SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 16 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-3571
LONG ISLAND LIGHTING COMPANY d/b/a LIPA
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-1019782
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 222-77000
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 $1 par value,
outstanding on August 16, 1999, was 1.
<PAGE>
Long Island Lighting Company d/b/a LIPA
Page No.
--------
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Statements of Operations 2-3
Balance Sheet 4-5
Statement of Cash Flows 6
Notes to Financial Statements 13
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-21
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 21
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 2 - Changes in Securities and Use of Proceeds 22
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>
2
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements
Long Island Lighting Company d/b/a LIPA (a
wholly owned subsidiary of the Long Island Power
Authority)
Statement of Operations
(Unaudited)
(Thousands of Dollars - Except Share Information)
<TABLE>
<CAPTION>
LIPA LILCO
-------------------------------- ----------------
Three Months
Ended May 29, 1998 to April 1, 1998 to
June 30, 1999 June 30, 1998 May 28, 1998
------------- ------------- ------------
<S> <C> <C> <C>
Revenue - Electric $ 509,090 $ 202,739 $ 330,011
Expenses
Operations - fuel and purchased power 170,779 66,787 91,762
Operations and maintenance 166,914 34,683 68,993
Depreciation and amortization 52,832 17,719 22,986
Base financial component amortization - - 16,014
Rate moderation component amortization - - (39,574)
Regulatory liability component amortization - - (14,048)
Other regulatory amortization - - 14,694
Operating taxes 61,331 31,049 60,885
Customer rebates 5 - -
Federal income tax - current - - (79,081)
Federal income tax - deferred and other - - 1,219
--------- --------- ------------
Total Expenses 451,861 150,238 143,850
--------- --------- ------------
Operating Income 57,229 52,501 186,161
--------- --------- ------------
Other Income and (Deductions)
Other income and deductions, net 2,594 5,396 (28,581)
Allowance for other funds used during construction - - 374
Federal income tax - current - - (67,259)
Federal income tax - deferred and other - - (22,094)
--------- --------- ------------
Total Other Income and (Deductions) 2,594 5,396 (117,560)
--------- --------- ------------
Income from Continuing Operations
Before Interest Charges 59,823 57,897 68,601
--------- --------- ------------
Interest Charges and (Credits)
Interest on long-term debt, net 1,054 14,082 56,258
Interest on advances from and note payable
to the Authority 72,160 20,563 -
Other interest 9,540 906 9,800
Allowance for borrowed funds used during construction (632) (163) (540)
--------- --------- ------------
Total Interest Charges 82,122 35,388 65,518
--------- --------- ------------
Income (loss) from continuing operations (22,299) 22,509 3,083
Loss from discontinued operations net of
taxes of zero, zero and ($1,946), respectively - - (4,480)
--------- --------- ------------
Net Income (Loss) (22,299) 22,509 (1,397)
Preferred stock dividend requirements - - 8,037
--------- --------- ------------
Earnings (Loss) for Common Stock $ (22,299) $ 22,509 $ (9,434)
========= ========= ============
Average Common Shares Outstanding 1 1 121,864,647
Basic and Diluted Earnings per Common Share N/A N/A $ (0.08)
Dividends Declared per Common Share N/A N/A $ 0.30
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
3
Long Island Lighting Company d/b/a LIPA (a
wholly owned subsidiary of the Long Island Power
Authority)
Statement of Operations
(Unaudited)
(Thousands of Dollars - Except Share Information)
<TABLE>
<CAPTION>
LIPA LILCO
-------------------------------- ------------------
Six Months
Ended May 29, 1998 to January 1, 1998 to
June 30, 1999 June 30, 1998 May 28, 1998
------------- ------------- ------------
<S> <C> <C> <C>
Revenue - Electric $ 984,698 $ 202,739 $ 885,693
Expenses
Operations - fuel and purchased power 324,892 66,787 257,786
Operations and maintenance 334,746 34,683 169,076
Depreciation and amortization 105,053 17,719 56,490
Base financial component amortization - - 41,257
Rate moderation component amortization - - (82,268)
Regulatory liability component amortization - - (36,191)
Other regulatory amortization - - 14,418
Operating taxes 122,454 31,049 153,288
Customer rebates 173 - -
Federal income tax - current - - (75,004)
Federal income tax - deferred and other - - 44,554
--------- --------- -------------
Total Expenses 887,318 150,238 543,406
--------- --------- -------------
Operating Income 97,380 52,501 342,287
--------- --------- -------------
Other Income and (Deductions)
Other income and deductions, net 3,565 5,396 (23,297)
Allowance for other funds used during construction - - 948
Federal income tax - current - - (67,543)
Federal income tax - deferred and other - - (22,442)
--------- --------- -------------
Total Other Income and (Deductions) 3,565 5,396 (112,334)
--------- --------- -------------
Income from Continuing Operations
Before Interest Charges 100,945 57,897 229,953
--------- --------- -------------
Interest Charges and (Credits)
Interest on long-term debt, net 2,201 14,082 143,989
Interest on advances from and note payable to
the Authority 143,540 20,563 -
Other interest 16,629 906 23,181
Allowance for borrowed funds used during construction (1,171) (163) (1,625)
--------- --------- -------------
Total Interest Charges 161,199 35,388 165,545
--------- --------- -------------
Income (loss) from continuing operations (60,254) 22,509 64,408
Income from discontinued operations net of
taxes of zero, zero and ($20,915), respectively - - 50,134
--------- --------- -------------
Net Income (Loss) (60,254) 22,509 114,542
Preferred stock dividend requirements - - 20,984
--------- --------- -------------
Earnings (Loss) for Common Stock $ (60,254) $ 22,509 $ 93,558
========= ========= =============
Average Common Shares Outstanding 1 1 121,534,827
Basic and Diluted Earnings per Common Share N/A N/A $ 0.77
Dividends Declared per Common Share N/A N/A $ 0.74
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
4
Long Island Lighting Company d/b/a LIPA (a
wholly owned subsidiary of the Long Island Power
Authority)
Balance Sheet
(Thousands of Dollars - Except Share Information)
June 30, December 31,
1999 1998
(unaudited)
----------- -----------
Assets
Utility Plant
Generation - nuclear $ 663,577 $ 662,893
Transmission and distribution 1,430,907 1,385,099
Common 3,166 3,827
Construction work in progress 49,627 52,897
Nuclear fuel in process and in reactor 9,160 17,053
---------- ----------
2,156,437 2,121,769
Less- Accumulated depreciation and amortization 82,087 50,287
---------- ----------
Total Net Utility Plant 2,074,350 2,071,482
---------- ----------
Current Assets
Customer accounts receivable (less allowance for
doubtful accounts of $17,500 and $20,211,
respectively) 122,918 119,161
Accrued unbilled revenues 91,474 78,414
Other accounts receivable 8,332 10,096
Promissory note receivable 1,000 398,000
Prepayments and other current assets 34,229 28,583
---------- ----------
Total Current Assets 257,953 634,254
---------- ----------
Promissory Note Receivable 646,902 646,902
---------- ----------
Designated Funds 33,147 194,972
---------- ----------
Nonutility Property and Other Investments 19,821 19,410
---------- ----------
Deferred Charges 81,555 78,507
---------- ----------
Acquisition Adjustment (net of accumulated
amortization of $127,411 and $68,766,
respectively) 3,968,245 4,026,956
---------- ----------
Total Assets $7,081,973 $7,672,483
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
5
Long Island Lighting Company d/b/a LIPA (a
wholly owned subsidiary of the Long Island Power
Authority)
Balance Sheet
(Thousands of Dollars)
June 30, December 31,
1999 1998
(unaudited)
----------- ------------
Capitalization and Liabilities
Capitalization
Long-term debt $ 647,784 $ 778,075
Note Payable - the Authority 4,390,409 5,355,085
Due to the Authority 1,411,800 855,684
Accumulated deficit (140,235) (79,981)
----------- -----------
Total Capitalization 6,309,758 6,908,863
----------- -----------
Current Liabilities
Current maturities of long-term debt 398,278 398,000
Due to the Authority 150,895 70,880
Due to KeySpan 23,613 75,085
Accounts payable and accrued expenses 34,533 35,921
Accrued taxes 34,815 79,021
Accrued interest 30,249 29,851
Customer deposits 22,961 23,205
----------- -----------
Total Current Liabilities 695,344 711,963
----------- -----------
Deferred Credits 62,029 34,059
----------- -----------
Claims and Damages 14,842 17,598
----------- -----------
Commitments and Contingencies
----------- -----------
Total Capitalization and Liabilities $ 7,081,973 $ 7,672,483
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
6
Long Island Lighting Company d/b/a LIPA (a
wholly owned subsidiary of the Long Island Power
Authority)
Statement of Cash Flows
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
LIPA LILCO
-------------------------------- ------------------
Six Months
Ended May 29, 1998 to January 1, 1998 to
June 30, 1999 June 30, 1998 May 28, 1998
------------- ------------- ------------
<S> <C> <C> <C>
Operating Activities
Net (Loss) Income $ (60,254) $ 22,509 $ 114,542
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities
Depreciation and amortization 105,053 17,719 68,326
Base financial component amortization - - 41,257
Rate moderation component amortization - - (82,268)
Regulatory liability component amortization - - (26,977)
Provision for fuel and purchased cost adjustment 26,603 - -
Other regulatory amortization - - 18,208
Rate moderation component carrying charges - - (12,200)
Class Settlement - - 5,226
Amortization of cost of issuing and redeeming securities 3,949 351 12,903
Federal income tax - deferred and other - - (12,487)
Allowance for other funds used during construction - - 2,390
Pensions and Other Post Retirement Benefits - - 23,066
1989 settlement credits amortization - - (9,213)
Gas Cost Adjustment - - 4,119
Other 11,401 (1,273) 60,433
Changes in operating assets and liabilities
Accounts receivable, net (1,993) (2,370) 12,688
Accrued unbilled revenues (13,060) (12,846) 68,233
Materials and supplies, fuel oil and gas in storage - - 39,386
Accounts payable and accrued expenses (1,388) - (39,007)
Due to KeySpan (51,472) (36,372) -
Pensions and other post retirement benefits - - (250,000)
Accrued taxes (44,206) 2,352 12,615
Accrued interest 398 19,820 (52,197)
Class Settlement - - (19,156)
Special deposits - - 37,498
Other (20,425) 7,452 (67,969)
---------- ----------- ----------
Net Cash Provided by (Used in) Operating Activities (45,394) 17,342 (50,584)
---------- ----------- ----------
Investing Activities
Shoreham post settlement costs - - (16,271)
Merger costs, net of cash transferred - (62,159) -
Other - - (1,677)
---------- ----------- ----------
Net Cash Used in Investing Activities - (62,159) (17,948)
---------- ----------- ----------
Capital and Related Financing Activities
Construction and nuclear fuel expenditures (49,277) (8,793) (122,229)
Proceeds from promissory note receivable 397,000 - -
Proceeds from sale of common stock - - 8,738
Acquisition of common stock - (2,497,500) -
Issuance of notes payable - - 350,000
Net proceeds from Authority loan 636,131 4,949,528 -
Repayment of note payable-Authority (964,676) (180,476) -
Redemption of long-term debt (135,609) (1,186,000) (100,000)
Issuance of preferred stock - - 75,000
Redemption of preferred stock - (221,600) (116,390)
Bond issuance costs - (48,627) -
Preferred stock dividends paid - - (18,659)
Common stock dividends paid - - (108,179)
Other - (3,989) (3,080)
---------- ----------- ----------
Net Cash Provided by (Used in) Capital
and Related Financing Activities (116,431) 802,543 (34,799)
---------- ----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (161,825) 757,726 (103,331)
Cash and cash equivalents at beginning of period 194,972 * 75,000 179,995
---------- ----------- ----------
Cash and cash equivalents at end of period $ 33,147 * $ 832,726 * $ 76,664
========== =========== ==========
</TABLE>
* Cash and cash equivalents include designated funds
The accompanying notes are an integral part of these financial statements.
<PAGE>
7
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Six Months Ended June 30, 1999
(Unaudited)
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Note 1. Basis of Presentation
As used herein, the term "LILCO" refers to the Long Island Lighting
Company, the publicly owned gas and electric utility company as it
existed prior to the LIPA/LILCO Merger, as described in Note 2, and
the term "LIPA" refers to that company as it exists after the
LIPA/LILCO Merger as a wholly-owned electric utility subsidiary
company of the Long Island Power Authority (the "Authority"), doing
business as LIPA.
The Authority was established as a corporate municipal instrumentality
of the State of New York, constituting a political subdivision of the
State, created by Chapter 517 of the Laws of 1986 (the "LIPA Act"). As
such, it is a component unit of the State and is included in the
State's annual financial statements.
On April 11, 1997, LILCO changed its year-end from December 31 to
March 31. Subsequent to the LIPA/LILCO Merger, LIPA adopted a calendar
year-end. Accordingly, unless otherwise indicated, references to June
30, 1999 and 1998 represent the three or six month periods ended June
30, 1999 and 1998, respectively. The financial information as of June
30, 1999, and for the three and six months ended June 30, 1999 and
1998 is 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 periods presented. Operating results for any of the
periods presented are not necessarily indicative of results to be
expected for the entire year due to the seasonal nature of the
electric business.
These Notes to Financial Statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three and six months ended June 30, 1999
and LIPA's Annual Report on Form 10-K for the nine months ended
December 31, 1998. In addition, please refer to the discussion
following in Note 2 regarding the change in control of LILCO on May
28, 1998.
Recent Accounting Pronouncements
In July 1999, the Financial Accounting Standards Board issued
Financial Accounting Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferred as of the Effective Date
of FAS 133," which deferred the effective date of Financial Accounting
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," from fiscal years beginning after June 15, 1999 to fiscal
years beginning after June 15, 2000. Accordingly, LIPA will defer
their adoption until the new effective date. LIPA does not expect a
material effect on the financial position, earnings or cash flows
resulting from the adoption of this statement.
Note 2. Merger/Change in Control
On May 28, 1998, LIPA Acquisition Corp., a wholly-owned subsidiary of
the Authority, was merged with and into LILCO (the "Merger") pursuant
to an Agreement and Plan of Merger
<PAGE>
8
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Six Months Ended June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
dated as of June 26, 1997, by and among LILCO, MarketSpan Corporation
(formerly known as BL Holding Corp., and currently known as KeySpan
Energy, "KeySpan"), the Authority and LIPA Acquisition Corp., (the
"Merger Agreement").
Pursuant to the Merger Agreement, immediately prior to the Merger, all
of the assets and liabilities of LILCO related to the conduct of its
gas distribution business and its non-nuclear electric generation
business, and all common assets used by LILCO in the operation and
management of its electric transmission and distribution business and
its gas distribution business and/or its non-nuclear electric
generation business (the "Transferred Assets") were sold to KeySpan.
The consideration received by LILCO for the Transferred Assets
consisted of: (i) 3,440,625 shares of the common stock of KeySpan;
(ii) 553,000 shares of the Series B Preferred Stock of KeySpan; and
(iii) 197,000 shares of the Series C Preferred Stock of KeySpan.
The value of the consideration was determined by KeySpan and LILCO to
be equal to the net fair market value of the Transferred Assets. The
transfer of assets and liabilities was effected by a Bill of Sale,
dated as of May 28, 1998, made and executed by LILCO and acknowledged
by KeySpan.
As a result of the Merger, the Authority became the holder of 1 share
of LILCO's common stock, representing 100% of the outstanding voting
securities of LILCO. In addition, KeySpan issued promissory notes to
LIPA of approximately $1.048 billion. The interest rate and timing of
principal and interest payments on the promissory notes from KeySpan
are identical to the terms of certain LILCO indebtedness assumed by
LIPA in the Merger. KeySpan is required to make principal and interest
payments to LIPA thirty days prior to the corresponding payment due
dates, and LIPA then transfers those amounts to debtholders in
accordance with the original debt repayment schedule.
The former holders of LILCO's common stock, primarily individual
public shareowners, became entitled to receive a pro-rata share of:
(i) cash consideration of $2.497 billion; and (ii) 3,440,625 shares of
the common stock of KeySpan, which were received by LILCO in exchange
for the Transferred Assets. Pursuant to the Merger Agreement, the
former holders of LILCO's common stock (other than holders of
dissenting shares) were deemed to have subscribed for additional
shares of the common stock of KeySpan, with an aggregate purchase
price equal to the cash consideration. In order to effect the Merger,
it was necessary to: (i) retire all shares of LILCO's preferred stock,
whether by conversion, redemption or cancellation; and (ii) redeem
certain of LILCO's bonds, at a cost to LIPA of approximately $1.557
billion. The cash consideration required for the Merger was obtained
by the Authority from the proceeds of the issuance and sale of its
Electric System General Revenue Bonds, Series 1998A and Electric
System Subordinated Revenue Bonds, Series 1 through Series 6. The
proceeds from the sale of the bonds were then transferred by the
Authority to LIPA in exchange for a promissory note of approximately
$4.949 billion. As a result of the Merger, there was a change in
control of LILCO which effectively resulted in the creation of a new
reporting entity, LIPA. Accordingly, the accompanying financial
statements for the periods prior to May 28, 1998 are not comparable to
the financial
<PAGE>
9
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Six Months Ended June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
statements presented subsequent to May 28, 1998. Therefore, a black
line has been drawn on the Statements of Operations and the Statement
of Cash Flows to distinguish between LIPA and LILCO balances and
activity.
The remaining assets and liabilities of LILCO acquired by LIPA consist
of: (i) LILCO's electric transmission and distribution system; (ii)
its net investment in Nine Mile Point Nuclear Power Station, Unit 2;
(iii) certain regulatory assets and liabilities associated with its
electric business, (iv) allocated accounts receivable and other assets
and liabilities; and (v) substantially all of its long-term debt.
The financial statements of LIPA include the push down of the
Authority's basis, including costs related to the acquisition of the
assets acquired and liabilities assumed. Because of the manner in
which LIPA's rates and charges will be established by the Authority's
Board of Trustees, the original net book value of the transmission and
distribution and nuclear generation assets acquired in the Merger is
considered to be their fair value. The excess of the acquisition costs
over the fair value of the net assets acquired has been recorded as an
intangible asset titled "acquisition adjustment" and is being
amortized over a 35 year period. The acquisition adjustment
principally arose through the elimination of LILCO's regulatory assets
and liabilities, totaling $6.3 billion, and net deferred federal
income tax liability of approximately $2.4 billion. Therefore, the
amortization of the regulatory assets and liabilities has effectively
been replaced by the amortization of the acquisition adjustment. In
addition, as a wholly-owned subsidiary of the Authority, LIPA is
exempt from Federal, state and local income taxes. Accordingly,
adjustments were made by LIPA on May 28, 1998 to eliminate deferred
tax assets and liabilities. The results of operations for the three
and six months ended June 30, 1999 and for the period May 29, 1998
through June 30, 1998 do not include a provision for income taxes.
Effective May 29, 1998, the Authority contracted with KeySpan, through
certain of its subsidiaries, to provide operations and management
services for LIPA's transmission and distribution system through a
management services agreement ("MSA"). Therefore, LIPA pays KeySpan
directly for their services and KeySpan, in turn, pays the salaries of
their employees. LIPA has no employees, however LIPA is charged a
management fee by the Authority to oversee LIPA's operations of which
the salaries of the Authority's employees is a significant component.
Through a power supply agreement ("PSA"), LIPA contracts for capacity
and, to the extent necessary, energy from the fossil fired generating
plants of KeySpan, formerly owned by LILCO. Energy and fuel are
purchased by KeySpan on LIPA's behalf through an energy management
agreement ("EMA") (collectively, the "Operating Agreements").
The electric transmission and distribution system is located in the
New York Counties of Nassau and Suffolk (with certain limited
exceptions) and a small portion of Queens County known as the
Rockaways. The service area is approximately 1,230 square miles and
the population of the service area is approximately 2.75 million
persons, including approximately 98,500 persons who reside in Queens
County within the City of New York. LIPA receives approximately 49% of
its revenues from residential sales, 48% from sales to commercial and
<PAGE>
10
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Six Months Ended June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
industrial customers, and the balance from sales to other utilities
and public authorities.
Discontinued Operations
The statement of operations of LILCO for the period January 1, 1998
through May 28, 1998 and the period April 1, 1998 through May 28, 1998
have been prepared to present the gas business (as transferred to
KeySpan subsidiaries pursuant to the Merger Agreement) as a
discontinued operation, in accordance with the provisions of
Accounting Principles Board Opinion No. 30.
Income from discontinued operations includes revenue from the gas
business of approximately $351.8 million and $79.9 million for the
period January 1, 1998 through May 28, 1998 and the period April 1,
1998 through May 28, 1998, respectively.
Note 3. Capitalization
On January 4, 1999, LIPA redeemed $102.6 million of the NYSERDA
Electric Facilities Revenue Bonds Series 1993B, 1994A, and 1995A,
which were called for redemption prior to December 31, 1998.
On March 1, 1999, the variable rate bonds listed below were converted
to fixed interest rates of 5.15% on the Pollution Control Revenue
Bonds ("PCRBs"), and 5.3% on the Electric Facilities Revenue Bonds
("EFRBs").
Balances
Interest Subsequent to
Maturity Rate Conversion
-------- ---- ----------
PCRBs
1985 Series A March 1, 2016 Variable $ 58,020
1985 Series B March 1, 2016 Variable 50,000
EFRBs
1993 Series B November 1, 2023 Variable 29,600
1994 Series A October 1, 2024 Variable 2,600
1995 Series A August 1, 2025 Variable 15,200
Also, on March 1, 1999, LIPA redeemed $30.1 million of the NYSERDA
Pollution Control Revenue Bonds, 1985 Series A.
Note 4. Rate Matters
Under current New York law, the Authority is empowered to set rates
for electric service in its service area without being required by law
to obtain the approval of the New York State Public Service Commission
(the "PSC") or any other state regulatory body. However, the Authority
<PAGE>
11
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Six Months Ended June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
has agreed, in connection with the approval of the Merger by the New
York State Public Authorities Control Board (the "PACB"), that it will
not impose any permanent increase, nor extend or reestablish any
portion of a temporary rate increase, in average customer rates over a
12 month period in excess of 2.5% without approval of the PSC,
following a full evidentiary hearing. Another of the PACB conditions
requires that the Authority reduce average rates within LIPA's service
area by no less than 14% over a ten year period commencing on the date
when LIPA began providing electric service, when measured against
LILCO's base rates in effect on July 16, 1997 (excluding the impact of
the proposed Shoreham tax settlement, but adjusted to reflect
emergency conditions and extraordinary unforeseeable events.)
The LIPA Act requires that any bond resolution of the Authority
contain a covenant that it will at all times maintain rates, fees or
charges sufficient to pay the costs of operation and maintenance of
facilities owned or operated by the Authority; payments in lieu of
taxes ("PILOT's"); renewals, replacements and capital additions; the
principal of and interest on any obligations issued pursuant to such
resolution as the same become due and payable, and to establish or
maintain any reserves or other funds or accounts required or
established by or pursuant to the terms of such resolution.
LIPA's rates include the fuel and purchased power cost adjustment
("FPPCA") which adjusts rates to reflect significant changes in the
cost of fuel, purchased power and related costs. The FPPCA is designed
to ensure that LIPA will recover from or return to customers any fuel
costs that fall outside an established base fuel and purchased power
tolerance band. The tolerance band is equal to one percent above and
one percent below LIPA's cost of fuel and purchased power costs for
1999. The tolerance band increases to two percent in 2000 and
continues to increase in one percent increments annually thereafter.
Expenses for fuel and purchased power cost in excess of or below this
level will be recovered from or returned to customers beginning the
following year. Should fuel and purchased power costs increase in
excess of five percent cumulatively over the original base cost, the
FPPCA will recover, from that year forward, all costs in excess of the
original base cost.
LIPA's rates are largely based on LILCO's pre-Merger rate design to
avoid customer confusion and facilitate an efficient transition from
LILCO billing to LIPA billing. In addition, LIPA's rates include the
FPPCA, a PILOT recovery rider, a rider providing for the Shoreham
settlement and a rider providing for the RICO Credits (credits to the
bills of customers as a result of the settlement by LILCO of a RICO
action in connection with the construction and completion of nuclear
generating facilities).
The LIPA Act requires LIPA to make PILOTs for certain New York State
and local revenue taxes which would otherwise have been imposed on
LILCO. The PILOT recovery rider allows for rate adjustments to
accommodate the PILOTs.
<PAGE>
12
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Six Months Ended June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
Note 5. Contingencies
Legal and Environmental Proceedings
Except as discussed below, no significant changes have occurred with
respect to legal and environmental contingencies as discussed in Note
13 of Notes to Financial Statements in LIPA's Annual Report on Form
10-K for the nine months ended December 31, 1998, as filed on March
31, 1999.
With respect to Shoreham Tax Matters, on July 26, 1999, the Appellate
Division, Second Department overruled the lower court's decision and
held that the Authority was not prohibited from enforcing any part of
the judgment relating to real property tax refunds attributable to
over assessments on the Shoreham Plant after the January 15, 1987
effective date of the LIPA Act. LIPA expects that Suffolk County will
seek leave to appeal this decision to the State Court of Appeals
sometime in August 1999.
In July 1992, LILCO and the Authority separately commenced proceedings
in the Supreme Court of the State of New York, County of Suffolk,
against the Assessor and the Board of Assessment Review for the Town
of Brookhaven, New York (the "Assessor") challenging the real property
tax assessment on Shoreham for the 1992-93 tax year. On or about May
1, 1992, the Assessor had tentatively assessed Shoreham in an amount
in excess of $156 million for the 1992-93 tax year. On April 22, 1996,
the two proceedings were consolidated. On May 13, 1999, the Assessor
moved to dismiss the proceedings on procedural grounds. Oral arguments
were held on August 5, 1999. No decision has been rendered by the
court as of the date of this filing.
With respect to the action brought by the County of Suffolk entitled
County of Suffolk v. KeySpan et al., this action was voluntarily
discontinued by plaintiffs without prejudice. The plaintiffs refiled
their claims related to executive compensation in the federal action
entitled County of Suffolk et al. v. Long Island Power Authority which
was filed on September 28, 1998.
With respect to the Sylvester v. Catacosinos et al. action, the judge
adopted the magistrate's recommendation that the complaint be
dismissed with leave to replead for failure to make a demand. All
discovery has been stayed.
With respect to the class action brought against LILCO, LILCO's
Retirement Income Plan and Robert X. Kelleher, the Plan Administrator,
the court on August 13, 1999, approved the settlement agreement.
Note 6. Nine Mile Point Nuclear Power Station, Unit 2 ("NMP2")
In June 1999, two co-tenants of NMP2 representing 57% of the ownership
interest reached an agreement in principle to sell their interests to
a single third party. The remaining co-tenants have 180 days to
exercise their right of first refusal. Such sale is subject to the
approval of, among
<PAGE>
13
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Six Months Ended June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
others, the PSC. At this time, LIPA is unable to determine what
effect, if any, this proposed change in ownership will have on its
operating and financial results. Any such sale, however, will not
affect LIPA's right to receive 18% of the plant's output.
Note 7. Subsequent Events
New York Power Pool Assessment
As a member of the New York Power Pool ("NYPP"), LIPA is required to
maintain generating capacity equal to 118% of its peak load. On July
6, 1999, LIPA set a new peak load of 4,590 MW, for which LIPA was
unable to fully meet the NYPP requirement of 5,416 MW (118% of 4,590
MW). As a result of this deficiency, LIPA is subject to an assessment
by the NYPP of approximately $5 million in July.
Note 8. Reclassifications
Certain prior period amounts have been reclassified in the financial
statements to conform with the current period presentation.
<PAGE>
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 1996. 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 Registrant's
business and financial results could cause actual results to differ
materially from those stated in the forward-looking statements. Those
factors include regulatory rate proceedings, competition, and certain
legal and environmental matters each as discussed herein, in the
Registrant's Annual Report on Form 10-K filed March 31, 1999, for the
nine months ended December 31, 1998, or in other reports filed by the
Registrant with the Securities and Exchange Commission.
General
KeySpan Energy ("KeySpan"), through certain of its subsidiaries
provides operations and management services for LIPA's transmission
and distribution system through a management services agreement
("MSA"). LIPA contracts for capacity and to the extent necessary,
energy from the fossil fuel fired generating plants formerly owned by
Long Island Lighting Company ("LILCO") through a power supply
agreement ("PSA") with KeySpan. Energy is purchased by KeySpan on
LIPA's behalf through an energy management agreement ("EMA"),
(collectively; the "Operating Agreements").
As LIPA is a wholly owned subsidiary of the Authority and not an
investor owned utility, the PSC does not have jurisdiction with
respect to the determination of rates and charges. Rates and charges
for LIPA are approved by the Authority's Board of Trustees. See Note 4
- Rate Matters of Notes to the Financial Statements.
The excess of the acquisition cost over the fair value of the net
assets acquired has been recorded as an intangible asset titled
"acquisition adjustment" and is being amortized over a 35 year period.
The acquisition adjustment principally arose through the elimination
of LILCO's regulatory assets and liabilities, totaling approximately
$6.3 billion, and net deferred Federal income tax liability of
approximately $2.4 billion. Therefore, the amortization of the
regulatory assets and liabilities has effectively been replaced by the
amortization of the acquisition adjustment. Because of the tax exempt
status of LIPA, the results of operations for the three and six months
ended June 30, 1999, and the period May 29, 1998 through June 30,
1998, do not include a provision for income taxes.
Results of Operations
Three and Six Months Ended June 30, 1999 and June 30, 1998
Earnings
The net losses for the three and six month periods ended June 30, 1999
were approximately $22.3 million and $60.3 million, respectively.
These losses were principally due to the seasonal nature of the
business, whereby revenues during these periods are significantly less
than those expected
<PAGE>
15
to be generated during the summer cooling season. This, combined with
the fact that the majority of LIPA's costs (other than fuel, for which
there is a separate rate mechanism, see the FPPCA discussed below) are
either fixed, or charged in accordance with contractual terms
specified by the MSA and the PSA, resulted in a net loss during these
periods.
For the three and six months ended June 30, 1998, earnings were
enhanced as a result of the change in the method of amortizing the
Rate Moderation Component ("RMC") to eliminate the effects of
seasonality on monthly operating income, as more fully discussed in
the section entitled "Rate Moderation Component".
Electric Revenues
The decrease in revenues of approximately $23.6 million and $103.7
million for the three and six months ended June 30, 1999,
respectively, when compared to the same period in 1998, was
principally the result of the rate reduction (approximately 20%), for
virtually all customers, effective May 29, 1998. Partially offsetting
the reduction in revenues was an increase in sales to existing
customers which is attributable to a strong and growing economy and
price elasticity reflecting the effect of LIPA's 20% rate reduction.
In addition, there has been a slight increase in the number of
customers relative to the same period last year.
Fuel and Purchased Power
Fuel and purchased power expense for the three and six months ended
June 30, 1999 and 1998, were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
(in millions) (in millions) (in millions) (in millions)
------------- ------------ ------------- -------------
Oil $ 25 $ 27 $ 67 $ 70
Gas 56 43 76 75
Nuclear 2 2 4 4
Purchased power 76 87 151 176
-------- ------- -------- --------
159 159 298 325
FPPCA 12 - 27 -
-------- ------- -------- --------
Total $ 171 $ 159 $ 325 $ 325
======== ======= ======== ========
Electric Energy Available
The percentage of total electric energy available, by type of fuel,
for electric operations for the three and six months ended June 30,
1999 and 1998 were as follows:
<PAGE>
16
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Mwh = Megawatt hours)
Mwh % Mwh % Mwh % Mwh %
--- - --- - --- - --- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oil 870 19 812 19 2,652 30 2,017 24
Gas 1,944 43 1,512 36 2,729 30 2,357 28
Nuclear 327 7 136 3 771 9 530 6
Purchased 1,414 31 1,738 42 2,828 31 3,499 42
----- --- ----- --- ----- --- ----- ---
Total 4,555 100 4,198 100 8,980 100 8,403 100
===== === ===== === ===== === ===== ===
</TABLE>
Variations in the fuel mix used to satisfy energy requirements on
LIPA's system are primarily the result of changes in the cost of each
particular commodity relative to the other commodities and the
availability of import capacity on LIPA's transmission
interconnections. In May of this year, LIPA's import capacity was
reduced by approximately 1/3 as a result of a transformer failure on
one of its interconnections. The interconnection is expected to be
back at full capacity prior to the cooling season of 2000. As a
result, LIPA was required to satisfy its requirements with more
expensive on-island generation from fossil fired power plants on Long
Island, formerly owned by LILCO. For the three months ended June 30,
1999, the decreasing price of gas and the reduced import capability
resulted in a larger percentage of LIPA's requirements being satisfied
with gas generated energy when compared to the same period last year.
For the six months ended June 30, 1999, generation with oil increased
over the same period last year as oil was more economical than other
fuels, and as a result of the reduced import capacity.
Variations in fuel and purchased power expenses have a minimal impact
on operating results as LIPA's current rate structure includes a
mechanism (the FPPCA mechanism) which requires LIPA to return to
customers or allows LIPA to recover from customers, actual fuel costs
which fall outside of the fuel cost tolerance band, which is defined
as 1% higher and 1% lower than the base cost of fuel collected through
rates. These percentages increase to two percent in 2000 and continue
to increase in one percent increments annually thereafter. To insure
that LIPA's customers will receive the lowest cost energy available,
the operating agreements provide KeySpan with incentives to support
that goal, and penalties when such goals are not satisfied.
Fuel expense for the three months ended June 30, 1999 increased when
compared to the same period of the prior year, principally as a result
of a 6% increase in sales, increased on-island generation, incentives
recognized and fees paid to KeySpan to manage the fuel and purchased
power supplies in accordance with the EMA, and the recognition of a
$12 million expense associated with the FPPCA mechanism. This increase
was minimized by lower oil prices relative to the same period in 1998.
Fuel expense for the six months ended June 30, 1999 was equal to that
of the same period of the prior year, despite a 5% increase in sales
and increased on-island generation, primarily as a result of lower oil
and gas prices relative to the same period last year. The lower oil
and gas prices were offset by incentives recognized and fees paid to
KeySpan to manage the fuel and purchased power supplies in accordance
with the EMA, and the recognition of $27 million of expense associated
with the FPPCA mechanism.
<PAGE>
17
Operations and Maintenance
Operations and Maintenance ("O&M") expenses, excluding fuel and
purchased power, increased approximately $63.2 million and $131.0
million during the three and six month periods ended June 30, 1999,
respectively, when compared to the same periods in 1998. The increase
is primarily due to the fact that LILCO classified expenses such as
depreciation and amortization, property taxes and other operating
taxes separately. These costs are incurred by LIPA as part of the
costs of contracts with KeySpan for the management of LIPA's assets
and are classified as O&M expense by LIPA. In addition, there were
charges incurred by LIPA related to the overhead expenses of the
Authority.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $12.1
million and $30.8 million during the three and six month periods ended
June 30, 1999, respectively, when compared to the same period of the
prior year. These increases were primarily due to the amortization of
the acquisition adjustment which totals approximately $10 million per
month and were partially offset by the absence of depreciation expense
on LILCO's non-nuclear generating assets, which is included in O&M as
a component of the PSA billings.
Operating Taxes
Operating taxes decreased approximately $30.6 million and $61.9
million during the three and six months ended June 30, 1999,
respectively, when compared to the same period in 1998, principally as
a result of the decrease in revenue taxes resulting from lower
revenues primarily due to the 20% rate reduction, a decrease in the
gross income tax rate, and the absence of property and payroll taxes
related to the operation of the non-nuclear generating facilities of
LILCO. These decreases were partially offset by PILOTs on the Shoreham
Nuclear Power Station (LILCO was able to capitalize these PILOTs under
its electric rate structure).
Regulatory Amortization
For the three and six months period ended June 30, 1999, the
amortization of various regulatory assets and liabilities were not
recorded as a result of the adjustments made on May 29, 1998, to
eliminate the related regulatory assets and liabilities.
Rate Moderation Component ("RMC")
The RMC represented the difference between LILCO's revenue
requirements under conventional ratemaking and the revenues provided
under LILCO's electric rate structure. In addition, the RMC was
adjusted for the operation of LILCO's Fuel Moderation Component
("FMC") mechanism and the difference between LILCO's share of actual
operating costs at Nine Mile Point Nuclear Power Station, Unit 2
("NMP2") and amounts provided for in electric rates.
In April 1998, the PSC authorized a revision to LILCO's method for
recording its monthly RMC amortization. Prior to this revision, the
amortization of the annual level of RMC was recorded monthly on a
straight-line, levelized basis over LILCO's rate year which ran from
December 1 to November 30. However, revenue requirements fluctuated
from month to month based upon consumption, which is greatly impacted
by the effects of weather. Under the revised method, effective
December 1, 1997, the monthly amortization of the annual RMC level
varied based upon each month's forecasted revenue requirements, which
more closely aligned such amortization with LILCO's cost of service.
As a result of this change, for the three and six months ended June
30, 1998, LILCO recorded approximately $51.5 million and $103.0
million
<PAGE>
18
more, respectively, of non-cash RMC credits to income than it would
have under the previous method.
Federal Income Tax
The decrease in Federal income tax expense for the three and six
months ended June 30, 1999, when compared to the same period in 1998,
is due to the fact that LIPA is exempt from Federal income taxes.
Other Income and Deductions
Other income and deductions contributed to income approximately $25.8
million and approximately $21.4 million more for the three and six
months ended June 30, 1999, respectively, when compared to the same
period in 1998, primarily due to merger related expenses recognized by
LILCO in May 1998, partially offset by the absence, in 1999, of
carrying charges on regulatory assets.
Interest Expense
Interest expense decreased for the three and six months ended June 30,
1999, by approximately $18.8 million and $39.7 million, respectively,
compared to the same periods in 1998. These decreases are principally
attributable to the lower borrowing rates of LIPA relative to the
borrowing rates of LILCO. The decrease in interest expense was
partially offset by the higher levels of debt that LIPA had
outstanding during these periods, when compared to LILCO during the
same periods in 1998. The increase in the level of debt is due to the
fact that LIPA's entire capital structure is debt, where LILCO's
capitalization structure was composed of debt, common stock and
preferred stock. As a result, the entire cost of LIPA's capital is
reflected in interest expense, where LILCO's cost of capital was
reflected in interest expense and common and preferred stock
dividends.
Liquidity and Capital Resources
Liquidity
Since May 29, 1998, LIPA has received approximately $6.7 billion from
the Authority to finance the Merger, as more fully discussed in Note 7
of Notes to Financial Statements included in LIPA's Annual Report on
Form 10-K for the nine months ended December 31, 1998, in exchange for
a promissory note. All cash from customer payments and other sources
is collected by the Authority. All of LIPA's obligations are paid by
the Authority on LIPA's behalf. Accordingly, all operating cash
amounts are held at the Authority. Cash collections and disbursements
by the Authority on LIPA's behalf increase or decrease amounts due the
Authority by LIPA. LIPA has repaid approximately $744.6 million of its
debt to the Authority because cash collected by the Authority from
customers and other sources since May 29, 1998 has exceeded cash paid
on LIPA's behalf by the Authority.
Pursuant to the Authority's Electric System General Revenue Bond
Resolution dated May 13, 1998, all amounts to be paid by the Authority
to LIPA in respect of the debt obligations of LIPA are subordinated in
right of payment to the payment of amounts due on the debt obligations
of the Authority. As a result, all debt assumed from LILCO is
structurally subordinated in right of payment to the Authority's debt
obligations.
During the six months ended June 30, 1999, LIPA retired prior to
maturity, with cash on hand, $132.7 million of outstanding NYSERDA
bonds which were assumed from LILCO as part of the
<PAGE>
19
Merger.
At June 30, 1999, the Authority's and LIPA's cash and cash equivalents
amounted to approximately $851.1 million. In addition, LIPA has
designated funds aggregating $33.1 million on hand, $9.6 million of
which are available to fund capital expenditures. LIPA estimates that
capital expenditures will total approximately $70 million for the
remainder of 1999. Funding for such expenditures will be provided by
the Authority which intends to issue new debt in 1999 that will be
designated by the Board of Trustees to replenish the capital
expenditures fund.
LIPA believes that cash from operations for 1999 will be sufficient to
meet its operating, capital and debt service requirements; however, as
noted above, LIPA will access the capital markets in 1999 in order to
finance its capital expenditures. In addition, LIPA will refinance
higher cost debt if conditions prove favorable.
LIPA estimates that for the remainder of 1999 debt maturities will
total approximately $469 million. Of the $469 million, $397 million
was received in June by LIPA from KeySpan in accordance with the terms
of the promissory note (LIPA subsequently made the $397 million
payment to the bondholders on July 15, 1999). The Authority will use
cash generated from operations to satisfy $71 million of the remaining
maturities. An additional $1 million is due from KeySpan in order to
satisfy LIPA's sinking fund requirement later this year.
The Authority also expects to use cash from operations to make
optional redemptions of debt in 1999. Such actions are consistent with
the Authority's plan to retire in 16 years, the approximately $4
billion it borrowed to purchase the Shoreham regulatory assets from
LILCO.
On May 29, 1998, LIPA began issuing credits to the bills of customers
arising from the proposed settlement of the Shoreham Property Tax
Litigation. Credits will be issued over the five years after May 29,
1998, in the total amount of $106.3 million for Suffolk County
customers and $208 million for Nassau County and Rockaway customers.
The Authority has issued $145.7 million of bonds and has proposed to
issue additional bonds over the next four years to finance the cost of
the proposed settlement. Beginning in May 2004, a surcharge will be
levied upon the Suffolk County customers in order to repay the bonds.
See Note 13 of Notes to Financial Statements - Shoreham Tax Matters,
included in LIPA's Annual Report on Form 10-K for the nine months
ended December 31, 1998.
Capital Requirements
Capital expenditures are expected to be made by LIPA in the ordinary
course of business for purposes of the normal upgrading and expansion
of the T&D System. LIPA considers the T&D System to be adequate and in
good condition. The actual amount and timing of future financing will
depend upon actual capital expenditures, the timeliness and adequacy
of rate increases, the availability and cost of capital and the
ability to meet interest and fixed charge coverage requirements. The
Authority believes that the amount of capital expenditures budgeted to
be made in 1999 is adequate to maintain system reliability and insures
customer and employee safety.
Impact of Year 2000
The Authority recently purchased new computer software to support
certain activities of LIPA and believes that these systems are Year
2000 compliant. Management also believes that, based on available
information, it will be able to manage its Year 2000 transition for
systems and
<PAGE>
20
infrastructure, without any material adverse effect on its business
operations or financial position. However, there can be no assurance
that failure to resolve any issue relating to such transition would
not have a material adverse effect on LIPA. LIPA has had discussions
with their largest vendor, KeySpan, which is responsible for the
management and operation of LIPA's transmission and distribution
system, and KeySpan has indicated that it has completed the testing
and remediation of critical systems to ensure no disruptions in
service or the supply of electricity to LIPA's customers. KeySpan's
computer applications are generally based on two digits and have
required some additional programming to recognize the start of the new
millennium. A corporate-wide program has been established by KeySpan
to review all software, hardware, embedded systems and associated
compliance plans of KeySpan and its subsidiaries. The program includes
both information technology (IT) and non-IT systems. The critical
non-IT systems are generally in the areas of electric production,
distribution, transmission, gas distribution and communications. The
readiness of suppliers and vendor systems is also under review. The
project is under the direction of the Year 2000 Program Office,
chaired by the Vice President, Technology Operations and Corporate Y2K
Officer. The critical areas of operations are being addressed through
a business process review methodology. Each of KeySpan's critical
business and service processes is being reviewed to: identify and
inventory sub-components; assess for Year 2000 compliance; establish
repair plans as necessary; and test in a Year 2000 environment. As of
July 1, 1999, inventory, assessment, repair, testing and the
development of contingency plans for these service critical processes
have been completed. Remediation of other business critical systems,
which includes metering, and certain financial and accounting systems
is 96% complete, and testing is 90% complete. Testing of the last of
these systems will be complete by November 1, 1999.
Vendors and business partners needed to support the critical processes
of KeySpan are also being reviewed for their Year 2000 readiness. At
this time, none of these vendors have indicated to KeySpan that they
will be materially affected by the Year 2000 issue. However, many
vendors and business partners have not responded to repeated requests
for their year 2000 readiness status. Included in the company's
overall contingency plans, are contingency plans that address vendor
and business partners year 2000 risk.
Risk Scenarios and Contingency Plans
KeySpan has analyzed each of the critical processes to identify
possible Year 2000 risks. Each critical process will be certified by
the responsible corporate officer as being Year 2000 ready. However,
the most reasonable likely worst case scenarios have been identified.
Operating procedures are being reviewed to ensure that risks are
minimized when entering the Year 2000 and other high risk dates.
Contingency plans have been developed to address possible failure
points in each critical process. Testing of these contingency plans
will be performed internally, as well as with neighboring utilities
and business partners.
While KeySpan must plan for the following possible worst case
scenarios, management believes that these events are improbable:
Loss of generating flexibility:
KeySpan's generation subsidiary receives gas delivery from multiple
national and international pipelines and, therefore the effects of a
loss in any one pipeline can be mitigated through the use of other
pipelines. Complete loss of all the supply lines is not considered a
reasonable scenario. Nevertheless, the impact of the loss of any one
pipeline is dependent on temperature and vaporization rate. The
partial loss of gas supply will not affect KeySpan's ability to supply
<PAGE>
21
electricity since many of the plants have the ability to operate on
oil.
Loss of electric grid interconnections/KeySpan operated electric
distribution facilities: Electric utilities are physically connected
on a regional basis to manage electric load. This is often referred to
as the regional grid. Presently, KeySpan is working, on behalf of LIPA
with other regional utilities to develop a coordinated operating plan.
Should there be an instability in the grid, KeySpan has the ability to
remove LIPA and operate independently.
Certain electric system components such as individual generating
units, transmission and distribution system facilities, and the
electric energy management system have the potential to be affected by
the Year 2000 issue. KeySpan has inventoried electric system
components and developed a plan to certify mission critical process as
Year 2000 ready. Contingency plans have been developed, where
appropriate, for loss of critical system elements.
Loss of telecommunications:
KeySpan has a substantial dependency on many telecommunication systems
and services for both internal and external communication providers.
External communications with the public and the ability of customers
to contact KeySpan in cases of emergency response, are essential.
KeySpan intends to coordinate its emergency response efforts with the
offices of emergency management of the various local governments
within its service territory. Internally, there are a number of
critical processes in both the gas and electric operating areas that
rely on external communication providers. Contingency plans address
methods for manually monitoring these functions and/or utilizing
alternative communication methods.
In addition to the above, KeySpan is also planning for the following
scenarios: short term reduction in system power generating capability;
limitation of fuel oil operations; reduction in quality of power
output; loss of automated meter reading; loss of ability to read
customer meters, prepare bills and collect and process customer
payments; and loss of the purchasing/materials management system.
KeySpan believes that, with modifications to existing software and
conversions to new hardware and software, the Year 2000 issue will not
pose significant operational problems for its computer systems.
However, if such modifications and conversions do not perform as
expected, and contingency plans fail the Year 2000 issue could have a
material adverse impact on the operations of LIPA.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred in this section as of June 30, 1999
from the information provided in LIPA's Annual Report on Form 10-K for
the nine months ended December 31, 1998, as filed on March 31, 1999.
<PAGE>
22
Part II. OTHER INFORMATION
Item 1. Legal proceedings
Except as discussed below, no significant changes have occurred with
respect to legal proceedings as discussed in Item 1. Business -
Shoreham Tax Matters and Item 3. Legal Proceedings in LIPA's Annual
Report on Form 10-K for the nine months ended December 31, 1998, as
filed on March 31, 1999.
With respect to Shoreham Tax Matters, on July 26, 1999, the Appellate
Division, Second Department overruled the lower court's decision and
held that the Authority was not prohibited from enforcing any part of
the judgment relating to real property tax refunds attributable to
over assessments on the Shoreham plant after the January 15, 1987
effective date of the LIPA Act. LIPA expects that Suffolk County will
seek leave to appeal this decision to the State Court of Appeals
sometime in August 1999.
In July 1992, LILCO and the Authority separately commenced proceedings
in the Supreme Court of the State of New York, County of Suffolk,
against the Assessor and the Board of Assessment Review for the Town
of Brookhaven, New York (the "Assessor") challenging the real property
tax assessment on Shoreham for the 1992-93 tax year. On or about May
1, 1992, the Assessor had tentatively assessed Shoreham in an amount
in excess of $156 million for the 1992-93 tax year. On April 22, 1996,
the two proceedings were consolidated. On May 13, 1999, the Assessor
moved to dismiss the proceedings on procedural grounds. Oral arguments
were held on August 5, 1999. No decision has been rendered by the
court as of the date of this filing.
With respect to the action brought by the County of Suffolk entitled
County of Suffolk v. KeySpan et al., this action was voluntarily
discontinued by plaintiffs without prejudice. The plaintiffs refiled
their claims related to executive compensation in the federal action
entitled County of Suffolk et al. v. Long Island Power Authority which
was filed on September 28, 1998.
With respect to the Sylvester v. Catacosinos et al. action, the judge
adopted the magistrate's recommendation that the complaint be
dismissed with leave to replead for failure to make a demand. All
discovery has been stayed.
With respect to the class action brought against LILCO, LILCO's
Retirement Income Plan and Robert X. Kelleher, the Plan Administrator,
the court on August 13, 1999, approved the settlement agreement.
Item 2. Changes in securities and use of proceeds
None
<PAGE>
23
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
27 Financial Data Schedule.
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the six months
ended June 30, 1999.
<PAGE>
24
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.
Date: August 16, 1999 LONG ISLAND LIGHTING COMPANY d/b/a LIPA
(Registrant)
/s/ David P. Warren
-----------------------
David P. Warren
Chief Financial Officer
<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> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,074,350
<OTHER-PROPERTY-AND-INVEST> 19,821
<TOTAL-CURRENT-ASSETS> 257,953
<TOTAL-DEFERRED-CHARGES> 81,555
<OTHER-ASSETS> 4,648,294
<TOTAL-ASSETS> 7,081,973
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> (140,235)
<TOTAL-COMMON-STOCKHOLDERS-EQ> (140,235)
0
0
<LONG-TERM-DEBT-NET> 647,784
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 5,802,209
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 398,278
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 373,937
<TOT-CAPITALIZATION-AND-LIAB> 7,081,973
<GROSS-OPERATING-REVENUE> 984,698
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 887,318
<TOTAL-OPERATING-EXPENSES> 887,318
<OPERATING-INCOME-LOSS> 97,380
<OTHER-INCOME-NET> 3,565
<INCOME-BEFORE-INTEREST-EXPEN> 100,945
<TOTAL-INTEREST-EXPENSE> 161,199
<NET-INCOME> (60,254)
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 145,741
<CASH-FLOW-OPERATIONS> (45,394)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
