-----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, Fa0f0EWPhq4EvaMLaFuzr9RJEECwA9tXaho76iiwvHoRikmXDTc8HdUU7XHG6JdE 6RtXEa+v/OTRJD07smwPSQ== 0000891092-99-000490.txt : 19990817 0000891092-99-000490.hdr.sgml : 19990817 ACCESSION NUMBER: 0000891092-99-000490 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99692806 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 June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 16 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-3571 LONG ISLAND LIGHTING COMPANY d/b/a LIPA - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New York 11-1019782 - --------------------------------------------- ------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 222-77000 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 August 16, 1999, was 1. Long Island Lighting Company d/b/a LIPA Page No. -------- Part I - FINANCIAL INFORMATION Item 1 - Financial Statements Statements of Operations 2-3 Balance Sheet 4-5 Statement of Cash Flows 6 Notes to Financial Statements 13 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 14-21 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21 Part II - OTHER INFORMATION Item 1 - Legal Proceedings 22 Item 2 - Changes in Securities and Use of Proceeds 22 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 I. Financial Statements Long Island Lighting Company d/b/a LIPA (a wholly owned subsidiary of the Long Island Power Authority) Statement of Operations (Unaudited) (Thousands of Dollars - Except Share Information)
LIPA LILCO -------------------------------- ---------------- Three Months Ended May 29, 1998 to April 1, 1998 to June 30, 1999 June 30, 1998 May 28, 1998 ------------- ------------- ------------ Revenue - Electric $ 509,090 $ 202,739 $ 330,011 Expenses Operations - fuel and purchased power 170,779 66,787 91,762 Operations and maintenance 166,914 34,683 68,993 Depreciation and amortization 52,832 17,719 22,986 Base financial component amortization - - 16,014 Rate moderation component amortization - - (39,574) Regulatory liability component amortization - - (14,048) Other regulatory amortization - - 14,694 Operating taxes 61,331 31,049 60,885 Customer rebates 5 - - Federal income tax - current - - (79,081) Federal income tax - deferred and other - - 1,219 --------- --------- ------------ Total Expenses 451,861 150,238 143,850 --------- --------- ------------ Operating Income 57,229 52,501 186,161 --------- --------- ------------ Other Income and (Deductions) Other income and deductions, net 2,594 5,396 (28,581) Allowance for other funds used during construction - - 374 Federal income tax - current - - (67,259) Federal income tax - deferred and other - - (22,094) --------- --------- ------------ Total Other Income and (Deductions) 2,594 5,396 (117,560) --------- --------- ------------ Income from Continuing Operations Before Interest Charges 59,823 57,897 68,601 --------- --------- ------------ Interest Charges and (Credits) Interest on long-term debt, net 1,054 14,082 56,258 Interest on advances from and note payable to the Authority 72,160 20,563 - Other interest 9,540 906 9,800 Allowance for borrowed funds used during construction (632) (163) (540) --------- --------- ------------ Total Interest Charges 82,122 35,388 65,518 --------- --------- ------------ Income (loss) from continuing operations (22,299) 22,509 3,083 Loss from discontinued operations net of taxes of zero, zero and ($1,946), respectively - - (4,480) --------- --------- ------------ Net Income (Loss) (22,299) 22,509 (1,397) Preferred stock dividend requirements - - 8,037 --------- --------- ------------ Earnings (Loss) for Common Stock $ (22,299) $ 22,509 $ (9,434) ========= ========= ============ Average Common Shares Outstanding 1 1 121,864,647 Basic and Diluted Earnings per Common Share N/A N/A $ (0.08) Dividends Declared per Common Share N/A N/A $ 0.30
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)
LIPA LILCO -------------------------------- ------------------ Six Months Ended May 29, 1998 to January 1, 1998 to June 30, 1999 June 30, 1998 May 28, 1998 ------------- ------------- ------------ Revenue - Electric $ 984,698 $ 202,739 $ 885,693 Expenses Operations - fuel and purchased power 324,892 66,787 257,786 Operations and maintenance 334,746 34,683 169,076 Depreciation and amortization 105,053 17,719 56,490 Base financial component amortization - - 41,257 Rate moderation component amortization - - (82,268) Regulatory liability component amortization - - (36,191) Other regulatory amortization - - 14,418 Operating taxes 122,454 31,049 153,288 Customer rebates 173 - - Federal income tax - current - - (75,004) Federal income tax - deferred and other - - 44,554 --------- --------- ------------- Total Expenses 887,318 150,238 543,406 --------- --------- ------------- Operating Income 97,380 52,501 342,287 --------- --------- ------------- Other Income and (Deductions) Other income and deductions, net 3,565 5,396 (23,297) Allowance for other funds used during construction - - 948 Federal income tax - current - - (67,543) Federal income tax - deferred and other - - (22,442) --------- --------- ------------- Total Other Income and (Deductions) 3,565 5,396 (112,334) --------- --------- ------------- Income from Continuing Operations Before Interest Charges 100,945 57,897 229,953 --------- --------- ------------- Interest Charges and (Credits) Interest on long-term debt, net 2,201 14,082 143,989 Interest on advances from and note payable to the Authority 143,540 20,563 - Other interest 16,629 906 23,181 Allowance for borrowed funds used during construction (1,171) (163) (1,625) --------- --------- ------------- Total Interest Charges 161,199 35,388 165,545 --------- --------- ------------- Income (loss) from continuing operations (60,254) 22,509 64,408 Income from discontinued operations net of taxes of zero, zero and ($20,915), respectively - - 50,134 --------- --------- ------------- Net Income (Loss) (60,254) 22,509 114,542 Preferred stock dividend requirements - - 20,984 --------- --------- ------------- Earnings (Loss) for Common Stock $ (60,254) $ 22,509 $ 93,558 ========= ========= ============= Average Common Shares Outstanding 1 1 121,534,827 Basic and Diluted Earnings per Common Share N/A N/A $ 0.77 Dividends Declared per Common Share N/A N/A $ 0.74
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 - Except Share Information) June 30, December 31, 1999 1998 (unaudited) ----------- ----------- Assets Utility Plant Generation - nuclear $ 663,577 $ 662,893 Transmission and distribution 1,430,907 1,385,099 Common 3,166 3,827 Construction work in progress 49,627 52,897 Nuclear fuel in process and in reactor 9,160 17,053 ---------- ---------- 2,156,437 2,121,769 Less- Accumulated depreciation and amortization 82,087 50,287 ---------- ---------- Total Net Utility Plant 2,074,350 2,071,482 ---------- ---------- Current Assets Customer accounts receivable (less allowance for doubtful accounts of $17,500 and $20,211, respectively) 122,918 119,161 Accrued unbilled revenues 91,474 78,414 Other accounts receivable 8,332 10,096 Promissory note receivable 1,000 398,000 Prepayments and other current assets 34,229 28,583 ---------- ---------- Total Current Assets 257,953 634,254 ---------- ---------- Promissory Note Receivable 646,902 646,902 ---------- ---------- Designated Funds 33,147 194,972 ---------- ---------- Nonutility Property and Other Investments 19,821 19,410 ---------- ---------- Deferred Charges 81,555 78,507 ---------- ---------- Acquisition Adjustment (net of accumulated amortization of $127,411 and $68,766, respectively) 3,968,245 4,026,956 ---------- ---------- Total Assets $7,081,973 $7,672,483 ========== ========== 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) June 30, December 31, 1999 1998 (unaudited) ----------- ------------ Capitalization and Liabilities Capitalization Long-term debt $ 647,784 $ 778,075 Note Payable - the Authority 4,390,409 5,355,085 Due to the Authority 1,411,800 855,684 Accumulated deficit (140,235) (79,981) ----------- ----------- Total Capitalization 6,309,758 6,908,863 ----------- ----------- Current Liabilities Current maturities of long-term debt 398,278 398,000 Due to the Authority 150,895 70,880 Due to KeySpan 23,613 75,085 Accounts payable and accrued expenses 34,533 35,921 Accrued taxes 34,815 79,021 Accrued interest 30,249 29,851 Customer deposits 22,961 23,205 ----------- ----------- Total Current Liabilities 695,344 711,963 ----------- ----------- Deferred Credits 62,029 34,059 ----------- ----------- Claims and Damages 14,842 17,598 ----------- ----------- Commitments and Contingencies ----------- ----------- Total Capitalization and Liabilities $ 7,081,973 $ 7,672,483 =========== =========== 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)
LIPA LILCO -------------------------------- ------------------ Six Months Ended May 29, 1998 to January 1, 1998 to June 30, 1999 June 30, 1998 May 28, 1998 ------------- ------------- ------------ Operating Activities Net (Loss) Income $ (60,254) $ 22,509 $ 114,542 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities Depreciation and amortization 105,053 17,719 68,326 Base financial component amortization - - 41,257 Rate moderation component amortization - - (82,268) Regulatory liability component amortization - - (26,977) Provision for fuel and purchased cost adjustment 26,603 - - Other regulatory amortization - - 18,208 Rate moderation component carrying charges - - (12,200) Class Settlement - - 5,226 Amortization of cost of issuing and redeeming securities 3,949 351 12,903 Federal income tax - deferred and other - - (12,487) Allowance for other funds used during construction - - 2,390 Pensions and Other Post Retirement Benefits - - 23,066 1989 settlement credits amortization - - (9,213) Gas Cost Adjustment - - 4,119 Other 11,401 (1,273) 60,433 Changes in operating assets and liabilities Accounts receivable, net (1,993) (2,370) 12,688 Accrued unbilled revenues (13,060) (12,846) 68,233 Materials and supplies, fuel oil and gas in storage - - 39,386 Accounts payable and accrued expenses (1,388) - (39,007) Due to KeySpan (51,472) (36,372) - Pensions and other post retirement benefits - - (250,000) Accrued taxes (44,206) 2,352 12,615 Accrued interest 398 19,820 (52,197) Class Settlement - - (19,156) Special deposits - - 37,498 Other (20,425) 7,452 (67,969) ---------- ----------- ---------- Net Cash Provided by (Used in) Operating Activities (45,394) 17,342 (50,584) ---------- ----------- ---------- Investing Activities Shoreham post settlement costs - - (16,271) Merger costs, net of cash transferred - (62,159) - Other - - (1,677) ---------- ----------- ---------- Net Cash Used in Investing Activities - (62,159) (17,948) ---------- ----------- ---------- Capital and Related Financing Activities Construction and nuclear fuel expenditures (49,277) (8,793) (122,229) Proceeds from promissory note receivable 397,000 - - Proceeds from sale of common stock - - 8,738 Acquisition of common stock - (2,497,500) - Issuance of notes payable - - 350,000 Net proceeds from Authority loan 636,131 4,949,528 - Repayment of note payable-Authority (964,676) (180,476) - Redemption of long-term debt (135,609) (1,186,000) (100,000) Issuance of preferred stock - - 75,000 Redemption of preferred stock - (221,600) (116,390) Bond issuance costs - (48,627) - Preferred stock dividends paid - - (18,659) Common stock dividends paid - - (108,179) Other - (3,989) (3,080) ---------- ----------- ---------- Net Cash Provided by (Used in) Capital and Related Financing Activities (116,431) 802,543 (34,799) ---------- ----------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents (161,825) 757,726 (103,331) Cash and cash equivalents at beginning of period 194,972 * 75,000 179,995 ---------- ----------- ---------- Cash and cash equivalents at end of period $ 33,147 * $ 832,726 * $ 76,664 ========== =========== ==========
* Cash and cash equivalents include designated funds 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 Six Months Ended June 30, 1999 (Unaudited) - -------------------------------------------------------------------------------- Note 1. Basis of Presentation As used herein, the term "LILCO" refers to the Long Island Lighting Company, the publicly owned gas and electric utility company as it existed prior to the LIPA/LILCO Merger, as described in Note 2, and the term "LIPA" refers to that company as it exists after the LIPA/LILCO Merger as a wholly-owned electric utility subsidiary company of the Long Island Power Authority (the "Authority"), doing business as LIPA. The Authority was established as a corporate municipal instrumentality of the State of New York, constituting a political subdivision of the State, created by Chapter 517 of the Laws of 1986 (the "LIPA Act"). As such, it is a component unit of the State and is included in the State's annual financial statements. On April 11, 1997, LILCO changed its year-end from December 31 to March 31. Subsequent to the LIPA/LILCO Merger, LIPA adopted a calendar year-end. Accordingly, unless otherwise indicated, references to June 30, 1999 and 1998 represent the three or six month periods ended June 30, 1999 and 1998, respectively. The financial information as of June 30, 1999, and for the three and six months ended June 30, 1999 and 1998 is unaudited. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial statements for the periods presented. Operating results for any of the periods presented are not necessarily indicative of results to be expected for the entire year due to the seasonal nature of the electric business. These Notes to Financial Statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations for the three and six months ended June 30, 1999 and LIPA's Annual Report on Form 10-K for the nine months ended December 31, 1998. In addition, please refer to the discussion following in Note 2 regarding the change in control of LILCO on May 28, 1998. Recent Accounting Pronouncements In July 1999, the Financial Accounting Standards Board issued Financial Accounting Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferred as of the Effective Date of FAS 133," which deferred the effective date of Financial Accounting Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. Accordingly, LIPA will defer their adoption until the new effective date. LIPA does not expect a material effect on the financial position, earnings or cash flows resulting from the adoption of this statement. Note 2. Merger/Change in Control On May 28, 1998, LIPA Acquisition Corp., a wholly-owned subsidiary of the Authority, was merged with and into LILCO (the "Merger") pursuant to an Agreement and Plan of Merger 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 Six Months Ended June 30, 1999 (Unaudited) - -------------------------------------------------------------------------------- dated as of June 26, 1997, by and among LILCO, MarketSpan Corporation (formerly known as BL Holding Corp., and currently known as KeySpan Energy, "KeySpan"), the Authority and LIPA Acquisition Corp., (the "Merger Agreement"). Pursuant to the Merger Agreement, immediately prior to the Merger, all of the assets and liabilities of LILCO related to the conduct of its gas distribution business and its non-nuclear electric generation business, and all common assets used by LILCO in the operation and management of its electric transmission and distribution business and its gas distribution business and/or its non-nuclear electric generation business (the "Transferred Assets") were sold to KeySpan. The consideration received by LILCO for the Transferred Assets consisted of: (i) 3,440,625 shares of the common stock of KeySpan; (ii) 553,000 shares of the Series B Preferred Stock of KeySpan; and (iii) 197,000 shares of the Series C Preferred Stock of KeySpan. The value of the consideration was determined by KeySpan and LILCO to be equal to the net fair market value of the Transferred Assets. The transfer of assets and liabilities was effected by a Bill of Sale, dated as of May 28, 1998, made and executed by LILCO and acknowledged by KeySpan. As a result of the Merger, the Authority became the holder of 1 share of LILCO's common stock, representing 100% of the outstanding voting securities of LILCO. In addition, KeySpan issued promissory notes to LIPA of approximately $1.048 billion. The interest rate and timing of principal and interest payments on the promissory notes from KeySpan are identical to the terms of certain LILCO indebtedness assumed by LIPA in the Merger. KeySpan is required to make principal and interest payments to LIPA thirty days prior to the corresponding payment due dates, and LIPA then transfers those amounts to debtholders in accordance with the original debt repayment schedule. The former holders of LILCO's common stock, primarily individual public shareowners, became entitled to receive a pro-rata share of: (i) cash consideration of $2.497 billion; and (ii) 3,440,625 shares of the common stock of KeySpan, which were received by LILCO in exchange for the Transferred Assets. Pursuant to the Merger Agreement, the former holders of LILCO's common stock (other than holders of dissenting shares) were deemed to have subscribed for additional shares of the common stock of KeySpan, with an aggregate purchase price equal to the cash consideration. In order to effect the Merger, it was necessary to: (i) retire all shares of LILCO's preferred stock, whether by conversion, redemption or cancellation; and (ii) redeem certain of LILCO's bonds, at a cost to LIPA of approximately $1.557 billion. The cash consideration required for the Merger was obtained by the Authority from the proceeds of the issuance and sale of its Electric System General Revenue Bonds, Series 1998A and Electric System Subordinated Revenue Bonds, Series 1 through Series 6. The proceeds from the sale of the bonds were then transferred by the Authority to LIPA in exchange for a promissory note of approximately $4.949 billion. As a result of the Merger, there was a change in control of LILCO which effectively resulted in the creation of a new reporting entity, LIPA. Accordingly, the accompanying financial statements for the periods prior to May 28, 1998 are not comparable to the financial 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 Six Months Ended June 30, 1999 (Unaudited) - -------------------------------------------------------------------------------- statements presented subsequent to May 28, 1998. Therefore, a black line has been drawn on the Statements of Operations and the Statement of Cash Flows to distinguish between LIPA and LILCO balances and activity. The remaining assets and liabilities of LILCO acquired by LIPA consist of: (i) LILCO's electric transmission and distribution system; (ii) its net investment in Nine Mile Point Nuclear Power Station, Unit 2; (iii) certain regulatory assets and liabilities associated with its electric business, (iv) allocated accounts receivable and other assets and liabilities; and (v) substantially all of its long-term debt. The financial statements of LIPA include the push down of the Authority's basis, including costs related to the acquisition of the assets acquired and liabilities assumed. Because of the manner in which LIPA's rates and charges will be established by the Authority's Board of Trustees, the original net book value of the transmission and distribution and nuclear generation assets acquired in the Merger is considered to be their fair value. The excess of the acquisition costs over the fair value of the net assets acquired has been recorded as an intangible asset titled "acquisition adjustment" and is being amortized over a 35 year period. The acquisition adjustment principally arose through the elimination of LILCO's regulatory assets and liabilities, totaling $6.3 billion, and net deferred federal income tax liability of approximately $2.4 billion. Therefore, the amortization of the regulatory assets and liabilities has effectively been replaced by the amortization of the acquisition adjustment. In addition, as a wholly-owned subsidiary of the Authority, LIPA is exempt from Federal, state and local income taxes. Accordingly, adjustments were made by LIPA on May 28, 1998 to eliminate deferred tax assets and liabilities. The results of operations for the three and six months ended June 30, 1999 and for the period May 29, 1998 through June 30, 1998 do not include a provision for income taxes. Effective May 29, 1998, the Authority contracted with KeySpan, through certain of its subsidiaries, to provide operations and management services for LIPA's transmission and distribution system through a management services agreement ("MSA"). Therefore, LIPA pays KeySpan directly for their services and KeySpan, in turn, pays the salaries of their employees. LIPA has no employees, however LIPA is charged a management fee by the Authority to oversee LIPA's operations of which the salaries of the Authority's employees is a significant component. Through a power supply agreement ("PSA"), LIPA contracts for capacity and, to the extent necessary, energy from the fossil fired generating plants of KeySpan, formerly owned by LILCO. Energy and fuel are purchased by KeySpan on LIPA's behalf through an energy management agreement ("EMA") (collectively, the "Operating Agreements"). The electric transmission and distribution system is located in the New York Counties of Nassau and Suffolk (with certain limited exceptions) and a small portion of Queens County known as the Rockaways. The service area is approximately 1,230 square miles and the population of the service area is approximately 2.75 million persons, including approximately 98,500 persons who reside in Queens County within the City of New York. LIPA receives approximately 49% of its revenues from residential sales, 48% from sales to commercial and 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 Six Months Ended June 30, 1999 (Unaudited) - -------------------------------------------------------------------------------- industrial customers, and the balance from sales to other utilities and public authorities. Discontinued Operations The statement of operations of LILCO for the period January 1, 1998 through May 28, 1998 and the period April 1, 1998 through May 28, 1998 have been prepared to present the gas business (as transferred to KeySpan subsidiaries pursuant to the Merger Agreement) as a discontinued operation, in accordance with the provisions of Accounting Principles Board Opinion No. 30. Income from discontinued operations includes revenue from the gas business of approximately $351.8 million and $79.9 million for the period January 1, 1998 through May 28, 1998 and the period April 1, 1998 through May 28, 1998, respectively. Note 3. Capitalization On January 4, 1999, LIPA redeemed $102.6 million of the NYSERDA Electric Facilities Revenue Bonds Series 1993B, 1994A, and 1995A, which were called for redemption prior to December 31, 1998. On March 1, 1999, the variable rate bonds listed below were converted to fixed interest rates of 5.15% on the Pollution Control Revenue Bonds ("PCRBs"), and 5.3% on the Electric Facilities Revenue Bonds ("EFRBs"). Balances Interest Subsequent to Maturity Rate Conversion -------- ---- ---------- PCRBs 1985 Series A March 1, 2016 Variable $ 58,020 1985 Series B March 1, 2016 Variable 50,000 EFRBs 1993 Series B November 1, 2023 Variable 29,600 1994 Series A October 1, 2024 Variable 2,600 1995 Series A August 1, 2025 Variable 15,200 Also, on March 1, 1999, LIPA redeemed $30.1 million of the NYSERDA Pollution Control Revenue Bonds, 1985 Series A. Note 4. Rate Matters Under current New York law, the Authority is empowered to set rates for electric service in its service area without being required by law to obtain the approval of the New York State Public Service Commission (the "PSC") or any other state regulatory body. However, the Authority 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 Six Months Ended June 30, 1999 (Unaudited) - -------------------------------------------------------------------------------- has agreed, in connection with the approval of the Merger by the New York State Public Authorities Control Board (the "PACB"), that it will not impose any permanent increase, nor extend or reestablish any portion of a temporary rate increase, in average customer rates over a 12 month period in excess of 2.5% without approval of the PSC, following a full evidentiary hearing. Another of the PACB conditions requires that the Authority reduce average rates within LIPA's service area by no less than 14% over a ten year period commencing on the date when LIPA began providing electric service, when measured against LILCO's base rates in effect on July 16, 1997 (excluding the impact of the proposed Shoreham tax settlement, but adjusted to reflect emergency conditions and extraordinary unforeseeable events.) The LIPA Act requires that any bond resolution of the Authority contain a covenant that it will at all times maintain rates, fees or charges sufficient to pay the costs of operation and maintenance of facilities owned or operated by the Authority; payments in lieu of taxes ("PILOT's"); renewals, replacements and capital additions; the principal of and interest on any obligations issued pursuant to such resolution as the same become due and payable, and to establish or maintain any reserves or other funds or accounts required or established by or pursuant to the terms of such resolution. LIPA's rates include the fuel and purchased power cost adjustment ("FPPCA") which adjusts rates to reflect significant changes in the cost of fuel, purchased power and related costs. The FPPCA is designed to ensure that LIPA will recover from or return to customers any fuel costs that fall outside an established base fuel and purchased power tolerance band. The tolerance band is equal to one percent above and one percent below LIPA's cost of fuel and purchased power costs for 1999. The tolerance band increases to two percent in 2000 and continues to increase in one percent increments annually thereafter. Expenses for fuel and purchased power 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 cost. LIPA's rates are largely based on LILCO's pre-Merger rate design to avoid customer confusion and facilitate an efficient transition from LILCO billing to LIPA billing. In addition, LIPA's rates include the FPPCA, a PILOT recovery rider, a rider providing for the Shoreham settlement and a rider providing for the RICO Credits (credits to the bills of customers as a result of the settlement by LILCO of a RICO action in connection with the construction and completion of nuclear generating facilities). The LIPA Act requires LIPA to make PILOTs for certain New York State and local revenue taxes which would otherwise have been imposed on LILCO. The PILOT recovery rider allows for rate adjustments to accommodate the PILOTs. 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 Six Months Ended June 30, 1999 (Unaudited) - -------------------------------------------------------------------------------- Note 5. Contingencies Legal and Environmental Proceedings Except as discussed below, no significant changes have occurred with respect to legal and environmental contingencies as discussed in Note 13 of Notes to Financial Statements in LIPA's Annual Report on Form 10-K for the nine months ended December 31, 1998, as filed on March 31, 1999. With respect to Shoreham Tax Matters, on July 26, 1999, the Appellate Division, Second Department overruled the lower court's decision and held that the Authority was not prohibited from enforcing any part of the judgment relating to real property tax refunds attributable to over assessments on the Shoreham Plant after the January 15, 1987 effective date of the LIPA Act. LIPA expects that Suffolk County will seek leave to appeal this decision to the State Court of Appeals sometime in August 1999. In July 1992, LILCO and the Authority separately commenced proceedings in the Supreme Court of the State of New York, County of Suffolk, against the Assessor and the Board of Assessment Review for the Town of Brookhaven, New York (the "Assessor") challenging the real property tax assessment on Shoreham for the 1992-93 tax year. On or about May 1, 1992, the Assessor had tentatively assessed Shoreham in an amount in excess of $156 million for the 1992-93 tax year. On April 22, 1996, the two proceedings were consolidated. On May 13, 1999, the Assessor moved to dismiss the proceedings on procedural grounds. Oral arguments were held on August 5, 1999. No decision has been rendered by the court as of the date of this filing. With respect to the action brought by the County of Suffolk entitled County of Suffolk v. KeySpan et al., this action was voluntarily discontinued by plaintiffs without prejudice. The plaintiffs refiled their claims related to executive compensation in the federal action entitled County of Suffolk et al. v. Long Island Power Authority which was filed on September 28, 1998. With respect to the Sylvester v. Catacosinos et al. action, the judge adopted the magistrate's recommendation that the complaint be dismissed with leave to replead for failure to make a demand. All discovery has been stayed. With respect to the class action brought against LILCO, LILCO's Retirement Income Plan and Robert X. Kelleher, the Plan Administrator, the court on August 13, 1999, approved the settlement agreement. Note 6. Nine Mile Point Nuclear Power Station, Unit 2 ("NMP2") In June 1999, two co-tenants of NMP2 representing 57% of the ownership interest reached an agreement in principle to sell their interests to a single third party. The remaining co-tenants have 180 days to exercise their right of first refusal. Such sale is subject to the approval of, among 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 Six Months Ended June 30, 1999 (Unaudited) - -------------------------------------------------------------------------------- others, the PSC. At this time, LIPA is unable to determine what effect, if any, this proposed change in ownership will have on its operating and financial results. Any such sale, however, will not affect LIPA's right to receive 18% of the plant's output. Note 7. Subsequent Events New York Power Pool Assessment As a member of the New York Power Pool ("NYPP"), LIPA is required to maintain generating capacity equal to 118% of its peak load. On July 6, 1999, LIPA set a new peak load of 4,590 MW, for which LIPA was unable to fully meet the NYPP requirement of 5,416 MW (118% of 4,590 MW). As a result of this deficiency, LIPA is subject to an assessment by the NYPP of approximately $5 million in July. Note 8. Reclassifications Certain prior period amounts have been reclassified in the financial statements to conform with the current period presentation. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements This report contains statements which, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1996. In this respect, the words "estimate," "project," "anticipate," "expect," "intend," "believe" and similar expressions are intended to identify forward-looking statements. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. A number of important factors affecting the Registrant's business and financial results could cause actual results to differ materially from those stated in the forward-looking statements. Those factors include regulatory rate proceedings, competition, and certain legal and environmental matters each as discussed herein, in the Registrant's Annual Report on Form 10-K filed March 31, 1999, for the nine months ended December 31, 1998, or in other reports filed by the Registrant with the Securities and Exchange Commission. General KeySpan Energy ("KeySpan"), through certain of its subsidiaries provides operations and management services for LIPA's transmission and distribution system through a management services agreement ("MSA"). LIPA contracts for capacity and to the extent necessary, energy from the fossil fuel fired generating plants formerly owned by Long Island Lighting Company ("LILCO") through a power supply agreement ("PSA") with KeySpan. Energy is purchased by KeySpan on LIPA's behalf through an energy management agreement ("EMA"), (collectively; the "Operating Agreements"). As LIPA is a wholly owned subsidiary of the Authority and not an investor owned utility, the PSC does not have jurisdiction with respect to the determination of rates and charges. Rates and charges for LIPA are approved by the Authority's Board of Trustees. See Note 4 - Rate Matters of Notes to the Financial Statements. The excess of the acquisition cost over the fair value of the net assets acquired has been recorded as an intangible asset titled "acquisition adjustment" and is being amortized over a 35 year period. The acquisition adjustment principally arose through the elimination of LILCO's regulatory assets and liabilities, totaling approximately $6.3 billion, and net deferred Federal income tax liability of approximately $2.4 billion. Therefore, the amortization of the regulatory assets and liabilities has effectively been replaced by the amortization of the acquisition adjustment. Because of the tax exempt status of LIPA, the results of operations for the three and six months ended June 30, 1999, and the period May 29, 1998 through June 30, 1998, do not include a provision for income taxes. Results of Operations Three and Six Months Ended June 30, 1999 and June 30, 1998 Earnings The net losses for the three and six month periods ended June 30, 1999 were approximately $22.3 million and $60.3 million, respectively. These losses were principally due to the seasonal nature of the business, whereby revenues during these periods are significantly less than those expected 15 to be generated during the summer cooling season. This, combined with the fact that the majority of LIPA's costs (other than fuel, for which there is a separate rate mechanism, see the FPPCA discussed below) are either fixed, or charged in accordance with contractual terms specified by the MSA and the PSA, resulted in a net loss during these periods. For the three and six months ended June 30, 1998, earnings were enhanced as a result of the change in the method of amortizing the Rate Moderation Component ("RMC") to eliminate the effects of seasonality on monthly operating income, as more fully discussed in the section entitled "Rate Moderation Component". Electric Revenues The decrease in revenues of approximately $23.6 million and $103.7 million for the three and six months ended June 30, 1999, respectively, when compared to the same period in 1998, was principally the result of the rate reduction (approximately 20%), for virtually all customers, effective May 29, 1998. Partially offsetting the reduction in revenues was an increase in sales to existing customers which is attributable to a strong and growing economy and price elasticity reflecting the effect of LIPA's 20% rate reduction. In addition, there has been a slight increase in the number of customers relative to the same period last year. Fuel and Purchased Power Fuel and purchased power expense for the three and six months ended June 30, 1999 and 1998, were as follows: Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 (in millions) (in millions) (in millions) (in millions) ------------- ------------ ------------- ------------- Oil $ 25 $ 27 $ 67 $ 70 Gas 56 43 76 75 Nuclear 2 2 4 4 Purchased power 76 87 151 176 -------- ------- -------- -------- 159 159 298 325 FPPCA 12 - 27 - -------- ------- -------- -------- Total $ 171 $ 159 $ 325 $ 325 ======== ======= ======== ======== Electric Energy Available The percentage of total electric energy available, by type of fuel, for electric operations for the three and six months ended June 30, 1999 and 1998 were as follows: 16
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (Mwh = Megawatt hours) Mwh % Mwh % Mwh % Mwh % --- - --- - --- - --- - Oil 870 19 812 19 2,652 30 2,017 24 Gas 1,944 43 1,512 36 2,729 30 2,357 28 Nuclear 327 7 136 3 771 9 530 6 Purchased 1,414 31 1,738 42 2,828 31 3,499 42 ----- --- ----- --- ----- --- ----- --- Total 4,555 100 4,198 100 8,980 100 8,403 100 ===== === ===== === ===== === ===== ===
Variations in the fuel mix used to satisfy energy requirements on LIPA's system are primarily the result of changes in the cost of each particular commodity relative to the other commodities and the availability of import capacity on LIPA's transmission interconnections. In May of this year, LIPA's import capacity was reduced by approximately 1/3 as a result of a transformer failure on one of its interconnections. The interconnection is expected to be back at full capacity prior to the cooling season of 2000. As a result, LIPA was required to satisfy its requirements with more expensive on-island generation from fossil fired power plants on Long Island, formerly owned by LILCO. For the three months ended June 30, 1999, the decreasing price of gas and the reduced import capability resulted in a larger percentage of LIPA's requirements being satisfied with gas generated energy when compared to the same period last year. For the six months ended June 30, 1999, generation with oil increased over the same period last year as oil was more economical than other fuels, and as a result of the reduced import capacity. Variations in fuel and purchased power expenses have a minimal impact on operating results as LIPA's current rate structure includes a mechanism (the FPPCA mechanism) which requires LIPA to return to customers or allows LIPA to recover from customers, actual fuel costs which fall outside of the fuel cost tolerance band, which is defined as 1% higher and 1% lower than the base cost of fuel collected through rates. These percentages increase to two percent in 2000 and continue to increase in one percent increments annually thereafter. To insure that LIPA's customers will receive the lowest cost energy available, the operating agreements provide KeySpan with incentives to support that goal, and penalties when such goals are not satisfied. Fuel expense for the three months ended June 30, 1999 increased when compared to the same period of the prior year, principally as a result of a 6% increase in sales, increased on-island generation, incentives recognized and fees paid to KeySpan to manage the fuel and purchased power supplies in accordance with the EMA, and the recognition of a $12 million expense associated with the FPPCA mechanism. This increase was minimized by lower oil prices relative to the same period in 1998. Fuel expense for the six months ended June 30, 1999 was equal to that of the same period of the prior year, despite a 5% increase in sales and increased on-island generation, primarily as a result of lower oil and gas prices relative to the same period last year. The lower oil and gas prices were offset by incentives recognized and fees paid to KeySpan to manage the fuel and purchased power supplies in accordance with the EMA, and the recognition of $27 million of expense associated with the FPPCA mechanism. 17 Operations and Maintenance Operations and Maintenance ("O&M") expenses, excluding fuel and purchased power, increased approximately $63.2 million and $131.0 million during the three and six month periods ended June 30, 1999, respectively, when compared to the same periods in 1998. The increase is primarily due to the fact that LILCO classified expenses such as depreciation and amortization, property taxes and other operating taxes separately. These costs are incurred by LIPA as part of the costs of contracts with KeySpan for the management of LIPA's assets and are classified as O&M expense by LIPA. In addition, there were charges incurred by LIPA related to the overhead expenses of the Authority. Depreciation and Amortization Depreciation and amortization expense increased approximately $12.1 million and $30.8 million during the three and six month periods ended June 30, 1999, respectively, when compared to the same period of the prior year. These increases were primarily due to the amortization of the acquisition adjustment which totals approximately $10 million per month and were partially offset by the absence of depreciation expense on LILCO's non-nuclear generating assets, which is included in O&M as a component of the PSA billings. Operating Taxes Operating taxes decreased approximately $30.6 million and $61.9 million during the three and six months ended June 30, 1999, respectively, when compared to the same period in 1998, principally as a result of the decrease in revenue taxes resulting from lower revenues primarily due to the 20% rate reduction, a decrease in the gross income tax rate, and the absence of property and payroll taxes related to the operation of the non-nuclear generating facilities of LILCO. These decreases were partially offset by PILOTs on the Shoreham Nuclear Power Station (LILCO was able to capitalize these PILOTs under its electric rate structure). Regulatory Amortization For the three and six months period ended June 30, 1999, the amortization of various regulatory assets and liabilities were not recorded as a result of the adjustments made on May 29, 1998, to eliminate the related regulatory assets and liabilities. Rate Moderation Component ("RMC") The RMC represented the difference between LILCO's revenue requirements under conventional ratemaking and the revenues provided under LILCO's electric rate structure. In addition, the RMC was adjusted for the operation of LILCO's Fuel Moderation Component ("FMC") mechanism and the difference between LILCO's share of actual operating costs at Nine Mile Point Nuclear Power Station, Unit 2 ("NMP2") and amounts provided for in electric rates. In April 1998, the PSC authorized a revision to LILCO's method for recording its monthly RMC amortization. Prior to this revision, the amortization of the annual level of RMC was recorded monthly on a straight-line, levelized basis over LILCO's rate year which ran from December 1 to November 30. However, revenue requirements fluctuated from month to month based upon consumption, which is greatly impacted by the effects of weather. Under the revised method, effective December 1, 1997, the monthly amortization of the annual RMC level varied based upon each month's forecasted revenue requirements, which more closely aligned such amortization with LILCO's cost of service. As a result of this change, for the three and six months ended June 30, 1998, LILCO recorded approximately $51.5 million and $103.0 million 18 more, respectively, of non-cash RMC credits to income than it would have under the previous method. Federal Income Tax The decrease in Federal income tax expense for the three and six months ended June 30, 1999, when compared to the same period in 1998, is due to the fact that LIPA is exempt from Federal income taxes. Other Income and Deductions Other income and deductions contributed to income approximately $25.8 million and approximately $21.4 million more for the three and six months ended June 30, 1999, respectively, when compared to the same period in 1998, primarily due to merger related expenses recognized by LILCO in May 1998, partially offset by the absence, in 1999, of carrying charges on regulatory assets. Interest Expense Interest expense decreased for the three and six months ended June 30, 1999, by approximately $18.8 million and $39.7 million, respectively, compared to the same periods in 1998. These decreases are principally attributable to the lower borrowing rates of LIPA relative to the borrowing rates of LILCO. The decrease in interest expense was partially offset by the higher levels of debt that LIPA had outstanding during these periods, when compared to LILCO during the same periods in 1998. The increase in the level of debt is due to the fact that LIPA's entire capital structure is debt, where LILCO's capitalization structure was composed of debt, common stock and preferred stock. As a result, the entire cost of LIPA's capital is reflected in interest expense, where LILCO's cost of capital was reflected in interest expense and common and preferred stock dividends. Liquidity and Capital Resources Liquidity Since May 29, 1998, LIPA has received approximately $6.7 billion from the Authority to finance the Merger, as more fully discussed in Note 7 of Notes to Financial Statements included in LIPA's Annual Report on Form 10-K for the nine months ended December 31, 1998, in exchange for a promissory note. All cash from customer payments and other sources is collected by the Authority. All of LIPA's obligations are paid by the Authority on LIPA's behalf. Accordingly, all operating cash amounts are held at the Authority. Cash collections and disbursements by the Authority on LIPA's behalf increase or decrease amounts due the Authority by LIPA. LIPA has repaid approximately $744.6 million of its debt to the Authority because cash collected by the Authority from customers and other sources since May 29, 1998 has exceeded cash paid on LIPA's behalf by the Authority. Pursuant to the Authority's Electric System General Revenue Bond Resolution dated May 13, 1998, all amounts to be paid by the Authority to LIPA in respect of the debt obligations of LIPA are subordinated in right of payment to the payment of amounts due on the debt obligations of the Authority. As a result, all debt assumed from LILCO is structurally subordinated in right of payment to the Authority's debt obligations. During the six months ended June 30, 1999, LIPA retired prior to maturity, with cash on hand, $132.7 million of outstanding NYSERDA bonds which were assumed from LILCO as part of the 19 Merger. At June 30, 1999, the Authority's and LIPA's cash and cash equivalents amounted to approximately $851.1 million. In addition, LIPA has designated funds aggregating $33.1 million on hand, $9.6 million of which are available to fund capital expenditures. LIPA estimates that capital expenditures will total approximately $70 million for the remainder of 1999. Funding for such expenditures will be provided by the Authority which intends to issue new debt in 1999 that will be designated by the Board of Trustees to replenish the capital expenditures fund. LIPA believes that cash from operations for 1999 will be sufficient to meet its operating, capital and debt service requirements; however, as noted above, LIPA will access the capital markets in 1999 in order to finance its capital expenditures. In addition, LIPA will refinance higher cost debt if conditions prove favorable. LIPA estimates that for the remainder of 1999 debt maturities will total approximately $469 million. Of the $469 million, $397 million was received in June by LIPA from KeySpan in accordance with the terms of the promissory note (LIPA subsequently made the $397 million payment to the bondholders on July 15, 1999). The Authority will use cash generated from operations to satisfy $71 million of the remaining maturities. An additional $1 million is due from KeySpan in order to satisfy LIPA's sinking fund requirement later this year. The Authority also expects to use cash from operations to make optional redemptions of debt in 1999. Such actions are consistent with the Authority's plan to retire in 16 years, the approximately $4 billion it borrowed to purchase the Shoreham regulatory assets from LILCO. On May 29, 1998, LIPA began issuing credits to the bills of customers arising from the proposed settlement of the Shoreham Property Tax Litigation. Credits will be issued over the five years after May 29, 1998, in the total amount of $106.3 million for Suffolk County customers and $208 million for Nassau County and Rockaway customers. The Authority has issued $145.7 million of bonds and has proposed to issue additional bonds over the next four years to finance the cost of the proposed settlement. Beginning in May 2004, a surcharge will be levied upon the Suffolk County customers in order to repay the bonds. See Note 13 of Notes to Financial Statements - Shoreham Tax Matters, included in LIPA's Annual Report on Form 10-K for the nine months ended December 31, 1998. Capital Requirements Capital expenditures are expected to be made by LIPA in the ordinary course of business for purposes of the normal upgrading and expansion of the T&D System. LIPA considers the T&D System to be adequate and in good condition. The actual amount and timing of future financing will depend upon actual capital expenditures, the timeliness and adequacy of rate increases, the availability and cost of capital and the ability to meet interest and fixed charge coverage requirements. The Authority believes that the amount of capital expenditures budgeted to be made in 1999 is adequate to maintain system reliability and insures customer and employee safety. Impact of Year 2000 The Authority recently purchased new computer software to support certain activities of LIPA and believes that these systems are Year 2000 compliant. Management also believes that, based on available information, it will be able to manage its Year 2000 transition for systems and 20 infrastructure, without any material adverse effect on its business operations or financial position. However, there can be no assurance that failure to resolve any issue relating to such transition would not have a material adverse effect on LIPA. LIPA has had discussions with their largest vendor, KeySpan, which is responsible for the management and operation of LIPA's transmission and distribution system, and KeySpan has indicated that it has completed the testing and remediation of critical systems to ensure no disruptions in service or the supply of electricity to LIPA's customers. KeySpan's computer applications are generally based on two digits and have required some additional programming to recognize the start of the new millennium. A corporate-wide program has been established by KeySpan to review all software, hardware, embedded systems and associated compliance plans of KeySpan and its subsidiaries. The program includes both information technology (IT) and non-IT systems. The critical non-IT systems are generally in the areas of electric production, distribution, transmission, gas distribution and communications. The readiness of suppliers and vendor systems is also under review. The project is under the direction of the Year 2000 Program Office, chaired by the Vice President, Technology Operations and Corporate Y2K Officer. The critical areas of operations are being addressed through a business process review methodology. Each of KeySpan's critical business and service processes is being reviewed to: identify and inventory sub-components; assess for Year 2000 compliance; establish repair plans as necessary; and test in a Year 2000 environment. As of July 1, 1999, inventory, assessment, repair, testing and the development of contingency plans for these service critical processes have been completed. Remediation of other business critical systems, which includes metering, and certain financial and accounting systems is 96% complete, and testing is 90% complete. Testing of the last of these systems will be complete by November 1, 1999. Vendors and business partners needed to support the critical processes of KeySpan are also being reviewed for their Year 2000 readiness. At this time, none of these vendors have indicated to KeySpan that they will be materially affected by the Year 2000 issue. However, many vendors and business partners have not responded to repeated requests for their year 2000 readiness status. Included in the company's overall contingency plans, are contingency plans that address vendor and business partners year 2000 risk. Risk Scenarios and Contingency Plans KeySpan has analyzed each of the critical processes to identify possible Year 2000 risks. Each critical process will be certified by the responsible corporate officer as being Year 2000 ready. However, the most reasonable likely worst case scenarios have been identified. Operating procedures are being reviewed to ensure that risks are minimized when entering the Year 2000 and other high risk dates. Contingency plans have been developed to address possible failure points in each critical process. Testing of these contingency plans will be performed internally, as well as with neighboring utilities and business partners. While KeySpan must plan for the following possible worst case scenarios, management believes that these events are improbable: Loss of generating flexibility: KeySpan's generation subsidiary receives gas delivery from multiple national and international pipelines and, therefore the effects of a loss in any one pipeline can be mitigated through the use of other pipelines. Complete loss of all the supply lines is not considered a reasonable scenario. Nevertheless, the impact of the loss of any one pipeline is dependent on temperature and vaporization rate. The partial loss of gas supply will not affect KeySpan's ability to supply 21 electricity since many of the plants have the ability to operate on oil. Loss of electric grid interconnections/KeySpan operated electric distribution facilities: Electric utilities are physically connected on a regional basis to manage electric load. This is often referred to as the regional grid. Presently, KeySpan is working, on behalf of LIPA with other regional utilities to develop a coordinated operating plan. Should there be an instability in the grid, KeySpan has the ability to remove LIPA and operate independently. Certain electric system components such as individual generating units, transmission and distribution system facilities, and the electric energy management system have the potential to be affected by the Year 2000 issue. KeySpan has inventoried electric system components and developed a plan to certify mission critical process as Year 2000 ready. Contingency plans have been developed, where appropriate, for loss of critical system elements. Loss of telecommunications: KeySpan has a substantial dependency on many telecommunication systems and services for both internal and external communication providers. External communications with the public and the ability of customers to contact KeySpan in cases of emergency response, are essential. KeySpan intends to coordinate its emergency response efforts with the offices of emergency management of the various local governments within its service territory. Internally, there are a number of critical processes in both the gas and electric operating areas that rely on external communication providers. Contingency plans address methods for manually monitoring these functions and/or utilizing alternative communication methods. In addition to the above, KeySpan is also planning for the following scenarios: short term reduction in system power generating capability; limitation of fuel oil operations; reduction in quality of power output; loss of automated meter reading; loss of ability to read customer meters, prepare bills and collect and process customer payments; and loss of the purchasing/materials management system. KeySpan believes that, with modifications to existing software and conversions to new hardware and software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions do not perform as expected, and contingency plans fail the Year 2000 issue could have a material adverse impact on the operations of LIPA. Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes have occurred in this section as of June 30, 1999 from the information provided in LIPA's Annual Report on Form 10-K for the nine months ended December 31, 1998, as filed on March 31, 1999. 22 Part II. OTHER INFORMATION Item 1. Legal proceedings Except as discussed below, no significant changes have occurred with respect to legal proceedings as discussed in Item 1. Business - Shoreham Tax Matters and Item 3. Legal Proceedings in LIPA's Annual Report on Form 10-K for the nine months ended December 31, 1998, as filed on March 31, 1999. With respect to Shoreham Tax Matters, on July 26, 1999, the Appellate Division, Second Department overruled the lower court's decision and held that the Authority was not prohibited from enforcing any part of the judgment relating to real property tax refunds attributable to over assessments on the Shoreham plant after the January 15, 1987 effective date of the LIPA Act. LIPA expects that Suffolk County will seek leave to appeal this decision to the State Court of Appeals sometime in August 1999. In July 1992, LILCO and the Authority separately commenced proceedings in the Supreme Court of the State of New York, County of Suffolk, against the Assessor and the Board of Assessment Review for the Town of Brookhaven, New York (the "Assessor") challenging the real property tax assessment on Shoreham for the 1992-93 tax year. On or about May 1, 1992, the Assessor had tentatively assessed Shoreham in an amount in excess of $156 million for the 1992-93 tax year. On April 22, 1996, the two proceedings were consolidated. On May 13, 1999, the Assessor moved to dismiss the proceedings on procedural grounds. Oral arguments were held on August 5, 1999. No decision has been rendered by the court as of the date of this filing. With respect to the action brought by the County of Suffolk entitled County of Suffolk v. KeySpan et al., this action was voluntarily discontinued by plaintiffs without prejudice. The plaintiffs refiled their claims related to executive compensation in the federal action entitled County of Suffolk et al. v. Long Island Power Authority which was filed on September 28, 1998. With respect to the Sylvester v. Catacosinos et al. action, the judge adopted the magistrate's recommendation that the complaint be dismissed with leave to replead for failure to make a demand. All discovery has been stayed. With respect to the class action brought against LILCO, LILCO's Retirement Income Plan and Robert X. Kelleher, the Plan Administrator, the court on August 13, 1999, approved the settlement agreement. Item 2. Changes in securities and use of proceeds None 23 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 27 Financial Data Schedule. (B) Reports on Form 8-K No reports on Form 8-K were filed during the six months ended June 30, 1999. 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: August 16, 1999 LONG ISLAND LIGHTING COMPANY d/b/a LIPA (Registrant) /s/ David P. Warren ----------------------- David P. Warren Chief Financial Officer EX-27 2 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-31-1999 JUN-30-1999 PER-BOOK 2,074,350 19,821 257,953 81,555 4,648,294 7,081,973 0 0 (140,235) (140,235) 0 0 647,784 0 5,802,209 0 398,278 0 0 0 373,937 7,081,973 984,698 0 887,318 887,318 97,380 3,565 100,945 161,199 (60,254) 0 0 0 145,741 (45,394) 0 0
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