Exhibit 99.1
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
KEYSPAN ENERGY CORP/LILCO COMBINATION AND LIPA TRANSACTION
(PURCHASE)
The following unaudited pro forma financial information reflects
adjustments to the historical financial statements of LILCO to give
effect to the proposed transfer of LILCO's gas and generation
business to subsidiaries of the newly formed Holding Company
(Holding Company), the proposed stock acquisition of LILCO by a
wholly owned subsidiary of LIPA and the proposed Combination
between KeySpan Energy Corporation (KeySpan) and LILCO
(Combination). The unaudited pro forma consolidated condensed
balance sheet at September 30, 1997 gives effect to the proposed
LIPA Transaction and the Combination as if they had occurred at
September 30, 1997. The unaudited pro forma consolidated condensed
statement of income for the twelve month period ended September 30,
1997 gives effect to the proposed LIPA Transaction and the
Combination as if they had occurred at October 1, 1996. These
statements are prepared on the basis of accounting for the
Combination under the purchase method of accounting and are based
on the assumptions set forth in the notes thereto. In April 1997
LILCO changed its year-end from December 31 to March 31.
The following pro forma financial information has been prepared
from, and should be read in conjunction with the historical
consolidated financial statements and related notes thereto of
KeySpan and LILCO. The following information is not necessarily
indicative of the financial position or operating results that
would have occurred had the proposed LIPA Transaction and the
Combination been consummated on the date, or at the beginning of
the period, for which the proposed LIPA Transaction and the
Combination are being given effect nor is it necessarily indicative
of future operating results or financial position.
5
KEYSPAN/LILCO HOLDING CORP.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
September 30, 1997
(In Millions)
KeySpan/LILCO
LIPA Transactions As Adjusted Combination
----------------------- ------------------------------------
Holding
LILCO Sale to Pro Forma LILCO KeySpan Pro Forma Company
(Historical) LIPA (1) Adjustments As Adjusted (Historical) Adjustments Pro Forma
---------- --------- ---------- ---------- ------------ --------- ---------
ASSETS
Property
Utility plant
Electric $ 3,969.6 $ 2,880.2 $ - $ 1,089.4 $ - $ - $ 1,089.4
Gas 1,192.5 - - 1,192.5 1,848.8 - 3,041.3
Common 268.5 - - 268.5 - - 268.5
Construction work in progress 119.5 38.6 - 80.9 - - 80.9
Nuclear fuel in process and - 0.0
in reactor 15.5 15.5 - 0.0 - - 0.0
Less - Accumulated depreciation
and amortization (1,823.9) (891.1) - (932.8) (458.1) - (1,390.9)
Gas exploration and production, at cost - - - 0.0 636.3 - 636.3
Less - Accumulated depletion - - - 0.0 (216.4) - (216.4)
---------- --------- ---------- ---------- ------------ --------- ---------
Total Property 3,741.7 2,043.2 0.0 1,698.5 1,810.6 0.0 3,509.1
---------- --------- ---------- ---------- ------------ --------- ---------
Cost in excess of net assets
acquired (Goodwill) - - - 0.0 - 308.0 (6) 308.0
---------- --------- ---------- ---------- ------------ --------- ---------
Regulatory Assets
Base financial component(less accum.
amortization of $808 ) 3,205.8 3,205.8 - 0.0 - - 0.0
Rate moderation component 402.8 402.8 - 0.0 - - 0.0
Shoreham post-settlement costs 1,004.1 1,004.1 - 0.0 - - 0.0
Regulatory tax asset 1,754.4 1,754.4 - 0.0 - 70.5 (5) 70.5
Postretirement benefits
other than pensions 350.5 - (295.7)(2) 54.8 - - 54.8
Other 431.5 330.6 - 100.9 - - 100.9
---------- --------- ---------- ---------- ------------ --------- ---------
Total Regulatory Assets 7,149.1 6,697.7 (295.7) 155.7 0.0 70.5 226.2
---------- --------- ---------- ---------- ------------ --------- ---------
Nonutility Property
and Other Investments 50.6 17.1 - 33.5 166.9 - 200.4
---------- --------- ---------- ---------- ------------ --------- ---------
Current Assets
Cash and cash equivalents 121.5 - 2,487.6 (3) 2,609.1 36.9 - 2,646.0
Accounts receivable-net 479.1 333.3 14.4 (2) 160.2 159.9 - 320.1
Deferred tax asset 25.2 25.2 119.0 (4) 119.0 - - 119.0
Other current assets 250.6 1.7 - 248.9 151.3 - 400.2
---------- --------- ---------- ---------- ------------ --------- ---------
Total Current Assets 876.4 360.2 2,621.0 3,137.2 348.1 0.0 3,485.3
---------- --------- ---------- ---------- ------------ --------- ---------
Deferred Charges 80.2 47.4 - 32.8 171.6 (70.5)(5) 133.9
Contractual receivable from LIPA - - 281.3 (2) 281.3 - - 281.3
---------- --------- ---------- ---------- ------------ --------- ---------
Total Assets $ 11,898.0 $ 9,165.6 $ 2,606.6 $ 5,339.0 $ 2,497.2 $ 308.0 $ 8,144.2
========== ========= ========== ========== ============ ========= =========
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements
6
KEYSPAN/LILCO HOLDING CORP.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
September 30, 1997
(In Millions)
KeySpan/LILCO
LIPA Transactions As Adjusted Combination
----------------------- ------------------------------------
Holding
LILCO Sale to Pro Forma LILCO KeySpan Pro Forma Company
(Historical) LIPA (1) Adjustments As Adjusted (Historical) Adjustments Pro Forma
---------------------- ---------- ---------- ------------ --------- ---------
CAPITALIZATION AND LIABILITIES
Capitalization
Common Shareholders' Equity 2,614.1 2,520.6 2,487.6 (3) 2,581.1 969.0 253.9 (6) 3,804.0
Long-term debt 4,458.5 3,293.6 (75.0)(14) 1,089.9 745.1 - 1,835.0
Preferred stock 701.0 338.0 75.0 (14) 438.0 0.0 0.0 438.0
---------- --------- ---------- ---------- ------------ --------- ---------
Total Capitalization 7,773.6 6,152.2 2,487.6 4,109.0 1,714.1 253.9 6,077.0
---------- --------- ---------- ---------- ------------ --------- ---------
Regulatory Liabilities 526.3 493.2 - 33.1 - - 33.1
---------- --------- ---------- ---------- ------------ --------- ---------
Current Liabilities
Accounts payable
and accrued liabilities 242.9 121.0 - 121.9 161.3 54.1 (6) 337.3
Accrued taxes 57.2 - 399.0 (4) 456.2 4.6 - 460.8
Other current liabilities 336.5 64.5 - 272.0 153.6 - 425.6
---------- --------- ---------- ---------- ------------ --------- ---------
Total Current Liabilities 636.6 185.5 399.0 850.1 319.5 54.1 1,223.7
---------- --------- ---------- ---------- ------------ --------- ---------
Deferred Credits
Deferred federal income tax 2,422.0 2,312.2 (280.0)(4) (170.2) 290.4 - 120.2
Other 100.9 29.6 - 71.3 88.0 - 159.3
---------- --------- ---------- ---------- ------------ --------- ---------
Total Deferred Credits 2,522.9 2,341.8 (280.0) (98.9) 378.4 0.0 279.5
---------- --------- ---------- ---------- ------------ --------- ---------
Operating Reserves 438.6 (7.1) - 445.7 - - 445.7
---------- --------- ---------- ---------- ------------ --------- ---------
Commitments and Contingencies - - - 0.0 - - 0.0
Minority Interest in
Subsidiary Company - - - 0.0 85.2 - 85.2
---------- --------- ---------- ---------- ------------ --------- ---------
Total Capitalization and Liabilities $ 11,898.0 $ 9,165.6 $ 2,606.6 $ 5,339.0 $ 2,497.2 $ 308.0 $ 8,144.2
========== ========= ========== ========== ============ ========= =========
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements
7
KEYSPAN/LILCO HOLDING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
For the Twelve Months Ended September 30, 1997
(In Millions, Except Per Share Amounts)
Holding
LILCO Sale to Pro Forma LILCO KeySpan Pro Forma Company
(Historical) LIPA Adjustments As Adjusted (Historical) Adjustments Pro Forma
---------- --------- ---------- ---------- ------------ --------- ---------
Revenues
Electric $ 2,458.3 $ 1,485.0 (9)$ 11.5 (7)$ 984.8 $ - $ - $ 984.8
Gas-utility sales 651.9 - - 651.9 1,363.7 - 2,015.6
Gas production and other - - - - 114.5 - 114.5
---------- --------- ---------- ---------- ------------ --------- ---------
Total Revenues 3,110.2 1,485.0 11.5 1,636.7 1,478.2 - 3,114.9
---------- --------- ---------- ---------- ------------ --------- ---------
Operating Expenses
Operations-fuel & purchased power 946.1 14.4 - 931.7 594.1 - 1,525.8
Operations-other 366.1 216.4 - 149.7 363.2 - 512.9
Maintenance 114.6 65.0 - 49.6 56.6 - 106.2
Depreciation,depletion and amortization 156.8 95.2 - 61.6 111.0 6.3 (6) 178.9
Base financial component amortization 101.0 101.0 - 0.0 - - 0.0
Rate moderation component amortization 33.9 33.9 - 0.0 - - 0.0
Regulatory liability component amortization (88.6) (88.6) - 0.0 - - 0.0
Other regulatory amortization 46.6 28.4 - 18.2 - - 18.2
Operating taxes 468.4 266.2 - 202.2 153.5 - 355.7
Federal income taxes 218.9 188.6 6.3 (8) 36.6 57.2 - 93.8
---------- --------- ---------- ---------- ------------ --------- ---------
Total Operating Expenses 2,363.8 920.5 6.3 1,449.6 1,335.6 6.3 2,791.5
---------- --------- ---------- ---------- ------------ --------- ---------
Operating Income 746.4 564.5 5.2 187.1 142.6 (6.3) 323.4
Other Income 14.3 26.7 - (12.4) 16.7 - 4.3
---------- --------- ---------- ---------- ------------ --------- ---------
Income Before Interest Charges 760.7 591.2 5.2 174.7 159.3 (6.3) 327.7
Interest Charges 419.3 325.1 (1.9)(8) 92.3 44.6 - 136.9
---------- --------- ---------- ---------- ------------ --------- ---------
Net Income 341.4 266.1 7.1 82.4 114.7 (15) (6.3) 190.8
Preferred stock dividend requirements 51.9 23.1 23.7 (14) 52.5 0.3 52.8
---------- --------- ---------- ---------- ------------ --------- ---------
Earnings for Common Stock $ 289.5 $ 243.0 $ (16.6) $ 29.9 $ 114.4 $ (6.3) $ 138.0
========== ========= ========== ========== ============ ========= =========
Average Common Shares Outstanding 121.1 121.1 121.1 121.1 50.2 (14.5)(3) 156.8
========== ========= ========== ========== ============ ========= =========
Earnings per Common and
Equivalent Shares $ 2.39 $ 2.01 $ (0.14) $ 0.25 $ 2.27 $ 0.43 $ 0.88
========== ========= ========== ========== ============ ========= =========
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements
8
Notes to Unaudited Pro Forma Consolidated Condensed Financial
Statements
1. The historical financial statements of LILCO have been
adjusted to give effect to the proposed transaction with LIPA,
pursuant to which LILCO will distribute certain of its net
assets relating to its gas and generation business
("Transferred Assets") to subsidiaries of the Holding Company.
LIPA will then acquire LILCO in a stock sale. The adjustments
are based upon a disaggregation of LILCO's balance sheet and
operations as estimated by the management of LILCO, and are
subject to adjustment pursuant to the terms of the LIPA
agreement.
In connection with this transaction, the principal assets to
be acquired by LIPA through its stock acquisition of LILCO
include the electric transmission and distribution system
("The LIPA Transmission and Distribution System"), LILCO's 18%
interest in Nine Mile Point 2 nuclear power station, certain
of LILCO's regulatory assets associated with its electric
business and an allocation of accounts receivable and other
assets. The principal liabilities to be assumed by LIPA
include LILCO's regulatory liabilities associated with its
electric business, a portion of LILCO's long-term debt and an
allocation of accounts payable, accrued expenses, customer
deposits, other deferred credits and claims.
2. In connection with the LIPA Transaction, LIPA is contractually
responsible for reimbursing the Holding Company for
postretirement benefits other than pension costs, related to
employees of LILCO's electric business. A pro forma
adjustment has been reflected to reclassify the associated
regulatory asset for postretirement benefits other than
pensions to current and non-current accounts receivable
pursuant to LIPA's obligation to a subsidiary of the Holding
Company.
3. The Cash Purchase Price to be paid by LIPA in connection with
its stock acquisition of LILCO will be $2,497.5 million. The
Cash Purchase Price was determined based upon the estimated
net book value of the LILCO Retained Assets of $2,500.8
million as estimated by LILCO in a projected balance sheet as
of December 31, 1997. Based upon the balance sheet as of
September 30, 1997, the net book value of the LILCO Retained
Assets amounted to $2,520.6 million. In addition, the LIPA
Transaction obligates the Holding Company upon the closing of
the transaction to remit to LIPA $15 million associated with
the recovery through litigation of certain real estate taxes
previously paid. Transaction costs are currently estimated to
be $18 million. Assuming the LIPA Transaction was completed
on September 30, 1997, the net cash to be received by the
Holding Company would amount to:
9
Cash Purchase Price ........................... $2,520.6
Cash Paid to LIPA ............................. (15.0)
Transaction Costs ............................. (18.0)
---------
Net Cash....................................... $2,487.6
=========
4. The distribution of Transferred Assets from LILCO to
subsidiaries of the Holding Company will result in the
imposition of federal income taxes on LILCO. Pursuant to the
LIPA Agreement, the subsidiaries created by the Holding
Company to receive the Transferred Assets will receive the
benefit of the increased tax basis of the Transferred Assets
and will pay the LILCO tax. If the LIPA Transaction were to
have occurred at September 30, 1997, the tax would have
amounted to approximately $399 million. The tax is derived
from the difference between the estimated fair value of the
distributed assets and their existing tax basis. For
financial reporting purposes, the subsidiaries reversed the
existing deferred tax liability of $280 million relating to
the Transferred Assets and recorded a $119 million deferred
tax asset reflecting the income tax effect by which the tax
basis of the Transferred Assets exceeded their book basis.
5. The unaudited pro forma condensed consolidated balance sheet
as of September 30, 1997 reflects the reclassification of
$70.5 million of KeySpan regulatory tax assets from deferred
charges to regulatory assets in order to consistently present
the regulatory assets of Keyspan and LILCO Consolidated.
6. The purchase price for Keyspan at September 30, 1997, which
amounted to approximately $1.245 billion including
approximately $54.1 million of transaction costs, has been
determined based upon an average of LILCO's opening and
closing stock prices for the two trading days before and three
trading days after December 29, 1996. The purchase price has
been allocated to assets acquired and liabilities assumed
based upon their estimated fair values. It is anticipated
that the fair value of the utility assets acquired is
represented by their book value, which approximates the value
of these assets recognized by the New York State Public
Service Commission (PSC) in establishing rates which are
designed to, among other things, provide for a return on the
book value of these assets and the recovery of costs included
as depreciation and amortization charges. The estimated fair
values of KeySpan's non-utility assets approximate their
carrying values. Both KeySpan and LILCO will seek PSC
approval for recovery of transaction costs.
10
At December 29, 1996, the purchase price, including merger
related transaction costs, exceeded the fair value of the net
assets acquired by $308.0 million, which will be amortized to
income over 40 years.
7. The agreement with LIPA includes a provision for the Holding
Company to earn in the aggregate approximately $11.5 million
in annual management service fees from LIPA for the management
of the LIPA Transmission and Distribution System and the
management of all aspects of fuel and power supply. These
agreements also contain certain incentive and penalty
provisions which could materially impact earnings from such
agreements.
8. The pro forma charge of $6.3 million represents the income tax
effect associated with the recording of the pro forma
adjustments for the $11.5 million management fee (see Note 7),
and a reduction in interest expense of approximately $1.9
million associated with the recapitalization of the subsidiary
which contains the gas and generation businesses.
9. Revenues for both the assets acquired by LIPA and the
Transferred Assets were determined based upon a revenue
requirements model which considered the cost of service for
these assets and a return on capitalization based upon an
imputed allowed rate of return.
10. No adjustments have been made to earnings on common stock to
reflect earnings on net available proceeds of approximately
$1.7 billion to be received, after remittances to the Holding
Company's gas and generation subsidiaries for working capital
purposes (see Notes 3 and 11). If these funds were invested
at 6.40% (the 30 year US Treasury Bond yield based on average
prices), the Holding Company would have realized additional
interest income, net of taxes, of approximately $70.7 million,
or approximately $.45 per share, on a pro forma consolidated
basis. Each one percent change in the assumed interest rate,
would increase/decrease interest income, net of taxes, by
$11.0 million. LILCO's allowed rate of return on its common
equity for its electric business is currently 11%.
11. Subsequent to the sale of LIPA, a portion of the proceeds to
be received by the Holding Company will be remitted to LILCO's
gas and generation subsidiaries in order to meet the
subsidiaries working capital needs. Such proposed transaction
has been eliminated in the consolidation process.
12. The allocation between KeySpan and LILCO and their customers
of the estimated cost savings resulting from the Combination,
net of the costs incurred to achieve such savings, will be
subject to regulatory review and approval. None of the
estimated cost savings, have been reflected in the unaudited
pro forma consolidated condensed financial statements.
11
13. The unaudited pro forma consolidated condensed financial
statements reflect the exchange of each share of LILCO Common
Stock outstanding into 0.880 shares of Holding Company Common
Stock and each share of KeySpan Common Stock outstanding into
one share of Holding Company Common Stock, as provided in the
KeySpan/LILCO Agreement.
14. In connection with the LIPA Transaction, LILCO will
transfer the Transferred Assets to subsidiaries of the Holding
Company in exchange for shares of the Holding Company Common
Stock and up to $75 million face amount of Holding Company
Preferred Stock. The privately placed Preferred Stock will be
non-voting, non-convertible and have a five-year term. For
purposes of these pro forma financial statements, it is
assumed that the Holding Company will issue $75 million of
Preferred Stock, LILCO will sell the Preferred Stock for $75
million in proceeds and will retain the proceeds (i.e., a
Retained Asset).
With a $75 million increase in the Retained Assets, the LIPA
Agreement provides that the Retained Debt will increase by a
corresponding amount. The LIPA Agreement also provides that
if the Holding Company were to issue an amount other than $75
million of Preferred Stock, the incremental difference between
the amount actually issued and $75 million, will result in a
corresponding increase or decrease in the amount of accounts
payable retained by LILCO. These pro forma financial
statements reflect a reduction in interest expense for the
reduced level of subsidiary debt, and to reflect an increase
in preferred stock dividend requirements. Finally, for
purposes of these pro forma financial statements, it is
assumed that the dividend rate on this privately placed
Preferred Stock will be 7.95%, which is equal to the Company's
highest cost preferred stock.
15. KeySpan earnings for the 12 month period ended September 30,
1997, include non-recurring income aggregating to
approximately $7.8 million, net of taxes, or $0.16 per share,
relating to gains on the sale of certain Canadian gas
processing properties and on the sales of a fuel management
operation.
12