<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: February 24, 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.
On December 30, 1996, The Brooklyn Union Gas Company
("Brooklyn Union") filed a Current Report on Form 8-K with the
Securities and Exchange Commission (the "SEC") pertaining to the
Agreement and Plan of Exchange that Brooklyn Union entered into as of
December 29, 1996 with Long Island Lighting Company ("LILCO")
providing for binding share exchanges (the "Binding Share
Exchanges"), pursuant to which each Brooklyn Union common share
would be exchanged for one share of common stock of a new holding
company and each share of LILCO common stock would be exchanged for
0.803 of a share of common stock of the new holding company.
Brooklyn Union is filing this Current Report on Form 8-K
to include in its filings (i) audited financial statements of LILCO
as of December 31, 1996 and for the three years then ended, and
(ii) unaudited pro forma combined condensed financial information
for Brooklyn Union and LILCO including historical interim
information of LILCO, after giving effect to the Binding
Share Exchanges as a pooling of interests for accounting purposes,
as attached as Exhibits 99.1 and 99.2 to this Current Report on
Form 8-K, which Exhibits are hereby incorporated by reference
herein.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
The audited financial statements and the unaudited
interim financial information of LILCO, and the unaudited pro forma
combined condensed financial information, referred to above in Item
5 and incorporated herein by reference, are attached hereto as the
following Exhibits:
Exhibit
Number
99.1 Audited financial statements of LILCO as of December 31,
1996 and for the three years then ended, including the
report of Independent Auditors.
99.2 Unaudited pro forma combined condensed financial
information for Brooklyn Union and LILCO including
historical information of LILCO for the quarters ended
December 31, 1996 and 1995.
23.1 Consent of Independent Auditors.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 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: February 24, 1997
THE BROOKLYN UNION GAS COMPANY
By: /s/ R.M. Desmond
-----------------------------
R.M. Desmond
Vice President, Comptroller and
Chief Accounting Officer
<PAGE>
Exhibit Index
Exhibit
Number
- -------
99.1 Audited financial statements of LILCO as of December 31,
1996 and for the three years then ended, including the
report of Independent Auditors, begin on page 4.
23.1 Consent of Independent Auditors is on page 52.
99.2 Unaudited pro forma combined condensed financial
information for Brooklyn Union and LILCO including
historical information of LILCO for the quarters ended
December 31, 1996 and 1995, begins on page 53.
<PAGE)
Exhibit 99.1
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BALANCE SHEET
- ---------------------------------------------------------------------------------
ASSETS (In thousands of dollars)
- ---------------------------------------------------------------------------------
at December 31 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
UTILITY PLANT
Electric $ 3,882,297 $ 3,786,540
Gas 1,154,543 1,086,145
Common 260,268 244,828
Construction work in progress 112,184 100,521
Nuclear fuel in process and in reactor 15,454 16,456
- ---------------------------------------------------------------------------------
5,424,746 5,234,490
Less - Accumulated depreciation
and amortization 1,729,576 1,639,492
- ---------------------------------------------------------------------------------
Total Net Utility Plant 3,695,170 3,594,998
- ---------------------------------------------------------------------------------
REGULATORY ASSETS
Base financial component
(less accumulated amortization
of $757,282 and $656,311) 3,281,548 3,382,519
Rate moderation component 402,213 383,086
Shoreham post-settlement costs 991,795 968,999
Shoreham nuclear fuel 69,113 71,244
Unamortized cost of issuing securities 194,151 222,567
Postretirement benefits other than pensions 360,842 383,642
Regulatory tax asset 1,772,778 1,802,383
Other 199,879 229,809
- ---------------------------------------------------------------------------------
Total Regulatory Assets 7,272,319 7,444,249
- ---------------------------------------------------------------------------------
NONUTILITY PROPERTY AND OTHER INVESTMENTS 18,597 16,030
- ---------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 279,993 351,453
Special deposits 38,266 63,412
Customer accounts receivable
(less allowance for doubtful
accounts of $25,000 and $24,676) 255,801 282,218
LRPP receivable - 74,281
Other accounts receivable 65,764 107,387
Accrued unbilled revenues 169,712 184,440
Materials and supplies at average cost 55,789 63,595
Fuel oil at average cost 53,941 32,090
Gas in storage at average cost 73,562 53,076
Deferred tax asset 145,205 191,000
Prepayments and other current assets 8,569 8,986
- ---------------------------------------------------------------------------------
Total Current Assets 1,146,602 1,411,938
- ---------------------------------------------------------------------------------
DEFERRED CHARGES 76,991 60,382
- ---------------------------------------------------------------------------------
TOTAL ASSETS $ 12,209,679 $ 12,527,597
================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES (In thousands of dollars)
- ---------------------------------------------------------------------------------
at December 31 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
CAPITALIZATION
Long-term debt $ 4,471,675 $ 4,722,675
Unamortized discount on debt (14,903) (16,075)
- ---------------------------------------------------------------------------------
4,456,772 4,706,600
- ---------------------------------------------------------------------------------
Preferred stock - redemption required 638,500 639,550
Preferred stock - no redemption required 63,664 63,934
- ---------------------------------------------------------------------------------
Total Preferred Stock 702,164 703,484
- ---------------------------------------------------------------------------------
Common stock 603,921 598,277
Premium on capital stock 1,127,971 1,114,508
Capital stock expense (49,330) (50,751)
Retained earnings 840,867 790,919
Treasury stock, at cost (60) -
- ---------------------------------------------------------------------------------
Total Common Shareowners' Equity 2,523,369 2,452,953
- ---------------------------------------------------------------------------------
Total Capitalization 7,682,305 7,863,037
- ---------------------------------------------------------------------------------
REGULATORY LIABILITIES
Regulatory liability component 198,398 277,757
1989 Settlement credits 127,442 136,655
Regulatory tax liability 102,887 116,060
Other 146,852 132,891
- ---------------------------------------------------------------------------------
Total Regulatory Liabilities 575,579 663,363
- ---------------------------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt 251,000 415,000
Current redemption requirements of preferred stock 1,050 4,800
Accounts payable and accrued expenses 289,141 260,879
LRPP payable 40,499 17,240
Accrued taxes (including federal income
tax of $25,884 and $28,736) 63,640 60,498
Accrued interest 160,615 158,325
Dividends payable 58,378 57,899
Class Settlement 55,833 45,833
Customer deposits 29,471 29,547
- ---------------------------------------------------------------------------------
Total Current Liabilities 949,627 1,050,021
- ---------------------------------------------------------------------------------
DEFERRED CREDITS
Deferred federal income tax 2,442,606 2,337,732
Class Settlement 98,497 129,809
Other 32,105 34,499
- ---------------------------------------------------------------------------------
Total Deferred Credits 2,573,208 2,502,040
- ---------------------------------------------------------------------------------
OPERATING RESERVES
Pensions and other postretirement benefits 381,996 396,490
Claims and damages 46,964 52,646
- ---------------------------------------------------------------------------------
Total Operating Reserves 428,960 449,136
- ---------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES - -
- ---------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 12,209,679 $ 12,527,597
=================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF INCOME (In thousands of dollars except per share amounts)
- ----------------------------------------------------------------------------------------------------
For year ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Electric $ 2,466,435 $ 2,484,014 $ 2,481,637
Gas 684,260 591,114 585,670
- ----------------------------------------------------------------------------------------------------
Total Revenues 3,150,695 3,075,128 3,067,307
- ----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operations - fuel and purchased power 963,251 834,979 847,986
Operations - other 381,076 383,238 406,014
Maintenance 118,135 128,155 134,640
Depreciation and amortization 153,925 145,357 130,664
Base financial component amortization 100,971 100,971 100,971
Rate moderation component amortization (24,232) 21,933 197,656
Regulatory liability component amortization (79,359) (79,359) (79,359)
1989 Settlement credits amortization (9,214) (9,214) (9,214)
Other regulatory amortization 127,288 161,605 4,328
Operating taxes 472,076 447,507 406,895
Federal income tax - current 42,197 14,596 10,784
Federal income tax - deferred and other 168,000 193,742 170,997
- ----------------------------------------------------------------------------------------------------
Total Operating Expenses 2,414,114 2,343,510 2,322,362
- ----------------------------------------------------------------------------------------------------
Operating Income 736,581 731,618 744,945
- ----------------------------------------------------------------------------------------------------
OTHER INCOME AND (DEDUCTIONS)
Rate moderation component carrying charges 25,259 25,274 32,321
Other income and deductions, net 19,197 34,400 35,343
Class Settlement (20,772) (21,669) (22,730)
Allowance for other funds used during construction 2,888 2,898 2,716
Federal income tax - deferred and other 940 2,800 5,069
- ----------------------------------------------------------------------------------------------------
Total Other Income and (Deductions) 27,512 43,703 52,719
- ----------------------------------------------------------------------------------------------------
Income Before Interest Charges 764,093 775,321 797,664
- ----------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 384,198 412,512 437,751
Other interest 67,130 63,461 62,345
Allowance for borrowed funds used during construction (3,699) (3,938) (4,284)
- ----------------------------------------------------------------------------------------------------
Total Interest Charges 447,629 472,035 495,812
- ----------------------------------------------------------------------------------------------------
NET INCOME 316,464 303,286 301,852
Preferred stock dividend requirements 52,216 52,620 53,020
- ----------------------------------------------------------------------------------------------------
EARNINGS FOR COMMON STOCK $ 264,248 $ 250,666 $ 248,832
====================================================================================================
AVERAGE COMMON SHARES OUTSTANDING (000) 120,361 119,195 115,880
- ----------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE $ 2.20 $ 2.10 $ 2.15
====================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 1.78 $ 1.78 $ 1.78
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS (In thousands of dollars)
- -------------------------------------------------------------------------------------------------
For year ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 316,464 $ 303,286 $ 301,852
cash provided by operating activities
Depreciation and amortization 153,925 145,357 130,664
Base financial component amortization 100,971 100,971 100,971
Rate moderation component amortization (24,232) 21,933 197,656
Regulatory liability component amortization (79,359) (79,359) (79,359)
1989 Settlement credits amortization (9,214) (9,214) (9,214)
Other regulatory amortization 127,288 161,605 4,328
Rate moderation component carrying charges (25,259) (25,274) (32,321)
Amortization of cost of issuing and redeeming securities 34,611 39,589 46,237
Class Settlement 20,772 21,669 22,730
Provision for doubtful accounts 23,119 17,751 19,542
Federal income tax - deferred and other 167,060 190,942 165,928
Other 66,624 61,576 46,531
Changes in operating assets and liabilities
Accounts receivable 69,215 (67,213) (17,353)
Class Settlement (42,084) (33,464) (30,235)
Accrued unbilled revenues 14,728 (20,061) 5,663
Accounts payable and accrued expenses 28,258 19,100 (44,598)
Other (50,574) (77,194) 6,727
- -------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 892,313 772,000 835,749
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Construction and nuclear fuel expenditures (239,896) (243,586) (276,954)
Shoreham post-settlement costs (51,722) (70,589) (167,367)
Other investing activities (4,806) 8,019 (1,349)
- -------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (296,424) (306,156) (445,670)
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of securities 18,837 68,726 449,434
Redemption of securities (419,800) (104,800) (639,858)
Common stock dividends paid (213,753) (211,630) (205,086)
Preferred stock dividends paid (52,264) (52,667) (52,927)
Other financing activities (369) 529 (4,723)
- -------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (667,349) (299,842) (453,160)
- -------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (71,460) $ 166,002 $ (63,081)
=================================================================================================
Cash and cash equivalents at January 1 $ 351,453 $ 185,451 $ 248,532
Net (decrease) increase in cash and cash equivalents (71,460) 166,002 (63,081)
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 279,993 $ 351,453 $ 185,451
=================================================================================================
Interest paid, before reduction for the allowance
for borrowed funds used during construction $ 404,663 $ 427,988 $ 446,340
Federal income tax - paid $ 45,050 $ 14,200 $ 10,780
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF RETAINED EARNINGS (In thousands of dollars)
- ---------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 790,919 $ 752,480 $ 711,432
Net income for the year 316,464 303,286 301,852
- ---------------------------------------------------------------------------------------
1,107,383 1,055,766 1,013,284
Deductions
Cash dividends declared on common stock 214,255 212,181 207,794
Cash dividends declared on preferred stock 52,240 52,647 53,046
Other 21 19 (36)
- ---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31 $ 840,867 $ 790,919 $ 752,480
=======================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
STATEMENT OF CAPITALIZATION Shares Issued (In thousands of dollars)
- -------------------------------------------------------------------------------------------------------------------------------
At December 31 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON SHAREOWNERS' EQUITY
Common stock, $5.00 par value 120,784,277 119,655,441 $ 603,921 $ 598,277
Premium on capital stock 1,127,971 1,114,508
Capital stock expense (49,330) (50,751)
Retained earnings 840,867 790,919
Treasury stock, at cost 3,485 - (60) -
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON SHAREOWNERS' EQUITY 2,523,369 2,452,953
- ------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - REDEMPTION REQUIRED
Par value $100 per share
7.40% Series L 161,000 171,500 16,100 17,150
8.50% Series R - 37,500 - 3,750
7.66% Series CC 570,000 570,000 57,000 57,000
Less - Sinking fund requirement 1,050 4,800
- ------------------------------------------------------------------------------------------------------------------------------
72,050 73,100
- ------------------------------------------------------------------------------------------------------------------------------
Par value $25 per share
7.95% Series AA 14,520,000 14,520,000 363,000 363,000
$1.67 Series GG 880,000 880,000 22,000 22,000
$1.95 Series NN 1,554,000 1,554,000 38,850 38,850
7.05% Series QQ 3,464,000 3,464,000 86,600 86,600
6.875% Series UU 2,240,000 2,240,000 56,000 56,000
- ------------------------------------------------------------------------------------------------------------------------------
566,450 566,450
- ------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock - Redemption Required 638,500 639,550
- ------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - NO REDEMPTION REQUIRED
Par value $100 per share
5.00% Series B 100,000 100,000 10,000 10,000
4.25% Series D 70,000 70,000 7,000 7,000
4.35% Series E 200,000 200,000 20,000 20,000
4.35% Series F 50,000 50,000 5,000 5,000
5 1/8% Series H 200,000 200,000 20,000 20,000
5 3/4% Series I - Convertible 16,637 19,336 1,664 1,934
- ------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock - No Redemption Required 63,664 63,934
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK $ 702,164 $ 703,484
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(In thousands of dollars)
- ------------------------------------------------------------------------------------------------------------------------------
At December 31 Maturity Interest Rate Series 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GENERAL AND REFUNDING BONDS
May 1, 1996 8 3/4% - 415,000
February 15, 1997 8 3/4% 250,000 250,000
April 15, 1998 7 5/8% 100,000 100,000
May 15, 1999 7.85% 56,000 56,000
April 15, 2004 8 5/8% 185,000 185,000
May 15, 2006 8.50% 75,000 75,000
July 15, 2008 7.90% 80,000 80,000
May 1, 2021 9 3/4% 415,000 415,000
July 1, 2024 9 5/8% 375,000 375,000
- ------------------------------------------------------------------------------------------------------------------------------
Total General and Refunding Bonds 1,536,000 1,951,000
- ------------------------------------------------------------------------------------------------------------------------------
DEBENTURES
July 15, 1999 7.30% 397,000 397,000
January 15, 2000 7.30% 36,000 36,000
July 15, 2001 6.25% 145,000 145,000
March 15, 2003 7.05% 150,000 150,000
March 1, 2004 7.00% 59,000 59,000
June 1, 2005 7.125% 200,000 200,000
March 1, 2007 7.50% 142,000 142,000
July 15, 2019 8.90% 420,000 420,000
November 1, 2022 9.00% 451,000 451,000
March 15, 2023 8.20% 270,000 270,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Debentures 2,270,000 2,270,000
- ------------------------------------------------------------------------------------------------------------------------------
AUTHORITY FINANCING NOTES
Industrial Development Revenue Bonds
December 1, 2006 7.50% 1976 A,B 2,000 2,000
Pollution Control Revenue Bonds
December 1, 2006 7.50% 1976 A 28,375 28,375
December 1, 2009 7.80% 1979 B 19,100 19,100
October 1, 2012 8 1/4% 1982 17,200 17,200
March 1, 2016 3.25% 1985 A,B 150,000 150,000
Electric Facilities Revenue Bonds
September 1, 2019 7.15% 1989 A,B 100,000 100,000
June 1, 2020 7.15% 1990 A 100,000 100,000
December 1, 2020 7.15% 1991 A 100,000 100,000
February 1, 2022 7.15% 1992 A,B 100,000 100,000
August 1, 2022 6.90% 1992 C,D 100,000 100,000
November 1, 2023 4.05% 1993 A 50,000 50,000
November 1, 2023 4.00% 1993 B 50,000 50,000
October 1, 2024 4.00% 1994 A 50,000 50,000
August 1, 2025 4.00% 1995 A 50,000 50,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Authority Financing Notes 916,675 916,675
- ------------------------------------------------------------------------------------------------------------------------------
Unamortized Discount on Debt (14,903) (16,075)
- ------------------------------------------------------------------------------------------------------------------------------
Total 4,707,772 5,121,600
Less Current Maturities 251,000 415,000
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 4,456,772 4,706,600
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION $ 7,682,305 $ 7,863,037
==============================================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
Note 1. Summary of Significant Accounting Policies
Nature of Operations
Long Island Lighting Company (Company) was incorporated in 1910
under the Transportation Corporations Law of the State of New York
and supplies electric and gas service in Nassau and Suffolk
Counties and to the Rockaway Peninsula in Queens County, all on
Long Island, New York. The Company's service territory covers an
area of approximately 1,230 square miles. The population of the
service area, according to the Company's 1996 estimate, is about
2.7 million persons, including approximately 98,000 persons who
reside in Queens County within the City of New York.
The Company serves approximately 1.03 million electric customers of
which approximately 921,000 are residential. The Company receives
approximately 49% of its electric revenues from residential
customers, 48% from commercial/industrial customers and the balance
from sales to other utilities and public authorities. The Company
also serves approximately 460,000 gas customers, 412,000 of which
are residential, accounting for 61% of the gas revenues, with the
balance of the gas revenues made up by the commercial/industrial
customers and off-system sales.
The Company's geographic location and the limited electrical
interconnections to Long Island serve to limit the accessibility of
the transmission grid to potential competitors from off the system.
In addition, the Company does not expect any new major independent
power producers (IPPs) or cogenerators to be built on Long Island
in the foreseeable future. One of the reasons supporting this
conclusion is based on the Company's belief that the composition
and distribution of the Company's remaining commercial and
industrial customers would make it difficult for large electric
projects to operate economically. Furthermore, under federal law,
the Company is required to buy energy from qualified producers at
the Company's avoided cost. Current long-range avoided cost
estimates for the Company have significantly reduced the economic
advantage to entrepreneurs seeking to compete with the Company and
with existing IPPs. For a further discussion of the competitive
issues facing the Company, see Note 11.
Regulation
The Company's accounting records are maintained in accordance with
the Uniform Systems of Accounts prescribed by the Public Service
Commission of the State of New York (PSC) and the Federal Energy
Regulatory Commission (FERC). Its financial statements reflect the
ratemaking policies and actions of these commissions in conformity
with generally accepted accounting principles for rate-regulated
enterprises.
<PAGE>
Accounting for the Effects of Rate Regulation
General
The Company is subject to the provisions of Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation". This statement recognizes the
economic ability of regulators, through the ratemaking process, to
create future economic benefits and obligations affecting rate-
regulated companies. Accordingly, the Company records these future
economic benefits and obligations as regulatory assets and
regulatory liabilities.
Regulatory assets represent probable future revenues associated
with previously incurred costs that are expected to be recovered
from customers. Regulatory liabilities represent probable future
reductions in revenues associated with amounts that are expected to
be refunded to customers through the ratemaking process.
Regulatory assets net of regulatory liabilities amounted to
approximately $6.7 billion and $6.8 billion at December 31, 1996
and 1995, respectively.
In order for a rate-regulated entity to continue to apply the
provisions of SFAS No. 71, it must continue to meet the following
three criteria: (i) the enterprise's rates for regulated services
provided to its customers must be established by an independent
third-party regulator; (ii) the regulated rates must be designed to
recover the specific enterprise's costs of providing the regulated
services; and (iii) in view of the demand for the regulated
services and the level of competition, it is reasonable to assume
that rates set at levels that will recover the enterprise's costs
can be charged to and collected from customers.
Based upon the Company's evaluation of the three criteria discussed
above in relation to its operations, the effect of competition on
its ability to recover its costs, including its allowed return on
common equity and the regulatory environment in which the Company
operates, the Company believes that SFAS No. 71 continues to apply
to the Company's electric and gas operations. The Company formed
its conclusion based upon several factors including: (i) the
Company's continuing ability to earn its allowed return on common
equity for both its electric and gas operations; and (ii) the PSC's
continued commitment to the Company's full recovery of the Shoreham
Nuclear Power Station (Shoreham) related assets and all other
prudently incurred costs.
Notwithstanding the above, rate regulation is undergoing
significant change as regulators and customers seek lower prices
for electric and gas service. As discussed more fully in Note 11,
the PSC has made a decision in the Competitive Opportunities
Proceedings to transition the electric industry to a wholesale
power market in early 1997 followed by the introduction of retail
<PAGE>
access for all customers by early 1998. In the event that
regulation significantly changes the opportunity for the Company to
recover its costs in the future, all or a portion of the Company's
operations may no longer meet the criteria discussed above. In
that event, a significant write-down of all or a portion of the
Company's existing regulatory assets and liabilities could result.
For additional information respecting the Company's Shoreham-
related assets, see below and Notes 2, 3 and 11.
In 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" which amends SFAS No. 71. Under SFAS No. 121, costs
which were capitalized in accordance with regulatory practices,
because it was probable that future recovery would be allowed by
the regulator, must be charged against current period earnings if
it appears that the criterion for capitalization no longer applies.
The carrying amount of such assets would be reduced by amounts for
which recovery is unlikely. SFAS No. 121 also provides for the
restoration of previously disallowed costs that are subsequently
allowed by a regulator. With respect to assets recognized under
SFAS No. 71 and all other long-lived assets, the adoption of SFAS
No. 121 did not have an effect on the Company's financial position,
cash flows or results of operations.
Discussed below are the Company's significant regulatory assets and
regulatory liabilities.
Base Financial Component and Rate Moderation Component
Pursuant to the 1989 Settlement, the Company recorded a regulatory
asset known as the Financial Resource Asset (FRA). The FRA is
designed to provide the Company with sufficient cash flows to
assure its financial recovery. The FRA has two components, the
Base Financial Component (BFC) and the Rate Moderation Component
(RMC).
The BFC represents the present value of the future net-after-tax
cash flows which the Rate Moderation Agreement (RMA), one of the
constituent documents of the 1989 Settlement, provided the Company
for its financial recovery. The BFC was granted rate base
treatment under the terms of the RMA and is included in the
Company's revenue requirements through an amortization included in
rates over a forty-year period on a straight-line basis which began
July 1, 1989.
The RMC reflects the difference between the Company's revenue
requirements under conventional ratemaking and the revenues
resulting from the implementation of the rate moderation plan
provided for in the RMA. The RMC is currently adjusted, on a
monthly basis, for the Company's share of certain Nine Mile Point
Nuclear Power Station, Unit 2 (NMP2) operations and maintenance
expenses, fuel credits resulting from the Company's electric fuel
<PAGE>
cost adjustment clause and gross receipts tax adjustments related
to the FRA. For a further discussion of the 1989 Settlement and
FRA, see Notes 2 and 3.
Shoreham Post-Settlement Costs
Consists of Shoreham decommissioning costs, fuel disposal costs,
payments-in-lieu-of-taxes, carrying charges and other costs. These
costs are being capitalized and amortized and recovered through
rates over a forty-year period on a straight-line remaining life
basis which began July 1, 1989. For a further discussion of
Shoreham post-settlement costs, see Note 2.
Shoreham Nuclear Fuel
Principally reflects the unamortized portion of Shoreham nuclear
fuel which was reclassified from Nuclear Fuel in Process and in
Reactor at the time of the 1989 Settlement. This amount is being
amortized and recovered through rates over a forty-year period on
a straight-line remaining life basis which began July 1, 1989.
Unamortized Cost of Issuing Securities
Represents the unamortized premiums or discounts and expenses
related to the issues of long-term debt that have been retired
prior to maturity and the costs associated with the early
redemption of those issues. In addition, this balance includes the
unamortized capital stock expense and redemption costs related to
certain series of preferred stock that have been refinanced. These
costs are amortized and recovered through rates over the shorter of
the life of the redeemed issue or the new issue as provided by the
PSC.
Postretirement Benefits Other Than Pensions
The Company defers as a regulatory asset the difference between
postretirement benefit expense recorded in accordance with SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions", and postretirement benefit expense reflected in current
rates. Pursuant to a PSC order, the ongoing annual SFAS No. 106
benefit expense must be phased into and fully reflected in rates by
November 30, 1997, with the accumulated deferred asset being
recovered in rates over the next fifteen-year period. For a
further discussion of SFAS No. 106, see Note 8.
Regulatory Tax Asset and Regulatory Tax Liability
The Company has recorded a regulatory tax asset for amounts that it
will collect in future rates for the portion of its deferred tax
liability that has not yet been recognized for ratemaking purposes.
The regulatory tax asset is comprised principally of the tax effect
of the difference in the cost basis of the BFC for financial and
<PAGE>
tax reporting purposes, depreciation differences not normalized and
the allowance for equity funds used during construction.
The regulatory tax liability is primarily attributable to deferred
taxes previously recognized at rates higher than current enacted
tax law, unamortized investment tax credits and tax credit
carryforwards.
Regulatory Liability Component
Pursuant to the 1989 Settlement, certain tax benefits attributable
to the Shoreham abandonment are to be shared between electric
ratepayers and shareowners. A regulatory liability of
approximately $794 million was recorded in June 1989 to preserve an
amount equivalent to the customer tax benefits attributable to the
Shoreham abandonment. This amount is being amortized over a ten-
year period on a straight-line basis which began
July 1, 1989.
1989 Settlement Credits
Represents the unamortized portion of an adjustment of the book
write-off to the negotiated 1989 Settlement amount. A portion of
this amount is being amortized over a ten-year period which began
on July 1, 1989. The remaining portion is not currently being
recognized for ratemaking purposes.
Utility Plant
Additions to and replacements of utility plant are capitalized at
original cost, which includes material, labor, indirect costs
associated with an addition or replacement and an allowance for the
cost of funds used during construction. The cost of renewals and
betterments relating to units of property is added to utility
plant. The cost of property replaced, retired or otherwise
disposed of is deducted from utility plant and, generally, together
with dismantling costs less any salvage, is charged to accumulated
depreciation. The cost of repairs and minor renewals is charged to
maintenance expense. Mass properties (such as poles, wire and
meters) are accounted for on an average unit cost basis by year of
installation.
Allowance for Funds Used During Construction
The Uniform Systems of Accounts defines the Allowance For Funds
Used During Construction (AFC) as the net cost of borrowed funds
used for construction purposes and a reasonable rate of return upon
the utility's equity when so used. AFC is not an item of current
cash income. AFC is computed monthly using a rate permitted by the
FERC on a portion of construction work in progress. The average
annual AFC rate, without giving effect to compounding, was 9.02%
9.36% and 9.18% for the years 1996, 1995 and 1994, respectively.
<PAGE>
Depreciation
The provisions for depreciation result from the application of
straight-line rates to the original cost, by groups, of depreciable
properties in service. The rates are determined by age-life
studies performed annually on depreciable properties. Depreciation
for electric properties was equivalent to approximately 3.0% of
respective average depreciable plant costs for each of the years
1996, 1995 and 1994. Depreciation for gas properties was
equivalent to approximately 2.0% of respective average depreciable
plant costs for each of the years 1996, 1995 and 1994.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with maturities of
three months or less when purchased. The carrying amount
approximates fair value because of the short maturity of these
investments.
LRPP Receivable/Payable
Represents the current portion of amounts recoverable from or due
to ratepayers that result from the revenue and expense
reconciliations, performance-based incentives and associated
carrying charges as established under the LILCO Ratemaking and
Performance Plan (LRPP). For further discussion of the LRPP, see
Note 3.
Fair Values of Financial Instruments
The fair values for the Company's long-term debt and redeemable
preferred stock are based on quoted market prices, where available.
The fair values for all other long-term debt and redeemable
preferred stock are estimated using discounted cash flow analyses
which is based upon the Company's current incremental borrowing
rate for similar types of securities.
Revenues
Revenues are based on cycle billings rendered to certain customers
monthly and others bi-monthly. The Company also accrues electric
and gas revenues for services rendered to customers but not billed
at month-end.
The Company's electric rate structure, as discussed in Note 3,
provides for a revenue reconciliation mechanism which eliminates
the impact on earnings of experiencing electric sales that are
above or below the levels reflected in rates.
The Company's gas rate structure provides for a weather
normalization clause which reduces the impact on revenues of
experiencing weather which is warmer or colder than normal.
<PAGE>
Fuel Cost Adjustments
The Company's electric and gas tariffs include fuel cost adjustment
(FCA) clauses which provide for the disposition of the difference
between actual fuel costs and the fuel costs allowed in the
Company's base tariff rates (base fuel costs). The Company defers
these differences to future periods in which they will be billed or
credited to customers, except for base electric fuel costs in
excess of actual electric fuel costs, which are currently credited
to the RMC as incurred.
Federal Income Tax
The Company provides deferred federal income tax with respect to
certain items of income and expense that are reported in different
years for federal income tax purposes and financial statement
purposes and with respect to items with different bases for
financial and tax reporting purposes, as discussed in Note 9.
The Company defers the benefit of 60% of pre-1982 gas and pre-1983
electric and 100% of all other investment tax credits, with respect
to regulated properties, when realized on its tax returns.
Accumulated deferred investment tax credits are amortized ratably
over the lives of the related properties.
For ratemaking purposes, the Company provides deferred federal
income tax with respect to certain differences between income
before income tax for financial reporting purposes and taxable
income for federal income tax purposes. Also, certain accumulated
deferred federal income tax is deducted from rate base and
amortized or otherwise applied as a reduction in federal income tax
expense in future years.
Reserves for Claims and Damages
Losses arising from claims against the Company, including workers'
compensation claims, property damage, extraordinary storm costs and
general liability claims, are partially self-insured. Reserves for
these claims and damages are based on, among other things,
experience, risk of loss and the ratemaking practices of the PSC.
Extraordinary storm losses incurred by the Company are partially
insured by various commercial insurance carriers. These insurance
carriers provide partial insurance coverage for individual storm
losses to the Company's transmission and distribution system
between $15 million and $25 million. Storm losses which are
outside of this range are self-insured by the Company.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
<PAGE>
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified in the financial
statements to conform with the current year presentation.
Note 2. The 1989 Settlement
In February 1989, the Company and the State of New York entered
into the 1989 Settlement resolving certain issues relating to the
Company and providing, among other matters, for the financial
recovery of the Company and for the transfer of Shoreham to the
Long Island Power Authority (LIPA), an agency of the State of New
York, for its subsequent decommissioning.
Upon the effectiveness of the 1989 Settlement, in June 1989, the
Company recorded the FRA on its Balance Sheet and the retirement of
its investment of approximately $4.2 billion, principally in
Shoreham. The FRA has two components, the BFC and the RMC. For a
further discussion of the FRA, see Note 1.
In February 1992, the Company transferred ownership of Shoreham to
LIPA. Pursuant to the 1989 Settlement, the Company was required to
reimburse LIPA for all of its costs associated with the
decommissioning of Shoreham. Effective May 1, 1995, the Nuclear
Regulatory Commission (NRC) terminated LIPA's possession-only
license for Shoreham. The termination signified the NRC's approval
that decommissioning was complete and that the site is suitable for
unrestricted use. At December 31, 1996, Shoreham post-settlement
costs totaled approximately $1.103 billion, consisting of $536
million of property taxes and payments-in-lieu-of-taxes, and $567
million of decommissioning costs, fuel disposal costs and all other
costs incurred at Shoreham after June 30, 1989.
The PSC has determined that all costs associated with Shoreham
which are prudently incurred by the Company subsequent to the
effectiveness of the 1989 Settlement are decommissioning costs.
The RMA provides for the recovery of such costs through electric
rates over the balance of a forty-year period ending 2029.
Note 3. Rate Matters
Electric
In 1995, the Company submitted a compliance filing requesting that
the PSC extend the provisions of its 1995 electric rate order,
discussed below, through November 30, 1996. This filing was
updated by the Company in August 1996 and approved by the PSC in
<PAGE>
January 1997.
During 1996, the PSC instituted numerous initiatives intended to
lower electric rates on Long Island. The Company shares the PSC's
concern regarding electric rate levels and is prepared to assist
the PSC in pursuing any reasonable opportunity to reduce electric
rates. The initiatives instituted were as follows:
An Order to Show Cause, issued in February 1996, to
examine various opportunities to reduce the Company's
electric rates;
An Order, issued in April 1996, expanding the scope of
the Order to Show Cause proceeding in an effort to
provide "immediate and substantial rate relief." This
order directed the Company to file financial and other
information sufficient to provide a legal basis for
setting new rates for both the single rate year (1997)
and the three-year period 1997 through 1999; and
An Order, issued in July 1996, to institute an expedited
temporary rate phase in the Order to Show Cause
proceeding to be conducted in parallel with the ongoing
phase concerning permanent rates.
The Order issued in July requested that interested parties file
testimony and exhibits sufficient to provide a basis for the PSC to
decide whether the Company's electric rates should be made
temporary and, if so, the proper level of such temporary rates.
The Staff of the PSC (Staff), in response to this Order,
recommended that the Company's rates be reduced on a temporary
basis by 4.2% effective October 1, 1996, until the permanent rate
case is decided. In its filing, the Company sought to demonstrate
that current electric rate levels were appropriate and that there
was no justification for reducing them. Although evidentiary
hearings on the Company's, Staff's and other interested parties'
submissions were subsequently held on an expedited basis to enable
the PSC to render a decision on the Company's rates, as of the date
of this report, the PSC has yet to take any action.
In September 1996, the Company completed the filing of a multi-year
rate plan (Plan) in compliance with the April 1996 Order. Major
elements of the Plan include: (i) a base rate freeze for the three-
year period December 1, 1996 through November 30, 1999; (ii) an
allowed return on common equity of 11.0% through the term of the
Plan with the Company fully retaining all earnings up to 12.66%,
and sharing with the customer any earnings above 12.66%; (iii) the
continuation of existing LRPP revenue and expense reconciliation
mechanisms and performance incentive programs; (iv) crediting all
net proceeds from the Shoreham property tax litigation to the RMC
to reduce its balance; and (v) a mechanism to fully recover any
outstanding RMC balance at the end of the 1999 rate year through
<PAGE>
inclusion in the Fuel Cost Adjustment (FCA), over a two-year
period.
1995 Electric Rate Order
The basis of the 1995 Order included minimizing future electric
rate increases while continuing to provide for the recovery of the
Company's regulatory assets and retaining consistency with the
RMA's objective of restoring the Company to financial health. The
1995 Order, which became effective December 1, 1994, froze base
electric rates, reduced the Company's allowed return on common
equity from 11.6% to 11.0% and modified or eliminated certain
performance-based incentives, as discussed below.
The LRPP, originally approved by the PSC in November 1991,
contained three major components: (i) revenue reconciliation; (ii)
expense attrition and reconciliation; and (iii) performance-based
incentives. In the 1995 Order, the PSC continued the three major
components of the LRPP with modifications to the expense attrition
and reconciliation mechanism and the performance-based incentives.
The revenue reconciliation mechanism remains unchanged.
Revenue reconciliation provides a mechanism that eliminates the
impact of experiencing sales that are above or below adjudicated
levels by providing a fixed annual net margin level (defined as
sales revenues, net of fuel expenses and gross receipts taxes).
The difference between actual and adjudicated net margin levels are
deferred on a monthly basis during the rate year.
The expense attrition and reconciliation component permits the
Company to make adjustments for certain expenses recognizing that
these cost increases are unavoidable due to inflation and changes
outside the control of the Company. Pursuant to the 1995 Order,
the Company is permitted to reconcile expenses for property taxes
only, whereas under the original LRPP the Company was able to
reconcile expenses for wage rates, property taxes, interest costs
and demand side management (DSM) costs.
The original LRPP had also provided for the deferral and
amortization of certain cost variances for enhanced reliability,
production operations and maintenance expenses and the application
of an inflation index to other expenses. Under the 1995 Order,
these deferrals have been eliminated and any unamortized balances
were credited to the RMC during 1995.
The modified performance-based incentive programs include the DSM
program, the customer service performance program and the
transmission and distribution reliability program. Under these
revised programs, the Company is subject to a maximum penalty of 38
basis points of the allowed return on common equity and can earn up
to 4 basis points under the customer service program. This 4 basis
point incentive can only be used to offset a penalty under the
<PAGE>
transmission and distribution reliability program. Under the
original LRPP, the Company was allowed to earn up to 40 basis
points or forfeit up to 18 basis points under these incentive
programs.
The partial pass-through fuel incentive program remains unchanged.
Under this incentive, the Company can earn or forfeit up to 20
basis points of the allowed return on common equity.
For the rate year ended November 30, 1996, the Company earned 20
basis points, or approximately $4.3 million, net of tax effects, as
a result of its performance under all incentive programs. For the
rate years ended November 30, 1995 and 1994, the Company earned 19
and 50 basis points, respectively, or approximately $4.0 million
and $9.2 million, respectively, net of tax effects, under the
incentive programs in effect at those times.
The deferred balances resulting from the net margin and expense
reconciliations, and earned performance-based incentives are netted
at the end of each rate year, as established under the LRPP and
continued under the 1995 Order. The first $15 million of the total
deferral is recovered from or credited to ratepayers by increasing
or decreasing the RMC balance. Deferrals in excess of the $15
million, upon approval of the PSC, are refunded to or recovered
from the customers through the FCA mechanism over a 12-month
period.
For the rate year ended November 30, 1996, the amount to be
returned to customers resulting from the revenue and expense
reconciliations, performance-based incentive programs and
associated carrying charges totaled $14.5 million. Consistent with
the mechanics of the LRPP, it is anticipated that the entire
balance of the deferral will be used to reduce the RMC balance upon
approval by the PSC of the Company's reconciliation filing which
was submitted to the PSC in January 1997. For the rate year ended
November 30, 1995, the Company recorded a net deferred LRPP credit
of approximately $41 million. The first $15 million of the
deferral was applied as a reduction to the RMC while the remaining
portion of the deferral of $26 million will be returned to
customers through the FCA when approved by the PSC. For the rate
year ended November 30, 1994, the Company recorded a net deferred
charge of approximately $79 million. The first $15 million of the
deferral was applied as an increase to the RMC while the remaining
deferral of $64 million was recovered from customers.
Another mechanism of the LRPP provides that earnings in excess of
the allowed return on common equity, excluding the impacts of the
various incentive and/or penalty programs, are used to reduce the
RMC. For the rate years ended November 30, 1996 and 1995, the
Company earned $9.1 million and $6.2 million, respectively, in
excess of its allowed return on common equity. These excess
earnings were applied as reductions to the RMC. In 1994, the
<PAGE>
Company did not earn in excess of its allowed return on common
equity.
The Company is currently unable to predict the outcome of any of
the rate proceedings currently before the PSC and their effect, if
any, on the Company's financial position, cash flows or results of
operations.
Gas
In December 1993, the PSC approved a three year gas rate settlement
between the Company and the Staff of the PSC. The gas rate
settlement provided annual gas rate increases of 4.7%, 3.8% and
3.2% for each of the three rate years beginning December 1, 1993,
1994, and 1995, respectively. In the determination of the revenue
requirements for the gas rate settlement, an allowed return on
common equity of 10.1% was used.
The gas rate settlement also provided that earnings in excess of a
10.6% return on common equity be shared equally between the
Company's firm gas customers and its shareowners. For the rate
years ended November 30, 1996, 1995 and 1994, the firm gas
customers' portion of gas earnings in excess of the allowed return
on common equity totaled approximately $10 million, $1 million and
$7 million, respectively. In 1996, the Company was granted
permission by the PSC to apply the customers' portion of the gas
excess earnings and associated carrying charges for the 1995 and
1994 rate years to the recovery of deferred costs associated with
postretirement benefits other than pensions and costs incurred for
investigation and remediation of manufactured gas plant (MGP)
sites. The Company has requested that the same treatment be
granted for the disposition of the customers' portion of the 1996
rate year gas excess earnings.
The Company currently has no gas rate filings before the PSC and
does not intend to file a gas rate case during the current rate
year, unless required to do so in connection with the proposed
merger with Brooklyn Union.
Note 4. The Class Settlement
The Class Settlement, which became effective on June 28, 1989,
resolved a civil lawsuit against the Company brought under the
federal Racketeer Influenced and Corrupt Organizations Act. The
lawsuit, which the Class Settlement resolved, had alleged that the
Company made inadequate disclosures before the PSC concerning the
construction and completion of nuclear generating facilities.
The Class Settlement provides the Company's electric customers with
rate reductions aggregating $390 million that are being reflected
as adjustments to their monthly electric bills over a ten-year
period which began on June 1, 1990. Upon its effectiveness, the
<PAGE>
Company recorded its liability for the Class Settlement on a
present value basis at $170 million. The Class Settlement
Obligation at December 31, 1996 reflects the present value of the
remaining reductions to be refunded to customers. The remaining
reductions to customers bills, amounting to approximately $201
million as of December 31, 1996, consists of approximately $21
million for the five-month period beginning January 1, 1997, and
$60 million for each of the 12-month periods beginning June 1,
1997, 1998 and 1999.
Note 5. Nine Mile Point Nuclear Power Station, Unit 2
The Company has an undivided 18% interest in NMP2, located near
Oswego, New York which is operated by Niagara Mohawk Power
Corporation (NMPC). Ownership of NMP2 is shared by five cotenants:
the Company (18%), NMPC (41%), New York State Electric & Gas
Corporation (18%), Rochester Gas and Electric Corporation (14%) and
Central Hudson Gas & Electric Corporation (9%). The Company's
share of the rated capability is approximately 206 MW. The
Company's net utility plant investment, excluding nuclear fuel, was
approximately $715 million and $740 million at December 31, 1996
and 1995, respectively. The accumulated provision for
depreciation, excluding decommissioning costs, was approximately
$169 million and $153 million at December 31, 1996 and 1995,
respectively. Generation from NMP2 and operating expenses incurred
by NMP2 are shared in the same proportions as the cotenants'
respective ownership interests. The Company is required to provide
its respective share of financing for any capital additions to
NMP2. Nuclear fuel costs associated with NMP2 are being amortized
on the basis of the quantity of heat produced for the generation of
electricity.
NMPC has contracted with the United States Department of Energy for
the disposal of spent nuclear fuel. The Company reimburses NMPC
for its 18% share of the cost under the contract at a rate of $1.00
per megawatt hour of net generation less a factor to account for
transmission line losses. For 1996, 1995 and 1994, this totaled
$1.4 million, $1.2 million, and $1.4 million, respectively.
Nuclear Plant Decommissioning
NMPC expects to commence the decommissioning of NMP2 in 2026,
shortly after the cessation of plant operations, using a method
which provides for the removal of all equipment and structures and
the release of the property for unrestricted use. The Company's
share of decommissioning costs, based upon a "Site-Specific" 1995
study (1995 study), is estimated to be $368 million in 2026 dollars
($148 million in 1996 dollars). The Company's estimate for
decommissioning costs decreased in 1996 as compared to 1995
principally as a result of a reduction in the estimated annual
inflation factor. The Company's share of the estimated
decommissioning costs is currently being provided for in electric
<PAGE>
rates and is being charged to operations as depreciation expense
over the service life of NMP2. The amount of decommissioning costs
recorded as depreciation expense in 1996, 1995 and 1994 was $3.9
million, $2.3 million and $1.6 million, respectively. The
accumulated decommissioning costs collected in rates through
December 31, 1996, 1995 and 1994 amounted to $14.9 million, $11.0
million and $8.7 million, respectively.
The Company has established trust funds for the decommissioning of
the contaminated portion of the NMP2 plant. It is currently
estimated that the cost to decommission the contaminated portion of
the plant will be approximately 76% of the total decommissioning
costs. These funds comply with regulations issued by the NRC and
the FERC governing the funding of nuclear plant decommissioning
costs. The Company's policy is to make quarterly contributions to
the funds based upon the amount of decommissioning costs reflected
in rates. As of December 31, 1996, the balance in these funds,
including reinvested net earnings, was approximately $15.3 million.
These amounts are included on the Company's Balance Sheet in
Nonutility Property and Other Investments. The trust funds
investment consists of U.S. Treasury debt securities and cash
equivalents. The carrying amounts of these instruments approximate
fair market value.
The Financial Accounting Standards Board issued an exposure draft
in 1996 entitled "Accounting for Certain Liabilities Related to
Closure or Removal of Long-Lived Assets". Under the provisions of
the exposure draft, the Company would be required to change its
current accounting practices for decommissioning costs as follows:
(i) the Company's share of the total estimated decommissioning
costs would be accounted for as a liability, based on discounted
future cash flows; (ii) the recognition of the liability for
decommissioning costs would result in a corresponding increase to
the cost of the nuclear plant rather than as depreciation expense;
and (iii) investment earnings on the assets dedicated to the
external decommissioning trust fund would be recorded as investment
income rather than as an increase to accumulated depreciation. If
the Company was required to record the present value of its share
of NMP2 decommissioning costs on its Balance Sheet as of December
31, 1996, the Company would have to recognize a liability and
corresponding increase to nuclear plant of approximately $54
million.
Nuclear Plant Insurance
NMPC procures public liability and property insurance for NMP2, and
the Company reimburses NMPC for its 18% share of those costs.
The Price-Anderson Act mandates that nuclear power plants secure
financial protection in the event of a nuclear accident. This
protection must consist of two levels. The primary level provides
liability insurance coverage of $200 million (the maximum amount
<PAGE>
available) in the event of a nuclear accident. If claims exceed
that amount, a second level of protection is provided through a
retrospective assessment of all licensed operating reactors.
Currently, this "secondary financial protection" subjects each of
the 110 presently licensed nuclear reactors in the United States to
a retrospective assessment up to $76 million for each nuclear
incident, payable at a rate not to exceed $10 million per year.
The Company's interest in NMP2 could expose it to a maximum
potential loss of $13.6 million, per incident, through assessments
of $1.8 million per year in the event of a serious nuclear accident
at NMP2 or another licensed U.S. commercial nuclear reactor. These
assessments are subject to periodic inflation indexing and to a 5%
surcharge if funds prove insufficient to pay claims.
NMPC has also procured $500 million primary nuclear property
insurance with the Nuclear Insurance Pools and approximately $2.3
million of additional protection (including decontamination costs)
in excess of the primary layer through Nuclear Electric Insurance
Limited (NEIL). Each member of NEIL, including the Company, is
also subject to retrospective premium adjustments in the event
losses exceed accumulated reserves. For its share of NMP2, the
Company could be assessed up to approximately $1.9 million per
loss. This level of insurance is in excess of the NRC's required
$1.06 billion of coverage.
The Company has obtained insurance coverage from NEIL for the extra
expense incurred in purchasing replacement power during prolonged
accidental outages. Under this program, should losses exceed the
accumulated reserves of NEIL, each member, including the Company,
would be liable for its share of deficiency. The Company's maximum
liability per incident under the replacement power coverage, in the
event of a deficiency, is approximately $842,000.
Recent Actions of the NRC
In October 1996, NMPC, along with other companies, received a
letter from the NRC requiring them to provide the NRC with
information on the "adequacy and availability" of design basis
documentation on their nuclear plants within 120 days. Such
information will be used by the NRC to verify that companies are in
compliance with the terms and conditions of their license(s) and
NRC regulations. In addition, it will allow the NRC to determine
if other inspection activities or enforcement actions should be
taken on a particular company. NMPC plans to respond to the NRC by
the February 9, 1997 due date.
NMPC believes that the NRC is becoming more stringent as indicated
by this request and that a direct cost impact on companies with
nuclear plants may result. The Company is unable to predict how
such a higher risk operating environment may affect its financial
position, cash flows or results of operations.
<PAGE>
Note 6. Capital Stock
Common Stock
The Company has 150,000,000 shares of authorized common stock, of
which 120,784,277 were issued and 3,485 shares were held in
Treasury at December 31, 1996. The Company has 1,678,208 shares
reserved for sale through its Employee Stock Purchase Plan,
2,728,486 shares committed to the Automatic Dividend Reinvestment
Plan and 97,093 shares reserved for conversion of the Series I
Convertible Preferred Stock at a rate of $17.15 per share. In
addition, in connection with the Share Exchange Agreement, as
discussed in Note 10, the Company has granted Brooklyn Union the
right, under certain circumstances, to purchase 23,981,964 shares
of common stock at a price of $19.725 per share.
Preferred Stock
The Company has 7,000,000 authorized shares, cumulative preferred
stock, par value $100 per share and 30,000,000 authorized shares,
cumulative preferred stock, par value $25 per share. Dividends on
preferred stock are paid in preference to dividends on common stock
or any other stock ranking junior to preferred stock.
Preferred Stock Subject to Mandatory Redemption
The aggregate fair value of redeemable preferred stock with
mandatory redemptions at December 31, 1996 and 1995 amounted to
approximately $637 million and $598 million, respectively, compared
to their carrying amounts of $640 million and $644 million,
respectively. For a further discussion on the basis of the fair
value of the securities discussed above, See Note 1.
Each year the Company is required to redeem certain series of
preferred stock through the operation of sinking fund provisions as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Redemption Provision
------------------------ Number Redemption
Series Beginning Ending of Shares Price
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
L 7/31/79 7/31/11 10,500 $100
NN 3/1/99 3/1/19 77,700 25
UU 10/15/99 10/15/19 112,000 25
=================================================================
</TABLE>
The Company has the non-cumulative option to double the number of
shares to be redeemed pursuant to the sinking fund provisions in
any year for the preferred stock series NN and UU. The aggregate
par value of preferred stock required to be redeemed through
sinking funds is $1.1 million in 1997 and 1998 and $5.8 million in
each of the years 1999, 2000 and 2001.
<PAGE>
The Company is also required to redeem all shares of certain series
of preferred stock which are not subject to sinking fund
requirements. The mandatory redemption requirements for these
series are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Redemption Number of Redemption
Series Date Shares Amounts
- ------------ ------------ ------------- --------------
<S> <C> <C> <C>
$1.67 Series GG 3/1/99 880,000 $ 22,000,000
7.95% Series AA 6/1/00 14,520,000 363,000,000
7.05% Series QQ 5/1/01 3,464,000 86,600,000
7.66% Series CC 8/1/02 570,000 57,000,000
=================================================================
</TABLE>
Preferred Stock Not Subject to Mandatory Redemption
The Company has the option to redeem certain series of its
preferred stock. For the series subject to optional redemption at
December 31, 1996, the call prices were as follows:
<TABLE>
<CAPTION>
-----------
Series Call Price
------------------------------ -----------
<S> <C>
5.00% Series B $101
4.25% Series D 102
4.35% Series E 102
4.35% Series F 102
5 1/8% Series H 102
5 3/4% Series I - Convertible 100
============================== ===========
</TABLE>
Preference Stock
At December 31, 1996, none of the authorized 7,500,000 shares of
nonparticipating preference stock, par value $1 per share, which
ranks junior to preferred stock, were outstanding.
Note 7. Long-Term Debt
G&R Mortgage
The General and Refunding (G&R) Bonds are the Company's only
outstanding secured indebtedness. The G&R Mortgage is a lien on
substantially all of the Company's properties.
The annual G&R Mortgage sinking fund requirement for 1996, due not
later than June 30, 1997, is estimated at $25 million. The Company
expects to satisfy this requirement with retired G&R Bonds,
property additions, or any combination thereof.
1989 Revolving Credit Agreement
The Company has available through October 1, 1997, $250 million
under its 1989 Revolving Credit Agreement (1989 RCA). In July
<PAGE>
1996, at the Company's request, the amount committed by the banks
participating in the facility was reduced from $300 million to $250
million. This line of credit is secured by a first lien upon the
Company's accounts receivable and fuel oil inventories. At
December 31, 1996, no amounts were outstanding under the 1989 RCA.
The 1989 RCA may be extended for one-year periods upon the
acceptance by the lending banks of a request by the Company, which
must be delivered to the lending banks prior to April 1 of each
year. It is the Company's intent to request an extension prior to
April 1, 1997.
Authority Financing Notes
Authority Financing Notes are issued by the Company to the New York
State Energy Research and Development Authority (NYSERDA) to secure
certain tax-exempt Industrial Development Revenue Bonds, Pollution
Control Revenue Bonds (PCRBs) and Electric Facilities Revenue Bonds
(EFRBs) issued by NYSERDA. Certain of these bonds are subject to
periodic tender, at which time their interest rates may be subject
to redetermination.
Tender requirements of Authority Financing Notes at December 31,
1996 were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
- -----------------------------------------------------------------
Interest
Rate Series Principal Tendered
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
PCRBs 8 1/4% 1982 $ 17,200 Tendered every three
years, next tender
October 1997
3.25% 1985 A,B 150,000 Tendered annually on
March 1
EFRBs 4.05% 1993 A 50,000 Tendered weekly
4.00% 1993 B 50,000 Tendered weekly
4.00% 1994 A 50,000 Tendered weekly
4.00% 1995 A 50,000 Tendered weekly
=================================================================
</TABLE>
The 1995, 1994 and 1993 EFRBs and the 1985 PCRBs are supported by
letters of credit pursuant to which the letter of credit banks have
agreed to pay the principal, interest and premium, if applicable,
in the aggregate, up to approximately $381 million in the event of
default. The obligation of the Company to reimburse the letter of
credit banks is unsecured.
<PAGE>
The expiration dates for these letters of credit are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Series Expiration Date
- --------------------------------------------------------------
<S> <C> <C>
PCRBs 1985 A,B 3/16/99
EFRBs 1993 A,B 11/17/99
1994 A 10/26/97
1995 A 8/24/98
==============================================================
</TABLE>
Prior to expiration, the Company is required to obtain either an
extension of the letters of credit or a substitute credit facility.
If neither can be obtained, the authority financing notes supported
by letters of credit must be redeemed.
Fair Values of Long-Term Debt
The carrying amounts and fair values of the Company's long-term
debt at December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
- -----------------------------------------------------------------
1996
- -----------------------------------------------------------------
Fair Carrying
Value Amount
- -----------------------------------------------------------------
<S> <C> <C>
General and Refunding Bonds $1,571,745 $1,536,000
Debentures 2,271,095 2,270,000
Authority Financing Notes 950,758 916,675
- -----------------------------------------------------------------
Total $4,793,598 $4,722,675
=================================================================
1995
- -----------------------------------------------------------------
General and Refunding Bonds $1,968,173 1,951,000
Debentures 2,245,138 2,270,000
Authority Financing Notes 928,967 916,675
- -----------------------------------------------------------------
Total $5,142,278 $5,137,675
=================================================================
</TABLE>
For a further discussion on the basis of the fair value of the
securities listed above, see Note 1.
Debt Maturity Schedule
The total long-term debt maturing in each of the next five years is
as follows: 1997, $251 million; 1998, $101 million; 1999, $454
million; 2000, $37 million; and 2001, $146 million.
Note 8. Retirement Benefit Plans
Pension Plans
The Company maintains a defined benefit pension plan which covers
substantially all employees (Primary Plan), a supplemental plan
which covers officers and certain key executives (Supplemental
<PAGE>
Plan) and a retirement plan which covers the Board of Directors
(Directors' Plan). The Company also maintains 401(k) plans for its
union and non-union employees to which it does not contribute.
Primary Plan
The Company's funding policy is to contribute annually to the
Primary Plan a minimum amount consistent with the requirements of
the Employee Retirement Income Security Act of 1974 plus such
additional amounts, if any, as the Company may determine to be
appropriate from time to time. Pension benefits are based upon
years of participation in the Primary Plan and compensation.
<PAGE>
The Primary Plan's funded status and amounts recognized on the
Balance Sheet at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
- -----------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation
Vested benefits $ 547,002 $ 518,487
Nonvested benefits 55,157 54,305
- -----------------------------------------------------------------
Accumulated Benefit Obligation $ 602,159 $ 572,792
=================================================================
Plan assets at fair value $ 746,400 $ 685,300
Actuarial present value of projected
benefit obligation 689,661 662,360
- -----------------------------------------------------------------
Projected benefit obligation less
than plan assets 56,739 22,940
Unrecognized net obligation 71,085 77,831
Unrecognized net gain (123,759) (97,285)
- -----------------------------------------------------------------
Net Prepaid (Accrued) Pension Cost $ 4,065 $ 3,486
=================================================================
</TABLE>
Periodic pension cost for the Primary Plan included the following
components:
<TABLE>
<CAPTION>
(In thousands of dollars)
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits
earned during the period $ 17,384 $ 15,385 $ 16,465
Interest cost on projected benefit
obligation and service cost 47,927 45,987 43,782
Actual return on plan assets (81,165) (102,099) (12,431)
Net amortization and deferral 33,541 57,665 (31,633)
- -----------------------------------------------------------------
Net Periodic Pension Cost $ 17,687 $ 16,938 $ 16,183
=================================================================
</TABLE>
Assumptions used in accounting for the Primary Plan were as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.25% 7.25% 7.75%
Rate of future compensation increases 5.00% 5.00% 5.00%
Long-term rate of return on assets 7.50% 7.50% 7.50%
- -----------------------------------------------------------------
</TABLE>
The Primary Plan assets at fair value include cash, cash
equivalents, group annuity contracts, bonds and equity securities.
In 1993, the PSC issued an Order which addressed the accounting and
ratemaking treatment of pension costs in accordance with SFAS No.
87, "Employers' Accounting for Pensions". Under the Order, the
Company is required to recognize any deferred net gains or losses
over a ten-year period rather than using the corridor approach
method. The Company believes that this method of accounting for
<PAGE>
financial reporting purposes results in a better matching of
revenues and the Company's pension cost. The Company defers
differences between pension rate allowance and pension expense
under the Order. In addition, the PSC requires the Company to
measure the difference between the pension rate allowance and the
annual pension contributions contributed into the pension fund.
Supplemental Plan
The Supplemental Plan, the cost of which is borne by the Company's
shareowners, provides supplemental death and retirement benefits
for officers and other key executives without contribution from
such employees. The Supplemental Plan is a non-qualified plan
under the Internal Revenue Code. Death benefits are currently
provided by insurance. The provision for plan benefits, which are
unfunded, totaled approximately $2.7 million in 1996 and $2.3
million in both 1995 and 1994.
Directors' Plan
The Directors' Plan provides benefits to directors who are not
officers of the Company. Directors who have served in that
capacity for more than five years qualify as participants under the
plan. The Directors' Plan is a non-qualified plan under the
Internal Revenue Code. The provision for retirement benefits,
which are unfunded, totaled approximately $127,000, $114,000, and
$148,000 in 1996, 1995 and 1994, respectively.
Postretirement Benefits Other Than Pensions
In addition to providing pension benefits, the Company provides
certain medical and life insurance benefits for retired employees.
Substantially all of the Company's employees may become eligible
for these benefits if they reach retirement age after working for
the Company for a minimum of five years. These and similar
benefits for active employees are provided by the Company or by
insurance companies whose premiums are based on the benefits paid
during the year. Effective January 1, 1993, the Company adopted
the provisions of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", which requires the
Company to recognize the expected cost of providing postretirement
benefits when employee services are rendered rather than when paid.
As a result, the Company, in 1993, recorded an accumulated
postretirement benefit obligation and a corresponding regulatory
asset of approximately $376 million.
The PSC requires the Company to defer as a regulatory asset the
difference between postretirement benefit expense recorded for
accounting purposes in accordance with SFAS No. 106 and the
postretirement benefit expense reflected in rates. The ongoing
annual postretirement benefit expense will be phased into and fully
reflected in rates within a five-year period from the year of
<PAGE>
adoption, which began December 1, 1993, with the accumulated
regulatory asset being recovered in rates over a 15-year period,
beginning December 1, 1997. In addition, the Company is required
to recognize any deferred net gains or losses over a ten-year
period.
In 1994, the Company established Voluntary Employee's Beneficiary
Association trusts for union and non-union employees for the
funding of incremental costs collected in rates for postretirement
benefits. For the years ended December 31, 1996 and 1995, the
Company funded the trusts with approximately $18 million and $50
million, respectively.
Accumulated postretirement benefit obligation other than pensions
at December 31 was as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
- -----------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Retirees $ 156,181 $ 135,497
Fully eligible plan participants 56,950 52,028
Other active plan participants 152,627 142,035
- -----------------------------------------------------------------
Accumulated postretirement
benefit obligation $ 365,758 $ 329,560
Plan assets 74,692 53,646
- -----------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets 291,066 275,914
Unrecognized prior service cost (188) -
Unrecognized net gain 75,309 100,335
- -----------------------------------------------------------------
Accrued Postretirement Benefit Cost $ 366,187 $ 376,249
=================================================================
</TABLE>
At December 31, 1996, and 1995, the Plan assets, which are recorded
at fair value, include cash and cash equivalents, fixed income
investments and approximately $100,000 of listed equity securities
of the Company.
Periodic postretirement benefit cost other than pensions for the
years were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits
earned during the period $ 10,690 $ 9,082 $ 11,275
Interest cost on projected
benefit obligation and
service cost 25,030 22,412 25,713
Actual return on plan assets (3,046) (1,034) -
Net Amortization
and deferral (12,175) (14,699) (5,213)
- -----------------------------------------------------------------
Periodic Postretirement
Benefit Cost $ 20,499 $ 15,761 $ 31,775
=================================================================
</TABLE>
<PAGE>
Assumptions used to determine the postretirement benefit obligation
were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.25% 7.25% 7.75%
Rate of future compensation increases 5.00% 5.00% 5.00%
Long-term rate of return on assets 7.50% 7.50% -
- ------------------------------------------------------------------
</TABLE>
The assumed health care cost trend rates used in measuring the
accumulated postretirement benefit obligation at December 31, 1996
and 1995 were 8.0% and 8.5%, respectively, gradually declining to
6.0% in 2001 and thereafter. A one percentage point increase in
the health care cost trend rate would increase the accumulated
postretirement benefit obligation as of December 31, 1996 and 1995
by approximately $43 million and $36 million, respectively, and the
sum of the service and interest costs in 1996 and 1995 by $5
million and $4 million, respectively.
Note 9. Federal Income Tax
At December 31, the significant components of the Company's
deferred tax assets and liabilities calculated under the provisions
of SFAS No. 109, "Accounting for Income Taxes", were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
- ------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Net operating loss carryforwards $ 145,205 $ 338,921
Reserves not currently deductible 58,981 66,825
Tax depreciable basis in excess
of book 34,314 41,428
Nondiscretionary excess credits 27,700 29,826
Credit carryforwards 135,902 149,545
Other 186,907 125,246
- ------------------------------------------------------------------
Total Deferred Tax Assets $ 589,009 $ 751,791
- ------------------------------------------------------------------
Deferred Tax Liabilities
1989 Settlement $ 2,163,239 $ 2,155,418
Accelerated depreciation 642,702 628,475
Call premiums 44,846 50,062
Rate case deferrals 2,127 28,971
Other 33,496 35,597
- ------------------------------------------------------------------
Total Deferred Tax Liabilities 2,886,410 2,898,523
- ------------------------------------------------------------------
Net Deferred Tax Liability $ 2,297,401 $ 2,146,732
==================================================================
</TABLE>
<PAGE>
SFAS No. 109 requires utilities to establish regulatory assets and
liabilities for the portion of its deferred tax assets and
liabilities that have not yet been recognized for ratemaking
purposes. The major components of these regulatory assets and
liabilities are as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
- -----------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Regulatory Assets
1989 Settlement $ 1,660,871 $ 1,666,744
Plant items 125,976 149,520
Other (14,069) (13,881)
- -----------------------------------------------------------------
Total Regulatory Assets $ 1,772,778 $ 1,802,383
=================================================================
Regulatory Liabilities
Carryforward credits $ 68,421 $ 82,330
Other 34,466 33,730
- -----------------------------------------------------------------
Total Regulatory Liabilities $ 102,887 $ 116,060
=================================================================
The federal income tax amounts included in the Statement of Income
differ from the amounts which result from applying the statutory
federal income tax rate to income before income tax. The table
below sets forth the reasons for such differences.
</TABLE>
<TABLE>
<CAPTION>
(In thousands of dollars)
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Income before federal income tax $ 525,721 $ 508,824 $ 478,564
Statutory federal income tax rate 35% 35% 35%
- -----------------------------------------------------------------
Statutory federal income tax $ 184,002 $ 178,088 $ 167,497
Additions (reductions) in federal
income tax
Excess of book depreciation over
tax depreciation 18,339 18,588 14,745
1989 Settlement 4,212 4,213 4,213
Interest capitalized 2,270 2,218 2,449
Tax credits (4,383) (1,025) (2,058)
Tax rate change amortization 3,686 3,752 (4,779)
Allowance for funds used during
construction (2,305) (2,392) (2,450)
Other items 3,436 2,096 (2,905)
- -----------------------------------------------------------------
Total Federal Income Tax Expense $ 209,257 $ 205,538 $ 176,712
=================================================================
Effective Federal Income Tax Rate 39.8% 40.4% 36.9%
=================================================================
</TABLE>
<PAGE>
The Company's net operating loss (NOL) carryforwards for federal
income tax purposes are estimated to be approximately $415 million
at December 31, 1996. These NOL carryforwards are scheduled to
expire in the years 2004 through 2007. The Company currently has
tax credit carryforwards of approximately $136 million. This
balance is composed of investment tax credit (ITC) carryforwards,
net of the 35% reduction required by the Tax Reform Act of 1986,
totaling approximately $128 million and research and development
credits totaling approximately $8 million. In 1990 and 1992, the
Company received Revenue Agents' Reports disallowing certain
deductions and credits claimed by the Company on its federal income
tax returns for the years 1981 through 1989. The Revenue Agents'
Reports proposed ITC adjustments which if sustained, would reduce
the ITC carryforwards to approximately $63 million.
Additionally, the Revenue Agents' Reports reflect proposed
adjustments to the Company's federal income tax returns for the
years 1981 through 1989 which, if sustained, would give rise to tax
deficiencies totaling approximately $227 million. The Company
believes that any such deficiencies as finally determined would be
significantly less than the amounts proposed in the Revenue Agents'
Reports. The Company has protested some of the proposed
adjustments which are presently under review by the Regional
Appeals Office of the Internal Revenue Service. If this review
does not result in a settlement that is satisfactory to the
Company, the Company intends to seek a judicial review. The
Company believes that its reserves are adequate to cover any tax
deficiency that may ultimately be determined and that cash from
operations will be sufficient to satisfy any settlement reached.
However, if necessary, the Company will avail itself of interim
financing via the 1989 RCA to meet this obligation. The Company
currently believes that a settlement of the 1981 through 1989 years
should be reached with the Regional Appeals Office sometime in
1997.
Note 10. Merger Agreement with The Brooklyn Union Gas Company
On December 29, 1996, the Company and The Brooklyn Union Gas
Company (Brooklyn Union) entered into an Agreement and Plan of
Exchange (Share Exchange Agreement), pursuant to which the
companies will be merged in a transaction that will result in the
formation of a new holding company. The new holding company, which
has not yet been named, will serve approximately 2.2 million
customers and have revenues of more than $4.5 billion. The merger
is expected to be accomplished through a tax-free exchange of
shares and accounted for as a pooling of interests.
The proposed transaction, which has been approved by both
companies' boards of directors, would unite the resources of the
Company with the resources of Brooklyn Union. Brooklyn Union, with
approximately 3,300 employees, distributes natural gas at retail,
primarily in a territory of approximately 187 square miles which
<PAGE>
includes the boroughs of Brooklyn and Staten Island and
approximately two-thirds of the borough of Queens, all in New York
City. Brooklyn Union has energy-related investments in gas
exploration, production and marketing in the United States and
Canada, as well as energy services in the United States, including
cogeneration products, pipeline transportation and gas storage.
Under the terms of the proposed transaction, the Company's common
shareowners will receive .803 shares (the Ratio) of the new holding
company's common stock for each share of the Company's common stock
that they currently hold. Brooklyn Union common shareowners will
receive one share of common stock of the new holding company for
each share of Brooklyn Union common stock that they currently hold.
Shareowners of the Company will own approximately 66% of the common
stock of the new holding company while Brooklyn Union shareowners
will own approximately 34%. The proposed transaction will have no
effect on either company's debt issues or outstanding preferred
stock.
The Share Exchange Agreement contains certain covenants of the
parties pending the consummation of the transaction. Generally,
the parties must carry on their businesses in the ordinary course
consistent with past practice, may not increase dividends on common
stock beyond specified levels and may not issue capital stock
beyond certain limits. The Share Exchange Agreement also contains
restrictions on, among other things, charter and by-law amendments,
capital expenditures, acquisitions, dispositions, incurrence of
indebtedness, certain increases in employee compensation and
benefits, and affiliate transactions. Accordingly, the Company's
ability to engage in certain activity described herein may be
limited or prohibited by the Share Exchange Agreement.
Upon completion of the merger, Dr. William J. Catacosinos will
become chairman and chief executive officer of the new holding
company; Mr. Robert B. Catell, currently chairman and chief
executive officer of Brooklyn Union, will become president and
chief operating officer of the new holding company. One year after
the closing, Mr. Catell will succeed Dr. Catacosinos as chief
executive officer, with Dr. Catacosinos continuing as chairman.
The board of directors of the new company will be composed of 15
members, six from the Company, six from Brooklyn Union and three
additional persons previously unaffiliated with either company and
jointly selected by them.
The companies will continue their respective current dividend
policies until the closing, consistent with the provisions of the
Share Exchange Agreement. It is expected that the new holding
company's dividend policy will be determined prior to closing.
The merger is conditioned upon, among other things, the approval of
the merger by the holders of two-thirds of the outstanding shares
of common stock of each of the Company and Brooklyn Union and the
<PAGE>
receipt of all required regulatory approvals. The Company is
unable to determine when or if all required approvals will be
obtained.
In 1995, the Long Island Power Authority (LIPA), an agency of the
State of New York (NYS), was requested by the Governor of NYS to
develop a plan, pursuant to its authority under NYS law, to provide
an electric rate reduction of at least 10%, provide a framework for
long-term competition in power production and protect property tax
payers on Long Island.
The Share Exchange Agreement contemplates that discussions, which
are currently in progress, will continue with LIPA to arrive at an
agreement mutually acceptable to the Company, Brooklyn Union and
LIPA, pursuant to which LIPA would acquire certain assets or
securities of the Company, the consideration for which would inure
to the benefit of the new holding company. In the event that such
a transaction is completed, the Ratio would become .880. In
connection with discussions with LIPA, LIPA has indicated that it
may exercise its power of eminent domain over all or a portion of
the Company's assets or securities, in order to achieve its
objective of reducing current electric rates, if a negotiated
agreement cannot be reached. The Company is unable to determine
when or if an agreement with LIPA will be reached, or what action,
if any, LIPA will take if such an agreement is not reached.
Note 11. Commitments and Contingencies
Commitments
Electric and Gas
The Company has entered into contracts with numerous Independent
Power Producers (IPPs) and the New York Power Authority (NYPA) for
electric generating capacity. Coincident with these agreements are
provisions which require the Company to make capacity payments,
fixed non-energy payments and, assuming performance by the IPPs and
NYPA, payments for energy delivered under these contracts at prices
that may exceed current market energy prices.
The Company has also entered into contracts for firm transmission
(wheeling) capacity with NYPA in connection with a transmission
cable which was constructed, in part, for the benefit of the
Company.
In addition, the Company has entered into long term contracts for
firm gas transportation, storage and supply that require the
Company to make payments even if the services are not provided.
The costs of these agreements are currently recoverable through
rates.
<PAGE>
The table below sets forth the Company's aggregate obligation under
these commitments which extend through 2020.
<TABLE>
<CAPTION>
(In millions of dollars)
- -----------------------------------------------------------------
Electric Gas
Business* Business
-------- --------
<S> <C> <C>
1997 $ 181.5 $ 38.7
1998 188.9 37.6
1999 190.7 37.6
2000 196.5 37.6
2001 205.7 34.7
Subsequent Years 2,370.6 232.5
- -----------------------------------------------------------------
Total $ 3,333.9 $ 418.7
Less: Imputed Interest 1,736.6 182.1
- -----------------------------------------------------------------
Present Value of Payments $ 1,597.3 $ 236.6
=================================================================
</TABLE>
*Assumes full performance by the IPPs and NYPA.
Continuous Emission Monitoring
The Company expended approximately $1 million in 1996 to meet
continuous emission monitoring requirements, to meet Phase II
nitrogen oxide (NOx) reduction requirements under the federal Clean
Air Act (CAA). Subject to requirements that are expected to be
promulgated in forthcoming regulations, the Company estimates that
it may be required to expend approximately $44 million by 2003 to
meet Phase II and Phase III NOx reduction requirements and
approximately $2 million by 1999 to meet potential requirements for
the control of hazardous air pollutants from power plants. The
Company believes that all of the above costs will be recoverable
through rates.
Competitive Environment
The electric industry continues to undergo fundamental changes as
regulators, elected officials and customers seek lower energy
prices. These changes, which may have a significant impact on
future financial performance of electric utilities, are being
driven by a number of factors including a regulatory environment in
which traditional cost-based regulation is seen as a barrier to
lower energy prices. In 1996, both the PSC and the FERC continued
their separate, but in some cases parallel, initiatives with
respect to developing a framework for a competitive electric
marketplace.
The Electric Industry - State Regulatory Issues
In 1994, the PSC began the second phase of its Competitive
Opportunities Proceedings to investigate issues related to the
future of the regulatory process in an industry which is moving
<PAGE>
toward competition. The PSC's overall objective was to identify
regulatory and ratemaking practices that would assist New York
State utilities in the transition to a more competitive environment
designed to increase efficiency in providing electricity while
maintaining safe, affordable and reliable service.
As a result of the Competitive Opportunities Proceedings, in May
1996, the PSC issued an order (Order) which stated its belief that
introducing competition to the electric industry in New York has
the potential to reduce electric rates over time, increase customer
choice and encourage economic growth. The Order calls for a
competitive wholesale power market to be in place by early 1997
which will be followed by the introduction of retail access for all
customers by early 1998.
The PSC stated that competition should be transitioned on an
individual company basis, due to differences in individual service
territories, the level and type of strandable investments (i.e.,
costs that utilities would have otherwise recovered through rates
under traditional cost of service regulation that, under market
competition, would not be recoverable) and utility specific
financial conditions.
The Order contemplates that implementation of competition will
proceed on two tracks. The Order requires that each major electric
utility file a rate/restructuring plan which is consistent with the
PSC's policy and vision for increased competition. Those plans
were submitted by October 1, 1996, in compliance with the Order.
However, the Company was exempted from this requirement due to the
PSC's separate investigation of the Company's rates and LIPA's
examination of the Company's structure. Since October 1, 1996,
proceedings have commenced for the five electric utilities which
filed restructuring plans in accordance with track one and the
Company has intervened in each of these proceedings.
The PSC order also anticipated that certain other filings would be
made on October 1, 1996, by all New York State utilities, to both
the PSC and the FERC. The filings were to address the delineation
of transmission and distribution facilities jurisdiction between
the FERC or the PSC, a pricing of each company's transmission
services, and a joint filing by all the utilities to address the
formation of an Independent System Operator (ISO) and the creation
of a market exchange that will establish spot market prices.
Although there were extensive collaborative meetings among the
parties, it was not possible for the additional filings to be
completed by October 1, 1996. While these discussions are
continuing in an attempt to narrow the differences among the
parties, on December 31, 1996, the New York Power Pool (NYPP)
members submitted a compliance filing to the FERC which provides
open membership and comparable services to eligible entities in
accordance with FERC Order 888, discussed below. It is anticipated
that the New York State utilities will submit the full ISO/Power
<PAGE>
Exchange filing to the FERC during the first quarter of 1997.
The PSC envisions that a fully operational wholesale competitive
structure will foster the expeditious movement to full retail
competition. The PSC's vision of the retail competitive structure,
known as the Flexible Retail Poolco Model, consists of: (i) the
creation of an ISO to coordinate the safe and reliable operation of
electric generation and transmission; (ii) open access to the
transmission system, which would be regulated by the FERC; (iii)
the continuation of a regulated distribution company to operate and
maintain the distribution system; (iv) the deregulation of
energy/customer services such as meter reading and customer
billing; (v) the ability of customers to choose among suppliers of
electricity; and (vi) the allowance of customers to acquire
electricity either by long-term contracts, purchases on the spot
market or a combination of the two.
One issue discussed in the Order that could affect the Company is
strandable investments. The PSC stated in its Order that it is not
required to allow recovery of all prudently incurred investments,
that it has considerable discretion to set rates that balance
ratepayer and shareholder interests, and that the amount of
strandable investments that a utility will be permitted to recover
will depend on the particular circumstances of each utility.
Additionally, the Order provided that every effort should be made
by utilities to mitigate these costs prior to seeking recovery.
Certain aspects of the restructuring envisioned by the PSC--
particularly the PSC's apparent determinations that it may deny the
utilities recovery of prudent investments made on behalf of the
public, order retail wheeling, require divestiture of generation
assets and deregulate certain sectors of the energy market--could,
if implemented, have a negative impact on the operations and
financial conditions of New York's investor-owned electric
utilities, including the Company.
The Company is party to a lawsuit commenced in September 1996 by
the Energy Association of New York State and the state's other
investor-owned electric utilities (collectively, Petitioners)
against the PSC in New York Supreme Court, Albany County (The
Energy Association of New York State, et al. v. Public Service
Commission of the State of New York, et al.). The Petitioners have
requested that the Court declare that the Order is unlawful or, in
the alternative, that the Court clarify that the PSC's statements
in the Order constitute simply a policy statement with no binding
legal effect. In November 1996, the Court issued a Decision and
Order denying the Petitioners' request to invalidate the Order.
Although the Court stated that most of the Order is a non-binding
statement of policy, the Court rejected the Petitioners'
substantive challenges to the Order. In December 1996, Petitioners
filed a notice of appeal with the Third Department of the Appellate
Division of the New York State Supreme Court. The litigation is
<PAGE>
ongoing and the Company is unable at this time to predict the
likelihood of success or the impact of the litigation on the
Company's financial position, cash flows or results of operations.
Oral argument in the Appellate Division has not yet been scheduled,
but a decision is expected by the end of 1997.
The Electric Industry - Federal Regulatory Issues
In April 1996, in response to its Notice of Proposed Rulemaking
issued in March 1995, the FERC issued two orders relating to the
development of competitive wholesale electric markets.
Order 888 is a final rule on open transmission access and stranded
cost recovery and provides that the FERC has exclusive jurisdiction
over interstate wholesale wheeling and that utility transmission
systems must now be open to qualifying sellers and purchasers of
power on a non-discriminatory basis.
Order 888 allows utilities to recover legitimate, prudent and
verifiable stranded costs associated with wholesale transmission,
including the circumstances where full requirements customers
become wholesale transmission customers, such as where a
municipality establishes its own electric system.
With respect to retail wheeling, the FERC concluded that it has
jurisdiction over rates, terms and conditions of service, but would
leave the issue of recovery of the costs stranded by retail
wheeling to the states.
Order 888 required utilities to file open access tariffs under
which they would provide transmission services, comparable to those
which they provide themselves and to third parties on a non-
discriminatory basis. Additionally, utilities must use these same
tariffs for their own wholesale sales. The Company filed its open
access tariff in July 1996. In September 1996, the FERC ordered
Rate Hearings on 28 utility transmission tariffs, including the
Company's. On the basis of a preliminary review, the FERC was not
satisfied that the tariff rates were just and reasonable.
Settlement discussions have been held between the Company and
various intervenors concerning the Company's transmission rates.
In December 1996, the parties reached a tentative settlement on the
rate issues. The procedural schedule was suspended pending filing
of the settlement agreement, which is anticipated during the first
quarter of 1997. Non-rate issues associated with the Company's
open access tariff have not yet been addressed by the FERC.
Order 889, which is a final rule on a transmission pricing bulletin
board, addresses the rules and technical standards for operation of
an electronic bulletin board that will make available, on a real-
time basis, the price, availability and other pertinent information
concerning each transmission utility's services. It also addresses
standards of conduct to ensure that transmission utilities
<PAGE>
functionally separate their transmission and wholesale power
merchant functions to prevent discriminatory self-dealing. In
December 1996, the Company filed its standards of conduct in
accordance with the Order.
With other members of the industry, the Company has participated in
several joint petitions for rehearing and/or clarification of the
FERC's Orders 888 and 889. Among other issues, these petitions
address the FERC's obligation to exercise its jurisdiction to
provide for the recovery of strandable investments in any retail
wheeling situations. The outcome and timing of the FERC Orders on
rehearing are uncertain.
It is not possible to predict the ultimate outcome of these
proceedings, the timing thereof, or the amount, if any, of stranded
costs that the Company would recover in a competitive environment.
The outcome of the state and federal regulatory proceedings could
adversely affect the Company's ability to apply Statement of
Financial Accounting Standards SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation," which, pursuant to SFAS
No. 101, "Accounting for Discontinuation of Application of SFAS No.
71," could then require a significant write-down of all or a
portion of the Company's net regulatory assets.
The Company's Service Territory
The Company's geographic location and the limited electrical
interconnections to Long Island serve to limit the accessibility of
its transmission grid to potential competitors from off the system.
However, the changing utility regulatory environment has affected
the Company by requiring the Company to co-exist with state and
federally mandated competitors. These competitors are non-utility
generators (NUGS), NYPA and Municipal Distribution Agencies (MDAs).
The Public Utility Regulatory Policies Act of 1978 (PURPA), the
goal of which is to reduce the United States' dependency on foreign
oil, to encourage energy conservation and to promote
diversification of the fuel supply, has negatively impacted the
Company through the encouragement of the NUG industry. PURPA
provides for the development of a new class of electric generators
which rely on either cogeneration technology or alternate fuels.
Utilities are obligated under PURPA to purchase the output of
certain of these generators, which are known as qualified
facilities (QFs).
In 1996, the Company lost sales to NUGs totaling 422 gigawatt-hours
(GWh) representing a loss in electric revenues net of fuel (net
revenues) of approximately $34 million, or 1.9% of the Company's
net revenues. In 1995, the Company lost sales to NUGs totaling 366
GWh or approximately $28 million or 1.5% of the Company's net
revenues.
<PAGE>
The increase in lost net revenues resulted principally from the
completion of seven facilities that became commercially operational
during 1996 and the full year operation of the IPP located at the
State University of New York at Stony Brook, NY. The Company
estimates that in 1997, sales losses to NUGs will be 429 GWh, or
approximately 1.8% of projected net revenues.
The Company believes that load losses due to NUGs have stabilized.
This belief is based on the fact that the Company's customer load
characteristics, which lack a significant industrial base and
related large thermal load, will mitigate load loss and thereby
make cogeneration economically unattractive.
Additionally, as mentioned above, the Company is required to
purchase all the power offered by QFs which in 1996 approximated
218 megawatts (MW) and in early 1995 approximated 205 MW. The
increase was the result of the SUNY Stony Brook facility going on
line in mid 1995. The Company estimates that purchases from QFs
required by federal and state law cost the Company $63 million and
$53 million in 1996 and 1995, respectively, more than it would have
cost had the Company generated this power.
QFs have the choice of pricing sales to the Company at either the
PSC's published estimates of the Company's long-range avoided costs
(LRAC) or the Company's tariff rates, which are modified from time
to time, reflecting the Company's actual avoided costs.
Additionally, until repealed in 1992, New York State law set a
minimum price of six cents per kilowatt-hour (kWh) for utility
purchases of power from certain categories of QFs, considerably
above the Company's avoided cost. The six cent minimum continues
to apply to contracts entered into before June 1992. The Company
believes that the repeal of the six cent minimum, coupled with
recent PSC updates which resulted in lower LRAC estimates, has
significantly reduced the economic benefits of constructing new QFs
within its service territory.
The Company has also experienced a revenue loss as a result of its
policy of voluntarily providing wheeling of NYPA power for economic
development. The Company estimates that in 1996 and 1995 NYPA
power displaced approximately 417 GWh and 429 GWh of annual energy
sales, respectively. Net revenue loss associated with these
volumes of sales is approximately $26 million, or 1.4% of the
Company's 1996 net revenues, and $30 million, or 1.6% of the
Company's 1995 net revenues. Currently, the potential loss of
additional load is limited by conditions in the Company's
transmission agreements with NYPA.
A number of customer groups are seeking to hasten consideration and
implementation of full retail competition. For example, an energy
consultant has petitioned the PSC, seeking alternate sources of
power for Long Island school districts. The County of Nassau has
also petitioned the PSC to authorize retail wheeling for all
<PAGE>
classes of electric customers in the County.
In addition, several towns and villages on Long Island are
investigating municipalization, in which customers form a
government-sponsored electric supply company. This is one form of
competition that is likely to increase as a result of the National
Energy Policy Act of 1992 (NEPA). NEPA sought to increase economic
efficiency in the creation and distribution of power by relaxing
restrictions on the entry of new competitors to the wholesale
electric power market. NEPA does so by creating exempt wholesale
generators that can sell power in wholesale markets without the
regulatory constraint placed on utility generators such as on the
Company. NEPA also expanded the FERC's authority to grant access
to utility transmission systems to all parties who seek wholesale
wheeling for wholesale competition. While it should be noted that
the FERC's position favoring stranded cost recovery from retail
turned wholesale customers will reduce utility risk from
municipalization, significant issues associated with the removal of
restrictions on wholesale transmission system access have yet to be
resolved.
There are numerous towns and villages in the Company's service
territory that are considering the formation of a municipally owned
and operated electric authority to replace the services currently
provided by the Company.
In 1995, Suffolk County issued a request for proposal from
suppliers for up to 300 MW of power which the County would then
sell to its residential and commercial customers. The County has
awarded the bid to two off-Long Island suppliers and has requested
the Company to deliver the power. After the Company challenged
Suffolk County's eligibility for such service, the County
petitioned the FERC to order the Company to provide the requested
transmission service.
In December 1996, the FERC ordered the Company to provide
transmission services to Suffolk County to the extent necessary to
accommodate proposed sales to customers to which it was providing
service on the date of enactment of NEPA (this Order could provide
Suffolk County with the ability to import up to 200 MW of power on
a daily basis). The FERC reserved decision on the remaining 100 MW
of Suffolk County's request until the County identifies the
ownership or control of distribution facilities that it alleges
qualifies it for a wheeling order to Suffolk County customers who
were not receiving service on the date of NEPA's enactment. The
Company may ask the FERC to reconsider their decision once that
decision becomes final, which is not expected for several months.
The FERC has yet to determine the pricing of that service. As
previously noted, FERC order 888 allows utilities to recover
legitimate, prudent and verifiable stranded costs associated with
wholesale transmission, including the circumstances where full
requirements customers become wholesale transmission customers,
<PAGE>
such as where a municipality establishes its own electric system.
The matters discussed above involve substantial social, economic,
legal, environmental and financial issues. The Company is opposed
to any proposal that merely shifts costs from one group of
customers to another, that fails to enhance the provision of least-
cost, efficiently-generated electricity or that fails to provide
the Company's shareowners with an adequate return on and recovery
of their investment. The Company is unable to predict what action,
if any, the PSC or the FERC may take regarding any of these
matters, or the impact on the Company's financial position, cash
flows or results of operations if some or all of these matters are
approved or implemented by the appropriate regulatory authority.
Notwithstanding the outcome of the state or federal regulatory
proceedings, or any other state action, the Company believes that,
among other obligations, the state has a contractual obligation to
allow the Company to recover its Shoreham-related assets.
Environmental Matters
The Company is subject to federal, state and local laws and
regulations dealing with air and water quality and other
environmental matters. Environmental matters may expose the
Company to potential liabilities which, in certain instances, may
be imposed without regard to fault or for historical activities
which were lawful at the time they occurred. The Company
continually monitors its activities in order to determine the
impact of its activities on the environment and to ensure
compliance with various environmental laws. Except as set forth
below, no material proceedings have been commenced or, to the
knowledge of the Company, are contemplated against the Company with
respect to any matter relating to the protection of the
environment.
The New York State Department of Environmental Conservation (DEC)
has required the Company and other New York State utilities to
investigate and, where necessary, remediate their former
manufactured gas plant (MGP) sites. Currently, the Company is the
owner of six pieces of property on which the Company or certain of
its predecessor companies are believed to have produced
manufactured gas. Operations at these facilities in the late
1800's and early 1900's may have resulted in the disposal of
certain waste products on these sites. Research is underway to
determine the existence and nature of operations and their
relationship, if any, to the Company or its predecessor companies.
The Company has entered into discussions with the DEC which may
lead to the issuance of one or more Administrative Consent Orders
(ACO) regarding the management of environmental activities at
these properties. Although the exact amount of the Company's
remediation costs cannot yet be determined, based on the findings
<PAGE>
of investigations at two of these six sites, estimates indicate
that it will cost approximately $51 million to remediate all of
these sites through the year 2005. Accordingly, the Company has
recorded a $35 million liability and a corresponding regulatory
asset to reflect its belief that the PSC will provide for the
future recovery of these costs through rates as it has for other
New York State utilities. The $35 million liability reflects the
present value of the future stream of payments to investigate and
remediate these sites. The Company used a risk-free rate of 7.25%
to discount this obligation.
In December 1996, the Company filed a complaint in the United
States District Court for the Southern District of New York against
14 of the Company's insurers which issued general comprehensive
liability (GCL) policies to the Company. The Company is seeking
recovery under the GCL policies for the costs incurred to date and
future costs associated with the clean-up of the Company's former
MGP sites and Superfund sites for which the Company has been named
a potentially responsible party (PRP). The Company is seeking a
declaratory judgment that the defendant insurers are bound by the
terms of the GCL policies, subject to the stated coverage limits,
to reimburse the Company for the remediation costs. The outcome of
this proceeding cannot yet be determined.
The Company has been notified by the United States Environmental
Protection Agency (EPA) that it is one of many PRPs that may be
liable for the remediation of three licensed treatment, storage and
disposal sites to which the Company may have shipped waste products
and which have subsequently become environmentally contaminated.
At one site, located in Philadelphia, Pennsylvania, and operated by
Metal Bank of America, the Company and nine other PRPs, all of
which are public utilities, have entered into an ACO with the EPA
to conduct a Remedial Investigation and Feasibility Study (RI/FS),
which has been completed and is currently being reviewed by the
EPA. Under a PRP participation agreement, the Company is
responsible for 8.2% of the costs associated with this RI/FS. The
level of remediation required will be determined when the EPA
issues its decision, but based on information available to date,
the Company currently anticipates that the total cost to remediate
this site will be between $14 million and $30 million. The Company
has recorded a liability of $1.1 million representing its estimated
share of the cost to remediate this site based upon its 8.2%
responsibility under the RI/FS.
The Company has also been named a PRP for disposal sites in Kansas
City, Kansas, and Kansas City, Missouri. The two sites were used
by a company named PCB, Inc. from 1982 until 1987 for the storage,
processing, and treatment of electric equipment, dielectric oils
and materials containing PCBs. According to the EPA, the buildings
and certain soil areas outside the buildings are contaminated with
PCBs.
<PAGE>
In 1994, the EPA requested certain of the large PRPs, which include
several other utilities, to form a group, sign an ACO, and conduct
a remediation program for the sites under the Toxic Substances
Control Act, or in the alternative, to perform a Superfund cleanup
for the sites. The EPA has provided the Company with documents
indicating that the Company was responsible for less than 1% of the
materials that were shipped to the Missouri site. The EPA has not
yet completed compiling the documents for the Kansas site. The
Company intends to join a PRP Group which includes other utilities,
which has been organized for the purpose of developing and
implementing acceptable remediation programs for the sites. The
Company is currently unable to determine its share of the cost to
remediate these sites.
In addition, the Company was notified that it is a PRP at a
Superfund site located in Farmingdale, New York. Portions of the
site are allegedly contaminated with PCBs, solvents and metals.
The Company was also notified by other PRPs that it should be
responsible for remediation expenses in the amount of approximately
$100,000 associated with removing PCB-contaminated soils from a
portion of the site which formerly contained electric transformers.
The Company is currently unable to determine its share of costs of
remediation at this site.
During 1996, the Connecticut Department of Environmental Protection
(DEP) issued a modification to an ACO previously issued in
connection with an investigation of an electric transmission cable
located under the Long Island Sound (Sound Cable) that is jointly
owned by the Company and the Connecticut Light and Power Company
(Owners). The modified ACO requires the Owners to submit to the
DEP and DEC a series of reports and studies describing cable system
condition, operation and repair practices, alternatives for cable
improvements or replacement and environmental impacts associated
with leaks of fluid into the Long Island Sound, which have occurred
from time to time. The Company continues to compile required
information and coordinate the activities necessary to perform
these studies and, at the present time, is unable to determine the
costs it will incur to complete the requirements of the modified
ACO or to comply with any additional requirements.
Previously, the U.S. Attorney for the District of Connecticut had
commenced an investigation regarding occasional releases of fluid
from the Sound Cable, as well as associated operating and
maintenance practices. The Owners have provided the U.S. Attorney
with all requested documentation. The Company believes that all
activities associated with the response to occasional releases from
the Sound Cable were consistent with legal and regulatory
requirements.
In addition, during 1996 the Long Island Soundkeeper Fund, a non-
profit organization, filed a suit against the Owners of the Sound
Cable in Federal District Court in Connecticut alleging that the
<PAGE>
Sound Cable fluid leaks constitute unpermitted discharges of
pollutants in violation of the Clean Water Act (CWA) and that such
pollutants present a threat to the environment and public health.
The suit seeks, among other things, injunctive relief prohibiting
the Owners from continuing to operate the Sound Cable in alleged
violation of the CWA and civil penalties of $25,000 per day for
each violation from each of the Owners.
In December 1996, a barge, owned and operated by a third party,
dropped anchor, causing extensive damage to the Sound Cable and a
release of dielectric fluid into the Long Island Sound. Temporary
clamps and leak abaters have been placed on the cables and have
stopped the leaks. Permanent repairs are expected to be undertaken
in the late spring of 1997. The preliminary estimate of the cost
of these repairs is $15 million. The Company intends to seek
recovery from third parties for costs incurred by the Company as a
result of this incident. The timing and amount of recovery, if
any, cannot yet be determined. In addition, the Owners maintain
insurance coverage for the Sound Cable which the Company believes
will be sufficient to cover any repair costs. In any event, costs
not reimbursed by a third party or not covered by insurance will be
shared equally by the Owners.
The Company believes that none of the environmental matters,
discussed above, will have a material adverse impact on the
Company's financial position, cash flows or results of operations.
In addition, the Company believes that all significant costs
incurred with respect to environmental investigation and
remediation activities, not recoverable from insurance carriers,
will be recoverable through rates.
<PAGE>
Note 12. Segments of Business
Identifiable assets by segment include net utility plant,
regulatory assets, materials and supplies, accrued unbilled
revenues, gas in storage, fuel and deferred charges. Assets
utilized for overall Company operations consist primarily of cash
and cash equivalents, accounts receivable, common net utility plant
and unamortized cost of issuing securities.
<TABLE>
<CAPTION>
(In millions of dollars)
- -----------------------------------------------------------------
For year ended December 31 1996 1995 1994
<S> <C> <C> <C>
Operating revenues
Electric $ 2,467 $ 2,484 $ 2,481
Gas 684 591 586
- -----------------------------------------------------------------
Total $ 3,151 $ 3,075 $ 3,067
=================================================================
Operating expenses (excludes federal income tax)
Electric $ 1,644 $ 1,657 $ 1,640
Gas 560 478 500
- -----------------------------------------------------------------
Total $ 2,204 $ 2,135 $ 2,140
=================================================================
Operating income (before federal income tax)
Electric $ 823 $ 827 $ 842
Gas 124 113 85
- -----------------------------------------------------------------
Total operating income 947 940 927
AFC (6) (7) (7)
Other income and deductions (23) (38) (45)
Interest charges 451 476 500
Federal income tax 209 206 177
- -----------------------------------------------------------------
Net Income $ 316 $ 303 $ 302
=================================================================
Depreciation and amortization
Electric $ 129 $ 122 $ 112
Gas 25 23 19
- -----------------------------------------------------------------
Total $ 154 $ 145 $ 131
=================================================================
Construction and nuclear fuel expenditures*
Electric $ 165 $ 162 $ 155
Gas 78 84 125
- -----------------------------------------------------------------
Total $ 243 $ 246 $ 280
=================================================================
* Includes non-cash allowance for other funds used during
construction and excludes Shoreham post-settlement costs.
(In millions of dollars)
- -----------------------------------------------------------------
At December 31 1996 1995 1994
- -----------------------------------------------------------------
Identifiable assets
Electric $ 9,835 $ 10,020 $ 10,285
Gas 1,232 1,181 1,181
Total identifiable assets 11,067 11,201 11,466
Assets utilized for overall
Company operations 1,143 1,326 1,013
- -----------------------------------------------------------------
Total Assets $ 12,210 $ 12,527 $ 12,479
=================================================================
</TABLE>
<PAGE>
Note 13. Quarterly Financial Information
(Unaudited)
<TABLE>
<CAPTION>
(In thousands of dollars except earnings per common share)
- -----------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Operating revenues
For the quarter ended March 31 $ 864,214 $ 791,188
June 30 694,602 653,824
September 30 849,775 875,794
December 31 742,104 754,322
=================================================================
Operating income
For the quarter ended March 31 $ 190,421 $ 180,875
June 30 141,065 143,246
September 30 235,402 239,561
December 31 169,693 167,936
=================================================================
Net income
For the quarter ended March 31 $ 81,753 $ 70,299
June 30 40,524 41,392
September 30 130,023 131,221
December 31 64,164 60,374
=================================================================
Earnings for common stock
For the quarter ended March 31 $ 68,682 $ 57,127
June 30 27,453 28,220
September 30 116,972 118,069
December 31 51,141 47,250
=================================================================
Earnings per common share
For the quarter ended March 31 $ .57 $ .48
June 30 .23 .24
September 30 .97 .99
December 31 .43 .39
==================================================================
</TABLE>
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Shareowners and Board of Directors of Long Island Lighting
Company
We have audited the accompanying balance sheet of Long Island Lighting
Company and the related statement of capitalization as of December 31,
1996 and 1995 and the related statements of income, retained earnings
and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Long Island
Lighting Company at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted
accounting principles.
Melville, New York
January 31, 1997
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP Independent Auditors
We consent to the use of our report dated January 31, 1997, with respect
to the financial statements of Long Island Lighting Company for the year
ended December 31, 1996, which are included in the Current Report on
Form 8-K of The Brooklyn Union Gas Company dated February 24, 1997,
filed with the Securities and Exchange Commission, which is incorporated
by reference into the Registration Statement (No. 333-03441) of The
Brooklyn Union Gas Company.
Melville, New York
February 24, 1997
<PAGE>
Exhibit 99.2
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
On December 30, 1996, The Brooklyn Union Gas Company ("Brooklyn Union")
filed a Current Report on Form 8-K with the Securities and Exchange
Commission (the "SEC") pertaining to the Agreement and Plan of Exchange
that Brooklyn Union entered into as of December 29, 1996 with Long Island
Lighting Company ("LILCO") providing for binding share exchanges (the
"Binding Share Exchanges"), pursuant to which each Brooklyn Union common
share would be exchanged for one share of common stock of a new holding
company and each share of LILCO common stock would be exchanged for
0.803 of a share of common stock of the new holding company.
The following unaudited pro forma combined condensed financial information
combines the historical consolidated balance sheets and statements of
income of Brooklyn Union and LILCO including their respective
subsidiaries, after giving effect to the Binding Share Exchanges.
Brooklyn Union's balance sheet as of September 30, 1996 and results of
operations for each of the three fiscal years in the period ended
September 30, 1996 have been combined with LILCO's balance sheet as of
December 31, 1996 and results of operations for each of the three fiscal
years in the period ended December 31, 1996 to arrive at the unaudited pro
forma combined condensed balance sheet as of December 31, 1996 on pages 55
and 56 and the related unaudited pro forma combined condensed statements
of income for each of the three fiscal years in the period ended December
31, 1996 on pages 57 to 59.
Brooklyn Union's balance sheet as of December 31, 1996 and results of
operations for its three months ended December 31, 1996 and 1995 have
been combined with LILCO's balance sheet as of December 31, 1996 and
results of operations for the three months ended December 31, 1996 and
1995 to arrive at the unaudited pro forma combined condensed balance
sheet as of December 31, 1996 on pages 60 and 61 and the related
unaudited pro forma combined condensed statements of income for the
three months ended December 31, 1996 and 1995 on pages 62 and 63.
The unaudited pro forma combined condensed balance sheets at December
31, 1996 give effect to the Binding Share Exchanges as if they had
occurred at December 31, 1996. The unaudited pro forma combined
condensed statements of income for each of the three fiscal years in the
period ended December 31, 1996 and for the three months ended December
31, 1996 and 1995 give effect to the Binding Share Exchanges as if they
had occurred at January 1, 1994. These statements are prepared on the
basis of accounting for the Binding Share Exchanges as a pooling of
interests and are based on the assumptions set forth in the notes
thereto.
<PAGE>
The following pro forma combined condensed 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
(included in Brooklyn Union's Form 10-K for the fiscal year ended
September 30, 1996 filed on December 18, 1996 and Form 10-Q for the
quarter ended December 31, 1996 filed on February 17, 1997) and LILCO
(filed as exhibits 99.1 and 99.2 to Brooklyn Union's Form 8-K filed
February 24, 1997 of which these materials form a part). The following
information is not necessarily indicative of the financial position or
operating results that would have occurred had the Binding Share
Exchanges been consummated on the date, or at the beginning of the
period, for which the Binding Share Exchanges are being given effect, nor
is it necessarily indicative of future operating results or financial
position.
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
December 31, 1996
(In Thousands)
Brooklyn
Union LILCO PRO FORMA PRO FORMA
(As Reported) (As Reported) ADJUSTMENTS COMBINED
------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
Property
Utility plant
Electric $ - $ 3,882,297 $ - $ 3,882,297
Gas 1,782,440 1,154,543 - 2,936,983
Common - 260,268 - 260,268
Construction work in progress - 112,184 - 112,184
Nuclear fuel in process and in reactor - 15,454 - 15,454
Less - Accumulated depreciation and
amortization (429,476) (1,729,576) - (2,159,052)
Gas exploration and production, at cost 510,568 - - 510,568
Less - Accumulated depletion (165,414) - - (165,414)
------------ ------------ -------------- -----------
Total Property 1,698,118 3,695,170 - 5,393,288
Regulatory Assets
Base financial component(less accumulated
amortization of $757,282) - 3,281,548 - 3,281,548
Rate moderation component - 402,213 - 402,213
Shoreham post-settlement costs - 991,795 - 991,795
Shoreham nuclear fuel - 69,113 - 69,113
Unamortized cost of issuing securities - 194,151 - 194,151
Post-retirement benefits other than pensions - 360,842 - 360,842
Regulatory tax asset - 1,772,778 74,885 (1) 1,847,663
Other - 199,879 - 199,879
------------ ------------ -------------- -----------
Total Regulatory Assets - 7,272,319 74,885 7,347,204
Nonutility Property and Other Investments 115,529 18,597 - 134,126
Current Assets
Cash and cash equivalents 41,921 279,993 - 321,914
Special deposits - 38,266 - 38,266
Accounts receivable-net 157,227 491,277 - 648,504
Materials and supplies at average cost 12,089 55,789 - 67,878
Fuel oil at average cost - 53,941 - 53,941
Gas in storage at average cost 91,813 73,562 - 165,375
Deferred tax asset - 145,205 - 145,205
Prepayments and other current assets 50,833 8,569 - 59,402
------------ ------------ -------------- -----------
Total Current Assets 353,883 1,146,602 - 1,500,485
Deferred Charges 122,073 76,991 (74,885)(1) 124,179
------------ ------------ -------------- -----------
Total Assets $ 2,289,603 $ 12,209,679 $ - $ 14,499,282
============ ============ ============== ===========
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
December 31, 1996
(In Thousands)
Brooklyn
Union LILCO PRO FORMA PRO FORMA
(As Reported) (As Reported) ADJUSTMENTS COMBINED
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 16,619 $ 603,921 $ (619,072)(2) 1,468
Premium on common stock 533,216 1,078,581 619,072 (2) 2,230,869
Retained earnings 355,973 840,867 - 1,196,840
------------ ------------ -------------- -----------
Total Common Shareholders' Equity 905,808 2,523,369 - 3,429,177
Long-term debt 712,013 4,456,772 - 5,168,785
Preferred stock 6,600 702,164 - 708,764
------------ ------------ -------------- -----------
Total Capitalization 1,624,421 7,682,305 - 9,306,726
Regulatory Liabilities
Regulatory liability component - 198,398 - 198,398
1989 Settlement credits - 127,442 - 127,442
Regulatory tax liability - 102,887 - 102,887
Other - 146,852 - 146,852
------------ ------------ -------------- -----------
Total Regulatory Liabilities - 575,579 - 575,579
Current Liabilities
Current maturities of long-term debt - 251,000 - 251,000
Current redemption requirements of preferred stock - 1,050 - 1,050
Accounts payable and accrued liabilities 143,561 289,141 - 432,702
LRPP payable - 40,499 - 40,499
Accrued taxes 10,905 63,640 - 74,545
Accrued interest 37,244 160,615 - 197,859
Dividends payable 18,229 58,378 - 76,607
Class Settlement - 55,833 - 55,833
Customer deposits 30,773 29,471 - 60,244
------------ ------------ -------------- -----------
Total Current Liabilities 240,712 949,627 - 1,190,339
Deferred Credits
Deferred federal income tax 282,041 2,442,606 - 2,724,647
Class Settlement - 98,497 - 98,497
Other 63,580 32,105 - 95,685
------------ ------------ -------------- -----------
Total Deferred Credits 345,621 2,573,208 - 2,918,829
Operating Reserves
Pension and other post-retirement benefits - 381,996 - 381,996
Claims and damages - 46,964 - 46,964
------------ ------------ -------------- -----------
Total Operating Reserves - 428,960 - 428,960
Commitments and Contingencies - - - -
Minority Interest in Subsidiary Company 78,849 - - 78,849
------------ ------------ -------------- -----------
Total Capitalization and Liabilities $ 2,289,603 $ 12,209,679 $ - $ 14,499,282
============ ============ ============== ===========
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
For the Year Ended December 31, 1996
(In Thousands, Except Per Share Amounts)
Brooklyn
Union LILCO PRO FORMA PRO FORMA
(As Reported) (As Reported) ADJUSTMENTS COMBINED
------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues
Electric $ - $ 2,466,435 $ - $ 2,466,435
Gas-utility sales 1,351,821 684,260 - 2,036,081
Gas production and other 80,181 - - 80,181
------------ ------------ -------------- ------------
Total Revenues 1,432,002 3,150,695 - 4,582,697
Operating Expenses
Operations-fuel & purchased power 610,053 963,251 - 1,573,304
Operations-other 375,257 381,076 - 756,333
Maintenance 53,720 118,135 - 171,855
Depreciation,depletion and amortization 79,610 153,925 - 233,535
Base financial component amortization - 100,971 - 100,971
Rate moderation component amortization - (24,232) - (24,232)
Regulatory liability component amortization - (88,573) - (88,573)
Other regulatory amortization - 127,288 - 127,288
Operating taxes 143,296 472,076 - 615,372
Federal income taxes 39,508 210,197 - 249,705
------------ ------------ -------------- ------------
Total Operating Expenses 1,301,444 2,414,114 - 3,715,558
------------ ------------ -------------- ------------
Operating Income 130,558 736,581 - 867,139
Other Income and (Deductions)
Income from energy services investments 13,523 - - 13,523
Gain on sale of investment in Canadian plant 16,160 - - 16,160
Gain on sale of subsidiary stock 35,437 - - 35,437
Rate moderation component carrying charges - 25,259 - 25,259
Class Settlement - (20,772) - (20,772)
Other income and deductions,net (1,188) 19,197 - 18,009
Allowance for other funds used during construction - 2,888 - 2,888
Federal income tax credit-deferred and other (19,861) 940 - (18,921)
------------ ------------ -------------- ------------
Total Other Income and (Deductions) 44,071 27,512 - 71,583
------------ ------------ -------------- ------------
Income Before Interest Charges 174,629 764,093 - 938,722
Interest Charges
Interest on long-term debt 46,803 384,198 - 431,001
Other interest 4,918 67,130 - 72,048
Allowance for borrowed funds used during
construction - (3,699) - (3,699)
------------ ------------ -------------- ------------
Total Interest Charges 51,721 447,629 - 499,350
Net Income 122,908 316,464 - 439,372
Preferred Stock dividend requirements 323 52,216 - 52,539
------------ ------------ -------------- ------------
Earnings for Common Stock $ 122,585 $ 264,248 $ - $ 386,833
============ ============ ============== ============
Average Common Shares Outstanding 49,365 120,361 (23,711)(2) 146,015
============ ============ ============== ============
Earnings per Common and Equivalent Shares $ 2.48 $ 2.20 $ - $ 2.65
============ ============ ============== ============
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
For the Year Ended December 31, 1995
(In Thousands, Except Per Share Amounts)
Brooklyn
Union LILCO PRO FORMA PRO FORMA
(As Reported) (As Reported) ADJUSTMENTS COMBINED
------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues
Electric $ - $ 2,484,014 $ - $ 2,484,014
Gas-utility sales 1,152,331 591,114 - 1,743,445
Gas production and other 63,953 - - 63,953
------------ ------------ -------------- ------------
Total Revenues 1,216,284 3,075,128 - 4,291,412
Operating Expenses
Operations-fuel & purchased power 446,559 834,979 - 1,281,538
Operations-other 330,841 383,238 - 714,079
Maintenance 54,813 128,155 - 182,968
Depreciation,depletion and amortization 72,020 145,357 - 217,377
Base financial component amortization - 100,971 - 100,971
Rate moderation component amortization - 21,933 - 21,933
Regulatory liability component amortization - (88,573) - (88,573)
Other regulatory amortization - 161,605 - 161,605
Operating taxes 134,718 447,507 - 582,225
Federal income taxes 41,989 208,338 - 250,327
------------ ------------ -------------- ------------
Total Operating Expenses 1,080,940 2,343,510 - 3,424,450
------------ ------------ -------------- ------------
Operating Income 135,344 731,618 - 866,962
Other Income and (Deductions)
Income from energy services investments 9,458 - - 9,458
Rate moderation component carrying charge - 25,274 - 25,274
Class Settlement - (21,669) - (21,669)
Other income and deductions,net 151 34,400 - 34,551
Allowance for other funds used during construction - 2,898 - 2,898
Federal income tax credit-deferred and other (51) 2,800 - 2,749
------------ ------------ -------------- ------------
Total Other Income and (Deductions) 9,558 43,703 - 53,261
------------ ------------ -------------- ------------
Income Before Interest Charges 144,902 775,321 - 920,223
Interest Charges
Interest on long-term debt 47,939 412,512 - 460,451
Other interest 5,128 63,461 - 68,589
Allowance for borrowed funds used during
construction - (3,938) - (3,938)
------------ ------------ -------------- ------------
Total Interest Charges 53,067 472,035 - 525,102
Net Income 91,835 303,286 - 395,121
Preferred stock dividend requirements 337 52,620 - 52,957
------------ ------------ -------------- ------------
Earnings for Common Stock $ 91,498 $ 250,666 $ - $ 342,164
============ ============ ============== ============
Average Common Shares Outstanding 48,211 119,195 (23,481)(2) 143,925
============ ============ ============== ============
Earnings per Common and Equivalent Shares $ 1.90 $ 2.10 $ - $ 2.38
============ ============ ============== ============
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
For the Year Ended December 31, 1994
(In Thousands, Except Per Share Amounts)
Brooklyn
Union LILCO PRO FORMA PRO FORMA
(As Reported) (As Reported) ADJUSTMENTS COMBINED
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Electric $ - $ 2,481,637 $ - $ 2,481,637
Gas-utility sales 1,279,638 585,670 - 1,865,308
Gas production and other 58,992 - - 58,992
------------ ------------ -------------- ------------
Total Revenues 1,338,630 3,067,307 - 4,405,937
Operating Expenses
Operations-fuel & purchased power 560,657 847,986 - 1,408,643
Operations-other 330,394 406,014 - 736,408
Maintenance 54,340 134,640 - 188,980
Depreciation,depletion and amortization 69,611 130,664 - 200,275
Base financial component amortization - 100,971 - 100,971
Rate moderation component amortization - 197,656 - 197,656
Regulatory liability component amortization - (88,573) - (88,573)
Other regulatory amortization - 4,328 - 4,328
Operating taxes 150,743 406,895 - 557,638
Federal income taxes 40,556 181,781 - 222,337
------------ ------------ -------------- ------------
Total Operating Expenses 1,206,301 2,322,362 - 3,528,663
------------ ------------ -------------- ------------
Operating Income 132,329 744,945 - 877,274
Other Income and (Deductions)
Income from energy services investments 5,689 - - 5,689
Rate moderation component carrying charges - 32,321 - 32,321
Class Settlement - (22,730) - (22,730)
Other income and deductions,net 700 35,343 - 36,043
Allowance for other funds used during construction - 2,716 - 2,716
Federal income tax credit-deferred and other (142) 5,069 - 4,927
------------ ------------ -------------- ------------
Total Other Income and (Deductions) 6,247 52,719 - 58,966
------------ ------------ -------------- ------------
Income Before Interest Charges 138,576 797,664 - 936,240
Interest Charges
Interest on long-term debt 46,900 437,751 - 484,651
Other interest 4,292 62,345 - 66,637
Allowance for borrowed funds used during
construction - (4,284) - (4,284)
------------ ------------ -------------- ------------
Total Interest Charges 51,192 495,812 - 547,004
Net Income 87,384 301,852 - 389,236
Preferred stock dividend requirements 351 53,020 - 53,371
------------ ------------ -------------- ------------
Earnings for Common Stock $ 87,033 $ 248,832 $ - $ 335,865
============ ============ ============== ============
Average Common Shares Outstanding 46,980 115,880 (22,828)(2) 140,032
============ ============ ============== ============
Earnings per Common and Equivalent Shares $ 1.85 $ 2.15 $ - $ 2.40
============ ============ ============== ============
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
December 31, 1996
(In Thousands)
Brooklyn
Union LILCO PRO FORMA PRO FORMA
(December 31, 1996) (December 31, 1996) ADJUSTMENTS COMBINED
------------------- ------------------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Property
Utility plant
Electric $ - $ 3,882,297 $ - $ 3,882,297
Gas 1,786,688 1,154,543 - 2,941,231
Common - 260,268 - 260,268
Construction work in progress - 112,184 - 112,184
Nuclear fuel in process and in reactor - 15,454 - 15,454
Less - Accumulated depreciation and
amortization (428,445) (1,729,576) - (2,158,021)
Gas exploration and production, at cost 538,551 - - 538,551
Less - Accumulated depletion (176,814) - - (176,814)
----------------- ---------------- ----------- -----------
Total Property 1,719,980 3,695,170 - 5,415,150
Regulatory Assets
Base financial component(less accumulated
amortization of $757,282) - 3,281,548 - 3,281,548
Rate moderation component - 402,213 - 402,213
Shoreham post-settlement costs - 991,795 - 991,795
Shoreham nuclear fuel - 69,113 - 69,113
Unamortized cost of issuing securities - 194,151 - 194,151
Post-retirement benefits other than
pensions - 360,842 - 360,842
Regulatory tax asset - 1,772,778 75,316 (1) 1,848,094
Other - 199,879 - 199,879
----------------- ---------------- ----------- -----------
Total Regulatory Assets - 7,272,319 75,316 7,347,635
Nonutility Property and Other Investments 113,183 18,597 - 131,780
Current Assets
Cash and cash equivalents 44,485 279,993 - 324,478
Special deposits - 38,266 - 38,266
Accounts receivable-net 317,325 491,277 - 808,602
Materials and supplies at average cost 12,691 55,789 - 68,480
Fuel oil at average cost - 53,941 - 53,941
Gas in storage at average cost 81,658 73,562 - 155,220
Deferred tax asset - 145,205 - 145,205
Prepayments and other current assets 50,635 8,569 - 59,204
----------------- ---------------- ----------- -----------
Total Current Assets 506,794 1,146,602 - 1,653,396
Deferred Charges 120,230 76,991 (75,316)(1) 121,905
----------------- ---------------- ----------- -----------
Total Assets $ 2,460,187 $ 12,209,679 $ - $ 14,669,866
================= ================ =========== ===========
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
December 31, 1996
(In Thousands)
Brooklyn
Union LILCO PRO FORMA PRO FORMA
(December 31, 1996) (December 31, 1996) ADJUSTMENTS COMBINED
------------------- ------------------- ------------ ----------
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 16,647 $ 603,921 $ (619,098)(2) 1,470
Premium on common stock 538,260 1,078,581 619,098 (2) 2,235,939
Retained earnings 382,430 840,867 - 1,223,297
----------------- ---------------- ----------- -----------
Total Common Shareholders' Equity 937,337 2,523,369 - 3,460,706
Long-term debt 712,031 4,456,772 - 5,168,803
Preferred stock 6,600 702,164 - 708,764
----------------- ---------------- ----------- -----------
Total Capitalization 1,655,968 7,682,305 - 9,338,273
Regulatory Liabilities
Regulatory liability component - 198,398 - 198,398
1989 Settlement credits - 127,442 - 127,442
Regulatory tax liability - 102,887 - 102,887
Other - 146,852 - 146,852
----------------- ---------------- ----------- -----------
Total Regulatory Liabilities - 575,579 - 575,579
Current Liabilities
Current maturities of long-term debt - 251,000 - 251,000
Current redemption requirements of
preferred stock - 1,050 - 1,050
Accounts payable and accrued liabilities 179,857 289,141 - 468,998
Commercial paper 28,000 - - 28,000
LRPP payable - 40,499 - 40,499
Accrued taxes 42,456 63,640 - 106,096
Accrued interest 32,547 160,615 - 193,162
Dividends payable 18,924 58,378 - 77,302
Class Settlement - 55,833 - 55,833
Customer deposits 49,692 29,471 - 79,163
----------------- ---------------- ----------- -----------
Total Current Liabilities 351,476 949,627 - 1,301,103
Deferred Credits
Deferred federal income tax 286,818 2,442,606 - 2,729,424
Class Settlement - 98,497 - 98,497
Other 85,493 32,105 - 117,598
----------------- ---------------- ----------- -----------
Total Deferred Credits 372,311 2,573,208 - 2,945,519
Operating Reserves
Pension and other post-retirement benefits - 381,996 - 381,996
Claims and damages - 46,964 - 46,964
----------------- ---------------- ----------- -----------
Total Operating Reserves - 428,960 - 428,960
Commitments and Contingencies - - - -
Minority Interest in Subsidiary Company 80,432 - - 80,432
----------------- ---------------- ----------- -----------
Total Capitalization and Liabilities $ 2,460,187 $ 12,209,679 $ - $ 14,669,866
================= ================ =========== ===========
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
For the Quarter Ended December 31, 1996
(In Thousands, Except Per Share Amounts)
Brooklyn PRO FORMA PRO FORMA
Union LILCO ADJUSTMENTS COMBINED
------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues
Electric $ - $ 550,046 $ - $ 550,046
Gas-utility sales 405,482 192,058 - 597,540
Gas production and other 41,244 - - 41,244
------------ ------------ -------------- ------------
Total Revenues 446,726 742,104 - 1,188,830
Operating Expenses
Operations-fuel & purchased power 197,536 245,786 - 443,322
Operations-other 88,769 88,680 - 177,449
Maintenance 13,108 30,522 - 43,630
Depreciation,depletion and amortization 24,982 40,102 - 65,084
Base financial component amortization - 25,243 - 25,243
Rate moderation component amortization - 9,690 - 9,690
Regulatory liability component amortization - (19,840) - (19,840)
Other regulatory amortization - (9,518) - (9,518)
Operating taxes 41,439 119,202 - 160,641
Federal income taxes 23,434 42,544 - 65,978
------------ ------------ -------------- ------------
Total Operating Expenses 389,268 572,411 - 961,679
------------ ------------ -------------- ------------
Operating Income 57,458 169,693 - 227,151
Other Income and (Deductions)
Income from energy services investments 2,290 - - 2,290
Rate moderation component carrying charges - 6,571 - 6,571
Class Settlement - (5,461) - (5,461)
Minority interest in earnings of subsidiary (1,583) - (1,583)
Other income and deductions,net (777) 2,719 - 1,942
Allowance for other funds used during
construction - 754 - 754
Federal income tax credit-deferred and other (883) (268) - (1,151)
------------ ------------ -------------- ------------
Total Other Income and (Deductions) (953) 4,315 - 3,362
------------ ------------ -------------- ------------
Income Before Interest Charges 56,505 174,008 - 230,513
Interest Charges
Interest on long-term debt 10,545 93,024 - 103,569
Other interest 1,159 17,760 - 18,919
Allowance for borrowed funds used during
construction - (940) - (940)
------------ ------------ -------------- ------------
Total Interest Charges 11,704 109,844 - 121,548
Net Income 44,801 64,164 - 108,965
Preferred stock dividend requirements 79 13,023 - 13,102
------------ ------------ -------------- ------------
Earnings for Common Stock $ 44,722 $ 51,141 $ - $ 95,863
============ ============ ============== ============
Average Common Shares Outstanding 49,942 120,784 (23,795)(2) 146,931
============ ============ ============== ============
Earnings per Common and Equivalent Shares $ 0.90 $ 0.43 $ - $ 0.65
============ ============ ============== ============
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
For the Quarter Ended December 31, 1995
(In Thousands, Except Per Share Amounts)
Brooklyn PRO FORMA PRO FORMA
Union LILCO ADJUSTMENTS COMBINED
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Electric $ - $ 561,500 $ - $ 561,500
Gas-utility sales 372,551 192,822 - 565,373
Gas production and other 25,532 - - 25,532
------------ ------------ -------------- ------------
Total Revenues 398,083 754,322 - 1,152,405
Operating Expenses
Operations-fuel & purchased power 160,303 224,743 - 385,046
Operations-other 87,691 101,970 - 189,661
Maintenance 13,611 32,355 - 45,966
Depreciation,depletion and amortization 18,081 36,956 - 55,037
Base financial component amortization - 25,243 - 25,243
Rate moderation component amortization - 4,564 - 4,564
Regulatory liability component amortization - (19,840) - (19,840)
Other regulatory amortization - 24,316 - 24,316
Operating taxes 38,722 111,490 - 150,212
Federal income taxes 22,275 44,589 - 66,864
------------ ------------ -------------- ------------
Total Operating Expenses 340,683 586,386 - 927,069
------------ ------------ -------------- ------------
Operating Income 57,400 167,936 - 225,336
Other Income and (Deductions)
Income from energy services investments 1,707 - - 1,707
Rate moderation component carrying charges - 5,813 - 5,813
Class Settlement - (5,303) - (5,303)
Other income and deductions,net 214 8,315 - 8,529
Allowance for other funds used during
construction - 752 - 752
Federal income tax credit-deferred and other (577) 993 - 416
------------ ------------ -------------- ------------
Total Other Income and (Deductions) 1,344 10,570 - 11,914
------------ ------------ -------------- ------------
Income Before Interest Charges 58,744 178,506 - 237,250
Interest Charges
Interest on long-term debt 12,922 102,803 - 115,725
Other interest 1,115 16,316 - 17,431
Allowance for borrowed funds used during
construction - (987) - (987)
------------ ------------ -------------- ------------
Total Interest Charges 14,037 118,132 - 132,169
Net Income 44,707 60,374 - 105,081
Preferred stock dividend requirements 83 13,124 - 13,207
------------ ------------ -------------- ------------
Earnings for Common Stock $ 44,624 $ 47,250 $ - $ 91,874
============ ============ ============== ============
Average Common Shares Outstanding 48,947 119,655 (23,572)(2) 145,030
============ ============ ============== ============
Earnings per Common and Equivalent Shares $ 0.91 $ 0.39 $ - $ 0.63
============ ============ ============== ============
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
1. The unaudited pro forma combined condensed balance sheets as
of December 31, 1996 on pages 55 and 56 and pages 60 and 61
reflect the reclassification of Brooklyn Union regulatory tax
assets from deferred charges to regulatory assets. All other
financial statement presentation and accounting policy
differences are immaterial and have not been adjusted in the
unaudited pro forma combined condensed financial statements.
2. The unaudited pro forma combined condensed financial information
reflects the conversion of each share of LILCO Common Stock
outstanding into 0.803 of a share of the new holding company's
Common Stock and the exchange of each share of Brooklyn Union
Common Stock outstanding for one share of the new holding
company's Common Stock, as provided in the Agreement and Plan of
Exchange. The unaudited pro forma combined condensed
financial information is presented as if the companies were
combined during all periods included therein.
3. The allocation between Brooklyn Union and LILCO and their
customers of the estimated cost savings resulting from the
Binding Share Exchanges, net of the costs incurred to achieve
such savings, will be subject to regulatory review and
approval. Transaction costs (including fees for financial
advisors, attorneys, accountants, consultants, filings and
printing) are not currently estimated. None of the estimated
cost savings, the costs to achieve such savings, or transaction
costs, have been reflected in the unaudited pro forma combined
condensed financial statements.
4. Intercompany transactions between Brooklyn Union and LILCO
during the periods presented were not material and,
accordingly, no pro forma adjustments were made to eliminate
such transactions.
5. Brooklyn Union earnings for the fiscal year ended September 30,
1996 include non-recurring income aggregating approximately
$33.5 million, net of taxes, or $0.68 per share, relating to
a gain on the initial public offering of a subsidiary's stock
and the sale of an investment in a Canadian gas processing
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 aforementioned
subsidiary.
6. The unaudited pro forma combined condensed balance sheet as of
December 31, 1996 on pages 60 and 61 and the unaudited pro
forma combined condensed statements of income for the quarters
ended December 31, 1996 and 1995 on pages 62 and 63 reflect (i)
unaudited financial information of Brooklyn Union as reported
in its Form 10-Q for the period ended December 31, 1996 and
<PAGE>
(ii) the balance sheet of LILCO as reported in its Form 10-K
for the period ended December 31, 1996 and its unaudited
financial information for the three months ended December 31,
1996 and 1995 as reported herein.
