ML18018B209
| ML18018B209 | |
| Person / Time | |
|---|---|
| Site: | Nine Mile Point  |
| Issue date: | 01/18/2018 |
| From: | Long Island Lighting Co |
| To: | Office of Nuclear Reactor Regulation |
| References | |
| Download: ML18018B209 (48) | |
Text
~ 'g 1988 Annual Report gj,w, Long Island Lighting GonIpany 0,
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~ The Year in Review 0
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0 A Year Of High Energy Sales And Improved Service In 1988, LILCOmade significant strides to improve service to its customers and provide Long Island with a reliable energy supply despite serious power shortages and a record demand for electricity. The company achieved these results under a new and energetic senior management which together with its employees is dedicated to continue improving the com-pany. This annual report discusses some of the programs LILCOhas implemented to achieve these ends.
To Our Shareowners In this report to all shareowners, Chairman and Chief Executive OIIicer WilliamJ.
Catacosinos describes how LILCOhas responded to the extraordinary challenges facing the company.
New Records Set For Power Use For the fifthstraight year, Long Islanders set a new all-time record for peak power use. On August 15, 1988, a record 3,822 megawatts were used, up 246 megawatts from 1987's record-breaking demand. In addition, a new winter peak was estab-lished on January 4, 1989 when LILCO customers used 3,017 megawatts of electricity. Meanwhile, the average Long Island household continues to increase its power use, up 12 percent over the past three years.
LILCOPower Plants Operate At 98%
AvailabilityDuring Summer Heat Wave With no additional generating facilities, LILCOmust rely on importing electricity from other utilities and upgrading its aging power plants to increase their performance during the hottest days of the year. During last summer's peak, 98 percent of LILCO's plant capacity was available to produce powerexceeding the industry average of 85 percent.
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New Consumer Programs Customer satisfaction with LILCOservice is at an all-time high as measured by complaint data from the New York State Public Service Commission (PSC).
LILCO's new consumer programs are tailored to serve the individual needs of customers.
Gas Operations Continue To Expand In 1988, LILCOinstalled more than 65 miles of new gas pipelines and connected 7,200 new customers. The company now has 421,429 gas customers. A comprehen-sive marketing program offers customers an easy way to find out whether converting to gas heat willsave them money on their energy costs.
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Table of Contents 1988 In Review Letter To Our Shareowners.....
The People At LILCO: Working And Caring.
5 Customer Service: Reaching Out......
7 Electric Operations: Record Customer Use.
9 Gas Operations: The Growing Gas Heat Market...
Financial Review................
Audited Financial Statements and Notes.
ll 13 18 Report of Independent Auditors.......
39 Selected Financial Data..........,.......
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Working For A Better Long Island The people at LILCOare the company's greatest resource. The dedication of LILCOemployees to the community they serve reaches beyond providing electric and gas service.
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, About the Cover Meter Reader Philip Clark takes a minute out ofa hot summer day to talk with a customer and her daughters about LILCO's many new consumer programs.
77trough an enhanced customer service program, the people at LILCOhave demonstrated a commitment to their neighbors across Long Island. Last August, employee efforts paid offas LILCObecame number one in customer satisfaction by recording the lowest complaint rate in New York State.
~ To Oor Shereowoers On behalf of the Board of Directors, I am pleased to present LILCO's 1988 Annual Report. In addition, presented in this letter are a number of recent develop-ments concerning the company.
In 1988, we pursued a three-track strategy to resolve the controversy over the Shoreham Nuclear Power Station and return the company to financial health. We simultaneously (I) sought a full-power license for Shoreham from the Nuclear Regulatory Commission (NRC);
(2) negotiated a settlement with the state of New York to transfer Shoreham to a state agency; and (3) evaluated offers from the Long Island Power Authority (LIPA)to acquire the company. We believed that any one of these three alter-natives could have presented a satisfac-tory resolution for our shareowners.
We made significant strides to resolve the controversy which I willbriefly describe in this letter.
Shoreham License On March 3, 1989, the NRC dismissed New York State and Suffolk County from the Shoreham licensing proceedings for acting in bad faith by obstructing the licensing process. The NRC ruling, if upheld on appeal, removes the major obstacles in the proceedings and paves the way for a full-power license. The NRC has instructed its staff to com-mence a final review of the plant, to evaluate the remaining state and county contentions and to report their findings to the NRC.
Status ofSettlement with New York State In June 1988, LILCOentered into an agreement with the state of New York, the New York State Public Service Commission (PSC), the New York Power Authority (NYPA) and the Long Island Power Authority which stipulated that the company would transfer the Shoreham plant to LIPA for $ 1, that NYPA, at our request, would construct power plants to meet the energy needs of Long Island, and that the company would return to financial health with guaranteed rate increases of approxi-mately 5 percent for three years, and targeted rate increases of 4.5 percent to 5 percent for the next seven years.
Although the PSC and LILCO's share-owners overwhelmingly approved the settlement, the New York State Legis-lature failed to approve the agreement which prevented it from taking effect.
Approximately nine months later, Governor Cuomo decided to proceed without the legislature and entered into a new agreement with LILCOon February 28, 1989, which does not require legisla-tive approval. Although the February agreement is similar to the previous agree-ment in most respects, the new agree-ment does not require elected officials to endorse future electric rate increases. The PSC willdetermine and grant rate increases. The agreement requires the approval of LIPA, NYPA, the PSC and LILCO's Board of Directors by April 15, 1989. LILCO's shareowners must then approve the agreement before it becomes effective. As called for in the agreement, LILCOwilluse its best effort to conduct its shareowners'eeting on this matter by June 15, 1989.
WilliamJ. Catacosinos Chairman and Chief Executive Officer
Long Island Power Authority In 1988, LIPA made three conditional proposals to acquire the company at
$8.75, $ 10 and $ 12 per common share plus, in>each case, the redemption price plus accrued dividends for each class of preferred stock outstanding. Your board's evaluation committee, comprised of non-management directors, rejected these conditional proposals as not fair to the company and all its shareowners.
In June, LIPA subsequently endorsed the governor's settlement agreement. The LIPA Board, which has met only once in the past eight months, has not made any new offers to acquire the company.
Suffolk County Suit On December 5, 1988, a jury in a civil suit brought by Suffolk County, under the Federal Racketeer Influenced and Corrupt Organization Act (RICO),
found LILCO and a former president jointlyand severally liable for approxi-mately $7.6 millionwhich, under the provisions of the RICO Act, would be trebled to approximately $23 million.
Further, the certification of the suit as a class action on behalf of all ratepayers would have increased the potential damages to an estimated $4.3 billion. If the jury had ruled against the company on all allegations in the suit, the company's potential liabilityfrom the class action could have been as high as
$8.7 billion. The lawsuit, which is con-cerned with prior management of the company, alleged that the company and several of its former officers had misled the PSC about expected completion dates for Shoreham and had obtained rate increases as a result.
On February 11, 1989, a federal judge dismissed the suit, ruling that the com-plex process ofsetting electric rates belonged before the PSC and not in the federal courts. While dismissing the suit, the trial court certified the class of all ratepayers. Ifthe trial court's dis-missal order were reversed on appeal, the jury verdict could be reinstated. The trial court urged the parties to reach a settle-ment in order to avoid appeals.
On February 14, 1989, the company and the class representatives entered into an agreement for a proposed settlement which would reduce future rate increases by $390 million over a 10-year period starting in June 1990. We believe the settlement with the class, which must be approved by the court and sustained on appeal, eliminates the risk of bankruptcy which could have resulted from an adverse appellate court ruling. LILCO's board also made the settlement condi-tional upon shareowner approval.
Financial Condition On February 15, 1989, the PSC granted the company its request for a temporary 5.4 percent electric rate increase, resulting in additional revenues of approximately
$97.7 millionthe company's first rate increase in more than three years. In granting the increase, the PSC stipulated that the company could not operate the Shoreham plant while the temporary rate increase remained in effect. The PSC is expected to consider the company's request for a permanent rate increase in the next several months. The PSC has also given the company permission to issue an additional $375 million ofdebt.
Also on February 15, 1989, LILCO's banks extended to the company a $200 million line ofcredit which expires February 1990. Under the terms of the agreement, the company has borrowed
$ 112 million from the line of credit to prepay principal payments on the company's $595 million bank term loan.
The balance of the line of credit may be borrowed after May 19, 1989, and after the public issuance of the $375 million of debt.
The rate increase, the bank line ofcredit and a successful issuance of $375 million of debt, which is planned for the near future, willprovide sufflcient cash to operate the company through the first quarter of 1990, but a resolution of the Shoreham controversy and of the RICO matter are necessary in order for the company to return to full financial health.
Company Operations Long Island continues its economic expansion indicating that our electric and gas business willcontinue to grow in the coming years. The company has made great strides in meeting the demand for electricity on Long Island by operating power plants efficiently and by imple-menting a comprehensive conservation program. We are also providing better service to our customers as reflected in a significant reduction in complaints and increases in complimentary letters. We attribute the improved service to our highly dedicated and skilled workforce and to the introduction of many innova-tive programs.
Management Changes Mr. Russell C. Youngdahl willretire as president and chief operating officer of the company on April I, 1989, when he reaches the company's normal retirement age. I am deeply grateful to Mr.
Youngdahl for his contribution to the company.
Mr. Anthony F. Earley, Jr. has been appointed president and chief operating officer of the company to succeed Mr. Youngdahl effective April 1, 1989.
Mr. Earley has been the company's general counsel since 1985 and its executive vice president since January 1988. Mr. Victor A. Staffleri, the company's deputy gen-eral counsel, has been appointed general counsel.
In addition, Mr. James T. Flynn will become group vice president for engineer-ing and operations on April I, 1989.
Mr. Flynn has been the company's vice president of fossil production since October I, 1986.
Mr. P. Alan Gambill was appointed group vice president forcommercial opera-tions effective March I, 1989. Mr. Gambill had been a senior executive with AT&T.
Over the past five years, your board has attracted a new senior management to the company which, together with the company's employees, is dedicated to improving service, meeting the energy needs of Long Island, and ending the con-troversy over Shoreham.
We appreciate your continued interest and support as we strive to return the company to finan-cial health.
On behalf of the Board of Directors, I would like to express my deep appreci-ation for your continued understanding and support during these difficulttimes.
Sincerely, IVilliamJ. Catacosinos Chairman and Chief Breeuri~v OJ7ieer a"
~ The People at LILCO:
Working and Caring Although working under extraordinarily difficultcircumstances, the people at LILCO have demonstrated a commit-ment to their neighbors across Long Island through an enhanced customer service program.
They have worked long and hard to maintain the flowofenergy to LILCO's customers and keep pace with the expanding electric and gas demands of Long Island's growing economy.
Through their dedication, LILCO employees have shown competence and a commitment to the company and its customers. Despite all these demands, the people at LILCOcontinue to enhance the quality of life on Long Island by involving themselves in many worthwhile community projects.
Community Service Volunteers from the company are involved in every aspect of community life. Their spirit led to the formation of the Lamplightersa voluntary organiza-tion of LILCOemployees. Since this group was formed in 1987, nearly 2,000 employees have donated their time and skills to 21 charitable events.
Last September, for example, LILCO Lamplighters were the largest corporate contingent at a walkathon to raise funds for thc Fidelco Guide Dog Foundation, a non-profit group that trains canines for the blind. Company employees walked 12 kilometers to raise money for this cause.
During 1988, LILCOemployees also pledged the most money of any company its size to the March of Dimes, and over the last three years donated almost nine tons of food to the needy through Long Island churches.
In addition, LILCOemployees have donated their time and skills as literacy volunteers to teach basic reading and writing to illiterate adults. They have participated in various blood drives, donating more than 1,600 gallons of blood in 1988, and made the holidays brighter for Long Island children in orphanages, shelters and hospitals by donating gifts through thc U.S. Marine Corps'Toys forTots" program.
Whether volunteering through the Lamplighters organization, or individual efforts, LILCOemployees are dedicated neighbors in the communities where they live and work on Long Island.
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I EIECO volunteers are Involved in every aspect of community life on long Island. Their spirit led to the formation of the Eamplighters, a voluntary organization of employees who donate their time and skills to worthy causes.
East September, Bob Benson and Dottle Thomsen (right) were part of the Eampllghters contingent at a walkathon to raise funds for the Fidelco Guide Dog Foundation.
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Educating customers about con-ervlng energy and saving money Is the thrust of ULCO's "Housowarmer" and "Saving Power" energy audit programs.
During a home audit. an energy specialist surveys a customer' home and points out various energy-saving techniques and equipment that can be installed.
Since f994, LILCOhas performed more than f05,000 audits-nearly SILOOO last year alone. ULCO energy specialist Mike Brown (abovo) tests the efficienc of a customer' heating system during a "Saving Power" energy audit.
IQ(p p Special Energy Experts LILCOretains a large, specially trained staff of energy experts to help its cus-tomers use electricity and gas as eAi-ciently as possible. These dedicated people go the extra mile to meet the special needs ofcustomers.
The company offers a variety ofconser-vation services to help educate customers and build interest in saving energy.
LILCO's Energy Works Center, located in the Sunrise Mall, Massapequa, is staffed seven days a week to provide Long Islanders individualized help on energy use. This personalized assistance is supported by a wide range of displays and exhibits that help turn complicated energy management processes into easy-to-apply information.
Displays showing highwfficiency lighting, appliances and heating units allow cus-tomers to discover how to save energy while LILCOspecialists are on hand to answer any questions. In addition, customers can gct advice from the company's energy experts by calling a toll-free telephone number.
During spring and summer months, a mobile version ofthe Energy Works Center travels to home improvement stores, schools and various community fairs. In 1988, approximately 18,000 customers received information from the Energy Works Center.
Through the company's "Housewarmer" and "Saving Power" home energy audit programs, customers receive house calls from LILCO. During a home audit, a LILCOenergy specialist surveys a cus-tomer's home and points out various energy saving techniques and equipmcnt.
The LILCOenergy experts also discuss low-interest conservation grants with the homeowner. In 1988, the company per-formed 29,000 "Saving Power" home energy audits.
LILCOcustomer relations representa-tives at our eleven business offices across Long Island are also prepared to guide customers on energy use matters, while also handling inquiries on billing and business matters.
Trained Workforce Making sure LILCO's workforce is thc best-trained in the business is an ongoing commitment to a standard ofexcellence that ensures its customers receive high quality service.
Every year, more than two-thirds of LILCO's workforce receive detailed training to enhance their professional development, job performance and im-prove service. In all, fifteen departments within the company conduct on-the-job trainingfrom electric linemen to customer representatives.
During 1988 alone, LILCOdevoted some 380,000 hours0 days <br />0 hours <br />0 weeks <br />0 months <br /> to employee training, the equiv-alent of 200 work years.
The dual commitment to LILCOcus-tomers and employees is embodied in the J.W. Dye, Jr. Training Center.
The 110,000-square-foot facility in Hauppauge opened in 1987. The center has 38 classrooms and laboratories, I I shop areas, a 140-seat auditorium along with audiovisual and computer facilities for individualized instruction.
~ Customer Service:
Reaching Out Two years ago, LILCOannounced 50 major programs to improve customer ser-vice in what became known as the "Year of the Customer." In l988, the company continued to aggressively improve customer service. This effort resulted in the lowest complaint rate, as measured by the Public Service Commission (PSC), in LILCO's history.
Adding New Programs LILCO's customer representatives are now available 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> a day, seven days a weeka service that symbolizes the company's effort to make doing business with LILCOeasier for customers.
"LILCObecame the first utilityin New York State to launch 24-hour, sevenday-a-week phone service," said Walter Wilm, vice president of customer relations.
"Customers can now call LILCOany-time, day or night, with business or billingquestions."
Last year, LILCOanswered approxi-mately 200,000 calls during the increased business hours.
Special Customer Needs Many programs have been designed to meet the special needs of various customer groups. To meet the needs of Long Island's growing senior citizen community, the company established a
program of"Golden Link"services.
Through this free program, LILCO is able to identify seniors for special protec-tion assistance and provide them informa-tion tailored to their needs through a quarterly newsletter. Nearly 35,000 senior citizens have already signed up for this voluntary service.
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'ther ncw programs such as "Peace of Mind"give hospitalized customers the extra time they need to make LILCObill payments, and the "Safety First" pro-gram helps parents educate their children about electric safety. LILCO has intro-duced a special service for the hearing impaired and plans to have large print and braille bills available for the visually impaired.
LILCO's residential tree trimming service continues to be one ofthe company's most successful programs. Since the program started three years ago, the company has trimmed trees for about
, 120,000 customers. In l988 alone, LILCOcrews pruned the trees of nearly 30,000 customers to prevent branches from interfering with electric wires.
/I n ft In 1987, ULCO became the first utilityin Ifew York State to offer 24-hour, seven-day-a-week phone service. To meet the special needs of the company's diverse customer groups, ULCO addedmany new programs such as "Golden Lln'k" services forsenior citizens, and the "Peace of Mind"program to give hospitalized customers more time to pay their ULCO bills. In addition, customer account representatives such as Alda Torres labove) are able to assist Spanish-speaking customers with their accounts.
Commitment To Customers In addition to introducing new service programs, LILCOemployees improved their understanding of customers'needs and concerns. Each employee from the company's top executives right down the line has participated in intensive cus-tomer sensitivity training.
As a result, customer satisfaction with LILCOservice has been steadily improv-ing. Last August, customer complaints to the New York State Public Service Commission fell to 4.8 per 100,000 customers the best mark among New York State utilities and the lowest ever recorded by LILCO.Since 1985, LILCO's annual complaint rate has fallen from 32.9 per 100,000 customers to 6.2 per 100,000 for 1988.
To ensure that LILCO's programs remain customer driven, the company developed a sophisticated tracking system to evaluate customer phone calls.
By itemizing these contacts into nearly 400,categories, the company can analyze trends and'customer concerns. In addi-tion, every operating area of LILCO randomly calls customers who have had work done to assure that they are satis-fied. During 1988, more than 50,000 customers were called or surveyed by LILCO.
Community Outreach Last year, LILCObecame one of the first utilities in New York State to start a consumer advocate program. These advocates counsel customers with eco-nomic hardships and recommend steps to help them gain financial stability. To help low-income families take advantage ofgovernment-subsidized home heating programs, LILCOhas made arrange-ments with Suffolk County Social Services to station personnel in each other's offices.
In 1988, LILCOheld 260 meetings, or consumer forums, with local community organizations, service agencies and church groups to help evaluate and improve service to customers who rely on these groups for aid.
"Byworking more closely with these local organizations," added Wilm, "the company is better prepared to assist needy customers."
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LILCO's rosidenVal tree trim service continues to be one of the company's most successful pro-grams. Nearly 30,000 customers had their tree branches pruned by ULCO in 10N. Customers who call the company's free tree trim hotline are contacted by ULCO within 48 hours5.555556e-4 days <br />0.0133 hours <br />7.936508e-5 weeks <br />1.8264e-5 months <br /> and are promised action on their request withintwo weeks of their call.
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~ Electric Operations:
Record Customer Use During a two-week heat wave in August, the energy needs of Long Island's booming economy shattered the LILCO record for peak electricity use four times.
These record power demands were suc-cessfully met because the company's generating plants performed at near per-fect levels and customers cooperated by reducing their electric use at critical supply times.
An extensive preventative plant mainten-ance program and the skilled work of LILCO plant operators had the company's aging plants operating like new. The staffs of LILCO's power plants kept their units running at a remarkable 98 percent availability levelfar exceeding the industry average of 85 percent.
Demand Outstrips Supply Long Island's record electric use is powered by strong economic growth.
Overall electric consumption grew by 3.8 percent in 1988 and peak demand has risen 23 percent in the last five years.
More than 13,000 new electric customers were added to the LILCOsystem during the year.
Last summer, for the first time ever, Long Islanders demanded more power than the company's electric system could produce. LILCOwas more than 500 megawatts short of the power needed to meet customer demand and have an adequate reserve level. This shortage is equal to the capacity of LILCO's Port Jefferson Power Station, one of the company's major generating plants.
To close the gap, the company had to purchase approximately 400 megawatts from other utilities and power agencies.
Another 200 megawatts were supplied from LILCO's 18 percent ownership of the Nine Mile Point 2 nuclear power plant in upstate New York.
Improved Power Plant Efficiency To get ready for the summer squeeze, LILCOembarked on a system-wide power plant maintenance program two years ago. Periodic overhauls were performed on units ranging in size from a 12-megawatt combustion turbine to the mammoth 1,500-megawatt Northport Power Stationthe largest oil-fired plant in the United States.
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,c'Thc goal of the maintenance program is to pinpoint possible failures before they occur and rebuild the units so that they are as close to new as possible," said James Flynn, group vice president of engineering and operations.
Maintenance overhauls are scheduled during periods when power demand is low such as the fall and spring when the work load of the shutdown units can be more easily absorbed by LILCO's sys-tem. However, as year-round energy demand continues to grow, it is becoming increasingly difficultfor the company to find a time during the year to take a power plant out ofservice for maintenance.
Demand Reduction Programs Customer participation in LILCO demand reduction energy management programs played a key role in getting Long Island through the critical summer power supply periods. In 1988, the company launched the most comprehen-sive energy management program in the Northeast. And for 1989, LILCO's $35 millionconservation plan contains 22 separate energy-saving programs designed to cut 109 megawatts from peak summer demand.
g1LCO alarrce Ouring f988, ULCO customers experienced four percent fewer service interruptions than In f987.
The company has budgeted about
$60 millionthrough I992 with the long-term goal of cutting customer outagcs by 40 percent These Improvements are being made by employees such as first class linemen Scott Foglla 1above) and his co-workcis.
The bulk of the summer power savings comes from programs the company offers its commercial/industrial cus-tomers. Last year, the LILCO Energy Cooperative 168 commercial customers each agreed to shave 100 kilowatts or more during peak demand and saved 40 megawatts. This year LILCO is expanding eligibilityby offering the program to any commercial customer that can cut back 50 kilowatts of demand.
Other programs offer cash incentives to both residential and commercial cus-tomers to replace existing equipment with high-efficiency air conditioners, lighting and motors. The programs help customers save on their energy costs and provide LILCOwith an economic alter-native to building new power plants.
In addition, on days when the power supply is tight, LILCOdeclares "Power Alerts," requesting commercial and residential customers to voluntarily curtail use of appliances and machinery.
Issuing these alerts can reduce demand by as much as 70 megawatts.
Imported Power Imported electricity is delivered to the LILCOsystem across four power cables that link Long Island to energy sources outside the area. These power lines were used to capacity last summer.
To bring more power to the area, we have contracted with the New York State Power Authority to install a 600-megawatt cable across Long Island Sound in 1992. To help meet short-term power needs, LILCOis installing 238 megawatts of oil-fired internal combustion generators in Brookhaven Town. The company plans to have the generators in operation during the summer of 1989.
Improved Service Reliability In 1988 the company put into place a variety of programs to make electric service more reliable then ever.
"The company has budgeted about $60 million through 1992 for reliability improvements," said William Museler, vice president of electric operations.
"Additional measures are being considered beyond this at a cost of $25 million annually, with the long-term goal of cut-ting the number and length of customer outages by 40 percent."
The new programs include installation of radiowontrolled switches throughout the company's 45,000 miles ofelectric lines. These devices willallow electric line problems to be isolated remotely and will help restore power to affected areas more quickly.
Other improvements include further replacement of uninsulated wire with storm resistant plastic covering, increased use ofsophisticated scanning equipment to find trouble spots on power lines, more frequent tree trimming along pri-mary distribution lines and installing a computerized system to identify cus-tomers who experience repeated power interruptions.
During 1988, LILCOcustomers experi-enced four percent fewer interruptions than in 1987. For the last several years, LILCO has been one of the top performers among New York State overhead utilities as measured by the time required to respond to power outagcs.
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To meet the summer peak, LILCO embarked on e system-wide power plant maintenance program two years ago. A complete over-haul (left) is performed on one of the turbines at the 1400 megawatt Northport Power Station. This extensive program, end the skilled work of ULCO plant operators, had company power plants running at a remarkable 98 percent availability level during the summer heat wave.
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~ Gas Operations: The Growing Gas Heat Market More and more Long Islanders are realizing that gas heat offers them con-venience, cleanliness and significant cost savings. To meet growing demand, LILCO is expanding its gas system to make this premium fuel available to more Long Island communities.
The company expects to add about 130,000 new gas space-heating customers in the next decade. Only about half of LILCO's 420,000 gas customers use the fuel for home heating and that means there is a prime market of I80,000 homes that could be converted to gas heat with minimal capital investment.
Future Pipelines To take advantage of that market, LILCO must ensure that enough natural gas supplies can be brought to Long Island. At present, about 60 percent of LILCO's annual gas supply of nearly 72 billion cubic feet is supplied by the Trans-Continental Gas Pipeline, which originates in Texas.
The new Iroquois Pipeline, extending 369 miles from Canada to Long Island, is expected to be completed by 1992. The new pipeline willsupply Long Island with 35 millioncubic feet of Canadian gas per daya 15 percent increase in LILCO's supply. The availability of that Canadian gas willplay a major role in LILCO's gas expansion program.
Another key factor willbe LILCO's ability to install new gas, or venture, mains in eastern Long Island to bring the gas from the interstate pipeline to busi-nesses and homes in areas where gas is currently not available. One such venture main was recently completed through a four-mile stretch in Manor ville on eastern Long Island which willbring gas to more than 3,000 new customers.
"The company plans to install about 25,000 feet ofventure mains during the next several years," said Jay Kessler, vice president of gas operations. "These new pipelines are expected to serve thousands of new gas customers."
Switching To Natural Gas In 1988, more than 9,400 Long Island homes and businesses became new gas heat customers. Marketing efforts to bring the many advantages of gas heat to the public's attention is increasing our share of the home heating market. Gas has greater consumer appeal than oil in both economy and cleanliness. Over the last three years, the company has added more than 28,000 gas heating customers.
lest year, ULCO gas crews Installed more than 65 miles of new gas pipeline end connected more than 7400 new customerL The company expects to add about 139000 new gas space-heating customers In the next decade.
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,c 'f' Unique New Customers At Belmont Park in Elmont, LILCOgas crews are converting the famous horse racing course from oil to natural gas heat. The race track, like many commer-cial businesses on Long Island, must remove old oil tanks in the ground to meet new environmental standards.
Converting to gas is a cost-saving alternative to adding new oil tanks.
In addition to Belmont, other large, high-profile customers that have recently switched to gas include Stony Brook University and the New York Institute of Technology. Last year, LILCOadded nearly 2,400 commercial gas customers through conversions and new service hook-ups.
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AllULCO gas customers get free 24-hour service. As part of a special preventative maintenance program, the company also pro-vides a free safety check with every heating Installation. Gas Serviceman Andrew Chiasera lebove) shows a customer how to keep her home's gas system running safely and efficientl.
Heating is the largest energy cost for most homes, and converting to natural gas heat offers customers a major advan-tage in helping them control their energy costs. Last year, LILCOintroduced a free home heating analysis program for its customers. LILCOenergy experts do an in-house heating analysis that allows cus-tomers to evaluate the cost-effectiveness of gas heat for their particular home.
They can then decide ifconversion to gas willbenefit them.
The company has highlighted this service in an extensive marketing campaign. The campaign includes television, radio com-mercials and an innovative cooperative advertising plan with manufacturers and installers.
Financial Review Financial Condition Overview In recent years, the financial integrity of the Company has been threatened by uncertainty concerning the licensing ofthe Shorcham Nuclear Power Station (Shoreham). Since 1982, the State of New York (the State) and Suffolk County (the County) have refused to participate in planning and testing an offsite emergency response plan and also have opposed the Company in the licensing proceedings before the Nuclear Regulatory Commission (NRC). The delays and uncertainties in this licensing process have jeopardized the Company's financial viabilitysince it has not been permitted to recover a significant portion of its investment in Shorcham from ratepayers in this period.
In order to maintain its financial viabilityin an environment of such adversity, the Company implemented a number of steps starting in 1984.
~ To conserve cash, the Company cut its operating and maintenance expenses and suspended Common and Preferred Stock dividends.
~ To assure interim operating capability, the Company employed long-term borrowings instead of short-term borrowings in order to build cash reserves.
As a result of these actions and others, the Company has maintained its financial viabilityto date. In 1987 'and 1988, its operating and maintenance
- expenses, as well as capital and refunding requirements, werc funded from cash generated from operations and from cash balances that had as their source long-term borrowings undertaken in 1986. On December 31, 1988, 1987 and 1986, cash balances totaled $93 million, $211 million and $366 million, respectively.
The Company's financial viabilitywillcontinue to be threatened so long as the political and regulatory uncertainties remain unresolved. Unless a sufficient amount ofexternal financing can be obtained to meet its operating and capital requirements, the Company estimates that it willrun out of cash during the second quarter of 1989.
The Company's continued financial viabilityis dependent upon various factors, including (a) continued access to the capital markets to meet its obligations as they mature, (b) receipt of adequate and timely rate relief, whether or not Shoreham operates, and (c) the satisfactory resolution of certain contingencies identified in Note 6 of Notes to Financial Statements.
The Company cannot predict at this time either its ability to access the capital markets or obtain such rate relief or the outcome of those contingencies, which, ifresolved adversely, would have a material effect on the Company's financial viability. Under the most adverse circumstances, the Company might seek the protection of federal bankruptcy laws while it continues its operations.
Rates and Agreements with the State On February 15, 1989,the Public Service Commission of the State of New York (PSC) granted the Company temporary annual electric rate relief, subject to refund, of $97.7 million, or 5.4% The temporary rates have become effective. In its implementing order, the PSC conditioned the rates upon the Company not operating Shoreham while the temporary rates are in effect. Although the PSC has indicated the temporary rates willremain in effect for approximately 90 days, no assurance can be given respecting when or what actions, if any, the PSC willtake. The Company is reviewing its options with respect to the restriction in the PSC order not to operate Shorcham. This rate relief is the first such relief granted by the PSC in more than three years. The PSC had last granted the Company electric rate relief totaling $245 million annually in 1984 and $69 million annually in January 1986. This rate relief enabled the Company to obtain additional credit, permitted access to the capital markets, and has Iirovided a portion of the cash needed for the Company's operating and capital requirements.
In December 1987, thc PSC denied the Company a 5.4%
increase in electric rates citing, among other reasons, the continuing "deadlock" over Shorcham, and further stating that the economic interests of the Company and the desires of its customers must be recognized ifthe deadlock was to be broken within the context of regulation of the Company "short of bankruptcy."
Also, in December 1987, the Company and New York State resumed long stagnant negotiations and, in June 1988, definitive agreements (the 1988 Settlement) were signed by the Company, the Governor of the State and others, addressing, among other issues, energy alternatives for Long Island, the cost ofelectricity for its residents, the future of Shoreham, and the Company's financial health.
The 1988 Settlement provided, among other things, that Shoreham be transferred to the Long Island Power Authority (LIPA)for $ 1 and that the New York Power Authority (NYPA) construct up to five new power plants on Long Island at the request of the Company. The 1988 Settlement also would have provided the Company with annual rate increases of 4.9% in December 1988 and 5.0% in October 1989 and 1990 and targeted rate increases of approximately 4.5% to 5.0% each year for the following seven years, with any variations to be determined by the PSC.
The 1988 Settlement also contemplated that the Company would have the ability to issue new debt to refund certain of its outstanding high-interest rate debt and to resume payment of dividends.
The 1988 Settlement was subject to a number of conditions, including approval by the Company's shareowncrs and the PSC. The Company's shareowners approved the 1988 Settlement on November 4, 1988 and the PSC gave its approval on November 18, 1988. However, one of the conditions that was not met was the requirement for legislative approval for the construction of power plants by NYPA.
The failure of the New York State legislature to enact legislation prior to recessing on December 1, 1988 prevented the 1988 Settlement from becoming effective. Accordingly, on December 2, 1988, the Company applied to the PSC for temporary annual rate relief of approximately $97.7 million, or 5.4% to become effective in January 1989. At the sanie time, the Company also requested that a schedule be set for the review of its application, filed in April 1988, for the same amount of rate relief on a permanent basis.
, On February 28, 1989,the Company and the Governor of the State entered into an agreement (the 1989 Issues Agreement) which is intended to resolve certain of the same issues sought to be resolved by the 1988 Settlement, principally the future of Shoreham. Similar to the 1988 Settlement, the 1989 Issues Agreement provides for the transfer of Shoreham to LIPA for $ 1.
One of the objectives stated in the 1989 Issues Agreement is the return of the Company to investment-grade financial condition. However, unlike the 1988 Settlement, the 1989 Issues Agreement does not commit the State to support rate increases in any particular amount, nor does it specifically provide for rate relief for the Company. It is the Company's position that a rate structure similar to that approved by the PSC in connection with the 1988 Settlement must be author-ized by the PSC before the Company's Board of Directors willact with respect to the 1989 Issues Agreement.
The Company has been informed by the PSC that the rate relief contemplated by the 1989 Issues Agreement willbe considered by the PSC prior to April 15, 1989. However, the Company can give no assurance that the PSC willact by that date, predict what action the PSC willtake with respect to rate relief,or give assurance that the rate relief, ifany, authorized by the PSC willreturn the Company to investment-grade financial condition.
The effectiveness of the 1989 Issues Agreement is conditioned upon approval on or before April 15, 1989 by the Company's Board of Directors, the PSC, LIPA and NYPA. The effective-ness of the 1989 Issues Agreement is also conditioned upon approval of a majority of the Company's shareowncrs and the Company has committed itself to use its best efforts to obtain such approval by June 15, 1989. During the period of time in which approvals are being sought, the Company has agreed not to operate Shoreham above 5% iflicensed to do so by the NRC. However, the Company intends to continue its vigorous pursuit of a fullpower license for Shoreham.
Shoreham and the Licensing Process The construction of Shoreham is complete and it has been successfully operated and tested at levels up to 5% of full power pursuant to a license issued in July 1985 by the NRC.
The Company continues to face strong political opposition to the licensing of Shoreham from the State and the County.
In June 1988, the Federal Emergency Management Agency (FEMA) held a review of a fullscale exercise'of the Company's offsite emergency response plan and, in September 1988, issued a favorable evaluation of the Company's performance at this exercise. Also, in September 1988, an Atomic Safety and Licensing Board (ASLB) of the NRC dismissed the State and County as a sanction for their conduct in proceedings before the NRC relating to the Company's application for the Shoreham license. This decision was partially reversed by the Appeal Board and subsequently appealed to the full NRC.
In November 1988, a presidential executive order was signed allowing FEMA to substitute its own resources whenever state or local governments decline or fail to prepare offsite emergency response plans that are sufficient to satisfy NRC requirements or to participate adequately in the preparation, demonstration, testing, exercise or use of such plans.
On March 3, 1989, the NRC affirmed the dismissal of the State and County from all proceedings before the NRC relating to Shoreham and instructed the staff of the NRC to review all remaining open licensing issues. The review process by the NRC staff could be completed within approximately one month but there is no guarantee of the length of time it willtake. Moreover, the Company can give no assurance that the staff of the NRC willreach a conclusion in favor of the Company on all matters before it. Furthermore, the decision of the NRC may be appealed to the courts for review. The Company expects that the NRC's decision in this matter will be appealed, but can give no assurance as to the outcome of such appeal or estimate the time required for such appellate process.
Liquidityand Financial Viability In contemplation of the 1988 Settlement becoming effective, the Company had arranged a refinancing of its 1986 Restructuring Credit Agreement (1986 RCA) and a new credit agreement designed to replace the 1984 Revolving Credit Agreement (1984 RCA) which has now expired. In addition, the Company had contemplated issuing up to $ 1.1 billion of debentures in the first quarter of 1989, approximately $500 millionof which would have been used to refund certain of its outstanding high interest rate General and Refunding Bonds (G&R Bonds), with the remainder used to reimburse the Company's treasury for expenditures incurred for construction of utilityplant and to provide working capital. Because the 1988 Settlement did not become effective, these financing arrangements have had to be set aside and alternative financing plans pursued.
The Company and certain of its lending banks have entered into a credit agreement (the 1989 Credit Agreement) which expires in February 1990. Under its terms, the Company is provided with up to $200 millionof credit, secured by a first lien upon the Company's accounts receivable and fuel oil inventory. Of this amount, approximately $ 112 million was used to prepay the March, June and September 1989 quarterly payments of approximately $37 million each, which represents three of the remaining 15 equal quarterly installments associated with the 1986 RCA. See Note 4 of Notes to Financial Statements. The Company paid the first installment, when due, on December 30, 1988. The approximately $88 million remaining under the 1989 Credit Agreement willbe available not sooner than May 19, 1989 and is contingent upon the Company selling approximately
$375 millionof debentures.
The Company willneed to sell such debentures to assist in meeting its operating and capital requirements for 1989.
Although the Company has received authorization from the PSC to sell G&R Bonds, its ability to issue and sell debentures is subject to authorization from the PSC, prevailing market conditions and the perception of the credit markets as to the financial viabilityof the Company. The Company can give no assurance that it willbe able to sell debentures.
The Company anticipates that even ifit is able to sell debentures and borrow the remaining $88 million available under the 1989 Credit Agreement, the Company's cash resources necessary to meet its operating and capital requirements willbe exhausted during the first quarter of 1990 in the absence of rate relief and additional financing, including the extension of or modifications to the Company's bank agreements.
Without adequate and timely rate relief and favorable resolution of the contingencies facing the Company, the Company can give no assurance that it willbe able to obtain such additional financings.
Capital Requirements Construction Electric Nuclear Shoreham NMP2 Fuel Non Nuclear 19SS 1987 (mil!ions of dollars)
$332
$383 19 47 16 l3 147 86 Total Electric Gas Common 514 3S 9
529 34 IS Total Construction Less: NMP2 Reimbursement AFC (Equity Component)
Total Construction Rcfundings Long Term Debt Treasury Stock Bank Loans Total Refundings Total Capital Requirements 561 SSI 52 75 12S 434 453 43 24 18 I6 37 98 40
$532
$493 Capital Provided 19SS 1987 (millions ofdollars)
Use of Cash Balances
$118
$ 156 Internal Cash Generation from Operations 414 337 Total Capital Provided
$532
$493 For further information, see the Statement of Cash Flows and Notes I and 6 of Notes to Financial Statements.
Capital Requirements and Capital Provided Capital requirements for 1988 amounted to $532 million, of which total construction was $434 million, and total refundings were $98 million. The construction requirements are exclusive of the equity component of AFC and the reimbursement for certain Nine Mile Point 2 (NMP2) expenditures previously incurred.
Internal cash generation from operations in 1988 was $414 million and provided 78% of the funds necessary to finance construction and refunding requirements. The remaining construction and refunding requirements were funded from the Company's cash balances.
For 1989, total capital requirements are estimated at $730 million, of which total construction is $430 million. Total refundings are estimated at $300 million. Capital requirements and capital provided for 1988 and 1987 were as follows:
Capitalization Ratios Long-Term Debt Preferred Stock Common Shareowners'quity 1988 l987 l986 51.7%
46.4%
48.4%
15.4 12.1 11.7 32.9 41.5 39.9 100.0%
IOO.O/o l00.0%
Dividends, Equity Securities and Capitalization Dividends: The Company suspended the payment ofdividends on its Preferred and Common Stock in 1984. Under the Company's Certificate of Incorporation, the payment of Common Stock dividends is prohibited so long as Preferred Stock sinking fund requirements or dividends are in"arrears.
At December 31, 1988, the total of all dividend arrearages on
, Preferred Stock was approximately $341 million. The 1989 Credit Agreement and, to an extent, the 1986 RCA prohibit.
the payment ofdividends on any of the Company's Preferred or Common Stock. See Note 2 of Notes to Financial Statements for a further discussion of dividend restrictions. If the 1989 Issues Agreement becomes effective, the Company intends to seek elimination of such restrictions from its bank agreements, but it can give no assurance that such restrictions willbe eliminated.
Equity Securities: The Company believes that the suspension of dividends on its Preferred and Common Stock and the uncertainties facing the Company have adversely affected its ability to raise funds through the sale of any of its equity securities in the public markets, the last such public sale having been in 1983. Consequently, the predominance of the
'"funds raised subsequent to 1983 have been limited to the debt markets and bank credit.
Capitalization: Capitalization (deflined as the total of Long-Term Debt, Preferred Stock and Common Shareowners'quity) was approximately $6.6 billion at December 31, 1988,
....reduced from $8.0 billion at December 31, 1987. The decrease in capitalization relates to a reduction in retained earnings in 1988 to, approximately $680 millionfrom approximately $ 1.8 billion at December 31, 1987. This decrease was caused by the Company's 1988 loss which resulted from adopting the provisions of Statement of Financial Accounting Standards No. 90 (SFAS No. 90). At'ecember 3I, 19881987 and 1986, the components of the Company's capitalization ratios were as follows:
Net Income Earnings for Common Stock Earnings Per Common Share (in millions, except per share amounts)
$298.5
$269.9
$ 316.7
$224.0
$ 192.3
$236.9
$2.02
$ 1.73
$2.13 AFC AFC% of Net Income
$ 150.0
$ 18 l.0
$269.0 50%%uo 6I%
85%
Allowance for Funds Used During Construction (AFC) is a noncash credit to income that represents thc cost of funds borrowed for construction purposes, and a reasonable rate of return upon'a utility's equity when so used. The amount of AFC fluctuates from period to period as a result of, among other things, changes in the cost of money, the level of construction activity, and the amount ofconstruction work in progress that is included in the Company's rate base.
Before the write-down, Earnings for Common Stock in 1988 increased approximately $32 million, or 16.5% above 1987 primarily as a result of higher revenues and lower federal income taxes, duc primarily to lower tax rates. These increases were partially offset by reductions in AFC and increases in expenses.
Earnings for Common Stock in 1987 declined approximately
$45 million, or 18.8% below 1986, due primarily to the Company's ceasing to accrue AFC on the disallowed portion of its investment in Shoreham and on all of its investment in NMP2. In addition, in December 1986, the Company recorded a net provision for loss relating to its investment in Jamesport of $ 16 million.
Results of Operations Earnings The Company incurred a loss for Common Stock of $ 1.1 billion or $ 10.08 per common share in 1988 as a result of a noncash write-down of certain disallowed plant costs. This writedown of net assets amounted to $ 1.3 billion, net of tax effects, or $ 12.10 per common share. Before this write-down, earnings for Common Stock in 1988 were $224 million, or
$2.02 per common share compared with earnings for Common Stock of $ 192 million or $ 1.73 per common share in 1987.
The writedown resulted principally from certain costs of Shoreham and NMP2 which the PSC has determined the Company may not recover. The Company recorded the write-down effective January 1988 as a result of adopting SFAS No. 90.
Net Income, Earnings for Common Stock, Earnings per Common Share, AFC and AFC as a percent ofNet Income for the years ended 1988, 1987 and 1986 are shown below.
The information for 1988 is reflected before the cumulative effect of adopting SFAS No. 90.
1988 1987 1986
Revenues Electric Gas Total Revenues (millions of dollars)
$ 1,787
$ 1,719
$ 1,612 351 353 365
$ 2,138
$ 2,072
$ 1,977 Electric Revenues: In 1988, electric revenues increased $68 million, or 4.0% over 1987. Revenues in 1987 had increased S 107 million, or 6.6% over 1986. The increases in electric revenues resulted primarily from the followingfactors:
88/87 87/86 Customer Consumption Customer Additions Unbilled Revenue Accruals Fuel Cost Adjustments Rate Increases Total (millions of dollars) 59
$ 45 23 23 30 3
(44) 26 10 68
$ 107 The increase in average customer consumption in 1988 was 516 kilowatt hours (kwh), or 3.3% with approximately 100 kwh attributable to warmer summer weather between 1988 and 1987 and the remainder basically attributable to increased customer usage. The average number ofelectric customers served in 1988 was approximately 985,900, up nearly 13,200, or 1.4% over 1987.
Unbilled revenue accruals represent revenues which have been earned on electric service supplied to our customers, but not yet billed to them. See Note 1 of Notes to Financial Statements.
Revenues from fuel cost adjustments were lower in 1988, due primarily to a decline in oil prices. The average cost of oil burned in 1988 was $ 15.78 per barrel, compared with $ 18.16 per barrel in 1987. The average cost of oil burned for 1986 was $ 15.62 per barrel.
Gas Revenues: In 1988, gas revenues decreased by $2 million, or 0.7% compared to 1987. Revenues in 1987 had decreased
$ 12 million, or 3.3% compared to 1986. The increases (decreases) in gas revenues resulted primarily from the followingfactors:
88/87 87/86 Customer Consumption Customer Additions Fuel Cost Adjustments Total (millions of donars) 6 I5 5
5 (0)
(32)
(2)
(12)
Revenues Total revenues in 1988, including revenues from recovery of fuel costs, were $2.1 billion, which represents an increase of
$66 million, or 3.2% over 1987 revenues. Total revenues for the Company's Electric and Gas operations for 1988, 1987 and 1986 are shown below:
1988 1987 1986 The increase in average customer consumption in 1988 was 2.65 dekatherms (dth), or 2.0% with one-third attributable to colder winter weather between 1988 and 1987 and the remainder basically attributable to increased customer usage.
The average number of gas customers served in 1988 was approximately 418,900, up more than 5,600 or 1.4% over 1987.
Revenues from fuel cost adjustments were lower in 1988, due primarily to a decline in gas prices. Thc average cost of gas sold in 1988 was $3. 10 per dth, compared with $3.12 per dth in 1987. The average cost of gas sold in 1986 was $3.97 per dth.
Operating and Maintenance Expenses Excluding fuels and purchased power, Operating and Maintenance (O&M)expenses were $358 million in 1988, an increase of $ 16 million, or 4.6% over 1987. In 1987, these 0&Mexpenses increased $ 19 million, or 5.9% over 1986.
The increases, principally relating to the costs of maintaining production plant, were largely a result ofefforts to further improve customer service. The success of this effort was evidenced by the extraordinary performance and reliability levels of the Company's electric generation facilities during the past two summer periods. Higher costs for employee wages and medical insurance also contributed to the increases.
Other Items Federal income taxes in 1988 were $57.0 million lower than in 1987. In 1987, these taxes werc $ 1.5 million lower than in 1986. Changes in federal income taxes are due principally to variations in net income before income taxes, recognition of investment tax credits, and items capitalized for financial statement purposes that are allowed as current deductions on the Company's tax returns. The decrease in 1988 was principally due to lower tax rates in 1988,reflectin the effects of the Tax Reform Act of 1986. The income tax expense recorded in 1987 includes certain adjustments required by the PSC in reflecting the effects of the Tax Reform Act of 1986.
See Note 5 of Notes to Financial Statements.
Operating taxes, predominantly property taxes, were $311 million in 1988, compared to $300 million in 1987 and $278 million in 1986.
Depreciation expenses increased by $20 million in 1988 and by $4 million in 1987, primarily attributable to the addition of NMP2 to plant in service in 1988. Interest expense increased by $3 million in 1988 and by $ 15 million in 1987, due to changes in rates and amounts outstanding.
Selected Financial Data Additional information respecting revenues, expenses, electric and gas operating income and operations data, capital expenditures, and balance sheet information for the last five years are provided in Tables I through 10 of"Selected Financial Data." Information with regard to the Company's business segments for the last three years is provided in Note 7 of Notes to Financial Statements.
Fin'ancial Statements Statement of Income For year ended December 31 (1n thousands of dollars) 1988 1987 1986 Revenues Electric Gas Total Revenues
$ 1,786,933 350,901 2,137,834
$1,718,861
$ 1,611,789 353,216 365,332 2,072,077 1,977,121 Expenses Operations fuel and purchased power Operations other Maintenance Depreciation, depletion, and amortization Operating taxes Federal income tax current Federal income tax deferred and other 674,429 248,698 109,198 93,596 310,864 18,395 181,716 685,689 240,713 101,287 73,905 300,159 83,577 204,143 666,015 220,309 102,645 70,139 277,992 41,347 211,597 Total Expenses Operating Income 1,636,896 500,938 1,689,473 1,590,044 382,604 387,077 Other Income and (Deductions)
Allowance for other funds used during construction Other income and (deductions)
Provision for nct loss on Jamespott abandoned generating project Federal income tax credit (provision) current Federal income tax credit deferred and other Total Other Income and (Deductions)
Income Before Interest Charges and Cumulative Effect of Accounting Change 75,491 (10,049) 88,264 153,706 654,644 127,958 14,885 80,597 38,269 261,709 644,313 139,639 6,697 (16,000) 41,347 41,232 212,915 599,992 Interest Charges and (Credits)
Interest on long-term debt Other interest Allowance for borrowed funds used during construction Total Interest Charges and (Credits)
Income Before Cumulative Effect of Accounting Change Cumulative Effect of Accounting Change For Disallowed Costs (net of applicable taxes of $448,978,000)
Net Income (Loss)
Preferred Stock dividend requirements Earnings (Loss) for Common Stock Average Common Shares Outstanding (000)
Earnings (Loss) per Common Share Income before cumulative effect of accounting change for disallowed costs Cumulative effect of accounting change Earnings (Loss) per Common Share Dividends Declared per Common Share Proforma Earnings with 1988 Accounting Change Applied Retroactively Earnings (Loss) for Common Stock Earnings (Loss) per Common Share Sec Notes to Financial Statctmcnts.
410,966 19,702 (74,514) 356,154 298,490 (1,345,110)
(1,046,620) 74,508
$(1,121,128) 111,177 2.02 (12.10)
(10.08) 223 982 202 410,097 397,318 17,404 15,316 (53,076)
(129,317) 374,425 283,317 269,888 316,675 269,888 316,675 77,576 79,811 192,312 236,864 111, 129 111,085 1.73 2.13 1.73 2.13 176,712 30,864 1.59
.28 18
Balance Sheet Assets At Dcccmbcr 31 Pn thousands ofdo/lars)
UtilityPlant Electric Gas Common Construction work in progress Nuclear fuel in process and in reactor Less Accumulated depreciation, depletion, and amortization Total Nct UtilityPlant 1988
$2,965,213 476,950 128,866 4,249,845 199,379 8,020,253 1,075,129 6,945,124 1987
$2,018,324 446,607 125,032 6,503,606 183,740 9,277,309 983,272 8,294,037 Other Property and Investments Current Assets Deferred Charges Nonutility property, principally at cost Investmcnt in subsidiary companies, at equity Other investments and deposits, principally Bokum Rcsourccs Corporation Total Other Property and Investments Cash Temporary cash investmcnts Special deposits Accounts receivable (less allowance for doubtful accounts of $4,239,000 and $4,048,000)
Accrued revenue Materials and supplies at average cost Fuel oil at average cost Gas in storage at average cost Prepayments and other current assets Total Current Assets Unamortized cost of Jamcsport abandoned gcncrating project Defcrrcd storm damage costs Other (including dcfcrrcd taxes of $525,029,000 and
$ 127,061,000) 1,027 334 67,910 69,271 13,647 78,902 17,940 193,083 96,110 46,997 36,581 35,971 52,703 571,934 98,616 44,048 597,344 1,031 354 67,378 68,763 19,995 190,786 18,858 168,508 22,801 42,231 40,094 45,638 57,668 606,579 118,484 44,048 191,776 Total Deferred Charges Total Assets 740,008 354,308
$8,326,337
$9,323,687 Scc Notes to Financial Statcmcnts.
19
Capitalization and Liabilities At December 31 Pn thousands ofdollars)
Capitalization Long-term debt Unamortized premium and (discount) on debt 1988
$3,449,821 (25,011) 1987
$3,724,601 (26,646)
Prefcrrcd Stock redemption required Preferred Stock no redemption required Treasury stock> at cost Retained earnings restricted for Preferred Stock dividend requirements
, Total Preferred Stock Common Stock Premium on capital stock Capital stock cxpensc Retained earnings Total Common Shareowncrs'ity Total Capitalization 3,424,810 513,924 221,050 (58,430) 341,008 1,017,552 555,965 1,001,328 (56,151) 679,579 2,180,721 6,623,083 3,697,955 520,788 221,051 (40,881) 265,288 966,246 555,749 1,001,179 (56,144) 1,801,919 3,302,703 7,966,904 Current Liabilities Current maturities of long-term debt Current redemption rcquircmcnts of Prefcrrcd Stock Accounts payable and accrued expenses Accrued taxes (including fcdcral income tax of $12,570,000 and $3,909,000)
Accrued interest Customer deposits Total Current Liabilities 274,780 19,888 164,977 35,877 70,207 17,288 583,017 81, 195 13,025 132,101 26,300 70,604 16,348 339,573 Dcferrcd Credits Accumulated deferred income tax reductions Other Total Deferred Credits Reserves for Claims, Damages,
- Pensions, and Benefits Commitments and Contingencies 963,975 144,015 1,107,990 12,247 921,397 83,217 1,004,614 12,596 Sec Notes to Financial Statements.
Total Capitalization and Liabilities
$8,326,337
$9,323,687
Shareowners'quity At December 31 (ln thousands ofdollar)
Statement of Retained Eamlngs Balance, January 1
Add (deduct) Nct income (loss) for the year Deduct Retained earnings rcstrictcd for preferred stock dividend requirements***
Balance, December 31 Common Stock Par Value $5 per Share Shares authorized Shares issued and outstanding Increase in shares outstanding Increase in $5 par value Increase in Premium on capital stock Increase in Capital stock expense Preferred Stock Par Value $100 per Share, Cumulative:
Shares authorized Shares issued and outstanding Shares held in treasury**
Call Price Per Share December 31, 1988 Final 1988 1,801,919 (1,046,620) 75,720 679,579 150,000,000 111,193,008 43,190 216 149 7
7,000,000 2,715,116 283,500 1987 1,609,268 269,888 77 237 1,801,919 150,000,000 111,149,818 44,823 224 221 6
7,000,000 2,793,227 205,404 1986 1,480,644 316,675 188,051 1,609,268 150,000,000 111,104,995 46,096 230 227 22 7,000,000 2,863,525 135,130 5.00% Series B 4.25% Series D 4.35% Series E 4.35% Series F 5~/e % Series H 5'14
% Series I Convertible 8.12% Series J 8.30% Series K 7.40% Series L*
8.40% Series M*
8.50% Series R*
9.80% Series S*
Total Par Value $ 100 Par Value $25 per Share, Cumulative:
Shares authorized Shares issued and outstanding Shares held in treasury**
$2.47 Series 0*
$2.43 Series P
$3.31 Series T*
$4.25 Series U*
$3.50 Series V*
$3.52 Series W
$3.50 Series X*
Total Par Value $25
$ 101.00 102.00 102.00 102.00 102.00 100.00 101.00 103.29 104.10 104.48 103.00 105.00
$ 25.75 28.50 26.25 26.67 26.50 29.00 26.50
$ 101.00 102.00 102.00 102.00 102.00 100.00 101.00 103.29 100.00 100.00 100.00 100.00
$ 25.25 27.75 25.00 25.00 25.00 27.50 25.00 10,000 7,000 20,000 5,000 20,000 4)050 25,000 30,000 27,650 33,600 45,000 72,562 299,862 30,000,000 17,140,000 1,060,000 40,000 35,000 75,000 65,000 75,000 65,000 100,000 455,000 10,000 7,000 20,000 5,000 20,000 4,052 25,000 30,000 27,650 33,600 45,000 72,562 299,864 30,000,000 17,348,600 851,400 40,000 35,000 75,000 65,000 75,000 65,000 100,000 455,000 10,000 7 000 20,000 5,000 20,000 4,053 25,000 30,000 27,650 33,600 45,000 72,562 299,865 30,000,000 17,595,900 604,100 40,000 35,000 75,000 65,000 75,000 65,000 100,000 455,000 Less Sinking fund requirements Less Treasury stock at cost**
Add Retained earnings restricted for Prcfcrrcd Stock dividend requirements***
Total Preferred Stock 19,888 58,430 341,008 1,017,552 13,025 40,881 265,288 966,246 6,347 25,701 188,051 910,868 See Notes to Financial Statements.
- Redemption required, sec Note 2.
- Heldto meet annual sinking fund requirements.
]
"*~Effective retroactive to 1986, the Company has scparatcly prcscntcd retained earnings restricte for Prcfcmd Stock dividend requirements.
21
Statement of Cash Flows For year ended December 31 (1n thousands ofdol/ars) 1988 1987 1986 Operating Activities:
Net Income (Loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Cumulative effect of accounting change for disallowed costs Depreciation, depletion, and amortization Federal income taxes deferred and other Amortization of New Haven abandoned generating project Allowance for other funds used during construction Provision for net loss on Jamesport abandoned generating project Other Changes in operating assets and liabilities:
Accounts receivable Accrued revenue Accounts payable and accrued expenses Materials and supplies, fuel oil and gas in storage NMP2 deferred revcnuc and carrying charge Other 1,345,110 93,596 93,452 (75,491) 29,450 (24,766)
(31,185) ll)814 8,414 13,881 (3,221) 73,905 165,874 10,853 (127,958) 15,264 2,991 (1,585) 3,249 (26,256)
(48,736) 70,139 170,365 16,280 (139,639) 16,000 68,725 7,282 1,406 (22,756) 8,918 16,097
$(1,046,620)
$ 269,888 316,675 Net Cash Provided by Operating Activities Investing Activities:
Construction and nuclear fuel expenditures Less-Allowance for other funds used during construction Construction and nuclear fuel expenditures, less allowance for other funds used during construction Advance payments for construction Nine Mile Point 2 settlement Other Nct Cash Used in Investing Activities Financing Activities:
Proceeds from issuance of long-term debt Redemption of long-term debt Acquisition of treasury stock Cost of issuing long-term debt Other 414,434 (561,157) 75,491 (485,666) 52,200 (532)
(433,998)
(81,195)
(17,549)
(280) 356 337,489 (581,175) 127,958 (453,217)
(434)
(453,651)
(24,000)
(15,179)
(601) 437 529,492 (713,144) 139,639 (573,505) 71,377 4,308 (497,820) 1,250,804 (874,799)
(18,047)
(39,104) 432 Nct Cash Provided by (Used in) Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and cash equivalents at beginning of year Nct increase (decrcasc) in cash and cash equivalents Cash and Cash Equivalents at End of Year Sec Notes to Financial Statcmcnts.
(98,668)
(39,343) 319,286 (118,232)
$(155,505) 350,958 210,781
$ 366,286 15,328 (118,232)
(155,505) 350,958 92,549
$ 210,781 366,286
Notes to Financial Statements Note 1. Summary of Significant Accounting Policies The Company's accounting policies conform to generally accepted accounting principles (GAAP) as they apply to a regulated enterprise. Its accounting records are maintained in accordance with the Uniform System of Accounts prescribed by the Public Service Commission of the State of New York (PSC) and the Federal Energy Regulatory Commission (FERC).
UtilityPlant Additions to and replacements ofutilityplant are recorded at original cost, which includes material, labor, overhead, and an allowance for the cost of funds used during construction (AFC). The cost of renewals and betterments relating to units of property is added to utilityplant. The cost of property replaced, retired, or otherwise disposed of is deducted from utilityplant and, generally, together with dismantling costs less any salvage, is charged to accumulated depreciation. The cost of repairs and minor renewals is charged to maintenance expense.
Mass properties (such as poles, wire, and meters) are accounted for on an average unit cost basis by year of installation.
Allowance for Funds Used During Construction The Uniform System of Accounts defines AFC, which is not an item ofcurrent cash income, as the net cost of borrowed funds for construction purposes and a reasonable rate of return upon the utility's equity, when so used. AFC is computed monthly using a rate permitted by FERC on that portion of construction work in progress (CWIP) which is not included in the Company's rate base. It is the Company's policy not to record AFC or interest on costs upon receipt of an order from a regulator disallowing such costs for ratemaking purposes. The portion ofAFC relating to borrowed funds is included in the Interest Charges and (Credits) section of the Statement of Income. The PSC has ordered that net of tax AFC rates be applied to the Shoreham Nuclear Power Station (Shoreham) CWIP.
The average annual AFC rate, without giving effect to compounding or the reduced net of tax rate, was 12.12%,
13.53%, and 13.56% for the years 1988, 1987, and 1986, respectively. The average net of tax annual AFC rate, without giving effect to compounding, was 9.95%, 11.78%, and 11.54% for the years 1988, 1987, and 1986, respectively.
Depreciation The provisions for depreciation result from the application of straight-line rates to the original cost, by groups, of depreciable properties in service. The rates are determined by age-life studies performed, annually on depreciable properties.
Depreciation was equivalent to approximately 3.6%, 3.5%,
and 3.4% for electric and 2.8%, 2.7%, and 2.5% for gas of respective average depreciable plant costs for the years 1988, 1987, and 1986, respectively.
Revenues Effective January I, 1988, the Company recorded on its Balance Sheet an asset for electric unbilled revenue, for all customers through December 31, 1987, and a corresponding liabilityamounting to $63.2 millionin order to conform to the opinion of the PSC in its December 1987 rate decision.
Pursuant to the same order, the Company is amortizing the liabilityand, therefore, increasing electric revenues by approximately $ 1.8 million per month, subject to any changes which the PSC may subsequently make to the level of
'mortization.
The recognition ofelectric unbilled revenue, in conformity with the PSC order, including the liability amortization, increased the 1988 electric revenues over 1987 electric revenues by approximately $29.5 million. The net after tax effect, for the year ended December 31, 1988, was an increase in earnings of approximately $ 19.5 million.
Previously, unbilled revenue was recognized only for customers billed on a bi-monthly cycle basis for the month in which they are normally not billed.
Deferred Fuel Cost Adjustments The Company's electric and gas tariffs include fuel cost adjustment clauses representing the difference between actual fuel costs and the fuel costs allowed in the Company's base tariffrates. The Company, to achieve a proper matching of costs and revenues, defers these adjustments, net of related income tax effects, to those future periods in which they will be billed or credited to customers.
Federal Income Taxes The Company provides deferred federal income taxes with respect to certain differences between net income before income taxes and taxable income in certain instances when approved by the PSC, as disclosed in Note 5. The Company defers the benefit of 60% of pre-1982 gas and pre-1983 electric and 100% of all other investment tax credits when realized on its tax returns.
For ratemaking purposes, certain accumulated deferred federal income taxes are deducted from rate base and amortized or otherwise applied as a reduction (increase) in federal income tax expense in future years. Accumulated deferred investment tax credits are amortized ratably over the lives of the related properties.
The tax effects of other differences between income for financial statement purposes and for federal income tax purposes are accounted for as current adjustments in federal income tax provisions.
In December 1987, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 96, Accounting for Income Taxes, effective for fiscal years beginning after December 15, 1988.
The FASB subsequently issued SFAS No. 100, Accounting for Income Taxes Deferral of the Effective Date of FASB Statement No. 96, which defers the effective date of SFAS No. 96 to fiscal years beginning after December 15, 1989.
SFAS No. 96 willrequire, among other matters, (a) recognition of the amount ofcurrent and deferred taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the financial statements and (b) adjustment of deferred income taxes for an enacted change in tax laws. For regulated enterprises, SFAS No. 96 will(a) prohibit net of tax accounting and reporting and (b) require recognition of a deferred tax liabilityfor (1) the tax benefits which are flowed through to its customers and (2) the equity component of AFC. A regulatory asset or liabilityshould be recognized
relating to such items ifit is probable that the future increase or decrease in taxes payable thereon shall be recovered from or returned to customers through future rates. The Company does not expect to adopt SFAS No. 96 prior to January 1,
1990, which willprovide additional time for the Company to complete its evaluation and analysis of SFAS No. 96. The impact of SFAS No. 96 on the Statement of Income is not expected to be material; however, the Company estimates that had it adopted SFAS No. 96 at December 31, 1988 the Company would have recorded on its Balance Sheet deferred tax and other liabilities of approximately $ 1.7 billion, and corresponding offsetting regulatory assets of approximately
$ 1.2 billion and additional CWIP of approximately $500 million. These estimates could be materially affected by the outcome of uncertainties affecting the Company as discussed in Note 6.
Reserves for Claims, Damages, Pensions, and Benefits Losses arising from claims against the Company are partially self-insured. Extraordinary storm losses are fullyself-insured.
Provisions credited to the reserves are based upon experience, risk of loss, actuarial estimates, and/or specific orders of the PSC.
Capitalization-Premiums, Discounts, and Expenses Premiums or discounts and expenses related to the issuance of long-term debt are amortized over the lives of the issues.
"Capital stock expense" related to that portion of Preferred Stock required to be redeemed is written-offas an adjustment to retained earnings or, ifthe Preferred Stock is redeemed below par value, any gain net of the related "Capital stock expense" is recorded as additional "Premium on capital stock." Through December'31, 1988, such gain was
$3,637,000.
Statement of Cash Flows In November 1987, the FASH issued SFAS No. 95, Statement of Cash Flows, effective for fiscal years ending after July 15, 1988. The Company has adopted the provisions of SFAS No.
95 in its 1988 financial statements and restated previously reported statements of changes in financial position for 1987 and 1986. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company made federal income tax payments of $ 17,090,000, $ 13,044,000, and
$9,649,000 during the years 1988, 1987, and 1986, respectively.
Additionally, the Company received refunds of federal income taxes for the years 1984 through 1986 of $7,827,000,
$ 15,650,000, and $3,037,000 during the years 1988, 1987, and 1986, respectively. The Company made interest payments totaling $422,780,000, $418,065,000, and $395,606,000, during the years 1988, 1987, and 1986, respectively.
Regulatory Accounting In December 1986, the FASB issued SFAS No. 90, Regulated Enterprises Accounting for Abandonments and Disallow-ances of Plant Costs,,effective for fiscal years beginning after December 15, 1987. SFAS No. 90 requires, among other matters, that a loss be recognized when it becomes probable that (1) costs of a plant willbe disallowed for ratemaking purposes or (2) the cost of an abandoned plant is in excess of the present value of the future revenues expected to be realized relative to the abandoned plant. At December 31, 1988, the amount of investments in Shoreham, Nine Mile Point 2 (NMP2) and Jamesport Generating Station (Jamesport) reflect a writc4own resulting from the Company's adoption, effective January I, 1988, of SFAS No.
- 90. As a result of adopting SFAS No. 90, the Company's 1988 financial statements reflect a write-down of net assets, amounting to approximately $ 1.3 billion, net of tax effects, or
$ 12. 10 per common share, which is accounted for as the cumulative effect of a change in accounting principle. This write-down relates principally to certain costs of Shoreham determined to be imprudent by the PSC in 1985 and to the estimate as of January 1, 1988 of the Company's share of NMP2 costs in excess of the amount provided in the settlement among the cotenants of NMP2, all of which are discussed in Note 6. Further, the Company has recorded in 1988 an adjustment reflecting revised estimated NMP2 disallowed project costs that are included within the settlement agreement. This adjustment reduced the write-down recorded effective January 1988 by $3.2 million, net of tax effects, and is reported in the Other Income and (Deductions) section of the Statement of Income.
In August 1987, the FASB issued SFAS No. 92, Regulated Enterprises Accounting for Phase-in Plans. A Rate Moderation Plan (RMP) ordered by the PSC on June 12, 1986, in conjunction with Shoreham and which has never been implemented, does not meet the criteria set forth in SFAS No. 92, which would provide for capitalization of costs which the regulator has permitted the utilityto defer for future recovery. Ifthe 1989 Settlement, as discussed in Note 6, does not become effective, the Company intends to request that the PSC modify the RMP so as to meet thc criteria established by SFAS No. 92 for capitalization of such costs if Shoreham enters commercial operation. However, the Company can give no assurances that the required modifica-tions willbe ordered by the PSC. Furthermore, SFAS No. 92, which is applicable to the recovery of the costs of certain operating facilities, would not apply to Shoreham ifthe 1989 Settlement becomes effective.
Since 1984, the PSC has authorized thc Company to collect additional revenues, designated as Financial Stability Adjustment (FSA) revenues, in excess of the amounts to which the Company would be entitled under conventional ratemaking. The effect of the FSA is to provide the Company with current cash and reduce the cost of construction through a decrease in non~h AFC. The total amount ofsuch cash flow revenues, net of tax effects, was $203, $ 185, and $ 161 millionduring 1988, 1987, and 1986, respectively. The PSC has ordered that the FSA would be terminated in the event of bankruptcy. Additionally, effective May 1984, the PSC ordered the Company to provide for an equity earnings cap adjustment which is an accounting mechanism established to defer certain cost savings for possible distribution to its customers.
Note 2. Capital Stock Preferred Stock Sinking Funds Redemption ofvarious series of Preferred Stock is effected through the operation of various sinking fund provisions.
However, the Company's Certificate of Incorporation prohibits the retirement of Preferred Stock so long as divi-dends are in arrears; accordingly, the sinking fund require-ments for 1988, 1987, and 1986 which totaled $ 19,888,000,
$ 16,888,000, and $ 13,637,500, respectively, were not satisfied.
The Company has purchased, but not yet retired, an aggregate number of shares of its Preferred Stock equivalent to the number of shares ofsuch series scheduled to be redeemed by way ofsinking funds through 1988. The aggregate par value of Preferred Stock required to be redeemed in each of the years 1989 through 1993 is $23,888,000.
Preferred Stock Dividends Preferred Stock dividends are cumulative. The Company and certain of its lending banks have entered into a credit agreement (thc 1989 Credit Agreement) which expires in February 1990. Under the 1989 Credit Agrecmcnt payment of all dividends is prohibited. Under thc 1986 Restructuring Credit Agrecmcnt (1986 RCA) payment of Preferred Stock dividends accruing after December 31, 1987 is limited by a formula tied to internal cash generation. No Preferred Stock dividends can currently be declared pursuant to this formula except arrearages prior to January I, 1988, which totaled
$265 million and whose payment is not limited by the aforementioned formula. Arrearages for the year ended December 31, 1988 totaled $76 million and may not be paid under the formula.
Preference Stock None of the authorized shares of nonparticipating Preference Stock, par value $ 1 per share, which ranks junior to the Preferred Stock, are outstanding.
Common Stock Of the 150,000,000 shares of authorized Common Stock at December 31, 1988, 1,956,892 shares were reserved for sale to employees, 6,802,247 shares werc committed to the Automatic Dividend Reinvestment Plan, and 236,099 shares were reserved for conversion of the Series I Convertible Preferred Stock at a rate of$ 17.15 per sharc.
Common Stock Dividends As discussed above, the 1989 Credit Agreement, which expires in February 1990, prohibits the payment of all dividends. Under the 1986 RCA, the payment of Common Stock dividends, subject in any event to the Company's Certificate of Incorporation which prohibits the payment of Common Stock dividends so long as Preferred Stock dividends and sinking fund payments are in arrears, is limited by the same formula, described above, which is applicable to Preferred Stock dividends. At December 31, 1988, no Common Stock dividends could be declared pursuant to this formula. Dividend limitations contained in the mortgage securing the Company's First Mortgage Bonds are not material. The Company's General and Refunding Indenture (G&R Mortgage) does not restrict the payment ofdividends.
~
Election of Board of Directors The Company's Certificate of Incorporation states that Preferred Stockholders have the right to elect the smallest number of members of the Board of Directors so as to constitute a majority, should the Company be in arrears for a total of four quarterly dividend payments in any one series of Preferred Stock. This right willcontinue so long as Preferred Stock dividends remain in arrears. Thc current Board of Directors consists of nine members, five of whom have been elected either by holders of Preferred Stock or by Directors elected by holders of Preferred Stock and four of whom have been elected by holders of Common Stock.
Note 3. Retirement Benefit Plans The Company maintains a primary defined benefit pension plan (Primary Plan) which covers substantially all employees and a supplemental plan (Supplemental Plan) which covers key executives. Allpension costs arc borne by the Company.
Actuarial present value of bcnelit obligation Vested benefits Nonvested benefits (77<ousands ofDollars)
$344,000
$320,040 11,000 I 1,608 Accumulated benefit obligation
$355,000
$33 I,648 Plan assets at fair value Actuarial present value of projected benelit obligation Projected benefit obligation less than plan assets Unrecognized January I, net obligations Unrecognized net gain Net accrued pension cost
$406,400
$379, I66 381,184 355,933 25,216 23,233 14851 I5,376 (42>006)
(41,444)
$ (2,439)
$ (2,835)
Net periodic pension cost for 1988 and 1987 for the Primary Pension Plan included the followingcomponents:
1988 I987 Service costbenefits earned during the period Interest cost on projected benelit obligation and service cost Actual return on plan assets Net amortization and deferral Net periodic pension cost fViousands ofDollars)
$ 9,800
$ 10,858 29,004 26,759 (34,061)
(23,490) 8,773 (847)
$ 13,516
$ I3,280 Assumptions used in accounting for the Primary Plan in 1988 and 1987, respectively, were:
1988 I987 Discount rate Rate of future compensation increases Long-term rate of return on assets 8.0%
8.0%
6.0%
6.0%a 7.0%
7 0%
As a result of adopting, in 1987, SFAS No. 87 Employers'ccounting for Pensions, and in conjunction with certain other actuarial assumption changes, 1987 pension cost was reduced by approximately $2.9 million. In addition, pursuant to an order issued by the PSC in September 1987, the The Company's funding policy is to contribute annually to the Primary Plan, a minimum amount consistent with the requirements of the Employee Retirement Income Security Act (ERISA) plus such additional amounts as the Company may determine to be appropriate from time to time. Pension benefits are determined by crediting the employee with an amount determined using the base salary for each year the employee is a participant in the plan, plus an additional amount credited for each year the employee remains a participant beyond the age of 50. To comply with changes in pension plan requirements under the Tax Reform Act of 1986, starting in 1989, employees willbe vested in the pension plan after five years of service with the Company.
The Supplemental Plan provides, without contribution from such employees, supplemental death and retirement benefits for officers and other key executives. Death benefits are currently provided by insurance. Retirement benefits totaling approximately $688,000 and $690,000 have been recognized as expense in 1988 and 1987, respectively, but are unfunded.
Thc Primary Plan's funded status and amounts recognized in the Balance Sheet at December 31, 1988 and 1987 are as follows:
1988 I987
Company has dcfcrrcd $2.1 million and $4.6 million in 1988 and 1987, respcctivcly, which rcprcsents the excess of pension expense collected from its ratepayers over that determined under SFAS No. 87.
The plan assets at fair value primarily include cash, cash equivalents, group annuities, bonds, and listed equity sccuritics.
During 1986, the cost of both plans totaled $ 15,838,000. The cost of thc Primary Plan was determined as the amount needed to meet the current service costs and the amount needed to amortize unfunded past service costs over a 30 year period.
In addition to providing pension benefits, thc Company provides certain health care and life insurance benefits for retired employees. Substantially all of the Company's employees may become eligible for these benefits ifthey reach retirement agc while working for the Company. These and similar benefits for active employccs are provided through insurance companies whose premiums arc based on the benefits paid during the year. The cost of providing these benefits was $23,298,000, $20,638,000, and $ 17,476,000, for 1988, 1987, and 1986, respectively. The cost of providing those benefits for 2,020, 1,952, and 1,899 retirccs, is not separable from thc cost of providing benefits for thc 5,931, 6,033, and 5,866 active employees in 1988, 1987, and 1986, respectively.
Note 4. Debt At December 31 See Note 6 under the heading Financial Viabilityfor a discussion of contingencies respecting the Company's continuing financial viability.
Each of the Company's three mortgages is a lien on substantially all of the Company's properties.
First Mortgage Allof the bonds issued under the First Mortgage, including those issued after June I, 1975, and pledged with thc Trustee of the G&R Mortgage as additional security for General and Refunding Bonds (G&R Bonds), are sccurcd by the lien of the First Mortgage. First Mortgage Bonds pledged with the G&R Trustee do not represent outstanding indebtedness of thc Company. Amounts ofsuch pledged bonds outstanding werc $469 millionat December 31, 1988 and 1987. The annual First Mortgage depreciation fund and sinking fund rcquircmcnts for 1988, due not later than June 30, 1989, are estimated at $ 171 million and $ 12 million, respcctivcly. The Company expects to meet all of these rcquircmcnts with property additions.
G&R Mortgage The lien of the G&R Mortgage is subordinate to the lien of the First Mortgage. The annual G&R Mortgage sinking fund requirement for 1988, due not later than June 30, 1989, is estimated at $26 million.
Third Mortgage Thc Third Mortgage, which is a lien on substantially all of the Company's properties, is subordinate to the liens of the First Mortgage and the G&R Mortgage and was created in 1984 to secure certain bank debt. Thc bank debt serviced by the Third Mortgage was rcstructurcd and combined in April 1986, and is described immediately below under the heading 1986 Restructuring Credit Agreemcnt.
1986 Restructuring Credit Agreement (1986 RCA)
In April 1986, when the Company entered into the 1986 RCA with its lending banks whereby the Company restruc-tured its bank debt, including thc former trust obligations outstanding under the Third Mortgage, the Company issued
$525 millionof G&R Bonds and, with a portion of the proceeds, permanently prepaid $400 million, on a pro-rata basis, of the $ 1.0 billion of debt outstanding under the Third Mortgage. The remaining $600 million of bank debt was restructured into several funding segments, each of which provides for a different interest rate. The average interest rate on the outstanding balance at December 31, 1988 was 10.54%.
Mandatory payments on the remaining bank loan balances, which totaled $558 million at December 31, 1988, are to be made in quarterly installments through September 30, 1992.
On December 30, 1988, thc Company paid the first installment of approximately $37 million.
Under certain circumstances in connection with the payment of Preferred and Common Stock dividends, the Company would be required to make mandatory prepayments to rcducc the bank loan balances by up to a total of $250 million pursuant to the formula discussed in Note 2.
The following Funding Segments are outstanding:
Variable Rate Segment:
Pursuant to this segment, the Company has the option to commit to one of three interest rates including: (i) Adjusted Certificate of Deposit Rate which is a rate based on the certificate of deposit rates of certain of the lending banks, (ii)
Base Rate which is generally a rate based on Citibank's prime rate, and (iii)Eurodollar Rate which is a rate based on LIBOR. At, December 31, 1988, the Company had $516 million outstanding at the Base Rate which was 10.5% per annum at that date.
Eurodollar Segment:
The Company had $42 million outstanding at December 31, 1988, pursuant to the Eurodollar Rate which was 10.97% per annum at that date.
Other Long Term Debt 1989 Credit Agreement Thc Company and certain of its lending banks recently entered into the 1989 Credit Agreement pursuant to which up to $200 millionof credit secured by a first lien upon thc Company's accounts receivable and fuel oil inventory has been made available to thc Company. Under the terms of this agreemcnt, which expires in February 1990, the Company immediately applied approximately $ 112 million to prepay the March, June and September 1989 payments of approxi-mately $37 millioneach associated with the Company's 1986 RCA. Thc balance of thc credit willbe made available when and ifthe Company sells approximately $375 million of Debentures (the New Dcbenturcs), but not sooner than May 19, 1989. The Company can give no assurance that it willbe able to sell the New Debentures.
Authority Financing Notes The Company issued $217 millionof Authority Financing Notes (Notes) to the New York State Energy Research and Development Authority (NYSERDA). Of this amount, $ 150 million was issued in 1985 and $ 17 million was issued in 1982 to secure the Pollution Control Revenue Bonds (PCRBs) which are subject to periodic tender. The remaining $50 millionof Notes werc issued at varying fixed rates and are not subject to tender.
The $ 150 millionof PCRBs issued by NYSERDA in 1985 are deemed to be tendered by the holders each March I thereafter and are remarketed at such tender date. The interest rate for these PCRBs is subject to rcdctcrmination at each tender date. These PCRBs were issued with an initial 6.5% interest rate and were remarketed at interest rates of 5.6% effective February 28, 1986, 3.875% elfective March I, 1987, 5.125% effective March I, 1988, and 7.0% cffectivc March I, 1989. Under arrangements made when the 1985 PCRBs were issued, letter of credit banks have agreed to pay the principal, interest and premium on the tendered PCRBs, in the aggregate, up to approximately $ 165 million in the event of default. Should thc Company fail to reimburse the letter of credit banks, Niagara Mohawk is obligated under a guarantee to pay the letter ofcredit banks on the Company's behalf. The Company has agreed to repay Niagara Mohawk up to $ 165 million in consideration of Niagara Mohawk's guarantee to the letter of credit banks in connection with the Notes and certain amounts of interest and premium thereon.
The Company's obligation under this guarantee is evidenced by a promissory note, under which there was no outstanding indebtedness at December 31, 1988, and is secured by an interest in the Third Mortgage in the amount of $85 million pari passu with other debt secured by the Third Mortgage.
The Company is obligated to repay Niagara Mohawk in three equal installments payable on October 31, 1992, January 31, 1993 and March 16, 1993 in the event Niagara Mohawk is required to honor its guarantee. The Company has also agreed to pay Niagara Mohawk certain fees and expenses in connection with their guarantee of thc extended letters of credit. Thcsc letters ofcredit, which were to have expired on March 16, 1989, have bccn extended to March 16, 1991, at which time the Company is required to obtain either an extension of the letters of credit or substitute credit backup. Ifneither can be obtained, the PCRBs must be redeemed unless the Company purchases the PCRBs in lieu of redemption and subsequently remarkets them.
The $ 17 millionof PCRBs issued by NYSERDA in 1982 may be tendered by the holders every three years. The next such tender willoccur in October 1991. The intcrcst rate on the 1982 PCRBs is fixed at 8.25%
Lottg-Term Dobt at December 31 (fn thousands ofdo//aa) 1988 1987 First Mortgage Bonds (excludes Pledged Bonds) 4t/a% Series J Due 1988 5% Series LDuc 1991 4.40% Series MDue 1993 4s/s% Series NDue 1994 4.55% Series ODuc 1995 5'4% Series P Due 1996 5'A% Series QDue 1997 8.20% Series RDue 1999 9t/a% Series S Duc 2000 7~/4% Series UDue 2001 7'/t% Series VDue 2001 7s/a% Series WDue 2002 8'/e% Series XDue 2003 Total First Mortgage Bonds Less Current Maturities Total Less Current Maturitics General and Refunding Bonds 17'/a% Series Due 1989 15%% Series Duc 1991 16)(% Series Due 1991 17% Series Due 1991 12s/a%
Series Due 1992 13'4% Series Due 1995 I 1 'A% Series Due 1996 9.75% Series Due 1999 9s/a% Series Due 2006 8s/a% Series Due 2006 8s/a% Series Due 20M 9.20% Series Due 2008 14~/i% Series Duc 2010 17'/a% Series Duc 2012 15'4% Series Due 2012 13'A% Series Due 2013 1 tr/e% Series Due 2015 25,000 40,000 25,000 25,000 40,000 35,000 35,000 25)000 40,000 50,000 50,000 60,000 450,000 450,000 100,000 60,000 50,000 50,000 75,000 225,000 250,000 80)000 70,000 50,000 85,000 75,000 50,000 100,000 100,000 105,000 275,000 20,000 25,000 40,000 25,000 25,000 40,000 35,000 35,000 25,000 40,000 50,000 50,000 60,000 470,000 20,000 450,000 100,000 80,000 50,000 50,000 75,000 225,000 250,000 84,000 70,000 50,000 85,000 75,000 50,000 100,000 100,000 105,000 275,000 Total General and Refunding Bonds Less Current Maturities 1,800,000 126,000 1,824,000 24,000 Total Less Current Maturitics 1,674,000 1,800,000 Third Mortgage 1986 RCA Less Current Maturities Total Less Current Maturitics Other Long-Term Debt Authority Financing Notes 5'/a% to 8'A% Due 2006-2016 Debentures 1 1 'A% to 1 1'A% Due 1993-2014 Total Other Long-Term Debt Less Current Maturities Total Less Current Maturities 557,926 148,780 409,146 216,675 700,000 916,675 916,675 595,121 37,195 557,926 216,675 700,000 916,675 916,675 Total Long-Term Debt Less Current Maturities
$3,449,821
$3,724,601 The aggregate of thc Company's long-tcrnt debt duc In thc next live years is
$274,780,000 (1989),
$175,781,000 (1990),
$297,781,000 (1991),
$196,585,000 (1992), and $219,000,000 (1993).
Note 5. Federal Income Taxes Thc federal income tax amounts included in the Statement of Income differ from the amounts which result from applying the statutory federal income tax rate to net income before income taxes. The reasons are as follows:
(In thousands ofdollars)
Federal income tax, per Statement of Income current Included in other income and deductions-current Total Current Deferred and other (sce Note I)
Accelerated tax depreciation Capitalized overheads TRA 86 benefits Interest capitalized Fuel cost adjustments Westinghouse settlement Call premiums Canccllcd gcncrating projects Accrued utility revenues Nine Mile Point 2 deferred revenues Deferred tax credits Other items, nct Total Dcfcrred 1988 Amount I,
18,395'8,395 47,926 55,504 1,659 185 1,448 (111)
(221) 8,131 (4,151)
(13,611)
(3,307) 93,452
% of Pre-tax Income 1987 Amount
$ 83,577 (80,597) 2,980 150,833 62,531 27,756 2,796 2,236 (59)
(538)
(2,153)
(13,585)
(67,642) 3,699 165,874
% of Pre-tax Income 1986 Amount
$ 41,347 (41,347) 74,702 43,131 53,636 (12,959)
(2,477) 6,305 (3,230) 5,487 5,770 170,365
% of Pre-tax Income Total federal income tax expense Income before cumulative effect of accounting change 111,847 298,490 Statutory federal income tax Additions (reductions) in Fcdcral income tax resulting from:
TRA 86 benefits Tax credits Interest capitalized Excess of book depreciation over tax dcprcciation Cancelled generating projects Costs charged to plant but deducted currently Lien date property taxes Allowance for funds used during construction Other items, net
$139,515 1,659 4,153 8,066 10,014 (2,673)
(54,899) 6,012 Income Before Cumulative Effect of Accounting Change and Income Taxes
$410,337 0.4 1.0 2.0 (0 6)
(13.4) 1.5 27,756 24,303 9,354 6,304 2,466 (1,384)
(4,840)
(72,035) 1,653 168,854 269,888
$438,742 34.0%
$ 175,277 170,365 316,675
$487,040 39.95%
$224,038 46.0%
1.4 0.6 (0.3)
(1.1)
(16.4) 0.4 7,646 11,618 (7,039)
(1,794)
(115,639) 487 1.5 2.4 (1.4)
(0.4)
(23.7) 0.1 6.3 5.5 5,485 1.1 2.1 45,563 9.4 Total Federal Income Tax Expense
$111,847 27.3%
$ 168,854 38.45%
$ 170,365 35.0%
The amount of investment tax credit (ITC) carryforward for financial statement purposes after 1988 is approximately $328 million. These credits expire by thc year 2002. In accordance with thc Tax Reform Act of 1986 (TRA 86), ITC allowable as credits to tax returns for years after 1987 must be reduced by 35%. The amount of the reduction will not be allowed as a credit for any other taxable year.
The Company has not provided deferred taxes on approximately $886 million of various other deductions and depreciation method differences for property placed in service prior to 1981 which, in conformity with the ratcmaking practices of thc PSC, have been Ilowcd through. These various other flow-through tax deductions, which are deductible currently for tax purposes but capitalized for accounting and ratemaking
- purposes, include certain taxes, a portion of AFC, pensions and certain other cmployce benefits. Sce Note 1 with rcspcct to SFAS No. 96 which thc Company must adopt by no later than 1990.
The PSC required the Company to defer certain TRA 86 tax changes, including thc lower corporate federal income tax rate, for future disposition. This resulted in recording an additional $ 1.7 million and $27.8 million of income tax expense in 1988 and 1987, respectively.
Note 6. Commitments and Contingencies The adverse resolution of certain of the matters discussed herein would have a material impact on the Company's financial viability. Under the most adverse circumstances, the Company might seek the protection of federal bankruptcy laws while it continues its operations.
Financial Viability The Company's financial viabilitywillbe materially adversely affected ifthe Company is unable to obtain needed financing, including the sale of New Debentures, as discussed in Note 4, for its operating and capital requirements. Such financial viability is also dependent upon, among other things, (a) the receipt of adequate and timely rate relief and (b) the satis-factory resolution of the other matters discussed herein. In thc abscncc of the proceeds from thc sale of Ncw Dcbenturcs planned to take place in early 1989, the Company estimates that, in the second quarter of 1989, its operating and capital requirements willexceed the total of the cash expected to be generated from operations and the cash and short-term investments that were on hand at December 31, 1988. The Company estimates that it willneed the procccds of the New Dcbcntures to meet its operating and capital requirements for 1989.
The Company anticipates that even ifit is able to consummate the sale of New Debentures, and, contingent upon such sale, borrow the remaining $88 million available under the 1989 Credit Agreement, the Company's cash rcsourccs to meet its capital and operating requirements willbe exhausted during the first quarter of 1990 in the absence of additional financing (including the extension or modification of the Company's bank agreements) and rate relief. The Company's ability to sell the New Debentures is subject to market conditions generally and to the perception of thc credit markets as to the financial viabilityof the Company. The sale of the New Debentures is intended to provide the Company with the flexibilityto maintain financial viabilityduring a period in which it awaits the outcome of the following matters: (i) final resolution of matters relating to a proposed settlement of the Federal Racketeer Influence and Corrupt Organizations Act (RICO Act) litigation discussed below; (ii) resolution of open issues before the staff of the Nuclear Regulatory Commission (NRC) concerning the Company's application for licenses to opcratc Shoreham at full power; (iii)the restoration of the Company to financial health through the effectiveness of the settlement discussed under the heading "The 1989 Settlement;"
(iv) action by the PSC respecting the Company's request for permanent rate relief; and (v) some combination of any of these matters or of others not yet proposed for the resolution of the problems facing the Company.
The Company can give no assurance as to the outcome of any of the foregoing matters or as to its ability to sell the New Debentures. Information respecting these matters is summarized below.
RICO Act Litigation and Related Matters On February 14, 1989, the Company, certain of its former Officers, all of its ratepayers (the class) acting through counsel for the class certified by a federal trial court in the RICO Act lawsuit and counsel for the plaintiffs in a civil lawsuit brought under the Federal False Claims Act, entered into a proposed agreement settling both lawsuits (the Class Settlement). The Class Settlemcnt provides for rate reductions aggregating $390 million to be reflected as adjustments to the ratepayers'onthly electric bills over a tcn-year period as follows: $20 million beginning on each of June I, 1990, 1991 and 1992; $30 million beginning on each of June I, 1993 and 1994; $40 million beginning on June I, 1995; $50 millionbeginning on June I, 1996; and $60 million beginning on each ofJune I, 1997, 1998 and 1999. The Class Settlement also provides for payment of up to $ 10 millionfor reasonable attorneys'ees and expenses and certain other costs associated with the Class Settleinent. In December 1988, a federal jury in the RICO Act lawsuit found the Company and one of its foriner Officers jointlyand severally liable to Suffolk County for approximately $7.6 million, which under the RICO Act is trebled to approximately $23 million. Subsequently, the trialjudge dismissed the claims asserted by Suffolk County. Suffolk County, which is not a party to the Class Settlement, may opt out of the class and may pursue an appeal. IfSuffolk County were to be successful on all of its grounds for appeal and, upon a new trial, the Company were to be found liable for claims on which Suffolk County did not prevail in the earlier trial, the Company could be liable to Suffolk County for as much as
$72 million. The Company can give no assurance as to the outcome of any such appeal.
In general, Suffolk County claimed that, from approximately 1974 to the present, the Company fraudulently failed to make adequate disclosures or alternatively made false and misleading statements (i) with respect to the projected completion dates for the nuclear projects at Shoreham and Jamesport in connection with rate applications and applications relating to the construction of both projects and (ii) with respect to Shoreham in a prudence investigation conducted by the PSC.
Allof the ratepayers of the Company have been certified as a class with respect to the matters in this litigation. Should the Class Settlement not be approved by the trial court and the Company's shareowners or if, in any of a number of possible appeals, all determinations were to be adverse to the Company and, in a new trial, the Company were to be found liable for claims upon which Suffolk County did not prevail in the earlier trial, the Company's ultimate liabilitycould be as large as $2.9 billion, which under the RICO Act could be trebled to approximately $8.7 billion. Thc Company is unable to predict whether the trial court and the Company's shareowners will approve the Class Settlement or, ifappeals are taken, the outcome of such appeals. Thus, the Company's liabilitycould be within a range from zero to as much as $8.7 billion.
Judgments against the Company in material amounts would have a material adverse effect on the financial condition and results of operations of the Company. Under the most adverse circumstances, the Company might seek the protection of federal bankruptcy laws while it continues its operations. The Company may be required at the discretion of the court to post a bond in order to take the appeal from any adverse judgment or to stay its enforcement.'The Company cannot predict the amount ofsuch bond and therefore it cannot predict its ability to post a bond in the required amount.
None of the Company's mortgages or its credit facilities permit a judgment lien in excess of $5 million. Judgment liens in such amounts, ifnot satisfied, could, under certain circumstances, lead to an event of default under those mortgages and credit facilitics. Such a default, in turn, could lead to an acceleration of the debt outstanding under the mortgages and the credit facilities.
The Class Settlcmcnt would also tcrminatc a lawsuit filed against the Company and certain of its former Officers on behalf of the United States under the Federal False Claims
Act by two former employees of Stone &Webster Engineering Corp., the architectwngineer and construction manager at Shoreham. The action sought to recover damages of $60 million trebled under the Federal False Claims Act for a total of $ 180 million allegedly sustained by the United States Government (U.S.) as a result of the Company's alleged conspiracy to defraud the U.S. by the submission of utilitybills'calculated using rates which include costs arising from the planning, engineering, procurement, construction and financing ofShoreham and Jamesport. In addition, plaintiffs sought a penalty which, according to plaintiffs' court filings, could have exceeded $ 100 million. The allegations in this lawsuit are similar to the claims asserted by the plaintiffs in the RICO Act litigation discussed above. The Company is unable to predict the outcome of this litigation if it is not terminated by the Class Settlement. Should the Class Settlement not be approved by the trial court and the Company's shareowners or if, in any number of possible appeals, all determinations were to be adverse to the Company, the outcome could have a material adverse effect on thc financial condition and results of operations of the Company.
The conditions and approvals which must be met before the Class Settlement becomes effective give rise to uncertainties as to the ultimate liabilityof the Company, ifany. Accordingly, the impact, ifany, of the Class Settlement has not been reflected in the Company's results of operations during 1988.
The Company is aware of an inquiry made by a United States Attorney or United States Attorneys respecting allegations that the Company engaged in possible criminal activity in connection with "scheduling cover-ups" and "document alterations" concerning Shoreham. The Company docs not know whether this inquiry is continuing and cannot predict what effect, ifany, the jury's verdict in the RICO Act litigation, the trial court's dismissal of Suffolk County's claims or the Class Settlement, described above, may have upon this inquiry. In addition, even ifthe jury's verdict in the RICO Act litigation were to be reinstated, it would not be a finding ofcriminal liabilityand would not be binding in a criminal matter. Criminal allegations require a more stringent level of proof than that required under the civil RICO Act provisions described above.
The Company has received a demand from a law firm representing a client, identified as a shareowner of the Company, that the Company commence a lawsuit seeking recovery from the defendants in the RICO Act litigation for alleged waste of corporate assets. The Company has been unable to ascertain the identity of the shareowner.
Shorcham Through December 31, 1988, the Company had expended approximately $4.2 billion for Shoreham, including AFC and
$96 millionfor nuclear fuel, after giving effect to a write-down of $ 1.4 billion recorded cffcctive January I, 1988. The Company estimates that subsequent expenditures for Shorcham, including AFC on its prudent costs, willbe approximately $25 to $35 million each month through the date of commercial operation should it be permitted to operate. Almost all of these expenditures are for carrying charges, including financing charges, insurance, taxes and other overhead expenses. The overhead expenses include maintenance expenses and plant personnel salaries and wages.
Shoreham has been successfully operated and tested at levels up to 5% of full power pursuant to a license issued in July 1985 by the NRC. Operation at levels above 5% is dependent upon further regulatory approval. Operation of Shoreham is also subject to the outcome ofefforts by its opponents who seek to have the licensing effort cease and to have Shoreham decommissioned.
In addition, the PSC's February 15, 1989 order authorizing temporary rate increases, discussed below, is conditioned upon the Company not operating Shoreham so long as those temporary rates are in effect.
Without Shoreham, the Company believes it willbe diAicult to meet the energy requirements of Long Island, and that alternatives to Shoreham which have been proposed, both by the Company and others, may not be implemented in suAicient time to provide adequate energy in 1989 or in the next several years.
Two events have occurred subsequent to December 31, 1988 which willsignificantly affect th'e future of Shorcham. One is a decision on March 3, 1989 by the NRC determining that all adjudicatory proceedings before it relating to Shoreham have been completed and that, as a consequence, all open matters relating to the licensing of Shorcham are to be reviewed by the staff of the NRC as in an uncontested proceeding, a process which, including a public hearing, could be completed within approximately one month. The Company cannot, however, give any assurance as to the length of time which this process willactually take or as to the outcome of the appeals which the State of New York, Suffolk County and the Town of Southampton (all of which have been dismissed by the NRC from all proceedings before it relating to Shoreham) have publicly stated they willtake. The other event which has occurred which could significantly affect the future of Shoreham is an agreement entered into on February 28, 1989 between the Company and the State of New York (by its Governor) settling certain issues relating to the Company (the 1989 Issues Agreement) and providing, among other matters, for Shoreham to bc transferred to thc Long Island Power Authority (LIPA) and decommissioned.
Additional information respecting the licensing of Shoreham and the 1989 Issues Agreement are discussed below.
Licensing: The Company has been unable thus far to obtain a license from the NRC to operate the completed Shoreham plant at full power because of strong political opposition from the State ofNew York, the County of Suffolk and the Town of Southampton (the Intervenors). However, on September 23, 1988, an Atomic Safety and Licensing Board (ASLB) of the NRC dismissed the Intcrvenors as a sanction for their conduct in proceedings before the NRC relating to the Company's application for the Shoreham license. The ASLB also authorized issuance of a full-power license. This decision was partially reversed by the NRC's Atomic Safety and Licensing Appeal Board (the Appeal Board) and subsequently appealed to the NRC Commissioners. On March 3, 1989, thc NRC affirmed the dismissal of the Intervenors from all proceedings before the NRC relating to Shoreham and instructed the staff of the NRC to review all remaining open licensing issues. The Company intends to continue its vigorous pursuit of the full-power license for Shoreham. The review process by the NRC staff could be completed within approximately one month but there is no guarantee of the length of time it willtake. Moreover, the Company can give no assurance that the staff of the NRC willreach a'conclusion in favor ol'he Company on all matters before it. The Company cxpccts that the NRC's decision in this matter willbe appealed, but can give no assurance as to the outcome ofsuch appeal or estimate the time required for such appellate process.
3O~
Prudence: In December 1985, the PSC issued an order finding that the Company had imprudently, managed the construction of Shoreham. The PSC concluded that approximately $ 1.4 billionof Shoreham expenditures were incurred as a result of the Company's imprudence and could not be recovered in rates. Pursuant to this PSC order, the Company, as of March I, 1986, ceased to accrue AFC on Shoreham expenditures disallowed by the PSC. The Company willcontinue to accrue AFC on the costs not found to be imprudent until, provided the 1989 Settlement discussed below does not become effective, following authorization from the NRC, levels of operation of Shoreham have ascended substantially above 5% for a period sufficient to indicate that Shoreham willbe a reliable source of base power. At that time, the Company may declare Shoreham to be in commercial operation (an event which may occur prior to operation at full power) and willcease to accrue AFC.
In December 1987, the Appellate Division, Third Department, of the New York Supreme Court, affirmed approximately $640 millionof the PSC's determination that
$ 1.4 billion of Shoreham's expenditures had been imprudently incurred. With respect to the remaining $759 million, the court remanded the matter to the PSC in order that it might further consider and explain the basis upon which it determined that delay costs for the period from August I, 1982 to March 1, 1986, totaling $ 1.518 billion, were to be shared equally between shareowners and ratepayers.
Upon remand, the Company willseek to reduce the amount of costs determined to be imprudent while intervenors might seek to have such amount increased. The Company is unable to predict the outcome of the remanded proceeding before the PSC or the outcome of furtherjudicial appeals, ifany, that might be taken from the court's decision. The appellate decision is also subject to further appeal by the Company or by intervenors. The Company has moved for leave to take such an appeal. There has been no determination of prudence respecting the costs of Shoreham subsequent to March I, 1986. The Company plans to take the position before the PSC that all of such costs have been prudently incurred. The Company cannot predict whether the PSC willconduct further proceedings relating to prudence or, ifheld, whether the PSC willagree with the Company's position in such proceedings or whether further disallowances would result.
Ifthe 1989 Settlement does not become effective and PSC precedent is followed, the Company expects to recover a carrying charge on any prudent costs not included in rate base until, over a period ofyears in future rate cases, all of such costs have, been included in the rate base. The Company also expects; should Shoreham become operational, that it willbe permitted to continue to receive in rates, through the partial inclusion in rate base of Shoreham's prudent costs, an amount equivalent to at least the amounts now generated by Shoreham CWIP in rates and the FSA. Such Shoreham-related revenues currently provide approximately $375 million annually. Because of the substantial uncertainties relating to Shoreham, the Company is unable at this time to determine when Shoreham willgo into commercial operation, ifever, or, ifShoreham does not go into commercial operation, what rate treatment, ifany, willbe accorded the Company's investment.
Ifthe Company is not permitted by the NRC to operate Shorcham and ifthe Company is unable to recover its prudent costs of Shoreham, the total write-offof these costs would exceed the Company's net worth and the Company might seek the protection of federal bankruptcy laws while it continues its operations.
The Company has initiated litigation against certain of the companies which participated in the construction of Shoreham. Atsome future time, the Company may also initiate litigation against other Shoreham contractors and suppliers. The Company cannot predict what recovery, ifany, willresult from this litigation.
Used and Useful: A New York statute adopted in 1986 which would have prohibited rate recovery of any costs incurred in connection with a nuclear generating station owned by a single utilitythat fails to commence or continue commercial operation has been declared unconstitutional by a United States District Court. An appeal of this decision has been dismissed without prejudice to reinstatement prior to April 18, 1989. Ifthe decision were to be reversed on appeal and the provisions ofthe statute determined to be applicable to Shoreham, the Company believes that the loss of Shoreham-related revenues, currently providing approximately $375 million annually, would have a material adverse effect on the Company's financial viability. For additional information respecting these Shoreham-related
- revenues, see the discussion in Note I concerning FSA revenues.
Oiher: The costs of Shoreham include real property taxes capitalized during construction. The Company is seeking a judicial review of the assessments upon which those taxes were based in certain years. In 1984 and 1985, the Company withheld payment of the taxes because it believed that ifthe Company were to be successful in the pending tax litigation reflecting the claimed overassessments, it would be unable to enforce a judgment directing a refund of the taxes already paid. Subsequently, the Company paid the taxes. During the period of non-payment, charges for non-payment were assessed by Suffolk County against the Company and included by the Company in capitalized plant costs. FERC, as part of an audit by its staff of the Company's books and records for the period from January I, 1979 through December 31, 1984, has directed the Company to take corrective action by charging to expense those capitalized Shoreham costs which were incurred as a result of withholding the taxes. The amount of such costs recorded on the Company's books and records at December 31, 1988 was
$ 15 million. The Company requested FERC to conduct an administrative proceeding to review the directed accounting treatment. An Administrative Law Judge (ALJ) has rendered a decision on this issue which upholds the position of the staff of FERC. However, a final disposition of the controversy willbe made by FERC itself, which may accept, reject or modify the ALJ's decision. The Company cannot predict the outcome of this issue before FERC. In the event of an adverse decision by FERC, the Company will determine whether to pursue an appeal to the federal courts.
Pending consideration of the 1988 Settlement by the Company's shareowners, the PSC and the New York State Legislature, the Company requested FERC to defer action on its administrative review. Although the 1988 Settlement did not become effective on December I, 1988 as contemplated, the Company has requested FERC to continue to defer action on its review. Ifthe 1989 Settlement becomes effective, the issues before FERC willbecome moot.
The 1989 Settlement General: The Company's inability to obtain a license to operate Shoreham has caused the Company severe financial problems. A settlement to which the Company, the State of New York, LIPA, the New York Power Authority (NYPA) and others were parties (the 1988 Settlement), was intended to achieve, among other things, the restoration of the Company to financial health through rate increases which were to provide, among other things, recovery of and on a regulatbry asset (the Financial Resource Asset or FRA),
which would have totaled approximately $3.843 billion at December 31, 1988, over 40 years. As part of the 1988 Settlement, the Company agreed that, should the 1988 Settlement become effective, it would not operate Shoreham, would reflect its retirement on its books and would seek a "possession only" license from the NRC. The 1988 Settlement also provided that, following an NRC-approved transfer to it of Shoreham, LIPAwould decommission Shoreham. The 1988 Settlement did not become effective because of, among other reasons, the failure of the New York Legislature to give its approval, in part, through the adoption ofcertain legislation. It is the Company's intention that the 1989 Settlement discussed below, which is intended to resolve the same issues sought to be resolved by the 1988 Settlement, should provide substantially the same benefits as those provided by the 1988 Settlement which the Company's shareowners approved on November 4, 1988.
The 1989 Settlement is expected to consist of the following documents: (i) an agreement dated February 28, 1989 between the Company and the State ofNew York (the 1989 Issues Agreement); (ii) a Rate Order, (iii)the Asset Transfer Agreement; and (iv) the Power Supply Memorandum. The Asset Transfer Agreement and the Power Supply Memorandum, both of which initiallyformed part of the 1988 Settlement, must be amended to reflect the passage of time subsequent to their execution in June 1988 and to reconcile them to the terms of the 1989 Issues Agreement.
The Company does not know the extent of such changes.
Neither LIPA nor NYPA are parties to the 1989 Issues Agreemcnt and have not yet given their approval to it and have not yet agreed to make the required amendments to the Asset Transfer Agreement or the Power Supply Memorandum.
The Company can give no assurance that LIPA and NYPA willapprove the 1989 Issues Agreement or enter into the required amendments to the Asset Transfer Agreement and the Power Supply Memorandum.
17>e l989 Issues Agreement: The principal issues which the 1989 Issues Agreement is intended to resolve relate to: (i) the operation, the transfer of ownership and the decommissioning of Shoreham; (ii) the settlement of certain pending litigation and administrative proceedings; and (iii)the implementation of certain recommendations contained in two PSC'Directed management audits. The 1989 Issues Agreement does not specifically provide for rate relief for the Company or commit New York State to support rate increases in any particular amount. However, the 1989 Issues Agreement recites the intention of the parties that the Company shall be returned to investment grade financial condition and recites that the Company and the State of New York anticipate that the PSC shall ensure that the future impacts on rates are to be minimized to the maximum extent practicable.
Conditions to the 1989 Issues Agreement: Effectiveness of the 1989 Issues Agreement is conditioned upon approval on or before April I5, 1989 by the PSC, LIPA, NYPA and the Company's Board of Directors and upon approval by the holders of a majority of the Company's outstanding shares of Preferred and Common Stock voting at the 1989 Annual Meeting of Shareowners, with the Company using its best efforts to obtain such approval by June 15, 1989. To date, none of these approvals have been obtained. Ifauthorized by its Board of Directors, the Company willinclude a resolution for approval of the 1989 Settlement among the matters to be considered at the Company's 1989 Annual Meeting of Shareowners. The Company can give no assurance that the required approvals can be obtained or, with respect to the Company's 1989 Annual Meeting of Shareowners, the date when such meeting willbe held. Pending receipt of these approvals, the Company is continuing to vigorously pursue a full-power operating license before the NRC.
The Rate Order: Because of the Company's increasingly precarious financial condition and because provisions for rate relief were omitted from the 1989 Issues Agreement, it is the position of the Company that a rate structure similar to that approved by the PSC pursuant to the 1988 Settlement must be authorized by the PSC, on or prior to April 15, 1989, before the Company's Board of Directors acts with respect to the 1989 Settlement. The 1988 Settlement provided that the Company would have received guaranteed rate increases of approximately 5% each year for three years and targeted increases of approximately 4.5% to 5% each year for the followingseven years.
In determining whether to approve the 1989 Settlement, the Company's Board of Directors willconsider whether the Rate Order willprovide the Company with rate relief adequate and timely enough to achieve one of the objectives of the 1989 Issues Agreement, namely, the return of the Company to investment grade financial condition. Thc Company has been informed by the PSC that the rate relief contemplated by the 1989 Issues Agreement willbe considered by the PSC prior to April I5, 1989. However, the Company cannot give any assurance: (i) that the PSC willact by April 15, 1989; (ii) as to the action, ifany, which the PSC willtake with respect to rate relief; (iii)that appeals, ifany, from the Rate Order willbe resolved in favor of the Company; (iv) that the provisions ofthe Rate Order willbe similar to those in the rate provisions of the 1988 Settlement; (v) that the rate relief, ifany, authorized by the PSC will return the Company to investment grade financial condition; or (vi) that the Company willrealize the full measure of the benefits contemplated by the 1989 Settlement.
Disposition ofLitigation: The Company and the State of New York, both of which are also parties in certain litigation and in certain administrative proceedings before the PSC, have agreed to stipulate to a discontinuance of that litigation and those proceedings. It is the Company's understanding that ifLIPA(which is a party to the Asset Transfer Agreement but is not a party to the 1989 Issues Agreement) and NYPA (which is a party to the Power Supply Memorandum but is not a party to the 1989 Issues Agreement) approve the 1989 Issues Agreement, they will also agree to the disposition of litigation and administrative proceedings described herein. These matters, including among others, the litigation and proceedings described more fully under the headings (i) "Shoreham: Prudence," (ii)
"Shoreham: Used and Useful" and related litigation in the New York courts and (iii)various proceedings before thc PSC including a petition described under the heading "Investments: Bokum Resources Corporation" which the Company may file with the PSC and the recovery ofstorm 32
damage costs associated with Hurricane Gloria discussed under the heading "Rate Relief," willbe settled upon the effectiveness of the 1989 Issues Agreement. In the event the 1989 Issues Agreement does not become effective, all ofsuch matters willproceed without prejudice to any of the parties.
The 1989 Issues Agreement also recites the intention of the Company and New York State that the signing of the 1989 Issues Agreement willfacilitate the settlement of the RICO Act litigation discussed above and the Brookhaven tax certiorari proceedings discussed under the heading "Shoreham: Other." The State is not a party to either action.
Transfer ofthe Shoreham Assets: The 1989 Issues Agreement provides that Shorcham is to be transferred to LIPA and decommissioncd by NYPA pursuant to the Asset Transfer Agreement ifthe 1989 Issues Agreement becomes effective.
The Company agrees, in the 1989 Issues Agreement, not to operate Shoreham above 5% offullpower iflicensed to do so by the NRC provided that the approvals required by the 1989 Issues Agreement, except shareowner approval, are received by April 15, 1989. Ifall such approvals have been received by April 15, 1989, the Company agrees not to operate Shoreham above 5% of fullpower even iflicensed until the Company's shareowners have considered the 1989 Issues Agreement.
Future Generating Facilities: The 1989 Issues Agreement incorporates the Power Supply Memorandum by reference.
The Company and the State have agreed to request that the PSC expressly agree to review and act on any agreement, such as those contemplated by the Power Supply Memorandum, for future electric generation facilities, within three months ofsubmission of any such agreement to'the PSC. In connection with financing certain ofsuch facilities, New York State has agreed in the 1989 Issues Agreement to make available to NYPA a sufficient amount of the State' federally allocated private activity bond volume "cap" to permit it to finance the entire anticipated cost of such facilities. In addition, the 1989 Issues Agreement assumes that the Company is to be allocated a minimum of $ 100 million per year of the New York State private activity volume "cap" for a minimum of five years to permit the issuance of tax-exempt securities. New York State has agreed to support the Company's requests for such allocations. Taxwxempt financing, ifavailable, is expected to reduce the cost of such projects and, therefore, the cost of electricity produced by such facilities and generated or purchased by the Company.
E'nforceability ofthe l989 Sealemenr:
Because the parties to the 1989 Settlement, other than the Company, are governmental entities, a question arises as to whether the terms of the 1989 Settlement and the obligations ofsuch parties, as embodied therein, would be enforceable against them. Because of their nature, governmental entities may have legal obligations or limitations that circumscribe their ability to be irrevocably bound by contract. The PSC, for example, may, in general, determine just and reasonable rates in accordance with certain procedures notwithstanding that a higher or lower rate has previously been established by contract, franchise or other agreement. In addition, the PSC may generally fixrates only for a maximum period of three years. Consequently, the PSC may take the position in the future that it is not legally bound by the rate increases contemplated by the 1989 Settlement and may seek to modify or avoid the provisions of the 1989 Settlement pursuant to its statutory authority. The power of the PSC to claim that it
~ ss is not bound by the 1989 Settlement may be limited, however, as a result of the provisions in the 1989 Settlement that permit the 1989 Settlement and the PSC's decision approving the 1989 Settlement to be submitted to the appropriate courts for approval and enforcement, if necessary, as part of the settlement of certain of the litigation pending before such courts.
Even ifthe PSC abides by the terms of the 1989 Settlement, there can be no assurance that other persons authorized by statute to make a complaint about the Company's rates may not seek to set aside or mitigate the contemplated rate increases, or seek to reduce rates. Nor can there be any assurance that New York State willnot enact subsequent legislation or that any other party to the 1989 Settlement will not take or refrain from taking some action which willin some way impair or alter the rights of the Company pursuant to the 1989 Settlemcnt.
In the event any party fails to perform in accordance with its obligations under the 1989 Settlement, the Company may be able to contend, in a judicial proceeding or otherwise, that such failure impairs the Company's contract rights as set forth in the 1989 Settlement, and that it violates the terms of certain proposed judicial settlements which are to incorporate the 1989 Settlement. However, the Company is unable to provide assurance that the Company willprevail in any judicial or other proceeding, or that the Company willre'alize the full benefits of the 1989 Settlement.
Certain Federal Tax Consequences ofthe 1989 Settlement: In connection with the 1988 Settlement, the Company received a private letter ruling from the Internal Revenue Service (IRS) confirming that the Company would be entitled, for federal income tax purposes, to a deduction for its abandonment loss associated with Shoreham upon effectiveness of the 1988 Settlement. The Company is reviewing with its special counsel whether there willbe a need, when the rate provisions of the 1989 Settlement are known, to seek a further ruling from the IRS.
Based on an abandonment loss deduction which the 1988 Settlement assumed would be taken in 1988, the Company estimated that the abandonmcnt loss would have been approximately $2.8 billion and would have resulted in an immediate tax refund of approximately $ 11 milliongenerated by a recalculation of the Company's 1987 alternative minimum tax payment. The 1988 Settlement provided that approximately 70% of the resulting tax benefits would have been allocated to ratepayers and the balance to shareowners.
Also as a result of the abandonment of the Shoreham Assets, the Company would have lost an estimated $93 millionof investment tax credits otherwise available to offset its federal income tax liability.
Accounting Treatment of(he l989 Seulemenr: Inasmuch as the rate provisions relating to thc 1989 Settlement have not as yet been determined, the accounting treatment of the 1989 Settlement cannot be determined either. However, such accounting treatment may be. similar to that contemplated for the 1988 Settlement, but the Company can give no assurance to that effect. Ifthe 1988 Settlement had taken place as contemplated, the Company, upon effectiveness of the 1988 Settlement, would have simultaneously recorded on its Balance Sheet the retirement of certain portions of its investment in Shoreham and Bokum Resources Corporation (Bokum) and the establishment of the FRA. The FRA had two components the Base Financial Component (BFC)
and the Rate Moderation Component (RMC). The FRA was to be equal to the present value of the future net-after-tax cash flows that the 1988 Settlement was to have provided to the Company. At December 31,1988, the Company's recorded costs for those portions of its investment in Shoreham and Bokum to be retired were approximately $4.2 billion and are continuing to increase at a rate of approximately $25 million to $35 million per month as additional costs, including AFC, are incurred. At January 1,
1989, the BFC ofthe FRA would have been $3.843 billion and would have increased monthly at an annual rate of 10%
until the effectiveness of the 1988 Settlement. The BFC, which would have been afforded rate base treatment under the terms of the 1988 Settlement, would have been included in the Company's revenue requirements through an amortization included in rates over 40 years on a straight-line basis commencing with the effective date of the 1988 Settlement. The BFC would have earned a return on the unamortized balance at the overall rate of return earned on rate base. The RMC would have reflecte the difference between the revenue requirements and the revenues resulting from the implementation of the rate moderation plan provided for in the 1988 Settlement. Such 'rate moderation plan was designed to hold electric rate increases to the levels provided for in the 1988 Settlement, subject to the adjustmcnts provided for therein. The RMC would have first increased as revenues, together with a carrying charge equal to the allowed rate of return on rate base, were deferred; it would have subsequently decreased and was expected to be fullyamortized by approximately 1998 as the deferred revenues werc recovered.
The Company would have recognized a loss (and therefore a decrease in shareowner equity) for financial statement reporting purposes as a result of the 1988 Settlement. This loss would have primarily reflected the difference between the recorded costs of the Company's investment in Shoreham and Hokum and of the FRA, after adjustment for tax cffccts.
Ifthe 1988 Settlement had become effective on December 31, 1988, the Company estimates that the loss resulting therefrom would have been approximately $250 million, after adjustment for tax effects.
The accounting treatment proposed by the 1988 Settlement for regulatory purposes would have been subject to review by FERC which,might have concurred, rejected or modified the accounting treatment for regulatory purposes ordered by the PSC. Based upon a review, the Company believes that the FRA and the accounting treatment afforded the FRA under the 1988 Settlement would have conformed to GAAP. For purposes of administering its uniform system of accounts, FERC has adopted the GAAP provisions of SFAS No. 90 which sets forth the criteria for recognition of regulatory-created assets resulting from abandonments.
Accordingly, the Company believes that the proposed accounting treatment for the FRA would have conformed to FERC's standards for accounting and asset recognition of regulatory-created assets.
Effect ofthe 1989 Settletnent on Holders ofthe Compnny's Securities: One ofthe objectives of the 1989 Settlemcnt is to improve the credit rating of the Company's debt securities as determined by independent rating agencies. Ifthe Company is successful in achieving this objective, it expects that it will be able to borrow money at lower rates of interest than it has been able to in the recent past and to raise debt capital morc readily. This objective was also an objective of the 1988 Settlement. There can be no assurance that this objective for the 1989 Settlement willbc achieved.
One of the assumptions underlying the 1988 Settlement was that the objective of improving the Company's debt security credit rating would be met and that the Company would refinance certain of its outstanding high interest series of G&R Bonds and high dividend bearing series of Preferred Stock. Another objective of the 1988 Settlement was to permit thc Company, subject to action by the Board of Directors, and to other factors, to become current on all Preferred dividends during the first quarter of 1989, including payment of arrearages, and to resume payment of dividends on the Company's Common Stock. It is the Company's intention, should the 1989 Settlement become effective and market conditions and other economic factors permit, to refinance high interest series of G&R Bonds and high dividend series of Preferred Stock and, subject to action by the Company's Board of Directors and other factors including the Company's financial condition, its ability to comply with provisions of the Company's Restated and Amended Certificate of Incorporation, restrictions in the 1989 Credit Agreement and 1986 RCA, and the availability of retained earnings, capital surplus, future earnings, and cash, to pay the arrearages in Preferred Stock dividends and resume the payment of Preferred and Common Stock dividends. However, the Company can give no assurance that it willbe able to refinance such series of G&R Bonds and Preferred Stock or to pay such dividends. Ifthe 1989 Settlement becomes effective, the Company willreflect the retirement of Shoreham in certain calculations made pursuant to covenants under its long term secured debt. Duc to the uncertainties surrounding the effectiveness of the 1989 Settlemcnt, the Company has not made a determination as to what actions, ifany, it might take ifthe implementation of the 1989 Settlement raises questions as to the Company's ability to comply with those covenants.
Rate Relief In December 1987, the PSC denied an application then pending for rate relief, indicating that it would review in April 1988 the Company's entitlement to its current rates.
The Company filed a new application for rate relief in April 1988, but consideration of the application was delayed while the PSC evaluated the 1988 Settlement.
On February 15, 1989, the PSC granted the Company temporary annual electric rate relief, subject to refund, of
$97.7 million, or 5.41%. The temporary rates, the first increase in rates approved by the PSC for the Company in over three years, have become effective. In its implementing order, the PSC conditioned the rates upon the Company not operating Shoreham while the temporary rates are in effect.
The PSC has indicated that it willrule on the Company's request to make the temporary rates permanent in approxi-mately 90 days. No assurance can be given, however, that the PSC will,in fact, act in 90 days or what action it may take.
The Company is reviewing the PSC's order to determine its options, including an immediate judicial appeal challenging the restriction in the order relating to the operation of Shoreham. In addition, as part ofits deliberation in connection with the rate relief to bc provided under the 1989 Settlement, the PSC willreview the effect ofsuch rate relief on those temporary rates.
The Class Settlement of the RICO Act and Federal False Claims Act lawsuits prohibit the Company from recovering any of the contemplated rate reductions, which willaggregate
$390 million, from its ratepayers. The rate reductions willnot be applied to the Company's rates until June 1, 1990.
The PSC's action on February 15, 1989 was in response to a request made by the Company on December 2, 1988. On December 2, 1988, responding to the failure of the New York State Legislature to adopt legislation which might have permitted the 1988 Settlement to become effective, the Company applied to the PSC for temporary rate relief. In response, on December 28, 1988 and again on January 25, 1989 and on February 8, 1989, the PSC stated that it would not then grant the Company's requests for temporary rate increases.
In its December 28, 1988 statement, the PSC urged the Company, LIPA and NYPA to reaffirm the 1988 Settlement or consider an alternative agreement encompassing the 1988 Settlement's principal components. The PSC identified those components as (I) the end to the Shoreham controversy, (2) rates and a financial plan adequate to return the Company to financial health at the minimum cost to its customers and consistent with fullydisallowing imprudent expenditures, (3) plans for major energy efficiency investments on Long Island, (4) plans for additional power supplies as needed, (5) implementation of outstanding management audit recommendations and (6) resolution of all major rate-related items in controversy between the PSC and the Company. The PSC also took notice of the uncertainties created by the verdict in the RICO Act litigation and reminded the parties of the costs to ratepayers which would continue, regardless of temporary rates, so long as the 1988 Settlement issues and the RICO Act litigation remain unresolved.
At the same time that it requested temporary rate relief, the Company also requested that a schedule be set for the review of its application, filed in April 1988, for the same amount of rate relief on a permanent basis. The New York State Consumer Protection Board (CPB), which had supported the rate relief provided for in the 1988 Settlement, is opposing the granting of any other rate relief to the Company.
The Company filed testimony in February 1988 demonstrating the reasonableness of storm damage costs associated with Hurricane Gloria. The Company is currently deferring these costs, has not sought recovery to date, and cannot predict when, ifever, the PSC willpermit them to be recovered through rates. Consequently, the Company can give no assur-ance as to the action which the PSC willtake respecting their recovery but believes that recovery is appropriate.
Nine Mile Point 2 Niagara Mohawk declared NMP2, in which the Company has an 18% undivided interest, to be in commercial operation on March I I, 1988. Had the 1988 Settlement become effective, NMP2 would have been considered to have been placed in commercial operation by the Company for ratemaking purposes on April5, 1988. The 1989 Issues Agreement contains no provision relating to NMP2.
The PSC has approved a settlement (the NMP2 settlement),
tendered by the Company, the four other cotenants ofNMP2 and the staff of the PSC, of an investigation of the prudence of the costs incurred in the construction ofNMP2 which limited the amount ofNMP2 expenditures which may be included in the rate bases of the cotenants. The Company's share of this maximum amount ofNMP2 expenditures, which the Company expects to recover from its ratepayers, is
$725 million. The order of the PSC approving the settlement has been appealed in the courts. The Company is unable to predict the outcome of the appeal. The NMP2 settlement provides that each coten'ant may seek to recover its sharc of allowed costs in separate rate proceedings and each cotenant Q
35 would be permitted to recover an accumulated deferred carrying cost on the portion of the allowed costs not yet included in rates. Substantially all of the costs of NMP2 allowed the Company pursuant to the NMP2 settlement are currently included in the Company's rates as cash flow revenues under the December 1987 Rate Order. Such cash flow revenues, amounting to approximately $ 113 million annually, would cease in the event of the Company's bankruptcy prior to the PSC declaring NMP2 to be in commercial operation for the Company's ratemaking purposes.
The Company can give no assurance as to the precise date on which the commercial operation of NMP2 willcommence for ratemaking purposes. However, as a result of the PSC's decision determining April5, 1988 as the commercial operation date ofNMP2 for the ratemaking purposes for Niagara Mohawk, the Company believes that an April 1988 date is also appropriate for the Company. Accordingly, the Company is accounting for its NMP2 operations based on this date. Ifthe date on which NMP2 entered commercial operation for the Company's ratemaking purposes is determined by the PSC to be other than in April 1988, the Company has estimated that a reduction of net income of approximately $4 to $5 millioncould result for each month's delay.
Niagara Mohawk, manager and a cotenant in NMP2, and the sole owner of Nine Mile Point I, another nuclear generating unit located at the same site, has been notified by the NRC that NMP2, along with Nine Mile Point I, had been categorized "as requiring close monitoring." The Company is unable to predict what effect, ifany, such close monitoring willhave on its financial condition and results of operations. The requirement for close monitoring imposed in late 1988 by senior managers of the NRC during their bi-annual review of the performance of nuclear power plants licensed by the NRC, was based on a current assessment of the overall performance of NMP2 during the first year of its operation. Niagara Mohawk has advised the Company that the completion of the normal first-year-of-operation outage of NMP2, which has been delayed, is now scheduled to be completed in mid-March 1989. Thereafter, NMP2 is scheduled to resume normal operation. The Company can give no assurance that the scheduled resumption of operation willnot be further delayed or what action, ifany, the PSC may take with respect to the length ofthe outage of NMP2.
The Company and the other cotenants have initiated litigation against certain of the companies which participated in the construction of NMP2. At some future time the Company and the other cotenants may also initiate litigation against other NMP2 contractors and suppliers. The Company cannot predict what recovery, ifany, willresult from this litigation.
Investments Jamesporr: In the 1970s, the Company and another New York utilitycompany sought regulatory approval for the construction of two nuclear generating units at Jamesport, New York but subsequently abandoned their plans to build the units. On April5, 1988, the PSC approved a settlement agreement between the Company and the staff of the PSC concerning recovery of the costs associated with the abandoned units. No appeal having been taken, the order of the PSC has become final. Under the settlement the Company would be allowed to recover in its electric rates
$77.5 million plus accrued carrying charges beginning in November 1987 of approximately $850 thousand per month.
The settlement also provides that this amount willbe recovered over a three year period commencing at the effective date of any such new rates with a return on the unamortized amount until recovery is complete. The Company is presently seeking the recovery of the settlement amount as part ofthe permanent relief requested in its pending rate case. The Company does not yet know what provision willbe made for Jamesport under the 1989 Settlement.
Bokutn Resources Corporationt Beginning in 1976, the Company began making investments in Bokum which, at December 31, 1988, totaled approximately $ 144 million. This amount includes $20 millionof advance payments made for uranium concentrates and $57 millionfor financing costs on those advance payments. Both amounts are included in the Balance Sheet under "Nuclear fuel in process and in reactor."
The remaining $67 millionof the investment consists of $60 millionof loans to Bokum, including financing costs, for the completion of a uranium mine and ore-processing millin New Mexico and $7 million expended since mid-1980 for preservation and maintenance of Bokum's mine and mill.
These amounts are included in the Balance Sheet under "Other investments and deposits, principally Bokum Resources Corporation." Bokum is presently in reorganization under Chapter 11 of the United States Bankruptcy Code. The Company ceased accruing interest on its loans to Bokum after the filingof the bankruptcy petition.
However, the Company is continuing to capitalize its financing costs on the advance payments for the uranium concentrates.
As part of the FERC staff audit discussed above in connection with a capitalized real property tax penalty, FERC has advised the Company that the capitalization of carrying charges on the advance payments for uranium, subsequent to the declaration of Bokum's bankruptcy in June 1981, is improper because its staff believes that performance by Hokum under the terms of the contract had become doubtful. Accordingly, FERC has directed the Company to expense those carrying charges. The amount of carrying charges recorded on the Company's books and records was
$33 million at December 31, 1988. An administrative hearing to review the directed accounting treatment, ordered by FERC at the request of the Company, was held in 1987. An ALJ has rendered a decision on this issue which upholds the position of the staff of FERC. However, a final disposition of the controversy willbe made by FERC itself, which may accept, reject or modify the ALJ's decision. The Company cannot predict the outcome of this issue before FERC. In the event of an adverse decision by FERC, the Company will determine whether to pursue an appeal to the federal courts.
Pending consideration of the 1988 Settlement by the Company's shareowners, the PSC and the State Legislature, the Company requested FERC to defer action on its administrative review. Although thc 1988 Settlement did not become effective on December I, 1988 as contemplated, the Company has requested FERC to continue to defer action on its review. Ifthe 1989 Settlement becomes effective, these issues before FERC become moot.
On June 12, 1981, the Company and several other creditors of Bokum petitioned the United States Bankruptcy Court for the District of New Mexico (the Bankruptcy Court) for a reorganization of Bokum under Chapter I I of the United States Bankruptcy Code. Virtuallyall litigation between the Company and Bokum in the Bankruptcy Court has been concluded. The United States District Court has affirmed, on appeal, all decisions by the Bankruptcy Court with respect to previously litigated matters. The only pending adversary proceeding between Bokum and the Company in the Bankruptcy Court is a mortgage foreclosure by the Company against Bokum. Ajury trial of the breach of contract suit by Bokum against the Company ended on February I I, 1988 with directed verdicts in favor of the Company on all issues raised in Hokum's complaint. The Company raised several counterclaims in that litigation which were submitted to the District Court for decision. The District Court ruled on those counterclaims and-awarded judgment for the Company in the amount of$33 millionwith interest. This decision and judgment has been affirmed on appeal by the United States Court of Appeals for the Tenth Circuit. Bokum has petitioned the court for a rehearing. Because of Hokum's bankruptcy, the Company does not expect that this judgment willbe satisfied with cash. Furthermore, although the Company intends to initiate foreclosure proceedings, it can give no assurance that it would realize any significant amount in satisfaction ofthe judgment upon the sale, ifany, of the mine and mill properties.
Based upon an analysis by consultants retained to assess the uranium market and the value of the mine and mill, the Company has concluded that the Hokum project is no longer economically viable. The analysis also concludes that the Bokum properties have a current value substantially below the amount of the Company's investment. Consequently, the Company has asked Bokum to dispose of the Hokum properties. Any such transaction would require the approval of thc Bankruptcy Court.
The Company believes that the amounts authorized by the PSC for ongoing expenditures and protection of the Company's interests in the properties willbe sufficient for such purposes. The Company, which had been in the process of preparing a petition to the PSC requesting the PSC to determine the prudence of the expenditures and to permit the Company to recover in its rates such prudent costs, had determined to delay any filingpending the effectiveness of the 1988 Settlement. The Company has not yet determined, in the light of the failure of the 1988 Settlement to become effective and the pendency of the effectiveness of the 1989 Settlement, whether it willbc necessary to resume preparation of its petition to the PSC for recovery of its Bokum costs.
Although it is the Company's position that its past expendi-tures for Bokum have been prudently incurred and that it should be permitted to recover such amounts from its rate-payers, the Company cannot predict what action the PSC will take should a petition seeking such relief be filed.
Due to the many contingencies upon which the outcome of the Bokum transactions, the related litigation, and the ratemaking treatment are dcpcndent, the Company cannot accurately measure either the probability of its realizing a loss on the transactions involving Bokum, or the amount of that loss ifit should occur. While under the most adverse circumstances the loss could bc material, the Company believes that any loss by itself willnot have a material adverse effect on the financial condition and results of operations of the Company.
Litigation Employtnent Discrimination LitigationCurrently there are several actions pending against the Company in federal court and before administrative agencies including the Federal Equal Employment Opportunity Commission and the New York State Division of Human Rights, the outcome ofsome ~
or all of which may be material, alleging employmcnt
discrimination. The Company believes it has meritorious defenses to these matters, but cannot at this time predict their ultimate outcome.
&vironrnenrair The Company has been named as a third-party defendant in an environmental lawsuit which, in general, alleges that the Company, along with others, disposed of chemical and industrial wastes and by-products, including hazardous wastes and substances, at the site named in the complaints. In addition, the Company has been named along with several other utilities by the United States Environmental Protection Agency as a potentially responsible party for PCBs at another site.
The Company believes that it has meritorious defenses to these matters, but cannot at this time predict their ultimate outcome. If, with respect to any one of these unresolved claims or litigation, the Company is found to be liable for damages in amounts which are material, the impact on the Company's financial viabilitycould be material, including the possibility of bankruptcy.
Asbestos Lirigarionr Beginning in 1987, a total of thirty-seven lawsuits were brought against the Company in New York Supreme Court alleging death and bodily injuries to 607 individuals since the 1930s as a result of exposure to asbestos in buildings. Each of the lawsuits named multiple defendants including one lawsuit in which 142 defendants were named.
The damages sought in these suits amount to $6.5 billion plus an additional unspecified amount of punitive damages.
Because discovery proceedings relating to these claims are only in their preliminary stages, the Company is presently unable to assess the validity of the complaints or measure the impact, ifany, that the ultimate resolution of this litigation may have on its financial condition and results of operations.
Should there eventually be a judicial determination against the Company which awards damages approaching the amounts sought by plaintiffs, the result would have a material adverse effect upon the Company's financial viability.
Other Litigation: In December 1987, two shareowners of the Company initiated class action litigation in Nassau County Supreme Court, alleging that the actions by the Company and certain of the Company's Directors, in opposing the takeover of the Company by LIPA, have tortiously interfered with the shareowners'ability to sell their shares to LIPA and are depriving them of the best price obtainable for the Company's shares. Counsel for these two shareowners recently advised the Company that they are willingto enter into a stipulation voluntarily dismissing the action, without prejudice and without costs, as moot. The parties are in the process of preparing an appropriate stipulation for execution.
Ifthe action is not dismissed, the Company cannot predict the outcome of this litigation or the impact, ifany, that its ultimate resolution willhave on the financial viabilityof the Company. Counsel for two other shareowners have written to the Company objecting to the alleged failure of the Company to give adequate consideration to LIPA's proposal.
Other Commirmenrsr The Company has entered into substantial commitments for fossil fuel and gas supply. The costs of fuel and gas supply are normally recovered from ratepayers through provisions in the Company's rate schedules. The Company has also entered into a contract with NYPA pursuant to which the Company has obligated itself to pay NYPA for the construction and operation of a new inter-connection between Westchester and Nassau Counties. The Company willseek to recover the costs of the interconnection from its ratepayers.
Nuclear Plant Insurance: The maximum amount of property damage insurance coverage currently available at Shorcham is approximately $ 1.725 billion. The insurable value of Shoreham at December 31, 1988 was $2.2 billion. The maximum amount of property damage insurance currently available at Nine Mile Point, where there are two units, is also approximately $ 1.725 billion for each unit under certain circumstances. The insurable value ofNMP2 at December 31, 1988 was $3.4 billion, of which the Company's 18% share was $612 million.The Company has no interest in Nine Mile Point I, which is owned and operated solely by Niagara Mohawk.
The NRC requires a minimum of approximately $ 1.1 billion of property damage coverage to be in effect at each nuclear generating site. For Shoreham, however, the Company was, on May 31, 1988, granted an exemption from the NRC permitting the Company to defer the effective date of, and the related premium for, $723 millionof coverage so long as Shoreham does not operate above 5% of fullpower.
Pursuant to this exemption, the Company currently carries
$337 million in coverage. Certain of these insurance programs provide for retroactive premium adjustments pursuant to which the Company would be liable for maximum assessments of approximately $20 million in any one policy year in the event of a loss to any other insured utility company. This assessment would only be required ifexisting premiums and loss reserves were exhausted. When new premium amounts have been established reflecting the recently reduced coverage, the amounts of the possible retroactive premium assessment willalso be reduced. For NMP2, the cotenants have approximately $ 1.575 billion of property damage coverage in effect but, under certain circumstances, only a portion of that amount would be available. Thc Company's share of the annual premium for the retroactive premium adjustment is currently approximately $ 1 million.
Amendments to the Price Anderson Act enacted in 1988 extended the statute for 15 years with provisions which increased the limitations upon liabilityfor third-party bodily injury and property damage arising out of a nuclear occurrence at each unit from $720 million to $7.3 billion.
Under thc provisions of the Price Anderson Act, coverage for this maximum liabilityis based upon the number of licensed nuclear units in the United States, currently 113, and is provided by insurance carriers and by retroactive premium assessments imposed on the owners of nuclear units. The Company expects that agreements established under the provisions of the Price Anderson Act willbe amended to provide that the Company may be assessed up to $74 million per nuclear incident in any one year at other nuclear units, but not in excess of$ 12 million in payments per year.
Take-or-Pay Costs: FERC has ruled that, subject to its regulations, interstate pipelincs may pass on to their customers certain costs which resulted when demand for natural gas from interstate gas pipelines dropped offbecause of changing market conditions. These costs, known as take-or-pay costs, are substantial. The Company estimates that a total of approximately $49 million in such costs may be billed to it by its pipeline suppliers over the next 5 years. The PSC has commenced a proceeding to investigate how to allocate to thc customers of New York State utilities, including the Company, the take-or-pay costs passed on by the interstate
pipeline companies. This proceeding willreview these utility purchasing practices in order to determine ifsuch practices imprudently contributed to the take-or-pay costs, and ifso, how much of the take-or-pay costs should be recovered by Note 7. Segments of Business the utilities. The Company has taken the position that its purchasing practices during the time period in question were prudent. The Company is unable to predict the outcome of this proceeding.
The Company is a public utilityoperating company engaged in the generation, distribution, and sale ofelectric energy and the purchase, distribution, and sale of natural gas.
1988' 1987 1986 Pn millions ofdollars)
Total Total Total Electric Gas Company Electric Gas Company Electric Gas Company Operating Information (Year ended December 31):
Revenues
$1,787
$351
$ 2,138
$ 1,719
$353
$2,072
$ 1,612
$365
$ 1,977 Expenses (excluding income tax) 1,140 297 1,437 1,101 301 1,402 1,017 320 1,337 Operating income (before income tax)
Allowance for other funds used during construction and other Provision for net loss on Jamesport abandoned generating project Interest charges, net Income taxes operating Income taxes nonoperating (credit)
(65) 356 200 (88)
(143) 374 288 (119)
(146) 16 283 253 (83) 647
$ 54 701 618
$ 52 670 595
$ 45
'$,640 Income before cumulative effect of accounting change Cumulative effect of accounting change for disallowed costs (net of taxes)
Net income (loss) per accompanying Statement of Income 298 (1,345)
$(1,047) 270 270 317 317 Other Information (Year ended December 31):
Depreciation, depletion, and amortization Construction and nuclear fuel expenditures 523 83 Investment Information (At December 31):
Assets (a)
$7,153 Nonutility plant Other investments (b) 67 Assets utilized for overall Company operations 38 561 547 34 581 681 32 713
$410
$ 7,563
$8,128
$370
$8,498
$7,633
$343
$7,976 1
1 1
1 68 67 I
68 66 I
67 694 757 814
$ 11 94 64
$ 10 74 61 9
70 Total Assets
$8,326
$9,324
$8,858 (a) Includes net utilityplant aud defened charges (excluding eonurron), maten'als and supplies, accrued revenues, gas in storage aud fuel.
(b) Principdly consisting of the Company's investmeut in Bairam Resources Corporation.
Note 8. Quarterly Financial Information (unaudited)
(In millions ofdollars except Earnings per eonrmon share) 1988 Operating revenues Operating income Nct income (loss)
Earnings (loss) for Common Stock Earnings (loss) per common sharc 1987 Operating revenues Operating income Net income Earnings for Common Stock Earnings per common share First Quarter 593 146 (1,271) (a)
(1,290) (a)
$ (11.61) (a) 569 116 70 50
.45 Second Quarter
$454 100 64 44
$.40
$452 72 39 19
$.17 Third Quarter
$ 611 191 143 125
$ 1.13
$ 578 124 108 88
$.79 Fourth Quarter
$ 480 17 (b) 0 (b)
$.00 (b)
$ 473 71 53 35
$.32 (a) As a result ofadopting SPAS Ko. 90 in January l988, these amounts include the cumulative effect ofan accounting change for disallowed costs amounting to approximately $1.34$ billion, net of tax effects, or $12. IO per common share.
(b) As a result of the settlement of the 1984 consolidated class action aud shamowrrers'envative action securities litigation, which became efleetive in December 1988, the Company has reoorded, dun'ng the founh quarter of l988, a charge to earmngs amounting to approxurrately $21 million or $. l9 per common share. 38
~ Report of Ernst 8 Whinney, Independent Auditors To the Shareowners and Board of Directors of Long Island Lighting Company Hicksville, New York We have audited the accompanying balance sheet of Long Island Lighting Company as of December 31, 1988 and 1987 and the related statements of income, shareowncrs'equity and cash flows for each of the three years in the period ended December 31, 1988. These financial statements are the respon-sibilityof the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and related schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Long Island Lighting Company at December 31, 1988 and 1987, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1988 in conformity with generally accepted accounting principles.
As more fullydiscussed in Note 6 ofthe Notes to Financial Statements, the Company can give no assurance as to the outcome of certain of the matters discussed therein. The adverse resolution of certain of those matters would have a material impact on the Company's financial viabilityand, under the most adverse circumstances, the Company might seek the protection of federal bankruptcy laws while it continues its operations.
1.
The accompanying financial statements have been prepared assuming that the Company willcontinue as a going concern. The Company's financial viabilitywillbe materially adversely affected ifthe Company is unable to obtain needed financing, including the sale of new deben-tures, for its operating and capital requirements. Such financial viabilityis also dependent upon, among other matters, (a) the receipt of adequate and timely rate relief and (b) the satisfactory resolution of the other matters discussed below. In the absence of the proceeds from the sale of new debentures which the Company plans to issue in early 1989, the Company estimates that, in the second quarter of 1989, its operating and capital requirements will exceed the cash expected to be generated from operations and cash and short-term investments on hand at December 31, 1988. The Company estimates that it willneed the proceeds of the $375 millionof new debentures to meet its operating and capital requirements for 1989.
Furthermore, the Company anticipates that even ifit is able to consummate the sale of new debentures and borrow the remaining $88 million available under the 1989 Credit Agreement, which is contingent upon such sale, its cash resources willbe exhausted during the first quarter of 1990 in the absence of additional financing (including the extension or modification ofthe Company's bank agree-ments) and rate relief. Further, the sale of new debentures is intended to provide the flexibilityto maintain financial viabilityduring a period in which the Company awaits the outcome of the following matters: (i) final resolution of matters relating to a proposed settlement of the Federal Racketeer Influenced and Corrupt Organizations Act
("RICO Act") litigation and related matters; (ii) resolution of open issues before the staff of the Nuclear Regulatory Commission ("NRC") concerning the Company's applica-tion for licenses to operate the Shoreham Nuclear Power Station ("Shoreham") at full power; (iii)the restoration of the Company to financial health through the effectiveness of the settlement more fullydescribed in Note 6 of the Notes to Financial Statements which would, among other matters, resolve the future of Shoreham and settle certain pending litigation and administrative proceedings (the "1989 Settlement" ); (iv) action by the Public Service Commission of the State of New York ("PSCQ respecting the Company's request for permanent rate relief; and (v) some combination of any of these matters or of others not yet proposed for the resolution of the problems facing the Company. The Company can give no assurance as to the outcome of any ofthe foregoing matters or as to its ability to sell the new debentures. Ifthe Company is unable to obtain needed financing or the matters discussed herein are resolved adversely, the Company's financial viabilitywill be materially adversely affected and, under the most adverse circumstances, the Company might seek the protection of fcdcral bankruptcy laws while it continues its operations. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classiTication of assets or the amounts and classifications of liabilities that may result from the inability of the Company to continue as a going concern.
- 2. <,The Company is presently unable to predict the final resolution of matters relating to a proposed settlement of the RICO Act litigation and related matters, which pio-vides for, among other matters, rate reductions aggregating
$390 millionto be reflected as adjustments to its rate-payers'onthly electric bills over a ten-year period. The Company is unable to predict whether the trial court and the Company's shareowners willapprove the settlement or, ifappeals are taken, the outcome of such appeals. While the Company might have no liabilityunder certain cir-cumstances, ifall determinations were to be adverse to the Company the Company's ultimate liabilitycould be as much as $8.7 billion. Accordingly, the Company is unable to determine the impact, ifany, that such litigation will have upon the Company and its financial statements.
3:
At December 31, 1988, the Company's investment in Shoreham approximated $4.2 billion, and the Company willexpend additional amounts through the date of its commercial operation. There is substantial opposition to the licensing ofShorcham from New York State, local governments and others and, accordingly, the Company is unable to predict when, ifever, Shoreham willobtain licenses to operate from the NRC. There are uncertainties with respect to the Company's ability to obtain adequate rate reliefduring the pendency of the Shoreham con-troversy and with respect to the ultimate rate treatment of Shorcham costs, including, among other matters, the effect, ifany, of the final disposition of the order of the PSC disallowing approximately $ 1.4 billion of Shoreham costs from rate recovery, which amount was written off effective January I, 1988. Alternatively, there are uncertainties with respect to the effectiveness of the 1989 Settlement to resolve the Shoreham controversy and to restore the Company to financial health including, among other matters, (i) whether the 1989 Settlement willreceive all required approvals from, among others, the Long Island Power Authority, the New York Power Authority, the PSC, the Company's Board of Directors and the Company's shareowners; (ii) what actions the PSC will take with.respect to rate relief and whether such rate relief willbe realized by the Company; (iii)whether such rate relief, ifany, willrestore the Company to financial health and return the Company to investment grade financial condition; and (iv) that the Company willrealize the full measure of the benefits contemplated by the 1989 Settlement. As a result of the foregoing, the Company is unable to determine the recoverability of its investment in Shoreham and the impact thereof upon the Company and its financial statements.
4.
At December 31, 1988, the Company's net investment (an 18% undivided interest) in Nine Mile Point 2 is approximately $700 million. The Company is unable to determine the date on which the commercial operation of Nine Mile Point 2 willcommence for its ratemaking purposes and what impact, ifany, the appeal of the PSC's approval of the Nine Mile Point 2 settlement, among other matters, willhave on the recoverability of the Company's investment.
5.
At December 31, 1988, the Company has made advances and loans, including financing costs, of approxi-mately $ 144 millionto Bokum Resources Corporation
("Bokum ) and litigation exists between the Company and Bokum. Further, the Company's investment in Bokum will be retired by the Company ifthe 1989 Settlement becomes effective. The Company is presently unable to determine the amount of loss, ifany, that willresult from these matters.
6.
The Company is presently unable to predict the outcome of the (a) 1987 shareowner class action lawsuit, (b) actions in federal court and before administrative agencies alleging employment discrimination, (c) environmental claims against the Company and (d) asbestos related lawsuits, and the impact, ifany, that the ultimate resolution of such litigation willhave upon the Company and its financial statements.
As more fullydiscussed in Note I of the Notes to Financial Statements, effective January 1, 1988, the Company adopted Statement of Financial Accounting Standards No. 90, "Regulated Enterprises Accounting for Abandonments and Disallowances of Plant Costs" and, accordingly, recorded a write4own of its net assets of approximately $ 1.3 billion, net of tax effects.
Melville, New York March 3, 1989 40
P
~ Selected Fieeeciei Octa 1988 1987 1986 1985 1984 Stlmmarll of OperatlolLS (gtc Nate I, 2, and 6 ofh'ores to Financial Statctncnts)
Tabte 1
Total revenues (000)-
Total operating income (000)
Before federal. income taxes After federal. income taxes Income before cumulaiive effect of accounting change (000)
Cumulative effect of accounting change for disallowed costs (net of taxes) (000)
Earnings (loss) for.Common Stock (000)
Average coinmon shares outstanding (000)
Earnings pcr common share before cumulative effect of accounting change Earnings (loss) per common share Dividends declared per common share Book value per common sharc at year cnd Common shareowncrs at year cnd Ratio of earnings to fixed charges Ratio of earnings to fixed charges and preferred dividends Ratio of earnings to fixed charges
'excluding AFC
'roforma e'arnings - with 1988 accounting change applied retroactively:
Earnings (loss) for Common Stock (000)
Earnings, (loss) per common sharc EleCtrIC Operating InCOme (In thousands of'dollars)
Revenues Residential Commercial and industrial Other System revenue Power pools Total Operating Revenue
- Expenses, Opciations fuel and purchased power Operations 'other Maintcnancc Depreciation Operating taxes Federal incbmc taxes Total Expenses Electric Operating Income Gas Operating Incotne (In thousands ofdollars)
Revenues Rcsidcntial space heating*
other Non-residential, firm space heating*
other Total firm sales rcvenuc Intcrruptible Total system sales'evenue Other utilitics Total sales revenue Other revenue Total Operating Revenue Expenses Operations fuel Operations other Maintcnancc Depreciation, depletion, and amortization Operating taxes Federal income taxes Total Expenses Gas Operating Income
$ 2,137,834 701,049 500,938 298,490
$(1,345,110)
$(1,121) 128) 111,177 2.02 (10.08) 19.61 93,267 1.95 1.58 1.60 223,982 2.02 835,5S4 883,267 43,930 1,762,781 24,152 1,786,933 501,998 195,283 96,599 82,811 262,644 184,951 1,324,286 462,647 201,312 31,803 68,114 28,078 329,307 18,821 34S,128 348,128 2 773 350,901 172,431 53,415 12,599 10,785 48,220 15,160 312,610 38,291
$2,072,077 670,324 382,604 269,888 192,312 111,129 1.73 1.73 29.71 106,117 2.02 1.56 176,712 1.59 800,952 849,626 56,394 1,706,972 11,889 1,718,861 511,079 187,573 88,431 63,840 250,047 273,049 1,374,019 344,842 194,303 32,877 63,267 28,443 318,890 24,150 343,040 4,970 348,010 5,206 353,216 174,610 53,140 12,856 10,065 50,112 14,671 315,454 37,762
$ 1,977,121 640,021 387,077 316,675 236,864 111,085 2.13 2.13 27.99 117,962 2.17 1.68 1.53 30,864
.28 744,898 804,387 51,447 1,600,732 11,057 1,611,789 460,399 173,702 91,611 61,194 230,508 242,708 1,260,122 351,667 207,937 35,393 68,380 31,473 343,183 22,132 365,315 365,315 17 365,332 205,616 46,607 11,034 8,945 47,484 10,236 329,922 35,410
$2,050,340 627,307 388,140 524,288 440,563 110,842 3.97 3.97 25.88 143,627 2.75 2.15 1.62 772,861 844,636 48,791 1,666,288 12,971 1,679,259 629,470 141,312 60,154 58,510 224,376 218,521 1,332,343 346,916 190,357 35,638 62,268 31,043 319,306 33,446 352,752 352,752 18,329 371,081 201,458 41,948 10,895 8,232 46,678 20,646 329,857 41,224
$ (682,947)
(6.16)
$ 1,955,230 510,993 308,421 427,788 340,264 110,120 3.09 3.09 22.05 163,354 2.49 1.91 1.40 340,264 3.09 Table 2 752,123 796,543 40,952 1,589,618 23,779 1,613,397 692,515 136,412 50,038 57,198 213,691 187,276 1,337,130 276,267 Table 3 195,035 35,916 63,442 31,526 325,919 32,149 358,068 358,068 (16,235) 341,833 192,581 41,097 10,530 8,011 42,164 15,296 309,679 32,154 "In thc heating classilications, thc rcvcnucs shown cover all gas used, including nonhcating usc.
41
Hecttic Operations 1988 1987 1986 1985 1984 Table 4 Energy millions of kWh Nct generation Power urchased and (sold) net 15,228 14,004 11,707 12,159 1,940 2,516 3,952 2,689 Total system requirements Com any use and unaccounted for System sales Power pool sales 17,168 (1,128) 16,040 433 16,520 (1,474) 15,046 239 15,659 (1,266) 14,393 244 15,136 (1,346) 13,790 226 14,848 (1,271) 13,577 418 Total Sales 16,473 15,285 14,637 14,016 13,995 Peak Demand mW Station coincident demand Purchased or (sold) net 3)347 475 3 333 243 2,969 472 2,773 2,528 607 568 System Peak Demand 3,822 3,576 3,441 3,380 3,096 System Capability mW LILCO stations Firm urchase or (sale) net 3,834 482 3,799 550 3,743 454 3,743 171 3,721 57 Total Capability 4,316 4,349 4,197 3,914 3',778 Fuel Consumed for Electric Operations Oil-thousands of barrels Gasthousands of dth Total-billions of Btu Dollars per million Btu Cents per kWh of net generation Heat rateBtu per net kWh 19,927 29,126 153,828 2.53 2.67O 10,545 18,624 29,762 146,536 2.86 3.01c 10,509 15,625 26,103 124,098 2.51 2.66')
10,600 15,790 29,154 128,629 3;97 4.16e 10,465 15,531 29, 149 127,468 4.47 4.68~
10,483 Gas Operations Energythousands of dth Natural gas Manufactured gas and change in storage Total Natural and Manufactured Gas Total system requirements Com any use and unaccounted for System sales Other utilities Total Sales Maximum Day Sendout-dth System Capability-dth pcr day Natural gas LNG manufactured, or LP gas Total Capability Calendar Degree Days (62-year average 5,051) 58,743 (18) 58,725 58,725 (3,148) 55,577 55,577 431,940 411,596 145,600 557,196 5,162 58,832 (63) 58,769 56,551 (2,460) 54,091 2,218 56,309 404,679 388,400 145,600 534,000 4,805 53,035 65 53,100 53,100 (1,282) 51,818 51,818 365,991 345,200 145,600 490,800 4,715 53,030 (30) 53,000 53,000 (3,219) 49,781 49,781 441,122 335,700 145,600 481,300 4,638 Table 5 52,558 (15) 52,543 52,543 (1,632) 50,911 50,911 359,527 315,400 145,600 461,000 4,739
Hectnc Sales and Customers Sales millions of kWh Residential Commercial and industrial Other System sales Power pool sales Total Sales Customers monthly avcragc Residential Commercial and industrial Others Customers total monthly average Customers total at year end Residential kWh per customer Revenue cents per kWh Commercial and Industrial kWh per customer Revenue per kWh System total revcnuc pcr kWh sold 1988 6,979 8,566 495 16,040 433 16,473 882,962 98,450 4,436 985,848 989,097 7,905 11.974 87,005 10.31o 10.974 1987 6,603 8,004 439 15,046 239 15,285 872,419 95,871 4,389 972,679 976,928 7,569 12.13e 83,487 10.62c 11.35c 1986 6,251 7,713 429 14,393 244 14,637 861,011 93,228 4,362 958,601 963,197 7,260 11.92'i 82,732 10.43 i 11.124 1985 5,970 7,369 451 13,790 226 14,016 850,683 90,548 4,391 945,622 948,797 7,018 12.95c 81,382 11.46e 12.08'i 1984 Table 6 6,000 7,129 448 13,577 418 13,995 840,843 88,459 4,339 933,641 935,964 7,136 12.53c 80,591 11.17i 11.71'as Sales and Customers Sales thousands of dth Residential space heating*
other Non-residential space heating*
other Total firm sales Interruptiblc Total system sales Other utilitics Total Sales Customers monthly avcragc Residential space heating*
other Non-residential space heating*
other Total firm customers Interruptible Customers total monthly average Customers total at year end Degree days billed Residential dth per customer Revenue per dth Non-residential, firm dth per customer Revenue per dth System total revenue per firm dth sold 31,276 3,589 11,054 4)580 50,499 5,078 55)577 55,577 198,949 181,926 25,979 11,725 418I579 325 418,904 421,429 5,074 91.5 6.51 414.6 6.15 6.26 29,239 3,952 10,055 4,389 47,635 6,456 54,091 2,218 56,309 192,550 184,411 24,234 11,778 412,973 301 413,274 415,629 4,802 88.0 6.84 401.1 6.35 6.69 28,438 3,629 9,711 4,533 46,311 5,507 51,818 51,818 186,625 186,600 22,514 11,889 407,628 289 407,917 410,064 4,795 85.9 7.59 414.0 7.01 7.41 26,387 3,642 8,967 4,510 43,506 6,275 49,781 49,781 182,593 188,594 20,935 11,930 404,052 297 404,349 405,330 4,444 80.9 7.53 410.1 6.92 7.34 Table 7 27,528 3,702 9,357 4,638 45,225 5,686 50,911 50,911 179,030 190,507 20,173 11,973 401,683 306 401,989 402,430 4,921 84.5 7.40 435.4 6.79 7.21
- In the heating classifications, thc sales shown cover all gas used, including nonhcating use.
1988 Operatiolls Rlci MBItltNMllc8ExpCtls8 DtlI8119 fin thousands ofdoll@a) 1987 1986 1985 1984 Table 8 Total payroll and employee benefits Less Charged to construction and other Charged to Operations Fuels clcctric operations Fuels gas operations Purchased power costs Fuel cost'ad'ustments deferred Total Fuel and Purchased Power All other Total Operations and Maintenance Employees at December 31 333,359 129,990 203,369 410,174 172)431 88,465 3,359 674,429 154,527
$ 1,032,325 6,281 315,114 115,315 199,799 422,997 174,610 93,186 (5,104) 685,689 142,201
$ 1,027,689 6,378 283,427 102,987 180,440 311,872 205,616 134,347 14,180 666,015 142,514 988,969 6,219 257,509 99,415 158,094 511,193 201,458 113,867 4,410 830,928 96,215
$ 1,085,237 5,676 215,373 66,331 149,042 569,528 192,581 123,963 (976) 885,096 89,035
$ 1,123,173 5,202 COllStrltCtlotl EXp8lltfttQFCS gn thousands of dollarS)
Electric Production Transmission Distribution General Electric Total Gas Total Common Total Total Construction Expenditures Nuclear Fuel 419)028 13)379 64,653 1,588 498,648 37,518 9,352 545)518 15,639 453,544 23,668 32,209 6,470 515,891 34,270 17,795 567,956 13,219 603,916 6,451 50,847 4,165 665,379 31,978 5,434 702',791 10,353 807,067 4,971 38,333 (4,132) 846,239 19,564 13,198 879,001 22,241 Table 9 852,774 3,541 31,778 1,294 889,387 12,354 4,622 906,363 14,771 BaIanCe Sheet (in thousands ofdollars)
Assets Utilityplant Less accumulated depreciation, depletion, and amortization Total Net Utility Plant Other property and investments Current assets Unamortized cost of abandoned generating projects Other Total Assets
'apitalization and Liabilities Capitalization:
Long-term debt*
Unamortized premium and (discount) on debt Preferred Stockredemption required Prcfcrred Stockno redemption requited Treasury stock, at cost Retained earnings restricted for Prefcrrcd Stock dividend requirements Common Stock and premium Capital stock expense Retained earnings Total Capitalization*
Current Liabilities Deferred Credits:
Accumulated deferred income tax reductions Other Total Defcrrcd Credits Rcscrves for Claims, Damages,
- Pensions, and Benefits Total Capitalization and Liabilities "Includes $68$,621,0% of Tiust Obligations for 1984.
$8,020,253 1,075,129 6,945,124 69,271 571,934 98)616 641,392
$ 8,326,337
$3,449,821 (25)011) 513,924 221,050 (58)430) 341,008 1,557,293 (56,151) 679)579 6,623,083 583,017 963,975 144,015 1,107,990 12,247
$8,326,337
$9,277,309 983,272 8,294,037 68,763 606,579 118,484 235,824
$9,323,687
$ 3,724,601 (26,646) 520,788 221,051 (40,881) 265,288 1,556,928 (56,144) 1,801,919 7,966,904 339,573 921,397 83,217 1,004,614 12,596
$9,323,687
$8,710,063 919,452 7,790,611 68,383 702,825 127,590 168,746
$ 8,858,155
$3,805,796 (28,281) 527,465 221,053 (25,701) 188,051 1,556,483 (56,138) 1,609,268 7,797,996 277,173 692,758 75,195 767,953 15,033
$8,858.155
$ 8,167,239 853,071 7,314,168, 139,783 367,967 27,133 114,215
$ 7,963,266
$2,718,192 (9,414) 527,612 221,056 (7,654) 1,556,026 (56,116) 1,480,644 6,430,346 975,214 486,333 62,039 548,372 9,334
$7,963,266 Table 10
$ 7,272,544 788,565 6,483,979 68,639 437,436 44,108 66,699
$7,100,861
$3,001,796 (9,658) 530,662 221,056 (505) 1,551,057 (56,103) 956,356 6,194,661 506,054'38,607 54,649 393,256 6,890
$7,100,861
Table 19 Common and Preferred Stock Prices The Common Stock of the Company is traded on the Ncw York Stock Exchange and the Pacific Stock Exchange. The Preferred Stock
$ 100 par value,Series B,E,I,J,K, and S and the Preferred Stock $25 par value, Series O,P, T,U,V,W, and X ofthe Company, are traded on the New York Stock Exchange. The table below indicates the high and low prices on the New York Stock Exchange listing of com-posite transactions for thc years 1987 and 1988.
Common Stock Preferred Stock Se'ies E Series I 4X9tr SVi95 Series J
- Series K 8.12WVD 83096 Series 0
$2.47 Sees P
Series S Series I
$2.43 9.80IIS
$3.31 Series U Series V Ser'es W Series X
$4.25
$3.50
$3.52
$350 1987 Fnt Ip/i 10 Second Ilk'Vi lhrd 12Vi 9 Fcufi IIVi SVt 45 40 4IYi 35Yi 9Th 74Vi 72Vi 63Vi 74 65 47 42 44 38 80 74Yi TSVi 68 78 I 52 45 48 41Vi 88 75Vi 81Yt 74Vi 82 75 52 4811 46hh 38Vi 88 81 Vi 81 67 8771 IA 23Vi 21 23 2Ã/i 89 84 29Yi 25 32i/ Pli 31'li 26Vi 31Vi Pl XVi X 23 19 23 19II II9 84'/i 28'/i 24'/i 31Vi 2815 XY/i 27 29Vi 26i/i 29'7 26Yt 2215 26Yi 22r/4 9015 88 32'li 27Yi 37Vi Xil 3315 2pli 3IVi 3P/4 32i/i 27r/i 26 ISVi 24 16Vi 95 80 31Vi 19r/4 35Yi ZTYi 32 2215 32'li 21 Xi/4 2V/g 1988 Fra Second Third lerfi 10Yi 7Vi I4 8
ISi/a 12tri
'P/i IIVt 50 44 49Yi 40Vt 80Vi 78Vt 81 67Vr 83 67Vt 66Yi 49 63Yi 49 110 79Yi 98 82 101Vi 82 61Vi 53Yt 52YI 49hh Ils 97 98 IYt 6I SN 56 41Vi 114 99 102 78Yi 105 AY/i 27 21 27 18Vi 102 81 X
23Vi 34 27Vt 30Yi 24Vt 30Vt 24Vi 122Vt 99r/i 37'9Vi 42Yi 32II 3P/i 28Yt Xl 26Vi 12215 116 37i/g 31'/i 42Vi 40 32Yi 23Vi 31Yi 28 125 IOSVr 38r/g 27Yi 4IYt 34 3II9 25 X
25/i 40r/g 31 35i/
4IYi mV 40Yi XVi 43Vi 32 The Series D4.25% Stock is traded in the over-the~ountcr market. No price data is available for 1988. The Series F, H, R Preferred Stock are held privately.
32 2415 38 Xl 38Vi 35Vt L, M,and Corporate Information Executive Offices 175 East Old Country Road Hicksvillc, N.Y. 11801 Common Stock Listed New York Stock Exchange Pacific Stock Exchange Ticker Symbol: LIL Transfer Agents Coninton Stock Manufacturers Hanover Trust Company 450 West 33rd Street Ncw York, N.Y. 10001 212;613-7 147 Prcfeircd Stock The First National Bank of Boston 50 Morrissey Boulevard Dorchester, MA. 02102 800442-2001 Registrar Conirnon and Prcfcrrcd Stock Mellon Securities Trust Company 120 Broadway Ncw York, N.Y. 10271 Sharcowners'gent for Automatic Dividend Rcinvcstmcnt Plan Manufacturers Hanover Trust Company Dividend Reinvestment Dcpartmcnt P.O. Box 24850 Church Street Station New York, N.Y. 10242 212-613-7147 Annual Meeting For the last several years, thc Annual Meeting ofShareowncrs has been held in May. For 1989, a specific date cannot yet be determined due to recent impor-tant events on which share-owners might have to vote. A notice of the meeting, a proxy statement and a proxy willbe mailed to sharcowncrs at a later date.
Form 10-K Annual Report The Company will furnish, without charge, a copy of the Company's Annual Rcport, Form 10-K, as filed with thc Securities and Exchange Com-mission, upon written request to:
Investor Relations, Long Island Lighting Company, 175 East Old Country Road, Hicksvillc, N.Y. 11801
Directors WilliamJ. Catacosinos Chairman ofthe Board and Chief Executive Officer Long Island LightingCompany Leon J. Campo Assistant Superintendent for Finance, East Meadow School District; Chairman, Suffolk County IVater Authority Winfield E. Fromm Retired Vice President Eaton Corporation Electronics Lionel M. Goldberg Senior Vice President Alexander &Alexander of New York, Inc.
Insurance Basil;.A. Paterson Partner Meyer, Suozzi, English
& Klein, PC
- Law, Eben W. Pyne Corporate Director and Consultant Retitcd Senior Vice President Citibank, N.A.
John H. Talmage Farm Manager H.R. Talmage &Son Phyllis S. Vineyard Director Long Island Community Foundation Russell C. Youngdahl President and Chief Operating Oflicer Long Island Lighting Company Officers WilliamJ. Catacosinos Chairman of the Board and Chief Executive Officer Russell C. Youngdahl President and Chief Operating Oflicer Anthony F. Earley, Jr.
Executive Vice President George J. Sid eris Senior Vice President Finance James T. Flynn Group Vice President Engineering and Operations P. Alan Gambill Group Vice President Commercial Operations Ralph T. BrandiTino Vice President Finance Ira L. Freilicher Vice President Law and Corporate Affairs and Associate Secretary Robert X. Kelleher Vice President Human Resources Jay R. Kessler Vice President Gas Operations John D. Leonard, Jr.
Vice President Nuclear Operations Adam M. Madsen Vice President Corporate Planning
'Brian R. McCaffrey Vice President Administration Joseph W. McDonnell Vice President Communications WilliamJ. Museler Vice President Electric Operations John J. Russell Vice President Community Affairs William G. Schiffmacher Vice President Engineering and Construction John A. Weismantle Vice President Corporate Projects Research and Development Walter F. Wilm,Jr.
Vice President Customer Relations Edward J. Youngling Vice President Conservation and Load Management Victor A. Staflieri General Counsel Michael Czumak Controller and Chief Accounting Oflicer Andrew R. Ragogna Treasurer John J. Kearney, Jr.
Secretary Herbert M. Lciman Assistant Secretary and Assistant General Counsel
Long Island LightIng Company 175 East Old Country Road Hicksville, NY 11801 8ULK-RATE'.b.
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