<SEC-DOCUMENT>0001062379-99-000020-index.html : 19990817

<SEC-HEADER>0001062379-99-000020.hdr.sgml : 19990817

ACCESSION NUMBER:      0001062379-99-000020

CONFORMED SUBMISSION TYPE: 10-Q

PUBLIC DOCUMENT COUNT:     6

CONFORMED PERIOD OF REPORT:     19990630

FILED AS OF DATE:      19990816

 

FILER:

 

     COMPANY DATA:

         COMPANY CONFORMED NAME:             KEYSPAN CORP

         CENTRAL INDEX KEY:              0001062379

         STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924]

         IRS NUMBER:                113431358

         STATE OF INCORPORATION:             NY

         FISCAL YEAR END:           1231

 

     FILING VALUES:

         FORM TYPE:        10-Q

         SEC ACT:     

         SEC FILE NUMBER:  001-14161

         FILM NUMBER:      99693144

 

     BUSINESS ADDRESS:

         STREET 1:         175 EAST OLD COUNTRY ROAD

         CITY:             HICKSVILLE

         STATE:            NY

         ZIP:          11801

         BUSINESS PHONE:        5167556650

 

     MAIL ADDRESS:

         STREET 1:         175 EAST OLD COUNTRY ROAD

         CITY:             HICKSVILLE

         STATE:            NY

         ZIP:          11801

 

     FORMER COMPANY:  

         FORMER CONFORMED NAME: MARKETSPAN CORP

         DATE OF NAME CHANGE:   19980526

</SEC-HEADER>

<DOCUMENT>

<TYPE>10-Q

<SEQUENCE>1

<DESCRIPTION>KEYSPAN ENERGY FORM 10-Q

<TEXT>

 

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D. C. 20549

                                    Form 10-Q

(Mark One)

 X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

     SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended       June 30, 1999

                                       OR

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

     SECURITIES EXCHANGE ACT OF 1934

 

     For the transition period from to

 

                         Commission file number 1-14161

 

                               KEYSPAN CORPORATION

             (Exact name of Registrant as specified in its charter)

 

             New York                             11-3431358

(State or other jurisdiction of                (I.R.S. Employer

 incorporation or organization)               Identification No.)

 

             175 East Old Country Road, Hicksville, New York 11801

                 One MetroTech Center, Brooklyn, New York 11201

              (Address of principal executive offices) (Zip Code)

 

                           (516) 755-6650 (Hicksville)

                            (718) 403-1000 (Brooklyn)

              (Registrant's telephone number, including area code)

 

                             MARKETSPAN CORPORATION

(Former name, former address and former fiscal year, if changed

since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required

to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during

the  preceding 12 months (or for such  shorter  period that the  registrant  was

required  to file  such  reports),  and  (2) has  been  subject  to such  filing

requirements for the past 90 days. Yes X No

 

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares  outstanding  of each of the  issuer's  classes of

common stock, as of the latest practicable date.

 

   Class of Common Stock                       Outstanding at July 29, 1999

         $.01 par value                                      139,292,752

 

 

 

<PAGE>

 

                      KEYSPAN CORPORATION AND SUBSIDIARIES

 

                                      INDEX

                                      -----

 

          Part I. FINANCIAL INFORMATION                        Page No.

                                                               --------

Item I. Financial Statements

 

                  Condensed Consolidated Balance Sheet -

                  June 30, 1999 and December 31, 1998                 3

 

                  Condensed Consolidated Statement of Income -

                  Three and Six Months Ended June 30,

                  1999 and 1998                                       5

 

                  Condensed Consolidated Statement of Cash Flows -

                  Three and Six Months Ended June 30,

                  1999 and 1998                                       6

 

                  Notes to Condensed Consolidated Financial

                  Statements                                          7

 

Item 2. Management's Discussion and Analysis Of Financial

                  Condition and Results of Operations                 19

 

Item 3. Quantitative and Qualitative Disclosures

                  About Market Risk                                   36

 

 

                           Part II. OTHER INFORMATION

 

Item 1 - Legal Proceedings                                            37

 

Item 4. Submission of Matters to a Vote of

                  Security Holders                                    40

 

Item 6 - Exhibits and Reports on Form 8-K                             41

 

 

Signature                                                             43

 

 

 

 

                                        2

 

<PAGE>

<TABLE>

<CAPTION>

 

                      CONDENSED CONSOLIDATED BALANCE SHEET

                            (IN THOUSANDS OF DOLLARS)

 

 

                                                            JUNE 30,1999         December 31, 1998

                                                         ------------------     -------------------

                                                            (UNAUDITED)               (Audited)

 

 

ASSETS

 

<S>                                                 <C>                      <C>

CURRENT ASSETS

  Cash and temporary cash investments               $             307,295    $            942,776

  Customer accounts receivable                                    201,017                 320,836

  Other accounts receivable                                       203,568                 230,479

  Allowance for uncollectible accounts                            (24,142)                (20,026)

  Special deposits                                                108,377                 145,684

  Gas in storage, at average cost                                  95,178                 145,277

  Materials and supplies, at average cost                          75,835                  74,193

  Other                                                           122,848                  72,818

                                                        ------------------     -------------------

                                                                1,089,976               1,912,037

                                                        ------------------     -------------------

 

 

EQUITY INVESTMENTS                                                308,578                 289,193

                                                        ------------------     -------------------

 

PROPERTY

  Electric                                                      1,322,162               1,109,199

  Gas                                                           3,330,828               3,257,726

  Other                                                           361,595                 345,007

  Accumulated depreciation                                     (1,540,284)             (1,480,038)

  Gas exploration and production, at cost                       1,052,428                 994,104

  Accumulated depletion                                          (481,478)               (447,733)

                                                        ------------------     -------------------

                                                                4,045,251               3,778,265

                                                        ------------------     -------------------

 

 

DEFERRED CHARGES

  Regulatory assets                                               311,577                 279,524

  Goodwill                                                        241,316                 254,040

  Other                                                           388,480                 382,043

                                                        ------------------     -------------------

                                                                  941,373                 915,607

                                                        ------------------     -------------------

TOTAL ASSETS                                        $           6,385,178    $          6,895,102

                                                        ==================     ===================

 

</TABLE>

 

 

 See accompanying notes to the Condensed Consolidated Financial Statements.

 

 

 

                                                               3

<PAGE>

 

 

<TABLE>

<CAPTION>

 

                      CONDENSED CONSOLIDATED BALANCE SHEET

                            (IN THOUSANDS OF DOLLARS)

 

                                                           JUNE 30,1999         December 31, 1998

                                                       ------------------      -------------------

                                                           (UNAUDITED)                (Audited)

 

 LIABILITIES AND CAPITALIZATION

<S>                                                  <C>                      <C>

 CURRENT LIABILITIES

   Current maturities of long-term debt              $               1,000    $            398,000

   Current redemption of preferred stock                           363,000                       -

   Accounts payable and accrued expenses                           421,875                 519,288

   Dividends payable                                                66,095                  66,232

   Taxes accrued                                                     8,939                  69,742

   Customer deposits                                                30,075                  29,774

   Interest accrued                                                 15,306                  19,965

                                                         ------------------     -------------------

                                                                   906,290               1,103,001

                                                         ------------------     -------------------

 

 DEFERRED CREDITS AND OTHER LIABILITIES

   Regulatory liabilities                                           26,235                  27,854

   Deferred federal income tax                                     163,948                  71,549

   Operating reserves                                              486,952                 457,459

   Other                                                            80,239                  75,740

                                                         ------------------     -------------------

                                                                   757,374                 632,602

                                                         ------------------     -------------------

 

 CAPITALIZATION

   Common stock, $.01 par value, authorized

     450,000,000 shares; outstanding 140,120,152

     and 144,628,654 shares stated at                            2,973,388               2,973,388

   Retained earnings                                               496,242                 474,188

   Accumulated foreign currency adjustment                           4,783                    (952)

   Treasury stock purchased                                       (546,448)               (423,716)

                                                         ------------------     -------------------

      Total common equity                                        2,927,965               3,022,908

   Preferred stock                                                  84,485                 447,973

   Long-term debt                                                1,637,491               1,619,067

                                                         ------------------     -------------------

 TOTAL CAPITALIZATION                                            4,649,941               5,089,948

                                                         ------------------     -------------------

 

 MINORITY INTEREST IN SUBSIDIARY COMPANY                            71,573                  69,551

                                                         ------------------     -------------------

 TOTAL LIABILITIES AND CAPITALIZATION                $           6,385,178    $          6,895,102

                                                         ==================     ===================

 

</TABLE>

 

 

See accompanying notes to the Condensed Consolidated Financial Statements.

 

 

                                                               4

 

<PAGE>

<TABLE>

<CAPTION>

 

                   CONDENSED CONSOLIDATED STATEMENT OF INCOME

                                   (Unaudited)

               (IN THOUSANDS OF DOLLARS ,EXCEPT PER SHARE AMOUNTS)

 

 

                                                   THREE MONTHS                    SIX MONTHS

                                                  ENDED JUNE 30,                 ENDED JUNE 30,

                                                1999          1998               1999          1998

                                             ------------   ----------        ------------  -----------

 

 REVENUES

<S>                                        <C>           <C>               <C>            <C>

 Gas Distribution                          $     277,482 $    152,904      $      993,312 $    424,798

 Gas Exploration and Production                   35,021       11,713              61,541       11,713

 Electric Services                               189,734       68,365             364,271       68,365

 Electric Distribution                                 -      330,011                   -      885,693

 Energy Related Services                          37,125        6,386              78,557        6,386

                                             ------------   ----------        ------------  -----------

 Total Revenues                                  539,362      569,379           1,497,681    1,396,955

 

 OPERATING EXPENSES

 Purchased gas                                    96,819       63,189             408,073      191,590

 Fuel and purchased power                              -       91,762                   -      257,786

 Operations and maintenance                      242,066      187,940             485,148      320,102

 Depreciation, depletion and amortization         59,382       43,990             117,568       88,199

 Electric regulatory amortizations                     -      (40,005)                  -      (79,875)

 Operating taxes                                  77,145       97,768             181,038      214,880

                                             ------------   ----------        ------------  -----------

 Total Operating Expenses                        475,412      444,644           1,191,827      992,682

                                             ------------   ----------        ------------  -----------

 OPERATING INCOME                                 63,950      124,735             305,854      404,273

                                             ------------   ----------        ------------  -----------

 

 OTHER INCOME AND (DEDUCTIONS)

 Income from equity investments                    2,509         (207)              5,481         (207)

 Interest income                                   7,746       12,895              18,789       16,609

 Minority interest                                (1,887)        (568)             (2,191)        (568)

 Transaction related expenses,net                      -       (6,450)                  -       (6,450)

 Other                                            (2,820)      10,177                (551)      13,797

                                             ------------   ----------        ------------  -----------

 Total Other Income                                5,548       15,847              21,528       23,181

                                             ------------   ----------        ------------  -----------

 INCOME BEFORE INTEREST CHARGES

   AND INCOME TAXES                               69,498      140,582             327,382      427,454

                                             ------------   ----------        ------------  -----------

 

 INTEREST CHARGES                                 33,756       76,825              68,340      176,852

                                             ------------   ----------        ------------  -----------

 

 INCOME TAXES

      Current                                    (39,505)     121,184               7,141      143,757

      Deferred                                    52,258      (94,677)             85,691      (46,344)

                                             ------------   ----------        ------------  -----------

 Total Income Taxes                               12,753       26,507              92,832       97,413

                                             ------------   ----------        ------------  -----------

 

 NET INCOME                                       22,989       37,250             166,210      153,189

 Preferred stock dividend requirements             8,690       11,216              17,379       24,163

                                             ------------   ----------        ------------  -----------

 EARNINGS FOR COMMON STOCK                 $      14,299 $     26,034      $      148,831 $    129,026

 

 Foreign Currency Adjustment                       2,425       (1,429)              5,735       (1,429)

 

                                             ============   ==========        ============  ===========

 COMPREHENSIVE INCOME                      $      16,724 $     24,605      $      154,566 $    127,597

                                             ============   ==========        ============  ===========

 

 AVERAGE COMMON

   SHARES OUTSTANDING (000)                      140,749      134,166             141,865      127,916

 

 BASIC AND DILUTED EARNINGS

   PER COMMON SHARE                        $        0.10 $       0.19      $         1.05 $       1.01

                                             ============   ==========        ============  ===========

 

</TABLE>

 

See accompanying notes to the Condensed Consolidated Financial Statements.

 

                                        5

 

 

 

<PAGE>

<TABLE>

<CAPTION>

                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

                                   (Unaudited)

                            (IN THOUSANDS OF DOLLARS)

 

                                                                THREE MONTHS      Three Months        SIX MONTHS         Six Months

                                                                    ENDED             Ended              ENDED             Ended

                                                               JUNE 30, 1999      June 30, 1998      JUNE 30, 1999     June 30, 1998

                                                               ---------------    --------------    ----------------   -------------

OPERATING ACTIVITIES

 

<S>                                                        <C>             <C>               <C>                <C>

 Net Income                                                $       22,989  $         37,250  $          166,210 $         153,189

 ADJUSTMENTS TO RECONCILE NET INCOME TO NET

       CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   Depreciation, depletion and amortization                        59,382            43,990             117,568            88,199

   Electric regulatory amortization                                     -           (40,005)                  -           (79,875)

   Deferred income tax                                             52,258           (94,677)             85,691           (46,344)

   Income from equity investments                                  (2,509)              207              (5,481)              207

   Dividends from equity investments                                    -                 -               4,296                 -

 CHANGES IN ASSETS AND LIABILITIES

   Accounts receivable                                            217,523            90,418             146,397            82,095

   Materials and supplies, fuel oil and gas in storage            (54,475)           (3,766)             48,252            66,858

   Accounts payable and accrued expenses                          (75,596)           (9,864)           (161,065)          (89,652)

   Interest accrued                                                (2,433)           67,486              (4,647)           56,306

   Special deposits                                                12,449            65,947              37,307            37,588

   Pensions and other post retirement benefits                          -          (285,212)                  -          (285,212)

   Other                                                          (30,539)         (113,481)            (35,856)          (96,360)

                                                             -------------    --------------    ----------------   ---------------

 Net Cash Provided by (Used in)  Operating Activities             199,049          (241,707)            398,672          (113,001)

                                                             -------------    --------------    ----------------   ---------------

 

 INVESTING ACTIVITIES

 

 Capital expenditures                                            (310,031)         (100,199)           (396,362)         (155,935)

 Net cash from KeySpan Acquisition                                      -           165,168                   -           165,168

 Net proceeds from LIPA Transaction                                     -         2,314,588                   -         2,314,588

 Other                                                             (3,563)           (8,390)             12,451           (17,679)

                                                              -------------    --------------    ----------------   ---------------

 Net Cash (Used in) Provided by Investing Activities             (313,594)        2,371,167            (383,911)        2,306,142

                                                             -------------    --------------    ----------------   ---------------

 

 FINANCING ACTIVITIES

 

 Proceeds from sale of common stock                                     -             6,514                   -            11,068

 Treasury stock purchased                                         (68,671)                -            (122,732)                -

 Issuance of preferred stock                                            -            75,000                   -            75,000

 Issuance of long-term debt                                         8,000                 -              15,000                 -

 Payment of long-term debt                                       (397,000)         (100,000)           (397,000)         (100,000)

 Preferred stock dividends paid                                    (8,690)          (12,926)            (17,379)          (25,873)

 Common stock dividends paid                                      (63,323)          (90,353)           (127,683)         (144,385)

 Other                                                                186           (16,965)               (448)          (17,297)

                                                             -------------    --------------    ----------------   ---------------

 Net Cash (Used in) Financing Activities                         (529,498)         (138,730)           (650,242)         (201,487)

                                                             -------------    --------------    ----------------   ---------------

 Net (Decrease) or Increase in Cash and Cash Equivalents   $     (644,043) $      1,990,730  $         (635,481)$       1,991,654

                                                             =============    ==============    ================   ===============

 

 Cash and cash equivalents at beginning of period          $      951,338  $        180,919  $          942,776 $         179,995

 Net (Decrease) or Increase in cash and cash equivalents         (644,043)        1,990,730            (635,481)        1,991,654

                                                             =============    ==============    ================   ===============

 Cash and Cash Equivalents at End of Period                $      307,295  $      2,171,649  $          307,295 $       2,171,649

                                                             =============    ==============    ================   ===============

</TABLE>

 

See accompanying notes to the Condensed Consolidated Financial Statements.

 

 

 

                                        6

 

 

<PAGE>

 

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.       ORGANIZATION OF THE COMPANY

 

         KeySpan Corporation,  d/b/a KeySpan Energy (the "Company"),  a New York

         corporation,   is  the  successor  to  Long  Island  Lighting   Company

         ("LILCO"),  as a result of the  transaction  with the Long Island Power

         Authority  ("LIPA")and  following  the  acquisition  of KeySpan  Energy

         Corporation ("KSE"). The Company is a "predominately intrastate" public

         utility  holding  company  exempt  from most of the  provisions  of the

         Public Utility Holding Company Act of 1935, as amended.

 

         On May 28, 1998, the Company  completed two business  combinations as a

         result of which it (i) became the successor operator of the non-nuclear

         electric generating facilities,  gas distribution operations and common

         plant  formerly  owned by LILCO  and  entered  into  long-term  service

         agreements  to  operate  the  electric  transmission  and  distribution

         ("T&D")  system  acquired  by LIPA (the "LIPA  Transaction");  and (ii)

         acquired  KSE,  the parent  company of The  Brooklyn  Union Gas Company

         ("Brooklyn Union")(the "KeySpan Acquisition").

 

         With the exception of a small portion of Queens  County,  the Company's

         subsidiaries are the only providers of gas distribution services in the

         New York City  counties  of Kings,  Richmond  and  Queens  and the Long

         Island  counties of Nassau and  Suffolk.  Brooklyn  Union  provides gas

         distribution  services to  customers  in the New York City  boroughs of

         Brooklyn,  Queens and Staten Island,  and KeySpan Gas East  Corporation

         d/b/a Brooklyn Union of Long Island  ("Brooklyn Union of Long Island"),

         a Company subsidiary,  provides gas distribution  services to customers

         in the Long Island  counties  of Nassau and  Suffolk  and the  Rockaway

         Peninsula of Queens County.

 

         In addition, Company subsidiaries operate the electric T&D system owned

         by LIPA,  own and sell  capacity and energy to LIPA from the  Company's

         generating  facilities  located on Long Island and manage fuel supplies

         for  LIPA to fuel  the  Company's  Long  Island  generating  facilities

         through  long-term  service  contracts that range from eight to fifteen

         years.  Moreover,  on June 18, 1999,  Company  subsidiaries  became the

         owner,  lessee and operator of the 2,168 megawatt  Ravenswood  electric

         generation  facility located in Long Island City, Queens.  (See Note 10

         "Contractual  Obligations and  Contingencies"  for a description of the

         Ravenswood Acquisition.)

 

 

 

                                        7

 

<PAGE>

 

 

 

 

         Other Company  subsidiaries are involved in gas and oil exploration and

         production; wholesale and retail gas and electric marketing; appliance,

         heating,   ventilation  and  air  conditioning   services;   and  large

         energy-system ownership,  installation and management. Further, certain

         subsidiaries   have  investments  in  natural  gas  pipelines  and  gas

         distribution facilities; midstream natural gas processing and gathering

         facilities    and   gas   storage    facilities,    domestically    and

         internationally.   (See  Note  8  "Business  Segments"  for  additional

         information.)

 

 

2.       BASIS OF PRESENTATION

 

         The  financial  statements  presented  herein  reflect  the  results of

         operations  of the  consolidated  Company  for the three and six months

         ended June 30, 1999. For financial reporting purposes,  LILCO is deemed

         the acquiring company pursuant to a purchase accounting  transaction in

         which  KSE  was  acquired.   Consequently,   the  financial  statements

         presented  herein  for the three and six  months  ended  June 30,  1998

         reflect the results of operations of the consolidated  Company from May

         29, 1998 through June 30, 1998.  Periods prior to May 29, 1998,  (i.e.,

         January 1, 1998 through May 28,  1998)reflect  results of operations of

         LILCO  only.  Since  the  acquisition  of KSE  was  accounted  for as a

         purchase,  purchase accounting  adjustments,  including goodwill,  have

         been reflected in the financial statements included herein.

 

         The weighted  average number of common shares  outstanding  used in the

         calculation  of earnings  per share for the three and six months  ended

         June  30,  1999  and 1998  reflect  the  issuance  of  common  stock to

         consummate the KeySpan  Acquisition  and the reduction  associated with

         repurchases of common stock.

 

         In the opinion of the Company,  the  accompanying  unaudited  Condensed

         Consolidated  Financial Statements contain all adjustments necessary to

         present  fairly the  financial  position  of the Company as of June 30,

         1999,  and the results of its  operations  and cash flows for the three

         and six months ended June 30, 1999 and 1998. Certain  reclassifications

         were made to conform prior period financial statements with the current

         period  financial   statement   presentation.   Other  than  as  noted,

         adjustments were of a normal, recurring nature.

 

         As  permitted  by the  rules  and  regulations  of the  Securities  and

         Exchange  Commission  ("SEC"),  the  Condensed  Consolidated  Financial

         Statements do not include all of the  accounting  information  normally

         included  with  financial   statements   prepared  in  accordance  with

         generally accepted accounting  principles.  Accordingly,  the Condensed

         Consolidated  Financial  Statements  should be read in conjunction with

         the financial  statements  and notes thereto  included in the Company's

         Annual Report on Form 10-K for the Transition Period ended December 31,

         1998.

 

 

3.       REVENUES

 

         The Gas  Distribution  segment of the Company is influenced by seasonal

         weather  conditions.  Annual gas  revenues are  substantially  realized

         during the heating  season  (November 1 to April 30) as a result of the

         large proportion of heating sales, primarily residential, compared with

         total sales.  Accordingly,  results of operations for gas  distribution

         operations  historically  are most  favorable in the three months ended

         March 31, with results of operations  being next most  favorable in the

         three months ended  December 31.  Results for the quarter ended June 30

         are  marginally  profitable or  unprofitable,  and losses are generally

         incurred in the quarter ended September 30.

 

         The  Company's  gas  distribution  subsidiaries  each  operate  under a

         utility tariff that contains a weather  normalization  adjustment  that

         largely  offsets  shortfalls  or excesses of firm net  revenues  (i.e.,

         revenues less gas costs and revenue  taxes) during a heating season due

         to variations from normal weather.

 

         Electric  Services  revenues are derived from  billings to LIPA for the

         management and operation of LIPA's T&D system, electric generation, and

         fuel management.  (For a description of the various services agreements

         with LIPA see the Company's  Form 10K for the  Transition  Period ended

         December 31,  1998.) In  addition,  electric  revenues,  since June 18,

         1999, also include revenues from the Ravenswood facility. Revenues from

         electric  generation  are not  affected by weather  since  billings are

         based on fully allocated capacity.

 

         Prior to the LIPA  Transaction,  electric  revenues  were  comprised of

         cycle  billings  rendered to  residential,  commercial  and  industrial

         customers and the accrual of electric revenues for services rendered to

         customers not billed at month-end. In addition,  LILCO's rate structure

         provided for a revenue reconciliation mechanism which

 

                                        8

 

<PAGE>

 

 

 

 

         eliminated  the impact on earnings of electric sales that were above or

         below the levels reflected in rates.

 

 

4.       GAS EXPLORATION AND PRODUCTION

 

         The Houston Exploration Company ("THEC"), a 64% owned subsidiary of the

         Company  which is engaged in gas and oil  exploration  and  production,

         uses the full cost method of accounting  for its  investment in natural

         gas and oil properties.  Under the full cost method of accounting,  all

         costs of  acquisition,  exploration  and development of natural gas and

         oil reserves  are  capitalized  into a "full cost pool".  To the extent

         that such capitalized costs (net of accumulated depreciation, depletion

         and amortization) less deferred taxes,  exceed the present value (using

         a 10%  discount  rate) of  estimated  future net cash flows from proved

         natural  gas and oil  reserves  and the lower of cost or fair  value of

         unproved properties, such excess costs are charged to operations.

 

         As of June 30, 1999, THEC estimates,  using prices in effect as of such

         date,  that the ceiling  limitation  imposed under full cost accounting

         rules exceeded actual capitalized costs.

 

 

5.       GOODWILL

 

         At June 30, 1999,  the Company had  recorded  goodwill in the amount of

         $241.3 million,  representing  the excess of acquisition  cost over the

         fair value of net assets  acquired  related to its purchases of certain

         consolidated and unconsolidated subsidiaries, including $166.3 million,

         net of accumulated amortization of $4.6 million relating to the KeySpan

         Acquisition. Goodwill is being amortized over 15 to 40 years.

 

 

6.       ENVIRONMENTAL MATTERS

 

         The Company has  recorded a liability  of  approximately  $129  million

         associated with investigation and remedial  obligations with respect to

         14 of the Company's former manufactured gas plant  ("MGP")sites,  three

         of which are designated as "Class II Sites." Three MGP sites (one Class

         II  Site)  are  associated  with  Brooklyn  Union's  operations  or its

         predecessors;  11 MGP  sites  are  associated  with the  operations  of

         Brooklyn  Union of Long  Island or its  predecessors  (two of which are

         designated

 

 

 

                                        9

 

<PAGE>

 

 

 

 

         as Class II Sites).  With  respect to the Brooklyn  Union MGP sites,  a

         total of approximately $47.8 million has been accrued, representing the

         best  estimate  of  remedial  costs for two sites  that are  subject to

         Administrative  Orders on  Consent  ("AOC's")  with the New York  State

         Department of Environmental  Conservation ("DEC") and the minimum range

         of an estimate for the investigation and/or remediation of other sites.

         Discussions  with the DEC are ongoing with regards to  investigation of

         other sites. With respect to Brooklyn Union of Long Island MGP sites, a

         total of  approximately  $81.2 million has been accrued as a minimum of

         an   estimated   range  of  costs  for  the  11  sites   that  will  be

         investigated/remediated  pursuant to AOC's with the DEC. Two AOC's were

         executed on March 31, 1999 for Brooklyn Union of Long Island MGP sites.

         One AOC  addressed  two MGP sites  classified  as Class II Sites on the

         State  registry  of  inactive  hazardous  waste  sites.  The  other AOC

         addressed four other MGP sites.  Both AOC's generally  require Brooklyn

         Union of Long  Island to  investigate  the  condition  of each site and

         conduct  remediation   activities  depending  on  the  results  of  the

         investigation. Brooklyn Union of Long Island also expects to enter into

         an AOC with the DEC requiring the Company to conduct  preliminary  site

         assessments  for the five  other  former  MGP sites  that are no longer

         owned by the Company.

 

         Under prior rate orders,  the Public Service Commission of the State of

         New York  ("NYPSC")  has allowed  recovery of costs  related to certain

         Brooklyn  Union MGP sites.  At June 30,  1999,  the Company has a total

         remaining  regulatory asset of approximately $100 million.  The Company

         believes  that current  rate plans in effect for both Gas  Distribution

         subsidiaries  provide for recovery of environmental  costs attributable

         to the Gas Distribution segment.

 

 

7.       REGULATORY ASSETS AND LIABILITIES

 

         The Company's  regulated  subsidiaries are subject to the provisions of

         Statement  of   Financial   Accounting   Standards   ("SFAS")  No.  71,

         "Accounting for the Effects of Certain Types of Regulation". Regulatory

         assets arise from the  allocation  of costs and revenues to  accounting

         periods  for  utility  ratemaking   purposes   differently  from  bases

         generally  applied by  nonregulated  companies.  Regulatory  assets and

         liabilities are recognized in accordance with SFAS-71.

 

 

 

 

                                       10

 

<PAGE>

 

 

 

 

         The  Company's  regulatory  assets  of  $311.6  million  are  primarily

         comprised of regulatory tax assets,  costs  associated with the KeySpan

         Acquisition,  certain environmental remediation and investigation costs

         and  postretirement  benefits  other than  pensions.  In the opinion of

         management, regulatory assets are fully recoverable in rates.

 

         In the event that the provisions of SFAS-71 were no longer  applicable,

         the Company  estimates  that the related  write-off  of net  regulatory

         assets (regulatory assets less regulatory  liabilities) could result in

         a  charge  to  net  income  of   approximately   $185.5   million,   or

         approximately   $1.32  per  share  of  common  stock,  which  would  be

         classified as an extraordinary item.

 

 

8.       BUSINESS SEGMENTS

 

         The Company has six reportable  segments:  Gas  Distribution,  Electric

         Services,  Gas Exploration and Production,  Energy Related Investments,

         Energy Related Services and Other.

 

         The Gas  Distribution  segment  consists of Brooklyn Union and Brooklyn

         Union  of Long  Island.  The  Electric  Services  segment  consists  of

         subsidiaries  that own and operate oil and gas fired generating  plants

         in Queens and Long Island, and through long-term contracts,  manage the

         electric  T&D  system,  the  fuel  and  electric  purchases,   and  the

         off-system electric sales for LIPA.

 

         The Gas  Exploration  and Production  segment is engaged in gas and oil

         exploration  and  production,  and the  development  and acquisition of

         domestic  natural gas and oil properties.  This segment consists of our

         64%  equity  interest  in  THEC,  an  independent  natural  gas and oil

         exploration company, as well as KeySpan Exploration and Production LLC,

         our wholly owned subsidiary engaged in a joint venture with THEC.

 

         Subsidiaries in the Energy Related  Investments segment include our 20%

         equity  interest  in the  Iroquois  Gas  Transmission  System LP; a 50%

         interest  in the  Premier  Transco  Pipeline  and a 24.5%  interest  in

         Phoenix  Natural Gas,  both in Northern  Ireland;  and  investments  in

         certain  midstream  natural gas assets in Western  Canada owned jointly

         with Gulf Canada Resources Limited, through the Gulf Midstream Services

         Partnership  ("GMS").  These  subsidiaries  are accounted for under the

         equity method since the Company's ownership

 

 

 

                                       11

 

<PAGE>

 

 

 

 

         interests  are 50% or  less.  Accordingly,  equity  income  from  these

         investments  is  reflected  in Other  Income  and  (Deductions)  in the

         Condensed Consolidated Income Statement.

 

         The  Company's  Energy  Related  Services  segment  primarily  includes

         KeySpan Energy  Management Inc.  ("KEM"),  KeySpan Energy Services Inc.

         ("KES"),  KeySpan Energy  Solutions,  LLC ("KESol") and KeySpan Fritze,

         LLC  ("Fritze").  KEM owns,  designs and/or operates energy systems for

         commercial  and  industrial   customers  and  provides   energy-related

         services  to  clients  located  primarily  within  the  New  York  City

         metropolitan  area.  KES  markets  gas and  electricity,  and  arranges

         transportation  and  related  services,  largely  to retail  customers,

         including   those  served  by  the  Company's   two  gas   distribution

         subsidiaries.  KESol and Fritze  provide  various  appliance,  heating,

         ventilation and air conditioning services to customers primarily within

         the Company's  service  territory.  KESol was established in April 1998

         and Fritze was acquired in November 1998.

 

         The  Other  segment  primarily  represents  unallocated  administrative

         expenses of the Company,  preferred stock dividends,  and earnings from

         the investment of cash proceeds from the LIPA Transaction.

 

         The accounting  policies of the segments are the same as those used for

         the preparation of the Condensed Consolidated Financial Statements. The

         Company's  segments  are  strategic  business  units  that are  managed

         separately   because  of  their  different   operating  and  regulatory

         environments.  As of June 30, 1999, the total assets of each reportable

         segment  have not  changed  materially  from those  levels  reported at

         December 31, 1998 except for the Gas Exploration and Production segment

         whose  assets  increased by $14.5  million due to our  formation of and

         investment in KeySpan  Exploration  and Production LLC and the Electric

         Services  segment whose assets  increased by $230.0  million due to the

         acquisition  of  the  2,168  megawatt  Ravenswood  electric  generation

         facility  located in Long Island City,  Queens,  a portion of which has

         been  leased to a Company  subsidiary  under a master  lease  financing

         arrangement.  (See Note 10 "Contractual  Obligations and Contingencies"

         for more  details.) The segment  information  presented  below reflects

         amounts reported in the Condensed  Consolidated  Financial  Statements,

         excluding special charges,  for the three and six months ended June 30,

         1999 and 1998.

 

 

 

                                       12

 

<PAGE>

 

<TABLE>

<CAPTION>

 

THREE MONTHS ENDED JUNE 30, 1999                                                                          (In Thousands of Dollars)

===================================================================================================================================

                                                        Gas Exploration    Energy Related  Energy Related

                 Gas Distribution   Electric Servies     and Production     Investments       Services         Other         Total

===================================================================================================================================

<S>              <C>               <C>                 <C>                 <C>             <C>              <C>          <C>

Revenue          $    277,482      $      189,734      $         35,021    $               $    37,125      $            $  539,362

-----------------------------------------------------------------------------------------------------------------------------------

Cost of Gas            96,819                   -                     -               -              -             -         96,819

 

Operations and

Maintenance            88,148             108,120                 6,326           1,580         37,327           565        242,066

 

Depreciation

Depletion &

Amortization           24,351              10,337                17,972             286            703         5,733         59,382

 

Operating Taxes        45,836              28,447                   113               1              -         2,748         77,145

 

Intercompany

Billings                  867              10,398                     -               -              -       (11,265)             -

-----------------------------------------------------------------------------------------------------------------------------------

Total Expense    $    256,021      $      157,302      $         24,411    $      1,867    $    38,030      $ (2,219)    $  475,412

-----------------------------------------------------------------------------------------------------------------------------------

Operating Income $     21,461      $       32,432      $         10,610    $     (1,867)   $      (905)     $  2,219     $   63,950

===================================================================================================================================

Earnings for

Common Stock     $      1,220      $       15,037      $          3,326    $      2,448    $      (254)     $ (7,478)    $   14,299

===================================================================================================================================

Basic and Diluted

EPS              $      0.01       $        0.11       $         0.02      $       0.02    $      0.00      $  (0.06)    $     0.10

===================================================================================================================================

</TABLE>

<TABLE>

<CAPTION>

 

THREE MONTHS ENDED JUNE 30, 1999                                                                          (In Thousands of Dollars)

===================================================================================================================================

                                                        Gas Exploration    Energy Related  Energy Related

                 Gas Distribution   Electric Servies     and Production     Investments       Services         Other         Total

===================================================================================================================================

<S>              <C>               <C>                 <C>                 <C>             <C>              <C>          <C>

Revenue          $    152,904      $    398,376        $         11,713    $         28    $    6,358       $      -     $  569,379

-----------------------------------------------------------------------------------------------------------------------------------

Cost of Gas            63,189            91,762                       -               -             -              -        154,951

 

Operations and

Maintenance            61,329           114,378                   2,138             600         6,701          2,794        187,940

 

Depreciation

Depletion &

Amortization            8,817            26,220                   6,781               -           162          2,010         43,990

 

Electric

Regulatory

Amortization                -           (40,005)                      -               -             -              -        (40,005)

 

Operating Taxes        25,672            70,805                      45               -           168          1,078         97,768

 

Intercompany

Billings                3,494             1,172                       -               -             -         (4,666)             -

-----------------------------------------------------------------------------------------------------------------------------------

Total Expense    $    162,501      $    264,332        $          8,964    $        600    $    7,031       $  1,216     $  444,644

====================================================================================================================================

Operating Income $     (9,597)     $    134,044        $          2,749    $       (572)   $     (673)      $ (1,216)    $  124,735

====================================================================================================================================

Earnings for

Common Stock     $    (16,381)     $     51,155        $          1,028    $         48    $     (317)      $ (3,049)    $ 32,484(a)

====================================================================================================================================

Basic and Diluted

EPS              $      (0.12)     $       0.38        $           0.01    $       0.00    $     0.00       $  (0.03)    $   0.24(a)

====================================================================================================================================

</TABLE>

 

(a) Excludes  $6.5 million or $0.05 per diluted  share of  non-recurring

charges associated with the LIPA Transaction.

 

 

                                       13

 

<PAGE>

 

<TABLE>

<CAPTION>

 

 

 

SIX MONTHS ENDED JUNE 30, 1999                                                                           (In Thousands of Dollars)

===================================================================================================================================

                                                               Gas Exploration    Energy Related  Energy Related

                 Gas Distribution       Electric Services      and Production     Investments     Services        Other    Total

===================================================================================================================================

<S>              <C>                    <C>                 <C>                 <C>             <C>              <C>          <C>

Revenue          $    993,312           $    364,271            $     61,541        $      -     $   78,557    $       -  $1,497,681

------------------------------------------------------------------------------------------------------------------------------------

Cost of Gas           408,073                      -                       -               -              -            -     408,073

 

Operations and

Maintenance           187,228                200,288                  12,285           2,669         80,555        2,123     485,148

 

Depreciation

Depletion &

Amortization           48,605                 20,265                  35,029             618          1,472       11,579     117,568

 

Operating Taxes       118,289                 57,440                     146               8              3        5,152     181,038

 

Intercompany

Billings                3,917                 21,041                       -               -              -      (24,958)          -

------------------------------------------------------------------------------------------------------------------------------------

Total Expense    $    766,112           $    299,034            $     47,460        $  3,295     $   82,030    $  (6,104) $1,191,827

------------------------------------------------------------------------------------------------------------------------------------

Operating Income $    227,200           $     65,237            $     14,081        $ (3,295)    $   (3,473)   $   6,104  $  305,854

====================================================================================================================================

Earnings for

Common Stock     $    121,909           $     31,621            $      3,804        $  2,750     $   (1,693)   $  (9,560) $  148,831

====================================================================================================================================

Basic and Diluted

EPS              $       0.86           $       0.22            $       0.03        $   0.02     $    (0.01)   $   (0.07) $     1.05

====================================================================================================================================

</TABLE>

<TABLE>

<CAPTION>

 

SIX MONTHS ENDED JUNE 30, 1999                                                                           (In Thousands of Dollars)

===================================================================================================================================

                                                               Gas Exploration    Energy Related  Energy Related

                 Gas Distribution       Electric Services      and Production     Investments     Services        Other    Total

===================================================================================================================================

<S>              <C>                    <C>                 <C>                 <C>             <C>            <C>      <C>

Revenue          $    424,798           $    954,058        $         11,713    $         28    $     6,358    $        $ 1,396,955

------------------------------------------------------------------------------------------------------------------------------------

Cost of Gas           191,590                257,786                       -               -              -          -      449,376

 

Operations and

Maintenance            93,408                214,461                   2,138             600          6,701      2,794      320,102

 

Depreciation

Depletion &

Amortization           19,522                 59,724                   6,781               -            162      2,010       88,199

 

Electric

Regulatory

Amortization                -                (79,875)                     -                -              -          -      (79,875)

 

Operating Taxes        50,381                163,208                     45                -            168      1,078      214,880

 

Intercompany

Billings                3,494                  1,172                      -                -              -     (4,666)           -

------------------------------------------------------------------------------------------------------------------------------------

Total Expense    $    358,395           $    616,476        $         8,964     $        600    $     7,031    $ 1,216  $   992,682

------------------------------------------------------------------------------------------------------------------------------------

Operating Income $     66,403           $    337,582        $         2,749     $       (572)   $      (673)   $(1,216) $   404,273

====================================================================================================================================

Earnings for

Common Stock     $     23,162           $    114,604        $         1,028     $         48    $      (317)   $(3,049) $ 135,476(a)

====================================================================================================================================

Basic and Diluted

EPS              $        0.1           $       0.90        $          0.01     $       0.00    $      0.00    $ (0.03) $    1.06(a)

====================================================================================================================================

</TABLE>

 

(a) Excludes  $6.5 million or $0.05 per diluted share of  non-recurring  charges

associated with the LIPA Transaction.

 

 

 

                                       14

 

<PAGE>

 

 

 

 

9.  EXTINGUISHMENT OF LONG-TERM DEBT

 

  On June  15,  1999  the  Company,  in  accordance  with  the  LIPA  Agreement,

  extinguished  its  obligations to LIPA under a promissory note relating to the

  7.30%  Debentures  due July 15,  1999.  The  Company's  obligation  for  these

  debentures  of $411.5  million  consisted  of the  principal  amount of $397.0

  million and $14.5 million of interest accrued and unpaid.

 

 

10.  CONTRACTUAL OBLIGATIONS AND CONTINGENCIES

 

  On June 18, 1999 the Company  completed its  acquisition of the 2,168 megawatt

  Ravenswood  electric  generating facility located in Long Island City, Queens,

  New York from  Consolidated  Edison Company of New York,  Inc. ("Con Ed"), for

  approximately $597

  million.

 

  As a means of financing  this  acquisition,  the Company  entered into a lease

  agreement with a special purpose,  unaffiliated financing entity that acquired

  a portion of the facility  directly  from Con Ed and leased it to a subsidiary

  of the Company under a ten year lease.  The Company has guaranteed all payment

  and  performance  obligations  of its  subsidiary  under  the  lease.  Another

  subsidiary of the Company provides all operating, maintenance and construction

  services for the facility.  The lease program was established in order for the

  Company to finance  approximately  $425 million of the acquisition cost of the

  facility.  The lease qualifies as an operating  lease for financial  reporting

  purposes while preserving the Company's  ownership of the facility for federal

  and state income tax purposes.  The balance of the funds needed to acquire the

  facility were provided from cash on hand. The Company has recorded an asset of

  approximately $230 million,  representing its ownership interest in the assets

  acquired.

 

  The Company has assumed all of Con Ed's  historical  contingent  environmental

  obligations  relating to facility  operations other than  liabilities  arising

  from  pre-closing  disposal of waste at off-site  locations  and any  monetary

  fines arising from Con Ed's pre-closing conduct. These environmental exposures

  are generally divided between (1) future capital  expenditures,  in the nature

  of  property  and  leasehold  improvements,  necessary  to address  compliance

  obligations and (2) expenditures to investigate  and, as necessary,  remediate

  certain  on-site  contamination  which  may or may  not  result  in  leasehold

  improvements. Given the recent nature of the acquisition, our

 

 

 

                                       15

 

<PAGE>

 

 

 

 

  actual  knowledge of facility  conditions  is in the  developmental  stage and

  implementation plans and estimates are, therefore, preliminary.

 

  Presently,  there are four AOC's  issued to Con Ed by the DEC. The Company has

  contractually  agreed  to  assume  Con  Ed's  remaining   obligations  at  the

  Ravenswood  facility under these AOC's.  Generally,  the Company's  derivative

  obligations are expected to include  investigation  and remediation of certain

  petroleum releases, inspection and any necessary corrective action for certain

  aboveground  storage  tanks and  underground  piping,  potential  upgrades  to

  existing  cooling  water  intake  structures,  and  implementation  of an  air

  emissions opacity reduction  program.  The Company is currently  negotiating a

  consolidated  AOC with the DEC that will clarify the scope and timing of these

  activities.

 

  The Company has identified  certain  capital  expenditures  for  environmental

  compliance  purposes at Ravenswood  that are  reasonably  likely to occur.  To

  address an anticipated  shortfall of NOx emissions allowances beginning in May

  2003,  the Company  may incur  immaterial  capital  costs for  additional  air

  pollution control equipment.  Alternatively, the Company may elect to purchase

  additional  allowances.  The Company  probably will be required to upgrade the

  Ravenswood  cooling intake  structures to meet the best  available  technology

  requirements  of the  Federal  Clean  Water  Act.  The  extent and cost of any

  upgrades are uncertain and will depend upon the results of analysis of certain

  studies.

 

  Pursuant to its  derivative  AOC  obligations,  the Company will  complete the

  investigation  and  remediation  of  certain  petroleum  and  other  hazardous

  material releases at Ravenswood,  as necessary.  The Company will also address

  similar releases not covered by the AOC's. The Ravenswood  facility is located

  on a former MGP site. The Company has no current  obligation to investigate or

  remediate  the  property  for  contamination  resulting  from  historical  MGP

  operations,  although there may be a need to perform certain site  remediation

  as part of an overall  improvement of property  related to the installation of

  new  generation  capacity.   Based  on  information  currently  available  for

  environmental contingencies related to the Ravenswood acquisition, the Company

  has accrued $5 million as the minimum liability to be incurred.

 

 

 

 

 

                                       16

 

<PAGE>

 

 

 

 

  The Company  intends to seek  regulatory  approvals to upgrade the  Ravenswood

  facility  through the  installation of a gas-fired  combined cycle  generation

  unit with a capacity of approximately  250 megawatts of electricity that would

  increase  electric  generation  capacity at the plant by 12%. The new capacity

  could be operational by 2002 depending upon the timeliness and  responsiveness

  of regulatory approvals.

 

 

11. NEW FINANCIAL ACCOUNTING STANDARDS

 

  In June 1999, the Financial  Accounting  Standards  Board ("FASB") issued SFAS

  No. 137,  "Accounting  for  Derivative  Instruments  and Hedging  Activities -

  Deferral  of the  Effective  Date of SFAS No.  133."  SFAS No.  137 defers the

  effective date of SFAS No. 133 from fiscal years beginning after July 15, 1999

  to fiscal years  beginning  after July 15, 2000.  The Company will  therefore,

  adopt SFAS No.  133 in the first  quarter  of fiscal  year 2001.  SFAS No. 133

  establishes  accounting and reporting standards for derivative instruments and

  for hedging  activities.  It requires that an entity recognize all derivatives

  as either assets or  liabilities  in the  statement of financial  position and

  measure  those  instruments  at fair value.  The  Company  does not expect any

  material earnings effect from adoption of this statement.

 

 

 

 

                                       17

 

<PAGE>

 

 

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

        CONDITION AND RESULTS OF OPERATIONS

 

Results of  operations  for the three and six months ended June 30, 1999 reflect

the operations of the  consolidated  Company,  which  includes all  KSE-acquired

companies,  Brooklyn Union of Long Island and  subsidiaries  providing  electric

services.   As  required  under  purchase   accounting  rules  for  the  KeySpan

Acquisition,  results of  operations  for the three  months  ended June 30, 1998

reflect the results of LILCO only for the period  April 1, 1998  through May 28,

1998 and results of the consolidated  Company from May 29, 1998 through June 30,

1998.  Results of operations  for the six months ended June 30, 1998 reflect the

results of LILCO only for the period  January 1, 1998  through  May 28, 1998 and

results of the  consolidated  Company  from May 29, 1998  through June 30, 1998.

(Capitalized  terms used in the discussions to follow but not otherwise defined,

have  the  same  meaning  as  when  used  in  the  Footnotes  to  the  Condensed

Consolidated Financial Statements included under Item 1.)

 

EARNINGS SUMMARY

 

Consolidated earnings for the quarter ended June 30, 1999 were $14.3 million, or

$0.10 per diluted  share,  compared to earnings of $26.0  million,  or $0.19 per

diluted share, in the corresponding  quarter last year. During the quarter ended

June 30, 1998, the Company  incurred  special  charges  associated with the LIPA

Transaction of $6.5 million or $0.05 per diluted share.  Consolidated  earnings,

excluding  special  charges,  for the  quarter  ended  June 30,  1998 were $32.5

million or $0.24 per diluted share.  (See Note 8. to the Condensed  Consolidated

Financial  Statements  "Business  Segments"  for a summary of earnings  for each

business segment.)

 

Consolidated  earnings  for the six  months  ended  June 30,  1999  were  $148.8

million, or $1.05 per diluted share,  compared to earnings of $129.0 million, or

$1.01 per diluted share,  in the  corresponding  period last year.  Consolidated

earnings, excluding special charges, for the six months ended June 30, 1998 were

$135.5  million  or $1.06  per  diluted  share.  (See  Note 8. to the  Condensed

Consolidated  Financial Statements "Business Segments" for a summary of earnings

for each business segment.)

 

Due to the change in the structure of the Company's  business as a result of the

LIPA Transaction and the requirements of purchase accounting rules applicable to

the KeySpan  Acquisition,  results of operations  for the periods ended June 30,

1999 are not  comparable to the results of operations for the periods ended June

30, 1998. Therefore, for comparative purposes, we will combine the results of

 

 

 

                                       18

 

<PAGE>

 

 

 

 

operations,  excluding special charges associated with the LIPA Transaction,  of

KSE and LILCO for the entire  three and six month  periods  ended June 30, 1998.

These combined  results are intended to reflect the results of the Company as if

the KeySpan Acquisition occurred on the first day of the reporting period, i.e.,

January 1, 1998. This "proforma,  combined company basis" format will be used to

explain  variations in operating  results  between periods in the discussions to

follow.

 

On a proforma,  combined  company  basis,  earnings for the three and six months

ended June 30, 1998 were $36.0  million and $219.3  million,  respectively.  The

following  table sets forth  consolidated  net  income for the  quarter  and six

months ended June 30, 1999 and the proforma, combined company basis consolidated

net income for the three and six months ended June 30, 1998:

<TABLE>

<CAPTION>

-------------------------------------------------------------------------------------------------------------

Results of Operations           Three Months Ended   Three Months Ended     Six Months Ended     Six Months Ended

   (In Thousands of Dollars)      June 30, 1999         June 30, 1998         June 30, 1999        June 30, 1998

-------------------------------------------------------------------------------------------------------------

<S>                                   <C>                 <C>                   <C>                  <C>

Gas Distribution                      $ 1,220             ($11,539)             $121,909             $108,722

 

Gas Exploration and Production          3,326                3,472                 3,804                7,805

 

Electric Services                      15,037               51,155                31,621              114,604

 

Energy Related Investments              2,448               (1,198)                2,750               (1,864)

 

Energy Related Services                  (254)              (2,071)               (1,693)              (5,728)

 

Other                                  (7,478)              (3,851)               (9,560)              (4,233)

-------------------------------------------------------------------------------------------------------------

Earnings for Common Stock             $14,299              $35,968              $148,831             $219,306

=============================================================================================================

</TABLE>

 

Gas Distribution  earnings for the quarter and six months ended June 30, 1999 as

compared to the same  periods in 1998,  on a proforma,  combined  company  basis

reflect the benefits of significantly  lower operating expenses offset, in part,

by lower net revenues  (revenues  less gas costs and revenue  taxes) due to rate

reductions associated with the KeySpan Acquisition. As previously indicated, Gas

Distribution  earnings for the quarter  ended June 30 generally  are  marginally

profitable or unprofitable due to the seasonal nature of gas heating sales.

 

Earnings from the Gas Exploration  and Production  segment for the quarter ended

June 30, 1999  remained  relatively  constant  as compared to the  corresponding

period in 1998,  on a  proforma,  combined  company  basis.  The  benefits  from

slightly higher production volumes and decreased  operating expenses were offset

by slightly lower average realized gas prices and increased  interest expense of

$2.2  million due to higher  levels of debt  outstanding.  Earnings  for the six

months ended June 1999 as compared to the same period in 1998, primarily reflect

significantly lower average

 

 

 

                                       19

 

<PAGE>

 

 

 

 

realized  gas  prices  (experienced  during the  quarter  ended  March  1999) as

compared to the same period in 1998 and higher interest expense of $5 million.

 

The change in the Company's  asset base and electric  operations  resulting from

the LIPA  Transaction  contributed  to the  comparative  reduction  in  Electric

Services  earnings,  which now  reflect  primarily  service-fee  revenues  under

various service  contracts with LIPA. The Company's  operating margins under the

agreements  with  LIPA  are  lower  than  those  experienced  prior  to the LIPA

Transaction.  Earnings  for the quarter and six months  ended June 30, 1999 also

include  earnings  of  $2.9  million  from  our  acquisition  of the  Ravenswood

facility.  The purchase of Ravenswood was completed on June 18, 1999.  (See Note

10 to the Condensed Consolidated Financial Statements  "Contractual  Obligations

and Contingencies.")

 

Comparative earnings from the Energy Related Investments segment for the quarter

and six months ended June 30, 1999 as compared to the corresponding periods last

year, on a proforma, combined company basis, primarily reflect earnings from our

investment in Gulf Midstream Services  Partnership  ("GMS"),  formed in December

1998, and more favorably  results from our investments in Northern  Ireland.  In

addition,  for the  quarter  and six  months  ended  June 30,  1998  results  of

operations  from this segment  reflect  after-tax costs of $1.6 million and $3.2

million,  respectively, to settle certain contracts associated with the sale, in

1997,  of our domestic  cogeneration  investments  and related  fuel  management

operations.

 

Operating  results from the Energy Related  Services segment for the quarter and

six months  ended June 30, 1999 as compared to the  corresponding  periods  last

year, on a proforma,  combined  company basis reflect the benefits  derived from

the continued  integration of companies  acquired  during the past two years and

more favorable results from gas and electric marketing services.  These benefits

were offset by losses  incurred by subsidiaries  providing  appliance and repair

services,  due to the start-up nature of their operations in highly  competitive

markets.

 

Earnings  from the Other  segment for the quarter and six months  ended June 30,

1999 reflect  charges,  including  preferred  stock  dividends,  incurred by the

corporate and  administrative  areas of the Company that have not been allocated

to the various business segments,  offset, in part, by interest income earned on

investments of the proceeds from the LIPA Transaction.

 

 

 

 

                                       20

 

<PAGE>

 

 

 

 

REVENUES

 

GAS DISTRIBUTION

Utility firm gas and transportation sales volumes for the quarter and six months

ended June 30, 1999, were 29,650 MDTH and 116,189 MDTH, respectively.  Total gas

sales  and   transportation,   which  includes  sales  and   transportation   to

interruptible  and off-system  customers,  were 38,648 MDTH and 142,027 MDTH for

the quarter and six months ended June 30, 1999, respectively.

 

On a proforma, combined company basis, firm gas and transportation sales volumes

for the quarter and six months ended June 30, 1998, were 30,120 MDTH and 106,213

MDTH,  respectively.  On a proforma,  combined company basis total gas sales and

transportation  for the quarter  and six months  ended June 30, 1998 were 40,105

MDTH and 139,223 MDTH, respectively.

 

Weather,  as measured by annual degree days, was 9.2% warmer than normal for the

six months  ended June 30, 1999 as compared to 18.3%  warmer than normal for the

corresponding  period last year. Firm gas sales normalized for weather were 2.5%

higher in the six months ended June 30, 1999 as compared to the six months ended

June 30, 1998, reflecting ongoing gas sales growth.

 

Gas  Distribution  revenues  for the quarter and six months  ended June 30, 1999

were $277.5 million and $993.3 million, respectively, compared to $152.9 million

and $424.8 million for the comparable  periods in 1998. The increase in revenues

for the quarter and six months was  principally  the result of the  inclusion of

Brooklyn  Union  revenues  for the entire  quarter and six months ended June 30,

1999.  Reported  revenues  for the  quarter  and six months  ended June 30, 1998

include  Brooklyn  Union  revenues  for the period May 29, 1998 through June 30,

1998  only.  On a  proforma,  combined  company  basis,  total Gas  Distribution

revenues for the quarter and six months ended June 30, 1998 were $303.7  million

and $1,063.7  million,  respectively.  Set forth below are net gas revenues on a

proforma, combined company basis:

<TABLE>

<CAPTION>

 

                                                                                          (In Thousands of Dollars)

-------------------------------------------------------------------------------------------------------------------

                                  Three Months          Three Months            Six Months          Six Months

                                     Ended                  Ended                 Ended               Ended

                                    June 30,               June 30,              June 30,            June 30,

                                      1999                  1998                   1999                1998

------------------------------------------------------------------------------------------------------------------

Gas Distribution

 

<S>                          <C>                                           <C>

Revenues                     $         277,482     $       303,714         $      993,312      $    1,063,681

 

Cost of Gas                             96,819             115,439                408,073             447,155

 

Revenue Taxes                           18,425              20,436                 62,621              67,042

------------------------------------------------------------------------------------------------------------------

Net Revenues                 $         162,238     $       167,839         $      522,618      $      549,484

==================================================================================================================

</TABLE>

 

                                       21

 

<PAGE>

 

The decrease in  comparative  net gas revenues of $5.6 million and $26.9 million

for the three and six months respectively,  was due primarily to rate reductions

associated  with the KeySpan  Acquisition.  Brooklyn  Union reduced rates to its

core  customers by $23.9  million on an annual basis  effective May 29, 1998 and

Brooklyn  Union of Long  Island  reduced  its rates to core  customers  by $12.2

million  annually  effective  February 5, 1998 and by an additional $6.3 million

annually  effective  May 29,  1998.  Reduced  net  revenues  resulting  from the

reductions  amounted to $4.8  million  for the  quarter  ended June 30, 1999 and

$19.2 million for the six months ended June 30, 1999. Further,  revenues derived

from  Brooklyn  Union's  appliance  and  repair  services  are  included  in Gas

Distribution  revenues for the period January 1, 1998 through March 31, 1998. In

April 1998, Brooklyn Union "spun-off" its appliance and repair services to KESol

and, as a result,  Gas  Distribution  revenues for 1999 do not include  revenues

from such services. As required by the NYPSC, on July 1, 1999, Brooklyn Union of

Long Island discontinued providing non-safety related appliance repair services.

These  services are now offered by KESol to customers  within  Brooklyn Union of

Long  Island's  service   territory.   Net  revenues  as  a  percentage  of  Gas

Distribution  sales were approximately 53% and 52% for the six months ended June

30, 1999 and 1998, respectively.

 

GAS EXPLORATION AND PRODUCTION

Gas  Exploration  and  Production  revenues for the quarter and six months ended

June 30, 1999 were $35.0 million and $61.5 million respectively,  as compared to

$11.7  million  for the  quarter  and six months  ended June 30,  1998.  For the

periods  ended June 30,  1998,  Gas  Exploration  and  Production  revenues  are

reflected for the period May 29, 1998 through June 30, 1998 only.

 

On a proforma  combined  company  basis,  revenues  from this segment were $35.1

million and $68.0  million for the quarter and six months  ended June 30,  1998,

respectively.  Revenues  for the quarter  ended June 30, 1999 as compared to the

same  period  last year  reflect  the  benefits  derived  from a 6%  increase in

production  volumes,  offset by a 6%  decrease in average  realized  gas prices.

Revenues  for the six months  ended June 1999 as  compared to the same period in

1998 primarily  reflect  significantly  lower average realized gas prices in the

quarter ended March 1999. The effective price realized  (average  wellhead price

received for production  including  hedging gains and losses) generally has been

increasing  recently  and was $2.03 per MCF for the quarter  ended June 30, 1999

compared  to $2.17 per MCF for the  corresponding  quarter of 1998.  The average

wellhead price was also $2.03 per MCF in the current  quarter  compared to $2.13

per MCF for the quarter ended June 30, 1998. The effective  wellhead  prices for

the six months ended June 30, 1999

 

 

 

                                       22

 

<PAGE>

 

 

 

 

and 1998 were $1.82 per MCF and $2.15 per MCF, respectively.  Gas production for

the three  and six  months  ended  June 30,  1999 was 17.2  BCFe and 33.7  BCFe,

respectively as compared to 16.2 BCFe and 31.6 BCFe for the three and six months

ended June 30, 1998, respectively.  At December 31, 1998, THEC had total natural

gas  reserves of  approximately  480 BCFe,  primarily  in the Gulf of Mexico and

Texas.

 

ELECTRIC SERVICES

Electric  Services revenues of $189.7 million and $364.3 million for the quarter

and six months ended June 30, 1999 represent revenues under various LIPA Service

Agreements  and   approximately  two  weeks  of  revenues  from  our  Ravenswood

investment.  Revenues  of $398.4  million  for the  quarter  ended June 30, 1998

reflect  Electric  Distribution  revenues of LILCO only for the period  April 1,

1998 through May 28, 1998 and Electric  Services revenues for the period May 29,

1998 through June 30, 1998 under  various LIPA Service  Agreements.  Revenues of

$954.1  million  for the  six  months  ended  June  30,  1998  reflect  Electric

Distribution  revenues of LILCO only for the period  January 1, 1998 through May

28, 1998 and Electric  Services  revenues under various LIPA Service  Agreements

for the period May 29, 1998 through June 30, 1998.

 

The  decrease in electric  revenues  for the three and six months ended June 30,

1999  when  compared  to the same  period  in 1998,  was the  result of the LIPA

Transaction.  Prior to the LIPA  Transaction,  LILCO provided  fully  integrated

electric  services  to its  customers.  Included  within  the rates  charged  to

customers  was a return on the  capital  investment  in the  generation  and T&D

assets,  as well as  recovery  of the  electric  business  costs to operate  the

system.  Upon  completion of the LIPA  Transaction,  the nature of the Company's

electric  business changed from that of owner of an electric  generation and T&D

system,  with a significant  capital  investment,  to a new role as owner of the

non-nuclear  generation facilities and as manager of the T&D system now owned by

LIPA. In its new role, the Company's capital investment is significantly reduced

and accordingly, its revenues under the LIPA contracts reflect that reduction.

 

Revenues resulting from the LIPA Service Agreements included the following:

 

Revenues  realized under the Management  Services  Agreement("MSA")  were $105.6

million  for the quarter  and $204.9  million for the six months  ended June 30,

1999.  These  revenues are derived  from the  performance,  by KeySpan  Electric

Services, LLC, of the day-to-day operation and maintenance of LIPA's T&D system,

management of construction additions to the T&D system, and management of LIPA's

 

 

 

                                       23

 

<PAGE>

 

 

 

 

interest in the Nine Mile Point Nuclear Power Station, Unit 2

("NMP2").

 

Revenues  realized by KeySpan  Generation,  LLC under the Power Supply Agreement

("PSA") were $74.0 million for the quarter and $147.0 million for the six months

ended June 30, 1999 and are derived from the sale of capacity and energy to LIPA

from the Company's generating facilities at rates approved by the Federal Energy

Regulatory Commission ("FERC").

 

Revenues  realized  by KeySpan  Energy  Trading  Services,  LLC under the Energy

Management  Agreement ("EMA") were $1.4 million for the quarter and $3.7 million

for the six months  ended June 30, 1999 and result from the  management  of fuel

supplies for LIPA to fuel the Company's generating facilities, the management of

energy  purchases on a least-cost  basis to meet LIPA's needs and the management

of off-system electric sales.

 

Revenues  realized from the Ravenswood  facility from June 18, 1999 through June

30,  1999  were  $8.7  million.  (See  Note  10  "Contractual   Obligations  and

Contingencies"  to the  Condensed  Consolidated  Financial  Statements  for more

details on the Ravenswood acquisition.)

 

ENERGY RELATED SERVICES

Revenues from the Energy Related  Services  segment were $37.1 million and $78.6

million  for the quarter and six months  ended June 30,  1999  respectively,  as

compared to $6.4  million for the  comparable  periods in 1998.  For the periods

ended June 30, 1998,  Energy  Related  Services  revenues are  reflected for the

period May 29, 1998 through June 30, 1998 only.

 

Revenues on a proforma,  combined  company  basis from this  segment  were $17.3

million for the quarter ended June 30, 1998 and $32.1 million for the six months

ended June 30, 1998, respectively.  The increase in comparative revenues for the

periods  ended June 30, 1999 was due primarily to the inclusion of revenues from

Fritze of $10.4  million and $20.9  million for the quarter and six months ended

June 30, 1999, respectively.  Moreover,  revenues from KEM and KES increased for

both  the  quarter  and six  months  ended  June  30,  1999 as  compared  to the

comparable periods last year due to the benefits derived from companies acquired

during the past two years and the growth in the number of  customers  purchasing

energy from KES.

 

 

 

 

                                       24

 

<PAGE>

 

 

 

 

OPERATING EXPENSES

 

Total operating expenses were $475.4 million for the quarter ended June 30, 1999

as compared to $444.6  million for the quarter ended June 30, 1998.  For the six

months ended June 30, 1999 total  operating  expenses were  $1,191.8  million as

compared to $992.7  million for the six months ended June 30, 1998.  Comparative

total  operating  expenses  reflect the change in the structure of the Company's

business and the timing of the LIPA Transaction and KeySpan Acquisition.

 

Operating  expenses,  excluding  the cost of gas and revenue  taxes  (i.e.,  net

operating expenses), were $360.2 million and $721.1 for the three and six months

ended June 30, 1999,  respectively.  On a proforma,  combined company basis, net

operating expenses,  excluding special charges, were $480.3 million and $1,053.8

million for the quarter and six months ended June 30, 1998. The discussion  that

follows  presents a comparison  of net  operating  expenses,  excluding  special

charges, on a proforma, combined company basis, by major segment for the quarter

and six months ended June 30, 1999  compared to the  corresponding  periods last

year.

 

GAS DISTRIBUTION

Net operating expenses were $140.8 million, or 51% of Gas Distribution revenues,

for the quarter ended June 30, 1999 as compared to $164.4 million, or 54% of Gas

Distribution  revenues,  for the  quarter  ended  June 30,  1998 on a  proforma,

combined  company  basis.  For the six months ended June 30, 1999 net  operating

expenses  were $295.4  million as compared to $337.8  million for the six months

ended June 30, 1998 on a proforma, combined company basis. The decrease of $23.6

million and $42.4  million for the quarter and six months ended June 30, 1999 as

compared  to the  corresponding  periods  last  year  was  due to a  significant

reduction in operations  and  maintenance  expense  reflecting,  primarily,  the

benefits  derived  from  cost  reduction  measures  and  operating  efficiencies

employed during the past few years. Such measures included, but were not limited

to,  the early  retirement  program  completed  in 1998,  and  similar  measures

employed in prior years by Brooklyn Union. Further,  Brooklyn Union's "spin-off"

of non-safety  related appliance repair services to KESol in 1998 contributed to

the reduction in operating and maintenance expense for the six months ended June

30,  1999.  Brooklyn  Union of Long  Island  discontinued  providing  non-safety

related appliance repair services on July 1, 1999.

 

The Company is committed to realizing the forecasted $1 billion of net operating

synergy  savings (over a ten-year  period)  currently being reflected in utility

tariff rates and contracts with LIPA;

 

 

 

                                       25

 

<PAGE>

 

 

 

 

however, no assurances can be given as to what level of savings

will be realized.

 

GAS EXPLORATION AND PRODUCTION

Gas Exploration and Production operating expenses for the quarter ended June 30,

1999 were $24.4 million, or 70% of Gas Exploration and Production  revenues,  as

compared to $26.8 million,  or 76% of Gas Exploration  and Production  revenues,

for the  corresponding  period last year on a proforma,  combined company basis.

Operating  expenses were $47.5 million for the six months ended June 30, 1999 as

compared to $52.7  million for the six months ended June 30, 1998 on a proforma,

combined company basis. The comparative decrease in expenses for the quarter and

six months was  primarily  due to a decrease in depletion  expense.  In December

1998,  THEC recorded a pre-tax  impairment  charge of $130 million to reduce the

value of its proved gas  reserves  in  accordance  with the asset  ceiling  test

limitations of the SEC applicable to gas exploration and development  operations

accounted for under the full cost method. As a result, THEC's depletion rate for

the quarter and six months ended June 30, 1999 was $1.05 per MCFe of  production

and $1.04 per MCFe of production, respectively, as compared to $1.25 per MCFe of

production for both the quarter and six months ended June 30, 1998.

 

ELECTRIC SERVICES

Operating  expenses  for the  quarter  and six months  ended June 30,  1999 were

$157.3 million and $299.0  million,  respectively  as compared to $264.3 million

and  $616.5  million  for the  quarter  and six  months  ended  June  30,  1998,

respectively.  The  decrease in  operating  expenses  was due  primarily  to the

elimination of electric fuel expense.  As a result of the LIPA Transaction,  and

in accordance with the terms of the EMA, LIPA is responsible for paying directly

the cost of fuel and purchased  power.  Further,  for the quarter and six months

ended June 30, 1999  depreciation  expense  decreased by $15.9 million and $39.5

million, respectively, and operating taxes decreased by $42.4 million and $105.8

million,  respectively,  as compared to the corresponding periods last year. Due

to the LIPA Transaction,  significant  property related assets were sold to LIPA

and, as a result, related depreciation and property taxes are no longer incurred

by the Company.  Offsetting these decreases was the effect on operating expenses

associated with electric regulatory amortizations, primarily the Rate Moderation

Component  ("RMC"),  which  reduced  operating  expenses by $40.0 million in the

quarter  ended June 30, 1998 and by $79.9  million in the six months  ended June

30, 1998.

 

ENERGY RELATED SERVICES

Operating  expenses for the quarter ended June 30, 1999 were $38.0  million,  as

compared to $20.7  million  for the  quarter  ended June 30, 1998 on a proforma,

combined company basis. Operating expenses

 

 

 

                                       26

 

<PAGE>

 

 

 

 

were $82.0  million for the six months  ended June 30, 1999 as compared to $41.2

million for the six months ended June 30, 1998 on a proforma,  combined  company

basis. The comparative  increase in operating  expenses for both periods was due

to the formation and  commencement  of operations of KESol,  the  acquisition of

Fritze in November 1998 and the  integration  of  operations  of other  acquired

companies during the past few years and increased purchased gas costs of KES.

 

OTHER INCOME AND DEDUCTIONS

 

Other  income for the  quarter  and six  months  ended  June 30,  1999  includes

primarily earnings from the investment of the proceeds from the LIPA Transaction

and equity earnings from subsidiaries  comprising the Energy Related Investments

segment,  offset by a charge of $6 million to accrue carrying charges on certain

rate settlement  items previously  recorded.  For the three and six months ended

June 30,  1998,  other income  includes  benefits of  approximately  $10 million

primarily  related  to certain  electric  regulatory  incentives  that have been

discontinued due to the LIPA Transaction.

 

OTHER EXPENSES

 

Interest  expense for the three and six months ended June 30, 1999  reflects the

significantly  reduced  level  of  outstanding  debt  resulting  from  the  LIPA

Transaction.  This benefit was offset, in part, by the interest expense from the

KSE-acquired companies. Upon consummation of the LIPA Transaction,  LIPA assumed

substantially  all of the  outstanding  debt of LILCO.  The Company,  in return,

issued  promissory notes to LIPA for its continuing  obligation to pay principal

and interest on certain series of debt that were assumed by LIPA. Since the LIPA

Transaction  occurred on May 28,  1998,  interest  expense for the three and six

months  ended June 30,  1998  reflects  only one month of the  reduced  level of

outstanding debt.  However,  interest expense for the three and six months ended

June 30, 1999 reflects the reduction in outstanding debt for the entire periods.

Outstanding  debt at June 30, 1999 was $1.6  billion as compared to $4.5 billion

(LILCO only) prior to the LIPA Transaction.

 

Income tax expense for the quarter and six months  ended June 30, 1999  reflects

the level of pre-tax  income in both periods and an  adjustment  to deferred tax

expense and current tax expense for the utilization of a previously deferred net

operating  loss  carryforward  ("NOL")  recorded in 1998.  In 1998,  the Company

recorded,  as a deferred tax asset, a benefit of $52.2 million for a NOL that it

will apply in its 1999 federal income tax return.  In the quarter ended June 30,

1999, the Company reversed the deferred

 

 

 

                                       27

 

<PAGE>

 

 

 

 

tax  asset  and  recorded  the NOL  benefit  in its  current  tax  provision  in

anticipation of applying this NOL to this year's federal income tax payment.

 

LIQUIDITY, CAPITAL REQUIREMENTS AND DIVIDENDS

 

LIQUIDITY

The  increase in cash flow from  operations  for the three and six months  ended

June 30, 1999 as  compared  to the  corresponding  periods  last year,  reflects

continued strong results from core utility  operations and the benefits from the

integration of  KSE-acquired  companies.  Further,  cash flow from operations in

1999 reflects the benefit of the $52.2 million NOL on quarterly  federal  income

tax payments for 1999,  as previously  discussed.  Moreover,  in May 1998,  $250

million  was funded into other  postretirement  Voluntary  Employee  Beneficiary

Trusts and as a result,  cash flow from  operations for the three and six months

ended June 30, 1998 was adversely affected.

 

At June 30, 1999, the Company had cash and temporary cash  investments of $307.3

million and had available  unsecured  bank lines of credit of $300  million.  In

addition,  THEC has an unsecured available line of credit with a commercial bank

that  provides  for a  current  commitment  of $200  million.  This  line can be

increased to $250  million,  subject to certain  conditions.  During the quarter

ended  June 30,  1999,  THEC  incurred  borrowings  of $8.0  million  under this

facility,  at which time $148 million was  outstanding.  Subsequent  to June 30,

1999, THEC had borrowed an additional $4 million, bringing borrowings under this

facility to $152 million.

 

CAPITAL  REQUIREMENTS

On June 15, 1999 the Company  extinguished  its promissory note to LIPA relating

to the 7.30%  Debentures due July 15, 1999.  The Company's  obligation for these

debentures of $411.5 million consisted of the principal amount of $397.0 million

and $14.5 million of interest accrued and unpaid.  (See Note 9. to the Condensed

Consolidated Financial Statements "Extinguishment of Long-Term Debt.")

 

The Company  acquired the  Ravenswood  facility on June 18, 1999.  As a means of

financing the  acquisition,  the Company  entered into a lease  agreement with a

special  purpose,  unaffiliated  financing entity that acquired a portion of the

facility directly from Con Ed and leased it to a subsidiary of the Company.  The

lease  program  was  established  in order for the Company to finance up to $425

million of the $597 million acquisition cost of the facility. The balance of the

funds needed to acquire the facility were provided from cash on hand.  (See Note

10. to the Condensed Consolidated

 

 

 

                                       28

 

<PAGE>

 

 

 

 

Financial  Statements  "Contractual  Obligations  and  Contingencies"  for  more

details on the lease agreement.)

 

In 1998, the Company's Board of Directors authorized the repurchase of a portion

of the Company's outstanding common stock. The initial  authorization  permitted

the repurchase of up to 10 percent of the Company's then  outstanding  stock, or

approximately  15 million  common  shares.  A second  authorization  permits the

Company to use up to an  additional  $500  million of cash for the  purchase  of

common shares.  As of July 29, 1999, the Company had repurchased 19.6 million of

its common shares for $568.9 million. In addition,  the Company has commenced an

"odd-lot"  program  whereby  holders  of less than 100  shares of the  Company's

common stock may sell their shares to the Company or "round-up"  their  holdings

to 100 shares. The Company intends to continue  repurchasing its common stock on

the open market.

 

As a result of the LIPA  Transaction,  the Company had a  significant  amount of

cash which it has used to, among other things,  repurchase  shares of its common

stock on the open market, expand its operations through increased investments in

energy related  activities,  such as gas processing  plants and gas exploration,

and acquire the Ravenswood facility.  Management expects to access the financial

markets during the fourth quarter of fiscal 1999 and during fiscal 2000 in order

to issue approximately $500 million of debt securities. It is anticipated that a

combination  of tax-exempt  debt  obligations  through the New York State Energy

Research Development Authority  ("NYSERDA"),  and publicly traded unsecured debt

obligations will be issued. Moreover, the debt may be issued through one or more

wholly owned  subsidiaries.  It is  anticipated  that these  securities  will be

issued to replace debt obligations that have matured,  as previously  discussed,

and/or provide working capital.  In addition,  the Company intends to enter into

certain  interest rate swap  transactions  to hedge a portion of its outstanding

fixed rate debt. The specific timing of these transactions will be determined in

light of market conditions and other factors.

 

In  addition,  THEC may sell,  in one or more  offerings,  shares of common  and

preferred  stock,  and/or  unsecured  debt  securities.  The  aggregate  initial

offering price of the securities  that will be issued are not expected to exceed

$250 million. The specific timing of these offerings,  as well as the prices and

terms of the  securities  to be issued,  will be  determined  in light of market

conditions and other factors. THEC indicated that the net proceeds received from

the sale of any  securities  will be used for the  repayment of debt and general

corporate purposes.  The Company intends to, at a minimum,  maintain its current

64% ownership

 

 

 

                                       29

 

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interest of THEC and therefore,  will purchase additional shares as necessary to

maintain this level of ownership interest.

 

The Company is currently  evaluating its entire  capital  structure to determine

the appropriate  levels of debt and equity.  Further,  the Company is evaluating

certain  credit  facilities  and may issue  commercial  paper  during the fourth

quarter.  The Company anticipates that this evaluation process will be completed

toward the latter part of 1999. At this point in time, except as indicated,  the

Company cannot determine the outcome of this evaluation process.

 

Through a  subsidiary,  the Company owns a 300-mile  fiber optic network on Long

Island and in New York City and is  currently in the process of  evaluating  its

options with respect to the use of this network. Specifically, the options under

consideration   include   entering  into  a  partnership  with  or  acquiring  a

telecommunications  company; using excess capacity on the fiber-optic network to

provide  services to other  carriers,  including  telecommunications  companies,

Internet  providers,  cable  television,  as  well  as  providing  high-capacity

transmission  to commercial  customers;  or expanding the  fiber-optic  business

network by bundling  energy and  telecommunications  products  and  services for

commercial customers.

 

The  Company  also  continues  to explore  opportunities  for  expansion  of its

operations  through one or more of the following types of transactions:  mergers

with or  acquisitions  of other  utilities or entities;  investments  in new gas

pipelines  (and related  assets) and gas  exploration;  or the  purchase  and/or

construction of additional  electric power plants.  However, no assurance can be

given that any additional transactions will occur or that such transactions,  if

completed,  will be  integrated  with the  Company's  operations  or prove to be

profitable.

 

DIVIDENDS

On June 21, 1999,  the Board of Directors  declared a quarterly cash dividend of

$0.445 per share on its  outstanding  common stock  payable on August 1, 1999 to

shareholders  of record on July 14,  1999.  The  Company is  currently  paying a

dividend at an annual rate of $1.78 per common  share.  The  Company's  dividend

policy is reviewed annually by the Board of Directors.  The amount and timing of

all dividend payments is subject to the discretion of the Board of Directors and

will  depend  upon  business  conditions,   results  of  operations,   financial

conditions and other factors.

 

GAS DISTRIBUTION - RATE MATTERS

 

By  orders  dated  February  5, 1998 and April  14,  1998 the NYPSC  approved  a

Stipulation and Agreement ("Stipulation") among Brooklyn Union, LILCO, the Staff

of the NYPSC and six other parties that in

 

 

 

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effect  approved  the KeySpan  Acquisition  and  established  gas rates for both

Brooklyn  Union and Brooklyn  Union of Long Island that are currently in effect.

(For more  information on these  agreements refer to the Company's Annual Report

on Form 10-K for the Transition Period ended December 31, 1998.)

 

ENVIRONMENTAL MATTERS

 

The Company is subject to various  federal,  state and local laws and regulatory

programs  related  to  the   environment.   Ongoing   environmental   compliance

activities,  which  have  not  been  material,  are  charged  to  operation  and

maintenance activities. The Company estimates that the remaining minimum cost of

its MGP-related  environmental  cleanup  activities,  including costs associated

with Ravenswood,  will be approximately  $134 million and has recorded a related

liability  for such  amount.  Further,  as of June 30,  1999,  the  Company  has

expended a total of $13.2 million. (See Note 6. "Environmental Matters" and Note

10.  "Contractual  Obligations and Contingencies" to the Condensed  Consolidated

Financial Statements.)

 

YEAR 2000 ISSUES

 

The Company's  computer  applications are generally based on two digits and have

required  additional  programming to recognize the start of the new  millennium.

Embedded  hardware  systems have also been updated in order to properly  operate

into the year 2000. The  remediation and testing of critical  systems  necessary

for the reliable and safe delivery of electricity and gas have been completed.

 

System Readiness

 

A  corporate-wide  project  has been in  progress  since 1997 to review  Company

software,  hardware,  embedded  systems and  associated  compliance  plans.  The

project includes both information  technology ("IT") and non-IT systems.  Non-IT

systems are basically vendor supplied  embedded systems that are critical to the

daily  operations  of the Company.  These systems are generally in the following

areas: electric production,  distribution,  and transmission;  gas distribution;

and communications.  The readiness of suppliers and vendor systems has also been

under  review.  The  project  is under the  direction  of the Year 2000  Program

Office,  chaired by the Vice President,  Technology Operations and Corporate Y2K

Officer.

 

The critical areas of operations have been addressed  through a mission critical

process review methodology. Each of the Company's mission critical processes has

been reviewed to:  identify and inventory  sub-components;  assess for year 2000

compliance;

 

 

 

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establish  repair  plans  as  necessary;  and test in a year  2000  environment.

Mission  critical  functions  consist of both  service  critical  functions  and

business critical functions. Service critical functions relate to our ability to

procure gas from  suppliers  and deliver the gas to our  customers in a safe and

reliable  manner;  and  to  generate   electricity  and  maintain  the  electric

transmission  and distribution  system for LIPA. As of July 1, 1999,  inventory,

assessment,  repair,  testing and the development of contingency plans for these

systems have been completed. Business critical systems, which includes metering,

billing  and certain  financial  and  accounting  systems,  are 96%  complete in

remediation  and 90% complete in testing.  Testing of the last of these  systems

will be complete by  November  1, 1999.  Reports  have been filed with the NYPSC

documenting, in detail, this status.

 

Vendors and business  partners needed to support the mission critical  processes

are also being  reviewed for their year 2000  readiness.  At this time,  none of

these  vendors  have  indicated  to the  Company  that they  will be  materially

adversely affected by the year 2000 problem.  However, many vendors and business

partners have not responded to repeated  requests for their year 2000  readiness

status.  Included in the Company's  overall  contingency  plans, are contingency

plans that address vendor and business partners year 2000 risks.

 

Risk Scenarios and Contingency Plans

 

The Company has  analyzed  each of the mission  critical  processes  to identify

possible year 2000 risks. Each mission critical process will be certified by the

responsible  corporate  officer as being year 2000  ready.  The most  reasonably

likely worst case scenarios have been identified. Operating procedures have been

reviewed  to ensure that risks are  minimized  when  entering  the year 2000 and

other high risk dates. Contingency plans have been completed to address possible

failure points in each mission critical process. These plans will continue to be

reviewed and revised as necessary. Revisions may be required based on the status

of critical vendors and business  partners.  Testing of these  contingency plans

will continue to be performed internally,  as well as with neighboring utilities

and business partners.

 

While the Company must plan for the  following  possible  worst case  scenarios,

management believes that these events are improbable:

 

LOSS OF GAS PIPELINE DELIVERY

 

The  Company's  gas utility  subsidiaries  receive gas  delivery  from  multiple

national and international  pipelines and therefore the effects of a loss in any

one pipeline can be mitigated through the

 

 

 

                                       32

 

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use of other pipelines.  Complete loss of all the supply lines is not considered

a reasonable scenario.  Nevertheless, the impact of the loss of any one pipeline

is  dependent  on  temperature  and  vaporization  rate.  Should  gas  supply be

decreased  due to the loss of a  pipeline,  each of the  Company's  gas  utility

subsidiaries  also has a local  liquefied  natural gas facility under its direct

control  that  stores  sufficient  gas to offset the  temporary  loss of any one

pipeline.  The partial loss of gas supply will not affect the Company's  ability

to supply  electricity  since most of the plants  have the ability to operate on

oil.

 

LOSS OF ELECTRIC GENERATION OR ELECTRIC TRANSMISSION AND

DISTRIBUTION

 

Electric  utilities  are  physically  connected  on a  regional  basis to manage

electric load. This  interconnection  is often referred to as the regional grid.

Presently  the  Company  is  working,  on behalf of LIPA,  with  other  regional

utilities  to  develop  a  coordinated   operating  plan.  Should  there  be  an

instability in the grid, the Company has the ability to remove LIPA's facilities

and operate independently.

 

Certain  electric system  components such as individual  generating  units,  T&D

control facilities, and the electric energy management system have the potential

to be affected by the year 2000 problem.  The Company has  inventoried  both its

and LIPA's  electric  system  components and developed a plan to certify mission

critical  processes as year 2000 ready.  As manager of the T&D  facilities,  the

Company is responsible for ensuring that these  facilities  operate properly and

that  related  systems are year 2000 ready.  Under the terms of the various LIPA

contracts,  LIPA will reimburse the Company for certain year 2000 costs incurred

by the  Company for these  facilities.  Contingency  plans have been  developed,

where appropriate, for loss of critical system elements.

 

LOSS OF TELECOMMUNICATIONS

 

The Company has a substantial dependency on many  telecommunication  systems and

services  for both  internal  and  external  communication  providers.  External

communications  with the public  and the  ability of  customers  to contact  the

Company in cases of emergency response is essential. The Company is coordinating

its emergency  response efforts with the offices of emergency  management of the

various local governments within its service territory.  Internally, there are a

number of critical  processes in both the gas and electric  operating areas that

rely on external communication providers.  Contingency plans address methods for

manually monitoring these functions and/or utilizing  alternative  communication

methods.

 

 

 

                                       33

 

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In  addition  to the above,  the  Company  has also  planned  for the  following

scenarios:   short  term  reduction  in  system  power  generating   capability;

limitation to fuel oil operations; reduction in quality of power output; loss of

automated meter reading; loss of ability to read customer meters,  prepare bills

and collect and process customer payments; and loss of the  purchasing/materials

management system.

 

The  Company  believes  that,  with   modifications  to  existing  software  and

conversions  to new  hardware  and  software,  the year 2000 issue will not pose

significant  operational  problems for its computer  systems.  However,  if such

modifications  and conversions do not perform as expected and contingency  plans

fail, the year 2000 issue could have a material adverse impact on the operations

of the Company, the extent of which cannot currently be determined.

 

Cost of Remediation

 

The Company expects to spend a total of  approximately  $30.8 million to address

the year 2000 issue. As of June 30, 1999, $21.5 million had been expended on the

project.  The largest  percentage  expended is  attributable  to the assessment,

repair and testing of  corporate  IT  supported  computer  software and in-house

written applications. In 1999, the IT year 2000 costs are expected to be 8.3% of

the IT budget.  The year 2000 issue has not  directly  resulted in delaying  any

other IT projects. Presently, the Company expects that cash flow from operations

and cash  on-hand will be  sufficient  to fund any  remaining  year 2000 project

expenditures.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Form 10-Q concerning expectations, beliefs,

plans,  objectives,   goals,  strategies,   future  events  or  performance  and

underlying  assumptions and other  statements which are other than statements of

historical facts, are "forward-looking statements" within the meaning of Section

21E of the  Securities  Exchange Act of 1934, as amended.  Without  limiting the

foregoing,   all  statements  relating  to  the  Company's  anticipated  capital

expenditures,  future cash flows and  borrowings,  pursuit of  potential  future

acquisition opportunities and sources of funding are forward-looking statements.

Such  forward-looking  statements  reflect  numerous  assumptions  and involve a

number of risks and  uncertainties and actual results may differ materially from

those  discussed in such  statements.  Among the factors that could cause actual

results to differ materially are:  available  sources and cost of fuel;  federal

and state regulatory  initiatives that increase  competition,  threaten cost and

investment recovery,  and impact rate structures;  the ability of the Company to

successfully reduce its

 

 

 

                                       34

 

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cost structure;  the successful integration of the Company's  subsidiaries;  the

degree to which the Company develops unregulated business ventures;  the ability

of the Company to identify and make complementary  acquisitions,  as well as the

successful  integration of such acquisitions;  inflationary  trends and interest

rates;  the ability of the Company and its  significant  vendors to modify their

computer  software,  hardware and databases to  accommodate  the year 2000;  and

other risks  detailed  from time to time in other  reports  and other  documents

filed by the Company  and its  predecessors  with the  Securities  and  Exchange

Commission.  For any of these  statements,  the Company claims the protection of

the  safe  harbor  for  forward-looking  information  contained  in the  Private

Securities Litigation Reform Act of 1995, as amended.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The  Company and its  subsidiaries  are subject to various  risk  exposures  and

uncertainties  associated with their operations.  The primary risk exposures are

related  to  firm  gas  contracts,  financial  instruments,  various  regulatory

initiatives  of  the  NYPSC  and  FERC,  the  increasingly   competitive  energy

environment,  and foreign currency  fluctuations.  The Company's exposure to the

aforementioned market risks has remained  substantially  unchanged from December

31,  1998.  However,  due to the  increased  level  of  investment  in  Canadian

affiliates in December 1998 and its  continued  investment in Northern  Ireland,

the Company's exposure to foreign currency  fluctuations has increased.  At June

30,  1999,  the  Company  has  approximately  $230  million  invested  in  these

affiliates.

 

Also,  during the period from January 1, 1999 to June 30, 1999,  Brooklyn  Union

utilized derivative instruments, primarily swaps, to "lock-in" approximately 40%

of its  profit  margins  related  to sales to its  large-volume  customers.  The

utility tariff  applicable to certain  large-volume  customers permits gas to be

sold at prices  established  monthly  within a specified  range  expressed  as a

percentage of prevailing alternate fuel oil prices. Whenever hedge positions are

in effect, the Company's subsidiaries are exposed to credit risk in the event of

nonperformance  by  counter  parties  to  derivative   contracts,   as  well  as

nonperformance by the counter parties of the transactions against which they are

hedged.  The  Company  believes  that  the  credit  risk  related  to  the  swap

instruments  is no  greater  than that  associated  with the  primary  commodity

contracts  which they hedge,  and that  reduction  of the exposure to price risk

lowers the Company's overall business risk.

 

 

 

 

 

 

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PART II.  OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Subsequent  to the  closing of the LIPA  Transaction  and  KeySpan  Acquisition,

former  shareholders of LILCO commenced 13 class action lawsuits in the New York

State Supreme Court,  Nassau County,  against the Company and each of the former

officers and  directors of LILCO . These  actions  were  consolidated  in August

1998. The consolidated  action alleges that, in connection with certain payments

LILCO had determined  were payable in connection  with the LIPA  Transaction and

KeySpan  Acquisition to LILCO's  chairman,  and to former officers of LILCO (the

"Payments"):  (i) the named  defendants  breached  their  fiduciary duty owed to

LILCO and KSE former  and/or  current  Company  shareholders  as a result of the

Payments;  (ii) the named  defendants  intended to defraud such  shareholders by

means of  manipulative,  deceptive and wrongful  conduct,  including  materially

inaccurate and  incomplete  news reports and filings with the SEC; and (iii) the

named defendants recklessly and/or negligently failed to disclose material facts

associated with the Payments.

 

In addition,  three shareholder  derivative actions have been commenced pursuant

to which such  shareholders seek the return of the Payments or damages resulting

from among other things,  an alleged breach of fiduciary duty on the part of the

former LILCO officers and  directors.  One action was brought on behalf of LILCO

in federal  court.  The Company moved to dismiss this action in September  1998,

and on June 25, 1999, the federal court issued an order  dismissing this action.

The other two  actions  were  brought on behalf of the Company in New York State

Supreme Court, Nassau County. In one of these state court actions, the Company's

directors and the recipients of the Payments are also named as defendants.

 

Finally,  two class action securities suits were filed in federal court alleging

that certain  officers and  directors of LILCO  violated the federal  securities

laws by failing to  properly  disclose  that the LIPA  Transaction  and  KeySpan

Acquisitions  would trigger the Payments.  These  actions were  consolidated  in

October 1998.

 

On April 28, 1999, the Company signed a Stipulation  and Agreement of Settlement

to settle the above-referenced  actions, except for the federal court derivative

action,  in exchange for (i) $7.9 million to be  distributed  (less  plaintiffs'

attorneys  fees) to  certain  former  LILCO  and KSE  shareholders  and  certain

MarketSpan shareholders and (ii) the Company's agreement to implement certain

 

 

 

                                       36

 

<PAGE>

 

 

 

 

corporate governance and executive compensation procedures. In this respect, the

Company has agreed to, among other things,  certain requirements with respect to

the composition of its Audit and Compensation and Nominating  Committees and has

agreed to be bound by a number of enumerated  principles in connection  with the

establishment  and payment of executive  compensation  and  severance  benefits.

These  requirements,  which are also  required to be  detailed in the  Company's

proxy  statements  for annual  meetings of  shareholders,  may not be altered or

rescinded prior to January 1, 2002. Further,  the entire $7.9 million settlement

commitment  will be funded  from  insurance.  The  parties  have  submitted  the

settlement  to the Nassau County  Supreme Court for its review and approval.  On

June 30, 1999,  following a hearing to consider the fairness of the  settlement,

the court gave final approval of the  settlement.  The parties have submitted to

the court a judgment of settlement  and on July 1, 1999 the court  approved that

judgment.  On August 3, 1999 an intervener plaintiff filed a notice of appeal of

that order and final  judgment.  Pending the outcome of the appeal,  the parties

intend  to make an  application  to the  federal  court  for an order  and final

judgment,  dismissing  the remaining  federal court actions  based,  among other

things, on the binding effect of the state court judgment.

 

In addition to the above-mentioned actions, a class action lawsuit has also been

filed in the New York State  Supreme  Court,  Suffolk  County,  by the County of

Suffolk,  on behalf  of itself  and other  Suffolk  County  ratepayers,  against

LILCO's former officers and/or directors. The County of Suffolk alleges that the

Payments  were  improper,  and seeks to recover the  Payments for the benefit of

Suffolk County ratepayers. The Company moved to consolidate this action with the

above-mentioned consolidated action in October 1998. On May 4, 1999, the parties

submitted a stipulation of discontinuation to the court.

 

In October 1998,  the County of Suffolk and the Towns of Huntington  and Babylon

commenced  an action  against  LIPA,  the  Company,  the NYPSC and others in the

United  States  District  Court  for  the  Eastern  District  of New  York  (the

"Huntington Lawsuit").  The Huntington Lawsuit alleges, among other things, that

LILCO  ratepayers  (i) have a property  right to receive or share in the alleged

capital gain that resulted from the transaction with LIPA (which gain is alleged

to be at least $1  billion);  and (ii)  that  LILCO  was  required  to refund to

ratepayers the amount of a Shoreham-related  deferred tax reserve (alleged to be

at least $800 million)  carried on the books of LILCO at the consummation of the

LIPA  Transaction.  In December  1998,  and again in June 1999,  the  plaintiffs

amended their complaint.  The amended complaint contains allegations relating to

the Payments and adds the

 

 

 

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<PAGE>

 

 

 

 

recipients of the Payments as  defendants.  In June 1999, the Company was served

with the  second  amended  complaint.  The  Company  intends to file a motion to

dismiss the second amended complaint.

 

Finally,  certain other proceedings have been commenced relating to the Payments

and disclosures made by LILCO with respect thereto.  These  proceedings  include

investigations by the New York State Attorney General, the NYPSC and LIPA, joint

hearings  conducted by two  committees  of the New York State  Assembly,  and an

informal,  non-public  inquiry by the SEC. In December 1998, the Company settled

with LIPA and the NYPSC. The agreement includes a payment of $5.2 million by the

Company  to LIPA that will be used by LIPA to supply  postage-paid  bill  return

envelopes  to  customers  for the next three  years.  The Company also agreed to

fully  reimburse and  indemnify  LIPA for costs  incurred by LIPA,  amounting to

approximately  $765,000,  for  attorneys and other  consultants  involved in the

investigation.  Such amounts are not covered by  insurance.  In March 1999,  the

Company  settled  with the New York  Attorney  General.  The  Company  agreed to

implement and adhere to the  corporate  governance  and  executive  compensation

procedures in accordance with the settlement of the shareholder  actions and pay

the New York Attorney General $1.5 million. One half of the $1.5 million will be

covered by insurance. To date, no action has been taken by the SEC.

 

At this time the  Company is unable to  determine  the  outcome  of the  ongoing

proceedings, or any of the remaining lawsuits described above.

 

 

 

 

 

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Company's  Annual Meeting of  Shareholders  was held on May 20, 1999 (Annual

Meeting).  The persons  named below were  elected as Directors by holders of the

Company's  Common  Stock,  casting  votes  in  favor  or  withholding  votes  as

indicated:

 

 

                                            VOTES                 VOTES

 

             DIRECTOR                     IN FAVOR              WITHHELD

 

LILYAN H. AFFINITO                       106,283,893           14,873,860

GEORGE BUGLIARELLO                       106,386,066           14,771,687

ROBERT B. CATELL                         106,496,729           14,661,024

HOWARD R. CURD                           106,473,146           14,684,607

RICHARD N. DANIEL                        106,567,865           14,589,888

DONALD H. ELLIOTT                        106,519,662           14,638,091

ALAN H. FISHMAN                          106,590,334           14,567,419

JAMES R. JONES                           106,468,778           14,688,975

STEPHEN W. MCKESSY                       106,534,614           14,623,139

EDWARD D. MILLER                         106,579,640           14,578,113

BASIL A. PATERSON                        106,353,423           14,804,330

JAMES Q. RIORDAN                         106,458,082           14,699,671

FREDERIC V. SALERNO                      106,509,267           14,648,486

VINCENT TESE                             106,478,822           14,678,931

 

 

The voting results of the other items that were approved by  shareholders at the

Annual Meeting are as follows:

 

1.    Ratification  of the  appointment  of Arthur  Andersen LLP as  independent

      auditors for the period January 1, 1999 to December 31, 1999.

 

                   FOR             AGAINST         ABSTAIN      BROKER NON-VOTES

                   ---             -------         -------      ----------------

 

  COMMON SHARES   119,885,950      601,527         670,276       NOT APPLICABLE

 

 

 

 

 

 

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2.    Approval of an amendment of the Company's  Certificate of Incorporation to

      change the Company's name to KeySpan Corporation.

 

                   FOR           AGAINST         ABSTAIN        BROKER NON-VOTES

                   ---           -------         -------        ----------------

 

  COMMON SHARES    119,681,554   824,064         652,135         NOT APPLICABLE

 

 

 

3. Approval of the Company's Employee Discount Stock Purchase Plan.

 

                   FOR          AGAINST         ABSTAIN         BROKER NON-VOTES

                   ---          -------         -------         ----------------

 

  COMMON SHARES    94,063,633   4,485,779       1,485,805           21,122,536

 

 

 

4.    Approval of the Company's  Long-Term  Performance  Incentive  Compensation

      Plan.

 

                   FOR          AGAINST         ABSTAIN         BROKER NON-VOTES

                   ---          -------         -------         ----------------

 

  COMMON SHARES    75,968,065   22,006,732      2,060,420           21,122,536

 

 

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)      Exhibits

 

*3.1     Certificate of Incorporation of the Company effective

         April 16, 1998, Amendment to

 

         Certificate of Incorporation of the Company effective May

         26, 1998, Amendment to

 

         Certificate of Incorporation of the Company effective May

         26, 1998, Amendment to

 

         Certificate of Incorporation of the Company effective

         April 7, 1999, and Amendment to

 

         Certificate of Incorporation of the Company effective May 20, 1999.

 

*10.1    Guaranty, dated as of June 9, 1999, from the Company in favor of

         LIC Funding, Limited Partnership.

 

 

 

 

 

 

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*10.2           Lease Agreement, dated as of June 9, 1999, between LIC

                Funding, Limited Partnership and KeySpan-Ravenswood, Inc.

                (Section 12(b)(i), (ii) and (iii) and Section 12(c)(i),

                (ii) and (iii), have been omitted from the material and

                filed separately with the Securities and Exchange

                Commission pursuant to a request for confidential

                treatment.  These sections appear on pages 60 and 61 of

                the complete document).

 

*10.3           Long-Term Performance Incentive Compensation Plan

                effective May 20, 1999.

 

*27             Financial Data Schedule

 

(b)             Reports on Form 8-K

 

In its  Report on Form 8-K dated May 20,  1999,  the  Company  reported  that it

changed its corporate name from MarketSpan Corporation to KeySpan Corporation.

 

In its Report on Form 8-K dated June 22, 1999, the Company reported that on June

18, 1999 it acquired the 2,168 megawatt  Ravenswood electric generation facility

from the Consolidated Edison Company of New York, Inc.

 

-------------------------

 

*Filed Herewith

 

 

 

 

 

 

                                       41

 

<PAGE>

 

 

 

                      KEYSPAN CORPORATION AND SUBSIDIARIES

 

 

 

                                    SIGNATURE

 

 

 

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the

registrant has duly caused this report to be signed on behalf of the undersigned

there unto duly authorized.

 

 

 

 

 

 

                                          KEYSPAN CORPORATION

 

                                             (Registrant)

 

 

 

Date August 13, 1999                    s/ Ronald S. Jendras

                                        ------------------------------

                                        Ronald S. Jendras

                                        Vice President, Controller

                                        and Chief Accounting Officer

</TEXT>

</DOCUMENT>

<DOCUMENT>

<TYPE>EX-3

<SEQUENCE>2

<DESCRIPTION>EXHIBIT 3.1

<TEXT>

 

 

 

 

                                                                   EXHIBIT 3.1

 

 

                         CERTIFICATE OF INCORPORATION

 

                                      OF

 

                               BL HOLDING CORP.

 

                           UNDER SECTION 402 OF THE

               BUSINESS CORPORATION LAW OF THE STATE OF NEW YORK

 

 

            I,  Thomas D.  Balliett,  being a natural  person over the age of 18

years,  for the purpose of forming a corporation  pursuant to Section 402 of the

New York Business Corporation Law (the "NYBCL"), do hereby certify as follows:

 

                                   ARTICLE I

                                     NAME

 

The name of the corporation (the "Corporation") is "BL Holding Corp."

 

                                  ARTICLE II

                                    PURPOSE

 

            The  purposes for which the  Corporation  is formed are to engage in

any lawful act or activity for which  corporations  may be  organized  under the

NYBCL,  but the  Corporation  is not  formed to  engage  in any act or  activity

requiring  the  consent or approval of any state  official,  department,  board,

agency or other body without such consent or approval first being obtained.

 

                                  ARTICLE III

                                    OFFICE

 

            The  office of the  Corporation  is to be  located  in the County of

Nassau, State of New York.

 

                                  ARTICLE IV

                                 CAPITAL STOCK

 

            SECTION  1. The  aggregate  number of shares  which the  Corporation

shall have authority to issue shall be 450,000,000  shares of Common Stock,  par

value $.01 per share and 100,000,000  shares of Preferred  Stock, par value $.01

per share.

 

 

                                   - 1 -

 

 

KL2:249558.1

 

<PAGE>

 

 

 

            SECTION 2. The amount of capital stock of the  Corporation  shall be

$5,500,000.

 

            SECTION 3. Shares of Preferred Stock may be issued from time to time

in one or more  series  as may be  determined  from time to time by the Board of

Directors.  Except in  respect  of the  particulars  to be fixed by the Board of

Directors as provided  below,  all shares of  Preferred  Stock shall be of equal

rank.  All shares in any one series of  Preferred  Stock shall be alike in every

particular  except that shares of any one series  issued at different  times may

differ as to the dates from which  dividends  thereon shall be  cumulative.  The

voting  rights,  if any, of each such series and the  preferences  and relative,

participating,  optional  and  other  special  rights  of  each  series  and the

qualifications,  limitations and restrictions  thereof,  if any, may differ from

those of any and all  other  series.  The  Board  of  Directors  shall  have the

authority to fix by resolution  duly adopted prior to the issuance of any shares

of a particular  series of Preferred Stock designated by the Board of Directors,

the voting  rights,  if any,  of the  holders  of shares of such  series and the

designations,  preferences  and  relative,  participating,  optional  and  other

special  rights  of  each  series  and  the   qualifications,   limitations  and

restrictions thereof (the "Preferred Stock Designation").

 

      Without limiting the generality of the foregoing authority of the Board of

Directors, the Board of Directors from time to time may:

 

     a.  establish  and  designate  a series of  Preferred  Stock,  which may be

     distinguished by number,  letter or title from other Preferred Stock of the

     Corporation or any series thereof;

 

     b. fix and  thereafter  increase or  decrease  (but not below the number of

     shares thereof then outstanding) the number of shares that shall constitute

     such series;

 

      c. provide for dividends on shares of such series and if provision is made

      for  dividends,  determine  the  dividend  rate  and the  dates  on  which

      dividends, if declared,  shall be payable,  whether the dividends shall be

      cumulative  and, if  cumulative,  for what date or dates  dividends  shall

      accrue, and the other conditions, if any, including rights of priority, if

      any, upon which the dividends shall be paid;

 

      d.  provide as to whether the shares of such series  shall be  redeemable,

      and if redeemable, the terms, limitations and restrictions with respect to

      such redemption,  including  without  limitation,  the manner of selecting

      shares for redemption if less than all shares are to be redeemed, the time

      or times and the price or prices at which the shares of such series  shall

      be subject to redemption,  in whole or in part, and the amount, if any, in

      addition to any accrued  dividends  thereon which the holders of shares of

      any series shall be entitled to receive upon the redemption thereof, which

      amount may vary at different  redemption  dates and may be different  with

      respect  to  shares  redeemed  through  the  operation  of  any  purchase,

      retirement or sinking fund and with respect to shares otherwise redeemed;

 

 

                                   - 2 -

 

 

KL2:249558.1

 

<PAGE>

 

 

 

      e. fix the amount, in addition to any accrued dividends thereon, which the

      holders of shares of such series  shall be  entitled  to receive  upon the

      voluntary or  involuntary  liquidation,  dissolution  or winding up of the

      Corporation,  which  amount  may  vary at  different  dates  and may  vary

      depending  on  whether  such  liquidation,  dissolution  or  winding up is

      voluntary or  involuntary,  and to determine any other rights,  if any, to

      which  holders of the shares of such series shall be entitled in the event

      of any liquidation, dissolution or winding up of the Corporation;

 

      f.  establish  whether the shares of such  series  shall be subject to the

      operation of a purchase,  retirement or sinking fund and if so, the terms,

      limitations  and  restrictions  with respect  thereto,  including  without

      limitation,  whether such  purchase,  retirement  or sinking fund shall be

      cumulative  or  noncumulative,  the extent to and the manner in which such

      funds shall be applied to the  purchase,  retirement  or redemption of the

      shares of such series for  retirement or to other  corporate  purposes and

      the terms and provisions relative to the operation thereof;

 

     g. determine the extent of the voting rights, if any, of the shares of such

     series and determine whether the shares of such series having voting rights

     shall have multiple votes per share;

 

      h. provide  whether or not the shares of such series shall be  convertible

      into or  exchangeable  for shares of any other class or classes of capital

      stock of the Corporation,  including  Common Stock,  Preferred Stock or of

      any series  thereof,  and if  convertible or  exchangeable,  establish the

      conversion or exchange price or rate,  the  adjustments  thereof,  and the

      other  terms  and  conditions,  if any,  on  which  such  shares  shall be

      convertible or exchangeable; and

 

       i.  provide  for  any  other  preferences,  any  relative  participating,

      optional or other  special  rights,  any  qualifications,  limitations  or

      restrictions  thereof,  or any other term or  provision  of shares of such

      series as the Board of Directors may deem appropriate or desirable.

 

            Shares of Preferred  Stock may be issued by the Corporation for such

consideration as is determined by the Board of Directors.

 

            SECTION 4. The Common Stock shall be subject to the express terms of

the  Preferred  Stock and any series  thereof.  The  holders of shares of Common

Stock  shall be  entitled  to one vote for each such  share  upon all  proposals

presented to the  shareholders on which the holders of Common Stock are entitled

to vote. Except as otherwise provided by law or by the resolution or resolutions

adopted by the Board of Directors designating the rights, powers and preferences

of any series of  Preferred  Stock,  the Common  Stock shall have the  exclusive

right to vote for the  election of  Directors  and for all other  purposes,  and

holders of Preferred Stock shall

 

                                   - 3 -

 

 

KL2:249558.1

 

<PAGE>

 

 

 

not be entitled to receive notice of any meeting of  shareholders  at which they

are not entitled to vote. The number of authorized shares of Preferred Stock may

be  increased  or  decreased  (but not below the number of shares  thereof  then

outstanding)  by the  affirmative  vote  of the  holders  of a  majority  of the

outstanding  shares  of  Common  Stock,  without  a vote of the  holders  of the

Preferred Stock, or of any series thereof,  unless a vote of any such holders is

required pursuant to any Preferred Stock Designation.

 

            The Corporation  shall be entitled to treat the person in whose name

any share of its stock is  registered  as the owner thereof for all purposes and

shall not be bound to recognize any equitable or other claim to, or interest in,

such share on the part of any other person, whether or not the Corporation shall

have notice thereof, except as expressly provided by applicable law.

 

                                   ARTICLE V

                              SHAREHOLDER ACTION

 

            Any action required or permitted to be taken by the  shareholders of

the  Corporation  must be effected at a duly called annual or special meeting of

such holders and may not be effected by any consent in writing by such  holders.

Except as otherwise  required by law and subject to the rights of the holders of

any class or series of stock  having a  preference  over the Common  Stock as to

dividends  or  upon  liquidation,   special  meetings  of  shareholders  of  the

Corporation  for any  purpose  or  purposes  may be called  only by the Board of

Directors  pursuant to a  resolution  stating  the  purpose or purposes  thereof

approved by a majority of the total  number of Directors  which the  Corporation

would have if there  were no  vacancies  (the  "Whole  Board")  and any power of

shareholders to call a special meeting is specifically denied. No business other

than that stated in the notice shall be transacted at any special meeting.

 

                                  ARTICLE VI

                             ELECTION OF DIRECTORS

 

            Unless and except to the extent that the By-Laws of the  Corporation

shall so require,  the election of Directors of the  Corporation  need not be by

written ballot.

 

                                  ARTICLE VII

                              BOARD OF DIRECTORS

 

            SECTION 1. NUMBER,  ELECTION AND TERMS. Except as otherwise fixed by

or pursuant to the provisions of Article IV hereof relating to the rights of the

holders  of any class or series of stock  having a  preference  over the  Common

Stock as to dividends or upon  liquidation to elect  additional  Directors under

specified circumstances, the number of the Directors of the Corporation shall be

fixed  from time to time  exclusively  pursuant  to a  resolution  adopted  by a

majority of the Whole Board.  No decrease in the number of  Directors,  however,

shall shorten the term of any incumbent Director.  Directors shall be elected by

the shareholders of the Corporation

 

                                   - 4 -

 

 

KL2:249558.1

 

<PAGE>

 

 

 

at their annual  meeting except as herein  otherwise  provided for newly created

directorships and vacancies, to serve for one year or until their successors are

elected or chosen and qualified.

 

            SECTION  2.   SHAREHOLDER   NOMINATION   OF   DIRECTOR   CANDIDATES;

SHAREHOLDER PROPOSAL OF BUSINESS.  Advance notice of shareholder nominations for

the election of Directors and of the proposal of business by shareholders  shall

be given in the manner provided in the ByLaws of the Corporation, as amended and

in effect from time to time.

 

            SECTION 3. NEWLY  CREATED  DIRECTORSHIPS  AND  VACANCIES.  Except as

otherwise  provided for or fixed by or pursuant to the  provisions of Article IV

hereof  relating  to the  rights of the  holders of any class or series of stock

having a preference over the Common Stock as to dividends or upon liquidation to

elect  Directors  under  specified  circumstances,  newly created  directorships

resulting  from any increase in the number of Directors and any vacancies on the

Board of Directors resulting from death, resignation,  disqualification, removal

or other  cause  shall be filled by the  affirmative  vote of a majority  of the

remaining  Directors then in office, even though less than a quorum of the Board

of Directors,  and not by the  shareholders.  Any Director elected in accordance

with  the  preceding  sentence  shall  hold  office  for the  remainder  of such

unexpired term or until such  Director's  successor shall have been duly elected

and qualified.  No decrease in the number of Directors constituting the Board of

Directors shall shorten the term of any incumbent Director.

 

            SECTION 4. REMOVAL.  Subject to the rights of any class or series of

stock  having  a  preference  over the  Common  Stock  as to  dividends  or upon

liquidation to elect Directors under specified  circumstances,  any Director may

be removed from office only for cause by the affirmative  vote of the holders of

at least a  majority  of the  voting  power  of all  shares  of the  Corporation

entitled to vote  generally in the election of  Directors  (the "Voting  Stock")

then outstanding, voting together as a single class.

 

            SECTION  5.  AMENDMENT,   REPEAL,  ETC.   Notwithstanding   anything

contained in this Certificate of Incorporation to the contrary,  the affirmative

vote of the holders of at least 80% of the voting power of all Voting Stock then

outstanding,  voting  together  as a single  class,  shall be required to alter,

amend, adopt any provision inconsistent with or repeal this Article VII.

 

                                 ARTICLE VIII

                                    BY-LAWS

 

            The  By-Laws  may be  altered or  repealed  and new  By-Laws  may be

adopted (1) at any annual or special meeting of shareholders, by the affirmative

vote of the  holders of a majority of the voting  power of the stock  issued and

outstanding and entitled to vote thereat,  provided,  however, that any proposed

alteration  or repeal  of, or the  adoption  of any  By-Law  inconsistent  with,

Section  2.2,  2.7 or 2.10 of Article II of the  By-Laws or with  Section 3.9 or

3.11 of Article  III of the  By-Laws,  by the  shareholders  shall  require  the

affirmative vote of the holders of at least

 

                                   - 5 -

 

 

KL2:249558.1

 

<PAGE>

 

 

 

80% of the voting power of all Voting Stock then outstanding, voting together as

a single class;  and provided,  further,  however,  that in the case of any such

shareholder action at a special meeting of shareholders,  notice of the proposed

alteration, repeal or adoption of the new By-Law or By-Laws must be contained in

the notice of such special meeting, or (2) by the affirmative vote of a majority

of the Whole Board;  provided that any proposed  alteration or repeal of, or the

adoption of any By-Law  inconsistent with, Section 4.9 or 4.11 of the Article IV

of the By-Laws by the Board of Directors shall require the vote of two-thirds of

the Whole Board.

 

                                  ARTICLE IX

                   AMENDMENT OF CERTIFICATE OF INCORPORATION

 

            The Corporation  reserves the right at any time from time to time to

amend,  alter,  change or repeal any provision  contained in this Certificate of

Incorporation,  and any other provisions  authorized by the laws of the State of

New York at the time in force may be added or  inserted,  in the  manner  now or

hereafter  prescribed by law;  and,  except as set forth in Articles XIV and XV,

all rights,  preferences  and  privileges of whatsoever  nature  conferred  upon

shareholders,  Directors or any other persons whomsoever by and pursuant to this

Certificate  of  Incorporation  in its present form or as hereafter  amended are

granted subject to the right reserved in this Article.  Notwithstanding anything

contained in this Certificate of Incorporation to the contrary,  the affirmative

vote of the holders of at least 80% of the Voting Stock then outstanding, voting

together  as a single  class,  shall be  required  to  alter,  amend,  adopt any

provision inconsistent with or repeal Article V, VII, VIII or this sentence.

 

                                   ARTICLE X

                         AGENT FOR SERVICE OF PROCESS

 

            The  Secretary  of State of the State of New York is  designated  as

agent of the  Corporation  upon whom  process  against  the  Corporation  may be

served.  The post office  address to which the  Secretary  of State shall mail a

copy of any  process  against  the  Corporation  served  upon  him  is:  c/o C T

Corporation System, 1633 Broadway, New York, New York 10019.

 

                                  ARTICLE XI

                               REGISTERED AGENT

 

            The name and  address  of the  registered  agent  which is to be the

agent of the  corporation  upon whom  process  against it may be  served,  is CT

Corporation System, 1633 Broadway, New York, New York 10019.

 

 

                                   - 6 -

 

 

KL2:249558.1

 

<PAGE>

 

 

 

                                  ARTICLE XII

                                   DURATION

 

            The duration of the Corporation shall be perpetual.

 

                                 ARTICLE XIII

                             NO PREEMPTIVE RIGHTS

 

            The holders of equity  shares and the  holders of voting  shares (as

each term is defined in Section 622 of the NYBCL) of the  Corporation  shall not

have any preemptive rights.

 

                                  ARTICLE XIV

                      LIMITED LIABILITY; INDEMNIFICATION

 

            SECTION 1. Each  person who was or is made a party or is  threatened

to be made a party to or is  involved  in any  action,  suit or  proceeding,  or

appeal  thereof,  whether  civil,  criminal,   administrative  or  investigative

(hereinafter a "proceeding"),  by reason of the fact that he or she, or a person

of whom he or she is the legal  representative,  is or was a Director or officer

of the  Corporation or is or was serving at the request of the  Corporation as a

Director, officer, employee or agent of another corporation or of a partnership,

joint  venture,  trust or other  enterprise,  including  service with respect to

employee  benefit plans,  whether the basis of such proceeding is alleged action

in an  official  capacity as a  Director,  officer,  employee or agent or in any

other capacity while serving as a Director, officer, employee or agent, shall be

indemnified  and  held  harmless  by  the  Corporation  to  the  fullest  extent

authorized by the NYBCL, as the same exists or may hereafter be amended (but, in

the case of any such amendment,  only to the extent that such amendment  permits

the  Corporation  to  provide  broader  indemnification  rights  than  said  law

permitted  the  Corporation  to provide  prior to such  amendment),  against all

expense, liability and loss (including, but not limited to, all attorneys' fees,

judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid

in  settlement)  reasonably  incurred or  suffered by such person in  connection

therewith and such indemnification  shall continue as to a person who has ceased

to be a Director,  officer,  employee or agent and shall inure to the benefit of

his or her heirs, executors and administrators;  PROVIDED, HOWEVER, that, except

as provided in Section 2 of this Article XIV, the  Corporation  shall  indemnify

any such person seeking indemnification in connection with a proceeding (or part

thereof)  initiated by such person only if such proceeding (or part thereof) was

authorized  by  the  Board  of  Directors  of  the  Corporation.  The  right  to

indemnification  conferred in this Section 1 shall be a contract right and shall

include the right to be paid by the Corporation the expenses (including, without

limitation,  attorneys'  fees)  incurred in  defending  any such  proceeding  in

advance  of its  final  disposition;  PROVIDED,  HOWEVER,  that,  if  the  NYBCL

requires,  the payment of such expenses incurred by a Director or officer in his

or her capacity as a Director or officer (and not in any other capacity in which

service  was or is  rendered  by  such  person  while  a  Director  or  officer,

including,  without limitation,  service to an employee benefit plan) in advance

of the final disposition of a proceeding shall be made only upon delivery

 

                                   - 7 -

 

 

KL2:249558.1

 

<PAGE>

 

 

 

to the  Corporation  of an  undertaking,  by or on  behalf of such  Director  or

officer,  to repay all amounts so advanced if it shall  ultimately be determined

that such  Director  or officer is not  entitled  to be  indemnified  under this

Article  XIV or  otherwise.  The  Corporation  may,  by  action  of its Board of

Directors,  provide  indemnification  to employees and agents of the Corporation

with the same scope and effect as the foregoing indemnification of Directors and

officers,  or on such other terms and  conditions  as the Board of Directors may

deem necessary or desirable.

 

            SECTION 2. If a claim  under  Section 1 of this  Article  XIV is not

paid in full by the  Corporation  within  thirty days after a written  claim has

been received by the Corporation,  the claimant may at any time thereafter bring

suit against the  Corporation  to recover the unpaid amount of the claim and, if

successful in whole or in part,  the claimant  shall be entitled to be paid also

the expense (including, without limitation, attorneys' fees) of prosecuting such

claim. It shall be a defense to any such action (other than an action brought to

enforce a claim for expenses  incurred in defending any proceeding in advance of

its final disposition where the required  undertaking,  if any is required,  has

been tendered to the Corporation) that the claimant has not met the standards of

conduct  which make it  permissible  under the NYBCL for the  Corporation  to in

demnify the  claimant  for the amount  claimed,  but the burden of proving  such

defense  shall be on the  Corporation.  Neither the  failure of the  Corporation

(including  its  Board of  Directors,  or any part  thereof,  independent  legal

counsel,  or its  shareholders)  to  have  made  a  determination  prior  to the

commencement  of such action that  indemnification  of the claimant is proper in

the circumstances  because he or she has met the applicable  standard of conduct

set  forth  in  the  NYBCL,  nor an  actual  determination  by  the  Corporation

(including  its  Board of  Directors,  or any part  thereof,  independent  legal

counsel,  or its  shareholders)  that the claimant  has not met such  applicable

standard  of conduct,  shall be a defense to the action or create a  presumption

that the claimant has not met the applicable standard of conduct.

 

            SECTION 3. The right to indemnification  and the payment of expenses

incurred in defending a proceeding in advance of its final disposition conferred

in this  Article XIV shall not be  exclusive of any other right which any person

may have or hereafter acquire under any statute, provision of the Certificate of

Incorporation,   By-Law,   agreement,  vote  of  shareholders  or  disinterested

Directors or otherwise.

 

            SECTION 4. The Corporation may maintain  insurance,  at its expense,

to  protect  itself  and  any  Director,  officer,  employee  or  agent  of  the

Corporation or another corporation,  partnership,  joint venture, trust or other

enterprise against any expense, liability or loss, to the fullest extent allowed

by law,  whether or not the  Corporation  would have the power to indemnify such

person against such expense, liability or loss under the NYBCL.

 

          ARTICLE XV DIRECTOR LIABILITY

 

     A  Director  of the  Corporation  shall  not be  personally  liable  to the

Corporation or

 

                                   - 8 -

 

 

KL2:249558.1

 

<PAGE>

 

 

 

its shareholders for damages for any breach of duty in such capacity except that

the  liability of a Director  shall not be so limited if (1) a judgment or other

final  adjudication  adverse to him estab lishes that his acts or omissions were

in bad faith or involved intentional misconduct or a knowing violation of law or

that he personally gained in fact a financial profit or other advantage to which

he was not legally  entitled or that his acts violated Section 719 of the NYBCL,

or (2) his acts or omissions  occurred prior to the adoption of this  provision.

No  amendment  to or repeal of this Article XV shall apply to or have any effect

on the liability or alleged  liability of any Director of the Corporation for or

with respect to any acts or omissions of such Director  occurring  prior to such

amendment  or repeal.  If the NYBCL is amended  hereafter to expand or limit the

liability of a director,  then the  liability  of a Director of the  Corporation

shall be expanded to the extent  required or limited to the extent  permitted by

the NYBCL, as so amended.

 

            IN  WITNESS   WHEREOF,   I  have   executed  this   Certificate   of

Incorporation this 15th day of April, 1998.

 

 

 

                                                /S/ THOMAS D. BALLIETT

                                                ----------------------

                                                Thomas D. Balliett, Esq.

                                                  Incorporator

                                                919 Third Avenue

                                                New York, NY  10022

 

 

 

                                   - 9 -

 

 

KL2:249558.1

 

<PAGE>

 

 

                                ACKNOWLEDGEMENT

 

 

STATE OF NEW YORK,  )

                    ) ss.:

COUNTY OF NEW YORK, )

 

 

            On this 15 day of April,  1998,  personally came before me Thomas D.

Balliett,  a person  known to me to be the person  who  executed  the  foregoing

Certificate  of   Incorporation,   and  he  acknowledged  that  he  signed  said

Certificate of Incorporation and acknowledged the same as his free act and deed.

 

            Given under my hand and seal the day and year first above written.

 

 

                               /s/ Judi Wasserman

                               ------------------

                                  Notary Public

 

 

 

 

 

 

[seal]

 

                                   - 10 -

 

 

KL2:249558.1

 

<PAGE>

 

 

                           CERTIFICATE OF AMENDMENT

 

                                    OF THE

 

                         CERTIFICATE OF INCORPORATION

 

                                      OF

 

                               BL HOLDING CORP.

 

 

              Under Section 805 of the Business Corporation Law

                           of the State of New York

 

                                  -----------

 

      BL Holding Corp.,  a corporation  organized and existing under the laws of

the State of New York (the "Corporation"), does hereby certify as follows:

 

            FIRST:  The name of the Corporation is BL Holding Corp.

 

          SECOND:  The certificate of incorporation of the Corporation was filed

by the New York Department of State on April 16, 1998.

 

            THIRD:  The certificate of incorporation is hereby amended to change

the name of the  Corporation  and to change the par value of the Preferred Stock

of the Corporation, each as authorized by the New York Business Corporation Law,

to wit:

 

            Article I relating to the name of the Corporation is amended to read

      in its entirety as follows:

 

                                  "ARTICLE I

                                     NAME

 

            "The name of the corporation shall be: MarketSpan Corporation."

 

 

 

<PAGE>

 

 

 

            Sections 1 and 2 of Article IV relating to the capital  stock of the

      Corporation are amended to read in their entirety as follows:

 

                  "SECTION  1.  The   aggregate   number  of  shares  which  the

            Corporation   shall  have  the  authority  to  issue  shall  be  (i)

            450,000,000  shares of Common Stock, par value $.01 per share,  (ii)

            16,000,000 shares of Preferred Stock, par value $25 per share, (iii)

            1,000,000  shares of Preferred  Stock,  par value $100 per share and

            (iv) 83,000,000 shares of Preferred Stock, par value $.01 per share.

 

                  SECTION 2.  The amount of capital stock of the Corporation

            shall be $505,330,000."

 

            FOURTH: The foregoing amendments to the certificate of incorporation

were duly  adopted by a Unanimous  Written  Consent of the Board of Directors of

the  Corporation and by a Unanimous  Written Consent of the  shareholders of the

Corporation, in accordance with Section 803 of the New York Business Corporation

Law.

 

 

<PAGE>

 

 

            IN WITNESS WHEREOF, the undersigned officers of the Corporation have

signed this  Certificate of Amendment and each affirms that the statements  made

herein are true under the penalties of perjury.

 

Dated:  May 21, 1998

 

                                    BL HOLDING CORP.

 

 

 

                                    By: /s/ William J. Catacosinos

                                    ------------------------------

                                    Name:   Dr. William J. Catacosinos

                                    Title:  Chief Executive Officer

 

 

                                    By: /s/ Kathleen Marion

                                    -----------------------

                                    Name:   Kathleen Marion

                                    Title:  Secretary

 

 

<PAGE>

 

 

                            CERTIFICATE OF AMENDMENT

 

                                     OF THE

 

                          CERTIFICATE OF INCORPORATION

 

                                       OF

 

                             MARKETSPAN CORPORATION

 

 

                Under Section 805 of the Business Corporation Law

                           of the State of New York

 

                                   -----------

 

      MarketSpan  Corporation,  a corporation  organized and existing  under the

laws of the  State of New York  (the  "Corporation"),  does  hereby  certify  as

follows:

 

     FIRST: The present name of the Corporation is MarketSpan  Corporation.  The

Corporation was formed under the name "BL Holding Corp."

 

      SECOND: The Certificate of Incorporation of the Corporation was filed with

the New York  Department of State on April 16, 1998. A Certificate  of Amendment

of the  Certificate of  Incorporation  was filed with the New York Department of

State on May 26, 1998.

 

     THIRD: The amendment of the Certificate of Incorporation of the Corporation

effected by this Certificate of Amendment is as follows:

 

      To add  provisions  stating  the  number,  designation,  relative  rights,

      preferences,   and  limitations  of  the  shares  of  the  Series  A  ESOP

      Convertible Preferred Stock, Series AA Preferred Stock, Series B Preferred

      Stock and Series C Preferred  Stock, as fixed by the Board of Directors of

      the Corporation.

 

     FOURTH:  To  accomplish  the  foregoing   amendment,   Article  IV  of  the

Certificate of Incorporation  of the Corporation,  relating to the capital stock

of the Corporation is hereby amended as follows:

 

      A Section 5 shall be  inserted  at the end of such  Article  IV,  and such

      Section 5 shall read in its entirety as follows:

 

 

 

<PAGE>

 

 

 

 

"SECTION 5. The designations, and relative, distribution,  dividend, liquidation

and other rights,  preferences and limitations of each series of Preferred Stock

are as follows:

 

 

PART A.           SERIES A ESOP CONVERTIBLE PREFERRED STOCK

 

1.    Designation and Issuance

 

      (A) One hundred  thousand  (100,000)  shares of Preferred Stock are hereby

designated as Series A ESOP Convertible Preferred Stock (hereinafter referred to

as  "Series A  Preferred  Stock").  Such  number of shares may be  increased  or

decreased by resolution of the Board of  Directors,  but no such decrease  shall

reduce the number of shares of Series A  Preferred  Stock to a number  less than

that of the shares  then  outstanding  plus the number of shares  issuable  upon

exercise of any rights,  options or warrants or upon  conversion of  outstanding

securities  issued by the  Corporation.  All shares of Series A Preferred  Stock

redeemed or purchased by the Corporation  shall be retired and shall be restored

to the status of authorized but unissued shares of Preferred Stock.

 

      (B) Shares of Series A  Preferred  Stock shall be issued only to a trustee

or trustees  acting on behalf of an employee  benefit plan of the Corporation or

any  subsidiary  or  affiliated  entity  (a  "Plan").  In the event of any sale,

transfer  or other  disposition  (hereinafter  for  purposes  of this  Part A, a

"transfer")  of shares of Series A Preferred  Stock to any person other than any

trustee  or  trustees  of any Plan,  the shares of Series A  Preferred  Stock so

transferred,   upon  such  transfer  and  without  any  further  action  by  the

Corporation  or the  holder,  shall be  automatically  converted  into shares of

Common Stock at the Conversion  Price (as hereinafter  defined) and on the terms

otherwise provided for the conversion of shares of Series A Preferred Stock into

shares of  Common  Stock  pursuant  to  Subsection  5 of this Part A and no such

transferee  shall  have any of the  voting  powers,  preferences  and  relative,

participating,  optional  or  special  rights  ascribed  to  shares  of Series A

Preferred Stock hereunder but, rather,  only the powers and rights pertaining to

the Common Stock into which such shares of Series A Preferred  Stock shall be so

converted.  In the event of such a conversion,  such transferee shall be treated

for all  purposes as the record  holder of the shares of Common Stock into which

the Series A Preferred  Stock shall have been  converted  as of the date of such

conversion.  Certificates  representing shares of Series A Preferred Stock shall

be  legended to reflect  such  restrictions  on  transfer.  Notwithstanding  the

foregoing  provisions of this  Subsection 1, shares of Series A Preferred  Stock

(i) may be converted  into shares of Common Stock as provided by Subsection 5 of

this Part A and the shares of Common  Stock issued upon such  conversion  may be

transferred  by the  holder  thereof  as  permitted  by law and  (ii)  shall  be

redeemable  by the  Corporation  upon  the  terms  and  conditions  provided  by

Subsections 6, 7 and 8 of this Part A.

 

2.    Dividends and Distributions

 

      (A)(1) Subject to the provisions for adjustment  hereinafter  set forth in

this Part A, the holders of shares of Series A Preferred Stock shall be entitled

to receive,  when and as declared by the Board of Directors out of funds legally

available therefor, cash dividends ("Regular

 

 

<PAGE>

 

 

 

 

Preferred  Dividends") in an amount per share initially equal to $6.00 per share

per annum, subject to adjustment from time to time as hereinafter provided,  and

no more,  except as  provided in  paragraph  (A)(2) of this  Subsection  2 (such

amount,  as  adjusted  from time to time,  being  hereinafter  referred  to, for

purposes of this Part A, as the  "Regular  Preferred  Dividend  Rate"),  payable

semiannually  in arrears,  one-half on March 1, and  one-half on  September 1 of

each year (each a "Series A Dividend  Payment Date")  commencing on September 1,

1998,  to holders of record at the start of  business  on such Series A Dividend

Payment Date.  Regular Preferred  Dividends shall begin to accrue on outstanding

shares of Series A  Preferred  Stock from the date of issuance of such shares of

Series A Preferred Stock.  Regular  Preferred  Dividends shall accrue on a daily

basis,  based on the  Regular  Preferred  Dividend  Rate in effect on such date,

whether  or not the  Corporation  shall  have  earnings  or surplus at the time,

computed on the basis of a 360-day  year of 30-day  months in case of any period

less  than a full  semiannual  period.  Accrued  but  unpaid  Regular  Preferred

Dividends shall cumulate as of the Series A Dividend  Payment Date on which they

first become  payable,  but no interest shall accrue on  accumulated  but unpaid

Regular Preferred Dividends.

 

      (2) In the event  that for any  period  of six (6)  months  preceding  any

Series A Dividend  Payment Date the aggregate  fair value (as  determined by the

Board of Directors) of all dividends and other distributions  declared per share

of Common Stock during such six month period  multiplied by the number of shares

of Common Stock into which a share of Series A Preferred  Stock was  convertible

on the appropriate  dividend  payment date for the Common Stock shall exceed the

amount  of the  Regular  Preferred  Dividends  accrued  on a share  of  Series A

Preferred  Stock  during  such six month  period,  the  holders of shares of the

Series A Preferred  Stock shall be entitled to receive,  when and as declared by

the Board of Directors out of funds legally available therefore,  cash dividends

(the  "Supplemental   Preferred   Dividends")  in  an  amount  per  share  (with

appropriate  adjustments  to reflect any stock split or combination of shares or

other  adjustment  provided  for in  Subsection  9 of this  Part A) equal to the

amount of such  excess up to but not  exceeding  (x) the  product of two percent

(2%)  times the  average  of the Fair  Market  Values of the number of shares of

Common Stock into which a share of Series A Preferred  Stock was  convertible on

the day next  preceding  the  ex-dividend  date for each such  dividend  and the

distribution  date  for  each  such  distribution  on the  Common  Stock  of the

Corporation  minus (y) such amount of accrued Regular Preferred  Dividends.  The

calculation  of  each  Supplemental  Preferred  Dividend  shall  be  subject  to

adjustment  corresponding  to the  adjustments  provided in Subsection 9 of this

Part A.  Supplemental  Preferred  Dividends  shall accrue and cumulate as of the

close of each  relevant  six month  period  and shall be payable on the Series A

Dividend Payment Date next following the close of any such six month period, but

no  interest  shall  accrue on  accumulated  but unpaid  Supplemental  Preferred

Dividends and no Supplemental Preferred Dividends shall accrue in respect of any

period of less than six months.

 

      (B)(1)  No full  dividends  shall be  declared  or paid or set  apart  for

payment on any shares  ranking,  as to dividends,  on a parity with or junior to

the Series A Preferred  Stock,  for any period unless full cumulative  dividends

(which for all  purposes of this  resolution  shall  include  Regular  Preferred

Dividends and Supplemental  Preferred  Dividends) have been or contemporaneously

are declared and paid or declared and a sum sufficient  for the payment  thereof

set apart for such  payment  on the  Series A  Preferred  Stock for all Series A

Dividend Payment Dates occurring on

 

 

<PAGE>

 

 

 

 

or prior to the date of payment of such full  dividends.  When dividends are not

paid in full, as aforesaid,  upon the shares of Series A Preferred Stock and any

other  shares  ranking,  as to  dividends,  on a parity  with Series A Preferred

Stock,  all dividends  declared upon shares of Series A Preferred Stock shall be

declared pro rata so that the amount of dividends declared per share on Series A

Preferred  Stock and such other  parity  shares  shall in all cases bear to each

other the same  ratio  that  accumulated  dividends  per share on the  shares of

Series A Preferred Stock and such other parity shares bear to each other. Except

as  otherwise  provided  herein,  holders of shares of Series A Preferred  Stock

shall not be entitled to any  dividends,  whether  payable in cash,  property or

shares, in excess of full cumulative dividends,  as herein provided, on Series A

Preferred Stock.

 

      (B)(2) So long as any shares of Series A Preferred Stock are  outstanding,

no  dividend  (other  than  dividends  or  distributions  paid in shares  of, or

options, warrants or rights to subscribe for or purchase shares of, Common Stock

or other shares ranking  junior to Series A Preferred  Stock as to dividends and

upon  liquidation  and  other  than as  provided  in  paragraph  (B)(1)  of this

Subsection  2) shall be  declared  or paid or set  aside  for  payment  or other

distribution  declared  or made upon the Common  Stock or upon any other  shares

ranking  junior to or on a parity with Series A Preferred  Stock as to dividends

or upon  liquidation,  nor shall  any  Common  Stock or any other  shares of the

Corporation ranking junior to or on a parity with Series A Preferred Stock as to

dividends or upon liquidation be redeemed,  purchased or otherwise  acquired for

any consideration (or any moneys be paid to or made available for a sinking fund

for the redemption of any such shares) by the Corporation  (except by conversion

into or  exchange  for  shares  of the  Corporation  ranking  junior to Series A

Preferred Stock as to dividends and upon liquidation)  unless, in each case, the

full cumulative  dividends on all outstanding shares of Series A Preferred Stock

shall have been paid.

 

      (3) Any dividend  payment made on shares of Series A Preferred Stock shall

first be credited against the earliest  accumulated but unpaid dividend due with

respect to shares of Series A Preferred Stock.

 

3.    Liquidation Preference

 

      (A) In the event of any  dissolution or  liquidation  of the  Corporation,

whether  voluntary or  involuntary,  before any payment or  distribution  of the

assets of the Corporation  (whether  capital or surplus) shall be made to or set

apart  for the  holders  of any  series  or  class  or  classes  of stock of the

corporation  ranking  junior to Series A  Preferred  Stock upon  dissolution  or

liquidation,  the  holders of Series A  Preferred  Stock  shall be  entitled  to

receive the Liquidation  Price (as  hereinafter  defined) per share in effect at

the time of  dissolution or  liquidation,  plus an amount equal to all dividends

accrued  (whether or not  accumulated)  and unpaid  thereon to the date of final

distribution  to such  holders;  but such  holders  shall not be entitled to any

further  payments.  The  Liquidation  Price per share which  holders of Series A

Preferred Stock shall receive upon dissolution or liquidation  shall be equal to

$100, subject to adjustment as hereinafter provided in this Part A. If, upon any

dissolution or liquidation of the Corporation, the assets of the Corporation, or

proceeds  thereof,  distributable  among the holders of Series A Preferred Stock

shall be  insufficient  to pay in full the  preferential  amount  aforesaid  and

liquidating   payments  on  any  other  shares  ranking  as  to  dissolution  or

liquidation, on a parity with Series A Preferred Stock, then such

 

 

<PAGE>

 

 

 

 

assets,  or the  proceeds  thereof,  shall be  distributed  among the holders of

Series A Preferred  Stock and any such other shares  ratably in accordance  with

the  respective  amounts  which  would be  payable  on such  shares  of Series A

Preferred  Stock and any such other shares if all amounts  payable  thereon were

paid in full. For the purposes of this Subsection 3, a  consolidation  or merger

of the  Corporation  with one or more  corporations  shall not be deemed to be a

dissolution or liquidation, voluntary or involuntary.

 

      (B)  Subject to the rights of the holders of shares of any series or class

or classes  of stock  ranking  on a parity  with or prior to Series A  Preferred

Stock,  upon any  dissolution or liquidation of the  Corporation,  after payment

shall  have been made in full to the  holders  of  Series A  Preferred  Stock as

provided in this Subsection 3, but not prior thereto,  any other series or class

or classes of stock ranking junior to Series A Preferred Stock upon  dissolution

or liquidation  shall,  subject to the respective  terms and provisions (if any)

applying thereto, be entitled to receive any and all assets remaining to be paid

or  distributed,  and the  holders  of  Series A  Preferred  Stock  shall not be

entitled to share therein.

 

4.    Ranking and Voting of Shares

 

      (A) Any shares of the Corporation shall be deemed to rank:

 

       (1) on a parity with Series A Preferred  Stock as to  dividends  or as to

distribution  of assets  upon  dissolution  or  liquidation,  whether or not the

dividend rates,  dividend payment dates, or redemption or liquidation prices per

share  thereof be  different  from  those of Series A  Preferred  Stock,  if the

holders of such class of stock and Series A Preferred Stock shall be entitled to

the  receipt  of  dividends  or of amounts  distributable  upon  dissolution  or

liquidation,  as the case may be, in proportion to their respective  dividend or

liquidation amounts, as the case may be, without preference or priority one over

the other, and

 

      (2)  junior  to  Series A  Preferred  Stock as to  dividends  or as to the

distribution of assets upon dissolution or liquidation,  if such shares shall be

Common Stock or if the holders of Series A Preferred  Stock shall be entitled to

receipt  of  dividends  or  of  amounts   distributable   upon   dissolution  or

liquidation,  as the case may be, in  preference  or  priority to the holders of

such shares.

 

       (B) The  holders  of shares of Series A  Preferred  Stock  shall have the

following voting rights:

 

      (1) Except as otherwise  required by law or set forth  herein,  holders of

Series A Preferred  Stock shall have no special  voting rights and their consent

shall not be  required  (except to the  extent  they are  entitled  to vote with

holders of Common  Stock as set forth  herein)  for the taking of any  corporate

action,  including  the  issuance  of  any  preferred  stock  now  or  hereafter

authorized;  PROVIDED,  HOWEVER,  that  the  vote  of at  least  66-2/3%  of the

outstanding  shares of Series A Preferred Stock,  voting separately as a series,

shall be  necessary  to  approve  any  alteration,  amendment  or  repeal of any

provision of the Certificate of  Incorporation  or any alteration,  amendment or

repeal of any provision of the Certificate of Incorporation relating to the

 

 

<PAGE>

 

 

 

 

designation,  preferences and rights of Series A Preferred Stock  (including any

such alteration,  amendment or repeal effected by any merger or consolidation in

which the  Corporation  is the  surviving  or  resulting  corporation),  if such

amendment,  alteration or repeal would alter or change the powers,  preferences,

or  special  rights  of the  Series  A  Preferred  Stock  so as to  affect  them

adversely.

 

5.    Conversion into Common Stock

 

      (A) Holders of shares of Series A Preferred  Stock shall be  entitled,  at

any time prior to the close of business on the date fixed for redemption of such

shares pursuant to Subsections 6, 7, or 8 of this Part A, to cause any or all of

such shares to be converted into shares of Common Stock. The number of shares of

Common  Stock  into which  each  share of the  Series A  Preferred  Stock may be

converted shall be determined by dividing the Liquidation Price in effect at the

time of conversion by the Conversion Price (as hereinafter defined) in effect at

the time of conversion. The Conversion Price per share at which shares of Common

Stock  shall be  issuable  upon  conversion  of any shares of Series A Preferred

Stock shall be 115% of the Current Market Price of the Common Stock on the first

day on which the Common  Stock is  publicly  traded,  subject to  adjustment  as

hereinafter provided in this Part A.

 

      (B) Any holder of shares of Series A Preferred  Stock  desiring to convert

such shares into shares of Common Stock shall surrender,  if  certificated,  the

certificate or certificates  representing the shares of Series A Preferred Stock

being  converted,  duly assigned or endorsed for transfer to the Corporation (or

accompanied   by  duly  executed   stock  powers   relating   thereto),   or  if

uncertificated,  a duly executed stock power relating thereto,  at the principal

executive office of the Corporation or the offices of the transfer agent for the

Series A  Preferred  Stock or such office or offices in the  continental  United

States of an agent for  conversion  as may from  time to time be  designated  by

notice to the holders of the Series A Preferred  Stock by the Corporation or the

transfer agent for the Series A Preferred  Stock,  accompanied by written notice

of conversion.  Such notice of conversion shall specify (i) the number of shares

of Series A Preferred  Stock to be converted and the name or names in which such

holder wishes the Common Stock and any shares of Series A Preferred Stock not to

be so converted to be issued,  and (ii) the address to which such holder  wishes

delivery to be made of a confirmation of such conversion, if uncertificated,  or

any new certificates which may be issued upon such conversion if certificated.

 

      (C) Upon surrender, if certificated, of a certificate representing a share

or shares of Series A Preferred Stock for conversion, or if uncertificated, of a

duly executed stock power relating thereto, the Corporation shall issue and send

by hand  delivery  (with  receipt to be  acknowledged)  or by first  class mail,

postage  prepaid,  to the holder  thereof or to such holder's  designee,  at the

address   designated  by  such  holder,   if  certificated,   a  certificate  or

certificates for, or if uncertificated, confirmation of, the number of shares of

Common  Stock to which such holder  shall be entitled  upon  conversion.  In the

event that there shall have been surrendered shares of Series A Preferred Stock,

only part of which are to be converted,  the Corporation shall issue and deliver

to such holder or such holder's designee, if certificated,  a new certificate or

certificates representing the number of shares of Series A Preferred Stock which

shall not have been

 

 

<PAGE>

 

 

 

 

converted, or if uncertificated,  confirmation of the number of shares of Series

A Preferred Stock which shall not have been converted.

 

      (D) The  issuance  by the  Corporation  of shares of Common  Stock  upon a

conversion  of shares of Series A Preferred  Stock into  shares of Common  Stock

made at the option of the holder thereof shall be effective as of the earlier of

(i) the delivery to such holder or such  holder's  designee of the  certificates

representing  the  shares of Common  Stock  issued  upon  conversion  thereof if

certificated  or  confirmation  if  uncertificated  or (ii) the  commencement of

business on the second  business day after the surrender of the  certificate  or

certificates,   if   certificated,   or  a  duly   executed   stock  power,   if

uncertificated,  for the shares of Series A Preferred Stock to be converted.  On

and after the effective  date of conversion,  the person or persons  entitled to

receive  Common Stock  issuable  upon such  conversion  shall be treated for all

purposes as the record holder or holders of such shares of Common Stock,  but no

allowance or adjustment shall be made in respect of dividends payable to holders

of  Common  Stock of  record  on any  date  prior to such  effective  date.  The

Corporation  shall not be obligated to pay any  dividends  which shall have been

declared  and shall be payable to holders of shares of Series A Preferred  Stock

on a Series A Dividend  Payment Date if such Series A Dividend  Payment Date for

such dividend  shall be on or subsequent to the effective  date of conversion of

such shares.

 

      (E) The Corporation shall not be obligated to deliver to holders of Series

A Preferred  Stock any fractional  share or shares of Common Stock issuable upon

any conversion of such shares of Series A Preferred  Stock,  but in lieu thereof

may make a cash payment in respect thereof in any manner permitted by law.

 

      (F) The  Corporation  shall at all times reserve and keep available out of

its authorized and unissued  Common Stock or treasury  Common Stock,  solely for

issuance  upon the  conversion  of shares of Series A Preferred  Stock as herein

provided,  such  number of shares of Common  Stock as shall from time to time be

issuable upon the conversion of all the shares of Series A Preferred  Stock then

outstanding.

 

6.    Redemption at the Option of the Corporation

 

      (A) The Series A Preferred Stock shall be redeemable, in whole or in part,

at the option of the Corporation at any time after January 1, 2004, out of funds

legally available therefor,  at the following redemption prices per share (or if

pursuant to paragraph  (C) of this  Subsection  6, at the  redemption  price set

forth therein):

 

<TABLE>

<CAPTION>

 DURING THE TWELVE-MONTH

    PERIOD BEGINNING                           PRICE PER SHARE

    ----------------                           ---------------

<S>                           <C>

Jan. 1, 2004                  102% of the Liquidation Price in effect on date fixed for redemption

Jan. 1, 2005                  101% of the Liquidation Price in effect on date fixed for redemption

Jan. 1, 2006                  100% of the Liquidation Price in effect on date fixed for redemption

</TABLE>

 

 

 

<PAGE>

 

 

 

 

and thereafter at 100% of the Liquidation  Price per share in effect on the date

fixed for  redemption,  plus, in each case (including in the case of redemptions

pursuant to paragraph (C) or (D) of this  Subsection  6), an amount equal to all

accrued (whether or not  accumulated)  and unpaid dividends  thereon to the date

fixed for  redemption.  Payment  of the  redemption  price  shall be made by the

Corporation  in cash or shares of Common  Stock,  or a combination  thereof,  as

permitted by paragraph  (D) of this  Subsection 6. From and after the date fixed

for  redemption,  dividends  on shares of Series A  Preferred  Stock  called for

redemption  will cease to  accrue,  such  shares  will no longer be deemed to be

outstanding  and all rights in respect of such shares of the  Corporation  shall

cease, except the right to receive the redemption price. If less than all of the

outstanding  shares  of  Series  A  Preferred  Stock  are  to be  redeemed,  the

Corporation  shall  either  redeem  a  portion  of the  shares  of  each  holder

determined  pro rata based on the