-----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, J86B6qfO9fZ+ExYw3e45vvyqIK1UQcbEeYD60LZJ0VnGoEnHTwc0x89CTOgKSx1s d4hrfKnwtii1bZDTUeiofg== 0000891092-98-000410.txt : 19981118 0000891092-98-000410.hdr.sgml : 19981118 ACCESSION NUMBER: 0000891092-98-000410 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-03571 FILM NUMBER: 98751854 BUSINESS ADDRESS: STREET 1: 333 EARLE OVINGTON BLVD STE 403 CITY: UNIONDALE STATE: NY ZIP: 11553 BUSINESS PHONE: 5165455184 MAIL ADDRESS: STREET 1: 333 EARLE OVINGTON BLVD STE 403 CITY: UNIONDALE STATE: NY ZIP: 11553 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 16 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-3571 LONG ISLAND LIGHTING COMPANY d/b/a LIPA (Exact name of registrant as specified in its charter) New York 11-1019782 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 222-7700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days Yes _X_ No The total number of shares of the registrant's Common Stock $1 par value, outstanding on November 11, 1998, was 100. Long Island Lighting Company d/b/a LIPA Page No. -------- Part I - FINANCIAL INFORMATION Item 1 - Financial Statements Statement of Operations 2-3 Balance Sheet 4-5 Statement of Cash Flows 6 Notes to Financial Statements 7-14 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 15-21 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21 Part II - OTHER INFORMATION 22 Item 1 - Legal Proceedings 22 Item 2 - Changes in Securities and Use of Proceeds 23 Item 3 - Defaults upon Senior Securities 23 Item 4 - Submission of Matters to a Vote of Security Holders 23 Item 5 - Other Information 23 Item 6 - Exhibits and Reports on Form 8-K 23 Signature 24 2 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Statement of Operations (Unaudited) (Thousands of Dollars - Except Share Information) Successor Predecessor Company Company -------------------------- Three Months Ended -------------------------- September 30, -------------------------- 1998 1997 -------------------------- Revenue - Electric $ 693,698 $ 790,331 Expenses Operations - fuel and purchased power 172,900 172,445 Operations and maintenance 194,060 100,990 Depreciation and amortization 50,479 32,537 Base financial component amortization -- 25,243 Rate moderation component amortization -- 9,126 Regulatory liability component amortization -- (22,143) Other regulatory amortization -- 27,261 Operating taxes 80,213 107,684 Federal income tax - current -- 33,997 Federal income tax - deferred and other -- 59,152 --------- ------------ Total Expenses 497,652 546,292 --------- ------------ Operating Income 196,046 244,039 --------- ------------ Other Income and (Deductions) Other income and deductions, net 9,915 1,909 Allowance for other funds used during construction -- 427 Federal income tax - current -- (946) Federal income tax - deferred and other -- 255 --------- ----------- Total Other Income 9,915 1,645 --------- ----------- Income from Continuing Operations Before Interest Charges 205,961 245,684 --------- ----------- Interest Charges and (Credits) Interest on long-term debt 41,821 94,760 Interest on advances from and note payable to the Authority 56,770 -- Other interest 3,915 6,981 Allowance for borrowed funds used during construction (527) (1,252) --------- ------------ Total Interest Charges 101,979 100,489 --------- ------------ Income from continuing operations 103,982 145,195 Loss from discontinued operations net of taxes of zero and ($6,290), respectively -- 811 --------- ------------ Net Income 103,982 144,384 Preferred stock dividend requirements -- 12,948 --------- ------------ Earnings for Common Stock $ 103,982 $ 131,436 ========= ============ Average Common Shares Outstanding N/A 121,341,228 Basic and Diluted Earnings per Common Share N/A $ 1.09 Dividends Declared per Common Share N/A $ 0.445 The accompanying notes are an integral part of these financial statements. 3 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Statement of Operations (Unaudited) (Thousands of Dollars - Except Share Information)
Successor Predecessor Company Company ------------------------------ --------------- Six Months May 29, 1998 to April 1, 1998 Ended September 30, to May 28, September 30, 1998 1998 1997 --------------- ------------- ------------ Revenue - Electric $896,437 $ 330,011 $ 1,350,417 Expenses Operations - fuel and purchased power 239,687 91,762 321,031 Operations and maintenance 228,743 68,993 199,780 Depreciation and amortization 68,434 22,986 64,765 Base financial component amortization -- 16,014 50,486 Rate moderation component amortization -- (39,574) 18,324 Regulatory liability component amortization -- (14,048) (44,286) Other regulatory amortization -- 14,694 31,343 Operating taxes 111,262 60,885 200,319 Federal income tax - current -- (79,081) 60,395 Federal income tax - deferred and other -- 1,219 67,723 -------- ------------ ------------ Total Expenses 648,126 143,850 969,880 -------- ------------ ------------ Operating Income 248,311 186,161 380,537 -------- ------------ ------------ Other Income and (Deductions) Other income and deductions, net 15,311 89,205 6,072 Allowance for other funds used during construction -- 374 1,216 Federal income tax - current -- (62,303) (946) Federal income tax - deferred and other -- (185,541) (375) -------- ------------ ------------ Total Other Income and (Deductions) 15,311 (158,265) 5,967 -------- ------------ ------------ Income from Continuing Operations Before Interest Charges 263,622 27,896 386,504 -------- ------------ ------------ Interest Charges and (Credits) Interest on long-term debt 55,903 61,852 191,684 Interest on advances from and note payable to the Authority 77,333 -- -- Other interest 4,585 4,206 14,247 Allowance for borrowed funds used during construction (690) (540) (2,118) -------- ------------ ------------ Total Interest Charges 137,131 65,518 203,813 -------- ------------ ------------ Income (loss) from continuing operations 126,491 (37,622) 182,691 Income from discontinued operations net of taxes of zero, ($42,651), and ($8,022), respectively -- 36,225 6,855 -------- ------------ ------------ Net Income (Loss) 126,491 (1,397) 189,546 Preferred stock dividend requirements -- 8,037 25,917 -------- ------------ ------------ Earnings (Loss) for Common Stock $126,491 $ (9,434) $ 163,629 ======== ============ ============ Average Common Shares Outstanding N/A 121,822,647 121,243,500 Basic and Diluted Earnings per Common Share N/A ($0.08) $ 1.35 Dividends Declared per Common Share N/A .445 .89
The accompanying notes are an integral part of these financial statements. 4 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Balance Sheet (Thousands of Dollars) Successor Predecessor Company Company ------------ ----------- September 30 March 31, 1998 1998 (unaudited) ----------- ----------- Assets Utility Plant Electric $2,027,927 $ 4,031,510 Gas -- 1,233,281 Common -- 290,221 Construction work in progress 42,735 118,808 Nuclear fuel in process and in reactor 16,431 18,119 ---------- ----------- 2,087,093 5,691,939 Less- Accumulated depreciation and amortization 31,011 1,877,858 ---------- ----------- Total Net Utility Plant 2,056,082 3,814,081 ---------- ----------- Regulatory Assets Base financial component, net of accumulated amortization of $883,496 at March 31, 1998 -- 3,155,334 Rate moderation component -- 434,004 Shoreham post-settlement costs -- 1,005,316 Shoreham nuclear fuel -- 66,455 Unamortized cost of issuing securities -- 159,941 Postretirement benefits other than pensions -- 340,109 Regulatory tax asset -- 1,737,932 Other -- 192,763 ---------- ----------- Total Regulatory Assets -- 7,091,854 ---------- ----------- Current Assets Cash and cash equivalents 552,720 180,919 Special deposits -- 95,790 Customer accounts receivable (less allowance for doubtful accounts of $19,467 and $23,483) 224,327 297,889 Other accounts receivable 12,052 43,744 Accrued unbilled revenues 86,432 124,464 Promissory note receivable 397,000 -- Materials and supplies at average cost -- 54,883 Fuel oil at average cost -- 32,142 Gas in storage at average cost -- 14,634 Prepayments and other current assets 31,373 13,807 ---------- ----------- Total Current Assets 1,303,904 858,272 ---------- ----------- Promissory note receivable 681,467 -- ---------- ----------- Designated funds 280,006 -- ---------- ----------- Nonutility Property and Other investments 19,199 50,816 ---------- ----------- Deferred Charges 56,100 85,702 ---------- ----------- Acquisition adjustment (net of accumulated amortization of $39,093 at September 30, 1998) 4,013,215 -- ---------- ----------- Total Assets $8,409,973 $11,900,725 ========== =========== The accompanying notes are an integral part of these financial statements. 5 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Balance Sheet (Thousands of Dollars) Successor Predecessor Company Company ------------ ----------- September 30 March 31, 1998 1998 (unaudited) ----------- ----------- Capitalization Long-term debt $2,934,074 $ 4,395,555 Unamortized discount on debt -- (13,606) Note Payable - the Authority 4,117,600 -- ---------- ------------ 7,051,674 4,381,949 ---------- ------------ Preferred Stock - redemption required -- 562,600 ---------- ------------ Common stock -- 608,635 Premium on capital stock -- 1,146,425 Capital stock expense -- (47,501) Retained earnings 126,491 956,092 Treasury stock, at cost -- (1,204) ---------- ------------ Total Common Shareowners' Equity 126,491 2,662,447 ---------- ------------ Total Capitalization 7,178,165 7,606,996 ---------- ------------ Regulatory Liabilities Regulatory liability component -- 99,199 1989 Settlement credits -- 59,397 Regulatory tax liability -- 78,913 Other -- 151,922 ---------- ------------ Total Regulatory Liabilities -- 389,431 ---------- ------------ Current Liabilities Current maturities of long-term debt 397,000 101,000 Current redemption requirements of preferred stock -- 139,374 Due to the Authority 613,794 -- Due to KeySpan 63,093 -- Accounts payable and accrued expenses -- 228,583 LRPP payable -- 30,118 Accrued taxes 75,735 34,753 Accrued interest 52,333 146,607 Dividends payable -- 58,748 Class Settlement -- 60,000 Customer deposits 23,275 28,627 ---------- ------------ Total Current Liabilities 1,225,230 827,810 ---------- ------------ Deferred Credits Deferred federal income tax - net -- 2,539,364 Class Settlement -- 46,940 Other 4,887 22,529 ---------- ------------ Total Deferred Credits 4,887 2,608,833 ---------- ------------ Operating Reserves Pensions and other postretirement benefits -- 401,401 Claims and damages 1,691 66,254 ---------- ------------ Total Operating Reserves 1,691 467,655 ---------- ------------ Commitments and Contingencies ---------- ------------ Total Capitalization and Liabilities $8,409,973 $ 11,900,725 ========== ============ The accompanying notes are an integral part of these financial statements. 6 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Statement of Cash Flows (Unaudited) (Thousands of Dollars)
Successor Predecessor Company Company ----------------------------- --------------- Six Months May 29, 1998 to April 1, 1998 Ended September 30, to May 28, September 30, 1998 1998 1997 --------------- ------------- ------------ Operating Activities Net Income $ 126,491 $ (1,397) $ 189,546 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 68,434 27,743 78,162 Base financial component amortization -- 16,014 50,485 Rate moderation component amortization -- (39,574) 18,324 Regulatory liability component amortization -- (131,834) (44,286) Other regulatory amortization -- 14,858 41,611 Rate moderation component carrying charges -- (6,411) (11,914) Class Settlement -- 2,018 8,366 Amortization of cost of issuing and redeeming securities 264 4,964 14,948 Federal income tax - deferred and other -- 56,966 76,052 Allowance for other funds used during construction (690) (418) (1,923) Pensions and Other Post Retirement Benefits -- 12,873 13,265 Gas Cost Adjustment -- 5,369 (1,495) Other (437) 36,099 47,396 Changes in operating assets and liabilities Accounts receivable, net (64,702) 53,765 (9,529) Accrued unbilled revenues (11,791) 47,465 22,463 Materials and supplies, fuel oil and gas in storage -- (31,238) (55,590) Accounts payable and accrued expenses -- 21,068 12,695 Net change in due to the Authority and KeySpan 457,386 -- -- Pensions and other post retirement benefits -- (250,000) -- Accrued taxes 75,734 15,924 5,983 Accrued interest 52,331 (38,393) 3,322 Class Settlement -- (6,918) (30,456) Special deposits -- 66,492 (28,683) Other (11,930) (54,725) (45,595) ----------- --------- --------- Net Cash Provided by (used in) Operating Activities 691,090 (179,290) 353,147 ----------- --------- --------- Investing Activities Construction and nuclear fuel expenditures (31,769) (66,493) (117,468) Shoreham post settlement costs -- (6,650) (20,936) Establish designated funds (280,006) -- -- Investment in subsidiary -- -- (30,000) Acquisition of common stock (2,497,500) -- -- Merger costs, net of cash transferred (61,789) -- -- Other -- (2,009) (1,293) ----------- --------- --------- Net Cash Used in Investing Activities (2,871,064) (75,152) (169,697) ----------- --------- --------- Financing Activities Proceeds from sale of common stock -- 4,184 9,034 Issuance of notes payable -- 350,000 -- Proceeds of note payable - parent 4,949,528 -- -- Repayment of note payable - parent (831,928) -- -- Redemption of long-term debt (1,186,000) (100,000) -- Issuance of preferred stock -- 75,000 -- Redemption of preferred stock (221,600) (116,390) (1,050) Bond issuance costs (48,316) -- -- Preferred stock dividends paid -- (5,711) (25,937) Common stock dividends paid -- (54,147) (107,754) Other (3,990) (2,749) (797) ----------- --------- --------- Net cash Provided by (used in) Financing Activities 2,657,694 150,187 (126,504) ----------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 477,720 (104,255) 56,946 Cash and cash equivalents at beginning of period 75,000 180,919 64,539 ----------- --------- --------- Cash and cash equivalents at end of period $ 552,720 $ 76,664 $ 121,485 =========== ========= =========
The accompanying notes are an integral part of these financial statements. 7 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Notes to Financial Statements For the Three Months Ended September 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- 1. Basis of Presentation As used herein, the term "LILCO" means the Long Island Lighting Company, the publicly owned gas and electric utility company as it existed prior to the LIPA/LILCO merger, as described in Note 2 below, and the term "LIPA" means that company as it exists after the LIPA/LILCO merger as a wholly-owned electric utility subsidiary company of the Long Island Power Authority (the "Authority"), doing business as LIPA. These Notes to Financial Statements reflect events subsequent to May 22, 1998, the date of the most recent Report of Independent Accountants, through the date of this Report on Form 10-Q for the three months ended September 30, 1998. These Notes to Financial Statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations for the three and six months ended September 30, 1998, LIPA's Quarterly Report on Form 10-Q for the three months ended June 30, 1998, LILCO's Audited Financial Statements for the year ended March 31, 1998, and the transition period from January 1, 1997 to March 31, 1997. In addition, please refer to the discussion following regarding the change in control of LILCO on May 28, 1998. The financial information as of September 30, 1998 and 1997, and for the periods in the three and six months then ended is unaudited. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial statements for the periods presented. Operating results for any of the periods presented are not necessarily indicative of results to be expected for the entire year due to the seasonal nature of the electric business. 2. Change in Control On May 28, 1998, LIPA Acquisition Corp., a wholly-owned subsidiary of the Authority, was merged with and into LILCO (the "Merger") pursuant to an Agreement and Plan of Merger dated as of June 26, 1997, by and among LILCO, MarketSpan Corporation (formerly known as BL Holding Corp., and currently known as KeySpan Energy Corporation, "KeySpan"), the Authority and LIPA Acquisition Corp., (the "Merger Agreement"). As a result of the Merger, the Authority became the holder of 100 shares of LILCO's common stock, representing 100% of the outstanding voting securities of LILCO. The former holders of LILCO's common stock, which was widely held by the public, received a pro-rata share of (i) cash consideration of $2,497,500,000 and (ii) 3,440,625 shares of the common stock of KeySpan, which were received by LILCO in exchange for certain assets of LILCO transferred to subsidiaries of KeySpan. Pursuant to the Merger Agreement, the former holders of LILCO's common stock (other than holders of dissenting shares) were deemed to have subscribed for additional shares of the common stock of KeySpan, with an aggregate purchase price equal to the cash consideration. In order to effect the Merger, it was necessary to (i) retire all shares of LILCO's preferred stock, whether by conversion, redemption or cancellation, and (ii) redeem certain of LILCO's bonds, at an additional cost to LIPA of approximately $1,556,900,000. The cash 8 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Notes to Financial Statements For the Three Months Ended September 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- consideration required for the Merger was obtained by the Authority from the proceeds of the issuance and sale of its Electric System General Revenue Bonds, Series 1998A and Electric System Subordinated Revenue Bonds, Series 1 through Series 6. The proceeds from the sale of the bonds were then transferred by the Authority to LIPA in exchange for a promissory note of approximately $4,949,000,000. As a result of the Merger, there was a change in control of LILCO which effectively resulted in the creation of a new reporting entity (the "Successor Company"). Accordingly, the accompanying financial statements for the periods prior to and including May 28, 1998 (the "Predecessor Company") are not comparable to the financial statements presented subsequent to May 28, 1998. A black line has been drawn on the accompanying financial statements to distinguish between the Successor and Predecessor Company balances and activity. Pursuant to the Merger Agreement, on May 28, 1998, immediately prior to the Merger, all of the assets of LILCO employed in the conduct of its gas distribution business and its non-nuclear electric generation business, and all common assets used by LILCO in the operation and management of its electric transmission and distribution business and its gas distribution business and/or its non-nuclear electric generation business (the "Transferred Assets") were sold to KeySpan. The consideration for the Transferred Assets consisted of (i) 3,440,625 shares of the common stock of KeySpan, (ii) 553,000 shares of the Series B Preferred Stock of KeySpan, (iii) 197,000 shares of the Series C Preferred Stock of KeySpan and (iv) promissory notes of $962,900,000. The interest rate and timing of principal and interest payments on the promissory notes from KeySpan are identical to the terms of certain Predecessor Company indebtedness assumed by the Successor Company in the Merger, but issued to finance assets transferred to KeySpan subsidiaries. KeySpan will make principal and interest payments to the Successor Company, when due, and the Successor Company will transfer those amounts to debtholders. The value of the consideration was determined by KeySpan and the Predecessor Company to be equal to the net fair market value of the Transferred Assets. The Transfer was effected by a Bill of Sale, dated as of May 28, 1998, made and executed by LILCO and acknowledged by KeySpan. The remaining assets and liabilities of LILCO acquired by LIPA consist of: (i) LILCO's electric transmission and distribution system, (ii) its net investment in Nine Mile Point Nuclear Power Station, Unit 2 ("NMP2"), (iii) certain regulatory assets and liabilities associated with its electric business, (iv) allocated accounts receivable and other assets and liabilities and (v) substantially all of its long-term debt. The financial statements of the Successor Company include the push down of the Authority's basis, including costs related to the acquisition, in the assets acquired and liabilities assumed. Because of the manner in which the Successor Company's rates and charges will be established by the Authority, the original net book value of the transmission and distribution and nuclear generation assets acquired in the Merger is considered to be their fair value. Because the New York State Public Service Commission will no longer have regulatory oversight of the Successor Company, all regulatory assets and liabilities, as well as the amortization of those assets and liabilities, were eliminated from the financial statements for the periods after May 29, 1998. The excess of the acquisition costs over the fair value of the net assets acquired has been recorded as an intangible asset titled "acquisition 9 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Notes to Financial Statements For the Three Months Ended September 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- adjustment" and is being amortized over a 35 year period, the weighted average useful life of the net plant assets acquired. The Authority was established as a corporate municipal instrumentality of the State of New York, constituting a political subdivision of the State, created by Chapter 517 of the Laws of 1986 (the "LIPA Act"). As such, it is a component unit of the State and is included in the State's annual financial statements. As a wholly-owned subsidiary of the Authority, the Successor Company is exempt from Federal, state and local income taxes. In addition, effective May 29, 1998, the Successor Company's financial statements have been prepared in accordance with standards applicable to governmental entities. 3. Discontinued Operations The income statement of the Predecessor Company for the period April 1, 1998 to May 28, 1998 has been prepared to present the gas business (as transferred to KeySpan subsidiaries pursuant to the Merger Agreement) as a discontinued operation, in accordance with the provisions of APB 30. The income statements for the three and six months ended September 30, 1997, has also been restated to present the gas business in a similar manner. The income from discontinued operations includes revenue from the gas business of approximately $79,979,000, $62,078,000 and $166,480,000 for the period April 1, 1998 to May 28, 1998, and the three and six months ended September 30, 1997, respectively. 4. Commitments and Contingencies The cash consideration portion of the Merger Agreement was based upon preliminary estimated values of the LIPA acquired assets and assumed liabilities, as reflected in the financial records of the Predecessor Company at May 28, 1998. The promissory notes from KeySpan have been adjusted at May 28, 1998 to reflect the refinement of estimated values as of that date. The promissory notes from KeySpan will be further adjusted, pursuant to the Merger Agreement, based upon a final determination of the actual value of acquired net assets as of that date as agreed to by the Successor Company and KeySpan. 5. Capitalization On May 29,1998, the Successor Company received approximately $4,949,000,000 from the Authority in exchange for a promissory note. The interest rate on the note is equal to the interest rate paid by the Authority on certain bonds issued to the public (5.4% at September 30, 1998) and the note will be repaid through revenues collected by the Successor Company from electric customers. The note is collateralized by those revenues. The proceeds of this note were used primarily to (i) repay certain 10 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Notes to Financial Statements For the Three Months Ended September 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- debt of $1,186,000,000, (ii) redeem preferred stock of $339,100,000 (iii) establish certain restricted funds of $311,495,000 and (iv) to acquire all of the then outstanding common stock of LILCO for $2,497,500,000. 6. Management Fees and Contract Costs The expenses of the Successor Company for the period May 29, 1998 to September 30, 1998, reflect charges by the Authority of management fees equal to the Authority's employee and overhead costs, as well as the costs of certain contracts entered into by the Successor Company with KeySpan for the management of its assets. 7. Reclassifications Certain prior period amounts have been reclassified in the financial statements to conform with the current period presentation. 8. Rate Matters Under current New York law, the Authority is empowered to set rates for electric service in the Successor Company's service area without being required by law to obtain the approval of the New York State Public Service Commission (the "PSC") or any other State regulatory body. However, the Authority has agreed, in connection with the approval of the Merger by the New York State Public Authorities Control Board (the "PACB"), that it will not impose any permanent increase, nor extend or reestablish any portion of a temporary rate increase, in average customer rates over a 12 month period in excess of 2.5% without approval of the PSC, following a full evidentiary hearing. Another of the PACB conditions requires that the Authority reduce average rates within the Successor Company's service area by no less than 14% over a ten year period commencing on the date when the Successor Company began providing electric service, when measured against the Predecessor Company's base rates in effect on July 16, 1997 (excluding the impact of the Shoreham tax settlement, but adjusted to reflect emergency conditions and extraordinary unforeseeable events.) The LIPA Act requires that any bond resolution of the Authority contain a covenant that it will at all times maintain rates, fees or charges sufficient to pay the costs of operation and maintenance of facilities owned or operated by the Authority; payments in lieu of taxes; renewals, replacements and capital additions; the principal of and interest on any obligations issued pursuant to such resolution as the same become due and payable, and to establish or maintain any reserves or other funds or accounts required or established by or pursuant to the terms of such resolution. Absent emergency conditions and unforeseeable events, LIPA expects to achieve an average rate reduction of no less than 14% over the ten year period for customers of the Successor Company, commencing on the date of the Merger and the Authority does not expect to increase average customer rates in excess of 2.5% over any 12 month period during the ten-year period following the date of the Merger. For purposes of determining compliance with the 2.5% and 14% PACB 11 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Notes to Financial Statements For the Three Months Ended September 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- conditions described in the first paragraph of this section, the Authority has interpreted the PACB conditions as allowing the exclusion of increases in the cost of electricity paid by the Successor Company's customers related to the Shoreham settlement, other pass-through adjustments and any decreases related to the RICO Credits. The Authority believes that it will be able to satisfy the 14% PACB condition and that it will be able to obtain any PSC approvals necessary to comply with its obligations under the LIPA Act and under the Authority's bond resolutions. If either the PSC or the PACB were to disagree with the Authority's interpretation of the PACB conditions, it may influence the timing and amount of rate increases implemented by the Authority and/or require (i) the modification of that portion of the Authority's plan to accelerate retirement of debt, (ii) the withdrawal of funds from the Rate Stabilization Fund to avoid or minimize rate increases, or (iii) other actions necessary to meet the conditions of the PACB approval. The Successor Company's rates are largely based on the Predecessor Company's pre-Merger rate design to avoid customer confusion and facilitate an efficient transition from Predecessor Company billing to Successor Company billing. In addition, the Successor Company's rates include a fuel and purchased power cost adjustment ("FPPCA"), a payment in lieu of taxes ("PILOT") payments recovery rider, a rider providing for the Shoreham Credits and the Suffolk Surcharge and a rider providing for the RICO Credits. The Successor Company's rates include the FPPCA to adjust rates to reflect significant changes in the cost of fuel, purchased power and related costs. The FPPCA is designed such that customers will not pay for average annual increases above an established base fuel and purchased power cost, or receive a credit for decreases below an established base cost, of less than one percent per year. Expenses for fuel and purchased power cost in excess of or below this level will be recovered from or returned to customers beginning the following year. Should fuel and purchased power costs increase in excess of five percent cumulatively over the original base cost, the FPPCA will recover, from that year forward, all costs in excess of the original base. The LIPA Act requires the Successor Company to make PILOTs to municipalities and school districts equal to the property taxes that would have been received by each such jurisdiction from the Predecessor Company if the acquisition of the Successor Company by the Authority had not occurred, and to make PILOTs for certain New York State and local taxes which would otherwise have been imposed on the Predecessor Company. The PILOT payments recovery rider allows for the Successor Company's rate adjustments to accommodate the PILOTs. Pre-Merger Rate Matters In December 1997, the PSC approved the continuation of the following Predecessor Company ratemaking mechanisms for the rate year ended November 30, 1997: (a) the gas excess earnings mechanism whereby earnings in excess of a return on common equity of 11.0% was allocated equally between ratepayers and shareowners, with the ratepayers' share of excess earnings credited to the regulatory asset created as a result of costs associated with manufactured gas plant site investigation 12 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Notes to Financial Statements For the Three Months Ended September 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- and remediation costs; and (b) the electric Rate Moderation Component ("RMC") and the Long Island Lighting Company Ratemaking and Performance Plan ("LRPP") mechanisms and performance incentive programs. Electric In April 1996, the PSC issued an order directing the Predecessor Company to file financial and other information sufficient to provide a legal basis for setting new rates for the three-year period 1997 through 1999. In compliance with the order, the Predecessor Company submitted a multi-year rate plan to be reviewed by the PSC. As an interim measure, pending the consummation of the Merger or the adjudication of its electric rate filing, the Predecessor Company submitted petitions in May 1997 and December 1997 requesting PSC approval to extend, through the rate years ending November 30, 1996 and 1997, respectively, the provisions of its 1995 electric rate order ( the "1995 Order"). These petitions were approved by the PSC in December 1997 and April 1998, respectively. The basis of the 1995 Order included minimizing future electric rate increases while continuing to provide for the recovery of the Predecessor Company's regulatory assets and retaining consistency with the rate moderation agreement objective of restoring the Predecessor Company to financial health. The 1995 Order, which became effective December 1, 1994, froze base electric rates, reduced the Predecessor Company's allowed return on common equity from 11.6% to 11.0% and modified or eliminated certain performance based incentives. For the rate year ended November 30, 1997, the Predecessor Company earned 12.7 basis points, or approximately $2.9 million, net of tax effects, as a result of its performance under all incentive programs. The deferred balances resulting from the net margin and expense reconciliations, and earned performance-based incentives are netted at the end of each rate year under the 1995 Order. The first $15 million of the total deferral was recovered from or credited to ratepayers by increasing or decreasing the RMC balance. Deferrals in excess of the $15 million, upon approval of the PSC, were refunded to or recovered from the customers through the FCA mechanism over a 12-month period. For the rate year ended November 30, 1997, the amount to be returned to customers resulting from the revenue and expense reconciliations, performance-based incentive programs and associated carrying charges totaled $4.1 million. Consistent with the mechanics of the LRPP, it is anticipated that the entire balance of the deferral will be used to reduce the RMC balance upon approval by the PSC of the Predecessor Company's reconciliation filing which was submitted to the PSC in March 1998. For the rate year ended November 30, 1996, the Predecessor Company recorded a net deferred LRPP credit of approximately $14.5 million which was subsequently applied as a reduction to the RMC upon the PSC's approval of the Predecessor Company's reconciliation filing in December 1996. For the rate year ended November 30, 1995, the Predecessor Company recorded a net deferred credit of approximately $41 million. The first $15 million of the deferral was applied as a reduction to the RMC while the remaining portion of the deferral of $26 million will be returned to customers through the fuel cost adjustment when approved by the PSC. Another mechanism of the LRPP provided that earnings in excess of the allowed return on common 13 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Notes to Financial Statements For the Three Months Ended September 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- equity, excluding the impacts of the various incentive and/or penalty programs, were used to reduce the RMC. For the rate years ended November 30, 1997, 1996 and 1995, the Predecessor Company earned $4.8 million, $9.1 million, and $6.2 million, respectively, in excess of its allowed return on common equity. These excess earnings were applied as reductions to the RMC. Gas In May 1997, the Predecessor Company submitted a petition requesting PSC approval to extend through the rate year ending November 30, 1997, the gas excess earnings sharing mechanism established in its prior three-year gas rate settlement agreement which expired on November 30, 1996. Pursuant to this request, earnings in excess of a return on common equity of 11.0% were to be allocated equally between customers and shareowners with the customers' share of excess earnings credited to the regulatory asset created as a result of costs associated with manufactured gas plant ("MGP") site investigation and remediation costs. This request was approved by the PSC in December 1997. As a result of this mechanism, the customer's allocation of excess earnings amounted to $6.3 million for the rate year ended November 30, 1997, and through the date of the Merger, was to be applied to offset costs incurred to investigate and remediate MGP sites. The prior gas rate settlement provided that earnings in excess of a 10.6% return on common equity be shared equally between the Predecessor Company's firm gas customers and its shareowners. For the rate years ended November 30, 1996 and 1995, the firm gas customers' portion of gas excess earnings totaled approximately $10 million and $1 million, respectively. In 1997, the Predecessor Company was granted permission by the PSC to apply the customers' portion of the gas excess earnings and associated carrying charges for the 1996 and 1995 rate years to the recovery of deferred costs associated with post-retirement benefits other than pensions and costs incurred for investigation and remediation of MGP sites. 14 Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Notes to Financial Statements For the Three Months Ended September 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- 9. Subsequent Events On October 12, 1998, LIPA commenced a tender offer for its 7.30% Debentures Due 2000, 6.25% Debentures Due 2001, 7.05% Debentures Due 2003, 7.00% Debentures Due 2004, 7.125% Debentures Due 2005 and 9.00% Debentures Due 2022 (collectively, the "Debentures"). In conjunction with the tender offers, LIPA also commenced a consent solicitation from the holders of the Debentures to effect an amendment to the indentures under which the Debentures were issued. The amendment deletes an inoperative provision in the indentures. As of October 26, 1998, the requisite consents for the amendment to the indentures were received. The tender offers for the Debentures expired at 5:00 p.m., New York City time, on November 9, 1998, and LIPA purchased an aggregate principal amount of Debentures including accrued interest in the amount of $1,131,671,323 on November 12, 1998 pursuant to the tender offers. Payment for Debentures purchased pursuant to the tender offers was made from the sale of $1,313,800,000 Electric System General Revenue Bonds, Series 1998B (the "Refinancing Bonds") of the Authority which closed on November 12, 1998. Under the terms of the financing agreement dated as of May 1, 1998, between LIPA and the Authority, a portion of the proceeds from the sale of the Refinancing Bonds were advanced to LIPA to fund payment for the tendered Debentures. In addition, on November 12, 1998, the Authority closed the sale of $250,000,000 Electric System Subordinated Revenue Bonds, Series 7. On October 26, 1998 LIPA sent a notice of redemption to the holders of its 7.50% Debentures Due 2007 calling for redemption on November 25, 1998 all of such debentures at a redemption price equal to 103.54% of the $142,000,000 aggregate principal amount outstanding. In addition, on October 27, 1998 LIPA sent a notice of redemption to the holders of its 8.90% Debentures Due 2019 calling for redemption on November 27, 1998 all of such debentures at a redemption price equal to 105.94% of the $420,000,000 aggregate principal amount outstanding. On November 12, 1998, LIPA defeased certain of its New York State Energy Research and Development Authority notes in the amount of $379,246,422. In October 1998 the Board of Trustees of the Authority approved and LIPA subsequently issued rebate checks to customers totaling approximately $158.7 million and also provided credits against certain customers statements totaling approximately $9.7 million. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements This report contains statements which, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1996. In this respect, the words "estimate," "project," "anticipate," "expect," "intend," "believe" and similar expressions are intended to identify forward-looking statements. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. A number of important factors affecting the Registrant's business and financial results could cause actual results to differ materially from those stated in the forward-looking statements. Those factors include state and federal regulatory rate proceedings, competition, and certain environmental matters each as discussed herein, in the Registrant's Annual Report on Form 10-K filed May 28, 1998, for the year ended March 31, 1998, or in other reports filed by the Registrant with the Securities and Exchange Commission. General Effective May 29, 1998, MarketSpan (currently known as KeySpan Energy Corporation, "KeySpan"), provides operations and management services for the transmission and distribution system of the Successor Company through a management services agreement. The Successor Company contracts for capacity from the fossil fired generating plants of KeySpan through a power supply agreement. Energy is purchased by KeySpan on the Successor Company's behalf through an energy management agreement. The following table combines the condensed results of operations of both the Predecessor and Successor Companies in order to facilitate comparison of the six months ended September 30, 1998 and 1997.
Successor Predecessor Predecessor Company Company Total Company ------------------ ------------------ ------------------- ------------------ May 29,1998 to April 1, 1998 to April 1, 1998 to April 1, 1997 to September 30, May 28, September 30, September 30, 1998 1998 1998 1997 ------------------ ------------------ ------------------- ------------------ (in thousands) (in thousands) (in thousands) (in thousands) Electric Revenues $896,437 $ 330,011 $1,226,448 $1,350,417 Operating Expenses 648,126 143,850 791,976 969,880 Other Income and (Deductions) 15,311 (158,265) (142,954) 5,967 Interest Charges 137,131 65,518 202,649 203,813 Income (Loss) from Continuing Operations $126,491 $ (37,622) 88,869 182,691
The table highlights the effects of the Merger, which includes lower electric revenues as a result of the Successor Company's rate reduction (approximately 20% for all customers effective May 29, 1998). As a result of the Merger, the New York Public Service Commission does not have jurisdiction over the Successor Company with respect to the determination of rates and charges. Rates and 16 charges for the Successor Company will be determined by the Authority. Therefore, adjustments were made on May 29, 1998 to eliminate all regulatory assets and liabilities on the balance sheet; accordingly, the results of operations for the period May 29, 1998 to September 30, 1998 exclude the amortization of such amounts. In addition, adjustments were made by the Successor Company on May 29, 1998 to eliminate deferred tax assets and liabilities due to the tax exempt status of the Authority. Therefore, the results of operations for the period May 29, 1998 to September 30, 1998 do not include a provision for income taxes. Earnings per Common Share Net losses for the period beginning April 1, 1998 and ending May 28, 1998 were $9.4 million or $0.08 per common share. Earnings for common stock for the six months ended September 30, 1997, were $163.6 million or $1.35 per common share. The results for the period ended May 28, 1998 were negatively impacted by merger-related expenses such as legal, accounting, financial and tax consultants, certain severance payments made to Predecessor Company officers, and Federal income taxes resulting from the Merger. These items were partially offset by the positive impact on earnings caused by the change in method of amortizing the Rate Moderation Component (RMC) discussed below under the caption regulatory amortization. Revenues Electric The decrease in electric revenues of approximately $96.6 million and $124.0 million for the three and six months ended September 30, 1998, respectively, when compared to the same period in 1997, was principally the result of the 20% rate reduction, for all customers, effective May 29, 1998. Partially offsetting the reduction in revenues was an increase in usage by existing customers which may be attributable to a number of factors including the relative humidity, timing of hot weather, a strong and growing economy and price elasticity reflecting the effect of the Successor Company's 20% rate reduction. Fuel and Purchased Power Fuel and purchased power expense for the three and six months ended September 30, 1998 and 1997, were as follows:
Three Months Ended Six Months Ended September 30, September 30, September 30, September 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- (in millions) (in millions) (in millions) (in millions) Oil $ 35 $ 32 $ 62 $ 50 Gas 53 59 96 111 Nuclear 2 3 3 7 Purchased 83 78 171 153 ---- ---- ---- ---- Total $173 $172 $332 $321 ==== ==== ==== ====
17 For the three and six months periods ended September 30, 1998, electric fuel costs increased, when compared to the same periods in 1997. The increase for the three and six month periods ended September 30, 1998, is primarily the result of higher sales volumes caused by warmer weather. However, the increase in fuel costs was mitigated as a result of an agreement between the Authority and KeySpan which requires that the most economical energy be delivered, whether that comes from generation owned by KeySpan or purchased from other sources. As a result of this agreement, oil fired generation was increased and production with less economical gas was reduced. Electric Energy Available The percentage of total electric energy available, by type of fuel, for electric operations for the three and six months ended September 30, 1998 and 1997 were as follows:
Three Months Ended Six Months Ended September 30, September 30, September 30, September 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- (in millions) (in millions) (in millions) (in millions) Oil 26% 16% 24% 14% Gas 37% 47% 35% 46% Nuclear 7% 8% 6% 8% Purchased 30% 29% 35% 32% --- --- --- --- Total 100% 100% 100% 100% === === === ===
Operations and Maintenance Operations and Maintenance, ("O&M"), expense increased approximately $93 million during the three month period ended September 30, 1998, when compared to the comparable period in 1997. The increase is primarily due to the manner in which the Predecessor Company classifies certain expenses such as depreciation and amortization, property taxes, payroll and other operating taxes. These costs are incurred by the Successor Company as part of the costs of certain contracts entered into by the Authority with KeySpan for the management of the Successor Company's assets and are classified as O&M expense by the Successor Company. In addition, there were charges incurred by the Successor Company related to the overhead expenses of the Authority and an increase in storm costs. For the six month period ended September 30, 1998, O&M increased by approximately $98 million as a result of the items noted above plus higher accruals for doubtful accounts and the recognition of certain employee benefit expenses recognized during the period April 1, 1998 through May 28, 1998. Depreciation and amortization Depreciation and amortization expense increased for the three and six month periods ended September 30, 1998 when compared to the same periods of the prior year primarily as a result of the amortization of acquisition costs totaling approximately $10 million per month beginning June 1998. This increase was partially offset by the absence of depreciation expense on the 18 Predecessor Company's non-nuclear generating assets which is included in O&M as it is part of the management services agreement billings. Operating taxes Operating taxes decreased during the three and six month periods ended September 1998, when compared to the comparable periods of 1997, as a result of the absence of property and payroll taxes related to the operation of the non-nuclear generating facilities of the Predecessor Company and reduced revenue taxes (due to lower revenues) partially offset by the PILOTS on the Shoreham Nuclear Power Station (Predecessor Company was able to capitalize these PILOTS under its electric rate structure). Regulatory amortization For the three month period ended September 30, 1998, the amortization of various regulatory assets and liabilities were not recorded as a result of the adjustments made on May 29, 1998, to eliminate the related regulatory assets and liabilities. The Rate Moderation Component ("RMC") reflected the difference between the Predecessor Company's electric revenue requirements under conventional ratemaking and the revenues provided by the rate structure in effect through May 28, 1998. The RMC amortization was adjusted by the operation of the Predecessor Company's Fuel Moderation Component ("FMC") mechanism and the difference between the Predecessor Company's share of actual operating costs at NMP2 and amounts provided for in electric rates. Included in the six month period ended September 30, 1998, however, was a non-cash credit to income of approximately $39.6 million, (recorded during the period April 1, 1998 through May 28, 1998), compared to a non-cash charge of $18.3 million for the comparable period in 1997. In December 1997, the Predecessor Company petitioned the New York State Public Service Commission ("PSC") to change the monthly amortization of the RMC to a method designed to compensate for the seasonality of the electric business. Accordingly, effective December 1, 1997, the Predecessor Company began recording RMC amortization on a non-levelized basis. Previously, the Predecessor Company had amortized the RMC on a straight-line basis over each 12 month period beginning December 1. As a result of the above change, for the period from April 1, 1998 to May 28, 1998, the Predecessor Company recorded non-cash credits of $46.5 million more than it would have under the previous method. Federal Income Tax The decrease in operating Federal income tax expense for the three and six months ended September 30, 1998, when compared to the same period in 1997, was principally the result of the fact that the Successor Company is not subject to Federal income taxes, various adjustments related to the Merger, and a decrease in operating pretax book income. The increase in non-operating Federal income tax expense of approximately $246 million for the six months ended September 30, 1998, when compared to the same period in 1997, was principally the result of an increase in non-operating pretax income, various adjustments related to the Merger, the reversal of previously recognized tax benefits because of the settlement of an IRS audit for tax years 1981 through 1989, partially offset by the fact that the Successor Company is not subject to Federal income taxes. 19 Other Income and Deductions The increase in the other income and deductions of approximately $98 million for the six months ended September 30, 1998, when compared to the same period in 1997 was primarily due to a settlement reached with the IRS in May 1998, by the Predecessor Company with respect to an audit covering the years 1981 to 1989. As a result of the settlement, the Predecessor Company released previously established reserves of approximately $117 million. The release of these reserves had no impact on earnings as the reversal of the reserve in May was offset by an increase in tax expense during this period. In addition, there was an increase in interest income of approximately $15 million due to excess cash maintained by the Successor Company from the proceeds of the promissory note from the Authority. These increases were partially offset by approximately $36 million of merger related expenses recognized by the Predecessor Company during the period April 1, 1998 to May 28, 1998. The increase in other income and deductions of approximately $8 million for the three months ended September 30, 1998, when compared to the same period in 1997, was primarily due to an increase in interest income resulting from excess cash maintained by the Successor Company from the proceeds of the promissory note from the Authority. Liquidity and Capital Resources At September 30, 1998, LIPA had cash and cash equivalents of $552.7 million. In addition, LIPA had designated funds aggregating $280.0 million on hand, $142.5 million and $103.5 million of which are available to fund a portion of the rebate checks to customers and capital expenditures, respectively. See "Financial Statements - Notes to Financial Statements - Subsequent Events." In addition, pursuant to a financing agreement between LIPA and the Authority dated May 1, 1998 (the "Financing Agreement"), at September 30, 1998, LIPA had an additional $335.5 million available to it from the Authority. Pursuant to the Financing Agreement, all cash generated by the assets of LIPA are paid immediately to the Authority, which in turn disburses monies for payment of the expenses of the Authority and LIPA. During the remainder of 1998, LIPA plans to use cash for the purchase of certain of its outstanding debentures pursuant to a tender offer, the redemption of certain of its debentures and the defeasance of certain of its New York State Energy Research and Development Authority ("NYSERDA") notes. See "Financial Statements - Notes to Financial Statements - Subsequent Events." During the twelve months subsequent to September 30, 1998, LIPA intends to refinance $169.8 million of its NYSERDA notes, and capital expenditures are expected to be made by LIPA in the ordinary course of business for purposes of the normal upgrading and expansion of its system. In addition, the collection of electric revenues from customers is expected to be sufficient to meet LIPA's operating needs and debt service requirements for at least the twelve months subsequent to September 30, 1998. Impact of Year 2000 The Authority recently purchased new computer software to support certain activities of the Successor Company and believes that these systems will be Year 2000 compliant. Management also believes that, based on available information, it will be able to manage its Year 2000 transition for systems and infrastructure, without any material adverse effect on its business operations or financial prospects. However, there can be no assurance that failure to resolve any issue relating to such transition would not have a material adverse effect on the Successor Company. The Successor Company has had discussions with KeySpan, their largest vendor, who is responsible for the management and operation of the Successor Company's transmission and distribution system, and KeySpan has indicated that they have evaluated the extent to which modifications to its computer software, hardware and database will be necessary to accommodate the year 2000. KeySpan's computer applications are generally based on two digits and do require some additional programming to recognize the start of the new millennium. A corporate-wide program has been established by KeySpan to review all software, hardware, embedded systems and associated compliance plans of KeySpan and its subsidiaries. The program includes both information technology (IT) and non-IT systems. The critical non-IT systems are generally in the areas of electric production, distribution, transmission, gas distribution and communications. The readiness of suppliers and vendor systems is also under review. The project is under the direction of the Year 2000 Program Office, chaired by the Vice President, Technology Operations and Corporate Y2K Officer. The critical areas of operations are being addressed through a business process review methodology. Each of KeySpan's critical business processes is being reviewed to: identify and inventory sub-components; assess for year 2000 compliance; establish repair plans as necessary; and test in a year 2000 environment. The inventory phase for the IT systems is 100% complete and 95% complete for non-IT systems. The total assessment phase is 100% 20 complete for the IT systems, and 50% complete for non-IT systems. The assessment phase is expected to be complete by January 1, 1999. Hardware, software and embedded systems are being tested and certified to be Year 2000 complaint. Repair and testing to sustain operability is now 65% complete for the IT systems and 20% complete for the non-IT systems. Components needed to support the critical business process and associated business contingency plans are expected to be ready for the year 2000 by July 1, 1999. Vendors and business partners needed to support the critical business processes of KeySpan are also being reviewed for their Year 2000 compliance. At this time none of these vendors have indicated to KeySpan that they will be materially affected by the year 2000 problem. By December 1999, KeySpan expects to spend a total of approximately $30.9 million to address the year 2000 issue. As of October 31, 1998, $11.3 million has been expended on the project. The largest percent expended is attributable to the assessment, repair and testing of corporate IT supported computer software and in-house written applications, which totals $8.4 million. In 1998, Year 2000 IT costs represent 11.6% of the total IT budget. In 1999, the IT Year 2000 costs are expected to be 8.3% of the IT budget. The year 2000 issue has not directly resulted in delaying any IT projects. Presently, KeySpan expects that cash flow from operations and cash on-hand will be sufficient to fund year 2000 expenditures. KeySpan is presently in the process of analyzing each of the critical business processes to identify possible Year 2000 risks. Each critical business process will be certified by the responsible corporate officer as being Year 2000 ready. However, the most reasonable likely worst case scenarios are also being identified. Business operating procedures will be reviewed to ensure that risks are minimized when entering the Year 2000 and other high risk dates. Contingency plans are being developed to address possible failure points in each critical business process. While KeySpan must plan for the following worst case scenarios, management believes that these events are improbable. Loss of gas pipeline delivery: KeySpan's generation subsidiary receives gas delivery from multiple national and international pipelines and, therefore the effects of a loss in any one pipeline can be mitigated through the use of other pipelines. Complete loss of all the supply lines is not considered a reasonable scenario. Nevertheless, the impact of the loss of any one pipeline is dependent on temperature and vaporization rate. The partial loss of gas supply will not affect KeySpan's ability to supply electricity since many of the plants have the ability to operate on oil. Loss of electric grid inter-connections/KeySpan operated electric distribution facilities Electric utilities are physically connected on a regional basis to manage electric load. This is often referred to as the regional grid. Presently, KeySpan is working with other regional utilities to develop a coordinated operating plan. Should there be an instability in the grid, KeySpan has the ability to remove itself and operate independently. Certain electric system components such as individual generating units, transmission and distribution system facilities, and the electric energy management system have the potential to malfunction due to Year 2000 problems. KeySpan has inventoried electric system components 21 and developed a plan to certify mission critical process as Year 2000 compliant. Contingency plans are being developed, where appropriate, for loss of critical system elements. KeySpan presently estimates that contingency plans regarding its electric facilities should be completed by July 1999. Loss of telecommunications: KeySpan has a substantial dependency on many telecommunication systems and services for both internal and external communications. External communications with the public and the ability of customers to contact KeySpan in cases of emergency response, is essential. KeySpan intends to coordinate its emergency response efforts with the offices of emergency management of the various local governments within its service territory. Internally, there are a number of critical processes in both the gas and electric operating areas that rely on external communication providers. Contingency plans will address methods for manually monitoring these functions. These contingency plans, KeySpan presently estimates, should be finalized by July 1999. In addition to the above, KeySpan is also planning for the following scenarios: short term reduction in system power generating capability; limitation of fuel oil operations; reduction in quality of power output; loss of automated meter reading; loss of ability to read, bill and collect; and loss of the purchasing/materials management system. KeySpan believes that, with modifications to existing software and conversions to new hardware and software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed on time, and contingency plans fail the Year 2000 issue could have a material adverse impact on the operations of the Successor Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk None 22 Part II. OTHER INFORMATION Item 1. Legal proceedings LIPA has been named as a nominal defendant in a derivative suit pending in the United States District Court for the Eastern District of New York entitled Sylvester v. Catacosinos, et al. A motion to dismiss on behalf of LIPA was filed on September 23, 1998. In addition, LIPA has been named as a defendant in an action brought by the County of Suffolk that is pending in New York State Supreme Court, Suffolk County, entitled County of Suffolk v. KeySpan. The response date has been postponed until such time as it is determined whether the action will be consolidated with a consolidated class action pending in New York State Supreme Court, Nassau County, entitled In re KeySpan Corporation Shareholder Litigation. Former officers and directors of LILCO also have been named as defendants in each of these actions. The complaints in the foregoing actions allege in substance that certain former officers of LILCO received excessive compensation which totaled approximately $67 million in connection with the closing of Brooklyn Union's merger with LILCO and with the Authority's acquisition of the common stock of LILCO. The Sylvester lawsuit seeks damages of an unspecified amount. The complaint brought by the County of Suffolk seeks that the defendants make restitution, or pay damages, of $67 million. Because the cases are in a very early stage, at which no discovery has yet taken place, LIPA cannot express an opinion as to the likelihood of any liability. LIPA has notified KeySpan of its entitlement to indemnification pursuant to an indemnification agreement dated June 26, 1997 for any losses LIPA suffers as a result of these litigations. LIPA expects that KeySpan will honor the request for indemnification. On September 28, 1998, Suffolk County and the Towns of Huntington and Babylon (collectively, the "Plaintiffs") brought a class action on behalf of themselves and all electric utility ratepayers in Suffolk County (the "Ratepayers") against the Authority, LIPA, KeySpan and others in the United States District Court for the Eastern District of New York entitled County of Suffolk et al. v. Long Island Power Authority, et al. (the "Huntington Lawsuit"). The Huntington Lawsuit alleges (i) that there exists a "regulatory compact" under which the Ratepayers have a legally protected property right to receive or share in the "capital gains" to KeySpan resulting from the Merger, (ii) that "capital gains" are recoveries in excess of net book value received on the disposition of LILCO's non-Shoreham tangible and intangible assets, (iii) that the amount of the alleged "capital gains" is not presently known but is believed by the Plaintiffs to be no less than $1 billion, and (iv) that the failure to refund this alleged "capital gain" directly to the Ratepayers unlawfully deprived them of their property under federal and state constitutional provisions. With respect to certain deferred tax reserves carried on the books of LILCO at the time of the Merger representing amounts collected from the Ratepayers that were to be used to pay federal income taxes with respect to Shoreham but had not been used at such time, the Plaintiffs allege that (i) this deferred tax reserve was in excess of $800 million, (ii) LILCO was required to refund this amount to the Ratepayers and (iii) KeySpan has been unjustly enriched by not making this refund. Based on these allegations, Plaintiffs are seeking judgements, among other things, (i) awarding damages against KeySpan and LIPA for impairment of contract, breach of contract and conversion and (ii) declaring that KeySpan holds the proceeds of the Merger attributable to the 23 "capital gains" and the deferred tax reserve in trust for the benefit of the Ratepayers and ordering KeySpan to make a full accounting of such proceeds. LIPA believes that, although the recovery sought by Plaintiffs could be material in amount, any such recovery would not have a material net financial impact on LIPA or its ratepayers. Item 2. Changes in securities and use of proceeds None Item 3. Defaults upon senior securities None Item 4. Submission of matters to a vote of security holders None Item 5. Other information None Item 6. Exhibits and reports on form 8-k (A) Exhibits 4(c) Financing Agreement Note dated as of May 28, 1998. 10(ii) Dealer Manager Agreement between Salomon Smith Barney, Inc. and Long Island Lighting Company d/b/a LIPA dated as of October 12, 1998. 10(jj) Financing Agreement dated as of May 1, 1998 between the Long Island Power Authority and LIPA Acquisition Corp. 27 Financial Data Schedule. (B) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1998. 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 16, 1998 LONG ISLAND LIGHTING COMPANY d/b/a LIPA (Registrant) /s/ David P. Warren ------------------------------------------ David P. Warren Chief Financial Officer Item 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 4(c) Financing Agreement Note dated as of May 28, 1998. 10(ii) Dealer Manager Agreement between Salomon Smith Barney, Inc. and Long Island Lighting Company d/b/a LIPA dated as of October 12, 1998. 10(jj) Financing Agreement dated as of May 1, 1998 between Long Island Power Authority and LIPA Acquisition Corp. 27 Financial Data Schedule. (B) Reports on Form 8-K None EX-4 2 FINANCING AGREEMENT NOTE LIPA ACQUISITION CORP. FINANCING AGREEMENT NOTE FOR VALUE RECEIVED, the undersigned LIPA Acquisition Corp., a New York business corporation (the "Subsidiary"), hereby promises to pay to the order of the Long Island Power Authority, a corporate municipal instrumentality of the State of New York (the "Authority"), on or before each due date for the payment of the principal of and redemption price, if any, or interest on, or other payments required under, Authority Obligations (as defined in the Financing Agreement hereinafter referred to), until the same shall have been paid in full or provision for the payment thereof in full shall have been made in accordance with the Resolution (as defined in the Financing Agreement) or the provisions thereof, payments in an amount which, when added to any moneys then on deposit under the Resolution and available therefor, including any dividends theretofore paid to the Authority and held thereunder, shall be equal to the amount payable on such due date with respect to the Authority Obligations as provided in the Resolution, including amounts due for the payment of the principal of and sinking fund installments and premium, if any, and interest on the Bonds. In addition, the Subsidiary shall pay or cause to be paid to the Authority, as and when the same shall become due, all other amounts due and payable by the Authority under the Resolution and all other documents entered into by the Authority in connection with the Authority Obligations, together with interest thereon at the then applicable rate. In order to assure a source of payment of and security for this Note, in accordance with, and as more particularly set forth in, the Financing Agreement, the Subsidiary has given, granted, conveyed and transferred to the Authority all of its right, title and interest in and to the Revenues and certain other assets and interests. The Subsidiary hereby agrees that the Authority may apply such Revenues and any amounts received by the Authority in respect of such other assets and interests to the payment hereof in accordance with the Resolution. This Note is issued pursuant to Section 2.2 of the Financing Agreement by and between the Authority and the Subsidiary, dated as of May 1, 1998, as amended and supplemented (the "Financing Agreement"). The principal amount from time to time due and owing hereunder, the scheduled amortization thereof and related interest rates (or the method of determining the same) shall evidenced by the periodic delivery to the Subsidiary of a certificate of an Authorized Officer of the Authority setting forth the same. Payments shall be made at such time or times, such office or offices and in such manner as shall be specified by the Authority. During the occurrence and continuance of any event of default as defined in the Financing Agreement, the Authority (or any permitted assignee under the Financing Agreement) may exercise any of the remedies provided in the Financing Agreement. THIS NOTE SHALL NOT BE A DEBT OF THE STATE OF NEW YORK OR ANY MUNICIPALITY, AND NEITHER THE STATE OF NEW YORK NOR ANY MUNICIPALITY SHALL BE LIABLE THEREON. NEITHER THE CREDIT, THE REVENUES NOT THE TAXING POWERS OF THE STATE OF NEW YORK OR ANY MUNICIPALITY SHALL BE, OR SHALL BE DEEMED TO BE, PLEDGED TO THE PAYMENT OF THIS NOTE. No recourse shall be had for the payment of this Note, or for any claim based on this Note or on the Financing Agreement, against any director or officer of the Subsidiary. This Note shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the Subsidiary has caused this Note to be duly executed and their corporate seals to be affixed hereto. DATED as of: May 28, 1998 LIPA ACQUISITION CORP. By: /s/Richard M. Kessel ------------------------------- Chairman (SEAL) Attest: /s/ Laurie Leat - ---------------------------------- Secretary 2 EX-10 3 DEALER MANAGER AGREEMENT DEALER MANAGER AGREEMENT October 12, 1998 Salomon Smith Barney, Inc. As Dealer Manager 7 World Trade Center, 42nd Floor New York, New York 10048 Ladies and Gentlemen: Long Island Lighting Company d/b/a LIPA (the "Purchaser") plans to make Offers for any and all of its 7.30% Debentures Due 2000 (the "7.30% Debentures"), 6.25% Debentures Due 2001 (the "6.25% Debentures"), 7.05% Debentures Due 2003 (the "7.05% Debentures"), 7.00% Debentures Due 2004 (the "7.00% Debentures"), 7.125% Debentures Due 2005 (the "7.125% Debentures") and 9.00% Debentures Due 2022 (the "9.00% Debentures" and together with each of the other series of debentures specified in this sentence, the "Securities") (each an "Offer" and collectively the "Offers") upon the terms and subject to the conditions set forth in the Offer to Purchase and Consent Solicitation Statement and the Letter of Transmittal (including the attachments thereto) attached hereto as Exhibit A (collectively, the "Offer Letter"). Capitalized terms used herein and not defined shall have the meaning ascribed to them in the Offer to Purchase and Consent Solicitation Statement. In conjunction with the Offers, the Purchaser is soliciting (the "Solicitation") consents (the "Consents") from Holders of the Securities of at least 66 2/3% of the outstanding aggregate principal amount of all series of Securities to the adoption of a certain amendment to the Indentures under which the Securities were issued. The Purchaser hereby appoints Salomon Smith Barney, Inc. as Dealer Manager (the "Dealer Manager") in connection with the Offers and the Solicitation and authorizes the Dealer Manager to act on its behalf in accordance with this agreement (the "Agreement") and the terms of the Offer Letter, which Offer Letter has been approved by the Purchaser and which the Dealer Manager is authorized to use in connection with the solicitation of tenders and Consents. The Dealer Manager agrees to furnish no written material to holders in connection with the Offers and the Solicitation other than the Offer Letter. The Purchaser and the Dealer Manager acknowledge and agree that the Offers will not comply with Rule 14e-1 under the Securities Exchange Act of 1934, as amended ("Rule 14e-1") to the extent permitted under the no-action letters to Merrill, Lynch, Pierce, Fenner & Smith Incorporated available July 19, 1993, The Times Mirror Company available November 15, 1994 and Salomon Brothers Inc. available October 1, 1990. 1. Solicitation of Tenders and Consents. (a) The Dealer Manager will use its best efforts to solicit tenders of Securities and Consents pursuant to the Offers. The Dealer Manager shall have no liability to the Purchaser hereunder or for any act or omission on the part of any securities broker or dealer, commercial bank or trust company which may solicit tenders or Consents hereunder except for the gross negligence or willful misconduct of the Dealer Manager. (b) The Purchaser will not use or publish any material in connection with the Offers and Solicitation, or refer to the Dealer Manager in any such material, without first obtaining the consent of the Dealer Manager. The Purchaser will promptly inform the Dealer Manager of any events known to the Purchaser that might require any change in the Offer Letter. The Purchaser will promptly inform the Dealer Manager of any litigation or administrative action known to the Purchaser with respect to the Offers and the Solicitation. (c) The Purchaser agrees to furnish to the Dealer Manager, to the extent the same is available to the Purchaser, the names and addresses of, and principal amount of Securities held by, the registered holders and beneficial owners of Securities or interests therein as of a recent date. The Dealer Manager will use such information only in connection with the Offers and the Solicitation and will not furnish such information to any other person except in connection with the Offers and the Solicitation. 2. Compensation and Expenses. (a) The Purchaser shall pay to the Dealer Manager, as compensation for its services as Dealer Manager, if the Securities tendered pursuant to the Offers are purchased, a fee of 0.25% for each $1,000 principal amount of the outstanding Securities purchased pursuant to the Offers, payable concurrently with the payment for Securities by the Purchaser under the Offers. (b) Whether or not any Securities are purchased pursuant to the Offers, the Purchaser shall pay all expenses of the preparation, printing, mailing and publishing of the Offer Letter and all its other expenses in connection with the Offers and the Solicitation, together with all of the Dealer Manager's expenses, including its out-of-pocket expenses (which will be documented at the request of the Purchaser) and the fees and the disbursements of the Dealer Manager's counsel, incurred by the Dealer Manager in connection with its serving as Dealer Manager. 3. Certain Representations and Warranties by the Purchaser. The Purchaser represents and warrants to the Dealer Manager that: (a) The Purchaser is validly existing as a New York corporation in good standing under the laws of the State of New York. (b) The Purchaser has duly taken all necessary corporate action to authorize the making of the Offers and the execution, delivery and performance of this Agreement; and this Agreement has been duly executed and delivered by the Purchaser. 2 (c) The Offer Letter does not and (as amended or supplemented, if amended or supplemented) will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. (d) The making and consummation of the Offers, including any related borrowings or other provisions for the payment for Securities by the Purchaser, and the execution, delivery and performance by the Purchaser of this Agreement do not and will not conflict with, or result in the acceleration of any obligation under or in a breach of, or constitute a default under, any of the provisions of any material resolution, indenture, loan agreement or mortgage to which the Purchaser is a party or by which it is bound or to which any material part of its property or assets is subject, and do not and will not contravene in any material respect, any Federal, state or local law, rule or regulation known to the Purchaser, or any order applicable to the Purchaser of any court or of any other governmental agency or instrumentality having jurisdiction over it or any material part of its property. 4. Certain Representations and Warranties by the Dealer Manager. The Dealer Manager represents and warrants to the Purchaser that: (a) All actions taken by it as Dealer Manager will comply in all material respects with all applicable laws, regulations and rules of the United States, including, without limitation, the no-action positions taken by the Staff of the Securities and Exchange Commission in Merrill, Lynch, Pierce, Fenner & Smith Incorporated available July 19, 1993, The Times Mirror Company available November 15, 1994 and Salomon Brothers Inc. available October 1, 1990, the applicable rules and regulations of the registered national securities exchanges of which the Dealer Manager is a member and of the National Association of Securities Dealers, Inc. and state securities laws. (b) During the period of the Offers, none of the Dealer Manager nor any of its affiliates shall effect any transactions in the Securities or the applicable U.S. Treasury Reference Notes listed on the cover page of the Offer to Purchase and Consent Solicitation Statement, for the purpose of creating actual, or apparent, active trading in, or raising or depressing the price of, the Securities or such applicable U.S. Treasury Reference Notes. 5. Conditions of Obligation. The obligation to act as Dealer Manager hereunder shall at all times be subject, in its discretion, to the conditions that: (a) All representations, warranties and other statements of the Purchaser contained herein are now, and at all times during the Offers and the Solicitation will be, true and correct in all material respects. (b) The Purchaser at all times during the Offers and the Solicitation shall have performed all of its material obligations hereunder and theretofore required to have been performed. 3 (c) Legal counsel to the Purchaser acceptable to the Dealer Manager shall have furnished to the Dealer Manager, concurrently with the execution of this Agreement, an opinion, dated the date hereof, substantially in the form of Exhibit B hereto. 6. Indemnification. (a) The Purchaser agrees to indemnify and hold harmless the Dealer Manager and any person, if any, who controls the Dealer Manager within the meaning of Section 20 of the Securities Exchange Act of 1934, as amended or Section 15 of the Securities Act of 1933, as amended, from and against any and all claims, damages, losses, liabilities, costs or expenses (including attorneys' fees) to which the Dealer Manager may become subject by reason of or in connection with (i) the Offers and the Solicitation, (ii) the execution and delivery of this Agreement or the performance, or failure to perform, by the Dealer Manager of its obligations hereunder, (iii) any breach by the Purchaser of any warranty, covenant, term or condition in, or the occurrence of any default under, this Agreement, and (iv) any untrue statement or alleged untrue statement of a material fact in the Offer Letter or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (v) any other event or transaction contemplated by any of the foregoing; provided, however, the Dealer Manager shall not be indemnified for any claims, damages, losses, liabilities, costs or expenses (i) relating to an untrue statement of a material fact or omission to state a material fact by the Dealer Manager or such controlling person and (ii) to the extent, but only to the extent, caused by the willful misconduct or gross negligence of the Dealer Manager. (b) The Purchaser agrees to assume the defense of any action against the Dealer Manager based upon allegations of any such loss, claim, damage, liability or action, including the retaining of counsel satisfactory to the Dealer Manager and the payment of counsel fees and all other expenses relating to such defense; provided, however, that the Dealer Manager may retain separate counsel in any such action and may participate in the defense thereof at the expense of the Dealer Manager unless such retaining of separate counsel has been specifically authorized by the Purchaser; and provided further, that if the Dealer Manager shall have been advised by counsel that there may be legal defenses available to the Dealer Manager which are different from or additional to those available to the Purchaser, then the Purchaser shall not have the right to assume the defense of the action on behalf of such Dealer Manager, and in such event the said fees and expenses of the Dealer Manager in defending such action shall be borne by the Purchaser. The indemnity agreement contained in Section 7(a) hereof will be in addition to any liability which the Purchaser may otherwise have. Promptly after receipt by any indemnified party under this Agreement of notice of the commencement of any action, suit or proceeding, such party will, if a claim in respect thereof is to be made against the Purchaser, notify the Purchaser of the commencement thereof, but the omission to notify the Purchaser will not relieve the Purchaser from any liability which it may have to the indemnified party. (c) In order to provide for just and equitable contribution in any case in which (a) the Dealer Manager (or any person who controls the Dealer Manager within the meaning of Section 15 of the Securities Act of 1933, as amended or Section 20 of the Securities Exchange Act of 1934, as amended) would otherwise be entitled to indemnification pursuant to Section 4 7(a) hereof but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that Section 7(a) provides for indemnification in such case or (b) contribution may be required on the part of the Dealer Manager or any such controlling person in circumstances for which indemnification is provided under Section 7(a); in each such case, the Purchaser and the Dealer Manager shall contribute to the amount paid as a result of such losses, claims, expenses, damages or liabilities (or actions in respect thereof) (A) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties on the one hand, and the party to be indemnified on the other hand, from the Offers and the Solicitation or (B) if the allocation provided by clause (A) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (A) above but also the relative fault of each of the contributing parties on the one hand and the party to be indemnified on the other hand in connection with statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations; provided, however, that, in any such case (x) the Dealer Manager shall not be required to contribute any amount in excess of the compensation paid to the Dealer Manager pursuant to Section 3 hereof, and (y) no person guilty of a fraudulent misrepresentation shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Promptly after receipt by any party to this Agreement of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (the "Contributing Party"), notify the Contributing Party of the commencement thereof, but the omission to notify the Contributing Party will not relieve it from any liability which it may have to any other party. In case any such action, suit or proceeding is brought against any party, and such party notifies a Contributing Party of the commencement thereof, the Contributing Party will be entitled to participate therein with the notifying party and any other Contributing Party similarly notified. 7. Miscellaneous. (a) The Purchaser shall advise the Dealer Manager promptly of the occurrence of any event which, in the Purchaser's judgment, could cause the Purchaser to withdraw, rescind or modify the Offers and the Solicitation. (b) This Agreement is made solely for the benefit of the Dealer Manager and the Purchaser and their respective successors, assigns, and legal representatives, and no other person shall acquire or have any right under or by virtue of this agreement. (c) Except as otherwise expressly provided in this agreement, whenever notice is required by the provisions of this agreement to be given to (i) the Purchaser, such notice shall be in writing addressed to the Purchaser, at its office at 333 Earle Ovington Boulevard, Uniondale, New York 11553, Attention: Stanley Klimberg, Esq.; and (ii) the Dealer Manager, such notice shall be in writing addressed to the Dealer Manager, at Salomon Smith Barney, Inc., World Trade Center, 42nd Floor, New York, New York 10048, Attention: Stephen J. Cheeseman. 5 (d) This Agreement contains the entire understanding of the parties with respect to Salomon Smith Barney, Inc. acting as Dealer Manager of the Offers and the Solicitation, superseding all prior agreements, understandings and negotiations with respect to such activities by Salomon Smith Barney, Inc., and shall be governed by and construed in accordance with the laws of the State of New York. This Agreement may be executed in any number of separate counterparts, each of which shall be an original, but all such counterparts shall together constitute one and the same agreement. 6 Please sign and return to us a duplicate of this letter, whereupon it will become a binding agreement. Very truly yours, LONG ISLAND LIGHTING COMPANY d/b/a LIPA By: /s/ David P. Warren ----------------------------------- Name: David P. Warren Title: Chief Financial Officer The undersigned hereby confirms that the foregoing letter, as of the date thereof, correctly sets forth the agreement between the Purchaser and the undersigned. SALOMON SMITH BARNEY, INC. By: /s/ Stephen Cheeseman ------------------------- Name: Stephen Cheeseman Title: Vice President 7 EXHIBIT A Offer to Purchase and Letter of Transmittal and attachments EXHIBIT B November 12, 1998 Salomon Smith Barney, Inc. As Dealer Manager 7 World Trade Center, 42nd Floor New York, New York 10048 Ladies and Gentlemen: We have acted as counsel to Long Island Lighting Company d/b/a LIPA (the "Purchaser"), in connection with the Offers for any and all its 7.30% Debentures Due 2000 (the "7.30% Debentures"), 6.25% Debentures Due 2001 (the "6.25% Debentures"), 7.05% Debentures Due 2003 (the "7.05% Debentures"), 7.00% Debentures Due 2004 (the "7.00% "Debentures"), 7.125% Debentures Due 2005 (the "7.125% "Debentures"), and 9.00% Debentures Due 2022 (the "9.00% "Debentures" and together with each of the other series of debentures specified in this sentence, the "Securities") (each an "Offer" and collectively "Offers"). In conjunction with the Offers, the Purchaser is soliciting ("the "Solicitation") consents from Holders of the Securities of at least 66 2/3% of the outstanding aggregate principal amount of all series of Securities to the adoption of a certain amendment to the Indentures under which the Securities were issued. Such Offers and Solicitation were made on the terms and subject to the conditions set forth in those certain documents which are attached as Exhibit A to the Dealer Manager Agreement referred to below (said letters are collectively referred to as the "Offer Letter"). In that connection, we have examined the Offer Letter, a signed copy of the agreement dated October 12, 1998, between the Purchaser and you providing for your services as Dealer Manager for the Offers and the Solicitation (the "Dealer Manager Agreement") and such other documents as we have deemed appropriate for the purpose of this opinion. We have not undertaken any independent review or investigation of the foregoing facts. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as photocopies and the authenticity of the originals of such photocopies. We have also assumed, with your consent and without undertaking, or having any duty to undertake any independent investigation, that the representations, warranties, statements and information as to factual matters made in the agreements and documents mentioned above or otherwise furnished to us are true and correct. Based upon such examination and in reliance thereon and having regard for legal considerations which we deem relevant, we are of the following opinion: (i) The Purchaser is validly existing and in good standing under laws of the State of New York. (ii) The Purchaser has duly taken all necessary corporate action to authorize the making and consummation of the Offers and the execution, delivery and performance of the Dealer Manager Agreement, and the Dealer Manager Agreement has been duly executed and delivered by the Purchaser. (iii) The making and consummation of the Offers, including any related borrowings or other provisions for the payment for Securities by the Purchaser, and the execution, delivery and performance by the Purchaser of the Dealer Manager Agreement do not and will not violate or conflict with, result in a breach of, constitute a default under, or result in the creation of any lien upon any property of LIPA under (a) the Certificate of Incorporation or the By-Laws of LIPA, (b) any other agreement or instrument listed on Annex 1 to which LIPA is a party or may be bound, or (c) Applicable Law. The opinions herein are further subject to the following limitations and qualifications: (a) We express no opinion as to matters of law in jurisdictions other than the State of New York, the State of California and the federal laws of the United States. (b) We express no opinion insofar as to compliance with applicable anti-fraud statutes, rules or regulations of state, and federal law. (c) We have assumed, without investigation, there was and will be no misrepresentation, omission, fraud, duress, undue influence, bad faith or deceit in connection with the Offers. For purposes of rendering the opinions expressed above the term "Applicable Laws" means those laws, rules or regulations of the State of New York and the State of California and the federal laws, rules or regulations of the United States of America that, in our experience, are normally applicable to transactions of the type contemplated by the Offer Letter. We are not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of any of the statements contained in the Offer Letter and make no representation that we have independently verified the accuracy, completeness or fairness of any such statements. In our capacity as counsel to LIPA, however, we had conferences and teleconferences with LIPA and representatives of the Dealer Manager and others, during which conferences and teleconferences the contents of the Offer Letter and related matters were discussed. Based on our participation in the above-mentioned conferences and in reliance thereon and on the records, documents, certificates and opinions herein mentioned above, we advise you that, during the course of our representation of LIPA as counsel on this matter, no information came to the attention of the attorneys in our firm rendering legal services in connection with such representation which caused us to believe that the Offer Letter at its date 9 and as of the date of this opinion (except for the statements contained in the "Total Purchase Price" section of the Offer Letter, as to which we express no opinion or view) contained or contains any untrue statements of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. This opinion is intended for your use and neither this opinion nor any part hereof may be delivered to, used or relied upon by any other person or entity, without our prior written consent except this opinion may be relied upon by the underwriters with regard to the sale by the Long Island Power Authority of its Electric System Revenue Bonds, Series 1998B. This opinion is given as of the date hereof and we assume no obligation to update or supplement this opinion to reflect any facts or circumstances which may hereafter come to our attention or any changes in law which may hereafter occur. Very truly yours, Annex 1 - -------------------------------------------------------------------------------- Description of Document - -------------------------------------------------------------------------------- (a) Debenture Indenture dated as of November 1, 1986 from LILCO to The Connecticut Bank and Trust Company, National Association, as Trustee. ----------------------------------------------------------------------- Seven Supplemental Indentures as follows: ----------------------------------------------------------------------- Supplemental Indenture ----------------------------------------------------------------------- Number Date ----------------------------------------------------------------------- First 11/1/86 ----------------------------------------------------------------------- Second 04/1/89 ----------------------------------------------------------------------- Third 07/1/89 ----------------------------------------------------------------------- Fourth 07/1/92 ----------------------------------------------------------------------- Fifth 11/1/92 ----------------------------------------------------------------------- Sixth 06/1/93 ----------------------------------------------------------------------- Seventh 07/1/93 - -------------------------------------------------------------------------------- (b) Debenture Indenture dated as of November 1, 1992 from LILCO to Chemical Bank, as Trustee. ----------------------------------------------------------------------- Four Supplemental Indenture as follows: ----------------------------------------------------------------------- Supplemental Indenture ----------------------------------------------------------------------- Number Date ----------------------------------------------------------------------- First 01/1/93 ----------------------------------------------------------------------- Second 03/1/93 ----------------------------------------------------------------------- Third 03/1/93 ----------------------------------------------------------------------- Fourth 03/1/93 - -------------------------------------------------------------------------------- (c) Indenture of Trust dated as of December 1, 1989 by and between NYSERDA and The Connecticut National Bank, as Trustee, relating to the 1989 Series A EFRBs. ----------------------------------------------------------------------- Indenture of Trust dated as of December 1, 1989 by and between New York State Energy Research and Development Authority and The Connecticut National Bank, as Trustee, relating to the 1989 Series B EFRBs. ----------------------------------------------------------------------- Participation Agreement dated as of December 1, 1989 by and between NYSERDA and LILCO relating to the 1989 Series A EFRBs. ----------------------------------------------------------------------- Participation Agreement dated as of December 1, 1989 by and between NYSERDA and LILCO relating to the 1989 Series B EFRBs. - -------------------------------------------------------------------------------- (d) Indenture of Trust dated as of May 1, 1990 by and between NYSERDA and The Connecticut National Bank, as Trustee, relating to the 1990 EFRBs. ----------------------------------------------------------------------- Participation Agreement dated as of May 1, 1990 by and between NYSERDA and LILCO relating to the 1990 EFRBs. - -------------------------------------------------------------------------------- (e) Indenture of Trust dated as of January 1, 1991 by and between NYSERDA and The Connecticut National Bank, as Trustee, relating to the 1991 EFRBs. ----------------------------------------------------------------------- Participation Agreement dated as of January 1, 1991 by and between NYSERDA and LILCO relating to the 1991 EFRBs. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (f) Indenture of Trust dated as of February 1, 1992 by and between NYSERDA and IBJ Schroder Bank and Trust Company, as Trustee, relating to the 1992 EFRBs, Series A. ----------------------------------------------------------------------- Participation Agreement dated as of February 1, 1992 by and between NYSERDA and LILCO relating to the 1992 EFRBs, Series A. - -------------------------------------------------------------------------------- (g) Indenture of Trust dated as of February 1, 1992 by and between NYSERDA and IBJ Schroder Bank and Trust Company, as Trustee, relating to the 1992 EFRBs, Series B. ----------------------------------------------------------------------- Participation Agreement dated as of February 1, 1992 by and between NYSERDA and LILCO relating to the 1992 EFRBs, Series B. - -------------------------------------------------------------------------------- (h) Indenture of Trust dated as of August 1, 1992 by and between NYSERDA and IBJ Schroder Bank and Trust Company, as Trustee, relating to the 1992 EFRBs, Series C. ----------------------------------------------------------------------- Participation Agreement dated as of August 1, 1992 by and between NYSERDA and LILCO relating to the 1992 EFRBs, Series C. - -------------------------------------------------------------------------------- (i) Indenture of Trust dated as of August 1, 1992 by and between NYSERDA and IBJ Schroder Bank and Trust Company, as Trustee, relating to the 1992 EFRBs, Series D. ----------------------------------------------------------------------- Participation Agreement dated as of August 1, 1992 by and between NYSERDA and LILCO relating to the 1992 EFRBs, Series D. - -------------------------------------------------------------------------------- (j) Indenture of Trust dated as of November 1, 1993 by and between NYSERDA and Chemical Bank, as Trustee, relating to the 1993 EFRBs, Series A. ----------------------------------------------------------------------- Participation Agreement dated as of November 1, 1993 by and between NYSERDA and LILCO relating to the 1993 EFRBs, Series A. - -------------------------------------------------------------------------------- (k) Indenture of Trust dated as of November 1, 1993 by and between NYSERDA and Chemical Bank, as Trustee, relating to the 1993 EFRBs, Series B. ----------------------------------------------------------------------- Participation Agreement dated as of November 1, 1993 by and between NYSERDA and LILCO relating to the 1993 EFRBs, Series B. - -------------------------------------------------------------------------------- (l) Indenture of Trust dated as of October 1, 1994 by and between NYSERDA and Chemical Bank, as Trustee, relating to the 1994 EFRBs, Series A. ----------------------------------------------------------------------- Participation Agreement dated as of October 1, 1994 by and between NYSERDA and LILCO relating to the 1994 EFRBs, Series A. - -------------------------------------------------------------------------------- (m) Indenture of Trust dated as of August 1, 1995 by and between NYSERDA and Chemical Bank, as Trustee, relating to the 1995 EFRBs, Series A. ----------------------------------------------------------------------- Participation Agreement dated as of August 1, 1995 by and between NYSERDA and LILCO relating to the 1995 EFRBs, Series A. - -------------------------------------------------------------------------------- (n) Indenture of Trust dated as of December 1, 1997 by and between NYSERDA and The Chase Manhattan Bank, as Trustee, relating to the 1997 EFRBs, Series A. ----------------------------------------------------------------------- Participation Agreement dated as of December 1, 1997 by and between NYSERDA and LILCO relating to the 1997 EFRBs, Series A. - -------------------------------------------------------------------------------- EX-10 4 FINANCING AGREEMENT ================================================================================ FINANCING AGREEMENT By and Between LONG ISLAND POWER AUTHORITY and LIPA ACQUISITION CORP. Dated as of May 1, 1998 ================================================================================ TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS Section 1.1. Definitions................................................ 1 Section 1.2. Agreement with Bondholders................................. 3 ARTICLE II AGREEMENTS AS TO SYSTEM AND REVENUES Section 2.1. Agreement to Finance Acquisition of System and Cost of System Improvements...................................... 3 Section 2.2. Obligation to Make Payments to Authority; Grant of Revenues and Certain Other Security to Authority............................................... 3 Section 2.3. Powers as to Grant, Conveyance and Transfer and as to Revenues of the System................................... 5 Section 2.4. Powers as to System and Collection of Revenues............. 5 Section 2.5. State not Liable with Respect to Note...................... 5 ARTICLE III TRANSFER OF FUNDS Section 3.1. Application of Bond Proceeds to Pay Costs.................. 6 Section 3.2. Payment From Construction Fund............................. 6 ARTICLE IV DEPOSIT AND APPLICATION OF REVENUES Section 4.1. Revenue Fund............................................... 6 Section 4.2. Subsidiary General Fund.................................... 6 Section 4.3. Application of Revenues After Event of Default............. 7 Section 4.4. Amounts Remaining.......................................... 7 (i) TABLE OF CONTENTS (continued) Page ---- ARTICLE V REPRESENTATIONS AND WARRANTIES; CONSENT TO ASSIGNMENT Section 5.1. Representations and Warranties............................. 7 Section 5.2. Consent to Assignment...................................... 7 Section 5.3. Incorporation By Reference................................. 8 ARTICLE VI COVENANTS Section 6.1. Rate Covenant.............................................. 8 Section 6.2. Compliance with Report as to System Condition.............. 8 Section 6.3. Operation and Maintenance.................................. 9 Section 6.4. Annual Subsidiary Budget................................... 9 Section 6.5. Compliance with Agreements; Tax Exemption.................. 10 Section 6.6. Compliance with Resolution................................. 10 Section 6.7. Enforcement of Rules and Regulations....................... 10 Section 6.8. Books, Records and Accounts................................ 10 Section 6.9. Liens...................................................... 11 Section 6.10. Compliance with Law........................................ 11 Section 6.11. Insurance.................................................. 11 Section 6.12. Covenant Regarding Additional System Agreements............ 11 Section 6.13. Limitations on Operating Expenses and Costs of Major Renewals and Replacements................................ 12 Section 6.14. Maintenance of Existence................................... 12 Section 6.15. Disposition of Property.................................... 12 Section 6.16. Competitive Facilities..................................... 13 Section 6.17. Payment of Lawful Charges.................................. 13 Section 6.18. Further Assurances......................................... 13 Section 6.19. No Additional G&R Bonds.................................... 13 Section 6.20. Tax Rulings................................................ 14 (ii) TABLE OF CONTENTS (continued) Page ---- ARTICLE VII AGREEMENT OF THE STATE Section 7.1. Agreement of the State..................................... 14 ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES Section 8.1. Events of Default.......................................... 14 Section 8.2. Remedies .................................................. 15 Section 8.3. Remedies Not Exclusive..................................... 15 ARTICLE IX TERMINATION Section 9.1. Termination................................................ 16 ARTICLE X AMENDMENTS TO THE AGREEMENT Section 10.1. Amendments to Agreement; Consents.......................... 16 Section 10.2. Consent of Trustee......................................... 16 ARTICLE XI INDEMNITY OF AUTHORITY Section 11.1. Indemnity by Subsidiary.................................... 17 ARTICLE XII MISCELLANEOUS Section 12.1. Conflicts.................................................. 17 (iii) TABLE OF CONTENTS (continued) Page ---- Section 12.2. Assignment................................................. 17 Section 12.3. No Waiver.................................................. 18 Section 12.4. Notices ................................................... 18 Section 12.5. Separability............................................... 18 Section 12.6. Headings .................................................. 18 Section 12.7. Governing Law.............................................. 18 Section 12.8. Payments on Saturdays, Sundays and Holidays................ 18 Section 12.9. Obligation for Payment Absolute............................ 18 Section 12.10. Counterparts............................................... 18 Section 12.11. Date of Agreement.......................................... 19 Exhibit A -Schedule of Outstanding Subsidiary Unsecured Debt.................A-1 Exhibit B -Form of Disbursement Request......................................B-1 Exhibit C -Form of Subsidiary Note...........................................C-1 (iv) FINANCING AGREEMENT FINANCING AGREEMENT, dated as of May 1, 1998, by and between the LONG ISLAND POWER AUTHORITY (the "Authority"), a corporate municipal instrumentality of the State of New York (the "State"), and the LIPA ACQUISITION CORP. (the "Subsidiary"), a New York business corporation and a wholly-owned subsidiary of the Authority. The parties hereto mutually agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. Capitalized terms used and not otherwise defined herein shall have the respective meanings accorded such terms in the General Bond Resolution. The terms set forth in this Section shall have the meanings ascribed to them for all purposes of this Financing Agreement unless the context clearly requires otherwise. Words in the singular shall include the plural, and words in the plural shall include the singular, where the context so requires. "Annual Subsidiary Budget" shall mean the annual budget of the Subsidiary, as amended or supplemented, adopted or in effect for a particular Fiscal Year, as provided in Section 6.4. "Authority Obligations" shall mean, collectively, all Bonds and other bonds, notes or other evidences of indebtedness for money borrowed of the Authority, Parity Reimbursement Obligations, Parity Contract Obligations and Subordinated Indebtedness, but shall not include debt of the Authority not secured by the Trust Estate. "Debenture Indentures" shall mean the Indenture dated as of November 1, 1986, between LILCO and The Connecticut Bank and Trust Company, National Association, as amended and supplemented, and the Indenture dated as of November 1, 1992, between LILCO and Chemical Bank, as amended and supplemented. "Disbursement Request" shall mean the written request signed by an Authorized Representative of the Subsidiary and required to be delivered to the Authority pursuant to Section 3.2 hereof to effect disbursements from the Construction Fund, in substantially the form set forth in Exhibit B hereto. "Financing Agreement" shall mean this Financing Agreement, dated as of May 1, 1998, by and between the Authority and the Subsidiary, as from time to time hereafter amended or supplemented in accordance with the provisions hereof and of the Resolution. "Fiscal Year" shall mean the twelve-month period commencing on January 1 of each year; provided, however, that the Authority and the Subsidiary may, from time to time, mutually agree on a different twelve-month period as the Fiscal Year, in which case January 1, when used herein with reference to Fiscal Year, shall be construed to mean the first day of the first calendar month of such different Fiscal Year. "G&R Bonds" shall mean any bonds authenticated and delivered, and outstanding from time to time, under the G&R Indenture. "G&R Indenture" shall mean the General and Refunding Indenture dated as of June 1, 1975 between LILCO and Manufacturers Hanover Trust Company, as supplemented and amended. "LILCO" shall mean the Long Island Lighting Company, a New York corporation. "Note" shall mean the promissory note or notes of the Subsidiary delivered in accordance with Section 2.1 hereof. "Outstanding Subsidiary Unsecured Debt" shall mean any indebtedness of the Subsidiary outstanding as of the date on which the merger and related transactions between the Authority and LILCO provided for by the Acquisition Agreement are completed, as more particularly described in Exhibit A hereto. "Property Tax Settlement" shall mean the agreement by the Authority to finance a program of rebates and credits to System customers in respect of the amounts otherwise payable by Suffolk County, the Town of Brookhaven and certain other municipalities within Suffolk County as refunds of taxes and payments in lieu of taxes relating to the Shoreham Nuclear Power Plant. "Reimbursement Agreement" shall mean that certain Reimbursement Agreement entered into by the Authority, dated as of May 1, 1998, in connection with the Authority's issuance of its Electric System Subordinated Revenue Bonds, 1998 Series 1, 2, 3, 4, 5 and 6. "Resolution" shall mean, collectively, the bond resolution adopted by the Authority on May 13, 1998, authorizing, among other things, the issuance of the Bonds from time to time (together with all supplemental resolutions thereto, and other resolutions contemplated thereby, the "General Bond Resolution") and, with respect to other bonds, notes or other evidences of indebtedness of the Authority, any other resolution, trust indenture or similar document, in each case as the same is amended or supplemented pursuant to the terms thereof. "Subsidiary" initially shall mean LIPA Acquisition Corp. and, following the merger of LIPA Acquisition Corp. into LILCO, shall mean LILCO as the surviving corporation following such merger, and any successor thereto and assignee thereof permitted hereunder. "Subsidiary Debentures" shall mean any "Bonds" as defined in the Debenture Indentures. "Subsidiary General Fund" shall mean the special fund by that name established by the Subsidiary and held by a bank, trust company or banking association designated by the Subsidiary to act as a depository for the general funds of the Subsidiary. 2 "System Manager" initially means, collectively, MarketSpan TD Management, LLC as Manager under the Management Services Agreement and MarketSpan Energy Management, LLC as Energy Manager under the Energy Manager Agreement, and thereafter means any person, company or entity who signs an agreement to operate some or all of System or System-related activities on behalf of the Subsidiary. "Transferee Promissory Notes" shall mean the Promissory Notes (as defined in the Acquisition Agreement) of the Transferee Subsidiaries (as defined in the Acquisition Agreement). Section 1.2. Agreement with Bondholders. Subject in all respects to the provisions of Article X hereof, the Authority and the Subsidiary agree that this Agreement is executed in part to induce the purchase or entering into by others of Authority Obligations issued or entered into from time to time, and all representations, warranties, covenants and agreements contained in this Financing Agreement are declared to be for the benefit of the holders of Authority Obligations or other parties thereto. ARTICLE II AGREEMENTS AS TO SYSTEM AND REVENUES Section 2.1. Agreement to Finance Acquisition of System and Cost of System Improvement. The Authority agrees to finance (i) the acquisition of all outstanding LILCO common stock in accordance with the Acquisition Agreement, (ii) the payment of a portion of the redemption price of certain preferred stock of LILCO in accordance with the Acquisition Agreement, (iii) the Property Tax Settlement, (iv) the retirement of certain outstanding debt of LILCO, (v) the purchase of certain interest rate hedges entered into in anticipation of the issuance of the Acquisition Debt, and (vi) capital expenditures and other purposes of the initial Series of Bonds, and, thereafter, to use its best efforts to finance all or a part of the Cost of System Improvements, by the issuance of Authority Obligations from time to time in accordance with the Resolution, in each case unless and to the extent funded from other sources. The Authority and the Subsidiary agree that the issuance of Authority Obligations, including the issuance of Authority Obligations for the purpose of refunding Authority Obligations or Outstanding Subsidiary Unsecured Debt in accordance with this Section 2. 1 and the Resolution, shall be deemed to constitute a loan to the Subsidiary. The obligation of the Subsidiary to repay such loan and to make payments in accordance with Section 2.2(a) shall be evidenced by the delivery of the Note, which shall be substantially in the form of Exhibit C hereto. Section 2.2. Obligation to Make Payments to Authority; Grant of Revenues and Certain Other Security to Authority. (a) On or before one business day prior to each due date for the payment of the principal of and redemption price, if any, or interest on, or other payments required under, or with respect to, Authority Obligations, until the same shall have been paid in full or provision for the payment thereof in full shall have been made in accordance with the Resolution or any other document entered into by the Authority in connection therewith, or the provisions thereof, the Subsidiary shall make or cause to be made payments to the Authority in an amount which, when added to any moneys then on deposit under the Resolution 3 and available therefor, including any dividends theretofore paid to the Authority and held thereunder, shall be equal to the amount payable on such due date with respect to the Authority Obligations, as provided in the Resolution, including amounts due for the payment of the principal of and sinking fund installments and premium, if any, and interest on the Bonds, which payment obligations are evidenced by the Note. In addition, the Subsidiary shall pay or cause to be paid to the Authority, as and when the same shall become due, all other amounts due and payable by it under the Resolution and all other documents entered into by the Authority in connection with the Authority Obligations, together with interest thereon at the then applicable rate. The principal amount from time to time due and owing under the Note and the scheduled amortization thereof and related interest rates (or the method of determining the same) shall be evidenced by the periodic delivery to the Subsidiary of a certificate of an Authorized Representative of the Authority setting forth the same. Outstanding Subsidiary Unsecured Debt shall be paid pursuant to and in accordance with the Resolution and the respective resolutions, indentures or similar instruments authorizing and providing for the issuance thereof. (b) In consideration of the promises and agreements of the Authority contained herein and in consideration of the issuance or entering into of the Authority Obligations and application of the proceeds thereof for the purposes specified in Section 2.1 hereof, and in order to assure a source of payment of and security for the Note and all amounts payable by the Authority under the Resolution or any other document entered into by the Authority in connection with Authority Obligations, including without limitation the Bonds, the Subordinated Indebtedness, Required Deposits, deposits in respect of the Rate Stabilization Fund and such other payments as are to be made from Revenues in accordance with the Resolution, the Subsidiary hereby gives, grants, conveys and transfers to the Authority all of its right, title and interest in and to the Revenues and the Transferee Promissory Notes, including all of its rights to collect and receive the same, subject only to the provisions of this Financing Agreement and the Resolution permitting the application thereof for or to the purposes and on the terms and conditions herein and therein set forth, and pledges and grants a security interest in the same to the Authority and to each Trustee under the Resolution for the benefit of the holders of Authority Obligations. (c) In consideration of the promises and agreements of the Authority contained herein and in consideration of the issuance or entering into of the Authority Obligations and application of the proceeds thereof for the purposes specified in Section 2. 1 hereof, and in order to assure a source of payment of and security for the payment obligations of the Authority hereunder and under the Note, the Subsidiary hereby further pledges and assigns to the Authority, and grants to the Authority a security interest in, the System Agreements, subject however to the right and obligation of the Subsidiary to exercise its rights and to carry out its obligations and duties thereunder, and further subject to the terms of this Financing Agreement and the Resolution, the right and obligation to enforce or realize upon its rights and interests in the System Agreements. (d) The pledges of subsections (b) and (c) shall be valid and binding from the time when it is made, and the liens of such pledges shall be valid and binding as against all parties having claims of any kind in tort, contract or otherwise against the Subsidiary, 4 irrespective of whether such parties have notice thereof. The Revenues, moneys and proceeds received by the Subsidiary shall immediately be subject to the lien of such pledges without any physical delivery or further act. Section 2.3. Powers as to Grant, Conveyance and Transfer and as to Revenues of the System. (a) The Subsidiary is and will be authorized under the Act and all applicable laws to grant, convey and transfer the Revenues, and to pledge and assign the System Agreements and other moneys, securities and funds and the rights under contracts purported to be granted, conveyed and transferred by this Financing Agreement, in the manner and to the extent provided in this Financing Agreement and the Resolution. The Revenues, the System Agreements and other moneys, securities and funds and the rights under contracts so granted, conveyed, pledged and transferred are and will be free and clear of any pledge, lien, charge or encumbrance thereon or with respect thereto prior to, or of equal rank with, the pledge created or authorized by the Resolution, and all corporate action on the part of the Subsidiary to that end has been duly and validly taken. The Subsidiary shall at all times, to the extent permitted by law, defend, preserve and protect the pledge of the Revenues, the System Agreements and other moneys, securities and funds and the rights under the contracts pledged under this Financing Agreement and the Resolution and all the rights of the Authority and the Bondholders under this Financing Agreement and the Resolution against all claims and demands of all persons whomsoever. (b) Subject to the provisions of Section 6.15 hereof, upon consummation of the merger of LIPA Acquisition Corp. with and into LILCO, the Subsidiary will be, and so long as any Authority Obligations remain outstanding will at all times continue to be, the owner of the System. Accordingly, all acts and things required to be done or performed by the Subsidiary with respect to the System hereunder shall be deemed to be acts and things which the Subsidiary will cause to be done or performed by the Subsidiary or any person acting on behalf of the Subsidiary. (c) The Subsidiary shall, so long as any Authority Obligations remain outstanding, perform all acts and duties required to be performed by it with respect to the System Agreements, and shall not permit any rescission or termination or amendment thereof, or otherwise take any action under or in connection with either, not expressly provided for by the terms thereof, which will in any manner impair or adversely affect the rights of the Subsidiary thereunder, or the rights or security of the holders of or parties to Authority Obligations under the provisions thereof or of the Resolution, and any action by the Subsidiary in violation of this covenant shall be null and void as to the Subsidiary. Section 2.4. Powers as to System and Collection of Revenues. So long as any Authority Obligations remain outstanding, the Subsidiary shall have or shall use its best efforts to obtain good right and lawful authority to maintain, operate and improve the System; to impose and collect such fees, rates, rents and charges for the use or services of the System as are established from time to time by the Authority in accordance with the Resolution and the Act; and to demand and collect all Revenues becoming due to it for the use or services of the System. Section 2.5. State not Liable with Respect to Note. The Note and other obligations of the Subsidiary under this Agreement shall not be a debt of the State or of any 5 municipality, and neither the State nor any municipality shall be liable thereon. Neither the credit, the revenues nor the taxing power of the State or of any municipality shall be, or shall be deemed to be, pledged to the payment of the Note or other obligations of the Subsidiary. ARTICLE III TRANSFER OF FUNDS Section 3.1. Application of Bond Proceeds to Pay Costs. The proceeds of the issuance of Bonds shall be deposited by the Authority in accordance with the provisions of the Resolution and the applicable provisions of the Supplemental Resolution authorizing such Bonds, and the proceeds of other bonds, notes or other evidences of indebtedness of the Authority shall be deposited and applied in accordance with the provisions of the resolution, trust indenture or similar document authorizing and providing therefor; provided, however, that the portion of proceeds which is to be used to pay the Costs of System Improvements shall be held only in the Construction Fund unless the Authority and the Subsidiary shall otherwise agree. Section 3.2. Payment From Construction Fund. The Costs incurred by the Subsidiary with respect to System Improvements shall be evidenced to the Authority by a certificate signed by an Authorized Representative of the Subsidiary. Each such certificate shall contain the information required to be set forth in a Disbursement Request. Upon receipt of such certificate the Authority shall pay or cause to be paid to the person entitled thereto amounts sufficient to pay all such certified Costs. Neither the Authority nor the Trustee shall be required to provide funds to pay the Costs of System Improvements from any source other than the Construction Fund and no such funds shall be required to be paid to the Subsidiary by the Authority or the Trustee in excess of the amounts set aside therefor in the Construction Fund. ARTICLE IV DEPOSIT AND APPLICATION OF REVENUES Section 4.1. Revenue Fund. All Revenues, as promptly as practicable after receipt thereof by or on behalf of the Subsidiary, shall be deposited by the Subsidiary or by any System Manager into the Revenue Fund. Without limiting the generality of the foregoing, the Subsidiary shall take such actions as it shall determine necessary and appropriate to assure that the Manager complies with Section 4.9(D) of the Management Services Agreement and that the Energy Manager complies with Section 6.2.2 of the Energy Management Agreement. All Revenues held by or for the Subsidiary shall be deemed to be held in trust for the Authority pending their deposit into the Revenue Fund. Section 4.2. Subsidiary General Fund. There shall be deposited in the Subsidiary General Fund all amounts received by the Subsidiary from the Authority or the Trustee pursuant to the Resolution for the purpose of paying Subsidiary Expenses and any necessary and proper renewals, replacements and extensions to the System or, as provided in Section 6.17, PILOTs. All amounts in the Subsidiary General Fund shall be held in trust by the Subsidiary and applied only as provided herein, in the Act or in the Resolution. Amounts on 6 deposit in the Subsidiary General Fund shall be applied by the Subsidiary solely for the payment of Subsidiary Expenses, or any such renewals, replacements or extensions, or PILOTs. Section 4.3. Application of Revenues After Event of Default. The Subsidiary covenants that if an "Event of Default", as defined in the Resolution, shall occur, the Subsidiary, upon demand of the Trustee, shall pay over or cause to be paid over to the Trustee all moneys and securities then held by the Subsidiary or by any System Manager in the Subsidiary General Fund, and thereafter, as promptly as practical, the Revenues, for application in accordance with Section 1003 of the General Bond Resolution. Section 4.4. Amounts Remaining. Any amounts received or held by the Authority or the Trustee pursuant to the provisions of the Resolution or this Financing Agreement after all Authority Obligations have been paid in full or are no longer outstanding pursuant to the provisions thereof and of the Resolution, and after payment of all other obligations and expenses of the Authority or provision for payment thereof in full has been made in accordance with the provisions thereof and of the Resolution, shall be paid to the Subsidiary. ARTICLE V REPRESENTATIONS AND WARRANTIES; CONSENT TO ASSIGNMENT Section 5.1. Representations and Warranties. The Subsidiary makes the following representations and warranties as the basis for the undertakings on its part herein contained: (a) It is a New York business corporation duly organized and validly existing under the laws of the State, and has full power and authority: (i) to own the System and to carry out its purposes in the manner proposed to be conducted pursuant to this Agreement; and (ii) to execute, deliver and perform, and observe all of the terms and provisions of, this Financing Agreement and all System Agreements in effect as of the date hereof. (b) The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of the Subsidiary. (c) The Subsidiary has duly and lawfully adopted, and there are now in force and effect, by-laws relating to the Subsidiary. Section 5.2. Consent of Assignment. The lien on the Revenues created by and pursuant to the Resolution and the Act is made for the benefit of the Authority and holders of and parties to Authority Obligations. The Subsidiary hereby consents to the assignment by the Authority to the Bondholders of the benefits and rights of the Authority provided by this Financing Agreement, including, without limitation, the lien upon the Revenues created by and pursuant to this Financing Agreement, the Resolution and the Act and the pledge and agreement 7 of the State included herein pursuant to Section 1020-o of the Act and set forth in Section 7.1 hereof, to the extent set forth in or pursuant to, or as permitted by, the Resolution. Section 5.3. Incorporation By Reference. The Subsidiary hereby makes with respect to itself each and every representation and warranty made with respect to the Subsidiary by the Authority in Article IV of the Reimbursement Agreement. ARTICLE VI COVENANTS Section 6.1. Rate Covenant. (a) The Subsidiary and the Authority hereby covenant and agree that fees, rates, rents, charges and surcharges for the use of, or services furnished, rendered or made available by, the System shall be established by the Authority in accordance with the Resolution and the Act such that such fees, rates, rents, charges and surcharges shall be adequate, together with any other available funds, to provide for, among other things, (i) the timely payment of the Principal Installments of and interest on all Bonds, the principal of and interest on any other Authority Obligations payable from Revenues, and the principal of and interest on the Outstanding Subsidiary Unsecured Debt, (ii) the proper operation and maintenance of the System, (iii) all other payments required for the System not otherwise provided for and (iv) all other payments required pursuant to this Agreement and any System Agreements. (b) If the periodic review of System fees, rates, rents, charges and surcharges conducted by the Authority in accordance with Section 701 of the General Bond Resolution, or the report prepared pursuant to Section 702 of the General Bond Resolution, indicates that such rates, fees, rents, charges and surcharges are, or will be, insufficient to meet the requirements of Section 701 of the General Bond Resolution, the Subsidiary, in accordance with the directions, if any, of the Authority, shall promptly take and diligently pursue all necessary actions within its reasonable control to cure or avoid any such deficiency. (c) Except to the extent required by law, the Subsidiary will not furnish or supply or cause to be furnished or supplied any product, use or service of the System free of charge (or at a nominal charge) to any person, firm or corporation, public or private unless and to the extent the Authority shall have determined that other adequate consideration has been or is expected to be received by the Subsidiary in connection therewith, and the Subsidiary will use reasonable efforts to enforce or cause to be enforced the payment of any and all amounts owing to the Subsidiary for use of the System in accordance with Section 6.7 hereof. (d) Nothing contained in this Financing Agreement shall be deemed to limit or restrict the right or obligation of the Authority or the Subsidiary to comply with any covenant relating to rates to be charged for the use of, or services provided by, the System which may be made with the holders of or parties to Authority Obligations in accordance with the Act. Section 6.2. Compliance with Report as to System Condition. (a) The Subsidiary covenants that if any report prepared in accordance with Section 702 of the General Bond Resolution shall set forth that the properties of the System have not been maintained in 8 good repair and sound operating condition, it will restore the properties or cause the properties to be restored to good repair and sound operating condition as promptly as practicable. (b) The Subsidiary further covenants that (i) the Authority, the Consulting Engineer, if any, and the Rate Consultant, if any, shall at all times have free access to all properties of the System and every part thereof for the purposes of inspection and examination, and (ii) its books, records and accounts may be examined by the Authority, such Consulting Engineer and such Rate Consultant at all reasonable times. Section 6.3. Operation and Maintenance. The Subsidiary hereby covenants that it shall, at all times: (a) In accordance with the advice and recommendations set forth in the reports prepared from time to time in accordance with Section 702 of the General Bond Resolution, operate the System properly and in a sound and economical manner and shall maintain, preserve, and keep the same preserved and kept with the appurtenances and every part and parcel thereof, in good repair, working order and condition, and shall from time to time make, or cause to be made, all necessary and proper repairs, replacements, renewals and extensions so that at all times the operation of the System may be properly and advantageously conducted; provided, however, that nothing herein contained shall require the Subsidiary to operate, maintain, preserve, repair, replace, renew or reconstruct any part of the System if, in the case of any part of the System having a market value of greater than $1 million, there shall be filed with the Subsidiary, the Authority and the Trustee a certificate of an Authorized Representative of the Subsidiary stating that in the opinion of the Subsidiary abandonment of operation of such part of the System will not adversely affect the operation of the System or impair the ability of the Subsidiary and the Authority to comply with the provisions of Section 6.1 hereof and Section 701 of the General Bond Resolution; (b) enforce the rules and regulations governing the operations, use and services of the System established from time to time by the Subsidiary or the Authority; and (c) observe and perform all of the terms and conditions contained in the Act, and comply with all valid acts, rules, regulations, orders and directions of any legislative, executive, administrative or judicial body having competent jurisdiction of the Subsidiary or the System; provided, however, that the failure of the Subsidiary to comply with the covenant contained in this subsection (c) for any period shall not constitute a default on its part so long as the Subsidiary (i) is taking reasonable and timely steps to achieve compliance and (ii) the Subsidiary shall have delivered to the Trustee and to the Authority a Certificate of an Authorized Representative of Subsidiary which (1) sets forth in reasonable detail the facts and circumstances attendant to such non-compliance, (2) sets forth the steps being taken by the Subsidiary to achieve compliance, (3) sets forth the estimated date on which the Subsidiary will be in compliance and (4) states that in the opinion of such Authorized Representative such noncompliance during the period described will not adversely affect the operation of the System or the amount of Revenues to be derived therefrom. Section 6.4. Annual Subsidiary Budget. Not less than thirty (30) days prior to the beginning of each Fiscal Year commencing with Fiscal Year 1999, the Subsidiary shall file 9 with the Authority and the Trustee an Annual Subsidiary Budget for the ensuing Fiscal Year which shall set forth in reasonable detail the estimated Revenues, Subsidiary Expenses and renewals, replacements and extensions for the System for such year. Such Annual Subsidiary Budget also may set forth such additional material as the Subsidiary may determine or the Authority shall request. At the end of each quarter, the Subsidiary shall review its estimates for such Fiscal Year, and in the event such estimates do not substantially correspond with actual Revenues or Subsidiary Expenses, or if there are at any time during any such Fiscal Year extraordinary receipts or payments of unusual costs, the Subsidiary shall prepare an amended Annual Subsidiary Budget for the remainder of the then current Fiscal Year. The Subsidiary also may at any time adopt an amended Annual Subsidiary Budget for the remainder of the then current Fiscal Year. Section 6.5. Compliance with Agreements; Tax Exemption. (a) The Subsidiary hereby covenants with the Authority that it shall take all such actions or refrain from taking all such actions, as the case may be, so as to comply with the terms and provisions of this Financing Agreement and the Resolution. The Authority hereby covenants with the Subsidiary that it shall take all such actions or refrain from taking any such actions, as the case may be, so as to comply with the terms and provisions of the Resolution and this Financing Agreement. (b) The Subsidiary hereby covenants with the Authority, so long as any Bonds or other Authority Obligations, issued with the intent that the interest thereon not be included in gross income for Federal income tax purposes, shall be outstanding, that it will not take any action, or fail to take any action, which, if taken or not taken, as the case may be, would adversely affect the tax-exempt status of the interest payable on any such Bonds or other Authority Obligations. Section 6.6. Compliance with Resolution. The Subsidiary shall take all such actions and refrain from taking all such actions, as the case may be, and otherwise shall operate the System as shall ensure their compliance, and the compliance of the Authority, with the terms and provisions of the Resolution, or any other agreement entered into by the Authority in connection with the financing or operation of the System and which shall, by its terms, directly or indirectly apply to the Subsidiary. Section 6.7. Enforcement of Rules and Regulations. The Subsidiary shall enforce or cause any System Manager of the System to enforce the rules and regulations providing for discontinuance of or disconnection from the provision of electric service, for non-payment of fees, rates, rents or other charges imposed by the Authority and the Subsidiary, provided that such discontinuance or disconnection shall not be carried out except in the manner and upon notice consistent with Section 1020-cc of the Act as in effect on the date hereof. Section 6.8. Books, Records and Accounts. (a) If the Authority so requests, the Subsidiary shall provide to the Authority such reports concerning the System as may be required by the Authority. (b) Each of the Authority and the Subsidiary shall keep or cause to be kept, proper books of record and account in which complete and correct entries shall be made of all transactions relating to their corporate purposes under the Act and this Agreement. 10 Section 6.9. Liens. Until all Authority Obligations have been paid in full or provision has been made therefor in accordance with the Resolution, the Subsidiary shall not create, and, except to the extent permitted under Section 6.17 hereof and to the extent it has the power to do so, shall not permit to be created, any lien upon or pledge of the System, any real or personal properties comprising any part of the System, or the Trust Estate including but not limited to the Revenues, except the lien and pledge thereon created by this Financing Agreement, the Resolution, and the Act. Section 6.10. Compliance with Law. The Authority and the Subsidiary hereby covenant and agree each for itself that it will observe and perform all of the terms and conditions contained in the Act, and comply with all valid laws, acts, rules, regulations, orders and directions of any legislative, executive, administrative or judicial body having competent jurisdiction over its property or affairs. Section 6.11. Insurance. (a) The Subsidiary shall maintain or cause the System Manager to maintain with responsible insurers all insurance required and reasonably obtainable in the amounts and of the types customarily maintained by electric utilities consistent with prudent utility practice, to indemnify for loss of or damage to the System, and against public and other liabilities relating to the operations of the Subsidiary and the System. (b) The Subsidiary shall also maintain or cause to be maintained any additional or other insurance which is required by the System Agreements. (c) Any insurance required to be maintained by this Section shall be in the form of policies or contracts for insurance with insurers of good standing qualified to do business in the State and shall be payable to the Authority, the Subsidiary, or the Trustee, as their interests may appear. (d) Any insurance procured and maintained by the Subsidiary pursuant to this Section, including any blanket insurance policy, may include reasonable deductibles. (e) No provision of this Section shall be construed to prohibit the Subsidiary from self-insuring against any risk at the recommendation of an insurance consultant chosen by or acceptable to an Authorized Representative of the Subsidiary; provided, however, that the Subsidiary shall provide adequate funding of such self-insurance if and to the extent recommended by such insurance consultant. (f) The Subsidiary shall file with the Trustee annually a Certificate of an Authorized Representative of the Subsidiary setting forth (i) a description in reasonable detail of the insurance then in effect pursuant to the requirements of this Section and that the Subsidiary has complied in all respects with the requirements of this Section, and (ii) whether during such year any portion of the System having a book value greater than $2 million has been damaged or destroyed and, if so, the amount of insurance proceeds covering such loss or damage and specifying the Subsidiary's reasonable and necessary costs of reconstruction or replacement thereof. Section 6.12. Convenant Regarding Additional System Agreements. Any additional System Agreement executed by the Subsidiary shall contain such terms and conditions 11 as will enable the Subsidiary to retain such overall supervision and control of the business, design, operating, management, transportation, maintenance, planning and research and development functions of the System as may be required by law, this Financing Agreement or the Resolution. Section 6.13. Limitations on Operating Expenses and Costs of Major Renewals and Replacements. The Subsidiary shall not incur or allow any System Manager to incur Operating Expenses or costs of major renewals, replacements and extensions for the System in any year in excess of the reasonable and necessary amount of such Operating Expenses or costs, respectively, and, except as may be necessary to respond to emergency conditions and to assure the continuing operation of the System, shall not expend or cause to be expended any amount from the Subsidiary General Fund for Operating Expenses or from the Construction Fund for costs of major renewals, replacements and extensions for the System for such year in excess of the respective amounts provided therefor in the Annual Subsidiary Budget as originally adopted or as amended. Section 6.14. Maintenance of Existence. (A) Except as set forth in Sections 6.14(B) and (C) hereof, the Subsidiary covenants and agrees that during the term of this Financing Agreement it will maintain its existence as a corporation, will continue to be a corporation either organized under the laws of or duly qualified to do business in the State, will not dissolve or otherwise dispose of all or substantially all of its assets and will not consolidate with or merge into one or more other entities or permit one or more other entities to consolidate with or merge into it. (B) The Company may, however, without violating the agreements contained in this Section, consolidate with or merge into one or more other entities or permit one or more other entities to consolidate with or merge into it, or sell or otherwise transfer to one or more other entities all or substantially all of its assets as an entirety and thereafter liquidate or dissolve, if (a) the Subsidiary is the surviving, resulting or transferee entity, or (b) in the event the Subsidiary is not the surviving, resulting or transferee entity, such entity (i) is solvent, and either organized under the laws of or duly qualified to do business subject to service or process in the State, (ii) assumes in writing all of the obligations of the Subsidiary herein and (iii) is either the Authority or is wholly owned by the Authority, and (c), in either event, the Trustee shall have been furnished (1) an Opinion of Bond Counsel to the effect that under then existing statutes and court decisions, such consolidation, merger, sale or transfer does not adversely affect the exclusion of interest on any obligations of the Authority then outstanding the interest on which is excluded from gross income for federal income tax purposes, and (2) written confirmation from each Rating Agency to the effect that such consolidation, merger, sale or transfer, in and of itself, will not result in a withdrawal, suspension or downward revision of the rating assigned by such Rating Agency to the Bonds. (C) Nothing in Section 6.14(B) hereof shall restrict the merger of the Subsidiary with and into LILCO on the date of issuance of the initial Series of Bonds with the effect that LILCO shall become the successor Subsidiary hereunder and under the Note. Section 6.15. Disposition of Property. The Subsidiary may, with the approval of the Authority, dispose of properties if such disposal, in the judgment of the Subsidiary, (i) is 12 desirable in the conduct of its business, (ii) is not disadvantageous in any material respect to the Holders of Authority Obligations and (iii) does not materially impair the ability of Authority and the Subsidiary to comply with Section 6. 1 of this Agreement and Section 701 of the General Bond Resolution. Section 6.16. Competitive Facilities. The Subsidiary shall not hereafter construct, acquire, or operate, any plants, structures, facilities or properties which will provide electric service in the Service Area (as defined in the Act as in effect on the date hereof) unless the same are a part of the System. Section 6.17. Payment of Lawful Charges. (A) The Subsidiary shall pay or cause to be paid, to the extent not paid by the Authority, all taxes and assessments or other municipal or governmental charges, if any, and all PILOTs to the extent not paid by the Authority, lawfully levied or assessed upon or in respect of the System, or upon any part thereof or upon the Revenues, when the same shall become due, and shall duly observe and comply in all material respects with all valid requirements of any municipal or governmental authority relative to any part of the System, and shall not create or suffer to be created any lien or charge upon the System or any part thereof or upon the Revenues therefrom, except the pledge and lien created hereby and by the Resolution for the payment of the principal and redemption price of and interest on, and other payments under, Authority Obligations. The Subsidiary shall pay or cause to be discharged, or will make adequate provision to satisfy and discharge, within sixty (60) days after the same shall accrue, all lawful claims and demands for labor, materials, supplies or other objects which, if unpaid, might by law become a lien upon the System or any part thereof or the Revenues therefrom; provided, however, that nothing contained in this Section shall require the Subsidiary to pay or cause to be discharged, or make provision for, any such tax, assessment, lien or charge, or any PILOTs so long as the validity thereof shall be contested in good faith and by appropriate legal proceedings. The Subsidiary may elect to pay any such tax, assessment or other municipal or governmental charges in such installments and over such period of time as may be allowed by the appropriate governmental agencies. (B) Nothing in subsection (A) of this Section 6.17 shall be construed to prevent the Subsidiary or the Authority from entering into agreements to make PILOTs. Section 6.18. Further Assurances. The Subsidiary from time to time shall make, do, execute, adopt, acknowledge and deliver and take all and every such further acts, deeds, conveyances, assignments, resolutions, transfers and assurances as may be necessary or desirable for the better assuring, conveying, granting, assigning, confirming and effecting the rights assigned and the Revenues pledged or perfecting the lien of this Financing Agreement and the Resolution. Section 6.19. No Additional G&R Bonds. The Subsidiary covenants that it will not further amend or supplement the G&R Indenture or the Debenture Indentures, or take any other action, to allow the issuance of any additional G&R Bonds or any additional Subsidiary Debentures other than bonds issued in lieu of or substitution therefor in accordance with the G&R Indenture and the Debenture Indentures. The Subsidiary agrees to take such further actions as may be required to close the G&R Indenture and the Debenture Indentures against the 13 authentication and delivery on initial issuance of additional G&R Bonds and Subsidiary Debentures, respectively. Section 6.20. Tax Rulings. The Subsidiary shall not do or omit to do any act that would result in (i) the revocation of the rulings that were issued by the Internal Revenue Service to the Authority, dated March 4, 1998, and (ii) a resultant material federal income tax liability. ARTICLE VII AGREEMENT OF THE STATE Section 7.1. Agreement of the State. In accordance with Section 1020-o of the Act, the Authority, as agent for the State, does hereby pledge to and agree with the holders of any obligations issued under the Act and the parties to any contracts with the Authority thereunder that the State will not limit or alter the rights thereby vested in the Authority until such obligations together with the interest thereon are fully met and discharged and/or such contracts are fully performed on the part of the Authority, provided that nothing herein contained shall preclude such limitation or alteration if and when adequate provision shall be made by law for the protection of the holders of such obligations of the Authority, or those entering into such contracts with the Authority. ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES Section 8.1. Events of Default. An "event of default" shall mean, whenever used in this Financing Agreement, the occurrence and continuation of any one or more of the following events: (a) failure by the Subsidiary to make any payment when due under the Note or required to be made to the Authority pursuant to Section 2.2 of this Financing Agreement; (b) failure by the Subsidiary to remit or cause to be remitted the Revenues, or any portion thereof, promptly upon receipt by the Subsidiary, for deposit in the Revenue Fund; (c) failure of the Subsidiary to observe any covenant, term or condition of this Agreement, other than as referred to in clause (a) or (b) of this Section; provided, however, that such failure shall have continued for a period of sixty (60) days after written notice, specifying such failure and requesting that it be remedied, is given to the Subsidiary by the Authority, unless the Authority shall agree in writing to an extension of such time prior to its expiration, and provided further, that if the failure stated in the notice cannot be remedied within the applicable period, the Authority shall not unreasonably withhold its consent to an extension of such time if corrective action has been instituted by the Subsidiary, as the case may be, within such period and is being diligently pursued; (d) if the Subsidiary (1) files a petition seeking a composition of its indebtedness under the Federal bankruptcy laws, or under any other applicable law or statute of 14 the United States of America or of the State; (2) consents to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar official of the Subsidiary or any substantial portion of its property; (3) makes any assignment for the benefit of creditors; (4) admits in writing its inability to pay its debts generally as they become due; or (5) takes action in furtherance of any of the foregoing; (e) if (1) a decree or order for relief is entered by a court having jurisdiction of the Subsidiary adjudging the Subsidiary a bankrupt or insolvent or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition in respect of the Subsidiary in an involuntary case under the Federal bankruptcy laws, or under any other applicable law or statute of the United States of America or of the State; (2) a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar official of the Subsidiary or of any substantial portion of its property is appointed; or (3) the winding up or liquidation of its affairs is ordered and the continuance of any such decree or order unstayed and in effect for a period of sixty (60) consecutive days; or (f) the respective provisions of the Act pursuant to which the Resolution has been adopted or Authority Obligations have been issued or entered into, including, without limitation, those provisions pursuant to which the lien upon the Revenues has been created pursuant to this Financing Agreement and the Resolution and those provisions authorizing the establishment of the Subsidiary, shall be materially and adversely limited, altered or impaired by any legislative action or any formal judgment or the terms, conditions and security provided under this Financing Agreement, the Authority Obligations and the Resolution shall be materially and adversely limited, altered or impaired by any legislative action or any final judgment. Section 8.2. Remedies. Whenever any event of default shall have occurred and be continuing, and written notice of the event of default, if required, shall have been given to the Subsidiary by the Authority or by the Trustee and the event of default shall not have been cured within the period provided therefor, the Authority and the Trustee may take whatever action at law or in equity may appear necessary or desirable to collect the payments then due and as they thereafter become due, and the Authority and the Trustee, so long as any Bonds are outstanding, may take whatever action at law or in equity may appear necessary or desirable to enforce performance and observance of any obligation, agreement or covenant of the Subsidiary under this Financing Agreement. Section 8.3. Remedies Not Exclusive. (a) Subject to the provisions of Sections 8.1 and 8.2 hereof, the remedies conferred upon or reserved to the Authority in respect of any event of default are not intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement or now or hereafter existing at law or in equity or by statute. (b) No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Authority to exercise any remedy reserved to it in this Article, it 15 shall not be necessary to give any notice, other than such notice as may be expressly required herein. ARTICLE IX TERMINATION Section 9.1. Termination. This Financing Agreement shall terminate, and the covenants and other obligations contained herein shall be discharged and satisfied, when (i) payment of all Authority Obligations has been made or provided for in accordance with the Resolution (or such other resolution, trust indenture or similar document securing such indebtedness) and (ii) either all payments required hereunder have been made in full, or provision for such payments satisfactory to the Authority and the Trustee has been made or the Authority pays or assumes all liabilities, obligations, duties, rights and powers of the Subsidiary hereunder. ARTICLE X AMENDMENTS TO THE AGREEMENT Section 10.1. Amendments to Agreement; Consents. (a) No amendment, waiver, consent or extension of the time for performance of or under this Financing Agreement shall be effective unless it is in writing, signed by each of the parties hereto and, to the extent required by the Resolution, consented to in writing by the Trustee. (b) Except as hereinafter expressly provided, the parties hereto may enter into any amendment, change or modification of this Financing Agreement; provided, however, the parties hereto shall not enter into or consent to, any amendment, change or modification of the provisions of this Agreement, without first obtaining the consent of the holders of or parties to Authority Obligations in accordance with and to the extent provided by the provisions thereof and of the Resolution, if such amendment, modification or change would materially adversely affect the rights of such holders or parties by modifying or revoking the provisions of this Financing Agreement with respect to: (i) the obligations of the Subsidiary under Article II, III, IV and VI hereof; (ii) the grant of Revenues to the Authority; (iii) the pledge and assignment of the System Agreements; (iv) the deposit or application of the Revenues in the Revenue Fund; (v) the consent to assignment by the Authority; (vi) the agreement of the State; (vii) events of default and remedies; (viii) termination; (ix) amendments to this Agreement; (x) the controlling effect of the Resolution and the Authority Obligations; (xi) severability of invalid provisions; (xii) governing law; or (xiii) the effective date of this Financing Agreement. Section 10.2. Consent of Trustee. In consenting to any amendment referred to in Section 10. 1 the Trustee shall be fully protected in relying on an opinion of Bond Counsel, reasonably satisfactory to the Trustee, that such amendment is authorized or permitted by the terms of this Financing Agreement. 16 ARTICLE XI INDEMNITY OF AUTHORITY Section 11.1. Indemnity by Subsidiary. To the extent permitted by law, the Subsidiary hereby releases and agrees to hold harmless and indemnify the Authority and its trustees, officers, officials, agents and employees from and against all, and agrees that the Authority and its trustees, officers, officials, agents and employees shall not be liable for any, (i) liabilities, suits, actions, claims, demands, damages, losses, expenses and costs of every kind and nature resulting from any action taken in accordance with, or permitted hereby, or the Resolution, or arising from or incurred by the Authority by reason of its incurrence of Authority Obligations pursuant hereto and the Resolution, or (ii) loss or damage to property or any injury to or death of any or all persons that may be occasioned by any cause whatsoever pertaining to the System arising by reason of or in connection with the presence on, in or about the premises of the System of any person; including in each case, without limiting the generality of the foregoing, causes of action and attorneys' fees and other expenses incurred in defending any suits or actions which may arise as a result of any of the foregoing and including any loss, damage or liability which may arise as a result of the negligence (but excluding any loss, damages or liability which may arise as a result of the gross negligence, willful misconduct, or intentional misrepresentation) of any party so indemnified by the Subsidiary, and to deliver at the request of an Authorized Representative of the Authority any further instrument or instruments in form satisfactory to such Authorized Representative as to such provisions of this Section; provided, however, that the indemnity provided in this sentence shall be effective only to the extent of any loss or liability that may be sustained by the Authority or another party so indemnified by the Subsidiary in excess of net proceeds received from any insurance carried with respect to such loss or liability; and provided further that the Authority and the Subsidiary shall each provide waiver of rights of subrogation against the other in any insurance coverage obtained relating to the System. ARTICLE XII MISCELLANEOUS Section 12.1. Conflicts. The provisions of this Financing Agreement are in no way intended to, nor shall such provisions, change or in any manner alter the terms of the Resolution, or the security, rights or remedies of the Trustee or the holders or owners of Authority Obligations. In the event any provision of this Financing Agreement conflicts at any time, or in any manner, with the provisions of the Resolution or any Authority Obligations, the provisions of the Resolution or Authority Obligation shall be controlling and conflicting provisions of this Financing Agreement shall be disregarded. Section 12.2. Assignment. The Authority has, pursuant to the Resolution, pledged and assigned to the Trustee certain of its rights and interests in and to this Financing Agreement including, without limitation, its rights and interests in and to all amounts payable to the Authority hereunder as security for the payment of the principal of, premium, if any, and interest on the Bonds and other Authority Obligations. The Subsidiary hereby consents to such pledge and assignment and to the enforcement of such rights and interests by the Trustee. 17 Section 12.3. No Waiver. No failure to exercise, and no delay in exercising by the parties hereto, any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof, or the exercise of any right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. Section 12.4. Notices. All notices, requests and other communications under this Agreement shall be deemed to have been duly given if in writing and delivered personally or by certified mail (a) to the Subsidiary at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553, attention: Chairman (with a copy to the attention of General Counsel at the same address); and (b) to the Authority at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553, attention: Chairman (with a copy to the attention of General Counsel at the same address), or such other address as, the Subsidiary and the Authority, as the case may be, shall hereafter designate by notice in writing. Section 12.5. Separability. In the event that any one or more of the provisions contained in this Agreement is or are invalid, irregular or unenforceable in any respect, the validity, regularity and enforceability of the remaining provisions contained in this Agreement shall be in no way affected, prejudiced or disturbed thereby. Section 12.6. Headings. The descriptive headings of the several articles of this Agreement are inserted in this Financing Agreement for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 12.7. Governing Law. This Financing Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York, without regard to conflicts of laws principles. Section 12.8. Payments on Saturdays, Sundays and Holidays. In any case where the date of any payment required to be made under this Financing Agreement shall be a Saturday or a Sunday or shall be, at the place designated for such payment, a legal holiday or a day on which banking institutions are authorized by law to close, then such payment shall not be made on such date but shall be made on the next preceding business day not a Saturday, Sunday or a legal holiday or a day upon which banking institutions are authorized by law to close. Section 12.9. Obligation for Payment Absolute. Anything herein to the contrary notwithstanding, the Subsidiary agrees that its obligation to make payments hereunder and under the Note shall be absolute, irrevocable and unconditional and shall not be subject to any defense (other than payment) or any right of set-off, counterclaim or recoupment for any reason, including, without limitation, any failure by the Authority to perform any of its obligations hereunder. Section 12.10. Counterparts. This Financing Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 18 Section 12.11. Date of Agreement. The date of this Financing Agreement shall be for identification purposes only. This Financing Agreement shall become effective upon the delivery of the initial issue of bonds, notes or other obligations of the Authority to the original purchasers thereof. IN WITNESS WHEREOF, the Authority has caused this Financing Agreement to be executed in its name by its Chairman and the Subsidiary has caused this Financing Agreement to be executed in its name by its Chairman, all as of the date first above written. LONG ISLAND POWER AUTHORITY By: /s/ Richard M. Kessel ----------------------------- Chairman LIPA ACQUISITION CORP. By: /s/ Richard M. Kessel ----------------------------- Chairman 19 Exhibit A Schedule of Outstanding Subsidiary Unsecured Debt Debentures Amount Redemption Maturity ($000) Rate Callable On Price(l) - -------- ------ ---- ----------- -------- 1/15/00 $ 36,000 7.300% NC NA 7/15/01 145,000 6.250 NC NA 3/15/03 150,000 7.050 NC NA 3/01/04 59,000 7.000 NC NA 6/01/05 200,000 7.125 NC NA 3/01/07 142,000 7.500 3/01/98 103.54% 7/15/19 420,000 8.900 7/15/98 105.94 11/01/22 451,000 9.000 11/l/02 104.19 ---------- $1,603,000 ========== 7/15/99(2) $ 397,000 7.300% NC NA 3/15/23(2) 270,000 8.200 3/15/2003 104% ---------- $ 667,000 ---------- $2,270,000 ========== - ---------- NC = Non-callable NA = Not applicable (1) Declining upon later redemption date. (2) Subject to BL Holding Corp. exchange offer. A-1 NYSERDA Financing Notes(1) Amount Outstanding Redemption Maturity ($000) Rate Callable On Price -------- ------ -------- ----------- ----- 12/01/06 $ 2,000 7.500% At any time 100% 12/01/06 27,375 7.500 At any time 100 12/01/09 19,100 7.800 At any time 100 10/01/12 17,200 8.250 At any time 100 3/01/16 150,000 Variable AIPD 100 9/01/19 50,000 7.150 6/15/02 102 9/01/19 50,000 7.150 6/15/02 102 6/01/20 100,000 7.150 6/15/02 102 12/01/20 100,000 7.150 6/15/02 102 2/01/22 50,000 7.150 6/15/02 102 2/01/22 50,000 7.150 6/15/02 102 8/01/22 50,000 6.900 1/21/03 102 8/01/22 50,000 6.900 1/21/03 102 11/01/23 50,000 Variable AIPD 100 11/01/23 50,000 Variable AIPD 100 10/01/24 50,000 Variable AIPD 100 8/01/25 50,000 Variable AIPD 100 -------- $915,675 ======== - ------------- NYSERDA = New York State Energy Research and Development Authority AIPD = Any Interest Payment Date (1) NYSERDA Financing Notes, Series 1997A, due 12/01/27 in the principal amount of $24,880,000 and bearing variable interest rates are to be transferred to BL Holding Corp. or one of its subsidiaries. A-2 Exhibit B Form of Disbursement Request STATEMENT NO._____ REQUESTING DISBURSEMENT OF FUNDS FROM THE CONSTRUCTION FUND Pursuant to Section 3.2 of the Financing Agreement dated as of May 1, 1998 by and between Long Island Power Authority and LIPA Acquisition Corp. (the "Financing Agreement"), the undersigned Authorized Representative (a defined in the Resolution) of the Subsidiary hereby requests the Authority to pay or cause to be paid to the Subsidiary or to the person(s) listed on the Schedule attached hereto out of the moneys on deposit in the Construction Fund (as defined in the Resolution) the aggregate sum of $_________ to pay such person(s) or to reimburse the Subsidiary, as indicated on such Schedule, for Costs of System Improvements. In connection with the foregoing, the undersigned hereby certifies that: (a) Each item for which disbursement is requested hereunder is properly payable out of the Construction Fund in accordance with the terms and conditions of the Financing Agreement and the Resolution and none of such items has formed the basis for any disbursement heretofore made from the Construction Fund; and (b) This Disbursement Request and all attachments hereto, including the Schedule attached hereto, shall constitute full warrant, protection and authority to the Authority for its actions taken pursuant hereto. Capitalized terms used herein and not otherwise defined shall have the respective meanings accorded such terms in the Financing Agreement. This _____ day of ________________, _____. ___________________________ Authorized Representative B-1 DISBURSEMENT SCHEDULE TO STATEMENT NO.____ REQUESTING DISBURSEMENT OF FUNDS FROM CONSTRUCTION FUND Name and Address of Payee Amount Description of Cost -------- ------ ------------------- B-2 Exhibit C Form of Subsidiary Note LIPA ACQUISITION CORP. FINANCING AGREEMENT NOTE FOR VALUE RECEIVED, the undersigned LIPA Acquisition Corp., a New York business corporation (the "Subsidiary"), hereby promises to pay to the order of the Long Island Power Authority, a corporate municipal instrumentality of the State of New York (the "Authority"), on or before one business day prior to each due date for the payment of the principal of and redemption price, if any, or interest on, or other payments required under, Authority Obligations (as defined in the Financing Agreement hereinafter referred to), until the same shall have been paid in full or provision for the payment thereof in full shall have been made in accordance with the Resolution (as defined in the Financing Agreement) or the provisions thereof, payments in an amount which, when added to any moneys then on deposit under the Resolution and available therefor, including any dividends theretofore paid to the Authority and held thereunder, shall be equal to the amount payable on such due date with respect to the Authority Obligations as provided in the Resolution, including amounts due for the payment of the principal of and sinking fund installments and premium, if any, and interest on the Bonds. In addition, the Subsidiary shall pay or cause to be paid to the Authority, as and when the same shall become due, all other amounts due and payable by the Authority under the Resolution and all other documents entered into by the Authority in connection with the Authority Obligations, together with interest thereon at the then applicable rate, and any other amounts payable by the Authority from Revenues in accordance with the Resolution. In order to assure a source of payment of and security for this Note, in accordance with, and as more particularly set forth in, the Financing Agreement, the Subsidiary has given, granted, conveyed and transferred to the Authority all of its right, title and interest in and to the Revenues and certain other assets and interests. The Subsidiary hereby agrees that the Authority may apply such Revenues and any amounts received by the Authority in respect of such other assets and interests to the payment hereof in accordance with the Resolution. This Note is issued pursuant to Section 2.2 of the Financing Agreement by and between the Authority and the Subsidiary, dated as of May 1, 1998, as amended and supplemented (the "Financing Agreement"). The principal amount from time to time due and owing hereunder, the scheduled amortization thereof and related interest rates (or the method of determining the same) shall be evidenced by the periodic delivery to the Subsidiary of a certificate of an Authorized Representative of the Authority setting forth the same. Payments shall be made at such time or times, such office or offices and in such manner as shall be specified by the Authority. During the occurrence and continuance of any Event of Default as defined in the Financing Agreement, the Authority (or any permitted assignee under the Financing Agreement) may exercise any of the remedies provided in the Financing Agreement. C-1 THIS NOTE SHALL NOT BE A DEBT OF THE STATE OF NEW YORK OR ANY MUNICIPALITY, AND NEITHER THE STATE OF NEW YORK NOR ANY MUNICIPALITY SHALL BE LIABLE THEREON. NEITHER THE CREDIT, THE REVENUES NOR THE TAXING POWERS OF THE STATE OF NEW YORK OR ANY MUNICIPALITY SHALL BE, OR SHALL BE DEEMED TO BE, PLEDGED TO THE PAYMENT OF THIS NOTE. No recourse shall be had for the payment of this Note, or for any claim based on this Note or on the Financing Agreement, against any director or officer of the Subsidiary. This Note shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the Subsidiary has caused this Note to be duly executed and its corporate seal to be affixed hereto. DATED as of: May 28, 1998 LIPA ACQUISITION CORP. By_________________________ Chairman (SEAL) Attest: ______________________________ Secretary C-2 EX-27 5 FDS --
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. 1,000 6-MOS DEC-31-1998 SEP-30-1998 PER-BOOK 2,056,082 19,199 1,303,904 56,100 4,974,688 8,409,973 0 0 126,491 126,491 0 0 2,934,074 0 4,117,600 0 397,000 0 0 0 834,808 8,409,973 1,226,448 (77,862) 869,838 791,976 434,472 (142,954) 291,518 202,649 125,094 8,037 117,057 54,147 195,088 511,800 0.00 0.00
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