ML17059C116: Difference between revisions

From kanterella
Jump to navigation Jump to search
(Created page by program invented by StriderTol)
(Created page by program invented by StriderTol)
Line 40: Line 40:
.Inthe'courseoftheCompany'sordinarybusinessoperations,the'CompanyisinvolvedinthehandlingofmaterialsthataredeemedtobehazardoussubstancesunderSuperfund.These-materialsincludeasbestos,metals,certainflammableandorganiccompoundsanddielectricfluidscontainingpolychlorinatedbiphenyls(PCBs).OtherhazardoussubstancesmaybehandledintheCompa'ny's'~operationsormay,bepresentatCompanylocationsasaresultofhistoricalpracticesbytheCompanyoritspredecessorsininterest.TheCompanyhas,receivednoticeconcerningpossibleclaimsunder;~'uperfundoranalogousstatelawsrelatingtoanumber,ofsitesatwhichjtisallegedthathazardoussubstancesgenerated,bytheCompanyandotherpotentially.responsibleparties(PRPs).weredeposited:Adiscussionofthesesitesissetforthbelow.EstimatesoftheCompany,'sallocatedshare'ofcostsforinvestigative,removalandremedialactiyItiesatthesesites~rangePorn,preliminarytorefinedandareupdatedasnewinformationbecomesavailable.InDecember1996,theCompanyfiledacomplaintintheUnitedStatesDistrictCourtfor,theSouthernDistrictofNewYorkagainst14oftheCompany'sinsurers,whichissuedgeneralcomprehensive,.liability(GCL)policiestotheCompany.InJanuary1998,.theCompanycommencedasimilar,actionagainstthesameandcertainadditionalinsurerdefendantsinNewYorkStateSupremeCourt,FirstDepartment;thefederalcourtactionwassubsequentlydismissedinMarch1998.TheCompanyis;..seekingrecoveryundertheGCLpoliciesforthecostsincurredtodateandfuture,costsassociatedwiththeclean-upoftheCompany'sformermanufacturedgasplant(MGP)sitesandSuperfundsitesforwhichtheCompany,hasbeennamedaPRP.TheCompanyisseekingadeclaratoryjudgment'thatthedefendantinsurersareboundbythetermsoftheGCLpolicies,subjecttothestatedcove'r'age'limits,toreimbursetheCompanyforthe.'cleanupcosts.,Theoutcomeofthisproceedingcannotyetbe..,,'etermined.S~ZSVMetalBankTheEPAhasnotifiedtheCompanythatitisoneofmanyPRPsthatmaybeliablefortheremediationofalicenseddisposalsitelocatedinPhiladelphia,Pennsylvania,andoperatedbyMetalBankofAmerica.TheCompanyandnineotherPRPs,allofwhicharepublicutilities,completedperforman'ceofaRemedialInvestigationandFeasibilityStudy(Rl/FS),whichwasconductedunder'anAGOwith'theEPA.InDecember1997,theEPAissueditsRecordofDecision(ROD),settingforththe:.final~'remedialactionselectedforthesite.IntheROD,theEPAestimatedthatthepresent'costofthe-selectedremedyfor'the'siteis$17.3million.Atthistime,theCompanycan'notpredictwith'reasonablecertaintytheactualcostoftheselectedr'emedy,whowillimplementtheremedy,'rthecost;ifany",totheCompany.UnderaPRPparticipatioriagreement,"'theCompanypreviouslywasresponsible'for"'.2%ofthecostsassociatedwiththeRI/FS--TlieCompany's'allocableshareofliabilityfortheremediationactivitieshasnotyetbeendetermined.IITheCompanyhasrecordedaliabilityofapproximately$]millionrepresentingitsestimatedshareoftheadditionalcosttoremediatethissitebaseduponits8.2%responsibilityundertheRI/FS.wSyossetTheCompanyandnineotherPRPshavebeennamedin'alawsuitwheretheTownof,OysterBay(Town)isseekingindemnificationforremediationandinvestigationcoststhathavebeen,orwillbe'49 incurredforafederalSuperfundsiteinSyosset,NewYork.Forafurtherdiscussiononthismatter,see.Item3,LegalProceedings-Environmental.PCBTreatment,Inc.TheCompanyhasalsobeennamedaPRPfordisposalsitesinKansasCity,Kansas,andKansasCity,Missouri.Thetwo"siteswereusedbyacompanynamedPCBTreatment,Inc.from1982until1987forthestorage,processing,andtr'eatmentofelectricequipment,dielectricoilsandmaterialscontainingPCBs.AccordingtotheEPA,thebuildingsandcertainsoilareasoutsidethebuildingsare'ontaminatedwithPCBs.CertainofthePRPs,includingtheCompanyandseveralotherutilities,formedaPRPgroup,signedanACO,andhavedevelopedaworkplanforinvestigatingenvironmentalconditionsatthesites'.DocumentationconnectingtheCompanytothesitesindicatesthattheCompanywasresponsibleforlessthan1%ofthematerialsthatwereshippedtotheMissourisite.TheEPAhasnotyetcompleted"compilingthedocumentsfortheKansassite.'JHOsageTheEPAhasnotifiedtheCompa'nythatitisaPRPattheOsageMetalsSite,aformer'scrapmetalrecyclingfacilitylocatedinKansasCity,Kans'as.UnderSection107(a)ofCERCLA,partieswhoarrangedfordisposalofhazardoussubstancesare'liableforcostsincurredbytheEPAinrespondingtoa'releaseorthreatofreleaseofthehazardous'ubstances.Osagehad"purchasedcapacitor'scrapmetalfromPCBTreatment,Inc.ThroughthearrangementsthattheCompanymadewithPCBTreatment,Inc.todisposeofcapacitors,theCompanyisallegedtohavearrangedfordisposalwithinthemeaningofthefederalSuperfundlaw.Asimilarletterwassentto861partieswhosentcapacitorstoPCBTreatment,Inc.TheEPAisseekingtorecoverapproximately$1.1milliondollarsitexpendedto'onductaremovalactionatthesite.TheCompanyiscurrentlyunabletodetermineitsshareofthe,$1~1millionexpenditure.PortRefineryTheCompanyhasbeennotifiedthatitisaPRPatthePortRefinerySuperfundsitelocatedinWestchesterCounty,NewYork:,PortRefinerywasengagedinthebusinessofpurchasing,selling,refiningandprocessingmercuryandtheCompanymayhaveshippedasmallamountofwasteproductscontainingmercurytothissite.TestsconductedbytheEPAindicatedthatthesiteandcertainadjacentpropertieswerecontaminatedwithmercury.Asaresult,theEPAhasperformedaresponseactionatthesiteandseekstorecoveritscosts,currentlytotalingapproximately$4.4million,plusinterest,fromthePRPs.TheCompanydoesnotbelieveitsportionofthesecosts,ifany,willbematerial.Port8'ashingtonIn1989,theEPAnotifiedtheCompanythatitwasaPRPfor'alandfillinPortWashington,NewYork.TheCompanydoesnotbelievethatitsentanymaterialstothesitethatcontributedtothecontaminationwhichrequiresremediationandhasthereforedeclinedtheEPA'srequeststoparticipateinfundingtheinvestigationandremediationactivitiesattheproperty.TheCompanyhasnotreceivedfurthercommunicationsregardingthissite.50 Liberty'heEPAhasnotifiedtheCompany'hatitisaPRPinaSuperfundsitelocatedinFarmingdale,NewtYork.Industrial'operationstookplaceatthissiteforatleastfiftyyears.ThePRPgrouphas'claimedthattheCompanyshouldabsorbremediationexpensesintheamountofapproximately$100,000associatedwithremovingPCB-contaminatedsoilsfromaportionofthesitewhichformerlycontainedelectrictransformers.TheCompanyiscurrentlyunabletodetermineitsshareofcostsofremediationatthissite.t&Huntington/East1Vorthport,TheDEChasnotifiedtheCompany,pursuanttotheStateSupeifundprogram,thatitsrecordsindicatetheCompanymayberesponsibleforthedisposalofwasteatthismunicipallandfillproperty.TheCompanyconductedasearchofitscorporaterecordsanddidnotlocateanydocumentsconcerningwastedisposalpracticesassociatedwiththislandfill.TheCompanyiscurrentlyunabletodetermineitsshare,ifany,ofthecoststoinvestigateandremediatethissite.BlydenburghTheNewYorkStateOfficeoftheAttorneyGeneralhasnotifiedtheCompanythatitmayberesponsibleforthedisposalofwastesand/orforthegenerationofhazardoussubstanceswhichmay,havebeendisposedofattheBlydenburghSuperfundsite,amunicipalsanitarylandfilllocatedintheTownofIslip,SuffolkCounty.TheStatehasincurredapproximately$15millionincostsfortheinvestigationandremediationofenvironmentalconditionsatthelandfill.Inconnectionwiththisnotification,theCompanyconductedareviewofitscorporaterecordsanddidnotlocateanydocumentsconcerningwastedisposalpracticesassociatedwiththislandfill.TheCompanyiscurrentlyunabletodetermineits-share,ifany,ofthecoststoinvestigateandremediatethissite.therSites4anufacturedGasPlantSitesTheDEChasrequiredtheCompanyandotherNewYorkStateutilitiestoinvestigateand,wherenecessary,remediatetheirformerMGPsites.Currently,theCompanyistheownerofsixpiecesofpropertyonwhichtheCompanyorcertainofitspredecessorcompaniesproducedmanufacturedgas.Operationsatthesefacilitiesinthelate1800'sandearly1900'smayhaveresultedinthedisposalofcertainwasteproductslocatedatthesesites.TheCompanyhasenteredintodiscussionswiththeDECwhichisexpectedtoleadtotheissuanceofoneormoreACOsregardingthemanagementofenvironmentalactivitiesatthesesixproperties.Althoughtheexactamount'oftheCompany'scleanupcostscannotyetbe,determined,basedonthefindingsofpreliminaryinvestigationsconductedateachofthesesixsites,currentestimatesindicatethatitmaycostapproximately$54to$92milliontoinvestigateandremediateallofthesesites.Consideringtherange,ofpossiblereinediationestimates,theCompanyfeltitappropriatetorecorda$54millionliabilityreflectingthepresentvalueofthefuturestreamofpaymentsamountingto$70milliontoinvestigateandremediatethesesites.TheCompanyused,arisk-freerateof6.0%todiscountthisobligation.TheCompanybelievesthatthePSCwillprovideforfuturerecoveryofthesecostsandhasrecordeda$54millionregulatoryasset.TheCompany'sratesettlementwhichthePSCapprovedFebruary4,1998asdiscussedinNote3ofNotestoFinancialStatements,allowsfortherecoveryofMGPexpendituresfromgascustomers.51 TheCompanyisalsoevaluatingitsresponsibilitieswithrespecttoseveralotherformerMGPsites,that,existedinitsterritorywhichit,doesnotpresentlyown.Researchisunderwaytodeterminetheexistenceandnatureofoperationsandrelationship,ifany,totheCompanyoritspredecessorcompanies.NorthHillsLeakTheCompanyhasundertakenremediationofcertainsoillocationsinNorthHills,NewYorkthatwereimpactedbyareleaseofinsulatingfluidfromanelectricalcableinAugust1994.TheCompanyestimatesthatanyadditionalcleanupcostswillnotexceed$0.5million.TheCompanyhas,initiatedcostrecoveryactionsagainstthethirdpartiesit,believespreresponsibleforcausingthe,cableleak,theoutcome,ofwhichareuncertain.4StorageFacilities,"Asaresultofpetroleumleaksfromundergro'undstoragefacilitiesandotherhistoricaloccurrences,the"Companyisrequiredtoinvestigateand,incertaincases,remediateaffectedsoilandgroundwaterconditionsatseveralfacilitieswithinitsserviceterritory.Theaggregatecostsofsuchreme'diationworkcouldbebetween$3millionand$5'million.Totheextent-thatthesecostsarenotrecoverablethroughinsurancecarriers,the'Companybelievessuchcostswillberecoverablefromitscustomers.IINuclearWastedNLowLevelRadioactive'WasteThefederalLow-LevelRadioactiveWastePolicyAmendmentActof1985;requiresstatestoarrangeforthedisposal,ofalllowlevelradioactive,wastegeneratedwithinthestateor,inthe,alternative,tocontractfortheirdisposalatanoperatingfacilityoutsidethestate.Asaresult,NewYorkStatehasstateditsintentionsofdevelopinganin-statedisposalfacilityduetothelargevolumeoflowlevelradioactivewastegeneratedwithinthestateandhascommittedtodevelopaplanforthemanagementofsuchwasteduringthe,interimperioduntiladisposalfacilityisavailable.NewYorkStateisstilldevelopingadisposalmethodologyandacceptancecriteriafora~disposalfacility.ThelatestNewYorkStatelowlevelradioactivewastesitedevelopmentschedulenowassumestwopossiblesitingscenarios,avolunteerapproachandanon-volunteerapproach,eitherofwhichwouldnotbeginoperationuntilatleast2001..Lowlevelradioactivewaste~generatedatNMP2iscurrentlybeingdisposedofattheBarnwell,SouthCarolinawastedisposalfacilitywhichreopenedinJuly1995toout-of-statelowlevelwastegenerators.Intheeventthatoff-sitestoragebecomesunavailable.priorto2001,NMPChasimplementedalow"levelradioactivewastemanagementprogramthat';willproperlyhandleinterimon-site.,storageoflowlevelradioactivewasteforNMP2foratleastten.years."TheCompany'sshareofthecosts,associatedwithtemporarystorageandultimatedisposal.arecurrentlyrecoveredinrates.I'lSpentNuclearFuelNMPC,on'behalfoftheNMP2cotenants,has'enteredintoacontractwiththeDOEforthepermanentstorageofNMP2spentnuclearfuel.TheCompanyreimbursesNMPCforits18%shareofthecostunderthecontractatarate'of$1.'00permegawatthour'o'fnet'generationlessafactortoaccountfortransmissionlinelosses.TheCompanyiscollectingitsportionofthisfeefromitselectriccustomers.ItisanticipatedthattheDOEfacilitymaynotbeavailableforpermanent52  
.Inthe'courseoftheCompany'sordinarybusinessoperations,the'CompanyisinvolvedinthehandlingofmaterialsthataredeemedtobehazardoussubstancesunderSuperfund.These-materialsincludeasbestos,metals,certainflammableandorganiccompoundsanddielectricfluidscontainingpolychlorinatedbiphenyls(PCBs).OtherhazardoussubstancesmaybehandledintheCompa'ny's'~operationsormay,bepresentatCompanylocationsasaresultofhistoricalpracticesbytheCompanyoritspredecessorsininterest.TheCompanyhas,receivednoticeconcerningpossibleclaimsunder;~'uperfundoranalogousstatelawsrelatingtoanumber,ofsitesatwhichjtisallegedthathazardoussubstancesgenerated,bytheCompanyandotherpotentially.responsibleparties(PRPs).weredeposited:Adiscussionofthesesitesissetforthbelow.EstimatesoftheCompany,'sallocatedshare'ofcostsforinvestigative,removalandremedialactiyItiesatthesesites~rangePorn,preliminarytorefinedandareupdatedasnewinformationbecomesavailable.InDecember1996,theCompanyfiledacomplaintintheUnitedStatesDistrictCourtfor,theSouthernDistrictofNewYorkagainst14oftheCompany'sinsurers,whichissuedgeneralcomprehensive,.liability(GCL)policiestotheCompany.InJanuary1998,.theCompanycommencedasimilar,actionagainstthesameandcertainadditionalinsurerdefendantsinNewYorkStateSupremeCourt,FirstDepartment;thefederalcourtactionwassubsequentlydismissedinMarch1998.TheCompanyis;..seekingrecoveryundertheGCLpoliciesforthecostsincurredtodateandfuture,costsassociatedwiththeclean-upoftheCompany'sformermanufacturedgasplant(MGP)sitesandSuperfundsitesforwhichtheCompany,hasbeennamedaPRP.TheCompanyisseekingadeclaratoryjudgment'thatthedefendantinsurersareboundbythetermsoftheGCLpolicies,subjecttothestatedcove'r'age'limits,toreimbursetheCompanyforthe.'cleanupcosts.,Theoutcomeofthisproceedingcannotyetbe..,,'etermined.S~ZSVMetalBankTheEPAhasnotifiedtheCompanythatitisoneofmanyPRPsthatmaybeliablefortheremediationofalicenseddisposalsitelocatedinPhiladelphia,Pennsylvania,andoperatedbyMetalBankofAmerica.TheCompanyandnineotherPRPs,allofwhicharepublicutilities,completedperforman'ceofaRemedialInvestigationandFeasibilityStudy(Rl/FS),whichwasconductedunder'anAGOwith'theEPA.InDecember1997,theEPAissueditsRecordofDecision(ROD),settingforththe:.final~'remedialactionselectedforthesite.IntheROD,theEPAestimatedthatthepresent'costofthe-selectedremedyfor'the'siteis$17.3million.Atthistime,theCompanycan'notpredictwith'reasonablecertaintytheactualcostoftheselectedr'emedy,whowillimplementtheremedy,'rthecost;ifany",totheCompany.UnderaPRPparticipatioriagreement,"'theCompanypreviouslywasresponsible'for"'.2%ofthecostsassociatedwiththeRI/FS--TlieCompany's'allocableshareofliabilityfortheremediationactivitieshasnotyetbeendetermined.IITheCompanyhasrecordedaliabilityofapproximately$]millionrepresentingitsestimatedshareoftheadditionalcosttoremediatethissitebaseduponits8.2%responsibilityundertheRI/FS.wSyossetTheCompanyandnineotherPRPshavebeennamedin'alawsuitwheretheTownof,OysterBay(Town)isseekingindemnificationforremediationandinvestigationcoststhathavebeen,orwillbe'49 incurredforafederalSuperfundsiteinSyosset,NewYork.Forafurtherdiscussiononthismatter,see.Item3,LegalProceedings-Environmental.PCBTreatment,Inc.TheCompanyhasalsobeennamedaPRPfordisposalsitesinKansasCity,Kansas,andKansasCity,Missouri.Thetwo"siteswereusedbyacompanynamedPCBTreatment,Inc.from1982until1987forthestorage,processing,andtr'eatmentofelectricequipment,dielectricoilsandmaterialscontainingPCBs.AccordingtotheEPA,thebuildingsandcertainsoilareasoutsidethebuildingsare'ontaminatedwithPCBs.CertainofthePRPs,includingtheCompanyandseveralotherutilities,formedaPRPgroup,signedanACO,andhavedevelopedaworkplanforinvestigatingenvironmentalconditionsatthesites'.DocumentationconnectingtheCompanytothesitesindicatesthattheCompanywasresponsibleforlessthan1%ofthematerialsthatwereshippedtotheMissourisite.TheEPAhasnotyetcompleted"compilingthedocumentsfortheKansassite.'JHOsageTheEPAhasnotifiedtheCompa'nythatitisaPRPattheOsageMetalsSite,aformer'scrapmetalrecyclingfacilitylocatedinKansasCity,Kans'as.UnderSection107(a)ofCERCLA,partieswhoarrangedfordisposalofhazardoussubstancesare'liableforcostsincurredbytheEPAinrespondingtoa'releaseorthreatofreleaseofthehazardous'ubstances.Osagehad"purchasedcapacitor'scrapmetalfromPCBTreatment,Inc.ThroughthearrangementsthattheCompanymadewithPCBTreatment,Inc.todisposeofcapacitors,theCompanyisallegedtohavearrangedfordisposalwithinthemeaningofthefederalSuperfundlaw.Asimilarletterwassentto861partieswhosentcapacitorstoPCBTreatment,Inc.TheEPAisseekingtorecoverapproximately$1.1milliondollarsitexpendedto'onductaremovalactionatthesite.TheCompanyiscurrentlyunabletodetermineitsshareofthe,$1~1millionexpenditure.PortRefineryTheCompanyhasbeennotifiedthatitisaPRPatthePortRefinerySuperfundsitelocatedinWestchesterCounty,NewYork:,PortRefinerywasengagedinthebusinessofpurchasing,selling,refiningandprocessingmercuryandtheCompanymayhaveshippedasmallamountofwasteproductscontainingmercurytothissite.TestsconductedbytheEPAindicatedthatthesiteandcertainadjacentpropertieswerecontaminatedwithmercury.Asaresult,theEPAhasperformedaresponseactionatthesiteandseekstorecoveritscosts,currentlytotalingapproximately$4.4million,plusinterest,fromthePRPs.TheCompanydoesnotbelieveitsportionofthesecosts,ifany,willbematerial.Port8'ashingtonIn1989,theEPAnotifiedtheCompanythatitwasaPRPfor'alandfillinPortWashington,NewYork.TheCompanydoesnotbelievethatitsentanymaterialstothesitethatcontributedtothecontaminationwhichrequiresremediationandhasthereforedeclinedtheEPA'srequeststoparticipateinfundingtheinvestigationandremediationactivitiesattheproperty.TheCompanyhasnotreceivedfurthercommunicationsregardingthissite.50 Liberty'heEPAhasnotifiedtheCompany'hatitisaPRPinaSuperfundsitelocatedinFarmingdale,NewtYork.Industrial'operationstookplaceatthissiteforatleastfiftyyears.ThePRPgrouphas'claimedthattheCompanyshouldabsorbremediationexpensesintheamountofapproximately$100,000associatedwithremovingPCB-contaminatedsoilsfromaportionofthesitewhichformerlycontainedelectrictransformers.TheCompanyiscurrentlyunabletodetermineitsshareofcostsofremediationatthissite.t&Huntington/East1Vorthport,TheDEChasnotifiedtheCompany,pursuanttotheStateSupeifundprogram,thatitsrecordsindicatetheCompanymayberesponsibleforthedisposalofwasteatthismunicipallandfillproperty.TheCompanyconductedasearchofitscorporaterecordsanddidnotlocateanydocumentsconcerningwastedisposalpracticesassociatedwiththislandfill.TheCompanyiscurrentlyunabletodetermineitsshare,ifany,ofthecoststoinvestigateandremediatethissite.BlydenburghTheNewYorkStateOfficeoftheAttorneyGeneralhasnotifiedtheCompanythatitmayberesponsibleforthedisposalofwastesand/orforthegenerationofhazardoussubstanceswhichmay,havebeendisposedofattheBlydenburghSuperfundsite,amunicipalsanitarylandfilllocatedintheTownofIslip,SuffolkCounty.TheStatehasincurredapproximately$15millionincostsfortheinvestigationandremediationofenvironmentalconditionsatthelandfill.Inconnectionwiththisnotification,theCompanyconductedareviewofitscorporaterecordsanddidnotlocateanydocumentsconcerningwastedisposalpracticesassociatedwiththislandfill.TheCompanyiscurrentlyunabletodetermineits-share,ifany,ofthecoststoinvestigateandremediatethissite.therSites4anufacturedGasPlantSitesTheDEChasrequiredtheCompanyandotherNewYorkStateutilitiestoinvestigateand,wherenecessary,remediatetheirformerMGPsites.Currently,theCompanyistheownerofsixpiecesofpropertyonwhichtheCompanyorcertainofitspredecessorcompaniesproducedmanufacturedgas.Operationsatthesefacilitiesinthelate1800'sandearly1900'smayhaveresultedinthedisposalofcertainwasteproductslocatedatthesesites.TheCompanyhasenteredintodiscussionswiththeDECwhichisexpectedtoleadtotheissuanceofoneormoreACOsregardingthemanagementofenvironmentalactivitiesatthesesixproperties.Althoughtheexactamount'oftheCompany'scleanupcostscannotyetbe,determined,basedonthefindingsofpreliminaryinvestigationsconductedateachofthesesixsites,currentestimatesindicatethatitmaycostapproximately$54to$92milliontoinvestigateandremediateallofthesesites.Consideringtherange,ofpossiblereinediationestimates,theCompanyfeltitappropriatetorecorda$54millionliabilityreflectingthepresentvalueofthefuturestreamofpaymentsamountingto$70milliontoinvestigateandremediatethesesites.TheCompanyused,arisk-freerateof6.0%todiscountthisobligation.TheCompanybelievesthatthePSCwillprovideforfuturerecoveryofthesecostsandhasrecordeda$54millionregulatoryasset.TheCompany'sratesettlementwhichthePSCapprovedFebruary4,1998asdiscussedinNote3ofNotestoFinancialStatements,allowsfortherecoveryofMGPexpendituresfromgascustomers.51 TheCompanyisalsoevaluatingitsresponsibilitieswithrespecttoseveralotherformerMGPsites,that,existedinitsterritorywhichit,doesnotpresentlyown.Researchisunderwaytodeterminetheexistenceandnatureofoperationsandrelationship,ifany,totheCompanyoritspredecessorcompanies.NorthHillsLeakTheCompanyhasundertakenremediationofcertainsoillocationsinNorthHills,NewYorkthatwereimpactedbyareleaseofinsulatingfluidfromanelectricalcableinAugust1994.TheCompanyestimatesthatanyadditionalcleanupcostswillnotexceed$0.5million.TheCompanyhas,initiatedcostrecoveryactionsagainstthethirdpartiesit,believespreresponsibleforcausingthe,cableleak,theoutcome,ofwhichareuncertain.4StorageFacilities,"Asaresultofpetroleumleaksfromundergro'undstoragefacilitiesandotherhistoricaloccurrences,the"Companyisrequiredtoinvestigateand,incertaincases,remediateaffectedsoilandgroundwaterconditionsatseveralfacilitieswithinitsserviceterritory.Theaggregatecostsofsuchreme'diationworkcouldbebetween$3millionand$5'million.Totheextent-thatthesecostsarenotrecoverablethroughinsurancecarriers,the'Companybelievessuchcostswillberecoverablefromitscustomers.IINuclearWastedNLowLevelRadioactive'WasteThefederalLow-LevelRadioactiveWastePolicyAmendmentActof1985;requiresstatestoarrangeforthedisposal,ofalllowlevelradioactive,wastegeneratedwithinthestateor,inthe,alternative,tocontractfortheirdisposalatanoperatingfacilityoutsidethestate.Asaresult,NewYorkStatehasstateditsintentionsofdevelopinganin-statedisposalfacilityduetothelargevolumeoflowlevelradioactivewastegeneratedwithinthestateandhascommittedtodevelopaplanforthemanagementofsuchwasteduringthe,interimperioduntiladisposalfacilityisavailable.NewYorkStateisstilldevelopingadisposalmethodologyandacceptancecriteriafora~disposalfacility.ThelatestNewYorkStatelowlevelradioactivewastesitedevelopmentschedulenowassumestwopossiblesitingscenarios,avolunteerapproachandanon-volunteerapproach,eitherofwhichwouldnotbeginoperationuntilatleast2001..Lowlevelradioactivewaste~generatedatNMP2iscurrentlybeingdisposedofattheBarnwell,SouthCarolinawastedisposalfacilitywhichreopenedinJuly1995toout-of-statelowlevelwastegenerators.Intheeventthatoff-sitestoragebecomesunavailable.priorto2001,NMPChasimplementedalow"levelradioactivewastemanagementprogramthat';willproperlyhandleinterimon-site.,storageoflowlevelradioactivewasteforNMP2foratleastten.years."TheCompany'sshareofthecosts,associatedwithtemporarystorageandultimatedisposal.arecurrentlyrecoveredinrates.I'lSpentNuclearFuelNMPC,on'behalfoftheNMP2cotenants,has'enteredintoacontractwiththeDOEforthepermanentstorageofNMP2spentnuclearfuel.TheCompanyreimbursesNMPCforits18%shareofthecostunderthecontractatarate'of$1.'00permegawatthour'o'fnet'generationlessafactortoaccountfortransmissionlinelosses.TheCompanyiscollectingitsportionofthisfeefromitselectriccustomers.ItisanticipatedthattheDOEfacilitymaynotbeavailableforpermanent52  
.storageuntilatleast2010.Currently,allspentnuclearfuelfromNMP2isstoredattheNMPCsite,andexistingfacilitiesare,sufficienttohandleallspentnuclearfuelgeneratedatNMP2throughtheyear2012.tForinformationconcerningenvironmentallitigation,seeItem3"LegalProceedings"undertheheadingEnvironmental.ImpactofYear2000SomeoftheCompany'soldercomputerprogramswerewrittenusingtwodigitsratherthanfourtodefinetheapplicable,year.Asaresult,thosecomputerprogramshavetime-sensitivesoftwarethatrecognizesadateusing"00"astheyear1900ratherthantheyear2000.Thiscouldcauseasystemfailureormiscalculationscausingdisruptionsofoperations,including,amongotherthings,atemporaryinabilitytoprocesstransactions,orengageinnormalbusinessactivities.TheCompanyembarkedonaprogramin1996tocompleteYear2000compliancebyDecember31,1998.Acorporate-wideprogramhasbeenestablishedtoreviewallsoftware,h'ardwareand"associatedcomplianceplans.Thereadinessofsuppliersan'dvendorsystemsisalsounderreview.Contingencyandbusinesscontinuationplansarebeingprepared"andwillbereviewedper'iodically.TheCompanyexpectstospendapproximately$10milliontoaddressthe'ear2000issueoverathree-yearperiod(1997-1999)consistingof$7milliontotestandmodifyapplication'systemsand$3milliontotestandmodifynori-informationtechnologysystems,Allcostswillbeexpensedasincurred.AsofMarch31,1998,$4.53millionhasbeenexpendedininvestigatingandmodifyingsoftware.Thiseffortisscheduledtobecompletedin1998andtestingwillcontinueintoearly1999.TheCompanybelievesthat,withmodificationstoexistingsoftwareandconversionstonewsoftware,theYear2000Issuewillriotposesignificantoperationalproblemsforitscomputersystems.However,ifsuchmodificationsandconversionsarenotmade,orarenotcompleted'ontime,theYear2000IssuecouldhaveamaterialadverseimpactontheoperationsoftheCompany.ThecostsoftheprojectandthedateonwhichtheCompanybelievesitwillcompletetheYear2000modificationsarebasedonmanagement'sbestestimates,whichwerederivedutilizingnumerousassumptionsoffutureevents,includingthecontinuedavailabilityofcertainresourcesandotherfactors.However,actualresultscoulddiffermateriallyfromthoseanticipated.Specificfactorsthatmightcausesuchmaterialdifferencesinclude,butarenotlimitedto,theavailabilityandcostofpersonneltrainedinthisarea,theabilitytolocateandcorrectallrelevantcomputercodesandsimilaruncertainties.JRecentAccountingPronouncementsComprehensiveIncomeInJune1997,theFinancialAccountingStandardsBoard(FASB)issuedStatementofFinancial'ccountirigStandards(SFAS)No.130.SFASNo.130establishesstandardsforreportingcomprehensiveincome.Comprehensiveincomeisthechange'intheequityofacompany,notincludingthosechangesthatresultfromshareholdertran'sactions.'Allcomponentsofcomprehensiveincomearerequiredtobereportedinanewfinancialstatementthatisdisplayedwithequal"53 prominenceasexistingfinancialstatements.TheCompanywill'berequiredtoadoptSFASNo.130fortheyearendingMarch31,1999.TheCompanydoesnotexpectthattheadoptionofSFASNo.130willhaveasignificantimpactonitsreportinganddisclosurerequirements..~SegmentDisclosuresAlsoinJune1997,FASBissuedSFASNo.131.SFASNo.131establishesstandardsforadditionaldisclosureaboutoperatingsegmentsforinterimandannualfinancialstatements.Morespecifically,itrequiresfinancialinformationtobedisclosedforsegmentswhoseoperatingresultsarereviewedbythechiefdecisionmakerfordecisionsonresourceallocation.Italsorequiresrelateddisclosuresaboutproductsandservices,geographicareas'andmajorcustomers.TheCompanywillberequiredtoadoptSFASNo.131fortheyearendingMarch31,1999.TheCompanydoesnotexpectthattheadoptionofSFASNo.131willhaveasignificantimpactonitsreportinganddisclosurerequirements.ConservationServicesTheCompany's1997DemandSideManagement(DSM)Planfocusedonthe.pursuitofenergyefficiencyandpeakloadreductioninawaythathadminimalimpacton,electricrateincreases.Toassurethesuccessofthisstrategy,>heCompanyimplementedabalancedandcost-effectivemixofDSMprogramsthatcontinuedtorepresentalimitedrelianceonbroad-basedrebatesandaconcentratedemphasisonprogramsthatprovidededucationandinformation,targetedbusinessdevelopment,providedfinancingforenergyefficiency,inducedmarkettransformationandimprovedtheefficiencyofLILCOfacilities.TheCompanywassuccessfulinmeetingthePSCEnergyPenaltyThresholdbyobtainingenergysavingsofapproximately24.4GWhatacostlessthanthatprovidedforinelectricrates.In1998,theCompanyplanstocontinuetofollowtheaforementionedstrategywhileintroducingseveralnewinitiatives.Theseincludeaprogramtargetedatincreasingtheenergyefficiencyofresidencesoflowincomecustomers,theintroductionofapeakloadcurtailmentprogramconstructedtohelptheCompanymeetitspeaksupplysiderequirementsandanincreasedemphasisonprogramsthatinducemarkettransformation.Overall,the1998Plantargetsanannualizedenergysavingsof18.6GWhatabudgetof$10.7million.NCautionaryStatementRegardingForward-LookingStatementsThisreportcontainsstatementswhich,totheextenttheyarenotrecitationsofhistoricalfact,constitute"forward-lookingstatements"withinthemeaningoftheSecuritiesLitigationReformActof1995(ReformAct).Inthisrespect,thewords"estimate,""project,""anticipate,""expect,""intend,""believe"andsimilarexpressionsareintendedtoidentifyforward-lookingstatements.Allsuchforward-lookingstatementsareintendedtobesubjecttothesafeharborprotectionprovidedbytheReformAct.AnumberofimportantfactorsaffectingtheCompany'sbusinessandfinancialresultscouldcauseactualresultstodiffermateriallyfromthosestatedintheforward-lookingstatements.ThosefactorsincludetheproposedtransactionswithTheKeySpanEnergyCorporationandLIPAas,discussedundertheheading"KeySpanEnergyCorporationTransaction"and"LongIslandPowerAuthorityTransaction"stateandfederalregulatoryrateproceedings,competition,andcertainenvironmentalmatterseachasdiscussedherein,intheJointProxyStatement/ProspectusfiledJune30,1997,orinotherreportsfiledbytheCompanywiththeSecuritiesandExchangeCommission.54 FINANCIALSTATEMENTSBalanceSheet'etsattInthousandsofdollars)March31,1998March31,1997December31,1996tilityPlantElectricGasCommonConstructionworkinprogressNuclearfuelinrocessandinreactorLess-AccumulateddcreciationandamortizationTotalNetUtiliPlantRegulatoryAssetsBasefinancialcomponent(lessaccumulatedamortizationof$883,496,$782,525and$757,282)RatemoderationcomponentShoreham'post-settlementcostsShorehamnuclearfuelUnamortizedcostofissuingsecuritiesPostretirementbenefitsotherthanpensionsRegulatoiytaxassetOtherTotalRelatoAssetsnutilitProcrtand"OthcrInvcstmcntsrentAssetsshandcashequivalentsSpecialdepositsCustomeraccountsreceivable(lessallowancefordoubtfulaccountsof$23,483,$23,675and$25,000)OtheraccountsreceivableAccruedunbilledrevenuesrMaterialsandsuppliesataveragecostFueloilataveragecostGasinstorageataveragecostDefcrrcdtaxasset-netoperatinglossPreamentsandothercurrentassetsTotalCurrentAssetsDeferredCharesTofalAssetsSee)VotestoFinancialStatements.4,031,510$1,233,281290,221118,80818,1195,691,9391,877;8583,814,0813,155,334434,0041,005,31666,455159,941340,1091,737,932192,7637,091,85450,816180,91995,790297,88943,744124,46454,88332,14214,63413,807858,27285,70211,900,725$3,900,264$1,'171,183263,267108,850-'5,5035,459,0671,759,1103,699,9573,256,305409,512'96,27068,581187,309357,6681,767,164200,1377,242,9461887064,53937,631305,43642,946141,38955,45449,70310,89393,3498,805810,14577,65611,849,574$3,882,2971,154,543260,268112,18415,4545,424,7461,729,5763,695,1703,281,548402,213991,79569,113194,151360,8421,772,778199,8797,272,31918597279,99338,266'r255,80165,764'69,71255,78953,'94173,562145,2058,5691,146,60276,99112,209,67955 CaitaltzationandLiabilitiesatMarch31,1998Pnthousandsodollars)March31,1997December31,199CapitalizationLong-termdebtUnamortizeddiscountondebtPreferredstock-redemptionrequiredFPrcfencdstock-noredemtionuiredTotalPreferredStockCommonstockPremiumoncapitalstockCapitalstockexpenseRetainedearningsTrcasustock,atcostTotalCommonShareoivners'iTotalCaitalizationRegulatoryLiabilitiesRegulatoryliabilitycomponent1989SettlementcreditsRegulatorytaxliabilityOtherT1RItLiabilitiesCurrentLiabilitiesCurrentmaturitiesoflong-termdebtCurrentredemptionrequirementsofpreferredstockAccountspayableandaccruedexpensesLRPPpayableAccruedtaxes(includingfederalincometaxof$28,308,$49,262and$25,884)AccruedinterestDividendspayableifClassSettlementCustomerdesitsTotalCurrentLiabilitiesDeferredCreditsDeferredfederalincometax-netClassSettlementOtherTotalDeferredCreditsOperatingReservesPensionsandotherpostretirementbenefitsClaimsanddamacsTotal0ratinReservesCommitmentsandContinenciesTotalCaitalizationandLiabilitiesSeeNotestoFinancialStatements.4,395,555(13,606)4,381,949562,600562,600608,6351,146,425(47,501)956,092(1,204)2,662,4477,606,99699,19959,39778,913151,922389,431101,000139,374228,58330,11834,753146,60758,74860,00028,627827,8102,539,36446,94022,5292,608,833401,40166,254467,655$'1,900,725564,471,675$(14,628)4,457,047638,50063,598702,098605,0221,131,576(48,915)861,751(385)2,549,0497,708,194178,558125,138100,377158,660562,7331,0001,050230,18940,49951,157143,98358,47458,33329,173613,8582,420,44389,48720,8892,530,819387,04846,922433,97011,849,574$4,471,67514,903)4,456,772638,50063,664702,164603,9211,127,971(49,330)840,867(60)2,523,3697,682,305198,398127,442102,887139,510568,237251,001,050289,14140,49963,640160,61558,37855,83329,471949,6272,442,60698,49739,4472,580,550381,99646,964428,96012,209, Statementofincome(inthousandsofdollarscxtYearEndedMarch31,1998,TheeMonthsEndedMarch31,1997YearEndedDecember31,1996YearEndedDecember31,1995RevenuesElcctncGasTotalRcvcnues$2,478,435645,6593,124,094557,791$2,466,435$2,484,014293,391684,260591,114851,1823,150,6953,075,128OperatingExpensesOperations-fuelandpurchasedpowerOperations-otherMaintcnanccDepreciationandamortizationBaseIinancialcomponentamortizationRatemoderationcomponentamortizationRcgu!atotyliabilitycomponentamortization1989SettlemcntcreditsamortizationOtherregulatoryamortizationOperatingtaxesFcdcralincometax-currentFederalincometax-deferredandotherTotalratinExnscs0ratinIncomeOtherIncomeand(Deductions)RatemoderationcomponentcarryingchargesOtherincomeanddeductions,nctClassScttlcmentforotherfundsusedduringconstructionFmctax-currentFetncometax-deferredan'dotherTotalOtherIncomeandDeductionsIncomeBcforcInterestCharcsInterestChargesInterest'onlong-termdebtOtherintcrcstAllowanceforborrowedfundsuseddurinconstructionTotalInterestChaesNetIncomePreferredstockdividendruircmentsEarninforCommonStockAvcraeCommonSharesOutstandin000BasicandDilutedEarninerCommonShareDividendsDeclaredcrCommonSharcSee"&#xb9;lesroFinanctalSlarensenrs.957,807400,045,111,120158,537100,971(35,079)(79,359)(9,213)47,272466,32686,388150,9832,355,798768,29623,632(18,156)(15,623)3,8465944,1241,583766,713351,26157,8054,593404,473362,24051,813310,427121,4152.561.78301,86795,67329,34038,56125,2435,907(19,840)(2,303)12,218117,51323,37833,624661,181190,0015,919645(4,496)7177893,574193,57590,16816,659949105,87887,69712,96974,728$120,9950.62$0.45$963,251381,076118,135153,925100,971(24,232)(79,359)(9,214)127p288472,07642,197168,0002,414,114736,58125,25919,197(20,772)2,888"'94027,512764,0933&4,19867,1303,699447,629316,46452,216264248$120,3602.20$1.78$834,979383,238128,155145,357100,97121,933(79,359)(9,214)161,605447,50714,596193,7422,343,510731,61825,27434,400(21,669)2,8982,80043,703775,321412,51263,4613938472,035303,28652,620250,666119,1952.101.7857 StatementofCashFlowsOperatingActivitiesNetIncomeAdjustmcntstoreconcilenetincometonetcashprovidedbyoperating,activitiesProvisionfordoubtfulaccountsDepreciationandamortizationBasefinancialcomponentamortizationRatemoderationcomponentamorhzationRegulatoryliabilitycomponentamortization1989SettlementcreditsamortizationOtherregulatoryamortizationRatemoderationcomponentcarryingchargesClassSettlementAmortizationofcostofissuingandredeemingsecuritiesFederalincometax-deferredandotherPensionsandOtherPostRetirementBenefitsOtherChangesinoperatingassetsandliabilitiesAccountsreceivableMaterialsandsupplies,fueloilandgasinstorageAccountspayableandaccruedexpensesClassSettlementSpecialdepositsOtherN'db0tinActivitiesInvestingActivuiesConstructionandnuclearfuelexpendituresShorehampost-settlementcostsInvestmentininterestratehedgeOtlierNetCashUsedinInvestinActivitiesFinancingActivitiesProceedsfromissuanceofsecuritiesRedemptionofsecuritiesCommonstockdividendspaidPtefetredstockdividendspaidOtherNetCashUsedhiFinancinActivitiesNctIncrease(Decrease)InCashandCashEquivalentsCashandcashequivalentsatbeginningofperiodNethicrease(decrease)incashandcasheuivalentsCashandCashEquivalentsatendofperiodInterestpai,otereduchonorieallowanceforborrowedfundsusedduringconstructionFederalincometaxpaidSeePtotestoFinancialStatements.YearEndedMarch311998$362,24023,239158,537100,971(35,079)(79,359)(9,213)47,272(23,632)15,62330,823146,85948,51287,618(14,905)14,3911,668(56,503)(58,159)(86,819)674,084(257,402)(39,828)(30,000)(1.987)329,217)43,218(2,050)(215,790)(51,833)2,032)(228,487)$116,380$64,539116,380$180,919$364,864$108,980ThtceMonthsEndedMarch311997$87,6974,82138,56125,243',907(19,840)(2,303)12,218(5,919)4,4968,08732,83513,4962,381(31,638)67,242(58,952)(11,006)63514,394159,567(50,375)(12,104)160(62,3194,640(250,000)(53,749)(12,969)(624)(312,702($215,454)$279,993215,454$64,539$112,981YearEndedDecember311996$316,46423,119153,925100,971(24,232)(79,359)(9,214)127,288(25,259)20,77234,611167,06014,95251,67169,215(34,531)28,258(42,084)25,14626,460892,313(239,896)(51,722)(4,806296,42418,837(419,800)(213,753)(52,264)(369)(667,349($71,460)$351,45371,460$279,993$404,663$45,050(fnthousandsofdollars)YearEnded.Decein199$303,28617,751"145,357'100,97121,'933(79,359)(9,214)161,605(25,274)21,66939,589190,9424,90056,675(67;213)21,98619,100'33,464)(35,798)83,442772000(6)(70,589)8,019306,15668,726(104,800)(211,630)(52,667),529299,842$166,002$185,451'66,002.'351,453'427,988$14,20058 StatementofRetainedEarninsPnthousandsofdolkws)Dcocmber31~1995st~ofperiodNctincomefortheperiodDeductionsIICashdividendsdeclaredoncommonstockCashdividendsdcclarcdonpreferredstockOthertBalancestendofrlodSreNotestoFinandolStaternerus.$861,7518362.240),223P91216,08651,8121$956,0925840,867887,697928,564$3,84412.969861,751$790,9198316,4641,107/83214,25552,24021840.867$752.480303~1,055,766212,18152,64719790,919StatementofCaitalizationShanesIssued(fnthousandsofdollars)March31,1998March31,1997Deccmbcr31,1996March31,1998rMarch31,1997December31,1996CommonShareovrncrs'quityCommonstock,$5.00pervaluePremiumoncapitalstockCapitalstockexpenseRctaincdcomingsTreasurystock,stcostTotalCommonShsreovrners'quity121,727,04012L00431$16,985120,784,277$3,485608,635$'~146,425(47,501)956,092(1,204)605,022$V31476(48.915)861,751(385)2,549,049603P211,127P71(49@30)840,867(60)2,523369PreferredStock-RedemptionRequiredParvsluo$100pcrshare/vSensaLvScricsCCescalledforredemption150,$00$70,000161,000570,000161,000570,00015,05057,00015.050'6,10057,0001,0$016,100$7,0001,0$057.0CN.72.0$0'2,050Parvalue$25pershare7.95%SeriesAA$1.67SeriesGG$1.95SeriesNN7.05%SeriesQQ6.875%SensaUULess-SeriescalledforredemptionLessredemptionofpreferredstock14/20,000880,0001/$4,0003,464,0002,~,00014,520,000880,0001,554,0003,464,0002,~00014,$20.000880,0001,554,0003,464.000',240,000363,000t22,00038,85086,60056,00038,850363,00022,00038,85086,60056,000363,00022,00038,8$086,60056,000TotalPrefcrrcdStock-Redem'onRequirel505.600i"566.450566,4$0PreferredStock-NoRedemptionRequiredParvalue$100persharo$.00/iSeriesB.4.25%SeriesD435%ScricsB4.35%SeriesF51/8/eScricsH,53/4%Series1-ConvertibleLess-ScncscelledlbrrcdcmptienTotalPreferredStock-NoRedemptionRequiredTotsreferredStock100,00070,00050,000200,00014,743100,00070,000200,00050,000200,00015,978)00,00070,000200,00050.000200,00016,63710,0007P~20,0005,000,20,0001,47463.474562600$10,0007,000~20,0005.00020,0001,59863,598702,098S10,0007,00020,0005,00020.000lr664163.66459 grithourrurr/sodollorr)31IGeneralandRefundingBoridsTotalGeneralandRetbndingBondsDcbcnturesTotalDcbcnturcsFehuaryIS,1997April15,1998Msy15,1999April15,2004Msy1$,2006JulyIS,2008May1,2021JulyI,2024JulyIS,1999January1$,2000July15.2001MarchIS.2003MachI,2004JunoI,2OOSMarchI,2007July1$,2019NovemberI,2022March15,202383/4%75/SYi7.85%85/SYi8.50Yi7.pter/i93/4%95/8/i7.30Yi7.30Yi6.25%7.05%7.00Yi7.125%7.50/i8.90Yi9.00Yi8.20Yi$100,00056,000185,00075.00080,000415,000375,0001,286.000397,00036,000145,000150,00059,000200,000142,000420.000451,000270.0002,270,000100,00056,000185,00075,00080,000'15,000375.0001,286,000397,00036,000145,0001$0,00059,000200,000142,000420,000451,000270.0002,270,000$250,000100,00056,000'SS,00075,00080,000415,000375,00036,000145,000150,00059,000451,000270,000AuthorityFlnanclngNotesIndustriaiDevelopmentRevenueBondsPoliurionControlRevenueBondsElcctrioFaeiliticsRcvcnueBendsDcccmberI,2006DecemberI,2006DeccmbcrI,2009OctoberI,2012MachI,20167.50Yi7.50/i7.80Yi8I/4%3.58/i,1976AB1976AI979B19821985AB2737$19,10017,200150.00028/7519,10017,200150,0002837$19,10017,200ISO,000Sq&#xb9;cmberI,2019JuneI,2020DecemberI,2020FchuaryI,2022AugustI,2022NovemberI~2023NovemberI,2023OctoberI,2024AugustI,202SDecemberI,20277.15%7.15%.7.15%7.15%6.90/i3.70/i3.70/i3.70Yi3.70Yi3.55%1989AB,1990A1991A1992iEB1992CiD1993A1993B1994A199SA1997A100,000100,000100,000100,000100,00050.000S0,00050,000S0,00024,880100,000100,000100.000100,000100,00050,000100,000100,000100,000100.000100,00050,00050,000-50,00050,000TotalAuthorityFinancingNotesUnamortizedDiscountonDebt940355916,675(13,606)(14.628)916.6754,482@49101.0004,4SS,OI71,0004,707,7722S1,000TotalLong-TermDebtTotalCaItalhatlonSceNo/rsroFinmrdol$/a/eaten/a4,381,9494.457.047$7.6069K$7.708.194$4.45(c7727,68230560 NOTESTOFINANCIALSTATEMENTSNote1.SummaryofSignificantAccountingPolicies~~~~~asisofPresentationOnApril11,1997,theCompanychangeditsyearendfromDecember31toMarch31.Accordingly,unlessotherwiseindicated,referencesto1998and1997representthetwelvemonthperiodendedMarch31,1998andMarch31,1997,whilereferencestoallotherperiods'refertotherespectivecalendaryearsendedDecember31.'sfurtherdiscussedinNote2,onJune26,1997,theCompanyandtheLongIslandPowerAuthority(LIPA)enteredintodefinitiveagreementspursuanttowhich,aflerthetransferoftheCompany'sgasbusinessunitassets,non-nuclearelectricgeneratingfacilityassetsandcertainotherassetsandliabilitiestooneormorenewly-formedsubsidiariesofanewholdingcompany,theCompany'scommonstockwillbesoldtoLIPAforapproximately$2.4975billionincash.NoadjustmentshavebeenmadetotheCompany'sfinancialstatementstoreflectthisproposedtransaction.IINatureofOperationsTheCompanywasincorporatedin1910undertheTransportationCorporationsLawoftheStateofNewYorkandsupplieselectricandgasserviceinNassauandSuffolkCountiesandtotheRockawayPeninsulainQueensCounty,allonLongIsland,NewYork.TheCompany'sserviceterritorycoversanareaofapproximately1,230squaremiles.Thepopulationoftheservicearea,accordingtotheCompany's1998LongIslandPopulationSurveyestimate,isabout2.75millionpersons,includingapproximately98,500personswhoresideinQueensCountywithintheCityofNewYork.eCompanyservesapproximately1.04millionelectriccustomersofwhichapproximately931,000aresidential.TheCompanyreceivesapproximately49'/0ofitselectricrevenuesfromresidentialcustomers,48/0fromcommercial/industrialcustomersandthebalancefromsalestootherutilitiesandpublicauthorities.TheCompanyalsoservesapproximately467,000gascustomers,417,000ofwhichareresidential,accountingforabout610/0ofitsgasrevenues,17,000ofwhicharecommercialiindustrial,:accountingfor23/oofitsgasrevenues,3,600ofwhicharefirmtransportationcustomers,accountingfor30/0ofitsgasrevenues,withthebalanceofthegasrevenuesmadeupbyoff-systemsales.TheCompany'sgeographiclocationandthelimitedelectricalinterconnectionstoLongIslandservetolimittheaccessibilityofthetransmissiongridtopotentialcompetitorsfromoffthesystem.Inaddition,theCompanydoesnotexpectanynewmajorindependentpowerproducers(IPPs)orcogeneratorstobebuiltonLongIslandintheforeseeablefuture.OneofthereasonssupportingthisconclusionisbasedontheCompany'sbeliefthatthecompositionanddistributionoftheCompany'sremainingcommercialandindustrialcustomerswouldmakeitdifficultforlargeelectricprojectstooperateeconomically.Furthermore,underfederallaw,theCompanyisrequiredtobuyenergyfromqualifiedproducersattheCompany'savoidedcost.Currentlong-rangeavoidedcostestimatesfortheCompanyhavesignificantlyreducedtheeconomicadvantagetoentrepreneursseekingtocompetewiththeCompanyandwithexistingIPPs.ForafurtherdiscussionofthecompetitiveissuesfacingtheCompany,seeNote12.RegulationTheCompany'saccountingrecordsaremaintainedinaccordancewiththeUniformSystemsofAccountscribedbythePublicServiceCommissionoftheStateofNewYork(PSC)andtheFederalEnergyulatoryCommission(FERC).Itsfinancialstatementsreflecttheratemakingpoliciesandactionsof61 thesecommissionsinconformitywithgenerallyacceptedaccountingprinciplesforrate-regulated-enterprises.AccountingfortheEffectsofRateRegulationGeneralTheCompanyissubject,totheprovisionsofStatementofFinancialAccountingStandards(SFAS)No.'1,"AccountingfortheEf'fectsofCertainTypesofRegulation."Thisstatementrecognizestheeconomicabilityofregulators,throughtheratemakingprocess,tocreatefutureeconomicbenefitsandobligationsaffectingrate-regulatedcompanies.Accordingly,theCompanyrecordsthesefutureeconomicbenefitsandobligationsasregulatoryassetsandregulatoryliabilities,respectively.Regulatoryassetsrepresentpr'ob'ablefuturerevenuesassociatedwithpreviouslyincurredcoststhatareexpectedtoberecoveredfromcustomers.Regulatoryliabilitiesrepresentprobablefuturereductionsin'evenuesassociatedwithamountsthatareexpectedtoberefundedtocustomersthroughtheratemakingprocess.Regulatoryassetsnetofregulatoryliabilitiesamo'untedtoapproximatefy$6.7billionatMarch31,1998,March31,1997andDecember31,199'6.Inorderforarate-regulatedentitytocontinuetoapplytheprovisionsofSFASNo.71,itmustcontinuetomeetthefollowingthree'criteria:(i)theenterprise'sratesforregulatedservicesprovidedtoitscustomersmustbeestablishedbyanindependentthird-partyregulator;(ii)theregulatedratesmustbedesignedtorecoverthespecificenterprise'scostsofprovidingtheregulatedservices;and(iii)inviewofthedemandfortheregulatedservicesandthelevelofcompetition,itisreasonabletoassumethatratessetatlevelsthatwillrecovertheenterprise'scostscanbechargedtoandcollectedfromcustomers.BasedupontheCompany'sevaluationofthethreecriteriadiscussedaboveinrelationtoitsoperations,theeffectof'competitiononitsabilitytorecoveritscosts,includingitsallowedreturnoncomrrionequityantheregulatoryenvironmentinwhichtheCompanyoperates,theCompanybelievesthatSFASNo.71continuestoapplytdtheCompany'selectricandgasoperations.TheCompanyformeditsconclusionbaseduponseveralfactorsincluding:(i)theCompany'scontinuingabilitytoearnitsallowedreturnoncommonequityforbothitselectricandgasoperations;and(ii)thePSC'scontinuedcommitmenttotheCompany'sfullrecoveryoftheShorehamNuclearPowerStation(Shoreham)relatedassetsandallotherprudentlyincurredcosts.Notwithstandirigtheabove,rate'regulationisundergoingsignificantchangeasregulatorsand'customersseeklowerpricesforelectricandgasservice.Intheeventthatregulationsig'nificantlychangestheopportunityfortheCompanytorecoveritscostsinthefuture,alloraportionoftheCompany'soperationsmaynolongermeetthe'criteriadiscussedabove.Inthatevent,asignificantwrite-downofall'raportionoftheCompany'sexistingregulatoryassetsandliabilitiesco1rldresult.IftheCompanyhadbeenunabletocontinuetoapplytheprovisionsofSFAS71atMarch31,1998,theCompanywouldapplytheprovisionsofSFAS101"RegulatedEnterprises-AccountingfortheDiscontinuationofApplicationofPASBStatementNo.71."IfSFAS'101wereimplement'ed,thechargetoearningscouldbeashighas$4.5billion,netoftax.ForadditionalinformationrespectingtheCompany'sShoreham-relatedassets,seebelowandNotes4and10.SFASNo.121,"AccountingfortheImpairmentofLong-LivedAssetsandforLong-LivedAssetstobeDisposedOf'equiresthatcostswhichwerecapitalizedinaccordancewithregulatorypractices,becauseitwasprobablethatfuturerecoverywouldbeallowedbytheregulator,mustbechargedagainstcurrentperiodearningsifitappearsthatthecriterionforcapitalizationnolongerapplies.Thecarryingamountsuchassetswouldbereducedbyamountsforwhichrecoveryisunlikely.SFASNo.121alsoprovidesfor62 therestorationofpreviouslydisallowedcoststhataresubsequentlyallowedbyaregulator.NoimpairmentlosseshavebeenrecognizedbytheCompanywithrespecttoregulatoryorotherlong-livedassets.lhtDiscussedbelowaretheCompany'ssignificantregulatoryassetsandregulatoryliabilities.IBaseFinancialComponentandRateModeration,Component,hPursuanttothe19S9Settlement,theCompanyrecordedaregulatoryassetknownastheFinancialResourceAsset(FRA).TheFRAisdesignedtoprovidetheCompanywithsufficientcashflowstoassureitsfinancialrecovery.TheFRAhastwocomponents,theBaseFinancialComponent(BFC)andtheRateModerationComponent(RMC).,TheBFCrepresentsthepresentvalueofthefuturenet-after-taxcash,,flowswhichtheRateModerationAgreement(RMA),oneoftheconstituentdocumentsofthe1989Settlement,providedtheCompany,foritsfinancialrecovery.TheBFCwasgrantedratebasetreatmentunderthetermsoftheRMAandisincludedintheCompany'srevenuerequirementsthroughanamortizationincludedinratesoveraforty-yearperiodonastraight-linebasiswhichbeganJuly1,19S9.'hTheRMCreflectsthedifferencebetweentheCompany'srevenuerequirementsunderconventionalratemakirigandtherevenuesresultingfromtheimplementationoftheratemoderationplanprovidedforinthe.RMA.TheRMCiscurrentlyadjusted,onamonthlybasis,fortheCompany'sshareofcertainNMP2operationsandmainten'anceexpenses,fuelcreditsresultingfromtheCompany'selectricfuelcostadjustmentclauseandgrossreceiptstaxadjustinentsrelatedtotheFRA.InApril1998,thePSCauthorizedarevisiontotheCompany'smethodforrecordingitsmonthlyRMCamortization.Priortothisrevision,theamortizationoftheannuallevelofRMCwasrecordedmonthlyonatraight-line,levelizedbasisovertheCompany'srateyearwhichrunsfromDecember1toNovember30.owever,revenuerequirementsfluctuatefrommonthtomonthbaseduponconsumptionwhichisgreatlyimpactedbytheeffectsofweather.Underthisrevisedmethod,effectiveDecember1,1997,themonthlyamortizationoftheannualRMClevelvariesbaseduponeachmonth'sforecastedrevenuerequirements,whichmore.closelyalignssuchamortizationwiththeCompany'scostofservice.Asaresultofthischange,forthefiscalyear'endedMarch31,1998,theCompanyrecordedapproximately$65.1millionmoreofnon-cashRMCcreditstoincome(representingaccretionoftheRMCbalance),,or$42.5millionnetoftax,representing$.35persharemorethanitwouldhaveunderthepreviousmethod.However,thetotalRMCamortizationfortherateyearendingNovember30,1998,willbeequaltotheamountthatwouldhavebeenprovidedforunderthepreviousmethod.AsdiscussedinNote2,theRMCwillbeacquiredbyLIPAaspartoftheLIPATransaction.hForafurtherdiscussionofthe1989SettlementandFRA,seeNotes4and10.ShorehamPost-SettlementCostsShorehampost-settlementcostsconsistofSh'orehamdecommissioningcosts,fueldisposalcosts,payments-in-lieu-of-taxes,carryingchargesandothercosts.Thesecostsarebeingcapitalizedandamortizedandrecoveredthroughratesoveraforty-yearperiodonastraight-lineremaininglifebasiswhichbeganJuly1,1989.ForafurtherdiscussionofShorehampost-settlementcosts,seeNote10.hShorehamNuclearFuelhorehamnuclearfuelprincipallyreflectstheunamortizedportionofShorehamnuclearfuelwhichwaslassifiedfromNuclearFuelinProcessandinReactoratthetimeofthe1989Settlement.Thisamountiseingamortizedandrecoveredthroughratesoveraforty-yearperiodonastraight-lineremaininglifebasiswhichbeganJuly1,1989.63 UnamortizedCostofIssuingSecuritiesUnamortizedcostofissuingsecuritiesrepresentstheunamortizedpremiumsordiscountsandexpensesrelatedtotheissuesoflong-termdebtthathavebeenretiredpriortomaturityandthecostsassociatedwiththeearlyredemptionofthoseissues.Inaddition,thisbalanceincludestheunamortizedcapitalstockexpenseandredemptioncostsrelatedtocertainseriesofpreferredstockthathavebeenrefinanced.Thesecostsareamortizedandrecoveredthroughrates,asprovidedbythePSC,overtheshorterofthelifeoftheredeemedissueorthenewissue.PostretirementBenefitsOtherThanPensionsTheCompanydefersasaregulatoryassetthedifferencebetweenpostretirementbenefitexpenserecordedinaccordancewithSFASNo.106,"Employers'ccountingforPostretirementBenefitsOtherThanPensions,"andpostretirementbenefitexpensereflectedincurrentrates.PursuanttoaPSCorder,theongoingannualSFASNo.106benefitexpensewasphasedintoandfullyreflectedinratesbyNovember30,1997,withtheaccumulateddeferredassettoberecoveredinratesoverthefifteen-yearperiodwhichbeganDecember1,1997.ForafurtherdiscussionofSFASNo.106,seeNote8.RegulatoryTaxAssetandRegulatoryTaxLiabilityTheCompanyhasrecordedaregulatorytaxassetforamountsthatitwillcollectinfutureratesfortheportionofitsdeferredtaxliabilitythathasnotyetbeenrecognizedforratemakingpurposes.The'egulatorytaxassetiscomprisedprincipallyofthetaxeffectofthedifferenceinthecostbasisoftheBFCforfinancialandtaxreportingpurposes,depreciationdifferencesnotnormalizedandtheallowanceforequityfundsusedduringconstruction.Theregulatorytaxliabilityisprimarilyattributabletodeferredtaxespreviouslyrecognizedatrateshigherthancurrentenactedtaxlaw,unamortizedinvestment'taxcreditsandtaxcreditcarryforwards.RegulatoryLiabilityComponentPursuanttothe1989Settlement,certaintaxbenefitsattributabletotheShorehamabandonmentaretobesharedbetweenelectriccustomersandshareowners.Aregulatoryliabilityofapproximately$794millionwasrecordedinJune1989topreserveanamountequivalenttothecustomertaxbenefitsattributabletotheShorehamabandonment.Thisamountisbeingamortizedoveraten-yearperiodonastraight-linebasiswhichbeganJuly1,1989.1989SettlementCreditstRepresentstheunamortizedportionofanadjustmentofthe'bookwrite-offtothenegotiated1989Settlementamount.Aportionofthisamountisbeingamortizedoveraten-yearperiodwhichbeganonJuly1,1989.Theremainingportionisnotcurrentlybeingrecognizedfor;ratemakingpurposes.UtilityPlantAdditionstoandreplacementsofutilityplantarecapitalizedatoriginalcost,whichincludesmaterial,labor,indirectcostsassociatedwithanadditionorreplacementandanallowanceforthecostoffundsusedduringconstruction.Thecostofrenewalsandbettermentsrelatingtounitsofpropertyisaddedtoutilityplant.Thecostofpropertyreplaced,retiredorotherwisedisposedofisdeductedfromutilityplantand,generally,togetherwithdismantlingcostslessanysalvage,ischargedtoaccumulateddepreciation.Thecostofrepairsandminorrenewalsischargedtomaintenanceexpense.Massproperties(suchaspoles,wireandmeters)areaccountedforonanaverageunitcostbasisbyyearofinstallation.64 AllowanceforFundsUsedDuringConstructionTheUniformSystemsofAccountsasprescribedbythePSC,definestheAllowance,ForFundsUsedDuringConstruction(AFC)asthenetcostofborrowedfundsusedforconstructionpurposesanda,treasonablerateofreturnupontheutility's.equity'whensoused.AFCisnotanitemofcurrentcashincome.AFCiscomputedmonthlyusingaratepermittedbytheFERConaportionofconstructionworkinprogress.TheaverageAFCrate,withoutgivingeffecttocompounding,wasasfollows:Periods'AFCRate12MonthsEnded3/31/989.29/o3MonthsEnded3/31/972.26/o12MonthsEnded12/31/969.02/o12MonthsEnded12/31/959.36/oDepreciationTheprovisionsfordepreciationresultfromtheapplicationofstraight-lineratestotheoriginalcost,bygroups,ofdepreciablepropertiesinservice.Theratesaredeterminedbyage-lifestudiesperformedannuallyondepreciableproperties.Theaveragedepreciationrateasapercentageofrespectiveaveragedepreciableplantcostswasasfollows:Periods12MonthsEnded3/31/983MonthsEnded3/31/9712MonthsEnded12/31/9612MonthsEnded12/31/95Electric3.07o/o78o/o3.00/o3.00o/oGas2.04o/o'51o/o200o/o200o/oCashandCashEquivalents~~Cashequivalentsarehighlyliquidinvestmentswithmaturitiesofthreemonthsorlesswhenpurchased.hecarryingamountapproximatesfairvaluebecauseoftheshortmaturityoftheseinvestments.LRPPPayableRepresentsthecurrentportionofamountsduetoratepayersthatresultfromtherevenueandexpensereconciliations,performance-basedincentivesandassociatedcarryingcharges'asestablishedun'dertheLILCORatemakingandPerformancePlan(LRPP).ForfurtherdiscussionoftheLRPP,seeNote4.FairValuesofFinancialInstrumentsThefairvaluesfortheCompany'slong-termdebtandredeemablepreferredstockarebasedonquotedmarketprices,whereavailable.Thefairvaluesforallotherlong-termdebtandredeemablepreferredstockareestimatedusingdiscountedcashflowanalysesbasedupontheCompany'scurrentincrementalborrowingrateforsimilartypesofsecurities.RevenuesRevenuesarecomprisedofcyclebillingsrenderedtocustomersandtheaccrualofelectricandgasrevenuesforservicesrenderedtocustomersnotbilledatmonth-end.TheCompany'selectricratestructureprovidesfeararevenuereconciliationmechanismwhicheliminatestheimpactonearningsofexperiencingelectricsalesthatareaboveorbelowthelevelsreflectedinrates.TheCompany'sgasratestructureprovidesforaweathernormalizationclausewhichreducestheimpactrevenuesofexperiencingweatherwhichiswarmerorcolderthannormal.gt65 FuelCostAdjustmentshTheCompany'selectric.andgastariffsincludefuelcostadjustment(FCA)clauseswhichprovideforthe'ispositionofthedifferencebetweenactualfuelcostsandthefuelcostsallowedintheCompany'sbasetariffrates(basefuelcosts).The.Companydefersthesedifferencestofutureperiodsinwhichtheywillbebilledorcreditedto'customers,exceptforbase'electricfuelcostsinexcessofactualelectricfuel'costs,'hicharecurrentlycreditedtotheRMCasincurred."Purs'uant'totheStipulation,'asdescribedinNote3,gasfuelcostsareexcludedfrombasefuelcostsandrecoveredthroughthegasfueladjustmentclause.FederalIncomeTaxTheCompanyprovidesdeferredfederalincometaxwithrespecttocertainitemsofincomeandexpensethatarereportedindifferentperiodsforfederalincometaxpurposesthanforfinancialstatementpurposes.Additionally,theCompanyprovidesdeferredfederalincometaxwithrespecttoitemswithdifferentbasesforfinancialandtaxreportingpurposes,asdiscussedinNote9.TheCompany'defersthebenefitof,60/0ofpre-1982gasandpre-.1983electricand100/oofallother,'nvestmenttaxcredits,withrespecttoregulatedproperties,whenrealizedonitstaxreturns.Accumulateddeferredinvestmenttaxcreditsareamortizedratablyoverthelivesoftherelatedproperties.'1IIForratemakingpurposes,theCompanyprovidesdeferredfederalincometaxwithrespecttocertaindifferencesbetweenincomebeforeincometaxforfinancialreportingpurposesandtaxableincomeforfederalincometaxpurposes.Also,certainaccumulateddeferredfederalincometaxisdeductedfromratebaseandamortizedorotherwiseappliedasareductionin'federalinc'ometaxexpensein'futureyears.ReservesforClaimsandDamagesLossesarisingfromclaimsagainst,theCompany,includingworkers',compensationclaims,property...damage,extraordinarystorm'costsandgeneralliabilityclaims,arepartiallyself-insured.-Reservesfortheseclaimsanddamagesarebasedon,amongotherthings,experience,riskoflossandtheratemakingpracticesofthePSC.ExtraordinarystormlossesincurredbytheCompanyarepartiallyinsuredbyvarious,commercialinsurancecarriers.-,These"insurancecarriersprovidepartialinsurancecoverageforindivjdualstormlossesto,theCompany',stransmissionanddistributionsystembetween$15millionand$25million..Stormlosseswhich,areoutsideofthisrangeareself-insuredbytheCompany.RecentAccountingPronouncements"V'IEarningsI'erShareAtDecember31,1997,theCompanyadoptedSFASNo;128,"EarningsPerShare."Thisstatementreplacedthecalculationof.primaryandfullydilutedearningspersharewithbasicanddilutedearningspershare.Unlikeprimaryearningspershare,basicearningspershareexcludes'anydilutiveeffectsofoptions,warrantsandconvertiblesecurities.Dilutedearningspershareareverysimilartothepreviouslyreportedfullydilutedearningspershare.Noneoftheearningspershareamountsforperiodspresentedwereeffectedby,theadoptionof.,SFASNo.128:.,'ComprehensiveIncomeInJune1997,theFinancialAccounting'StandardsBoard'(FASB)issuedStatementofFinancialAccounting.Standards(SFAS)No.130."SFASNo."130establish'tandardsforreportingcomprehensiveincome.Comprehensiveincomeisthechangeintheequityofacompany,notincludingthosechangesthatre'suitfrom'sh'areholdertran'sactions'.Allcomponentsofcomprehensiveincomearerequiredtobereportedinanewfinancialstatementthatisdisplayedwithequalprominence'asexistingfinancialstatements.TheCompanywillberequiredtoadoptSFASNo.130fortheyearendingMarch31,1999.66 TheCompanydoes'n'otexpectthattheadoptionofSFASNo.130willhaveasignificantimpactonits"'eportinganddisclosurerequirements'.III'i~~7?7~~~~~~~Irr~~u~I!~~~!~~~~!~~~!!~~~~~~~~~l~iSegmentDisclosuresInJune1997,FASBissuedSFASNo.131"DisclosuresaboutSegmentsofanEnterpriseandRelatedInformation."SFASNo.131establishesstandardsforadditionaldisclosureaboutoperafingsegmentsforinterimand'annualfinancialstatem'ents.Morespecifically,it,requiresfinancialinform'ationtobedisclosedforsegmentswhoseoperatingresultsarereviewedbythechiefoper'atingdecisionmakerfordecisionsonresourceallocation.Italsorequiresrelateddisclosuresaboutproductsandservices,"""geographicareasandmajorcustom'ers.TheCompanywillberequiredtoadoptSFASNo.131forthefiscalyearendingMarch31,1999.TheCompanydoes"notexpectthattheadoptionofSFASNo.131willhaveasignificant'impactonitsreportinganddisclosurerequirements.'IUseofEstimates'lTheprepar'ationofthe'financialstatementsinconfo'rmitywithgenerallyacceptedaccountingprinciplesrequiresmanagementtomakeestimatesandassumptionsthataffectthe'amountsreported'inthefinancialstatementsandaccompanyingnotes.Actualresultscoulddifferfromthoseestimates.VVReclassifications"'ertain'prioryearamountshaveb'eenreclassifiedinthefinancialstatementstoconform'withthecurrentyearpresentation.VilhIV'ote2.'LongIslandPowerAuthorityTransactionOnJune26,1997,theCompanyandLongIslandPowerAuthority(LIPA)e'ntered'intodefinitiveagreementspurs'uanttowhich,afterthetransferoftheCompany'sgasbusinessunitassets,non-nuclear'ectricgeneratingfacilityassetsandcertainotherassetsandliabilitiestooneormorenewly-foimed'ubsidiariesofanewholdingcompany(HoldCo),formedinconnectionwiththeLIPATransactionandKey'Span'Transactiondiscussedbelow,theCo'mpany'scommonstockwillbes'old'toLIPAfor$2.4975billionincash.Inconnectionwiththistransacti'on",theprincipal'assetstobeacquiredbyLIPAthroughitsstock'cquisitionofLIL'COinclude:(i)thenetbookvalueofLILCO'selectrictransmissionanddistributionsystem',whichamountedto'pproximately$1.3billionatMarch31;1998;(ii)LILCOs'etinvestmentinNMP2,whichamountedtoapproximately$0.7billionatMarch31,1998(asmorefullydiscus'sedinNote5);(iii)certainofLILCO'sregulatoryassetsassociatedwithitselectricbusiness;and(iv)allocated'ccountsreceivableandotherassets.TheregulatoryassetstobeacquiredbyLIPAamountedtoapproximately$6.6billionatMarch31,1998,aridp'rimarilyconsistoftheBaseFinancialComponent(BFC),RateModerationComponent(RMC),'Shorehampost-settlementcosts,Shorehamnuclear''fuel,andtheelectricportionoftheregulatorytaxasset.Forafurtherdiscussionoftheseregulatoryassets,seeNote1.VVIILIPAiscontractuallyre'sponsibleforreimbursingHoldCoforpostretirementb'enefitsotherthanpensioncostsrelatedtoemployeesofLILCO's'electricbusiness.'Accordingly,uponcoinsurnmationiofthe'ransaction,HoldCowillreclassifytheassociatedregulatoryassetforpo'stretirementbenefitsotherthanpensionstoacontractualreceivable.IVeprincipalliabilitiestobeassumedbyLIPAthroughitsstockacquisitionofLILCOinclude::(i)LCO'sregulatoryliabilitiesassociatedwithitselectricbusiness;(ii)allocatedaccountspayable,ustomerdeposits,otherde'ferred'creditsandclaimsanddamages;and(iii)certainseriesoflong-term67 debt.TheregulatoryliabilitiestobeassumedbyLIPAamountedtoapproximately$365millionatMarch31,1998,andprimarilyconsistoftheregulatoryliabilitycomponent,1989Settlement,creditsandtheelectricportionoftheregulatorytaxliability.Forafurtherdiscussionoftheseregulatoryliabilities,seeNote1ofNotestoFinancialStatements.Thelong-termdebttobeassumedbyLIPAwillconsistof:(i)allamountsthenoutstandingundertheGeneralandRefunding(G&R)Indentures;(ii)allamountsthenoutstandingundertheDebentureIndentures,exceptasnotedbelow;and(iii).substantiallyallofthetax-exemptauthorityfinancingnotes.HoldCoisrequiredtoassumethe,financialobligationassociatedwiththe7.30'/0DebenturesdueJuly15,1999,withanaggregateprincipalamountcurrentlyoutstandingof$397millionand8.20/0DebenturesdueMarch15,2023,withanaggregateprincipalamountcurrentlyoutstandingof$270million.HoldCowillseektoexchangeitsDebentures,withidenticalterms,forthesetwoseriesofDebenturesandwillissueapromissorynotetoLIPAinanamountequaltotheunexchangedamountofsuchDebentures.HoldCowillalsoissueapromissorynotetoLIPAforaportionofthetax-exemptdebtborrowedtosupportLILCO'scurrentgasoperations,withtermsidenticaltothosecurrentlyoutstanding.TheCompanycurrentlyestimatestheamountofthispromissorynotetobeapproximately$250million.lInJuly1997,inaccordancewiththeprovisionsoftheLIPATransaction,theCompanyandTheBrooklynUnionGasCompany(BrooklynUnion)formedalimitedpartnershipandeachCompanyinvested$30millioninordertopurchaseaninterestrateswapoptioninstrumenttoprotectLIPAagainstmarketriskassociatedwiththemunicipalbondsexpectedtobeissuedbyLIPAtofinancethetransaction.UpontheclosingoftheLIPATransaction,eachlimitedpartnerwillreceivefromLIPA$30millionplusinterestthereon,basedoneachpartners'verageweightedcostofcapital.IntheeventthattheLIPATransactionisnotconsummated,themaximumpotentiallosstotheCompanyistheamountoriginallyinvested.Insuchevent,theCompanyplanstodeferanylossandpetitionthePSCtoallowrecoveryfromitscustomers.AspartoftheLIPATransaction,thedefinitiy'eagreementscontemplatethatoneormoresubsidiariesofHoldCowillenterintoagreementswithLIPA,pursuanttowhichsuchsubsidiarieswillprovidemanagementandoperationsservicestoLIPAwithrespecttotheelectrictransmissionanddistributionsystem,deliverpowergeneratedbyitspowerplantstoLIPA,andmanageLIPA'sfuelandelectricpurchasesandanyoff-systemelectricsales.Inaddition,threeyearsaAertheLIPATransactionisconsummated,LIPAwillhavetherightforaone-yearperiodtoacquireallofHoldCo'sgeneratingassetsatthefairmarketvalueatthetimeoftheexerciseoftheright,whichvaluewill,bedeterminedbyindependentappraisers.1I4InJuly1997,theNewYorkStatePublicAuthoritiesControlBoard(PACB),createdpursuanttotheNeqYorkStatePublicAuthoritiesLawandconsistingoffivemembersappointedbythegovernor,unanimouslyapprovedthedefinitiveagreementsrelatedtotheLIPATransactionsubjecttothefollowingconditions:(i)withinoneyearoftheeffectivedateofthetransaction,LIPAmustestablishaplanforopenaccesstotheelectricdistributionsystem;(ii)ifLIPAexercisesitsoptiontoacquirethegenerationassetsofHoldCo'sgenerationsubsidiary,LIPAmaynotpurchasethegeneratingfacilities,ascontemplatedinthegenerationpurchaserightagreement,at,apricegreaterthanbookvalue<(iii)HoldComustagreetoinvest,overaten-yearperiod,atleast$1.3billioninenergy-relatedandeconomicdevelopmentprojects,andnaturalgasinfrastructureprojectsonLongIsland;(iv)LIPAwillguaranteethat,overaten-yearperiod,averageelectricrateswillbereducedbynolessthan14/owhenmeasuredagainsttheCompany'sratestodayandnolessthana2/o'costsavingstoLIPAcustomersmustresultfromthesavingsattributabtothemergerofLILCOandKeySpan;and(v)LIPAwillnotincreaseaverageelectriccustomerrates'bmorethan2.50/0overatwelve-monthperiodwithoutapprovalfromthePSC.LIPAhasadoptedtheconditionssetforthbythePACB.68 T'eholdersofcommonandcertain.s'eriesofpreferredstockoftheCompanyeligible'tovote'approvedtheLIPATransactioninAugust1997."-'IIh~lnDecember1997,theUnitedStates'NuclearRegulatoryCommission'(NRC)is'suedanorderapproving.~theindirecttransferofcontroloftheCo'mpany's18loownershipinterestinNMP2toLIPA.InDecember1997,theCompanyfiledwiththeFERCasettlementagreementreachedwith'LIPAinconnectionwithaprev'iousfilingoftheCompany'sproposedratesforthesaleofcapacityandenergytoLIPA,ascontemplatedintheLIPAtransaction'agreements.TheCompany'lsohadpreviouslyfile'dan""applicationwiththeFERCseekingapprovalofthetransferoftheCompany'selectrictr'ansmissionanddistributionsystemtoLIPAinconnectionwithLIPA'spur'chaseofthecommonstockoftheCompany.InFebruary1998,theFERCissuedordersonbothoftheCompanyfilings.Specifically,theFERCapprovedtheCompany'sapplicationtotransferassetstoLIPAinconnectionwithLIPA'sacquisition.oftheCompany'scommonstock.Inaddition,theFERCacceptedtheCompariy'spro'posedratesforsale"ofcapacityandenergytoLIPA.Thoseratesmaygointoeffecton.thedatetheservicetoLIPA''egins,subjecttorefund,andfinalrateswillbe"setaftertheFERChascompleteditsinvestigationofsuchrates,:"thetimingofwhichcannot'bedeterminedatthistime.I'IInJanuary1998,theCompanyfiledanapplicationwiththePSCinconnectionwiththeproposedtransferofitsgasbusinessunitassets,non-nucleargeneratingfacilityassetsandcertainotherassetsandrelated.'iabilitiestooneormoresubsidiariesofHoldCotobeformedas'contemplated.,in'theLIPATransactionagreements.OnApril29,1998,thePSCapprovedthetransferoftheabove-mentionedassets..InJuly1997,theCompany,BrooklynUnionandLIPAfiledrequestsforprivateletter.rulingswiththeternalRevenueService(IRS)regardingcertainfederalincometaxissueswhichrequirefavorablelingsinorderfortheLIPATransactiontobeconsummated.OnMarch4,1998,theIRSissuedaprivateletterrulingconfirmingthatthesaleoftheCompany'scommonstocktoLIPAwouldnotresultinacorporatetaxliabilitytotheCompany.Inaddition,theIRS'ruledthat,aAerthestocksale,theincomeofLIPA'selectricutilitybusinesswillnotbesubjecttofede'ralincometax'.In'a'separaterulingonFebruary27,1998,theIRSalsoruledthatthebondstobeissuedbyLIPAtofinancetheacquisitionwouldbetax-exempt.CI'InJanuary1998,theCompanyfiledanapplicationwiththeSECseekinganexception'ormostoftheprovisionsofthePublicUtilitiesHoldingCompanyActof1935.In'May1998,the'SECissuedanorderapprovingtheCompany'sapplication~I[TheCompanycurrentlyanticipatesthattheLIPAtransactionwillbeconsummatedbyJune30,1998.Note3.KeySpanEnergyCorporationTransactionOnDecember29,1996,The-Brooklyn,UnionGasCompany"(Brookl)nUnion)andtheCompanyenteredintoanAgreementandPlanofExchangeandMerger(ShareExchangeAgreemen't),pursuanttowhichthecompanieswillbemergedinatransaction(KeySpanTransaction)thatwill'resultintheformationof'HoldCo.P'4TheShareExchangeAgreementwasamendedandrestatedtoreflectcertaintechnicalchanges'asofFebruary7,1997andJune26,1997.EffectiveSeptember29,1997,BrooklynUnionreorganizedintoa69 holdingcompanystructure,withKeySpanEnergyCorporation(KeySpan)becomingitsparentholding'-company.Accordingly,thepartiesenteredintoanAmendment,AssignmentandAssumptionAgreement,datedasofSeptember29,1997,whichamongotherthings,amendedtheShareExchangeAgreementandtrelatedstockoptionagreementstoreflecttheassignmentbyBrooklynUniontoKeySpanandtheassumptionbyKeySpanofallBrooklynUnion'srights'andobligationsundersuchagreements.TheKeySpanTransaction,whichhasbeenapprovedbybothcompanies'oardsofdirectorsand,shareholders,wouldunitetheresourcesoftheCompanywiththeresourcesofKeySpan.KeySpan,withapproximately3,300employees,distributesnaturalgasatretail,primarilyinaterritoryofapproximately187squaremileswhichincludestheboroughsofBrooklynandStatenIslandandtwo-thirdsoftheboroughofQueens,allinNewYorkCity.KeySpanhasenergy-relatedinvestmentsingasexploration,productionandmarketingintheUnitedStatesandNorthernIreland,aswellasenergyservicesintheUnitedStates,includingcogenerationprojects,pipelinetransportationandgasstorage.UnderthetermsoftheKeySpanTransaction,theCompany'scommonshareownerswillreceive.803shares(theRatio)ofHoldCo'scommonstockforeachshareoftheCompany'scommonstockthattheycurrentlyhold.KeySpancommonshareownerswillreceiveoneshareofcommonstockofHoldCofor.eachcommonshareofKeySpantheycurrentlyhold.ShareownersoftheCompanywillownapproximately66%ofthecommonstockofHoldCowhileKeySpanshareownerswillownapproximately34%.IntheeventthattheLIPATransactionisconsummated,theRatiowillbe0.880withCompanyshareownersowningapproximately68%oftheHoldCocommonstock.Basedoncurrentfactsandcircumstances,itisprobablethatthepurchasemethodofaccountingwillapplytotheKeySpan'ransaction,withtheCompanybeingtheacquiringcompanyforaccountingpurposes;ConsummationoftheShareExchangeAgreementisnotconditionedupontheconsummationoftheLIPATransactionandconsummationoftheLIPATransactionisnotconditioneduponconsummationoftheShareExchangeAgreement.InMarch1997,theCompanyfiledanapplicationwiththeFERCseekingapprovalofthetransferoftheCompany'scommonequityandcertainFERC-jurisdictionalassetstoHoldCo.OnJuly17,1997,theFERCgrantedsuchapproval.TheShareExchangeAgreementcontainscertaincovenantsofthepartiespendingtheconsummationofthetransaction.Generally,thepartiesmustcarryontheirbusinessesintheordinarycourseconsistentwithpastpractice,maynotincreasedividends.on,commonstockbeyondspecifiedlevelsandmaynot~issuecapitalstockbeyondcertainlimits.TheShareExchangeAgreementalsocontainsrestrictionson,amongotherthings,charterandby-lawamendmerits,capitalexpenditures,acquisitions,dispositions,incurrenceofindebtedness,certainincreasesinemployeecompensationandbenefits,andaffiliatetransactions.Uponcompletionofthemerger,Dr.WilliamJ.CatacosinoswillbecomechairmanandchiefexecutiveofficerofHoldCo;Mr.RobertB.Catell,currentlychairmanandchiefexecutiveoffiicerofKeySpan,will,becomepresidentandchiefoperatingofficerofHoldCo.Oneyearaftertheclosing,Mr.CatellwillsucceedDr.Catacosinosaschief.executiveofficer,withDr.Catacosinoscontinuingaschairman.TheboardofdirectorsofHoldCowillbecomprisedof15members,sixfromtheCompany,sixfromKeySpanandthreeadditionalpersonspreviouslyunaffiliatedwitheithercompany.70 InMarch-1997,theCompanyandtheBrooklynUnionGasCompany(BrooklynUnion)filedajointpetitionwiththePSCseekingapproval,undersection70oftheNewYorkPublicSer'viceLaw,oftheKeySpanAgreementbywhichtheCompanyandKeySpaneachwouldbecomesubsidiariesofHoldCothroughanexchangeofsharesofcommonstockwithHoldCo.Inaddition,thepetitioncalledforapproximately$1.0billionofsavingsattributabletooperatingsynergiesthatareexpectedtoberealizedoverthe10-yearperiodfollowingthecombinationtobeallocatedto'customers,netoftransactioncostsforthecombination.OnDecember10,1997,BrooklynUnion,theCompany,theStaffofthePSCandthreeotherpartiesenteredintoaSettlementAgreement(Stipulation)resolvingallissuesamongthemintheproceeding.HearingsontheStipulationwereheldinearlyJanuary1998and,onFebruary4,1998,thePSCapproved,effectiveFebruary5,1998,theStipulation,modiflied'onlytoreduceBrooklynUnion'searningscapfortheremainingyearsofitsrateplan.rUndertheStipulation,athree-yeargasrateplancoveringtheperiodDecember1,1997throughNovember30,2000willbeimplementedbytheCompanywhichprovidesfor,amongotherthings,anestimatedreductionincustomers'illsofapproximately3.9%,includingfuelsavings,throughatleastNovember30,2000.Thisgasratereductionwilloccurinthreephasesasfollows:(i)areductioninbaseratesofapproximately$12.2'"milliontoreflectdecreasesintheCompany'sgascostofserviceeffectiveonFebruary5,1998;(ii)abaseratereductionofapproximately$6.2millionassociatedwithnon-fuelsavingsrelatedtotheKeySpanTransactiontobecomeeffectiveontheclosingdateofthetransaction;and(iii)anexpectedreductionintheGasAdjustmentClause(GAC)toreflectannualfuelsavingsassociatedwiththetransactionestimatedatapproximately$4.0million,theactuallevelofwhichwillbereflectedinratesifandwhentheyactuallymaterialize.'heCompanywillbesubjecttoanearningssharingprovisionpursuanttowhichitwillberequiredtocredittocore/firmcustomers60%ofanyutilityearningsupto100basispointsabove11.10%and50%ofanyutilityearningsinexcessof12.10%oftheallowedreturnoncommonequity.BothacustomerserviceandasafetyandreliabilityincentiveperformanceprogramwilleimplementedeffectiveDecember1,1997,withmaximumpre-taxreturnonequitypenaltiesof40and12basispoints,respectively,iftheCompanyfails'toachievecertainperformancestandardsintheseareas.TheStipulation,whichobligatestheCompanytoreduceelectriccustomers'illsbyapproximately2.5%resultingfromthesavingsinoperatingandfuelcosts,relatedtosynergysavings,alsodefersthetimewithinwhichthePSCmustactontheCompany'spendingelectricrateplanuntilJuly1,1998.However,anyreductionincustomers'illswouldnotbecomeeffectiveuntilthePSCsetstheCompany'selectricrates.ForBrooklynUnion,effectiveonthedateoftheconsummationoftheKeySpanTransaction,BrooklynUnion'.sbaseratestocore/firmcustomerswillbereducedby$23.9millionannually.Inaddition,effectiveinthefiscalyearinwhichtheKeySpanTransactionisconsummated,BrooklynUnionwillbesubjecttoanearningssharingprovisionpursuanttowhichitwillberequiredtocredittocore/firmcustomers60%ofanyutilityearningsupto100basispointsabovecertainthresholdequityreturnlevelsoverthetermoftherateplan(otherthananyearningsassociatedwithdiscreteincentives)and50%ofanyutilityearningsinexcessof100basispointsabovesuchthresholdlevels.Thethresholdlevels,asmodifiedbytheFebruary5,1998Order,are13.75%forfiscalyear1998,-13.50%forfiscalyears1999,<<II71 2000,and2001;and13.25'/0for,fiscal~year2002.Asafetyandreliabilityincentivemechanismwill'beimplementedeffectiveontheconsummationdateoftheKeySpanTransaction,withamaximum12basispointpre.-taxpenaltyreturn.-oncommonequityifBrooklynUnionfailstoachievecertainsafetyand''reliability.performancestandards.Withtheexceptionofthesimplificationofthecustomerserviceperformancestandards,thecurrentBrooklynUnionrateplanapprovedbythePSCin1996remainsunchanged.AnygascostsavingsallocabletoBrooklynUnionresultingfromtheKeySyanTransactionwillbe,reflectedinratestoutilitycustomersthroughtheGAC.asthosesavingsarerealized.ITheStipulationadopts.certainaffiliate,transactionrestrictionscostallocationandfinancialintegrityconditions,andacompetitivecodeofconduct.TheserestrictionsandconditionseliminateorrelaxmanyrestrictionscurrentlyapplicabletoBrooklynUnioninsuchareasasaffiliatetransactions,useofthenameandreputationofBrooklynUnionbyunregulatedaffiliates,commonofficersofHoldCo,theutilitysubsidiariesandunregulatedlsubsidiaries,dividendpaymentrestrictions,andthecompositionoftheBoardofDirectorsofBrooklynUnion.RRIRI~TheStipulationalsoenables,theutilitiestoform,oneormoresharedservicessubsidiariestoperformfunctionscommontobothutilitiesandtheiraffiliates,suchasaccounting,finance,humanresources,legal.andinformationsystemsand.technologytorealizesynergysavings,IRNote4.RateMatters,RlElectricInApril1996,thePSCissuedanorderdirectingthe,Companytofilefinancialand.otherinformation.sufficienttoprovidealegalbasisforsettingnewratesforthethree-yearperiod1997through1999,Incompliancewiththeorder,theCompanysubmittedamulti-year,rateplan(Plan)inSeptember1996.MajorelementsofthePlaninclude:(i)abaseratefreezeforthethree-yearperiodDecember1,1996throughNovember,30,1999;,(ii)anallowedreturnoncommonequityof11.0/0throughtheterm'ofthePlanwiththeCompanyfullyretaining.allearningsup,to12.66/o,andsharingwiththecustomeranyearningsabove12.66/0,(iii)thecontinuationofexistingLRPPrevenueandexpensereconciliationmechanismsandperformanceincentiveprograms;(iv)creditingallnetproceedsfromtheShoreham,propertytaxlitigationtotheRMCtoreduceitsbalance;and(v)a.mechanismtofullyrecoveranyoutstanding.RMCbalance.attheendofthe1999rate.yea'rthroughRinclusionintheFCA,overatwo-yearperiod.Pursuantto'theprovisionsoftheStipulationdiscussedabove,undertheheadingKeySpanEnergyCorporationTransaction,thePSChasuntilJuly1,1998torenderadecision'onthisfiling.Asan.interimmeasure,pendingtheconsummationoftheLIPA.Transactionortheadjudicationofits=electricratefiling;theCompanysubmittedpetitionsinkfay1997and,December:1997requestingPSCapprovaltoextend,throughtherateyearsendingNovember30,1996a'nd1997,respectively,theprovisionsofits1995electricrateorder(1995Order).ThesepetitionswereappiovedbythePSCinDecember1997and,April;1998;respectively.RRII'~RR.1995ElectricRateOrder,Thebasis.ofthe1995OrderincludedminimizingfutureelectricrateincreaseswhilecontinuingtoprovidefortherecoveryoftheCompany'sregulatoryassetsandretainingconsistencywiththeRMA'sobjectiveofrestoringtheCompanytofinancialhealth.The1995Order,whichbecameeffectiveDecember1,1994,frozebaseelectricrates,reducedtheCompany'sallowedreturnoncommonequityfrom11.6/0to11.0/0andmodifiedoreliminatedcertainperformance-basedincentives,asdiscussedbelow.TheLRPP,originallyapprovedbythePSCinNovember1991,containedthreemajorcomponents:(i)revenuereconciliation;(ii)expenseattritionandreconciliation;and,(iii)performance-basedincentives.72 Inthe1995Order,thePSCcontinuedthethreemajorcomponentsoftheLRPPwithmodificationstotheexpenseattritionandreconciliationmechanismandtheperformance-basedincentives.Therevenuereconciliationmechanismremainsunchanged.Ievenuereconciliationprovidesamechanismthateliminatestheimpactofexperiencingsalesthatareaboveorbelowadjudicatedlevelsbyprovidingafixedannualnetmarginlevel(definedassalesrevenues,netoffuelexpensesandgrossreceiptstaxes).Thedifferencebetweenactualandadjudicatednetmarginlevelsaredeferredonamonthlybasisduringtherateyear.1TheexpenseattritionandreconciliationcomponentpermitstheCompanytomakeadjustmentsforcertainexpensesrecognizingthatthesecostincreasesareunavoidableduetoinflationandchangesoutsidethecontroloftheCompany.Pursuanttothe1995Order,theCompanyispermittedtoreconcileexpensesforpropertytaxesonly,whereasundertheoriginalLRPPtheCompanywasabletoreconcileexpensesforwagerates;propertytaxes,interestcostsanddemandsidemanagement(DSM)costs.TheoriginalLRPPhadalsoprovidedforthedeferralandamortizationofcertaincostvariancesforenhancedreliability,productionoperationsandmaintenanceexpensesandtheapplicationofaninflationindextootherexpenses.Underthe1995Order,thesedeferralshave'beeneliminatedandany.unamortizedbalanceswerecreditedtotheRMCduring1995.Themodifiedperformance-basedincentiveprogramsincludetheDSMprogram,thecustomerserviceperformanceprogramandthetransmissionanddistributionreliabilityprogram.Undertheserevisedprograms,theCompanywassubjecttoamaximumpenaltyof38basispointsoftheallowedreturnoncommonequityandcouldearnupto4basispointsunderthecustomerserviceprogram.PursuanttotheStipulation,theCompany'scustomerserviceincentiveprogramwasfurthermodifiedtoeliminatethe4ispointrewardandincreasedthemaximumpenaltywhichcanbeincurredunderthetheseprogramsom38to62basispoints.Thepartialpass-throughfuelincentiveprogramremainsunchanged.Underthisincentive,theCompanycanearnorforfeitupto20basispointsoftheallowedreturnoncommonequity.FortherateyearendedNovember30,1997,theCompanyearned12.7basispoints,orapproximately$2.9million,netoftaxeffects,asaresultofitsperformanceunderallincentiveprograms.FortherateyearsendedNovember30,1996and1995,theCompanyearned20and19basispoints,respectively,orapproximately$4.3millionand$4.0million,respectively,netoftaxeffects,undertheincentiveprogramsineffectatthosetimes.Thedeferredbalancesresultingfromthenetmarginandexpensereconciliations,andearnedperformance-basedincentivesarenettedattheendofeachrateyear,asestablishedundertheLRPPandcontinuedunderthe1995Order.Thefirst$15millionofthetotaldeferralisrecoveredfromorcreditedtoratepayersbyincreasingordecreasingtheRMCbalance.Deferralsinexcessofthe$15million,uponapprovalofthePSC,arerefundedtoorrecoveredfromthecustomersthroughtPeFCAmechanismovera12-monthperiod.FortherateyearendedNovember30,1997,theamounttobereturnedtocustomersresultingfromtherevenueandexpensereconciliations,performance-basedincentiveprogramsandassociatedcarryingchargestotaled$4.1million.ConsistentwiththemechanicsoftheLRPP,'itisanticipatedthattheentirenceofthedeferralwillbeusedtoreducetheRMCbalanceuponapprovalbythePSCofthepany'sreconciliationfilingwhichwassubmittedtothePSCinMarch1998.FortherateyearendedNovember30,1996,theCompanyrecordedanetdeferredLRPPcreditofapproximately$14.5million73 whichwassubsequentlyappliedasareductiontotheRMCuponthePSClsapproval.oftheCompany's~reconciliationfilinginDecember1996.FortherateyearendedNovember301995,theCompanyrecordedanetdeferredcreditofapproximately$41million.Thefirst$15millionofthedeferralwasappliedasareductiontotheRMCwhiletheremainingportionofthedeferralof$26millionwillbereturnedtocustomersthroughtheFCAwhenapprovedbythePSC.'IAnothermechanismoftheLRPP,providesthatearningsinexcessoftheallowedreturnoncommonequity,excludingtheimpactsofthevariousincentiveand/orpenaltyprograms,areusedtoreducetheRMC.FortherateyearsendedNovember30,1997,1996and1995,theCompanyearned$4.8million,$9.1million,and$6.2million,respectively,inexcessofitsallowedreturnoncommonequity.TheseexcessearningswereappliedasreductionstotheRMC.hlIntheeventthattheLIPATransactionisnotconsummated,"theCompanyiscurrentlyunabletopredicttheoutcomeoftheelectricrateproceedingcurrentlybefore.thePSCanditseffect,ifany,ontheCompany'sfinancialposition,cashflowsorresultsofoperations.0.GasInMay1997,theCompanysubmittedapetitionrequestingPSCapprovaltoextendthroughtherateyearendingNovember30,1997,thegasexcessearningssharingmechanismestablishedinitspriorthree-yeargasratesettlementagreementwhichexpiredonNovember30,1996.Pursuanttothisrequest,earningsinexcessofareturnoncommonequityof11.0/0aretobeallocatedequallybetweencustomersandshareownerswiththecustomers'hareofexcessearningscreditedtotheregulatoryassetcreatedasaresultofcostsassociatedwithmanufacturedgasplant(MGP)siteinvestigationandremediationcosts.ThisrequestwasapprovedbythePSCinDecember1997.Asaresultofthismechanism,thecustomer'allocationofexcessearningsamountedto$6.3millionfortherateyearendedNovember30,1997,andwillbeappliedtooffsetcostsincurredtoinvestigateandremediateMGPsites.Thepriorgasratesettlementprovidedthatearningsinexcessofa10.6/0returnoncommonequitybesharedequallybetweentheCompany'sfirmgascustomersanditsshareowners.FortherateyearsendedNovember30,1996and1995,thefirmgascustomers'ortionofgasexcessearningstotaledapproximately$10millionand$1million,respectively.In1997,theCompanywasgrantedpermissionbythePSCtoapplythecustomers'ortionofthegasexcessearningsandassociatedcarryingchargesforthe1996and1995rateyearstotherecoveryofdeferredcostsassociatedwithpost-retirementbenefitsotherthanpensionsandcostsincurredforinvestigationandremediationofMGPsites.4Note5.NineMilePointNuclearPowerStation,Unit2TheCompanyhasanundivided18/0interestinNMP2,locatednearOswego,NewYorkwhichisoperatedbyNiagaraMohawkPowerCorporation(NMPC).TheownersofNMP2andtheirrespectivepercentageownershipareasfollows:theCompany(18/0),NMPC(41/0),NewYorkStateElectric&GasCorporation(18/0),'ochesterGasandElectricCorporation(14/0)andCentralHudsonGas&ElectricCorporation(9/0).TheCompany'sshareoftheratedcapabilityisapproximately205MW.TheCompany'snetutilityplantinvestment,excludingnuclearfuel,wasapproximately$689millionatMarch31,1998,$710millionatMarch31,1997and$715millionatDecember31,1996.Theaccumulatedprovisionfordepreciation,excludingdecommissioningcosts,wasapproximately$196millionand$175millionatMarch31,1998and1997,respectively,and$169millionatDecember31,1996,GenerationfromNMP2andoperatingexpensesincurredbyNMP2aresharedinthesameproportionsasthecotenants'espectiveownershipinterests.TheCompanyisrequiredtoprovideitsrespectiveshareoffinancingforanycapitaladditionstoNMP2.NuclearfuelcostsassociatedwithNMP2arebeingamortizedonthebasisofthequantityofheatproducedforthegenerationofelectricity.74 NMPChascontractedwiththeUnitedStatesDepartmentofEnergyforthedisposalofspentnuclearfuel.TheCompanyreimbursesNMPCforits18'/oshare,ofthecostunderthecontractatarateof$1.00permegawatthourofnetgenerationlessafactortoaccountfortransmissionlinelosses.Fortheyearendedarch31,1998andforthethreemonthsendedMarch31,1997,thistotaled$1.4millionand$0.4illion,respectively.FortheyearsendedDecember31,1996and1995,thistotaled$1.4millionand$1.2million,respectively.AsdiscussedinNote2,theLIPATransactioncontemplatesthatLIPAwillacquiretheCompany's18/0interestinNMP2.NuclearPlantDecommissioningNMPCexpectstocommencethedecommissioningofNMP2in2026,shortlyafterthecessationofplantoperations,usingamethodwhichprovidesfortheremovalofallequipmentandstructuresandthereleaseofthepropertyforunrestricteduse:TheCompany'sshareofdecommissioningcosts,basedupona"Site-Specific"1995study(1995study),isestimatedtobe$309millionin2026dollars($155millionin1998dollars).TheCompany'sshareoftheestimateddecommissioningcostsiscurrentlybeingprovidedforinelectricratesandisbeingchargedtooperationsasdepreciationexpenseovertheservicelifeofNMP2.TheamountofdecommissioningcostsrecordedasdepreciationexpensefortheyearendedMarch31,'998andthethreemonthsendedMarch31,1997,totaled$2.2millionand$0.5million,respectively,,and$3.9millionand$2.3millionfortheyearsendedDecember31,1996and1,995,respectively.TheaccumulateddecommissioningcostscollectedinratesthroughMarch31,1998and1997andDecember31,'1996amountedto$17.7million,$15.5millionand$14.9million,respectively.TheCompanyhasestablishedtrustfundsforthedecommissioningofthecontaminatedportionoftheNMP2plant.Itiscurrentlyestimatedthatthecosttodecommissionthecontaminatedportionoftheplantwillbeapproximately76/oofthetotaldecommissioningcosts.These.fundscomplywithregulations'ssuedbytheNRCandtheFERCgoverningthefundingofnuclearplantdecommissioningcosts.Thempany'spolicyistomakequarterlycontributionstothefundsbasedupontheamountofecommissioningcostsreflectedinrates.AsofMarch31,1998,thebalanceinthesefunds,includingreinvestednetearnings,wasapproximately$17.9million.useamountsareincludedontheCompany'sBalanceSheetinNonutilityPropertyandOtherInvestments.ThetrustfundsinvestmentconsistsofU.S.Treasurydebtsecuritiesandcashequivalents.Thecarryingamountsoftheseinstrumentsapproximatefairmarketvalue.'IITheFASBissuedanexposuredraftin1996,entitled"AccountingforCertainLiabilitiesRelatedtoClosureorRemovalofLong-LivedAssets."Undertheprovisionsoftheexposuredraft,theCompanywouldberequiredtochangeitscurrentaccountingpracticesfordecommissioningcostsasfollows;(i)theCompany'sshareofthetotalestimateddecommissioningcostswouldbeaccountedforasaliability,basedondiscountedfuturecashflows;(ii)therecognitionoftheliabilityfordecommissioningcostswouldresultinacorrespondingincreasetothecostofthenuclearplantratherthanasdepreciationexpense;and(iii)investmentearningsontheassetsdedicatedtotheexternaldecommissioningtrustfundwouldbbrecordedasinvestmentincomeratherthanasanincreasetoaccumulateddepreciation.Discussionsoftheissuesexpressedintheexposuredraftareongoing.IftheCompanywasrequiredtorecordthepresentvalueofitsshareofNMP2decommissioningcostsonitsBalanceSheetasofMarch31,1998,theCompanywouldhavetorecognizealiabilityandcorrespondingincreasetonuclearplantofapproximately$62million.UponconsummationoftheLIPATransactiori,'LIPAwillacquiretheCompany'sinterestinNMP2aswellasthetrustsreferredtoabove."'clearPlantInsurancePCprocurespublicliabilityandprop'ertyinsuranceforNMP2,andtheCompanyreimbursesNMPCforits18/0shareofthosecosts.75 ThePrice-AndersonAmendmentsActmandatesthatnuclearpowerplantssecurefinancialprotectionin'heeventofanuclearaccident.Thisprotectionmustconsistoftwolevels.Theprimarylevelprovidesliabilityinsurancecoverageof$200million(themaximumamountavailable)intheeventofanuclearaccident.Ifclaimsexceedthatamount,asecondlevelofprotectionisprovidedthrougharetrospectiveassessmentofalllicensedoperatingreactors.Currently,this"secondaryfinancialprotection"subjectseachofthe110presentlylicensednuclearreactorsintheUnit'edStatestoaretrospectiveassessmentofupto$76millionforeachnuclearincident,payableataratenottoexceed$10millionperyear.The'ompany'sinterestinNMP2couldexposeittoamaximumpotentiallossof$13.6million,perincident,throughassessmentsof$1.8millionperyearintheeventofaseriousnuclearaccidentatNMP2oranotherlicensedU.S;commercialnuclearreactor.Theseassessmentsaresubjecttoperiodicinflationindexingandtoa5'/0surchargeiffundsproveinsufficienttopayclaims..II4NMPChasalsoprocured$500millionprimarynuclearpropertyinsurancewiththeNuclearInsurancePoolsandapproximately$2.3billionofadditionalprotection(includingdecontaminationcosts)inexcessoftheprim'arylayerthroughNuclearElectricInsuranceLimited(NEIL).EachmemberofNEIL,includingtheCompany,'salsosubjecttoretrospectivepremiumadjustmentsintheeventlossesexceedaccumulatedreserves.-ForitsshareofNMP2,theCompanycouldbeassesseduptoapproximately$1.6millionperloss.ThislevelofinsuranceisinexcessoftheNRCrequired$1.06billionofcoverage.TheCompanyhasobtainedinsurancecoveragefromNEILfortheextraexpenseincurredinpurchasingreplacementpowerduringprolongedaccidentaloutages.Underthisprogram,shouldlossesexceedtheaccumulatedreservesofNEIL,eachmember,includingtheCompany,wouldbeliableforifsshareofdeficiency.TheCompany'smaximumliabilityperincidentunderthereplacementpowercoverage,intheeventofadeficiency,isapproximately$0.7million.Note6.CapitalStockCommonStockCurrentlytheCompanyhas150,000,000sharesofauthorizedcommonstock,ofwhich121,727,040wereissuedand46,281shareswereheldinTreasuryatMarch31,1998.TheCompanyhas1,644,865sharesreservedforsalethroughitsEmployeeStockPurchasePlan,2,829,968sharescommittedtotheInvestorCommonStockPlanand86,099sharesreservedforconversionoftheSeriesIConvertiblePreferredStockatarateof$17.15pershare.Inaddition,inconnectionwiththeShareExchangeAgreement,asdiscussed'inNote3,thbCompanyhasgrantedKeySpantheoptiontopurchase,undercertaincircumstances,23,981,964sharesofcommonstockatapr'iceof$19.725pershare.Inconnectionwithsuchoption,theCompanyhasreceivedshareownerapprovaltoincreasetheauthorizedsharesofcommonstockto160,000,000.C'referredStockATheCompanyhas7,000,000authorizedshares,cumulativepreferredstock,parvalue$100pershareand.,3P,000,000authorizedshares,cumulativepreferredstock,parvalue$25pershare.Dividendsonpreferredstockarepaidinpreferencetodividendsoncommonstockoranyotherstockrankingjuniortopreferredstock.PreferredStockSubjecttoMandatoryRedemptionTheaggregatefairvalueofredeemablepreferredstockwithmandatoryredemptionsatMarch31,1998and1997andDecember31,1996amountedtoapproximately$675,$643and$637million,respectively,comparedtotheircarryingamountsof$639,$640and$640million,respectively.Forafurtherdiscussiononthebasisofthefairvalueofthesecuritiesdiscussedabove,seeNote1.76 EachyeartlieCompanyisrequired'toredeemcertainseriesofpreferredstockthroughtheoperationofsinkingfundprovisions'asfollows:"NumberofSharesRedemplionAmountshSeriesRedemlionProvisionBeginningEnding6.875%SeriesUU...10/15/99,,10/15/19~112,000,,$2,800,0001ltIl'heaggregateparvalu'eofpreferredstockrequiredtoberedeemedthroughsinkingfundsduringthefiscalyearendedMarch31,is$2.8million'ineachoftheyears2000,2001,2002and2003.TheCompanyalso,hasthenon-cumulativeoptiontodoublethenumberofsharestobe,redeemedpursuanttothesinkingfundprovisionsinanyyearfor,thepreferred;stockseriesUU.TheCompanyisalsorequiredtoredeemallsharesofcertainseries'ofpreferredstockwhicharenotsubjecttosinkingfundrequirements.Themandatoryredemptionrequirementsfortheseseriesareasfollows:Series".RedemptionDale'Numb'erofSitaresRedemptionAmounts,$1.67Ser'ies'GG.''3/1/997.95%SeriesAA...-,6/1/00'7.05%SeriesQQ5/1/017.66%SeriesCC8/1/02880,00014,520,0003,464,000570,000$22,000,000'63,000,00086,600,00057,000,000PreferredStockSubjecttoOptionalRedemption'''heCompany,hastheoptiontoredeemcertainseriesofitspreferred,stock.Fortheseriessubjecttooptionalredemptionat,March31,,1998,,thecallpriceswereas'olio'ws:',"~hgh'htlSeriesCalpPrice-'edemptionAmounts.00/0SenesB$101.00,$10,100,0004.25%SeriesD102.00'7,140,0004.35%SeriesE102.00''~'20,400,0004.35%SeriesFE102.00~'5,100,0005'/,%SeriesH102.00.,20,400,0005'/,%Series1-Convertible100.001,474,3007.40%SeriesL,,'102.07~,15,361,535$1'.95'Serie'sNN''6.95'1880300JtlaOn'April17,1998,the'Companyexeiciseditsoptiontoredeemitscallablepreferredstockand'calledforredemptiononMay19,1998alloftheoutstandingsharesofthepreferredstockseriesnotedabove'oratotalof$122millionincludingapproximately$5millionofcallpremiums.h'tPreferenceStock.AtMarch31,1998,noneoftheauthorized7,500,000sharesofnonparticipatingpreferencestock,parvalue$1pershare,whichranksjuniortopreferredstock,wereoutstanding.>>Note7.Long-TermDebtG&RMortgageTheGeneralandRefundingl'G&R)BondsaretheCompany'sonlyoutstandingsecuredindebtedness.,The.G&RMortgageisalienon'substantiallyalloftheCompany'sproperties.TheannualG&RMortgage,sinkingfundrequirementfor1997,duenotlaterthanJune30,1998,isatedat$25million.Itisanticipatedthatthisrequirementwi11besatisfiedwithretiredG&RBonds,erty'additions,'r'ahnycombination'hereof.77 Uponconsummation,.oftheLIPATransaction,alloftheCompany'sseriesofG&RBondswillbe,'ssumedbyLIPA.LIPAhasindicatedthatitintendstoredeemallsuchG&RBondsassoonaspracticableaftertheclosingoftheLIPATransaction.1989RevolvingCreditAgreementTheCompanyhasavailablethroughOctober1,1998,$250millionunderits1989RevolvingCreditAgreement(1989RCA).ThislineofcreditissecuredbyafirstlienupontheCompany'.saccountsreceivableandfueloilinventories.InFebruary1997,theCompanyutilized$30millionininterimfinancingunderthe1989RCA,whichwasrepaidinMarch1997,and$40millioninJuly'1997,whichwasrepaidinAugust1997.AtMarch31,1998,noamountswereoutstandingunderthe1989RCA.,TheCompanyhasfiled,withthelendinginstitutions,thedocumentationnecessarytoterminatethe1989RCAeffectiveupontheclosingofthe,LIPAandKeySpanTransactions.AuthorityFinancingNotesAuthorityFinancingNotesareissuedbytheCompanytotheNewYorkStateEnergyResearchandDevelopmentAuthority(NYSERDA)tosecurecertaintax-exeinptIndustrialDevelopmentRevenueBonds,PollutionControlRevenueBonds(PCRBs)andElectricFacilitiesRevenueBonds(EFRBs)issuedbyNYSERDA.Certainofthesebondsaresubjecttoperiodictender,atwhichtimetheirinterestratesmaybesubjecttoredetermination.TenderrequirementsofAuthorityFinancingNotesatMarch31,1998wereasfollows:(Inthousandsofdollars)InterestRateSeriesPrincipalTenderedPCRBsEFRBs8'/%3.58%3.70%3.70%3.70%3.70%3.55%19821985A,B1993A1993B1994A1995A1997A$17,200150,00050,00050,00050,00050,00024,880Tenderedeverythreeyears,nexttenderOctober2000TenderedannuallyonMarch1TenderedweeklyTenderedweeklyTenderedweeklyTenderedweeklyTenderedweeklyIThe1997,1995,1994and1993EFRBsandthe1985PCRBsaresupportedbylettersofcreditpursuanttowhichtheletterofcreditbankshaveagreedtopaytheprincipal,interestandpremium,ifapplicable,intheaggregate,uptoapproximately$408millionintheeventofdefault.TheobligationoftheCompany,toreimbursethe,letterofcreditbanksisunsecured.Theexpirationdatesfortheselettersofcreditareasfollows:PCRBsEFRBsSeries1985A,B1993A,B1994A1995A1997AExiralionDale3/16/9911/17/9910/26/008/24/9812/30/98Priortoexpiration,theCompanyisrequiredtoobtaineitheranextensionofthelettersofcreditorasubstitutecreditfacility.Ifneithercanbeobtained,theauthorityfinancingnotessupportedbylettersofcreditmustberedeemed.InaccordancewiththeLIPAAgreement,LIPAwillassumesubstantiallyallofthetax-exemptauthoritrfinancingnotes.HoldCowillissueapromissorynotetoLIPAforaportionofthetax-exemptdebtborrowedtosupportLILCO'scurrentgasoperations,withtermsidenticaltothosecurrentlyoutstanding.TheCompanycurrentlyestimatestheamountofthispromissorynotetobeapproximately$250million.78 FairValu'esofLong-TermDebt8ThecarryingamountsandfairvaluesoftheCompany'slong-termdebtatMarch31,1998and1997andDecember31,1996wereasfollows:airlGeneralandRefundingBondsDebentures'uthorityFinancingNotesTotalMarch31,1998$1,288,4702,407,178987,646$4,683,294March31,1997$1,314,2732,256,573959,092$4,529,938,.(Inthousandsofdollars)December31,1996$1,571,7452,271,095950,758$4,793,598CarryingAmountGen'eralandRefundingBondsDebenturesAuthorityFinancingNotesTotal'arch31,1998$1,286,0002,270,000940,555$4,496,555March31,1997=-$1,286,000,2,270,000916,675$4,472,675(Inthousandsofdollars)December31,1996$1,536,0002,270,000916,675$4,722,675Forafurtherdiscussiononthebasisofthefairvalueofthesecuritieslistedabove,seeNote1.DebtMaturityScheduleThetotallong-termdebtmaturingineachofthenextfiveyearsendingMarch31isasfollows:1999,$10.1million;2000,$490million;2001,$1million;2002,$146million;and2003,$154million.,NoteS.RetirementBenefitPlansPensionPlansTheCompanymaintainsadefinedbenefitpensionplanwhichcoverssubstantiallyallemployees(Primaryn),asupplementalplanwhichcoversofficersandcertainkeyexecutives(SupplementalPlan)andatirementplanwhichcoverstheBoardofDirectors(Directors'lan).TheCompanyalsomaintains$401(k)plansforitsunionandnon-unionemployeestowhichitdoesnotcontribute.~PrimaryPlan,TheCompany'sfundingpolicyistocontributeannuallytothePrimaryPlanaminimumamountconsistentwiththerequirementsofthe.EmployeeRetirementIncomeSecurityActof1974,plussuchadditionalamounts,ifany,astheCompanymaydeterminetobeappropriatefromtimetotime.PensionbenefitsarebaseduponyearsofparticipationinthePrimaryPlanandcompensation.ThePrimaryPlan'sfundedstatusandamountsrecognized,ontheBalanceSheetatMarch31,1998andMarch31,1997andDecember31,1996wereasfollows:(Inthousandsofdollars)March31,1998March31,1997December31,1996ActuarialpresentvalueofbenefitobligationVestedbenefitsNonvestedbenefits$661,07559,268$642,39257,960$547,00255,157AccumulatedBenefitObligationPlanassetsatfairvalueActuarialpresentvalueofprojectedbenefitobligationProjectedbenefito'bligationless(greater)thanlanassetsrecognizednetobligationrecognizednet(gam)Net(Accrued)PrepaidPensionCost$700,352$602,159$720,343$919,100$744,400$746,400689,661825,159'07,70393,941(63,303)56,73962,652<<.69;399,"71,085(163034)'1,605)(123,759)$(6,441)$4,491$4,0679 TheincreaseinthepresentvalueoftheaccruedbenefitatMarch31,1997comparedtoDecember31,1996,isdueprimarilytothechangeinthediscountratefrom7.25%to7.00%andtheuseofupdatedactuarialassumptions,relatingtomortality.PeriodicpensioncostforthePrimaryPlanandthesignificantassumptionsconsistedofthefollowing:(Inthousandsofdollars)YearEndedThreeMonthsEndedYearEndedYearEndedMarch31,1998March31,1997December31,1996December31,1995Servicecost-benefitsearnedduringtheperiodInterestcostonprojectedbenefitsobligationandservicecostActualreturn'on'planassetsNetamortizationanddeferral$21,11'456,379(200,025)151,438$4,64512,494(3,694)(9,446)$17,38447,927(81,165)33,541$15,38545,987(102,099)57,665NetPeriodicPensionCost$28,906$3,999$17,687$16,938March31,1998.March31,1997December31,1996December31,1995DiscountrateforobligationDiscountrateforexpenseRateoffuturecompensationincreasesLong-termrateofreturnonassets7.00%7.00%4.50%85P%7.00%7.25%5PP%7.50%725%7.25%5.00%7.50%7.25%7.25%500%750%ThePrimaryPlanassetsatfairvalueincludecash,cashequivalents,groupannuitycontracts,bondsandequitysecurities.In1993,thePSCissuedanOrderwhichaddressedtheaccountingandratemakingtreatmentofpensioncostsinaccordancewithSFASNo.87,"Employers'ccountingforPensions."UndertheOrder,theCompany.isrequiredtorecognizeanydeferrednetgainsorlossesoveraten-yearperiodratherthanusingthecorridorapproachmethod.TheCompanybelievesthatthismethodofaccountingforfinancialreportingpurposesresultsinabettermatchingofrevenuesandtheCompany'spensioncost.TheCompanydefersdifferencesbetweenpensionrateallowanceandpensionexpenseundertheOrder.Inaddition,thePSCrequirestheCompanytomeasureandpayacarryingchargeonamountsinexcessofthepensionrateallowanceandtheannualpensioncontributionscontributedintothepensionfund.I'naddition,effectiveDecember1,1997,inaccordancewiththeStipulation,theCompanydefersthedifferencebetweenthesumofgaspensionandgaspostretirementbenefitcostsotherthanpensionandtheamountsprovidedforinrates,totheextentthatsuchdifferencesareinexcessoforbelowthreepercentoftheCompany'spretaxnetincomefromitsgasoperations.Suchexcesswillbetransferredtoagasbalancingaccount.ForafurtherdiscussionoftheStipulation,seeNote3.SupplementalPlanTheSupplementalPlanprovidessupplementaldeathandretirementbenefitsforofficersandotherkeyexecutiveswithoutcontributionfromsuchemployees.TheSupplementalPlanisanon-qualifiedplanundertheInternalRevenueCode.Theprovisionforplanbenefitstotaledapproximately$0.7millionforthethreemonthsendedMarch31,1997and$2.7millionand$2.3millionfortheyearsendedDecember31,1996and1995,respectively.FortheyearendedMarch31,1998,theCompanyrecordedachargeofapproximately$31millionrelatingtocertainben'efitsearnedbyitsofficersrelatingtotheterminationoftheirannuitybenefitsearnedthroughthesupplementalretirementplanandotherexecutiveretirementbenefits.Thesecharges,thecostofwhicharebornebytheCompany'sshareowners,resultfromprovisionsoftheofficers'mploymentcontracts,includingtheChairman'semploymentcontract,andthependingtransactionswithLIPAandKeySpanwhichaffectthetimingofwhenthesecostsarerecordei'0 Directors'PlanTheDirectors'PlanprovidesbenefitstodirectorswhoarenotofficersoftheCompany.Directorswhohaveservedinthatcapacityformorethanfiveyearsqualifyasparticipantsundertheplan.TheDirectors'anisanon-qualifiedplanundertheInternalRevenueCode.Theprovisionforretirementbenefits,hichareunfunded,totaledapproximately$132,000fortheyearendedMarch31,1998,$34,000forthethreemonthsendedMarch31,1997and$127,000and$114,000fortheyearsendedDecember31,1996and1995,respectively.PostretirementBenefitsOtherThanPensionsInadditiontoprovidingpensionbenefits,theCompanyprovidescertainmedicalandlifeinsurancebenefitstoretiredemployees.SubstantiallyalloftheCompany,'semployeesmaybecomeeligibleforthesebenefitsiftheyreachretirementageafterworkingfortheCompanyforaminimumoffiveyears.TheseandsimilarbenefitsforactiveemployeesareprovidedbytheCompanyorbyinsurancecompanieswhosepremiumsarebasedonthebenefitspaidduringtheyear.EffectiveJanuary1,1993,theCompanyadoptedtheprovisionsofSFASNo.106,"Employers'ccountingforPostretirementBenefitsOtherThanPensions,"whichrequirestheCompanytorecognizetheexpectedcostofprovidingpostretirementbenefitswhenemployeeservicesarerenderedratherthanwhenpaid.Asaresult,theCompany,in1993,recordedan'accumulated,postretirementbenefitobligationandacorrespondingregulatoryassetofapproximately$376million.ThePSCrequirestheCompanytodeferasare'gulatoryassetthedifferencebetweenpostretirementbenefitexpenserecordedforaccountingpurposesinaccordancewithSFASNo.106andthepostretirementbenefitexpensereflectedinrates.TheongoingannualpostretirementbenefitexpensewasphasedintoandfullyreflectedinratesbeginningDecember1,1996withtheaccumulatedregulatoryassettoberecoveredinratesovera15-yearperiod,beginningDecember1,1997.Inaddition,theCompanyisquiredtorecognizeanydeferrednetgainsorlossesoveraten-yearperiod.Inaddition,effectiveDecember1,1997,inaccordancewiththeStipulation,theCompanydefersthedifferencebetweenthesumofgaspensionandgaspostretirementbenefitcostsotherthanpensionandtheamountsprovidedforinrates,totheextentthatsuchdifferencesareinexcessoforbelowthreepercentoftheCompany'spretaxnetincomefromitsgasoperations.Suchexcesswillbetransferredtoagasbalancingaccount.ForafurtherdiscussionoftheStipulation,seeNote3.VIn1994,theCompanyestablishedVoluntaryEmployee'sBeneficiaryAssociationtrustsfor'unionandnon-unionemployeesforthefundingofincrementalcostscollectedinratesforpostretirementbenefits.TheCompanyfundedthetrustswithapproximately$21millionfortheyearendedMarch31,1998,$5millionforthethreemonthsendedMarch'31,1997and$18millionand$50millionfortheyearsendedDecember31,1996and1995,respectively.InMay1998,theCompanyfundedanadditional$250millionintothetrusts,representingobligationsrelatedtotheelectricbusinessunitemployees.TheCompanysecuredabridgeloantofundthesetrusts.81 f)December31,1996$156,18156,950152,627$365,75874,692March31,1997March31,1998$169,65562,491183,526$157,38060,711140,850RetireesFullyeligibleplanparticipantsOtheractiveplanparticipants$358,941108,165$415,67280,533AccumulatedpostretirementbenefitobligationPlanassetsAccumulatedpostretirementbenefitobligationotherthanpensionsatMarch31,1998,March31;1997~andDecember31,1996wasasfollows:v(InthousandsodollarsAccumulatedpostretirementbenefitobligationinexcessofplanassetsUnrecognizedprior,servicecostsUnrecognizednetgainAccruedPostretirementBenefitCost250,776(175)102,346$352,947335,139(185)'8,563$363,517291,066(188)75,309$366,187TheincreaseinthepresentvalueoftheaccruedbenefitatMarch31,1997comparedtoDecember31,1996isduetothechangeinthediscountratefrom7.25%to7.00%andtheuseofupdatedactuarialassumptionsrelatingtomortality.ThechangeintheaccumulatedpostretirementbenefitobligationfromMarch31,1997toMarch31;1998reflectsadecreaseinthehealthcarecosttrendratebasedontheCompany'sreviewofthemedicalplancostexperienceandalsorevisedassumptionswithrespecttofuturecompensationincreases,mortalityandthepercentageofemployeeswhoareassumedtobemarriedatthetimeofretirement.AtMarch31,1998,March31,1997andDecember31,1996thePlanassets,'whicharerecoidedatfairvalue,includecashandcash"equivalents,fixedincomeinvestmentsandapproximately$100,000oflistedequitysecuritiesoftheCompany.Periodicpostretirementbenefitcostotherthanpensionsandthe'significantassumptionsconsistedofthefollowing:f(Inthousandsofdollars)YearEndedThreeMonthsEndedYearEndedYearEndedMarch31,1998March31,1997December31,1996December31,1995Servicecost-benefits=earnedduringtheperiodInterestcostonprojectedbenefitsobligationandservicecostActualreturnonplanassetsNetamortizationanddeferral$12,20427,328(6,632)(10,000)$2,8216,642(591)(3,446)$10,69025,030(3,046)(12,175)$9,08222,412(1,034)(14,699)NetPeriodicPensionCost$22,900$5,426$20,499$15,761March31,1998March31,1997December31,1996December31,1995DiscountrateforobligationDiscountrateforexpenseRateoffuturecompensationincreasesLong-termrateofreturnonassets7.00%7.00%450%850%7.00%7.25PP%7.50%725%7.25%5PP%750%7.25%7.25%5P07.50%Theactuarialassumptionsusedforpostretirementbenefitplansare:(InIhousandsofdollars)March31,1998March31,1997December3l,1996HealthcarecosttrendEffectofonepercentincreaseinhealthcarecosttrendrate:OncostcomponentsOnaccumulatedbenefitobligation(a)Peryearindefinitely(b)Graduallydecliningto6.0%in2001andthereafter.500%(a)$7$428.00%(b)$1$598.00%(b)$5$4382 Note9.FederalIncomeTaxThesignificantcomponentsoftheCompany'sdeferredtaxassetsandliabilitiescalculatedundertheprovisionsofSFASNo.109,"AccountingforIncomeTaxes,"wereasfollows:(Inthousandsofdollars)DeferredTaxAssetsNetoperatinglosscarryforwardsReservesnotcurrentlydeductibleTaxdepreciablebasisinexcessofbookNondiscretionaryexcesscreditsCreditcarryforwardsOtherTotalDeferredTaxAssetsDeferredTaxLiabilities1989SettlementAccelerateddepreciationCallpremiumsRatecasedefer'raisOtherTotalDeferredTaxLiabilitiesNetDeferredTaxLiability3/31/9839,66710,55924,85840,318261,729$377,131$2,169,909650,56238,69856456,7622,916,495'2,539,3643/31/97$93,34956,74933,84827,037128,469225,885$565,337$2,165,462642,65643,6172,57938,117'2,892,431$2,327,09412/31/96$145,20558,98134,314'7,700135,902186,907$589,009$2,163,239642,70244,8462,12733,4962,886,410$2,297,401SFASNo.109requiresutilitiestoestablishregulatoryassetsandliabilitiesfortheportionofitsdeferredtaxassetsandliabilitiesthathavenotyetbeenrecognizedforratemaking,purposes.Themajorcomponentsoftheseregulatoryassetsandliabilitiesareasfollows:(Intltousandsofdollars)RegulatoryAssets1989Settlementlantitemsther,TotalRegulatoryAssets3/31/98$1,652,412100,661(15141)$1,737,9323/31/97$1,659,065120,460(12,361)$1,767,16412/31/96$1,660>871125,976(14,069)$1,772,778RegulatoryLiabilitiesCarryforwardcreditsOther$38,72040,193$64,548$68,42135,82934,466TotalRegulatoryLiabilities'78,913$100,377$102,887fThefederalincometaxamountsincludedintheStatementofIncomedifferfromtheamountswhichresultfromapplyingthestatutoryfederalincometaxratetoincomebeforeincometax.The'tablebelowsetsforththereasonsforsuchdifferences..INI(Inthousandsofdollars)YearEndedThreeMonthsEnded"YearEndedYearEndedMarch31,1998March31,1997December31,1996December31,1995IncomebeforefederalincometaxStatutoryfederalincometaxrateStatutoryfederalincometaxAdditions(reductions)tnjegeralincometaxExcessofbookovertaxdepreciation1989SettlementInterestcapitalizedTaxcreditsTaxratechangeamortizationhAIIowanccforfundsusedduringconstructionOtheritems$594,89335%$208,21317,9124,2122,962(2,464)2223(2,953)2,549$,I43,91035%$50,3694,3561,053588(940)815(583)555$525,72135%$184,00218,3394,2122,270(4,383)3,686(2,305)3,436$508,82435%$I78,08818,5884,2132,218(1,025)3,752(2,392)2,096otalFederalIncomeTaxExpensectlveFederalIncomeTaxRate$232,654$56,2I3$209,257~$205,538404%398%39,1%39.1%83 TheCompanycurrentlyhastaxcreditcarryforwardsofapproximately$40million.-Thisbalanceiscomposedofinvestmenttaxcredit(ITC)carryforwards,netofthe35/oreductionrequiredbytheTaxReformActof1986,totalingapproximately$31millionandresearchanddevelopmentcreditstotalingapproximately$9million.In1990and1992,theCompanyreceivedRevenueAgents'eportsdisallowingcertaindeductionsandcreditsclaimedbytheCompanyonitsfederalincometaxreturnsfortheyears1981through1989.AsettlementresolvingallauditissueswasreachedbetweentheCompanyandtheInternalRevenueServiceinMay1998.Thesettlementprovidedforthepaymentoftaxesandinterestofapproximately$9millionand$35million,respectively,whichtheCompanymadeinMay1998.TheCompanyhadpreviouslyprovidedreservesadequatetocoversuchtaxesandinterest.Note10.The1989SettlementInFebruary1989,theCompanyandtheStateofNewYorkenteredintothe1989SettlementresolvingcertainissuesrelatingtotheCompanyandproviding,amongothermatters,forthefinancialrecoveryoftheCompanyandforthetransferofShorehamtoLIPA,anagencyoftheStateofNewYork,foritssubsequentdecommissioning.InFebruary1992,theCompanytransferredownershipofShorehamtoLIPA.InMay1995,theNRCterminatedLIPA'spossession-onlylicenseforShorehamwhichsignifiedtheNRC'sapprovalthatdecommissioningwascompleteandthatthesiteissuitableforunrestricteduse.Upontheeffectivenessofthe1989Settlement,inJune1989,theCompanyrecordedtheFRAonitsBalanceSheetandtheretirementofitsinvestmentofapproximately$4.2billion,principallyinShoreham.'orafurtherdiscussionoftheFRA,seeNote1.Pursuanttothe1989Settlement,theCompanywasrequiredtoreimburseLIPAforallofitscostsassociatedwiththedecommissioningofShoreham.ThePSChasdeterminedthatallcostsassociatedwiShorehamwhichareprudentlyincurredbytheCompanysubsequenttotheeffectivenessofthe1989Settlementaredecommissioningcosts.TheRMAprovidesfortherecoveryofsuchcoststhroughelectricratesoverthebalanceofaforty-yearperiodending2029.AtMarch31,1998,Shorehampost-settlementcoststotaledapproximately$1.2billion,consistingof$587millionofpropertytaxesandpayments-in-lieu-of-taxes,and$568millionofdecommissioningcosts,fueldisposalcostsandallothercostsincurredatShorehamafterJune30,1989.Note11.TheClassSettlementTheClassSettlement,whichbecameeffectiveinJune1989,resolvedacivillawsuitagainsttheCompanybroughtunderthefederalRacketeerInfluencedandCorruptOrganizationsAct.Thelawsuit,whichtheClassSettlementresolved,hadallegedthattheCompanymadeinadequatedisclosuresbeforethePSCconcerningtheconstructionandcompletionofnucleargeneratmgfacilities.eTheClassSettlementprovidestheCompany'selectriccustomers'withratereductionsaggregating$390millionthatarebeingreflectedasadjustmentstotheirmonthlyelectricbillsoveraten-yearperiod'whichbeganonJune1,1990.Uponitseffectiveness,theCompanyrecordeditsliabilityfo'rtheClassSettlementonapresentvaluebasisat$170million.TheClassSettlementobligationatMarch31,1998reflectsthepresentvalueoftheremainingreductionstoberefundedtocustomers.Theremainingreductionstocustomersbills,amountingtoapproximately$130millionasofMarch31,1998,consistsofapproximately$10millionforthetwo-monthperiodbeginningApril1,1998,and$60millionforeachofthe12-monthperiodsbeginningJune1,1998and1999.84 Npte12.CommitmentsandContingenciesElectric,.TheCompanyhasenteredintocontractswithnumerousIndependentPowerProducers(IPPs)andtheNewYorkPowerAuthority(NYPA)forelectricgeneratingcapacity.Underthetermsoftheagreementwith.,YPA,whichissettoexpireinMay2014,theCompanymaypurchaseupto100%oftheelectricenergy.producedattheNYPAfacilitylocatedwithintheCompany'sserviceterritoryatHoltsville,NY.TheCompanyisrequiredtoreimbursePYPAfortheminimumdebtservicepayments,andtomake,fixednon-energypaymentsandexpensesassociatedwithoperatingandmaintainingtheplant.WithrespecttocontractsenteredintowiththeIPPs,the,Companyjsob]igatedtopurchasealltheenergytheymakeavailable,totheCompanyatpricesthatoftenexceedcurrentmarketprices.However,theCompanyhasnoobligationtotheIPPsiftheyfailtodeliverenergy,For,purposesofthetablebelow,theCompanyhasassumedfullperformancebytheIPPs,asnoeventhasoccurredtosuggestanythinglessthanfullperformancebytheseparties.*~,TheCompanyalsohascontractedwithNYPAforfirmtransmission(wheeling)capacityinconnectionwithatransmissioncablewhich'wasconstructed,inpart,for'heb'enefitoftheCompany.Inaccordancewith'theprovisionsofthisagreement,whichexpir'e's'in2020,'heCompanyisrequiredtoreimburseNYPAfordebtservicepaymentsandthecost'ofoperatingand'maintainingthecables.Thecostofsuchcontractsisincludedinelectricfuelexpenseand,isrecoverablethroughrates.IThefollowingtablerepresentstheCompany'scommitmentsunderpurchasedpowercontracts.4,ElectricOperations(Inmillionsofdollars)NYPAHoltsvillel9'therFixed~FirmForthefiscalyearsendedDebtSerin'ceC/barges.-.Energy~...TransmissionIPPsiTotalB900020012002'003SubsequentYearsTotal$196.4200.8207.2214.2'13.52$14.7$6.7$25.7$127.6,21.713.7,6.7,26.0,,,132.721.814.67.227.8135.821.9"16.3',."8.727.8''139.522.0"16.7,",',9.0'27.9137.9,,232.4,217.1.,119.8,474,0..957.5',,000.8$341.5$293.1$158.1$609.2,~$1,631.0$3,032.9Less:lmpu'te'dInterest'"$166.8$154.1$85.3"$381.9"'805.2'$1,593.3PresentValueofPayments$174.7$139.0'72.8"$227.3'$825.8"~~$1,439.6'AssumesfullperformancebytheIPPsandJIYPA.-GasHInordertoprovideforsufficientsuppliesofg'as'for'theCompany'sgascust'omers,'theCompanyhasenteredintolong-termfirmgastransportation,storageandsupplycontractswhichco'ntainprovision'sthatrequiretheCompanytomakefixedpayments(demandcharges)eveniftheservicesarenotfullyutilized.Thecostofsuchcontractsis,included.ingasfuel,expenseandisrecoverablethroughrates.The.tablebelowsetsforththeCompany'saggregateobligationunderthesecommitmentswhichextendthrough,2014.Gas0erationsInmillionsofdollarsForthefiscalyearsended1999$111.732000110.372001'i,101.33,,2002,,:97.812003''1.69SubseuentYears'71.20Total~$884.'13Less:ImutedInterest.258.45PresentValueofPaments$625.6885 CompetitiveEnvironmentTheelectricindustrycontinuestoundergofundamentalchangesasregulators,electedofficialsandcustomersseeklowerenergyprices.Thesechanges,whichmayhaveasignificantimpactonfuturefinancialperformanceofelectricutilities,arebeingdrivenbyanumberoffactorsincludingaregulatoryenvironmentinwhichtraditionalcost-basedregulationisseenasabarriertolowerenergyprices.In199and1998,boththePSCandtheFERCcontinuedtheirseparate,butmsomecasesparallel,initiativeswithrespecttodevelopingaframeworkforacompetitiveelectricmarketplace.TheElectricIndustry-StateRegulatoryIssuesIn1994,thePSCbegantheseco'ndphaseofitsCompetitiveOpportunitiesProceedingstoinvestigateissuesrelatedtothefutureoftheregulatoryproces'sinanindustrywhichismovingtowardcompetition.ThePSC'soverallobjectivewastoidentifyregulatoryandratemakingpracticesthatwouldassistNewYorkStateutilitiesinthetransitiontoamorecompetitiveenvironmentdesignedtoincreaseefficiencyinprovidingelectricitywhilemaintainingsafe,affordableandreliableservice.AsaresultoftheCompetitiveOpportunitiesProceedings,inMay1996,thePSCissuedanorder(Order)whichstateditsbeliefthatintroducingcompetitiontotheelectricindustryinNewYorkhasthepotentialtoreduceelectricratesovertime,increasecustomerchoiceandencourageeconomicgrowth.TheOrdercalledforacompetitivewholesalepowermarkettobeinplacebyearly1997tobefollowedbytheintroductionofretailaccessforallcustomersbyearly1998.ThePSCstatedthatcompetitionshouldbetransitionedonanindividualcompanybasis,duetodifferencesinindividualserviceterritories,thelevelandtypeofstrandableinvestments(i.e.,coststhatutilitieswouldhaveotherwiserecoveredthroughratesundertraditionalcostofserviceregulationthat,undermarketcompetition,wouldnotberecoverable)andutilityspecificfinancialconditions.TheOrdercontemplatesthatimplementationofcompetitionwillproceedontwotracks.TheOrderrequiresthateachmajorelectricutility(excepttheCompanyandNiagaraMohawkPowerCorporation)filearate/restructuringplanwhichisconsistentwiththePSC'spolicyandvisionforincreasedcompetition.ThoseplansweresubmittedbyOctober1,1996,incompliancewiththeOrder.However,theCompanywasexemptedfrom:thisrequirementduetothePSC'sseparateinvestigationoftheCompany'sratesandLIPA'sexaminationoftheCompany'sstructure.ThePSChasnowapprovedsettlementagreementswitheachofthefiveNewYorkutilitiesthatwererequiredIofilerestructuringplansintheCompetitiveOpportunitiesProceeding.LILCOandNiagaraMohawkwereexempthowever,onFebruary18,1998thePSCalsoapprovedasettlementagreementontheNiagaraMohawkPowerChoicerestructuringproposalthathadbeenfiledinOctober1995.Ingeneral,theterm'softheagreementsvaryfromthreeto'fiveyearswithallagreementscallingforsomeratereductions,structuralseparationofthegenerationandpowerdeliveryfunction,divestitureoffossilgeneration,fullretailaccessintwotofouryears,andtheimpositionofasystembenefitschargetocoverthecostsofresearchanddevelopment(R&D),conservation,low-incomeandenvironmentalprograms.Ineachcase,thePSCisgivingtheutilityareasonableopportunitytorecoverallprudently-incurredstrandedcosts.ThePSCOrderalsoanticipatedthatcertainotherfilingswouldbemadeonOctober1,1996,byallNewYorkStateutilities,toboththePSCandtheFERC.ThefilingsweretoaddressthedelineationoftransmissionanddistributionfacilitiesjurisdictionbetweentheFERCorthePSC,apricingofeachcompany'stransmissionservices,andajointfilingbyalltheutilitiestoaddresstheformationofanIndependentSystemOperator(ISO)andthecreationofamarketexchangethatwillestablishspotmark86 prices.Althoughtherewereextensivecollaborativemeetingsamongtheparties,itwasnotpossiblefortheadditionalfilingstobecompletedbyOctober1,1996.OriDecember31,1996,theNewYorkPowerPoolmemberssubmittedacompliancefilingtotheFERCwhichprovidesopenmembershipandomparableservicestoeligibleentitiesinaccordancewithFERCOrder888,discussedbelow.TheNeworkStateutilitiessubmittedthefullISO/PowerExchangefilingtotheFERGinJanuary1997,whichproposestoestablishacompetitivewholesalemarketplaceinNewYorkStateforelectricenergyandtransmissionpricingatmarket-basedrates.SubsequenttotheFERCfilinginJanuary1997,theNewYorkStateutilitiesmadethreerelatingfilingswiththeFERC:(i)asupplementalfiling,providingadditionaldetailsregardingthecreationofaNewYorkStateReliabilityCouncil,inMay1997;(ii)arequestformarket-basedrateauthority,bysixoftheNewYorkutilities,inAugust1997;and(iii)asupplementalfilingwiththeFERConDecember19,1997whichexpandsuponandprovidesadditionaldetailswithrespecttotheJanuary1997filing.ThePSChastakenthepositionthatafullyoperationalwholesalecompetitivestructurewillfosterthe'xpeditiousmovementtofullretailcompetition.ThePSC'svisionoftheretailcompetitivestructure,knownastheFlexibleRetailPoolcoModel,consistsof:(i)thecreationofanISOtocoordinatethesafeandreliableoperationofelectricgenerationandtransmission;(ii)openaccesstothetransmissionsystem,whichwouldberegulatedbytheFERC;(iii)thecontinuationofaregulateddistributioncompanytooperateandmaintainthedistributionsystem;(iv)thederegulationofenergy/customerservicessuchasmeterreadingandcustomerbilling;(v)theabilityofcustomerstochooseamongsuppliersofelectricity;and(vi)theallowanceofcustomerstoacquireelectricityeitherbylong-termcontracts,purchasesonthespotmarket,or,acombinationofthetwo.OneissuediscussedintheOrderthatcouldaffecttheCompanyisstrandableinvestments.ThePSCstatedinitsOrderthatitisnotrequiredtoallowrecoveryofallprudently-incurredinvestments,that,ithasnsiderablediscretiontosetratesthatbalanceratepayerandshareholderinterests,andthattheamountofandableinvestmentsthatautilitywillbepermittedtorecoverwilldependontheparticularcircumstancesofeachutility.Additionally,theOrderprovidedthateveryeffortshouldbemadebyutilitiestomitigatethesecostspriortoseekingrecovery.hCertainaspectsoftherestructuringenvisionedbythePSC-particularlythePSC'sapparentdeterminationsthatitmaydenytheutilitiesrecoveryofprudentinvestmentsmadeonbehalfofthepublic,orderretailwheeling,requiredivestitureofgenerationassets,andderegulatecertainsectorsoftheenergymarket-could,ifimplemented,haveanegativeimpactontheoperationsandfinancialconditionsofNew,York'sinvestor-ownedelectricutilities,including.theCompany.TheCompanyispartytoalawsuitcommencedinSeptember1996bytheEnergyAssociationofNewYorkStateandthestate'sotherinvestor-ownedelectricutilities(collectively,Petitioners)againstthePSCinNewYorkSupremeCourt,AlbanyCountyTheEnerAssociationofNewYorkStateetal.v.PublicServiceCommissionoftheStateofNewYorketal..ThePetitionershaverequestedthattheCourtdeclarethattheOrderisunlawfulor,inthealternative,thattheCourtclarifythatthePSC'sstatementsintheOrderconstitutesimplyapolicystatementwithnobindinglegaleffect.InNovember1996,the,CourtissuedaDecisionandOrderdenyingthePetitioners'equesttoinvalidatetheOrder.AlthoughtheCourtstatedthatmostoftheOrderisanon-bindingstatementofpolicy,theCourtrejectedthePetitioners'ubstantivechallengestotheOrder.InDecember1996,thePetitionersfiledanoticeofappealwiththeThirdDepartmentoftheAppellateDivisionoftheNewYorkStateSupremeCourt;ThelitigationisoingandtheCompanyisunableatthistimetopredictthelikelihoodofsuccessortheimpactoftheationontheCompany'sfinancialposition,cashflowsorresultsofoperations.AttherequestoftheI87 EnergyAssociationandPublicUtilityLawProjectofNewYork(PULP),theCourthasextendeddhetiradeinwhichtheEnergyAssociationandPULPmustperfecttheirappealsuntilJuly6,1998.TheElectricIndustry-FederalRegulatoryIssuesInApril1996,inresponsetoitsNoticeofProposedRulemakingissuedinMarch1995,theFERCissuedOrders8S8and889relatingtothedevelopmentofcompetitivewholesaleelectricmarkets.Order888isafinalruleonopentransmissionaccessandstrandedcostrecoveryandprovidesthatthe'ERChasexclusivejurisdictionoverinterstatewholesalewheelingandthatutilitytransmissionsystemsmustnowbeopentoqualifyingsellersandpurchasersofpoweronanon-discriminatorybasis.Order888allowsutilitiestorecoverlegitimate,prudentandverifiablestrandedcostsassociatedwithwholesaletransmission,includingthecircumstanceswherefullrequirementscustomersbecomewholesaletransmissioncustomers,suchaswhereamunicipalityestablishesitsownelectricsystem.Withrespecttoretailwheeling,theFERCconcludedthatithasjurisdictionoverrates,termsandconditionsofservice,butwouldleavetheissueofrecoveryofthecostsstrandedbyretailwheelingtothestates.Order888requiredutilitiestofileopenaccesstariffsunder'whichtheywouldprovidetransmissionservices,comparablet'othosewhichthey'rovidetothemselvesandtothirdpartiesonanon-discriminatorybasis.Additionally,utilitiesmustusethesesametariffsfortheirownwholesalesales.Order8SS-A,issuedinMarch1997,generallyreaffirmedtheFERC'sbasicdeterminationinOrder888.OnepertinentchangemadeinS88-A,however,wasthattheFERC,asopposedtothestates,willbetheprimaryforumfordeterminingstrandedcostsincasesinvolvingmunicipalannexation.OrderSSS-B,issuedNovember1997,reaffirmed888-A'sfindings.TheCompanyfileditsopenaccesstariffinJuly1996.InSeptember1996,theFERCorderedRateHearingson28utilitytransmissiontariffs,includingtheCompany's.Onthebasisofapreliminaryreview,theFERCwasnotsatisfiedthatthetariffrateswerejustandreasonable.SettlementdiscussionshavebeenheldbetweentheCompanyandvariousintervenorsconcerningtheCompany'stransmissionrates.InDecember1996,thepartiesreachedatentativesettlementontherateissues.OnMay14,1997,theFERCapprovedthesettlementagreementthattheCompanyfiled(withfiveotherentities)concerningtheratesfortheCompany'sopenaccesselectrictariff.TheeffectivedateforthoserateswasJuly9,1996.TheCompanyandfourotherNewYork'utilitiesareseekingreviewofcertainnon-rateaspectsoftheFERC'sopenaccesstransmissiontariffordersintheU.S.CourtofAppealsfortheD.C.Circuit.Order889,'hich'isafinalruleonatransmissionpricingbulletinboard,addressestherulesandtechnicalstandardsforoperationofanelectronicbulletinboardthatwillmakeavailable,onareal-timebasis,theprice,availabilityandotherpertinentinformationconcerningeachtransmissionutility'sservices.Italso"addressesstandardsofconducttoensurethattransmissionutilitiesfunctionallyseparatetheirtransmissionandwholesalepowermerchantfunctionstopreventdiscriminatoryself-dealing.InDecember1996,theCompanyfileditsstandardsofconductinaccordancewiththeOrder.Order889-Aand889-B,issuedinMarchandNovember1997,respectively,generallyreaffirmedandclarifiedtheoriginalOrder889.Order889-Aimplementednewdiscountingpoliciesandrequiredthatnegotiationsbetweenatransmissionproviderandapotentialcustomertakeplaceonthetransmissionpricingbulletinboardandbevisibletoall.88 Itisnotpossibletopredicttheultimateoutcomeoftheseproceedings,thetimingthereof,orthe'amount,jfany,ofstrandedcoststhatthe.Companywouldrecoverinacomp'etitiveenvironment.TheoutcomeofthestateandfederalregulatoryproceedingscouldadverselyaffecttheCompany'sabilitytoapplySFASNo.1,"AccountingfortheEffectsofCertainTypesofRegulation,"which,pursuanttoSFASNo.101,ccountingforDiscontinuationofApplicationofSFASNo.71,"couldthenrequireasignificantwrite-downofalloraportionoftheCompany'snetregulatoryassets.TheCompany'sServiceTerritoryTheCompany'sgeographiclocationandthelimitedelectricalinterconnectionstoLongIslandservetolimitthe.accessibilityofitstransmissiongridtopotentialcompetitorsfromoffthesystem.However,thechangingutilityregulatoryenvironmenthasaffectedtheCompanybyrequiringtheCompanytoco-existwithstate'andfederallymandatedcompetitors,non-utilitygenerators(NUGs).ThePublicUtilityRegulatoryPoliciesActof1978(PURPA),thegoalsofwhicharetoreducetheUnitedStates'ependencyonforeignoil,toencourageenergyconservationandtopromotediversificationofthe=fuelsupply,hasnegativelyimpactedthe'CompanythroughtheencouragementoftheNUGindustry.ThePURPAprovidesforthedevelopmentofanewclassofelectricgeneratorswhichrelyoneithercogenerationtechnologyoralternatefuels.UtilitiesareobligatedunderthePURPAtopurchasetheoutputofcertainofthesegenerators,whichareknownasqualifiedfacilities(QFs).FortheyearsendedMarch31,1998and1997,theCompany.lostsalestoNUGstotaling447and422gigawatthours(GWh)representingalossinelectricrevenuesnetoffuel(netrevenues)ofapproximately$36millionand$34million,respectivelyor2.0/oand1.9/0oftheCompany'snetrevenue's,respectively.FortheyearendedDecember31,1996,theCompanylostsalestoNUGstotaling422GWh~epresentingasinelectricnetrevenuesofapproximately$34million,or1.9/0oftheCompany'snetrevenues.ForyearendedDecember31,1995,theCompanylostsalestoNUGstotaling366GWhorapproximately28millionor1.5'/0oftheCompany'snetrevenues.'lTheincreaseinlostnetrevenues'esultedprincipallyfromthecompletionofsevenfacilitiesthatbecamecommerciallyoperationalduring1996andthefullyearoperationoftheIPPlocatedattheStateUniversityofNewYorkatStonyBrook,NY.TheCompanyestimatesthatin1999saleslossestoNUGswillbe447GWh,orapproximately1.8/0ofprojectednetrevenues,''TheCompanybelievesthatloadlossesduetoNUGshavestabilized.ThisbeliefisbasedonthefactthattheCompany'scustomerloadcharacteristics,whichlackasignificantindustrialbaseandrelatedlargethermalload,willmitigateloadlossandtherebymakecogenerationeconomically,unattractive.Additionally,asmentionedabove,theCompanyisrequiredtopurchaseallthepowerofferedbyQFs,whichfortheyearsendedMarch31,19)8and1997,approximated220megawatts(MW)and226MW,respectively.TheCompanyestimatesthatpurchasesfromQFsrequiredbyfederalandstatelawcosttheCompany$71millionand$64millionin1998and1997,respectively,morethanitwouldhavecosthadtheCompanypurchasedthepowerintheopenmarketorgeneratedit.FortheyearsendedDecember31,1996and1995,QFsofferedapproximately218MWand205MW,respectively.TheCompanyestimatesthatpurchasesfromQFsrequiredbyfederalandstatelawcosttheCompany$63millionand$5$millionfortheyearsendedDecember31,1996and1995,respectively,thanitwouldhavecosthadtheCompanypurchasedthepowerin,theopenmarket"orgeneratedit.89 QFshavethechoiceofpricingsalestotheCompanyateitherthePSC'spublishedestimatesofthe'-Company'slong-rangeavoidedcosts(LRAC)ortheCompany'stariffrates,whicharemodifiedfromtimetotime,reflectingtheCompany'sactualavoidedcosts.Additionally,untilrepealedin1992,NewYorkStatelawsetaminimumpriceofsixcentsperkilowatt-hour,(kWh)forutilitypurchasesofpowerfromcertaincategoriesofQFs,considerablyabovetheCompany'savoidedcost.ThesixcentminimumcontinuestoapplytocontractsenteredintobeforeJune1992.TheCompanybelievesthattherepealof'hesixcentminimum,coupledwithrecentPSCupdateswhichresultedinlowerLRACestimates,hassignificantlyreducedtheeconomicbenefitsofconstructingnewQFswithinitsserviceterritory.TheCompanyhasalsoexperiencedarevenuelossasaresultofitspolicyofvoluntarilyprovidingwheelingofNewYorkPowerAuthority(NYPA)powerforeconomicdevelopment.TheCompanyestimatesthatfortheyearsendedMarch31,1998and1997,NYPApowerdisplacedapproximately373GWhand424GWhofannualenergysales,respectively.Netrevenuelossassociatedwiththesevolumesofsalesisapproximately$23million,or1.2~/ooftheCompany's1998netrevenues,and$27million,or1.5/ooftheCompany's1997netrevenues.Currently,thepotentiallossofadditionalloadislimitedbyconditionsinthe'Company'stransmissionagreementswithNYPA.TheCompanyestimatesthatfortheyearsendedDecember31,1996and1995,NYPApowerdisplacedapproximately417GWhand429GWhofannualenergysales,respectively,Netrevenuelossassociatedwiththesevolumesofsalesisapproximately$26million,or1.4~/ooftheCompany's1996netrevenues,and$30million,or1.6o/ooftheCompany's1995netrevenues.Anumberofcustomergroupsareseeking;tohastenconsiderationandimplementationoffullretailcompetition.Forexample,anenergyconsultanthaspetitionedthePSC,seekingalternatesourcesofpowerforLongIslandschooldistricts.TheCountyofNassauhasalsopetitionedthePSCtoauthorizeretailwheelingforallclassesofelectriccustomersinthecounty.,Inaddition,severaltownsandvillagesonLongIslandareinvestigatingmunicipalization,inwhichcustomersformagovernment-sponsoredelectricsupplycompany.ThisisoneformofcompetitionthatislikelytoincreaseasaresultoftheNationalEnergy,PolicyActof1992(NEPA).NEPAsoughttoincreaseeconomicefficiencyinthecreationanddistributionofpowerbyrelaxingrestrictionsontheentryofnewcompetitorstothewholesaleelectric.powermarket.NEPAdoessobycreatingexemptwholesalegeneratorsthatcansellpowerinwholesalemarketswithouttheregulatoryconstraintplacedonutilitygeneratorssuchasontheCompany.NEPAalsoexpandedtheFERC'sauthoritytograntaccesstoutilitytransmissionsystemstoallpartieswhoseekwholesalewheelingforwholesalecompetition.WhileitshouldbenotedthattheFERC'spositionfavoringstrandedcostrecoveryfromretailturnedwholesalecustomerswillreduceutilityriskfrommunicipalization,significa'ntissuesassociatedwiththeremovalofrestrictionsonwholesaletransmissionsystemaccesshaveyettoberesolved.TherearenumeroustownsandvillagesintheCompany'sserviceterritorythatareconsideringtheformationofamunicipally-ownedandoperatedelectricauthoritytoreplacetheservicescurrentlyprovidedbytheCompany.tr,sIn1995,SuffolkCountyissuedarequestforproposalfromsuppliersforupto300MWofpowerwhichtheCountywouldthenselltoitsresidentialandcommercialcustomer'.TheCountyhasawardedthebidtotwooff-LongIslandsuppliers:andhasrequestedtheCompanytodeliverthepower.AftertheCompanychallengedSuffolkCounty'seligibility-forsuchservice,theCountypetitionedtheFERCtoordertheCompanytoprovidetherequestedtransmissionservice.~90 InDhcemB'er1996,the'FERCorderedtheCompanytoprovidetransmissionservicesto'SuffolkCountytotheextentnecessarytoaccommodateproposed.salestocustomerstowhichitwasprovidingserviceonthedateofenactmentofNEPA(thisOrdercouldprovideSuffolkCountywiththeabilitytoimportupto200Wofpoweronadailybasis).TheFERCreserveddecisionontheremaining.100MWofSuffolkounty'srequestuntiltheCountyidentifiestheownershiporcontrolofdistributionfacilitiesthatitallegesqualifiesitforawheelingordertoSuffolkCountycustomerswhowerenotreceivingserviceonthedateofNEPA'senactment.TheCompanymayasktheFERCtoreconsideritsdecisiononcethatdecisionbecomesfinal;whichisnotexpectedfoxseveralmonths.TheCompanyandSuffolkCountysubmittedbriefsinJuly1997addressingthepricingforthe200MWofpower.TheFERChasyettodeterminethepricingof.thatservice.Aspreviouslynoted;FERC'Order888allows'utilitiestorecoverlegitimate,pruderitandverifiablestrandedcostsassociated"withwholesaletransmission,'ncludingthecircumstanceswherefullrequirementscustomers'.becomewholesaletransmissioncustomers,such'aswhereamunicipalityestablishesitsownelec'tricsystem'.'ttttIt')Themattersdiscussedaboveinvolvesubstantialsocial;economic,legal,environmental'andfinancialissues.TheCompany;is,opposedtoanyproposal.thatmerelyshiAscostsfromonegroupofcustomerstoanother,thatfailstoenhancetheprovisionofleast-cost,efficiently-generatedelectricityorthatfailstoprovidetheCompany'sshareownerswithanadequatereturnonandrecoveryoftheirinvestment.TheCompanyisunabletopredictwhataction,ifany,thePSCortheFERCmaytakeregardinganyofthesematters,ortheimpactontheCompany'sfinancialposition,c'ashflowsor'esultsofoperationsifsomeorallofthesemattersareapprovedorimplementedbytheappropriateregul'atoryauthority'.Notwithstandingtheoutcomeofthestateorfederalregulatoryproceedings,oranyotherstateaction,theCompanybelievesthat,amongotherobligations,theStatehasacontractualobligationtoallowtheCompanytorecover'itsShoreham-relatedass'ets.Flh)gttAkvironmentalMattersTheCompanyissubjecttofederal,stateandlocallawsandregulations&#x17d;dealingwith'airandwaterqualityandotherenvironmentalmatters.Environmentalmatte'rsmayexposetheCompanytopotentialliabilitieswhich,incertaininstances,maybeimposed'withoutregardtofaultorforhistoricalactivitieswhikhwere"lawfulatthe'timetheyoccurred.'heCompan'ycontinuallymonitorsitsactivitiesinordertodeterminetheimpactofitsactivitiesontheenvironmentandtoensurecompli'ancewithvarious'environmentallaws.Exceptassetforthbelow,nomater'ialproceedingshavebeencommencedor,totheknowledgeoftheCompany,arecontemplatedagainsttheCompanywithrespecttoa'ymatterrelating-totheprotectionoftheenvironment.4vTheNewYorkStateDepartmentofEnvironmentalConservation(DEC)hasrequiredtheCompanyandotherNewYorkStateutilities'toinvestigateand,where'necessary,'re'mediatetheirformermanufacturedgasplant(MGP)sites.-Currently,theCompanyisthe'ownerofsixpiecesofpropertyonwhichtheCompanyorcertainofitspredecessorcompaniesarebelievedtohaveproduce'dmanufacturedgas.Operationsatthesefacilities'inthelate1800'sandearly1900'smayhaveresultedinthe'disposalofcertainwasteproductsonthesesites.'"'''t\TheCompanyhasenteredintodiscussionswiththeDECwhichisexpectedtoleadtotheissuanceofoneormoreACOsregardingthemanagementofenvironmentalactivitiesatthesesixproperties.,AlthoughtheexactamountoftheCompany'scleanupcostscannot'yetbedetermined,based'onthefindingsof'inaryinvestigationsconductedateachofthesesixsites,currentestimatesindicatethatitmaycostximately$54to$92milliontoinvestigateandremediateallofthesesites.Inconsideringtherangeoossibleremediationestimates,theCompany'feltita'ppropriatetorecorda$54millionliabilitytt191 reflectingthe,presentvalue-ofthe,futurestreamofpaymentsamountingto$70milliontoinvestigateand.remediatethesesites."The,Companyused.arisk-free,rateof6.0/otodiscount.thisobligation.TheCompany.believesthat,thePSCw'illprovideforfuturerecoveryofthesecostsandhasrecordeda$54millionregulatory'ass'et.The.Company'sratesettleinentwhich'thePSCapproved'February4,:1998as'discussedin,Note3:o'fNotes'toFinancialStatements,allowsfortherecoveryofMGPexpendituresfrom~gascustomers.~rrh'rrInDecember,1996,theCompanyfiledacomplaintinthe,UnitedStatesDistrictCourtfortheSouthern,,DistrictofNewYorkagainst,14oftheCompany,'sinsuredswhichissuedgeneralcomprehensiveliability(GCL)policiestotheCompany."InJanuary1998;theCompanycommencedasimilaractionagainstthesameandcertainadditionalinsurerdefendantsinNewYorkStateSupremeCourt,First33epartment;the-federalcourtactionwassubsequentlydismissedinMarch1998..The,Companyisseekingrecovery.under.theGCLpoliciesforthecostsincurredtodateandfuturecostsassociatedwiththeclean-upoftheCompany'sformermanufacturedgasplant(MGP)sitesandSuperfundsitesforwhichtheCompanyhasbeennameda,PRP:TheCompanyisseekingadeclaratoryjudgmentthatthedefendantinsurersare"bound.bythe.termsofthe,GCLpolicies,subjecttothestatedcoveragelimits,toreimbursetheCompany'orthecleanupcosts.The'outcomeofthisproceedingcannotyetbedetermined.rrt'riTheCompanyhasbeennotifiedbytheUnitedStatesEnvironmentalProtectionAgency(EPA)thatit-isoneofmany+/Psthatmaybeliablefortheremediationofthreelicensedtreatment,storageanddisposalsitestowhichtheCompanymayhaveshippedwasteproductsand.which.havesubsequentlybecomeenvironmentallycontaminated.II,rAtonesite,locatl;dinPhiladelphia,Pennsylvania,andoperatedbyMetal.BankofAmerica,.theCompany.andnineotherPRPs,allofwhicharepublicutilities,completedperformanceofaRemedialIpvestigationandFeasibilityStudy(RI/FS),whichwasconductedunderanACOwiththeEPA.InDecember1997,EPAissueditsRecordofDecision(ROD),settingforththefinalremedialactionselected'orthissite.theROD,the;EPAe'gtimatedthat,thepresentcostoftheselectedremedyforthesiteis$17.3million..Atthistime;theCompanycannotpredict.with,reasonablecertainty,the.actual.costoftheselectedremedy,'howill,implementtheremedy,orthecost,ifany,totheCompany.,UnderaPRPparticipationagreement,the~Companypreviouslywasresponsiblefor8.2/oofthecostsassociatedwiththeRI/FS.~TheCompany,'s,allocableshareofliabilityfor.theremediationactivitieshasnot'yetbeen:determined;TheCompany,hasrecordedaliabilityofapproximately.$1millionrepresentingitsestimatedshareofthecosttoremediate,thissite;-baseduponits8.2'/0responsibilityundertheRI/FS;TheCompanyhasalsobeennamedaPRPfordisposalsitesinKansasCity,Kansas,andKansasCity,Missouri.ThetwositeswereusedbyacompanynamedPCB,Inc.from1982until1987forthestorage,'processing,and,treatmentofelectricequipment,dielectricoilsandmaterialscontainingPCBs.AccordingtotheEPA,'thebuildingsandcertainsoilareasoutsidethebuildingsarecontaminatedwithe'CBs.CertainofthePRPs,includingtheCompanyand,severalotherutilitiesformeda,PRPgroup,signedan.ACO,andhavedevelopedaworkplanforinvestigatingenvironmentalconditionsatthesites.DocumentationconnectingtheCompanytothesitesindicatesthattheCompanywasresponsibleforlessthan1/0ofthematerialsthatwereshippedtotheMissourisite.TheEPAhasnotyetcompleted.compilingthedocumentsfortheKansassite.''..itWIInadditiqn,ttieCompanywas;notifiedthatitjsa,PRP,ata$uperfundsite,locatedinFarmingdale,NewYork..Industrialoperations,tookplaceatthissiteforatleastfiftyyears.ThePRPgrouphasclaimedttheCompanyshouldabsorbremediationexpenses-intheamountofapproximately.$100,000associatwithremovingPCB-'contaminatedsoilsfromaportionofthesitewhichformerlycontainedelectrictransformers.TheCompanyiscurrentlyunabletodetermineitsshareofcostsofremediationatthissite.92 Dur'ing1996,theConnecticutDepartmentofEnvironmentalProtection(DEP)issuedamodificationtoanACOpreviously,issuedin'connectionwithaninvesti'gation.ofanelectric'transmissioncablelocatedundertheLongIslandSound(SoundCable)thatisjointlyownedbyth'eCompanyandtheConnecticutLight.dPowerCompany(Owners).The'modifiedACOrequirestheOwnersto'submittotheDEPandDECariesofreportsandstudiesdescribingcablesystemcondition,operationandrepairpractices,alternativesforcableimprovementsorreplacementandenvironmentalimpactsassociatedwithleaksoffluidintotheLongIslandSound,whichhaveoccurredfromtimetotime.TheCompanycontinuestocompilerequiredinformationandcoordinatethe.activitiesnecessarytoperformthesestudiesand,atthepresenttime,isunabletodeterminethecostsitwillincurtocompletetherequirementsofthemodifiedACOortocomplywithanyadditionalrequirements.'heOwnershavealsoenteredintoanACOwiththeDECasaresultofleaksofdielectricfluidfromtheSoundCable.TheACOformalizestheDEC'sauthoritytoparticipateinandseparately,approvethereportsandstudiesbeingpreparedpursuanttotheACOissuedbytheDEP.Inaddition,theACOsettlesanyDECclaimfornaturalresourcedamagesinconnectionwithhistoricalreleasesofdielectricfluidfromtheSoundCable.InOctober1995,theU.S.AttorneyfortheDistrictofConnecticuthadcommencedaninvestigationregardingoccasionalreleasesoffluidfromtheSound.Cable,aswell.asassociatedoperatingandmaintenancepractices.TheOwnershaveprovidedtheU.S.Attorneywithallrequesteddocumentation.TheCompanybelievesthatallactivitiesassociatedwiththeresponsetooccasionalreleasesfromtheSoundCablewereconsistentwithlegalandregulatoryrequirements.InDecember1996,abarge,ownedandoperated-byathirdparty,droppedanchorwhichthendraggedoverddamagedtheSoundCable,resultinginthereleaseofdielectricfluidintoLongIslandSoun'd.poraryclampsandleakabaterswereinstalledonthecablestostoptheleaks.PermanentrepairswerepletedinJune1997.The'costtorepairtheSoundCablewasapproximately$17.8million,forwhichtherewas$15millionofinsurancecoverage.TheOwnersfiledaclaimandanswerinresponsetothemaritimelimitationproceedinginstitutedbythebargeownerintheUnitedStatesDistrictCourt,Easte'rnDistrictofNewYork.Theclaimseeksrecoveryoftheamountspaidbyinsurancecarriersandrecoveryofthecostsincurredfor..whichtherewasnoinsurancecoverage.AnycoststorepairtheSoundCablewhicharenotreimbursedbyathirdpartyorcoveredbyinsurance'willbesharedequallybytheOwners.TheCompanybelievesthat.noneoftheenvironmentalmatters,discussedabove,willhaveamaterialadverseimpactontheCompany'sfinancialposition,cashflowsorresultsofoperations.Inaddition,theCompanybelievesthatallsignificantcostsincurredwithrespecttoenvironmentalinvestigationandremediationactivities,notrecoverablefrominsurancecarriers,willberecoverablethroughrates.93 Note13.BusinessSegmentsIdentifiableassetsbysegmentincludenetutilityplant,regulatoryassets,materialsandsupplies,accruedunbilledrevenues,gasinstorage;fuelanddeferredcharges.AssetsutilizedforoverallCompanyoperationsconsistprimarily'fcashandcashequivalents,accountsreceivable,commonnetutilityplant'ndunamortizedcostofissuingsecurities.YearEndedMarch31,1998ThreeMonthsEndedMarch31,1997(Inmillionsofdollars)YearEndedYearEndedDecember31,1996December31,1995OperatingrevenuesElectricGas'otalOperatingexpenses(excludesfederalincometax)ElectricGasTotalOperatingincome(beforefederalincometax)Electric'asTotaloperatingincomeAFCOtherincomeanddeductionsInterestchargesFederalincometaxNetIncomeDepreciationandAmortizationElectricGasTotal$2,478646$3,124''1,595523$2,118$883123$1,006$(8)10409233$362"$131"28$159$558293$851$400204$604$15889$247(2)(2)"10756$88$327$.39$2,467684$3,151$1,644560$2,204$823124$947$(6)(23)451209$316$12925$154$2,484591$3,075$1,657478$2,135$827113$940(7)(38)476206$303Constructionandnuclearfuelexpenditures*ElectricGasfl$181'35'''165$16280,~'67884Total$261$51$243$,246~Includesnon-cashallowanceforotherfundsusedduringconstructionandexcludesShorehampost-settlementcosts.March31,1998March31,1997December31,1996December31,1995IdentifiableAssetsElectric'asTotalIdentifiableAssetsAssetsUtilizedforOverallCompanyOperations$9,5531,21910,7721,129$10,0481,13411,182668$9,835I)23211,0671,143$10,0201,18111,2011,326TotalAssets$11,901$11,850$12,210$12,52794 Note'14.0'isaggregatedCondensedBalanceSheet(Unaudited),SetforthbelowistheCompany'scondensedbalancesheetatMarch3l,1998whichhasbeendisaggregatedpursuanttothetermsoftheLIPAAgreementtogiveeffecttotheproposedLIPAansactionasifithadoccurredonMarch31;1998.Theassets;-capitalizationandliabilitiesattributableHoldCoSubsidiaryrepresentthe,Company'stransferofitsgasandgenerationbusinesstosuchsubsidiary.Theassets,capitalizationandliabilitiesattributable'toLIPArepresentthoseitemsthatwillbeacquiredorassumedbyLIPAthroughitsacquisitionoftheCompany'scommonstock.Allsuchamountsexclude'theproceedsfromthesaleofcommonstocktoLIPA.Thedisaggregatedcondensedbalancesheetwaspreparedby'managemento'ftheCom'pany,andissubjecttoadjustment.ForafurtherdiscussionoftheLIPATransaction,seeNote2.'(Inmillionstofdollars)ASSETSLILCOHoldCoSubsidiaryLIPATotalNetUtilityPlantRegulatoryAssetsShorehamrelatedRegulatorytaxassetOtherTotalRegulatoryAssets$3,814.14,661.11,737.9'92.8=7,091.8$1,777.821.0430,1451.1$2,036.34,661.11,716.9262,76,640.7NonutilityPropertyandOtherInvestments.,TotalCurrentAssetsDeferredChargesTotalAssetsCAPITALIZATIONAND,LIABILITIES50.8858.3,85.7$11,900.732.9,'7.9494.2,,364.138.047.7$2,794.0$9,106.7Longtermdebt,includingcurrentmaturitiesPreferredstock,includingcurrentmaturitiestommonShareowner'sEquity1''latoryLiabilitiesCurrentLiabilitiesDeferredCredits,OperatingReserves'ommitmentsandContingencies$4,482.9702.02,662.5$7,847.4389.4587.4.,2,608.8,467.7.$1,130.5363.0161.7$1,655.224.2433.0211.2,470.4$3,352.4339.025008$6,192.2365.2154.42,397.6,-(2.7)TotalCapitalizationandLiabilities$11,900.7';'2,794.0$9,106.7kckkItktt'I~ktt'tfPk"ttktk95 Note15.QuarterlyFinancialInformation(Unaudited)Summarized'quarterlyfinancial'datafor1998,"1997and1996is.asfollows:(In'ihousandsofdollarsexceptearningspercommonshare)iscaear3MonthsEnded"'"''3/31/976/30/97'9/30/9712/31/97"3/31/98OperatingRevenues~$851,182OperatingIncome.'190,001'etIncome87,697Earningsforcommonstock,74,728,Basicanddilutedearningspercommonsfiare'62$664,488""'852,408',$779,622144,079,",,'42,611,171,96945)16)',1144)384-i56,75632,193131,435.,43,807.261.09.36$827,576209,637115,939,.102,992.853MonthsEnde'iI3/31/96CalendarYearEndedDecember31,19966/30/969/30/9612/31/96OperatingRevenuesOperatingIncomeNetIncomeEarnings'forcommonstockBasicanddilutedearningspercommonshare$864,214190,42181,75368,682.57$694,602141,06540,52427,453.23$849,775235,402130,023116,972.97$742;104169,693'4,16451,141.43ReportofErnst&,YoungLLP,IndependentAuditors,TotheShareownersandBoardofDirectorsofLongIslandLightingCompanyWehaveauditedtheaccompanyingbalancesheetofLongIslandLightingCompanyandtherelatedstatementofcapitalizationasofMarch31,1998and1997,andDecember31,1996andtherelatedstatementsofincome,retainedearningsandcashflowsfortheyearendedMarch31,1998,thetransitionperiodfromJanuary1,1997toMarch31,1997and'eachofthetwoyearsintheperiodendedDecember31,1996.OurauditsalsoincludedthefinancialstatementschedulelistedintheindexatItem14(a).ThesefinancialstatementsandschedulearetheresponsibilityoftheCompany'smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsandschedulebasedonouraudits.Weconductedourauditsinaccordancewithgenerallyacceptedauditingstandards.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.-In.our'pinion",thefinancialstatementsreferredto.abovepresentfairly,'inall'materialrespec'ts,'thefinancialpositionofLongIslandLightingCompanyatMarch31,1998and1997,andDecember31,1996,andtheresultsofitsoperationsanditscflowsfortheyearendedMarch31,1998,theqtransitionperiodfromJanuary1,1997toMarch31,1997andeachofthetwoyearsintheperiodendedDecember31,1996,inconformitywithgenerally'cceptedaccountingprinciples.Also,"inouropinion,therelatedfinancialstatementschedule,whenconsideredinrelationtothebasicfinancialstatementstakenasawhole,presentsfairlyinallmaterialrespectstheinformationsetforththerein.AsdiscussedinNote1tothefinancialstatements,duringtheyearendedMarch31,1998theCompanychangeditsmethodofaccountingforrevenuesprovidedforundertheRateModerationComponent.Melville,NewYorkMay22,199896 Item9.'ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosuresflVNotapplicable.httItJVg97 PARTIII~'ncludedintheSECfilingofMay28,1998.Item10.DirectorsandExecutiveOfficersoftheCompanyllItem11.ExecutiveCompensationItem12.SecurityOwnershipofCertainBeneficialOwnersandManagement1Item13.CertainRelationshipsandRelatedTransactionsPARTIVItem1'4.Exhibits,FinancialStatementSchedules,andReportsonForm8-K(a)(1)ListofFinancialStatementsStatementofIncomefortheyearendedMarch31,1998,thethreemonthsendedMarch31,1997andtheyearsendedDecember31,1996and1995.BalanceSheetatMarch31,1998and1997andDecember31,1996.StatementofRetainedEarningsatMarch31,1998'and1997andDecember31,1996and1995.StatementofCapitalizationatMarch31,1998and1997andDecember31,1996.StatementofCashFlowsfortheyearendedMarch31,1998,thethreemonthsendedMarch1997andtheyearsendedDecember31,1996and1995.NotestoFinancialStatements(2)ListofFinancialStatementSchedulesValuationandQualifyingAccounts(ScheduleII)(3)ListofExhibitsTobeprovidedbytheLegalDepartmentandincludedinthefilingcopy.98 SCHEDULEII-VALUATIONANDQUALIFYINGACCOUNTS(ThousandsofDollars)ColumnAColumnBColumnCColumnDColumnEAdditionsDescriptionBalanceatbeginningofperiodChargedtocostsandexpensesChargedtootheraccounts-describeDeductions-describeBalanceatendofperiodYearendedMarch31,1998Deductedfromassetaccounts:Allowancefordoubtfulaccounts$23,675$23,239$23,431to$23,483ThreeMonthsEndedMarch31,1997Deductedfromassetaccounts:Allowancefordoubtfulaccounts$25,000$4,821$6,146<0$23,675YearendedDecember31,1996Deductedfromassetaccounts:Allowancefordoubtfulaccounts$24,676$23,119$22,795re$25,000arendedDecember31,1995ductedfromassetaccounts:Allowancefordoubtfulaccounts$23,365$17,751$16,44000$24,676(I)Uncollectibleaccountswrittenognetofrecoveries.99  
.storageuntilatleast2010.Currently,allspentnuclearfuelfromNMP2isstoredattheNMPCsite,andexistingfacilitiesare,sufficienttohandleallspentnuclearfuelgeneratedatNMP2throughtheyear2012.tForinformationconcerningenvironmentallitigation,seeItem3"LegalProceedings"undertheheadingEnvironmental.ImpactofYear2000SomeoftheCompany'soldercomputerprogramswerewrittenusingtwodigitsratherthanfourtodefinetheapplicable,year.Asaresult,thosecomputerprogramshavetime-sensitivesoftwarethatrecognizesadateusing"00"astheyear1900ratherthantheyear2000.Thiscouldcauseasystemfailureormiscalculationscausingdisruptionsofoperations,including,amongotherthings,atemporaryinabilitytoprocesstransactions,orengageinnormalbusinessactivities.TheCompanyembarkedonaprogramin1996tocompleteYear2000compliancebyDecember31,1998.Acorporate-wideprogramhasbeenestablishedtoreviewallsoftware,h'ardwareand"associatedcomplianceplans.Thereadinessofsuppliersan'dvendorsystemsisalsounderreview.Contingencyandbusinesscontinuationplansarebeingprepared"andwillbereviewedper'iodically.TheCompanyexpectstospendapproximately$10milliontoaddressthe'ear2000issueoverathree-yearperiod(1997-1999)consistingof$7milliontotestandmodifyapplication'systemsand$3milliontotestandmodifynori-informationtechnologysystems,Allcostswillbeexpensedasincurred.AsofMarch31,1998,$4.53millionhasbeenexpendedininvestigatingandmodifyingsoftware.Thiseffortisscheduledtobecompletedin1998andtestingwillcontinueintoearly1999.TheCompanybelievesthat,withmodificationstoexistingsoftwareandconversionstonewsoftware,theYear2000Issuewillriotposesignificantoperationalproblemsforitscomputersystems.However,ifsuchmodificationsandconversionsarenotmade,orarenotcompleted'ontime,theYear2000IssuecouldhaveamaterialadverseimpactontheoperationsoftheCompany.ThecostsoftheprojectandthedateonwhichtheCompanybelievesitwillcompletetheYear2000modificationsarebasedonmanagement'sbestestimates,whichwerederivedutilizingnumerousassumptionsoffutureevents,includingthecontinuedavailabilityofcertainresourcesandotherfactors.However,actualresultscoulddiffermateriallyfromthoseanticipated.Specificfactorsthatmightcausesuchmaterialdifferencesinclude,butarenotlimitedto,theavailabilityandcostofpersonneltrainedinthisarea,theabilitytolocateandcorrectallrelevantcomputercodesandsimilaruncertainties.JRecentAccountingPronouncementsComprehensiveIncomeInJune1997,theFinancialAccountingStandardsBoard(FASB)issuedStatementofFinancial'ccountirigStandards(SFAS)No.130.SFASNo.130establishesstandardsforreportingcomprehensiveincome.Comprehensiveincomeisthechange'intheequityofacompany,notincludingthosechangesthatresultfromshareholdertran'sactions.'Allcomponentsofcomprehensiveincomearerequiredtobereportedinanewfinancialstatementthatisdisplayedwithequal"53 prominenceasexistingfinancialstatements.TheCompanywill'berequiredtoadoptSFASNo.130fortheyearendingMarch31,1999.TheCompanydoesnotexpectthattheadoptionofSFASNo.130willhaveasignificantimpactonitsreportinganddisclosurerequirements..~SegmentDisclosuresAlsoinJune1997,FASBissuedSFASNo.131.SFASNo.131establishesstandardsforadditionaldisclosureaboutoperatingsegmentsforinterimandannualfinancialstatements.Morespecifically,itrequiresfinancialinformationtobedisclosedforsegmentswhoseoperatingresultsarereviewedbythechiefdecisionmakerfordecisionsonresourceallocation.Italsorequiresrelateddisclosuresaboutproductsandservices,geographicareas'andmajorcustomers.TheCompanywillberequiredtoadoptSFASNo.131fortheyearendingMarch31,1999.TheCompanydoesnotexpectthattheadoptionofSFASNo.131willhaveasignificantimpactonitsreportinganddisclosurerequirements.ConservationServicesTheCompany's1997DemandSideManagement(DSM)Planfocusedonthe.pursuitofenergyefficiencyandpeakloadreductioninawaythathadminimalimpacton,electricrateincreases.Toassurethesuccessofthisstrategy,>heCompanyimplementedabalancedandcost-effectivemixofDSMprogramsthatcontinuedtorepresentalimitedrelianceonbroad-basedrebatesandaconcentratedemphasisonprogramsthatprovidededucationandinformation,targetedbusinessdevelopment,providedfinancingforenergyefficiency,inducedmarkettransformationandimprovedtheefficiencyofLILCOfacilities.TheCompanywassuccessfulinmeetingthePSCEnergyPenaltyThresholdbyobtainingenergysavingsofapproximately24.4GWhatacostlessthanthatprovidedforinelectricrates.In1998,theCompanyplanstocontinuetofollowtheaforementionedstrategywhileintroducingseveralnewinitiatives.Theseincludeaprogramtargetedatincreasingtheenergyefficiencyofresidencesoflowincomecustomers,theintroductionofapeakloadcurtailmentprogramconstructedtohelptheCompanymeetitspeaksupplysiderequirementsandanincreasedemphasisonprogramsthatinducemarkettransformation.Overall,the1998Plantargetsanannualizedenergysavingsof18.6GWhatabudgetof$10.7million.NCautionaryStatementRegardingForward-LookingStatementsThisreportcontainsstatementswhich,totheextenttheyarenotrecitationsofhistoricalfact,constitute"forward-lookingstatements"withinthemeaningoftheSecuritiesLitigationReformActof1995(ReformAct).Inthisrespect,thewords"estimate,""project,""anticipate,""expect,""intend,""believe"andsimilarexpressionsareintendedtoidentifyforward-lookingstatements.Allsuchforward-lookingstatementsareintendedtobesubjecttothesafeharborprotectionprovidedbytheReformAct.AnumberofimportantfactorsaffectingtheCompany'sbusinessandfinancialresultscouldcauseactualresultstodiffermateriallyfromthosestatedintheforward-lookingstatements.ThosefactorsincludetheproposedtransactionswithTheKeySpanEnergyCorporationandLIPAas,discussedundertheheading"KeySpanEnergyCorporationTransaction"and"LongIslandPowerAuthorityTransaction"stateandfederalregulatoryrateproceedings,competition,andcertainenvironmentalmatterseachasdiscussedherein,intheJointProxyStatement/ProspectusfiledJune30,1997,orinotherreportsfiledbytheCompanywiththeSecuritiesandExchangeCommission.54 FINANCIALSTATEMENTSBalanceSheet'etsattInthousandsofdollars)March31,1998March31,1997December31,1996tilityPlantElectricGasCommonConstructionworkinprogressNuclearfuelinrocessandinreactorLess-AccumulateddcreciationandamortizationTotalNetUtiliPlantRegulatoryAssetsBasefinancialcomponent(lessaccumulatedamortizationof$883,496,$782,525and$757,282)RatemoderationcomponentShoreham'post-settlementcostsShorehamnuclearfuelUnamortizedcostofissuingsecuritiesPostretirementbenefitsotherthanpensionsRegulatoiytaxassetOtherTotalRelatoAssetsnutilitProcrtand"OthcrInvcstmcntsrentAssetsshandcashequivalentsSpecialdepositsCustomeraccountsreceivable(lessallowancefordoubtfulaccountsof$23,483,$23,675and$25,000)OtheraccountsreceivableAccruedunbilledrevenuesrMaterialsandsuppliesataveragecostFueloilataveragecostGasinstorageataveragecostDefcrrcdtaxasset-netoperatinglossPreamentsandothercurrentassetsTotalCurrentAssetsDeferredCharesTofalAssetsSee)VotestoFinancialStatements.4,031,510$1,233,281290,221118,80818,1195,691,9391,877;8583,814,0813,155,334434,0041,005,31666,455159,941340,1091,737,932192,7637,091,85450,816180,91995,790297,88943,744124,46454,88332,14214,63413,807858,27285,70211,900,725$3,900,264$1,'171,183263,267108,850-'5,5035,459,0671,759,1103,699,9573,256,305409,512'96,27068,581187,309357,6681,767,164200,1377,242,9461887064,53937,631305,43642,946141,38955,45449,70310,89393,3498,805810,14577,65611,849,574$3,882,2971,154,543260,268112,18415,4545,424,7461,729,5763,695,1703,281,548402,213991,79569,113194,151360,8421,772,778199,8797,272,31918597279,99338,266'r255,80165,764'69,71255,78953,'94173,562145,2058,5691,146,60276,99112,209,67955 CaitaltzationandLiabilitiesatMarch31,1998Pnthousandsodollars)March31,1997December31,199CapitalizationLong-termdebtUnamortizeddiscountondebtPreferredstock-redemptionrequiredFPrcfencdstock-noredemtionuiredTotalPreferredStockCommonstockPremiumoncapitalstockCapitalstockexpenseRetainedearningsTrcasustock,atcostTotalCommonShareoivners'iTotalCaitalizationRegulatoryLiabilitiesRegulatoryliabilitycomponent1989SettlementcreditsRegulatorytaxliabilityOtherT1RItLiabilitiesCurrentLiabilitiesCurrentmaturitiesoflong-termdebtCurrentredemptionrequirementsofpreferredstockAccountspayableandaccruedexpensesLRPPpayableAccruedtaxes(includingfederalincometaxof$28,308,$49,262and$25,884)AccruedinterestDividendspayableifClassSettlementCustomerdesitsTotalCurrentLiabilitiesDeferredCreditsDeferredfederalincometax-netClassSettlementOtherTotalDeferredCreditsOperatingReservesPensionsandotherpostretirementbenefitsClaimsanddamacsTotal0ratinReservesCommitmentsandContinenciesTotalCaitalizationandLiabilitiesSeeNotestoFinancialStatements.4,395,555(13,606)4,381,949562,600562,600608,6351,146,425(47,501)956,092(1,204)2,662,4477,606,99699,19959,39778,913151,922389,431101,000139,374228,58330,11834,753146,60758,74860,00028,627827,8102,539,36446,94022,5292,608,833401,40166,254467,655$'1,900,725564,471,675$(14,628)4,457,047638,50063,598702,098605,0221,131,576(48,915)861,751(385)2,549,0497,708,194178,558125,138100,377158,660562,7331,0001,050230,18940,49951,157143,98358,47458,33329,173613,8582,420,44389,48720,8892,530,819387,04846,922433,97011,849,574$4,471,67514,903)4,456,772638,50063,664702,164603,9211,127,971(49,330)840,867(60)2,523,3697,682,305198,398127,442102,887139,510568,237251,001,050289,14140,49963,640160,61558,37855,83329,471949,6272,442,60698,49739,4472,580,550381,99646,964428,96012,209, Statementofincome(inthousandsofdollarscxtYearEndedMarch31,1998,TheeMonthsEndedMarch31,1997YearEndedDecember31,1996YearEndedDecember31,1995RevenuesElcctncGasTotalRcvcnues$2,478,435645,6593,124,094557,791$2,466,435$2,484,014293,391684,260591,114851,1823,150,6953,075,128OperatingExpensesOperations-fuelandpurchasedpowerOperations-otherMaintcnanccDepreciationandamortizationBaseIinancialcomponentamortizationRatemoderationcomponentamortizationRcgu!atotyliabilitycomponentamortization1989SettlemcntcreditsamortizationOtherregulatoryamortizationOperatingtaxesFcdcralincometax-currentFederalincometax-deferredandotherTotalratinExnscs0ratinIncomeOtherIncomeand(Deductions)RatemoderationcomponentcarryingchargesOtherincomeanddeductions,nctClassScttlcmentforotherfundsusedduringconstructionFmctax-currentFetncometax-deferredan'dotherTotalOtherIncomeandDeductionsIncomeBcforcInterestCharcsInterestChargesInterest'onlong-termdebtOtherintcrcstAllowanceforborrowedfundsuseddurinconstructionTotalInterestChaesNetIncomePreferredstockdividendruircmentsEarninforCommonStockAvcraeCommonSharesOutstandin000BasicandDilutedEarninerCommonShareDividendsDeclaredcrCommonSharcSee"&#xb9;lesroFinanctalSlarensenrs.957,807400,045,111,120158,537100,971(35,079)(79,359)(9,213)47,272466,32686,388150,9832,355,798768,29623,632(18,156)(15,623)3,8465944,1241,583766,713351,26157,8054,593404,473362,24051,813310,427121,4152.561.78301,86795,67329,34038,56125,2435,907(19,840)(2,303)12,218117,51323,37833,624661,181190,0015,919645(4,496)7177893,574193,57590,16816,659949105,87887,69712,96974,728$120,9950.62$0.45$963,251381,076118,135153,925100,971(24,232)(79,359)(9,214)127p288472,07642,197168,0002,414,114736,58125,25919,197(20,772)2,888"'94027,512764,0933&4,19867,1303,699447,629316,46452,216264248$120,3602.20$1.78$834,979383,238128,155145,357100,97121,933(79,359)(9,214)161,605447,50714,596193,7422,343,510731,61825,27434,400(21,669)2,8982,80043,703775,321412,51263,4613938472,035303,28652,620250,666119,1952.101.7857 StatementofCashFlowsOperatingActivitiesNetIncomeAdjustmcntstoreconcilenetincometonetcashprovidedbyoperating,activitiesProvisionfordoubtfulaccountsDepreciationandamortizationBasefinancialcomponentamortizationRatemoderationcomponentamorhzationRegulatoryliabilitycomponentamortization1989SettlementcreditsamortizationOtherregulatoryamortizationRatemoderationcomponentcarryingchargesClassSettlementAmortizationofcostofissuingandredeemingsecuritiesFederalincometax-deferredandotherPensionsandOtherPostRetirementBenefitsOtherChangesinoperatingassetsandliabilitiesAccountsreceivableMaterialsandsupplies,fueloilandgasinstorageAccountspayableandaccruedexpensesClassSettlementSpecialdepositsOtherN'db0tinActivitiesInvestingActivuiesConstructionandnuclearfuelexpendituresShorehampost-settlementcostsInvestmentininterestratehedgeOtlierNetCashUsedinInvestinActivitiesFinancingActivitiesProceedsfromissuanceofsecuritiesRedemptionofsecuritiesCommonstockdividendspaidPtefetredstockdividendspaidOtherNetCashUsedhiFinancinActivitiesNctIncrease(Decrease)InCashandCashEquivalentsCashandcashequivalentsatbeginningofperiodNethicrease(decrease)incashandcasheuivalentsCashandCashEquivalentsatendofperiodInterestpai,otereduchonorieallowanceforborrowedfundsusedduringconstructionFederalincometaxpaidSeePtotestoFinancialStatements.YearEndedMarch311998$362,24023,239158,537100,971(35,079)(79,359)(9,213)47,272(23,632)15,62330,823146,85948,51287,618(14,905)14,3911,668(56,503)(58,159)(86,819)674,084(257,402)(39,828)(30,000)(1.987)329,217)43,218(2,050)(215,790)(51,833)2,032)(228,487)$116,380$64,539116,380$180,919$364,864$108,980ThtceMonthsEndedMarch311997$87,6974,82138,56125,243',907(19,840)(2,303)12,218(5,919)4,4968,08732,83513,4962,381(31,638)67,242(58,952)(11,006)63514,394159,567(50,375)(12,104)160(62,3194,640(250,000)(53,749)(12,969)(624)(312,702($215,454)$279,993215,454$64,539$112,981YearEndedDecember311996$316,46423,119153,925100,971(24,232)(79,359)(9,214)127,288(25,259)20,77234,611167,06014,95251,67169,215(34,531)28,258(42,084)25,14626,460892,313(239,896)(51,722)(4,806296,42418,837(419,800)(213,753)(52,264)(369)(667,349($71,460)$351,45371,460$279,993$404,663$45,050(fnthousandsofdollars)YearEnded.Decein199$303,28617,751"145,357'100,97121,'933(79,359)(9,214)161,605(25,274)21,66939,589190,9424,90056,675(67;213)21,98619,100'33,464)(35,798)83,442772000(6)(70,589)8,019306,15668,726(104,800)(211,630)(52,667),529299,842$166,002$185,451'66,002.'351,453'427,988$14,20058 StatementofRetainedEarninsPnthousandsofdolkws)Dcocmber31~1995st~ofperiodNctincomefortheperiodDeductionsIICashdividendsdeclaredoncommonstockCashdividendsdcclarcdonpreferredstockOthertBalancestendofrlodSreNotestoFinandolStaternerus.$861,7518362.240),223P91216,08651,8121$956,0925840,867887,697928,564$3,84412.969861,751$790,9198316,4641,107/83214,25552,24021840.867$752.480303~1,055,766212,18152,64719790,919StatementofCaitalizationShanesIssued(fnthousandsofdollars)March31,1998March31,1997Deccmbcr31,1996March31,1998rMarch31,1997December31,1996CommonShareovrncrs'quityCommonstock,$5.00pervaluePremiumoncapitalstockCapitalstockexpenseRctaincdcomingsTreasurystock,stcostTotalCommonShsreovrners'quity121,727,04012L00431$16,985120,784,277$3,485608,635$'~146,425(47,501)956,092(1,204)605,022$V31476(48.915)861,751(385)2,549,049603P211,127P71(49@30)840,867(60)2,523369PreferredStock-RedemptionRequiredParvsluo$100pcrshare/vSensaLvScricsCCescalledforredemption150,$00$70,000161,000570,000161,000570,00015,05057,00015.050'6,10057,0001,0$016,100$7,0001,0$057.0CN.72.0$0'2,050Parvalue$25pershare7.95%SeriesAA$1.67SeriesGG$1.95SeriesNN7.05%SeriesQQ6.875%SensaUULess-SeriescalledforredemptionLessredemptionofpreferredstock14/20,000880,0001/$4,0003,464,0002,~,00014,520,000880,0001,554,0003,464,0002,~00014,$20.000880,0001,554,0003,464.000',240,000363,000t22,00038,85086,60056,00038,850363,00022,00038,85086,60056,000363,00022,00038,8$086,60056,000TotalPrefcrrcdStock-Redem'onRequirel505.600i"566.450566,4$0PreferredStock-NoRedemptionRequiredParvalue$100persharo$.00/iSeriesB.4.25%SeriesD435%ScricsB4.35%SeriesF51/8/eScricsH,53/4%Series1-ConvertibleLess-ScncscelledlbrrcdcmptienTotalPreferredStock-NoRedemptionRequiredTotsreferredStock100,00070,00050,000200,00014,743100,00070,000200,00050,000200,00015,978)00,00070,000200,00050.000200,00016,63710,0007P~20,0005,000,20,0001,47463.474562600$10,0007,000~20,0005.00020,0001,59863,598702,098S10,0007,00020,0005,00020.000lr664163.66459 grithourrurr/sodollorr)31IGeneralandRefundingBoridsTotalGeneralandRetbndingBondsDcbcnturesTotalDcbcnturcsFehuaryIS,1997April15,1998Msy15,1999April15,2004Msy1$,2006JulyIS,2008May1,2021JulyI,2024JulyIS,1999January1$,2000July15.2001MarchIS.2003MachI,2004JunoI,2OOSMarchI,2007July1$,2019NovemberI,2022March15,202383/4%75/SYi7.85%85/SYi8.50Yi7.pter/i93/4%95/8/i7.30Yi7.30Yi6.25%7.05%7.00Yi7.125%7.50/i8.90Yi9.00Yi8.20Yi$100,00056,000185,00075.00080,000415,000375,0001,286.000397,00036,000145,000150,00059,000200,000142,000420.000451,000270.0002,270,000100,00056,000185,00075,00080,000'15,000375.0001,286,000397,00036,000145,0001$0,00059,000200,000142,000420,000451,000270.0002,270,000$250,000100,00056,000'SS,00075,00080,000415,000375,00036,000145,000150,00059,000451,000270,000AuthorityFlnanclngNotesIndustriaiDevelopmentRevenueBondsPoliurionControlRevenueBondsElcctrioFaeiliticsRcvcnueBendsDcccmberI,2006DecemberI,2006DeccmbcrI,2009OctoberI,2012MachI,20167.50Yi7.50/i7.80Yi8I/4%3.58/i,1976AB1976AI979B19821985AB2737$19,10017,200150.00028/7519,10017,200150,0002837$19,10017,200ISO,000Sq&#xb9;cmberI,2019JuneI,2020DecemberI,2020FchuaryI,2022AugustI,2022NovemberI~2023NovemberI,2023OctoberI,2024AugustI,202SDecemberI,20277.15%7.15%.7.15%7.15%6.90/i3.70/i3.70/i3.70Yi3.70Yi3.55%1989AB,1990A1991A1992iEB1992CiD1993A1993B1994A199SA1997A100,000100,000100,000100,000100,00050.000S0,00050,000S0,00024,880100,000100,000100.000100,000100,00050,000100,000100,000100,000100.000100,00050,00050,000-50,00050,000TotalAuthorityFinancingNotesUnamortizedDiscountonDebt940355916,675(13,606)(14.628)916.6754,482@49101.0004,4SS,OI71,0004,707,7722S1,000TotalLong-TermDebtTotalCaItalhatlonSceNo/rsroFinmrdol$/a/eaten/a4,381,9494.457.047$7.6069K$7.708.194$4.45(c7727,68230560 NOTESTOFINANCIALSTATEMENTSNote1.SummaryofSignificantAccountingPolicies~~~~~asisofPresentationOnApril11,1997,theCompanychangeditsyearendfromDecember31toMarch31.Accordingly,unlessotherwiseindicated,referencesto1998and1997representthetwelvemonthperiodendedMarch31,1998andMarch31,1997,whilereferencestoallotherperiods'refertotherespectivecalendaryearsendedDecember31.'sfurtherdiscussedinNote2,onJune26,1997,theCompanyandtheLongIslandPowerAuthority(LIPA)enteredintodefinitiveagreementspursuanttowhich,aflerthetransferoftheCompany'sgasbusinessunitassets,non-nuclearelectricgeneratingfacilityassetsandcertainotherassetsandliabilitiestooneormorenewly-formedsubsidiariesofanewholdingcompany,theCompany'scommonstockwillbesoldtoLIPAforapproximately$2.4975billionincash.NoadjustmentshavebeenmadetotheCompany'sfinancialstatementstoreflectthisproposedtransaction.IINatureofOperationsTheCompanywasincorporatedin1910undertheTransportationCorporationsLawoftheStateofNewYorkandsupplieselectricandgasserviceinNassauandSuffolkCountiesandtotheRockawayPeninsulainQueensCounty,allonLongIsland,NewYork.TheCompany'sserviceterritorycoversanareaofapproximately1,230squaremiles.Thepopulationoftheservicearea,accordingtotheCompany's1998LongIslandPopulationSurveyestimate,isabout2.75millionpersons,includingapproximately98,500personswhoresideinQueensCountywithintheCityofNewYork.eCompanyservesapproximately1.04millionelectriccustomersofwhichapproximately931,000aresidential.TheCompanyreceivesapproximately49'/0ofitselectricrevenuesfromresidentialcustomers,48/0fromcommercial/industrialcustomersandthebalancefromsalestootherutilitiesandpublicauthorities.TheCompanyalsoservesapproximately467,000gascustomers,417,000ofwhichareresidential,accountingforabout610/0ofitsgasrevenues,17,000ofwhicharecommercialiindustrial,:accountingfor23/oofitsgasrevenues,3,600ofwhicharefirmtransportationcustomers,accountingfor30/0ofitsgasrevenues,withthebalanceofthegasrevenuesmadeupbyoff-systemsales.TheCompany'sgeographiclocationandthelimitedelectricalinterconnectionstoLongIslandservetolimittheaccessibilityofthetransmissiongridtopotentialcompetitorsfromoffthesystem.Inaddition,theCompanydoesnotexpectanynewmajorindependentpowerproducers(IPPs)orcogeneratorstobebuiltonLongIslandintheforeseeablefuture.OneofthereasonssupportingthisconclusionisbasedontheCompany'sbeliefthatthecompositionanddistributionoftheCompany'sremainingcommercialandindustrialcustomerswouldmakeitdifficultforlargeelectricprojectstooperateeconomically.Furthermore,underfederallaw,theCompanyisrequiredtobuyenergyfromqualifiedproducersattheCompany'savoidedcost.Currentlong-rangeavoidedcostestimatesfortheCompanyhavesignificantlyreducedtheeconomicadvantagetoentrepreneursseekingtocompetewiththeCompanyandwithexistingIPPs.ForafurtherdiscussionofthecompetitiveissuesfacingtheCompany,seeNote12.RegulationTheCompany'saccountingrecordsaremaintainedinaccordancewiththeUniformSystemsofAccountscribedbythePublicServiceCommissionoftheStateofNewYork(PSC)andtheFederalEnergyulatoryCommission(FERC).Itsfinancialstatementsreflecttheratemakingpoliciesandactionsof61 thesecommissionsinconformitywithgenerallyacceptedaccountingprinciplesforrate-regulated-enterprises.AccountingfortheEffectsofRateRegulationGeneralTheCompanyissubject,totheprovisionsofStatementofFinancialAccountingStandards(SFAS)No.'1,"AccountingfortheEf'fectsofCertainTypesofRegulation."Thisstatementrecognizestheeconomicabilityofregulators,throughtheratemakingprocess,tocreatefutureeconomicbenefitsandobligationsaffectingrate-regulatedcompanies.Accordingly,theCompanyrecordsthesefutureeconomicbenefitsandobligationsasregulatoryassetsandregulatoryliabilities,respectively.Regulatoryassetsrepresentpr'ob'ablefuturerevenuesassociatedwithpreviouslyincurredcoststhatareexpectedtoberecoveredfromcustomers.Regulatoryliabilitiesrepresentprobablefuturereductionsin'evenuesassociatedwithamountsthatareexpectedtoberefundedtocustomersthroughtheratemakingprocess.Regulatoryassetsnetofregulatoryliabilitiesamo'untedtoapproximatefy$6.7billionatMarch31,1998,March31,1997andDecember31,199'6.Inorderforarate-regulatedentitytocontinuetoapplytheprovisionsofSFASNo.71,itmustcontinuetomeetthefollowingthree'criteria:(i)theenterprise'sratesforregulatedservicesprovidedtoitscustomersmustbeestablishedbyanindependentthird-partyregulator;(ii)theregulatedratesmustbedesignedtorecoverthespecificenterprise'scostsofprovidingtheregulatedservices;and(iii)inviewofthedemandfortheregulatedservicesandthelevelofcompetition,itisreasonabletoassumethatratessetatlevelsthatwillrecovertheenterprise'scostscanbechargedtoandcollectedfromcustomers.BasedupontheCompany'sevaluationofthethreecriteriadiscussedaboveinrelationtoitsoperations,theeffectof'competitiononitsabilitytorecoveritscosts,includingitsallowedreturnoncomrrionequityantheregulatoryenvironmentinwhichtheCompanyoperates,theCompanybelievesthatSFASNo.71continuestoapplytdtheCompany'selectricandgasoperations.TheCompanyformeditsconclusionbaseduponseveralfactorsincluding:(i)theCompany'scontinuingabilitytoearnitsallowedreturnoncommonequityforbothitselectricandgasoperations;and(ii)thePSC'scontinuedcommitmenttotheCompany'sfullrecoveryoftheShorehamNuclearPowerStation(Shoreham)relatedassetsandallotherprudentlyincurredcosts.Notwithstandirigtheabove,rate'regulationisundergoingsignificantchangeasregulatorsand'customersseeklowerpricesforelectricandgasservice.Intheeventthatregulationsig'nificantlychangestheopportunityfortheCompanytorecoveritscostsinthefuture,alloraportionoftheCompany'soperationsmaynolongermeetthe'criteriadiscussedabove.Inthatevent,asignificantwrite-downofall'raportionoftheCompany'sexistingregulatoryassetsandliabilitiesco1rldresult.IftheCompanyhadbeenunabletocontinuetoapplytheprovisionsofSFAS71atMarch31,1998,theCompanywouldapplytheprovisionsofSFAS101"RegulatedEnterprises-AccountingfortheDiscontinuationofApplicationofPASBStatementNo.71."IfSFAS'101wereimplement'ed,thechargetoearningscouldbeashighas$4.5billion,netoftax.ForadditionalinformationrespectingtheCompany'sShoreham-relatedassets,seebelowandNotes4and10.SFASNo.121,"AccountingfortheImpairmentofLong-LivedAssetsandforLong-LivedAssetstobeDisposedOf'equiresthatcostswhichwerecapitalizedinaccordancewithregulatorypractices,becauseitwasprobablethatfuturerecoverywouldbeallowedbytheregulator,mustbechargedagainstcurrentperiodearningsifitappearsthatthecriterionforcapitalizationnolongerapplies.Thecarryingamountsuchassetswouldbereducedbyamountsforwhichrecoveryisunlikely.SFASNo.121alsoprovidesfor62 therestorationofpreviouslydisallowedcoststhataresubsequentlyallowedbyaregulator.NoimpairmentlosseshavebeenrecognizedbytheCompanywithrespecttoregulatoryorotherlong-livedassets.lhtDiscussedbelowaretheCompany'ssignificantregulatoryassetsandregulatoryliabilities.IBaseFinancialComponentandRateModeration,Component,hPursuanttothe19S9Settlement,theCompanyrecordedaregulatoryassetknownastheFinancialResourceAsset(FRA).TheFRAisdesignedtoprovidetheCompanywithsufficientcashflowstoassureitsfinancialrecovery.TheFRAhastwocomponents,theBaseFinancialComponent(BFC)andtheRateModerationComponent(RMC).,TheBFCrepresentsthepresentvalueofthefuturenet-after-taxcash,,flowswhichtheRateModerationAgreement(RMA),oneoftheconstituentdocumentsofthe1989Settlement,providedtheCompany,foritsfinancialrecovery.TheBFCwasgrantedratebasetreatmentunderthetermsoftheRMAandisincludedintheCompany'srevenuerequirementsthroughanamortizationincludedinratesoveraforty-yearperiodonastraight-linebasiswhichbeganJuly1,19S9.'hTheRMCreflectsthedifferencebetweentheCompany'srevenuerequirementsunderconventionalratemakirigandtherevenuesresultingfromtheimplementationoftheratemoderationplanprovidedforinthe.RMA.TheRMCiscurrentlyadjusted,onamonthlybasis,fortheCompany'sshareofcertainNMP2operationsandmainten'anceexpenses,fuelcreditsresultingfromtheCompany'selectricfuelcostadjustmentclauseandgrossreceiptstaxadjustinentsrelatedtotheFRA.InApril1998,thePSCauthorizedarevisiontotheCompany'smethodforrecordingitsmonthlyRMCamortization.Priortothisrevision,theamortizationoftheannuallevelofRMCwasrecordedmonthlyonatraight-line,levelizedbasisovertheCompany'srateyearwhichrunsfromDecember1toNovember30.owever,revenuerequirementsfluctuatefrommonthtomonthbaseduponconsumptionwhichisgreatlyimpactedbytheeffectsofweather.Underthisrevisedmethod,effectiveDecember1,1997,themonthlyamortizationoftheannualRMClevelvariesbaseduponeachmonth'sforecastedrevenuerequirements,whichmore.closelyalignssuchamortizationwiththeCompany'scostofservice.Asaresultofthischange,forthefiscalyear'endedMarch31,1998,theCompanyrecordedapproximately$65.1millionmoreofnon-cashRMCcreditstoincome(representingaccretionoftheRMCbalance),,or$42.5millionnetoftax,representing$.35persharemorethanitwouldhaveunderthepreviousmethod.However,thetotalRMCamortizationfortherateyearendingNovember30,1998,willbeequaltotheamountthatwouldhavebeenprovidedforunderthepreviousmethod.AsdiscussedinNote2,theRMCwillbeacquiredbyLIPAaspartoftheLIPATransaction.hForafurtherdiscussionofthe1989SettlementandFRA,seeNotes4and10.ShorehamPost-SettlementCostsShorehampost-settlementcostsconsistofSh'orehamdecommissioningcosts,fueldisposalcosts,payments-in-lieu-of-taxes,carryingchargesandothercosts.Thesecostsarebeingcapitalizedandamortizedandrecoveredthroughratesoveraforty-yearperiodonastraight-lineremaininglifebasiswhichbeganJuly1,1989.ForafurtherdiscussionofShorehampost-settlementcosts,seeNote10.hShorehamNuclearFuelhorehamnuclearfuelprincipallyreflectstheunamortizedportionofShorehamnuclearfuelwhichwaslassifiedfromNuclearFuelinProcessandinReactoratthetimeofthe1989Settlement.Thisamountiseingamortizedandrecoveredthroughratesoveraforty-yearperiodonastraight-lineremaininglifebasiswhichbeganJuly1,1989.63 UnamortizedCostofIssuingSecuritiesUnamortizedcostofissuingsecuritiesrepresentstheunamortizedpremiumsordiscountsandexpensesrelatedtotheissuesoflong-termdebtthathavebeenretiredpriortomaturityandthecostsassociatedwiththeearlyredemptionofthoseissues.Inaddition,thisbalanceincludestheunamortizedcapitalstockexpenseandredemptioncostsrelatedtocertainseriesofpreferredstockthathavebeenrefinanced.Thesecostsareamortizedandrecoveredthroughrates,asprovidedbythePSC,overtheshorterofthelifeoftheredeemedissueorthenewissue.PostretirementBenefitsOtherThanPensionsTheCompanydefersasaregulatoryassetthedifferencebetweenpostretirementbenefitexpenserecordedinaccordancewithSFASNo.106,"Employers'ccountingforPostretirementBenefitsOtherThanPensions,"andpostretirementbenefitexpensereflectedincurrentrates.PursuanttoaPSCorder,theongoingannualSFASNo.106benefitexpensewasphasedintoandfullyreflectedinratesbyNovember30,1997,withtheaccumulateddeferredassettoberecoveredinratesoverthefifteen-yearperiodwhichbeganDecember1,1997.ForafurtherdiscussionofSFASNo.106,seeNote8.RegulatoryTaxAssetandRegulatoryTaxLiabilityTheCompanyhasrecordedaregulatorytaxassetforamountsthatitwillcollectinfutureratesfortheportionofitsdeferredtaxliabilitythathasnotyetbeenrecognizedforratemakingpurposes.The'egulatorytaxassetiscomprisedprincipallyofthetaxeffectofthedifferenceinthecostbasisoftheBFCforfinancialandtaxreportingpurposes,depreciationdifferencesnotnormalizedandtheallowanceforequityfundsusedduringconstruction.Theregulatorytaxliabilityisprimarilyattributabletodeferredtaxespreviouslyrecognizedatrateshigherthancurrentenactedtaxlaw,unamortizedinvestment'taxcreditsandtaxcreditcarryforwards.RegulatoryLiabilityComponentPursuanttothe1989Settlement,certaintaxbenefitsattributabletotheShorehamabandonmentaretobesharedbetweenelectriccustomersandshareowners.Aregulatoryliabilityofapproximately$794millionwasrecordedinJune1989topreserveanamountequivalenttothecustomertaxbenefitsattributabletotheShorehamabandonment.Thisamountisbeingamortizedoveraten-yearperiodonastraight-linebasiswhichbeganJuly1,1989.1989SettlementCreditstRepresentstheunamortizedportionofanadjustmentofthe'bookwrite-offtothenegotiated1989Settlementamount.Aportionofthisamountisbeingamortizedoveraten-yearperiodwhichbeganonJuly1,1989.Theremainingportionisnotcurrentlybeingrecognizedfor;ratemakingpurposes.UtilityPlantAdditionstoandreplacementsofutilityplantarecapitalizedatoriginalcost,whichincludesmaterial,labor,indirectcostsassociatedwithanadditionorreplacementandanallowanceforthecostoffundsusedduringconstruction.Thecostofrenewalsandbettermentsrelatingtounitsofpropertyisaddedtoutilityplant.Thecostofpropertyreplaced,retiredorotherwisedisposedofisdeductedfromutilityplantand,generally,togetherwithdismantlingcostslessanysalvage,ischargedtoaccumulateddepreciation.Thecostofrepairsandminorrenewalsischargedtomaintenanceexpense.Massproperties(suchaspoles,wireandmeters)areaccountedforonanaverageunitcostbasisbyyearofinstallation.64 AllowanceforFundsUsedDuringConstructionTheUniformSystemsofAccountsasprescribedbythePSC,definestheAllowance,ForFundsUsedDuringConstruction(AFC)asthenetcostofborrowedfundsusedforconstructionpurposesanda,treasonablerateofreturnupontheutility's.equity'whensoused.AFCisnotanitemofcurrentcashincome.AFCiscomputedmonthlyusingaratepermittedbytheFERConaportionofconstructionworkinprogress.TheaverageAFCrate,withoutgivingeffecttocompounding,wasasfollows:Periods'AFCRate12MonthsEnded3/31/989.29/o3MonthsEnded3/31/972.26/o12MonthsEnded12/31/969.02/o12MonthsEnded12/31/959.36/oDepreciationTheprovisionsfordepreciationresultfromtheapplicationofstraight-lineratestotheoriginalcost,bygroups,ofdepreciablepropertiesinservice.Theratesaredeterminedbyage-lifestudiesperformedannuallyondepreciableproperties.Theaveragedepreciationrateasapercentageofrespectiveaveragedepreciableplantcostswasasfollows:Periods12MonthsEnded3/31/983MonthsEnded3/31/9712MonthsEnded12/31/9612MonthsEnded12/31/95Electric3.07o/o78o/o3.00/o3.00o/oGas2.04o/o'51o/o200o/o200o/oCashandCashEquivalents~~Cashequivalentsarehighlyliquidinvestmentswithmaturitiesofthreemonthsorlesswhenpurchased.hecarryingamountapproximatesfairvaluebecauseoftheshortmaturityoftheseinvestments.LRPPPayableRepresentsthecurrentportionofamountsduetoratepayersthatresultfromtherevenueandexpensereconciliations,performance-basedincentivesandassociatedcarryingcharges'asestablishedun'dertheLILCORatemakingandPerformancePlan(LRPP).ForfurtherdiscussionoftheLRPP,seeNote4.FairValuesofFinancialInstrumentsThefairvaluesfortheCompany'slong-termdebtandredeemablepreferredstockarebasedonquotedmarketprices,whereavailable.Thefairvaluesforallotherlong-termdebtandredeemablepreferredstockareestimatedusingdiscountedcashflowanalysesbasedupontheCompany'scurrentincrementalborrowingrateforsimilartypesofsecurities.RevenuesRevenuesarecomprisedofcyclebillingsrenderedtocustomersandtheaccrualofelectricandgasrevenuesforservicesrenderedtocustomersnotbilledatmonth-end.TheCompany'selectricratestructureprovidesfeararevenuereconciliationmechanismwhicheliminatestheimpactonearningsofexperiencingelectricsalesthatareaboveorbelowthelevelsreflectedinrates.TheCompany'sgasratestructureprovidesforaweathernormalizationclausewhichreducestheimpactrevenuesofexperiencingweatherwhichiswarmerorcolderthannormal.gt65 FuelCostAdjustmentshTheCompany'selectric.andgastariffsincludefuelcostadjustment(FCA)clauseswhichprovideforthe'ispositionofthedifferencebetweenactualfuelcostsandthefuelcostsallowedintheCompany'sbasetariffrates(basefuelcosts).The.Companydefersthesedifferencestofutureperiodsinwhichtheywillbebilledorcreditedto'customers,exceptforbase'electricfuelcostsinexcessofactualelectricfuel'costs,'hicharecurrentlycreditedtotheRMCasincurred."Purs'uant'totheStipulation,'asdescribedinNote3,gasfuelcostsareexcludedfrombasefuelcostsandrecoveredthroughthegasfueladjustmentclause.FederalIncomeTaxTheCompanyprovidesdeferredfederalincometaxwithrespecttocertainitemsofincomeandexpensethatarereportedindifferentperiodsforfederalincometaxpurposesthanforfinancialstatementpurposes.Additionally,theCompanyprovidesdeferredfederalincometaxwithrespecttoitemswithdifferentbasesforfinancialandtaxreportingpurposes,asdiscussedinNote9.TheCompany'defersthebenefitof,60/0ofpre-1982gasandpre-.1983electricand100/oofallother,'nvestmenttaxcredits,withrespecttoregulatedproperties,whenrealizedonitstaxreturns.Accumulateddeferredinvestmenttaxcreditsareamortizedratablyoverthelivesoftherelatedproperties.'1IIForratemakingpurposes,theCompanyprovidesdeferredfederalincometaxwithrespecttocertaindifferencesbetweenincomebeforeincometaxforfinancialreportingpurposesandtaxableincomeforfederalincometaxpurposes.Also,certainaccumulateddeferredfederalincometaxisdeductedfromratebaseandamortizedorotherwiseappliedasareductionin'federalinc'ometaxexpensein'futureyears.ReservesforClaimsandDamagesLossesarisingfromclaimsagainst,theCompany,includingworkers',compensationclaims,property...damage,extraordinarystorm'costsandgeneralliabilityclaims,arepartiallyself-insured.-Reservesfortheseclaimsanddamagesarebasedon,amongotherthings,experience,riskoflossandtheratemakingpracticesofthePSC.ExtraordinarystormlossesincurredbytheCompanyarepartiallyinsuredbyvarious,commercialinsurancecarriers.-,These"insurancecarriersprovidepartialinsurancecoverageforindivjdualstormlossesto,theCompany',stransmissionanddistributionsystembetween$15millionand$25million..Stormlosseswhich,areoutsideofthisrangeareself-insuredbytheCompany.RecentAccountingPronouncements"V'IEarningsI'erShareAtDecember31,1997,theCompanyadoptedSFASNo;128,"EarningsPerShare."Thisstatementreplacedthecalculationof.primaryandfullydilutedearningspersharewithbasicanddilutedearningspershare.Unlikeprimaryearningspershare,basicearningspershareexcludes'anydilutiveeffectsofoptions,warrantsandconvertiblesecurities.Dilutedearningspershareareverysimilartothepreviouslyreportedfullydilutedearningspershare.Noneoftheearningspershareamountsforperiodspresentedwereeffectedby,theadoptionof.,SFASNo.128:.,'ComprehensiveIncomeInJune1997,theFinancialAccounting'StandardsBoard'(FASB)issuedStatementofFinancialAccounting.Standards(SFAS)No.130."SFASNo."130establish'tandardsforreportingcomprehensiveincome.Comprehensiveincomeisthechangeintheequityofacompany,notincludingthosechangesthatre'suitfrom'sh'areholdertran'sactions'.Allcomponentsofcomprehensiveincomearerequiredtobereportedinanewfinancialstatementthatisdisplayedwithequalprominence'asexistingfinancialstatements.TheCompanywillberequiredtoadoptSFASNo.130fortheyearendingMarch31,1999.66 TheCompanydoes'n'otexpectthattheadoptionofSFASNo.130willhaveasignificantimpactonits"'eportinganddisclosurerequirements'.III'i~~7?7~~~~~~~Irr~~u~I!~~~!~~~~!~~~!!~~~~~~~~~l~iSegmentDisclosuresInJune1997,FASBissuedSFASNo.131"DisclosuresaboutSegmentsofanEnterpriseandRelatedInformation."SFASNo.131establishesstandardsforadditionaldisclosureaboutoperafingsegmentsforinterimand'annualfinancialstatem'ents.Morespecifically,it,requiresfinancialinform'ationtobedisclosedforsegmentswhoseoperatingresultsarereviewedbythechiefoper'atingdecisionmakerfordecisionsonresourceallocation.Italsorequiresrelateddisclosuresaboutproductsandservices,"""geographicareasandmajorcustom'ers.TheCompanywillberequiredtoadoptSFASNo.131forthefiscalyearendingMarch31,1999.TheCompanydoes"notexpectthattheadoptionofSFASNo.131willhaveasignificant'impactonitsreportinganddisclosurerequirements.'IUseofEstimates'lTheprepar'ationofthe'financialstatementsinconfo'rmitywithgenerallyacceptedaccountingprinciplesrequiresmanagementtomakeestimatesandassumptionsthataffectthe'amountsreported'inthefinancialstatementsandaccompanyingnotes.Actualresultscoulddifferfromthoseestimates.VVReclassifications"'ertain'prioryearamountshaveb'eenreclassifiedinthefinancialstatementstoconform'withthecurrentyearpresentation.VilhIV'ote2.'LongIslandPowerAuthorityTransactionOnJune26,1997,theCompanyandLongIslandPowerAuthority(LIPA)e'ntered'intodefinitiveagreementspurs'uanttowhich,afterthetransferoftheCompany'sgasbusinessunitassets,non-nuclear'ectricgeneratingfacilityassetsandcertainotherassetsandliabilitiestooneormorenewly-foimed'ubsidiariesofanewholdingcompany(HoldCo),formedinconnectionwiththeLIPATransactionandKey'Span'Transactiondiscussedbelow,theCo'mpany'scommonstockwillbes'old'toLIPAfor$2.4975billionincash.Inconnectionwiththistransacti'on",theprincipal'assetstobeacquiredbyLIPAthroughitsstock'cquisitionofLIL'COinclude:(i)thenetbookvalueofLILCO'selectrictransmissionanddistributionsystem',whichamountedto'pproximately$1.3billionatMarch31;1998;(ii)LILCOs'etinvestmentinNMP2,whichamountedtoapproximately$0.7billionatMarch31,1998(asmorefullydiscus'sedinNote5);(iii)certainofLILCO'sregulatoryassetsassociatedwithitselectricbusiness;and(iv)allocated'ccountsreceivableandotherassets.TheregulatoryassetstobeacquiredbyLIPAamountedtoapproximately$6.6billionatMarch31,1998,aridp'rimarilyconsistoftheBaseFinancialComponent(BFC),RateModerationComponent(RMC),'Shorehampost-settlementcosts,Shorehamnuclear''fuel,andtheelectricportionoftheregulatorytaxasset.Forafurtherdiscussionoftheseregulatoryassets,seeNote1.VVIILIPAiscontractuallyre'sponsibleforreimbursingHoldCoforpostretirementb'enefitsotherthanpensioncostsrelatedtoemployeesofLILCO's'electricbusiness.'Accordingly,uponcoinsurnmationiofthe'ransaction,HoldCowillreclassifytheassociatedregulatoryassetforpo'stretirementbenefitsotherthanpensionstoacontractualreceivable.IVeprincipalliabilitiestobeassumedbyLIPAthroughitsstockacquisitionofLILCOinclude::(i)LCO'sregulatoryliabilitiesassociatedwithitselectricbusiness;(ii)allocatedaccountspayable,ustomerdeposits,otherde'ferred'creditsandclaimsanddamages;and(iii)certainseriesoflong-term67 debt.TheregulatoryliabilitiestobeassumedbyLIPAamountedtoapproximately$365millionatMarch31,1998,andprimarilyconsistoftheregulatoryliabilitycomponent,1989Settlement,creditsandtheelectricportionoftheregulatorytaxliability.Forafurtherdiscussionoftheseregulatoryliabilities,seeNote1ofNotestoFinancialStatements.Thelong-termdebttobeassumedbyLIPAwillconsistof:(i)allamountsthenoutstandingundertheGeneralandRefunding(G&R)Indentures;(ii)allamountsthenoutstandingundertheDebentureIndentures,exceptasnotedbelow;and(iii).substantiallyallofthetax-exemptauthorityfinancingnotes.HoldCoisrequiredtoassumethe,financialobligationassociatedwiththe7.30'/0DebenturesdueJuly15,1999,withanaggregateprincipalamountcurrentlyoutstandingof$397millionand8.20/0DebenturesdueMarch15,2023,withanaggregateprincipalamountcurrentlyoutstandingof$270million.HoldCowillseektoexchangeitsDebentures,withidenticalterms,forthesetwoseriesofDebenturesandwillissueapromissorynotetoLIPAinanamountequaltotheunexchangedamountofsuchDebentures.HoldCowillalsoissueapromissorynotetoLIPAforaportionofthetax-exemptdebtborrowedtosupportLILCO'scurrentgasoperations,withtermsidenticaltothosecurrentlyoutstanding.TheCompanycurrentlyestimatestheamountofthispromissorynotetobeapproximately$250million.lInJuly1997,inaccordancewiththeprovisionsoftheLIPATransaction,theCompanyandTheBrooklynUnionGasCompany(BrooklynUnion)formedalimitedpartnershipandeachCompanyinvested$30millioninordertopurchaseaninterestrateswapoptioninstrumenttoprotectLIPAagainstmarketriskassociatedwiththemunicipalbondsexpectedtobeissuedbyLIPAtofinancethetransaction.UpontheclosingoftheLIPATransaction,eachlimitedpartnerwillreceivefromLIPA$30millionplusinterestthereon,basedoneachpartners'verageweightedcostofcapital.IntheeventthattheLIPATransactionisnotconsummated,themaximumpotentiallosstotheCompanyistheamountoriginallyinvested.Insuchevent,theCompanyplanstodeferanylossandpetitionthePSCtoallowrecoveryfromitscustomers.AspartoftheLIPATransaction,thedefinitiy'eagreementscontemplatethatoneormoresubsidiariesofHoldCowillenterintoagreementswithLIPA,pursuanttowhichsuchsubsidiarieswillprovidemanagementandoperationsservicestoLIPAwithrespecttotheelectrictransmissionanddistributionsystem,deliverpowergeneratedbyitspowerplantstoLIPA,andmanageLIPA'sfuelandelectricpurchasesandanyoff-systemelectricsales.Inaddition,threeyearsaAertheLIPATransactionisconsummated,LIPAwillhavetherightforaone-yearperiodtoacquireallofHoldCo'sgeneratingassetsatthefairmarketvalueatthetimeoftheexerciseoftheright,whichvaluewill,bedeterminedbyindependentappraisers.1I4InJuly1997,theNewYorkStatePublicAuthoritiesControlBoard(PACB),createdpursuanttotheNeqYorkStatePublicAuthoritiesLawandconsistingoffivemembersappointedbythegovernor,unanimouslyapprovedthedefinitiveagreementsrelatedtotheLIPATransactionsubjecttothefollowingconditions:(i)withinoneyearoftheeffectivedateofthetransaction,LIPAmustestablishaplanforopenaccesstotheelectricdistributionsystem;(ii)ifLIPAexercisesitsoptiontoacquirethegenerationassetsofHoldCo'sgenerationsubsidiary,LIPAmaynotpurchasethegeneratingfacilities,ascontemplatedinthegenerationpurchaserightagreement,at,apricegreaterthanbookvalue<(iii)HoldComustagreetoinvest,overaten-yearperiod,atleast$1.3billioninenergy-relatedandeconomicdevelopmentprojects,andnaturalgasinfrastructureprojectsonLongIsland;(iv)LIPAwillguaranteethat,overaten-yearperiod,averageelectricrateswillbereducedbynolessthan14/owhenmeasuredagainsttheCompany'sratestodayandnolessthana2/o'costsavingstoLIPAcustomersmustresultfromthesavingsattributabtothemergerofLILCOandKeySpan;and(v)LIPAwillnotincreaseaverageelectriccustomerrates'bmorethan2.50/0overatwelve-monthperiodwithoutapprovalfromthePSC.LIPAhasadoptedtheconditionssetforthbythePACB.68 T'eholdersofcommonandcertain.s'eriesofpreferredstockoftheCompanyeligible'tovote'approvedtheLIPATransactioninAugust1997."-'IIh~lnDecember1997,theUnitedStates'NuclearRegulatoryCommission'(NRC)is'suedanorderapproving.~theindirecttransferofcontroloftheCo'mpany's18loownershipinterestinNMP2toLIPA.InDecember1997,theCompanyfiledwiththeFERCasettlementagreementreachedwith'LIPAinconnectionwithaprev'iousfilingoftheCompany'sproposedratesforthesaleofcapacityandenergytoLIPA,ascontemplatedintheLIPAtransaction'agreements.TheCompany'lsohadpreviouslyfile'dan""applicationwiththeFERCseekingapprovalofthetransferoftheCompany'selectrictr'ansmissionanddistributionsystemtoLIPAinconnectionwithLIPA'spur'chaseofthecommonstockoftheCompany.InFebruary1998,theFERCissuedordersonbothoftheCompanyfilings.Specifically,theFERCapprovedtheCompany'sapplicationtotransferassetstoLIPAinconnectionwithLIPA'sacquisition.oftheCompany'scommonstock.Inaddition,theFERCacceptedtheCompariy'spro'posedratesforsale"ofcapacityandenergytoLIPA.Thoseratesmaygointoeffecton.thedatetheservicetoLIPA''egins,subjecttorefund,andfinalrateswillbe"setaftertheFERChascompleteditsinvestigationofsuchrates,:"thetimingofwhichcannot'bedeterminedatthistime.I'IInJanuary1998,theCompanyfiledanapplicationwiththePSCinconnectionwiththeproposedtransferofitsgasbusinessunitassets,non-nucleargeneratingfacilityassetsandcertainotherassetsandrelated.'iabilitiestooneormoresubsidiariesofHoldCotobeformedas'contemplated.,in'theLIPATransactionagreements.OnApril29,1998,thePSCapprovedthetransferoftheabove-mentionedassets..InJuly1997,theCompany,BrooklynUnionandLIPAfiledrequestsforprivateletter.rulingswiththeternalRevenueService(IRS)regardingcertainfederalincometaxissueswhichrequirefavorablelingsinorderfortheLIPATransactiontobeconsummated.OnMarch4,1998,theIRSissuedaprivateletterrulingconfirmingthatthesaleoftheCompany'scommonstocktoLIPAwouldnotresultinacorporatetaxliabilitytotheCompany.Inaddition,theIRS'ruledthat,aAerthestocksale,theincomeofLIPA'selectricutilitybusinesswillnotbesubjecttofede'ralincometax'.In'a'separaterulingonFebruary27,1998,theIRSalsoruledthatthebondstobeissuedbyLIPAtofinancetheacquisitionwouldbetax-exempt.CI'InJanuary1998,theCompanyfiledanapplicationwiththeSECseekinganexception'ormostoftheprovisionsofthePublicUtilitiesHoldingCompanyActof1935.In'May1998,the'SECissuedanorderapprovingtheCompany'sapplication~I[TheCompanycurrentlyanticipatesthattheLIPAtransactionwillbeconsummatedbyJune30,1998.Note3.KeySpanEnergyCorporationTransactionOnDecember29,1996,The-Brooklyn,UnionGasCompany"(Brookl)nUnion)andtheCompanyenteredintoanAgreementandPlanofExchangeandMerger(ShareExchangeAgreemen't),pursuanttowhichthecompanieswillbemergedinatransaction(KeySpanTransaction)thatwill'resultintheformationof'HoldCo.P'4TheShareExchangeAgreementwasamendedandrestatedtoreflectcertaintechnicalchanges'asofFebruary7,1997andJune26,1997.EffectiveSeptember29,1997,BrooklynUnionreorganizedintoa69 holdingcompanystructure,withKeySpanEnergyCorporation(KeySpan)becomingitsparentholding'-company.Accordingly,thepartiesenteredintoanAmendment,AssignmentandAssumptionAgreement,datedasofSeptember29,1997,whichamongotherthings,amendedtheShareExchangeAgreementandtrelatedstockoptionagreementstoreflecttheassignmentbyBrooklynUniontoKeySpanandtheassumptionbyKeySpanofallBrooklynUnion'srights'andobligationsundersuchagreements.TheKeySpanTransaction,whichhasbeenapprovedbybothcompanies'oardsofdirectorsand,shareholders,wouldunitetheresourcesoftheCompanywiththeresourcesofKeySpan.KeySpan,withapproximately3,300employees,distributesnaturalgasatretail,primarilyinaterritoryofapproximately187squaremileswhichincludestheboroughsofBrooklynandStatenIslandandtwo-thirdsoftheboroughofQueens,allinNewYorkCity.KeySpanhasenergy-relatedinvestmentsingasexploration,productionandmarketingintheUnitedStatesandNorthernIreland,aswellasenergyservicesintheUnitedStates,includingcogenerationprojects,pipelinetransportationandgasstorage.UnderthetermsoftheKeySpanTransaction,theCompany'scommonshareownerswillreceive.803shares(theRatio)ofHoldCo'scommonstockforeachshareoftheCompany'scommonstockthattheycurrentlyhold.KeySpancommonshareownerswillreceiveoneshareofcommonstockofHoldCofor.eachcommonshareofKeySpantheycurrentlyhold.ShareownersoftheCompanywillownapproximately66%ofthecommonstockofHoldCowhileKeySpanshareownerswillownapproximately34%.IntheeventthattheLIPATransactionisconsummated,theRatiowillbe0.880withCompanyshareownersowningapproximately68%oftheHoldCocommonstock.Basedoncurrentfactsandcircumstances,itisprobablethatthepurchasemethodofaccountingwillapplytotheKeySpan'ransaction,withtheCompanybeingtheacquiringcompanyforaccountingpurposes;ConsummationoftheShareExchangeAgreementisnotconditionedupontheconsummationoftheLIPATransactionandconsummationoftheLIPATransactionisnotconditioneduponconsummationoftheShareExchangeAgreement.InMarch1997,theCompanyfiledanapplicationwiththeFERCseekingapprovalofthetransferoftheCompany'scommonequityandcertainFERC-jurisdictionalassetstoHoldCo.OnJuly17,1997,theFERCgrantedsuchapproval.TheShareExchangeAgreementcontainscertaincovenantsofthepartiespendingtheconsummationofthetransaction.Generally,thepartiesmustcarryontheirbusinessesintheordinarycourseconsistentwithpastpractice,maynotincreasedividends.on,commonstockbeyondspecifiedlevelsandmaynot~issuecapitalstockbeyondcertainlimits.TheShareExchangeAgreementalsocontainsrestrictionson,amongotherthings,charterandby-lawamendmerits,capitalexpenditures,acquisitions,dispositions,incurrenceofindebtedness,certainincreasesinemployeecompensationandbenefits,andaffiliatetransactions.Uponcompletionofthemerger,Dr.WilliamJ.CatacosinoswillbecomechairmanandchiefexecutiveofficerofHoldCo;Mr.RobertB.Catell,currentlychairmanandchiefexecutiveoffiicerofKeySpan,will,becomepresidentandchiefoperatingofficerofHoldCo.Oneyearaftertheclosing,Mr.CatellwillsucceedDr.Catacosinosaschief.executiveofficer,withDr.Catacosinoscontinuingaschairman.TheboardofdirectorsofHoldCowillbecomprisedof15members,sixfromtheCompany,sixfromKeySpanandthreeadditionalpersonspreviouslyunaffiliatedwitheithercompany.70 InMarch-1997,theCompanyandtheBrooklynUnionGasCompany(BrooklynUnion)filedajointpetitionwiththePSCseekingapproval,undersection70oftheNewYorkPublicSer'viceLaw,oftheKeySpanAgreementbywhichtheCompanyandKeySpaneachwouldbecomesubsidiariesofHoldCothroughanexchangeofsharesofcommonstockwithHoldCo.Inaddition,thepetitioncalledforapproximately$1.0billionofsavingsattributabletooperatingsynergiesthatareexpectedtoberealizedoverthe10-yearperiodfollowingthecombinationtobeallocatedto'customers,netoftransactioncostsforthecombination.OnDecember10,1997,BrooklynUnion,theCompany,theStaffofthePSCandthreeotherpartiesenteredintoaSettlementAgreement(Stipulation)resolvingallissuesamongthemintheproceeding.HearingsontheStipulationwereheldinearlyJanuary1998and,onFebruary4,1998,thePSCapproved,effectiveFebruary5,1998,theStipulation,modiflied'onlytoreduceBrooklynUnion'searningscapfortheremainingyearsofitsrateplan.rUndertheStipulation,athree-yeargasrateplancoveringtheperiodDecember1,1997throughNovember30,2000willbeimplementedbytheCompanywhichprovidesfor,amongotherthings,anestimatedreductionincustomers'illsofapproximately3.9%,includingfuelsavings,throughatleastNovember30,2000.Thisgasratereductionwilloccurinthreephasesasfollows:(i)areductioninbaseratesofapproximately$12.2'"milliontoreflectdecreasesintheCompany'sgascostofserviceeffectiveonFebruary5,1998;(ii)abaseratereductionofapproximately$6.2millionassociatedwithnon-fuelsavingsrelatedtotheKeySpanTransactiontobecomeeffectiveontheclosingdateofthetransaction;and(iii)anexpectedreductionintheGasAdjustmentClause(GAC)toreflectannualfuelsavingsassociatedwiththetransactionestimatedatapproximately$4.0million,theactuallevelofwhichwillbereflectedinratesifandwhentheyactuallymaterialize.'heCompanywillbesubjecttoanearningssharingprovisionpursuanttowhichitwillberequiredtocredittocore/firmcustomers60%ofanyutilityearningsupto100basispointsabove11.10%and50%ofanyutilityearningsinexcessof12.10%oftheallowedreturnoncommonequity.BothacustomerserviceandasafetyandreliabilityincentiveperformanceprogramwilleimplementedeffectiveDecember1,1997,withmaximumpre-taxreturnonequitypenaltiesof40and12basispoints,respectively,iftheCompanyfails'toachievecertainperformancestandardsintheseareas.TheStipulation,whichobligatestheCompanytoreduceelectriccustomers'illsbyapproximately2.5%resultingfromthesavingsinoperatingandfuelcosts,relatedtosynergysavings,alsodefersthetimewithinwhichthePSCmustactontheCompany'spendingelectricrateplanuntilJuly1,1998.However,anyreductionincustomers'illswouldnotbecomeeffectiveuntilthePSCsetstheCompany'selectricrates.ForBrooklynUnion,effectiveonthedateoftheconsummationoftheKeySpanTransaction,BrooklynUnion'.sbaseratestocore/firmcustomerswillbereducedby$23.9millionannually.Inaddition,effectiveinthefiscalyearinwhichtheKeySpanTransactionisconsummated,BrooklynUnionwillbesubjecttoanearningssharingprovisionpursuanttowhichitwillberequiredtocredittocore/firmcustomers60%ofanyutilityearningsupto100basispointsabovecertainthresholdequityreturnlevelsoverthetermoftherateplan(otherthananyearningsassociatedwithdiscreteincentives)and50%ofanyutilityearningsinexcessof100basispointsabovesuchthresholdlevels.Thethresholdlevels,asmodifiedbytheFebruary5,1998Order,are13.75%forfiscalyear1998,-13.50%forfiscalyears1999,<<II71 2000,and2001;and13.25'/0for,fiscal~year2002.Asafetyandreliabilityincentivemechanismwill'beimplementedeffectiveontheconsummationdateoftheKeySpanTransaction,withamaximum12basispointpre.-taxpenaltyreturn.-oncommonequityifBrooklynUnionfailstoachievecertainsafetyand''reliability.performancestandards.Withtheexceptionofthesimplificationofthecustomerserviceperformancestandards,thecurrentBrooklynUnionrateplanapprovedbythePSCin1996remainsunchanged.AnygascostsavingsallocabletoBrooklynUnionresultingfromtheKeySyanTransactionwillbe,reflectedinratestoutilitycustomersthroughtheGAC.asthosesavingsarerealized.ITheStipulationadopts.certainaffiliate,transactionrestrictionscostallocationandfinancialintegrityconditions,andacompetitivecodeofconduct.TheserestrictionsandconditionseliminateorrelaxmanyrestrictionscurrentlyapplicabletoBrooklynUnioninsuchareasasaffiliatetransactions,useofthenameandreputationofBrooklynUnionbyunregulatedaffiliates,commonofficersofHoldCo,theutilitysubsidiariesandunregulatedlsubsidiaries,dividendpaymentrestrictions,andthecompositionoftheBoardofDirectorsofBrooklynUnion.RRIRI~TheStipulationalsoenables,theutilitiestoform,oneormoresharedservicessubsidiariestoperformfunctionscommontobothutilitiesandtheiraffiliates,suchasaccounting,finance,humanresources,legal.andinformationsystemsand.technologytorealizesynergysavings,IRNote4.RateMatters,RlElectricInApril1996,thePSCissuedanorderdirectingthe,Companytofilefinancialand.otherinformation.sufficienttoprovidealegalbasisforsettingnewratesforthethree-yearperiod1997through1999,Incompliancewiththeorder,theCompanysubmittedamulti-year,rateplan(Plan)inSeptember1996.MajorelementsofthePlaninclude:(i)abaseratefreezeforthethree-yearperiodDecember1,1996throughNovember,30,1999;,(ii)anallowedreturnoncommonequityof11.0/0throughtheterm'ofthePlanwiththeCompanyfullyretaining.allearningsup,to12.66/o,andsharingwiththecustomeranyearningsabove12.66/0,(iii)thecontinuationofexistingLRPPrevenueandexpensereconciliationmechanismsandperformanceincentiveprograms;(iv)creditingallnetproceedsfromtheShoreham,propertytaxlitigationtotheRMCtoreduceitsbalance;and(v)a.mechanismtofullyrecoveranyoutstanding.RMCbalance.attheendofthe1999rate.yea'rthroughRinclusionintheFCA,overatwo-yearperiod.Pursuantto'theprovisionsoftheStipulationdiscussedabove,undertheheadingKeySpanEnergyCorporationTransaction,thePSChasuntilJuly1,1998torenderadecision'onthisfiling.Asan.interimmeasure,pendingtheconsummationoftheLIPA.Transactionortheadjudicationofits=electricratefiling;theCompanysubmittedpetitionsinkfay1997and,December:1997requestingPSCapprovaltoextend,throughtherateyearsendingNovember30,1996a'nd1997,respectively,theprovisionsofits1995electricrateorder(1995Order).ThesepetitionswereappiovedbythePSCinDecember1997and,April;1998;respectively.RRII'~RR.1995ElectricRateOrder,Thebasis.ofthe1995OrderincludedminimizingfutureelectricrateincreaseswhilecontinuingtoprovidefortherecoveryoftheCompany'sregulatoryassetsandretainingconsistencywiththeRMA'sobjectiveofrestoringtheCompanytofinancialhealth.The1995Order,whichbecameeffectiveDecember1,1994,frozebaseelectricrates,reducedtheCompany'sallowedreturnoncommonequityfrom11.6/0to11.0/0andmodifiedoreliminatedcertainperformance-basedincentives,asdiscussedbelow.TheLRPP,originallyapprovedbythePSCinNovember1991,containedthreemajorcomponents:(i)revenuereconciliation;(ii)expenseattritionandreconciliation;and,(iii)performance-basedincentives.72 Inthe1995Order,thePSCcontinuedthethreemajorcomponentsoftheLRPPwithmodificationstotheexpenseattritionandreconciliationmechanismandtheperformance-basedincentives.Therevenuereconciliationmechanismremainsunchanged.Ievenuereconciliationprovidesamechanismthateliminatestheimpactofexperiencingsalesthatareaboveorbelowadjudicatedlevelsbyprovidingafixedannualnetmarginlevel(definedassalesrevenues,netoffuelexpensesandgrossreceiptstaxes).Thedifferencebetweenactualandadjudicatednetmarginlevelsaredeferredonamonthlybasisduringtherateyear.1TheexpenseattritionandreconciliationcomponentpermitstheCompanytomakeadjustmentsforcertainexpensesrecognizingthatthesecostincreasesareunavoidableduetoinflationandchangesoutsidethecontroloftheCompany.Pursuanttothe1995Order,theCompanyispermittedtoreconcileexpensesforpropertytaxesonly,whereasundertheoriginalLRPPtheCompanywasabletoreconcileexpensesforwagerates;propertytaxes,interestcostsanddemandsidemanagement(DSM)costs.TheoriginalLRPPhadalsoprovidedforthedeferralandamortizationofcertaincostvariancesforenhancedreliability,productionoperationsandmaintenanceexpensesandtheapplicationofaninflationindextootherexpenses.Underthe1995Order,thesedeferralshave'beeneliminatedandany.unamortizedbalanceswerecreditedtotheRMCduring1995.Themodifiedperformance-basedincentiveprogramsincludetheDSMprogram,thecustomerserviceperformanceprogramandthetransmissionanddistributionreliabilityprogram.Undertheserevisedprograms,theCompanywassubjecttoamaximumpenaltyof38basispointsoftheallowedreturnoncommonequityandcouldearnupto4basispointsunderthecustomerserviceprogram.PursuanttotheStipulation,theCompany'scustomerserviceincentiveprogramwasfurthermodifiedtoeliminatethe4ispointrewardandincreasedthemaximumpenaltywhichcanbeincurredunderthetheseprogramsom38to62basispoints.Thepartialpass-throughfuelincentiveprogramremainsunchanged.Underthisincentive,theCompanycanearnorforfeitupto20basispointsoftheallowedreturnoncommonequity.FortherateyearendedNovember30,1997,theCompanyearned12.7basispoints,orapproximately$2.9million,netoftaxeffects,asaresultofitsperformanceunderallincentiveprograms.FortherateyearsendedNovember30,1996and1995,theCompanyearned20and19basispoints,respectively,orapproximately$4.3millionand$4.0million,respectively,netoftaxeffects,undertheincentiveprogramsineffectatthosetimes.Thedeferredbalancesresultingfromthenetmarginandexpensereconciliations,andearnedperformance-basedincentivesarenettedattheendofeachrateyear,asestablishedundertheLRPPandcontinuedunderthe1995Order.Thefirst$15millionofthetotaldeferralisrecoveredfromorcreditedtoratepayersbyincreasingordecreasingtheRMCbalance.Deferralsinexcessofthe$15million,uponapprovalofthePSC,arerefundedtoorrecoveredfromthecustomersthroughtPeFCAmechanismovera12-monthperiod.FortherateyearendedNovember30,1997,theamounttobereturnedtocustomersresultingfromtherevenueandexpensereconciliations,performance-basedincentiveprogramsandassociatedcarryingchargestotaled$4.1million.ConsistentwiththemechanicsoftheLRPP,'itisanticipatedthattheentirenceofthedeferralwillbeusedtoreducetheRMCbalanceuponapprovalbythePSCofthepany'sreconciliationfilingwhichwassubmittedtothePSCinMarch1998.FortherateyearendedNovember30,1996,theCompanyrecordedanetdeferredLRPPcreditofapproximately$14.5million73 whichwassubsequentlyappliedasareductiontotheRMCuponthePSClsapproval.oftheCompany's~reconciliationfilinginDecember1996.FortherateyearendedNovember301995,theCompanyrecordedanetdeferredcreditofapproximately$41million.Thefirst$15millionofthedeferralwasappliedasareductiontotheRMCwhiletheremainingportionofthedeferralof$26millionwillbereturnedtocustomersthroughtheFCAwhenapprovedbythePSC.'IAnothermechanismoftheLRPP,providesthatearningsinexcessoftheallowedreturnoncommonequity,excludingtheimpactsofthevariousincentiveand/orpenaltyprograms,areusedtoreducetheRMC.FortherateyearsendedNovember30,1997,1996and1995,theCompanyearned$4.8million,$9.1million,and$6.2million,respectively,inexcessofitsallowedreturnoncommonequity.TheseexcessearningswereappliedasreductionstotheRMC.hlIntheeventthattheLIPATransactionisnotconsummated,"theCompanyiscurrentlyunabletopredicttheoutcomeoftheelectricrateproceedingcurrentlybefore.thePSCanditseffect,ifany,ontheCompany'sfinancialposition,cashflowsorresultsofoperations.0.GasInMay1997,theCompanysubmittedapetitionrequestingPSCapprovaltoextendthroughtherateyearendingNovember30,1997,thegasexcessearningssharingmechanismestablishedinitspriorthree-yeargasratesettlementagreementwhichexpiredonNovember30,1996.Pursuanttothisrequest,earningsinexcessofareturnoncommonequityof11.0/0aretobeallocatedequallybetweencustomersandshareownerswiththecustomers'hareofexcessearningscreditedtotheregulatoryassetcreatedasaresultofcostsassociatedwithmanufacturedgasplant(MGP)siteinvestigationandremediationcosts.ThisrequestwasapprovedbythePSCinDecember1997.Asaresultofthismechanism,thecustomer'allocationofexcessearningsamountedto$6.3millionfortherateyearendedNovember30,1997,andwillbeappliedtooffsetcostsincurredtoinvestigateandremediateMGPsites.Thepriorgasratesettlementprovidedthatearningsinexcessofa10.6/0returnoncommonequitybesharedequallybetweentheCompany'sfirmgascustomersanditsshareowners.FortherateyearsendedNovember30,1996and1995,thefirmgascustomers'ortionofgasexcessearningstotaledapproximately$10millionand$1million,respectively.In1997,theCompanywasgrantedpermissionbythePSCtoapplythecustomers'ortionofthegasexcessearningsandassociatedcarryingchargesforthe1996and1995rateyearstotherecoveryofdeferredcostsassociatedwithpost-retirementbenefitsotherthanpensionsandcostsincurredforinvestigationandremediationofMGPsites.4Note5.NineMilePointNuclearPowerStation,Unit2TheCompanyhasanundivided18/0interestinNMP2,locatednearOswego,NewYorkwhichisoperatedbyNiagaraMohawkPowerCorporation(NMPC).TheownersofNMP2andtheirrespectivepercentageownershipareasfollows:theCompany(18/0),NMPC(41/0),NewYorkStateElectric&GasCorporation(18/0),'ochesterGasandElectricCorporation(14/0)andCentralHudsonGas&ElectricCorporation(9/0).TheCompany'sshareoftheratedcapabilityisapproximately205MW.TheCompany'snetutilityplantinvestment,excludingnuclearfuel,wasapproximately$689millionatMarch31,1998,$710millionatMarch31,1997and$715millionatDecember31,1996.Theaccumulatedprovisionfordepreciation,excludingdecommissioningcosts,wasapproximately$196millionand$175millionatMarch31,1998and1997,respectively,and$169millionatDecember31,1996,GenerationfromNMP2andoperatingexpensesincurredbyNMP2aresharedinthesameproportionsasthecotenants'espectiveownershipinterests.TheCompanyisrequiredtoprovideitsrespectiveshareoffinancingforanycapitaladditionstoNMP2.NuclearfuelcostsassociatedwithNMP2arebeingamortizedonthebasisofthequantityofheatproducedforthegenerationofelectricity.74 NMPChascontractedwiththeUnitedStatesDepartmentofEnergyforthedisposalofspentnuclearfuel.TheCompanyreimbursesNMPCforits18'/oshare,ofthecostunderthecontractatarateof$1.00permegawatthourofnetgenerationlessafactortoaccountfortransmissionlinelosses.Fortheyearendedarch31,1998andforthethreemonthsendedMarch31,1997,thistotaled$1.4millionand$0.4illion,respectively.FortheyearsendedDecember31,1996and1995,thistotaled$1.4millionand$1.2million,respectively.AsdiscussedinNote2,theLIPATransactioncontemplatesthatLIPAwillacquiretheCompany's18/0interestinNMP2.NuclearPlantDecommissioningNMPCexpectstocommencethedecommissioningofNMP2in2026,shortlyafterthecessationofplantoperations,usingamethodwhichprovidesfortheremovalofallequipmentandstructuresandthereleaseofthepropertyforunrestricteduse:TheCompany'sshareofdecommissioningcosts,basedupona"Site-Specific"1995study(1995study),isestimatedtobe$309millionin2026dollars($155millionin1998dollars).TheCompany'sshareoftheestimateddecommissioningcostsiscurrentlybeingprovidedforinelectricratesandisbeingchargedtooperationsasdepreciationexpenseovertheservicelifeofNMP2.TheamountofdecommissioningcostsrecordedasdepreciationexpensefortheyearendedMarch31,'998andthethreemonthsendedMarch31,1997,totaled$2.2millionand$0.5million,respectively,,and$3.9millionand$2.3millionfortheyearsendedDecember31,1996and1,995,respectively.TheaccumulateddecommissioningcostscollectedinratesthroughMarch31,1998and1997andDecember31,'1996amountedto$17.7million,$15.5millionand$14.9million,respectively.TheCompanyhasestablishedtrustfundsforthedecommissioningofthecontaminatedportionoftheNMP2plant.Itiscurrentlyestimatedthatthecosttodecommissionthecontaminatedportionoftheplantwillbeapproximately76/oofthetotaldecommissioningcosts.These.fundscomplywithregulations'ssuedbytheNRCandtheFERCgoverningthefundingofnuclearplantdecommissioningcosts.Thempany'spolicyistomakequarterlycontributionstothefundsbasedupontheamountofecommissioningcostsreflectedinrates.AsofMarch31,1998,thebalanceinthesefunds,includingreinvestednetearnings,wasapproximately$17.9million.useamountsareincludedontheCompany'sBalanceSheetinNonutilityPropertyandOtherInvestments.ThetrustfundsinvestmentconsistsofU.S.Treasurydebtsecuritiesandcashequivalents.Thecarryingamountsoftheseinstrumentsapproximatefairmarketvalue.'IITheFASBissuedanexposuredraftin1996,entitled"AccountingforCertainLiabilitiesRelatedtoClosureorRemovalofLong-LivedAssets."Undertheprovisionsoftheexposuredraft,theCompanywouldberequiredtochangeitscurrentaccountingpracticesfordecommissioningcostsasfollows;(i)theCompany'sshareofthetotalestimateddecommissioningcostswouldbeaccountedforasaliability,basedondiscountedfuturecashflows;(ii)therecognitionoftheliabilityfordecommissioningcostswouldresultinacorrespondingincreasetothecostofthenuclearplantratherthanasdepreciationexpense;and(iii)investmentearningsontheassetsdedicatedtotheexternaldecommissioningtrustfundwouldbbrecordedasinvestmentincomeratherthanasanincreasetoaccumulateddepreciation.Discussionsoftheissuesexpressedintheexposuredraftareongoing.IftheCompanywasrequiredtorecordthepresentvalueofitsshareofNMP2decommissioningcostsonitsBalanceSheetasofMarch31,1998,theCompanywouldhavetorecognizealiabilityandcorrespondingincreasetonuclearplantofapproximately$62million.UponconsummationoftheLIPATransactiori,'LIPAwillacquiretheCompany'sinterestinNMP2aswellasthetrustsreferredtoabove."'clearPlantInsurancePCprocurespublicliabilityandprop'ertyinsuranceforNMP2,andtheCompanyreimbursesNMPCforits18/0shareofthosecosts.75 ThePrice-AndersonAmendmentsActmandatesthatnuclearpowerplantssecurefinancialprotectionin'heeventofanuclearaccident.Thisprotectionmustconsistoftwolevels.Theprimarylevelprovidesliabilityinsurancecoverageof$200million(themaximumamountavailable)intheeventofanuclearaccident.Ifclaimsexceedthatamount,asecondlevelofprotectionisprovidedthrougharetrospectiveassessmentofalllicensedoperatingreactors.Currently,this"secondaryfinancialprotection"subjectseachofthe110presentlylicensednuclearreactorsintheUnit'edStatestoaretrospectiveassessmentofupto$76millionforeachnuclearincident,payableataratenottoexceed$10millionperyear.The'ompany'sinterestinNMP2couldexposeittoamaximumpotentiallossof$13.6million,perincident,throughassessmentsof$1.8millionperyearintheeventofaseriousnuclearaccidentatNMP2oranotherlicensedU.S;commercialnuclearreactor.Theseassessmentsaresubjecttoperiodicinflationindexingandtoa5'/0surchargeiffundsproveinsufficienttopayclaims..II4NMPChasalsoprocured$500millionprimarynuclearpropertyinsurancewiththeNuclearInsurancePoolsandapproximately$2.3billionofadditionalprotection(includingdecontaminationcosts)inexcessoftheprim'arylayerthroughNuclearElectricInsuranceLimited(NEIL).EachmemberofNEIL,includingtheCompany,'salsosubjecttoretrospectivepremiumadjustmentsintheeventlossesexceedaccumulatedreserves.-ForitsshareofNMP2,theCompanycouldbeassesseduptoapproximately$1.6millionperloss.ThislevelofinsuranceisinexcessoftheNRCrequired$1.06billionofcoverage.TheCompanyhasobtainedinsurancecoveragefromNEILfortheextraexpenseincurredinpurchasingreplacementpowerduringprolongedaccidentaloutages.Underthisprogram,shouldlossesexceedtheaccumulatedreservesofNEIL,eachmember,includingtheCompany,wouldbeliableforifsshareofdeficiency.TheCompany'smaximumliabilityperincidentunderthereplacementpowercoverage,intheeventofadeficiency,isapproximately$0.7million.Note6.CapitalStockCommonStockCurrentlytheCompanyhas150,000,000sharesofauthorizedcommonstock,ofwhich121,727,040wereissuedand46,281shareswereheldinTreasuryatMarch31,1998.TheCompanyhas1,644,865sharesreservedforsalethroughitsEmployeeStockPurchasePlan,2,829,968sharescommittedtotheInvestorCommonStockPlanand86,099sharesreservedforconversionoftheSeriesIConvertiblePreferredStockatarateof$17.15pershare.Inaddition,inconnectionwiththeShareExchangeAgreement,asdiscussed'inNote3,thbCompanyhasgrantedKeySpantheoptiontopurchase,undercertaincircumstances,23,981,964sharesofcommonstockatapr'iceof$19.725pershare.Inconnectionwithsuchoption,theCompanyhasreceivedshareownerapprovaltoincreasetheauthorizedsharesofcommonstockto160,000,000.C'referredStockATheCompanyhas7,000,000authorizedshares,cumulativepreferredstock,parvalue$100pershareand.,3P,000,000authorizedshares,cumulativepreferredstock,parvalue$25pershare.Dividendsonpreferredstockarepaidinpreferencetodividendsoncommonstockoranyotherstockrankingjuniortopreferredstock.PreferredStockSubjecttoMandatoryRedemptionTheaggregatefairvalueofredeemablepreferredstockwithmandatoryredemptionsatMarch31,1998and1997andDecember31,1996amountedtoapproximately$675,$643and$637million,respectively,comparedtotheircarryingamountsof$639,$640and$640million,respectively.Forafurtherdiscussiononthebasisofthefairvalueofthesecuritiesdiscussedabove,seeNote1.76 EachyeartlieCompanyisrequired'toredeemcertainseriesofpreferredstockthroughtheoperationofsinkingfundprovisions'asfollows:"NumberofSharesRedemplionAmountshSeriesRedemlionProvisionBeginningEnding6.875%SeriesUU...10/15/99,,10/15/19~112,000,,$2,800,0001ltIl'heaggregateparvalu'eofpreferredstockrequiredtoberedeemedthroughsinkingfundsduringthefiscalyearendedMarch31,is$2.8million'ineachoftheyears2000,2001,2002and2003.TheCompanyalso,hasthenon-cumulativeoptiontodoublethenumberofsharestobe,redeemedpursuanttothesinkingfundprovisionsinanyyearfor,thepreferred;stockseriesUU.TheCompanyisalsorequiredtoredeemallsharesofcertainseries'ofpreferredstockwhicharenotsubjecttosinkingfundrequirements.Themandatoryredemptionrequirementsfortheseseriesareasfollows:Series".RedemptionDale'Numb'erofSitaresRedemptionAmounts,$1.67Ser'ies'GG.''3/1/997.95%SeriesAA...-,6/1/00'7.05%SeriesQQ5/1/017.66%SeriesCC8/1/02880,00014,520,0003,464,000570,000$22,000,000'63,000,00086,600,00057,000,000PreferredStockSubjecttoOptionalRedemption'''heCompany,hastheoptiontoredeemcertainseriesofitspreferred,stock.Fortheseriessubjecttooptionalredemptionat,March31,,1998,,thecallpriceswereas'olio'ws:',"~hgh'htlSeriesCalpPrice-'edemptionAmounts.00/0SenesB$101.00,$10,100,0004.25%SeriesD102.00'7,140,0004.35%SeriesE102.00''~'20,400,0004.35%SeriesFE102.00~'5,100,0005'/,%SeriesH102.00.,20,400,0005'/,%Series1-Convertible100.001,474,3007.40%SeriesL,,'102.07~,15,361,535$1'.95'Serie'sNN''6.95'1880300JtlaOn'April17,1998,the'Companyexeiciseditsoptiontoredeemitscallablepreferredstockand'calledforredemptiononMay19,1998alloftheoutstandingsharesofthepreferredstockseriesnotedabove'oratotalof$122millionincludingapproximately$5millionofcallpremiums.h'tPreferenceStock.AtMarch31,1998,noneoftheauthorized7,500,000sharesofnonparticipatingpreferencestock,parvalue$1pershare,whichranksjuniortopreferredstock,wereoutstanding.>>Note7.Long-TermDebtG&RMortgageTheGeneralandRefundingl'G&R)BondsaretheCompany'sonlyoutstandingsecuredindebtedness.,The.G&RMortgageisalienon'substantiallyalloftheCompany'sproperties.TheannualG&RMortgage,sinkingfundrequirementfor1997,duenotlaterthanJune30,1998,isatedat$25million.Itisanticipatedthatthisrequirementwi11besatisfiedwithretiredG&RBonds,erty'additions,'r'ahnycombination'hereof.77 Uponconsummation,.oftheLIPATransaction,alloftheCompany'sseriesofG&RBondswillbe,'ssumedbyLIPA.LIPAhasindicatedthatitintendstoredeemallsuchG&RBondsassoonaspracticableaftertheclosingoftheLIPATransaction.1989RevolvingCreditAgreementTheCompanyhasavailablethroughOctober1,1998,$250millionunderits1989RevolvingCreditAgreement(1989RCA).ThislineofcreditissecuredbyafirstlienupontheCompany'.saccountsreceivableandfueloilinventories.InFebruary1997,theCompanyutilized$30millionininterimfinancingunderthe1989RCA,whichwasrepaidinMarch1997,and$40millioninJuly'1997,whichwasrepaidinAugust1997.AtMarch31,1998,noamountswereoutstandingunderthe1989RCA.,TheCompanyhasfiled,withthelendinginstitutions,thedocumentationnecessarytoterminatethe1989RCAeffectiveupontheclosingofthe,LIPAandKeySpanTransactions.AuthorityFinancingNotesAuthorityFinancingNotesareissuedbytheCompanytotheNewYorkStateEnergyResearchandDevelopmentAuthority(NYSERDA)tosecurecertaintax-exeinptIndustrialDevelopmentRevenueBonds,PollutionControlRevenueBonds(PCRBs)andElectricFacilitiesRevenueBonds(EFRBs)issuedbyNYSERDA.Certainofthesebondsaresubjecttoperiodictender,atwhichtimetheirinterestratesmaybesubjecttoredetermination.TenderrequirementsofAuthorityFinancingNotesatMarch31,1998wereasfollows:(Inthousandsofdollars)InterestRateSeriesPrincipalTenderedPCRBsEFRBs8'/%3.58%3.70%3.70%3.70%3.70%3.55%19821985A,B1993A1993B1994A1995A1997A$17,200150,00050,00050,00050,00050,00024,880Tenderedeverythreeyears,nexttenderOctober2000TenderedannuallyonMarch1TenderedweeklyTenderedweeklyTenderedweeklyTenderedweeklyTenderedweeklyIThe1997,1995,1994and1993EFRBsandthe1985PCRBsaresupportedbylettersofcreditpursuanttowhichtheletterofcreditbankshaveagreedtopaytheprincipal,interestandpremium,ifapplicable,intheaggregate,uptoapproximately$408millionintheeventofdefault.TheobligationoftheCompany,toreimbursethe,letterofcreditbanksisunsecured.Theexpirationdatesfortheselettersofcreditareasfollows:PCRBsEFRBsSeries1985A,B1993A,B1994A1995A1997AExiralionDale3/16/9911/17/9910/26/008/24/9812/30/98Priortoexpiration,theCompanyisrequiredtoobtaineitheranextensionofthelettersofcreditorasubstitutecreditfacility.Ifneithercanbeobtained,theauthorityfinancingnotessupportedbylettersofcreditmustberedeemed.InaccordancewiththeLIPAAgreement,LIPAwillassumesubstantiallyallofthetax-exemptauthoritrfinancingnotes.HoldCowillissueapromissorynotetoLIPAforaportionofthetax-exemptdebtborrowedtosupportLILCO'scurrentgasoperations,withtermsidenticaltothosecurrentlyoutstanding.TheCompanycurrentlyestimatestheamountofthispromissorynotetobeapproximately$250million.78 FairValu'esofLong-TermDebt8ThecarryingamountsandfairvaluesoftheCompany'slong-termdebtatMarch31,1998and1997andDecember31,1996wereasfollows:airlGeneralandRefundingBondsDebentures'uthorityFinancingNotesTotalMarch31,1998$1,288,4702,407,178987,646$4,683,294March31,1997$1,314,2732,256,573959,092$4,529,938,.(Inthousandsofdollars)December31,1996$1,571,7452,271,095950,758$4,793,598CarryingAmountGen'eralandRefundingBondsDebenturesAuthorityFinancingNotesTotal'arch31,1998$1,286,0002,270,000940,555$4,496,555March31,1997=-$1,286,000,2,270,000916,675$4,472,675(Inthousandsofdollars)December31,1996$1,536,0002,270,000916,675$4,722,675Forafurtherdiscussiononthebasisofthefairvalueofthesecuritieslistedabove,seeNote1.DebtMaturityScheduleThetotallong-termdebtmaturingineachofthenextfiveyearsendingMarch31isasfollows:1999,$10.1million;2000,$490million;2001,$1million;2002,$146million;and2003,$154million.,NoteS.RetirementBenefitPlansPensionPlansTheCompanymaintainsadefinedbenefitpensionplanwhichcoverssubstantiallyallemployees(Primaryn),asupplementalplanwhichcoversofficersandcertainkeyexecutives(SupplementalPlan)andatirementplanwhichcoverstheBoardofDirectors(Directors'lan).TheCompanyalsomaintains$401(k)plansforitsunionandnon-unionemployeestowhichitdoesnotcontribute.~PrimaryPlan,TheCompany'sfundingpolicyistocontributeannuallytothePrimaryPlanaminimumamountconsistentwiththerequirementsofthe.EmployeeRetirementIncomeSecurityActof1974,plussuchadditionalamounts,ifany,astheCompanymaydeterminetobeappropriatefromtimetotime.PensionbenefitsarebaseduponyearsofparticipationinthePrimaryPlanandcompensation.ThePrimaryPlan'sfundedstatusandamountsrecognized,ontheBalanceSheetatMarch31,1998andMarch31,1997andDecember31,1996wereasfollows:(Inthousandsofdollars)March31,1998March31,1997December31,1996ActuarialpresentvalueofbenefitobligationVestedbenefitsNonvestedbenefits$661,07559,268$642,39257,960$547,00255,157AccumulatedBenefitObligationPlanassetsatfairvalueActuarialpresentvalueofprojectedbenefitobligationProjectedbenefito'bligationless(greater)thanlanassetsrecognizednetobligationrecognizednet(gam)Net(Accrued)PrepaidPensionCost$700,352$602,159$720,343$919,100$744,400$746,400689,661825,159'07,70393,941(63,303)56,73962,652<<.69;399,"71,085(163034)'1,605)(123,759)$(6,441)$4,491$4,0679 TheincreaseinthepresentvalueoftheaccruedbenefitatMarch31,1997comparedtoDecember31,1996,isdueprimarilytothechangeinthediscountratefrom7.25%to7.00%andtheuseofupdatedactuarialassumptions,relatingtomortality.PeriodicpensioncostforthePrimaryPlanandthesignificantassumptionsconsistedofthefollowing:(Inthousandsofdollars)YearEndedThreeMonthsEndedYearEndedYearEndedMarch31,1998March31,1997December31,1996December31,1995Servicecost-benefitsearnedduringtheperiodInterestcostonprojectedbenefitsobligationandservicecostActualreturn'on'planassetsNetamortizationanddeferral$21,11'456,379(200,025)151,438$4,64512,494(3,694)(9,446)$17,38447,927(81,165)33,541$15,38545,987(102,099)57,665NetPeriodicPensionCost$28,906$3,999$17,687$16,938March31,1998.March31,1997December31,1996December31,1995DiscountrateforobligationDiscountrateforexpenseRateoffuturecompensationincreasesLong-termrateofreturnonassets7.00%7.00%4.50%85P%7.00%7.25%5PP%7.50%725%7.25%5.00%7.50%7.25%7.25%500%750%ThePrimaryPlanassetsatfairvalueincludecash,cashequivalents,groupannuitycontracts,bondsandequitysecurities.In1993,thePSCissuedanOrderwhichaddressedtheaccountingandratemakingtreatmentofpensioncostsinaccordancewithSFASNo.87,"Employers'ccountingforPensions."UndertheOrder,theCompany.isrequiredtorecognizeanydeferrednetgainsorlossesoveraten-yearperiodratherthanusingthecorridorapproachmethod.TheCompanybelievesthatthismethodofaccountingforfinancialreportingpurposesresultsinabettermatchingofrevenuesandtheCompany'spensioncost.TheCompanydefersdifferencesbetweenpensionrateallowanceandpensionexpenseundertheOrder.Inaddition,thePSCrequirestheCompanytomeasureandpayacarryingchargeonamountsinexcessofthepensionrateallowanceandtheannualpensioncontributionscontributedintothepensionfund.I'naddition,effectiveDecember1,1997,inaccordancewiththeStipulation,theCompanydefersthedifferencebetweenthesumofgaspensionandgaspostretirementbenefitcostsotherthanpensionandtheamountsprovidedforinrates,totheextentthatsuchdifferencesareinexcessoforbelowthreepercentoftheCompany'spretaxnetincomefromitsgasoperations.Suchexcesswillbetransferredtoagasbalancingaccount.ForafurtherdiscussionoftheStipulation,seeNote3.SupplementalPlanTheSupplementalPlanprovidessupplementaldeathandretirementbenefitsforofficersandotherkeyexecutiveswithoutcontributionfromsuchemployees.TheSupplementalPlanisanon-qualifiedplanundertheInternalRevenueCode.Theprovisionforplanbenefitstotaledapproximately$0.7millionforthethreemonthsendedMarch31,1997and$2.7millionand$2.3millionfortheyearsendedDecember31,1996and1995,respectively.FortheyearendedMarch31,1998,theCompanyrecordedachargeofapproximately$31millionrelatingtocertainben'efitsearnedbyitsofficersrelatingtotheterminationoftheirannuitybenefitsearnedthroughthesupplementalretirementplanandotherexecutiveretirementbenefits.Thesecharges,thecostofwhicharebornebytheCompany'sshareowners,resultfromprovisionsoftheofficers'mploymentcontracts,includingtheChairman'semploymentcontract,andthependingtransactionswithLIPAandKeySpanwhichaffectthetimingofwhenthesecostsarerecordei'0 Directors'PlanTheDirectors'PlanprovidesbenefitstodirectorswhoarenotofficersoftheCompany.Directorswhohaveservedinthatcapacityformorethanfiveyearsqualifyasparticipantsundertheplan.TheDirectors'anisanon-qualifiedplanundertheInternalRevenueCode.Theprovisionforretirementbenefits,hichareunfunded,totaledapproximately$132,000fortheyearendedMarch31,1998,$34,000forthethreemonthsendedMarch31,1997and$127,000and$114,000fortheyearsendedDecember31,1996and1995,respectively.PostretirementBenefitsOtherThanPensionsInadditiontoprovidingpensionbenefits,theCompanyprovidescertainmedicalandlifeinsurancebenefitstoretiredemployees.SubstantiallyalloftheCompany,'semployeesmaybecomeeligibleforthesebenefitsiftheyreachretirementageafterworkingfortheCompanyforaminimumoffiveyears.TheseandsimilarbenefitsforactiveemployeesareprovidedbytheCompanyorbyinsurancecompanieswhosepremiumsarebasedonthebenefitspaidduringtheyear.EffectiveJanuary1,1993,theCompanyadoptedtheprovisionsofSFASNo.106,"Employers'ccountingforPostretirementBenefitsOtherThanPensions,"whichrequirestheCompanytorecognizetheexpectedcostofprovidingpostretirementbenefitswhenemployeeservicesarerenderedratherthanwhenpaid.Asaresult,theCompany,in1993,recordedan'accumulated,postretirementbenefitobligationandacorrespondingregulatoryassetofapproximately$376million.ThePSCrequirestheCompanytodeferasare'gulatoryassetthedifferencebetweenpostretirementbenefitexpenserecordedforaccountingpurposesinaccordancewithSFASNo.106andthepostretirementbenefitexpensereflectedinrates.TheongoingannualpostretirementbenefitexpensewasphasedintoandfullyreflectedinratesbeginningDecember1,1996withtheaccumulatedregulatoryassettoberecoveredinratesovera15-yearperiod,beginningDecember1,1997.Inaddition,theCompanyisquiredtorecognizeanydeferrednetgainsorlossesoveraten-yearperiod.Inaddition,effectiveDecember1,1997,inaccordancewiththeStipulation,theCompanydefersthedifferencebetweenthesumofgaspensionandgaspostretirementbenefitcostsotherthanpensionandtheamountsprovidedforinrates,totheextentthatsuchdifferencesareinexcessoforbelowthreepercentoftheCompany'spretaxnetincomefromitsgasoperations.Suchexcesswillbetransferredtoagasbalancingaccount.ForafurtherdiscussionoftheStipulation,seeNote3.VIn1994,theCompanyestablishedVoluntaryEmployee'sBeneficiaryAssociationtrustsfor'unionandnon-unionemployeesforthefundingofincrementalcostscollectedinratesforpostretirementbenefits.TheCompanyfundedthetrustswithapproximately$21millionfortheyearendedMarch31,1998,$5millionforthethreemonthsendedMarch'31,1997and$18millionand$50millionfortheyearsendedDecember31,1996and1995,respectively.InMay1998,theCompanyfundedanadditional$250millionintothetrusts,representingobligationsrelatedtotheelectricbusinessunitemployees.TheCompanysecuredabridgeloantofundthesetrusts.81 f)December31,1996$156,18156,950152,627$365,75874,692March31,1997March31,1998$169,65562,491183,526$157,38060,711140,850RetireesFullyeligibleplanparticipantsOtheractiveplanparticipants$358,941108,165$415,67280,533AccumulatedpostretirementbenefitobligationPlanassetsAccumulatedpostretirementbenefitobligationotherthanpensionsatMarch31,1998,March31;1997~andDecember31,1996wasasfollows:v(InthousandsodollarsAccumulatedpostretirementbenefitobligationinexcessofplanassetsUnrecognizedprior,servicecostsUnrecognizednetgainAccruedPostretirementBenefitCost250,776(175)102,346$352,947335,139(185)'8,563$363,517291,066(188)75,309$366,187TheincreaseinthepresentvalueoftheaccruedbenefitatMarch31,1997comparedtoDecember31,1996isduetothechangeinthediscountratefrom7.25%to7.00%andtheuseofupdatedactuarialassumptionsrelatingtomortality.ThechangeintheaccumulatedpostretirementbenefitobligationfromMarch31,1997toMarch31;1998reflectsadecreaseinthehealthcarecosttrendratebasedontheCompany'sreviewofthemedicalplancostexperienceandalsorevisedassumptionswithrespecttofuturecompensationincreases,mortalityandthepercentageofemployeeswhoareassumedtobemarriedatthetimeofretirement.AtMarch31,1998,March31,1997andDecember31,1996thePlanassets,'whicharerecoidedatfairvalue,includecashandcash"equivalents,fixedincomeinvestmentsandapproximately$100,000oflistedequitysecuritiesoftheCompany.Periodicpostretirementbenefitcostotherthanpensionsandthe'significantassumptionsconsistedofthefollowing:f(Inthousandsofdollars)YearEndedThreeMonthsEndedYearEndedYearEndedMarch31,1998March31,1997December31,1996December31,1995Servicecost-benefits=earnedduringtheperiodInterestcostonprojectedbenefitsobligationandservicecostActualreturnonplanassetsNetamortizationanddeferral$12,20427,328(6,632)(10,000)$2,8216,642(591)(3,446)$10,69025,030(3,046)(12,175)$9,08222,412(1,034)(14,699)NetPeriodicPensionCost$22,900$5,426$20,499$15,761March31,1998March31,1997December31,1996December31,1995DiscountrateforobligationDiscountrateforexpenseRateoffuturecompensationincreasesLong-termrateofreturnonassets7.00%7.00%450%850%7.00%7.25PP%7.50%725%7.25%5PP%750%7.25%7.25%5P07.50%Theactuarialassumptionsusedforpostretirementbenefitplansare:(InIhousandsofdollars)March31,1998March31,1997December3l,1996HealthcarecosttrendEffectofonepercentincreaseinhealthcarecosttrendrate:OncostcomponentsOnaccumulatedbenefitobligation(a)Peryearindefinitely(b)Graduallydecliningto6.0%in2001andthereafter.500%(a)$7$428.00%(b)$1$598.00%(b)$5$4382 Note9.FederalIncomeTaxThesignificantcomponentsoftheCompany'sdeferredtaxassetsandliabilitiescalculatedundertheprovisionsofSFASNo.109,"AccountingforIncomeTaxes,"wereasfollows:(Inthousandsofdollars)DeferredTaxAssetsNetoperatinglosscarryforwardsReservesnotcurrentlydeductibleTaxdepreciablebasisinexcessofbookNondiscretionaryexcesscreditsCreditcarryforwardsOtherTotalDeferredTaxAssetsDeferredTaxLiabilities1989SettlementAccelerateddepreciationCallpremiumsRatecasedefer'raisOtherTotalDeferredTaxLiabilitiesNetDeferredTaxLiability3/31/9839,66710,55924,85840,318261,729$377,131$2,169,909650,56238,69856456,7622,916,495'2,539,3643/31/97$93,34956,74933,84827,037128,469225,885$565,337$2,165,462642,65643,6172,57938,117'2,892,431$2,327,09412/31/96$145,20558,98134,314'7,700135,902186,907$589,009$2,163,239642,70244,8462,12733,4962,886,410$2,297,401SFASNo.109requiresutilitiestoestablishregulatoryassetsandliabilitiesfortheportionofitsdeferredtaxassetsandliabilitiesthathavenotyetbeenrecognizedforratemaking,purposes.Themajorcomponentsoftheseregulatoryassetsandliabilitiesareasfollows:(Intltousandsofdollars)RegulatoryAssets1989Settlementlantitemsther,TotalRegulatoryAssets3/31/98$1,652,412100,661(15141)$1,737,9323/31/97$1,659,065120,460(12,361)$1,767,16412/31/96$1,660>871125,976(14,069)$1,772,778RegulatoryLiabilitiesCarryforwardcreditsOther$38,72040,193$64,548$68,42135,82934,466TotalRegulatoryLiabilities'78,913$100,377$102,887fThefederalincometaxamountsincludedintheStatementofIncomedifferfromtheamountswhichresultfromapplyingthestatutoryfederalincometaxratetoincomebeforeincometax.The'tablebelowsetsforththereasonsforsuchdifferences..INI(Inthousandsofdollars)YearEndedThreeMonthsEnded"YearEndedYearEndedMarch31,1998March31,1997December31,1996December31,1995IncomebeforefederalincometaxStatutoryfederalincometaxrateStatutoryfederalincometaxAdditions(reductions)tnjegeralincometaxExcessofbookovertaxdepreciation1989SettlementInterestcapitalizedTaxcreditsTaxratechangeamortizationhAIIowanccforfundsusedduringconstructionOtheritems$594,89335%$208,21317,9124,2122,962(2,464)2223(2,953)2,549$,I43,91035%$50,3694,3561,053588(940)815(583)555$525,72135%$184,00218,3394,2122,270(4,383)3,686(2,305)3,436$508,82435%$I78,08818,5884,2132,218(1,025)3,752(2,392)2,096otalFederalIncomeTaxExpensectlveFederalIncomeTaxRate$232,654$56,2I3$209,257~$205,538404%398%39,1%39.1%83 TheCompanycurrentlyhastaxcreditcarryforwardsofapproximately$40million.-Thisbalanceiscomposedofinvestmenttaxcredit(ITC)carryforwards,netofthe35/oreductionrequiredbytheTaxReformActof1986,totalingapproximately$31millionandresearchanddevelopmentcreditstotalingapproximately$9million.In1990and1992,theCompanyreceivedRevenueAgents'eportsdisallowingcertaindeductionsandcreditsclaimedbytheCompanyonitsfederalincometaxreturnsfortheyears1981through1989.AsettlementresolvingallauditissueswasreachedbetweentheCompanyandtheInternalRevenueServiceinMay1998.Thesettlementprovidedforthepaymentoftaxesandinterestofapproximately$9millionand$35million,respectively,whichtheCompanymadeinMay1998.TheCompanyhadpreviouslyprovidedreservesadequatetocoversuchtaxesandinterest.Note10.The1989SettlementInFebruary1989,theCompanyandtheStateofNewYorkenteredintothe1989SettlementresolvingcertainissuesrelatingtotheCompanyandproviding,amongothermatters,forthefinancialrecoveryoftheCompanyandforthetransferofShorehamtoLIPA,anagencyoftheStateofNewYork,foritssubsequentdecommissioning.InFebruary1992,theCompanytransferredownershipofShorehamtoLIPA.InMay1995,theNRCterminatedLIPA'spossession-onlylicenseforShorehamwhichsignifiedtheNRC'sapprovalthatdecommissioningwascompleteandthatthesiteissuitableforunrestricteduse.Upontheeffectivenessofthe1989Settlement,inJune1989,theCompanyrecordedtheFRAonitsBalanceSheetandtheretirementofitsinvestmentofapproximately$4.2billion,principallyinShoreham.'orafurtherdiscussionoftheFRA,seeNote1.Pursuanttothe1989Settlement,theCompanywasrequiredtoreimburseLIPAforallofitscostsassociatedwiththedecommissioningofShoreham.ThePSChasdeterminedthatallcostsassociatedwiShorehamwhichareprudentlyincurredbytheCompanysubsequenttotheeffectivenessofthe1989Settlementaredecommissioningcosts.TheRMAprovidesfortherecoveryofsuchcoststhroughelectricratesoverthebalanceofaforty-yearperiodending2029.AtMarch31,1998,Shorehampost-settlementcoststotaledapproximately$1.2billion,consistingof$587millionofpropertytaxesandpayments-in-lieu-of-taxes,and$568millionofdecommissioningcosts,fueldisposalcostsandallothercostsincurredatShorehamafterJune30,1989.Note11.TheClassSettlementTheClassSettlement,whichbecameeffectiveinJune1989,resolvedacivillawsuitagainsttheCompanybroughtunderthefederalRacketeerInfluencedandCorruptOrganizationsAct.Thelawsuit,whichtheClassSettlementresolved,hadallegedthattheCompanymadeinadequatedisclosuresbeforethePSCconcerningtheconstructionandcompletionofnucleargeneratmgfacilities.eTheClassSettlementprovidestheCompany'selectriccustomers'withratereductionsaggregating$390millionthatarebeingreflectedasadjustmentstotheirmonthlyelectricbillsoveraten-yearperiod'whichbeganonJune1,1990.Uponitseffectiveness,theCompanyrecordeditsliabilityfo'rtheClassSettlementonapresentvaluebasisat$170million.TheClassSettlementobligationatMarch31,1998reflectsthepresentvalueoftheremainingreductionstoberefundedtocustomers.Theremainingreductionstocustomersbills,amountingtoapproximately$130millionasofMarch31,1998,consistsofapproximately$10millionforthetwo-monthperiodbeginningApril1,1998,and$60millionforeachofthe12-monthperiodsbeginningJune1,1998and1999.84 Npte12.CommitmentsandContingenciesElectric,.TheCompanyhasenteredintocontractswithnumerousIndependentPowerProducers(IPPs)andtheNewYorkPowerAuthority(NYPA)forelectricgeneratingcapacity.Underthetermsoftheagreementwith.,YPA,whichissettoexpireinMay2014,theCompanymaypurchaseupto100%oftheelectricenergy.producedattheNYPAfacilitylocatedwithintheCompany'sserviceterritoryatHoltsville,NY.TheCompanyisrequiredtoreimbursePYPAfortheminimumdebtservicepayments,andtomake,fixednon-energypaymentsandexpensesassociatedwithoperatingandmaintainingtheplant.WithrespecttocontractsenteredintowiththeIPPs,the,Companyjsob]igatedtopurchasealltheenergytheymakeavailable,totheCompanyatpricesthatoftenexceedcurrentmarketprices.However,theCompanyhasnoobligationtotheIPPsiftheyfailtodeliverenergy,For,purposesofthetablebelow,theCompanyhasassumedfullperformancebytheIPPs,asnoeventhasoccurredtosuggestanythinglessthanfullperformancebytheseparties.*~,TheCompanyalsohascontractedwithNYPAforfirmtransmission(wheeling)capacityinconnectionwithatransmissioncablewhich'wasconstructed,inpart,for'heb'enefitoftheCompany.Inaccordancewith'theprovisionsofthisagreement,whichexpir'e's'in2020,'heCompanyisrequiredtoreimburseNYPAfordebtservicepaymentsandthecost'ofoperatingand'maintainingthecables.Thecostofsuchcontractsisincludedinelectricfuelexpenseand,isrecoverablethroughrates.IThefollowingtablerepresentstheCompany'scommitmentsunderpurchasedpowercontracts.4,ElectricOperations(Inmillionsofdollars)NYPAHoltsvillel9'therFixed~FirmForthefiscalyearsendedDebtSerin'ceC/barges.-.Energy~...TransmissionIPPsiTotalB900020012002'003SubsequentYearsTotal$196.4200.8207.2214.2'13.52$14.7$6.7$25.7$127.6,21.713.7,6.7,26.0,,,132.721.814.67.227.8135.821.9"16.3',."8.727.8''139.522.0"16.7,",',9.0'27.9137.9,,232.4,217.1.,119.8,474,0..957.5',,000.8$341.5$293.1$158.1$609.2,~$1,631.0$3,032.9Less:lmpu'te'dInterest'"$166.8$154.1$85.3"$381.9"'805.2'$1,593.3PresentValueofPayments$174.7$139.0'72.8"$227.3'$825.8"~~$1,439.6'AssumesfullperformancebytheIPPsandJIYPA.-GasHInordertoprovideforsufficientsuppliesofg'as'for'theCompany'sgascust'omers,'theCompanyhasenteredintolong-termfirmgastransportation,storageandsupplycontractswhichco'ntainprovision'sthatrequiretheCompanytomakefixedpayments(demandcharges)eveniftheservicesarenotfullyutilized.Thecostofsuchcontractsis,included.ingasfuel,expenseandisrecoverablethroughrates.The.tablebelowsetsforththeCompany'saggregateobligationunderthesecommitmentswhichextendthrough,2014.Gas0erationsInmillionsofdollarsForthefiscalyearsended1999$111.732000110.372001'i,101.33,,2002,,:97.812003''1.69SubseuentYears'71.20Total~$884.'13Less:ImutedInterest.258.45PresentValueofPaments$625.6885 CompetitiveEnvironmentTheelectricindustrycontinuestoundergofundamentalchangesasregulators,electedofficialsandcustomersseeklowerenergyprices.Thesechanges,whichmayhaveasignificantimpactonfuturefinancialperformanceofelectricutilities,arebeingdrivenbyanumberoffactorsincludingaregulatoryenvironmentinwhichtraditionalcost-basedregulationisseenasabarriertolowerenergyprices.In199and1998,boththePSCandtheFERCcontinuedtheirseparate,butmsomecasesparallel,initiativeswithrespecttodevelopingaframeworkforacompetitiveelectricmarketplace.TheElectricIndustry-StateRegulatoryIssuesIn1994,thePSCbegantheseco'ndphaseofitsCompetitiveOpportunitiesProceedingstoinvestigateissuesrelatedtothefutureoftheregulatoryproces'sinanindustrywhichismovingtowardcompetition.ThePSC'soverallobjectivewastoidentifyregulatoryandratemakingpracticesthatwouldassistNewYorkStateutilitiesinthetransitiontoamorecompetitiveenvironmentdesignedtoincreaseefficiencyinprovidingelectricitywhilemaintainingsafe,affordableandreliableservice.AsaresultoftheCompetitiveOpportunitiesProceedings,inMay1996,thePSCissuedanorder(Order)whichstateditsbeliefthatintroducingcompetitiontotheelectricindustryinNewYorkhasthepotentialtoreduceelectricratesovertime,increasecustomerchoiceandencourageeconomicgrowth.TheOrdercalledforacompetitivewholesalepowermarkettobeinplacebyearly1997tobefollowedbytheintroductionofretailaccessforallcustomersbyearly1998.ThePSCstatedthatcompetitionshouldbetransitionedonanindividualcompanybasis,duetodifferencesinindividualserviceterritories,thelevelandtypeofstrandableinvestments(i.e.,coststhatutilitieswouldhaveotherwiserecoveredthroughratesundertraditionalcostofserviceregulationthat,undermarketcompetition,wouldnotberecoverable)andutilityspecificfinancialconditions.TheOrdercontemplatesthatimplementationofcompetitionwillproceedontwotracks.TheOrderrequiresthateachmajorelectricutility(excepttheCompanyandNiagaraMohawkPowerCorporation)filearate/restructuringplanwhichisconsistentwiththePSC'spolicyandvisionforincreasedcompetition.ThoseplansweresubmittedbyOctober1,1996,incompliancewiththeOrder.However,theCompanywasexemptedfrom:thisrequirementduetothePSC'sseparateinvestigationoftheCompany'sratesandLIPA'sexaminationoftheCompany'sstructure.ThePSChasnowapprovedsettlementagreementswitheachofthefiveNewYorkutilitiesthatwererequiredIofilerestructuringplansintheCompetitiveOpportunitiesProceeding.LILCOandNiagaraMohawkwereexempthowever,onFebruary18,1998thePSCalsoapprovedasettlementagreementontheNiagaraMohawkPowerChoicerestructuringproposalthathadbeenfiledinOctober1995.Ingeneral,theterm'softheagreementsvaryfromthreeto'fiveyearswithallagreementscallingforsomeratereductions,structuralseparationofthegenerationandpowerdeliveryfunction,divestitureoffossilgeneration,fullretailaccessintwotofouryears,andtheimpositionofasystembenefitschargetocoverthecostsofresearchanddevelopment(R&D),conservation,low-incomeandenvironmentalprograms.Ineachcase,thePSCisgivingtheutilityareasonableopportunitytorecoverallprudently-incurredstrandedcosts.ThePSCOrderalsoanticipatedthatcertainotherfilingswouldbemadeonOctober1,1996,byallNewYorkStateutilities,toboththePSCandtheFERC.ThefilingsweretoaddressthedelineationoftransmissionanddistributionfacilitiesjurisdictionbetweentheFERCorthePSC,apricingofeachcompany'stransmissionservices,andajointfilingbyalltheutilitiestoaddresstheformationofanIndependentSystemOperator(ISO)andthecreationofamarketexchangethatwillestablishspotmark86 prices.Althoughtherewereextensivecollaborativemeetingsamongtheparties,itwasnotpossiblefortheadditionalfilingstobecompletedbyOctober1,1996.OriDecember31,1996,theNewYorkPowerPoolmemberssubmittedacompliancefilingtotheFERCwhichprovidesopenmembershipandomparableservicestoeligibleentitiesinaccordancewithFERCOrder888,discussedbelow.TheNeworkStateutilitiessubmittedthefullISO/PowerExchangefilingtotheFERGinJanuary1997,whichproposestoestablishacompetitivewholesalemarketplaceinNewYorkStateforelectricenergyandtransmissionpricingatmarket-basedrates.SubsequenttotheFERCfilinginJanuary1997,theNewYorkStateutilitiesmadethreerelatingfilingswiththeFERC:(i)asupplementalfiling,providingadditionaldetailsregardingthecreationofaNewYorkStateReliabilityCouncil,inMay1997;(ii)arequestformarket-basedrateauthority,bysixoftheNewYorkutilities,inAugust1997;and(iii)asupplementalfilingwiththeFERConDecember19,1997whichexpandsuponandprovidesadditionaldetailswithrespecttotheJanuary1997filing.ThePSChastakenthepositionthatafullyoperationalwholesalecompetitivestructurewillfosterthe'xpeditiousmovementtofullretailcompetition.ThePSC'svisionoftheretailcompetitivestructure,knownastheFlexibleRetailPoolcoModel,consistsof:(i)thecreationofanISOtocoordinatethesafeandreliableoperationofelectricgenerationandtransmission;(ii)openaccesstothetransmissionsystem,whichwouldberegulatedbytheFERC;(iii)thecontinuationofaregulateddistributioncompanytooperateandmaintainthedistributionsystem;(iv)thederegulationofenergy/customerservicessuchasmeterreadingandcustomerbilling;(v)theabilityofcustomerstochooseamongsuppliersofelectricity;and(vi)theallowanceofcustomerstoacquireelectricityeitherbylong-termcontracts,purchasesonthespotmarket,or,acombinationofthetwo.OneissuediscussedintheOrderthatcouldaffecttheCompanyisstrandableinvestments.ThePSCstatedinitsOrderthatitisnotrequiredtoallowrecoveryofallprudently-incurredinvestments,that,ithasnsiderablediscretiontosetratesthatbalanceratepayerandshareholderinterests,andthattheamountofandableinvestmentsthatautilitywillbepermittedtorecoverwilldependontheparticularcircumstancesofeachutility.Additionally,theOrderprovidedthateveryeffortshouldbemadebyutilitiestomitigatethesecostspriortoseekingrecovery.hCertainaspectsoftherestructuringenvisionedbythePSC-particularlythePSC'sapparentdeterminationsthatitmaydenytheutilitiesrecoveryofprudentinvestmentsmadeonbehalfofthepublic,orderretailwheeling,requiredivestitureofgenerationassets,andderegulatecertainsectorsoftheenergymarket-could,ifimplemented,haveanegativeimpactontheoperationsandfinancialconditionsofNew,York'sinvestor-ownedelectricutilities,including.theCompany.TheCompanyispartytoalawsuitcommencedinSeptember1996bytheEnergyAssociationofNewYorkStateandthestate'sotherinvestor-ownedelectricutilities(collectively,Petitioners)againstthePSCinNewYorkSupremeCourt,AlbanyCountyTheEnerAssociationofNewYorkStateetal.v.PublicServiceCommissionoftheStateofNewYorketal..ThePetitionershaverequestedthattheCourtdeclarethattheOrderisunlawfulor,inthealternative,thattheCourtclarifythatthePSC'sstatementsintheOrderconstitutesimplyapolicystatementwithnobindinglegaleffect.InNovember1996,the,CourtissuedaDecisionandOrderdenyingthePetitioners'equesttoinvalidatetheOrder.AlthoughtheCourtstatedthatmostoftheOrderisanon-bindingstatementofpolicy,theCourtrejectedthePetitioners'ubstantivechallengestotheOrder.InDecember1996,thePetitionersfiledanoticeofappealwiththeThirdDepartmentoftheAppellateDivisionoftheNewYorkStateSupremeCourt;ThelitigationisoingandtheCompanyisunableatthistimetopredictthelikelihoodofsuccessortheimpactoftheationontheCompany'sfinancialposition,cashflowsorresultsofoperations.AttherequestoftheI87 EnergyAssociationandPublicUtilityLawProjectofNewYork(PULP),theCourthasextendeddhetiradeinwhichtheEnergyAssociationandPULPmustperfecttheirappealsuntilJuly6,1998.TheElectricIndustry-FederalRegulatoryIssuesInApril1996,inresponsetoitsNoticeofProposedRulemakingissuedinMarch1995,theFERCissuedOrders8S8and889relatingtothedevelopmentofcompetitivewholesaleelectricmarkets.Order888isafinalruleonopentransmissionaccessandstrandedcostrecoveryandprovidesthatthe'ERChasexclusivejurisdictionoverinterstatewholesalewheelingandthatutilitytransmissionsystemsmustnowbeopentoqualifyingsellersandpurchasersofpoweronanon-discriminatorybasis.Order888allowsutilitiestorecoverlegitimate,prudentandverifiablestrandedcostsassociatedwithwholesaletransmission,includingthecircumstanceswherefullrequirementscustomersbecomewholesaletransmissioncustomers,suchaswhereamunicipalityestablishesitsownelectricsystem.Withrespecttoretailwheeling,theFERCconcludedthatithasjurisdictionoverrates,termsandconditionsofservice,butwouldleavetheissueofrecoveryofthecostsstrandedbyretailwheelingtothestates.Order888requiredutilitiestofileopenaccesstariffsunder'whichtheywouldprovidetransmissionservices,comparablet'othosewhichthey'rovidetothemselvesandtothirdpartiesonanon-discriminatorybasis.Additionally,utilitiesmustusethesesametariffsfortheirownwholesalesales.Order8SS-A,issuedinMarch1997,generallyreaffirmedtheFERC'sbasicdeterminationinOrder888.OnepertinentchangemadeinS88-A,however,wasthattheFERC,asopposedtothestates,willbetheprimaryforumfordeterminingstrandedcostsincasesinvolvingmunicipalannexation.OrderSSS-B,issuedNovember1997,reaffirmed888-A'sfindings.TheCompanyfileditsopenaccesstariffinJuly1996.InSeptember1996,theFERCorderedRateHearingson28utilitytransmissiontariffs,includingtheCompany's.Onthebasisofapreliminaryreview,theFERCwasnotsatisfiedthatthetariffrateswerejustandreasonable.SettlementdiscussionshavebeenheldbetweentheCompanyandvariousintervenorsconcerningtheCompany'stransmissionrates.InDecember1996,thepartiesreachedatentativesettlementontherateissues.OnMay14,1997,theFERCapprovedthesettlementagreementthattheCompanyfiled(withfiveotherentities)concerningtheratesfortheCompany'sopenaccesselectrictariff.TheeffectivedateforthoserateswasJuly9,1996.TheCompanyandfourotherNewYork'utilitiesareseekingreviewofcertainnon-rateaspectsoftheFERC'sopenaccesstransmissiontariffordersintheU.S.CourtofAppealsfortheD.C.Circuit.Order889,'hich'isafinalruleonatransmissionpricingbulletinboard,addressestherulesandtechnicalstandardsforoperationofanelectronicbulletinboardthatwillmakeavailable,onareal-timebasis,theprice,availabilityandotherpertinentinformationconcerningeachtransmissionutility'sservices.Italso"addressesstandardsofconducttoensurethattransmissionutilitiesfunctionallyseparatetheirtransmissionandwholesalepowermerchantfunctionstopreventdiscriminatoryself-dealing.InDecember1996,theCompanyfileditsstandardsofconductinaccordancewiththeOrder.Order889-Aand889-B,issuedinMarchandNovember1997,respectively,generallyreaffirmedandclarifiedtheoriginalOrder889.Order889-Aimplementednewdiscountingpoliciesandrequiredthatnegotiationsbetweenatransmissionproviderandapotentialcustomertakeplaceonthetransmissionpricingbulletinboardandbevisibletoall.88 Itisnotpossibletopredicttheultimateoutcomeoftheseproceedings,thetimingthereof,orthe'amount,jfany,ofstrandedcoststhatthe.Companywouldrecoverinacomp'etitiveenvironment.TheoutcomeofthestateandfederalregulatoryproceedingscouldadverselyaffecttheCompany'sabilitytoapplySFASNo.1,"AccountingfortheEffectsofCertainTypesofRegulation,"which,pursuanttoSFASNo.101,ccountingforDiscontinuationofApplicationofSFASNo.71,"couldthenrequireasignificantwrite-downofalloraportionoftheCompany'snetregulatoryassets.TheCompany'sServiceTerritoryTheCompany'sgeographiclocationandthelimitedelectricalinterconnectionstoLongIslandservetolimitthe.accessibilityofitstransmissiongridtopotentialcompetitorsfromoffthesystem.However,thechangingutilityregulatoryenvironmenthasaffectedtheCompanybyrequiringtheCompanytoco-existwithstate'andfederallymandatedcompetitors,non-utilitygenerators(NUGs).ThePublicUtilityRegulatoryPoliciesActof1978(PURPA),thegoalsofwhicharetoreducetheUnitedStates'ependencyonforeignoil,toencourageenergyconservationandtopromotediversificationofthe=fuelsupply,hasnegativelyimpactedthe'CompanythroughtheencouragementoftheNUGindustry.ThePURPAprovidesforthedevelopmentofanewclassofelectricgeneratorswhichrelyoneithercogenerationtechnologyoralternatefuels.UtilitiesareobligatedunderthePURPAtopurchasetheoutputofcertainofthesegenerators,whichareknownasqualifiedfacilities(QFs).FortheyearsendedMarch31,1998and1997,theCompany.lostsalestoNUGstotaling447and422gigawatthours(GWh)representingalossinelectricrevenuesnetoffuel(netrevenues)ofapproximately$36millionand$34million,respectivelyor2.0/oand1.9/0oftheCompany'snetrevenue's,respectively.FortheyearendedDecember31,1996,theCompanylostsalestoNUGstotaling422GWh~epresentingasinelectricnetrevenuesofapproximately$34million,or1.9/0oftheCompany'snetrevenues.ForyearendedDecember31,1995,theCompanylostsalestoNUGstotaling366GWhorapproximately28millionor1.5'/0oftheCompany'snetrevenues.'lTheincreaseinlostnetrevenues'esultedprincipallyfromthecompletionofsevenfacilitiesthatbecamecommerciallyoperationalduring1996andthefullyearoperationoftheIPPlocatedattheStateUniversityofNewYorkatStonyBrook,NY.TheCompanyestimatesthatin1999saleslossestoNUGswillbe447GWh,orapproximately1.8/0ofprojectednetrevenues,''TheCompanybelievesthatloadlossesduetoNUGshavestabilized.ThisbeliefisbasedonthefactthattheCompany'scustomerloadcharacteristics,whichlackasignificantindustrialbaseandrelatedlargethermalload,willmitigateloadlossandtherebymakecogenerationeconomically,unattractive.Additionally,asmentionedabove,theCompanyisrequiredtopurchaseallthepowerofferedbyQFs,whichfortheyearsendedMarch31,19)8and1997,approximated220megawatts(MW)and226MW,respectively.TheCompanyestimatesthatpurchasesfromQFsrequiredbyfederalandstatelawcosttheCompany$71millionand$64millionin1998and1997,respectively,morethanitwouldhavecosthadtheCompanypurchasedthepowerintheopenmarketorgeneratedit.FortheyearsendedDecember31,1996and1995,QFsofferedapproximately218MWand205MW,respectively.TheCompanyestimatesthatpurchasesfromQFsrequiredbyfederalandstatelawcosttheCompany$63millionand$5$millionfortheyearsendedDecember31,1996and1995,respectively,thanitwouldhavecosthadtheCompanypurchasedthepowerin,theopenmarket"orgeneratedit.89 QFshavethechoiceofpricingsalestotheCompanyateitherthePSC'spublishedestimatesofthe'-Company'slong-rangeavoidedcosts(LRAC)ortheCompany'stariffrates,whicharemodifiedfromtimetotime,reflectingtheCompany'sactualavoidedcosts.Additionally,untilrepealedin1992,NewYorkStatelawsetaminimumpriceofsixcentsperkilowatt-hour,(kWh)forutilitypurchasesofpowerfromcertaincategoriesofQFs,considerablyabovetheCompany'savoidedcost.ThesixcentminimumcontinuestoapplytocontractsenteredintobeforeJune1992.TheCompanybelievesthattherepealof'hesixcentminimum,coupledwithrecentPSCupdateswhichresultedinlowerLRACestimates,hassignificantlyreducedtheeconomicbenefitsofconstructingnewQFswithinitsserviceterritory.TheCompanyhasalsoexperiencedarevenuelossasaresultofitspolicyofvoluntarilyprovidingwheelingofNewYorkPowerAuthority(NYPA)powerforeconomicdevelopment.TheCompanyestimatesthatfortheyearsendedMarch31,1998and1997,NYPApowerdisplacedapproximately373GWhand424GWhofannualenergysales,respectively.Netrevenuelossassociatedwiththesevolumesofsalesisapproximately$23million,or1.2~/ooftheCompany's1998netrevenues,and$27million,or1.5/ooftheCompany's1997netrevenues.Currently,thepotentiallossofadditionalloadislimitedbyconditionsinthe'Company'stransmissionagreementswithNYPA.TheCompanyestimatesthatfortheyearsendedDecember31,1996and1995,NYPApowerdisplacedapproximately417GWhand429GWhofannualenergysales,respectively,Netrevenuelossassociatedwiththesevolumesofsalesisapproximately$26million,or1.4~/ooftheCompany's1996netrevenues,and$30million,or1.6o/ooftheCompany's1995netrevenues.Anumberofcustomergroupsareseeking;tohastenconsiderationandimplementationoffullretailcompetition.Forexample,anenergyconsultanthaspetitionedthePSC,seekingalternatesourcesofpowerforLongIslandschooldistricts.TheCountyofNassauhasalsopetitionedthePSCtoauthorizeretailwheelingforallclassesofelectriccustomersinthecounty.,Inaddition,severaltownsandvillagesonLongIslandareinvestigatingmunicipalization,inwhichcustomersformagovernment-sponsoredelectricsupplycompany.ThisisoneformofcompetitionthatislikelytoincreaseasaresultoftheNationalEnergy,PolicyActof1992(NEPA).NEPAsoughttoincreaseeconomicefficiencyinthecreationanddistributionofpowerbyrelaxingrestrictionsontheentryofnewcompetitorstothewholesaleelectric.powermarket.NEPAdoessobycreatingexemptwholesalegeneratorsthatcansellpowerinwholesalemarketswithouttheregulatoryconstraintplacedonutilitygeneratorssuchasontheCompany.NEPAalsoexpandedtheFERC'sauthoritytograntaccesstoutilitytransmissionsystemstoallpartieswhoseekwholesalewheelingforwholesalecompetition.WhileitshouldbenotedthattheFERC'spositionfavoringstrandedcostrecoveryfromretailturnedwholesalecustomerswillreduceutilityriskfrommunicipalization,significa'ntissuesassociatedwiththeremovalofrestrictionsonwholesaletransmissionsystemaccesshaveyettoberesolved.TherearenumeroustownsandvillagesintheCompany'sserviceterritorythatareconsideringtheformationofamunicipally-ownedandoperatedelectricauthoritytoreplacetheservicescurrentlyprovidedbytheCompany.tr,sIn1995,SuffolkCountyissuedarequestforproposalfromsuppliersforupto300MWofpowerwhichtheCountywouldthenselltoitsresidentialandcommercialcustomer'.TheCountyhasawardedthebidtotwooff-LongIslandsuppliers:andhasrequestedtheCompanytodeliverthepower.AftertheCompanychallengedSuffolkCounty'seligibility-forsuchservice,theCountypetitionedtheFERCtoordertheCompanytoprovidetherequestedtransmissionservice.~90 InDhcemB'er1996,the'FERCorderedtheCompanytoprovidetransmissionservicesto'SuffolkCountytotheextentnecessarytoaccommodateproposed.salestocustomerstowhichitwasprovidingserviceonthedateofenactmentofNEPA(thisOrdercouldprovideSuffolkCountywiththeabilitytoimportupto200Wofpoweronadailybasis).TheFERCreserveddecisionontheremaining.100MWofSuffolkounty'srequestuntiltheCountyidentifiestheownershiporcontrolofdistributionfacilitiesthatitallegesqualifiesitforawheelingordertoSuffolkCountycustomerswhowerenotreceivingserviceonthedateofNEPA'senactment.TheCompanymayasktheFERCtoreconsideritsdecisiononcethatdecisionbecomesfinal;whichisnotexpectedfoxseveralmonths.TheCompanyandSuffolkCountysubmittedbriefsinJuly1997addressingthepricingforthe200MWofpower.TheFERChasyettodeterminethepricingof.thatservice.Aspreviouslynoted;FERC'Order888allows'utilitiestorecoverlegitimate,pruderitandverifiablestrandedcostsassociated"withwholesaletransmission,'ncludingthecircumstanceswherefullrequirementscustomers'.becomewholesaletransmissioncustomers,such'aswhereamunicipalityestablishesitsownelec'tricsystem'.'ttttIt')Themattersdiscussedaboveinvolvesubstantialsocial;economic,legal,environmental'andfinancialissues.TheCompany;is,opposedtoanyproposal.thatmerelyshiAscostsfromonegroupofcustomerstoanother,thatfailstoenhancetheprovisionofleast-cost,efficiently-generatedelectricityorthatfailstoprovidetheCompany'sshareownerswithanadequatereturnonandrecoveryoftheirinvestment.TheCompanyisunabletopredictwhataction,ifany,thePSCortheFERCmaytakeregardinganyofthesematters,ortheimpactontheCompany'sfinancialposition,c'ashflowsor'esultsofoperationsifsomeorallofthesemattersareapprovedorimplementedbytheappropriateregul'atoryauthority'.Notwithstandingtheoutcomeofthestateorfederalregulatoryproceedings,oranyotherstateaction,theCompanybelievesthat,amongotherobligations,theStatehasacontractualobligationtoallowtheCompanytorecover'itsShoreham-relatedass'ets.Flh)gttAkvironmentalMattersTheCompanyissubjecttofederal,stateandlocallawsandregulations&#x17d;dealingwith'airandwaterqualityandotherenvironmentalmatters.Environmentalmatte'rsmayexposetheCompanytopotentialliabilitieswhich,incertaininstances,maybeimposed'withoutregardtofaultorforhistoricalactivitieswhikhwere"lawfulatthe'timetheyoccurred.'heCompan'ycontinuallymonitorsitsactivitiesinordertodeterminetheimpactofitsactivitiesontheenvironmentandtoensurecompli'ancewithvarious'environmentallaws.Exceptassetforthbelow,nomater'ialproceedingshavebeencommencedor,totheknowledgeoftheCompany,arecontemplatedagainsttheCompanywithrespecttoa'ymatterrelating-totheprotectionoftheenvironment.4vTheNewYorkStateDepartmentofEnvironmentalConservation(DEC)hasrequiredtheCompanyandotherNewYorkStateutilities'toinvestigateand,where'necessary,'re'mediatetheirformermanufacturedgasplant(MGP)sites.-Currently,theCompanyisthe'ownerofsixpiecesofpropertyonwhichtheCompanyorcertainofitspredecessorcompaniesarebelievedtohaveproduce'dmanufacturedgas.Operationsatthesefacilities'inthelate1800'sandearly1900'smayhaveresultedinthe'disposalofcertainwasteproductsonthesesites.'"'''t\TheCompanyhasenteredintodiscussionswiththeDECwhichisexpectedtoleadtotheissuanceofoneormoreACOsregardingthemanagementofenvironmentalactivitiesatthesesixproperties.,AlthoughtheexactamountoftheCompany'scleanupcostscannot'yetbedetermined,based'onthefindingsof'inaryinvestigationsconductedateachofthesesixsites,currentestimatesindicatethatitmaycostximately$54to$92milliontoinvestigateandremediateallofthesesites.Inconsideringtherangeoossibleremediationestimates,theCompany'feltita'ppropriatetorecorda$54millionliabilitytt191 reflectingthe,presentvalue-ofthe,futurestreamofpaymentsamountingto$70milliontoinvestigateand.remediatethesesites."The,Companyused.arisk-free,rateof6.0/otodiscount.thisobligation.TheCompany.believesthat,thePSCw'illprovideforfuturerecoveryofthesecostsandhasrecordeda$54millionregulatory'ass'et.The.Company'sratesettleinentwhich'thePSCapproved'February4,:1998as'discussedin,Note3:o'fNotes'toFinancialStatements,allowsfortherecoveryofMGPexpendituresfrom~gascustomers.~rrh'rrInDecember,1996,theCompanyfiledacomplaintinthe,UnitedStatesDistrictCourtfortheSouthern,,DistrictofNewYorkagainst,14oftheCompany,'sinsuredswhichissuedgeneralcomprehensiveliability(GCL)policiestotheCompany."InJanuary1998;theCompanycommencedasimilaractionagainstthesameandcertainadditionalinsurerdefendantsinNewYorkStateSupremeCourt,First33epartment;the-federalcourtactionwassubsequentlydismissedinMarch1998..The,Companyisseekingrecovery.under.theGCLpoliciesforthecostsincurredtodateandfuturecostsassociatedwiththeclean-upoftheCompany'sformermanufacturedgasplant(MGP)sitesandSuperfundsitesforwhichtheCompanyhasbeennameda,PRP:TheCompanyisseekingadeclaratoryjudgmentthatthedefendantinsurersare"bound.bythe.termsofthe,GCLpolicies,subjecttothestatedcoveragelimits,toreimbursetheCompany'orthecleanupcosts.The'outcomeofthisproceedingcannotyetbedetermined.rrt'riTheCompanyhasbeennotifiedbytheUnitedStatesEnvironmentalProtectionAgency(EPA)thatit-isoneofmany+/Psthatmaybeliablefortheremediationofthreelicensedtreatment,storageanddisposalsitestowhichtheCompanymayhaveshippedwasteproductsand.which.havesubsequentlybecomeenvironmentallycontaminated.II,rAtonesite,locatl;dinPhiladelphia,Pennsylvania,andoperatedbyMetal.BankofAmerica,.theCompany.andnineotherPRPs,allofwhicharepublicutilities,completedperformanceofaRemedialIpvestigationandFeasibilityStudy(RI/FS),whichwasconductedunderanACOwiththeEPA.InDecember1997,EPAissueditsRecordofDecision(ROD),settingforththefinalremedialactionselected'orthissite.theROD,the;EPAe'gtimatedthat,thepresentcostoftheselectedremedyforthesiteis$17.3million..Atthistime;theCompanycannotpredict.with,reasonablecertainty,the.actual.costoftheselectedremedy,'howill,implementtheremedy,orthecost,ifany,totheCompany.,UnderaPRPparticipationagreement,the~Companypreviouslywasresponsiblefor8.2/oofthecostsassociatedwiththeRI/FS.~TheCompany,'s,allocableshareofliabilityfor.theremediationactivitieshasnot'yetbeen:determined;TheCompany,hasrecordedaliabilityofapproximately.$1millionrepresentingitsestimatedshareofthecosttoremediate,thissite;-baseduponits8.2'/0responsibilityundertheRI/FS;TheCompanyhasalsobeennamedaPRPfordisposalsitesinKansasCity,Kansas,andKansasCity,Missouri.ThetwositeswereusedbyacompanynamedPCB,Inc.from1982until1987forthestorage,'processing,and,treatmentofelectricequipment,dielectricoilsandmaterialscontainingPCBs.AccordingtotheEPA,'thebuildingsandcertainsoilareasoutsidethebuildingsarecontaminatedwithe'CBs.CertainofthePRPs,includingtheCompanyand,severalotherutilitiesformeda,PRPgroup,signedan.ACO,andhavedevelopedaworkplanforinvestigatingenvironmentalconditionsatthesites.DocumentationconnectingtheCompanytothesitesindicatesthattheCompanywasresponsibleforlessthan1/0ofthematerialsthatwereshippedtotheMissourisite.TheEPAhasnotyetcompleted.compilingthedocumentsfortheKansassite.''..itWIInadditiqn,ttieCompanywas;notifiedthatitjsa,PRP,ata$uperfundsite,locatedinFarmingdale,NewYork..Industrialoperations,tookplaceatthissiteforatleastfiftyyears.ThePRPgrouphasclaimedttheCompanyshouldabsorbremediationexpenses-intheamountofapproximately.$100,000associatwithremovingPCB-'contaminatedsoilsfromaportionofthesitewhichformerlycontainedelectrictransformers.TheCompanyiscurrentlyunabletodetermineitsshareofcostsofremediationatthissite.92 Dur'ing1996,theConnecticutDepartmentofEnvironmentalProtection(DEP)issuedamodificationtoanACOpreviously,issuedin'connectionwithaninvesti'gation.ofanelectric'transmissioncablelocatedundertheLongIslandSound(SoundCable)thatisjointlyownedbyth'eCompanyandtheConnecticutLight.dPowerCompany(Owners).The'modifiedACOrequirestheOwnersto'submittotheDEPandDECariesofreportsandstudiesdescribingcablesystemcondition,operationandrepairpractices,alternativesforcableimprovementsorreplacementandenvironmentalimpactsassociatedwithleaksoffluidintotheLongIslandSound,whichhaveoccurredfromtimetotime.TheCompanycontinuestocompilerequiredinformationandcoordinatethe.activitiesnecessarytoperformthesestudiesand,atthepresenttime,isunabletodeterminethecostsitwillincurtocompletetherequirementsofthemodifiedACOortocomplywithanyadditionalrequirements.'heOwnershavealsoenteredintoanACOwiththeDECasaresultofleaksofdielectricfluidfromtheSoundCable.TheACOformalizestheDEC'sauthoritytoparticipateinandseparately,approvethereportsandstudiesbeingpreparedpursuanttotheACOissuedbytheDEP.Inaddition,theACOsettlesanyDECclaimfornaturalresourcedamagesinconnectionwithhistoricalreleasesofdielectricfluidfromtheSoundCable.InOctober1995,theU.S.AttorneyfortheDistrictofConnecticuthadcommencedaninvestigationregardingoccasionalreleasesoffluidfromtheSound.Cable,aswell.asassociatedoperatingandmaintenancepractices.TheOwnershaveprovidedtheU.S.Attorneywithallrequesteddocumentation.TheCompanybelievesthatallactivitiesassociatedwiththeresponsetooccasionalreleasesfromtheSoundCablewereconsistentwithlegalandregulatoryrequirements.InDecember1996,abarge,ownedandoperated-byathirdparty,droppedanchorwhichthendraggedoverddamagedtheSoundCable,resultinginthereleaseofdielectricfluidintoLongIslandSoun'd.poraryclampsandleakabaterswereinstalledonthecablestostoptheleaks.PermanentrepairswerepletedinJune1997.The'costtorepairtheSoundCablewasapproximately$17.8million,forwhichtherewas$15millionofinsurancecoverage.TheOwnersfiledaclaimandanswerinresponsetothemaritimelimitationproceedinginstitutedbythebargeownerintheUnitedStatesDistrictCourt,Easte'rnDistrictofNewYork.Theclaimseeksrecoveryoftheamountspaidbyinsurancecarriersandrecoveryofthecostsincurredfor..whichtherewasnoinsurancecoverage.AnycoststorepairtheSoundCablewhicharenotreimbursedbyathirdpartyorcoveredbyinsurance'willbesharedequallybytheOwners.TheCompanybelievesthat.noneoftheenvironmentalmatters,discussedabove,willhaveamaterialadverseimpactontheCompany'sfinancialposition,cashflowsorresultsofoperations.Inaddition,theCompanybelievesthatallsignificantcostsincurredwithrespecttoenvironmentalinvestigationandremediationactivities,notrecoverablefrominsurancecarriers,willberecoverablethroughrates.93 Note13.BusinessSegmentsIdentifiableassetsbysegmentincludenetutilityplant,regulatoryassets,materialsandsupplies,accruedunbilledrevenues,gasinstorage;fuelanddeferredcharges.AssetsutilizedforoverallCompanyoperationsconsistprimarily'fcashandcashequivalents,accountsreceivable,commonnetutilityplant'ndunamortizedcostofissuingsecurities.YearEndedMarch31,1998ThreeMonthsEndedMarch31,1997(Inmillionsofdollars)YearEndedYearEndedDecember31,1996December31,1995OperatingrevenuesElectricGas'otalOperatingexpenses(excludesfederalincometax)ElectricGasTotalOperatingincome(beforefederalincometax)Electric'asTotaloperatingincomeAFCOtherincomeanddeductionsInterestchargesFederalincometaxNetIncomeDepreciationandAmortizationElectricGasTotal$2,478646$3,124''1,595523$2,118$883123$1,006$(8)10409233$362"$131"28$159$558293$851$400204$604$15889$247(2)(2)"10756$88$327$.39$2,467684$3,151$1,644560$2,204$823124$947$(6)(23)451209$316$12925$154$2,484591$3,075$1,657478$2,135$827113$940(7)(38)476206$303Constructionandnuclearfuelexpenditures*ElectricGasfl$181'35'''165$16280,~'67884Total$261$51$243$,246~Includesnon-cashallowanceforotherfundsusedduringconstructionandexcludesShorehampost-settlementcosts.March31,1998March31,1997December31,1996December31,1995IdentifiableAssetsElectric'asTotalIdentifiableAssetsAssetsUtilizedforOverallCompanyOperations$9,5531,21910,7721,129$10,0481,13411,182668$9,835I)23211,0671,143$10,0201,18111,2011,326TotalAssets$11,901$11,850$12,210$12,52794 Note'14.0'isaggregatedCondensedBalanceSheet(Unaudited),SetforthbelowistheCompany'scondensedbalancesheetatMarch3l,1998whichhasbeendisaggregatedpursuanttothetermsoftheLIPAAgreementtogiveeffecttotheproposedLIPAansactionasifithadoccurredonMarch31;1998.Theassets;-capitalizationandliabilitiesattributableHoldCoSubsidiaryrepresentthe,Company'stransferofitsgasandgenerationbusinesstosuchsubsidiary.Theassets,capitalizationandliabilitiesattributable'toLIPArepresentthoseitemsthatwillbeacquiredorassumedbyLIPAthroughitsacquisitionoftheCompany'scommonstock.Allsuchamountsexclude'theproceedsfromthesaleofcommonstocktoLIPA.Thedisaggregatedcondensedbalancesheetwaspreparedby'managemento'ftheCom'pany,andissubjecttoadjustment.ForafurtherdiscussionoftheLIPATransaction,seeNote2.'(Inmillionstofdollars)ASSETSLILCOHoldCoSubsidiaryLIPATotalNetUtilityPlantRegulatoryAssetsShorehamrelatedRegulatorytaxassetOtherTotalRegulatoryAssets$3,814.14,661.11,737.9'92.8=7,091.8$1,777.821.0430,1451.1$2,036.34,661.11,716.9262,76,640.7NonutilityPropertyandOtherInvestments.,TotalCurrentAssetsDeferredChargesTotalAssetsCAPITALIZATIONAND,LIABILITIES50.8858.3,85.7$11,900.732.9,'7.9494.2,,364.138.047.7$2,794.0$9,106.7Longtermdebt,includingcurrentmaturitiesPreferredstock,includingcurrentmaturitiestommonShareowner'sEquity1''latoryLiabilitiesCurrentLiabilitiesDeferredCredits,OperatingReserves'ommitmentsandContingencies$4,482.9702.02,662.5$7,847.4389.4587.4.,2,608.8,467.7.$1,130.5363.0161.7$1,655.224.2433.0211.2,470.4$3,352.4339.025008$6,192.2365.2154.42,397.6,-(2.7)TotalCapitalizationandLiabilities$11,900.7';'2,794.0$9,106.7kckkItktt'I~ktt'tfPk"ttktk95 Note15.QuarterlyFinancialInformation(Unaudited)Summarized'quarterlyfinancial'datafor1998,"1997and1996is.asfollows:(In'ihousandsofdollarsexceptearningspercommonshare)iscaear3MonthsEnded"'"''3/31/976/30/97'9/30/9712/31/97"3/31/98OperatingRevenues~$851,182OperatingIncome.'190,001'etIncome87,697Earningsforcommonstock,74,728,Basicanddilutedearningspercommonsfiare'62$664,488""'852,408',$779,622144,079,",,'42,611,171,96945)16)',1144)384-i56,75632,193131,435.,43,807.261.09.36$827,576209,637115,939,.102,992.853MonthsEnde'iI3/31/96CalendarYearEndedDecember31,19966/30/969/30/9612/31/96OperatingRevenuesOperatingIncomeNetIncomeEarnings'forcommonstockBasicanddilutedearningspercommonshare$864,214190,42181,75368,682.57$694,602141,06540,52427,453.23$849,775235,402130,023116,972.97$742;104169,693'4,16451,141.43ReportofErnst&,YoungLLP,IndependentAuditors,TotheShareownersandBoardofDirectorsofLongIslandLightingCompanyWehaveauditedtheaccompanyingbalancesheetofLongIslandLightingCompanyandtherelatedstatementofcapitalizationasofMarch31,1998and1997,andDecember31,1996andtherelatedstatementsofincome,retainedearningsandcashflowsfortheyearendedMarch31,1998,thetransitionperiodfromJanuary1,1997toMarch31,1997and'eachofthetwoyearsintheperiodendedDecember31,1996.OurauditsalsoincludedthefinancialstatementschedulelistedintheindexatItem14(a).ThesefinancialstatementsandschedulearetheresponsibilityoftheCompany'smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsandschedulebasedonouraudits.Weconductedourauditsinaccordancewithgenerallyacceptedauditingstandards.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.-In.our'pinion",thefinancialstatementsreferredto.abovepresentfairly,'inall'materialrespec'ts,'thefinancialpositionofLongIslandLightingCompanyatMarch31,1998and1997,andDecember31,1996,andtheresultsofitsoperationsanditscflowsfortheyearendedMarch31,1998,theqtransitionperiodfromJanuary1,1997toMarch31,1997andeachofthetwoyearsintheperiodendedDecember31,1996,inconformitywithgenerally'cceptedaccountingprinciples.Also,"inouropinion,therelatedfinancialstatementschedule,whenconsideredinrelationtothebasicfinancialstatementstakenasawhole,presentsfairlyinallmaterialrespectstheinformationsetforththerein.AsdiscussedinNote1tothefinancialstatements,duringtheyearendedMarch31,1998theCompanychangeditsmethodofaccountingforrevenuesprovidedforundertheRateModerationComponent.Melville,NewYorkMay22,199896 Item9.'ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosuresflVNotapplicable.httItJVg97 PARTIII~'ncludedintheSECfilingofMay28,1998.Item10.DirectorsandExecutiveOfficersoftheCompanyllItem11.ExecutiveCompensationItem12.SecurityOwnershipofCertainBeneficialOwnersandManagement1Item13.CertainRelationshipsandRelatedTransactionsPARTIVItem1'4.Exhibits,FinancialStatementSchedules,andReportsonForm8-K(a)(1)ListofFinancialStatementsStatementofIncomefortheyearendedMarch31,1998,thethreemonthsendedMarch31,1997andtheyearsendedDecember31,1996and1995.BalanceSheetatMarch31,1998and1997andDecember31,1996.StatementofRetainedEarningsatMarch31,1998'and1997andDecember31,1996and1995.StatementofCapitalizationatMarch31,1998and1997andDecember31,1996.StatementofCashFlowsfortheyearendedMarch31,1998,thethreemonthsendedMarch1997andtheyearsendedDecember31,1996and1995.NotestoFinancialStatements(2)ListofFinancialStatementSchedulesValuationandQualifyingAccounts(ScheduleII)(3)ListofExhibitsTobeprovidedbytheLegalDepartmentandincludedinthefilingcopy.98 SCHEDULEII-VALUATIONANDQUALIFYINGACCOUNTS(ThousandsofDollars)ColumnAColumnBColumnCColumnDColumnEAdditionsDescriptionBalanceatbeginningofperiodChargedtocostsandexpensesChargedtootheraccounts-describeDeductions-describeBalanceatendofperiodYearendedMarch31,1998Deductedfromassetaccounts:Allowancefordoubtfulaccounts$23,675$23,239$23,431to$23,483ThreeMonthsEndedMarch31,1997Deductedfromassetaccounts:Allowancefordoubtfulaccounts$25,000$4,821$6,146<0$23,675YearendedDecember31,1996Deductedfromassetaccounts:Allowancefordoubtfulaccounts$24,676$23,119$22,795re$25,000arendedDecember31,1995ductedfromassetaccounts:Allowancefordoubtfulaccounts$23,365$17,751$16,44000$24,676(I)Uncollectibleaccountswrittenognetofrecoveries.99  
".(',i",'~'ignatures,,DateWILLIAMJ.CATACOSINOS4*'.Willia'mJ.Catacosinos,PrincipalExecutiyeOtic'erandChairmanoftheBoard,ofDirectors.JAMEST."FLYNN*JamesT.Flynn,President,',ChiefOperatingOfficer,Director"/s/JOSEPHE.FONTANAJosephE.Fontana,VicePresident,Controller,PrincipalAccountingOfficerPursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheregistrantandinthecapacitiesandonthedatesindicated.tSinatureandTitleA.JAMESBARNES*A.JamesBarnes,DirectorI,fMay28,1998GEORGEBUGLIARELLO*GeorgeBugliarello,DirectorRENSOL.CAPORALI*.,RensoL.Caporali,DirectorVICKIL.FULLER*VickiL.Fuller,DirectorKATHERINED.ORTEGA*KatherineD.Ortega,DirectorBASILA.PATERSON*BasilA.Paterson,DirectorRICHARDL.SCHMALENSEE*RichardL.Schmalensee,DirectorGEORGEJ.SIDERIS*GeorgeJ.Sideris,DirectorJOHNH.TALMAGE*JohnH.Talmage,Director/s/ANTHONYNOZZOLILLOAnthonyNozzolillo(Individually,asSeniorVicePresidentandPrincipalFinancialOfficerandasattorney-in-factforeachofthepersonsindicated)100 SIGNATURES,ByP11PursuanttotherequirementsofSection13or.15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycaused,thisreporttobesignedonitsbehalfbytheundersigned,,thereuntodulyauthprized.LONGISLANDLIGHTINGCOMPANYVIi4qltDate:May28,1998:=/s/ANTHONYNOZZOLILLOANTHONYNOZZOLILLOPrincipalFinancialOfficerOriginalpowersofattorney,authorizingKathleenA.MarionandAnthonyNozzolillo,andeachofthem;tosignthisreportandanyamendmentsthereto,asattorney-in-factforeachoftheDirectorsandOfficersoftheCompany,andacertifiedcopyoftheresolutionoftheBoardofDirectorsoftheCompanyauthorizingsaidpersonsandeachofthemtosignthisreportand~,,'mendmentstheretoasattorney-in-factforanyOfficerssigningonbehalfoftheCompany,havebeen,arebeingfiledorwillbefiledwiththeSecuritiesandExchangeCommission.101 ConsentofIndeendentAuditorsWeconsenttotheincorporationbyreferenceinthePost-EffectiveAmendmentNo.3toRegistrationStatement(No.33-16238)onFormS-8relatingtoLongIslandLightingCompany'sEmployeeStock'PurchasePlan,Post"-EffectiveAmendmentNo.1toRegistrationStatement(No.2-87427)onFormS-3relatingtoLongIslandLightingCompany'sAutomaticDividendReinvestmentPlanandintherelatedProspectus,RegistrationStatement(No.2-88578)onFormS-3relatingtotheissuanceofCommonStockandintherelatedProspectusandRegistrationStatement(No.33-52963)onFormS-3relatingtotheissuanceofGeneralandRefundingBonds,Debentures,PreferredStockorCommonStockandintherelatedProspectus,ofourreportdatedMay22,1998,withrespecttothefinancialstatementsandscheduleofLongIslandLighting"Companyincludedin'thisAnnualReportonForm10-KfortheyearendedMarch31,1998./s/ERNST&YOUNG'LLPiMelville,NewYorkMay26,1998102  
".(',i",'~'ignatures,,DateWILLIAMJ.CATACOSINOS4*'.Willia'mJ.Catacosinos,PrincipalExecutiyeOtic'erandChairmanoftheBoard,ofDirectors.JAMEST."FLYNN*JamesT.Flynn,President,',ChiefOperatingOfficer,Director"/s/JOSEPHE.FONTANAJosephE.Fontana,VicePresident,Controller,PrincipalAccountingOfficerPursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheregistrantandinthecapacitiesandonthedatesindicated.tSinatureandTitleA.JAMESBARNES*A.JamesBarnes,DirectorI,fMay28,1998GEORGEBUGLIARELLO*GeorgeBugliarello,DirectorRENSOL.CAPORALI*.,RensoL.Caporali,DirectorVICKIL.FULLER*VickiL.Fuller,DirectorKATHERINED.ORTEGA*KatherineD.Ortega,DirectorBASILA.PATERSON*BasilA.Paterson,DirectorRICHARDL.SCHMALENSEE*RichardL.Schmalensee,DirectorGEORGEJ.SIDERIS*GeorgeJ.Sideris,DirectorJOHNH.TALMAGE*JohnH.Talmage,Director/s/ANTHONYNOZZOLILLOAnthonyNozzolillo(Individually,asSeniorVicePresidentandPrincipalFinancialOfficerandasattorney-in-factforeachofthepersonsindicated)100 SIGNATURES,ByP11PursuanttotherequirementsofSection13or.15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycaused,thisreporttobesignedonitsbehalfbytheundersigned,,thereuntodulyauthprized.LONGISLANDLIGHTINGCOMPANYVIi4qltDate:May28,1998:=/s/ANTHONYNOZZOLILLOANTHONYNOZZOLILLOPrincipalFinancialOfficerOriginalpowersofattorney,authorizingKathleenA.MarionandAnthonyNozzolillo,andeachofthem;tosignthisreportandanyamendmentsthereto,asattorney-in-factforeachoftheDirectorsandOfficersoftheCompany,andacertifiedcopyoftheresolutionoftheBoardofDirectorsoftheCompanyauthorizingsaidpersonsandeachofthemtosignthisreportand~,,'mendmentstheretoasattorney-in-factforanyOfficerssigningonbehalfoftheCompany,havebeen,arebeingfiledorwillbefiledwiththeSecuritiesandExchangeCommission.101 ConsentofIndeendentAuditorsWeconsenttotheincorporationbyreferenceinthePost-EffectiveAmendmentNo.3toRegistrationStatement(No.33-16238)onFormS-8relatingtoLongIslandLightingCompany'sEmployeeStock'PurchasePlan,Post"-EffectiveAmendmentNo.1toRegistrationStatement(No.2-87427)onFormS-3relatingtoLongIslandLightingCompany'sAutomaticDividendReinvestmentPlanandintherelatedProspectus,RegistrationStatement(No.2-88578)onFormS-3relatingtotheissuanceofCommonStockandintherelatedProspectusandRegistrationStatement(No.33-52963)onFormS-3relatingtotheissuanceofGeneralandRefundingBonds,Debentures,PreferredStockorCommonStockandintherelatedProspectus,ofourreportdatedMay22,1998,withrespecttothefinancialstatementsandscheduleofLongIslandLighting"Companyincludedin'thisAnnualReportonForm10-KfortheyearendedMarch31,1998./s/ERNST&YOUNG'LLPiMelville,NewYorkMay26,1998102}}
}}

Revision as of 22:45, 18 May 2018

1997 Annual Rept for Chge. W/Form 10-K
ML17059C116
Person / Time
Site: Nine Mile Point  Constellation icon.png
Issue date: 12/31/1997
From: GANCI P J, MACK J E
CENTRAL HUDSON GAS & ELECTRIC CORP.
To:
Shared Package
ML17059C114 List:
References
NUDOCS 9807070353
Download: ML17059C116 (174)
v • d • e


Text

F00grDDroM@,~iDII5iggg000-0~D~00JgDgOD@0(Qgg3f+oPgQQPPPl~QDD00o]~tomCO~IO(QO0Ijtjli5)~(OO000-'0-.00e,Do",t'EisenhowerHall,theUnitedStatesMilitaryAcademyatWestPoint9807070353980b30PDRADOCK05000220PDR1997AnnualReportandForm10-K Cover:CentralHudsonprovidesEnergySolutionsforourelectricandnaturalgascustomers.TheUnitedStatesMilitaryAcademyatWestPointisamajorgascustomer,andthesummerof1997markedthefirstfullseasonthatgaswasusedtoprovideairconditioningforEisenhowerHall.FormoreinformationaboutgascoolingatEisenhowerHallandavarietyofotherEnergySolutions,seepagesfourthroughtenofthisreport.~~~~MN~4~I~A\OE~MW~~IlaLj3g(lEisenhowerHallwasnamedafterDwightD.Eisenhower,theSupremeCommanderoftheAlliedExpeditionaryForcesinEuropeduringWorldWarIIandthe34thPresidentoftheUnitedStates.Themilitaryinsigniashownontherightisdisplayedonthefrontofthebuilding.

ContentsFinancialHighlightsReporttoShareholdersReportfortheYear1997FinancialProfileCorporate&StockInformationForm10-KAnnualReportDirectorskOfficerspage1page2page4page11page12page13insidebackcoverFinancialHighliglhtsOperatingRevenuesNetIncomeEarningsPerShareAverageSharesOutstandingDividendsDeclaredPerShareTotalAssetsElectricSalesOwnTerritory(kwh.)NaturalGasFirmSales(thousandsofcubicfeet)ElectricCustomersOwnTerritory(average)FirmGasCustomers(average)197$520,277)00055,086,000$2.9717,435,000$2.135$1,252,090,0004,490,317,00010,285,000266,4716173371996$513,971,00056,082,000$2.9917,549,000$2.115$1,249,106,0004,608,211,00010,850,000263,78160,470change1.2%(1.8)%(.7)%(.6)%.9%.2%(2.6)%(5.2)%1.0%1.4%ICentralHudsonGas&ElectricCorporation JohnE.MackIII,seated,ChairmanoftheBoardandChiefExecutiveOfficer;andPaulJ.Ganci,PresidentandChiefOperatingOfficer."Inacompetitivebusinessworldwe'egoingtobeawinner."Thisquotewasdisplayedonthecoverofour1994AnnualReport.Thepurposeforrepeatingitasaprologuetothisyear'sletteristore-affirmourconfi-denceinthedirectors,officers,managementandunionemployeesasbeingthebestoftheutilityindustry.1997wasayearofcontinuedgrowth,solidfinancialperformanceandimprovedproductivity.Earningspersharewere$2.97for1997,aslightdecreasefrom1996reflectingunseasonalweather.Dividendspaidtoshareholdersincreasedonepercentfrom$2.11in1996to$2.13in1997.Duringthepastfiveyears,theaverageannualreturntoshareholderswas14.9percent,andin1997itwas48.4percent,ranking15thoutof96electricutilitiesintheUnitedStates.Bookvaluepershareincreasedfrom$26.87attheendof1996to$27.61attheendof1997.Inthepast,wehavepointedoutthatwhiletheoveralltrendinutilitycreditratingsinrecentyearshasbeendownward,CentralHudson'shastrendedupward.During1997,Standard8zPoor'supgradedtheCompany'ssecureddebtratingtoAfromA-basedonastrengthenedfinancialprofile,whichisexpectedtocontinuetoimprove.Thisprofilereflectsourcompetitiveprices,aflexibleanddiversefuelandenergysupplymixandmanagement'scommitmenttocreditquality.2CentralHudsonGas&ElectricCorporation Webelievethatthisupgrade,whichmarkedthefirsttimethattheCompanyhasreceivedanAratingfromStandard&Poor'ssince1975,recognizesoureffortstoaggressivelymanageourcostsandstrengthenourfinancialpositioninanticipationofacompetitivemarketplace.InourJanuary15,1998lettertoshareholders,weinformedyouaboutthestatusofanAmendedandRestatedSettlementAgreement,datedJanuary2,1998,whichwasexecutedandfiledwiththeNewYorkStatePublicServiceCommission.Aswepointedout,thisagreement,whichwasapprovedonFebruary4,1998,providesabalancedapproachforprovidingretailaccesstoallofourcustomersbyJuly1,2001andprovidesshareholderswiththeoppor-tunityforfullcostrecoveryofallexpendituresmadebytheCompanytofulfillitsobligationtoserveandprovidesafe,reliableenergytocustomerswithinourfranchisedserviceterritory.Inaddition,theagreementpro-videsfortheformationofaholdingcompanynolaterthanJune30,2001.TheagreementalsorequiresthattheCompanyauctionitsfossil-fueledgeneratingstationsnolaterthanJune30,2001.TheagreementcallsforthecustomershareofthenetsaleproceedsabovenetbookvaluetobeappliedascustomerbenefitstooffsetregulatoryassetsandtheCompany'snetinvestmentintheNineMilePoint2NuclearStation.AlthoughtheCompanyretainstherighttobidintheauctionthroughanunregulatedaffiliate,wecanmakenoprojectionsastotheoutcomeoftheauctionorotherstrategicalternativestheCompanymaypursue,norcanweestimatethefutureimpactofregulationontherestructuredcom-pany.Aspartofthetransitionprocesswewillreevaluateourfinancialpolicies,includingtheappropriatelevelofthecommondividend.Thethemeofthisyear'sAnnualReportillustrateshowwearebuildingpartnershipswithcustomersthroughourEnergySolutionsprogram,whichprovidesabroadrangeofproductsandservicestohelpsolveamultitudeofbusinesschallenges.OurlongstandingpresenceintheCommunityhelpsusunderstandtheneedsofourcustomers.Ouremployeesliveandworkinthecommu-nitiesweserve.Weareaccessible,weareresponsiveandwestrivetobesuccessfulbycontinuouslyexceedingtheexpectationsofourcustomers,meetingtheneedsofouremployeesandretainingtheconfidenceofourshareholders.Verytrulyyours,ChairmanoftheBoardandChiefExecutiveOfficerPresidentandChiefOperatingOfficer3CentralHudsonGas&ElectricCorporation CentralHudsonanditspredecessorcompanieshavebeenservingtheMid-HudsonValleysince1850.Wearethe"local"utilitycompany,withlongstandingrootsintheValley.Wearehonoredtoservethepeopleoftheregion.Wevaluethemascustomersandwewanttocontinueservingtheminthemonthsandyearsahead.Beingthelocalutilitycompany,wehaveapresenceinthecommunitywhichhelpsusunderstandtheneedsofourcustomers.Weareaccessibleandweareresponsive.Weareabletomeetourcustomers'xpectations.EisenhowerHallisthemaincadetactivitiesbuildingattheUnitedStatesMilitaryAcademyatWestPoint,OrangeCounty.CentralHudsonhasbeenprovidingnaturalgasservicetoWestPointsince1931.WhentheacademywasconsideringreplacinganagingelectricairconditioningsysteminEisenhowerHall,CentralHudsonrecommendedtheuseofnaturalgascooling,whichwasconsistentwiththefederalgovernment'sobjectiveofusingcleannaturalgasasafuelwheneverpossiblebecauseofenvironmentalconsiderations.Inthisinstance,gassuppliedbyCentralHudsonreplacedelectricitysuppliedbyaneighboringutilitycompany.LookingnorthfromWestPoint,theHudsonRiverpassesthroughtheHudsonHighlands.'it'll.l)IX(l.'LIIPITliltXi'I!lVI'AI'I'/'lllodezniga((onolCoIkInca(lscieceBa(ldMII;INCLUDES;CHEMISTRY,BIOLOGY,JOURNALISTS%MEDIACENTER.COMPUTERSERVICESANDPLANETARIUMNaturalgasisreplacingoilattheStateUniversityofNewYorkatNewPaltz,UlsterCounty.PhaseIwascompletedwiththeinstallationofgasservicetofivemajorbuildingsforhotwaterandotherapplications.PhaseIIwillinvolvetheconversionoflargebc'tonaturalgas.Eventually,naturalgaswillservetheentirecampCentralHudsonGas&ElectricCorporation CentralHudsoncollaboratedwithamajorperformingartstorganization,citygovernment,onomicdevelopmentagenciesandbusinessorganizationstocreateaRiverfrontAmphitheaterasanewentertainmentvenueontheHudsonRiverinPoughkeepsie,DutchessCounty.CentralHudsonprovidedavarietyoflightingdesignandrelatedelectricserviceswhichhelpedmakepossibletheinitialconcertbySawyerBrown,recognizedasAmerica'stopcountryband.Thispartnershiphelpedre-enforceCentralHudson'spresenceinthecommunityanditsreputationasthe"local"energysupplier.'IRaregeologicalbeautyandexceptionaloutdoorrecreationalactivitiescharacterizetheMinnewaskaStateParkPreserve,locatednearNewPaltz,UlsterCounty.Keepingtheenvironmentinmind,CentralHudsondevelopedacomprehensiveEnvironmentalManagementandConstructionPlanforrebuildinganelectrictransmissionlinewhichwasbuiltthroughMinnewaskainthe1930swhenthelandwasprivatelyowned.Oneinnovativeaspectoftheplanwastheuseofahelicoptertotransportpersonnelandequipmenttoworkareas,thuseliminatingtheneedtomoveheavytrucksandmaterialsalongthepark'strailsandcarriageways.Inaddition,allconstructionpersonnelreceivedformalenvironmentalsensitivitytrainingregardingtheproject,whichwillenhancethereliabilityofelectricserviceintheregion.Thephotographshowsalargehelicoptertransportingatransmissionstructure,whichweighsabout8,000pounds.5CentralHudsonGas&ElectricCorporation d$P4~~pl~CentralHudsonhasastrong,workingrelationshipwithHunterMountain,datingbackalmost40yearstowhentheskicenterfirstopenedinGreeneCounty.Overtheyears,CentralHudshelpedHunterMountainintroducenewelectricsnowmakingtechnologytoproducemoresnow,operatemoreefficientlyandcontrolcosts.Theskicenter,thelargestintheCatskills,recentlytookadvantageofCentralHudson'snewlow-costfinancingprogramtoaddmoreenergyefficientequipment,whichwillenhanceitsreputationasthe"SnowmakingCapitaloftheWorld."Snowmakingbeganafewweeksafterthefallfoliagereacheditspeak.Customerscandependonus...torespondincreativewaystotheirenergy-relatedproblems...tooffergreaterchoice,serviceandvalue.Forexample,CentralHudsonintroducedaServiceGuaranteeonApril1oflastyear.Underthisprogram,CentralHudsonguaranteesthatitwilpscheduledappointmentswithanelectricorgascustomeroritwillcredit$20tothecustomeraccount.Duringthelastninemonthsof1997,10,078appointmentsweremade,and9,960-or98.8%-werekeptonschedule.CentralHudson'sabilitytodistinguishitsproductsandservicesinacompetitiveenergymarketplacedependsuponmeetingitscustomers'xpectations.Asaresult,theServiceGuaranteegoalfor1998istokeep100%ofallscheduledappointments.6CentralHudsonGas&ElectricCorporationFavorableexperiencewith"groundsource"heatpumpsincampusbuildingsencouragedBardCollegetoinstalladditionalheatpumpsinstudentresidences,whichwerebeingrenovatedandexpanded.Thecollege,locatedinAnnandale-on-Hudson,DutchessCounty,isoneoftheleadingliberalartscollegesintheNortheast.Groundsourceheatpumps,whicharequicklybecomingthemostreliableandcompetitivesystemforheating,cingandwaterheating,arebecomingattractivefincommercialandeducationalbuildingsaswasforresidentialuse.

-sPassengersonanearlymorningDeltaflighttoAtlantausednewboardingbridgeswhicharepartofa$15.4millionrenovationprogramatStewartInternationalAirport,locatedintheNewburgharea,OrangeCounty.Theexpansionprojectdoubledthesizeoftheterminalandaddedanumberofotherpassengeramenities.Naturalgaswasselectedforheatingandwaterheatingintheexpandedfacility.Stewart,recognizedasthe"economicengine"forthefuturedevelopmentoftheMid-HudsonValley,isthefirstcommercialairportinthecountrytoreceivefederalapprovaltoproceedwithprivatizationundertheFederalAviationAdministration'spilotprogram.tisabout2a.m.onasnowyNovembermorningatthePoughkeepsieTrainStation,whereMetroNorthpassengercarsontheHudsonlinearebeingheatedforearlymorningtripsintoNewYorkCity.During1997,MetroNorthcontactedCentralHudsonaboutthepossibilityofreplacingdieselfuelwithelectricityforheatingtraincarsinthewinterandcoolingtheminthesummer.MetroNorthalsowantedtoservicethetraincarsatthePoughkeepsiestationratherthanatvariouslocationsalongtheHudsonline.CentralHudsonworkedcloselywithMetroNorthtodevelopasolutiontothisenergyproblempriortothearrivalofcoldweather.addition,alargenumberofhwereinstalledatthestationforbothsafetyandsecurity.kI/47CentralHudsonGas&ElectricCorporation We'zeyomzjzzzezgySollmlL;zozzscozzzyzzzy'entralHudson'sEnergySolutionsprogramhasexpandedfromaninitiativetohelpcommercialandindustrialcustomersbecomemorecompetitivetoabroad-basedprogramwhichoffersEnergySolutionstoresidentialcustomersaswell:suchthingsasenergy-relatedproducts,servicesandexpertise.During1998,anumberofnewproductsandserviceswillbeintroducedtoenhanceourfocusonmeetingtheneedsofourcustomers.Ai)~+')l)I-I,.I)):5Q.'1:.xf.)'reservingthenaturalenvironmentwasamajorpriorityintheconstructionofMohonkPreserve's$2.8millionvisitorscenter,locatednearNewPaltz,UlsterCounty.Byusingnativematerialsforconstructionandleavingthesiteundisturbedasmuchaspossible,theTrappsGatewayCenterreflectsitssurroundingenvironmentatthefootoftheShawangunkmountains.Aninnovativeapplicationofaground-sourceheatpumpwilluserenewableenergyresourceslocatedbelowtheearth'ssurfacetoprovidecentralheating,coolingandhotwaterforthe9,200square-footcenter.Inadditiontobeingenergyefficientandcosteffective,theheatpumpwillhavevirtuallynoeffectontheenvironment,noemissionsandnoriskoffuelleaksonthesite.8CentralHudsonGas&ElectricCorporation~ePS~l~~Fels"'I'IW))))))it\tNllCSKlll,f4>41big))~)))-LLThedilemma:howtomaintainiceforindoorskatingattheIceTimeSportsComplexwhentheoutsidetemperatureis90degreesandthehumidityis80percent.TheEnergySolution:installaninsulatedfoilceilingabovetheicerinktocontrolcondensation.ByutilizingCentralHudson'senergyefficiencyexpertise,IceTimesolvedanoperatingproblem,reducedenergycostsandcreatedabusinessopportunityallatthesametime.IceTime,whichopenedoneyearagoinNewburgh,OrangeCounty,ollyplannedtooperateonlyduringthewintermonths.Thesuspeioilceiling,however,hasbeenamajorfactorinenablingIceTimetooperateyear-round.

nklinCorporation,locatedinPleasantValley,utchessCounty,isaleadingsupplierofdatansmissiontechnologiestotelephonecompaniesthroughoutNorthAmerica.Uponlearningthatthiscustomerwasplanningaplantexpansion,andrealizingtheemphasisthatConklinCorporationplacesonproducinghighqualityproducts,CentralHudsonassistedbyconductinganIndustrialCompetitivenessSurvey.Basedontheresultsofthesurvey,whichanalyzedmanufacturingoperations,recommendationsweremadetoenhanceproductivityandqualitycontrol.ConklinCorporationwasthefirstISO9001registeredcompanyintheMid-HudsonValley,andithasbeenrecognizedasaSupplierofExcellenceforthreeconsecutiveyearsbyGTETelephone.PicturedaboveisConklin'sfamilyofISDNMultiplexers,whichallowtelephonecompaniestodeployhigh-speeddataserviceanywherethereisaneed.Theirsmallsizerepresentsapackagingbreakthroughutilizingadvancedmanufacturingmethodswhichprovidecustomerswitha40%savings.Theproductsareusedfortelecommuting,high-speedInternetaccess,distancelearningandtele-medicine,allofwhicharerapidlygrowingapplications.ondoutReservoirinUlsterCountyispartofthereservoirsystemwhichsuppliesanaverageofbilliongallonsofwaterperdayfortheCityofNewYork.CentralHudsonisworkingwiththecity'sDepartmentofEnvironmentalProtectiontodeterminehowvariouselectrotechnologiesmaybeusedtohelpprotectthequalityofdrinkingwaterfromtheCatskillMountainswatershed.9CentralHudsonGas8cElectricCorporation Zjliiea.gySOlliLlllEOnSfoxIReaMlelliilL;ilailCmlI;ormssI~~JAfterconsideringalloptions,morethan1,000customershaveelectedtoleaseanelectricwaterheaterfromCentralHudson.Foraslittleas$10.95amonth,thispopularprogramprovidesinstallationand24-hourserviceandrepairsforthelifeofthelease.During1997,waterheaterleaseswereup32%.iCw)Moreandmorecustomersareselectingclean-burningnaturalgasfireplacesoverwood-burningfireplaces.Thereisnochopping,nosplitting,nostacking,nosparks,nosmoke,nosootandnoash.Toenhancesales,CentralHudsonofferslow-costfinancingtocustomers.g'tr('pi~~rr~r~rest~rrrrr~~~r~-=,.A,'ihi"~Qpr'rI"IgIIIjmIrIII'Ilrlrl'I1lH",IIIIIII~41.,rgrCIOCentralHudsonGas&ElectricCorporationWhenconsideringoutdoorlighting,anincreasingnumberofhome-owners,residentialdevelopmentsandbusinessesarechoosinglow-cost,leased1'optionsfromCentralHudson.Alightinstallednexistingpolestartsatlessthen$10permonth.Outdoorlightingsaleswereup33%in1997.

04CO3K21ElectricSales199319941995199619970Residential5CommercialCIIndustrialQOther11109v)8C65uO43210FirmGasSales199319941995199619976,517',483',719',718*6,164*'BillingDegreeDaysClResidentialIICommercial0IndustrialRatioofFundsFromOperationsToTotalInterestCharges5.554.5l-43.52.52o1.5O10.5EPS&DividendsClDividendsPaidQEPS199319941995199619971993199419951996199710080g6040o20CapitalizationRatios0CommonEquityIIPreferredStockCILong-termDebtQShort-termDebt5040I30OO2010CommonStockPricesCILowlgHighaBookDClosetli1993199419951996199719931994199519961997IICentralHudsonGasRElectricCorporation CorporatecRStockInformationAnnualMeetingTheannualmeetingofholdersofcommonstockwillbeheldonTuesday,April7,1998at10:30a.m.attheCorporation'sGeneralOffices,284SouthAvenue,Poughkeepsie,NewYork.Themanagementwelcomesthepersonalattendanceofshareholdersatthismeeting.Asummaryreportofthemeetingwillbemailedtoallshareholdersofrecordatalaterdate.FinanciolandStatisticalReportAcomprehensiveten-yearfinancialandstatisticalsupplementtothisAnnualReportwillbeavailabletoshareholdersattendingtheAnnualMeeting.CopiesmayalsobeobtainedbywritingorcallingStevenV.Lant,TreasurerandAssistantSecretary,284SouthAvenue,Poughkeepsie,NY12601;telephone(914)486-5254.SecurityAnalystsandInstitutionalInvestorsStevenV.Lant,TreasurerandAssistantSecretary;telephone(914)486-5254.MultipleCopiesofthisAnnualReportShareholderswhoreceivemultiplecopiesofthisAnnualReportmay,iftheychoose,reducethenumberreceivedbycallingFirstChicagoTrustCompanyofNewYorkat(800)428-9578.CommonStockPurchasePlanCentralHudsonoffersaStockPurcliasePlanunderwhichinvestorsmayconvenientlypurchasecommonstockandreinvestcashdividends.AllbrokerageandotherfeestoacquiresharesarepaidbytheCorporation.Toparticipate,contactPaulJ.Gajdos,Director-OfficeServicesandShareholderRelations,at(914)486-5204orFirstChicagoTrustCompanyofNewYorkat(800)428-9578.InternetThisAnnualReport,ourSECfilingsandtheProspectusforourStockPurchasePlan,aswellasotherinformationabouttheCompany,isavailablebyaccessingourWebsiteatwww.cenhud.corn.TransferAgentcRRegistrar,CommonandPreferredStock/ShareholderInformationFirstChicagoTrustCompanyofNewYork,POBox2500,JerseyCity,NJ07303-2500.Internet:www.fctc.corn;telephone(800)428-9578between8:30a.m.and7p.m.weekdays.StockExchangeListing/StockTradingSymbolCommon:NewYorkStockExc/range-CNHGeneralCounselGould&WilkieOneChaseMan)rattanPlazaNewYork,NY10005enIIfClillU(ol3QoAYourEnergySolutionsCompany"IIndependentAccountantsPriceWaterhouseLLP1177AvenueoftheAmericasNcwYork,NY10036Common1"Quarter2""Quarter3"Quarter4'hQuarterStockMarketPriceandDividendsPaidPerShare19971996~W~vlCJl~l~w$33'/s$30'/z$53$31'/2$28'/4$.52534'/429'/4.5331'/428/s525357/s32i/53531r/29r/53437/s34>>/r653531r/z29S312CentralHudsonGas&ElectricCorporation SECURITIESANDEXCHANGECOMMISSIONWashington,D.C.20549FORMI0-KANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934Forthefiscalyearended......................December31,1997Commissionfilenumber1-3268CENTRALHUDSONGAS8tELECTRICCORPORATION(Exactnameofregistrantasspecifiedinitscharter)NewYork(Stateorotherjurisdictionofincorporationororganization)I4-0555980(I.R.S.EmployerIdentificationNo.)284SouthAvenue,Poughkeepsie,NewYork(Addressofprincipalexecutiveoffices)I260I-4879(ZipCode)Registrant'stelephonenumber,includingareacode(914)452-2000SecuritiesregisteredpursuanttoSection12(b)oftheAct:TitleofeachclassNameofeachexchangeonwhichregisteredCommonStock,$5.00parvalueNewYorkStockExchangeSecuritiesregisteredpursuanttoSection12(g)oftheAct:TitleofeachclassCumulativePreferredStock:4I/2%Series4.75%SeriesIndicatebycheckmarkwhethertheRegistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheRegistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesXNoIndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestofRegistrant'sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.[X]Theaggregatemarketvalueofthevotingandnon-votingcommonequityheldbynon-affiliatesoftheRegistrantasofFebruary9,1998was$689,835,480baseduponthelowestpriceatwhichRegistrant'sCommonStockwastradedonsuchdate,asreportedontheNewYorkStockExchangelistingofcompositetransactions.ThenumberofsharesoutstandingofRegistrant'sCommonStock,asofFebruary9,1998,was17,245,887.DOCUMENTSINCORPORATEDBYREFERENCECertainportionsofRegistrant'sAnnualReporttoShareholders,forthefiscalyearendedDecember31,1997,are;--incorporatedbyreferenceinPartsI,IIandIVofthisReport.rRegistrant'sdefinitiveProxyStatement,tobedatedMarch2,1998,andtobeusedinconnectionwithitsAnnualMeetingofShareholderstobeheldonApril7,1998,isincorporatedbyreferenceinPartIIIhereof.l3CentralHudsonGas&ElectricCorporation TABLEOFCONTENTSPagePARTIITENIITEN2BUSINESSGenerallyRatesRegulationConstructionProgramandFinancingFuelSupplyandCostEnvironmentalQualityResearchandDevelopmentOtherMattersExecutiveOfficersoftheCompanyPROPERTIESElectricNcwYorkPowerPool/IndependentSystemOperatorGasOtherMatters151515161616171919202222242425ITEN3ITEN4LEGALPROCEEDINGSSUBMISSIONOFMATTERSTOAVOTEOFSECURITYHOLDERSPARTIIITEMSITEN6ITEM7ITEM7AITEN8ITEM9MARKETFORTHECOMPANY'SCOMMONEQUITYANDRELATEDSTOCKHOLDERMATTERSSELECTEDFINANCIALDATAMANAGEMENT'SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONSQUANTITATIVEANDQUALITATIVEDISCLOSUREABOUTMARKETRISKFINANCIALSTATEMENTSANDSUPPLEMENTARYDATACHANGESINANDDISAGREEMENTSWITHACCOUNTANTSONACCOUNTINGANDFINANCIALDISCLOSURE28383861PARTIIIITEN10ITEMIIITEM12ITEN13DIRECTORSANDEXECUTIVEOFFICERSOFTHECOMPANYEXECUTIVECOMPENSATIONSECURITYOWNERSHIPOFCERTAINBENEFICIALOWNERSANDMANAGEMENTCERTAINRELATIONSHIPSANDRELATEDTRANSACTIONS6162PARTIYITEN14SIGNATURESEXHIBITS,FINANCIALSTATEMENTSCHEDULE,ANDREPORTSONFORM8-K-0l4CentralHudsonGas8ElectricCorporation PARTIForwardLookingStatementsThisForm10-Kmaycontainstatementswhich,totheextenttheyarenotrecitationsofhistoricalfact,constitute"forward-lookingstatements'ithinthemeaningoftheSecuritiesLitigationReformActof1995("ReformAct").Allsuchforward-lookingstatementsareintendedtobesubjecttothesafeharborprotectionprovidedbythcReformAct.AnumberofimportantfactorsaffectingthcCompany'sbusinessandfinancialresultscouldcauseactualresultstodiffermateriallyfromthosestatedintheforward-lookingstatements.Thosefactorsincludedevelopmentsinthelegislative,regulatoryandcompetitiveenvironment,electricandgasindustryrestructuringandcertainenvironmentalmatters.ITENIBusinessGenerallyRegistrant("Company")isagasandelectriccorporationformedonDecember31,1926,asaconsolidationofseveraloperatingutilitieswhichhadbeenaccumulatedunderonemanagementduringtheprevious26years.ThcCompanygenerates,purchasesanddistributeselectricity,andpurchasesanddistributesgas.TheCompany,intheopinionofitsgeneralcounsel,has,withminorexceptions,validfranchises,unlimitedinduration,toserveaterritoryextendingabout85milesalongtheHudsonRiverandabout25to40mileseastandwestfromsuchRiver.Thesouthernendoftheterritoryisabout25milesnorthofNewYorkCity,andthenorthernendisabout10milessouthoftheCityofAlbany.Theterritory,comprisingapproximately2,600squaremiles,hasapopulationestimatedat622300.Electricserviceisavailablethroughouttheterritory,andnaturalgasserviceisprovidedinandaboutthccitiesofPoughkeepsie,Beacon,NewburghandKingstonandincertainoutlyingandinterveningterritories.ThenumberofCompanyemployeesatDecember31,1997was1,196.TheCompany'sterritoryreflectsadiversifiedeconomy,includingmanufacturingindustries,rcscarchfirms,farms,overnmentalagencies,publicandprivateinstitutions,resorts,andwholesaleandretailtradeoperations.Forinformationconcerningrevenuesandoperatingincomebeforetaxes(expressedaspercentages)andoperatingprofitsandinformationregardingidentifiableassetsfortheelectricandgassegments,whicharethesignificantindustrysegmentsoftheCompany,secNote10-"DepartmentalInformation"oftheNotestotheFinancialStatementsrefcrrcdtoinItem8hereof(eachsuchNotebeinghereinaftercalledthe"Note").ConsumptionofelectricityinNewYorkStatehasstabilizedandthereisanexcessofelectricgeneratingcapacityintheState.In1998,asthecompetitivemarketplaceisdevelopedforelectricutilities,itisanticipatedthatelectriccustomerswillhavetheopportunitytopurchaseenergyandrelatedservicesfromsourcesotherthantheirlocalutility.Theseopportunitiesexisttodayfornaturalgascustomers.SeeItem7hereofunderthccaption"Competition/Deregulation"andNote1-"RegulatoryMatters"hereinforadiscussionofthecurrentsettlemcntnegotiationsregardingtheOctober1,1996submissionsofthcNewYorkutilitiesaspartofthePublicServiceCommissionoftheStateofNewYork's("PSC")CompetitiveOpportunitiesProceedingwhichmayaffectfutureoperationsoftheCompany.RatesGenerally:TheelectricandgasratesoftheCompanyapplicabletoservicesuppliedtoretailcustomerswithintheStateofNewYorkareregulatedbythePSC.TransmissionratesandratesforelectricitysoldforresaleininterstatecommerceareregulatedbytheFederalEnergyRegulatoryCommission("FERC").TheCompany'spresentretailratestructureconsistsofvariousserviceclassificationscoveringresidential,commercialandindustrialcustomers.During1997,theaveragepriceofelectricitytosuchcustomerswas8.55centsperkilowatthour("kWh"),representingnochangefromthe1996averageprice.RateProcccdings-ElectricandGas:ForinformationregardingtheCompany'smostrcccntclcctricandgascasesfiledwithePSC,seeItem7hereofunderthecaption"RateProceedings."CostAdjustmentClauses:ForinformationwithrespecttotheCompany'selectricandgascostadjustmentclauses,seeNote2-"SummaryofSignificantAccountingPolicies"hereinunderthccaption"Rates,RcvenucsandCostAdjustmentClauses."ISCentralHudsonGas&ElectricCorporation RegulationGenerally:TheCompanyissubjecttoregulationbythePSCwithrespectto,amongotherthings,servicerendered(includingtheratescharged),majortransmissionfacilitysiting,energyplanning,accountingproceduresandissuanceofsecurities.CertainoftheCompany'sactivities,includingaccountingandtheacquisitionanddispositionofcertainproperty,aresubjecttoregulationbytheFERC,undertheFederalPowerAct,byreasonoftheCompany'stransmissionandsaleforresaleofelectricenergyininterstatecommerce.TheCompanyisnotsubjecttotheprovisionsoftheNaturalGasAct.IntheopinionofgeneralcounselfortheCompany,theCompany'smajorhydroelectricfacilitiesarenotrequiredtobelicensedundertheFederalPowerAct.PurchasedElectricPowerGeneration:PursuanttotheprovisionsofthefederalPublicUtilityRegulatoryPoliciesActof1978("PURPA"),andtheNewYorkPublicServiceLaw,theCompanyisrequiredtoenterintolong-termcontractstopurchaseelectricpowergeneratedbysmallhydro,alternativeenergyandcogenerationfacilitieswhichmeetqualificationstandardsestablishedbysuchstatutesandtheregulatoryprogramspromulgatedthereunder.WithrespecttofacilitiesqualifiedunderPURPA,theCompanymustpayitsavoidedcost(i.e.,thecosttheCompanywouldotherwiseincurtogeneratetheincrementofpowerpurchased)forelectricpowerpurchasedfromqualifiedfacilities,which,undertheNewYorkPublicServiceLaw,is"atratesjustandreasonabletoelectric[...]corporationratepayers."AsofDecember31,1997,theCompany'savoidedcostatthe115kVtransmissionlevelwasapproximately3.0centsperkWh.AsofDecember31,1997,19Megawatts("MW")ofgeneration,qualifyingforavoidedcostpaymentsbytheCompanywasinterconnectedwiththeCompany'ssystem.TheopportunityunderPURPAandtheNewYorkPublicServiceLawtorequiretheCompanytopurchasepowerfromqualifyingfacilitiescouldserveasaninducementtotheCompany'sindustrialandcommercialcustomerstoinstalltheirownqualifyingon-sitegenerationfacilitiestoreducetheirpurchasesofelectricpowerfromtheCompanyThisactionwouldresultinlossesofrevenuesfromsuchcustomers.However,asofDecember31,1997,nosignificantcustomerhasindicatedtotheCompanytheintentiontopursuesuchalternative.ConstructionProgramandFinancingTheCompanyisengagedinaconstructionprogramwhichispresentlyestimatedtoinvolvetotalcashexpendituresduringtheperiod1998through1999ofapproximately$109.8million.TheCompany'sprincipalconstructionprojectsconsistofthosedesignedtoimprovethereliability,efficiencyandenvironmentalcompatibilityoftheCompany'sgeneratingfacilitiesandthoserequiredtoexpand,reinforceandreplacetheCompany'stransmission,substation,distributionandcommonfacilities.Forestimatesofconstructionexpenditures,internalfundsavailable,mandatoryandoptionalredemptionoflong-termsecurities,andworkingcapitalrequirementsforthetwo-yearperiod1998-1999,seethesubcaption"ConstructionProgram"inItem7hereofunderthecaption"CapitalResourcesandLiquidity."ForadiscussionoftheCompany'scapitalstructure,financingprogramandshort-termborrowingarrangements,seeNotes5,6and7"Short-termBorrowingArrangements,""Capitalization-CapitalStock"and"Capitalization-Long-termDebt,"respectively,andItem7hereofunderthesubcaptions"CapitalStructure,""FinancingProgram"and"Short-TermDebt"ofthecaption"CapitalResourcesandLiquidity."TheCompany'sCertificateofIncorporationanditsvariousdebtinstrumentsdonotcontainanylimitationsupontheissuanceofauthorized,butunissued,preferredstockandcommonstockorofunsecuredshort-termdebt.TheCompany'svariousdebtinstrumentsincludelimitationsastotheamountofadditionalfundedindebtednesswhichtheCompanycanissue.TheCompanybelievessuchlimitationswillnotimpairitsabilitytoissueanyorallofthedebtdescribedundertheabove-referencedsubcaption"FinancingProgram."FuelSupplyandCostTheCompany'stwoprimaryfossilfuel-firedelectricgeneratingstationsaretheRosetonSteamElectricGeneratingPlant("RosetonPlant")(describedinItem2hereofunderthesubcaptions"Electric-General"and"Electric-RosetonPlant")andtheDanskammerPointSteamElectricGeneratingStation("DanskammerPlant")(referredtoinItem2hereofunderthesubcaption"Electric-General").Unit2oftheRosetonPlant,whichPlantisfullyequippedtoburnbothresidualoilandnaturalgas,hasbeenthepredominantoperatingunitofthatPlant'stwounitsduring1997,withUnit1availableonanalternatebasis.Units1and2oftheDanskammerPlant,whichareequippedtobumresidualoilornaturalgas,areonlyoperatedwhenthedemandforpowerishighorpurchasedpowerandenergyexchangecontractsareuneconomical.Units3and4oftheDanskammerPlant,whichareoperatedpredominantly,arecapableofburningcoal,naturalgas,orresidualoil.l6CentralHudsonGas&ElectricCorporation Forthe12monthsendedDecember31,1997,thesourcesandrelatedcostsofelectricgenerationfortheCompanywereasfollows:SourcesofGenerationPurchasedPowerCoalGasNuclearOilHydroelectricAggregatePercentageofEnergyGenerated34.0%38.54.813.76.62.4100.0%Costsin1997($000)$56,00240,1597,6004,10011,437638FuelHandlingCostsDeferredFuelCost1,536509$121,981ResidualOil:AtDecember31,1997,therewere438,176barrelsoffueloilininventoryinCompany-ownedtanksforuseintheDanskammerandRosetonPlants,whichamountrepresentsanaveragedailysupplyof36days.TheoilstoragecapacityasofDecember31,1997forthesePlantswas16,251and1,079,000barrels,respectively.TheCompany'sshareoftheRosetonPlant'soilstoragecapacityis377,650barrels.During1997,therewerenopurchasesoffueloilmadefortheDanskammerPlant.During1997,theRosetonPlant'sfueloilrequirementsweresuppliedunderoncfirmandtwospotmarketcontracts.Thepricesunderthefirmcontractweredeterminedonthebasisofpublishedmarketindicesineffectatthetimeofdelivery.ThetermofthefirmcontractbecameeffectiveonSeptember1,1996andcontinuesthroughAugust31,1998.ThisfirmcontractpermitstheCompanytomakecertainspotpurchasesfromothers.Coal:InordertoprovideforitsfuturerequirementsforcoaltobeburnedinUnits3and4attheDanskammerPlant,theCompany,effectiveJanuaryI,1997,enteredintotwosupplycontractsforthepurchaseofanaggregateof720,000tonsperyearoflowsulfur(0.7%maximum)coal.OnecontractprovidesforthedeliveryofcoalbywaterfromsourcesinVenezuelaandColumbia,SouthAmerica.ThebasepriceofpurchasesunderthiscontractwasfixedfortheperiodwhichendedonDecember31,1997.Asrequiredbythiscontract,thepriceisrenegotiatedbythepartiesonanannualbasis.Thecontract,aslastrenegotiated,nowcoversthetermfromJanuary1,1998throughDecember31,2000.Thesecondcontract,whichprovidesforthedeliveryofdomesticcoalbyrail,expiresonDecember31,1998.Thebasepriceofpurchasesisfixedforthetermofthatcontract.TheCompanyhasalsoenteredintoalong-termrailcontractforthedeliveryofcoal.ThiscontractcoverstheperiodJanuaryI,1997-December31,2001.Duringthefirsttwoyearsofthiscontract,railratesarefixed,andthereafter,suchrateswillbenegotiatedbytheparties.ITheCompanyalsopurchasedduring1997aportionofitscoalsupplyonthespotmarket.Nuclear:ForinformationregardingfuelreloadingatUnitNo.2oftheNineMilePointNuclearStation("NineMile2"),ofwhichtheCompanyownsa9%interest,secItem7hereofunderthesubcaption"NuclearOperations"underthecaption"ResultsofOperations."EnvironmentalQualityTheCompanyissubjecttoregulationbyfederal,stateand,tosomeextent,localauthoritieswithrespecttotheenvironmentaleffectsofitsoperations,includingregulationsrelatingtoairandwaterquality,aesthetics,levelsofnoise,hazardouswastes,toxicsubstances,protectionofvegetationandwildlifeandlimitationsonlanduse.Inconnectionwithsuchregulation,certainpermitsarequiredwithrespecttotheCompany'sfacilities,whichpermitshavebeenobtainedand/orareintherenewalprocess.Generally,eprincipalenvironmentalareasandrequirementstowhichtheCompanyissubjectareasfollows:Air:StateregulationsaffectingtheCompany'sexistingelectricgeneratingplantsgovernthesulfurcontentoffuelusedtherein,theemissionofparticulatematterandcertainotherpollutantsthcrcfiomandthevisibilityofsuchemissions.Inaddition,federall7CentralHudsonGas&ElectricCorporation andstateambientairqualitystandardsforsulfurdioxide,nitrogenoxidesandsuspendedparticulatesmustbecompliedwithintheareasurroundingthcCompany'sgeneratingplants.BasedontheoperationofitscontinuousemissionstackmonitoringsystemsanditsambientairqualitymonitoringsystemintheareasurroundingtheRosetonandDanskammerPlants,theCompanybelievesthatpresentairqualitystandardsfornitrogenoxides,sulfurdioxideandparticulatesaresatisfiedinthoseareas.ThcDanskammerPlantburnscoalhavingamaximumsulfurcontentof0.7%,fueloilhavingamaximumsulfurcontentof1%andnaturalgas.ThesulfurcontentoftheoilburnedattheRosetonPlantislimitedbystipulationwith,amongothers,theNewYorkStateDepartmentofEnvironmentalConservation("NYSDEC"),toanamountnotexceeding1.5%maximumand1.3%weightedannualaverage.SuchsulfurcontentlimitationattheRosetonPlantcanbemodifiedbytheNYSDECintheeventoftechnologicalchangesatsuchPlant,providedthatthesulfurdioxideandnitrogenoxidesemissionsarelimitedtothatwhichwouldhavebeengeneratedbytheuseofoilwithasulfurcontentof1.3%onaweightedannualaverage.NaturalgasfuelisalsoburnedattheRosetonPlant.ForadiscussionoftheimpactoftheCleanAirActAmendmentsof1990("CAAAmendments")ontheCompany'seffortstoattainandmaintainnationalambientairqualitystandardsforcmissionsfromitsfossil-fueledelectricpowerplantsandforadiscussionoftheproposaloftheFederalEnvironmentalProtectionAgency("EPA")tomodifyemissionstandardsfornitrogenoxidesandsuspendedparticulates,seeNote9-"CommitmentsandContingencies,"hereofunderthecaption,"EnvironmentalMatters-CleanAirActAmendments."Exceptassetforthabove,theCompanyisunabletopredicttheeffect(includingcost)oftheseprogramsonitspowerplantoperationssincethedetailsoftheCAAAmendmentsareyettobecompletelyestablishedbyimplementingregulationstobeissuedoveraperiodofyearsbytheEPAandtheNYSDEC.IVntcr:TheCompanyisrequiredtocomplywithapplicablestateandfederallawsandregulationsgoverningthedischargeofpollutantsintoreceivingwaters.ThedischargeofanypollutionintonavigablewaterwaysisprohibitedexceptincompliancewithapermitissuedbytheEPAundertheNationalPollutantDischargeEliminationSystem("NPDES")establishedundertheCleanWaterAct.Likewise,underthcNewYorkEnvironmentalConservationLawindustrialwastecannotbedischargedintostatewaterswithoutaStatePollutantDischargeEliminationSystem("SPDES")permitissuedbytheNYSDEC.IssuanceofaSPDESpermitsatisfiestheNPDESpermitrequirement.TheCompanyhasreceivedSPDESpermitsforboththeRosetonPlantandtheDanskammerPlant,itsEltingsCornersmaintenanceandwarehousefacility,anditsRiftonRecreationandTrainingCenter.TheSPDESpermitsfortheRosetonandDanskammerPlantsexpiredonOctoberIandNovember1,1992,respectively,andsuchpermitrenewalapplicationsarependingbeforetheNYSDEC.ThcRosctonPlantapplicationiscurrentlybeingreviewedinaNYSDECproceeding.ThesubjectoftherestrictiononuseofwaterforcoolingpurposesatthatPlant(asreferredtoinItem3hereofunderthecaption"EnvironmentalLitigation")isbeingconsidcrcdinthatproceeding.ItistheCompany'sbeliefthattheexpiredSPDESpermitscontinueinfullforceandeffectpendingissuanceofthenewSPDESpermits.ForfurtherdiscussionoftheCompany'scompliancewiththeCleanWaterActandtheCompany'sSPDESpermitrenewalproceeding,seeNote9-"CommitmentsandContingencies,"hereofunderthecaption"EnvironmentalMatters-CleanWaterActCompliance."ToxicSubstancesandHazardousWastes:TheCompanyissubjecttostateandfederallawsandregulationsrelatingtotheuse,handling,storage,treatment,transportationanddisposalofindustrial,hazardousandtoxicwastes.TheNYSDECin1986addedtotheNewYorkStateRegistryofInactiveHazardousWasteDisposalSites(the"Registry")sixlocationsatwhichgasmanufacturingplantsownedoroperatedbytheCompanyorbypredecessorstotheCompanywereoncelocated.Twoothersites,whichformerlycontainedgasmanufacturingplants,havebeenidentifiedbytheCompany.TheCompanystudiedtheseeightsitestodeterminewhethertheycontainanyhazardouswasteswhichcouldposeathreattotheenvironmentorpublichealthand,ifsuchwasteswerelocatedatsuchsites,todeterminetheremedialactionswhichmaybeappropriate.AlloftheseeightsiteswerestudiedusingthePhaseIguidelinesoftheNYSDECandfivesuchsiteswerestudiedusingthemoreextensivePhaseIIguidelinesoftheNYSDEC.Asaresultofthesestudies,theCompanyconcludedthatnoremedialactionswererequiredatanyofthesesites.In1991,theNYSDECadvisedtheCompanythatfourofthesixsiteshadbeendeletedfromsuchRegistry.In1992,theNYSDECadvisedtheCompanythatthetworemainingsiteslistedontheRegistryhadbeendeletedfromtheRegistry.ThcNYSDECalsoindicatedthatsuchdeletionsofthesitesweresubjecttoreconsiderationinthefuture,atISCentralHudsonGas&ElectricCorporation whichtimenewanalyticaltestsmayberequiredtodeterminewhetherornotwastesonsitearehazardous.If,asaresultofsuchpotentialnewanalyticaltests,orotherwisc,remedialactionswereultimatelyrequiredatthesesitesbytheNYSDEC,thecostthereofcouldhaveamaterialadverseeffect(theextentofwhichcannotbereasonablyestimated)onthcfinancialconditionoftheCompanyiftheCompanycouldnotrecoverall,orasubstantialportionthereof,throughinsuranceandrates.ForadiscussionoFlitigationfiledagainsttheCompanyinvolvingoneoftheeightsitesbytheCityofNewburgh,NewYorkandtheCompany'sresponsethereto,seeNote9-"CommitmentsandContingencies,"hereofunderthesubcaption"EnvironmentalMatters-FormerManufacturedGasPlantFacilities."InAugust1992,theNYSDECnotifiedtheCompanythattheNYSDECsuspectedthattheCompany'sofficesatLittleBritainRoadinNewWindsor,NewYork,mayconstituteaninactivehazardouswastedisposalsite.PursuanttoaConsentOrderenteredintobetweentheCompanyandtheNYSDEC,theCompanyperformedapreliminarysiteassessmentand,onJanuary31,1996,adraftfinalreport("siteassessmentrcport")preparedbytheCompany'sconsultantwassubmittedtotheNYSDECforitsreview,evaluationandcomment.AsaresultoftheNYSDEC'sreviewofthissiteassessmcntreport,theCompanyagreedtoperformadditionaltesting.ThedraftrcportonthisadditionaltestingwassubmittedtothePIYSDEConDecember6,1996.Thesereportsbothindicatedthatalimitedamountofsubsurfacesoilcontaminationwasdetectednearonecornerofthesiteandthatcontaminantswerealsodetectedinthegroundwaterbeneaththesite.OperationsconductedonthcsitebythcCompanysinceitpurchasedthepropertyin1978arenotbelicvcdtohavecontributedtoeitherthesoilorthcgroundwatercontamination.TheCompanycanmakeno(i)prcdictionregardingw)iatactionthcNYSDECmaytakewithregardtothedraftreports,or(ii)predictionastotheoutcomeofrecoveryattemptsagainstthirdpartiesbytheCompany.However,theCompanybelievesthatthecostofsuchsiteassessmentandremediation,ifany,willnotbematerial.Other:ThcCompanyestimatesthatexpendituresattributable,inwholeorinsubstantialpart,toenvironmentalconsiderationstotaled$8.4millionin1997,ofwhichabout$.5millionrelatedtocapitalprojectsand$7.9millionwerechargedtoexpense.Itisestimatedthatin1998thetotalofsuchexpenditureswillbeapproximately$10.6million.ThcCompanyisnotinvolvedasadefendantinanycourtlitigationwithrespecttoenvironmentalmattersand,tothebestofitsknowledge,nolitigationagainstitisthreatenedwithrespectthereto,exceptwithrespecttothelitigationdescribedinItem3hereofunderthecaptions"EnvironmentalLitigation"and"EnvironmentalClaims-NewburghManufacturedGasSite,"andasdescribedinMote9-"CommitmentsandContingencies,"underthecaption"EnvironmentalMatters-FormerManufacturedGasPlantacilities."tResearchandDevelopmentTheCompanyisengagedintheconductandsupportofresearchanddevelopment("R&D")activitiesthatarefocusedonprovidingenhancedcustomerserviceatlowercostswhileimprovingexistingenergytechnologiesanddevelopingnewtechnologiesrelatedtotheproduction,distributionandconservationofenergy.ThcCompanylcvcragcsitsR&DexpendituresbycontributingtoprojectssponsoredbyvariousstateandnationalresearchconsortiaandseekingexternalfundingforthosesponsoredbytheCompany.Inaddition,NewYorklawrequireselectricandgasutiliticstocontributetoresearchundertakenbytheNewYorkStateEnergyResearchandDevelopmentAuthority.TheCompany'sexpenditures,netofrevenuesfromroyalties,forelectricandgasresearchanddevelopmentprojectsamountedto$3.3millionin1996and$3.6millionin1997.TheCompanyprojectsthatits1998expendituresforresearchanddevelopmentwilltotalapproximately$3.4million.OtherMattersMunicipalUtilities:Article14-AofthcNewYorkGeneralMunicipalLawpermitsanymunicipalitytoconstruct,lease,purchase,own,acquire,uscand/oroperateanyutilityserviceforthebenefitofitsinhabitants,and,infurtherancethereof,permitsanymunicipalitytoacquire,throughpurchaseorcondemnation,thepublicutilityserviceofanypublicutilitycompany.ThecurrentandprojectedexcesssupplyofelectricityintheNortheasternUnitedStatesandinCanadahassignificantlydepressedwholesaleprices,andtheincreasedlevelofcompetitioninthcelectricutilityindustrycouldcausemunicipalizationeffortstointensify.ThcCompanyisnotawareofanymunicipalizationeffortsinitsfranchisearea.PASNYEconomicDevelopmentPowcriTheNewYorkStateEconomicDevelopmentPowerAllocationBoardisauthorizedlawtosolicitapplicationsfor"economicdevelopmentpower"bymunicipalitiesormunicipalagcncicsonbehalfofbusinesseshichnormallyuseaminimumpeakelectricdemandof400kWforpurposesofeconomicdevelopment,particularlyjobcreation."EconomicDevelopmentPower"("EDP")iselectricpowergeneratedattheFitzpatrickNuclearGcncratingStationofthePowerAuthorityoFtheStateofNewYork("PASNY")whichisavailableforsuchpurpose.ShouldsuchpowerbcallocatedtoacustomerwithintheCompany'sserviceterritory,theCompanywouldberequiredtowheelsuchpowertotheuseratacost-basedrate,whichmustbeapprovedbythePSCand/orbytheFERC.l9CentralHudsonGas&ElectricCorporation AsofDecember31,1997,theCompanyisnotawareofanyofitselectriccustomershavingappliedforsuchEDP.Inaddition,in1997theNewYorkStateGovernorsignedlegislationmaking400MWoflowcostpoweravailabletocommercialandindustrialcustomersaswellasnot-for-profitorganizations.Energyavailableunderthis"PowerforJobs"programwillbeobtainedfromPASNYaswellascompetitivelybidsources,includingprivateutilities.TheCompanywillreceiveacreditagainstitsgrossreceiptstaxliability,underSection186-aoftheNewYorkTaxLaw,foranylostrevenueresultingfromcustomersparticipatinginthisprogram.ElectricEconomicDevelopmentRate:TheCompany'stariffincludesaneconomicdevelopmentelectricratediscountprovisionforlargeindustrialcustomers(whichexhibitnewannualelectricloadof500kWormore)takingsubstationortransmissionserviceandlocatingorexpandingtheirbusinessoperationswithintheCompany'sserviceterritory.Certainenergyefficiencyguidelinesmustalsobemetbyeligiblecustomers.Qualifyingcustomerspaylowerelectricpricesfortheincreasedload,withsavingsoncurrentratesfortenyears.CustomersmustapplyforthediscountbyOctoberI,1999.AsofDecember31,1997,theCompanyhadfourindustrialcustomersparticipatingunderthisratestructure.LaborRelations:TheCompanyhasagreementswiththeInternationalBrotherhoodofElectricalWorkersforits834unionizedemployees,representingproductionandmaintenanceemployees,customerrelationsrepresentatives,serviceworkersandclericalcmployces,excludingpersonsinmanagerial,professionalorsupervisorypositions,whichagreementswererenegotiatedeffectiveJuly1,1994andcontinuethroughJune30,1998.Theagreementsprovideforanaveragegeneralwageincreaseof3.2%ineachofthefirstthreeyearsofsuchagreementsanda3.5%increaseinthefourthyearofsuchagreements,andcertainadditionalfringebenefits.Afliliatcs:iI':CentralHudsonEnterprisesCorporation("CHEC")isengagedinthebusinessofconductingenergyaudits,providingservicesrelatedtothedesign,financing,installationandmaintenanceofenergyconservationmeasuresandcogenerationsystemsforprivatebusinesses,institutionalorganizationsandgovernmentalentitiesandparticipatesincogeneration,smallhydroandalternateenergyproductionprojects,directlyorthroughoneormorcofitsaffiliates.ann.nni1:Thesecorporations,eachawholly-ownedsubsidiaryoftheCompany,wereestablishedtoeitherholdrealpropertyforthefutureuseoftheCompanyortoparticipateinenergy-relatedventures.Currently,theassetsheldbythesesubsidiariesarenotmaterial.CHECandtheothersubsidiariesnotedabove(withtheexceptionofPhoenixDevelopmentCompany,Inc.)wouldbecomesubsidiariesofaproposedholdingcompanyaspartofarestructuringoftheCompanydescribedinItem7hereofunderthecaption,"Competition/Deregulation-CompetitiveOpportunitiesProceeding"andinNoteI-"RegulatoryMatters"hereofunderthecaption"AmendedSettlemcntAgreement."ExecutiveOfficersoftheCompanyThenamesofthecurrentofficersoftheBoardofDirectorsandtheexecutiveofficersoftheCompany,theirpositionsheldandbusinessexperienceduringthcpastfive(5)yearsandages(atDecember31,1997)areasfollows:NameofOfficer,AgeandPositionHeldOfficersoftheBoardPrincipalOccupationorEmploymcntandPositionsandOfficeswiththeCompanyduringthepastfive(5)yearsJohnE.Mack,III,63,ChairmanofthcBoardandChiefExecutiveOfficer;ChairmanoftheExecutive,RetirementandFinanceCommitteesPresentpositions,exceptChairmanoftheCommitteeonFinance,April1996JackEffron,64,ChairmanofCommitteeonCompensationandSuccessionPresentpositionsinceApril1994;PresidentofEFCOProducts,abakeryingredientscorporation;memberoftheSt.FrancisHealthCareFoundation;ChairmanoftheChiefExecutive'sNetworkforManufacturingoftheCouncilofIndustryofSoutheasternNewYorkHeinzK.Fridrich,64,ChairmanofCommitteeonAudit20CentralHudsonGas&ElectricCorporationPresentpositionsinceApril1995;CourtesyProfessUniversityofFloridaatGainesville,since1994;VicePresident-Manufacturing,InternationalBusinessMachinesCorporation,December1992-September1993;BoardofTrustees;MountSt.MaryCollege ExecutiveOfficersoftheCompanyNameofOfficer,AgeandPositionHeldPaulJ.Ganci,59,PresidentandChiefOperatingOfficerPrincipalOccupationorEmploymentandPositionsandOfficeswiththeCompanyduringthepastfive(5)yearsPresentpositionCarlE.Meyer,50,Sr.VicePresident-CustomerServicesPresentpositionsinceApril1996;VicePresident-CustomerServices,December1992-April1996AllanR.Page,50,Sr.VicePresident-CorporateServicesPresentpositionsinceApril1996;VicePresident-CorporateServices,December1992-April1996JosephJ.DeVirgilio,Jr.,46,VicePresident-HumanResourcesandAdministrationPresentpositionRonaldP.Brand,59,VicePresident-EngineeringandEnvironmentalAffairsPresentpositionEllenAhearn,43,SecretaryPresentpositionsinceApril1994;AssistantSecretaryandInternalAuditingManager,December1992-April1994StevenV.Lant,40,TreasurerandAssistantSecretaryPresentpositionssinceApril1993;AssistantTreasurerandAssistantSecretary,December1992-April1993DonnaS.Doyle,49,ControllerPresentpositionsinceApril1995;AssistantControllerApril1994-April1995;ManagerofTaxes,BudgetsandCustomerAccounting,April1993-April1995,ManagerofPlantandDepreciationandGeneralAccounting,December1992-April1993ArthurR.Upright,54,AssistantVicePresident-CostandRateandFinancialPlanningPresentpositionsinceFebruary1994;ManagerCostandRateandFinancialPlanning,December1992-February1994GladysL.Cooper,46,AssistantVicePresident-GovernmentalRelationsPresentpositionsinceSeptember1995;leaveofabsenceforeducationalpurposesDecember1992-September1995;Secretary,December1992-April1994JamesP.Lovette,48,AssistantVicePresident-FossilProductionPresentpositionsinceOctober1997;PlantSuperintendent,December1992-November1997TherearenofamilyrelationshipsexistingamonganyoftheexecutiveofficersoftheCompany.EachoftheaboveexecutiveofficersiselectedorappointedannuallybytheBoardofDirectors.2ICentralHudsonGas&ElectricCorporation ITEN2PropertiesElectricGeneral:ThenetcapabilityoftheCompany'selectricgeneratingplantsasofDecember31,1997,thenetoutputofeachplantfortheyearendedDecember31,1997,andtheyeareachplantwasplacedinserviceorrehabilitatedareassetforthbelow:ElectricGeneratingPlant(MW)*NetCapability(96-97)1997UnitTeofFuelYearPlacedInServiceSummerWinterNetOututMWhDanskammerPlant**ResidualOil,1951-1967NaturalGasandCoal4994972,359,884RosetonPlant(35%share)**ResidualOilandNaturalGas1974422419510,944NevcrsinkHydroStationWater1953232370/10DashvilleHydroStationWater192011,752SturgeonPoolHydroStationHighFallsHydroStationWaterWater19241986161653@527/97CoxsackicGasTurbine("GT")KeroseneorNaturalGas196920253,128So.CairoGTNineMile2Plant(9%share)KeroseneNuclear1970198819212,008102104794,475Total1,1071,1123,813350Rejlectsmaxitnumone.hournetcapabilityoftheCompany'sownershipofgenerationresourcesand,therefore,doesnotincludefinnpurchasesorsales.~~PlantssubjecttoauctionbasedonAmendedSettlementAgreementasdescribedinItem7hereofunderthccaption"Cotnpetition/Deregulation-CompetitiveOpportunitiesProceeding"andinblateI-"Regulatoryhfatters."TheCompanyhasacontractwithPASNYwhichentitlesthcCompanyto49MWnetcapabilityfromthcBlenheim-GilboaPumpedStorageHydroelectricPlantthrough2002.SeeItem1hereof,underthecaption"Regulation"andthesubcaption"PurchasedElectricPowerGeneration,"withrespecttoalternativeelectricpowergenerationinterconnectedwiththeCompany'ssystem..ThcCompanyowns83substationshavinganaggregatetransformercapacityof4AmillionkVA.Thetransmissionsystemconsistsof588polemilesoflineandthedistributionsystemof7/94polemilesofoverheadlinesand856trenchmilesofundergroundlines.LoadandCapacity:TheCompany'smaximumone-hourdemandwithinitsownterritory,fortheyearendedDeccmbcr31,1997,occurredonJuly15,1997andamountedto917MW.TheCompany'smaximumone-hourdemandwithinitsownterritory,forthatpartofthc1997-1998wintercapabilityperiodthroughFebruary9,1998occurredonDecember10,1997andamountedto752MW.Basedoncurrentprojectionsofpeakone-hourdemandsforthethree-yearperiodcomprisingthc1998summercapabilityperiodthroughthewintercapabilityperiodof2000-2001,theCompanyestimatesthatitwillhavecapacityavailabletosatisfyitsprojectedpeakdemandsplustheestimatedinstalledreservegcncratingcapacityrequirementswhichitisrequiredtomaintainasamemberofthcNewYorkPowerPool("NYPP"),describedherein.22CentralHudsonGasRElectricCorporation Thefollowingtablesetsforththeamountsofanyexcesscapacitybysummerandwintercapabilityperiodsforsuchthree-yearperiod:CapabilityPeriodForecastedPeak(MW)ExcessofCapacityoverPeakPlusPeakPlusInstalledAvailableNYPPInstalledReserveRequirementsReserveof18%(MW)Caacit(MW)(MW)Percent1998Summer1998-99Winter1999Summer1999-00Winter2000Summer2000-01Winter910870925885940905107410744109210924'1091109*117411791174117911741179100105828765709.39.87.58.05.96.3*Summerperiodpeakplusreserverequirementscarryovertothefollowingwinterperiod.RosctonPlant:TheRosetonPlantislocatedintheCompany'sfranchiseareaatRoseton,NewYork,andisownedbytheCompany,ConsolidatedEdisonCompanyofNewYork("ConEdison")andNiagaraMohawkPowerCorporation("NiagaraMohawk")astenants-in-common.TheRosetonPlant,placedincommercialoperationin1974,hasageneratingcapacityof1,200MWconsistingoftwo600MWgeneratingunits,bothofwhicharecapableofbeingfiredeitherbyresidualoilornaturalgas(seesubcaptionbelowentitled"Gas-SufficiencyofSupplyandFutureGasSupply").ThcCompanyisactingasagentfortheownerswithrespecttooperationoftheRosetonPlant.Generally,theownerssharethecostsandexpensesoftheoperationofsuchPlantinaccordancewiththeirrespectiveownershipinterests.TheCompany,undera1968Agreement("BasicAgreement"),hastheoptiontopurchasethcinterestsofNiagaraMohawk(25%)andofConEdison(40%)intheRosetonPlantinDecember2004.TheexerciseofthisoptionissubjecttoPSCapproval.However,byagrecmcnt,datedMarch30,1994,betweentheCompanyandNiagaraMohawk,NiagaraMohawkwasgiven,amongotherthings,anoptiontoretainits25%interestintheRosetonPlant,providedthatNiagaraMohawkexercisessuchoptionbyMay31,1999.InMarch1997,NiagaraMohawkandtheCompanyenteredintoaPowerSalesandOptionAgreementwhich,amongotherhings,providestheCompanywithvariousoptionsfrom1998through2004topurchasecapacityandassociatedenergyfromNiagaraMohawk'sinterestintheRosetonPlant.OnDecember1,1997,aspartofitsrestructuringproposal,NiagaraMohawkfiledwiththePSCaplantodivestitsfossil-fueledandhydroelectricgeneratingassetsbyauctionbymid-1999.NiagaraMohawk's25%interestintheRosetonPlantwouldbepartofsuchdivestiture.AspartofConEdison'sAmendedandRestatedAgreementandSettlement,asamendedonSeptember19,1997,betweenConEdison,theStaffofthcPSC("Staff')andothers,andasapprovedbythePSCbyitsOrderissuedandeffectiveNovember3,1997,ConEdisonagreedtodevelopaplantodivestandtransfercertainofitselectricgeneratingassetstounregulatedentities,includingthirdpartiesandConEdisonaffiliates,bytheendof2002.ConEdison's40%interestintheRosetonPlantwouldbesubjecttosuchdivestiture.TheCompanycannotpredictwhateffectanyauction/transferofNiagaraMohawk'sand/orConEdison'sinterestsintheRosetonPlantwouldhaveontheCompany'sinterestintheRosetonPlant.ForinformationwithrespecttotheCompany'sobligationtodivestitselfofitsinterestintheRosctonPlant,seeItem7hereofunderthecaption"Competition/Deregulation-CompetitiveOpportunitiesProceeding"andNote1-"RegulatoryMatters,"underthesubcaption"AmendedSettlementAgreement."The345kVtransmissionlinesandrelatedfacilitiestoconnecttheRosetonPlantwithotherpointsinthesystemoftheCompanyandwiththesystemsofConEdisonandNiagaraMohawktothenorthandwestofsuchPlantare100%-ownedbytheCompany.TheshareofeachofthepartiesintheoutputoftheRosetonPlantistransmittedovertheselinespursuittoacertaintransmissionagreementrelatingtosuchPlant,whichprovides,amongotherthings,forcompensationtotheCompanyforsuchusebytheotherparties.Inaddition,theCompanyhascontractrightswhichentitletheCompanytothelesserof300MW,oronequarterofthccapacityina345kVtransmissionlineownedbyPASNY,whichconnectstheRosetonPlantwithaConEdisonsubstationtotheeastofsuchPlantinEastFishkill,NewYork.Inexchangefortheserights,theCompanyagreedtoprovideASNYcapacityinthe345kVtransmissionlinestheCompanyownsfromtheRosetonPlant,totheextentitcandosoaftertisfyingitsobligationstoConEdisonandNiagaraMohawk.NineMile2Plant:ForadiscussionoftheCompany'sownershipinterestin,costsfor,andcertainoperatingmattersrelatingtotheNineMile2Plant,seeItem7hereofunderthesubcaption"NuclearOperations,"Note3-"NineMile2Plant,"andNote2-"SummaryofSigniTicantAccountingPolicies,"underthesubcaption"Jointly-OwnedFacilities."23CentralHudsonGas&ElectricCorporation NewYorkPowerPool/IndependentSystemOperatorTheCompanyisamemberoftheNYPPconsistingofthemajorinvestor-ownedelectricutilitycompaniesintheStateandPASNY.ThemembersoftheNYPP,byagreement,provideforcoordinatedoperationoftheirbulkpowerelectricsystemswiththeobjectivesofusingthemosteconomicalsourceofelectricity,forthemaintenanceofareservemarginequaltoatleast18%ofeachmember'sforecastedpeakloadandforthesaleandinterchangeofelectricgeneratingcapabilityandenergyamongsuchmembers.ThemembersoftheNYPPalsoprovideforthecooperativedevelopmentoflong-rangeplansfortheexpansiononanintegratedbasisofthebulkpowersupplysystemforNewYorkState,compatiblewithenvironmentalstandards,andappropriatelyrelatedtointerstateandinternationalcapacityandreliabilityconsiderations.AspartoftheongoingdiscussionsregardingtherestructuringoftheelectricindustryinNewYorkStatereferredtoinItem7hereofunderthecaption"Competition/Deregulation,"proposalshavebeenmadetorestructuretheNYPP.InafilingwithFERC,datedJanuary31,1997,themembersystemsoftheNYPPproposedanewmarketstructurethatwouldincludeasitskeyelementstheestablishmentofanIndependentSystemOperator("ISO"),theNewYorkStateReliabilityCouncil("NYSRC"),andtheNewYorkPowerExchange("NYPE").TheISO,NYSRCandNYPEwouldcollectivelyreplacetheNYPP.AsupplementalfilingexpandingtheproposedrestructureofNYPPwasmadebyNYPPtoFERCinDecember,1997.TheCompanyisunabletopredicttheoutcomeoftheseFERCfilings.TheISO'sprincipalmissionwouldbetomaintainthereliabilityoftheNewYorkStatebulkpowersystemsandtoprovidetransmissionserviceonacomparableandnon-discriminatorybasis.TheISOwouhlbeopentobuyers,sellers,consumersandenvironmentalgroupsandtransmissionproviders;eachofthesegroupswouldberepresentedontheBoardofDirectorsoftheISO,whichisproposedtobeanot-for-profitNewYorkcorporation.TheNYSRC'smissionwouldbetopromoteandpreservethereliabilityofthebulkpowersystemwithinNewYorkState,throughitsprimaryresponsibilityforthepromulgationofreliabilityrules;theISOwoulddeveloptheproceduresnecessarytooperatethesystemwithinthesereliabilityrules.TheNYSRCisproposedtobegovcrncdbyacommitteecomprisedoftransmissionprovidersandrepresentativesofbuyers,sellers,andconsumerandenvironmentalgroups.TheNYPEisproposedtobeestablishedasanon-profitcorporationthatwouldprovideavehiclethroughwhichbuyersandsellerscouldparticipateinthemarketsforenergy,capacityandancillaryservices.GasGeneral:TheCompany'sgassystemconsistsof161milesoftransmissionpipelinesand977milesofdistributionpipelines.During1997,naturalgaswasavailabletofirmgascustomersatapricecompetitivewiththatofalternativefuels.Ascomparedto1996,in1997,firmretailgassales,normalizedforweather,increasedby1.17%andtheaveragenumberoffirmgascustomersincreasedby1.43%or867.Salestointerruptiblecustomersincreased111%in1997ascomparedto1996.ForfurtherintormationregardingtheCompany'sincentivearrangementsforinterruptiblegassales,seeItem7hereofunderthesubcaption"InterruptibleGasSales."FortheyearendedDecember31,1997,thetotalamountofgaspurchasedfromallsourceswas19,397,777Mcf.,whichincludes1,831,307Mcf.purchaseddirectlyforuseasaboilerfuelattheRosetonPlant.TheCompanyalsoownstwopropane-airmixingfacilitiesforemergencyandpeakshavingpurposeslocatedinPoughkeepsieandinNewburgh,NewYork.Eachfacilityiscapableofsupplying8,000Mcf.perdaywithpropanestoragecapabilityadequatetoprovidemaximumfacilitysendoutforuptothreeconsecutivedays.SufIiciencyofSupplyandFutureGasSupply:ThepeakdailydemandfornaturalgasbytheCompany'scustomersfortheyearendedDecember31,1997occurredonJanuary18,1997andamountedto101,175Mcf.TheCompany'speak-daygascapabilityin1997was116,865Mcf.ThepeakdailydemandfornaturalgasbytheCompany'scustomersforthatpartofthe1997-1998heatingseasonthroughFebruary9,1998,occurredonDecember3,1997andamountedto88,903Mcf.FixedPriceOption:ByPSCOrderissuedandeffectiveJune5,1997,theCompanyfiledaratedesignforafixednaturalgaspriceoption.Thefixedpriceserviceoptionwasmadeavailabletofirmsalescustomerseffectivewiththe1997-98heatingseasoninanattempttostabilizethecommoditypricethatcustomerspayfornaturalgas.Thisoptionisofferedtoresidential,commercialandindustrialcustomerswhoseannualconsumptionisgreaterthan500Ccf(hundredcubicfeet)annually.Approximately36,000customersqualifiedfortheprogramonafirst-come,first-servicebasis.Responsetothefixedpriceoptionwasfavorable.Other:FERCpermitsnon-discriminatoryaccesstothepipelinefacilitiesofinterstategaspipelinetransmissioncompaniessubjecttothejurisdictionofFERCundertheNaturalGasAct.Thisruleallowsaccesstosuchpipelincsbythepipelinetransmissioncompany'scustomersenablingthemtotransportgaspurchaseddirectlyfromthirdpartiesandspotsourcesthroughsuchpipelines.Suchaccessalsopermitsindustrialcustomersofgasdistributionutilitiestoconnectdirectlywiththepipeline24CentralHudsonGas&ElectricCorporation transmissioncompanyandtocontractdirectlywiththepipelinetransmissioncompaniestotransportgas,therebyby-passingthedistributionutility.ThePSChasauthorizedNewYorkStatedistributiongasutilitiestotransportcustomer-ownedgasthroughitsfacilitiesuponrequestofacustomer.Currently,interstatepipelinetransmissioncompaniesarelocatedincertainareaswheretheCompanyprovidesretailgasservice(theTownsofCarmel,PleasantValley,Coxsackie,andLaGrangeinNewYorkState).TherehasbeennoadverserevenueimpactontheCompanyasaresultofsuchactionbytheCompanytotransportgas.ForadiscussionofthePSCproceedingrelatingtoissuesassociatedwiththerestructuringofthenaturalgasmarket,seeItem7hereofunderthesubcaption"Competition/Deregulation-NaturalGas-PSCPositionPaper."OtherMattersTheDanskammerPlantandtheRosetonPlantandalloftheotherprincipalgeneratingplantsandimportantpropertyunitsoftheCompanyareheldbyitinfeesimple,except(1)certainrights-of-way,and(2)aportionofthepropertyusedinconnectionwiththehydroelectricplantsofthcCompanyconsistingofflowageorotherriparianrights.TheCompany'spresentinterestsintheRosetonPlantandtheNineMile2Plantareownedasundividedinterestsasatenant-in-commonwiththeotherutilityownersthereof.CertainofthepropertiesoftheCompanyarcsubjecttorights-of-wayandeasementswhichdonotinterferewiththeCompany'soperations.Inthccaseofcertaindistributionlines,theCompanyownsonlyapartinterestinthepolesuponwhichitswiresareinstalled,theremainingintcrcstbeingownedbytelephonecompanies.CertainelectrictransmissionfacilitiesownedbyothersareusedbytheCompanypursuanttolong-termcontractualarrangements.AllofthephysicalpropertiesoftheCompany,otherthanpropertysuchasmaterialandsuppliesexcludedintheCompany'sFirstMortgageBondIndenture("Mortgage")anditsfranchises,aresubjecttothelienoftheMortgageunderwhichallofitsMortgageBondsareoutstanding.SuchpropertiesarefromtimetotimesubjecttoliensforcurrenttaxesandassessmentswhichtheCompanypaysregularlyasandwhendue.Duringthethree-yearperiodendedDecember31,1997,theCompanymadegrosspropertyadditionsof$144.0millionandpropertyretirementsandadjustmentsof$34.7million,resultinginanctincrease(includingConstructionWorkinProgress)inutilityplantof$109.3million,or7.7%.ITEN3LegalProceedingsAsbestosLitigation:ForadiscussionoflitigationagainsttheCompanyinvolvingasbestos,seeNote9-"CommitmentsandContingencies,"hereofunderthecaption"AsbestosLitigation."EnvironmentalLitigation:OnMarch23,1992,inanactionbroughtin1991bytheNaturalResourcesDefenseCouncil,Inc.,theHudsonRiverFisherman'sAssociationandScenicHudson,Inc.,aConsentOrderwasapprovedbytheSupremeCourtoftheStateofNewYork,AlbanyCounty.SuchConsentOrderprovidesforcertainoperatingrestrictionsattheRosetonPlantrelatingtotheuseofriverwaterforplantcoolingpurposes,whichrestrictionshavenot,andarenotexpectedtoimposematerialadditionalcostsontheCompany.TheConsentOrderwasextendeduntilFebruary1,1998byagrccmentofthcpartiesandCourtapproval.Afurtherextensionisbeingcurrentlynegotiated.ForadescriptionofthependingNYSDECproceedinginvolvingtherenewaloftheSPDESpermitfortheRosctonPlant,seeItem1hereofunderthesubcaption"EnvironmentalQuality-Water,"andNote9-"CommitmentsandContingencies,"underthecaption"EnvironmentalMatters-CleanWaterActCompliance."EnvironmentalClaims-NcwburghManufacturedGasSite:ForadiscussionoflitigationfiledagainsttheCompanybytheCityofNewburgh,NewYork,onMay26,1995inthcUnitedStatesDistrictCourt,SouthernDistrictofNewYork,andtheCompany'sresponsethereto,seeNote9-"CommitmentsandContingencies,"underthesubcaption"EnvironmentalMattcrs-FormerManufacturedGasPlantFacilities."CatskillIncident:AnexplosionoccurredinadwellingintheCompany'sgasserviceterritoryinCatskill,NewYorkinNovember1992whichresultedinpersonalinjuries,thedeathofanoccupantandpropertydamage.LawsuitshavebeencommencedagainsttheCompanyarisingoutofsuchincident,includingthefollowing:Bycomplaint,datedFebruary2,1994,CarlFatzinger,asexecutoroftheestateofMildredFatzinger,andVirginiaFatzingerommencedanactionintheSupremeCourtoftheStateofNcwYork,GreeneCounty,againsttheCompanyandtwoother25CentralHudsonGas&ElectricCorporation defendants.Thecomplaintseeksanunspecifiedamountofcompensatoryandpunitivedamagesbasedontheoriesofnegligence,absoluteliabilityandgrossnegligenceforthedeathofMildredFatzinger,personalinjuriestoVirginiaFatzingerandpropertydamageallegedtohavebeencausedbysaidexplosion.Bycomplaint,datedOctober18,1993andfiledintheSupremeCourtoftheStateofNewYork,GreeneCounty,FrankReyescommencedanactionagainsttheCompanyforunspecifiedpersonalinjuriesandpropertydamageallegedtohavebeencausedbysaidexplosion.Thecomplaintseeks$2,000,000incompensatorydamagesand$2,000,000inpunitivedamagesfromtheCompany,basedontheoriesofnegligenceandgrossnegligence.TheCompanyisinvestigatingtheseclaimsandpresentlyhasinsufficientinformationonwhichtopredicttheiroutcome.TheCompanybelievesthatithasadequateinsurancewithregardtotheclaimsforcompensatorydamages.TheCompany'sinsurance,however,doesnotextendtopunitivedamages.Ifpunitivedamageswercultimatelyawardedineitherorbothoftheselawsuits,suchaward(s)couldhaveamaterialadverseeffectonthefinancialconditionoftheCompany.Atthistime,theCompanycanmakenopredictionastoanyotherlitigationwhichmayariseoutofthisincident.WapplngcrsFallsIncident:TwoconsecutivefiresandexplosionsoccurredonFebruary12,1994,destroyingaresidenceandcommercialestablishmentintheVillageofWappingersFalls,NewYork,intheCompany'sserviceterritory.LawsuitshavebeencommencedagainsttheCompanyarisingoutofsuchincident,includingthefollowing:OnAugust31,1994,theCompanywasservedwithasummonsandcomplaintinanactionbroughtbyJohnDeLorenzoagainsttheCompanyandtheVillageofWappingersFallsintheSupremeCourtoftheStateofNewYork,CountyofDutchess.Thecomplaintseeksunspecifiedamountsofdamages,basedonatheoryofnegligence,forpersonalinjuriesandpropertydamageallcgcdtohavebeencausedbytheincident.OnMarch9,1995,theCompanywasservedwithasummonsandcomplaintinanactionbroughtbyCengizCeng,individuallyandasexecutorunderthelastwillandtestamentofNizamettinCcng,andTarkanThomasCengagainsttheCompanyandtheVillageofWappingersFallsintheSupremeCourtofthcStateofNewYork,CountyofDutchess.Thecomplaintsccksrecoveryof$250,000fromtheCompany,basedonthetheoryofnegligence,forpropertydamagesallegedtohavebeencausedbythcincident.TheCompanyisinvestigatingtheseclaimsandprcscntlyhasinsufficientinformationonwhichtopredicttheiroutcome.TheCompanybelievesthatithasadequateinsurancewithregardtotheclaimsforcompensatorydamages.TheCompany'sinsurance,howcvcr,doesnotextendtopunitivedamages.Ifpunitivedamageswereultimatelyawarded,inanyoftheselawsuits,suchaward(s)couldhaveamaterialadverseeffectonthefinancialconditionoftheCompany.Atthistime,theCompanycanmakenopredictionastoanyotherlitigationwhichmayariseoutofthisincident.ITEN4SubmissionofNatterstoaVoteofSecurityHoldersNomatterwassubmittedtoavoteofsecurityholdersduringthefourthquarteroftheCompany'sfiscalyearcoveredbythisReport.PARTIIITEN5NarketfortheCompany'sCommonEquityandRelatedStockholderNattersForinformationregardingthemarketfortheCompany'scommonstockandrelatedstockholdermatters,seeItem7hereofunderthecaptions"CapitalResources&Liquidity-FinancingProgram"and"CommonStockDividendsandPriceRanges"andNote6-"Capitalization-CapitalStock."PursuanttoapplicablestatutesanditsCertificateofIncorporation,theCompanymaypaydividendsonsharesofPreferredandCommonStockonlyoutofsurplus.Forinformationregardingthereplacement,effectiveJanuary1,1997,oftheCompany'sAutomaticDividendReinvestmentandStockPurchasePlan("DRP"),CustomerStockPurchasePlan("CSPP")andEmployeeStockPurchasePlan("ESPP"),byasinglenewStockPurchasePlan,seeNote6-"Capitalization-CapitalStock."ForinformationontheCompany'sprogramtorepurchasesomeofitsissuedandoutstandingcommonstockpursuanttoaprogramapprovedbythePSC,seeItem7hereofunderthecaption"FinancingProgram."26CentralHudsonGas&ElectricCorporation ITEN6SelectedFinancialData$411,082$422,92510458694448520,277513,971512,215515,668517,373Five-YearSummaryofConsolidatedOperationsandSelectedFinancialData*ttnThousands)OperatingRevenuesElectric$416,429$418,761$409,445Gas.10384895210102770TotalOperatingExpensesOperationsMaintenance..........Depreciationandamortization...Taxes,otherthanincometax......Federalincometax.TotalOperatingIncome284,71427,57443,86464,87929190267,77928,93842,58066,14532700274,66529,44041,46766,7092904045022143814244132170,05675,82970,894274,49732,71640,38066,89928043274,47734,48639,68265,5642860344253544281273,13374,561OtherIncomeAllowanceforequityfundsusedduringconstruction...FederalincometaxOther-netTotal3874669862,9531,632353807948158886114196,91310,2258661,23762968,3999341,44551677,546IncomebeforeInterestCharges...InterestChargesNctIncomePremiumonPreferredStockRedemption-NetDividendsDcclarcdonCumulativePreferredStock...............IncomeAvailableforCommonStock.......DividendsDeclaredonCommonStock....AmountRetainedintheBusiness.............RetainedEarnings-beginningofyear.....RetainedEarnings-endofyear................81)47582,74281,1192638926,66028,39755,08656,08252,7223781693,2303,2304,90351,8537,13737,12836,45915,3469047514,71910582111,19179284$120,540$105,821$90,47581,53230,60350,92982,10731,71750,3905,1275,56235,54134,49710,3315869210,26169023$79,284$69,023CommonStockAveragesharesoutstanding(000s).....Earningspershareonaveragesharesoutstanding..........Dividendsdeclaredpershare..............Bookvaluepershare(atyear-end)....17,435$2.97$2.135$27.6117,549$2.99$2.115$26.8717,380$2.74$2.095$25.9617,102$2.68$2.075$25.3416,725$2.68$2.045$24.65$1,264,240391,81081,030417,846$1,249,106362,04056,030471,709$1,250,781389,36481,030436,731$1,250,092389,24569,030454,239$1)252,090361,82956,0304777104TotalAssets.Long-termDebtCumulativePreferredStock..........................CommonEquityThissummaryshouldbereadinconjunctionwiththeConsolidatedFinancialStatementsandNotestheretoincludedinItem8ofthisForm10-K.27CentralHudsonGas&ElectricCorporation lTEN7Nanagement'sDiscussionAndAnalysisOfFinancialConditionAndResultsOfOperations0COMPETITION/DEREGULATIONGeneralTheregulatoryframeworkunderwhichutilitiesoperateisundergoingsignificantchange,althoughthepathandpaceofthatchangevaryfromjurisdictiontojurisdiction.TheCompanyissubjecttoregulationforretailratesbythePSCandwholesaleratesbytheFERC.Theseagencieshaveeachadoptedpoliciesthatfocusoncompetitioningasandelectricmarkets.Asaresult,thepublicutilityindustryisfacingincreasingcompetitionanddcrcgulationinitiativesacrossthecountryandinNewYorkState.Duetotherapidchangeintheutilityindustry,theCompanycontinuestodevelopstrategiesdesignedtoenhanceitscompetitivepositionandtoadapttoanticipatedchangesinitsbusiness.TheCompany'sgoalistobetheenergyservicesproviderofcompetitivechoiceintheemergingretailmarket.Inordertoachievethisgoal,theCompanycontinuestoidentifyandimplementmeasurestoincreaseefficiencyandimproveeffectiveness.CompetitiveOpportunitiesProceedingIn1994,thePSCinstitutedthe"CompetitiveOpportunitiesProceeding,"theoverallobjectiveofwhichistoidentifyregulatoryandrate-makingpracticesthatwillassistinthetransitiontoamorecompetitiveelectricindustry.InMay1996,thePSCissueditsorderinthatProceeding,whichrequiredalloftheelectricutilitiessubjecttothatProceeding,includingtheCompany,tofilearestructuringplanbyOctober,1996.ThatPlanwasrequiredtoaddress,amongotherthings,thestructureoftheelectricutility,bothintheshortandlong-term,andaschedulefortheintroductionofretailaccess.TheCompanyfileditsresponseonOctober1,1996andthereafterbeganaseriesoflengthydiscussionsandnegotiationswiththcPSCandcertainotherinterestedpartieswhichculminatedinanAmendedandRestatedSettlementAgreement,datedJanuary2,1998("AmendedSettlementAgreement"),amongtheCompany,PSCStaffandcertainotherparties.ThePSCapprovedtheAmendedSettlementAgreementatitsFebruary4,1998session;however,thePSChadnotyetissueditsfinalorderatthctimethisdocumentwasfiledwiththeSecuritiesandExchangeCommission.Generally,theprincipalpointsoftheAmendedSettlementAgreementareasfollows:(i)continuationofabasicelectricratefreezeforresidential,commercialandsmallindustrialcustomersthroughJune2001;(ii)a5%reductioninbaseelectricratesforlargeindustrialcustomers;(iii)aphase-inofretailaccessthroughJunc30,2001toresidential,commercialandsmallindustrialcustomers;(iv)a10.6%returnonequity("ROE")capwithexcessearnings,ifany,deferredforstrandedcostmitigation;(v)areasonableopportunitytorecoverallprudentlyincurredstrandablecosts;(vi)functionalunbundlingofthcCompany'sDanskammerPlantanditsinterestintheRosetonPlantin1998,followedbystructuralseparationbyJune30,2001;(vii)transferoftitlebyanauctionoftheCompany'sDanskammcrPlantanditsinterestintheRosetonPlanttobecompletedbyJune30,2001(anaffiliateoftheCompanycanbid);(viii)approvaltoformaholdingcompanynotlaterthanJune30,2001,whichholdingcompanyinitiallywouldownthcCompanyandallbutoneoftheCompany'sexistingsubsidiaries;and(ix)permissionfortheCompanytotransferupto$100millionofequityfromthcCompanytounregulatedaffiliatespriortoformationoftheholdingcompany.TheconsiderationreceivedbytheCompanyinanauction,referredtoin(vii)above,would,uptothcnetbookvalueoftheassetssold,beavailableforinvestmcntinunregulatedoperationswithoutPSCapproval.AnyexcessoversuchnetbookvaluewouldberequiredtobeusedtooffsettheCompany'sfossil-fueledgenerationrelatedregulatoryassetsand,totheextentofanyremainingconsideration,toreducethebookcostoftheCompany'sinvestmentintheNineMile2Plant.IntheeventthatthesalepriceofanysuchassetswerebelowtheCompany'sthencurrentnctbookvalue,thcdiffcrcncewouldbepreservedforrecoveryasastrandablecost.IntheeventaCompanyaffiliateelectsnottobidonanysuchauction,theCompanywouldretain,priortoapplicationoftheconsiderationdescribedintheimmediatelyprecedingparagraph,10%ofsuchconsiderationinexcessofthebookvalueoftheCompany'sfossil-fueledgenerationassets,nottoexceedintheaggregate$17.5million.AsprovidedforintheAmendedSettlementAgrcemcnt,theCompanywillwithdrawfromacertainlawsuitcommencedbytheCompanyandcertainotherutilitiesintheNewYorkStatecourtsystemchallengingthevalidityofsaidMay1996PSCOrder.TheAmendedSettlementAgreementcreatescertainchangestotheCompany'saccountingpolicies.FormoreinformationregardingtheAmendedSettlementAgreementanditsimpactontheCompany'saccountingpoliciesseeNote1-"RegulatoryMatters"herein.FERC-ElectricOnApril24,1996,theFERCreleasedOrderNos.888and889,promotingwholesalecompetitionbetweenpublicutilitiesbyprovidingopenaccess,non-discriminatorytransmissionservices.ThcOrdershavethceffectof(i)requiringelectricutilitiestoopertheirtransmissionlinestowholesalecompetitors,whileallowingrecoveryofcertain"strandedcosts,"(ii)requiringelectricutilitiestoestablishelectronicsystemstosharcinformationaboutavailabletransmissioncapacity,subjecttocertainstandardsofconduct,28CentralHudsonGas&ElectricCorporation and(iii)requiringcertainfunctionalseparationofpowermarketingfromotheroperations.TheCompanydulyfileditsopenaccesstransmission("OAT")tariffwithFERC,asrequiredbyOrderNo.888,whichtariffhasbeenapprovedbyFERC.UndertheOATtariff,theCompanymustoffertransmissionservicetowholesalecustomersonabasisthatiscomparabletothatwhichitprovidesitself.TheCompanyisalsorequiredtoofferand/orprovidecertainancillaryserviceswhichcontributetothereliabilityandsecurityofthetransmissionsystem.OnDecember30,1996,theNYPP,ofwhichtheCompanyisamember,filedaninterimrestructuringplanwithFERCinresponsetotherequirementsofOrderNo.888.OnJanuary31,1997,theNYPPfiledanadditionalrestructuringfiling,whichincludesproposalstoestablishanISO,aNYPE,andaNYSRC.TheNYPPfiledasupplementalfilingwithFERCinDecember1997whichexpandedthepriorrestructuringfiling.PendingtheoutcomeofsuchproceedingsastheFERCmayrequireinresponsetosuchfilings,theCompanycanmakenopredictionastotheeffectonitofthesefilings,orofcompliancewithFERCOrderNos.888or889.MergersintheElectricIndustryInresponsetotheincreasinglycompetitiveenvironment,utilitiesacrossthecountryhavebeenreorganizingtobetterpositionthemselvesfinanciallyintheirmarketareasforthefuture.Thus,mergersandpossiblemergershavebeenreportedinthenewsmedia,includingthepublicannouncementoftheproposedmergerbetweenLongIslandLightingCompany("LILCO")andBrooklynUnionGasCompany,twoNewYorkutilities.NaturalGas-PSCPositionPaperOnSeptember4,1997,thcPSCissuedanoticeinvitingcommentsonareportpreparedbythePSCStaff,entitled"TheFutureoftheNaturalGasIndustry"("PositionPaper").RecognizingthatcustomerchoicehasnotevolvedasexpectedunderthegasgenericrestructuringordersfromthePSC,thePSCStaffreachedtheconclusionthat"themosteffectivewaytoestablisharobustlycompetitivemarketingassupplyistoseparatethemerchantanddistributionfunction."ThePositionPapersetsforthavarietyofrecommendationsaddressingissuessuchasupstreamcapacity,ratedesign,systemreliability,marketpower,customercommunication,socialprogramsandtaxes.ThePSCStaffbelievesthatafive-yearperiodisnecessaryforlocaldistributioncompaniestotransitionoutofthemerchantbusiness.TheCompanyisunabletopredictwhatwillbetheultimateoutcomeofsuchaproposal.RATEPROCEEDINGSElectricTheCompany'smostrecentcompletedelectricratecasewasfiledNovember12,1992and,byOrderissuedandeffectiveFebruary11,1994,thePSCpermittedtheCompanytoincreaseitselectricbaseratesby$5.133million(orapproximately1.3%onanannualbasis),basedona10.6%returnoncommonequity,andan8.58%returnontotalinvestedcapital.Seethecaptionabove"Competition/Deregulation"andthesubcaption"CompetitiveOpportunitiesProceeding"thereunder,foradiscussionrelatedtotheCompany'sOctober1,1996filinginthatProceeding.GasTheCompanyfileditsmostrecentgasratecaseonNovember10,1995,andthePSC,onOctober3,1996,issueditsOrderandOpinion("Order")regardingtheCompany'srequesttoincreaseitsnaturalgasprices.TheOrderdidnotprovideforanincreaseinbaseprices,butdidauthorizeratemoderationtooffsetaprojectedrevenuedeficiencyof$500,000,largelythroughtheuseofpreviouslyretainedinterruptibleprofits.ThePSCalsodeterminedthata10%returnoncommonequityisappropriatefortheCompany'sgasoperations.CAPITALRESOURCESANDLIQUIDITYConstructionProgramAsshownintheConsolidatedStatementofCashFlows,thecashexpendituresrelatedtotheCompany'sconstructionprogramamountedto$43.5millionin1997,a$5.9milliondecreasefromthe$49.4millionexpendedin1996.Asshowninthetablebelow,cashconstructionexpendituresfor1998areestimatedtobe$58.1million,anincreaseof$14.6millioncomparedto1997expenditures.In1998,theCompanyexpectstosatisfyitsexternalfundingrequirements,ifany,throughissuancesofadditionaldebtsecurities,theamountandtypeofwhichcannotbepredicted.29CentralHudsonGas&ElectricCorporation Estimatesofconstructionexpenditures,internalfundsavailable,mandatoryandoptionalredemptionorrepurchaseoflong-termsecurities,andworkingcapitalrequirementsforthetwo-yearperiod1998-1999aresetforthbyyearinthefollowingtable:Total19991998-1999ConstructionExpenditures*...InternalFundsAvailable$58,100(InThousands)$51,700$109,80055,90056,600112,500ExcessofConstructionExpendituresoverInternalFunds...MandatoryRedemptionofLong-termdebt.....OptionalRedemptionorPurchaseofSecurities:Long-termdebtCommonstock.Total.OtherCashRequirements...TotalCashRequirements...2,200(4,900)(2,700)10020,10020,2007,00011,00018.000$33,300$66,900$100,20016,70016,70024000240004800024,00040,70064,700~ErcludingtheequityportionofAllowanceforFundsUsedDuringConstruction("AFDC"),anoncashitem.Estimatesofconstructionexpendituresaresubjecttocontinuousreviewandadjustment,andactualexpendituresmayvaryfromestimates.Theseconstructionexpendituresincludecapitalizedoverheads,nuclearfuelandthedebtportionofAFDC.IncludedintheconstructionexpendituresareexpenditureswhicharerequiredtocomplywiththeCleanAirActandrelatedAmendmentsof1990.Asshowninthetableabove,itispresentlyestimatedthatfundsavailablefrominternalsourceswillfinanceover100%oftheCompany'scashconstructionexpendituresforthetwo-yearperiod1998-1999.Duringthissametwo-yearperiod,totalexternalfinancingrequirementsarcprojectedtoamountto$100.2million,ofwhich$20.2millionisrelatedtothemandatoryredemptionoflong-termsecuritiesand$64.7millionisrelatedtotheoptionalredemptionoflong-termsecuritiesandtherepurchaseofcommonstock.CapitalStructureOvertheperiod1988-1997,theCompanysubstantiallyincreaseditscommonequityratiothroughretentionofaportionofitsearnings,offeringsofitscommonstocktothcpublic,originalissuancesofitscommonstockunderitsDRPanditsCSPP(bothofwhichhavesincebeensuperseded,effectiveJanuaryI,1997,bytheCompany'sStockPurchasePlandescribedinthisItem7underthecaption"FinancingProgram,"belowandinNote6-"Capitalization-CapitalStock"hereof)andredemptionofdebtandpreferredstock.OncresultoftheserecentincreasesintheCompany'scommonequityratiohasbeenasignificantimprovementinitsinterestcoverageratiosasshownunderthecaption"FinancialIndices"inthisItem7.TheCompany'sinterestcoverageratioshavealsobeenimprovedbytherefinancingofaportionofitsdebtatlowerinterestrates.Despiteatighteningofbondratingcriteriaappliedtotheelectricutilityindustry,theCompanyhasmaintainedorimproveditsbondratingssince1991.During1997,Standard8t,Poor'sCorporation,upgradedtheCompany'sseniordebtratingfrom"A-"to"A."TheCompany'sotherbondratings,whichwerereaffirmedduring1997,arc"A"byDuff&PhelpsCreditRatingCo.andFitchInvestorsServiceand"A3"byMoody'sInvestorsService,Inc.TheCompany'scontinuinggoalistoachieveandmaintainbondratingsatthe"A"level.UnderthetermsoftheAmendedSettlementAgreement,describedunderthccaption"Competition/Deregulation"ofItem7hereof,theCompanymayinvestupto$100millioninunregulatedbusinessespriortothcformationofaholdingcompany,whichformationiscontemplatedtobecomeeffectivebetweenJanuary1,1999andJune30,2001.Afteritsformation,suchholdingcompanywillbefreetoinvestinnewbusinessessubjectonlytothetermsoftheAmendedSettlementAgreement.AsaresultofthenewinvestmcntopportunitiestheCompanyexpectstobecomeavailablein1998and1999,theCompanymaymakesubstantialnewinvestmentsandmaychangeitscapitalstructureinwaysthatcannotbepredictedatthistime.Setforthbelowisce'rtaininformationwithrespecttotheCompany'scapitalstructureattheendof1997,1996and1995:Year-cndCaitalStructure199719961995Long-termdebt.Short-termdebtPreferredstockCommonequity40.5%6.353.240.1%42.8%1.76.27.552.049.730CentralHudsonGas&ElectricCorporation100.0%100.0%100.0%

~~FinancingProgramByanOrderissuedandeffectiveDecember4,1996,thePSCgrantedtheCompanyauthorizationtoissueandsell,throughDecember31,1999,uptoanadditional$40millionofsecurities.This$40millioncanbecomprisedofmediumtermnotesorcommonstocksolelyoracombinationofmediumtermnotesandcommonstock.ThatOrderalsoauthorizestheCompanytoacquire,throughDecember31,1999,notmorethan2.5millionsharesofitsissuedandoutstandingcommonstock.TheCompanyalsoreceivedapprovaltocombineitsDRP,itsCSPPanditsESPPintoanewStockPurchasePlan,effectiveJanuary1,1997.TheCompanyimproveditscommonequityratiofrom35.4%atDecember31,1987(followingthewritedownofaportionoftheNineMile2PlantasdirectedbythePSC)to52.0%atDecember31,1996,whichlevelwasdeemedsufficientbytheCompany.PursuanttotheaforementionedPSCauthorization,theCompany,inJanuary1997,institutedacommonstockrepurchaseprogramprimarilyforthepurposeofmanagingcontinuinggrowthinitscommonequityratio.UndersuchprogramtheCompanyrepurchased275,200sharesofitscommonstockduring1997.Despitesuchprogram,theCompany'scommonequityratiofurtherimprovedto53.2%atDecember31,1997.TheCompany'stargetlevelofsharerepurchasefor1998willbedeterminedinearly1998inviewofthepricepershareofcommonstock,cashflowandopportunitiestoreinvestintheCompny'sbusinessorinvestinnewbusinesses.TheCompanyintendstorefinance,ifeconomic,its8.375%SeriesNYSERDABonds($16.7million)onorsoonafteritscalldateonDecemberI,1998atalowercost.TheCompanyalsointendstorefundatmaturityits5.38%SeriesMediumTermNotes($20million)onJanuary15,1999.UnderthetermsoftheAmendedSettlementAgreementdescribedaboveunderthecaption"CompetitiveOpportunitiesProceeding,"priortotheformationofanewholdingcompany,theCompanymaytransferupto$100millionfromitsregulatedutilitybusinesstoitsunregulatedbusinesses.TheCompanymay,pursuanttothisauthorization,issueupto$100millionofnewsecuritiesin1998or1999.FollowingtheformationoftheholdingcompanycontemplatedundertheAmendedSettlementAgreementtooccurbetweenJanuary1,1999andJune30,2001,theCompanymayissuenewsecuritiesinfurtheranceofitsbusinessplantobedevelopedforsuchholdingcompany.Thetypeofanysuchsecuritiestobeissuedaftertheformationofsuchholdingcompanyandtimingofissuancecannotbepredictedatthistime.FormoreinformationwithrespecttosuchOrderandtheCompany'sfinancingprogramin.general,seeNote6-"Capitalization-CapitalStock"andNote7-"Capitalization-Long-TermDebt."Short-TermDebtAsmorefullydiscussedinNote5-"Short-TermBorrowingArrangements"hereof,theCompanyhasarevolvingcreditagreementwithfourcommercialbanksforborrowingupto$50millionthroughOctober23,2001.Inaddition,theCompanyhasseveralcommittedanduncommittedbankfacilitiesrangingfrom$.5millionto$50millionfromwhichitmayobtainshort-termfinancing.SuchagreementsgivetheCompanycompetitiveoptionstominimizeitscostofshort-termborrowing.AuthorizationfromthePSClimitstheamounttheCompanymayhaveoutstandingatanytimeunderallofitsshort-termborrowingarrangementsto$52.0millionintheaggregate.RESULTSOFOPERATIONSThefollowingdiscussionandanalysisincludesanexplanationofthesignificantchangesinrevenuesandexpenseswhencomparing1997to1996and1996to1995.AdditionalinformationrelatingtochangesbetweentheseyearsisprovidedintheNotes.EarningsEarningspersharcofcommonstockareshownafterprovisionfordividendsonpreferredstockandarecomputedonthebasisofthcaveragenumberofcommonsharesoutstandingduringtheyear.Thenumberofcommonshares,theearningspershareandtherateofreturnearnedonaveragecommonequityareasfollows:1997Averagesharesoutstanding(000s).....................................17,435Earningspershare....$2.97Returnearnedoncommonequityperfinancialstatements*10.8%~Returnonequityforregulatoryrate-makingpurposesdiversfromthesefigures.199617,549$2.9911.1%199517,380$2.7410.5%Earningspersharein1997,whencomparedto1996results,decreased$.02pershare.Thisdecreaseresultedsubstantiallyfromdecreasedelectricandgasnetoperatingrevenues(includingfuelcostsandpurchasedelectricity)attributablelargelytodecreasedIalesresultingprimarilyfromadecreaseinusagebyresidentialandindustrialelectriccustomersandresidentialandcommercialgascustomersduetounseasonableweatherexperiencedin1997.Billingadjustedheatingdegreedayswere8%lowerandcoolingdegreedayswere16%lower,when1997resultswerecomparedto1996.Theeffectoftheseunseasonableweatherconditionsalonereducedearningsbyanestimated$.22,despitea1%increaseinthenumberofcustomers.Alsocontributingtothedecreasein19973ICentralHudsonGas&ElectricCorporation earningsaredecreasedelectricearningsrelatedtoregulatoryincentiveprogramsbasedonfuelcostsandenergyefficiency,largelyduetothereducedavailabilityofpurchasedpoweratacostbelowtheCompany'sfossil-fueledgeneration,andincreaseddepreciationexpenseontheCompany'splantandequipment.Partiallyoffsettingthesedecreasesin1997earningsisa$.09increaseresultingfromtheneteffectoftwonon-recurringitemsasfollows:the1997recordingoftaxadjustmentsincludingadditionalinvestmenttaxcreditsandrelatedinterestrefundedfromthesettlementofvariousInternalRevenueService("IRS")audits,andthe1997provisionforthenon-recoverableportionofapurchasedpowercontract.Otheritemsalsoimpactedearningsfavorablyincluding:decreaseduncollectibleaccounts,avoidedinterestexpensefromtheoptionalredemptioninMay1996oftheCompany's83/4%Series$30millionFirstMortgageBonds,increasedinterestanddividendincome,anddecreasedinterestexpense.Earningspersharein1996increased$.25pershareover1995resultingprimarilyfromincreasedelectricandgasnetoperatingrevenuescausedlargelybyanincreaseinusagebyresidentialcustomers,andtheunseasonablehotand/orcoldweatherconditionsexperiencedin1996whencomparedto1995.Hcatingdegreedayswere17%higherin1996thanintheprioryear.Alsocontributingtotheincreasein1996weretheoptionalredemptionoftheCompany's7.44%SeriesCumulativePreferredStockinOctober1995,7.72%SeriesCumulativePreferredStockinJanuary1996and83/4%Series$30millionFirstMortgageBondsinMay1996.This1996increaseinearningspersharewaspartiallyoffsetbyincreasedemployeewagesandassociatedfringebenefitsandthc1995non-recurringgainfromthesaleoflong-termstockinvestments.VariousotheritemsunfavorablyimpactedearningspershareincludingincreaseddepreciationexpenseassociatedwiththeCompany'splantandequipment,decreasedinterestanddividendincomeandincreaseduncollectibleaccounts.OperatingRevenuesTotaloperatingrevenuesincreased$6.3million(1%)in1997ascomparedto1996andincreased$1.8million(.3%)in1996,ascomparedto1995.Seethetablebelowfordetailsofthevariations:Increaseor(Decrease)fromPriorYear1997ElectricC~asTotalElectric1996asTotalCustomersales.Salestootherutilities...Fuelcostadjustment....Deferredrevenues.Miscellaneous.Total(InThousands)$(5,236)$9,7842,5503308,555(1,248)(450)677887(227)$(7,860)4,840(291)675304$2,624(2,290)8,846(1,125)583$1,4162,805(3,745)1,517(237)$(8,368)2,475(2,497)840(10)$(2)332)$8,638$6@06S9,316S(7,560)S1,756SalesTheCompany'ssalesvaryseasonallyinresponsetoweather.Generallyelectricrevenues.peakinthesummerandgasrevenuespeakinthewinter.SalesofelectricitywithintheCompany'sserviceterritorydecreased3%in1997andincreased3%in1996.Electricsalesin1997decreasedprimarilybecauseofadecreaseinusagebyresidentialandindustrialcustomerslargelyduetotheunseasonableweatherconditionscxperienccdin1997whencomparedto1996.In1996,electricsalesincreasedlargelyfromanincreaseinusagebyresidentialcustomers,andthcunseasonablehotand/orcoldweatherexperiencedthroughout1996whencomparedtotheweatherconditionsof1995.Firmsalesofnaturalgas(whichexcludesinterruptibleandtransportationsales)decreased5%in1997dueprimarilytoadecreaseinusagebyresidentialandcommercialcustomers.In1996,firmsalesofnaturalgasincreased12%duetoanincreaseinusagebyrcsidcntial,commercialandindustrialcustomers.Changesinsalesfromlastyearbymajorcustomerclassification,includinginterruptiblegassalesaresetforthbelow.Alsoindicatedarethechangesrelatedtotransportationofcustomer-ownedgas:%IncreaseDecreasefromPriorYearElectric(Mwh)Gas(Mcf)1997199619971996Residential.Commercial.IndustrialInterruptibleTransportationofCustomer-OwnedGas...(2)(6)N/AN/A5I3N/AN/A(6)(6)1111174161215(78)10532CentralHudsonGas&ElectricCorporation

~~ResidentialandCommercialSales:Residentialelectricandgassalesareprimarilyaffectedbythegrowthinthenumberofcustomersandthechangeincustomerusage.In1997,residentialelectricandgassalesandcommercialgassalesdecreasedprimarilyfromadecreaseincustomerusagelargelyduetotheunseasonableweatherexperiencedintheCompany'sserviceterritory.in1997.Billingadjustedheatingdegreedayswere8%lowerandcoolingdegreedayswere16%lowerwhen1997resultswerecomparedto1996.In1996,residentialandcommercialelectricandgassalesincreasedprimarilyduetoanincreaseincustomerusagepartlycausedbyunseasonablehotand/orcoldweatherexperiencedthroughout1996intheCompany'sserviceterritory.Heatingdegreedayswere17%higherin1996thanintheprioryear.IndustrialElectricSales:In1997,ascomparedto1996,industrialelectricsalesdecreased6%primarilyduetoadecreaseinusagebyalargeindustrialcustomer.In1996,ascomparedto1995,industrialelectricsalesincreased3%largelybecauseofanincreaseinusagebyalargeindustrialcustomer.IndustrialGasSales:In1997,firmgassalestoindustrialcustomersincreased11%primarilybecauseofanincreaseinusagebyalargeindustrialcustomer.Firmgassalestoindustrialcustomersfor1996increased15%substantiallybecauseofincreasedusagebyseverallargeindustrialcustomers.InterruptibleGasSales:In1997,interruptiblegassalesincreased111%largelyduetoanincreaseinnaturalgassoldforuseasaboilerfuelattheRo'setonPlant.Interruptiblegassalesdecreased78%in1996,duesubstantiallytoadecreaseinnaturalgassoldforuseasaboilerfuelattheRosetonPlant.TheuseofgasasaboilerfuelattheRosetonPlantisdependentuponitseconomicbenefitascomparedtotheuseofoilforgenerationorthepurchaseofelectricitytomeettheCompany'sloadrequirements.Duetosharingarrangements,asdescribedinthecaption"IncentiveArrangements"ofItem7hereofthatareinplaceforinterruptiblegassalesandtransportationofcustomer-ownedgas,variationsfromyeartoyeartypicallyhaveaminimalimpactonearnings.TransportationofCustomer-OwnedGastThevolumeofcustomer-ownedgastransportedin1997increased74%and105%in1996dueprimarilytoanincreaseinusagebyalargetransportationcustomer.IncentiveArrangementsPursuanttocertainincentiveformulasapprovedbythePSC,theCompanyeithershareswithitscustomers,certainrevenuesand/orcostsavingsexceedingdefinedpredeterminedlevels,orispenalizedinsomecasesforshortfallsfromthetargetedlevelsordefinedperformancestandards.Incentiveformulasareinplaceforfuelcostvariations,salesofelectricityandgastootherutilities,interruptiblegassales,capacityreleasetransactionsandcustomersatisfaction.Thenetresultsoftheseincentiveformulasweretoincreasepretaxearningsby$700,000,$2.9millionand$2.8millionduring1997,1996and1995,respectively.-OperatingExpensesChangesfromtheprioryearinthecomponentsoftheCompany'soperatingexpensesarelistedbelow:Increaseor(Decrease)fromPriorYearAmount1997Amount(InThousands)1996OperatingExpenses:Fuelandpurchasedelectricity......Purchasednaturalgas...................Otherexpensesofoperation........Maintenance................Depreciationandamortization.....Taxes,otherthanincometax.......Federalincometax.......................Total$7,58410,878(1,527)(1,364)1,284(1,266)3510$12,079722(2)(5)3(2)11$1,134(11,703)3,683(502)1,113(564)3.6603$(3,179)I(19)4(2)3(I)13ThemostsignificantelementsofoperatingexpensesarefuelandpurchasedelectricityintheCompany'selectricdepartmentndpurchasednaturalgasintheCompany'sgasdepartment.Approximately29%in1997and27%in1996ofeveryrevenuedollarilledbytheCompany'selectricdepartmentwasexpendedforthecombinedcostoffuelusedinelectricgenerationandpurchasedelectricity.ThecorrespondingfiguresintheCompany'sgasdepartmentforthecostofpurchasedgaswere59%and53%,respectively.33CentralHudsonGas&ElectricCorporation Inanefforttokeepthecostofelectricityatthelowestreasonablelevel,theCompanypurchasesenergyfromsourcessuchasothermembercompaniesoftheNYPP,CanadianhydrosourcesandenergymarketerswheneverenergycanbepurchasedataunitcostlowerthantheincrementalcostofgeneratingtheenergyintheCompany'splants.Fuelandpurchasedelectricityincreased$7.6million(7%)in1997primarilybecauseofa3%increaseintotalsystemsaleswhichincludessalestootherutilities.Purchasednaturalgasincreased$10.9million(22%)in1997largelyduetohigherinterruptiblegassales,includinggasusedasaboilerfuelattheRosetonPlant.In1996,purchasednaturalgasdecreased$11.7million(19%)primarilybecauseoflowerinterruptiblegassalesforusageasaboilerfuelattheRosetonPlant.Otherexpensesofoperationincreased$3.7million(4%)in1996primarilyduetoincreasedemployeewagesandassociatedfringebenefitsandincreaseduncollectibleaccounts.SeeNote4-"FcdcralIncomeTax,"hereinforananalysisandreconciliationofthefederalincometax.OtherIncomeAndInterestChargesOtherincome(excludingAFDC)increased$4.6million(71%)in1997anddecreased$2.8million(30%)in1996.The1997increasewasdueprimarilytointerestrefundedin1997fromthesettlementofvariousIRSauditsandthe1996chargesassociatedwiththeoptionalredemptionofthe83/4%SeriesofFirstMortgageBonds.The1996decreasewaslargelyduetothenon-recurringgainof$2.1millionrealizedin1995fromthesaleoflong-termstockinvestmentsandtherecordingofone-timechargesassociatedwiththeoptionalredemptionof$30million83/4%SeriesofFirstMortgageBondsinMay1996.Totalinterestcharges(excludingAFDC)decreased$533,000(2%)in1997and$1.7million(6%)in1996.ThefollowingtablesetsforthsomeofthepertinentdataontheCompany'soutstandingdebt:19971996(InThousands)1995Long-termdebt:Debtretired$85Outstandingatyear-end*:Amount(includingcurrentportion)...........363,744364,026Effectiverate6.78%6.70%Short-termdebt:Averagedailyamountoutstanding.............$1,692$5,477Weightedaverageinterestrate...................5.54%5.59%<</neludingdebtofsubsidiariesof$7.4millioninl997,$7.6millionin1996and$$.3millionin1995.$2,562$30,000391,7157.00%$1036.16%SeeNote5-"Short-TermBorrowingArrangements"andNote7-"Capitalization-Long-TermDebt"foradditionalinformationonshort-termandlong-termdebtoftheCompany.NuclearOperationsThcNineMile2Plantisowned,astenants-in-common,bytheCompany,NiagaraMohawk,NewYorkStateElectriclkGasCorporation("NYSEG"),LILCOandRochesterGasandElectricCorporation("Rochester").NiagaraMohawkoperatestheNineMile2Plant.TheCompanyownsa9%interestoftheNineMile2Plant,whichisdiscussedinNote3-"NineMile2Plant."TheoperationsofthisPlanthavecontinuedtoimprove.Theactualcapacityfactorof88.7%for1997exceededthetargetedcapacityfactorof84%includedintheCompany'selectricfueladjustmentclause.Thisresultedinafavorableimpactonearnings.Theoperatingexpenses,taxesanddepreciationpertainingtotheoperationofthcNineMile2PlantareincludedintheCompany'sfinancialresults.Forboth1997and1996,theactualcostofoperationswaslessthantheallowableNineMile2PlantoperationandmaintenanceexpensesprovidedinSupplementNo.5tothe1990SettlementAgreement,asapprovedbythePSC.Inboth1997and1996,theunderrunswereentirelydeferredforthefuturebenefitofcustomers(seeNote1-"RegulatoryMatters").TheCompanyhascontinuedtoparticipateactivelyinthemanagement,operationsandaccountingcommitteesfortheNineMile2Plantandwilldosointhefuture.OnOctober12,1996,NiagaraMohawkandRochesterannouncedplanstoestablishajointnuclearoperationcompanytobeknownasNewYorkNuclearOperatingCompany("NYNOC").NYNOCisenvisionedtoassumefullresponsibilityforoperationofallthenuclearplantsinNewYorkState,includingtheNineMile2Plant,NiagaraMohawk'sUnitNo.1ofthcNineMilePointNuclearStationandRochester'sGinnaNuclearPlant.SincethattimeNYNOChasbeenorganizedasaNewYorklimitedliabilitycompany,andConEdisonandPASNYhaveannouncedtheirdesiretomoveforwardwiththeNiagaraMohawkandRochesterplanstoimplementNYNOC.ItisexpectedthatNYNOCcouldcontributetomaintainingahighlevelofoperationalperformance,contributetocontinuedsatisfactoryNuclearRegulatoryCommission("NRC")regulatorycompliance,provideopportunitiesforcontinuedcostreductionsandprovidethebasisforsatisfactoryeconomicregulationbythePSC.Variousgroupsarenowinvolved34CentralHudsonGas&ElectricCorporation inthedetailedstudiesandanalysisrequiredbeforeadefinitivedecisiontoproceedwithNYNOCcanbemade.SufficientinformationisnotavailablefortheCompanytomakeanassessmentofsuchplansorwhetheritwouldconsenttosuchplanstotheextentthattheNineMile2Plantisaffected.Untilsuchassessmcntcanbemade,theCompanycantakenopositionwithrespecttosuchplans.TheNineMile2PlantcompleteditsfifthrefuelingoutageNovember2,1996.ItisscheduledtocommenceitssixthrefuelingoutageinMay1998,withatargeted37-dayduration.AdecommissioningstudyfortheNineMile2Plantwascompletedin1995.Thestudy'sestimateofthecosttodecommissiontheNineMile2Plantissignificantlyhigherthanpreviousestimates.TheCompanybelievesthatdecommissioningcosts,ifhigherthancurrentlyestimated,willultimatelyberecoveredinrates,althoughnosuchassurancecanbegiven.However,futuredevelopmentsintheutilityindustry,includingtheeffectsofderegulationandincreasingcompetitioncouldchangethisconclusion.TheCompanycannotpredicttheoutcomeofthesedevelopments.Forfurtherinformationondecommissioning,seeNote3-"NineMile2Plant."InOctober1996,NiagaraMohawk,asoperatingcotenantfortheNineMile2Plant,alongwithothercompaniesthatoperatenuclearplants,receivedaletterfromtheNRC,requiringittoprovidetheNRCwithinformationonthe"adequacyandavailability"ofdesignbasisdocumentationontheirnuclearplantswithin120days.SuchinformationwillbeusedbytheNRCtoverifythatcompaniesareincompliancewiththetermsandconditionsoftheirlicense(s)andNRCregulations.Inaddition,itwillallowtheNRCtodetermineifotherinspectionactivitiesorenforcementactionsshouldbetakenonaparticularcompany.TheCompanybelievesthattheNRCisbecomingmorestringentasindicatedbythisletterandthattheremaybedirectcostimpactoncompanieswithnuclearplantsasaresult.TheNRCissuedapolicystatementontheRestructuringandEconomicDeregulationoftheElectricUtilityIndustry("PolicyStatement")in1997.ThePolicyStatementaddressesNRC'sconcernsabouttheadequacyofdecommissioningfundsandaboutthepotentialimpactonoperationalsafety.CurrentNRCregulationsallowautilitytosetasidedecommissioningfundsannuallyovertheestimatedlifeofaplant.InadditiontotheabovePolicyStatement,theNRCisproposingtoamenditsregulationsondecommissioningfundingtoreflectconditionsexpectedfromdcrcgulationoftheelectricpowerindustry.TheCompanyisunabletopredicthowsuchincreasedstringencymayaffectthcresultsofoperationsorfinancialconditionoftheNineMile2Plant.OnAugust27,1997,thePSCStaffissueda"NoticeSolicitingCommentsonNuclearGeneration"requestingcommentsandalternativeapproachesbyinterestedpartiesona"StaffReportonNuclearGeneration"("NuclearReport").TheNuclearReportconcludesthatnucleargeneration,alongwithnon-nucleargenerationfacilities,shouldbesubjecttothedisciplineofmarket-based~~pricing.AccordingtothePSCStaff,theoptimal,leastcostmethodfor"regulating"generatingunitsistofreethemtooperateinthewholesalecompetitivemarketswhererunningcostsmustberecoveredinthewholesalemarketpriceofpower.TheCompanysubmittedcomments,pointingouttheshortcomingsintheNuclearReport,whichcommentsincludedadoptingaprocesstofullydevelopthenecessaryfactsandanalyses.TheNYNOCorganizingutilitiessubmittedcommentsnotingthatthePSCStaffproposalwouldnullifythepotentialbenefitsofNYNOC.ThePSCStaffhasyettorespondtothecommentsandreplycommentsofthenumerousparties.TheCompanycanmakenopredictionastotheoutcomeoftheNuclearReportproposal.OnDecember30,1997,theNRCissueditslatestsystematicassessmentoflicenseeperformance("SALP")reviewoftheNineMilePointNuclearStationfortheperiodJune2,1996toNovcmbcr8,1997("1996/97SALPReport").TheNineMilePointNuclearStationiscomprisedofbothUnitsNo.1andNo.2.UnitNo.1,locatedadjacenttotheNineMile2Plant,isownedandoperatedsolelybyNiagaraMohawk.The1996/97SALPReport,conductedundertherevisedSALPprocessthatwasimplementedbytheNRConJuly19,1993,rateslicenseeperformanceinfourfunctionalareas;operations,maintcnancc,engineeringandplantsupport.Overall,theNRCindicatedthattheperformanceattheNineMilePointNuclearStationwasgenerallygood;however,continuedmanagementattentionwasneededtoaddressissuesinseveralareas.Theratingswereasfollows:(i)operationswasratedCategory2("good"),whichwaslowerthantheCategory1("superior")ratingonthepriorSALPReport(coveringtheperiodJanuary1995throughJune1,1996);(ii)maintenancewasratedCategory2("good"),whichwasthcsameratingasonthe1995/1996SALPReport;(iii)engineeringwasratedCategory3("acceptable"),whichwaslowerthantheCategory2insaidpriorSALPReport;and(iv)plantsupportwasratedCategory2("good"),remainingthesameasthepriorSALPReport.OtherIviattersStormCosts:OnApril1,1997,asnowandwindstormdisruptedservicetoapproximately100,000customersintheCompany'sscrviccterritory.Therestorationcostsofthestormtotaledapproximately$8.9millionwhich,afterapplyingmitigatingcredits,amountedto$5.3millionasreflectedin"DeferredCharges-Other"intheConsolidatedBalanceShcct.TheCompanybelievesthesecostsarerecoverableinratesandhasthereforerequestedthePSCtoauthorizedeferralofthesecosts.TheAmendedSettlementAgreementauthorizesthedeferralofthesecosts.FederalIncomeTaxRefund:Inthesecondquarterof1997theCompanyreceiveda$1.9millionnetrefundasaresultofauditsbytheIRSoftheCompany'sfederalincometaxreturnsfortheyears1987-1991.TheCompanyhascompliedwiththePSCnotificationrcquircmcntsfortaxrefundsandrecordedtherefundinthefourthquarterof1997.35CentralHudsonGas&ElectricCorporation Year2000:TheCompanyisaddressingpotentialadverseimpactsfrompotentialYear2000computersoftwarefailurestoensuretheavailabilityandintegrityofitsfinancialsystemsandthereliabilityofitsoperationalsystems.TheCompanyhasestablishedprocessesforevaluatingandmanagingtherisksandcostsassociatedwiththisproblem.TheCompanyhas,andwillcontinuetomake,certaininvestmentsinitssoftwaresystemsandapplicationstoensuretheCompanyisYear2000compliant.ThefinancialimpacttotheCompanyhasnotbeendeterminedbutisnotanticipatedtobematerial.ElectricSalestoIBM:TheCompany'slargestcustomerisInternationalBusinessMachinesCorporation("IBM"),whichaccountedforapproximately9%and10%oftheCompany'stotalelectricrevenuesfortheyearsendedDecember31,1997and1996,respectively.IBMannouncedthatitwillbeinvesting$700millionatitsEastFishkill,NewYorkfacilitytoconstructoneoftheworld'mostsophisticatedmicrochipmanufacturingplants.Thisfacility,slatedtoopenin1999with400employees,willembracenewtechnologyindeveloping12"diametersiliconwafers.ThisexpansioncouldhaveafavorableimpactontheCompany'srevenuebaseandcustomers.NewAccountingStandards:InJune1997,theFinancialAccountingStandardsBoard("FASB")issuedStatementofFinancialAccountingStandardsNo.131"DisclosuresaboutSegmentsofanEnterpriseandRelatedInformation"("SFAS131").ThisStatementestablishesstandardsforreportinginformationaboutoperatingsegmentsinannualandinterimfinancialstatements.TheCompanydoesnotexpectthattheadoptionofSFAS131willhaveasignificantimpactonthereportingrequirementsoftheCompany.ForadiscussionofproposedandnewaccountingstandardsfromtheFASB,seeNote2-"SummaryofSignificantAccountingPolicies,"herein.InFebruary1996,theFASBissuedanexposuredraftentitled"AccountingforCertainLiabilitiesRelatedtoClosureandRemovalofLong-LivedAssets,"whichincludesnuclearplantdecommissioning.Iftheaccountingstandardproposedinsuchexposuredraftwereadopted,itcouldresultinhigherannualprovisionsforremovalordecommissioningtoberecognizedearlierintheoperatinglifeofnuclearandothergeneratingunitsandanacceleratedrecognitionofthedecommissioningobligation.TheFASBisdeliberatingthisissueandtheresultingfinalpronouncementcouldbedifferentfromthatproposedintheexposuredraft.TheCompanycanmakenopredictionatthistimeastotheultimateformofsuchproposedaccountingstandard,assumingitisadopted,norcanitmakeanypredictionastoitsultimateeffect(s)onthefinancialconditionof'heCompany.OtherIssues:Onanongoingbasis,theCompanyassessesenvironmentalissueswhichcouldimpacttheCompanyanditscustomers.Note3-"NineMile2Plant"andNote9-"CommitmentsandContingencies"discusscurrentenvironmentalissuesaffectingtheCompany,including(i)the1995decommissioningcoststudyoftheNineMile2Plant,(ii)theCleanWaterActandCleanAirActAmendmentsof1990,whichrequirecontrolofemissionsfromfossil-fueledelectricgeneratingunits,(iii)asbestoslitigationcases,and(iv)alegalactionfiledin1995againsttheCompanybytheCityofNewburgh,NcwYork.36CentralHudsonGas&ElectricCorporation FINANCIALINDICESSelectedfinancialindicesforthelastfiveyearsaresetforthinthefollowingtable:Pretaxcoverageoftotalinterestcharges:IncludingAFDCExcludingAFDCFundsfromOperations.199719963.94x4.08x3.69x3.83x5.18x5.29x19953.68x3.43x4.69x19943.38x3.15x4.24x19933.29x3.15x4.27xPretaxcoverageoftotalinterestchargesandpreferredstockdividends...............Percentofconstructionexpendituresfinancedfrominternalfunds...........3.37x100%3.47x100%2.97x100%2.74x2.65x100%100%AFDCandMirrorCWIP*asapercentageofincomeavailableforcommonstock.....Effectivetaxrate.13%13%16%16%32%36%35%35%11%35%*Referto/VoteI-"Regulatoryhfaners"undersubcaptions"SummaryofRegulatoryAssetsandLiabilities"and"DeferredFinanceCharges-¹nehfile2Plant"foradefinitionofMirrorC)VIP.CONNONSTOCKDIYIDENDSANDPRICERANGESTheCompanyanditsprincipalpredecessorshavepaiddividendsonitscommonstockineachyearcommencingin1903,andthecommonstockoftheCompanyhasbeenlistedontheNewYorkStockExchangesince1945.ThepricerangesandthedividendspaidforeachquarterlyperiodduringtheCompany'slasttwofiscalyearsareasfollows:Hih1997LowDividendHih1996LowDividend1stQuarter......2ndQuarter....3rdQuarter.....4thQuarter.....$333/8$301/2$.53343/4293/4.53357/8321/8.535437/83411/16.535$31I/231I/431I/431I/2$283/4$.525287/8.52529I/2.5329.53OnJune27,1997,theCompanyincreaseditsquarterlydividendrateto$.535persharefrom$.53in1996.OnJune28,1996,theCompanyincreaseditsquarterlydividendrateto$.53persharefrom$.525pershare.Anydeterminationwithregardtofuturedividenddeclarations,andtheamountsanddatesofsuchdividends,willdependonthecircumstancesatthetimeofconsiderationofsuchdeclaration.OnesuchconsiderationwillbetheeffectonthcCompanyofthecorporaterestructuringdescribedinthisItem7underthecaption"Competition/Deregulation."ThcnumberofregisteredholdersofcommonstockasofDecember31,1997was22,605.Ofthese,21,933wereaccountsinthenamesofindividualswithtotalholdingsof5,544,827shares,oranaverageof253sharesperaccount.The672otheraccounts,inthenamesofinstitutionalorothernon-individualholders,forthemostpart,holdsharesofcommonstockforthebenefitofindividuals.37CentralHudsonGas&ElectricCorporation ITEN7AQuantitativeandQualitativeDisclosureAboutNarketRiskNotApplicableITEN8FinancialStatementsAndSupplementaryDataI-IndextoFinancialStatements:ReportofIndependentAccountantsStatementofManagement'sResponsibilityConsolidatedBalanceSheetatDecember31,1997and1996ConsolidatedStatementofIncomeforthethreeyearsendedDecember31,1997ConsolidatedStatementofRetainedEarningsforthethreeyearsendedDecember31,1997ConsolidatedStatementofCashFlowsforthethreeyearsendedDecember31,1997NotestoConsolidatedFinancialStatementsSelectedQuarterlyFinancialData(Unaudited)Page3939404242434460II-ScheduleII-ReservesAllotherschedulesareomittedbecausetheyarenotapplicableortherequiredinformationisshownintheConsolidatedFinancialStatementsortheNotesthereto.61SupplementaryDataSupplementarydatathatisincludedin"SelectedQuarterlyFinancialData(Unaudited)"appearsunderthisItemandreferenceismadethereto.38CentralHudsonGasScElectricCorporation REPORTOFINDEPENDENTACCOUNTANTSQlPriceWaterhoaseLLpTotheBoardofDirectorsandShareholdersofCentralHudsonGas&ElectricCorporationInouropinion,theconsolidatedfinancialstatementslistedintheaccompanyingindexpresentfairly,inallmaterialrespects,thefinancialpositionofCentralHudsonGas&ElectricCorporationanditssubsidiariesatDecember31,1997and1996,andtheresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,1997,inconformitywithgenerallyacceptedaccountingprinciples.ThesefinancialstatementsaretheresponsibilityoftheCompany'smanagement;ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits.Weconductedourauditsofthesefinancialstatementsinaccordancewithgenerallyacceptedauditingstandardswhichrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,andevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovidearcasonablcbasisforthcopinionexpressedabove./~43JU~t-t.WNewYork,NewYorkJanuary23,1998,exceptastoNote1oftheconsolidatedfinancialstatementswhichisasofFebruary4,1998STATENENTOFNANAGENENT'SRESPONSIBILITYManagementisresponsibleforthepreparation,mtegntyandobJectivityoftheconsolidatedfinancialstatementsofCentralHudsonGas&ElectricCorporationanditssubsidiaries(collectiveiy,theCompany)aswellasallotherinformationcontainedinthisForm10-K.Theconsolidatedfinancialstatementshavebeenpreparedinconformitywithgenerallyacceptedaccountingprinciplesand,insomecases,reflectamountsbasedonthebestestimatesandjudgementsoftheCompany'sManagement,givingdueconsider-ationtomateriality.TheCompanymaintainsadequatesystemsofinternalcontroltoprovidereasonableassurance,that,amongotherthings,transac-tionsareexecutedinaccordancewithManagement'sauthorization,thattheconsolidatedfinancialstatementsarepreparedinaccor-dancewithgenerallyacceptedaccountingprinciplesandthattheassetsoftheCompanyareproperlysafeguarded.Thesystemsofin-ternalcontrolaredocumented,evaluatedandtestedbytheCompany'sinternalauditorsonacontinuingbasis.Duetothcinherentlimitationsofthecffcctivenessofinternalcontrols,nointernalcontrolsystemcanprovideabsoluteassurancethaterrorswillnotoc-cur.ManagementbelievesthattheCompanyhasmaintainedaneffectivesystemofinternalcontroloverthcpreparationofitsflinan-cialinformationincludingtheconsolidatedfinancialstatementsoftheCompanyasofDecember31,1997.IndependentaccountantswerecngagcdtoaudittheconsolidatedfinancialstatementsoftheCompanyandissuetheirreportthereon.TheReportofIndepcndcntAccountants,whichispresentedabove,doesnotlimittheresponsibilityofManagementforin-formationcontainedintheconsolidatedfinancialstatementsandelsewhereinthisForm10-K.TheCompany'sBoardofDirectorsmaintainsaCommitteeonAuditwhichiscomposedofDirectorswhoarcnotemployeesoftheCompany.TheCommitteeonAuditmeetswithManagement,itsInternalAuditingManager,anditsindcpcndentaccountantsseveraltimesayeartodiscussinternalcontrolsandaccountingmatters,theCompany'sconsolidatedfinancialstatements,thescopeandresultsoftheauditspcrformcdbytheindependentaccountantsandtheCompany'sInternalAuditingDepartment.Theindepen-dentaccountantsandtheCompany'sInternalAuditingManagerhavedirectaccesstotheCommitteeonAudit.JOHNE.MACK,IIIChairmanoftheBoardandChiefExecutiveOfficerDONNAS.DOYLEControllerJanuary23,199839CentralHudsonGas&ElectricCorporation ConsolidatedBalanceSheetAtDecember31,UtilityPlantElectricGas..Common.Nuclearfuel.Less:Accumulateddepreciation.Nuclearfuelamortization.(InThousands)ASSETS1997$1,193,735151,22291,52237,2621,473,741560,30433,059880,3781996$1,171,798145,37587,59136,9131,441,677520,99929,748890,930ConstructionworkinprogressNctUtilityPlant52,413932,79148,699939,629InvestmentsandOtherAssetsPrefundcdpensioncostsOther.TotalInvestmcntsandOtherAssets23,53614,95838,49410,67212,41923,091CurrentAssetsCashandcashequivalents.Accountsrcccivablefromcustomers-netofallowancefordoubtfulaccounts;$2.8millionin1997and$3.2millionin1996...Accruedunbilledutilityrevenues.Otherreceivables...Materialsandsupplies,ataveragecost:Fuel.Constructionandoperating.Specialdepositsandprepayments.TotalCurrentAssets.9,05449,64316,2292,07311,92012,18014,210115,3094,23548,08016,0422,89614,93513,16013,440112,788DeferredClmrgcsRegulatoryassets(Note1)UnamortizeddebtexpenseTotalDeferredCharges139,2365,00221,258165,496151,4265,39316,779173,598TOTALASSETS$1@52,090$1,249,106TheNotestoConsolidatedFinanualStatementsareanintegralparthereof.40CentralHudsonGas&ElectricCorporation CapitalizationCommonStockEquity(InThousands)CAPITALIZATIONANDLIABILITIES19971996Commonstock,$5parvalue(Note6).Paid-incapital(Note6)Retainedearnings.Reacquiredcapitalstock(Note6)CapitalstockexpenseTotalCommonStockEquity$87,775284,4651201540(9,398)(6,278)477,104$87,775284,465105,821(6,352)471,709CumulativePrcfcrredStock(Note6)NotsubjecttomandatoryredemptionSubjecttomandatoryredemptionTotalCumulativePreferredStock21)03035,00056,03021,03035,00056,030Long-termDebt(Note7)..TotalCapitalization.361)829,894,963362,040889,779CurrentLiabilitiesCurrentmaturitiesoflong-termdebtNotespayableAccountspayable..Dividendspayable.Accruedtaxesandinterest.AccruedvacationCustomerdeposits.OtherTotalCurrentLiabilities..1,31724@6810,0523,2404,3394,0016,54553,8621,36215,60026,13710,1125,3474,2514,0196,67673,504DeferredCreditsandOtherLiabilitiesRegulatoryliabilities(NoteI)OperatingreservesOtherTotalDeferredCreditsandOtherLiabilities.81,2716,5821001997,87274,5874,755915588,497DeferredIncomeTax(Note4)205,393197,326CommitmentsandContingencies(NotesI,3and9).TOTALCAPITALIZATIONANDLIABILITIES$1,252,090$1,249,106TheNotestoConsolidatedFinancialStatementsareanintegralparthereof.4ICentralHudsonGas&ElectricCorporation ConsolidatedStatementofIncomeYearEndedDecember31,OperatingRevenuesElectricGas(InThousands)1997$416,4291038481996$418,761952101995$409,445102770TotalOperatingRcvcnucs.OperatingExpensesOperation:Fuelusedinelectricgeneration.PurchasedelectricityPurchasednaturalgasOtherexpensesofoperation.MaintenanceDepreciationandamortization(Note2)Taxes,otherthanincometaxFederalincometax(Note4).TotalOperatingExpcnscs60,94052,32362,33999,06329,44041,46766,7092904058,87455,52350,636102,74628,93842,58066,1453270066,11755,86461,514101,21927,57443,86464,87929190450221438,142441,321520,277513,971512,215OperatingIncomeOtherIncome...Allowanceforequityfundsusedduringconstruction(Note2)....Federalincometax(Note4).Other-net.TotalOtherIncome.IncomebeforeInterestCharges.InterestClmrgcsInterestonlong-termdebtOtherinterestAllowanceforborrowedfundsusedduringconstruction(Note2)...AmortizationofexpenseondebtTotalInterestCharges...........................................................700563872,953807911,4198147523,0972,647(261)758294661,63248156,91382,74223,6172,626(523)2666070894986353888610,22581,11925,9251,917(514)28397NetIncomePremiumonPrcfcrrcdStockRedemptions-Net.DividendsDeclaredonCumulativePreferredStockIncomeAvailableforCommonStock56,082378323055,086323052,7221694903$51,856S52,474S47,650CommonStock:Averagesharesoutstanding(000s).Earningspershareonaveragesharesoutstanding.17,435$2.9717,549$2.9917,380$2.74ConsolidatedStatementofRetainedEarningsYearEndedDecember31,(InThousands)BalanceatbeginningofyearNctIncome.PremiumonPreferredStockRedemption-NetDividendsdeclared:OncumulativepreferredstockOncommonstock($2.135persharc1997;$2.115pershare1996;$2.095persltare1995)TotalDividendsDcclarcdBalanceatendofyear.1997$105,82155,0863,2303713740,367$120,5401996S90,47556,0823783,2303712840,358$105,8211995S79,28452,7221694,9033645941,362$90,475TheNotestoConsolidatedFinancialStatementsareanintegralparthereof.42CentralHudsonGas&ElectricCorporation ConsolidatedStatementofCashFlowsYearEndedDecember31,(InThousands)199719961995OperatingActivitiesNetIncomeAdjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivities:Depreciationandamortizationincludingnuclearfuelamortization.Deferredincometaxes,net.Allowanceforequityfundsusedduringconstruction.NineMile2Plantdeferredfinancecharges,netProvisionsforuncollectibles........AccruedpensioncostsGainonsaleoflong-terminvestment.DeferredgascostsDeferredgasrefunds.Other-netChangesincurrentassetsandliabilities,net:Accountsreceivableandunbilledutilityrevenues.Materialsandsupplies................................................SpecialdepositsandprepaymentsAccountspayableAccruedtaxesandinterestOthercurrentliabilitiesNctcashprovidedbyoperatingactivities.48,34814,077(387)(4)855)3,493(8,555)3,4751,6957/23347,07317,848(466)(4,855)4,336(6,757)(4,861)(1,556)4,039(4,420)3)995(770)(1,769)(27107)61114,478(6,338)(505)(781)1,704(2,477)602103,088$55,086$56,082$52,72245,38814,146(986)(4,855)3,220,(10,627)(2,104)5,302(1,784)11,466(3,300)5,799(567)(5,008)995944110,751InvestingActivitiesAdditionstoplant.AllowanceforequityfundsusedduringconstructionNetadditionstoplantNineMile2Plantdecommissioningtrustfund.Proceedsfromsaleoflong-terminvestments.Other-net.Nctcashusedininvestingactivities.I<'inancingActivitiesProceedsfromissuanceof:Long-termdebtCommonstock.Netborrowings(repayments)ofshort-termdebt.Retirementandredemptionoflong-termdebtRetirementandredemptionofcumulativepreferredstock.Premiumonpreferredstockredemption.DividendspaidoncumulativepreferredandcommonstockIssuanceandredemptioncosts.ReacquiredcapitalstockNctcashusedinfinancingactivities.NetChangeinCashandCashEquivalents.CashandCashEquivalentsatBeginningofYear.CashandCashEquivalentsatEndofYear(43,868)387(43,481)(2,861)2,389(43,953)2,000(15,600)(2,282)(40,426)(9,398)(65,706)4,8194,235$9,054$(49,860)466(49,394)(1,734)200(50,928)3,0901,81715,600(30,779)(13,000)(378)(40,489)736(63,403)(11,243)15,4784,235(50,269)986(49,283)(1,895)2,879(1,161)(49,460)1,0007,064(3,000)(3,139)(12,000)(146)(41,364)(20)(51,605)9,6865,792$15,478SupplementalDisclosureofCashFlowInformationInterestpaidFederalincometaxespaid..$24,30917,111$25,18415,875$26,73814,100TheNotestoConsolidatedFinancialStatementsareanintegralparthereof.43CentralHudsonGas&ElectricCorporation NOTESTOCONSOLIDATEDFINANCIALSTATENENTSNOTEI-REGULATORYMATTERSCompetitiveOpportunitiesProceedingIn1994,thePublicServiceCommissionoftheStateofNewYork("PSC")institutedthe"CompetitiveOpportunitiesProceeding,"theoverallobjectiveofwhichistoidentifyregulatoryandrate-makingpracticesthatwillassistinthetransitiontoamorecompetitiveelectricindustry.OnMay20,1996,thePSCissueditsOrder("Order")inthisproceedingsettingforththePSC'svisionandgoalsforthefutureoftheelectricindustryinNewYorkState.TheOrdercalledforimplementationofacompetitivewholesalepowermarket,reducingratesforconsumers,increasingcustomerchoice,continuingreliabilityofservice,continuingprogramsthatareinthepublicinterest,allayingconcernsaboutmarketpower,continuingcustomerprotectionsandtheobligationtoserve.TheOrderrequiredtheCompanyandcertainotherutilitiestofilearateandrestructuringplanwiththePSCbyOctoberI,1996.TheCompanywasobligatedtocomply(anddidsoonOctober1,1996)withtheprovisionoftheOrder.OnOctober9,1996,thePSCissuedanorderestablishingproceduresforacompletionofdiscoveryandsettlementnegotiationsregardingtheutilities'ctober1,1996submissions,and,intheabsenceofsettlement,foradministrativelitigationbeforeaPSCAdministrativeLawJudge.AmendedSettlementAgreementOnMarch20,1997,aftermonthsofnegotiations,theCompanyenteredintoaSettlementAgreementwiththeStaffofthePSC("Staff',theNewYorkStateDepartmentofEconomicDevelopmentandotherparties("SettlementAgreement")whichaddressedtheCommission'sOrderbyprovidinga(i)four-yearbasicelectricratefreezeforallcustomers;(ii)economicdevelopmentinducementstocreateandmaintainjobsintheMid-HudsonValley;(iii)areductioninpricesforthelargestindustrialcustomers;(iv)aphased-inprogramtoprovideallcustomerswiththeopportunitytochoosetheirenergysupplierbeginningin1998;(v)amechanismfortheCompanytorecoverallprudentlyincurredstrandablecostsand(vi)aproposaltostructurallyseparateitsgenerationassetsbyJuly1,2001throughthccreationofaholdingcompany,divestitureorotheroption.AtitsSeptember17,1997session,thePSCdiscussedtheSettlementAgreementandindicatedthatfurthernegotiationswereneededoncertainopenissuesrelatedtotheauctioningoftheCompany'sfossil-fuelelectricgeneratingunits,theprovisionofcertaintypesofmetersandenvironmentalprogramfunding.OnJanuary2,1998,theCompanyconcludedfurthernegotiationswithStaffandothersresultinginanAmendedSettlementAgreementbetweentheCompany,thePSCStaff,andseveralotherinterestedparties("AmendedSettlementAgreement").ThePSCapprovedtheAmendedSettlementAgreementatitsFebruary4,1998session;howeverthePSChadnotyetissueditsfinalorderatthetimethisdocumentwasfiledwiththeSccuriticsandExchangeCommission.AmongthemostsignificantdevelopmentsintheAmendedSettlementAgreementisanagreementthattheCompanywillauctionitsfossil-fueledelectricgeneratingunitsfi.e.,theCompany'sinterestintheRosetonElectricGeneratingStation("RosetonPlant")andtheCompany'sDanskammerPointSteamElectricGeneratingStation,("DanskammerPlant")],withthesaleandtransfertobecompletedbyJune30,2001.AtDecember31,1997thebookvalueofthoseunitsrepresentedapproximately20%ofnetutilityplant.TheCompanyhasmaintainedtherighttobidintheauction.Theauctionwillalsoprovidecustomerbenefitsiftheauctionresultsinthesaleofassetsinexcessoftheirbookvalue.TheAmendedSettlementAgreementdoesnotcontemplatethedivestitureortransferoftheCompany'sshareofUnitNo.2oftheNineMilePointNuclearStation("NineMile2Plant").AspartoftheAmendedSettlementAgreement,theCompanywillhaveareasonableopportunitytorecoverprudentlyincurredandappropriatelymitigatedinvestments.TheCompany'spotentialstrandablecostsarethosepriorutilityinvestmentsandcommitmentsthatmaynotberecoverableinacompetitiveenergymarket.ExamplesincludeanyunrecoveredcostoftheCompany'sfossil-fueledgeneratingplants(resultingfromtheauctionprocess)andnetgenerationrelatedregulatoryassets.Duringthetransition,theCompanywillcontinuetorecoveritspotentialelectricstrandablecostsintheratesitchargesitstransmissionanddistributioncustomers.Followingthetransition,theCompanywillbegivenareasonableopportunitytorecover,throughanon-bypassablechargetocustomers,remainingelectricstrandablecosts.OtherkeycomponentsoftheAmendedSettlementAgreementinclude(i)abasicelectricratefreezethroughJune2001;(ii)phase-inofretailaccessthroughJune30,2001toresidential,commercialandsmallindustrialcustomers;(iii)a10.6%returnonequitycapwithexcessearningsdeferredforstrandedcostmitigation;(iv)provisiontoparticipateinastatewideprogramtosupportpublicpolicyinitiativessuchasenergyefficiencyandrenewablesourcesforelectricityproduction;(v)thecreationofamechanismforimplementingretailtransmissiontariffsthatwillbelimitedtocustomerseligibleduringthetransitionperiodand(vi)adeterminationthatcustomersparticipatingintheCompany's"CustomerChoicePlanforFarmersandFoodProcessingBusinesses"willdosoundertermsoftheAmendedSettlementAgreement.TheAmendedSettlementAgreementalsoaddressesoptionsregardinganewcorporatestructurefortheCompany.OnorbeforeJune30,2001,theCompany,subjecttoshareholderandregulatoryapprovals,willestablishaholdingcompany.Theholdingcompanywillincludearegulatedtransmissionanddistributioncompanythatwillmaintainthesystemofwiresandpipelineswhichdeliverelectricityandnaturalgastocustomers.Theholdingcompanywillalsoincludeunregulatedcompanieswhichwillprovidea,varietyofnewservicestocustomerswithinandoutsidetheMid-HudsonValleyregionand,possibly,fossil-fueledgeneratingunitsretainedoracquired.44CentralHudsonGas&ElectricCorporation ImpactofAmendedSettlementAgreementonAccountingPoliciesThcAmendedSettlementAgreementcreatescertainchangestotheCompany'saccountingpolicies.TheCompany'saccountingpoliciesconformtogenerallyacceptedaccountingprinciples,which,forregulatedpublicutilities,includeStatementofFinancialAccountingStandardsNo.71,"AccountingfortheEffectsofCertainTypesofRegulation"("SFAS71").UnderSFAS71,regulatedcompaniesdefercostsandcreditsonthebalancesheetasregulatoryassetsandliabilitieswhenitisprobablethatthosecostsandcreditswillbeallowedintherate-makingprocessinaperioddifferentfromwhentheyotherwisewouldhavebeenrcflectedinincome.Thesedeferredregulatoryassetsandliabilitiesarethenreflectedintheincomestatementinthcperiodinwhichthcsameamountsarerefiectcdinrates.Ifsomeofanenterprise'soperationsareregulatedandmeettheappropriatecriteria,SFAS71isappliedonlytothcregulatedportionoftheenterprise'soperations.Asdiscussedabove,thegoaloftheAmendedSettlementAgreementistoderegulateand,ultimately,divesttheCompany'sfossil-fueledgeneratingassets.During1997,theFinancialAccountingStandardsBoard("FASB")EmergingIssuesTaskForceconcludedthatanentityshoulddiscontinueapplicationofSFAS71toanyportionofitsbusinesswhenaderegulationtransitionplanisinplaceandthetermsareknown.TheAmendedSettlementAgreementwasapprovedbythePSConFebruary4,1998,andonthatdatetheCompanyappliedthestandardsinStatementofFinancialAccountingStandardsNo.101,"RegulatedEnterprises-AccountingfortheDiscontinuationofApplicationofFASHStatementNo.71"("SFAS101")tothefossil-fueledgeneratingportionofitsbusiness.Therefore,theCompanydiscontinuedapplicationofSFAS71toitsfossil-fueledgenerationassetsasofthedateofsuchapproval.TheapplicationofSFAS101tothefossil-fueledgeneratingportionoftheCompany'sbusinesswillnothaveamaterialadversecffcctonthcCompany'sfinancialpositionorresultsofoperationsasofthedateofsuchapproval.StatementofFinancialAccountingStandardsNo.121,"AccountingfortheImpairmentofLong-LivedAssetsandforLong-LivedAssetstobcDisposedOf,"("SFAS121")requiresthatlong-livedassetsbereviewedforimpairmentifthccarryingvalueofthcassetmaynotbcrecoverable.SFAS121alsorequiresthatlong-livedassetstobedisposedofbecarriedatthelowerofnetbookvalueorfairvalue,andamendsSFAS71torequirethatregulatoryassetsbechargedagainstearningsifrecoveryofsuchassetsisnolongerconsideredprobable.TheCompanywillnotrecognizeanimpairmentofitsfossil-fueledgeneratingassetsbecausethcestimatedcashflowsfromoperations,thesaleofsuchgeneratingassets,andstrandedcostrecoveryprovisionsoftheAmendedSettlementAgreementarenotexpectedtobelessthanthenetcarryingamountofsuchgeneratingassets.CertainregulatoryassetsandliabilitieshavebeencreatedasaresultoftransactionsrelatingtotheCompany'sfossil-fueledgeneratingassets.AtDecember31,1997,netregulatoryassetsassociatedwiththefossil-fueledgeneratingassetstotaled$7.6million.ThcCompanydidnotexpenseanyofthesenetregulatoryassetsbecauserecoveryofsuchassetsisconsideredprobable~~~undertheAmendedSettlementAgreement.SummaryofRegulatoryAssetsandLiabilitiesThefollowingtablesetsforththeCompany'sregulatoryassetsandliabilities:AtDecember31RegulatoryAssets(Debits):Defcrrcdfinancecharges-NineMile2Plant....Incometaxesrecoverablethroughfuturerates...Deferredenergyefficiencycosts.........................Other.TotalRegulatoryAssets1997$68,47049/205,16816378$139/361996S69,61555,7918,89417126$151,426(InThousands)RegulatoryLiabilities(Credits):Deferredfinancecharges-NineMile2Plant...IncometaxesrefundableDeferredNineMile2Plantcosts.......................Deferredpensioncostsovercollection...............DeferredOPEBcostsovercollection.................Deferredunbilledgasrevenues...........Other.TotalRegulatoryLiabilities.NetRegulatoryAssets.S16%43128/1611/968@066/244/555643$81771$57@65S22,43129,0776/2239974,77843573625$74/87$76,839Someofthesignificantregulatoryassetsandliabilitiesinclude:DeferredFinanceCharges-NineMile2Plant:DuringtheconstructionoftheNineMile2Plant,thePSCauthorizedthenclusioninratebaseofincreasingamountsoftheCompany'sinvestmentinthatPlant.TheCompanydidnotaccrueanallowanceforthccostoffundsusedduringconstruction("AFDC")onanyofthcNineMile2Plantconstructionworkinprogress("CWIP")whichwasincludedinratebaseandforwhichacashreturnwasbeingallowed;howcvcr,thcPSCordered,effectiveJanuary1,1983,45CentralHudsonGas&ElectricCorporation thatamountsbeaccumulatedindeferreddebitandcreditaccountsequaltotheamountofAFDCwhichwasnotbeingaccruedontheCWIPincludedinratebase("MirrorCWIP").Thebalanceinthe-deferredcreditaccountisavailabletoreducefuturerevenuerequirementsbyamortizingportionsofthedeferredcredittootherincomeorbytheeliminationthroughwritingoffotherdeferredbalancesasdirectedbythePSC.TheCompanyexpectssuchapplicationofthedeferredcreditwilloccuroveraperiodsubstantiallyshorterthanthelifeoftheNineMile2Plant.Whenamountsofsuchdeferredcreditareappliedinordertoreducerevenuerequirements,amortizationisstartedforacorrespondingamountofthedeferreddebit,whichamortizationcontinuesonalevelbasisovertheremaininglifeoftheNineMile2Plantresultinginrecoveryofsuchcorrespondingamountthroughrates.MirrorCWIPisexpectedtobeexhaustedbythecndoftheusefullifeoftheNineMile2Planteitherthroughtheamortizationorwrite-offproccdurcsdescribedaboveorthroughthewrite-offoftheremainingdebitandcreditasdirectedbythePSC.Theneteffectofthisprocedureisthatattheendoftheamortizationperiodforthedeferredcredit,theaccountingandrate-makingtreatmentwillbethesameasiftheNineMile2PlantCWIPhadnotbeenincludedinratebaseduringtheconstructionperiod.PursuanttoaPSCOrderissuedandeffectiveFebruary11,1994,inanelectricrateproceeding,theCompanywasauthorizedtoamortize$6.0millionannuallyofthedeferredcreditbeginninginDecember1993.The$6.0millionamortizationofthedeferredcreditwillbecontinuedunlesschangedbyafuturePSCrateorderoruntilitisexhausted.UnderprovisionsoftheAmendedSettlementAgreement,thisamortizationwillbereplacedwithotherdeferredcreditstotheextentnecessarytoprovideforfullreplacementoftheexpiringmirrorCWIPcredits.Thecurrentlevelofthedeferreddebitamortizationof$1.145millionisbasedonthelevelofdeferredcreditsthathavebeenutilizedthroughthemostrecentrateyear,whichhasended.CreditamountsutilizedsubsequentlyareincludedinthedeferreddebitamortizationlevelatthetimeofthenextPSCrateorderforthenewrateyearbasedonthethenremaininglifeoftheNineMile2Plant.IncomeTaxesRccovcrabldRcfundablc:TheadoptionofStatementofFinancialAccountingStandards109,"AccountingforIncomeTaxes,"("SFAS109")in1993increasedtheCompany'snetdeferredtaxobligation.Asitisprobablethattheincreasewillberecoveredfromcustomers,theCompanyestablishedanetregulatoryasset.DcfcrrcdNineMile2PlantCosts:Theexistingrate-makingfortheNineMile2Plant,asdirectedbythePSCinitsOrderonNineMile2OperatingandCapitalForecastfor1996("SupplementNo.5"),providesforthedeferralofthedifferencebetweenactualandauthorizedoperatingandmaintenanceexpense.SupplementNo.5continuesineffectuntilchangedbyasubsequentrateorder.For1996and1997theNineMile2Plantincurredlessactualexpensethanauthorized,andtheCompany'ssharehasbeenrccordcdasaregulatoryliabilityinaccordancewithSupplementNo.5.IndependentSystemOperatorThcCompanyisamemberoftheNewYorkPowerPool("NYPP")whosemembers,majorinvestor-ownedStateelectricutilitycompaniesandthePowerAuthorityoftheStateofNewYork("PASNY"),byagreement,provideforcoordinatedoperationoftheirbulkpowerelectricsystems.InafilingwiththeFederalEnergyRegulatoryCommission("FERC"),datedJanuary31,1997,themembersystemsoftheNYPPproposedanewmarketstructurethatwouldincludeasakeyelementtheestablishmentofanIndependentSystemOperator("ISO").TheISO'sprincipalmissionwouldbetomaintainthereliabilityoftheNewYorkStatebulkpowersystemsandtoprovidetransmissionserviceonacomparableandnon-discriminatorybasis.TheNYPPfiledasupplementalfilingwithFERCinDecember1997,whichexpandedtherestructuringfilingofJanuary31,1997.TheCompanyisunabletopredicttheoutcomeoftheseFERCfilings.NOTE2-SUNIvIARYOFSIGNIFICANTACCOUNTINGPOLICIESPrinciplesofConsolidationThcconsolidatedfinancialstatementsincludetheaccountsoftheCompanyanditssubsidiaries.Intercompanybalancesandtransactionshavebeeneliminated.TheCompany'ssubsidiariesareeachwhollyownedandarecomprisedoflandholding,cogenerationorenergy'anagementcompanies.ThenetincomeoftheCompany'ssubsidiariesisreflectedintheConsolidatedStatementofIncomeasothernon-operatingincome.Rates,RevenuesandCostAdjustmentClausesElectricandgasretailrates,includingfuelandgascostadjustmentclauses,applicabletointrastateservice(otherthancontractuallyestablishedratesforservicetomunicipalitiesandgovernmentalbodies)areregulatedbythePSC.Transmissionrates,facilitieschargesandratesforelectricitysoldforresaleininterstatecommerceareregulatedbytheFERC.Revenuesarerccognizcdonthebasisofcyclebillingsrenderedmonthlyorbimonthly.Estimatedrevenuesareaccruedforthosecustomersbilledbimonthlywhosemetersarenotreadinthecurrentmonth.TheCompany'stariffforretailelectricserviceincludesafuelcostadjustmentclausepursuanttowhichelectricratesareadjustedtoreflectchangesintheaveragecostoffuelsusedforelectricgenerationandincertainpurchasedpowercosts,fromtheaverageofsuchcostsincludedinbaserates.TheCompany'stariffforgasservicecontainsacomparableclausetoadjustgasratesforchangesinthcpriceofpurchasednaturalgasandcertaincostsofmanufacturedgas.46CentralHudsonGas&ElectricCorporation

~~~UtilityPlantThecostsofadditionstoutilityplantandreplacementsofretiredunitsofpropertyarecapitalizedatoriginalcost.TheCompany'sshareofthecostsoftheNineMile2Plantarecapitalizedatoriginalcost,lessthedisallowedinvestmentof$169.3millionwhichwasrecordedin1987.Costsincludelabor,materialsandsupplies,indirectchargesforsuchitemsastransportation,certaintaxes,pensionandotheremployeebenefitsandAFDC.Replacementofminoritemsofpropertyisincludedinmaintenanceexpenses.Theoriginalcostofproperty,togetherwithremovalcost,lesssalvage,ischargedtoaccumulateddepreciationatsuchtimeasthepropertyisretiredandremovedfromservice.JointlyOwnedFacilitiesTheCompanyhasa9%,or103MW,undividedinterestinthe1,143MWNineMile2Plant(seeNote3,hereof)anda35%,or420MW,undividedinterestinthe1,200MWRosetonPlant.TheCompany'sshareoftherespectiveinvestmentsintheNineMile2PlantandtheRosetonPlant,asincludedinitsConsolidatedBalanceSheetatDecember31,1997and1996,were:(InThousands)NineMile2PlantPlantinserviceAccumulateddepreciation..........Constructionworkinprogress....RosetonPlantPlantinserviceAccumulateddepreciation..........Constructionworkinprogress....$316,123(70,202)1,032$134,555(77,438)571$314,270(61,708)1,894$135,026(74,963)745AllowanceForFundsUsedDuringConstructionTheCompanyincludesinplantcostsAFDCapproximatelyequivalenttothecostoffundsusedtofinanceconstructionexpenditures.TheconcurrentcreditfortheamountsocapitalizedisreportedintheConsolidatedStatementofIncomeasfollows:theportionapplicabletoborrowedfundsisreportedasareductionofinterestchargeswhiletheportionapplicabletootherfunds(theequitycomponent,anoncashitem)isreportedasotherincome.TheAFDCratewas8.0%in1997,7.5%in1996and8.5%in1995.DepreciationandAmortizationForfinancialstatementpurposes,thcCompany'sdepreciationprovisionsarecomputedonthestraight-linemethodusingratesbasedonstudiesoftheestimatedusefullivesandestimatednetsalvagevalueofproperties,withtheexceptionoftheNineMile2Plantwhichisdepreciatedonaremaininglifeamortizationmethod.Theyear2026,whichistheyearinwhichtheNineMile2Plantoperatinglicenseexpires,isusedastheenddateinthedevelopmentoftheremaininglifeamortization.ThcCompanyperformsdepreciationstudiesonacontinuingbasisand,uponapprovalbythePSC,periodicallyadjuststheratesofitsvariousclassesofdepreciableproperty.Themostrecentstudywasperformedin1993.TheCompany'scompositeratesfordepreciationwere3.16%in1997,3.13%in1996and3.14%in1995oftheoriginalcostofaveragedepreciableproperty.TheratiooftheamountofaccumulateddepreciationtothecostofdepreciablepropertyatDecember31was38.2%in1997,36.5%in1996and35.3%in1995.Forfcdcralincometaxpurposes,theCompanyusesanaccclcratcdmethodofdepreciationandgenerallyusestheshortestlifepermittedforeachclassofassets.AmortizationofNuclearFuelThecostoftheNineMile2Plantnuclearfuelassembliesandcomponentsisamortizedtooperatingexpensebasedonthcquantityofheatproducedforthegenerationofelectricenergy.NiagaraMohawkPowerCorporation("NiagaraMohawk"),onbehalfoftheNineMile2Plantcotenants,hasenteredintoanagreemcntwiththeU.S.DepartmentofEnergy("DOE")fortheultimatedisposalandstorageofspentnuclearfuel.ThecotenantsareassessedafeeforsuchdisposalbaseduponthekilowatthoursgeneratedbytheNineMile2Plant.Thesecostsarechargedtooperatingexpenseandrecoveredfromcustomersthroughbaseratesorthroughtheelectricfuelcostadjustmentclausedescribedherein.TheCompanycannotnowdeterminewhethersucharrangementswiththeDOEwillultimatelyprovideforthesatisfactorypcrmancntdisposalofsuchwasteproducts.47CentralHudsonGas&ElectricCorporation CashandCashEquivalentsForpurposesoftheConsolidatedStatementofCashFlows,theCompanyconsiderstemporarycashinvestmentswithamaturitywhenpurchasedofthreemonthsorlesstobecashequivalents.FederalIncomeTaxTheCompanyanditswholly-ownedsubsidiariesfileaconsolidatedfederalincometaxreturn.FederalincometaxesareallocatedtooperatingexpensesandotherincomeanddeductionsintheConsolidatedStatementofIncome.FederalincometaxesaredeferredundertheliabilitymethodinaccordancewithFinancialAccountingStandardNo.109,"AccountingforIncomeTaxes."Undertheliabilitymethod,deferredincometaxesareprovidedforalldifferencesbetweenfinancialstatementandtaxbasisofassetsandliabilities.Additionaldeferredincometaxesandoffsettingregulatoryassetsorliabilitiesarerecordedtorecognizethatincometaxeswillberecoverableorrefundablethroughfuturerevenues.UseofEstimatesPreparationofthefinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciplesincludestheuseofestimatesandassumptionsbymanagementthataffectthereportedamountsofassetsandliabilitiesanddisclosuresofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandreportedamountofrevenuesandexpensesduringthereportingperiod.Actualresultsmaydifferfromthoseestimates.NewAccountingStandardsandOtherFASBProjectsSegmentDisclosures:InJune1997,theFASBissuedStatementofFinancialAccountingStandardsNo.131,"DisclosuresaboutSegmentsofanEnterpriseandRelatedInformation"("SFAS131").ThisStatementestablishesstandardsforreportinginformationaboutoperatingsegmentsinannualandinterimfinancialstatements.Italsoestablishesstandardsforrelateddisclosuresaboutproductsandservices,geographicareasandmajorcustomers.IncompliancewiththerequirementsofthisStatement,theCompanyexpectstoadoptSFAS131in1998.TheCompanydoesnotexpectthattheadoptionofSFAS131willhaveasignificantimpactonthereportingrequirementsoftheCompany.PlantDecommissioning:TheFASBisconsideringwhenaliabilityforplantdecommissioningorotherlong-livedassetretirementshouldberecognized,howanysuchliabilityshouldbemeasured,andwhetheracorrespondingassetiscreated.InanexposuredraftissuedFebruary1996,FASBtentativelyconcludedthataliabilityshouldberecognizedforlegalorunavoidableconstructiveobligationsforclosureandremovaloffacilities,suchastheNineMile2Plant,astheobligationisincurred.Theliabilityrecognizedforthoseclosureandremovalobligationsshallreflectthcpresentvalueofestimatedfuturecashoutflowscurrentlyexpectedtoberequiredtosatisfythoseobligations.Initialrecognitionofaliabilityforclosureandremovalobligationsincreasesthecostoftherelatedassetbecauseincurrenceoftheobligationisintegraltooraprerequisiteforoperatingtheasset.Further,anysecuritiesorotherassetsdedicatedtofuturesettlementofclosureandremovalobligationscannotbcoffsettothoseliabilitiesforfinancialreportingpurposes.TheFASBisdeliberatingthisissueandtheresultingfinalpronouncement,whichmaybeissuedin1998,couldbedifferentfromthatprojectedintheexposuredraft.TheCompanydocsnotbelievethatsuchchanges,ifrequired,wouldhaveasignificantadverseeffectonresultsofoperationsduetoitscurrentbeliefthatdecommissioningcostswillcontinuetoberecoveredinrates.However,futuredevelopmentsintheutilityindustry,includingtheeffectsofdcrcgulationandincreasingcompetition,couldchangethisconclusion.NOTE3-NINENILE2PLANTGeneralTheNineMile2PlantislocatedinOswegoCounty,NewYork,andisoperatedbyNiagaraMohawk.TheNineMile2PlantisownedastenantsincommonbytheCompany(9%interest),NiagaraMohawk(41%interest),NewYorkStateElectric&GasCorporation("NYSE&G")(18%interest),LongIslandLightingCompany("LILCO")(18%interest),andRochesterGasandElectricCorporation("Rochester")(14%interest).TheoutputoftheNineMile2Plant,whichhasaratednetcapabilityof1,143MW,issharedandtheoperatingexpensesofthePlantareallocatedtothecotenantsinthesameproportionsasthecotenants'espectiveownershipinterests.TheCompany'sshareofdirectoperatingexpensefortheNineMile2PlantisincludedintheappropriateexpenseclassificationsintheaccompanyingConsolidatedStatementofIncome.UndertheOperatingAgreemententeredintobythecotenants,NiagaraMohawkactsasoperatoroftheNineMile2Plant,andallfivecotenantssharecertainpolicy,budgetandmanagerialoversightfunctions.TheOperatingAgreementremainsineffectsubjecttoterminationonsixmonths'otice.48CentralHudsonGas&ElectricCorporation

~~RadioactiveWasteNiagaraMohawkhascontractedwiththeDOEfordisposalofhigh-levelradioactivewaste("spentfuel")fromtheNineMile2Plant.DespiteacourtorderreaffirmingtheDOE'sobligationtoacceptspentnuclearfuelbyJanuary31,1998,theDOEhasforecastedthestartofoperationsofitshigh-levelradioactivewasterepositorytobenoearlierthan2010.TheCompanyhasbeenadvisedbyNiagaraMohawkthattheNineMile2Plantspentfuelstoragepoolhasacapacityforspentfuelthatisadequateuntil2012.IfDOEscheduleslippageshouldoccur,facilitiesthatextendtheon-sitestoragecapabilityforspentfuelattheNineMile2Plantbeyond2012wouldneedtobeacquired.NuclearPlantDecommissioningCostsTheCompany's9%shareofcoststodecommissiontheNineMile2Plantisestimatedtobeapproximately$209.6million($77.7millionin1997dollars)andassumesthatdecommissioningwillbeginintheyear2028.Thisestimateisbaseduponasite-specificstudycompletedinDecember1995.InordertoassisttheCompanyinmeetingthisobligation,theCompanymakesannualcontributionsof$868,000toaqualiTiedexternaldecommissioningtrustfund.Thetotalannualamountallowedinratesis$999,000,butthemaximumannualtaxdeductionallowedis$868,000.Currently,thedifferencebetweentherateallowance($999,000)andtheamountcontributedtotheexternalqualifiedfund($868,000)isrecordedasaninternalreserve($131,000),andthefundsareheldbytheCompany.ThcqualifiedexternaldecommissioningtrustfundatDcccmbcr31,1997and1996amountedto$11.0millionand$8.1million,respectively,includingnetreinvestedearningstodateof$4.3million.ThequalifiedexternaldecommissioningtrustfundisreflecteintheCompany'sConsolidatedBalanceSheetin"InvestmentsandOtherAssets-Other."AtDecember31,1997,theexternaldecommissioningtrustfundinvestmentscarryingvalueapproximatedfairmarketvalue.TheamountofaccumulateddecommissioningcostsrecoveredthroughratesandthenctearningsoftheexternaldecommissioningtrustfundarereflectedinaccumulateddepreciationintheConsolidatedBalanceShcctandamountto$12.6millionand$9.6millionatDecember31,1997and1996,respectively.Referenceismadetothesubcaption"NewAccountingStandardsandOtherFASBProjects-PlantDecommissioning"inNote2hereoffordetailsoftheproposedchangesinaccountingfornucleardecommissioningcosts.TheCompanybelievesthatifdecommissioningcostsaregreaterthancurrentlyestimated,suchrevisedcostswouldberecoveredinrates.However,futuredevelopmentsintheutilityindustry,includingtheeffectsofderegulationandincreasingcompetition,couldchangethisconclusion.NOTE4-FEDERALINCOMETAXComponentsofFederalIncomeTaxThefollowingisasummaryofthecomponentsoffederalincometaxasreportedintheConsolidatedStatementofIncome:199719961995(InThousands)Chargedtooperatingexpense:Fcdcralincometax.................................................DeferredincometaxIncometaxchargedtooperatingexpense.....$19,00410,18629,190$18,93613,76432,700$19,2459,79529,040Charged(credited)tootherincomeanddeductions:FederalincometaxDeferredincometaxIncometaxcharged(credited)tootherincomeanddeductions.Totalfederalincometax.(6,844)3,891(2,953)$26,237(5,716)4,084(1,632)$31,068(4,704)4,351(353)$28,68749CentralHudsonGas&ElectricCorporation Reconciliation:ThefollowingisareconciliationbetweentheamountoffederalincometaxcomputedonincomebeforetaxesatthestatutoryrateandtheamountreportedintheConsolidatedStatementofIncome:19971996(InThousands)1995Netincome......................Federalincometax.DeferredincometaxIncomebeforetaxes$55,08612,16014077$81823$56,08213/2017848$87,150$52,72214/4114146$81,409ComputedtaxI35%statutoryrateIncrease(decrease)tocomputedtaxdueto:Alternativeminimumtax.TaxdepreciationPensionexpenseDeferredstormcosts.Deferredfinancecharges-NineMile2Plant...NineMile2settlementcostsDeferredgascosts...............................................OtherFederalincometax.DcferrcdincometaxTotalfcdcralincometax$28/63(7@50)(4/25)(2855)(2457)(1,699)1/671/16(700)12,16014077$26/37$30403(2862)(10,499)(2,424)(1,699)1,043(1,703)26113/2017848$31,068$28,493(2,958)(10,096)(1,738)(1,701)8432/86588)14/4114146$28,687Effectivetaxrate323%35.6%35.2%ThefollowingisasummaryofthecomponentsofdefcrrcdtaxesatDcccmber31,1997and1996,asreportedintheConsolidatedBalanceSheet:1997(InThousands)1996AccumulatedDcfcrrcdIncomeTaxAssets:FuturetaxbenefitsoninvestmcnttaxcreditbasisdifferenceAlternativeminimumtax.UnbilledrevenuesOther.AccumulatedDcfcrrcdIncomeTaxAssets$14/371,0485,67529,047$50,607$isyig8@985,65426,891$56$61AccumulatedDeferredIncomeTaxLiabilities:TaxdcprcciationAccumulateddeferredinvestmenttaxcredit.................Futurerevenues-recoveryofplantbasisdifferences...Other.AccumulatedDeferredIncomeTaxLiabilities..................$181P1427/5517,47529656$256,000$176/2228,44820,3212896$253/87NetAccumulatedDefencdIncomeTaxLiability...$205493$197@2650CentralHudsonGas&ElectricCorporation NOTE5-SHORT-TERNBORROWINGARRANGEIvIENTSTheCompanyhasineffectarevolvingcreditagreementwithfourcommercialbankswhichallowsittoborrowupto$50.0millionthroughOctober23,2001("Agreement").TheAgreementgivestheCompanytheoptionofborrowingateitherthehigheroftheprimerateorthesumofthefederalfundsrateplus1/2%,orthreeothermoneymarketrates,ifsuchratesarelower.CompensatingbalancesarenotrequiredundertheAgreement.Inaddition,theCompanycontinuestomaintainconfirmedlinesofcredittotaling$1.5millionwithtworegionalbanks.TherewerenooutstandingloansundertheAgrecmcntorthelinesofcreditatDecember31,1997or1996.Inordertodiversifyitssourcesofshort-termfinancing,theCompanyhasenteredintoshort-termcreditfacilitiesagreementswithseveralcommercialbanks.TheCompanyhadnoshort-termdebtoutstandingatDecember31,1997.AtDecember31,1996,theCompanyhadoutstandingshort-termdebtof$15.6millionundersuchfacilitieswithaweightedaverageinterestrateof5.94%.AuthorizationfromthePSClimitstheamounttheCompanymayhaveoutstanding,atanytime,underallofitsshort-termborrowingarrangementsto$52.0millionintheaggregate.NOTE6-CAPITALIZATION-CAPITALSTOCKCommonStock,$5parvalue;30,000,000sharesauthorized:SharesOutstandingAmount($000)CommonStockPaid-InCapital($000)ReacquiredCapitalStock($000)January1,1995Issuedunderdividendreinvestmentplan("DRP")(a)...Issuedundercustomerstockpurchaseplan("CSPP")(a).RedemptionofpreferredstockDecember31,1995.IssuedunderDRP(a).IssuedunderCSPP(a)December31.1996.Rcpurchascdundercommonstockrepurchaseplan.December31,1997.17438,464218,610$86,192$277,205$1,0934,8978793919538,97717,496,05149,023913282,9421,27824587,4802450284,465939887,77517654,98727520017+79,787$87,775$284,465$(9/98)(a)Inhfayl996,theCompanyconverteditsDRPanditsCSPPfromoriginalissuetoopenmarketpurchaseofcommonshares.CumulativePreferredStock,$100parvalue;1,200,000sharesauthorized:NotSubjecttoMandatoryRedemption:SeriesFinalRedemptionRedemptionPriceDate12/31/97SharesOutstandinDecember31,19971996SubjecttoMandatoryRedemption:41/2%4.75%4.35%4.96%6.20%6.80%10/I/08(a)10/1/27(0)Total$107.00106.75102.00101.0070,30020,00060)00060,000210,300200,00015000035000056)030070/0020,00060,00060,000210300200,000150000350000560300(a)CannotberedeemedpriortoOctoberI,2003.51CentralHudsonGas&ElectricCorporation TheCompanyhadnocumulativepreferredstockredemptionsorissuancesduring1997;howeveronJanuaryI,1996,theCompanyoptionallyredeemedits7.72%SeriesCumulativePreferredStock(parvalue$100pershare)ataredemptionpriceof$101.00pershare.The$13.1millionredemptionpricepaidandassociatedcostswerefundedthroughinternalsources.Expensesincurredonissuanceofcapitalstockareaccumulatedandreportedasareductionincommonstockequity.Theseexpensesarenotbeingamortized,exceptthat,asdirectedbythePSC,certainissuanceandredemptioncostsandunamortizedexpensesassociatedwithcertainissuesofpreferredstockthatwereredeemedhavebeendeferredandarebeingamortizedovertheremaininglivesoftheissuessubjecttomandatoryredemptions.ByOrder,issuedandeffectiveDecember4,1996,thePSCauthorizedtheissuanceandsaleofcertaindebtandequitysecuritiesoftheCompany.ThatOrderauthorizestheCompany,throughDecember31,1999,to:I)issueandsellupto$40.0millionofnewsecuritiescomprisedofcommonstockand/ormediumtermnotes,2)acquirenotmorethan2.5millionsharesofitsissuedandoutstandingcommonstockofwhichtheCompanyrepurchased275,200sharesduring1997,and3)effectiveJanuaryI,1997,combineitsexistingDRP,itsCSPPanditsEmployeeStockPurchasePlanintoasingleplancalledtheStockPurchasePlan.TheStockPurchasePlanbecameeffectiveJanuaryI,1997,supersededsuchotherplansandoperatesasanoriginalissueoropenmarketpurchaseplan.NOTE7-CAPITALIZATION-LONG-TERNDEBTDetailsof'ong-termdebtareshownbelow:December31,SeriesMaturitDate(InThousands)FirstMortgageBonds(NctofSinkingFundRequirements):6.10%(a)7.70%(a)7.97%(a)7.97%(a)6.46%(a)6I/4%(b)9I/4%8.12%(a)8.14%(a)8.375%(b)PromissoryNotes:April28,2000June12,2000June11,2003Junc13,2003August11,2003JuneI,2007MayI,2021August29,2022August29,2022DecemberI,2028$10,00025,0008,0008,00010,0004@2570,00010,00010,00016700172025$10,00025,0008,0008,00010,0004,41570,00010,00010,00016700172,1151984SeriesA(73/8%)(c)1984SeriesB(73/8%)(c)1985SeriesA(Var.rate)(c)1985SeriesB(Var.rate)(c)1987SeriesA(Var.rate)(c)1987SeriesB(Var.rate)(c)5.38%(a)7.85%(a)OctoberI,2014OctoberI,2014NovemberI,2020NovemberI,2020JuneI,2027JuneI,2027January15,1999July2,200416,70016,70036,25036,00033,7009,90020,00015.000184,25016,70016,70036,25036,00033,7009,90020,00015.000184,250SecuredNotesPayableofSubsidiaryUnamortizedDiscountonDebtTotallong-termdebt6,152(598)$361,8296,299(624)$362,040(a)IssuedundertheCompany'shfediumTermNoteProgram.(b)FirsthiortgageBondsissuedinconnectionwiththesalebytlteNewYorkStateEnergyResearchandDevelopmentAuthority("NYSERDA")oftax-exemptpollutioncontrolrevenuebonds.(c)Prom!ssoryNotesissuedinconnectionwiththesalebyNYSERDAoftax.exemptpollutioncontrolrevenuebonds.52CentralHudsonGas&ElectricCorporation FirstMortgageBondsTheCompanydidnotissueorredeemanyfirstmortgagebondsduring1997;however,onMay1,1996,theCompanyredeemed$30millionofits83/4%Seriesdue2001ataredemptionpriceof102.07%oftheprincipalamount.MediumTermNotesByOrder,issuedandeffectiveDecember4,1996,thePSCauthorizedtheCompanytoissueandsellnotlaterthanDecember31,1999,acombinationofnewdebtsecuritiesand/orcommonstocktotalingnotmorethan$40.0millionintheaggregate.AmendedSettlementAgreementUnderthetermsoftheAmendedSettlementAgreementdescribedinNoteIhereof,theCompanymaytransferupto$100millionfromitsregulatedutilitybusinesstoitsunregulatedbusinessespriortotheformationofaholdingcompany.TheCompanymay,pursuanttothisauthorization,issueupto$100millionnewsecuritiesin1998or1999.Thetypeofsecuritiesortimingofissuanceisuncertain.NYSERDATheNYSERDAPollutionControlRevenueBondsissuedin1985(SeriesAandB)and1987(SeriesAandB)(collectively,the"1985and1987NYSERDABonds")arevariablerateobligationssubjecttoweeklyrepricingandinvestortender.TheCompanyhastheright,exercisableindependentlywithrespecttoeachseriesofthe1985and1987NYSERDABonds,toconvertthoseBondsofeachsuchseriestoafixedratefortheremainderoftheirterm.Initsrateorders,thePSChasauthorizeddeferredaccountingfortheinterestcostsontheCompany's1985and1987SeriesAandBPromissoryNoteswhichwereissuedinconnectionwiththesaleofthe1985and1987NYSERDABonds.Theauthorizationprovidesforfullrecoveryofthevariancebetweenthatportionoftheactualinterestcostssupportingutilityoperationsandtheinterestcostsallowedinrates.Thepercentofinterestcostssupportingutilityoperationsrepresentsapproximately95%ofthetotalcosts.Thedeferredbalancesundersuchaccountingwere$3.8millionand$2.4millionatDecember31,1997and1996,respectively,andwereincludedin"RegulatoryAssets"intheCompany'sConsolidatedBalanceSheet.Suchdcferrcdbalancesaretobeaddressedinfutureratecases.ByOrder,issuedandeffectiveDecember4,1996,thePSCauthorizedtheCompanytoissueupto$132.55millionoftax-exemptNYSERDAPollutionControlRevenueBondsforrefundingpurposesorforthepurposeofrefinancing,ifeconomical,alikeamountofsuchbondspresentlyoutstanding.LettersofCreditTheCompanyhasinplaceirrevocablelettersofcreditwhichsupportcertainpaymentsrequiredtobemadeonthe1985and1987NYSERDABonds.Suchlettersofcreditexpirein1999and2000.TheCompanyanticipatesbeingabletoextendsuchlettersofcreditiftheinterestrateontherelatedseriesofsuchBondsisnotconvertedtoafixedinterestrate.IftheCompanywereunabletoextendtheletterofcreditthatisrelatedtoaparticularseriesofsuchBonds,thatserieswouldhavetoberedeemedunlessafixedrateofinterestbecameeffective.Paymentsmadeunderthelettersofcreditinconnectionwithpurchasesoftendered1985and1987NYSERDABondsarerepaidwiththeproceedsfromtheremarketingofsuchBonds.Totheextenttheproceedsarenotsufficient,theCompanywouldberequiredtoreimbursethebankthatissuedtheletterofcreditfortheamountofanyresultingdrawunderthatletterpriortoitsexpirationdate.InterestRateCapByOrder,issuedandeffectiveDecember4,1996,thePSCauthorizedtheCompanytoemployinterestratecaps,collarsandfloorstomanageinterestrateriskassociatedwithitsvariablerate1985and1987NYSERDABondsandtorecognizetheassociatedcostsasinterestexpenseforrate-makingpurposes.TheCompanyenteredintoaninterestratecapagreementwithabanktomanageexposuretoupwardchangesininterestratesonthe1985and1987NYSERDABonds.Underthisagreement,intheeventanationallyrecognizedtax-exemptbondinterestrateindexexceeds8%,theCompanywillreceiveapaymentfromsuchbankequaltotheamountbywhichtheactualinterestcostsonsuchBondsexceeds8%perannum.ThisagreementhastheeffectoflimitingtheinterestratetheCompanymustpayonsuchbonds(ona$115.9millionnotionalamount)tothelesseroftheiractualrateor8%perannum.Intheeventsuchbankfailedtomakeanyrequiredpaymentundersuchinterestratecapagreement,theCompany'sexposurewouldbelimitedtoamaximuminterestrateof15%perannumunderthetermsofsuchBonds.TheinterestratecapagreementcurrentlyineffectexpiresonApril19,1998.TheCompanyintendstoenterintoanewagreementpriortosuchexpirationdatetoprovidesimilarriskmanagementbenefitsfortheremainderof1998andpossiblybeyond.DebtExpenseExpensesincurredondebtissuesandanydiscountorpremiumondebtaredeferredandamortizedoverthelivesoftherelatedissues.ExpensesincurredondebtredemptionspriortomaturityhavebeendeferredandaregenerallybeingamortizedovertheshorteroftheremaininglivesoftherelatedextinguishedissuesorthenewissuesasdirectedbythcPSC.DebtCovenantsCertaindebtagreementsrequirethemaintenancebytheCompanyofcertainfinancialratiosandcontainotherrestrictivecovenants.MortgageIndentureCovenantArticleXXIoftheCompany'sFirstMortgageBondIndenturerequiresthattheCompanydeposit,annuallywiththeIndenturerusteecashinanamountequaltothedifferencebetweenannualcapitaladditionsanddepreciationcharges,ifsuchchargesexceedcapitaladditions,totheextentthatsuchdifferenceisnotoffsetbycreditsfromprioryears.Thoughnocashdepositwasrcquircdin1997or1996,theCompanyanticipatesthatadepositofcashofupto$4.0millionwillbemadepursuanttosuchArticlebyMarch31,1998.Suchdepositmaybewithdrawnatasubsequentdatetofundredemptionsofoutstandingmortgagebonds.53CentralHudsonGas8cElectricCorporation NOTE8-POSTENPLOYNENTBENEFITSRetirementIncomePlanTheCompanyhasanon-contributoryretirementincomeplan("RetirementPlan")coveringsubstantiallyallofitsemployees.TheRetirementPlanprovidespensionbenefitsthatarebasedontheemployee'scompensationandyearsofservice.IthasbeentheCompany'spracticetoprovideperiodicupdatestothebenefitformulastatedintheRetirementPlan.TheCompany'sfundingpolicyistomakeannualcontributionsequaltotheamountofnetperiodicpensioncost,butnotinexcessofthemaximumallowabletax-deductiblecontributionunderthefederalincometaxlawnorlessthantheminimumrequirementundertheEmployeeRetirementIncomeSecurityActof1974.Thereturnonplanassetshasresultedinnetperiodicpensionincomeofwhich25%wasallocatedtocapitalprojectsinboth1997and1996and27%in1995.Thisallocationfollowsthepayrolldistribution.Netperiodicpensionincomefor1997,1996and1995includethefollowingcomponents:19971996(InThousands)1995Servicecost-benefitsearnedduringtheperiod.InterestcostonprojectedbenefitobligationActualreturnonRetirementPlanassetsNetamortizationanddeferralNetperiodicpension(income)$4,47915@16(60,760)28,101$(12,864)S4,556$3,87714,594(30,772)1,87214,449(38,849)9,896S(9,750)$(10,627)ThefollowingtablesetsforththeRetirementPlan'sfundedstatusatOctober1,1997and1996andamountsrecognizedintheCompany'sConsolidatedBalanceSheetatDecember31,1997and1996:19971996(InThousands)Actuarialpresentvalueofbenefitobligations:Vested..Nonvested.Total.$192,4103455$195,865$173,4243207$176,631Projectedbenefitobligation("PBO")forservicerenderedtodateRetirementPlanassetsatmarketvalueExcessofRetirementPlanassetsoverPBO...Unrecognizednctgain.UnrecognizedpriorservicecostUnrecognizednetasset*PrefundedPensionCost.$222,25031685294,602(74,326)5,9602700$23,536$199,41626861569,199(58,464)32733336S10,672~Beingamorrizedover15years.Assumptionsusedtodetermineactuarialvaluations:DiscountrateusedtodeterminePBO.RateofcompensationincreaseusedtodeterminePBO...Long-termrateofreturnonplanassetsfornetpensionbenefit.7.25%4.50%9.25%7.75%4.50%9.75%RetirementPlanassetsconsistprimarilyofequities,realestateandfixedincomesecurities.TheRetirementPlanisdeemedtobcfullyfundedforfederalincometaxpurposes,therefore,theCompanydidnotmakeanycontributionstotheRetirementPlanduring1997or1996.The1997and1996accountingforpensionbenefitsreflectsadoptionofPSC-prescribedprovisionswhich,amongotherthings,requiresten-yearamortizationofactuarialgainsandlossesanddeferralofdifferencesbetweenactualcostsandrateallowances.54CentralHudsonGas&ElectricCorporation OtherPostretirernentBenefitsTheCompanyprovidescertainhealthcareandlifeinsurancebenefitsforretiredemployeesthroughitspostretircmentbenefitplan("BenefitPlan").SubstantiallyalloftheCompany'semployeesmaybecomeeligibleforthesebenefitsiftheyreachretirementagewhileworkingfortheCompany.Theseandsimilarbenefitsforactiveemployeesareprovidedthroughinsurancecompanieswhosepremiumsarebasedonthebenefitspaidduringtheyear.Inordertorecoveraportionofthecostsofthesebenefits,theCompanyrcquircsemployeeswhoretiredonorafterOctober1,1994,tocontributetowardthecostofsuchbenefits.TheCompanyisfullyrecoveringitsnetperiodicpostretircmentcostsinaccordancewithPSCguidelines.Undertheseguidelines,thedifferencebetweentheamountsofpostretirementbenefitsrecoverableinratesandtheamountsofpostretiremcntbenefitsdeterminedbythcactuaryunderSFAS106,"EmployersAccountingforPostrctirementBenefitsOtherThanPensions,"aredeferredaseitheraregulatoryassetorliability,asappropriate.Netperiodicpostrctirementbenefitcostfor1997,1996and1995includesthefollowingcomponents:199719961995Servicecost-benefitsattributedtotheperiod............Intcrcstcostonaccumulatedpostretiremcntbenefitobligation.ActualreturnonBenefitPlanassetsAmortizationofTransitionObligation*......................NetamortizationanddeferralNctperiodicpostretirementbenefitcost..................$1,745(InThousands)$1,8755,149(1/35)3,114(784)5/64(1/86)3,114(1/14)$6,7238,019$1,3844,613(875)3,114(1,837)6,399~TheCompanyisamortizingtheunfundedaccumulatedpostretirementbenefitobligation("TransitionObligation")atJanuaryl,1993overa20-yearperiod.ThcCompanyhasestablishedaqualifiedfundingvehicleforsuchretirementbenefitsforcollectivebargainingemployeesandasimilarvehicleformanagementemployeesintheformofqualifiedVoluntaryEmployeeBeneficiaryAssociation("VEBA")trusts.ContributionstothcVEBAtrustsaretaxdeductible,subjecttolimitationscontainedintheInternalRevenueCodeandotheregulations.ContributionstotheVEBAtrustsaremadetofundemployees'ostretirementhealthcareandlifeinsurancebenefits,aswellasbenefitsastheyarepaidtoretirees.TheVEBAtrustsconsistsprimarilyofequitiesandfixedincomesecurities.ThcBenefitPlan'sfundedstatusreconciledwiththeCompany'sConsolidatedBalanceSheetisasfollows:December31,19971996(lnThousands)Accumulatedpostretircmentbenefitobligation("APBO"):Retirecs.Fullyeligibleemployees.OtheremployeesBenefitPlanassetsatfairvalue...$(36@91)(4P91)(37/71)(78853)45,109$(33,427)(4,632)(33,422)(71,481)31,402ExcessofAPBOoverBenefitPlanassets.UnrecognizednctgainUnrecognizedpriorservicecost.UnrecognizedTransitionObligation(33/44)(14,716)(139)46,693(40,079)(11,419)(149)49,807Postretiremcntbenefitliability.$(2,006)$(1,840)Assumptionsusedtodetermineactuarialvaluations:DiscountrateusedtodetermineAPBO.RateofcompensationincreaseforapplicablelifeinsuranceplansLong-termrateofreturnonplanassetsforperiodicpostretirementbenefitcosts.7.25%450%6.80%7.75%4.50%6.60%55CentralHudsonGas&ElectricCorporation Theassumedhealthcarecosttrendis11%intheearlyyearsandtrendsdowntoanultimaterateof5.5%bytheyear2010.A~1%increaseinhealthcarecosttrendrateassumptionswouldproduceanincreaseintheaccumulatedpostretirementsbenefitobligationatDecember31,1997and1996of$10.3and$9.4million,respectively,andanincreaseintheaggregateserviceandinterestcostcomponentsofthenetperiodicpostretirementbenefitcostof$1millionforboth1997and1996,respectively.NOTE9-COIvIIvIITIvIENTSANDCONTINGENCIESNuclearLiabilityandtnsuranceThePrice-AndersonActisafederallawwhichlimitsthepublicliabilitywhichcanbeimposedwithrespecttoanuclearincidentatalicensednuclearelectricgeneratingfacility.SuchActalsoprovidesforassessmentofownersofalllicensednuclearunitsintheUnitedStatesforlossesinexcessofcertainlimitsintheeventofanuclearincidentatanysuchlicensedunit.UndertheprovisionsofthePrice-AndersonAct,theCompany'spotentialassessment(basedonits9%ownershipinterestintheNineMile2PlantandassumingthattheotherNineMile2Plantcotenantsweretocontributetheirproportionatesharesofthepotentialassessments)wouldbe$6.8million(subjecttoadjustmentforinflation)andtheCompanycouldbeassessed$339,800(subjecttoadjustmentforinflation)asanadditionalsurcharge,butwouldbelimitedtoamaximumassessmentof$900,000inanyyearwithrespecttoanynuclearincident.Thepublicliabilityinsurancecoverageof$200millionrequiredunderthePrice-AndersonActfortheNineMile2PlantisprovidedthroughNiagaraMohawk.TheCompanyalsocarriesinsurancetocovertheadditionalcostsoFreplacementpower(underaBusinessInterruptionand/orExtraExpenseInsurancePolicy)incurredbytheCompanyintheeventofaprolongedaccidentaloutageoftheNineMile2Plant.Thisinsurancearrangementprovidesforpaymentsofupto$342,000perweekiftheNineMile2Plantexperiencesacontinuousaccidentaloutagewhichextendsbeyond21weeks.Suchpaymentswillcontinuefor52weeksafterexpirationofthe21-weekdeductibleperiod,andthereaftertheinsurershallpay80%oftheweeklyindemnityforasecondandthird52-weekperiod.Subjecttocertainlimitations,theCompanymayrequestprepayment,inalumpsumamount,oftheinsurancepaymentswhichwouldotherwisebepaidtoitwithrespecttosaidthird52-weekperiod,calculatedonanetpresentvaluebasis.'heCompanyisinsuredastoitsrespectiveinterestintheNineMile2PlantunderpropertydamageinsuranceprovidedthroughNiagaraMohawk.Theinsurancecoverageprovides$500millionofprimarypropertydamagecoverageforbothUnitsoftheNineMilePointNuclearStationand$2.25billionofexcesspropertydamagecoveragesolelyforUnit2ofthatstation.Suchinsurancecoversdecontaminationcosts,debrisremovalandrepairand/orreplacementofproperty.TheCompanyintendstomaintain,orcausetobemaintained,insuranceagainstsuchrisksattheNineMile2Plant,providedsuchcoveragecanbeobtainedatanacceptablecost.EnvironmentalMattersGeneral:Onanongoingbasis,theCompanyassessesenvironmentalissueswhichcouldimpacttheCompanyanditscustomers.CleanWaterActCompliance:In1992theCompanyfiledrenewalapplicationsfortheStatePollutionDischargeEliminationSystem("SPDES")permitsforitsRosetonandDanskammerPlants.SuchpermitsarerequiredtooperatethePlants'oolingwatersystemsandwastewatertreatmentsystems.TheCompanyisapartytoanactiveproceedingbeforetheNewYorkStateDepartmentofEnvironmentalConservation("NYSDEC")relatedtotheprocessingoftheapplicationfortheRosetonPlant.Atthisstageoftheproceeding,theCompanycanmakenodeterminationastotheoutcomeoftheproceedingortheimpact,iFany,ontheCompany'sfinancialposition.CleanAirActAmendments:TheCleanAirActAmendmentsof1990("CAAAmendments")addedseveralnewprogramswhichaddressattainmentandmaintenanceofnationalambientairqualitystandards.Theseincludecontrolofemissionsfromfossil-fueledelectricpowerplantsthataffect"acidrain"andozone.AtDecember31,1997,theCompanybelievesitwasinfullcompliancewithregulationspromulgatedtodateundertheCAAAmendments.OngoingfederalandstatecleanairinitiativesmayrequiretheCompanytoreduceitsemissionsinthefuture.TheCompany'semissionsofnitrogenoxides("NOx")weresubjecttoadditionalcontrolseffectiveMay31,1995underTitleIoftheCAAAmendments.TheCompanyhasinstalledappropriatecontrolsincompliancewiththisrequirement.TheNortheastOzoneTransportCommission,ofwhichNewYorkStateisamember,hasagreedthatadditionalreductionsofNOxemissionswillberequiredin1999and,possibly,intheyear2003.BecauseregulationshavenotyetbeenpromulgatedbyNewYorkStatetoimplementthisagreement,thespecificreductionsrequiredattheCompany'sfacilitieshavenotbeendetermined.InJuly1997,theEnvironmentalProtectionAgency("EPA")promulgatedrevisionstotheNationalAmbientAirQualityStandardsforozoneandparticulates.TheseregulationsmayresultintheneedforadditionalreductionsofsulfurdioxideandNOxemissions,dependingontheresultsoFongoingambientairmonitoringprograms.ShouldmonitoringdeterminethatcountiesinthevicinityoftheCompany'selectricgeneratingstationsexceedthenewstandards,emissionsreductionscouldberequired.However,ambientairmonitoringforparticulateswillnotbecompleteduntil2002,atwhichtimetheEPAalsointendstocompleteareassessmentofhealthrisksassociatedwithparticulateemissions.Similarly,additionalcontrolsofNOxemissionsthatare56CentralHudsonGas8cElectricCorporation associatedwithozoneformationareunlikelyuntil2003.AtthattimetheEPAwillhavecompleteditsreviewofplansformeetingthenewozonestandardsthataretobesubmittedbythestates.Whileitisnotpresentlypossibletodeterminetheadditionalemissionsreductions,ifany,requiredattheCompany'sfacilities,theCompanyexpectsthatitwillhaveadequatefinancialresourcestocomplywiththeCAAAmendmentsrequirements.FormerManufacturedGasPlant:FacilitiesInMay1995,theCityofNewburgh,NewYork("City")filedsuitagainsttheCompanyintheUnitedStatesDistrictCourtfortheSouthernDistrictofNewYork("DistrictCourt").TheCityallegesthattheCompanyhasreleasedcertainallegedlyhazardoussubstanceswithoutapermitfromthesiteoftheCompany'sformercoalgasificationplant("CentralHudsonSite")inNewburgh,NewYorkintothegroundattheCentralHudsonSiteandintoadjacentandnearbypropertyoftheCity,inviolationofthefederalComprehensiveEnvironmentalResponse,CompensationandLiabilityAct("CERCLA"),thefederalResourceConservationandRecoveryAct("RCRA")andthefederalEmergencyPlanningandCommunityRighttoKnowAct("EPCRA").TheCityalsoallcgesanumberofnuisance,trespass,damageandindemnificationclaimspursuanttoNewYorkStatelaw.TheCityseeksinjunctivereliefagainstsuchallegeddisposal,storageorreleaseofhazardoussubstancesattheCentralHudsonSite,remediationandabatementoftheconditionsallegedtoleadtoendangermentoftheCity'sproperty,paymentofrestitutionofclean-upcostsandmonetarydamagesofatleast$70million,assessmcntofcertaincivilpenaltiesunderRCRA,CERCLAandEPCRA,andrecoveryoftheCity'scostsandattorneys'eesinsuchaction.TheCompanyandtheCitycontinuetoinvestigatethismatter.AtentativescheduleofproceedinghasbeenappliedbytheDistrictCourt.TheCompanyandtheNYSDEChaveenteredintoanOrderonConsentregardingthedevelopmentandimplementationofaninvestigationandremediationprogramfortheCentralHudsonSite,thcCity'sadjacentandnearbypropertyandtheadjoiningareasoftheHudsonRiver.RemedialinvestigationswerecompletedinScptcmber1997.AdraftreportontheinvestigationswasprovidedtotheNYSDECforitsreviewandcommentonOctober31,1997.Theinvestigationsrevealedthepresenceofcontaminantsinthesoilinportionsofthestudyarea.Inthemajorityofthestudyareacontaminantswerefounddeepwithinthegroundandarenotathreattothepublic.Contaminatedgroundwaterisassociatedwiththecontaminatedsoilbutitisnotusedasadrinkingwatersupply.ImpactedsedimentswerealsopresentwithintheHudsonRiveradjacenttotheCity'spropertywhichisthelocationofitssewagetreatmentplant.Thereareseveralpossiblesourcesofthecontaminantsduetothelongindustrialhistoryandcurrentusesofthearea.FollowingNYSDEC'sapprovalofthereportanditsdeterminationwhetherornotthecontaminantsfoundintheinvestigationmayposeasignificantthreattohumanhealthortheenvironment,ariskassessmentwillbecompletedbytheCompany,ifrequired.Remedialalternativesaddressinganyunacceptablerisksidentifiedintheriskassessmentwillbeevaluated.Itiscurrentlyanticipatedthattheriskassessmentandremedialalternativesreportwillbecompletedin1998.Atthistime,theCompanycanmakenopredictionastotheoutcomeofthislitigation,norcanitmakereasonableestimatesofthecostoftheactivitiesrequiredundertheOrderonConsent.However,thcCompanyhasputitsinsurancecarriersonnoticeandintendstopursuereimbursementfromthem.TheCompanycannotpredictthcextentofreimbursementthatwillbeavailablefromitscarriersatthistime.ByletterdatedJune3,1997,theCompanyreceivedauthorizationfromthePSCtodefercostsrelatedtothismatter,includinglegaldefensecosts,butexcludingtheCompany'slabor,relatedtoenvironmentalsiteinvestigationandremediationactions.TheCompanyhasdeferredcostsexpendedtodatethatitexpectstoberecoveredinfuturerates.Thecumulativedeferredcostsfor1997amountedto$2.2millionandwereincludedin"DeferredCharges-RegulatoryAssets"intheCompany'sConsolidatedBalanceSheet.AsbestosLitigationSince1987,theCompany,alongwithmanyotherparties,hasbeenjoinedasadefendantorthird-partydefendantin1,212asbestoslawsuitscommencedinNewYorkStateandfederalcourts.Theplaintiffsintheselawsuitshaveeachsoughtmillionsofdollarsincompensatoryandpunitivedamagesfromalldefendants.Thecaseswerebroughtbyoronbehalfofindividualswhohaveallegedlysufferedinjuryfromexposuretoasbestos,includingexposurewhichallegedlyoccurredatCompanyfacilities.AsofDecember31,1997,ofthe1,212casesthathadbeenbroughtagainsttheCompany,596remainedpendingagainsttheCompany.The616casesthatwerenolongerpendingagainsttheCompanyasofDecember31,1997wereresolvedasfollows:(i)theCompanynegotiatedvoluntarydismissalsin372casesandwonsummaryjudgcmcntdismissalsin10cases;(ii)116third-partyclaimswereextinguishedwithrespecttotheCompanywhenthethirdpartyplaintiff,OwensCorningFiberglasssettledthecaseswiththeplaintiffs;and(iii)theCompanysettled118cases.TheCompanyispresentlyunabletoassessthevalidityoftheremainingasbestoslawsuits;accordingly,itcannotdeterminetheultimateliabilityrelatingtothesecases.BasedoninformationknowntotheCompanyatthistime,includingitsexperienceinsettlingasbestoscasesandinobtainingdismissalsofasbestoscases,theCompanybelievesthatthecosttobeincurredinconnectionwiththeremaininglawsuitswillnothaveamaterialadverseeffectontheCompany'sfinancialpositionorresultsofoperations.TheCompanyisinsuredundersuccessivecomprehensivegeneralliabilitypolicicsissuedbyanumberofinsurers,hasputsuchinsurersonnoticeoftheasbestoslawsuitsandhasdemandedrcimburscmentforitsdefensecostsandliability.57CentralHudsonGas&ElectricCorporation PurchasedPowerCommitmentsUnderfederalandNewYorkStatelawsandregulations,theCompanyisrequiredtopurchasetheelectricaloutputofunregulatedcogenerationfacilities("IPPs")whichmeetcertaincriteriaforQualifyingFacilities,assuchtermisdefinedintheappropriatelegislation.Purchasesaremadeunderlong-termcontractswhichrequirepaymentatrateshigherthanwhatcanbepurchasedonthewholesalemarket.ThesecostsarecurrentlyfullyrecoverablethroughtheCompany'selectricfueladjustmentclause.However,thePSChasindicatedtotheCompanythatitmaynotallowfullrecoveryofoncsuchIPPcontract.AtDecember31,1997,thcCompanyhasaccruedaliabilityforitsestimateoffuturepaymentsunderthisIPPcontractwhichwillnotberecoveredthroughrates.IPPswithwhichtheCompanyhascontractsrepresent4.6%oftheCompany'senergypurchasesin1997.OtherMattersTheCompanyisinvolvedinvariousotherlegalandadministrativeproceedingsincidentaltoitsbusinesswhicharcinvariousstages.Whilethesematterscollectivelyinvolvesubstantialamounts,itistheopinionofmanagementthattheirultimateresolutionwillnothaveamaterialadverseeffectonthcCompany'sfinancialpositionorresultsofoperations.IncludedinsuchproceedingsarelawsuitsagainsttheCompanyarisingfromaNovember1992explosioninadwellinginCatskill,NewYork.Theselawsuitsinclude:oneallegingpersonalinjuries,thedeathofanoccupant,andpropertydamageandrecoveryofanunspecifiedamountofcompensatoryandpunitivedamages;andoneallegingpersonalinjuriesandpropertydamageandcompensatoryandpunitivedamagesinthesumof$4.0million.Inadditiontotheabove,onFebruary12,1994,afireandanexplosiondestroyedaresidenceintheVillageofWappingersFalls,NewYork,inthcCompany'sserviceterritory.Ashorttimelater,asecondexplosionandfiredestroyedanearbycommercialfacility.LawsuitshavebccncommcnccdagainsttheCompanyarisingoutoftheWappingersFallsincidentincluding:oneallegingpropertydamageandseekingrecoveryof$250,000incompensatorydamagesandoneallegingpersonalinjuriesandpropertydamageandseekinganunspecifiedamountofdamagesagainsttheCompany.TheCompanyisinvestigatingthcaboveclaimsandpresentlyhasinsufficientinformationonwhichtopredicttheiroutcome.TheCompanybelievesthatithasadequateinsurancetocoveranycompensatorydamagesthatmightbeawarded.TheCompany'sinsurance,however,doesnotextendtopunitivedamageswhich,ifawarded,couldhaveamaterialadverseeffectontheCompany'sfinancialposition.NOTEI0-DEPARTMENTALINFORMATIONTheCompanyisengagedintheelectricandnaturalgasutilitybusinessesandservestheMid-HudsonValleyregionofNewYorkState.Totalrevenuesandoperatingincomebeforeincometaxes(expressedaspercentages),derivedfromelectricandgasoperationsforeachofthelastthreeyears,wereasfollows:PercentofTotalRevenuesPercentofOperatingIncomeBeforeIncomeTaxesElectricGasElectricGas1997~eoteoooo1996................1995................80%81%80%20%19%20%85%88%90%15%12%10%FortheyearendedDecember31,1997,theCompanyservedanaverageof266,471electricand61,402gascustomers.OftheCompany'stotalelectricrevenuesduringthatperiod,approximately43%wasdcrivcdfromresidentialcustomers,31%fromcommercialcustomers,17%fromindustrialcustomersand9%fromotherutilitiesandmiscellaneoussources.OfthcCompany'stotalgasrevenuesduringthatperiod,approximately43%wasderivedfromresidentialcustomers,32%fromcommercialcustomers,5%fromindustrialcustomers,15%frominterruptiblecustomersand5%frommiscellaneoussources(includingrevenuesfromtransportationofcustomer-ownedgas).TheCompany'slargestcustomerisInternationalBusinessMachinesCorporation("IBM"),whichaccountedforapproximately9%oftheCompany'stotalelectricrevcnucsandapproximately1%ofitstotalgasrevenuesfortheyearendedDecember31,1997.58CentralHudsonGas&ElectricCorporation Certainadditionalinformationregardingthesesegmentsissetforthinthefollowingtable.Generalcorporateexpenses,propertycommontobothsegmentsanddepreciationofsuchcommonpropertyhavebeenallocatedtothesegmentsinaccordancewithpracticeestablishedforregulatorypurposes.ELECTRIC19971996(InThousands)1995OperatingRevenuesOperatingExpenses:FuelandpurchasedelectricityDepreciationandamortization.Other,excludingincometax.Total.$416,429121,98139,480170338331,799114,39738,401170498113,26337,503168313323,296319,079$418761$409445OperatingIncomebeforeIncomeTax.Fcdcralincometax,includingdeferredincometax-net.OperatingIncome.ConstructionExpenditures84,63024622$60,008$36,68695,4652859290,36626632S66,873S63,734S43,359S41,195IdentifiableAssetsatDecember31*Netutilityplant.Constructionworkinprogress..TotalutilityplantMaterialsandsuppliesTotal.$771,11043173814,28318695$832,978$784,58234823,92822668$784,345823,32323167$846,596$846,490GASOperatingRevcnucs.OperatingExpenses:Purchasednaturalgas..Depreciationandamortization.Other,excludingincometax.Total..$103,84861,5144,3842333489,232$95,210$102,77050,6364,1792733162,3393,9642689982,14693,202OperatingIncomebeforeIncomeTax.Federalincometax,includingdefcrrcdincometax-net.OperatingIncomeConstructionExpenditures..14,6164568$10,048$7,18313,0649,56841082408S8,956$7,160$6,501$9,074IdentifiableAssetsatDecember31*Netutilityplant.Constructionworkinprogress..TotalutilityplantMaterialsandsuppliesTotal.$109,2689240118,5085405$123,913115,7015427113,7714423$121,128$118,194$106,348$103,97993539792~IdentifiableassetsnotincludedIrereinareconsideredtobecorporateassetsandhavenotbeenallocatedbenveentheelectricandgassegments.59CentralHudsonGas&ElectricCorporation Thefollowingmethodsandassumptionswereusedtoestimatethefairvalueofeachclassoffinancialinstrumentsforwhichitispracticabletoestimatethatvalue:CashandTemporaryCashInvestments:Thecarryingamountapproximatesfairvaluebecauseoftheshortmaturityofthoseinstruments.CumulativePreferredStockSubjecttoMandatoryRcdcmptioniThefairvalueisestimatedbasedonthequotedmarketpriceofsimilarinstruments.Long-TermDebt:ThefairvalueisestimatedbasedonthequotedmarketpricesforthesameorsimilarissuesoronthecurrentratesofferedtotheCompanyfordebtofthesameremainingmaturitiesandquality.NotesPayable:Thecarryingamountapproximatesfairvaluebecauseoftheshortmaturityofthoseinstruments.TheestimatedfairvaluesoftheCompany'sfinancialinstrumentsareasfollows:December311997December311996CarryingAmountFairValueCarryingAmountFairValue(InThousands)Cumulativepreferredstocksubjecttomandatoryredemption................................Long-termdebt(includingcurrentmaturities)...$(35,000)$(39,100)(363,146)(382/37)$(35,000)$(33,950)(363,402)(380,875)SELECTEDQUARTERLYFINANCIALDATA(UNAUDITED)Selectedfinancialdataforeachquarterlyperiodwithin1997and1996arepresentedbelow:QuarterEnded:1997March31.June30.September30..........December31...OperatingRcvcnues$151/75118,604123407126/91OperatingIncome(InThousands)$25/0214/4217@1111/01IncomeAvailableforCommonStock$20,6779,65612/608/63EarningsPerAverageShareofCommonStockOutstandin(Dollars)$1.1855.72$21996March31June30.............September30.....December31.$153,846116,994117,684125,447$27,09216,36618,00014,371$21,01410,19512,8578,407$1.20.58.73.4860CentralHudsonGas&ElectricCorporation CHEDULEll-ReservesAdditionsDescriptionBalanceatBeginningofPeriodChargedtoCostandExpensesChargedtoOtherAccountsPaymentsChargedtoReservesBalanceatEndofPeriodYEARENDEDDECEMBER31,1997OperatingReserves...$4,755,264$2,142,391$334,700$650,741$6,581,614ReserveforUncollectibleAccounts.....$3,200,000$3,493,405$-$3,893,405$2,800,000YEARENDEDDECEMBER31,1996OperatingReserves...............................$6,024,101$2,665,136$195,608$4.129.581$4,755,264ReserveforUncollectibleAccounts.....$2,500,000$4,335,676$-$3,635,676$3,200,000YEARENDEDDECEMBER31,1995OperatingReserves...$5,663,407$3,044,329$1,091,388$3,775,023$6,024,101ReserveforUncollectibleAccounts.....$2,000,000$3,220,608$-$2,720,608$2,500,000TEN9ChangesInAndDisagreementsW'ithAccountantsOnAccountingAndFinancialDisclosureNone.PARTIIIITENIODirectorsAndExecutiveOfficersOfTheCompanyTheinformationwithrespecttotheDirectorsoftheCompanyrequiredhereunderisincorporatedbyreferencetothecaption"ElectionofDirectors"intheCompany'sdefinitiveproxystatement,tobedatedMarch2,1998,andtobeusedinconnectionwithitsAnnualMeetingofShareholderstobeheldonApril7,1998,whichproxystatementwillbesubmittedtotheSecuritiesandExchangeCommissionpursuanttothatCommission'sRegulationS-T.TheinformationwithrespecttotheexecutiveofficersoftheCompanyrequiredhereunderisincorporatedbyreferencetoItemIherein,underthecaption"ExecutiveOfficersoftheCompany."ITENIIExecutiveCompensationTheinformationrequiredhereunderisincorporatedbyreferencetothecaption"ExecutiveCompensation"intheCompany'sdefinitiveproxystatement,tobedatedMarch2,1998,andtobeusedinconnectionwithitsAnnualMeetingofShareholderstobeldonApril7,1998.61CentralHudsonGas&ElectricCorporation ITENl2SecurityOwnershipOfCertainBeneficialOwnersAndNanagementTheinformationrequiredhereunderisincorporatedbyreferencetothecaption"SecurityOwnership"intheCompany'sdefinitiveproxystatement,tobedatedMarch2,1998,andtobeusedinconnectionwithitsAnnualMeetingofShareholderstobeheldonApril7,1998.ITENI3CertainRelationshipsAndRelatedTransactionsTherewerenorelationshipsortransactionsofthctyperequiredtobedescribedbythisItem.PARTIYITENl4Exhibits,FinancialStatementSchedule,AndReportsOnForm8-K(a)l.and2.AllFinancialStatementsandFinancialStatementSchedulesfiledaspartofthisReportareincludedinItem8ofthisForm10-Kandrefercnccismadethereto.3.ExhibitsIncorporatedhereinbyreferencetotheExhibitIndexforthisRcport.SuchExhibitsincludethefollowingmanagementcontractsorcompensatoryplansorarrangementsrequiredtobefiledasanExhibitpursuanttoItem14(c)hereof:Directors'eferredCompensationPlan,effectiveOctoberI,1980.(Exhibit(10)(iii)1)TrustAgreementbetweenRegistrantandDutchessBank&TrustCompany,astrustee,datedasofJanuary1,1984,pursuanttoRegistrant'sSavingsIncentivePlan.(Exhibit(10)(iii)2)FirstAmcndmcnt,datedDecember31,1990,toTrustAgreementbetweenRegistrantandTheBankofNewYork,assuccessortrustee,datedasofJanuary1,1984,pursuanttoRegistrant'sSavingsIncentivePlan.(Exhibit(10)(iii)3)Agreement,madeMarch14,1994byandbetweenRegistrantandMellonBank,N.A.,amendingandrestating,effectiveAprilI,1994,Registrant'sSavingsIncentivePlanandrelatedTrustAgreementwithTheBankofNewYork,togetherwithiamendmentsdatedJuly22,1994andDecember16,1994.(Exhibits(10)(iii)18,19and20)ExecutiveDeferredCompensationPlanofthcCompany,effectiveMarchI,1992,togetherwithAmendmenttheretodatedDecember17,1993.(Exhibits(10)(iii)8and15)RetirementBenefitRestorationPlanofthcCompany,cffectivcMay1,1993,togetherwithAmendmenttheretodatedJuly23,1993.(Exhibits(10)(iii)10and11)ExecutiveIncentiveCompensationPlanoftheCompany,effectiveJanuary1,1993,togetherwithAmendmenttheretodatedApril4,1995.(Exhibits(10)(iii)17and21)StockPlanforOutsideDirectorsoftheCompany,datedNovember17,1995.(Exhibit(10)(iii)22)ManagementIncentiveProgramoftheCompany,effectiveApril1,1994,togetherwithAmendmenttheretodatedJuly25,1997.(Exhibits(10)(iii)23and24)462CentralHudsonGas8ElectricCorporation DuringthclastquarteroftheperiodcoveredbythisRcportandincludingtheperiodtothedatehereof,thefollowingReportsonForm8-KwerefiledbytheCompany:(1)ReportdatedNovember17,1997relatingtotheCompany'sformermanufacturedgasplantfacilitiesdescribedunderthecaption"EnvironmentalClaims-NewburghManufacturedGasSite"inItem3ofPartIoftheAnnualReportonForm10-KforthefiscalyearendingDecember31,1997,whichinturnrelatestothelitigationfiledagainstthcCompanybythcCityofNcwburgh,NewYork,onMay26,1995,inthcUnitedStatesDistrictCourt,SouthernDistrictofNewYork.PursuanttotheOctober1995OrderonConsententeredintobetweentheCompanyandtheNYSDEC,asreferredtoinsaidItem3,theCompanyfiled,onOctober31,1997,aRemedialInvestigationreportwiththeNYSDECfortheinvestigationandremediationprogmmbeingconductedontheCompany'sformercoalgasificationplantsiteandtheCityofNewburgh'sadjacentandnearbyproperty.OnOctober31,1997,theCompanyissuedarelatedpressreleasewhichwasfiledasExhibit99andincorporatedbyreferencetosaidForm8-K.(2)RcportdatedJanuary7,1998regardingtheCompany'sexecutionofanAmendedandRestatedSettlementAgreement,datedJanuary2,1998withvariousparties,relatedtothcCompetitiveOpportunitiesProceedingdescribedinNotel.(c)tIIncorporatedhereinbyreferencetosubpart(a)-3ofItem14,above.NotetoShareholders:ThecopyofthisAnnualRcporttotheSEC,onForm10-KforthefiscalyearendedDecember31,1997,doesnotcontainthelistofexhibitscontainedinthccopyoftheRcportasfiledwiththeSEC.Sliareholderswhowishtoobtainacopyofthelistofexhibitsmayobtainitwithoutchargebycontacting:EllenAhcam,Secretary,CentralHudsonGas&ElectricCorporation,284SouthAvenue,Poughkccpsie,NY12601-4879,telephone(914)486-5757;E-mail:http://www.ccnhud.corn.CopiesoftheexhibitscanbcpurchasedfromtheCompanyforaspecifiedfcc.(d)wNotapplicable,sceItem8hereof.63CentralHudsonGas&ElectricCorporation SIGNATURESitVPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theCompanyhasdulycausedthis.2Reporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.iCENTRALHUDSONGAS&ELECTRICCORPORATIONBy(JohnE.Mack,III,ChairmanoftheBoardandChiefExecutiveOfficer)Dated:February10,1998PursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisReporthasbeensignedbelowbythefollowingpersonsonbehalfoftheCompanyandinthecapacitiesandonthedateindicated:BigtgItm(a)PrincipalExecutiveOfficerorOfficers(hnE.Mack,III)ChairmanoftheBoardandChiefExecutiveOfficerFebruary10,1998(b)PrincipalAccountingOfficer:(DonnaS.Doyle)ControllerFebruary10,1998.r(c)PrincipalFinancialOfficer:(StevenV.Lant)TreasurerandAssistantSecretaryFebruary10,1998(d)AmajorityofDirectors:L.i~VallaceCross*,JackEffron*,HeinzK.Fridrich*,EdwardF.X.Gallagher*,PaulJ.Ganci*,CharlesLaForge*,JohnE.Mack,IIVandEdwardP.Swyer*,DirectorsBy:(JoiE.Mack,III)February10,1998*JohnE.Mack,III,bysigninghisnamehereto,doestherebysignthisdocumentforhimselfandonbehalfofthepersonsnamedaboveafterwhoseprintednameanasteriskappears,pursuanttopowersofattorneydulyexecutedbysuchpersonsandfiledwiththeSecuritiesandExchangeCommissionasExhibit24hereof.64CentralHudsonGas8cElectricCorporation QtectorsLWallaceCrosskeepsie,NYExecutiveVicePresidentandChiefFinancialOfficeroftheCorporation;retired;memberoftheCommitteesonAuditandonFinance*1990EdwardP.SwyerAlbany,NYPresident,TheSwyerCompanies;memberoftheCommitteeonCompensationandSuccessionandtheRctiremcntCommittee*1990AllanR.PageSeniorVicePresident-CorporateServicesRonaldP.BrandVicePresident-EngineeringandEnvironmentalAffairsJackEffronPoughkeepsie,NYPresident,EFCOProducts,Inc.;ChairmanoftheCommitteeonCompensationandSuccessionandmemberoftheExecutiveCommitteeandtheCommitteeonFinance*1987FrancesD.FergussonPoughkeepsie,NYPresident,VassarCollege;memberofthcCommitteesonAuditandonCompensationandSuccession*1993HeinzK.FridrichFernandinaBeach,FLCourtesyProfessor,UniversityofFlorida,Gainsville,FL;FormerVicePresident-Manufacturing,InternationalBusinessMainesCorp.;ChairmanoftheCommitteert;memberoftheExecutivetee*1988EdwardF.X.GallagherNewburgh,NYPresidentandOwner,GallagherTransportationServices;memberoftheCommitteeonFinance*1984Paul'J.GanciPoughkeepsie,NYPresidentandChiefOperatingOfficer;memberoftheExecutiveCommitteeandtheCommitteeonFinance*1989*YearjoinedtiicboardQfftcersofTheBoardJohnE.MackIIIChairmanoftheBoardandChiefExecutiveOfficer;ChairmanoftheExecutive,FinanceandRetirementComrnittecsJackEffronCliairmanoftheCommitteeonCompensationandSuccessionHeinzK.FridrichChairmanofthcCommitteeonAuditJohnE.Mack,IIIChairmanoftheBoardandChiefExecutiveOfficerPaulJ.GanciPresidentandChiefOperatingOfficerCarlE.MeyerSeniorVicePresident-CustomerServicesBenonBudziakI'IVicePresident-ProductionJosephJ.DeVirgilio,Jr.VicePresident-HumanResourcesandAdministrationEllenAbeamSecretaryDonnaS.DoyleControllerStevenV.LantTreasurerandAssistantSecretaryGladysL.CooperAssistantVicePresident-GovcrnmcntalRelationsJamesP.Lovette<'>AssistantVicePresident-FossilProductionArthurR.UprightAssistantVicePresident-Cost&RateandFinancialPlanningWilliamP.ReillyAssistantSecretaryandAssistantTreasureri'>>RetiredeffectiveNovemberi,1997u>AppointedeffectiveOctober20,1997CharlesLaForgeRhinebeck,NYPresidentofWayfarerInnsandOwnerofBeekmanArms;memberoftheRctircmcntCommitteeandthcCommitteeonAudit*1987,JohnE.Mack,III,IPoughkeepsie,NY',ChairmanoftheBoardandChiefExecutivetOft"ChairmanoftheExecutive,FinanceiaimentCommittees*1981AffirmativeActionStatementofPolicyItisthepolicyofCentralHudsonGas8cElectricCorporationtoprovideequalemploymentopportunitiesforallpersons.CentralHudsoniscommittedtorecruit,hire,trainandpromotepersonsinallpositions,withoutregardtorace,sex,color,creed,religion,age,nationalorigin,personswithadisability,disabledvctcranorVietnam-cravctcranstatus,exceptwheresexisabonafideoccupationalqualiTication.TheCoinpanywillbasedecisionsonemploymentsoastofurthertheprincipleofequalcmploymcntopportunity.CentralHudsonwillinsurethatpromotiondecisionsarcinaccordwi(hprinciplesofequalemploymentopportunitybyimposingonlyvalidrequirementsforpromotionalopportunities.CentralHudsonwillinsurethatallpersonnelactionssuchascompensation,bcncfits,transfers,layoffs,returnfromlayoff,employersponsoredtraining,education,tuitionassistance,socialandrecreationalprograms,willbeadministeredwithoutregardtorace,scx,color,creed,religion,age,nationalorigin,disability,disabledveteranorVietnam-eraveteranstatus.

A'lIll'GoIUdomOoAYourEnergySolutionsCompanyŽQPPrintedonrecycledpaper SeriesGG,$1.67SeriesNN,$1.95"lSKCUR.ITIKSANDKX'C8AN6KC0MMISSI0NWASHINGTON,D.C.20549Form'10-KXANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934[NOFEEREQUIRED]ForthefiscalyearendedMarch31,19980TRANSITIONREPORTPURSUA'NTTOSECTION'13OR15(tt)OFTHESECURITIESEXCHANGEACTOF1934fNOFEEREQUIRED]Commissionfilenumber1-3571LongIslandLightingCompany'ncorporatedpursuanttotheLawsofNewYorkStateInternalRevenueService-EmployerIdentification,Number11-1019782175EastOldCountryRoad,Hicksville,'ew'York11801516-755-,6650SecuritiesregisteredpursuanttoSection12(b)-oftheAct:.Titleofeachclasssoregistered:CommonStock($5par)PreferredStock($100par,cumulative):SeriesB,5.00%SeriesE,4.35%,,SeriesI,53/4%,ConvertibleeriesD,4.25%,...SeriesCC,7.66%NlPreferredStock($25par,cumulative):SeriesAA,7.95%SeriesQQ,7.05PoGeneralandRefundingBonds:7.85%SeriesDue199985/8%SeriesDue20048.50%SeriesDue20067.90%SeriesDue200893/4%SeriesDue202195/8%SeriesDue2024,Debentures:7.30%SeriesDue19997.30%SeriesDue20006.25%SeriesDue2001Indicatebycheckmarkwhethertheregistrant(I)hasfiledallreportsrequiredtobefiledbySection13:or15(d)oftheSecuritiesExchangeActot1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchteports)and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesXNoQIgIndicatebycheckmarkifdisclosureofdelinquentfilersyursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestofregistrant'sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.K7.05%SeriesDue2003,,8.90%SeriesDue20197.00%SeriesDue20049'.00%SeriesDue20227.125%SeriesDue20058.20%SeriesDue20237.50%SeriesDue2007Nameofeachexchangeonwhicheachclassisregistered:TheNewYorkStock.ExchangeandthePacificStockExchangearetheonlyexchangesonwhichtheCommon'Stockisregistered.TheNewYorkStockExchangeistheonlyexchangeonwhichcertainoftheothersecuritieslistedaboveareregistered.kliSecuritiesregister'edpursuanttoSection'12(g)oftheAct:NoneThBro'aggregatemarketvalueoftheCommonStockheldbynon-affiliatesoftheCompanyatMarch31,1998was$3,832,943,909.temarketvalueofPreferredStockheldbynon-aAiliatesoftheCompanyatMarch31,1998,establishedbyLehmanedontheaveragebidandaskedprice,was$735,033,360.CommonStock($5par)-SharesoutstandingatMarch31,1998:121,680,759 TABLEOFCONTENTSAbbreviations..Item1.Item2,Item3.PARTIBusiness.TheCompany.Territory.BusinessSegments.Employees.RegulationandAccountingControls.LongIslandPowerAuthority,Transaction.KeySpanEnergyCorporationTransaction.CompetitiveEnvironment..ElectricOperations.General..SystemRequirements,EnergyAvailableandReliabilityFuelMixEnergySources."'......Oil..NaturalGas.PurchasedPowerNuclear".Interconnections.Conservation'ServicesThe1989SettlementElectricRates.GasOperations...........................................,..............,................General..GasSystemRequirements...................................................PeakDayCapabilityTransportationStorageCogen/IPPDeliveries.PeagkShaving.....FirmGasSupplyGasRatesRecoveryofTransitionCostsNaturalGasVehicles.EnvironmentalMatters.General..Air.WaterLandNuclearWaste..........................................~...........................TheCompany'sSecurities.General..TheG&RMortgage.UnsecuredDebtEquitySecurities.CommonStockPreferredStockPreferenceStockExecutiveOfficersoftheCompanyCapitalRequirements,LiquidityandCapitalProvided.PropertiesLegalProceedingsShorehamEnvironmentalHumanResources.OtherMatters'I14.6.6.6.7.7.7.7.....8.8.9.9.9.9.9....1010101111121212131516.....192020202121212222,23"2828'282829.3030 Item4.~'ubmissionofMatterstoaVoteofSecurityHolders........tItem5.Item6.Item7.ItemS.Item9.Item10.Item11.Item12.Item13.tern14.SIGNATURESPARTII......3355'.",;......55................575859,'.....'......59.6I9698..............98...................9898'.............9898.......,.........98...................99~100fr~~~J~'r~~~~~~~~~l~~~~~~~~~~~~~~~~~~~~~~~~~~~MarketfortheRegistrant'sCommonEquityandRelatedStockholderMatter....'.........~......~...31SelectedFinancialData~,..........32Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations.FinancialStatementsandSupplementaryData'.~BalanceSheetStatementofIncomeStatementofCashFlows.StatementofRetainedEarnings..',.StatementofCapitalization.'NotestoFinancialStatements.'eportofIndependentAuditors:ChangesinandDisagreem'eritsrWithAc'countantsonAccounting'andFinancialDisclosures...:.97IPARTIIIDirectorsandExecutiveOfficersof.theCompany..~~ExecutiveCompensation~~'.'"'~ISecurityOwnershipofCertainBeneficialOwnersandManagement.CertainRelationshipsandRelatedTransactions...........................................IPARTIV,'I,4Exhibits,FinancialStatementSchedules,aridReportsonListofFinancialStatements.,ListofFinancialStatementSchedulesList'ofExhibitsR~eortsonForm8-K..'IrIIIIrP,lhl<rI

~~~~~~~~'~~~~I-I~~~lO~~~~~~~~I~-.I~.~~~I.~.I.~'o.I~~~~~II~~.I.II~~I~~'~~~~~~~~~~~~~~~~~~a~~I~~~~~,~~~~~I.~.~'I'II'I~I~~~~~~~~~o.I~~I~~~~~I~I~~~~~I~I~I.~~'~~IIs~~~~~~~~~~~~~~~~~~~~~I~~'~~~~~I~~I'~~~I~.~I~0~~~~~~'a~~~~~~~I~~~~~~~~I'~~~~~~~I~o~~o~~~~~I~~~~I~

PARTIItem1.BusinessTheCompanyongIslandLightingCompany(CompanyorLILCO)wasincorporatedin1910undertheransportationCorporationsLawoftheStateofNew.YorkandsupplieselectricandgasserviceinNassauandSuffolkCountiesandtotheRockawayPeninsulainQueensCounty,allonLongIsland,NewYork.ThemailingaddressoftheCompanyis175EastOldCountryRoad,Hicksville,NewYork11801andthegeneraltelephonenumberis(516)755-6650.IplOnApril11,1997,theCompanychangeditsyearendfromDecember31toMarch31..Accordingly,unlessotherwiseindicated,referencesto1998and1997representthetwelvemonthperiodsendedMarch31,1998andMarch31,1997,respectively,whilereferencestoallotherperiodsreferto-therespectivecalendaryearsendedDecember31.TerritoryTheCompany'sserviceterritorycoversanareaofapproximately1,230squaremiles.The.populationoftheservicearea,accordingtotheCompany's1998LongIslandPopulationSurvey,is2.75millionpersons,including,approximately'8,500personswhoresideinQueensCountywithintheCityofNewYork.The1998populationsurveyreflectsa1.6%increasesincethe1990census.llApproximately80%ofallworkersresidinginNassauandSuffolkCountiesareemployedwithinthetwocounties.DuringtheyearendedDecember31,1997totalnon-agriculturalemploymentinNassauandSuffolkCountiesincreasedbyapproximately18,600positions,anemploymentincreaseof1.7%.eCompanyservesapproximately1.04millionelectriccustomersofwhichapproximately931,000areresidential.TheCompanyreceivesapproximately49%ofitselectricrevenuesfrom,residentialcustomers,48%;-fromcommerciaVindustrial,customersandthebalancefromsalestootherutilitiesandpublicauthorities.TheCompanyalsoservesapproximately467,000gascustomers,417,000ofwhichareresidential,accountingforabout,f1%ofitsgasrevenues,17,000ofwhicharecommercial/industrial,accountingfor23%ofitsgasrevenues,3,600ofwhicharefirmtransportationcustomers,accountingfor3%ofitsgasrevenues,withthebalanceofthegasrevenuesderivedfromoff-systemsales.BusinessSegmentsForinformationconcerningtheCompany'selectricandgasfinancialandoperatingresults,seeItem7,"Management'sDiscussionandAnalysisofFinancial'ConditionandResultsofOperations"andNote13ofNotestoFinancialStatements.E<mployees,AsofMarch31,1998,theCompanyhad5,187full-timeemployees,ofwhich2,149belongtoLocal1049and1,220belongtoLocal1381oftheInternationalBrotherhoodofElectricalWorkers.EffectiveFebruary14,1996,theCompanyandtheseunionsagreeduponcontractswhichwillexpireonFebruary13,2001.Thecontractsprovide,amongotherthings,forwageincreasestotaling15.5%overthetermoftheagreements.

RegulationandAccountingControlsTheCompanyissubjecttoregulationbythePublicServiceCommissionoftheStateofNewYork(PSC)withrespecttorates,issuancesandsalesofsecurities,adequacyandcontinuanceofservice,safetyandsitingofcertainfacilities,accounting,conservationofenergy,managementeffectivenessandothermatters.Toensurethatitsaccountingcontrolsandproceduresareconsistentlymaintained,theCompanyactivelymonitorsthesecontrolsandprocedures.TheAuditCommitteeoftheCompany'sBoardofDirectors,aspartofitsresponsibilities,periodicallyreviewsthismonitoringprogram.4TheCompanyisalsosubject,incertainofitsactivities,tothejurisdictionoftheUnitedStatesDepartmentofEnergy(DOE)andtheFederalEnergyRegulatoryCommission(FERC).Inadditiontoaccountingjurisdiction,theFERChasjurisdictionoverratesthattheCompanymaychargeforthesaleofelectricenergyforresaleininterstatecommerce,includingratestheCompanychargesforelectricitysoldtomunicipalelectricsystemswithintheCompany'sterritory,andforthetransmission,throughtheCompany'ssystem,ofelectricenergytootherutilitiesorcertainindustrialcustomers.ItisintheexerciseofthisjurisdictionovertransmissionthattheFERChasissuedtwoordersrelatingtothedevelopmentofcompetitivewholesaleelectricmarkets.ForadiscussionoftheseFERCOrders,seeNote12ofNotestoFinancialStatements.TheFERCalsohassomejurisdictionoveraportionoftheCompany'sgassuppliesandsubstantialjurisdictionovertransportationtotheCompanyofitsgassupplies.OperationofNineMilePointNuclearPowerStation,Unit2(NMP2),anuclearfacilityinwhichtheCompanyhas"an18%interest,issubjecttoregulationbytheNuclearRegulatoryCommission(NRC).nLongIslandPowerAuthorityTransactionOnJune26,1997,theCompanyandLongIslandPowerAuthority(LIPA)enteredintodefinitiveagreementspursuanttowhich,afterthetransferoftheCompany'sgasbusinessunitassets,non-nuclearelectricgeneratingfacilityassetsandcertainotherassetsandliabilitiestooneormorenewly-formedsubsidiariesofanewholdingcompany(HoldCo),formedinconnectionwiththeLIPATransactionandKeySpanTransactiondiscussedbelow,theCompany'scommonstockwillbesold'toLIPAfor$2.4975billionincash.Inconnectionwiththistransaction,theprincipalassetsto'beacquiredbyLIPAthroughitsstockacquisitionofLILCOinclude:(i)thenetbookvalueofLILCO'selectrictransmissionanddistributionsystem,whichamountedtoapproximately$1.3billionatMarch31,1998;(ii)LILCO'snetinvestmentinNMP2,whichamountedtoapproximately$0.7billionatMarch31,1998;(iii)certainofLILCO'sregulatoryassetsassociatedwithitselectricbusiness;-and(iv)allocatedaccountsreceivableandotherassets.TheregulatoryassetstobeacquiredbyLIPAamountedtoapproximately$6.6billionatMarch31,1998,andprimarilyconsistoftheBaseFinancialComponent(BFC),RateModerationComponent(RMC),Shorehampost-settlementcosts,Shorehamnuclearfuel,andtheelectricportionoftheregulatorytaxasset.Forafurtherdiscussionoftheseregulatoryassets,seeNote1ofNotestoFinancialStatements.LIPAiscontractuallyresponsibleforreimbursing-HoldCoforpostretirementbenefitsotherthanpensioncostsrelatedtoemployeesofLILCO'selectricbusiness.Accordingly,uponconsummationofthetransaction,HoldCowillreclassifytheassociatedregulatoryassetforpostretirementbenefitsotherthanpensionstoacontractualreceivable.TheprincipalliabilitiestobeassumedbyLIPAthroughitsstockacquisitionofLILCOinclude2 I(i)LILCO'sregulatoryliabilitiesassociatedwithitselectricbusiness;(ii)allocatedaccountspayable,customerdeposits,otherdeferredcreditsandclaimsanddamages;and(iii)certainseriesoflong-termdebt,aportionofwhichwillberefinanced.TheregulatoryliabilitiestobeassumedbyLIPAamountedtoapproximately$365millionatMarch31,1998,andprimarilyconsistoftheegulatoryliabilitycomponent,1989Settlementcreditsandtheelectricportionoftheregulatorytaxliability.Forafurtherdiscussionoftheseregulatory,liabilities,seeNote1ofNotestoFinancialStatements.Thelong-termdebttobeassumedbyLIPAwillconsistof;(i)allamountsthenoutstandingundertheGeneralandRefunding(G&R)Indentures;(ii)allamountsthenoutstandingundertheDebentureIndentures,exceptasnotedbelow;and(iii)substantiallyallofthetax-exemptauthorityfinancingnotes.HoldCoisrequiredtoassumethefinancialobligationassociatedwiththe7.30/tyDebenturesdueJuly15,1999,withanaggregateprincipalamountcurrentlyoutstandingof$397millionand8.2010DebenturesdueMarch15,2023,withanaggregateprincipalamountcurrentlyoutstandingof$270million.HoldCowillseektoexchangeitsDebentures,withidenticalterms,forthesetwoseriesofDebenturesandwillissueapromissorynotetoLIPAinanamountequaltotheunexchangedamountofsuchDebentures.HoldComillalsoissueapromissorynotetoLIPAforaportionofthetax-exemptdebtborrowedtosupportLILCO'scurrentgasoperations,withtermsidenticaltothosecurrentlyoutstanding.TheCompanycurrentlyestimatestgeamountofthispromissorynotetobeapproximately$250million.InJuly1997,inaccordancewiththeprovisionsoftheLIPATransaction,theCompanyandTheBrooklynUnionGasCompany(BrooklynUnion)formedalimitedpartnershipandeachCompanyinvested$30millioninordertopurchaseaninterestrateswapoptioninstrumenttoprotectLIPAagainstmarketriskassociatedwiththemunicipalbondsexpectedtobeissuedbyLIPAtofinanceetransaction.UpontheclosingoftheLIPATransaction,eachlimitedpartnerwillreceive.fromPA$30millio'nplusinterestthereon,basedoneachpartners'verageweightedcostofcapital.theeventthattheLIPATransactionisnotconsummated,themaximumpotentiallosstotheCompanyistheamountoriginallyinvested.Insuchevent,theCompanyplanstodeferanylossandpetitionthePSCtoallowrecoveryfromitscustomers.AspartoftheLIPATransaction,thedefinitiveagreementscontemplatethatoneormore'ubsidiariesofHoldCowillenterintoagreementswithLIPA,pursuanttowhichsuchsubsidiarieswillprovidemanagementandoperationsservicestoLIPAwith'respecttotheelectrictransmissionanddistributionsystem,deliverpowergeneratedbyitspowerplantstoLIPAandmanageLIPA'sfuelandelectricpurchasesandanyoff-systemelectric'sales.Inaddition,threeyearsaAertheLIPATransactionisconsummated,LIPAwillhavetherightforaone-yearperiodtoacquireallofHoldCo'sgeneratingassetsatthefairmarketvalueatthetimeoftheexerciseoftheright,whichvaluewillbedeterminedbyindependentappraisers.InJuly1997,theNewYorkStatePublicAuthoritiesControlBoard(PACB),createdpursuantfotheNewYorkStatePublicAuthoritiesLawandconsistingoffivemembersappointedby})hebq~s,,governor,unanimouslyapprovedthedefinitiveagreementsrelatedtotheLIPATransaction'subjecttothefollowingconditions:(I)withinoneyearoftheeffectivedateofthetransaction,Ii,+rtp)n-;;!itttrestablishaplanforopenaccesstotheelectricdistributionsystem;(ii)ifLIPAexercisesitsoptiqn-.toacquirethegenerationassetsofHoldCo'sgenerationsubsidiary,LIPAmaynotpurchasetheg"generatingfacilities,ascontemplatedinthegenerationpurchaserightagreement,'ataprice"greater'hanbookvalue;(iii)HoldComustagreetoinvest,'veraten-yearperiod,atleast$1.3billidniny-relatedandeconomicdevelopmentprojects,andnaturalgasinfrastructureproJectsonLongd;(iv)LIPAwillguaranteethat,overaten-yearperiod,averageelectricrateswillbereduced3 bynolessthan14%whenmeasuredagainsttheCompany'sratestodayandnolessthana2%co's<<savingstoLIPAcustomersmustresultfromthesavingsattributabletothemergerofLILCOandKeySpan;and(v)LIPAwillnotincreaseaverageelectriccustomerratesbymorethan2.5%overatwelve-monthperiodwithoutapprovalfromthePSC.LIPAhasadoptedtheconditionssetforthbythePACB.TheholdersofcommonandcertainseriesofpreferredstockoftheCompanyeligibletovoteapprovedtheLIPATransactioninAugust1997.InDecember1997,theUnitedStatesNuclearRegulatoryCommission(NRC)issuedanorderapprovingtheindirecttransferofcontroloftheCompany's18%ownershipinterestinNMP2toLIPA./rInDecember1997,theCompanyfiledwiththeFERCasettlementagreementreachedwithLIPAinconnectionwithapreviousfilingoftheCompany'sproposedratesforthesaleofcapacityandenergytoLIPA,ascontemplatedintheLIPAtransactionagreements.TheCompanyalsohadpreviouslyfiledanapplicationwiththeFERCseekingapprovalofthetransferoftheCompany'selectrictransmissionanddistributionsystemtoLIPAinconnectionwithL'IPA'spurchaseofthecommonstockoftheCompany.WInFebruary1998,the'FERCissuedordersonbothoftheCompanyfilings.Specifically,theFERCapprovedtheCompany'sapplicationto'trarisferassetstoLIPAinconnectionwithLIPA'sacquisitionoftheCompany'scommonstock.Inaddition,theFERCacceptedtheCompany'sproposedratesforsaleofcapacityandenergytoLIPA.Thoseratesmaygointoeffect.onthedatetheservicetoLIPAbegins,subjecttorefund,andfinalrateswillbesetaftertheFERChascompleteditsinvestigationofsuchrates,thetimingofwhichcannotbedeterminedatthistime.InJanuary1998,theCompanyfiledanapplicationwiththePSCinconnectionwiththeproposedtransferofitsgasbusinessunitassets,non-nucleargeneratingfacilityassetsandcertainotherassetsandrelatedliabilitiestooneormoresubsidiariesofHoldCotobeformedascontemplatedintheLIPATransactionagreements.OpApril29,1998,thePSGapprovedthetransferoftheabove-mentionedassets.InJuly1997,theCompany,BrooklynUnionandLIPAfiledrequestsforprivateletterrulingswiththeInternalRevenueService(IRS)regardingcertainfederalincometaxissueswhichrequirefavorablerulingsinorderfortheLIPATransactiontobeconsummated.OnMarch4,1998,theIRSissuedaprivateletterrulingconfirmingthatthesaleoftheCompany'scommonstocktoLIPAwouldnotresultinacorporatetaxliabilitytotheCompany.Inaddition,theIRSruledthat,afterthestocksale,theincomeofLIPA'selectricutilitybusinesswillnotbesubjecttofederalincometax.InaseparaterulingonFebruary27,1998,theIRSalsoruledthatthebondstobeissuedbyLIPAtofinancetheacquisitionwouldbetax-exempt.InJanuary1998,theCompanyfiledanapplicationwiththeSECseekinganexceptionformostoftheprovisionsofthePublicUtilitiesHoldingCompanyActo'f1935.InMay1998,theSECissuedanorderapprovingtheCompany'sapplication.TheCompanycurrentlyanticipatesthattheLIPAtransactionwillbeconsummatedonoraboutMay28,1998.KeySpanEnergyCorporationTransactionOnDecember29,1996,TheBrooklynUnionGasCompany(BrooklynUnion)andtheCompanyentered-intoanAgreementandPlanofExchangeandMerger(ShareExchangeAgreement),

pursuanttowhichthecompanieswillbemergedinatransaction(KeySpanTransaction)thatwillresultintheformationofHoldCo.TheShareExchangeAgreementwasamendedandrestatedtoreflectcertaintechnicalchangesasfFebruary7,1997andJune26,1997.EffectiveSeptember29,1997,BrooklynUnionreorganizedintoaholdingcompanystructure,withKeySpan,EnergyCorporation(KeySpan)becomingitsparentholdingcompany.Accordingly,thepartiesenteredintoanAmendment,AssignmentandAssumptionAgreement,datedasofSeptember29,1997,whichamongotherthings,amendedtheShareExchangeAgreementandrelatedstockoptionagreementstoreflecttheassignmentbyBrooklynUniontoKeySpanandtheassumptionbyKeySpanofallBrooklynUnion'srightsandobligationsundersuchagreements.TheKeySpanTransaction,'whichhasbeenapprovedbybothc'ompanies'oardsofdirectorsandshareholders,wouldunitetheresourcesoftheCompanywiththeresourcesofKeySpan.KeySpan,withapproximately3,300employees,distribu'tesnaturalgasatretail,primarilyinaterritoryof'pproximately187squaremileswhichincludestheb'o<oughsofBrooklynandStatenIslandandtwo-thirdsoftheboroughofQueens,allinNewYorkCity.KeySpanhasenergy-relatedinvestmentsingasexploration,>productionand.marketiitg'ihtheUnitedStatesandNorthernIreland,aswellasenergyservicesintheUnitedStates,includingcogenerationprojects,pipelinetransportationandgasstorage.UnderthetermsoftheKeySpanTransaction,theCompany'scommonshareownbrswillreceive0.803shares(theRatio)ofHoldCo'scommonstockforeachshareoftheCompaq'ommonstockthattheyholdatthetimeofclosing.KeySpancommonshareownerswillreceiveoneshareofcommonstockofHoldCoforeachcommonshareofKeySpantheyholdatthetimeofclosing.ShareownersoftheCompanywillownapproximately66/oofthecommonstockofHoldCowhileySpanshareownerswillownapproximately34/o.IntheeventthattheLIPATransactionisnsummated,theRatiowillbe0.880withCompanyshareownersowningapproximately68/ooftheHoldCocommonstock.ConsummationoftheShare'xchangeAgreementisnotconditionedupontheconsummationoftheLIPATransactionandconsummationoftheLIPATransactionisnotconditioneduponconsummationoftheShareExchangeAgreement.Basedoncurrentfactsandcircumstances,it'isprobablethatthepurchase'methodofaccountingwillapplytotheKeySpanTransaction,withtheCompanybeingtheacquiring'companyforaccountingpurposes.,InMarch1997,theCompanyfiledanapplicationwiththeFERCseekingapprovalofthetransferoftheCompany'scommonequityandcertainFERC-jurisdictionalassetstoHoldCo.InJuly1997,theFERCgrantedsuchapproval.TheShareExchangeAgreementcontainscertaincovenantsofthepartiespendingtheconsummationofthetransaction.Generally,thepartiesmustcarryontheirbusinessesintheordinarycourseconsistentwithpastpractice,maynotincreasedividendsoncommonstockbeyondspecifiedlevelsandmaynotissuecapitalstockbeyondcertainlimits.TheShareexchangeAgreementalsocontainsrestrictionson,amongotherthings,charterandby-lawamendments,capitalexpenditures,acquisitions,dispositions,incurrenceofindebtedness,certainincreasesinemployeecompensationandbenefits,andaffiliatetransactions.TheCompanyandKeySpanexpecttocontinuetheirrespectivecurrentdividendpoliciesuntilcompletionoftheKeySpanTransaction.ItisanticipatedthatHoldCowillsetaninitialannual'dendrateof$1.78pershareforitscommopstock.

Uponcompletionofthemerger,Dr.WilliamJ.Catacosino'swillbecomechairmanandchief.executiveofficerofHoldCo;Mr.RobertB.Catell,currentlychairmanandchiefexecutiveofficer-ofKeySpan,willbecomepresidentandchiefoperatingofficerofHoldCo.Oneyearaftertheclosing,Mr.CatellwillsucceedDr.Catacosinosaschi'efexecutiveofficer,withDr.Catacosinoscontinuingaschairman.TheboardofdirectorsofHoldCow'illbecomprisedof15members,sixfromtheCompany,sixfromKeySpanandthreeadditionalpersonspreviouslyunaffiliatedwitheithercompany.EffectsofLIPAandE'eySpanTransactionsonFutureOperationsThefutureoperationsandfinancialpositionoftheCompanywillbesignificantlyaffectedbyeachoftheproposedtransactionswithLIPAandKeySparidescribed"above.Thediscussioncontainedinthisreportandanyanalysisoffinancialconditionan'dresultsofoperationsdoesnotreflect,unlessotherwiseindicated,thepotentialeffectsofthetransactionswithLIPAandKeySpan.CompetitiveEnvironmentAdiscussionofthecompetitiveissuestheCompanyfacesappearsinNote12ofNotestoFinancialStatements.ElectricOperationst~'jlIGeneralTheCompany'ssystemenergyrequirementsaresuppliedfromsourceslocatedbothonandoffLongIsland.tThefollowingtableindicatesthe1997summercapacityoftheCompany'ssteamgenerationfacilities,InternalCombustion(IC)Unitsandother,generationfacilitiesasreportedtotheNewYorkPowerPool(NYPP):~~itLocationofUnitsDescriptionFuelUnitsMWCompanyOwned:Northport,L.I.PortJefferson,L.I.Glenwood,L.I.IslandPark,L.I.FarRockaway,L.I.'hroughoutL.I.lSteamTurbineSteamTurbineSteamTurbineSteamTurbineSteamTurbineICUnitsDual*.OilDual*GasDual*Dual*'ual*Oil*2222"2230778,754382218386'092791,072Jointly0wned:NMP2(18%Share)Oswego,NewYorkOwnedbytheNewYorkPowerAuthorityHoltsville,L.I.SteamTurbineCombinedCycleNuclear1Dual*"205142Total554,325*Dual-Oilornaturalgas.1ErAdditionalgeneratingfacilitiesownedbyothers,suchasindeperidentpowerproducers(IPPs)andcogeneratorslocatedonLongIslandandinvestor-ownedandpublicelectricsystemslochtedoffLongIslandprovidethebalanceoftheCompany'senergysupplies."ThemaximumdemandontheCompany'ssystemwas4,"140Megawatts(MW)onJuly15,1997,representing84%ofthetotalavailablecapacityof4,953MWonthatday,w'hichincluded766MWoffirmcapacitypurchasedfromothersources.ByagreementwiththeNYPP,theCompanyisrequiredtomaintain,onamonthlybasis,aninstalledandcontractedfirmpowerreserve6 generatingcapacityequaltoatleast18%ofitsactualpeakload.TheCompanycontinuestomeet.thisNYPPrequirement.,hstemReuirementsEner-AvailableandRelb'11rortheyearendedMarch31,1998,systemkilowatthours(kWh)energyrequirementsontheCompany'ssystemwere1.0%higherthanthecorresponding1997period.TheCompanyforecastsincreasesof2.3%and3.2%,for'theyearsendingMarch1999and2000,respec'tivelycomparedtothatexperiencedfortheyearendedMarch31,1998.FortheyearsendingMarch31,2001-2010,theCompanyforecastsanaverageannualgrowthrateinsystemenergyrequirementsof1.1%.Duetotheeffectsofpriceela'sticity,theprojectedpeakdemandforelectricpowerisexpectedtoincreaseiftheLIPAtransactionisconsummated.Base'd'onprojecti'onsofpeak'demandforelectricpowerinthe',absenceoftheLIPATransaction,theCompanybelievesitwill'needto,acquireadditionalgeneratingordemhand-sideresourcesstartingin1998inordertomaintainelectricsupplyreliability.InaccordancewiththeCompany'sIntegratedElectricResourcePlan(IERP),issuedin1996,theComp'anyintendstoinstituteacombinati'onofapeakloadreduction'emand-sidemanagementprogramandacapacitypurchasetomeetthisneed.CurrentprojectionsarethatnewelectricgeneratingcapacitywillnotneedtobeinstalledonLongIslandtomeet.peakdemanduntilaAer2002.Itisanticipatedthat'suchnew.capacitywouldbeacquiredthroughacompetitivebiddingprocess.FuelMixThemegawatthours'(MWh)andpercentagesoftotalenergyavailableby,typeoffuelforelectricoperationsfortheyearsendedMarch31;1998and1997,and-theyearsendedDecember31,1996and1995wereasfollows:InthousandsfMWh'earEndedMarch3119981997,YearEndedDecember31'9961995MWhMWh%MWh%"1MWhOilGasNuclearPurchasedower3,43420%6,21235%15459%641236%3,278-19%546931%1,5539%'"7261414,219'24%',54225%:15589%738842%309917%6,344i36%13017%714340%Total17603100%'7561100%17707100%17887100%iIiiThetotalenergyprovidedbyoilandnaturalgasisgeneratedbytheCompany'sunitslocatedonLongIsland,whilethenucleargenerationisprovidedthrough.NMP2,theCompany's18%owned>nuclearpowerplantwhichislocatednearOswego,NewYork.~hi'1OslTheavailabilityandcostofoilusedbytheCompanyisaffectedbyfactorssuchasthein'ternational.oil,m'arket,environmentalregulations,,conservationmeasuresandtheavailabilityof,alternativefuels.Inordertoreducetheimpactoftheabovefactorson-theCompany'soperations,,.theCompany,overthepastseveralyears,has,refittedthemajorityofjtssteamgen'erationunitsenablingthemtoburnoilornaturalgas,whicheverismoreeconomicalandconsistentwithseasonalenvironmentalrequirements.'heCompany'sfueloilissuppliedprincipallybythreepliers.

Oilconsumptioninbarrelswasasfollows:YearsEndedMarch311998March311997,December311996December311995Consumption(inbarrels)5.6million5.5million7.1million5.2million.~NaturalGasNineoftheCompany'selevensteamgeneratingunitshavethe'capabilityofburningnaturalgas.Sevenoftheseunitsarecapableofburningeitheroilo'rnaturalgas.ThisenablestheCompanytoburnthemostcost-efficientfuel,consisten'twithseasonalenvironmentalrequir'ements,therebyreducingtheCompany'sgenerationcosts.InApril1996andMay1997,theCompanycompletedtwoplannedconversionsofoil-firedsteamgeneratingunitsatitsPortJeffersonPowerStationtodual-firingunits.Gasconsumptionforelectricgenerationwasasfollows:YearsEndedMarch311998March311997December311996December31'995Consumption(inmillionDth)69.463.650.269.8ThepercentageofenergygeneratedbyburningnaturalgasattheCompany'ssteamandinternalcombustionunitswasasfollows:YearsEndedMarch311998March311997December311996December311995PercentGenerated64%63%52%67%PurchasedPowerTheCompanystrivestoprovideitscustomerswiththemosteconomicalenergyavailabletokeepelectricratesaslowaspossible.Often,thisenergyisgeneratedmoreeconomicallyatpowerplantswithinotherelectricsystemsandtransmittedtotheCompanythroughitsinterconnections.Inaddition,theCompanyisrequiredtopurchaseenergyfromsourceslocatedwithinitsserviceterritoryincludingtheNewYorkPowerAuthority(NYPA)'Holtsvillefacility,IPPsandcogenerators.IPPsandcogeneratorslocatedwithintheCompany'sserviceterritoryprovidedapproximately206MWofcapacitytotheCompanyduringtheyearendedMarch31,1998.ThepercentageofthetotalenergymadeavailabletotheCompanybyIPPs,cogeneratorsandtheNYPAHoltsvillefacilitywasfollows:YearsEndedMarch311998March311997December311996December3119958PercentofEnergyAvailable17.2%16.1%163%

TileCompanydoesnotexpectanynewmajorIPPsorcogeneratorstobebuiltonLongIslandinthenearfuture.AmongthereasonssupportingthisconclusionistheCompany'sbeliefthatthemarketforIPPsandcogeneratorstoprovide.powertotheCompany'sremainingcommercialand~~~dustrialcustomersissmall.Furthermore,underfederallaw,theCompanyisrequiredtobuynergyfromqualifiedproducersattheCompany'slong-rangeavoidedcosts.Currentlong-range"avoidedcostestimatesfortheCompanyhavesignificantlyreducedtheeconomicadvantagetoentrepreneursseekingtocompetewiththeCom'panyandwithexistingIPPs.Foradditionalinformationwithrespecttocompetitive'issuesfacingtheCompany,seeNote12ofNote'stoFinancialStatements.18Nuclear4TheCompanyholdsan18%interestinNMP2,an1,137MWnucleargeneratingunitnearOswego,NewYork,whichisoperatedbyNiagaraMohawkPowerCorporation(NMPC).ThecotenantsofNMP2,"inadditiontotheCompany,'areNMPC(41%),NewYork-St'ateElectric&GasCorporation(18%),RochesterGasandElectricCorporation(14%)andCentralHudsonGas&,ElectricCorporation(9%).FortheyearendedMar'ch31,1998,NMP2operatedat86.63%'ofitscapacity.ForafurtherdiscussionofNMP2,seeNote5ofNotestoFinancialStatements.ffInterconnectionsFiveinterconnectionsallowforthetransferofelectricitybetweentheCompanyandmembersoftheNYPPandtheNewEnglandPowerPool.Energyfromthesesourcesistransmittedpursuantto',transmissionagreementswithNMPC,NYPA,NortheastUtilitiesServiceCompany(NUSCO),aco-ownerofoneoftheseinterconnections,andConsolidatedEdisonCompanyofNewYork,Inc.(ConEdison)anddisplacesenergythatwouldotherwisebegeneratedontheCompany'ssystematahighercost.ThecapacityoftheseinterconnectionsisutilizedforCompany'equirementseludingthetransmissionoftheCompany'sshareofpowerfromNMP2,therequirementsofConison,aco-ownerwiththeCompanyofthreeoftheseinterconnections,andtherequirementsonongIslandofNYPA,theownerofoneoftheseinterconnections.ConservationServicesAdiscussionofconservationservicesappearsin'tem7,"Management'sDiscussionandAnalysis'fFinancialConditionandResultsofOperations."The1989SettlementrInFebruary1989,th'eCompanyandtheStateofNewYorkenteredintothe1989SettlementresolvingcertainissuesrelatingtotheCompanyandpro9idin'g,amongothermatters,forthefinancialrecoveryoftheCompanyandforthe"transferoftheShoreham'NuclearPowerStation(Shoreham)toLIPAforitssubsequentdecommission'ing.IIAdiscussionofthe1989SettlementandShorehamdecommissioningappearsinNote10ofNotestoFinancialStatements.ElectricRatesAdiscussionofelectricratesappearsinNote4ofNotestoFinancialStatements.

eqSGasOperationsGeneral'TheCompany'sgassuppliesaretransportedbyinterstatepipelinesfromCanadiananddomesticsources.On-.systempeakshavingandIPP/Cogenpeakingsuppliesareavailabletomeetsystemrequirementsduringwinterperiods.Duringthepastseveralyears,theCompanyactivelyparticipatedinproceedingsbeforetheFERCinanefforttomitigateany.adverseimpactthatfilingsbyinterstatepipelinecompaniesmighthave.ontheCompany'sgascustomersaswellastodecreaseupstreamtransportationcostsandimproveoperationaltariffs.TheCompanyalsoactivelyparticipatedintheproceedingsbeforethePSCwhichestablishedtheframeworkfora.newcompetitivenaturalgasmarketplacewithintheStateofNewYork.g1In.responsetochangesinfederalandstateregulationsthathave"unbundled"traditionalpipelineservicesinordertopromotecompetitioninthegassupplyandgasservicesmarket,theCompanyimplementeditsNaturalChoicefirmtransportationprograminApril1996.UnderNaturalChoice,customersmaypurchasenaturalgasfromqualifiedsuppliersotherthantheCompany.TheCompanycontinuestoprovideNaturalChoicecustomerswithallgasservicesprovidedtotraditionalcustomersexceptfortheprocurementandsaleofgas.Theseservicesincludethelocaltransportationofgas,meterreadingandbilling,,equipmentmaintenanceandemergencyresponse.TheCompany'sprofitmarginshavenotbeenimpactedby.thisnewprogramastheCompanycollectsfromthesecustomersallcostsassociatedwithprovidingitsservice,includingoperatingthegassystem.AsofMarch31,1998,therewereapproximately3,600NaturalChoicecustomerswithannualrequirementsofapproximately4,213,000Dthor7percentoftheCompany'sannualgassystemrequirements.GasSstemReuirementsTheCompanyhas467,000firmgascustomersatMarch31,1998,including295,000gasspaceheatingcustomers,anincreaseofmorethan15,000gasspaceheatingcustomersoverthepastthreeyears.TheCompany'spenetrationinthegasspaceheatingmarketwithinitsseryiceterritoryisapproximately29%.TotalfirmsalesfortheyearendedMarch31,1998,whennormalizedforweather,decreasedapproximately3.6%overthecomparableperiodin199$primarilyduetocustomersswitchingtotheNaturalChoiceProgram.ThemaximumdailysendoutexperiencedontheCompany'sgassystemwas585,227DthonJanuary,19,1994,representing83%oftheCompany'sperdaycapabilityatthattime.Theforecastedmaximumdailysendoutforthe1998-1999winterseason(November1-March31)isapproximately652,000Dth,or88%oftheCompany'speak-daycapability.10 PeakDaCaabiliTheCompanyhasfirmgaspeakdaycapabilityinexcessofitsprojectedrequirementsforfirmgascustomersforthe1998-1999winterseason(November1-March31).Firmcapabilityisummarizedinthefollowingtable.'iITransportation'torage.'ogen/IPPDeliveriesPeakShavingTotalDth'perda263,000-294,00085,000.103,000745,000%ofTotal3540,1114100%lIIIiTransportationTheCompanyhasavailableunderfirmcontract263,000Dthperday,ofyear-r'oundandseasonalpipelinetransportationcapacitywhichisprovidedbyfourinterstatepip'elinecompaniesincludingtheIroquoisGasTransmissionSystem.TheCompany,throughitsmajority,,intei;estina,subsidiary,LILCOEnergySystems,Inc.,isageneralpartnerintheIroquoispipelinewithanequityshareof1%.StorageInordertomeethigherwinterdemand,theCompanyalsohaslong-termfirmmarketareastorageservicesinPennsylvaniaandNewYorkwhichprovideatotalmaximumsupplyof294,000Dthperday,withatotal.capacityof22,534,000Dthforthewinterperiod.*I),gIIInordertoprovidetheCompanywithgreatersecurity,ofsupplyandenhancedoperational'lexibilityinmeeti'ngpeak-dayrequirements,theCompanyalsocontractsforproductionarea.ragecapacityinLouisianaandMississippi.However,theCompanyhasnojncrementalfirmelinetransportationcapacityforthesesupplies.IICogen/IPPDeliveriesTheCompanyhas'contractrightswiththeBrooklynNavyYardCogenfacilitytoreceive'pproximately576,000Dthofpeakingsuppliesduringthewinterperiodat'arateofapproximately30,000Dthperday.Also,theCompanyhascontractrightswiththeNassauDistrictEnergyCorporationtoreceive250,000Dthofpeakingsuppliesduringthewinterperiodata'rate'of12;500Dthperday.'heCompanyhascontractrightswiththeNYPAIPPfacilitytoreceive900,000Dthofstorageserviceduringany'continuous100-dayperiodduringeachwinter'seasonatadailyratenotto'exceed31,000Dth'perday.Inaddition,theCompanyhascontractrigh'tswithNissequogueCogenfacilityto"receiveup"to330,000Dth'ofstorageservicefor'30daysduringeachwinterseasonata'dailyratenot'toexceed'11,000Dthperday.TheCompanyhastheobligationtoreturnthesequantitiesinkindduringthefollowingsummerperiod.Inaddition,theCompanyhastherightto'equest812,000DthinthewinterseasonfromtheTBGCogenfacilitywiththeobligationtoreturnthequantitiesinkindduringthefollowingsummerperiod.Thedailyquantityof12,500Dthisonlyavailableonwarmerwinterdays.PeakShavingTheCompanyhasitsownpeakshavingsuppliestomeetitsfirmrequirementsonexcessivelycoldnterdays.Theyincludealiquefied,naturalgasplantwithastoragecapacityofapproximately000Dthandvaporizationfacilitieswhichprovideapproximately103,000Dthperdaytothe11 peak-daycapabilityoftheCompany'ssystem.'IIiiISTheCompanyhasapproximately161,000Dthperdayoffirmgassuppliesthataretransportedunderitsfirmpipelinetransportationcapacity.About83,000DthperdayisobtainedfromCanadiansourcesand78,000Dthper.day,isobtainedfromdomesticsources.Includedinthelong-termfirmCanadiangasisabout'3,000Dthperday'fgascontractedwithBoundaryGas,Inc.(Boundary).TheCompanyowns2.7%ofthecommonstockofBoundary,acorporationformedwith14othergasutilitycompaniestoactasapurchasingagentfortheimportationofnaturalgas"'romCanada.TheCompany's161,000Dthperdayoflong-termsupplycontractshavecommodityratesthataremarket-based.TheCompanyhasnofixedpricesupplycontracts.Certainofthesecontracts'haveminimum'annual'takeorpayar'rangementsand/orassociateddemandcharges".'4TheCompanyalso'purchasesvariousquantitiesofmarket-priced'gasinboththeseasonaland'onthlyspot'marketsthatistransportedunderfirmandinterruptibletranspo'rtationagreements.'1GasRatesAdiscussionofgasratesappearsinNote4ofNotestoFinancialStatements.RecoveofTransitionCos'ts*Transitioncostsarethecostsassociated'withunbund/ingthepip'elinecompanies'erchantservicesincompliancewith.FERCOrderNo.636.Theyincludepipelinecompanies'..unrecoveredgascostsandthecoststhatpipelinesincuras,"aresultofmodifyingorterminatingtheirgassupplycontracts.Ino'rder"torecovertransitioncosts,pipeliriecompaniesmustdemonstratetotheFERCthatsuchcostswereattributabletoOrderNo.636andthattheywereprudentlyincurred.WhiletheCompanyhaschallenged,onbotheligibilityandprudencegrounds,itssupplier'ipelines'ffortstorecovertheirclaimedtransitioncosts,theCompanyestimatesthatitwillberesponsible.fortotaltransitioncostsofapproximately$10million.AsofMarch31,1998,theCompanyhascollected$8.7millionofthesetransitioncosts,fromitsgascustomers.,I,NaturalGasVehicles'IIITheCompanycontinuestomaintainafocusonpromotingNaturalGasVehicles(NGVs)andinfrastructuredevelopment.AdditionalresourceshavebeendedicatedtotheNGVprogramin1997and1998andanarrangementwithacompanynamedFuelmakerhasprovidedcustomerswithalowrisk,lowcost.approachtorefuelingtheirNGVs.Inaddition,consistentwithaCleanCitiesdesignation,theCompanyhasaggressivelyassistedcustomersinobtainingCongestionMitigationAirQuality(CMAQ)grantsand,otherDepartmentofEnergyfundstohelpoffsettheir,incrementalNGVandrefuelingequipmentcosts.Asaresultoftheseefforts,NGVsconsumedapproximately130,000,Dthandresultedin$260,000inrevenuenetoffuelfortheyearendedMarch3,1,1998.III'nvironmentalMattersGeneralTheCompany'sordinarybusinessoperationsnecessarilyinvolvematerialsandactivitieswhichsubjecttheCo'mpanytofederal,stateandlocallaws,rulesandregulationsdealingwiththeenvironment,includingair,waterandlandquality.Theseenvironmentalrequirementsmayentailsignificantexpendituresforcapitalimprovements.ormodificationsandmayexposetheCompany12 to,potentialliabilitieswhich,incertaininstances,maybeimposedwithout,regardtofaultorforhistoricalactivitieswhichwerelawfulatthetimetheyoccurred.Lawswhichmayimposesuchpotentialliabilitiesinclude(butarenotlimitedto)thefederal,omprehensiyeEnvironmentalResponse,CompensationandLiabilityAct(CERCLA,commonlyownasSuperfund),thefederalResourceConservationandRecoveryAct,thefederalToxicSubstancesControlAct(TSCA),thefederalCleanWaterAct(CWA),andthefederalCleanAir~Act(CAA).Capitalexpendituresforenvironmentalimprovementsandrelatedstudiesamountedtoapproximately$9.2millionfortheyearendedMarch31,1998and,,basedonexistinginformation,areexpectedtobe$4.0millionfortheyearendedMarch31,1999.Theexpendituresinfiscalyear1998andexpectedspendinginfiscalyear1999includea,totalof$10.6millionforthecompletionofagas-firingcapabilityprojectatNorthportUnit1andPortJeffersonUnit$.Itisnotpossibletoascertainwithcertaintyiforwhenthevariousrequiredgovernmentalapprovalsforwhichapplicationshavebeenmadewillbeissued,orwhether,exceptasnotedbelowadditionalfacilitiesormodificationsofexistingorplannedfacilitieswillberequiredoi,generally,whateffectexistingorfuturecontrolsmayhaveuponCompanyoperations.ExceptassetforthbelowandinItem3-"LegalProceedings,"nomaterialproceedingshavebeencommencedor,totheknowledgeoftheCompany,arecontemplatedbyanyfederal,stateorlocalagencyagainsttheCompany,noristheCompanyadefendantinanymateriallitigationwithrespecttoanymatterrelatingtotheprotectionoftheenvironment.RecoverabilioEnvironmentalCosts"~~TheCompanybelievesthatnoneoftheenvironmentalmatters,discussedbelow,willhaveaterialadverseimpactontheCompany'sfinancialposition,cashflowsorresultsofoperations...addition,theCompanybelievesthatallsignificantcostsincurredwithrespecttoenvironmentalinvestigationandremediationactivities,notrecoverablefrominsuiancecarriers,willberecoverablefromitscustomers.lt\IAirL,1Federal,stateandlocalregulationsaffectingnew,andexistingelectricgeneratingplantsgovernemissionsofsulfurdioxide(SO,),nitrogenoxides(NO),particulatematter,and,potentiallyinthefuture,fineparticulatematter(aerosolsofSO,),ha'zardousairpollutantsandcarbondioxide(CO,).,SulfurDioxideRequirementsThelawsgoverningthesulfurcontentofthefueloilbeingburnedbytheCompanyincompliance,withtheUnitedStatesEnvironmentalProtectionAgency(EPA)approvedAirQualityStateImplementationPlan(SIP)areadministeredbytheNewYorkStateDepartmentofEnvironmentalConservation(DEC).TheCompanydoesnotexpecttoincuranycoststosatisfythe1990,amendmentstothefederalCAAwithrespecttothereductionofSO,emissions,astheCompanyalreadyusesnaturalgasandoilwithacceptablylowlevelsofsulfurasboilerfuels.Thesefuelsalsoresultinreducedvulnerabilitytoanyfuturefineparticulatestandardsimplementedintheformofstringentsulfurdioxideemissionlimits.TheCompany'suseoflowsulfurfuelshasresulted,andwillcontinuetoresult,inapproximately70,000excessSO,allowancesperyearthroughtheyear1999.TheCompanypresentlyappliestheproceedsresultingfromanysalesofexcessSO,allowancesasareductiontotheRMCbalance.~ompanyenteredintoavoluntaryMemorandumofUnderstandingwiththeDECwhich13 providesthattheCompanywillnotsellSO,allowancesforusein15statesinanefforttomitigatethetransportofacidrainprecursorsintoNewYorkStatefromupwindstates.NitrogenOxidesRequirementsDuetotheCompany'sprogramofcost-effectiveemissionreductions,includingtheoptimizationofnaturalgasfiringabilityatalmostallthesteamelectricgeneratingstations,theCompanyhadthelowestNOemissionsrateofalltheutilitiesinNewYorkStatefortheyearsendedDecember31,1997,1996and1995.'SincetheCompany'sgeneratingfacilitiesarelocatedwithinaCAA,Amendment-designatedozonenon-attainmentarea,theyaresubjecttoNOreductionrequirementswhicharebeingimplementedinthreephases.PhaseIwascompletedin1995;PhaseIIandPhaseIIIwillbecompletedin1999and2003,respectively.>>TheCompanyiscurrentlyincompliancewithPhaseINOreductionrequirements.Itis'estimatedthatadditionalexpendituresofapproximately$1millionwillberequiredto'meetPhaseIINOreductionrequirements.Subjecttorequirementsthatareexpectedtobepromulgatedinforthcomingregulations,theCompanyestimatesthatitmayberequiredtospendanadditional$10millionto$34million,excludingtheNorthportUnit1conversion,bytheyear2003'omeetPhase'IINOreductionrequirements.Thecompletionoftheprojecttoaddgas-firing'apabilityatNorthportUnit1(completedinMay1998atatotalcostofapproximately$8.4million)willalsofacilitatetheCompany'scompliancewiththeanticipatedPhaseIIINoreductionrequirements.ContinuousEmissionMonitoringAdditionalsofbvareandequipmentupgradesforContinuousEmissionsMonito'rsofapproximately$2millionmayberequiredthrough1999atallgeneratingfacilitiesinordertomeetEPArequirementsunderdevelopmentfortheNOallowancetracking/tradingprogram.>>HazardousAirPollutantsUtilityboilersarepresentlyexemptfromregulationassourcesofhazardousairpollutantsuntiltheEPAcompletesastudyoftherisks,ifany,topublichealthreasonablyanticipatedtooccurasaresultofemissionsbyelectricgeneratingunits.TheEPAisexpectedtomakeadetermination'oncerningtheneedforcontrolofhazardousairpollutantsfromutilityfacilitiesin1998.UntilsuchdeterminationismadebytheEPA,theCompanycannotfullyascertainwhat,ifany,costswillbeincurredforthecontrolofhazardousairpollutants.However,aftertheexpenditureofapproximately$1.5millioninfiscal1998andtheplannedspendingof$0.5millionthroughMarch31,1999,forelectrostaticprecipitatorupgradesand,withthemaximizationofcleanburningnaturalgasastheprimaryfuel,hazardousairpollutantregulations,ifenacted,shouldnotimposeanyadditionalcontrolrequirementsfortheCompany'sfacilities.mkCarbonDioxideRequirementsCO,emissionsfromtheCompany'splantshazebeenreducedbyapproximately23%since1990,largelythroughgreaterrelianceontheuseofnaturalgasandthroughconservationprograms.ThismakestheCompanylessvulnerabletofutureCO,reductionrequirements.'pacityIssuesTheDEChasproposedcommencingenforcementactions'gainstallNewYorkutilitiesforallegedopacityexceedencesfromsteamelectricgeneratingfacilities.Opacityisameasureoftherelativeleveloflightthatisobscuredfrompassingthroughapowerplantstackemissionplume.Anexceedenceoccurswhentheleveloflightpassingthroughtheplumeisreducedbymorethan20%140 forsixmihutesormor'.'TheCompanyhasenteredintoanAdininistrativeConsentOrder(ACO)withtheDECwhichresolvesallhistoricalopacityexceedences,establishesanopacityreductionprogramtobeundertakenbytheCompany,andsetsastipulatedpenaltyscheduleforfuturexceedences.Thenumberofexceedences'experiencedbytheCompanyisrelativelylow,placingeCompanyamongthebestperformersinNewYorkState.ElectromagneticFieldsElectromagneticfields(EMF)occurnaturallyandalsoare'producedwhereverthereiselectricity.Thesefieldsexistaroundpowerlinesandother'utilityequipment.TheCompanyisincompliancewithallapplicableregulatorystandardsandrequirementsconcerningEMF."TheCompanyalsomonitorsscientificdevelopmentsinthestudyofEMF,hascontributedtofundingforresearchefforts,andisactivelyinvolvedincustomerandemployeeoutreachprogramstoinformthecommunityofEMFdevelopmentsastheyoccur.Althoughanextensivebodyofscientificliteraturehasnotshownanunsafe"exposureleveloracausalrelationshipbetweenEMFexposureandadversehealtheffects,concernoverthepotentialforadversehealtheffectswilllikelycontinuewithoutfinalresolutionforsometime.Todate,fourresidentialpropertyownershaveinitiatedseparate'lawsuitsagainsttheCompanyallegingthatthee'xistenceofEMFhasdiminishedthevalueoftheirhomes.TheseactionsareinthepreliminarystagesofdiscoveryandaresimilartoactionsbroughtagainstanotherNewYorkStateutility,whichweredismissedbytheNewYorkStateCourtofAppeals.'heCompanyisnotinvolvedinanyactivelitigationthatallegesacausalrelationshipbetweenexposuretoEMFandadversehealtheffects.WaterUnderthefederalCWAandtheNewYorkStateEnvironmentalConservationLaw,theCompanyisrequiredtoobtainaStatePollutantDischargeEliminationSystempermit'tomakeanydischargetothewatersoftheUnitedStateso'rNewYor'kState.TheDEChasthejurisdictiontoissuesepermitsandtheirrenew'alsaridhasissuedpermitsfortheCompan'y's'generatingunits.Thepermitsallowthecontinueduseofthecirculatingwatersystemswhichhavebeendeterminedtobeincompliancewithstatewaterqualitystandards.Thepermitsalsoallowforthecontinueduseofthechemicaltreatmentsystemsandforthecontinueddischargeofwater'naccordancewithapplicablepermitlimits.vVHF.Infiscalyear1998,theCompanyspentapproximately"$300;000toupgradeitswastewatertreatmentfacilitiesandforothermeasuresdesignedtopro'tectsurfaceandgroundwaterqu'alityandexpectstospendan'additional$100,000intheyears1998-2000.LongIslandSoundTransriiissionCables"'During1996,theConnecticutDepartm'entofEnvironment'alProtection(DEP)issuedamodificationtoanAdministrativeConsentOrder(ACO)previouslyissuedinconnectionwithaninvestigationofanelectrictransmissio'ncablesystemlocatedundertheLongIslandSound(SoundCable)thatisjointlyownedbytheCompanyand'the'onnecticutLightandPowerCompany(Owners).ThembdifiedACOrequirestheOwnerstosubmittotheDEPandDECaseriesofreportsandstudiesde'scribingcablesystemcondition,operationandr'epairpractices,alternativesforcableimprovementsorr'eplacementandenvironmentalimpactsassociatedwithleaksoffluidintotheLongIslandSoundwhichh'aveoccurredfr'omtimetotime.TheCompanycontinuestocompilerequiredinformationandcoordinatethe'activitiesnecessarytoperformthesestudiesandatthepresenttime,isunabletodeterminethe'costsitwillincurto'completetherequirementsofodifiedACOorto,complywithanyadditionalrequirements.15 TheOwnershavealsoenteredintoanACOwiththeDEC.asaresultofleaksofdielectricfluid'fromtheSoundCable,TheACOformalizestheDEC's,authoritytoparticipateinandseparatelyapprovethereportsandstudiesbeingpreparedpursuanttotheACOissuedbythe,DEP.Inaddition,theACOsettlesanyDECclaimfornaturalresourcedamagesinconnectionwithhistoricalreleasesofdielectricfluidfromtheSoundCable.InOctober1995,theU.S.AttorneyfortheDistrictofConnecticuthadcommencedaninvestigationregardingoccasionalreleasesoffluidfromtheSoundCable,aswellasassociatedoperatingandmaintenancepractices.TheOwnershaveprovidedtheU.S.Attorneywithallrequesteddocumentation.TheCompanybelievesthatallactivitiesassociatedwiththeresponsetooccasionalreleasesfromtheSoundCablewereconsistentwithlegalandregulatoryrequirements.EIInDecember1996,abarge,ownedandoperatedbyathirdparty,droppedanchorwhichthendraggedoveranddamagedthe,SoundCable,resultinginthereleaseofdielectricfluidintoLong.IslandSound.Temporaryclampsandleakabaterswere,installedonthecablestostoptheleaks.PermanentrepairswerecompletedinJune1997.ThecosttorepairtheSoundCablevyasapproximately.$17.8million,forwhichtherewas$15millionofinsurancecoverage.TheOwnersfiledaclaimandanswer,inresponse.to,themaritimelimitationproceedinginstitutedbythebargeownerintheUnitedStatesDistrictCourt,EasternDistrictofNewYork.Theclaimseeksrecoveryoftheamountspaid,byinsurancecarriersandrecoveryofthecostsincurredforwhichtherewasno,insurancecoverage.AnycoststorepairtheSound,CablewhicharenotreimbursedbyathirdpartyorcoveredbyinsurancewillbesharedequallybytheOwners.LandUSuperfundimposesjoint,andseveralliability,regardless,offault,upongeneratorsofhazardoussubstancesfor,costsassociatedwithenvironmentalcleanupactivities.Superfundalsoimposes,liabilityforremediationofpollutioncausedbyhistoricalactswhichwere.lawfulatthetimetheyoccurred.i,IInthecourseoftheCo'mpany'sordinarybusiriess'operations,theCompanyisinvolvedinth'handlingofmaterials"thataredeemedtobehazardoussubsfa'nc'esunderSuperfund.Thesematerialsincludeasbestos,metals,certainflammableandorganiccompoundsanddielectricfluidscontainingpolychlorinatedbiphenyls(PCBs)..Otherhazardoussubstances,maybehandledintheCompany's,operationsormaybepresentatCompany.locationsasaresultofhistoricalpracticesbytheCompanyoritspredecessorsininterest.,TheCompanyhas,receivednoticeconcerningpossibleclaimsunderSuperfundoranalogousstatela'wsrelatingtoanumberofsitesatwhichitisallegedthathazardoussubstancesgeneratedbytheCompanyandother,potentially.responsible,parties(PRPs)weredeposited.Adiscussionofthesesitesissetforthbelow.J,Estimates'oftheCompa'ny'sallocatedshar'eofc'osts'for'investigative,removalandremedialactivitiesatthesesitesrangefrompreli'minarytorefinedandareupdatedasnewinformationbecomesavailable.InDe'cember1996,theCompanyfiledacomplaintin'heUnitedStatesDistrictCourtfortheSouthernDistrictofNewYorkagaIrist1$oftheCompany'sinsurerswhich'ssuedgeneralcomprehensivelIability(GCL)policiestotheCompany.In'January1998,the.'ompany,"commencedasimilaractionagainstthesame,andcertainadditionalinsurerdefendantsinNewYorkStateSupremeCourt,'irstDepartment;thefederalcourtactionwassubsequentlydismissedinMarch1998.TheCompanyisseekingrecovery,undertheGCLpolicies'forthecostsincurredtodateandfuturecostsassociatedwiththeclean-upoftheCompany'sformermanufacturedgasplant(MGP)sitesandSuperfundsitesfor.whichtheCompanyhasbeennamedaPRP.TheCompanyisseekingadeclaratoryjudgmentthatthedefendantinsurersare'boundbythe160 termsoftheGCLpolicies,subjecttothestatedcoveragelimits,toreimbursetheCompanyforthecleanupcosts.Theoutcomeofthisproceedingcannotyetbedetermined.SuerundSites,etalBankTheEPAhasnotified,theCompanythat,itisoneofmanyPRPsthatmay.beliablefortheremediationofalicenseddisposalsitelocatedin,Philadelphia,Pennsylvania,andoperatedby.",MetalBankofAmerica.TheCompanyandnineotherPRPs,allofwhicharepublicutilities,completedperformanceofaRemedialInvestigationandFeasibility,Study(RI/FS),whichwas.conductedunderan.ACOwiththeZPA.InDecember1997,theEPAissueditsRecordofDecision(ROD),settingforththefinalremedialactionselectedforthesite.IntheROD,the.EPAestimatedthat'thepresentcostoftheselectedremedyforthesiteis$17.3million.Atthistime,theCompanycannotpredictwithreasonablecertaintytheactualcostoftheselectedremedy,whowillimplementtheremedy,1orthecost,ifany,totheCompany.UnderaPRP"participationagreement,theCompanypreviouslywasresponsiblefor8.2%ofthe'costsass'ociatedwiththeRI/FS.TheCompany.'sallocableshareofliabilityfortheremediationactivitieshasnotyetbeendetermined.,E'TheCompanyhasrecordedaliabilityofapproximately$1millionrepresenting'tsestimatedshareoftheadditionalcosttoremediatethissitebaseduponits8.2%responsibilityundertheRI/FS.E'ESyossetTheCompany'andnineotherPRPshavebe'ennamedin'alawsuitwheretheTownofOysterBay(Town)isseekingindemnificationfor'emediation'ndinvestigationcoststhathave,beenorwillbeincurredforafeder'alSuperfundsiteinSyos'set,-NewYork.Forafurtherdiscussiononthismatter,seeIt'em3,'Le'galProceedings-Environm'ental.BTreatment,Inc.eCompanyhasalsobeennamedaPRPfordisposalsitesinKansasCity,Kansas',andKan'sasCity,Missouri.Thetwositesw'ere'used'by'acompanynamedPQBTreatment,Inc.from1982until1987forthestorage,'processing,andtreatment'ofelectricequipment,dielectricoilsandmaterialscontaihingPCBs.AccordingtotheEPA,thebuildings'andcertainsoilar'easoutsidethebuildingsarecontaminatedwith'PCBs.II1F111CertainofthePRPs,includingtheCompanyandseveralotherutilities,formedaPRPgroup,signedanACO,andhavedevelopedaworkplanforinvestigatingenvironmentalconditionsatthesites.Documentationc'onnectingtheCompanytothesitesin'dicatesthattheCompa'nywas'esponsibleforless.tHan1%oftHematerialsthatwereshippedtotheMissourisite;'fheEPAhas"'.notyetcorn'pletedcompiling'the~documentsfortheKansassite.1',11'E',1OsageTheEPAhasnotifiedthe'Company'thatitisaPRPattheOsageMetalsSite,aformerscrapmetal"recyclingfacilitylocatedin-KansasCity,Kanshs.UnderSection107(a)ofCERCLA,partieswhoarrangedfordisposalofhazardoussubstancesareliableforcostsincurredbythe'EPA'inrespondingtoareleaseorthreatofreleaseofthehazardoussubstances.OsagehadpurchasedcapacitorscrapmetalfromPCBTreatment,Inc.ThroughthearrangementsthattheCompanymadewithPCBTreatment,Inc.todisposeofcapacitors,theCompanyisallegedto'havearrangedfordisposal<withinthe'meaningofthefederalSuperfundlaw:Asimilarletterwassentto861..ieswhosentcapacitorstoPCBTreatment,Inc.'TheEPAisseekingtorecover.approximatelymilliondollarsitexpendedtoconductaremovalactionatthesite.TheCompanyiscurrentlylEV17 unabletodetermineitsshareofthe$1.1millionexpenditure.PortRefineryTheCompanyhasbeennotifiedthatitisaPRPatthePortRefinery'uperfundsitelocatedinWestchesterCounty,NewYork.PortRefinerywasengagedinthebusinessofpurchasing,selling,refiningandprocessingmercuryandtheCompanymayhaveshippedasmallamount:ofwasteproductscontainingmercurytothissite.Testsconductedby.theEPAindicatedthatthesiteandcertainadjacentpropertieswerecontaminatedwithmercury.Asaresult,theEPAhasperformedaresponseactionat'hesiteandseekstorecoveritscosts,currentlytotalingapproximately$4.4million,plusinterest,fromthePRPs.TheCompanydoesnotbelieveitsportionofthesecosts,ifany,willbematerial.Port0'ashingtonIn1989,theEPAnotifiedtheCompanythatitwas"aPRPforalandfillinPortWashington,NewYork.TheCompanydoesnotbelievethatitsentanymaterialstothesitethatcontributedtothecontaminationwhichrequiresremediationandhasthereforedeclinedtheEPA'srequeststoparticipateinfundingtheinvestigationandremediationactivitiesattheproperty.TheCompanyhasnotreceivedfurthercommunicationsregardingthissite.LibertyTheEPAhasnotifiedtheCompanythatitisaPRPinaSuperfundsitelocatedinFarmingdale,NewYork.IndustrialoperationstookplaceatthissiteforatleastfiAyyears.ThePRPgrouphasclaimedthattheCompanyshouldabsorbremediationexpensesintheamountofapproximately$100,000associatedwithremovingPCB-contaminatedsoilsfromaportionofthesitewhichformerlycontainedelectrictransformers.TheCompanyiscurrentlyunabletodetermineitsshareofcostsofremediationatthissite.Huntington/EastNorthportTheDEChasnotifiedtheCompany,pursuanttotheStateSuperfundprogram,thatitsrecordsindicatetheCompanymayberesponsibleforthedisposalofwasteatthismunicipallandfillproperty.TheCompanyconductedasearchofitscorporaterecordsanddidnotlocateanydocumentsconcerningwastedisposalpracticesassociatedwiththislandfill.TheCompanyiscurrentlyunabletodetermineitsshare,ifany,ofthecoststoinvestigateandremediatethissite.BlydenburghTheNewYorkStateOfficeoftheAttorneyGeneralhasnotifiedtheCompanythatitmayberesponsibleforthedisposalofwastesand/orforthegenerationofhazardoussubstanceswhichmayhavebeendisposedofattheBlydenburghSuperfundsite,amunicipalsanitarylandfilllocatedintheTownofIslip,SuffolkCounty.TheStatehasincurredapproximately$15millionincostsfortheinvestigationandremediationofenvironmentalconditionsatthelandfill.Inconnectionwiththisnotification,theCompanyconductedareviewofitscorporaterecordsanddidnotlocateanydocumentsconcerningwastedisposalpracticesassociatedwiththislandfill.TheCompanyiscurrentlyunabletodetermineitsshare,ifany,ofthecoststoinvestigateandremediatethissite.OtherSitesManufacturedGasPlantSitesTheDEChasrequiredtheCompanyandotherNewYorkStateutilitiestoinvestigateand,wherenecessary,remediatetheirformerMGPsites.Currently,theCompanyistheownerofsixpiecesofpropertyonwhichtheCompanyorcertainof-itspredecessorcompaniesproducedmanufacturedgas.Operationsatthesefacilitiesinthelate1800'sandearly1900'smayhaveresultedinthe18 disposalofcertainwasteproductslocatedatthesesites.TheCompanyhasenteredintodiscussionswiththeDECwhichpreexpectedtoleadtotheissuanceofoneormoreACOsregardingthemanagementofenvironmentalactivitiesatthesesixroperties.AlthoughtheexactamountoftheCompany'scleanupcostscannotyetbedetermined,basedonthefindingsofpreliminaryinvestigationsconductedateachofthesesixsites,currentestimatesindicatethatit'maycost'approximately$54to$92milliontoinvestigateandremediateallofthesesites.Consideringtherangeofpossibleremediationestimates,theCompanyfeltitappropriatetorecorda$54millionliabilityreflectingthepresentvalueofthefuturestreamofpaymentsamountingto$70milliontoinvestigateandremediatethesesites.TheCompanyusedarisk-freerateof6.0/otodiscountthisobligation.TheCompanybelievesthatthePSCwillprovideforfuturerecoveryofthesecostsandhasrecordeda$54millionregulatoryasset.TheCompany'sratesettlementwhichthePSCapprovedFebruary4,1998asdiscussedinNote3ofNotestoFinancialStatements,allowsfortherecoveryofMGPexpendituresfromgascustomers.-TheCompanyisalsoevaluatingitsresponsibilitieswithrespecttoseveralotherformerMGPsitesthatexistedinitsterritorywhichitdoesnotpresentlyown.Researchisunderwaytodeterminetheexistenceandnatureofoperationsandrelationship,ifany,totheCompanyoritspredecessorcompanies.NorthHillsLeakTheCompanyhasundertak'enremediationofcertainsoillocationsinNorthHills,NewYorkthatwereimpactedbyareleaseofinsulatingfluidfromanelectricalcableinAugust1994.TheCompanyestimatesthatanyadditionalcleanupcostswillnotexceed$0.5million.TheCompanyhasinitiatedcostrecoveryactionsagainstthethirdpartiesitbelievesareresponsibleforcausingecableleak,theoutcomeofwhichareuncertain.torageFacilitiesAs:aresultofpetroleumleaksfromundergroundstoragefacilitiesandotherhistoricaloccurrences,theCompanyisrequiredtoinvestigateand,incertaincases,remediateaQectedsoilandgroundwaterconditionsatseveralfacilitieswithinitsservice'territory.Theaggregatecostsofsuchremediationworkcouldbebetween$3millionand$5milli'on.'Totheextentthatthesecostsarenotrecoverablethroughinsurancecarriers,theCompanybelievessuchcostswillberecoverablefromitscustomers.NuclearWasteLoivLevelRadioactive5'asteThefederalLowLevelRadioactiveWastePolicyAmendmentActof1985,requiresstatesto'rrangeforthedisposalofalllowlevelradioactivewastegeneratedwithinthes'tateor,inthealternative,tocontractfor.theirdisposalatanoperatingfacilityoutsidethestate.Asaresult,NewYorkStatehasstateditsintentionsofdev'elopinganin-statedisposalfacilityduetothelargevolumeoflowlevelradioactivewastegeneratedwithinthe"stateandhascommittedtodevelopaplanforthemanagementofsuchwasteduringtheinterimperioduntiladisposalfacilityis'vailable.NewYork'Stateisstilldevelopingadisposalmethodologyandacceptancecriteriaforadisposalfacility.ThelatestNewYorkStatelowlevelradioactivewastesitedevelopmentschedulenowassumestwopossiblesitingscenarios,,avolunteerapproachandanon-volunteerapproach,eitherofwhichwouldnotbeginoperationuntilatleast2001.Low'evelradioactivewasteratedatNMP2iscurrentlybeingdisposedofattheBarnwell,SouthCarolinawastedisposalitywhichreopenedinJuly1995toout-,of-statelowlevelwastegenerators.19 Intheeventthatoff-sitestoragebecomesunavailablepriorto2001,NMPChasimplementedalowlevelradioactivewastemanagementprogramthatwillproperlyhandleinterimon-sitestorageoflowlevelradioactivewasteforNMP2foratleasttenyears.TheCompany'sshareofthecostsassociatedwithtemporarystorageandultimatedisposalarecurrentlyrecoveredin-rates.CSpentNuclearFuelNMPC,onbehalfoftheNMP2cotenants,hasenteredintoacontractwiththeDOEforthepermanentstorageofNMP2spentnuclearfuel.TheCompanyreimbursesNMPCforits18%shareofthecostunderthecontractatarateof$1.00permegawatthourofnetgenerationlessafactortoaccountfortransmissionlinelosses.TheCompanyiscollectingitsportionofthisfeefromitselectriccustomers.ItisanticipatedthattheDOEfacilitymaynotbeavailableforpermanentstorageuntilatleast2010.Currently,allspentnuclearfuelfromNMP2isstoredattheNMPCsite,and.existingfacilitiesaresufficienttohandleallspentnuclearfuelgeneratedatNMP2throughtheyear2012.Forinformationconcerningenvironmentallitigation;seeItem3"LegalProceedings"undertheheadingEnvironmental.IITheCompany'sSecuritiesGeneralTheCompany'ssecuritiesareratedbyMoody'sInvestorsService,Inc.,StandardandPoor's,FitchIBCA,Inc.andDuff&PhelpsCreditRatingCo.ForinformationrelatingtotheratingsoftheCompany'ssecurities,seeItem7,"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations."TheG&RMortaeTheCompany'sGeneralandRefundingIndenturedatedJune1,1975(G&RMortgage)isalienupon.substantiallyalloftheCompany'sproperties.OutstandingatMarch31,1998and1997wereapproximately$1.3billionofG&RBonds.UndertheG&RMortgage,theCompanymayissueG&RBondsonthebasisofeithermaturedorredeemedG&RBondsoronthebasisoftheBondableValueofPropertyAdditions(BVPA).Generally,whenissuingG&RBonds,theCompanymustsatisfyamortgageinterestcoveragerequirement,knownastheG&RMortgageInterestCoverage.TheG&RMortgageInterestCoveragerequiresthatthenetearningsasdefinedintheG&RIndenture,availableforinterestfor,any12consecutivecalendarmonthswithinthe15consecutivecalendarmonthsprecedingtheissuanceofanyG&RBondsmustbeequaltoatleasttwotimesthestatedannualinterestpayableonoutstandingG&RBonds,includinganynewG&RBonds.UndertheG&RMortgageInterestCoverage,theCompanywould,currentlybeabletoissueapproximately$5.2billionofadditionalG&RBondsbaseduponnetearningsfortheyearendedMarch31,1998andanassumedinterestrateof7.75%forsuchadditionalG&RBonds.AchangeofI/8-of1%intheassumedinterestrateofsuchG&RBondswouldresultinachangeofapproximately$82millionintheamountofsuchG&RBondsthattheCompanycouldissue.ThemaximumamountofadditionalG&RBondswhichtheCompanyiscurrentlyableto.issueonthebasisofeithermaturedorretiredG&RBondsandonthebasisoftheBVPAisapproximately$1.5billion.Underthepro'visionsoftheG&RMortgage,theCompanymustalsosatisfybyJune30ofeachyearaSinkingFundrequirement,whichfortheyearendedDecember31,1997is$25million.TheCompanybelievesthat,baseduponcurrentlyscheduledredemptionsandmaturities,itwill200 heeachavesufficientretiredG&RBondsfortheforeseeablefuturetosatisfytherequirementsoftheG&RSinkingFund.G&RMortgagealsocontainsaMaintenanceFundcovenantwhichrequiresthattheaggregateountofpropertyadditionsaddedsubsequenttoDecember31,1974mustbe,asoftheendofhcalendaryearsubsequentto1974,atleastequaltothecumulativeprovisionfordepreciation(asdefinedintheG&RMortgage)fromDecember31,1974.TheG&RMortgagerequirescash(orretiredG&RBonds)tobedepositedtosatisfytheMaintenanceFundrequirem'entonlywhensuchcumulativeprovisionfordepreciationexceedssuchaggregateamountofpropertyadditions.AsofDecember31,1997,theamountofsuchcumulativepropertyadditionscalculatedpursuanttotheG&RMortgagewasapproximately$10.4billion,includingapproximately$5.5billionofpropertyadditionsattributabletoShoreham.Also,asofDecember31;1997;theamountofthecumulativeprovisionfordepreciation,similarlycalculated,wasapproximately$2.0billion.TheCompanyanticipatesthattheaggregateamountofpropertyadditionswillcontinuetoexceedthecumulativeprovisionfordepreciation.ForadiscussionoftheeffecttheLIPATransactionwillhaveonCompanydebtoutstanding,seeLongIslandPowerAuthorityTransaction,above.UnsecuredDebtTheCompany'sG&RMortgageanditsRestatedCertificateofIncorporationdonotcontainanylimitationsupontheissuanceofunsecureddebt.TheCompany'sunsecureddebtconsistsofdebenturesandcertaintax-exemptsecurities.TheCompany'sDebentureIndenture,datedasofNovember1,1986,assupplemented,anditsebentureIndenture,datedasofNovember1,1992,assupplemented,eachprovidefortheuanceofanunlimitedamountofDebenturestobeissuedinamountsthatmaybeauthorizedromtimetotimeinoneormoreseries.Thedebenturesareunsecuredandrank~errnssuwithallotherunsecuredindebtednessoftheCompanysubordinatetotheobligationssecuredbytheCompany'sG&RMortgage.AtMarch31,1998and1997,therewere'pproximately$2.3billionofdebenturesoutstanding.ForadiscussionoftheeffectthattheLIPATransactionwillhaveontheCompany'sG&RBondsandDebentures,see"LongIslandPowerAuthorityTransaction,"above.AsofMarch31,1998,theCompanyhadoutstandingapproximately$941millionprincipalamountofpromissorynotes,comprisedof:(i)$2millionoftax-exemptIndustrialDevelopmentRevenueBonds(IDRBs);(ii)approximately$214millionoftax-exemptPollutionControlRevenueBonds(PCRBs);and(iii)$725millionoftax-exemptElectricFacilitiesRevenueBonds(EFRBs).Oftheseamounts,certainseriesaresubjecttoperiodictenders.ForadiscussionoftheeffectthattheLIPATransactionwillhaveontheCompany'stax-exemptauthorityfinancingnotes,see"LongIslandPowerAuthorityTransaction,"above.ForadditionalinformationrespectingtenderprovisionsandotherinformationontheCompany'soutstandingdebt,seeNote7ofNotestoFinancialStatements.EuitSecuritiesCommonStockeCompany'scommonstockislistedontheNewYorkandPacificStockExchanges,andisedunderthesymbol"LIL."TheBoardofDirectors'urrentpolicyistopaycashdividendsoncommonstockonaquarterlybasis.However,beforedeclaringanydividends,theCompany's21 BoardofDirectorsconsiders,amongotherfactors,theCompany'sfinancialcondition,itsability'tecomplywithprovisionsoftheCompany'sRestatedCertificateofIncorporationandtheavailabilityofretainedearnings,futureearningsandcash.ForadditionalinformationwithrespecttotheCompany'scommonstock,seeNote6ofNotestoFinancialStatements.1PreferredStockTheCompany'sRestatedCertificateofIncorporationprovidesthattheCompanymaynotissueadditionalpreferredstockunless,forany12consecutivecalendarmonthswithinthe15calendarmonthsimmediatelyprecedingthecalendarmonthwithinwhichsuchadditionalsharesshallbeissued,thenetearningsoftheCompanyavailableforthepaymentofinterestchargesonthe.Company'sinterest-bearingindebtedness,determinedaAerprovisionfordepreciationandalltaxes,andinaccordancewithsoundaccountingpractice,shallhavebeenatleastoneandone-halftimestheaggregateoftheannualinterestchargesontheinterest-bearingindebtednessoftheCompanyandannualdividendrequirementsonallsharesof.preferredstocktobeoutstandingimmediatelyaftertheproposedissueofsuchsharesofthepreferredstock(EarningsRatio).AtMarch31,1998,theCompanysatisfiedtheEarningsRatioandcouldissueuptoapproximately$1,076millionofpreferredstockatanassumeddividendrateof8.25%.Whentheproceedsfromthesaleofthe,preferredstocktobeissuedareusedtoredeemoutstandingpreferredstock,therequirementtosatisfytheEarningsRatioisnotapplicableifthedividendrequirementandtherequirementsforredemptioninavoluntaryliquidationofthepreferredstocktobeissueddonotexceedtherespectiveamountsforthepreferredstockwhichistoberetired.AdditionalpreferredstockmayalsobeissuedbeyondamountspermittedundertheEarningsRatiowiththeapprovalofatleasttwo-thirdsofthevotesentitledtobecastbytheholdersofthetotalnumberofsharesofoutstandingpreferredstock.ForadditionalinformationwithrespecttotheCompany'spreferredstock,seeNote6ofNotestoFinancialStatements.PreferenceStockIssuanceofpreferencestock,whichissubordinatetotheCompany'spreferredstockbutseniortoitscommonstock,withrespecttodeclarationandpaymentofdividendsandtherighttoreceiveamountspayableon,anydissolution,'oesnotrequiresatisfactionofanetearningstestoranyothercoveragerequirement,unlessestablishedbytheBoardofDirectorsforoneormoreseriesofpreferencestock,priortotheissuanceofsuchseries.NopreferencestockhasbeenissuedbytheCompany,nordoestheCompanycurrentlyplantoissueany.I22 ExecutiveOfficersoftheCompanyCurrentinformationregardingtheCompany'sExecutiveOfficers,allofwhomserveatthewilloftheBoardofDirectors,follows:illiamJ.'atacosinos:Dr.CatacosinoshasservedasChairmanoftheBoardofDirectorsandChiefExecutiveOfficeroftheCompanysinceJanuary1984,andasaDirectorsinceDecember1978.HecurrentlychairstheExecutiveCommitteeoftheCompany'sBoardofDirectors.Dr.CatacosinosalsoservedasPresidentoftheCompanyfromMarch1984toJanuary1987andfromMarch1994toDecember1996.Dr.Catacosinos,68,aresidentofMillNeck,LongIsland,earnedabachelorofsciencedegree,amastersdegreeinbusinessadministrationandadoctoraldegreeineconomicsfromNewYorkUniversity.Dr.CatacosinosisamemberoftheBoardsofAtlanticBankofNewYo'rk,theLongIslandAssociationandtheEmpireStateBusinessAlliance,andisamemberoftheAdvisoryCommitteeoftheHuntingtonTownshipChamberFoundation.HeistheformerChairmanandChiefExecutiveOfficerofAppli'edDigitalDataSystems,Inc.,Hauppauge,NewYork;servedasChairmanoftheBoardandTreasurerofCorometricSystems,Inc.of~Wallingford,Connecticut;andservedasAssistantDiiectoratBrookhavenNationalLaboratory,Upton,NewYork.TheodoreA.Babcock:VicePresidentsinceJanuary1997,TreasurersinceFebruary1994andAssistantCorporateSecretarysinceJanuary1996,Mr.BabcockjoinedtheCompanyinJuly1992asAssistantTreasurer.HepreviouslyspentfiveyearswiththeAMBASECorporationasanAssistantVicePresidentandwaspromotedin1988toVicePresidentandTreasurer.PriortoAMBASE,Mr.Babcockspent11yearswiththeAssociatedDryGoodsCorporationwherehewaspromotedtoAssistantTreasurerandDirectorofCorporateTreasuryOperationsin1984.Mr.Babcock,43,receivedabachelorofsciencedegreeinaccountingfromManhattanCollegeanda~~~~~astersdegreeinfinancefromIonaCollege.Mr.BabcockisamemberoftheboardofthentingtonTownshipChamberFoundation.MichaelE.Bray:SeniorVicePresidentoftheElectricBusinessUnitsincejoiningtheCompanyinMarch1997.PriortojoiningtheCompanyMr.BraywasPresidentandCEOofDBRileyConsolidatedinWorcester,Massachusetts.From1987-1994Mr.BraywaswithABBPowerGeneration,Inc.inWindsor,ConnecticutholdingthepositionsofSeniorVicePresidentSales&MarketingforABBPowerGenerationandPresidentofABB'sResourceRecoverySystemsorganization.Priortothat,hespent17yearswithGeneralElectricCompanybeginningasafield'ngineerinthepowerequipmentserviceorganizationandultimatelymanagingGen'eralElectric'scogenerationdevelopment,constructionandoperatingorganization.Mr.Bray,50,holdsabachelorofsciencedegreeinmechanicalengineeringfromtheUniversityofMissouriatRollaand'mastersdegreeinBusinessAdministrationfromWashingtonUniversity.Mr.BrayisamemberoftheAmericanAcademyofMechanicalEngineers,pastBoardofDirector/memberofAmericanBoilerManufacturer'sAssociationandtheGreaterHartfordChamberofCommerce.Heisalsoachartermemberofthe'AcademyofMechanicalEngineersattheUniversityofMissouriatRolla.CharlesA.Daverio:VicePresidentofTheEnergyExchangeGroupsinceDecember1996,Mr.Daverio,48,holdsabachelorofengineeringdegreeinmechanicalengineeringfromManhattanCollege,amasterofsciencedegreeinindustrialengineeringfromNewYork'niversityanda=masterofbusinessadministrationfromNewYorkInstituteofTechnology.HejoinedtheCompanyin1976asanAssociateEngineer.HeheldvarioussupervisoryandmanagerialpositionstheNuclearEngineeringDepartmentfrom1979through1989.In1990,hewasassignedagerofGasSupplyandPlanningandwasgiventheadditionalresponsibilityforGasperationsin1993.Mr.DaverioistheCompany'srepresentativeontheIroquoisGas23 TransmissionSystem'sManagementCommitteeandisontheBoardoftheIroquoisPipeline,OperatingCompany.Mr.DaverioisamemberoftheboardoftheHuntingtonArtsCouncil.JaneA.Fernandez:VicePresidentofHumanResourcessinceMay1997,Ms.FernandezjoinedtheCompanyin1973andhas.heldvariouspositionsintheEmployeeRelations/HumanResourcesorganizationsince,thattime.ShewasDirectorofHumanResourcePlanningfrom1988to1990,-,.DirectorofHumanResourceServicesfrom,1990to19/4;Director,ofCorporateTrainingaqdHumanResourcesin1994,andAssistantVicePresidentofHumanResourcesfrom1994to1997.Ms.Fernandez,48,isagraduateofC.W.Post,CollegeandholdsanMBAinManagementfromHofstraUniversity.,~4JamesT.Flynn:PresidentandmemberoftheCompany'sBoardofDirectorssinceDecember1996andChiefOperatingOfficersinceMarch.1994,Mr.,FlynnjoinedtheCompanyinOctober1986asVicePresidentofFossilProduction.HealsogeldthepositionsofGroupVicePresident,EngineeringandOperations,andExecutiveVicePresident.beforejoiningtheCompany,Mr.Flynn,64,wasGeneralManager-Easter'erviceDepartmentforGeneralElectric.HiscareerbeganasamemberofGeneralElectric'sTechnicalMarketingProgramin1957.Heholdsa,bachelorofsciencedegreeinmechanicalengineeringfromBucknellUniversityandisaLicensedProfessionalEngineerintheStateofPennsylvania.'lllHJosephE.Fontana:.VicePresidentsinceJanuary1997andControllersinceOctober1994,Mr.FontanajoinedtheCompanyinDecember1992asDiiectorofAccountingServices.HeheldthepositionofAssistantControllerfromFebruary1994throughSeptember1994.InhiscapacityasController,Mr.FontanaservesastheCompany'sChiefAccountingOfficer.Mr.FontanaisamemberoftheAmericanInstituteofCertifiedPublicAccountantsandtheNewYorkStateSocietyofCPAs.BeforejoiningtheCompany,Mr.FontanawasaSeniorManagerattheinternationalaccountingfirmofErnstAYoung,LLP.Mr.Fontana,40,holdsabachelorofsciencedegreeinaccountingfromWestchesterStateCollegeandisaCertifiedPublicAccountant.'IGeorgeB.Jongeling:VicePresidentofSpecialProjectssinceApril1998.Priortojoiningthe.Company,Mr.JongelingwasPresidentandChiefOperatingOfficerofSmithCogenerationCompany,anIndependentPower.DevelopmentCompanywithactiveindependentpowerdevelopmentinAsiaandoperatingplantsintheU.S.PreviousassignmentsjncludedVicePresidentofOperationsandMemberoftheBoardofDirectorsofDBRiley,PresidentofPACEConstructionCompany,VicePresidentofServiceandSparePartsforEBBGasTurbine,BusinessandVicePresidentofBusinessDevelopmentforABBwastet'oenergybusiness.Hestartedhiscareerin'1966,asafieldengineerfortheGeneralElectricCompanyandspent24,yearsworkinginthepowergenerationbusinessindomesticandforeignmanagementpositions.HislastGeneralElectricassignmentwasasManageroftheEasternRegionoftheU.S.fortheSystemsMarketingGroupsupportingthecogeneration,construction,developmentandOEcMbusinessesforGeneral,Electric.Mr.Jongelin'g,54,receivedaBachelorofSciencedegreeinMechanicalEngineeiingfromtheSouthDakotaSchoolofMinesandTechnologyandisalicensedprofessionalengineerinIllinoisandMissouri.,IRobertXKelleher:SeniorVicePresidentofHumangesourcessince,May1997,Mr.KelleherjoinedtheCompanyin1959andhasheldvariousmanagerialpositionsintheFinance,Accounting,Purchasing,Stores,andEmployeeRelationsorganizations.HewasIndustrialRelationsManagerfrom,1975to1979,ManageroftheEmployee,RelationsDepartmentfrom1979,to1985,AssistantVicePresidentoftheEmployeeRelationsDepartmentfrom1985to1986,andVicePresidentofHumanResourcesfrom.1986to1997.Mr.Kelleher,61,isagraduateofSt.24 FrancisCollegeand,theHumanResourcesManagementandExecutiveManagementProgramsofPennsylvaniaStateUniversity.Mr.Kelleherisamember.oftheAmericanCompensationAssociation,"PersonnelDirectorsCouncil,IndustrialRelationsResearchInstituteandTheEdisonlectricInstitute'sL'aborRelationsCommittee.JohnD.Leonard,Jr.:VicePresidentofSpecialProjectssinceApril1997,Mr.Leonardjoined.the.Companyin1984asVicePresidentofNuclearOperations.Hecontinues.toberesponsiblefornuclearissues.Mr.LeonardservedasVicePresidentofEngineeringandConstructionfromMarch1994throughMarch1997,andpreviouslyservedasVicePresidentofCorporateServicesfrom~July1989throughMarch1994.,From'1980to1984,Mr.LeonardwastheVicePresidentandAssistantChiefEngineerforDesignandAnalysisattheNewYorkPowerAuthority.Priortothisposition,heservedahaResidentManageroftheFitzpatrickNuclearPowerPlant.,for...approximatelyfiveyears.BeforeacceptingapositionattheNewYorkPowerAuthority,Mr.Leonardservedas.CorporateSupervisorofOperationalQualityAssuranceoftheVirginiaElectricPowerCompanyfrom1974to1976.In1974,Mr.'eonard:retiredwiththerankofCommander,fromtheUnitedStatesNavy,havingcommandedtwonuclear-poweredsubmarinesina.careerthatspanned20years.HeholdsabachelorofsciencedegreefromDukeUniversityandamasterofsciencedegreefromtheNavalPostGraduateSchool.Heis65and.aLicensedProfessionalEngineerintheStateofNewYork.ivAdamM.Madsen:SeniorVicePresidentofCorporateandStrategicPlanningsince1984,'r.Madsen,61,holdsabachelorsdegreeinelectricalengineeringfromManhattanCollegeandamasterofsciencedegree.innuclearengineeringfromLongIslandUniversity.HehasbeenwiththeCompanysince1961;"servinginvariousengineeringpositionsincludingManagerofEngineeringfrom1978to'1984.Priortothattime,heheldthe.position"ofManager'ofthe"armingDepartment.Since.1978,Mr.MadsenhasbeentheCompany'srepresentativetothe-~ingCommitteeoftheNewYorkPowerPool.Heisamemberofthe.NortheastPower'oordinatingCouncil',sExecutiveCommitteeandtheCouncil'sReliabilityCoordinating,.Committee.HealsoservesontheBoardofDirectorsoftheEmpireStateElectricEnergyResearchCompany.Mr.MadsenisaLicensedProfessionalEngineerintheStateofNewYork.14KathleenA.Marion:'VicePresidentofCorporateiServicessinceApril1994andCorporateSecretarysinceApril,1992,Ms.'MarionhasservedasAssistant,totheChairmansinceApril1987.ShewasAssistantCorporateSecretaryfromApril3990toApril1992.Ms.Marion;43,hasa.bachelorofsciencedegreeinbusinessandfinancefromtheStateUniversityofNewYorkatOld.Westbury.BrianR.McCafPey:VicePresidentofCommunicationssinceFebruary.$997,"Mr.McCaffrey,joinedtheCompanyin1973.Mr.McCaffrey,52,holdsabachelorofscience,degreeinaerospaceengineeringfrom,theUniversityofNotreDame;Healamoreceived.amasterofsciencedegreeinaerospaceengineeringfromPennsylvaniaStateUniversityandamasterof.sciencedegreein,nuclearengineeringfromPolytechnicUniversity.HeisaLicensedProfessionalEngineerintheStateofNewYork.Priortohispresentassignment,Mr.McCaffreywasVicePresidentofAdministrationsince1987.Previously,Mr.McCaffreyservedinmanypositionsinthe,nuclearorganizationsoftheCompanyandpositionsinengineering'capacitiesassociatedwithgasturbineandfossilpowerstationprojects.Mr.McCaffreyisamemberoftheExecutiveBoardoftheSuffolkCounty'CouncilB'oyScoutsofAmerica."1vphP'.McDonnell:SeniorVicePresidentofMarketingand,ExternalAffairssinceDecember6,Dr.McDonnelljoinedtheCompanyin1984.Dr.McDonnellwasAssistanttotheChairman25 from1984through1987whenhewasnamedVicePresidentofCommunications.In'July1992h6wasnamedVicePresidentofExternalAffairs.PriortojoiningtheCompany,hewastheDirectorofStrategicPlanningandBusinessAdministrationforAppliedDigitalDataSystems,Inc.andAssociateDirectoroftheUniversityHospitalattheStateUniversityofNewYorkatStonyBrook.Dr.McDonnell,46,holdsbachelorofartsandmasterofartsdegreesinphilosophyfromtheStateUniversityofNewYorkatStonyBrookandadoctoraldegreeincommunicationsfromtheUniversityofSouthernCalifornia.LeonardP.NovelloSeniorVicePresidentsinceDecember1996,andGeneralCounselsincehejoinedtheCompanyinApril1995.BeforejoiningtheCompany,Mr.NovellowasGeneralCounselattheinternationalaccountingfirmofKPMGPeatMarwick,whereheadvisedseniormanagementonavarietyoflitigationandcorporateissuesandwasresponsibleforalllegalJmattersarisingoutofthefirm'soperationsanditsaudit,taxandmanagement'consultingengagements.PriortojoiningPeatMarwickin1975asanAssociateGeneralCounsel,Mr.NovellowasassociatedwiththeNewYorklawfirmofCravath,SwaineandMoore.Mr.NovelloisactiveinprofessionalassociationsandisamemberoftheExecutiveCommitteeoftheLitigationCommercialandFederalSectionoftheNewYorkStateBarAssociationandtheAssociationoftheBaroftheCityofNewYork..HeisalsoamemberoftheExecutiveCommitteeoftheCPRInstituteforDisputeResolution.Mr.Novello,57,hasabachelorsdegreefromtheCollegeoftheHolyCrossandajurisdoctoratefromFordhamUniversity.AnthonyNozzolillo:SeniorVicePresidentofFinanceandChiefFinancialOfficeroftheCompanysinceFebruary1994,Mr.NozzolilloservedastheCompany'sTreasurerfromJuly1992toFebruary1994.HehasbeenwiththeCompanysince1972servinginvariouspositionsincludingManagerofFinancial.PlanningandManagerofSystemsPlanning.Mr.Nozzolillo,49,holdsabachelorofsciencedegreeinelectricalengineeringfromthePolytechnicInstituteofBrooklynandamasterofbusinessadministrationdegreefromLongIslandUniversity,C.W.PostCampus.Mr.NozzolilloischairmanoftheCommunityAdvisoryBoardofLawrencePublicSchools'SchooltoCareerInitiative."RichardReichler:DeputyGeneralCounselandVicePresidentofTaxPlanningandServicessinceJanuary1997.Mr.ReichlerheldthepositionsofDeputyGeneralCounselandVicePresidentofFinancialPlanningandTaxationfromJanuary1995throughDecember1996andAssistantVicePresidentforTaxandBenefitsPlanningfromOctober1992throughDecember1994.Priortojoiningthe'Company,hewasapartnerintheinternationalaccountingfirmofErnst&YoungLLPfor23years.Mr.Reichler,63,holdsabachelorofartsdegreefromColumbiaCollegeandabacheloroflawdegreefromColumbiaUniversitySchoolofLaw.Since1989,hehastaughtvariouscoursesatBaruchCollege,includingstateandlocaltaxation,'corporatetaxationandrealestatetaxation.HehasauthoredseveralpublicationsontaxandemployeebenefittopicsandhasservedasamemberoftheExecutiveCommitteeoftheTaxSectionoftheNewYorkStateBarAssociationandasanAdvisortotheUrbanDevelopmentCorporationHighTechnologyAdvisoryCouncil.,18'illiamG.Schiffmacher:SeniorVicePresidentofCustomerRelationsandInformationSystemsandTechnologysinceDecember1996,Mr.SchiffmacherheldthepositionsofVicePresidentofCustomerRelationsfromApril1994throughNovember1996andVicePresidentofElectricOperationsfromJuly1990throughMarch1994.HejoinedtheCompanyin1965afterreceivingabachelorofelectricalengineeringdegreefromManhattanCollege.Mr.Schiffmacher,54,alsoholdsamasterofsciencedegreeinmanagementengineeringfromLongIslandUniversity.HehasheldavarietyofpositionsintheCompany,includingManager'ofElectricSystemOperations,26 ManagerofElectricalEngineeringandVicePresidentofEngineeringandConstruction..8'ernerJ.Schweiger:VicePresidentofElectricOperationssinceDecember1996,Mr.Schweiger'oinedtheCompanyin1981andhasheldanumberofpositionsinElectricOperations,aswellasEngineering.Mostrecently,hewasManagerofElectricSystemsEngineeringfromOctober1995throughNovember1996.Mr.Schweiger,38,receivedhisbachelorsdegreeinelectricalengineeringfromManhattanCollegeandalsoholdsamastersdegreeinEnergyManagementfromtheNewYorkInstituteofTechnology.RichardM.Siegel:VicePresidentofInformationSystemsandTechnologysinceDecember1996,Mr.SiegelheldthepositionofDirectorofInformationSystemsandTechnologyfromJune1995toDecember1996.Mr.Siegel,51,joined'theCompanyin1969asanAssociateEngineerandhasheldprogressivemanagementpositionsinElectricOperationsandEngineering,including'anagerofElectricSystemEngineeringandManagerofElectricSystemOperations.Mr.SiegelholdsabachelorofelectricalengineeringdegreefromtheCityCollegeofNewYorkandamasterofsciencedegreeinIndustrialManagementfromtheStateUniversityofNewYorkatStonyBrook.Mr.SiegelisaLicensedProfessionalEngineerintheStateofNewYork.RobertB.Steger:SeniorVicePresidentofGasBusinessUnitsinceDecember1996,Mr.StegerheldthepositionsofVicePresidentofElectricOperationsfromApril1994throughNovember1996andVicePresidentofFossilProductionfromFebruary1990throughMarch1994.HejoinedtheCompanyin1963andheldprogressiveoperatingandengineeringpositionsincludingManagerofElectricProduction-Fossilfrom1985through1989.Mr.Steger,61,holdsabachelorof,mechanicalengineeringdegreefromPrattInstituteandisaLicensedProfessionalEngineerintheStateofNewYork.'lliamE.Steiger,Jr.:.VicePresidentofFacilitiesandRealEstatesinceFebruary,1997,Mr.eiger,54,heldthepositionsofVicePresidentofFossilProduction,fromApril1994throughFebruary1997andVicePresidentofEngineeringandConstructionfromJuly1990throughMarch1994.DuringhiscareerwiththeCompany,whichbeganin1968,hehasserved,amongotherpositions,asLeadNuclearEngineerforShoreham,ChiefOperationsEngineerforShoreham,PlantManagerforShorehamaswellasAssistantVicePresidentofNuclearOperations.Mr.SteigerreceivedabachelorofsciencedegreeinmarineengineeringfromtheUnitedStatesMerchantMarineAcademyandamasterofsciencedegreeinnuclearengineeringfromLongIslandUniversity.EdwardJ.Youngling:SeniorVicePresidentofEngineeringBcConstructionsinceFebruary1997,.Mr.YounglingjoinedtheCompanyin1968andhasheldvariouspositionsintheofficesofFossilProduction,EngineeringandNuclearOperationsincludingserviceasDepartmentManagerofNuclearEngineering.In1988,Mr.YounglingwasnamedVicePresidentofConservationandLoadManagement.In1990,hebecameVicePresidentofCustomerRelations,andfromMarch1993throughMarch1994,hewasVicePresidentofCustomerRelationsandConservation.InApril1994hewasnamedSeniorVicePresidentoftheElectricBusinessUnit.Mr.Youngling,53,holdsabachelorofsciencedegreeinmechanicalengineeringfromLehigh,University.Mr.YounglingservesontheboardoftheEmpireStateElectricEnergyResearchCompanyandisamemberoftheExecutiveCommitteeoftheNewYorkPowerPool.Mr.YounglingalsoservesontheEasternAdvisoryBoardoftheProtectionMutualInsuranceCompany.27 CapitalRequirements,LiquidityandCapitalProvidedInformationasto"CapitalRequirements,""Liquidity"and"CapitalProvided"appearsinItem7,"Management'sDiscu'ssionandAnalysisofFinancialConditionandResultsofOperations."Item2.'ropertiesThelocationandgeneralcharacteroftheprincipalpropertiesoftheCompanyaredescribedinItem1,"Business"'underthe'headings"ElectricOperations"and"GasOperations."Item3.LegalProceedingsPShorehamPursuanttotheLIPAAct,LIPAisrequiredtomakepayments-in-lieu-of-taxes(PILOTs)tothemunicipalities'thatimposerealpropertytaxesonShoreham.Pursuanttothe1989Settlement,theCompanyagreedtofundLIPA'sobligationtomakeShorehamPILOTs.ThetiminganddurationofPILOTsundertheLIPAActwerethesubjectof,litigationentitledLIPAetal.v.Shoreham-WadinRiverCentralSchoolDistrictetal.,broughtinNassauCountySupremeCourtbyLIPAagainst,amongothers,SuffolkCounty,theTownofBrookhavenandtheShoreham-WadingRiverCentralSchoolDistrict.TheCompanywaspermittedtointerveneinthelawsuit.InJune1996,theNewYorkStateCourtofAppealsrendereditsopiniononthecross-appealsfiledbythepartiesregardingthetiming,durationandrefundabilityofPILOTsundertheLIPAAct.TheCourtaffirmedportionsofapriorrulin'gbytheAppellateDivision,SecondDepartmentbyholdingthat(a)LIPA'sPILOTobligationisperpetual,(b)PILOTs,liketaxes,aresubjecttorefundiftheassessmentuponwhichthePILOTswerebasedisdeterminedtobeexcessive,and(c)PILOTsphasedownbytenpercentoftheprioryear'samount,ratherthantenpercentofthefirstPILOTyearamount,untilPILOTsreachalevelthatequalsthetaxesthatwouldhavebeenleviedontheplantinanon-operativestate.Additionally,theCourtmodifiedtheAppellateDivision'srulingbyfindingthatPILOTscommence,notatthetimetheCompanytransferredShorehamtoLIPAinFebruary1992,butratheronDecember1,1992,thebeginningofthenexttaxyear.IUnlessotherwiseagreedbytheparties,theproperassessmentofShorehamforpurposesofdeterminingtheproperamountofPILOTsistobedeterminedinaproceedingchallengingtheShorehamassessmentforthe1992-93taxyear.IfthatdeterminationresultsinPILOTsthatarelessthantheamountofPILOTsthathavealreadybeenpaid,LIPA,andthereforetheCompany,shouldbeentitledtorefundsofexcessivePILOTsalreadymade.ThecostsofShorehamincludedrealpropertytaxesimposedby,amongothers,theTownofBrookhaven,and.werecapitalizedbytheCompanyduringconstruction.TheCompanysoughtjudicialreviewinNewYorkSupremeCourt,SuffolkCountyLonIslandLihtinComanv.TheAssessoroftheTownofBrookhavenetal.oftheassessmentsuponwhichthosetaxeswerebasedfortheyears1976through1992(excluding1979whichhadbeensettled).TheSupremeCourtconsolidatedthereviewofthetaxyearsatissueintotwophases:1976through1983(PhaseI);and1984through1992(PhaseII).InJanuary1996,theCompanyreceivedapproximately$81million,includinginterest,'romSuffolkCountypursuanttorulingbytheSupremeCourt,upheldonappeal,thatfoundthatShorehamhadbeenovervaluedforrealpropertytaxpurposesinPhaseI.280 InNovember1996,theSupremeCourtruledthatShorehamhadalsobeenover-assessedforreal'ropertytaxpurposesfor'PhaseILAjudgmentwasenteredonMarch26,1997intheamountof$868,478,912whichincludesinteresttoNovember4,1996.SuffolkCounty,theTownofrookhavenandtheShorehamWading-RiverCentralSchoolDistricthaveappealedthejudgmentotheAppellateDivision,SecondDepartment.AllbriefshavebeenfiledandoralargumentoccurredonMay6,1998.TheCourtreserveddecision.Iftheassessmentforthe1991-92taxyearisusedtodeterminetheproper'amountofPILOTsthisrulingshouldalsoresultinarefundof'pproximately$260millionplusinterestforPILOTsfortheyears1992-1996.IITherefundofanyrealpropertytaxes,PILOTs,andinterestthereon,netoflitigationcosts;willbeusedtoreduceelectricratesinthefuture.However,thecourt'srulingissubjecttoappealand,asaresult,theCompanyisunabletodeterminetheamountandtimingofanyadditionalrealpropertytaxandPILOTrefunds.EnvironmentalInFebruary1994,alawsuitwasfiledintheUnitedStatesDistrictCourtfortheEasternDistrictofNewYorkbytheTownofOysterBay(Town),'gainsttheCompanyandnineotherPRPs.The'ownisseekingindemnificationforremediationandinvestigationcoststhathavebeenorwillbe'ncurredforafederalSuperfundsiteinSyosset,NewYork,whichservedasaTown-ownedandoperatedlandfillbetween1933and1975.InaRecordofDecisionissuedinSeptember1990,'theEPAsetfortharemedialdesignplan;thecostofwhichwasestimatedat$27millionandisreflectedintheTown'slawsuit.InanAdministrativeConsentDecreeenteredintobetweentheEPAandtheTowninDec'ember1990,theTownagreedtoundertakeremediationatthesite.TheCompanyisparticipatinginajointPRPdefenseeffortwithseveralotherdefendants.'iability,ifimposed,wouldbejointandsev'eral.Anagreementinprincipalhasbeenreachedbetwee'ntheompany,certainotherdefendants,theStateofNewYorkandtheTown;anysettlementissubjectcourtapprovalandifapprovedwouldnothaveamaterialadverseeffectonitsfinancialposition,cashflowsorresultso'foperatioris.InMarch1996,theVillageofAsharokenfiledalawsuitagainsttheCompanyintheNewYorkSupremeCourt,SuffolkCountyIncooratedVillaeofAsharokenNewYorketal.v.LonIslandLihtinComan.TheVillageisseekingmonetarydamagesandinjunctivereliefbasedupontheoriesofnegligence,grossnegligenceandnuisanceinconnectionwiththeCompany'sdesignandconstructionoftheNorthportPowerPlantwhichtheVillageallegesupsetthelittoral'rift,therebycausingbeacherosion.InNovember1996,theCourtdecidedtheCompany'smotiontodismissthelawsuit,dismissingtwoofthethreecausesofaction.TheCourtlimitedmonetarydamagesonthesurvivingcontinuousnuisanceclaimtothreeyearspriortothecommencementoftheaction.TheCompany'sliability,ifany,resultingfromthisproceedingcannoty'etbedetermined.However,theCompanydoesnotbelievethatthisproceedingwillhaveamaterialadverseeffectonitsfinancialposition,cashflowsorresultsofoperations.InJune1996,alawsuitwascommencedagainsttheCompanyintheNewYorkSupremeCourt,SuffolkCountyTownofRiverheadetal.v.LonIslandLihtinComan,inwhichtheplaintiffsseekmonetarydamagesandinjunctivereliefbasedupontheoriesofnuisance,breachofcontract,andbreachofthePublicTrustinconnectionwiththeCompany'sconstructionoftheShorehamNuclearPowerStationandtheCompany'sdiversionandmaintenanceoftheWadingRiverCreek.TheplaintiffsallegethatthediversionoftheWadingRiverCreekandthestructionoftheShorehamNuclearPowerStationhavecausednegativeenvironmentalimpactsurroundingareas.TheplaintiffsalsoallegethattheCompanyhascontractualobligationsto29 performannualmaintenancedredgingoftheWadingRiverCreekandbeachreplenishmentof~,certainbeachfrontproperty.InSeptember1996,theCompanyfiledamotiontodismissthecomplaintonnumerousgrounds.InJanuary1997,theplaintiffscross-movedforanorderseekingpartialsummaryjudgment.TheCourtissuedanOrderdatedAugust26,1997whichdeniedbothmotionsexceptthatitdismissedPlaintiffs'auseofactionallegingviolationofthePublicTrustDoctrineandprohibitedtheTownofRiverheadfromsuinginitssovereigncapacity.Thepartieshavefilednoticesofintenttoappealthisorderanddiscoveryhascommenced.TheCompany'sliability,ifany,resultingfromthisproceedingcannotyetbedetermined.However,theCompanydoesnotbelievethatthisproceedingwillhaveamaterialadverseeffectonitsfinancialposition,cashflowsorresultsofoperations.,HumanResourcesPendingbeforefederalandstatecourts,thefederalEqualEmploymentOpportunity,CommissionandtheNewYorkStateDivisionofHumanRightsarechargesbyseveralindividualsalleging,inseparateactions,thattheCompariydiscriminatedagainstthem,orthattheywerethesubjectofharassment,onvariousgrounds.TheCompanyhasestimatedthatanycoststotheCompanyresultingfromthesematterswillnothaveamaterialadverseeffectonitsfinancialposition,cashflowsorresultsofoperations.InMay1995,eightparticipantsoftheCompany'sRetirementIncomePlan(RIP)'filed.alawsuitagainsttheCompany,theRIPandRobertX.Kelleher,thePlanAdministrator,intheUnitedStatesDistrictCourtfortheEasternDistrictofNewYorkBecheretal.v.LonIslandLihtinC~l.).tJV1996,ICd*dhUiib"iidaction.Thisproceedingaroseinconnectionwiththeplaintiffs'ithdrawal,approximately25yearsago,ofcontributionsmadetotheRIP,therebyresultinginareductionoftheirpensionbenefits.Theplaintiffsarenowseeking,amongotherthings,tohavethesereducedbenefitsrestoredtotheirpensionaccounts.TheCompany'sliability,ifany,resultingfromthisproceedingcannotyetbedetermined.InNovember1997,theCompanyfiledamotionforpartialsummaryjudgmentwiththeDistrictCourt.OnApril28,1998,theCourtdeniedtheCompany'smotionandpermittedtheCompanytofileafurthermotionforpartialsummaryjudgementonadditionalgrounds.TheCompanymaintainsthattheplaintiff'sclaimsarewithoutmeritandintendstodefendagainstsaidclaims.OtherMattersIIAdiscussionoflegalproceedingsrelatedtocompetitiveissuesfacingtheCompanyappearsinNote12ofNotestoFinancialStatements.Item4.NoneSubmissionofMatterstoaVoteofSecurityHolders30 PARTIIItem5.MarketfortheRegistrant'sCommonEquityandRelatedStockholderMatters~~~~tMarch31,1998,theCompanyhad78,314registeredholdersofrecordofcommonstock.ThecommonstockoftheCompanyistradedontheNewYorkStockExchangeandthePacificStockExchange.CertainoftheCompany'spreferredstockseriesaretradedontheNewYorkStockExchange.ThehighandlowmarketpricesoftheCompany'scommonstockanddividendspercommonsharefor1996,1997andthefirstquarterofcalendar1998issetforthonthetablebelow.3MonthsEnded3/31/976/30/97FiscalYearEndedMarch31,19989/30/9712/31/97,3/31/98MarketpriceofcommonstockHighLowDividendspercommonshare24'/,21s/,.44524'/g22,445,26229.44530*'/,24'/s.44531s/s27l5/.445CalendarYearEndedDecember31,19963MonthsEndedMarketpriceofcommonstockHighLowDividendspercommonsharc3/31/961815r/g.4456/30/96177/s16i/s.4459/30/96179,6s/z.44512/31/9622'/,17'/,.44531 Item6.SelectedFinaricialfData(inthousandsofdollarsexceptpcrsharoamounts)ForthecarendedMarch31"1998'h{arch311997December31Dcccmbcr31'995December311994RevenuesElectricGasTotalRcvcnucsOperatingExpensesOperations-fuelandpurchasedpower'Operations-otherh{aintcnsnccDcprcciationandamortizationBasefinancialcomponentamortizationRatemoderationcoinponentamortizationRegulatoryliabilitycomponentamortization1989ScttlcmcntcreditsamortizationOtherregulatoryamortizationOperatingtaxesFederalincometax-currentFcdcralincometax-defcircdandotherTotaltintinincomeOtherIncomeand(Deductions)RatemoderationcomponentcanyingchargesOtherincomoanddeductions,netClassScttlcmcntAllowanceforotherfundsusedduringconstruction"'ederalincometax-currentFederalincometax-dcfcncdandotherTotalOtherIncomeandductionslcornoeorecrearcsInterestChargesInterestonIong.termdebtOtherintcrcstAllowancoforbonowcdfundsusedduiinconstructionTotalIntcrcstChaNetIncomePrcfcnedstockdividendrcuircments"EarnlnsforCommonStockAveraeCommonSharesOutstandin000,S2,478,435645,6593124,094957,807*'400,045111,1201$8,S37100>971(3$,079)(79,359)(9,213)47,272466,32686,388150983$5,79876829623,632'.(18,156)(15,623)3,84659441241$83351,26157,8054,593404473362,24051,813S310,427121415S2;464>95767270$3131,662954,848>>.372,880116,9881$4,921100>971(2,999)(79,359)(9>213)112,294469,S61S2,7371$78732,401,502736,160'5,27913>921(19,89$)2,88672321468372,10866,8183,70435,219322,40952,113S270,2961206202,466,43$6842603,150,695963,251381,076118,13$153,92$100,971(24>232)(79,359)(9,214)127,288472,07642,1911680002,414114736,58125,25919>197(20,772)2,88894027512384,19867,1303699447,629316,46452,216S264,248'120,360$',484,0145911143075128~834,979383,238128,155145>357100,971ZIP33(79,359)(9,214)161>605447,50714,$961937422,343$1073161825,27434>400(21,669)2,89880043703412,S1263,4613,93847035303,2865620S250666119,195$2,481,637$8$6703067307847>986406,014134,640130,664100,971191,656(79,359)(9>214)4,328406>89510,784170997362744,94$32,3213$,343(22,730)2,71650695719437,75162,3454284495812301,8$253020$248832115880S2,352,109528886880995827,S91387,808133,852122,471100>97188,667(79@59)(9,214)(18,044)385,8476,324178$301254447$$$$140,00438>997(23,178)2,47315780874466,S3867,5344210529862296,56356108S24045511057BasicandDilutedEarninserCominonShareS2.56S2.24S2.20S2.10S2.15$2.1$CommonstockdividendsdeclaredpcrshareCommonstockdividendspaidpcrshamBookvsluopcrconunonshareatCommonsharesoutstandingat(000)ConuuonsharcownersofrecordatTotalAssetsLong-TermDebtPreferredStock-redemptionrequiredPreferredStock-noredemptionrequiredCommonShareowners'quity$1.78$1.78S21.88121,68178314$11,900,725$4,381,949$S62,600SS2,662,447$1.78$1.78S21.07120,98777691$11,849>574S4>457,047,$638,$00S63,598$2,$49>049S1.78$1.78S20.89120,78186,60712,209>67$4,456,772638>$0063,6642,523>369$1.78S',1.78S,20;$0119,65$93088S12,S27,597$4,706,600S639>$50S63,934$2,452,953S1.78S1,78S20.21118,41796,491S12,419,289S5,145,397S644,350$63,9$7$2,393,628S1.76S1,75S19.88112@3294877$12,4$3,771S4,870,340S649,150$64,038S2,232/SO32 Item7;'anagement'sDiscussionandAnalysisofFinancialConditionand-ResultsofOperationsNtOnApril11,1997,theCompanychangeditsyearendfromDecember31toMarch31.Accordingly,unlessotherwiseindicated,referencesto1998and1997representthetwelvemonthperiodsendedMarch31,1998andMarch31,1997,respectively,whilereferencestoallotherperiodsrefer.totherespectivecalendaryearsendedDecember31.EffectsofLIPAandKeySpanTransactionsonFutureOperations-,,*ThefutureoperationsandfinancialpositionoftheCompanywillbesignificantlyaffectedbyeachoftheproposedtransactionswithLIPAandKeySpandescribedbelow.Thediscussioncontainedinthismanagement'sdiscussionandanalysisoffinancialconditionandresultsofoperationsdoesnotreflect,unlessotherwiseindicated,thepotentialeffectsofthetransactionswithLIPAandKeySpan.ResultsofOperationsEarningsEarningsfortheyearsendedMarch31,1998andMarch31,1997wereasfollows:(Inmillionsofdollarsandsharesexceptearningspershare)19981997NetincomePreferredstockdividendruirements$362.2$322.451.852.1Eaminsforcommonstock$310.4$270.3AveraecommonsharesoutstandinBasicanddilutedeaminsercommonshare121.4120.6$2.56$2.24ortheyearendedMarch31,1998theCompanyhadhigherearningsintheelectricbusinesspartiallyffsetbylowerearningsinthegasbusinesscomparedtotheyearendedMarch31,1997.Intheelectric'-business,theincreaseinearningsfortheyearendedMarch31,1998,wasprimarilyduetoachangeinthemethodofamortizingtheRateModerationComponent(RMC)toeliminatetheeffectsofseasonalityonmonthlyoperatingincome,asmorefullydiscussedinthesectiontitled"RateModerationComponent."-Thispositivecontributortoearningsmorethanoffsettheeffectsoflowershort-terminterestincomeandtheaccrualsforcertainobligationsforkeyemployees,asmorefullydiscussedinNote8ofNotestoFinancialStatements.VThedecreaseinearningsinthegasbusinessfortheyearendedMarch31,1998resultedfromlowershort-terminterestincomeandtheaccruals,notedabove,partiallyoffsetbyloweroperationsandmaintenanceexpenses.EarningsfortheyearsendedDecember31,1996andDecember31,1995wereasfollows:(Inmillionsofdollarsandsharesexceptearningspershare)NetincomePreferredstockdividendreuirementsEaminsforcommonstockAveraecommonsharesoutstandinBasicanddilutedeaminsercommonshare1996$316.552.2$264.3"120.4$2.201995$303.352.6$250.7119.2$,2.1033 TheCompany's1996earningswerehigherforbothitselectricandgasbusinessesascomparedto1995.WhiletheCompany'sallowedrateofreturnin1996wasthesameas1995,thehigherearningsfortheelectricbusinessweretheresultoftheCompany'sincreasedinvestmentinelectricplantin1996,ascomparedto1995.AlsocontributingtotheincreaseinelectricbusinessearningsweretheCompany'scontinuedeffortstoreduceoperationsandmaintenanceexpensesandtheefficientuseofcashgeneratedbyoperationstoretirematuringdeb't.JTheincreaseinearningsinthegasbusinesswastheresultofadditionalrevenuesduetothecontinuedgrowthinthenumberofgasspaceheatingcustomers.Alsocontributingtotheincreaseingasbusinessearningswasa3.2%rateincreasewhichbecameeffectiveDecember1,1995,andanincreaseinoff-systemgassales.IRevenuesElectricRevenuesThetablebelowprovidesasummaryoftheCompany'selectricrevenues,salesandcustomers.YearsEndedIvlarch31,YearsEnded1)ecember31,Revenues(000)1998199719961995ResidentialCommercialandindustrialOthersystemrevenues$1,206,640$1,199,976$1,205,133$1,204,9871,194,7251,178,4711,174,4991,194,01447,83250,49950,51352,472TotalsystemrevenuesOtherrevenues2,449,19729,2382,428,94636,0112,430,14536,2902,451,47332,541TotalRevenues$2,478,435.,$2,464,957$2,466,435$2,484,014Sales-millionsofkwhResidentialCommercialandindustrialOthersystemsalesTotalsystemsalesCustomers-monthlyaverageResidentialCommercialandindustrial7,1708,37541515,960928,580105,7957,1218,20943715,767922,330104,7037,2038,24244115,886920,930'04,4887,1568,33646015,952915,162103,669YearsEndedMarch311998and1997"TheCompany'selectricrevenu'esfluctuatemainlyasaresultofsystemgrowth,'ariationsinweatherandfuelcosts,aselectricbaserateshaveremainedunchangedsinceDecember1993.However,thesevariations,havenoimpactonearningsduetothecurrentelectricratestructurewhichincludesarevenuereconciliationmechanismtoeliminatetheimpactonearningscausedbysalesvolumesthatareaboveorbelowadjudicatedlevels.TheslightincreaseinrevenuesfortheyearendedMarch31,1998,whencomparedtotheyearendedMarch31,1997,wasprimarilyduetohighersystemsalesvolumes-.resultinginpartfromtheadditionofapproximately8,000newelectriccustomersandhigherfuelexpenserecoveries,partiallyoffsetbylowersalestootherutilities.YearsEndedDecember311996and1995TheCompanyexperiencedagrowthinelectricsystemsalesin1996onaweather-normalizedbasiscomparedto1995.Thisgrowthisprimarilyattributabletotheadditionofnewelectriccustomers.34 Zorafurtherdiscussiononelectricrates,seeNote4ofNotes'toFinancialStatements.GasRevenuesaThetablebelowprovidesasummaryoftheCompany'sgasrevenues,salesandcustomers.IYearsEncedMarch31,Year>Endedl)eccmber31,Revenues(000)199819971996'995ResidentialCommercialandindustrial$390>990.$396,143$414,749,,$365,775145,861163,824~,181>356165,257TotalfirmrevenuesInterruptiblerevenuesTotalsystemrevenuesOtherrevenuesTotalRevenuesSales-thousandsofDthResidentialCommercialandindustrialTotalfirmsalesInterruptiblesalesOfr-systemsalesTotalSalesCustomers-monthlyaverageResidentialCommercialandindustrialTotalfirmcustomersInterruptiblecustomersFirmtransportationcustomers536,85137,565574,41671,243$645,65937,41717,16854,5859,13010,37274>087415>36944,917460,2866883,589559,96742,584602,55170,154$672,70539,28619,34158,6278,39910>03677,062411,73445,684457,418659833596,10537,927634,03250,228$684,26040,85021,05461,9047,8697,45777,230U410,92245,887456,809651349531,03232,837563,86927,245$591,11438,26520,43958,7049,1767,74375,623407,56645,340452,906623YearsEndedMarch311998and1997Despiteanincreaseofapproximately5,600gasspaceheatingcustomers,gasrevenuesdecreasedprimarilyasaresultoflowersalesvolumesduetowarmerweatherexperiencedduringtheyearendedMarch31,1998whencomparedtotheyearendedMarch31,1997.In1998and1997,othergasrevenuestotaled$71millionand$70million,respectively.Includedinothergasrevenuesisoff-systemgassaleswhichtotaled$34millionand$43million,for1998and1997,respectively.Profitsgeneratedfromoff-systemgassalesareallocated85%tofirmgascustomersand15%totheshareowners,inaccordancewithPSCmandates..Off-systemgassalesdecreasedasthedemandfornaturalgasdeclinedasadirectresultofthewarmerweatherexperiencedinthisregionduringthisperiod.YearsEndedDecember311996and1995Theincreasein1996gasrevenueswhencomparedto1995isattributabletoa3.2%gasrateincreasewhichbecameeffectiveonDecember1,1995,highersalesvolumes,anincreaseingasfuelexpenserecoveriesdrivenbyhighersalesvolumes,andrevenuesgeneratedthroughnon-traditionalservices,includingoff-systemgassales.,Therecoveryofgasfuelexpensesin1996whencomparedto1995increasedapproximately$31millionasaresultofhigheraveragegaspricesandincreasedpercustomerusageduetocolderweatherthanexperiencedintheprioryear.In1996and1995,othergas35 revenuestotaled$50millionand$27million,respectively.IncludedinothergasrevenuesisOff-systemgassaleswhichtotaled$37millionand$24millionfor1996and1995,respectively.OperatingExpensesFuelandPurchasedPowerElectricSystemFuelandpurchasedp'owerexpensesfortheyearsendedMarch31,1998and1997,andfortheyears'ndedDecember31,1996and1995wereasfollows:(Inmillionsofdollars),YearsEndedMarch3119981997YearsEndedDecember3119961998FuelforElectricOperationsOilGasNuclearPurchasedower$12319715324$12817015333$15813815329$9814914310Total$659$646$640$571VariationsinfuelandpurchasedpowercostshavenoimpactonoperatingresultsastheCompany'scurrentelectricratestructureincludesa-mechanismthatprovidesfortherecoveryoffuelcostswhicharegreaterthanthecostscollectedinbaserates.Iftheactualfuelcostsarelessthantheamountsincludedinbaserates,thedifferenceiscreditedtotheRMCbalance.ElectricfuelandpurchasedpowermixfortheyearsendedMarch31,1998and1997,andyearsendedDecember31,1996and1995wereasfollows:InthousandsofMWhYearsEndedMarch3119981997YearsEndedDecember3119961995MWhMWhMWhMWhOilGasNuclearPurchasedower3,43420%3,27819%,4,21924%3,09917%621235%546931%454225%634436%15459%1,5539%1,5589%1,301641236%726141%738842%714340%Total17603100%17561100%'7707100%17887100%InMay1997,theCompanycompletedthesecondoftwoplannedconversionsofoil-firedsteamgeneratingunitsatitsPortJeffersonPowerStationtodualfiringunits,bringingthetotalnumberofsteamunitscapableofburningnaturalgastonine.Asaresult,sevenoftheCompany'sninesteamgeneratingunitsarecurrentlydual-fired,providingtheCompanywiththeabilitytoburnthemostcost-efficientfuelavailable,consistentwithseasonalenvironmentalrequirements.YearsEndedMarch311998and1997Electricfuelcostsincreasedasaresultofhighersystemsalesvolumes.During1998,the'priceperkWhofpowerpurchasedincreasedover1997.Asaresult,'theCompanychangedthemixofgenerationandpurchasedpowerin1998whencomparedto1997'bygeneratingmoreelectricityusinggasandoilratherthanpurchasingtheequivalentenergyfromoff-system.36 YearsEitdedDecember311996and1995,*Asaresultofasharpincreaseinthecostofnatural'gas'n1996,generationwithoilbecamemoreeconomicalthangenerationwithgas.Thetotalbarrelsofoilconsumedforelectricoperations'ere7.1millionand5.2millio'nfortheyears1996and1995;respectively.IGasSystem'IVariationsingasfuelcosts.havenoimpactonoperatingresults,astheCompany'scurrentgasrate,structureincludesafueladjustmentclausewherebyvariationsbetweenactualfuel'costsandfuelcostsincludedinbaseratesaredeferredandsubsequentlyreturnedtoorcollectedfromcustomers.EffectiveFebruary5,1998,inaccordancewiththeStipulation,discussedinNote3ofNotestoFinancialStatements,totalgasfuelcostsarerecoveredthroughthegasfueladjustmentclause.YearsEndedMarch311998and1997Gas"systemfuelexpensetotaled$299millio'nand$309million'fortheyear'sendedMarch31,"1998and1997,respectively.Thedecreaseisduetolowerfirmsalesvolumesandloweroff-systemgassalesresultingfromwarmerweatherexperiencedinthisregion"duringthisperiod.YearsEndedDecember311996and19958FortheyearsendedDecember31,1996and1995,gassystemfuelexpensetotaled$323millionand$264million,respectively.Theincreaseof$59millionwasduetohigherfirmsales'volumes,anincreaseintheCompany'saveragepriceofgasandhigheroff-system'gassales.'f/OperationsandMaintenariceExpensesYearsEndedMarch311998and1997perationsandMaintenance(O&M)expenses,excludingfuelandpur'chased'power,were$511millionand$490million,fortheyearsendedMarch31,1998and1997,respectively.ThisincreaseinO&Mwasprimarilyduetotherecognitionofhigherperformance'-basedemployeeincentivesandcertain,other,chargesforemployeebenefitsrelated,totheKeySpan/LILCOmerger.,IIIIIYearsEndedDecember311996and'1995,'&Mexpenses,exclu'dingfuelandpurchasedpower,were$499millionand$511million,fortheyearsendedDecember31,1996and1995,respectively..Thisdecreasein0&M'wasprimarilyduetotheCompany'scostcontainment'programwhich'resultedinlowerplantmaintenanceexpenses;lowerdistributionexpensesandloweradministrativeandgeneralexpenses.'RateModerationComponentTheRateModerationComponent(RMC)representsthedifferencebetweentheCompany'srevenuerequirementsunderconventionalratemakingandtherevenuesprovi'dedoyitselectric'testructure.'naddition,theRMC:isalsoadjustedfortheoperationof'theCompany'sFuelModerationComponent"(FMC)mechanismandthedifferencebetweentheComp'any'sshareofactualoperatingcostsat-'Nine"'ilePointNuclearPowerStation,'Uriit2(NMP2)andamountsprovidedforinelectricrates.37 InApril1998,thePSCauthorizedarevisiontotheCompany'smethodforrecordingitsmonthlyRMCamortization.Priortothisrevision,theamortizationoftheannuallevelofRMCwasrecordedmonthlyonastraight-line,levelizedbasisovertheCompany'srateyearwhichrunsfromDecember1toNovember30.However,revenuerequirementsfluctuatefrommonthtomonthb'asedupontconsumption,whichisgreatlyimpactedbytheeffectsofweather.Underthisrevisedmethod,effectiveDecember1,1997,themonthlyamortizationoftheannualRMClevelvariesbaseduponeachmonth'sforecastedrevenuerequirements,whichmorecloselyalignssuchamortizationwiththeCompany'scostofservice.Asaresultofthischange,forthe'iscalyearendedMarch31,1998,theCompanyrecordedapproximately$65.1millionmoreofnon-cashRMCcreditstoincome(representingaccretionoftheRMCbalance),or$42.5millionnetoftax,representing$.35persharemorethanitwouldhaveunderthepreviousmethod.However,thetotalRMCamortizationfortherateyearendedNovember30,1998,willbeequaltotheamountthatwouldhavebeenprovidedforunderthepreviousmethod.TheCompanycontinuestobelievethatthefullamortizationandrecoveryoftheRMCbalance,whichatMarch31,1998,wasapproximately$434million,willtakeplacewithinthetimeframeestablishedbytheRateModerationAgreement(RMA),inaccordancewiththerateplanssubmittedtothePublicServiceCommissionoftheStateofNewYork(PSC)forthesinglerateyear1997andthethreeyearrateperiod1997through1999.InDecember1997,theCompanyreceivedPSCapprovaltocontinuetheRMCmechanismandtheLILCORatemakingandPerformancePlan(LRPP)ratemakingmechanismsandincentivesfortheelectricrateyearendingNovember30,1997.IntheeventthattheLIPATransactionisnotconsummated,theCompanyexpectsthatthePSCwillissueanorderprovidingfor,amongotherthings,thecontinuingrecovery,throughrates,oftheRMCbalance,oneoftheShoreham-relatedregulatoryassets.IfsuchanelectricrateorderisnotobtainedordoesnotprovideforthecontinuingrecoveryoftheRMCbalance,theCompanymayberequiredtowrite-offtheamountnotexpectedtobeprovidedforinrates.ForafurtherdiscussionoftheLIPATransaction,seeNote2ofNotestoFinancialStatements.YearsEndedMarch311998and1997FortheyearsendedMarch31,1998andMarch31,1997,theCompanyrecordednon-cashcreditstoincomeofapproximately$52millionand$30million,respectively,representingtheamountbywhichrevenuerequirementsexceededrevenuesprovidedforunderthecurrentelectricratestructure.PartiallyoffsettingtheseaccretionsweretheeffectsoftheFMCmechanismandthedifferencesbetweenactualandadjudicatedoperatingcostsforNMP2,asdiscussedabove.TheadjustmentstotheaccretionoftheRMCtotaled$17millionand$27million,respectively,ofwhich$12millionand$23.million,respectively,werederivedfromtheoperationoftheFMCmechanism.YearsEndedDecember311996and1995FortheyearendedDecember31,1996,theCompanyrecordedanon-cashcredittoincomeofapproximately$50million,representingtheamountbywhichrevenuerequirementsexceededrevenuesprovidedforunderthecurrentelectricratestructure.PartiallyoffsettingthisaccretionweretheeffectsoftheFMCmechanismandthedifferencesbetweenactualandadjudicatedoperatingcostsforNMP2.TheadjustmentstotheaccretionoftheRMCtotaled$26million,ofwhich$24million,'asderivedfromtheoperationoftheFMCmechanism.38

,FortheyearendedDecember31,1995,theCompanyrecordedanon-cashchargetoincomeofapproximately$22million,aftergivingeffecttothecreditsgenerated.principallybytheoperationoftheFMCmechanism.FMCcreditsfor1995totaledapproximately$87million.t1ForafurtherdiscussionoftheRMC,seeNote4ofNotestoFinancialStatements.OtherRegulatoryAmortizationThesignificantcomponentsofotherregulatoryamortizationarethefollowing:InmillionsodollarsIncomeExenseYearsEndedMarch31YearsEndedDecember31NetMarginLRPPAmortizationExcessEarnings-ElectricExcessEarnings-GasShorehamPostSettlementCostsOther1998$2(3)10317$471997$(5)4221103014$1121996$35910102916$1271995$6453312714$162NetMargin-Anelectricbusinessunitrevenuereconciliationmechanism,establishedundertheLRPP,whicheliminatestheimpactonearningsofexperiencingsalesthatareaboveorbelowadjudicatedlevelsbyprovidingafixedannualnetmarginlevel(definedassalesrevenue,netoffuelandgrossreceiptstaxes).Variationsinelectricrevenueresultingfromdifferencesbetweenactualandadjudicatednetmarginsaleslevelsaredeferredonamonthlybasisduringtherateyearthroughachargeorcredittootherregulatoryamortization.Thesedeferralsarethenrefundedtoorrecoveredtfromratepayersasexplainedbelowunder"LRPPAmortization."LRPPAmortization-AsestablishedundertheLRPP,deferredbalancesresultingfromthenetmargin,electricpropertytaxexpensereconciliation,earnedperformanceincentives,andassociatedcarryingchargesareaccumulatedduringeachrateyear.Thefirst$15millionofthetotaldeferralisrecoveredfromorcreditedtoelectricratepayersbyincreasingordecreasingtheRMCbalance.Amountsdeferredinexcessof$15million,uponapprovalbythePSC,"arerefundedtoorrecoveredfromratepayersthroughtheFuelCostAdjustment(FCA)mechanismoverasubsequent12-monthperiod,withtheoffsetbeingrecordedinotherregulatoryamortization.FortherateyearsendedNovember30,1997and1996,thetotalamountdeferredundertheLRPPwas$4.0and$15.0million,respectively.SuchamountswerecreditedagainsttheRMCbalance.YearsEndedMarch311998and1997FortheyearendedMarch31,1998,therewasnoLRPPamortization,astheCompanyhasnotyetreceivedapprovalfromthePSCtobeginrefunding$26millionoftheremainingdeferredLRPPbalanceinexcessof$15millionfortherateyearendedNovember30,1995.FortheyearendedMarch31,1997,theCompanyrecognized$42.4millionofnon-cashchargestoincomerepresentingtheamortizationofthedeferredLRPPbalancerelatedtotherateyearendedNovember30,1994.39 YearsEndedDecember311996and1995FortheyearendedDecember,3'1,1996,theCompanyrecognized$58.7millionofnon-cashchargestoincomerepresentingtheamortizationofthedeferredLRPPbalancerelatedtotherateyearendedNovember30,1994.FortheyearendedDecember31,1995,theCompanyrecognized$52.9millionofnon-cashchargestoincomerepresentingtheamortizationofthedeferredLRPP.balancerelatedtotherateyearendedNovember30,1993..Forafurtherdiscussion'oftheLRPP,see'Note4ofNotestoFinancialStatements.ExcessEarnings-Alsorecordedinotherregulat'oryamortization,ifapplicable,arenon-cashchargesrepresenting:(a)100%ofelectricearningsgeneratedbytheCompanyinexcessofamountsprovidedforinelectricrates,whichisreturnedtotheelectriccustomer,,throughareductiontotheRMCbalance;and(b)50%ofthegasearningsgeneratedbytheCompanyinexcessofamountsprovidentfoiingasrates,whichwillbe'returnedtothefirmgascustomers.EffectiveFebruary5,1998,the'Company,-inaccordance'withtheStipulation,discussedinNote3ofNotestoFinancialStatements,establishedagasbalancingaccountinordertodeferexcessgasearningsforfuturedisposition.FortherateyearendedNovember30,1997,theelectricbusinessearned$4.8millioninexcessofitsallowedreturnoncommonequity'and'thefirmgascustomers'ortionofthegasbusinessearningswas$6.3million.tShoreham'Pos'tSettlementCosfs-Representstheamortizationof-Shorehamdecommissioningcosts,=-fueldisposalcosts,payments'-in-lieu-'of-taxes,carryingchargesandothercostsoveraforty-yearperiodonastraightlineremaining'lifebasis.1Pll'It,YearsEndedMarch311998and1997pOtherregulatoryamortizationwasanon-"cashchargetoincome.of$47millionand$112,millionforthsendedMarch31,'1998and1997.;respectively.For,theyearendedMarch31,,1997;theCompanyrecognizeda'pproximately$42millionofchargesrepresentingtheamortizationofthedeferredLRPPbalanceassociatedwiththerateyearended'Noveinber30;~1994.,FortheyearendedMarch31,1998,therewasno,LRPPamortizatio'n,as.the;Compariyhasnotyet"receivedapproval.fromthePSC;tobegin.refunding$26millionofthe.remainingdeferredLRPPbalanceinexcessof$15millionfor.therate'year'endedNovember30,1995.Alsocontributingtothedecreaseinother,regulatory,amortization.wasthetimingoftherecognitionofelectricexcessearningsfortherateyearsen/edNovember30,1997and1996.pYearsEndedDecember311996and1995Otherregulatoryamortizationwasanon-cashchargetoincomeof$127millionand$162;million.fortheyearsendedDecember31,1996and1995,respectively.Thisdecreaseisprimarilyattributabletotheoperationofthenetmargin;discussedabove.FortheyearendedDecember31,1995,theamountdeferredrelatedtothenetmarginamountedto$64millioncompare'dto$3:millionfortheyearendedDecember31,.1996.V1It'gH40 DperdtingTaxesOperatingtaxeswere$466millionand$470millionfortheyearsendedMarch31,1998and1,997trespectively.Thedecreasein1998isprimarilyattributabletotheexpirationoftheCorporateTaxSurchargeandlowergrossreceiptstaxesrelatedtolowergasrevenues.FortheyearsendedDecember31,1996and1995,operatingtaxeswere$472millionand$448million,respectively.Theincreasein1996comparedto1995isprimarilyrelatecltohigherpropertytaxesandhighergrossreceiptstaxes,duetoincreasedrevenues.FederalIncomeTaxFederalincometaxwas$233millionand$211millionfortheyearsendedMarch311998and1997,respectively.FortheyearsendedDecember31,1996andDecember31,1995,federalincometaxwas$209millionand$206million,respectively.Theincreaseinfederalincometaxforbothperiodswasprimarilyattributabletohigherpre-taxearningspartiallyoffsetbytheutilizationofinvestmenttaxcredits.4OtherIncomeandDeductions,NetYearsEndedMarch311998and1997Otherincomeand'deductionswasa$18millionchargetoincome.fortheyearendedMarch.31,1998,comparedtoa$14millioncredittoincomeforthesameperiodin1997.Thedifference,whichamountstoapproximately$32million,relatesprimarilytoachargeofapproximately$31millionwithrespecttocertainbenefitsearnedbyitsofficersrecordedin1998.Forafurtherdiscussionofthismatter,seeNote8ofNotestoFinancialStatements.tYearsEndedDecember311996and1995Otherincomeanddeductionstotaled$19millionfortheyearendedDecember31,1996,comparedto$34millionforthesameperiodin1995.Thedecreasein1996whencomparedto1995isprimarilyattributabletotherecognitionofnon-recurringexpendituresassociatedwithoneoftheCompany'swholly-ownedsubsidiaries,adecreaseinnon-cashcarryingchargeincomeassociatedwithregulatoryassetsnotcurrentlyinratebaseandtherecognitionin1995ofcertainlitigationproceedsrelatedtotheconstructionoftheShorehamNuclearPowerStation.Interest'Expense'earsEndedMarch311998and1997InterestexpensefortheyearendedMarch31,1998totaled$409millioncomparedto$439millionfortheyearendedMarch31,1997.ThisdecreaseisprimarilyattributabletoloweroutstandingdebtlevelsastheCompanyretired$250millionofG&RBondsinFebruary1997.YearsEndedDecember311996and1995InterestexpensefortheyearendedDecember31,1996totaled$451millioncomparedto$476millionfortheyearendedDecember31,1995.Thisdecreaseisprimarilyattributabletoloweroutstandingdebtlevels,partiallyoffsetbyhigherletterofcreditandcommitmentfeesassociatedwiththechangeintheCompany'screditratin'gin1996.III41 heCompany'sheresultof,amongLiquidityandCapitalResourcesLiquidityFortheyearendedMarch31,1998,cashgeneratedfromoperationsexceededtoperating,constructionanddividendrequirements.Thispositivecashflowistotherthings:(i)theCompany'scontinuingeffortstocontrolbothO&Mexpensesandconstructionexpenditures;(ii)lowerinterestpaymentsresultingfromlowerdebtlevels;and(iii)lowerfuelexpenditures.AtMarch31,1998,theCompany'scashandcashequivalentsamountedtoapproximately$181million,comparedto$65millionatMarch31,1997.Inaddition,the'CompanyhasavailableforitsusearevolvinglineofcreditthroughOctober1,1998,providedbyits1989RevolvingCreditAgreement(1989RCA).ThislineofcreditissecuredbyafirstlienupontheCompany'saccountsreceivableandfueloilinventories.InJuly1997,theCompanyutilized$40millionininterimfinancingundertheRCA,whichwasrepaidinAugust1997.TheCompanywill,inordertosatisfyshort-termcashrequirements,continuetoavailitselfofinterimfinancingthroughtheRCA,asnecessary.Forafurtherdiscussionofthe1989RCA,seeNote7ofNotestoFinancialStatements.TheCompanydoesnotintendtoaccessthefinancialmarketsduring1998tomeetanyofitsongoingoperating,constructionorrefundingrequirements.However,theCompanywillavailitselfofanytax-exemptfinancingmadeavailabletoitbytheNewYorkStateEnergyResearchandDevelopmentAuthority(NYSERDA).TheCompanyusedcashonhandtosatisfytheretirementof$100millionofG&RBondswhichmaturedonApril15,1998.InDecember1997,theCompanyreceived$24.5millioninnetproceedsfromthesaleofElectricFacilitiesRevenueBonds(EFRBs)issuedbyNYSERDA.Theproceedsfromthisofferingwereused,toreimbursetheCompany'streasuryforamountspreviouslyexpendedonelectricnon-nucleargenerationprojects.LWithrespecttotherepaymentof$454millionofmaturingdebtand$22millionofmaturingpreferredstockin1999andtherepaymentof$37millionofmaturing,debtand$363millionofmaturingpreferredstockin2000,shouldtheLIPATransactionnotclose,theCompanyintendstousecashgeneratedfromoperationstothemaximumextentpracticable.PursuanttothetermsoftheLIPATransaction,eachissuedandoutstandingshareoftheCompany'spreferredstockthatissubjecttooptionalredemptionwillbecalledforredemptionatorbeforeclosingoftheLIPATransaction.TheLIPATransactionprovidesforrepaymenttotheCompany,atclosing,fortheprincipalamountofthepreferredstocktoberedeemed.,Accordingly,onApril17,1998,theCompanyexerciseditsoptionandcalledforredemptiononMay]9,1998,alltheoutstandingsharesofitsPreferredStockSeriesB,D,E,F,H,I,L,andNN.TheredemptionofthesePreferredStockSeriesamountedto$122millionwhichincludedapproximately$5millionofredemptionpremiums.TheCompanyusedcashgeneratedfromoperationsandtheutilizationofinterimfinancingthroughits1989RCAtofinancetheredemption.IntheeventtheLIPATransactionisnotconsummated,theCompanymayelecttoaccessthecapitalmarketsforpermanentfinancingtoreplacethePreferredStockredeemed.In1990and1992,theCompanyreceivedRevenueAgents'eportsdisallowingcertaindeductionsandcreditsclaimedbytheCompanyonitsfederalincometaxreturnsfortheyears1981through1989.AsettlementresolvingallauditissueswasreachedbetweentheCompanyandtheInternalRevenue42 ServiceinMay1998.Thesettlementprovidedforthepaymentoftaxesandinterestofapproximately$9millionand$35million,respectively,whichtheCompanymadeinMay1998.InMay1998,theCompanyfundedcertainofitsobligationsforpostretirementbenefitsotherthanpensionsinordertotakeacurrenttaxdeduction.TheCompanysecuredabridgeloanof$250milliontofundVoluntaryEmployee'sBeneficiaryAssociationtrusts.TheCompanyintends.torepaythisbridgeloanupontheclosingoftheLIPATransaction.CapitalizationTheCompany'scapitalization,includingcurrentmaturitiesoflong-termdebtandcurrentredemptionrequirementsofpreferredstock,atMarch31,1998and1997andDecember31,1996and1995,was$7.8billion,$7.7billion,$7.9billionand$8.3billion,respectively.AtMarch31,1998and1997andat,December31,1996and1995,theCompany'scapitalizationratioswereasfollows:1998March311997December3119961995LongtermdebtPreferredstockCommonshareowners'quity57.3%9.033.7578%9.133.1593%8.931.861.8%8.629.6IPPP%IPPP%100.0%1PPPInsupportoftheCompany'scontinuinggoaltoreduceitsdebtratio,theCompany,inFebruary1997,retiredatmaturity$250millionofG&RBondswithcashonhandandbyutilizinginterimfinancingof$30million,whichwasrepaid.inMarch1997.TheCompanyusedcashonhandtosatisfythe$100~~millionofG&RBondswhichmaturedinApril1998.nvestmentRatingTheCompany'ssecuritiesareratedbyStandardandPoor's(S&P),Moody'sInvestorsService,Inc.(Mo'ody's),FitchIBCA,Inc.(Fitch)andDuff&PhelpsCreditRatingCo.(D&P).AtMarch31,1998,theratingsforeachoftheCompany'sprincipalsecuritieswereasfollows:S&P,Moody'sFitchD&PG&RBondsDebenturesPreferredStockBBBBB+BB+Baa3BalbalBBB-BB+BB-BBBBB+BBMinimumInvestmentGradeBBB-Baa3BBB-BBB-BoldfaceindicatessecuritiesthatmeetorerceedminimuminvestmentgradeDuringMarch1998,followingtheannouncementthattheCompanyreceivedfavorabletaxrulingsfromtheIRSwithrespecttotheLIPATransaction,Moody'sraisedtheratingsoftheCompany'sG&RBondstoBaa3fromBal;itsdebenturestoBalfromBa3anditspreferredstocktobalfromba3.DuringOctober1997,S&PannouncedthatitraisedtheCompany'sG&RBondsratingsonenotchtoBBBfromBBB-.TheupgraderesultedfromS&Pincorporatingintoitsratingsofcorporateissuesamorevigorousanalysisofultimaterecoverypotentialtosupplementtheanalysisofdefaultrisk.The043 incorporationofultimaterecoveryriskisparticularlyimportantforratingsofelect'ric,gas;and'water"~utilityseniorsecureddebt.If,in~S&P.'sanalytical.conclusion,fullrecoveryofprincipalcanbeanticipatedinapost-defaultscenario,anissue'sratingmaybeenhancedabovethecorporatecreditratingordefaultrating.UUCapitalRequirementsandCapitalProvided.~UlCapitalrequirementsandcapitalprovided.fortheyearendedMarch31,1998,thethreemonthsendedMarch31,1997andtheyearendedDecember31,1996,wereasfollows:(InMillionsofDollars)CapitalRequirementsConstruction'-'U.YearEnded,March31,1998'$257ThreeMonthsEndedMarch31,1997$50YearEndedDecember31,1996$240RedemptionsandDividendsLong-termdebtPreferredstockPreferredstockdividendsCommonstockdividendsI,,250.415I5521352'16,54214TotalRedemptionandDividendsShorehampost-settlementcosts,InvestmentininterestratehedgeTotalCapitalRequircmcnts2704030$59731712,$37968652."$978CapitalProvidedCashfromoperations(Increase)DecreaseincashbalancesLongtermdebtissuedCommonstockissuedOtherinvestingandfinancingactivitiesTotalCapitalProvided$8927119)$160215'(I),.,$674(116)2518,(4)~(4$597.,~$379$978Excludesnon-cashallowanceforotherfitndsusedduringconstruction.eForfurtherinformation,seetheStatementofCashFlows.FortheyearendedMarch31,1999,totalcapitalrequirements(excluding'commonstock.dividends)areestimatedtobe$589million,ofwhichmaturingdebtis$101million,constructionrequirementsare$266million,preferredstockdividendsare$45million,redemptionsofpreferredstockare$144'illionandShorehampost-settlementcostsare$33million(including$31millionforpayments-in-lieu-of-taxes).TheCompanybelievesthat'cashgeneratedfromoperationscoupledwithcashbalanceswillbesufficienttomeetallcapitalrequirementsduringthisperiod.IOtherMattersLongIslandPowerAuthorityTransactionForadiscussionoftheLongIslandPowerAuthorityTransaction,seeNote.2ofNotes,toFinancial'tatements,Ul'ti'itIIIil'IKeySpanEnergyCorporationTransactionForadiscussionoftheKeySpanEnergyCorporatio'nTransaction,seeNote3ofNotestoFinancialStatements..'ji'i44

'R'ateM'attersForadiscussionofRateMatters,seeNote4ofNotestoFinancialStatements...'ICompetitiveEnvironmentForadiscussionofCompetitiveissuesfacingtheCompany,seeNote12ofNotestoFinancialStatements.IEnvironmentalMattersIIGeneralI~rTheCompany'sordinarybusinessoperationsnecessarilyinvolvematerialsandactivitieswhichsubjecttheCompanytofederal,stateandlocallaws,'rulesandregulationsdealingwiththeenvironment,includingair,waterandlandquality.TheseenvironmentalrequirementsmayentailsignificantexpendituresforcapitalimprovementsormodificationsandmayexposetheCompanytopotentialliabilitieswhich;incertaininstances,'aybeimposedwithoutregardtofaultorforhistoricalactivitieswhichwerelawfulatthetimeth'eyoccurred}!'i'I,Lawswhichmayimposesuchpotentialliabilitiesinclude(butarenotlimitedto)thefederalComprehensiveEnvironmentalResponse,CompensationandLiabilityAct(CERCLA',commonlyknownasSuperfund),thefederalResourceConservationandRecoveryAct,thefederalToxic'ubstancesControlAct(TSCA),thefederalCleanWaterAct(CWA),andthefederalCleanAirAct(CAA).'I'apitalexpendituresforenvironmentalimprovementsandrelatedstudiesamountedtoapproximately$9.2millionfortheyearendedMarch31,1998and,basedonexistinginformation,areexpectedtobe$4.0millionfortheyearendedMarch31,1999.Theexpendituresinfiscalyear1998andexpected.spendinginfiscalyear1999includeatotalof$10.6millionforthecompletionofagas-firingcapabilityprojectatNorthportUnit1andPortJeffersonUnit4.IIIItisnotpossibletoascertainwithcertaintyiforwhenthevariousrequiredgovernmentalapprovalsfor,whichapplicationshavebeenmadewIlfbeissued,orwhether,exceptasnotedbelow,additionalfacilitiesormodificationsofexistingorplannedfacilitieswillberequiredor,generally,whateffectexistingorfuturecontrolsmayhaveuponCompanyoperations.ExceptassetforthbelowandinItem3-"LegalProceedings,"nomaterialproceedingshavebeencommencedor,totheknowledgeoftheCompany,arecontemplatedbyanyfederal,stateorlocalagencyagainsttheCompany,noristheCompanyadefendantinanymateriallitigationwithrespecttoanymatterrelatingtotheprotectionoftheenvironment.RecoverabilioEnvironmentalCosts'TheCompanybelievesthatnoneoftheenvironmentalmatters,discussedbelow,willhaveamaterialadverseimpactontheCompany'sfinancialposition,cashflowsorresultsofoperations.Inaddition,theCompanybelievesthatallsignificantcostsincurredwithrespecttoenvironmentalinvestigationandremediationactivities,notrecoverablefrominsurancecarriers,willberecoverablefromitscustomers.AirIIII'ederal,stateandlocalregulationsaffectingnewandexisting.electricgenerating,plantsgovernemissionsofsulfurdioxide(SO2),nitrogenoxides(NOx),particulatematter,and,potentiallyinthefuture,fineparticulatematter(aerosolsofSO2),hazardousairpollutantsandcarbondioxide(CO>).45 SulfurDioxideRequirements~~)~Thelawsgoverningthesulfurcontentofthefuel-oilbeingburnedbytheCompanyincompliancewiththeUnitedStatesEnvironmentalProtectionAgency(EPA)approvedAirQualityStateImplementationPlan(SIP)areadministeredbytheNewYorkStateDepartmentofEnvironmental'Conservation'DEC).The.Companydoesnotexpecttoincuran/'coststosatisfythe1990amendmentstothefederalCAAwithrespecttothereductionofSO2emissions,astheCompanyalreadyusesnaturalgasandoil"withacceptablylowlevelsofsulfurasboilerfuels.Thesefuelsalsoresultinreducedvulnerabilitytoanyfuturefineparticulatestandardsimplementedintheformofstringentsulfurdioxideemissionlimits.TheCompany'suseoflowsulfurfuelshasresulted,andwillcontinuetoresult,inapproximately70,000.excessSOzallowancesperyearthroughtheyear1999.TheCompanypresentlyappliestheproceedsresultingfromanysalesofexcessS02allowancesasareduction.totheRMCbalance."I4'TheCompanyenteredintoavoluntaryMemorandumofUnderstandingwiththeDECwhichprovidesthattheCompanywillnotsellSO2allowancesforusein15statesinaneffortto,mitigatethetransportofacidrainprecursorsintoNewYorkStatefromupwindstates.I*NitrogenOxidesRequirements.DuetotheCompany'spr'oIgramofcost-'effectiveemission'reductions,includingtheoptimizationofnaturalgasfiringabilityatalmostallthesteamelectricgenerating'tations,theCompanyhadthe""'owestNOxemissionsrateofalltheutilitiesinNewYorkStatefortheyearsendedDecember31,1997,1996and1995.SincetheCompany'sgeneratingfacilitiesarelocatedwithinaCAAAmendment-designatedozonenon-attainmentarea,they'resubjec'ttoNOreductionrequirementswhicharebeingimplementedin'threephases.PhaseIwascompletedin1995;PhaseIIandPhaseIIIwillbecompletedin1999and2003',respectively.4ITheCompanyiscurrentlyincompliancewithPhaseINOreductionrequirements.Itisestimatedthat~additionalexpendituresofapproximately$1millionwillberequiredtomeetPhaseIINOreductionrequirements.Subjectto'requirementsthatareexpectedtobepromulgatedinforthcomingregulations,theCompanyestimatesthatitmayberequiredtospendanadditional$10millionto$34million,excludingtheNorthportUnit1'conversion,bytheyear2003tomeetPhaseIIINOreductionrequirements.'Thecompletionoftheprojecttoaddgas-firingcapabilityatNorthport'Unit1(completedinMay1998ata,total'costofapproximately$8.4'million)willalsofacilitatethe'ompany'scomplian'cewiththeanticipatedPhaseIIINoreductionrequirements.ContinuousEmissionMonitoringAdditionalsoftwareandequipmentupgradesforContinuousEmissionsMonitorsofapproximately$2millionmayberequiredthrough1999atallgeneratingfacilitiesinordertomeetEPArequirementsunderdevelopmentfortheNO'llowancetracking/tradingprogram.414HazardousAirPollutantsUtilityboilersarepresentlyexemptfromregulationassourcesofhazardousairpollutantsuntiltheEPAcompletesastudyoftherisks,ifany,topublichealthreasonablyanticipatedtooccurasaresultofemissionsbyelectricgeneratingunits.TheEPAisexpectedtomakeadeterminationconcerningtheneedforcontrolofhazardousairpollutantsfromutilityfacilitiesin1998.Untilsuchdeterminatio'nIIII46

.is'madebytheEPA,the:.Companycannotfullyascertainwhat,.ifany,costswill'beincurredforthecontrolofhazardousairpollutants.l'However,aftertheexpenditureofapproximately$1.5millioninfiscal,1998andtheplannedspending'f$0.5millionthroughMarch,31,:1999,forelectrostaticprecipitatorupgradesand,withthemaximizationofcleanburningnaturalgasastheprimaryfuel,hazardous'irpollritantregulations,ifenacted,shouldnotimposeanyadditionalcontrolrequirementsfortheCompany'sfacilities.CarbonDioxideRequirements,CO2emissionsfromthe.Company.'splantshavebeenreducedbyapproximately23%since1990,largelythroughgreaterrelianceontheuseofnaturalgasandthroughconservationprograms.ThismakestheCompanylessvulnerabletofutureCO2reductionrequirements.i"ffrtOpacityIssuesv8~4fTheDEChasproposedcommencingenforcementactionsagainst'allNew'orkutilities"for=alle'gedopacityexceedencesfromsteamelectricgeneratingfa'cilities."'Op'acityis'ameasureofthe:relativeleveloflightthatis'obscuredfrompassingthr6ughapowerplantstackemissionplume.An'"exceedenceoccurswh'entheleveloflightpassingthroughtheplumeisreducedbymorethan20%forsixminutesormore.TheCompanyhasenteredintoanAdministrativeConsentOrder(ACO)withtheDECwhichresolvesallhistoricalopacityexceedences,establishesanopacityreductionprogramtobeundertakenbytheCompany,andsetsastipulatedpenalty,scheduleforfutureexceedences.Thenumberofexceedences'experiencedbytheCompanyisrelatively,low',placingtheCompanyamong'hebestperformersinNew'YorkState."lectromagneticFieldslectromagneticfields(EMF)occurnaturallyandalsoareproducedwhereverthereiselectricity.hesefieldsexistaroundpowerlinesandotherutilityiequipment.TheCompanyisincompliancewithallapplicableregulatorystandardsand..requirementsconcerningEMF.TheCompanyalsomonitorsscientificdevelopmentsigthestudyofEMF,hascontributedtofundingforresearchefforts,andisactivelyinvolvedincustomerandemployeeoutreachprogramstoinformthecommunityof.EMFdevelopmentsastheyoccur.AlthoughanextensivebodyofscientificliteraturehasnotshownanunsafeexposureleveloracausalrelationshipbetweenEMFexposureandadversehealtheffects,concern'overthepotentialforadversehealtheffectswilllikelycontinuewithoutfinalresolutionfor'ometime.Todate,fourresidentialpropertyownershaveinitiatedseparatelawsuitsagainsttheCompan'yallegingthattheexistenceofEMFhasdiminishedthevalue'oftheirhomes,Theseactionsareinthepreliminarystagesofdiscoveryandare'similartoactionsbroughtagainstanotherNewYorkStateutility,whichweredismissedbytheNew'YorkStateCourtofAppeals.TheCompanyisnot"'nvolvedinanyactivelitigationthatallegesacausalrelationshipbetw'eenexposuretoEMFandadveisehealtheffects.'INtWaterUnderthefederalCWAandtheNewYorkStateEnvironmentalConservationLaw,theCompanyisrequiredtoobtainaStatePollutantDischargeEliminationSystempermittomakeanydischargeintothewatersoftheUnitedStatesorNewYorkState.TheDEChasthejurisdictiontoissuethesepermitsandtheirrenewalsandhasissuedpermitsfortheCompany'sgeneratingunits:Thepermitsallowthecontinueduseofthecirculating'watersystemswhichhavebeendeterminedtobeincompliancewith47 statewaterqualitystandards.Thepermitsalsoallowforthecontinueduseofthechemicaltreatment"~systemsandforthecontinueddischargeofwaterinaccordancewithapplicablepermitlimits.Infiscalyear1998,th'eCompanyspentapproximately$300,000toupgradeitswastewatertreatmentfacilitiesandforothermeasuresdesignedtoprotectsurfaceandgroundwaterqualityand.expectstospendanadditional$100,000intheyears1998-2000.rrrkILongIslandSoundTransmissionCablesDuring1996,theConnecticutDepartmentofEnvironmentalProtection(DEP)issuedamodificationtoanAdministrativeConsentOrder(ACO)previouslyissuedinconnectionwithaninvestigationofanelectrictransmissioncablesystemlocatedundertheLongIslandSound(SoundCable)thatisjointlyownedbytheCompanyandtheConnecticutLightandPowerCompany(Owners).ThemodifiedACOrequirestheOwnerstosubmittotheDEPandDECaseriesofreportsandstudiesdescribingcablesystemcondition,operationandrepairpractices,alternativesforcableimprovementsorreplacementandenvironmentalimpactsassociatedwithleaksoffluidintotheLongIsland.Soundwhichhaveoccurredfromtime,totime.TheCompanycontinuestocompilerequiredinformationandcoordinatetheactivities,necessarytoperformthesestudiesand,atthepresenttime,isunabletodeterminethecostsitwillincurtocompletetherequirementsofthemodifiedACOortocomplywithanyadditionalrequirements.'ITheOwnershavealsoenteredintoanACOwiththeDECasaresultofleaksofdielectricfluidfromtheSoundCable.TheACOformalizestheDEC'sauthority,toparticipateinandseparatelyapprovethereport'sandstudiesbeingpreparedpursuanttotheACOissuedbytheDEP.Inaddition,theACOsettlesanyDECclaimfornaturalresourcedamagesinconnectionwithhistoricalreleasesofdielectricfluidfromtheSoundCable.InOctober1995,theU.S.AttorneyfortheDistrictofConnecticuthadcommencedaninvestigationregardingoccasionalreleasesoffluidfromtheSoundCable,aswellasassociatedoperatingandmaintenancepractices.TheOwnershaveprovidedtheU.S.Attorneywithallrequesteddocumentation.TheCompanybelievesthatallactivitiesassociatedKiththeresponsetooccasionalreleasesfromtheSoundCablewereconsistentwithle'galandregulatoryrequirements.rrInDecember1996,abarge,ownedandoperatedbyathirdparty,droppedanchorwhichthendraggedoveranddamagedtheSoundCable,resultinginthereleaseofdielectricfluidinto.LongIslandSound.Temporaryclampsandleakabaterswereinstalledonthecablestostoptheleaks.PermanentrepairswerecompletedinJune1997.ThecosttorepairtheSoundCablewasapproximately$17.8million,forwhichtherewas$15millionofinsurance,coverage.TheOwnersfiledaclaimandanswerinresponsetothemaritimelimitationproceedinginstitutedbythebargeownerintheUnitedStatesDistrictCou~rEasternDistrictofNewYork.Theclaimseeksrecoveryoftheamountspaidbyinsurancecarriersandrecoveryofthecostsincurredforwhichtherewasnoinsurancecoverage.AnycoststorepairtheSoundCablewhicharenotreimbursedbyathirdpartyorcoveredbyinsurancewillbesharedequallybytheOwners.LandrSuperfundimposesjointandseveralliability,regardlessoffault,upongeneratorsofhazardoussubstancesfoicostsassociatedwithenvironmental,cleanupactivities.Superfundalsoimposesliabilityforremediationofpollutioncausedbyhistoricalactswhichwerelawfulatthetimetheyoccurred.48

.Inthe'courseoftheCompany'sordinarybusinessoperations,the'CompanyisinvolvedinthehandlingofmaterialsthataredeemedtobehazardoussubstancesunderSuperfund.These-materialsincludeasbestos,metals,certainflammableandorganiccompoundsanddielectricfluidscontainingpolychlorinatedbiphenyls(PCBs).OtherhazardoussubstancesmaybehandledintheCompa'ny's'~operationsormay,bepresentatCompanylocationsasaresultofhistoricalpracticesbytheCompanyoritspredecessorsininterest.TheCompanyhas,receivednoticeconcerningpossibleclaimsunder;~'uperfundoranalogousstatelawsrelatingtoanumber,ofsitesatwhichjtisallegedthathazardoussubstancesgenerated,bytheCompanyandotherpotentially.responsibleparties(PRPs).weredeposited:Adiscussionofthesesitesissetforthbelow.EstimatesoftheCompany,'sallocatedshare'ofcostsforinvestigative,removalandremedialactiyItiesatthesesites~rangePorn,preliminarytorefinedandareupdatedasnewinformationbecomesavailable.InDecember1996,theCompanyfiledacomplaintintheUnitedStatesDistrictCourtfor,theSouthernDistrictofNewYorkagainst14oftheCompany'sinsurers,whichissuedgeneralcomprehensive,.liability(GCL)policiestotheCompany.InJanuary1998,.theCompanycommencedasimilar,actionagainstthesameandcertainadditionalinsurerdefendantsinNewYorkStateSupremeCourt,FirstDepartment;thefederalcourtactionwassubsequentlydismissedinMarch1998.TheCompanyis;..seekingrecoveryundertheGCLpoliciesforthecostsincurredtodateandfuture,costsassociatedwiththeclean-upoftheCompany'sformermanufacturedgasplant(MGP)sitesandSuperfundsitesforwhichtheCompany,hasbeennamedaPRP.TheCompanyisseekingadeclaratoryjudgment'thatthedefendantinsurersareboundbythetermsoftheGCLpolicies,subjecttothestatedcove'r'age'limits,toreimbursetheCompanyforthe.'cleanupcosts.,Theoutcomeofthisproceedingcannotyetbe..,,'etermined.S~ZSVMetalBankTheEPAhasnotifiedtheCompanythatitisoneofmanyPRPsthatmaybeliablefortheremediationofalicenseddisposalsitelocatedinPhiladelphia,Pennsylvania,andoperatedbyMetalBankofAmerica.TheCompanyandnineotherPRPs,allofwhicharepublicutilities,completedperforman'ceofaRemedialInvestigationandFeasibilityStudy(Rl/FS),whichwasconductedunder'anAGOwith'theEPA.InDecember1997,theEPAissueditsRecordofDecision(ROD),settingforththe:.final~'remedialactionselectedforthesite.IntheROD,theEPAestimatedthatthepresent'costofthe-selectedremedyfor'the'siteis$17.3million.Atthistime,theCompanycan'notpredictwith'reasonablecertaintytheactualcostoftheselectedr'emedy,whowillimplementtheremedy,'rthecost;ifany",totheCompany.UnderaPRPparticipatioriagreement,"'theCompanypreviouslywasresponsible'for"'.2%ofthecostsassociatedwiththeRI/FS--TlieCompany's'allocableshareofliabilityfortheremediationactivitieshasnotyetbeendetermined.IITheCompanyhasrecordedaliabilityofapproximately$]millionrepresentingitsestimatedshareoftheadditionalcosttoremediatethissitebaseduponits8.2%responsibilityundertheRI/FS.wSyossetTheCompanyandnineotherPRPshavebeennamedin'alawsuitwheretheTownof,OysterBay(Town)isseekingindemnificationforremediationandinvestigationcoststhathavebeen,orwillbe'49 incurredforafederalSuperfundsiteinSyosset,NewYork.Forafurtherdiscussiononthismatter,see.Item3,LegalProceedings-Environmental.PCBTreatment,Inc.TheCompanyhasalsobeennamedaPRPfordisposalsitesinKansasCity,Kansas,andKansasCity,Missouri.Thetwo"siteswereusedbyacompanynamedPCBTreatment,Inc.from1982until1987forthestorage,processing,andtr'eatmentofelectricequipment,dielectricoilsandmaterialscontainingPCBs.AccordingtotheEPA,thebuildingsandcertainsoilareasoutsidethebuildingsare'ontaminatedwithPCBs.CertainofthePRPs,includingtheCompanyandseveralotherutilities,formedaPRPgroup,signedanACO,andhavedevelopedaworkplanforinvestigatingenvironmentalconditionsatthesites'.DocumentationconnectingtheCompanytothesitesindicatesthattheCompanywasresponsibleforlessthan1%ofthematerialsthatwereshippedtotheMissourisite.TheEPAhasnotyetcompleted"compilingthedocumentsfortheKansassite.'JHOsageTheEPAhasnotifiedtheCompa'nythatitisaPRPattheOsageMetalsSite,aformer'scrapmetalrecyclingfacilitylocatedinKansasCity,Kans'as.UnderSection107(a)ofCERCLA,partieswhoarrangedfordisposalofhazardoussubstancesare'liableforcostsincurredbytheEPAinrespondingtoa'releaseorthreatofreleaseofthehazardous'ubstances.Osagehad"purchasedcapacitor'scrapmetalfromPCBTreatment,Inc.ThroughthearrangementsthattheCompanymadewithPCBTreatment,Inc.todisposeofcapacitors,theCompanyisallegedtohavearrangedfordisposalwithinthemeaningofthefederalSuperfundlaw.Asimilarletterwassentto861partieswhosentcapacitorstoPCBTreatment,Inc.TheEPAisseekingtorecoverapproximately$1.1milliondollarsitexpendedto'onductaremovalactionatthesite.TheCompanyiscurrentlyunabletodetermineitsshareofthe,$1~1millionexpenditure.PortRefineryTheCompanyhasbeennotifiedthatitisaPRPatthePortRefinerySuperfundsitelocatedinWestchesterCounty,NewYork:,PortRefinerywasengagedinthebusinessofpurchasing,selling,refiningandprocessingmercuryandtheCompanymayhaveshippedasmallamountofwasteproductscontainingmercurytothissite.TestsconductedbytheEPAindicatedthatthesiteandcertainadjacentpropertieswerecontaminatedwithmercury.Asaresult,theEPAhasperformedaresponseactionatthesiteandseekstorecoveritscosts,currentlytotalingapproximately$4.4million,plusinterest,fromthePRPs.TheCompanydoesnotbelieveitsportionofthesecosts,ifany,willbematerial.Port8'ashingtonIn1989,theEPAnotifiedtheCompanythatitwasaPRPfor'alandfillinPortWashington,NewYork.TheCompanydoesnotbelievethatitsentanymaterialstothesitethatcontributedtothecontaminationwhichrequiresremediationandhasthereforedeclinedtheEPA'srequeststoparticipateinfundingtheinvestigationandremediationactivitiesattheproperty.TheCompanyhasnotreceivedfurthercommunicationsregardingthissite.50 Liberty'heEPAhasnotifiedtheCompany'hatitisaPRPinaSuperfundsitelocatedinFarmingdale,NewtYork.Industrial'operationstookplaceatthissiteforatleastfiftyyears.ThePRPgrouphas'claimedthattheCompanyshouldabsorbremediationexpensesintheamountofapproximately$100,000associatedwithremovingPCB-contaminatedsoilsfromaportionofthesitewhichformerlycontainedelectrictransformers.TheCompanyiscurrentlyunabletodetermineitsshareofcostsofremediationatthissite.t&Huntington/East1Vorthport,TheDEChasnotifiedtheCompany,pursuanttotheStateSupeifundprogram,thatitsrecordsindicatetheCompanymayberesponsibleforthedisposalofwasteatthismunicipallandfillproperty.TheCompanyconductedasearchofitscorporaterecordsanddidnotlocateanydocumentsconcerningwastedisposalpracticesassociatedwiththislandfill.TheCompanyiscurrentlyunabletodetermineitsshare,ifany,ofthecoststoinvestigateandremediatethissite.BlydenburghTheNewYorkStateOfficeoftheAttorneyGeneralhasnotifiedtheCompanythatitmayberesponsibleforthedisposalofwastesand/orforthegenerationofhazardoussubstanceswhichmay,havebeendisposedofattheBlydenburghSuperfundsite,amunicipalsanitarylandfilllocatedintheTownofIslip,SuffolkCounty.TheStatehasincurredapproximately$15millionincostsfortheinvestigationandremediationofenvironmentalconditionsatthelandfill.Inconnectionwiththisnotification,theCompanyconductedareviewofitscorporaterecordsanddidnotlocateanydocumentsconcerningwastedisposalpracticesassociatedwiththislandfill.TheCompanyiscurrentlyunabletodetermineits-share,ifany,ofthecoststoinvestigateandremediatethissite.therSites4anufacturedGasPlantSitesTheDEChasrequiredtheCompanyandotherNewYorkStateutilitiestoinvestigateand,wherenecessary,remediatetheirformerMGPsites.Currently,theCompanyistheownerofsixpiecesofpropertyonwhichtheCompanyorcertainofitspredecessorcompaniesproducedmanufacturedgas.Operationsatthesefacilitiesinthelate1800'sandearly1900'smayhaveresultedinthedisposalofcertainwasteproductslocatedatthesesites.TheCompanyhasenteredintodiscussionswiththeDECwhichisexpectedtoleadtotheissuanceofoneormoreACOsregardingthemanagementofenvironmentalactivitiesatthesesixproperties.Althoughtheexactamount'oftheCompany'scleanupcostscannotyetbe,determined,basedonthefindingsofpreliminaryinvestigationsconductedateachofthesesixsites,currentestimatesindicatethatitmaycostapproximately$54to$92milliontoinvestigateandremediateallofthesesites.Consideringtherange,ofpossiblereinediationestimates,theCompanyfeltitappropriatetorecorda$54millionliabilityreflectingthepresentvalueofthefuturestreamofpaymentsamountingto$70milliontoinvestigateandremediatethesesites.TheCompanyused,arisk-freerateof6.0%todiscountthisobligation.TheCompanybelievesthatthePSCwillprovideforfuturerecoveryofthesecostsandhasrecordeda$54millionregulatoryasset.TheCompany'sratesettlementwhichthePSCapprovedFebruary4,1998asdiscussedinNote3ofNotestoFinancialStatements,allowsfortherecoveryofMGPexpendituresfromgascustomers.51 TheCompanyisalsoevaluatingitsresponsibilitieswithrespecttoseveralotherformerMGPsites,that,existedinitsterritorywhichit,doesnotpresentlyown.Researchisunderwaytodeterminetheexistenceandnatureofoperationsandrelationship,ifany,totheCompanyoritspredecessorcompanies.NorthHillsLeakTheCompanyhasundertakenremediationofcertainsoillocationsinNorthHills,NewYorkthatwereimpactedbyareleaseofinsulatingfluidfromanelectricalcableinAugust1994.TheCompanyestimatesthatanyadditionalcleanupcostswillnotexceed$0.5million.TheCompanyhas,initiatedcostrecoveryactionsagainstthethirdpartiesit,believespreresponsibleforcausingthe,cableleak,theoutcome,ofwhichareuncertain.4StorageFacilities,"Asaresultofpetroleumleaksfromundergro'undstoragefacilitiesandotherhistoricaloccurrences,the"Companyisrequiredtoinvestigateand,incertaincases,remediateaffectedsoilandgroundwaterconditionsatseveralfacilitieswithinitsserviceterritory.Theaggregatecostsofsuchreme'diationworkcouldbebetween$3millionand$5'million.Totheextent-thatthesecostsarenotrecoverablethroughinsurancecarriers,the'Companybelievessuchcostswillberecoverablefromitscustomers.IINuclearWastedNLowLevelRadioactive'WasteThefederalLow-LevelRadioactiveWastePolicyAmendmentActof1985;requiresstatestoarrangeforthedisposal,ofalllowlevelradioactive,wastegeneratedwithinthestateor,inthe,alternative,tocontractfortheirdisposalatanoperatingfacilityoutsidethestate.Asaresult,NewYorkStatehasstateditsintentionsofdevelopinganin-statedisposalfacilityduetothelargevolumeoflowlevelradioactivewastegeneratedwithinthestateandhascommittedtodevelopaplanforthemanagementofsuchwasteduringthe,interimperioduntiladisposalfacilityisavailable.NewYorkStateisstilldevelopingadisposalmethodologyandacceptancecriteriafora~disposalfacility.ThelatestNewYorkStatelowlevelradioactivewastesitedevelopmentschedulenowassumestwopossiblesitingscenarios,avolunteerapproachandanon-volunteerapproach,eitherofwhichwouldnotbeginoperationuntilatleast2001..Lowlevelradioactivewaste~generatedatNMP2iscurrentlybeingdisposedofattheBarnwell,SouthCarolinawastedisposalfacilitywhichreopenedinJuly1995toout-of-statelowlevelwastegenerators.Intheeventthatoff-sitestoragebecomesunavailable.priorto2001,NMPChasimplementedalow"levelradioactivewastemanagementprogramthat';willproperlyhandleinterimon-site.,storageoflowlevelradioactivewasteforNMP2foratleastten.years."TheCompany'sshareofthecosts,associatedwithtemporarystorageandultimatedisposal.arecurrentlyrecoveredinrates.I'lSpentNuclearFuelNMPC,on'behalfoftheNMP2cotenants,has'enteredintoacontractwiththeDOEforthepermanentstorageofNMP2spentnuclearfuel.TheCompanyreimbursesNMPCforits18%shareofthecostunderthecontractatarate'of$1.'00permegawatthour'o'fnet'generationlessafactortoaccountfortransmissionlinelosses.TheCompanyiscollectingitsportionofthisfeefromitselectriccustomers.ItisanticipatedthattheDOEfacilitymaynotbeavailableforpermanent52

.storageuntilatleast2010.Currently,allspentnuclearfuelfromNMP2isstoredattheNMPCsite,andexistingfacilitiesare,sufficienttohandleallspentnuclearfuelgeneratedatNMP2throughtheyear2012.tForinformationconcerningenvironmentallitigation,seeItem3"LegalProceedings"undertheheadingEnvironmental.ImpactofYear2000SomeoftheCompany'soldercomputerprogramswerewrittenusingtwodigitsratherthanfourtodefinetheapplicable,year.Asaresult,thosecomputerprogramshavetime-sensitivesoftwarethatrecognizesadateusing"00"astheyear1900ratherthantheyear2000.Thiscouldcauseasystemfailureormiscalculationscausingdisruptionsofoperations,including,amongotherthings,atemporaryinabilitytoprocesstransactions,orengageinnormalbusinessactivities.TheCompanyembarkedonaprogramin1996tocompleteYear2000compliancebyDecember31,1998.Acorporate-wideprogramhasbeenestablishedtoreviewallsoftware,h'ardwareand"associatedcomplianceplans.Thereadinessofsuppliersan'dvendorsystemsisalsounderreview.Contingencyandbusinesscontinuationplansarebeingprepared"andwillbereviewedper'iodically.TheCompanyexpectstospendapproximately$10milliontoaddressthe'ear2000issueoverathree-yearperiod(1997-1999)consistingof$7milliontotestandmodifyapplication'systemsand$3milliontotestandmodifynori-informationtechnologysystems,Allcostswillbeexpensedasincurred.AsofMarch31,1998,$4.53millionhasbeenexpendedininvestigatingandmodifyingsoftware.Thiseffortisscheduledtobecompletedin1998andtestingwillcontinueintoearly1999.TheCompanybelievesthat,withmodificationstoexistingsoftwareandconversionstonewsoftware,theYear2000Issuewillriotposesignificantoperationalproblemsforitscomputersystems.However,ifsuchmodificationsandconversionsarenotmade,orarenotcompleted'ontime,theYear2000IssuecouldhaveamaterialadverseimpactontheoperationsoftheCompany.ThecostsoftheprojectandthedateonwhichtheCompanybelievesitwillcompletetheYear2000modificationsarebasedonmanagement'sbestestimates,whichwerederivedutilizingnumerousassumptionsoffutureevents,includingthecontinuedavailabilityofcertainresourcesandotherfactors.However,actualresultscoulddiffermateriallyfromthoseanticipated.Specificfactorsthatmightcausesuchmaterialdifferencesinclude,butarenotlimitedto,theavailabilityandcostofpersonneltrainedinthisarea,theabilitytolocateandcorrectallrelevantcomputercodesandsimilaruncertainties.JRecentAccountingPronouncementsComprehensiveIncomeInJune1997,theFinancialAccountingStandardsBoard(FASB)issuedStatementofFinancial'ccountirigStandards(SFAS)No.130.SFASNo.130establishesstandardsforreportingcomprehensiveincome.Comprehensiveincomeisthechange'intheequityofacompany,notincludingthosechangesthatresultfromshareholdertran'sactions.'Allcomponentsofcomprehensiveincomearerequiredtobereportedinanewfinancialstatementthatisdisplayedwithequal"53 prominenceasexistingfinancialstatements.TheCompanywill'berequiredtoadoptSFASNo.130fortheyearendingMarch31,1999.TheCompanydoesnotexpectthattheadoptionofSFASNo.130willhaveasignificantimpactonitsreportinganddisclosurerequirements..~SegmentDisclosuresAlsoinJune1997,FASBissuedSFASNo.131.SFASNo.131establishesstandardsforadditionaldisclosureaboutoperatingsegmentsforinterimandannualfinancialstatements.Morespecifically,itrequiresfinancialinformationtobedisclosedforsegmentswhoseoperatingresultsarereviewedbythechiefdecisionmakerfordecisionsonresourceallocation.Italsorequiresrelateddisclosuresaboutproductsandservices,geographicareas'andmajorcustomers.TheCompanywillberequiredtoadoptSFASNo.131fortheyearendingMarch31,1999.TheCompanydoesnotexpectthattheadoptionofSFASNo.131willhaveasignificantimpactonitsreportinganddisclosurerequirements.ConservationServicesTheCompany's1997DemandSideManagement(DSM)Planfocusedonthe.pursuitofenergyefficiencyandpeakloadreductioninawaythathadminimalimpacton,electricrateincreases.Toassurethesuccessofthisstrategy,>heCompanyimplementedabalancedandcost-effectivemixofDSMprogramsthatcontinuedtorepresentalimitedrelianceonbroad-basedrebatesandaconcentratedemphasisonprogramsthatprovidededucationandinformation,targetedbusinessdevelopment,providedfinancingforenergyefficiency,inducedmarkettransformationandimprovedtheefficiencyofLILCOfacilities.TheCompanywassuccessfulinmeetingthePSCEnergyPenaltyThresholdbyobtainingenergysavingsofapproximately24.4GWhatacostlessthanthatprovidedforinelectricrates.In1998,theCompanyplanstocontinuetofollowtheaforementionedstrategywhileintroducingseveralnewinitiatives.Theseincludeaprogramtargetedatincreasingtheenergyefficiencyofresidencesoflowincomecustomers,theintroductionofapeakloadcurtailmentprogramconstructedtohelptheCompanymeetitspeaksupplysiderequirementsandanincreasedemphasisonprogramsthatinducemarkettransformation.Overall,the1998Plantargetsanannualizedenergysavingsof18.6GWhatabudgetof$10.7million.NCautionaryStatementRegardingForward-LookingStatementsThisreportcontainsstatementswhich,totheextenttheyarenotrecitationsofhistoricalfact,constitute"forward-lookingstatements"withinthemeaningoftheSecuritiesLitigationReformActof1995(ReformAct).Inthisrespect,thewords"estimate,""project,""anticipate,""expect,""intend,""believe"andsimilarexpressionsareintendedtoidentifyforward-lookingstatements.Allsuchforward-lookingstatementsareintendedtobesubjecttothesafeharborprotectionprovidedbytheReformAct.AnumberofimportantfactorsaffectingtheCompany'sbusinessandfinancialresultscouldcauseactualresultstodiffermateriallyfromthosestatedintheforward-lookingstatements.ThosefactorsincludetheproposedtransactionswithTheKeySpanEnergyCorporationandLIPAas,discussedundertheheading"KeySpanEnergyCorporationTransaction"and"LongIslandPowerAuthorityTransaction"stateandfederalregulatoryrateproceedings,competition,andcertainenvironmentalmatterseachasdiscussedherein,intheJointProxyStatement/ProspectusfiledJune30,1997,orinotherreportsfiledbytheCompanywiththeSecuritiesandExchangeCommission.54 FINANCIALSTATEMENTSBalanceSheet'etsattInthousandsofdollars)March31,1998March31,1997December31,1996tilityPlantElectricGasCommonConstructionworkinprogressNuclearfuelinrocessandinreactorLess-AccumulateddcreciationandamortizationTotalNetUtiliPlantRegulatoryAssetsBasefinancialcomponent(lessaccumulatedamortizationof$883,496,$782,525and$757,282)RatemoderationcomponentShoreham'post-settlementcostsShorehamnuclearfuelUnamortizedcostofissuingsecuritiesPostretirementbenefitsotherthanpensionsRegulatoiytaxassetOtherTotalRelatoAssetsnutilitProcrtand"OthcrInvcstmcntsrentAssetsshandcashequivalentsSpecialdepositsCustomeraccountsreceivable(lessallowancefordoubtfulaccountsof$23,483,$23,675and$25,000)OtheraccountsreceivableAccruedunbilledrevenuesrMaterialsandsuppliesataveragecostFueloilataveragecostGasinstorageataveragecostDefcrrcdtaxasset-netoperatinglossPreamentsandothercurrentassetsTotalCurrentAssetsDeferredCharesTofalAssetsSee)VotestoFinancialStatements.4,031,510$1,233,281290,221118,80818,1195,691,9391,877;8583,814,0813,155,334434,0041,005,31666,455159,941340,1091,737,932192,7637,091,85450,816180,91995,790297,88943,744124,46454,88332,14214,63413,807858,27285,70211,900,725$3,900,264$1,'171,183263,267108,850-'5,5035,459,0671,759,1103,699,9573,256,305409,512'96,27068,581187,309357,6681,767,164200,1377,242,9461887064,53937,631305,43642,946141,38955,45449,70310,89393,3498,805810,14577,65611,849,574$3,882,2971,154,543260,268112,18415,4545,424,7461,729,5763,695,1703,281,548402,213991,79569,113194,151360,8421,772,778199,8797,272,31918597279,99338,266'r255,80165,764'69,71255,78953,'94173,562145,2058,5691,146,60276,99112,209,67955 CaitaltzationandLiabilitiesatMarch31,1998Pnthousandsodollars)March31,1997December31,199CapitalizationLong-termdebtUnamortizeddiscountondebtPreferredstock-redemptionrequiredFPrcfencdstock-noredemtionuiredTotalPreferredStockCommonstockPremiumoncapitalstockCapitalstockexpenseRetainedearningsTrcasustock,atcostTotalCommonShareoivners'iTotalCaitalizationRegulatoryLiabilitiesRegulatoryliabilitycomponent1989SettlementcreditsRegulatorytaxliabilityOtherT1RItLiabilitiesCurrentLiabilitiesCurrentmaturitiesoflong-termdebtCurrentredemptionrequirementsofpreferredstockAccountspayableandaccruedexpensesLRPPpayableAccruedtaxes(includingfederalincometaxof$28,308,$49,262and$25,884)AccruedinterestDividendspayableifClassSettlementCustomerdesitsTotalCurrentLiabilitiesDeferredCreditsDeferredfederalincometax-netClassSettlementOtherTotalDeferredCreditsOperatingReservesPensionsandotherpostretirementbenefitsClaimsanddamacsTotal0ratinReservesCommitmentsandContinenciesTotalCaitalizationandLiabilitiesSeeNotestoFinancialStatements.4,395,555(13,606)4,381,949562,600562,600608,6351,146,425(47,501)956,092(1,204)2,662,4477,606,99699,19959,39778,913151,922389,431101,000139,374228,58330,11834,753146,60758,74860,00028,627827,8102,539,36446,94022,5292,608,833401,40166,254467,655$'1,900,725564,471,675$(14,628)4,457,047638,50063,598702,098605,0221,131,576(48,915)861,751(385)2,549,0497,708,194178,558125,138100,377158,660562,7331,0001,050230,18940,49951,157143,98358,47458,33329,173613,8582,420,44389,48720,8892,530,819387,04846,922433,97011,849,574$4,471,67514,903)4,456,772638,50063,664702,164603,9211,127,971(49,330)840,867(60)2,523,3697,682,305198,398127,442102,887139,510568,237251,001,050289,14140,49963,640160,61558,37855,83329,471949,6272,442,60698,49739,4472,580,550381,99646,964428,96012,209, Statementofincome(inthousandsofdollarscxtYearEndedMarch31,1998,TheeMonthsEndedMarch31,1997YearEndedDecember31,1996YearEndedDecember31,1995RevenuesElcctncGasTotalRcvcnues$2,478,435645,6593,124,094557,791$2,466,435$2,484,014293,391684,260591,114851,1823,150,6953,075,128OperatingExpensesOperations-fuelandpurchasedpowerOperations-otherMaintcnanccDepreciationandamortizationBaseIinancialcomponentamortizationRatemoderationcomponentamortizationRcgu!atotyliabilitycomponentamortization1989SettlemcntcreditsamortizationOtherregulatoryamortizationOperatingtaxesFcdcralincometax-currentFederalincometax-deferredandotherTotalratinExnscs0ratinIncomeOtherIncomeand(Deductions)RatemoderationcomponentcarryingchargesOtherincomeanddeductions,nctClassScttlcmentforotherfundsusedduringconstructionFmctax-currentFetncometax-deferredan'dotherTotalOtherIncomeandDeductionsIncomeBcforcInterestCharcsInterestChargesInterest'onlong-termdebtOtherintcrcstAllowanceforborrowedfundsuseddurinconstructionTotalInterestChaesNetIncomePreferredstockdividendruircmentsEarninforCommonStockAvcraeCommonSharesOutstandin000BasicandDilutedEarninerCommonShareDividendsDeclaredcrCommonSharcSee"¹lesroFinanctalSlarensenrs.957,807400,045,111,120158,537100,971(35,079)(79,359)(9,213)47,272466,32686,388150,9832,355,798768,29623,632(18,156)(15,623)3,8465944,1241,583766,713351,26157,8054,593404,473362,24051,813310,427121,4152.561.78301,86795,67329,34038,56125,2435,907(19,840)(2,303)12,218117,51323,37833,624661,181190,0015,919645(4,496)7177893,574193,57590,16816,659949105,87887,69712,96974,728$120,9950.62$0.45$963,251381,076118,135153,925100,971(24,232)(79,359)(9,214)127p288472,07642,197168,0002,414,114736,58125,25919,197(20,772)2,888"'94027,512764,0933&4,19867,1303,699447,629316,46452,216264248$120,3602.20$1.78$834,979383,238128,155145,357100,97121,933(79,359)(9,214)161,605447,50714,596193,7422,343,510731,61825,27434,400(21,669)2,8982,80043,703775,321412,51263,4613938472,035303,28652,620250,666119,1952.101.7857 StatementofCashFlowsOperatingActivitiesNetIncomeAdjustmcntstoreconcilenetincometonetcashprovidedbyoperating,activitiesProvisionfordoubtfulaccountsDepreciationandamortizationBasefinancialcomponentamortizationRatemoderationcomponentamorhzationRegulatoryliabilitycomponentamortization1989SettlementcreditsamortizationOtherregulatoryamortizationRatemoderationcomponentcarryingchargesClassSettlementAmortizationofcostofissuingandredeemingsecuritiesFederalincometax-deferredandotherPensionsandOtherPostRetirementBenefitsOtherChangesinoperatingassetsandliabilitiesAccountsreceivableMaterialsandsupplies,fueloilandgasinstorageAccountspayableandaccruedexpensesClassSettlementSpecialdepositsOtherN'db0tinActivitiesInvestingActivuiesConstructionandnuclearfuelexpendituresShorehampost-settlementcostsInvestmentininterestratehedgeOtlierNetCashUsedinInvestinActivitiesFinancingActivitiesProceedsfromissuanceofsecuritiesRedemptionofsecuritiesCommonstockdividendspaidPtefetredstockdividendspaidOtherNetCashUsedhiFinancinActivitiesNctIncrease(Decrease)InCashandCashEquivalentsCashandcashequivalentsatbeginningofperiodNethicrease(decrease)incashandcasheuivalentsCashandCashEquivalentsatendofperiodInterestpai,otereduchonorieallowanceforborrowedfundsusedduringconstructionFederalincometaxpaidSeePtotestoFinancialStatements.YearEndedMarch311998$362,24023,239158,537100,971(35,079)(79,359)(9,213)47,272(23,632)15,62330,823146,85948,51287,618(14,905)14,3911,668(56,503)(58,159)(86,819)674,084(257,402)(39,828)(30,000)(1.987)329,217)43,218(2,050)(215,790)(51,833)2,032)(228,487)$116,380$64,539116,380$180,919$364,864$108,980ThtceMonthsEndedMarch311997$87,6974,82138,56125,243',907(19,840)(2,303)12,218(5,919)4,4968,08732,83513,4962,381(31,638)67,242(58,952)(11,006)63514,394159,567(50,375)(12,104)160(62,3194,640(250,000)(53,749)(12,969)(624)(312,702($215,454)$279,993215,454$64,539$112,981YearEndedDecember311996$316,46423,119153,925100,971(24,232)(79,359)(9,214)127,288(25,259)20,77234,611167,06014,95251,67169,215(34,531)28,258(42,084)25,14626,460892,313(239,896)(51,722)(4,806296,42418,837(419,800)(213,753)(52,264)(369)(667,349($71,460)$351,45371,460$279,993$404,663$45,050(fnthousandsofdollars)YearEnded.Decein199$303,28617,751"145,357'100,97121,'933(79,359)(9,214)161,605(25,274)21,66939,589190,9424,90056,675(67;213)21,98619,100'33,464)(35,798)83,442772000(6)(70,589)8,019306,15668,726(104,800)(211,630)(52,667),529299,842$166,002$185,451'66,002.'351,453'427,988$14,20058 StatementofRetainedEarninsPnthousandsofdolkws)Dcocmber31~1995st~ofperiodNctincomefortheperiodDeductionsIICashdividendsdeclaredoncommonstockCashdividendsdcclarcdonpreferredstockOthertBalancestendofrlodSreNotestoFinandolStaternerus.$861,7518362.240),223P91216,08651,8121$956,0925840,867887,697928,564$3,84412.969861,751$790,9198316,4641,107/83214,25552,24021840.867$752.480303~1,055,766212,18152,64719790,919StatementofCaitalizationShanesIssued(fnthousandsofdollars)March31,1998March31,1997Deccmbcr31,1996March31,1998rMarch31,1997December31,1996CommonShareovrncrs'quityCommonstock,$5.00pervaluePremiumoncapitalstockCapitalstockexpenseRctaincdcomingsTreasurystock,stcostTotalCommonShsreovrners'quity121,727,04012L00431$16,985120,784,277$3,485608,635$'~146,425(47,501)956,092(1,204)605,022$V31476(48.915)861,751(385)2,549,049603P211,127P71(49@30)840,867(60)2,523369PreferredStock-RedemptionRequiredParvsluo$100pcrshare/vSensaLvScricsCCescalledforredemption150,$00$70,000161,000570,000161,000570,00015,05057,00015.050'6,10057,0001,0$016,100$7,0001,0$057.0CN.72.0$0'2,050Parvalue$25pershare7.95%SeriesAA$1.67SeriesGG$1.95SeriesNN7.05%SeriesQQ6.875%SensaUULess-SeriescalledforredemptionLessredemptionofpreferredstock14/20,000880,0001/$4,0003,464,0002,~,00014,520,000880,0001,554,0003,464,0002,~00014,$20.000880,0001,554,0003,464.000',240,000363,000t22,00038,85086,60056,00038,850363,00022,00038,85086,60056,000363,00022,00038,8$086,60056,000TotalPrefcrrcdStock-Redem'onRequirel505.600i"566.450566,4$0PreferredStock-NoRedemptionRequiredParvalue$100persharo$.00/iSeriesB.4.25%SeriesD435%ScricsB4.35%SeriesF51/8/eScricsH,53/4%Series1-ConvertibleLess-ScncscelledlbrrcdcmptienTotalPreferredStock-NoRedemptionRequiredTotsreferredStock100,00070,00050,000200,00014,743100,00070,000200,00050,000200,00015,978)00,00070,000200,00050.000200,00016,63710,0007P~20,0005,000,20,0001,47463.474562600$10,0007,000~20,0005.00020,0001,59863,598702,098S10,0007,00020,0005,00020.000lr664163.66459 grithourrurr/sodollorr)31IGeneralandRefundingBoridsTotalGeneralandRetbndingBondsDcbcnturesTotalDcbcnturcsFehuaryIS,1997April15,1998Msy15,1999April15,2004Msy1$,2006JulyIS,2008May1,2021JulyI,2024JulyIS,1999January1$,2000July15.2001MarchIS.2003MachI,2004JunoI,2OOSMarchI,2007July1$,2019NovemberI,2022March15,202383/4%75/SYi7.85%85/SYi8.50Yi7.pter/i93/4%95/8/i7.30Yi7.30Yi6.25%7.05%7.00Yi7.125%7.50/i8.90Yi9.00Yi8.20Yi$100,00056,000185,00075.00080,000415,000375,0001,286.000397,00036,000145,000150,00059,000200,000142,000420.000451,000270.0002,270,000100,00056,000185,00075,00080,000'15,000375.0001,286,000397,00036,000145,0001$0,00059,000200,000142,000420,000451,000270.0002,270,000$250,000100,00056,000'SS,00075,00080,000415,000375,00036,000145,000150,00059,000451,000270,000AuthorityFlnanclngNotesIndustriaiDevelopmentRevenueBondsPoliurionControlRevenueBondsElcctrioFaeiliticsRcvcnueBendsDcccmberI,2006DecemberI,2006DeccmbcrI,2009OctoberI,2012MachI,20167.50Yi7.50/i7.80Yi8I/4%3.58/i,1976AB1976AI979B19821985AB2737$19,10017,200150.00028/7519,10017,200150,0002837$19,10017,200ISO,000Sq¹cmberI,2019JuneI,2020DecemberI,2020FchuaryI,2022AugustI,2022NovemberI~2023NovemberI,2023OctoberI,2024AugustI,202SDecemberI,20277.15%7.15%.7.15%7.15%6.90/i3.70/i3.70/i3.70Yi3.70Yi3.55%1989AB,1990A1991A1992iEB1992CiD1993A1993B1994A199SA1997A100,000100,000100,000100,000100,00050.000S0,00050,000S0,00024,880100,000100,000100.000100,000100,00050,000100,000100,000100,000100.000100,00050,00050,000-50,00050,000TotalAuthorityFinancingNotesUnamortizedDiscountonDebt940355916,675(13,606)(14.628)916.6754,482@49101.0004,4SS,OI71,0004,707,7722S1,000TotalLong-TermDebtTotalCaItalhatlonSceNo/rsroFinmrdol$/a/eaten/a4,381,9494.457.047$7.6069K$7.708.194$4.45(c7727,68230560 NOTESTOFINANCIALSTATEMENTSNote1.SummaryofSignificantAccountingPolicies~~~~~asisofPresentationOnApril11,1997,theCompanychangeditsyearendfromDecember31toMarch31.Accordingly,unlessotherwiseindicated,referencesto1998and1997representthetwelvemonthperiodendedMarch31,1998andMarch31,1997,whilereferencestoallotherperiods'refertotherespectivecalendaryearsendedDecember31.'sfurtherdiscussedinNote2,onJune26,1997,theCompanyandtheLongIslandPowerAuthority(LIPA)enteredintodefinitiveagreementspursuanttowhich,aflerthetransferoftheCompany'sgasbusinessunitassets,non-nuclearelectricgeneratingfacilityassetsandcertainotherassetsandliabilitiestooneormorenewly-formedsubsidiariesofanewholdingcompany,theCompany'scommonstockwillbesoldtoLIPAforapproximately$2.4975billionincash.NoadjustmentshavebeenmadetotheCompany'sfinancialstatementstoreflectthisproposedtransaction.IINatureofOperationsTheCompanywasincorporatedin1910undertheTransportationCorporationsLawoftheStateofNewYorkandsupplieselectricandgasserviceinNassauandSuffolkCountiesandtotheRockawayPeninsulainQueensCounty,allonLongIsland,NewYork.TheCompany'sserviceterritorycoversanareaofapproximately1,230squaremiles.Thepopulationoftheservicearea,accordingtotheCompany's1998LongIslandPopulationSurveyestimate,isabout2.75millionpersons,includingapproximately98,500personswhoresideinQueensCountywithintheCityofNewYork.eCompanyservesapproximately1.04millionelectriccustomersofwhichapproximately931,000aresidential.TheCompanyreceivesapproximately49'/0ofitselectricrevenuesfromresidentialcustomers,48/0fromcommercial/industrialcustomersandthebalancefromsalestootherutilitiesandpublicauthorities.TheCompanyalsoservesapproximately467,000gascustomers,417,000ofwhichareresidential,accountingforabout610/0ofitsgasrevenues,17,000ofwhicharecommercialiindustrial,:accountingfor23/oofitsgasrevenues,3,600ofwhicharefirmtransportationcustomers,accountingfor30/0ofitsgasrevenues,withthebalanceofthegasrevenuesmadeupbyoff-systemsales.TheCompany'sgeographiclocationandthelimitedelectricalinterconnectionstoLongIslandservetolimittheaccessibilityofthetransmissiongridtopotentialcompetitorsfromoffthesystem.Inaddition,theCompanydoesnotexpectanynewmajorindependentpowerproducers(IPPs)orcogeneratorstobebuiltonLongIslandintheforeseeablefuture.OneofthereasonssupportingthisconclusionisbasedontheCompany'sbeliefthatthecompositionanddistributionoftheCompany'sremainingcommercialandindustrialcustomerswouldmakeitdifficultforlargeelectricprojectstooperateeconomically.Furthermore,underfederallaw,theCompanyisrequiredtobuyenergyfromqualifiedproducersattheCompany'savoidedcost.Currentlong-rangeavoidedcostestimatesfortheCompanyhavesignificantlyreducedtheeconomicadvantagetoentrepreneursseekingtocompetewiththeCompanyandwithexistingIPPs.ForafurtherdiscussionofthecompetitiveissuesfacingtheCompany,seeNote12.RegulationTheCompany'saccountingrecordsaremaintainedinaccordancewiththeUniformSystemsofAccountscribedbythePublicServiceCommissionoftheStateofNewYork(PSC)andtheFederalEnergyulatoryCommission(FERC).Itsfinancialstatementsreflecttheratemakingpoliciesandactionsof61 thesecommissionsinconformitywithgenerallyacceptedaccountingprinciplesforrate-regulated-enterprises.AccountingfortheEffectsofRateRegulationGeneralTheCompanyissubject,totheprovisionsofStatementofFinancialAccountingStandards(SFAS)No.'1,"AccountingfortheEf'fectsofCertainTypesofRegulation."Thisstatementrecognizestheeconomicabilityofregulators,throughtheratemakingprocess,tocreatefutureeconomicbenefitsandobligationsaffectingrate-regulatedcompanies.Accordingly,theCompanyrecordsthesefutureeconomicbenefitsandobligationsasregulatoryassetsandregulatoryliabilities,respectively.Regulatoryassetsrepresentpr'ob'ablefuturerevenuesassociatedwithpreviouslyincurredcoststhatareexpectedtoberecoveredfromcustomers.Regulatoryliabilitiesrepresentprobablefuturereductionsin'evenuesassociatedwithamountsthatareexpectedtoberefundedtocustomersthroughtheratemakingprocess.Regulatoryassetsnetofregulatoryliabilitiesamo'untedtoapproximatefy$6.7billionatMarch31,1998,March31,1997andDecember31,199'6.Inorderforarate-regulatedentitytocontinuetoapplytheprovisionsofSFASNo.71,itmustcontinuetomeetthefollowingthree'criteria:(i)theenterprise'sratesforregulatedservicesprovidedtoitscustomersmustbeestablishedbyanindependentthird-partyregulator;(ii)theregulatedratesmustbedesignedtorecoverthespecificenterprise'scostsofprovidingtheregulatedservices;and(iii)inviewofthedemandfortheregulatedservicesandthelevelofcompetition,itisreasonabletoassumethatratessetatlevelsthatwillrecovertheenterprise'scostscanbechargedtoandcollectedfromcustomers.BasedupontheCompany'sevaluationofthethreecriteriadiscussedaboveinrelationtoitsoperations,theeffectof'competitiononitsabilitytorecoveritscosts,includingitsallowedreturnoncomrrionequityantheregulatoryenvironmentinwhichtheCompanyoperates,theCompanybelievesthatSFASNo.71continuestoapplytdtheCompany'selectricandgasoperations.TheCompanyformeditsconclusionbaseduponseveralfactorsincluding:(i)theCompany'scontinuingabilitytoearnitsallowedreturnoncommonequityforbothitselectricandgasoperations;and(ii)thePSC'scontinuedcommitmenttotheCompany'sfullrecoveryoftheShorehamNuclearPowerStation(Shoreham)relatedassetsandallotherprudentlyincurredcosts.Notwithstandirigtheabove,rate'regulationisundergoingsignificantchangeasregulatorsand'customersseeklowerpricesforelectricandgasservice.Intheeventthatregulationsig'nificantlychangestheopportunityfortheCompanytorecoveritscostsinthefuture,alloraportionoftheCompany'soperationsmaynolongermeetthe'criteriadiscussedabove.Inthatevent,asignificantwrite-downofall'raportionoftheCompany'sexistingregulatoryassetsandliabilitiesco1rldresult.IftheCompanyhadbeenunabletocontinuetoapplytheprovisionsofSFAS71atMarch31,1998,theCompanywouldapplytheprovisionsofSFAS101"RegulatedEnterprises-AccountingfortheDiscontinuationofApplicationofPASBStatementNo.71."IfSFAS'101wereimplement'ed,thechargetoearningscouldbeashighas$4.5billion,netoftax.ForadditionalinformationrespectingtheCompany'sShoreham-relatedassets,seebelowandNotes4and10.SFASNo.121,"AccountingfortheImpairmentofLong-LivedAssetsandforLong-LivedAssetstobeDisposedOf'equiresthatcostswhichwerecapitalizedinaccordancewithregulatorypractices,becauseitwasprobablethatfuturerecoverywouldbeallowedbytheregulator,mustbechargedagainstcurrentperiodearningsifitappearsthatthecriterionforcapitalizationnolongerapplies.Thecarryingamountsuchassetswouldbereducedbyamountsforwhichrecoveryisunlikely.SFASNo.121alsoprovidesfor62 therestorationofpreviouslydisallowedcoststhataresubsequentlyallowedbyaregulator.NoimpairmentlosseshavebeenrecognizedbytheCompanywithrespecttoregulatoryorotherlong-livedassets.lhtDiscussedbelowaretheCompany'ssignificantregulatoryassetsandregulatoryliabilities.IBaseFinancialComponentandRateModeration,Component,hPursuanttothe19S9Settlement,theCompanyrecordedaregulatoryassetknownastheFinancialResourceAsset(FRA).TheFRAisdesignedtoprovidetheCompanywithsufficientcashflowstoassureitsfinancialrecovery.TheFRAhastwocomponents,theBaseFinancialComponent(BFC)andtheRateModerationComponent(RMC).,TheBFCrepresentsthepresentvalueofthefuturenet-after-taxcash,,flowswhichtheRateModerationAgreement(RMA),oneoftheconstituentdocumentsofthe1989Settlement,providedtheCompany,foritsfinancialrecovery.TheBFCwasgrantedratebasetreatmentunderthetermsoftheRMAandisincludedintheCompany'srevenuerequirementsthroughanamortizationincludedinratesoveraforty-yearperiodonastraight-linebasiswhichbeganJuly1,19S9.'hTheRMCreflectsthedifferencebetweentheCompany'srevenuerequirementsunderconventionalratemakirigandtherevenuesresultingfromtheimplementationoftheratemoderationplanprovidedforinthe.RMA.TheRMCiscurrentlyadjusted,onamonthlybasis,fortheCompany'sshareofcertainNMP2operationsandmainten'anceexpenses,fuelcreditsresultingfromtheCompany'selectricfuelcostadjustmentclauseandgrossreceiptstaxadjustinentsrelatedtotheFRA.InApril1998,thePSCauthorizedarevisiontotheCompany'smethodforrecordingitsmonthlyRMCamortization.Priortothisrevision,theamortizationoftheannuallevelofRMCwasrecordedmonthlyonatraight-line,levelizedbasisovertheCompany'srateyearwhichrunsfromDecember1toNovember30.owever,revenuerequirementsfluctuatefrommonthtomonthbaseduponconsumptionwhichisgreatlyimpactedbytheeffectsofweather.Underthisrevisedmethod,effectiveDecember1,1997,themonthlyamortizationoftheannualRMClevelvariesbaseduponeachmonth'sforecastedrevenuerequirements,whichmore.closelyalignssuchamortizationwiththeCompany'scostofservice.Asaresultofthischange,forthefiscalyear'endedMarch31,1998,theCompanyrecordedapproximately$65.1millionmoreofnon-cashRMCcreditstoincome(representingaccretionoftheRMCbalance),,or$42.5millionnetoftax,representing$.35persharemorethanitwouldhaveunderthepreviousmethod.However,thetotalRMCamortizationfortherateyearendingNovember30,1998,willbeequaltotheamountthatwouldhavebeenprovidedforunderthepreviousmethod.AsdiscussedinNote2,theRMCwillbeacquiredbyLIPAaspartoftheLIPATransaction.hForafurtherdiscussionofthe1989SettlementandFRA,seeNotes4and10.ShorehamPost-SettlementCostsShorehampost-settlementcostsconsistofSh'orehamdecommissioningcosts,fueldisposalcosts,payments-in-lieu-of-taxes,carryingchargesandothercosts.Thesecostsarebeingcapitalizedandamortizedandrecoveredthroughratesoveraforty-yearperiodonastraight-lineremaininglifebasiswhichbeganJuly1,1989.ForafurtherdiscussionofShorehampost-settlementcosts,seeNote10.hShorehamNuclearFuelhorehamnuclearfuelprincipallyreflectstheunamortizedportionofShorehamnuclearfuelwhichwaslassifiedfromNuclearFuelinProcessandinReactoratthetimeofthe1989Settlement.Thisamountiseingamortizedandrecoveredthroughratesoveraforty-yearperiodonastraight-lineremaininglifebasiswhichbeganJuly1,1989.63 UnamortizedCostofIssuingSecuritiesUnamortizedcostofissuingsecuritiesrepresentstheunamortizedpremiumsordiscountsandexpensesrelatedtotheissuesoflong-termdebtthathavebeenretiredpriortomaturityandthecostsassociatedwiththeearlyredemptionofthoseissues.Inaddition,thisbalanceincludestheunamortizedcapitalstockexpenseandredemptioncostsrelatedtocertainseriesofpreferredstockthathavebeenrefinanced.Thesecostsareamortizedandrecoveredthroughrates,asprovidedbythePSC,overtheshorterofthelifeoftheredeemedissueorthenewissue.PostretirementBenefitsOtherThanPensionsTheCompanydefersasaregulatoryassetthedifferencebetweenpostretirementbenefitexpenserecordedinaccordancewithSFASNo.106,"Employers'ccountingforPostretirementBenefitsOtherThanPensions,"andpostretirementbenefitexpensereflectedincurrentrates.PursuanttoaPSCorder,theongoingannualSFASNo.106benefitexpensewasphasedintoandfullyreflectedinratesbyNovember30,1997,withtheaccumulateddeferredassettoberecoveredinratesoverthefifteen-yearperiodwhichbeganDecember1,1997.ForafurtherdiscussionofSFASNo.106,seeNote8.RegulatoryTaxAssetandRegulatoryTaxLiabilityTheCompanyhasrecordedaregulatorytaxassetforamountsthatitwillcollectinfutureratesfortheportionofitsdeferredtaxliabilitythathasnotyetbeenrecognizedforratemakingpurposes.The'egulatorytaxassetiscomprisedprincipallyofthetaxeffectofthedifferenceinthecostbasisoftheBFCforfinancialandtaxreportingpurposes,depreciationdifferencesnotnormalizedandtheallowanceforequityfundsusedduringconstruction.Theregulatorytaxliabilityisprimarilyattributabletodeferredtaxespreviouslyrecognizedatrateshigherthancurrentenactedtaxlaw,unamortizedinvestment'taxcreditsandtaxcreditcarryforwards.RegulatoryLiabilityComponentPursuanttothe1989Settlement,certaintaxbenefitsattributabletotheShorehamabandonmentaretobesharedbetweenelectriccustomersandshareowners.Aregulatoryliabilityofapproximately$794millionwasrecordedinJune1989topreserveanamountequivalenttothecustomertaxbenefitsattributabletotheShorehamabandonment.Thisamountisbeingamortizedoveraten-yearperiodonastraight-linebasiswhichbeganJuly1,1989.1989SettlementCreditstRepresentstheunamortizedportionofanadjustmentofthe'bookwrite-offtothenegotiated1989Settlementamount.Aportionofthisamountisbeingamortizedoveraten-yearperiodwhichbeganonJuly1,1989.Theremainingportionisnotcurrentlybeingrecognizedfor;ratemakingpurposes.UtilityPlantAdditionstoandreplacementsofutilityplantarecapitalizedatoriginalcost,whichincludesmaterial,labor,indirectcostsassociatedwithanadditionorreplacementandanallowanceforthecostoffundsusedduringconstruction.Thecostofrenewalsandbettermentsrelatingtounitsofpropertyisaddedtoutilityplant.Thecostofpropertyreplaced,retiredorotherwisedisposedofisdeductedfromutilityplantand,generally,togetherwithdismantlingcostslessanysalvage,ischargedtoaccumulateddepreciation.Thecostofrepairsandminorrenewalsischargedtomaintenanceexpense.Massproperties(suchaspoles,wireandmeters)areaccountedforonanaverageunitcostbasisbyyearofinstallation.64 AllowanceforFundsUsedDuringConstructionTheUniformSystemsofAccountsasprescribedbythePSC,definestheAllowance,ForFundsUsedDuringConstruction(AFC)asthenetcostofborrowedfundsusedforconstructionpurposesanda,treasonablerateofreturnupontheutility's.equity'whensoused.AFCisnotanitemofcurrentcashincome.AFCiscomputedmonthlyusingaratepermittedbytheFERConaportionofconstructionworkinprogress.TheaverageAFCrate,withoutgivingeffecttocompounding,wasasfollows:Periods'AFCRate12MonthsEnded3/31/989.29/o3MonthsEnded3/31/972.26/o12MonthsEnded12/31/969.02/o12MonthsEnded12/31/959.36/oDepreciationTheprovisionsfordepreciationresultfromtheapplicationofstraight-lineratestotheoriginalcost,bygroups,ofdepreciablepropertiesinservice.Theratesaredeterminedbyage-lifestudiesperformedannuallyondepreciableproperties.Theaveragedepreciationrateasapercentageofrespectiveaveragedepreciableplantcostswasasfollows:Periods12MonthsEnded3/31/983MonthsEnded3/31/9712MonthsEnded12/31/9612MonthsEnded12/31/95Electric3.07o/o78o/o3.00/o3.00o/oGas2.04o/o'51o/o200o/o200o/oCashandCashEquivalents~~Cashequivalentsarehighlyliquidinvestmentswithmaturitiesofthreemonthsorlesswhenpurchased.hecarryingamountapproximatesfairvaluebecauseoftheshortmaturityoftheseinvestments.LRPPPayableRepresentsthecurrentportionofamountsduetoratepayersthatresultfromtherevenueandexpensereconciliations,performance-basedincentivesandassociatedcarryingcharges'asestablishedun'dertheLILCORatemakingandPerformancePlan(LRPP).ForfurtherdiscussionoftheLRPP,seeNote4.FairValuesofFinancialInstrumentsThefairvaluesfortheCompany'slong-termdebtandredeemablepreferredstockarebasedonquotedmarketprices,whereavailable.Thefairvaluesforallotherlong-termdebtandredeemablepreferredstockareestimatedusingdiscountedcashflowanalysesbasedupontheCompany'scurrentincrementalborrowingrateforsimilartypesofsecurities.RevenuesRevenuesarecomprisedofcyclebillingsrenderedtocustomersandtheaccrualofelectricandgasrevenuesforservicesrenderedtocustomersnotbilledatmonth-end.TheCompany'selectricratestructureprovidesfeararevenuereconciliationmechanismwhicheliminatestheimpactonearningsofexperiencingelectricsalesthatareaboveorbelowthelevelsreflectedinrates.TheCompany'sgasratestructureprovidesforaweathernormalizationclausewhichreducestheimpactrevenuesofexperiencingweatherwhichiswarmerorcolderthannormal.gt65 FuelCostAdjustmentshTheCompany'selectric.andgastariffsincludefuelcostadjustment(FCA)clauseswhichprovideforthe'ispositionofthedifferencebetweenactualfuelcostsandthefuelcostsallowedintheCompany'sbasetariffrates(basefuelcosts).The.Companydefersthesedifferencestofutureperiodsinwhichtheywillbebilledorcreditedto'customers,exceptforbase'electricfuelcostsinexcessofactualelectricfuel'costs,'hicharecurrentlycreditedtotheRMCasincurred."Purs'uant'totheStipulation,'asdescribedinNote3,gasfuelcostsareexcludedfrombasefuelcostsandrecoveredthroughthegasfueladjustmentclause.FederalIncomeTaxTheCompanyprovidesdeferredfederalincometaxwithrespecttocertainitemsofincomeandexpensethatarereportedindifferentperiodsforfederalincometaxpurposesthanforfinancialstatementpurposes.Additionally,theCompanyprovidesdeferredfederalincometaxwithrespecttoitemswithdifferentbasesforfinancialandtaxreportingpurposes,asdiscussedinNote9.TheCompany'defersthebenefitof,60/0ofpre-1982gasandpre-.1983electricand100/oofallother,'nvestmenttaxcredits,withrespecttoregulatedproperties,whenrealizedonitstaxreturns.Accumulateddeferredinvestmenttaxcreditsareamortizedratablyoverthelivesoftherelatedproperties.'1IIForratemakingpurposes,theCompanyprovidesdeferredfederalincometaxwithrespecttocertaindifferencesbetweenincomebeforeincometaxforfinancialreportingpurposesandtaxableincomeforfederalincometaxpurposes.Also,certainaccumulateddeferredfederalincometaxisdeductedfromratebaseandamortizedorotherwiseappliedasareductionin'federalinc'ometaxexpensein'futureyears.ReservesforClaimsandDamagesLossesarisingfromclaimsagainst,theCompany,includingworkers',compensationclaims,property...damage,extraordinarystorm'costsandgeneralliabilityclaims,arepartiallyself-insured.-Reservesfortheseclaimsanddamagesarebasedon,amongotherthings,experience,riskoflossandtheratemakingpracticesofthePSC.ExtraordinarystormlossesincurredbytheCompanyarepartiallyinsuredbyvarious,commercialinsurancecarriers.-,These"insurancecarriersprovidepartialinsurancecoverageforindivjdualstormlossesto,theCompany',stransmissionanddistributionsystembetween$15millionand$25million..Stormlosseswhich,areoutsideofthisrangeareself-insuredbytheCompany.RecentAccountingPronouncements"V'IEarningsI'erShareAtDecember31,1997,theCompanyadoptedSFASNo;128,"EarningsPerShare."Thisstatementreplacedthecalculationof.primaryandfullydilutedearningspersharewithbasicanddilutedearningspershare.Unlikeprimaryearningspershare,basicearningspershareexcludes'anydilutiveeffectsofoptions,warrantsandconvertiblesecurities.Dilutedearningspershareareverysimilartothepreviouslyreportedfullydilutedearningspershare.Noneoftheearningspershareamountsforperiodspresentedwereeffectedby,theadoptionof.,SFASNo.128:.,'ComprehensiveIncomeInJune1997,theFinancialAccounting'StandardsBoard'(FASB)issuedStatementofFinancialAccounting.Standards(SFAS)No.130."SFASNo."130establish'tandardsforreportingcomprehensiveincome.Comprehensiveincomeisthechangeintheequityofacompany,notincludingthosechangesthatre'suitfrom'sh'areholdertran'sactions'.Allcomponentsofcomprehensiveincomearerequiredtobereportedinanewfinancialstatementthatisdisplayedwithequalprominence'asexistingfinancialstatements.TheCompanywillberequiredtoadoptSFASNo.130fortheyearendingMarch31,1999.66 TheCompanydoes'n'otexpectthattheadoptionofSFASNo.130willhaveasignificantimpactonits"'eportinganddisclosurerequirements'.III'i~~7?7~~~~~~~Irr~~u~I!~~~!~~~~!~~~!!~~~~~~~~~l~iSegmentDisclosuresInJune1997,FASBissuedSFASNo.131"DisclosuresaboutSegmentsofanEnterpriseandRelatedInformation."SFASNo.131establishesstandardsforadditionaldisclosureaboutoperafingsegmentsforinterimand'annualfinancialstatem'ents.Morespecifically,it,requiresfinancialinform'ationtobedisclosedforsegmentswhoseoperatingresultsarereviewedbythechiefoper'atingdecisionmakerfordecisionsonresourceallocation.Italsorequiresrelateddisclosuresaboutproductsandservices,"""geographicareasandmajorcustom'ers.TheCompanywillberequiredtoadoptSFASNo.131forthefiscalyearendingMarch31,1999.TheCompanydoes"notexpectthattheadoptionofSFASNo.131willhaveasignificant'impactonitsreportinganddisclosurerequirements.'IUseofEstimates'lTheprepar'ationofthe'financialstatementsinconfo'rmitywithgenerallyacceptedaccountingprinciplesrequiresmanagementtomakeestimatesandassumptionsthataffectthe'amountsreported'inthefinancialstatementsandaccompanyingnotes.Actualresultscoulddifferfromthoseestimates.VVReclassifications"'ertain'prioryearamountshaveb'eenreclassifiedinthefinancialstatementstoconform'withthecurrentyearpresentation.VilhIV'ote2.'LongIslandPowerAuthorityTransactionOnJune26,1997,theCompanyandLongIslandPowerAuthority(LIPA)e'ntered'intodefinitiveagreementspurs'uanttowhich,afterthetransferoftheCompany'sgasbusinessunitassets,non-nuclear'ectricgeneratingfacilityassetsandcertainotherassetsandliabilitiestooneormorenewly-foimed'ubsidiariesofanewholdingcompany(HoldCo),formedinconnectionwiththeLIPATransactionandKey'Span'Transactiondiscussedbelow,theCo'mpany'scommonstockwillbes'old'toLIPAfor$2.4975billionincash.Inconnectionwiththistransacti'on",theprincipal'assetstobeacquiredbyLIPAthroughitsstock'cquisitionofLIL'COinclude:(i)thenetbookvalueofLILCO'selectrictransmissionanddistributionsystem',whichamountedto'pproximately$1.3billionatMarch31;1998;(ii)LILCOs'etinvestmentinNMP2,whichamountedtoapproximately$0.7billionatMarch31,1998(asmorefullydiscus'sedinNote5);(iii)certainofLILCO'sregulatoryassetsassociatedwithitselectricbusiness;and(iv)allocated'ccountsreceivableandotherassets.TheregulatoryassetstobeacquiredbyLIPAamountedtoapproximately$6.6billionatMarch31,1998,aridp'rimarilyconsistoftheBaseFinancialComponent(BFC),RateModerationComponent(RMC),'Shorehampost-settlementcosts,Shorehamnuclearfuel,andtheelectricportionoftheregulatorytaxasset.Forafurtherdiscussionoftheseregulatoryassets,seeNote1.VVIILIPAiscontractuallyre'sponsibleforreimbursingHoldCoforpostretirementb'enefitsotherthanpensioncostsrelatedtoemployeesofLILCO's'electricbusiness.'Accordingly,uponcoinsurnmationiofthe'ransaction,HoldCowillreclassifytheassociatedregulatoryassetforpo'stretirementbenefitsotherthanpensionstoacontractualreceivable.IVeprincipalliabilitiestobeassumedbyLIPAthroughitsstockacquisitionofLILCOinclude::(i)LCO'sregulatoryliabilitiesassociatedwithitselectricbusiness;(ii)allocatedaccountspayable,ustomerdeposits,otherde'ferred'creditsandclaimsanddamages;and(iii)certainseriesoflong-term67 debt.TheregulatoryliabilitiestobeassumedbyLIPAamountedtoapproximately$365millionatMarch31,1998,andprimarilyconsistoftheregulatoryliabilitycomponent,1989Settlement,creditsandtheelectricportionoftheregulatorytaxliability.Forafurtherdiscussionoftheseregulatoryliabilities,seeNote1ofNotestoFinancialStatements.Thelong-termdebttobeassumedbyLIPAwillconsistof:(i)allamountsthenoutstandingundertheGeneralandRefunding(G&R)Indentures;(ii)allamountsthenoutstandingundertheDebentureIndentures,exceptasnotedbelow;and(iii).substantiallyallofthetax-exemptauthorityfinancingnotes.HoldCoisrequiredtoassumethe,financialobligationassociatedwiththe7.30'/0DebenturesdueJuly15,1999,withanaggregateprincipalamountcurrentlyoutstandingof$397millionand8.20/0DebenturesdueMarch15,2023,withanaggregateprincipalamountcurrentlyoutstandingof$270million.HoldCowillseektoexchangeitsDebentures,withidenticalterms,forthesetwoseriesofDebenturesandwillissueapromissorynotetoLIPAinanamountequaltotheunexchangedamountofsuchDebentures.HoldCowillalsoissueapromissorynotetoLIPAforaportionofthetax-exemptdebtborrowedtosupportLILCO'scurrentgasoperations,withtermsidenticaltothosecurrentlyoutstanding.TheCompanycurrentlyestimatestheamountofthispromissorynotetobeapproximately$250million.lInJuly1997,inaccordancewiththeprovisionsoftheLIPATransaction,theCompanyandTheBrooklynUnionGasCompany(BrooklynUnion)formedalimitedpartnershipandeachCompanyinvested$30millioninordertopurchaseaninterestrateswapoptioninstrumenttoprotectLIPAagainstmarketriskassociatedwiththemunicipalbondsexpectedtobeissuedbyLIPAtofinancethetransaction.UpontheclosingoftheLIPATransaction,eachlimitedpartnerwillreceivefromLIPA$30millionplusinterestthereon,basedoneachpartners'verageweightedcostofcapital.IntheeventthattheLIPATransactionisnotconsummated,themaximumpotentiallosstotheCompanyistheamountoriginallyinvested.Insuchevent,theCompanyplanstodeferanylossandpetitionthePSCtoallowrecoveryfromitscustomers.AspartoftheLIPATransaction,thedefinitiy'eagreementscontemplatethatoneormoresubsidiariesofHoldCowillenterintoagreementswithLIPA,pursuanttowhichsuchsubsidiarieswillprovidemanagementandoperationsservicestoLIPAwithrespecttotheelectrictransmissionanddistributionsystem,deliverpowergeneratedbyitspowerplantstoLIPA,andmanageLIPA'sfuelandelectricpurchasesandanyoff-systemelectricsales.Inaddition,threeyearsaAertheLIPATransactionisconsummated,LIPAwillhavetherightforaone-yearperiodtoacquireallofHoldCo'sgeneratingassetsatthefairmarketvalueatthetimeoftheexerciseoftheright,whichvaluewill,bedeterminedbyindependentappraisers.1I4InJuly1997,theNewYorkStatePublicAuthoritiesControlBoard(PACB),createdpursuanttotheNeqYorkStatePublicAuthoritiesLawandconsistingoffivemembersappointedbythegovernor,unanimouslyapprovedthedefinitiveagreementsrelatedtotheLIPATransactionsubjecttothefollowingconditions:(i)withinoneyearoftheeffectivedateofthetransaction,LIPAmustestablishaplanforopenaccesstotheelectricdistributionsystem;(ii)ifLIPAexercisesitsoptiontoacquirethegenerationassetsofHoldCo'sgenerationsubsidiary,LIPAmaynotpurchasethegeneratingfacilities,ascontemplatedinthegenerationpurchaserightagreement,at,apricegreaterthanbookvalue<(iii)HoldComustagreetoinvest,overaten-yearperiod,atleast$1.3billioninenergy-relatedandeconomicdevelopmentprojects,andnaturalgasinfrastructureprojectsonLongIsland;(iv)LIPAwillguaranteethat,overaten-yearperiod,averageelectricrateswillbereducedbynolessthan14/owhenmeasuredagainsttheCompany'sratestodayandnolessthana2/o'costsavingstoLIPAcustomersmustresultfromthesavingsattributabtothemergerofLILCOandKeySpan;and(v)LIPAwillnotincreaseaverageelectriccustomerrates'bmorethan2.50/0overatwelve-monthperiodwithoutapprovalfromthePSC.LIPAhasadoptedtheconditionssetforthbythePACB.68 T'eholdersofcommonandcertain.s'eriesofpreferredstockoftheCompanyeligible'tovote'approvedtheLIPATransactioninAugust1997."-'IIh~lnDecember1997,theUnitedStates'NuclearRegulatoryCommission'(NRC)is'suedanorderapproving.~theindirecttransferofcontroloftheCo'mpany's18loownershipinterestinNMP2toLIPA.InDecember1997,theCompanyfiledwiththeFERCasettlementagreementreachedwith'LIPAinconnectionwithaprev'iousfilingoftheCompany'sproposedratesforthesaleofcapacityandenergytoLIPA,ascontemplatedintheLIPAtransaction'agreements.TheCompany'lsohadpreviouslyfile'dan""applicationwiththeFERCseekingapprovalofthetransferoftheCompany'selectrictr'ansmissionanddistributionsystemtoLIPAinconnectionwithLIPA'spur'chaseofthecommonstockoftheCompany.InFebruary1998,theFERCissuedordersonbothoftheCompanyfilings.Specifically,theFERCapprovedtheCompany'sapplicationtotransferassetstoLIPAinconnectionwithLIPA'sacquisition.oftheCompany'scommonstock.Inaddition,theFERCacceptedtheCompariy'spro'posedratesforsale"ofcapacityandenergytoLIPA.Thoseratesmaygointoeffecton.thedatetheservicetoLIPAegins,subjecttorefund,andfinalrateswillbe"setaftertheFERChascompleteditsinvestigationofsuchrates,:"thetimingofwhichcannot'bedeterminedatthistime.I'IInJanuary1998,theCompanyfiledanapplicationwiththePSCinconnectionwiththeproposedtransferofitsgasbusinessunitassets,non-nucleargeneratingfacilityassetsandcertainotherassetsandrelated.'iabilitiestooneormoresubsidiariesofHoldCotobeformedas'contemplated.,in'theLIPATransactionagreements.OnApril29,1998,thePSCapprovedthetransferoftheabove-mentionedassets..InJuly1997,theCompany,BrooklynUnionandLIPAfiledrequestsforprivateletter.rulingswiththeternalRevenueService(IRS)regardingcertainfederalincometaxissueswhichrequirefavorablelingsinorderfortheLIPATransactiontobeconsummated.OnMarch4,1998,theIRSissuedaprivateletterrulingconfirmingthatthesaleoftheCompany'scommonstocktoLIPAwouldnotresultinacorporatetaxliabilitytotheCompany.Inaddition,theIRS'ruledthat,aAerthestocksale,theincomeofLIPA'selectricutilitybusinesswillnotbesubjecttofede'ralincometax'.In'a'separaterulingonFebruary27,1998,theIRSalsoruledthatthebondstobeissuedbyLIPAtofinancetheacquisitionwouldbetax-exempt.CI'InJanuary1998,theCompanyfiledanapplicationwiththeSECseekinganexception'ormostoftheprovisionsofthePublicUtilitiesHoldingCompanyActof1935.In'May1998,the'SECissuedanorderapprovingtheCompany'sapplication~I[TheCompanycurrentlyanticipatesthattheLIPAtransactionwillbeconsummatedbyJune30,1998.Note3.KeySpanEnergyCorporationTransactionOnDecember29,1996,The-Brooklyn,UnionGasCompany"(Brookl)nUnion)andtheCompanyenteredintoanAgreementandPlanofExchangeandMerger(ShareExchangeAgreemen't),pursuanttowhichthecompanieswillbemergedinatransaction(KeySpanTransaction)thatwill'resultintheformationof'HoldCo.P'4TheShareExchangeAgreementwasamendedandrestatedtoreflectcertaintechnicalchanges'asofFebruary7,1997andJune26,1997.EffectiveSeptember29,1997,BrooklynUnionreorganizedintoa69 holdingcompanystructure,withKeySpanEnergyCorporation(KeySpan)becomingitsparentholding'-company.Accordingly,thepartiesenteredintoanAmendment,AssignmentandAssumptionAgreement,datedasofSeptember29,1997,whichamongotherthings,amendedtheShareExchangeAgreementandtrelatedstockoptionagreementstoreflecttheassignmentbyBrooklynUniontoKeySpanandtheassumptionbyKeySpanofallBrooklynUnion'srights'andobligationsundersuchagreements.TheKeySpanTransaction,whichhasbeenapprovedbybothcompanies'oardsofdirectorsand,shareholders,wouldunitetheresourcesoftheCompanywiththeresourcesofKeySpan.KeySpan,withapproximately3,300employees,distributesnaturalgasatretail,primarilyinaterritoryofapproximately187squaremileswhichincludestheboroughsofBrooklynandStatenIslandandtwo-thirdsoftheboroughofQueens,allinNewYorkCity.KeySpanhasenergy-relatedinvestmentsingasexploration,productionandmarketingintheUnitedStatesandNorthernIreland,aswellasenergyservicesintheUnitedStates,includingcogenerationprojects,pipelinetransportationandgasstorage.UnderthetermsoftheKeySpanTransaction,theCompany'scommonshareownerswillreceive.803shares(theRatio)ofHoldCo'scommonstockforeachshareoftheCompany'scommonstockthattheycurrentlyhold.KeySpancommonshareownerswillreceiveoneshareofcommonstockofHoldCofor.eachcommonshareofKeySpantheycurrentlyhold.ShareownersoftheCompanywillownapproximately66%ofthecommonstockofHoldCowhileKeySpanshareownerswillownapproximately34%.IntheeventthattheLIPATransactionisconsummated,theRatiowillbe0.880withCompanyshareownersowningapproximately68%oftheHoldCocommonstock.Basedoncurrentfactsandcircumstances,itisprobablethatthepurchasemethodofaccountingwillapplytotheKeySpan'ransaction,withtheCompanybeingtheacquiringcompanyforaccountingpurposes;ConsummationoftheShareExchangeAgreementisnotconditionedupontheconsummationoftheLIPATransactionandconsummationoftheLIPATransactionisnotconditioneduponconsummationoftheShareExchangeAgreement.InMarch1997,theCompanyfiledanapplicationwiththeFERCseekingapprovalofthetransferoftheCompany'scommonequityandcertainFERC-jurisdictionalassetstoHoldCo.OnJuly17,1997,theFERCgrantedsuchapproval.TheShareExchangeAgreementcontainscertaincovenantsofthepartiespendingtheconsummationofthetransaction.Generally,thepartiesmustcarryontheirbusinessesintheordinarycourseconsistentwithpastpractice,maynotincreasedividends.on,commonstockbeyondspecifiedlevelsandmaynot~issuecapitalstockbeyondcertainlimits.TheShareExchangeAgreementalsocontainsrestrictionson,amongotherthings,charterandby-lawamendmerits,capitalexpenditures,acquisitions,dispositions,incurrenceofindebtedness,certainincreasesinemployeecompensationandbenefits,andaffiliatetransactions.Uponcompletionofthemerger,Dr.WilliamJ.CatacosinoswillbecomechairmanandchiefexecutiveofficerofHoldCo;Mr.RobertB.Catell,currentlychairmanandchiefexecutiveoffiicerofKeySpan,will,becomepresidentandchiefoperatingofficerofHoldCo.Oneyearaftertheclosing,Mr.CatellwillsucceedDr.Catacosinosaschief.executiveofficer,withDr.Catacosinoscontinuingaschairman.TheboardofdirectorsofHoldCowillbecomprisedof15members,sixfromtheCompany,sixfromKeySpanandthreeadditionalpersonspreviouslyunaffiliatedwitheithercompany.70 InMarch-1997,theCompanyandtheBrooklynUnionGasCompany(BrooklynUnion)filedajointpetitionwiththePSCseekingapproval,undersection70oftheNewYorkPublicSer'viceLaw,oftheKeySpanAgreementbywhichtheCompanyandKeySpaneachwouldbecomesubsidiariesofHoldCothroughanexchangeofsharesofcommonstockwithHoldCo.Inaddition,thepetitioncalledforapproximately$1.0billionofsavingsattributabletooperatingsynergiesthatareexpectedtoberealizedoverthe10-yearperiodfollowingthecombinationtobeallocatedto'customers,netoftransactioncostsforthecombination.OnDecember10,1997,BrooklynUnion,theCompany,theStaffofthePSCandthreeotherpartiesenteredintoaSettlementAgreement(Stipulation)resolvingallissuesamongthemintheproceeding.HearingsontheStipulationwereheldinearlyJanuary1998and,onFebruary4,1998,thePSCapproved,effectiveFebruary5,1998,theStipulation,modiflied'onlytoreduceBrooklynUnion'searningscapfortheremainingyearsofitsrateplan.rUndertheStipulation,athree-yeargasrateplancoveringtheperiodDecember1,1997throughNovember30,2000willbeimplementedbytheCompanywhichprovidesfor,amongotherthings,anestimatedreductionincustomers'illsofapproximately3.9%,includingfuelsavings,throughatleastNovember30,2000.Thisgasratereductionwilloccurinthreephasesasfollows:(i)areductioninbaseratesofapproximately$12.2'"milliontoreflectdecreasesintheCompany'sgascostofserviceeffectiveonFebruary5,1998;(ii)abaseratereductionofapproximately$6.2millionassociatedwithnon-fuelsavingsrelatedtotheKeySpanTransactiontobecomeeffectiveontheclosingdateofthetransaction;and(iii)anexpectedreductionintheGasAdjustmentClause(GAC)toreflectannualfuelsavingsassociatedwiththetransactionestimatedatapproximately$4.0million,theactuallevelofwhichwillbereflectedinratesifandwhentheyactuallymaterialize.'heCompanywillbesubjecttoanearningssharingprovisionpursuanttowhichitwillberequiredtocredittocore/firmcustomers60%ofanyutilityearningsupto100basispointsabove11.10%and50%ofanyutilityearningsinexcessof12.10%oftheallowedreturnoncommonequity.BothacustomerserviceandasafetyandreliabilityincentiveperformanceprogramwilleimplementedeffectiveDecember1,1997,withmaximumpre-taxreturnonequitypenaltiesof40and12basispoints,respectively,iftheCompanyfails'toachievecertainperformancestandardsintheseareas.TheStipulation,whichobligatestheCompanytoreduceelectriccustomers'illsbyapproximately2.5%resultingfromthesavingsinoperatingandfuelcosts,relatedtosynergysavings,alsodefersthetimewithinwhichthePSCmustactontheCompany'spendingelectricrateplanuntilJuly1,1998.However,anyreductionincustomers'illswouldnotbecomeeffectiveuntilthePSCsetstheCompany'selectricrates.ForBrooklynUnion,effectiveonthedateoftheconsummationoftheKeySpanTransaction,BrooklynUnion'.sbaseratestocore/firmcustomerswillbereducedby$23.9millionannually.Inaddition,effectiveinthefiscalyearinwhichtheKeySpanTransactionisconsummated,BrooklynUnionwillbesubjecttoanearningssharingprovisionpursuanttowhichitwillberequiredtocredittocore/firmcustomers60%ofanyutilityearningsupto100basispointsabovecertainthresholdequityreturnlevelsoverthetermoftherateplan(otherthananyearningsassociatedwithdiscreteincentives)and50%ofanyutilityearningsinexcessof100basispointsabovesuchthresholdlevels.Thethresholdlevels,asmodifiedbytheFebruary5,1998Order,are13.75%forfiscalyear1998,-13.50%forfiscalyears1999,<<II71 2000,and2001;and13.25'/0for,fiscal~year2002.Asafetyandreliabilityincentivemechanismwill'beimplementedeffectiveontheconsummationdateoftheKeySpanTransaction,withamaximum12basispointpre.-taxpenaltyreturn.-oncommonequityifBrooklynUnionfailstoachievecertainsafetyandreliability.performancestandards.Withtheexceptionofthesimplificationofthecustomerserviceperformancestandards,thecurrentBrooklynUnionrateplanapprovedbythePSCin1996remainsunchanged.AnygascostsavingsallocabletoBrooklynUnionresultingfromtheKeySyanTransactionwillbe,reflectedinratestoutilitycustomersthroughtheGAC.asthosesavingsarerealized.ITheStipulationadopts.certainaffiliate,transactionrestrictionscostallocationandfinancialintegrityconditions,andacompetitivecodeofconduct.TheserestrictionsandconditionseliminateorrelaxmanyrestrictionscurrentlyapplicabletoBrooklynUnioninsuchareasasaffiliatetransactions,useofthenameandreputationofBrooklynUnionbyunregulatedaffiliates,commonofficersofHoldCo,theutilitysubsidiariesandunregulatedlsubsidiaries,dividendpaymentrestrictions,andthecompositionoftheBoardofDirectorsofBrooklynUnion.RRIRI~TheStipulationalsoenables,theutilitiestoform,oneormoresharedservicessubsidiariestoperformfunctionscommontobothutilitiesandtheiraffiliates,suchasaccounting,finance,humanresources,legal.andinformationsystemsand.technologytorealizesynergysavings,IRNote4.RateMatters,RlElectricInApril1996,thePSCissuedanorderdirectingthe,Companytofilefinancialand.otherinformation.sufficienttoprovidealegalbasisforsettingnewratesforthethree-yearperiod1997through1999,Incompliancewiththeorder,theCompanysubmittedamulti-year,rateplan(Plan)inSeptember1996.MajorelementsofthePlaninclude:(i)abaseratefreezeforthethree-yearperiodDecember1,1996throughNovember,30,1999;,(ii)anallowedreturnoncommonequityof11.0/0throughtheterm'ofthePlanwiththeCompanyfullyretaining.allearningsup,to12.66/o,andsharingwiththecustomeranyearningsabove12.66/0,(iii)thecontinuationofexistingLRPPrevenueandexpensereconciliationmechanismsandperformanceincentiveprograms;(iv)creditingallnetproceedsfromtheShoreham,propertytaxlitigationtotheRMCtoreduceitsbalance;and(v)a.mechanismtofullyrecoveranyoutstanding.RMCbalance.attheendofthe1999rate.yea'rthroughRinclusionintheFCA,overatwo-yearperiod.Pursuantto'theprovisionsoftheStipulationdiscussedabove,undertheheadingKeySpanEnergyCorporationTransaction,thePSChasuntilJuly1,1998torenderadecision'onthisfiling.Asan.interimmeasure,pendingtheconsummationoftheLIPA.Transactionortheadjudicationofits=electricratefiling;theCompanysubmittedpetitionsinkfay1997and,December:1997requestingPSCapprovaltoextend,throughtherateyearsendingNovember30,1996a'nd1997,respectively,theprovisionsofits1995electricrateorder(1995Order).ThesepetitionswereappiovedbythePSCinDecember1997and,April;1998;respectively.RRII'~RR.1995ElectricRateOrder,Thebasis.ofthe1995OrderincludedminimizingfutureelectricrateincreaseswhilecontinuingtoprovidefortherecoveryoftheCompany'sregulatoryassetsandretainingconsistencywiththeRMA'sobjectiveofrestoringtheCompanytofinancialhealth.The1995Order,whichbecameeffectiveDecember1,1994,frozebaseelectricrates,reducedtheCompany'sallowedreturnoncommonequityfrom11.6/0to11.0/0andmodifiedoreliminatedcertainperformance-basedincentives,asdiscussedbelow.TheLRPP,originallyapprovedbythePSCinNovember1991,containedthreemajorcomponents:(i)revenuereconciliation;(ii)expenseattritionandreconciliation;and,(iii)performance-basedincentives.72 Inthe1995Order,thePSCcontinuedthethreemajorcomponentsoftheLRPPwithmodificationstotheexpenseattritionandreconciliationmechanismandtheperformance-basedincentives.Therevenuereconciliationmechanismremainsunchanged.Ievenuereconciliationprovidesamechanismthateliminatestheimpactofexperiencingsalesthatareaboveorbelowadjudicatedlevelsbyprovidingafixedannualnetmarginlevel(definedassalesrevenues,netoffuelexpensesandgrossreceiptstaxes).Thedifferencebetweenactualandadjudicatednetmarginlevelsaredeferredonamonthlybasisduringtherateyear.1TheexpenseattritionandreconciliationcomponentpermitstheCompanytomakeadjustmentsforcertainexpensesrecognizingthatthesecostincreasesareunavoidableduetoinflationandchangesoutsidethecontroloftheCompany.Pursuanttothe1995Order,theCompanyispermittedtoreconcileexpensesforpropertytaxesonly,whereasundertheoriginalLRPPtheCompanywasabletoreconcileexpensesforwagerates;propertytaxes,interestcostsanddemandsidemanagement(DSM)costs.TheoriginalLRPPhadalsoprovidedforthedeferralandamortizationofcertaincostvariancesforenhancedreliability,productionoperationsandmaintenanceexpensesandtheapplicationofaninflationindextootherexpenses.Underthe1995Order,thesedeferralshave'beeneliminatedandany.unamortizedbalanceswerecreditedtotheRMCduring1995.Themodifiedperformance-basedincentiveprogramsincludetheDSMprogram,thecustomerserviceperformanceprogramandthetransmissionanddistributionreliabilityprogram.Undertheserevisedprograms,theCompanywassubjecttoamaximumpenaltyof38basispointsoftheallowedreturnoncommonequityandcouldearnupto4basispointsunderthecustomerserviceprogram.PursuanttotheStipulation,theCompany'scustomerserviceincentiveprogramwasfurthermodifiedtoeliminatethe4ispointrewardandincreasedthemaximumpenaltywhichcanbeincurredunderthetheseprogramsom38to62basispoints.Thepartialpass-throughfuelincentiveprogramremainsunchanged.Underthisincentive,theCompanycanearnorforfeitupto20basispointsoftheallowedreturnoncommonequity.FortherateyearendedNovember30,1997,theCompanyearned12.7basispoints,orapproximately$2.9million,netoftaxeffects,asaresultofitsperformanceunderallincentiveprograms.FortherateyearsendedNovember30,1996and1995,theCompanyearned20and19basispoints,respectively,orapproximately$4.3millionand$4.0million,respectively,netoftaxeffects,undertheincentiveprogramsineffectatthosetimes.Thedeferredbalancesresultingfromthenetmarginandexpensereconciliations,andearnedperformance-basedincentivesarenettedattheendofeachrateyear,asestablishedundertheLRPPandcontinuedunderthe1995Order.Thefirst$15millionofthetotaldeferralisrecoveredfromorcreditedtoratepayersbyincreasingordecreasingtheRMCbalance.Deferralsinexcessofthe$15million,uponapprovalofthePSC,arerefundedtoorrecoveredfromthecustomersthroughtPeFCAmechanismovera12-monthperiod.FortherateyearendedNovember30,1997,theamounttobereturnedtocustomersresultingfromtherevenueandexpensereconciliations,performance-basedincentiveprogramsandassociatedcarryingchargestotaled$4.1million.ConsistentwiththemechanicsoftheLRPP,'itisanticipatedthattheentirenceofthedeferralwillbeusedtoreducetheRMCbalanceuponapprovalbythePSCofthepany'sreconciliationfilingwhichwassubmittedtothePSCinMarch1998.FortherateyearendedNovember30,1996,theCompanyrecordedanetdeferredLRPPcreditofapproximately$14.5million73 whichwassubsequentlyappliedasareductiontotheRMCuponthePSClsapproval.oftheCompany's~reconciliationfilinginDecember1996.FortherateyearendedNovember301995,theCompanyrecordedanetdeferredcreditofapproximately$41million.Thefirst$15millionofthedeferralwasappliedasareductiontotheRMCwhiletheremainingportionofthedeferralof$26millionwillbereturnedtocustomersthroughtheFCAwhenapprovedbythePSC.'IAnothermechanismoftheLRPP,providesthatearningsinexcessoftheallowedreturnoncommonequity,excludingtheimpactsofthevariousincentiveand/orpenaltyprograms,areusedtoreducetheRMC.FortherateyearsendedNovember30,1997,1996and1995,theCompanyearned$4.8million,$9.1million,and$6.2million,respectively,inexcessofitsallowedreturnoncommonequity.TheseexcessearningswereappliedasreductionstotheRMC.hlIntheeventthattheLIPATransactionisnotconsummated,"theCompanyiscurrentlyunabletopredicttheoutcomeoftheelectricrateproceedingcurrentlybefore.thePSCanditseffect,ifany,ontheCompany'sfinancialposition,cashflowsorresultsofoperations.0.GasInMay1997,theCompanysubmittedapetitionrequestingPSCapprovaltoextendthroughtherateyearendingNovember30,1997,thegasexcessearningssharingmechanismestablishedinitspriorthree-yeargasratesettlementagreementwhichexpiredonNovember30,1996.Pursuanttothisrequest,earningsinexcessofareturnoncommonequityof11.0/0aretobeallocatedequallybetweencustomersandshareownerswiththecustomers'hareofexcessearningscreditedtotheregulatoryassetcreatedasaresultofcostsassociatedwithmanufacturedgasplant(MGP)siteinvestigationandremediationcosts.ThisrequestwasapprovedbythePSCinDecember1997.Asaresultofthismechanism,thecustomer'allocationofexcessearningsamountedto$6.3millionfortherateyearendedNovember30,1997,andwillbeappliedtooffsetcostsincurredtoinvestigateandremediateMGPsites.Thepriorgasratesettlementprovidedthatearningsinexcessofa10.6/0returnoncommonequitybesharedequallybetweentheCompany'sfirmgascustomersanditsshareowners.FortherateyearsendedNovember30,1996and1995,thefirmgascustomers'ortionofgasexcessearningstotaledapproximately$10millionand$1million,respectively.In1997,theCompanywasgrantedpermissionbythePSCtoapplythecustomers'ortionofthegasexcessearningsandassociatedcarryingchargesforthe1996and1995rateyearstotherecoveryofdeferredcostsassociatedwithpost-retirementbenefitsotherthanpensionsandcostsincurredforinvestigationandremediationofMGPsites.4Note5.NineMilePointNuclearPowerStation,Unit2TheCompanyhasanundivided18/0interestinNMP2,locatednearOswego,NewYorkwhichisoperatedbyNiagaraMohawkPowerCorporation(NMPC).TheownersofNMP2andtheirrespectivepercentageownershipareasfollows:theCompany(18/0),NMPC(41/0),NewYorkStateElectric&GasCorporation(18/0),'ochesterGasandElectricCorporation(14/0)andCentralHudsonGas&ElectricCorporation(9/0).TheCompany'sshareoftheratedcapabilityisapproximately205MW.TheCompany'snetutilityplantinvestment,excludingnuclearfuel,wasapproximately$689millionatMarch31,1998,$710millionatMarch31,1997and$715millionatDecember31,1996.Theaccumulatedprovisionfordepreciation,excludingdecommissioningcosts,wasapproximately$196millionand$175millionatMarch31,1998and1997,respectively,and$169millionatDecember31,1996,GenerationfromNMP2andoperatingexpensesincurredbyNMP2aresharedinthesameproportionsasthecotenants'espectiveownershipinterests.TheCompanyisrequiredtoprovideitsrespectiveshareoffinancingforanycapitaladditionstoNMP2.NuclearfuelcostsassociatedwithNMP2arebeingamortizedonthebasisofthequantityofheatproducedforthegenerationofelectricity.74 NMPChascontractedwiththeUnitedStatesDepartmentofEnergyforthedisposalofspentnuclearfuel.TheCompanyreimbursesNMPCforits18'/oshare,ofthecostunderthecontractatarateof$1.00permegawatthourofnetgenerationlessafactortoaccountfortransmissionlinelosses.Fortheyearendedarch31,1998andforthethreemonthsendedMarch31,1997,thistotaled$1.4millionand$0.4illion,respectively.FortheyearsendedDecember31,1996and1995,thistotaled$1.4millionand$1.2million,respectively.AsdiscussedinNote2,theLIPATransactioncontemplatesthatLIPAwillacquiretheCompany's18/0interestinNMP2.NuclearPlantDecommissioningNMPCexpectstocommencethedecommissioningofNMP2in2026,shortlyafterthecessationofplantoperations,usingamethodwhichprovidesfortheremovalofallequipmentandstructuresandthereleaseofthepropertyforunrestricteduse:TheCompany'sshareofdecommissioningcosts,basedupona"Site-Specific"1995study(1995study),isestimatedtobe$309millionin2026dollars($155millionin1998dollars).TheCompany'sshareoftheestimateddecommissioningcostsiscurrentlybeingprovidedforinelectricratesandisbeingchargedtooperationsasdepreciationexpenseovertheservicelifeofNMP2.TheamountofdecommissioningcostsrecordedasdepreciationexpensefortheyearendedMarch31,'998andthethreemonthsendedMarch31,1997,totaled$2.2millionand$0.5million,respectively,,and$3.9millionand$2.3millionfortheyearsendedDecember31,1996and1,995,respectively.TheaccumulateddecommissioningcostscollectedinratesthroughMarch31,1998and1997andDecember31,'1996amountedto$17.7million,$15.5millionand$14.9million,respectively.TheCompanyhasestablishedtrustfundsforthedecommissioningofthecontaminatedportionoftheNMP2plant.Itiscurrentlyestimatedthatthecosttodecommissionthecontaminatedportionoftheplantwillbeapproximately76/oofthetotaldecommissioningcosts.These.fundscomplywithregulations'ssuedbytheNRCandtheFERCgoverningthefundingofnuclearplantdecommissioningcosts.Thempany'spolicyistomakequarterlycontributionstothefundsbasedupontheamountofecommissioningcostsreflectedinrates.AsofMarch31,1998,thebalanceinthesefunds,includingreinvestednetearnings,wasapproximately$17.9million.useamountsareincludedontheCompany'sBalanceSheetinNonutilityPropertyandOtherInvestments.ThetrustfundsinvestmentconsistsofU.S.Treasurydebtsecuritiesandcashequivalents.Thecarryingamountsoftheseinstrumentsapproximatefairmarketvalue.'IITheFASBissuedanexposuredraftin1996,entitled"AccountingforCertainLiabilitiesRelatedtoClosureorRemovalofLong-LivedAssets."Undertheprovisionsoftheexposuredraft,theCompanywouldberequiredtochangeitscurrentaccountingpracticesfordecommissioningcostsasfollows;(i)theCompany'sshareofthetotalestimateddecommissioningcostswouldbeaccountedforasaliability,basedondiscountedfuturecashflows;(ii)therecognitionoftheliabilityfordecommissioningcostswouldresultinacorrespondingincreasetothecostofthenuclearplantratherthanasdepreciationexpense;and(iii)investmentearningsontheassetsdedicatedtotheexternaldecommissioningtrustfundwouldbbrecordedasinvestmentincomeratherthanasanincreasetoaccumulateddepreciation.Discussionsoftheissuesexpressedintheexposuredraftareongoing.IftheCompanywasrequiredtorecordthepresentvalueofitsshareofNMP2decommissioningcostsonitsBalanceSheetasofMarch31,1998,theCompanywouldhavetorecognizealiabilityandcorrespondingincreasetonuclearplantofapproximately$62million.UponconsummationoftheLIPATransactiori,'LIPAwillacquiretheCompany'sinterestinNMP2aswellasthetrustsreferredtoabove."'clearPlantInsurancePCprocurespublicliabilityandprop'ertyinsuranceforNMP2,andtheCompanyreimbursesNMPCforits18/0shareofthosecosts.75 ThePrice-AndersonAmendmentsActmandatesthatnuclearpowerplantssecurefinancialprotectionin'heeventofanuclearaccident.Thisprotectionmustconsistoftwolevels.Theprimarylevelprovidesliabilityinsurancecoverageof$200million(themaximumamountavailable)intheeventofanuclearaccident.Ifclaimsexceedthatamount,asecondlevelofprotectionisprovidedthrougharetrospectiveassessmentofalllicensedoperatingreactors.Currently,this"secondaryfinancialprotection"subjectseachofthe110presentlylicensednuclearreactorsintheUnit'edStatestoaretrospectiveassessmentofupto$76millionforeachnuclearincident,payableataratenottoexceed$10millionperyear.The'ompany'sinterestinNMP2couldexposeittoamaximumpotentiallossof$13.6million,perincident,throughassessmentsof$1.8millionperyearintheeventofaseriousnuclearaccidentatNMP2oranotherlicensedU.S;commercialnuclearreactor.Theseassessmentsaresubjecttoperiodicinflationindexingandtoa5'/0surchargeiffundsproveinsufficienttopayclaims..II4NMPChasalsoprocured$500millionprimarynuclearpropertyinsurancewiththeNuclearInsurancePoolsandapproximately$2.3billionofadditionalprotection(includingdecontaminationcosts)inexcessoftheprim'arylayerthroughNuclearElectricInsuranceLimited(NEIL).EachmemberofNEIL,includingtheCompany,'salsosubjecttoretrospectivepremiumadjustmentsintheeventlossesexceedaccumulatedreserves.-ForitsshareofNMP2,theCompanycouldbeassesseduptoapproximately$1.6millionperloss.ThislevelofinsuranceisinexcessoftheNRCrequired$1.06billionofcoverage.TheCompanyhasobtainedinsurancecoveragefromNEILfortheextraexpenseincurredinpurchasingreplacementpowerduringprolongedaccidentaloutages.Underthisprogram,shouldlossesexceedtheaccumulatedreservesofNEIL,eachmember,includingtheCompany,wouldbeliableforifsshareofdeficiency.TheCompany'smaximumliabilityperincidentunderthereplacementpowercoverage,intheeventofadeficiency,isapproximately$0.7million.Note6.CapitalStockCommonStockCurrentlytheCompanyhas150,000,000sharesofauthorizedcommonstock,ofwhich121,727,040wereissuedand46,281shareswereheldinTreasuryatMarch31,1998.TheCompanyhas1,644,865sharesreservedforsalethroughitsEmployeeStockPurchasePlan,2,829,968sharescommittedtotheInvestorCommonStockPlanand86,099sharesreservedforconversionoftheSeriesIConvertiblePreferredStockatarateof$17.15pershare.Inaddition,inconnectionwiththeShareExchangeAgreement,asdiscussed'inNote3,thbCompanyhasgrantedKeySpantheoptiontopurchase,undercertaincircumstances,23,981,964sharesofcommonstockatapr'iceof$19.725pershare.Inconnectionwithsuchoption,theCompanyhasreceivedshareownerapprovaltoincreasetheauthorizedsharesofcommonstockto160,000,000.C'referredStockATheCompanyhas7,000,000authorizedshares,cumulativepreferredstock,parvalue$100pershareand.,3P,000,000authorizedshares,cumulativepreferredstock,parvalue$25pershare.Dividendsonpreferredstockarepaidinpreferencetodividendsoncommonstockoranyotherstockrankingjuniortopreferredstock.PreferredStockSubjecttoMandatoryRedemptionTheaggregatefairvalueofredeemablepreferredstockwithmandatoryredemptionsatMarch31,1998and1997andDecember31,1996amountedtoapproximately$675,$643and$637million,respectively,comparedtotheircarryingamountsof$639,$640and$640million,respectively.Forafurtherdiscussiononthebasisofthefairvalueofthesecuritiesdiscussedabove,seeNote1.76 EachyeartlieCompanyisrequired'toredeemcertainseriesofpreferredstockthroughtheoperationofsinkingfundprovisions'asfollows:"NumberofSharesRedemplionAmountshSeriesRedemlionProvisionBeginningEnding6.875%SeriesUU...10/15/99,,10/15/19~112,000,,$2,800,0001ltIl'heaggregateparvalu'eofpreferredstockrequiredtoberedeemedthroughsinkingfundsduringthefiscalyearendedMarch31,is$2.8million'ineachoftheyears2000,2001,2002and2003.TheCompanyalso,hasthenon-cumulativeoptiontodoublethenumberofsharestobe,redeemedpursuanttothesinkingfundprovisionsinanyyearfor,thepreferred;stockseriesUU.TheCompanyisalsorequiredtoredeemallsharesofcertainseries'ofpreferredstockwhicharenotsubjecttosinkingfundrequirements.Themandatoryredemptionrequirementsfortheseseriesareasfollows:Series".RedemptionDale'Numb'erofSitaresRedemptionAmounts,$1.67Ser'ies'GG.3/1/997.95%SeriesAA...-,6/1/00'7.05%SeriesQQ5/1/017.66%SeriesCC8/1/02880,00014,520,0003,464,000570,000$22,000,000'63,000,00086,600,00057,000,000PreferredStockSubjecttoOptionalRedemption'heCompany,hastheoptiontoredeemcertainseriesofitspreferred,stock.Fortheseriessubjecttooptionalredemptionat,March31,,1998,,thecallpriceswereas'olio'ws:',"~hgh'htlSeriesCalpPrice-'edemptionAmounts.00/0SenesB$101.00,$10,100,0004.25%SeriesD102.00'7,140,0004.35%SeriesE102.00~'20,400,0004.35%SeriesFE102.00~'5,100,0005'/,%SeriesH102.00.,20,400,0005'/,%Series1-Convertible100.001,474,3007.40%SeriesL,,'102.07~,15,361,535$1'.95'Serie'sNN6.95'1880300JtlaOn'April17,1998,the'Companyexeiciseditsoptiontoredeemitscallablepreferredstockand'calledforredemptiononMay19,1998alloftheoutstandingsharesofthepreferredstockseriesnotedabove'oratotalof$122millionincludingapproximately$5millionofcallpremiums.h'tPreferenceStock.AtMarch31,1998,noneoftheauthorized7,500,000sharesofnonparticipatingpreferencestock,parvalue$1pershare,whichranksjuniortopreferredstock,wereoutstanding.>>Note7.Long-TermDebtG&RMortgageTheGeneralandRefundingl'G&R)BondsaretheCompany'sonlyoutstandingsecuredindebtedness.,The.G&RMortgageisalienon'substantiallyalloftheCompany'sproperties.TheannualG&RMortgage,sinkingfundrequirementfor1997,duenotlaterthanJune30,1998,isatedat$25million.Itisanticipatedthatthisrequirementwi11besatisfiedwithretiredG&RBonds,erty'additions,'r'ahnycombination'hereof.77 Uponconsummation,.oftheLIPATransaction,alloftheCompany'sseriesofG&RBondswillbe,'ssumedbyLIPA.LIPAhasindicatedthatitintendstoredeemallsuchG&RBondsassoonaspracticableaftertheclosingoftheLIPATransaction.1989RevolvingCreditAgreementTheCompanyhasavailablethroughOctober1,1998,$250millionunderits1989RevolvingCreditAgreement(1989RCA).ThislineofcreditissecuredbyafirstlienupontheCompany'.saccountsreceivableandfueloilinventories.InFebruary1997,theCompanyutilized$30millionininterimfinancingunderthe1989RCA,whichwasrepaidinMarch1997,and$40millioninJuly'1997,whichwasrepaidinAugust1997.AtMarch31,1998,noamountswereoutstandingunderthe1989RCA.,TheCompanyhasfiled,withthelendinginstitutions,thedocumentationnecessarytoterminatethe1989RCAeffectiveupontheclosingofthe,LIPAandKeySpanTransactions.AuthorityFinancingNotesAuthorityFinancingNotesareissuedbytheCompanytotheNewYorkStateEnergyResearchandDevelopmentAuthority(NYSERDA)tosecurecertaintax-exeinptIndustrialDevelopmentRevenueBonds,PollutionControlRevenueBonds(PCRBs)andElectricFacilitiesRevenueBonds(EFRBs)issuedbyNYSERDA.Certainofthesebondsaresubjecttoperiodictender,atwhichtimetheirinterestratesmaybesubjecttoredetermination.TenderrequirementsofAuthorityFinancingNotesatMarch31,1998wereasfollows:(Inthousandsofdollars)InterestRateSeriesPrincipalTenderedPCRBsEFRBs8'/%3.58%3.70%3.70%3.70%3.70%3.55%19821985A,B1993A1993B1994A1995A1997A$17,200150,00050,00050,00050,00050,00024,880Tenderedeverythreeyears,nexttenderOctober2000TenderedannuallyonMarch1TenderedweeklyTenderedweeklyTenderedweeklyTenderedweeklyTenderedweeklyIThe1997,1995,1994and1993EFRBsandthe1985PCRBsaresupportedbylettersofcreditpursuanttowhichtheletterofcreditbankshaveagreedtopaytheprincipal,interestandpremium,ifapplicable,intheaggregate,uptoapproximately$408millionintheeventofdefault.TheobligationoftheCompany,toreimbursethe,letterofcreditbanksisunsecured.Theexpirationdatesfortheselettersofcreditareasfollows:PCRBsEFRBsSeries1985A,B1993A,B1994A1995A1997AExiralionDale3/16/9911/17/9910/26/008/24/9812/30/98Priortoexpiration,theCompanyisrequiredtoobtaineitheranextensionofthelettersofcreditorasubstitutecreditfacility.Ifneithercanbeobtained,theauthorityfinancingnotessupportedbylettersofcreditmustberedeemed.InaccordancewiththeLIPAAgreement,LIPAwillassumesubstantiallyallofthetax-exemptauthoritrfinancingnotes.HoldCowillissueapromissorynotetoLIPAforaportionofthetax-exemptdebtborrowedtosupportLILCO'scurrentgasoperations,withtermsidenticaltothosecurrentlyoutstanding.TheCompanycurrentlyestimatestheamountofthispromissorynotetobeapproximately$250million.78 FairValu'esofLong-TermDebt8ThecarryingamountsandfairvaluesoftheCompany'slong-termdebtatMarch31,1998and1997andDecember31,1996wereasfollows:airlGeneralandRefundingBondsDebentures'uthorityFinancingNotesTotalMarch31,1998$1,288,4702,407,178987,646$4,683,294March31,1997$1,314,2732,256,573959,092$4,529,938,.(Inthousandsofdollars)December31,1996$1,571,7452,271,095950,758$4,793,598CarryingAmountGen'eralandRefundingBondsDebenturesAuthorityFinancingNotesTotal'arch31,1998$1,286,0002,270,000940,555$4,496,555March31,1997=-$1,286,000,2,270,000916,675$4,472,675(Inthousandsofdollars)December31,1996$1,536,0002,270,000916,675$4,722,675Forafurtherdiscussiononthebasisofthefairvalueofthesecuritieslistedabove,seeNote1.DebtMaturityScheduleThetotallong-termdebtmaturingineachofthenextfiveyearsendingMarch31isasfollows:1999,$10.1million;2000,$490million;2001,$1million;2002,$146million;and2003,$154million.,NoteS.RetirementBenefitPlansPensionPlansTheCompanymaintainsadefinedbenefitpensionplanwhichcoverssubstantiallyallemployees(Primaryn),asupplementalplanwhichcoversofficersandcertainkeyexecutives(SupplementalPlan)andatirementplanwhichcoverstheBoardofDirectors(Directors'lan).TheCompanyalsomaintains$401(k)plansforitsunionandnon-unionemployeestowhichitdoesnotcontribute.~PrimaryPlan,TheCompany'sfundingpolicyistocontributeannuallytothePrimaryPlanaminimumamountconsistentwiththerequirementsofthe.EmployeeRetirementIncomeSecurityActof1974,plussuchadditionalamounts,ifany,astheCompanymaydeterminetobeappropriatefromtimetotime.PensionbenefitsarebaseduponyearsofparticipationinthePrimaryPlanandcompensation.ThePrimaryPlan'sfundedstatusandamountsrecognized,ontheBalanceSheetatMarch31,1998andMarch31,1997andDecember31,1996wereasfollows:(Inthousandsofdollars)March31,1998March31,1997December31,1996ActuarialpresentvalueofbenefitobligationVestedbenefitsNonvestedbenefits$661,07559,268$642,39257,960$547,00255,157AccumulatedBenefitObligationPlanassetsatfairvalueActuarialpresentvalueofprojectedbenefitobligationProjectedbenefito'bligationless(greater)thanlanassetsrecognizednetobligationrecognizednet(gam)Net(Accrued)PrepaidPensionCost$700,352$602,159$720,343$919,100$744,400$746,400689,661825,159'07,70393,941(63,303)56,73962,652<<.69;399,"71,085(163034)'1,605)(123,759)$(6,441)$4,491$4,0679 TheincreaseinthepresentvalueoftheaccruedbenefitatMarch31,1997comparedtoDecember31,1996,isdueprimarilytothechangeinthediscountratefrom7.25%to7.00%andtheuseofupdatedactuarialassumptions,relatingtomortality.PeriodicpensioncostforthePrimaryPlanandthesignificantassumptionsconsistedofthefollowing:(Inthousandsofdollars)YearEndedThreeMonthsEndedYearEndedYearEndedMarch31,1998March31,1997December31,1996December31,1995Servicecost-benefitsearnedduringtheperiodInterestcostonprojectedbenefitsobligationandservicecostActualreturn'on'planassetsNetamortizationanddeferral$21,11'456,379(200,025)151,438$4,64512,494(3,694)(9,446)$17,38447,927(81,165)33,541$15,38545,987(102,099)57,665NetPeriodicPensionCost$28,906$3,999$17,687$16,938March31,1998.March31,1997December31,1996December31,1995DiscountrateforobligationDiscountrateforexpenseRateoffuturecompensationincreasesLong-termrateofreturnonassets7.00%7.00%4.50%85P%7.00%7.25%5PP%7.50%725%7.25%5.00%7.50%7.25%7.25%500%750%ThePrimaryPlanassetsatfairvalueincludecash,cashequivalents,groupannuitycontracts,bondsandequitysecurities.In1993,thePSCissuedanOrderwhichaddressedtheaccountingandratemakingtreatmentofpensioncostsinaccordancewithSFASNo.87,"Employers'ccountingforPensions."UndertheOrder,theCompany.isrequiredtorecognizeanydeferrednetgainsorlossesoveraten-yearperiodratherthanusingthecorridorapproachmethod.TheCompanybelievesthatthismethodofaccountingforfinancialreportingpurposesresultsinabettermatchingofrevenuesandtheCompany'spensioncost.TheCompanydefersdifferencesbetweenpensionrateallowanceandpensionexpenseundertheOrder.Inaddition,thePSCrequirestheCompanytomeasureandpayacarryingchargeonamountsinexcessofthepensionrateallowanceandtheannualpensioncontributionscontributedintothepensionfund.I'naddition,effectiveDecember1,1997,inaccordancewiththeStipulation,theCompanydefersthedifferencebetweenthesumofgaspensionandgaspostretirementbenefitcostsotherthanpensionandtheamountsprovidedforinrates,totheextentthatsuchdifferencesareinexcessoforbelowthreepercentoftheCompany'spretaxnetincomefromitsgasoperations.Suchexcesswillbetransferredtoagasbalancingaccount.ForafurtherdiscussionoftheStipulation,seeNote3.SupplementalPlanTheSupplementalPlanprovidessupplementaldeathandretirementbenefitsforofficersandotherkeyexecutiveswithoutcontributionfromsuchemployees.TheSupplementalPlanisanon-qualifiedplanundertheInternalRevenueCode.Theprovisionforplanbenefitstotaledapproximately$0.7millionforthethreemonthsendedMarch31,1997and$2.7millionand$2.3millionfortheyearsendedDecember31,1996and1995,respectively.FortheyearendedMarch31,1998,theCompanyrecordedachargeofapproximately$31millionrelatingtocertainben'efitsearnedbyitsofficersrelatingtotheterminationoftheirannuitybenefitsearnedthroughthesupplementalretirementplanandotherexecutiveretirementbenefits.Thesecharges,thecostofwhicharebornebytheCompany'sshareowners,resultfromprovisionsoftheofficers'mploymentcontracts,includingtheChairman'semploymentcontract,andthependingtransactionswithLIPAandKeySpanwhichaffectthetimingofwhenthesecostsarerecordei'0 Directors'PlanTheDirectors'PlanprovidesbenefitstodirectorswhoarenotofficersoftheCompany.Directorswhohaveservedinthatcapacityformorethanfiveyearsqualifyasparticipantsundertheplan.TheDirectors'anisanon-qualifiedplanundertheInternalRevenueCode.Theprovisionforretirementbenefits,hichareunfunded,totaledapproximately$132,000fortheyearendedMarch31,1998,$34,000forthethreemonthsendedMarch31,1997and$127,000and$114,000fortheyearsendedDecember31,1996and1995,respectively.PostretirementBenefitsOtherThanPensionsInadditiontoprovidingpensionbenefits,theCompanyprovidescertainmedicalandlifeinsurancebenefitstoretiredemployees.SubstantiallyalloftheCompany,'semployeesmaybecomeeligibleforthesebenefitsiftheyreachretirementageafterworkingfortheCompanyforaminimumoffiveyears.TheseandsimilarbenefitsforactiveemployeesareprovidedbytheCompanyorbyinsurancecompanieswhosepremiumsarebasedonthebenefitspaidduringtheyear.EffectiveJanuary1,1993,theCompanyadoptedtheprovisionsofSFASNo.106,"Employers'ccountingforPostretirementBenefitsOtherThanPensions,"whichrequirestheCompanytorecognizetheexpectedcostofprovidingpostretirementbenefitswhenemployeeservicesarerenderedratherthanwhenpaid.Asaresult,theCompany,in1993,recordedan'accumulated,postretirementbenefitobligationandacorrespondingregulatoryassetofapproximately$376million.ThePSCrequirestheCompanytodeferasare'gulatoryassetthedifferencebetweenpostretirementbenefitexpenserecordedforaccountingpurposesinaccordancewithSFASNo.106andthepostretirementbenefitexpensereflectedinrates.TheongoingannualpostretirementbenefitexpensewasphasedintoandfullyreflectedinratesbeginningDecember1,1996withtheaccumulatedregulatoryassettoberecoveredinratesovera15-yearperiod,beginningDecember1,1997.Inaddition,theCompanyisquiredtorecognizeanydeferrednetgainsorlossesoveraten-yearperiod.Inaddition,effectiveDecember1,1997,inaccordancewiththeStipulation,theCompanydefersthedifferencebetweenthesumofgaspensionandgaspostretirementbenefitcostsotherthanpensionandtheamountsprovidedforinrates,totheextentthatsuchdifferencesareinexcessoforbelowthreepercentoftheCompany'spretaxnetincomefromitsgasoperations.Suchexcesswillbetransferredtoagasbalancingaccount.ForafurtherdiscussionoftheStipulation,seeNote3.VIn1994,theCompanyestablishedVoluntaryEmployee'sBeneficiaryAssociationtrustsfor'unionandnon-unionemployeesforthefundingofincrementalcostscollectedinratesforpostretirementbenefits.TheCompanyfundedthetrustswithapproximately$21millionfortheyearendedMarch31,1998,$5millionforthethreemonthsendedMarch'31,1997and$18millionand$50millionfortheyearsendedDecember31,1996and1995,respectively.InMay1998,theCompanyfundedanadditional$250millionintothetrusts,representingobligationsrelatedtotheelectricbusinessunitemployees.TheCompanysecuredabridgeloantofundthesetrusts.81 f)December31,1996$156,18156,950152,627$365,75874,692March31,1997March31,1998$169,65562,491183,526$157,38060,711140,850RetireesFullyeligibleplanparticipantsOtheractiveplanparticipants$358,941108,165$415,67280,533AccumulatedpostretirementbenefitobligationPlanassetsAccumulatedpostretirementbenefitobligationotherthanpensionsatMarch31,1998,March31;1997~andDecember31,1996wasasfollows:v(InthousandsodollarsAccumulatedpostretirementbenefitobligationinexcessofplanassetsUnrecognizedprior,servicecostsUnrecognizednetgainAccruedPostretirementBenefitCost250,776(175)102,346$352,947335,139(185)'8,563$363,517291,066(188)75,309$366,187TheincreaseinthepresentvalueoftheaccruedbenefitatMarch31,1997comparedtoDecember31,1996isduetothechangeinthediscountratefrom7.25%to7.00%andtheuseofupdatedactuarialassumptionsrelatingtomortality.ThechangeintheaccumulatedpostretirementbenefitobligationfromMarch31,1997toMarch31;1998reflectsadecreaseinthehealthcarecosttrendratebasedontheCompany'sreviewofthemedicalplancostexperienceandalsorevisedassumptionswithrespecttofuturecompensationincreases,mortalityandthepercentageofemployeeswhoareassumedtobemarriedatthetimeofretirement.AtMarch31,1998,March31,1997andDecember31,1996thePlanassets,'whicharerecoidedatfairvalue,includecashandcash"equivalents,fixedincomeinvestmentsandapproximately$100,000oflistedequitysecuritiesoftheCompany.Periodicpostretirementbenefitcostotherthanpensionsandthe'significantassumptionsconsistedofthefollowing:f(Inthousandsofdollars)YearEndedThreeMonthsEndedYearEndedYearEndedMarch31,1998March31,1997December31,1996December31,1995Servicecost-benefits=earnedduringtheperiodInterestcostonprojectedbenefitsobligationandservicecostActualreturnonplanassetsNetamortizationanddeferral$12,20427,328(6,632)(10,000)$2,8216,642(591)(3,446)$10,69025,030(3,046)(12,175)$9,08222,412(1,034)(14,699)NetPeriodicPensionCost$22,900$5,426$20,499$15,761March31,1998March31,1997December31,1996December31,1995DiscountrateforobligationDiscountrateforexpenseRateoffuturecompensationincreasesLong-termrateofreturnonassets7.00%7.00%450%850%7.00%7.25PP%7.50%725%7.25%5PP%750%7.25%7.25%5P07.50%Theactuarialassumptionsusedforpostretirementbenefitplansare:(InIhousandsofdollars)March31,1998March31,1997December3l,1996HealthcarecosttrendEffectofonepercentincreaseinhealthcarecosttrendrate:OncostcomponentsOnaccumulatedbenefitobligation(a)Peryearindefinitely(b)Graduallydecliningto6.0%in2001andthereafter.500%(a)$7$428.00%(b)$1$598.00%(b)$5$4382 Note9.FederalIncomeTaxThesignificantcomponentsoftheCompany'sdeferredtaxassetsandliabilitiescalculatedundertheprovisionsofSFASNo.109,"AccountingforIncomeTaxes,"wereasfollows:(Inthousandsofdollars)DeferredTaxAssetsNetoperatinglosscarryforwardsReservesnotcurrentlydeductibleTaxdepreciablebasisinexcessofbookNondiscretionaryexcesscreditsCreditcarryforwardsOtherTotalDeferredTaxAssetsDeferredTaxLiabilities1989SettlementAccelerateddepreciationCallpremiumsRatecasedefer'raisOtherTotalDeferredTaxLiabilitiesNetDeferredTaxLiability3/31/9839,66710,55924,85840,318261,729$377,131$2,169,909650,56238,69856456,7622,916,495'2,539,3643/31/97$93,34956,74933,84827,037128,469225,885$565,337$2,165,462642,65643,6172,57938,117'2,892,431$2,327,09412/31/96$145,20558,98134,314'7,700135,902186,907$589,009$2,163,239642,70244,8462,12733,4962,886,410$2,297,401SFASNo.109requiresutilitiestoestablishregulatoryassetsandliabilitiesfortheportionofitsdeferredtaxassetsandliabilitiesthathavenotyetbeenrecognizedforratemaking,purposes.Themajorcomponentsoftheseregulatoryassetsandliabilitiesareasfollows:(Intltousandsofdollars)RegulatoryAssets1989Settlementlantitemsther,TotalRegulatoryAssets3/31/98$1,652,412100,661(15141)$1,737,9323/31/97$1,659,065120,460(12,361)$1,767,16412/31/96$1,660>871125,976(14,069)$1,772,778RegulatoryLiabilitiesCarryforwardcreditsOther$38,72040,193$64,548$68,42135,82934,466TotalRegulatoryLiabilities'78,913$100,377$102,887fThefederalincometaxamountsincludedintheStatementofIncomedifferfromtheamountswhichresultfromapplyingthestatutoryfederalincometaxratetoincomebeforeincometax.The'tablebelowsetsforththereasonsforsuchdifferences..INI(Inthousandsofdollars)YearEndedThreeMonthsEnded"YearEndedYearEndedMarch31,1998March31,1997December31,1996December31,1995IncomebeforefederalincometaxStatutoryfederalincometaxrateStatutoryfederalincometaxAdditions(reductions)tnjegeralincometaxExcessofbookovertaxdepreciation1989SettlementInterestcapitalizedTaxcreditsTaxratechangeamortizationhAIIowanccforfundsusedduringconstructionOtheritems$594,89335%$208,21317,9124,2122,962(2,464)2223(2,953)2,549$,I43,91035%$50,3694,3561,053588(940)815(583)555$525,72135%$184,00218,3394,2122,270(4,383)3,686(2,305)3,436$508,82435%$I78,08818,5884,2132,218(1,025)3,752(2,392)2,096otalFederalIncomeTaxExpensectlveFederalIncomeTaxRate$232,654$56,2I3$209,257~$205,538404%398%39,1%39.1%83 TheCompanycurrentlyhastaxcreditcarryforwardsofapproximately$40million.-Thisbalanceiscomposedofinvestmenttaxcredit(ITC)carryforwards,netofthe35/oreductionrequiredbytheTaxReformActof1986,totalingapproximately$31millionandresearchanddevelopmentcreditstotalingapproximately$9million.In1990and1992,theCompanyreceivedRevenueAgents'eportsdisallowingcertaindeductionsandcreditsclaimedbytheCompanyonitsfederalincometaxreturnsfortheyears1981through1989.AsettlementresolvingallauditissueswasreachedbetweentheCompanyandtheInternalRevenueServiceinMay1998.Thesettlementprovidedforthepaymentoftaxesandinterestofapproximately$9millionand$35million,respectively,whichtheCompanymadeinMay1998.TheCompanyhadpreviouslyprovidedreservesadequatetocoversuchtaxesandinterest.Note10.The1989SettlementInFebruary1989,theCompanyandtheStateofNewYorkenteredintothe1989SettlementresolvingcertainissuesrelatingtotheCompanyandproviding,amongothermatters,forthefinancialrecoveryoftheCompanyandforthetransferofShorehamtoLIPA,anagencyoftheStateofNewYork,foritssubsequentdecommissioning.InFebruary1992,theCompanytransferredownershipofShorehamtoLIPA.InMay1995,theNRCterminatedLIPA'spossession-onlylicenseforShorehamwhichsignifiedtheNRC'sapprovalthatdecommissioningwascompleteandthatthesiteissuitableforunrestricteduse.Upontheeffectivenessofthe1989Settlement,inJune1989,theCompanyrecordedtheFRAonitsBalanceSheetandtheretirementofitsinvestmentofapproximately$4.2billion,principallyinShoreham.'orafurtherdiscussionoftheFRA,seeNote1.Pursuanttothe1989Settlement,theCompanywasrequiredtoreimburseLIPAforallofitscostsassociatedwiththedecommissioningofShoreham.ThePSChasdeterminedthatallcostsassociatedwiShorehamwhichareprudentlyincurredbytheCompanysubsequenttotheeffectivenessofthe1989Settlementaredecommissioningcosts.TheRMAprovidesfortherecoveryofsuchcoststhroughelectricratesoverthebalanceofaforty-yearperiodending2029.AtMarch31,1998,Shorehampost-settlementcoststotaledapproximately$1.2billion,consistingof$587millionofpropertytaxesandpayments-in-lieu-of-taxes,and$568millionofdecommissioningcosts,fueldisposalcostsandallothercostsincurredatShorehamafterJune30,1989.Note11.TheClassSettlementTheClassSettlement,whichbecameeffectiveinJune1989,resolvedacivillawsuitagainsttheCompanybroughtunderthefederalRacketeerInfluencedandCorruptOrganizationsAct.Thelawsuit,whichtheClassSettlementresolved,hadallegedthattheCompanymadeinadequatedisclosuresbeforethePSCconcerningtheconstructionandcompletionofnucleargeneratmgfacilities.eTheClassSettlementprovidestheCompany'selectriccustomers'withratereductionsaggregating$390millionthatarebeingreflectedasadjustmentstotheirmonthlyelectricbillsoveraten-yearperiod'whichbeganonJune1,1990.Uponitseffectiveness,theCompanyrecordeditsliabilityfo'rtheClassSettlementonapresentvaluebasisat$170million.TheClassSettlementobligationatMarch31,1998reflectsthepresentvalueoftheremainingreductionstoberefundedtocustomers.Theremainingreductionstocustomersbills,amountingtoapproximately$130millionasofMarch31,1998,consistsofapproximately$10millionforthetwo-monthperiodbeginningApril1,1998,and$60millionforeachofthe12-monthperiodsbeginningJune1,1998and1999.84 Npte12.CommitmentsandContingenciesElectric,.TheCompanyhasenteredintocontractswithnumerousIndependentPowerProducers(IPPs)andtheNewYorkPowerAuthority(NYPA)forelectricgeneratingcapacity.Underthetermsoftheagreementwith.,YPA,whichissettoexpireinMay2014,theCompanymaypurchaseupto100%oftheelectricenergy.producedattheNYPAfacilitylocatedwithintheCompany'sserviceterritoryatHoltsville,NY.TheCompanyisrequiredtoreimbursePYPAfortheminimumdebtservicepayments,andtomake,fixednon-energypaymentsandexpensesassociatedwithoperatingandmaintainingtheplant.WithrespecttocontractsenteredintowiththeIPPs,the,Companyjsob]igatedtopurchasealltheenergytheymakeavailable,totheCompanyatpricesthatoftenexceedcurrentmarketprices.However,theCompanyhasnoobligationtotheIPPsiftheyfailtodeliverenergy,For,purposesofthetablebelow,theCompanyhasassumedfullperformancebytheIPPs,asnoeventhasoccurredtosuggestanythinglessthanfullperformancebytheseparties.*~,TheCompanyalsohascontractedwithNYPAforfirmtransmission(wheeling)capacityinconnectionwithatransmissioncablewhich'wasconstructed,inpart,for'heb'enefitoftheCompany.Inaccordancewith'theprovisionsofthisagreement,whichexpir'e's'in2020,'heCompanyisrequiredtoreimburseNYPAfordebtservicepaymentsandthecost'ofoperatingand'maintainingthecables.Thecostofsuchcontractsisincludedinelectricfuelexpenseand,isrecoverablethroughrates.IThefollowingtablerepresentstheCompany'scommitmentsunderpurchasedpowercontracts.4,ElectricOperations(Inmillionsofdollars)NYPAHoltsvillel9'therFixed~FirmForthefiscalyearsendedDebtSerin'ceC/barges.-.Energy~...TransmissionIPPsiTotalB900020012002'003SubsequentYearsTotal$196.4200.8207.2214.2'13.52$14.7$6.7$25.7$127.6,21.713.7,6.7,26.0,,,132.721.814.67.227.8135.821.9"16.3',."8.727.8139.522.0"16.7,",',9.0'27.9137.9,,232.4,217.1.,119.8,474,0..957.5',,000.8$341.5$293.1$158.1$609.2,~$1,631.0$3,032.9Less:lmpu'te'dInterest'"$166.8$154.1$85.3"$381.9"'805.2'$1,593.3PresentValueofPayments$174.7$139.0'72.8"$227.3'$825.8"~~$1,439.6'AssumesfullperformancebytheIPPsandJIYPA.-GasHInordertoprovideforsufficientsuppliesofg'as'for'theCompany'sgascust'omers,'theCompanyhasenteredintolong-termfirmgastransportation,storageandsupplycontractswhichco'ntainprovision'sthatrequiretheCompanytomakefixedpayments(demandcharges)eveniftheservicesarenotfullyutilized.Thecostofsuchcontractsis,included.ingasfuel,expenseandisrecoverablethroughrates.The.tablebelowsetsforththeCompany'saggregateobligationunderthesecommitmentswhichextendthrough,2014.Gas0erationsInmillionsofdollarsForthefiscalyearsended1999$111.732000110.372001'i,101.33,,2002,,:97.8120031.69SubseuentYears'71.20Total~$884.'13Less:ImutedInterest.258.45PresentValueofPaments$625.6885 CompetitiveEnvironmentTheelectricindustrycontinuestoundergofundamentalchangesasregulators,electedofficialsandcustomersseeklowerenergyprices.Thesechanges,whichmayhaveasignificantimpactonfuturefinancialperformanceofelectricutilities,arebeingdrivenbyanumberoffactorsincludingaregulatoryenvironmentinwhichtraditionalcost-basedregulationisseenasabarriertolowerenergyprices.In199and1998,boththePSCandtheFERCcontinuedtheirseparate,butmsomecasesparallel,initiativeswithrespecttodevelopingaframeworkforacompetitiveelectricmarketplace.TheElectricIndustry-StateRegulatoryIssuesIn1994,thePSCbegantheseco'ndphaseofitsCompetitiveOpportunitiesProceedingstoinvestigateissuesrelatedtothefutureoftheregulatoryproces'sinanindustrywhichismovingtowardcompetition.ThePSC'soverallobjectivewastoidentifyregulatoryandratemakingpracticesthatwouldassistNewYorkStateutilitiesinthetransitiontoamorecompetitiveenvironmentdesignedtoincreaseefficiencyinprovidingelectricitywhilemaintainingsafe,affordableandreliableservice.AsaresultoftheCompetitiveOpportunitiesProceedings,inMay1996,thePSCissuedanorder(Order)whichstateditsbeliefthatintroducingcompetitiontotheelectricindustryinNewYorkhasthepotentialtoreduceelectricratesovertime,increasecustomerchoiceandencourageeconomicgrowth.TheOrdercalledforacompetitivewholesalepowermarkettobeinplacebyearly1997tobefollowedbytheintroductionofretailaccessforallcustomersbyearly1998.ThePSCstatedthatcompetitionshouldbetransitionedonanindividualcompanybasis,duetodifferencesinindividualserviceterritories,thelevelandtypeofstrandableinvestments(i.e.,coststhatutilitieswouldhaveotherwiserecoveredthroughratesundertraditionalcostofserviceregulationthat,undermarketcompetition,wouldnotberecoverable)andutilityspecificfinancialconditions.TheOrdercontemplatesthatimplementationofcompetitionwillproceedontwotracks.TheOrderrequiresthateachmajorelectricutility(excepttheCompanyandNiagaraMohawkPowerCorporation)filearate/restructuringplanwhichisconsistentwiththePSC'spolicyandvisionforincreasedcompetition.ThoseplansweresubmittedbyOctober1,1996,incompliancewiththeOrder.However,theCompanywasexemptedfrom:thisrequirementduetothePSC'sseparateinvestigationoftheCompany'sratesandLIPA'sexaminationoftheCompany'sstructure.ThePSChasnowapprovedsettlementagreementswitheachofthefiveNewYorkutilitiesthatwererequiredIofilerestructuringplansintheCompetitiveOpportunitiesProceeding.LILCOandNiagaraMohawkwereexempthowever,onFebruary18,1998thePSCalsoapprovedasettlementagreementontheNiagaraMohawkPowerChoicerestructuringproposalthathadbeenfiledinOctober1995.Ingeneral,theterm'softheagreementsvaryfromthreeto'fiveyearswithallagreementscallingforsomeratereductions,structuralseparationofthegenerationandpowerdeliveryfunction,divestitureoffossilgeneration,fullretailaccessintwotofouryears,andtheimpositionofasystembenefitschargetocoverthecostsofresearchanddevelopment(R&D),conservation,low-incomeandenvironmentalprograms.Ineachcase,thePSCisgivingtheutilityareasonableopportunitytorecoverallprudently-incurredstrandedcosts.ThePSCOrderalsoanticipatedthatcertainotherfilingswouldbemadeonOctober1,1996,byallNewYorkStateutilities,toboththePSCandtheFERC.ThefilingsweretoaddressthedelineationoftransmissionanddistributionfacilitiesjurisdictionbetweentheFERCorthePSC,apricingofeachcompany'stransmissionservices,andajointfilingbyalltheutilitiestoaddresstheformationofanIndependentSystemOperator(ISO)andthecreationofamarketexchangethatwillestablishspotmark86 prices.Althoughtherewereextensivecollaborativemeetingsamongtheparties,itwasnotpossiblefortheadditionalfilingstobecompletedbyOctober1,1996.OriDecember31,1996,theNewYorkPowerPoolmemberssubmittedacompliancefilingtotheFERCwhichprovidesopenmembershipandomparableservicestoeligibleentitiesinaccordancewithFERCOrder888,discussedbelow.TheNeworkStateutilitiessubmittedthefullISO/PowerExchangefilingtotheFERGinJanuary1997,whichproposestoestablishacompetitivewholesalemarketplaceinNewYorkStateforelectricenergyandtransmissionpricingatmarket-basedrates.SubsequenttotheFERCfilinginJanuary1997,theNewYorkStateutilitiesmadethreerelatingfilingswiththeFERC:(i)asupplementalfiling,providingadditionaldetailsregardingthecreationofaNewYorkStateReliabilityCouncil,inMay1997;(ii)arequestformarket-basedrateauthority,bysixoftheNewYorkutilities,inAugust1997;and(iii)asupplementalfilingwiththeFERConDecember19,1997whichexpandsuponandprovidesadditionaldetailswithrespecttotheJanuary1997filing.ThePSChastakenthepositionthatafullyoperationalwholesalecompetitivestructurewillfosterthe'xpeditiousmovementtofullretailcompetition.ThePSC'svisionoftheretailcompetitivestructure,knownastheFlexibleRetailPoolcoModel,consistsof:(i)thecreationofanISOtocoordinatethesafeandreliableoperationofelectricgenerationandtransmission;(ii)openaccesstothetransmissionsystem,whichwouldberegulatedbytheFERC;(iii)thecontinuationofaregulateddistributioncompanytooperateandmaintainthedistributionsystem;(iv)thederegulationofenergy/customerservicessuchasmeterreadingandcustomerbilling;(v)theabilityofcustomerstochooseamongsuppliersofelectricity;and(vi)theallowanceofcustomerstoacquireelectricityeitherbylong-termcontracts,purchasesonthespotmarket,or,acombinationofthetwo.OneissuediscussedintheOrderthatcouldaffecttheCompanyisstrandableinvestments.ThePSCstatedinitsOrderthatitisnotrequiredtoallowrecoveryofallprudently-incurredinvestments,that,ithasnsiderablediscretiontosetratesthatbalanceratepayerandshareholderinterests,andthattheamountofandableinvestmentsthatautilitywillbepermittedtorecoverwilldependontheparticularcircumstancesofeachutility.Additionally,theOrderprovidedthateveryeffortshouldbemadebyutilitiestomitigatethesecostspriortoseekingrecovery.hCertainaspectsoftherestructuringenvisionedbythePSC-particularlythePSC'sapparentdeterminationsthatitmaydenytheutilitiesrecoveryofprudentinvestmentsmadeonbehalfofthepublic,orderretailwheeling,requiredivestitureofgenerationassets,andderegulatecertainsectorsoftheenergymarket-could,ifimplemented,haveanegativeimpactontheoperationsandfinancialconditionsofNew,York'sinvestor-ownedelectricutilities,including.theCompany.TheCompanyispartytoalawsuitcommencedinSeptember1996bytheEnergyAssociationofNewYorkStateandthestate'sotherinvestor-ownedelectricutilities(collectively,Petitioners)againstthePSCinNewYorkSupremeCourt,AlbanyCountyTheEnerAssociationofNewYorkStateetal.v.PublicServiceCommissionoftheStateofNewYorketal..ThePetitionershaverequestedthattheCourtdeclarethattheOrderisunlawfulor,inthealternative,thattheCourtclarifythatthePSC'sstatementsintheOrderconstitutesimplyapolicystatementwithnobindinglegaleffect.InNovember1996,the,CourtissuedaDecisionandOrderdenyingthePetitioners'equesttoinvalidatetheOrder.AlthoughtheCourtstatedthatmostoftheOrderisanon-bindingstatementofpolicy,theCourtrejectedthePetitioners'ubstantivechallengestotheOrder.InDecember1996,thePetitionersfiledanoticeofappealwiththeThirdDepartmentoftheAppellateDivisionoftheNewYorkStateSupremeCourt;ThelitigationisoingandtheCompanyisunableatthistimetopredictthelikelihoodofsuccessortheimpactoftheationontheCompany'sfinancialposition,cashflowsorresultsofoperations.AttherequestoftheI87 EnergyAssociationandPublicUtilityLawProjectofNewYork(PULP),theCourthasextendeddhetiradeinwhichtheEnergyAssociationandPULPmustperfecttheirappealsuntilJuly6,1998.TheElectricIndustry-FederalRegulatoryIssuesInApril1996,inresponsetoitsNoticeofProposedRulemakingissuedinMarch1995,theFERCissuedOrders8S8and889relatingtothedevelopmentofcompetitivewholesaleelectricmarkets.Order888isafinalruleonopentransmissionaccessandstrandedcostrecoveryandprovidesthatthe'ERChasexclusivejurisdictionoverinterstatewholesalewheelingandthatutilitytransmissionsystemsmustnowbeopentoqualifyingsellersandpurchasersofpoweronanon-discriminatorybasis.Order888allowsutilitiestorecoverlegitimate,prudentandverifiablestrandedcostsassociatedwithwholesaletransmission,includingthecircumstanceswherefullrequirementscustomersbecomewholesaletransmissioncustomers,suchaswhereamunicipalityestablishesitsownelectricsystem.Withrespecttoretailwheeling,theFERCconcludedthatithasjurisdictionoverrates,termsandconditionsofservice,butwouldleavetheissueofrecoveryofthecostsstrandedbyretailwheelingtothestates.Order888requiredutilitiestofileopenaccesstariffsunder'whichtheywouldprovidetransmissionservices,comparablet'othosewhichthey'rovidetothemselvesandtothirdpartiesonanon-discriminatorybasis.Additionally,utilitiesmustusethesesametariffsfortheirownwholesalesales.Order8SS-A,issuedinMarch1997,generallyreaffirmedtheFERC'sbasicdeterminationinOrder888.OnepertinentchangemadeinS88-A,however,wasthattheFERC,asopposedtothestates,willbetheprimaryforumfordeterminingstrandedcostsincasesinvolvingmunicipalannexation.OrderSSS-B,issuedNovember1997,reaffirmed888-A'sfindings.TheCompanyfileditsopenaccesstariffinJuly1996.InSeptember1996,theFERCorderedRateHearingson28utilitytransmissiontariffs,includingtheCompany's.Onthebasisofapreliminaryreview,theFERCwasnotsatisfiedthatthetariffrateswerejustandreasonable.SettlementdiscussionshavebeenheldbetweentheCompanyandvariousintervenorsconcerningtheCompany'stransmissionrates.InDecember1996,thepartiesreachedatentativesettlementontherateissues.OnMay14,1997,theFERCapprovedthesettlementagreementthattheCompanyfiled(withfiveotherentities)concerningtheratesfortheCompany'sopenaccesselectrictariff.TheeffectivedateforthoserateswasJuly9,1996.TheCompanyandfourotherNewYork'utilitiesareseekingreviewofcertainnon-rateaspectsoftheFERC'sopenaccesstransmissiontariffordersintheU.S.CourtofAppealsfortheD.C.Circuit.Order889,'hich'isafinalruleonatransmissionpricingbulletinboard,addressestherulesandtechnicalstandardsforoperationofanelectronicbulletinboardthatwillmakeavailable,onareal-timebasis,theprice,availabilityandotherpertinentinformationconcerningeachtransmissionutility'sservices.Italso"addressesstandardsofconducttoensurethattransmissionutilitiesfunctionallyseparatetheirtransmissionandwholesalepowermerchantfunctionstopreventdiscriminatoryself-dealing.InDecember1996,theCompanyfileditsstandardsofconductinaccordancewiththeOrder.Order889-Aand889-B,issuedinMarchandNovember1997,respectively,generallyreaffirmedandclarifiedtheoriginalOrder889.Order889-Aimplementednewdiscountingpoliciesandrequiredthatnegotiationsbetweenatransmissionproviderandapotentialcustomertakeplaceonthetransmissionpricingbulletinboardandbevisibletoall.88 Itisnotpossibletopredicttheultimateoutcomeoftheseproceedings,thetimingthereof,orthe'amount,jfany,ofstrandedcoststhatthe.Companywouldrecoverinacomp'etitiveenvironment.TheoutcomeofthestateandfederalregulatoryproceedingscouldadverselyaffecttheCompany'sabilitytoapplySFASNo.1,"AccountingfortheEffectsofCertainTypesofRegulation,"which,pursuanttoSFASNo.101,ccountingforDiscontinuationofApplicationofSFASNo.71,"couldthenrequireasignificantwrite-downofalloraportionoftheCompany'snetregulatoryassets.TheCompany'sServiceTerritoryTheCompany'sgeographiclocationandthelimitedelectricalinterconnectionstoLongIslandservetolimitthe.accessibilityofitstransmissiongridtopotentialcompetitorsfromoffthesystem.However,thechangingutilityregulatoryenvironmenthasaffectedtheCompanybyrequiringtheCompanytoco-existwithstate'andfederallymandatedcompetitors,non-utilitygenerators(NUGs).ThePublicUtilityRegulatoryPoliciesActof1978(PURPA),thegoalsofwhicharetoreducetheUnitedStates'ependencyonforeignoil,toencourageenergyconservationandtopromotediversificationofthe=fuelsupply,hasnegativelyimpactedthe'CompanythroughtheencouragementoftheNUGindustry.ThePURPAprovidesforthedevelopmentofanewclassofelectricgeneratorswhichrelyoneithercogenerationtechnologyoralternatefuels.UtilitiesareobligatedunderthePURPAtopurchasetheoutputofcertainofthesegenerators,whichareknownasqualifiedfacilities(QFs).FortheyearsendedMarch31,1998and1997,theCompany.lostsalestoNUGstotaling447and422gigawatthours(GWh)representingalossinelectricrevenuesnetoffuel(netrevenues)ofapproximately$36millionand$34million,respectivelyor2.0/oand1.9/0oftheCompany'snetrevenue's,respectively.FortheyearendedDecember31,1996,theCompanylostsalestoNUGstotaling422GWh~epresentingasinelectricnetrevenuesofapproximately$34million,or1.9/0oftheCompany'snetrevenues.ForyearendedDecember31,1995,theCompanylostsalestoNUGstotaling366GWhorapproximately28millionor1.5'/0oftheCompany'snetrevenues.'lTheincreaseinlostnetrevenues'esultedprincipallyfromthecompletionofsevenfacilitiesthatbecamecommerciallyoperationalduring1996andthefullyearoperationoftheIPPlocatedattheStateUniversityofNewYorkatStonyBrook,NY.TheCompanyestimatesthatin1999saleslossestoNUGswillbe447GWh,orapproximately1.8/0ofprojectednetrevenues,TheCompanybelievesthatloadlossesduetoNUGshavestabilized.ThisbeliefisbasedonthefactthattheCompany'scustomerloadcharacteristics,whichlackasignificantindustrialbaseandrelatedlargethermalload,willmitigateloadlossandtherebymakecogenerationeconomically,unattractive.Additionally,asmentionedabove,theCompanyisrequiredtopurchaseallthepowerofferedbyQFs,whichfortheyearsendedMarch31,19)8and1997,approximated220megawatts(MW)and226MW,respectively.TheCompanyestimatesthatpurchasesfromQFsrequiredbyfederalandstatelawcosttheCompany$71millionand$64millionin1998and1997,respectively,morethanitwouldhavecosthadtheCompanypurchasedthepowerintheopenmarketorgeneratedit.FortheyearsendedDecember31,1996and1995,QFsofferedapproximately218MWand205MW,respectively.TheCompanyestimatesthatpurchasesfromQFsrequiredbyfederalandstatelawcosttheCompany$63millionand$5$millionfortheyearsendedDecember31,1996and1995,respectively,thanitwouldhavecosthadtheCompanypurchasedthepowerin,theopenmarket"orgeneratedit.89 QFshavethechoiceofpricingsalestotheCompanyateitherthePSC'spublishedestimatesofthe'-Company'slong-rangeavoidedcosts(LRAC)ortheCompany'stariffrates,whicharemodifiedfromtimetotime,reflectingtheCompany'sactualavoidedcosts.Additionally,untilrepealedin1992,NewYorkStatelawsetaminimumpriceofsixcentsperkilowatt-hour,(kWh)forutilitypurchasesofpowerfromcertaincategoriesofQFs,considerablyabovetheCompany'savoidedcost.ThesixcentminimumcontinuestoapplytocontractsenteredintobeforeJune1992.TheCompanybelievesthattherepealof'hesixcentminimum,coupledwithrecentPSCupdateswhichresultedinlowerLRACestimates,hassignificantlyreducedtheeconomicbenefitsofconstructingnewQFswithinitsserviceterritory.TheCompanyhasalsoexperiencedarevenuelossasaresultofitspolicyofvoluntarilyprovidingwheelingofNewYorkPowerAuthority(NYPA)powerforeconomicdevelopment.TheCompanyestimatesthatfortheyearsendedMarch31,1998and1997,NYPApowerdisplacedapproximately373GWhand424GWhofannualenergysales,respectively.Netrevenuelossassociatedwiththesevolumesofsalesisapproximately$23million,or1.2~/ooftheCompany's1998netrevenues,and$27million,or1.5/ooftheCompany's1997netrevenues.Currently,thepotentiallossofadditionalloadislimitedbyconditionsinthe'Company'stransmissionagreementswithNYPA.TheCompanyestimatesthatfortheyearsendedDecember31,1996and1995,NYPApowerdisplacedapproximately417GWhand429GWhofannualenergysales,respectively,Netrevenuelossassociatedwiththesevolumesofsalesisapproximately$26million,or1.4~/ooftheCompany's1996netrevenues,and$30million,or1.6o/ooftheCompany's1995netrevenues.Anumberofcustomergroupsareseeking;tohastenconsiderationandimplementationoffullretailcompetition.Forexample,anenergyconsultanthaspetitionedthePSC,seekingalternatesourcesofpowerforLongIslandschooldistricts.TheCountyofNassauhasalsopetitionedthePSCtoauthorizeretailwheelingforallclassesofelectriccustomersinthecounty.,Inaddition,severaltownsandvillagesonLongIslandareinvestigatingmunicipalization,inwhichcustomersformagovernment-sponsoredelectricsupplycompany.ThisisoneformofcompetitionthatislikelytoincreaseasaresultoftheNationalEnergy,PolicyActof1992(NEPA).NEPAsoughttoincreaseeconomicefficiencyinthecreationanddistributionofpowerbyrelaxingrestrictionsontheentryofnewcompetitorstothewholesaleelectric.powermarket.NEPAdoessobycreatingexemptwholesalegeneratorsthatcansellpowerinwholesalemarketswithouttheregulatoryconstraintplacedonutilitygeneratorssuchasontheCompany.NEPAalsoexpandedtheFERC'sauthoritytograntaccesstoutilitytransmissionsystemstoallpartieswhoseekwholesalewheelingforwholesalecompetition.WhileitshouldbenotedthattheFERC'spositionfavoringstrandedcostrecoveryfromretailturnedwholesalecustomerswillreduceutilityriskfrommunicipalization,significa'ntissuesassociatedwiththeremovalofrestrictionsonwholesaletransmissionsystemaccesshaveyettoberesolved.TherearenumeroustownsandvillagesintheCompany'sserviceterritorythatareconsideringtheformationofamunicipally-ownedandoperatedelectricauthoritytoreplacetheservicescurrentlyprovidedbytheCompany.tr,sIn1995,SuffolkCountyissuedarequestforproposalfromsuppliersforupto300MWofpowerwhichtheCountywouldthenselltoitsresidentialandcommercialcustomer'.TheCountyhasawardedthebidtotwooff-LongIslandsuppliers:andhasrequestedtheCompanytodeliverthepower.AftertheCompanychallengedSuffolkCounty'seligibility-forsuchservice,theCountypetitionedtheFERCtoordertheCompanytoprovidetherequestedtransmissionservice.~90 InDhcemB'er1996,the'FERCorderedtheCompanytoprovidetransmissionservicesto'SuffolkCountytotheextentnecessarytoaccommodateproposed.salestocustomerstowhichitwasprovidingserviceonthedateofenactmentofNEPA(thisOrdercouldprovideSuffolkCountywiththeabilitytoimportupto200Wofpoweronadailybasis).TheFERCreserveddecisionontheremaining.100MWofSuffolkounty'srequestuntiltheCountyidentifiestheownershiporcontrolofdistributionfacilitiesthatitallegesqualifiesitforawheelingordertoSuffolkCountycustomerswhowerenotreceivingserviceonthedateofNEPA'senactment.TheCompanymayasktheFERCtoreconsideritsdecisiononcethatdecisionbecomesfinal;whichisnotexpectedfoxseveralmonths.TheCompanyandSuffolkCountysubmittedbriefsinJuly1997addressingthepricingforthe200MWofpower.TheFERChasyettodeterminethepricingof.thatservice.Aspreviouslynoted;FERC'Order888allows'utilitiestorecoverlegitimate,pruderitandverifiablestrandedcostsassociated"withwholesaletransmission,'ncludingthecircumstanceswherefullrequirementscustomers'.becomewholesaletransmissioncustomers,such'aswhereamunicipalityestablishesitsownelec'tricsystem'.'ttttIt')Themattersdiscussedaboveinvolvesubstantialsocial;economic,legal,environmental'andfinancialissues.TheCompany;is,opposedtoanyproposal.thatmerelyshiAscostsfromonegroupofcustomerstoanother,thatfailstoenhancetheprovisionofleast-cost,efficiently-generatedelectricityorthatfailstoprovidetheCompany'sshareownerswithanadequatereturnonandrecoveryoftheirinvestment.TheCompanyisunabletopredictwhataction,ifany,thePSCortheFERCmaytakeregardinganyofthesematters,ortheimpactontheCompany'sfinancialposition,c'ashflowsor'esultsofoperationsifsomeorallofthesemattersareapprovedorimplementedbytheappropriateregul'atoryauthority'.Notwithstandingtheoutcomeofthestateorfederalregulatoryproceedings,oranyotherstateaction,theCompanybelievesthat,amongotherobligations,theStatehasacontractualobligationtoallowtheCompanytorecover'itsShoreham-relatedass'ets.Flh)gttAkvironmentalMattersTheCompanyissubjecttofederal,stateandlocallawsandregulationsŽdealingwith'airandwaterqualityandotherenvironmentalmatters.Environmentalmatte'rsmayexposetheCompanytopotentialliabilitieswhich,incertaininstances,maybeimposed'withoutregardtofaultorforhistoricalactivitieswhikhwere"lawfulatthe'timetheyoccurred.'heCompan'ycontinuallymonitorsitsactivitiesinordertodeterminetheimpactofitsactivitiesontheenvironmentandtoensurecompli'ancewithvarious'environmentallaws.Exceptassetforthbelow,nomater'ialproceedingshavebeencommencedor,totheknowledgeoftheCompany,arecontemplatedagainsttheCompanywithrespecttoa'ymatterrelating-totheprotectionoftheenvironment.4vTheNewYorkStateDepartmentofEnvironmentalConservation(DEC)hasrequiredtheCompanyandotherNewYorkStateutilities'toinvestigateand,where'necessary,'re'mediatetheirformermanufacturedgasplant(MGP)sites.-Currently,theCompanyisthe'ownerofsixpiecesofpropertyonwhichtheCompanyorcertainofitspredecessorcompaniesarebelievedtohaveproduce'dmanufacturedgas.Operationsatthesefacilities'inthelate1800'sandearly1900'smayhaveresultedinthe'disposalofcertainwasteproductsonthesesites.'"t\TheCompanyhasenteredintodiscussionswiththeDECwhichisexpectedtoleadtotheissuanceofoneormoreACOsregardingthemanagementofenvironmentalactivitiesatthesesixproperties.,AlthoughtheexactamountoftheCompany'scleanupcostscannot'yetbedetermined,based'onthefindingsof'inaryinvestigationsconductedateachofthesesixsites,currentestimatesindicatethatitmaycostximately$54to$92milliontoinvestigateandremediateallofthesesites.Inconsideringtherangeoossibleremediationestimates,theCompany'feltita'ppropriatetorecorda$54millionliabilitytt191 reflectingthe,presentvalue-ofthe,futurestreamofpaymentsamountingto$70milliontoinvestigateand.remediatethesesites."The,Companyused.arisk-free,rateof6.0/otodiscount.thisobligation.TheCompany.believesthat,thePSCw'illprovideforfuturerecoveryofthesecostsandhasrecordeda$54millionregulatory'ass'et.The.Company'sratesettleinentwhich'thePSCapproved'February4,:1998as'discussedin,Note3:o'fNotes'toFinancialStatements,allowsfortherecoveryofMGPexpendituresfrom~gascustomers.~rrh'rrInDecember,1996,theCompanyfiledacomplaintinthe,UnitedStatesDistrictCourtfortheSouthern,,DistrictofNewYorkagainst,14oftheCompany,'sinsuredswhichissuedgeneralcomprehensiveliability(GCL)policiestotheCompany."InJanuary1998;theCompanycommencedasimilaractionagainstthesameandcertainadditionalinsurerdefendantsinNewYorkStateSupremeCourt,First33epartment;the-federalcourtactionwassubsequentlydismissedinMarch1998..The,Companyisseekingrecovery.under.theGCLpoliciesforthecostsincurredtodateandfuturecostsassociatedwiththeclean-upoftheCompany'sformermanufacturedgasplant(MGP)sitesandSuperfundsitesforwhichtheCompanyhasbeennameda,PRP:TheCompanyisseekingadeclaratoryjudgmentthatthedefendantinsurersare"bound.bythe.termsofthe,GCLpolicies,subjecttothestatedcoveragelimits,toreimbursetheCompany'orthecleanupcosts.The'outcomeofthisproceedingcannotyetbedetermined.rrt'riTheCompanyhasbeennotifiedbytheUnitedStatesEnvironmentalProtectionAgency(EPA)thatit-isoneofmany+/Psthatmaybeliablefortheremediationofthreelicensedtreatment,storageanddisposalsitestowhichtheCompanymayhaveshippedwasteproductsand.which.havesubsequentlybecomeenvironmentallycontaminated.II,rAtonesite,locatl;dinPhiladelphia,Pennsylvania,andoperatedbyMetal.BankofAmerica,.theCompany.andnineotherPRPs,allofwhicharepublicutilities,completedperformanceofaRemedialIpvestigationandFeasibilityStudy(RI/FS),whichwasconductedunderanACOwiththeEPA.InDecember1997,EPAissueditsRecordofDecision(ROD),settingforththefinalremedialactionselected'orthissite.theROD,the;EPAe'gtimatedthat,thepresentcostoftheselectedremedyforthesiteis$17.3million..Atthistime;theCompanycannotpredict.with,reasonablecertainty,the.actual.costoftheselectedremedy,'howill,implementtheremedy,orthecost,ifany,totheCompany.,UnderaPRPparticipationagreement,the~Companypreviouslywasresponsiblefor8.2/oofthecostsassociatedwiththeRI/FS.~TheCompany,'s,allocableshareofliabilityfor.theremediationactivitieshasnot'yetbeen:determined;TheCompany,hasrecordedaliabilityofapproximately.$1millionrepresentingitsestimatedshareofthecosttoremediate,thissite;-baseduponits8.2'/0responsibilityundertheRI/FS;TheCompanyhasalsobeennamedaPRPfordisposalsitesinKansasCity,Kansas,andKansasCity,Missouri.ThetwositeswereusedbyacompanynamedPCB,Inc.from1982until1987forthestorage,'processing,and,treatmentofelectricequipment,dielectricoilsandmaterialscontainingPCBs.AccordingtotheEPA,'thebuildingsandcertainsoilareasoutsidethebuildingsarecontaminatedwithe'CBs.CertainofthePRPs,includingtheCompanyand,severalotherutilitiesformeda,PRPgroup,signedan.ACO,andhavedevelopedaworkplanforinvestigatingenvironmentalconditionsatthesites.DocumentationconnectingtheCompanytothesitesindicatesthattheCompanywasresponsibleforlessthan1/0ofthematerialsthatwereshippedtotheMissourisite.TheEPAhasnotyetcompleted.compilingthedocumentsfortheKansassite...itWIInadditiqn,ttieCompanywas;notifiedthatitjsa,PRP,ata$uperfundsite,locatedinFarmingdale,NewYork..Industrialoperations,tookplaceatthissiteforatleastfiftyyears.ThePRPgrouphasclaimedttheCompanyshouldabsorbremediationexpenses-intheamountofapproximately.$100,000associatwithremovingPCB-'contaminatedsoilsfromaportionofthesitewhichformerlycontainedelectrictransformers.TheCompanyiscurrentlyunabletodetermineitsshareofcostsofremediationatthissite.92 Dur'ing1996,theConnecticutDepartmentofEnvironmentalProtection(DEP)issuedamodificationtoanACOpreviously,issuedin'connectionwithaninvesti'gation.ofanelectric'transmissioncablelocatedundertheLongIslandSound(SoundCable)thatisjointlyownedbyth'eCompanyandtheConnecticutLight.dPowerCompany(Owners).The'modifiedACOrequirestheOwnersto'submittotheDEPandDECariesofreportsandstudiesdescribingcablesystemcondition,operationandrepairpractices,alternativesforcableimprovementsorreplacementandenvironmentalimpactsassociatedwithleaksoffluidintotheLongIslandSound,whichhaveoccurredfromtimetotime.TheCompanycontinuestocompilerequiredinformationandcoordinatethe.activitiesnecessarytoperformthesestudiesand,atthepresenttime,isunabletodeterminethecostsitwillincurtocompletetherequirementsofthemodifiedACOortocomplywithanyadditionalrequirements.'heOwnershavealsoenteredintoanACOwiththeDECasaresultofleaksofdielectricfluidfromtheSoundCable.TheACOformalizestheDEC'sauthoritytoparticipateinandseparately,approvethereportsandstudiesbeingpreparedpursuanttotheACOissuedbytheDEP.Inaddition,theACOsettlesanyDECclaimfornaturalresourcedamagesinconnectionwithhistoricalreleasesofdielectricfluidfromtheSoundCable.InOctober1995,theU.S.AttorneyfortheDistrictofConnecticuthadcommencedaninvestigationregardingoccasionalreleasesoffluidfromtheSound.Cable,aswell.asassociatedoperatingandmaintenancepractices.TheOwnershaveprovidedtheU.S.Attorneywithallrequesteddocumentation.TheCompanybelievesthatallactivitiesassociatedwiththeresponsetooccasionalreleasesfromtheSoundCablewereconsistentwithlegalandregulatoryrequirements.InDecember1996,abarge,ownedandoperated-byathirdparty,droppedanchorwhichthendraggedoverddamagedtheSoundCable,resultinginthereleaseofdielectricfluidintoLongIslandSoun'd.poraryclampsandleakabaterswereinstalledonthecablestostoptheleaks.PermanentrepairswerepletedinJune1997.The'costtorepairtheSoundCablewasapproximately$17.8million,forwhichtherewas$15millionofinsurancecoverage.TheOwnersfiledaclaimandanswerinresponsetothemaritimelimitationproceedinginstitutedbythebargeownerintheUnitedStatesDistrictCourt,Easte'rnDistrictofNewYork.Theclaimseeksrecoveryoftheamountspaidbyinsurancecarriersandrecoveryofthecostsincurredfor..whichtherewasnoinsurancecoverage.AnycoststorepairtheSoundCablewhicharenotreimbursedbyathirdpartyorcoveredbyinsurance'willbesharedequallybytheOwners.TheCompanybelievesthat.noneoftheenvironmentalmatters,discussedabove,willhaveamaterialadverseimpactontheCompany'sfinancialposition,cashflowsorresultsofoperations.Inaddition,theCompanybelievesthatallsignificantcostsincurredwithrespecttoenvironmentalinvestigationandremediationactivities,notrecoverablefrominsurancecarriers,willberecoverablethroughrates.93 Note13.BusinessSegmentsIdentifiableassetsbysegmentincludenetutilityplant,regulatoryassets,materialsandsupplies,accruedunbilledrevenues,gasinstorage;fuelanddeferredcharges.AssetsutilizedforoverallCompanyoperationsconsistprimarily'fcashandcashequivalents,accountsreceivable,commonnetutilityplant'ndunamortizedcostofissuingsecurities.YearEndedMarch31,1998ThreeMonthsEndedMarch31,1997(Inmillionsofdollars)YearEndedYearEndedDecember31,1996December31,1995OperatingrevenuesElectricGas'otalOperatingexpenses(excludesfederalincometax)ElectricGasTotalOperatingincome(beforefederalincometax)Electric'asTotaloperatingincomeAFCOtherincomeanddeductionsInterestchargesFederalincometaxNetIncomeDepreciationandAmortizationElectricGasTotal$2,478646$3,1241,595523$2,118$883123$1,006$(8)10409233$362"$131"28$159$558293$851$400204$604$15889$247(2)(2)"10756$88$327$.39$2,467684$3,151$1,644560$2,204$823124$947$(6)(23)451209$316$12925$154$2,484591$3,075$1,657478$2,135$827113$940(7)(38)476206$303Constructionandnuclearfuelexpenditures*ElectricGasfl$181'35165$16280,~'67884Total$261$51$243$,246~Includesnon-cashallowanceforotherfundsusedduringconstructionandexcludesShorehampost-settlementcosts.March31,1998March31,1997December31,1996December31,1995IdentifiableAssetsElectric'asTotalIdentifiableAssetsAssetsUtilizedforOverallCompanyOperations$9,5531,21910,7721,129$10,0481,13411,182668$9,835I)23211,0671,143$10,0201,18111,2011,326TotalAssets$11,901$11,850$12,210$12,52794 Note'14.0'isaggregatedCondensedBalanceSheet(Unaudited),SetforthbelowistheCompany'scondensedbalancesheetatMarch3l,1998whichhasbeendisaggregatedpursuanttothetermsoftheLIPAAgreementtogiveeffecttotheproposedLIPAansactionasifithadoccurredonMarch31;1998.Theassets;-capitalizationandliabilitiesattributableHoldCoSubsidiaryrepresentthe,Company'stransferofitsgasandgenerationbusinesstosuchsubsidiary.Theassets,capitalizationandliabilitiesattributable'toLIPArepresentthoseitemsthatwillbeacquiredorassumedbyLIPAthroughitsacquisitionoftheCompany'scommonstock.Allsuchamountsexclude'theproceedsfromthesaleofcommonstocktoLIPA.Thedisaggregatedcondensedbalancesheetwaspreparedby'managemento'ftheCom'pany,andissubjecttoadjustment.ForafurtherdiscussionoftheLIPATransaction,seeNote2.'(Inmillionstofdollars)ASSETSLILCOHoldCoSubsidiaryLIPATotalNetUtilityPlantRegulatoryAssetsShorehamrelatedRegulatorytaxassetOtherTotalRegulatoryAssets$3,814.14,661.11,737.9'92.8=7,091.8$1,777.821.0430,1451.1$2,036.34,661.11,716.9262,76,640.7NonutilityPropertyandOtherInvestments.,TotalCurrentAssetsDeferredChargesTotalAssetsCAPITALIZATIONAND,LIABILITIES50.8858.3,85.7$11,900.732.9,'7.9494.2,,364.138.047.7$2,794.0$9,106.7Longtermdebt,includingcurrentmaturitiesPreferredstock,includingcurrentmaturitiestommonShareowner'sEquity1latoryLiabilitiesCurrentLiabilitiesDeferredCredits,OperatingReserves'ommitmentsandContingencies$4,482.9702.02,662.5$7,847.4389.4587.4.,2,608.8,467.7.$1,130.5363.0161.7$1,655.224.2433.0211.2,470.4$3,352.4339.025008$6,192.2365.2154.42,397.6,-(2.7)TotalCapitalizationandLiabilities$11,900.7';'2,794.0$9,106.7kckkItktt'I~ktt'tfPk"ttktk95 Note15.QuarterlyFinancialInformation(Unaudited)Summarized'quarterlyfinancial'datafor1998,"1997and1996is.asfollows:(In'ihousandsofdollarsexceptearningspercommonshare)iscaear3MonthsEnded"'"3/31/976/30/97'9/30/9712/31/97"3/31/98OperatingRevenues~$851,182OperatingIncome.'190,001'etIncome87,697Earningsforcommonstock,74,728,Basicanddilutedearningspercommonsfiare'62$664,488""'852,408',$779,622144,079,",,'42,611,171,96945)16)',1144)384-i56,75632,193131,435.,43,807.261.09.36$827,576209,637115,939,.102,992.853MonthsEnde'iI3/31/96CalendarYearEndedDecember31,19966/30/969/30/9612/31/96OperatingRevenuesOperatingIncomeNetIncomeEarnings'forcommonstockBasicanddilutedearningspercommonshare$864,214190,42181,75368,682.57$694,602141,06540,52427,453.23$849,775235,402130,023116,972.97$742;104169,693'4,16451,141.43ReportofErnst&,YoungLLP,IndependentAuditors,TotheShareownersandBoardofDirectorsofLongIslandLightingCompanyWehaveauditedtheaccompanyingbalancesheetofLongIslandLightingCompanyandtherelatedstatementofcapitalizationasofMarch31,1998and1997,andDecember31,1996andtherelatedstatementsofincome,retainedearningsandcashflowsfortheyearendedMarch31,1998,thetransitionperiodfromJanuary1,1997toMarch31,1997and'eachofthetwoyearsintheperiodendedDecember31,1996.OurauditsalsoincludedthefinancialstatementschedulelistedintheindexatItem14(a).ThesefinancialstatementsandschedulearetheresponsibilityoftheCompany'smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsandschedulebasedonouraudits.Weconductedourauditsinaccordancewithgenerallyacceptedauditingstandards.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.-In.our'pinion",thefinancialstatementsreferredto.abovepresentfairly,'inall'materialrespec'ts,'thefinancialpositionofLongIslandLightingCompanyatMarch31,1998and1997,andDecember31,1996,andtheresultsofitsoperationsanditscflowsfortheyearendedMarch31,1998,theqtransitionperiodfromJanuary1,1997toMarch31,1997andeachofthetwoyearsintheperiodendedDecember31,1996,inconformitywithgenerally'cceptedaccountingprinciples.Also,"inouropinion,therelatedfinancialstatementschedule,whenconsideredinrelationtothebasicfinancialstatementstakenasawhole,presentsfairlyinallmaterialrespectstheinformationsetforththerein.AsdiscussedinNote1tothefinancialstatements,duringtheyearendedMarch31,1998theCompanychangeditsmethodofaccountingforrevenuesprovidedforundertheRateModerationComponent.Melville,NewYorkMay22,199896 Item9.'ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosuresflVNotapplicable.httItJVg97 PARTIII~'ncludedintheSECfilingofMay28,1998.Item10.DirectorsandExecutiveOfficersoftheCompanyllItem11.ExecutiveCompensationItem12.SecurityOwnershipofCertainBeneficialOwnersandManagement1Item13.CertainRelationshipsandRelatedTransactionsPARTIVItem1'4.Exhibits,FinancialStatementSchedules,andReportsonForm8-K(a)(1)ListofFinancialStatementsStatementofIncomefortheyearendedMarch31,1998,thethreemonthsendedMarch31,1997andtheyearsendedDecember31,1996and1995.BalanceSheetatMarch31,1998and1997andDecember31,1996.StatementofRetainedEarningsatMarch31,1998'and1997andDecember31,1996and1995.StatementofCapitalizationatMarch31,1998and1997andDecember31,1996.StatementofCashFlowsfortheyearendedMarch31,1998,thethreemonthsendedMarch1997andtheyearsendedDecember31,1996and1995.NotestoFinancialStatements(2)ListofFinancialStatementSchedulesValuationandQualifyingAccounts(ScheduleII)(3)ListofExhibitsTobeprovidedbytheLegalDepartmentandincludedinthefilingcopy.98 SCHEDULEII-VALUATIONANDQUALIFYINGACCOUNTS(ThousandsofDollars)ColumnAColumnBColumnCColumnDColumnEAdditionsDescriptionBalanceatbeginningofperiodChargedtocostsandexpensesChargedtootheraccounts-describeDeductions-describeBalanceatendofperiodYearendedMarch31,1998Deductedfromassetaccounts:Allowancefordoubtfulaccounts$23,675$23,239$23,431to$23,483ThreeMonthsEndedMarch31,1997Deductedfromassetaccounts:Allowancefordoubtfulaccounts$25,000$4,821$6,146<0$23,675YearendedDecember31,1996Deductedfromassetaccounts:Allowancefordoubtfulaccounts$24,676$23,119$22,795re$25,000arendedDecember31,1995ductedfromassetaccounts:Allowancefordoubtfulaccounts$23,365$17,751$16,44000$24,676(I)Uncollectibleaccountswrittenognetofrecoveries.99

".(',i",'~'ignatures,,DateWILLIAMJ.CATACOSINOS4*'.Willia'mJ.Catacosinos,PrincipalExecutiyeOtic'erandChairmanoftheBoard,ofDirectors.JAMEST."FLYNN*JamesT.Flynn,President,',ChiefOperatingOfficer,Director"/s/JOSEPHE.FONTANAJosephE.Fontana,VicePresident,Controller,PrincipalAccountingOfficerPursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheregistrantandinthecapacitiesandonthedatesindicated.tSinatureandTitleA.JAMESBARNES*A.JamesBarnes,DirectorI,fMay28,1998GEORGEBUGLIARELLO*GeorgeBugliarello,DirectorRENSOL.CAPORALI*.,RensoL.Caporali,DirectorVICKIL.FULLER*VickiL.Fuller,DirectorKATHERINED.ORTEGA*KatherineD.Ortega,DirectorBASILA.PATERSON*BasilA.Paterson,DirectorRICHARDL.SCHMALENSEE*RichardL.Schmalensee,DirectorGEORGEJ.SIDERIS*GeorgeJ.Sideris,DirectorJOHNH.TALMAGE*JohnH.Talmage,Director/s/ANTHONYNOZZOLILLOAnthonyNozzolillo(Individually,asSeniorVicePresidentandPrincipalFinancialOfficerandasattorney-in-factforeachofthepersonsindicated)100 SIGNATURES,ByP11PursuanttotherequirementsofSection13or.15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycaused,thisreporttobesignedonitsbehalfbytheundersigned,,thereuntodulyauthprized.LONGISLANDLIGHTINGCOMPANYVIi4qltDate:May28,1998:=/s/ANTHONYNOZZOLILLOANTHONYNOZZOLILLOPrincipalFinancialOfficerOriginalpowersofattorney,authorizingKathleenA.MarionandAnthonyNozzolillo,andeachofthem;tosignthisreportandanyamendmentsthereto,asattorney-in-factforeachoftheDirectorsandOfficersoftheCompany,andacertifiedcopyoftheresolutionoftheBoardofDirectorsoftheCompanyauthorizingsaidpersonsandeachofthemtosignthisreportand~,,'mendmentstheretoasattorney-in-factforanyOfficerssigningonbehalfoftheCompany,havebeen,arebeingfiledorwillbefiledwiththeSecuritiesandExchangeCommission.101 ConsentofIndeendentAuditorsWeconsenttotheincorporationbyreferenceinthePost-EffectiveAmendmentNo.3toRegistrationStatement(No.33-16238)onFormS-8relatingtoLongIslandLightingCompany'sEmployeeStock'PurchasePlan,Post"-EffectiveAmendmentNo.1toRegistrationStatement(No.2-87427)onFormS-3relatingtoLongIslandLightingCompany'sAutomaticDividendReinvestmentPlanandintherelatedProspectus,RegistrationStatement(No.2-88578)onFormS-3relatingtotheissuanceofCommonStockandintherelatedProspectusandRegistrationStatement(No.33-52963)onFormS-3relatingtotheissuanceofGeneralandRefundingBonds,Debentures,PreferredStockorCommonStockandintherelatedProspectus,ofourreportdatedMay22,1998,withrespecttothefinancialstatementsandscheduleofLongIslandLighting"Companyincludedin'thisAnnualReportonForm10-KfortheyearendedMarch31,1998./s/ERNST&YOUNG'LLPiMelville,NewYorkMay26,1998102

Retrieved from "https://kanterella.com/w/index.php?title=ML17059C116&oldid=663626"