-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BhnpLHRXYbgTiKsY1wiY/dE9mUiJfVk29JJey2JMdw72OCpKKw5O8B+W84TW0FOA v06FvMAUc55GLF6YjAlZYQ== 0000060251-98-000005.txt : 19980427 0000060251-98-000005.hdr.sgml : 19980427 ACCESSION NUMBER: 0000060251-98-000005 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980424 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980424 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: LONG ISLAND LIGHTING CO CENTRAL INDEX KEY: 0000060251 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 111019782 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-03571 FILM NUMBER: 98601062 BUSINESS ADDRESS: STREET 1: 175 E OLD COUNTRY RD CITY: HICKSVILLE STATE: NY ZIP: 11801 BUSINESS PHONE: 5165455184 MAIL ADDRESS: STREET 1: 175 E. OLD COUNTRY RD CITY: HICKSVILLE STATE: NY ZIP: 11801 8-K 1 LILCO CURRENT REPORT ON FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 8-K CURRENT REPORT ----------------------------------- Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 DATE OF REPORT (Date of earliest event reported): April 24, 1998 LONG ISLAND LIGHTING COMPANY (Exact name of registrant as specified in charter) New York 1-3571 11-1019782 (State of Incorporation) (Commission File No.) (I.R.S. Employer Identification No.) 175 East Old Country Road, Hicksville, New York 11801 516-755-6650 (Address and telephone number of Principal Executive Offices) Item 5. Other Events The Company is filing this Current Report on Form 8-K to provide unaudited pro forma consolidated condensed financial information for Long Island Lighting Company ("LILCO") and KeySpan Energy Company ("KeySpan") at December 31, 1997 and for the twelve months ended December 31, 1997 in order to give effect under the purchase method of accounting to the transactions summarized in Exhibit 99.1 hereto and in the assumptions set forth in the notes thereto. Based on current facts and circumstances, LILCO and KeySpan believe that the applicability of the purchase method of accounting is probable. If the LIPA Transaction is not consummated, it is possible that the combination between LILCO and KeySpan would qualify for the pooling of interests method of accounting. The unaudited pro forma consolidated condensed financial information set forth in Exhibit 99.1 to this Current Report on Form 8-K reflects the condensed consolidated financial information of LILCO contained in its Quarterly Report on Form 10-Q filed on February 17, 1998 and of KeySpan contained in its Quarterly Report on Form 10-Q filed on February 13, 1998. Exhibit 99.1 is hereby incorporated by reference in response to this Item 5. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits The unaudited pro forma consolidated condensed financial information referred to above in Item 5 and incorporated herein by reference, is attached hereto as the following Exhibit: Exhibit Number 99.1 Unaudited pro forma consolidated condensed financial information for LILCO and KeySpan at December 31, 1997 and for the twelve months ended December 31, 1997. 99.2 LILCO's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, incorporated herein by reference and available on the SEC's EDGAR system. 99.3 The Joint Proxy Statement/Prospectus dated June 27, 1997, incorporated herein by reference and available on the SEC's EDGAR system. - 2 - 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. Dated: April 24, 1998 LONG ISLAND LIGHTING COMPANY Registrant By: /S/ THEODORE A. BABCOCK --------------------------- THEODORE A. BABCOCK Vice President and Treasurer - 3 - Exhibit Index Exhibit Number 99.1 Unaudited pro forma consolidated condensed financial information for LILCO and KeySpan at December 31, 1997 and for the twelve months ended December 31, 1997. 99.2 LILCO's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, incorporated herein by reference and available on the SEC's EDGAR system. 99.3 The Joint Proxy Statement/Prospectus dated June 27, 1997, incorporated herein by reference and available on the SEC's EDGAR system. - 4 - EX-99 2 EXHIBIT 99.1 UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION KEYSPAN ENERGY CORP\LILCO COMBINATION AND LIPA TRANSACTION The following unaudited pro forma financial information reflects adjustments to the historical financial statements of LILCO to give effect to the proposed transfer of LILCO's gas and generation business to subsidiaries of the newly formed Holding Company (Holding Company), the proposed stock acquisition of LILCO by a wholly owned subsidiary of LIPA and the proposed combination between KeySpan Energy Corporation (KeySpan) and LILCO (Combination). The unaudited pro forma consolidated condensed balance sheet at December 31, 1997 gives effect to the proposed LIPA Transaction and the Combination as if they had occurred at December 31, 1997. The unaudited pro forma consolidated condensed statement of income for the 12-month period ended December 31, 1997 gives effect to the proposed LIPA Transaction and the Combination as if they had occurred at January 1, 1997. These statements are prepared on the basis of accounting for the Combination under the purchase method of accounting and are based on the assumptions set forth in the notes thereto. In April 1997 LILCO changed its year-end from December 31 to March 31. The following pro forma financial information has been prepared from, and should be read in conjunction with, the LIPA Agreement (Annex D to the Joint Proxy dated June 27, 1997), and the historical consolidated financial statements and related notes thereto of KeySpan and LILCO. The following information is not necessarily indicative of the financial position or operating results that would have occurred had the proposed LIPA Transaction and the Combination been consummated on the date, or at the beginning of the period, for which the proposed LIPA Transaction and the Combination are being given effect nor is it necessarily indicative of future operating results or financial position. - 5 -
KEYSPAN/LILCO HOLDING CORP. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET 12/31/97 (In Millions) Sale LILCO Adjustments Adjusted to Pro Forma (Historical) LILCO LIPA (1) Adjustments ----------- ----------- ----------- ------------- -------------- ASSETS Property Utility Plant 0.0 Electric $4,005.9 4,005.9 2,911.4 Gas 1,218.7 1,218.7 0.0 Common 286.4 286.4 0.0 Construction work in progress 116.1 116.1 42.0 Nuclear fuel in process and in reactor 16.2 16.2 16.2 Less - Accumulated depreciation 0.0 0.0 0.0 and amortization (1,847.8) (1,847.8) (933.3) ----------- ----------- ----------- ------------- -------------- Total Net Utility Plant 3,795.5 3,795.5 2,036.3 0.0 Gas exploration and production, at cost 0.0 0.0 0.0 Less - Accumulated depletion 0.0 0.0 0.0 ----------- ----------- ----------- ------------- -------------- Total Net Plant 3,795.5 3,795.5 2,036.3 0.0 ----------- ----------- ----------- ------------- -------------- Cost In Excess of Net Assets Acquired 0.0 0.0 0.0 0.0 ----------- ----------- ----------- ------------- -------------- Regulatory Assets Base financial component (less accumulated amortization of $858.2 ) 3,180.6 3,180.6 3,180.6 Rate moderation component 385.5 385.5 385.5 Shoreham post-settlement costs 1,003.6 1,003.6 1,003.6 Regulatory tax asset 1,746.9 1,746.9 1,724.4 Postretirement benefits other than pensions 346.1 346.1 0.0 (292.2) (2) Other 422.1 422.1 347.8 ----------- ----------- ----------- ------------- -------------- Total Regulatory Assets 7,084.8 7,084.8 6,641.9 (292.2) ----------- ----------- ----------- ------------- -------------- Nonutility Property and Other Investments 49.9 49.9 17.7 0.0 ----------- ----------- ----------- ------------- -------------- Current Assets Cash and cash equivalents 180.0 75.0(10) 255.0 75.0 2,477.6 (3) Deferred tax asset 11.3 11.3 0.0 119.0 (4) Accounts receivable and accrued revenues 463.4 463.4 314.0 19.4 (2) Other Current Assets 252.6 252.6 55.1 ----------- ----------- ----------- ------------- -------------- Total Current Assets 907.3 75.0 982.3 444.1 2,616.0 Deferred Charges 70.2 70.2 46.8 0.0 ----------- ----------- ----------- ------------- -------------- Contractual recievable from LIPA 0.0 0.0 0.0 0.0 272.8 (2) ----------- ----------- ----------- ------------- -------------- Total Assets 11,907.7 75.0 11,982.7 9,186.8 2,596.6 =========== =========== =========== ============= ============== CAPITALIZATION AND LIABILITIES Capitalization Common Shareowners' Equity 2,608.5 2,608.5 2,500.8 2,464.6 (3) Long-term debt, includes current maturities 4,482.7 4,482.7 3,434.1 Preferred stock 701.0 75.0(10) 776.0 338.0 ----------- ----------- ----------- ------------- -------------- Total Capitalization 7,792.2 75.0 7,867.2 6,272.9 2,464.6 ----------- ----------- ----------- ------------- -------------- Regulatory Liabilities 407.0 0.0 407.0 385.8 0.0 ----------- ----------- ----------- ------------- -------------- Current Liabilities Accounts payable and accrued expenses 288.6 288.6 101.7 13.0 (3) Accrued taxes (including Federal income tax) 54.5 54.5 399.0 (4) Other current liabilities 336.6 336.6 54.0 ----------- ----------- ----------- ------------- -------------- 679.7 0.0 679.7 155.7 412.0 ----------- ----------- ----------- ------------- -------------- Deferred Credits Deferred federal income tax 2,506.9 2,506.9 2,355.9 (280.0) (4) Other 77.4 77.4 18.6 ----------- ----------- ----------- ------------- -------------- Total Deferred Credits 2,584.3 0.0 2,584.3 2,374.5 (280.0) ----------- ----------- ----------- ------------- -------------- Operating Reserves 444.5 0.0 444.5 (2.1) 0.0 ----------- ----------- ----------- ------------- -------------- Commitments and Contingencies 0.0 0.0 0.0 0.0 0.0 ----------- ----------- ----------- ------------- -------------- Minority Interest in Subsidiary Company 0.0 0.0 0.0 0.0 0.0 ----------- ----------- ----------- ------------- -------------- Total Capitalization and Liabilities 11,907.7 75.0 11,982.7 9,186.8 2,596.6 =========== =========== =========== ============= ============== See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements.
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KEYSPAN/LILCO HOLDING CORP. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET 12/31/97 (In Millions) NEWCO Keyspan Pro Forma before Keyspan (Historical) Adjustments NEWCO -------------- ------------- ------------- -------------- ASSETS PROPERTY Utility Plant Electric 1,094.5 0.0 0.0 1,094.5 Gas 1,218.7 1,855.7 0.0 3,074.4 Common 286.4 0.0 0.0 286.4 Construction work in progress 74.1 0.0 0.0 74.1 Nuclear fuel in process and in reactor 0.0 0.0 0.0 0.0 Less - Accumulated depreciation 0.0 0.0 0.0 0.0 and amortization (914.5) (461.6) 0.0 (1,376.1) -------------- ------------- ------------- -------------- Total Net Utility Plant 1,759.2 1,394.1 0.0 3,153.3 Gas exploration and production, at cost 0.0 684.0 0.0 684.0 Less - Accumulated depletion 0.0 (237.1) 0.0 (237.1) -------------- -------------- -------------- -------------- Total Net Plant 1,759.2 1,841.0 0.0 3,600.2 -------------- ------------- ------------- -------------- Cost In Excess of Net Assets Acquired 0.0 0.0 241.0 (6) 241.0 -------------- ------------- ------------- -------------- REGULATORY ASSETS Base financial component (less accumulated amortization of $858.2 ) 0.0 0.0 0.0 0.0 Rate moderation component 0.0 0.0 0.0 0.0 Shoreham post-settlement costs 0.0 0.0 0.0 0.0 Regulatory tax asset 22.5 0.0 68.7 (5) 91.2 Postretirement benefits other than pensions 53.9 0.0 0.0 53.9 Other 74.3 0.0 29.4 (6) 103.7 -------------- ------------- ------------- -------------- Total Regulatory Assets 150.7 0.0 98.1 248.8 -------------- ------------- ------------- -------------- NONUTILITY PROPERTY AND OTHER INVESTMENTS 32.2 98.6 0.0 130.8 -------------- ------------- ------------- -------------- CURRENT ASSETS 0.0 Cash and cash equivalents 2,657.6 39.8 0.0 2,697.4 Deferred tax asset 130.3 0.0 0.0 130.3 Accounts receivable and accrued revenues 168.8 318.7 0.0 487.5 Other Current Assets 197.5 165.2 0.0 362.7 -------------- ------------- ------------- -------------- TOTAL CURRENT ASSETS 3,154.2 523.7 0.0 3,677.9 DEFERRED CHARGES 23.4 154.3 (76.9)(5) (6) 100.8 -------------- ------------- ------------- -------------- CONTRACTUAL RECIEVABLE FROM LIPA 272.8 0.0 0.0 272.8 -------------- ------------- ------------- TOTAL ASSETS 5,392.5 2,617.6 262.2 8,272.3 ============== ============= ============= -------------- 0.0 CAPITALIZATION AND LIABILITIES 0.0 CAPITALIZATION 0.0 Common Shareowners' Equity 2,572.3 1,014.1 200.4 (6) 3,786.8 Long-term debt, includes current maturities 1,048.6 760.1 0.0 1,808.7 Preferred stock 438.0 0.0 0.0 438.0 -------------- ------------- ------------- -------------- Total Capitalization 4,058.9 1,774.2 200.4 6,033.5 -------------- ------------- ------------- -------------- REGULATORY LIABILITIES 21.2 0.0 0.0 21.2 -------------- ------------- ------------- -------------- CURRENT LIABILITIES 0.0 Accounts payable and accrued expenses 199.9 177.6 61.8 (6) 439.3 Acrued taxes (including Federal income tax) 453.5 37.9 0.0 491.4 Other current liabilites 282.6 152.7 0.0 435.3 -------------- ------------- ------------- -------------- 936.0 368.2 61.8 1,366.0 -------------- ------------- ------------- -------------- DEFERRED CREDITS 0.0 Deferred federal income tax (129.0) 291.9 0.0 162.9 Other 58.8 94.8 0.0 153.6 -------------- ------------- ------------- -------------- Total Deferred Credits (70.2) 386.7 0.0 316.5 -------------- ------------- ------------- -------------- OPERATING RESERVES 446.6 0.0 0.0 446.6 -------------- ------------- ------------- -------------- COMMITMENTS AND CONTINGENCIES 0.0 0.0 0.0 0.0 -------------- ------------- ------------- -------------- MINORITY INTEREST IN SUBSIDIARY COMPANY 0.0 88.5 0.0 88.5 -------------- ------------- ------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES 5,392.5 2,617.6 262.2 8,272.3 ============== ============= ============= ============== See Accompanying Notes To Unaudited Pro Forma Consolidated Condensed Financial Statements.
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(KEYSPAN/LILCO) HOLDING CORP. UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 (In Millions Except Per Share Amounts) Sale Pro NEWCO LILCO to Forma before KeySpan Pro Forma (Historical) LIPA (1) Adjustments KeySpan (Historical) Adjustments NEWCO ----------- ----------- ----------- ----------- ----------- ----------- ---------- REVENUES Electric $2,480.5 $2,118.4 $11.5(7) $373.6 $0.0 $0.0 $373.6 Gas - Utility sales 667.2 0.0 0.0 667.2 1,356.9 0.0 2,024.1 Gas production and other 0.0 0.0 0.0 0.0 126.6 0.0 126.6 ----------- ----------- --------- ------- ----------- -------- ----------- Total Revenues 3,147.7 2,118.4 11.5 1,040.8 1,483.5 0.0 2,524.3 OPERATING EXPENSES Operations - fuel and purchased power 965.2 657.4 0.0 307.8 579.9 0.0 887.7 Operations - other 390.4 235.0 0.0 155.4 363.0 0.0 518.4 Maintenance 113.6 63.2 0.0 50.4 58.4 0.0 108.8 Depreciation, depletion and amortization 156.6 94.7 0.0 61.9 119.8 6.0(6) 187.7 Base financial component amortization 101.0 101.0 0.0 0.0 0.0 0.0 0.0 Rate moderation component amortization 13.5 13.5 0.0 0.0 0.0 0.0 0.0 Regulatory liability component amortization (88.5) (88.5) 0.0 0.0 0.0 0.0 0.0 Other regulatory amortization 56.1 46.5 0.0 9.6 0.0 0.0 9.6 Operating taxes 466.7 261.6 0.0 205.1 154.4 0.0 359.5 Federal income taxes 224.5 165.0 4.0(8) 63.5 58.6 0.0 122.1 ----------- ----------- --------- ------- ----------- -------- ----------- Total Operating Expenses 2,399.1 1,549.4 4.0 853.7 1,334.1 6.0 2,193.8 ----------- ----------- --------- ------- ----------- -------- ----------- Operating Income 748.6 569.0 7.5 187.1 149.4 (6.0) 330.5 OTHER INCOME AND (DEDUCTIONS) (4.3) 15.3 0.0 (19.6) 21.6 0.0 2.0 ----------- ----------- --------- ------- ----------- -------- ----------- INCOME BEFORE INTEREST CHARGES 744.3 584.3 7.5 167.5 171.0 (6.0) 332.5 INTEREST CHARGES 410.3 314.7 0.0 95.6 44.5 0.0 140.1 ----------- ----------- --------- ------- ----------- -------- ----------- NET INCOME 334.0 269.6 7.5 71.9 126.5 (6.0) 192.4 ----------- ----------- --------- ------- ----------- -------- ----------- Preferred stock dividend requirements 51.8 23.1 6.0(10) 34.7 0.2 0.0 34.9 ----------- ----------- --------- ------- ----------- -------- ----------- EARNINGS FOR COMMON STOCK $282.2 $246.5 $1.5 $37.2 $126.3 ($6.0) $157.5 =========== ========== ========= ======= =========== ======== =========== AVERAGE COMMON SHARES OUTSTANDING 121.2 121.2 121.2 121.2 50.4 (14.5)(12) 157.1 =========== =========== ========= ======= =========== ======== =========== EARNINGS PER COMMON AND EQUIVALENT SHARES $2.33 $2.03 $0.01 $0.31 $2.50 ($0.04) $1.00(9) =========== =========== ========= ======= =========== ======== =========== See Accompanying Notes To Unaudited Pro Forma Consolidated Condensed Financial Statements.
- 8 - NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. The historical financial statements of LILCO have been adjusted to give effect to the proposed transaction with LIPA, pursuant to which LILCO will distribute certain of its net assets relating to its gas and generation business ("Transferred Assets") to subsidiaries of the Holding Company. LIPA will then acquire LILCO in a stock sale. The adjustments are based upon a disaggregation of LILCO's balance sheet and operations as estimated by the management of LILCO, and are subject to adjustment pursuant to the terms of the LIPA agreement. In connection with this transaction, the principal assets to be acquired by LIPA through its stock acquisition of LILCO include the electric transmission and distribution system ("The LIPA Transmission and Distribution System"), LILCO's 18% interest in Nine Mile Point 2 nuclear power station, certain of LILCO's regulatory assets associated with its electric business and an allocation of accounts receivable and other assets. The principal liabilities to be assumed by LIPA include LILCO's regulatory liabilities associated with its electric business, a portion of LILCO's long-term debt and an allocation of accounts payable, accrued expenses, customer deposits, other deferred credits and claims. 2. In connection with the LIPA Transaction, LIPA is contractually responsible for reimbursing the Holding Company for postretirement benefits other than pension costs, related to employees of LILCO's electric business. A pro forma adjustment has been reflected to reclassify the associated regulatory asset for postretirement benefits other than pensions to current and non-current accounts receivable pursuant to LIPA's obligation to a subsidiary of the Holding Company. 3. The Cash Purchase Price to be paid by LIPA in connection with its stock acquisition of LILCO will be $2,497.5 million. The Cash Purchase Price was determined based upon the estimated net book value of the LILCO Retained Assets of $2,500.8 million as estimated by LILCO in a projected balance sheet as of December 31, 1997. In addition, the LIPA Transaction obligates the Holding Company upon the closing of the transaction to remit to LIPA $15 million associated with the recovery through litigation of certain real estate taxes previously paid and to pay call premiums totaling $4.9 million on preferred stock series to be redeemed by LIPA. Transaction costs are currently estimated to be $26 million, $13 million of which has been incurred to date, leaving a balance of $13 million as a pro forma adjustment to accrued expenses. Assuming the LIPA Transaction was completed on December 31, 1997, the net cash to be received by the Holding Company would amount to: Cash Purchase Price $2,497.5 Cash paid to LIPA (15.0) Call premiums ( 4.9) -------- Net Cash $2,477.6 ======== 4. The transfer of the Transferred Assets from LILCO to the Holding Company (which will then transfer the assets to its subsidiaries) will result in the imposition of federal income taxes on LILCO. Pursuant to the LIPA Agreement, the subsidiaries created by the Holding Company will receive the benefit of the increased tax basis of the Transferred Assets and will receive the Transferred Assets net of the tax imposed on LILCO. The tax is derived from the difference between the fair market value of the Transferred Assets and their existing tax basis. There are many different ways of valuing assets which may result in substantially different values. The Company has retained professional appraisers to assist it in determining the fair market value of the Transferred Assets. However, the valuation determined by the Company and its appraisers is not binding on the Internal Revenue Service, which may assert a higher value and a correspondingly greater tax liability. Thus, the actual tax liability and the amount of cash that will be available to the Company net of such liability cannot be determined at this time. The unaudited pro forma consolidated balance sheet as of December 31, 1997, reflects an estimated tax liability of approximately $399 million based upon an estimate of the value of the Transferred Assets made at the time the Company entered into the LIPA Agreement. For financial reporting purposes, the subsidiaries reversed the existing deferred tax liability of $280 million relating to the Transferred Assets and recorded a $119 deferred tax asset, reflecting the estimated income tax effect by which the tax basis of the Transferred Assets exceeded their book basis. 5. The unaudited pro forma condensed consolidated balance sheet as of December 31, 1997 reflects the reclassification of $68.7 million of KeySpan regulatory tax assets from deferred charges to regulatory assets in order to consistently present the regulatory assets of KeySpan with LILCO. - 9 - 6. The purchase price for KeySpan, which amounts to approximately $1.255 billion including $40.6 million of direct transaction costs, has been determined based upon an average of LILCO's opening and closing stock prices for the two trading days before and three trading days after December 29, 1996. The purchase price has been allocated to assets acquired and liabilities assumed based upon their estimated fair values. It is anticipated that the fair value of the utility assets acquired is represented by their book value, which approximates the value of these assets recognized by the New York State Public Service Commission (PSC) in establishing rates which are designed to, among other things, provide for a return on the book value of these assets and the recovery of costs included as depreciation and amortization charges. The estimated fair values of KeySpan non-utility assets approximate their carrying values. Both KeySpan and LILCO will seek PSC approval for recovery of transaction costs. At December 31, 1997, the purchase price exceeded the fair value of the net assets acquired by $241.0 million, which will be amortized to income over 40 years. The actual amount of goodwill to be recorded will be based on the net assets acquired as of the closing date. An additional $29.4 million in direct transaction costs will be recovered through rates of Holding Company's regulated subsidiaries and as a result, these costs have been recorded as a regulatory asset. 7. The agreement with LIPA includes a provision for the Holding Company to earn in the aggregate approximately $11.5 million in annual management service fees from LIPA for the management of the LIPA Transmission and Distribution System and the management of all aspects of fuel and power supply. These agreements also contain certain incentive and penalty provisions which could materially impact earnings from such agreements. 8. The net pro forma charge of $4.0 million represents the income tax effect associated with the recording of the pro forma adjustments for the $11.5 million management fee (See Note 7). 9. No adjustments have been made to earnings for common stock to reflect earnings on net available proceeds of approximately $1.7 billion to be received, after remittances to the Holding Company's gas and generation subsidiaries for working capital purposes (see Notes 3). If these funds were invested at 5.92% (the 30 year US Treasury Bond yield based on recent prices), the Holding Company would have realized additional interest income, net of taxes, of approximately $65.3 million, or approximately $.42 per share, on a pro forma consolidated basis. Each one percent change in the assumed interest rate, would increase/decrease interest income, net of taxes, by $11.0 million. LILCO's allowed rate of return on its common equity for its electric business is currently 11%. 10. As more fully described in the section entitled "The LIPA Transaction-Agreement and Plan of Merger," as described in the Joint Proxy Statement/Prospectus dated June 27, 1997, LILCO will transfer the Transferred Assets to subsidiaries of the Holding Company in exchange for shares of the Holding Company common stock and up to $75 million face amount of Holding Company Preferred Stock. The privately placed Preferred Stock will be non-voting, non-convertible and have a five year term. For purposes of these pro forma financial statements, it is assumed that the Holding Company will issue $75 million of Preferred Stock, LILCO will sell the preferred stock for $75 million in proceeds and will retain the proceeds (i.e. a Retained Asset). With a $75 million increase in the Retained Assets, the LIPA Agreement provides that the Retained Debt will increase by a corresponding amount. The LIPA Agreement also provides that if the Holding Company were to issue an amount other than $75 million of Preferred Stock, the incremental difference between the amount actually issued and $75 million, will result in a corresponding increase or decrease in the amount of accounts payable retained by LILCO. These pro forma financial statements reflect a reduction in interest expense for the reduced level of subsidiary debt, and an increase in preferred stock dividend requirements. Finally, for purposes of these pro forma financial statements, it is assumed that the dividend rate on this privately place Preferred Stock will be 7.95%, which is equal to the Company's highest cost preferred Stock. 11. KeySpan earnings for the 12 month period ended December 31, 1997 include gains of 15.2 million, or $0.30 per share resulting from the sale of various cogeneration investments as well as the sale of residual interests in certain Canadian assets. 12. These pro-forma financial statements reflect the exchange of each outstanding share of LILCO Common Stock into 0.880 shares of Holding Company Common Stock and the exchange of each outstanding share of KeySpan Common Stock into one share of Holding Company Common Stock, as provided in the proposed KeySpan/LILCO transaction. - 10 - -----END PRIVACY-ENHANCED MESSAGE-----