FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 1997 to March 31, 1997
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 March 31, 1997, was 120,987,330.
<PAGE>
LONG ISLAND LIGHTING COMPANY
Page No.
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Income 3
Balance Sheet 4
Statement of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 14
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 24
Signature 25
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<TABLE>
<CAPTION>
LONG ISLAND LIGHTING COMPANY
STATEMENT OF INCOME
(UNAUDITED)
(Thousands of Dollars - except per share amounts)
Three Months Ended
March 31
---------------------------
1997 1996
---------------------------
<S> <C> <C>
REVENUES
Electric $557,791 $559,268
Gas 293,391 304,946
------------ ------------
Total Revenues 851,182 864,214
------------ ------------
EXPENSES
Operations - fuel and purchased power 301,867 310,269
Operations - other 95,673 103,869
Maintenance 29,340 30,488
Depreciation and amortization 38,561 37,565
Base financial component amortization 25,243 25,243
Rate moderation component amortization 5,907 (15,326)
Regulatory liability component amortization (22,143) (22,143)
Other regulatory amortization 12,218 27,212
Operating taxes 117,513 120,028
Federal income tax - current 23,378 12,838
Federal income tax - deferred and other 33,624 43,750
------------ ------------
Total Expenses 661,181 673,793
------------ ------------
OPERATING INCOME 190,001 190,421
------------ ------------
OTHER INCOME AND (DEDUCTIONS)
Rate moderation component carrying charges 5,919 5,900
Class Settlement (4,496) (5,372)
Other income and deductions, net 645 5,920
Allowance for other funds used during construction 717 719
Federal income tax - deferred and other 789 2,451
------------ ------------
Total Other Income and (Deductions) 3,574 9,618
------------ ------------
INCOME BEFORE INTEREST CHARGES 193,575 200,039
------------ ------------
INTEREST CHARGES AND (CREDITS)
Interest on long-term debt 90,168 102,256
Other interest 16,659 16,971
Allowance for borrowed funds used during construction (949) (941)
------------ ------------
Total Interest Charges and (Credits) 105,878 118,286
------------ ------------
NET INCOME 87,697 81,753
Preferred stock dividend requirements 12,969 13,071
------------ ------------
EARNINGS FOR COMMON STOCK $74,728 $68,682
============ ============
AVERAGE COMMON SHARES OUTSTANDING (000) 120,995 119,944
EARNINGS PER COMMON SHARE $0.62 $0.57
DIVIDENDS DECLARED PER COMMON SHARE $0.445 $0.445
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
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<PAGE>
<TABLE>
<CAPTION>
LONG ISLAND LIGHTING COMPANY
BALANCE SHEET
(Thousands of Dollars)
March 31 December 31
1997 1996
ASSETS (unaudited) (audited)
-------------- ---------------
<S> <C> <C>
UTILITY PLANT
Electric $3,900,264 $3,882,297
Gas 1,171,183 1,154,543
Common 263,267 260,268
Construction work in progress 108,850 112,184
Nuclear fuel in process and in reactor 15,503 15,454
-------------- ---------------
5,459,067 5,424,746
-------------- ---------------
Less - Accumulated depreciation and
amortization 1,759,110 1,729,576
-------------- ---------------
Total Net Utility Plant 3,699,957 3,695,170
-------------- ---------------
REGULATORY ASSETS
Base financial component (less accumulated
amortization of $782,525 and $757,282) 3,256,305 3,281,548
Rate moderation component 409,512 402,213
Shoreham post-settlement costs 996,270 991,795
Shoreham nuclear fuel 68,581 69,113
Unamortized cost of issuing securities 187,309 194,151
Postretirement benefits other than pensions 357,668 360,842
Regulatory tax asset 1,767,164 1,772,778
Other 200,137 199,879
-------------- ---------------
Total Regulatory Assets 7,242,946 7,272,319
-------------- ---------------
-------------- ---------------
NONUTILITY PROPERTY AND OTHER INVESTMENTS 18,870 18,597
-------------- ---------------
CURRENT ASSETS
Cash and cash equivalents 64,539 279,993
Special deposits 37,631 38,266
Customer accounts receivable (less allowance
for doubtful accounts of $23,675 and $25,000) 305,436 255,801
Other accounts receivable 42,946 65,764
Accrued unbilled revenues 141,389 169,712
Materials and supplies at average cost 55,454 55,789
Fuel oil at average cost 49,703 53,941
Gas in storage at average cost 10,893 73,562
Deferred tax asset 93,349 145,205
Prepayments and other current assets 8,805 8,569
-------------- ---------------
Total Current Assets 810,145 1,146,602
-------------- ---------------
-------------- ---------------
DEFERRED CHARGES 77,656 76,991
-------------- ---------------
TOTAL ASSETS $11,849,574 $12,209,679
============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
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<PAGE>
LONG ISLAND LIGHTING COMPANY
BALANCE SHEET
(Thousands of Dollars)
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
CAPITALIZATION AND LIABILITIES (unaudited) (audited)
-------------- ---------------
<S> <C> <C>
CAPITALIZATION
Long-term debt $4,471,675 $4,471,675
Unamortized discount on debt (14,628) (14,903)
-------------- ---------------
4,457,047 4,456,772
-------------- ---------------
Preferred stock - redemption required 638,500 638,500
Preferred stock - no redemption required 63,598 63,664
-------------- ---------------
Total Preferred Stock 702,098 702,164
-------------- ---------------
Common stock 605,022 603,921
Premium on capital stock 1,131,576 1,127,971
Capital stock expense (48,915) (49,330)
Retained earnings 861,751 840,867
Treasury stock, at cost (385) (60)
-------------- ---------------
Total Common Shareowners' Equity 2,549,049 2,523,369
-------------- ---------------
-------------- ---------------
Total Capitalization 7,708,194 7,682,305
-------------- ---------------
REGULATORY LIABILITIES
Regulatory liability component 178,558 198,398
1989 Settlement credits 125,138 127,442
Regulatory tax liability 100,377 102,887
Other 158,660 139,510
-------------- ---------------
Total Regulatory Liabilities 562,733 568,237
-------------- ---------------
CURRENT LIABILITIES
Current maturities of long-term debt 1,000 251,000
Current redemption requirements of preferred stock 1,050 1,050
Accounts payable and accrued expenses 230,189 289,141
LRPP payable 40,499 40,499
Accrued taxes (including federal income tax of $49,262 and $25,884) 51,157 63,640
Accrued interest 143,983 160,615
Dividends payable 58,474 58,378
Class Settlement 58,333 55,833
Customer deposits 29,173 29,471
-------------- ---------------
Total Current Liabilities 613,858 949,627
-------------- ---------------
DEFERRED CREDITS
Deferred federal income tax 2,420,443 2,442,606
Class Settlement 89,487 98,497
Other 20,889 39,447
-------------- ---------------
Total Deferred Credits 2,530,819 2,580,550
-------------- ---------------
OPERATING RESERVES
Pensions and other postretirement benefits 387,048 381,996
Claims and damages 46,922 46,964
-------------- ---------------
Total Operating Reserves 433,970 428,960
-------------- ---------------
COMMITMENTS AND CONTINGENCIES - -
-------------- ---------------
TOTAL CAPITALIZATION AND LIABILITIES $11,849,574 $12,209,679
============== ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
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<PAGE>
<TABLE>
<CAPTION>
LONG ISLAND LIGHTING COMPANY
STATEMENT OF CASH FLOWS
(UNAUDITED)
(Thousands of Dollars)
Three Months Ended
March 31
-------------------------
1997 1996
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $87,697 $81,753
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Provision for doubtful accounts 4,821 4,828
Depreciation and amortization 38,561 37,565
Base financial component amortization 25,243 25,243
Rate moderation component amortization 5,907 (15,326)
Regulatory liability component amortization (22,143) (22,143)
Other regulatory amortization 12,218 27,212
Rate moderation component carrying charges (5,919) (5,900)
Class Settlement 4,496 5,372
Amortization of cost of issuing and redeeming
securities 8,087 9,486
Federal income tax - deferred and other 32,835 41,299
Allowance for other funds used during construction (717) (719)
Gas Cost Adjustment (7,891) 19,190
Other 24,485 15,542
CHANGES IN OPERATING ASSETS AND LIABILITIES
Accounts receivable (31,638) (3,992)
Accrued unbilled revenues 28,323 35,772
Materials and supplies, fuel oil and gas in storage 67,242 43,702
Accounts payable and accrued expenses (58,952) (31,997)
Accrued taxes (12,483) (10,249)
Class Settlement (11,006) (5,366)
Other (29,599) (12,241)
------------ ------------
Net Cash Provided by Operating Activities 159,567 239,031
------------ ------------
INVESTING ACTIVITIES
Construction and nuclear fuel expenditures (50,375) (44,189)
Shoreham post-settlement costs (12,104) (15,798)
Other 160 (1,206)
------------ ------------
Net Cash Used in Investing Activities (62,319) (61,193)
------------ ------------
FINANCING ACTIVITIES
Proceeds from sale of common stock 4,640 4,672
Redemption of long-term debt (250,000) 0
Preferred stock dividends paid (12,969) (13,072)
Common stock dividends paid (53,749) (53,247)
Other (624) (359)
------------ ------------
Net Cash Used in Financing Activities (312,702) (62,006)
------------ ------------
Net (Decrease) Increase in Cash and Cash Equivalents ($215,454) $115,832
============ ============
Cash and cash equivalents at January 1 $279,993 $351,453
Net (Decrease) Increase in Cash and Cash Equivalents (215,454) 115,832
------------ ------------
Cash and Cash Equivalents at March 31 $64,539 $467,285
============ ============
SUPPLEMENTARY INFORMATION
Interest paid, before reduction for the allowance
for borrowed funds used during construction $112,981 $115,711
Federal income tax - paid $0 $50
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
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<PAGE>
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
These Notes to Financial Statements reflect events subsequent to January 31,
1997, the date of the most recent Report of Independent Auditors, through the
date of this Transition Report on Form 10-Q for the three months ended March 31,
1997. These Notes to Financial Statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three months ended March 31, 1997, and the Company's Annual
Report on Form 10-K/A, for the Year Ended December 31, 1996, 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 three month period presented. Operating results for the three
month period are not necessarily indicative of results to be expected for an
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. LONG ISLAND POWER AUTHORITY PROPOSED TRANSACTION
On April 30, 1997, the Long Island Power Authority (LIPA) submitted to the New
York State Public Authorities Control Board for approval, unexecuted copies of
agreements related to LIPA's proposed acquisition (via the purchase of the
Company's common stock) of the Company's transmission and distribution system
and certain other assets and liabilities (LIPA Transaction). Prior to LIPA's
acquisition of the common stock, the Company's gas assets, electric generating
facility assets and certain other assets and liabilities will be transferred to
affiliates of the holding company to be formed in connection with the binding
share exchange with Brooklyn Union Gas Company (Brooklyn Union).
While the specific allocation of assets and liabilities has not yet been finally
determined, it is currently contemplated that the holding company would, subject
to obtaining all required consents, assume the Company's (i) 7.30% Debentures
due July 15, 1999; (ii) 8.20% Debentures due March 15, 2023; and (iii) Preferred
Stock, 7.95%, Series AA. It is also contemplated that each issued and
outstanding share of preferred stock of the Company that is subject to optional
redemption at or before the closing of the LIPA Transaction will be called for
redemption by the Company no later than the date of the closing. Each issued
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<PAGE>
and outstanding share of preferred stock of the Company not subject to optional
redemption (other than the Series AA) will, subject to obtaining all required
consents, be acquired by the Company for cash pursuant to the terms of the LIPA
Transaction agreements.
The Company is unable to determine when or if the agreements related to the LIPA
Transaction will be executed by the parties or when or if all consents and
approvals required to consummate the LIPA Transaction will be obtained. For
additional information concerning the LIPA Transaction and the proposed binding
share exchange with Brooklyn Union, see the Company's Form 8-K/A dated March 24,
1997 and Form 8-K dated December 30, 1996, respectively.
NOTE 3. RATE MATTERS
During 1996, the Public Service Commission of the State of New York (PSC)
instituted numerous initiatives intended to lower electric rates on Long Island,
including:
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."
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.
As a result of the Order issued in April 1996, the Company, in September 1996,
filed financial and other information sufficient to provide a legal basis for
the PSC to set new rates for both the single rate year (1997) and the three-year
rate period 1997 through 1999.
As of the date of this report, the PSC has yet to render a decision or take any
action with respect to this filing.
BROOKLYN UNION TRANSACTION
On March 14, 1997, the Company and Brooklyn Union filed a joint petition with
the PSC requesting approval of the proposed merger of the two companies and
certain related matters. The petition proposes, among other matters, that 93% or
$1.0 billion of the estimated total efficiency savings attributable to operating
synergies that are expected to be realized over the 10 year period following the
merger, be allocated to ratepayers and the
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<PAGE>
remaining 7% or $73 million be allocated to shareholders. The ratepayers'
portion will be allocated to both utilities' customers and will reduce both
electric and gas rates by an estimated 2% for the 10 year period following the
closing of the merger. To accomplish this, the base rates of both utilities
would be reduced immediately following the closing to reflect the levelized
annual amount of the non-fuel related synergy savings forecasted to materialize
over this period. Fuel related synergy savings will be passed back to the
ratepayers through a reduction in the respective fuel adjustment clauses as they
are achieved. The Company will be required to amend its petition to the PSC in
order to reflect certain aspects of the transaction currently contemplated with
LIPA. The petition also requests the PSC's approval of the following:
o The formation of a holding company and the exchange of shares
of common stock between the two utilities and the holding
company in order to effectuate the merger.
o Continuation of the Brooklyn Union holding company
agreement previously approved by the PSC but
modified to include LILCO under its terms and
elimination of certain restrictions on dividend
payments, debt-to-equity ratio maintenance levels,
the level of investment in unregulated businesses,
and relationships between the utilities and their
unregulated affiliates.
o The formation of an unregulated corporate services subsidiary
to perform functions common to both utilities and their
affiliates such as accounting and finance, human resources and
corporate planning to attain synergy savings.
o LILCO's multi-year electric rate plan as filed in
September 1996.
o The continuation of Brooklyn Union's currently
approved multi-year gas rate plan without
modification.
o The proposal to establish a synergy savings balancing account
to enable the utilities to reduce rates immediately for future
non-fuel synergy savings without adversely affecting earnings.
o LILCO's proposed multi-year gas rate plan for
freezing base rates through the year 2001.
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<PAGE>
THE FEDERAL ENERGY REGULATORY COMMISSION FILING
In March 1997, in connection with the proposed Brooklyn Union merger the Company
filed an application with the Federal Energy Regulatory Commission (FERC)
seeking approval of the transfer of the Company's common equity and certain
FERC-jurisdictional assets to the holding company contemplated to be formed to
effectuate the merger with Brooklyn Union. The Company's application explained
how the proposal meets the three major concerns of the FERC merger guidelines
which are that the transfer must have no adverse effect on rates, competition
and regulation.
All interested parties will have sixty days from publication of notice in the
Federal Register to intervene and/or protest. Thereafter, the FERC will decide
on the need for evidentiary hearings (beginning with settlement negotiations)
and a procedural schedule.
The Company will be required to amend its petition to the FERC in order to
reflect certain aspects of the transaction currently contemplated with LIPA.
NOTE 4. CAPITALIZATION
In February 1997, the Company retired $250 million of General and Refunding
Bonds at maturity. The Company satisfied this obligation with cash on hand and
by utilizing interim financing of $30 million obtained through its Revolving
Credit Agreement (RCA). The Company repaid this short-term RCA borrowing in
March 1997. Accordingly, no amounts were outstanding under the RCA at March 31,
1997.
NOTE 5. RETIREMENT BENEFIT PLANS
PENSION PLANS
The Company maintains a defined benefit pension plan which covers substantially
all employees (Primary Plan).
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.
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<PAGE>
<TABLE>
<CAPTION>
The Primary Plan's funded status and amounts recognized on the Balance Sheet at
March 31, 1997 and December 31, 1996 were as follows:
(In thousands of dollars)
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation
Vested benefits $ 642,392 $ 547,002
Nonvested benefits 57,960 55,157
- --------------------------------------------------------------------------------
Accumulated Benefit Obligation $ 700,352 $ 602,159
================================================================================
Plan assets at fair value $ 744,400 $ 746,400
Actuarial present value of projected
benefit obligation 807,703 689,661
- --------------------------------------------------------------------------------
Projected benefit obligation less
than plan assets (63,303) 56,739
Unrecognized net obligation 69,399 71,085
Unrecognized net gain (1,605) (123,759)
- --------------------------------------------------------------------------------
Net Prepaid Pension Cost $ 4,491 $ 4,065
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Periodic pension cost for the Primary Plan for the period ended March 31, 1997
and Year Ended December 31, 1996, respectively, included the following
components:
(In thousands of dollars)
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Service cost - benefits
earned during the period $ 4,645 $ 17,384
Interest cost on projected benefit
obligation and service cost 12,494 47,927
Actual return on plan assets (3,694) (81,165)
Net amortization and deferral (9,446) 33,541
- --------------------------------------------------------------------------------
Net Periodic Pension Cost $ 3,999 $ 17,687
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Assumptions used in accounting for the Primary Plan were as follows:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.25% 7.25%
Rate of future compensation increases 5.00% 5.00%
Long-term rate of return on assets 7.50% 7.50%
- --------------------------------------------------------------------------------
</TABLE>
The Primary Plan assets at fair value include cash, cash equivalents, group
annuity contracts, bonds and equity securities.
As of March 31, 1997, the Company revised actuarial assumptions relating to
mortality and the use of a 7.00% discount rate, which changed the present value
of the accrued benefit. In accordance with the PSC Order,
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<PAGE>
which was effective in 1993, "Statement of Policy and Order Concerning the
Accounting and Ratemaking Treatment for Pensions and Postretirement Benefits
Other than Pensions" these assumption changes are amortized over a ten-year
period and will be reflected ratably in pension expense during that period.
As of April 1, 1997, the Company intends to change the long-term rate of return
on assets to 7.00%.
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. In addition, the Company is required to recognize any net gains or losses
over a ten-year period.
Accumulated postretirement benefit obligation other than pensions at March 31,
1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Retirees $ 169,655 $ 156,181
Fully eligible plan participants 62,491 56,950
Other active plan participants 183,526 152,627
- --------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation $ 415,672 $ 365,758
Plan assets 80,533 74,692
- --------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets 335,139 291,066
Unrecognized prior service cost (185) (188)
Unrecognized net gain 28,563 75,309
- --------------------------------------------------------------------------------
Accrued Postretirement Benefit Cost $ 363,517 $ 366,187
================================================================================
</TABLE>
At March 31, 1997 and December 31, 1996, 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.
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<PAGE>
<TABLE>
<CAPTION>
Periodic postretirement benefit cost other than pensions for the period ended
March 31, 1997 and Year Ended December 31, 1996, respectively, were as follows:
(In thousands of dollars)
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Service cost-benefits
earned during the period $ 2,821 $ 10,690
Interest cost on projected
benefit obligation and
service cost 6,642 25,030
Actual return on plan assets ( 591) (3,046)
Net Amortization
and deferral (3,446) (12,175)
- --------------------------------------------------------------------------------
Periodic Postretirement
Benefit Cost $ 5,426 $ 20,499
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Assumptions used to determine the postretirement benefit obligation were as
follows:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.25% 7.25%
Rate of future compensation increases 5.00% 5.00%
Long-term rate of return on assets 7.50% 7.50%
- --------------------------------------------------------------------------------
</TABLE>
As of March 31, 1997, the Company revised actuarial assumptions relating to
mortality and the use of a 7.00% discount rate, which changed the present value
of the accrued benefit. In accordance with the PSC Order, which was effective in
1993, "Statement of Policy and Order Concerning the Accounting and Ratemaking
Treatment for Pensions and Postretirement Benefits Other than Pensions" these
assumption changes are amortized over a ten-year period and will be reflected
ratably in periodic postretirement benefit cost during that period.
As of April 1, 1997, the Company intends to change the long-term rate of return
on assets to 7.00%.
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation at both March 31, 1997 and December 31, 1996
were 8.0%, 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 March 31, 1997 and December 31, 1996 by
approximately $59 million and $43 million, respectively, and the sum of the
service and interest costs in 1997 and 1996 by $1 million and $5 million,
respectively.
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<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EARNINGS
Earnings for common stock for the three months ended March 31, 1997, were $74.7
million or $0.62 per common share compared with $68.7 million or $0.57 per share
for the same period last year.
The Company experienced higher earnings for both its electric and gas business
units.
Gas business earnings increased for the three month period ended March 31, 1997,
compared to the same period last year, primarily as the result of the
recognition of revenues relating to an independent power producer contract for
the period 1989-1996, which increased earnings by approximately $.03 per share.
Absent this amount, earnings per share for the gas system are comparable to the
same 1996 period.
Electric business earnings increased for the three month period ended March 31,
1997, compared to the same period last year. Factors contributing to this
increase include the Company's continuing efforts to reduce operations and
maintenance expenses and the efficient use of cash generated by operations to
retire maturing debt.
REVENUES
Total revenues for the three months ended March 31, 1997 were $851.2 million,
representing a decrease of approximately $13.0 million when compared to the
three months ended March 31, 1996. Electric revenues decreased by $1.5 million
and gas revenues decreased by $11.5 million when compared to the same period in
1996.
The decrease in gas revenues for the three months ended March 31, 1997, when
compared to the same period in 1996, was primarily the result of lower fuel
expense recoveries driven in part by lower sales volumes associated with the
warmer than normal winter experienced in the Company's service territory during
1997. Variations in weather have a limited impact on revenues as the Company's
current gas rate structure includes a weather normalization clause which
mitigates the impact on revenues of experiencing weather that is warmer or
colder than normal.
The slight decrease in electric revenues during the three months ended March 31,
1997, when compared to the same period in 1996, was primarily due to lower sales
volumes caused by the warmer weather experienced in the region during the winter
of 1997. The decrease in revenues resulting from these lower sales volumes
however, had no effect on earnings due to the Company's current
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<PAGE>
electric rate structure which includes a revenue reconciliation mechanism that
eliminates the impact on earnings of sales volumes that are above or below
adjudicated levels.
FUEL AND PURCHASED POWER
<TABLE>
<CAPTION>
Fuel and purchased power expenses for the three months ended March 31, 1997 and
1996 were as follows:
Three Months Ended
3/31/97 3/31/96
------- -------
(In Millions)
<S> <C> <C>
ELECTRIC SYSTEM
Oil $ 37 $ 67
Gas 39 7
Nuclear 4 4
Purchased Power 85 81
-- --
Total Electric Fuel Costs 165 159
GAS SYSTEM 137 151
--- ---
Total $302 $310
==== ====
</TABLE>
For the three months ended March 31, 1997, electric fuel costs were higher when
compared to the same period last year primarily as a result of higher purchased
power prices. Also contributing to the increase was a reduction in credits
generated by electric off-system gas sales. Profits from off-system gas sales by
the electric business are used to offset the cost of fuel for electric
generation, thereby supporting the Company's goal of providing electric energy
to customers at the lowest cost possible. Electric off-system gas sales in 1997
were significantly below those of the same period last year due to a decrease in
the demand for gas resulting from the warmer winter.
Gas fuel costs for operating the gas business decreased for the three months
ended March 31, 1997, when compared to the same period last year due to a
decrease in gas prices coupled with a refinement in the method of recognizing
gas fuel expenses. Also contributing to the decrease was lower sales volumes
resulting from the warmer winter.
- 15 -
<PAGE>
<TABLE>
<CAPTION>
The percentages of total electric energy available by type of fuel for electric
operations for the three months ended March 31, 1997 and 1996 were as follows:
Three Months Ended
3/31/97 3/31/96
------- -------
<S> <C> <C>
Oil 22% 42%
Gas 30 8
Nuclear 10 10
Purchases 38 40
-- --
Total 100% 100%
=== ===
</TABLE>
The use of oil for electric generation decreased in 1997 as oil became less
economical than gas. The Company also experienced lower electric off-system gas
sales in 1997, making more gas available for use in generating electricity.
In an effort to maximize the Company's operating flexibility, the Company is
continuing to convert its oil-fired steam generating units to dual fired units.
Of the Company's eight steam generation units capable of burning natural gas,
six are dual- fired, providing the Company with the ability to burn the most
cost efficient fuel available, consistent with seasonal environmental
requirements, thereby providing customers with the lowest cost energy possible.
OPERATIONS AND MAINTENANCE EXPENSES
Operations and maintenance (O&M) expenses, excluding fuel and purchased power,
amounted to $125.0 million for the three months ended March 31, 1997, compared
to $134.4 million for the three months ended March 31, 1996. This decrease of
$9.4 million or 7.0%, is primarily attributable to the Company's continuing
efforts to control costs.
RATE MODERATION COMPONENT
The Rate Moderation Component (RMC) reflects the difference between the
Company's revenue requirements under conventional ratemaking and the revenues
provided by its electric rate structure. The RMC is adjusted monthly for the
operation of the Company's Fuel Moderation Component (FMC) mechanism and for any
differences between the Company's share of actual costs for O&M, property taxes
and payroll taxes incurred for the Nine Mile Point Nuclear Power Station Unit 2
(NMP2) and amounts provided for in electric rates.
For the three months ended March 31, 1997, the Company recorded a non-cash
charge to income of approximately $5.9 million, including adjustments for
expenses for NMP2 and amounts generated
- 16 -
<PAGE>
by the FMC mechanism, as operating income generated by the Company's current
electric rate structure exceeded that required under a conventional ratemaking
calculation. For the three months ended March 31, 1996, the Company recorded a
non-cash credit to income of approximately $15.3 million as operating income
generated by the Company's current electric rate structure were below those
required under a conventional ratemaking calculation.
The Company continues to believe that the full amortization of the RMC balance,
which at March 31, 1997, was approximately $410 million, will take place within
the time frame established by the Rate Moderation Agreement (RMA).
For a further discussion of the RMC and RMA see Notes 1, 2 and 3 of Notes to
Financial Statements in the Company's Annual Report on Form 10-K/A, for the Year
Ended December 31, 1996 and for a further discussion of the FMC see Management's
Discussion and Analysis included in the Company's Annual Report on Form 10-K/A,
for the Year Ended December 31, 1996.
OTHER REGULATORY AMORTIZATION
For the three months ended March 31, 1997, and 1996, other regulatory
amortization was a non-cash charge to income of $12.2 million and $27.2 million,
respectively. This decrease has no impact on earnings since it reflects the
deferral of income or expense resulting from the Company's various ratemaking
mechanisms, as explained below.
The electric revenue reconciliation mechanism, as established under the LILCO
Ratemaking and Performance Plan (LRPP), eliminates the impact on earnings of
experiencing sales that are above or below adjudicated levels by providing a
fixed annual net margin level (defined as sales revenue, net of fuel and gross
receipts taxes). Variations in electric revenue resulting from differences
between actual and adjudicated net margin sales levels are deferred on a monthly
basis during the rate year through a charge or credit to other regulatory
amortization. Since actual net margin sales levels for the three months ended
March 31, 1997 and 1996 were lower than the adjudicated sales levels, the
Company recorded non-cash credits to income of $10.2 million and $2.0 million,
respectively.
Included in other regulatory amortization for the three months ended March 31,
1996 is $16.3 million of non-cash charges to income related to the amortization
of the deferred LRPP balance for the rate year ended November 30, 1994. The
Company is awaiting PSC permission to begin amortization of the deferred LRPP
balance for the rate year ended November 30, 1995. As such there was no
corresponding amortization in 1997.
- 17 -
<PAGE>
For a further discussion of the LRPP, see Note 3 of Notes to Financial
Statements included in the Company's Annual Report on Form 10-K/A, for the Year
Ended December 31, 1996.
In the first quarter of 1997 the Company recorded approximately $1.6 million of
gas excess earnings related to the 1994, 1995 and 1996 rate years that were not
previously recognized. The Company recognized approximately $2.5 million of gas
excess earnings for the quarter ended March 31, 1996.
Partially offsetting the decreases in other regulatory amortization between 1997
and 1996 was the recognition of electric earnings in excess of the allowed rate
of return on common equity. The Company earned $10.8 million of Electric excess
earnings for the three months ended March 31, 1997. The Company did not earn any
electric excess earnings for the three months ended March 31, 1996.
OPERATING TAXES
For the three months ended March 31, 1997, operating taxes totaled $117.5
million, a decrease of $2.5 million or 2.1% compared to the same period last
year. The decrease in operating taxes was primarily attributable to lower
revenue taxes and the expiration of the corporate tax surcharge.
FEDERAL INCOME TAX
For the three months ended March 31, 1997, federal income tax totaled $56.2
million, an increase of $2.1 million or 3.8% compared to the same period last
year. The increase in federal income tax was primarily the result of an increase
in pre-tax book income.
The Alternative Minimum Tax liability for the three months ended March 31, 1997
totaled $23.4 million, an increase of $10.6 million over the comparable period
last year. The year to year change in the current and deferred components is
primarily a result of the full utilization of the Alternative Minimum Tax Net
Operating Loss carryforward during 1996.
OTHER INCOME AND DEDUCTIONS
Other income net of deductions, for the three months ended March 31, 1997, was
$3.6 million, a decrease of $6.0 million when compared to the same period in
1996. This decrease resulted from a reduction in interest income from short term
investments as the Company utilized available cash balances to retire maturing
debt of $250 million in February 1997 and a reduction in non-cash carrying
charge income.
- 18 -
<PAGE>
INTEREST EXPENSE
Interest expense for the three months ended March 31, 1997, was $106.8 million,
a decrease of $12.4 million or 10.4% when compared to the same period of 1996.
This decrease was due to lower debt levels resulting from the retirement of
maturing debt of $250 million in February 1997 and $415 million in May 1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company's cash and cash equivalents amounted to
approximately $65 million, compared to $280 million at December 31, 1996. The
decrease in cash at March 31, 1997, primarily reflects the satisfaction at
maturity of $250 million of the Company's General and Refunding Bonds on
February 15, 1997, with cash on hand. The Company also utilized interim
financing of $30 million obtained through its Revolving Credit Agreement (RCA).
The Company repaid this short-term borrowing under the RCA in March 1997.
The Company's debt ratio decreased from 59.3% at December 31, 1996, to 57.8% at
March 31, 1997 primarily as a result of the debt redemption noted above. The use
of cash generated from operations to satisfy maturing debt is part of the
Company's continuing commitment to improve its capital structure.
The Company has available, through October 1, 1997, $250 million revolving line
of credit under its RCA. This line of credit is secured by a first lien upon the
Company's accounts receivable and fuel oil inventories. The Company delivered a
written request to the Co-Agent, for acceptance by the lending banks, to extend
the RCA for a one-year period. The Company is currently awaiting a reply from
the banks, however, the Company does not envision any problems in being granted
the extension.
The Company has no current plans to access the public markets as cash from
operations should be sufficient to meet operating requirements and the debt
maturities through 1998. However, if necessary, the Company would borrow under
the RCA to satisfy short-term cash requirements. Also, the Company would access
the public securities markets to refinance existing debt or preferred stock
should market conditions prove favorable, subject to any restrictions contained
in the merger agreement with Brooklyn Union. The Company would also take
advantage of any tax-exempt financing made available by the New York State
Energy Research and Development Authority.
- 19 -
<PAGE>
CAPITAL REQUIREMENTS AND CAPITAL PROVIDED
<TABLE>
<CAPTION>
Capital requirements and capital provided for the three months ended March 31,
1997, were as follows:
(In Millions of Dollars)
- --------------------------------------------------------------------------------
Three Months Ended
March 31, 1997
- --------------------------------------------------------------------------------
<S> <C>
CAPITAL REQUIREMENTS
Total Construction $ 50
- --------------------------------------------------------------------------------
Redemptions and Dividends
Long-term debt 250
Preferred stock dividends 13
Common stock dividends 54
- --------------------------------------------------------------------------------
Total Redemptions and Dividends 317
- --------------------------------------------------------------------------------
Shoreham post-settlement costs 12
- --------------------------------------------------------------------------------
Total Capital Requirements $ 379
================================================================================
CAPITAL PROVIDED
Cash generation from operations $ 160
Decrease in cash balances 215
Common stock issued 5
Other investing and financing activities (1)
- --------------------------------------------------------------------------------
Total Capital Provided $ 379
================================================================================
</TABLE>
For further information, see the Statement of Cash Flows.
- 20 -
<PAGE>
INVESTMENT RATING
The Company's securities are rated by Standard & Poor's (S&P), Moody's Investors
Service, Inc. (Moody's), Fitch Investors Service, L.P.(Fitch) and Duff & Phelps
Credit Rating Co. (D&P). The credit ratings for each of the Company's principal
securities remain unchanged since December 31, 1996.
In response to the March 1997 announcement that the Company reached an agreement
in principle with LIPA, the rating agencies took the following actions:
o Moody's placed the securities of the Company under review for
potential upgrade.
o S&P announced that the Company's corporate credit rating will remain on
CreditWatch with positive implications, but revised the CreditWatch
implications on the Company's senior debt and preferred stock to
"Developing" from "Positive".
o D&P announced they will retain the Company's ratings on Rating
Watch - Uncertain.
o Fitch maintained the Company's fixed income securities on FitchAlert
"Positive", indicating the rating is likely to be either raised or
affirmed.
For a further discussion of the Company's credit ratings see Investment Rating
in the Company's Annual Report Form 10-K/A, for the Year Ended December 31,
1996.
RATE MATTERS
For a discussion of Rate Matters see, Note 3 of Notes to Financial Statements.
LONG ISLAND POWER AUTHORITY PROPOSED TRANSACTION
On April 30, 1997, the Long Island Power Authority (LIPA) submitted to the New
York State Public Authorities Control Board for approval, unexecuted copies of
agreements related to LIPA's proposed acquisition (via the purchase of the
Company's common stock) of the Company's transmission and distribution system
and certain other assets and liabilities (LIPA Transaction). Prior to LIPA's
acquisition of the common stock, the Company's gas assets, electric generating
facility assets and certain other assets and liabilities will be transferred to
affiliates of the holding company to be formed in connection with the binding
share exchange with Brooklyn Union Gas Company (Brooklyn Union).
While the specific allocation of assets and liabilities has not
yet been finally determined, it is currently contemplated that the
- 21 -
<PAGE>
holding company would, subject to obtaining all required consents, assume the
Company's (i) 7.30% Debentures due July 15, 1999; (ii) 8.20% Debentures due
March 15, 2023; and (iii) Preferred Stock, 7.95%, Series AA. It is also
contemplated that each issued and outstanding share of preferred stock of the
Company that is subject to optional redemption at or before the closing of the
LIPA Transaction will be called for redemption by the Company no later than the
date of the closing. Each issued and outstanding share of preferred stock of the
Company not subject to optional redemption (other than the Series AA) will,
subject to obtaining all required consents, be acquired by the Company for cash
pursuant to the terms of the LIPA Transaction agreements.
The Company is unable to determine when or if the agreements related to
the LIPA Transaction will be executed by the parties or when or if all consents
and approvals required to consummate the LIPA Transaction will be obtained. For
additional information concerning the LIPA Transaction and the proposed binding
share exchange with Brooklyn Union, see the Company's Forms 8-K/A dated March
24, 1997 and Form 8-K dated December 30, 1996, respectively.
BROOKLYN UNION TRANSACTION
For a further discussion on the Brooklyn Union Transaction see Note 3 of Notes
to Financial Statements.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements which, to the extent they are not recitations of
historical fact, constitute "forward-looking statements" within the meaning of
the Securities Litigation Reform Act of 1995 (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 the proposed transactions with Brooklyn Union and LIPA as
discussed under the heading "Long Island Power Authority Proposed Transaction"
and "Brooklyn Union Transaction", state and federal regulatory rate proceedings,
competition, and certain environmental matters each as discussed herein, in the
Company's Annual Report on Form 10-K/a, for the Year Ended December 31, 1996 or
in other reports filed by the Company with the Securities and Exchange
Commission.
- 22 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On March 27, 1997, the Company's Board of Directors voted to change
the Company's fiscal year end to March 31. The Company previously
reported results of operations on a calendar year basis.
On April 23, 1997, the Company, The Connecticut Light and Power
Company (CL&P) and the Long Island Soundkeeper Fund, Inc.
(Soundkeeper) jointly filed a Stipulation of Dismissal in Federal
District Court, which settled a lawsuit previously commenced by the
Soundkeeper alleging that fluid leaks from the electric transmission
cable located under the Long Island Sound (Sound Cable), jointly owned
by the Company and CL&P, violated the Clean Water Act. The settlement
of the Soundkeeper lawsuit will not have a material adverse effect on
the financial condition of the Company. For additional information
concerning the Sound Cable see Note 11 of Notes to Financial
Statements in the Company's Annual Report on Form 10-K/A, for the Year
Ended December 31, 1996.
- 23 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
Exhibit 10
(1) Executive Employment Agreement by and between the Company
and Michael E. Bray dated as of March 1, 1997.
(2) Indemnification Agreement by and between the Company and Michael
E. Bray dated as of March 1, 1997 which agreement is
substantially the same as Indemnification Agreement by and between
the Company and certain officers dated as of February 23, 1994
(filed as an Exhibit to the Company's Form 10-K for the Year Ended
December 31, 1994) which is incorporated herein by reference.
Exhibit 27 - Financial Data Schedule UT for the three-month period
ended March 31, 1997.
b. REPORTS ON FORM 8-K
In its current report on Form 8-K dated February 25, 1997, the
Company filed the following: (i) audited financial statements of
Brooklyn Union as of September 30, 1996 and 1995 and for each of the
three years in the period ended September 30, 1996; (ii) unaudited
interim financial statements of Brooklyn Union as of and for the
three months and twelve months ended December 31, 1996 and 1995; and
(iii) unaudited pro forma combined condensed financial information
for the Company and Brooklyn Union, after giving effect to the
Binding Share Exchanges as a pooling of interest for accounting
purposes.
In its current report on Form 8-K dated March 20, 1997 and Form
8-K/A dated March 24, 1997, the Company reported that the Company
and LIPA entered into an Agreement in Principle pursuant to which
LIPA would, among other things, acquire certain assets of the
Company through the purchase of the Company's outstanding shares of
Common Stock.
In its current report on Form 8-K dated April 11, 1997, the Company
reported that it changed its fiscal year-end to March 31.
- 24 -
<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: May 15, 1997
- 25 -
<PAGE>
EXHIBIT INDEX
-------------
PAGE NO.
--------
Exhibit 10
(1) Executive Employment Agreement by and between the Company and 27
Michael E. Bray dated as of March 1, 1997.
(2) Indemnification Agreement by and between the Company and Michael --
E. Bray dated as of March 1, 1997 which agreement is substantially the
same as Indemnification Agreement by and between the Company and
certain officers dated as of February 23, 1994 (filed as an Exhibit to
the Company's Form 10-K for the Year Ended December 31, 1994) which is
incorporated herein by reference.
Exhibit 27
Financial Data Schedule UT for the three-month period ended March 31, 40
1997.
LONG ISLAND LIGHTING COMPANY EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of the 1st day of March,
1997, by and between LONG ISLAND LIGHTING COMPANY, a New York corporation
(hereinafter referred to as the "Company"), and Michael E. Bray (hereinafter
referred to as "Executive").
W I T N E S S E T H :
WHEREAS, the Executive is employed by the Company in a key executive
capacity and the Executive's services are valuable to the conduct of the
business of the Company; and
WHEREAS, the Company recognizes that circumstances may arise in
which a change in control of the Company occurs, through acquisition or
otherwise, thereby causing uncertainty about the Executive's future employment
with the Company without regard to the Executive's competence or past
contributions, which uncertainty may result in the loss of valuable services of
the Executive to the detriment of the Company and its shareholders, and the
Company and the Executive wish to provide reasonable security to the Executive
as an incentive for the continuation by Executive of his or her current
relationship with the Company.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto mutually
covenant and agree as follows:
1. Definitions.
(A) Cause. "Cause" for termination by the Company of the Executive's
employment after a Change of Control of the Company shall, for purposes of this
Agreement, be limited to (i) the Executive's intentionally engaging in conduct
not in good faith which has caused demonstrable and serious financial injury to
the Company, all of which shall be evidenced by a determination in a binding and
final judgment, order or decree of a court or administrative agency of competent
jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an
action, suit or proceeding, whether civil, criminal, administrative or
investigative; (ii) conviction of a felony (as evidenced by binding and final
judgment, order or decree of a court of competent jurisdiction, in effect after
exhaustion of all rights of appeal) which substantially impairs the Executive's
ability to perform his duties or responsibilities; and (iii) continuing willful
and unreasonable refusal by the
<PAGE>
Executive to perform the Executive's duties or responsibilities (unless such
duties or responsibilities have been significantly changed without the
Executive's consent).
(B) Change of Control. The term "Change of Control" means an event
which shall be deemed to have occurred if:
(i) any "person" as such term is used in Section 13(d) and 14(d) of
the Securities Exchange Act of 1934 (the "Exchange Act") (other than the
Company, any trustee or other fiduciary holding securities under any
employee benefit plan of the Company, or any company owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 40% or
more of the combined voting power of the Company's then outstanding
securities;
during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board, and any new director (other
than a director designated by a person who has entered into an agreement
with the Company to effect a transaction described in clause (iii) or (iv)
herein) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at least a
majority thereof;
the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation; provided, however, that a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no "person" (as hereinabove defined)
acquires more than 25% of the combined voting power of the Company's then
outstanding securities shall not constitute a Change of Control; or
the stockholders of the Company approve a plan of
<PAGE>
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of, or the Company sells or disposes of, all or
substantially all of the Company's assets or all or substantially all of
the assets of the Company acquired for or used in the electric utility
business of the Company, or any such sale or disposition is effected
through condemnation proceedings.
The Chief Legal Officer shall notify the parties to this Agreement as to
whether and when a Change of Control has occurred. The preceding sentence shall
not preclude any other party to this Agreement from giving such notice.
(C) Company. Upon the occurrence of any merger or consolidation
described in Section 1(B)(iii) in which the Company is not the surviving entity
and which is not a Change of Control, "Company" shall thereafter for all
purposes hereof be deemed to mean such surviving entity and in such event
"Company" for purposes of Section 1(B)(ii) shall mean Long Island Lighting
Company prior to such event and such surviving entity thereafter.
(D) Notice of Termination. "Notice of Termination" shall mean a
notice delivered by the Company or the Executive, as the case may be, and
stating that the Executive's employment with the Company is terminated and the
reason why such employment is terminated.
(E) Limited Waiver. The waiver by the Company of a violation of any
provisions of this Agreement, whether express or implied, shall not operate or
be construed as a waiver of any subsequent violation of any such provision.
(F) Code. For purposes of this Agreement, the term "Code" means the
Internal Revenue Code of 1986, including any amendments thereto or successor tax
codes thereof. References to any section of the Code shall include any amended
or successor section of comparable import.
(G) Covered Termination. For purposes of this Agreement, the term
"Covered Termination" means any termination of the Executive's employment by the
Company, if the Termination Date is any date prior to the end of the Employment
Period and, if such termination is by the Executive, for a Good Reason as
defined below.
(H) Employment Period. For purposes of this Agreement, the term
"Employment Period" means a period commencing on the date of a Change of Control
of the Company, and ending at 11:59 p.m. Eastern Time on the third anniversary
of such date.
<PAGE>
(I) Good Reason. For purposes of this Agreement, the Executive shall
have a "Good Reason" for termination of employment after a Change of Control of
the Company in the event of significant adverse change, without the Executive's
written consent, in the Executive's status with the Company from such status in
effect immediately prior to the Change of Control of the Company.
(J) Person. For purposes of this Agreement, the term "Person" shall
mean any individual, firm, partnership, corporation or other entity, including
any successor (by merger or otherwise) of such entity, or a group of any of the
foregoing acting in concert.
(K) Termination Date.
(i) For purposes of this Agreement, the term "Termination Date"
means (a) if the Executive's employment is terminated by the Executive's
death, the date of death; (b) if the Executive's employment is terminated
by reason of voluntary early retirement, as agreed in writing by the
Company and the Executive, the date of such early retirement which is set
forth in such written agreement; (c) if the Executive's employment is
terminated for purposes of this Agreement by reason of disability, as
defined in the Retirement Income Plan of the Company (as in effect on the
date hereof), the earlier of thirty days after the Notice of Termination
is given or one day prior to the end of the Employment Period; (d) if the
Executive's employment is terminated by the Company (other than by reason
of disability) or by the Executive for Good Reason, the earlier of thirty
days after the Notice of Termination is given or one day prior to the end
of the Employment Period, except that if the Notice of Termination is
given on or prior to the third anniversary of the date of the Change of
Control of the Company, the Termination Date shall be deemed to have
occurred no later than the third anniversary of the date of the Change of
Control of the Company. Notwithstanding the foregoing:
If the party receiving the Notice of Termination notifies the other
party that a dispute exists concerning the termination and it is finally
determined that the reason asserted in such Notice of Termination did not
exist, then (a) if such Notice was delivered by the Executive, the
Executive will be deemed to have voluntarily terminated his employment and
(b) if delivered by the Company, the Company will be deemed to have
terminated the Executive other than by reason of death or disability.
<PAGE>
2. Termination or Cancellation Prior to Change of Control. The
Company and the Executive shall each retain the right to terminate the
employment of the Executive at any time prior to a Change of Control of the
Company. In the event (A) the Executive's employment is terminated prior to a
Change of Control of the Company, or (B) no Change of Control of the Company
occurs prior to December 31, 1999, this Agreement shall be terminated and
canceled and of no further force and effect, and any and all rights and
obligations of the parties hereunder shall cease.
3. Benefits. If there is a Covered Termination, the
Executive shall be entitled to the following benefits:
(A) Accrued Benefits. The Executive shall be paid the amount of the
Executive's Accrued Benefits. For purposes of this Agreement, the Executive's
"Accrued Benefits" shall include the following amounts, payable as described
herein: (i) all base salary, and accrued vacation pay, for the time period
ending with the Termination Date; (ii) reimbursement for any and all monies or
other reimbursable costs advanced in connection with the Executive's employment
for reasonable and necessary expenses incurred by the Executive on behalf of the
Company for the time period ending with the Termination Date; (iii) any and all
other cash earned through the Termination Date and deferred at the election of
the Executive or pursuant to any deferred compensation plan then in effect, and
any increments thereon as determined under such plan; and (iv) a lump sum
payment of the bonus or incentive compensation otherwise payable to the
Executive with respect to the year in which termination occurs, or for the prior
year, under all bonus or incentive compensation plans in which the Executive is
a participant. Payment of Accrued Benefits shall be made promptly in accordance
with the Company's prevailing practice.
(B) Welfare Benefits.
(i) Until the third anniversary of the date of the Covered
Termination, the Executive shall continue to be covered, at the expense of the
Company, by the same or equivalent welfare benefits, including life insurance,
hospitalization, medical and dental coverage and disability benefits, as were
provided to the Executive immediately prior to the date of the Change of
Control.
In the case of benefits of a character described in Section
4980B of the Code, the Company shall reimburse the Executive for the cost of
coverage for such benefits until such third anniversary of the date of the
Covered Termination (which may be effected by paying the applicable
<PAGE>
premium on behalf of the Executive and reporting it as income of the Executive
for federal and other applicable income tax purposes). The amount of such
payment shall be grossed up so that the net effect of such payment by the
Company, after giving effect to federal, state and local income taxes on
payments under this subdivision (ii), shall be the same as if the Company had
provided such coverage fully at its own expense as described in subdivision (i)
of this Section (B).
(C) Leased Automobile. For a period of 90 days from the date of a
Covered Termination, the Company shall continue to make available to the
Executive the leased automobile being provided for the Executive by the Company
at the date of the Change of Control (or in the case of a successor automobile,
such automobile) on the same basis and at the same cost to the Executive, if
any, as such automobile is provided on the Termination Date.
(D) Severance Payment. The Executive will be entitled to cash
compensation equal to three (3) years pay, calculated as described below,
payable in equal monthly installments. The aggregate cash compensation will be
calculated as the greater of three (3) times (i) the Executive's current rate of
base salary at the Termination Date or (ii) the Executive's highest annual rate
of base salary within one (1) year prior to the Change of Control. Cash
compensation paid pursuant to this provision shall be subject to appropriate
payroll deductions.
(E) Supplemental Death and Retirement Benefit Plan.
(i) An executive whose employment is terminated for any reason after
a Change of Control and who is not vested at the time of such termination
in the post-retirement benefits provided under the Supplemental Death and
Retirement Benefits Plan (SD&RB) shall become vested as of the date of a
Change of Control in the following percentage of such benefits.
The percentage referred to in subdivision (i) of this Section is the
percentage determined by multiplying 100 percent by a fraction, the
numerator of which is the Executive's period of service at the Executive's
Termination Date computed to the nearest whole month and then increased by
36 months, and the denominator of which is the years of service, or
partial years of service, computed to the nearest whole month, which the
Executive would have had at the first day of the month in which the
Executive's 65th birthday falls (but not greater than 100 percent), had
the Executive been continuously employed until such date. The percentage
so determined shall be multiplied by the number
<PAGE>
of the Participant's Units of Participation in the SD&RB at the date of
any Change of Control to determine the Units available to the Participant
at the Termination Date and the provisions of the SD&RB shall be deemed to
be amended to the full extent necessary to give effect to the provisions
of this Section 3(E).
The percentage of the life insurance or annuity benefit provided
under the SD&RB for each Unit, or fraction thereof, shall become payable
at the end of the period described in (A) above during which the
pre-retirement death benefit provided under the SD&RB is continued.
If the Executive elects any annuity benefit provided under the
SD&RB, such benefit shall be elected within 90 days of the Termination
Date. With respect to the calculation of the amount of any annuity benefit
payable to the Executive under the SD&RB, the actuarial equivalent of the
normal form of benefit provided under the SD&RB shall be computed by
adding 36 months to the Executive's attained age, and with no reduction
for commencement before age 60 (determined after such addition), and a
reduction of four percent (4%) for each full year that the Executive is
under age 60 (determined after such addition). In addition to the options
available under the SD&RB, the Executive may elect to receive a lump sum
payment of the actuarial equivalent of any annuity option provided under
the SD&RB. Any such lump sum payment shall be determined by utilizing an
actuarial factor of 110.16 per $1 of monthly income as of the Termination
Date. The amount determined as of the Termination Date, whether in a lump
sum or annuity form, shall be actuarially increased to reflect the
interval between the Termination Date and the date of payment, based on
the rate of interest announced by Morgan Guaranty Trust Company of New
York from time to time as its prime or base lending rate between the
Termination Date and the payment date.
(F) Tax Gross-Up.
(i) In the event that the Executive becomes entitled to payments in
connection with a Change in Control or his termination of employment (the
"Payments"), if any of the Payments will be subject to the tax imposed by
Section 4999 of the Code (or any similar tax that may hereafter be
imposed) (the "Excise Tax"), the Company shall pay to Executive an
additional amount (the "Gross-Up Payment") such that the net amount
retained by him, after deduction of any Excise Tax on the Payments and any
federal, state and local income tax and Excise Tax upon the payment
provided for by
<PAGE>
this paragraph, shall be equal to the Payments. For purposes of
determining whether any of the Payments will be subject to the Excise Tax
and the amount of such Excise Tax, (a) any other payments or benefits
received or to be received by Executive in connection with a Change of
Control or his termination of employment (whether pursuant to the terms of
this Agreement or any plan, arrangement or agreement with the Company or
any person whose actions result in a Change of Control or any person
affiliated with the Company or such person) shall be treated as "parachute
payments" within the meaning of Section 280G(b)(2) of the Code, and all
"excess parachute payments" within the meaning of Section 280G(b)(1) shall
be treated as subject to the Excise Tax, unless in the opinion of tax
counsel selected by the Company's independent auditors, and consented to
in writing by the Executive, which consent shall not be unreasonably
withheld, such other payments or benefits (in whole or in part) do not
constitute parachute payments, or such excess parachute payments (in whole
or in part) represent reasonable compensation for services actually
rendered before the date of the change within the meaning of Section
280G(b)(4) of the Code in excess of the base amount within the meaning of
Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise
Tax, (b) the amount of the Payments which shall be treated as subject to
the Excise Tax shall be equal to the lesser of (1) the total amount of the
Payments or (2) the amount of excess parachute payments within the meaning
of Section 280G(b)(1) (after applying clause (a), above), and (c) the
value of any non-cash benefits or any deferred payment or benefit shall be
determined by the Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay federal, state and local income taxes at
the highest marginal rate of federal, state and local income taxation in
the calendar year in which the Gross-Up Payment is to be made. In the
event that the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder at the time of termination of
Executive's employment, he shall repay to the Company at the time that the
amount of such reduction in Excise Tax is finally determined the portion
of the Gross-Up Payment attributable to such reduction (plus the portion
of the Gross-Up Payment attributable to the Excise Tax and federal, state
and local income tax imposed on the Gross-Up Payment being repaid by
Executive if such repayment results in a reduction in Excise Tax and/or a
federal, state and local tax deduction) plus interest on the
<PAGE>
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code, applied by treating the period between initial payment of the
Gross-Up Payment and the repayment in respect thereof as the term of the
debt instrument referred to in section 1274(d)(1)(A) of the Code. In the
event that the Excise Tax is determined to exceed the amount taken into
account hereunder at the time of the termination of Executive's employment
(including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess (plus
any interest payable with respect to such excess) at the time that the
amount of such excess is finally determined.
A Gross-Up Payment shall be made not later than the fifth day, or as
soon thereafter as the Company in good faith deems practicable, following
the date Executive becomes subject to payment of excise tax; provided,
however, that if the amounts of such payment cannot be finally determined
on or before such day, the Company shall pay to Executive on such day an
estimate, as determined in good faith by the Company, of the minimum
amount of such payments and shall pay the remainder of such payment
(together with interest at the rate provided under Section 1274(b)(2)(B)
of the Code) as soon as the amount can be determined but no later than the
thirtieth day after the date Executive becomes subject to the payment of
excise tax. In the event the amount of the estimated payment exceeds the
amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to Executive, payable on the fifth day
after demand by the Company (together with interest at the rate provided
in Section 1274(b)(2)(B) of the Code).
4. Further Obligations of the Executive.
(A) Confidentiality. The Executive agrees that, the Executive shall
hold in confidence and not directly or indirectly disclose or use or copy or
make lists of any confidential information or proprietary data of the Company,
except to the extent authorized in writing pursuant to authorization by the
Board of Directors of the Company or required by any court or administrative
agency, other than to an employee of the Company or a person to whom disclosure
is reasonably necessary or appropriate in connection with the performance by the
Executive of duties as an executive of the Company. Confidential information
shall not include any information known generally to the public or any
information of a type not otherwise considered confidential by persons engaged
in the same business or a
<PAGE>
business similar to that of the Company. All records, files, documents and
materials, or copies thereof, relating to the business of the Company which the
Executive shall prepare, or use, or come into contact with, shall be and remain
the sole property of the Company and shall be promptly returned to the Company
upon termination of employment with the Company.
5. Expenses and Interest. If, after a Change in Control of the
Company, (A) a dispute arises with respect to the enforcement of the Executive's
rights under this Agreement or (B) any legal or arbitration proceeding shall be
brought to enforce or interpret any provision contained herein or to recover
damages for breach hereof, the Executive shall recover from the Company any
reasonable attorneys' fees and necessary costs and disbursements, including
without limitation expert witness fees, incurred as a result of such dispute,
legal or arbitration proceeding ("Expenses"), and prejudgment interest on any
money judgment or arbitration award obtained by the Executive calculated at the
rate of interest announced by Morgan Guaranty Trust Company of New York from
time to time as its prime or base lending rate from the date that payments to
him should have been made under this Agreement. Within ten days after the
Executive's written request therefor (which, without limitation, may be made
periodically or from time to time based on the date or dates at which the
Executive is billed for services and related expenses which are reimbursable as
"Expenses" hereunder), the Company shall pay to the Executive, or such other
person or entity as the Executive may designate in writing to the Company, the
Executive's reasonable Expenses in advance of the final disposition or
conclusion of any such dispute, legal or arbitration proceeding.
6. Payment Obligations Absolute. The Company's obligation during and
after the Employment Period to pay the Executive the amounts and to make the
benefit and other arrangements provided herein shall be absolute and
unconditional and shall not be affected by any circumstances, including, without
limitation, any setoff, counterclaim, recoupment, defense or other right which
the Company may have against him or anyone else. All amounts payable by the
Company hereunder shall be paid without notice or demand. Each and every payment
made hereunder by the Company shall be final, and the Company will not seek to
recover all or any part of such payment from the Executive, or from whomsoever
may be entitled thereto, for any reason whatsoever.
<PAGE>
7. Successors.
(A) If the Company sells, assigns or transfers all or substantially
all of its business and assets to any Person or if the Company merges into or
consolidates or otherwise combines (where the Company does not survive such
combination) with any Person (any such event, a "Sale of Business"), then the
Company shall assign all of its right, title and interest in this Agreement as
of the date of such event to such Person, and the Company shall cause such
Person, by written agreement in form and substance reasonably satisfactory to
the Executive, to expressly assume and agree to perform from and after the date
of such assignment all of the terms, conditions and provisions imposed by this
Agreement upon the Company. In case of such assignment by the Company and of
assumption and agreement by such Person, as used in this Agreement, "Company"
shall thereafter mean such Person which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law, and this Agreement shall
inure to the benefit of, and be enforceable by, such Person. The Executive
shall, in his discretion, be entitled to proceed against any or all of such
Persons, any Person which theretofore was such a successor to the Company (as
defined in the first paragraph of this Agreement) and the Company (as so
defined) in any action to enforce any rights of the Executive hereunder. Except
as provided in this Subsection, this Agreement shall not be assignable by the
Company. This Agreement shall not be terminated by the voluntary or involuntary
dissolution of the Company.
(B) This Agreement and all rights of the Executive shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, heirs and beneficiaries. All amounts
payable to the Executive under this Agreement, if the Executive had lived shall
be paid, in the event of the Executive's death, to the Executive's estate, heirs
and representatives; provided, however, that the foregoing shall not be
construed to modify any terms of any benefit plan of the Company or of any
agreement or arrangement of the Company with respect to benefits, as such terms
are in effect on the date of the Change of Control of the Company, that
expressly govern benefits under such plan, agreement or arrangement in the event
of the Executive's death.
8. Severability. The provisions of this Agreement shall be regarded
as divisible, and if any of said provisions or any part hereto are declared
invalid or unenforceable by a court of competent jurisdiction, the validity and
enforceability of the remainder of such provisions or parts hereof and the
applicability thereof shall not be affected thereby.
<PAGE>
9. Amendment. This Agreement may not be amended or
modified at any time except by written instrument executed by the
Company and the Executive.
10. Withholding. The Company shall be entitled to withhold from
amounts to be paid to the Executive hereunder any federal, state or local
withholding or other taxes or charges which it is from time to time required to
withhold; provided, that the amount so withheld shall not exceed the minimum
amount required to be withheld by law. The Company shall be entitled to rely on
an opinion of nationally recognized tax counsel if any question as to the amount
or requirement of any such withholding shall arise.
11. Governing Law; Resolution of Disputes. This Agreement and the
rights and obligations hereunder shall be governed and construed in accordance
with the laws of the State of New York. Any dispute arising out of this
Agreement shall, at the Executive's election, be determined by arbitration under
the rules of the American Arbitration Association then in effect (in which case
both parties shall be bound by the arbitration award) or by litigation. Whether
the dispute is to be settled by arbitration or litigation, the venue for the
arbitration or litigation shall be New York or, at the Executive's election, if
the Executive is no longer residing or working in the New York metropolitan
area, in the judicial district encompassing the city in which the Executive
resides; provided, that, if the Executive is not then residing in the United
States, the election of the Executive with respect to such venue shall be either
in New York, New York or in the judicial district encompassing that city in the
United States among the thirty cities having the largest population (as
determined by the most recent United States Census data available at the
Termination Date) which is closest to the Executive's residence. The parties
consent to personal jurisdiction in each trial court in the selected venue
having subject matter jurisdiction notwithstanding their residence or situs, and
each party irrevocably consents to service of process in the manner provided
hereunder for the giving of notices.
12. Payment from Trust Funds. The Company has established various
Trust Funds in order to assure payment by the Company of obligations under its
various benefit programs and pursuant to this Agreement. In the event that the
Company or its successors or assigns shall not make a payment required by this
Agreement or pursuant to any employment arrangement or agreement with respect to
which a Trust has been established, the Trustee of such Trust, consistent with
the terms and conditions of the Trust, shall make the payment required of the
Company without any need to inquire into the obligations of the Executive to the
Company under this Agreement.
<PAGE>
13. Notices. All notices hereunder shall be in writing and deemed
properly given if delivered by hand and receipted or if mailed by registered
mail, return receipt requested. Notices to the Company shall be directed to the
Corporate Secretary at the Company's headquarters offices. Notices to the
Executive shall be directed to his last known home address.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
dated this 1st day of March, 1997.
LONG ISLAND LIGHTING COMPANY
By: /s/ William J Catacosinos
------------------------------
William J. Catacosinos
/s/ Michael E. Bray
-------------------
Michael E. Bray
<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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,699,957
<OTHER-PROPERTY-AND-INVEST> 18,870
<TOTAL-CURRENT-ASSETS> 810,145
<TOTAL-DEFERRED-CHARGES> 77,656
<OTHER-ASSETS> 7,242,946
<TOTAL-ASSETS> 11,849,574
<COMMON> 605,022
<CAPITAL-SURPLUS-PAID-IN> 1,082,276
<RETAINED-EARNINGS> 861,751
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,549,049
638,500
63,598
<LONG-TERM-DEBT-NET> 4,471,675
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,000
1,050
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 4,124,702
<TOT-CAPITALIZATION-AND-LIAB> 11,849,574
<GROSS-OPERATING-REVENUE> 851,182
<INCOME-TAX-EXPENSE> 57,002
<OTHER-OPERATING-EXPENSES> 604,179
<TOTAL-OPERATING-EXPENSES> 661,181
<OPERATING-INCOME-LOSS> 190,001
<OTHER-INCOME-NET> 3,574
<INCOME-BEFORE-INTEREST-EXPEN> 193,575
<TOTAL-INTEREST-EXPENSE> 105,878
<NET-INCOME> 87,697
12,969
<EARNINGS-AVAILABLE-FOR-COMM> 74,728
<COMMON-STOCK-DIVIDENDS> 53,748
<TOTAL-INTEREST-ON-BONDS> 90,168
<CASH-FLOW-OPERATIONS> 159,567
<EPS-PRIMARY> $0.62
<EPS-DILUTED> $0.62
</TABLE>
