SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
-----------------------------------
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
DATE OF REPORT (Date of earliest event reported):
June 12, 1998
MARKETSPAN CORPORATION
(Exact name of registrant as specified in charter)
New York 1-14161 11-3431358
(State of Incorporation) (Commission File No.) (I.R.S. Employer
Identification No.)
175 East Old Country Road, Hicksville, New York 11801
516-755-6650
(Address and telephone number of Principal Executive Offices)
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
On May 28, 1998, pursuant to the Agreement and Plan of Merger, dated
as of June 26, 1997, by and among MarketSpan Corporation (formerly known as BL
Holding Corp., "MarketSpan"), Long Island Lighting Company ("LILCO"), Long
Island Power Authority ("LIPA"), and LIPA Acquisition Corp. (the "Merger
Agreement"), LIPA acquired all of the then outstanding common stock of LILCO for
$2.4975 billion in cash and thereafter directly or indirectly assumed, redeemed
or refinanced certain liabilities as well as approximately $339 million in
preferred stock and approximately $3.6 billion in debt attributable to LILCO.
Immediately prior to such acquisition, all of its assets employed in the conduct
of its gas distribution business and its non-nuclear electric generation
business, and all common assets used by LILCO in the operation and management of
its electric transmission and distribution business and its gas distribution
business and/or its non-nuclear electric generation business (the "Transferred
Assets") were sold to MarketSpan and transferred to the following wholly-owned
subsidiaries of MarketSpan (the "Transferee Subsidiaries") at MarketSpan's
direction: MarketSpan Gas Corporation, MarketSpan Trading Services LLC,
MarketSpan Generation LLC, MarketSpan Corporate Services LLC, MarketSpan Utility
Services LLC, and MarketSpan Electric Services LLC, each a New York corporation
or limited liability company, and MarketSpan Finance Corporation, a Vermont
corporation (the "Transfer").
The consideration for the Transferred Assets consisted of (i)
3,440,625 shares of the common stock of MarketSpan, (ii) 553,000 shares of the
Series B preferred stock of MarketSpan, (iii) 197,000 shares of the Series C
preferred stock of MarketSpan, (iv) the assumption by MarketSpan of certain
liabilities of LILCO. The value of the consideration was determined by
MarketSpan and LILCO to be equal to the net fair market value of the Transferred
Assets. The Transfer was effected by a Bill of Sale, dated as of May 28, 1998,
made and executed by LILCO and acknowledged by MarketSpan. At the time of the
Transfer, Dr. William J. Catacosinos was a director and Chief Executive Officer
of both LILCO and MarketSpan, and the following individuals held the respective
offices at both LILCO and MarketSpan: Leonard P. Novello - Senior Vice President
and General Counsel; Joseph E. Fontana - Vice President, Controller and Chief
Accounting Officer; Kathleen A. Marion - Vice President and Secretary. In
addition, at the time of the Transfer, James T. Flynn was a director, President
and Chief Operating Officer of LILCO and Executive Vice President of MarketSpan.
Also, on May 28, 1998, KeySpan Energy Corporation ("KeySpan") was
merged with and into a subsidiary of MarketSpan, pursuant to an Agreement and
Plan of Exchange and Merger, dated as of December 29, 1996, between LILCO and
the Brooklyn Union Gas Company ("Brooklyn Union"). This agreement was amended
and restated as of February 7, 1997, June 26, 1997, and September 29, 1997, to
reflect certain technical changes and the assignment by Brooklyn Union of all of
its rights and obligations under the agreement to KeySpan. On September 29,
1997, KeySpan became the parent company of Brooklyn Union when it reorganized
into a holding company structure. At the time of the merger, Robert B. Catell
was a
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<PAGE>
Director, President and Chief Executive Officer of KeySpan and a Director,
President and Chief Operating Officer of MarketSpan. Also at the time of the
merger Craig G. Matthews was Executive Vice President of KeySpan and Executive
Vice President and Chief Financial Officer of MarketSpan.
As a result of these transactions, holders of KeySpan common stock
received one share of MarketSpan common stock, par value $.01 per share, for
each share of KeySpan they owned and holders of LILCO common stock received
0.880 shares of MarketSpan common stock for each share of LILCO they owned. Upon
closing of these transactions, holders of KeySpan and LILCO owned 32% and 68%,
respectively, of the MarketSpan common stock. MarketSpan's common stock and
certain series of its preferred stock have been listed on the New York and
Pacific Stock Exchanges under the symbol "MN." KeySpan and LILCO common stock
are no longer traded on a national securities exchange.
MarketSpan and its wholly-owned subsidiaries own and operate the gas utility
system and non-nuclear electric generating plants previously owned by LILCO and
the gas utility system owned by Brooklyn Union. In addition, MarketSpan continue
to operate the electric transmission and distribution systems previously owned
by LILCO in accordance with a comprehensive set of operational and management
services agreements with LIPA.
The number of directors comprising the Board of Directors of
MarketSpan will be 15 persons, six designated by KeySpan, six designated by
LILCO, and three designated by a committee consisting of prior KeySpan and LILCO
directors. Currently the board consists of 14 persons, as follows:
William J. Catacosinos George Bugliarello
Robert B. Catell Howard R. Curd
Donald H. Elliott Richard N. Daniel
Alan H. Fishman Basil A. Paterson
Stephen W. McKessy Frederic V. Salerno
Edward D. Miller James R. Jones
James Q. Riorden Vincent Tese
In connection with the transactions described above, MarketSpan
issued a press release, a copy of which is attached hereto as Exhibit 99.1 and
is incorporated herein by reference.
Item 5. OTHER EVENTS.
On June 10, 1998, former shareholders of LILCO commenced a lawsuit in New
York State Supreme Court, Nassau County (the "Court") against LILCO and each of
the former directors of LILCO (ROSE LIPSCHUTZ, ET AL. V. WILLIAM J. CATACOSINOS,
ET AL.). Also on this date,
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<PAGE>
former shareholders of LILCO and KeySpan commenced a lawsuit in the Court
against MarketSpan, "the former officers and/or directors of LILCO and current
officers and/or directors" of MarketSpan (CLAIRE KUDEL, ET AL. V. WILLIAM J.
CATACOSINOS, ET AL.). The suits generally allege that in connection with
payments LILCO had determined were payable in connection with the LIPA and
KeySpan transactions (i) to Dr. Catacosinos relating to retirement benefits,
incentive compensation and benefits pursuant to agreements entered into between
LILCO and Dr. Catacosinos, which amounts totaled approximately $42 million; and
(ii) to former officers of LILCO relating to retirement benefits, incentive
compensation and benefits pursuant to employment agreements entered into between
LILCO and such officers, which amounts totaled approximately $25 million, $14.5
million of which related to such employment agreements (the "Payments"): (1) the
named defendants breached their fiduciary duty owed to LILCO and KeySpan former
and current MarketSpan shareholders as a result of the Payments; (2) the former
directors and officers of LILCO intended to defraud such shareholders by means
of manipulative, deceptive and wrongful conduct, including materially inaccurate
and incomplete news reports and filings with the Securities and Exchange
Commission; and (3) the former officers derived an improper economic benefit as
a result of their breach of fiduciary duty. Both suits seek to have a plaintiff
class certified which includes certain shareholders of MarketSpan who were
former shareholders of LILCO and/or The Brooklyn Union Gas Company (or KeySpan)
(other than the defendants and other related entities). Also, on June 10, 1998,
MarketSpan received a demand letter from counsel for a former shareholder of
LILCO requesting that MarketSpan take legal action to recover the Payments.
Under the terms of the Merger Agreement, MarketSpan has assumed all
indemnification obligations LILCO may have to its former officers and directors
and has agreed to indemnify LILCO for certain liabilities relating to LILCO's
activities prior to the closing of the transaction with LIPA, including the
activity relating to the Payments. MarketSpan believes the allegations in the
suits are entirely without merit, and is determined to defend the actions
vigorously.
In addition, certain related investigations have been commenced by
the New York State Public Service Commission and the New York State Attorney
General relating to the Payments and disclosures made by LILCO with respect
thereto prior to the closing of the LIPA and KeySpan transactions.
The Company is unable to determine the outcome of each of the
proceedings discussed above and what effect, if any, such outcome will have on
its financial condition and results of operations.
At a meeting held on June 11, 1998, the MarketSpan Board of
Directors determined to thoroughly review the Payments and the issues relating
thereto, and will retain outside legal counsel to assist in this review. The
Board intends to resolve this matter expeditiously.
<PAGE>
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
Pro Forma Financial Statements as of and for the twelve months ended March
31, 1998, are attached as Exhibits hereto.
Exhibits
2.1 Agreement and Plan of Exchange and Merger, dated as of December 29, 1996,
as amended between LILCO and KeySpan and the Agreement and Plan of Merger,
dated as of June 26, 1997, by and among MarketSpan Corporation (formerly
known as BL Holding Corp.), LILCO, LIPA, LIPA Acquisition Corp. (filed as
Annex A and Annex D, respectively, to Registration Statement on Form S-4,
No. 333-30353 on June 30, 1997) and hereby incorporated by reference and
made a part of this report with the same effect as if filed herewith.
99.1 Press Release dated May 29, 1998 announcing the consummation of the
transactions between LILCO, KeySpan, LIPA and MarketSpan.
99.2 Pro Forma Financial Statements as of and for the twelve months ended March
31, 1998.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 12, 1998
MARKETSPAN CORPORATION
Registrant
By:/S/ Joseph E. Fontana
------------------------
Joseph E. Fontana
Vice President, Controller and
Chief Accounting Officer
1
NEW YORK CONTACT: LONG ISLAND CONTACT:
MEDIA: ROBERT MAHONY MEDIA: ELAINE DAVIS
(718) 403-2503 (516) 545-5052
INVESTORS: JAN CHILDRESS INVESTORS: WILLIAM CATACOSINOS, JR.
(718) 403-3382 (516) 545-4688
FOR IMMEDIATE RELEASE:
KEYSPAN AND LILCO COMBINE TO FORM MARKETSPAN
"BROOKLYN UNION" AND "LIPA" REPLACE "LILCO" ON LONG ISLAND
NEW YORK, MAY 29, 1998 -- KeySpan Energy Corporation (NYSE: KSE) combined today
with Long Island Lighting Company (NYSE: LIL) to form MarketSpan Corporation
(NYSE:MN), a new holding company dedicated to market growth in the Northeast as
well as investments in energy in North America and abroad.
KeySpan and LILCO trading on the New York Stock Exchange will be replaced by
MarketSpan at the opening bell on June 1, 1998. Shareholders of LILCO will
receive 0.880 shares of MarketSpan common stock for each share of LILCO, and
KeySpan shareholders will receive one share of MarketSpan common stock for each
share of KeySpan. Within two weeks, KeySpan and LILCO shareholders of record on
May 29, 1998, will receive instructions in the mail for exchanging their stock.
"The merger consummated today provides customers from Staten Island to Montauk
Point with reduced energy costs and enhanced services," said William J.
Catacosinos, Chairman and CEO of MarketSpan.
"By merging, we are in the forefront of the transformation of the energy market
in the Northeast," said Robert B. Catell, President and COO of MarketSpan. "The
merger provides us with the base for strategic growth that will help us compete
and succeed in the region."
Headquartered in both Brooklyn and Hicksville, MarketSpan owns LILCO's common
plant, non-nuclear electric-generation assets and operations, and the regulated
natural gas businesses of both LILCO and Brooklyn Union. In addition, Market
Span owns KeySpan's unregulated subsidiaries and its investments in gas
exploration, production and transportation -- including a 66% ownership in
Houston Exploration Company (NYSE:THX). The KeySpan unregulated subsidiaries,
which have achieved high recognition for providing energy supply, management and
services, will retain their names.
As a result of consolidation, Brooklyn Union will continue to serve customers in
Brooklyn, Queens, and Staten Island. A separate MarketSpan subsidiary will
provide gas service to Long Island also under the Brooklyn Union name.
In conjunction with the sale of some of LILCO's electric assets today to the
Long Island Power Authority, LIPA became the authority providing electric
service on Long Island. Long Island gas and electric customers will pay their
gas and electric bills to the Long Island Power Authority. Gas customers on Long
Island who do not buy electricity from LIPA, however, will pay their bills to
Brooklyn Union.
Brooklyn Union customers in New York City and on Long Island, in general, will
begin receiving an average reduction of 3.8% in their gas transportation rate.
In New York City, the reduction results from the consolidation. On Long Island,
the reduction results from both the consolidation and a 2.1% reduction set by a
rate agreement with the New York State Public Service Commission on February 5,
1998.
MarketSpan will have 8,000 employees and serve more than 1.5 million natural gas
customers. The Company will also operate five electric generating plants on Long
Island and manage the transmission and distribution of electricity to more than
one million electric customers in Nassau and Suffolk Counties and the Rockaway
Peninsula of Queens County under a contract with the Long Island Power
Authority.
For more information about MarketSpan, visit our web site at
www.marketspancorp.com.
This press release includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements reflect numerous assumptions and involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are: electric load and customer growth; abnormal weather conditions;
available sources and cost of fuel and generating capacity; the speed and degree
to which competition enters the power generation, wholesale and retail sectors
of the electric utility industry; state and federal regulatory initiatives that
increase competition, threaten cost and investment recovery, and impact rate
structures; the ability of the combined company to successfully reduce its cost
structure; the degree to which the combined company develops non- regulated
business ventures; the economic climate and growth in the service territories of
the two companies; economies generated by the combination; inflationary trends
and interest rates and the other risks detailed from time to time in reports and
other documents filed by LILCO and KeySpan with the Securities and Exchange
Commission.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
KEYSPAN ENERGY CORP\LILCO COMBINATION AND LIPA TRANSACTION
The following unaudited pro forma financial information reflects adjustments to
the historical financial statements of LILCO to give effect to the transfer of
LILCO's gas and generation business to subsidiaries of MarketSpan Corporation
(MarketSpan), the stock acquisition of LILCO by a wholly owned subsidiary of
LIPA and the combination between KeySpan Energy Corporation (KeySpan) and LILCO
(Combination). The unaudited pro forma consolidated condensed balance sheet at
March 31, 1998 gives effect to the LIPA Transaction and the Combination as if
they had occurred at March 31, 1998. The unaudited pro forma consolidated
condensed statement of income for the 12-month period ended March 31, 1998 gives
effect to the LIPA Transaction and the Combination as if they had occurred on
April 1, 1997. These statements are prepared on the basis of accounting for the
Combination under the purchase method of accounting and are based on the
assumptions set forth in the notes thereto.
The following pro forma financial information has been prepared from, and should
be read in conjunction with, the LIPA Agreement (Annex D to the Joint Proxy
dated June 27, 1997), and the historical consolidated financial statements and
related notes thereto of KeySpan and LILCO. The following information is not
necessarily indicative of the financial position or operating results that would
have occurred had the LIPA Transaction and the Combination been consummated on
the date, or at the beginning of the period, for which the LIPA Transaction and
the Combination are being given effect nor is it necessarily indicative of
future operating results or financial position.
<PAGE>
MARKETSPAN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
3/31/98
(In Millions)
<TABLE>
Sale MarketSpan
LILCO to Pro Forma before Keyspan Pro Forma
(Historical) LIPA (1) Adjustments KeySpan (Historical) Adjustments MarketSpan
----------- ----------- ----------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
PROPERTY
Utility Plant
Electric $4,031.6 2,929.4 1,102.2 1,102.2
Gas 1,233.3 0.0 1,233.3 1,873.1 3,106.4
Common 290.2 0.0 290.2 290.2
Construction work in progress 118.7 41.1 77.6 77.6
Nuclear fuel in process and in reactor 18.1 18.1 0.0 0.0
Less - Accumulated depreciation 0.0 0.0 0.0 0.0
and amortization (1,877.8) (952.3) (925.5) (474.8) (1,400.3)
----------- -------------- -------- ------- ------------- ------------- ---------
Total Net Utility Plant 3,814.1 2,036.3 0.0 1,777.8 1,398.3 0.0 3,176.1
Gas exploration and production, at cost 0.0 0.0 723.6 723.6
Less - Accumulated depletion 0.0 0.0 (256.5) (256.5)
------------- ----------
----------- -------------- --------- ------- -------------
Total Net Plant 3,814.1 2,036.3 0.0 1,777.8 1,865.4 0.0 3,643.2
----------- -------------- --------- ------- ------------- ------------- ----------
----------- -------------- --------- -------------
Cost In Excess of Net Assets Acquired 0.0 0.0 0.0 0.0 0.0 177.0(6) 177.0
----------- -------------- --------- ------- ------------- ------------- ----------
REGULATORY ASSETS
Base financial component (less accumulated
amortization of $883.5 ) 3,155.3 3,155.3
Rate moderation component 434.0 434.0
Shoreham post-settlement costs 1,005.3 1,005.3
Regulatory tax asset 1,737.9 1,716.9 21.0 67.7 (5) 88.7
Postretirement benefits other than pensions 340.1 0.0 (287.7)(2) 52.4 0.0 52.4
Other 419.2 329.2 90.0 29.4 (6) 119.4
----------- -------------- --------- ------- ------------- ------------- ----------
Total Regulatory Assets 7,091.8 6,640.7 (287.7) 163.4 0.0 97.1 260.5
----------- -------------- --------- ------- ------------- ------------- ----------
NONUTILITY PROPERTY AND OTHER INVESTMENTS 50.8 17.9 0.0 32.9 105.5 (64.8)(16) 73.6
----------- -------------- --------- ------- ------------- ------------- ----------
CURRENT ASSETS
Cash and cash equivalents 180.9 75.0 2,482.5 (3) 2,418.4 72.1 2,555.3
75.0(10)
(4.6)(11)
(21.0)(12)
64.5(12)
(33.9)(12)
(250.0)(13) 64.8 (16)
Deferred tax asset 0.0 0.0 236.6 (4) 236.6 0.0 236.6
Accounts receivable and accrued revenues 466.1 328.6 14.4 (2) 151.9 335.3 487.2
Other Current Assets 211.3 3.3 (64.5)(12) 143.5 76.8 220.3
----------- -------------- --------- ------- ------------- ------------- ----------
TOTAL CURRENT ASSETS 858.3 406.9 2,499.0 2,950.4 484.2 64.8 3,499.4
DEFERRED CHARGES 85.7 47.7 0.0 38.0 180.4 (104.4)(5)(6) 114.0
----------- -------------- --------- ------- ------------- ------------- ---------
CONTRACTUAL RECIEVABLE FROM LIPA 0.0 0.0 273.3 (2) 273.3 0.0 0.0 273.3
----------- -------------- --------- ------- ------------- ------------- ---------
TOTAL ASSETS 11,900.7 9,149.5 2,484.6 5,235.8 2,635.5 169.7 8,041.0
=========== ============== ========= ======= ============= ============= ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Shareowners' Equity 2,662.5 2,500.8 2,497.5 (3) 2,605.6 1,083.5 136.4 (6) 3,812.5
(15.0)(3) (13.0) (6)
(13.0)(6)
(21.0)(12)
(4.6)(11)
(6.4)(17) (6.4)
Long-term debt, includes
current maturities 4,482.9 3,396.1 1,086.8 782.1 6.4 (17) 1,875.3
Preferred stock 702.0 339.0 438.0 0.0 0.0 438.0
75.0(10) 0.0
----------- -------------- --------- ------- ------------- ------------- ----------
Total Capitalization 7,847.4 6,235.9 2,518.9 4,130.4 1,865.6 143.4 6,119.4
----------- -------------- --------- --------------------- ------------- ----------
REGULATORY LIABILITIES 389.4 365.1 0.0 24.3 0.0 0.0 24.3
----------- -------------- --------- ------- ------------- ------------- ----------
CURRENT LIABILITIES
Accounts payable and accrued expenses 228.6 101.7 13.0 (6) 139.9 110.0 46.3(6) 296.2
Accrued taxes (including
Federal income tax) 34.8 399.0 (4) 346.3 38.4 384.7
(87.5)(13)
Other current liabilites 324.0 52.7 271.3 115.7 0.0 387.0
----------- -------------- --------- ------- ------------- ------------- ----------
587.4 154.4 324.5 757.5 264.1 46.3 1,067.9
----------- -------------- --------- ------- ------------- ------------- ----------
DEFERRED CREDITS
Deferred federal income tax 2,539.4 2,377.0 (162.4)(4) 87.5 288.9 376.4
87.5(13)
Other 69.4 19.7 49.7 119.9 169.6
----------- -------------- --------- ------- ------------- ------------- ----------
Total Deferred Credits 2,608.8 2,396.7 (74.9) 137.2 408.8 0.0 546.0
----------- -------------- --------- ------- ------------- ------------- ----------
OPERATING RESERVES 467.7 (2.6) (33.9(12) 436.4 0.0 0.0 436.4
(250.0(13) (250.0) (250.0)
----------- -------------- --------- ------- ------------- ------------- ----------
COMMITMENTS AND CONTINGENCIES 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----------- -------------- --------- ------- ------------- ------------- ----------
MINORITY INTEREST IN SUBSIDIARY COMPANY 0.0 0.0 0.0 0.0 97.0 0.0 97.0
----------- -------------- --------- ------- ------------- ------------- ----------
TOTAL CAPITALIZATION AND LIABILITIES 11,900.7 9,149.5 2,484.6 5,235.8 2,635.5 169.7 8,041.0
=========== ============== ========= ======= ============= ============= ==========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS.
MARKETSPAN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
(In Millions Except Per Share Amounts)
<TABLE>
Sale Pro MarketSpan
LILCO to Forma before KeySpan Pro Forma
(Historical) LIPA (1) Adjustments KeySpan (Historical) Adjustments MarketSpan
----------- ----------- ---------- ----------- ----------- ----------- -----------
REVENUES
<S> <C> <C> <C> <C> <C> <C> <C>
Electric $2,478.4 $2,100.6 $11.5(7) $389.3 $0.0 $389.3
Gas - Utility sales 645.7 645.7 1,299.5 1,945.2
Gas production and other 0.0 130.5 130.5
-------- ----------- -------- ----------- ----------- ----------- -----------
Total Revenues 3,124.1 2,100.6 11.5 1,035.0 1,430.0 0.0 2,465.0
OPERATING EXPENSES
Operations - fuel and purchased power 957.8 658.3 299.5 524.7 824.2
Operations - other 400.0 244.8 155.2 365.5 520.7
Maintenance 111.1 62.3 48.8 57.1 105.9
Depreciation, depletion and amortization 158.5 95.4 63.1 128.5 2.9(6) 194.5
Base financial component amortization 101.0 101.0 0.0 0.0 0.0
Rate moderation component amortization (35.1) (35.1) 0.0 0.0 0.0
Regulatory liability component amortizatio (88.6) (88.6) 0.0 0.0 0.0
Other regulatory amortization 47.3 36.0 11.3 0.0 11.3
Operating taxes 466.3 261.6 204.7 150.0 354.7
Federal income taxes 237.5 205.5 4.0(8) 36.0 58.3 94.3
-------- ----------- ---------- ----------- ----------- ----------- ---------
Total Operating Expenses 2,355.8 1,541.2 4.0 818.6 1,284.1 2.9 2,105.6
-------- ----------- ---------- ----------- ----------- ----------- ---------
Operating Income 768.3 559.4 7.5 216.4 145.9 (2.9) 359.4
Other Income and (Deductions) (1.6) 29.5 (31.1) 25.1 (6.0)
-------- ----------- ---------- ----------- ----------- ----------- --------
Income Before Interest Charges 766.7 588.9 7.5 185.3 171.0 (2.9) 353.4
Interest Charges 404.5 311.6 92.9 44.5 137.4
-------- ----------- ---------- ----------- ----------- ----------- ---------
NET INCOME 362.2 277.3 7.5 92.4 126.5 (2.9) 216.0
-------- ----------- ---------- ----------- ----------- ----------- -------
Preferred stock dividend requirements 51.8 22.9 6.0(10) 34.9 0.1 35.0
-------- ----------- ---------- ----------- ----------- ----------- ---------
EARNINGS FOR COMMON STOCK $310.4 $254.4 $1.5 $57.5 $126.(14) ($2.9) $181.0
======== =========== ========== =========== =========== =========== =========
Average Common Shares Outstanding 121.4 121.4 121.4 121.4 50.7 (14.7) 157.4
======== =========== ========== =========== =========== =========== ========
EARNINGS PER COMMON AND EQUIVALENT SHARES $2.56 $2.10 $0.01 $0.47 $2.49 $1.15(9)
======== =========== ========== =========== =========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The historical financial statements of LILCO have been adjusted to give
effect to the transaction with LIPA on May 28, 1998, pursuant to which LILCO
transferred certain of its net assets relating to its gas and generation
business ("Transferred Assets") to subsidiaries of MarketSpan Corporation. LIPA
then acquired LILCO in a stock sale. The adjustments are based upon a
disaggregation of LILCO's balance sheet and operations as estimated by the
management of MarketSpan, and are subject to adjustment pursuant to the terms of
the LIPA agreement.
In connection with this transaction, the principal assets acquired by LIPA
through its stock acquisition of LILCO include the electric transmission and
distribution system ("The LIPA Transmission and Distribution System"), LILCO's
18% interest in Nine Mile Point 2 nuclear power station, certain of LILCO's
regulatory assets associated with its electric business and an allocation of
accounts receivable and other assets. The principal liabilities assumed by LIPA
include LILCO's regulatory liabilities associated with its electric business, a
portion of LILCO's long-term debt and an allocation of accounts payable, accrued
expenses, customer deposits, other deferred credits and claims.
2. In connection with the LIPA Transaction, LIPA is contractually responsible
for reimbursing MarketSpan for postretirement benefits other than pension costs,
related to employees of LILCO's electric business. A pro forma adjustment has
been reflected to reclassify the associated regulatory asset for postretirement
benefits other than pensions to current and non-current accounts receivable
pursuant to LIPA's obligation to a subsidiary of MarketSpan.
3. The Cash Purchase Price paid by LIPA in connection with its stock acquisition
of LILCO was $2,497.5 million as determined based upon the estimated net book
value of the LILCO Retained Assets of $2,500.8 million. In addition, the LIPA
Transaction required MarketSpan upon the closing of the transaction to remit to
LIPA $15 million associated with the certain real estate tax litigation
recoveries. The net cash received by MarketSpan amounted to:
Cash Purchase Price $2,497.5
Cash paid to LIPA (15.0)
--------
Net Cash $2,482.5
========
4. The Transferred Assets from LILCO to subsidiaries of MarketSpan will result
in the imposition of federal income taxes on LILCO. Pursuant to the Merger
Agreement, the subsidiaries created by MarketSpan will receive the benefit of
the increased tax basis of the Transferred Assets and will receive the
Transferred Assets net of the tax imposed on LILCO. The tax is derived from the
difference between the fair market value of the Transferred Assets and their
existing tax basis. There are many different ways of valuing assets which may
result in substantially different values. MarketSpan has retained professional
appraisers to assist it in determining the fair market value of the Transferred
Assets. However, the valuation determined by its appraisers is not binding on
the Internal Revenue Service, which may assert a higher value and a
correspondingly greater tax liability. Thus, the actual tax liability and the
amount of cash that will be available to MarketSpan net of such liability cannot
be determined at this time. The unaudited pro forma consolidated balance sheet
as of March 31, 1998, reflects an estimated tax liability of approximately $399
million based upon an estimate of the value of the Transferred Assets. For pro
forma financial reporting purposes, the subsidiaries reversed the existing
deferred tax liability of $162 million relating to the Transferred Assets and
recorded a $237 deferred tax asset, reflecting the estimated income tax effect
by which the tax basis of the Transferred Assets exceeded their book basis.
5. The unaudited pro forma condensed consolidated balance sheet as of March 31,
1998 reflects the reclassification of $67.7 million of KeySpan regulatory tax
assets from deferred charges to regulatory assets in order to consistently
present the regulatory assets.
6. The purchase price for KeySpan, which amounted to approximately $1.260
billion including certain transaction costs not recoverable through rates, has
been determined based upon an average of LILCO's opening and closing stock
prices for the two trading days before and three trading days after December 29,
1996, the Transaction date. The purchase price has been allocated to assets
acquired and liabilities assumed based upon their estimated fair values. It is
anticipated that the fair value of the utility assets acquired is represented by
their book value, which approximates the value of these assets recognized by the
New York State Public Service Commission (PSC) in establishing rates which are
designed to, among other things, provide for a return on the book value of these
assets and the recovery of costs included as depreciation and amortization
charges. The estimated fair values of KeySpan non-utility assets approximate
their carrying values.
At March 31, 1998, the purchase price exceeded the fair value of the net assets
acquired by $177.0 million, which MarketSpan expects to amortize over 40 years.
The actual amount of goodwill to be recorded will be based on the net assets
acquired as of the closing date.
MarketSpan estimates total transaction costs related to the KeySpan Transaction
to be $70 million, $23.7 million of which has been incurred through March 31,
1998. Accordingly, a pro forma adjustment of $46.3 million has been recorded to
reflect additional transaction costs anticipated to be incurred subsequent to
March 31, 1998. Of the total transaction costs, $29.4 million has been
reclassified to Regulatory Assets as MarketSpan will recover these amounts
through rates charged to its gas customers.
In addition, MarketSpan estimates transaction costs related to the LIPA
Transaction to be $26 million, $13 million of which has been incurred through
March 31, 1998. A pro forma adjustment of $13 million has been recorded to
reflect the additional costs anticipated to be incurred subsequent to March 31,
1998.
7. The agreement with LIPA includes a provision for MarketSpan to earn in the
aggregate approximately $11.5 million in annual management service fees from
LIPA for the management of the LIPA Transmission and Distribution System and the
management of all aspects of fuel and power supply. These agreements also
contain certain incentive and penalty provisions which could materially impact
earnings from such agreements.
8. The net pro forma charge of $4.0 million represents the income tax effect
associated with the recording of the pro forma adjustments for the $11.5 million
management fee (See Note 7).
9. No adjustments have been made to earnings on common stock to reflect earnings
on net available proceeds of approximately $1.6 billion to be received, after
remittances to subsidiaries of MarketSpan of approximately $350 million for
working capital purposes, (see Note 3) payment of taxes related to the
Transferred Assets and the funding of VEBA Trusts (see Note 13). If these funds
were invested at 5.93% (the 30 year US Treasury Bond yield at March 31, 1998),
MarketSpan would have realized additional interest income, net of taxes, of
approximately $60.6 million, or approximately $.39 per share, on a pro forma
consolidated basis. Each one percent change in the assumed interest rate, would
increase/decrease interest income, net of taxes, by $11.0 million. LILCO's
allowed rate of return on its common equity for its electric business for the
year ended March 31, 1998 was 11%.
10. As more fully described in the section entitled "The LIPA
Transaction-Agreement and Plan of Merger," as described in the Joint Proxy
Statement/Prospectus dated June 27, 1997, LILCO transferred the Transferred
Assets to subsidiaries of MarketSpan in exchange for shares of MarketSpan common
stock, and $75 million face amount of privately placed MarketSpan Preferred
Stock. This Preferred Stock, issued in two series, is non-voting and
non-convertible. One series has a term of seven years and the other series h as
a term of ten years. For purposes of these pro forma financial statements,
MarketSpan has issued $75 million of Preferred Stock which LILCO re-sold for $75
million and retained the proceeds (i.e. a Retained Asset). A pro forma
adjustment of $5.3 million has been recorded to reflect the increased preferred
stock dividend requirements.
11. A pro forma adjustment in the amount of $4.6 million was made to reflect
call premiums, related to the redemption of certain series of LILCO preferred
stock.
12. A pro forma adjustment of $21.0 million has been recorded to reflect
benefits payable to LILCO officers subsequent to March 31, 1998 resulting from
the completion of the LIPA and KeySpan Transactions. These amounts principally
relate to incentive compensation plans, transaction related incentives and
contract benefits. In accordance with previously executed employment agreements,
LILCO paid during the fiscal year ended March 31, 1998 and through the
Transaction date a total of $67 million to its officers. Approximately $42
million of such payments related to its chairman and $25 million to its
officers.
13. A pro forma adjustment of $250 million to reflect the funding of VEBA trusts
related to LILCO's obligations with respect to post employment benefits other
than pensions with proceeds from the LIPA Transaction and the associated tax
benefits of $87.5 million.
14. KeySpan earnings for the 12 month period ended March 31, 1998 included
non-recurring net gains of $0.25 per share.
15. The unaudited pro forma consolidated condensed financial statements reflect
the exchange of each share of LILCO Common Stock outstanding into 0.880 shares
of MarketSpan common stock and each share of KeySpan common stock outstanding
into one share of MarketSpan common stock, as provided in the KeySpan/LILCO
Agreement.
16. A pro forma adjustment has been recorded to reflect the repayment by LIPA of
amounts funded by LILCO and KeySpan to purchase an interest rate hedge
instrument. The repayment includes principal plus interest.
17. A pro forma adjustment has been recorded to reflect the issuance of
MarketSpan preferred stock, the proceeds from which were used to fund employee
401(k) plans.
