<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-3571
LONG ISLAND LIGHTING COMPANY
INCORPORATED PURSUANT TO THE LAWS OF NEW YORK STATE
INTERNAL REVENUE SERVICE - EMPLOYER IDENTIFICATION NO. 11-1019782
175 EAST OLD COUNTRY ROAD, HICKSVILLE, NEW YORK 11801
(516) 755-6650
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO
THE TOTAL NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK, $5 PAR VALUE,
OUTSTANDING ON SEPTEMBER 30, 1996, WAS 120,512,382.
<PAGE>
LONG ISLAND LIGHTING COMPANY
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF INCOME 3
BALANCE SHEET 5
STATEMENT OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 23
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURE 24
<PAGE>
LONG ISLAND LIGHTING COMPANY
STATEMENT OF INCOME
(UNAUDITED)
(Thousands of Dollars - except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
SEPTEMBER 30
------------
1996 1995
---- ----
<S> <C> <C>
REVENUES
Electric $780,158 $815,342
Gas 69,617 60,452
-------- --------
Total Revenues 849,775 875,794
-------- --------
EXPENSES
Operations - fuel and purchased power 203,305 177,934
Operations - other 98,547 88,595
Maintenance 27,173 25,896
Depreciation and amortization 38,305 36,577
Base financial component amortization 25,243 25,243
Rate moderation component amortization (7,992) 28,126
Regulatory liability component amortization (22,143) (22,143)
Other regulatory amortization 49,301 74,636
Operating taxes 121,550 119,268
Federal income tax - current 8,292 4,081
Federal income tax - deferred and other 72,792 78,020
-------- --------
Total Expenses 614,373 636,233
-------- --------
Operating Income 235,402 239,561
-------- --------
OTHER INCOME AND (DEDUCTIONS)
Rate moderation component carrying charges 6,513 5,989
Class Settlement (4,930) (5,466)
Other income and deductions, net 372 5,295
Allowance for other funds used during construction 798 757
Federal income tax credit - deferred and other 856 1,866
-------- --------
Total Other Income and (Deductions) 3,609 8,441
-------- --------
Income Before Interest Charges 239,011 248,002
-------- --------
INTEREST CHARGES AND (CREDITS)
Interest on long-term debt 92,892 103,072
Other interest 17,098 14,727
Allowance for borrowed funds used
during construction (1,002) (1,018)
-------- --------
Total Interest Charges and (Credits) 108,988 116,781
-------- --------
Net Income 130,023 131,221
Preferred stock dividend requirements 13,051 13,152
-------- --------
Earnings for Common Stock $116,972 $118,069
======== ========
Average Common Shares Outstanding (000) 120,495 119,370
Earnings per Common Share $0.97 $0.99
Dividends Declared per Common Share $0.445 $0.445
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LONG ISLAND LIGHTING COMPANY
STATEMENT OF INCOME
(UNAUDITED)
(Thousands of Dollars - except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
SEPTEMBER 30
------------
1996 1995
---- ----
<S> <C> <C>
REVENUES
Electric $1,916,389 $1,922,514
Gas 492,203 398,292
---------- ----------
Total Revenues 2,408,592 2,320,806
---------- ----------
EXPENSES
Operations - fuel and purchased power 717,465 610,236
Operations - other 292,395 281,267
Maintenance 87,612 95,799
Depreciation and amortization 113,822 108,401
Base financial component amortization 75,728 75,728
Rate moderation component amortization (33,922) 17,369
Regulatory liability component amortization (66,429) (66,429)
Other regulatory amortization 134,503 134,986
Operating taxes 352,873 336,017
Federal income tax - current 31,292 10,309
Federal income tax - deferred and other 136,361 153,440
---------- ----------
Total Expenses 1,841,700 1,757,123
---------- ----------
Operating Income 566,892 563,683
---------- ----------
OTHER INCOME AND (DEDUCTIONS)
Rate moderation component carrying charges 18,688 19,461
Class Settlement (15,311) (16,366)
Other income and deductions, net 16,478 26,084
Allowance for other funds used during construction 2,134 2,146
Federal income tax credit - deferred and other 1,208 1,807
---------- ----------
Total Other Income and (Deductions) 23,197 33,132
---------- ----------
Income Before Interest Charges 590,089 596,815
---------- ----------
INTEREST CHARGES AND (CREDITS)
Interest on long-term debt 291,174 309,709
Other interest 49,370 47,145
Allowance for borrowed funds used
during construction (2,759) (2,951)
---------- ----------
Total Interest Charges and (Credits) 337,785 353,903
---------- ----------
Net Income 252,304 242,912
Preferred stock dividend requirements 39,194 39,495
---------- ----------
Earnings for Common Stock $213,110 $203,417
========== ==========
Average Common Shares Outstanding (000) 120,220 119,042
Earnings per Common Share $1.77 $1.71
Dividends Declared per Common Share $1.335 $1.335
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LONG ISLAND LIGHTING COMPANY
BALANCE SHEET
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
ASSETS (UNAUDITED) (AUDITED)
------ ----------- ---------
<S> <C> <C>
UTILITY PLANT
Electric $3,859,997 $3,786,540
Gas 1,135,350 1,086,145
Common 257,799 244,828
Construction work in progress 99,161 100,521
Nuclear fuel in process and in reactor 25,115 16,456
----------- -----------
5,377,422 5,234,490
----------- -----------
Less - Accumulated depreciation and
amortization 1,712,721 1,639,492
----------- -----------
Total Net Utility Plant 3,664,701 3,594,998
----------- -----------
REGULATORY ASSETS
Base financial component (less accumulated
amortization of $732,039 and $656,311) 3,306,791 3,382,519
Rate moderation component 451,683 383,086
Shoreham post-settlement costs 987,848 968,999
Shoreham nuclear fuel 69,645 71,244
Unamortized cost of issuing securities 200,993 222,567
Postretirement benefits other than pensions 372,440 383,642
Regulatory tax asset 1,782,049 1,802,383
Other 184,226 230,663
----------- -----------
Total Regulatory Assets 7,355,675 7,445,103
----------- -----------
NONUTILITY PROPERTY AND OTHER INVESTMENTS 18,061 16,030
----------- -----------
CURRENT ASSETS
Cash and cash equivalents 172,891 351,453
Special deposits 35,902 63,412
Customer accounts receivable (less allowance
for doubtful accounts of $24,324 and $24,676) 327,284 282,218
LRPP receivable 20,019 74,238
Other accounts receivable 22,786 107,387
Accrued unbilled revenues 145,780 184,440
Materials and supplies at average cost 60,850 63,595
Fuel oil at average cost 42,105 32,090
Gas in storage at average cost 82,708 53,076
Deferred tax asset 183,000 191,000
Prepayments and other current assets 10,049 8,986
----------- -----------
Total Current Assets 1,103,374 1,411,895
----------- -----------
DEFERRED CHARGES 66,753 70,915
----------- -----------
TOTAL ASSETS $12,208,564 $12,538,941
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LONG ISLAND LIGHTING COMPANY
BALANCE SHEET
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
CAPITALIZATION AND LIABILITIES (UNAUDITED) (AUDITED)
------------------------------ ----------- ---------
<S> <C> <C>
CAPITALIZATION
Long-term debt $4,472,675 $4,722,675
Unamortized discount on debt (15,187) (16,075)
----------- -----------
4,457,488 4,706,600
----------- -----------
Preferred stock - redemption required 638,500 639,550
Preferred stock - no redemption required 63,677 63,934
----------- -----------
702,177 703,484
----------- -----------
Common stock 602,562 598,277
Premium on capital stock 1,124,563 1,114,508
Capital stock expense (49,722) (50,751)
Retained earnings 846,473 790,919
Treasury stock, at cost (60) --
----------- -----------
Total Common Shareowners' Equity 2,523,816 2,452,953
----------- -----------
Total Capitalization 7,683,481 7,863,037
----------- -----------
REGULATORY LIABILITIES
Regulatory liability component 218,238 277,757
1989 Settlement credits 129,745 136,655
Regulatory tax liability 114,359 116,060
Other 162,829 132,891
----------- -----------
Total Regulatory Liabilities 625,171 663,363
----------- -----------
CURRENT LIABILITIES
Current maturities of long-term debt 250,000 415,000
Current redemption requirements of
preferred stock 4,800 4,800
Accounts payable and accrued liabilities 274,546 278,986
Accrued taxes (including federal income
tax of $19,978 and $28,736) 33,368 60,498
Accrued interest 142,311 158,325
Dividends payable 55,307 57,899
Class Settlement 53,333 45,833
Customer deposits 29,439 29,547
----------- -----------
Total Current Liabilities 843,104 1,050,888
----------- -----------
DEFERRED CREDITS
Deferred federal income tax 2,446,330 2,337,732
Class Settlement 106,125 129,809
Other 70,136 44,976
----------- -----------
Total Deferred Credits 2,622,591 2,512,517
----------- -----------
OPERATING RESERVES
Pension and other postretirements benefits 385,415 396,490
Claims and damages 48,802 52,646
----------- -----------
Total Operating Reserves 434,217 449,136
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES $12,208,564 $12,538,941
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LONG ISLAND LIGHTING COMPANY
STATEMENT OF CASH FLOWS
(UNAUDITED)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ending
SEPTEMBER 30
------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 252,304 $ 242,912
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for doubtful accounts 18,649 13,420
Depreciation and amortization 113,822 108,401
Base financial component amortization 75,728 75,728
Rate moderation component amortization (33,922) 17,369
Regulatory liability component amortization (66,429) (66,429)
Other regulatory amortization 134,503 134,986
Rate moderation component carrying charges (18,688) (19,461)
Class Settlement 15,311 16,366
Amortization of cost of issuing and
redeeming securities 26,448 30,078
Federal income tax - deferred and other 135,153 151,633
Allowance for other funds used during construction (2,134) (2,146)
Gas Cost Adjustment 16,969 14,701
Other 55,502 4,642
Changes in operating assets and liabilities
Accounts receivable 20,887 (109,125)
Accrued unbilled revenues 38,660 28,505
Materials and supplies, fuel oil and
gas in storage (36,902) 8,381
Accounts payable and accrued liabilities (32,412) (26,543)
Accrued taxes (27,130) (11,081)
Class Settlement (31,495) (28,785)
Special deposits 27,510 (34,191)
Prepayments and other current assets (1,063) (5,191)
Other (39,003) (30,329)
--------- ---------
Net Cash Provided by Operating Activities 642,268 513,841
--------- ---------
INVESTING ACTIVITIES
Construction and nuclear fuel expenditures (176,552) (170,214)
Shoreham-post settlement costs (40,544) (58,544)
Other (2,112) 8,625
--------- ---------
Net Cash Used in Investing Activities (219,208) (220,133)
--------- ---------
FINANCING ACTIVITIES
Proceeds from sale of common stock 14,083 14,572
Proceeds from issuance of long-term debt -- 49,287
Redemption of long-term debt (415,000) (100,000)
Redemption of preferred stock (1,050) (1,050)
Preferred stock dividends paid (39,215) (39,515)
Common stock dividends paid (160,127) (158,505)
Other (313) 569
--------- ---------
Net Cash Used in Financing Activities (601,622) (234,642)
--------- ---------
Net (Decrease) Increase in Cash and
Cash Equivalents $(178,562) $ 59,066
========= =========
Cash and cash equivalents at January 1 $ 351,453 $ 185,451
Net (decrease) increase in cash and
cash equivalents (178,562) 59,066
--------- ---------
Cash and Cash Equivalents at September 30 $ 172,891 $ 244,517
========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
These Notes to Financial Statements reflect events subsequent to February 7,
1996, the date of the most recent Report of Independent Auditors, through the
date of this Quarterly Report on Form 10-Q for the three months ended September
30, 1996. These Notes to Financial Statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the nine months ended September 30, 1996, the Company's Quarterly
Reports on Form 10-Q for the three months ended March 31, 1996 and June 30,
1996, and the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1995, incorporated herein by reference.
The financial statements furnished are unaudited. However, in the opinion of
management, the financial statements include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the financial
statements for the interim periods presented. Operating results for these
interim periods are not necessarily indicative of results to be expected for the
entire year, due to seasonal, operating and other factors.
Certain prior year amounts have been reclassified to be consistent with current
year presentation.
NOTE 2. RATE MATTERS
ELECTRIC
In 1995, the Company requested that the Public Service Commission of the State
of New York (PSC) extend the provisions of its July 1995 electric rate order
through November 30, 1996. As of the date of this report, the PSC has yet to act
upon this request.
During the nine month period ended September 30, 1996, the PSC has instituted
the following initiatives intended to lower electric rates on Long Island:
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-
1999;
An Order, issued in July 1996, to institute an expedited temporary rate
phase in the Order to Show Cause proceeding mentioned above, to be
conducted in parallel with the ongoing phase concerning permanent rates.
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.
<PAGE>
The Commission's July 1996 Order, referred to above, requested that interested
parties file testimony and exhibits sufficient to provide a basis for the
Commission to decide whether the Company's electric rates should be made
temporary and, if so, the proper level of such temporary rates. The Company's
filing demonstrated that current electric rate levels were justified and that
there was no basis for reducing them on a temporary basis. The Staff, in its
filing, 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.
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 addition to the above filing, 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 as opposed to a base rate
decrease, even on a temporary basis; (ii) an allowed return on common equity of
11.0% for the term of the Plan; (iii) an equity earnings cap of 12.66%, whereby
earnings in excess of the 11.0% allowed return on common equity up to this cap,
would be fully retained by the shareowner, with any excess above the 12.66% cap
shared with the ratepayer; (iv) the continuation of existing LILCO Ratemaking
and Performance Plan (LRPP) revenue and expense reconciliation mechanisms and
performance incentive programs; (v) directly crediting all net proceeds from the
Shoreham property tax litigation and other sources to the Rate Moderation
Component (RMC) to reduce its balance; and (vi) a mechanism to fully recover any
outstanding RMC balance at the end of the 1999 rate year through inclusion in
the Fuel Cost Adjustment (FCA), over a two-year period.
The Company is currently unable to predict the outcome of either the temporary
or permanent rate proceedings and their effect, if any, on the Company's
financial condition or its results of operations.
For a further discussion of the rate proceedings see the Company's Quarterly
Reports on Form 10-Q for the three months ended March 31, 1996 and June 30,
1996, and Note 3 of Notes to Financial Statements included in the Company's
Annual Report on Form 10-K, as amended, for the year ended December 31, 1995.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
RESULTS OF OPERATIONS
EARNINGS
Earnings for common stock for the three months ended September 30, 1996, were
$117.0 million or $0.97 per common share compared with $118.1 million or $0.99
per common share for the same period last year. For the nine months ended
September 30, 1996, earnings for common stock amounted to $213.1 million or
$1.77 per common share, compared with $203.4 million or $1.71 per common share
for the same period last year.
The increase in earnings for the nine months ended September 30, 1996, is
attributable to an increase in earnings for the gas business which resulted from
several positive developments. These developments include the recognition of
additional sales volumes due to the continued growth in the number of space
heating customers, colder than normal weather and significantly higher
off-system sales when compared to the same period last year. Also contributing
to the increase in gas business earnings was a 3.2% rate increase which became
effective December 1, 1995.
The decrease in earnings, for the three months ended September 30, 1996,
resulted primarily from the timing of when revenues and expenses associated with
the growth in the gas business are recognized. Specifically, the added revenues
associated with such growth are concentrated in the heating season, whereas the
increased costs necessary for such growth are incurred throughout the year.
REVENUES
Total revenues for the three months ended September 30, 1996, were $849.8
million, representing a decrease of $26.0 million or 3%, from total revenues for
the three months ended September 30, 1995. Electric revenues decreased by $35.2
million or 4.3% and gas revenues increased by $9.2 million or 15.2%, when
compared to the same period in 1995.
For the nine months ended September 30, 1996, revenues totaled $2.4 billion, an
increase of $87.8 million or 3.8% compared with the same period last year.
Electric revenues were lower by $6.1 million or 0.3% and gas revenues were
higher by $93.9 million or 23.6%, when compared with the same period in 1995.
<PAGE>
Electric
Electric revenues decreased for the three and nine months ended September 30,
1996, as compared with the same periods in 1995. This decrease is due to
decreased sales volumes during the three months ended September 30, 1996, when
compared to the same period in 1995, as a result of variations in weather.
However, these lower revenues from sales have no effect on earnings due to the
Company's current electric rate structure which includes a revenue
reconciliation mechanism that eliminates the impact on earnings caused by sales
volumes that are above or below adjudicated levels.
Gas
The increase in gas revenues for the three and nine months ended September 30,
1996, compared with the same periods in 1995, is primarily the result of an
increase in the number of gas heating customers, higher sales volumes resulting
from colder than normal winter weather, an increase in off-system sales and in
the commodity cost of natural gas which is recovered from customers through the
Gas Cost Adjustment Mechanism included in rates. Also contributing to higher gas
revenues was a gas base rate increase of 3.2% which became effective December 1,
1995.
<PAGE>
FUELS AND PURCHASED POWER
Fuels and purchased power expenses for the three and nine months ended September
30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
9/30/96 9/30/95 9/30/96 9/30/95
------- ------- ------- -------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
ELECTRIC SYSTEM
Oil $ 35 $ 25 $127 $ 82
Gas 50 43 94 106
Nuclear 4 4 12 10
Purchased Power 85 82 248 233
---- ---- ---- ----
Total Electric Fuel Costs 174 154 481 431
GAS SYSTEM 29 24 236 179
---- ---- ---- ----
Total $203 $178 $717 $610
==== ==== ==== ====
</TABLE>
For the three and nine months ended September 30, 1996, electric fuel costs were
higher when compared to the same period last year primarily due to higher per
unit prices for oil, gas and purchased power. The total fuel expense was
partially offset by a decrease in demand due to weather and profits realized by
the electric business unit from the off-system gas sales which were credited to
the total fuel expense, discussed below.
Fuel costs for operating the gas business increased for the three and nine
months ended September 30, 1996, when compared to the same periods last year due
to higher gas prices coupled with the increase in sales volumes associated with
the colder than normal winter weather.
The percentages of total electric energy available by type of fuel for electric
operations for the three and nine months ended September 30, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
9/30/96 9/30/95 9/30/96 9/30/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
Oil 18% 16% 25% 20%
Gas 33 41 24 34
Nuclear 9 7 10 6
Purchases 40 36 41 40
---- ---- ---- ---
Total 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
For the three months ended September 30, 1996, the Company utilized purchased
power to displace more costly generation. For the nine months ended September
30, 1996, electricity generated with gas decreased compared to the same period
in 1995, as the high demand for gas resulting from the unusually cold winter
experienced in the northeast caused an increase in gas prices. During this
period, the electric business unit sold portions of its gas supply for electric
generation to off-system entities. Profits realized by the electric business
unit from these sales, which total $5 million, were used to offset the cost of
fuel for electric generation, thereby providing electric energy to customers at
the lowest possible cost.
<PAGE>
OPERATIONS AND MAINTENANCE EXPENSES
For the three months ended September 30, 1996, operations and maintenance (O&M)
expenses increased over the same period in 1995 primarily as a result of higher
accruals for doubtful accounts and due to the timing of certain employee benefit
expenses. For the nine months ended September 30, 1996 O&M increased over the
same period in 1996 as a result of higher minor storm costs (storms in which the
total costs incurred are less than $1 million) higher accruals for doubtful
accounts and due to the timing of certain other expenses. These increases were
mitigated by the Company's continuing efforts to control costs. Although O&M
expenses for the nine months ended September 30, 1996 are higher than for 1995,
the Company expects that the total O&M expenses for the year ended December 1996
will be lower than those incurred in 1995.
RATE MODERATION COMPONENT
The Rate Moderation Component (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 in the
Rate Moderation Agreement (RMA) and subsequent rate case decisions.
Presently, the Company has an electric fuel adjustment clause mechanism that
collects the higher of: a) the actual cost of fuel; or b) the amount included in
base rates. When fuel costs are below the amount of revenues collected for fuel,
this difference, called the Fuel Moderation Component (FMC), is credited to the
RMC to reduce its balance and mitigate the need for future rate increases. When
fuel expenses are greater than the amount reflected in base rates for fuel, this
difference, called the Fuel Cost Adjustment (FCA) is collected from customers
over the following three-month period.
The operation of the FMC has been a significant contributor to the reduction of
the RMC balance since 1989. However, recent increases in the cost of fuel and
purchased power, have resulted in a reduction of the FMC credit to a level below
that which the Company had experienced during the past several years.
Based on the Company's current electric rate structure, the RMC balance is
expected to increase above the December 31, 1995 balance resulting in non-cash
credits to income in 1996. For the three and nine months ended September 30,
1996, the Company recorded non-cash credits to income of approximately $8.0
million and $33.9 million, respectively, representing amounts, net of offsets
generated principally by the FMC mechanism, by which adjudicated revenues were
below revenues that would have been collected under conventional ratemaking.
For the three and nine months ended September 30, 1995, primarily as a result of
amounts credited to the RMC balance through the operation of the Company's FMC
mechanism, the Company amortized the RMC balance, resulting in a charge to
income of approximately $28.1 million and $17.4 million, respectively.
For a further discussion of the RMC, RMA, FMC and FCA, see Notes 1, 2 and 3 of
Notes to Financial Statements included in the Company's Annual Report on Form
10-K, as amended, for the year ended December 31, 1995.
OTHER REGULATORY AMORTIZATION
Charges or credits to other regulatory amortization have no impact on earnings
as the Company recovers from or returns to customers an equivalent amount of
revenue through various mechanisms contained in its current rate structure.
For the three months ended September 30, 1996 and 1995, other regulatory
amortization was a non-cash charge to income of approximately $49.3 million and
$74.6 million, respectively. This decrease is primarily the result of an
electric ratemaking mechanism which eliminates the impact on earnings of
experiencing sales that are above (or below) adjudicated levels. Despite
decreased revenues, primarily attributable to variations in weather, actual
revenues net of fuel and gross receipts taxes (net electric revenue) continue to
exceed adjudicated levels. For the three months ended September 30, 1996 and
1995, the Company, in accordance with mechanisms contained in the current rate
structure, eliminated the impact on earnings of these higher than adjudicated
net electric revenues by recording non-cash charges to income of $19.9 million
and $47.7 million, respectively. The remaining variance is the net result of the
increased amortization of the LILCO Ratemaking and Performance Plan (LRPP)
deferrals of prior rate years, higher non-cash charges resulting from gas excess
earnings and lower non-cash charges related to electric excess earnings.
<PAGE>
OPERATING TAXES
For the three months ended September 30, 1996, operating taxes totaled $121.6
million, an increase of $2.3 million or 1.9% over the comparable period last
year. For the nine months ended September 30, 1996, these taxes amounted to
$352.9 million, an increase of $16.9 million or 5.0% over the same period in
1995. The increase in operating taxes was attributable to higher property and
revenue taxes.
FEDERAL INCOME TAX
The current portion of the Company's federal income tax expense for the three
and nine month periods ended September 30, 1996, was $8.3 million and $31.3
million, respectively. This represents an increase of $4.2 million and $21.0
million in the Company's current federal income tax expense over the three and
nine month periods ended September 30, 1995, respectively. These increases are
primarily attributable to the full utilization in 1996 of the Company's
Alternative Minimum Tax (AMT) net operating loss (NOL) carryforward.
The Company forecasts that its current federal income tax payments, net of
investment tax credit carryforwards, for the year ended December 31, 1996 will
amount to approximately $46 million.
OTHER INCOME AND DEDUCTIONS, NET
Other income net of deductions, for the three months ended September 30, 1996,
was $.4 million, a decrease of $4.9 million when compared to the same period in
1995. This decrease resulted from a reduction in interest income from short term
investments, lower non-cash carrying charge income and the settlement of a claim
against the Company. For the nine months ended September 30, 1996, other income
net of deductions, was $16.5 million, a decrease of $9.6 million compared with
the same period in 1995. This decrease resulted from reduced non-cash carrying
charge income and the recognition in 1995 of approximately $7 million of
litigation proceeds related to the construction of Shoreham, partially offset by
higher short term interest income for the period.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 1996, was $110.0
million, a decrease of $7.8 million or 6.6% when compared to the same period of
1995. For the nine months ended September 30, 1996, interest expense amounted to
$340.5 million, a decrease of $16.3 million or 4.6% compared with the same
period last year. These decreases are due to lower debt levels resulting from
the retirement of maturing debt by using cash generated from operations.
<PAGE>
FINANCIAL CONDITION
LIQUIDITY
At September 30, 1996, the Company's cash and cash equivalents amounted to
approximately $172.9 million, compared to $351.5 million at December 31, 1995.
The decrease in the cash balance at September 30, 1996, primarily reflects the
utilization of cash on hand and cash previously deposited with the Trustee of
the General and Refunding (G&R) Mortgage to satisfy the mandatory redemption of
$415 million of the Company's G&R Bonds on May 1, 1996.
Primarily, as a result of the above redemption, the Company's debt ratio dropped
from 61.8% at December 31, 1995, to 59.3% at September 30, 1996. The use of cash
to satisfy maturing debt is part of the Company's commitment to improve its
capital structure.
In January 1996, the Company received $81 million, including interest, from
Suffolk County pursuant to a judgment that found that the Shoreham property was
overvalued for property tax purposes between 1976 and 1983 (excluding 1979 which
had been previously settled). Depending upon the outcome of the current electric
rate proceedings, the Company may be required to return all or a portion of this
recovery, net of legal expenses, to its electric ratepayers instead of crediting
the RMC balance as requested by the Company. For a further discussion of the
first phase of this tax certiorari proceeding see Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 3 of Notes to Financial Statements included in the Company's Annual Report
on Form 10-K, as amended, for the year ended December 31, 1995.
In February 1997 and April 1998, the Company has maturing debt obligations of
$250 million and $100 million, respectively. The Company intends to use cash
generated from operations to the maximum extent practicable to satisfy these
obligations.
The Company has no current plans for accessing the public markets to raise
capital for the next several years. However, the Company would access the public
markets to refinance existing debt or preferred stock should market conditions
prove favorable. The Company would also take advantage of any tax-exempt
financing made available by the New York State Energy Research and Development
Authority.
The Company has available for its use a revolving line of credit through October
1, 1997, provided by its 1989 Revolving Credit Agreement. In July 1996, at the
Company's request, the amount committed by the banks participating in the
facility was reduced from $300 million to $250 million. The Company believes
this action is appropriate given the levels of cash on hand, projected future
cash generated from operations and modest debt and preferred stock maturities
through 1998. This line of credit is secured by a first lien upon the Company's
accounts receivable and fuel oil inventories.
<PAGE>
CAPITAL REQUIREMENTS AND CAPITAL PROVIDED
Capital requirements and capital provided for the three and nine months ended
September 30, 1996, were as follows:
<TABLE>
<CAPTION>
(In Millions of Dollars)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
CAPITAL REQUIREMENTS
Construction $ 70 $177
- --------------------------------------------------------------------------------
Redemptions and Dividends
Long-term debt - 415
Preferred stock 1 1
Preferred stock dividends 13 39
Common stock dividends 53 160
- --------------------------------------------------------------------------------
Total Redemptions and Dividends 67 615
- --------------------------------------------------------------------------------
Shoreham post-settlement costs 11 41
- --------------------------------------------------------------------------------
Total Capital Requirements $148 $833
================================================================================
CAPITAL PROVIDED
Cash generation from operations $236 $642
(Increase) decrease in cash (92) 179
Common stock issued 5 14
Other investing and financing
activities (1) (2)
- --------------------------------------------------------------------------------
Total Capital Provided $148 $833
================================================================================
</TABLE>
For further information, see the Statement of Cash Flows.
Given the Company's current electric load forecast and the availability of
electric energy provided by the Company's generating facilities and firm
purchases from others, the Company believes it will need additional capacity,
which it plans to satisfy through firm purchase contracts of approximately 100
megawatts (MW) in 1998, and 150 MW starting in 1999. The Company anticipates
that Long Island will need additional generating capability by 2001. This
facility will most likely be approximately 140 MW and constructed on behalf of
the Company by an outside party and as such, will not be financed by the
Company.
The Company estimates that cash generated from operations will be sufficient to
meet total capital expenditures for the remainder of 1996.
INVESTMENT RATING
The Company's securities are rated by Standard and Poor's Corporation (S&P),
Moody's Investors Service (Moody's), Fitch Investors Service, L.P.(Fitch) and
Duff and Phelps, Inc. (D&P).
On November 11, 1996, Moody's revised its outlook on the Company's General and
Refunding Bonds, Debentures and Preferred Stock from negative to stable, as a
result of a New York State Supreme Court, Suffolk County ruling, that the Town
of Brookhaven over assessed the Shoreham Nuclear Power Station (Shoreham) for
the years 1984-1992. For a discussion of this ruling see Part II., Other
Information, Item 1. Legal Proceedings.
For a further discussion of the Company's credit ratings see Investment Rating
in the Company's Quarterly Reports on Form 10-Q for the three months ended March
31, 1996 and June 30, 1996, and Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 1995.
RATE MATTERS
For a discussion of rate matters, see Note 2 of Notes to Financial Statements
and Note 3 of Notes to Financial Statements included in the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 1995.
<PAGE>
COMPETITIVE OPPORTUNITIES
New York State Competitive Opportunities Proceeding
On May 20, 1996, the Public Service Commission of the State of New York (PSC)
issued its "Opinion and Order Regarding Competitive Opportunities for Electric
Service," discussed in greater detail in the Company's Form 10-Q for the three
months ended June 30, 1996, in which the PSC announced its "vision" for the
future of the electric industry in New York State. Certain aspects of the
restructuring envisioned by the PSC -- particularly the PSC's apparent
determinations that it can deny a reasonable opportunity to recover 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 of New
York's investor-owned electric utilities, including the Company. The Company
therefore joined in a lawsuit filed by the Energy Association of New York State
and the State's other electric utilities against the PSC on September 18, 1996,
in the New York Supreme Court for Albany County. The utilities have requested
that the Court declare that the May 20 Order is unlawful or, in the alternative,
that the Court clarify that the May 20 Order can be given no binding effect by
the PSC. The litigation is 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 operations.
Also in response to the PSC's May 20 Order, filings were made on October 1, 1996
by the five utilities who were directed therein to submit proposed rate and
restructuring plans addressing a transition to competition: Central Hudson Gas
and Electric Corporation; Consolidated Edison Company of New York, Inc.; New
York State Electric and Gas Corporation; Orange and Rockland Utilities, Inc. and
Rochester Gas and Electric Corporation. The PSC has commenced separate,
company-specific proceedings to address these submittals, and the Company has
sought permission to intervene in each.
The Electric Industry - Federal Regulatory Issues
In April 1996, in response to its Notice of Proposed Rulemaking (NOPR) issued in
March 1995, the Federal Energy Regulatory Commission (FERC) issued two orders
relating to the development of competitive wholesale electric markets.
<PAGE>
Order 888, a final rule on open transmission access and stranded cost recovery,
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 that which they provide themselves,
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. On September 25, 1996, the FERC ordered Rate
Hearings on 28 utility transmission tariffs, including the Company's. The Order
indicated that, on the basis of a preliminary review, the FERC was not satisfied
that the rates were just and reasonable.
Order 889, 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
functionally separate their transmission and wholesale power merchant functions
to prevent discriminatory self-dealing.
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 amount of stranded costs, if any, that the
Company would be unable to 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 assets, the amount of
which cannot presently be determined.
Notwithstanding the outcome of the state and federal regulatory proceedings, or
any other state action, the Company believes that, among other obligations, New
York State has a contractual obligation to allow the Company to recover its
Shoreham-related assets.
LONG ISLAND POWER AUTHORITY PROPOSED PLAN
For information regarding the Long Island Power Authority (LIPA) Proposed Plan,
see the Company's Form 10-Q for the three months ended March 31, 1996, and Note
10 of Notes to Financial Statements in the Company's Annual Report on Form 10-K,
as amended, for the year ended December 31, 1995.
<PAGE>
FORWARD-LOOKING STATEMENTS
This three month report on Form 10-Q and the documents incorporated by reference
contain statements which, to the extent they are not recitations of historical
fact, constitute "forward-looking statements" within the meaning of the
Securities Litigation Reform Act of 1995 (Reform Act). In this respect, the
words "estimate," "project," "anticipate," "expect," "intend," "believe" and
similar expressions are intended to identify forward-looking statements. All
such forward-looking statements are intended to be subject to the safe harbor
protection provided by the Reform Act. A number of important factors affecting
the Company's business and financial results could cause actual results to
differ materially from those stated in the forward-looking statements. Those
factors include state and federal regulatory rate proceedings, competition, the
LIPA Proposed Plan, certain environmental matters as well as such other factors
as set forth in the Company's Annual Report on Form 10-K, as amended, for the
year ended December 31, 1995, and all documents subsequently filed with the
Securities and Exchange Commission.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 4, 1996, the New York State Supreme Court, Suffolk County, ruled
that the Town of Brookhaven has over assessed the Shoreham Nuclear Power Station
for the years 1984-1992. According to preliminary estimates by Company
officials, the overpayment of taxes is approximately $500 million plus interest.
The assessments in this ruling should also result in a refund of approximately
$260 million plus interest for payments-in-lieu-of taxes (PILOTs) for the years
1992-1996. Pursuant to the 1989 Settlement, the Company agreed to fund the
PILOTs that LIPA is required to make to the municipalities that impose real
property taxes on Shoreham.
The overpayment of taxes and PILOTs, plus interest, are expected to be returned
to the Company and such amounts, excluding litigation costs, will be used to
reduce electric rates in the future. However, the court's ruling is subject to
appeal and, as a result, the Company is unable to determine the amount and
timing of receipt of the refunds. For a discussion of the refund received by the
Company in the first phase of this tax certiorari proceeding see Management's
Discussion and Analysis of Financial Condition and Results of Operation herein.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 27 - Financial Data Schedule UT for the nine-month period
ended September 30, 1996.
B. REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LONG ISLAND LIGHTING COMPANY
(Registrant)
By /S/ ANTHONY NOZZOLILLO
----------------------------
ANTHONY NOZZOLILLO
Senior Vice President and
Principal Financial Officer
Dated: November 14, 1996
<PAGE>
EXHIBIT INDEX
-------------
PAGE NO.
--------
Exhibit 27 - Financial Data Schedule UT
for the nine-month period ended September 30, 1996 26
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Income, Balance Sheet and Statement of Cash Flows and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,664,701
<OTHER-PROPERTY-AND-INVEST> 18,061
<TOTAL-CURRENT-ASSETS> 1,103,374
<TOTAL-DEFERRED-CHARGES> 66,753
<OTHER-ASSETS> 7,355,675
<TOTAL-ASSETS> 12,208,564
<COMMON> 602,562
<CAPITAL-SURPLUS-PAID-IN> 1,074,781
<RETAINED-EARNINGS> 846,473
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,523,816
638,500
63,677
<LONG-TERM-DEBT-NET> 4,472,675
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 250,000
4,800
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 4,255,096
<TOT-CAPITALIZATION-AND-LIAB> 12,208,564
<GROSS-OPERATING-REVENUE> 2,408,592
<INCOME-TAX-EXPENSE> 167,653
<OTHER-OPERATING-EXPENSES> 1,674,047
<TOTAL-OPERATING-EXPENSES> 1,841,700
<OPERATING-INCOME-LOSS> 566,892
<OTHER-INCOME-NET> 23,197
<INCOME-BEFORE-INTEREST-EXPEN> 590,089
<TOTAL-INTEREST-EXPENSE> 337,785
<NET-INCOME> 252,304
39,194
<EARNINGS-AVAILABLE-FOR-COMM> 213,110
<COMMON-STOCK-DIVIDENDS> 160,127
<TOTAL-INTEREST-ON-BONDS> 291,174
<CASH-FLOW-OPERATIONS> 642,268
<EPS-PRIMARY> $1.77
<EPS-DILUTED> $1.77
</TABLE>
