandretailcustomers issubstantially eliminated.

TheLSEassumesresponsibility forproviding itsretailcustomers withbundledenergyanddeliveryservices, andforvirtually allrelatedretailing functions, including directcontactandcommunications withretailcustomers.

Withtheexception oftransmission anddistribution service,theLSEwillprocureforitscustomers, orwillitselfcreateandprovidethemwith,allnecessary components offullybundledserviceonacompetitive basis.Throughout thetermoftheSettlement, RGREwillcontinuetoprovideregulated andfullybundledelectricserviceunderitsretailservicetarifftocustomers whochoosetocontinuewithorreturntosuchservice,andtocustomers towhomnocompetitive alternative isoffered.Untilthedevelopment ofawholesale marketforgenerating

capacity, therewillbenosuitablemechanism forthereallocation, fromtheregulated utilitytotheLSE,ofresponsibility forensuringadequateinstalled reservecapacity.

Accordingly, duringtheinitial"EnergyOnly"stageoftheEnergyChoiceProgramOuly1,1998toJuly1,1999),LSEswillbeabletochoosetheirownsourcesofenergysupply,whileRGREwillprovidetoLSEs,andwillbecompensated for,thegenerating capacity(installed reserve)neededtoservetheirretailcustomers reliably.

Duringthe"EnergyandCapacity" stagecommencing July1,1999,theLSEswillbeabletoselect,andwillberesponsible forprocuring, generating

capacity, aswellasenergy,toservetheloadsoftheirretailcustomers, anddistribution chargeswillbeaccordingly reducedashereinafter described.

IfbyJuly1,1998thereisnotafunctioning Statewide energyandcapacitymarket(seediscussion underFERCOpenTransmission Orders),theCompanymaypetitionthePSCfordeferralofthescheduled commencement oftheEnergyandCapacitystage.VSummary:Theavailability ofLSEstoserveeligiblecustomers andhowquicklytheydecidetobecomeinvolvedcannotbedetermined.

Likewise, theCompanyisnotabletopredict23 Rochcstcs GasandElccutcCorporanonthenumberofcustomers thatmaychosetonolongerbeservedundertheCompany's regulated tariffs.TheproposedtariffsforEnergyChoiceasfiledbytheCompanyareexpectedtobecomeeffective February1,1998forthepilotprogram.ThePSChasnotsetadecision-making dateforthefull-scale program.TheCompanyisunabletopredictwhatfinalrulesorregulations willultimately beadoptedbythePSCforthisprogram.Unregulated EnergyServicesCompany.ItispartoftheCompany's financial strategytostimulate growthbyenteringintounregulated businesses.

Thefirststepinthisdirection wastheformation andoperation ofEnergetix effective January1,1998.Energetix isanunregulated subsidiary oftheCompanythatwillbringenergyproductsandservicestothemarketplace bothwithinandoutsidetheCompany's franchise area.TheSettlement approvedbythePSCinNovemberallowsfortheinvestment ofupto$100millioninunregulated businesses duringthenextfiveyears.During1998,theCompanyexpectstodetermine theactualleveloftheinitialinvestments tobemadeinunregulated businessopportunities.

OnJuly1,1997theCompanyandEnergetix filedwiththeFederalEnergyRegulatory Commission (FERC)seekingauthorization toengageinthewholesale saleofelectricenergyandcapacityatmarket-based rates.Theseapplications wereacceptedbyFERConSeptember 12,1997.TheCompanymustseekseparateauthorization inordertosellelectricenergytoEnergetix atmarket-based rates.StockRepurchase Plan,InDecember1997theCompany's BoardofDirectors approvedaStockRepurchase Plan.Thisplan,whichissubjecttoapprovalbythePSC,providesfortherepurchase overthenextthreeyearsofupto4.5millionsharesofCommonStock,representing approximately 11.5percentoftheCompany's outstanding sharesofCommonStockatDecember31,1997.TheCompanyexpectsaPSCdecisioninearly1998.NuclearOperating Company.InOctober1996,theCompanyandNiagaraMohawkPowerCorporation (Niagara) announced planstoestablish anuclearoperating companytobeknownastheNewYorkNuclearOperating Company(NYNOC).SincethattimeNYNOChasbeenorganized asaNewYorkLimitedLiability CompanyandtheConsolidated EdisonCompanyofNewYorkandNewYorkPowerAuthority haveannounced theirdesiretomoveforwardwiththeCompanyandNiagarawithplanstoimplement NYNOC.Itisenvisioned thatNYNOCwouldeventually assumeresponsibility foroperation ofallthenuclearplantsinNewYorkState,including theCompany's totallyownedGinnaNuclearPlantandjointlyownedNineMileTwo.TheCompanybelievesthatNYNOCcouldcontribute tomaintaining ahighlevelofoperational performance, contribute tocontinued satisfactory NuclearRegulatory Commission (NRC)compliance, provideopportunities forcontinued costreduction andprovidethebasisforsatisfactory economicregulation bythePSC.Variousgroupsarenowinvolvedinthedetailedstudiesandanalysesrequiredbeforeadefinitive decisiontoproceedwithNYNOCcanbemade.Theorganizing utilities havesubmitted commentsonthePSCStaffpositionpaperonnucleargeneration (discussed belowundertheheadingPSCPositionPaperonNuclearGeneration) notingthattheStaffproposalwouldnullifythepotential benefitsofNYNOC.PSCPOSITIONPAPERONNUCLEARGENERATION.

OnAugust27,1997,thePSCrequested commentsfrominterested partiesonaPSCStaffpositionpaperconcerning thetreatment ofnucleargeneration afteratransition period.TheStaffpaperconcludes that(1)nucleargeneration shouldoperateonacompetitive basis,(2)sale24 ofgeneration plantsatauctiontothirdpartiesisthepreferred meansofdetermining marketvalueandoffersthegreatestpotential formitigation ofstrandedcostsandtheelimination ofanti-competitive subsidies, and(3)wherethirdpartysalesarenotfeasible, "to-go"costs(fuel,laborandotheroperating costs,prospective capitaladditions, propertytaxesandinsurance) mustberecovered inthewholesale marketpriceofpower.OnOctober15,1997,theCompanyandfourotherutilities jointlyresponded tothePSC.Theutilities believethattheinherentoperating characteristics ofnucleargeneration andtheimplications ofNRCregulation requirethatnuclearplantshaveaccesstoanadequaterevenuestreamandthatsuchplantsshouldbetreatedfordispatchpurposesasbaseload, mustrununits.Theutilities urgethePSCtoadoptaprocessthatwouldenableallpartiestofullydevelopthenecessary factsandanalysesandtoinvitetheNRCtoparticipate inaddressing thefutureofnucleargeneration inNewYorkState.Certainotherpartieshavefiledcommentsonthepositionpaper,someofwhichopposefullrecoveryof"stranded costs"thatcouldresultfromsalesofplantsatlessthanbookcosts.TheCompanyisunabletopredicttheoutcomeofthePSC'sconsideration.

FERCOPENTRANSMISSION ORDERSANDCOMPANYFILINGS.Inearly1996FERCissuednewrulestofacilitate thedevelopment ofcompetitive wholesale marketsbyrequiring electricutilities tooffer"open-access" transmission serviceonanon-discriminatory basisintariffs.TheCompanyfileditsrequiredtransmission servicetariffonJuly9,1996.Thenewtariffwouldapplytowholesale purchases andsalesmadebythel'lIll(I/ijgi25 Recharter GarandHcctrlcCorporation Companyandthefinancial impactwilldependonprevailing energypricesinthewholesale market.Thenear-term impactsofthistariffarenotexpectedtobesignificant.

OnMarch6,1997,theCompanyreachedasettlement inprinciple withtheotherpartiesrespecting rateissues.FERCapprovalofthesettlement wasgrantedonJune25,1997.OnJanuary31,1997,theutilities fileda"Comprehensive ProposalToRestructure theNewYorkWholesale ElectricMarket"withtheFERC.Asproposed, theexistingNewYorkPowerPool(NYPP)willbedissolved andanindependent systemoperator(ISO)willadminister astate-wideopenaccesstariffandprovidefortheshort-term reliableoperation ofthebulkpowersysteminthestate.Inadditiontoproposing aFERC-endorsed ISO,theproposalcallsforcreationofaNewYorkPowerExchangeandaNewYorkStateReliability Council.Anadditional supplemental filingwithI'ERCwasmadeonDecember19,1997whichlaysoutaspecifictimeframe fortheimplementation ofacompetitive wholesale electricity marketinNewYorkState.Theutilities haverequested FERCapprovaloftheirrestructuring plannolaterthanMarch31,1998,whichwouldallowtheISOtobeoperational byJune30,1998.Thetimetable forretailcompetition willbedetermined foreachutilityinaccordance withindividual settlements intheCompetitive Opportunities Proceeding.

Significant changestopricingprocedures nowineffectwithinNYPPareexpected, butitisunclearwhateffectthesechangesmayhaveonceotherregulatory changesinNewYorkStateareimplemented.

Atthepresenttime,theCompanycannotpredictwhateffectsregulations ultimately adoptedbyFERCwillhave,ifany,onfutureoperations orthefinancial condition oftheCompany.GASRESTRUCTURING ANDPSCNEGOTIATIONS.

InMarch1996thePSCissuedanOrderandapprovedutilityrestructuring plansdesignedtoopenupthelocalnaturalgasmarkettocompetition andtherebyallowresidential, smallbusinessandcommercial/industrial usersthesameabilitytopurchasetheirgassuppliesfromavarietyofsources,otherthanthelocalutility,thatlargerindustrial customers alreadyhave.Duringathree-year phase-inperiodtheState'sgasutilities wouldbepermitted torequirecustomers converting fromsalesservicetotakeassociated pipelinecapacityforwhichtheutilities hadoriginally contracted.

ThePSChasindicated thatitwilladdresstheissueofhowthecostsofsuchcapacitywouldberecovered afterthethree-year periodduringthethirdyearofthephase-inperiod.ThePSCStaffhasrecentlyissuedapositionpaperonTheFutureoftheNaturalGasIndustryinwhichtheStaffproposesthatlocaldistribution companies (suchastheCompany)exitthemerchantfunctioninfiveyears.Treatment ofexistingpipelinecapacitycontracts andProviderofLastResortresponsibilities aresubstantial issuestobeworkedoutbetweenthePSC,thelocalgasdistribution companies andotherstakeholders.

SeeNote10oftheNotestoFinancial Statements forfurtherinformation aboutthePSCgasrestructuring proceedings andthePSCStaffpositionpaper.Gascustomers havehadachoiceofsuppliers sinceNovember1,1996.Underseparatetransportation tariffs,theCompanydistributes thegasandchargesforthedistribution aswellasassociated services.

TheCompanybelievesitspositioninthemarketissuchthatitwillmaintainitsdistribution systemmargins.Underaphase-inlimitation, lossofgascommodity salesmaybelimitedtofivepercentoftheCompany's annualgasvolumethefirstyear,andthenfiveadditional percentforeachofthefollowing twoyears.Thephase-inwillberevieweasexperience isgainedwiththeprogram.TheCompanyanticipates thattheuseof2B transportation gasservicewillincrease.

ThroughDecember31,1997,150customers werebeingservedunderthisservice.InJuly1997,theCompanycommenced negotiations withthePSCStaffandotherpartieswiththeobjective ofdeveloping amulti-year settlement ofissuespertaining totheCompany's gasbusinessthatwouldtakeeffectuponexpiration ofthecurrent1995GasSettlement (seeRatesandRegulatory Matters)onJune30,1998.Afurtherobjective ofthesenegotiations istomaximizetheefficiencies oftheentirebusinessbystructuring asettlement thatwillbeasconsistent aspossiblewiththeprovisions oftheSettlement intheCompetitive Opportunities Proceeding, asdiscussed earlier.Negotiations areatanearlystage;accordingly, theCompanycanmakenoprediction astotheiroutcome.COMPETITION ANDTHECOMPANY'S PROSPECTIVE FINANCIAL POSITION.

WithPSCapproval, theCompanyhasdeferredcertaincostsratherthanrecognize themonitsbookswhenincurred.

Suchdeferredcostsarethenrecognized asexpenseswhentheyareincludedinratesandrecovered fromcustomers.

Suchdeferralaccounting ispermitted bySFAS-71.ThesedeferredcostsareshownasRegulatory AssetsontheCompany's BalanceSheetandadiscussion andsummarization ofsuchRegulatory Assetsispresented inNote10oftheNotestoFinancial Statements.

paletot'y Asseg-Inacompetitive electricmarket,strandable assetswouldarisewheninvestments aremadeinfacilities, orcostsareincurredtoservicecustomers, andsuchcostsarenotfullyrecoverable inmarket-based rates.Estimates ofsuchstrandable assetsarehighlysensitive tothecompetitive wholesale marketpriceassumedintheestimation.

InaEndofPeriod(millions ofdollars)311284competitive naturalgasmarket,strandable assetswouldarisewherecustomers migrateawayfromdependence ontheCompanyforfullservice,leavingtheCompanywith419971996surpluspipelineandstoragecapacity, aswellasnaturalgassupplies, undercontract.

Adiscussion ofstrandable assetsI,$ispresented inNote10oftheNotestoFinancial Statements.

1995AtDecember31,1997theCompanybelievesthatitsregulatory andstrandable assets,ifany,arenotimpairedandareprobableofrecovery.

TheSettlement intheCompetitive Opportunities Proceeding doesnotimpairtheopportunity oftheCompanytorecoveritsinvestment intheseassets.However,thePSChaspublished aStaffpapertoaddressissuessurrounding nucleargeneration, including thedetermination offairmarketvalueforfacilities afterafiveyearrestructuring transition period.ItappearsthatthePSCmayseektoapplysimilarprinciples toothertypesofgenerating facilities.

Adetermination inthisproceeding couldhaveanimpactonstrandable assets.RatesandRegulatory Matters1996ELECTRICRATESETI'LEMENT ThePSCapprovedaSettlement Agreement (1996RateSettlement) amongtheCompany,PSCStaffandseveralotherpartieswhichsetratesforathree-year periodcommencing July1,1996.

Roeherter GerendElectricCorporrtlon TheCompetitive Opportunities Settlement (Settlement) supersedes the1996RateSettlement.

Aratereduction forthefirstrateyearundertheSettlement of0.5percent($3.5million)commencing July1,1997isequaltothepreviously approvedplannedreduction underthe1996RateSettlement.

AfterapprovaloftheSettlement becomesfinalandnon-appealable, theCompanywillterminate itspetitionseekingjudicialreviewofthe1996RateSettlement.

1995GASSETTLEMENT InOctoberof1995,asettlement ofvariousgasrateandmanagement issueswasfinalized (the1995GasSettlement).

Thissettlement affectstheratetreatment ofvariousgascoststhroughOctober31,1998.Highlights ofthe1995GasSettlement are:VTheCompanywillforego,forthreeyearsendinginmid-1998, gasrateincreases exclusive ofthecostofnaturalgasandcertaincostincreases imposedbyinterstate pipelines.

VTheCompanyhasagreednottochargecustomers forpipelinecapacitycostsin1996,1997and1998of$22.5million,$24.5million,and$27.2million,respectively.

TheCompanymaysellitsexcesstransportation capacityinthemarketunderFERCrules.YTheCompanyagreedtowriteoffexcessgaspipelinecapacityandothercostsincurredthrough1995.Theeconomiceffectofthe1995GasSettlement ontheCompany's 1995resultsofoperations wastoreduceearningsby$.75pershare.TheCompanyhasenteredintoseveralagreements tohelpmanageitspipelinecapacitycostsandhassuccessfully metsettlement targetsforcapacityremarketing forthetwelvemonths'eriods endingOctober31,1997andOctober31,1996,'thereby avoidingnegativefinancial impactsforthoseperiods.TheCompanybelievesthatitwillalsobesuccessful inmeetingtheSettlement targetsintheremaining yearoftheSettlement period,althoughnoassurance maybegiven.FLEXIBLEPRICINGTARIFF.Underitsflexiblepricingtariffformajorindustrial andcommercial electriccustomers, theCompanymaynegotiate competitive electricratesatdiscountpricestocompetewithalternative powersources,suchascustomer-owned generation facilities.

PursuanttothetermsoftheSettlement undertheCompetitive Opportunities Proceeding, theCompanywillabsorb,asithasdonesincetheinception oftheserates,thedifference betweenthediscounted ratespaidundertheseindividual contracts andtheratesthatwouldotherwise apply.Approximately 27percentofallelectricsales(KWHs)tocustomers aremadeunderlong-term contracts, primarily tolargeindustrial customers.

Thesecontracts represent approximately 42percentoftheCompany's revenuesfromitscommercial andindustrial customers.

TheCompanyhasnotexperienced anysignificant customerlossduetocompetitive alternative arrangements.

Certainprovisions ofaflexibleratecontractwiththeUniversity ofRochester havebeenchallenged bytheAntitrust DivisionoftheUnitedStatesDepartment ofJusticeasdiscussed inNote10totheFinancial Statements undertheheadingLitigation.

Liquidity andCapitalResources Cashflow,mainlyfromoperations, providedthefundsforconstruction expenditures, debtreductions, redemption ofPreferred Stockandthepaymentofdividends during1997(seeConsolidated Statement ofCashFlows).Qr CAPITALANDOTHERREQUIREMENTS.

TheCompany's capitalrequirements relateprimarily toexpenditures forenergydelivery, including electrictransmission anddistribution facilities andgasmainsandservicesaswellasnuclearfuel,electricproduction andtherepayment ofexistingdebt.In1996theCompanycompleted replacement ofthetwosteamgenerators attheGinnaNuclearPlantwhichresultedinimprovedplantefficiency.

TheCompanyspentapproximately

$46milliononthisprojectin1996and$29millionin1995.TheCompanyhasnoplanstoinstalladditional baseloadgeneration.

Purchased PowerRequirement.

UnderfederalandNewYorkStatelawsandregulations, theCompanyisrequiredtopurchasetheelectrical outputofunregulated cogeneration facilities whichmeetcertaincriteria(Qualifying Facilities).

TheCompanywascompelled byregulators toenterintoacontractwithKamineforapproximately 55megawatts ofcapacity, thecircumstances ofwhicharediscussed inNote10oftheNotestoFinancial Statements.

TheCompanyhasnootherlong-term obligations topurchaseenergyfromQualifying Facilities.

Year2000ComputerIssues.Astheyear2000approaches manycompanies faceapotentially seriousinformation systems(computer) problembecausemostsoftwareapplication andoperational programswritteninthepastwillnotproperlyrecognize calendardatesbeginning withtheyear2000.Atthistime,theCompanybelievesthattheproblemisbeingaddressed properlytopreventanyadverseoperational orfinancial impacts,TheCompanybelievesitwillincurapproximately

$15millionofcoststhroughJanuary1,2000,associated withmakingthenecessary modifications identified todate.Totalcostsincurredin1997wereapproximately

$1.4million.Environmental Issues.Theproduction anddeliveryofenergyarenecessarily accompanied bythereleaseofby-products subjecttoenvironmental controls.

TheCompanyhastakenavarietyofmeasures(e.g,,self-auditing, recycling andwasteminimization, trainingofemployees inhazardous wastemanagement) toreducethepotential foradverseenvironmental effectsfromitsenergyoperations.

Amoredetaileddiscussion concerning theCompany's environmental matters,including adiscussion ofthefederalCleanAirActAmendments, canbefoundinNote10oftheNotestoFinancial Statements.

REDEMPTION OFSECURITIES.

Inadditiontofirstmortgagebondmaturities andmandatory sinkingfundobligations overthepastthreeyears,discretionary redemption ofsecurities totaled$1millionin1995,$49millionin1996,andapproximately

$152millionin1997.Includedindiscretionary redemptions for1997werenearly$102millionoftax-exempt securities whichwererefinanced withnewmulti-mode tax-exempt bondsasdiscussed underFinancing.

CapitalRequirements

-Summary.Capitalrequirements forthethree-year period1995to1997andthecurrentestimateofcapitalrequirements through2000aresummarized intheCapitalRequirements table.TheCompany's capitalexpenditures programisundercontinuous reviewandcouldberevisedforanynumberofissues.TheCompanyalsomayconsider, asconditions warrant,theredemption orrefinancing ofcertainoutstanding long-term securities.

CAPITALREQUIREMENTS TypeofFacilities Actual1995199619971998(Millions ofDollars)Projected 19992000ElectricPropertyProduction EnergyDeliverySubtotalNuclearI'uelTotalElectricGasPropertyCommonPropertyTotalCarryingCostsAllowance forFundsUsedDuringConstruction TotalConstruction Requirements Securities Redemptions, Maturities andSinkingFundObligations*

TotalCapitalRequirements

• Excludes prospective refinancings.

$48$57252373801716909614174610811932111121167$112$188$9283719562298788182$270$19436215772324124112540$165$17$13322849411627656817181861009211101931030$111$123Rochester GasandHectrlcCorporation FINANCING.

Capitalrequirements in1997,including thediscretionary redemption of$49.7millionofsecurities, weresatisfied primarily withinternally generated funds.Inaddition, theCompanyatitsoptionrefinanced

$101.9millionofoutstanding tax-exempt securities withtheproceedsfromthesaleonAugust19,1997of$101.9millionofNewYorkStateEnergyResearchandDevelopment Authority (NYSERDA) multi-mode tax-exempt bondsdueAugust1,2032.Interestratesonthesebondsmaybesetweeklyormaybesetforvaryingperiodsbasedonmarketconditions atthetime.Theweightedaverageinterestrateonthesebondswas3.65percentfor1997.OnSeptember 16,1997,theCompanycompleted arrangements forthedeliveryinSeptember 1998of$25.5millionof5.95%NYSERDAtax-exempt bondsdueSeptember 1,2033.Proceedswillbeusedtoredeemanissueoftax-exempt firstmortgagebondswhichisnotredeemable untilDecember1998.UndertheCompany's Performance StockOptionPlan,optionsfor403,605sharesofCommonStockbecameexercisable duetoCommonStockmarketpriceperformance during1997.During1997,CommonStocksharesoutstanding increased by10,883sharesasaresultofthoseoptionswhichwereactuallyexercised duringtheyear.TheseweretheonlysharesofCommonStockissuedbytheCompanyduring1997.TheCompanyforeseesmodestnear-term financing requirements.

Withanincreasingly competitive environment, theCompanybelievesmaintaining ahighdegreeoffinancial flexibility iscritical.

Inthisregard,theCompany's long-term objective istocontrolcapitalexpenditures.

Moreover, in1998theCompanymaybeginfundingastockrepurchase programandinvestments inunregulated businesses asdiscussed underCompetition.

Capitalandothercashrequirements during1998areanticipated tobesatisfied primarily fromacombination ofinternally generated fundsandtheuseofshort-term credit arrangements.

TheCompanymayrefinance maturinglong-term debtandPreferred Stockobligations during1998depending onprevailing financial marketconditions.

TheCompanyanticipates utilizing itscreditagreements andunsecured linesofcredittomeetanyinterimexternalfinancing needspriortoissuinganylong-term securities.

Forinformation withrespecttoshort-term borrowing arrangements andlimitations, seeNote9oftheNotestoFinancial Statements.

Asfinancial marketconditions warrant,theCompanymayalso,fromtimetotime,redeemhighercostseniorsecurities.

ResultsofOperations Thefollowing financial reviewidentifies thecausesofsignificant changesintheamountsofrevenuesandexpenses, comparing 1997to1996and1996to1995.TheNotestoFinancial Statements containadditional information.

OPERATING REVENUESANDSALES.Operating revenuesin1997werelowerthan1996withtheeffectofelectricbaseratedecreases inJuly1996and1997andlowerthermsalesofgasduetomilderweatherthanlastyearpartially offsetbyhighercustomerelectrickilowatt-hour salesresulting fromincreased customers andhigherelectricsalestootherutilities.

Despiteloweroperating

revenues, operating revenueslessfuelexpenseswerenearlyunchanged reflecting primarily adeclineinpurchased electricity expenseasaresultofincreased availability oftheCompany's generating facilities.

Theeffectofweathervariations onoperating revenuesismostmeasurable intheGasDepartment, whererevenuesfromspaceheating customers compriseabout90to95percentoftotalgasoperating revenues.

Comparedtoayearearlier,weatherintheCompany's serviceareawas9.0percentwarmerduringthefirstthreemonthsof1997and1.1percentwarmerfortheentireyearonacalendarmonthheatingdegreedaybasis.Incontrast, weatherduring1996was7.1percentcolderthan1995onacalendarmonthheatingdegreedaybasis.Withelimination ofaweathernormalization clauseintheCompany's gastariffeffective November1,1995,abnormalweathervariations mayhaveamorepronounced effectongasrevenues.

Coolerthannormalsummerweatherduring1997and1996hamperedthedemandforairconditioning usage,ecteicSaleswithamorepronounced effectin1997withthe1997(thousands ofmNth)weatherbeingapproximately 27percentcoolerthan1996.Comparedwithayearearlier,kilowatt-hour salesofenergytoretailcustomers wereup1.2percentin1997,following a0.3percentincreasein1996.Salestocommercial customers achievedthelargestgainin1997.Salestoindustrial customers ledtheincreasein1996comparedtoayearearlierandweredrivenbyonelargeindustrial customerwhopurchased moreelectricpoweras199519961997analternative topowerproducedatitsownplant.Decreased electricdemandforairconditioning usagecausedbycoolersummerweatherhadanimpactonkilowatt-hour salesin1996and1997.Fluctuations inrevenuesfromelectricsalestootherutilities aregenerally relatedtotheCompany's customerenergyrequirements, thewholesale energymarket, availability oftransmission, andtheavailability ofelectricgeneration fromCompanyfacilities.

Revenuesfromelectricsalestootherutilities rosein1997duetoincreased salesresulting fromgreateravailability ofourcombinednuclearandfossilgeneration, afavorable wholesale marketinthesecondhalfoftheyear,andincreased marketing ofavailable capacity.

Incontrastto1997,revenuesfromsalestootherelectricutilities declinedin1996reflecting decreased kilowatt-hour salestosuchutilities andlessgeneration fromtheCompany's GinnaNuclearPlant.Thetransportation ofgasforlarge-volume customers whoareabletopurchasenaturalgasfromsourcesotherthantheCompanyisanimportant component oftheCompany's marketing mix.Companyfacilities areusedtodistribute thisgas,whichamountedto16.6milliondekatherms in1997and16.8milliondekatherms in1996.Thesepurchases byeligiblecustomers havecauseddecreases inCompanyrevenues, withoffsetting decreases inpurchased gasexpensesand,ingeneral,donotadversely affectearningsbecausetransportation customers arebilledatrateswhich,exceptforthecostofbuyingandtransporting gastotheCompany's citygate,approximate therateschargedtheCompany's retailgasservicecustomers.

Gassuppliestransported inthismannerarenotincludedinCompanythermsales,depressing reportedgassalestonon-residential customers.

@Sold'Tmngpoeted'millions oftherms)561538520asiaa++'rrtrrY.'99519961997Thermsofgassoldandtransported weredown4.1percentin1997,afterincreasing nearlyeightpercentin1996.Thesechangesreflect,primarily, theeffectofweathervariations onthermsalestocustomers withspaceheating.

Ifadjustedfornormalweatherconditions, residential gassaleswouldhavedecreased about1.5percentin1997over1996,whilenon-residential sales,including gastransported, wouldhaveincreased approximately twopercentin1997.Theaverageuseperresidential gascustomer, whenadjustedfornormalweatherconditions, showedamodestdecreasein1996and1997.FOSSILUNITRATINGSANDSTATUS.SeveraloftheCompany's fossil-fueled generating unitshavebeentemporarily deratedsinceFebruary1997tomaintainacceptable opacitylevelswhiletheCompanyinvestigates additional engineering solutions toaddresstheopacityoftheUnits'missions (seeNote10oftheNotestoFinancial Statements undertheheading"Environmental Matters,OpacityIssue").Thefinancial impactofthederatings includesthelostopportunity associated withenergysalesand,attimes,theneedtomakeadditional purchases tomeetsystemrequirements.

Whilethederatings havedecreased

earnings, andwillcontinuetodoso,theamountisnotexpectedtobematerial.

TheNYPPisintheprocessofevaluating newrulesforitssystemloadregulation.

Opacitylimitations areexpectedtoreducetheabilityoftheCompanytoreacttochangesinloadandRochester GasanctBectrlcCorporatton 32 providesystemloadregulation serviceswhencalleduponbytheNYPP,resulting inadditional costs.Depending onthenewNYPPrequirements, andwhetherthederatings remainineffect,therevisedrulescouldresultintheCompanyhavingtopurchaseadditional regulation serviceswhichmaycostbetween$500,000and$2,500,000 annually.

TheCompanyintendstomakea$2.7millioncapitalupgradetotheprecipitator ofoneofitsfossil-fueled generating unitswhichisexpectedtoremoveasubstantial portionoftheopacityexceedance whichledtothederating.

OnJanuary21,1998theCompanydecidedtoretireBeebeeStationbymid-1999.

Factorssuchastheplant'sage,locationinanareanolongerconsistent withthesurrounding development, lackofarail/coal deliverysystemandmorestringent cleanairregulations madetheplantuneconomical inthedeveloping competitive generation business.

Theretirement ofBeebeeStationisnotexpectedtohaveamaterialeffectontheCompany's financial positionorresultsofoperations.

Theplantwillbefullydepreciated atthetimeofretirement.

TheSettlement providesthatallprudently incurredincremental costsassociated withtheshutdownanddecommisioning oftheplantarerecoverable throughtheCompany's distribution accesstariff.Theelectriccapability andenergycurrently providedbytheplantisexpectedtobereplacedbypurchased powerasneeded.OnDecember1,1997Niagaraannounced aplantosellitsfossil-fueled andhydroelectric generating stationsbyauctionin1998.ThisplanwasagreedtoaspartofNiagara's PowerChoiceSettlement currently underreviewbythePSC.TheCompanyintendstoincludeits24percentshareoftheOswegoSteamStationUnit6(Oswego6)forsaleaspartofNiagara's auction.AnygainsorlossesrealizedbytheCompanyfromthesaleofitsshareofOswego6wouldbetreatedinaccordance withthetermsoftheSettlement undertheCompetitive Opportunities Proceeding.

OPERATING EXPENSES.

EnergyCosts-Electric.

Higherfuelexpenseforelectricgeneration in1997comparedwithayearearlierreflectsincreased generation frombothfossilandnuclear-fueled plants.TotalCompanyelectricgeneration wasupapproximately 21percentin1997over1996.Forthe1996comparison period,lowerelectricfuelcostsresultedfromlesselectricgeneration.

Thefuelcostadjustment clausehasbeeneliminated effective July1,1996.Companyshareholders willassumethefullbenefitsanddetriments realizedfromactualelectricfuelcostsandgeneration mixcomparedwithPSC-approved forecastamounts.TheCompanynormallypurchases electricpowertosupplement itsowngeneration whenneededtomeetloadorreserverequirements, andwhensuchpowerisavailable atacostlowerthantheCompany's production cost.Increased availability andefficiencies following the1996installation ofnewsteamgenerators attheGinnanuclearplantresultedinlowerkilowatt-hour purchases ofelectricity in1997whichledtoadeclineinpurchased electricpowerexpense.Despiteanincreaseinkilowatt-hours purchased in1996,electricpurchased powerexpensewasalsodownin1996reflecting, inpart,lowerpurchases fromthehigher-cost Kaminefacilityasdiscussed below.UnderacontractwithKamine,theCompanyhasbeenrequiredtopurchaseunneededenergyatuneconomical rates(seeNote10oftheNotestoFinancial Statements).

The33 Rochester GatandBcctricCorporation Companypurchased 337thousandmegawatt-hours ofenergyfromKamineatatotalpriceof$16.6millionin1995.TheKaminefacilityhasbeenoutofservicesincethemiddleofFebruary1996whichhelpedtolowertheunitcostforpurchased electricity in1996comparedto1995.EnergyManagement andCosts-Gas.TheCompanyacquiresgassupplyandtransportation capacitybasedonitsrequirements tomeetpeakloadswhichoccurinthewintermonths.TheCompanyiscommitted totransportation capacityontheEmpireStatePipeline(Empire)andtheCNGTransmission Corporation (CNG)pipelinesystems,aswellastoupstreampipelinetransportation andstorageservices.

ThecombinedCNGandEmpiretransportation capacityisadequatetomeettheCompany's currentrequirements.

Forthe1997comparison period,gaspurchased forresaleexpensedeclineddrivenbyareducedvolumeofpurchased gasresulting fromawarmerheatingseason.Highercommodity costsandincreased volumesofpurchased gascausedanincreaseingaspurchased forresaleexpensein1996comparedto1995.Operations Excluding FuelExpenses.

Forthe1997comparison period,theincreaseinoperations excluding fuelexpensesreflectsmainlyhigheroutsideservicesexpenses, recognition ofobsoleteandunproductive materials inventory, stormcosts,andregulatory compliance costspartially offsetbylowerpayrollcostsanddecreased expenseassociated withuncollectible accounts.

Forthe1996comparison period,theincreaseinoperations excluding fuelexpensesreflectsmainlyhigherpayrollcostsandanincreaseinamortization expensebeginning July1,1996forcustomerinformation systemenhancements.

Higherpayrollcostsforthisperiodreflectsamortization ofadditional earlyretirement costsforprogramsconcluded inOctober1994andgreateremployeeredeployment/outplacement costs.Anadditional expenseaccrualfordoubtfulaccountsincreased operating expensesby$15.0millionin1995.TheCompanyiscontinuing totakeaggressive stepstoimproveitscollection efforts.Uncollectible expensein1997was$18million,comparedwith$20millionin1996.In1995,uncollectible expensewas$23million.Forbothcomparison periods,theincreaseindepreciation expensereflectsprimarily resultsfromdepreciation ofthenewGinnanuclearplantsteamgenerators (approximately

$800,000additional expensepermonth)andrecoveryofincreased nucleardecommissioning expenseofapproximately

$3.2millionperquarterbeginning July1,1996.TaxesChargedToOperating Expenses.

Local,stateandothertaxesdecreased in1997reflecting mainlylowerpropertytaxesduetodecreases inassessments and/orratesandlowerrevenuetaxesduetodecreases inrevenuesandtheNewYorkStaterevenuetaxsurcharge rate.Thedecreaseinthesetaxesfor1996reflectsmainlylowerpropertytaxesduetodecreases inassessments.

Thedecreaseinfederalincometaxin1997reflectsmainlythereversalofapriorprovision forthein-service dateofNineMileTwoasaresultofanagreement reachedwiththeInternalRevenueService.OtherStatement ofIncomeItems.Forthe1996comparison period,thevariation innon-operating federalincometaxreflectsmainlyaccounting adjustments relatedtoregulatory disallowances.

RecordedunderthecaptionOtherIncomeandDeductions istherecognition ofregulatory disallowances inconnection withthe1995GasSettlement (seeRatesandRegulatory Matters).

Other(Income)andDeductions, Other-netdecreased in1997duemainlytorecognition ofexpenseassociated withmanagement performance awardsandtheCompany's Performance StockOptionPlan.Forthe1996comparison period,Other(Income)andDeductions, Other-netincreased mainlyduetotheelimination in1996oftwoaccruedexpensesin1995relatedtodepreciation expensefortheEmpireStatePipelineandamortization ofcertainemployeeearlyretirement costs.Bothmandatory redemptions andtheoptionalredemptions ofcertainhigher-cost long-term debthavehelpedtoreducelong-term debtinterestexpenseoverthethree-year period1995-1997.Comparedtotheprioryear,theaverageshort-term debtoutstanding wasupslightlyin1997following adecreasein1996.Preferred Stockdividends decreased in1997duetotheCompany's discretionary redemption inAprilofits7.50%Preferred Stocl',SeriesNandthemandatory sinkingfundredemption ofits7.45%Preferred Stock,SeriesSinSeptember.

DividendPolicy.TheleveloffuturecashdividendpaymentsonCommonStockwillbedependent upontheCompany's futureearnings, itsfinancial requirements, andotherfactors.TheCompany's Certificate ofIncorporation providesforthepaymentofdividends onCommonStockoutofthesurplusnetprofits(retained earnings) oftheCompany.2C8f'2lll mal/lgInOctober1997,MichaelT.TomainojoinedtheCompanyasSeniorVicePresident andGeneralCounsel.Mr.TomainowasformerlyVicePresident, GeneralCounselandSecretary atGouldPumps,Inc.PriortothathewasapartneratthelawfirmofNixon,Hargrave, DevansandDoyle,wherehespecialized intelecommunication andutilitylawandgeneralcivillitigation.

MichaelT.Tomaino~1i(/gll~-~)InApril1997,WilliamJ.ReddywasnamedController oftheCompanywithresponsibility forCorporate Accounting ServicesandRegulatory Affairs.Mr.Reddywaspreviously GroupManager,PublicAffairsServices.

Wi%I'amLReddy35 MBBnCEBl+ZpoltgReportofIndependent Accountants

..36ReportofManagement

~...,~....~.62Statement ofIncome...~...~...~.37InterimFinancial Data........

~.~.62Statement ofRetainedEarnings.~...37CommonStockandDividends

..~.~.63BalanceSheet..38SelectedFinancial Data...........

64Statement ofCashFlows..........

39ElectricDepartment Statistics.......

66NotestoFinancial Statements.......

40GasDepartment Statistics..........

67GEElllEEQIE-GONE-(

l92-'s"~portofIndependent Accountants PriceWaterhouse ceo1100BauschRLombPlaceRochester, NewYork14604-2705 January23,1998TotheShareholders andBoardofDirectors ofRochester GasandElectricCorporation Inouropinion,theaccompanying consolidated balancesheetsandtherelatedconsolidated statements ofincome,retainedearningsandcashflowspresentfairly,inallmaterialrespects, thefinancial positionofRochester GasandElectricCorporation anditssubsidiaries atDecember31,1997and1996,andtheresultsoftheiroperations andtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,1997inconformity withgenerally acceptedaccounting principles.

Thesefinancial statements aretheresponsibility oftheCompany's management; ourresponsibility istoexpressanopiniononthesefinancial statements basedonouraudits.Weconducted ourauditsofthesestatements inaccordance withgenerally acceptedauditingstandards whichrequirethatweplanandperformtheaudittoobtainreasonable assurance aboutwhetherthefinancial statements arefreeofmaterialmisstatement.

Anauditincludesexamining, onatestbasis,evidencesupporting theamountsanddisclosures inthefinancial statements, assessing theaccounting principles usedandsignificant estimates madebymanagement, andevaluating theoverallfinancial statement presentation.

Webelievethatourauditsprovideareasonable basisfortheopinionexpressed above.1/~//

'l+02Bf8t2t8mellf 0PlColM(Thousands ofDollars)Operating RevenuesElectricGasYearEndedDecember311997$679,473336,3091996$690,883346;2791995$696,582293,863Electricsalestootherutilities TotalOperating RevenuesOperating ExpensesFuelExpensesFuelforelectricgeneration Purchased electncity Gaspurchased forresaleTotalFuelExpensesOperating RevenuesLessFuelExpensesOtherOperating Expenses.

0erationsexcluding fuelexpensesaintenance Depreciation an'damortization Taxes-local,stateandotherFederalincometaxTotalOtherOperating ExpensesOperating hrconfeOther(Income)andDeductions Allow'ance for'therfundsusedduringconstruction FederalincometaxRegulatory disallowances Other,netTotalOther(Incomts) andDeductions InterestChargesLongtermdebtOther,netAllowance forborrowedfundsusedduringconstruction TotalInterestChargesNetInconreDividends onPreferred StockEarningsApplicable toCo>mnonStockEarningsperConunonShare-BasicEarningsperConunonShare-.Diluted 170)5,782 20,856.1,036,638 47,66528,347196,579272,591'64,047268,47446,635'116,522121,796t65,27%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, 16,8851,054,047 40,93846,484202,297289,719764,328.266,094'7,063105,614126,86869,501615,140149,188(684)(3,450)(712)(4,846)48,6189,328(1,423)56952397,5117,465$90,046$2.32$2.32990,44525,8831,016,328 44,19054,167167;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(Thousands ofDollars)I'earEndedDecember3119971996,1995BalanceatBeginning ofPer(odAddNetIncomeAdjustment A~sociated withStockRedemption TotalDeductDividends declaredoncapitalstockCumulative preferred stock-atrequiredratesCommonstockTotalBalanceatEndofPeriodCashDividends DeclaredperCommonShareTheaccompanying notesareaninteyafpartofthefinandalstatements.

$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$0ndElectricCorporruon 4rnsoliChtedSeleniteMeet(thousands ofDollars)AssetsUtility'Plant ElectricGasCommonNuclearfuel-.Less:Accumulated depreciation

.Nuclearfuelamo~tization Construction workinprogressNetUtilityPlantCurrentAssetsCashandcashequivalents Accountsreceivable, netofallowance fordoubtfulaccounts:

1997-$26,926;1996-$17,502Unbilledrevenuereceivable Materials, supplies'and fuelsPrepayments, TotalCurrentAssetsDeferredDebits'Nucleargenerating plantdecommissioning fundNinehjifeTwodeferredcostsUnamortized debtexpenseOtherdeferreddebitsRegulatory assets,TotalDeferredDebits,TotalAssetsCapttallzatlen andLiabilities Capitalization

~Longtermdebt-mortgagebonds-promissory.

notesPreferred stockredeemable atoptionofCompanyPreferred stocksubjecttomandatory redemption Commonshareholders'quity:

CommonstockRetainedearnings,.~TotalCommonShareholders'quity TotalCapitalization LongTennLiabilities (Departnrent ofEnergy)NuclearwastedisposalUraniumenrichment decommissioning TotalLongTermLiabilities CurrentLiabilities LongtermdebtduewithinoneyearPreferred stockredeemable withmoneyearShorttermdebt.AccountspayableDividends payableTaxesaccrued-InterestaccruedOtherTotalCurrentLiabilities DeferredCreditsaudOtherLiabilities, Accumulated deferred'income taxesPensioncostsaccruedOtherTotalDeferredCreditsandOtherLiabilities Connnltnrents andOtherMattersTotalCapitalization andLiabilities Theaccompanying notesareanintegralpartofthefinancial statements.

AtDecember311997$2,439,108 416,989134,938'43,042 3,234,077 1,510,074 204,2941,519,709 74,0181,593,727 25,405104,78148,43839,92923,818242,371132,54030,30916,94320,411231,988432,191$2,268,289

$485,434~101,90047,00035,000699,031109,313808,3441,477,678 7'3,26113,46596,72630,00010,00020,00053,19518,7915,0418,59333,697189,317344,96967,36192,238504,568$2,268,289 1996$2,413,881

391,231129,946224,7013,159,759 1,381,908 187,1701,590.681 69,711'1,660,392 21,301112,90853,26139,88823,103250,461"91,195-31,36014,82028,759284,489450,623$2,361,47$555,054,91,67,00,45,000696,01990,540786,5591,545,513 79,05714,695'93,752"-20,00010,00014,00049,46219,3494,69410,31730,395158,217,370,02869,806124,160563,994$2,361,476

-~38 nsolidated Statement ofCorkFlows(Thousands ofDollars)YearEndedDecember31199719961995CashFlowfromOperations NetinconreAdinstnrents toreconcile netinconretonetcastsprovidedfrontoperating activities:

Depreciation andamortization DeferredfuelDeferredincometaxesAllowance forfundsusedduringconstruction Unbilledrevenue,netIStockoptionplanNucleargenerating plantdecommissioning fundPensioncostsaccruedPostemployment benefitinternalreserveRegulatory disallowance Provision fordoubtfulaccountsChangesincertaincurrentassetsandliabilities:

.Accountsreceivable Materials, suppliesandfuelsTaxesaccruedAccountspayableOthercurrentassetsandliabilities, netOther,net\Total0cratingCashFlowfromInvesting Activities Netadditions toutilityplantOther,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$71,928CashFlowfromFinancing Activities Proceedsfront:Sale/Issuance ofcommonstockIssuanceoflongtermdebtShorttermborrowings, netRetirement oflongtenndebtRetirenfent ofpreferred stockDividends pairionpreferred stockDividends paidoncoin!nonstockOther,netTotalFinancing Increase(Decrease) incashandcashequivalents

~Cashandcashequivalents atbeginning ofyearCashandcasheuivalents atendofear272101,9006,000(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~uppkmental Disclogur eofCaskFlowinformation (Thousands ofDollars)CashPaidDuringtheYearInterestpaid(netofcapitalized atnonnt)IncometaxespaidYearEndedDecember31199719961995Theaccompanying notesareanintegralpartofthefinandalstatements.

39

'~oi'egToFinancial StatementS Rochester GasandHectrlcCofpofatiofl Surnrnarf ofAccounring principles GENERAL.TheCompanysupplieselectricandgasserviceswhollywithintheStateof¹wYork.Itproducesanddistributes electricity anddistributes gasinpartsofninecountiescentering abouttheCityofRochester.

TheCompanyissubjecttoregulation bythePublicServiceCommission ofth'eStateofNewYork(PSC)underNewYorkstatutesandbythePederal EnergyRegulatory Commission (FERC)asalicenseeandpublicutilityundertheFederalPowerAct.TheCompany's accounting policiesconformtogenerally accepfedaccounting principles asappliedtoNewYorkStatepublicutilities givingeffecttotheratemaking andaccounting practices andpolicies.

ofthePSC.Theprepar'ation offinancial statements requiresmanagement.to makeestimates andassumptions thataffectthereportedamountsofassetsandliabilities atthedateofthefinancial statements andthereportedamountsofrevenuesandexpensesduringthereporting period.Actualresultscoulddifferfromthose.e'stimates.

Adescription oftheCompany.'s principal accounting policiesfollows.PRINCIPLES OFCONSOLIDATION.

'heconsolidated fifiancial statements includetheaccou'nts oftheCompanyanditswholly-owned subsidiaries Roxdel(nowuEnergetixn) andEnergyline.

Allintercompany balancesandtransactions havebeeneliminated.

Energyline wasformedasagaspipeliiie corporation tofundtheCompany's investment intheEmpireStatePipelineproject.Inlate1996,Energyline solditsinvestment intheEmpireStatePipeline.

llTheRoxdel(nowuEnergetixn) activityisinsignificant totheCompany's.financial positionandresultsofoperation.

RATESANDREVENUE.Revenueisrecordedonthebasisofmetersread.Inaddition, theCompan'yrecordsanestimateofunbilledrevenueforservicerenderedsubsequent tothemeter-read datethroughtheendoftheaCcoun'ting period.ThroughJune30;1996,tariffsforelectricserviceincludedfuelcostadjustment clauseswhichadjustedtheratesmonthlytoreflectchangesintheactualaveragecostoffuels.Beginning July1,1996,theelectricfueladjustment clausewaseliminated inconnection witharatesettlement agree-mentwiththePSC.Inprioryears,retailcustomers whousedgasforspaceheating wereSubjecttoaweathernormaliza--

tionadjustinent toreflecttheimpactofvariatioqs fiomnormalweatheronabillingmonthbasisforthemonthsofOctoberthroughMay,inclusive.

OnJanuary25,1995,theCompanysuspended theweathernormalization adjustment inanefforttomitigatehighbillingsduetothewarmweather,andthesuspension becamepermanent.

Thisdecreased 1995pre-taxearningsfromgasoperations by$5.8million.TheCompanycontinues tousegascostdeferralaccounting, Areconciliation ofrecoverable gascostswithgasrevenuesisdoneannuallyasofAugust31,andtheexcessordeficiency isrefundedtoorrecovered fromthe,customers duringasubsequent period.UTILITYPLANTrDEPRECIATION ANDAMORTIZATION.

Thecostofadditions toutilityplantandreplacement ofretirement unitsofpropertyiscapital-ized.Costincludeslabor,material, andsimilaritems,aswellasindirectchargessuchasengineering andsupervision, andisrecordedatoriginalcost.TheCompanycapitalizes anAllowance forFundsUsedDuringConstruction (AFUDC)approximately equivalent tothecostofcapitaldevotedtoplanturIderconstruction thatisnotincludedinitsratebase.AFUDCissegregated intotwocomponents

~-andclassified intheConsolidated Statement ofIncomeasAllowance forBorrowedFundsUsed DuringConstruction, anoffsettoInterestCharges,andAllowance forOtherFundsUsedDuringConstruction, apartof'OtherIncome.TherateapprovedbythePSCforpurposesofcomputing

'AFUDCwas5.0%duringthethree-year periodendedDecember31;1997.Replacement ofminor~*.itemsofpropertyisincludedinmaintenance expenses.

Costsofdepreciable unitsofplantretiredareeliminated fromutilityplantaccounts, aridsuchcosts,plusremovalexpenses, lesssalvage,are-chargedtotheaccumulated depreciation reserve.CASHANDCASHEQUIVALENTS.

Cashandcash'quivalents consistofcashandshort-term commercial paper.,These investments

.hav'eoriginalmaturi'ty notexceeding threemonths.Suchinvestments arestatedatcost,which.approximates fairvalue,andareconsidered cashequivalents forfinancial statement pilrposes.

INVESIMENIS INDEBTANDEQUITYSECURITIES.

.'fheCompany's accounting policy,as.presciibed bythePSC,withrespecttoitsnucleardecommis-siohingtrustsistoreflectthetrusts'ssets atmarketvalueandreflectunrealized gainsandlossesasachangeinthecorresponding accrueddecommissioning liability.

GASSUPPLY.-TheCompany,periodically entersintoagreements tominimizeprice'risks fornaturalgasin.storage.Gainsorlossesresulting fromtheseagreements aredeferred, untilthecorresponding gasiswithdrawn fromstorageanddelivered to'ustomers.

~RESEARCHANDDEVELOPMENT COST.1ResearchandDevelopment costswerechargedtoexpenseas'incurred.

Expenditures forthygears1997,1996,and1995were$4.5million,$4.9millionand$5.2millionrespectively.

ENVIRONMENTAL REMEDIATION COSIS.TheCompanyaccruesfo~lossesassociated withenvironmental remediation obligations when,suchlossesareprobableandreasonably estimable.

Accrualsforestimated lossesfromenvironmental remediation obligations generally.

are'recognized nolaterthancompletion oftheremedialfeasibility study..Suchaccrualsareadjustedasfurtherinformation developsorcircumstances changersCostsoffuture-expenditures.

forenvironmental remediation obligations arenotdiscounted totheirpresentvalue.r,MATERIALS, SUPPLIESANDFUELS.Materials andsuppliesinventories arevaluedatthelowerofcostormarketusingthefirst-in, first-outmethod.Fuelinventories arevaluedataverage'cost.

TheCompanyperiodically entersintoagreements to.minimize pricerisksfornaturalgasinstorage.Gainsorlossesresulting fromtheseagreements aredeferreduntilthecorresponding gasiswithdrawn fromstorageand'delivered tocustomers..

STOCK-BASED'COMPENSATION;,

/Financial Accounting Standards BoardStatement No.123(SFAS-)23),

Accounting for.Stock-Based Compensation, wasadoptedbytheCompanyinthefirstquarterof1996:Itrecommends theuseofa'airvaluebasedmethodofaccounting forcompensation.

costsassociated withstock-based compensa-

'tion.TheCompanycurrently hasStockAppreciation Rightsplanscoveringcertainemployees anddirectors.

Fortheseplans,theCompany's accounting policyhasbeentouseafairvaluemethodofcomputing periodiccompensation expense.SFAS-123wasappliedtothevaluation ofthe1996Performance StockOptionPlan(PSOP),whichbecameeffective onJanuary22,'1997.

Theaggregate amountchargedtoexpenseasaresultoftheseplansapproximates

$1.0millionannuallyin1996and1995,andapproximates

$8.2millionin1997.Additional information onthePSOPisincludgdinNote8.RECLASSIFICATIONS.

ICertainamountsintheprioryears'inancial.

statements werereclassified toconformwithcurrentyearpresentation.

(Volt'Inmtinucdonpage42)

(conrinnad frnmpn,ra41)EARNINGSPERSHARE.ISEAS-128, EarningsPerShare,wasadoptedbytheCompanyinthefourthquarterof1997.Thisstatement replacesthepresentation ofprimaryEarningsPerSharewithBasicEarningsPerShare,andalsorequirespresentation ofDilutedEarningsPerShare.BasicEarningsPerShare(EPS)iscomputedbydividingincomeavailable tocommonshareholders bytheweightedaveragenumberofcommonsharesoutstanding fortheperiod.DilutedEPSreflectsthepotential dilutionthatcouldoccurifsecurities orothercontracts toissuecommonstockwereexercised orconverted intocommonstockorresultedintheissuanceofcommonstockthatthensharedintheearningsoftheCompany.Thefollowing tableillustrates thecalculation ofbothBasicandDilutedEPSfortheyearendedDecember31,1997.BasicEPS:NetIncomeLess:Preferred StockDividends Incomeavailable toCommonShareholders DilutedEPS:EffectofDilutiveSecurities StockOptionPlanIncomeavailable toCommonShareholders plusassumedconversions Income(Numerator)

$95,360(5,805)89,555$89,555Shares(Oenominator) 38,85338,909Per-Share Amount$2.3052.3DAstherewerenodilutivesharesinprioryears,basicanddilutiveearningspersharewerethesamefor1996and1995.I)LI(ai.'~I')i-,I'4E(ochattat (iaaantiE1((tric(*erporat)ott t'aia332)

Federa1IncoineTaxes4The'piovision forfederalincometaxesisdistributed betweenoperating expenseandotherincomebaseduponthetreatment ofthevariouscomponents oftheprovision intherate-makingprocess.Thefollowing isasummaryofincometaxexpenseforthethreemostrecentyears.(Thousands ofDollars)Charged(Credited) tooperating expense:CurrentDeferred-Total.Charged(Credited) to.otherincome:CurrentDeferredDeferredinvestment taxcreditTotalTotalFederalincometaxexpense.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)$49,267Thefollowing isareconciliation ofthedifference betweentheamountoffederalincometaxexpensereportedintheConsolidated Statement ofIncomeandtheamount.computedbymultiplying the'ncomebythestatutory taxrateof35%.(Thousands ofDollars)1997.19961995NetIncomeAdd:FederalincometaxexpenseIncomebeforeFederalincometaxComputedtaxexpenseatstatutory taxrateIncreases (decrease) intaxresulting from:Difference betweentaxdepreciation andamountdeferredDeferredinvestment taxcreditMiscellaneous items,net.TotalFederalincometaxexpenseIAsummaryofthecomponents ofthenetdeferredtax(Thousands ofDollars)Nucleardecommissioning Accelerated depreciation Deferredinvestment taxcreditDepreciation previously flowedthroughPensionOtherTotal$95,360~61,575$156,935$54,927107772(2,432)(1,692)$61,575liability isasfollows:1997$(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"Accounting forIncomeTaxes"requiresthatadeferredtaxliability mustberecognized onthebalancesheetfortaxdifferences previously flowedthroughtocustomers.

Substantially alloftheseflow-through adjustments relatefoproperty, plantandequipment andrelatedinvestment taxcreditsandwillbeamortized consistent withthedepreciation oftheseaccounts.

Thenetamountoftheadditional liability atDecember31,1997and1996was$160millionand$175million, respectively.

Inconjunction withtherecognition ofthisliability, acorresponding regulatory assetwasalsorecognized.

43 PensionPlanandOtherPostemplopnent BenefitsTheCompanyhasadefinedbenefitpensionplancoveringsubstantially allofitsemployees.

Thebenefitsarebasedonyearsofserviceandthe'employee's compensation.

TheCompany's fundingpolicyisto,contribute annuallyanamountconsistent withtherequirements oftheEmployeeRetirement IncomeSecurityActarrdtheInternalRevenueCode.Thesecontributions areintendedtoprovideforbenefitsattributed toservicetodateandforthoseexpectedtobeearnedinthefuturq.Theplan'sfundedstatusandamountsrecognized ontheCompan)i's balancesheetareasfollows:(Millions) 19971996'Accumulated benefitobligation, including vestedbenefitsof$384.7in1997and$314.6in1996Projected benefitobligation forservicerenderedtodateLess-Planassetsatfairvalue,primarily listedstocksandbondsPlanassetsinexcessofprojected benefitsUnrecognized netloss(gain)frompastexperience different fromthatassumedandeffectsofchangesinassumptions

'riorservicecostnotyetrecognized innetperiodicpensioncostUnrecognized netobligation atDecember31Pensioncostsaccrued'Actuarial presentvalue.Netpensioncostincludedthefollowing components (219.0)10.71.8$(67.4)(170.7)11.62.4$(69.8)$(404.0)*$(392.6)*$(499.3)'(480.2)'38.4 567.1139.1,86.9"(Millions) 199719961995Servicecost-benefitsearnedduringtheperiodInterestcoston-projected benefitobligation ActualreturnonplanasSetsNetamortization anddeferralNetperiodicpension(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)Theprojected benefitobligation atDecember31,1997andDecember31;1996assumeddiscountratesof6.75%and7.25%,respectiVely, andalong-term rateofincreaseinfuturecompensation levelsof5.00%.Theassumedlong-term rateofreturnonplanassetswas8.50%.Theunrecognized netobligation lsbeingamortized over15yearsbeginning January1986.Inadditiontoproviding pensionbenefits, theCompanyprovidescertainhealthcareandlifeinsurance benefitstoretiredemployees andhealthcarecoverageforsurviving spousesofretirees.

Substantially alloftheCompany's employees areeligibleprovidedthattheyretireasemployees oftheCompany.In1997,thehealthcarebenefitconsisted ofacontribution ofupto$200perretireepermonthtowardsthecostofagrouphealthpolicyprovidedbytheCompany;Thelifeinsurance

-benefitconsist's ofaBasicGroupLifebenefit,coveringsubstantially allemployees, providing adeathbenefitequal'toone-halfoftheretiree's'final pay.Inaddition, certainemployees andretirees, employedbytheCompanyatDecember31,1982,areentitledtoaSpecialGroupLifebenefitprovid-ingadeathbenefitequaltotheemployee's December31,1982pay.SFAS-106, "Accounting forPostretirement BenefitsOtherthanPensions",

allowstheCompanyto'mortize theinitialunrecognized, unfundedAccumulated Postretirement BenefitObligation atJanuary1992estimated.

at$56millionovertwentyyears.TheCompanyintendstocontinuefundingthesebenefitsasthebenefitbecomesdue.'Rochester GasandBectrtcCoqeratton Theplan'sfundedstatusreconciled withtheCompany's balancesheetisasfollows:{Millions) 1997f996Accumulated postretirement benefitobligation; Retiredemployees Activeemployees

~'Less-PlanassetsatfairvalueAccumulated postretirement benefitobligation (inexcessof).lessthanfairvalueofassetsUnrecognized netloss(gain)frompastexperience different fromthatassumedandeffectsofchangesinassumptions Priorservicecostnotyetrecognized innetperiodicpensioncostUnrecognized netobligation atDecember31Accruedpostretirement benefitcost$(73.9j(15.1)$(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'postretirement benefitcostincludedthefollowing components i(Millions)

~19971996Servicecost-benefitattributed totheperiodInterestcostonaccumulated postretirement benefitobligation ActualreturnonplanassetsNetamortization anddeferralNetperiodicpostretirement benefitcast$0.95.80.03.5$10.2$1.05.40.04.2$10.6TheAccumulated Postretirement BenefitObligation atDecember31,1997and1996assumed'iscountratesof6.7$%and7.25%,respectively, andlong-term rateofincreaseinfuturecompensation levelsof5.00%.SFAS-112,"Employers'ccounting forPostemployment Benefits",

requirestheCompanytorecognize theobligatioh toprovidepostemployment benefitstoformerorinactiveemployees afteremployment bptbeforeretirement.

TheCompanyhasbeenallowedtorecoverthiscostinrates.C.Q0t 1995ELECTRICOperallng Infornratlon Operatin'g revenuesOperating

expenses, excluding proPretaxoperating incom'eProvision.

forincometaxesNetopeiating incomeOlberInformalton'epreciation andamortization Nuclearfuelamortization Capitalexpenditures

'Ineeslment Information Identifiable assets(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

$1,877,224 cDeparbnental I'inandal Information TheCompany's recordsaremaintained byopeiating depaitments, inaccordance withPSCaccounting policies.

Thefollowing istheoperating datafor,eachoftheCompany's departments, andnointerdepartmental adjustments arerequiredtoarriveattheoperating dataincludedinthe.Consolidated Statement ofIncome.(Thousands ofDollars)19971996,270843,442,Operating Informallon Operating revenues..$Operating

expenses, excluding provision forincometaxesPretaxoperating incomeProvision forincometaxesNetoperating income$OtherInformalton Depreciation andamortization

$13,127Capitalexpenditures

$25,546lneeslment Information Identifiable assets(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-(honed I'adlities Thefollowing'table setsforththejointly-owned electricgenerating facilities inwhichtheCompanyisparticipating.

BothOswegoUnitNo;6andNineMilePoint,NuclearPlantUnitNo.2havebeencon-.structedandareoperatedbyNiagaraMohawkPowerCorporation.

Eachparticipant mustprovideitsownfinancing foranyadditions tothefacilities.

TheCompany's shareofdirectexpensesassociated withthesetwounitsisincludedintheappropriate operating expensesintheConsolidated Statement ofIncome.Variousmodifications willbemadethroughout thelivesoftheseplantstoincreaseoper-atingefficiency-or reliability,.

andtosatisfychangingenvironmental andsafetyregulations..

sOswegoUnitNo.6NineMilePointNuclearUnitNo.2.~Rochestet

.G83atiltHcctrtc'Corporation fNetmegawattcapability(summer),

.7881,128RGRgsshare-megawatts

'189.$58-percent,"--;.-24,.14Yearofcompletion 1980988MillionsofDollarsatDecember31~1997PlantInServiceBalance$98.9,'879.3'ccumulated Provision ForDepreciation

$41.4$478.7PlantUnderCpnstruction

$0.6$3.3ThePlantinServiceandAccumulated Provision forDepreciation balancesforNineMilePoint-NuclearUnitNo.2shownaboveincludedisallowed costsof$374.3million.Suchcosts,netofincometaxeffects,werepreviously'ritten offin1987and1989:,s49 I*Long-Tenn DebtIRSr8ORTCulrIE 80'(ISeriesDue(Thousands ofDollars)Principal Amount'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.10,2003 Mar.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'tMortgageBondsequaltheprincipal amountofandprovideforallpaymentsofprincipal, premiumandInterestcorresponding tothePollution ControlRevenueBonds,SeriesC,andPollution ControlRefunding RevenueBonds,Series1992A,Series1992B(Rochester GasandElectricCorporation Projects),

respectively, issuedbytheNewYorkStateEnergy.ResearchandDevelopment Authority (NYSERDA) throughaparticipation agreement withtheCompany.Paymentsoftheprincipal of,andinterestontheSeries1992AandSeries1992BBondsarpguaranteed underaBondInsurance PolicybyMBIAInsurance Corporation.

(b)TheSeriesQQFirstMortgageBondsandthe7%~7.15%,7.13%and6.375%medium-term notesdescribed belowaregenerally notredeemable priortomaturity.

'c)In1993theCompanyissued$200millionunderamedium-term noteprogramentitled"FirstMortgageBonds,Designated SecuredMedium-Term Notes,Seri(,sAn'withmaturities thatrangefromsevenyearstothirtyyears.TheFirstMortgageprovidessecurityforthebondsthroughafirstlienonsubstantially allthepropertyownedbytheCompany(exceptcashandaccountsreceivable).

Sinkingandimprovement fundrequirements aggregate

$333,540perannumundertheFirstMortgage,-

excluding mandatory sinkingfundsofindividual series.Suchrequirements maybemetbycertification ofadditional propertyorbydepositing cashwiththeTrustee.The1997and1996requirements weremetwithfundsdeposited withtheTrustee,andthesefundswereusedforredemp-tionofoutstanding bondsofSeriesY,OnMay1,1997theCompanyredeemedallitsoutstanding FirstIMortgage 8%Bonds,SeriesY,dueAugust15,1999andallitsoutstanding FirstMortgage6N%Bonds,SeriesW,dueSeptember 15,1997.OnOctober15,1997,theCompanyredeemedallitsoutstanding FirstMortgage'6/ao/o Bonds,SeriesEE.II47frroro6rontinunf onpago48) t(continued frompage47)PSinkingfundrequirements andbondmaturities forthenextfiveyearsare:Phousands ofDollars)SeriesX7%SeriesSeriesQQ1998$30,000$30,00019992000$30,000$30,0002001$100,000$100,000I')ro.trigger hornIssuedDue(Thousands ofDollars)~December 3119973996November15,1984(d),December 5,1985(e)August19,1997(f)TotalOctober1,2014November15,2015August1,2032101,900.$101,900$51970040,20P$91,900'(d)The$51.7millionPromissory Notewasissuedinconnection withNYSERDA's FloatingRateMonthlyDemandPollution Control'Revenue Bonds(Rochester GasandElectricCorporation Project),

Series1984.OnOctober1,1997,theCompanyredeemedalltheoutstanding Series1984Bonds.Theaverageinterestratewas3.43%throughSeptember 301997,3.38%for1996and3.68%for1995.(e)The$40.2millionPromissory Notewasissuedinconnection with'NYSERDA's Adjustable RatePollution ControlRevenueBonds(Rochester GasandelectricCorporation Project),

Series1985."OnNovember15,1997theCdmpanyredeemedalltheoutstanding Series1985Bonds.Theannual-interestratewasadjustedto3.60~/oeffective November15,1996andtq3.75%effective "November15,1995.(f)Multi-mode pollution control'notes totalingtheprincipal amountof$101.9millionwereissuedin-connection withNYSERDA's Pollution ControlRevenueBonds(Rochester GasandElectricCorporation Project),

$34;000,000 1997SeriesA,$34,000,000 1997SeriesBand$33,900,000 1997SeriesC.TheMulti-mode RevenueBondshaveastructure thatenablestheCompanytooptimizetheuseofshort-term'rates byallowingfortheinterestratestobebasedonadailyrate,aweeklyrate,acommercial paperrate,anauctionrateoramulti-year fixedrate.Paymentoftheprincipal of,andinterestontheMulti-mode RevenueBondsisguaranteed underBondInsurance PoliciesbyMBIAInsurance Corporation.

AtDecember31,1997,theMulti-mode Revenut;Bondsboreinterestattheweeklyrateandtheaverageannualinterestrateforallthreeserieswas3:65%.4TheCompanyisfobligated tomakepaymentsofprincipal, premiumandinterestoneachPromissory Notewhichcorrespond tothepaymentsofprincipal, premium,ifany,'andinterestoncertainPollution.

ControlRevenueBondsissuedbyNYSERDAasdescribed above.Basedonanestimated borrowing rateatyear-end1997of6.62%forlong-term debtwithsimilartermsandaveragematurities (13tyears),thefairvalueoftheCompany's long-term debtoutstanding (including Promissory Notesasdescribed above)isapproximately

$655millionatDecember31,1997.Basedonanesfimated borrowing rateatyear-end1996of7.30%forlong-term debtwithsimilartermsandaveragematurities (13years),thefairvalueoftheCompany's long-term debtoutstanding

-(including Promissory Notesasdescribed above)isapproximately

$670millionatDecember31,1996.OnSeptember 16,1997,theCompanycompleted arrangements forthedeliveryinSeptember 1998of$25.5millionof5.95%NYSERDAtax-exempt bondsdueSeptember 1,2033.Proceedsare~expectedtobeusedtoredeemtheSeriesOO,tax-exempt, firstmortgagebondswhicharenotredeemable untilDecember1998.iRocherterG0$0ndHectrtc'orpora tronR8 IIPreferred andPreference StockType,byOrderofSeniority Preferred Stock(cumulative)

Preferred Stock(cumulative)

Preference StockSharesAuthorized ParValueSharesOutstanding 920,000',000,000 4,000,000 5,000,000

$100~251irements.

'Seebelowformandatory redemption requNosharesofpreferred orpreference stock'are reservedforemployees, oiforoptions,warrants, conversions, orotherrights,A.Preferred Stock,notsubjectto,mandatory redemption:,:

$12,0008,0006,000',0006,00010,000$47,000F-'HIJK.MN44.104Y54.104.954.55'.50Total120,00080,000'0,000 50,00060,000100,00P$12,0008,0006,0005,0006,000.10,00020,000~$67,000470,000IShares'--(Ihousands)

'Outstanding December31'SeriesDecember31,1997.1997=~1996OptionalRedemption (pershare)P$105101101102.5102.101102ffMayberedeemedatanytimeattheoptionoftheCompanyon,30daysminimumnotice,plusaccrueddividends inallcases.TheSeriesNwereredeemedonApril22,'1997.IB.Preferred Stock,subjecttomandatory redemption:

~'4Shares.phousnds),OpgonaiOutstanding December31,Redemption Series'ecember31,1997.19971996'pershare)7.457.557.656.60ST"UVNotapplicable Notapplicable, Notapplicable NotBefore3/1/04+,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+Thereafter at$100.00k'I/MANDATORY REDEMPITON PROVISIONS IntheeventtheCompanyshouldbeinarrearsinthesinkingfundrequirement, theCompanymaynotredeemorpaydividends onanystocksubordinate tothePreferred Stock.-SeriesT,SeriesU.Allofthesharesaresubjecttoredemption pursuanttomandatory sinkingfundsonSeptember'1, 1998inthecaseofSeriesTandSeptember 1,1999inthecaseofSeriesU;ineachcaseat$'l00pershare.SeriesV.TheSeriesVissubjecttoamandatory sinkingfundsufficient toredeemoneachMarch1,beginning in2004toandincluding 2008;12,500sharesat$100p'erishare andon.March1,2009,thebalanceoftheoutstanding'shares.

TheCompanyhastheoption,to redeemuptoan.additional 12,500sharesonthesametermsanddatesasapplicable tothemandatory sinkingfund..Basedonanestimated dividendrateatyear-end1997of5.67%forPreferred Stock,subjecttomttndatory redemption, withsimilartermsandaveragematurities (5.92years),thefairvalueoftheCompany's Preferred Stctck,subjecttomandatory redemption, isapproximately

$48millionatDecember31,1997.-Basedonanestimated dividendrateatyear-end1996of6,50%forPreferred Stock,subjecttomandatory redemption, withsimilartermsandaveragematurities (5.66years),thefairvalueofthe'ompany's Preferred Stock,subjectto~andatory redemption, isapproximately

$57'million atDecember31,1996.'9 CommonStockandStock.OptionsIn.December1997,theBoard.ofDirectors oftheCompanyauthorized therepurchase ofupto".~4.5millionsharesoftheCompany's CommonStockontheopenmarket.Noneofthe'shares werepur;chasedpriortoyearend.AtDecember31,1997,therewere50,000,000 sharesof$5pa'rvalueCommonStockauthorized, of,which38,862,347 wereoutstanding.

NosharesofCommonStockarereservedforwarrants, conversions',

orotherrights.Therewere1,445,141 sharesofCommronStockreservedforemployees un'derthe1996*-Peifoirmance StockOptionPlan,a'sfurtherdescribed below.Therewere1,026,840 sharesofCommonStockreservedandunissuedforshareholders undertheAutomatic DividendReinvestment andStockPurchasePlanand129,664sharesreservedandunissuedforemployees undertheRGRESavingsPlusPlan.C0.1iruozv STOCA'Shares'AmountOutstanding

'Thousands)

Balance,January1,1995,SharesIssuedthroughStockPlansDecrease(Increase) mCapitalStockExpenseBalance,December31,1995SharesIssuedthroughStockPlans.Decrease(Increase) mCapitalStockExpenseBalance,December31,1996SharesIssuedthroughStockPlansAdditional PaidinCapital'ecrease(Increase) inCapitalStockExpenseBalance,December31,199737,669,963 783,20038,453,163 398,30138,851,464 10,88338,862,347

$670,56917,074(125)$687,5188,612(111)$696,0192722,3993415699,031PERFORMANCE STOCKOPTIONPLANEffective January22;1997,"

the'Company adoptedaPerformance StockOptionPlanwhichprovidesforthegrantingofoptionstopurchaseupto2,000,000 authorized butunissuedsharesortreasuryshares,of$5parvalueCommonStocktoexecutive officersandotherkeyemployees.

Aoparticipant.

shallbegrantedoptionsformorethan200,000sharesofCommonStockduringanycalendaryear.Theoptionswouldbeexercisable foraperiodtobedetermined bytheCommittee onManagement (theCommittee).

TheCommittee mayinitssolediscretion granttheright'toreceiveacashpaymentuponanyexerciseof.anoptionequaltothequarterly dividendpaymentpershareofCommonStockpaidfromthedatethe"'ptionwasgrantedtothedateofexercise.'n 1997,theBoardofDirectors-granted 504,700optionsatanexeicisepriceof519.0625pershare.Theseoptionsarevestedat50o/owhenthestockclosesat$25pershare,75%at$30pershareand100%at$35pershare.Alsoin19r)7,theBoardofDirectors granted50,159optionsatanexercisepriceof$24.75pershare.,Theseoptionsareve'stedat25%whenthestockclosesat$25pershare,50o(oat$30persh'are,'75o/o at$35pershareand100%at$40pershare.Inorderfortheoptionstobecomevested,theclosingpricesmustbesustained atorabovethelevelsindicated abovefor"aminimumoffiveconsecutive tradingdays.-.SincetheCompanyadoptedFAS123,compensation expenseassociated withtheoptionsgrantedisreflected in1997netincome.Forcalendar1997,thecompensation expenserecordedwas$2.4million.InapplyingFAS123,thefairvalueofeachoptiongrantedisestimated onthedateofthegrantusingtheBlackScholes optionpricingmodelwith-thefollowing assumptions:

risk-free rateofreturnrangingbetween6.39o/oand6.56%,expecteddividendyieldof9.44%,andexpectedstockvolatility of17%.AsummaryoftheCoinpany's stockoptionactivityispresented below:rWeghted4*.-OptionsAveragePricel4xhc5t48 G85BndElectricCorporation 4r'ptionsgranted1997Optionsexercised Outstanding at12/31/97, Vested,at12/31/97Available forfuturegrantat12/31/97554,859(10,883)543,976392,7221,446,141

$19.57$19.06$19.587$19.426J50 IShort-Tenn DebtOnDecember31,1997,theCompanyhadshort-term debtoutstanding of$20.0million.AtDecember~31,1996theCompanyhadshort-term debtoutstanding of$14.0million.Theweightedaverageinterestrate'in1997onshort-term debtoutstanding atyearendwas6:64%.and was6.07%for.borrowings duiingtheyear..The weightedaverageinterestrateonshort-term, debtborrowedduring1996was5.86%.InDecember1997theCompany's

$90millionrevolving creditagreement wasamendedextending itstermtofiveyears,terminating December31;2002.Commitment'fees relatedtothisfacilityamountedto$113,000in1997and1996,and$165,000in1995.TheCompany's CharterprovidesthattheCompanymaynotiss'ueunsecured debtifimmediately aftersuchissuancethetotalamountofunsecured debtoutstanding wouldexceed15percentof'theCompany's totalsecuredindebtedness, capital,andsurpluswithouttheapprovalofatleastamajorityoftheholdersofoutstanding Preferred Stock.AsofDecember31,1997,theCompanywouldbeabletoincurapproxi-mately$103.8millionofadditional unsecured debtunderthisprovision-.

TheCompanyhasunsecured.

'inesofcredittotaling$27millionavailable fromseveralbanks,attheiidiscretion.

Inordertobeabletouseits$90millionrevolving creditag'reement, theCompanyhascreatedasubor-dinatemortgagewhichsecuresbopowings underitsrevolving creditagreement thatmightotherwise be~restricted bythisprovision oftheCompany's Charter.Inaddition, theCompanyhasaLoanandSecurityAgreement toprovideforborrowings upto$10millionfortheexclusive purposeoffinancing FederalEnergyRegulatory Commission Order636transition costs(636 Notes)andupto$30millionasneededfromtimetotimeforotherworkingcapitalneeds.Borrowings underthisagreement, whichcanberenewedannually, aresecuredbyalienontheCompany's accountsre'ceivable.

AtDecember31,1997,borrowings outstanding were$4.34millionof636Notes(recorded ontheBalanceSheetasaliability underDeferredCreditsandOtherLiabilities)".

\Commi*nents andOtherMattersCOMPETITION Overview.

ThePSC,throughitsCompetitive'Opportunities Proceeding, hasembarkedonafundamen-talrestructuring oftheelectricutilityindust'ry inthestate.Amongotherelements, thePSC'sgoalsincludedlowerratesforconsumerkand increased customerchoiceinobtaining electricity andotherenergyservices.

During1996and1997,theCompany,theStaffofthePSC,andseveralotherpartiesnego-tiatedaSettlement Agreement (the"Settlement"

)whichwasapprovedbythePSCinNovember1997.TheSettlement setstheframework forthe,introduction anddevelopment ofopencompetition intheelectriceneigymarketplace.

PSCCompetitive Opportunities CaseSettlement, TheSettlement providesforatransition tocompe-titionduringitsfiveyearterm(july1,1997toJune30,2002)andestablishes theCompany's electricratesforeachannualperiod.ARetailAccessProgramwillbephasedin,allowingcustomers topurchaseelectric-ity,andlaterelectricity andCapacitycommitments, fromsourcesotherthantheCompany.TheCompany.,willbegivenareasonable opportunity torecoverprudently incurredcosts,including theepertaining togeneration andpurchased power.TheSettlement alsorequirestheCompanytofunctionally separateitscomponent operations:

distribution, generation, andretailing.

Anyunregulated retailoperations mustbestructurally separatefromtheregulated utilityfunctions butmaybefundedwithupto$100million.AlthoughtheSettlement providesincentives forthesaleofgenerating assets,itrequiresneitherdivestiture ofgenerating orotherassetsnorwriteoffofstrandedcosts.TheCompanybelieyesthattheSettlement

.willnotadversely affectitseligibility tocontinuetoapplySFAS-71withtheexception ofcertainto-gocostsassociated withnon-nuclear, generation.

If,contrarytotheCompany's view,sucheligibility wereadversely

affected, a.material write-down ofassets,theamountofwhichisnotpresently determinable,"

,couldberequired.

~RatePlan.OverthefivyeartermoftheSettlement, cumulative ratereductions willbe:RateYear1:$3.5million;RateYear2:$12.8million;RateYear3:$27.6million;RateYear4:$39.5million;andRate'ear5:$64.6million.TheRatePlanpermitstheCompanytooffsetagainsttheforegoing reductions certaininflation-related expensesandcertainamountsrelatedtoapurchasepopoveragreement with.Kamine.IntheeventthattheCompanyearnsareturnoncommonequityinexcessof11.50/0overtheentirefiveyeartermoftheSettlement, 500/0ofsuchexcesswillbeusedtowritedowndeferredcostsaccu-mulatedduringtheterm,and50%>villbeusedtowritedownaccumulated deferrals orinvestment in-electricplantorregulatory assets.51(Noti10continued onpage52)

~(<oniinued frompage51),lbxhcstcr GasandElectricCorpontlon IIRetailAccess.TlieCompany's EnergyChoiceProgramwillbhavailable toallofitscustomers onanequalbasisuptocertainusagecaps.OnJuly1,1998,customers whoseelectricloadsrepresent approxi-mately10%oftheCompany's totalannualretailsaleswillbeeligibletopurchaseelectricity (butnotcapacitycommitments) fromalternative suppliers.

OnJuly1,1999,thepercentoftotalsalesmovesto20%,andcustomers wouldpurchasebothelectricity andcapacity'commitments.

OnJuly1,2000,the'ercentmovesto30%,andonJuly1,2001,allretailcustomers willbeeligibletopurchaseenergyandlcapacityfromalternative suppliers.

Duringtheinitial,energyonlystageoftheRetailAccessProgram,theCompany's distribution ratewillbesetbydeducting 2.3centspejkilowatthour("KWH")fromitsfullservice(."bundled"

)ratesandLoad,ServingEntitiesactingasretailers intheCompany's serviceareawillbeentitledtopurchaseelectricity fromtheCompanyatarateof1.9centsperKWH.Duringtheenergyandcapacitystage,theratewillgen-erallyequalthebundledratelessthecostoftheelectriccommodity andtheCompany's non-nuclear gen-eratingcapacity.

Thesecommodity andcapacitycosts,generally referredtoas"contestable costs,"are,estimated tobe3.2centsperKWH,inclusive ofgrossreceiptstaxes.Generating Assets.TheCompanywillnotberequiredtodivestanyofitsgeneration facilities.

TotheextentthattheCompanysellsanygenerating assetsduringthetermoftheSettlement, gairison>uchsaleswillbesharedbetweentheCompanyandcustomers.

Withregardtolossesonsuchsales,theSettlement acknowledges anintentthattheCompanywillbepermitted torecoversuchlossesthroughdistribution

'atesduringthetermoftheSettlement:

Futureratetreatment is'tobeconsistent withthepiinciple thattheCorn/anyistohaveareasonable opportunity torecoversuchcosts..~"To-gocosts".of theCompany's non-nuclear resources (i.e.,capitalcostsincurredafterFebruary28,1997,operation andmaintenance

expenses, andproperty, payrollandothertaxes)aretobeinitially recovered throughdistribution rates.Thefixedportionofto-gocostswouldberecovered infulluntilJuly1,1999,andbesubjecttothemarketthereafter inaccordance withthephase-inschedulefortheRetailAccessprogram.Thevariableportio'nofnon-nuclear to-gocostswouldalsobesubjecttothemarketinaccordance withthephase-inschedule.

UndertheSettlement, nuclearcostswouldremainrecoverable throughregulated rates.Miscellaneous.

ThepresentSettlement supersedes the1996RateSettlement.

Variousincentive and~penaltyprovisions inthe1996RateSettlement areeliminated.

EITFIssue97~Deregulation ofthePricingofElectricity.

InJuly,1997,theFinancial Accounting Standards Board'sEmergingIssuesTaskForce(EITF)reachedaconsensus onaccounting rulesforutilities'ransition plansformovingtomorecompetitive environments andprovided'guidance onwhenutilities withtransition planswillneedtodiscontinue theapplication ofSFAS-71,"Accounting fortheEffectsofCertainTypesofRegulation".

iPThemajorEITFconsensus wasthattheapplication ofSFAS-71toasegment(e.g.generation) whichissubjecttoaderegulation transition planshouldceasewhenthelegislation orenablingrate,ordercontainssufficient detailfortlieutilitytoreasonably determine whatthetransition planwillentail.TheEITFalsoconcluded thatadecisiontocontinuetocarrysomeoralloftheregulatory assets(including strandedcosts)andliabilities oftheseparable portionofthebusinessthatisdiscontinuing theapplication ofSFAS-71shouldbedetermined onthebasisofwheretheregulated cashflowstorealizeandsettlethemwillbederived.Ifatransition planprovidesforanon-bypassable Seefortherecoveryofstrandedcosts,theremaynotbeanysignificant write-off ifSFAS-711s discontinued forasegment.TheCompany's application oftheEITF97-4consensus hasnotaffecteditsfinancial positionorresultsofoperations becauseanyabove-market generation costs,regulatory assetsandregulatory liabilities associ-atedwiththegeneration portionofitsbusinesswillberecovered bytheregulated portionoftheCompanythroughitsdistribution rates,giventheSettlement provisions.

TheSettlement providesforrecoveryofallprudently incurredsunkcosts(allinvestment inelectricplantandelectricregulatory assets)asofMarch1,1997byinclusion inrateschargedpursuanttotheCompany's distribution accesstariff.TheSettlement alsostatesthat"thePartiesintendthattheprovisions ofthisSettlement willallowthe'ompanytocontinuetorecoversuchcosts,duringthetermoftheSettlement, underSFAS-71",

andthat"suchtreatment shallbeconsistent withtheprinciple thattheCompanyshallhaveareasonable opportu-nitybeyondJuly1,2002torecoverallsuchcosts".Asnoted.previously, thefixedportionofthenon-nucleargeneration to-gocostsafterJuly1,1999andthevariableportionofthenon-nuclear generation to-gocostsafterJuly1,1998aresubjecttOmarketforcesandwouldnolongerbeabletoapply'SFAS-7$

.TheCompany's netinvestment atDecember'31,.1997 innucleargenerating assetsis$698.4millionand'on-nuclear generating assetsis$122.0million.52' 1hREGULATORY ANDSTRANDAHLE ASSETSWithPSCapprovaltheCompany'has deferredcertaincostsratherthanrecognize themonitsbookswhenincurred.

Suchdeferredcosfsaretherirecognized asexpenseswhentheyareincludedinratesandrecovered fromcustomers.

Suchdeferralaccounting is'permitted bySFAS-71.IhesedefeiredcostsareshownasRegulatory AssetsontheCompany's'Balance Sheet.Su'chcostdeferralisappropriate undertraditionalregulated cost-'of-service ratesetting,whereall'prudently,incurred costsarerecovered throughrates.Ina,purelycompetitive pricingenvironment, suchcostsmight nothavebeenincurredandcouldnothavebeendeferred.

Accordingly, iftheCompany's Tatesettingwaschangedfromacost-of-service

approach, anditwasnolongerallowedtodeferthesecostsunderSFAS-71,theseassetswouldbeadjustedforanyimpairment torecovery(pursuant toSFAS-121).

Incertaincases,thettntire'amount couldbe.writtenoff.SFAS-121requireswrite-down ofassetswhenevereventsorcircumstances occurwhichindicatethatthe,=carryingamountofalong-lived assetmaynotbefullyrecoverable.

'elow'sa,summ'arization.qf theRegulatory AssetsasofDecember31,1997aiid1996:(Millions ofDollars)'.19971996-IncomeTaxesUraniumEnrichment I)ecommissioning

Deferral, DeferredIceStormCharges-FERC636Transition Costs'emandSideManagement CostsDeferred-GasDeferredFuelOther,netTotal=Regulatory Assets$159.616.411.5",11.04,41/722.0$232.0$174.617.714,032.38.47729.8$284.5'tncomeTaxes:Thisamountrepresents theunrecovefed portionoftaxbenefitsfromaccelerated depre-ciationandothertiming,differences whichwereusedtoreducetaxexpenseinpastyears.Therecoveryofthisdeferral.

isanticipated overtheremaining lifeoftherelatedpropertywhentheeffectofthepast'eductions reversesinfutureyears.VUranium.Enrichment Decommissioning Deferral:

TheEnergyPolicyActof1992requiresutilities tocontribute suchamountsbasedontheamountofuraniumenrichedbyDOEforeachutility.ThisamountismandatedtobepaidtoDOEthroughtheyear'007.

Therecoveryofthesecostsisthroughbaseratesoffuel.VDeferredIceStormCharges:Thesecostsresultfromthenon-capital stormdamagerepaircostsfollow-"ingtheMarch1991ice-storm.

Therecoveryofthesecostshasbeen.approvedbythePSCthroughtheyear2007,.VFERC636Transition Costs:Thesecostsarepayabletogassupplyandpipelinecompanies whicharepassingvariousrestructuring andothertransition costsontotheCompany,asorderedbyFERC.Themajorityofthesecostswillberecovered throughtheCompany's gascostadjustment bytheyear2000.VDemandSideManagement CostsDeferred:

ThesecostsareDemandSideManagement costswhich'refatetoprogramsinitiat'ed toincreaseefficiency withwhichelectricity isused.Thesecostsarerecover-ablebytheCompany,through'he year2002.~~VGasDeferredFuel:ThesecostsresultfroniaPSC-approved annualreconciliation ofrecoverable gas.,costswithgasrevenuesinwhichtheexcessordeficiency isrefundedto.orrecovered fromcustomers

"-duringasubsequent period.InaCompetitive electricmarket,strandable assetswouldarisewheninvestments aiemadeinfacilities,

-oicosts,aie incurredtoservicecustomers, andsuchcostsarenot.fully recoverable inmarket-based rates.Examplesincludepurchasepowercontracts (e.g.,theKamine/Besicorp AlleganyL.P.'contract),

orhighcostgenerating assets.Estimates ofstrandable assetsarehighlysensitive tothecompetitive wholesale marketpiiceassumedintheestiination.

Theamountofpotentially strandable assetsatDecember31,1997dependsonmarketpricesandthecompetitive marketinNewYorkStatewhichisstill'under development.

'ndsubjecttocontinuing changeswhicharenotyetdeterminable,'ut couldbesignifican't.

Strandable assets,ifany,couldbewrittendownforimpairment ofrecoveryinthesamemannerasdeferredcosts-'discussed above.Inacompetitive naturalgasmarket;strandable assetswouldarisewherecustomers migrateawayfromdependence ontheCompanyforfullservice,leavingtheCompanywithsurpluspipelineandstorage'capacity, aswellasnaturalgassupplies, undercontract:

TheCompanyhasbeenrestructuring itstrans-portation, storageandsupplyportfolio toieduceitspotential exposuretostrandable assets.Regulatory P'otelocontinued onpage54)63 (continurd frompago53)Rochester GasandBearicpxpceation developments discussed under"GasRestructuring Proceeding,"

below,mayaffectthisexposure; butwhetherandtowhatextenttheremaybeanimpactonthelevelandrecoverability ofstrandable assetscannotbedetermined atthistime.AtDecember.

31,1997theCompanybelievesthatitsregulatory andstrandable assets,ifany,arenotimpairedandareprobableof'recovery.

Thesettlement approvedintheCompetitive Opportunities pro-ceedingdoesnotimpairtheopportunity oftheCompanytore'coveritsinvestment intheseassets.However,thePSChaspublished aStaffpapertoaddressissuessurrounding nucleargeneration, including thedetermination offairmarketvalueforfacilities afterafiveyearrestructuring transition

-period.ItappearsthatthePSCmayseektoapplysimilarprinciples toothertypesofgenerating facilities.-

Adetermination inthisproceeding couldhaveanimpactonstrandable assets.CAPITALEXPENDITURES TheCompany's 1998construction expenditures programiscurrently estimated at$124million.TheCompanyhasenteredjntocertaincommitments forpurchaseofmaterials andequipment, inconnection.

withthatprogram.NUCLEAR-RELATED MATTERSDecommissioning Trust.TheCompanyiscollecting amountsinitselectricratesfortheeventualdecommissioning of-itsGinnaPlantandforits14%shareofthedecommissioriing ofNineMileTwo.Theoperating licensesfortheseplantsexpirein2009and2026,respectively.

,Underaccounting procedures approvedbythePSC,theCompanyhascollected decommissioning costsofapproximately

$116.1millionthroughDecember31,1997andisauthorized tocollectapproximately

$22millionannuallythroughJune30,2002fordecommissioning, coveringbothnuclearunits.The'amountallowedinratesisbasedonestimated ultimatedecommisSioning costsof$296.3millionforGinnaand$112.8millionfortheCompany's 14%shareofNineMileT~'vo(1995dollars).

Theseestimates arebasedonsitespecificcoststudiesforeachplantcompleted in1995.Sitespecificstudiesoftheantici-patedcostsofactualdecommissioning arerequiredtobesubmitted totheNRCatleastfiveyearspriortotheexpiration ofthelicense.~.</The,NRCrequiresreactorlicensees tosubmitfundingplansthatestablish minimumNRCexternalfundinglevelsforreactordecommissioning.

TheCompany's plan,filedin1990,consistsofanexternaldecommissioning trustfundcoveringbothitsGinnaPlaritanditsNineMileTwoshaie.Since1990,the'ompanyhascontributed

$86.4milliontothisfuhdand,including realizedandunrealized investment

.returns,thefundhasabalanceof$132.5millionasofDecember31,1997,.Theamountattributed totheallowance forremovalofnon-contaminated structures isbeingheldinaninternalreserve.TheinternalreservebalanceasofDecember31,1997is$29.7million..TheNRCiscurrently considering proposals whichm'ayimpactfinancial fundingrequirements fordecommissioning ofnuclearpowerplants.UndercurrentNRCregulations electricutilities providefordecommissioning fundsannuallyovertheestimated lifeofaplant.Ifstateregulatory authorities weretoadoptaprogramtoremoveelectricgeneration (including nuclearplants)fromcost-based rateregulation, anactionwhichtheNewYorkPSCiscurrently considering, suchplantswouldoperateinacompetitive electricmarketandwouldhavenoassuredsourceofrevenuefromenergysales.Undercurrentregulations, theNRCcanrequiretheownersofnuc/earplantslackingsuchassuredrevenuestreams,toprovideassur-ancethatthefullestimated costofdecommissioning willultimately beavailable throughsomeguarante'e mechanism.

'TheNRCisseekingpubjiccommentonanumberofquestions,,

including thelikelytimetable forutilityrestructuriIig andderegulation andtowhatextentcostswillberecoverable ifalargebaseloadplantisdeemedtobenon-competitive becauseofhighconstruction costsandwhatfundingsourceswillbeusedtoshutdownaplantprematurely andsafely.-TheNRChasreleasedforcommentsanoticeofproposedrulemaking (NOPR)modifying certainaspectsofthefinancial assurance requirements fordecommissioning nuclearpowerreactors.

TheNOPRincludes, amongotherthings,changestothedefinition of"electric utility"forthepurposesofproviding financial assurance fordecommissioning aswellasnewreporting requirements iegarding eachlicerisee's progressonexternalfunding.TheCompanydoesnotanticipate amaterialimpactfromtheapplication oftheserulesintheirproposedform;howeveritcannotpredicttheimpactoftheserulesasresolution ofstrandedassetissuesproceedinNewYork.ThePSCinAugust1997issuedforcommentareportbyitsstaffproposing normsbywhichnuclearplantsinthestatewouldrelatetothecompetitive electricity marketfollowing theperiodcoveredby~electric'utility restructuring agreements thenpendingbeforethePSC.Amongotherthings,thereport/54

'envisioned tliesaleoftheseplantsatauction,butwiththesellingutilities remaining iesponsible for.'ltimatedecommissioning aswellasfordisposalofcertainspentfuel.Recognizing thatbiddersmaynot'eattracted tocertainunits-whichcouldincludeboththe'Company's GinnaplanfandtheNineMileTwoplantinwhichithasa14%interest, thereportcontemplated theirearlyshutdownunlesstheycouldcompetewithotherformsofgeneration.

InFall1997,theCompanyandotherscommented ontheseandotherfacetsofthereport.Throughmid-January 1998,thePSChadtakennoactiononthereportandcomm'ents.

.TheStaffoftheFinancial Accounting Standards Boardarestudyingtherecognition, measurement andclassification ofdecommissioning costsfornucleaigenerating stationsinthefinancial statements ofelectricutilities.

Ifcurrentaccounting practices forsuchcostswerechanged,theannualprovisions fordecommissioning costscouldincrease, theestimated costfordecommissioning couldbereclassified asaliability ratherthanasaccumulated depreciation',

theliability accourits andcorresponding plantassetaccountscouldbeincreased andtrustfundincomefromtheexternaldecommissioning trustscouldbereportedasinvestment incomeratherthanasareduction todecommissionihg expense.'Ifannualdecommissioning costs'ncreased, theCompanywouldexpecttodefertheeffectsofsuchcostspendingdisposition bythePSC.UraniumEnrichment Deconfamination andDecommissioning Fund.UndeitheNationalEnergyAct,utilities withnucleargenerating facilities areassessedanannualfeepayabjeover15yearsforthedecommissioning offederally owneduraniumenrichment facilities.

Theassessments foiGinnaandtheCompany's shareofNineMile'Avoareestimated tototal$22.1million,excluding inflation andinterest.

Installments aggregating approximately

$9.4millionhaveIIeenpaidthrough1997.Aliability hasbeenrecognized onthefinancial statements alongwithacorresponding regulatory asset.Forthetwofacilities

'heCompany's liability atDecember31,1997is$15.1million($13.4millionasalong-term liability and$1.7millionasacurrentliability).

TheCompapyisrecovering coststhroughbaseratesoffuel.lnJuly1996,th6Companyjoinedotherutilities inacivilactionagainsttheU.S.DepaItment ofEnergy'DOE),

concerning theseassessments.

Afterafavorable initialdecisioninaParallelcase,theCourtofAppeals~for.theFederalCircuitinMay1997reyeisedthelower,courtandheldthatthefederalgovernment couldassesslicensees fortheclean-upofthesefederalfacilities.

InJanuary1998,theU.S.SupremeCourtrefused'.tohearthecase,effectively upholding thedismissal oftheutilityclaiins.NuclearFuelDisposalCosts.TheNuclearWastePolicyAct(NuclearWasteAct)of1982,asamended,requirestheDOEtoestablish anuclearwastedisposalsiteand,totaketitletonuclearwaste.Apermanent DOEhigh-level nuclearwasterepository isnotexpectedtobooperational beforetheyear2010.TheDOF,isproposin'g toestablish aninterimstoragefacilitywhichmayallowittotaketitletoandpossession ofnuclearwastepi'iortotheestablishment ofapermanent repository.

In'December 1996.theDOEnotifiedtheCompanythattheDOEwillnotstartacceptance ofGinnaspentfuelin1998.InJanuary1997theDOEreleasedadraftrequestforproposaloutlining aprocessforprivatefifmstoacceptan'dtransport wastefromreactorsuntilafederalfacilityisoperational.

TheNuclearWasteActprovidesforadetermina-tionofthefeescollectible bytheDOEforthedisposalofnuclearfuelirradiated priortoApril7,1983andforthreepaym'entoptions.Theoptionofasinglepaymenttobemadeatanytimepriorto'tilefirstdeliveryoffueltotheDOEwasselectedbytheCompanyinJune1985.TheCompanyestimates thefees,including accruedinterest, owedtotheDOEtobe$833millionat.December31,1997.TheCompanyis.allowedbythePSCtorecovertheseco'stsinrates.Theestimated feesareclassified asalong-term liability andinterestisaccruedatthecurrentthree-month Treasurybillrate,adjustedquarterly.

TheNuclearWasteActalsorequirestheDOEtoprovideforthedisposalofnuclearfuelirradiated afterApril6,1983,fo'rachargeofappioximately onemill($.001)perKWHofnuclearenergygenerated andsold.Thischarge(approximately

$3.6millionperyear)iscurrently being'collected fromcustomers andpaidtotheDOEpursuanttoPSCauthorization.

TheCompanyexpectstoutilizeop-sitestorageforallspentorretirednuclearfuelassemblies untilaninterimorpermanent nucleardisposalfacilityisoperational.

Therearepresently nofacilities inoperation intheUnitedStatesavailable forthereprocessing ofspentnuclearfuelfromutilitycompanies.

IntheCompany's determination'of nuclearfuelcostsithastakenintoaccountthatnuclearfuelwouldnotbereprocessed andhas'provided fordisposal'costs inaccordance withtheNuclearWasteAct.TheCompanyhascompleted aconceptual studyofalternatives toincreasethecapacityfortheinterimstorageofspentnuclearfuelattheGinnaPlant.Thepreferred-alternative, basedoncostandsafetycriteria,.is toihstallhigh-capacity spentfuelracksintheexistingareaofthespegtfuelpool.Theadditional storagecapacity, scheduled tobeimplemented priortoSeptember 2000,wouldallowinterimst'o'rage ofallspent.fueldischarged fromtheGinnaPlantthroughtheendofitsOperating Licenseintheyear2009.+tote10continued onpage56)

'ENVIRONMENTAL MATTEI5,\pnsms5)Thefollowing tableslistvarioussiteswherepastwastehandlinganddisposalhasormayhaveoccurredthatarediscussed below:SiteNameLocation, Estimated CompanyCost.-l4xhester GasandHcctdcCorpontlon JI1.'ltimate costshavenotbeendetermined.

TheCompanyhasincurredaggregate costsforthesesitesthroughDecember31,199'7oflessthan$1.0million.lIJ58'TableI-Conrpany-Owned Sites:WestStation*Rochester, NY"'ltimatecostshaveriotbeenEastStation.-Rochester, NY.'etermined.

TheCompanyhasFrontStreet'ochester, NYinc'urred aregatecostsforthese*,BrewerStre'etRochester, NYsitesthroughDecember31, 1997BrooksAvenue-Rochester,NY, of$4.3million.-

Canandaigua'

'anandaigua, NY-'Voluntary agreement signed::TableII-Superfund andNon-Owned OtherSites:QuantaResources',

'yracuse, NY,FrontierChenlical-Pendleton*

Pendleton, NYMaxeyFlats*'orehead, KY.MexicoMilkMexico,NYByronBarrelandDrumergen,NYFultonTerminals',

IOswego,NYPASofOswego',

Oswego,NY "Ordersonconsentsigned.Company-Owned WasteSite,Activities.

Aspartofitscommitment toenvironmental excellence, theCompanyisconducting proactive SiteInvestigation and/orRemediation (SIR)effortsatsixCompany-ownedsiteswherepastwastehandlinganddisposalmayhaveoccurred.

Remediation activities atfourofthesesitesareinvariousstages'of,planning orcompletion andtheCompanyisconducting a'program torestoretheothertwosites.TheCompanyhasfecordedatotalliability ofapproximately

$13.6million,$12.8millionofwhichitanticipates spendingonSIReffortsat.thesixCompany-owned siteslistedin'ableIabove.Concurrently, theCompanyrecordedasimilaramountinitsRegulatory Assets.Inmid-1995, theNewYorkStateDepartment ofEnviroqmental Conservation (NYSDEC)developed alistingofsitescalled"-TheHazardous Substance SiteInventory".

Under'current NewYorkStatelaw,unlessasite,ttIhichisdetermined toposeapublichealthorenvironmental risk,containshazardous wastes,State."Superfund" moniescannotbeusedtoassistinthe,cleanup.The'State wantedtohavesomesenseofthescaleofthisproblembeforethelegislature considered otheravenuesoflegaland'financial redressthan,thosecurrently available.

TheNYSDEC's"Hazardous Substance WasteDisposalSiteStudy"wasdeveloped toassessthenumberofandcosttoremediate siteswherehazardous chemicals, butnothazardous wastesarepresent.OfthesixCompany-owned siteslistedinTableIabove,threearelisted,inthisinventory.

Theseare-EastStatiqn,FrontStreetandBrooksAvenue.Inadditiontothesethreesites,thyinventory includesAmbroseYardandLindbergHeatTreating.

TheCompanydoesnotbelievethatadditional SIR,porkforwhichtheCompanyisresponsible isrequiredateithersite,howevertheCompanyisunabletopredictwhatactionwillbenecessitated asa'resultofthelisting.TheCompanyanditspredecessors formerlyowneda'ndoperatedthreemanufactured gasfacilities, tntheRochester area:TheyareincludedinTableI.Cleanupactivities whichwerepreviously suspended,

.~-,resumed.

onaportionoftheWestStationsiteandwereconcluded inJulyltt96underayoluntary agree-mentwith'theNYSDEC.TheCompanyreceivedreleasefromfutureliability andacovenantnottosuefromtheNYSDECforthiswork.Thereremainotherportionsof.theprbpertywhereadditiorial, remedial:workisexpected; however,onlyapreliminary scopeandschedulehavebeendetermined.

Atthesecondof*thethreemanufactured gasplantsitesknownasEastltation, aninterimremedialactionwasundertaken

'nlate1993.Groundwatermonitoring wellsweiealsoinstalled toassessthequalityofthegroundwateratthislocation.

TheCompanyhasinformedtheNYSDECoftheresultsofthesamplestaken.Subsequent dataevaluation indicateawiderarrayofpotential sourcesofcoalgassification relatedmaterials thanprevi-ouslythoughtsuggesting significant remedialworkmayberequired.

AtthethirdRochester areapropertyownedbytheCompany(FrontStreet)wheregasmanufacturing',

tookplace,aboringplacedintheFallof1988fora.sewersystemptojectshowedalayercontaining ablack;viscousmaterial.

Thestudyofthelayerfoundthatsomeofthesoilandgroundwater-on-site hadbeen'dversely impacted.

ThematterwasreportedtotheNYSDEGand,inSeptember 1990,theCompanyalsoprovidedtheaI;encywithariskassessment.

ThereportoftheresultsofthisstudyandtheNYSDFC'sresponsetotherecommendations madethereinwillinfluence thefutureremediation costs.TheCompany hassignedavoluntary agreement toperformlimited,additional, investigation atthesitetodetermine whethercertainremedialactionsarenecessary priortodevelopment.

AnotherpropertyownedbytheCompanywheregasmanufacturing tookplaceislocatedin"Canandaigua, NewYork.Limitedinvestigative workperformed thereduringthesummerof1995has,sliownevidenceofboth.theformergasmanufpcturing operations andleakagefromfueltanks.The...NYSDEC wasinformed; thefueltanksremoved;andadditional investigative workcontinues.

TheSIRcosts-associated withthe~eactionsareincludedinTableI.TheNYSDEChasnottakenanyactionagainsttheCompanyasaresultofthesefindings.

OnanotherportionoftheCompany's property(BrewerStreet),theCountyofMonroehasinstalled andoperatessewerlines.Duringsewerinstallation, theCountyconstructed overCompanyproperty=certainretention pondswhichreportedly receivedfrom'thesewerconstruction areacertainfossil-fuel-basedmaterials (thematerials) foundthere.InJuly1989,theCompanyreceivedaletterfromtheCounty,"asserting thatactivities oftheCompanylefttheCountyunabletoeffectaregulatorily-approved closureof'.theretention pondarea.TheCounty'slettertakesthepositionthatitintendstoseekreimbursement foritsadditional costsincurredwithrespecttothematerials oncetheNYSDECidentifies thegenerator

'hereofandthatanyfurthercleanupactionwpichtheNYSDECmayrequireattheretention pondsiteistheCompany's responsibility.

InaNovember1997letter,the,CountyhasclaimedthattheCompanywas'heoriginalgenerator ofthematerials.

Itassertsthatitwillh'oldtheCompanyliable.for50%ofallCountycosts-presently estimated atatotalofapproximately

$5million-associated bothwith'themate-"rials'xcavation, treatment anddisposalandwitlieffecting aregulatorify-approved closureofthereten-tionpondarea.TheCompanycouldincurcostsasyetundetermined ifitweretobefoundliableforsuch*closureandmaterials

handling, althoughprovisions ofan,existingeasemerit affordtheCompanyrightswhichmayservetooffsetall'oraportionofanysuchCountyclaim.Todate,theCompanyhasagreedtopaya20%shareoftheCounty's1995investigation ofthisarea,whichisestimated tocostnomore-than

$150,000,butnocommitment hasbeenmadetowardanysubsequent investigations orremedialmeasureswhichmaybe,recommended bytheinvestigations.

Monitoring wellsinstalled atanotherCompanyfacility(BrooksAvenue)in1989revealedthatanunde-terminedamountofleadedgasolinehadreachedthegroundwater.TheCompanyhascontinued tomonitorfreeproductlevelsinthewells,andhasbegunamodest'free productrecoveryproject.Itisesti-matedthatfurtherinvestigative workintothisproblemmay.costupto$100,0PO.awhilethecostofcor'rec-tiveactionscannotbedetermined untilinvestigatiohs arecompleted, preliminary estimates arenot-,expectedtoexceed$500,000.Superfund andNon-Owned OtherSites.TheCompanyhasbeenormaybeassociated asapotentially responsible party(PRP)atsevensitesnotownedbyit.TheCompanyhassignedordersonconsentfor-five, ofthesesitesandrecordedestimated liabilities totalingapproximately

$.8million.IInonesite,knownastheQuantaResources Site,theCompanysignedaconsent'order withtheEnvironmental Protection Agency(EPA)andpaidits$27,500shareofremedialcost.TheCompanywasagaincontacted byEPAinlateAugust,1996.TheEPAinformedtheCompanythatitbelievedcertainaddi-tionalworkwasrequired, including astudytodetermine theextenttowhichadditional removalofwaste~materials wasrequired.

TheEPA'slistofPRPshadgrowntoabout80:TheCompany,alongwithmostofthosePRPs,hasagreed(throughan'Administrative OrderonConsenf)toconducttherequiredstudy..The Companyanticipates itsobligation-throughthisphasewillbe'lessthan,$10,000.OnMay12,1997,theCompanysignedanAdministrative OrderonConsentwiththeNYSDEC.Thisagreement served-to obligatetherespective partiestopayNYSDEC'spastcostsattheSite,theCompany's shareofwhichwasdetermined tobe$1,500.Thereisas'yet,noinformation onwhichtodetermine thecosttodesignandcondu'ctatthesiteanyremedialmeasureswhichfederalorStateauthorities mayrequire,"the Companydoesnotexpectitsadditional coststoexceed,$150,000.OnMay21,,1993, theCompanywasnotifiedbyNYSDECthatitwasconsidered aPRPfortheFrontier,Ch'emical Pendleton Sqperfund SitelocatedinPendleton, NY.TheCompanyhassigned,alongwithotherparticipating parties,anAdministrative OrderonConsentwithNYSDEC.TheOrderonConsentobligates thepartiestoimplement aworkplanangremediate thesite.ThePRPshavenegotiated a'wdrkplanfor,.siteremediation andhav'eretainedaconsulting firmtoimplement theworkplan.Preliminary estimates indicatetheCompany's shareofadditional siteremediation costsarenotexpectedtoexceed$350,000.-

TheCompanyisparticipating withthegrouptoallocatecostsamongthePRPs.Subsequent workhasindi-catedthatthefinalcostislikelytobelower.TheCompanyisinvolvedintheinvestigation andcleanupoftheMaxeyFlatsNuclearDisposalSiteinMorehead,'Kentucky andhassignedvariousconsentorderstothateffect.TheCompanyhascontributed

,toastudyof-thhsiteandestimates thatitsshareoftheadditional costsofinvestigation andremediation is,notexpectedtoexceed$250,000.p'oee10continued onpage58)57 (mnttnurd frompart57)Rochestrr GttjrtdHCCt!ICCoqorttlort JpTheCompanyhasbeennamedasaPRPatthreeothersitesandhasbeenassociated withtanothersiteforwhichtheCompany's shareoftotaladditional projected costsisnotexpectedtoex'ceed$71,000.ActualCompanyexpenditures forthesesitesaredependent uponthetotalcostofinvestigation andreme-diationandtheultimatedetermination oftheCompany's shareofresponsibility forsuchcostsas'wellas~thefinancial viability ofotheridentified responsible parties.FederalCleanAirActA'mendments.

TheCompanyisdeveloping strategies responsive tothefederalcleanairactamendments of1990(Amendments) whichwillprimarily affectairemissions fromthe-,Company's fossil-fueled generating facilities.'he strategybeingdeveloped isacombination ofhardwaresolutions whichhaveacapitalandoperation andmaititenance (ORM)component andallowance tradingsolutions whichhavestrictlyanORMimpact.Themostrecentstrategic developments stillenvisionthiscombinafion ofeffortsasthemostcosteffective meansofproceeding althoughStatelegislative activitycouldimpacttheCompany's abilitytorelyupontheemissionallowance markettomeetsomeofitsenvironmental commitments.

TheCompanycannotpredicttheoutcomeoftheseproceedings intheLegislature and,asaresult,theCompany's projections arebasedsolelyonthecombination.

strategy.,

Arangeofcapitalcostsbetween$2.9and$3.5million hasbeenestimated fortheimplementation ofseveralpotential alterations formeetingtheforeseeable nitrogenoxide,opacityandsulfurdioxiderequirements oftheAmendments, aswellas$$.0to$1.5millionperyearinoperating expenses.

Thesecapitalcostswouldbeincurredbetween1998and2000.TheORMexpenseswouldbefortheyear1999.Fortheyear2000andbeyon'd,theCompanyestimates thattheannualoperating expenseswouldrisetobetween$2.4millionand$3.7million.Anyadditional post/000capitalcosts,and operating expensecannotbepredicted untilresolution ofStateandfederallegislative activityenablesthe"Companytohnalizeitscompliance strategy.

OpacityIssue.InMay1997,the,Companycommenced negotiations withtheNYSDECtoresolvealit!-gationsofpastopacityviolations attheCompany's BeebeeandRussellStations.

Theopacitystandardisaregulation whichlimitsthedensityofthesmokeemittedfromtheStations'mokestacks.

TheCompany!believesthatitwillreachanagreement withNYSDEConthisissueandthattheamountofanycivilpenaltywilllikelyincludebothcashandenvironmental benefitprojectcomponents which,intheaggre-gate,will'notbematerial.

Inaddition, theStationshavebeentemporaiily deratedsinceFebruary1997to~maintainacceptable opacitylevelswhiletheCompanyinvestigates additional'engineering solutions toaddressopacityemissions.

ThefinanCial impactofthederatings includesthelostopportunity associated withenergysa/esand;attimes,theneedtomakeadditional purchases tomeetsystemrequirements.

Whilethederatings havedecreased

earnings, andwillcontinuetodoso,th'eCompanydoesnotexpect.theamounttobematerial.

Finally,theNewYoikPowerPool(NYPP)-is intheprocessofevaluating newrulesforitysystemloadregulation.

ThecurrentStationderatings foropacityreasonswouldreducetheabilityoftheCompanytoreacttochangesinloadandprovideregulation serviceswhencalleduponbytheNYPP,resulting inadditional costs.Depending onthenewNYPPrequirements, andwhethertheder-atingsremainineffect,therevisedrulescouldresultintheCompanyhavingtopurchaseadditional regu-lationserviceswhichmaycostbetween$500,000and$2,500,000.annually.

GAsCosrREcovERP" GasRestructuring Proceeding, InthePSC'sProceeding onRestructuring theEmergingCompetitive NaturalGasMarket,thePSCestablished athree-year period(endingMarch28,1999)duringwhichthe'State'slocaldistribution companies (LDCs)wouldbepermitted torequirecustomers converting fromsales.servicetotakeassociated pipelinecapacityforwhichtheLDCshadoriginally contracted.'Prior tothebeginning ofthe'third year,theLDCswouldberequiredtodemonstrate theireffortstodisposeof"excess"capacity.

OnSeptember 4,1997,thePSCissuedanOrderclarifying theMarch28,1996Order.TheSeptembei 4Orderrequires, amongotherthings,thattheLDCs(a)assessstrandable costs;P)evaluateandpursueoptionstoaddressstrandable costs,including exploration ofalternative usesandquantifica-tionofmarketvaluesforthecapacitythatcouldbestrandedbyconverting customers (c)actively,encour-agecompetition including collaboration withmarketers toexpandthenumberofcustomers takingtransportation servicefromtheLDCandtoprovidecustomereducation; and(d)totheextentLDCscannotshedalltheircapacityascontracts expire,tocontinuetoseeklowercostoptionsandmoreflexibil-ityandshortercontractterms,wherecost-effective.

LDCsarerequiredtofileplansaddressing theforego-ingissuesbyApril1,1998rPursuanttothePSC'sorders,thecostofcapacitydefinedas"excess"maynotbefullyrecoverable inrates.Accordingly, theCompany's~bility toavoidabsorbing thiscostwilldependonthesuccessofremarketing andportfolio structuring efforts'and, ifsuch'efforts donot~result inelimi-natingall"excess"capacity, onasatisfactory explanation astowhyallsuchca'pacity couldnotbeelimi-nated.TheCompanyisengagedinnegotiations withtheStaffofthePSCandotherpartiestoaddiessP58

-theseandotherissuesrelatedtothefutureprovision ofgasservice.Atthistime,noassessment ofthe.potential impactoftheserequirements ontheCompanycanbemade.OnSeptember 4,1997,thePSCalsoissuedforcommentaStaffpositionpaperwhichproposesthat,LDCsexittheirmerchantfunction, i.e.,ceasetosupplythenaturalgascommodity=to theirexistingcus-tomers,withinfiveyearsandthattheyeliminate orrestructure transportation andstoragecapacitycon-tractsextending.

beyondfiveyearssoastoeliminate obligations beyondthatpoint,exceptwherecapacityisrequiredtofulfilloperational requirements ortheLDC'sobligations asthe"supplier oflastresort"tocustomers havingnocompetitive alternative.

IfadoptedbythePSC,theStaffproposalcouldrequiretheCompanytoremarketmorecapacityandtodosomorerapidlythancurrently contemplated.

Thecommentperiodconcluded onDecember20,1997,andnoprediction can6emadeastowhethertheStaffproposalwillbeadoptedor;ifso,theextentofitspotential impa'ctontheCompany.,

1995GasSettlement.

TheCompanyhasenteredintoseveralagreements tohelpmanageitspipelinecapacitycostsandhassuccessfully metSettlement targetsfor'capacity remarketing forthetwelvemonthsendingOctober31,1997,therebyayoidin'g negativefinancial impactsforthatperiod.The,Company,believesthatitwillalsobesuccessful inmeetingtheSettlement targetsintheremaining yearof'the'ettlement period,althoughnoassurance maybegiven.TheFERCapprovedachangeinratedesignfortheGreatLakesGasTransmission LimitedPartnership (GreatLakes)onwhichtheCompanyholdstransportation capacity.

Thischangeresultedinaretroactive-.

surcharge byGreatLakestotheCompanyintheamountofapproximately

$8million,'including interyt.'Underthetermsofthe1995GasSettlement, theCompanymayrecoverapproximately one-halfofthesurcharge inrateschargedtocustomers; buttheremainder maynotbepassedthroughandhasbeenpre-~viouslyreserved.

TheCompany,which,paidtlieGreatLakesassessment underprotest,vigorously con-testeditbefore.theFERC,butonApril25,1996,theFERCuphelrlthis,determination thatthechargetotheCompanyisproper.TheCompany's petitiontotheU.S.CourtofAppealswasdeniedonJanuary16;1998.TheCompanyisevaluating itsnextsteps.LEASEAGREEMENIS

'TheCompanyleasesfiveproperties foradministrative officesandoperating activities.

Thetotalleaseexpensechargedtooperations was$4.2million,$3.9millionand$2.4millionin1997,3996and1995respectively.

Fortheyears1998,199$,2000,2001and2002theestimated leaseexpensechargedtoopera-tionswillbe$4.1million,$2.4million,$2.4million,$2.4millionand$2.4,million, respectively; Commitments undercapitalleaseswerenot.significant tothe'accompanying financial statements.

LITIGATION SpentNuclearFuelLitigation.

TheNuclearWasteAct(Act)obligates theDOEtoacceptfordisposalspentnuclear'fuel (SNF),starting in1998.Sincethemid-1980s

'theCompanyandother,nuclearplant'ownersandoperators havepaidsubstantial feestotheDOEtofunditsobligations undertheNuclearWasteAct.DOEhasindicated thatitwillnotbeinapositiontoacceptSNFin1998.In1994,NorthernStatesPowerCompanyandotherownersandoperators ofnuclearpowerplantsfiledsuitagainstDOEand-theU.S.intheU.S.Court'ofAppealsfortheDistrictofColumbiaCircuitseekingadeclaration thatDOE'scourseofaction.was inviolatiorr of.itsobligations undertheAct,andreq'uesting otherrelief.InaJuly1996decision, thecourtupheldtheutilities'osition thatDOEisobligated toacceptanddisposeoftheutilities'NF beginning notlaterthanJanuary31,1998.DOEhadcontended ineffectthatitcoulddeferthedisposaluntil'the availability ofasuitableSNFrepository.

ThecourtrejectedthisDOEreadingoftheNuclearWasteAct,butstoppedshortofproviding theutilities aremedy'since DOEhasnotyet'defaulted onitsobligations.

ByletterdatedDecember17,1996,DOEinvitedthepartiesto.theproceeding-to providewrittencommentsonhowDOE'santicipated inability tomeetitsJanuary31,1998obligation tobeginaccepting SNFcould"bestbeaccommodated".

TheCompanyandanumberofotherpartiesresponded tothatinvitation.

ByJointPetitionforReview,datedJanuary31,1997,theCompanyandanumberofothernuclearutilities petitioned theUnitedStatesCourtofAppealsfortheDistrictof,Columbia Circuitforadeclaration that,thePetitioners wererelievedoftheobligation topayfeesinto.the.NuclearWasteFund,andauthorized toplacethosefeesintoescrowwhenanduntilDOEcommences dis-posingofSNF.ThePetitionfurtherrequested thatDOEbeorderedtodevelopaprogramthatwouldnenableittobeginacceptance ofSNFbyJanuary31,1998.ByOrderdatedNovember14,1997,theD.C.-CircuitheldthatDOEcouldnotexercisedelayinaccepting fuelongroundsthatitlackedanSNEreposi-to'ry,andthattheutilities hada",clearright'torelief".RatherthangrantfundingreliefandordertheDOEtomovefuel,however,theC;ourtreferredtheutilities totheremediessetforthintheircontracts withtheDOE.TheCompanyispursuingsuchremedies.

IN(Ãoto10continued onpaso60)59 (mntinurd frompages9)Rocheater GatandBectrlcCorporatton BOaeDepartment, ofJusticeLawsuit.,On June24,.1997, theAntitrust DivisionoftheUnitedStatesDepartment ofJusticefiledacivilcomplaint against.theCompanyintheUnitedStatesDistrictCourtfortheWesternDistrictofNewYork.Thecomplaint followsaCivilInvestigative Demandinvestigation.

That~investigation included,a broadlookattheCompany's activities intheelectricpowerindustryincluding

~initially, theCompany's payerpurchaseagreement withanindependent powerproducer.

Theinvestiga-tionthenfocusedprimarily upontheflexibleratelongtermcontracts enteredbetweentheCompanyandanumber'of itslargecustomers underatariffapprovedbythePSC.ThetariffandthePSCpoliciesitimplemented recognized thatiflargecustomers took.theirelectrical loadoffthesystem,theratesfor.remaining customers wouldhavetoincreasetocoverthefixed'costs ofoperation.

TheDivisioninitscomplaint haschallenged oiilycertainprovisions ofoneflexibleratecontract,.the contractwiththeUniversity ofRochester.

TheComplaint allegesthatthoseprovisions.in thatcontract~violateSection1oftheShermanActbyrestricting thecustomer's righttocompetewiththeCompanyinthesaleofelectricity andseeksaninjunction prohibiting theCompanyfromenforcing thatcontractandfromenteringotheragreem'ents thatlimitcompetition inthesaleofelectricity toother,customers, TheCompanyiielieves thattheinvestigation andtheComplaint reflectthedesirebytheAntitrust Divisiontobecomeinvolvedinthederegulation ofelectricutilities, butthattheproperwaytodo.thatisintheproceedings beforethePSCintheCompetitive Opportunities Case.OnSeptember 3,1997,theCompanyfileditsanswerwhichdeniedthematerialallegations oftheComplaint.

Atthesametime,the,CompanyfiledaMotionforSummaryJudgmentaskingtheCourtto.dismisstheactionwithprejudice onthegroundsthattheCompany's actionsareimmunefromantitrust

,liability undertheStateactionexemption, thatthe'Company's actionsdidnotinjurecompetition andthattheDepartment ofJustice's claimsarespeculative.

OnNovember3,1997,thhDepartment ofJusticefileditsopposition totheCompany's MotionforSummaryJudgmentandfileditsownMotionforSummaryJudgement.

TheCompany's'response totheJusticeDepartment motionwasfiledonDecember5,1997.*TheseMotionsforSuminaryJudgmentwerearguedonDecember19,1997.InCourt,thepartiesagreedtoaresolution ofthedispute,suggested bytheJudgewhich,inthecompany's opinion,wouldnothaveanymaterialeffect,onitscontractwiththeUniversity.

TheAntitrust Divisionhowever,hasexpressed itsunwillingness toagreetoaConsentDecreebasedontheagreement reachedincourtandthematterisstillpe'nding.

Litigation withCo-Generator.

UnderfederalandNewYorkStatelawsandregulations, theCompanyisrequiredtopurchasetheelectrical outputofunregulated cogeneration facilities whichmeetcertairicriteria(Qualifying Facilities).

Underthesestatutes,'

utilityisrequiredtopayforelectricity fromQualifying Facilities ataratethatequalsthecosttotheutilityofpoweritwouldotherwise produceitselforpurchasefromothersources(AvoidedCost).Withtheexception ofonecontractwhichthe~-Companywascompelled byregulators toenterintowithKamine/Besicorp AlleganyLJ.(Kamine)for:,.approximately 55megawatts ofcapacity, theCompanyhasnolong-term obligations topurchaseenergyfromQualifying Facilities,-

UiiderStatelawandregulatory requirements ineffectatthetim'ethecontr'act withKaminewasnegoti-ated,theCompanywasrequiredtoagieetopayKamineapriceforpowerthatissubstantially greaterthanthe-Company's owncostofproduction andotherpurchases.

SincethattimetheState"six-centn lawman-datingaminimumpricehigherthantheCompany's owncostshasbeenrepealedandPSCestimatesef futurecbstsonwhichthecontractwasbasedhavedeclineddramatically.

InSeptember 1994,theCompanycommenced alawsuitinNewYorkStateS'upremeCourt,Monroe.County,seekingtovoidor,alternatively, toreformaPowerPurchaseAgreement withKamineforthepuichaseoftheelectrical outputofacogeneration facilityintheTownofHume,AlleganyCounty,NewYorl,foratermof25years.Thecontractwasnegotiated pursuant'to thespecificpricing,requirement ofaStatestatutethat.waslaterrepealed, as>veilasestimates ofAvoidedCostsbythePSCthatsubsequently weredrastically reduced.Asaresult,thecontractrequirestheCompanytopaypricesforKamine'selectri--caloutputtliatdramatically exceedcurrentAvoidedCostsandcurrentprojections ofAvoidedCosts.The.Company's lawsuitseekstoavoidpaymentstoKaminethatexceedactualandcurrently projected AvoidedCosts.KamineansweredtheCompany's complaint, seekingtoforcetheCompanytotakeandpayforpoweratthehigherratescalledforinthecontractandclaimingdamagesin.anunspecified amountallegedtohave'been causedbytheCompany's conduct.TheCompanyreceivedtestgeneiation fromthe~Kaminefacilityduringthelastquarterof1994.Kaminecontendsthatthefacilitywentintocommercial

~'peration inDecember1994andthattheCompanyisobligated topay,thefullcontractrateforit.The'Companydisputesthiscontention andrefusestopaythefullcontractrate:Duiing 1995Kaminefileda'otionforSummaryJudgmentdismissing theCompany's complaint anddiiecting ittoperformthe~'e\

PowerPurchaseAgreement.

ThecourtdeniedthatmotionandKamineappealed.

AfterargumentofthatappealKaminefiledforprotection undertheBankruptcy lawsand.senttotheAppellate Divisionanoticethatallfurtherproceedings werestayed.Inaddition, Kaminehasfiledarelatedcomplaint intheUnitedStatesDistrictCourtfortheWesternDistrictofNewYorkallegingthattheconductwhichisthesubjectoftheStatecourtactionviolatesthefederalantitrust laws.Thecomplaint seeksdamagesintheamountof$420,000,000, whentrebeled, aswellaspreliminary andpermanent injunctions.

Subsequently, Kaminefiledamotionforapreliminhry injunction inthe.federal.actiontognjointheCompanyfromrefusihgtoacceptandpurchaseelectricpowerfromKamineandenjoining theCompanyfromterminating duringthependencyofthislawsuititsperformance underthecontract.

InNovember1995,theCourtissuedadecisiondenyingKamine'smotionforapreliminary injunction, finding,amongotherthings,thatKamirlehadnotestablished thenecessary likelihood ofsuccessonthemeritsofitsaction.Kaminefiledanoticebfappealfromthat.decisionbuthassubsequently announced thatitiswithdrawing thatappeal.During1995thePSCinvitedtheCompanytofileapytitionrequesting, amongotherthings,thatthe.Commission commenceaninvestigation todeteimine whetheratthetimeofclaimedcommercial opera-tiontheHume.plant wasacogeneration facilityunde?NewYorklawasrequiredbythePowerPurchaseAgreement.

TheCorn/anyfiledsuchapetitionandKaminefiledpapersinopposition.

IDuring1995KaminefiledapetitionbeforetheFERCtowaivecertainrequirements forfederalQualified Facilitystatusfor1994.TheCompanyandthePSCfiledinopposition totherequest.Subsequently FERCissuedanordergrantingthewaiverrequestandtheCompany's motionforrehearing wasdenied.TheCompanyfiledapetitionforreviewwiththeU.S.CourtofAppealsfortheDistrictofColumbiaCircuitbutthatcourtdeniedtherequestforreview.InNovember1995KaminefiledinNewark,NewJerseyforprotection undertheBankruptcy lawsandfiledacomplaint inanadve'rsary proceeding seeking,amongotherthings,specificperformance oftheAgreembnt.

KaminefiledamotiontocompeltheCompanytopay.whatwouldbedueunderKamine'sviewofthet0rmsoftheAgreement duringthependencyoftheAdversary Proceeding.

Afterhearing,'the Bankruptcy Courtdeniedthatmotion.TheCourtalsodeniedvariousmotionsmadebytheCompanytochangethevenueoftheproceedings toNewYorkStateandtolifttheautomatic stayofthependingNew'orkStateaction.OnappealtheBankruptcy CourtwasreversedandthecasesentbacktotheBankruptcy

.'ourttodecidewherethecontractissuesintheAdversary Proceeding shouldbeadjudicated.

AsofJune16,1997,theCompanyfiledaSecbndAmendedComplaint intheStateCourtactionasserting additional

'claimsbasedonsubsequent occurrences.

OnMarch19,1997,theBankruptcy Courtstayed.thi.

'Adversary Proceeding pendingresolution ofthecontractissuesintheNewYorkStatecourttrial.Kaminehasindicated itwillnotappealthisaction.OnJune26,1997,thedefendants filedaJointNoticeofRemovalofAction,removingtheactiontotheUnitedStatesDistrictCourtfortheWesternDistrictofNewYork.Therehavebeennofurtherproceedings todate.Numerousotherprocedural motionshavebeenpresented intheBankruptcy Court;someofwhichmayno&becon'sidered bytheNewYorkStatecourt.Whiletheseproceedings arepending,theCompany'ouldpayapproximately twocentsperkilowatthourwhentheplantoperates:

Itisnotoperating atthepresenttime.GeneralElectricCapitalCorporation Lawsuit.OnJuly3,1997,GeneralElectricCapitalCorporation (GECC)filedacomplaint againsttheCompanyintheUnitedStatesDistrictCourtfortheWesternDistrictofNewYorkinconnection withtheKamineprojectinHume,NewYork,forwhichGECCprovidedfinancing.

Thecomplaint assertsthattheCompanyviolatedtheantitrust lawsinitsd'ealings withKamine'andseeksinjunctive relief,trebledamagesandallegedactualdamagesofnotlessthan$100,000,000.

Theclaimsmadeinthecomplaint filedaresubstantially similartotheclaimsmadebyKamineinthesame'ourtunderKamine'sversionofthetermsofthePowerPurchase'Agreeinent fortheHumeproject..

ThecourtdeniedKamine'smotionforapreliminary injunction ongroundswhichincludedKamine'sfailuretoestablish alikelihood ofsuccess,onthemeritsofitsclaims.KaminehadfiledanoticeofappealfromadecisiondenyingKamine'smotionforapreliminary injunction.

Kaminesubsequently withdrewtheappeal.TheCompanybelievesthecomplaint byGECCisalsowithoutmeritandintendstodefendtheactidn.

Epo(rofAXBr(agpBlerir

~'LY7Theman'agement ofRochester GasandElectricCorporation haspreparedandisresponsible fortheconsolidated financial statements andrelatedfinancial information contained inthisAnnualReport.Managemen't usesitsbestjudgements andestimates toerisurethatthefinancial statements reflectfairlythefinancial

position, resultsofoperations andcashflowsoftheCompanyinaccor-'ancewithgenerally acceptedaccounting principles.

Management maintains asystemofinternalaccouriting controlsoverthepreparation of'itsfinancial statements designedtoprovidereasonable assurance astotheintegrity andreliability ofthefinancial'records.

Thissystemofinternalcontrolincludesdocumented, policiesandguidelines andperiodicevalua-tionandtestingbythe,inteinalauditdepartmerit.

TheCompany's financial statements.

havebeen,examinedbyI'riceWaterhouse LLP,independent accountants, inaccordance withgenerally.

acceptedauditingstandards.

Theirexamination includesareviewoftheCompany's systemofinternalaccounting controlandsuchtestsandotherprocedures necessary toexpressanopinionastowhethertheCompany's financial statements arepresented

.fairlyinallmaterialrespectsinconformity withgenerally acceptedaccounting principles Thereportof-PriceWaterhouse LLPispresented'on page36.TheAuditCommittee oftheBoardofDirectors is',responsible forreviewing andmonitoring theCompany's financial reporting andaccounting practices.

TheAuditCommitfee meets,regularly withmanagement andtheindependent accountants toreviewauditing, internalcontrolandfinancial,

"'reporting matters.,The independent accountants havedirectaccesstotheAuditCommittee, withoutmanagement present,todiscusstheresultsoftheirexaminations andtheiropinionsontheadequacyofinternalaccounting controlsandthequalityoffinancial reporting..

Management believesthat,atDecember31,1997,theCompanymaintained aneffective systemofinternalcontroloverthepreparation ofitspublished financial statements.

rChairmanoftheBoard,-President andSeniorVicePresident, Corporate ServicesandChiefExecutive OfficerChiefFinancial OfficerrrJanuary23,1998rnterimFinanci~/Dita

-.IntheopinionoftheCompa'ny, thefollowing quarterly information includesalladjustments, consisting

,ofnormalrecurring adjustments, necessary forafairstatement oftheresultsofoperations forsuchperiods.,Thevariationk inoperations reportedonaquarterly basisarearesultofthesea'sonal natureoftheCompany's businessandtheavailability ofsurplus'electricity.

Thesumo$thequarterly earningspersharemaynotequalthefiscalyear'arnings pershareduetorounding.

t(Thousands ofDollars)aOperating

.Operating NetEarningsonQuarterEnded-Revenues IncoineIncomeCommonStockEarningsperCommonShare.(indollars)Basic,DilutedRorhtrtrr GarartdBatt(toCorporattort December31,1997September 30,1997June30,1997

'.March31,1997December31,1996'September 30,1996June30,1996March31,1996December31,1995t~September 30,1995June30,1995March31,1995.-$271,039221,335229,419314,845$274,431234,843235,577309,195'270,518 245,145219,546281,119'Reclassified forcomparative purposes.

'Includes recogriition of$28.7millionnet-of.tax II$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,&gassettlement adjustment.

$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

,.Earnings pershare-basic-.diluted Dividends paidershare$2.30$2.32$1.69$2.30$2.32$1.69$1.80$1.80$1.80Numbeiofshares(000's)Weightedaverage-basic38I853-diluted38,909ActualnumberatDecember3138,862Numberofshareholders atDecember31.31,33738,76238,76238,11338,11338,85138,453.,33,67535,356199719961995Shares/Shareholders

'9971996'995TAxSTATUsQFCAsHDlvlDENDs.

Cashdividends paidin1997,1996and1995were100percenttaxableforfederalincometaxpurposes.

DIVIDENDPOLICY.TheCompanyhaspaidcashdividends quarterly onitsCommonStockwithoutinterruption sinceitbecamepubliclyheldin1949.Theleveloffuturecashdividendpaymentswillbedependent upontheCompany's futureearnings, itsfinancial requirements andotherfactors.TheCompany's Certificate ofIncorporation providesforthepaymentofdividends-on CommonStockoutofthesurplusnetprofits(retained earnings) oftheCompany.Quarterly dividends onCommonStockaregenerally paidonthetwenty-fifth dayofJanuary,April,JulyandOctober.InJanuary1998,theCompanypaidacashdividendof$.45pershareonitsCommonStock.TheJanuary1998dividendpaymentisequivalent to$1.80onanannualbasis.CQMMQNSTocKTRADING.Sharesofthe.Company's CommonStockaretradedontheNewYorkStockExchangeunderthesymbol"RGS."19971996'995CommonStock-PriceRangeHigh1stquarter2ndquarter"3rdquarter4thquarterLow,1stquarter2ndquarter3rdquarter'thquarterAtDecerrrber 3120Ya21Yic24'c/sc34i/a18Ya1820i/a23Yi3423i!i21Na21s/s19i/a21i/i19Ns1817Ns19N2322Na24N24N20Ns20Ns2022s/s22i/a63 electea'Financial

'Data(Thousands ofDollars)YearEndedDecember311997-1996'995'994'993'992 Consolidated SummaryofOperations Operating RevenuesElectricGasElectricsalestootherutilities TotalOperating Revenues'perating Experrses FuelExpensesFuelforelectricgeneration Purchased electricity Gaspurchased forresaleTotalFuelExpensesOperating RevenuesLessFuelExpensesOtherOperating ExpensesOperations excluding fuelexpensesMaintenance Depreciation andamortization Taxes-local,stateandotherFederalincometax-current-deferredTotalOtherOperating ExpensesOperating IncoureOther(Income)aridDeductions Allowance for,otherfundsusedduringconstruction FederalincometaxRegulatory disallowances Pensionplancurtailment Other,netTotalOther(income)andDeductions InterestChargesLongtermdebtShorttermdebtOther,netAllowance forborrowedfundsusedduringconstruction TotalInterestCharges"NetIncomeDividends onPreferred Stockat.RequiredRatesEarningsAlicabletoCoumronStockEarningsperCouunonShare-BasicEar7ungserCoumronShare-DiluteriCashDividends DeclarederComuronShare'Reclassified forcomparative purposes.

$679,473336,3091,015,782 20,8561,036,638 47,66528,347196,579272,591764,047268,47446,635,116,522121,79669,812(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$690,883346,2791,037,162 16,8851,054,047 40,93846,484202,297289,719764,328266,09447,063105,614126,86865,7573,744615,140149,188(684)(3,450)(712)(4,846)48,618219,307(1,423)56,52397,5117,465$90,046$2.32$2.32$1.80$696,582293,863990,44525,8831,016,328 44719954,167167,762266,119750,209259,20749,22691,593133,89565,368847600,136150,073(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$1.69R0ehester GasandElectric Condensed Consolidated BalanceSheet(Thousands ofDollars)AtDecember31'9971996TS95*'.1994"1993*1992'ssets UtilityPlantLess:A'ccumulated depreciation and'mortization

\Construction workinprogressNetutilityplantCurrentAssets,Investment inEnrpireDeferredDebitsTotalAssets$3,234,077 1,714,368 1/519,709 74,0181,593,727 242,371,.432,191$2,268,289 1,569,078 1,590,681 69,7111,518,878 1,549,225 121,7251,660,392 1,670,950 250,461292,59638,879450,623..453,72652,361,476

$2,456,151

,$3,159,759

$3,068,103

$2,981,151 1,423,098

-1,558,053 128,8601,686,913 236,51938,560484,962$2,446,954

$2,890,799 1,335,083

$2,798,581 1,253,117 1,545,464 83,834',555,716 112,75011668,466 248,589~38,560488527J,629,298 "209,6219,846181,434$2,444,142

$2,030,199 Capitalization anftliatfitities Capitalization LongtermdebtPreferred stockredeemable atoptionofCompany,Preferred stoclcsubjecttomandatory redemption Commonshareholdersquity:

CommonstockRetainedearningsTotalcommonshareholders'quity TotalCapitalization LongTennLiabilities (Departnrent ofEnergy)CurrentLiabilities, DeferredCreditsanrlOtherLiabilities TotalCapitalization andLiabilities'587,334 "47,00035,000699,031109,313$646,95467,000i45,000696,01990,54096,726189,317504,56893,752158,217563,994$2,268,289

$2,361,476 808,344786,5591,477,678 1,545,513

,$716,23267,00055,000687/51870,330757,848',596,080 90,8871824338586,846$2,456,151

$735,178$.747,631,67,00055,00067,00042,000$6S8,88067,00054,000670,56974,566652,17275,126591,53266,968745,135727,298658,5001,602,313 1,583,929.

',438,380 87,82689,804.94/602181,327234,530267,276575,488'35,879 229,941.$2;446,954

$2,444,'142

-$2,030,199

'Redassihed forcomparative purposes.

Financial Oata-AtDecember3119971996'995199419931992Capitalization Ratios(a)

(percent),

ongterindebtPreferred stockCommonshareholders'quity

-TotalBookValueperCofnnlonShare-YearEndRateofRetunronAverageCornnronEquity(b)(percent)

EmbeddedCost.ofSeniorCapital(percent)

LongtermdebtPreferred stockEffective FederalInconreTaxRate,(percent)

Depreciation Rate(percent)

-Electric-GasInterestCoverages Beforefederalincometaxes(incld.AFUDC)(excld.AFUDC)Afterfedtsralincometaxes(incld.AFUDC)(excld.AFUDC)InterestCoverages Exclutling'on-Recurring Items(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's longteanliability totheDepartment ofEnergy(DOE)lornudearwastedisposal.

ExdudesDOElongtermliability foruraniumenrichment decommissioning andamountsdueorredeemable withinone>m.(b)Thereturnonaveragecommonequityfor1995excluding eflectsolthe1995GasSettlement lsI2.IN6.Therateofreturnonaeragemmmonequityexcluding effectsofretirement enhancement programsremgrrized bytheCompanyIn1994and1993is11.9'ndI1.2N6,respectively.

~(c)Remgnitlon bytheCorppanyIn1992ofdisallowed icestormmstsasapprondbysshePSChasbeenexduded lrom1992coverages.

Comragesfo?1994and1993exdudetheeffectsolretirement enhancenient programsrecognized bytheCompanyduringeach)varandcertaingaspurchaseundercharges wittenoffin1994and1993.Coverages In199Sexcludetheeconomiceffectofthe199SGasSettlement

($44.2million,pretax).1865

~/~/eerr'lc'eppr'rmeEl 8;,Sr2rlgrlcpYearEndedDecember3119971996"1g9591994;i1993'1992/Rochrstrr asan(tHcctricrporatton ElectricRevenue(000's)-Residential Commercial Industrial-Municipal andotherElectricrevenuefromourcustomers Otherelectricutilities TotalelectricrevenueElectricExpense(000's)Fuelusedinelectricgeneration Purchased electricity

,Otheroperation Maintenance Depreciation andamortization Taxes-.local, stateandotherTotalelectricexpenseOperating InconlebeforeFederalgncoine TaxFederalincometaxOperating IncomefronlElectricOperations (000's)ElectricOperating Ratio%electricSales-KWH(000's)Residential Commercial Industrial Municipal andotherTotalcustomersalesOtherelectricutilities Totalelectricsales'lectricCustomers atDecember31Residential Commercial Industrial Municipal andotherTotalelectriccustomers

/Electricity Generated and.Purchased

-KWH(000's),FossilNuclearHydroPumpedstorageLessenergyforpumpingOtherTotalgenerated

-netPurchased Totalelectricenergy'ystemNetCapability-KWatDecelnber 31FossilNuclear-HydroOther~Purchased Totalsystemnetcapability NetPeakLoad-KWAnnualLoadFactor-Net%*Reclassified forcomparative purposes.

$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

',118,991 2,010,613 537,0516,805,719 1,218,794 47.1"2,132,902 2,061,625 2,010,963 520,8856,726,375 994,8428,024,513 7,721,217

-308,90930,940,1,3002,824'07,181 30,6201,3252,688343,973341,8411,664,914 5,119,544 227I867238(900(358,350) 8906,893,765 1,301,636 1,512,513 4,094,272 248,990246,726(370,097) 9365,733,340 2,437,433 8,195,401 8,170,773 526,000638,00047,00028,000375,000529,000638,00047,00028,000375,0001,614,000 1,617,000 1/4217000 4113057000 56.1'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,)0043,8455139,8605127,1635120,45547.3I2,144,718 2,064,813 1,964I975 531,3116,705,817 1,484,196 47.72,117,168',028,611 1,860I833 513,6756,520,287 1,021,733 49.22,123,277, 1,986,100 1,892,700 504,9876,507,064 4743,5888,190,013 7,542,020 7,250,652 306,60130,4261,3472,711304,494302,21929,98429,6351,361.1,3822,670-2,638=,341,085338,509335,8741,631,933 4,645,646 171,886237,904(361,144) 1,5656,327,790 2,343,484 1,478,120 47527;178 218,129247,5501(371,383) 1,2456,100,839 1,998,882 1,520,936 4,495,457 199,239233,477(355,725) 2,5596,095,943 1,646,244 8,671,274 8,099,721 7,742,187 529,000640,00047,00028,000375,000532,000617,00047,00029,000375,000541,000620,00047,000'29,000~347,000"1,619,000 1,600,000 1,584,(O) 1,425,000.

1,374,000 1,'333,000 57.658.8,59.1$222,21187,262141,50757;288608,26725,541~633,808r48,37629,706183;118w53,71473,21394,841482;968150,84038,046$112,79449.72,084,705 1938(1731,929,720 503,3886,455,91,062,7.7,518,724 300,34429,3391,3862,605333;6742;197,757 4,191,035 278,318226,391"(344,245 8116,550,067 1,389,875 7,939,942

~541,000617,00047,00029,000348,0001,582,1,252)62.~(BB 4asDepart'ment Statistics YearEndedDecember31.19971996'995'.

1994'993'992 GasRevenue(000's)Residential

~.Residential spaceheating Commercial Industrial Municipal andotherTotalgasrevenueIGasExpense(000's)Gaspurchased forresaleOtheroperation Maintenance Depreciation Taxes-lo'cal,stateandother~Totalgasexpense,Operating InconiebeforeFederalIncomeTax,FederalincometaxOperating IncomefromGasOperations (000's)GasOperating Ratio%,GasSales-Therins(000's)'Residential Residential spaceheating Commercial.

Industrial Municipal Tot'algassalesTransportation ofcustomer-owned gasTotalgassoldandtransported GasCustoniers atDe'cember 31'esidential Residential spaceheating

-Commercial Industrial Municipal

-Transportation Totalgascustomers Gas-Z7iernis(000's)Purchaseri forresaleGasfromstorage-.Other"Totalgasavailable CostofgasperthermTotalDailyCapacity-ThernrsatDecember31'",Maximumdailythroughput

-ThermsDegreeDays(Calendar Month)'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=1,410380,15751.70e4,380,000 47114,290 6,9212.8$'6,010246,94552,0736,17535,076346,279$4,081230,93451,1176,6861,045293,863202,29761,3485,63412,99931,858314,136167,76259,6845,194'2,781 31,514276,93532,143-7,60016,928',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~.279,010277,203279,353122,8431,082237,728.152,8521,800403,278392,38052.30e45.80e4,480,000 5,230,000.

4,022,600' 3,980,000 6,9986,5353.9'3.0)$5,935215,97449,1157,088,47,949326,061194,39049,3127,77412,25031859295,58530,4768,403$22,07377.16,535283,03972,410-11,'42010,230,383,634136,372520,00617,836235,31318,742'05 988'58274,342262,267134,8022,959'00,028 50.00eS,625,000 4,735,690 6,699'0.6)

$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',850 7,044443,768,470 6,9813.45,625,000 4,485,000

~4'Reclassified forcomparative purposes.

"Methodfordetermining dailycapacity, basionsystemscanacceptwithoutadehcieetworkanaiysisedoncurrentnncy.s,reilectsthemaximumdemandwhichthetransmis-874 Wnvesrorrnyormarton I'4BusinessandFinancial information

'.RGREbusinessandfinancial

.information isavailable'around the,clockbyphoneandotitheInternet.

RGREbyPhoneShareholders canaccessRGRE-fromanywhereintheUnitedStatesorCanada,bycallingourautomated investorcommuni-cationssystemat(800).724-8833.

"Youwillbegreetedwithabriefmessage,thengivenamenuofoptions.Amongotherthings,youcanchoosetohearRGRE'squarterly eainingsannouncement orrequestacopy,including financial statements, byfaxormail.RGREontheIntentet>YDLIcanvisitRGREonlineathttp://wwwige.corn.

Ourwebsitefeaturesthelatestnewsandfinancial information including.

quarterlydivi'dend andearningsannouncements, financial statements, consumerandproductinformation.-

RG8rEfinancial resultswill,typically bereleasedjustpriortothedividendpaymentdateeach,quarter.

Secttrlty AnalystContactSecurityanalystsandothersreque'sting information aboutRGREshouldcontactThomasE..Newberry, DirectorofInvestorRelations at(716)724-8091.

rRG&Ewishestothankallofthosecontributors "whoandinformative/

givingoftheirtime~,ond expertise, providing theirphotosforindusfon.

Corporate AddressRochester Gasand.ElectricCorporation 89EastAvenue--Rochester, NewYork14649(716)546-2700-Shareholder ServicesShareholders withquestions aboutdividendpayments, addresschanges,missingcertificates, ownership changesandother'ccountinformation should'contactourstocktransferagent:StockTransferAgentBankBoston, N.A.c(oBostonEquiServe P.O.Box8040Boston,MA02266-8040 (800)736-3001.Tnlecotsttnttnicatton DevtcefortheDeaf(TDD)(800)952-9245Dividends, Dlvl<lend PayntentDatesRGRE'sBoardofDirectors meets'quarterly'to consider'the paymentofdividends.

Dividends on'CommonStockarenormallypaidonoraboutthe,25thofJanuary,April,JulyandOctober.Dividends onthePreferred Stocksarepayable,asdeclared, onoraboutthe1stofMarch,June,September andDecember.

DlvldendDirectDepositShareholders canelecttohavetheirquarterly cashdividends electronically deposited intotheirpersonal.

bankaccounts.

Depositsaremadeonthe'datethedivide'nd ispayable.Ifyouwouldliketo~takeadvantage ofthisservice,cantactourstockt'ransfer agent.wentovtoftheirwaytobesoaccommodoting lendingtheirartifacts forphotography, dndrDlvtdendRelnvestntent'GgtE offersadividendreinvestment planas,aservicetoCommonStockshareholders whowishtopurchaseadditional shares.Inadditiontofullorpartialreinvestment ofdividends, theplangivesshareholders theopportunity tomakedirectcashInvestments rangingfrom$50to$5,000asoftenasonceamonth.'or furtherinformation, contact~ourstocktransferagent.FirstNorlgageBondlrusteeBankersTrustCompanyc/oBTServicesTennessee Inc.~Securities PaymentUnit',P.O.Box291207-Nashville, TN-37229-1207 (800)735-7777-Annualtjfeettng RGRE's1998annualmeetingofshareholders willbeheldattheRochester Riverside Convention CenteronWednesday, April15,1998at11am.,Stocktjstings RGRE'sCommonStoclcislisted,ontheNewYorkStockExchangeandisidentified by.thestocksymbolRGS.ThePreferred Stockissuesaretradedontheover-the-countermarket..FormlgrKAnnualReportSharehoIders mayobtainacopyoftheCompany's 1997annualreportonForm10-K,asfiledwiththeSecurities andExchangeCommission, withoutcharge,bycalling(800)724-8833orwritingtoInvestorServices.

~ITheinformolarchlvists ofRG&EDickBiedenbach, GinnaKimMagnvson, GinnaRickMeier,Corporate Communicotions

-"BillMeyers,Operations DonSchlegel, Op'erotions, PaulSissonrLaborousry

&Inspection Services<

Operations BettyWeis,Marketing JimWhite,Operations SteveWright,Operations LeaZimmermon, EmpbyeeEmeritusandformerRG&EKibette-,Pn'voteCollectors ondOurFriendsIntheCommunity:

rDickBowman,Webster,NY:glassinsvbtorcollection JohnA.o'ndJeonneWenrich,Avon,NY:Kerosenelampondlightbulbcollection DanielM.Barber,DepvtyDirector, Collections; EugeneLtmberger, CuratorofHistoryChairmonondStephenFentreis,

Director, Strasenbvrgh Planetarium; theRochester Museum&ScienceCentermonHouse,international rahondFilmTheGeorgeEastMuseumofPhotogpyBavsch&LombCorporation Xerox'orpprationOuropologies tooilthosewhoheededthecoilandcontributed itemsbutwereleftoutduerspocelimitations.

yPrincipal Photogrophy:

KenRiemer'8 0270l78ctofg2ll2c8fgBoardAppointments MarkB.DrierMarkB.GrierisExecutive VicePresident forfinancial management ofthePrudential Insurance CompanyofAmerica.SusanR.HollldaySusanR.HollidayisPresident andpublisher oftheRochester BusinessJourna,aweeklybusinessnewspaper.

BoardofDirectors (asofJanuary1,1998)WilliamBalderston III'gjFormerExecutive VicePresident, TheChaseManhattan Corporation AngeloJ.Chlarella tJVicePresident, Rochester Midtown,L.L.C.AllanE.Dugan"gSeniorVicePresident, Corporate Strategic

Services, XeroxCorporation MarkB.GrlerExecutive VicePresident, Financial Management, ThePrudential Insurance CompanyofAmericaSusanR.HollldayPresident andPublisher, Rochester BusinessJournalJayT.Holmes"JAttorneyandCommercial Arbitrator SamuelT,Hubbard,Jr.t0President andChiefExecutive Officer,TheAilingandCoryCompanyRogerW.Kober'ormer ChairmanoftheBoardandChiefExecutive Officer,Rochester GasandElectricCorporation Constance M.Mitchellt/FormerProgramDirector, Industrial Management CouncilofRochester, NewYork,Inc.Cornelius J.Murphy"4SeniorVicePresident, GoodrichgtSherwoodCompanyCharlesI.PlossergDeanandJohnM.OlinDistinguished Professor ofEconomics andPublicPolicyoftheWilliamE.SimonGraduateSchoolofBusinessAdministration, University ofRochester ThomasS.Richards'hairman oftheBoard,President andChiefExecutive Officer,Rochester GasandElectricCorporation

• MemberofExecutive andFinanceCommittee tMemberofAuditCommittee IMemberofCommittee onManagement

/hfemberofCommittee onDirectors Officers(asofJanuary1,1998)ThomasS.RichardsChairmanoftheBoard,President andChiefExecutive OfficerAge54,YearsofService,6RobertE.SmithSeniorVicePresident, EnergyOperations Age60,YearsofService,38J.BurtStokesSeniorVicePresident, Corporate ServicesandChiefFinancial OfficerAge54,YearsofService,2MichaelT.TomainoSeniorVicePresident andGeneralCounselAge60,YearsofService,0'atrfdC.Heillgman VicePresident andCorporate Secretary Age57,YearsofService,34RobertC.MecredyVicePresident, NuclearOperations Age52,YearsofService,26WilliamJ.ReddyController Age50,YearsofService,30MarkKeoghTreasurer Age52,YearsofService,26JessicaS.RalnesAuditorAge40,YearsofService,2ENERGETIX, Inc.MichaelJ.Botralino President Age42,YearsofService,IJohnA.HamiltonVicePresident, Operations

'ge43,YearsofService,0'*WlllredJ.Schrouder, Jr.VicePresident, SalesAge56,YearsofService,35'ppointed SeniorVicePresident andGeneralCounsel,effective October1,1997-EmployedMay19,1997