-----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, CuOCH/oudbu6K8CxebJHdlYb6x2EHAHXPD1+UL6H+a0VOFUPMTEQnpbYrNpU+qZl 51YRyOaS8d6VbPkhdryvEQ== 0000060251-97-000017.txt : 19970520 0000060251-97-000017.hdr.sgml : 19970520 ACCESSION NUMBER: 0000060251-97-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE SROS: PSE 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03571 FILM NUMBER: 97609220 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 10-Q 1 LILCO TRANSITION REPORT ON FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from January 1, 1997 to March 31, 1997 Commission file number 1-3571 LONG ISLAND LIGHTING COMPANY Incorporated pursuant to the Laws of New York State Internal Revenue Service - Employer Identification No. 11-1019782 175 East Old Country Road, Hicksville, New York 11801 (516) 755-6650 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No The total number of shares of the registrant's Common Stock, $5 par value, outstanding on March 31, 1997, was 120,987,330. LONG ISLAND LIGHTING COMPANY Page No. Part I - FINANCIAL INFORMATION Item 1. Financial Statements Statement of Income 3 Balance Sheet 4 Statement of Cash Flows 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Part II - OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes in Securities 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 24 Signature 25 -2-
LONG ISLAND LIGHTING COMPANY STATEMENT OF INCOME (UNAUDITED) (Thousands of Dollars - except per share amounts) Three Months Ended March 31 --------------------------- 1997 1996 --------------------------- REVENUES Electric $557,791 $559,268 Gas 293,391 304,946 ------------ ------------ Total Revenues 851,182 864,214 ------------ ------------ EXPENSES Operations - fuel and purchased power 301,867 310,269 Operations - other 95,673 103,869 Maintenance 29,340 30,488 Depreciation and amortization 38,561 37,565 Base financial component amortization 25,243 25,243 Rate moderation component amortization 5,907 (15,326) Regulatory liability component amortization (22,143) (22,143) Other regulatory amortization 12,218 27,212 Operating taxes 117,513 120,028 Federal income tax - current 23,378 12,838 Federal income tax - deferred and other 33,624 43,750 ------------ ------------ Total Expenses 661,181 673,793 ------------ ------------ OPERATING INCOME 190,001 190,421 ------------ ------------ OTHER INCOME AND (DEDUCTIONS) Rate moderation component carrying charges 5,919 5,900 Class Settlement (4,496) (5,372) Other income and deductions, net 645 5,920 Allowance for other funds used during construction 717 719 Federal income tax - deferred and other 789 2,451 ------------ ------------ Total Other Income and (Deductions) 3,574 9,618 ------------ ------------ INCOME BEFORE INTEREST CHARGES 193,575 200,039 ------------ ------------ INTEREST CHARGES AND (CREDITS) Interest on long-term debt 90,168 102,256 Other interest 16,659 16,971 Allowance for borrowed funds used during construction (949) (941) ------------ ------------ Total Interest Charges and (Credits) 105,878 118,286 ------------ ------------ NET INCOME 87,697 81,753 Preferred stock dividend requirements 12,969 13,071 ------------ ------------ EARNINGS FOR COMMON STOCK $74,728 $68,682 ============ ============ AVERAGE COMMON SHARES OUTSTANDING (000) 120,995 119,944 EARNINGS PER COMMON SHARE $0.62 $0.57 DIVIDENDS DECLARED PER COMMON SHARE $0.445 $0.445
SEE NOTES TO FINANCIAL STATEMENTS. - 3 -
LONG ISLAND LIGHTING COMPANY BALANCE SHEET (Thousands of Dollars) March 31 December 31 1997 1996 ASSETS (unaudited) (audited) -------------- --------------- UTILITY PLANT Electric $3,900,264 $3,882,297 Gas 1,171,183 1,154,543 Common 263,267 260,268 Construction work in progress 108,850 112,184 Nuclear fuel in process and in reactor 15,503 15,454 -------------- --------------- 5,459,067 5,424,746 -------------- --------------- Less - Accumulated depreciation and amortization 1,759,110 1,729,576 -------------- --------------- Total Net Utility Plant 3,699,957 3,695,170 -------------- --------------- REGULATORY ASSETS Base financial component (less accumulated amortization of $782,525 and $757,282) 3,256,305 3,281,548 Rate moderation component 409,512 402,213 Shoreham post-settlement costs 996,270 991,795 Shoreham nuclear fuel 68,581 69,113 Unamortized cost of issuing securities 187,309 194,151 Postretirement benefits other than pensions 357,668 360,842 Regulatory tax asset 1,767,164 1,772,778 Other 200,137 199,879 -------------- --------------- Total Regulatory Assets 7,242,946 7,272,319 -------------- --------------- -------------- --------------- NONUTILITY PROPERTY AND OTHER INVESTMENTS 18,870 18,597 -------------- --------------- CURRENT ASSETS Cash and cash equivalents 64,539 279,993 Special deposits 37,631 38,266 Customer accounts receivable (less allowance for doubtful accounts of $23,675 and $25,000) 305,436 255,801 Other accounts receivable 42,946 65,764 Accrued unbilled revenues 141,389 169,712 Materials and supplies at average cost 55,454 55,789 Fuel oil at average cost 49,703 53,941 Gas in storage at average cost 10,893 73,562 Deferred tax asset 93,349 145,205 Prepayments and other current assets 8,805 8,569 -------------- --------------- Total Current Assets 810,145 1,146,602 -------------- --------------- -------------- --------------- DEFERRED CHARGES 77,656 76,991 -------------- --------------- TOTAL ASSETS $11,849,574 $12,209,679 ============== ===============
SEE NOTES TO FINANCIAL STATEMENTS. - 4 - LONG ISLAND LIGHTING COMPANY BALANCE SHEET (Thousands of Dollars)
March 31 December 31 1997 1996 CAPITALIZATION AND LIABILITIES (unaudited) (audited) -------------- --------------- CAPITALIZATION Long-term debt $4,471,675 $4,471,675 Unamortized discount on debt (14,628) (14,903) -------------- --------------- 4,457,047 4,456,772 -------------- --------------- Preferred stock - redemption required 638,500 638,500 Preferred stock - no redemption required 63,598 63,664 -------------- --------------- Total Preferred Stock 702,098 702,164 -------------- --------------- Common stock 605,022 603,921 Premium on capital stock 1,131,576 1,127,971 Capital stock expense (48,915) (49,330) Retained earnings 861,751 840,867 Treasury stock, at cost (385) (60) -------------- --------------- Total Common Shareowners' Equity 2,549,049 2,523,369 -------------- --------------- -------------- --------------- Total Capitalization 7,708,194 7,682,305 -------------- --------------- REGULATORY LIABILITIES Regulatory liability component 178,558 198,398 1989 Settlement credits 125,138 127,442 Regulatory tax liability 100,377 102,887 Other 158,660 139,510 -------------- --------------- Total Regulatory Liabilities 562,733 568,237 -------------- --------------- CURRENT LIABILITIES Current maturities of long-term debt 1,000 251,000 Current redemption requirements of preferred stock 1,050 1,050 Accounts payable and accrued expenses 230,189 289,141 LRPP payable 40,499 40,499 Accrued taxes (including federal income tax of $49,262 and $25,884) 51,157 63,640 Accrued interest 143,983 160,615 Dividends payable 58,474 58,378 Class Settlement 58,333 55,833 Customer deposits 29,173 29,471 -------------- --------------- Total Current Liabilities 613,858 949,627 -------------- --------------- DEFERRED CREDITS Deferred federal income tax 2,420,443 2,442,606 Class Settlement 89,487 98,497 Other 20,889 39,447 -------------- --------------- Total Deferred Credits 2,530,819 2,580,550 -------------- --------------- OPERATING RESERVES Pensions and other postretirement benefits 387,048 381,996 Claims and damages 46,922 46,964 -------------- --------------- Total Operating Reserves 433,970 428,960 -------------- --------------- COMMITMENTS AND CONTINGENCIES - - -------------- --------------- TOTAL CAPITALIZATION AND LIABILITIES $11,849,574 $12,209,679 ============== ===============
SEE NOTES TO FINANCIAL STATEMENTS. - 5 -
LONG ISLAND LIGHTING COMPANY STATEMENT OF CASH FLOWS (UNAUDITED) (Thousands of Dollars) Three Months Ended March 31 ------------------------- 1997 1996 ------------------------- OPERATING ACTIVITIES Net Income $87,697 $81,753 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Provision for doubtful accounts 4,821 4,828 Depreciation and amortization 38,561 37,565 Base financial component amortization 25,243 25,243 Rate moderation component amortization 5,907 (15,326) Regulatory liability component amortization (22,143) (22,143) Other regulatory amortization 12,218 27,212 Rate moderation component carrying charges (5,919) (5,900) Class Settlement 4,496 5,372 Amortization of cost of issuing and redeeming securities 8,087 9,486 Federal income tax - deferred and other 32,835 41,299 Allowance for other funds used during construction (717) (719) Gas Cost Adjustment (7,891) 19,190 Other 24,485 15,542 CHANGES IN OPERATING ASSETS AND LIABILITIES Accounts receivable (31,638) (3,992) Accrued unbilled revenues 28,323 35,772 Materials and supplies, fuel oil and gas in storage 67,242 43,702 Accounts payable and accrued expenses (58,952) (31,997) Accrued taxes (12,483) (10,249) Class Settlement (11,006) (5,366) Other (29,599) (12,241) ------------ ------------ Net Cash Provided by Operating Activities 159,567 239,031 ------------ ------------ INVESTING ACTIVITIES Construction and nuclear fuel expenditures (50,375) (44,189) Shoreham post-settlement costs (12,104) (15,798) Other 160 (1,206) ------------ ------------ Net Cash Used in Investing Activities (62,319) (61,193) ------------ ------------ FINANCING ACTIVITIES Proceeds from sale of common stock 4,640 4,672 Redemption of long-term debt (250,000) 0 Preferred stock dividends paid (12,969) (13,072) Common stock dividends paid (53,749) (53,247) Other (624) (359) ------------ ------------ Net Cash Used in Financing Activities (312,702) (62,006) ------------ ------------ Net (Decrease) Increase in Cash and Cash Equivalents ($215,454) $115,832 ============ ============ Cash and cash equivalents at January 1 $279,993 $351,453 Net (Decrease) Increase in Cash and Cash Equivalents (215,454) 115,832 ------------ ------------ Cash and Cash Equivalents at March 31 $64,539 $467,285 ============ ============ SUPPLEMENTARY INFORMATION Interest paid, before reduction for the allowance for borrowed funds used during construction $112,981 $115,711 Federal income tax - paid $0 $50
SEE NOTES TO FINANCIAL STATEMENTS. - 6- NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) NOTE 1. BASIS OF PRESENTATION These Notes to Financial Statements reflect events subsequent to January 31, 1997, the date of the most recent Report of Independent Auditors, through the date of this Transition Report on Form 10-Q for the three months ended March 31, 1997. These Notes to Financial Statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations for the three months ended March 31, 1997, and the Company's Annual Report on Form 10-K/A, for the Year Ended December 31, 1996, incorporated herein by reference. The financial statements furnished are unaudited. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial statements for the three month period presented. Operating results for the three month period are not necessarily indicative of results to be expected for an entire year, due to seasonal, operating and other factors. Certain prior year amounts have been reclassified to be consistent with current year presentation. NOTE 2. LONG ISLAND POWER AUTHORITY PROPOSED TRANSACTION On April 30, 1997, the Long Island Power Authority (LIPA) submitted to the New York State Public Authorities Control Board for approval, unexecuted copies of agreements related to LIPA's proposed acquisition (via the purchase of the Company's common stock) of the Company's transmission and distribution system and certain other assets and liabilities (LIPA Transaction). Prior to LIPA's acquisition of the common stock, the Company's gas assets, electric generating facility assets and certain other assets and liabilities will be transferred to affiliates of the holding company to be formed in connection with the binding share exchange with Brooklyn Union Gas Company (Brooklyn Union). While the specific allocation of assets and liabilities has not yet been finally determined, it is currently contemplated that the holding company would, subject to obtaining all required consents, assume the Company's (i) 7.30% Debentures due July 15, 1999; (ii) 8.20% Debentures due March 15, 2023; and (iii) Preferred Stock, 7.95%, Series AA. It is also contemplated that each issued and outstanding share of preferred stock of the Company that is subject to optional redemption at or before the closing of the LIPA Transaction will be called for redemption by the Company no later than the date of the closing. Each issued - 7 - and outstanding share of preferred stock of the Company not subject to optional redemption (other than the Series AA) will, subject to obtaining all required consents, be acquired by the Company for cash pursuant to the terms of the LIPA Transaction agreements. The Company is unable to determine when or if the agreements related to the LIPA Transaction will be executed by the parties or when or if all consents and approvals required to consummate the LIPA Transaction will be obtained. For additional information concerning the LIPA Transaction and the proposed binding share exchange with Brooklyn Union, see the Company's Form 8-K/A dated March 24, 1997 and Form 8-K dated December 30, 1996, respectively. NOTE 3. RATE MATTERS During 1996, the Public Service Commission of the State of New York (PSC) instituted numerous initiatives intended to lower electric rates on Long Island, including: An Order to Show Cause, issued in February 1996, to examine various opportunities to reduce the Company's electric rates; An Order issued in April 1996, expanding the scope of the Order to Show Cause proceeding in an effort to provide "immediate and substantial rate relief." An Order, issued in July 1996, to institute an expedited temporary rate phase in the Order to Show Cause proceeding to be conducted in parallel with the ongoing phase concerning permanent rates. As a result of the Order issued in April 1996, the Company, in September 1996, filed financial and other information sufficient to provide a legal basis for the PSC to set new rates for both the single rate year (1997) and the three-year rate period 1997 through 1999. As of the date of this report, the PSC has yet to render a decision or take any action with respect to this filing. BROOKLYN UNION TRANSACTION On March 14, 1997, the Company and Brooklyn Union filed a joint petition with the PSC requesting approval of the proposed merger of the two companies and certain related matters. The petition proposes, among other matters, that 93% or $1.0 billion of the estimated total efficiency savings attributable to operating synergies that are expected to be realized over the 10 year period following the merger, be allocated to ratepayers and the - 8 - remaining 7% or $73 million be allocated to shareholders. The ratepayers' portion will be allocated to both utilities' customers and will reduce both electric and gas rates by an estimated 2% for the 10 year period following the closing of the merger. To accomplish this, the base rates of both utilities would be reduced immediately following the closing to reflect the levelized annual amount of the non-fuel related synergy savings forecasted to materialize over this period. Fuel related synergy savings will be passed back to the ratepayers through a reduction in the respective fuel adjustment clauses as they are achieved. The Company will be required to amend its petition to the PSC in order to reflect certain aspects of the transaction currently contemplated with LIPA. The petition also requests the PSC's approval of the following: o The formation of a holding company and the exchange of shares of common stock between the two utilities and the holding company in order to effectuate the merger. o Continuation of the Brooklyn Union holding company agreement previously approved by the PSC but modified to include LILCO under its terms and elimination of certain restrictions on dividend payments, debt-to-equity ratio maintenance levels, the level of investment in unregulated businesses, and relationships between the utilities and their unregulated affiliates. o The formation of an unregulated corporate services subsidiary to perform functions common to both utilities and their affiliates such as accounting and finance, human resources and corporate planning to attain synergy savings. o LILCO's multi-year electric rate plan as filed in September 1996. o The continuation of Brooklyn Union's currently approved multi-year gas rate plan without modification. o The proposal to establish a synergy savings balancing account to enable the utilities to reduce rates immediately for future non-fuel synergy savings without adversely affecting earnings. o LILCO's proposed multi-year gas rate plan for freezing base rates through the year 2001. - 9 - THE FEDERAL ENERGY REGULATORY COMMISSION FILING In March 1997, in connection with the proposed Brooklyn Union merger the Company filed an application with the Federal Energy Regulatory Commission (FERC) seeking approval of the transfer of the Company's common equity and certain FERC-jurisdictional assets to the holding company contemplated to be formed to effectuate the merger with Brooklyn Union. The Company's application explained how the proposal meets the three major concerns of the FERC merger guidelines which are that the transfer must have no adverse effect on rates, competition and regulation. All interested parties will have sixty days from publication of notice in the Federal Register to intervene and/or protest. Thereafter, the FERC will decide on the need for evidentiary hearings (beginning with settlement negotiations) and a procedural schedule. The Company will be required to amend its petition to the FERC in order to reflect certain aspects of the transaction currently contemplated with LIPA. NOTE 4. CAPITALIZATION In February 1997, the Company retired $250 million of General and Refunding Bonds at maturity. The Company satisfied this obligation with cash on hand and by utilizing interim financing of $30 million obtained through its Revolving Credit Agreement (RCA). The Company repaid this short-term RCA borrowing in March 1997. Accordingly, no amounts were outstanding under the RCA at March 31, 1997. NOTE 5. RETIREMENT BENEFIT PLANS PENSION PLANS The Company maintains a defined benefit pension plan which covers substantially all employees (Primary Plan). PRIMARY PLAN The Company's funding policy is to contribute annually to the Primary Plan a minimum amount consistent with the requirements of the Employee Retirement Income Security Act of 1974 plus such additional amounts, if any, as the Company may determine to be appropriate from time to time. Pension benefits are based upon years of participation in the Primary Plan and compensation. - 10 -
The Primary Plan's funded status and amounts recognized on the Balance Sheet at March 31, 1997 and December 31, 1996 were as follows: (In thousands of dollars) - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Actuarial present value of benefit obligation Vested benefits $ 642,392 $ 547,002 Nonvested benefits 57,960 55,157 - -------------------------------------------------------------------------------- Accumulated Benefit Obligation $ 700,352 $ 602,159 ================================================================================ Plan assets at fair value $ 744,400 $ 746,400 Actuarial present value of projected benefit obligation 807,703 689,661 - -------------------------------------------------------------------------------- Projected benefit obligation less than plan assets (63,303) 56,739 Unrecognized net obligation 69,399 71,085 Unrecognized net gain (1,605) (123,759) - -------------------------------------------------------------------------------- Net Prepaid Pension Cost $ 4,491 $ 4,065 ================================================================================
Periodic pension cost for the Primary Plan for the period ended March 31, 1997 and Year Ended December 31, 1996, respectively, included the following components: (In thousands of dollars) - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Service cost - benefits earned during the period $ 4,645 $ 17,384 Interest cost on projected benefit obligation and service cost 12,494 47,927 Actual return on plan assets (3,694) (81,165) Net amortization and deferral (9,446) 33,541 - -------------------------------------------------------------------------------- Net Periodic Pension Cost $ 3,999 $ 17,687 ================================================================================
Assumptions used in accounting for the Primary Plan were as follows: - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Discount rate 7.25% 7.25% Rate of future compensation increases 5.00% 5.00% Long-term rate of return on assets 7.50% 7.50% - --------------------------------------------------------------------------------
The Primary Plan assets at fair value include cash, cash equivalents, group annuity contracts, bonds and equity securities. As of March 31, 1997, the Company revised actuarial assumptions relating to mortality and the use of a 7.00% discount rate, which changed the present value of the accrued benefit. In accordance with the PSC Order, - 11 - which was effective in 1993, "Statement of Policy and Order Concerning the Accounting and Ratemaking Treatment for Pensions and Postretirement Benefits Other than Pensions" these assumption changes are amortized over a ten-year period and will be reflected ratably in pension expense during that period. As of April 1, 1997, the Company intends to change the long-term rate of return on assets to 7.00%. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In addition to providing pension benefits, the Company provides certain medical and life insurance benefits for retired employees. Substantially all of the Company's employees may become eligible for these benefits if they reach retirement age after working for the Company for a minimum of five years. These and similar benefits for active employees are provided by the Company or by insurance companies whose premiums are based on the benefits paid during the year. In addition, the Company is required to recognize any net gains or losses over a ten-year period. Accumulated postretirement benefit obligation other than pensions at March 31, 1997 and December 31, 1996 were as follows:
(In thousands of dollars) - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Retirees $ 169,655 $ 156,181 Fully eligible plan participants 62,491 56,950 Other active plan participants 183,526 152,627 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation $ 415,672 $ 365,758 Plan assets 80,533 74,692 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets 335,139 291,066 Unrecognized prior service cost (185) (188) Unrecognized net gain 28,563 75,309 - -------------------------------------------------------------------------------- Accrued Postretirement Benefit Cost $ 363,517 $ 366,187 ================================================================================
At March 31, 1997 and December 31, 1996, the Plan assets, which are recorded at fair value, include cash and cash equivalents, fixed income investments and approximately $100,000 of listed equity securities of the Company. - 12 -
Periodic postretirement benefit cost other than pensions for the period ended March 31, 1997 and Year Ended December 31, 1996, respectively, were as follows: (In thousands of dollars) - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 2,821 $ 10,690 Interest cost on projected benefit obligation and service cost 6,642 25,030 Actual return on plan assets ( 591) (3,046) Net Amortization and deferral (3,446) (12,175) - -------------------------------------------------------------------------------- Periodic Postretirement Benefit Cost $ 5,426 $ 20,499 ================================================================================
Assumptions used to determine the postretirement benefit obligation were as follows: - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Discount rate 7.25% 7.25% Rate of future compensation increases 5.00% 5.00% Long-term rate of return on assets 7.50% 7.50% - --------------------------------------------------------------------------------
As of March 31, 1997, the Company revised actuarial assumptions relating to mortality and the use of a 7.00% discount rate, which changed the present value of the accrued benefit. In accordance with the PSC Order, which was effective in 1993, "Statement of Policy and Order Concerning the Accounting and Ratemaking Treatment for Pensions and Postretirement Benefits Other than Pensions" these assumption changes are amortized over a ten-year period and will be reflected ratably in periodic postretirement benefit cost during that period. As of April 1, 1997, the Company intends to change the long-term rate of return on assets to 7.00%. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation at both March 31, 1997 and December 31, 1996 were 8.0%, gradually declining to 6.0% in 2001 and thereafter. A one percentage point increase in the health care cost trend rate would increase the accumulated postretirement benefit obligation as of March 31, 1997 and December 31, 1996 by approximately $59 million and $43 million, respectively, and the sum of the service and interest costs in 1997 and 1996 by $1 million and $5 million, respectively. - 13 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EARNINGS Earnings for common stock for the three months ended March 31, 1997, were $74.7 million or $0.62 per common share compared with $68.7 million or $0.57 per share for the same period last year. The Company experienced higher earnings for both its electric and gas business units. Gas business earnings increased for the three month period ended March 31, 1997, compared to the same period last year, primarily as the result of the recognition of revenues relating to an independent power producer contract for the period 1989-1996, which increased earnings by approximately $.03 per share. Absent this amount, earnings per share for the gas system are comparable to the same 1996 period. Electric business earnings increased for the three month period ended March 31, 1997, compared to the same period last year. Factors contributing to this increase include the Company's continuing efforts to reduce operations and maintenance expenses and the efficient use of cash generated by operations to retire maturing debt. REVENUES Total revenues for the three months ended March 31, 1997 were $851.2 million, representing a decrease of approximately $13.0 million when compared to the three months ended March 31, 1996. Electric revenues decreased by $1.5 million and gas revenues decreased by $11.5 million when compared to the same period in 1996. The decrease in gas revenues for the three months ended March 31, 1997, when compared to the same period in 1996, was primarily the result of lower fuel expense recoveries driven in part by lower sales volumes associated with the warmer than normal winter experienced in the Company's service territory during 1997. Variations in weather have a limited impact on revenues as the Company's current gas rate structure includes a weather normalization clause which mitigates the impact on revenues of experiencing weather that is warmer or colder than normal. The slight decrease in electric revenues during the three months ended March 31, 1997, when compared to the same period in 1996, was primarily due to lower sales volumes caused by the warmer weather experienced in the region during the winter of 1997. The decrease in revenues resulting from these lower sales volumes however, had no effect on earnings due to the Company's current - 14 - electric rate structure which includes a revenue reconciliation mechanism that eliminates the impact on earnings of sales volumes that are above or below adjudicated levels. FUEL AND PURCHASED POWER
Fuel and purchased power expenses for the three months ended March 31, 1997 and 1996 were as follows: Three Months Ended 3/31/97 3/31/96 ------- ------- (In Millions) ELECTRIC SYSTEM Oil $ 37 $ 67 Gas 39 7 Nuclear 4 4 Purchased Power 85 81 -- -- Total Electric Fuel Costs 165 159 GAS SYSTEM 137 151 --- --- Total $302 $310 ==== ====
For the three months ended March 31, 1997, electric fuel costs were higher when compared to the same period last year primarily as a result of higher purchased power prices. Also contributing to the increase was a reduction in credits generated by electric off-system gas sales. Profits from off-system gas sales by the electric business are used to offset the cost of fuel for electric generation, thereby supporting the Company's goal of providing electric energy to customers at the lowest cost possible. Electric off-system gas sales in 1997 were significantly below those of the same period last year due to a decrease in the demand for gas resulting from the warmer winter. Gas fuel costs for operating the gas business decreased for the three months ended March 31, 1997, when compared to the same period last year due to a decrease in gas prices coupled with a refinement in the method of recognizing gas fuel expenses. Also contributing to the decrease was lower sales volumes resulting from the warmer winter. - 15 -
The percentages of total electric energy available by type of fuel for electric operations for the three months ended March 31, 1997 and 1996 were as follows: Three Months Ended 3/31/97 3/31/96 ------- ------- Oil 22% 42% Gas 30 8 Nuclear 10 10 Purchases 38 40 -- -- Total 100% 100% === ===
The use of oil for electric generation decreased in 1997 as oil became less economical than gas. The Company also experienced lower electric off-system gas sales in 1997, making more gas available for use in generating electricity. In an effort to maximize the Company's operating flexibility, the Company is continuing to convert its oil-fired steam generating units to dual fired units. Of the Company's eight steam generation units capable of burning natural gas, six are dual- fired, providing the Company with the ability to burn the most cost efficient fuel available, consistent with seasonal environmental requirements, thereby providing customers with the lowest cost energy possible. OPERATIONS AND MAINTENANCE EXPENSES Operations and maintenance (O&M) expenses, excluding fuel and purchased power, amounted to $125.0 million for the three months ended March 31, 1997, compared to $134.4 million for the three months ended March 31, 1996. This decrease of $9.4 million or 7.0%, is primarily attributable to the Company's continuing efforts to control costs. RATE MODERATION COMPONENT The Rate Moderation Component (RMC) reflects the difference between the Company's revenue requirements under conventional ratemaking and the revenues provided by its electric rate structure. The RMC is adjusted monthly for the operation of the Company's Fuel Moderation Component (FMC) mechanism and for any differences between the Company's share of actual costs for O&M, property taxes and payroll taxes incurred for the Nine Mile Point Nuclear Power Station Unit 2 (NMP2) and amounts provided for in electric rates. For the three months ended March 31, 1997, the Company recorded a non-cash charge to income of approximately $5.9 million, including adjustments for expenses for NMP2 and amounts generated - 16 - by the FMC mechanism, as operating income generated by the Company's current electric rate structure exceeded that required under a conventional ratemaking calculation. For the three months ended March 31, 1996, the Company recorded a non-cash credit to income of approximately $15.3 million as operating income generated by the Company's current electric rate structure were below those required under a conventional ratemaking calculation. The Company continues to believe that the full amortization of the RMC balance, which at March 31, 1997, was approximately $410 million, will take place within the time frame established by the Rate Moderation Agreement (RMA). For a further discussion of the RMC and RMA see Notes 1, 2 and 3 of Notes to Financial Statements in the Company's Annual Report on Form 10-K/A, for the Year Ended December 31, 1996 and for a further discussion of the FMC see Management's Discussion and Analysis included in the Company's Annual Report on Form 10-K/A, for the Year Ended December 31, 1996. OTHER REGULATORY AMORTIZATION For the three months ended March 31, 1997, and 1996, other regulatory amortization was a non-cash charge to income of $12.2 million and $27.2 million, respectively. This decrease has no impact on earnings since it reflects the deferral of income or expense resulting from the Company's various ratemaking mechanisms, as explained below. The electric revenue reconciliation mechanism, as established under the LILCO Ratemaking and Performance Plan (LRPP), eliminates the impact on earnings of experiencing sales that are above or below adjudicated levels by providing a fixed annual net margin level (defined as sales revenue, net of fuel and gross receipts taxes). Variations in electric revenue resulting from differences between actual and adjudicated net margin sales levels are deferred on a monthly basis during the rate year through a charge or credit to other regulatory amortization. Since actual net margin sales levels for the three months ended March 31, 1997 and 1996 were lower than the adjudicated sales levels, the Company recorded non-cash credits to income of $10.2 million and $2.0 million, respectively. Included in other regulatory amortization for the three months ended March 31, 1996 is $16.3 million of non-cash charges to income related to the amortization of the deferred LRPP balance for the rate year ended November 30, 1994. The Company is awaiting PSC permission to begin amortization of the deferred LRPP balance for the rate year ended November 30, 1995. As such there was no corresponding amortization in 1997. - 17 - For a further discussion of the LRPP, see Note 3 of Notes to Financial Statements included in the Company's Annual Report on Form 10-K/A, for the Year Ended December 31, 1996. In the first quarter of 1997 the Company recorded approximately $1.6 million of gas excess earnings related to the 1994, 1995 and 1996 rate years that were not previously recognized. The Company recognized approximately $2.5 million of gas excess earnings for the quarter ended March 31, 1996. Partially offsetting the decreases in other regulatory amortization between 1997 and 1996 was the recognition of electric earnings in excess of the allowed rate of return on common equity. The Company earned $10.8 million of Electric excess earnings for the three months ended March 31, 1997. The Company did not earn any electric excess earnings for the three months ended March 31, 1996. OPERATING TAXES For the three months ended March 31, 1997, operating taxes totaled $117.5 million, a decrease of $2.5 million or 2.1% compared to the same period last year. The decrease in operating taxes was primarily attributable to lower revenue taxes and the expiration of the corporate tax surcharge. FEDERAL INCOME TAX For the three months ended March 31, 1997, federal income tax totaled $56.2 million, an increase of $2.1 million or 3.8% compared to the same period last year. The increase in federal income tax was primarily the result of an increase in pre-tax book income. The Alternative Minimum Tax liability for the three months ended March 31, 1997 totaled $23.4 million, an increase of $10.6 million over the comparable period last year. The year to year change in the current and deferred components is primarily a result of the full utilization of the Alternative Minimum Tax Net Operating Loss carryforward during 1996. OTHER INCOME AND DEDUCTIONS Other income net of deductions, for the three months ended March 31, 1997, was $3.6 million, a decrease of $6.0 million when compared to the same period in 1996. This decrease resulted from a reduction in interest income from short term investments as the Company utilized available cash balances to retire maturing debt of $250 million in February 1997 and a reduction in non-cash carrying charge income. - 18 - INTEREST EXPENSE Interest expense for the three months ended March 31, 1997, was $106.8 million, a decrease of $12.4 million or 10.4% when compared to the same period of 1996. This decrease was due to lower debt levels resulting from the retirement of maturing debt of $250 million in February 1997 and $415 million in May 1996. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1997, the Company's cash and cash equivalents amounted to approximately $65 million, compared to $280 million at December 31, 1996. The decrease in cash at March 31, 1997, primarily reflects the satisfaction at maturity of $250 million of the Company's General and Refunding Bonds on February 15, 1997, with cash on hand. The Company also utilized interim financing of $30 million obtained through its Revolving Credit Agreement (RCA). The Company repaid this short-term borrowing under the RCA in March 1997. The Company's debt ratio decreased from 59.3% at December 31, 1996, to 57.8% at March 31, 1997 primarily as a result of the debt redemption noted above. The use of cash generated from operations to satisfy maturing debt is part of the Company's continuing commitment to improve its capital structure. The Company has available, through October 1, 1997, $250 million revolving line of credit under its RCA. This line of credit is secured by a first lien upon the Company's accounts receivable and fuel oil inventories. The Company delivered a written request to the Co-Agent, for acceptance by the lending banks, to extend the RCA for a one-year period. The Company is currently awaiting a reply from the banks, however, the Company does not envision any problems in being granted the extension. The Company has no current plans to access the public markets as cash from operations should be sufficient to meet operating requirements and the debt maturities through 1998. However, if necessary, the Company would borrow under the RCA to satisfy short-term cash requirements. Also, the Company would access the public securities markets to refinance existing debt or preferred stock should market conditions prove favorable, subject to any restrictions contained in the merger agreement with Brooklyn Union. The Company would also take advantage of any tax-exempt financing made available by the New York State Energy Research and Development Authority. - 19 - CAPITAL REQUIREMENTS AND CAPITAL PROVIDED
Capital requirements and capital provided for the three months ended March 31, 1997, were as follows: (In Millions of Dollars) - -------------------------------------------------------------------------------- Three Months Ended March 31, 1997 - -------------------------------------------------------------------------------- CAPITAL REQUIREMENTS Total Construction $ 50 - -------------------------------------------------------------------------------- Redemptions and Dividends Long-term debt 250 Preferred stock dividends 13 Common stock dividends 54 - -------------------------------------------------------------------------------- Total Redemptions and Dividends 317 - -------------------------------------------------------------------------------- Shoreham post-settlement costs 12 - -------------------------------------------------------------------------------- Total Capital Requirements $ 379 ================================================================================ CAPITAL PROVIDED Cash generation from operations $ 160 Decrease in cash balances 215 Common stock issued 5 Other investing and financing activities (1) - -------------------------------------------------------------------------------- Total Capital Provided $ 379 ================================================================================
For further information, see the Statement of Cash Flows. - 20 - INVESTMENT RATING The Company's securities are rated by Standard & Poor's (S&P), Moody's Investors Service, Inc. (Moody's), Fitch Investors Service, L.P.(Fitch) and Duff & Phelps Credit Rating Co. (D&P). The credit ratings for each of the Company's principal securities remain unchanged since December 31, 1996. In response to the March 1997 announcement that the Company reached an agreement in principle with LIPA, the rating agencies took the following actions: o Moody's placed the securities of the Company under review for potential upgrade. o S&P announced that the Company's corporate credit rating will remain on CreditWatch with positive implications, but revised the CreditWatch implications on the Company's senior debt and preferred stock to "Developing" from "Positive". o D&P announced they will retain the Company's ratings on Rating Watch - Uncertain. o Fitch maintained the Company's fixed income securities on FitchAlert "Positive", indicating the rating is likely to be either raised or affirmed. For a further discussion of the Company's credit ratings see Investment Rating in the Company's Annual Report Form 10-K/A, for the Year Ended December 31, 1996. RATE MATTERS For a discussion of Rate Matters see, Note 3 of Notes to Financial Statements. LONG ISLAND POWER AUTHORITY PROPOSED TRANSACTION On April 30, 1997, the Long Island Power Authority (LIPA) submitted to the New York State Public Authorities Control Board for approval, unexecuted copies of agreements related to LIPA's proposed acquisition (via the purchase of the Company's common stock) of the Company's transmission and distribution system and certain other assets and liabilities (LIPA Transaction). Prior to LIPA's acquisition of the common stock, the Company's gas assets, electric generating facility assets and certain other assets and liabilities will be transferred to affiliates of the holding company to be formed in connection with the binding share exchange with Brooklyn Union Gas Company (Brooklyn Union). While the specific allocation of assets and liabilities has not yet been finally determined, it is currently contemplated that the - 21 - holding company would, subject to obtaining all required consents, assume the Company's (i) 7.30% Debentures due July 15, 1999; (ii) 8.20% Debentures due March 15, 2023; and (iii) Preferred Stock, 7.95%, Series AA. It is also contemplated that each issued and outstanding share of preferred stock of the Company that is subject to optional redemption at or before the closing of the LIPA Transaction will be called for redemption by the Company no later than the date of the closing. Each issued and outstanding share of preferred stock of the Company not subject to optional redemption (other than the Series AA) will, subject to obtaining all required consents, be acquired by the Company for cash pursuant to the terms of the LIPA Transaction agreements. The Company is unable to determine when or if the agreements related to the LIPA Transaction will be executed by the parties or when or if all consents and approvals required to consummate the LIPA Transaction will be obtained. For additional information concerning the LIPA Transaction and the proposed binding share exchange with Brooklyn Union, see the Company's Forms 8-K/A dated March 24, 1997 and Form 8-K dated December 30, 1996, respectively. BROOKLYN UNION TRANSACTION For a further discussion on the Brooklyn Union Transaction see Note 3 of Notes to Financial Statements. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report contains statements which, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1995 (Reform Act). In this respect, the words "estimate," "project," "anticipate," "expect," "intend," "believe" and similar expressions are intended to identify forward-looking statements. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. A number of important factors affecting the Company's business and financial results could cause actual results to differ materially from those stated in the forward-looking statements. Those factors include the proposed transactions with Brooklyn Union and LIPA as discussed under the heading "Long Island Power Authority Proposed Transaction" and "Brooklyn Union Transaction", state and federal regulatory rate proceedings, competition, and certain environmental matters each as discussed herein, in the Company's Annual Report on Form 10-K/a, for the Year Ended December 31, 1996 or in other reports filed by the Company with the Securities and Exchange Commission. - 22 - PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION On March 27, 1997, the Company's Board of Directors voted to change the Company's fiscal year end to March 31. The Company previously reported results of operations on a calendar year basis. On April 23, 1997, the Company, The Connecticut Light and Power Company (CL&P) and the Long Island Soundkeeper Fund, Inc. (Soundkeeper) jointly filed a Stipulation of Dismissal in Federal District Court, which settled a lawsuit previously commenced by the Soundkeeper alleging that fluid leaks from the electric transmission cable located under the Long Island Sound (Sound Cable), jointly owned by the Company and CL&P, violated the Clean Water Act. The settlement of the Soundkeeper lawsuit will not have a material adverse effect on the financial condition of the Company. For additional information concerning the Sound Cable see Note 11 of Notes to Financial Statements in the Company's Annual Report on Form 10-K/A, for the Year Ended December 31, 1996. - 23 - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. EXHIBITS Exhibit 10 (1) Executive Employment Agreement by and between the Company and Michael E. Bray dated as of March 1, 1997. (2) Indemnification Agreement by and between the Company and Michael E. Bray dated as of March 1, 1997 which agreement is substantially the same as Indemnification Agreement by and between the Company and certain officers dated as of February 23, 1994 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1994) which is incorporated herein by reference. Exhibit 27 - Financial Data Schedule UT for the three-month period ended March 31, 1997. b. REPORTS ON FORM 8-K In its current report on Form 8-K dated February 25, 1997, the Company filed the following: (i) audited financial statements of Brooklyn Union as of September 30, 1996 and 1995 and for each of the three years in the period ended September 30, 1996; (ii) unaudited interim financial statements of Brooklyn Union as of and for the three months and twelve months ended December 31, 1996 and 1995; and (iii) unaudited pro forma combined condensed financial information for the Company and Brooklyn Union, after giving effect to the Binding Share Exchanges as a pooling of interest for accounting purposes. In its current report on Form 8-K dated March 20, 1997 and Form 8-K/A dated March 24, 1997, the Company reported that the Company and LIPA entered into an Agreement in Principle pursuant to which LIPA would, among other things, acquire certain assets of the Company through the purchase of the Company's outstanding shares of Common Stock. In its current report on Form 8-K dated April 11, 1997, the Company reported that it changed its fiscal year-end to March 31. - 24 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LONG ISLAND LIGHTING COMPANY (Registrant) By /s/ ANTHONY NOZZOLILLO ------------------------- ANTHONY NOZZOLILLO Senior Vice President and Principal Financial Officer Dated: May 15, 1997 - 25 - EXHIBIT INDEX ------------- PAGE NO. -------- Exhibit 10 (1) Executive Employment Agreement by and between the Company and 27 Michael E. Bray dated as of March 1, 1997. (2) Indemnification Agreement by and between the Company and Michael -- E. Bray dated as of March 1, 1997 which agreement is substantially the same as Indemnification Agreement by and between the Company and certain officers dated as of February 23, 1994 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1994) which is incorporated herein by reference. Exhibit 27 Financial Data Schedule UT for the three-month period ended March 31, 40 1997. EX-10 2 EXECUTIVE EMPLOYMENT AGREEMENT LONG ISLAND LIGHTING COMPANY EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of the 1st day of March, 1997, by and between LONG ISLAND LIGHTING COMPANY, a New York corporation (hereinafter referred to as the "Company"), and Michael E. Bray (hereinafter referred to as "Executive"). W I T N E S S E T H : WHEREAS, the Executive is employed by the Company in a key executive capacity and the Executive's services are valuable to the conduct of the business of the Company; and WHEREAS, the Company recognizes that circumstances may arise in which a change in control of the Company occurs, through acquisition or otherwise, thereby causing uncertainty about the Executive's future employment with the Company without regard to the Executive's competence or past contributions, which uncertainty may result in the loss of valuable services of the Executive to the detriment of the Company and its shareholders, and the Company and the Executive wish to provide reasonable security to the Executive as an incentive for the continuation by Executive of his or her current relationship with the Company. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto mutually covenant and agree as follows: 1. Definitions. (A) Cause. "Cause" for termination by the Company of the Executive's employment after a Change of Control of the Company shall, for purposes of this Agreement, be limited to (i) the Executive's intentionally engaging in conduct not in good faith which has caused demonstrable and serious financial injury to the Company, all of which shall be evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an action, suit or proceeding, whether civil, criminal, administrative or investigative; (ii) conviction of a felony (as evidenced by binding and final judgment, order or decree of a court of competent jurisdiction, in effect after exhaustion of all rights of appeal) which substantially impairs the Executive's ability to perform his duties or responsibilities; and (iii) continuing willful and unreasonable refusal by the Executive to perform the Executive's duties or responsibilities (unless such duties or responsibilities have been significantly changed without the Executive's consent). (B) Change of Control. The term "Change of Control" means an event which shall be deemed to have occurred if: (i) any "person" as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 40% or more of the combined voting power of the Company's then outstanding securities; during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (iii) or (iv) herein) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 25% of the combined voting power of the Company's then outstanding securities shall not constitute a Change of Control; or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of, or the Company sells or disposes of, all or substantially all of the Company's assets or all or substantially all of the assets of the Company acquired for or used in the electric utility business of the Company, or any such sale or disposition is effected through condemnation proceedings. The Chief Legal Officer shall notify the parties to this Agreement as to whether and when a Change of Control has occurred. The preceding sentence shall not preclude any other party to this Agreement from giving such notice. (C) Company. Upon the occurrence of any merger or consolidation described in Section 1(B)(iii) in which the Company is not the surviving entity and which is not a Change of Control, "Company" shall thereafter for all purposes hereof be deemed to mean such surviving entity and in such event "Company" for purposes of Section 1(B)(ii) shall mean Long Island Lighting Company prior to such event and such surviving entity thereafter. (D) Notice of Termination. "Notice of Termination" shall mean a notice delivered by the Company or the Executive, as the case may be, and stating that the Executive's employment with the Company is terminated and the reason why such employment is terminated. (E) Limited Waiver. The waiver by the Company of a violation of any provisions of this Agreement, whether express or implied, shall not operate or be construed as a waiver of any subsequent violation of any such provision. (F) Code. For purposes of this Agreement, the term "Code" means the Internal Revenue Code of 1986, including any amendments thereto or successor tax codes thereof. References to any section of the Code shall include any amended or successor section of comparable import. (G) Covered Termination. For purposes of this Agreement, the term "Covered Termination" means any termination of the Executive's employment by the Company, if the Termination Date is any date prior to the end of the Employment Period and, if such termination is by the Executive, for a Good Reason as defined below. (H) Employment Period. For purposes of this Agreement, the term "Employment Period" means a period commencing on the date of a Change of Control of the Company, and ending at 11:59 p.m. Eastern Time on the third anniversary of such date. (I) Good Reason. For purposes of this Agreement, the Executive shall have a "Good Reason" for termination of employment after a Change of Control of the Company in the event of significant adverse change, without the Executive's written consent, in the Executive's status with the Company from such status in effect immediately prior to the Change of Control of the Company. (J) Person. For purposes of this Agreement, the term "Person" shall mean any individual, firm, partnership, corporation or other entity, including any successor (by merger or otherwise) of such entity, or a group of any of the foregoing acting in concert. (K) Termination Date. (i) For purposes of this Agreement, the term "Termination Date" means (a) if the Executive's employment is terminated by the Executive's death, the date of death; (b) if the Executive's employment is terminated by reason of voluntary early retirement, as agreed in writing by the Company and the Executive, the date of such early retirement which is set forth in such written agreement; (c) if the Executive's employment is terminated for purposes of this Agreement by reason of disability, as defined in the Retirement Income Plan of the Company (as in effect on the date hereof), the earlier of thirty days after the Notice of Termination is given or one day prior to the end of the Employment Period; (d) if the Executive's employment is terminated by the Company (other than by reason of disability) or by the Executive for Good Reason, the earlier of thirty days after the Notice of Termination is given or one day prior to the end of the Employment Period, except that if the Notice of Termination is given on or prior to the third anniversary of the date of the Change of Control of the Company, the Termination Date shall be deemed to have occurred no later than the third anniversary of the date of the Change of Control of the Company. Notwithstanding the foregoing: If the party receiving the Notice of Termination notifies the other party that a dispute exists concerning the termination and it is finally determined that the reason asserted in such Notice of Termination did not exist, then (a) if such Notice was delivered by the Executive, the Executive will be deemed to have voluntarily terminated his employment and (b) if delivered by the Company, the Company will be deemed to have terminated the Executive other than by reason of death or disability. 2. Termination or Cancellation Prior to Change of Control. The Company and the Executive shall each retain the right to terminate the employment of the Executive at any time prior to a Change of Control of the Company. In the event (A) the Executive's employment is terminated prior to a Change of Control of the Company, or (B) no Change of Control of the Company occurs prior to December 31, 1999, this Agreement shall be terminated and canceled and of no further force and effect, and any and all rights and obligations of the parties hereunder shall cease. 3. Benefits. If there is a Covered Termination, the Executive shall be entitled to the following benefits: (A) Accrued Benefits. The Executive shall be paid the amount of the Executive's Accrued Benefits. For purposes of this Agreement, the Executive's "Accrued Benefits" shall include the following amounts, payable as described herein: (i) all base salary, and accrued vacation pay, for the time period ending with the Termination Date; (ii) reimbursement for any and all monies or other reimbursable costs advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Company for the time period ending with the Termination Date; (iii) any and all other cash earned through the Termination Date and deferred at the election of the Executive or pursuant to any deferred compensation plan then in effect, and any increments thereon as determined under such plan; and (iv) a lump sum payment of the bonus or incentive compensation otherwise payable to the Executive with respect to the year in which termination occurs, or for the prior year, under all bonus or incentive compensation plans in which the Executive is a participant. Payment of Accrued Benefits shall be made promptly in accordance with the Company's prevailing practice. (B) Welfare Benefits. (i) Until the third anniversary of the date of the Covered Termination, the Executive shall continue to be covered, at the expense of the Company, by the same or equivalent welfare benefits, including life insurance, hospitalization, medical and dental coverage and disability benefits, as were provided to the Executive immediately prior to the date of the Change of Control. In the case of benefits of a character described in Section 4980B of the Code, the Company shall reimburse the Executive for the cost of coverage for such benefits until such third anniversary of the date of the Covered Termination (which may be effected by paying the applicable premium on behalf of the Executive and reporting it as income of the Executive for federal and other applicable income tax purposes). The amount of such payment shall be grossed up so that the net effect of such payment by the Company, after giving effect to federal, state and local income taxes on payments under this subdivision (ii), shall be the same as if the Company had provided such coverage fully at its own expense as described in subdivision (i) of this Section (B). (C) Leased Automobile. For a period of 90 days from the date of a Covered Termination, the Company shall continue to make available to the Executive the leased automobile being provided for the Executive by the Company at the date of the Change of Control (or in the case of a successor automobile, such automobile) on the same basis and at the same cost to the Executive, if any, as such automobile is provided on the Termination Date. (D) Severance Payment. The Executive will be entitled to cash compensation equal to three (3) years pay, calculated as described below, payable in equal monthly installments. The aggregate cash compensation will be calculated as the greater of three (3) times (i) the Executive's current rate of base salary at the Termination Date or (ii) the Executive's highest annual rate of base salary within one (1) year prior to the Change of Control. Cash compensation paid pursuant to this provision shall be subject to appropriate payroll deductions. (E) Supplemental Death and Retirement Benefit Plan. (i) An executive whose employment is terminated for any reason after a Change of Control and who is not vested at the time of such termination in the post-retirement benefits provided under the Supplemental Death and Retirement Benefits Plan (SD&RB) shall become vested as of the date of a Change of Control in the following percentage of such benefits. The percentage referred to in subdivision (i) of this Section is the percentage determined by multiplying 100 percent by a fraction, the numerator of which is the Executive's period of service at the Executive's Termination Date computed to the nearest whole month and then increased by 36 months, and the denominator of which is the years of service, or partial years of service, computed to the nearest whole month, which the Executive would have had at the first day of the month in which the Executive's 65th birthday falls (but not greater than 100 percent), had the Executive been continuously employed until such date. The percentage so determined shall be multiplied by the number of the Participant's Units of Participation in the SD&RB at the date of any Change of Control to determine the Units available to the Participant at the Termination Date and the provisions of the SD&RB shall be deemed to be amended to the full extent necessary to give effect to the provisions of this Section 3(E). The percentage of the life insurance or annuity benefit provided under the SD&RB for each Unit, or fraction thereof, shall become payable at the end of the period described in (A) above during which the pre-retirement death benefit provided under the SD&RB is continued. If the Executive elects any annuity benefit provided under the SD&RB, such benefit shall be elected within 90 days of the Termination Date. With respect to the calculation of the amount of any annuity benefit payable to the Executive under the SD&RB, the actuarial equivalent of the normal form of benefit provided under the SD&RB shall be computed by adding 36 months to the Executive's attained age, and with no reduction for commencement before age 60 (determined after such addition), and a reduction of four percent (4%) for each full year that the Executive is under age 60 (determined after such addition). In addition to the options available under the SD&RB, the Executive may elect to receive a lump sum payment of the actuarial equivalent of any annuity option provided under the SD&RB. Any such lump sum payment shall be determined by utilizing an actuarial factor of 110.16 per $1 of monthly income as of the Termination Date. The amount determined as of the Termination Date, whether in a lump sum or annuity form, shall be actuarially increased to reflect the interval between the Termination Date and the date of payment, based on the rate of interest announced by Morgan Guaranty Trust Company of New York from time to time as its prime or base lending rate between the Termination Date and the payment date. (F) Tax Gross-Up. (i) In the event that the Executive becomes entitled to payments in connection with a Change in Control or his termination of employment (the "Payments"), if any of the Payments will be subject to the tax imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed) (the "Excise Tax"), the Company shall pay to Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by him, after deduction of any Excise Tax on the Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this paragraph, shall be equal to the Payments. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) any other payments or benefits received or to be received by Executive in connection with a Change of Control or his termination of employment (whether pursuant to the terms of this Agreement or any plan, arrangement or agreement with the Company or any person whose actions result in a Change of Control or any person affiliated with the Company or such person) shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors, and consented to in writing by the Executive, which consent shall not be unreasonably withheld, such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered before the date of the change within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (b) the amount of the Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Payments or (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying clause (a), above), and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal, state and local income taxes at the highest marginal rate of federal, state and local income taxation in the calendar year in which the Gross-Up Payment is to be made. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Executive's employment, he shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by Executive if such repayment results in a reduction in Excise Tax and/or a federal, state and local tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code, applied by treating the period between initial payment of the Gross-Up Payment and the repayment in respect thereof as the term of the debt instrument referred to in section 1274(d)(1)(A) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. A Gross-Up Payment shall be made not later than the fifth day, or as soon thereafter as the Company in good faith deems practicable, following the date Executive becomes subject to payment of excise tax; provided, however, that if the amounts of such payment cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payment (together with interest at the rate provided under Section 1274(b)(2)(B) of the Code) as soon as the amount can be determined but no later than the thirtieth day after the date Executive becomes subject to the payment of excise tax. In the event the amount of the estimated payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 4. Further Obligations of the Executive. (A) Confidentiality. The Executive agrees that, the Executive shall hold in confidence and not directly or indirectly disclose or use or copy or make lists of any confidential information or proprietary data of the Company, except to the extent authorized in writing pursuant to authorization by the Board of Directors of the Company or required by any court or administrative agency, other than to an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of duties as an executive of the Company. Confidential information shall not include any information known generally to the public or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that of the Company. All records, files, documents and materials, or copies thereof, relating to the business of the Company which the Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company and shall be promptly returned to the Company upon termination of employment with the Company. 5. Expenses and Interest. If, after a Change in Control of the Company, (A) a dispute arises with respect to the enforcement of the Executive's rights under this Agreement or (B) any legal or arbitration proceeding shall be brought to enforce or interpret any provision contained herein or to recover damages for breach hereof, the Executive shall recover from the Company any reasonable attorneys' fees and necessary costs and disbursements, including without limitation expert witness fees, incurred as a result of such dispute, legal or arbitration proceeding ("Expenses"), and prejudgment interest on any money judgment or arbitration award obtained by the Executive calculated at the rate of interest announced by Morgan Guaranty Trust Company of New York from time to time as its prime or base lending rate from the date that payments to him should have been made under this Agreement. Within ten days after the Executive's written request therefor (which, without limitation, may be made periodically or from time to time based on the date or dates at which the Executive is billed for services and related expenses which are reimbursable as "Expenses" hereunder), the Company shall pay to the Executive, or such other person or entity as the Executive may designate in writing to the Company, the Executive's reasonable Expenses in advance of the final disposition or conclusion of any such dispute, legal or arbitration proceeding. 6. Payment Obligations Absolute. The Company's obligation during and after the Employment Period to pay the Executive the amounts and to make the benefit and other arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against him or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company will not seek to recover all or any part of such payment from the Executive, or from whomsoever may be entitled thereto, for any reason whatsoever. 7. Successors. (A) If the Company sells, assigns or transfers all or substantially all of its business and assets to any Person or if the Company merges into or consolidates or otherwise combines (where the Company does not survive such combination) with any Person (any such event, a "Sale of Business"), then the Company shall assign all of its right, title and interest in this Agreement as of the date of such event to such Person, and the Company shall cause such Person, by written agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform from and after the date of such assignment all of the terms, conditions and provisions imposed by this Agreement upon the Company. In case of such assignment by the Company and of assumption and agreement by such Person, as used in this Agreement, "Company" shall thereafter mean such Person which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law, and this Agreement shall inure to the benefit of, and be enforceable by, such Person. The Executive shall, in his discretion, be entitled to proceed against any or all of such Persons, any Person which theretofore was such a successor to the Company (as defined in the first paragraph of this Agreement) and the Company (as so defined) in any action to enforce any rights of the Executive hereunder. Except as provided in this Subsection, this Agreement shall not be assignable by the Company. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. (B) This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive under this Agreement, if the Executive had lived shall be paid, in the event of the Executive's death, to the Executive's estate, heirs and representatives; provided, however, that the foregoing shall not be construed to modify any terms of any benefit plan of the Company or of any agreement or arrangement of the Company with respect to benefits, as such terms are in effect on the date of the Change of Control of the Company, that expressly govern benefits under such plan, agreement or arrangement in the event of the Executive's death. 8. Severability. The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereto are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. 9. Amendment. This Agreement may not be amended or modified at any time except by written instrument executed by the Company and the Executive. 10. Withholding. The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes or charges which it is from time to time required to withhold; provided, that the amount so withheld shall not exceed the minimum amount required to be withheld by law. The Company shall be entitled to rely on an opinion of nationally recognized tax counsel if any question as to the amount or requirement of any such withholding shall arise. 11. Governing Law; Resolution of Disputes. This Agreement and the rights and obligations hereunder shall be governed and construed in accordance with the laws of the State of New York. Any dispute arising out of this Agreement shall, at the Executive's election, be determined by arbitration under the rules of the American Arbitration Association then in effect (in which case both parties shall be bound by the arbitration award) or by litigation. Whether the dispute is to be settled by arbitration or litigation, the venue for the arbitration or litigation shall be New York or, at the Executive's election, if the Executive is no longer residing or working in the New York metropolitan area, in the judicial district encompassing the city in which the Executive resides; provided, that, if the Executive is not then residing in the United States, the election of the Executive with respect to such venue shall be either in New York, New York or in the judicial district encompassing that city in the United States among the thirty cities having the largest population (as determined by the most recent United States Census data available at the Termination Date) which is closest to the Executive's residence. The parties consent to personal jurisdiction in each trial court in the selected venue having subject matter jurisdiction notwithstanding their residence or situs, and each party irrevocably consents to service of process in the manner provided hereunder for the giving of notices. 12. Payment from Trust Funds. The Company has established various Trust Funds in order to assure payment by the Company of obligations under its various benefit programs and pursuant to this Agreement. In the event that the Company or its successors or assigns shall not make a payment required by this Agreement or pursuant to any employment arrangement or agreement with respect to which a Trust has been established, the Trustee of such Trust, consistent with the terms and conditions of the Trust, shall make the payment required of the Company without any need to inquire into the obligations of the Executive to the Company under this Agreement. 13. Notices. All notices hereunder shall be in writing and deemed properly given if delivered by hand and receipted or if mailed by registered mail, return receipt requested. Notices to the Company shall be directed to the Corporate Secretary at the Company's headquarters offices. Notices to the Executive shall be directed to his last known home address. IN WITNESS WHEREOF, the parties hereto have executed this Agreement dated this 1st day of March, 1997. LONG ISLAND LIGHTING COMPANY By: /s/ William J Catacosinos ------------------------------ William J. Catacosinos /s/ Michael E. Bray ------------------- Michael E. Bray EX-27 3 FDS UT
UT 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. 1000 3-MOS MAR-31-1998 MAR-31-1997 PER-BOOK 3,699,957 18,870 810,145 77,656 7,242,946 11,849,574 605,022 1,082,276 861,751 2,549,049 638,500 63,598 4,471,675 0 0 0 1,000 1,050 0 0 4,124,702 11,849,574 851,182 57,002 604,179 661,181 190,001 3,574 193,575 105,878 87,697 12,969 74,728 53,748 90,168 159,567 $0.62 $0.62
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