The $5.4 billion merger of Keyspan Energy, parent of the Brooklyn Union Gas (BUG), and the Long Island Lighting Company (LILCO) crossed a major hurdle last week as the New York State Public Service Commission approved a settlement agreement signed by PSC staff, consumer and environmental advocates, labor unions, and Trigen-Nassau Energy. The agreement paves the way for merger-related savings of $100 million/year to be passed on to LILCO’s and BUG’s 1.6 million gas customers and 1 million electric customers. It also caps corporate earnings and installs a new revenue sharing mechanism.

“This is a major milestone in the formation of a new energy company and will provide customers with $1 billion in savings over a 10-year period,” said LILCO CEO William J. Catacosinos. “And, coupled with the pending LIPA transaction, customers will see significant rate reductions in their gas and electric bills.”

The Long Island Power Authority transaction is expected to result in an overall 20% decrease from LILCO’s current rates, which are the highest in the continental U.S. LIPA would purchase all of LILCO’s transmission and power distribution assets, its 18% interest in the Nine Mile Island Point 2 nuclear facility, and would assume $3.6 billion of debt associated with the failed Shoreham nuclear plant and high-cost IPP contracts. LILCO would retain its non-nuclear generation, but would sell power to LIPA under a 15-year power service agreement. To help pay for Shoreham, LIPA proposes adding a 2% surcharge for the next 30 years to electric bills on Long Island.

But the LIPA transaction faces a number of difficult challenges, including a lawsuit from the Suffolk County legislature and FERC and Internal Revenue Service approval. The merger agreement, however, is designed so it can go forward separate from the LIPA transaction, the PSC noted.

Other positive aspects of the merger settlement include average bill reductions of about 3% for customers of Brooklyn Union in addition to a $3.5 million reduction already in effect, bringing the total average bill decrease to about 3.3%. LILCO gas customers currently are receiving bill reductions averaging 2.18% and are expected to receive additional merger-related savings of 1.67% for a total average reduction of 3.85%. LILCO electric customers are expected to experience an average 2.47% reduction in electricity bills directly attributable to merger synergy savings, the PSC said.

The merger settlement also establishes new penalties for the companies if they fail to meet service reliability and customer-service targets. It sets caps on earnings and puts in place a revenue sharing mechanism. For Brooklyn Union, the cap is 13.75% for 1998, 13.5% for the years 1999 through 2001, and 13.25% in 2002. LILCOs earnings are capped at 11.1% through 2002. The sharing mechanism would pass on to customers 60% of any earnings up to 100 basis points more than the caps, and share any earnings greater than that level on a 50-50 basis with stockholders. Both companies also are obligated to phase out their appliance repair programs to facilitate a competitive environment in the gas industry in New York.

The merger agreement, as separated from the LIPA’s purchase of LILCO’s electric lines and nuclear assets, now is contingent only on Securities and Exchange Commission approval and joint approval of the Justice Department and the Federal Trade Commission.

The merger transaction involves KeySpan shareholders receiving one share of the new holding company for each of their shares and LILCO shareholders receiving 0.803 shares of the new holding company for each of their shares if the LIPA transaction does not go forward. LILCO shareholders would receive 0.880 shares of the new holding company for each of their shares if the LIPA deal is completed. A new name for the combined companies is expected to be announced this spring.

KeySpan reported operating revenues of $1.5 billion for the fiscal year ending Sept. 30, 1997. Brooklyn Union serves 1.1 million customers in New York City proper. LILCO reported operating revenues of $2.3 billion in 1997. It serves 460,000 gas customers and 1 million electric customers on Long Island.

Rocco Canonica

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