UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
KEYSPAN ENERGY CORP\LILCO COMBINATION AND LIPA TRANSACTION
The following unaudited pro forma financial information reflects adjustments to
the historical financial statements of LILCO to give effect to the transfer of
LILCO's gas and generation business to subsidiaries of MarketSpan Corporation
(MarketSpan), the stock acquisition of LILCO by a wholly owned subsidiary of
LIPA and the combination between KeySpan Energy Corporation (KeySpan) and LILCO
(Combination). The unaudited pro forma consolidated condensed balance sheet at
March 31, 1998 gives effect to the LIPA Transaction and the Combination as if
they had occurred at March 31, 1998. The unaudited pro forma consolidated
condensed statement of income for the 12-month period ended March 31, 1998 gives
effect to the LIPA Transaction and the Combination as if they had occurred on
April 1, 1997. 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.
The following pro forma financial information has been prepared from, and should
be read in conjunction with, the LIPA Agreement (Annex D to the Joint Proxy
dated June 27, 1997), and 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 LIPA Transaction and the Combination been consummated on
the date, or at the beginning of the period, for which the LIPA Transaction and
the Combination are being given effect nor is it necessarily indicative of
future operating results or financial position.
MARKETSPAN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
3/31/98
(In Millions)
Sale MarketSpan
LILCO to Pro Forma before Keyspan Pro Forma
(Historical) LIPA (1) Adjustments KeySpan (Historical) Adjustments MarketSpan
----------- ----------- ----------- --------- ------------ ----------- ----------
ASSETS
PROPERTY
Utility Plant
Electric $4,031.6 2,929.4 1,102.2 1,102.2
Gas 1,233.3 0.0 1,233.3 1,873.1 3,106.4
Common 290.2 0.0 290.2 290.2
Construction work in progress 118.7 41.1 77.6 77.6
Nuclear fuel in process and in reactor 18.1 18.1 0.0 0.0
Less - Accumulated depreciation 0.0 0.0 0.0 0.0
and amortization (1,877.8) (952.3) (925.5) (474.8) (1,400.3)
----------- -------------- -------- ------- ------------- ------------- ---------
Total Net Utility Plant 3,814.1 2,036.3 0.0 1,777.8 1,398.3 0.0 3,176.1
Gas exploration and production, at cost 0.0 0.0 723.6 723.6
Less - Accumulated depletion 0.0 0.0 (256.5) (256.5)
------------- ----------
----------- -------------- --------- ------- -------------
Total Net Plant 3,814.1 2,036.3 0.0 1,777.8 1,865.4 0.0 3,643.2
----------- -------------- --------- ------- ------------- ------------- ----------
----------- -------------- --------- -------------
Cost In Excess of Net Assets Acquired 0.0 0.0 0.0 0.0 0.0 177.0(6) 177.0
----------- -------------- --------- ------- ------------- ------------- ----------
REGULATORY ASSETS
Base financial component (less accumulated
amortization of $883.5 ) 3,155.3 3,155.3
Rate moderation component 434.0 434.0
Shoreham post-settlement costs 1,005.3 1,005.3
Regulatory tax asset 1,737.9 1,716.9 21.0 67.7 (5) 88.7
Postretirement benefits other than pensions 340.1 0.0 (287.7)(2) 52.4 0.0 52.4
Other 419.2 329.2 90.0 29.4 (6) 119.4
----------- -------------- --------- ------- ------------- ------------- ----------
Total Regulatory Assets 7,091.8 6,640.7 (287.7) 163.4 0.0 97.1 260.5
----------- -------------- --------- ------- ------------- ------------- ----------
NONUTILITY PROPERTY AND OTHER INVESTMENTS 50.8 17.9 0.0 32.9 105.5 (64.8)(16) 73.6
----------- -------------- --------- ------- ------------- ------------- ----------
CURRENT ASSETS
Cash and cash equivalents 180.9 75.0 2,482.5 (3) 2,418.4 72.1 2,555.3
75.0(10)
(4.6)(11)
(21.0)(12)
64.5(12)
(33.9)(12)
(250.0)(13) 64.8 (16)
Deferred tax asset 0.0 0.0 236.6 (4) 236.6 0.0 236.6
Accounts receivable and accrued revenues 466.1 328.6 14.4 (2) 151.9 335.3 487.2
Other Current Assets 211.3 3.3 (64.5)(12) 143.5 76.8 220.3
----------- -------------- --------- ------- ------------- ------------- ----------
TOTAL CURRENT ASSETS 858.3 406.9 2,499.0 2,950.4 484.2 64.8 3,499.4
DEFERRED CHARGES 85.7 47.7 0.0 38.0 180.4 (104.4)(5)(6) 114.0
----------- -------------- --------- ------- ------------- ------------- ---------
CONTRACTUAL RECIEVABLE FROM LIPA 0.0 0.0 273.3 (2) 273.3 0.0 0.0 273.3
----------- -------------- --------- ------- ------------- ------------- ---------
TOTAL ASSETS 11,900.7 9,149.5 2,484.6 5,235.8 2,635.5 169.7 8,041.0
=========== ============== ========= ======= ============= ============= ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Shareowners' Equity 2,662.5 2,500.8 2,497.5 (3) 2,605.6 1,083.5 136.4 (6) 3,812.5
(15.0)(3) (13.0) (6)
(13.0)(6)
(21.0)(12)
(4.6)(11)
(6.4)(17) (6.4)
Long-term debt, includes
current maturities 4,482.9 3,396.1 1,086.8 782.1 6.4 (17) 1,875.3
Preferred stock 702.0 339.0 438.0 0.0 0.0 438.0
75.0(10) 0.0
----------- -------------- --------- ------- ------------- ------------- ----------
Total Capitalization 7,847.4 6,235.9 2,518.9 4,130.4 1,865.6 143.4 6,119.4
----------- -------------- --------- --------------------- ------------- ----------
REGULATORY LIABILITIES 389.4 365.1 0.0 24.3 0.0 0.0 24.3
----------- -------------- --------- ------- ------------- ------------- ----------
CURRENT LIABILITIES
Accounts payable and accrued expenses 228.6 101.7 13.0 (6) 139.9 110.0 46.3(6) 296.2
Accrued taxes (including
Federal income tax) 34.8 399.0 (4) 346.3 38.4 384.7
(87.5)(13)
Other current liabilites 324.0 52.7 271.3 115.7 0.0 387.0
----------- -------------- --------- ------- ------------- ------------- ----------
587.4 154.4 324.5 757.5 264.1 46.3 1,067.9
----------- -------------- --------- ------- ------------- ------------- ----------
DEFERRED CREDITS
Deferred federal income tax 2,539.4 2,377.0 (162.4)(4) 87.5 288.9 376.4
87.5(13)
Other 69.4 19.7 49.7 119.9 169.6
----------- -------------- --------- ------- ------------- ------------- ----------
Total Deferred Credits 2,608.8 2,396.7 (74.9) 137.2 408.8 0.0 546.0
----------- -------------- --------- ------- ------------- ------------- ----------
OPERATING RESERVES 467.7 (2.6) (33.9(12) 436.4 0.0 0.0 436.4
(250.0(13) (250.0) (250.0)
----------- -------------- --------- ------- ------------- ------------- ----------
COMMITMENTS AND CONTINGENCIES 0.0 0.0 0.0 0.0 0.0 0.0 0.0
----------- -------------- --------- ------- ------------- ------------- ----------
MINORITY INTEREST IN SUBSIDIARY COMPANY 0.0 0.0 0.0 0.0 97.0 0.0 97.0
----------- -------------- --------- ------- ------------- ------------- ----------
TOTAL CAPITALIZATION AND LIABILITIES 11,900.7 9,149.5 2,484.6 5,235.8 2,635.5 169.7 8,041.0
=========== ============== ========= ======= ============= ============= ==========
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS.
MARKETSPAN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED MARCH 31, 1998
(In Millions Except Per Share Amounts)
Sale Pro MarketSpan
LILCO to Forma before KeySpan Pro Forma
(Historical) LIPA (1) Adjustments KeySpan (Historical) Adjustments MarketSpan
----------- ----------- ---------- ----------- ----------- ----------- -----------
REVENUES
Electric $2,478.4 $2,100.6 $11.5(7) $389.3 $0.0 $389.3
Gas - Utility sales 645.7 645.7 1,299.5 1,945.2
Gas production and other 0.0 130.5 130.5
-------- ----------- -------- ----------- ----------- ----------- -----------
Total Revenues 3,124.1 2,100.6 11.5 1,035.0 1,430.0 0.0 2,465.0
OPERATING EXPENSES
Operations - fuel and purchased power 957.8 658.3 299.5 524.7 824.2
Operations - other 400.0 244.8 155.2 365.5 520.7
Maintenance 111.1 62.3 48.8 57.1 105.9
Depreciation, depletion and amortization 158.5 95.4 63.1 128.5 2.9(6) 194.5
Base financial component amortization 101.0 101.0 0.0 0.0 0.0
Rate moderation component amortization (35.1) (35.1) 0.0 0.0 0.0
Regulatory liability component amortizatio (88.6) (88.6) 0.0 0.0 0.0
Other regulatory amortization 47.3 36.0 11.3 0.0 11.3
Operating taxes 466.3 261.6 204.7 150.0 354.7
Federal income taxes 237.5 205.5 4.0(8) 36.0 58.3 94.3
-------- ----------- ---------- ----------- ----------- ----------- ---------
Total Operating Expenses 2,355.8 1,541.2 4.0 818.6 1,284.1 2.9 2,105.6
-------- ----------- ---------- ----------- ----------- ----------- ---------
Operating Income 768.3 559.4 7.5 216.4 145.9 (2.9) 359.4
Other Income and (Deductions) (1.6) 29.5 (31.1) 25.1 (6.0)
-------- ----------- ---------- ----------- ----------- ----------- --------
Income Before Interest Charges 766.7 588.9 7.5 185.3 171.0 (2.9) 353.4
Interest Charges 404.5 311.6 92.9 44.5 137.4
-------- ----------- ---------- ----------- ----------- ----------- ---------
NET INCOME 362.2 277.3 7.5 92.4 126.5 (2.9) 216.0
-------- ----------- ---------- ----------- ----------- ----------- -------
Preferred stock dividend requirements 51.8 22.9 6.0(10) 34.9 0.1 35.0
-------- ----------- ---------- ----------- ----------- ----------- ---------
EARNINGS FOR COMMON STOCK $310.4 $254.4 $1.5 $57.5 $126.(14) ($2.9) $181.0
======== =========== ========== =========== =========== =========== =========
Average Common Shares Outstanding 121.4 121.4 121.4 121.4 50.7 (14.7) 157.4
======== =========== ========== =========== =========== =========== ========
EARNINGS PER COMMON AND EQUIVALENT SHARES $2.56 $2.10 $0.01 $0.47 $2.49 $1.15(9)
======== =========== ========== =========== =========== =========
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The historical financial statements of LILCO have been adjusted to give
effect to the transaction with LIPA on May 28, 1998, pursuant to which LILCO
transferred certain of its net assets relating to its gas and generation
business ("Transferred Assets") to subsidiaries of MarketSpan Corporation. LIPA
then acquired 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 MarketSpan, and are subject to adjustment pursuant to the terms of
the LIPA agreement.
In connection with this transaction, the principal assets 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 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 MarketSpan 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 MarketSpan.
3. The Cash Purchase Price paid by LIPA in connection with its stock acquisition
of LILCO was $2,497.5 million as determined based upon the estimated net book
value of the LILCO Retained Assets of $2,500.8 million. In addition, the LIPA
Transaction required MarketSpan upon the closing of the transaction to remit to
LIPA $15 million associated with the certain real estate tax litigation
recoveries. The net cash received by MarketSpan amounted to:
Cash Purchase Price $2,497.5
Cash paid to LIPA (15.0)
--------
Net Cash $2,482.5
========
4. The Transferred Assets from LILCO to subsidiaries of MarketSpan will result
in the imposition of federal income taxes on LILCO. Pursuant to the Merger
Agreement, the subsidiaries created by MarketSpan will receive the benefit of
the increased tax basis of the Transferred Assets and will receive the
Transferred Assets net of the tax imposed on LILCO. The tax is derived from the
difference between the fair market value of the Transferred Assets and their
existing tax basis. There are many different ways of valuing assets which may
result in substantially different values. MarketSpan has retained professional
appraisers to assist it in determining the fair market value of the Transferred
Assets. However, the valuation determined by its appraisers is not binding on
the Internal Revenue Service, which may assert a higher value and a
correspondingly greater tax liability. Thus, the actual tax liability and the
amount of cash that will be available to MarketSpan net of such liability cannot
be determined at this time. The unaudited pro forma consolidated balance sheet
as of March 31, 1998, reflects an estimated tax liability of approximately $399
million based upon an estimate of the value of the Transferred Assets. For pro
forma financial reporting purposes, the subsidiaries reversed the existing
deferred tax liability of $162 million relating to the Transferred Assets and
recorded a $237 deferred tax asset, reflecting the estimated 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 March 31,
1998 reflects the reclassification of $67.7 million of KeySpan regulatory tax
assets from deferred charges to regulatory assets in order to consistently
present the regulatory assets.
6. The purchase price for KeySpan, which amounted to approximately $1.260
billion including certain transaction costs not recoverable through rates, 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 Transaction date. 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 non-utility assets approximate
their carrying values.
At March 31, 1998, the purchase price exceeded the fair value of the net assets
acquired by $177.0 million, which MarketSpan expects to amortize over 40 years.
The actual amount of goodwill to be recorded will be based on the net assets
acquired as of the closing date.
MarketSpan estimates total transaction costs related to the KeySpan Transaction
to be $70 million, $23.7 million of which has been incurred through March 31,
1998. Accordingly, a pro forma adjustment of $46.3 million has been recorded to
reflect additional transaction costs anticipated to be incurred subsequent to
March 31, 1998. Of the total transaction costs, $29.4 million has been
reclassified to Regulatory Assets as MarketSpan will recover these amounts
through rates charged to its gas customers.
In addition, MarketSpan estimates transaction costs related to the LIPA
Transaction to be $26 million, $13 million of which has been incurred through
March 31, 1998. A pro forma adjustment of $13 million has been recorded to
reflect the additional costs anticipated to be incurred subsequent to March 31,
1998.
7. The agreement with LIPA includes a provision for MarketSpan 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 net pro forma charge of $4.0 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).
9. No adjustments have been made to earnings on common stock to reflect earnings
on net available proceeds of approximately $1.6 billion to be received, after
remittances to subsidiaries of MarketSpan of approximately $350 million for
working capital purposes, (see Note 3) payment of taxes related to the
Transferred Assets and the funding of VEBA Trusts (see Note 13). If these funds
were invested at 5.93% (the 30 year US Treasury Bond yield at March 31, 1998),
MarketSpan would have realized additional interest income, net of taxes, of
approximately $60.6 million, or approximately $.39 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 for the
year ended March 31, 1998 was 11%.
10. As more fully described in the section entitled "The LIPA
Transaction-Agreement and Plan of Merger," as described in the Joint Proxy
Statement/Prospectus dated June 27, 1997, LILCO transferred the Transferred
Assets to subsidiaries of MarketSpan in exchange for shares of MarketSpan common
stock, and $75 million face amount of privately placed MarketSpan Preferred
Stock. This Preferred Stock, issued in two series, is non-voting and
non-convertible. One series has a term of seven years and the other series h as
a term of ten years. For purposes of these pro forma financial statements,
MarketSpan has issued $75 million of Preferred Stock which LILCO re-sold for $75
million and retained the proceeds (i.e. a Retained Asset). A pro forma
adjustment of $5.3 million has been recorded to reflect the increased preferred
stock dividend requirements.
11. A pro forma adjustment in the amount of $4.6 million was made to reflect
call premiums, related to the redemption of certain series of LILCO preferred
stock.
12. A pro forma adjustment of $21.0 million has been recorded to reflect
benefits payable to LILCO officers subsequent to March 31, 1998 resulting from
the completion of the LIPA and KeySpan Transactions. These amounts principally
relate to incentive compensation plans, transaction related incentives and
contract benefits. In accordance with previously executed employment agreements,
LILCO paid during the fiscal year ended March 31, 1998 and through the
Transaction date a total of $67 million to its officers. Approximately $42
million of such payments related to its chairman and $25 million to its
officers.
13. A pro forma adjustment of $250 million to reflect the funding of VEBA trusts
related to LILCO's obligations with respect to post employment benefits other
than pensions with proceeds from the LIPA Transaction and the associated tax
benefits of $87.5 million.
14. KeySpan earnings for the 12 month period ended March 31, 1998 included
non-recurring net gains of $0.25 per share.
15. The unaudited pro forma consolidated condensed financial statements reflect
the exchange of each share of LILCO Common Stock outstanding into 0.880 shares
of MarketSpan common stock and each share of KeySpan common stock outstanding
into one share of MarketSpan common stock, as provided in the KeySpan/LILCO
Agreement.
16. A pro forma adjustment has been recorded to reflect the repayment by LIPA of
amounts funded by LILCO and KeySpan to purchase an interest rate hedge
instrument. The repayment includes principal plus interest.
17. A pro forma adjustment has been recorded to reflect the issuance of
MarketSpan preferred stock, the proceeds from which were used to fund employee
401(k) plans.