SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 16 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-3571
LONG ISLAND LIGHTING COMPANY d/b/a LIPA
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-1019782
- ----------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 222-7700
-----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days
Yes X No
--- ---
The total number of shares of the registrant's Common Stock $1 par value,
outstanding on November 15, 1999, was 1.
<PAGE>
<TABLE>
<CAPTION>
Long Island Lighting Company d/b/a LIPA
Page No.
Part I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1 - Financial Statements
Statements of Operations 2-3
Balance Sheet 4-5
Statement of Cash Flows 6
Notes to Financial Statements 7-13
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-22
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 23
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 23
Item 2 - Changes in Securities and Use of Proceeds 23
Item 3 - Defaults upon Senior Securities 23
Item 4 - Submission of Matters to a Vote of Security Holders 23
Item 5 - Other Information 24
Item 6 - Exhibits and Reports on Form 8-K 24
Signature 25
</TABLE>
<PAGE>
2
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Statement of Operations
(Unaudited)
(Thousands of Dollars - Except Average Shares Outstanding)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Revenue - Electric $ 737,265 $ 693,698
Expenses
Operations - fuel and purchased power 210,019 180,808
Operations and maintenance 185,876 194,060
Depreciation and amortization 52,334 50,479
Operating taxes 61,935 72,305
Customer rebates 5 -
------------- -------------
Total Expenses 510,169 497,652
------------- -------------
Operating Income 227,096 196,046
------------- -------------
Other Income and (Deductions)
Other, net 1,348 9,915
------------- -------------
Total Other Income and (Deductions) 1,348 9,915
------------- -------------
Income Before Interest Charges 228,444 205,961
------------- -------------
Interest Charges and (Credits)
Interest on long-term debt, net 1,295 41,821
Interest on advances from and note payable
to the Authority 72,163 56,770
Other interest 8,644 3,915
Allowance for borrowed funds used during construction (602) (527)
------------- -------------
Total Interest Charges 81,500 101,979
------------- -------------
Net Income $ 146,944 $ 103,982
------------- -------------
Average Common Shares Outstanding 1 1
Basic and Diluted Earnings Per Common Share N/A N/A
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
3
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Statement of Operations
(Unaudited)
(Thousands of Dollars - Except Share Information)
<TABLE>
<CAPTION>
LIPA LILCO
-------------------------------- ------------------------
Nine Months
Ended May 29, 1998 to
September 30, September 30, January 1, 1998 to
1999 1998 May 28, 1998
-----------------------------------------------------------
<S> <C> <C> <C>
Revenue - Electric $ 1,721,963 $ 896,437 $ 885,693
Expenses
Operations - fuel and purchased power 534,911 247,595 257,786
Operations and maintenance 520,622 228,743 169,076
Depreciation and amortization 157,387 68,434 56,490
Base financial component amortization - - 41,257
Rate moderation component amortization - - (82,268)
Regulatory liability component amortization - - (36,191)
Other regulatory amortization - - 14,418
Operating taxes 184,389 103,354 153,288
Customer rebates 178 - -
Federal income tax - current - - (75,004)
Federal income tax - deferred and other - - 44,554
------------- ------------ ---------------
Total Expenses 1,397,487 648,126 543,406
------------- ------------ ---------------
Operating Income 324,476 248,311 342,287
------------- ------------ ---------------
Other Income and (Deductions)
Other, net 4,913 15,311 (23,297)
Allowance for other funds used during construction - - 948
Federal income tax - current - - (67,543)
Federal income tax - deferred and other - - (22,442)
------------- ------------ ---------------
Total Other Income and (Deductions) 4,913 15,311 (112,334)
------------- ------------ ---------------
Income from Continuing Operations
Before Interest Charges 329,389 263,622 229,953
------------- ------------ ---------------
Interest Charges and (Credits)
Interest on long-term debt, net 3,496 55,903 143,989
Interest on advances from and note payable to
the Authority 215,703 77,333 -
Other interest 25,273 4,585 23,181
Allowance for borrowed funds used during construction (1,773) (690) (1,625)
------------- ------------ ---------------
Total Interest Charges 242,699 137,131 165,545
------------- ------------ ---------------
Income from continuing operations 86,690 126,491 64,408
Income from discontinued operations net of
taxes of zero, zero and ($20,915), respectively - - 50,134
------------- ------------ ---------------
Net Income 86,690 126,491 114,542
Preferred stock dividend requirements - - 20,984
------------- ------------ ---------------
Earnings for Common Stock $ 86,690 $ 126,491 $ 93,558
------------- ------------ ---------------
Average Common Shares Outstanding 1 1 121,534,827
Basic and Diluted Earnings per Common Share N/A N/A $ 0.77
Dividends Declared per Common Share N/A N/A $ 0.74
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
4
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
----------------- ----------------
Assets
Utility Plant
<S> <C> <C>
Generation - nuclear $ 663,596 $ 662,893
Transmission and distribution 1,433,930 1,385,099
Common 2,738 3,827
Construction work in progress 52,283 52,897
Nuclear fuel in process and in reactor 17,052 17,053
----------------- ----------------
2,169,599 2,121,769
Less- Accumulated depreciation and amortization 95,741 50,287
----------------- ----------------
Total Net Utility Plant 2,073,858 2,071,482
----------------- ----------------
Current Assets
Customer accounts receivable (less allowance for doubtful
accounts of $19,480 and $20,211, respectively) 199,730 119,161
Accrued unbilled revenues 69,076 78,414
Other accounts receivable 10,491 10,096
Promissory note receivable 1,000 398,000
Prepayments and other current assets 34,393 28,583
----------------- ----------------
Total Current Assets 314,690 634,254
----------------- ----------------
Promissory Note Receivable 646,902 646,902
----------------- ----------------
Designated Funds 21,390 194,972
----------------- ----------------
Nonutility Property and Other Investments 19,938 19,410
----------------- ----------------
Deferred Charges 79,867 78,507
----------------- ----------------
Acquisition Adjustment (net of accumulated amortization
of $156,733 and $68,766, respectively) 3,938,923 4,026,956
----------------- ----------------
Total Assets $ 7,095,568 $7,672,483
----------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
5
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Balance Sheet
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
----------------- ----------------
Capitalization and Liabilities
Capitalization
<S> <C> <C>
Long-term debt $ 650,527 $ 778,075
Note Payable - the Authority 3,704,017 5,355,085
Due to the Authority 2,373,951 855,684
Retained earnings (accumulated deficit) 6,709 (79,981)
----------------- ----------------
Total Capitalization 6,735,204 6,908,863
----------------- ----------------
Current Liabilities
Current maturities of long-term debt 1,278 398,000
Due to the Authority 150,895 70,880
Due to KeySpan 50,048 75,085
Accounts payable and accrued expenses 34,299 35,921
Accrued taxes 40,070 79,021
Accrued interest 12,218 29,851
Customer deposits 22,749 23,205
----------------- ----------------
Total Current Liabilities 311,557 711,963
----------------- ----------------
Deferred Credits 37,584 34,059
----------------- ----------------
Claims and Damages 11,223 17,598
----------------- ----------------
Commitments and Contingencies
----------------- ----------------
Total Capitalization and Liabilities $ 7,095,568 $7,672,483
----------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
6
Long Island Lighting Company d/b/a LIPA
(a wholly owned subsidiary of the Long Island Power Authority)
Statement of Cash Flows
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
LIPA LILCO
------------------------------- -----------------
Nine Months
Ended May 29, 1998 to
September 30, September 30, January 1, 1998 to
1999 1998 May 28, 1998
------------- --------------- -----------------
Operating Activities
<S> <C> <C> <C>
Net Income $ 86,690 $ 126,491 $ 114,542
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 157,387 68,434 68,326
Base financial component amortization - - 41,257
Rate moderation component amortization - - (82,268)
Regulatory liability component amortization - - (26,977)
Provision for fuel and purchased power cost adjustment 1,850 - -
Other regulatory amortization - - 18,208
Rate moderation component carrying charges - - (12,200)
Class Settlement - - 5,226
Amortization of cost of issuing and redeeming securities 5,961 264 12,903
Federal income tax - deferred and other - - (12,487)
Allowance for other funds used during construction - - 2,390
Pensions and Other Post Retirement Benefits - - 23,066
1989 settlement credits amortization - - (9,213)
Gas Cost Adjustment - - 4,119
Other 20,725 (437) 60,433
Changes in operating assets and liabilities
Accounts receivable, net (80,964) (64,702) 12,688
Accrued unbilled revenues 9,338 (11,791) 68,233
Materials and supplies, fuel oil and gas in storage - - 39,386
Accounts payable and accrued expenses (1,622) - (39,007)
Due to KeySpan (25,037) 457,386 -
Pensions and other post retirement benefits - - (250,000)
Accrued taxes (38,951) 75,734 12,615
Accrued interest (17,633) 52,331 (52,197)
Class Settlement - - (19,156)
Special deposits - - 37,498
Other (31,135) (12,620) (67,969)
------------- -------------- --------------
Net Cash Provided by (Used in) Operating Activities 86,609 691,090 (50,584)
------------- -------------- --------------
Investing Activities
Shoreham post settlement costs - - (16,271)
Merger costs, net of cash transferred - (61,789) -
Other - - (1,677)
------------- -------------- --------------
Net Cash Used in Investing Activities - (61,789) (17,948)
------------- -------------- --------------
Capital and Related Financing Activities
Construction and nuclear fuel expenditures (71,797) (31,769) (122,229)
Proceeds from promissory note receivable 397,000 - -
Proceeds from sale of common stock - - 8,738
Acquisition of common stock - (2,497,500) -
Issuance of notes payable - - 350,000
Net proceeds from Authority loan 1,598,282 4,949,528 -
Repayment of note payable-Authority (1,651,068) (831,928) -
Redemption of long-term debt (532,608) (1,186,000) (100,000)
Issuance of preferred stock - - 75,000
Redemption of preferred stock - (221,600) (116,390)
Bond issuance costs - (48,316) -
Preferred stock dividends paid - - (18,659)
Common stock dividends paid - - (108,179)
Other - (3,990) (3,080)
------------- -------------- --------------
Net Cash (Used in) Provided by Capital
and Related Financing Activities (260,191) 128,425 (34,799)
------------- -------------- --------------
Net (Decrease) Increase in Cash and Cash Equivalents (173,582) 757,726 (103,331)
Cash and cash equivalents at beginning of period 194,972 * 75,000 179,995
------------- -------------- --------------
Cash and cash equivalents at end of period $ 21,390 * $ 832,726 * $ 76,664
============= ============== ==============
* Cash and cash equivalents include designated funds
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Long Island Lighting Company d/b/a LIPA 7
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Nine Months Ended September 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
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
September 30, 1999 and 1998 represent the three or nine month periods
ended September 30, 1999 and 1998, respectively. The financial
information as of September 30, 1999, and for the three and nine
months ended September 30, 1999 and 1998 is unaudited. However, in the
opinion of management, the financial statements include all
adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the financial statements for the periods
presented. Operating results for any of the periods presented are not
necessarily indicative of results to be expected for the entire year
due to the seasonal nature of the electric business.
These Notes to Financial Statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three and nine months ended September
30, 1999 and LIPA's Annual Report on Form 10-K for the nine months
ended December 31, 1998. In addition, please refer to the discussion
following in Note 2 regarding the change in control of LILCO on May
28, 1998.
Recent Accounting Pronouncements
In July 1999, the Financial Accounting Standards Board issued
Financial Accounting Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133," which deferred the effective date of
Financial Accounting Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," from fiscal years beginning after
June 15, 1999 to fiscal years beginning after June 15, 2000. LIPA will
defer its adoption until the new effective date. LIPA does not expect
a material effect on the financial position, earnings or cash flows
resulting from the adoption of this pronouncement.
Reclassifications
Certain prior period amounts have been reclassified in the financial
statements to conform with the current period presentation.
<PAGE>
Long Island Lighting Company d/b/a LIPA 8
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Nine Months Ended September 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
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 indebtedness assumed by
LIPA in the Merger. KeySpan is required to make principal and interest
payments to LIPA thirty days prior to the corresponding payment due
dates, and LIPA then transfers those amounts to debtholders in
accordance with the original debt repayment schedule.
The former holders of LILCO's common stock, primarily individual
public shareowners, became entitled to receive a pro-rata share of:
(i) cash consideration of $2.497 billion; and (ii) 3,440,625 shares of
the common stock of KeySpan, which were received by LILCO in exchange
for the Transferred Assets. Pursuant to the Merger Agreement, the
former holders of LILCO's common stock (other than holders of
dissenting shares) were deemed to have subscribed for additional
shares of the common stock of KeySpan, with an aggregate purchase
price equal to the cash consideration. In order to effect the Merger,
it was necessary to: (i) retire all shares of LILCO's preferred stock,
whether by conversion, redemption or cancellation; and (ii) redeem
certain of LILCO's bonds, at a cost to LIPA of approximately $1.557
billion. The cash consideration required for the Merger was obtained
by the Authority from the proceeds of the issuance and sale of its
Electric System General Revenue Bonds, Series 1998A and Electric
System Subordinated Revenue Bonds, Series 1 through Series 6. The
proceeds from the sale of the bonds were then
<PAGE>
Long Island Lighting Company d/b/a LIPA 9
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Nine Months Ended September 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
transferred by the Authority to LIPA in exchange for a promissory note
of approximately $4.949 billion. As a result of the Merger, there was
a change in control of LILCO which effectively resulted in the
creation of a new reporting entity, LIPA. Accordingly, the
accompanying financial statements for the periods prior to May 28,
1998 are not comparable to the financial statements presented
subsequent to May 28, 1998. Therefore, a black line has been drawn on
the Statements of Operations and the Statement of Cash Flows to
distinguish between LIPA and LILCO balances and activity.
The remaining assets and liabilities of LILCO acquired by LIPA consist
of: (i) LILCO's electric transmission and distribution system; (ii)
its net investment in Nine Mile Point Nuclear Power Station, Unit 2;
(iii) certain regulatory assets and liabilities associated with its
electric business, (iv) allocated accounts receivable and other assets
and liabilities; and (v) substantially all of its long-term debt.
The financial statements of LIPA include the push down of the
Authority's basis, including costs related to the acquisition of the
assets acquired and liabilities assumed. Because of the manner in
which LIPA's rates and charges will be established by the Authority's
Board of Trustees, the original net book value of the transmission and
distribution and nuclear generation assets acquired in the Merger is
considered to be their fair value. The excess of the acquisition costs
over the fair value of the net assets acquired has been recorded as an
intangible asset titled "acquisition adjustment" and is being
amortized over a 35 year period. The acquisition adjustment
principally arose through the elimination of LILCO's regulatory assets
and liabilities, totaling $6.3 billion, and net deferred federal
income tax liability of approximately $2.4 billion. Therefore, the
amortization of the regulatory assets and liabilities has effectively
been replaced by the amortization of the acquisition adjustment. In
addition, as a wholly-owned subsidiary of the Authority, LIPA is
exempt from Federal, state and local income taxes. Accordingly,
adjustments were made by LIPA on May 28, 1998 to eliminate deferred
tax assets and liabilities. The results of operations for the three
and nine months ended September 30, 1999 and for the period May 29,
1998 through September 30, 1998 do not include a provision for income
taxes.
Effective May 29, 1998, the Authority contracted with KeySpan, through
certain of its subsidiaries, to provide operations and management
services for LIPA's transmission and distribution system and its
interest in Nine Mile Point Nuclear Power Station, Unit 2 through a
management services agreement ("MSA"). LIPA pays KeySpan directly for
their services and KeySpan, in turn, pays the salaries of its
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 are a significant component.
Through a power supply agreement ("PSA"), LIPA contracts for capacity
and, to the extent necessary, energy from the fossil fired generating
plants of KeySpan, formerly owned by LILCO. Energy and fuel are
purchased by KeySpan on LIPA's behalf through an energy management
agreement ("EMA") (collectively, the "Operating Agreements").
The electric transmission and distribution system is located in the
New York Counties of Nassau and Suffolk (with certain limited
exceptions) and a small portion of Queens County known as
<PAGE>
Long Island Lighting Company d/b/a LIPA 10
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Nine Months Ended September 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
the Rockaways. The service area is approximately 1,230 square miles
and the population of the service area is approximately 2.75 million
persons, including approximately 98,500 persons who reside in Queens
County within the City of New York. LIPA receives approximately 49% of
its revenues from residential sales, 48% from sales to commercial and
industrial customers, and the balance from sales to other utilities
and public authorities.
Discontinued Operations
The statement of operations of LILCO for the period January 1, 1998
through May 28, 1998 have been prepared to present the gas business
(as transferred to KeySpan subsidiaries pursuant to the Merger
Agreement) as a discontinued operation, in accordance with the
provisions of Accounting Principles Board Opinion No. 30.
Income from discontinued operations includes revenue from the gas
business of approximately $351.8 million for the period January 1,
1998 through May 28, 1998.
Note 3. Capitalization
On January 4, 1999, LIPA redeemed $102.6 million of the NYSERDA
Electric Facilities Revenue Bonds Series 1993B, 1994A, and 1995A,
which were called for redemption prior to December 31, 1998.
On March 1, 1999, the variable rate bonds listed below were converted
to fixed interest rates of 5.15% on the Pollution Control Revenue
Bonds ("PCRBs"), and 5.3% on the Electric Facilities Revenue Bonds
("EFRBs").
<TABLE>
<CAPTION>
Balances
Subsequent to
Maturity Conversion
PCRBs
<S> <C> <C>
1985 Series A March 1, 2016 $ 58,020
1985 Series B March 1, 2016 50,000
EFRBs
1993 Series B November 1, 2023 29,600
1994 Series A October 1, 2024 2,600
1995 Series A August 1, 2025 15,200
</TABLE>
Also, on March 1, 1999, LIPA redeemed $30.1 million of the NYSERDA
Pollution Control Revenue Bonds, 1985 Series A.
<PAGE>
Long Island Lighting Company d/b/a LIPA 11
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Nine Months Ended September 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
Note 4. Rate Matters
Under current New York law, the Authority is empowered to set rates
for electric service in its service area without being required by law
to obtain the approval of the New York State Public Service Commission
(the "PSC") or any other state regulatory body. However, the Authority
has agreed, in connection with the approval of the Merger by the New
York State Public Authorities Control Board (the "PACB"), that it will
not impose any permanent increase, nor extend or reestablish any
portion of a temporary rate increase, in average customer rates over a
12 month period in excess of 2.5% without approval of the PSC,
following a full evidentiary hearing. Another of the PACB conditions
requires that the Authority reduce average rates within LIPA's service
area by no less than 14% over a ten year period commencing on the date
when LIPA began providing electric service, when measured against
LILCO's base rates in effect on July 16, 1997 (excluding the impact of
the proposed Shoreham tax settlement, but adjusted to reflect
emergency conditions and extraordinary unforeseeable events.)
The LIPA Act requires that any bond resolution of the Authority
contain a covenant that it will at all times maintain rates, fees or
charges sufficient to pay the costs of operation and maintenance of
facilities owned or operated by the Authority; payments in lieu of
taxes ("PILOTs"); renewals, replacements and capital additions; the
principal of and interest on any obligations issued pursuant to such
resolution as the same become due and payable, and to establish or
maintain any reserves or other funds or accounts required or
established by or pursuant to the terms of such resolution.
LIPA's rates include the fuel and purchased power cost adjustment
("FPPCA") which adjusts rates to reflect significant changes in the
cost of fuel, purchased power and related costs. The FPPCA is designed
to ensure that LIPA will recover from or return to customers any fuel
costs that fall outside an established base fuel and purchased power
tolerance band. The tolerance band is equal to one percent above and
one percent below LIPA's cost of fuel and purchased power 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 cost.
LIPA's rates are largely based on LILCO's pre-Merger rate design to
avoid customer confusion and facilitate an efficient transition from
LILCO billing to LIPA billing. In addition, LIPA's rates include the
FPPCA, a PILOT recovery rider, a rider providing for the Shoreham
settlement and a rider providing for the RICO Credits (credits to the
bills of customers as a result of the settlement by LILCO of a RICO
action in connection with the construction and completion of nuclear
generating facilities).
The LIPA Act requires LIPA to make PILOTs for certain New York State
and local revenue
<PAGE>
Long Island Lighting Company d/b/a LIPA 12
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Nine Months Ended September 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
taxes which would otherwise have been imposed on LILCO. The PILOT
recovery rider allows for rate adjustments to accommodate the PILOTs.
Note 5. Contingencies
Legal and Environmental Proceedings
Except as discussed below, no significant changes have occurred with
respect to legal and environmental contingencies as discussed in Note
13 of Notes to Financial Statements in LIPA's Annual Report on Form
10-K for the nine months ended December 31, 1998.
With respect to Shoreham Tax Matters, on July 26, 1999, the Appellate
Division, Second Department, overruled the lower court's decision and
held that the Authority was not prohibited from enforcing any part of
the judgment relating to real property tax refunds attributable to
over assessments on the Shoreham Plant after the January 15, 1987
effective date of the LIPA Act. On August 24, 1999, Suffolk County
filed a motion with the Appellate Division to reargue and/or for
permission to appeal this decision to the State Court of Appeals. On
October 14, 1999, the Appellate Division denied the motion. LIPA
expects that Suffolk County will file a motion with the Court of
Appeals for permission to appeal the Appellate Division's July 26,
1999 decision to the Court of Appeals.
In July 1992, LILCO and the Authority separately commenced proceedings
in the Supreme Court of the State of New York, County of Suffolk,
against the Assessor and the Board of Assessment Review for the Town
of Brookhaven, New York (the "Assessor") challenging the real property
tax assessment on Shoreham for the 1992-93 tax year. On or about May
1, 1992, the Assessor had tentatively assessed Shoreham an amount in
excess of $156 million for the 1992-93 tax year. On April 22, 1996,
the two proceedings were consolidated. On May 13, 1999, the Assessor
moved to dismiss the proceedings on procedural grounds. Oral arguments
were held on August 5, 1999. On October 20, 1999, the court declined
to dismiss the proceedings.
With respect to the action brought by the County of Suffolk entitled
County of Suffolk v. KeySpan et al., this action was voluntarily
discontinued by plaintiffs without prejudice. The plaintiffs refiled
their claims related to executive compensation in the federal action
entitled County of Suffolk et al. v. Long Island Power Authority,
which was filed on September 28, 1998.
With respect to the Sylvester v. Catacosinos et al. action, U.S.
District Court approved a stipulation of the parties dismissing the
action with prejudice.
<PAGE>
Long Island Lighting Company d/b/a LIPA 13
(a wholly owned subsidiary of the Long Island Power Authority)
Notes to Financial Statements
For the Nine Months Ended September 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
Note 6. Nine Mile Point Nuclear Power Station, Unit 2 ("NMP2")
In June 1999, two co-tenants of NMP2 representing 57% of the ownership
interest reached an agreement in principle to sell their interests to
a single third party. The remaining co-tenants have 180 days to
exercise their right of first refusal. Such sale is subject to the
approval of, among others, the PSC. At this time, LIPA is unable to
determine what effect, if any, this proposed change in ownership will
have on its operating and financial results. Any such sale, however,
will not affect LIPA's right to receive 18% of the plant's output.
Note 7. Subsequent Events
On October 27, 1999, LIPA entered into an agreement with KeySpan,
whereby KeySpan advanced approximately $47.2 million of its promissory
note payable to LIPA, including interest, to be used to fund the
optional redemption of New York State Research and Development
Authority Pollution Control Revenue Funding Bonds 1976 Series A and
1979 Series B totaling $26.4 million and $19.1 million, respectively.
These funds are to be held in escrow by LIPA until December 1, 1999, at
which time, LIPA will call such debt at par.
<PAGE>
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement Regarding Forward-Looking Statements
This report contains statements which, to the extent they are not
recitations of historical fact, constitute "forward-looking statements"
within the meaning of the Securities Litigation Reform Act of 1996. In
this respect, the words "estimate," "project," "anticipate," "expect,"
"intend," "believe" and similar expressions are intended to identify
forward-looking statements. All such forward-looking statements are
intended to be subject to the safe harbor protection provided by the
Reform Act. A number of important factors affecting the Registrant's
business and financial results could cause actual results to differ
materially from those stated in the forward-looking statements. Those
factors include regulatory rate proceedings, competition, and certain
legal and environmental matters each as discussed herein, in the
Registrant's Annual Report on Form 10-K, for the nine months ended
December 31, 1998, or in other reports filed by the Registrant with the
Securities and Exchange Commission.
General
KeySpan Energy ("KeySpan"), through certain of its subsidiaries
provides operations and management services for LIPA's transmission and
distribution system and LIPA's interest in Nine Mile Point Nuclear
Power Station, Unit 2 ("NMP2") through a management services agreement
("MSA"). LIPA contracts for capacity and to the extent necessary,
energy from the fossil fuel fired generating plants formerly owned by
Long Island Lighting Company ("LILCO") through a power supply agreement
("PSA") with KeySpan. Energy and fuel is purchased by KeySpan on LIPA's
behalf through an energy management agreement ("EMA"), (collectively;
the "Operating Agreements").
As LIPA is a wholly owned subsidiary of the Authority and not an
investor owned utility, the PSC does not have jurisdiction with respect
to the determination of LIPA's rates and charges. Rates and charges for
LIPA are approved by the Authority's Board of Trustees. See Note 4 -
Rate Matters of Notes to the Financial Statements.
The excess of the acquisition cost over the fair value of the net
assets acquired has been recorded as an intangible asset titled
"acquisition adjustment" and is being amortized over a 35-year period.
The acquisition adjustment principally arose through the elimination of
LILCO's regulatory assets and liabilities, totaling approximately $6.3
billion, and net deferred Federal income tax liability of approximately
$2.4 billion. Therefore, the amortization of the regulatory assets and
liabilities has effectively been replaced by the amortization of the
acquisition adjustment. Because of the tax-exempt status of LIPA, the
results of operations for the three and nine months ended September 30,
1999, and the period May 29, 1998 through September 30, 1998, do not
include a provision for income taxes.
Results of Operations
Three and Nine Months Ended September 30, 1999 and September 30, 1998
Earnings
For the three and nine month periods ended September 30, 1999, LIPA
generated net income of
<PAGE>
15
approximately $147 million and $87 million, respectively. During the
similar periods in 1998, net income was approximately $104 million and
$241 million, respectively.
The increase in earnings for the three month period ended September 30,
1999 relative to the similar period in 1998 was the result of: i) the
impact of weather, where in 1999, LIPA set a new peak demand record of
4,590 MWH in July 1999, surpassing the previous record of 4,208 MWH set
in July 1998; ii) reduced interest expense resulting from lower debt
levels as LIPA called for redemption, approximately $132 million of
debt, and refinanced approximately $1.3 billion of debt at lower
interest rates; and iii) the absence of the Fuel and Purchase Power
Cost Adjustment ("FPPCA") in 1998, as the tariff had not been in effect
during this period last year. (The FPPCA is discussed in more detail in
Note 4 of Notes to Financial Statements, and in the section below
titled Fuel and Purchased Power.
The nine month period ended September 30, 1999, and 1998, are not
comparable as the prior year figures include the operations of the
former LILCO gas and generation businesses for the period January 1,
1998 through May 28, 1998, the date of the Merger.
Revenues
The increase in revenues of approximately $44 million for the three
month period ended September 30, 1999, when compared to the same period
in 1998, was principally the result of a 2% increase in sales due to
weather, a 3% increase in usage by existing customers (on a weather
normalized basis) and a slight increase in the number of customers.
The decrease in revenues of approximately $60 million for the nine
month period ended September 30, 1999, when compared to the same period
in 1998 was the result of the rate reduction (approximately 20%), for
virtually all customers, effective May 29, 1998. Partially offsetting
the reduction in revenues was a 5% increase in sales attributable to
weather, a strong and growing economy, increased usage by existing
customers resulting from LIPA's rate reduction and a slight increase in
the number of customers.
Fuel and Purchased Power
Fuel and purchased power expense for the three and nine month periods
ended September 30, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(in millions) (in millions) (in millions) (in millions)
<S> <C> <C> <C> <C>
Oil $ 47 $ 43 $ 114 $ 113
Gas 97 53 173 127
Nuclear 1 2 5 5
Purchased power 90 83 241 260
----------- ----------- ----------- ----------
235 181 533 506
FPPCA (25) - 2 -
----------- ----------- ----------- ----------
Total $ 210 $ 181 $ 535 $ 505
----------- ----------- ----------- ----------
</TABLE>
<PAGE>
16
Electric Energy Available
The percentage of total electric energy available, by type of fuel,
for electric operations for the three and nine month periods ended
September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------- ------------- -------------- -------------
(Mwh = Megawatt hours)
Mwh % Mwh % Mwh % Mwh %
------- ----- ------- ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oil 1,153 20 1,424 16 3,805 26 3,440 25
Gas 2,956 50 2,056 47 5,686 38 4,412 32
Nuclear 331 6 385 8 1,102 7 915 7
Purchased 1,467 24 1,699 29 4,295 29 5,200 36
------- ---- ------- ---- ------- ---- ------- ----
Total 5,907 100 5,564 100 14,888 100 13,967 100
------- ---- ------- ---- ------- ---- ------- ----
</TABLE>
Variations in the fuel mix used to satisfy energy requirements on
LIPA's system are primarily the result of changes in the cost of each
particular commodity relative to the other commodities and the
availability of import capacity on LIPA's transmission
interconnections. In May 1999, LIPA's import capacity was reduced by
approximately 33% as a result of a transformer failure on one of its
interconnections. The interconnection is expected to return to full
capacity prior to the summer 2000. In addition, during the three month
period ended September 30, 1999, NMP2 had an unplanned outage which
lasted 24 days. As a result, LIPA was required to satisfy its
requirements with more expensive on-island generation from fossil fired
power plants on Long Island. For the three month ended September 30,
1999, the decreasing price of gas relative to other fuels and the
reduced import capability resulted in a larger percentage of LIPA's
requirements being satisfied with gas generated energy when compared to
the same period last year. For the nine month period ended September
30, 1999, generation with gas increased over the same period last year,
as gas was more economical than other fuels, and as a result of the
reduced import capacity.
As a result of the implementation of the FPPCA mechanism, variations in
fuel and purchased power expenses have a minimal impact on operating
results. The FPPCA mechanism requires LIPA to return to customers or
allows LIPA to recover from customers, actual fuel costs which fall
outside of the fuel cost tolerance band, which is defined as 1% higher
and 1% lower than the base cost of fuel collected through rates. These
percentages increase to two percent in 2000 and continue to increase in
one percent increments annually thereafter. To insure that LIPA's
customers will receive the lowest cost energy available, the operating
agreements with KeySpan provide incentives designed to support that
goal, and penalties when such goals are not satisfied.
Fuel expense for the three month period ended September 30, 1999
increased when compared to the same period of the prior year,
principally as a result of a 5% increase in sales, partially offset by
the recognition of a $25 million credit associated with the FPPCA
mechanism, and the absence of an FPPCA charge in 1998 as the mechanism
did not become effective until January 1, 1999. Had the FPPCA been
operable in 1998, LIPA would have recorded a $9 million charge.
Fuel expense for the nine month period ended September 30, 1999
increased as a result of a 5% increase in sales and the absence of a
FPPCA charge in 1998 as the mechanism did not become
<PAGE>
17
effective until January 1, 1999. Had the FPPCA been operable in 1998,
LIPA would have recorded a $9 million charge.
Operations and Maintenance
Operations and Maintenance ("O&M") expenses, excluding fuel and
purchased power, decreased approximately $8 million during the three
month period ended September 30, 1999, when compared to the same period
in 1998, primarily as a result of: i) the classification of; and ii)
the timing of the recognition of certain expenses in 1998 related to
the Operating Agreements with KeySpan which totaled approximately $27
million. Excluding the effects of the item above, O&M would have
increased approximately $16 million during the quarter principally as a
result of: i) a $3.8 million assessment from the New York Power Pool
("NYPP") (As a member of the NYPP, LIPA is required to maintain
generating capacity equal to 118% of its peak load. On July 6, 1999,
LIPA set a new peak load of 4,590 MW, for which LIPA was unable to
fully meet the NYPP requirement of 5,416MW which resulted in the
assessment.); ii) increased storm costs of approximately $8 million;
and iii) increased research and development and conservation costs
totaling approximately $4 million.
For the nine month period ended September 30, 1999, O&M increased when
compared to the same period in 1998, primarily due to the fact that
LILCO classified expenses such as depreciation and amortization,
property taxes and other operating taxes separately. LIPA, however,
incurs similar costs through the operating agreements with KeySpan and
classifies such costs as O&M.
Depreciation and Amortization
Depreciation and amortization expense increased approximately $1.8
million for the three month period ended September 30, 1999 when
compared to the same period in 1998, as a result of additional plant in
service and a slight increase in the amortization of the acquisition
adjustment due to refinements in the balance. Depreciation and
amortization expense for the nine month period ended September 30, 1999
increased approximately $32.4 million when compared to the same period
of 1998 due to the amortization of the acquisition adjustment which
totals approximately $9.6 million per month. 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
For the three month period ended September 30, 1999, operating taxes
decreased approximately $10.4 million primarily as a result of the
implementation of the New York State Power for Jobs Program whereby
qualifying companies receive discounted energy and the utility in turn,
is permitted to offset its New York State gross receipts tax by an
amount equal to the lost revenue attributable to the discounted energy
sales.
Operating taxes decreased approximately $72 million during the nine
month period ended September 30, 1999 when compared to the same period
in 1998, principally as a result of the decrease in revenue taxes
resulting from lower revenues primarily due to the 20% rate reduction,
a decrease in the gross receipts tax rate, the absence of property and
payroll taxes related to the operation of the non-nuclear generating
facilities of LILCO and the implementation of the New York State Power
for Jobs Program as discussed previously. These decreases were
partially offset by PILOTs on the Shoreham Nuclear Power Station (LILCO
was able to capitalize these PILOTs under its electric rate structure)
and increased sales volumes.
<PAGE>
18
Regulatory Amortization
For the three and nine month period ended September 30, 1999, the
amortization of various regulatory assets and liabilities were not
recorded as a result of the adjustments made on May 29, 1998, to
eliminate the related regulatory assets and liabilities.
Rate Moderation Component ("RMC")
The RMC represented the difference between LILCO's revenue requirements
under conventional ratemaking and the revenues provided under LILCO's
electric rate structure. In addition, the RMC was adjusted for the
operation of LILCO's Fuel Moderation Component ("FMC") mechanism and
the difference between LILCO's share of actual operating costs at Nine
Mile Point Nuclear Power Station, Unit 2 ("NMP2") and amounts provided
for in electric rates.
LIPA's rate structure does not provide a RMC mechanism and as a result,
no such amortization is being recorded.
Federal Income Tax
The decrease in Federal income tax expense for the three and nine month
period ended September 30, 1999, when compared to the same period in
1998, is due to the fact that LIPA is exempt from Federal income taxes.
Other Income and Deductions
Other income and deductions primarily represents interest earned on
designated funds. As a result of the significantly lower designated
fund balances, other income and deductions decreased approximately $8.5
million for the three month ended September 30, 1999 when compared to
the same period in 1998.
Other income and deductions contributed to income approximately $12.9
million more for the nine month period ended September 30, 1999 than
compared to the same period in 1998, primarily due to merger related
expenses recognized by LILCO in May 1998, partially offset by the
absence, in 1999, of carrying charges on regulatory assets.
Interest Expense
Interest expense decreased $20.5 million for the three month period
ended September 30, 1999 when compared to the same period in 1998. This
decrease is attributable to the lower debt levels in 1999 relative to
1998.
Interest expense decreased for the nine month period ended September
30, 1999, by approximately $60.0 million, when compared to the same
period in 1998. This decrease is principally attributable to the lower
borrowing rates of the Authority relative to the borrowing rates of
LILCO. This decrease was partially offset by the higher levels of debt
that LIPA had outstanding during these periods when compared to LILCO
during the same periods in 1998. The increase in the level of debt is
due to the fact that LIPA's entire capitalization structure is debt,
whereas LILCO's capitalization structure was composed of debt, common
stock and preferred stock. As a result, the entire cost of LIPA's
capital is reflected in interest expense, whereas LILCO's cost of
capital was reflected in interest expense and common and preferred
stock dividends.
<PAGE>
19
Liquidity and Capital Resources
Liquidity
Since May 29, 1998, LIPA has received approximately $6.7 billion from
the Authority to finance the Merger, as more fully discussed in Note 7
of Notes to Financial Statements included in LIPA's Annual Report on
Form 10-K for the nine month period ended December 31, 1998, in
exchange for a promissory note. All cash from customer payments and
other sources is collected by the Authority. All of LIPA's obligations
are paid by the Authority on LIPA's behalf. Accordingly, all operating
cash amounts are held at the Authority. Cash collections and
disbursements by the Authority on LIPA's behalf increase or decrease
amounts due the Authority by LIPA. LIPA has repaid approximately $471
million of its debt to the Authority because cash collected by the
Authority from customers and other sources since May 29, 1998 has
exceeded cash paid on LIPA's behalf by the Authority.
Pursuant to the Authority's Electric System General Revenue Bond
Resolution dated May 13, 1998, all amounts to be paid by the Authority
to LIPA in respect of the debt obligations of LIPA are subordinated in
right of payment to the payment of amounts due on the debt obligations
of the Authority. As a result, all debt assumed from LILCO is
structurally subordinated in right of payment to the Authority's debt
obligations.
During the nine month period ended September 30, 1999, LIPA redeemed
prior to maturity, cash on hand, $132.7 million of NYSERDA bonds. In
addition, LIPA satisfied the maturity of a $397 million debenture with
cash provided by KeySpan in accordance with the terms of the promissory
note between KeySpan and LIPA, as discussed in more detail in Note 2 of
Notes to Financial Statements.
On October 27, 1999, LIPA entered into an agreement with KeySpan,
whereby KeySpan advanced approximately $47.2 million of its promissory
note payable to LIPA, including interest, to be used to fund the
optional redemption of New York State Research and Development
Authority Pollution Control Revenue Funding Bonds 1976 Series A and
1979 Series B totaling $26.4 million and $19.1 million, respectively.
These funds are to be held in escrow by LIPA until December 1, 1999, at
which time, LIPA will call such debt at par.
At September 30, 1999, the Authority's and LIPA's cash and cash
equivalents amounted to approximately $634 million. In addition, LIPA
holds designated funds aggregating $21.3 million. LIPA estimates that
capital expenditures will total approximately $30 million for the
remainder of 1999. Funding for such expenditures will be provided by
the Authority which intends to issue new debt in 1999 that will be
designated by the Board of Trustees to replenish the capital
expenditures fund.
LIPA believes that cash on hand and cash from operations for 1999 will
be sufficient to meet its operating, capital and debt service
requirements. Depending on market conditions the Authority expects to
issue $150 to $250 million of bonds in 2000 in order to finance its
capital expenditures. The Authority estimates that for the remainder of
1999 debt maturities will total approximately $72 million. The
Authority will use cash generated from operations to satisfy $71
million of the remaining maturities. An additional $1 million is due
from KeySpan in order to satisfy LIPA's sinking fund requirement later
in 1999.
<PAGE>
20
The Authority is planning to repurchase up to $150 million of its
outstanding debt, with cash on hand, through the issuance of a tender
offer prior to the end of 1999. The Authority also expects to use cash
from operations to make optional redemptions of debt in 1999. Such
actions are consistent with the Authority's plan to retire in 16 years,
the approximately $4 billion it borrowed to purchase the Shoreham
regulatory assets from LILCO.
On May 29, 1998, LIPA began issuing rebates and credits to customers'
bills arising from the proposed settlement of the Shoreham Property Tax
Litigation. Rebates and credits will be issued over the five years
after May 29, 1998, in the total amount of $150 million for Suffolk
County customers and $312.5 million for Nassau County and Rockaway
customers. The Authority has issued $145.7 million of bonds and has
proposed to issue additional bonds over the next four years to finance
the cost of the proposed settlement. Beginning in May 2004, a surcharge
will be levied upon the Suffolk County customers in order to repay the
bonds. See Note 13 of Notes to Financial Statements - Shoreham Tax
Matters, included in LIPA's Annual Report on Form 10-K for the nine
months ended December 31, 1998.
Capital Requirements
Capital expenditures are expected to be made by LIPA in the ordinary
course of business for purposes of the normal upgrading and expansion
of the T&D System. LIPA considers the T&D System to be adequate and in
good condition. The actual amount and timing of future financing will
depend upon actual capital expenditures, the timeliness and adequacy of
rate increases, the availability and cost of capital and the ability to
meet interest and fixed charge coverage requirements. The Authority
believes that the amount of capital expenditures budgeted in 1999 is
adequate to maintain system reliability and insures customer and
employee safety.
Impact of Year 2000
The Authority recently purchased new computer software to support
certain activities of LIPA and believes that these systems are Year
2000 compliant. Management also believes that, based on available
information, it will be able to manage its Year 2000 transition for
systems and infrastructure, without any material adverse effect on its
business operations or financial position. However, there can be no
assurance that failure to resolve any issue relating to such transition
would not have a material adverse effect on LIPA. LIPA has had
discussions with its largest vendor, KeySpan, which is responsible for
the management and operation of LIPA's transmission and distribution
system, and KeySpan has indicated that it has completed the testing and
remediation of critical systems to ensure no disruptions in service or
the supply of electricity to LIPA's customers. KeySpan's computer
applications are generally based on two digits and have required some
additional programming to recognize the start of the new millennium. A
corporate-wide program has been established by KeySpan to review all
software, hardware, embedded systems and associated compliance plans of
KeySpan and its subsidiaries. The program includes both information
technology (IT) and non-IT systems. The critical non-IT systems are
generally in the areas of electric production, distribution,
transmission, gas distribution and communications. The readiness of
suppliers and vendor systems is also under review. The project is under
the direction of the Year 2000 Program Office, chaired by the Vice
President, Technology Operations and Corporate Y2K Officer. The
critical areas of operations are being addressed through a business
process review methodology. Each of KeySpan's critical business and
service processes is being reviewed to: identify and inventory
sub-components; assess for Year 2000 compliance; establish repair plans
as necessary; and test in a Year 2000 environment. As of July 1, 1999,
inventory, assessment, repair, testing and the development of
contingency plans for these service critical processes had been
completed. Remediation of other
<PAGE>
21
business critical systems, which includes metering, and certain
financial and accounting systems is 98% complete, and testing is 93%
complete. Testing of the last of these systems will be complete by
November 30, 1999.
Vendors and business partners needed to support the critical processes
of KeySpan are also being reviewed for their Year 2000 readiness. At
this time, none of these vendors have indicated to KeySpan that it will
be materially affected by the Year 2000 issue. However, many vendors
and business partners have not responded to repeated requests for its
year 2000 readiness status. KeySpan has developed contingency plans
that address vendor and business partners year 2000 risk.
Risk Scenarios and Contingency Plans
KeySpan has analyzed each of the critical processes to identify
possible Year 2000 risks. Each critical process will be certified by
the responsible corporate officer as being Year 2000 ready. However,
the most reasonable likely worst case scenarios have been identified.
Operating procedures are being reviewed to ensure that risks are
minimized when entering the Year 2000 and other high risk dates.
Contingency plans have been developed to address possible failure
points in each critical process. Testing of these contingency plans
will be performed internally, as well as with neighboring utilities and
business partners.
While KeySpan must plan for the following possible worst case
scenarios, management believes that these events are improbable:
Loss of generating flexibility:
KeySpan's generation subsidiary receives gas delivery from multiple
national and international pipelines and, therefore the effects of a
loss in any one pipeline can be mitigated through the use of other
pipelines. Complete loss of all the supply lines is not considered a
reasonable scenario. Nevertheless, the impact of the loss of any one
pipeline is dependent on temperature and vaporization rate. The partial
loss of gas supply will not affect KeySpan's ability to supply
electricity since many of the plants have the ability to operate on
oil.
Loss of electric grid interconnections/KeySpan operated electric
distribution facilities:
Electric utilities are physically connected on a regional basis to
manage electric load. This is often referred to as the regional grid.
Presently, KeySpan is working, on behalf of LIPA, with other regional
utilities to develop a coordinated operating plan. Should there be an
instability in the grid, KeySpan has the ability to remove LIPA and
operate independently.
Certain electric system components, such as individual generating
units, transmission and distribution system facilities, and the
electric energy management system have the potential to be affected by
the Year 2000 issue. KeySpan has inventoried electric system components
and developed a plan to certify mission critical processes as Year 2000
ready. Contingency plans have been developed, where appropriate, for
loss of critical system elements.
Loss of telecommunications:
KeySpan has a substantial dependency on many telecommunication systems
and services for both internal and external communication providers.
External communications with the public and the ability of customers to
contact KeySpan in cases of emergency response, are essential. KeySpan
intends to coordinate its emergency response efforts with the offices
of emergency management
<PAGE>
22
of the various local governments within its service territory.
Internally, there are a number of critical processes in both the gas
and electric operating areas that rely on external communication
providers. Contingency plans address methods for manually monitoring
these functions and/or utilizing alternative communication methods.
In addition to the above, KeySpan is also planning for the following
scenarios: short term reduction in system power generating capability;
limitation of fuel oil operations; reduction in quality of power
output; loss of automated meter reading; loss of ability to read
customer meters, prepare bills and collect and process customer
payments; and loss of the purchasing/materials management system.
KeySpan believes that, with modifications to existing software and
conversions to new hardware and software, the Year 2000 issue will not
pose significant operational problems for its computer systems.
However, if such modifications and conversions do not perform as
expected, and contingency plans fail, the Year 2000 issue could have a
material adverse impact on the operations of LIPA.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred in this section as of September 30,
1999 from the information provided in LIPA's Annual Report on Form 10-K
for the nine months ended December 31, 1998, as filed on March 31,
1999.
<PAGE>
23
Part II. OTHER INFORMATION
Item 1. Legal proceedings
Except as discussed below, no significant changes have occurred with
respect to legal proceedings as discussed in Item 1. Business -
Shoreham Tax Matters and Item 3. Legal Proceedings in LIPA's Annual
Report on Form 10-K for the nine months ended December 31, 1998.
With respect to Shoreham Tax Matters, on July 26, 1999, the Appellate
Division, Second Department overruled the lower court's decision and
held that the Authority was not prohibited from enforcing any part of
the judgment relating to real property tax refunds attributable to
over assessments on the Shoreham plant after the January 15, 1987,
effective date of the LIPA Act. On August 24, 1999 Suffolk County
filed a motion with the Appellate Division to reargue and/or for
permission to appeal this decision to the State Court of Appeals. On
October 14, 1999 the Appellate Division denied the motion. LIPA
expects that Suffolk County will seek leave directly from the Court of
Appeals to seek leave to appeal the Appellate Division's July 26, 1999
decision to the Court of Appeals. No decision has been rendered by the
court as of the date of this filing.
In July 1992, LILCO and the Authority separately commenced proceedings
in the Supreme Court of the State of New York, County of Suffolk,
against the Assessor and the Board of Assessment Review for the Town
of Brookhaven, New York (the "Assessor") challenging the real property
tax assessment on Shoreham for the 1992-93 tax year. On or about May
1, 1992, the Assessor had tentatively assessed Shoreham an amount in
excess of $156 million for the 1992-93 tax year. On April 22, 1996,
the two proceedings were consolidated. On May 13, 1999, the Assessor
moved to dismiss the proceedings on procedural grounds. Oral arguments
were held on August 5, 1999. On October 20, 1999 the court declined to
dismiss the two proceedings.
With respect to the action brought by the County of Suffolk entitled
County of Suffolk v. KeySpan et al., this action was voluntarily
discontinued by plaintiffs without prejudice. The plaintiffs refiled
their claims related to executive compensation in the federal action
entitled County of Suffolk et al. v. Long Island Power Authority,
which was filed on September 28, 1998.
With respect to the Sylvester v. Catacosinos et al. action, U.S.
District Court approved the Stipulation of the parties dismissing the
action with prejudice.
Item 2. Changes in securities and use of proceeds
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
None
<PAGE>
24
Item 5. Other information
None
Item 6. Exhibits and reports on form 8-K
(A) Exhibits
27 Financial Data Schedule.
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended September 30, 1999.
<PAGE>
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 15, 1999 LONG ISLAND LIGHTING COMPANY d/b/a LIPA
(Registrant)
/s/ David P. Warren
-------------------------
David P. Warren
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Income, Balance Sheet and Statement of Cash Flows, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Sep-30-1999
<BOOK-VALUE> Per-Book
<TOTAL-NET-UTILITY-PLANT> 2,073,858
<OTHER-PROPERTY-AND-INVEST> 19,938
<TOTAL-CURRENT-ASSETS> 314,690
<TOTAL-DEFERRED-CHARGES> 79,867
<OTHER-ASSETS> 3,938,923
<TOTAL-ASSETS> 7,095,568
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 6,709
<TOTAL-COMMON-STOCKHOLDERS-EQ> 6,709
0
0
<LONG-TERM-DEBT-NET> 650,527
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 6,077,968
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,278
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 359,086
<TOT-CAPITALIZATION-AND-LIAB> 7,095,568
<GROSS-OPERATING-REVENUE> 1,721,963
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 1,397,487
<TOTAL-OPERATING-EXPENSES> 1,397,487
<OPERATING-INCOME-LOSS> 324,476
<OTHER-INCOME-NET> 4,913
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 242,699
<NET-INCOME> 86,690
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
