SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 or 15 (d)
OF THE EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended __________________
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from April 1, 1998 to December 31, 1998
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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code) (516) 222-7700
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
------------------- -----------------------------------------
7.30% Debentures Due 2000 New York Stock Exchange
7.05% Debentures Due 2003 New York Stock Exchange
7.00% Debentures Due 2004 New York Stock Exchange
9.00% Debentures Due 2022 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The number of shares of the registrant's common stock outstanding on March
29, 1999 was 1.
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LONG ISLAND LIGHTING COMPANY d/b/a LIPA
TRANSITION REPORT ON FORM 10-K
FOR THE TRANSITION PERIOD FROM APRIL 1, 1998 TO
DECEMBER 31, 1998
INDEX PART I Page Number
Item 1. Business 3
Item 2 Properties 20
Item 3 Legal Proceedings 20
Item 4. Submission of Matters to a Vote
of Security Holders 24
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 25
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 26
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 43
Item 8. Financial Statements and Supplementary Data 44
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 97
PART III
Item 10. Directors and Executive Officers of
the Registrant 97
Item 11. Executive Compensation 101
Item 12. Security Ownership of Certain Beneficial
Owners and Management 102
Item 13. Certain Relationships and Related
Transactions 102
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 103
Signatures 108
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PART I.
This Annual Report on Form 10-K 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 business and financial results of Long Island
Lighting Company d/b/a LIPA ("LIPA") could cause actual results to differ
materially from those stated in the forward-looking statements. Those factors
include state and federal regulatory rate proceedings, competition and certain
environmental matters each as discussed herein, or in other reports filed by
LIPA with the Securities and Exchange Commission.
Item 1. BUSINESS
LIPA is a wholly-owned subsidiary of the Long Island Power Authority (the
"Authority"), a corporate municipal instrumentality and a political subdivision
of the State of New York. The Authority's and LIPA's principal offices are
located at 333 Earle Ovington Blvd., Uniondale, New York 11553 and their
telephone number is (516) 222-7700.
On May 28, 1998, the Authority became the sole stockholder of LILCO (as
defined below) as a result of LIPA Acquisition Corp. (a wholly-owned transitory
subsidiary formed by the Authority to facilitate the acquisition ) merging into
LILCO (the "Merger"). Prior to the Merger, LILCO transferred certain generation
and other assets to a subsidiary company which merged with the former Brooklyn
Union Gas Company to form what was then known as MarketSpan Corporation
("MarketSpan"). MarketSpan has since announced that it will henceforth conduct
its business under the name of KeySpan Energy ("KeySpan"), and that it expects
to formally change its name in 1999. At the time of the Merger, LILCO's
principal assets included: (i) the electric transmission and distribution system
and other items relating to the system that provides electric power and energy
at retail in LIPA's Service Area (as defined herein) (the "T & D System"); (ii)
an 18% undivided ownership interest in Unit 2 of the Nine Mile Point Nuclear
Station ("NMP2"); and (iii) certain agreements and contracts for power supply
and transmission. As used herein, the term "LILCO" means the Long Island
Lighting Company, the publicly-owned gas and electric utility company as it
existed prior to the Merger, and the term "LIPA" means that company as it exists
after the Merger as a wholly-owned electric utility subsidiary company of the
Authority, doing business as LIPA.
Service Area
The service area in which LIPA conducts its retail electric business
includes two counties on Long Island, Nassau County and Suffolk County (except
for the Nassau County villages of Freeport and Rockville Centre and the Suffolk
County village of Greenport, each of which has its individually owned municipal
electric system), and a small portion of the borough of Queens in New York City
known as the Rockaways (the "Service Area").
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As of December 31, 1998, LIPA had approximately 1.04 million customers in
the Service Area. LIPA receives approximately 49% of its revenue from
residential customers and approximately 48% from commercial and industrial
customers with the balance derived from sales to other utilities and public
authorities. Individual commercial and industrial customers are relatively small
with approximately 45% of these customers having peak demands at less than 75kW.
LIPA's largest customer in the Service Area accounted for less than two percent
of total sales for the nine months ended December 31, 1998.
In addition to its retail customers, LIPA makes wholesale sales (sales for
resale) to other electric utilities (through the EMA as defined below),
including the three existing municipally-owned electric utilities on Long Island
(the villages of Greenport, Freeport, and Rockville Centre). These villages rely
primarily upon their own generation and purchases from the Power Authority of
the State of New York ("NYPA") for their power supply.
LIPA also provides electric transmission service to NYPA for the delivery
of NYPA capacity and energy to the three municipal utilities and other
NYPA-power recipients on Long Island, including the Suffolk County Electrical
Agency and the Nassau County Public Utility Agency.
System Operation
The operation of LIPA's system (including obtaining all necessary power
supplies) is done through operating agreements with various subsidiaries of
KeySpan. Day-to-day operations and maintenance are performed by the workforce of
such subsidiaries. The operating agreements consist of a Management Services
Agreement ("MSA"), a Power Supply Agreement ("PSA") and an Energy Management
Agreement ("EMA").
The MSA provides for KeySpan Electric Services LLC ("KeySpan Electric") to
perform the day-to-day operation and maintenance of the T&D System, including
among other functions, transmission and distribution facility operation,
customer service, billing and collection, meter reading, planning, engineering
and construction, all in accordance with policies and procedures adopted by the
Authority. Under the MSA, KeySpan Electric earns a management fee and can earn
certain incentive payments or be subject to certain penalties based upon
performance. The term of the MSA is eight years. The PSA provides for the sale
to LIPA by KeySpan Generation LLC of all of the capacity and, to the extent LIPA
requests, energy from the existing oil and gas-fired generation plants on Long
Island formerly owned by LILCO (the "Generating Facilities"). The PSA provides
for incentives and penalties for the maintenance of the output capability of the
Generating Facilities. The term of the PSA is fifteen years. The EMA provides
for KeySpan Energy Trading Services LLC ("KeySpan Energy Trading") to: (i)
procure and manage fuel supplies for LIPA to fuel the Generating Facilities;
(ii) perform off-system capacity and energy purchases on a least-cost basis to
meet LIPA's needs; and (iii) manage off-system sales of output from the
Generating Facilities and other power supplies owned or under contract to LIPA.
The EMA provides for incentives and penalties for performance related to fuel
purchases and off-system power purchases. LIPA is entitled to two-thirds of the
profit from any off-system energy sales arranged by KeySpan Energy Trading. The
term for the services provided in (i) above is fifteen years and the term of the
services provided in (ii) and (iii) above is eight years.
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The Transmission and Distribution System
The T&D System is an integrated transmission and distribution system with
electricity delivered to and from the Service Area over five transmission
interconnections that are owned in part by or are under contract to LIPA. These
interconnections connect the T&D System to utilities outside of the Service Area
and enable delivery of: (i) energy produced by NMP2; (ii) additional energy
resources needed to meet the peak demands of LIPA's electric customers; (iii)
favorably-priced energy to supplement or displace generation from generating
resources within the Service Area; and (iv) excess generation from generating
facilities within the Service Area to purchasers outside of the Service Area
when market conditions merit. The table below provides summary information on
the transmission interconnections.
TABLE 1
SERVICE AREA TRANSMISSION INTERCONNECTIONS
<TABLE>
<CAPTION>
Off-System Interconnecting Voltage
Name Terminal Location Utility (1)(2) Level (3)
---- ----------------- -------------- ---------
<S> <C> <C> <C>
Dunwoodie to Shore Road .......... Westchester County, NY Con Edison 345kV
East Garden City to Sprainbrook .. Westchester County, NY NYPA 345kV
Northport to Norwalk Harbor ...... Norwalk, CT CL&P 138kV
Jamaica to Lake Success .......... Queens, NY Con Edison 138kV
Jamaica to Valley Stream ......... Queens, NY Con Edison 138kV
</TABLE>
(1) These utilities own the portion of the interconnections not owned by LIPA,
except for the interconnection with NYPA, which is owned entirely by NYPA.
(2) CL&P = The Connecticut Light and Power Company.
(3) Kilovolt or "kV".
Two of the T&D System's transmission interconnections are tied to the
Consolidated Edison Company of New York, Inc. ("Con Edison") transmission system
in Queens County, New York. LIPA owns these facilities to the border of Nassau
County and Queens County, at which point ownership transfers to Con Edison. The
three remaining interconnections extend under water across the Long Island Sound
to New York or Connecticut. One of these lines, the East Garden City to
Sprainbrook line, is owned entirely by NYPA (the "NYPA Line") and is used by
LIPA under the terms of the contract with NYPA. The other two interconnections
are owned by LIPA from their termination points on Long Island to the middle of
Long Island Sound, at which point ownership is held by the interconnecting
utility.
The agreement for use of the NYPA Line provides that LIPA will reimburse
NYPA for the costs it incurs in connection with the NYPA Line, including, but
not limited to, debt service, reserves, and operation and maintenance expenses,
in return for the use of the capacity of the line. LIPA is contractually
obligated to pay such costs based on the full capacity of the NYPA Line;
however, to the extent that NYPA allocates capacity to other parties, LIPA's
payment obligations are reduced proportionately, with such other parties making
payments pursuant to rates under NYPA's Open Access Tariff. In the past, NYPA
has allocated capacity of the NYPA Line to certain loads served by NYPA in the
Service Area when there has been insufficient
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capacity to serve such loads on another transmission line jointly owned by LIPA
and Con Edison. This practice is expected to continue in the future.
LIPA's transmission system includes approximately 1,300 miles of overhead
and underground lines with voltage levels ranging from 345kV to 23kV. There are
32 transmission substations to step down transmission voltage levels from 345kV
or 138kV to 69kV, 33kV or 23kV. The distribution system has approximately 46,000
circuit miles of overhead lines and over 10,000 circuit miles of underground
lines and approximately 149,000 line transformers.
Nine Mile Point Nuclear Power Station, Unit 2
LIPA owns an 18 percent interest in NMP2, which is part of a two-unit
nuclear power station located at a 900-acre site on Lake Ontario in the Town of
Scriba, New York. NMP2 is rated at 1,144 MW of capacity and is owned by five
co-tenants under a Basic Agreement dated as of September 22, 1975, which
provides for contractual rights, payments and other matters. Under an Operating
Agreement among the co-tenants, dated December 29, 1992, Niagara Mohawk Power
Corporation ("Niagara Mohawk") has the exclusive control of the operation and
maintenance of NMP2 under the oversight of a Management Committee (comprised of
the co-tenants) for policy making, planning, budgeting, and operational
decisions of Niagara Mohawk related to NMP2. This Operating Agreement provides
for a sharing of all costs relating to NMP2 by the co-tenants in proportion to
their percentage interests in the unit.
NMP2 is scheduled for decommissioning in 2026. LIPA's share of the
decommissioning costs, based on a site specific study conducted in 1995, is
estimated to be $161 million in 1998 dollars ($407 million in 2026 dollars).
LIPA retained title to LILCO's external trust fund established for the
decommissioning of the contaminated portion of the NMP2 plant. The balance in
the external trust fund as of December 31, 1998 was approximately $19 million.
An annual contribution of approximately $3 million is required to fully fund the
external trust fund to meet LIPA's 18 percent share of the costs of
decommissioning the contaminated portion of NMP2 by the decommissioning date of
2026. Commencing in 1999, LIPA will also contribute approximately $1.2 million
annually to fund its share of decommissioning the non-contaminated portion of
NMP2.
NMP2 has generally exceeded average industry performance for the five
years ended 1997 (the most recent period for which complete information is
reported) with respect to annual capacity factor. Periodic outages for refueling
are being extended to every 24 months rather than every 18 months to improve
overall unit capacity factors. Notwithstanding a 1998 outage described below,
planned and actual outage times have generally decreased due to improved outage
management and fewer emergent problems. The principal factors that caused the
extended outage in 1998 are not expected to recur in future outages.
NMP2's most recent refueling outage occurred from May 1, 1998 through July
5, 1998. This outage was scheduled to last 35 days, but was extended to 64 days
due, in part, to additional inspections resulting from indications of stress
corrosion cracking of the reactor shroud, a hollow cylinder inside the reactor
vessel that serves to divert cooling water recirculation flow. Niagara Mohawk
reported that the cracking indications were not of any safety significance, and
NMP2 was allowed to resume operations with no particular restrictions. Niagara
Mohawk installed
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appropriate equipment and procedures to manage the problem. Design problems with
the control building heating, ventilating, and air conditioning system, and
delays in reactor pressure vessel disassembly and core off load, among other
factors, caused further delays in the refueling outage. In addition to the
removal of spent fuel assemblies and the installation of new assemblies, Niagara
Mohawk used this refueling outage to perform maintenance and repairs on NMP2.
The next scheduled refueling outage for NMP2 is in 2000.
Niagara Mohawk has announced that it plans to pursue the sale of its
nuclear assets including its interest in NMP2. LIPA is reviewing its rights and
remedies under the agreements governing its 18% interest in NMP2. LIPA has not
received an offer to purchase its 18% interest in NMP2 and is not pursuing a
sale at this time.
Loads
The Service Area is characterized by customer usage patterns and weather
conditions that result in peak usage during the summer and relatively low annual
load factors. The peak usage in the summer of 1998 was approximately 4,208 MW.
It is estimated that peak load growth will range between 0.4 percent and 1.3
percent annually on a weather-normalized basis, averaging 0.9 percent over the
1998-2008 period. It is estimated that energy growth will range between 1.0
percent and 1.8 percent annually, averaging 1.3 percent over the 1998-2008
period. This load forecast assumes moderate economic growth in the Service Area,
consistent with the general economic conditions and low levels of unemployment
on Long Island. Residential sales are projected to grow at approximately 1.2
percent per year between 1998 and 2008, while commercial and industrial sales
are expected to grow 1.5 percent per year.
The load and energy forecasts mentioned above were prepared by KeySpan and
reviewed by LIPA's consulting engineers and take into account a price elasticity
effect resulting from rate reductions that LIPA has implemented. In addition,
these forecasts include the effects of LIPA's conservation program and further
reductions resulting from cogeneration or similar installations designed to
serve customer loads directly.
Power Supply
LIPA currently expects to rely on existing power supply resources,
additional purchases, and demand side management ("DSM") programs to meet its
capacity and energy requirements during the 1998 through 2008 period. During
1998, LIPA's 18% interest in NMP2 and its rights to the capacity of the
Generating Facilities provided approximately 4,224 MW of generating capacity,
with on-island independent power producers providing an additional 350 MW of
capacity under contract to LIPA. Purchases from NYPA, excluding NYPA's Power for
Jobs Program, and on-island municipal utilities provided approximately 235 MW.
Additional capacity was provided by purchases of 20 MW from NYPA under the Power
for Jobs Program, other firm purchases of 159 MW, and DSM program load
curtailment capability of 17 MW. In aggregate, these resources provided
approximately 5,000 MW in 1998.
To satisfy the growing needs of its electric customers, LIPA is expected
to enter into additional power purchase agreements beginning on or about June
1999. The estimated power supply plan also anticipates an additional reduction
of approximately 150 MW in customer peak
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load requirements through DSM programs by 2008. As a result of these changes,
total capacity available to LIPA to meet the needs of its customers is expected
to be 5,529 MW by 2008.
Fuel Supply
Pursuant to the EMA, KeySpan procures and manages the fuel supplies used
at the Generating Facilities. The particular fuel used for generation depends on
generation plant fuel capability, fuel supply, transportation availability, fuel
cost and environmental restrictions. Most of the KeySpan steam units can burn
either natural gas or residual oil and certain units are required to burn lower
sulfur residual oil or natural gas. Natural gas or distillate fuel is burned in
the gas turbines.
KeySpan shares eight gas delivery interconnections between its
distribution system and the New York gas market. KeySpan and Con Edison have
entered into the New York Facilities Agreement that provides for use of their
joint systems to allow the parties to receive gas from interstate pipelines
connected to their systems.
Oil is stored on site or at locations accessible by each generation
facility. LIPA believes that: (i) existing oil storage capacity plus an active
oil management program has historically helped avoid a fuel oil supply
disruption at the Generating Facilities; and (ii) conversion of certain
generating units to burn natural gas has further reduced exposure to potential
oil interruptions.
Regulation
LIPA is subject to regulation by various State and Federal agencies.
New York State. The Public Service Commission ("PSC") is the principal
agency in the State regulating the generation, transmission, distribution and
sale of electric power and energy. It has no statutory jurisdiction over rates
for power generated, transmitted, distributed or sold by LIPA but does regulate
the rates of New York State's investor-owned utilities and certain municipal
systems to which LIPA sells power.
The PSC is empowered by the New York Public Service Law to issue
Certificates of Environmental Compatibility and Public Need prior to the
construction in New York of power transmission lines of certain capacities and
lengths, including those of LIPA. In addition, the New York State Board on
Electric Generation Siting and the Environment is empowered by the New York
Public Service Law to issue Certificates of Environmental Compatibility and
Public Need prior to the construction in New York of major electric generating
facilities.
Under the Long Island Power Authority Act (the "LIPA Act"), the Authority
is empowered to set rates on behalf of LIPA for electric service in the Service
Area without obtaining the approval of the PSC or any other state regulatory
body. See, however, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Rate Matters."
The Department of Environmental Conservation ("DEC") is the principal
agency of the State of New York regulating air, water and land quality. Before
any Federal license or permit
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can be issued for any activity involving a discharge into navigable waters, the
DEC must certify that the discharge will comply with the State water quality
standards (or waive certification). Certain aspects of the DEC's regulatory
authority over pollutant discharge permits, air quality permits and hazardous
waste regulation arise from delegation of such authority to the State by Federal
legislation.
Federal. Under Part II of the Federal Power Act, the Federal Energy
Regulatory Commission ("FERC") regulates the rates, terms and conditions of: (i)
the sale for resale of electric power by "public utilities"; and (ii) the
provision of transmission service in interstate commerce by public utilities.
Neither the Authority nor LIPA is a "public utility" under the Federal Power Act
("FPA"). Although the rates, terms and conditions under which LIPA provides
transmission service are not currently subject to general FERC jurisdiction,
FERC may order LIPA to provide transmission services to individual customers
meeting the requirements of Sections 211 and 212 of the Federal Power Act on
rates, terms and conditions comparable to those of LIPA for LIPA's own use of
its system.
The Environmental Protection Agency ("EPA") is the principal agency of the
Federal government regulating air, water and land quality. LIPA and the
Authority are subject to EPA rules requiring the securing of routine discharge
permits for non-radiological emissions and effluents from all Authority and LIPA
facilities. The Nuclear Regulatory Commission ("NRC") regulates the construction
and operation of nuclear power plants. The NRC prescribes various operating
standards and other rules for the operation of nuclear power plants.
Shoreham Tax Matters
Through November 1992, Suffolk County and the following Suffolk County
political subdivisions (collectively, the "Suffolk Taxing Jurisdictions"), the
Town of Brookhaven, Shoreham-Wading River Central School District, Wading River
Fire District and the Shoreham-Wading River Library District (which was
succeeded by the North Shore Library District), levied and received real estate
taxes from LILCO on the Shoreham plant. When the Authority acquired the Shoreham
plant in February 1992, it was obligated pursuant to the LIPA Act to make
Payments-In-Lieu-Of-Taxes ("PILOTs") on the Shoreham plant beginning in December
1992. As part of the agreement between LILCO and the Authority providing for the
transfer of Shoreham to the Authority, LILCO agreed to fund these payments.
Prior to the Merger, LILCO charged rates in an amount sufficient to make these
payments to the Authority. Both LILCO and the Authority contested the
assessments, claiming the Shoreham plant was overassessed. To date, the
Authority has made such payments, in whole or in part, pursuant to interim PILOT
agreements and collected the costs thereof pursuant to the PILOTs rider which is
part of LIPA's rates.
On March 26, 1997, a judgment was entered in the Supreme Court, State of
New York, Suffolk County, on behalf of LILCO against the Suffolk Taxing
Jurisdictions ordering them to refund to LILCO property tax overpayments
(resulting from over-assessments of Shoreham) in an amount exceeding $868
million, including interest as of the date of the judgment. In addition, the
judgment provides for the payment of post-judgment interest (the "Shoreham
Property Tax Litigation"). The Court also determined that the Shoreham plant had
a value of nearly zero during the period the Authority has owned Shoreham. This
judgment was unanimously affirmed
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by the Appellate Division of the State of New York on July 13, 1998. Certain of
the Suffolk Taxing Jurisdictions sought to appeal this judgment to the New York
State Court of Appeals. Their applications were unanimously denied by the
Appellate Division. New applications for leave to appeal were made to the Court
of Appeals. On January 19, 1999, the Court of Appeals denied the motions. There
is no further review in the New York State court system.
The Authority had proposed a settlement agreement with the Suffolk Taxing
Jurisdictions and Nassau County. The proposed settlement agreement would, among
other things, cause the Authority: (i) not to enforce the judgment in favor of
LILCO; and (ii) not to make any claim for a refund of what the Authority
believes is an overpayment of PILOTs, in exchange for the payment by the Suffolk
Taxing Jurisdictions to the Authority of $625 million.
On February 1, 1999, a lawsuit was filed in the Supreme Court of the State
of New York, Nassau County by the Association for a Better Long Island against
the Authority and LIPA. This lawsuit seeks: (i) to require the Authority to
collect the full amount of the judgment obtained by the Authority in the
Shoreham Property Tax Litigation; and (ii) to declare that the offer of the
Authority to settle the Shoreham Property Tax Litigation is void and legally
unenforceable. No assurance can be given as to the method, amount (if any) or
timing of any recovery by the Authority related to the Shoreham Property Tax
Litigation.
The proposed settlement agreement with the Suffolk Taxing Jurisdictions
was not accepted and on March 1, 1999, the Authority withdrew its offer to
settle the Shoreham Property Tax Litigation including claims related to the
Authority's overpayment of PILOTs on the Shoreham plant for $625 million and
indicated that any settlement would have to be at a higher amount. On that date,
the Authority also demanded that the Suffolk Taxing Jurisdictions pay refunds of
real estate taxes in the amount of approximately $784 million consisting of (i)
refunds and interest due as of the entry of the judgment on March 26, 1997 for
the period from and after January 15, 1987 (the effective date of the LIPA Act)
of approximately $675 million and (ii) accrued post-judgment interest in the
amount of approximately $109 million. Post-judgment interest will continue to
accrue until the judgment is satisfied.
On September 15, 1998, Suffolk County filed an action against the
Authority in the Supreme Court of the State of New York, County of Suffolk
seeking to enjoin the Authority from recovering tax refunds based upon the
over-assessment of the Shoreham nuclear plant. The action claims that the
Authority does not have the right to recover property taxes previously assessed
against LILCO for tax years 1984-1985 through 1991-1992. On March 19, 1999, the
court ruled that the Authority was not entitled to collect any refund of
property taxes assessed against the Shoreham plant. In addition, the court
stated that the Authority has a duty to discontinue and abandon all proceedings
which seek the repayment of all or part of the taxes assessed against the
Shoreham Plant. The Authority intends to appeal this decision. The Authority
does not believe that an adverse decision in this litigation will have a
material adverse effect on the Authority's or LIPA's financial condition.
Further, the court stated that under a ruling of the New York State Court of
Appeals, the Authority is not prohibited from seeking refunds of PILOTs paid on
over-assessments of the Shoreham plant.
The New York State Court of Appeals in a separate case has ruled that the
LIPA Act does not prohibit the Authority from seeking refunds plus interest if
it has overpaid PILOTs based on
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an over-assessment of Shoreham. The Authority has made PILOT payments of
approximately $345 million which it believes were based on such an
over-assessment. On February 24, 1999, the Authority filed an action against the
Suffolk Taxing Jurisdictions in the Supreme Court of the State of New York,
Nassau County, seeking a judgment in an amount equal to the total amount of
PILOTs overpaid by the Authority, plus interest.
On March 23, 1999, the Shoreham Wading River Central School District filed
an action against the Authority in the Supreme Court of the State of New York,
County of Nassau seeking an order directing the Authority to pay approximately
$6.4 million of PILOTs which the plaintiff alleges are due and owing and
approximately $24.6 million of PILOTs which the plaintiff alleges is the
cumulative deficiency as of June 1, 1998. The Authority does not believe that an
adverse decision in this litigation will have a material adverse effect on the
Authority's or LIPA's financial condition.
Certain Factors Affecting the Electric Utility Industry
General
The electric utility industry has been, and in the future will be,
affected by a number of factors which will have an impact on the business,
affairs and financial condition of both public and private electric utilities,
including the Authority and LIPA.
One of the most significant of these factors is the efforts on both the
national and local levels to restructure the electric utility industry from a
heavily regulated monopoly to an industry in which there is open competition for
power supply service on both the wholesale and retail level.
Electric utilities are also subject to increasing Federal, state and local
statutory and regulatory requirements with respect to the siting and licensing
of facilities, safety and security, air and water quality, land use and other
environmental factors. The industry is subject to claims asserting health
effects from electric and magnetic fields associated with power lines, home
appliances and other sources.
Energy Policy Act of 1992
The Energy Policy Act of 1992 (the "Energy Policy Act") made fundamental
changes in the Federal regulation of the electric utility industry, particularly
in the area of transmission access. The purpose of these changes, in part, was
to bring about increased competition in the wholesale electric power supply
market. In particular, the Energy Policy Act provides FERC with the authority,
upon application by any person selling electricity, federal power marketing
agency, or other power generator, to require a transmitting utility to provide
transmission services to the applicant essentially on a cost-of-service basis.
Municipally-owned electric utilities are "transmitting utilities" for purposes
of these provisions of the Energy Policy Act. However, the Energy Policy Act
specifically denied FERC the authority to mandate "retail wheeling," under which
a retail customer of one utility could obtain transmission services for the
purpose of obtaining power from another utility or non-utility power generator.
FERC Initiatives
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On April 24, 1996, the FERC issued two final rules that contain
significant policy initiatives designed to open the market for generation of
electricity to competition. The final rules effect significant changes in the
regulation of transmission services provided by "public utilities" (as defined
in the FPA) that own, operate or control interstate transmission facilities used
to transmit power in interstate commerce ("jurisdictional utilities"). Neither
the Authority nor LIPA is a jurisdictional utility as so defined.
One of the final rules, Order No. 888, as modified on rehearing: (i)
requires all public utilities to provide open access transmission services on a
non-discriminatory basis by requiring all such public utilities to file tariffs
that offer other entities seeking use of the interstate transmission system the
same transmission services they provide themselves under comparable terms and
conditions; and (ii) contains a reciprocity provision that requires
non-jurisdictional utilities (including municipal and consumer-owned utilities
such as LIPA and the Authority) that purchase transmission services under
FERC-filed open-access tariffs and that own or control transmission facilities
to, in turn, provide open access service to the transmitting utility on rates,
terms and conditions that are comparable to the service that the
non-jurisdictional utility provides itself. Order No. 888 also includes
provisions which, in effect, would permit jurisdictional utilities to recover
so-called "stranded costs" for generating and other facilities from wholesale
customers of a utility who opt to purchase from other power suppliers.
The rates that LIPA charges for transmission service under its Open Access
Transmission Tariff ("OATT"), including the calculation of any stranded cost
charge, are not subject to direct regulation by FERC under Part II of the FPA.
FERC has reviewed the rates under LIPA's OATT and found that the OATT represents
an acceptable reciprocity tariff subject to the condition that LIPA adopt a code
of conduct and maintain an Open Access Same-time Information Service ("OASIS").
A prospective customer seeking service under the OATT may challenge the rate or
stranded cost charge quoted by LIPA to the customer by filing an application to
the FERC for an order requiring LIPA to provide transmission service under
Sections 211 and 212 of the FPA. FERC has discretion to entertain such an
application, but it has noted that when FERC has approved an OATT for
comparability purposes for that nonjurisdictional utility the applicant
requesting a Section 211 order has the burden to show why service to the
applicant under the same terms as available under the OATT is not sufficient and
why a Section 211 order should be granted.
The other final rule, Order No. 889, as supplemented by later orders,
requires standards of conduct for utilities that offer open access transmission
services to ensure that transmission owners and their affiliates do not have an
unfair competitive advantage in using transmission to sell power. To this end,
Order No. 889 (i) requires those utilities to establish an electronic OASIS to
share transmission-related information (including information about available
capacity) on a real-time basis, and also requires those utilities to obtain
information about their transmission systems for their own wholesale power
transactions, such as available capacity, in the same way that their competitors
do via an OASIS; and (ii) promulgated standards of conduct to ensure that
utilities functionally separate their transmission and wholesale power merchant
functions to prevent self-dealing.
In the Spring of 1997, FERC issued its orders on rehearing of Order Nos.
888 and 889. In these supplemental orders FERC upheld the bulk of its rulings in
Order Nos. 888 and 889, while
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making changes to certain aspects of those rules to implement its open-access
policies. Public utilities were required to submit revised tariffs to FERC
during the Summer of 1997 to reflect FERC's orders on rehearing. In November
1997 and again in 1998, FERC issued further orders on rehearing affirming, with
certain clarifications, its previous orders. Both Order Nos. 888 and 889 have
been appealed to the U.S. Court of Appeals.
Neither the Authority nor LIPA is directly subject to the new rules.
However, the Authority and LIPA are subject to the reciprocity provision in
Order No. 888, described above. Moreover, the Authority has voluntarily filed an
OATT that substantially conforms to the provisions of Order No. 888, as modified
on rehearing, which FERC had made a condition to FERC's approval of the transfer
to the Authority of LILCO's transmission assets. On September 22, 1998, FERC
approved LIPA's OATT finding that it is consistent with the compatibility
requirements of Order No. 888 as modified on rehearing for an acceptable
reciprocity transmission tariff on the condition that LIPA adopt a code of
conduct and maintain an OASIS. LIPA's OASIS is in place. LIPA has filed its code
of conduct with FERC.
Under Part 11 of the FPA, "public utilities" are subject to regulation by
FERC. A "public utility" includes any person or entity that owns, controls, or
operates facilities used for the transmission of electric energy in interstate
commerce or for the sale of electric energy at wholesale in interstate commerce.
However, under Part 11 of the FPA a "public utility" does not include a
state or any political subdivision of a state, or any agency, authority, or
instrumentality of any one or more of the foregoing. As a corporate municipal
instrumentality and political subdivision of the State of New York, the
Authority, and, indirectly, LIPA, are largely exempt from FERC regulation as
"public utilities" under Part H of the FPA. Notwithstanding this exemption, the
Authority and LIPA are subject to the authority of FERC to order interconnection
of its facilities pursuant to Section 210 of the FPA, and the authority of FERC
to order "transmitting utilities" to provide transmission services in accordance
with sections 211 and 212 of the FPA as amended by the Energy Policy Act.
Proposed Federal Deregulation Legislation
Many bills have been introduced into the United States House of
Representatives and the United States Senate to deregulate the electric utility
industry on the federal or state level, including bills supported by the Clinton
Administration as discussed below. In general, many of the bills provide for
open competition in the furnishing of electricity to all retail customers (i.e.,
retail wheeling). No prediction can be made as to whether these bills, or any
future proposed federal bills to deregulate the electric industry, will become
law, or, if they become law, what their final form or effect would be.
In March 1998, the Clinton Administration announced a Comprehensive
Electricity Competition Plan. The components of the plan fall into five
categories which include: (i) encouraging states to implement retail competition
by permitting retail customers to purchase power from the supplier of their
choice by January 1, 2003, although it would permit states or non-regulated
utilities to opt out of competition under certain circumstances; (ii) protecting
consumers by facilitating competitive markets; (iii) assuring access to and
reliability of
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transmission systems by amending the Federal Power Act to provide FERC with the
authority to require transmitting utilities to turn over the operational control
of transmission facilities to an independent system operator; (iv) promoting and
preserving public benefits by, among other things, requiring a minimum level of
renewable generation facilities and requiring a trading system for nitrogen
oxide pollutant reductions; and (v) amending federal statutes to provide FERC
with authority to order transmission in certain circumstances, reinforcing FERC
authority over certain matters and amending the laws with respect to tax-exempt
bonds. The Clinton Administration Plan to amend the laws with respect to
tax-exempt bonds would provide that the private use limitations are inapplicable
to outstanding bonds for publicly-owned generation, transmission or distribution
facilities if used in connection with retail competition or open access
transmission. Tax-exempt financing would not be available for new generation or
transmission facilities but would continue to be available for distribution
facilities subject to current law private use limitations.
Bills were introduced into the Senate and the House in 1998 which
reflected the Clinton Administration's proposal which bills expired upon the
adjournment of the 1998 Congressional session. On February 1, 1999, the Clinton
Administration released its revenue proposals, including proposals that are
substantially the same as those announced in 1998, as described above, which
would impose restrictions on the availability of tax-exempt financing for
electric generation facilities. LIPA can not predict whether the Clinton
Administration will introduce actual legislation to deregulate the electric
utility industry in the current session of Congress and, if so, whether such
legislation will be similar to that which was introduced in 1998. Moreover, LIPA
cannot predict what effect such legislation, if adopted, would have on the
Authority or LIPA.
New York State Electric Utility Industry Restructuring Matters
Public Service Commission Competitive Opportunities Proceeding. On March
19, 1993, the PSC commenced a proceeding to investigate issues related to a
future regulatory regime for New York's electric industry in light of increasing
competitive opportunities. The second phase of this proceeding, which commenced
in August 1994, concerned issues related to potential restructuring of the
industry from a regulated monopoly service to a more competitive framework.
The PSC issued an Opinion and Order on May 20, 1996 ("Order 96-12") in the
competitive opportunities proceeding which required each of the New York
investor-owned electric utilities (except Niagara Mohawk and LILCO) to submit a
restructuring plan to the PSC. In Order 96-12, the PSC set goals for the
introduction of competition in New York State's generation and energy services
sectors. The PSC's preferred industry structure would ultimately allow all
customers retail access after a period of transition. The PSC anticipates both
lower electricity prices and economic development to result from competition.
One of the key issues that must be addressed before competition is
established in New York concerns stranded costs. Stranded (or strandable) costs
are defined by the PSC as those costs incurred by utilities that may become
unrecoverable during the transition from regulation to a competitive market for
electricity. The investor-owned utilities contend that all prudent costs
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incurred to provide electric service should be recovered. The PSC stated in
Order 96-12 that the utilities and independent power producers must mitigate
potential stranded costs.
While not under the regulatory control of the PSC, LIPA has a significant
interest in the outcome of Con Edison, New York State Electric and Gas
Corporation ("NYSEG") and other PSC restructuring proceedings. Any decision by
the PSC relating to the future competitive structure of New York's electric
industry could affect the manner in which LIPA operates.
Nuclear Plant Issues. In August 1997, the staff of the PSC issued a report
in the context of the PSC's Competitive Opportunities Proceeding proposing,
among other things, that, beyond a transition period, which is generally the
period covered by the individual restructuring agreements before the PSC,
nuclear generation should operate on a competitive basis. The report also
proposed that the sale of nuclear plants to third parties be the preferred means
of determining the fair market value of marketable generation plants, as it
offers the greatest potential for mitigation of stranded costs and for the
elimination of anti-competitive subsidies.
On March 20, 1998, the PSC initiated a proceeding to examine a number of
issues raised by the staff report and the comments received in response thereto.
In summary, the PSC: (i) adopted as a rebuttable presumption the premise that
nuclear power should be priced on a market basis to the same degree as power
from other sources, with parties challenging that premise having to bear a
substantial burden of persuasion; (ii) characterized the proposals in the staff
report as by and large consistent in concept with the PSC's goal of a
competitive, market-based electricity industry; (iii) questioned the staff's
position that would leave funding and other decommissioning responsibilities
with the sellers of nuclear power interests; and (iv) indicated interest in the
potential for New York Nuclear Operating Company ("NYNOC") to benefit customers
through efficiency gains and directed pursuit of that matter in this nuclear
generation proceeding or separately upon the filing of a formal NYNOC proposal.
The initiating order announced the intention to complete the proceeding by the
second quarter of 1999.
During 1997, NYPA, Con Edison, Niagara Mohawk and Rochester Gas and
Electric Corporation, the four utilities operating nuclear generating facilities
in New York State, executed a joint announcement which expressed their desire to
move forward with plans to form NYNOC, and stated that the four utilities will
initiate the steps to assure that NYNOC will have the necessary leadership,
personnel and structure to operate the six nuclear units now operated
independently by such utilities. The joint announcement also stated that during
the transition phase, while necessary governmental approvals are sought, the
utilities would continue with and add to the cooperative initiatives the
companies have already begun. NYNOC, a limited liability company, would operate
the six nuclear plants currently operated by the four entities to achieve
economies of scale and increase cost effectiveness. The plants would continue to
be owned, and the output of the plants marketed, by the respective owners of the
plants. It is contemplated that NYNOC would become the operator under the
plants' NRC operating licenses, while other aspects of the NRC licenses would
remain with the owners of the plants. It is uncertain what effect Niagara
Mohawk's participation in such an arrangement will have on LIPA; nor can LIPA
predict the effect on such an arrangement of the auction proposal in the staff
report.
On or about June 15, 1998, NYSEG, one of the owners of NMP2 commenced an
action against Niagara Mohawk in Supreme Court of the State of New York,
Tompkins County,
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demanding, among other things, judgment to: (i) enjoin Niagara Mohawk from
transferring operating responsibility of NMP2 to NYNOC; and (ii) declare that
Niagara Mohawk may not transfer its operational responsibility for NMP2 to NYNOC
without NYSEG's consent. LIPA can make no prediction as to the outcome of this
litigation.
The NRC issued a policy statement on the Restructuring and Economic
Deregulation of the Electric Utility Industry ("Policy Statement") in 1997. The
Policy Statement addresses NRC's concerns about the adequacy of decommissioning
funds and about the potential impact on operational safety, and reserves to the
NRC, the right, in highly unusual situations where adequate protection of public
health and safety would be compromised, to consider imposing joint and several
liability on minority co-owners when one or more co-owners have defaulted on
their contractual obligations. On December 28, 1998, the NRC announced
commencement of a rulemaking proceeding initiated by a group of utilities which
are nonoperating joint owners of nuclear plants. These utilities request that
the enforcement provisions of the NRC regulations be amended to clarify NRC
policy regarding the potential liability of joint owners if other joint owners
become financially incapable of bearing their share of the burden for safe
operation or decommissioning of a nuclear power plant. On March 22, 1999, the
Authority filed comments in support of the rule proposed by the group of
utilities. In addition to the above Policy Statement, the NRC is proposing to
amend its regulations on decommissioning funding to reflect conditions expected
from deregulation of the electric power industry. LIPA is unable to predict how
such increased stringency may affect the results of operations or financial
condition of NMP2.
Independent System Operator Proposal. Pursuant to FERC Order No. 888 as
modified on rehearing, applicable to, among others, the investor-owned electric
utilities (the "IOUs") in New York, which, along with NYPA, comprise the New
York Power Pool ("NYPP"), the IOUs undertook, with NYPA, to develop an
arrangement for providing non-discriminatory open-access transmission over all
of the electric transmission lines in New York. As a result of this effort, the
IOUs and NYPA filed a proposal (as most recently revised, the "Proposal") with
FERC to provide open access to their transmission lines. In addition, the
Proposal would establish the Reliability Council (as defined herein) and the New
York Power Exchange ("NYPE"). The NYPP will be replaced by the independent
system operator ("ISO"), Reliability Council and NYPE. Under the Proposal, the
IOUs and NYPA would form a not-for-profit corporation, the ISO, which would have
responsibility for the operation of most of the transmission lines of the
participants. The ISO would be responsible for scheduling the use of the lines
by its members and others that wished to use the lines for transmission of
electricity, and would be responsible for collecting fees from transmission
customers. Each member and NYPA would retain ownership, and would be responsible
for maintenance, of their respective transmission lines. The customers of the
ISO, including the IOUs and NYPA, would pay fees to the ISO. Any ISO member may
withdraw from the arrangement contemplated by the Proposal, on 90-days' notice
to the board of directors of the ISO but, in the case of an IOU, such withdrawal
requires FERC approval unless the IOU has an "open access" transmission
facilities tariff on file with FERC.
A significant feature of the ISO's tariff will be its use of a schedule of
flexible transmission rates to take account of the cost of energy at its
destination along the transmission network in meeting competing demands for the
transmission facilities subject to the ISO's jurisdiction.
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Under the Proposal, the IOUs and NYPA would be the first members of the
ISO, and LIPA may join. The Proposal also allows any "Market Participant" (which
would include any person engaged in the wholesale sale, transmission or purchase
of electric energy) to join the ISO by becoming a signatory to the ISO
Agreement. Finally, non-Market Participants (e.g. environmental and consumer
organizations) have the opportunity to participate in the governance of the ISO.
The ISO would be governed by a Board of Directors consisting of the executive
director of the ISO and nine individuals selected by a selection committee
composed of representatives of members, other interested parties and the PSC. No
member of the board of directors will be able to own shares in or have a
continuing business relationship with any Market Participant. The chief
executive officer of the ISO will be chosen by the Board of Directors and will
be responsible for the day-to-day operation of the ISO.
Pursuant to FERC's June 1998 Order conditionally approving the ISO, the
governance provisions of the ISO are being revised. On October 23, 1998, the
members of the NYPP, including NYPA and the Authority, submitted a settlement
agreement to FERC to modify certain governance provisions in response to FERC's
June 1998 Order. Signatories to the settlement agreement include seventeen
entities other than the members of NYPP (the transmission owners), including the
PSC and representatives of consumer, environmental and other organizations.
Among other things, the proposed agreement modifies the structure of the
management, operations and business issues committees to facilitate a more
diverse representation, reduces the percentage that the votes of the
transmission owners as a group and any individual transmission owner may
constitute of the required vote for adoption of proposals, requires annual
updating of membership on these committees and requires the ISO board to
publicly announce the process for selecting members of these committees. This
proposal must be approved by FERC before it can be implemented.
The Reliability Council proposed to be established concurrently with the
ISO will be a separate not-for-profit corporation or limited liability company
which will establish safety and reliability standards for all entities,
including the ISO, engaging in electric power transactions on the ISO's
transmission system. An executive committee consisting of thirteen members will
govern the Reliability Council. FERC's June 1998 Order approved the proposed
structure and governance of the Reliability Council.
Certain members of the ISO have reserved the right to seek a determination
of the United States Internal Revenue Service (the "IRS") that participation in
the arrangement contemplated by the Proposal will not adversely affect the
federal tax-exempt status of any obligations issued by such a member nor
adversely affect its ability to issue future federal tax-exempt obligations.
FERC has conditionally authorized the establishment of the ISO but has not
approved the rates or terms and conditions of service. In December 1998, the
Authority approved LIPA's participation in the ISO provided that certain
modifications are made to the Proposal and approved by FERC which would protect
the tax-exempt status of the Authority's debt in light of LIPA's participation
in the ISO. By order dated January 27, 1999, FERC conditionally accepted, with
modifications, the proposed ISO tariff and the proposed market rules of the ISO
and granted the request for market-based rates. The January 27, 1999 order
called for public hearings on certain aspects of the proposed rates and provided
for settlement judge proceedings.
Environmental
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Electric utilities are subject to continuing environmental regulation.
Federal, state and local standards and procedures which regulate the
environmental impact of electric utilities are subject to change. These changes
may arise from continuing legislative, regulatory and judicial action regarding
such standards and procedures. No assurance can be given that new standards and
procedures will not be imposed or that existing standards and procedures will
not be changed. An inability to comply with environmental standards could result
in additional capital expenditures to comply, reduced operating levels or the
complete shutdown of individual electric generating units, including NMP2 and
those under contract to LIPA under the PSA, not in compliance. See "Legal
Proceedings - Environmental."
Nuclear Plant Matters
The Energy Policy Act provides, among other things, that utilities with
nuclear reactors will contribute an aggregate total of $150 million annually,
based upon an assessment, for a period of 15 years, up to a total of $2.25
billion (in 1992 dollars), for the costs for the decommissioning and
decontamination of the DOE nuclear fuel enrichment facilities.
In accordance with the Nuclear Waste Policy Act of 1982, Niagara Mohawk,
as the operator of Nine Mile Point, in August 1995, entered into a contract with
DOE, under which DOE, commencing not later than January 31, 1998, would accept
and dispose of spent nuclear fuel. However, it appears unlikely that DOE will
accept any spent nuclear fuel from Niagara Mohawk or others before 2010. The
contract provides that Niagara Mohawk will pay quarterly to DOE a fee based on
nuclear generation and sales of electricity from Nine Mile Point at a specified
rate.
The NRC has adopted decommissioning rules which require reactor operators
to certify that sufficient funds will be available for decommissioning the
contaminated portion of nuclear plants in the form of prepayments or external
sinking funds, either of which must be segregated from the licensee's assets and
outside its administrative control, or by the surety of insurance payable to a
trust established for decommissioning costs. LILCO established such an external
decommissioning trust fund in 1990 to meet these regulatory requirements. LIPA
expects that by the expiration of NMP2's operating license in 2026, there will
be funds in LIPA's decommissioning trust fund sufficient to meet the current
estimated costs for its 18% share of the decommissioning costs of Nine Mile
Point 2. If the estimated NMP2 decommissioning costs should increase, based on
future site specific studies or NRC regulatory changes, LIPA expects to increase
its contributions into the decommissioning trust fund to meet the revised
requirements.
The Federal Low-Level Radioactive Waste Policy Act, as amended in 1985,
requires states to join compacts or to individually develop their own low-level
radioactive waste disposal site. In response to the Federal law, New York State
had decided to develop its own site because of the large volume of such waste
generated in New York, and had committed to develop a plan for the management of
the low-level radioactive waste in New York State during the interim period
until the disposal facility was available. LIPA cannot predict when such a
facility may be available.
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Niagara Mohawk presently ships the low-level radioactive waste generated
at Nine Mile Point to a disposal facility in Barnwell, South Carolina. During
the period July 1, 1994, to June 30, 1995, the legislature of South Carolina
denied access to the facility to out-of-region low-level radioactive waste
generators, including those in New York State. LIPA cannot predict whether the
Barnwell facility will be closed again to out-of-region low-level radioactive
waste generators at some future date before the New York State disposal facility
becomes available.
NMP2 has a spent fuel pool ("SFP") to store the spent fuel assemblies
discharged from normal plant operations. The SFP has a total designed capacity
to house 4,049 spent fuel assemblies. There are 1,400 spent fuel assemblies
currently residing in the NMP2 SFP.
SFP capacity will be reached in the year 2012. Therefore, starting in the
time frame of 2008-2010, the operator of NMP2 is expected to focus on one of the
following options available at that time for the management of its spent fuel:
use of a permanent repository, use of a central interim storage facility
mandated by Congress or the creation and use of additional storage capacity at
Nine Mile Point.
Niagara Mohawk procures public liability and property insurance for NMP2,
and LIPA reimburses Niagara Mohawk for its 18% share of those costs. The
Price-Anderson Amendments Act mandates that nuclear power plants secure
financial protection in the event of a nuclear accident. This protection must
consist of two levels. The primary level provides liability insurance coverage
of $200 million (the maximum amount available) in the event of a nuclear
accident. If claims exceed that amount, a second level of protection is provided
through a retrospective assessment of all licensed operating reactors.
Currently, this "secondary financial protection" subjects each of the 110
presently licensed nuclear reactors in the United States to a retrospective
assessment of up to $88.1 million for each nuclear incident, payable at a rate
not to exceed $10 million per year. LIPA's interest in NMP2 could expose it to a
maximum potential loss of $15.9 million, per incident, through assessments of
$1.8 million per year in the event of a serious nuclear accident at NMP2 or
another licensed U.S. commercial nuclear reactor. These assessments are subject
to periodic inflation indexing and to a 5% surcharge if funds prove insufficient
to pay claims.
Niagara Mohawk has also procured $500 million primary nuclear property
insurance with the Nuclear Insurance Pools and approximately $2.3 billion of
additional protection (including decontamination costs) in excess of the primary
layer through Nuclear Electric Insurance Limited ("NEIL"). Each member of NEIL,
including LIPA, is also subject to retrospective premium adjustments in the
event losses exceed accumulated reserves. For its share of NMP2, LIPA could be
assessed up to approximately $1.6 million per loss. This level of insurance is
in excess of the NRC required $1.06 billion of coverage.
LIPA has obtained insurance coverage from NEIL for the extra expense
incurred in purchasing replacement power during prolonged accidental outages.
Under this program, should losses exceed the accumulated reserves of NEIL, each
member, including LIPA would be liable for its share of deficiency. LIPA's
maximum liability per incident under the replacement power coverage, in the
event of a deficiency, is approximately $700,000.
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The NRC has notified all utilities operating nuclear power plants that
they are required to inform the NRC of steps they are taking to see that
computer systems will function properly by the year 2000. In connection
therewith, each such utility was required to submit a written indication of,
among things, whether or not they are pursuing and continuing to pursue a plan
to solve their Year 2000 issue, such as, or similar to, that outlined in the
publication Nuclear Utility Year 2000 Readiness published by the Nuclear Energy
Institute and the Nuclear Utilities Software Management Group (the "NEI/NUSM
Plan"). In addition, not later than July 1, 1999, each such utility must submit
a written response confirming that its plant is Year 2000 ready, or if not
ready, the utility must provide a status report of work remaining to be done.
Niagara Mohawk submitted its required response indicating that it has pursued
and is continuing a Year 2000 readiness program similar to that recommended in
the NEI/NUSM Plan.
Item 2. PROPERTIES
The location and general character of the principal properties of LIPA are
described in Item 1, "Business" under the headings "The Transmission and
Distribution System" and "Nine Mile Point Nuclear Power Station, Unit 2."
Item 3. LEGAL PROCEEDINGS
LIPA has been named as a nominal defendant in a derivative suit pending in
the United States District Court for the Eastern District of New York entitled
Sylvester v. Catacosinos, et al. A motion to dismiss on behalf of LIPA was filed
on September 23, 1998 and argued on January 28, 1999. In addition, LIPA has been
named as a defendant in an action brought by the County of Suffolk that is
pending in New York State Supreme Court, Suffolk County, entitled County of
Suffolk v. KeySpan et al. The response date has been postponed until such time
as it is determined whether the action will be consolidated with a consolidated
class action pending in New York State Supreme Court, Nassau County, entitled In
re KeySpan Corporation Shareholder Litigation. Former officers and directors of
LILCO also have been named as defendants in each of these actions.
The complaints in the foregoing actions allege in substance that certain
former officers of LILCO received excessive compensation which totaled
approximately $67 million in connection with the closing of Brooklyn Union's
merger with LILCO and with the Authority's acquisition of the common stock of
LILCO. The Sylvester lawsuit seeks damages of an unspecified amount. The
complaint brought by the County of Suffolk seeks that the defendants make
restitution, or pay damages, of $67 million.
Because the cases are in an early state, at which no discovery has yet
taken place, LIPA cannot express an opinion as to the likelihood of any
liability. LIPA has notified KeySpan of its entitlement to indemnification
pursuant to an indemnification agreement dated June 26, 1997, for any losses
LIPA suffers as a result of these lawsuits. LIPA expects that KeySpan will honor
the request for indemnification. LIPA also understands that the Attorney General
of the State of New York is investigating the actions and statements of certain
former officers of LILCO in connection with such compensation.
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On September 28, 1998, Suffolk County and the Towns of Huntington and
Babylon (collectively, the "Plaintiffs") brought a class action on behalf of
themselves and all electric utility ratepayers in Suffolk County (the
"Ratepayers") against the Authority, LIPA, KeySpan and others in the United
States District Court for the Eastern District of New York entitled County of
Suffolk et al. v. Long Island Power Authority, et al. (the "Huntington
Lawsuit"). The Huntington Lawsuit alleges, among other things, that: (i) LIPA
and the Authority failed to refund alleged capital gains directly to Ratepayers
as a result of the Merger, unlawfully depriving Ratepayers of their property
under federal and state constitutional provisions; and (ii) LIPA failed to
refund to Ratepayers certain deferred tax reserves carried on LILCO's books at
the time of the Merger, unjustly enriching KeySpan.
Based on these allegations, Plaintiffs are seeking judgments, among other
things: (i) awarding damages against KeySpan and LIPA for impairment of
contract, breach of contract and conversion; and (ii) declaring that KeySpan
holds the proceeds of the Merger attributable to the capital gains and the
deferred tax reserve in trust for the benefit of the Ratepayers and ordering
KeySpan to make a full accounting of such proceeds. LIPA believes that, although
the recovery sought by Plaintiffs could be material in amount, any such recovery
would not have a material financial impact on LIPA or its Customers.
In an action commenced on May 26, 1998 (Schulz et al. v. New York State
Public Authorities Control Board et al., United States District Court, Northern
District of New York), plaintiff's complaint, in several claims for relief,
sought a judgment declaring, inter alia, the resolution of the PACB authorizing
the Authority to issue bonds to be null and void on State and federal
constitutional grounds and sought a temporary restraining order or preliminary
injunction prohibiting and enjoining the issuance of bonds. On May 27, 1998, the
District Court denied the plaintiff's request for a temporary restraining order
or preliminary injunction and dismissed the plaintiff's action on the ground
that the plaintiffs lack standing to assert the claims pleaded in the complaint.
On February 8, 1999, the United States Court of Appeals for the Second Circuit
affirmed the District Court's dismissal of the plaintiff's action.
On May 27, 1998, the Initiative for Competitive Energy (the "ICE") filed
an action in the Supreme Court of the State of New York, County of Suffolk,
against the Authority seeking, inter alia, an injunction enjoining the Authority
from selling bonds "whose purpose is to finance the proposed Shoreham Property
Tax Settlement, the Shoreham Rebates, Credits and Suffolk Surcharge." The action
further requested a judgment declaring invalid and directing the rescission of
the sale of such bonds. By decision dated October 7, 1998, the Supreme Court
dismissed the complaint and ruled in favor of the Authority on all issues. On
October 28, 1998, the ICE filed a notice of appeal.
In May 1995, eight participants of LILCO's Retirement Income Plan ("RIP")
filed a lawsuit against LILCO, the RIP and Robert X. Kelleher, the Plan
Administrator, in the United States District Court for the Eastern District of
New York. In January 1996, the Court ordered that this action be maintained as a
class action. This proceeding arose in connection with the plaintiffs'
withdrawal, approximately 25 years ago, of contributions made to the RIP,
thereby resulting in a reduction of their pension benefits. On January 7, 1999,
a settlement agreement was filed with the Court providing for the payment of
$7.75 million to the plaintiffs. The Authority would be responsible for
approximately $5.4 million. The settlement is subject to
21
<PAGE>
judicial review. Amended settlement papers were filed on February 22, 1999 and a
hearing date is scheduled for July 27, 1999.
In December 1997, Suffolk County brought a suit against the Authority and
others in the Supreme Court of the State of New York County of Nassau seeking a
judgment, among other things: (I) annulling and vacating the acceptance by the
Authority of certain conditions contained in the July 1997 PACB resolution
approving the Authority's acquisition of LILCO and related transactions; (ii)
declaring that all or any actions taken by the Authority to implement or carry
out the PACB conditions are null and void; and (iii) directing that the
Authority take no further action to acquire the stock or assets of LILCO unless
and until such acquisition has been approved by the PACB in the manner approved
by law. A decision was rendered in March 1998 which held for the Authority on
all substantive issues. Suffolk County filed a notice of appeal to the Appellate
Division of the State of New York.
LIPA is involved in various legal proceedings which are routine litigation
matters incidental to the conduct of its business. In the judgment of the
Authority and LIPA, these matters will not individually or in the aggregate,
have a material adverse effect on the financial position, results of operations
or cash flows of LIPA. See "Business--Shoreham Tax Matters."
Environmental
In connection with the Merger, KeySpan and LIPA entered into Liabilities
Undertaking and Indemnification Agreements which, when taken together, provide,
generally, that environmental liabilities will be divided between KeySpan and
LIPA on the basis of whether they relate to assets transferred to KeySpan or
retained by LIPA as part of the Merger. In addition, to clarify and supplement
these agreements, KeySpan and LIPA also entered into an agreement to allocate
between them certain liabilities, including environmental liabilities, arising
from events occurring prior to the Merger and relating to the business and
operations to be conducted by LIPA after the Merger (the "Retained Business")
and to the business and operations to be conducted by KeySpan after the Merger
(the "Transferred Business").
KeySpan is responsible for all liabilities arising from all manufactured
gas plant operations ("MGP Sites"), including those currently or formerly
operated by KeySpan or any of its predecessors, whether or not such MGP Sites
related to the Transferred Business or the Retained Business. In addition,
KeySpan is liable for all environmental liabilities traceable to the Transferred
Business and certain scheduled environmental liabilities. Environmental
liabilities that arise from the non-nuclear generating business may be
recoverable by KeySpan as part of the capacity charge under the PSA. LIPA is
responsible for all environmental liabilities traceable to the Retained Business
and certain scheduled environmental liabilities.
Environmental liabilities that exist as of the date of the Merger that are
untraceable, including untraceable liabilities that arise out of common and/or
shared services have been allocated 53.6% to LIPA and 46.4% to KeySpan.
Environmental Matters Retained by LIPA
Long Island Sound Transmission Cables. The Connecticut Department of
Environmental Protection ("DEP") and the DEC separately have issued
Administrative Consent Orders ("ACOs") in connection with releases of insulating
fluid from an electric transmission cable system located under the Long Island
Sound. The ACOs require the submission of a series of
22
<PAGE>
reports and studies describing cable system condition, operation and repair
practices, alternatives for cable improvements or replacement, and environmental
impacts associated with prior leaks of fluid into the Long Island Sound.
Compliance activities associated with the ACOs are ongoing.
Simazine. Simazine is a commercially available herbicide manufactured by
Novartis that was used by LILCO as a defoliant until 1993 under the direction of
a New York State Certified Pesticide Applicator. Simazine contamination was
found in groundwater at one of the LIPA substations in 1997. LIPA is working
cooperatively with the Suffolk County Department of Health, the DEC and Novartis
to conduct studies and monitoring activities in connection with the presence of
this herbicide.
Superfund Sites.
Under Section 107(a) of the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA", also commonly referred to as the
"Superfund Legislation"), parties who generated or arranged for disposal of
hazardous substances are liable for costs incurred by the EPA in responding to a
release or threat of release of the hazardous substances.
Metal Bank. In December 1997, the EPA issued its Record of Decision
("ROD"), in connection with the remediation of a licensed disposal site located
in Philadelphia, Pennsylvania, and operated by Metal Bank of America. In the
ROD, the EPA estimated that the present worth cost of the selected remedy for
the site is $17.3 million. In June 1998, the EPA issued a unilateral
administrative order to 13 PRPs, including LIPA, for the remedial design and for
remedial action at the site. LIPA can not predict with reasonable certainty the
actual cost of the selected remedy, who will implement the remedy, or the cost,
if any, to LIPA. Under a PRP participation agreement, LIPA is responsible for
7.95% of the costs associated with implementing the remedy. LIPA has recorded a
liability of $1.6 million representing its estimated share of the additional
cost to remediate this site.
PCB Treatment Inc. LILCO has also been named a PRP for disposal sites in
Kansas City, Kansas and Kansas City, Missouri. The two sites were used by a
company named PCB Treatment, Inc. from 1982 until 1987 for the storage,
processing, and treatment of electric equipment, oils and other materials
containing PCBs. According to the EPA, the buildings and certain soil areas
outside the buildings are contaminated with PCBs. Certain of the PRPs, including
LILCO and several other utilities, formed a group, signed a consent order, and
have developed a work plan for investigating environmental conditions at the
site. The EPA provided LILCO with documents indicating that LILCO was
responsible for less than 1% of the materials that were shipped to this site.
LIPA is currently unable to determine its share of the cost to remediate these
sites.
Environmental Matters Which May Be Recoverable From LIPA By KeySpan Through The
PSA
Asharoken. In March 1996, the Village of Asharoken (the "Village") filed a
lawsuit against LILCO in the New York Supreme Court, Suffolk County
(Incorporated Village of Asharoken, New York, et al. V. Long Island Lighting
Company). The Village is seeking
23
<PAGE>
monetary damages and injunctive relief based upon theories of negligence, gross
negligence and nuisance in connection with the LILCO design and construction of
the Northport Power Plant which the Village alleges upset the littoral drift,
thereby causing beach erosion. In November 1996, the court decided LILCO's
motion to dismiss the lawsuit, dismissing two of the three causes of action. The
court limited monetary damages on the surviving continuous nuisance claim to
three years prior to the commencement of the action. The liability, if any,
resulting from this proceeding cannot yet be determined. However, LIPA does not
believe that this proceeding will have a material adverse effect on its
financial position, cash flows or results of operations.
Environmental Matters Which Are Currently Untraceable For Which LIPA Could Have
Responsibility
Other Superfund Sites. In connection with a lawsuit filed against LILCO
and nine other PRPs by the Town of Oyster Bay for indemnification for
remediation and investigation costs for a federal Superfund site in Syosset, New
York, a settlement agreement has been reached and is subject to court approval.
If approved, the settlement would not have a material adverse effect on LIPA's
financial position, cash flows or results of operations. In addition, LILCO was
notified by the Attorney General of the State of New York that it may be
responsible for the disposal of wastes and/or for the generation of hazardous
substances that may have been disposed of at the Blydenburgh Superfund site.
LILCO conducted a search of its corporate records and did not locate any
documents concerning waste disposal practices associated with this landfill.
Based on current information, LIPA does not believe that this proceeding will
have a material adverse effect on its financial position, cash flows or results
of operations.
DEC has notified LILCO, pursuant to the New York State superfund program,
that LIPA may be responsible for the disposal of hazardous substances at the
Huntington/East Northport Site, a municipal landfill property. The DEC
investigation is in its preliminary stages, and LIPA is currently unable to
determine its share, if any, of the costs to investigate and remediate this
site.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 12, 1998, LIPA commenced a tender offer for its 7.30%
Debentures Due 2000, 6.25% Debentures Due 2001, 7.05% Debentures Due 2003, 7.00%
Debentures Due 2004, 7.125% Debentures Due 2005 and 9.00% Debentures Due 2022
(collectively, the "Debentures").
In conjunction with the tender offers, LIPA also commenced a consent
solicitation from the holders of the Debentures to effect an amendment to the
indentures under which the Debentures were issued. The amendment deletes an
inoperative provision in the indentures. The tender of a Debenture constituted a
consent. As of October 26, 1998, the requisite consents for the amendment to the
indentures were received. For each series of Debentures the following table
lists as of November 9, 1998, 5:00 p.m., New York City time, the expiration date
of the tender offer, the principal amount validly tendered pursuant to the
tender offer and the principal amount remaining outstanding on such date:
24
<PAGE>
Amount
Amount Tendered Outstanding
--------------- -----------
7.30% due 2000 $ 35,733,000 $ 267,000
6.25% due 2001 $136,566,000 $ 8,434,000
7.05% due 2003 $144,310,000 $ 5,690,000
7.00% due 2004 $ 56,105,000 $ 2,895,000
7.125% due 2005 $186,389,000 $13,611,000
9.00% due 2022 $427,438,000 $23,562,000
PART II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
None.
Item 6. SELECTED FINANCIAL DATA
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
LIPA LILCO
-------------- -----------------------------------------------------------------------------
For the Year For the Year For the Year For the Year For the Year
May 29, 1998 April 1, 1998 Ended Ended Ended Ended Ended
to December 31, to May 28, March 31, March 31, December 31, December 31, December 31,
1998 1998 1998 1997 1996 1995 1994
--------------- ------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Electric $ 1,377,605 $ 330,011 $2,478,435 $2,464,957 $2,466,435 $2,484,014 $2,481,637
Operating Expenses
Operations - fuel and purchased
power 408,192 91,762 658,338 646,448 640,610 570,697 568,738
Operations and maintenance 398,193 68,993 403,944 376,064 386,322 399,215 418,011
Depreciation and amortization 121,969 22,986 131,186 129,183 128,534 121,980 111,996
Base financial component amortization - 16,014 100,971 100,971 100,971 100,971 100,971
Rate moderation component amortization - (39,574) (35,079) (2,999) (24,232) 21,933 197,656
Regulatory liability component
amortization - (14,048) (79,359) (79,359) (79,359) (79,359) (79,359)
1989 Settlement credits amortization - - (9,213) (9,213) (9,214) (9,214) (9,214)
Other regulatory amortization - 14,694 36,039 96,100 109,532 155,532 (4,883)
Operating taxes 157,561 60,885 388,592 390,584 390,861 375,164 336,263
Customer rebates 168,806 - - - - - -
Federal income tax - current - (79,081) 76,890 52,737 42,197 14,596 10,784
Federal income tax - deferred and
other - 1,219 133,495 126,730 138,307 168,377 156,646
----------- --------- ----------- ---------- ---------- ---------- ----------
Total Operating Expenses 1,254,721 143,850 1,805,804 1,827,246 1,824,529 1,839,892 1,807,609
----------- --------- ----------- ---------- ---------- ---------- ----------
Operating Income 122,884 186,161 672,631 637,711 641,906 644,122 674,028
----------- --------- ----------- ---------- ---------- ---------- ----------
Other Income and (Deductions)
Rate moderation component carrying
charges - - 23,632 25,279 25,259 25,274 32,321
Other income and deductions, net 25,041 (28,581) (7,455) 10,107 14,237 30,750 31,620
Class Settlement - - (15,623) (19,895) (20,772) (21,669) (22,730)
Allowance for other funds used during
construction - 374 1,881 1,563 1,400 1,354 686
Federal income tax - current - (67,259) 594 - - - -
Federal income tax - deferred and other - (22,094) 1,104 (89) 1,456 2,688 3,353
----------- --------- ----------- ---------- ---------- ---------- ----------
Total Other Income and (Deductions) 25,041 (117,560) 4,133 16,965 21,580 38,397 45,250
----------- --------- ----------- ---------- ---------- ---------- ----------
Income from Continuing Operations
Before Interest Charges 147,925 68,601 676,764 654,676 663,486 682,519 719,278
----------- --------- ----------- ---------- ---------- ---------- ----------
Interest Charges
Interest on long-term debt, net 76,392 56,258 351,261 372,108 384,198 412,512 437,751
Interest on advances from and note
payable to the Authority 142,882 - - - - - -
Other interest 9,933 9,800 57,805 66,818 67,130 63,461 62,345
Allowance for borrowed funds used
during construction (1,301) (540) (4,593) (3,707) (3,699) (3,938) (4,284)
----------- --------- ----------- ---------- ---------- ---------- ----------
Total Interest Charges 227,906 65,518 404,473 435,219 447,629 472,035 495,812
----------- --------- ----------- ---------- ---------- ---------- ----------
Income\(loss) from Continuing
Operations (79,981) 3,083 272,291 219,457 215,857 210,484 223,466
Income from Discontinued Operations - (4,480) 89,949 102,952 100,607 92,802 78,386
----------- --------- ----------- ---------- ---------- ---------- ----------
Net Income (Loss) (79,981) (1,397) 362,240 322,409 316,464 303,286 301,852
Preferred stock dividend requirements - 8,037 51,813 52,113 52,216 52,620 53,020
----------- --------- ----------- ---------- ---------- ---------- ----------
Earnings (Loss) for Common Stock $ (79,981) $ (9,434) $ 310,427 $270,296 $ 264,248 $ 250,666 $248,832
=========== ========= =========== ========== ========== ========== ==========
Average Common Shares Outstanding (000) N/A 121,864 121,415 120,620 120,360 119,195 115,880
=========== ========= =========== ========== ========== ========== ==========
Basic and Diluted Earnings from
continuing operations per common
share N/A $(.04) $ 1.82 $1.39 $1.36 $1.32 $1.47
Basic and Diluted Earnings per
Common Share N/A $(.08) $ 2.56 $2.24 $2.20 $2.10 $2.15
=========== ========= =========== ========== ========== ========== ==========
Common stock dividends declared per
share N/A $ .30 $ 1.78 $1.78 $1.78 $1.78 $1.78
Common stock dividends paid per share N/A $ .30 $ 1.78 $1.78 $1.78 $1.78 $1.78
Book value per common share at N/A $ 21.88 $ 21.07 $20.89 $20.50 $20.21
Common shares outstanding at (000) - 121,681 120,987 120,781 119,655 118,417
Common shareowners of record at - 78,314 77,691 86,607 93,088 96,491
=========== ========= =========== ========== ========== ========== ==========
Balance Sheet Date:
Total Assets $ 7,672,483 $11,900,725 $11,849,574 $12,209,679 $12,527,597 $12,479,289
Long-Term Debt $ 778,075 $ 4,381,949 $ 4,457,047 $ 4,456,772 $ 4,706,600 $ 5,145,397
Preferred Stock - redemption required N/A (1) $ 562,600 $ 638,500 $ 638,500 $ 639,550 $ 644,350
Preferred Stock - no redemption
required N/A (1) $ - $ 63,598 $ 63,664 $ 63,934 $ 63,957
Common Shareowners' (Deficit) Equity $ (79,981) $ 2,662,447 $ 2,549,049 $2,523,369 $ 2,452,953 $ 2,393,628
</TABLE>
(1) Items marked N/A are not meaningful due to the significant change in the
capital structure as a result of the merger and because no public equity of LIPA
is outstanding as of December 31, 1998.
25
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On May 28, 1998, LIPA Acquisition Corp., a wholly-owned subsidiary of the
Authority, was merged with and into LILCO, pursuant to an Agreement and Plan of
Merger 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").
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. See Note 2
of Notes to Financial Statements. Accordingly, the accompanying financial
statements for the periods prior to and including May 28, 1998 are not
comparable to the financial statements presented subsequent to May 28, 1998.
Therefore, a black line has been drawn on the accompanying financial statements
to distinguish between LIPA and LILCO balances and activity.
The amounts presented in the financial statements for LILCO reflect the
presentation of the gas business (as transferred to a KeySpan subsidiary
pursuant to the Merger Agreement) as a discontinued operation, in accordance
with the provisions of Accounting Principles Board ("APB") Statement No. 30.
On April 11, 1997, LILCO changed its year-end from December 31 to March 31.
Subsequent to the Merger, LIPA adopted a calendar year-end. Accordingly, unless
otherwise indicated, references to December 1998 and December 1997 represent the
nine month periods ended December 31, 1998 and December 31, 1997, respectively.
References to March 31, 1998 and March 31, 1997 represent the twelve-month
periods then ended, while references to all other periods refer to the
respective calendar years ended December 31.
Effective May 29, 1998, LIPA contracted with KeySpan to provide operations and
management services to LIPA's transmission and distribution system through the
MSA. LIPA contracts for capacity from the fossil fired generating plants of
KeySpan through the PSA. Energy is purchased by KeySpan on LIPA's behalf through
the EMA. See "Business - System Operation."
The following table combines the condensed results of operations of both LIPA
and LILCO in order to facilitate comparison of the nine months ended December
31, 1998 and 1997.
<TABLE>
<CAPTION>
LIPA LILCO Total LILCO
--------------- --------------- --------------- ----------------
May 29, 1998 to April 1, 1998 to April 1, 1998 to April 1, 1997 to
December 31, May 28, December 31, December 31,
1998 1998 1998 1997
--------------- --------------- --------------- ----------------
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C>
Electric Revenues $1,377,605 $ 330,011 $1,707,616 $1,922,752
Operating Expenses 1,254,721 143,850 1,398,571 1,406,248
Other Income and (Deductions) 25,041 (117,560) (92,519) (5,161)
Interest Charges 227,906 65,518 293,424 304,446
Income (Loss) from
---------- ----------- ---------- ----------
Continuing Operations $ (79,981) $ 3,083 $ (76,838) $ 206,897
========== =========== ========== ==========
</TABLE>
The table highlights the effects of the Merger, which include lower electric
revenues as a result of LIPA's rate reduction (approximately 20% for all
customers effective May 29, 1998).
26
<PAGE>
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. See, however, Note 4 of Notes to the Financial Statements.
Rates and charges for LIPA are determined by the Authority's Board of Trustees.
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 weighted average
useful life of the net plant assets acquired. The acquisition adjustment
principally arose through the eliminaiton 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. Because of the tax exempt status of
LIPA, the results of operations for the period May 29, 1998 to December 31,
1998, do not include a provision for income taxes.
Results of Operations
Earnings
Earnings for the nine month period ended December 31, 1998 and the nine month
period ended December 31, 1997 were as follows:
Net losses for the period beginning May 29, 1998 and ending December 31, 1998
were $80 million. The loss was principally due to customer rebates of $168.8
million paid by LIPA. Earnings per share for the period May 29, 1998 to December
31, 1998 is not meaningful due to the significant change in the capital
structure as a result of the Merger and because no public equity of LIPA is
outstanding as of December 31, 1998.
Net losses for the period beginning April 1, 1998 and ending May 28, 1998 were
$9.4 million or $0.08 per common share. Earnings for common stock for the nine
months ended December 31, 1997, were $207.4 million or $1.71 per common share.
The results for the two month period ended May 28, 1998 were negatively impacted
by Merger-related expenses such as legal, accounting, financial and tax
consultants, certain severance payments made to LILCO officers, and Federal
income taxes resulting from the Merger. These items were partially offset by the
positive impact on earnings caused by the change in method of amortizing the
Rate Moderation Component ("RMC"), as discussed below.
Earnings for the years ended March 31, 1998 and March 31, 1997 were as follows:
(In millions of dollars and shares, except earnings per share)
1998 1997
---- ----
Net income $ 362.2 $ 322.4
Preferred stock dividend requirements 51.8 52.1
------- --------
Earnings for common stock $ 310.4 $ 270.3
------- --------
Average common shares outstanding 121.4 120.6
------- --------
Basic and diluted earnings per common share $ 2.56 $ 2.24
======= ========
27
<PAGE>
For the year ended March 31, 1998, LILCO had higher earnings in the electric
business partially offset by lower earnings in the gas business, as compared to
the prior year.
The increase in earnings for the year ended March 31, 1998, was primarily due to
a change in the method of amortizing the RMC to eliminate the effects of
seasonality on monthly operating income, as more fully discussed in the section
titled "Rate Moderation Component." This positive contributor to earnings more
than offset the effects of reduced interest income and the accruals for certain
obligations for key employees, as more fully discussed in Note 3 of Notes to
Financial Statements.
The decrease in earnings in the gas business for the year ended March 31, 1998
resulted primarily from the accruals noted above, partially offset by lower
operations and maintenance expenses.
Earnings for the years ended December 31, 1996 and December 31, 1995 were as
follows:
(In millions of dollars and shares, except earnings per share)
1996 1995
---- ----
Net income $ 316.5 $ 303.3
Preferred stock dividend requirements 52.2 52.6
--------- ----------
Earnings for common stock $ 264.3 $ 250.7
--------- ----------
Average common shares outstanding 120.4 119.2
--------- ----------
Basic and diluted earnings per common share $ 2.20 $ 2.10
--------- ----------
LILCO's 1996 earnings were higher for both its electric and gas businesses, as
compared to 1995, despite an allowed return on common equity in 1996 equal to
the prior year. The higher earnings were the result of LILCO's increased
investment in electric plant in 1996, as compared to 1995. Also contributing to
the increase in electric business earnings was LILCO's ability to reduce
operations and maintenance expenses and the efficient use of cash generated by
operations to retire maturing debt.
The increase in earnings in the gas business was the result of additional
revenues due to the continued growth in the number of gas space heating
customers. Also contributing to the increase in gas business earnings was a 3.2%
rate increase which became effective December 1, 1995, and an increase in
off-system gas sales.
28
<PAGE>
Revenues
Electric Revenues and Sales
The table below provides a summary of both LILCO and LIPA's electric revenues,
sales and customers.
<TABLE>
<CAPTION>
Nine month period Years Ended March 31, Years Ended December 31,
ended December 31, --------------------------------------------------------
1998 1997 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues (000's)
Residential $ 800,170 $ 920,391 $ 1,206,640 $1,199,976 $ 1,205,133 $ 1,204,987
Commercial and industrial 809,834 941,610 1,194,725 1,178,471 1,174,499 1,194,014
Other system revenues 28,537 36,069 47,832 50,499 50,513 52,472
---------- ---------- ----------- ---------- ----------- -----------
Total system revenues 1,638,541 1,898,070 2,449,197 2,428,946 2,430,145 2,451,473
Other revenues 69,075 24,682 29,238 36,011 36,290 32,541
---------- ---------- ----------- ---------- ----------- -----------
Total Revenues $1,707,616 $1,922,752 $ 2,478,435 $2,464,957 $ 2,466,435 $ 2,484,014
========== ========== =========== ========== =========== ===========
Sales - millions of kWh
Residential 5,743 5,400 7,170 7,121 7,203 7,156
Commerical and industrial 6,737 6,410 8,375 8,209 8,242 8,336
Other system sales 294 306 415 437 441 460
---------- ---------- ----------- ---------- ----------- -----------
Total system sales 12,774 12,116 15,960 15,767 15,886 15,952
========== ========== =========== ========== =========== ===========
Customers - at year end
Residential 939,346 931,917 928,580 922,330 920,930 915,162
Commercial and industrial 106,990 105,700 105,795 104,703 104,488 103,669
---------- ---------- ----------- ---------- ----------- -----------
Total 1,046,336 1,037,617 1,034,375 1,027,033 1,025,418 1,018,831
========== ========== =========== ========== =========== ===========
</TABLE>
Nine Months Ended December 31, 1998 and 1997
Revenues decreased approximately $215 million during the nine month period ended
December 31, 1998, compared to the similar period in 1997. The decrease in
revenue is principally the result of the rate reduction (of approximately 20%),
for all customers, effective May 29, 1998. The increase in sales volume, is
attributable to the rate reduction (reflecting the price elasticity of demand),
the effects of weather (as cooling degree days during the summer months of 1998
were greater than 1997 levels), combined with the addition of new customers.
Years Ended March 31, 1998 and 1997
The slight increase in revenues for the year ended March 31, 1998, when compared
to the year ended March 31, 1997, was primarily due to higher system sales
volumes resulting in part from the addition of approximately 8,000 new electric
customers and higher fuel expense recoveries, partially offset by lower sales to
other utilities.
29
<PAGE>
Years Ended December 31, 1996 and 1995
Revenue decreased approximately $18 million during the 12-month period ended
December 31, 1996, when compared to the similar period in 1995. This decrease is
primarily the result of weather, as the summer cooling season of 1996 included
fewer cooling degree days than that of 1995. It should be noted, however, that
LILCO experienced a growth in electric system sales in 1996 on a
weather-normalized basis compared to 1995. This growth was primarily
attributable to the addition of new electric customers.
Operating Expenses
Fuel and Purchased Power
Fuel and purchased power expenses for the nine months ended December 31, 1998
and 1997, the years ended March 31, 1998 and 1997, and for the years ended
December 31, 1996 and 1995 were as follows
<TABLE>
<CAPTION>
Nine Months
Ended December 31, Years Ended March 31, Years Ended December 31,
------------------ --------------------- ------------------------
1998 1997 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(In millions of dollars)
Fuel for Electric Operations
Oil $104 $ 80 $123 $128 $158 $ 98
Gas 119 166 197 170 138 149
Nuclear 7 11 15 15 15 14
Purchased power 248 235 323 333 329 310
---- ---- ---- ---- ---- ----
478 492 658 646 640 571
FPPCA 22 -- -- -- -- --
---- ---- ---- ---- ---- ----
Total $500 $492 $658 $646 $640 $571
==== ==== ==== ==== ==== ====
</TABLE>
30
<PAGE>
Fuel and purchased power mix for the nine months ended December 31, 1998 and
1997, the years ended March 31, 1998 and 1997, and years ended December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
Nine Months Years Ended Years Ended
Ended December 31, March 31, December 31,
----------------------------- ---------------------------- ------------------------------
MWh = Megawatt hours
1998 1997 1998 1997 1996 1995
------------ ------------ ----------- ------------ ------------- --------------
MWh % MWh % MWh % MWh % MWh % MWh %
--- - --- - --- - --- - --- - --- -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oil 3,983 28% 2,229 17% 3,434 20% 3,278 19% 4,219 24% 3,099 17%
Gas 4,358 31% 5,367 40% 6,212 35% 5,469 31% 4,542 25% 6,344 36%
Nuclear 912 6% 1,151 8% 1,545 9% 1,553 9% 1,558 9% 1,301 7%
Purchased power 4,800 35% 4,651 35% 6,412 36% 7,261 41% 7,388 42% 7,143 40%
------ --- ------ --- ------ --- ------ --- ------ --- ------ ---
Total 14,053 100% 13,398 100% 17,603 100% 17,561 100% 17,707 100% 17,887 100%
====== === ====== === ====== === ====== === ====== === ====== ===
</TABLE>
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 provides LIPA with the ability to collect from its
customers, and requires LIPA to return to its 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 thereafter.
Nine Months Ended December 31, 1998 and 1997
Fuel expense for the nine month period ended December 31, 1998 increased
approximately $8 million, when compared to the similar period of 1997,
principally as a result of the recognition of an expense associated with the
FPPCA mechanism, which totaled approximately $22 million, thereby matching fuel
expense with fuel revenue. A corresponding liability was recorded to recognize
these overcollections. Fuel expense incurred to generate and or purchase
electric energy decreased approximately $14 million (exclusive of the FPPCA
mechanism adjustment), despite a 5% increase in energy requirements. This
decrease is primarily attributable to decreasing oil prices and slightly lower
gas prices partially offset by the fees paid to KeySpan by LIPA under the EMA.
Under this agreement, KeySpan is required to deliver the most economical energy
available, whether that energy comes from generation owned by KeySpan or
purchased from others.
Years Ended March 31, 1998 and 1997
Fuel costs increased as a result of higher system sales volumes. During 1998,
the price per kilowatt hours ("kWh") of power purchased increased over 1997. As
a result, LILCO changed the mix of generation and purchased power in 1998, when
compared to 1997, by generating more electricity using gas and oil rather than
purchasing the equivalent energy off-system.
Years Ended December 31, 1996 and 1995
Despite a slight decrease in energy requirements, fuel expense increased as a
result of a sharp increase in the cost of natural gas and an increase in the per
unit cost of purchased power. LILCO increased generation with oil to minimize
the impact of increasing gas prices on generation costs.
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<PAGE>
Operations and Maintenance Expenses
Nine Months Ended December 31, 1998 and 1997
Operations and Maintenance ("O&M") expenses, excluding fuel and purchased power,
were $467 million and $304 million for the nine month periods ended December 31,
1998 and 1997, respectively. The increase is primarily due to the manner in
which LILCO classified certain expenses such as depreciation and amortization,
property taxes and other operating taxes. 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. These expenses were separately
reported by LILCO. In addition, there were charges incurred by LIPA related to
the overhead expenses of the Authority, and charges incurred by LILCO for
certain employee benefit expenses, including non-officer incentives and
previously deferred vacation accruals, which were recognized during the period
April 1, 1998 through May 28, 1998.
Years Ended March 31, 1998 and 1997
O&M expenses, excluding fuel and purchased power, were $404 million and $376
million, for the years ended March 31, 1998 and 1997, respectively. This
increase in O&M was primarily due to the recognition of higher performance-based
employee incentives and certain other charges for employee benefits related to
the Merger.
Years Ended December 31, 1996 and 1995
O&M expenses, excluding fuel and purchased power, were $386 million and $399
million, for the years ended December 31, 1996 and 1995, respectively. This
decrease in O&M was primarily due to LILCO's cost containment program which
resulted in lower plant maintenance, distribution and administrative and general
expenses.
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 fiscal year ended March 31, 1998, LILCO recorded approximately $65.1 million
more of non-cash RMC credits to income (representing accretion of the RMC
balance), or $42.5 million net of tax, representing $.35 per share more than it
would have under the previous method.
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<PAGE>
Nine Months Ended December 31, 1998 and 1997
As mentioned above, adjustments were made on May 29, 1998 to eliminate all
regulatory assets and liabilities from the balance sheet; accordingly, the
results of operations for the nine months ended December 31, 1998 include only
amortization for the period April 1, 1998 through May 28, 1998.
Years Ended March 31, 1998 and 1997
For the years ended March 31, 1998 and March 31, 1997, LILCO recorded non-cash
credits to income of approximately $52 million and $30 million, respectively,
representing the amount by which its revenue requirements exceeded revenues
provided for under the electric rate structure then in effect. Partially
offsetting these accretions was the effect of the FMC mechanism and the
difference between actual NMP2 costs and the amounts provided for in electric
rates. The adjustments to the accretion of the RMC totaled $17 million and $27
million, respectively, of which $12 million and $23 million, respectively, were
derived from the operation of the FMC mechanism.
Years Ended December 31, 1996 and 1995
For the year ended December 31, 1996, LILCO recorded a non-cash credit to income
of approximately $50 million, representing the amount by which revenue
requirements exceeded revenues provided for under the electric rate structure
then in effect. Partially offsetting this accretion were the effects of the FMC
mechanism and the difference between actual NMP2 costs and the amounts provided
for in electric rates. The adjustments to the accretion of the RMC totaled $26
million, of which $24 million was derived from the operation of the FMC
mechanism.
For the year ended December 31, 1995, LILCO recorded a non-cash charge to income
of approximately $22 million, after giving effect to the credits generated
principally by the operation of the FMC mechanism.
For a further discussion of the RMC, see Note 3 of Notes to Financial
Statements.
Other Regulatory Amortization
The significant components of LILCO's other regulatory amortization were as
follows:
(In millions of dollars)
(Income) Expense
------------------------------------
Nine Months Ended Years Ended Years Ended
December 31, March 31, December 31,
1998 1997 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
Net Margin $ - $ 13 $ 2 $(5) $ 3 64
LRPP Amortization - - - 42 59 53
Excess Earnings (2) (5) (3) 21 10 3
Shoreham Post
Settlement Costs 5 23 31 30 29 27
Other 12 5 6 8 9 9
----- ----- ---- --- ----- ----
$ 15 $ 36 $ 36 $96 $ 110 $156
===== ===== ==== === ===== ====
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<PAGE>
Net Margin - An electric business unit revenue reconciliation mechanism,
established under the LRPP (as discussed below), which eliminated the impact on
earnings of sales that were above or below those amounts provided in electric
rates 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 the differences between the actual net margin sales levels and those
provided for in rates were deferred on a monthly basis during the rate year
through a charge or credit to other regulatory amortization. These deferrals
were then refunded to or recovered from customers as explained below under "LRPP
Amortization."
LRPP Amortization - Under LILCO Ratemaking and Performance Plan ("LRPP"),
deferred balances resulting from the net margin, electric property tax expense
reconciliation, earned performance incentives, and associated carrying charges
were accumulated during each rate year. The first $15 million of the total
deferral was recovered from or credited to electric customers by increasing or
decreasing the RMC balance. Amounts deferred in excess of $15 million, upon
approval by the PSC, were refunded to or recovered from customers through the
Fuel Cost Adjustment ("FCA") mechanism over a subsequent 12-month period, with
the offset being recorded in other regulatory amortization.
For the rate years ended November 30, 1997 and 1996, the total amount deferred
under the LRPP was $4.0 and $15.0 million, respectively. Such amounts were
credited against the RMC balance.
Nine Months Ended December 31, 1998 and 1997
As mentioned above, adjustments were made on May 29, 1998 to eliminate all
regulatory assets and liabilities from the balance sheet; accordingly, the
results of operations for the nine months ended December 31, 1998 include only
amortization for the period April 1, 1998 through May 28, 1998.
Years Ended March 31, 1998 and 1997
For the year ended March 31, 1998, there was no LRPP amortization, as LILCO had
not received approval from the PSC to begin refunding $26 million of the
remaining deferred LRPP balance in excess of $15 million for the rate year ended
November 30, 1995. For the year ended March 31, 1997, LILCO recognized $42.4
million of non-cash charges to income representing the amortization of the
deferred LRPP balance related to the rate year ended November 30, 1994.
Years Ended December 31, 1996 and 1995
For the year ended December 31, 1996, LILCO recognized $58.7 million of non-cash
charges to income representing the amortization of the deferred LRPP balance
related to the rate year ended November 30, 1994.
For the year ended December 31, 1995, LILCO recognized $52.9 million of non-cash
charges to income representing the amortization of the deferred LRPP balance
related to the rate year ended November 30, 1993.
For a further discussion of the LRPP, see Note 3 of Notes to Financial
Statements.
Excess Earnings - Also recorded in other regulatory amortization, if applicable,
were non-cash charges representing: (a) 100% of electric earnings generated by
LILCO in excess of amounts provided for in electric rates, which was returned to
electric customers through a reduction to the RMC balance; and (b) 50% of the
gas earnings generated by LILCO in excess of amounts provided for in gas rates,
which was returned to firm gas customers. Effective February 5, 1998, LILCO, in
accordance with PSC guidelines, established a gas balancing account in order to
defer excess gas earnings for future disposition. For the
34
<PAGE>
rate year ended November 30, 1997, the electric business earned $4.8 million in
excess of its allowed return on common equity and the firm gas customers'
portion of the gas business earnings was $6.3 million.
Shoreham Post Settlement Costs - Represented the amortization of Shoreham
decommissioning costs, fuel disposal costs, PILOT's, carrying charges and other
costs over a forty-year period on a straight line remaining life basis.
Nine Months Ended December 31, 1998 and 1997
As previously indicated, adjustments were made on May 29, 1998 to eliminate all
regulatory assets and liabilities on the balance sheet; accordingly, the results
of operations for the nine months ended December 31, 1998 only include
amortization for the period April 1, 1998 through May 28, 1998.
Years Ended March 31. 1998 and 1997
Other regulatory amortization was a non-cash charge to income of $36 million and
$96 million for the years ended March 31, 1998 and 1997, respectively. For the
year ended March 31, 1997, LILCO recognized approximately $42 million of charges
representing the amortization of the deferred LRPP balance associated with the
rate year ended November 30, 1994. For the year ended March 31, 1998, there was
no LRPP amortization, as LILCO had not received approval from the PSC to begin
refunding $26 million of the remaining deferred LRPP balance in excess of $15
million for the rate year ended November 30, 1995. Also contributing to the
decrease in other regulatory amortization was the timing of the recognition of
electric excess earnings for the rate years ended November 30, 1997 and 1996.
Years Ended December 31, 1996 and 1995
Other regulatory amortization was a non-cash charge to income of $110 million
and $156 million for the years ended December 31, 1996 and 1995, respectively.
This decrease is primarily attributable to the operation of the net margin
discussed above. For the year ended December 31, 1995, the amount deferred
related to the net margin amounted to $64 million compared to $3 million for the
year ended December 31, 1996.
Depreciation and Amortization
Nine Months Ended December 31, 1998 and 1997
Depreciation and amortization expense increased approximately $47 million for
the nine month period ended December 31, 1998, when compared to the similar
period of the prior year, primarily due to the amortization of the acquisition
adjustment totaling approximately $10 million per month beginning June 1998.
This increase was 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
Nine Months Ended December 31, 1998 and 1997
Operating taxes were $218 million and $296 million for the nine month periods
ended December 31, 1998 and 1997, respectively. The decrease is principally the
result of the absence of property and payroll taxes related to the operation of
the non-nuclear generating facilities of LILCO and reduced revenue taxes
35
<PAGE>
(due to lower revenues), partially offset by PILOTS on the Shoreham Nuclear
Power Station (LILCO was able to capitalize these PILOTS under its electric rate
structure).
Years Ended December 31, 1996 and 1995
Operating taxes were $390 million and $375 million for the years ended December
31, 1996 and 1995, respectively. The increase in 1996, as compared to 1995, is
primarily related to higher property taxes.
Customer Rebates
Nine Months Ended December 31, 1998 and 1997
During the period May 29, 1998 to December 31, 1998, LIPA paid customer rebates
of $169 million relating to Shoreham property tax over assessments (for a
further discussion see Note 13 of the Notes to Financial Statements). Such
rebates were contemplated as a part of the Merger and were recognized as an
expense in the period.
Federal Income Tax
Nine Months Ended December 31, 1998 and 1997
LIPA was not subject to Federal income tax for seven of the nine months in this
reporting period (May 29 to December 31, 1998), which contributed significantly
to the $241 million decrease in operating Federal income tax expense when
compared to the similar period in 1997. In addition, adjustments related to the
Merger, recorded during the two month period April 1 to May 28, 1998, also
contributed to this decrease.
The increase in non-operating Federal income tax expense of approximately $85
million for the nine months ended December 31, 1998, when compared to the
similar period in 1997, was principally the result of events which took place
during the period April 1, 1998 to May 28, 1998, including, an increase in
non-operating pretax income and various adjustments related to the Merger. These
increases were partially offset by the impact of LIPA's exemption from Federal
income taxes.
Years Ended March 31, 1998 and 1997
Federal income tax was $210 million and $179 million for the years ended March
31, 1998 and 1997, respectively. The increase in federal income tax was
primarily attributable to higher pre-tax earnings partially offset by the
utilization of investment tax credits.
Other Income and Deductions, Net
Years Ended March 31, 1998 and 1997
Other income and deductions was a $7 million charge to income for the year ended
March 31, 1998, compared to a $10 million credit to income for the same period
in 1997. The difference of approximately $17 million, relates primarily to a
charge of approximately $31 million for certain benefits earned by LILCO
officers recorded in 1998. For a further discussion of this matter, see Note 10
of Notes to Financial Statements.
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<PAGE>
Years Ended December 31, 1996 and 1995
Other income and deductions totaled a credit to income of $14 million for the
year ended December 31, 1996, compared to $31 million for the same period in
1995. The decrease in 1996, when compared to 1995, is primarily attributable to
the recognition of non-recurring expenditures associated with one of LILCO's
wholly-owned subsidiaries, a decrease in non-cash carrying charge income
associated with regulatory assets not currently in rate base and the recognition
in 1995 of certain litigation proceeds related to the construction of the
Shoreham Nuclear Power Station.
Interest Expense
Nine Months Ended December 31, 1998 and 1997
Interest expense for the nine month period ended December 31, 1998 is
approximately $11 million less than that of the similar 1997 period. This
decrease is principally attributable to the lower borrowing rates of LIPA
relative to the borrowing rates of LILCO. This decrease in interest expense was
partially offset by the higher levels of debt that LIPA has outstanding during
this period, when compared to LILCO during the similar 1997 period. This
increase in the level of debt is due to the refinancing by LIPA of LILCO's
equity.
Years Ended March 31, 1998 and 1997
Interest expense for the year ended March 31, 1998 totaled $404 million compared
to $435 million for the year ended March 31, 1997. This decrease is primarily
attributable to lower outstanding debt levels, as LILCO retired $250 million of
the General and Refunding Bonds in February 1997.
Years Ended December 31, 1996 and 1995
Interest expense for the year ended December 31, 1996 totaled $448 million,
compared to $472 million for the year ended December 31, 1995. This decrease is
primarily attributable to lower outstanding debt levels, partially offset by
higher letter of credit and commitment fees associated with the change in
LILCO's credit rating in 1996.
Liquidity and Capital Resources
Liquidity
During the period May 29, 1998 to December 31, 1998, LIPA received approximately
$6.7 billion from the Authority to finance the Merger, as more fully discussed
in Note 7 of Notes to the Financial Statements, in exchange for a Promissory
Note. All cash from customers payments and other sources is collected by the
Authority. The Authority makes all disbursements 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 $448 million of its debt to
the Authority because cash collected by the Authority from customers and other
sources during this period 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.
37
<PAGE>
At December 31, 1998, the Authority's and LIPA's cash and cash equivalents
amounted to approximately $517 million. In addition, LIPA has designated funds
aggregating $195 million on hand, $62 million of which are available to fund
capital expenditures.
During 1998, pursuant to a tender offer and a notice of redemption for certain
debentures, LIPA refinanced approximately $1.5 billion of the debentures assumed
from LILCO. In addition, during 1998, LIPA defeased $323 million of the New York
State Energy Research and Development Authority ("NYSERDA") Notes assumed from
LILCO. For further discussion of the Bond refundings and defeasance see Note 7
of the Notes to the Financial Statements. Subsequent to December 31, 1998, LIPA
retired approximately $133 million of debt. In March 1999, LIPA converted
certain of its variable rate NYSERDA Bonds to a fixed rate, as more fully
described in Note 15 of Notes to the Financial Statements. LIPA believes that
cash from operations for 1999 will be sufficient to meet its operating, capital
and debt service requirements. However, LIPA will access the capital markets in
1999 in order to finance capital expenditures and to refinance higher cost debt,
if conditions prove favorable.
LIPA estimates that for 1999, capital spending will total approximately $124
million. With respect to debt maturities subsequent to 1998, the Authority will
use cash generated from operations to satisfy such maturities.
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.
During 1998, the Authority issued rebate checks to all of its customers in the
amount of $232 for each Nassau County and Rockaway customer and $101 for each
Suffolk County customer. The total amount of the rebate program was
approximately $169 million. In addition, 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.
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 has been advised by KeySpan that the amount of
capital expenditures budgeted to be made in 1999 is adequate to maintain system
reliability and insures customer and employee safety.
Investment Rating
Securities of the Authority and LIPA, which are not supported by letters of
credit, are rated by Fitch IBCA, Inc. ("Fitch"), Moody's Investors Services,
Inc. ("Moody's") and Standard & Poor's Rating Services, a division of the
McGraw-Hill Companies, Inc. ("S&P").
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<PAGE>
The rating for each of the Authority's and LIPA's principal securities is as
follows:
S&P Moody's Fitch
LIPA Debt
Debentures A- Baa1 BBB+
NYSERDA's A- Baa3 BBB+
Authority Debt
General Revenue Bonds, Series 1998A (Insured) AAA Aaa AAA
General Revenue Bonds, Series 1998A A- Baa1 A-
General Revenue Bonds, Series 1998B (Insured) AAA Aaa AAA
General Revenue Bonds, Series 1998B A- Baa1 A-
Subordinated Revenue Bonds, Series 1-2* AAA Aaa AAA
Subordinated Revenue Bonds, Series 3-4* AAA Aaa AAA
Subordinated Revenue Bonds, Series 5-6* AA+ Aaa AA+
Subordinated Revenue Bonds, Series 7 (Insured) AAA Aaa AAA
Subordinated Revenue Bonds, Series 8 (Insured) AAA Aaa AAA
*Supported by letters of credit - ratings reflect those of the banks issuing
those letters of credit.
The Board of Trustees of the Authority has adopted a resolution directing
management of the Authority and LIPA to implement procedures to improve the
ratings on the debt of the Authority and LIPA. To date, no such procedures have
been implemented and there can be no assurance that such procedures, if and when
implemented will improve the ratings.
Impact of Year 2000
General.
A portion of the computer hardware and software and embedded technology (such as
microcontrollers and microprocessors contained in equipment and machinery) used
by the Authority and LIPA, as well as KeySpan and the subsidiaries of KeySpan
that are parties to the MSA, EMA and PSA and others with whom the foregoing have
business arrangements, was not designed to recognize calendar years after 1999
(the "Year 2000 Issue").
The Authority recently purchased new computer software to support certain
activities of LIPA and believes that these systems are Year 2000 ready.
Management also believes that, based on available information, it will be able
to manage its Year 2000 transition for systems and infrastructure, without any
material adverse effect on its business operations or financial prospects.
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
continuing discussions with KeySpan, their largest vendor, who is responsible
for the management and operation of LIPA's transmission and distribution system,
and KeySpan indicates that they have evaluated the extent to which modifications
to computer software, hardware and databases will be necessary to accommodate
the year 2000.
KeySpan's computer applications are generally based on two digits and do require
additional programming to recognize the new millennium. A corporate-wide program
has been established by 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 KeySpan's
Year 2000 Program Office, chaired by the Vice President, Technology Operations
and Corporate Y2K Officer. Each of KeySpan's critical business processes is
being reviewed to: identify and inventory sub-components; assess for Year 2000
compliance;
39
<PAGE>
establish repair plans as necessary; and test in a Year 2000 environment. The
inventory phase for the IT systems and non-IT systems is 100% complete. The
assessment phase is 100% complete for the IT systems, and over 90% complete for
non-IT systems. The assessment phase is expected to be complete by July 1, 1999.
KeySpan's hardware, software and embedded systems are being tested and certified
to be Year 2000 compliant. Repair and testing to sustain operability is now 73%
complete for the IT systems and approximately 75% for the non-IT systems.
Components needed to support the critical business process and associated
business contingency plans are expected to be ready for the year 2000 by July 1,
1999.
KeySpan's vendors and business partners needed to support the critical business
processes of KeySpan are also being reviewed for their year 2000 compliance. At
this time, none of these vendors have indicated to Key Span that they will be
materially affected by the year 2000 problem.
Key-Span has analyzed each of the critical business processes to identify
possible Year 2000 risks. Each of KeySpan's critical businesses will be
certified by the responsible KeySpan officer as being Year 2000 ready. However,
the most reasonable likely worst case scenarios are also being identified.
Business operating procedures at KeySpan will be reviewed to ensure that risks
are minimized when entering the Year 2000 and other high risk dates. KeySpan is
developing contingency plans to address possible failure points in each critical
business process.
While KeySpan must plan for the following 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
electricity since many of the plants have the ability to operate on oil.
Loss of electric grid inter-connections/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 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's operations from the grid, 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 malfunction due to Year 2000 problems.
KeySpan has inventoried electric system components and developed a plan to
certify mission critical processes as Year 2000 compliant. Contingency plans are
being developed, where appropriate, for loss of critical system elements.
KeySpan presently estimates that contingency plans regarding its electric
facilities should be completed by July 1999.
Loss of telecommunications:
KeySpan has a substantial dependency on many telecommunication systems and
services for both internal and external communications. External communications
with the public and the ability of customers to contact KeySpan in cases of
emergency response is 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
40
<PAGE>
operating areas that rely on external communication providers. Contingency plans
will address methods for manually monitoring these functions. These contingency
plans, KeySpan presently estimates, should be finalized by July 1999.
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 operation; reduction in quality of power output; loss of automated meter
reading; loss of ability to read, bill and collect; 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 are not made, or are not completed on time, and contingency
plans fail the Year 2000 issue could have a material adverse impact on the
operations of LIPA.
LIPA's Contingency Plans
In order to insure that the Year 2000 will have a minimal impact on the
operations of LIPA, LIPA is closely monitoring the initiatives and progress of
KeySpan's Year 2000 Program Office. In addition, LIPA is working with various
other governmental agencies to insure communication between LIPA and such other
governmental entities is uninterrupted.
Rate Matters
For a discussion of Rate Matters, see Note 4 of Notes to Financial Statements.
Competitive Environment
Fostering competition in wholesale and retail electric power has become a
significant policy goal in many states, including New York, as well as at the
federal level. The fostering of competition has been accompanied by and requires
separating power supply services and costs from electric transmission and
distribution services and costs. In New York and many other states, there have
been regulatory actions to promote competition in the supply of power by
requiring, among other things, that utilities sell all or part of their
non-nuclear generating plants. Federal regulation of transmission has been the
focus of increasing action and attention as transmission is viewed as the
vehicle for delivery of competitively priced generation to wholesale and retail
customers. In general, transmission and distribution is viewed as an inherently
monopoly function that must remain regulated.
The Merger accomplished the disaggregation of ownership of power supply (with
the exception of the 18% interest in NMP2) from the provision of transmission
and distribution services in the Service Area. Through the Merger, the ownership
and operation of the transmission and distribution system on Long Island became
LIPA's business and responsibility, and the on-island generating resources
became owned by, and the responsibility of, KeySpan. The PSA provides for
KeySpan to supply LIPA with all of the capacity and to the extent LIPA requests,
energy from the electric generation facilities on Long Island previously owned
by LILCO. LIPA continues to own an 18% interest in NMP2, which is not on Long
Island and which is operated by Niagara Mohawk Power Corporation.
The Authority's effort at creating competition in power supply resources is to
gradually create a competitive retail market for power supply. The Authority has
adopted a customer retail choice plan intended to lead to full choice among
power suppliers by all retail customers by 2003. Under the retail choice plan,
the Authority will initially provide customers representing an aggregate load of
400 MW the option of selecting competitive suppliers of electric capacity and
energy. During this initial phase of the
41
<PAGE>
retail choice plan, anticipated to begin by August 1, 1999, available program
load will be apportioned among residential and other classes of customers.
Approximately 90,000 residential customers will be eligible to participate.
Regardless of a customer's choice of electricity supplier, LIPA will remain the
sole provider of transmission and distribution services to customers in the
Service Area. LIPA plans to set rates for delivery service to include all costs
that are not avoidable once customers choose alternative suppliers, with the
intent that the Authority be kept revenue neutral. Costs that the Authority will
not be able to avoid, and therefore will be included in the rates for delivery
service, include its debt service obligations and any long-term power purchase
contracts, among other items. The Authority's retail choice plan has been
designed to assume that LIPA will continue to recover all costs needed for safe
and reliable T&D System operation and to meet its financial obligations,
regardless of customer participation in the Authority's retail choice program.
Customers could reduce LIPA's role of supplying and delivering electric capacity
and energy through the installation of their own generating facilities.
Self-generation is most attractive to customers who are high energy load factor
users, such as hospitals, or manufacturers with multiple shift operations. There
are few such customers of significant size on Long Island.
Recent Accounting Pronouncements
Derivative Instruments
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
LIPA will adopt SFAS No. 133 in the first quarter of fiscal year 2000. LIPA does
not expect any material earnings effect from adoption of this statement.
Plant Decommissioning
In February 1996, the FASB issued an exposure draft entitled "Accounting for
Certain Liabilities Related to Closure and Removal of Long-Lived Assets," which
includes nuclear plant decommissioning. Over the past two years, this exposure
draft has been the source of continual debate. The FASB has committed to
completing the project and is proceeding toward issuance of another exposure
draft (expected in the second quarter of 1999). If the accounting standard
proposed in such exposure draft were adopted, it could result in higher annual
provisions for removal or decommissioning to be recognized earlier in the
operating life of nuclear and other generating units and an accelerated
recognition of the decommissioning obligation. The FASB is continuing to explore
various issues associated with this project including liability measurement and
recognition issues. In addition, an effective date for the new exposure draft
has not yet been determined. The FASB is deliberating this issue and the
resulting final pronouncement could be different from that proposed in the
exposure draft. LIPA can make no prediction at this time as to the ultimate form
of such proposed accounting standard, assuming it is adopted, nor can it make
any prediction as to its ultimate effect(s) on the financial condition of LIPA.
Investments
GASB Statement No. 31, "Accounting and Financial Reporting for Certain
Investments and for External Investment Pools," was implemented during the
period ending December 31, 1998. The statement generally requires that
investments should be reported in the balance sheet at fair value and that
realized and unrealized gains and losses on investments flow through the
statement of operations. The impact of this statement did not have a material
impact on LIPA.
42
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Authority's and LIPA's debt
instruments that are sensitive to interest rates.
Expected Maturity Date
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Term Debt:
Fixed Rate $398,000 $1,278 $9,460 $3,500 $9,390 $682,083 $1,103,711 $1,269,784
Average Interest Rate 7.30% 7.50% 6.60% 7.50% 7.20% 7.10%
Variable Rate $203,580 $127,960 $147,130 $167,385 $161,515 $5,606,779 $6,414,349 $6,625,862
Average Interest Rate 5.90% 4.10% 4.30% 4.60% 4.40% 5.00%
</TABLE>
43
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
To the Board of Directors
Long Island Lighting Company d/b/a LIPA
In our opinion, the accompanying balance sheet and statement of capitalization
and the related statements of operations, (accumulated deficit) retained
earnings and of cash flows present fairly, in all material respects, the
financial position of Long Island Lighting Company d/b/a LIPA ("LIPA") at
December 31, 1998, and the results of its operations and its cash flows for the
period May 29, 1998 to December 31, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
LIPA's management; our responsibility is to express an opinion on these
financial statements based on our audit. The accompanying financial statements
of the Long Island Lighting Company as of March 31, 1998 and December 31, 1996
and for the years ended March 31, 1998 and December 31, 1996 and for the three
months ended March 31, 1997 were audited by other auditors whose report thereon
dated May 22, 1998, expressed an unqualified opinion on those statements, before
the restatement described in Note 2 to the financial statements. We conducted
our audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
We also audited the adjustments described in Note 2 that were applied to restate
the statement of operations for the years ended March 31, 1998 and December 31,
1996 and the three months ended March 31, 1997, for discontinued operations
treatment. In our opinion, such adjustments are appropriate and have been
properly applied.
The year 2000 supplementary information on page 94 is not a required part of the
basic financial statements but is supplementary information required by the
Governmental Accounting Standards Board, and we did not audit and do not express
an opinion on such information. Further, we were unable to apply to the
information certain procedures required by professional standards because the
disclosure criteria specified by TB 98-1, as amended, are not sufficiently
specific and, therefore, preclude the prescribed procedures from providing
meaningful results. In addition, we do not provide assurance that LIPA is or
will become year 2000 compliant, that LIPA's year 2000 remediation efforts will
be successful in whole or in part, or that parties with which LIPA does business
are or will become year 2000 compliant.
PricewaterhouseCoopers LLP
Melville, New York
March 5, 1999
44
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Long Island Power Authority:
We have audited the accompanying statements of income and cash flows of Long
Island Lighting Company (a New York corporation) for the period April 1, 1998 to
May 28, 1998. These financial statements are the responsibility of Long Island
Lighting Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statements of income and cash flows are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the statements of income and cash
flows. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statements of income and cash flows referred to above
present fairly, in all material respects, the results of operations and cash
flows of Long Island Lighting Company for the period April 1, 1998 to May 28,
1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
February 12, 1999
45
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Shareowners and Board of Directors of Long Island Lighting Company:
We have audited the accompanying balance sheet of Long Island Lighting Company
and the related statement of capitalization as of March 31, 1998 and December
31, 1996 and the related statements of income (prior to restatement to present
the gas business as a discontinued operations), retained earnings and cash flows
for the year ended March 31, 1998, the three months ended March 31, 1997 and the
year ended December 31, 1996. Our audits also included the financial statement
schedule listed in the index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits. We did not audit the restatements described in Note 2 to present the
operations of the gas business as a discontinued operation for the years ended
March 31, 1998 and December 31, 1996 and the three months ended March 31, 1997.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Long Island Lighting Company at
March 31, 1998 and December 31, 1996 and the results of its operations (prior to
restatement) and its cash flows for the year ended March 31, 1998, the three
months ended March 31, 1997 and the year ended December 31, 1996, in conformity
with generally accepted accounting principles. Also, in our opinion the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
During the year ended March 31, 1998 the Company changed its method of
accounting for revenues provided for under the Rate Moderation Component.
ERNST & YOUNG LLP
Melville, New York
May 22, 1998
46
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
LIPA LILCO
------------ -----------------------
December 31, March 31, December 31,
1998 1998 1996
---- ---- ----
<S> <C> <C> <C>
Assets
Utility Plant
Electric $2,047,992 $ 4,031,510 $ 3,882,297
Gas -- 1,233,281 1,154,543
Common 3,827 290,221 260,268
Construction work in progress 52,897 118,808 112,184
Nuclear fuel in process and in reactor 17,053 18,119 15,454
---------- ----------- -----------
2,121,769 5,691,939 5,424,746
Less- Accumulated depreciation and amortization 50,287 1,877,858 1,729,576
---------- ----------- -----------
Total Net Utility Plant 2,071,482 3,814,081 3,695,170
---------- ----------- -----------
Regulatory Assets
Base financial component, net of accumulated
amortization of $883,496 at March 31, 1998,
$757,282 at December 31, 1996 -- 3,155,334 3,281,548
Rate moderation component -- 434,004 402,213
Shoreham post-settlement costs -- 1,005,316 991,795
Shoreham nuclear fuel -- 66,455 69,113
Unamortized cost of issuing securities -- 159,941 194,151
Postretirement benefits other than pensions -- 340,109 360,842
Regulatory tax asset -- 1,737,932 1,772,778
Other -- 192,763 199,879
---------- ----------- -----------
Total Regulatory Assets -- 7,091,854 7,272,319
---------- ----------- -----------
Current Assets
Cash and cash equivalents -- 180,919 279,993
Special deposits -- 95,790 38,266
Customer accounts receivable (less allowance
for doubtful accounts of $20,211, $23,483
and $25,000, respectively) 119,161 297,889 255,801
Other accounts receivable 10,096 43,744 65,764
Accrued unbilled revenues 78,414 124,464 169,712
Promissory note receivable 398,000 -- --
Materials and supplies at average cost -- 54,883 55,789
Fuel oil at average cost -- 32,142 53,941
Gas in storage at average cost -- 14,634 73,562
Deferred tax asset - net operating loss -- -- 145,205
Prepayments and other current assets 28,583 13,807 8,569
---------- ----------- -----------
Total Current Assets 634,254 858,272 1,146,602
---------- ----------- -----------
Promissory Note Receivable 646,902 -- --
---------- ----------- -----------
Designated Funds 194,972 -- --
---------- ----------- -----------
Nonutility Property and Other Investments 19,410 50,816 18,597
---------- ----------- -----------
Deferred Charges 78,507 85,702 76,991
---------- ----------- -----------
Acquisition Adjustment (net of accumulated
amortization of $68,766 at December 31, 1998) 4,026,956 -- --
---------- ----------- -----------
Total Assets $7,672,483 $11,900,725 $12,209,679
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
47
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
LIPA LILCO
------------ ----------------------------
Deember 31, March 31, December 31,
1998 1998 1996
---- ---- ----
<S> <C> <C> <C>
Capitalization
Long-term debt $ 778,075 $ 4,395,555 $ 4,471,675
Unamortized discount on debt -- (13,606) (14,903)
Note Payable - the Authority 5,355,085 -- --
Due to the Authority 855,684 -- --
----------- ------------ ------------
6,988,844 4,381,949 4,456,772
----------- ------------ ------------
Preferred Stock - redemption required -- 562,600 638,500
Preferred Stock - no redemption required -- -- 63,664
----------- ------------ ------------
Total Preferred Stock -- 562,600 702,164
----------- ------------ ------------
Common stock -- 608,635 603,921
Premium on capital stock -- 1,146,425 1,127,971
Capital stock expense -- (47,501) (49,330)
(Accumulated deficit) retained earnings (79,981) 956,092 840,867
Treasury stock, at cost -- (1,204) (60)
----------- ------------ ------------
Total Common Shareowners' (Deficit) Equity (79,981) 2,662,447 2,523,369
----------- ------------ ------------
Total Capitalization 6,908,863 7,606,996 7,682,305
----------- ------------ ------------
Regulatory Liabilities
Regulatory liability component -- 99,199 198,398
1989 Settlement credits -- 59,397 127,442
Regulatory tax liability -- 78,913 102,887
Other -- 151,922 139,510
----------- ------------ ------------
Total Regulatory Liabilities -- 389,431 568,237
----------- ------------ ------------
Current Liabilities
Current maturities of long-term debt 398,000 101,000 251,000
Current redemption requirements of preferred stock -- 139,374 1,050
Due to the Authority 70,880 -- --
Due to KeySpan 75,085 -- --
Accounts payable and accrued expenses 35,921 228,583 289,141
LRPP payable -- 30,118 40,499
Accrued taxes 79,021 34,753 63,640
Accrued interest 29,851 146,607 160,615
Dividends payable -- 58,748 58,378
Class Settlement -- 60,000 55,833
Customer deposits 23,205 28,627 29,471
----------- ------------ ------------
Total Current Liabilities 711,963 827,810 949,627
----------- ------------ ------------
Deferred Credits
Deferred federal income tax - net -- 2,539,364 2,442,606
Class Settlement -- 46,940 98,497
Other 34,059 22,529 39,447
----------- ------------ ------------
Total Deferred Credits 34,059 2,608,833 2,580,550
----------- ------------ ------------
Operating Reserves
\Pensions and other postretirement benefits -- 401,401 381,996
Claims and damages 17,598 66,254 46,964
----------- ------------ ------------
Total Operating Reserves 17,598 467,655 428,960
----------- ------------ ------------
Commitments and Contingencies
----------- ------------ ------------
Total Capitalization and Liabilities $ 7,672,483 $ 11,900,725 $ 12,209,679
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Statement of Operations
(Thousands of Dollars--Except Per Share Information)
<TABLE>
<CAPTION>
LIPA LILCO
-------------- -----------------------------------------------------
Year Three Months Year
May 29, 1998 April 1, 1998 Ended Ended Ended
to December 31, to May 28, March 31, March 31, December 31,
1998 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue - Electric $ 1,377,605 $ 330,011 $ 2,478,435 $ 557,791 $2,466,435
Expenses
Operations - fuel and purchased power 408,192 91,762 658,338 165,140 640,610
Operations and maintenance 398,193 68,993 403,944 90,875 386,322
Depreciation and amortization 121,969 22,986 131,186 31,993 128,534
Base financial component amortization -- 16,014 100,971 25,243 100,971
Rate moderation component amortization -- (39,574) (35,079) 5,907 (24,232)
Regulatory liability component amortization -- (14,048) (88,572) (22,143) (88,573)
Other regulatory amortization -- 14,694 36,039 10,159 109,532
Operating taxes 157,561 60,885 388,592 92,398 390,861
Customer rebates 168,806 -- -- -- --
Federal income tax - current -- (79,081) 76,890 23,378 42,197
Federal income tax - deferred and other -- 1,219 133,495 6,548 138,307
----------- --------- ----------- --------- ---------
Total Expenses 1,254,721 143,850 1,805,804 429,498 1,824,529
----------- --------- ----------- --------- ---------
Operating Income 122,884 186,161 672,631 128,293 641,906
----------- --------- ----------- --------- ---------
Other Income and (Deductions)
Other income and deductions, net 25,041 (28,581) 554 1,263 18,724
Allowance for other funds used during construction -- 374 1,881 530 1,400
Federal income tax - current -- (67,259) 594 -- --
Federal income tax - deferred and other -- (22,094) 1,104 1,068 1,456
----------- --------- ----------- --------- ---------
Total Other Income and (Deductions) 25,041 (117,560) 4,133 2,861 21,580
----------- --------- ----------- --------- ---------
Income from Continuing Operations
Before Interest Charges 147,925 68,601 676,764 131,154 663,486
----------- --------- ----------- --------- ---------
Interest Charges and (Credits)
Interest on long-term debt, net 76,392 56,258 351,261 90,168 384,198
Interest on advances from and note payable to the
Authority 142,882 -- -- -- --
Other interest 9,933 9,800 57,805 16,659 67,130
Allowance for borrowed funds used during construction (1,301) (540) (4,593) (949) (3,699)
----------- --------- ----------- --------- ---------
Total Interest Charges 227,906 65,518 404,473 105,878 447,629
----------- --------- ----------- --------- ---------
Income (loss) from continuing operations (79,981) 3,083 272,291 25,276 215,857
Income (loss) from discontinued operations net of
taxes of zero, ($1,946), $23,966, $27,355,
and $30,209, respectively -- (4,480) 89,949 62,421 100,607
----------- --------- ----------- --------- ---------
Net Income (Loss) (79,981) (1,397) 362,240 87,697 316,464
Preferred stock dividend requirements -- 8,037 51,813 12,969 52,216
----------- --------- ----------- --------- ---------
Earnings (Loss) for Common Stock $ (79,981) $ (9,434) $ 310,427 $ 74,728 $ 264,248
=========== ========= =========== ========= =========
Basic and diluted earnings (loss) per common share
from continuing operations (a) N/A $ (.04) $ 1.82 $ .10 $ 1.36
Basic and diluted earnings (loss) per common share
from discontinued operations (a) N/A $ (.04) $ .74 $ .52 $ .84
Average Common Shares Outstanding (000) (a) N/A 121,864 121,415 120,995 120,360
Basic and Diluted Earnings per Common Share (a) N/A $ (.08) $ 2.56 $ .62 $ 2.20
Dividends Declared per Common Share (a) N/A $ .30 $ 1.78 $ .45 $ 1.78
</TABLE>
(a) Share and per share data are not meaningful on or after May 29, 1998
because of the significant change in the capital structure in connection
with the Merger and because no public equity of LIPA is outstanding as of
December 31, 1998.
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Statement of Cash Flows
(Thousands of Dollars)
<TABLE>
<CAPTION>
LIPA LILCO
------------- --------------------------------------------------
Year Three Months Year
May 29, 1998 April 1, 1998 Ended Ended Ended
to December 31, to May 28, March 31, March 31, December 31,
1998 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Activities
Net Income (loss) $ (79,981) $ (1,397) $ 362,240 $ 87,697 $ 316,464
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 121,969 27,743 158,537 38,561 153,925
Base financial component amortization -- 16,014 100,971 25,243 100,971
Rate moderation component amortization -- (39,574) (35,079) 5,907 (24,232)
Regulatory liability component amortization -- (14,048) (79,359) (19,840) (79,359)
Other regulatory amortization -- 14,858 38,059 9,915 118,074
Rate moderation component carrying charges -- (6,411) (23,632) (5,919) (25,259)
Class Settlement -- 2,018 15,623 4,496 20,772
Amortization of cost of issuing and redeeming securities 1,705 4,964 30,823 8,087 34,611
Federal income tax - deferred and other -- (60,820) 146,859 32,835 167,060
Pensions and Other Post Retirement Benefits -- 12,873 48,512 13,496 14,952
Other 1,973 41,050 87,618 2,381 51,671
Changes in operating assets and liabilities
Accounts receivable, net and accrued unbilled revenue 34,568 101,230 8,334 (26,817) 92,334
Materials and supplies, fuel oil and gas in storage -- (31,238) 14,391 67,242 (34,531)
Accounts payable and accrued expenses 35,921 21,068 1,668 (58,952) 28,258
Net change in due to KeySpan (136,712) -- -- -- --
Pensions and other post retirement benefits -- (250,000) -- -- --
Accrued taxes 56,358 15,924 -- -- --
Accrued interest 29,850 (38,393) -- -- --
Class Settlement -- (6,918) (56,503) (11,006) (42,084)
Special deposits -- 66,492 (58,159) 635 25,146
Other 45,657 (54,725) (86,819) (14,394) (26,460)
----------- --------- --------- --------- ---------
Net Cash Provided by (Used in) Operating Activities 111,308 (179,290) 674,084 159,567 892,313
----------- --------- --------- --------- ---------
Investing Activities
Construction and nuclear fuel expenditures (71,030) (66,493) (257,402) (50,375) (239,896)
Shoreham post settlement costs -- (6,650) (39,828) (12,104) (51,722)
Merger costs, net of cash transferred (61,498) -- -- -- --
Acquisition of common stock (2,497,500) -- -- -- --
Investment in interest rate hedge -- -- (30,000) -- --
Other -- (2,009) (1,987) 160 (4,806)
----------- --------- --------- --------- ---------
Net Cash Used in Investing Activities (2,630,028) (75,152) (329,217) (62,319) (296,424)
----------- --------- --------- --------- ---------
Cash flows from Non-Capital related financing activities
Proceeds of note payable-Authority 2,640,000 -- -- -- --
----------- --------- --------- --------- ---------
Net cash provided by non-capital and related financing
activities 2,640,000 -- -- -- --
----------- --------- --------- --------- ---------
Cash flows from Capital and related financing activities
Proceeds from notes receivable 3,000 -- -- -- --
Proceeds from sale of common stock -- 4,184 43,218 4,640 18,837
Issuance of notes payable -- 350,000 -- -- --
Net proceeds from Authority loan 926,564
Proceeds of note payable - Authority 4,137,992 -- -- -- --
Repayment of note payable - Authority (1,422,908) -- -- -- --
Redemption of securities -- -- (2,050) (250,000) (419,800)
Redemption of long-term debt (3,338,659) (100,000) -- -- --
Issuance of preferred stock -- 75,000 -- -- --
Redemption of preferred stock (221,600) (116,390) -- -- --
Bond issuance costs (81,706) -- -- -- --
Preferred stock dividends paid -- (5,711) (51,833) (12,969) (52,264)
Common stock dividends paid -- (54,147) (215,790) (53,749) (213,753)
Other (3,991) (2,749) (2,032) (624) (369)
----------- --------- --------- --------- ---------
Net cash provided by (used in) capital and related
Financing Activitie (1,308) 150,187 (228,487) (312,702) (667,349)
----------- --------- --------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 119,972 (104,255) 116,380 (215,454) (71,460)
----------- --------- --------- --------- ---------
Cash and cash equivalents at beginning of period 75,000 180,919 64,539 279,993 351,453
----------- --------- --------- --------- ---------
Cash and cash equivalents at end of period* $ 194,972 $ 76,664 $ 180,919 $ 64,539 $ 279,993
=========== ========= ========= ========= =========
Interest paid $ 178,564 $ 59,733 $ 364,864 $ 112,981 $ 404,663
Federal income tax paid $ -- $ 13,428 $ 108,980 $ -- $ 45,050
*Cash and cash equivalents include designated funds
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Statement of (Accumulated Deficit) Retained Earnings
<TABLE>
<CAPTION>
(In thousands of dollars)
LIPA LILCO
------------- -------------------------------------
December 31, March 31, March 31, December 31,
1998 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ -- $ 861,751 $ 840,867 $ 790,919
Net income (loss) for the period (79,981) 362,240 87,697 316,464
----------- ---------- ---------- ----------
(79,981) 1,223,991 928,564 1,107,383
Deductions:
Cash dividends declared on common stock -- 216,086 53,844 214,255
Cash dividends declared on preferred stock -- 51,812 12,969 52,240
Other -- 1 -- 21
----------- ---------- ---------- ----------
Balance at end of period $ (79,981) $ 956,092 $ 861,751 $ 840,867
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Statement of Capitalization
<TABLE>
<CAPTION>
Shares (In thousands of dollars)
LIPA LILCO LIPA LILCO LILCO
----------- -------------------------- ------------ --------- -----------
December 31, March 31, December 31, December 31, March 31, December 31,
1998 1998 1996 1998 1998 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Common Shareowners' Equity
Common stock, $5.00 par value -- 121,727,040 120,784,277 $ -- $ 608,635 $ 603,921
Common stock, $1.00 par value 1 -- --
Premium on capital stock -- -- -- -- 1,146,425 1,127,971
Capital stock expense -- -- -- -- (47,501) (49,330)
(Accumulated deficit) Retained earnings -- -- -- (79,981) 956,092 840,867
Treasury stock, at cost -- (46,281) (3,485) -- (1,204) (60)
-------- ----------- -----------
Total Common Shareowners' (Deficit) Equity (79,981) $ 2,662,447 $ 2,523,369
-------- ----------- -----------
Preferred Stock - Redemption Required
Par value $100 per share
7.40% Series L -- 150,500 161,000 -- $ 15,050 $ 16,100
7.66% Series CC -- 570,000 570,000 -- 57,000 57,000
Series called for redemption -- (150,500) -- -- (15,050) (1,050)
-------- ----------- -----------
-- 57,000 72,050
-------- ----------- -----------
Par value $25 per share
7.95% Series AA -- 14,520,000 14,520,000 -- 363,000 363,000
$1.67 Series GG -- 880,000 880,000 -- 22,000 22,000
$1.95 Series NN -- 1,554,000 1,554,000 -- 38,850 38,850
7.05% Series QQ -- 3,464,000 3,464,000 -- 86,600 86,600
6.875% Series UU -- 2,240,000 2,240,000 -- 56,000 56,000
Series called for redemption -- (1,554,000) -- -- (38,850) --
Mandatory redemption of preferred stock -- (880,000) -- -- (22,000) --
-------- ----------- -----------
-- 505,600 566,450
-------- ----------- -----------
Total Preferred Stock - Redemption Required -- 562,600 638,500
-------- ----------- -----------
Preferred Stock - No Redemption Required
Par value $100 per share
5.00% Series B -- 100,000 100,000 -- 10,000 10,000
4.25% Series D -- 70,000 70,000 -- 7,000 7,000
4.35% Series E -- 200,000 200,000 -- 20,000 20,000
4.35% Series F -- 50,000 50,000 -- 5,000 5,000
5 1/8% Series H -- 200,000 200,000 -- 20,000 20,000
5 3/4% Series I - Convertible -- 14,743 16,637 -- 1,474 1,664
Series called for redemption -- (634,743) -- -- (63,474) --
-------- ----------- -----------
Total Preferred Stock - No Redemption Required -- -- 63,664
-------- ----------- -----------
Total Preferred Stock -- $ 562,600 $ 702,164
======== ============ ===========
</TABLE>
52
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Statement of Capitalization (continued)
<TABLE>
<CAPTION>
(In thousands of dollars)
LIPA LILCO
------------- ---------------------------
Interest December 31, March 31, December 31,
Maturity Rate Series 1998 1998 1996
----------------- -------- -------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
General and Refunding Bonds
February 15, 1997 8.75% $ - $ - $ 250,000
April 15, 1998 7.63% - 100,000 100,000
May 15, 1999 7.85% - 56,000 56,000
April 15, 2004 8.63% - 185,000 185,000
May 15, 2006 8.50% - 75,000 75,000
July 15, 2008 7.90% - 80,000 80,000
May 1, 2021 9.75% - 415,000 415,000
July 1, 2024 9.63% - 375,000 375,000
------------ ------------ -----------
Total General and Refunding Bonds - 1,286,000 1,536,000
------------ ------------ -----------
Debentures
July 15, 1999 7.30% 397,000 397,000 397,000
January 15, 2000 7.30% 278 36,000 36,000
July 15, 2001 6.25% 8,460 145,000 145,000
March 15, 2003 7.05% 5,890 150,000 150,000
March 1, 2004 7.00% 2,999 59,000 59,000
June 1, 2005 7.13% 14,307 200,000 200,000
March 1, 2007 7.50% - 142,000 142,000
July 15, 2019 8.90% - 420,000 420,000
November 1, 2022 9.00% 26,877 451,000 451,000
March 15, 2023 8.20% 270,000 270,000 270,000
------------ ------------ -----------
Total Debentures 725,811 2,270,000 2,270,000
------------ ------------ -----------
Authority Financing Notes
Industrial Development Revenue Bonds
December 1, 2006 7.50% 1976 A,B - 2,000 2,000
Pollution Control Revenue Bonds
December 1, 2006 7.50% 1976 A 26,375 27,375 28,375
December 1, 2009 7.80% 1979 B 19,100 19,100 19,100
October 1, 2012 8.25% 1982 - 17,200 17,200
March 1, 2016 3.58% 1985 A,B 138,120 150,000 150,000
Electric Facilities Revenue Bonds
September 1, 2019 7.15% 1989 A,B 35,030 100,000 100,000
June 1, 2020 7.15% 1990 A 73,900 100,000 100,000
December 1, 2020 7.15% 1991 A 26,560 100,000 100,000
February 1, 2022 7.15% 1992 A,B 13,455 100,000 100,000
August 1, 2022 6.90% 1992 C,D 28,060 100,000 100,000
November 1, 2023 3.70% 1993 A - 50,000 50,000
November 1, 2023 3.70% 1993 B 50,000 50,000 50,000
October 1, 2024 3.70% 1994 A 50,000 50,000 50,000
August 1, 2025 3.70% 1995 A 50,000 50,000 50,000
December 1, 2027 3.55% 1997 A - 24,880 -
------------ ------------ -----------
Total Authority Financing Notes 510,600 940,555 916,675
------------ ------------ -----------
Unamortized discount and deferred
amortization (60,336) (13,606) (14,903)
------------ ------------ -----------
Subtotal 1,176,075 4,482,949 4,707,772
Note Payable - the Authority (a) 4.71% 5,355,085 - -
Due to the Authority (a) 4.71% 926,564 - -
------------ ------------ -----------
Total 7,457,724 4,482,949 4,707,772
Less Current Maturities 468,880 101,000 251,000
------------ ------------ -----------
Total Long-Term Debt 6,988,844 4,381,949 4,456,772
------------ ------------ -----------
Total Capitalization $ 6,908,863 $ 7,606,996 $ 7,682,305
============ ============ ===========
</TABLE>
(a) Weighted average interest rate on debt of the Authority as of December 31,
1998.
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 December 1998 and
December 1997 represent the nine month periods ended December 31, 1998 and
December 31, 1997, respectively . References to March 31, 1998 represent the
twelve month period then ended. References to March 31, 1997 represent the three
month period then ended, while references to all other periods refer to the
calendar years ended December 31.
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 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
54
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
indebtedness assumed by the 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 and including May 28,
1998 are not comparable to the financial statements presented subsequent to May
28, 1998. Therefore, a black line has been drawn on the accompanying financial
statements 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 ("NMP2"); (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, in 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 weighted average useful life of the net
plant assets acquired. 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.
Therefore, the results of operations for the period May 29, 1998 to December 31,
1998 do not include a provision for income taxes.
Effective May 29, 1998, LIPA contracted with KeySpan to provide operations and
management services for LIPA's transmission and distribution system through a
management services agreement. Therefore,
55
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
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. LIPA contracts
for capacity from the fossil fired generating plants of KeySpan through a power
supply agreement. Energy and fuel are purchased by KeySpan on LIPA's behalf
through an energy management agreement (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 covers an area
of 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
industrial customers, and the balance from sales to other utilities and public
authorities.
2. Discontinued Operations
The statement of operations of LILCO for the period April 1, 1998 to May 28,
1998 has 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.
The statements of operations for the years ended March 31, 1998 and December 31,
1996 and the three months ended March 31, 1997, have also been restated to
present the gas business in a similar manner.
The income from discontinued operations includes revenue from the gas business
of approximately $79.9 million, $645.6 million, $684.2 million and $293.4
million for the period April 1, 1998 to May 28, 1998, the years ended March 31,
1998 and December 31, 1996 and the three months ended March 31, 1997,
respectively.
Note 3. Summary of Significant Accounting Policies
General
LIPA complies with all applicable pronouncements of the Governmental Accounting
Standards Board ("GASB"). In accordance with GASB Statement No. 20, "Accounting
and Financial Reporting for Proprietary Funds and Other Governmental Entities
That Use Proprietary Fund Accounting," LIPA also complies with all authoritative
pronouncements applicable to non-governmental entities (i.e., Financial
Accounting Standards Board ("FASB") statements) that do not conflict with GASB
pronouncements.
LILCO maintained its accounting records in accordance with the Uniform Systems
of Accounts prescribed by the Public Service Commission of the State of New York
("PSC") and the Federal Energy Regulatory Commission ("FERC"). Its financial
statements reflected the ratemaking policies and actions of these Commissions in
conformity with generally accepted accounting principles for rate-regulated
enterprises.
56
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Accounting for the Effects of Rate Regulation
Under current New York law, the Authority is empowered to set rates for electric
service in LIPA's 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.
Both LILCO and LIPA are subject to the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Regulation." This statement recognizes the economic ability of
regulators, through the ratemaking process, to create future economic benefits
and obligations affecting rate-regulated companies. Accordingly, LIPA records
these future economic benefits and obligations as regulatory assets and
regulatory liabilities, respectively.
Regulatory assets represent probable future revenues associated with previously
incurred costs that are expected to be recovered from customers. Regulatory
liabilities represent probable future reductions in revenues associated with
amounts that are expected to be refunded to customers through the ratemaking
process.
Utility Plant
Utility plant is stated at cost for LILCO, and fair values, at the date of the
Merger, for LIPA. Additions to and replacements of utility plant are capitalized
at original cost, which includes material, labor, indirect costs associated with
an addition or replacement, plus an allowance for funds used during
construction. The cost of renewals and betterments relating to units of property
is added to utility plant. The cost of property replaced, retired or otherwise
disposed of is deducted from utility plant and, generally, together with
dismantling costs less any salvage, is charged to accumulated depreciation. The
cost of repairs and minor renewals is charged to maintenance expense. Mass
properties (such as poles, wire and meters) are accounted for on an average unit
cost basis by year of installation.
Depreciation
The provisions for depreciation result from the application of straight-line
rates to the original cost for LILCO, fair values at the date of the Merger for
LIPA, by groups, of depreciable properties in service. The rates are determined
by age-life studies performed on depreciable properties. The average
depreciation rate as a percentage of respective average depreciable plant costs
was as follows:
Electric Gas
-------------------- -----
LIPA LILCO LILCO
---- ----- -----
7 months ended 12/31/98 2.9% -- --
2 months ended 5/28/98 -- 3.07% 2.04%
12 months ended 3/31/98 -- 3.07% 2.04%
3 months ended 3/31/97 -- 3.12% 2.04%
12 months ended 12/31/96 -- 3.00% 2.00%
Allowance for Funds Used During Construction
The Allowance For Funds Used During Construction ("AFC") is the net cost of
borrowed funds used for construction purposes and a reasonable rate of return
upon a utility's equity when so used. AFC is not an item of current cash income.
AFC is computed monthly on a portion of construction work in progress.
57
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
The average AFC rate, was as follows:
LIPA LILCO
----------- ----------
7 Months Ended 12/31/98 4.71% (a) -
2 Months Ended 5/28/98 9.42%
12 Months Ended 3/31/98 9.29%
3 Months Ended 3/31/97 9.04%
12 Months Ended 12/31/96 9.02%
(a) Cost of borrowed funds only.
Designated Funds
Designated funds are certificates of deposit and highly liquid investments with
maturities of three months or less when purchased and are valued at amortized
cost, which approximates market value at December 31, 1998. These funds have
been designated by the Authority's Board of Trustees to be used for specific
purposes, including debt service and capital expenditures. LIPA's designated
funds are held by the Authority in an investment pool that is administered in
accordance with the Authority's investment guidelines pursuant to Section 2925
of the New York State Public Authorities Law. These guidelines comply with the
New York State Comptroller's investment guidelines for public authorities. The
certificates of deposit are either insured by the FDIC or collateralized by
securities held by the Authority's custodian bank in the Authority's name.
Investments are comprised of commercial paper rated A-1 by Standard & Poor's
Corporation or P-1 by Moody's Commercial Paper Record.
Statement No. 3 of the Governmental Accounting Standards Board, "Investments,
including Repurchase Agreements" ("GASB 3"), requires state and local
governments to classify their investments in three defined categories of credit
risk. Category one includes investments that are insured or registered, or
securities that are held by the Authority or its agent in the Authority's name.
The investments held by the Authority are classified as Category one at December
31, 1998.
Fair Values of Financial Instruments
The fair values for LILCO's and LIPA's long-term debt and redeemable preferred
stock are based on quoted market prices, where available. The fair values for
all other long-term debt and redeemable preferred stock were estimated using
discounted cash flow analyses based upon LILCO or LIPA's current incremental
borrowing rate for similar types of securities.
Revenues
Revenues are comprised of cycle billings rendered to customers and the accrual
of electric and/or gas revenues for services rendered to customers not billed at
month-end.
LILCO's electric rate structure provided for a revenue reconciliation mechanism
which eliminated the impact on earnings of electric sales that were above or
below the levels reflected in rates. LIPA's rate structure does not include a
similar mechanism.
58
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
LILCO's gas rate structure provided for a weather normalization clause which
reduced the impact on revenues of experiencing weather which was warmer or
colder than normal.
Fuel and Purchased Power Cost Adjustment ("FPPCA")
LIPA's rates include the FPPCA mechanism whereby rates may be adjusted 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 1% above and 1%
below LIPA's base cost of fuel and purchased power costs for 1999. The tolerance
band increases to two percent in 2000 and continue to increase in one percent
increments annually thereafter. Expenses for fuel and purchased power costs 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.
Under LIPA's current tariffs, the measurement of the under or over recovery of
fuel costs was scheduled to begin January 1, 1999. However, as a result of
decreasing fuel costs, LIPA recovered from customers approximately $22 million
more for fuel than was incurred for the period May 29, 1998, through December
31, 1998. In order to preserve this benefit for customers, LIPA recorded a
liability for the full amount of the over recovery. This amount is included in
deferred credits.
Fuel Cost Adjustments
LILCO's electric and gas tariffs included fuel cost adjustment ("FCA") clauses
which provided for disposition of the difference between actual fuel costs and
the fuel costs allowed in LILCO's base tariff rates (base fuel costs). LILCO
deferred the differences to future periods in which they would be billed or
credited to customers, except for base electric fuel costs in excess of actual
electric fuel costs, which were credited to the Rate Moderation Component
("RMC") as incurred. Gas fuel costs were excluded from base fuel costs and
recovered through Gas fuel adjustment clause under LILCO's tariff.
Federal Income Tax
LIPA is exempt from Federal, state and local income taxes.
LILCO provided deferred federal income tax with respect to items with different
bases for financial and tax reporting purposes.
LILCO deferred the benefit of 60% of pre-1982 gas and pre-1983 electric and 100%
of all other investment tax credits, with respect to regulated properties, when
realized on its tax returns. Accumulated deferred investment tax credits were
amortized ratably over the lives of the related properties.
For ratemaking purposes, LILCO provided deferred federal income tax with respect
to certain differences between income before income tax for financial reporting
purposes and taxable income for federal income tax purposes. Also, certain
accumulated deferred federal income taxes were deducted from rate base and
amortized or otherwise applied as a reduction in federal income tax expense in
future years.
Reserves for Claims and Damages
Losses arising from claims against LIPA, including workers' compensation claims,
property damage,
59
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
extraordinary storm costs and general liability claims, are partially
self-insured. Reserves for these claims and damages are based on, among other
things, experience and risk of loss. Extraordinary storm losses incurred by LIPA
are partially insured by various commercial insurance carries. These insurance
carriers provide partial insurance coverage for individual storm losses to the
transmission and distribution system between $15 million and $35 million. Storm
losses which are outside of this range are self-insured by LIPA.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified in the financial statements
to conform with the current period presentation.
Recent Accounting Pronouncements
Derivative Instruments
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement established accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
LIPA will adopt SFAS No. 133 in the first quarter of fiscal year 2000. LIPA does
not expect any material earnings effect from adoption of this statement.
Plant Decommissioning
In February 1996, the FASB issued an exposure draft entitled "Accounting for
Certain Liabilities Related to Closure and Removal of Long-Lived Assets," which
includes nuclear plant decommissioning. Over the past two years, this exposure
draft has been the source of continual debate. The FASB has committed to
completing the project and is proceeding toward issuance of another exposure
draft (expected in the second quarter of 1999). If the accounting standard
proposed in such exposure draft were adopted, it could result in higher annual
provisions for removal or decommissioning to be recognized earlier in the
operating life of nuclear and other generating units and an accelerated
recognition of the decommissioning obligation. The FASB is continuing to explore
various issues associated with this project including liability measurement and
recognition issues. In addition, an effective date for the new exposure draft
has not yet been determined. The FASB is deliberating this issue and the
resulting final pronouncement could be different from that proposed in the
exposure draft. LIPA can make no prediction at this time as to the ultimate form
of such proposed accounting standard, assuming it is adopted, nor can it make
any prediction as to its ultimate effect(s) on the financial condition of LIPA.
Investments
GASB Statement No. 31, "Accounting and Financial Reporting for Certain
Investments and for External Investment Pools," was implemented during the
period ending December 31, 1998. The statement generally requires that
investments should be reported in the balance sheet at fair value and that
realized
60
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
and unrealized gains and losses on investments flow through the statement of
operations. The adoption of this statement did not have a material impact on
LIPA.
Regulatory Assets and Liabilities of LILCO
Base Financial Component and Rate Moderation Component
Pursuant to the 1989 Settlement (as described in Note 11), LILCO recorded a
regulatory asset known as the Financial Resource Asset ("FRA"). The FRA was
designed to provide LILCO with sufficient cash flows to assure its financial
recovery. The FRA had two components, the Base Financial Component ("BFC") and
the RMC.
The BFC represented the present value of the future net-after-tax cash flows
which the Rate Moderation Agreement ("RMA"), one of the constituent documents of
the 1989 Settlement, provided LILCO for its financial recovery. The BFC was
granted rate base treatment under the terms of the RMA and was included in
LILCO's revenue requirements through amortization included in rates over a
forty-year period on a straight-line basis which began July 1, 1989.
The RMC reflected the difference between LILCO's revenue requirements under
conventional ratemaking and the revenues resulting from the implementation of
the rate moderation plan provided for in the RMA. The RMA was adjusted, on a
monthly basis, for LILCO's share of certain NMP2 operations and maintenance
expenses, fuel credits resulting from LILCO's electric fuel cost adjustment
clause and gross receipts tax adjustments related to the FRA.
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 basis, 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 was
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 period April 1, 1998 through May 28, 1998, and for the fiscal year ended
March 31, 1998, LILCO recorded approximately $51.5 and $65.1 million,
respectively, more of non-cash RMC credits to income (representing accretion of
the RMC balance), or $33.5 million and $42.5 million net of tax, more than it
would have under the previous method.
Shoreham Post-Settlement Costs
Shoreham post-settlement costs consisted of Shoreham decommissioning costs, fuel
disposal costs, Payments-In-Lieu-Of-Taxes ("PILOT's"), carrying charges and
other costs. These costs were being capitalized and amortized and recovered
through rates over a forty-year period on a straight-line remaining life
61
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
basis which began July 1, 1989.
Shoreham Nuclear Fuel
Shoreham nuclear fuel principally reflected the unamortized portion of Shoreham
nuclear fuel which was reclassified from Nuclear Fuel in Process and in Reactor
at the time of the 1989 Settlement. This amount was being amortized and
recovered through rates over a forty-year period on a straight-line remaining
life basis which began July 1, 1989.
Unamortized Cost of Issuing Securities
Unamortized cost of issuing securities represented the unamortized premiums or
discounts and expenses related to the issues of long-term debt that had been
retired by LILCO prior to maturity and the costs associated with the early
redemption of those issues. In addition, this balance included the unamortized
capital stock expense and redemption costs related to certain series of
preferred stock that had been refinanced by LILCO. These costs were amortized
and recovered through rates, as provided by the PSC, over the shorter of the
life of the redeemed issue or the new issue.
Postretirement Benefits Other Than Pensions
LILCO deferred as a regulatory asset the difference between postretirement
benefits expense recorded in accordance with SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and postretirement
benefits expense reflected in rates. Pursuant to a PSC order, the ongoing annual
SFAS No. 106 benefit expense was phased into and fully reflected in rates by
November 30, 1997, with the accumulated deferred asset to be recovered in rates
over the fifteen-year period which began December 1, 1997.
Regulatory Tax Asset and Regulatory Tax Liability
LILCO had recorded a regulatory tax asset for amounts that if would have
collected in future rates for the portion of its deferred tax liability that had
not been recognized for ratemaking purposes. The regulatory tax asset was
comprised principally of the tax effect of the difference in the cost basis of
the BFC for financial and tax reporting purposes, depreciation differences not
normalized and the allowance for equity funds used during construction.
The regulatory tax liability was primarily attributable to deferred taxes
previously recognized by LILCO at rates higher than the then current enacted tax
law, unamortized investment tax credits and tax credit carryforwards.
Regulatory Liability Component
Pursuant to the 1989 Settlement (as discussed in Note 12), certain tax benefits
attributable to the Shoreham abandonment were to be shared between electric
customers and shareowners. A regulatory liability of approximately $794 million
was recorded in June 1989 to preserve an amount equivalent to the customer tax
benefits attributable to the Shoreham abandonment. This amount was being
amortized over a ten-year period on a straight-line basis which began July 1,
1989.
1989 Settlement Credits
Represented the unamortized portion of an adjustment of the book write-off to
the negotiated 1989 Settlement amount. A portion of this amount was being
amortized over a ten-year period which began on July 1, 1989. The remaining
portion was not being recognized for ratemaking purposes.
LRPP Payable
Under the provisions of LILCO's rate structure, the LRPP Payable represented the
then current portion of amounts due to ratepayers that resulted from the revenue
and expense reconciliations, performance-based
62
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
incentives and associated carrying charges as established under the LILCO
Ratemaking and Performance Plan ("LRPP").
Note 4. LIPA 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 PSC or any other state regulatory body. However, the Authority 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; 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 FPPCA to adjust 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 1% above and 1% below LIPA's base 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 costs 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.
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 payments
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
payments recovery rider allows for LIPA's rate adjustments to accommodate the
PILOTs.
For a further discussion on the Shoreham tax settlement see Note 13.
63
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 5. Utility Plant
Utility Plant consists of:
(in millions)
LIPA LILCO
------------ -------------------------
December 31, March 31, December 31,
1998 1998 1996
------------ --------- ------------
Generation - non nuclear $ -- $ 1,077.2 $ 1,035.8
Generation - nuclear 662.9 887.8 883.9
Transmission and distribution 1,385.1 2,066.5 1,962.6
Gas -- 1,233.3 1,154.5
Common 3.8 290.3 260.3
Construction work in progress 52.9 118.7 112.1
Nuclear fuel in process and in reactor 17.1 18.1 15.5
---------- ---------- ---------
2,121.8 5,691.9 5,424.7
Less - Accumulated depreciation and
amortization 50.3 1,877.9 1,729.5
---------- ---------- ---------
Total Net Utility Plant $ 2,071.5 $ 3,814.0 $ 3,695.2
========== ========== =========
Note 6. Nine Mile Point Nuclear Power Station, Unit 2 ("NMP2")
As a result of the Merger, LIPA acquired an undivided 18% interest in NMP2,
located in Scriba, New York which is operated by Niagara Mohawk Power
Corporation ("NMPC"). The owners of NMP2 and their respective percentage
ownership are as follows: LIPA (18%), NMPC (41%), New York State Electric & Gas
Corporation ("NYSEG") (18%), Rochester Gas Electric Corporation ("RG&E") (14%)
and Central Hudson Gas & Electric Corporation (9%). LIPA's share of the rated
capability is approximately 205 MW. LIPA's net utility plant investment,
excluding nuclear fuel, was approximately $650 million at December 31, 1998,
$689 million at March 31, 1998 and $715 million at December 31, 1996. The
accumulated provision for depreciation, excluding decommissioning costs, was
approximately $13 million and $196 million at December 31, 1998 and March 31,
1998, respectively, and $169 million at December 31, 1996. The provision for
accumulated depreciation was re-established at zero on May 28, 1998, pursuant to
the Merger. Generation from NMP2 and operating expenses incurred by NMP2 are
shared in the same proportions as the cotenant's respective ownership interest.
LIPA is required to provide its share of financing for any capital additions to
NMP2. Nuclear fuel costs associated with NMP2 are being amortized on the basis
of the quantity of heat produced for the generation of electricity.
NMPC has contracted with the United States Department of Energy for the disposal
of spent nuclear fuel. LIPA reimburses NMPC for its 18% share of the cost under
the contact at a rate of $1.00 per megawatt hour of net generation less a factor
to account for transmission line losses.
64
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Nuclear Plant Decommissioning
NMPC expects to commence the decommissioning of NMP2 in 2026, shortly after the
cessation of plant operations, using a method which provides for the removal of
all equipment and structures and the release of the property for unrestricted
use. LIPA's share of decommissioning costs, based upon a "Site-Specific" 1995
study (1995 study), is estimated to be $407 million in 2026 dollars ($161
million in 1998 dollars using a 3.5% escalation factor). LIPA's share of the
estimated decommissioning costs is currently being provided for in electric
rates and is being charged to operations as depreciation expense over the
service life of NMP2. The amount of decommissioning costs recorded as
depreciation expense for the seven months ended December 31, 1998 totaled $3.9
million, for the two months ended May 28, 1998 totaled $0.4 million, for the
year ended March 31, 1998 and the three months ended March 31, 1997, totaled
$2.2 million and $0.5 million, respectively, and $3.9 million for the year ended
December 31, 1996. The accumulated decommissioning costs collected in rates
through December 31, 1998, March 31, 1998 and December 31, 1996 amounted to
$20.2 million, $18.3 million and $15.6 million, respectively.
LIPA has acquired external trust funds established for the decommissioning of
the contaminated portion of the NMP2 plant. It is currently estimated that the
cost to decommission the contaminated portion of the plant will be approximately
76% of the total decommissioning costs. These funds comply with regulations
issued by the NRC and the FERC governing the funding of nuclear plant
decommissioning costs. LIPA's policy is to fund these trusts at least annually.
As of December 31, 1998, the balance in these funds, including reinvested net
earnings, was approximately $19 million. These amounts are included in
Nonutility Property and Other Investments. The trust fund investments consist of
U.S. Treasury debt securities and cash equivalents. The carrying amounts of
these investments approximate fair market value.
Reference is made to Note 3 under the subcaption "Recent Accounting
Pronouncements" for details of the proposed changes in accounting for nuclear
decommissioning costs.
In 1996, NMPC and RG&E announced plans to establish a joint nuclear operating
company to be known as New York Nuclear Operating Company ("NYNOC"). NYNOC was
envisioned to assume full responsibility for operation of all nuclear plants in
New York. In 1997, NYPA, Con Edison, Niagara Mohawk and Rochester Gas and
Electric Corporation, the four utilities operating nuclear generating facilities
in New York State, executed a joint announcement which expressed their desire to
move forward with plans to form NYNOC, and stated that the four utilities will
initiate the steps to assure that NYNOC will have the necessary leadership,
personnel and structure to operate the six nuclear units now operated
independently by such utilities. The joint announcement also stated that during
the transition phase, while necessary governmental approvals are sought, the
utilities would continue with and add to the cooperative initiatives the
companies have already begun. NYNOC, a limited liability company, would operate
the six nuclear plants currently operated by the four entities to achieve
economies of scale and increase cost effectiveness. The plants would continue to
be owned, and the output of the plants marketed, by the respective owners of the
plants. It is contemplated that NYNOC would become the operator under the
plants' NRC operating licenses, while other aspects of the NRC licenses would
remain with the owners of the plants. It is uncertain what effect Niagara
Mohawk's participation in such an arrangement will have on LIPA; nor can LIPA
predict the effect on such an arrangement of the auction proposal in the staff
report.
65
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
On or about June 15, 1998, NYSEG, one of the owners of the Nine Mile 2 Plant,
commenced an action against NMPC (which is the operator of the Nine Mile 2
Plant) in Supreme Court of the State of New York, Tompkins County, demanding,
among other things, judgment to: (i) enjoin NMPC from transferring operating
responsibility of the Nine Mile 2 Plant to NYNOC; and (ii) declare that NMPC may
not transfer its operational responsibility for the Nine Mile 2 Plant to NYNOC
without NYSE&G's consent. LIPA can make no prediction as to the outcome of this
litigation.
NMPC and NYSE&G have announced that they plan to pursue the sale of their
nuclear assets including its interest in NMP2. LIPA is reviewing its rights and
remedies under the agreements governing its 18% interest in NMP2. LIPA has not
received an offer to purchase its 18% interest in NMP2 and is not pursuing a
sale at this time.
On August 27, 1997, the PSC Staff ("Staff") issued a "Notice Soliciting Comments
on Nuclear Generation" requesting comments and alternative approaches by
interested parties on a "Staff Report on Nuclear Generation" ("Nuclear Report").
The Nuclear Report concludes that nuclear generation along with non-nuclear
generation facilities, should be subject to the discipline of market-based
pricing.
On March 20, 1998, the PSC initiated a proceeding to examine a number of issues
raised by the Nuclear Report and the comments received in response to it. In
reviewing the Nuclear Report and parties' comments, the PSC: (a) adopted as a
rebuttable presumption the premise that nuclear power should be priced on a
market basis to the same degree as power from other sources, with parties
challenging that premise having to bear a substantial burden of persuasion; (b)
characterized the proposals in the Staff paper as by and large consistent in
concept with the PSC's goal of a competitive, market-based electricity industry;
(c) questioned PSC Staff's position that would leave funding and other
decommissioning responsibilities with the sellers of nuclear power interests;
and, (d) indicated interest in the potential for the NYNOC to benefit customers
through efficiency gains and directed pursuit of that matter in this nuclear
generating proceeding or separately upon the filing of a formal NYNOC proposal.
The proceeding is expected to be completed in 1999.
The NRC issued a policy statement on the Restructuring and Economic Deregulation
of the Electric Utility Industry ("Policy Statement") in 1997. The Policy
Statement addresses NRC's concerns about the adequacy of decommissioning funds
and about the potential impact on operational safety and reserves to the NRC the
right, in highly unusual situations where adequate protection of public health
and safety would be compromised, to consider imposing joint and several
liability on minority co-owners when one or more co-owners have defaulted on
their contractual obligations. On December 28, 1998, the NRC announced
commencement of a rulemaking proceeding initiated by a group of utilities which
are non-operating joint owners of nuclear plants. These utilities request that
the enforcement provisions of the NRC regulations be amended to clarify NRC
policy regarding the potential liability of joint owners if other joint owners
become financially incapable of bearing their share of the burden for safe
operation or decommissioning of a nuclear power plant. On March 22, 1999, the
Authority filed comments in support of the rule proposed by the group of
utilities. In addition to the above Policy Statement, the NRC is proposing to
amend its regulations on decommissioning funding to reflect conditions expected
from deregulation of the electric power industry. LIPA is unable to predict how
such increased stringency may affect the results of operations or financial
condition of the Nine Mile 2 Plant.
66
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
On July 5, 1998, the Nine Mile 2 Plant completed its sixth refueling outage,
which commenced on May 2, 1998. It is scheduled to commence its seventh
refueling outage in March 2000.
Radioactive Waste
NMPC has contracted with the U.S. Department of Energy ("DOE") for disposal of
high-level radioactive waste ("spent fuel") from the Nine Mile 2 Plant. Despite
a court order reaffirming the DOE's obligation to accept spent nuclear fuel by
January 31, 1998, the DOE has forecasted the start of operations of its
high-level radioactive waste repository to be no earlier than 2010. LIPA has
been advised by NMPC that the Nine Mile 2 Plant spent fuel storage pool has a
capacity for spent fuel that is adequate until 2012. If DOE schedule slippage
should occur, the storage for NMP2 spent fuel, either at the plant or some
alternative location, may be required.
Nuclear Plant Insurance
NMPC procures public liability and property insurance for NMP2, and LIPA
reimburses NMPC for its 18% share of those costs.
The Price-Anderson Amendments Act mandates that nuclear power secure financial
protection in the event of a nuclear accident. This protection must consist of
two levels. The primary level provides liability insurance coverage of $200
million (the maximum amount available) in the event of a nuclear accident. If
claims exceed that amount, a second level of protection is provided through a
retrospective assessment of all licensed operating reactors. Currently, this
"secondary financial protection" subjects each of the 108 presently licensed
nuclear reactors in the United States to a retrospective assessment of up to
$88.1 million for each nuclear incident, payable at a rate not to exceed $10
million per year. LIPA's interest in NMP2 could expose it to a maximum potential
loss of $15.9 million, per incident, through assessments of up to $1.8 million
per year in the event of a serious nuclear accident at NMP2 or another licensed
U.S. commercial nuclear reactor. These assessments are subject to periodic
inflation indexing and to a 5% surcharge if funds prove insufficient to pay
claims.
NMPC has also procured $500 million primary nuclear property insurance with the
Nuclear Insurance Pools and approximately $2.3 billion of additional protection
(including decontamination costs) in excess of the primary layer through Nuclear
Electric Insurance Limited (NEIL). Each member of NEIL, including LIPA, is also
subject to retrospective premium adjustments in the event losses exceed
accumulated reserves. For its share of NMP2, LIPA could be assessed up to
approximately $1.6 million per loss. This level of insurance is in excess of the
NRC required minimum of $1.06 billion of coverage.
LIPA has obtained insurance coverage from NEIL for the extra expense incurred in
purchasing replacement power during prolonged accidental outages. Under this
program, should losses exceed the accumulated reserves of NEIL, each member,
including LIPA, would be liable for its share of deficiency. LIPA's maximum
liability per incident under the replacement power coverage, in the event of a
deficiency, is approximately $700,000.
The NRC has notified all utilities operating nuclear power plants that they are
required to inform the NRC of steps they are taking to see that computer systems
will function properly by the year 2000. In connection therewith, each such
utility was required to submit a written indication of, among other things,
whether or not they are pursuing and continuing to pursue a plan to solve their
Year 2000 issue, such as,
67
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
or similar to, that outlined in the publication Nuclear Utility Year 2000
Readiness published by the Nuclear Energy Institute and the Nuclear Utilities
Software Management Group (the "NEI/NUSM Plan"). In addition, not later than
July 1, 1999, each such utility must submit a written response confirming that
its plant is Year 2000 ready, or if not ready, the utility must provide a status
report of work remaining to be done. Niagara Mohawk submitted its required
response indicating that it has pursued and is continuing a Year 2000 readiness
program similar to that recommended in the NEI/NUSM Plan.
Note 7. Debt
Note Payable to the Authority
The debt of LIPA consists of certain debt assumed as of result of the Merger,
titled Long-Term Debt, a Note payable to the Authority, and amounts due to the
Authority for advances for the day-to-day operations of LIPA. The note payable
to the Authority represents the proceeds from the sale of Authority bonds which
were then transferred to LIPA in exchange for a promissory note. Such proceeds
were used by LIPA to finance the Merger, and to refinance certain of the assumed
debt as part of the Merger. The initial borrowing under this promissory note was
approximately $6.7 billion. As of December 31, 1998, the balance owed to the
Authority was approximately $5.4 billion. This promissory note transferred to
the Authority all of LIPA's right, title and interest in and to the revenue it
generates from the operation of the transmission and distribution system,
including the right to collect and receive that revenue. Therefore, cash
receipts from customers are collected by the Authority thereby reducing the note
payable to the Authority. The note payable to the Authority bears interest at a
rate equal to the weighted average interest rate on the bonds issued by the
Authority, approximately 4.71% at December 31, 1998.
Bonds issued by the Authority provided the funds to loan to LIPA. The Authority
bonds outstanding at December 31, 1998, consist of:
(in thousands)
Electric System General Revenue Bonds, Series A $ 3,449,528
Electric System General Revenue Bonds, Series B 1,313,800
Electric System Subordinated Revenue Bonds, Series 1-6 1,500,000
Electric System Subordinated Revenue Bonds, Series 7 250,000
Electric System Subordinated Revenue Bonds, Series 8
(subseries A-H) 218,300
-----------
$ 6,731,628
===========
Interest Rate Swaps
The Authority has entered into interest rate swap agreements to reduce the
impact of changes in interest rates on certain variable rate long-term debt of
the Authority. At December 31, 1998, the Authority had interest rate swap
agreements outstanding having a total notional amount of $150 million and $100
million, respectively. These agreements effectively change the Authority's
interest rate exposure on its $250 million variable rate notes due 2025 to a
fixed rate of 4.208 percent. The interest rate swap
68
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
agreements mature at the time the related notes mature with optional earlier
termination at the Authority's discretion. The Authority is exposed to credit
loss in the event of nonperformance by the other parties to the interest rate
swap agreements. However, the Authority does not anticipate nonperformance by
the counterparties.
Due to the Authority
All cash receipts from customers are collected by the Authority and are used to
repay the Note Payable to the Authority. Operating expenditures of LIPA are paid
by the Authority, and are recorded by LIPA as a loan-Due to the Authority. The
balance at December 31, 1998, totaled approximately $927 million. The interest
rate on this loan is equal to that on the Note Payable to the Authority.
Long Term Debt
Long Term Debt represents debt of LILCO assumed by LIPA as part of the Merger,
and consisted of $1.186 billion of G&R bonds, which were defeased by LIPA
immediately upon the closing of the Merger, debentures totaling $2.2 billion,
and tax exempt debt of $916 million. As part of the Merger, KeySpan and LIPA
executed Promissory Notes whereby KeySpan is obligated to LIPA for approximately
$1.048 billion of the assumed debt (the "Promissory Notes"). KeySpan is also
required to pay LIPA principal and interest on the Promissory Notes 30 days in
advance of the date amounts are due to bond holders. At December 31, 1998, the
balance of the Promissory Notes between KeySpan and LIPA totaled $1.045 billion
of which $398 million will be collected in 1999.
The tax exempt debt assumed by LIPA were notes issued by LILCO to the New York
State Research and Development Authority ("NYSERDA") to secure tax-exempt
Industrial Development Revenue Bonds, Pollution Control Revenue Bonds ("PCRBs"),
and Electric Facilities Revenue Bonds ("EFRBs") issued by NYSERDA.
Letters of Credit
The 1995, 1994 and 1993 EFRBs and the 1985 PCRBs are supported by letters of
credit pursuant to which a letter of credit bank has agreed to pay the
principal, interest and premium, if applicable, in the aggregate, up to $326
million in the event of default. Subsequent to December 31, 1998, EFRBs and
PCRBs were converted to fixed rate securities and LIPA cancelled the letters of
credit.
Bond Defeasance/Refundings
A portion of the proceeds of the Authority's Electric System General Revenue
Bonds and Subordinated Bonds (which includes fixed and variable rate debt) were
used to refund all the General and Refunding Bonds, certain Debentures and
certain NYSERDA Notes issued by LILCO that were assumed by LIPA as a result of
the Merger. The purpose of these refundings was to achieve debt service savings.
69
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
General and Refunding Bonds
On May 29, 1998, LIPA refunded all the G&R Bonds totaling $1.186 billion by
depositing $1.190 billion in an irrevocable escrow deposit account to be
invested in the direct obligations of the United States of America. The maturing
principal of and interest on these obligations were sufficient to pay the
principal and interest on the G&R Bonds which were redeemed on June 29, 1998.
The Authority will realize gross debt service savings from this refunding of
approximately $588 million over the life of the bonds. The refunding produced an
economic gain (the present value of the debt service savings) of approximately
$576 million.
Debentures
In October 1998, LIPA commenced a tender offer for its 7.30% Debentures Due
2000, 6.25% Debentures Due 2001, 7.05% Debentures Due 2003, 7.00% Debentures Due
2004, 7.125% Debentures Due 2005 and 9.00% Debentures Due 2022 (collectively,
the "Debentures"). The tender offers for the Debentures expired in November, and
LIPA purchased an aggregate principal amount of Debentures including accrued
interest in the amount of $1.13 billion pursuant to the tender offers. Payment
for Debentures purchased pursuant to the tender offers was made from the sale of
$1.31 billion Electric System General Revenue Bonds, Series 1998B (the
"Refinancing Bonds") of the Authority which closed in November. Under the terms
of the financing agreement dated as of May 1, 1998, between LIPA and the
Authority, a portion of the proceeds from the sale of the Refinancing Bonds were
advanced to LIPA to fund payment for the tendered Debentures.
In October 1998, LIPA sent a notice of redemption to the holders of its 7.50%
Debentures Due 2007 calling for redemption in November of all such debentures at
a redemption price equal to 103.54% of the $142 million aggregate principal
amount outstanding. In addition, LIPA sent a notice of redemption to the holders
of its 8.90% Debentures Due 2019 calling for redemption in November of all such
debentures at a redemption price equal to 105.94% of the $420 million aggregate
principal amount outstanding.
As a result of the refundings described above, the Authority will realize gross
debt service savings of approximately $547 million over the life of the bonds.
The refunding produced an economic gain (the present value of the debt service
savings) of approximately $376 million.
NYSERDAs
The Authority deposited $379 million in an irrevocable escrow deposit account to
be invested in the direct obligations of the United States of America. The
maturing Principal of and interest on such securities will be sufficient to pay
the principal, interest and applicable call premium on the following issues of
NYSERDA Notes: $11.9 million Series 1985A, $50 million Series 1989A, $15 million
Series 1989B, $26 million Series 1990A, $73 million Series 1991A, $50 million
Series 1992A, $36.5 million Series 1992B, $50 million Series 1992C and $22
million Series 1992D, (collectively, the "Refunded NYSERDA Notes").
70
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
As a result of the refunding and the deposit with the Escrow Agent, the Refunded
NYSERDA Notes are deemed to have been paid, and they cease to be a liability of
LIPA. Accordingly, the Refunded NYSERDA Notes (and the related deposit with the
Escrow Agent) are excluded from the Balance Sheet. The Authority will realize
gross debt service savings from this refunding of approximately $287 million
over the life of the bonds. The refunding produced an economic gain (the present
value of the debt service savings) of approximately $66 million.
In November 1998, LIPA sent a notice of redemption to the holders of its 1982
NYSERDA Notes calling for redemption in December of all such NYSERDA notes at a
redemption price equal to the $17.2 million aggregate principal amount
outstanding.
The Authority will realize gross debt service savings from the refunding of
approximately $14.9 million over the life of the bonds. The refunding produced
an economic gain (the present value of the debt service savings) of
approximately $6.5 million.
Deferred Amortization
A debt refinancing charge of $61.9 million resulted from the transactions
described above primarily because of the difference between the amounts paid for
refundings, including amounts deposited with the Escrow Agent, and the carrying
amount of the G&R Bonds, Debentures and NYSERDA Notes. In accordance with the
provisions of GASB No. 23, the $61.9 million has been deferred and is shown in
the Balance Sheet as Deferred Amortization within long term debt and is being
amortized.
71
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Fair Values of Long-term Debt
(In thousands of dollars)
LIPA LILCO
------------ ------------------------
December 31, March 31, December 31,
Fair Value 1998 1998 1996
------------ ---------- ------------
General and Refunding Bonds $ -- $1,288,470 $ 1,571,745
Debentures 745,822 2,407,178 2,271,095
NYSERDA Notes 536,401 987,646 950,758
------------ ---------- ------------
Total $ 1,282,223 $4,683,294 $ 4,793,598
============ ========== ============
(in thousands of dollars)
December 31, March 31, December 31,
Carrying Amount 1998 1998 1996
------------ ---------- ------------
General and Refunding Bonds $ -- $1,286,000 $ 1,536,000
Debentures 725,811 2,270,000 2,270,000
NYSERDA Notes 510,600 940,555 916,675
------------ ---------- ------------
Total $ 1,236,411 $4,496,555 $ 4,722,675
============ ========== ============
Debt Maturity Schedule
The total long-term debt maturity in each of the next five years ending December
31 is as follows: 1999, $398 million; 2000, $1.3 million; 2001, $9.4 million;
2002, $3.5 million; and 2003, $9.4 million.
Note 8. Capital Stock
Common Stock
LIPA has 1 share of $1 par value common stock authorized, issued and
outstanding. All such shares are held by the Authority. LILCO had 150,000,000
shares of authorized common stock, of which 121,727,040 were issued and 46,281
shares were held in Treasury at March 31, 1998.
Preferred Stock
LILCO had 7,000,000 authorized shares, cumulative preferred stock, par value
$100 per share and 30,000,000 authorized shares, cumulative preferred stock, par
value $25 per share. Dividends on preferred stock were paid in preference to
dividends on common stock or any other stock ranking junior to preferred stock.
72
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Preferred Stock Subject to Mandatory Redemption
The aggregate fair value of LILCO's redeemable preferred stock with mandatory
redemptions at March 31, 1998 and December 31, 1996 amounted to approximately
$675, and $637 million, respectively, compared to carrying amounts of $639, and
$640 million, respectively.
Note 9. Federal Income Tax
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 from the financial statements, deferred tax assets and
liabilities, and, the results of operations for the period May 29, 1998 through
December 31, 1998, do not include a provision for income taxes. The significant
components of LILCO's deferred tax assets and liabilities calculated under the
provisions of SFAS No. 109, "Accounting for Income Taxes," were as follows:
March 31, December 31,
1998 1996
--------- ------------
Deferred Tax Assets
Net operating loss carryforwards $ -- $ 145,205
Reserves not currently deductible 39,667 58,981
Tax depreciable basis in excess of book 10,559 34,314
Excess credits 24,858 27,700
Credit carryforwards 40,318 135,902
Other 261,729 186,907
---------- ----------
Total Deferred Tax Assets $ 377,131 $ 589,009
========== ==========
Deferred Tax Liabilities
1989 Settlement $2,169,909 $2,163,239
Accelerated depreciation 650,562 642,702
Call premiums 38,698 44,846
Rate case deferrals 564 2,127
Other 56,762 33,496
---------- ----------
Total Deferred Tax Liabilities 2,916,495 2,886,410
---------- ----------
Net Deferred Tax Liability $2,539,364 $2,297,401
========== ==========
73
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
SFAS No. 109 requires utilities to establish regulatory assets and liabilities
for the portion of its deferred tax assets and liabilities that have not yet
been recognized for ratemaking purposes. The major components of these
regulatory assets and liabilities were as follows:
March 31, December 31,
1998 1996
---- ----
Regulatory Assets
1989 Settlement $ 1,652,412 $ 1,660,871
Plant items 100,661 125,976
Other (15,141) (14,069)
----------- -----------
Total Regulatory Assets $ 1,737,932 $ 1,772,778
=========== ===========
Regulatory Liabilities
Carryforward credits $ 38,720 $ 68,421
Other 40,193 34,466
----------- -----------
Total Regulatory Liabilities $ 78,913 $ 102,887
=========== ===========
The federal income tax amounts included in Statement of Operations differ from
the amounts which result from applying the statutory federal income tax rate to
income before income tax.
74
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
The table below sets forth the reasons for such differences.
<TABLE>
<CAPTION>
(In thousands of dollars)
Three Months
Year Ended Ended Year Ended
April 1, 1998 - March 31, March 31, December 31,
May 28, 1998 1998 1997 1996
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income before federal income tax $ 8,148 $594,893 $143,910 $525,721
Statutory federal income tax rate 35% 35% 35% 35%
-------- -------- -------- --------
Statutory federal income tax 2,852 208,213 50,369 184,002
Additions (reductions) in federal
income tax
Excess of book over tax depreciation 2,859 17,912 4,356 18,339
1989 Settlement 666 4,212 1,053 4,212
Interest capitalized 570 2,962 588 2,270
Tax credits (3,656) (2,464) (940) (4,383)
Tax rate change amortization -- 2,223 815 3,686
Net Gain on KeySpan Transaction 4,863 -- -- --
Allowance for funds used
during construction (370) (2,953) (583) (2,305)
Other items 1,761 2,549 555 3,436
-------- -------- -------- --------
Total Federal Income Tax Expense $ 9,545 $232,654 $ 56,213 $209,257
======== ======== ======== ========
Effective Federal Income Tax Rate 117.1% 39.1% 39.1% 39.8%
======== ======== ======== ========
</TABLE>
LILCO had tax credit carryforwards of approximately $189 million at March 31,
1998. The carryforward credits were comprised of investment tax credits ("ITC")
carryforwards, net of the 35% reduction required by the Tax Reform Act of 1986,
totaling approximately $30 million, research and development ("R&D") credits
totaling approximately $9 million, and alternative minimum tax ("AMT") credits
of approximately $150 million.
In May 1998, as a result of the Merger, LILCO recognized a net federal income
tax liability of approximately $70 million, after the utilization of all of the
company's ITC and R&D credit carryforwards of approximately $39 million and the
utilization of AMT credits of approximately $16 million.
In May 1998, LILCO reached a final settlement with the Internal Revenue Service
on its federal income tax returns for the years 1981 through 1989. The
settlement provided for the payment of taxes and
75
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
interest of approximately $9 million and $35 million, respectively, which LILCO
paid. LILCO had previously provided reserves adequate to pay such taxes and
interest.
Note 10. Retirement Benefit Plans
LILCO
Pension Plans
LILCO maintained a defined benefit pension plan which covered substantially all
employees (Primary Plan), a supplemental plan which covered officers and certain
key executives (Supplemental Plan) and a retirement plan which covered the Board
of Directors (Directors' Plan). LILCO also maintained 401(k) plans for its union
and non-union employees to which it did not contribute.
Primary Plan
LILCO's funding policy was to contribute annually to the Primary Plan a minimum
amount consistent with the requirements of the Employees Retirement Income
Security Act of 1974, plus such additional amounts, if any, as LILCO determined
to be appropriate. Pension benefits were based upon years of participation in
the Primary Plan and compensation.
76
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
The Primary Plan's funded status and amounts recognized on the Balance Sheet at
March 31, 1998 and December 31, 1996 were as follows:
March 31, December 31,
1998 1996
---- ----
Actuarial present value of benefit obligation
Vested benefits $ 661,075 $ 547,002
Nonvested benefits 59,268 55,157
--------- ---------
Accumulated Benefit Obligation $ 720,343 $ 602,159
--------- ---------
Plan assets at fair value $ 919,100 $ 746,400
Actuarial present value of projected benefit
obligation 825,159 689,661
--------- ---------
Projected benefit obligation less than
plan assets 93,941 56,739
Unrecognized net obligation 62,652 71,085
Unrecognized net gain (163,034) (123,759)
--------- ---------
Net (Accrued) Prepaid Pension Cost $ (6,441) $ 4,065
========= =========
The increase in the present value of the accrued benefit at March 31, 1998,
compared to December 31, 1996, was due to the change in the discount rate from
7.25% to 7.00% and the use of updated actuarial assumptions relating to
mortality.
77
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Periodic pension cost for the Primary Plan and the significant assumptions
consisted of the following:
<TABLE>
<CAPTION>
(In thousands of dollars)
Three Months
Year Ended Ended Year Ended
April 1, 1998 - March 31, March 31, December 31,
May 28, 1998 1998 1997 1996
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Service cost - benefits
earned during the period $ 3,447 $ 21,114 $ 4,645 $ 17,384
Interest cost on projected benefits
obligation and service cost 9,162 56,379 12,494 47,927
Actual return on plan assets (10,378) (200,025) (3,694) (81,165)
Net amortization and deferral 263 151,438 (9,446) 33,541
-------- --------- -------- --------
Net Periodic Pension Cost $ 2,494 $ 28,906 $ 3,999 $ 17,687
======== ========= ======== ========
</TABLE>
May 28, March 31, March 31, December 31,
1998 1998 1997 1996
---- ---- ---- ----
Discount rate for obligation 7.00% 7.00% 7.00% 7.25%
Discount rate for expense 7.00% 7.00% 7.25% 7.25%
Rate of future compensation increases 4.50% 4.50% 5.00% 5.00%
Long-term rate of return on assets 8.50% 8.50% 7.50% 7.50%
The Primary Plan assets at fair value included cash, cash equivalents, group
annuity contracts, bonds and equity securities.
In 1993, the PSC issued an Order which addressed the accounting and ratemaking
treatment of pension costs in accordance with SFAS No. 87, "Employers'
Accounting for Pensions." Under the Order, LILCO was required to recognize any
deferred net gains or losses over a ten-year period rather than using the
corridor approach method. LILCO believed that this method of accounting for
financial reporting purposes resulted in a better matching of revenues and
LILCO's pension cost. LILCO deferred the differences between pension rate
allowances and pension expense under the Order. In addition, the PSC required
LILCO to measure and pay a carrying charge on amounts in excess of the pension
rate allowance and the annual pension contributions contributed into the pension
fund.
In addition, effective December 1, 1997, LILCO deferred the difference between
the sum of gas pension and gas postretirement benefit costs other than pension
and the amounts provided for in rates, to the extent that such differences were
in excess of or below three percent of LILCO's pretax net income from gas
operations. Such excess was transferred to a gas balancing account.
78
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Supplemental Plan
The Supplemental Plan provided supplemental death and retirement benefits for
officers and other key executives without contribution by those employees. The
Supplemental Plan was a non-qualified plan under the Internal Revenue Code. For
the year ended March 31, 1998, LILCO recorded a charge of approximately $31
million relating to certain benefits earned by its officers relating to the
termination of their annuity benefits earned through the supplemental retirement
plan and other executive retirement benefits. These charges, the cost of which
were borne by LILCO's shareowners, resulted from provisions of the officers'
employment contracts, including employment contract of LILCO's Chairman, and the
pending transactions with LIPA and KeySpan which affected the timing of when
these costs were recorded. The provision for plan benefits totaled approximately
$200,000 for the period April 1, 1998 through May 28, 1998, $700,000 for the
three months ended March 31, 1997 and $2.7 million for the year ended December
31, 1996.
Directors' Plan
The Directors' Plan provided benefits to directors who were not officers of
LILCO. Directors who had served in the capacity for more than five years
qualified as participants under the plan. The Directors' Plan was a
non-qualified plan under the Internal Revenue Code. The provision for retirement
benefits, which were unfunded, totaled approximately $245,000 for the period
April 1, 1998 through May 28, 1998, $132,000 for the year ended March 31, 1998,
$34,000 for the three months ended March 31, 1997 and $127,000 for the year
ended December 31, 1996.
Postretirement Benefits Other Than Pensions
In addition to providing pension benefits, LILCO provided certain medical and
life insurance benefits to retired employees. Substantially all of LILCO's
employees became eligible for such benefits if they had reached retirement age
after working for LILCO for a minimum of five years. These and similar benefits
for active employees were provided by LILCO or by insurance companies whose
premiums are based on the benefits paid during the year. Effective January 1,
1993, LILCO adopted the provisions of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," which required LILCO to recognize
the expected cost of providing postretirement benefits when employee services
were rendered rather than when paid. As a result, LILCO, in 1993, recorded an
accumulated postretirement benefit obligation and a corresponding regulatory
asset of approximately $376 million.
The PSC required LILCO to defer as a regulatory asset the difference between
postretirement benefit expense recorded for accounting purposes in accordance
with SFAS No. 106 and the postretirement benefit expense reflected in rates. The
ongoing annual postretirement benefit expense was phased into and fully
reflected in rates which began December 1, 1996, with the accumulated regulatory
asset to be recovered in rates over a 15-year period, beginning December 1,
1997. In addition, LILCO was required to recognize any deferred net gains or
losses over a ten-year period.
In addition, effective December 1, 1997, LILCO deferred the difference between
the sum of gas pension and gas postretirement benefit costs other than pension
and the amounts provided for through rates, to the extent that such differences
were in excess of or below three percent of LILCO's pretax net income from gas
operations. Such excess was transferred to a gas balancing account.
79
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
In 1994, LILCO maintained Voluntary Employee's Beneficiary Association trusts
for union and non-union employees for the funding of incremental costs collected
in rates for postretirement benefits. LILCO funded the trusts with approximately
$21 million for the year ended March 31, 1998, $5 million for the three months
ended March 31, 1997 and $18 million for the year ended December 31, 1996. In
May 1998, LILCO contributed an additional $250 million into the trusts,
representing obligations related to the electric business unit employees. LILCO
secured a bridge loan to fund these trusts.
Accumulated postretirement benefit obligation other than pensions at March 31,
1998, and December 31, 1996 was as follows:
(In thousands of dollars)
March 31, December 31,
1998 1996
-------- ------------
Retirees $ 157,380 $ 156,181
Fully eligible plan participants 60,711 56,950
Other active plan participants 140,850 152,627
--------- ---------
Accumulated postretirement benefit obligation 358,941 365,758
Plan assets 108,165 74,692
--------- ---------
Accumulated postretirement benefit obligation
in excess of plan assets 250,776 291,066
Unrecognized prior service costs (175) (188)
Unrecognized net gain 102,346 75,309
--------- ---------
Accrued Postretirement Benefit Cost $ 352,947 $ 366,187
========= =========
At March 31, 1998, and December 31, 1996 the Plan assets, which were recorded at
fair value, included cash and cash equivalents, fixed income investments and
approximately $100,000 of listed equity securities of LILCO.
80
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Periodic postretirement benefit cost other than pensions and the significant
assumptions of LILCO consisted of the following:
<TABLE>
<CAPTION>
(In thousands of dollars)
Three Months
Year Ended Ended Year Ended
April 1, 1998 - March 31, March 31, December 31,
May 28, 1998 1998 1997 1996
--------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Service cost - benefits
earned during the period $ 1,566 $ 12,204 $ 2,821 $ 10,690
Interest cost on projected benefits
obligation and service cost 3,989 27,328 6,642 25,030
Actual return on plan assets (1,900) (6,632) (591) (3,046)
Net amortization and deferral (1,843) (10,000) (3,446) (12,175)
------- -------- ------- --------
Net Periodic Pension Cost $ 1,812 $ 22,900 $ 5,426 $ 20,499
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
April 1, 1998 - March 31, March 31, December 31,
May 28, 1998 1998 1997 1996
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate for obligation 7.00% 7.00% 7.00% 7.25%
Discount rate for expense 7.00% 7.00% 7.25% 7.25%
Rate of future compensation increases 4.50% 4.50% 5.00% 5.00%
Long-term rate of return on assets 8.50% 8.50% 7.50% 7.50%
</TABLE>
81
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
The actuarial assumptions used for postretirement benefit plans of LILCO were:
<TABLE>
<CAPTION>
(In millions of dollars)
April 1, 1998 - March 31, March 31, December 31,
May 28, 1998 1998 1997 1996
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Health care cost trend 5.00%(a) 5.00%(a) 8.00%(b) 8.00%(b)
Effect of one percent increase in health
care cost trend rate:
On cost components $ 1 $ 7 $ 1 $ 5
On accumulated benefit obligation $ 43 $ 42 $ 59 $ 43
</TABLE>
(a) Per year indefinitely
(b) Gradually declining to 6.0% in 2001 and thereafter.
Note 11. The Class Settlement
The Class Settlement, which became effective in June 1989, resolved a civil
lawsuit against LILCO brought under the federal Racketeer Influenced and Corrupt
Organizations Act. The lawsuit, which the Class Settlement resolved, had alleged
that LILCO made inadequate disclosures before the PSC concerning the
construction and completion of nuclear generating facilities.
The Class Settlement continues to provide the electric rate payers with rate
reductions which will total $390 million over a ten-year period which began on
June 1, 1990. As of December 31, 1998, the remaining rate reductions, which are
being reflected as adjustments to customer's bills, total approximately $85
million and consists of approximately $25 million for the five-month period
beginning January 1, 1999 and $60 million for the 12-month period beginning June
1, 1999. Such reductions to LIPA's customer's are reimbursed by KeySpan, in
accordance with the Merger Agreement.
Note 12. The 1989 Settlement
In February 1989, LILCO and the State of New York entered into the 1989
Settlement resolving certain issues relating to LILCO and provided for the
transfer of Shoreham to the Authority. The Settlement also included provisions
for the decommissioning of Shoreham and the recovery by the Authority of the
costs of decommissioning from LILCO, and in turn the recovery of those costs by
LILCO from customers. In February 1992, LILCO transferred ownership of Shoreham
to the Authority. In May 1995, the NRC terminated the Authority's
possession-only license for Shoreham which signified the NRC's approval that
decommissioning was complete and that the site was suitable for unrestricted
use.
Upon the effectiveness of the 1989 Settlement, in June 1989, LILCO recorded the
FRA on its Balance Sheet and the retirement of its investment of approximately
$4.2 billion, principally in Shoreham.
82
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Pursuant to the 1989 Settlement, LILCO was required to reimburse the Authority
for all of its costs associated with the decommissioning of Shoreham. The PSC
had determined that all costs associated with Shoreham which were prudently
incurred by LILCO subsequent to the effectiveness of the 1989 Settlement were
decommissioning costs. The RMA provided for the recovery of such costs through
electric rates over the balance of a forty-year period ending 2029. At March 31,
1998, Shoreham post-settlement costs totaled approximately $1.2 billion,
consisting of $587 million of property taxes and PILOTS, and $568 million of
decommissioning costs, fuel disposal costs and all other costs incurred at
Shoreham after June 30, 1989.
Note 13. Commitments and Contingencies
Legal Proceedings
Shoreham Tax Matters
Through November 1992, Suffolk County and the following Suffolk County political
subdivisions (collectively, the "Suffolk Taxing Jurisdictions"), the Town of
Brookhaven, Shoreham-Wading River Central School District, Wading River Fire
District and the Shoreham-Wading River Library District (which was succeeded by
the North Shore Library District), levied and received real estate taxes from
LILCO on the Shoreham plant. When the Authority acquired the Shoreham plant in
February 1992, it was obligated pursuant to the LIPA Act to make PILOTs on the
Shoreham plant beginning in December 1992. As part of the agreement between
LILCO and the Authority providing for the transfer of Shoreham to the Authority,
LILCO agreed to fund these payments. Prior to the Merger, LILCO charged rates
sufficient to make these payments to the Authority. Both LILCO and the Authority
contested the assessments, claiming the Shoreham plant was overassessed. To
date, the Authority has made such payments, in whole or in part, pursuant to
interim PILOT agreements and collected the costs thereof pursuant to the PILOTs
rider which is part of LIPA's rates.
On March 26, 1997, a judgment was entered in the Supreme Court, State of New
York, Suffolk County, on behalf of LILCO against the Suffolk Taxing
Jurisdictions ordering them to refund to LILCO property tax overpayments
(resulting from over-assessments of Shoreham) in an amount exceeding $868
million, including interest as of the date of the judgement. In addition, the
judgment provides for the payment of post-judgment interest (the "Shoreham
Property Tax Litigation"). The Court also determined that the Shoreham plant had
a value of nearly zero during the period the Authority has owned Shoreham. This
judgment was unanimously affirmed by the Appellate Division of the State of New
York on July 13, 1998. Certain of the Suffolk Taxing Jurisdictions sought to
appeal this judgment to the New York State Court of Appeals. Their applications
were unanimously denied by the Appellate Division. New applications for leave to
appeal were made to the Court of Appeals. On January 19, 1999, the Court of
Appeals denied the motions. There is no further review in the New York State
court system.
The Authority had proposed a settlement agreement with the Suffolk Taxing
Jurisdictions and Nassau County. The proposed settlement agreement would, among
other things, cause the Authority: (i) not to enforce the judgment in favor of
LILCO; and (ii) not to make any claim for a refund of what the
83
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Authority believes is an overpayment of PILOT's, in exchange for the payment by
the Suffolk Taxing Jurisdictions to the Authority of $625 million.
On February 1, 1999, a lawsuit was filed in the Supreme Court of the State of
New York, Nassau County, by the Association for a Better Long Island against the
Authority and LIPA. This lawsuit seeks: (i) to require the Authority to collect
the full amount of the judgment obtained by the Authority in the Shoreham
Property Tax Litigation as well as certain overpaid PILOTs; and (ii) to declare
that the offer of the Authority to settle the Shoreham Property Tax Litigation
is void and legally unenforceable. No assurance can be given as to the method,
amount (if any) or timing of any recovery by the Authority related to the
Shoreham Property Tax Litigation.
The proposed settlement agreement with the Suffolk Taxing Jurisdictions was not
accepted and on March 1, 1999, the Authority withdrew its offer to settle the
Shoreham Property Tax Litigation including claims related to the Authority's
overpayment of PILOTs on the Shoreham plant for $625 million and indicated that
any settlement would have to be at a higher amount. On that date, the Authority
also demanded that the Suffolk Taxing Jurisdictions pay refunds of real estate
taxes in the amount of approximately $784 million consisting of: (i) refunds and
interest due as of the entry of the judgment on March 26, 1997, for the period
from and after January 15, 1987, (the effective date of the LIPA Act), of
approximately $675 million; and (ii) accrued post-judgment interest in the
amount of approximately $109 million. Post-judgment interest will continue to
accrue until the judgment is satisfied.
On September 15, 1998, Suffolk County filed an action against the Authority in
the Supreme Court of the State of New York, Suffolk County seeking to enjoin the
Authority from recovering tax refunds based upon the over-assessment of the
Shoreham nuclear plant. The action claims that the Authority does not have the
right to recover property taxes previously assessed against LILCO for tax years
1984-1985 through 1991-1992. On March 19, 1999, the Court ruled that the
Authority was not entitled to collect any refund of property taxes assessed
against the Shoreham plant. In addition, the court stated that the Authority has
a duty to discontinue and abandon all proceedings which seek the repayment of
all or part of the taxes assessed against the Shoreham plant. The Authority
intends to appeal this decision. The Authority does not believe that an adverse
decision in this litigation will have a material adverse effect on the
Authority's or LIPA's financial condition. Further, the court stated that under
a ruling of the State Court of Appeals, the Authority is not prohibited from
seeking refunds of PILOTs paid on over-assessments of the Shoreham plant.
The New York State Court of Appeals in a separate case has ruled that the Act
does not prohibit the Authority from seeking refunds plus interest if it has
overpaid PILOTs based on an over-assessment of Shoreham. The Authority has made
PILOT payments of approximately $345 million which it believes were based on
such an over-assessment. On February 24, 1999, the Authority filed an action
against the Suffolk Taxing Jurisdictions in the Supreme Court of the State of
New York, Nassau County seeking a judgment in an amount equal to the total
amount of PILOTs overpaid by the Authority, plus interest.
On March 23, 1999, the Shoreham Wading River Central School District filed an
action against the Authority in the Supreme Court of the State of New York,
County of Nassau seeking an order directing the Authority to pay approximately
$6.4 million of PILOTs which the plaintiff alleges are due and owing and
approximately $24.6 million of PILOTs which the plaintiff alleges is the
cumulative deficiency as of
84
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
June 1, 1998. The Authority does not believe that an adverse decision in this
litigation will have a material adverse effect on the Authority's or LIPA's
financial condition.
Merger Matters
LIPA has been named as a nominal defendant in a derivative suit pending in the
United States District Court for the Eastern District of New York entitled
Sylvester v. Catacosinos, et al. A motion to dismiss on behalf of LIPA was filed
on September 23, 1998 and argued on January 28, 1999. In addition, LIPA has been
named as a defendant in an action brought by the County of Suffolk that is
pending in New York State Supreme Court, Suffolk County, entitled County of
Suffolk v. KeySpan et al. The response date has been postponed until such time
as it is determined whether the action will be consolidated with a class action
pending in New York State Supreme Court, Nassau County, entitled In re KeySpan
Corporation Shareholder Litigation. Former officers and directors of LILCO also
have been named as defendants in each of these actions.
The complaints in the foregoing actions allege in substance that certain former
officers of LILCO received excessive compensation which totaled approximately
$67 million in connection with the closing of the Brooklyn Union merger with
LILCO and with the Authority's acquisition of the common stock of LILCO. The
Sylvester lawsuit seeks damages of an unspecified amount. The complaint brought
by the County of Suffolk seeks to make the defendants pay restitution, or
damages, of $67 million.
Because the cases are in an early state, at which no discovery has yet taken
place, LIPA cannot express an opinion as to the likelihood of any liability.
LIPA has notified KeySpan of its entitlement to indemnification pursuant to an
indemnification agreement dated June 26, 1997 for any losses LIPA suffers as a
result of these lawsuits. LIPA expects that KeySpan will honor the request for
indemnification. LIPA also understands that the Attorney General of the State of
New York is investigating the actions and statements of certain former officers
of LILCO in connection with such compensation.
On September 28, 1998, Suffolk County and the Towns of Huntington and Babylon
(collectively, the "Plaintiffs") brought a class action on behalf of themselves
and all electric utility ratepayers in Suffolk County (the "Ratepayers") against
the Authority, LIPA, KeySpan and others in the United States District Court for
the Eastern District of New York entitled County of Suffolk et al. v. Long
Island Power Authority, et al. (the "Huntington Lawsuit"). The Huntington
Lawsuit alleges that (i) LIPA and the Authority failed to refund alleged capital
gains directly to Ratepayers as a result of the Merger, unlawfully depriving
Ratepayers of their property under federal and state constitutional provisions
and (ii) LIPA failed to refund to Ratepayers certain deferred tax reserves
carried on LILCO's books at the time of the Merger, unjustly enriching KeySpan.
Based on these allegations, Plaintiffs are seeking judgments, among other
things: (i) awarding damages against KeySpan and LIPA for impairment of
contract, breach of contract and conversion; and (ii) declaring that KeySpan
holds the proceeds of the Merger attributable to the capital gains and the
deferred tax reserve in trust for the benefit of the Ratepayers and ordering
KeySpan to make a full accounting of such proceeds. LIPA believes that, although
the recovery sought by Plaintiffs could be material in amount, any such recovery
would not have a material financial impact on LIPA or its customers.
85
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
In an action commenced on May 26, 1998 (Schulz et al. v. New York State Public
Authorities Control Board et al., United States District Court, Northern
District of New York), plaintiff's complaint, in several claims for relief,
sought a judgment declaring, inter alia, the resolution of the PACB authorizing
the Authority to issue bonds to be null and void on State and federal
constitutional grounds and sought a temporary restraining order or preliminary
injunction prohibiting and enjoining the issuance of bonds. On May 27, 1998, the
District Court denied the plaintiff's request for a temporary restraining order
or preliminary injunction and dismissed the plaintiff's action on the ground
that the plaintiffs lack standing to assert the claims pleaded in the complaint.
On February 8, 1999, the United States Court of Appeals for the Second Circuit
affirmed the District Court's dismissal of the plaintiff's action.
On May 27, 1998, the Initiative for Competitive Energy (the "ICE") filed an
action in the Supreme Court of the State of New York, County of Suffolk, against
the Authority seeking, inter alia, an injunction enjoining the Authority from
selling bonds "whose purpose is to finance the proposed Shoreham Property Tax
Settlement, the Shoreham Rebates, Credits and Suffolk Surcharge." The action
further requested a judgment declaring invalid and directing the rescission of
the sale of such bonds. By decision dated October 7, 1998, the Supreme Court
dismissed the complaint and ruled in favor of the Authority on all issues. On
October 28, 1998, the ICE filed a notice of appeal.
In May 1995, eight participants of LILCO's Retirement Income Plan ("RIP") filed
a lawsuit against LILCO, the RIP and Robert X. Kelleher, the Plan Administrator,
in the United States District Court for the Eastern District of New York. In
January 1996, the Court ordered that this action be maintained as a class
action. This proceeding arose in connection with the plaintiff's withdrawal,
approximately 25 years ago, of contributions made to the RIP, thereby resulting
in a reduction of their pension benefits. On January 7, 1999, a settlement
agreement was filed with the Court providing for the payment of $7.75 million to
the plaintiffs. The Authority would be responsible for approximately $5.4
million. The settlement is subject to judicial review. Amended settlement papers
were filed on February 22, 1999 and a hearing date is scheduled for July 27,
1999.
In December 1997, Suffolk County brought a suit against the Authority and others
in the Supreme Court of the State of New York seeking a judgment, among other
things: (i) annulling and vacating the acceptance by the Authority of certain
conditions contained in the July 1997 PACB resolution approving the Authority's
acquisition of LILCO and related transactions; (ii) declaring that all or any
actions taken by the Authority to implement or carry out the PACB conditions are
null and void; and (iii) directing that the Authority take no further action to
acquire the stock or assets of LILCO unless and until such acquisition has been
approved by the PACB in the manner approved by law. A decision was rendered in
March 1998 which held for the Authority on all substantive issues. Suffolk
County filed a notice of appeal to the Appellate Division of the State of New
York.
LIPA is involved in various legal proceedings which are routine litigation
matters incidental to the conduct of its business. In the judgment of the
Authority and LIPA, these matters will not individually or in the aggregate,
have a material adverse effect on the financial position, results of operations
or cash flows of LIPA.
86
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Environmental
In connection with the Merger, KeySpan and LIPA entered into Liabilities
Undertaking and Indemnification Agreements which, when taken together, provide,
generally, that environmental liabilities will be divided between KeySpan and
LIPA on the basis of whether they relate to assets transferred to KeySpan or
retained by LIPA as part of the Merger. In addition, to clarify and supplement
these agreements, KeySpan and LIPA also entered into an agreement to allocate
between them certain liabilities, including environmental liabilities, arising
from events occurring prior to the Merger and relating to the business and
operations to be conducted by LIPA after the Merger (the "Retained Business")
and to the business and operations to be conducted by KeySpan after the Merger
(the "Transferred Business").
KeySpan is responsible for all liabilities arising from all manufactured gas
plant operations ("MGP Sites"), including those currently or formerly operated
by KeySpan or any of its predecessors, whether or not such MGP Sites related to
the Transferred Business or the Retained Business. In addition, KeySpan is
liable for all environmental liabilities traceable to the Transferred Business
and certain scheduled environmental liabilities. Environmental liabilities that
arise from the non-nuclear generating business may be recoverable by KeySpan as
part of the capacity charge under the PSA. LIPA is responsible for all
environmental liabilities traceable to the Retained Business and certain
scheduled environmental liabilities.
Environmental liabilities that exist as of the date of the Merger that are
untraceable, including untraceable liabilities that arise out of common and/or
shared services have been allocated 53.6% to LIPA and 46.4% to KeySpan.
Environmental Matters Retained by LIPA
Long Island Sound Transmission Cables. The Connecticut Department of
Environmental Protection ("DEP") and the DEC separately have issued
Administrative Consent Orders ("ACOs") in connection with releases of insulating
fluid from an electric transmission cable system located under the Long Island
Sound. The ACOs require the submission of a series of reports and studies
describing cable system condition, operation and repair practices, alternatives
for cable improvements or replacement, and environmental impacts associated with
prior leaks of fluid into the Long Island Sound. Compliance activities
associated with the ACOs are ongoing.
Simazine. Simazine is a commercially available herbicide manufactured by
Novartis that was used by LILCO as a defoliant until 1993 under the direction of
a New York State Certified Pesticide Applicator. Simazine contamination was
found in groundwater at one of the LIPA substations in 1997. LIPA is working
cooperatively with the Suffolk County Department of Health, the DEC and Novartis
to conduct studies and monitoring activities in connection with the presence of
this herbicide. The liability, if any, resulting from the use of this herbicide
cannot yet be determined. However, LIPA does not believe that it will have a
material adverse effect on its financial position, cash flows, or results of
operations.
Superfund Sites
Under Section 107(a) of the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA", also commonly referred to as the
"Superfund Legislation"), parties who
87
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
generated or arranged for disposal of hazardous substances are liable for costs
incurred by the EPA in responding to a release or threat of release of the
hazardous substances.
Metal Bank. In December 1997, the EPA issued its Record of Decision ("ROD"), in
connection with the remediation of a licensed disposal site located in
Philadelphia, Pennsylvania, and operated by Metal Bank of America. In the ROD,
the EPA estimated that the present worth cost of the selected remedy for the
site is $17.3 million. In June 1998, the EPA issued a unilateral administrative
order to 13 PRPs, including LIPA, for the remedial design and for remedial
action at the site. LIPA can not predict with reasonable certainty the actual
cost of the selected remedy, who will implement the remedy, or the cost, if any,
to LIPA. Under a PRP participation agreement, LIPA is responsible for 7.95% of
the costs associated with implementing the remedy. LIPA has recorded a liability
of $1.6 million representing its estimated share of the additional cost to
remediate this site.
PCB Treatment Inc. LILCO has also been named a PRP for disposal sites in Kansas
City, Kansas and Kansas City, Missouri. The two sites were used by a company
named PCB Treatment, Inc. from 1982 until 1987 for the storage, processing, and
treatment of electric equipment, oils and other materials containing PCBs.
According to the EPA, the buildings and certain soil areas outside the buildings
are contaminated with PCBs. Certain of the PRPs, including LILCO and several
other utilities, formed a group, signed a consent order, and have developed a
work plan for investigating environmental conditions at the site. The EPA
provided LILCO with documents indicating that LILCO was responsible for less
than 1% of the materials that were shipped to this site. LIPA is currently
unable to determine its share of the cost to remediate these sites.
Environmental Matters Which May Be Recoverable From LIPA By KeySpan Through
The PSA
Asharoken. In March 1996, the Village of Asharoken (the "Village") filed a
lawsuit against LILCO in the New York Supreme Court, Suffolk County
(Incorporated Village of Asharoken, New York, et al. v. Long Island Lighting
Company). The Village is seeking monetary damages and injunctive relief based
upon theories of negligence, gross negligence and nuisance in connection with
the LILCO design and construction of the Northport Power Plant which the Village
alleges upset the littoral drift, thereby causing beach erosion. In November
1996, the court decided LILCO's motion to dismiss the lawsuit, dismissing two of
the three causes of action. The court limited monetary damages on the surviving
continuous nuisance claim to three years prior to the commencement of the
action. The liability, if any, resulting from this proceeding cannot yet be
determined. However, LIPA does not believe that this proceeding will have a
material adverse effect on its financial position, cash flows or results of
operations.
Environmental Matters Which Are Currently Untraceable For Which LIPA Could Have
Responsibility
Other Superfund Sites. In connection with a lawsuit filed against LILCO and nine
other PRPs by the Town of Oyster Bay for indemnification for remediation and
investigation costs for a federal Superfund site in Syosset, New York, a
settlement agreement has been reached and is subject to court approval. If
approved, the settlement would not have a material adverse effect on LIPA's
financial position, cash flows or results of operations. In addition, LILCO was
notified by the Attorney General of the State of New York that it may be
responsible for the disposal of wastes and/or for the generation of hazardous
substances that may have been disposed of at the Blydenburgh Superfund site.
LILCO conducted a
88
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
search of its corporate records and did not locate any documents concerning
waste disposal practices associated with this landfill. Based on current
information, LIPA does not believe that this proceeding will have a material
adverse effect on its financial position, cash flows or results of operations.
DEC has notified LILCO, pursuant to the New York State superfund program, that
LIPA may be responsible for the disposal of hazardous substances at the
Huntington/East Northport Site, a municipal landfill property. The DEC
investigation is in its preliminary stages, and LIPA is currently unable to
determine its share, if any, of the costs to investigate and remediate this
site.
Other Matters
As a result of the Merger, LIPA has assumed contracts with numerous Independent
Power Producers ("IPPs") and the New York Power Authority ("NYPA") for electric
generating capacity. Under the terms of the agreement with NYPA, which will
expire in May 2014, LIPA may purchase up to 100% of the electric energy produced
at the NYPA facility located within LIPA's service territory at Holtsville, New
York. LIPA is required to reimburse NYPA for the minimum debt service payments
and to make fixed non-energy payments associated with operating and maintaining
the plant.
With respect to contracts entered into with the IPPs, LIPA is obligated to
purchase all the energy they make available to LIPA at prices that often exceed
current market prices. However, LIPA has no obligation to the IPPs it they fail
to deliver energy. For purposes of the table below, LIPA has assumed full
performance by the IPPs, as no event has occurred to suggest anything less than
full performance by these parties.
LIPA has also assumed a contract with NYPA for firm transmission ("wheeling")
capacity in connection with a transmission cable which was constructed, in part,
for the benefit of LIPA. In accordance with the provisions of this agreement,
which expires in 2020, LIPA is required to reimburse NYPA for debt service
payments and the cost of operating and maintaining the cables. The cost of such
contracts is included in electric fuel expense and is recoverable through rates.
89
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
The following table represents LIPA's commitments under purchased power
contracts:
(in millions of dollars)
<TABLE>
<CAPTION>
NYPA Holtsville
---------------------------------
Debt Other Fixed Firm Total
Service Charges Energy* Transmission IPPs* Business*
------- ------- ------- ------------ ----- ---------
<S> <C> <C> <C> <C> <C> <C>
For the years ended
1999 $ 21.7 $ 14.0 $ 8.7 $ 26.3 $ 126.6 $ 197.3
2000 21.8 14.4 8.7 26.0 132.5 203.4
2001 21.9 14.8 8.6 28.3 135.5 209.1
2002 22.0 15.2 8.8 28.4 139.3 213.7
2003 22.0 15.5 9.1 28.5 142.6 217.7
Subsequent thereto 215.9 185.2 105.3 514.0 991.1 2,011.5
------- ------- ------- -------- -------- ---------
Total 325.3 259.1 149.2 651.5 1,667.6 3,052.7
Less: Imputed Interest 142.9 121.8 69.5 368.9 683.5 1,386.6
------- ------- ------- -------- -------- ---------
$ 182.4 $ 137.3 $ 79.7 $ 282.6 $ 984.1 $ 1,666.1
======= ======= ======= ======== ======== =========
</TABLE>
* Assumes full performance by the IPPs and NYPA.
Note 14. Related Party Transactions
LIPA, as owner of the transmission and distribution system and as party to the
Operating Agreements, conducts the electric business in the Service Area. The
Authority is responsible, however, for administering, monitoring and managing
the performance by all parties to the Operating Agreements.
The Authority and LIPA are also parties to an Administrative Services Agreement
which describes the terms and conditions under which the Authority provides
personnel, personnel-related services and other services necessary for LIPA to
provide electric service in the Service Area.
As compensation to the Authority for the services described above, the Authority
charges LIPA a monthly management fee equal to the costs incurred by the
Authority in order to perform its obligations under the agreements described
above. For the period May 29, 1998 to December 31, 1998, management fees charged
by the Authority amounted to approximately $10.5 million.
90
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 15. Subsequent Events
On January 4, 1999, LIPA redeemed $102.6 million of the NYSERDA Electric
Facilities Revenue Bonds Series 1982, 1993A, 1993B 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 PCRBs and 5.3% on the EFRBs.
(In thousands)
Balance at
Interest December 31,
Maturity Rate 1998
-------- ---- ----
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.
91
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 16. Quarterly Financial Information (Unaudited)
Summarized quarterly financial data for 1998, 1997 and 1996 is as follows:
(in thousands)
<TABLE>
<CAPTION>
3 Months Ended 6/30/98 9/30/98 12/31/98
------- ------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 532,750 $ 693,698 $ 459,155
Operating income (loss) 238,426 196,046 (125,427)
Net income (loss) 21,112 103,982 (206,472)
Earnings (loss) for common stock 13,075 103,982 (206,472)
3 Months Ended 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98
------- ------- ------- -------- -------
Operating revenues $ 557,791 $ 560,086 $ 790,331 $ 572,335 $ 555,683
Operating income 128,293 136,498 244,039 135,967 156,126
Net income 87,697 45,161 144,384 56,756 115,939
Earnings for common stock 74,728 32,193 131,435 43,807 102,992
Basic and diluted earnings per
common share .62 .26 1.09 .36 .85
3 Months Ended 3/31/96 6/30/96 9/30/96 12/31/96
------- ------- ------- --------
Operating revenues $ 559,268 $ 576,963 $ 780,158 $ 550,046
Operating income 132,486 132,192 238,175 139,052
Net income 81,753 40,524 130,023 64,164
Earnings for common stock 68,682 27,453 116,972 51,141
Basic and diluted earnings per
common share .57 .23 .97 .43
</TABLE>
92
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 17. Change in Fiscal Year End
Effective December 22, 1998, LIPA changed its fiscal year end from March 31 to
December 31. The unaudited financial information of LILCO, restated for
discontinued operations, for the nine months ended December 31, 1997 is as
follows:
Nine Months
Ended
December 31,
1997
(thousands of dollars - except per share information) (unaudited)
-------------
Revenues $1,922,752
----------
Operating income $1,406,248
----------
Income taxes $ 158,451
----------
Income from continuing operations $ 206,897
Income from discontinued operations, net of taxes of $3,297 39,404
----------
Net income 246,301
Preferred stock dividend requirements 38,865
----------
Earnings for common stock $ 207,436
==========
Basic and diluted earnings per common share from continuing
operations $ 1.38
Basic and diluted earnings per common share from discontinued
operations .33
----------
Basic and diluted earnings per common share $ 1.71
==========
93
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
- --------------------------------------------------------------------------------
Supplementary Information
Impact of Year 2000
General. A portion of the computer hardware and software and embedded technology
(such as microcontrollers and microprocessors contained in equipment and
machinery) used by the Authority and LIPA, as well as KeySpan and the
subsidiaries of KeySpan that are parties to the MSA, EMA and PSA and others with
whom the foregoing have business arrangements, was not designed to recognize
calendar years after 1999 (the "Year 2000 Issue").
The Authority recently purchased new computer software to support certain
activities of LIPA and believes that these systems are Year 2000 ready.
Management also believes that, based on available information, it will be able
to manage its Year 2000 transition for systems and infrastructure, without any
material adverse effect on its business operations or financial prospects.
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
continuing discussions with KeySpan, their largest vendor, who is responsible
for the management and operation of LIPA's transmission and distribution system,
and KeySpan indicates that they have evaluated the extent to which modifications
to computer software, hardware and databases will be necessary to accommodate
the year 2000.
KeySpan's computer applications are generally based on two digits and do require
additional programming to recognize the new millennium. A corporate-wide program
has been established by 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 KeySpan's
Year 2000 Program Office, chaired by the Vice President, Technology Operations
and Corporate Y2K Officer. Each of KeySpan's critical business 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. The inventory phase for the IT systems and non-IT systems is 100%
complete. The assessment phase is 100% complete for the IT systems, and over 90%
complete for non-IT systems. The assessment phase is expected to be complete by
July 1, 1999.
KeySpan's hardware, software and embedded systems are being tested and certified
to be Year 2000 compliant. Repair and testing to sustain operability is now 73%
complete for the IT systems and approximately 75% for the non-IT systems.
Components needed to support the critical business process and associated
business contingency plans are expected to be ready for the year 2000 by July 1,
1999.
KeySpan's vendors and business partners needed to support the critical business
processes of KeySpan are also being reviewed for their year 2000 compliance. At
this time, none of these vendors have indicated to Key Span that they will be
materially affected by the year 2000 problem.
Key-Span has analyzed each of the critical business processes to identify
possible Year 2000 risks. Each of KeySpan's critical businesses will be
certified by the responsible KeySpan officer as being Year 2000 ready. However,
the most reasonable likely worst case scenarios are also being identified.
Business operating procedures at KeySpan will be reviewed to ensure that risks
are minimized when entering the
94
<PAGE>
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
- --------------------------------------------------------------------------------
Year 2000 and other high risk dates. KeySpan is developing contingency plans to
address possible failure points in each critical business process.
While KeySpan must plan for the following 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
electricity since many of the plants have the ability to operate on oil.
Loss of electric grid inter-connections/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 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's operations from the grid, 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 malfunction due to Year 2000 problems.
KeySpan has inventoried electric system components and developed a plan to
certify mission critical processes as Year 2000 compliant. Contingency plans are
being developed, where appropriate, for loss of critical system elements.
KeySpan presently estimates that contingency plans regarding its electric
facilities should be completed by July 1999.
Loss of telecommunications:
KeySpan has a substantial dependency on many telecommunication systems and
services for both internal and external communications. External communications
with the public and the ability of customers to contact KeySpan in cases of
emergency response is 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 will address methods for
manually monitoring these functions. These contingency plans, KeySpan presently
estimates, should be finalized by July 1999.
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 operation; reduction in quality of power output; loss of automated meter
reading; loss of ability to read, bill and collect; 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 are not made, or are not completed on time, and contingency
plans fail the Year 2000 issue could have a material adverse impact on the
operations of LIPA.
95
<PAGE>
LIPA's Contingency Plans
Long Island Lighting Company d/b/a LIPA
(a wholly-owned subsidiary of the Long Island Power Authority)
- --------------------------------------------------------------------------------
In order to insure that the Year 2000 will have a minimal impact on the
operations of LIPA, LIPA is closely monitoring the initiatives and progress of
KeySpan's Year 2000 Program Office. In addition, LIPA is working with various
other governmental agencies to insure communication between LIPA and such other
governmental entities is uninterrupted.
96
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information regarding change in accountants required under this Item 9
was previously reported by LIPA on Form 8-K filed on June 23, 1998.
PART III.
Item 10. Directors and Executive Officers of LIPA
The following table sets forth the directors and executive officers of
LIPA, their ages and the positions held by them with LIPA as of December 31,
1998.
Name Age Position
- ---- --- --------
Richard M. Kessel 48 Chairman, President and
Chief Executive Officer
Seth D. Hulkower 40 Chief Operating Officer
David P. Warren 44 Chief Financial Officer
Stanley B. Klimberg 53 General Counsel and
Secretary
Edward P. Murphy, Jr. 55 Vice President and
Controller
Richard J. Bolbrock 52 Vice President - Power
Markets
Bert J. Cunningham 51 Vice President of
Communications
Patrick J. Foye 41 Director
Michael Affrunti 74 Director
Harvey Auerbach 71 Director
Thomas A. Doherty 61 Director
97
<PAGE>
Michael L. Faltischek 51 Director
Harriet A. Gilliam 44 Director
Rupert H. Hopkins 47 Director
Joseph F. Janoski 57 Director
Nancy N. Miklos 48 Director
Vincent Polimeni 55 Director
Jonathan Sinnreich 52 Director
Richard M. Kessel has been Chairman, President and Chief Executive Officer
of LIPA since May 1998. Mr. Kessel has been Chairman, President and Chief
Executive Officer of the Authority since April 1997 and a Trustee of the
Authority since 1987. Mr. Kessel was appointed as Executive Director and
Chairman of New York State's Consumer Protection Board in January 1984 and
served until January 1995. Mr. Kessel served as an ex-officio member of Governor
Cuomo's Advisory Commission on Liability Insurance. Since 1981, Mr. Kessel has
been a member of the Board of Trustees of Nassau Community College. Mr. Kessel
is a graduate of New York University. He received his Masters in Political
Science from Columbia University.
Patrick Foye has been a director of LIPA since May 1998 and a Trustee of
the Authority since June 1995. Mr. Foye's current term expired August 31, 1998.
Pursuant to the Act, Mr. Foye continues to serve until his successor is
appointed. Mr. Foye has been Executive Vice President of Apartment Investment
and Management Company, a real estate investment trust and the nation's largest
owner and manager of multifamily apartment properties since June 1998. He was
partner from April 1989 to June 1998 in the law firm of Skadden, Arps, Slate,
Meagher & Flom LLP. Since October 1998, Mr. Foye has been a trustee of Insignia
Property Trust, a real estate investment trust. Mr. Foye is also a director of
and executive vice president of the general partners of a number of
partnerships. Mr. Foye is a member of Governor Pataki's New York State
Privatization Research Council. Mr. Foye is a graduate of Fordham College and
Fordham Law School.
Seth D. Hulkower has been Chief Operating Officer of LIPA and the
Authority since January 1999. Mr. Hulkower was Executive Director of LIPA from
May 1998 to January 1999 and Executive Director of the Authority from July 1996
to January 1999. From December 1994 to June 1996, Mr. Hulkower was a Vice
President of Merrill International Ltd., an energy project development and
consulting company. From May 1992 to November 1994, Mr. Hulkower was a Vice
President of JFG Associates, Inc., a financial advisory and management
consulting firm. He has also held positions with the consulting firm of Putnam,
Hayes, & Bartlett, Inc., New England Power Company and Stone & Webster
Engineering Company, Mr. Hulkower received his S.M. in Technology and Policy
from the Massachusetts Institute of Technology and his B.S. in Mechanical
Engineering and B.A. in Economics from Tufts University.
98
<PAGE>
David P. Warren has been Chief Financial Officer of LIPA since May 1998
and Chief Financial Officer of the Authority since January 1998. From 1995 to
1998, Mr. Warren was Deputy Treasurer of the State of Connecticut where he
administered the State's public finance program. Before entering the public
sector, Mr. Warren was a vice president in public finance at CS First Boston.
Mr. Warren holds an M.B.A. from the Yale School of Management and a B.A. from
Wesleyan University.
Stanley B. Klimberg has been General Counsel of LIPA since May 1998 and
General Counsel of the Authority since September 1995. Mr. Klimberg joined the
Authority in March 1987 as General Counsel and Acting Executive Director and has
served in various capacities with the Authority. Before joining the Authority,
Mr. Klimberg was General Counsel of the New York State Energy Office from 1979
to 1987, and before that he was Assistant General Counsel and Staff Counsel of
the New York State Public Service Commission. Mr. Klimberg received his J.D.
from the New York University School of Law and his B.A. in History with high
honors from Lehigh University.
Edward P. Murphy, Jr. has been Vice President and Controller of LIPA since
May 1998 and Vice President and Controller of the Authority since April 1998.
Prior to his employment at LIPA, Mr. Murphy held several management positions at
Brooklyn Union Gas Company. From 1995 to 1997, he was Vice President for
Business Transformation. Mr. Murphy was Vice President for Public Affairs from
1988 to 1994. From 1982 to 1987, he served as General Auditor and was Budget
Director from 1976 to 1982. Prior to this, Mr. Murphy held various positions in
operations and accounting at Brooklyn Union. Mr. Murphy received his B.S. in
Accounting from Clarkson University and attended the Executive Program in
Business Administration at Columbia University.
Richard J. Bolbrock has been Vice President - Power Markets of LIPA and
the Authority since May 1998. From 1974 to 1997, Mr. Bolbrock held several
positions at New England Power Pool including Director-Planning and Information
Technology for ISO New England, Inc., Director of New England Power Planning
from 1983 to 1997, and Manager of Billing for the New England Power Exchange
from 1979 to 1983. Prior to this, Mr. Bolbrock held various positions at
Northeast Utilities and American Electric Power. Mr. Bolbrock received his B. S.
in Electrical Engineering and his M.E. in Electric Power Engineering from
Rensselaer Polytechnic Institute and is a Registered Professional Engineer.
Bert J. Cunningham has been Vice President of Communications of LIPA and
the Authority since September 1998. From October 1992 to September 1998, Mr.
Cunningham was President /Chief Operating Officer of The Blankman Cunningham
Group, LLC (formerly Howard Blankman Incorporated), a regional public relations
and marketing communications firm. From September 1990 to October 1992, he
served as Chief of Staff and Executive Director of Government and Community
Affairs of The Long Island Rail Road, an operating agency of the Metropolitan
Transportation Authority. Mr. Cunningham has also served as Chief of Staff to
the Supervisor of the Town of North Hempstead in Nassau County, and Director of
Public Affairs for both the New York State Senate Standing Committee on
Transportation and the New York State Legislative Commission on Critical
Transportation Choices. Mr. Cunningham holds a B.F.A. in Communications from the
New York Institute of Technology.
99
<PAGE>
Michael Affrunti has been a Director of LIPA since May 1998, and a Trustee
of the Authority since August 1995. Mr. Affrunti is founder of Albertson
Electric and has been President since 1957.
Harvey Auerbach has been a director of LIPA since May 1998 and a Trustee
of the Authority since 1997. From January 1994 to January 1999, Mr. Auerbach was
President of Brookwood Communities Inc., a residential and commercial
construction management company. Mr. Auerbach currently serves as a director of
the Long Island Commercial Bank and is Trustee and Acting Vice Chair of the City
University of New York. Mr. Auerbach graduated from the University of North
Carolina and attended New York University Law School.
Thomas A. Doherty has been a director of LIPA since May 1998 and a Trustee
of the Authority since September 1995. Since March 1995, Mr. Doherty has been
the Chief Administrative Officer of First Quality Enterprises, Inc. Mr. Doherty
served as Chairman, President and Chief Executive Officer of Fleet Bank from
1987 through 1995. Mr. Doherty graduated from Fordham University and attended
New York University's Graduate School of Business.
Michael L. Faltischek has been a director of LIPA since May 1998 and a
Trustee of the Authority since September 1995. Mr. Faltischek has been a partner
in the law firm of Ruskin, Moscou, Evans & Faltischek, P.C. since May 1973. Mr.
Faltischek graduated from Pace University and Brooklyn Law School.
Harriet A. Gilliam has been a director of LIPA since May 1998 and a
Trustee of the Authority since February 1997. Ms. Gilliam has been an attorney
in private practice for the past eight years. Ms. Gilliam served as a
Councilwoman in the town of Riverhead, New York and a member of the Riverhead
Community Development Agency from 1992 to 1995. Ms. Gilliam graduated from Holy
Cross College and the University of Pennsylvania Law School.
Rupert H. Hopkins has been a director of LIPA since May 1998 and a Trustee
of the Authority since February 1997. Since July 1998, Mr. Hopkins has been
President of XSB, Inc., a software research and development company. Mr. Hopkins
was the Department Manager for the Center for Agile Sources of Parts at Dayton
T. Brown, Inc. from January 1994 to July 1998.
Joseph F. Janoski has been a director of LIPA since May 1998 and a Trustee
of the Authority since September 1995. Since 1968, Mr. Janoski has been a
teacher in the Middle Country School District in Centereach, New York. From
January 1980 to January 1995, Mr. Janoski served as Riverhead Town Supervisor.
Mr. Janoski graduated from Wilkes College and received a Master of Education
from the University of Pennsylvania.
Nancy N. Miklos has been a director of LIPA since May 1998 and a Trustee
of the Authority since April 1998. Since 1994, Ms. Miklos has been a Deputy
County Attorney in the Civil Rights and Torts Litigation Bureau of the Nassau
County Attorney's Office.
Vincent Polimeni has been a director of LIPA since May 1998 and a Trustee
of the Authority since November 1997. Mr. Polimeni is the founder of Polimeni
Enterprises, Inc., a real estate firm and other affiliated entities, and has
been Chief Executive Officer since
100
<PAGE>
September 1983. Mr. Polimeni serves on the Advisory Board for the Hofstra
University School of Business.
Jonathan Sinnreich has been director of LIPA since May 1998 and a Trustee
of the Authority since September 1995. Mr. Sinnreich has been a partner in the
law firm of Sinnreich, Wasserman & Grubin LLP since 1982.
Item 11. Executive Compensation
The following table sets forth the total compensation paid or accrued for
the nine month period ended December 31, 1998, the fiscal year ended March 31,
1998 and the fiscal year ended December 31, 1996, for LIPA's Chief Executive
Officer, LILCO's former Chief Executive Officer and two of its former executive
officers, whose salary and bonus for such periods were in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Payouts
--------------------- ------------ All other
Salary Bonus LTIP Payouts Compensation
Name and Principal Position Year ($)(1) ($) ($) ($)
- --------------------------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Richard M. Kessel (2)
President and Chief 1998 54,154 0 0 0
Executive Officer
1997/1998 0 0 0 0
1996 0 0 0 0
William J. Catacosinos (3) 1998 233,333 964,870 (4) 1,506,732 (5) 39,903,415 (6)
Chief Executive Officer
1997/1998 673,333 1,202,972 (7) 742,500 (8) 23,241 (9)
1996 580,413 153,203 (7) 0 18,653 (9)
James T. Flynn (3)
Chief Operating Officer 1998 247,500 109,354 371,803 (10) 1,015,385 (11)
and President
1997/1998 310,000 408,956 (7) 294,362 (8) 8,300 (9)
1996 263,364 90,554 (7) 0 5,800 (9)
Michael E. Bray (3)
Senior Vice President - 1998 196,875 102,756 166,593 (10) 809,712 (12)
Electric Business Unit
1997/1998 254,334 62,500 (7) 0 738 (9)
1996 0 0 0 0
</TABLE>
- ----------
(1) In March 1997, the Board of Directors of LILCO voted to change LILCO's
fiscal year end from December 31 to March 31 effective with the three
month period ended March 31, 1997. During this period, Mr. Catacosinos and
Mr. Flynn received salary payments of $133,234 and $75,000, respectively.
(2) Compensation for Mr. Kessel consists of amounts paid after May 28, 1998,
the date of the Merger. Mr. Kessel does not participate in any bonus or
other compensation plan.
(3) During 1998, Messrs. Catacosinos, Flynn and Bray left the employ of LILCO.
101
<PAGE>
(4) Consists of (i) cash awards paid under the LILCO Annual Stock Incentive
Plan for 1998 in the amount of $218,750, (ii) the dollar value of LILCO
Common Stock awards received in connection with the Merger in the amount
of $196,567 or 4,361 shares, (iii) the dollar value of LILCO Common Stock
awards under the LILCO Annual Stock Incentive Plan for 1997 in the amount
of $381,490 or 8,501 shares and (iv) the dollar value of LILCO Common
Stock awards received in connection with the LIPA and KeySpan transactions
in the amount of $168,063 or 3,727 shares.
(5) Consists of (i) cash awards paid under the LILCO 1997/1999 Long Term
Incentive Plan in the amount of $743,750 and (ii) the dollar value of
LILCO Common Stock awards under the LILCO 1996/1997 Long Term Incentive
Plan in the amount of $762,982 or 16,870 shares.
(6) Consists of (i) a severance payment of $2,100,000, (ii) a vacation payment
of $50,221, (iii) a retirement payment of $34,284,986, (iv) a consulting
contract payment of $2,660,000 and (v) deferred compensation of $808,208.
(7) Represents (i) the dollar value of LILCO Common Stock awards under the
Annual Stock Incentive Plan for plan years 1996 (other than for Mr. Bray)
and 1997, including applicable tax withholdings and (ii) awards in
connection with the LIPA and KeySpan transactions (other than for Mr.
Bray). The net amount of the awards in 1996 and 1997 were primarily paid
in shares of LILCO Common Stock as follows: Mr. Catacosinos - 27,081
shares, Mr. Flynn - 8,976 shares and Mr. Bray - 1,406 shares.
(8) Represents (i) the dollar value of LILCO Common Stock awards under the
Long Term Incentive Plan for plan years 1996-1997, including applicable
tax withholdings. The net amount of the awards were paid in shares of
LILCO Common Stock as follows: Mr. Catacosinos - 16,703 shares and Mr.
Flynn - 6,621 shares.
(9) Includes the cost of life insurance paid by LILCO.
(10) Consists of cash awards paid under the LILCO 1997/1999 Long Term Incentive
Plan.
(11) Consists of (i) a severance payment of $990,000 and (ii) a vacation
payment of $25,385.
(12) Consists of (i) a severance payment of $787,500 and (ii) a vacation
payment of $22,212.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Authority owns 100% of the outstanding Common Stock of LIPA.
Item 13. Certain Relationships and Related Transactions
On May 1, 1998, the Authority and LIPA entered into a financing agreement
(the "Financing Agreement") providing for their respective duties and
obligations relating to the financing and operation of the retail electric
business in the Service Area. Pursuant to the Financing Agreement, the Authority
has issued and will issue, among other things, all required debt necessary to
fund the LIPA/LILCO Merger, the debt necessary to finance the LIPA tender offer
for the Debentures and any debt necessary to fund improvements to the system.
The proceeds of such debt is treated as being loaned to LIPA (the "LIPA Loan")
which will repay such loans from the cash that the Authority receives from its
electric business. To secure the loans, LIPA has pledged its revenues to the
Authority which has, in turn, pledged such revenues as security for such debt.
At December 31, 1998, $5.4 billion was outstanding under the LIPA Loan. See Note
7 to Notes to Financial Statements.
In addition to the LIPA Loan, LIPA's operating expenditures are paid for
by the Authority and LIPA records the amounts paid as a payable to the Authority
(this is necessary since the Authority collects all customer payments). At
December 31, 1998, the amount due to the Authority totaled approximately $856
million.
On May 1, 1998, the Authority and LIPA entered into an administrative
services agreement (the "Administrative Services Agreement"). The term of the
Administrative Services Agreement commenced on May 1, 1998 and continues to
December 31, 2038. Thereafter, the agreement shall be renewed for successive
periods of 3 years upon mutual agreement of the parties. Pursuant to the
Administrative Services Agreement, the Authority provides personnel and
personnel services (including management, supervisory, payroll and otherwise)
necessary for LIPA to conduct its business. In addition, the Authority
furnishes, or coordinates with LIPA's
102
<PAGE>
agents, attorneys and consultants to provide, such other services as LIPA may
from time to time request.
All services rendered under the Administrative Services Agreement will be
at the actual cost thereof, including a reasonable charge for general and
administrative expense. See Note 14 to the Notes to the Financial Statements.
Immediately prior to the Merger, LILCO made payments of severance, change
of control and other employee benefits to William J. Catacosinos, the former
Chief Executive Officer of LILCO, Joseph W. McDonnell, the former Vice President
of Communications of LILCO, Leonard P. Novello, the former Senior Vice President
and General Counsel of LILCO and twenty-two other former LILCO executives
totaling approximately $67 million which were not disclosed to the Authority at
such time.
The Authority considered these payments to be in violation of the merger
agreement and related documents, including the MSA and EMA. On June 16, 1998,
the Authority approved a resolution which, among other things, instructed the
Authority and LIPA to (i) withhold and place in escrow present and future
management fees owed to KeySpan and (ii) withhold their consent to the
appointment of William J. Catacosinos, Joseph W. McDonnell and Leonard P.
Novello to senior executive positions at KeySpan.
On December 15, 1998, the Authority and LIPA, KeySpan and the PSC entered
into an agreement by which KeySpan represented and warranted (i) that Mr.
Catacosinos tendered his retirement and resignation as Chief Executive Officer
and Chairman of the Board of KeySpan effective July 31, 1998; and (ii) that the
24 LILCO executives (other than Catacosinos) who received payments have either
been terminated, retired, resigned or been retained as officers on condition
that all previously paid severance payments be repaid to KeySpan. In addition,
KeySpan agreed to pay to LIPA its cost of providing postage-paid bill return
envelopes to its customers for the next three years which cost is expected to be
$5.4 million. In return, the Authority and LIPA agreed to release and pay to
KeySpan the monies related to the management fees held in escrow by LIPA.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are included as part of this report:
(1) Financial Statements: Page
Reports of Independent Accountants.............................. 44
Balance Sheet -
LIPA - December 31, 1998 and LILCO-
March 31, 1998 and December 31, 1996............................ 47
Statement of Operations -
103
<PAGE>
LIPA - May 29, 1998 to December 31, 1998
and April 1, 1998 to May 28, 1998 and LILCO
- Year Ended March 31, 1998, Three Months
Ended March 31, 1997 and Year Ended
December 31, 1996............................................... 49
Statement of Cash Flows -
LIPA - May 29, 1998 to December 31, 1998 and April 1,
1998 to May 28, 1998 and LILCO - Year Ended March 31,
1998, Three Months Ended March 31, 1997 and
Year Ended December 31, 1996.................................... 50
Statement of (Accumulated Deficit) Retained Earnings -
LIPA - December 31, 1998 and LILCO March 31, 1998 and
1997 and December
31, 1996........................................................ 51
Statement of Capitalization -
LIPA - December 31, 1998 and LILCO -
March 31, 1998 and December 31, 1996............................ 52
Notes to Financial Statements................................... 54
(2) Financial Statement Schedules:
Report of Independent Accountants............................... 110
Schedule II - Valuation and Qualifying Accounts................. 111
(3) Exhibits:
3.1 Restated Certificate of Incorporation of LILCO.*
3.2 Form of New By-Laws of LILCO.*
3.3 Certificate of Assumed Name Designating LIPA as the assumed name of
LILCO dated June, 1998.*
4.1 Financing Agreement Note dated as of May 28, 1998.**
10.1 Management Services Agreement dated as of June 26, 1997 between
LILCO and the Authority.*
10.2 Power Supply Agreement dated as of June 26, 1997 between LILCO and
the Authority.*
104
<PAGE>
10.3 Energy Management Agreement dated as of June 26, 1997 between LILCO
and the Authority.*
10.4 Generation Purchase Rights Agreement dated June 26, 1997 between
LILCO and the Authority with counterpart executed by MarketSpan
Generation LLC as of May 28, 1998.*
10.5 Guaranty Agreement dated May 28, 1998 by MarketSpan Corporation
(F/K/A BL Holding Crop.); agreed to and accepted by the Authority.*
10.6 Liabilities Undertaking and Indemnification Agreement dated as of
June 26, 1997 by LILCO and MarketSpan Electric Services LLC,
MarketSpan Generation LLC, MarketSpan Trading Services LLC,
MarketSpan Utility Services LLC, MarketSpan Gas Corporation (d/b/a
Brooklyn Union), MarketSpan Corporate Services and MarketSpan
Finance Corporation.*
10.7 Liabilities Undertaking and Indemnification Agreement dated as of
June 26, 1997 by the Authority and LILCO.*
10.8 Energy Management Agreement - Assignment and Assumption Agreement
dated as of May 28, 1998 by and between LILCO, MarketSpan Trading
Services LLC and MarketSpan Corporation (F/K/A BL Holding Corp.);
acknowledged and agreed to by the Authority and LIPA Acquisition
Corp.*
10.9 Management Services Agreement - Assignment and Assumption Agreement
dated as of May 28, 1998 by and between LILCO, MarketSpan Electric
Services LLC and MarketSpan Corporation (F/K/A BL Holding Corp.);
acknowledged and agreed to by the Authority and LIPA Acquisition
Corp.*
10.10 Power Supply Agreement - Assignment and Assumption Agreement dated
as of May 28, 1998 by and between LILCO, MarketSpan Generation LLC
and MarketSpan Corporation (F/K/A BL Holding Corp.); acknowledged
and agreed to by the Authority and LIPA Acquisition Corp.*
10.11 Generation Purchase Rights Agreement - Assignment and Assumption
Agreement dated as of May 28, 1998 by and between LILCO, MarketSpan
Corporation (F/KA BL Holding Corp.); acknowledged and agreed to by
the Authority and LIPA Acquisition Corp.*
10.12 Operating Agreements - Assignment and Assumption Agreement dated as
of May 28, 1998 by and among the Authority, LIPA Acquisition Corp.
and MarketSpan Corporation (F/K/A BL Holding Corp.).*
10.13 Collections Allocation and Segregation Agreement dated as of May 28,
1998 by and among the Authority, LIPA Acquisition Corp. and
105
<PAGE>
MarketSpan Corporation (F/K/A BL Holding Corp.) and MarketSpan
Trading Services LLC.*
10.14 7.3% Promissory Note in favor of LILCO in the principal amount of
$397,000,000.* 10.15 8.20% Promissory Note in favor of LILCO in the
principal amount of $270,000,000.*
10.16 Amended and Restated $28,375,000 Pollution Control Revenue Bonds
(LILCO Projects) Series A Promissory Note in favor of LILCO.
10.19 Amended and Restated $19,100,000 Pollution Control Revenue Bonds
(LILCO Projects) Series B Promissory Note in favor of LILCO.
10.21 Amended and Restated Adjustable Rate Pollution Control Revenue Bonds
(LILCO Projects) 1985 Series A Promissory Note in favor of LILCO.
10.22 Amended and Restated Adjustable Rate Pollution Control Revenue Bonds
(LILCO Projects) 1985 Series B Promissory Notes in favor of LILCO.
10.24 Amended and Restated Electric Facilities Revenue Bonds (LILCO
Projects) 1989 Series B Promissory Note in favor of LILCO.
10.25 Amended and Restated Electric Facilities Revenue Bonds (LILCO
Projects) 1990 Series A Promissory Note in favor of LILCO.
10.26 Amended and Restated Electric Facilities Revenue Bonds (LILCO
Projects) 1991 Series A Promissory Note in favor of LILCO.
10.28 Amended and Restated Electric Facilities Revenue Bonds (LILCO
Projects) 1992 Series B Promissory Note in favor of LILCO.
10.30 Amended and Restated Electric Facilities Revenue Bonds (LILCO
Projects) 1992 Series D Promissory Note in favor of LILCO.
10.32 Amended and Restated Electric Facilities Revenue Bonds (LILCO
Projects) 1993 Series B Promissory Note in favor of LILCO.
10.33 Amended and Restated Electric Facilities Revenue Bonds (LILCO
Projects) 1994 Series A Promissory Note in favor of LILCO.
10.34 Amended and Restated Electric Facilities Revenue Bonds (LILCO
Projects) 1995 Series A Promissory Note in favor of LILCO.
10.35 Dealer Manager Agreement between Salomon Smith Barney, Inc. and Long
Island Lighting Company d/b/a LIPA dated as of October 12, 1998.**
106
<PAGE>
10.36 Financing Agreement dated as of May 1, 1998 between the Long Island
Power Authority and LIPA Acquisition Corp.**
10.37 Indemnification Agreement dated May 28, 1998 by and between LIPA
Acquisition Corp. and each of the officers and directors of the
Registrant.
16.1 Letter dated June 23, 1998 from Ernst & Young LLP to the Securities
and Exchange Commission.***
27. Financial Data Schedule.
(b) Reports on Form 8-K
A report on Form 8-K was filed on December 22, 1998 in connection with LIPA's
change in fiscal year from March 31 to December 31.
* Previously filed with the Securities and Exchange Commission as an
exhibit to LIPA's Form 10-Q for the period ended June 30, 1998.
** Previously filed with the Securities and Exchange Commission as an
exhibit to LIPA's Form 10-Q for the period ended September 30, 1998
*** Previously filed with the Securities and Exchange Commission as an
exhibit to LIPA's Form 8-K filed on June 23, 1998
107
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Uniondale, State of New York, on March 31, 1999.
LONG ISLAND LIGHTING COMPANY d/b/a LIPA
By: /s/Richard M. Kessel
-----------------------------------
Richard M. Kessel
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Richard M. Kessel Chairman of the Board, March 31, 1999
- --------------------------------------- President and Chief
Richard M. Kessel Executive Officer
(Principal Executive Officer)
/s/ David P. Warren Chief Financial Officer March 31, 1999
- ---------------------------------------
David P. Warren
(Principal Financial Officer)
/s/Edward P. Murphy, Jr. Vice President and March 31, 1999
- --------------------------------------- Controller
Edward P. Murphy, Jr.
(Principal Accounting Officer)
/s/ Patrick Foye Director March 31, 1999
- ---------------------------------------
Patrick Foye
_______________________________________ Director March , 1999
Michael Affrunti
108
<PAGE>
/s/Harvey Auerbach Director March 31, 1999
- ---------------------------------------
Harvey Auerbach
_______________________________________ Director March , 1999
Thomas A. Doherty
/s/ Michael L. Faltischek Director March 31, 1999
- ---------------------------------------
Michael L. Faltischek
/s/ Harriet A. Gilliam Director March 31, 1999
- ---------------------------------------
Harriet A. Gilliam
/s/Rupert H. Hopkins Director March 31, 1999
- ---------------------------------------
Rupert H. Hopkins
/s/ Joseph F. Janoski Director March 31, 1999
- ---------------------------------------
Joseph F. Janoski
/s/ Nancy N. Miklos Director March 31, 1999
- ---------------------------------------
Nancy N. Miklos
_______________________________________ Director March , 1999
Vincent Polimeni
_______________________________________ Director March , 1999
Jonathan Sinnreich
109
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Long Island Lighting Company d/b/a LIPA
Our audit of the financial statements referred to in our report dated March 5,
1999 appearing on page 44 of this 1998 Annual Report on Form 10-K also included
an audit of the financial statement schedule listed on page 111 of this Form
10-K. In our opinion, for the nine months ended December 31, 1998, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Melville, New York
March 5, 1999
110
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Thousands of Dollars)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------
Additions
---------------------
Charged to
Balance at Charged to other Balance at
beginning costs and accounts- Deductions end of
Description of period expenses describe - describe period
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nine months ended December 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $23,483 $11,663 - $ 9,227(1) $20,211
$ 5,708(2)
Year ended March 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $23,675 $23,239 - $23,431 (1) $23,483
Three Months Ended March 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $25,000 $ 4,821 - $ 6,146(1) $23,675
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $24,676 $23,119 - $22,795 (1) $25,000
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Transferred with sale of gas operations.
111
1976A NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Pollution Control Revenue Bonds
(Long Island Lighting Company Project), Series A" (the "Bonds") issued by the
New York State Energy Research and Development Authority ("NYSERDA"). The
Obligee is required to make payments, among others, equal to the principal,
premium, if any, and interest on the Bonds under a Participation Agreement dated
as of December 1, 1976 between the Obligee and NYSERDA (the "Participation
Agreement") and a related corporation Note issued by the Obligee to NYSERDA
under and pursuant to the Participation Agreement (the "Corporation Note" and,
together with the Participation Agreement, the "NYSERDA Financing Documents").
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
1979B NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Pollution Control Revenue Bonds
(Long Island Lighting Company Project), Series B" (the "Bonds") issued by the
New York State Energy Research and Development Authority ("NYSERDA"). The
Obligee is required to make payments, among others, equal to the principal,
premium, if any, and interest on the Bonds under a First Supplemental
Participation Agreement dated as of October 1, 1979 to the Participation
Agreement dated as of December 1, 1976 between the Obligee and NYSERDA (the
"Participation Agreement") and a related corporation Note issued by the Obligee
to NYSERDA under and pursuant to the Participation Agreement (the "Corporation
Note" and, together with the Participation Agreement, the "NYSERDA Financing
Documents").
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
1985A NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Adjustable Rate Pollution Control
Revenue Bonds (Long Island Lighting Company Project), 1985 Series A" (the
"Bonds") issued by the New York State Energy Research and Development Authority
("NYSERDA"). The Obligee is required to make payments, among others, equal to
the principal, premium, if any, and interest on the Bonds under a Participation
Agreement dated as of December 1, 1985 between the Obligee and NYSERDA (the
"Participation Agreement") and a related Corporation Note issued by the Obligee
to NYSERDA under and pursuant to the Participation Agreement (the "Corporation
Note" and, together with the Participation Agreement, the "NYSERDA Financing
Documents"). On March 1, 1999, the $58,020,000 outstanding principal amount of
the Bonds was converted to a fixed interest rate of 5.15% per annum from and
after March 1, 1999 (30/360 day count), payable on September 1, 1999 and on each
March 1 and September 1 thereafter.
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
1985B NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Adjustable Rate Pollution Control
Revenue Bonds (Long Island Lighting Company Project), 1985 Series B" (the
"Bonds") issued by the New York State Energy Research and Development Authority
("NYSERDA"). The Obligee is required to make payments, among others, equal to
the principal, premium, if any, and interest on the Bonds under a Participation
Agreement dated as of December 1, 1985 between the Obligee and NYSERDA (the
"Participation Agreement") and a related Corporation Note issued by the Obligee
to NYSERDA under and pursuant to the Participation Agreement (the "Corporation
Note" and, together with the Participation Agreement, the "NYSERDA Financing
Documents"). On March 1, 1999, the $50,000,000 outstanding principal amount of
the Bonds was converted to a fixed interest rate of 5.15% per annum from and
after March 1, 1999 (30/360 day count), payable on September 1, 1999 and on each
March 1 and September 1 thereafter.
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
1989B NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Electric Facilities Revenue Bonds
(Long Island Lighting Company Project), 1989 Series B" (the "Bonds") issued by
the New York State Energy Research and Development Authority ("NYSERDA"). The
Obligee is required to make payments, among others, equal to the principal,
premium, if any, and interest on the Bonds under a Participation Agreement dated
as of December 1, 1989 between the Obligee and NYSERDA (the "Participation
Agreement") and a related Corporation Note issued by the Obligee to NYSERDA
under and pursuant to the Participation Agreement (the "Corporation Note" and,
together with the Participation Agreement, the "NYSERDA Financing Documents").
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
1990A NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Electric Facilities Revenue Bonds
(Long Island Lighting Company Project), 1990 Series A" (the "Bonds") issued by
the New York State Energy Research and Development Authority ("NYSERDA"). The
Obligee is required to make payments, among others, equal to the principal,
premium, if any, and interest on the Bonds under a Participation Agreement dated
as of May 1, 1990 between the Obligee and NYSERDA (the "Participation
Agreement") and a related Corporation Note issued by the Obligee to NYSERDA
under and pursuant to the Participation Agreement (the "Corporation Note" and,
together with the Participation Agreement, the "NYSERDA Financing Documents").
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
1991A NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Electric Facilities Revenue Bonds
(Long Island Lighting Company Project), 1991 Series A" (the "Bonds") issued by
the New York State Energy Research and Development Authority ("NYSERDA"). The
Obligee is required to make payments, among others, equal to the principal,
premium, if any, and interest on the Bonds under a Participation Agreement dated
as of January 1, 1991 between the Obligee and NYSERDA (the "Participation
Agreement") and a related Corporation Note issued by the Obligee to NYSERDA
under and pursuant to the Participation Agreement (the "Corporation Note" and,
together with the Participation Agreement, the "NYSERDA Financing Documents").
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
1992B NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Electric Facilities Revenue Bonds
(Long Island Lighting Company Project), 1992 Series B" (the "Bonds") issued by
the New York State Energy Research and Development Authority ("NYSERDA"). The
Obligee is required to make payments, among others, equal to the principal,
premium, if any, and interest on the Bonds under a Participation Agreement dated
as of February 1, 1992 between the Obligee and NYSERDA (the "Participation
Agreement") and a related company Note issued by the Obligee to NYSERDA under
and pursuant to the Participation Agreement (the "Corporation Note" and,
together with the Participation Agreement, the "NYSERDA Financing Documents").
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
1992D NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Electric Facilities Revenue Bonds
(Long Island Lighting Company Project), 1992 Series D" (the "Bonds") issued by
the New York State Energy Research and Development Authority ("NYSERDA"). The
Obligee is required to make payments, among others, equal to the principal,
premium, if any, and interest on the Bonds under a Participation Agreement dated
as of August 1, 1992 between the Obligee and NYSERDA (the "Participation
Agreement") and a related company Note issued by the Obligee to NYSERDA under
and pursuant to the Participation Agreement (the "Corporation Note" and,
together with the Participation Agreement, the "NYSERDA Financing Documents").
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
1993B NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Electric Facilities Revenue Bonds
(Long Island Lighting Company Project), 1993 Series B" (the "Bonds") issued by
the New York State Energy Research and Development Authority ("NYSERDA"). The
Obligee is required to make payments, among others, equal to the principal,
premium, if any, and interest on the Bonds under a Participation Agreement dated
as of November 1, 1993 between the Obligee and NYSERDA (the "Participation
Agreement") and a related company Note issued by the Obligee to NYSERDA under
and pursuant to the Participation Agreement (the "Corporation Note" and,
together with the Participation Agreement, the "NYSERDA Financing Documents").
On March 1, 1999, the $29,600,000 outstanding principal amount of the Bonds was
converted to a fixed interest rate of 5.30% per annum from and after March 1,
1999 (30/360 day count), payable on May 1, 1999 and on each November 1 and May 1
thereafter.
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
1994A NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Electric Facilities Revenue Bonds
(Long Island Lighting Company Project), 1994 Series A" (the "Bonds") issued by
the New York State Energy Research and Development Authority ("NYSERDA"). The
Obligee is required to make payments, among others, equal to the principal,
premium, if any, and interest on the Bonds under a Participation Agreement dated
as of October 1, 1994 between the Obligee and NYSERDA (the "Participation
Agreement") and a related Corporation Note issued by the Obligee to NYSERDA
under and pursuant to the Participation Agreement (the "Corporation Note" and,
together with the Participation Agreement, the "NYSERDA Financing Documents").
On March 1, 1999, the $2,600,000 outstanding principal amount of the Bonds was
converted to a fixed interest rate of 5.30% per annum from and after March 1,
1999 (30/360 day count), payable on April 1, 1999 and on each October 1 and
April 1 thereafter.
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
1995A NOTE
PROMISSORY NOTE
March 1, 1999
FOR VALUE RECEIVED, MARKETSPAN CORPORATION (d/b/a KEYSPAN ENERGY), KEYSPAN
GAS EAST CORPORATION (d/b/a BROOKLYN UNION OF LONG ISLAND), KEYSPAN ENERGY
TRADING SERVICES LLC, KEYSPAN GENERATION LLC, KEYSPAN CORPORATE SERVICES LLC,
KEYSPAN UTILITY SERVICES LLC, and KEYSPAN ELECTRIC SERVICES LLC, each a New York
corporation or limited liability company, with its principal place of business
at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE
CORPORATION, a Vermont corporation (collectively, together with their respective
successors and assigns and predecessors, the "Obligors"), hereby jointly and
severally promise to pay, on or before the dates set forth below, the amounts
set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, d/b/a
LIPA, with its principal place of business at 333 Earle Ovington Boulevard,
Suite 403, Uniondale, New York 11553 (the "Obligee").
This Promissory Note is related to the "Electric Facilities Revenue Bonds
(Long Island Lighting Company Project), 1995 Series A" (the "Bonds") issued by
the New York State Energy Research and Development Authority ("NYSERDA"). The
Obligee is required to make payments, among others, equal to the principal,
premium, if any, and interest on the Bonds under a Participation Agreement dated
as of August 1, 1995 between the Obligee and NYSERDA (the "Participation
Agreement") and a related Corporation Note issued by the Obligee to NYSERDA
under and pursuant to the Participation Agreement (the "Corporation Note" and,
together with the Participation Agreement, the "NYSERDA Financing Documents").
On March 1, 1999, the $15,200,000 outstanding principal amount of the Bonds was
converted to a fixed interest rate of 5.30% per annum from and after March 1,
1999 (30/360 day count), payable on August 1, 1999 and on each February 1 and
August 1 thereafter.
This Promissory Note is a successor to and, on and after March 1, 1999,
supercedes in all respects, the original Promissory Note dated May 28, 1998
issued by the Obligors (or their predecessors) to the Obligee relating to the
Bonds (the "Original Promissory Note"). The Original Promissory Note was issued
pursuant to the purchase price adjustment provisions provided for by Section 2.1
of the Agreement and Plan of Merger dated as of June 26, 1997 by and among
MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long
Island Power Authority and LIPA Acquisition Corp. (the "Merger Agreement"). As
provided for by Section 2.1(e) of the Merger Agreement, this successor
Promissory Note is being executed and delivered in substitution for the Original
Promissory Note to evidence the final agreed-upon obligations of the Obligors
with respect to the obligations of the Obligee relating to the Bonds under and
as evidenced by the Participation Agreement and the Corporation Note.
Upon the occurrence of a Material Decline in Parent's (KeySpan Energy's)
Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger
Agreement) this Promissory Note (i) shall be secured by a letter of credit
provided by KeySpan Energy, at its sole cost and expense, and (ii) may be
economically defeased by KeySpan Energy, in each case as provided under Section
2.1(f) of the Merger Agreement.
<PAGE>
The terms and conditions of this Promissory Note shall be determined by
reference to the debt and other obligations of the Obligee under the
Participation Agreement and the Corporation Note. The payment obligations of the
Obligors thereunder shall be equal to 100% of all such debt and other
obligations of the Obligee that remain outstanding as of the date hereof under
the NYSERDA Financing Documents (the "Applicable Percentage").
All provisions of the NYSERDA Financing Documents relating to the payment
by the Obligee of principal, interest, premium, if any, and any other amounts
payable thereunder, including, without limitation, all provisions relating to
any acceleration of any such payment obligations for any reason, are hereby
incorporated herein and made a part hereof, except that, for purposes of such
incorporation by reference: (i) all references to the "Corporation" shall be
deemed to be references to the Obligors (jointly and severally); (ii) all
references to the "Authority" or the "Trustee" shall be deemed to be references
to the Obligee; (iii) all references to the "Corporation Note" shall be deemed
to be references to this Promissory Note; (iv) all references to amounts payable
shall be deemed to be references to such amount multiplied by the Applicable
Percentage; (v) each due date under this Promissory Note for the payment by the
Obligors of amounts representing principal, premium, if any, or interest on the
Bonds, or payment of other amounts due under the NYSERDA Financing Documents,
shall be the date which is thirty (30) days prior to the due date under the
NYSERDA Financing Documents for such payment; and (vi) the initial Interest
Payment Date hereunder shall be 30 days prior to the next interest payment date
on the Bonds.
Each of the Obligors hereby waives presentment for payment, demands,
notice of dishonor and protest of this Promissory Note and any right to assert
setoff of any of its obligations hereunder against any amounts owing by the
Obligee thereto. The Obligors further agree that none of the terms or provisions
of this Promissory Note may be waived, altered, modified or amended except as
the Obligee may consent in a writing duly signed for and on its behalf. The
Obligee agrees that it shall not agree to any alteration, modification or
amendment of any of the NYSERDA Financing documents in any way that would
increase the payment obligations of the Obligors hereunder, without the prior
written consent of KeySpan Energy. No failure or delay on the part of the
Obligee in exercising any of its rights, powers or privileges hereunder shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
The Obligors agree to pay on demand any and all reasonable out-of-pocket
costs and expenses (including reasonable fees and expenses of counsel) incurred
by the Obligee and its successor and assigns in enforcing this Promissory Note.
This Promissory Note is binding upon the Obligors and their successors and
assigns and is for the benefit of the Obligee and its successors and assigns.
The Obligors may not, without the prior written consent of the Obligee, assign
or otherwise transfer their obligations under this Promissory Note.
2
<PAGE>
This Promissory Note has been delivered in the State of New York and
shall be construed and enforced in accordance with the internal and substantive
laws of such State without giving effect to the choice of law rules.
MARKETSPAN CORPORATION
d/b/a KEYSPAN ENERGY
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GAS EAST CORPORATION
d/b/a BROOKLYN UNION OF LONG ISLAND
By:/s/ Robert D. Ekholm
--------------------------------------------
Name: Robert D. Ekholm
Title: Secretary
KEYSPAN ENERGY TRADING SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN GENERATION LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN CORPORATE SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN UTILITY SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
KEYSPAN ELECTRIC SERVICES LLC
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
MARKETSPAN FINANCE CORPORATION
By:/s/ Robert R. Wieczorek
--------------------------------------------
Name: Robert R. Wieczorek
Title: Vice President, Secretary & Treasurer
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT dated as of May 28,1998 (the "Agreement")
by and between LIPA ACQUISITION CORP., ("ACQUISITION"), a New York Corporation
located at 333 Earle Ovington Blvd., Suite 403, Uniondale, New York, 11553 (the
"Indemnitor"), and each individual identified on Schedule I attached hereto and
hereby made part hereof (each an "Indemnitee," collectively, the "Indemnitees").
W I T N E S S E T H
WHEREAS, each Indemnitee has agreed to serve, currently serves, or has
served as a director or officer of the Indemnitor, or as a director or officer
of Long Island Lighting Company (doing business as "LIPA") subsequent to May 28,
1998, or as a trustee or officer of Long Island Power Authority (the
"Authority"), or as a director or officer of any subsidiary of the Authority
(other than LIPA), or while such director, officer or trustee, has agreed to
serve, currently serves, or has served, at the request of the Indemnitor, LIPA
(subsequent to May 28, 1998), the Authority or any subsidiary of the Authority
(other than LIPA), any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise in any capacity, and
WHEREAS, the Indemnitor desires to indemnify each Indemnitee to the
fullest extent permitted by law and each Indemnitee desires to be so indemnified
by the Indemnitor,
NOW THEREFORE, in consideration of each Indemnitee's past, present or
future service, and in order to induce the continued and/or future service of
each current and/or future Indemnitee, the parties hereby agree as follows:
1. Indemnification.
(a) The Indemnitor shall indemnify and hold harmless each Indemnitee to
the fullest extent permitted by law against any and all expenses (including,
without limitation, investigation expenses and expert witnesses' and attorneys'
fees and expenses), losses, judgments, fines and amounts paid in settlement
actually incurred by an Indemnitee (net of any related insurance proceeds or
other indemnification payments received, paid to, or on behalf of such
Indemnitee as described in Section 4(b)) in connection with any present or
future threatened, pending or completed claim, action, suit or proceeding
whether civil, criminal, administrative or investigative (a "Proceeding"),
whether or not such Proceeding is by or in the right of the Indemnitor, based
upon, arising from, relating to, or by reason of the fact that such Indemnitee
was, is, shall be or shall have been a director or officer of the Indemnitor, or
a director or officer of LIPA subsequent to May 28, 1998, or a trustee or
officer of the Authority, or a director or officer of any subsidiary of the
Authority (other than LIPA), or while such director, officer or trustee, has
agreed to serve, currently serves, or has served, at the request of the
Indemnitor, LIPA (subsequent to May 28, 1998), the Authority or any subsidiary
of the Authority (other than LIPA), any other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise in any capacity;
provided that no indemnification may be made to or on behalf of any Indemnitee
if a judgment or other final adjudication adverse to such Indemnitee establishes
that such Indemnitee's acts were committed in bad faith or were the result of
active and deliberate dishonesty, and were material to the cause of the action
so adjudicated, or that such Indemnitee
<PAGE>
personally gained in fact a financial profit or other advantage to which such
Indemnitee was not legally entitled, and further, provided that no such
indemnification shall be required with respect to any settlement or other
nonadjudicated disposition of any Proceeding unless the Indemnitor has given its
prior consent to such settlement or disposition, such consent not to be
unreasonably withheld.
(b) To the extent an Indemnitee has been successful, on the merits or
otherwise, in the defense of a Proceeding or in the defense of any claim, issue
or matter involved therein, such Indemnitee shall be entitled as a matter of
right to indemnification as authorized in Section 1 (a) upon receipt by the
Indemnitor of a statement from such Indemnitee requesting such indemnification
without further determination of entitlement to indemnification by the
Indemnitor. Any other indemnification under Section 1 (a), unless awarded by a
court, shall be made by the Indemnitor only if authorized in a specific case,
(i) by the Board of Directors of the Indemnitor, acting by a quorum of its
directors who are not parties to such action or proceeding, upon a finding that
the Indemnitee has met the standard of conduct so forth in Section 1 (a),
(ii) if such a quorum is not obtainable or, even if obtainable, a quorum
of disinterested directors so directs, (x) by the Board of Directors the
Indemnitor upon the opinion in writing of independent legal counsel reasonably
acceptable to the Indemnitee and the Indemnitor, that indemnification is proper
in the circumstances because the applicable standard of conduct set forth in
Section 1 (a) has been met by such Indemnitee, or (y) by the shareholders of the
Indemnitor upon a finding that such Indemnitee has met the applicable standard
of conduct set forth in Section 1 (a).
(c) The termination of any such Proceeding by judgment, settlement,
conviction or upon a plea of nolo contendere, or its equivalent, shall not in
itself create a presumption that the Indemnitee's acts were committed in bad
faith or were the result of active and deliberate dishonesty and were material
to the cause of the action or that such Indemnitee personally gained in fact a
financial profit or other advantage to which such Indemnitee was not legally
entitled. In making a determination of entitlement pursuant to Section 1 (b) or
Section 3, the person or entity making such determination shall presume that
such Indemnitee is entitled to indemnification.
2. Method of Payment.
(a) Each Indemnitee shall, upon making a written request to the
Indemnitor, be entitled to receive promptly from the Indemnitor, and the
Indemnitor shall promptly pay to such Indemnitee, by check payable in next-day
funds, the amount such Indemnitee is entitled to receive from the Indemnitor
pursuant to Section 1 ("Indemnified Amounts"). In making any such written
request, an Indemnitee shall submit to the Indemnitor a schedule setting forth
in reasonable detail the amount expended (or incurred and expected to be
expended) for each Indemnified Amount accompanied by a copy of the relevant bill
or other documentation.
(b) Amounts reasonably expected to be incurred or expended by the
Indemnitee within six (6) months next succeeding a request by such Indemnitee as
described below for expenses. including attorneys' fees, in defending any
Proceeding in advance of the final
2
<PAGE>
disposition thereof ("Advanced Amount") shall be paid by the Indemnitor upon
such Indemnitee's written request, which shall include a schedule setting forth
in reasonable detail the amount expended, or reasonably expected to be expended
within the next six (6) months, by such Indemnitee, accompanied by any relevant
documentation. An Indemnitee may make as many requests for an Advanced Amount
under this Section 2(b) as such Indemnitee may deem reasonably necessary to
cover Indemnified Amounts.
(c) Each Indemnitee hereby agrees to repay all Indemnified Amounts and
Advanced Amounts to the Indemnitor within ten (10) days following the final
resolution of any Proceeding to which such Indemnified Amounts and/or Advanced
Amounts relate, if, and to the extent, it is determined that such Indemnitee is
not entitled to indemnification with respect thereto pursuant to Section 1.
(d) In the event that an Indemnitee is entitled to indemnification
pursuant to Section 1, such Indemnitee shall have the right to seek payment for
that portion of Indemnified Amounts which is in excess of Advanced Amounts
received by such Indemnitee (the "Unadvanced Indemnified Amount") by following
the procedures set forth in Section 2(a); provided that the schedule of
Indemnified Amounts shall in addition set forth each and every Advanced Amount
received as of the date of such listing in order to calculate the net Unadvanced
Indemnified Amounts. If an Indemnitee is entitled to indemnification pursuant to
Section 1 and the total of the Advanced Amounts theretofore received by such
Indemnitee exceeds the total amount of Indemnified Amounts, such Indemnitee
shall pay the amount of the difference to the Indemnitor within thirty (30) days
after a determination of the amount of such excess.
3. Enforcement of Rights under this Agreement.
The rights to indemnification or advances pursuant to this Agreement shall
be enforceable by any Indemnitee at such Indemnitee's election (i) in any court
of competent jurisdiction, or (ii) by arbitration by a single arbitrator in
accordance with the rules of the American Arbitration Association and such
Indemnitee's costs and expenses incurred in connection with the Indemnitee's
efforts to establish his or her right to indemnification or advances in any such
judicial or arbitration proceeding shall be paid by the Indemnitor, if the
Indemnitee is successful. If an Indemnitee elects to proceed by arbitration, the
arbitrator shall render his or her decision and notify the parties of such
decision within thirty (30) days following the initiation of arbitration. The
Indemnitor agrees to be subject to the jurisdiction of and be bound by the
determination of any court or arbitration in which such proceeding shall have
been commenced, continued or appealed. Further, the Indemnitor shall not oppose
an Indemnitee's claim by reason of any prior determination made pursuant to this
Agreement and shall limit its defense to the merits of the claim. Further, any
adjudication or arbitration shall be conducted de novo, without prejudice in any
manner whatsoever by reason of any prior determination by the Indemnitor. In any
such judicial or arbitration proceeding, the Indemnitor shall have the burden of
proving by the preponderance of the evidence that the Indemnitee is not entitled
to indemnification or advances hereunder. Neither the failure of the Indemnitor
(including its Board of Directors, independent legal counsel or shareholders) to
have made a determination that an Indemnitee is entitled to indemnification or
advances in neither the circumstances nor an actual determination by the
Indemnitor (including its Board of Directors, independent legal counsel or
3
<PAGE>
shareholders) that such Indemnitee is not so entitled shall be a defense to an
action or create a presumption that such Indemnitee is not so entitled.
4. Rights to Indemnification and Advances Not Exclusive.
(a) The rights to indemnification and advances hereunder shall not be
deemed exclusive of, or in limitation of, any other rights to which an
Indemnitee may be entitled under any law, agreement, provision of the
certificate of incorporation or by-laws of the Indemnitor, vote of the
shareholders or disinterested Directors of the Indemnitor or otherwise, both as
to action in such Indemnitee's official capacity and as to action in another
capacity while holding such office, and shall continue after an Indemnitee has
ceased to be a director or officer of the Indemnitor, or a director or officer
of LIPA or a trustee or officer of the Authority, or a director or officer of
any subsidiary of the Authority (other than LIPA), or to serve, at the request
of the Indemnitor, LIPA (subsequent to May 28, 1998), the Authority or any
subsidiary of the Authority (other than LIPA), any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise in
any capacity.
(b) If an Indemnitee shall receive payment from any insurance carrier or
from the plaintiff in any Proceeding or indemnification payments from any entity
if the Proceeding involves such Indemnitee's service with such entity in respect
of Indemnified Amounts after payments on account of all or any part of such
indemnified Amounts have been made by the Indemnitor, such Indemnitee shall
reimburse the Indemnitor the amount, if any, by which the sum of such payments
by such insurance carrier, such enterprise and such plaintiff and payments by
the Indemnitor to such Indemnitee exceed the Indemnified Amounts; provided that
any such insurance proceeds or payments required to be reimbursed to the
insurance carrier or enterprise shall not be payments to such Indemnitee for
purposes of this Section 4(b). Upon payment of Indemnified Amounts hereunder,
the Indemnitor shall, to the extent not prohibited under such insurance
policies, be subrogated to such Indemnitee's rights against any insurance
carrier or enterprise in respect of such Indemnified Amounts.
5. Protection Pending Determination of Entitlement.
During the interval between the Indemnitor's receipt of any Indemnitee's
request for indemnification and the later to occur of (a) payment in full to
such Indemnitee of the Indemnified Amounts, or (b) a final determination (if
required) pursuant to Sections 1(b) or 3 that such Indemnitee is not entitled to
indemnification, the Indemnitor shall protect such Indemnitee against loss
which, for purposes of this Agreement, shall mean the taking of the necessary
steps (whether or not such steps require expenditures to be made by the
Indemnitor at that time) to stay, pending a final determination of such
Indemnitee's entitlement to indemnification (and, if such Indemnitee is so
entitled, the payment thereof), the execution, enforcement or collection of any
judgments, penalties, fines or any other amounts for which such Indemnitee may
be liable in order to avoid such Indemnitee's being or becoming in default with
respect to any such amounts (such necessary steps to include, but not be limited
to, the procurement of a surety bond to achieve such stay), within three (3)
days after receipt of such Indemnitee's written request therefor, together with
a written undertaking by such Indemnitee to repay, no later than twenty (20)
days following receipt of a statement therefor from the Indemnitor, amounts (if
any) expended by the Indemnitor for such purpose, if it is ultimately
4
<PAGE>
determined (if such determination is required) pursuant to Sections 1 (b) or 3
that such Indemnitee is not entitled to be indemnified against such judgments,
penalties, fines or other amounts, provided that in no event shall the
Indemnitor pay the amount of any such judgment, penalty, fine or other amount
except pursuant to Sections 1 (b) or 3.
6. Successors; Binding Agreement, Retroactive Effect.
(a) The Indemnitor shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of its business or assets, by agreement in form and substance
reasonably satisfactory to each Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Indemnitor would be required to perform if no such succession had taken place.
(b) This Agreement shall inure to the benefit of and be enforceable by
each Indemnitee's personal or legal representatives, executors, administrators,
successors, heirs, distributees and devisees. If an Indemnitee should die while
any amounts would still be payable to such Indemnitee hereunder if such
Indemnitee had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to such
Indemnitee's devisee or other designee, or if there be no such designee, to such
Indemnitee's estate.
(c) This Agreement is intended to be retroactive for the benefit of each
Indemnitee and the full benefits hereof shall be available in respect of an
alleged or actual occurrence, acts or failures to act prior to the date of this
Agreement.
7. Notice.
All notices and all other communications provided for in this Agreement
shall be in writing and shall be deemed to have been given upon receipt
delivered personally or mailed by registered or certified mail (return receipt
requested) or overnight delivery service to the address set forth in the
forepart of this Agreement with respect to the Indemnitor and to the address set
forth in Schedule I with respect to an Indemnitee or to such other address as
the Indemnitor may have furnished to the Indemnitees or an Indemnitee may have
furnished to the Indemnitor, in each case in writing in accordance herewith.
8. Severability.
If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable under any particular circumstances or for any
reason whatsoever (a) the validity, legality and enforceability of the remaining
provisions of this Agreement, including, without limitation, all other portions
of any Section, paragraph or clause of this Agreement that contains any
provision that has been found to be invalid, illegal or unenforceable, that are
not themselves invalid, illegal or unenforceable), or the validity, legality or
enforceability under any other circumstances shall not in any way be affected or
impaired thereby and (b) to the fullest extent possible consistent with
applicable law, the provisions of this Agreement (including, without limitation,
all other portions of any Section, paragraph or clause of this Agreement that
contains any such provision that has been found to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable shall
be deemed revised, and shall be construed
5
<PAGE>
so as to give effect to the intent manifested by this Agreement (including the
provision held invalid, illegal or unenforceable).
9. Miscellaneous.
This Agreement may not be modified or amended, waived or discharged unless
agreed to in writing by the Indemnitor and by each Indemnitee against whom such
modification, amendment, waiver or discharge is sought to be asserted. No waiver
by any party hereto at any time of any breach by any other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
any other party shall be deemed a waiver of similar or dissimilar provisions or
conditions. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without giving effect to the principles of
conflicts of laws thereof. Each Indemnitee seeking to obtain the benefits of
this Agreement may, as a condition to receiving such benefits, be required by
the Indemnitor to execute a counterpart of this Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the Indemnitor has caused this Agreement to be duly
executed, all as of the day and year first above written.
LIPA ACQUISITION CORP.
By: /s/Richard Kessel
----------------------------------
Name:
Title:
Accepted and agreed, as
of May 28, 1998, pursuant
to Section 6 hereof
LONG ISLAND LIGHTING COMPANY
By: /s/Richard Kessel
---------------------------------
Name:
Title:
7
<PAGE>
SCHEDULE I
Schedule of Indemnitees
Indemnitee Address
- ---------- -------
Richard M. Kessel __________________________________
Patrick J. Foye __________________________________
Michael Affrunti __________________________________
Harvey Auerbach __________________________________
Thomas A. Doherty __________________________________
Michael L. Faltischek __________________________________
Harriet A. Gilliam __________________________________
Joseph Janoski __________________________________
Rubert H. Hopkins __________________________________
Robert McMillan __________________________________
Nancy N. Miklos __________________________________
Denise Molia __________________________________
Vincent Polimeni __________________________________
Jonathan Sinnreich __________________________________
James G. Gill __________________________________
Frank Zarb __________________________________
Pauline Balkin __________________________________
James D. Bennett __________________________________
Frank R. Jones __________________________________
Deborah Pfeiffer __________________________________
Daniel Sweeney __________________________________
8
<PAGE>
Stanley B. Klimberg __________________________________
Anastasia Song __________________________________
Seth D. Hulkower __________________________________
David Warren __________________________________
Edward P. Murphy __________________________________
Richard J. Bolbrock __________________________________
Laurel A. Leat __________________________________
In addition to those persons identified by name in this Schedule I, each person
who has agreed to serve, currently serves, or has served as a director or
officer of the Indemnitor, or as a director or officer of Long Island Lighting
Company (doing business as "LIPA") subsequent to May 29, 1998, or as a trustee
or officer of Long Island Power Authority (the "Authority"), or as a director or
officer of any subsidiary of the Authority (other than LIPA), or while such
director, officer or trustee, has agreed to serve, currently serves, or has
served, at the request of the Indemnitor, LIPA (subsequent to May 28, 1998), the
Authority or any subsidiary of the Authority (other than LIPA), any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity shall be deemed an Indemnitee for all purposes of the
Indemnification Agreement to which this Schedule I is attached.
9
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Operations, Balance Sheet and Statement of Cash Flows, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,071,482
<OTHER-PROPERTY-AND-INVEST> 19,410
<TOTAL-CURRENT-ASSETS> 634,254
<TOTAL-DEFERRED-CHARGES> 78,507
<OTHER-ASSETS> 4,868,830
<TOTAL-ASSETS> 7,672,483
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> (79,981)
<TOTAL-COMMON-STOCKHOLDERS-EQ> (79,981)
0
0
<LONG-TERM-DEBT-NET> 778,075
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 5,355,085
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 398,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,221,304
<TOT-CAPITALIZATION-AND-LIAB> 7,672,483
<GROSS-OPERATING-REVENUE> 1,707,616
<INCOME-TAX-EXPENSE> (77,862)
<OTHER-OPERATING-EXPENSES> 1,476,433
<TOTAL-OPERATING-EXPENSES> 1,398,571
<OPERATING-INCOME-LOSS> 309,045
<OTHER-INCOME-NET> (133,224)
<INCOME-BEFORE-INTEREST-EXPEN> 175,821
<TOTAL-INTEREST-EXPENSE> 293,424
<NET-INCOME> (81,378)
8,037
<EARNINGS-AVAILABLE-FOR-COMM> (89,415)
<COMMON-STOCK-DIVIDENDS> 54,147
<TOTAL-INTEREST-ON-BONDS> 280,109
<CASH-FLOW-OPERATIONS> 111,308
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
