<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: September 19, 1997
THE BROOKLYN UNION GAS COMPANY
(Exact name of registrant as specified in its charter)
NEW YORK 1-722 11-0584613
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation or File Number) Identification No.)
organization)
One MetroTech Center,Brooklyn, New York 11201-3850
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (718) 403-2000
<PAGE>
Item 5. Other Events
The Company is filing this Current Report on Form 8-K to provide
unaudited pro forma combined condensed financial information for
Brooklyn Union and Long Island Lighting Company (LILCO) at June 30,
1997 and for the twelve months ended June 30, 1997 in order to give
effect under the purchase method of accounting to the transactions
summarized in Exhibit 99.1 hereto and in the assumptions set forth
in the notes thereto.
Based on current facts and circumstances, Brooklyn Union and LILCO
believe that the applicability of the purchase method of accounting
is probable. If the LIPA Transaction is not consummated, it is
possible that the combination between Brooklyn Union and LILCO
would qualify for the pooling of interests method of accounting.
The unaudited pro forma combined condensed financial information
set forth in Exhibit 99.1 to this Current Report on Form 8-K
reflects the condensed consolidated financial information of
Brooklyn Union and LILCO contained in their respective Quarterly
Reports on Form 10-Q filed on August 14, 1997, which Quarterly
Report of LILCO is attached hereto as Exhibit 99.2. Exhibits 99.1
and 99.2 are hereby incorporated by reference in response to this
Item 5.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits
The unaudited pro forma combined condensed financial information
and LILCO's Quarterly Report on Form 10-Q filed on August 14, 1997,
referred to above in Item 5 and incorporated herein by reference,
are attached hereto as the following Exhibits:
Exhibit
Number
99.1 Unaudited pro forma combined condensed financial
information for Brooklyn Union and LILCO at June 30, 1997
and for the twelve months ended June 30, 1997.
99.2 LILCO 10-Q Report for the quarter ended June 30, 1997.
2
<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 hereunto duly authorized.
Dated: September 19, 1997
THE BROOKLYN UNION GAS COMPANY
By: /s/ R.M. Desmond
-----------------------------
R.M. Desmond
Vice President, Comptroller and
Chief Accounting Officer
3
<PAGE>
Exhibit Index
Exhibit
Number
99.1 Unaudited pro forma combined condensed financial
information for Brooklyn Union and LILCO at June 30, 1997
and for the twelve months ended June 30, 1997, begins on
page 5.
99.2 LILCO 10-Q Report for the quarter ended June 30, 1997
begins on page 14.
4
<PAGE>
Exhibit 99.1
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
BROOKLYN UNION/LILCO COMBINATION AND LIPA TRANSACTION
(PURCHASE)
The following unaudited pro forma financial information reflects
adjustments to the historical financial statements of LILCO to give
effect to the proposed transfer of LILCO's gas and generation
business to subsidiaries of the newly formed Holding Company
(Holding Company), the proposed stock acquisition of LILCO by a
wholly owned subsidiary of LIPA and the proposed Combination with
Brooklyn Union and LILCO (Combination). The unaudited pro forma
consolidated condensed balance sheet at June 30, 1997 gives effect
to the proposed LIPA Transaction and the Combination as if they had
occurred at June 30, 1997. The unaudited pro forma consolidated
condensed statement of income for the twelve month period ended
June 30, 1997 gives effect to the proposed LIPA Transaction and the
Combination as if they had occurred at July 1, 1996. 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. In April 1997
LILCO changed its year-end from December 31 to March 31.
The following pro forma financial information has been prepared
from, and should be read in conjunction with the historical
consolidated financial statements and related notes thereto of
Brooklyn Union and LILCO. The following information is not
necessarily indicative of the financial position or operating
results that would have occurred had the proposed LIPA Transaction
and the Combination been consummated on the date, or at the
beginning of the period, for which the proposed LIPA Transaction
and the Combination are being given effect nor is it necessarily
indicative of future operating results or financial position.
5
<TABLE>
<CAPTION>
BUG/LILCO HOLDING CORP.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
June 30, 1997
(In Millions)
Brooklyn Union/LILCO
LIPA Transactions As Adjusted Combination
----------------------- ------------------------------------
Holding
LILCO Sale to Pro Forma LILCO Brooklyn Union Pro Forma Company
(Historical) LIPA (1) Adjustments As Adjusted (Historical) Adjustments Pro Forma
---------------------- ---------- ---------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property
Utility plant
Electric $ 3,939.2 $ 2,855.1 $ - $ 1,084.1 $ - $ - $ 1,084.1
Gas 1,180.9 - - 1,180.9 1,815.8 - 2,996.7
Common 265.1 - - 265.1 - - 265.1
Construction work in progress 119.4 53.3 - 66.1 - - 66.1
Nuclear fuel in process and - 0.0
in reactor 15.5 15.5 - 0.0 - - 0.0
Less - Accumulated depreciation
and amortization (1,790.7) (873.2) - (917.5) (447.3) - (1,364.8)
Gas exploration and production, at cost - - - 0.0 591.8 - 591.8
Less - Accumulated depletion - - - 0.0 (200.7) - (200.7)
---------- --------- ---------- ---------- ------------ --------- ---------
Total Property 3,729.4 2,050.7 0.0 1,678.7 1,759.6 0.0 3,438.3
Cost in excess of net assets 0.0
acquired (Goodwill) - - - 0.0 - 308.0 (6) 308.0
Regulatory Assets
Base financial component(less accum.
amortization of $808 ) 3,231.1 3,231.1 - 0.0 - - 0.0
Rate moderation component 406.1 406.1 - 0.0 - - 0.0
Shoreham post-settlement costs 1,000.6 1,000.6 - 0.0 - - 0.0
Shoreham nuclear fuel - - - 0.0 - - 0.0
Unamortized cost of issuing securities - - - 0.0 - - 0.0
Regulatory tax asset 1,760.5 1,760.5 - 0.0 - 72.5 (5) 72.5
Postretirement benefits
other than pensions 353.9 - (299.2)(2) 54.7 - - 54.7
Other 439.6 341.7 - 97.9 - - 97.9
---------- --------- ---------- ---------- ------------ --------- ---------
Total Regulatory Assets 7,191.8 6,740.0 (299.2) 152.6 0.0 72.5 225.1
Nonutility Property
and Other Investments 19.2 14.9 - 4.3 165.8 - 170.1
Current Assets
Cash and cash equivalents 54.0 - 2,404.9 (3) 2,458.9 81.6 - 2,540.5
Special deposits - - - 0.0 - - 0.0
Accounts receivable-net 435.1 290.0 17.9 (2) 163.0 - - 163.0
Materials and supplies at average cost - - - 0.0 - - 0.0
Fuel oil at average cost - - - 0.0 - - 0.0
Gas in storage at average cost - - - 0.0 - - 0.0
Deferred tax asset 86.4 86.4 119.0 (4) 119.0 - - 119.0
Other current assets 254.8 1.8 - 253.0 305.8 - 558.8
---------- --------- ---------- ---------- ------------ --------- ---------
Total Current Assets 830.3 378.2 2,541.8 2,993.9 387.4 0.0 3,381.3
Deferred Charges 81.2 55.1 - 26.1 131.1 (72.5)(5) 84.7
Contractual receivable from LIPA - - 281.3 (2) 281.3 - - 281.3
---------- --------- ---------- ---------- ------------ --------- ---------
Total Assets $ 11,851.9 $ 9,238.9 $ 2,523.9 $ 5,136.9 $ 2,443.9 $ 308.0 $ 7,888.8
========== ========= ========== ========== ============ ========= =========
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements
6
</TABLE>
<TABLE>
<CAPTION>
BUG/LILCO HOLDING CORP.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
June 30, 1997
(In Millions)
Brooklyn Union/LILCO
LIPA Transactions As Adjusted Combination
----------------------- ------------------------------------
Holding
LILCO Sale to Pro Forma LILCO Brooklyn Union Pro Forma Company
(Historical) LIPA (1) Adjustments As Adjusted (Historical) Adjustments Pro Forma
---------------------- ---------- ---------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common Shareholders' Equity 2,531.4 2,437.9 2,404.9 (3) 2,498.4 993.3 253.8 (6,7) 3,745.5
Long-term debt 4,458.3 3,414.6 (75.0)(15) 968.7 733.6 - 1,702.3
Preferred stock 702.1 339.1 75.0 (15) 438.0 6.3 (6.3)(7) 438.0
---------- --------- ---------- ---------- ------------ --------- ---------
Total Capitalization 7,691.8 6,191.6 2,404.9 3,905.1 1,733.2 247.5 5,885.8
Regulatory Liabilities 540.7 509.5 - 31.2 - - 31.2
Current Liabilities
Current maturities of long-term debt - - - 0.0 - - 0.0
Current redemption requirements 0.0 0.0
of preferred stock - - - 0.0 - - 0.0
Accounts payable 0.0 0.0
and accrued liabilities 263.7 146.7 - 117.0 170.1 60.8 (6,7) 347.9
Commercial paper - - - 0.0 - - 0.0
LRPP payable - - - 0.0 - - 0.0
Accrued taxes 43.1 - 399.0 (4) 442.1 40.1 - 482.2
Other current liabilities 347.6 64.6 - 283.0 41.7 (0.3)(7) 324.4
---------- --------- ---------- ---------- ------------ --------- ---------
Total Current Liabilities 654.4 211.3 399.0 842.1 251.9 60.5 1,154.5
Deferred Credits
Deferred federal income tax 2,421.0 2,306.3 (280.0)(4) (165.3) 286.1 - 120.8
Class Settlement - - - 0.0 - - 0.0
Other 109.1 27.3 - 81.8 87.4 - 169.2
---------- --------- ---------- ---------- ------------ --------- ---------
Total Deferred Credits 2,530.1 2,333.6 (280.0) (83.5) 373.5 0.0 290.0
Operating Reserves 434.9 (7.1) - 442.0 - - 442.0
Commitments and Contingencies - - - 0.0 - - 0.0
Minority Interest in
Subsidiary Company - - - 0.0 85.3 - 85.3
---------- --------- ---------- ---------- ------------ --------- ---------
Total Capitalization and Liabilities $ 11,851.9 $ 9,238.9 $ 2,523.9 $ 5,136.9 $ 2,443.9 $ 308.0 $ 7,888.8
========== ========= ========== ========== ============ ========= =========
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements
7
</TABLE>
<TABLE>
<CAPTION>
BUG/LILCO HOLDING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
For the Twelve Months Ended June 30, 1997
(In Millions, Except Per Share Amounts)
Brooklyn Holding
LILCO Sale to Pro Forma LILCO Union Pro Forma Company
(Historical) LIPA Adjustments As Adjusted (Historical) Adjustments Pro Forma
----------- ---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Electric $ 2,448.1 $ 1,499.4 (10) 11.5 (8) 960.2 $ - $ - $ 960.2
Gas-utility sales 659.5 - - 659.5 1,318.7 - 1,978.2
Gas production and other - - - - 141.7 - 141.7
----------- ---------- --------- --------- ---------- --------- ---------
Total Revenues 3,107.6 1,499.4 11.5 1,619.7 1,460.4 - 3,080.1
Operating Expenses
Operations-fuel & purchased power 942.7 14.5 - 928.2 602.5 - 1,530.7
Operations-other 377.0 226.1 - 150.9 370.3 - 521.2
Maintenance 115.0 66.8 - 48.2 54.5 - 102.7
Depreciation,depletion and amortization 155.9 94.2 - 61.7 100.3 6.3 (6) 168.3
Base financial component amortization 101.0 101.0 - - - - 0.0
Rate moderation component amortization 16.8 16.8 - - - - 0.0
Regulatory liability component amortization (88.6) (88.6) - - - - 0.0
Other regulatory amortization 67.4 46.2 - 21.2 - - 21.2
Operating taxes 467.6 278.9 - 188.7 151.7 - 340.4
Federal income taxes 213.8 163.2 5.4 (9) 56.0 46.4 - 102.4
----------- ---------- --------- --------- ---------- --------- ---------
Total Operating Expenses 2,368.6 919.1 5.4 1,454.9 1,325.7 6.3 2,786.9
----------- ---------- --------- --------- ---------- --------- ---------
Operating Income 739.0 580.3 6.1 164.8 134.7 (6.3) 293.2
Other Income 15.7 26.9 - (11.2) 46.5 - 35.3
Income Before Interest Charges 754.7 607.2 6.1 153.6 181.2 (6.3) 328.5
Interest Charges 427.8 345.5 (3.8)(9) 78.5 45.6 - 124.1
Net Income 326.9 261.7 9.9 75.1 135.6 (16 (6.3) 204.4
Preferred stock dividend requirements 52.1 39.9 23.7 (11) 35.9 0.3 (0.3)(7) 35.9
----------- ---------- --------- --------- ---------- --------- ---------
Earnings for Common Stock $ 274.8 $ 221.8 $ (13.8) $ 39.2 $ 135.3 $ (6.0) $ 168.5
=========== ========== ========= ========= ========== ========= =========
Average Common Shares Outstanding 120.8 120.8 120.8 120.8 50.0 (14.5)(3) 156.3
=========== ========== ========= ========= ========== ========= =========
Earnings per Common and Equivalent Share $ 2.27 $ 1.84 $ (0.11) $ 0.32 $ 2.70 $ 0.41 $ 1.08
=========== ========== ========= ========= ========== ========= =========
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements
8
</TABLE>
<PAGE>
Notes to Unaudited Pro Forma Consolidated Condensed Financial
Statements
1. The historical financial statements of LILCO have been
adjusted to give effect to the proposed transaction with LIPA,
pursuant to which LILCO will distribute certain of its net
assets relating to its gas and generation business
("Transferred Assets") to subsidiaries of the Holding Company.
LIPA will then acquire 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 LILCO, and are
subject to adjustment pursuant to the terms of the LIPA
agreement.
In connection with this transaction, the principal assets to
be 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 to be 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 the Holding Company 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 the Holding
Company.
3. The Cash Purchase Price to be paid by LIPA in connection with
its stock acquisition of LILCO will be $2,497.5 million. The
Cash Purchase Price was determined based upon the estimated
net book value of the LILCO Retained Assets of $2,500.8
million as estimated by LILCO in a projected balance sheet as
of December 31, 1997. Based upon the balance sheet as of
June 30, 1997, the net book value of the LILCO Retained
Assets amounted to $2,437.9 million. In addition, the LIPA
Transaction obligates the Holding Company upon the closing of
the transaction to remit to LIPA $15 million associated with
the recovery through litigation of certain real estate taxes
previously paid. Transaction costs are currently estimated to
be $18 million. Assuming the LIPA Transaction was completed
9
<PAGE>
on June 30, 1997, the net cash to be received by the Holding
Company would amount to:
Cash Purchase Price ........................... $2,437.9
Cash Paid to LIPA ............................. (15.0)
Transaction Costs ............................. (18.0)
Net Cash....................................... $2,404.9
4. The distribution of Transferred Assets from LILCO to
subsidiaries of the Holding Company will result in the
imposition of federal income taxes on LILCO. Pursuant to the
LIPA Agreement, the subsidiaries created by the Holding
Company to receive the Transferred Assets will receive the
benefit of the increased tax basis of the Transferred Assets
and will pay the LILCO tax. If the LIPA Transaction were to
have occurred at June 30, 1997, the tax would have amounted
to approximately $399 million. The tax is derived from the
difference between the estimated fair value of the distributed
assets and their existing tax basis. For financial reporting
purposes, the subsidiaries reversed the existing deferred tax
liability of $280 million relating to the Transferred Assets
and recorded a $119 million deferred tax asset reflecting the
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 June 30, 1997 reflects the reclassification of $72.5
million of Brooklyn Union regulatory tax assets from deferred
charges to regulatory assets in order to consistently present
the regulatory assets of Brooklyn Union and LILCO.
6. The purchase price for Brooklyn Union at June 30, 1997, which
amounted to approximately $1.245 billion including
approximately $54.1 million of transaction costs, 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 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 Brooklyn Union's non-utility assets approximate
10
<PAGE>
their carrying values. Both Brooklyn Union and LILCO will
seek PSC approval for recovery of transaction costs.
Based upon current information, the purchase price, including
merger related transaction costs, exceeds the fair value of
the net assets acquired by $308.0 million, which will be
amortized to income over 40 years.
7. In connection with the formation of KeySpan, Brooklyn Union
will redeem its outstanding preferred stock at a premium of 2%
per terms of the original issuance agreement. As a result,
accounts payable has been adjusted to reflect a payable of
$6.3 million including premiums of $0.1 million which have
been charged to Common Shareholders' Equity.
8. The agreement with LIPA includes a provision for the Holding
Company 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.
9. The pro forma charge of $5.4 million represents the income tax
effect associated with the recording of the pro forma
adjustments for the $11.5 million management fee (see Note 8),
and a reduction in interest expense of approximately $3.8
million associated with the recapitalization of the subsidiary
which contains the gas and generation businesses.
10. Revenues for both the assets acquired by LIPA and the
Transferred Assets were determined based upon a revenue
requirements model which considered the cost of service for
these assets and a return on capitalization based upon an
imputed allowed rate of return.
11. No adjustments have been made to earnings on common stock to
reflect earnings on net available proceeds of approximately
$1.7 billion to be received, after remittances to the Holding
Company's gas and generation subsidiaries for working capital
purposes (see Notes 3 and 12). If these funds were invested
at 6.78% (the 30 year US Treasury Bond yield based on recent
prices), the Holding Company would have realized additional
interest income, net of taxes, of approximately $74.9 million,
or approximately $.48 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 is currently 11%.
11
<PAGE>
12. Subsequent to the sale of LIPA, a portion of the proceeds to
be received by the Holding Company will be remitted to LILCO's
gas and generation subsidiaries in order to meet the
subsidiaries working capital needs. Such proposed transaction
has been eliminated in the consolidation process.
13. The allocation between Brooklyn Union and LILCO and their
customers of the estimated cost savings resulting from the
Combination, net of the costs incurred to achieve such
savings, will be subject to regulatory review and approval.
None of the estimated cost savings, have been reflected in the
unaudited pro forma consolidated condensed financial
statements.
14. The unaudited pro forma consolidated condensed financial
statements reflect the exchange of each share of LILCO Common
Stock outstanding into 0.880 shares of Holding Company Common
Stock and each share of Brooklyn Union Common Stock
outstanding into one share of Holding Company Common Stock, as
provided in the Brooklyn Union/LILCO Agreement.
15. In connection with the LIPA Transaction, LILCO will
transfer the Transferred Assets to subsidiaries of the Holding
Company in exchange for shares of the Holding Company Common
Stock and up to $75 million face amount of Holding Company
Preferred Stock. The privately placed Preferred Stock will be
non-voting, non-convertible and have a five-year term. For
purposes of these pro forma financial statements, it is
assumed that the Holding Company will issue $75 million of
Preferred Stock, LILCO will sell the Preferred Stock for $75
million in proceeds and will retain the proceeds (i.e., a
Retained Asset).
With a $75 million increase in the Retained Assets, the LIPA
Agreement provides that the Retained Debt will increase by a
corresponding amount. The LIPA Agreement also provides that
if the Holding Company were to issue an amount other than $75
million of Preferred Stock, the incremental difference between
the amount actually issued and $75 million, will result in a
corresponding increase or decrease in the amount of accounts
payable retained by LILCO. These pro forma financial
statements reflect a reduction in interest expense for the
reduced level of subsidiary debt, and to reflect an increase
in preferred stock dividend requirements. Finally, for
purposes of these pro forma financial statements, it is
assumed that the dividend rate on this privately placed
Preferred Stock will be 7.95%, which is equal to the Company's
highest cost preferred stock.
16. The Brooklyn Union earnings for the 12 month period ended
June 30, 1997 include non-recurring income aggregating
approximately $33.5 million, net of taxes, or $0.68 per share,
relating to gains on the initial public offering of a
12
<PAGE>
subsidiary's stock and the sale of an investment in a Canadian
plant. This income was partially offset by a $7.8 million
charge, net of taxes, or $0.16 per share, relating to
reorganization expenses incurred by the subsidiary.
13
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-3571
LONG ISLAND LIGHTING COMPANY
Incorporated pursuant to the Laws of New York State
Internal Revenue Service - Employer Identification No. 11-1019782
175 East Old Country Road, Hicksville, New York 11801
(516) 755-6650
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.
Yes X No
The total number of shares of the registrant's Common Stock, $5 par value,
outstanding on June 30, 1997, was 121,146,042.
<PAGE>
LONG ISLAND LIGHTING COMPANY
Page No.
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Income 3
Balance Sheet 5
Statement of Cash Flows 7
Notes to Financial Statements 8
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 11
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote
of Security Holders 21
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 25
2
<PAGE>
LONG ISLAND LIGHTING
STATEMENT OF INCOME
(UNAUDITED)
(Thousands of Dollars - except per share amounts)
Three Months Ended
----------------------
June 30
1997 1996
----------------------
Revenues
Electric $ 560,086 $ 576,963
Gas 104,402 117,639
--------- ---------
Total Revenues 664,488 694,602
--------- ---------
Expenses
Operations - fuel and purchased power 191,776 203,891
Operations - other 94,306 89,979
Maintenance 27,782 29,952
Depreciation and amortization 38,893 37,952
Base financial component amortization 25,243 25,243
Rate moderation component amortization 9,198 (10,604)
Regulatory liability component amortization (22,143) (22,143)
Other regulatory amortization 13,052 57,990
Operating taxes 109,324 111,295
Federal income tax - current 22,615 10,162
Federal income tax - deferred and other 10,363 19,820
--------- ---------
Total Expenses 520,409 553,537
--------- ---------
Operating Income 144,079 141,065
--------- ---------
Other Income and (Deductions)
Rate moderation component carrying charges 5,981 6,274
Class Settlement (4,199) (5,009)
Other income and deductions, net 2,370 10,186
Allowance for other funds used during construction 958 617
Federal income tax - current (701) -
Federal income tax - deferred and other (188) (2,099)
--------- ---------
Total Other Income and (Deductions) 4,221 9,969
--------- ---------
Income Before Interest Charges 148,300 151,034
--------- ---------
Interest Charges and (Credits)
Interest on long-term debt 87,916 96,024
Other interest 16,274 15,301
Allowance for borrowed funds used during construction (1,051) (815)
------- ---------
Total Interest Charges and (Credits) 103,139 110,510
--------- ---------
Net Income 45,161 40,524
Preferred stock dividend requirements 12,968 13,071
--------- ---------
Earnings for Common Stock $ 32,193 $ 27,453
========= =========
Average Common Shares Outstanding (000) 121,146 120,221
Earnings per Common Share $ 0.26 $ 0.23
Dividends Declared per Common Share $ 0.445 $ 0.445
See Notes to Financial Statements.
3
<PAGE>
LONG ISLAND LIGHTING COMPANY
STATEMENT OF INCOME
(UNAUDITED)
(Thousands of Dollars - except per share amounts)
Six Months Ended
June 30
1997 1996
-----------------------
Revenues
Electric $1,117,876 $1,136,231
Gas 397,793 422,586
---------- ----------
Total Revenues 1,515,669 1,558,817
---------- ----------
Expenses
Operations - fuel and purchased power 493,643 514,160
Operations - other 189,979 193,848
Maintenance 57,123 60,439
Depreciation and amortization 77,454 75,517
Base financial component amortization 50,485 50,485
Rate moderation component amortization 15,105 (25,930)
Regulatory liability component amortization (44,286) (44,286)
Other regulatory amortization 25,271 85,202
Operating taxes 226,837 231,323
Federal income tax - current 45,993 23,000
Federal income tax - deferred and other 43,986 63,569
---------- ----------
Total Expenses 1,181,590 1,227,327
---------- ----------
Operating Income 334,079 331,490
---------- ----------
Other Income and (Deductions)
Rate moderation component carrying charges 11,901 12,175
Class Settlement (8,695) (10,381)
Other income and deductions, net 3,015 16,106
Allowance for other funds used during construction 1,676 1,336
Federal income tax - current (701) -
Federal income tax - deferred and other 600 352
---------- ----------
Total Other Income and (Deductions) 7,796 19,588
---------- ----------
Income Before Interest Charges 341,875 351,078
---------- ----------
Interest Charges and (Credits)
Interest on long-term debt 178,084 198,282
Other interest 32,933 32,272
Allowance for borrowed funds used during construction (2,000) (1,757)
------- ----------
Total Interest Charges and (Credits) 209,017 228,797
---------- ----------
Net Income 132,858 122,281
Preferred stock dividend requirements 25,937 26,143
---------- ----------
Earnings for Common Stock $ 106,921 $ 96,138
========== ==========
Average Common Shares Outstanding (000) 121,066 120,082
Earnings per Common Share $ 0.88 $ 0.80
Dividends Declared per Common Share $ 0.89 $ 0.89
See Notes to Financial Statements.
4
<PAGE>
LONG ISLAND LIGHTING COMPANY
BALANCE SHEET
(Thousands of Dollars)
June 30 March 31 December 31
1997 1997 1996
(unaudited) (unaudited) (audited)
----------- ----------- ---------
ASSETS
Utility Plant
Electric $ 3,939,163 $ 3,900,264 $ 3,882,297
Gas 1,180,860 1,171,183 1,154,543
Common 265,111 263,267 260,268
Construction work in progress 119,435 108,850 112,184
Nuclear fuel in process
and in reactor 15,512 15,503 15,454
----------- ---------- ----------
5,520,081 5,459,067 5,424,746
----------- ---------- ----------
Less - Accumulated depreciation and
amortization 1,790,662 1,759,110 1,729,576
----------- ---------- ----------
Total Net Utility Plant 3,729,419 3,699,957 3,695,170
----------- ---------- ----------
Regulatory Assets
Base financial component (less
accumulated amortization of
$807,768, $782,525 and $757,282) 3,231,062 3,256,305 3,281,548
Rate moderation component 406,148 409,512 402,213
Shoreham post-settlement costs 1,000,623 996,270 991,795
Shoreham nuclear fuel 68,050 68,581 69,113
Unamortized cost of issuing
securities 180,467 187,309 194,151
Postretirement benefits
other than pensions 353,851 357,668 360,842
Regulatory tax asset 1,760,486 1,767,164 1,772,778
Other 191,131 200,137 199,879
----------- ---------- ----------
Total Regulatory Assets 7,191,818 7,242,946 7,272,319
----------- ---------- ----------
Nonutility Property and
Other Investments 19,235 18,870 18,597
----------- ---------- ----------
Current Assets
Cash and cash equivalents 54,010 64,539 279,993
Special deposits 67,916 37,631 38,266
Customer accounts receivable (less
allowance for doubtful accounts of
$22,853, $23,675 and $25,000) 255,126 305,436 255,801
Other accounts receivable 36,981 42,946 65,764
Accrued unbilled revenues 142,969 141,389 169,712
Materials and supplies at average cost 55,053 55,454 55,789
Fuel oil at average cost 48,940 49,703 53,941
Gas in storage at average cost 43,231 10,893 73,562
Deferred tax asset 86,447 93,349 145,205
Prepayments and other current assets 39,595 8,805 8,569
----------- ----------- -----------
Total Current Assets 830,268 810,145 1,146,602
----------- ----------- -----------
Deferred Charges 81,133 77,656 76,991
----------- ----------- -----------
Total Assets $11,851,873 $11,849,574 $12,209,679
=========== =========== ===========
See Notes to Financial Statements.
5
<PAGE>
LONG ISLAND LIGHTING COMPANY
BALANCE SHEET
(Thousands of Dollars)
June 30 March 31 December 31
1997 1997 1996
(unaudited) (unaudited) (audited)
----------- ----------- -----------
CAPITALIZATION AND LIABILITIES
Capitalization
Long-term debt $ 4,371,675 $ 4,471,675 $ 4,471,675
Unamortized discount on debt (14,372) (14,628) (14,903)
----------- ----------- -----------
4,357,303 4,457,047 4,456,772
----------- ----------- -----------
Preferred stock - redemption required 638,500 638,500 638,500
Preferred stock - no redemption
required 63,584 63,598 63,664
----------- ----------- -----------
Total Preferred Stock 702,084 702,098 702,164
----------- ----------- -----------
Common stock 605,923 605,022 603,921
Premium on capital stock 1,134,998 1,131,576 1,127,971
Capital stock expense (48,588) (48,915) (49,330)
Retained earnings 840,034 861,751 840,867
Treasury stock, at cost (902) (385) (60)
----------- ----------- -----------
Total Common Shareowners' Equity 2,531,465 2,549,049 2,523,369
----------- ----------- -----------
Total Capitalization 7,590,852 7,708,194 7,682,305
----------- ----------- -----------
Regulatory Liabilities
Regulatory liability component 158,718 178,558 198,398
1989 Settlement credits 122,835 125,138 127,442
Regulatory tax liability 96,771 100,377 102,887
Other 162,406 158,660 139,510
----------- ----------- -----------
Total Regulatory Liabilities 540,730 562,733 568,237
----------- ----------- -----------
Current Liabilities
Current maturities of long-term debt 101,000 1,000 251,000
Current redemption requirements
of preferred stock 1,050 1,050 1,050
Accounts payable and
accrued expenses 263,674 230,189 289,141
LRPP payable 40,499 40,499 40,499
Accrued taxes (including federal
income tax of $49,561, $49,262
and $25,884) 43,070 51,157 63,640
Accrued interest 158,377 143,983 160,615
Dividends payable 58,538 58,474 58,378
Class Settlement 60,000 58,333 55,833
Customer deposits 29,051 29,173 29,471
----------- ----------- -----------
Total Current Liabilities 755,259 613,858 949,627
----------- ----------- -----------
Deferred Credits
Deferred federal income tax 2,421,021 2,420,443 2,442,606
Class Settlement 81,380 89,487 98,497
Other 27,705 20,889 39,447
----------- ----------- -----------
Total Deferred Credits 2,530,106 2,530,819 2,580,550
----------- ----------- -----------
Operating Reserves
Pensions and other postretirement
benefits 388,830 387,048 381,996
Claims and damages 46,096 46,922 46,964
----------- ----------- -----------
Total Operating Reserves 434,926 433,970 428,960
----------- ----------- -----------
Commitments and Contingencies - - -
----------- ----------- -----------
Total Capitalization and
Liabilities $11,851,873 $11,849,574 $12,209,679
=========== =========== ===========
See Notes to Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
LONG ISLAND LIGHTING COMPANY
STATEMENT OF CASH FLOWS
(UNAUDITED)
(Thousands of Dollars)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Operating Activities
Net Income $ 45,161 $ 40,524 $ 132,858 $ 122,281
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for doubtful accounts 3,870 3,847 8,691 8,675
Depreciation and amortization 38,893 37,952 77,454 75,517
Base financial component amortization 25,243 25,243 50,485 50,485
Rate moderation component amortization 9,198 (10,604) 15,105 (25,930)
Regulatory liability component amortization (22,143) (22,143) (44,286) (44,286)
Other regulatory amortization 13,052 57,990 25,271 85,202
Rate moderation component carrying charges (5,981) (6,274) (11,901) (12,175)
Class Settlement 4,199 5,009 8,695 10,381
Amortization of cost of issuing and
redeeming securities 7,934 8,682 16,021 18,168
Federal income tax - deferred and other 10,551 21,918 43,386 63,217
Allowance for other funds used during
construction (958) (617) (1,676) (1,336)
Gas Cost Adjustment 2,512 6,873 (5,379) 26,063
Other 23,066 15,738 47,551 31,280
Changes in operating assets and liabilities
Accounts receivable 54,655 60,563 23,017 56,571
Accrued unbilled revenues (1,580) (1,459) 26,743 34,313
Materials and supplies, fuel oil and
gas in storage (31,174) (48,202) 36,068 (4,500)
Accounts payable and accrued expenses 33,485 22,994 (25,467) (9,003)
Accrued taxes (8,087) (48,948) (20,570) (59,197)
Class Settlement (10,639) (11,219) (21,645) (16,585)
Special deposits (30,285) 27,159 (29,650) 27,159
Other (27,288) (18,171) (57,522) (30,414)
--------- --------- --------- ---------
Net Cash Provided by Operating Activities 133,684 166,855 293,249 405,886
--------- --------- --------- ---------
Investing Activities
Construction and nuclear fuel expenditures (69,219) (62,594) (118,634) (106,783)
Shoreham post-settlement costs (11,983) (14,307) (24,087) (30,105)
Other 221 4 (577) (1,202)
--------- --------- --------- ---------
Net Cash Used in Investing Activities (80,981) (76,897) (143,298) (138,090)
--------- --------- --------- ---------
Financing Activities
Proceeds from sale of common stock 4,309 4,753 8,950 9,425
Redemption of long-term debt - (415,000) (250,000) (415,000)
Preferred stock dividends paid (12,968) (13,071) (25,938) (26,143)
Common stock dividends paid (53,844) (53,381) (107,593) (106,628)
Other (729) 133 (1,353) (226)
--------- --------- --------- ---------
Net Cash Used in Financing Activities (63,232) (476,566) (375,934) (538,572)
--------- --------- --------- ---------
Net (decrease) in cash and cash equivalents ($10,529) ($386,608) ($225,983) ($270,776)
========= ========= ========= =========
Cash and cash equivalents at beginning
of period $ 64,539 $ 467,285 $ 279,993 $ 351,453
Net (decrease) in cash and cash equivalents (10,529) (386,608) (225,983) (270,776)
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 54,010 $ 80,677 $ 54,010 $ 80,677
========= ========= ========= =========
See Notes to Financial Statements.
7
</TABLE>
<PAGE>
Notes to Financial Statements
For the Three Months Ended June 30, 1997
(Unaudited)
Note 1. Basis of Presentation
These Notes to Financial Statements reflect events subsequent to January 31,
1997, the date of the most recent Report of Independent Auditors, through the
date of this Report on Form 10-Q for the three months ended June 30, 1997.
These Notes to Financial Statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and six months ended June 30, 1997, the Company's
Quarterly Report on Form 10-Q for the three months ended March 31, 1997, the
Company's Annual Report on Form 10-K/A filed June 30, 1997, for the Year Ended
December 31, 1996, and the Company's Joint Proxy Statement/Prospectus filed
June 30, 1997.
The financial statements furnished are unaudited. However, in the opinion of
management, the financial statements include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the financial
statements for the interim periods presented. Operating results for the
interim periods are not necessarily indicative of results to be expected for
an entire year, due to seasonal, operating and other factors.
On April 11, 1997 the Company changed its year end to March 31. Accordingly,
the Company's financial statements have been presented on the new basis as
well as its historical basis for comparative purposes.
Certain prior year amounts have been reclassified to be consistent with
current year presentation.
Note 2. Brooklyn Union/LIPA Transactions
Brooklyn Union Transaction
On December 29, 1996, the Company and Brooklyn Union entered into an Agreement
and Plan of Exchange (Share Exchange Agreement or Brooklyn Union Transaction),
pursuant to which the outstanding common stock of the companies will be
exchanged for common stock of a new holding company, yet to be named. The
Share Exchange Agreement, filed as an exhibit to a Form 8-K filed December 30,
1996, was amended and restated to reflect certain technical changes as of
February 7, 1997 and again as of June 26, 1997.
The Brooklyn Union Transaction has been approved by both companies' boards of
directors; the common stock shareholders of both companies approved the
transaction at separate meetings held on August 7, 1997.
8
<PAGE>
The Brooklyn Union Transaction is conditioned upon, among other things, the
receipt of all required regulatory approvals. On July 17, 1997, the Federal
Energy Regulatory Commission (FERC) approved the Brooklyn Union Transaction.
The Company is unable to determine when, or if, all other required regulatory
approvals will be obtained.
Long Island Power Authority Transaction
On June 26, 1997, LILCO and the Long Island Power Authority (LIPA) entered
into definitive agreements pursuant to which, after the transfer of LILCO's
gas assets, non-nuclear electric generating facility assets and certain other
assets and liabilities to one or more newly-formed subsidiaries of the new
holding company, LILCO's stock will be sold to LIPA for $2.4975 billion in
cash. Upon completion of the LIPA transaction, it is anticipated that LIPA
will own LILCO's electric transmission and distribution system, its 18%
interest in the Nine Mile Point 2 Nuclear Power Station, and its electric
regulatory assets and liabilities, and will assume or refinance approximately
$339 million in preferred stock and approximately $3.6 billion in long term
debt.
As part of the LIPA Transaction, the definitive agreements contemplate that
one or more subsidiaries of the newly formed holding company will enter into
agreements with LIPA, pursuant to which such subsidiaries will provide
management and operations services to LIPA with respect to the transmission
and distribution system, sell power generated by the non-nuclear power plants
to LIPA, and manage LIPA's fuel and electric purchases and any off-system
electric sales. In addition, three years after the LIPA Transaction is
consummated, LIPA will have the right for a one year period to acquire the
non-nuclear generating assets. The purchase price for such assets would be
the fair market value at the time of the exercise of the right, which value
will be determined by independent appraisers.
On July 16, 1997, the New York State Public Authorities Control Board
unanimously approved the definitive agreements related to the LIPA Transaction
subject to the following conditions: (1) within one year, LIPA must establish
a plan for open access to the electric distribution system; (2) LIPA may not
purchase the generating facilities, as contemplated in the generation purchase
right agreement, at a price greater than book value; (3) the holding company
formed in connection with the LIPA Transaction (or the Brooklyn Union
Transaction) must agree to invest, over a ten year period, at least $1.3
billion in energy-related and economic development projects, and natural gas
infrastructure projects on Long Island; (4) LIPA will guarantee that, over a
ten year period, average electric rates will be reduced by no less than
9
<PAGE>
fourteen percent when measured against the Company's rates today. As part of
this guarantee, no less than 2% cost savings to LIPA customers must result
from the savings attributable to the Brooklyn Union transaction; and (5) LIPA
will not increase average customer rates by more than 2 1/2% over a twelve
month period without approval from the PSC.
In addition, the holders of common and preferred stock of the Company eligible
to vote approved the LIPA Transaction at the meeting held on August 7, 1997.
Related Filings
On June 30, 1997, a Registration Statement on Form S-4 was filed with the
Securities and Exchange Commission in conjunction with the filing of a Joint
Proxy Statement on the proposed transactions affecting the Company.
In July 1997, the Company, Brooklyn Union and LIPA filed requests for private
letter rulings with the Internal Revenue Service regarding certain federal
income tax issues which require favorable rulings in order for the LIPA
Transaction to close.
Note 3. Rate Matters
In May 1997, the Company filed a petition with the PSC, seeking among other
things to: 1) re-institute the gas excess earnings mechanism for the gas rate
year ending November 30, 1997 whereby earnings in excess of a return on common
equity of 11.0% would be allocated equally between ratepayers and shareowners,
with the ratepayers' portion being applied to manufactured gas plant site
remediation costs; and 2) continue a) the Rate Moderation Component (RMC) and
b) the Long Island Ratemaking and Performance Plan (LRPP) ratemaking
mechanisms and c) the performance incentive programs for the electric rate
year ending November 30, 1997.
Note 4. Capitalization
In February 1997, the Company retired $250 million of General and Refunding
Bonds at maturity. The Company satisfied this obligation with cash on hand
and by utilizing interim financing of $30 million obtained through its
Revolving Credit Agreement (RCA). The Company repaid this short-term RCA
borrowing of $30 million in March 1997.
At the August 7, 1997 meeting the holders of common stock approved an
amendment to the Company's certificate of incorporation to increase the total
amount of authorized common stock to 160,000,000 common shares.
10
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Earnings
Earnings for common stock for the three months ended June 30, 1997, were $32.2
million or $0.26 per common share compared with $27.5 million or $0.23 per
share for the same period last year.
For the six months ended June 30, 1997, earnings for common stock amounted to
$106.9 million or $.88 per common share compared to $96.1 million or $.80 per
common share for the same period last year.
Electric business earnings increased for the three and six month periods ended
June 30, 1997, compared to the same periods last year. Factors contributing
to these increases included the Company's continuing efforts to control
operations and maintenance expenses and the efficient use of cash generated by
operations to retire maturing debt.
Gas business earnings for the three month period ended June 30, 1997 decreased
when compared to the prior year as a result of lower sales volumes. For the
six month period ended June 30, 1997, earnings were equal to those of the same
period last year, despite lower sales volumes resulting from warmer weather.
Contributing to earnings for the six months ended June 30, 1997 were a one-
time revenue enhancement relating to an Independent Power Producer (IPP)
contract and lower operations and maintenance expenses.
Revenues
Electric
The decrease in electric revenues of approximately $16.9 and $18.4 million for
the three and six months ended June 30, 1997, respectively, when compared to
the same periods in 1996, was primarily due to lower sales volumes resulting
from milder weather experienced in the region during the three months ended
June 30, 1997. The decrease in revenues resulting from these lower sales
volumes, however, had no effect on earnings due to the Company's current
electric rate structure which includes a revenue reconciliation mechanism that
eliminates the impact on earnings of sales volumes that are above or below
adjudicated levels.
Gas
The decrease in gas revenues of approximately $13.2 and $24.8 million for the
three and six months ended June 30, 1997, respectively, when compared to the
same periods in 1996, was primarily the result of lower fuel expense
11
<PAGE>
recoveries driven by lower sales volumes associated with the milder weather
experienced in the Company's service territory during 1997. Variations in
weather have a limited impact on revenues as the Company's gas rate structure
includes a weather normalization clause which mitigates the impact on revenues
of experiencing weather that is warmer or colder than normal.
Fuel and Purchased Power
Fuel and purchased power expenses for the three and six months ended June 30,
1997 and 1996 were as follows:
Three Months Ended Six Months Ended
6/30/97 6/30/96 6/30/97 6/30/96
------------------ ----------------
(In Millions) (In Millions)
Electric System
Oil $ 18 $ 26 $ 55 $ 92
Gas 52 37 91 45
Nuclear 4 4 8 8
Purchased Power 75 81 160 162
---- ---- ---- ----
Total Electric Fuel Cost 149 148 314 307
Gas System 43 56 180 207
---- ---- ---- ----
Total $192 $204 $494 $514
==== ==== ==== ====
Electric
For the three months ended June 30, 1997, electric fuel expense increased
slightly despite lower sales volumes as oil and purchased power prices
increased. This increase in electric fuel costs was mitigated as the Company
was able to generate increased amounts of energy with more economical gas.
Of the Company's eleven steam generation units, nine are capable of burning
natural gas, while seven are dual-fired. This provides the Company with the
ability to burn the most cost efficient fuel available, consistent with
seasonal environmental requirements. In an effort to maximize the Company's
operating flexibility, the Company has plans to convert its two remaining oil-
fired steam generating units to dual fired units within the next two years.
For the six months ended June 30, 1997, electric fuel costs were higher when
compared to the same period last year, primarily as a result of a reduction in
profits generated by electric off-system gas sales. Profits from such gas
sales are used to offset the cost of fuel for electric generation, supporting
the Company's goal of providing electric energy to customers at the lowest
cost possible. Also contributing to the increase in this period were higher
fuel oil and purchased power prices.
12
<PAGE>
Electric Energy Available
The percentages of total electric energy available by type of fuel for
electric operations for the three months ended and the six months ended June
30, 1997 and 1996 were as follows:
Three Months Ended Six Months Ended
6/30/97 6/30/96 6/30/97 6/30/96
------- ------- ------- -------
Oil 8% 16% 16% 29%
Gas 43 25 38 18
Nuclear 11 11 10 10
Purchases 38 48 36 43
----- ---- ---- ----
Total 100% 100% 100% 100%
===== ==== ==== ====
The use of gas for electric generation increased for the three and six months
ended June 30, 1997 as gas became more economical than fuel oil and purchased
power. The Company also experienced lower electric off-system gas sales for
the six months ended June 30, 1997, making more gas available for use in
generating electricity.
Gas
Gas fuel costs for operating the gas business decreased for the three and six
months ended June 30, 1997, when compared to the same period last year, due to
lower gas prices coupled with a decrease in sales volumes. Also contributing
to the decrease in the gas fuel costs is the operation of the Gas Cost
Adjustment (GCA) mechanism which requires the Company to increase or decrease
current year fuel expense for differences between amounts collected and
amounts actually spent for fuel during the previous rate year. For the three
and six months ended June 30, 1997, the amount being refunded, via the GCA, is
greater than that of the same three and six month periods of the prior year.
Operations and Maintenance Expenses
Operations and maintenance (O&M) expenses, excluding fuel and purchased power,
amounted to $122.1 million for the three months ended June 30, 1997, compared
to $119.9 million for the three months ended June 30, 1996. This increase is
primarily due to the timing of the recognition of costs related to certain
employee benefits.
For the six months ended June 30, 1997, O&M expenses amounted to $247.1
million, compared to $254.3 million for the six months ended June 30, 1996.
This decrease, partially offset by the employee benefit costs noted above, is
primarily attributable to the Company's cost containment programs.
13
<PAGE>
Rate Moderation Component
The Rate Moderation Component (RMC) reflects the difference between the
Company's electric revenue requirements under conventional ratemaking and the
revenues provided by its electric rate structure. The RMC is adjusted monthly
for the operation of the Company's Fuel Moderation Component (FMC) mechanism
and the difference between the Company's share of actual operating costs at
Nine Mile Point 2 Nuclear Power Station (NMP2) and amounts provided for in
electric rates.
For the three and six months ended June 30, 1997, the Company recorded non-
cash charges to income of approximately $9.2 million and $15.1 million,
respectively, as operating income generated by the Company's electric rate
structure exceeded that required under a conventional ratemaking calculation.
For the three and six months ended June 30, 1996, the Company recorded non-
cash credits to income of approximately $10.6 million and $25.9 million,
respectively, as operating income generated by the Company's electric rate
structure was below that required under a conventional ratemaking calculation.
The Company continues to believe that the full amortization and recovery of
the RMC balance, which at June 30, 1997, was approximately $406 million, will
take place within the time frame established by the Rate Moderation Agreement
(RMA), in accordance with the rate plans submitted to the PSC for the single
rate year (1997) and the three year rate period 1997 through 1999. In the
event that the Long Island Power Authority (LIPA) Transaction is terminated,
the Company expects that the PSC will issue an order providing for, among
other things, the continuing recovery, through rates, of the RMC balance. If
such an electric rate order is not obtained or does not provide for the
continuing recovery of the RMC balance, the Company may be required to write-
off the amount not expected to be provided for in rates. For a further
discussion of the LIPA Transaction, see the Joint Proxy Statement/Prospectus
filed June 30, 1997.
For a further discussion of the RMC, RMA and FMC, see the Company's Annual
Report on Form 10-K/A filed June 30, 1997, for the Year Ended December 31,
1996.
Other Regulatory Amortization
For the three months ended June 30, 1997 and 1996, other regulatory
amortization was a non-cash charge to income of $13.1 million and $58.0
million, respectively. For the six months ended June 30, 1997, and 1996,
other regulatory amortization was a non-cash charge to income of $25.3 million
and $85.2 million, respectively. These variances are primarily due to changes
in the items discussed below. Such variances have no impact on earnings since
14
<PAGE>
they reflect the net deferral of income and expense resulting from the
Company's ratemaking mechanisms.
The changes in Other Regulatory Amortizations for the three and six months
ended June 30, 1997 are as follows:
Three Months Six Months
(In thousands of dollars)
- --------------------------------------------------------
(Income) (Income)
Expense Expense
- --------------------------------------------------------
Net Margin $(28,794) $(36,985)
Amortization of LRPP Deferral (15,899) (32,189)
Excess Earnings - Electric (5,586) 5,066
Excess Earnings - Gas 5,909 5,313
Other (568) (1,136)
- -------------------------------------------------------
$(44,938) $(59,931)
=======================================================
Net Margin- An electric revenue reconciliation mechanism, established under
the LILCO Ratemaking and Performance Plan (LRPP), which eliminates the impact
on earnings of experiencing sales that are above or below adjudicated levels
by providing a fixed annual net margin level (defined as sales revenue, net of
fuel and gross receipts taxes). Variations in electric revenue resulting from
differences between actual and adjudicated net margin sales levels are
deferred on a monthly basis during the rate year through a charge or credit to
other regulatory amortization. These deferrals are either refunded to or
recovered from ratepayers as explained below under "LRPP Amortization."
15
<PAGE>
For the three months ended June 30, 1997, actual and adjudicated sales levels
approximated the target levels. For the three months ended June 30, 1996, the
Company recorded a non-cash charge to income of $28.7 million. Actual sales
levels for six months ended June 30, 1997 were lower than the adjudicated
amount and the Company recorded a non-cash credit to income of $10.3 million,
whereas for the six months ended June 30, 1996, actual levels were higher than
the adjudicated net margin and the Company recorded a non-cash charge to
income of $26.7 million.
LRPP Amortization- As established under the LRPP, deferred balances resulting
from the electric business net margin, electric property tax reconciliation,
earned performance incentives, and associated carrying charges are accumulated
until the end of each rate year. The first $15 million of the total deferral
is recovered from or credited to electric ratepayers by increasing or
decreasing the RMC balance. Amounts deferred in excess of $15 million, upon
approval by the PSC, are refunded to or recovered from ratepayers through the
FCA mechanism over a subsequent 12-month period, with the offset being
recorded in other regulatory amortization.
For the three and six months ended June 30, 1997, the Company has not refunded
the deferred LRPP balance in excess of $15 million, related to the rate year
ended November 30, 1995, as the PSC has yet to grant the Company permission to
do so. For the three and six months ended June 30, 1996, the Company
recognized $15.9 million and $32.2 million, respectively, of non-cash charges
to income representing the amortization of the deferred LRPP balance for the
rate year ended November 30, 1994. For a further discussion of the LRPP, see
Note 3 of Notes to Financial Statements included in the Company's Annual
Report on Form 10-K/A filed June 30, 1997, for the Year Ended December 31,
1996.
Excess Earnings- Also recorded in other regulatory amortization, if applicable
are, non-cash charges representing: a) 100% of electric earnings generated by
the Company in excess of amounts provided for in electric rates, which is
returned to the electric ratepayer through a reduction to the RMC balance; and
b) 50% of the gas earnings generated by the Company in excess of amounts
provided for in gas rates, which is returned to the customer in the form of a
reduction in the amount due from gas ratepayers related to manufactured gas
plant site (MGP) clean-up costs and certain employee benefit expenses, in
accordance with PSC mandates. These excess earnings calculations are updated
quarterly to reflect the Company's best estimate of amounts that it may earn
in excess of a return on common equity of 11%, and as a result, non-cash
charges or credits may be recorded in the period.
For the three months ended June 30, 1997, the Company recorded non-cash
charges of approximately $8.7 million bringing the six month total of gas
excess earnings to $10.5 million, including $1.6 million related to the 1994,
1995 and 1996 rate years that were not previously recognized. The Company
recognized approximately $2.8 million of gas excess earnings for the three
months ended June 30, 1996, for a six month total at June 30, 1996, of
approximately $5.2 million.
For the three months ended June 30, 1997, the Company recorded a non-cash
credit of approximately $5.6 million to adjust previously recorded electric
excess earnings. As a result, electric excess earnings for the six months
ended June 30, 1997 totaled approximately $5.0 million. The Company did not
earn any electric excess earnings for either the three or six months ended
June 30, 1996.
Operating Taxes
For the three and six months ended June 30, 1997, operating taxes decreased
compared to the same periods in the prior year as a result of lower revenue.
16
<PAGE>
Federal Income Tax
For the three months and six months ended June 30, 1997, federal income tax
(FIT) expense increased as a result of an increase in pre-tax book income.
The current portion of FIT liability for the three months ended June 30, 1997
totaled $22.6 million, of which $11.1 million was Alternative Minimum Tax.
The FIT liability for the six months ended June 30, 1997 totaled $46.0
million, of which $34.5 million was Alternative Minimum Tax. The increase in
FIT liability over the comparable periods last year is primarily attributable
to the Company's full utilization of the Alternative Minimum Tax Net Operating
Loss during 1996.
Other Income and Deductions
Other income and deductions for the three and six months ended June 30, 1997,
decreased when compared to the same periods in 1996 as a result of the Company
recognizing less income associated with its fuel incentive program, due to the
increased cost of electric fuel. In addition, interest income from short term
investments was lower than the prior year due to lower cash balances.
Interest Expense
Interest expense decreased for the three and six months ended June 30, 1997
when compared to the same period of 1996 as a result of lower debt levels.
Liquidity and Capital Resources
At June 30, 1997, the Company's cash and cash equivalents amounted to
approximately $54 million, compared to $65 million at March 31, 1997.
At June 30, 1997, March 31, 1997 and December 31, 1996, the
Company's capitalization ratios were as follows:
6/30/97 3/31/97 12/31/96
------- ------- --------
Amount Percent Amount Percent Amount Percent
(000's) % (000's) % (000's) %
- --------------------------------------------------------------------------
Long-term debt $4,458 58.0 $4,458 57.8 $4,708 59.3
Preferred stock 703 9.1 703 9.1 703 8.9
Common shareowners'
equity 2,531 32.9 2,549 33.1 2,523 31.8
- --------------------------------------------------------------------------
$7,692 100.0 $7,710 100.0 $7,934 100.0
==========================================================================
The Company has no current plans to access the public markets for permanent
financing as cash from operations should be sufficient to meet operating
17
<PAGE>
requirements and debt maturities through 1998. The Company however, would
access the public securities market, should market conditions prove favorable,
to refinance existing debt or preferred stock, subject to any restrictions
contained in the agreements with Brooklyn Union or LIPA. The Company would
also take advantage of any tax-exempt financing made available by the New York
State Energy Research and Development Authority.
A $250 million line of credit, secured by a first lien upon the Company's
accounts receivable and fuel oil inventories, is available to the Company
under its Revolving Credit Agreement (RCA). The lending banks participating
in the RCA have agreed to extend their commitments through October 1, 1998.
In February 1997, the Company utilized $30 million in interim financing under
the RCA, which was repaid in March 1997. In July 1997, the Company borrowed
$40 million pursuant to the RCA, which was repaid on August 7, 1997. The
Company will, in order to satisfy short-term cash requirements, continue to
avail itself of such interim financing through its RCA if necessary.
LIPA Transaction
In July 1997, the Company and the Brooklyn Union Gas Company formed a limited
partnership and each invested $30 million in order to purchase an interest
rate swap option instrument to protect LIPA against market risk associated
with the municipal bond financing contemplated by the LIPA Transaction
agreements.
Upon the closing of the LIPA Transaction, each limited partner will receive
from LIPA $30 million plus interest thereon, based on each partners' average
weighted cost of capital. In the event that the LIPA transaction is not
consummated, the maximum potential loss to the Company is the amount
originally invested. In the event of a loss, the Company plans to defer the
amount and petition the PSC to allow recovery from the ratepayers.
18
<PAGE>
Capital Requirements and Capital Provided
Capital requirements and capital provided for the three and six
months ended June 30, 1997 were as follows:
(In Millions of Dollars)
- -----------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
- -----------------------------------------------------------------
Capital Requirements
Construction $ 69 $119
- ----------------------------------------------------------------
Redemptions and Dividends
Long-term debt - 250
Preferred stock dividends 13 26
Common stock dividends 54 108
- ----------------------------------------------------------------
Total Redemptions and Dividends 67 384
Shoreham post-settlement costs 12 24
- ----------------------------------------------------------------
Total Capital Requirements $148 $527
================================================================
Capital Provided
Cash generation from operations $134 $293
Decrease in cash balances 11 226
Common stock issued 4 9
Other investing and financing
activities (1) (1)
- ----------------------------------------------------------------
Total Capital Provided $148 $527
================================================================
For further information, see the Statement of Cash Flows.
Rate Matters
For a discussion of Rate Matters see, Note 3 of Notes to Financial Statements.
Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
This statement supersedes APB Opinion No. 15, "Earnings per Share" and
simplifies the computation of earnings per share (EPS). SFAS No. 128 will be
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company will adopt this statement March 31,
1998. The adoption of SFAS 128 is not expected to have any impact on the
Company's EPS calculations.
Cautionary Statement Regarding Forward-Looking Statements
This report contains 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. In this respect, the words
19
<PAGE>
"estimate," "project," "anticipate," "expect," "intend," "believe" and similar
expressions are intended to identify forward-looking statements. 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 the proposed
transactions with Brooklyn Union and Long Island Power Authority, state and
federal regulatory rate proceedings, competition, and certain environmental
matters each as discussed herein, in the Company's Annual Report on Form 10-
K/A, filed June 30, 1997, for the Year Ended December 31, 1996 or in other
reports filed by the Company with the Securities and Exchange Commission.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on August 7, 1997 (Annual
Meeting). The persons named below were elected as Directors by holders of the
Company's Common Stock, voting cumulatively, casting votes in favor or
withholding votes as indicated:
IN FAVOR WITHHELD
-------------------------------
William J. Catacosinos 104,373,735 2,004,424
John H. Talmage 104,564,755 1,813,404
Basil A. Paterson 104,436,584 1,888,575
George Bugliarello 104,436,584 1,941,575
George J. Sideris 104,536,484 1,814,675
A. James Barnes 104,606,012 1,772,147
Richard L. Schmalensee 104,567,530 1,810,629
Renso L. Caporali 104,564,969 1,813,190
Peter O. Crisp 104,474,835 1,903,324
Katherine D. Ortega 104,571,459 1,806,700
Vicki L. Fuller 104,601,593 1,776,566
James T. Flynn 104,573,020 1,805,139
The voting results of the other items that were approved by shareholders at the
Annual Meeting are as follows:
21
<PAGE>
<TABLE>
<CAPTION>
The voting results of the other items that were approved by shareholders at the Annual Meeting
are as follows:
1. Adoption of the Amended and Restated Agreement and Plan of Exchange and Merger, dated as of
June 26, 1997, between the Brooklyn Union Gas Company and the Long Island Lighting Company.
BROKER
FOR AGAINST ABSTAIN NON-VOTERS
--- ------- ------- ----------
<S> <C> <C> <C> <C>
Common Share 92,515,320 1,093,241 744,289 11,755,305
</TABLE>
<TABLE>
<CAPTION>
2. Adoption of the Agreement and Plan of Merger, dated as of June 26, 1997, between the
Long Island Power Authority, LIPA Acquisition Corp., and Long Island Lighting Company.
BROKER
FOR AGAINST ABSTAIN NON-VOTERS
--- ------- ------- ----------
<S> <C> <C> <C> <C>
Commons Shares 92,107,780 1,414,065 830,801 11,755,509
Preferred Shares:
Series CC, par $100 448,296 0 0 Not Applicable
Series AA, par $ 25 2,759,463 16,456 14,982 Not Applicable
Series GG, par $ 25 169,048 150 50 Not Applicable
Series UU, par $ 25 452,677 220 75 Not Applicable
Series QQ, par $ 25 710,530 646 22,130 Not Applicable
</TABLE>
<TABLE>
<CAPTION>
3. Ratification of the appointment of Ernst & Young LLP as independent auditors for the period
January 1, 1997 to March 31, 1997.
BROKER
FOR AGAINST ABSTAIN NON-VOTERS
--- ------- ------- ----------
<S> <C> <C> <C> <C>
Commons Shares 104,526,680 516,040 1,065,435 Not Applicable
</TABLE>
<TABLE>
<CAPTION>
4. Approval of the LILCO Annual Stock Incentive Plan.
BROKER
FOR AGAINST ABSTAIN NON-VOTERS
--- ------- ------- ----------
<S> <C> <C> <C> <C>
Commons Shares 97,030,196 6,396,441 2,681,516 Not Applicable
</TABLE>
<TABLE>
<CAPTION>
5. Approval of the LILCO Employee Stock Purchase Plan.
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
Commons Shares 100,056,842 3,738,119 2,307,194
</TABLE>
22
<PAGE>
6. Approval of an amendment to the Company's certificate of
incorporation to increase the total number of authorized
shares of common stock.
FOR AGAINST ABSTAIN
--- ------- -------
Commons Shares 96,256,646 4,864,511 1,977,998
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 10
(1) Executive Employment Agreement by and between the Company and Jane
E. Fernandez dated as of November 21, 1994 which agreement is
substantially the same as Executive Employment Agreement by and
between the Company and certain officers dated as of November 21,
1994 (filed as an Exhibit to the Company's Form 10-K for the Year
Ended December 31, 1994).
(2) Indemnification Agreement by and between the Company and Jane E.
Fernandez dated as of September 19, 1994 which agreement is
substantially the same as Indemnification Agreement by and between
the Company and certain officers dated as of February 23, 1994
(filed as an Exhibit to the Company's Form 10-K for the Year Ended
December 31, 1994).
(3) Executive Employment Agreement by and between the Company and Howard
A. Kosel dated as of April 1, 1997, which agreement is substantially
the same as Executive Employment Agreement by and between the
Company and certain officers dated as of November 21, 1994 (filed as
an Exhibit to the Company's Form 10-K for the Year Ended December
31, 1994).
(4) Indemnification Agreement by and between the Company and Howard A.
Kosel dated as of April 1, 1997, which agreement is substantially
the same as Indemnification Agreement by and between the Company
and certain officers dated as of February 23, 1994 (filed as an
Exhibit to the Company's Form 10-K for the Year Ended December
31,1994).
*(5) Amendment by and between the Company and William J. Catacosinos
dated as of December 29, 1996, which amends the Executive Employment
Agreement by and between the Company and William J. Catacosinos
dated as of January 30, 1984, as amended.
23
<PAGE>
Exhibit 27
*(1) Financial Data Schedule UT for the three month period ended June 30,
1997.
b. Reports on Form 8-K
(1) In its current report on Form 8-K dated April 11, 1997, the company
reported that it changed its fiscal year-end to March 31.
(2) In its current report on Form 8-K dated June 26, 1997, the Company
reported that the Company, BL Holding Corp., Long Island Power
Authority and LIPA Acquisition Corp. Executed an Agreement and Plan
of Merger dated as of June 26, 1997.
- --------------------
* Filed herewith
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this rport to be signed on its behalf by the
undersigned thereunto duly authorized.
LONG ISLAND LIGHTING COMPANY
(Registrant)
By:
--------------------------
ANTHONY NOZZOLILLO
Senior Vice President and
Principal Financial Officer
Dated: August 14, 1997
25
