-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K/YnUR3J8CXcd9RsQfIuhvGBArlWUgvWf/jt1WV+k5AHx06Hw3I3L55N0jAkTOEA Z1CT/YwRPh8wAL/6fsGLrw== 0000018647-99-000018.txt : 19990302 0000018647-99-000018.hdr.sgml : 19990302 ACCESSION NUMBER: 0000018647-99-000018 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL HUDSON GAS & ELECTRIC CORP CENTRAL INDEX KEY: 0000018647 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 140555980 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03268 FILM NUMBER: 99553149 BUSINESS ADDRESS: STREET 1: 284 SOUTH AVE CITY: POUGHKEEPSIE STATE: NY ZIP: 12601 BUSINESS PHONE: 9144522000 MAIL ADDRESS: STREET 1: 284 SOUTH AVENUE CITY: POUGHKEEPSIE STATE: NY ZIP: 12601 10-K405 1 ANNUAL FINANCIAL FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K --------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended......................December 31, 1998 Commission file number 1-3268 CENTRAL HUDSON GAS & ELECTRIC CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) New York 14-0555980 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 284 South Avenue, Poughkeepsie, New York 12601-4879 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (914) 452-2000 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class On Which Registered - ------------------- --------------------- Common Stock, $5.00 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of Each Class ------------------- Cumulative Preferred Stock: 4 1/2% Series 4.75% Series Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. NO [ ] YES [ X ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of February 18, 1999, was $628,112,741 based upon the lowest price at which Registrant's Common Stock was traded on such date, as reported on the New York Stock Exchange listing of composite transactions. The number of shares outstanding of Registrant's Common Stock, as of February 18, 1999, was 16,862,087. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Certain portions of Registrant's Annual Report to Shareholders, for the fiscal year ended December 31, 1998, are incorporated by reference in Parts I, II and IV of this Report. Registrant's definitive Proxy Statement, to be dated March 1, 1999, and to be used in connection with its Annual Meeting of Shareholders to be held on April 27, 1999, is incorporated by reference in Part III hereof. TABLE OF CONTENTS Page ---- Table of Contents - ----------------- PART I ------ ITEM 1 BUSINESS 1 - ------ Generally 1 Rates 2 Regulation 3 Construction Program and Financing 3 Fuel Supply and Cost 4 Environmental Quality 6 Other Matters 9 Executive Officers of the Company 11 ITEM 2 PROPERTIES 13 - ------ Electric 13 New York Power Pool/Independent System Operator 18 Gas 19 Other Matters 21 ITEM 3 LEGAL PROCEEDINGS 21 - ------ ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY - ------ HOLDERS 24 (i) TABLE OF CONTENTS (Cont'd) Page ---- PART II ------- ITEM 5 MARKET FOR THE COMPANY'S COMMON EQUITY AND - ------ RELATED STOCKHOLDER MATTERS 24 ITEM 6 SELECTED FINANCIAL DATA 25 - ------ ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT - ------- MARKET RISK 50 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 51 - ------ ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS - ------ ON ACCOUNTING AND FINANCIAL DISCLOSURE 100 PART III -------- ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 100 - ------- ITEM 11 EXECUTIVE COMPENSATION 100 - ------- ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL - ------- OWNERS AND MANAGEMENT 100 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 100 - ------- PART IV ------- ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND - ------- REPORTS ON FORM 8-K 101 SIGNATURES 103 (ii) PART I ------ FORWARD LOOKING STATEMENTS This Form 10-K Report and the documents incorporated by reference may contain statements which, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1995 ("Reform Act"). These statements will contain words such as "believes," "expects," "intends," "plan," and other similar words. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. A number of important factors affecting the Company's business and financial results could cause actual results to differ materially from those stated in the forward- looking statements. Those factors include weather, energy supply and demand, developments in the legislative, regulatory and competitive environment, electric and gas industry restructuring and cost recovery, future market prices for energy, capacity and ancillary services, nuclear industry regulation, the outcome of pending litigation, and certain environmental matters, particularly ongoing development of air quality regulations and hazardous waste remediation requirements. ITEM 1 - BUSINESS ----------------- GENERALLY Registrant ("Company") is a gas and electric corporation formed on December 31, 1926, as a consolidation of several operating utilities which had been accumulated under one management during the previous 26 years. The Company generates, purchases and distributes electricity, and purchases and distributes gas. The Company, in the opinion of its general counsel, has, with minor exceptions, valid franchises, unlimited in duration, to serve a territory extending about 85 miles along the Hudson River and about 25 to 40 miles east and west from such River. The southern end of the territory is about 25 miles north of New York City, and the northern end is about 10 miles south of the City of Albany. The territory, comprising approximately 2,600 square miles, has a population estimated at 622,000. Electric service is available throughout the territory, and natural gas service is provided in and about the cities of Poughkeepsie, Beacon, Newburgh and Kingston and in certain outlying and intervening territories. The number of Company employees, at December 31, 1998, was 1,149. The Company's territory reflects a diversified economy, including manufacturing industries, research firms, farms, governmental agencies, public and private institutions, resorts, and wholesale and retail trade operations. 1 For information concerning revenues and operating income before taxes and operating profits and information regarding assets for the electric, gas, and other segments, which are currently the significant industry segments of the Company, see Note 10 - "Segments and Related Information" of the Notes to the Financial Statements referred to in Item 8 hereof (each such Note being hereinafter called the "Note"). In 1998, the competitive market place continued to develop for electric utilities and certain electric customers were given the opportunity to purchase energy and related services from sources other than their local utility. These opportunities also exist today for natural gas customers. See Item 7 hereof under the caption "Competition/ Deregulation" and Note 2 - "Regulatory Matters" hereof for a discussion of the Amended and Restated Settlement Agreement ("Agreement") reached between the Company and the Public Service Commission of the State of New York ("PSC") in the PSC's Competitive Opportunities Proceeding, which Agreement may affect future operations of the Company. See the caption "Holding Company Restructuring" in Note 2 - "Regulatory Matters" hereof for a discussion of the proposed holding company restructuring of the Company. RATES Generally: The electric and gas rates of the Company applicable to service supplied to retail customers within the State of New York are regulated by the PSC. Transmission rates and rates for electricity sold for resale in interstate commerce are regulated by the Federal Energy Regulatory Commission ("FERC"). The Company's present full-service retail rate structure consists of various service classifications covering residential, commercial and industrial customers. During 1998, the average price of electricity to such customers was 8.45 cents per kilowatthour ("kWh"), representing a 1.2% decrease from the 1997 average price. Rate Proceedings - Electric and Gas: For information regarding the Company's most recent electric and gas cases filed with the PSC, see Item 7 hereof under the caption "Rate Proceedings." Cost Adjustment Clauses: For information with respect to the Company's electric and gas cost adjustment clauses, see Note 1 - "Summary of Significant Accounting Policies" hereof under the caption "Rates, Revenues and Cost Adjustment Clauses." 2 REGULATION Generally: The Company is subject to regulation by the PSC with respect to, among other things, service rendered (including the rates charged), major transmission facility siting, accounting procedures and issuance of securities. Certain of the Company's activities, including accounting and the acquisition and disposition of certain property, are subject to regulation by the FERC, under the Federal Power Act, by reason of the Company's transmission and sales for resale of electric energy in interstate commerce. The Company is not subject to the provisions of the Natural Gas Act. In the opinion of general counsel for the Company, the Company's major hydroelectric facilities are not required to be licensed under the Federal Power Act. Purchased Electric Power Generation: Pursuant to the provisions of the federal Public Utility Regulatory Policies Act of 1978 ("PURPA"), and the New York Public Service Law ("NYPSL"), the Company is required to enter into long-term contracts to purchase electric power generated by small hydro, alternative energy and cogeneration facilities which meet qualification standards established by such statutes and the regulatory programs promulgated thereunder. With respect to facilities qualified under PURPA, the Company must pay its avoided cost (the cost the Company would otherwise incur to generate the increment of power purchased) for electric power purchased from qualified facilities. As of December 31, 1998, the Company's avoided cost at the 115 kilovolt ("kV") transmission level was approximately 3.0 cents per kWh. CONSTRUCTION PROGRAM AND FINANCING For estimates of construction expenditures, internal funds available, mandatory and optional redemption of long-term securities, and working capital requirements for the two-year period 1999-2000, see the subcaption "Construction Program" in Item 7 hereof under the caption "Capital Resources and Liquidity." For a discussion of the Company's capital structure, financing program and short-term borrowing arrangements, see Notes 5, 6 and 7 "Short-term Borrowing Arrangements," "Capitalization - Capital Stock" and "Capitalization - Long-term Debt," respectively, and Item 7 hereof under the subcaptions "Capital Structure," "Financing Program" and "Short-Term Debt" of the caption "Capital Resources and Liquidity." 3 The Company's Certificate of Incorporation and its various debt instruments do not contain any limitations upon the issuance of authorized, but unissued, preferred stock and common stock or of unsecured short-term debt. The Company's various debt instruments include limitations as to the amount of additional funded indebtedness which the Company can issue. The Company believes such limitations will not impair its ability to issue any or all of the debt described under the above-referenced subcaption "Financing Program." FUEL SUPPLY AND COST The Company's two primary fossil fuel-fired electric generating stations are the Roseton Steam Electric Generating Plant ("Roseton Plant") (described in Item 2 hereof under the subcaptions "Electric - General" and "Electric - Roseton Plant") and the Danskammer Point Steam Electric Generating Station ("Danskammer Plant") (referred to in Item 2 hereof under the subcaption "Electric - General"). Units 1 and 2 of the Roseton Plant are fully equipped to burn both residual oil and natural gas. Units 1 and 2 of the Danskammer Plant, which are equipped to burn residual oil or natural gas, are operated when economical. Units 3 and 4 of the Danskammer Plant, which are operated predominantly, are capable of burning coal, natural gas, or residual oil. For the 12 months ended December 31, 1998, the sources and related costs of electric generation for the Company were as follows: Aggregate Sources of Percentage of Costs in 1998 Generation Energy Generated ($000) - ---------- ---------------- ------------- Purchased Power 22.4% $ 40,441 Coal 40.1 43,289 Gas 5.5 8,190 Nuclear 10.4 2,984 Oil 19.3 27,892 Hydroelectric 2.3 450 ----- 100.0% ===== Fuel Handling Costs 1,729 Deferred Fuel Cost 286 -------- $125,261 ======== Residual Oil: At December 31, 1998, there were 403,369 barrels of fuel oil in inventory in Company-owned tanks for use in the Danskammer and Roseton Plants, which aggregate amount 4 represents an average daily supply for 20 days. The total oil storage capacity as of December 31, 1998, for these Plants was 16,251 and 1,079,000 barrels, respectively. The Company's share of the Roseton Plant's oil storage capacity is 377,650 barrels. During 1998, there were no purchases of fuel oil made for the Danskammer Plant. During 1998, the Roseton Plant's fuel oil requirements were supplied under both firm and spot market contracts. The prices under the firm contract were determined on the basis of published market indices in effect at the time of delivery. The term of the firm contract became effective on September 1, 1996, and continued through its expiration on August 31, 1998. This contract was replaced with the Company making spot market purchases. Coal: In order to provide for its future requirements for coal to be burned in Units 3 and 4 at the Danskammer Plant, the Company, effective January 1, 1997, entered into two supply contracts for the purchase of an aggregate of 720,000 tons per year of low sulfur (0.7% maximum) coal. One contract provides for the delivery of coal by water from sources in Venezuela and Colombia, South America. As required by this contract, the base price of purchases under this contract are renegotiated by the parties on an annual basis. The contract, as last renegotiated, now covers the term from January 1, 1998 through December 31, 2001. The second contract, which provided for the delivery of domestic coal by rail, expired on December 31, 1998. The base price of purchases was fixed for the term of that contract. The Company, effective January 1, 1999 through December 31, 2001, has entered into another supply contract from sources in Venezuela and Colombia and a third contract which provides for the delivery of domestic coal by water or rail. All three contracts can be terminated effective December 31, 2000, with six months' written notice to the supplier. The base price is fixed for 1999 with annual reopeners which provide for rates to be renegotiated by all parties thereafter. The Company has also entered into a long-term rail contract for the delivery of coal. This contract covers the period January 1, 1997 through December 31, 2001. During the first two years of this contract, rail rates are fixed and thereafter such rates will be negotiated by the parties. The Company also purchased during 1998 approximately 172,600 tons of its coal supply on the spot market. 5 Nuclear: For information regarding fuel reloading at Unit No. 2 of the Nine Mile Point Nuclear Station ("Nine Mile 2"), of which the Company owns a 9% interest, see Item 7 hereof under the subcaption "Nuclear Operations" of the caption "Results of Operations." ENVIRONMENTAL QUALITY The Company is subject to regulation by federal, state and, to some extent, local authorities with respect to the environmental effects of its operations, including regulations relating to air and water quality, aesthetics, levels of noise, hazardous wastes, toxic substances, protection of vegetation and wildlife and limitations on land use. In connection with such regulation, certain permits are required with respect to the Company's facilities, which permits have been obtained and/or are in the renewal process. Generally, the principal environmental areas and requirements to which the Company is subject are as follows: Air: State regulations affecting the Company's existing electric generating plants govern the sulfur content of fuel used therein, the emission of particulate matter and certain other pollutants therefrom and the visibility of such emissions. In addition, federal and state ambient air quality standards for sulfur dioxide ("SO2"), nitrogen oxides ("NOx")and suspended particulates must be complied with in the area surrounding the Company's generating plants. Based on the operation of its continuous emission stack monitoring systems and its ambient air quality monitoring system in the area surrounding the Roseton and Danskammer Plants, the Company believes that present air quality standards for NOx, SO2 and particulates are satisfied in those areas. However, beginning in 1997 the New York State Department of Environmental Conservation ("NYSDEC"), began an initiative seeking penalties from all New York electric utilities for past opacity variances and requiring various opacity reduction measures and stipulated penalties for future excursions after execution of a consent order. Each New York State electric utility, including the Company, is in the process of negotiating, or has negotiated, the various terms and conditions of a draft consent order with the NYSDEC. The Company's Danskammer Plant and the Roseton Plant are the subject of these negotiations. The outcome of this matter is uncertain at this time; however, the Company believes that the amount of any civil penalty payment and implementation of an opacity reduction program, in the aggregate, will not be material. The Danskammer Plant burns coal having a maximum sulfur content of 0.7%, fuel oil having a maximum sulfur content of 1% 6 and natural gas. The sulfur content of the oil burned at the Roseton Plant is limited by stipulation with, among others, the NYSDEC, to an amount not exceeding 1.5% maximum and 1.3% weighted annual average. Such sulfur content limitation at the Roseton Plant can be modified by the NYSDEC in the event of technological changes at such Plant, provided that the SO2 and NOx emissions are limited to that which would have been generated by the use of oil with a sulfur content of 1.3% on a weighted annual average. Natural gas is also burned at the Roseton Plant. For more information on the impact of the Clean Air Act Amendments of 1990 ("CAA Amendments") on the Company's efforts to attain and maintain national ambient air quality standards for emissions from its fossil-fueled electric power plants, the proposal of the federal Environmental Protection Agency ("EPA") to modify emission standards for NOx and suspended particulates, and the proposal of the NYSDEC to modify NOx standards for generating facilities operating in New York State, see Note 9 "Commitments and Contingencies," hereof under the caption, "Environmental Matters - Clean Air Act Amendments." Except as set forth above, the Company is unable to predict the effect (including cost) of these programs on its power plant operations since the details of the CAA Amendments are yet to be completely established by implementing regulations to be issued over a period of years by the EPA and the NYSDEC. Water: The Company is required to comply with applicable state and federal laws and regulations governing the discharge of pollutants into receiving waters. The discharge of any pollution into navigable waterways is prohibited except in compliance with a permit issued by the EPA under the National Pollutant Discharge Elimination System ("NPDES") established under the Clean Water Act. Likewise, under the New York Environmental Conservation Law, industrial waste cannot be discharged into state waters without a State Pollutant Discharge Elimination System ("SPDES") permit issued by the NYSDEC. Issuance of a SPDES permit satisfies the NPDES permit requirement. The Company has received SPDES permits for both the Roseton Plant and the Danskammer Plant, its Eltings Corners maintenance and warehouse facility, and its Rifton Recreation and Training Center. The SPDES permits for the Roseton and Danskammer Plants expired on October 1 and November 1, 1992, respectively, and such permit renewal applications are pending before the NYSDEC. The Roseton Plant application is currently being reviewed in a NYSDEC proceeding. The subject of the restriction on use of water for cooling purposes at that Plant (as referred 7 to in Item 3 hereof under the caption "Environmental Litigation") is being considered in that proceeding. It is the Company's belief that the expired SPDES permits continue in full force and effect pending issuance of the new SPDES permits. For further discussion of the Company's compliance with the Clean Water Act and the Company's SPDES permit renewal proceeding, see Note 9 - "Commitments and Contingencies," hereof under the caption "Environmental Matters - - Clean Water Act Compliance." Toxic Substances and Hazardous Wastes: The Company is subject to state and federal laws and regulations relating to the use, handling, storage, treatment, transportation and disposal of industrial, hazardous and toxic wastes. The NYSDEC, in 1986, added to the New York State Registry of Inactive Hazardous Waste Disposal Sites ("Registry") six locations at which gas manufacturing plants owned or operated by the Company or by predecessors to the Company were once located. Two other sites, which formerly contained gas manufacturing plants, have been identified by the Company. The Company studied these eight sites to determine whether they contain any hazardous wastes which could pose a threat to the environment or public health and, if such wastes were located at such sites, to determine the remedial actions which may be appropriate. All of these eight sites were studied using the Phase I guidelines of the NYSDEC and five such sites were studied using the more extensive Phase II guidelines of the NYSDEC. As a result of these studies, the Company concluded that no remedial actions were required at any of these sites. In 1991, the NYSDEC advised the Company that four of the six sites had been deleted from such Registry. In 1992, the NYSDEC advised the Company that the two remaining sites listed on the Registry had been deleted from the Registry. The NYSDEC also indicated that such deletions of the sites were subject to reconsideration in the future, at which time new analytical tests may be required to determine whether or not wastes on site are hazardous. If, as a result of such potential new analytical tests, or otherwise, remedial actions are ultimately required at these sites by the NYSDEC, the cost thereof could have a material adverse effect (the extent of which cannot be reasonably estimated) on the financial condition of the Company if the Company could not recover all, or a substantial portion thereof, through insurance and rates. For a discussion of litigation filed by the City of Newburgh, New York against the Company involving one of the Company's eight former manufactured gas sites and a recent ruling 8 related thereto, see Note 9 - "Commitments and Contingencies," hereof under the subcaption "Environmental Matters - Former Manufactured Gas Plant Facilities." In August 1992, the NYSDEC notified the Company that the NYSDEC suspected that the Company's offices at Little Britain Road in New Windsor, New York, may constitute an inactive hazardous waste disposal site. As a result of the NYSDEC's review of a site assessment report prepared by the Company's consultant submitted to the NYSDEC in 1996, the Company agreed to perform additional testing, which testing detected a limited amount of subsurface soil contamination near one corner of the site and contaminants in the ground water beneath the site. Operations conducted on the site by the Company since it purchased the property in 1978 are not believed to have contributed to either the soil or the ground water contamination. The Company and the NYSDEC have reached an agreement in principle that the Company will conduct a voluntary clean-up of the site in terms to be further negotiated between the parties. The Company can make no (i) prediction regarding what action the NYSDEC may take with regard to the reports, or (ii) prediction as to the outcome of recovery attempts against third parties by the Company. However, the Company believes that the cost of such site assessment and remediation, if any, will not be material. Other: The Company's expenditures attributable, in whole or in substantial part, to environmental considerations totaled $8.7 million in 1998, of which approximately $.5 million related to capital projects and $8.2 million were charged to expense. It is estimated that in 1999 the total of such expenditures will be approximately $9.5 million. The Company is not involved as a defendant in any court litigation with respect to environmental matters and, to the best of its knowledge, no litigation against it is threatened with respect thereto, except with respect to the litigation described in Item 3 "Legal Proceedings" hereof under the subcaption "Environmental Litigation - Newburgh Manufactured Gas Site," and as described in Note 9 - "Commitments and Contingencies," hereof under the subcaption "Environmental Matters - Former Manufactured Gas Plant Facilities." OTHER MATTERS Labor Relations: The Company has agreements with the International Brotherhood of Electrical Workers ("IBEW") for its 801 unionized employees, representing production and maintenance employees, customer representatives, service workers and clerical employees (excluding persons in managerial, professional or supervisory positions), which agreements were renegotiated effective July 1, 1998. An agreement with Locals 2218 and 320 9 Non-Production Plant Workers continues through April 30, 2003, and an agreement with IBEW Local 320 Production Plant Workers expires on August 31, 2003. The agreements provide for an average annual general wage increase of 3.0% and certain additional fringe benefits. AFFILIATES: CH Energy Group, Inc.: CH Energy Group, Inc. is a wholly-owned subsidiary of the Company formed in April 1998. Effective upon a one-for-one share exchange expected to occur during the first half of 1999, a holding company restructuring will be effected so that CH Energy Group, Inc. will become the holding company parent corporation of the Company and its then wholly-owned subsidiaries (with the exception of Phoenix Development Company, Inc.) identified below. For further information regarding the holding company restructuring, see Item 7 hereof under the captions "Competition/Deregulation - Competitive Opportunities Proceeding Settlement Agreement" and Note 2 - "Regulatory Matters" hereof under the captions "Competitive Opportunities Proceeding Settlement Agreement" and "Holding Company Restructuring." Central Hudson Enterprises Corporation: Central Hudson Enterprises Corporation ("CHEC") is engaged in the business of marketing electric, gas and oil related services to retail and wholesale customers, conducting energy audits; providing services including, but not limited to, the design, financing, installation and maintenance of energy conservation measures and generation systems for private businesses, institutional organizations and governmental entities; and participating in cogeneration, small hydro, alternate fuel and energy production projects and services. During 1998, CHEC formed Scasco, Inc. ("SCASCO"), a Connecticut corporation, as CHEC's wholly-owned subsidiary. In August 1998, SCASCO purchased the assets of a fuel oil business located in Connecticut, for the purpose of expanding the customer base of CHEC and SCASCO and providing additional energy-based services. This expansion continued during February 1999, when SCASCO purchased Island Sound Commercial Energy Sales, Inc., a business which holds contracts to sell natural gas to customers in Connecticut and Rhode Island, to be SCASCO's wholly-owned subsidiary. CH Resources, Inc.: CH Resources, Inc. is a wholly-owned subsidiary of the Company established to hold real property for generating electricity and for other uses of the Company, directly or indirectly through one or more of its affiliates. In December 1998, CH Resources acquired an 80 megawatt ("MW") combined cycle gas turbine facility in Solvay, New York and in December, 1998, it acquired an 80 MW combined cycle gas turbine facility in Beaver Falls, New York. 10 CH Syracuse Properties, Inc.: In December 1998, CH Resources, Inc. established CH Syracuse Properties, Inc., a wholly-owned subsidiary of CH Resources, Inc., to lease real property. Phoenix Development Company, Inc., and Greene Point Development Corporation: These corporations, are wholly-owned subsidiaries of the Company, established to hold or lease real property for the future use of the Company, or to participate in energy-related ventures. Currently, the assets held by these subsidiaries are not material. EXECUTIVE OFFICERS OF THE COMPANY The names of the current officers of the Board of Directors and the executive officers of the Company, their positions held and business experience during the past five (5) years and ages (at December 31, 1998) are as follows: Principal Occupation or Employment and Positions Name of Officer, Age and Offices with the Company and Position Held During the Past Five (5) Years - -------------------- ------------------------------ Officers of the Board --------------------- John E. Mack III, 64, Present positions, except Chairman Chairman of the Board; of the Board since August 1, Chairman of the 1998; Chairman of the Board and Executive, Retirement Chief Executive Officer, December and Finance Committees 1993-July 31, 1998; Chairman of the Committee on Finance, April 1996 Jack Effron, 65, Present position since April 1994; Chairman of Committee President of EFCO Products, a on Compensation and bakery ingredients corporation; Succession member of the St. Francis Health Care Foundation; Chairman of the Chief Executive's Network for Manufacturing of the Council of Industry of Southeastern New York Heinz K. Fridrich, 65, Present position since April 1995; Chairman of the Courtesy Professor, University of Committee on Audit Florida at Gainsville since 1994; Board of Trustees, Mount St. Mary College 11 Principal Occupation or Employment and Positions Name of Officer, Age and Offices with the Company And Position Held During the Past Five (5) Years - -------------------- ------------------------------ Executive Officers of the Company --------------------------------- Paul J. Ganci, 60, Present position since August 1, President and Chief 1998; President and Chief Oper- Executive Officer ating Officer, December 1993- July 31, 1998 Carl E. Meyer, 51, Present position since April 1998; Executive Vice Senior Vice President - Customer President - Operations Services, April 1996-April 1998; Vice President - Customer Services, December 1993-April 1996 Allan R. Page, 51, Present position since April 1998; Executive Vice Senior Vice President - Corporate President - Energy Services, April 1996-April 1998; Resources & Development Vice President - Corporate Services, December 1993-April 1996 Ronald P. Brand, 60, Present position since November Senior Vice President - 1998; Vice President - Engineering Engineering, and Environmental Affairs, Environmental Affairs & December 1993-November 1998 Special Projects Joseph J. DeVirgilio, Jr., Present position since November 47, Senior Vice 1998; Vice President - Human President - Corporate Resources and Administration, Services and December 1993-November 1998 Administration Arthur R. Upright, 55, Present position since November Senior Vice President - 1998; Assistant Vice President - Regulatory Affairs, Cost & Rate and Financial Plan- Financial Planning and ning, February 1994-November 1998; Accounting Manager, Cost & Rate and Financial Planning, December 1993-February 1994 James P. Lovette, 49, Present position since November Vice President - Fossil 1998; Assistant Vice President - Production Fossil Production, October 1997- November 1998; Plant Superinten- dent, December 1993-November 1997 12 Principal Occupation or Employment and Positions Name of Officer, Age and Offices with the Company and Position Held During the Past Five (5) Years - -------------------- ------------------------------ Executive Officers of the Company - (Continued) ----------------------------------------------- Steven V. Lant, 41, Present position since November Chief Financial Officer, 1998; Treasurer and Assistant Treasurer and Corporate Secretary, December 1993-November Secretary 1998 Donna S. Doyle, 50, Present position since April 1995; Controller Assistant Controller, April 1994- April 1995; Manager of Taxes Budgets & Customer Acctg., December 1993-April 1995 Gladys L. Cooper, 47, Present positions since September Assistant Vice President 1995; leave of absence for - Governmental Relations educational purposes, December 1993-September 1995; Corporate Secretary, December 1993-April 1994 John C. Checklick, 50, Present position since November Assistant Vice President - 1998; Manager of Customer Customer Services Services, December 1993-November 1998 There are no family relationships existing among any of the executive officers of the Company. Each of the above executive officers is elected or appointed annually by the Board of Directors. ITEM 2 - PROPERTIES ------------------- ELECTRIC General: The net capability of the Company's electric generating plants as of December 31, 1998, the net output of each plant for the year ended December 31, 1998, and the year each plant was placed in service or rehabilitated are as set forth below: 13
(MW)* Electric Net Capability 1998 Unit Generating Year Placed (97-98) Net Output Plant Type of Fuel in Service Summer Winter (Mwh) - ---------- ------------ ---------- ------ ------ ---------- Danskammer Residual Oil, Natural 1951-1967 492 502 2,721,238 Plant ** Gas and Coal Roseton Plant Residual Oil 1974 425 404 1,320,329 (35% share)** and Natural Gas Neversink Water 1953 23 22 64,232 Hydro Station Dashville Water 1920 5 5 13,995 Hydro Station Sturgeon Pool Water 1924 16 16 58,229 Hydro Station High Falls Water 1986 3 4 7,701 Hydro Station Coxsackie Gas Kerosene or 1969 19 24 2,554 Turbine ("GT") Natural Gas So. Cairo GT Kerosene 1970 19 21 1,532 Nine Mile 2 Nuclear 1988 Plant (9% share) 103 104 653,322 ----- ----- --------- Total 1,105 1,102 4,843,132 ===== ===== =========
* Reflects maximum one-hour net capability of the Company's ownership of generation resources and, therefore, does not include firm purchases or sales. ** Plants subject to auction based on the Agreement as described in Item 7 hereof under the caption "Competition/Deregulation - Competitive Opportunities Proceeding Settlement Agreement" and in Note 2 - "Regulatory Matters" hereof under the caption "Competitive Opportunities Proceeding Settlement Agreement." 14 The Company has a contract with the Power Authority of the State of New York ("PASNY") which entitles the Company to 49 MW net capability from the Blenheim-Gilboa Pumped Storage Hydroelectric Plant through 2002. See Item 1 hereof, under the caption "Regulation" and the subcaption "Purchased Electric Power Generation," with respect to alternative electric power generation interconnected with the Company's system. The Company owns 83 substations having an aggregate transformer capacity of 4.5 million kVa. The transmission system consists of 588 pole miles of line and the distribution system of 7,277 pole miles of overhead lines and 860 trench miles of underground lines. Load and Capacity: The Company's maximum one-hour demand within its own territory, for the year ended December 31, 1998, occurred on July 22, 1998, and amounted to 900 MW. The Company's maximum one-hour demand within its own territory, for that part of the 1998-1999 winter capability period, through February 18, 1999, occurred on January 14, 1999 and amounted to 825 MW. Based on current projections of peak one-hour demands for the 1999 summer capability period, the Company estimates that it will have capacity available to satisfy its projected peak demands plus the estimated installed reserve generating capacity requirements which it is required to maintain as a member of the New York Power Pool ("NYPP"), described herein. The Company plans to divest its Roseton and Danskammer Plants under the terms of the Agreement. This divestiture is likely to occur between late 1999 and mid-2001. For further information regarding the Agreement, see Item 7 hereof under the caption "Competition/Deregulation" and Note 2 - "Regulatory Matters" hereof. Following such divestiture, the Company will no longer own sufficient capacity to serve the peak demands of its transmission and distribution customers and may need to rely on purchased capacity from third party providers to meet such demands not satisfied. See the caption "New York Power Pool/Independent System Operator," of this Item for further information regarding the termination of the NYPP and the formation of the Independent System Operator ("ISO") to coordinate reliability and transmission of New York State's bulk power systems. 15 The following table sets forth the amounts of any excess capacity by summer and winter capability periods for 1999 and 2000:
Forecasted Forecasted Peak - Peak - Peak Plus Excess of Capacity Total Full Installed over Peak Plus NYPP Delivery Service Reserve of Available Installed Reserve Capability Rqts. (MW) Rqts. Only 18% (MW) Capacity Requirements Period (1) (2) (3) (MW) (MW)(3) Percent(3) ---------- ---------- ---------- -------- -------- ------- ---------- 1999 Summer 910 860 1,015 1,149 134 13.2 1999-2000 Winter 845 800 1,015* 1,169 134 15.2
* Summer period peak plus reserve requirements carry over to the following winter period. (1) Total delivery requirements include requirements for both full service (delivery and energy) and retail access (delivery only) customers (2) Excludes retail access customer requirements (3) Based on full service requirements 16 Roseton Plant: The Roseton Plant is located in the Company's franchise area at Roseton, New York, and is owned by the Company, Consolidated Edison Company of New York, Inc. ("Con Edison") and Niagara Mohawk Power Corporation ("Niagara Mohawk") as tenants-in-common. The Roseton Plant, placed in commercial operation in 1974, has a generating capacity of 1,200 MW consisting of two 600 MW generating units, both of which are capable of being fired either by residual oil or natural gas (see subcaption below entitled "Gas - Sufficiency of Supply and Future Gas Supply"). The Company is acting as agent for the owners with respect to operation of the Roseton Plant. Generally, the owners share the costs and expenses of the operation of such Plant in accordance with their respective ownership interests. The Company, under a 1968 agreement, has the option to purchase the interests of Niagara Mohawk (25%) and of Con Edison (40%) in the Roseton Plant in December 2004. The exercise of this option is subject to PSC approval. However, by agreement dated March 30, 1994 between the Company and Niagara Mohawk, Niagara Mohawk was given, among other things, an option to retain its 25% interest in the Roseton Plant, provided that Niagara Mohawk exercises such option by May 31, 1999. As part of Niagara Mohawk's restructuring plan, the PSC, in May 1998, authorized Niagara Mohawk to divest its fossil- fueled and hydroelectric generating assets by auction by mid- 1999, except that the auction of Niagara Mohawk's interest in the Roseton Plant was permitted by the PSC to be delayed to be coordinated with the Company's auction of that Plant. Con Edison has agreed to divest and transfer certain of its electric generating assets (including its interest in the Roseton Plant) to unregulated entities, including third parties and Con Edison affiliates, by the end of 2002. The Company, Niagara Mohawk and Con Edison adopted Principles of Agreement on October 7, 1998, concluding that a joint auction of the Roseton Plant will maximize proceeds from the sale, and that the cotenants intend to enter into an agreement whereby the Company will conduct the auction sale on behalf of the cotenants in coordination with the auction of the Company's adjacent Danskammer Plant, which Agreement was accepted by the PSC by order issued and effective December 18, 1998. For additional information with respect to the Company's obligation to divest itself of its interest in the Roseton and Danskammer Plants, see Item 7 hereof under the caption "Competition/Deregulation - Competitive Opportunities Proceeding Settlement Agreement" and Note 2 - "Regulatory Matters," under the caption "Competitive Opportunities Settlement Agreement." The 345 kV transmission lines and related facilities to connect the Roseton Plant with other points in the system of the Company and with the systems of Con Edison and Niagara Mohawk to the north and west of such Plant are 100%-owned by the Company. 17 The share of each of the parties in the output of the Roseton Plant is transmitted over these lines pursuant to a certain transmission agreement relating to such Plant, which provides, among other things, for compensation to the Company for such use by the other parties. In addition, the Company has contract rights which entitle the Company to the lesser of 300 MW, or one quarter of the capacity in a 345 kV transmission line owned by PASNY, which connects the Roseton Plant with a Con Edison substation to the east of such Plant in East Fishkill, New York. In exchange for these rights, the Company agreed to provide PASNY capacity in the 345 kV transmission lines the Company owns from the Roseton Plant, to the extent it can do so after satisfying its obligations to Con Edison and Niagara Mohawk. Nine Mile 2 Plant: For a discussion of the Company's ownership interest in, costs for, and certain operating matters relating to the Nine Mile 2 Plant, see Item 7 hereof under the subcaption "Nuclear Operations," Note 3 - "Nine Mile 2 Plant," and Note 1 - "Summary of Significant Accounting Policies," under the subcaption "Jointly-Owned Facilities." NEW YORK POWER POOL/INDEPENDENT SYSTEM OPERATOR The Company is a member of the NYPP consisting of the major investor-owned electric utility companies in the State, Long Island Lighting Company ("LILCO"), a subsidiary of the Long Island Power Authority ("LIPA"), and PASNY. The members of the NYPP, by agreement, provide for coordinated operation of their bulk power electric systems with the objectives of using the most economical source of electricity, for the maintenance of a reserve margin equal to at least 18% of each member's forecasted peak load and for the sale and interchange of electric generating capability and energy among such members. The members of the NYPP also provide for the cooperative development of long-range plans for the expansion on an integrated basis of the bulk power supply system for New York State, compatible with environmental standards, and appropriately related to interstate and international capacity and reliability considerations. As part of the ongoing discussions regarding the restructuring of the electric industry in New York State referred to in Item 7 hereof under the caption "Competition/Deregulation," proposals have been made to terminate the NYPP and establish the following: In a filing with FERC, dated January 31, 1997, the member systems of the NYPP proposed a new market structure that included as its key elements the establishment of an ISO, the New York State Reliability Council ("NYSRC"), and the New York Power Exchange ("NYPE"). The ISO, NYSRC and NYPE will collectively replace the NYPP. 18 By order dated June 30, 1998, FERC conditionally authorized the establishment of the ISO and, by order dated January 27, 1999 FERC conditionally accepted, with modifications, the proposed ISO tariff and the proposed market rules of the ISO and granted the request for market-based rates. The January 27, 1999, order calls for public hearings on certain aspects of the proposed rates and provides for settlement judge proceedings. Future filings with FERC will be required to obtain FERC approval of the transfer of control of all necessary facilities to the ISO; any such transfer would not involve the transfer of ownership of such assets. The ISO's principal mission will be to maintain the reliability of the New York State bulk power systems and to provide transmission service on a comparable and non-discriminatory basis. The ISO will be open to buyers, sellers, consumers, and transmission providers; each of these groups would be represented on the Board of Directors of the ISO, which is proposed to be a not-for-profit New York corporation. The NYSRC's mission will be to promote and preserve the reliability of the bulk power system within New York State, through its primary responsibility for the promulgation of reliability rules; the ISO will develop the procedures necessary to operate the system within these reliability rules. The NYSRC is to be governed by a committee comprised of transmission providers and representatives of buyers, sellers, and consumer and environmental groups. The NYPE will provide a vehicle through which buyers and sellers can participate in the markets for energy, capacity and ancillary services. For more information on the ISO, see caption "Independent System Operator" in Note 2 "Regulatory Matters" hereof. GAS General: The Company's gas system consists of 161 miles of transmission pipelines and 986 miles of distribution pipelines. During 1998, natural gas was available to firm gas customers at a price competitive with that of alternative fuels. As compared to 1997, in 1998, firm retail gas sales, normalized for weather, decreased by 1% and the average number of firm gas customers increased by 1% or 633. Sales to interruptible customers decreased 22% in 1998 as compared to 1997. As compared to 1997, in 1998, firm retail transportation sales, normalized for weather, increased by 983% due to the average number of customers using firm retail transportation service increasing to 31 customers. In total, as compared with 1997 normalized, firm gas sendout increased by 1% in 1998. 19 For further information regarding the Company's incentive arrangements for interruptible gas sales, see Item 7 hereof under the subcaption "Interruptible Gas Sales." For the year ended December 31, 1998, the total amount of gas purchased from all sources was 16,962,360 million cubic feet ("Mcf."), which includes 369,067 Mcf. purchased directly for use as a boiler fuel at the Roseton Plant. The Company also owns two propane-air mixing facilities for emergency and peak shaving purposes located in Poughkeepsie and in Newburgh, New York. Each facility is capable of supplying 8,000 Mcf. per day with propane storage capability adequate to provide maximum facility sendout for up to three consecutive days. Sufficiency of Supply and Future Gas Supply: The peak daily demand for natural gas by the Company's customers for the year ended December 31, 1998, occurred on December 30, 1998, and amounted to 91,070 Mcf. The Company's peak-day gas capability in 1998 was 116,865 Mcf. The peak daily demand for natural gas by the Company's customers for that part of the 1998-1999 heating season through February 18, 1999, occurred on January 14, 1999, and amounted to 109,676 Mcf. Other: FERC permits non-discriminatory access to the pipeline facilities of interstate gas pipeline transmission companies subject to the jurisdiction of FERC under the Natural Gas Act. This rule allows access to such pipelines by the pipeline transmission company's customers enabling them to transport gas purchased directly from third parties and spot sources through such pipelines. Such access also permits industrial customers of gas distribution utilities to connect directly with the pipeline transmission company and to contract directly with the pipeline transmission companies to transport gas, thereby by-passing the distribution utility. None of the Company's customers have elected this by-pass option. The PSC has authorized New York State distribution gas utilities to transport customer-owned gas through their facilities upon request of a customer. Currently, interstate pipeline transmission companies are located in certain areas where the Company provides retail gas service (the Towns of Carmel, Pleasant Valley, Coxsackie, and LaGrange in New York State). For a discussion of the PSC proceeding relating to issues associated with the restructuring of the natural gas market, see Item 7 hereof under the subcaption "Natural Gas - PSC Restructuring Policy Statement" of the caption "Competition/ Deregulation." 20 OTHER MATTERS The Danskammer Plant and the Roseton Plant and all of the other principal generating plants and important property units of the Company are held by it in fee simple, except (1) certain rights-of-way, and (2) a portion of the property used in connection with the hydroelectric plants of the Company consisting of flowage or other riparian rights. The Company's present interests in the Roseton Plant and the Nine Mile 2 Plant are owned as undivided interests as a tenant-in-common with the other utility owners thereof. Certain of the properties of the Company are subject to rights-of-way and easements which do not interfere with the Company's operations. In the case of certain distribution lines, the Company owns only a part interest in the poles upon which its wires are installed, the remaining interest being owned by telephone companies. Certain electric transmission facilities owned by others are used by the Company pursuant to long-term contractual arrangements. All of the physical properties of the Company, other than property such as material and supplies excluded in the Company's First Mortgage Bond Indenture ("Mortgage") and its franchises, are subject to the lien of the Mortgage under which all of its Mortgage Bonds are outstanding. Such properties are from time to time subject to liens for current taxes and assessments which the Company pays regularly as and when due. During the three-year period ended December 31, 1998, the Company made gross property additions of $139.4 million and property retirements and adjustments of $32.5 million, resulting in a net increase (including Construction Work in Progress) in utility plant of $106.9 million, or 7.4%. ITEM 3 - LEGAL PROCEEDINGS -------------------------- ASBESTOS LITIGATION For a discussion of litigation against the Company involving asbestos, see Note 9 - "Commitments and Contingencies," hereof under the caption "Asbestos Litigation." ENVIRONMENTAL LITIGATION Roseton Plant: On March 23, 1992, in an action brought in 1991 by the Natural Resources Defense Council, Inc., the Hudson River Fisherman's Association and Scenic Hudson, Inc., a Consent Order was approved by the Supreme Court of the State of New York, Albany County. 21 Such Consent Order provides for certain operating restrictions at the Roseton Plant relating to the use of river water for plant cooling purposes, which restrictions have not, and are not expected to impose material additional costs on the Company. The Consent Order was extended until February 1, 1998, by agreement of the parties and Court approval. The Consent Order has since lapsed; however, both parties continue to consider themselves bound by its terms. For a description of the pending NYSDEC proceeding involving the renewal of the SPDES permit for the Roseton Plant, see Item 1 hereof under the subcaption "Environmental Quality - Water," and Note 9 "Commitments and Contingencies," under the caption "Environmental Matters - Clean Water Act Compliance." For a description of the Company's negotiations with the NYSDEC on a consent order for alleged opacity violations, see Item 1 hereof under the subcaption "Environmental Quality - Air." Newburgh Manufactured Gas Site: For a discussion of litigation filed against the Company by the City of Newburgh, New York, on May 26, 1995, in the United States District Court, Southern District of New York, and the Company's response thereto, see Note 9 - "Commitments and Contingencies," under the subcaption "Environmental Matters - Former Manufactured Gas Plant Facilities." CATSKILL INCIDENT An explosion occurred in a dwelling in the Company's gas service territory in Catskill, New York in November, 1992 which resulted in personal injuries, the death of an occupant and property damage. Lawsuits have been commenced against the Company arising out of such incident, including the following which could be material to the Company: By complaint, dated February 2, 1994, Carl Fatzinger, as executor of the estate of Mildred Fatzinger, and Virginia Fatzinger commenced an action in the Supreme Court of the State of New York, Greene County, against the Company and two other defendants. The complaint sought an unspecified amount of compensatory and punitive damages based on theories of negligence, absolute liability and gross negligence for the death of Mildred Fatzinger, personal injuries to Virginia Fatzinger and property damage alleged to have been caused by said explosion. By complaint, dated October 18, 1993, and filed in the Supreme Court of the State of New York, Greene County, Frank Reyes commenced an action against the Company for unspecified personal injuries and property damage alleged to have been caused by said explosion. The complaint seeks $2 million in compensatory damages and $2 million in punitive damages from the Company, based on theories of negligence and gross negligence. 22 The Fatzinger lawsuit was settled by the Company in January 1999 in an amount that is not material to the Company. With regard to the Reyes litigation, the Company believes that it has adequate insurance with regard to the claims for compensatory damages. The Company's insurance, however, does not extend to punitive damages. If punitive damages were ultimately awarded in the Reyes lawsuit, such award could have a material adverse effect on the financial condition of the Company. At this time, the Company can make no prediction as to any other litigation which may arise out of this incident. WAPPINGERS FALLS INCIDENT Two consecutive fires and explosions occurred on February 12, 1994, destroying a residence and commercial establishment in the Village of Wappingers Falls, New York, in the Company's service territory. Lawsuits have been commenced against the Company arising out of such incident, including the following: On August 31, 1994, the Company was served with a summons and complaint in an action brought by John DeLorenzo against the Company and the Village of Wappingers Falls in the Supreme Court of the State of New York, County of Dutchess. The complaint seeks unspecified amounts of damages, based on a theory of negligence, for personal injuries and property damage alleged to have been caused by the incident. On March 9, 1995, the Company was served with a summons and complaint in an action brought by Cengiz Ceng, individually and as executor under the last will and testament of Nizamettin Ceng, and Tarkan Thomas Ceng against the Company and the Village of Wappingers Falls in the Supreme Court of the State of New York, County of Dutchess. The complaint seeks recovery of $250,000 from the Company, based on the theory of negligence, for property damages alleged to have been caused by the incident. The above lawsuits have been consolidated into one action against the Company; however, no trial date has been set. The Company continues to investigate these claims and presently has insufficient information on which to predict their outcome. The Company believes that it has adequate insurance with regard to the claims for compensatory damages; however, the Company's insurance does not extend to punitive damages. If punitive damages were ultimately awarded, in any of these lawsuits, such award(s) could have a material adverse effect on the financial condition of the Company. At this time, the Company can make no prediction as to any other litigation which may arise out of this incident. 23 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------- No matter was submitted to a vote of security holders during the fourth quarter of the Company's fiscal year covered by this Report. PART II ------- ITEM 5 - MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ---------------------------------------------------- For information regarding the market for the Company's common stock and related stockholder matters, see Item 7 hereof under the captions "Capital Resources & Liquidity - Financing Program" and "Common Stock Dividends and Price Ranges" and Note 6 - "Capitalization - Capital Stock." Pursuant to applicable statutes and its Certificate of Incorporation, the Company may pay dividends on shares of Preferred and Common Stock only out of surplus. For information on the Company's program to repurchase some of its issued and outstanding common stock pursuant to a program approved by the PSC, see Item 7 hereof under the subcaption "Financing Program." 24 ITEM 6 - SELECTED FINANCIAL DATA -------------------------------- FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS AND SELECTED FINANCIAL DATA* (In Thousands)
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Operating Revenues Electric........................................ $ 418,507 $ 416,429 $ 418,761 $ 409,445 $ 411,082 Gas............................................. 84,962 103,848 95,210 102,770 104,586 --------- --------- --------- --------- --------- Total......................................... 503,469 520,277 513,971 512,215 515,668 --------- --------- --------- --------- --------- Operating Expenses Operations...................................... 266,472 284,714 267,779 274,665 274,497 Maintenance..................................... 26,904 27,574 28,938 29,440 32,716 Depreciation and amortization................... 45,560 43,864 42,580 41,467 40,380 Taxes, other than income tax.................... 63,458 64,879 66,145 66,709 66,899 Federal income tax.............................. 29,775 29,190 32,700 29,040 28,043 --------- -------- --------- --------- --------- Total......................................... 432,169 450,221 438,142 441,321 442,535 --------- -------- --------- --------- --------- Operating Income.................................. 71,300 70,056 75,829 70,894 73,133 --------- -------- --------- --------- --------- Other Income Allowance for equity funds used during construction....................... 585 387 466 986 866 Federal income tax.............................. 1,148 2,953 1,632 353 1,237 Other - net..................................... 6,865 8,079 4,815 8,886 6,296 --------- -------- --------- --------- --------- Total......................................... 8,598 11,419 6,913 10,225 8,399 --------- -------- --------- --------- --------- Income before Interest Charges.................... 79,898 81,475 82,742 81,119 81,532 Interest Charges.................................. 27,354 26,389 26,660 28,397 30,603 --------- -------- --------- --------- ---------
25 FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS AND SELECTED FINANCIAL DATA* (CONT'D) (In Thousands)
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net Income........................................ 52,544 55,086 56,082 52,722 50,929 Premium on Preferred Stock Redemption-Net......... - - 378 169 - Dividends Declared on Cumulative Preferred Stock.. 3,230 3,230 3,230 4,903 5,127 --------- --------- --------- --------- --------- Income Available for Common Stock................. 49,314 51,856 52,474 47,650 45,802 Dividends Declared on Common Stock................ 36,567 37,137 37,128 36,459 35,541 --------- --------- --------- --------- --------- Amount Retained in the Business................... 12,747 14,719 15,346 11,191 10,261 Retained Earnings - beginning of year............. 120,540 105,821 90,475 79,284 69,023 --------- --------- --------- --------- --------- Retained Earnings - end of year................... $ 133,287 $ 120,540 $ 105,821 $ 90,475 $ 79,284 ========= ========= ========= ========= ========= Common Stock Average shares outstanding (000s)............... 17,034 17,435 17,549 17,380 17,102 Earnings per share on average shares outstanding..................... $2.90 $2.97 $2.99 $2.74 $2.68 Dividends declared per share.................... $2.155 $2.135 $2.115 $2.095 $2.075 Book value per share (at year-end).............. $28.00 $27.61 $26.87 $25.96 $25.34 Total Assets...................................... $1,316,038 $1,252,090 $1,249,106 $1,250,092 $1,250,781 Long-term Debt.................................... 356,918 361,829 362,040 389,245 389,364 Cumulative Preferred Stock........................ 56,030 56,030 56,030 69,030 81,030 Common Equity..................................... 472,180 477,104 471,709 454,239 436,731 * This summary should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Form 10-K Report.
26 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------ COMPETITION/DEREGULATION GENERAL The Company remains subject to regulation for retail rates by the PSC and wholesale rates by the FERC. However, as a result of competition/deregulation initiatives and policy changes instituted by these agencies, the Company is experiencing increased electric and gas competition. COMPETITIVE OPPORTUNITIES PROCEEDING SETTLEMENT AGREEMENT For a discussion of the Company's Agreement, approved by the PSC in its Competitive Opportunities Proceeding, and a discussion of the impact of the Agreement on the Company's Accounting Policies, see the caption "Competitive Opportunities Proceeding Settlement Agreement" in Note 2 "Regulatory Matters" hereof. FORMATION OF HOLDING COMPANY For information with respect to the Company's proposed holding company restructuring see the caption "Holding Company Restructuring" in Note 2 - - "Regulatory Matters" hereof. FERC - ELECTRIC On April 24, 1996, the FERC released Order Nos. 888 and 889, promoting wholesale competition between public utilities by providing open access, non-discriminatory transmission services. The Orders have the effect of (i) requiring electric utilities to open their transmission lines to wholesale competitors, while allowing recovery of certain "stranded costs," (ii) requiring electric utilities to establish electronic systems to share information about available transmission capacity, subject to certain standards of conduct, and (iii) requiring certain functional separation of power marketing from other operations. The Company duly filed its open access transmission tariff ("OATT") with FERC, as required by Order No. 888, which tariff has been approved by FERC. Under the OATT, the Company must offer transmission service to wholesale customers on a basis that is comparable to that which it provides itself. The Company is also required to offer and/or provide certain ancillary services which contribute to the reliability and security of the transmission system. For information with respect to filings with the FERC to terminate the NYPP and establish an ISO, see the caption 27 "Independent System Operator" in Note 2 - "Regulatory Matters" hereof. NATURAL GAS-PSC RESTRUCTURING POLICY STATEMENT On November 3, 1998, the PSC, by Order, issued its "Policy Statement Concerning the Future of the Natural Gas Industry in New York State and Order Terminating Capacity Assignment" which sets forth the PSC's view of how best to ensure a competitive market for natural gas in New York State. That Order requires local distribution companies ("LDCs") to cease assigning capacity to migrating customers no later than April 1, 1999, and indicates LDCs will be provided a reasonable opportunity to recover strandable capacity costs. LDCs will also be required to develop individual plans to effectuate the changes required by the PSC. Each LDC must address gas supply and stranded cost strategies, rates, and customer education. In such Order, the PSC also identified several generic issues related to the gas industry which must be addressed. The PSC has indicated a desire to address these issues through collaborative sessions on a state-wide basis. THE YEAR 2000 ISSUE OVERVIEW Over the last several decades, certain computer systems and programs were designed to identify the year with two digits. Such systems may read dates in the year 2000 and thereafter as if those dates represent the year 1900 or thereafter. As a result, errors may occur if computers cannot distinguish between 1900 and 2000. All mainframe and personal computers, and related system, application code and process control systems using embedded chip technology have a potential for being adversely affected by the use of two digit definitions for the identification of the year component of date information. These include corporate business applications, facilities maintenance and operation systems, energy generation, control and distribution processes, customer service and support activities and the equipment related to the support of these activities. If such adverse effects are not successfully remediated before December 31, 1999, interruption to electric and/or natural gas service could occur, with attendant lost revenues and adverse customer relations impacts. At the Company, the Year 2000 problem project ("Project") is a high priority undertaking, encompassing all aspects of the Company's operations. The Project focuses on mission critical systems affecting delivery of service to the Company's customers and business critical applications necessary for the operational and financial stability of the Company. The Project is currently on schedule with implementation projected to be completed by June 1999. A Project Committee comprised of Company officers reports directly to the Chief Executive Officer 28 on a monthly basis on the status of its efforts to assess and remediate any of the Company's Year 2000 problems. The Company is actively engaged in the coordination and remediation of Year 2000 problems potentially affecting interconnection affiliations, electric transmission grid impact planning, service reliability and emergency and operational requirements with the North American Electric Reliability Council ("NERC") and NYPP. The Company has combined with domestic and international electric utilities in developing and sharing information through the Electric Power Research Institute ("EPRI") data base addressing Year 2000 problem assessment, testing and remediation of digital and embedded systems. Under the NERC guidelines, the Company's remediation is scheduled for completion by July 1999. The PSC has accepted the NERC guidelines and schedule. The Company has joined in similar initiatives to facilitate Year 2000 problem solving among electric and gas utilities under the auspices of the Edison Electric Institute ("EEI") and American Gas Association ("AGA"), respectively. The Company has not experienced any significant Year 2000 problems to date nor does it anticipate problems which may impact the Company's ability to provide uninterrupted service to its customers. However, given the complexity of Year 2000 problems and the Company's technology sensitive industry, even the most comprehensive and intensive program cannot guarantee that an unforeseen problem will not occur. Therefore, all Company operational emergency, disaster recovery and contingency plans currently in place are being reviewed against potential Year 2000 problem impacts. A Year 2000 problem contingency plan to deal with any unanticipated problems which may occur will be in place by the summer of 1999 and will address the reasonably likely worst-case scenarios. This contingency plan will identify supplemental staffing required to manually operate critical systems and intervene to resolve unanticipated problems. The Company also plans for an independent, external review and assessment of all Project activities in the second quarter of 1999. SCOPE & STATUS The Project began in 1995 to determine the potential for the Year 2000 problem to interrupt the Company's ability to provide reliable electric and gas services to its customers. The Project Committee was established to address the issues and established Year 2000 problem Project teams for each of the Company's operating areas to address the following key components: 1. Computer hardware and software operating systems and infrastructure; 29 2. Information applications, including customer service, financial and human resource systems; 3. Telecommunication systems; 4. Digital systems and devices with embedded processors such as power instrumentation, controls and metering; and 5. Major suppliers. The part of the Project dealing with the inventory and assessment of all known Company mission critical and business critical systems has been completed. These items are those believed by the Company to affect the delivery of service to the customer, the integrity of the environment, the financial and operational infrastructure of the Company and the safety of individuals. The part of the Project dealing with the remediation, testing and implementation of required modifications to Company assets to eliminate Year 2000 problems and achieve Year 2000 compliant status is on, or ahead of, schedule. The design, development and testing of Company contingency planning is following the guidelines for content and completeness as issued by the NERC. The process of identifying and prioritizing critical suppliers, has been completed with evaluation of supplier status currently in progress. To identify the Company's critical suppliers, the Company's materials control and fuels procurement personnel reviewed those materials and services required for support of mission and business critical activities. These results were reviewed with management and formed the basis of direct written requests to suppliers for information on their Year 2000 compliance. Evaluation of responses to those requests will determine future verification procedures. Validation of supplier compliance may include on-site verification of their Year 2000 readiness information, including individual and/or industry compliance test results. Supplier contingency planning is scheduled to be developed concurrently and as part of the Company's overall contingency planning. COSTS Total Project costs for all activities, including inventory, remediation and testing required to become Year 2000 compliant are not deemed material nor significant relative to the Company's financial position. It is expected that all Project expenditures will be paid for by the Company from its normal operating and maintenance budgets. Of a total Project estimate of $3.0 million approximately $1.4 million has been expended through December, 1998, including $814,400 of internal labor charges. The Company does not expect final Project costs to exceed this estimate; however, no assurances can be given. 30 RISKS The reasonably likely worst-case scenario should the Company and/or its suppliers fail to correct a material Year 2000 problem is an interruption in the Company's ability to deliver electric and/or gas service to customers, thereby adversely impacting the ability of major customers to continue effective operations. If such interruption extended for a lengthy period of time, it could result in a loss of revenue that could have a material adverse effect on the Company's financial position. Additionally, Year 2000-related problems could disrupt the operations of major customers, reducing their use of Company services or their ability to pay for such services. However, it is expected that any potential impact to the Company specifically related to a Year 2000 problem-induced business failure for any of its customers would not differ from an extended Company service interruption attributable to physical service failures, weather events or natural disaster. The Company believes that the completion of the Project as scheduled will significantly reduce the possibility of significant interruptions to its normal business operations; however, no assurance can be given. RATE PROCEEDINGS ELECTRIC See the caption "Competitive Opportunities Proceeding Settlement Agreement" in Note 2 hereof. GAS The Company currently does not have a gas rate case on file with the PSC. Management will continue to monitor the financial position of its gas business to determine the necessity of filing a gas rate case in the future. CAPITAL RESOURCES AND LIQUIDITY CONSTRUCTION PROGRAM As shown in the Consolidated Statement of Cash Flows, the cash expenditures related to the Company's construction program amounted to $45.1 million in 1998, a $1.6 million increase from the $43.5 million expended in 1997. As shown in the table below, cash construction expenditures for 1999 are estimated to be $50.7 million, an increase of $5.6 million compared to 1998 expenditures. In 1999, the Company expects to satisfy its external funding requirements, either through short-term borrowings or issuances of medium term notes. 31 Estimates of construction expenditures, internal funds available, mandatory and optional redemption or repurchase of long-term securities, and working capital requirements for the two-year period 1999-2000 are set forth by year in the following table: Total 1999 2000 1999-2000 ---- ---- --------- (In Thousands) Construction Expenditures*..... $ 50,700 $ 49,100 $ 99,800 Internal Funds Available....... 55,200 45,200 100,400 ------- ------- ------- Excess of Construction Expenditures over Internal Funds......................... (4,500) 3,900 600) ------- ------- ------ Mandatory Redemption of Long- term debt..................... 20,100 35,100 55,200 Optional Redemption or Purchase of Long-term debt............. 37,600 - 37,600 Other Cash Requirements........ 3,000 19,000 22,000 ------- ------- ------- Total Cash Requirements........ $ 56,200 $ 58,000 $114,200 ======= ======= ======= * Excluding the equity portion of Allowance for Funds Used During Construction ("AFDC"), a noncash item. Estimates of construction expenditures are subject to continuous review and adjustment, and actual expenditures may vary from estimates. These construction expenditures include capitalized overheads, nuclear fuel and the debt portion of AFDC and assume that the planned divestiture of the Roseton and Danskammer Plants occurs on January 1, 2000. The actual date of divestiture is likely to occur at some future date in 2000. Included in the 1999 construction expenditures are expenditures which are required to comply with the Clean Air Act and related Amendments of 1990. As shown in the table above, it is presently estimated that funds available from internal sources will finance 100% of the Company's cash construction expenditures in 1999 and 92% in 2000. During this same two-year period, total external financing requirements are projected to amount to $114.2 million, of which $55.2 million is related to the mandatory redemption of long-term securities and $37.6 million is related to the optional redemption of long-term securities. 32 CAPITAL STRUCTURE Over the period 1989-1996, the Company worked to increase its common equity ratio to a target range of 50% to 52%, which it achieved in 1996. As a result of the ratio exceeding this target range during 1997, the Company instituted a common stock repurchase program, which enabled the Company to both maintain the target equity ratio and enhance earnings per share in 1998. The Company reached the target equity ratio through the retention of a portion of its earnings, original issuances of its common stock under its Dividend Reinvestment Program ("DRP") and its Customer Stock Purchase Plan ("CSPP") (both of which have since been superseded, effective January 1, 1997, by the Company's Stock Purchase Plan described in this Item 7 under the caption "Financing Program," below and in Note 6 "Capitalization - Capital Stock" hereof) and redemptions of debt and preferred stock. However, the common equity ratio target range of 50% to 52% was established under a "vertically integrated" structure in effect prior to the effectiveness of the Agreement, (described in Note 2 - "Regulatory Matters" hereof under the caption "Competitive Opportunities Proceeding Settlement Agreement"). The Agreement requires that the Company divest itself of its fossil-fueled generation and permits the Company to establish a holding company structure which will allow the Company to invest in unregulated business ventures. Divesture of its fossil-fueled generation and the formation of the holding company structure will require that the Company reevaluate its common equity ratio target. The target equity ratio may be reduced in view of a potentially lower level of business risk after such divestiture. This reduction may make additional equity capital available to invest in unregulated business ventures. The increase in the common equity ratio has contributed to the significant improvement in the Company's interest coverage ratios as shown under the caption "Financial Indices" in this Item 7. The Company's interest coverage ratios have also improved due to the refinancing of a portion of its debt at lower interest rates. Despite a tightening of bond rating criteria applied to the electric utility industry, the Company has maintained or improved its senior secured debt ratings since 1991. During 1998, Moody's Investors Service, Inc., upgraded the Company's senior debt rating from "A3" to "A2." The Company's other bond ratings, which were reaffirmed during 1998, are "A" by Standard & Poor's Corporation, Duff & Phelps Credit Rating Co. and Fitch/IBCA Investors Service. The Company's continuing goal is to achieve and maintain bond ratings at the "A" level. Under the terms of the Agreement, the Company may invest up to $100 million in unregulated businesses prior to the formation of a holding company structure, which formation is contemplated to become effective in the first half of 1999. After its formation, such holding company structure will be free 33 to invest in new businesses subject only to the terms of the Agreement. Pursuant to the terms of the Agreement, the Company has invested an additional $25.5 million of equity capital in unregulated ventures. Set forth below is certain information with respect to the Company's capital structure at the end of 1998, 1997 and 1996: YEAR-END CAPITAL STRUCTURE ------------------------------- 1998 1997 1996 ---- ---- ---- Long-term debt .......... 41.0%(a) 40.5% 40.1% Short-term debt ......... 1.9 - 1.7 Preferred stock ......... 6.1 6.3 6.2 Common equity ........... 51.0 53.2 52.0 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== (a) Excludes $16.7 million of bonds issued through the New York Energy Research and Development Authority ("NYSERDA") on December 2, 1998, discussed below under the subcaption "Financing Program." FINANCING PROGRAM By an Order issued and effective December 4, 1996, the PSC granted the Company authorization to issue and sell, through December 31, 1999, up to an additional $40 million of securities which can be comprised of medium term notes or common stock solely or a combination of medium term notes and common stock. The December 1996 Order also authorizes the Company to acquire, through December 31, 1999, not more than 2.5 million shares of its issued and outstanding common stock. The Company also received approval to combine its DRP, its CSPP and its Employee Stock Purchase Plan ("ESPP") into a new Stock Purchase Plan, which was done effective January 1, 1997. The Stock Plan can be either an original issue plan or an open market purchase plan. The Stock Purchase Plan is currently an open-market purchase plan. Pursuant to the aforementioned PSC authorization, the Company, in January 1997, instituted a common stock repurchase program primarily for the purpose of managing its common equity ratio. Since inception of such program, the Company repurchased through December 31, 1998, 692,900 shares of its common stock. As a result of such program and the issuance of incremental debt, the Company's common equity ratio declined to 51.0% at December 31, 1998. In view of the price per share of common stock, cash flow and opportunities to reinvest in the Company's business or invest in new unregulated businesses, the Company has suspended this program, effective December 31, 1998. However, the Company will continue to reevaluate reactivation of its repurchase program on a quarterly basis. Under the terms of the Agreement, prior to the formation of a new holding company structure, the Company may 34 transfer up to $100 million from its regulated utility business to its unregulated businesses, of which approximately $25.5 million has been transferred as of December 31, 1998. The Company may, pursuant to this authorization, issue, no later than June 30, 2001, up to $100 million of new securities, including up to one million shares of common stock. This authorization is separate from the securities issuance authorization under the PSC's December, 1996 Order discussed above. Following the formation of the holding company structure contemplated under the Agreement, the holding company may issue new securities in furtherance of its business plan. On September 8, 1998, the Company issued and sold a $15 million tranche of its unsecured Medium-Term Notes, Series B, under its medium term note program pursuant to said PSC Order of December 1996. Such notes bear a fixed annual interest rate of 5.93%, mature on September 10, 2001, and are not redeemable at the option of the Company prior to maturity. The net proceeds to the Company from the sale of such notes were $14,947,500 or 99.65% (before deducting expenses). On December 2, 1998, the Company refinanced the 8.375% series of pollution control bonds issued on its behalf in 1988 in the aggregate principal amount of $16.7 million by NYSERDA (the "1988 NYSERDA Bonds") by refunding the 1988 NYSERDA Bonds with the proceeds of the issuance and sale on that date of $16.7 million aggregate principal amount of a new series of NYSERDA bonds (the "1998 NYSERDA Bonds"). The redemption date for the 1988 NYSERDA Bonds is March 1, 1999. The 1998 NYSERDA Bonds have the same maturity date (December 1, 2028) as the 1988 NYSERDA Bonds they refunded; however, the 1998 NYSERDA Bonds have multi- modal features, which allows the Company in certain circumstances to convert the 1998 NYSERDA Bonds from time to time to and from certain interest rate modes (variable and fixed) of varying lengths, at the end of which the 1998 NYSERDA are subject to mandatory tender and purchase and may be remarketed, or their interest rate may be converted to a fixed rate until maturity. During certain variable interest rate modes, the 1998 NYSERDA Bonds are subject to optional tender and purchase by their holders and may be remarketed. The 1998 NYSERDA Bonds are insured as to payment of principal and interest as they become due by a municipal bond insurance policy issued by Ambac Assurance Corporation and purchased by the Company. The 1998 NYSERDA Bonds were issued initially in a term rate mode for five years, ending on November 30, 2003, during which period they will bear interest at the fixed annual rate of 4.20%. Upon their mandatory tender for purchase on December 1, 2003, the Company will have the option to convert the 1998 NYSERDA Bonds to an alternate interest rate mode or to bonds bearing a fixed rate of interest for the remainder of their term as described above. On January 15, 1999, the Company issued and sold a $20 million tranche of its unsecured Medium-Term Notes, Series C, under its medium term note program pursuant to said PSC Order of December 1996. Such notes bear a fixed annual interest rate of 35 6.00%, mature on January 15, 2009, and are not redeemable at the option of the Company prior to maturity. The net proceeds to the Company from the sale of such notes were $19,875,000 or 99.875% (before deducting expenses). Such proceeds were applied to the payment at maturity on January 15, 1999, of a $20,000,000 tranche of the Company's unsecured Medium-Term Notes, Series A, that bore interest at a fixed annual interest rate of 5.38%. If interest rates are favorable, the Company may redeem its 6 1/4% NYSERDA Bonds ($4.1 million) at par and its 7 3/8% NYSERDA Bonds ($33.4 million) at 103%. For more information with respect to the Company's financing program in general, see Note 6 - "Capitalization Capital Stock" and Note 7 - "Capitalization - Long-Term Debt." SHORT-TERM DEBT As more fully discussed in Note 5 - "Short-Term Borrowing Arrangements" hereof, the Company has a revolving credit agreement with four commercial banks for borrowing up to $50 million through October 23, 2001. In addition, the Company has several committed and uncommitted bank facilities ranging from $.5 million to $50 million from which it may obtain short-term financing. Such agreements give the Company competitive options to minimize its cost of short-term borrowing. Authorization from the PSC limits the amount the Company may have outstanding at any time under all of its short-term borrowing arrangements to $52 million in the aggregate. As part of its establishing a holding company, structure, CH Energy Group, Inc., the proposed holding company, has established a revolving credit agreement with three commercial banks for borrowing up to $50 million through December 4, 2001. No borrowings are permitted under such agreement until the share exchange establishing CH Energy Group, Inc. as a holding company has been effected. RESULTS OF OPERATIONS The following discussion and analysis includes an explanation of the significant changes in revenues and expenses when comparing 1998 to 1997 and 1997 to 1996. Additional information relating to changes between these years is provided in the Notes. EARNINGS Earnings per share of common stock are shown after provision for dividends on preferred stock and are computed on the basis of the average number of common shares outstanding during the year. The number of common shares, the earnings per share and the rate of return earned on average common equity are as follows: 36 1998 1997 1996 ---- ---- ---- Average shares outstanding (000s).. 17,034 17,435 17,549 Earnings per share................. $ 2.90 $ 2.97 $ 2.99 Return earned on common equity per financial statements*......... 10.3% 10.8% 11.1% * Return on equity for regulatory rate-making purposes differs from these figures. Earnings per share in 1998 when compared to 1997 decreased $.07 per share. This decrease resulted primarily from the net effect of $.11 for the non-recurring items recorded in 1998 and 1997. The 1998 non-recurring items are the final provision for the non-recoverable portion of a purchased power contract and the gain on the sale of a subsidiary asset. Nonrecurring items in 1997 included the recording of tax adjustments from the favorable settlement of various Internal Revenue Service ("IRS") audits and the initial provision for the non-recoverable portion of a purchased power contract. Also contributing to the decrease was increased depreciation of $.07 on the Company's plant and equipment and decreased net operating revenues of $.07. The reduction in net operating revenues includes a reduction in gas net operating revenues of $.05 resulting primarily from a decrease in usage by residential, commercial and industrial customers due to milder weather. Heating billing degree days, as compared to 1997, were 11% lower in 1998. These decreased earnings in 1998 were partially offset by the favorable earnings impact of decreased operation and maintenance expenses of $.11, of which $.10 is a reduction in employee compensation and associated fringe benefits and the favorable impact of the Company's common stock repurchase program of $.07. The reduction in compensation is primarily due to a reduction in the number of employees. Earnings per share in 1997, when compared to 1996 results, decreased $.02 per share. This decrease resulted substantially from a $.13 reduction in electric and gas net operating revenues (including fuel costs and purchased electricity) attributable largely to decreased sales resulting primarily from a decrease in usage by residential and industrial electric customers and residential and commercial gas customers due to unseasonable weather experienced in 1997. Heating billing degree days were 8% lower and cooling degree days were 16% lower, when 1997 results were compared to 1996. The effect of these unseasonable weather conditions alone reduced earnings by an estimated $.22, despite a 1% increase in the number of customers. Also contributing to the decrease in 1997 earnings were decreased electric earnings related to regulatory incentive programs based on fuel costs and energy efficiency of $.10, largely due to the reduced availability of purchased power at a cost below the Company's fossil-fueled generation, and increased depreciation expense of $.07 on the Company's plant and equipment. 37 Partially offsetting these decreases in 1997 earnings was a $.09 increase resulting from the net effect of two non-recurring items as follows: the 1997 recording of tax adjustments from the favorable settlement of various IRS audits and the 1997 provision for the non-recoverable portion of a purchased power contract. Other items which impacted earnings favorably included: decreased uncollectible accounts of $.05, avoided interest expense from the optional redemption in May 1996 of the Company's 8 3/4% Series $30 million First Mortgage Bonds of $.04 and $.10 due to the combined effect of various other items including a decrease in interest expense and an increase in interest and dividend income. The Company has established a projection for earnings in calendar year 1999 of $2.79 per share. This projected level, which is $.11 per share below the actual 1998 level of $2.90 per share, reflects the planned transfer of equity capital from regulated utility operations to unregulated affiliates in stages over the course of the year. These transfers will fund expansion of unregulated affliates into new competitive energy markets to take advantage of opportunities expected to develop due to industry restructuring. However, these transfers are projected to result in a modest reduction in earnings per share in 1999 as the new operations mature. As a result of the Company's strong financial condition and conservative dividend policy, the Company expects that any resulting reduction in earnings as new business development activities mature will not impact the Company's ability to maintain the current level of dividend, although no assurances can be given. 38 OPERATING REVENUES Total operating revenues decreased $16.8 million (3%) in 1998 as compared to 1997 and increased $6.3 million (1%) in 1997, as compared to 1996. See the table below for details of the variations: INCREASE OR (DECREASE) FROM PRIOR YEAR ------------------------------------------------------------------------------------------- 1998 1997 ---- ---- ELECTRIC GAS TOTAL ELECTRIC GAS TOTAL -------- --- ----- -------- --- ----- (In Thousands) Customer sales............. $ 770 $(12,797) $(12,027) $(7,860) $ 2,624 $(5,236) Sales to other utilities... 6,991 561 7,552 4,840 (2,290) 2,550 Fuel cost adjustment....... 1,743 (8,172) (6,429) (291) 8,846 8,555 Deferred revenues.......... (7,013) 1,563 (5,450) 675 (1,125) (450) Miscellaneous.............. (412) (42) (454) 304 583 887 ------ ------- ------- ------ ------ ------ Total............... $ 2,079 $(18,887) $(16,808) $(2,332) $ 8,638 $ 6,306 ====== ======= ======= ====== ====== ======
39 SALES The Company's sales vary seasonally in response to weather. Generally electric revenues peak in the summer and gas revenues peak in the winter. Sales of electricity within the Company's service territory increased 1% in 1998 and decreased 3% in 1997. Electric sales in 1998 to residential, commercial and industrial customers each increased 1%. In 1997, electric sales decreased 3% due primarily because of a decrease in usage by residential and industrial customers largely due to the unseasonable weather conditions experienced in 1997, when compared to 1996. Firm sales of natural gas (which excludes interruptible and transportation sales) decreased 12% in 1998 due primarily to a decrease in usage by residential and commercial customers largely due to the unseasonable weather conditions experienced in 1998. In addition, firm sales to industrial customers decreased due substantially to a decrease in usage by a large industrial customer and the conversion of a number of industrial customers to transportation service. Firm sales of natural gas in 1997 decreased 5% due primarily to a decrease in usage by residential and commercial customers. Changes in sales from last year by major customer classification, including interruptible gas sales, are set forth below. Also indicated are the changes related to energy delivery service: % Increase (Decrease) From Prior Year ---------------------------------------- Electric (MWh) Gas (Mcf) -------------- --------- 1998 1997 1998 1997 ---- ---- ---- ---- Residential...................... 1 (2) (11) (6) Commercial....................... 1 - (9) (6) Industrial....................... 1 (6) (32) 11 Interruptible.................... N/A N/A (22) 111 Energy Delivery Service Electric ...................... (a) N/A N/A N/A Gas - Firm Customers........... N/A N/A 869 (a) - Interruptible............ N/A N/A (3) 74 (a) - Prior year was zero. Residential and Commercial Sales: Residential electric and gas sales are primarily affected by the growth in the number of customers and the change in customer usage. In 1998, sales of electricity to residential customers increased 1% due to an increase in usage per customer. Commercial sales increased 1% resulting from the net effect of a 2% increase in the number of customers and a 1% decrease in usage per customer. Unseasonable weather conditions (billing degree days were 11% lower) contributed to the decrease in residential and commercial sales 40 of gas. Sales of gas to residential customers decreased 11% due to the net effect of a 12% decrease in usage per customer due to unseasonable weather conditions and a 1% increase in the number of customers. Commercial sales decreased 9% due to the net effect of a 12% decrease in usage per customer and a 3% increase in the number of customers. In 1997, residential electric and gas sales and commercial gas sales decreased primarily because of a decrease in customer usage largely due to the unseasonable weather experienced in the Company's service territory in 1997. Heating billing degree days were 8% lower and cooling degree days were 16% lower in 1997 than in the prior year. Industrial Electric Sales: In 1998, as compared to 1997, industrial electric sales increased 1%. In 1997, as compared to 1996, industrial electric sales decreased 6% primarily due to a decrease in usage by a large industrial customer. Industrial Gas Sales: In 1998, firm gas sales to industrial customers decreased 32% primarily because of a decrease in usage by a large industrial customer and the conversion of a number of industrial customers to firm transportation service. Firm gas sales to industrial customers for 1997 increased 11% primarily because of increased usage by a large industrial customer. Interruptible Gas Sales: In 1998, interruptible gas sales decreased 22% largely due to a decrease in boiler gas usage for electric generation. Interruptible gas sales increased 111% in 1997, due largely to an increase in natural gas sold for use as a boiler fuel at the Roseton Plant. The use of gas as a boiler fuel at the Roseton Plant is dependent upon its economic benefit as compared to the use of oil for generation or the purchase of electricity to meet the Company's load requirements. Due to sharing arrangements, as described in the caption "Incentive Arrangements" of Item 7 hereof that are in place for interruptible gas sales and transportation of customer-owned gas, variations from year to year typically have a minimal impact on earnings. Electric Delivery Service: The phase-in of retail access for residential, commercial and small industrial customers began in 1998 as part of the Agreement. As a result of .1% of the Company's customers moving from purchases of electricity from the Company within the Company's franchise area to purchases from energy marketers (retail access), 53 million kWh of electricity was delivered to retail access customers in 1998. Transportation of Customer-owned Gas: The volume of customer-owned gas transported for firm customers increased 869% in 1998 due to an increase in the number of customers switching 41 from full gas supply to firm transportation service, which had no material revenue impact on the Company. No volumes of gas were transported in 1996 for firm customers. Transported gas for interruptible customers decreased 3% in 1998 due to a decrease in usage by a large industrial customer. In 1997, transported gas for interruptible customers increased 74% due to an increase in usage by a large industrial customer. INCENTIVE ARRANGEMENTS Pursuant to certain incentive formulas approved by the PSC, the Company either shares with its customers, certain revenues and/or cost savings exceeding defined predetermined levels, or is penalized in some cases for shortfalls from the targeted levels or defined performance standards. Incentive formulas are in place for fuel cost variations, sales of electricity and gas to other utilities, interruptible gas sales, capacity release transactions and customer satisfaction. The net results of these incentive formulas were to increase pretax earnings by $1.0 million, $700,000 and $2.9 million during 1998, 1997, and 1996, respectively. OPERATING EXPENSES Changes from the prior year in the components of the Company's operating expenses are listed below: Increase or (Decrease) From Prior Year -------------------------------------- 1998 1997 ---------------- ----------------- Amount % Amount % ------ - ------ - (In Thousands) Operating Expenses: Fuel and purchased electricity............... $ 3,280 3 $ 7,584 7 Purchased natural gas...... (16,550) (27) 10,878 22 Other expenses of operation................. (4,972) (5) (1,527) (2) Maintenance................ (670) (2) (1,364) (5) Depreciation and amortization.............. 1,696 4 1,284 3 Taxes, other than income tax................ (1,421) (2) (1,266) (2) Federal income tax......... 585 2 (3,510) (11) ------- ------- Total.............. $(18,052) (4) $ 12,079 3 ======= ======= The most significant elements of operating expenses are fuel and purchased electricity in the Company's electric department and purchased natural gas in the Company's gas 42 department. Approximately 30% in 1998 and 29% in 1997 of every revenue dollar billed by the Company's electric department was expended for the combined cost of fuel used in electric generation and purchased electricity. The corresponding figures in the Company's gas department for the cost of purchased gas were 53% and 59%, respectively. In an effort to keep the cost of electricity at the lowest reasonable level, the Company purchases energy from sources such as other member companies of the NYPP, Canadian hydro sources and energy marketers whenever energy can be purchased at a unit cost lower than the incremental cost of generating the energy in the Company's plants. Purchased natural gas decreased $16.6 million (27%) in 1998 largely due to lower firm and interruptible gas sales, including gas used as a boiler fuel. Other expenses of operations decreased $5.0 million (5%) in 1998 resulting from decreased employee compensation due to fewer employees and associated fringe benefits. In 1997, fuel and purchased electricity increased $7.6 million (7%) primarily because of a 3% increase in total system sales which includes sales to other utilities. Purchased natural gas increased $10.9 million (22%) in 1997 primarily because of higher interruptible gas sales including gas used as a boiler fuel at the Roseton Plant. See Note 4 - "Federal Income Tax," hereof for an analysis and reconciliation of the federal income tax. OTHER INCOME AND INTEREST CHARGES Other income (excluding AFDC) decreased $3.0 million (27%) in 1998 and increased $4.6 million (71%) in 1997. The 1998 decrease resulted primarily from interest refunded in 1997 from the settlement of various IRS audits. The 1997 increase was due primarily to interest refunded in 1997 from the settlement of various IRS audits and the 1996 charges associated with the optional redemption of the 8 3/4% Series of First Mortgage Bonds. Total interest charges (excluding AFDC) increased $1.0 million (4%) in 1998 primarily because of an increase in borrowings, and $533,000 (2%) in 1997. 43 The following table sets forth some of the pertinent data on the Company's outstanding debt: 1998 1997 1996 ---- ---- ---- (In Thousands) Long-term debt: Debt retired................ $ 90 $ 85 $ 30,000 Outstanding at year-end*: Amount (including current portion)................... 396,998 363,744 364,026 Effective rate.............. 6.56% 6.78% 6.70% Short-term debt: Average daily amount outstanding ............... $ 1,171 $ 1,692 $ 5,477 Weighted average interest rate ............. 5.51% 5.54% 5.59% *Including debt of subsidiaries of $9.0 million in 1998, $7.4 million in 1997, and $7.6 million in 1996. See Note 5 - "Short-Term Borrowing Arrangements" and Note 7 "Capitalization - Long-Term Debt" hereof for additional information on short-term and long-term debt of the Company. NUCLEAR OPERATIONS The Nine Mile 2 Plant is owned, as tenants-in-common, by the Company, Niagara Mohawk, New York State Electric & Gas Company ("NYSEG"), LILCO, a subsidiary of LIPA, and Rochester Gas and Electric Corporation ("Rochester"). Niagara Mohawk operates the Nine Mile 2 Plant. The Company owns a 9% interest of the Nine Mile 2 Plant, which is discussed in Note 3 - "Nine Mile 2 Plant." The Company's share of operating expenses, taxes and depreciation pertaining to the operation of the Nine Mile 2 Plant are included in the Company's financial results. For both 1998 and 1997, the actual cost of operations was less than the allowable Nine Mile 2 Plant operation and maintenance expenses provided in Supplement No. 5 to the 1990 Settlement Agreement, as approved by the PSC. In both 1998 and 1997, the underruns were entirely deferred for the future benefit of customers (see Note 2 - "Regulatory Matters"). The Company has continued to participate actively in the management, operations and accounting committees for the Nine Mile 2 Plant and will continue to do so in the future. On October 12, 1996, Niagara Mohawk and Rochester announced plans to establish a joint nuclear operating company to be known as New York Nuclear Operating Company ("NYNOC"). NYNOC was envisioned to assume full responsibility for operation of all the nuclear plants in New York State, including the Nine Mile 2 Plant, Niagara Mohawk's Unit No. 1 of the Nine Mile Point Nuclear Station and Rochester's Ginna Nuclear Plant. Since that time 44 NYNOC has been organized as a New York Limited Liability Company with three members: Niagara Mohawk, Rochester, and Con Edison. Although not a member, the PASNY has participated in the development of plans to implement NYNOC. It is expected that NYNOC could contribute to maintaining a high level of operational performance, contribute to continued satisfactory Nuclear Regulatory Commission ("NRC") regulatory compliance, provide opportunities for continued cost reductions and provide the basis for satisfactory economic regulation by the PSC. The initial work associated with plans for implementation of NYNOC was completed in 1998. No substantial further work on its implementation is anticipated until completion of the PSC proceeding regarding the future of nuclear power plants in New York State (as described below). Sufficient information is not available for the Company to make an assessment of such plans or whether it would consent to such plans to the extent that the Nine Mile 2 Plant is affected. Until such assessment can be made, the Company can take no position with respect to such plans. On or about June 15, 1998, NYSEG, one of the owners of the Nine Mile 2 Plant, commenced an action against Niagara Mohawk (which is the operator of the Nine Mile 2 Plant) in Supreme Court of the State of New York, Tompkins County, demanding, among other things, judgment to (i) enjoin Niagara Mohawk from transferring operating responsibility of the Nine Mile 2 Plant to NYNOC; and (ii) declare that Niagara Mohawk may not transfer its operational responsibility for the Nine Mile 2 Plant to NYNOC without NYSE&G's consent. The Company can make no prediction as to the outcome of this litigation. Niagara Mohawk and NYSE&G publicly announced in January 1999 plans to pursue the sale of their nuclear assets, including their interest in the Nine Mile 2 Plant. The Company can make no prediction as to whether or not any such sale will occur, or if such sale occurs, the effect on the Company's interest in the Nine Mile 2 Plant or its operations. On August 27, 1997, the PSC Staff issued a "Notice Soliciting Comments on Nuclear Generation" requesting comments and alternative approaches by interested parties on a "Staff Report on Nuclear Generation" ("Nuclear Report"). The Nuclear Report concludes that nuclear generation along with non-nuclear generation facilities, should be subject to the discipline of market-based pricing. On March 20, 1998, the PSC initiated a proceeding to examine a number of issues raised by the Nuclear Report and the comments received in response to it. In reviewing the Nuclear Report and parties' comments, the PSC: (a) adopted as a rebuttable presumption the premise that nuclear power should be priced on a market basis to the same degree as power from other sources, with parties challenging that premise having to bear a substantial burden of persuasion, (b) characterized the proposals in the Staff paper as by and large consistent in concept with the PSC's goal of a competitive, market-based electricity industry, 45 (c) questioned PSC Staff's position that would leave funding and other decommissioning responsibilities with the sellers of nuclear power interests and (d) indicated interest in the potential for the NYNOC to benefit customers through efficiency gains and directed pursuit of that matter in this nuclear generating proceeding or separately upon the filing of a formal NYNOC proposal. The proceeding is expected to be completed in 1999. A decommissioning study for the Nine Mile 2 Plant was completed in 1995. The study's estimate of the cost to decommission the Plant is significantly higher than previous estimates. The Company believes that decommissioning costs, if higher than currently estimated, will ultimately be recovered in rates, although no such assurance can be given. However, future developments in the utility industry, including the effects of deregulation and increasing competition could change this conclusion. The Company cannot predict the outcome of these developments. For further information on decommissioning, see Note 3 - "Nine Mile 2 Plant." The NRC issued a policy statement on the Restructuring and Economic Deregulation of the Electric Utility Industry ("Policy Statement") in 1997. The Policy Statement addresses NRC's concerns about the adequacy of decommissioning funds and about the potential impact on operational safety and reserves to the NRC the right, in highly unusual situations where adequate protection of public health and safety would be compromised, to consider imposing joint and several liability on minority co-owners when one or more co-owners have defaulted on their contractual obligations. On December 28, 1998, the NRC announced commencement of a rulemaking proceeding initiated by a group of utilities which are non-operating joint owners of nuclear plants. These utilities request that the enforcement provisions of the NRC regulations be amended to clarify NRC policy regarding the potential liability of joint owners if other joint owners become financially incapable of bearing their share of the burden for safe operation or decommissioning of a nuclear power plant. Current NRC regulations allow a utility to set aside decommissioning funds annually over the estimated life of a plant. In addition to the above Policy Statement, the NRC is proposing to amend its regulations on decommissioning funding to reflect conditions expected from deregulation of the electric power industry. The Company is unable to predict how such increased stringency may affect the results of operations or financial condition of the Nine Mile 2 Plant. On July 5, 1998, the Nine Mile 2 Plant completed its sixth refueling outage, which commenced on May 2, 1998. It is scheduled to commence its seventh refueling outage March 1, 2000. 46 OTHER MATTERS New Accounting Standards: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Any gain or loss resulting from changes in such fair value is required to be recognized in earnings to the extent the derivatives are not effective as hedges. SFAS 133 is effective for fiscal years beginning after June 15, 1999, and is effective for interim periods in the initial year of adoption. The Company currently does not own any derivative instruments; however, the Company intends to implement an energy trading risk management program in 1999 to manage the price risks associated with fuel purchases for generation, natural gas purchases for native load customers, and wholesale power transactions. The Company may utilize various financial instruments, such as futures, options, swaps, caps, floors and collars to stabilize the price volatility of these commodities. At this time, the Company cannot assess the impact that the proposed hedging program would have on its financial position or results of operations. In February 1996, the FASB issued an exposure draft entitled "Accounting for Certain Liabilities Related to Closure and Removal of Long-Lived Assets," which includes nuclear plant decommissioning. Over the past two years, this exposure draft has been the source of continual debate. The FASB has committed to completing this project and is proceeding toward issuance of another exposure draft (expected in the second quarter of 1999). If the accounting standard proposed in such exposure draft were adopted, it could result in higher annual provisions for removal or decommissioning to be recognized earlier in the operating life of nuclear and other generating units and an accelerated recognition of the decommissioning obligation. The FASB is continuing to explore various issues associated with this project including liability measurement and recognition issues. In addition, an effective date for the new exposure draft has not yet been determined. The FASB is deliberating this issue and the resulting final pronouncement could be different from that proposed in the exposure draft. The Company can make no prediction at this time as to the ultimate form of such proposed accounting standard, assuming it is adopted, nor can it make any prediction as to its ultimate effect(s) on the financial condition of the Company. 47 Other Issues: On an ongoing basis, the Company assesses environmental issues which could impact the Company and its customers. Note 3 - "Nine Mile 2 Plant" and Note 9 "Commitments and Contingencies" discuss current environmental issues affecting the Company, including (i) the 1995 decommissioning cost study of the Nine Mile 2 Plant, (ii) the Clean Water Act and CAA Amendments, which require control of emissions from fossil-fueled electric generating units, (iii) asbestos litigation cases, and (iv) a legal action filed in 1995 against the Company by the City of Newburgh, New York. 48 FINANCIAL INDICES Selected financial indices for the last five years are set forth in the following table:
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Pretax coverage of total interest charges: Including AFDC..................................... 3.83x 3.94x 4.08x 3.68x 3.38x Excluding AFDC..................................... 3.54x 3.69x 3.83x 3.43x 3.15x Funds from Operations.............................. 4.39x 5.18x 5.29x 4.69x 4.24x Pretax coverage of total interest charges and preferred stock dividends.................. 3.27x 3.37x 3.47x 2.97x 2.74x Percent of construction expenditures financed from internal funds........................... 100% 100% 100% 100% 100% AFDC and Mirror CWIP* as a percentage of income available for common stock................... 17% 13% 13% 16% 16% Effective tax rate...................................... 35% 32% 36% 35% 35% * Refer to Note 2 - "Regulatory Matters" under the caption "Summary of Regulatory Assets and Liabilities" and the subcaption "Deferred Finance Charges - - Deferred Nine Mile 2 Plant Costs" for a definition of Mirror CWIP.
49 COMMON STOCK DIVIDENDS AND PRICE RANGES The Company and its principal predecessors have paid dividends on its common stock in each year commencing in 1903, and the common stock of the Company has been listed on the New York Stock Exchange since 1945. The price ranges and the dividends paid for each quarterly period during the Company's last two fiscal years are as follows:
1998 1997 ---------------------------------- ---------------------------------- HIGH LOW DIVIDEND HIGH LOW DIVIDEND 1st Quarter $43 3/4 $39 5/8 $.535 $33 3/8 $30 1/2 $ .53 2nd Quarter 46 38 7/8 .535 34 3/4 29 3/4 .53 3rd Quarter 47 1/16 40 7/8 .54 35 7/8 32 1/8 .535 4th Quarter 45 1/8 39 7/8 .54 43 7/8 34 11/16 .535
On June 26, 1998, the Company increased its quarterly dividend rate to $.54 per share from $.535 in 1997. On June 27, 1997, the Company increased its quarterly dividend rate to $.535 per share from $.53 per share. Any determination with regard to future dividend declarations, and the amounts and dates of such dividends, will depend on the circumstances at the time of consideration of such declaration. One such consideration will be the effect on the Company of the proposed holding company restructuring described in this Item 7 under the caption "Competition/Deregulation." The number of registered holders of common stock as of December 31, 1998, was 21,416. Of these, 20,836 were accounts in the names of individuals with total holdings of 5,132,676 shares, or an average of 246 shares per account. The 580 other accounts, in the names of institutional or other non-individual holders, for the most part, hold shares of common stock for the benefit of individuals. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ------------------------------------------------------- The Company intends to implement an energy trading risk management program in 1999 to manage the price risks associated with fuel purchases for generation, natural gas purchases for native load customers, and wholesale power transactions. The Company may utilize various financial instruments, such as, futures, options, swaps, caps, floors and collars to stabilize the price volatility of these commodities. At this time, the Company cannot assess the impact that this proposed hedging program would have on its financial position or results of operations. 50 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ----------------------------------------------------- I - Index to Financial Statements: PAGE ---- Report of Independent Accountants 52 Statement of Management's Responsibility 53 Consolidated Balance Sheet at December 31, 1998 and 1997 54 Consolidated Statement of Income for the three years ended December 31, 1998 56 Consolidated Statement of Retained Earnings for the three years ended December 31, 1998 58 Consolidated Statement of Cash Flows for the three years ended December 31, 1998 59 Notes to Consolidated Financial Statements 61 Selected Quarterly Financial Data (Unaudited) 98 II - Schedule II - Reserves All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto. SUPPLEMENTARY DATA Supplementary data is included in "Selected Quarterly Financial Data (Unaudited)" referred to in I above and reference is made thereto. 51 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Central Hudson Gas & Electric Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Central Hudson Gas & Electric Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP New York, New York January 29, 1999 52 STATEMENT OF MANAGEMENT'S RESPONSIBILITY Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Central Hudson Gas & Electric Corporation and its subsidiaries (collectively, the Company) as well as all other information contained in this Form 10-K Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and, in some cases, reflect amounts based on the best estimates and judgements of the Company's Management, giving due consideration to materiality. The Company maintains adequate systems of internal control to provide reasonable assurance, that, among other things, transactions are executed in accordance with Management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the Company are properly safeguarded. The systems of internal control are documented, evaluated and tested by the Company's internal auditors on a continuing basis. Due to the inherent limitations of the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. Management believes that the Company has maintained an effective system of internal control over the preparation of its financial information including the consolidated financial statements of the Company as of December 31, 1998. Independent accountants were engaged to audit the consolidated financial statements of the Company and issue their report thereon. The Report of Independent Accountants, which is presented above, does not limit the responsibility of Management for information contained in the consolidated financial statements and elsewhere in this Form 10-K Report. The Company's Board of Directors maintains a Committee on Audit which is composed of Directors who are not employees of the Company. The Committee on Audit meets with Management, its Internal Auditing Manager, and its independent accountants several times a year to discuss internal controls and accounting matters, the Company's consolidated financial statements, the scope and results of the audits performed by the independent accountants and the Company's Internal Auditing Department. The independent accountants and the Company's Internal Auditing Manager have direct access to the Committee on Audit. John E. Mack III DONNA S. DOYLE Chairman of the Board Controller January 29, 1999 53 CONSOLIDATED BALANCE SHEET (In Thousands) December 31, ASSETS 1998 1997 ---- ---- Utility Plant Electric............................... $1,222,743 $1,193,735 Gas.................................... 158,165 151,222 Common................................. 94,271 91,522 Nuclear fuel........................... 42,317 37,262 --------- --------- 1,517,496 1,473,741 Less: Accumulated depreciation......... 597,383 560,304 Nuclear fuel amortization........ 35,381 33,059 --------- --------- 884,732 880,378 Construction work in progress.......... 43,512 52,413 --------- --------- Net Utility Plant.................... 928,244 932,791 --------- --------- Other Property and Plant................. 19,059 1,089 --------- --------- Investments and Other Assets Prefunded pension costs................ 40,218 23,536 Other.................................. 18,209 13,869 --------- --------- Total Investments and Other Assets... 58,427 37,405 --------- --------- Current Assets Cash and cash equivalents.............. 10,499 9,054 Accounts receivable from customers - net of allowance for doubtful accounts; $2.4 million in 1998 and $2.8 million in 1997............................... 45,564 49,643 Accrued unbilled utility revenues...... 15,233 16,229 Other receivables...................... 4,555 2,073 Materials and supplies, at average cost: Fuel................................. 11,797 11,920 Construction and operating........... 11,790 12,180 Special deposits and prepayments....... 34,823 14,210 ---------- --------- Total Current Assets................. 134,261 115,309 ---------- --------- Deferred Charges Regulatory assets (Note 2)............. 149,261 139,236 Unamortized debt expense............... 5,062 5,002 Other.................................. 21,724 21,258 ---------- ---------- Total Deferred Charges............... 176,047 165,496 ---------- ---------- TOTAL ASSETS $1,316,038 $1,252,090 ========= ========= The Notes to Consolidated Financial Statements are an integral part hereof. 54 CONSOLIDATED BALANCE SHEET (CONT'D) (In Thousands) December 31, CAPITALIZATION AND LIABILITIES 1998 1997 ---- ---- Capitalization Common Stock Equity Common stock, $5 par value (Note 6)... $ 87,775 $ 87,775 Paid-in capital (Note 6).............. 284,465 284,465 Retained earnings..................... 133,287 120,540 Reacquired capital stock (Note 6)..... (27,143) (9,398) Capital stock expense................. (6,204) (6,278) --------- -------- Total Common Stock Equity............ 472,180 477,104 --------- --------- Cumulative Preferred Stock (Note 6) Not subject to mandatory redemption... 21,030 21,030 Subject to mandatory redemption....... 35,000 35,000 --------- --------- Total Cumulative Preferred Stock..... 56,030 56,030 --------- --------- Long-term Debt (Note 7)................. 356,918 361,829 --------- --------- Total Capitalization................. 885,128 894,963 --------- --------- Current Liabilities Current maturities of long-term debt.... 39,507 1,317 Notes payable........................... 18,000 - Accounts payable........................ 23,591 24,368 Dividends payable....................... 9,913 10,052 Accrued taxes and interest.............. 6,334 3,240 Accrued vacation ....................... 4,400 4,339 Customer deposits....................... 4,248 4,001 Other................................... 7,932 6,545 --------- --------- Total Current Liabilities............ 113,925 53,862 --------- --------- Deferred Credits and Other Liabilities Regulatory liabilities (Note 2)......... 81,065 81,271 Operating reserves...................... 5,995 6,582 Other................................... 27,251 10,019 --------- --------- Total Deferred Credits and Other Liabilities..................... 114,311 97,872 --------- --------- Deferred Income Tax (Note 4)............. 202,674 205,393 --------- --------- Commitments and contingencies (Notes 2, 3 and 9)..................... TOTAL CAPITALIZATION AND LIABILITIES $1,316,038 $1,252,090 ========= ========= The Notes to Consolidated Financial Statements are an integral part hereof. 55 CONSOLIDATED STATEMENT OF INCOME (In Thousands) Year ended December 31, 1998 1997 1996 ---- ---- ---- Operating Revenues Electric......................... $418,507 $416,429 $418,761 Gas.............................. 84,962 103,848 95,210 ------- ------- ------- Total Operating Revenues....... 503,469 520,277 513,971 ------- ------- ------- Operating Expenses Operation: Fuel used in electric generation....................... 84,688 66,117 58,874 Purchased electricity............. 40,573 55,864 55,523 Purchased natural gas............. 44,964 61,514 50,636 Other expenses of operation 96,247 101,219 102,746 Maintenance........................ 26,904 27,574 28,938 Depreciation and amortization (Note 1)........................... 45,560 43,864 42,580 Taxes, other than income tax............................... 63,458 64,879 66,145 Federal income tax (Note 4)............................ 29,775 29,190 32,700 ------- ------- ------- Total Operating Expenses......... 432,169 450,221 438,142 ------- ------- ------- Operating Income..................... 71,300 70,056 75,829 ------- ------- ------- Other Income Allowance for equity funds used during construction (Note 1).......................... 585 387 466 Federal income tax (Note 4) 1,148 2,953 1,632 Other - net........................ 6,865 8,079 4,815 ------- ------- ------- Total Other Income............... 8,598 11,419 6,913 ------- ------- ------- Income before Interest Charges............................ 79,898 81,475 82,742 ------- ------- ------- The Notes to Consolidated Financial Statements are an integral part hereof. 56 CONSOLIDATED STATEMENT OF INCOME (CONT'D) (In Thousands) Year ended December 31, 1998 1997 1996 ---- ---- ---- Interest Charges Interest on long-term debt.......... 23,115 23,097 23,617 Other interest...................... 3,639 2,647 2,626 Allowance for borrowed funds used during construction (Note 1).............. (324) (261) (523) Amortization of expense on debt............................... 924 906 940 ------- ------- ------- Total Interest Charges............ 27,354 26,389 26,660 ------- ------- ------- Net Income........................... 52,544 55,086 56,082 Premium on Preferred Stock Redemptions-Net.................... - - 378 Dividends Declared on Cumul- ative Preferred Stock............... 3,230 3,230 3,230 ------- ------- ------- Income Available for Common Stock........................ $ 49,314 $ 51,856 $ 52,474 ======= ======= ======= Common Stock: Average shares outstanding (000s)............................. 17,034 17,435 17,549 Earnings per share on average shares outstanding........ $2.90 $2.97 $2.99 The Notes to Consolidated Financial Statements are an integral part hereof. 57 CONSOLIDATED STATEMENT OF RETAINED EARNINGS (In Thousands) Year ended December 31, 1998 1997 1996 ---- ---- ---- Balance at beginning of year......... $120,540 $105,821 $ 90,475 Net Income........................... 52,544 55,086 56,082 Premium on preferred stock redemption-net..................... - - 378 Dividends declared: On cumulative preferred stock............................. 3,230 3,230 3,230 On common stock ($2.155 per share 1998; $2.135 per share 1997 $2.115 per share 1996)....................... 36,567 37,137 37,128 ------- ------- ------- Total dividends declared........ 39,797 40,367 40,358 ------- ------- ------- Balance at end of year............... $133,287 $120,540 $105,821 ======= ======= ======= The Notes to Consolidated Financial Statements are an integral part hereof. 58 CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) Year ended December 31, 1998 1997 1996 ---- ---- ---- Operating Activities Net Income ........................ $ 52,544 $ 55,086 $ 56,082 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization including nuclear fuel amortization................ 49,011 48,348 47,073 Deferred income taxes........... (116) 14,077 17,848 Allowance for equity funds used during construction........... (585) (387) (466) Nine Mile 2 Plant deferred finance charges, net.......... (4,855) (4,855) (4,855) Provisions for uncollectibles... 2,639 3,493 4,336 Accrued pension costs........... (12,277) (8,555) (6,757) Deferred gas costs............. 1,072 3,475 (4,861) Deferred gas refunds........... (1,640) 1,695 (1,556) Other - net..................... 4,888 7,233 4,039 Changes in current assets and liabilities, net: Accounts receivable and unbilled utility revenues.............. (46) (4,420) (6,338) Materials and supplies.......... 513 3,995 (505) Special deposits and prepayments................... (20,613) (770) (781) Accounts payable................ (777) (1,769) 1,704 Accrued taxes and interest...... 3,094 (2,107) (2,477) Other current liabilities....... 1,695 (61) 602 -------- -------- ------- Net cash provided by operating activities........................ 74,547 114,478 103,088 -------- ------- ------- The Notes to Consolidated Financial Statements are an integral part hereof. 59 CONSOLIDATED STATEMENT OF CASH FLOWS (CONT'D) (In Thousands) 1998 1997 1996 ---- ---- ---- Investing Activities Additions to plant................. (45,661) (43,868) (49,860) Allowance for equity funds used during construction............... 585 387 466 -------- ------- ------- Net additions to plant............. (45,076) (43,481) (49,394) Subsidiaries' fixed asset additions......................... (19,460) - - Nine Mile 2 Plant decommissioning trust fund........................ (868) (868) (1,008) Other - net........................ (801) 396 (526) -------- ------- ------- Net cash used in investing activities........................ (66,205) (43,953) (50,928) -------- ------- ------- Financing Activities Proceeds from issuance of: Long-term debt................... 35,250 2,000 3,090 Common stock..................... - - 1,817 Net borrowings (repayments) of short-term debt................... 18,000 (15,600) 15,600 Retirement & redemption of long-term debt................. (2,466) (2,282) (30,779) Retirement & redemption of cumulative preferred stock........ - - (13,000) Premium on preferred stock redemption........................ - - (378) Dividends paid on cumulative preferred and common stock........ (39,936) (40,426) (40,489) Issuance and redemption costs...... - - 736 Reacquired capital stock........... (17,745) (9,398) - -------- ------- ------- Net cash used in financing activities........................ (6,897) (65,706) (63,403) -------- ------- ------- Net Change in Cash and Cash Equivalents......................... 1,445 4,819 (11,243) Cash and Cash Equivalents at Beginning of Year................... 9,054 4,235 15,478 -------- ------- ------- Cash and Cash Equivalents at End of Year............................. $ 10,499 $ 9,054 $ 4,235 ======= ======= ======= Supplemental Disclosure of Cash Flow Information Interest paid.................... $ 24,002 $ 24,309 $ 25,184 Federal income taxes paid........ 26,900 17,111 15,875 The Notes to Consolidated Financial Statements are an integral part hereof. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Central Hudson Gas & Electric Corporation (the "Company"), and its subsidiaries. Intercompany balances and transactions have been eliminated. The Company's subsidiaries are each directly or indirectly wholly owned and are comprised of landholding, cogeneration, fuel oil, electric generating or energy management companies. The net income of the Company's subsidiaries is reflected in the Consolidated Statement of Income as other non-operating income. Effective April 24, 1998, the Company formed a wholly-owned subsidiary named CH Energy Group, Inc., which, after a one-for-one share exchange, will become the holding company parent of the Company and its existing subsidiaries (with the exception of Phoenix Development Company, Inc.). See Note 2 - "Regulatory Matters," under the caption "Holding Company Restructuring" for further details. RATES, REVENUES AND COST ADJUSTMENT CLAUSES Electric and gas retail rates are regulated by the Public Service Commission of the State of New York ("PSC"). Transmission rates, facilities charges and rates for electricity sold for resale in interstate commerce are regulated by the Federal Energy Regulatory Commission ("FERC"). Revenues are recognized on the basis of cycle billings rendered monthly or bimonthly. Estimated revenues are accrued for those customers billed bimonthly whose meters are not read in the current month. The Company's tariff for retail electric service includes a fuel cost adjustment clause pursuant to which electric rates are adjusted to reflect changes in the average cost of fuels used for electric generation and in certain purchased power costs, from the average of such costs included in base rates. The Company's tariff for gas service contains a comparable clause to adjust gas rates for changes in the price of purchased natural gas. UTILITY PLANT The costs of additions to utility plant and replacements of retired units of property are capitalized at original cost. The Company's share of the costs of Unit No. 2 of the Nine Mile Point Nuclear Station ("Nine Mile 2") Plant are capitalized at original cost, less the disallowed investment of 61 $169.3 million which was recorded in 1987. Capitalized costs include labor, materials and supplies, indirect charges for such items as transportation, certain taxes, pension and other employee benefits, and Allowance for the Cost of Funds Used During Construction ("AFDC"), a non-cash item. Replacement of minor items of property is included in maintenance expenses. The original cost of property, together with removal cost, less salvage, is charged to accumulated depreciation at such time as the property is retired and removed from service. JOINTLY OWNED FACILITIES The Company has a 9%, or 103 megawatt ("MW"), undivided interest in the 1,143 MW Nine Mile 2 Plant (see Note 3 - "Nine Mile 2 Plant") and a 35%, or 420 MW, undivided interest in the 1,200 MW Roseton Electric Generating Station ("Roseton Plant"). The Company's share of the respective investments in the Nine Mile 2 Plant and the Roseton Plant, as included in its Consolidated Balance Sheet at December 31, 1998 and 1997, were: 1998 1997 ---- ---- (In Thousands) Nine Mile 2 Plant Plant in service................... $315,358 $316,123 Accumulated depreciation........... (77,178) (70,202) Construction work in progress...... 2,132 1,032 Roseton Plant Plant in service................... $135,197 $134,555 Accumulated depreciation........... (80,486) (77,438) Construction work in progress...... 213 571 ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION The Company's regulated utility plant includes AFDC, which is defined in applicable regulatory systems as the net cost of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. The concurrent credit for the amount so capitalized is reported in the Consolidated Statement of Income as follows: the portion applicable to borrowed funds is reported as a reduction of interest charges while the portion applicable to other funds (the equity component, a noncash item) is reported as other income. The AFDC rate was 8.5% in 1998 and 8.0% in 1997 and 7.5% in 1996. For a discussion of the effect of the Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation ("SFAS 71"), as issued by the Financial Accounting Standards Board ("FASB"), on the Company's fossil-fueled generating plants, see Note 2 "Regulatory Matters," under the caption "Impact of Amended Settlement Agreement on Accounting Policies." Accordingly, beginning in 1998, significant capital projects relating to the 62 fossil-fueled generating plants include capitalized interest instead of AFDC. For 1998 no such projects met the criteria for capitalized interest. DEPRECIATION AND AMORTIZATION For financial statement purposes, the Company's depreciation provisions are computed on the straight-line method using rates based on studies of the estimated useful lives and estimated net salvage value of properties, with the exception of the Nine Mile 2 Plant which is depreciated on a remaining life amortization method. The year 2026, which is the year in which the Nine Mile 2 Plant operating license expires, is used as the end date in the development of the remaining life amortization. The Company performs depreciation studies on a continuing basis and, upon approval by the PSC, periodically adjusts the rates of its various classes of depreciable property. The Company's composite rates for depreciation were 3.2% in 1998, 3.16% in 1997 and 3.13% in 1996 of the original cost of average depreciable property. The ratio of the amount of accumulated depreciation to the cost of depreciable property at December 31 was 39.6% in 1998, 38.2% in 1997 and 36.5% in 1996. For federal income tax purposes, the Company uses an accelerated method of depreciation and generally uses the shortest life permitted for each class of assets. The cost of the Nine Mile 2 Plant nuclear fuel assemblies and components is amortized to operating expense based on the quantity of heat produced for the generation of electric energy. CASH AND CASH EQUIVALENTS For purposes of the Consolidated Statement of Cash Flows, the Company considers temporary cash investments with a maturity when purchased of three months or less to be cash equivalents. FEDERAL INCOME TAX The Company and its wholly-owned subsidiaries file a consolidated federal income tax return. Federal income taxes are allocated to operating expenses and other income and deductions in the Consolidated Statement of Income. Federal income taxes are deferred under the liability method in accordance with Financial Accounting Standard No. 109, "Accounting for Income Taxes," ("SFAS 109"). Under the liability method, deferred income taxes are provided for all differences between financial statement and tax basis of assets and liabilities. Additional deferred income taxes and offsetting regulatory assets or liabilities are recorded to recognize that income taxes will be recoverable or refundable through future revenues. 63 USE OF ESTIMATES Preparation of the financial statements in accordance with generally accepted accounting principles includes the use of estimates and assumptions by management that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amount of revenues and expenses during the reporting period. Actual results may differ from those estimates. NEW ACCOUNTING STANDARDS AND OTHER FASB PROJECTS Derivatives and Hedging Accounting: In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Any gain or loss resulting from changes in such fair value is required to be recognized in earnings to the extent the derivatives are not effective as hedges. SFAS 133 is effective for fiscal years beginning after June 15, 1999, and is effective for interim periods in the initial year of adoption. The Company currently does not own any derivative instruments; however, the Company intends to implement an energy trading risk management program in 1999 to manage the price risks associated with fuel purchases for generation, natural gas purchases for native load customers, and wholesale power transactions. The Company may utilize various financial instruments, such as futures, options, swaps, caps, floors, and collars to stabilize the price volatility of these commodities. At this time, the Company cannot assess the impact that the proposed hedging program would have on its financial position or results of operations. Plant Decommissioning: In February 1996, the FASB issued an exposure draft entitled "Accounting for Certain Liabilities Related to Closure and Removal of Long-Lived Assets," which includes nuclear plant decommissioning. Over the past two years, this exposure draft has been the source of continual debate. The FASB has committed to completing the project and is proceeding toward issuance of another exposure draft (expected in the second quarter of 1999). If the accounting standard proposed in such exposure draft were adopted, it could result in higher annual provisions for removal or decommissioning to be recognized earlier in the operating life of nuclear and other generating units and an accelerated recognition of the decommissioning obligation. The FASB is continuing to explore various issues associated with this project including liability measurement and recognition issues. In addition, an effective date for the new 64 exposure draft has not yet been determined. The FASB is deliberating this issue and the resulting final pronouncement could be different from that proposed in the exposure draft. The Company can make no prediction at this time as to the ultimate form of such proposed accounting standard, assuming it is adopted, nor can it make any prediction as to its ultimate effect(s) on the financial condition of the Company. NOTE 2 - REGULATORY MATTERS COMPETITIVE OPPORTUNITIES PROCEEDING SETTLEMENT AGREEMENT In response to the May 1996 Order of the PSC issued in its generic Competitive Opportunities Proceeding ("Proceeding"), the Company, the PSC Staff and certain other parties entered into an Amended and Restated Settlement Agreement, dated January 2, 1998, ("Agreement"). The PSC approved the Agreement by its final Order issued and effective June 30, 1998. Shortly after the PSC issued its May 1996 Order, the Company and other electric utilities filed a court challenge to such Order. In addition, the Public Utility Law Project ("PULP") filed a similar appeal. Both appeals are stayed at this time. Subsequently, in December 1998, PULP filed an additional appeal with respect to such Order approving the Company's restructuring settlement. The Company has moved to dismiss this second appeal. The matter remains pending at this time and the Company can make no prediction as to the potential outcome of these matters. The Agreement generally includes the following provisions: (i) continuation of a basic electric rate freeze, along with a phase-in of retail access, for residential, commercial and small industrial customers through June 2001; (ii) a 5% reduction in base electric rates for large industrial customers; (iii) a 10.6% return on equity ("ROE") cap with excess earnings, if any, deferred for stranded cost mitigation (at December 31, 1998, the Company recorded an estimated regulatory liability of $651,000 due to excess earnings); (iv) a reasonable opportunity to recover all prudently incurred strandable costs, defined as "production expenditures of the company made in fulfilling its obligation to serve and provide safe, reliable electric service to customers within its franchise territory which are not expected to be recoverable in a competitive electricity market"; (v) functional separation of the Company's Danskammer Steam Generating Station ("Danskammer Plant") and its interest in the Roseton Plant in 1998; (vi) transfer of title by an auction of the Company's Danskammer Plant and its interest in the Roseton Plant to be completed by June 30, 2001, (an affiliate of the Company can bid, and the PSC reserved its authority to require an auction and transfer of the Company's fossil-fueled electric generating assets prior to June 30, 2001 if such action is found by the PSC to be in the public interest); (vii) approval to effect a holding company restructuring not later than June 30, 65 2001, which holding company initially would own the Company and all but one of the Company's existing wholly-owned subsidiaries; and (viii) permission for the Company to transfer up to $100 million of equity from the Company to unregulated affiliates prior to such holding company restructuring. In addition, the PSC directed the PSC Staff to provide assurance that the Company does not incur imprudent generation costs which could be avoided by divestiture of fossil-fueled electric generating assets prior to June 30, 2001, and added a provision dealing with mergers and acquisitions; namely, pursuant to a petition filed jointly or individually by the Company, the Company will have the flexibility to retain, on a cumulative basis, all savings associated with an acquisition or merger with another utility for a period of five years from the date of closing of any merger or acquisition up to the amount of the acquisition premium paid over the lesser of book value or fair market value of assets merged or acquired, and savings in excess of the recovery will be disposed of by the PSC. The consideration received by the Company in an auction, referred to in (vi) of the second preceding paragraph above, would, up to the net book value of the assets sold, be available for investment in unregulated operations without PSC approval. Any excess over such net book value will be required to be used to offset the Company's fossil-fueled generation related regulatory assets and, to the extent of any remaining consideration, to reduce the book cost of the Company's investment in the Nine Mile 2 Plant. In the event that the sale price of any such assets is below the Company's then current net book value, the difference will be preserved for recovery as strandable costs. The Company's potential strandable costs are those prior utility investments and commitments that may not be recoverable in a competitive energy market. Examples include any unrecovered cost of the Company's fossil-fueled generating plants (resulting from the auction process) and net generation related regulatory assets. During the period ending June 30, 2001, the Company will continue to recover its potential electric strandable costs in the rates it charges its transmission and distribution customers. Following June 2001, the Company will be given a reasonable opportunity to recover, through a non- bypassable charge to customers, all prudently incurred, verifiable and appropriately mitigated electric strandable costs. The net book value of the Company's fossil generating assets at December 31, 1998, represented approximately 18% of net utility plant. In the event that no Company affiliate elects to bid in its auction, the Company will retain, prior to application of the consideration described in the immediately preceding paragraph, 10% of the proceeds in excess of the book value of the Company's fossil-fueled generation assets, not to exceed in the aggregate $17.5 million. After such divestiture, the Company expects to be obligated to continue to serve a portion of its electric 66 customers. The Company cannot predict the amount of such service which it will be obligated to provide or the cost or availability of electricity to satisfy its service obligations. HOLDING COMPANY RESTRUCTURING Effective April 24, 1998, the Company formed a wholly-owned subsidiary named CH Energy Group, Inc. which, after a one-for-one share exchange, will become the holding company parent of the Company and its then existing subsidiary companies (with the exception of Phoenix Development Company, Inc.). The Company has received approval from its shareholders, the PSC, the FERC, and the Nuclear Regulatory Commission ("NRC") to form such holding company. While no specific date has been established, it is expected that the holding company restructuring will occur some time during the first half of 1999. This will allow the Company to coordinate closely with such restructuring the transfer of up to $100 million in equity (as authorized by the PSC under the Agreement) from the Company to unregulated operations, of which approximately $25.5 million has been transferred as of December 31, 1998. Initially, the holding company (CH Energy Group, Inc.) will own, as first tier subsidiaries, the Company and its existing subsidiaries, as described in the subcaption "Affiliates" under the caption in Item 1 "Other Matters", with one exception: Phoenix Development Company, Inc., which holds real property for future use, will remain a wholly-owned subsidiary of the Company. CH Energy Group, Inc., following the share exchange, may also establish other subsidiaries over time. IMPACT OF AMENDED SETTLEMENT AGREEMENT ON ACCOUNTING POLICIES The Agreement created certain changes to the Company's accounting policies. The Company's accounting policies conform to generally accepted accounting principles, which, for regulated public utilities, include SFAS 71. Under SFAS 71, regulated companies apply AFDC to the cost of construction projects. Because the Company's fossil-fueled generating plants are no longer subject to SFAS 71, capitalized interest will be applied instead of AFDC. Under SFAS 71, regulated companies defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be allowed in the rate-making process in a period different from when they otherwise would have been reflected in income. These deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are reflected in rates. If some of an enterprise's operations are regulated and meet the appropriate criteria, SFAS 71 is applied only to the regulated portion of the enterprise's operations. During 1997, the FASB Emerging Issues Task Force ("EITF") concluded that an entity should discontinue application of SFAS 71, to any portion of its business when a deregulation 67 transition plan is in place and the terms are known. However, the EITF further qualified, in its Issue No. 97-4, that regulatory assets and liabilities should be evaluated based on where the cash flows are to be derived in the determination of the applicability of SFAS 71. When the cash flows are from rates to be charged to customers of the regulated business for recovery and settlement, respectively, of regulatory assets and liabilities, they should not be eliminated until: a) they are recovered or settled through the regulated cash flows, or b) they are individually impaired or the regulator eliminates the individual obligation or c) the portion of the business providing the regulated cash flows no longer meets the criteria of SFAS 71. None of these conditions has occurred as it applies to the Company's fossil-fueled generation regulatory assets and liabilities even though the Agreement put into place a deregulation transition plan with the ultimate goal of divesting the Company's fossil-fueled generating plant assets. Therefore, these balances continue to be reflected in the total for regulatory assets and liabilities in the Company's consolidated balance sheet. At December 31, 1998, and 1997, net regulatory assets associated with the fossil-fueled generating assets totalled $6.5 million and $7.6 million, respectively. 68 SUMMARY OF REGULATORY ASSETS AND LIABILITIES The following table sets forth the Company's regulatory assets and liabilities: At December 31, 1998 1997 Regulatory Assets (Debits): ---- ---- - --------------------------- (In Thousands) Deferred finance charges - Nine Mile 2 Plant...................... $ 67,326 $ 68,470 Income taxes recoverable through future rates.................... 35,221 49,220 Deferred Newburgh Gas Site (Note 9)....... 22,679 2,195 Other..................................... 24,035 19,351 -------- -------- Total Regulatory Assets................. $ 149,261 $ 139,236 -------- -------- Regulatory Liabilities (Credits): - --------------------------------- Deferred finance charges - Nine Mile 2 Plant....................... $ 10,431 $ 16,431 Income taxes refundable................... 17,574 28,516 Deferred Nine Mile 2 Plant costs.......... 15,790 11,296 Deferred pension costs overcollection (Note 8)................................. 11,693 8,306 Deferred OPEB costs overcollection (Note 8)................................. 9,796 6,824 Customer benefits account................. 5,447 - Other..................................... 10,334 9,898 -------- -------- Total Regulatory Liabilities............ 81,065 81,271 -------- -------- Net Regulatory Assets................ $ 68,196 $ 57,965 ======== ======== Some of the significant regulatory assets and liabilities include: Deferred Finance Charges - Nine Mile 2 Plant: During the construction of the Nine Mile 2 Plant, the PSC authorized the inclusion in rate base of increasing amounts of the Company's investment in that Plant. The Company did not accrue AFDC on any of the Nine Mile 2 Plant construction work in progress ("CWIP") which was included in rate base and for which a cash return was being allowed; however, the PSC ordered, effective January 1, 1983, that amounts be accumulated in deferred debit and credit accounts equal to the amount of AFDC which was not being accrued on the CWIP included in rate base ("Mirror CWIP"). The balance in the deferred credit account is available to reduce future revenue requirements by amortizing portions of the deferred credit to other income or by the elimination through writing off other deferred balances as directed by the PSC. The Company expects such application of the deferred credit will occur over a period substantially shorter than the life of the Nine Mile 2 Plant. When amounts of such deferred credit are applied in order 69 to reduce revenue requirements, amortization is started for a corresponding amount of the deferred debit, which amortization continues on a level basis over the remaining life of the Nine Mile 2 Plant resulting in recovery of such corresponding amount through rates. Mirror CWIP is expected to be exhausted by the end of the useful life of the Nine Mile 2 Plant either through the amortization or write-off procedures described above or through the write-off of the remaining debit and credit as directed by the PSC. The net effect of this procedure is that at the end of the amortization period for the deferred credit, the accounting and rate-making treatment will be the same as if the Nine Mile 2 Plant CWIP had not been included in rate base during the construction period. Pursuant to a PSC Order issued and effective February 11, 1994, in an electric rate proceeding, the Company was authorized to amortize $6 million annually of the deferred credit beginning in December 1993. The $6 million amortization of the deferred credit will be continued unless changed by a future PSC rate order or until it is exhausted. Under provisions of the Agreement, this amortization will be replaced with other deferred credits to the extent necessary to provide for full replacement of the expiring Mirror CWIP credits. The current level of the deferred debit amortization of $1.1 million is based on the level of deferred credits that have been utilized through the most recent rate year. Credit amounts utilized subsequently are included in the deferred debit amortization level at the time of the next PSC rate order for the new rate year based on the then remaining life of the Nine Mile 2 Plant. Income Taxes Recoverable/refundable: The adoption of SFAS 109 in 1993 increased the Company's net deferred tax obligation. As it is probable that the increase will be recovered from customers, the Company established a net regulatory asset for the recoverable future taxes. Deferred Nine Mile 2 Plant Costs: The existing rate-making for the Nine Mile 2 Plant, as directed by the PSC in its Order on Nine Mile 2 Operating and Capital Forecast for 1996 ("Supplement No. 5"), provides for the deferral of the difference between actual and authorized operating and maintenance expense. Supplement No. 5 continues in effect until changed by a subsequent rate order. For 1998 and 1997, the Nine Mile 2 Plant incurred less actual expense than authorized, and the Company's share has been recorded as a regulatory liability in accordance with Supplement No. 5. Customer Benefits Account: The Agreement requires that the Company set aside $10.0 million per calendar year in a Customer Benefits Account to fund rate reductions and retail access options. Funding sources include $3.0 million from shareholder sources, $3.5 million from fuel cost savings 70 generated by the installation of the Company's coal dock unloading facility at its Danskammer Plant and $3.5 million from deferred credits related to the reconciliation of pension and OPEB costs. The Agreement also stipulates that unused funding accumulated to the end of the Agreement term is to be used for offsetting strandable costs or providing other ratepayer benefits. AUCTION OF FOSSIL GENERATION PLANTS Under the Agreement, the Company is required to sell its fossil generation plants and transfer title by June 30, 2001. The Company has provided for the necessary internal and external resources to carry out the auction that is called for in the Agreement. An auction plan is being developed for approval by the PSC. The plan is intended to maximize the value received for the assets and provide for an orderly process and objective bid evaluation. Approval of the auction plan is expected during 1999 and selection of the winning bidder(s) is anticipated in 2000. INDEPENDENT SYSTEM OPERATOR The Company is a member of the New York Power Pool ("NYPP") whose members, major investor-owned State electric utility companies, Long Island Lighting Company ("LILCO"), as a subsidiary of the Long Island Power Authority ("LIPA"), and the Power Authority of the State of New York ("PASNY"), by agreement, provide for coordinated operation of their bulk power electric systems. In a filing with the FERC, dated January 31, 1997, the member systems of the NYPP proposed a new market structure that would include as a key element the establishment of an Independent System Operator ("ISO") and certain other entities to supersede the NYPP. The ISO's principal mission would be to maintain the reliability of the New York State bulk power systems and to provide transmission service on a comparable and non-discriminatory basis. By Order, dated June 24, 1998, the FERC conditionally authorized the establishment of an ISO by the member systems of the NYPP. Said Order made an interim finding that the member systems' conditional proposal to restructure the New York electric wholesale market satisfied the principles set forth in FERC Order 888. The FERC deferred action on other aspects of such proposal including the rates, terms and conditions of the ISO's open access tariff. By order dated June 30, 1998, FERC conditionally authorized the establishment of the ISO and by order dated January 27, 1999, FERC conditionally accepted, with modifications, the proposed ISO tariff and the proposed market rules of the ISO and granted the request for market-based rates. The January 27, 1999, order called for public hearings on certain aspects of the proposed rates and provided for settlement judge proceedings. Future filings with FERC will be required to obtain FERC approval of the transfer of 71 control of all necessary facilities to the ISO; any such transfer would not involve the transfer of ownership of such assets. Significant changes to pricing procedures now in effect within NYPP are expected, but it is unclear what effect these changes may have once other regulatory changes in New York State are implemented. At the present time, the Company cannot predict what effects regulations ultimately adopted by FERC will have, if any, on future operations or the financial condition of the Company. NOTE 3 - NINE MILE 2 PLANT GENERAL The Nine Mile 2 Plant is located in Oswego County, New York, and is operated by Niagara Mohawk Power Corporation ("Niagara Mohawk"). The Nine Mile 2 Plant is owned as tenants- in- common by the Company (9% interest), Niagara Mohawk (41% interest), New York State Electric & Gas Corporation ("NYSE&G") (18% interest), LILCO, as a subsidiary of the LIPA (18% interest), and Rochester Gas and Electric Corporation ("Rochester") (14% interest). The output of the Nine Mile 2 Plant, which has a rated net capability of 1,143 MW, is shared and the operating expenses of the Plant are allocated to the cotenants in the same proportions as the cotenants' respective ownership interests. The Company's share of direct operating expense for the Nine Mile 2 Plant is included in the appropriate expense classifications in the accompanying Consolidated Statement of Income. Under the Operating Agreement entered into by the cotenants, Niagara Mohawk acts as operator of the Nine Mile 2 Plant, and all five cotenants share certain policy, budget and managerial oversight functions. The Operating Agreement remains in effect subject to termination on six months notice. RADIOACTIVE WASTE Niagara Mohawk has contracted with the U.S. Department of Energy ("DOE") for disposal of high-level radioactive waste ("spent fuel") from the Nine Mile 2 Plant. Despite a court order reaffirming the DOE's obligation to accept spent nuclear fuel by January 31, 1998, the DOE has forecasted the start of operations of its high-level radioactive waste repository to be no earlier than 2010. The Company has been advised by Niagara Mohawk that the Nine Mile 2 Plant spent fuel storage pool has a capacity for spent fuel that is adequate until 2012. If DOE schedule slippage should occur, facilities that extend the on-site storage capability for spent fuel at the Nine Mile 2 Plant beyond 2012 would need to be acquired. 72 NUCLEAR PLANT DECOMMISSIONING COSTS The Company's 9% share of costs to decommission the Nine Mile 2 Plant is estimated to be approximately $209.6 million ($80.4 million in 1998 dollars) and assumes that decommissioning will begin shortly after the operating license expires in the year 2026. This estimate is based upon a site-specific study completed in December 1995. In order to assist the Company in meeting this obligation, the Company makes annual contributions of $868,000 to a qualified external decommissioning trust fund. The total annual amount allowed in rates is $999,000, but the maximum annual tax deduction allowed is $868,000. Currently, the difference between the rate allowance ($999,000) and the amount contributed to the external qualified fund ($868,000) is recorded as an internal reserve ($131,000), and the funds are held by the Company. The qualified external decommissioning trust fund at December 31, 1998 and 1997, amounted to $13.9 million and $11 million, respectively, including net reinvested earnings to date of $6.4 million. The qualified external decommissioning trust fund is reflected in the Company's Consolidated Balance Sheet in "Investments and Other Assets-Other." At December 31, 1998, the external decommissioning trust fund investments carrying value approximated fair market value. The amount of accumulated decommissioning costs recovered through rates and the net earnings of the external decommissioning trust fund are reflected in accumulated depreciation in the Company's Consolidated Balance Sheet and amount to $15.6 million and $12.6 million at December 31, 1998 and 1997, respectively. Reference is made to the subcaption "New Accounting Standards and Other FASB Projects - Plant Decommissioning" in Note 1 - "Summary of Significant Accounting Policies" for details of the proposed changes in accounting for nuclear decommissioning costs. The Company believes that if decommissioning costs are greater than currently estimated, such revised costs would be recovered in rates. However, future developments in the utility industry, including the effects of deregulation and increasing competition, could change this conclusion. 73 NOTE 4 - FEDERAL INCOME TAX COMPONENTS OF FEDERAL INCOME TAX The following is a summary of the components of federal income tax as reported in the Consolidated Statement of Income: 1998 1997 1996 ------- ------ ------ (In Thousands) Charged to operating expense: Federal income tax................. $28,408 $19,004 $18,936 Deferred income tax................ 1,367 10,186 13,764 ------ ------ ------ Income tax charged to operating expense.............. 29,775 29,190 32,700 ------ ------ ------ Charged (credited) to other income and deductions: Federal income tax................. 335 (6,844) (5,716) Deferred income tax................ (1,483) 3,891 4,084 ------ ------ ------ Income tax (credited) to other income and deductions.................... (1,148) (2,953) (1,632) ------ ------ ------ Total federal income tax......... $28,627 $26,237 $31,068 ====== ====== ====== 74 RECONCILIATION: The following is a reconciliation between the amount of federal income tax computed on income before taxes at the statutory rate and the amount reported in the Consolidated Statement of Income: 1998 1997 1996 -------- -------- ------- (In Thousands) Net income....................... $52,544 $55,086 $56,082 Federal income tax............... 28,743 12,160 13,220 Deferred income tax.............. (116) 14,077 17,848 ------ ------ ------ Income before taxes............ $81,171 $81,323 $87,150 ====== ====== ====== Computed tax @ 35% statutory rate.................. $28,410 $28,463 $30,503 Increase (decrease) to computed tax due to: Pension expense................ (4,486) (2,855) (2,424) Deferred finance charges - Nine Mile 2 Plant............. (1,700) (1,699) (1,699) Alternative minimum tax........ (1,048) (7,350) (2,262) Tax depreciation............... 4,248 (4,225) (10,499) Customer Benefits Account...... 1,906 - - Nine Mile 2 settlement costs 1,282 1,567 1,043 Deferred gas costs............. 375 1,216 (1,703) Deferred storm costs........... - (2,257) - Other.......................... (244) (700) 261 ------ ------ ------ Federal income tax............... 28,743 12,160 13,220 Deferred income tax.............. (116) 14,077 17,848 ------ ------ ------ Total federal income tax....... $28,627 $26,237 $31,068 ====== ====== ====== Effective tax rate.............. 35.3% 32.3% 35.6% ====== ====== ====== 75 The following is a summary of the components of deferred taxes at December 31, 1998 and 1997, as reported in the Consolidated Balance Sheet: 1998 1997 ------ ------ (In Thousands) Accumulated Deferred Income Tax Assets: Future tax benefits on investment tax credit basis difference................... $ 14,033 $ 14,837 Unbilled revenues.............. 5,261 5,675 Alternative minimum tax........ - 1,048 Other.......................... 32,938 29,047 ------- ------- Accumulated Deferred Income Tax Assets........................ $ 52,232 $ 50,607 ------- ------- Accumulated Deferred Income Tax Liabilities: Tax depreciation............... $180,339 $181,314 Accumulated deferred investment tax credit................... 26,062 27,555 Future revenues - recovery of plant basis differences...... 11,319 17,475 Other.......................... 37,186 29,656 ------- ------- Accumulated Deferred Income Tax Liabilities................... 254,906 256,000 ------- ------- Net Accumulated Deferred Income Tax Liability..................... $202,674 $205,393 ======= ======= NOTE 5 - SHORT-TERM BORROWING ARRANGEMENTS The Company has in effect a revolving credit agreement with four commercial banks which allows it to borrow up to $50 million through October 23, 2001, ("Borrowing Agreement"). The Borrowing Agreement gives the Company the option of borrowing at either the higher of the prime rate or the sum of the federal funds rate plus 1/2 of 1%, or three other money market rates, if such rates are lower. Compensating balances are not required under the Borrowing Agreement. In addition, the Company maintains confirmed lines of credit totaling $1.5 million with regional banks. There were no outstanding loans under the Borrowing Agreement or the line of credit at December 31, 1998 or 1997. In order to diversify its sources of short-term financing, the Company has entered into short-term credit facilities agreements with several commercial banks. At December 31, 1998, the Company had outstanding short-term debt of $18 million under such facilities with a weighted average interest rate of 5.5%. The Company had no short-term debt outstanding at December 31, 1997. 76 Authorization from the PSC limits the amount the Company may have outstanding, at any time, under all of its short-term borrowing arrangements to $52 million in the aggregate. As part of its establishing a holding company structure, CH Energy Group, Inc., the proposed holding company, has established a $50 million revolving credit agreement with three commercial banks through December 4, 2001. No borrowings are permitted under such agreement until the share exchange establishing CH Energy Group, Inc. as a holding company is effected. 77 NOTE 6 - CAPITALIZATION - CAPITAL STOCK COMMON STOCK, $5 par value; 30,000,000 shares authorized:
Reacquired Common Stock Paid-In Capital Shares Amount Capital Stock Outstanding ($000) ($000) ($000) ----------- ------ -------- ---------- January 1, 1996..................... 17,496,051 $87,480 $282,942 $ - Issued under dividend reinvestment plan("DRP")(a)....... 49,023 245 1,278 - Issued under customer stock purchase plan ("CSPP")(a)......... 9,913 50 245 - ---------- ------ ------- ------- December 31, 1996................... 17,554,987 87,775 284,465 - Repurchased under common stock repurchase plan............. (275,200) - - (9,398) ---------- ------ ------- ------- December 31, 1997................... 17,279,787 87,775 284,465 (9,398) Repurchase under common stock repurchase plan............. (417,700) - - (17,745) ---------- ------ ------- ------- December 31, 1998................... 16,862,087 $87,775 $284,465 $(27,143) ========== ====== ======= ======= (a) In May 1996, the Company converted its DRP and its CSPP from original issue to open market purchase of common shares.
78 CUMULATIVE PREFERRED STOCK, $100 par value; 1,200,000 shares authorized: Final Redemption Shares Outstanding Redemption Price December 31, Series Date 12/31/98 1998 1997 ------ ---------- ---------- ---- ---- Not Subject to Mandatory Redemption: 4 1/2% $107.00 70,300 70,300 4.75% 106.75 20,000 20,000 4.35% 102.00 60,000 60,000 4.96% 101.00 60,000 60,000 ------- ------- 210,300 210,300 ------- ------- Subject to Mandatory Redemption: 6.20% 10/1/08 (a) 200,000 200,000 6.80% 10/1/27 (a) 150,000 150,000 ------- ------- 350,000 350,000 ------- ------- Total 560,300 560,300 ======= ======= (a) Cannot be redeemed prior to October 1, 2003. The Company had no cumulative preferred stock redemptions or issuances during 1998 and 1997; however, on January 1, 1996, the Company optionally redeemed its 7.72% Series Cumulative Preferred Stock (par value $100 per share) at a redemption price of $101.00 per share. The $13.1 million redemption price paid and associated costs were funded through internal sources. Expenses incurred on issuance of capital stock are accumulated and reported as a reduction in common stock equity. These expenses are not being amortized, except that, as directed by the PSC, certain issuance and redemption costs and unamortized expenses associated with certain issues of preferred stock that were redeemed have been deferred and are being amortized over the remaining lives of the issues subject to mandatory redemptions. By Order, issued and effective December 4, 1996, the PSC authorized the issuance and sale of certain debt and equity securities of the Company. That Order authorizes the Company, through December 31, 1999, to: 1) issue and sell up to $40 million of new securities comprised of common stock and/or medium term notes, 2) acquire not more than 2.5 million shares of its issued and outstanding common stock, of which the Company repurchased 692,900 shares through December 31, 1998, and 3) effective January 1, 1997, combine its existing DRP, its CSPP and its Employee Stock Purchase Plan into a single plan called the Stock Purchase Plan. The Stock Purchase Plan became effective January 1, 1997, superseded such other plans and operates as an original issue or open market purchase plan. 79 NOTE 7 - CAPITALIZATION - LONG-TERM DEBT Details of long-term debt are as follows: December 31, -------------------- 1998 1997 ---- ---- (In Thousands) Series Maturity Date ------ ------------- First Mortgage Bonds: 6.10% (a) April 28, 2000 $ 10,000 $ 10,000 7.70% (a) June 12, 2000 25,000 25,000 7.97% (a) June 11, 2003 8,000 8,000 7.97% (a) June 13, 2003 8,000 8,000 6.46% (a) August 11, 2003 10,000 10,000 6 1/4%(b) June 1, 2007 4,325 4,415 9 1/4% May 1, 2021 70,000 70,000 8.12% (a) August 29, 2022 10,000 10,000 8.14% (a) August 29, 2022 10,000 10,000 8.375%(b)(d) December 1, 2028 16,700 16,700 ------- ------- 172,025 172,115 Promissory Notes: 1984 Series A (7 3/8%)(c) Oct. 1, 2014 16,700 16,700 1984 Series B (7 3/8%)(c) Oct. 1, 2014 16,700 16,700 1985 Series A (Var. rate)(c) Nov. 1, 2020 36,250 36,250 1985 Series B (Var. rate)(c) Nov. 1, 2020 36,000 36,000 1987 Series A (Var. rate)(c) June 1, 2027 33,700 33,700 1987 Series B (Var. rate)(c) June 1, 2027 9,900 9,900 1998 Series A (4.20%)(c) Dec. 1, 2028 16,700 - 5.38% (a) Jan. 15,1999 20,000 20,000 5.93% (a) Sept.10,2001 15,000 - 7.85% (a) July 2, 2004 15,000 15,000 ------- ------- 215,950 184,250 Secured Notes Payable of Subsidiary 9,023 7,379 Unamortized Discount on Debt (573) (598) ------- ------- Total long-term debt 396,425 363,146 ------- ------- Less Current Portion (39,507) (1,317) ------- ------- $356,918 $361,829 ======= ======= (a) Issued under the Company's Medium Term Note Program. (b) First Mortgage Bonds issued in connection with the sale by the New York State Energy Research and Development Authority ("NYSERDA") of tax-exempt pollution control revenue bonds. (c) Promissory Notes issued in connection with the sale by NYSERDA of tax-exempt pollution control revenue bonds. (d) To be redeemed March 1, 1999. 80 LONG-TERM DEBT MATURITIES The aggregate principal amounts of long-term debt maturing for the next five years and thereafter are as follows: $39.5 million in 1999, $36.4 million in 2000, $16.4 million in 2001, $1.1 million in 2002, $26.7 million in 2003 and $276.3 million thereafter. FIRST MORTGAGE BONDS The Company, on December 2, 1998, refinanced the 8.375% series of pollution control bonds, issued on its behalf by NYSERDA in 1988 in the aggregate principal amount of $16.7 million, which bonds are supported by the Company's First Mortgage Bonds of like principle amount. Such bonds were refinanced with lower cost NYSERDA pollution control bonds, which bonds are supported by the Company's Promissory Note of like principal amount, at a fixed rate of 4.20% for their initial term of five years and thereafter are subject to repricing. The 8.375% series will be redeemed on March 1, 1999, in order to coordinate with the Article XXI Mortgage Indenture requirements noted below under the subcaption "Mortgage Indenture Covenant." Accordingly, these bonds have been included in the "Current Maturities of Long-Term Debt" on the Company's Balance Sheet. The Company did not issue or redeem any First Mortgage Bonds during 1997; however, on May 1, 1996, the Company redeemed $30 million of its 8 3/4% Series due 2001 at a redemption price of 102.07% of their principal amount. MEDIUM TERM NOTES On September 8, 1998, the Company issued and sold a $15 million tranche of its unsecured Medium-Term Notes, Series B, under its medium term note program. Such notes bear a fixed annual interest rate of 5.93%, mature on September 10, 2001, and are not redeemable at the option of the Company prior to maturity. The net proceeds to the Company from the sale of such notes were $14,947,500 or 99.65% (before deducting expenses). On January 15, 1999, the Company issued and sold a $20 million tranche of its unsecured Medium-Term Notes, Series C, under its medium term note program. Such notes bear a fixed annual interest rate of 6.00%, mature on January 15, 2009, and are not redeemable at the option of the Company prior to maturity. The net proceeds to the Company from the sale of such notes were $19,875,000 or 99.875% (before deducting expenses). Such proceeds were applied to the payment at maturity on January 15, 1999, of a $20,000,000 tranche of the Company's unsecured Medium-Term Notes, Series A, that bore interest at a fixed annual interest rate of 5.38%. 81 AMENDED SETTLEMENT AGREEMENT Under the terms of the Agreement described in Note 2 "Regulatory Matters," the Company may transfer up to $100 million from its regulated utility business to its unregulated businesses prior to completing the holding company restructuring. As of December 31, 1998, approximately $25.5 million has been transferred. The Company may, pursuant to this authorization, issue up to $100 million of new securities prior to June 30, 2001. The Company expects to issue medium term notes; however, the amount and timing of any such issuance is not determinable at this time. NYSERDA The NYSERDA Pollution Control Revenue Bonds issued in 1985 (Series A and B) and 1987 (Series A and B) (collectively, the "1985 and 1987 NYSERDA Bonds") are variable rate obligations subject to weekly repricing and investor tender. The Company has the right, exercisable independently with respect to each series of the 1985 and 1987 NYSERDA Bonds, to convert those Bonds of each such series to a fixed rate for the remainder of their term. In its rate orders, the PSC has authorized deferred accounting for the interest costs on the Company's 1985 and 1987 Series A and B Promissory Notes which were issued in connection with the sale of the 1985 and 1987 NYSERDA Bonds. The authorization provides for full recovery of the variance between that portion of the actual interest costs supporting utility operations and the interest costs allowed in rates. The percent of interest costs supporting utility operations represents approximately 95% of the total costs. The deferred balances under such accounting were $4.9 million and $3.8 million at December 31, 1998 and 1997, respectively, and were included in "Regulatory Assets" in the Company's Consolidated Balance Sheet. Such deferred balances are to be addressed in future rate cases. By Order, issued and effective December 4, 1996, the PSC authorized the Company to issue up to $132.55 million of tax-exempt NYSERDA Pollution Control Revenue Bonds for refunding purposes or for the purpose of refinancing, if economical, a like amount of such bonds presently outstanding. LETTERS OF CREDIT The Company has in place irrevocable letters of credit which support certain payments required to be made on the 1985 and 1987 NYSERDA Bonds. Such letters of credit, which expire in 1999 and 2000, will be renewed prior to expiration. The Company anticipates being able to extend such letters of credit if the interest rate on the related series of such Bonds is not converted to a fixed interest rate. If the Company were unable to extend the letter of credit that is related to a particular 82 series of such Bonds, that series would have to be redeemed unless a fixed rate of interest became effective. Payments made under the letters of credit in connection with purchases of tendered 1985 and 1987 NYSERDA Bonds are repaid with the proceeds from the remarketing of such Bonds. To the extent the proceeds are not sufficient, the Company would be required to reimburse the bank that issued the letter of credit for the amount of any resulting draw under that letter prior to its expiration date. DEBT EXPENSE Expenses incurred on debt issues and any discount or premium on debt are deferred and amortized over the lives of the related issues. Expenses incurred on debt redemptions prior to maturity have been deferred and are generally being amortized over the shorter of the remaining lives of the related extinguished issues or the new issues as directed by the PSC. DEBT COVENANTS Certain debt agreements require the maintenance by the Company of certain financial ratios and contain other restrictive covenants. MORTGAGE INDENTURE COVENANT Article XXI of the Company's Indenture of Mortgage, pursuant to which the Company's first mortgage bonds are outstanding (the "Mortgage"), requires generally that, to the extent that the cost of property additions (as defined in the Mortgage) acquired by the Company during a calendar year is less than the allowance for depreciation on property subject to the Mortgage (calculated pursuant to the Mortgage) for such calendar year, the Company must deposit cash with the Mortgage Trustee in the amount of such deficiency, less certain credits available to the Company under the Mortgage (the "Article XXI Deficiency"). Any cash deposited with the Mortgage Trustee as a result of an Article XXI Deficiency may be withdrawn by the Company in an amount equal to the cost of property additions acquired by the Company subsequent to such calendar year, or may be applied by the Mortgage Trustee, at the request of the Company, to redeem or purchase outstanding mortgage bonds in accordance with the provisions of the Mortgage. If any such cash left on deposit with the Mortgage Trustee for 12 consecutive months or more is in excess of $350,000, the amount of such cash in excess of $250,000 must be applied by the Mortgage Trustee to redeem or purchase mortgage bonds, subject to certain exceptions set forth in the Mortgage. Article XXI of the Mortgage will remain in effect so long as any of the Company's mortgage bonds of any series created prior to 1994 are outstanding under the Mortgage. 83 For calendar year 1997, the Company experienced an Article XXI Deficiency in the amount of $722,226, in satisfaction of which, on March 24, 1998, it deposited with the Mortgage Trustee cash in that amount. For calendar year 1998, the Company experienced an Article XXI Deficiency in the approximate amount of $16.3 million, in satisfaction of which it deposited with the Mortgage Trustee cash in that amount received by the Company from the proceeds of the 1998 NYSERDA Bonds. Such cash deposited will be applied by the Mortgage Trustee, at the request of the Company, to the redemption, on March 1, 1999, of the Company's First Mortgage Bonds, 8.375% Series due 2028. NOTE 8 - POSTEMPLOYMENT BENEFITS PENSION BENEFITS The Company has a non-contributory retirement income plan ("Retirement Plan") covering substantially all of its employees. The Retirement Plan provides pension benefits that are based on the employee's compensation and years of service. It has been the Company's practice to provide periodic updates to the benefit formula stated in the Retirement Plan. The Company's funding policy is to make annual contributions equal to the amount of net periodic pension cost, but not in excess of the maximum allowable tax-deductible contribution under the federal income tax law nor less than the minimum requirement under the Employee Retirement Income Security Act of 1974. The 1998 and 1997 accounting for pension benefits reflects adoption of PSC-prescribed provisions which, among other things, requires ten-year amortization of actuarial gains and losses and deferral of differences between actual pension expense and rate allowances. In addition to the Retirement Plan, the Company sponsors a non-qualified plan for eligible officers (the "EDCP") and a non-qualified pension restoration plan. OTHER POSTRETIREMENT BENEFITS The Company provides certain health care and life insurance benefits for retired employees through its post-retirement benefit plan ("Benefit Plan"). Substantially all of the Company's employees may become eligible for these benefits if they reach retirement age while working for the Company. These and similar benefits for active employees are provided through insurance companies whose premiums are based on the benefits paid during the year. In order to reduce the total costs of these benefits, the Company requires employees who retired on or after October 1, 1994, to contribute toward the cost of such benefits. The Company is fully recovering its net periodic postretirement costs in accordance with PSC guidelines. Under 84 these guidelines, the difference between the amounts of post-retirement benefits recoverable in rates and the amounts of post-retirement benefits determined by the actuary under SFAS 106, "Employers Accounting for Postretirement Benefits Other Than Pensions," are deferred as either a regulatory asset or liability, as appropriate. Reconciliations of Pension and OPEB Plans' benefit obligation, plan assets and funded status, as well as the components of net periodic pension cost and the weighted average assumptions are as follows:
Pension Benefits Other Benefits ---------------------- ------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- In Thousands In Thousands ------------ ------------ Change in Benefit Obligation: Benefit obligation at beginning of year $225,038 $201,779 $78,953 $ 71,481 Service cost 5,205 4,578 2,076 1,745 Interest cost 16,234 15,504 5,610 5,264 Plan amendments 14,439 - - - Benefits paid (12,433) (11,750) (2,973) (2,606) Actuarial (gain) or loss 22,021 14,927 9,805 3,069 -------- -------- ------- -------- Benefit Obligation at End of Year $270,504 $225,038 $93,471 $ 78,953 -------- -------- ------- -------- Change in Plan Assets: Fair value of plan assets at begin- ning of year $316,852 $268,615 $45,109 $ 31,402 Actual return on plan assets 6,040 60,842 10,607 10,004 Employer contributions 72 48 5,489 6,431 Benefits paid (12,433) (11,750) (3,569) (2,606) Administrative Expenses (1,494) (903) (456) (122) -------- -------- ------- -------- Fair Value of Plan Assets at End of Year $309,037 $316,852 $ 57,180 $ 45,109 -------- -------- ------- --------
Pension Benefits Other Benefits ---------------------- ------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- In Thousands In Thousands ------------ ------------ Reconciliation of Funded status Funded status $ 38,533 $ 91,814 $(36,291) $(33,844) Unrecognized actuarial (gain) (18,985) (73,949) (9,800) (14,716) Unrecognized transition (asset) or obligation (2,065) (2,700) 43,579 46,693 Unamortized prior service cost 20,179 6,292 (129) (139) -------- -------- -------- -------- Accrued Benefit Cost $ 37,662 $ 21,457 $ (2,641) $ (2,006) -------- -------- -------- -------- Components of Net Periodic Benefit Cost Service cost $ 5,205 $ 4,578 $ 2,076 $ 1,745 Interest cost 16,234 15,504 5,610 5,264 Expected return on plan assets (27,325) (24,373) (2,867) (1,886) Amortization of prior service cost 552 355 (10) (10) Amortization of transitional (asset) or obligation (635) (635) 3,114 3,114 Recognized actuarial (gain) or loss (10,162) (7,846) (1,789) (1,504) -------- -------- -------- -------- Net Periodic Benefit Cost $(16,131) $(12,417) $ 6,134 $ 6,723 -------- -------- -------- -------- Weighted-average assumptions as of December 31 Discount rate 6.50% 7.25% 6.50% 7.25% Expected long-term rate of return on plan assets 8.50% 9.25% 6.80% 6.80% Rate of compen- sation increase 4.00% 4.50% 4.00% 4.50%
86 For measurement purposes, a 9.5% (9.9% for participants over age 65) annual rate of increase in the per capita cost of covered health benefits is assumed for 1999. The rate is assumed to decrease gradually to 5.5% for 2008 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one- percentage-point change in assumed health care cost trend rates would have the following effects: One-Percentage- One-Percentage- Point Decrease Point Increase -------------- -------------- Effect on total of service and interest cost compo- nents for 1998 $ 1,138,000 $ (987,000) Effect on year-end 1998 postretirement benefit obligation $12,245,000 $(10,826,000) NOTE 9 - COMMITMENTS AND CONTINGENCIES NUCLEAR LIABILITY INSURANCE The Price-Anderson Act is a federal law which limits the public liability which can be imposed with respect to a nuclear incident at a licensed nuclear electric generating facility. Such Act also provides for assessment of owners of all licensed nuclear units in the United States for losses in excess of certain limits in the event of a nuclear incident at any such licensed unit. Under the provisions of the Price-Anderson Act, the Company's potential assessment (based on its 9% ownership interest in the Nine Mile 2 Plant and assuming that the other Nine Mile 2 Plant cotenants were to contribute their proportionate shares of the potential assessments) would be $7.6 million (subject to adjustment for inflation) and the Company could be assessed $378,000 (subject to adjustment for inflation) as an additional surcharge, but would be limited to a maximum assessment of $900,000 in any year with respect to any nuclear incident. The public liability insurance coverage of $200 million required under the Price-Anderson Act for the Nine Mile 2 Plant is provided through Niagara Mohawk. The Company also carries insurance to cover the additional costs of replacement power (under a Business Interruption and/or Extra Expense Insurance Policy) incurred by the Company in the event of a prolonged accidental outage of the Nine Mile 2 Plant. This insurance arrangement provides for payments of up to $276,000 per week if the Nine Mile 2 Plant 87 experiences a continuous accidental outage which extends beyond 21 weeks. Such payments will continue for 52 weeks after expiration of the 21-week deductible period, and thereafter the insurer shall pay 80% of the weekly indemnity for a second and third 52-week period. Subject to certain limitations, the Company may request prepayment, in a lump sum amount, of the insurance payments which would otherwise be paid to it with respect to said third 52-week period, calculated on a net present value basis. The Company is insured as to its respective interest in the Nine Mile 2 Plant under property damage insurance provided through Niagara Mohawk. The insurance coverage provides $500 million of primary property damage coverage for both Units of the Nine Mile Point Nuclear Station and $2.25 billion of excess property damage coverage solely for Unit 2 of that station. Such insurance covers decontamination costs, debris removal and repair and/or replacement of property. The Company intends to maintain, or cause to be maintained, insurance against such risks at the Nine Mile 2 Plant, provided such coverage can be obtained at an acceptable cost. ENVIRONMENTAL MATTERS General: On an ongoing basis, the Company assesses environmental issues which could impact the Company and its customers. Clean Water Act Compliance: In 1992 the Company filed renewal applications for the State Pollution Discharge Elimination System ("SPDES") permits for its Roseton and Danskammer Plants. Such permits are required to operate the Plants' cooling water systems and wastewater treatment systems. The Company is a party to an active proceeding before the New York State Department of Environmental Conservation ("NYSDEC") related to the processing of the application for the Roseton Plant. The utility participants in the proceeding agreed to prepare and submit a revised Draft Environmental Impact Statement ("DEIS") with a target date of December 31, 1999. NYSDEC has indicated that draft SPDES permits will be issued after the revised DEIS is filed. At this stage of the proceeding, the Company can make no determination as to the outcome of the proceeding or the impact, if any, on the Company's financial position. Clean Air Act Amendments: The Clean Air Act Amendments of 1990 ("CAA Amendments") added several new programs which address attainment and maintenance of national ambient air quality standards. These include control of emissions from fossil-fueled electric generating plants that affect "acid rain" and ozone. At December 15, 1998, the Company believes it was in 88 full compliance with regulations promulgated to date under the CAA Amendments. Ongoing federal and state clean air initiatives may require the Company to reduce its emissions in the future. The Company's emissions of nitrogen oxides ("NOx") were subject to additional controls, effective May 31, 1995, under Title I of the CAA Amendments. The Company has installed appropriate controls in compliance with this requirement. The Northeast Ozone Transport Commission ("OTC"), of which New York State is a member, has agreed that additional reductions of NOx emissions will be required in 1999 and, possibly, in the year 2003. The NYSDEC has proposed regulations intended to implement the 1999-2002 NOx emissions reduction contemplated by OTC. The Company is developing plans to comply with the NYSDEC proposal and believes that it can do so by fuels and operation management not requiring the use of additional back-end emissions controls. In July 1997, the Environmental Protection Agency ("EPA") promulgated proposed revisions to the National Ambient Air Quality Standards for ozone and particulates. These regulations may result in the need for additional reductions of sulfur dioxide and NOx emissions, depending on the results of ongoing ambient air monitoring programs. Should monitoring determine that counties in the vicinity of the Company's electric generating stations exceed the new standards, emissions reductions could be required. However, ambient air monitoring for particulates will not be completed until 2002, at which time the EPA also intends to complete a reassessment of health risks associated with particulate emissions. Additional controls of NOx emissions that are associated with ozone formation are required in 2003 under rules promulgated by the EPA in September 1998. EPA has established limits on NOx emissions for each of 22 states in the midwest, southeast and northeast. While it is not presently possible to determine the additional emissions reductions, if any, required at the Company's facilities under this EPA rule, the Company expects that they can be achieved by conventional control technologies, in combination with prudent operational management. Beginning in 1997 the NYSDEC, began an initiative seeking penalties from all New York electric utilities for past opacity variances and requiring various opacity reduction measures and stipulated penalties for future excursions after execution of a consent order. Each New York State electric utility, including the Company, is in the process of negotiating, or has negotiated, the various terms and conditions of a draft consent order with the NYSDEC. The Company's facilities, which are the subject of these negotiations, are in its Danskammer Plant and its Roseton Plant. The outcome of this matter is uncertain at this time; however, the Company believes that the amount of any civil penalty payment and implementation of an opacity reduction program, in the aggregate, will not be material. 89 FORMER MANUFACTURED GAS PLANT FACILITIES In October 1995, the Company and the NYSDEC entered into an Order on Consent regarding the development and implementation of an investigation and remediation program for the Company's former coal gasification plant ("Central Hudson Site"), the City of Newburgh, New York's ("City") adjacent and nearby property and the adjoining areas of the Hudson River. Remedial investigations were completed in September 1997. A draft report on the investigations was provided to the NYSDEC for its review and comment on October 31, 1997. The investigations revealed the presence of contaminants in the soil in portions of the study area. In the majority of the study area contaminants were found deep within the ground and are not a threat to the public. Contaminated ground water is associated with the contaminated soil but it is not used as a drinking water supply. Impacted sediments were also present within the Hudson River adjacent to the City's property which is the location of its sewage treatment plant. There are several possible sources of the contaminants due to the long industrial history and current uses of the area. The Company is conducting additional studies as part of the remedial investigation required by the Order on Consent with NYSDEC. The results of these studies will be provided as part of a revised final report on the remedial investigation to the NYSDEC in early 1999. Following NYSDEC's approval of the report and its determination whether or not the contaminants found in the investigation may pose a significant threat to human health or the environment, a risk assessment will be completed by the Company, if required. Remedial alternatives addressing any unacceptable risks identified in the risk assessment will be evaluated. It is currently anticipated that the risk assessment and remedial alternatives report will be completed in 1999. In May 1995, the City filed suit against the Company in the United States District Court for the Southern District of New York. The City alleges that the Company has released certain allegedly hazardous substances without a permit from the Central Hudson Site in Newburgh, New York into the ground at the Central Hudson Site and into adjacent and nearby property of the City, in violation of the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the federal Resource Conservation and Recovery Act ("RCRA") and the federal Emergency Planning and Community Right to Know Act ("EPCRA"). The City also alleges a number of nuisance, trespass, damage and indemnification claims pursuant to New York State law. The City seeks injunctive relief against such alleged disposal, storage or release of hazardous substances at the Central Hudson Site, remediation and abatement of the conditions alleged to lead to endangerment of the City's property, payment of restitution of clean-up costs and monetary damages of at least 90 $70 million, assessment of certain civil penalties under RCRA, CERCLA and EPCRA, and recovery of the City's costs and attorneys' fees in such action. The trial on this matter began November 30, 1998, and on December 18, 1998, the jury made its determination that the proper cost of environmental remediation on the City's property is $20 million and the Company's share is 80% (or $16 million). In addition, the jury awarded the City $435,000 of damages for increased costs of future operations of the City's sewage treatment plant due to the existence of contamination. The Court reserved to itself decision on the City's allegations that the Company violated certain provisions of the federal RCRA and the EPCRA. The extent of exposure to the Company under these allegations cannot be estimated. In addition, the City's request for attorney's and consultant's fees (estimated to be approximately $5 million) also is yet to be determined by the Court. The Court is expected to issue a decision on the matters referred to in the immediately preceding paragraph in the Spring of 1999. Upon issuance of such decision either party will have 30 days to appeal the jury's decision and/or the Court's decision. The Company and the City have stipulated that the damages for clean-up costs awarded by the jury will be deposited by the City into an interest earning account ("Clean-up Fund") which, upon Court approval, shall be applied to the costs of the environmental clean-up of the City's properties pursuant to the said Order on Consent. Any excess funds in the Clean-up Fund shall be retained by the City. Within 45 days after any appeals become final in this matter, the City may apply to the NYSDEC to assume the responsibilities of the Company under said Order on Consent. If the City does not so apply to NYSDEC, or does apply and is not accepted for substitution by the NYSDEC, the Company shall continue to be responsible for the clean-up under said Order on Consent. In the event the amount in the Clean-up Fund is not sufficient to satisfy the clean-up responsibilities under said Order on Consent, the party responsible for the clean-up will be responsible for any excess required to comply with said Order on Consent. In July 1998, the City and the Company entered into an agreement ("Newburgh Agreement") which allowed the City to recommence construction at its sewage treatment plant. The Newburgh Agreement provides for the City to construct a clarifier at the sewage treatment plant and to deal appropriately with any contaminants that may be encountered during the construction activities and for the Company to fund these construction and related activities. The Company estimates that the cost of such construction and other related activity is approximately $2.8 million. The Company's obligation to fund the costs of constructing the clarifier at the City's sewage treatment plant is in addition to the jury award, discussed above. 91 As of December 31, 1998, the Company recorded liabilities of $16.4 million and $2.4 million regarding this matter which are included in "Deferred Credits and Other Liabilities - Other" and "Current Liabilities - Other," respectively, in the Company's Consolidated Balance Sheet. By letter dated June 3, 1997, the Company received authorization from the PSC to defer costs related to this matter, including legal defense costs, but excluding the Company's labor, related to environmental site investigation and remediation actions. The Company has deferred costs expended to date that it expects to be recovered in future rates. The cumulative deferred costs for 1998 amounted to $22.7 million and were included in "Deferred Charges-Regulatory Assets" in the Company's Consolidated Balance Sheet. The Company can make no prediction as to the full financial effect this matter will have on it, including the extent, if any, of insurance reimbursement and including implementation of environmental clean-up under said Order on Consent. ASBESTOS LITIGATION Since 1987, the Company, along with many other parties, has been joined as a defendant or third-party defendant in 1,576 asbestos lawsuits commenced in New York State and federal courts. The plaintiffs in these lawsuits have each sought millions of dollars in compensatory and punitive damages from all defendants. The cases were brought by or on behalf of individuals who have allegedly suffered injury from exposure to asbestos, including exposure which allegedly occurred at Company facilities. To date, of the 1,576 cases that had been brought against the Company, 642 remained pending against the Company. The 934 cases that were no longer pending against the Company, as of December 31, 1998, were resolved as follows: (i) the Company negotiated voluntary dismissals in 685 cases and won summary judgement dismissals in 10 cases; (ii) 113 third-party claims were extinguished with respect to the Company when the third party plaintiff, Owens Corning Fiberglas settled the cases with the plaintiffs; and (iii) the Company settled 126 cases. The Company is presently unable to assess the validity of the remaining asbestos lawsuits; accordingly, it cannot determine the ultimate liability relating to these cases. Based on information known to the Company at this time, including its experience in settling asbestos cases and in obtaining dismissals of asbestos cases, the Company believes that the cost to be incurred in connection with the remaining lawsuits will not have a material adverse effect on the Company's financial position or results of operations. 92 The Company is insured under successive comprehensive general liability policies issued by a number of insurers, has put such insurers on notice of the asbestos lawsuits and has demanded reimbursement for its defense costs and liability. PURCHASED POWER COMMITMENTS Under federal and New York State laws and regulations, the Company is required to purchase the electrical output of unregulated cogeneration facilities ("IPPs") which meet certain criteria for Qualifying Facilities, as such term is defined in the appropriate legislation. Purchases are made under long-term contracts which require payment at rates higher than what can be purchased on the wholesale market. These costs are currently fully recoverable through the Company's electric fuel adjustment clause, with one exception, for which the impaired portion of the contract has been recognized as a reduction to income. IPPs with which the Company has contracts represent 6% of the Company's energy purchases in 1998. OTHER MATTERS The Company is involved in various other legal and administrative proceedings incidental to its business which are in various stages. While these matters collectively involve substantial amounts, it is the opinion of management that their ultimate resolution will not have a material adverse effect on the Company's financial position or results of operations. Included in such proceedings are lawsuits against the Company arising from a November 1992 explosion in a dwelling in Catskill, New York. One lawsuit in this matter alleging personal injuries, the death of an occupant, and property damage and recovery of an unspecified amount of compensatory and punitive damages was settled in January 1999 in an amount that is not material to the Company; and one lawsuit remains, alleging personal injuries and property damage and compensatory and punitive damages in the sum of $4 million. In addition to the above, on February 12, 1994, a fire and an explosion destroyed a residence in the Village of Wappingers Falls, New York, in the Company's service territory. A short time later, a second explosion and fire destroyed a nearby commercial facility. Lawsuits commenced against the Company arising out of the Wappingers Falls incident include one alleging property damage and seeking recovery of $250,000 in compensatory damages and one alleging personal injuries and property damage and seeking an unspecified amount of damages against the Company. All such lawsuits have been consolidated; however, no trial date has been set. The Company is investigating the above claims and presently has insufficient information on which to predict their 93 outcome. The Company believes that it has adequate insurance to cover any compensatory damages that might be awarded. The Company's insurance, however, does not extend to punitive damages which, if awarded, could have a material adverse effect on the Company's financial position. NOTE 10 - SEGMENTS AND RELATED INFORMATION The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," during the fourth quarter of 1998. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-making group includes the senior executive officers. The Company's reportable operating segments are its electric and gas operations. The Company's "Other Segment" consists primarily of Central Hudson Enterprises Corporation and CH Resources, Inc., both of which are non-regulated energy businesses. All of the segments currently operate in the northeast region of the United States. Certain additional information regarding these segments is set forth in the following table. General corporate expenses, property common to both segments and depreciation of such common property have been allocated to the segments in accordance with practice established for regulatory purposes. 94 Central Hudson Gas & Electric Segment Disclosure - FAS 132 Year Ended December 31, 1998 ----------------------------------------------- Electric Gas Other Total -------- --- ----- ----- Net revenues from external customers $ 418,426 $ 84,898 $ - $ 503,324 Intersegment net revenues 80 65 - 145 ---------- -------- ------- ---------- Total net revenues 418,506 84,963 - 503,469 ---------- -------- ------- ---------- Depreciation and amortization 40,996 4,564 - 45,560 Interest expense 23,803 3,875 - 27,678 Interest income 695 87 - 782 Income tax (credit) expense 24,646 3,981 - 28,627 Earnings per share 2.51 0.35 0.04 2.90 Segment assets 1,093,455 169,587 52,996 1,316,038 Construction Expenditures 39,183 6,478 - 45,661 1997 ----------------------------------------------- Electric Gas Other Total -------- --- ----- ----- Net revenues from external customers $ 416,346 $103,835 $ - $ 520,181 Intersegment net revenues 83 13 - 96 ---------- -------- ------- ---------- Total net revenues 416,429 103,848 - 520,277 ---------- -------- ------- ---------- Depreciation and amortization 39,480 4,384 - 43,864 Interest expense 23,186 3,464 - 26,650 Interest income 1,970 290 - 2,260 Income tax (credit) expense 21,405 4,832 - 26,237 Earnings per share 2.58 0.37 0.02 2.97 Segment assets 1,067,042 163,021 22,027 1,252,090 Construction Expenditures 36,685 7,183 - 43,868 95 Central Hudson Gas & Electric (Cont'd) Segment Disclosure - FAS 132 Year Ended December 31, 1996 ----------------------------------------------- Electric Gas Other Total -------- --- ----- ----- Net revenues from external customers $ 418,673 $ 95,228 $ - $ 513,901 Intersegment net - revenues 88 (18) 70 ---------- -------- ------- ---------- Total net revenues 418,761 95,210 - 513,971 ---------- -------- ------- ---------- Depreciation and amortization 38,401 4,179 - 42,580 Interest expense 23,649 3,534 - 27,183 Interest income 263,426 36,748 - 300,174 Income tax (credit) expense 27,103 3,965 - 31,068 Earnings per share 2.67 0.27 0.05 2.99 Segment assets 1,066,185 160,764 22,157 1,249,106 Construction Expenditures 43,359 6,501 - 49,860 NOTE 11 - FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Temporary Cash Investments: The carrying amount approximates fair value because of the short maturity of those instruments. Cumulative Preferred Stock Subject to Mandatory Redemption: The fair value is estimated based on the quoted market price of similar instruments. Long-term Debt: The fair value is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities and quality. Notes Payable: The carrying amount approximates fair value because of the short maturity of those instruments. 96 The estimated fair values of the Company's financial instruments are as follows: December 31, 1998 ------------------------ Carrying Fair Amount Value -------- ----- (In Thousands) Cumulative preferred stock subject to mandatory redemption............. $ (35,000) $ (37,083) Long-term debt (including current maturities)................. (396,425) (413,905) December 31, 1997 ------------------------ Carrying Fair Amount Value -------- ----- Cumulative preferred stock subject to mandatory redemption............. $ (35,000) $ (39,100) Long-term debt (including current maturities)................. (363,146) (382,837) 97 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected financial data for each quarterly period within 1998 and 1997 are presented below:
Earnings Per Income Average Available Share of for Common Operating Operating Common Stock Revenues Income Stock Outstanding -------- --------- --------- ------------ (In Thousands) (Dollars) ------------------------------------------- ------------ Quarter Ended: 1998 ---- March 31............ $143,882 $24,003 $18,360 $1.06 June 30............. 112,106 14,404 9,234 .54 September 30........ 125,723 18,350 13,003 .77 December 31......... 121,758 14,543 8,717 .53 1997 ---- March 31............ $151,875 $25,802 $20,678 $1.18 June 30............. 118,604 14,842 9,657 .55 September 30........ 123,507 17,911 12,561 .72 December 31......... 126,291 11,501 8,963 .52
98 SCHEDULE II - RESERVES Additions ---------------------------- Payments Balance Balance At Charged to Charged to Charged At End Beginning Cost and Other to of Description of Period Expenses Accounts Reserves Period - ----------- --------- -------- -------- -------- ------ YEAR ENDED DECEMBER 31, 1998 Operating Reserves........ $6,581,614 $7,474,979 $ 103,700 $8,165,693 $5,994,600 ========= ========= ========= ========= ========= Reserve for Uncollectible Accounts................. $2,800,000 $2,638,719 $ - $3,038,719 $2,400,000 ========= ========= ========= ========= ========= YEAR ENDED DECEMBER 31, 1997 Operating Reserves........ $4,755,264 $2,142,391 $ 334,700 $ 650,741 $6,581,614 ========= ========= ========= ========= ========= Reserve for Uncollectible Accounts................. $3,200,000 $3,493,405 $ - $3,893,405 $2,800,000 ========= ========= ========= ========= ========= YEAR ENDED DECEMBER 31, 1996 Operating Reserves........ $6,024,101 $2,665,136 $ 195,608 $4,129,581 $4,755,264 ========= ========= ========= ========= ========= Reserve for Uncollectible Accounts................. $2,500,000 $4,335,676 $ - $3,635,676 $3,200,000 ========= ========= ========= ========= =========
99 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ------------------------------------------------------------ None. PART III -------- ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY ----------------------------------------------------------- The information with respect to the Directors of the Company required hereunder is incorporated by reference to the caption "Election of Directors" in the Company's definitive proxy statement, to be dated March 1, 1999, and to be used in connection with its Annual Meeting of Shareholders to be held on April 27, 1999, which proxy statement will be submitted to the Securities and Exchange Commission pursuant to that Commission's Regulation S-T. The information with respect to the executive officers of the Company required hereunder is incorporated by reference to Item 1 herein, under the caption "Executive Officers of the Company." ITEM 11 - EXECUTIVE COMPENSATION ---------------------------------- The information required hereunder is incorporated by reference to the caption "Executive Compensation" in the Company's definitive proxy statement, to be dated March 1, 1999, and to be used in connection with its Annual Meeting of Shareholders to be held on April 27, 1999. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ----------------------------------------------------------- The information required hereunder is incorporated by reference to the caption "Security Ownership" in the Company's definitive proxy statement, to be dated March 1, 1999, and to be used in connection with its Annual Meeting of Shareholders to be held on April 27, 1999. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------------------- There were no relationships or transactions of the type required to be described by this Item. 100 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K ----------------------------------------------------- (a) DOCUMENTS FILED AS PART OF THIS REPORT 1. and 2. All Financial Statements and Financial Statement Schedules filed as part of this Report are included in Item 8 of this Form 10-K and reference is made thereto. 3. Exhibits Incorporated herein by reference to the Exhibit Index for this Report. Such Exhibits include the following management contracts or compensatory plans or arrangements required to be filed as an Exhibit pursuant to Item 14(c) hereof: Description in the Exhibit List and Exhibit Nos. for this --------------------------------------------------------- Report ------ Directors' Deferred Compensation Plan, effective October 1, 1980. (Exhibit (10)(iii)1) Executive Deferred Compensation Plan of the Company, effective March 1, 1992, together with Amendments thereto effective December 17, 1993 and December 1, 1998. (Exhibits (10)(iii)2, 5 and 17) Retirement Benefit Restoration Plan of the Company, effective May 1, 1993, together with Amendments thereto effective July 23, 1993 and December 1, 1998. (Exhibits (10)(iii)3, 4 and 18) Agreement, made March 14, 1994, by and between Registrant and Mellon Bank, N.A., amending and restating, effective April 1, 1994, Registrant's Savings Incentive Plan and related Trust Agreement with The Bank of New York, together with amendments dated July 22, 1994, and December 16, 1994. (Exhibits (10)(iii)7, 8 and 9) Executive Incentive Compensation Plan of the Company, effective January 3, 1993, as amended and restated, effective April 4, 1995. (Exhibits (10)(iii)6 and 10) Stock Plan for Outside Directors of the Company, dated November 17, 1995. (Exhibit (10)(iii)11) Management Incentive Program of the Company, effective April 1, 1994, together with Amendment thereto dated July 25, 1997. (Exhibits (10)(iii)12 and 13) 101 Change-of-Control Severance Policy, as approved by the Board of Directors October 23, 1998 and, effective December 1, 1998, for all management employees of the Company. Form of Employment Agreement, dated October 23, 1998, effective December 1, 1998, for all officers of the Company. Employment Agreement, dated October 23, 1998, effective December 1, 1998, for the President and Chief Executive Officer of the Company. (b) REPORTS ON FORM 8-K During the last quarter of the period covered by this Report and including the period to the date hereof, the following Reports on Form 8-K were filed by the Company: 1) Report dated October 9, 1998, relating to a special shareholders meeting held on September 25, 1998, at which more than the required two-thirds of outstanding shares of the Company were voted in favor of establishing a holding company, CH Energy Group, Inc., which holding company is more fully described under the caption "Competition/Deregulation" in Item 7 of Part I of this Annual Report on Form 10-K and the Company's Registration Statement, on Form S-4, Registration No. 333-52797 filed with the SEC. 2) Report dated December 22, 1998, relating to the jury decision in the lawsuit filed by the City of Newburgh against the Company as reported under the caption "Former Manufactured Gas Plant Facilities" in Note 9 - "Commitments and Contingencies" to the Company's Consolidated Financial Statements made a part of this Annual Report on Form 10-K. 3) Report dated January 15, 1999, relating to the Company's sale of a tranche of Medium Term Notes in the aggregate principal amount of $20 million, such sale being authorized under the Company's shelf registration statement on Form S-3 (Registration No. 333-65597) as filed with the SEC. (c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K Incorporated herein by reference to subpart (a)-3 of Item 14, above. 102 (d) Financial Statement Schedule required by Regulation S-X which is excluded -------------------------------------------------------------------------- from the Company's Annual Report to Shareholders for the fiscal year ended -------------------------------------------------------------------------- December 31, 1998 ----------------- Not applicable, see Item 8 hereof. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTRAL HUDSON GAS & ELECTRIC CORPORATION By (SGD.) John E. Mack III -------------------------- (John E. Mack III, Chairman of the Board Dated: March 1, 1999 103 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following person on behalf of the Company and in the capacities and on the date indicated: SIGNATURE TITLE DATE --------- ----- ---- (a) Principal Executive Officer or Officers: (SGD.) John E. Mack III - ----------------------- (John E. Mack III) Chairman of the Board March 1, 1999 (SGD.) Paul J. Ganci - ----------------------- (Paul J. Ganci) President and Chief Executive Officer March 1, 1999 (b) Principal Accounting Officer: (SGD.) Donna S. Doyle - ----------------------- (Donna S. Doyle) Controller March 1, 1999 (c) Chief Financial Officer: (SGD.) Steven V. Lant - ----------------------- (Steven V. Lant) Chief Financial Officer, Treasurer and Corporate Secretary March 1, 1999 (d) A majority of Directors: Jack Effron*, Frances D. Fergusson*, Heinz K. Fridrich*, Edward F.X.Gallagher*, Paul J. Ganci*, Charles LaForge* and John E. Mack III*, Directors By (SGD.) John E. Mack III - --------------------------- (John E. Mack III) March 1, 1999 104 - ----------------- *John E. Mack III, by signing his name hereto, does thereby sign this document for himself and on behalf of the persons named above after whose printed name an asterisk appears, pursuant to powers of attorney duly executed by such persons and filed with the Securities and Exchange Commission as Exhibit 24 hereof. 105 EX-99 2 EXHIBIT INDEX EXHIBIT INDEX Following is the list of Exhibits, as required by Item 601 of Regulation S-K, filed as a part of this Annual Report on Form 10-K, including Exhibits incorporated herein by reference (1): Exhibit No. (Regulation S-K Item 601 Designation) Exhibits - --------------- -------- (3) Articles of Incorporation and Bylaws: (i) 1-- Restated Certificate of Incorporation of the Registrant under Section 807 of the Business Corporation Law, filed August 14, 1989. ((1); Exhibit (3)1) (i) 2-- Certificate of Amendment to the Certificate of Incorporation of the Registrant under Section 805 of the Business Corporation Law, filed April 5, 1990. ((1); Exhibit (3)2) (i) 3-- Certificate of Amendment to the Certificate of Incorporation of the Registrant under Section 805 of the Business Corporation Law, filed October 19, 1993 ((1); Exhibit (3)3) (ii) 1-- Bylaws in effect on the date of this Report. (4) Instruments defining the rights of security holders, including indentures (see also Exhibit (3) above): - -------------------- (1) Exhibits which are incorporated by reference to other filings are followed by information contained in parentheses, as follows: The first reference in the parenthesis is a numeral, corresponding to a numeral set forth in the Notes which follow this Exhibit list, which identifies the prior filing in which the Exhibit was physically filed; and the second reference in the parenthesis is to the specific document in that prior filing in which the Exhibit appears. E-1 *(ii) 1-- Indenture dated January 1, 1927 between the Registrant and American Exchange Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)1) *(ii) 2-- Supplemental Indenture dated March 1, 1935 between the Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)2) *(ii) 3-- Second Supplemental Indenture dated June 1, 1937 between the Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)3) *(ii) 4-- Third Supplemental Indenture dated April 1, 1940 between the Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)4) *(ii) 5-- Fourth Supplemental Indenture dated March 1, 1941 between the Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)5) *(ii) 6-- Fifth Supplemental Indenture dated December 1, 1950 between the Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)6) *(ii) 7-- Sixth Supplemental Indenture dated December 1, 1952 between the Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)7) *(ii) 8-- Seventh Supplemental Indenture dated October 1, 1954 between the Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)8) *(ii) 9-- Eighth Supplemental Indenture dated May 15, 1958 between the Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)9) (ii) 10-- Ninth Supplemental Indenture dated December 1, 1967 between the Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)10) E-2 (ii) 11-- Tenth Supplemental Indenture dated as of January 15, 1969 between the Registrant and Irving Trust Company, as Trustee. ((3); Exhibit 2.12) (ii) 12-- Eleventh Supplemental Indenture dated as of June 1, 1970 between the Registrant and Irving Trust Company, as Trustee. ((4); Exhibit 1.13) (ii) 13-- Twelfth Supplemental Indenture dated as of February 1, 1972 between the Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)13) (ii) 14-- Thirteenth Supplemental Indenture dated as of April 15, 1974 between the Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)14) (ii) 15-- Fourteenth Supplemental Indenture dated as of November 1, 1975 between Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)15) (ii) 16-- Fifteenth Supplemental Indenture dated as of June 1, 1977 between Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)16) (ii) 17-- Sixteenth Supplemental Indenture dated as of September 15, 1979 between Registrant and Irving Trust Company, as Trustee. ((4); Exhibit 1.18) (ii) 18-- Seventeenth Supplemental Indenture dated as of May 15, 1980 between Registrant and Irving Trust Company, as Trustee. ((5); Exhibit (4)(a)18) (ii) 19-- Eighteenth Supplemental Indenture dated as of November 15, 1980 between Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)19) (ii) 20-- Nineteenth Supplemental Indenture dated as of August 15, 1981 between Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)20) E-3 (ii) 21-- Twentieth Supplemental Indenture dated as of September 1, 1982 between Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)21) (ii) 22-- Twenty-First Supplemental Indenture dated as of November 22, 1982 between Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)22) (ii) 23-- Twenty-Second Supplemental Indenture dated as of May 24, 1984 between Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)23) (ii) 24-- Twenty-Third Supplemental Indenture dated as of June 15, 1985 between Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)24) (ii) 25-- Twenty-Fourth Supplemental Indenture dated as of September 1, 1986 between Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)25) (ii) 26-- Twenty-Fifth Supplemental Indenture dated as of December 1, 1988 between Registrant and Irving Trust Company, as Trustee. ((2); Exhibit (4)(ii)26) (ii) 27-- Twenty-Sixth Supplemental Indenture dated as of May 1, 1991 between Registrant and The Bank of New York, as Trustee. ((2); Exhibit (4)(ii)27) (ii) 28-- Twenty-Seventh Supplemental Indenture dated as of May 15, 1992 between Registrant and The Bank of New York, as Trustee. ((2); Exhibit (4)(ii)28); and Prospectus Supplement Dated May 28, 1992 (To Prospectus Dated April 13, 1992) relating to $125,000,000 principal amount of First Mortgage Bonds, designated Secured Medium-Term Notes, Series A, and the Prospectus Dated April 13, 1992, relating to $125,000,000 principal amount of Registrant's debt securities attached thereto, as filed pursuant to Rule 424(b) in connection with Registration Statement No. 33- 46624. ((6)(a)), and, as applicable to E-4 a tranche of such Secured Medium-Term Notes, one of the following: (a) Pricing Supplement No. 1, Dated June 4, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992) filed pursuant to Rule 424(b) in connection with Registration Statement No. 33- 46624. ((6)(b)) (b) Pricing Supplement No. 2, Dated June 4, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992) filed pursuant to Rule 424(b) in connection with Registration Statement No. 33- 46624. ((6)(c)) (c) Pricing Supplement No. 3, Dated June 4, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992) filed pursuant to Rule 424(b) in connection with Registration Statement No. 33- 46624. ((6)(d)) (d) Pricing Supplement No. 4, Dated August 20, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992) filed pursuant to Rule 424(b) in connection with Registration Statement No. 33-46624. ((6)(e)) (e) Pricing Supplement No. 5, Dated August 20, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992) filed pursuant to Rule 424(b) in connection with Registration Statement No. 33-46624. ((6)(f)) E-5 (f) Pricing Supplement No. 6, Dated July 26, 1993 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992) filed pursuant to Rule 424(b) in connection with Registration Statement No. 33-46624. ((6)(g)) (g) Pricing Supplement No. 7, Dated July 26, 1993 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992) filed pursuant to Rule 424(b) in connection with Registration Statement No. 33-46624. ((6)(h)) (ii) 29-- Twenty-Eighth Supplemental Indenture dated as of May 1, 1995 between Registrant and The Bank of New York, as Trustee. ((27); Exhibit (4)(ii)33) Prospectus Supplement Dated May 15, 1995 (To Prospectus Dated April 4, 1995) relating to $80,000,000 principal amount of First Mortgage Bonds, designated Secured Medium-Term Notes, Series B, and the Prospectus Dated April 4, 1995, relating to (i) $80,000,000 of Registrant's Debt Securities and Common Stock, $5.00 par value, but not in excess of $40 million aggregate initial offering price of such Common Stock and (ii) 250,000 shares of Registrant's Cumulative Preferred Stock, par value $100 per share, which may be issued as 1,000,000 shares of Depositary Preferred Shares each representing 1/4 of a share of such Cumulative Preferred Stock attached thereto, as filed pursuant to Rule 424(b) in connection with Registration Statement No. 33-56349). (9) (ii) 30-- Indenture, dated as of April 1, 1992, between Registrant and Morgan Guaranty Trust Company of New York, as Trustee. ((7); Exhibit (4)(ii)29); and Prospectus Supplement Dated May 28, 1992 (To Prospectus Dated April 13, 1992) relating to $125,000,000 principal E-6 amount of Medium-Term Notes, Series A, and the Prospectus Dated April 13, 1992, relating to $125,000,000 principal amount of Registrant's debt securities attached thereto, as filed pursuant to Rule 424(b) in connection with Registration Statement No. 33-46624. ((8)(a)), and, as applicable to a tranche of such Medium-Term Notes, one of the following: (a) Pricing Supplement No. 1, Dated June 26, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992) filed pursuant to Rule 424(b) in connection with Registration Statement No. 33-46624. ((8)(b)) (b) Pricing Supplement No. 2, Dated October 6, 1993 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992) filed pursuant to Rule 424(b) in connection with Registration Statement No. 33-46624. ((8)(c)); and Prospectus Supplement Dated August 24, 1998 (To Prospectus Dated April 4, 1995) related to $80,000,000 principal amount of Medium-Term Notes, Series B, and the Prospectus Dated April 4, 1995, relating to (i) $80,000,000 of Registrant's Debt Securities and Common Stock, $5.00 par value, but not in excess of $40 million aggregate initial offering price of such Common Stock and (ii) 250,000 shares of Registrant's Cumulative Preferred Stock, par value $100 per share, which may be issued as 1,000,000 shares of Depositary Preferred Shares each representing 1/4 of a share of such Cumulative Preferred Stock attached thereto, as filed pursuant to Rule 424(b) in connection with Registration Statement No. 33- 56349). ((10)(a)), and, as applicable to a tranche of such Medium-Term Notes, one of the following: E-7 Pricing Supplement No. 1, Dated September 2, 1998 (To Prospectus Dated April 4, 1995, as supplemented by a Prospectus Supplement Dated August 24, 1998) filed pursuant to Rule 424(b) in connection with Registration Statement No. 33-56349. ((10)(b)); and Prospectus Supplement Dated January 8, 1999 (To Prospectus Dated January 7, 1999) relating to $110,000,000 principal amount of Medium-Term Notes, Series C, and the Prospectus Dated January 7, 1999, relating to $110,000,000 principal amount of Registrant's debt securities attached thereto, as filed pursuant to Rule 424(b) in connection with Registration Statement Nos. 333-65597 and 33-56349. ((36)(a)), and, as applicable to a tranche of such Medium- Term Notes, one of the following: Pricing Supplement No. 1, Dated January 12, 1999 (To Prospectus Dated January 7, 1999, as supplemented by a Prospectus Supplement Dated January 8, 1999) filed pursuant to Rule 424(b) in connection with Registration Statement Nos. 333-65597 and 33-56349. ((36)(b)) (ii) 31-- Participation Agreement, dated as of November 1, 1985, by and between New York State Energy Research and Development Authority and the Registrant. ((2); Exhibit (4)(ii)31) (ii) 32-- The Registrant has entered into certain other instruments with respect to long- term debt of the Registrant. No such instrument relates to securities authorized thereunder which exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees to provide the Commission, upon request, copies of any instruments defining the rights of holders of long-term debt of the Registrant and subsidiaries for which E-8 consolidated or unconsolidated financial statements are required to be filed with the Commission. (10) Material contracts: (i) 1-- Agreement dated October 31, 1968 between the Registrant and Consolidated Edison Company of New York, Inc. and Niagara Mohawk Power Corporation. ((3); Exhibit 5.1) (i) 2-- Agreement dated as of April 4, 1977 between Registrant, Consolidated Edison Company of New York, Inc., Long Island Lighting Company, New York State Electric & Gas Corporation, Niagara Mohawk Power Corporation, Orange and Rockland Utilities, Inc., Rochester Gas and Electric Corporation and the Power Authority of the State of New York. ((3); Exhibit 5.6) (i) 3-- Agreement dated April 27, 1973 between Registrant and the Power Authority of the State of New York. ((11); Exhibit 5.19) (i) 4-- Agreement dated as of September 22, 1975 between Registrant, Niagara Mohawk Power Corporation, Long Island Lighting Company, New York State Electric & Gas Corporation, and Rochester Gas and Electric Corporation. ((12); Exhibit 5.21) (i) 5-- Agreement dated November 23, 1976 between Registrant and Consolidated Edison Company of New York, Inc. ((13); Exhibit 5.29) (i) 6-- Agreement dated December 29, 1975 between Registrant and Niagara Mohawk Power Corporation, Long Island Lighting Company, New York State Electric & Gas Corporation, and Rochester Gas & Electric Corporation. ((14); Exhibit (10)(i)18) (i) 7-- Assignment and Assumption dated as of October 24, 1975 between Registrant and E-9 New York State Electric & Gas Corporation. ((12); Exhibit 5.25) (i) 8-- Amendment to Assignment and Assumption dated October 30, 1978 between Registrant and New York State Electric & Gas Corporation. ((3); Exhibit 5.34) (i) 9-- Agreement dated as of May 12, 1977 between Registrant and Niagara Mohawk Power Corporation. ((15); Exhibit 5.34) (i) 10-- Agreement, dated May 8, 1980, by and between Registrant and Jersey Central Power & Light Company. ((16); Exhibit (10)(i)21) (i) 11-- Purchase Agreement, dated as of June 1, 1980, by and between Registrant and Consolidated Edison Company of New York, Inc. ((16); Exhibit (10)(i)22) (i) 12-- Purchase Agreement, dated as of June 16, 1980, by and between Registrant and Philadelphia Electric Company. ((16); Exhibit (10)(i)23) (i) 13-- Purchase Agreement, dated as of June 18, 1980, by and between Registrant and Public Service Electric and Gas Company. ((16); Exhibit (10)(i)24) (i) 14-- Purchase Agreement, dated as of July 1, 1980, by and between Registrant and Connecticut Light and Power Company. ((16); Exhibit (10)(i)25) (i) 15-- Letter Amendment Agreement, dated December 16, 1980, by and between Registrant and Niagara Mohawk Power Corporation. ((16); Exhibit (10)(i)26) (i) 16-- Settlement Agreement, dated December 19, 1980, by and among the United States Environmental Protection Agency, The Department of Environmental Conservation of the State of New York, The Attorney General of the State of New York, Hudson River Fisherman's Association, Inc., Scenic Hudson Preservation Conference, Natural Resources Defense Council, Inc., Registrant, Consolidated Edison Company E-10 of New York, Inc., Orange and Rockland Utilities, Inc., Niagara Mohawk Power Corporation and Power Authority of the State of New York. ((16); Exhibit (10)(i)27) (i) 17-- Agreement dated April 2, 1980 by and between Registrant and the Power Authority of the State of New York. ((2); Exhibit (10)(i)24) (i) 18-- Purchase Agreement, dated April 19, 1983, between Registrant and New York State Electric & Gas Corporation. ((2); Exhibit (10)(i)29) (i) 19-- Transmission Agreement, dated October 25, 1983, between Registrant and Niagara Mohawk Power Corporation. ((2); Exhibit (10)(i)30) (i) 20-- Underground Storage Service Agreement, dated June 30, 1982, between Registrant and Penn-York Energy Corporation. ((2); Exhibit (10)(i)32) (i) 21-- Interruptible Transmission Service Agreement, dated December 20, 1983, between Registrant and Power Authority of the State of New York. ((2); Exhibit (10)(i)33) (i) 22-- Agreement, dated December 7, 1983, between Registrant and the Power Authority of the State of New York. ((2); Exhibit (10)(i)34) (i) 23-- Specification of Terms and Conditions of Settlement in State of New York Public Service Commission Proceeding - Case 29124, dated September 3, 1985. ((2); Exhibit (10)(i)35) (i) 24-- Reimbursement Agreement, dated as of November 1, 1985, between Registrant and the Bank named therein. ((2); Exhibit (10)(i)36) E-11 (i) 25-- General Joint Use Pole Agreement between Registrant and the New York Telephone Company effective January 1, 1986 (not including the Administrative and Operating Practices provisions thereof). ((2); Exhibit (10)(i)37) (i) 26-- Agreement, dated June 3, 1985, between Registrant, Consolidated Edison Company of New York, Inc. and the Power Authority of the State of New York relating to Marcy South Real Estate - East Fishkill, New York. ((2); Exhibit (10)(i)38) (i) 27-- Agreement, dated June 11, 1985, between the Registrant and the Power Authority of the State of New York relating to Marcy South Substation - East Fishkill, New York. ((2); Exhibit (10)(i)39) (i) 28-- Agreement, dated as of April 9, 1986, among Registrant, Consolidated Edison Company of New York, Inc., Niagara Mohawk Power Corporation and the Power Authority of the State of New York relating to Real Estate - Roseton/ Danskammer. ((2); Exhibit (10)(i)40) (i) 29-- Agreement, dated as of April 9, 1986, between Registrant, for itself and as agent for itself, Niagara Mohawk Power Corporation and Consolidated Edison Company of New York, Inc., and the Power Authority of the State of New York relating to Supplemental Land Use - Roseton/Danskammer. ((2); Exhibit (10)(i)41) (i) 30-- Roseton Amendment Agreement, dated as of September 9, 1987, between Registrant and Niagara Mohawk Power Corporation, for the purchase of interests in the Roseton Steam Electric Generating Plant. ((17); Exhibit (19)(10)(i)76) E-12 (i) 31-- Memorandum of Understanding, dated as of March 22, 1988, by and among Registrant, Alberta Northeast Gas, Limited, the Brooklyn Union Gas Company, New Jersey Natural Gas Company and Connecticut Natural Gas Corporation. ((17); Exhibit (20)(10)(i)98) (i) 32-- Restatement of Purchase and Administration Agreement, dated as of April 4, 1989, between Registrant and CSW Credit, Inc., amending and restating the Purchase and Administration Agreement, dated as of November 25, 1987, between such parties providing for the sale of Registrant's accounts receivables. ((18); Exhibit (28) (10)(i)101) (i) 33-- Credit Agreement, dated as of December 17, 1990, among Registrant and the Banks named therein. ((19); Exhibit (19)(10)(i)74) (i) 34-- Agreement, effective as of November 1, 1989, between Columbia Gas Transmission Corporation and Registrant. ((19); Exhibit (19)(10)(i)75) (i) 35-- Agreement, dated as of November 1, 1989, between Columbia Gas Transmission Corporation and Registrant. ((19); Exhibit (19)(10)(i)77) (i) 36-- Agreement, dated as of November 1, 1989, between Columbia Gas Transmission Corporation and Registrant. ((19); Exhibit (19)(10)(i)78) (i) 37-- Agreement, dated as of November 1, 1989, between Columbia Gulf Transmission Company and Registrant. ((19); Exhibit (19)(10)(i)79) (i) 38-- Agreement, dated October 9, 1990, between Texas Eastern Transmission Corporation and Registrant. ((19); Exhibit (19)(10)(i)80) E-13 (i) 39-- Agreement, dated July 2, 1990, between Texas Eastern Transmission Corporation and Registrant. ((19); Exhibit (19)(10)(i)81) (i) 40-- Agreement, dated December 28, 1989, between Texas Eastern Transmission Corporation and Registrant. ((19); Exhibit (19)(10)(i)82) (i) 41-- Agreement, dated December 28, 1989, between Texas Eastern Transmission Corporation and Registrant. ((19); Exhibit (19)(10)(i)83) (i) 42-- Agreement, dated November 3, 1989, between Texas Eastern Transmission Corporation and Registrant. ((19); Exhibit (19)(10)(i)84) (i) 43-- Agreement, dated September 4, 1990, between Algonquin Gas Transmission Company and Registrant. ((19); Exhibit (19)(10)(i)87) (i) 44-- Storage Service Agreement, dated July 1, 1989, between CNG Transmission Corporation and Registrant. ((19); Exhibit (19)(10)(i)91) (i) 45-- Agreement dated as of February 7, 1991 between Registrant and Alberta Northeast Gas, Limited for the purchase of Canadian natural gas from ATCOR Ltd. to be delivered on the Iroquois Gas Transmission System. ((19); Exhibit (19)(10)(i)92) (i) 46-- Agreement dated as of February 7, 1991 between Registrant and Alberta Northeast Gas, Limited for the purchase of Canadian natural gas from AEC Oil and Gas Company, a Division of Alberta Energy Company, Ltd. to be delivered on the Iroquois Gas Transmission System. ((19); Exhibit (19)(10)(i)93) (i) 47-- Agreement dated as of February 7, 1991 between Registrant and Alberta Northeast Gas, Limited for the purchase of Canadian natural gas from ProGas Limited to be delivered on the Iroquois Gas E-14 Transmission System. ((19); Exhibit (19)(10)(i)94) (i) 48-- Agreement No. 2 dated as of February 7, 1991 between Registrant and Alberta Northeast Gas, Limited for the purchase of Canadian natural gas from TransCanada Pipelines Limited under Precedent Agreement No. 2 to be delivered on the Iroquois Gas Transmission System. ((19); Exhibit (19)(10)(i)95) (i) 49-- Agreement No. 1 dated as of February 7, 1991 between Registrant and Alberta Northeast Gas, Limited for the purchase of Canadian natural gas from TransCanada Pipelines Limited under Precedent Agreement No. 1 to be delivered on the Iroquois Gas Transmission System. ((19); Exhibit (19)(10)(i)96) (i) 50-- Agreement dated as of February 7, 1991 between Registrant and Iroquois Gas Transmission System to transport gas imported by Alberta Northeast Gas, Limited to Registrant. ((19); Exhibit (19)(10)(i)97) (i) 51-- Service Agreement, dated September 30, 1986, between Registrant and Algonquin Gas Transmission Company, for firm storage transportation under Rate Schedule SS-III. ((20); Exhibit (19)(10)(i)95) (i) 52-- Service Agreement, dated March 12, 1991, between Registrant and Algonquin Gas Transmission Company, for firm transportation of 5,056 dth. of Texas Eastern Transmission Corporation incremental volume. ((20); Exhibit (19)(10)(i)99) (i) 53-- Agreement, dated December 28, 1990 and effective February 5, 1991, between Registrant and National Fuel Gas Supply Corporation for interruptible transportation. ((20); Exhibit (19)(10)(i)100) E-15 (i) 54-- Utility Services Contract, effective October 1, 1991, between Registrant and the U.S. Department of the Army, for the provision of natural gas service to the U.S. Military Academy at West Point and Stewart Army Subpost, together with an Amendment thereto, effective October 10, 1991. ((20); Exhibit (19)(10)(i)101) (i) 55-- Service Agreement, effective December 1, 1990, between Registrant and Texas Eastern Transmission Corporation, for firm transportation service under Rate Schedule FT-1. ((20); Exhibit (19)(10)(i)103) (i) 56-- Service Agreement, dated February 25, 1991, between Registrant and Texas Eastern Transmission Corporation, for incremental 5,056 dth. under Rate Schedule CD-1. ((20); Exhibit (19)(10)(i)104) (i) 57-- Service Agreement, dated January 7, 1992, between Registrant and Texas Eastern Transmission Corporation, for the firm transportation of 6,000 dth./day under Rate Schedule FTS-5. ((20); Exhibit (19)(10)(i)106) (i) 58-- Amendment Nos. 1-4, dated February 21, 1989, May 31, 1990, January 8, 1991 and November 20, 1991, respectively, by and between Registrant and Norfolk Southern Railway, to Contract, dated October 5, 1987, between Registrant and Norfolk and Western Railway Company, providing for transportation of coal to the Danskammer Plant. [Certain portions of said amendment 4 setting forth or relating to pricing provisions are omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under the rules of said Commission.] ((20); Exhibit (19)(10)(i)107) (i) 59-- Agreement dated as of July 1, 1992 between Registrant and Tennessee Gas Pipeline Company for storage of natural gas. ((21); Exhibit (10)(i)114) E-16 (i) 60-- Agreement dated as of July 1, 1992 between Registrant and Tennessee Gas Pipeline Company for firm transportation periods. ((21); Exhibit (10)(i)115) (i) 61-- Agreement, dated November 1, 1990, between Tennessee Gas Pipeline and Registrant for transportation of third-party gas for injection into and withdrawal from Penn York storage. ((2); Exhibit (19)(10)(i)100) (i) 62-- Agreement, dated December 1, 1991, between Registrant and Iroquois Gas Transmission System for interruptible gas transportation service. ((2); Exhibit (19)(10)(i)101) (i) 63-- Letter Agreement, dated August 24, 1992, between Registrant and Iroquois Gas Transmission System amending that certain Agreement, dated December 1, 1991 between said parties for interruptible gas transportation service. ((19); Exhibit (19)(10)(i)102) (i) 64-- Agreement, dated as of July 16, 1993, between Registrant, Consolidated Edison Company of New York, Inc., Long Island Lighting Company, New York State Electric & Gas Corporation, Niagara Mohawk Power Corporation, Orange and Rockland Utilities, Inc., Rochester Gas and Electric Corporation and the Power Authority of the State of New York. ((2); Exhibit (19)(10)(i)104) (i) 65-- Nine Mile Point Nuclear Station Unit 2 Operating Agreement, effective January 1, 1993, between and among Registrant, Niagara Mohawk Power Corporation, Long Island Lighting Company, New York State Electric & Gas Corporation and Rochester Gas and Electric Corporation. ((2); Exhibit (19)(10)(i)105) (i) 66-- Gas Transportation Agreement, dated as of September 1, 1993, by and between Tennessee Gas Pipeline Company and Registrant. ((1); Exhibit (19)(10)(i)108) E-17 (i) 67-- Agreement, dated as of May 20, 1993, between Registrant and New York State Electric & Gas Corporation. ((24); Exhibit (10)(i)93) (i) 68-- Fuel Oil Supply Contract, effective as of September 1, 1996, between Bayway Refining Company and Central Hudson Gas & Electric Corporation, Consolidated Edison Company of New York, Inc. and Niagara Mohawk Power Corporation for the Roseton Electric Generating Plant. [Certain portions of the contract setting forth or relating to pricing provisions are omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under the rules of said Commission.] ((29); Exhibit (10)(i)106) (i) 69-- Agreement for the Sale and Purchase of Coal, dated as of December 1, 1996, among Registrant, Inter-American Coal N.V. and Inter-American Coal, Inc. [Certain portions of the agreement setting forth or relating to pricing provisions are omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under the rules of said Commission.] ((30); Exhibit (10)(i)107) (i) 70-- Agreement for the Sale and Purchase of Coal, dated as of January 1, 1997, among Registrant, HPM Corporation and Integrity Coal Sales, Inc. [Certain portions of the amendment setting forth or relating to pricing provisions are omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under the rules of said Commission.] ((30); Exhibit (10)(i)108) (i) 71-- Transportation Contract by and between Registrant and Consolidated Rail Corporation, dated as of November 26, 1996. [Certain portions of the agreement setting forth or relating to pricing provisions are omitted and filed E-18 separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under the rules of said Commission.] ((30); Exhibit (10)(i)109) (i) 72-- Credit Agreement, dated as of October 23, 1996, among Registrant and The Banks listed herein and Morgan Guaranty Trust Company of New York, as Agent. ((30); Exhibit (10)(i)110) (i) 73-- Settlement Agreement, dated March 20, 1997, among the Registrant, the Staff of the Public Service Commission of the State of New York and the New York State Department of Economic Development. ((31); Exhibit (10)(i)111) (i) 74-- Amended and Restated Settlement Agreement, dated January 2, 1998, among the Registrant, the Staff of the Public Service Commission of the State of New York and the New York State Department of Economic Development. ((32); Exhibit (10)(i)112) (i) 75-- Amendment, dated as of March 20, 1994, to the Agreement, dated as of September 9, 1987, between Registrant and Niagara Mohawk Power Corporation relating to the purchase of interests in the Roseton Steam Electric Generating Plant (Exhibit (19)(10)(i)76) [Certain portions of said Amendment set forth and relate to confidential terms of said Amendment and will be filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under the rules of said Commission.] ((33); Exhibit (10)(i)112) (i) 76-- Amendment, dated as of November 1, 1997, to the Agreement for the Sale and Purchase of Coal, dated December 1, 1996, among Registrant, Inter-American Coal N.V. and Inter-American Coal, Inc. [Certain portions of said Amendment set forth and relate to pricing provisions and will be filed separately with the Securities and Exchange Commission E-19 pursuant to a request for confidential treatment under the rules of said Commission.] ((33); Exhibit (10)(i)113) (i) 77-- Order of the Public Service Commission of the State of New York, issued and effective February 19, 1998, adopting the terms of the Registrant's Amended Settlement Agreement, subject to certain modifications and conditions. ((34); Exhibit (10)(i)114) (i) 78-- Modification to the Amended and Restated Settlement Agreement, dated February 26, 1998, signed by the Registrant, the Staff of the Public Service Commission of the State of New York, the New York State Consumer Protection Board and Pace Energy Project. ((34); Exhibit (10)(i)115) (i) 79-- Order of the Public Service Commission of the State of New York, issued and effective June 30, 1998, explaining in greater detail and reaffirming its Abbreviated Order, issued and effective February 19, 1998, which February 19, 1998 Order modified, and as modified, approved the Amended and Restated Settlement Agreement, dated January 2, 1998, entered into among the Registrant, the PSC Staff and others as part of the PSC's "Competitive Opportunities" proceeding (ii) the Order, dated June 24, 1998, of the Federal Energy Regulatory Commission conditionally authorizing the establishment of an Independent System Operator by the member systems of the New York Power Pool and (iii) disclosing, effective August 1, 1998, Paul J. Ganci's appointment by the Registrant's Board of Directors as President and Chief Executive Officer and John E. Mack III's (formerly Chairman of the Board and Chief Executive Officer) continuation as Chairman of the Board. ((35); Exhibit (10)(i)116) E-20 (i) 80-- Amendment II, dated as of November 1, 1998, to the Agreement for the Sale and Purchase of Coal, dated December 1, 1996, among Registrant, Inter-American Coal N.V. and Inter-American Coal, Inc. [Certain portions of said Amendment setting forth or relating to pricing provisions are omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under the rules of said Commission.] (i) 81-- Agreement, dated as of November 1, 1998, between Registrant and Glencore Ltd., for the Sale and Purchase of Coal. [Certain portions of said Agreement setting forth or relating to pricing provisions are omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under the rules of said Commission.] (i) 82-- Participation Agreement, dated as of December 1, 1998, by and between New York State Energy Research and Development Authority and the Registrant. (i) 83-- Reimbursement Agreement, dated as of July 1, 1987, between Registrant and the Bank named herein. ((17); Exhibit (19) (10)(i)90) (i) 84-- First Amendment, dated as of September 1, 1987, to the Reimbursement Agreement, dated as of November 1, 1985, between Registrant and the Bank named therein. ((17); Exhibit (19)(10)(i)93) (i) 85-- Second Amendment, dated as of July 1, 1990, to the Reimbursement Agreement, dated as of November 1, 1985, between Registrant and the Bank named therein. ((19); Exhibit (19)(10)(i)93) (i) 86-- First Amendment, dated as of July 1, 1990, to the Reimbursement Agreement, dated as of July 1, 1987, between Registrant and the Bank named therein. ((19); Exhibit (19)(10)(i)73) E-21 (i) 87-- Third Amendment, dated as of July 29, 1992, to the Reimbursement Agreement, dated as of November 1, 1985, between Registrant and the Bank named therein. ((2); Exhibit (19)(10)(i)106) (i) 88-- Second Amendment, dated as of July 29, 1992, to the Reimbursement Agreement, dated as of July 1, 1987, between Registrant and the Bank named therein. ((2); Exhibit (19)(10)(i)107) (iii) 1-- Directors' Deferred Compensation Plan, effective October 1, 1980. ((16); Exhibit (10)(iii)1) (iii) 2-- Executive Deferred Compensation Plan of Registrant, effective March 1, 1992. ((20); Exhibit (19)(10)(iii)8) (iii) 3-- Retirement Benefit Restoration Plan of Registrant, effective May 1, 1993. ((22); Exhibit (10)(iii)10) (iii) 4-- Amendment, dated July 23, 1993, to Retirement Benefit Restoration Plan of Registrant. ((22); Exhibit (10)(iii)11) (iii) 5-- First Amendment, dated December 17, 1993, to the Registrant's Executive Deferred Compensation Plan. ((29); Exhibit (10)(iii)15) (iii) 6-- Executive Incentive Compensation Plan of Registrant, effective January 1, 1993. ((24); Exhibit (10)(iii)17) (iii) 7-- Agreement, made March 14, 1994, by and between Registrant and Mellon Bank, N.A., amending and restating, effective April 1, 1994, Registrant's Savings Incentive Plan and related Trust Agreement with The Bank of New York. ((25); Exhibit (10)(iii)18) (iii) 8-- Amendment 1, dated July 22, 1994 (effective April 1, 1994) to the Amended and Restated Savings Incentive Plan of Registrant. ((26); Exhibit (10)(iii)19) E-22 (iii) 9-- Amendment 2, dated December 16, 1994 (effective January 1, 1995) to the Amended and Restated Savings Incentive Plan of Registrant, as amended. ((26); Exhibit (10)(iii)20) (iii) 10-- Amendment, dated April 4, 1995, to the Executive Incentive Compensation Plan of Registrant. ((30); Exhibit (10)(iii)21) (iii) 11-- Stock Plan for Outside Directors of Registrant, dated November 17, 1995. ((30); Exhibit (10)(iii)22) (iii) 12-- Management Incentive Program of Registrant, effective April 1, 1994. ((30); Exhibit (10)(iii)23) (iii) 13-- Amendment, dated July 25, 1997, to the Management Incentive Program of Registrant, effective August 1, 1997. ((33); Exhibit (10)(iii)24) (iii) 14-- Change-of-Control Severance Policy, as approved by the Board of Directors October 23, 1998 and, effective December 1, 1998, for all management employees of the Company. (iii) 15-- Form of Employment Agreement, dated October 23, 1998, effective December 1, 1998, for all officers of the Company. (iii) 16-- Employment Agreement, dated October 23, 1998, effective December 1, 1998, for the President and Chief Executive Officer of the Company. (iii) 17-- Amendment, dated December 1, 1998, to the Executive Deferred Compensation Plan of the Registrant. (iii) 18-- Amendment, dated December 1, 1998, to the Retirement Benefit Restoration Plan of the Registrant. (12) -- Statement showing the computation of the ratio of earnings to fixed charges and ratio of earnings to fixed charges and preferred dividends. E-23 (21) -- Subsidiaries of the Registrant: State or other Name under which Jurisdiction of Subsidiary conducts Name of Subsidiary Incorporation Business - ------------------ --------------- ------------------- CH Energy Group, Inc. New York CH Energy Group, Inc. Phoenix Development New York Phoenix Development Company, Inc. Company, Inc. Greene Point New York Greene Point Development Corporation Development Corporation CH Resources, Inc. New York CH Resources, Inc. CH Syracuse New York CH Syracuse Properties, Properties, Inc. Inc. Central Hudson New York Central Hudson Enterprises Enterprises Corporation Corporation SCASCO, Inc. Connecticut SCASCO Island Sound Commercial Energy Sales, Inc. Delaware SCASCO/Paragon (23) -- Consent of Experts: The consents of PricewaterhouseCoopers LLP. (24) -- Powers of Attorney: Powers of Attorney for each of the directors comprising a majority of the Board of Directors of Registrant authorizing execution and filing of this Annual Report on Form 10-K by John E. Mack III. (27) -- Financial Data Schedule E-24 (99) -- Additional Exhibits: (i) 1-- Stipulation and Order on Consent signed on behalf of the Department of Environmental Protection of the City of New York, Environmental Defense Fund, Inc., Department of Environmental Conservation of the State of New York, Central Hudson Gas & Electric Corporation and Consolidated Edison Company of New York, Inc. ((23); Exhibit 28.1) (i) 2-- Settlement Agreement on Issues Related to Nine Mile Two Nuclear Plant, dated June 6, 1990, among the Staff of the Department of Public Service, the Consumer Protection Board, the Attorney General of the State of New York, Assemblyman Maurice Hinchey, Multiple Intervenors, Registrant, Long Island Lighting Company, New York State Electric & Gas Corporation, Niagara Mohawk Power Corporation and Rochester Gas and Electric Corporation. ((19); Exhibit (19)(28)(i)4) (i) 3-- Order on Consent signed on behalf of the New York State Department of Environmental Conservation and Registrant relating to Registrant's former manufactured gas site located in Newburgh, New York. ((28); Exhibit (99)(i)5) (i) 4-- Summary of principal terms of the Amended and Restated Settlement Agreement, dated January 2, 1998, among the Registrant, the Staff of the Public Service Commission of the State of New York and the New York State Department of Economic Development. ((32); Exhibit 99(i)9) (i) 5-- Registrant's acceptance, dated February 26, 1998, of the Order of the Public Service Commission of the State of New York, issued and effective February 19, 1998, adopting the terms of Registrant's Amended and Restated Settlement subject to modifications and conditions. ((34); Exhibit 99(i)10) - -------------------- E-25 The following are notes to the Exhibits listed above: (1) Incorporated herein by reference to Registrant's Quarterly report on Form 10-Q for fiscal quarter ended September 30, 1993 (File No. 1-3268). (2) Incorporated herein by reference to Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1992 (File No. 1-3268). (3) Incorporated herein by reference to Registrant's Registration Statement No. 2- 65127. (4) Incorporated herein by reference to Registrant's Registration Statement No. 2- 67537. (5) Incorporated herein by reference to Registrant's Registration Statement No. 2- 69640 (6) (a) Incorporated herein by reference to Prospectus Supplement Dated May 28, 1992 (To Prospectus Dated April 13, 1992) relating to $125,000,000 principal amount of First Mortgage Bonds, designated Secured Medium- Term Notes, Series A, and to the Prospectus Dated April 13, 1992 relating to $125,000,000 principal amount of Registrant's debt securities attached thereto, as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(5) under the Securities Act of 1933, in connection with Registration Statement No. 33-46624. (b) Incorporated herein by reference to Pricing Supplement No. 1, Dated June 4, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992), as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement No. 33-46624. E-26 (c) Incorporated herein by reference to Pricing Supplement No. 2, Dated June 4, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992), as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement No. 33-46624. (d) Incorporated herein by reference to Pricing Supplement No. 3, Dated June 4, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992), as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement No. 33-46624. (e) Incorporated herein by reference to Pricing Supplement No. 4, Dated August 20, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992), as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement No. 33-46624. (f) Incorporated herein by reference to Pricing Supplement No. 5, Dated August 20, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992), as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement No. 33-46624. (g) Incorporated herein by reference to Pricing Supplement No. 6, Dated July 26, 1993 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992), as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement No. 33-46624. E-27 (h) Incorporated herein by reference to Pricing Supplement No. 7, Dated July 26, 1993 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992), as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement No. 33-46624. (7) Incorporated herein by reference to Registrant's Current Report on Form 8-K, dated May 27, 1992 (File No. 1-3268). (8) (a) Incorporated herein by reference to Prospectus Supplement Dated May 28, 1992 (To Prospectus Dated April 13, 1992) relating to $125,000,000 principal amount of Medium-Term Notes, Series A, and to the Prospectus Dated April 13, 1992, relating to $125,000,000 principal amount of Registrant's debt securities attached thereto, as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(5) under the Securities Act of 1933, in connection with Registration Statement No. 33-46624. (b) Incorporated herein by reference to Pricing Supplement No. 1, Dated June 26, 1992 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992), as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement No. 33-46624. (c) Incorporated herein by reference to Pricing Supplement No. 2, Dated October 6, 1993 (To Prospectus Dated April 13, 1992, as supplemented by a Prospectus Supplement Dated May 28, 1992), as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement No. 33-46624. (9) Incorporated herein by reference to Prospectus Supplement Dated May 15, 1995 (To Prospectus Dated April 4, 1995) relating to $80,000,000 principal amount of First Mortgage Bonds, designated Secured Medium- E-28 Term Notes, Series B, and the Prospectus Dated April 4, 1995, relating to (i) $80,000,000 of Registrant's Debt Securities and Common Stock, $5.00 par value, but not in excess of $40 million aggregate initial offering price of such Common Stock and (ii) 250,000 shares of Registrant's Cumulative Preferred Stock, par value $100 per share, which may be issued as 1,000,000 shares of Depositary Preferred Shares each representing 1/4 of a share of such Cumulative Preferred Stock attached thereto, as filed pursuant to Rule 424(b) in connection with Registration Statement No. 33-56349. (10) (a) Incorporated herein by reference to Prospectus Supplement Dated August 24, 1998 (To Prospectus Dated April 4, 1995) relating to $80,000,000 principal amount of Medium- Term Notes, Series B, and the Prospectus Dated April 4, 1995, relating to (i) $80,000,000 of Registrant's Debt Securities and Common Stock, $5.00 par value, but not in excess of $40 million aggregate initial offering price of such Common Stock and (ii) 250,000 shares of Registrant's Cumulative Preferred Stock, par value $100 per share, which may be issued as 1,000,000 shares of Depositary Preferred Shares each representing 1/4 of a share of such Cumulative Preferred Stock attached thereto, as filed pursuant to Rule 424(b) in connection with Registration Statement No. 33-56349. (b) Incorporated herein by reference to Pricing Supplement No. 1, Dated September 2, 1998 (To Prospectus Dated April 4, 1995, as supplemented by a Prospectus Supplement Dated August 24, 1998), as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(2) under the Securities Act of 1933 in connection with Registration Statement No. 33-56349. (11) Incorporated herein by reference to Registrant's Registration Statement No. 2-50276. (12) Incorporated herein by reference to Registrant's Registration Statement No. 2-54690. E-29 (13) Incorporated herein by reference to Registrant's Registration Statement No. 2-58500. (14) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986 (File No. 1-3268). (15) Incorporated herein by reference to Registrant's Registration Statement No. 2-60496. (16) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 1-3268). (17) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 (File No. 1-3268). (18) Incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1989 (File No. 1-3268). (19) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-3268). (20) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (File No. 1-3268). (21) Incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1992 (File No. 1-3268). (22) Incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1993 (File No. 1-3268). (23) Incorporated herein by reference to Registrant's Current Report on Form 8-K, dated May 15, 1987 (File No. 1-3268). E-30 (24) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 1-3268). (25) Incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994 (File No. 1-3268). (26) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 1-3268). (27) Incorporated herein by reference to Registrant's Current Report on Form 8-K, dated May 15, 1995 (File No. 1-3268). (28) Incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 (File No. 1-3268). (29) Incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996 (File No. 1-3268). (30) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 1-3268). (31) Incorporated herein by reference to Registrant's Current Report on Form 8-K, dated April 1, 1997 (File No. 1-3268). (32) Incorporated herein by reference to Registrant's Current Report on Form 8-K, dated January 7, 1998 (File No. 1-3268). (33) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as amended December 8, 1998 (File No. 1-3268). (34) Incorporated herein by reference to Registrant's Current Report on Form 8-K, dated February 10, 1998 (File No. 1-3268). E-31 (35) Incorporated herein by reference to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998 (File No. 1-3268). (36) (a) Incorporated herein by reference to Prospectus Supplement Dated January 8, 1999 (To Prospectus Dated January 7, 1999) relating to $110,000,000 principal amount of Medium-Term Notes, Series C, and to the Prospectus Dated January 7, 1999, relating to $110,000,000 principal amount of Registrant's debt securities attached thereto, as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(2) under the Securities Act of 1933, in connection with Registration Statement Nos. 333-65597 and 33- 56349. (b) Incorporated herein by reference to Pricing Supplement No. 1, Dated January 12, 1999 (To Prospectus Dated January 7, 1999, as supplemented by a Prospectus Supplement Dated January 8, 1999), as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 in connection with Registration Statement Nos. 333-65597 and 33-56349. * Exhibits preceded by an asterisk have heretofore been classified as basic documents under previous Rule 24(b) of the SEC Rules of Practice. E-32 EX-3.(II)(1) 3 BY-LAWS Exhibit (3)(ii)(1) B Y - L A W S OF CENTRAL HUDSON GAS & ELECTRIC CORPORATION 2/10/99 TABLE OF CONTENTS BY-LAWS OF CENTRAL HUDSON GAS & ELECTRIC CORPORATION Page ARTICLE I. MEETING OF SHAREHOLDERS 1 Section 1. Place of Meeting 1 Section 2. Annual Meeting 1 Section 3. Special Meeting 1 Section 4. Notice of Meetings 1 Section 5. Quorum 2 Section 6. Inspectors 2 Section 7. Adjournment of Meetings 2 Section 8. Voting 3 Section 9. Record Date 3 ARTICLE II. BOARD OF DIRECTORS 4 Section 1. Number and Qualifications 4 Section 2. Election of Directors 4 Section 3. Term of Office 4 Section 4. Resignation and Removal 4 Section 5. Newly Created Directorships and Vacancies 5 Section 6. Election of Directors by Holders of Preferred Stock 5 Section 7. Regular Meetings 6 Section 8. Special Meetings 6 Section 9. Notice and Place of Meetings 6 Section 10. Business Transacted at Meetings 7 Section 11. Quorum and Manner of Acting 7 Section 12. Compensation 7 Section 13. Indemnification of Officers and Directors 7 Section 14. Committees of the Board 8 ARTICLE III. EXECUTIVE COMMITTEE 9 Section 1. How Constituted and Powers 9 Section 2. Removal and Resignation 9 - 2 - Page Section 3. Filling of Vacancies 9 Section 4. Quorum 9 Section 5. Record of Proceedings, etc. 10 Section 6. Organization, Meetings, etc. 10 Section 7. Compensation of Members 10 ARTICLE IV. OFFICERS 11 Section 1. Election 11 Section 2. Removal 11 Section 3. Resignation of Officers 11 Section 4. Filling of Vacancies 11 Section 5. Compensation 12 Section 6. Chairman of the Board of Directors and Chief 12 Executive Officer Section 7. Vice Chairman of the Board of Directors 12 Section 8. President and Chief Operating Officer 12 Section 9. The Vice Presidents 12 Section 10. The Treasurer 13 Section 11. Controller 13 Section 12. The Secretary 14 Section 13. Other Officers 14 ARTICLE V. CONTRACTS, LOANS, BANK ACCOUNTS, ETC. 15 Section 1. Contracts, etc., How Executed 15 Section 2. Loans 15 Section 3. Checks, Drafts, etc. 15 Section 4. Deposits 16 Section 5. General and Special Bank Accounts 16 ARTICLE VI. CAPITAL STOCK 17 Section 1. Issue of Certificates of Stock 17 Section 2. Transfer of Stock 17 Section 3. Lost, Destroyed and Mutilated Certificates 17 - 3 - Page ARTICLE VII. DIVIDENDS, SURPLUS, ETC. 18 Section 1. General Discretion of Directors 18 ARTICLE VIII. MISCELLANEOUS PROVISIONS 19 Section 1. Fiscal Year 19 Section 2. Waiver of Notice 19 Section 3. Notices 19 Section 4. Examination of Books 19 Section 5. Gender 20 ARTICLE IX. AMENDMENTS 21 Section 1. Amendment by Directors 21 Section 2. Amendment by Shareholders 21 B Y - L A W S OF CENTRAL HUDSON GAS & ELECTRIC CORPORATION ------------------- ARTICLE I. MEETINGS OF SHAREHOLDERS SECTION 1. Place of Meeting. All meetings of the shareholders shall be held at the principal office of the Corporation in the City of Poughkeepsie, County of Dutchess, State of New York, or at such other place or places in the State of New York as may from time to time be fixed by the Board of Directors. SECTION 2. Annual Meeting. The Annual Meeting of the shareholders, for the election of directors and the transaction of such other business as may brought before the meeting, shall be held each year on the last Tuesday in April (or if said day be a legal holiday, then on the next succeeding business day), at such time of day as the directors may determine. SECTION 3. Special Meetings. Special meetings of the shareholders may be called by the Board of Directors or by the Chairman of the Board of Directors or by the President, or by shareholders together holding at least one third of the capital stock of the Corporation entitled to vote or act with respect thereto upon the business to be brought before such meeting. SECTION 4. Notice of Meetings. Notice of any annual or special meeting of the shareholders shall be in writing and shall be signed by the Chairman of the Board of Directors or the President or the Secretary or an Assistant Secretary. Such notice shall state the purpose or purposes for which the meeting is called and shall state the place, date and hour of the meeting and, unless it is the annual meeting, indicate that it is being issued by or at the direction of the person or persons calling the meeting. A copy of the notice of any meeting shall be given, personally - 2 - or by first-class mail, not fewer than ten nor more than sixty days before the date of the meeting, provided, however, that a copy of such notice may be given by third-class mail not fewer than twenty-four nor more than sixty days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice is given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at his address as it appears on the record of shareholders, or, if he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, then directed to him at such other address. An affidavit of the Secretary of the Corporation or other person giving the notice or of a transfer agent of the Corporation that the notice required by this section has been given shall be supplied at the meeting to which it relates. SECTION 5. Quorum. Except as otherwise provided by statute, the holders of a majority of the shares entitled to vote thereat shall constitute a quorum at a meeting of shareholders for the transaction of any business, provided that when a specified item of business is required to be voted on by a class or series, voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum for the transaction of such specified item of business. SECTION 6. Inspectors. The person presiding at a shareholders' meeting may, and on the request of any shareholder entitled to vote thereat shall, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. The inspectors shall make a report in writing of any matter determined by them and execute a certificate of any fact found by them. SECTION 7. Adjournment of Meetings. Any meeting of shareholders may be adjourned by a majority vote of the shareholders present or represented by proxy despite the absence of a quorum. When a meeting of shareholders is adjourned to another time or place, it shall not be necessary to give any notice of the adjourned meeting if the time and place to which the meeting is - 3 - adjourned are announced at the meeting at which the adjournment is taken, and at the adjourned meeting at which a quorum shall be present, any business may be transacted, and any corporate action may be taken, which might have been transacted or taken if the meeting had been held as originally called. SECTION 8. Voting. Every shareholder of record shall be entitled at every meeting of the shareholders to one vote for every share of stock standing in his name on the record of shareholders of the Corporation unless otherwise provided in the Certificate of Incorporation and amend ments thereto and except as provided in Section 9 of this Article I. Every shareholder entitled to vote at a meeting of shareholders may authorize another person or persons to act for him by proxy. No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy. A list of shareholders as of the record date certified by the officer responsible for its preparation or by a transfer agent shall be available at every meeting of shareholders and shall be produced upon the request of any shareholder, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting. SECTION 9. Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than sixty nor less than ten days before the day of such meeting, nor more than sixty days prior to any other action. - 4 - ARTICLE II. BOARD OF DIRECTORS SECTION 1. Number and Qualifications. The number of directors constituting the entire Board shall be nine. The number of directors may be increased, or decreased to not less than three nor more than 25, by amendment of the by-laws adopted by vote of a majority of the entire Board of Directors. Each director shall be at least 18 years of age. No person who has reached age 70 shall stand for election as a director. SECTION 2. Election of Directors. Except as otherwise required by law or by the Certificate of Incorporation as amended, and except as hereinafter otherwise provided by Sections 5 and 6 of this Article II, directors shall be elected by a plurality of the votes cast at the annual meeting of shareholders by the holders of shares entitled to vote at the election and shall hold office until the next annual meeting of shareholders. SECTION 3. Term of Office. Each director shall, except as hereinafter provided in Section 4 and in Section 6 of this Article II, hold office until the expiration of the term for which he is elected and until his successor has been elected and qualified. SECTION 4. Resignation and Removal. Any director may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of its receipt by the Chairman of the Board of Directors or the Secretary. The acceptance of a resignation shall not be necessary to make it effective unless so specified therein. Any director may at any time, with or without cause, be removed by vote of the shareholders at a special meeting called for that purpose. When, however, pursuant to the provisions of the Certificate of Incorporation as amended, the holders of the shares of any class or series, voting as a class, have the right to elect one or more directors, such director or directors so elected may be removed only by the applicable vote of the holders of the shares of that class or series, voting as a class. - 5 - SECTION 5. Newly Created Directorships and Vacancies. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board for any reason, except the removal of directors without cause, and except as provided for in Section 6 of this Article II, may be filled by vote of a majority of the directors then in office, although less than a quorum exists. A vacancy occurring in the Board by reason of the removal of a director without cause, may be filled only by vote of the shareholders, subject to the provisions of said Section 6. A director elected to fill a vacancy shall be elected to hold office for the unexpired term of his predecessor, and until his successor is elected and qualified. SECTION 6. Election of Directors by Holders of Preferred Stock. Anything in the by-laws to the contrary notwithstanding: In case dividends on any series of the serial preferred stock of the Corporation at the rate or rates prescribed for such series shall not have been paid in full for periods aggregating one year or more, than, and until full cumulative dividends thereon shall have been paid, the holders of each such series shall have the right, together with holders of all other serial preferred stock in respect to which the same right shall be conferred, to elect a majority of the members of the Board of Directors of the corporation. Whenever the holders of any series of serial preferred stock shall become so entitled, either separately or together with the holders of other serial preferred stock as aforesaid, to elect a majority of the members of the Board of Directors, and upon the written request of the holders of record of at least five percent of the total number of shares of serial preferred stock then outstanding and entitled to such right of election, addressed to the Secretary of the Corporation, a special meeting of the holders of serial preferred stock entitled to such right of election and the holders of Common Stock shall be called for the purpose of electing directors. At such meeting the holders of serial preferred stock and the holders of Common Stock shall vote separately, and the holders of serial preferred stock present in person or by proxy at such meeting shall be entitled to elect, by a plurality of votes cast by them, a majority of the members of a new Board of Directors of the corporation, and the holders of Common Stock present in person or by proxy shall be entitled to elect, by a plurality of votes cast by them, the remainder of the new Board of Directors. The persons so elected as directors shall thereupon constitute the Board of Directors of the Corporation, and the terms of office of the previous directors of the Corporation shall thereupon terminate. The term "a majority of the members of Board of Directors" as herein used shall mean one more than one half of the total number of directors provided for by the by-laws, regardless of the number then in office, and in case one half of such number shall not be a whole number, such one half shall be the next smaller whole number. In the event of any vacancy in the Board of Directors among the directors elected by the holders of serial preferred stock, such vacancy may be filled by the other directors elected by them, and if not so filled may be filled by the holders of serial preferred stock entitled to the right of election as aforesaid at a special meeting of the holders of said stock called for that purpose, and such a meeting shall be called upon the written request of at least five percent of the total number of shares of serial preferred stock - 6 - then outstanding and entitled to such right of election. If and when, however, full cumulative dividends upon any series of the serial preferred stock shall at any subsequent time be paid, then and thereupon such power of the holders of such series of serial preferred stock to vote in the election of a majority of the members of the Board of Directors shall cease; subject, however, to being again revived at any subsequent time if there shall again be default in payment of dividends upon such series of serial preferred stock for periods aggregating one year or more as aforesaid. Whenever such power of the holders of all series of serial preferred stock to vote shall cease, the proper officer of the Corporation may and upon the written request of the holders of record of five percent of the total number of shares of Common Stock then outstanding shall call a special meeting of the holders of Common Stock for the purpose of electing directors. At any meeting so called, the holders of a majority of the Common Stock then outstanding, present in person or by proxy, shall be entitled to elect, by a plurality of votes, a new Board of Directors of the Corporation. The persons so elected as directors shall thereupon constitute the Board of Directors of the Corporation, and the terms of office of the previous directors of the Corporation shall thereupon terminate. SECTION 7. Regular Meetings. The directors shall hold a regular annual meeting for the election of officers as soon as practicable after the adjournment of the Annual Meeting of the shareholders, and, in addition, regular meetings of the directors shall be held at such times as the Board of Directors may by resolution determine. No notice of the Annual Meeting shall be required if held immediately after the Annual Meeting of the shareholders and if a quorum is present. SECTION 8. Special Meetings. Special meetings of the directors may be called by the Chairman of the Board of Directors or by the President or by any two directors at any time and must be called by the Secretary on the written request of any two directors. SECTION 9. Notice and Place of Meetings. Regular meetings shall be held at such place or places either within or without the State of New York as the Board of Directors may from time to time determine. Special meetings shall be held at such place or places either within or without the State of New York as may be specified in the respective notices of the meetings. Except as provided in Section 7 of this Article II, notice of any regular or special meeting of the directors shall be mailed to each director addressed to him at his residence or usual place of business at least two days before the day on which the meeting is to be held, or shall be sent to him at such place by telegraph, or be delivered personally or by telephone, not later than the - 7 - day before the day on which the meeting is to be held. SECTION 10. Business Transacted at Meetings. Any business may be transacted and any corporate action taken at any regular or special meeting of the directors whether stated in the notice of the meeting or not. SECTION 11. Quorum and Manner of Acting. Any five of the directors in office at the time of any meeting of the Board shall consti tute a quorum and, except as by law otherwise provided, the act of a majority of the directors present at any such meeting, at which a quorum is present, shall be the act of the Board of Directors. In the event it is necessary to obtain a quorum, and only in such event, at the discretion of the presiding Board member, any one or more members of the Board may be present and participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at such meeting. In the absence of a quorum, the directors present may adjourn the meeting from time to time until a quorum be had. Notice of any adjourned meeting need not be given other than by announcement at the meeting. The directors shall act only as a Board and the individual directors shall have no power as such. SECTION 12. Compensation. The compensation of the directors, other than employees of the Corporation, for services as directors and as members of committees of the Board shall be as fixed by the Board from time to time. Such directors shall also be reimbursed for expenses incurred in attending meetings of the Board and/or committees thereof. SECTION 13. Indemnification of Officers and Directors. Any person made, or threatened to be made a party to any action or proceedings, whether civil or criminal, by reason of the fact that he, his testator or intestate, is or was a director or officer of the Board of Directors, or officer or employee of the Corporation or serves or served any other corporation in any capacity at the request of the Corporation, shall be indemnified by the Corporation, and the Corporation may advance his related expenses, to the full extent authorized or permitted by law. The Corporation may enter into indemnification agreements with such directors and officers, as the Chairman of the Board and/or President shall authorize, to the full extent authorized or permitted by law. - 8 - SECTION 14. Committees of the Board. The Board, by resolution adopted by a majority of the entire Board, may designate from among its members, in addition to the Executive Committee provided for in Article III of these By-Laws, committees of the Board, each consisting of three or more directors, and each of which shall have the powers and duties prescribed in the resolution designating such committees. Anything in these By-Laws or in the resolution designating such committees to the contrary notwithstanding, in the event it is necessary to obtain a quorum, and only in such event, at the discretion of the presiding committee member, any one or more members of any committee of the Board of Directors may participate in any meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at such meeting. - 9 - ARTICLE III. EXECUTIVE COMMITTEE SECTION 1. How Constituted and Powers. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate two or more of the directors, together with the Chairman of the Board of Directors, and the President, to constitute an Executive Committee, to serve at the pleasure of the Board, which Committee shall during the intervals between meetings of the Board of Directors, unless limited by the resolution appointing such Committee, have authority to exercise all or any of the powers of the Board of Directors in the management of the affairs of the Corporation, insofar as such powers may lawfully be delegated. The Board may designate one or more directors as alternate members of such Committee, who may replace any absent member or members at any meeting of such Committee. SECTION 2. Removal and Resignation. Any member of the Executive Committee, except a member ex officio, may be removed at any time with or without cause, by resolution adopted by a majority of the entire Board. Any member of the Executive Committee may resign at any time. Such resignation shall be in writing and shall take effect at the time specified therein, or, if no time be specified, at the time of its receipt by the Chairman of the Board of Directors or the President or Secretary. The acceptance of a resignation shall not be necessary to make it effective unless so specified therein. Any person ceasing to be a director shall ipso facto cease to be a member of the Executive Committee. SECTION 3. Filling of Vacancies. Any vacancy among the members of the Executive Committee occurring from any cause whatsoever may be filled from among the directors by a majority of the entire Board of Directors. SECTION 4. Quorum. A majority of the members of the Executive Committee shall constitute a quorum. The act of a majority of the members of the Executive Committee present at any meeting at which a quorum is present shall be the act of the Executive Committee. The members of the Executive Committee shall act only as a committee and the individual members thereof shall have no powers as such. - 10 - SECTION 5. Record of Proceedings, etc. The Executive Committee shall keep a record of its acts and proceedings and shall report the same to the Board of Directors when and as required. SECTION 6. Organization, Meetings, etc. The Executive Committee shall make such rules as it may deem expedient for the regulation and carrying on of its meetings and proceedings. SECTION 7. Compensation of Members. The members of the Executive Committee shall be entitled to such compensation as may be allowed them by resolution of the Board of Directors. - 11 - ARTICLE IV. OFFICERS SECTION 1. Election. The Board of Directors, at its regular annual meeting, shall elect or appoint from their number a Chairman of the Board of Directors and the Chairmen of Committees of the Board and may elect or appoint a vice chairman of the Board of Directors and vice chairmen of Committees of the Board, which officers shall be officers of the Board; and it shall elect or appoint a President, one or more Vice Presidents, a Secretary, a Treasurer, and a Controller which officers shall be officers of the Corporation. Each of said officers, subject to the provisions of Sections 2 and 3 of this Article, shall hold office, if elected, until the meeting of the Board following the next Annual Meeting of shareholders and until his successor has been elected and qualified, or, if appointed, for the term specified in the resolution appointing him and until his successor has been elected or appointed. Any two or more offices may be held by the same person, except the offices of President and Secretary. Should any of the officers of the Board or the President cease to be a director, he shall ipso facto cease to be such officer. SECTION 2. Removal. Any officer may be removed summarily with or without cause at any time by resolution of the Board of Directors, or, except in the case of any officer elected by the Board of Directors, by any committee or officer upon whom such power of removal may be conferred by the Board of Directors, without prejudice, however, to any rights which any such person may have by contract. SECTION 3. Resignation of Officers. Any officer may resign at any time by giving written notice of such resignation to the Board of Directors, its Chairman, the President or Secretary of the Corporation. Such resignation shall take effect at the time specified therein, or, if no time be specified, at the time of its receipt by the Board of Directors or one of the above-named officers of the Corporation. The acceptance of a resignation shall not be necessary to make it effective unless so specified therein. SECTION 4. Filling of Vacancies. A vacancy in any office, from whatever cause arising, shall be filled for the unexpired portion of the - 12 - term in the manner provided in these by-laws for the regular election or appointment of such officer. SECTION 5. Compensation. The compensation of the officers shall be fixed by the Board of Directors or by any committee or superior officer upon whom power in that regard may be conferred by the Board of Directors. SECTION 6. Chairman of the Board of Directors. The Chairman of the Board of Directors shall, when presented, preside at all meetings of the shareholders and the Board of Directors. He shall be Chairman of the Executive Committee. He shall be responsible for direction of the policy of the Board of Directors and shall have the power and perform the duties necessary to implement such responsibility. SECTION 7. Vice Chairman of the Board of Directors. In the absence of the Chairman of the Board of Directors, the Vice Chairman shall, when present, preside at all meetings of the shareholders and the Board of Directors. He shall have such powers and perform such duties as the Chairman of the Board of Directors shall delegate to him. SECTION 8. President and Chief Executive Officer. The President and Chief Executive Officer shall, subject to the authority of the Chairman of the Board of Directors, have the power and perform the duties usually appertaining to the president and chief executive officer of a corporation, and such power and duties as the Chairman of the Board of Directors shall assign to him. He shall be a member of the Board of Directors and of the Executive Committee. SECTION 9. The Vice Presidents. The Vice Presidents shall have such duties as may from time to time be assigned to them by the Board of Directors or the President, or by the Chairman of the Board in the President's absence. When performing the duties of the President, they shall have all the powers of, and be subject to all the restrictions upon, the President. - 13 - SECTION 10. The Treasurer. The Treasurer shall: (a) Except as otherwise ordered by the Board, have charge and custody of, and be responsible for all funds, securities, receipts and disbursements of the Corporation and shall deposit, or cause to be deposited, all money and other valuable effects in its name in such banks, trust companies or other depositaries as shall be selected in accordance with these by-laws; (b) Receive and give receipts for payments made to the Corporation and take and preserve proper receipts for all monies disbursed by it; (c) In general, perform such duties as are incident to the office of Treasurer, or as may be from time to time assigned to him by the Board of Directors, the Chairman of the Board or the President, or as may be prescribed by law or by these by-laws. The Treasurer shall give to the Corporation a bond if, and in such sum as, required by the Board of Directors, conditioned for the faithful performance of the duties of his office and the restoration to the Corporation at the expiration of his term of office, or in case of his death, resignation or removal from office, of all books, papers, vouchers, money or other property of whatever kind, in his possession belonging to the Corporation. SECTION 11. Controller. The Controller shall: (a) Keep at the office of the Corporation correct books of account of all its business and transactions, subject to the supervision and control of the President and Treasurer; (b) Exhibit at all reasonable times his books of accounts and records to any of the directors upon application during business hours at the office of the Corporation where such books and records are kept; (c) Render a full statement of the financial condition of the Corporation whenever requested so to do by the Board of Directors, the Chairman of the Board or the President; and (d) In general, perform such duties as may be from time to time assigned to him by the Board of Directors, the Chairman of the Board or the President. - 14 - SECTION 12. The Secretary. The Secretary shall: (a) Keep the minutes of the meetings of the shareholders, Board of Directors and Executive Committee in books provided for the purpose; (b) See that all notices are duly given in accordance with the provisions of these by-laws or as required by law; (c) Be custodian of the seal of the Corporation and see that it or a facsimile thereof is affixed to all stock certificates prior to their issue, and that it is affixed to all documents the execution of which under the seal of the Corporation is duly authorized or which require that the seal be affixed thereto; (d) Have charge of the stock certificate books of the Corporation and keep, or cause to be kept, at the office of the Corporation or at the office of its transfer agent or registrar, a record of shareholders of the Corporation, containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof; and (e) In general, perform such duties as are incident to the office of Secretary, or as may be from time to time assigned to him by the Board of Directors, the Chairman of the Board or the President, or as are prescribed by law or by these by-laws. SECTION 13. Other Officers. Other officers, including one or more additional Vice Presidents, may from time to time be appointed by the Board of Directors or by any officer or committee upon whom a power of appointment may be conferred by the Board of Directors, which other officers shall have such powers and perform such duties as may be assigned to them by the Board of Directors, the Chairman of the Board or the President and shall hold office for such terms as may be designated by the Board of Directors or the officer or committee appointing them. - 15 - ARTICLE V. CONTRACTS, LOANS, BANK ACCOUNTS, ETC. SECTION 1. Contracts, etc., How Executed. The Board of Directors, except as in these by-laws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances, and, unless so authorized by the Board of Directors, no officer or agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credits or to render it liable pecuniarily for any purpose or to any amount. SECTION 2. Loans. No loans shall be contracted on behalf of the Corporation and no negotiable paper shall be issued in its name, unless authorized by the vote of the Board of Directors. When so authorized, any officer or agent of the Corporation may effect loans and advances for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the corporation. When so authorized any officer or agent of the Corporation, as security for the payment of any and all loans, advances, indebtedness and liabilities of the Corporation, may pledge, hypothecate or transfer any and all stocks, securities and other personal property at any time held by the Corporation, and to that end endorse, assign and deliver the same. Such authority may be general or confined to specific instances. The Board of Directors may authorize any mortgage or pledge of, or the creation of a security interest in, all or any part of the corporate property, or any interest therein, wherever situated. SECTION 3. Checks, Drafts, etc. All checks, drafts or other orders for the payment of money, notes or other evidence of indebtedness issued in the name of the Corporation shall be signed by the Treasurer or such other officer or officers, agent or agents of the Corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. - 16 - SECTION 4. Deposits. All funds of the Corporation shall be deposited from time to time to its credit in such banks, trust companies or other depositaries as the Board of Directors may select, or as may be selected by an officer or officers, agent or agents of the Corporation to whom such power, from time to time, may be delegated by the Board of Directors and, for the purpose of such deposit, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by the President or a Vice President, or the Treasurer or the Secretary, or by any officer, agent or employee of the Corporation to whom any of said officers, or the Board of Directors, by resolution, shall have delegated such power. SECTION 5. General and Special Bank Accounts. The Board of Directors may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositaries as the Board may select and may make such special rules and regulations with respect thereto, as it may deem expedient. - 17 - ARTICLE VI. CAPITAL STOCK SECTION 1. Issue of Certificates of Stock. Certificates for shares of the capital stock of the Corporation shall be in such form as shall be approved by the Board of Directors. They shall be numbered, as nearly as may be, in the order of their issue and shall be signed by the Chairman of the Board of Directors or by the President or a Vice President, and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and sealed with the seal of the Corporation or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee. SECTION 2. Transfer of Stock. Shares of the capital stock of the Corporation shall be transferable by the holder thereof in person or by duly authorized attorney upon surrender of the certificate or certificates for such shares properly endorsed. Every certificate of stock exchanged or returned to the Corporation shall be appropriately cancelled. A person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof as regards the Corporation. The Board of Directors may make such other and further rules and regulations as they may deem necessary or proper concerning the issue, transfer and registration of stock certificates. SECTION 3. Lost, Destroyed and Mutilated Certificates. The holder of any stock of the Corporation shall immediately notify the corporation of any loss, destruction or mutilation of the certificates therefor. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it alleged to have been lost or destroyed, and the Board of Directors may, in its discretion, require the owner of the lost or destroyed certificate or his legal representatives to give the Corporation a bond in such sum and with such surety or sureties, as they may require to indemnify the Corporation, and any registrar or transfer agent of its stock, against any claim that may be made against it by reason of the issue of such new certificate and against all other liability in the premises. - 18 - ARTICLE VII. DIVIDENDS, SURPLUS, ETC. SECTION 1. General Discretion of Directors. The Board of Directors shall have the power from time to time to fix and determine and to vary the amount of working capital of the Corporation, to determine whether any and, if any, what dividends shall be declared and paid to the shareholders, to fix the date or dates for the payment of dividends, and to fix a time, not exceeding 50 days preceding the date fixed for the payment of any dividend, as a date for the determination of shareholders entitled to receive payment of such dividend. When any dividend is paid or any other distribution is made, in whole or in part, from sources other than earned surplus, it shall be accompanied by a written notice (1) disclosing the amounts by which such dividend or distribution affects stated capital, surplus and earned surplus, or (2) if such amounts are not determinable at the time of such notice, disclosing the approximate effect of such dividend or distribution as aforesaid and stating that such amounts are not yet determinable. - 19 - ARTICLE VIII. MISCELLANEOUS PROVISIONS SECTION 1. Fiscal Year. The fiscal year of the Corporation shall be the calendar year. SECTION 2. Waiver of Notice. Notice of meeting need not be given to any shareholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him. Notice of a meeting need not be given to any director who submits a signed waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. Whenever the Corporation or the Board of Directors or any committee thereof is authorized to take any action after notice to any person or persons or after the lapse of a prescribed period of time, such action may be taken without notice and without the lapse of such period of time, if at any time before or after such action is completed the person or persons entitled to such notice or entitled to participate in the action to be taken or, in the case of a shareholder, by his attorney-in-fact, submit a signed waiver of notice of such requirements. SECTION 3. Notices. Whenever by the by-laws any written notice is required to be given to any shareholder, director or officer, the same may be given, unless otherwise required by law and except as hereinbefore otherwise expressly provided, by delivering it personally to him or by mailing or telegraphing it to him at his last known post office address. Where a notice is mailed or telegraphed, it shall be deemed to have been given at the time it is mailed or telegraphed. SECTION 4. Examination of Books. The Board of Directors shall, subject to the laws of the State of New York have power to determine from time to time, whether, to what extent, and under what conditions and regulations the accounts and books of the Corporation or any of them shall be open to the inspection of the shareholders, and no shareholder shall have any right to inspect any account book or document of the Corporation except as conferred by the laws of the - 20 - State of New York unless and until authorized so to do by resolution of the Board of Directors or shareholders of the Corporation. SECTION 5. Gender. Words used in these by-laws importing the male gender shall be construed to include the female gender, wherever appropriate. - 21 - ARTICLE IX. AMENDMENTS SECTION 1. Amendment by Directors. The Board of Directors shall have the power without the assent or vote of the shareholders to adopt by-laws, and except as hereinafter provided in Section 2 of this Article, and subject to such limitations as may be imposed by law, to rescind, alter, amend or repeal by a vote of a majority of the whole Board any of the by-laws, whether adopted by the Board or by the shareholders. SECTION 2. Amendment by Shareholders. The shareholders shall have power to rescind, alter, amend or repeal any by-laws and to adopt by-laws which, if so expressed, may not be rescinded, altered, amended or repealed by the Board of Directors. - 22 - I, Steven V. Lant, Corporate Secretary of Central Hudson Gas & Electric Corporation, do hereby certify that the foregoing is a full, true and correct copy of the by-laws of said Corporation as in effect at the date hereof. IN WITNESS WHEREOF, I have hereunto set my hand as Corporate Secretary of said Corporation and hereunto affixed its corporate seal this 17th day of February 1999. /s/ Steven V. Lant ___________________________ Corporate Secretary Amended: January 29, 1999 EX-10 4 AMENDMENT II:AGREEMENT FOR SALE & PURCHASE OF COAL Exhibit (10)(i)80) THIS EXHIBIT CONTAINS CONFIDENTIAL INFORMATION WHICH HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. AMENDMENT II TO THE AGREEMENT FOR THE SALE AND PURCHASE OF COAL THIS AMENDMENT ("AMENDMENT"), dated as of November 1, 1998 TO THAT AGREEMENT ("AGREEMENT") FOR THE SALE AND PURCHASE OF COAL made and entered into as of the 1st day of December 1996 and as AMENDED ("AMENDMENT I") ON November 1, 1997 by and between CENTRAL HUDSON GAS & ELECTRIC CORPORATION, (herein-after referred to as "BUYER") and INTER-AMERICAN COAL N.V., (hereinafter referred to as "PRODUCER") and INTER-AMERICAN COAL, INC., (hereinafter referred to as "SALES AGENT"). PRODUCER and SALES AGENT are hereinafter collectively referred to as "SELLER". WITNESSETH: WHEREAS, Article VI of Amendment I of the AGREEMENT provides that beginning July 1, 1998, BUYER and SELLER shall commence good faith negotiations with respect to the price of coal for the next Contract Year; and WHEREAS, notice was duly given and BUYER and SELLER entered into good faith negotiations; and WHEREAS, after completion of good faith negotiations, BUYER and SELLER desire to amend the AGREEMENT to provide for the pricing of coal and certain other AGREEMENT provisions; NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth herein, the parties hereto agree as follows: ARTICLE II (TERM OF AGREEMENT), ARTICLE IV (SPECIFICATION & QUALITY & WEIGHT), ARTICLE VI (BASE PRICE) and ARTICLE VII (ADJUSTMENT IN PRICE FOR QUALITY) of AMENDMENT I of the AGREEMENT shall be respectively amended in their entirety and ARTICLE III (DELIVERIES) of the AGREEMENT shall be amended as indicated, all to read as follows: ARTICLE II TERM OF AGREEMENT The Term of this AGREEMENT shall be for the period commencing January 1, 1997 and continuing until midnight, December 31, 2001, unless sooner terminated as provided for herein. This AGREEMENT shall terminate automatically, without further obligation or liability to either party, except for payments for coal delivered, at the end of the Term. In recognition of the pending Auction of the Danskammer 2 Generating Station, and to provide the new ownership with maximum flexibility, Seller agrees to forgo deliveries under this AGREEMENT in Contract Year 2001 upon six months advance notice from the New Owners. ARTICLE III DELIVERIES Section 1. Quantities/Delivery Schedule: Except for as provided for below, the quantity of coal sold and purchased hereunder shall be a Firm tonnage of 300,000 Metric Tons (+ or - 10%) per year. In addition, there will be up to 60,000 Metric Tons (+ or - 10%) per year called Incremental Tonnage which will be sold and purchased hereunder provided that the delivered cost per million Btu's of oil, natural gas or spot coal usable at Buyer's Danskammer Plant or the equivalent price of replacement electric energy exceeds the applicable Base Price of coal in delivered cost per million Btu's at appropriately applied heat rates. The Sales Agent/Seller will assume that one Vessel per month of a nominal 30,000 Metric Tons (+ or - 10%) will be shipped under this Agreement. The third Vessel in the first and fourth quarter will deliver Incremental Tonnage provided (1) 3 Buyer requires the tonnage and (2) Buyer and Seller have agreed on the price for said tonnage as per the notification procedure described herein. On or before the the first day of the Notice Month, Buyer will provide to Seller the fifteen (15) day delivery window for each Vessel for the following quarter as well as a notice of the Incremental Price for the third Vessel to be shipped if the schedule is for the first or the fourth quarter. The Seller is obligated to deliver Incremental Tonnage quoted at the Base Price . On the first working day of each month of the quarter or fifteen (15) days prior to each Vessel's ETA, whichever is sooner, the lay days will be reduced to a ten (10) day window and fifteen (15) days prior to ETA the lay days will be reduced to a seven (7) day window. Vessel's ETA will be narrowed by the Vessel owner. Seller will provide notice to the Buyer on or before the fifteenth day of the Notice Month as to whether Incremental Tonnage will be shipped at the quoted price. If the Seller accepts the quoted price, the coal will be shipped as scheduled, with the Incremental tonnage at the quoted price and the Firm tonnage at the Base Price. The Seller reserves the right to re- offer any unshipped Incremental Tonnage to the Buyer at another time in the ensuing twelve (12) months (commencing with the 4 CONFIDENTIAL INFORMATION REPRESENTED IN THIS FILING BY AN "X" HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. quarter during which the unshipped Incremental Tonnage would otherwise have been shipped) at the Base Price. In each such instance, Buyer will then have the option to accept that Incremental Tonnage or permanently cancel that Incremental Tonnage. Section 3. Delivery Schedule Limitations: All Firm Tonnage in a quarter will be delivered before any Incremental Tonnage is delivered. Both Firm and Incremental Tonnage can be delivered during the same quarter, but Seller will not be obligated to deliver more than three (3) 30,000 Metric Ton shipments of coal during any one quarter, unless otherwise mutually agreed. There will be a minimum of fifteen (15) calendar days between shipment releases from the Load Port unless otherwise mutually agreed. Section 9.1 Vessel Failure to Discharge at Minimum Rate: Should Seller's Vessel fail to offload cargo at a minimum rate of X,XXX Metric Tons per hour, Buyer shall receive a reduction of U.S. $ .XX per NT for each NT so delivered by said Vessel. This reduction is over and above any allowances previously provided herein. 5 CONFIDENTIAL INFORMATION REPRESENTED IN THIS FILING BY AN "X" HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. ARTICLE IV SPECIFICATION & QUALITY & WEIGHT Section 1. Origin: The coal shall be from the Producer's operations as per the component blends indicated and meet the specifications as per Attachment I: Blend A Blend B Blend C Santander 70% 100% 50% Mina Norte 0% 0% 30% Tachira 30% 0% 20% If the coal blend of the shipment is within a X% deadband per component (ie: for a XX% component blend the deadband would be XX.X% to XX.X% inclusive) there will be no adjustment to the Base Price or the accepted Incremental Price. The Base Price and the accepted Incremental Price will not be increased unless Central Hudson requests a change to the desired blend of the delivery which, on actual loading, falls outside the above ranges. The X% deadband methodology shall also be used if a replacement blend is requested. If the coal blend is outside of the X% deadband the Base Price will be adjusted to the actual weighted blend using the rates as per Attachment III. The Incremental Price will be adjusted by; (1)adjust the Base Price,(2) reduce the result by the differential per NT between the Base Price and the accepted Incremental Price. 6 CONFIDENTIAL INFORMATION REPRESENTED IN THIS FILING BY AN "X" HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. ARTICLE VI BASE PRICE Section 1. The Base Price for coal shipped under the terms of this Agreement will be $XX.XX DES per NT for Blend A , $ XX.XX per NT for Blend B and $ XX.XX per NT for Blend C for the Contract Year 1999. Buyer has requested and Seller has agreed to ship Blends A & B in contract year 1999 however Seller reserves the option to ship Blend C in the event that coal stocks or vessel availability make Blends A & B untenable. Section 2. On or before July 1, 1999, Buyer and Seller will enter into negotiations to fix the Base Price for coal delivered hereunder for the ensuing year. This Agreement will terminate on December 31, 1999, if negotiations for the following year have not been completed by October 1. 7 CONFIDENTIAL INFORMATION REPRESENTED IN THIS FILING BY AN "X" HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. ARTICLE VII ADJUSTMENT IN PRICE FOR QUALITY Section 3. Adjustment for Ash Value: The Price to be paid to Seller by Buyer is based upon coal with an ash content (Ash Value) of XXXXX percent (X%) by weight of the "as received" analysis of the coal. If the Ash Value is between X.X% and X.X%, there will be no adjustment for Ash Value. If the Ash Value is less than X.X%, then a premium of $.XXX per net ton shall be paid to Seller for each .X% Ash Value variation below X.X%. If the Ash Value is greater than X.X%, then a penalty of $X.XXX per net ton shall be deducted from the Price for each .X% Ash Value variation in excess of X.X%. 8 IN WITNESS WHEREOF, each party hereto has caused this AGREEMENT to be executed in its behalf by its proper officer thereunder duly authorized, all as of the day and year first above written. BUYER: CENTRAL HUDSON GAS & ELECTRIC CORPORATION BY: /s/ Allan R. Page ______________________ Allan R. Page Executive Vice President Energy Resources and Development PRODUCER: INTER-AMERICAN COAL N.V. BY: /s/ Marcel L. J. van den Berg _______________________________________________ Marcel L. J. van den Berg ITS: President and Chief Executive Officer SALES AGENT: INTER-AMERICAN COAL, INC. BY: /s/ Marcel L. J. van den Berg _______________________________________________ Marcel L. J. van den Berg ITS: President 9 Attachment III CONFIDENTIAL INFORMATION REPRESENTED IN THIS FILING BY AN "X" HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. Base Price/Blend: Component $/MMBtu Min % Max % --------- ------- ----- ----- Mina Norte $X.XX 0 30 Norte de Santander $X.XXX 50 100 Tachira $X.XXX 0 30 Weighted Prices per short ton determined using the above $/MMBtu and the guaranteed contract Btu/Lb. EX-10 5 TERM COAL PUCHASE AGREEMENT-CH & GLENCORE LTD. Exhibit (10(i)81) THIS EXHIBIT CONTAINS CONFIDENTIAL INFORMATION WHICH HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. TERM COAL PURCHASE AGREEMENT BETWEEN CENTRAL HUDSON GAS & ELECTRIC CORPORATION AND GLENCORE LTD. CENTRAL HUDSON CONTRACT #__________ TABLE OF CONTENTS Article Page I. TERM OF AGREEMENT 2 II. DELIVERIES 2 III. SPECIFICATIONS & QUALITY & WEIGHT 7 IV. PAYMENT 9 V. ADJUSTMENT IN PRICE FOR QUALITY 10 VI. SAMPLING AND ANALYSIS 12 VII. CHANGES IN LAW 14 VIII. OTHER GOVERNMENTAL LEGISLATION, REGULATIONS AND ORDERS 15 IX. FORCE MAJEURE 15 X. EMPLOYEE INTEREST 16 XI. WAIVER 17 XII. NOTICES 17 XIII. GOVERNING LAW 18 XIV. FINALITY 18 XV. TITLES 18 XVI. INTERPRETATION 19 XVII. AGREEMENT FOR BENEFIT OF PARTIES ONLY 19 XVIII. ASSIGNMENT - TERMINATION 19 XIX. COUNTERPARTS 20 XX. REPRESENTATIONS AND WARRANTIES OF BOTH PARTIES 20 ATTACHMENT I: ROSETON DOCK AND HUDSON RIVER LIMITATIONS This Agreement, made and entered into as of the 1ST day of November, 1998 by and between Central Hudson Gas & Electric Corporation (hereinafter referred to as "Buyer"), with its principal office at 284 South Avenue, Poughkeepsie, New York 12601-4879, a New York corporation, and Glencore Ltd. (hereinafter referred to as "Seller"), with its principal office at Three Stamford Plaza, 301 Tresser Boulevard, Stamford, CT 06901. WITNESSETH WHEREAS, Seller has mining facilities known as the Caesar Mine ("Operations"), the Operations are located on lands in Colombia, South America and which Operations (except as hereinafter provided) are the source of coal to be sold and purchased hereunder and Seller also has a port facility known as Prodeco from which the herein referenced coal will be shipped; and, WHEREAS, Buyer is a consumer of coal and desires to purchase coal from Seller;and, WHEREAS, the parties hereto wish to enter into a coal supply agreement based on the terms and conditions hereof. NOW THEREFORE, the parties hereto for good and valuable mutual consideration, and intending to be legally bound, hereby agree as follows: 1 ARTICLE I TERM OF AGREEMENT The term of this Agreement shall be for a period commencing 1 January 1999 and continuing until midnight, 31 December 2001, unless sooner terminated as provided for herein. In recognition of the pending Auction of the Danskammer Generating Station, and to provide the new owner with maximum flexibility, Seller agrees to forgo deliveries under this Agreement in contract year 2001 upon six months advance notice from the New Owners. ARTICLE II DELIVERIES Section 1. Quantities/Delivery Schedule: Except as provided for below, the annual quantity of coal sold and purchased hereunder shall be four (4) Firm cargoes of 30,000 Metric Tons (+ or - 10%) each plus two (2) Option cargoes of 30,000 Metric Tons (+ or - 10%) each. Delivery of all cargoes shall be made by ocean-going vessel during ten (10) day lay day periods scheduled by Buyer at least forty five (45) days prior to the start of the ten (10) day lay day period. Delivery of the Option cargoes shall be subject to; (1) Buyer's need for additional coal and (2) Seller's acceptance of revised pricing equal to the lower of quoted spot coal for the delivery calendar quarter, other fuel that can be used in the Danskammer coal-burning units or the equivalent cost of purchased energy. Every third cargo (#3 & #6) shall be an Option cargo. Buyer shall provide pricing for the Option cargoes when scheduling same and Seller shall have ten (10) calendar days thereafter to indicate acceptance of the Option cargo pricing. Option cargoes will be priced at the Base Price as specified herein if Buyer fails to quote an Option Cargo price. For water-borne deliveries, the Buyer will provide to Seller the ten (10) day delivery window (Buyer's Dock) for the Vessel. Ten (10) days prior to the scheduled arrival, the vessel's ETA will be reduced to a five (5) day window by the Seller. Seller's maximum obligation under this 2 Agreement is six (6) cargoes however Seller is not obligated to load more than one (1) cargo in a calendar month. In addition, Seller may offer any passed Option cargoes during the remainder of the Contract Term at a mutually agreeable time and price. Buyer will be scheduling and receiving other deliveries of coal and oil during the Contract Term. The Roseton Dock which is used for both oil and coal deliveries can handle only one vessel at a time. Therefore, if Seller's vessel arrives outside of its five (5) day delivery window and within the time frame of another scheduled fuel delivery, Seller will hold Buyer harmless as to any and all demurrage charges associated with either delivery. Section 2. Passage of Title: The coal sold and delivered solely by water to Buyer hereunder is CIFFO Roseton Dock (Incoterms 1990) and, title to and risk of loss of the coal supplied hereunder shall pass to Buyer as coal passes from the vessel's conveyor into the receival hopper at the Roseton Dock. Section 3. Initial Quality Notification: The Parties recognize the Buyer's need to know the quality of the coal prior to receipt of the shipment at the Danskammer Plant. Two (2) days prior to loading, the Seller shall submit in writing a loading plan which lists the source of the coal inventories at the load facility, the average (or projected) quality of each pile, and the quantity of each pile to be loaded. The loading plan should include a brief description of the method to be used to blend the coals into a homogenous mixture prior to loading. The Buyer or Buyer's Agent shall have access to the Seller's facilities to inspect the coal inventory and loading equipment and shall have the option of collecting and analyzing samples of the individual piles prior to loading. The coal blend shall be sampled in 5,000-ton sub-lots as it is loaded and analyzed expeditiously by a mutually agreed upon independent coal testing laboratory. The Seller shall notify the Buyer by telephone, telegram, or TWX of the average "as received" analytical results of the shipment within 48 hours of the load date. The additional results (AFT, HGI, Ultimate Analysis and Ash Analysis) of the composite sample shall be reported within 72 hours. 3 Section 4. Shipping Notice: For each shipment of coal hereunder, Seller shall promptly mail or courier to Buyer's Danskammer Plant and to the Roseton Administrative Offices, Central Hudson Gas & Electric Corporation, 992 River Road, Newburgh, New York 12550, a shipping notice showing weight, type of car and number of each railway car contained in the shipment, shipping date and origin mine; or in the case of water-borne deliveries the B/L date, total B/L weights, name of Vessel and ETA Roseton Dock. Section 5. Delivery by Water Only: Coal delivered under this Agreement by Seller is done so CIFFO the Roseton Dock. Prices quoted by Buyer and accepted by Seller include all transportation components. Coal deliveries to the Roseton Dock can only be made in Belt Self Unloading Vessels that meet the Roseton Dock and Hudson River limitations as described in Attachment I herein. However, Seller and its Agents are responsible for the safe passage of Vessels under their control in all waters and any limitations thereon, whether or not they are included in Attachment I. Buyer will provide a safe berth, free of wharfage or dockage charges, to which Vessels may proceed and from which they may depart, and where they may always lie safely afloat. With assistance as necessary from Buyer's dockside personnel (Buyer will provide shore- side labor for line handling during docking/undocking procedures), it shall be the responsibility of Seller to secure the Vessel to Buyer's berth prior to such discharging of coal. Section 6. Importer of Record: For imported coal, Seller will act as importer of record on behalf of Buyer. Usual and customary costs incurred in clearing cargo will be reimbursed by Buyer to Seller as per a statement from the Customs broker. 4 CONFIDENTIAL INFORMATION REPRESENTED IN THIS FILING BY AN "X" HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. Section 7. Vessels can be berthed/deberthed any time during the day or night and docking/undocking will only be constrained through directions given by the docking/undocking pilot if such a pilot is required. If upon arrival of the Vessel the discharge berth at Roseton Dock is open and ready to receive the Vessel for immediate docking, Seller's vessel will tender its notice of readiness to start discharging coal provided that the Vessel is in all respects ready to start discharging coal from its conveyor boom into Buyer's dockside hopper. Buyer will receive the coal from the tip of the Vessel's conveyor at an average minimum rate of X,XXX short tons/hour and a maximum rate not to exceed X,XXX short tons/hour. Buyer's belt scale results will be used as documentation of the Vessel's unloading rate. In addition, Seller will be responsible for demurrage charged by other vessels held out due to Seller's Vessel's inability to offload at an average minimum rate of X,XXX short tons per hour and/or by Seller's Vessel arrival outside of its five (5) day delivery window. Any delays experienced shore-side preventing the Vessel to achieve its X,XXX short tons/hour average minimum rate will count as laytime. Allowed laytime is defined as follows: Cargo Size in Short Tons = allowed hours ________________________ X,XXX Short Tons/Hour If upon arrival of the Vessel the discharge berth at Roseton Dock is not available for immediate docking, Seller's Vessel will tender its notice of readiness WIBON, WIFPON, WCCON from the closest practical safe anchorage and laytime will start counting provided the Vessel arrives within Seller's five (5) day delivery window and the Roseton Dock is occupied. Subsequent shifting time from anchorage to berth will not count as laytime. 5 CONFIDENTIAL INFORMATION REPRESENTED IN THIS FILING BY AN "X" HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. Section 8. If Buyer's coal unloading system or equipment is damaged or forced to shut down as the result of receiving foreign or oversized material from the vessel, then the Seller shall be liable for any damage and/or delays associated with the unauthorized delivery of this extraneous material. Demurrage at Discharge Berth If after completion of discharge Buyer has used more time to receive the entire cargo than allowed, Buyer will reimburse Seller for excess laytime used at the rate of USD $XX,XXX for each 24 hours, fractions pro rata. If after completion of discharge Seller has used more time to offload the entire cargo than allowed, Seller will reimburse Buyer for excess laytime used at the rate of USD $XX,XXX for each 24 hours, fractions pro rata. 6 CONFIDENTIAL INFORMATION REPRESENTED IN THIS FILING BY AN "X" HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. ARTICLE III SPECIFICATIONS & QUALITY & WEIGHT Section 1. Origin: The coal shall be from the Caesar (mine, seam, region) and shall meet the specifications herein. Coals from other sources shall not be shipped without prior written approval of Buyer. Section 2. As Received Quality Specifications: The quality of coal sold and purchased hereunder shall meet the following specifications: Expected Minimum Maximum ASTM Method As Received: Moisture % X -- XX D 3173 Volatiles % XX XX XX D 3175 Fixed Carbon % XX XX XX D 3172 Ash % X.X -- X.X D 3174 BTU/LB XX,XXX XX,XXX -- D 3286 Sulphur % X.XX X.XX X.XX D 3177/4239 SO2(LBS./MMBTU) X.X -- X.X Calculated Grind (HGI) XX XX(1) XX D 409-85 Ash Fusion (Reducing) (I.D., Deg. F) X,XXX X,XXX -- D 1587 Coal Fines: (A) 1/4" Round Hole -- -- XX% D 4749 (B) 35 Mesh U.S. Standard -- -- XX% D4749 (1) Subject to approval by Buyer. THIS COAL SHALL BE FREE OF EXTRANEOUS MATERIAL AND SHALL HAVE A MAXIMUM TOP SIZE OF TWO INCHES. (A) Coal defined as zero times one quarter inch round hole. (B) Coal fines defined as zero by 0.5 mm (35 mesh U.S. Standard sieve or 32 mesh Tyler sieve). 7 Section 3a. Buyer's Remedies Related to Quality Specifications: In lieu of any other remedies related to Seller's failure to meet the quality specifications provided for herein, except for the price adjustments for quality provided for in Article V herein, Buyer shall have the rights and remedies described in this Section 3 upon Seller's failure to deliver coal in accordance with the specifications set forth in Sections 2 and 3 of this Article III. Section 3b. Buyer's Right to Reject Individual Shipments: Buyer's ability to use the coal being dependent on the coal meeting the specifications set forth above, it is agreed that Buyer shall have the right to reject any and all shipments which fail to meet any of the individual shipment as received rejection limits shown below: INDIVIDUAL SHIPMENT REJECTION LIMITS ------------------------------------ Sulphur (By Weight) 0.7% Maximum Volatiles 30% Minimum Ash Fusion (I.D.) 2,400 F Minimum (1) Grind (HGI) 43 Minimum Gross Calorific Value (BTU/LB) 12,300 Minimum SO2/Million BTU 1.1 LBS. Maximum (1) Lower value subject to approval by Buyer. Seller shall pay all freight, diversion, demurrage, testing and other expenses in connection with any such rejected shipment, or shipments found by Seller to be nonconforming, unless such shipment is accepted by Buyer. Furthermore, Seller certifies that it will not make any shipment shown by sampling and analyses (as provided in Article VI) to exceed the individual shipment rejection limits. 8 CONFIDENTIAL INFORMATION REPRESENTED IN THIS FILING BY AN "X" HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. Section 4. Seller's Duty of Care: Seller shall, at all times exercise reasonable care and diligence in its efforts to ship to Buyer coal which conforms to the specifications set forth in above Section 2. Nothing in this Article III shall be construed to relieve Seller of its obligation to conduct its mining and operations in a competent manner, consistent with good industry practices, so as to produce coal which will meet the specifications set forth above. ARTICLE IV PAYMENT Section 1. Price: The Base Price of the Firm cargoes of coal sold hereunder in contract year 1999 is fixed at $XX.XX per short ton CIFFO Roseton Dock. Option Cargoes will be priced in accordance with ARTICLE II, Section 1. Section 2. On or before July 1st 1999 & 2000, Buyer and Seller will enter into negotiations to fix the Base Price for coal delivered hereunder for the ensuing year. Unless otherwise agreed, this Agreement will terminate on December 31st of the then current contract year if negotiations for the following year have not been completed by November 1st. Section 3. Submission of Analysis and Weight: In addition to Seller's notifications provided for in Article II, Section 3, Seller shall submit to Buyer the analytical data on said shipments from the Operations as obtained by the Independent Lab(s) for each shipment within five days after each shipment. For rail only deliveries, the Buyer shall submit to Seller the certified weights within five (5) working days after the certified weights become available. For rail/water deliveries, the Seller shall submit to Buyer the certified rail weights provided by the origin carrier within five (5) working days after the certified weights become available. 9 CONFIDENTIAL INFORMATION REPRESENTED IN THIS FILING BY AN "X" HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. For water only deliveries, the weight of coal sold hereunder shall be determined by an Independent Marine Survey(s) of the Vessel at the Load Port or by Independent Marine Survey (s) at Buyer's Discharge Port if Seller's Vessel has multiple Discharge Ports. The Buyer, Seller or their Agents reserve the right to witness any or all Marine Surveys. Section 4. Invoice: Thereafter, an invoice for any adjustments for quality as hereinafter defined, and all coal shipped from the Operations based on weights determined in accordance with Article IV Section 2 will be submitted by the Seller to the Buyer. The coal shipped will be invoiced at the Price as defined in ARTICLE IV, Section 1. Section 5. Taxes: All taxes due on Vessel or cargo in Colombia are for Seller's account. All taxes due on cargo in U.S.A. upon transfer of title per Incoterms (1990) are for Buyer's account. Section 6. Vessel Costs: All usual and customary Vessel costs, including but not limited to docking, are for the account of the Seller (i.e., pilots, tugs). Section 7. Payment: Buyer shall make payment to Seller within fifteen (15) calendar days from Bill of Lading Date. There shall be no discount for early payment. Payment shall be made by wire transfer as directed by Seller. ARTICLE V ADJUSTMENT IN PRICE FOR QUALITY Section 1. BTU Value (Gross Calorific Value As Received Basis - BTU/LB): The Price to be paid to Seller by Buyer is based upon coal with XX,XXX BTU/LB heat content (BTU Value) for each net ton of coal in each shipment. The BTU Value of the coal sold hereunder may 10 CONFIDENTIAL INFORMATION REPRESENTED IN THIS FILING BY AN "X" HAS BEEN REDACTED AND FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION. vary, and the Price for such coal shall be adjusted to compensate for variations in BTU Value, as described below. Section 2. Adjustment for BTU Value: If the BTU Value of the coal shipment is between XX,XXX BTU/LB and XX,XXX BTU/LB there will be no adjustment for BTU Value variation. If the BTU Value is less than XX,XXX BTU/LB or greater than XX,XXX BTU/LB, the Price for a shipment shall be adjusted, based upon variations from the XX,XXX BTU/LB BTU Value, as follows: [a] For a coal shipment with a BTU Value greater than XX,XXX BTU/LB, a premium shall be paid by Buyer to Seller at the rate of $X.XX per 100 BTU/LB, fractions pro rata; [b] For a coal shipment with a BTU Value less than XX,XXX BTU/LB but greater than XX,XXX BTU/LB, a penalty shall be deducted from the Price at the rate of $X.XX per 100 BTU/LB, fractions pro rata below XX,XXX BTU/LB. Section 3. Adjustments for Ash Value: The Price to be paid to Seller by Buyer is based upon coal with an ash content (Ash Value) of XXXXX percent (X%) by weight of the "as received" analysis of the coal. If the Ash Value is between X.X% and X.X% there will be no adjustment for Ash Value. If the Ash Value is less than X.X% then a premium of $.XXX per ton shall be paid to Seller for each X.X% Ash Value variation below X.X%. If the Ash Value is greater than X.X% but less than X% then a penalty of $.XXX per ton shall be deducted from the Price for each X.X% Ash Value variation in excess of X.X%. If the Ash Value is greater than X% but less than XX% then a penalty of $.XX per ton for each 0.1% of ash greater than X.X%. Section 4. Adjustment for Sulfur Value: If the Sulfur Value of the coal shipment is less than or equal to X.XX% there will be no adjustment for Sulfur Value variation. If the Sulfur Value is greater than X.XX% but less than X.XX% then a penalty of $X.XX per ton shall be deducted from the Price for each X.XX% Sulfur Value variation in excess of X.XX%. 11 ARTICLE VI SAMPLING AND ANALYSES Two recognized Independent Laboratories experienced in the sampling and analyzing of coal, shall be mutually agreed upon by Buyer and Seller as the Labs of Record. One of these laboratories shall be engaged by each Party to perform the sampling, sample preparation, and analysis of the coal shipped hereunder. The other laboratory at the option of either the Buyer or the Seller shall perform analyses of the prepared splits from the sublot and composite samples. At least one of the Labs of Record shall utilize the High Temperature Combustion Method with Infrared Absorption Detection Procedures (ASTM D4239 Method C) for determination of sulfur in samples of coal. During the loading of the rail cars, barges, or ship, sample increments shall be collected by the most reliable, practical and mutually agreeable procedures in accordance with either ASTM D2234 (manual) or D4702 (mechanical). The frequency and mass of the increments shall be in accordance with ASTM standards. For all water deliveries, the cargo shall be divided into 5,000 MT sublots. The preparation of each sublot sample shall yield the following four mesh sample splits: a) laboratory analyses, b) referee split and c) Buyer's split. A 60 mesh split of the sublots shall be prepared for the second laboratory as well as an 8 mesh split of the composite sample. The Buyer or Buyer's Agent shall have access to witness all sampling, sample preparation, screen testing and sealing of samples. The Independent Lab shall provide upon request the splits of the sublot samples to the Buyer or Buyer's Agent and/or Seller as soon as the sample is prepared. The Labs of Record shall properly identify, seal, and retain the referee splits of each sublot sample for a period of 60 days so that the Buyer or Seller may analyze such samples. The Buyer's Agent will be permitted to place a suitable seal on Referee samples. The sublot samples shall be analyzed by the first Lab of Record for total moisture, ash, sulfur, volatile, and gross calorific value (BTU/LB). The initial sublot(s) shall be tested 12 immediately and the results reported to Seller and Buyer/Buyer's Agent upon completion of testing. The second Lab of Record at the option of either the Seller or Buyer shall analyze the 60 mesh splits of the sublot samples for Dry Basis: ash, volatile, sulfur, and gross calorific value. The sulfur determination shall be run in duplicate by both Labs of Record. The certified analysis shall be the weighted mathematical average for all sublot values for moisture, ash, volatile, sulfur, and calorific value. Should the weighted average of the sulfur values differ by more than 0.04% then the highest reported sulfur value shall be used to determine whether or not the shipment should be rejected. A physical composite sample of the sublot samples shall be prepared and analyzed by the first laboratory for grindability index (HGI), ash fusion temperature, mineral ash, and ultimate analyses. The cost of the laboratory services for such sampling and analyzing of the coal in each shipment shall be paid for by the Buyer and Seller, equally. If the Buyer or Seller should question the correctness of the analyses made by the Independent Lab, they may, within 30 days after the Vessel unloading, notify the other Party in writing to request that the Referee splits be analyzed by a third mutually agreeable Independent Laboratory. This notification should specify which analytical parameter or parameters are in dispute. The Independent Lab shall provide the Referee Lab with the properly identified sealed Referee sublot samples. The integrity of the moisture in reserve samples is the most difficult to preserve. Therefore, if the moisture value is in dispute, the governing result will be the higher of the averaged value reported by the Independent and Referee Laboratory. Other analytical parameters shall be determined on a 'dry basis' and corrected to the 'as received' basis using the governing moisture. 13 The following are the acceptable tolerance for other test parameters: Ash +/- 0.3%; Sulphur +/- 0.03%; Volatile +/- 0.5%; Calorific Value +/- 100 BTU/LB Dry Basis; Ash Fusion Temperature I.D. +/- 75 Degrees F. and HGI 3. Should the results fall within these tolerances, the results of the Independent Lab will stand. Should the results fall outside the tolerance, then the Referee analyses shall be the governing result. Should the grindability (HGI) result be in dispute, the Referee Lab will prepare the physical composite sample from the Referee sublot samples to perform the HGI test. If the HGI test result of the Referee laboratory is within tolerance (3), the original laboratory result will stand. If out of tolerance, the Referee results will be the governing analysis. The cost of this Referee analysis will be paid by the Party requesting the check analysis. Neither Party shall require the other Party to use equipment or procedures which exceed the requirements of ASTM. ARTICLE VII CHANGES IN LAW Seller hereby certifies that it is in substantial compliance with the rules, practices and standards issued by any governmental agencies having jurisdiction with respect to applicable legislation, regulations, rules or mandates which were in effect as of 24 June 1998. Seller and Buyer recognize that this coal purchase is of limited duration and therefore agree that there shall be no adjustment in price as a result of enactment, modification, or revision of any federal, state or local legislation or regulations, rules or mandates issues pursuant thereto after such above date, which affects the bituminous coal industry with respect to the reclamation, conservation, environmental protection, mine safety, mine working conditions and 14 practices, ventilation, health, employee retirement programs, occupational hazards, research and reclamation and conservation of mine areas, which increases or decreases Seller's cost of producing coal under this Agreement. ARTICLE VIII OTHER GOVERNMENTAL LEGISLATION, REGULATIONS AND ORDERS Section 1. Compliance with Law: Each Party shall use its best efforts to comply with the provisions of all applicable federal, state and other governmental laws and any applicable orders and/or regulations, or any amendments or supplements thereto, which have been, or may at any time be, issued by a governmental agency. ARTICLE IX FORCE MAJEURE No Party shall be subject to liability to the other Party for failure to perform in conformity with this Agreement where such failure results from an event or occurrence beyond the control of the party affected thereby, whether foreseen, foreseeable or unforeseeable, which wholly or partially prevents the mining, preparation, loading or shipping of coal by Seller or the receiving, unloading or utilization of coal by Buyer. Such events shall include, by way of illustration but not by way of limitation, acts of God, war, insurrection, riots, nuclear disaster, strikes, labor disputes, labor and material shortages, fires, explosions, floods, river freezeups, breakdowns or damage to mines, plant equipment or facilities (including emergency outages of equipment or facilities to make repairs to avoid breakdowns thereof or damage thereto), interruptions to transportation, railway car shortages, embargoes, orders or acts of civil or military authority, laws, regulations or administrative rulings. 15 The provisions of the above sentence shall not excuse a Party from performing unless such Party shall give reasonable notice to the other Party and furnish reasonable information as to the cause of inability to perform and probable extent thereof within ten (10) calendar days after such cause occurs. Failure to give such notice and furnish such information within the time specified shall be deemed a waiver of all rights under this Article for such period of time during which notice was not given. No suspension or reduction by reasons of force majeure shall invalidate the remainder of this Agreement but, on the removal of the cause, shipments shall resume at the specified rate. During such periods when force majeure conditions result in a reduction in deliveries, Seller shall equitably prorate shipments among its customers. Nothing herein contained shall be construed as requiring Seller or Buyer to accede to any demands of labor, or labor unions, or suppliers, or other parties which Seller or Buyer considers unacceptable. Deficiencies in shipments so caused shall not be made up except by mutual consent. ARTICLE X EMPLOYEE INTEREST Seller represents to Buyer that Seller has not given and will not give, directly or indirectly, anything of value to any employee or other representative of Central Hudson Gas & Electric Corporation with the view of securing this Agreement or obtaining favorable treatment with respect to the performance of this Agreement. If such representation is untrue, or becomes untrue, Buyer shall have the right to declare this Agreement null and void or to terminate it, to sue for damages and to take such other action as may be provided by law. If Seller obtains knowledge at any time that any such employee has a direct or indirect interest in Seller or its affiliates, (excluding routine purchases in the open market by such employee of securities issued by Seller or its parent corporations) it will immediately inform Buyer of such fact. 16 ARTICLE XI WAIVER The failure of any party to insist in any one or more instances upon strict performance of any of the provisions of this Agreement or to take advantage of any of its rights hereunder shall not be construed as a future waiver of any such provisions or the relinquishment of any such rights, but the same shall continue and remain in full force and effect for the term of this Agreement. ARTICLE XII NOTICES Notices and other communications provided for or required herein shall be given (effective, if written, when presented for delivery by postal authorities when sent by postage prepaid, certified mail) or by facsimile as follows: TO BUYER: CENTRAL HUDSON GAS & ELECTRIC CORPORATION 284 SOUTH AVENUE POUGHKEEPSIE, NEW YORK 12601-4879 ATTENTION: MR. DONALD L. DU BOIS, JR. DIRECTOR OF FUELS PHONE: (914) 486-5844 FAX: (914) 486-5626 TO SELLER: GLENCORE LTD. THREE STAMFORD PLAZA, 301 TRESSER BOULEVARD STAMFORD, CT 06901 ATTENTION: MR. GREGORY L. MARCUM PHONE: (203) 328-3119 FAX: (203) 978-2630 17 ARTICLE XIII GOVERNING LAW This Agreement shall be construed, enforced and performed in accordance with the laws of the State of New York. ARTICLE XIV FINALITY This Agreement is intended as the final, complete and exclusive statement of the terms of the Agreement among the Parties. The Parties agree that parol or extrinsic evidence may not be used to vary or contradict the express terms of this Agreement. No waiver of any provision hereof shall be effective, unless set forth in a written instrument authorized and executed with the same formality as this Agreement. ARTICLE XV TITLES The titles of the articles and sections of this Agreement have been inserted as a matter of convenience for reference only. 18 ARTICLE XVI INTERPRETATION No understandings, agreements or trade customs not expressly stated in or required to be applied in accordance with the terms of this Agreement shall be binding on the Parties in the interpretation or performance hereof unless such understandings, agreements or trade customs are reduced to writing and signed by the respective Parties. ARTICLE XVII AGREEMENT FOR BENEFIT OF PARTIES ONLY Buyer agrees to indemnify, including reasonable attorneys fees, defend, and hold Producer/Seller harmless from any and all claims of any broker, consultant, finder or like agent with whom Buyer has dealt, or is alleged to have dealt, regarding this Agreement. Producer/Seller agrees to indemnify, including reasonable attorneys' fees, defend, and hold Buyer harmless against any and all claims of any broker, consultant, finder or like agent with whom Producer/Seller has dealt, or is alleged to have dealt regarding this Agreement. ARTICLE XVIII ASSIGNMENT - TERMINATION All of the rights and obligations of this Agreement shall inure to and be binding upon the legal representatives, successors and permitted assigns of the Parties hereto. No assignment shall impose upon the non-assigning Party any obligation or burden in excess of those obligations or burdens as exist between the original Parties to this Agreement. This Agreement or any interest herein shall not be assigned without the prior written consent of the other Parties, which consent shall not be unreasonably withheld. 19 Subject to the provisions of the Federal Bankruptcy Code, this Contract shall not be deemed an asset of either Seller or Buyer and, upon five (5) days prior written notice, either such Party may terminate this Agreement without penalty at any time in the event the other such Party enters into any voluntary or involuntary receivership, bankruptcy, or insolvency proceedings in any applicable national jurisdiction. ARTICLE XIX COUNTERPARTS This Agreement is being executed in several counterparts, each of which is an original and all of which together constitute but one and the same Agreement. ARTICLE XX REPRESENTATIONS AND WARRANTIES OF BOTH PARTIES Each party warrants and represents to the other that: (i) it has all requisite power, authority, licenses, permits, permissions, approvals and franchises, corporate or otherwise, to execute and deliver this Agreement and perform its obligations hereunder; (ii) its execution, delivery, and performance of this Agreement has been duly authorized by, or is in accordance with, its organic instruments, this Agreement has been duly executed and delivered for it by the signatories so authorized, and this Agreement constitutes its legal, valid and binding obligation enforceable in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights in general and by general principles of equity; 20 (iii) its execution, delivery, and performance of this Agreement will not result in a breach or violation of, or constitute a default under, any agreement, lease or instrument to which it is a party or by which it or its properties may be bound or affected; and (iv) it has not received any notice, nor to the best of its knowledge is there pending or threatened any notice, of any violation of any applicable laws, ordinances, regulations, rules, decrees, awards, permits or orders which would materially adversely affect its ability to perform hereunder. IN WITNESS WHEREOF, each Party hereto has caused this Agreement to be executed in its behalf by its proper officer thereunder duly authorized, all as of the day and year first above written. BUYER: CENTRAL HUDSON GAS & ELECTRIC CORPORATION BY /s/ Allan R. Page _______________________________________ ITS Executive Vice President - Energy Resources and Development SELLER: GLENCORE LTD. BY /s/ Gregory L. Marcum _______________________________________ ITS Trader _______________________________________ 21 Attachment I Roseton Dock and Vessel Limitations: - - LOA - 890 Feet Maximum - - Beam - No Restriction - - Water Depth in Berth - 36+ Feet MLW (Operational Draft 31 Feet MLW Channel at Haverstraw is Limiting) Current List of Vessels which have Delivered Coal to Roseton: - - Ambassador - - Nelvana - - Bernhard Oldendorff - - Ballangen - - Energy Enterprise EX-10 6 NYSERDA PARTICIPATION AGREEMENT Exhibit (10)(i)82) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY AND CENTRAL HUDSON GAS & ELECTRIC CORPORATION - ------------------------------------------------------------------------------ PARTICIPATION AGREEMENT - ------------------------------------------------------------------------------ Dated as of December 1, 1998 - relating to - Pollution Control Refunding Revenue Bonds (Central Hudson Gas & Electric Corporation Project), 1998 Series A TABLE OF CONTENTS Table of Contents Page ARTICLE I DEFINITIONS; RULES OF CONSTRUCTION; EFFECTIVE DATE AND DURATION OF PARTICIPATION AGREEMENT SECTION 1.01. Definitions; Rules of Construction.............................2 SECTION 1.02. Effective Date of Participation Agreement; Duration of Participation Agreement.......................................2 ARTICLE II REPRESENTATIONS SECTION 2.01. Representations and Warranties by the Authority................3 SECTION 2.02. Representations and Warranties by the Company..................3 i ARTICLE III THE PROJECT; ISSUANCE OF BONDS SECTION 3.01. The Project....................................................4 SECTION 3.02. Sale of Bonds and Deposit of Proceeds; Liability Under Bonds.........................................................4 SECTION 3.03. No Interest in Project Conferred...............................5 SECTION 3.04. Operation, Maintenance and Repair..............................5 SECTION 3.05. Agreement not to Exercise Option to Convert to Fixed Rate Absent Specified Rating.......................................5 SECTION 3.06. Securities Depository..........................................5 SECTION 3.07. Investments Under the Indenture................................5 ARTICLE IV COMPANY NOTE AND PAYMENTS; CREDIT AND LIQUIDITY SUPPORT SECTION 4.01. Execution and Delivery of Company Note to Trustee..............6 SECTION 4.02. Redemption of Bonds............................................6 SECTION 4.03. Obligation for Payment Absolute; Deficiencies..................6 SECTION 4.04. Administration Fees; Expenses, Etc.............................6 SECTION 4.05. Compensation of Fiduciaries, Remarketing Agents and Indexing Agents...............................................7 SECTION 4.06. Project Not Security for Bonds.................................7 SECTION 4.07. Payment of Taxes and Assessments; No Liens or Charges..........7 SECTION 4.08. Indemnification of Authority, Fiduciaries, Remarketing Agents and Indexing Agents....................................8 SECTION 4.09. Company to Pay Attorneys' Fees and Disbursements...............8 SECTION 4.10. No Abatement of Administration Fees and Other Charges..........8 SECTION 4.11. Payment to Tender Agent........................................9 SECTION 4.12. Support Facilities.............................................9 ii ARTICLE V SPECIAL COVENANTS SECTION 5.01. No Warranty as to Suitability of Project.......................9 SECTION 5.02. Authority's Rights to Inspect Project and Plans and Specifications................................................9 SECTION 5.03. Company Consent to Amendment of Indenture......................9 SECTION 5.04. Tax Covenant...................................................9 SECTION 5.05. Company Agrees to Perform Obligations Imposed by Indenture....................................................10 SECTION 5.06. Maintenance of Office or Agency of Company....................10 SECTION 5.07. Further Assurances............................................10 SECTION 5.08. Payment of Taxes and Other Charges............................10 SECTION 5.09. Maintenance of Properties.....................................10 SECTION 5.10. Insurance.....................................................11 SECTION 5.11. Proper Books of Record and Account............................11 SECTION 5.12. Certificates as to Defaults...................................11 SECTION 5.13. Company Not to Permit Hindrance or Delay of Payment of Company Note.................................................11 SECTION 5.14. Consolidation, Merger or Sale of Assets.......................11 SECTION 5.15. Financial Statements of Company...............................12 SECTION 5.16. Compliance with Laws..........................................12 ARTICLE VI DEFAULTS BY COMPANY; REMEDIES SECTION 6.01. Events of Default; Acceleration...............................13 SECTION 6.02. Certain Events of Default; Authority or Trustee May Take Certain Actions..............................................14 SECTION 6.03. Judicial Proceedings by Trustee...............................15 ARTICLE VII MISCELLANEOUS SECTION 7.01. Disposition of Amounts After Payment of Bonds.................15 SECTION 7.02. Notices.......................................................15 SECTION 7.03. Successors and Assigns........................................15 SECTION 7.04. References to the Liquidity Facility..........................16 SECTION 7.05. Amendment of Participation Agreement..........................16 SECTION 7.06. Assignment and Transfer.......................................16 SECTION 7.07. Participation Agreement Supersedes Any Prior Agreements.......17 SECTION 7.08. Counterparts..................................................17 SECTION 7.09. Severability..................................................17 SECTION 7.10. New York Law To Govern........................................17 EXHIBIT A: FORM OF PROMISSORY NOTE.........................................A-1 iii This PARTICIPATION AGREEMENT, dated as of December 1, 1998, between NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY, a body corporate and politic, constituting a public benefit corporation, established and existing under and by virtue of the laws of the State of New York (the "Authority"), and CENTRAL HUDSON GAS & ELECTRIC CORPORATION, a corporation duly organized and existing and qualified to do business as a public utility under the laws of the State of New York (the "Company"), W I T N E S S E T H : WHEREAS, pursuant to a special act of the Legislature of the State of New York (Title 9 of Article 8 of the Public Authorities Law of New York, as from time to time amended and supplemented, herein called the "Act"), the New York State Energy Research and Development Authority (the "Authority") has been established as a body corporate and politic, constituting a public benefit corporation; WHEREAS, pursuant to the Act, the Authority is empowered to contract with any power company to participate in the incorporation of features in power plants and the construction of associated facilities to the extent required by the public interest in development, health, recreation, safety, conservation of natural resources, and aesthetics; WHEREAS, pursuant to the Act, the Authority is also empowered to extend credit and make loans from bond proceeds to any person for the construction, acquisition, and installation of, or for the reimbursement to any person for costs in connection with, any special energy project, including, but not limited to, any land, works, system, building or other improvement and all real and personal properties of any nature or any interest in any of them which are suitable for or related to the furnishing, generation, or production of energy; WHEREAS, the Authority is also authorized under the Act to borrow money and issue its negotiable bonds and notes to provide sufficient moneys for achieving its corporate purposes, including the refunding of outstanding obligations of the Authority; WHEREAS, the Authority is also authorized under the Act to enter into any contracts and to execute all instruments necessary or convenient for the exercise of its corporate powers and the fulfillment of its corporate purposes; WHEREAS, the Company is a public utility corporation doing business in the State of New York and operates power plants in the State of New York; WHEREAS, the Company has requested that the Authority issue bonds for the purpose of refunding the Pollution Control Revenue Bonds (Central Hudson Gas & Electric Corporation Projects), Series C (the "Prior Bonds"), of the Authority which were issued to finance a portion of the cost of construction of certain pollution control and other facilities at Nine Mile Point Nuclear Station Unit No. 2 generating station located in Oswego, New York; WHEREAS, the Authority proposes to issue such bonds and make the proceeds thereof available to the Company to refund the Prior Bonds; WHEREAS, simultaneously with the issuance and delivery of such bonds, the Company will deliver a promissory note dated the date of issuance of such bonds as evidence of its obligation to repay the advance of the proceeds of the bonds; and 1 WHEREAS, the Authority, pursuant to Resolution No. 922, adopted September 28, 1998, has determined to issue its Pollution Control Refunding Revenue Bonds (Central Hudson Gas & Electric Corporation Project), 1998 Series A, in an aggregate principal amount of $16,700,000 (the "Bonds"), for the purpose of refunding the Prior Bonds, all such Bonds to be issued under and secured by an Indenture of Trust dated as of December 1, 1998, between the Authority and The Chase Manhattan Bank, as Trustee (the "Indenture"); NOW, THEREFORE, for and in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, it is hereby agreed by and between the parties as follows: ARTICLE I DEFINITIONS; RULES OF CONSTRUCTION; EFFECTIVE DATE AND DURATION OF PARTICIPATION AGREEMENT SECTION 1.01. Definitions; Rules of Construction. Unless the context otherwise indicates, terms defined in the Indenture are used herein as so defined; and: (a) Words importing the singular number shall include the plural number and vice versa; (b) All references herein to particular articles or sections are references to articles or sections of this Participation Agreement; (c) The captions and headings herein are solely for convenience of reference and shall not constitute a part of this Participation Agreement nor shall they affect its meaning, construction or effect; (d) The terms "hereby," "hereof," "hereto," "herein," "hereunder" and any similar terms, as used in this Participation Agreement, refer to this Participation Agreement in its entirety and not to the particular article or section of this Participation Agreement in which they appear, and the term "hereafter" means after, and the term "heretofore" means before, the effective date of this Participation Agreement; and (e) In the event that there is any conflict between the provisions of this Participation Agreement and those of the Indenture, the provisions of the Indenture shall govern the disposition of such conflict. SECTION 1.02. Effective Date of Participation Agreement; Duration of Participation Agreement. This Participation Agreement shall become effective upon its execution and delivery, and shall continue in full force and effect until the principal of, and premium, if any, and interest on, the Company Note and Bonds have been fully paid (or provision for their payment has been made in accordance with the provisions of the Indenture) and all sums to which the Authority or the Fiduciaries are entitled hereunder have been fully paid. ARTICLE II REPRESENTATIONS SECTION 2.01. Representations and Warranties by the Authority. The Authority represents and warrants as follows: (a) The Authority is a body corporate and politic, constituting a public benefit corporation, established and existing under the laws of the State of New York; 2 (b) The Authority has full power and authority to execute and deliver this Participation Agreement, the Indenture and the Tax Regulatory Agreement and to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder; (c) The Authority is not in default under any of the provisions of the laws of the State of New York which would affect its existence or its powers referred to in the preceding paragraph (b); (d) The Authority has determined that its participation in the financing of the Project, as contemplated by this Participation Agreement, is in the public interest; (e) The Authority has duly authorized the execution and delivery of this Participation Agreement, the Indenture and the Tax Regulatory Agreement and the execution and delivery of the other documents incidental to this transaction, and all necessary authorizations therefor or in connection with the performance by the Authority of its obligations hereunder or thereunder have been obtained and are in full force and effect; and (f) The execution and delivery by the Authority of this Participation Agreement, the Indenture and the Tax Regulatory Agreement and the consummation of the transactions herein or therein contemplated will not violate any indenture, mortgage, loan agreement or other contract or instrument to which the Authority is a party or by which it is bound or, to the best of the Authority's knowledge, any judgment, decree, order, statute, rule or regulation applicable to the Authority. SECTION 2.02. Representations and Warranties by the Company. The Company represents and warrants as follows: (a) The Company is a corporation duly incorporated and in good standing under the laws of the State of New York, is duly qualified and authorized to engage in business as a public utility in the State of New York, has power to enter into, execute and deliver this Participation Agreement, the Tax Regulatory Agreement and the Company Note by proper corporate action and has duly authorized the execution and delivery by it of this Participation Agreement, the Tax Regulatory Agreement and the Company Note; (b) The execution and delivery by the Company of this Participation Agreement, the Tax Regulatory Agreement and the Company Note and the consummation of the transactions herein contemplated do not conflict with or constitute a breach of or a default under the Company's Certificate of Incorporation, By-Laws or any indenture, mortgage, loan agreement or other contract or instrument to which the Company is a party or by which it is bound or, to the best of the Company's knowledge, any judgment, decree, order, statute, rule or regulation applicable to the Company; (c) This Participation Agreement, the Tax Regulatory Agreement and the Company Note constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as the right of indemnity hereunder may be limited by principles of public policy and except as enforcement may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or other laws, judicial decisions or principles of equity relating to or 3 affecting the enforcement of creditors' rights or contractual obligations generally (regardless of whether enforceability is considered in a proceeding in equity or at law); (d) The issuance and delivery by the Company of the Company Note in the manner and for the purposes herein set forth have been duly authorized by an order of the Public Service Commission of the State of New York; (e) No additional authorizations for or approvals of the execution and delivery by the Company of this Participation Agreement, the Tax Regulatory Agreement and the Company Note need be obtained by the Company or if any such authorization or approval is necessary it has been obtained; and (f) The representations of the Company set forth in the Tax Regulatory Agreement are hereby incorporated by reference as though fully set forth herein. ARTICLE III THE PROJECT; ISSUANCE OF BONDS SECTION 3.01. The Project. The Company represents that the Project is complete. The Project belongs to and is the property of the Company. In order to effectuate the purposes of this Participation Agreement, the Company will do or cause to be done all things requisite or proper for the fulfillment of the obligations of the Company under this Participation Agreement. SECTION 3.02. Sale of Bonds and Deposit of Proceeds; Liability Under Bonds. 1. In order to refund the Prior Bonds, the Authority, as soon as practicable after the execution of this Participation Agreement will issue, sell and deliver the Bonds to the Underwriters thereof, all pursuant to and as provided in the Bond Purchase Agreement for the Bonds among the Authority, the Company and the Underwriters and will deposit the proceeds of such sale of the Bonds with the Trustee in the Proceeds Fund. 2. The Bonds shall not be general obligations of the Authority, and shall not constitute an indebtedness of, or a charge against the general credit of, the Authority or give rise to any pecuniary liability of the Authority. The liability of the Authority under the Bonds shall be enforceable only to the extent provided in the Indenture, and the Bonds shall be payable solely from the Company Note Payments, any payments by the Company under Section 4.11, funds paid under the Support Facilities and any other funds held by the Trustee under the Indenture or the Tender Agent under the Bond Purchase Trust Agreement and available for such payment. The Bonds shall not be a debt of the State of New York, and the State of New York shall not be liable thereon. SECTION 3.03. No Interest in Project Conferred. Neither the Authority nor the Trustee shall be entitled to any interest in the Project by reason of the advance of Bond proceeds pursuant to this Participation Agreement. SECTION 3.04. Operation, Maintenance and Repair. The Authority and the Company recognize that the Project constitutes integrated portions of the electric energy and production facilities of the Company and its co-tenants and that it is not feasible to administer the Project separately from such facilities. The Company shall operate the Project or cause the Project to be operated (with such changes, improvements or additions as the Company may deem desirable) as part of such facilities for the joint useful life of the Project and such facilities, shall maintain and 4 repair the Project or cause the Project to be maintained and repaired in conformity with the Company's and its co-tenants' normal maintenance and repair programs for such facilities and shall proceed in good faith to maintain the availability of the Project for use as an authorized project under the Act; but the Company and its co-tenants shall have no obligation to operate, maintain or repair or cause to be operated, maintained, or repaired, or proceed in good faith to maintain the availability of the Project for use as an authorized project under the Act with respect to, any element or item of the Project the operation, maintenance, or repair of which becomes uneconomic to the Company because of damage or destruction or obsolescence (including physical, functional and economic obsolescence), or change in government standards and regulations, or the termination of the operation of the portion of such facilities to which the element or item of the Project is an adjunct, or the sale, transfer or other disposition by the Company of its interest in such facilities. SECTION 3.05. Agreement not to Exercise Option to Convert to Fixed Rate Absent Specified Rating. The Company agrees not to direct that a Fixed Rate become effective pursuant to Section 4.02 of the Indenture unless the Company shall have delivered to the Authority evidence satisfactory to the Authority that upon conversion to a Fixed Rate the Bonds are expected to be rated in at least the third highest rating category (without regard to gradations therein) of Moody's or S&P, currently "A" in the case of Moody's and "A" in the case of S&P. SECTION 3.06. Securities Depository. The Company acknowledges that the Authority and the Trustee, at the request of the Company, have arranged for the initial deposit of the Bonds with The Depository Trust Company ("DTC") which will act as Securities Depository in order to effectuate a book-entry-only system and that this system may be discontinued or, if discontinued, reinstituted (with DTC or another Securities Depository) in accordance with the Indenture. The Company agrees to take all actions necessary, and to refrain from taking actions contrary to the effectuation of a book-entry-only system established pursuant to the Indenture and any arrangements among the Authority, the Trustee and any Securities Depository. The Authority shall not enter into any written agreements with a Securities Depository without receipt and acceptance of such agreements by the Company. SECTION 3.07. Investments Under the Indenture. Any money held in any fund under the Indenture shall be invested and reinvested as provided in the Tax Regulatory Agreement and Article IX of the Indenture. ARTICLE IV COMPANY NOTE AND PAYMENTS; CREDIT AND LIQUIDITY SUPPORT SECTION 4.01. Execution and Delivery of Company Note to Trustee. 1. Concurrently with the authentication by the Trustee and delivery by the Authority of the Bonds and in order to evidence the obligation of the Company to the Authority to repay the advance of the proceeds of the Bonds, the Authority hereby directs the Company, and the Company hereby agrees, to execute and deliver to the Trustee its Company Note and to duly and punctually pay the principal of, premium, if any, and interest on, the Company Note at the place, the times and in the manner provided therein. The Company Note shall be substantially in the form attached hereto as Exhibit A. 2. The obligation of the Company to make any payment of principal of, and premium, if any, and interest on, the Company Note shall be deemed satisfied and discharged by 5 and to the extent of a corresponding payment made by a Liquidity Provider (other than as Purchase Price), but not by any payment under the Policy. SECTION 4.02. Redemption of Bonds. Whenever Bonds are redeemable in whole or in part, the Authority will redeem the same at the written direction of an Authorized Corporation Representative given in accordance with Section 5.01 of the Indenture. Expenses in connection with the redemption of Bonds shall be paid by the Company. SECTION 4.03. Obligation for Payment Absolute; Deficiencies. The Company agrees that its obligation to make the Company Note Payments and payments under Section 4.11 at the times and in the amounts provided in the Company Note and this Participation Agreement shall be absolute, irrevocable and unconditional and shall not be subject to any defense (other than payment) or any right of set-off, counterclaim or recoupment for any reason, including, without limitation, the unenforceability (because of judicial decision or otherwise) or the impossibility of performance of the Company Note obligations, or any breach by the Authority of any obligation to the Company, whether under this Participation Agreement or otherwise, or inaccuracy of any representation by the Authority to the Company under this Participation Agreement or in any other instrument, or any indebtedness or liability at any time owing to the Company by the Authority, or the destruction by fire or other casualty of the Project or any portion thereof, or the taking of title thereto or the use thereof by the exercise of the power of eminent domain. If for any reason Company Note Payments, together with other money held by the Trustee and then available for such purpose (including money paid by a Liquidity Provider other than as Purchase Price), would not be sufficient to make the corresponding payments of principal of, and premium, if any, and interest on, the Bonds when such payments are due, the Company will pay the amounts required from time to time to make up any such deficiency. If for any reason payments under Section 4.11, together with other money held by the Trustee and the Tender Agent and then available for such purpose (including money paid by the Liquidity Provider), would not be sufficient to make the corresponding payments of the Purchase Price of the Bonds when such payments are due, the Company will pay the amounts required from time to time to make up any such deficiency. SECTION 4.04. Administration Fees; Expenses, Etc. In order to defray a portion of the expenses incurred by the Authority in conducting and administering its programs for the acquisition and construction of facilities for the furnishing of electricity, special energy projects and the development of advanced technologies, the Company shall pay to the Authority an initial Administration Fee in the amount of $41,750 on the date of the authentication and delivery of the Bonds and an annual Administration Fee in the amount of $2,210 on December 1 of each year commencing December 1, 1999, until the Bonds are no longer outstanding. In addition, the Company shall pay to the State of New York with respect to the Bonds a bond issuance charge in the amount of $46,760 on the date of authentication and delivery of the Bonds. In addition to such Administration Fees, the Company will pay or reimburse the Authority upon its request for all reasonable expenses, disbursements and advances incurred or made by the Authority (including printing costs and the reasonable fees, expenses and disbursements of its counsel and bond counsel) in connection with this Participation Agreement, the Indenture, the Tax Regulatory Agreement or any transaction or event contemplated by this Participation Agreement, the Tax Regulatory Agreement or the Indenture. 6 SECTION 4.05. Compensation of Fiduciaries, Remarketing Agents and Indexing Agents. The Company agrees: (1) to pay to the Trustee from time to time upon its request reasonable compensation for all services rendered by it in any capacity under the Indenture (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as so otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred by it in any capacity under the Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; (3) to pay to the Fiduciaries, other than the Trustee, from time to time upon their request, reasonable compensation for all services rendered by them under the Indenture and reimburse them for their reasonable expenses incurred under the Indenture (including reasonable compensation and expenses and disbursements of their agents and counsel), except any such expense as may be attributable to their negligence or bad faith; and (4) to pay to the Remarketing Agents and the Indexing Agents their reasonable fees and expenses as and when the same become due, except any such expense as may be attributable to such person's negligence or bad faith. SECTION 4.06. Project Not Security for Bonds. It is expressly recognized by the parties hereto that neither the Project nor any other property of the Company will constitute any part of the security for the Bonds. SECTION 4.07. Payment of Taxes and Assessments; No Liens or Charges. The Company will (a) pay, when the same shall become due, all taxes and assessments, including income, profits, property or excise taxes, if any, or other municipal or governmental charges, imposed, levied or assessed by the Federal, state or any municipal government upon the Authority or any Fiduciary in respect of any payments (other than payments made pursuant to Sections 4.04 and 4.05) made or to be made pursuant to this Participation Agreement or the Company Note and (b) pay or cause to be discharged, within 60 days after the same shall accrue, any lien or charge upon any such payment made or to be made under this Participation Agreement, provided that the Company shall not be required to pay any such tax or assessment so long as (i) the Company at its expense contests, by appropriate legal proceedings conducted in good faith and with due diligence, the amount, validity or application of any such tax, assessment or charge, (ii) such proceedings shall have the effect of suspending the collection thereof from the Authority or such Fiduciary, and (iii) the Company shall indemnify and hold the Authority and each Fiduciary harmless from any losses, costs, charges, expenses (including reasonable attorneys' fees and disbursements), judgments and liabilities arising in respect of such tax, assessment or charge and the nonpayment thereof. SECTION 4.08. Indemnification of Authority, Fiduciaries, Remarketing Agents and Indexing Agents. Any obligation of the Authority created by or arising out of this Participation Agreement shall be a limited obligation of the Authority, payable solely from the Company Note 7 Payments, any payments by the Company under Section 4.11, funds paid under the Support Facilities and any other funds held by the Trustee under the Indenture and available for such payment, and shall not constitute an indebtedness of or a charge against the general credit of the Authority and shall not constitute or give rise to any pecuniary liability of the Authority; nevertheless, if the Authority shall incur any such pecuniary liability, then in such event the Company shall indemnify and hold the Authority harmless by reason thereof. The Company releases the Authority, the Fiduciaries, the Remarketing Agents and the Indexing Agents from, agrees that the Authority, the Fiduciaries, the Remarketing Agents and the Indexing Agents shall not be liable for, and agrees to indemnify and hold the Authority, the Fiduciaries, the Remarketing Agents and the Indexing Agents harmless from, any liability for any loss or damage to property or any injury to or death of any person that may be occasioned by any cause whatsoever arising out of the construction or operation of the Project. The Company agrees to indemnify and hold the Authority, its members, officers and employees, the Fiduciaries, the Remarketing Agents and the Indexing Agents harmless from any losses, costs, charges, expenses (including reasonable attorneys' fees and disbursements), judgments and liabilities incurred by it or them, as the case may be, in connection with any claims made, or any action, suit or proceeding instituted or threatened, in connection with the transactions contemplated by this Participation Agreement, the Bond Purchase Trust Agreement, any Remarketing Agreement or the Indenture (i) so long as, in the case of the Authority, its members, officers and employees, it or they, as the case may be, have acted in good faith to carry out the transactions contemplated by this Participation Agreement, the Remarketing Agreement, the Bond Purchase Trust Agreement and the Indenture and (ii) so long as, in the case of the Fiduciaries, the Indexing Agents and the Remarketing Agents, it or they shall not have acted negligently, in bad faith or with willful misconduct in carrying out the transactions contemplated by this Participation Agreement, the Remarketing Agreement, the Bond Purchase Trust Agreement and the Indenture. SECTION 4.09. Company to Pay Attorneys' Fees and Disbursements. If the Company shall default under any of the provisions of this Participation Agreement and the Authority or the Trustee or both of them shall employ attorneys or incur other expenses for the collection of payments due under this Participation Agreement or for the enforcement of performance or observance of any obligation or agreement on the part of the Company contained in this Participation Agreement, the Company will on demand therefor reimburse the reasonable fees of such attorneys and such other reasonable disbursements so incurred. SECTION 4.10. No Abatement of Administration Fees and Other Charges. It is understood and agreed that, so long as any Bonds are outstanding under the Indenture, Administration Fees and other charges payable to the Authority pursuant to this Participation Agreement shall continue to be payable at the times and in the amounts herein specified, whether or not the Project, or any portion thereof, shall have been destroyed by fire or other casualty, or title thereto or the use thereof shall have been taken by the exercise of the power of eminent domain, and that there shall be no abatement of any such Administration Fees and other charges by reason thereof. SECTION 4.11. Payment to Tender Agent. The Company shall timely pay, or cause to be paid, to the Tender Agent amounts equal to the amounts to be paid pursuant to Article V of the Indenture in respect of Bonds duly tendered or deemed tendered for purchase; but the obligation of the Company to make any such payment shall be deemed satisfied to the extent of any money available pursuant to a Liquidity Facility or from the proceeds of remarketing. 8 SECTION 4.12. Support Facilities. The Company has obtained the Policy and the Surety Bond. At all times on or prior to the Fixed Rate Conversion Date, except during any period when all the Bonds then outstanding are held by or for the account of the Company, a Liquidity Facility meeting the requirements of this Section 4.12 shall be in effect and, in the event that an Alternate Liquidity Facility is to replace a Liquidity Facility, the requirements of Section 6.02 of the Indenture with regard to such Liquidity Facility will be fulfilled. A Liquidity Facility shall expire no earlier than the earliest of (1) its stated expiration date, which shall be no earlier than the second business day after the next succeeding date when Bonds are subject to optional or mandatory tender for purchase not less than six months from its effective date, (2) when all available amounts have been drawn, (3) the second business day following the Fixed Rate Conversion Date, (4) on the effective date of any Alternate Liquidity Facility that replaces the then effective Liquidity Facility, (5) the earliest date on which no Bonds are outstanding and (6) twelve days after the Trustee receives notice from the Liquidity Provider that it is terminating the Liquidity Facility and directing the Trustee to cause a mandatory tender and purchase of the Bonds. ARTICLE V SPECIAL COVENANTS SECTION 5.01. No Warranty as to Suitability of Project. The Authority makes no warranty, either express or implied, with respect to actual or designed capacity of the Project, as to the suitability of the Project for the purposes specified in this Participation Agreement, as to the condition of the Project, or as to the suitability of the Project for the Company's purposes or needs. SECTION 5.02. Authority's Rights to Inspect Project and Plans and Specifications. The Authority shall have the right at all reasonable times to examine and inspect the Project and, to the extent reasonably available, the plans and specifications therefor and such other information and records relating to the Project as may be reasonably necessary to establish the qualification of the Project for financing under the Act and compliance with this Participation Agreement. SECTION 5.03. Company Consent to Amendment of Indenture. The Authority shall not enter into any indenture supplemental to or amendatory of the Indenture without the prior consent of the Company as evidenced by a certificate in writing signed by an Authorized Corporation Representative. SECTION 5.04. Tax Covenant. Notwithstanding any other provision hereof, the Company covenants and agrees that it will not take or authorize or permit any action to be taken with respect to the Project, or the proceeds of Bonds, including any amounts treated as proceeds of the Bonds for any purpose of Section 103 of the Code, which will result in the loss of the exclusion of interest on the Bonds from gross income for Federal income tax purposes under Section 103 of the Code (except for any Bond during any period while any such Bond is held by a person referred to in Section 147(a) of the Code). This provision shall control in case of conflict or ambiguity with any other provision of this Participation Agreement. In furtherance of such covenant and agreement, the Authority and the Company have entered into the Tax Regulatory Agreement and the Company hereby agrees to comply with the provisions thereof insofar as the Tax Regulatory Agreement relates to the Bonds. 9 SECTION 5.05. Company Agrees to Perform Obligations Imposed by Indenture. The Company agrees to perform such obligations as may be required of it by the provisions of the Indenture. SECTION 5.06. Maintenance of Office or Agency of Company. The Company will at all times keep in Poughkeepsie, New York, or another location in the State of New York, an office or agency where notices and demands to or upon the Company with respect to the Company Note and this Participation Agreement may be served, and will, from time to time, give written notice to the Trustee and the Authority of the location of such office or agency; and, in case the Company shall fail so to do, notices may be served and demands may be made at the principal office of the Trustee. SECTION 5.07. Further Assurances. Upon request of the Trustee in writing, the Company will make, execute, acknowledge and deliver, or cause to be made, executed, acknowledged and delivered, to the Trustee any and all such further acts, instruments or assurances as may be reasonably required for effectuating the intention of this Participation Agreement and the Company Note. SECTION 5.08. Payment of Taxes and Other Charges. The Company will promptly pay and discharge, or cause to be paid and discharged, as the same become due and payable, any and all taxes, rates, levies, assessments, and governmental liens, claims and other charges at any time lawfully imposed or accruing upon or against the Company or upon or against its properties or any part thereof, or upon the income derived therefrom or from the operations of the Company, provided that the Company shall not be required to pay or discharge, or cause to be paid or discharged, any such obligation, tax, rate, levy, assessment, lien, claim or other charge so long as in good faith and by appropriate legal proceedings the validity thereof shall be contested. SECTION 5.09. Maintenance of Properties. The Company will at all times make or cause to be made such expenditures for repairs, maintenance and renewals, or otherwise, as shall be necessary to maintain its properties in good repair, working order and condition as an operating system or systems to the extent necessary to meet the Company's obligations under the Public Service Law of the State of New York and this Participation Agreement; provided, however, that nothing herein contained shall be construed to prevent the Company from ceasing to own or operate any of its plants or any other property, if, in the judgment of the Company, it is advisable not to own or operate the same and the ownership or operation thereof shall not be essential to the maintenance and continued operation of the rest of the operating system or systems, and the security under the Indenture afforded by the Company Note will not be substantially impaired by the termination of such operation. SECTION 5.10. Insurance. The Company will keep or cause to be kept such parts of its properties as, in the opinion of an Authorized Corporation Representative (who shall for this purpose be a professional experienced in corporate risk management or a licensed professional engineer), are of an insurable nature, insured against loss or damage by fire or other casualties, the risk of which is customarily insured against by companies similarly situated and operating like properties, to the extent that property of similar character is customarily insured against by such companies, either (a) by reputable insurers or (b) in whole or in part in the form of reserves or of one or more insurance funds created by the Company, whether alone or with other corporations. 10 SECTION 5.11. Proper Books of Record and Account. The Company will at all times keep or cause to be kept proper books of record and account, in which full, true and correct entry will be made of all dealings, business and affairs of the Company, including proper and complete entries to capital or property accounts covering property worn out, obsolete, abandoned or sold, all in accordance with the requirements of any system of accounting or keeping accounts or the rules, regulations or orders prescribed by a regulatory commission with jurisdiction over the rates of the Company giving rise to more than 50% of the Company's gross revenues, or if there are no such requirements or rules, regulations or orders, then in compliance with generally accepted accounting principles. SECTION 5.12. Certificates as to Defaults. The Company shall file with the Trustee, on or before November 1 of each year, a certificate signed by an Authorized Corporation Representative stating that, to the best of his knowledge, information and belief, the Company has kept, observed, performed and fulfilled each and every one of its covenants and obligations contained in this Participation Agreement and in the Company Note and, to the best of his knowledge, information and belief, there does not exist at the date of such certificate any default by the Company under this Participation Agreement or any event of default hereunder or other event which, with notice or the lapse of time specified in Section 6.01, or both, would become an event of default or, if any such default or event of default or other event shall so exist, specifying the same and the nature and status thereof. SECTION 5.13. Company Not to Permit Hindrance or Delay of Payment of Company Note. The Company will not voluntarily do, suffer or permit any act or thing intended to hinder or delay the payment of the indebtedness evidenced by the Company Note. SECTION 5.14. Consolidation, Merger or Sale of Assets. (a) The Company will not consolidate with or permit itself to be merged into any individual, corporation, partnership, joint venture, trust, limited liability company or corporation, unincorporated organization or government or any political subdivision thereof, or any department, agency authority or other instrumentality of any government or political subdivision thereof (each, a "Person") or Persons or convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets (any such conveyance, transfer, lease or other disposition, a "Transfer"), except in the manner and upon the terms and conditions set forth in this Section 5.14. (b) Nothing contained in this Participation Agreement shall prevent (and this Participation Agreement shall be construed as permitting and authorizing) any lawful consolidation or merger of the Company with or into any other Person lawfully authorized to acquire and operate the properties of the Company, or a series of consolidations or mergers, or successive consolidations or mergers, in which the Company or its successor or successors shall be a party, or any Transfer to a Person lawfully authorized to acquire and operate the same; provided that upon any consolidation, merger or Transfer, the Person formed by such consolidation, or into which such merger may be made if other than the Corporation, or the Person that is a transferee in a Transfer shall execute and deliver to the Trustee an instrument, in form satisfactory to the Trustee, whereby such Person shall effectually assume the due and punctual payment of the principal of, and premium, if any, and interest on, the Company Note according to its tenor and the due and punctual performance and observance of all covenants and agreements to be performed by the Company pursuant to this Participation Agreement, the Tax Regulatory Agreement and the Company Note; and, thereupon, the Company shall be released 11 from its obligations under this Participation Agreement and under the Tax Regulatory Agreement and the Company Note. (c) Every such successor Person (or transferee Person under Section 7.06) shall possess, and may exercise, from time to time, each and every right and power of the Company hereunder and under the Note, in its name or otherwise; and any act, proceeding, resolution or certificate by any of the terms of this Participation Agreement, the Tax Regulatory Agreement and the Company Note required or provided to be done, taken and performed or made, executed or verified by any board or officer of the Company shall and may be done, taken and performed or made, executed or verified with like force and effect by the corresponding board or officer of any such successor Person. (d) If consolidation, merger or sale or other Transfer is made as permitted by this Section, the provisions of this Section shall continue in full force and effect and no further consolidation, merger or Transfer shall be made except in compliance with the provisions of this Section. SECTION 5.15. Financial Statements of Company. So long as the Company is a publicly-owned corporation, it shall (a) furnish the Trustee and Ambac with a copy of its annual report to shareholders for each year, beginning with the year 1998, on or before March 31 of the subsequent year or as soon thereafter as it is reasonably available, and (b) furnish to the Trustee, to Ambac, and to any owner of the Bonds if requested in writing by such owner, all financial statements which it sends to its shareholders generally. While the Municipal Bond Insurance Policy is in effect, the Company shall furnish to Ambac such additional information it may reasonably request. To the extent that the Company has entered into a continuing disclosure undertaking pursuant to Rule 15c2-12 under the Securities Exchange Act as in effect on the date of this Participation Agreement or any successor thereto (the "Rule") with respect to the Bonds, Ambac shall be included as party to receive notices of all material events (as described in paragraph (b)(5)(i)(C) of the Rule). SECTION 5.16. Compliance with Laws. The Company agrees to use its best efforts to comply in all material respects with all applicable laws, rules and regulations and orders of any governmental authority, non-compliance with which would materially adversely affect the Company's ability to perform its obligations hereunder or under the Tax Regulatory Agreement or the Company Note, except laws, rules, regulations or orders being contested in good faith or laws, rules, regulations or orders for which the Company has applied for variances from or exceptions to. ARTICLE VI DEFAULTS BY COMPANY; REMEDIES SECTION 6.01. Events of Default; Acceleration. In case one or more of the following events of default (each, an "event of default") shall have occurred and be continuing: (a) failure by the Company to pay when due any amount required to be paid under this Participation Agreement or the Company Note, which failure causes a default in the payment when due of the interest on any of the Bonds and continuance of such default for five Business Days; 12 (b) failure by the Company to pay when due any amount required to be paid under this Participation Agreement or the Company Note, which failure causes a default in the payment when due of the principal of, or premium, if any, on any of the Bonds; provided that, with respect to any payment of principal of, or premium, if any, payable on Bonds called for redemption, such failure by the Company shall continue for five Business Days; or (c) failure by the Company to pay when due any amount required to be paid under Section 4.11, which failure causes a default in the payment when due of any amount payable pursuant to Article V of the Indenture; (d) failure on the part of the Company duly to observe or perform any other of the covenants or agreements on the part of the Company contained in this Participation Agreement (other than failure to pay amounts required to be paid under Sections 4.04, 4.05, 4.07, 4.08, 4.09 or 4.10) or in the Company Note for a period of 90 days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Authority or the Trustee, provided, however, that, if such failure is such that it cannot be corrected within such 90-day period, it shall not constitute an event of default if corrective action is instituted by the Corporation within such 90-day period and diligently pursued until such failure is corrected; or (e) an Act of Bankruptcy relating to the Company; then, and in any such event, the Trustee with the consent of Ambac, may, and upon the written request of Ambac or the owners of at least 25% in aggregate principal amount of the Bonds then outstanding with the consent of Ambac shall, by notice in writing to the Company and Ambac and provided that the default has not theretofore been cured, declare the Company Note to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything contained in this Participation Agreement or in the Company Note to the contrary notwithstanding. Any amounts collected by the Trustee pursuant to action taken under this Section 6.01 shall be applied in accordance with the Indenture. In addition, if at any time the principal of the Bonds shall have been declared to be due and payable by acceleration pursuant to the terms of the Indenture, the Company Note shall thereupon become and be immediately due and payable, subject to such declaration with respect to the Bonds being rescinded or annulled pursuant to the Indenture. The right or obligation of the Trustee to make any such declaration as aforesaid, however, is subject to the condition that if, at any time after declaration, but before all the Bonds shall have matured by their terms, the principal of, premium, if any, and interest on, the Company Note which shall have become due and payable otherwise than by such declaration, and all other sums payable hereunder, except the principal of, and interest on, the Company Note which shall have become due and payable by such declaration, shall have been paid or provision satisfactory to the Trustee shall have been made for such payment, and the reasonable expenses of the Trustee and of the owners of the Bonds incurred pursuant to the Indenture shall have been paid, including reasonable attorneys' fees paid or incurred, and all defaults hereunder and under the Bonds or under the Indenture, except as to the payment of principal and interest due and payable solely by reason of such declaration, shall be made good or be secured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall be made therefor, then and in every such 13 case the owners of a majority in aggregate principal amount of the Bonds then outstanding, by written notice to the Authority and to the Trustee, may rescind such declaration and annul such default in its entirety, or, if the Trustee shall have acted in the absence of a written request of the owners of at least 25% in aggregate principal amount of the outstanding Bonds, and if there shall not have been theretofore delivered to the Trustee written direction to the contrary by the owners of at least 25% in aggregate principal amount of the outstanding Bonds, then any such declaration shall ipso facto be deemed to be rescinded and any such default and its consequences shall ipso facto be deemed to be annulled, but no such rescission and annulment shall extend to or affect any subsequent default or impair or exhaust any right or power consequent thereon. Anything in this Participation Agreement to the contrary notwithstanding, upon the occurrence and continuance of an event of default as defined herein, Ambac Assurance (if not in default) shall be entitled to control and direct the enforcement of all rights and remedies granted to the Bondholders or the Trustee for the benefit of the Bondholders under this Participation Agreement, including, without limitation: (i) the right to accelerate the principal of the Company Note as described in this Participation Agreement, and (ii) the right to rescind any declaration of acceleration, and Ambac Assurance shall also be entitled to approve all waivers of events of default. In case the Trustee shall have proceeded to enforce any right under this Participation Agreement or the Company Note and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Authority and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Company, the Authority and the Trustee shall continue as though no such proceedings had been taken. In the event of any Act of Bankruptcy, reorganization or liquidation, Ambac Assurance shall have the right to vote on behalf of all Bondholders absent a default by Ambac Assurance under the Policy. SECTION 6.02. Certain Events of Default; Authority or Trustee May Take Certain Actions. In case the Company shall have failed to comply with its obligations under Article III or under Sections 4.04, 4.08, 4.09, 4. 10 or 5.16, which event shall have continued for a period of 90 days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Authority or the Trustee, the Authority or the Trustee may take whatever action at law or in equity as may appear necessary or desirable to enforce performance or observance of any obligations or agreements of the Company under said Article or Sections. In case the Company shall have failed to comply with its obligations under Section 4.05, which event shall have continued for a period of 90 days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Trustee, the Trustee may take whatever action at law or in equity as may appear necessary or desirable to the Trustee to enforce performance or observance of any obligations or agreements of the Company under said Section. SECTION 6.03. Judicial Proceedings by Trustee. Upon the occurrence and continuance of an event of default (as defined in Section 6.01) the Trustee may, and upon the written request of the owners of at least 25 % in aggregate principal amount of the Bonds then outstanding and receipt by the Trustee of indemnity satisfactory to it shall, institute any actions or proceedings at law or in equity for the collection of any amounts then due and unpaid on the Company Note, 14 and may prosecute any such action or proceeding to judgment or final decree, and may collect in the manner provided by law the money adjudged or decreed to be payable. ARTICLE VII MISCELLANEOUS SECTION 7.01. Disposition of Amounts After Payment of Bonds. Any amounts determined by the Trustee to be remaining in the funds created under the Indenture after payment in full, or provision for payment in full, of principal of, and premium, if any, and interest on, all of the Bonds, in accordance with the provisions of the Indenture, and payment of all the fees, charges and expenses of the Authority, the Fiduciaries, the Remarketing Agents and the Indexing Agents in accordance with the Indenture and this Participation Agreement and any amounts required to be paid to the United States of America pursuant to the Tax Regulatory Agreement, shall belong to and be paid to the Company. SECTION 7.02. Notices. All notices, certificates, requests or other communications between the Authority, the Company and the Trustee required or permitted to be given under this Participation Agreement or under the Indenture (except as otherwise provided therein) shall be sufficiently given and shall be deemed given when delivered or mailed by first class mail, postage prepaid, addressed as follows: if to the Authority, at Corporate Plaza West, 286 Washington Avenue Extension, Albany, New York 12203, Attention: President; if to the Company, at 284 South Avenue, Poughkeepsie, New York 12601-4879, Attention: Treasurer; if to the Trustee, at 450 West 33rd Street, New York, N.Y. 10001, Attention: Global Trust Services; if to the Remarketing Agent, at the address set forth in the Remarketing Agreement; and if to the Tender Agent or Ambac to the addresses set forth for such persons in Section 17.09 of the Indenture. A duplicate copy of each notice, certificate, request or other communication given hereunder to the Authority, Ambac, the Company or the Trustee shall also be given to the others. The Company, Ambac, the Authority and the Trustee may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates, requests or other communications shall be sent. SECTION 7.03. Successors and Assigns. This Participation Agreement shall inure to the benefit of and shall be binding upon the Authority, the Company, the Fiduciaries, all providers of Support Facilities, the Remarketing Agents, the Indexing Agents and their respective successors and assigns. To the extent that this Participation Agreement confers upon or gives or grants to Ambac any right, remedy or claim under or by reason of this Participation Agreement, Ambac (if not in default under the Policy) is hereby explicitly recognized as being a third-party beneficiary hereunder and may enforce any such right remedy or claim conferred, given or granted hereunder. Nothing in this Participation Agreement expressed or implied is intended or shall be construed to confer upon, or to give or grant to, any Person, other than the Authority, the Fiduciaries, the providers of Support Facilities, the Remarketing Agents, the Indexing Agents, the Company and the Bondholders, any right, remedy or claim under or by reason of this Participation Agreement or any covenant, condition or stipulation hereof, and all covenants, stipulations, promises and agreements in this Participation Agreement contained by and on behalf of the Company shall be for the sole and exclusive benefit of the Authority, the Fiduciaries, all providers of Support Facilities, the Remarketing Agents, the Indexing Agents, and the Bondholders. 15 SECTION 7.04. References to the Liquidity Facility. After establishment of a Fixed Rate for the Bonds and upon receipt by the Trustee of notice from the Liquidity Provider that all amounts payable to the Liquidity Provider with respect to the Liquidity Facility have been received, all references in this Participation Agreement to the Liquidity Facility or the Liquidity Provider shall be ineffective. SECTION 7.05. Amendment of Participation Agreement. This Participation Agreement may not be amended except by an instrument in writing signed by the parties hereto and upon compliance with the applicable provisions of Sections 14.06, 14.07 and 14.08 of the Indenture. Subject to the provisions of Section 14.06 of the Indenture, any provision of this Participation Agreement expressly recognizing or granting rights in or to Ambac Assurance may not be amended in any manner which affects the rights of Ambac Assurance hereunder without the prior written consent of Ambac Assurance. SECTION 7.06. Assignment and Transfer. The Authority shall assign its rights under and interest in this Participation Agreement (except the rights and interest of the Authority under Article III and Sections 4.04, 4.08, 4.09, 4.10 and 5.16, clause (a) of this Section 7.06, and insofar as the obligations of the Company under Section 4.07 relate to taxes and assessments imposed upon the Authority and not the Fiduciaries, Section 4.07 thereof), subject to the provisions of this Participation Agreement relating to the amendment thereof, to the Trustee pursuant to the Indenture, as security for payment of the principal of, and premium, if any, and interest on, the Bonds. In addition, the Trustee shall have the same power as the Authority to enforce from time to time the rights of the Authority set forth in Article III and Section 5.16, subject to the provisions of this Participation Agreement relating to the amendment hereof. Except as provided in this Section 7.06, the Authority will not sell, assign, transfer, convey or otherwise dispose of its interest in this Participation Agreement during the term of this Participation Agreement. The Company may convey, transfer, lease or otherwise dispose of the Project and be released from its obligations under this Participation Agreement, the Tax Regulatory Agreement and the Company Note, in a transaction not constituting a Transfer as defined in Section 5.14(a), subject to the following: (a) The Authority shall have consented to the conveyance, transfer, lease or other disposition upon receipt of legal opinions and other documents satisfactory to it under the circumstances. (b) The Person that is a transferee of the Project shall execute and deliver to the Trustee an instrument, in form satisfactory to the Trustee, whereby such Person shall effectually assume the due and punctual payment of the principal of, and premium, if any, and interest on, the Company Note according to its tenor and the due and punctual performance and observance of all covenants and agreements to be performed by the Company pursuant to this Participation Agreement, the Tax Regulatory Agreement and the Company Note. (c) If a disposition is made as permitted by this Section, the provisions of this Section and Section 5.14 shall continue in full force and effect and no further disposition shall be made except in compliance with the provisions of this Section or Section 5.14. 16 SECTION 7.07. Participation Agreement Supersedes Any Prior Agreements. This Participation Agreement and the related documents identified herein supersede any other prior agreements or understandings, written or oral, between the parties with respect to the transactions contemplated hereby. SECTION 7.08. Counterparts. This Participation Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but such counterparts shall together constitute but one and the same Participation Agreement. SECTION 7.09. Severability. If any clause, provision or section of this Participation Agreement is held illegal, invalid or unenforceable by any court or administrative body, such Participation Agreement shall be construed and enforced as if such illegal or invalid or unenforceable clause, provision or section had not been contained in this Participation Agreement. In case any agreement or obligation contained in this Participation Agreement shall be held to be in violation of law, then such agreement or obligation shall be deemed to be the agreement or obligation of the Authority or the Company, as the case may be, to the full extent permitted by law. SECTION 7.10. NEW YORK LAW TO GOVERN. THE DOMESTIC LAW OF THE STATE OF NEW YORK SHALL GOVERN THE CONSTRUCTION OF THIS PARTICIPATION AGREEMENT. 17 IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be duly executed as of the day and year first written above. NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY By: /s/ Paul J. Ganci _____________________ President (SEAL) ATTEST: Vice President and Secretary CENTRAL HUDSON GAS & ELECTRIC CORPORATION By: /s/ Steven V. Lant _______________________ Chief Financial Officer, Treasurer and Secretary (SEAL) ATTEST: /s/ William P. Reilly _______________________ Assistant Secretary 18 EXHIBIT A (To Participation Agreement dated as of December 1, 1998, between New York State Energy Research and Development Authority and Central Hudson Gas & Electric Corporation) CENTRAL HUDSON GAS & ELECTRIC CORPORATION $16,700,000 PROMISSORY NOTE FOR POLLUTION CONTROL REFUNDING REVENUE BONDS (CENTRAL HUDSON GAS & ELECTRIC CORPORATION PROJECT), 1998 SERIES A Central Hudson Gas & Electric Corporation (the "Company"), a New York corporation, for value received, hereby promises to pay, on or before the dates set forth below, the amounts set forth below, to The Chase Manhattan Bank, New York, New York, as trustee or its successor or successors as trustee (the "Trustee") under the Trust Indenture dated as of December 1, 1998, between the New York State Energy Research and Development Authority (the "Authority"), a body corporate and politic, constituting a public benefit corporation, established and existing under and by virtue of the laws of the State of New York, and the Trustee. Such Trust Indenture, as it may be amended or supplemented from time to time, is herein called the "Indenture." Unless otherwise defined herein, the terms used in this promissory note (the " Company Note ") which are defined in Section 1.01 of the Indenture shall have the meanings, respectively, herein which such terms are given in said Section 1.01 of the Indenture. This Company Note is issued pursuant to the Participation Agreement in order to evidence the obligation of the Company to the Authority to repay the advance of the proceeds of the Bonds. In accordance with the Participation Agreement, the Authority has authorized and directed the Company to issue this Company Note payable to the order of the Trustee as security for the payment of principal of, premium, if any, and interest on, the Bonds. The rights and interest of the Authority under the Participation Agreement (except the rights and interest of the Authority under Article III and Sections 4.04, 4.08, 4.09, 4.10 and 5.16 thereof, clause (a) of Section 7.06, and insofar as the obligations of the Company under Section 4.07 relate to taxes and assessments imposed upon the Authority and not the Fiduciaries, Section 4.07 thereof), subject to the provisions of the Participation Agreement relating to the amendment thereof, have been assigned to the Trustee pursuant to the Indenture. In addition, the Authority has granted the Trustee the same power as the Authority to enforce from time to time the rights of the Authority set forth in said Article III and Section 5.16, subject to the provisions of the Participation Agreement relating to the amendment thereof. All of the terms, conditions and provisions of the A-1 Participation Agreement are, by this reference thereto, incorporated herein as part of this Company Note. This Company Note shall be payable as to principal, premium, if any, and interest as follows: (a) On or before each Interest Payment Date, commencing June 1, 1999, a sum which together with other money then available for such purpose in the Bond Fund will enable the Trustee to pay the interest on the Bonds coming due on such date; (b) On or before any redemption date for the Bonds (other than a redemption date pursuant to Section 5.06 of the Indenture), a sum which together with other money then available for such purpose in the Bond Fund will enable the Trustee to pay the principal of, premium, if any, and interest on the Bonds which are to be redeemed on such date; and (c) On or before December 1, 2028, a sum which together with other money then available for such purpose in the Bond Fund will enable the Trustee to pay the outstanding principal amount of the Bonds; provided that, if the Bonds are redeemed pursuant to Section 5.06 of the Indenture, the amounts that would otherwise have been payable on this Company Note if not for such redemption, shall continue to be payable at the times and in the amounts set forth above as if such redemption had not occurred; and provided further that if the Bonds are redeemed pursuant to Section 5.06 of the Indenture the Company shall have the right at any time thereafter to prepay this Company Note by paying the amount due on this Company Note at the time of such prepayment together with unpaid interest accrued thereon to the date of such prepayment. The obligation of the Company to make any payment of principal of, and premium, if any, and interest on, this Company Note shall be deemed satisfied and discharged to the extent of the corresponding payment made by a Liquidity Provider (other than as Purchase Price). All payments of principal of, and premium, if any, and interest on, this Company Note shall be made by wire transfer in immediately available funds to the Trustee at its corporate trust office, 450 West 33rd Street, New York, N.Y. 10001, ABA Routing Number: F021000021, to Account No. 323-332749; Attn.: NYSERDA/Central Hudson 1998 Series A, or to such different address or account as the Trustee may from time to time designate, on or before each date on which such principal, premium, if any, or interest is due in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. The Company has agreed in the Participation Agreement that if for any reason Company Note Payments, together with other moneys held by the Trustee and then available for such purpose (including money paid by a Liquidity Provider (other than as Purchase Price)), would not be sufficient to make the corresponding payments of principal of, and premium, if any, and A-2 interest on, the Bonds when such payments are due, the Company will pay the amounts required from time to time to make up any such deficiency. In the event that payment has been made in respect of the principal of and premium, if any, and interest on, all of the Bonds, or provision therefor has been made in accordance with the Indenture, then this Company Note shall be deemed paid in full and shall be cancelled and returned to the Company; provided that this Company Note shall not be deemed paid in full if the Bonds are redeemed pursuant to Section 5.06 of the Indenture. No reference herein to the Participation Agreement shall impair the obligation of the Company to pay the principal of and premium, if any, and interest on this Company Note at the time and place and in the amounts herein prescribed, which obligation is absolute, irrevocable and unconditional and is not subject to any defense (other than payment) or any right of set-off, counterclaim or recoupment for any reason, including, without limitation, any breach by the Authority of any obligation to the Company, whether under the Participation Agreement or otherwise, or inaccuracy of any representation by the Authority to the Company under the Participation Agreement, or any indebtedness or liability at any time owing to the Company by the Authority or any failure to complete the Project or the destruction by fire or other casualty of the Project or any portion thereof, or the taking of title thereto or the use thereof by the exercise of the power of eminent domain. In case of an event of default (as defined in Section 6.01 of the Participation Agreement), the principal of and interest to the date of payment of this Company Note may be declared immediately due and payable as provided in the Participation Agreement. In addition, if at any time the principal of the Bonds shall have been declared to be due and payable by acceleration pursuant to the terms of the Indenture, this Company Note shall thereupon become and be immediately due and payable, subject to such declaration with respect to the Bonds being annulled pursuant to the Indenture. This Company Note may not be amended except by an instrument in writing signed by the Company, by the Authority and by the Trustee, on behalf of the owners of the Bonds, in the manner and subject to the conditions provided in the Indenture. This Company Note may not be transferred by the Trustee except to effect an assignment to a successor Trustee under the Indenture or pursuant to Section 5.06 of the Indenture. THIS COMPANY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAW OF THE STATE OF NEW YORK. Presentment, demand, protest and notice of dishonor are hereby expressly waived. A-3 IN WITNESS WHEREOF, the Company has caused this Company Note to be duly executed and delivered as of December 1, 1998. CENTRAL HUDSON GAS & ELECTRIC CORPORATION By: /s/ Steven V. Lant ________________________________ (SEAL) Chief Financial Officer, Treasurer and Secretary ATTEST: /s/ William P. Reilly ____________________________ Assistant Secretary EX-10 7 CHANGE-OF-CONTROL SEVERANCE POLICY Exhibit (10)(iii)14) CHANGE-OF-CONTROL SEVERANCE POLICY Introduction The Board of Directors of Central Hudson Gas & Electric Corporation recognizes that the Company may experience a Change of Control, and that this possibility and the uncertainty it creates may result in the loss or distraction of employees of the Company to the detriment of the Company and its shareholders. The Board considers the avoidance of such loss and distraction to be essential to protecting and enhancing the best interests of the Company and its shareholders. The Board also believes that when a Change of Control is perceived as imminent, or is occurring, the Board should be able to receive and rely on disinterested service from employees regarding the best interests of the Company and its shareholders without concern that employees might be distracted or concerned by the personal uncertainties and risks created by the perception of an imminent or occurring Change of Control. In addition, the Board believes that it is consistent with the Company's employment practices and policies and in the best interests of the Company and its shareholders to treat fairly its employees whose employment terminates in connection with or following a Change of Control. Accordingly, the Board has determined that appropriate steps should be taken to assure the Company of the continued employment and attention and dedication to duty of its employees and to seek to ensure the availability of their continued service, notwithstanding the possibility or occurrence of a Change of Control. Therefore, in order to fulfill the above purposes, the following plan has been developed and is hereby adopted. ARTICLE I ESTABLISHMENT OF PLAN As of the Effective Date, the Company hereby establishes the Central Hudson Gas & Electric Corporation Change-of-Control Severance Policy, as set forth in this document. ARTICLE II DEFINITIONS As used herein the following words and phrases shall have the following respective meanings (unless the context clearly indicates otherwise): (a) Base Salary. The amount a Participant is entitled to receive as wages or salary on an annualized basis, excluding all bonus, overtime, incentive compensation, payable by the Company or any of its affiliates as consideration for the Participant's services. (b) Board. The Board of Directors of the Company. (c) Cause. A termination for "Cause" shall have occurred where a Participant is terminated because of (A) the willful and continued failure of the Participant to perform substantially the Participant's duties with the Company or any of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness); or (B) the willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. (d) Change of Control. Any of the following events: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (a) the then out standing shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (d) any acquisition pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 2(c); or (ii) Individuals who, as of the date of this Plan, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date of this Plan whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another entity (a "Corporate Transaction"), in each case, unless, following such -2- Corporate Transaction, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Corporate Transaction) beneficially own, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Corporate Transaction and (C) at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Corporate Transaction; or (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (e) Code. The Internal Revenue Code of 1986, as amended from time to time. (f) Committee. The Committee on Compensation and Succession of the Board. (g) Company. Central Hudson Gas & Electric Corporation and any successor thereto. (h) Date of Termination. As defined in Section 4.2(a). (i) Disability. A termination for "Disability" shall have occurred where a Participant is terminated because of a disability entitling him or her to long-term disability benefits under the applicable long-term disability plan of the Company or any of its affiliates. (j) Effective Date. Such date as the Board shall designate in its resolution approving the Plan. -3- (k) Employee. Any regular, full-time or part-time employee of the Company or any of its affiliates. (l) Good Reason. With respect to any Participant, the occurrence of any of the following events after a Change of Control: (A) a reduction in the Participant's Base Salary below the Required Base Salary; (B) a material and adverse change in the Participant's duties and responsibilities in comparison to the duties and responsibilities enjoyed by the Participant immediately prior to the Change of Control; (C) a material reduction in the aggregate level of the incentive compensation and employee benefits offered to the Participant in comparison to the incentive compensation and benefits arrangements enjoyed by the Participant immediately prior to the Change of Control; or (D) a requirement that the Participant be based at a location outside the Company's service territory (as it existed immediately prior to the Change of Control) unless the Participant is provided with relocation benefits at least as favorable as those that would have been provided under the Company's relocation policy as in effect immediately before the Change of Control. (m) Multiple. As defined in Section 4.2(a). (n) Participant. An Employee who meets the eligibility requirements of Section 3.1. (o) Plan. The Central Hudson Gas & Electric Corporation Change-of-Control Severance Policy. (p) Qualified Transfer. With respect to any Participant, either (i) a sale, distribution or other disposition (a "Sale") by the Company or an affiliate of the Company of the subsidiary, branch or other business unit in which the Participant was employed before such sale, distribution or disposition, if the Participant is offered employment with the purchaser of such subsidiary, branch or other business unit or the corporation or other entity which is the owner thereof, or (ii) a transfer of the Participant to the employ of a subsidiary or other affiliate of the Company (a "Transfer"), in either case on substantially the same terms and conditions under which the Participant worked immediately before the Sale or Transfer, including, without limitation, base salary, duties and responsibilities, program of benefits and location where based, and a legally binding agreement or plan covering such Participant providing that upon a termination of employment with the subsidiary, affiliate, branch or business unit (or the corporation or other entity which is the owner thereof) or any successor of the kind described in Article VI of this Plan, within two years after the Change of Control of the Company, the Participant's employer or any successor will pay to such former Participant an amount equal to the Separation Benefit and other benefits that such former Participant would have received under the Plan had he or she been a Participant at the time of such termination, and which new employer plan or agreement treats service with the Company and its affiliates (irrespective of whether the affiliate was an affiliate of the Company or the Employee was a Participant at the time of such service) and the new employer as continuous service for purposes of calculating -4- separation benefits. (q) Release. As defined in Section 4.5. (r) Required Base Salary. With respect to any Participant, the higher of (x) the Participant's Base Salary as in effect immediately prior to the Change of Control and (y) the Participant's highest Base Salary in effect at any time thereafter. (s) Retirement. A termination by "Retirement" shall have occurred where a Participant's termination is due to his or her voluntary normal or early retirement under a pension plan sponsored by the Company or any of its affiliates, as defined in such plan. (t) Separation Benefit. The benefits payable in accordance with Section 4.2 of the Plan. (u) Weekly Salary. The Participant's Required Base Salary divided by 52. (v) Year of Service. A twelve-month continuous period of employment, including periods of authorized vacation, authorized leave of absence and short-term disability leave, with the Company or any of its affiliates or their predecessors or successors. ARTICLE III ELIGIBILITY 3.1 Participation. Each individual (i) who is an Employee of the Company, (ii) who is not a party to an employment agreement with the Company that becomes effective in the event of a Change of Control, and (iii) who is not covered by a collective bargaining agreement shall be a Participant in the Plan. The Committee may also designate any other Employee as a Participant. Notwithstanding the foregoing, the Committee may cause any Employee to cease to be a Participant at any time prior to the occurrence of a Change of Control, provided that such action is not taken in connection with or in anticipation of a Change of Control. 3.2 Duration of Participation. A Participant shall cease to be a Participant in the Plan when he or she ceases to be an Employee of the Company or otherwise ceases to be eligible pursuant to Section 3.1, unless the Committee specifically determines that the Employee shall remain a Participant. Notwithstanding the foregoing, a Participant who is entitled, as a result of ceasing to be an Employee of the Company, to payment of a Separation Benefit or any other amounts under the Plan shall remain a Participant in the Plan until the full amount of the Separation Benefit and any other amounts payable under the Plan have been paid to the Par ticipant. -5- ARTICLE IV SEPARATION BENEFITS 4.1 Right to Separation Benefit. A Participant shall be entitled to receive from the Company a Separation Benefit in the amount provided in Section 4.2 if a Change of Control has occurred and the Participant's employment is terminated: (i) by action of the Company or any of its affiliates, unless the termination is because of the Participant's death, Disability, or Retirement, for Cause, or as a result of a Qualified Transfer; or (ii) by the Participant within 90 days after the occurrence of an event constituting Good Reason; provided, in either event, that either (A) such termination occurs after such Change of Control and on or before the second anniversary thereof, or (B) the termination described in clause (i), or the event constituting Good Reason giving rise to the termination described in clause (ii), as applicable, occurs before such Change of Control but the Participant can reasonably demonstrate that such termination or event, as applicable, occurred at the request of a third party who had taken steps reasonably calculated to effect a Change of Control or otherwise in contemplation of or in connection with a Change of Control. 4.2 Separation Benefits. (a) In General. If a Participant's employment is terminated in circumstances entitling him or her to a Separation Benefit as provided in Section 4.1, the Company shall pay such Participant, within ten days of the date such termination takes effect (the "Date of Termination") or, if later, on the date the Participant's Release ceases to be revocable, a Separation Benefit in a lump sum in cash equal to the Multiple times the Weekly Salary, reduced by any severance pay or pay in lieu of notice required to be paid to such Employee under applicable law. The "Multiple" for a particular Participant means three times the number of Years of Service completed by the Participant as of the Date of Termination, but subject to the following minimum and maximum Multiples, depending upon the Participant's salary grade as of the Date of Termination or, if higher, as of immediately before the Change of Control: Salary Grade Minimum Multiple Maximum Multiple - ------------ ---------------- ---------------- IX and X 8 104 VIII through V 6 75 IV through I and executive and 3 30 human resources secretaries -6- (b) Welfare Benefits. In addition, a Participant entitled to a Separation Benefit will continue to be provided, for the period of two years beginning on the Date of Termination, with medical, life insurance and other welfare benefits, comparable in scope and cost to the Participant to the coverage that would have been provided if the Participant had continued to be an Employee, for the Separation Period; provided, that if the Participant becomes re-employed with another employer and is eligible to receive any such benefits from such employer, the benefits provided pursuant to this sentence shall be secondary to those provided under such other plans. 4.3 Other Benefits Payable. The Separation Benefit provided pursuant to Section 4.2 above shall be provided in addition to, and not in lieu of, all other accrued or vested or earned but deferred compensation, rights, options or other benefits which may be owed to a Participant upon or following termination, including but not limited to accrued vacation or sick pay, amounts or benefits payable under any bonus or other compensation plans, stock purchase plan, life insurance plan, health plan, disability plan or similar or successor plan. 4.4 Certain Reduction of Payments by the Company. (a) For purposes of this Section 4.4:(i) a "Payment" shall mean any payment or distribution in the nature of compensation to or for the benefit of a Participant, whether paid or payable pursuant to this Plan or otherwise; (ii) "Separation Payment" shall mean a Payment paid or payable pursuant to this Plan (disregarding this Section); (iii) "Present Value" shall mean such value determined in accordance with Sections 280G(b)(2)(A)(ii) and 280G(d)(4) of the Code; and (iv) "Reduced Amount" shall mean an amount expressed in Present Value that maximizes the aggregate Present Value of Separation Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. (b) Anything in the Plan to the contrary notwithstanding, in the event the Accounting Firm (as defined below) shall determine that receipt of all Payments would subject the Participant to tax under Section 4999 of the Code, the aggregate Separation Payments shall be reduced (but not below zero) to meet the definition of Reduced Amount. The "Accounting Firm" means a major accounting firm with expertise in such matters designated by the Participant. (c) If the Accounting Firm determines that aggregate Separation Payments should be reduced to the Reduced Amount, the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof, and the Participant may then elect, in his or her sole discretion, which and how much of the Separation Payments shall be eliminated or reduced (as long as after such election the Present Value of the aggregate Separation Payments equals the Reduced Amount), and shall advise the Company in writing of his or her election within ten days of his or her receipt of notice. If no such election is made by the Participant within such ten-day period, the Company may elect which of such Separation Payments shall be eliminated or reduced (as long as after such election the Present Value of the -7- aggregate Separation Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. All determinations made by the Accounting Firm under this Section shall be binding upon the Company and the Participant and shall be made within 60 days of a termination of employment of the Participant. As promptly as practicable following such de termination, the Company shall pay to or distribute for the benefit of the Participant such Separation Payments as are then due to the Participant under this Plan and shall promptly pay to or distribute for the benefit of the Participant in the future such Separation Payments as become due to the Participant under this Plan. (d) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that amounts will have been paid or distributed by the Company to or for the benefit of a Participant pursuant to this Plan which should not have been so paid or distributed ("Overpayment") or that additional amounts which will have not been paid or distributed by the Company to or for the benefit of a Participant pursuant to this Plan could have been so paid or distributed ("Underpayment"), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Participant which the Accounting Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of a Participant shall be treated for all purposes as a loan to the Participant which the Participant shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by a Participant to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which the Participant is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Participant together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. (e) All fees and expenses of the Accounting Firm in implementing the provisions of this Section 4.4 shall be borne by the Company. 4.5 Release and Waiver. Notwithstanding any other provision of this Plan, the right of a Participant to receive Separation Benefits hereunder shall be subject to the execution by the Participant of a general release of claims in favor of the Company in form and substance reasonably satisfactory to the Company (a "Release"); provided, that the Release shall not require the Participant to relinquish all or any portion of his or her Separation Benefit, nor to relinquish or waive any rights or benefits described in Section 4.3 above that have vested as of the Date of Termination, nor impose any noncompetition or other covenants or obligations on the Participant that were not in effect prior to the Date of Termination. -8- 4.6 Payment Obligations Absolute. Upon a Change of Control, subject to Sections 4.4 and 4.5, the obligations of the Company to pay the Separation Benefits described in Section 4.2 shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company or any of its Subsidiaries may have against any Participant. In no event shall a Participant be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to a Participant under any of the provisions of this Plan, nor shall the amount of any payment hereunder be reduced by any compensation earned by a Participant as a result of employment by another employer. ARTICLE V SUCCESSOR TO COMPANY This Plan shall bind any successor of the Company, its assets or its businesses (whether direct or indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing provision or by operation of law be bound by this Plan, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. The term "Company," as used in this Plan, shall mean the Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by this Plan. ARTICLE VI DURATION, AMENDMENT AND TERMINATION 6.1 Duration. If a Change of Control has not occurred, this Plan shall expire five years from the Effective Date designated by the Board, unless sooner terminated as provided in Section 7.2, or unless extended for an additional period or periods by resolution adopted by the Board. If a Change of Control occurs, this Plan shall continue in full force and effect and shall not terminate or expire until after all Participants who become entitled to any payments hereunder shall have received such payments in full and all adjustments required to be made pursuant to Section 4.4 have been made. 6.2 Amendment and Termination. The Plan may be terminated or amended in any respect by resolution adopted by a majority of the Board, unless a Change of Control has previously occurred. However, in connection with or in anticipation of a Change of Control, this Plan may not be terminated or amended in any manner which would adversely affect the rights or potential rights of Participants. If a Change of Control occurs, the Plan shall no longer be subject to amendment, change, substitution, deletion, revocation or termination in any respect which ad versely affects the rights of Participants. -9- 6.3 Form of Amendment. The form of any amendment or termination of the Plan shall be a written instrument signed by a duly authorized officer or officers of the Company, certifying that the amendment or termination has been approved by the Board. An amendment of the Plan in accordance with the terms hereof shall automatically effect a corresponding amendment to all Participants' rights hereunder. A termination of the Plan shall in accordance with the terms hereof automatically effect a termination of all Participants' rights and benefits hereunder. ARTICLE VII MISCELLANEOUS 7.1 Indemnification. If a Participant institutes any legal action in seeking to obtain or enforce, or is required to defend in any legal action the validity or enforceability of, any right or benefit provided by this Plan, the Company or the Employer shall reimburse the Participant for all reasonable costs and expenses relating to such legal action, including reasonable attorney's fees and expenses incurred by such Participant, unless a court or other finder of fact having jurisdiction thereof makes a determination that the Participant's position was frivolous. In no event shall the Participant be required to reimburse the Company for any of the costs and expenses relating to such legal action. The Company's obligations under this Section 7.1 shall survive the termination of this Plan. 7.2 Employment Status. This Plan does not constitute a contract of employment or impose on the Participant or the Company and its affiliates any obligation to retain the Participant as an Employee, to change the status of the Participant's employment, or to change the Company's policies or those of its affiliates regarding termination of employment. 7.3 Validity and Severability. The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 7.4 Governing Law. The validity, interpretation, construction and performance of the Plan shall in all respects be governed by the laws of the State of New York, without reference to principles of conflict of law. -10- EX-10 8 EMPLOYMENT AGREEMENT Exhibit (10)(iii)15) EMPLOYMENT AGREEMENT AGREEMENT by and between Central Hudson Gas & Electric Corporation, a New York corporation (the "Company") and _________ _________ (the "Executive"), dated as of the 1st day of December, 1998. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on July 31, 1999; provided, however, that commencing on July 31, 1999, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate one year from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended; provided, that such a notice shall be null and void if it is reasonably demonstrated by the Executive that such notice was given (i) at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise in connection with or anticipation of a Change of Control. (c) The "Multiple" shall mean three. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from 2 such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location within the Company's service territory (as it existed immediately before the Effective Date); provided, that the Executive may be required to relocate outside such service territory if the Company provides the Executive with relocation benefits at least as favorable as those that would have been provided under the Company's relocation policy as in effect immediately before the Effective Date. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall 3 not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's highest bonus under the Company's Management Incentive Plan, or Executive Compensation Plan, as applicable, or any comparable annual bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the 4 Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office and support staff at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii)Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has 5 occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. 6 (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance 7 which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) the Multiple and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; (ii) for a number of years after the Executive's Date of Termination equal to the Multiple, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to 8 them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the expiration of a number of years after the Date of Termination equal to the Multiple and to have retired on the last day of such period; (iii) the Company shall, at its sole expense as incurred, provide the Executive with out placement services from a recognized out placement service provider, the scope of which shall be selected by the Executive in his sole discretion but the cost to the Company of which shall not exceed $30,000; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate as of the 9 Disability Effective Date, without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to 10 pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company or its affiliates to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a major accounting firm with expertise in such matters designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that 11 Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one 12 or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. 13 (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: ---------------------------- ---------------------------- ---------------------------- If to the Company: Central Hudson Gas & Electric Corporation 284 South Avenue Poughkeepsie, New York 12601-4879 Attention: Chief Executive Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 14 (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement; provided, that this Agreement may not be terminated by the Company if it is reasonably demonstrated by the Executive that such termination (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof, other than the letter dated ____________ regarding confidentiality. 15 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. _____________________________________ [Executive] CENTRAL HUDSON GAS & ELECTRIC CORPORATION By _______________________________- 16 EX-10 9 EMPLOYMENT AGREEMENT-PJ GANCI Exhibit (10)(iii)16) EMPLOYMENT AGREEMENT AGREEMENT by and between Central Hudson Gas & Electric Corporation, a New York corporation (the "Company") and Paul J. Ganci (the "Executive"), dated as of the first day of December, 1998. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on July 31, 1999; provided, however, that commencing on July 31, 1999, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate one year from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended; provided, that such a notice shall be null and void if it is reasonably demonstrated by the Executive that such notice was given (i) at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise in connection with or anticipation of a Change of Control; and provided, further, that in any event the Change of Control Period shall end on May 1, 2003. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined -2- voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on May 1, 2003 (the "Employment Period"). It is understood and agreed that the termination of the Executive's employment for any reason, whether before, at or after the end of the Employment Agreement, shall be considered to be a retirement of the Executive for all purposes of the employee benefit plans, practices, policies and programs of the Company and its affiliated companies. 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location within the Company's service territory (as it existed immediately before the Effective Date); provided, that the Executive may be required to relocate outside such service territory if the Company provides the Executive with relocation benefits at least as favorable as those that would have been provided under the Company's relocation policy as in effect immediately before the Effective Date. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a -3- monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's highest bonus under the Company's Management Incentive Plan, or Executive Compensation Plan, as applicable, or any comparable annual bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more -4- favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office and support staff at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. -5- (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) By the Executive. The Executive's employment may be terminated by the Executive for any reason. (d) Notice of Termination. Any termination by the Company for Cause or by the Executive for any reason shall be communicated by Notice of Termination to other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause shall not waive any right of the Company hereunder or preclude the Company from asserting such fact or circumstance in enforcing the Company's rights hereunder. -6- (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for any reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for any reason: (i) until the last day of the Employment Period, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until May 1, 2003 and to have retired on May 1, 2003; and (ii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations (as defined below) and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and -7- affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. The term "Accrued Obligations" means the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any accrued vacation pay, in each case to the extent not theretofore paid. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate as of the Disability Effective Date, without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits, and except as provided in Section 6(e). Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. (e) Retirement Benefits. Notwithstanding the foregoing and the provisions of the Company's Executive Deferred Compensation Plan and Retirement Benefit Restoration Plan (together, the "Nonqualified Plans"), following the termination of the Executive's employment during the Employment Period for any reason other than by the Company for Cause or as a result of the Executive's death, the Executive and his beneficiaries shall receive benefits under the Nonqualified Plans (the "Guaranteed Retirement Benefits") such that the total benefits received under the Nonqualified Plans (as modified hereby), together with the -8- actual benefits they receive under the Company's Retirement Income Plan and any successor thereto in which the Executive participates (collectively, the "Qualified Plan"), equal the benefits the Executive and his beneficiaries would have received if (A) the Executive had continued to be employed through May 1, 2003, with the compensation and benefits required by Section 4 of this Agreement except that it shall be assumed that the Executive's base salary and other cash compensation would each have increased by 10% annually on each October 1 from and after the actual Date of Termination, (B) the Executive had then retired on May 1, 2003, and (C) the Nonqualified Plans and Qualified Plan had remained in effect without amendment adverse to the Executive and his beneficiaries after the Effective Date (but taking into account any amendments after the Effective Date that are favorable to the Executive and his beneficiaries). The Guaranteed Retirement Benefits shall begin to be paid immediately following the Date of Termination except to the extent otherwise elected by the Executive in accordance with the applicable plans. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefit or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of an contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company or its affiliates to or for the benefit of the Executive (whether paid or payable or -9- distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a major accounting firm with expertise in such matters designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 busines days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the -10- Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the company shall determine; provided, however, that if the company directs the executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a -11- determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. ---------------- (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: -12- If to the Executive: Paul J. Ganci 50 Pleasant Ridge Poughkeepsie, New York 12603 If to the Company: Central Hudson Gas & Electric Corporation 284 South Avenue Poughkeepsie, New York 12601-4879 Attention: Chairman of the Board or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement; provided, that this Agreement may not be terminated by the Company if it is reasonably demonstrated by the Executive that such termination (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof, other than the letter dated May 30, 1990 regarding confidentiality. -13- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Paul J. Ganci _________________ Paul J. Ganci CENTRAL HUDSON GAS & ELECTRIC CORPORATION By /s/ John E. Mack III ____________________ -14- EX-10 10 SECOND AMENDMENT-EXEC DEFERRED COMPENSATION PLAN Exhibit (10)(iii)17) FORM OF SECOND AMENDMENT TO CENTRAL HUDSON GAS & ELECTRIC CORPORATION EXECUTIVE DEFERRED COMPENSATION PLAN WHEREAS, Central Hudson Gas & Electric Corporation (the "Company") established, effective March 1, 1992, its Executive Deferred Compensation Plan (the "Plan"), and amended the Plan effective December 17, 1993; and WHEREAS, the Company now desires to further amend the Plan to protect benefits thereunder in the event of a Change of Control of the Company; NOW, THEREFORE, the Company hereby amends the Plan as set forth below, effective as of December 1, 1998. 1. Article I of the Plan is hereby amended by inserting a new Section 1.07 at the end thereof, reading in its entirety as follows: 1.07 "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.07; or (b) Individuals who, as of December 1, 1998, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Busiess Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 2. Article II of the Plan is hereby amended by adding a new Section 2.05 at the end thereof, reading in its entirety as follows: 2.05 Change of Control Vesting. Notwithstanding anything herein to the contrary, upon a Change of Control, all Participants in the Plan who have not then reached age 60 and 10 years of service with the Company shall be vested in the benefits described in Section 2.01 (and, thereupon, shall be eligible to receive such benefits on retirement) as if they had reached age 60 and had 10 years of service with the Company as of the date of the Change of Control. 3. Article 3.06 is hereby amended by adding the following at the end thereof: Notwithstanding the foregoing: (i) any termination of employment that gives rise to a right, on the part of a Participant, to severance pay or benefits under a -2- Change-of-Control Employment Agreement between the Company and the Participant shall be treated as a retirement rather than a resignation by the Participant or termination of the Participant by the Company; and (ii) clause c. of the preceding sentence shall be inapplicable after a Change of Control. The Plan is in all other respects ratified and confirmed without amendment. Pursuant to authorization of the Board of Directors of the Company granted on October 23, 1998, I have executed this Second Amendment this 1st day of December, 1998. /s/ Paul J. Ganci _________________________________________ Paul J. Ganci President and Chief Executive Officer -3- EX-10 11 AMENDMENT-RETIREMENT BENEFIT RESTORATION PLAN Exhibit (10)(iii)18) FORM OF FIRST AMENDMENT TO CENTRAL HUDSON GAS & ELECTRIC CORPORATION RETIREMENT BENEFIT RESTORATION PLAN WHEREAS, Central Hudson Gas & Electric Corporation (the "Company") established, effective March 1, 1992, its Retirement Benefit Restoration Plan (the "Plan"); and WHEREAS, the Company now desires to amend the Plan to protect benefits thereunder in the event of a Change of Control of the Company; NOW, THEREFORE, the Company hereby amends the Plan as set forth below, effective as of December 1, 1998. 1. Article I of the Plan is hereby amended by inserting new Sections 1.10 and 1.11 at the end thereof, reading in their entirety as follows: 1.10 "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d- 3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.10; or (b) Individuals who, as of December 1, 1998, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Busiess Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 1.11 "Employment Agreement" shall mean a Change-of-Control Employment Agreement between a Participant and the Company. 2. Article II of the Plan is hereby amended by adding the following new Section 2.04 at the end thereof, reading in its entirety as follows: 2.04 Change-of-Control Benefit. Notwithstanding any other provision of the Plan, if a Participant's employment is terminated under circumstances entitling him or her to severance pay or benefits under an Employment Agreement that becomes effective as a result of the Change of Control, the amount (but not the time for payment) of the Unrestricted Benefit shall be computed as if the Participant's employment had continued for a number of years equal to the Multiple (as defined in such Employment Agreement), with compensation equal to the compensation required by the Employment Agreement, and as if the Participant's accrued benefits were fully vested even if they are not then fully vested. -2- 3. Section 3.02 of the Plan is hereby amended by adding the following at the end thereof: Notwithstanding the foregoing, for three years following a Change of Control: (a) the Plan may not be amended in any manner adverse to any individual who is a Participant in the Plan immediately before the Change of Control (a "Protected Participant"), or a beneficiary of a Protected Participant; and (b) the Plan may not be terminated with respect to Protected Participants and their beneficiaries. 4. The Plan is in all other respects ratified and confirmed without amendment. Pursuant to authorization of the Board of Directors of the Company granted on October 23, 1998, I have executed this First Amendment this 1st day of December, 1998. /s/ Paul J. Ganci _____________________________ Paul J. Ganci President and Chief Executive Officer -3- EX-12 12 STATEMENT RE: COMPUTATION OF RATIOS Exhibit 12 CENTRAL HUDSON GAS & ELECTRIC CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
Year Ended December 31, ---------------------------------------------------- 1998 1997 (1) 1996 (1) 1995 1994 ---- ---- ---- ---- ---- Earnings: A. Net Income $ 52,544 $ 55,086 $ 56,082 $ 52,722 $ 50,929 B. Federal Income Tax 28,627 26,237 31,068 28,687 26,806 -------- -------- -------- -------- -------- C. Earnings before Income Taxes $ 81,171 $ 81,323 $ 87,150 $ 81,409 $ 77,735 ======== ======== ======== ======== ======== D. Total Fixed Charges Interest on Mortgage Bonds 14,225 14,237 15,112 16,862 19,624 Interest on Other Long-Term Debt 8,890 8,860 8,505 9,063 7,917 Other Interest 3,639 2,647 2,626 1,917 1,784 Interest Portion of Rents 1,004 1,020 1,094 1,522 1,561 Amortization of Premium & Expense on Debt 924 906 940 1,069 1,793 -------- -------- -------- -------- -------- 28,682 27,670 28,277 30,433 32,679 -------- -------- -------- -------- -------- E. Total Earnings $109,853 $108,993 $115,427 $111,842 $110,414 ======== ======== ======== ======== ======== Preferred Dividend Requirements: F. Allowance for Preferred Stock Dividends Under IRC Sec 247 $ 3,230 $ 3,230 $ 3,230 $ 4,903 $ 5,127 G. Less Allowable Dividend Deduction 127 127 127 528 528 -------- -------- -------- -------- -------- H. Net Subject to Gross-up 3,103 3,103 3,103 4,375 4,599 I. Ratio of Earnings before Income Taxes to Net Income (C/A) 1.545 1.476 1.554 1.544 1.526 -------- -------- -------- -------- -------- J. Pref. Dividend (Pre-tax) (HxI) 4,794 4,580 4,822 6,755 7,018 K. Plus Allowable Dividend Deduction 127 127 127 528 528 -------- -------- -------- -------- -------- L. Preferred Dividend Factor 4,921 4,707 4,949 7,283 7,546 M. Fixed Charges (D) 28,682 27,670 28,277 30,433 32,679 -------- -------- -------- -------- -------- N. Total Fixed Charges and Preferred Dividends $ 33,603 $ 32,377 $ 33,226 $ 37,716 $ 40,225 ======== ======== ======== ======== ======== O. Ratio of Earnings to Fixed Charges (E/D) 3.83 3.94 4.08 3.68 3.38 ======== ======== ======== ======== ======== P. Ratio of Earnings to Fixed Charges and Preferred Dividends (E/N) 3.27 3.37 3.47 2.97 2.74 ======== ======== ======== ======== ======== (1) Restated to properly reflect the exclusion of AFUDC from fixed charges.
EX-23 13 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in (I) the Prospectus constituting part of the Registration Statement, on Form S-3 (Registration No. 333-11521), relating to Central Hudson Gas & Electric Corporation's Stock Purchase Plan, and (ii) the Prospectus constituting part of the Registration Statement, on Form S-3 (Registration No. 333-65597), relating to $110 million of Central Hudson Gas & Electric Corporation's debt securities, of our report dated January 29, 1999, appearing in this Annual Report on Form 10-K for the year ended December 31, 1998. /s/ PRICEWATERHOUSECOOPERS LLP - -------------------------------- PRICEWATERHOUSECOOPERS LLP New York, New York March 1, 1999 EX-24 14 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, JOHN E. MACK III, Chairman of the Board, a Principal Executive Officer and a Director of Central Hudson Gas & Electric Corporation ("Corporation"), have made, constituted and appointed, and by these presents do make, constitute and appoint, PAUL J. GANCI, DONNA S. DOYLE, STEVEN V. LANT, WILLIAM P. REILLY, and each of them, my true and lawful attorneys, for me and in my name, place and stead, and in my office and capacity as aforesaid, to sign and file the Corporation's Annual Report, on Form 10-K, for the year ended December 31, 1998, with the Securities and Exchange Commission, pursuant to the applicable provisions of the Securities Exchange Act of 1934, together with any and all amendments and supplements to said Annual Report and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in the premises as fully, to all intents and purposes, as I might or could do if personally present, hereby ratifying and confirming in all respects all that said attorneys or any of them may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand and seal this 29th day of January, 1999. /s/ JOHN E. MACK III L.S. STATE OF NEW YORK ) : ss.: COUNTY OF DUTCHESS ) On this 29th day of January, 1999, before me personally came JOHN E. MACK III to me known and known to me to be the individual described in and who executed the foregoing instrument, and duly acknowledged to me that he executed the same. /s/ DONNA M. GIAMETTA Notary Public Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, PAUL J. GANCI, President and Chief Executive Officer, a Principal Executive Officer and a Director of Central Hudson Gas & Electric Corporation ("Corporation"), have made, constituted and appointed, and by these presents do make, constitute and appoint, JOHN E. MACK III, DONNA S. DOYLE, STEVEN V. LANT, WILLIAM P. REILLY, and each of them, my true and lawful attorneys, for me and in my name, place and stead, and in my office and capacity as aforesaid, to sign and file the Corporation's Annual Report, on Form 10-K, for the year ended December 31, 1998, with the Securities and Exchange Commission, pursuant to the applicable provisions of the Securities Exchange Act of 1934, together with any and all amendments and supplements to said Annual Report and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in the premises as fully, to all intents and purposes, as I might or could do if personally present, hereby ratifying and confirming in all respects all that said attorneys or any of them may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand and seal this 29th day of January, 1999. /s/ PAUL J. GANCI L.S. STATE OF NEW YORK ) : ss.: COUNTY OF DUTCHESS ) On this 29th day of January, 1999, before me personally came PAUL J. GANCI to me known and known to me to be the individual described in and who executed the foregoing instrument, and duly acknowledged to me that he executed the same. /s/ DONNA M. GIAMETTA Notary Public Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, EDWARD P. SWYER, a Director of Central Hudson Gas & Electric Corporation ("Corporation"), have made, constituted and appointed, and by these presents do make, constitute and appoint, JOHN E. MACK III, PAUL J. GANCI, DONNA S. DOYLE, STEVEN V. LANT, WILLIAM P. REILLY, and each of them, my true and lawful attorneys, for me and in my name, place and stead, and in my office and capacity as aforesaid, to sign and file the Corporation's Annual Report, on Form 10-K, for the year ended December 31, 1998, with the Securities and Exchange Commission, pursuant to the applicable provisions of the Securities Exchange Act of 1934, together with any and all amendments and supplements to said Annual Report and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in the premises as fully, to all intents and purposes, as I might or could do if personally present, hereby ratifying and confirming in all respects all that said attorneys or any of them may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand and seal this 29th day of January, 1999. /s/ EDWARD P. SWYER L.S. STATE OF NEW YORK ) : ss.: COUNTY OF DUTCHESS ) On this 29th day of January, 1999, before me personally came EDWARD P. SYWER to me known and known to me to be the individual described in and who executed the foregoing instrument, and duly acknowledged to me that he executed the same. /s/ DONNA M. GIAMETTA Notary Public Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, JACK EFFRON, a Director of Central Hudson Gas & Electric Corporation ("Corporation"), have made, constituted and appointed, and by these presents do make, constitute and appoint, JOHN E. MACK III, PAUL J. GANCI, DONNA S. DOYLE, STEVEN V. LANT, WILLIAM P. REILLY, and each of them, my true and lawful attorneys, for me and in my name, place and stead, and in my office and capacity as aforesaid, to sign and file the Corporation's Annual Report, on Form 10-K, for the year ended December 31, 1998, with the Securities and Exchange Commission, pursuant to the applicable provisions of the Securities Exchange Act of 1934, together with any and all amendments and supplements to said Annual Report and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in the premises as fully, to all intents and purposes, as I might or could do if personally present, hereby ratifying and confirming in all respects all that said attorneys or any of them may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand and seal this 29th day of January, 1999. /s/ JACK EFFRON L.S. STATE OF NEW YORK ) : ss.: COUNTY OF DUTCHESS ) On this 29th day of January, 1999, before me personally came JACK EFFRON to me known and known to me to be the individual described in and who executed the foregoing instrument, and duly acknowledged to me that he executed the same. /s/ DONNA M. GIAMETTA Notary Public Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, HEINZ K. FRIDRICH, a Director of Central Hudson Gas & Electric Corporation ("Corporation"), have made, constituted and appointed, and by these presents do make, constitute and appoint, JOHN E. MACK III, PAUL J. GANCI, DONNA S. DOYLE, STEVEN V. LANT, WILLIAM P. REILLY, and each of them, my true and lawful attorneys, for me and in my name, place and stead, and in my office and capacity as aforesaid, to sign and file the Corporation's Annual Report, on Form 10-K, for the year ended December 31, 1998, with the Securities and Exchange Commission, pursuant to the applicable provisions of the Securities Exchange Act of 1934, together with any and all amendments and supplements to said Annual Report and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in the premises as fully, to all intents and purposes, as I might or could do if personally present, hereby ratifying and confirming in all respects all that said attorneys or any of them may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand and seal this 29th day of January, 1999. /s/ HEINZ K. FRIDRICH L.S. STATE OF NEW YORK ) : ss.: COUNTY OF DUTCHESS ) On this 29th day of January, 1999, before me personally came HEINZ K. FRIDRICH to me known and known to me to be the individual described in and who executed the foregoing instrument, and duly acknowledged to me that he executed the same. /s/ DONNA M. GIAMETTA Notary Public Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, EDWARD F. X. GALLAGHER, a Director of Central Hudson Gas & Electric Corporation ("Corporation"), have made, constituted and appointed, and by these presents do make, constitute and appoint, JOHN E. MACK III, PAUL J. GANCI, DONNA S. DOYLE, STEVEN V. LANT, WILLIAM P. REILLY, and each of them, my true and lawful attorneys, for me and in my name, place and stead, and in my office and capacity as aforesaid, to sign and file the Corporation's Annual Report, on Form 10-K, for the year ended December 31, 1998, with the Securities and Exchange Commission, pursuant to the applicable provisions of the Securities Exchange Act of 1934, together with any and all amendments and supplements to said Annual Report and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in the premises as fully, to all intents and purposes, as I might or could do if personally present, hereby ratifying and confirming in all respects all that said attorneys or any of them may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand and seal this 29th day of January, 1999. /s/ EDWARD F. X. GALLAGHER L.S. STATE OF NEW YORK ) : ss.: COUNTY OF DUTCHESS ) On this 29th day of January, 1999, before me personally came EDWARD F. X. GALLAGHER to me known and known to me to be the individual described in and who executed the foregoing instrument, and duly acknowledged to me that he executed the same. /s/ DONNA M. GIAMETTA Notary Public Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, CHARLES LAFORGE, a Director of Central Hudson Gas & Electric Corporation ("Corporation"), have made, constituted and appointed, and by these presents do make, constitute and appoint, JOHN E. MACK III, PAUL J. GANCI, DONNA S. DOYLE, STEVEN V. LANT, WILLIAM P. REILLY, and each of them, my true and lawful attorneys, for me and in my name, place and stead, and in my office and capacity as aforesaid, to sign and file the Corporation's Annual Report, on Form 10-K, for the year ended December 31, 1998, with the Securities and Exchange Commission, pursuant to the applicable provisions of the Securities Exchange Act of 1934, together with any and all amendments and supplements to said Annual Report and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in the premises as fully, to all intents and purposes, as I might or could do if personally present, hereby ratifying and confirming in all respects all that said attorneys or any of them may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand and seal this 29th day of January, 1999. /s/ CHARLES LAFORGE L.S. STATE OF NEW YORK ) : ss.: COUNTY OF DUTCHESS ) On this 29th day of January, 1999, before me personally came CHARLES LAFORGE to me known and known to me to be the individual described in and who executed the foregoing instrument, and duly acknowledged to me that he executed the same. /s/ DONNA M. GIAMETTA Notary Public Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, FRANCES D. FERGUSSON, a Director of Central Hudson Gas & Electric Corporation ("Corporation"), have made, constituted and appointed, and by these presents do make, constitute and appoint, JOHN E. MACK III, PAUL J. GANCI, DONNA S. DOYLE, STEVEN V. LANT, WILLIAM P. REILLY, and each of them, my true and lawful attorneys, for me and in my name, place and stead, and in my office and capacity as aforesaid, to sign and file the Corporation's Annual Report, on Form 10-K, for the year ended December 31, 1998, with the Securities and Exchange Commission, pursuant to the applicable provisions of the Securities Exchange Act of 1934, together with any and all amendments and supplements to said Annual Report and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in the premises as fully, to all intents and purposes, as I might or could do if personally present, hereby ratifying and confirming in all respects all that said attorneys or any of them may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand and seal this 29th day of January, 1999. /s/ FRANCES D. FERGUSSON L.S. STATE OF NEW YORK ) : ss.: COUNTY OF DUTCHESS ) On this 29th day of January, 1999, before me personally came FRANCES D. FERGUSSON to me known and known to me to be the individual described in and who executed the foregoing instrument, and duly acknowledged to me that she executed the same. /s/ DONNA M. GIAMETTA Notary Public Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, DONNA S. DOYLE, Controller and Principal Accounting Officer of Central Hudson Gas & Electric Corporation ("Corporation"), have made, constituted and appointed, and by these presents do make, constitute and appoint, JOHN E. MACK III, PAUL J. GANCI, STEVEN V. LANT, WILLIAM P. REILLY, and each of them, my true and lawful attorneys, for me and in my name, place and stead, and in my office and capacity as aforesaid, to sign and file the Corporation's Annual Report, on Form 10-K, for the year ended December 31, 1998, with the Securities and Exchange Commission, pursuant to the applicable provisions of the Securities Exchange Act of 1934, together with any and all amendments and supplements to said Annual Report and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in the premises as fully, to all intents and purposes, as I might or could do if personally present, hereby ratifying and confirming in all respects all that said attorneys or any of them may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand and seal this 29th day of January, 1999. /s/ DONNA S. DOYLE L.S. STATE OF NEW YORK ) : ss.: COUNTY OF DUTCHESS ) On this 29th day of January, 1999, before me personally came DONNA S. DOYLE to me known and known to me to be the individual described in and who executed the foregoing instrument, and duly acknowledged to me that he executed the same. /s/ DONNA M. GIAMETTA Notary Public Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, STEVEN V. LANT, Chief Financial Officer, Treasurer and Corporate Secretary and the Principal Financial Officer of Central Hudson Gas & Electric Corporation ("Corporation"), have made, constituted and appointed, and by these presents do make, constitute and appoint, JOHN E. MACK III, PAUL J. GANCI, DONNA S. DOYLE, STEVEN V. LANT, WILLIAM P. REILLY, and each of them, my true and lawful attorneys, for me and in my name, place and stead, and in my office and capacity as aforesaid, to sign and file the Corporation's Annual Report, on Form 10-K, for the year ended December 31, 1998, with the Securities and Exchange Commission, pursuant to the applicable provisions of the Securities Exchange Act of 1934, together with any and all amendments and supplements to said Annual Report and any and all other documents to be signed and filed with the Securities and Exchange Commission in connection therewith, hereby granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in the premises as fully, to all intents and purposes, as I might or could do if personally present, hereby ratifying and confirming in all respects all that said attorneys or any of them may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand and seal this 29th day of January, 1999. /s/ STEVEN V. LANT L.S. STATE OF NEW YORK ) : ss.: COUNTY OF DUTCHESS ) On this 29th day of January, 1999, before me personally came STEVEN V. LANT to me known and known to me to be the individual described in and who executed the foregoing instrument, and duly acknowledged to me that he executed the same. /s/ DONNA M. GIAMETTA Notary Public EX-24 15 RESOLUTION Exhibit 24 February 17, 1999 I, Steven V. Lant, Corporate Secretary of Central Hudson Gas & Electric Corporation, hereby certify that at the meeting of the Board of Directors of Central Hudson Gas & Electric Corporation, a corporation organized under the laws of the State of New York, duly called and held at the office of said Corporation, 284 South Avenue, in the City of Poughkeepsie, State of New York, on January 29, 1999, at which a quorum was present and voting throughout, the following resolution was unanimously and duly adopted and is now in full force and effect: RESOLVED, that the Annual Report to the Securities and Exchange Commission, on Form 10-K, for the year ended December 31, 1998, in the form presented to this meeting, be and the same hereby is in all respects approved; and that the Chairman of the Board and the officers of this Corporation be and they hereby are authorized in the name and on behalf of this Board of Directors and this Corporation to execute said Form 10-K Report, in the form presented to this meeting, and that the officers and Directors of this Corporation be and they hereby are requested and authorized to join in the execution of said Form 10-K Report, and that the Chairman of the Board and the officers of this Corporation be and they hereby are authorized and directed to file or cause to be filed as required or permitted by law said Form 10-K, together with appropriate Exhibits, as required in connection therewith, subject to such changes therein as the Chairman of the Board and the officers of this Corporation, advised by counsel, may deem necessary or appropriate to comply with the requirements of the Securities and Exchange Commission; and to do and cause to be done any and all things necessary or appropriate to effect the filing of said Form 10-K and any amendments thereto. IN WITNESS WHEREOF, I have hereunto set my hand as Corporate Secretary of Central Hudson Gas & Electric Corporation and affixed its corporate seal this 17th day of February, 1999. /s/ Steven V. Lant ____________________________________ Steven V. Lant Corporate Secretary EX-27 16 FDS --
OPUR1 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FOR THE CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 PER-BOOK $928,244 $77,486 $134,261 $176,047 $0 $1,316,038 $87,775 $278,261 $133,287 $472,180 $35,000 $21,030 $356,918 $18,000 $0 $0 $39,507 $0 $0 $0 $373,403 $1,316,038 $503,469 $29,775 $402,394 $432,169 $71,300 $8,598 $79,898 $27,354 $52,544 $3,230 $49,314 $36,567 $14,225 $74,547 $2.90 $0
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