Item 1. Business
General development of business
Energy East Corporation: Energy East is a public utility holding company organized under the laws of the state of New York in 1997. Energy East is a super-regional energy services and delivery company with operations in New York, Connecticut, Massachusetts, Maine and New Hampshire. We conduct all of our operations through our wholly-owned subsidiaries including CNE, CMP Group, CTG Resources, Berkshire Energy, RGS Energy and The Energy Network.
CNE's wholly-owned subsidiary, The Southern Connecticut Gas Company, is a regulated utility primarily engaged in the retail distribution of natural gas in Connecticut.
CMP Group's wholly-owned subsidiary, Central Maine Power Company, is a regulated utility primarily engaged in transmitting and distributing electricity generated by others to retail customers in Maine.
CTG Resources' wholly-owned subsidiary, Connecticut Natural Gas Corporation, is a regulated utility primarily engaged in the retail distribution of natural gas in Connecticut.
Berkshire Energy's wholly-owned subsidiary, The Berkshire Gas Company, is a regulated utility primarily engaged in the distribution of natural gas in western Massachusetts.
RGS Energy's wholly-owned subsidiaries are NYSEG and RG&E. NYSEG is a regulated utility primarily engaged in purchasing and delivering electricity and natural gas in the central, eastern and western parts of the state of New York. NYSEG sold a majority of its generation assets in 1999 and most of its remaining generation assets in 2001. RG&E is a regulated utility primarily engaged in generating, purchasing and delivering electricity and purchasing and delivering natural gas in an area centered around the city of Rochester, New York. RG&E sold its largest generating station, Ginna, in 2004.
The Energy Network's wholly-owned subsidiaries include Cayuga Energy and NYSEG Solutions, Inc.
We created a support services company in 2004, Utility Shared Services Corporation, to consolidate support service functions for our largest regulated utilities. This consolidation allows us to optimize the efficiency of those services.
Rochester Gas and Electric Corporation: RG&E is a public utility organized under the laws of the state of New York in 1904. RGS Energy was incorporated in 1998 in the state of New York and became the holding company for RG&E in August 1999. In June 2002, pursuant to a Plan of Merger, RGS Energy became our wholly-owned subsidiary and also became the holding company for NYSEG.
The following general developments have occurred in our businesses since January 1, 2006:
See Item 7 - MD&A - Electric Delivery Rate Overview, Electric Delivery Business Developments, Natural Gas Delivery Rate Overview and Natural Gas Delivery Business Developments.
Regulation
We operate under the authority of the NYPSC in New York, the MPUC in Maine, the DPUC in Connecticut and the DTE in Massachusetts. We are also subject to regulation by the FERC. The FERC and state utility commissions have authority to regulate and monitor, among other things, intercompany cost allocations of holding company systems such as Energy East.
Financial information about segments
See Item 8 - Note 15 to our Consolidated Financial Statements and Note 13 to RG&E's Financial Statements.
Narrative description of business
Principal business
Our principal business consists of our regulated electricity transmission and distribution operations in upstate New York and Maine and our regulated natural gas transportation, storage and distribution operations in upstate New York, Connecticut, Maine and Massachusetts. We serve approximately two million electricity customers and one million natural gas customers. Our service territories reflect diversified economies, including high-technology firms, insurance, light industry, consumer goods manufacturing, pulp and paper, ship building, colleges and universities, agriculture, fishing and recreational facilities. Our operating revenues derived from regulated electricity sales were 58% in 2006, 56% in 2005 and 58% in 2004. Operating revenues derived from regulated natural gas sales were 32% in 2006, 34% in 2005 and 33% in 2004. No customer accounts for more than 5% of either electric or natural gas revenues.
NYSEG conducts regulated electricity transmission and distribution operations and regulated natural gas transportation, storage and distribution operations in upstate New York. It also generates electricity, primarily from its several hydroelectric stations. NYSEG serves approximately 871,000 electricity and 256,000 natural gas customers in its service territory of approximately 20,000 square miles, which is located in the central, eastern and western parts of the state of New York and has a population of approximately 2.5 million. The larger cities in which NYSEG serves electricity and natural gas customers are Binghamton, Elmira, Auburn, Geneva, Ithaca and Lockport.
RG&E's principal business consists of its regulated electricity generation, transmission and distribution operations and regulated natural gas transportation and distribution operations in western New York. RG&E generates electricity from one coal-fired plant, three gas turbine plants and several smaller hydroelectric stations. RG&E serves approximately 359,000 electricity and 296,000 natural gas customers in its service territory of approximately 2,700 square miles. The service territory contains a substantial suburban
area and a large agricultural area in parts of nine counties including and surrounding the city of Rochester, New York with a population of approximately one million people. Approximately 66% of RG&E's operating revenues for 2006, 63% for 2005 and 64% for 2004 were derived from electricity sales, with the balance each year derived from natural gas sales. No customer accounts for more than 5% of either electric or natural gas revenues.
CMP conducts regulated electricity transmission and distribution operations in Maine serving approximately 596,000 customers in its service territory of approximately 11,000 square miles with a population of approximately one million people. The service territory is located in the southern and central areas of Maine and contains most of Maine's industrial and commercial centers, including the city of Portland and the Lewiston-Auburn, Augusta-Waterville, Saco-Biddeford and Bath-Brunswick areas.
SCG conducts natural gas transportation and distribution operations in Connecticut serving approximately 176,000 customers in its service territory of approximately 560 square miles with a population of approximately 800,000. SCG's service territory extends along the southern Connecticut coast from Westport to Old Saybrook and includes the urban communities of Bridgeport and New Haven.
CNG conducts natural gas transportation and distribution operations in Connecticut serving approximately 155,000 customers in its service territory of approximately 800 square miles with a population of approximately 800,000, principally in the greater Hartford-New Britain area and Greenwich.
Berkshire Gas conducts natural gas distribution operations in western Massachusetts serving approximately 36,000 customers in its service territory of approximately 520 square miles with a population of approximately 220,000. Berkshire Gas' service territory includes the cities of Pittsfield and North Adams.
See Item 7 - MD&A - Electric Delivery Rate Overview, Electric Delivery Business Developments, Natural Gas Delivery Rate Overview and Natural Gas Delivery Business Developments.
Other businesses
Our other businesses include retail energy marketing companies, a nonutility generating company, a FERC-regulated liquefied natural gas peaking plant, a natural gas delivery company, a propane air delivery company, telecommunications assets, a district heating and cooling system, and an energy consulting services company. We include their results of operations, financial condition and cash flows in our Other segment.
Energetix, Inc. and NYSEG Solutions, Inc. market electricity and natural gas services throughout the state of New York. The revenues from these two companies accounted for approximately 9% of Energy East's total revenues in 2006, 10% in 2005 and 9% in 2004.
Cayuga Energy owns electric generation facilities that sell power in the NYISO and PJM Interconnection wholesale markets at times of high demand.
CNE Energy Services Group, Inc. has an interest in two small natural gas pipelines that serve power plants in Connecticut. CNE Energy Services Group has a long-term lease for a liquefied natural gas plant that serves the peaking gas markets in the Northeast and has an equity interest in an energy technology venture partnership.
Energy East Enterprises, Inc. includes Maine Natural Gas, a small natural gas delivery company and New Hampshire Gas, Inc., a propane air delivery company.
MaineCom Services owns fiber optic lines and provides telecommunications services in Maine.
TEN Companies, Inc. owns and manages The Hartford Steam Company, a district heating and cooling network in Hartford, Connecticut, and owns an interest in the Iroquois Gas Transmission System.
The Union Water-Power Company owns and manages real estate in Maine and New Hampshire and provides energy consulting services throughout New England.
Sources and availability of raw materials
Electric
See Item 7 - MD&A - Electric Delivery Rate Overview, Electric Delivery Business Developments and Commodity Price Risk and Item 8 - Note 1 to our Consolidated Financial Statements and Note 1 to RG&E's Financial Statements.
NYSEG satisfied the majority of its power requirements for 2006 through purchases under long-term contracts with NUGs, the New York Power Authority and Constellation Nuclear, and through generation from its several hydroelectric stations. NYSEG managed fluctuations in the cost of electricity
for its remaining power requirements through the use of electricity contracts, both physical and financial.
RG&E satisfied the majority of its power requirements for 2006 through purchases under long-term contracts with the New York Power Authority, Constellation Nuclear, and Ginna Nuclear Power Plant, LLC. A small portion, less than 20%, was satisfied from its generation facilities including coal, natural gas, hydroelectric and peaking. RG&E managed fluctuations in the cost of electricity for its remaining power requirements through the use of electricity contracts, both physical and financial.
Coal - RG&E's 2007 coal requirements are expected to be approximately 400,000 tons. RG&E's coal supply portfolio contains both spot and term agreements with multiple suppliers. In 2006, 80% of RG&E's coal requirements was purchased under contract and 20% was purchased on the spot market. RG&E maintains a reserve supply of coal ranging from 30 to 60 days.
Under a Maine State Law adopted in 1997, CMP was mandated to sell its generation assets and relinquish its supply responsibility. CMP no longer owns generating assets but retains its power entitlements under long-term contracts with NUGs and a power purchase contract with
Entergy Nuclear Vermont Yankee, LLC. Since March of 2000 CMP has sold its power entitlement under auctions approved by the MPUC. By its orders issued in December 2004, December 2005 and January 2007, the MPUC approved CMP's sale of its entitlements for various periods ranging from one to three years, through February 28, 2010. CMP's retail electricity prices are set to provide recovery of the costs associated with its ongoing power entitlement obligations. CMP's revenues and purchased power costs would increase if it were required to be the standard-offer provider of electricity supply for retail customers. There would be no effect on CMP's net income in such an event, however, because CMP is ensured cost recovery through Maine state law for any standard-offer obligations.
Natural Gas
NYSEG, RG&E, CNG, SCG, Berkshire Gas and MNG satisfied their natural gas supply requirements through purchases from BP Energy Company and other natural gas suppliers, natural gas storage capacity contracts and winter peaking supplies and resources. A majority of the natural gas supply purchased was acquired under long- and short-term supply contracts and the remainder was acquired on the spot market. Firm underground natural gas storage capacity is contracted for using long-term contracts. Firm transportation capacity was acquired under long-term contracts and was utilized to transport both natural gas supply purchased and natural gas withdrawn from storage to local distribution systems. Winter peaking supplies and resources are either owned by Energy East, NYSEG and RG&E and are attached to the distribution system, or are contracted for under long-term arrangements.
See Item 7 - MD&A - Natural Gas Delivery Rate Overview, Natural Gas Delivery Business Developments and Commodity Price Risk and Item 8 - Note 1 to our Consolidated Financial Statements and Note 1 to RG&E's Financial Statements.
Franchises
Our operating utilities have valid franchises, with minor exceptions, from the municipalities in which they render service to the public.
Seasonal business
Winter peak electricity loads are primarily due to space heating usage and fewer daylight hours. Summer peak electricity loads are due to the use of air-conditioning and other cooling equipment. Our sales of natural gas are highest during the winter months primarily due to space heating usage.
Working capital
Our operating utilities have been granted, through the ratemaking process, an allowance for working capital to operate their ongoing electric and/or natural gas utility systems. Their major working capital requirements include natural gas inventories, which increase during the summer and fall for winter sales; accounts receivable, which are highest during periods of peak sales; and cash requirements to pay for utility construction and operating expenses.
Competitive conditions
In New York, the NYPSC has experimented with programs that require utilities to actively encourage their customers to migrate to ESCO suppliers. NYSEG and RG&E have filed proposed parameters for ESCO referral programs. To date the NYPSC has not acted on these filings and NYSEG and RG&E have requested postponement of the respective tariffs for six months. NYSEG and RG&E are unable to predict the ultimate effect of these programs on their ability to continue to provide commodity service to their customers.
See Item 1A
Item 1A. Risk Factors
We regularly identify, monitor and assess our exposure to risk and seek to mitigate the risks inherent in our energy services and delivery businesses. However, there are risks that are beyond our control or that cannot be limited cost-effectively or that may occur despite our risk mitigation efforts. The risk factors discussed below could have a material effect on our financial position, results of operation or cash flows.
NYSEG's Electric Rate Order issued by the NYPSC that went into effect on January 1, 2007, will significantly impact NYSEG's earnings potential.
The reduction in rates and changes in NYSEG's commodity supply program reduces NYSEG's earnings potential by $35 million to $45 million, which will have an adverse effect on NYSEG's financial condition and results of operations. In addition, we cannot predict the effect of the Electric Rate Order on our credit ratings.
The NYPSC has experimented with programs that require utilities to actively encourage their customers to migrate to ESCO suppliers.
The NYPSC has experimented with programs to require utilities to actively encourage customers to switch to ESCOs for the purchase of electricity or natural gas. NYSEG and RG&E have developed such "ESCO Referral" programs, and they have been submitted to the NYPSC for review and approval. However, to date, the NYPSC has not acted to implement these programs at RG&E or NYSEG. The NYPSC has also dismantled the Office of Retail Market Development, upon the resignation of its director, and has re-assigned staff to other offices of the NYPSC. We cannot predict the outcome of these proceedings.
Our regulated utilities are subject to substantial governmental regulation on the federal, state and local levels.
On the federal level, the FERC regulates our utilities' transmission rates, affiliate transactions, the issuance of certain short-term debt securities by our electric utilities and certain other aspects of our utilities' businesses. State commissions regulate the rates, terms and conditions of service, various business practices and transactions, financings, and transactions between the utilities and affiliates. Local regulation affects the siting of our transmission and distribution facilities and our ability to make repairs to such facilities. Our allowed rates of return, rate structures, operation and construction of facilities, rates of depreciation and amortization, recovery of costs (including exogenous costs such as storm-related expenses), are all determined by the regulatory process. The timing and adequacy of regulatory relief directly affect our results of operations and cash flows. Furthermore, compliance with regulatory requirements may result in substantial costs in our operations that may not be recovered. We cannot predict the effect that any future changes or revisions to laws and regulations affecting the utility industry may have on our financial position, results of operations or cash flows.
We are a holding company whose material assets are the stock of our subsidiaries.
Accordingly, we conduct all of our operations through those subsidiaries. Our ability to pay dividends on our common stock and to pay principal and accrued interest on our debt depends upon our receipt of dividends from our principal subsidiaries. Payments to us by those subsidiaries depend, in turn, upon their results of operations and cash flows, which are subject to the risk factors discussed in this section. The ability of our subsidiaries to make payments to us is also affected by the level of their indebtedness, and the restrictions on payments to us imposed under the terms of such indebtedness and restrictions imposed by the Federal Power Act.
Our natural gas companies may be affected by various factors that could limit their ability to obtain natural gas supplies.
Supply and demand factors including hurricanes or other natural disasters could affect our future ability to obtain natural gas supplies. Increases in demand and lower supplies can result in higher natural gas prices. While higher costs are generally passed on to customers pursuant to natural gas adjustment clauses, and therefore do not pose a direct risk to our earnings, we are unable to predict what effect increases in natural gas prices may have on our customers' energy consumption or ability to pay.
Transmission projects are subject to regulations and other factors beyond our control.
Our electric utility companies have substantial transmission capital investment programs including an RG&E transmission project of approximately $119 million that has received the required regulatory approvals and proposed transmission projects in Maine that could require significant investment. These transmission projects are expected to increase reliability, meet new load growth requirements and interconnect with new generation, including renewable generation. The regulatory approval process for transmission projects is extensive and we may not be able to obtain the approvals required for our proposed transmission projects. Various factors beyond our control, including an increase in the cost of materials or labor, may increase the cost of completing construction projects and may delay construction.
Our new transmission projects are subject to the effects of new legislation, regulation and regional interpretations of applicable laws and regulations. Any changes to these laws and regulations may increase the costs or timing of our transmission projects.
The FERC has jurisdiction over transmission expansion and generation interconnection. The FERC has issued several orders regarding transmission expansion and generation interconnection cost allocation. Changes to the rules and regulations concerning transmission expansion and generation cost allocations may affect future transmission rates.
RTOs and independent system operators now oversee wholesale transmission services in NYSEG's, RG&E's, and CMP's service territories and between regions. Our transmission facilities are operated by and subject to the rules and regulations of the NYISO and ISO-NE. Changes to those rules and regulations could cause us to incur additional expenses to maintain our facilities.
Our ability to provide energy delivery and commodity services depends on the operations and facilities of third parties.
These third party facilities include independent system operators, electric generators from whom we purchase electricity and natural gas pipeline operators from whom we receive shipments of natural gas. The loss of use or destruction of our facilities or the facilities of third parties that are used in providing our services, or with which our electric or natural gas facilities are interconnected, due to extreme weather conditions, breakdowns, war, acts of terrorism or other occurrences could greatly reduce potential earnings and cash flows and increase our costs of repairs and/or replacement of assets. While we carry property insurance to protect certain assets and have regulatory agreements that provide for the recovery of losses for such incidents, our losses may not be fully recoverable through insurance or customer rates.
The demand for our services is directly affected by weather conditions.
The demand for our services, especially our natural gas delivery service, is directly affected by weather conditions. Milder winter months or cooler summer months could greatly reduce our earnings and cash flows. Loss of revenue due to power outages in severe weather could also reduce our earnings or require us to defer some costs for future recovery, thus reducing our cash flow. While our natural gas distribution companies mitigate the risk of warmer winter weather through weather normalization clauses or weather insurance, and we have historically been able to defer major storm costs for future recovery, we may not always be able to fully recover all lost revenues or increased expenses.
We
use derivative instruments, such as swaps, options, futures and forwards to manage our commodity and financial market risks.
We could recognize financial losses as a result of volatility in the market values of these contracts. We also bear the risk of a counterparty failing to perform. While we employ prudent credit policies and obtain collateral where appropriate, counterparty credit exposure cannot be eliminated, particularly in volatile energy markets.
Our ability to hedge our commodity market risk depends on our ability to accurately forecast demand in future periods. Because of changes in weather and customer demand from period to period, we may hedge amounts that are greater or less than our actual commodity deliveries. Such differences may lead to financial losses and, if the differences exceed certain levels, could result in our hedges becoming ineffective under accounting guidance. Gains or losses on ineffective hedges are marked-to-market on our income statement without reference to our underlying sale of the commodity.
Prices for electricity and natural gas are subject to volatility in response to changes in supply and other market conditions.
We pass commodity price increases on to electric customers who choose a variable price option and to all natural gas customers. We have a comprehensive hedging program in place to mitigate the price risk for the load required for electric customers who choose a fixed price option under NYSEG's and RG&E's current commodity option programs. Higher prices passed on to customers can lead to higher bad debt expense and customer conservation resulting in reduced demand for our energy services.
Our pension plan assets are primarily made up of equity and fixed income investments.
Any fluctuations in the performance of those markets, as well as changes in interest rates, could increase our funding requirements for pension and postretirement benefit obligations and cause us to recognize increased expense. In addition, the cost to implement regulatory requirements and potential revisions to accounting standards could affect our financial position, results of operations or cash flow.
Our business follows the economic cycle of the customers in the regions that we serve.
A falling, slow or sluggish economy as found in our upstate New York service territories and reduced demand for electricity and/or natural gas in the areas in which we do business - through forced temporary plant shutdowns, closing operations or slow economic growth - would reduce our earnings potential in the affected region.
We are subject to extensive federal and state environmental regulation.
Our subsidiaries' operations are subject to extensive federal, state and local environmental laws, rules and regulations that monitor, among other things, emission allowances, pollution controls, maintenance, site remediation, upgrading equipment and management of hazardous waste. Various governmental agencies require us to obtain environmental licenses, permits, inspections and approvals. Compliance with environmental laws and requirements can impose significant costs, reduce cash flows and result in plant shutdowns.
Our ability and/or cost to access capital could be negatively affected by changes in our financial position, results of operations or cash flows.
If any of our utility subsidiaries' credit ratings were to be downgraded, our ability to access the capital markets, including the commercial paper markets, could be adversely affected and our borrowing costs would increase. Some of the factors that affect credit ratings are cash flows, liquidity and the amount of debt as a component of total capitalization. An example of a factor that could cause our subsidiaries' debt as a component of total capitalization to increase is the need to borrow money to pay for unexpected repairs to their transmission and distribution systems caused by a catastrophic event.
The application of our critical accounting policies reflects complex judgments and estimates.
Those policies include industry-specific accounting standards applicable to our rate-regulated utilities, accounting for goodwill and other intangible assets, pension and other postretirement benefit plans, unbilled revenue and allowance for doubtful accounts. The adoption of new accounting standards, changes to current accounting standards or interpretations of such standards may materially affect our financial position, results of operations or cash flows.
The NYPSC proceeding regarding NYSEG's OPEB reserve could have a significant one-time impact on earnings.
On August 23, 2006, the NYPSC issued its decision in the NYSEG rate case. Among other things, the NYPSC instructed the ALJ to open a separate proceeding regarding the NYPSC staff's position that NYSEG should have retained $57 million of interest in its OPEB reserve and used it to reduce rate base. A proceeding has been opened and hearings on the issues raised by the NYPSC staff are currently scheduled for July 2007. NYPSC acceptance of its staff's position would result in NYSEG treating all or a portion of the $57 million as an addition to its internal OPEB reserve, with a corresponding charge to income. While we are vigorously opposing staff on these issues, contending that the NYPSC staff is engaged in retroactive ratemaking, we cannot predict how this matter will be resolved.
Item 1B.
Item 1B. Unresolved Staff Comments
None for Energy East or RG&E.
Item 2.
Item 2. Properties
See Item 7 - MD&A - Electric Delivery Business Developments.
NYSEG's electric system includes hydroelectric and gas turbine generating stations, substations and transmission and distribution lines, substantially all of which are located in the state of New York.
RG&E's electric system includes coal-fired, combustion turbine and hydroelectric generating stations, substations and transmission and distribution lines, all of which are located in the state of New York.
CMP's electric system includes substations and transmission and distribution lines, all of which are located in the state of Maine.
The Energy Network owns interests in two natural gas-fired peaking generating stations: one located in the state of New York and operated by Cayuga Energy, a wholly-owned subsidiary; and one located in the state of Pennsylvania for which Cayuga Energy manages fuel procurement and electricity sales.
The operating companies' generating facilities consist of:
(1) Cayuga Energy's 50.1% share of the generating capability.
CMP owns the following percentages of stock in three companies with nuclear generating facilities: Maine Yankee in Wiscasset, Maine, 38%; Yankee Atomic in Rowe, Massachusetts, 9.5%; and Connecticut Yankee in Haddam, Connecticut, 6%. The three facilities have been permanently shut down. Maine Yankee completed its decommissioning in 2005 and Yankee Atomic completed its decommissioning in 2006. Connecticut Yankee expects to complete its decommissioning in 2007. Each of the three facilities has an established NRC-licensed independent spent fuel storage installation on site to store spent nuclear fuel in dry casks until the DOE takes the fuel for disposal. (See Item 7 - MD&A - CMP Nuclear Costs.)
CMP owns 311 substations in the state of Maine having an aggregate transformer capacity of 6,772,787 kilovolt-amperes. The transmission system consists of 2,564 circuit miles of line. The distribution system consists of 21,984 pole miles of overhead lines and 1,255 miles of direct bury and network underground lines.
NYSEG owns 439 substations in the state of New York having an aggregate transformer capacity of 15,221,800 kilovolt-amperes. The transmission system consists of 4,400 circuit miles of line. The distribution system consists of 30,521 pole miles of overhead lines and 2,063 miles of direct bury and network underground lines.
RG&E owns 164 substations in the state of New York having an aggregate transformer capacity of 6,480,400 kilovolt-amperes. The transmission system consists of 763 circuit miles of overhead lines and 502 circuit miles of underground lines. The distribution system consists of 17,258 circuit miles of overhead lines and 5,274 circuit miles of underground lines.
The operating utilities' natural gas systems consist of:
NYSEG owns the Seneca Lake Natural Gas Storage Facility, which is able to store approximately 1.4 billion cubic feet of natural gas. As of December 31, 2006, the facility was at approximately 95% of capacity.
A portion of our utility plant is subject to liens or mortgages securing certain of our subsidiaries' first mortgage bonds. None of CMP's, NYSEG's or CNG's utility plant is subject to liens or mortgages securing first mortgage bonds. RG&E, Berkshire Gas and SCG have first mortgage bond indentures that constitute a direct first mortgage lien on substantially all of their respective properties. (See Item 8 - Note 6 to our Consolidated Financial Statements and Note 5 to RG&E's Financial Statements.)
Item 3.
Item 3. Legal Proceedings
See Item 7 - MD&A - Electric Delivery Rate Overview, Electric Delivery Business Developments, Natural Gas Delivery Rate Overview and Natural Gas Delivery Business Developments and Item 8 - Note 10 to our Consolidated Financial Statements and Note 9 to RG&E's Financial Statements.
Since the NYPSC, DPUC, MPUC and DTE have allowed our operating utilities to recover in rates remediation costs for certain of the sites referred to in the second and fourth paragraphs of Note 10 to our Consolidated Financial Statements and Note 9 to RG&E's Financial Statements, there is a reasonable basis to conclude that such operating utilities will be permitted to recover in rates any remediation costs that they may incur for all of the sites referred to in those paragraphs. Therefore, Energy East and RG&E believe that the ultimate disposition of the matters referred to in the paragraphs of the Notes referred to above will not have a material adverse effect on their results of operations, financial position or cash flows.
(a) In October 1999 RG&E received a letter from the New York State Attorney General's office alleging that RG&E may have constructed and operated major modifications to the Beebee and Russell generating stations without obtaining the required prevention of significant deterioration or new source review permits. The letter requested that RG&E provide the Attorney General's office with a large number of documents relating to this allegation. In January 2000 RG&E received a subpoena from the NYSDEC ordering production of similar documents. RG&E supplied documents and complied with the subpoena.
The NYSDEC served RG&E with a notice of violation in May 2000 alleging that between 1983 and 1987 RG&E completed five projects at Russell Station and two projects at Beebee Station, which is currently shut down, without obtaining the appropriate permits. RG&E believes it has complied with the applicable rules and there is no basis for the Attorney General's and the NYSDEC's allegations. Beginning in July 2000 the NYSDEC, the Attorney General and RG&E had a number of discussions with respect to resolution of the notice of violation. In October 2006 the Attorney General's office and the NYSDEC notified RG&E of their intention to file a complaint in federal court for violations at Russell Station unless a settlement can be reached. Were the Attorney General and the NYSDEC to commence a Clean Air Act lawsuit against RG&E, they would need to demonstrate, among other things, that the challenged modifications to the Russell generating station cause an "increase" in emissions from the station. The issue of what constitutes the appropriate test for an emissions increase currently is before the United States Supreme Court in Environmental Defense v. Duke Energy Corporation, Docket No. 05-848. Oral argument was held on November 2006, and a decision is expected in the first half of 2007. RG&E, the NYSDEC and the Attorney General continue to discuss this matter and no suit has been filed to date. RG&E is not able to predict the outcome of this matter.
(b) The State of Connecticut filed suit in February 2007 against Energy East and its affiliates TEN Companies, CNG and CTG Resources, Inc. for an alleged $14 million overcharge for heating and cooling services supplied to state buildings since 1992. While the company believes that there is no merit to this action, it cannot predict the outcome of this matter.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None for Energy East or RG&E.
* * * * * * * * * * *
Executive Officers of the Registrants
(Identification of executive officers is inserted in Part
I in accordance with Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of December 31, 2006.
Wesley W. von Schack has an employment agreement for a term ending June 30, 2007. Mr. von Schack's agreement provides for his employment as Chairman, President & Chief Executive Officer of the company. The agreement provides for automatic one-year extensions unless either party gives notice that such agreement is not to be extended.
Robert M. Allessio, Sara J. Burns and F. Michael McClain each have an employment agreement, which is automatically extended each month unless either party to an agreement gives written notice that it is not to be extended. Ms. Burns' agreement provides for her employment as President of CMP and Mr. Allessio's agreement provides for his employment as Chief Executive Officer of Berkshire Gas.
Each officer holds office for the term for which he or she is elected or appointed, and until his or her successor is elected and qualifies. The term of office for each officer extends to and expires at the meeting of the Board of Directors following the next annual meeting of shareholders.
PART
II
Item 5.
Item 5. Market for Registrants' Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange. The number of shareholders of record was 29,896 at January 31, 2007.
RGS Energy, a wholly-owned subsidiary of Energy East, owns all of RG&E's common stock. See Item 8 - RG&E's Statements of Changes in Common Stock Equity for information regarding dividends declared.
Equity Compensation Plan Information
The following table provides information as of December 31, 2006, with respect to shares of common stock that may be issued under Energy East's 2000 Stock Option Plan and its Restricted Stock Plan.
(1) See Item 8 - Note 12 to our Consolidated Financial Statements for information regarding the Restricted Stock Plan.
Issuer Purchases of Equity Securities
(1)
Represents shares of our common stock (Par Value $.01) purchased in open-market transactions on behalf of our Employees' Stock Purchase Plan.
RG&E had no issuer purchases of equity securities during the quarter ended December 31, 2006.
Item 6.
Item 6. Selected Financial Data
See the information under the heading Selected Financial Data for Energy East, which is included on page
II-23.
RG&E meets the conditions set forth in General Instruction I (1)(a) and (b) of Form 10-K for a reduced disclosure format. Accordingly, the Item 6 information related to RG&E is not presented.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
See the information under the heading Management's Discussion and Analysis of Financial Condition and Results of Operations for Energy East, which is included in this report on pages
II-24 to II-55.
RG&E meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K for a reduced disclosure format and is therefore including a management's narrative analysis of the results of operations as specified in General Instruction I(2)(a) of Form 10-K. See information under the heading Management's Narrative Analysis of Results of Operations for RG&E, which is included in this report on pages II-97 to II-98.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Rochester Gas and Electric Corporation
Market risk represents the risk of changes in value of a financial or commodity instrument, derivative or nonderivative, caused by fluctuations in interest rates and commodity prices. The following discussion of RG&E's risk management activities includes "forward-looking" statements that involve risks and uncertainties. Actual results could differ materially from those contemplated in the "forward-looking" statements. RG&E handles market risks in accordance with established policies, which may include various offsetting, nonspeculative derivative transactions. (See Item 8
Item 14. Principal Accounting Fees and Services
Audit Fees
: Aggregate fees billed to or allocated to RG&E by Energy East as part of its consolidated audits for each of the last two fiscal years for professional services rendered for the audit of RG&E's annual financial statements and the reviews of the financial statements included in RG&E's Forms 10-Q were $1,180,467 for 2006 and $667,233 for 2005.
Audit-Related Fees
: Aggregate fees billed to or allocated to RG&E by Energy East for each of the last two fiscal years for assurance and related services reasonably related to the performance of the audit of RG&E's annual financial statements and the reviews of the financial statements included in RG&E's Forms 10-Q were $- for 2006 and $2,389 for 2005, consisting of the following:
Tax Fees
: Aggregate fees billed to or allocated to RG&E by Energy East for each of the last two fiscal years for professional tax services rendered consisting of tax compliance and refunds were $8,015 for 2006 and $10,406 for 2005.
All Other Fees
: Other fees were $275 for 2006 and $1,500 for 2005.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of this report for Energy East:
Financial statements
Included in Part II of this report:
Consolidated Balance Sheets as of December 31, 2006 and 2005
For the three years ended December 31, 2006
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Common Stock Equity
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Financial statement schedule
Included in Part II of this report:
For the three years ended December 31, 2006
II. Consolidated Valuation and Qualifying Accounts
The following documents are filed as part of this report for RG&E:
Schedules other than those listed above have been omitted since they are not required, are inapplicable or the required information is presented in the Consolidated Financial Statements, Financial Statements or notes thereto.
Exhibits
(a)(1) The following exhibits are delivered with this report:
Registrant
Exhibit No.
Description
Energy East Corporation
(A)10-17 -
Amended and Restated Employment Agreement dated as of December 31, 2006, by and among the Company, Energy East Management Corporation and W. W. von Schack.
(A)10-26 -
Award Agreement (February 2007) under the 2000 Stock
Option Plan.
12-1 -
Computation of Ratio of Earnings to Fixed Charges.
12-2 -
Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
21 -
Subsidiaries.
23 -
Consent of PricewaterhouseCoopers LLP to incorporation by reference into certain registration statements.
31-1 -
Certification under Section 302 of the Sarbanes-Oxley Act of 2002.
31-2 -
Certification under Section 302 of the Sarbanes-Oxley Act of 2002.
*32 -
Certifications under Section 906 of the Sarbanes-Oxley Act of 2002.
Rochester Gas and Electric
Corporation
31-1 -
Certification under Section 302 of the Sarbanes-Oxley Act of 2002.
31-2 -
Certification under Section 302 of the Sarbanes-Oxley Act of 2002.
*32 -
Certifications under Section 906 of the Sarbanes-Oxley Act of 2002.
____________________________
* Furnished pursuant to Regulation S-K Item 601(b)(32).
(A) Management contract or compensatory plan or arrangement.
(a)(2) The following exhibits are incorporated herein by reference:
Registrant
Exhibit No.
Filed in
As Exhibit No.
Energy East Corporation
3-1 -
Restated Certificate of Incorporation of the Company pursuant to Section 807 of the Business Corporation Law filed in the Office of the Secretary of State of the state of New York on April 23, 1998 - Post-effective Amendment No.1 to Registration No.
033-54155
4-1
3-2 -
Certificate of Amendment of the Certificate of Incorporation filed in the Office of the Secretary of State of the state of New York on April 26, 1999 - Company's 10-Q for the quarter ended March 31, 1999 - File No.
1-14766
3-3
3-3 -
Certificate of Amendment of the Certificate of Incorporation filed in the Office of the Secretary of State of the state of New York on June 21, 2004 - Company's 10-Q for the quarter ended June 30, 2004 - File No.
1-14766
3-5
3-4 -
Certificate of Amendment of the Certificate of Incorporation filed in the Office of the Secretary of State of the state of New York on June 12, 2006 - Company's 10-Q for the quarter ended June 30, 2006 - File No.
1-14766.
3-6
3-5 -
By-laws of the Company as amended April 6, 2006 - Company's 10-Q for the quarter ended March 31, 2006 - File No. 1-14766
3-4
4-1 -
Indenture between the Company and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as Trustee, dated as of August 31, 2000 - Company's 10-Q for the quarter ended September 30, 2000 - File No. 1-14766
4-1
4-2 -
Third Supplemental Indenture between the Company and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as Trustee, dated as of November 14, 2000 related to the Indenture between the Company and JPMorgan Chase Bank, as Trustee, dated as of August 31, 2000 - Company's 10-K for the year ended December 31, 2000 - File No. 1-14766
4-3
4-3 -
Fourth Supplemental Indenture between the Company and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as Trustee, dated as of November 14, 2001, related to the Indenture between the Company and JPMorgan Chase Bank, as Trustee, dated as of August 31, 2000 - Company's 10-K for the year ended December 31, 2001 - File No. 1-14766
4-4
Registrant
Exhibit No.
Filed in
As Exhibit No.
Energy East Corporation
4-4 -
Sixth Supplemental Indenture between the Company and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as Trustee, dated as of June 14, 2002, related to the Indenture between the Company and JPMorgan Chase Bank, as Trustee, dated as of August 31, 2000 - Company's 10-Q for the quarter ended June 30, 2002 - File No.
1-14766
4-6
4-5 -
Seventh Supplemental Indenture between the Company and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as Trustee, dated as of September 9, 2003, related to the Indenture between the Company and JPMorgan Chase Bank, as Trustee, dated as of August 31, 2000 - Company's 10-Q for the quarter ended September 30, 2003 - File No. 1-14766
4-9
4-6 -
Eighth Supplemental Indenture between the Company and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as Trustee, dated as of July 24, 2006, related to the Indenture between the Company and JPMorgan Chase Bank, as Trustee, dated as of August 31, 2000 - Company's 10-Q for the quarter ended September 30, 2006 - File No. 1-14766
4-8
(A)10-1 -
Deferred Compensation Plan for Directors - Company's 10-Q for the quarter ended September 30, 2000 - File No. 1-14766
10-40
(A)10-2 -
Amended and Restated Director Share Plan - Company's 10-Q for the quarter ended September 30, 2000 - File No. 1-14766
10-38
(A)10-3 -
Amendment No. 1 to Director Share Plan - Company's 10-K for the year ended December 31, 2005 - File No. 1-14766
10-3
(A)10-4 -
Amendment No. 2 to Director Share Plan - Company's 10-K for the year ended December 31, 2005 - File No. 1-14766
10-4
(A)10-5 -
Deferred Compensation Plan - Director Share Plan - Company's 10-Q for the quarter ended September 30, 2000 - File No. 1-14766
10-39
(A)10-6 -
Amendment No. 1 to Deferred Compensation Plan - Director Share Plan - Company's 10-K for the year ended December 31, 2005 - File No. 1-14766
10-6
(A)10-7 -
Supplemental Executive Retirement Plan - Company's 10-Q for the quarter ended September 30, 2001 - File No. 1-14766
10-33
(A)10-8 -
Supplemental Executive Retirement Plan Amendment No. 1 - Company's 10-K for the year ended December 31, 2001 - File No.
1-14766
10-5
Registrant
Exhibit No.
Filed in
As Exhibit No.
Rochester Gas and Electric
Corporation
10-2 -
Agreement dated March 9, 1990 between the Company and Mellon Bank, N.A. - Company's 10-Q for the quarter ended March 31, 1990 - File No. 1-672
10-1
10-3 -
Agreement between New York Independent System Operator and Transmission Owners, dated as of December 2, 1999 - New York State Electric & Gas Corporation's 10-K for the year ended December 31, 1999 - File No. 1-3103-2
10-1
10-4 -
Independent System Operator Agreement, dated as of December 2, 1999 - New York State Electric & Gas Corporation's 10-K for the year ended December 31, 1999 - File No. 1-3103-2
10-2
10-5 -
Asset Purchase Agreement by and among Rochester Gas and Electric Corporation, Constellation Generation Group, LLC and Constellation Energy Group, Inc. dated as of November 24, 2003 - Company's 10-K for the year ended December 31, 2003 - File No. 1-672
10-7
10-6 -
Power Purchase Agreement between Constellation Power Source, Inc. and the Company dated as of November 24, 2003 - Company's 10-Q for the quarter ended September 30, 2005 - File No. 1-672
10-28
_____________________________
(A) Management contract or compensatory plan or arrangement.
Energy East agrees to furnish to the Commission, upon request, a copy of the following documents:
A.
Five-Year Revolving Credit Agreement among Energy East, certain lenders, Citibank, N.A., as Administrative Agent, Bank of America, N.A., as Syndication Agent and HSBC Bank USA, National Association, UBS Securities LLC and Wachovia Bank, N.A., as Co-Documentation Agents, as amended and restated as of June 2, 2006.
B.
Five-Year Revolving Credit Agreement among RG&E, New York State Electric & Gas Corporation, Central Maine Power Company, The Southern Connecticut Gas Company, Connecticut Natural Gas Corporation and The Berkshire Gas Company, certain lenders, Wachovia Bank N.A., as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent and The Bank of New York, Citibank, N.A. and Sovereign Bank, as Co-Documentation Agents, as amended and restated as of June 2, 2006 (the "Joint Revolving Credit Agreement").
C.
Indenture dated as of August 1, 1989, between Central Maine Power Company and The Bank of New York, and the Supplemental Indentures related thereto.
D.
Loan and Trust Agreement dated as of December 1, 2001, among the Business Finance Authority of the state of New Hampshire, Central Maine Power Company and State Street Bank and Trust company, as Trustee, relating to Pollution Control Revenue Refunding Bonds (Series 2001).
E.
The Southern Connecticut Gas Company's Indenture, dated as of March 1, 1948, with The Bridgeport City Trust Company (now US Bank, N.A.), as Trustee, and Supplemental Indentures related thereto.
F.
Connecticut Natural Gas Corporation's Issuing and Paying Agency Agreement with The Connecticut National Bank (now US Bank, N.A.) for Medium Term Notes, Series A, dated November 1, 1991.
G.
Connecticut Natural Gas Corporation's Issuing and Paying Agency Agreement with Shawmut Bank Connecticut, National Association (now US Bank, N.A.) for Medium Term Notes, Series B, dated June 14, 1994, and an Amendment related thereto.
H.
Connecticut Natural Gas Corporation's Issuing and Paying Agency Agreement with US Bank, N.A. for Medium Term Notes, Series C, dated September 12, 2005.
I.
The Berkshire Gas Company's First Mortgage Indenture and Deed of Trust, dated as of July 1, 1954, with Chemical Corn Exchange Bank (now The Bank of New York), and the Supplemental Indenture related thereto.
J.
Loan Agreement, dated April 30, 2004, between The Berkshire Gas Company
and Banknorth, N.A.
K.
Senior Note Agreement dated as of July 1, 1990 between The Berkshire Gas Company and Allstate Life Insurance Company.
L.
Senior Note Agreement dated as of November 1, 1996 between The Berkshire Gas Company and First Colony Life Insurance Company, and Amendments related thereto.
The total amount of securities authorized under each of such documents does not exceed 10% of the total assets of Energy East.
RG&E agrees to furnish to the Commission, upon request, a copy of the Participation Agreement dated as of August 1, 1997, between RG&E and NYSERDA relating to Pollution Control Revenue Bonds, Rochester Gas and Electric Corporation Project (1997 Series A), (1997 Series B), (1997 Series C) and (1998 Series A); a copy of the Participation Agreements dated as of August 1, 2004, between RG&E and NYSERDA relating to Pollution Control Revenue Bonds (2004 Series A) and (2004 Series B); a copy of certain supplemental indentures to the General Mortgage dated September 1, 1918, as supplemented; and a copy of the Joint Revolving Credit Agreement. The total amount of securities authorized under each of such documents does not exceed 10% of the total assets of RG&E.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 28, 2007
ENERGY EAST CORPORATION
By /s/Robert D. Kump
Robert D. Kump
Senior Vice President &
Chief Financial Officer
Date: February 28, 2007
ROCHESTER GAS AND ELECTRIC CORPORATION
By /s/Joseph J. Syta
Joseph J. Syta
Vice President - Controller and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of each Registrant and in the capacities and on the dates indicated.
ENERGY EAST CORPORATION
Date: February 28, 2007
PRINCIPAL EXECUTIVE OFFICER
By /s/Wesley W. von Schack
Wesley W. von Schack
Chairman, President, Chief
Executive Officer & Director
Date: February 28, 2007
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
By /s/Robert D. Kump
Robert D. Kump
Senior Vice President &
Chief Financial Officer
Signatures (Continued)
ENERGY EAST CORPORATION, continued
Date: February 28, 2007
By /s/James H. Brandi
James H. Brandi, Director
Date: February 28, 2007
By /s/John T. Cardis
John T. Cardis, Director
Date: February 28, 2007
By /s/Joseph J. Castiglia
Joseph J. Castiglia, Director
Date: February 28, 2007
By /s/Lois B. DeFleur
Lois B. DeFleur, Director
Date: February 28, 2007
By /s/G. Jean Howard
G. Jean Howard, Director
Date: February 28, 2007
By /s/David M. Jagger
David M. Jagger, Director
Date: February 28, 2007
By /s/Seth A. Kaplan
Seth A. Kaplan, Director
Date: February 28, 2007
By /s/Ben E. Lynch
Ben E. Lynch, Director
Date: February 28, 2007
By /s/Peter J. Moynihan
Peter J. Moynihan, Director
Date: February 28, 2007
By /s/Walter G. Rich
Walter G. Rich, Director
Signatures (Continued)
ROCHESTER GAS AND ELECTRIC CORPORATION
Date: February 28, 2007
PRINCIPAL EXECUTIVE OFFICER
By /s/James P. Laurito
James P. Laurito
Director, President and Chief Executive Officer
Date: February 28, 2007
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
By /s/Joseph J. Syta
Joseph J. Syta
Vice President - Controller and Treasurer
Date: February 28, 2007
By /s/Robert E. Rude
Robert E. Rude, Director
Date: February 28, 2007
By /s/Wesley W. von Schack
Wesley W. von Schack, Director
____________________________
* Incorporated by reference.
** Furnished pursuant to Regulation S-K Item 601(b)(32).
(A) Management contract or compensatory plan or arrangement.