ML17053A638

Annual Financial Rept 1978

ML17053A638
Person / Time
Site:	Nine Mile Point
Issue date:	04/23/1979
From:	LONG ISLAND LIGHTING CO.
To:
Shared Package
ML17053A635	List: ML17053A633 ML17053A636 ML17053A637 ML17053A638 ML17053A639
References
NUDOCS 7904250428
Download: ML17053A638 (48)

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1978 Annual Report Highlights Eamlngs and Dividends (Dollars per share)

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0.50 1,00 1.50 2.00 2.50 LILCO's earnings per share have beenincreased in17 ofthe last 20 years. The dividend rate on the common stock has been raised in 19 of these years.

Earnings $2.44 per share, down 15lt from 1977.

Quarterly dividend rate on common stock raised 7ff, or 4.3%, in March 1978, to 42Vatf', per share. equivalent to $1.70 per year.

Permanent electric rate in-crease of $59.7 million effective January17, 1978, of which $15.0 million be-came effective August1, 1977, on an interim basis.

Additional$4.9 millioneffec-tive August 24, 1978, to off-set most of the higher wage rates resulting from new labor contracts.

Applications fora$ 147.1 mil-lion increase in electric rates and a $23.9 million increase in gas rates filed May 31, 1978.

System electric kWh sales up 0.5%.

earnings per share Annual dividend rate al year end System gas mcf sales down 16%

Gross plant investment ex-ceeded $3 billion.

Capital requirements to-taled $415.8 million.

Tri-Counties Construction Trust established to provide flexibilityin financing LILCO's 18% share of the Nine Mile Point Unit 2 nuclear electric generating unit.

Permanent financing totaled

$199.9 million.

Tri-Counties Resources Trust and Tri-Counties Con-struction Trust provided ad-ditional funds totaling $96.5 millionin1978.

First management audit of LILCOcompleted with highly favorable results.

To Our Shareowners C

Charles R. Pierce Chairman of the Board and Chief Executive Officer y 'C Wilfred O. Uhl President In recent years the condi-tions under which we operate our business have

" undergone a marked trans-formation. The nature of these changes, and our approach to successfully meeting the resulting chal-lenges, are discussed in a special section of this report starting on page 17. Upon reading this section, we be-lieve you willconcur with us that a new level of stability is within sight, and that the transitional process willbe effectively managed.

The Company's response to these radically changed conditions has been favor-ably recognized in the recently completed audit of the Company's operations by the consultant firmof Booz, Allen 8 Hamilton, Inc.

Conducted under the direc-tion of the Public Service Commission as part of a State-wide program cover-ing all major electric and gas utilities, the audit con-cluded that LILCOis an effi-cient and well-managed util-ity. A particularly valuable contribution of the audit team was an incisive and objective analysis of how profoundly external change has impacted the utility business and made utility operations more compli-cated than ever before. The auditors commented favor-ably on the Company's eon-

'istent orientation toward customer service and oper-ational efficiency, and further concluded that our ratepayers are receiving cost-effective electric and gas service. In addition to, the overall favorable as-sessment of the Company's management, the audit has offered a number of helpful recommendations for further improvements. The auditors have pointed out that these improvements are not expected to yield significant savings, but will fine-tune internal opera-tions. Plans are now under way for implementing these recommendations.

In our remarks at the 1978 Annual Meeting we noted that the revenue level estab-lished by the Public Service Commission in its January 1978 electric rate decision would probably cause 1978 per share earnings to fall short of those achieved in 1977. The results were in accord with that prediction as 1978 earnings of $2.44 per share failed to equal 1977's $2.59, although total

<<arnings available for com-vlon stock did increase from*

5104.6 millionto $111.3 mil-ion. Following the January l978 rate decision, we oared operating expenses vy $10 millionat some sac-

'ifice in service improve-ments we had hoped to nitiate. But slow growth in

<<ales, as a result of mild leather and added conser-vation on the part ofour cus-

'.omers, combined with in-adequate rates, made the

<<arnings insufficient to pro-ride for the 13.0% increase n the average number of

ommon shares outstand-ng. In March the dividend t

Nas increased by 7Ii,'per

>>hare to an annual rate of 31.70, still amply covered by he $2.44 earnings. This was he nineteenth increase in he'past 20 years.

n May 1978, we filed for ad-ditional gas and electric rate ncreases to offset inflation,

>liowfor needed service mprovements, and restore

.arnings to an appropriate evel. With inflation currently-unning at 8.3% per year, hort-term interest over11%

)er annum, and the cumula-ive effect of a series of in-idequate rate decisions,

)eriodic applications for ate increases have be-

ome a necessary way of ife. The remarkable fact is hat on an inflation-adjusted

)asis, electric and gas rates iave shown littlechange iver the past three years. A iecision on the current rate ipplication is not expected intillate April1979.

The greatest opportunity to protect consumers from future higher energy costs continues to rest on our abil-ityto switch our generating system from heavy use of foreign oil to the use of nuclear energy. The recent arbitrary oil price increase instituted by the OPEC nations and the withdrawal of Irania~il brings home once again the constantly lurking economic dangers that are a consequence of this reliance. Substantial re-lieffrom this dependence willbe achieved with the start of operation of the Shoreham Nuclear Station in 1980. Shoreham's opera-tion willresult in the reduc-tion of LILCO's oil consump-tion by some eight million barrels a year, and willpro-vide an important stabilizing influence on electric costs.

Unfortunately, additional regulatory delay at the State level once again threatens to set back the scheduled start of the Jamesport Nu-clear Station and the sub-stantial economic benefits its operation would provide consumers. With the recent receipt of the Nuclear Reg-ulatory Commission's final approval to build James-port, State approval now remains as the sole obstacle to the plant's construction.

As a result of further pro-longation of the State hear-ing process, the plant's 1988 commercial operation now seems in jeopardy. The economic impact on con-sumers could be substan-tial, since each year of delay increases the cost of Jamesport by $300 million and State-wide consump-tion of foreign oil by 21 millionbarrels.

To balance the economic and political uncertainties that have intruded so heav-ilyupon our Company's operations, we note the presence of a number of

'trengths that warrant op-timism when we look ahead.

Important among these is the new sense of community feeling that is being dem-onstrated in the Long Island area. Prominent leaders from all sectors of the com-munity are joining together in a concerted effort to pro-mote a unified Long Island identity forthe planning of a new asset base of economic activity and to pursue the solution of problems on a regional scale. We be-lieve this new community partnership bodes well for Long Island's future.

Our most significant strengths, of course, are those that are contained within the Company. Out-standing among these are the talents, skills, and dedi-cation of LILCOpeople. The positive Booz, Allen &

Hamilton assessment of the Company's operations is really a tribute to the 5,400 LILCOemployees and their willingness and skill in find-ing and applying more pro-ductive ways to get their jobs done. Their leadership both on the job and in their communities lends confi-dence to our anticipation of a stronger LILCOand a better Long Island in the months and years ahead.

Chairman and Chief Executive Officer President

1978 in Review Our review of LILCO's 1978 activities benefits from a new and valuable perspec-tive, an independent study of Company operations conducted by the man-agement consulting firmof Booz, Allen 8 Hamilton, Inc.

The study was ordered and the firmwas selected by the Public Service Commis-sion (PSC), in compliance with a 1976 State law requir-ing a management audit of each major electric and gas utilityin New Yorkat least once every five years.

Among the general findings of the two-part report, which covered LILCO's general management and project management for major construction, was the auditors'onclusion that LILCO is an efficient and well-managed utilitywhose ratepayers are receiving cost-effective electric and gas service. The auditors found that LILCOmanage-ment demonstrates a con-sistent and active interest in improving operational efficiency and effective-ness wherever possible, and that the management team is strong overall, with experienced and capable senior executives guiding the Company. In its exami-

~nation of the Shoreham nu-clear project, Booz, Allen &

Hamilton found expendi-tures to be generally rea-sonable despite the escala-tion in costs of the project.

Both parts of the audit re-port contained a number of recommendations for man-agement improvements.

The Company is in agree-ment with the majority of these suggestions, many ofwhich constitute rec-ommendations for expan-sion or acceleration of programs already begun by LILCO. Some of the key findings of the audit willbe mentioned in this report.

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pl Long ISland eeppnpmy Newsday nowoneofthe10largesl newspapers in the country, will grBW at 8 mpderate paCB move to Melvillein1979, to the new during 1978. ImprOVed building pictured above. The labor market cpnditipn$

315.000-square-foot structure was one of several new commercial/

Were refleCted in a reCOrd industrial construction projects year-end total of1,232,100 begun onLong Islandin 1978.

employed residents of Nassau and Suffolk Coun Housing construction activ-ties. This represented a

ity remained slow; as a re-gain pf 79 800 jpbs pver the suit, the 8,100 new residen-1977 year-end level. The tial electric customers con-unemployment rate cle nected to the LILCOsystem clinecl significantly from a was the smallest number year earlier, reaching 5.3%

since1945. However, for at the end of1978. Atotal of the flrst11months of1978, 81 new industrial plants and newly authorized non-warehouses were added in residential construction the area, and operations reached a dollar value of were expanded by 243

$159 million, an increase of existing plants and 18.8% over the same 1977 warehouses.

period. The 2,600 new LILCOcommercial cus-The total population of tomers connected in 1978 LILCO's service area of was 8.0% higher than in Nassau and Suffolk Coun-1977.

ties and the Rockaway Peninsula ofQueens County is now over 2.9 million, ac-cording to LILCOestimates.

This is greater than the population of each of 25 states in the nation. For the third consecutive year, the Nassau-Suffolk area ranked among the nation's 10 largest population centers in total personal income, t

consumer spendable in-come, and retail sales per household.

Use of the1978 Revenue Dollar (Percent)

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10 Long Island's business, labor, government, and educational leaders began a strong regional effort to stimulate the area's economy and formulate solutions to its problems.

Catalysts in the process were a series by Newsday, "Long Island at the Cross-roads," and a conference at the State University of New York at Stony Brook, which sought to define the region's strengths, identify its major problems, and report prog-ress towards their solution.

One of the important groups established as a result was the Long Island Action Committee, formed by busi-ness, labor, and community leaders to study key issues such as taxes. Among the Committee's priorities is the attraction ot high-technology industry to the Island.

Another promising new or-ganization is the Long Is-land Economic Develop-ment Agency, the first at-tempt by the Nassau and SuffolkCounty governments to approach economic proj-ects on a joint basis. This 30-member agency, which includes 21 private-sector ap pointees, is working to at-tract federal and state fund-ing foreconomic develop-ment projects, and to pro-mote a unitied Long Island identity to other parts of the country/.

Kilowatt-hoursales of electricity to system cus-tomers increased 0.5%

over the previous year.

Reflecting moderate sum-mer weather in 1978, resi-dential sales declined 1.1%.

Commercial and industrial sales rose 2.2%.

The peak demand for elec-tricityin 1978 occurred on August17, when system demand reached 2,997,000 kW. This was below the re-cord peak demand of 3,107,000 kW experienced on July 21, 1977, tollowing several days of very hot weather. Under normal weather conditions, the pat-tem of modest growth which has developed over the past few years can be expected to continue, according to the Company's latest elec-tric load forecast. Customer application of conservation measures. combined with improving appliance ef-ficiencies, are among the factors contributing to a slower rate ofgrowth ofelec-tric demand and sales.

Construction of the LILCO/Consolidated Edi-son intertie was com-pleted, and the new line was put Into service in August1978. This major transmission interconnec-tion enables LILCOto re-ceive up to an additional 900,000 kWof power from other utilities for limited periods in the event of an emergency.

In addition to reinforcing system reliability, the new intertie willfacilitate LILCO's purchase of energy from, and sale to, other utilities. Purchases of economy energy in 1978 saved LILCOabout $10.4 million. These savings were passed on to customers through the tuel adjustment clause. Earnings from sales of electricity to other utilities exceeded $1.6 millionin 1978.

Amajor portion of the new intertie consists of a 345 kV cable extending 17.4 miles underground and under Long Island Sound, from LILCO's substation at Glenwood Landing in Nas-sau County to a Consoli-dated Edison substation at Yonkers in Westchester County. An additional138 kV underground extension runs 8.5 miles from Glen-wood to Lake Success, where itconnects to an 8.2 mile line continuing to Con Edison's substation in Jamaica, Queens. With the completion of this intertie project, LILCOis linked to other power grids by four separate interconnections.

Atthe end of1978, con-struction of the Shoreham Nuclear Plant was approx-imately 78% complete, with commercial opera-tion scheduled forthe fall of1980. Operating license hearings conducted by the Nuclear Regulatory Com-mission (NRC) are expected to begin in the third quarter of 1979. The Company is particularly concerned that the hearings be conducted in a timely manner. Every day of delay in operating the plant deprives the Com-pany and its customers of the opportunity to save ap-proximately $300,000 in fuel costs through the dis-placement of expensive foreign oil by nuclear gen-eration. The capital costs of the plant also increase by about $240,000 with each day of delay.

The operating organization for Shoreham, assembled over a five-year period, is essentially in place, and is in the final phase of its training tor operating licenses.

Escalating costs accom-panying the extensive delay of the Shoreham project have been the focus of pub-lic concern, prompting the PSC to order the recent audit of LILCO's major con-struction projects. In analyz-ing the delay and increased costs, Booz, Allen 8 Hamil-ton cited changing regula-tory requirements, inter-ventions in the licensing process, and inhospitable

political and economic cli-mates as key factors largely beyond the Company's con-trol. Concluding that LILCO had developed consider-able strength in its man-agement of the Shoreham project, the report noted some of the contributions of individual departments and organizations within the Company: LILCO's pro-curement procedures were called highly effective. The Shoreham start-up organi-zation was credited with having adopted a unique and innovative approach to structuring the start-up effort.

With the generation of nu-clear power on the LILCO system, the Company ex-pects to realize substantial economic benefits for its customers through the dis-placement of costly foreign oil now used in LILCO's steam electric generating units. When compared to the only available alterna-tive, a coal-fired generating plant, the Shoreham Unit's operation can be expected to produce savings of nearly

$2 billionover the 30-year lifeof the plant. Afterthe first year of operation, nuclear power generated by the 820,000 kW Shoreham Unit willrepresent about 30% of total customer electric re-quirements, reducing LILCO's consumption of oil by about eight million bar-rels a year. In1978, genera-tion of electricity on the LILCOsystem required 21 millionbarrels of oil, primar-ilyobtained from member nations of the OPEC cartel.

Attop, the reactor building at the Shoreham Nuclear Plant, which is currently approaching comple-tion. Below, a view of the refueling area under construction within

.the reactor building.

To provide flexibilityln financing ULCO's share of Nine MllePoint Unit2, the Trl-Counties Construction Trust was established. The new Trust is similar to the Tri-Counties Resources Trust, established in 1977 to finance the Company's in-vestment in nuclear fuel.

Cost and output of the plant, which is being built in Os-wego, New York, by Niagara Mohawk Power Corpora-tion, willbe shared by LILCOand four other New YorkState utilities. The Company's18% share will add 195,000 kW to system generating capability.

Commercial operation is scheduled for 1984.

Tri-Counties Construction Trust willhold titleto LILCO's share of Nine Mile Point Unit

2. This facilityis scheduled to be among the first units ac-quired in the future by Em-pire State Power Resources, Inc. (ESPRI), a proposed generating company to be owned by the investor-owned electric utilities of New York State, which will provide electricity to cus-tomers in the future at least cost. PSC approval of ESPRI is required. Additional fed-eral approvals are also re-quired before ESPRI can be implemented.

Ownership of Nine Mile Point Unit 2 by the Trust, rather than by the Company directly, willfacilitate its transfer to ESPRI. Allex-penditures forthe unit are now made by the Trust.

Funds are obtained by bor-rowing under a10-year,

$300 millionbank credit which allows the Trust to borrow funds through 1986.

When the plant is completed or ifthe unit is transferred to ESPRI, the Company or

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ESPRI willtake title to the unit and repay the Trust for the cost it has incurred to that point. The added option ofgiving the Trust a note with a June 30,1988, maturity in exchange forthe plant has also been provided. Pay-ments under the note will begin no earlier than March 31, 1985. This arrangement willpermit the Company to spread these payments over a period of time if its financing requirements are large in the year in which the transfer of title takes place.

Although the cost ofoil for generating LILCOelectricity in 1978 was lower thanin1977, itstill was nearly six times the cost in 1969-1970. This increase in fuel costs has been the major reason forthe rise in the cost of electricity to LILCOcustomers.

Average Annual Cost of Fuel (Cents per kWh)

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0 0.3 0.6 0.9 1.2 1.5, 1,8 2.ts Final approval was re-ceived from the Nuclear Regulatory Commission to build two nuclear units at Jamesport.

In its deci-sion, issued in December 1978, the Atomic Safety and Licensing Board (ASLB)of the NRC stated it had found that a nuclear facilityat Jamesport would be

'uperior to all available al-ternatives, including coal, purchased power, solar and wind power, refuse4erived power, conservation, and a combination of these.

Earlier in the year, the ASLB had issued a partial initial approval of the two James-port Units, in which it noted that the greatest benefit of the plant willbe reducing Long Island's dependence on expensive OPEC oil:

."The need for providing against a partial or total loss of oil supply is especially acute on Long Island since all of LILCO's generating plants are oil-fired....Unless new generating capacity derived from some other fuel is added to LILCO'ssys-tem, it is overwhelmingly clear...that the conse-quences [ofloss of oil sup-ply]on Long Island would be catastrophic.

In such a situation, the benefits of hav-ing Jamesport would be incalculable."

A reciprocal agreement be-tween LILCOand New York State Electric &Gas Corpo-ration (NYSEG) calls for ownership and capacity of the Jamesport Units to be shared equally by LILCO and NYSEG. In turn, LILCO willassume an equal share of the costs and generating capacity of two 1,250,000 kW nuclear units to be built by NYSEG at New Haven, in upstate New York, in the 1990s. In November 1978, joint applications were filed with the NRC and the New York State Board for Electric Generation Siting and the Environment (Siting Board) for permission to begin con-struction of the nuclear sta-tion at New Haven. Hearings are expected to be initiated before the end of 1979.

State approval of the Jamesport project is still pending. In May 1978, rec-ommendations supporting nuclear power on Long Is-land were made to the Siting Board by two hearing examiners in the proceed-ings. However, in November, the Siting Board announced that it wou!d reopen the Jamesport hearings in order to review the latest electric load forecasts, the subject of need, and associated is-sues. The financial impact of further delay in these pro-ceedings could be substan-tial, since each month of delay increases the total cost of the Jamesport Plant

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by approximately $25 million.

Early in1978, as a result of licensing delays in the Jamesport project, LILCO and NYSEG deferred further engineering and materials procurement except en-gineering primarily in support of licensing appli-cations and construction planning. The Company is prepared to resume James-port engineering activities as soon as the necessary permits have been finalized.

In the Booz, Allen &Hamil-ton audit, LILCO's plans for managing the Jamesport project were said to reflect a fundamentally sound ap-proach to the organization and management of the Company's engineering and construction effort.

Economic advantages of the Jamesport Units over 30 years of operation are con-siderable: lower fuel and operating costs for the nu-clear units are expected to save LILCOcustomers about $10 billioncom-pared to costs forcoal-fired units of equivalent capacity.

The protection of the Is-land's air quality is a key en-vironmental advantage of nuclear power; reduced dependence on imported oil is another important ben-efit. With the addition of Nine Mile Point Unit 2 and Jamesport capacity to that of Shoreham, about 60%

of LILCOsystem electricity willbe nuclear-generated.

Operation of all three nu-clear projects is expected to reduce future foreign oil re-quirements by more than 30 millionbarrels a yeara greater volume of oil than the total currently used for all residential space heating in Nassau and Suffolk Counties.

In1978, LILCOcompleted additional arrangements to secure reasonably priced uranium fuel for its nuclear reactors, and negotiated a financing agreement with Bokum Resources Corporation (Bokum). Under the terms of the agreements, LILCO willpurchase four million pounds of uranium concen-trates in addition to the six millionpounds provided for under a 1976 contract. In addition, LILCOwilllend Hokum up to $51.1 million through 1980 to complete the uranium mine and con-struct a millin Marquez, New Mexico. The loan will be repaid by 1986, with in-terest at10.5% annually. As a result of the favorable pric-ing provisions in the con-tracts, LILCOestimates these arrangements will save its customdrs approx-imately $100 millioncom-pared to projected uranium costs at market prices be-tween now and 1989. PSC approval of the loan was re-ceived in November 1978.

Litigation against Westing-house Electric Corporation continued in 1978, as the Company and nine other utilities continued their ef-forts to obtain the nuclear fuel committed to them in contractual agreements.

In October 1978, the court re-jected the Westinghouse defense of commercial im-practicability. LILCOis con-tinuing the litigation on the question of damages and other matters.

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'arly in 1979, LILCOre-ceived 619,000 pounds of uranium concentrates in the form of uranium hexafluo-ride from Westinghouse.

This completed delivery over two years of 1.5 million pounds, or about16%, ofthe original Westinghouse con-tractual commitments to LILCOat prices substan-tiallybelow the current market, as directed by a court order issued in Feb-ruary 1976.

While LILCOcontinues to seek additional quantities of uranium for the future, the arrangements made by the Company to date have al-ready provided for sufficient nuclear fuel to operate the Shoreham Unit and the two Jamesport Units until at least 1995, or the Shoreham Unit alone for its entire ser-vice life.

Increased availabilityof natural gas In1978 en-abled LILCOto begin sup-plying gas service to new customers, and provide additional service to exist-ing customers who re-quested greater use of the fuel. As the winter of 1978-79 approached, LILCO was confident its gas sup-plies would be more than adequate to meet the de-mands of all firmgas cus-tomers, even in the event of severe weather conditions.

The Company's major pipeline supplier has fore-cast increasing supplies over the next12 months.

Planning the use of avail-able gas supplies during the year enabled the Company to place over13 billioncubic feet of gas in storage priorto the start of the1978-79 heating season, using regu-larlycontracted storage service and LILCO's liquefied natural gas plant at Holbrook.

Other factors serving to rein-force LILCO's expectations of a modest excess of natural gas during the next few years were the conser-vation practices adoptedby many customers, and the natural attrition of gas cus-tomers since restrictions were first imposed. LILCO system sales of gas in1978 were 1.6% below those in 1977.

In June1978, the PSC ap-proved LILCO's petition, filed in late 1977, to expand gas sales by as much as one billioncubic feet of new natural gas load annually.

By the end of the year, LILCOhad committed the total additional gas to resi-dential, commercial, and industrial customers, and had received PSC approval to sell an additional 0.6 bil-lion cubic feet of gas in 1979. The availability of natural gas to the industrial market provided a needed stimulus for Long Island business, since the fuel is essential to many manufac-turing processes.

Based on its evaluation of improved gas supply and the strong demand for natural gas on Long Island, the Company is seeking approval for further substantial sales.

Passage of the Natural Gas Policy Act in 1978 provides forgradually rising prices over a seven-year period, with deregulation of new gas effective January1, 1985. The higher prices are intended to bring gas prices closer to those of other forms of energy, and to stimulate development of significant new gas sup-plies. Other energy legisla-tion passed at the same time willalso affect gas usage.

Because regulations under these laws are still being formulated, their impact on the Company cannot yet be fullyassessed.

The Company continued its efforts to introduce tlmwf-use rates forcer-tain customers. Histori-cally, utilityrates have not re-flected the fact that the costs of producing electric energy vary not only from season to season but also from one part of the day to another. Timewf-use rates are designed to approxi-mate these changes in costs, enabling the cus-tomer to make a choice be-.

tween paying the higher price at a particular point in time or deferring consump-tion until lower rates are in effect. One result of time-of-use rates can be to shift customer demand from peak to off-peak periods.

thereby reducing the need foradditional plant invest-ment. A second result can be to help hold down costs by enabling LILCOto make more efficient use ofexisting electric generating equip-ment.

Consumer Price Index vs. Average Price per kWh of LILCOResidential Electricity (Percent change)

The average price per kwh of electricity to LILCO's residential customers is stilllower today than itwas in1935. In contrast. the consumer price index rose al-most 400% between1935 and 1978.

W Cernrrxner pnce index 9

Resdenriel price per kWh In 1977, the Company intro-duced mandatory time~f-use rates for about 200 of its largest commercial/indus-trial customers. Plans were also made by LILCO, and approved by the PSC, to in-troduce time-of-use rates for residential customers.

However, implementation of this program was delayed in 1978 followinga legal action against the PSC. In De-cember, the New York State Court of Appeals upheld the initial application of LILCO's time-of-use rates to the Company's large commer-cial/industrial customers, clearing the way for LILCO to proceed with implemen-tation oftime-of-use rates for large residential customers as well. Following PSC ap-proval and installation of the special meters required, LILCOexpects the rates will take effect in the fallof1979.

Three experimental pro-grams studying the use of electricity priced at lower rates during off-peak periods were pursued by LILCOIn1978. Two of these willalso provide the Com-pany with important infor-mation about the use of solar energy supplemented by electric backup systems.

AtWading River, five solar homes were completed fora national project being con-ducted by the Electric Power Research Institute (EPRI), withLILCOacting as host utility.Each home is equipped with a different heating and cooling system that combines solar energy and efficient electric heat pumps. With five typical Long Island families now liv-ing in the homes, LILCOwill participate in the monitoring of the systems forthree years to determine their effi-ciency and reliability. The project willinvestigate the practicality of such systems to conserve expensive and irreplaceable fossil fuel resources.

One type ofoff-peak electric energy rate introduced by LILCOin 1977 offers cus-tomers lower prices forelec-tricityused from12:00 mid-night to 7:00a.m. forstorage purposes, such as charging batteries of electric vehicles or heating water in storage.

Using this rate, a new dem-onstration project studying thermal energy storage is being conducted by LILCO, the U.S. Department of Energy (DOE), and the Em-pire State Electric Energy Research Corporation (ESEE RCO).

LILCOhelped its customers con-serve energy and save money by mailing to them the device pic-tured above, which restricts the flowof shower water. By reducing their use of hot water, a familycould save from $20 to $100 a year on water heating bills.

Two experimental systems for space heating or cooling willbe studied in the homes of 100 Long Islanders in 1979. During off-peak periods at night, the units use electricity to heat or cool water, which is then stored in highly insulated tanks for use during the day. LILCO willmonitor the systems re-motely by radio as it tests the efficiency of the units under various operating conditions.

A third project announced by the Company in October 1978, was developed en-tirely by LILCOto explore the potential of solar water heating. Six hundred Long Island families willbe cho-sen to participate in the program, the largest of its kind in the nation. The domestic water heating sys-tem has been designed to meet the needs of a typical famiiyof four or five, and to take advantage of LILCO's off-peak electric energy storage rate. When the sun is shining, hot water is pro-vided by solar energy; at night and during extended cloudy periods, the volume of water in the storage tank is automatically heated by a backup electric element.

The excellent response of Long Islanders to the an-nouncement of the program brought the Company more than 2,000 customer in-quiries. Because of this in-terest, LILCOrevised the target date forcompletion of the installations from three years to 18 months. In addi-tion to fuel savings, custom-ers purchasing the systems willqualify forthe new in-come tax credits specified in the National Energy Act, amounting to 30% of the cost of solar system equip-mentin the case of the LILCOsystem, more than

$500. Monitoring of the sys-tems by LILCOwillprovide information on operating data and cost.

Cost of Energy for Home Heating on Long Isfand1968-1978 (Percent increase) 50 Over the past 10 years, the cost of a gallon of home heating oilon Long Island has more than tri-pIed, increasing by 220%. By comparison, during the same period, the cost of a kilowatt-hour of electricity forhome heating has increased 161%, and the cost of gas per mcf has risen142%.

>p(p + 'A r

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.Responding to the worst storm emergency ln the Company's history, LILCO employees worked long hours to restore service during the ice storm of January1978.

More than 340,000 electric customers were affected by the storm.

Heavy icing conditions combined with severe winds to cause substantial tree destruction and atten-dant electric line damage.

The restoration effort re-quired 5,455 people, of whom 4,184 were LILCO personnel and retirees, with the remaining assistance provided by other utilities and contractors. The dedi-cation of LILCOemployees was demonstrated to an extraordinary degree in their restoration effort performance.

During normal operations, the Company's emphasis on productivity has done much to help keep the number of employees al-most constant from year to year. Over the past 20 years, 342,300 electric and 74,600 gas customers have been added to the LILCOsystem, and the amount of each energy form supplied has tripled. Despite these greater demands, today only 4.70 employees are re-quired to serve 1,000 cus-tomers, whereas in1958 the number of employees per 1,000 customers was 6.94.

The difference represents a savings in employee wages and benefits ofover $70 mil-lion a year.

With the installation of the Performance Management System (PMS) in additional areas of the Company in 1978, more than 40% of all LILCOemployees are now utilizing the system. Pro-ductivity improvement is achieved through PMS by setting job standards, measuring performance, and providing prompt feed-back to personnel. The Booz, Allen 8 Hamilton audit concluded that LILCO's work force productivity management system is ad-vanced by utilitystandards.

Integration of PMS with the operating, accounting, and customer relations functions willcontinue in1979.

Under LILCO's Affirmative Action Program, efforts to promote equal employment opportunity continued in 1978. Since the program was initiated in1966, the number of minorities and women inmanagement po-sitions has increased almost fivefold.

In November1978, the Company announced lt was participating as the largest contractor In a na-tional electric vehicle demonstration program being conducted by the DOE. Through a cost-sharing arrangement with the federal agency, LILCO willobtain 40 electric vehi-cles in three different mod-els, to be used for meter reading, general transporta-tion, and employee van-pooling. These willbe added to the existing fleet of 12 electric vehicles. The Company willalso arrange for the sale of another 20 electric vehicles to Long Is-land organizations. The goal of the project is the de-velopment of the electric vehicle as an alternate means of transportation.

Late in 1978, DOE selected LILCOto participate in a second phase ofthe electric vehicle program, which would involve the addition of another 50 electric vehicles to the program. A decision on the Company's participa-tion willbe made following completion of negotiations with DOE.

Electricity generated ln the process ofsolld-waste disposal entered the LILCOsystem forthe firsttime ln the fall of 1978. Designed to process 2,000 tons ofsolid waste per day, the Hempstead Re-sources Recovery Plant, located in the Town of Hempstead, is the largest refuse-townergy facilityin the country. Reusable ma-terials such as metal and glass are recovered for re-sale. Steam produced from the combustion of non-recoverable materials is sold to LILCOand used to generate electricity in two LILCO<wned on-site tur-bine generators with a capability of 32.000 kW. The-price paid for the steam is related to LILCO's average system fuel cost. The plant is expected to be fullyoper-ational in 1979.

LILCOparticipated in this project as a mean5 of help-ing the area solve a serious solid-waste disposal prob-lem. There are related con-servation benefits as well, since every kilowatt-hour of electricity generated with steam produced in the refuse-treatment process displaces a kilowatt-hour which would have been produced using fossil fuels.

The Company continued discussions in 1978 with other municipalities inter-ested in the possibilities of linking solid-waste dis-posal and electric gen-eration.

10

gppgjgi LILCO'scontinuing en-vironmental protection efforts won the Company a Phillips Award for Pro-tection of the Physical Environment. The award is given annually by the C.W.

Post Center of Long Island University to corporations which have shown an un-usually high awareness of their social responsibilities.

LILCOwas cited in 1978 for high environmental stan-dards and its programs to protect air and water quality; for reducing noise levels near system facilities; for re-covering vanadium from the waste of oil combustion; for land use and beautification efforts; and forcooperation with environmental groups.

The first phase of a re-search and development project exploring the feasibility of an auto-mated distribution sys-tem was completed by LILCOin1978. LILCOis serving as the host utilityin the new EPRI project, which entails a field demonstration of a radio communications system for remote control of electric distribution power lines. Pole-mounted radio control devices are being installed which can detect a power disruption along a distribution line and relay the information to a central computer. The radio control device isolates the problem so that service can be re-stored immediately to cus-tomers not directly affected by the damaged line. LILCO expects the system willbe operational in1979, at which point it willbegin a one-year trial period.

Programs to protect air and water quality were ex-panded in1978, as LILCO began construction of waste water treatment facilities. Virtuallyall the liquid industrial waste at LILCO's five fossil-fueled steam electric generating stations willbe processed by these facilities. Comple-tion of the treatment sys-tems at the Glenwood and Far Rockaway Stations is scheduled formid-1979.

The larger Northport, Port Jefferson, and Barrett Sta-tions willhave finished sys-tems approximately a year later. These systems qualify for financing through tax-exempt pollution control securities similar to those sold in 1976.

LILCO's efforts to preserve the environment reflect a commitment of long stand-ing. Since 1972, the Com-pany has operated what was then the first automatic air quality monitoring sys-tem in the country, its En-vironmental Quality Control System (EQUAC). By main-taining a continuous read-ing of ambient air quality, the system enables LILCOto burn lower-cost, high sulfur oil routinely, and provides for rapid switching to low sulfur fuel when air quality readings indicate sulfur dioxide values are ap-proaching established limits.

Operation of the EQUAC system at LILCO's two power stations in Suffolk County continued through 1978, with air quality meet-ing all applicable standards by a wide margin. Fuel cost savings to LILCOcustomers

\\

I Above, nesting platforms are being installed on salvaged utility poles to encourage the breeding of ospreys on Long Island, and protect electric service reliability.

In the past, the birds nested on poles supporting electric wires.

causing service interruptions and sometimes killingthe birds. The program is a joint effort of LILCO and the New York State Depart-ment of Environmental Conservation.

achieved through the use of EQUAC amounted to $17 millionlast year. Savings realized by customers since the system was introduced total $170 million.

The Company's application to extend the EQUAC sys-tem to generating plants in Nassau County was ap-proved in 1978 by the New YorkState Department of

~Environmental Conserva-tion (DEC). Federal ap-proval was withheld by the Environmental Protection Agency (EPA), however, pending the resolution of certain technical questions.

The Company anticipates a final resolution of this matter in 1979. Atcurrent oil prices, the potential fuel cost sav-ings from EQUAC operation in Nassau County are esti-mated to be at least $8 mil-lion annually.

Financial Analysis 0

0.5

. 'l.o t.s 2.0 2.5 3.0 3.5 4.0 4.5tt Electric System Expenses (Cents per kWh)

LILCO'soperating and mainte-nance expenses excluding fuel

'nd purchased power per kwh of electricity sold have increased only 66% since1968. These are the expenses most subject to management control, but repre-sent the smallest component of cost. By contrast, the cost of fuel and purchased power per kwh, the largest cost component, have soared 493%. Taxes per kwh have risen 92%.

~

Operations anent maintenance

~

Total taxes R

Fuel anrt purctrased power Dividends Payment Dates Feb.

1 May 1 Aug. 1 Nov. 1 Paid per Share 1978 1977 4(84 39 p

42Va 4Ã'i 42Va 40V4 42 Mt 40V4 Total Paid

$1.68V4

$1.61 V4 The Company estimates that 70% of the common stock dividends paid in 1978 represented a return of capital for federal income tax purposes and, therefore, may not be taxable as ordi-nary income. Such esti-mates are subject to audit by the Internal Revenue Service.

Dividends on all series ofthe Company's preferred stock were paid quarterly based on the stated annual divi-dend rates as shown on page 31.

1978 Results Calendar year earnings were $2A4 per share com-pared with$2.59 in 1977.

The average number of common shares outstand-ing was13% higher in1978 than in the prioryear.,

The quarterly dividend on the common stock was raised in March1978, to 42t/2'er share. This was equivalent to a 7t. increase in the annual rate to $1.70 per share. The dividend rate has been raised in 19 of the last 20 years. The quarterly dividends paid in 1978 and 1977, respectively, are shown below:

Rate Increases On January17,1978, the Public'Service Commission (PSC) authorized perma-nent electric relief of $59.7 million, including $15.0 mil-lion previously granted on an interim basis effective August1, 1977. As a part of this rate action, the PSC al-lowed the Company to in-crease the amount of con-struction work in progress (CWIP) included in rate base from $100 millionto

$300 million, thereby im-proving internal cash gen-eration for the coverage of fixed charges. The PSC also granted the Company an additional electric rate in-crease of $4.9 millioneffec-tive August 24, 1978, to offset most of the in-creases resulting from the negotiation of new contracts with the Company's local labor unions.

Both the $59.7 millionelec-tric and the priorgas rate increases were less than those requested and needed to support our con-struction program to meet the future energy needs of our customers and to pro-vide an adequate return to our shareowners. Accord-ingly, on May 31, 1978, LILCOfiled rate increase requests totaling $171.0 mil-lion, comprised of a $147.1 million,or 18.5%, increase in electric rates and a $23.9 million,or 13.1%, increase in gas rates based upon forecasted sales forthe 12 months ending June 30, 1980.

The electric and gas rate in-creases requested are de-signed to offset increased costs due to inflation and to improve earnings perfor-mance. Additionally, the higher electric rates are de-signed to improve the qual-ityof earnings and internal cash generation. Further, the electric relief requested is needed to permit im-proved service quality as well as to provide an adequate return on addi-tional plant placed in ser-vice. The Company has requested a 14.3% return on average common equity, compared with the 13.3%

grantedby the PSC, and the inclusion of an additional

$400 millionof CWIP in rate base.

The PSC willgive considera-tion to the impact of the re-cently issued wage and price guidelines in determin-ing the increases to be granted. By law, decisions must be rendered as to the amounts of both the electric and gas rate increases by April28, 1979.

Gas System Expenses (Dollars per mcf)

LILCO'soperating and mainte-nance expenses per mcf of gas sold have risen only 70/o over the last 10 years. Since 1968, the cost per mcf of fuel has climbed 147%

while taxes per mcf have risen 119/o.

II operations ana rnairxenance II Total taxes Q

Fuel 0

0.50 1.00 1.50 2.00 2.50 3.00 53 50 Electric Gas

$55.3

$93.3 19.5 6.2 Total

$74.8

$99.5 Electric revenues in 1978 reflect most of the $59.7 millionelectric rate increase effective January17, 1978, including the $15.0 million effective August1, 1977, and approximately one-third of the $4.9 million rate increase effective August

24. 1978. Changes in elec-tric revenue were also influ-enced by changes in sys-tem sales of electricity (excluding sales to other utilities) which were 0.5%

higher in 1978 than in 1977.

System sales in1977 were 3.2% above 1976. KWh sales to power pools were up128.3% in1978over1977 and 38.4% in1977over 1976.

Changes in gas revenues reflect the $9.4 millionrate, increase effective August 16, 1977, the increased cost of gas and changes in sys-tem mcf sales of gas which in1978 were1.6% below those in1977. Systemmcf gas sales in 1977 were 1.1%

below1976. The decline from 1977 to 1978 was due largely to tower sales to in-terruptible customers equipped to use alternate fuel.

Revenues Revenues totaled $898.9 million in 1978. Electric rev-enues were $738.3 million.

Gas revenues were $160.6 million. The increases from prior years were:

Re Venue e pWSons ot IXIIlars)

Increase or(Decrease)

Electric fuels and purchased power Gas fuels Other operations and mamtenance expenses Total

$ 4.3 $52.4 10.5 5.4 10.8 9.5

$25.6 $67.3 The average costs of fuel for electric generation and gas sendout were as follows:

Average Fuel Costs For electric eneration-million Btu Forgassendout 4/mcf 1978 1977

$1.87 $1.98

$1.58 $1.36 The changes in electric and gas fuel costs were offset in each year by changes in revenues obtained through the appropriate fuel adjust-ment clause.

Operations and Maintenance Expenses Operations and mainte-nance expenses increased due to higher wage rates and other costs reflecting in-flation. Changes in electric fuels and purchased power and gas fuels expense between periods are influ-enced by changes in ener-gy sales (see Revenues).

and fuel prices.

Operations and Maintenance Expenses (Malone eloosars)

Increase or (Decrease) tram Prior Year 1978 1977 Operations and mainte-nance expenses excluding all fuels and purchased power increased $10.8 mil-lion, or 7.8%, in 1978 and

$9.5 million,or 7.4%, in 1977, largely as a result of higher payroll and employee benefit costs in both years. The increase in 1978 was limited in part be-cause some normal opera-tion and maintenance ac-tivities were not performed, in order to divert manpower and funds to restoration and cleanup necessitatedby the severe ice and snow storms during the first quarter of 1978. The costs of this res-toration were not charged to operating expenses.

Por-tions of such costs have either been recovered through insurance or charged to the Company's storm reserve; the balance of these costs await final disposition in the pending rate case.

Depreciation and Taxes Increases in depreciation result from the addition of plant in service. Increases in operating taxes are princi-pally due to the addition of new plant and increased property tax rates, as well as higher state and local gross income and franchise taxes on increased revenues.

Changes in federal income taxes are due principally to variations in net income be-fore income taxes, utilization of investment tax credits, and items capitalized for financial statement pur-poses that are current de-ductions on the Company's tax return. (See Note 7 of the Notes to Financial Statements.)

Depreciation and Taxes (MS(>ons of collars)

Increase or (Oecrease) trom Prior Year Depreciation

$ 6.1 $ 2.3 Operating taxes 9.6 9.5 Federal income taxes 12.0 1.1

Common and Preferred Stock The common stock, the preferred stock $100 par value Series B, E, I, J, and K, and the preferred stock $25 par value Series 0 and P of the Company, are traded on the New YorkStock Exchange. Trading in the Preferred Stock, $100 par value, Series N.

ended on December1,1977, on the New YorkStock Exchange.

,Common Stock Preferred Stock Series B-5%

Series E4.35% Series I-5Ve%

Series J4.12% Series K-8.30%Series N-13% Series 042.47 Series P42.43 High Lcw High Low High Low High Low High Low High

.Low High Low High Low High Low 1977 1st Quarter 2nd Quarter 3rd Quarter 4thQuarter 19Ya 17T/6 2(AS 17T/6 20 1%5 19Ya 17$/e 57 55 51f)S 49%

89 85 93Va 89 96Va 92IS 131 Va 125Vi 28 27 28 26T/6 58 55 50Va 47 95 84Vs 95 89 95 91 130 125'8VS 26IS 27 VS 26Vi 59VS 56 51 48Vi 94Vi 88Vi 95Va 90'9Vi 92Vi 131 119 '8Vi 27Yi 28%

27VS 58 55Vi 51 49 91 87 93 90 96Vi 91Yi 122 120 28 2NS 28 2IRS 1978 1st Quarter

'-r2nd Quarter 3rd Quarter 4th Quarter 19Va 17Vs 57 54 4IAS 45T/s 90 86 92Y<

87 94 89Yi 27SS 26 27$/e 26 19Vi 18Yi 52Vi 50 47Yi 44Ve 92 88Yi 86Vs 80 92 80 27 24%

26Va 24Vi 19$/e 18hh 54 52 48Vs 43 92Yi 91Yi 90 81 93Ys 83 27Ve 24Ve 27 25 18T/6 17 52Yi 49 44Vi 43 85Vi 83 85 77 89)S 80 26T/s 25Vs 26Yi 23 The Series D-4.25% Preferred Stock is traded in the over-the-counter market. We have been advised of scattered trading at prices ranging between 6391k and $46rir per share during 1976. The Series F H, k, M, Q, and R Preferred Stock are held privately. Alloutstanding shares of Series N Preferred Stock were redeemed on December 2,1977.

. AFC and Other Items

" 'ecord levels of construc-tion and associated financ-

,ing, which are expected to continue in1979, coupled with higher costs of capital,.

have resulted in increases'in interest charges, preferred stock dividend require-ments, and allowance for funds used during construc-tion (AFC). The increases in interest charges and pre-ferred stock dividends re-sult primarily from the sale of additional securities. Un-der PSC rules, the record-ing of AFC, which is not an item of current cash income, is an accepted accounting practice de-signed to capitalize the cost of money invested during the construction period in a manner sim-ilar to construction labor and materials.

The amount of AFC fluc-tuates from period to period with changes in the cost of money, the level ofconstruc-tion, the amount ofconstruc-tion work in progress (CWIP) included in rate base, and modifications in regulatory policy. Accordingly, AFC would be expected to in-crease in conjunction with the Company's continuing construction program and to decline when major generating units begin commercial operation. The average amount of CWIP allowed in rate base was

$288A millionin1978 and

$125.1 millionin 1977. The increase in the amount of AFC in 1978 from prior periods has been limited as a result of including addi-tional amounts of CWIP as well as the Northport 4 elec-tric generating unit, which went into commercial opera-tion in December1977, in rate base.

The increases in AFC;which resulted primarily from fi-nancing associated with in-creases in the level of con-struction and, commencing in 1975, compounding of AFC, contributed substan-tiallyto income forcommon stock in 1978 and 1977.(See Note 1 of Notes to Financial Statements.)

Dividends declared on the common stock of the Com-pany in1978 and1977 amounted to approximately 70.7% and 63.8%, respec-tively, of income forcommon stock. Such income in-cludes earnings attributable to AFC.

AFC and Other Items (InCludeS TruStS) tMrsrons orrfoifars)

Increase or (Decrease) from Prior Year Interest charges (ex-cluding AFC related to borrowed fun')

$14.9 $13.3 Preferred stock dividends 3.0 2.9 AFC (including AFC related to borrowed funds) 3.9 15.1 14

The number of LILCOcommon shareowners increased13,300 in 1978 to 143,300. Since 1968. the number of shareowners has risen over 70%.

Common Shareowners at Yearwnd (Thousands) kaXSZEA KEG~~

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75 100 125 150 Financing Trusts In September 1977, the Company entered into ar-rangements with Tri-Counties Resources Trust forfinancing its nuclear fuel.

These arrangements give the Company extensive financing flexibilitythrough-out the nuclear fuel cycle, An initial$75 millionfive-year bank revolving credit agreement was established by the Trust. For the long term, approval of the PSC has been obtained for in-debtedness of the Trust up to $200 million.

In August1978, the Com-pany entered into arrange-ments to finance its 18%

share of the Nine MilePoint Unit 2 through Tri-Counties Construction Trust. The Company's contract with the Construction Trust re-quires all the obligations to be repaid after the unit be-comes operational. A$300 millioncredit agreement, which willmature not later than June 30,1988. has been established by the Trust.

Both Trusts may make cer-tain investments, including investments in LILCOlong-term promissory notes; to the extent their available credit lines are not required to directly finance nuclear fuel or plant assets held by the Trusts. In addition, the-Trusts may borrow funds from LILCO.Additional in-formation on the operation of the Trusts is provided in Note 4 of the Notes to Finan-cial Statements.

Capital Requirements LILCO's capital require-ments, including AFC, to-taled $415.8 million in 1978:

Mortgage bonds Preferred stock Common equity

$ 75.0 124.9 Total Permanent Financing $199.9 In addition, Tri-Counties Resources Trust and Tri-Counties Construction Trust provided a total of$96.5 mil-lion through the Trusts'red-it agreements with lending institutions. This amount in-cludes $9.1 millionof the

$24.6 millionloan outstand-ing byLILCOto Bokum Re--

sources Corporation. (See Note 6 of Notes to Financial Statements.)'he use of short-term debt was significantly reduced in 1978. No short-term debt was outstanding at the end ofeach ofthe last four years.

(See Note 5 of the Notes to Financial Statements.)

Capital Requirements (Includes Trusts) (MiNionsoiooliars)

Construction and nuclear fuel expenditures Electric property

$381.9 Gas property 8.1 Common property 4.0 Nuclear fuel 21.8 Total Capital Requirements $415.8 Permanent financing in 1978 totaled $199.9 million, com-posed of:

Permanent Flnancfng (MSrisrrS Oi r)OSarS)

LILCO's capital require-ments are currently esti-mated at approximately

$456 million in 1979. Exter-nal financing is expected to total $212 million,and an additional $127 million is es-timated to be provided through the Trusts. An addi-tional $18 millionis ex-pected to be provided in 1979 through the Trusts to-increase LILCO's loan to Bokum. For the years 1979 through 1983, inclusive, LILCO's capital require-ments are estimated at $2.1 billion, including $0.3 billion to repay maturing securities principally in 1981 through 1983, with $0.7 billion to be provided from external sources and another $0.5 billionto be provided through the Trusts.

Shareowners'nvestment Of the total $111.3 millionof income for common stock,

$32.7 million,or 29.4%, was reinvested in LILCOfor shareowners. Atthe end of 1978, common equity rep-resented 38.6% of total capitalization compared with 35.5% at the end of 1977. These ratios exclude.

the Trusts from capitaliza-tion. Aiding in this increase was the conversion of 29,400 shares of Series I

Convertible Preferred Stock. Over 60% of all the Series I shares have now been converted. The total increase in common equity represented 69.6% of the total increase in capital-ization.

In 1978, LILCOholders of common stock invested

$13.4 millionof their divi-dends and additional cash in new common shares through the Company's Au-tomatic Dividend Reinvest-ment and Optional Cash Payment Plan. Over 21% of LILCOshareowners cur-rently participate in this Plan, investing about14% of the total common stock divi-dends and additional cash equivalent to up to 5% of the total dividends paid quar-terly. Since its inception in December 1972, shareown-ers have invested $41.3 mil-lion in LILCOthrough the Plan. Nonparticipating common shareowners may obtain a copy of the current prospectus describing the terms and conditions of the Plan in full, including the op-tional cash feature and,an 15

authorization form forpar--

ticipation, by writingto Long Island Lighting Company, Investor Relations Division, 250 Old Country Road, Mineola, New York 11501.

Authorization forms from nonparticipating share-owners desiring to invest their May 1, 1979, dividend must be received no later than April20, 1979.

LILCOparticipated actively with other companies in 1978 in forming the Commit-

" 'tee on Capital Formation through Dividend'Rein-vestment. The purpose of the Committee is to seek federal legislation that would permit the deferral of payment of personal federal income taxes on dividends

,, reinvested in new issue

,,common shares under such plans as LILCO's. Passage of such legislation would provide an incentive for ad-ditional capital formation.

This would be particularly beneficial to industries such as utilities that are highly capital intensive. LILCOwill continue to assist the Com-mittee's efforts in 1979.

Directors and Officers Three new Directors were, elected in1978. In Febru--

ary, WilliamJ. Casey and Winfield E. Fromm were.

elected Directors to filltwo vacancies existing on the Board at that time. In De-cember, WilliamJ. Cata-cosinos was elected a Di-rector to fillthe vacancy created by the resignation from the Board of Directors, effective November 30, 1978, of Robert G. Olmsted.

Mr. Olmsted's career with LILCOspanned almost half a century. He played a vital role in the direction of the fi-nancial affairs of the Com-pany as it rapidly developed and expanded during Long Island's growth years. His father, George Olmsted, was LILCO's first president after the Company was incorporated in 1910.

In May, Matthew C. Cordaro was elected Vice President for Engineering. Dr. Cor-daro, then 34 years of age, had supervised all environ-mental matters for LILCO since 1971 as Manager of Environmental Engineering.

Errol W. Doebler, former'hairman ofthe Board of Di-rectors, died on December 16,1978, at the age of 86.'-

Mr. Doebler began his 47-,

'ear career with the Com-pany in 1927, as a commer-cial manager. He was named a Vice President in 1941 and Director of the Company in1945. In1953, he rose to President and Chief Executive Officer. Mi.

Doebler retained his title of Chief Executive Officer when he became Chairman of the Board in 1957. He served as Chairman until 1968, and then as a member of the Board of Directors until his retirement in 1973.

As part of his lifelong com-mitment to community ser-vice, Mr. Doebler was also an influential figure in many Long Island organizations.

Insurance The Company has restruc-tured its Directors'nd Offi-cers'iability insurance with the National Union Fire In-surance Company and the Continental Casualty Com-pany. These policies pro-vide the Company with coverage forwrongful acts by Directors and Officers as well as indemnification for the Company and its Direc-tors and Officers. The total annual premium for this coverage, which became effective December 31, 1978, is $60,220.

The Company has obtained a fiduciary liabilitypolicy underwritten by the National Union Fire Insurance Com-pany. This policy provides liabilitycoverage for the Company, its Directors and Officers, and any employee deemed to be a fiduciary or trustee, for any alleged

'reach of fiduciary liability under the Employee Re-tirement Income Security Act of 1974. This coverage was renewed effective April 1, 1978, at an annual pre-mium of $11,400.

No payments have been made under any policyof indemnification insurance issued to the Company for Directors, Officers, or fiduciaries.

Managing Energy in a Changing World

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The electric and gas utility industries are in the midst of an unheralded but funda-mental revolution. During the four decades between the passage of the holding companies legislation in the early1930s, and the Arab oil embargo in late 1973, the utilityindustries led what in retrospect was a rather hal-cyon existence.

In the elec-tric industry, the gradual in-troduction of economies of scale, new technology, and cheaper fuels made possi-ble substantial decreases in the cost of electricity and substantial improvements in the quality of service to cus-tomers. In the gas industry, the introduction of natural gas similarlymade available an inexpensive and reliable source of energy. The greatest problems faced by utilities were those of keep-ing up with the demands of an expanding economy for a secure energy base.

With the arrival of the 1970s, a rather sudden and mas-sive ferment unsettled the energy world. Underlying assumptions were chal-lenged, technology itself became a controversial is-sue, predictability was re-placed by uncertainty, the pace of change quickened, and a quiet but efficient util-ity industry found itself on the cutting edge of controversy.

Nowhere has this contro-versy been more apparent than in the licensing and construction of new facilities. By the early 1970s, electric generating plants had become a symbol of progress in consumer-oriented technology: they incorporated vast economies of scale, sophis-ticated environmental con-trols, and an ability to use cheaper fuels. Despite these advantages, or perhaps because of them, these facilities have be-come the focal point of pub-lic controversy over economic growth, the envi-ronment, and the shape of our economy. This con-troversy, together with the complexity of the plants themselves, has stretched the lead time for an electric generating plant from about five years to as many as 15 years, or more.

Unrestricted "public par-ticipation" by a small but vocal minority in the decision-making process has resulted in mammoth licensing proceedings, stretching over many years and embodying thousands of pages of expert tes-timony. The proceedings themselves have become a stage fora modern morality play in which social and technical issues are acted out. In this drama, the utility is cast as the representative of the economic "establish-ment," while the opponents see themselves as harbin-gers of an energy utopia in which conventional facilities are replaced by "soft tech-nologies," such as wind, so-lar, and biomass. These proceedings consume large quantities of human and financial resources, and have spawned a variety of ancillary consulting in-dustries. They require very large commitments by the utilities for environmental studies and fundamental design and engineering work. Equally important, they vastly complicate the energy planning process.

Energy on Demand Electricity and gas are there when we need them, and we tend to take for granted this availability: the flickof a switch or the turn of a knob is deceptively simple. Yet the energy supply which supports our society Is pro-duced and delivered by a complex network of facilities, controlled by highly skilled people.

A unique characteristic of electricity also suggests some of the complexity in-volved ln Its production and u'."delivery: Itcannot be stored,

'yet it must be instantly avail-

",'ble to all who want It In

~ whatever quantities they demand. Plans for utility construction are based on this need to meet the maximum level of demand for electricity at any point in time.

I.'In operating an electric sys-

';tem, a principal objective Is

'.to use facilities in the most economical manner possi-ble. The newest generating plants are also the most effi-cient; these are used to pro-vide base load generation.

As the level of consumer demand rises, additional units are automatically acti-vated. In recent years, this principle of "economic dis-patch" has been greatly ex-tended through Intra-and interstate coordination by area power pools.

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Planning to Meet Demand.

In the days when utility facilities could be con-ceived and builtwithin a few years, demand forecasts over longer time periods were not particularly crucial.

With lead times extending up to 15 years or more, how-ever, enormous burdens began to.fall on energy planners. Moreover, at the same time that the planners were called upon to extend

,,-qtheir time periods, the fore-

-casting work itself became

-.infinitelymore complex.

.:.'The simple extrapolative approach that had pro-duced reasonably accurate forecasts in the past, based largely on historic trends, was suddenly inadequate,

as powerful new influences

-,-:='on energy use emerged.

..-'Rapid increases in the cost

'" of electric service following the oil crisis, and curtail-ment of natural gas service as a result of shortages, slowed the pace of demand growth. Long-established consumption habits were modified, and planners had to calculate for effects of conservation practices and price elasticity, both insig-nificant factors in pre-embargo forecasting.

Further complicating the forecasting task were such constraints on demand growth as steady improve-ment of appliance effi-ciencies, and the gradual implementation by utilitiesof timewf-use rates reflecting marginal-cost pricing principles.

Load forecasting method-ologies capable of incor-porating these new ele-ments into short-and long-range energy scenarios were developed by utilities in a remarkably short time.

Using sophisticated analyt-ical tools such as economet-ric models and sensitivity analyses, utilityplanners were able to project the likelyimpact of individual variables on peak demand and energy use; by apply-ing simulation techniques, they were further able to generate every conceivable combination of events and construct a probability dis-tribution of the results.

Planners of system facilities developed decision-making models with similar intent, varying factors such as construction schedules, capital costs, fuel costs, and reliabilitylevels to determine the probable consequences of a wide range of future conditions and their likelyimpact on system in-tegrity. Essentially, they found that many uncertain-ties could be explicitlyiden-tified, then quantified in the form of probabilities.

The Environment. As appropriate skilis were de-veloped to suit the new complexity of the planning function, other areas of util-ityoperations were assum-ing a new importance that demanded similarlyeffec-tive action. Concern for the environment, exaggerated to some extent through its promotion as a fashionable social cause, emerged dur-ing the early1970s as one of the most highly publicized subjects requiring utilities'ttention.

Beginning with the National Environmental Policy Act in 1970, federal and state legislators produced a pro-fusion of environmental reg-ulations, most of which were revised and expanded with astonishing frequency over the next several years. Of-ten, there was little indica-tion of coordination among the various regulatory agencies.

In the late 1960s, for example, an awareness of deteriorating air quality, among other things, led to the conversion of some generating units from coal to oil burning. Then, in 1977, federal authorities initiated attempts to convert many of the same units back to coal in view of its far greater domestic abundance than that of oil. Some utilities pointed out, however, that the resumption of coal-burning would endanger the very air quality goals which had led to the abandonment 20

of coal as a primary fuel in the first place. Conflicts such as this were one result of the fragmentation and proliferation of agencies holding authority over one or more aspects of utility operations.

In the matter of facilitysiting, the familiarcry of "not in my backyard" was now framed in the new language of "the environment." Controversy over environmental impacts produced long and costly delays in the regulatory process. as utilities pre-pared extensive studies to demonstrate environmental compatibility as well as pub-lic need. The requirement of an environmental impact statement in many states added a minimum of two years to all construction lead times for fossil-fueled plants, while in the case of nuclear units, the period was extended even further by additional federal reg-ulatory requirements.

Against this atmosphere, utilities approached the task of clarifying the new en-vironmental requirements, placing special emphasis on determining the most ef-ficient and economical methods of compliance.

Some companies, including LILCO, recognized that en-vironmental regulations would quite likelybecome a permanent and substantial operating priority in the years ahead. LILCOmoved early to establish an en-vironmental engineering department in 1969, cen-tralizing its organization in order to serve all operating areas. In]972, the Com-pany was the first utilityto design and install an elec-trostatic precipitator spe-cificallyfor use on an oil-burning unit.

Installing pollution-control equipment entailed sub-stantial capital investment by the utilities. While they readily acknowledged the desirability of improving air and water quality, they pointed out that the degree of incremental improvement achievable at any point should be carefully weighed against the cost of achiev-ing it. In certain states, utilities'osts to meet en-vironmental standards in-cluded the purchase of ex-pensive low sulfur oil from OPEC nations. LILCOwas able to avoid the full poten-tial economic impact of these soaring oil prices while maintaining air quality through the operation of its Environmental Quality Con-trol System (EQUAC). This advanced air quality mon-itoring system the first of its kind in the countryen-abled the Company to burn less expensive, high sulfur oil at two generating plants in Suffolk County.

Fuel Cost and Supply.

Escalating fuel costs under-scored the problem of diminishing domestic sup-plies of oil and natural gas, and presented utilitieswith a twofold challenge: to sub-stantially reduce reliance on expensive and politically uncertain foreign oil, and to achieve greater control over fuel availabilities as well as costs. The substitution of nuclear power foroil-fueled electric generation was clearly the best means of accomplishing the first ob-jective over the long term in many areas of the country.

Given the extensive lead times forconstruction of nuclear plants, however, utilities sought other means of achieving immediate fuel economies.

Transmission interconnec-tions were usedby utilitiesto considerable advantage.

They enhanced system re-liability,since emergency power could be supplied during an outage; and they enabled utilities to exchange power under purchase agreements to their mutual benefit. In LILCO's case, economy energy could be purchased from other utilities which produced it at lower cost through the use of hydro-electric or nuclear genera-tion. Four separate inter-connections, three of which were completed during 21

A Commitment to Service Their Company's service is vital, and the community they serve is their ownto LILCOmen and women, these are two good reasons to take pride in their Job performance.

More than 5,400 people are working to provide gas and electric service across the 1,230 square miles of LILCO'sservice territory.

A continuing objective of the Company is to make the most efficient use of all per-

~i=sonnel, regardless of chang-

,;ing work loads. Many LILCO

<<.,personnel have been trained,

= -,inavarietyofskills,enabling

- - them to perform both gas and electric functions as needed.

Perhaps the most visible employee effort is service restoration after a major

, 'storm. Line crews work

='> i16-hour shifts, often in se-

="vere weather conditions.

'Management and clerical personnel direct restoration activities, conduct field sur-veys of system damage, and staff emergency call boards to take customer calls around-the-clock. Every day, under less heroic condi-tions, LILCOpeople execute unheralded but vital pro-grams, such as preventive maintenance of LILCO facilities, with equivalent dedication and skill.

22

23

a the1970s, now linkLILCOto other power grids.

Throughout the State, plan-ning among utilities has been coordinated to achieve greater operating efficiency since the forma-tion of the New York Power Pool in 1970.

To one degree or another, all utilityfuel sources were touched by uncertainty dur-ing the 1970s. Natural gas curtailments by pipeline suppliers in 1971 led dis-tribution companies such as LILCOto refrain from con-necting large new custom-ers. Yet planning by the Company well in advance of curtailments proved ade-quate to meet the needs of all existing firmgas custom-

,,;,. ers, even during the severe

~~, winter of 1976-77. Construe-

. '; tion of a liquefied natural

"" gas plant by LILCOhad been completed just before the first curtailment; other arrangements, such as purchased storage con-tracts with pipeline sup-pliers, put the Company in a relatively secure position during the period of nation-wide gas shortages.

Fuel procurement activities took on a strategic cast for many utilities, as the com-panies sought to introduce greater flexibilityto their fuel policies. At LILCO, itwas decided that the provision of oil for electric generation should be made through multiple supply sources holding varying contract expiration dates.

In view of the uncertainties of nuclear plant licensing and commercial operating dates, nuclear fuel.strategy was also reformulated to provide maximum flexibility.

During the late 1970s, LILCOwas one of a rela-tivelysmall number of utilities that chose to par-ticipate more fullyin the fuel supply function. In 1978, the Company entered into an arrangement with Bokum Resources Corporation to finance the development of a uranium mine and proc-essing mill, to gain price advantages and greater re-source supply security.

The Price of Energy. While the question offuture energy needs and environmental compatibility of power facilities has generated considerable debate, a more pervasive influence affecting public attitudes towards utilities has been the rising cost of electric and gas service. For many years, the utilityindustry was able to reduce the price of electric and gas service through technological de-velopments and the avail-abilityof abundant fuel supplies. These factors more than offset levels of inflation prior to 1969, the year when electric service reached its lowest cost, in the nation as a whole and on Long Island.

Bythe early1970s, however, the major economic benefits of large-scale technology had been realized, and with the oilembargo pushing fuel prices as much as 400%

above previous levels, and the impact of general infla-tion, utilities'osts began rising rapidly. Substantial increases in labor rates, the rising costs of equipment and construction materials, the increasing investment in pollution-control facilities, and the need for additional capital financing during the lengthy construction of a facility all were responsi-ble forescalating utilitybills.

Interest rates began a pre-cipitous rise, compounding 24

the impact on annual fixed costs of facilities. Other ris-ing expenses over which utilities had littlecontrol were the substantial tax payments to government at federal, state, and local levels.

In operating and mainte-nance areas of their busi-ness, where utilities could exercise greater cost con-trol, new efforts were ex-pended to locate oppor-tunities for cost reductions.

Atthe same time, many utilities chose to undertake a thorough and continuing examination of performance standards and employee productivity, introducing the possibility of extensive change in methods and procedures.

At LILCO, particular em-phasis was placed on de-veloping greater flexibilityin managing the work force and the work load. Field personnel were trained to perform both gas and elec-tric work in a given function, such as underground dis-tribution, and the Company established the practice of shifting personnel among departments to meet the changing work loads.

LILCOalso developed a,

- computerized work informa-tion system to provide a more accurate measure of performance on a daily basis.

Despite considerable effort and accomplishment by utilities to improve produc-tivity, the pressures pushing costs upward could not be countered sufficiently, and rate increases became un-avoidable. Responding to consumer pressure, reg-ulatory commissions in many states granted smaller increases than the amounts needed and requested by the utilities. Because of in-sufficient and delayed rate relief, facilitycompletions have been prolonged and their costs seriously inflated, causing customer bills to rise even higher.

Shift ln Public Attitude.

As the circumstances of energy production and use underwent the profound al-terations ofthe 1970s, the re-lationship between the utilities and their customers changed rapidly. For many years, customers had re-garded their electric and gas service as a necessary but not particularly interest-ing constant in their lives.

Like water and air, energy was there for the taking, at times and in quantities de-termined by the customer.

Prices were minimal, and occasionally they were even reduced. Given these cir-cumstances, the sudden escalation in costs of elec-tricityand the equally abrupt imposition of restric-tions on natural gas service were viewed with alarm and anger by some utilitycus-tomers. To further com-pound public confusion, vacillation in energy policy-making by the fed-eral government tended to confirm consumer skepti-cism about the very exis-tence of an energy crisis.

The need to reestablish cus-tomer confidence in the ser-vice motivation of utilities was clear. Many companies began an expansion of their service activities to include specific, individual cus-tomer assistance on methods of implementing conservation measures such as home insulation. In addition to these steps, LILCOregularly conducted consumer education clas-ses on a wide variety of energy-related subjects, in-cluding the purchase and use of appliances to achieve maximum energy efficiency.

The Company was an indus-try leader in the develop-ment and application of timewf-use rates, offering lower prices for electricity used during off-peak periods when system de-mand is low. As the new rates were implemented during the late 1970s, LILCO emphasized the possible long-term benefits: a shift of electric demand from peak to off-peak periods could moderate the need for capital expansion to accommodate demand growth. Similarly, customer use of residential solar energy systems for space and water heating was en-couraged by LILCOas these systems became more widely available, since the use of solar energy dur-ing peak4emand periods constituted another means-of controlling demand growth. Other programs were initiated to investigate the potential of new de-velopments such as electric vehicles. In some cases, such as LILCO'sexperimen-tal solar water heating pro-jects, customer participa-tion was called for, and the interest and enthusiasm of the response was con-sidered a salutary indication forthe future.

25

Looking Ahead The foundation for a secure energy future on Long Island was established during the 1970s with the construction of LILCO's Shoreham Nu-clear Plant. No other form of electric generation Is as safe, environmentally ac-ceptable, and economical for Long Island as nuclear powe1'.

Supplementing the electrici-ty base provided by nuclear power, Long island willmake Increasing use of solar water

~and'space heating systems,

"'any of them introduced

experimentally by LILCO

',". during the1970s. Efficient

-'e'at pumps willprovide backup electric service as needed, on cloudy days and at night.

Another resource forelectric generation converts solid

"'~.waste to steam while recov-

, ering usable by-products.

LILCOwas an active par-

'"ticipant In the development of America's largest refuse-t~nergy proJect, the Hempstead Resources Re-covery Plant.

C r

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~

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26

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'k%': "'"~/;."g'.".~t%+i Who.'1"!:. t

. hh tlat-t'l<9'g'hh.".!<~hat zhh th tghttht)~Pta4,

$ A. ww

,cP 27

Financial Considerations.

Atthe same time, and for many of the same funda-mental reasons, financial

, aspects of utilitymanage-ment demanded review and restructuring.

The decline in utilityearn-ings levels, interest cover-age ratios, and credit rat-

, ings was most severe in

1973 and 1974. While these

indicators of financial stabil-ity have generally improved since then, the industry's capital requirements in the next several years are ex-pected to expand consider-ably.

By the end of the 1970s, the utilities were emerging from this controversial period. While uncertainty may well persist in many areas of their operations in the years ahead, their ability to identify and respond to the needs of customers, investors, and employ-ees has been greatly strengthened.

Although the utilityindustry was always highly capital in-tensive compared to other industries, the capital re-quirements of today, with large-scale construction of nuclear power plants under-taken to provide lower long-term operating costs and environmental advantages, are even greater. Inmost manufacturing industries, approximately one dollar of investment is required for every dollar of revenue; in the utilityindustry, the cur-rent ratio is five dollars of in-vestment for every revenue dollar. With this high rate of capitalization, a smaller proportion of utilityexpan-sion pro'grams can be fi-nanced internally.

Many utilties addressed the need to strengthen their fi-nancial position by propos-ing methods allowing for a higher cash flow,thus reduc-ing the need for external financing. Inclusion of construction-work-in-progress in the rate base was fre-quently a preferred ap-proach, as it was for LILCO.

The practice is considered by the Company to be best forcustomers in the long run as well. By recovering the costs of investment capital while the plant is still under construction, the utilityis able to avoid incurring addi-tional long-term debt and in-terest charges, which would ultimately be recovered from customer revenues.

28

1978 Financials Statement Of InCOme for Year Ended December 31 (In thousands of dollars) 1978 1977 1976 1975 1974 Revenues Electric Gas

$738,339 160,632

$682.997 141,083

$589,665 134,924

$557,971 113,556

$486,334 100,169 Total Revenues 898,971 824,080 724,589 671,527 586,503 Expenses Operations-fuel and purchased power Operations other Maintenance Depreciation Operating taxes Federal income taxcurrent Federal income taxdeferred and other 365,307 104,384 441660 51,192 141,160 7,297 24,183 350,465 97,289 40,935 45,049 131,563 7,860 15,311 292,707 89,263 39,476 42,737 122,066 228 13,986 280,455 80,720 37,164 40,715 111,306 4,737 5.375 250,716 71,825 31,149 37,972 97,908 (712) 5,044 Total Expenses Operating Income 738,183 688,472 600,463 560,472 493,902 160,788 135,608 124,126 111.055 92.601 Other income and (Deductions)

Allowance for funds used during construction Allowance forother funds used during construction Other income and deductions Federal income tax creditcurrent Federal income tax creditdeferred and other 47,294 (11026) 3,498 9,471 44,654 (142) 4,973 11,655 50,681 256 3,727 5,079 36,345 (814) 2,431 123 18.359 121 1,050 Total Other Income and (Deductions)

Income Before interest Charges 59,237 61,140 59,743 38,085 19,530 220,025 196,748 183,869 149,140 112,131 Interest Charges and (Credits)

Interest on long-term debt Other interest Allowance for borrowed funds used during construction Interest capitalized by trusts Allowance for borrowed funds used during construction trusts (18,883) 3,562 (3,562)

(21,147) 91,195 '0,555 5,720 5,030 66,864 5,436 54,264 7,596 42,266 8,193 Total Interest Charges Net Income Preferred stock dividend requirements 78,032 141,993 30,688 64,438 132,310 27,717 72,300 111,569 24,782 61,860 87,280 20,296 50,459 61,672 13,951 Income forCommon Stock

$111,305

$104,593

$ 86,787

$ 66,984

$ 47,721 Average Common Shares Outstanding-(000)

Earned per Common Share See Notes to Rnancial Statements.

45,670 40,399 34,437 28.949 23,565 2.44 2.59 2.52 2.31 2.03 29

BalanCe Sheet at December 31 (In thousands of dollars)

Assets utilityPlant Other Property and Investments Current Assets Deferred Charges Capitalization and Uabllltles

. Capitalization locust Obligations Current Liabilities Deferred Credits Reserves for Claims and Damages Electric Gas Common Construction work in progress Nuclear fuel in process Construction and nuclear fuel in trusts

'ess Accumulated depreciation Total Net UtilityPlant Nonutilityproperty, principally at cost Investments in subsidiary company, at equity Other investments and deposits Total Other Property and Investments Cash Temporary cash investments Special deposits Note receivable-construction trust Accounts receivable (less allowance for doubtful accounts of $2,413,000 and $2,424,000)

Accrued revenue on accounts billed bimonthly Materials and supplies at average cost Gas in storage at average cost Fuel at average cost Prepayments Total Current Assets Electric fuel cost adjustment deferred Other Total Deterred Charges Total Assets Long-termdebt Unamortized premium and discount on debt Preferred stock Common stock Premium on capital stock Capital stock expense Retained earnings Total Shareowners'quity Total Capitalization Current maturities of long-term debt Sinking fund requirement on preferred stock Accounts payable, including payrolls and other accruals Accrued taxes, including tederal income tax Accrued interest Customer deposits Dividends payable Total Current Liabilities Accumulated deferred income tax reductions Other Total Deferred Credits 1978

$1,506,659 275,046 71,273 1,145,445 3,675 165,503 3,167,601 486,865 2,680,736 2,300 385 68,099 70>784 7,221 3,000 2,908 48,229 92,816 11>045 21>896 18,222 23>108 1,018 229>463 8,131 27,599 35,730

$3,016,713

$1,175,662 89 1,175,751 390,449 257,072 442,353 (28,321) 311>838 1,373,391 2,549,142 189,603 37 1>050 129,285 31,403 18,499 8,125 25,984 214,383 49,926 7,213 57,139 6,446 1977

$1,414,993 269,012 67.296 978.086 45,844 2.775,231 456.019 2,319,212 2,231 1,288 453 3,972 8,347 5,654 95,254 10,522 23,797 16,131 27,613 1,144 188,462 14,932 19,967 34,899

$2,546,545

$ 1 ~100,375 1,628 1,102,003 394,436 220,207 351,229 (27,110) 279,157 1.217,919 2,319,922 30,000 70,700 26,812 15,915 8,299 22,122 143,848 42,835 2,008 44,843 7,932 30 Total Capitalization and Uabilltles

$3,016,713

$2,546,545

ShareoWfterS'quity at December 31 (In thousands of dollars) 1978 1977 1976 1975 1974 Statement of Retained Earnings Balance, January 1

Add-Net income for the year Less-Cost of issuance of retired preferred stock Less-gash dividends declared:

Preferred stock Common stock

$279)157 141,993 30,651 78,661

$242,147 132,310 1,335 27,223 66,742

$209,524 111,569 24,459 54,487

$187,537 87,280 20,474 44,819

$174,550 61,672 13,951 34,734 Balance. December 31

$311)838

$279,157

$242,147

$209,524

$187,537 Common Stock Par Value $5 per Share Shares authorized Shares outstanding Increase in shares outstanding Increases in $5 Par Value Increases in Premium on capital stock Increases in Capital stock expense 91,124 1,211 88,348 8,713 66,251 3,217 53,357 5,261 12,588 2,693 80,000,000 60,000,000 60,000,000 40,000,000 40.000,000 51,414,352 44,041,453 37,639,385 32,073,338 25,053,394 7,372,899 6,402,068 5,566,047 7,019,944 2,596,844

$ 36,865

$ 32,010

$27,830

$35,100

$12,984 Preferred Stock Par Value $100 per Share, Cumulative:

Shares authorized Shares outstanding Shares subscribed 5)050)000 5,050,000 5,050,000 3,064,993 3,024.360 2,464,306 70,000 3,800,000 3,800,000 2,549,795 2,570,056 5

% Series B 4.25% Series D 4.35% Series E 4.35% Series F SMr % Series H SVi % Series I*

8.12% Series J 8.30% Series K 7.40% Series L 8.40% Series M 13.00% Series N 7.50% Series 0 8.50% Series R

$ 10,000 7,000 20,000 5)000 20,000 11,499 25,000 30,000 35,000 35,000 48,000 60,000

$ 10,000 7,000 20,000 S,OOO 20,000 14,436 25,000 30,000 35,000 35,000 48,000 60,000-

$ 10,000 7,000 20,000 5,000 20,000 19,431 25,000 30,000 35,000 35,000 40,000

$ 10,000 7,000 20.000 5,000 20,000 27,980 25,000 30,000 35,000 35,000 40,000

$ 10,000 7,000 20,000 5,000 20,000 30,006 25,000 30,000 3S,000 35,000 40,000 Total Par Value $ 100 Par Value $25 per Share, Cumulative:

Shares authorized Shares outstanding Shares subscribed

$2.47 Series 0

$2.43 Series P Total Par Value $25 LessSinking fund requirements Total Preferred Stock

$306,499

$309,436

$246,431

$254,980

$257,006 7,200,000 7,200,000 7,200,000 7,200,000 1,200,000 3,400,000 3,400.000 3,400,000 1,920,000 80,000

$ 50,000

$ 50,000

$ 50,000 50,000'5,000 35,000 35,000 85,000 85,000 85,000 50,000 1,050

$390,449

$394,436

$331,431

$304,980

$257,006

'Convertible See Notes to Rnancial Statements

-Includes subscribed shares 3I

Statement Of ChangeS in FlnanCIaI POSitlOn for Year Ended December 31 (In thousands of dollars)

~

1978 1977 1976 1975 1974 Source of Funds Operations Net income

$141,993

$132,310

$111,569 S

87,280 S

61,672 Principal noncash charges and (credits) to income:

Depreciation Deferred and other federal income taxes Allowance for funds used during construction Other Interest capitalized by trusts-Allowance for borrowed funds used during construction trusts Funds Provided from Operations Long-term Financing Long-term debt Preferred stock Common stock Trust obligations Other Decrease in working capital (excluding debt)

NYSEG reimbursements, prior periods, re: Jamesport Other sources 51)192 14,712 (66,177) 8,478 3>562

'3,562) 150,198

,?5,287 127,882 159,603 29,534 2,046 122,479 119,655 115,000 150,375 108,000 38.500 120,325 90,558 6,181 16,254 1,461 45,049 42,737 3,656 8,907 (65,801)

(50,681) 7,265, 7,123 40,715 5,252 (36,345) 7,410 104,312 170,000 50,000 88,445 2,423 37,972 5,044 (18,359) 4,625 90,954 110,000 75,000 25,640 5,653 Total Source of Funds Use of Funds Construction expenditures Nuclear fuel expenditures Construction and nuclear fuel in trusts Less Allowance forfunds used during construction Total Construction and Nuclear Fuel Expenditures Dividends on preferred stock Dividends on common stock Payment of long-term debt Preferred stock conversions and retirements Decrease in short-term debt Increase inworking capital (excluding debt)

Electric fuel cost adjustment deferred Other investments and deposits Capitalstockexpense Cost of removal Otheruses Total Use of Funds

$544,530

$292,519 (42,169) 165,503 66,17?

349,676 30,651 78,661

.2,937 (6,801) 67,646 2,388 4,074 15,298 S 544,530

$472,748

$359,420 23,913 65,801 317,532 27.223 66,742 aa,ees (836),

235 8,713 1,510 6,634 S472,748

$416,803

$314,125 14,424 50,681 277,868 24,459 54,487 25,000 8,549 14,031 995',217 3,220

',977

$416,803

$415,180

$281,455 5,642 36,345 250,752 20,474 aa,81e 40.625 2,026 31,800 7,979 41 5,261 1,908 9,495 S415,180

$307,247

$244,175 4,785 18,359 230.601 13,951 34,734 625 24 7,559 10,363 25 2,693 1,655 5,017

$307,247 Increase (Decrease) In Working Capital by Element (Excluding debt)

Cash Temporary cash Investments Special deposits Accounts and notes receivable Accrued revenue Materials, supplies, gas in storage and fuel Prepayments Current maturities on long.term debt Sinking fund requirement on preferred stock Accounts payabie Accrued taxes Accrued interest Customer deposits Dividends payable Net Increase (Decrease) 32

$ (1,126) 3,000 (2,746) 45,791 523 (4,315)

(126)

(37)

(1,050)

(58,585)

(4,591)

(2,584) 174 (3,862)

$(29,534)

(609)

(9,293) 9,509 733 4,412 P0)

(615)

(750)

(1,728) 834 (3,186)

(763)

S 1,035 13.218 9,030 989 11,344 598 (9.681)

(8,840)

(1,151) 28 (2,539)

$14,031

$(5,843) 788 4,251 763 7,543 (221) 13,072 (4,318)

(3,057)

(1 ~127)

'3,872)

S 7,979 S 5,035 (355) 18.629 1,349 13,809 (199)

(32,681) 5,232 (1,263)

(98)

(1,899)

S 7,559

LOng-term Debt at December 31 (In thousands of dollars)

Rate of Interest Series Due 1978 1977 First Mortgage Bonds 3

3%

3'i/o

'3%

4s/s 4Vs 5'.40 4%

4.55 SY SVs 8.20 9Vs 7'/i 7'/s 7%

8Vs 10 9Yo t 9V4 t 9Ys t 9%

t 8%

t 8%

t 9.20 A

E F

G H

I J

L

'M N

0 P

0 R

S U

V W

X Y

z BB CC DD EE FF 1980 1982 1983 1984 1985 1986 1988 1991 1993 1994 1995 1996 1997 1999 2000 2001 2001 2002 2003 1981 1982 1983 1984 2006 2006 2007 2008 20,000 20I000 25,000 15,000 15,000 20,000 20,000 25,000 40,000 25,000 25,000 40,000 35,000 35,000 25,000 40,000 50,000 50,000 60,000 601000 50,000 56,000 44,000 63,000 50,000 50,000 40,000 998,000 20.000 20,000 25.000 1S,000 1S,000 20,000 20.000 25,000 40.000 25,000 25.000 40,000 35,000 35,000'5,000 40,000 50,000 50.000 60.000 60.000 50.000 56,000 44,000 63,000 50,000 50,000 958,000 tLess Deposited withTrustee of the General and.Refunding Indenture as additional security for General and Refunding Bonds Total First Mortgage Bonds General and Refunding Bonds 9Ys % Series Due 1983 9Fs % Series Due 1984 9% % Series Due 2006 8% % Series Due 2006 8'

Series Due 2007 9.20% Series Due 2008 Total General and Refunding Bonds 303,000 695,000 80,000 90,000 70,000 50,000 85,000 75,000 450,000 263,000 695,000 80,000 90,000 70,000 50.000 85,000 375,000 Other Long-term Debt 7M'%

AuthorityFinancing Notes 8Ys% Promissory Notes LessCurrent Maturity on 8Vs% Promissory Notes 2006 1985 30,375 324'7 30,375 Total Other Long-term Debt Total Long-term Debt 30,662

$11175,662 30.375

$ 1 ~100,375 The aggregate of the Company's long-term debt due in the five years ended December 31 ~ 1983 is:

$20,000,000 (1980), $60,000,000 (1981), $70,000,000 (1982) and $105,000,000 (1983).

See Notes to Financial Statements.

Report of Independent Accountants Notes to Financial Statements To the Shareowners and Board of Directors of Long Island Lighting Company In our opinion, the financial statements appearing on pages 29 to 39 present fairly the financial position of

'ong Island Lighting Com-pany at December 31, 1978 and 1977, and the results of its operations and the changes in its financial posi-tion foreach of the fiveyears ended December 31, 1978, in conformity with generally accepted accounting prin-ciples consistently applied.

Our examinations of these statements were made in accordance with generally accepted auditing stan-dards and accordingly in-

"=eluded such testsof the ac-counting records and such other auditing procedures as we considered neces-sary in the circumstances.

Price Waterhouse & Co.

Huntington Station, NY January 26, 1979 Note1. Summary of Significant Accounting Policies The accounting records of the Company are main-tained in accordance with the Uniform Systems ofAc-counts prescribed by the Public Service Commission of the State of New York (PSC) and the Federal Energy Regulatory Com-mission (FERC), formerly the Federal Power Commission.

UtilityPlant Additions to and replace-ments of utilityplant are recorded at original cost, which includes material, labor, overheads, and an allowance for the cost of funds used during con-struction (AFC). The cost of renewals and bet terments relating to units of property is added to utilityplant. The cost of property replaced, retired or otherwise dis-posed of is deducted from utilityplant and, generally, together with dismantling costs less any salvage, is charged to accumulated depreciation. The cost of repairs and minor renewals is charged to maintenance expense. Mass properties (such as poles, wire and meters) are accounted for on an average unit cost basis by year of installation.

Allowance forFunds Used During Construction (AFC)

The Uniform Systems of Accounts define AFC as the net cost of borrowed funds forconstruction purposes and a reasonable rate upon the utility'sother funds when so used."AFC is com-puted monthly on that por-tion of construction work in progress (CWIP) which is not included in the Com-pany's rate base. The aver-age annual AFC rate, with-'ut giving effect to com-pounding or the reduced Shoreham net of tax rate, was 8.8%, 8.9%, 9.25%,

9.38% and 9.72% for the years1974 through 1978, respectively.

In 1975, with PSC permis-sion, the Company began monthly compounding of AFC. In June 1976, it began computing AFC on its Shoreham Unitat a reduced rate of 7.34% (increased to 7.63% in July1977), which reflects the income tax ef-fect of the interest portion of AFC. The Company adopted the FERC method for calculating AFC for the year 1978. There was an immaterial difference be-tween the PSC and FERC results forthe year 1977.

The AFC rate for 1978, with-out giving effect to semi-annual compounding, was 9.72%. The 1978 Shoreham net of tax rate was 7.93%.

Based upon a five-year average of the Company's capitalization and upon the most current costs of pre-ferred stock and long-term debt (without adjustment 34

for income taxes, except with respect to the Shoreham Unit) in the re-spective periods, the por-tion of AFC attributable to funds provided by common stock equity for the years 1974 through 1976, was equivalent to 9%,14%, and 17% of Income forCommon Stock.

In compliance with a FERC order effective January 1, 1977, the Company has al-located the portion of AFC relating to borrowed funds to the Interest Charges sec-tion of the Statement of In-come. Periods prior to 1977 have not been reclassified.

The Company believes that such reclassification would be inappropriate since the allocation between the borrowed and other com-ponents for prior periods would not be comparable to the components of AFC de-termined subsequent to December 31, 1976, by using the FERC formula.

Depreclatlon The provisions for depre-ciation result from the ap-plication of straight-line rates to the original cost, by groups, of depreciable properties in service. The rates are determined by annual age-life studies of depreciable properties.

Depreciation accruals were equivalent to 3% ofaverage depreciable plant cost for each of the years 1974 through 1978.

Revenues Revenues are recorded when billed. Billings are rendered on a monthly or bimonthly cycle basis. The Company accrues esti-mated revenues forcus-tomers billed bimonthly in the month in which they normally are not billed.

The Company's tariffs for electric service include a fuel adjustment clause under which electric rates charged to most customers are adjusted to reflect changes in the average cost of fuels and of certain purchased power costs.

The Company's tariffs for gas service contain a com-parable clause.

Deferred Electric Fuel Cost Adjustment The Electric Fuel Cost Ad-justment represents the dif-ference between actual fuel costs and the fuel costs al-lowed in the Company's base tariffrates. The Com-pany, to achieve a proper matching of costs and rev-enues, defers this differ-ence along with the related income tax effects to those future periods inwhich itwill be billed to customers. The Company believes that the PSC willcontinue to permit the recovery of deferred fuel costs.

Federal Income Taxes An accelerated deprecia-tion method, together with depreciation lives which are shorter than those re-ferred to under Deprecia-tion, is used for income tax purposes. Interest, pen-

.sions, taxes, research and development costs, etc.,

which are charged to plant or accumulated deprecia-tion for financial statement purposes. are deducted currently where permitted by the tax laws. AFC is not subject to income tax.

Property taxes are de-ducted on a lien date basis, in contrast to the fiscal year basis used for financial statements.

For these and similar reasons. taxable in-come is less than financial statement income.

The Company's general policy is to reflect as in-come tax expense the amount of income taxes currently payable; however, in certain cases provisionis made for income tax effects of the differences between net income before income taxes and taxable income, as disclosed in Note 7.

The major items which are part of the deferred tax pro-vision are as follows:

o Income tax benefits re-sulting from reduced de-preciation lives permitted by the Revenue Actof 1971.

o Income tax benefits relat-ing to deferred fuel cost.

o Starting in1975, the addi-tional benefits resulting from the investment tax credit increase from 4% to 10% are being deferred and amortized over the average book lifeof the related properties. The balance of deferred in-vestment tax credit at December 31, 1978 and 1977 is $28,341,000 and

$18,933,000, respectively.

One-half of the investment tax credits received under the Revenue Act of 1971 and, effective June 1976, the imputed income tax benefits resulting from the interest component of Shoreham AFC have been allocated to Other Income and Deductions. Effec-tive February 1978, the portion of this credit gener-ated by the construction at Shoreham has been trans-ferred to Other Deferred Credits.

The Company established an Employee Stock Owner-ship Plan (TRASOP) which allows for additional in-vestment tax credit to be claimed fortax purposes for the benefit of employ-ees.

35

Research and Development Costs Research and develop-ment costs of approxi-mately $3,400,000,

$1,800,000, $700,000,

$1,200,000, and $1,300,000 related to construction pro-jects, for the years 1978 through 1974, respectively, were capitalized. Other research and develop-ment costs forthe same years (approximately

$4,800,000, $4,300,000,

$3,400,000, $2,500,000, and $2,200,000, respec-tively)were charged to expense. The Company's research and development programs are subject to PSC review.

CapitalizationPremiums, Discounts and Expenses Premiums or discounts and expenses related to the is-suance of long-term debt are amortized over the lives of the issues.

Reserves forClaims and Damages Losses arising from claims against the Company, from extraordinary storm losses, and from certain equipment damage are partially self-insured. Provisions to the reserves are based upon experience, risk of loss, and/or specific orders of the PSC.

36 Note 2. Retirement Plans Retirement plans consist of an insured group annuity plan and a supplemental trusteed equity annuity plan. The plans cover most employees. The costs related to the plans were

$10,732,000, $9,712,000,

$8,370,000, $7,556,000 and $7,359,000 forthe years1978 through 1974, respectively. Allpension costs are borne by the Company. The Company's policy is to fund the costs accrued. The actuarially computed value of the vested benefits at January

1. 1978 (the date of the latest actuarial valuation) exceeds the funds accumu-lated by approximately

$29,000,000, most of which was attributable to prior ser-vice. The total unfunded prior service cost at the date of the latest actuarial valua-tion was about $27,000,000, which amount is being amortized principally over a 30-year period.

Note 3. Capital Stock Of the 80,000,000 shares of authorized common stock, 994,799 shares are re-

"served for sale to employ-ees, 3,705,414 shares are committed to the Au-tomatic Dividend Reinvest-ment Plan, and 567,027 shares are reserved for conversion of the Series I

Convertible Preferred Stock at $20.28 per share.

The Series I Convertible Preferred Stock is not con-sidered, under generally accepted accounting prin-ciples, to have a dilutive ef-fect on earnings per share.

In December 1977, the Company refunded its 13%

Series N Preferred Stock with the issuance of 7.50%

Series Q Preferred Stock. In accordance with a PSC or-der, the cost of issuance of Series N was charged to Retained Earnings and the cost of issuance of Series Q and the $8,000,000 call premium of Series N was charged to Capital Stock Expense and is being amortized and recovered in the Company's rates over seven years, the term of the Series Q issue.

Redemption of Series L, M, 0, Q, and R Preferred Stock is provided forthrough varying sinking fund provi-sions, certain ofwhich commence in 1979. The aggregate amount of pre-ferred stock required to be redeemed in each of the years 1979 through 1983 is

$1,050,000, $7,850,000,

$7,850,000, $11,600,000, and $11,600,000.

Note 4. Trust Obligations The Company entered into arrangements with Tri-Counties Resources Trust (Resources Trust), in Sep-tember 1977, and Tri-Counties Construction Trust (Construction Trust), in Au-gust 1978, providing forthe Trusts to finance, respec-tively, the acquisition of the Company's nuclear fuel and its18% share of con-struction and nuclear fuel-costs for Nine Mile Point Unit 2. The Resources Trust and the Construction Trust have revolving/credit ar-rangements providing for borrowings of up to $75,000,000 and

$300,000,000, respectively.

The Trusts may, with avail-able funds not immediately needed for such financing, make certain investments, including investments in the Company's promissory notes. The Trusts'otal obli-gation of $189,603,000 at December 31, 1978, is com-prised of $165,503,000 for financing construction and nuclear fuel expenditures and $24,100,000 utilized by the Company for general corporate purposes.

The Company is obligated to arrange to purchase nu-clear fuel owned by the Re-sources Trust, or heat fiom such fuel, just prior to load-ing the fuel in the Com-pany's reactors or upon termination of the Trust.

Similarly, the Company is obligated to arrange to reimburse the Construction Trust for nuclear fuel and construction just prior to Nine Mile Point Unit 2 going into operation.

The Resources Trust and the Construction Trust in-terest is calculated, respec-tively, at 110% and 105% of the prevailing prime rate (based upon the respective Trusts'orrowing arrange-ments). The Trusts'nterest costs of borrowings utilized to finance construction and nuclear fuel is reflected in the Company's Construc-tion and Nuclear Fuel in Trusts accounts.

.=, The Trusts'verage annual interest rate (excluding commitment fees) for average borrowings of $69,062,000 and

$32,577,000 outstanding during the year1978 and the period September 21 through December 31, 1977, was10.6% and 8.4%,

'respectively. Of the total outstanding borrowings,

$39,303,000 and

$32,577,000 related to gen-eral corporate purposes for the respective periods.

Note 5. Short-term Loans and Compensating Balances The Company has authority from FERC to issue up to a total of $200,000,000 in-notes to banks and com-mercial paper. The Com-pany has established bank lines of credit totaling

$125,000,000 at December 31, 1978. Bank loans, most ofwhich were obtained at 108% of the lending banks'revailing prime interest rate, generally mature within 90 days. The Com-pany, under informal ar-rangements, maintains compensating balances, which are not legally re-stricted, averaging 10% of the lines of credit or pays fees in lieu thereof. Net of average "float, com-pensating balances at De-cember 31,1978, amounted to approximately

$3,400,000. No bank loans were outstanding at either year-end.

Commercial paper is is-sued at various discount rates and usually matures within 30 to 45 days. No commercial paper was out-standing at either year-end. During 1978 and 1977, the maximum aggregate.

amount of short-term bor-rowings at any one month-end was $95,000,000 at August 31, 1978 and

$113,550,000 at July 31, 1977, and the daily aver-ages ofshort-term borrow-ings were $33,531,000 and

$51,652,000, respectively.

The approximate weighted average interest rates (ex-cluding the effects ofcom-pensating balances and lines of credit fees) on short-term borrowings were 7.6% and 5.8%,

respectively.

Note 6. Commitments and Contingencies The Company's expendi-tures for construction and nuclear fuel for the years 1979 through 1983 as esti-mated at December 31, 1978, total approximately

$2.1 billion and assume timely and adequate rate relief and financing.

Substantial commitments have been made for the Company's construction program, including com-mitments for the nuclear generating stations at Shoreham and Nine Mile Point Unit 2 which are un-der construction and for Jamesport and New Haven, respectively, forwhich reg-ulatory approvals are pend-ing. The Company has a 50% interest in Jamesport and New Haven, an18% in-terest in Nine Mile Point 2, and is responsible for fi-nancing its respective share of each of the units.

The Company has, at December 31, 1978, ex-penditures for CWIP of

$979,966,000 for Shoreham, $41,853,000 representing its 50% in-terest in Jamesport,

$101,653,000 representing its 18% interest in Nine Mile Point 2 and $27,059,000 representing its 50% in-terest in New Haven and expenditures for nuclear fuel of $67,689,000 relating to these projects. In addi-tion to the $27,059,000 re-ferred to above, the Com-pany has recorded in Other investments and deposits

$28,131,000 which together with the related nuclear fuel brings its total interest in New Haven to $57,544,000 which is included in Ac-counts Payable on the bal-ance sheet.

In 1978, the Company entered into additional agreements with Bokum Resources Corporation (a Development Stage Com-pany) for the purchase of uranium concentrates.

These agreements provide for loans to Bokum of up to

$51,100,000, ($24,595,000 outstanding at December 31, 1978) and advanced payments of $20,000,000,

$15,350,000 of which has been paid by the Company and the balance by New York State Electric and Gas Corporation. The loan bears interest at 10.5% and is secured by, among other rights, an assignment of leases and a mortgage on certain of Bokum's assets.

The terms of the financing agreement provide for re-payment of LILCO's loans by1986. The Company has recorded its loans to Bokum in Other investments and deposits.

The Company has also en-tered into substantial long-range commitments for fuel and gas supply. (See pages 7-8 pertaining to nuclear fuel commitments.)

37

There are currently pending in the Federal courts, be-fore the U.S. Equal Em-ployment Opportunity Commission and the New York State Division of Hu-man Rights, complaints by employees alleging that the Company has discrimi-nated against them on the basis of race. The Com-pany believes it has meri-torious defenses to these complaints, but it cannot predict the ultimate out-come of these matters.

Federal income tax, per Statement of Income Current 7.297 Included in other income and deductions (current)

(3,498) 7,860 (4,973) 228 (3,727)

$ 4,737 (712)

(2,431)

(1,050) 3,799 2,887 (3,499) 2,306 (1,762)

Deterred and other (See Note 1)

Asset depreciation range system Fuel cost adjustments Investment tax credits-Tax Reduction Act of 1975 Other items, net 692 (3,604) 11,461 6,163 662

'1,309) 6,328 (2,025)

',784 (1,074) 5,909 1,288 2,417 331 3,790 (1,286) 1,914 4,975 (1,845)

Note 7. Federal Income Taxes The Federal income tax amounts included in the Statement of Income differfrom the amounts which result from applying the statutory Federal income tax rate to Net Income before income tax. The reasons are as shown below:

(In thousands of dollars) 1978 1977 1976 1975 1974

%or

%of

%of

%of

%of Pre-tax Pre.tax Pre-tax Pre tax Pre.tax Amount Income Amount Income Amount Income Amount Incone Amount Inccme 14,712 3,656 8,907 5,252 5,044 Total Net income 6,543 132,310 18,511 141,993 5,408 111,569 7,558 87,280 Income Before Taxes

$160,504

$138,853

$116,977

$94,838 3,282 61,672

$64,954 Statutory Federal income tax

$ 77,042 Reductions in Federal income tax resulting from:

Excess of tax depreciation over book depreciation (11,170)

AFC, which does not con-stitute taxable income (31,765)

Costs charged to ptant but deducted currently (10,142)

Property taxes deduct-ed on a lien date basis Investment tax credits Property tax amortization Other items, net 48,0%$ 66,649 48.0%$ 56,149 48.0%$ 45,522 48.0%$ 31,178 48.0%

(7.0) (10,967)

(7.9)

(7,775)

(6.7)

(8,052)

(8.5)

(8,336) (12.8)

(19.8)

(31,585) (22.7)

(24,327) (20.8) (17,446) (18.4)

(8,812) (13.6)

(6.3) (10,143)

(7.3)

(6,670)

(5.7)

(4,245)

(4.5)

(4,065)

(6.3)

(1.4)

(1,911)

(1.4)

(3,775)

(3.2)

(2,803)

(2.9)

(1,432)

(2.2)

(4.7)

(10,257)

(7.4)

(7,984)

(6.8)

(4,198)

(4A)

(2,216)

(3.4)

(1,900)

(2.0)

(1,900)

(2.9) 2.7 4,757 3.4 (210)

(0.2) 680 0.7 (1 ~135)

(1.7)

Total Federal Income Tax Expense

$ 18,511 11.5%$ 6,543 4.7%$ '5,408 4.6%$ 7,558 8.0%$ 3,282 5.1%

At December 31, 1978, the Company had an investment tax credit carryforward of approxi-mately $34,000,000 forfinancial statement purposes.

In accordance with the Company's accounting policy, approximately $22,000,000 of the carfyfolward willbe deferred when utilized. These credits expire in 1985.

Note 8. Replacement Costs (Unaudited)

In compliance with the re-porting requirements of the Securities and Exchange Commission (SEC), the Company willdisclose in its 1978 annual report to the SEC, on Form 10-K, its esti-mates of (1) the current cost of replacing (new) its pro-ductive capacity (plant) at December 31, 1978 and 1977, (2) the accumulated depreciation on such amounts at December 31, 1978 and 1977, and (3) the amount of such deprecia-tion expense for the years ended December 31, 1978 and 1977. The impact of in-flation has resulted in re-placement costs of the Company's productive

.capacity being significantly greater than historical costs of such capacity as re-ported in the financial statements and as currently recognized by the PSC in establishing rates.

Note 9. Segments of Business The Company is a public utilityoperating company engaged in the generation, distribution, and sale of electric energy and the purchase, distribution, and sale of natural gas. The reportable items forelectric and gas departments are:

(In thousands of dollars)

Electric 1978 Total Gas Company Electric 1977 Total Gas Company Operating income (before income tax)

AFC and other Interest charges Income taxes operating Income taxes nonoperating credit S

164,750 S 27,518 S 192,268 S 138,160

$ 20,619 S

158,779 46,268 44,512 78,032 64,438 31,480 23,171 12.969 16,628 Net income per accompanying Statement of Income S

141,993 S

132,310 Other Information (Year ended December 31):

Depreciation expense Capital expenditures for construction and nuclear tuel Investment Information (At December 31):

Identifiable assets (a)

Nonutilityplant Other investments (b)

Assets utilized tor overall Company operations 45,217 5,975 S 51,192 $

39.451 5,598 $

45,049 407,032 8,821 415,853 374,367 8,966 383,333

$2,492,055

$234,111 $2,726,166 $2,139,902

$228.497 $2,368,399 2,300 2,231 52,726 385 68,484 1,288 1,741 219,763 174,174 Total Assets

$3,016,713

$2,546.545 (a) Includes net utilityplant and deterred charges (excluding common), materials and supplies. accrued revenues, gas in storage and fuel.

(b) Consisting of, in1978, $24 595 0006okum Resources Corporation, $28131,000 New Haven Units. $385 000 subsidiary company, $14 958 000 TIl~unties Resources Trust. and $417 000 other investments; and in 1977. $1,288 000 subsidiary company. and $453.000 other Investments.

Operating Information (Year ended December 31):

Revenue S

738,339

$ 160,632 $

898.971 682.997

$141,083 S

824.080 Expenses (excluding income tax) 573,589 133.114 706,703 544,837 120,464 665.301 Note10. Quarterly Financial Information (Unaudited)

(In thousands of dollars)

Operating Revenues Operating Income

~

Income for Earned per Net Common Common Income Stock Share First Quarter 1978 1977 Second Quarter 1978 1977 Third Quarter 1978 1977

$247,890 S 48,919

$ 45,546 S 37,880 S 0.86 224,101 39,968 38,010 31 ~113 0.82 203.259 34,339 29,539 21,854 0.49 178,100 25,352 22,932 16,060 0.42 238,472 49,256 43.540 35,868 0.80 225,124 42.341 42,196 35,342 0.84 Fourth Quarter 1978 1977 209.350 196,755 28;274.

23,368 i 15.703 0.32 27,947 29,172 22.078 0.51 39

EleCtrlC Operating InCOme (ln thousands of dollars) 1978 1977 1976 1975 1974.

1973 1968 Revenues Residential Commercial and industrial Street and highway lighting Other public authorities Other utilities Other

$348,307 337,521 12,743 13,615 921 4,885

$326,035 315,952 12,817 13,647 1,287 3,578

$284,774 270,513 12,619 11,005 543 2,747

$266,077 256,762 12.472 11,988

~

725 2,228

$232,431 223,204 10,869 10,680 731 709

'165,681 149,004 10,025 5,815 283 512 S 93,037 80,983 7,987 3,076 938 920 System revenue Power pools 717,992 20,347 673.316 582,201 550,252 478,624 331,320 186,941 9,681 7,464 7,719

.7,710 7,324 6.418 Total Revenues

~

738,339 682.997 589,665 557,971 486,334 338,644 193,359 Expenses Operations fuel and purchased power Operations other Maintenance Depreciation Operating taxes Federal income taxcurrent Federal income tax-deferred and other 294,911 78,328 37,086 45,217 118,047 1,110 24,249 290,576 72,860 32.665 39,451 109,285 4,830 15,399 238,185 66.101 32,501 37,399 100,102 (4,398) 13,752 236,329 59,182 30,164 35,267 91,326 5,655 3,695 219,406 52,841 24,803 32,604 79,925 (3,098) 5,195 90,371 48.852 23,500 30,936 69.725 5,021 2,435 33,266 29,135 16,912 21,096 37,635 11,628 121 Total Expenses Operating Income 598,948 565.066

'483.642 461,618 411,676 270,840 149,793

$139,391

$117.931

$106.023

$ 96,353

$ 74,658

$ 67,804 S 43,566 GaS Operating IhCOmB (ln thousands of dollars) 1978 1977 1976 1975 1974 1973 1968 Revenues Residential Residential heating'ommercial Commercial heating'ther

$ 21,098 88,168 19,109 30,486 286

$ 18,672 75,626 19,868 25.374 80 S 17,734 74,225 16,244 25.225 18 S 16,672 61,592 13,771 20,012 46 S 14,988 52.308 13,512 17,208 27 S 14,293 48.297 11,986 15,812 20

$ 12.389 36,299 8.666 10,326 6

System revenue Other utilities 159,147 1,485 139,620 133,446 112,093 98,043 90,408 67,686 1,463 1,478 1,463 2,126 3,533 (1)

Total Revenues 160>632 141,083 134,924 113,556 100,169 93,941

'7,685 Expenses Operations tuel Operations-other Maintenance Depreciation Operating taxes Federal income tax-current Federal income taxdeferred and other 70,396 26,056 7,574 5,975 23,113 6,187 (66) 59,889 24,429 8,270 5,598 22.278 3,030 (88) 54,522 23,162 6,975 5,338 21,964

'4,626 234 44,126 21,538 7,000 5,448 19,980 (918) 1,680 31,310 18,984 6,346 5,368 17,983 2,386 (151) 28,643 18,330 6,281 5,247 17,179 2,304 (411) 20.336 13,885 4,313 4,281 10,229 2.159 Total Expenses Operating Income 139,235 123,406 116,821 98,854 82,226 77,573 55,203

$ 21,397 S 17,677 S 18,103 S 14,702 S 17,943 S 16,368

$ 12,482

'In the heatinp ctassrrcaticns. the revenues shr>wn cover aa pas usert. inckxhrg ncnheatinp tea>.

Common Stock Data 1978 1977 1976 1975 1974 1973 1968 Income forcommon stock ($000)

Average common shares outstanding (000)

Earned per common share Dividends paid per share Book value per share at year-end Common shareowners at year-end

$111,305 45>670 2.44 1.68Y4 19.12 143,267

$104,593 40,399 S

2.59 1.61'/4 18.70 130,018 S 86,787 34,437 2.52 1.54' 17.93 123,057

$ 66,984 28,949 S

2.31 S

1.49 17.19 116,008

$ 47,721 23,565 S

2.03 1.46 17.81 102,251

$ 45,150 22.370 2.02 1.45 18.27 93,340

$ 33,781 18,153 S

1.86 1.22 14.74 83,530 Operating Ratios 1978 1977 1976 1975 1974 '973 1968 Percent ofTotal Revenues Electric Gas 82.1%

17.9 82.9%

17.1 81.4%

83.1%

82.9%

78.3/o 74.1%

18.6 16.9 17.1 21.7 25.9 Percent of Electric Revenue Operations expense fuel and purchased power Operations expense-other Maintenance expense 39.9%

10.6 5.0 42.5%

10.7 4.8 40.4'/o 11.2 5.5 42.4%

10.6 5,4 45.1'Yo 26.7'Yo t 7.2%

10.9 14.4 15.1 5.1 7.0 8.7 Total Operations and Maintenance Expense Operating Income 55.Plo 58.0%

57.1%

58.4'Yo 61.1%

48.1%

41.CP%%d 18.PYo

'l7.2%

18.0%

17.3%

15.4%

20.1%

22.5/o Percent of Gas Revenue Operations expense fuel Operations expense other Maintenance expense 43.8Yo 16.2 4.7 42.5%

40.4%

38.9%

31.3Yo 30.5%

30.0Yo 17.3 17.2 18.9 18.9 19.5 20.5 5.9 5.2 6.2 6.3 6.7 6.4 Total Operations and Maintenance Expense Operating Income 64.7%

65.7%

62.8%

64.0%

56.5%

56.7%

56.9%

1 3.P/o 12.5%

13.4%

12.9'Yo 1 7.9%

1 7.4%

1 8.4%

.Percent ofTotal Operating Income Before Income Taxes Electric Gas 85.7Yo 14,3 87.0Yo 83.4%

87.2%

79,2%

80.5%

'9.1%

13.0 16.6 12.8 20.8 19.5 20.9 OperatiOnS and MaintenanCe EXpenSe DetailS (In thousands of dollars)

Total payroll and employee benefits Less Charged to construction and other Charged to operations 1978 1977 1976 1975 1974 1973 1968

$139,334

$126,013

$118,379

$107,400

$ 100,008

$ 96,306 S 65,031 47,367 39,873 37,558 32,888 31,335'1,399 20,868 91,967 86,140 80,821 74,512 68,673 64,907 44,163 Fuels electric operations-Fuelsgas operations Purchased power costs Electric fuel cost adjustment deferred 244,546 70,396 43,564 61801 258.988.

59,889 30,752 836 216,264 228,151 224.105 91,537 32.749 54,522 44,126 31,310 '8,643 20,336 22,916 8,219 5,664 3,203 517 (995)

(41)

(10,363)

(4,369)

Total Fuel and Purchased Power Atlother 57,077 52,084 47,918 43,372 34,301 32.056 20,082 365,307 350,465 292,707 280,455 250,716 119,014 53,602 Total Operations and Maintenance

$514,351

$488,689

$421,446

$398,339

$353,690

$215,977

$ 117,847 Employees at December 31 5,442 5,381 5,444 5,446 5,426 5,477 5,495 41

k Electric Operations 1978 1977 1976 1975 1974 1973 1968 Energymillionsof kWh Net generation Power purchased and (sold)net Total system requirements

<<Company use andunaccounted for System sales Power pool sales 12,739 980 13,719 (1,282) 12,437 790 12,710 889 13,599 (1,225) 12,374 346 12,450 868 13,318 (1,326) 11,992 250 12,854 159 13,013 (1,301) 11,712 290 12,795 (89) 12,706 (1,285) 11,421 314 13,438 (286) 13,152 (1,094) 12,058 449 9,904 (730) 9,174 (904) 8,270 788 Total Sales 12,720

'2,242 12,002 11,735 12,507 9,058 Peak Demand net MW Station coincident demand Purchased or (sold) 2,899 2,994 2.566 2,597 2,553 2,607 2,117 98 113 153 335

~

246 322 (241)

System Peak Demand

'2,997 ',107 2,719 2,932 2,799 2,929 1,876 Capability at Time of Peak net MW LILCOstations Rrm purchase or (sale) 3,842 3,709 3,727 3,727 3,457 3,199 2,382 126 121 136 89

9 (250)

Total Capability 3,968 3,830 3,863 3,816 3,457 3,208 2,132 Fuel Consumed forElectric Operations Coalthousands ot tons Oilthousands of barrels Gas-thousands of mcf Totalbillions of Btu Cents per millionBtu Millsper kWh of net generation Heat rateBtu per net kWh 21,0l7 75 131,096 186$ c 19.20 10,304 20,669 1,980 130,904 197.94 20.38 10,299 20,287 1,195 127,244 170.0g 17.37 10,221 21,142 1,227 131,135 174'7.75 10,202 20,773 3,444 131,414 170.5g 17.52 10,271 21,695 6,279 140,075 65.3r 6.81 10,424 279 13.412 10,062 102,472 32.Q 3.31 10,340 Gas Operations 1978 1977 1976 1975 1974 1973 1968

'nergythousands of mct (1,000 Btu)

" Natural gas

'anufactured gas and change in storage Total natural and manufactured gas Gas sold Total system requirements Company use and unaccounted for 44 611 44,103 46,034 42,552 47,176 49,766 41.666 19 (11)

(77) 105

,(69) 18 44,630 44,092 45,957 42,657 47,176 49,697 41,684 (349)

(2,651) 44,630 44,092 45,957 42,657 46,827 47,046 41,684 (2,596)

(1,377)

(2,809)

(2,143)

(2,270)

(1,345)

(3,309)

System sales Sales to other utilities Total Sales 42,034 42,715 43,148 40,514 42,034 42,715 43,148 40,514 44,557 45,701 38,375 349 2,651 44.906 48,352 38.375 Maximum Day Sendout-mct (1,000 Btu)

Capability at Time of Peak-mcf per day Natural gas Manufactured, LP or LNG gas Total Capability 303,844 340,684 325,836 273,100 301,500 326,600 281,100 A

303,485 326,500 326,500 328,900 314,700 304,800 265,600 142,300 148,300 148,300 148,300 153,300 180,300 78,400 445,785 474,800 474,800 477,200 468,000 485,100 344,000 Natural Gas Purchased Electric operations-thousands of mct Gas operations thousands of mcf Total Natural Gas Purchased Degree Days (52-year average 5,098) 73 43,961 44,034 5,432 1,978 44,638 46,616 5,178 1,195 45,690 46,885 5,373 1,227 42,535 43,762 4,739 3,444 46,817 50,261 4,921 6,279 49,355 55,634 4,618 10,062 40,784 50,846 5,230 42

Electric Sales and Customers 1978 1977 1976 1975 1974 1973 1968 Sales millionsofkWh Residential Commercial and industrial Street and highway lighting Other public authorities Other utilities 5,559 6,259 188 399 32 5,620 6,120 189 397 48 5,486 5,905 190 386 25 5,334 5,757 182 405 34 5,185 5,540 3,714 5,621

5,925 4,062 187 182 147 394 385 257 34 26 90 System sales Power pool sales 12,437 12,374 11,992 11,712 11,421 12.058 8,270 790

. 346 250 290 314 449 788 Total Sales 13,227 12,720 12,242 12,002 11,735 12,507 9,058 Customers-monthly average Residential Commercial and industrial Others 798,288 791,808 784,359 776,178 766,612 754,396 686,381 81,071 80,205 78,535 77,317 76,108 74,504 65,342 41014 3,881 3,882 4.027 2,790 2,707 2,960 Customers-monthly average Total at Year-end 883,373 885,591 875,894 866,776 857,522 845.510 831.607 754,683 877,022 869,126 859,527 848,236 836,371 759,466 Residential kWh per customer Revenue per kWh 85964 8.27s 7,098 5.80s 6,994 5.19s 6,873 4.99tr.

6,763 4,48s 7,344 2.99s 5,412 2.51c Commercial and Industrial kWh per customer Revenue per kWh 77r204 5.39tt.

76,309 5.1 Sent 75,197 4.58it 74,455 73,849 79,528 62,170 4.46s 3.97s 2.52s 1.99s Gas Sales and Customers 1978 1977 1976 1975 1974 1973 1968 Sales thousands of mcf (1,000 Btu)

Residential Residential heating Commercial Commercial heating'ystem sales Other utilities 3i388 3,396 3,390 3,368 3,359 3.305 3,256 24r085 23,887 24,357 22,544 23,023 23,306 20,050 5,790 6,762 6,376 6,282 9,431 10,192 8,205 8,773 8,670

. 9,025 8,320 8,744 8.898 6,864 42,034 42,715 43,148 40,514 44,557 45,701 38,375 349 2,651 Total Sales 4? 034 42,715 43,148 40,514 44,906 48,352 38,375 Customers monthly average Residential Residential heating Commercial Commercial heating 219,082 219,930 220,769 221,602 222,413 224,352 236,872 137,486 137,580 137,724 137,461 136,110 133.098 110,607 33,151 13,344 13.573 13,776 14,022 14,164 14,016 171324 17,469 17,499 17,587 17,780 17,910 14,420 Customers monthly average.

Total at Year-end 387,023 388,323 386,091

- 386,830 389,565 390,426 390,325 389.524 375,915 388,147 389,122 389,260 388,387 376,009 Residential mcf per customer Revenue per mcf Commercial mcf per customer Revenue per mcf 77.1

'6.3 77.4 72.2 73.6 74.4 67.1

$ 3.98

$ 3.46

$ 3.31

$ 3.02

$ 2.55

$ 2.35

$ 2.09 477.9 500.8 495.7 465.6 571.5 595.2 529.9

$ 3.41

$ 2.93

$ 2.69

'2.31

$ 1.69

$ 1.46

$ 1.26

'In the heating ctasslrications. the sales shown cover att gas used. inciuding nonheating use.

43

BalanCe Sheet (In thousands of dollars) 1978 1977 1976 1975 1974 1973 1968 Assets UtilityPlant LessAccumulated depreciation

$3,167,601 486,865

$2,775,231 456,019

$2,398,900

'$2,097,019

$1,825,666

$1.585,492 413,305 377,720 "349,935 318,805

$1,030,931 t 207,890 Total UtilityPlant Other Property and Investments Current Assets

'eferred Charges:

Electric fuel cost adjustment deferred Other 2,680,736 70,784 229,463 8,131 27,599 2,319,212 3,972

'188,462.

14,932.

19,967 15,768

'18,775 14,773 17,091 1,985,595 1,719,299 3,803 3,892 183,780, 147,566 14,'732 7,548 4,369 4,942 1,475,731 1,266,687 1,193 1,290

~ 140,285 102,017 823,041 1,029 56,951 1,921 Total Assets

$3,016,713

$2,546,545

$2,207,721

$1,902,621

$1,639,489

$1,379.305 882,942 Capitalization and Uabllltles Capitalization Long-term debt Unamortized premium and discount on debt Preferred stock Common stock and premium Capital stock expense Retained earnings

$1,175,662 "89 390,449 699,425 (28,321) 311)838

$1,100,375

~,

$1,015,375

"= '$865,000

$735,000 (27,110) 279,157 (18,397);

(15,180)

(9,919) 242,147 209,524 187,537 1,628 2,602 -',

2,475

,614 394,436 331,431

'04,980 257,006 571,436

~ 45],078,.

'56.997 268,540

$650,625 2,754 182,030 242,968 (7,226) 174,550

$430.250 1,665

'2,196 162,665 (4,994) 110,223 Total Capitalization Trust Obligations Current Uabilities 2,549,142 189,603 214,383 2,319,922 30,000 143,848 2,024,236 1.723,796 1,440,778 1,245.701 138,)t03 141,220 174,343 116,334 792,005 79,072 Deferred Credits:

Accumulated deferred income tax reductions

'rQther 49,926 7,213 42,835 2,008 35,264

'7,519 2,640 3,'171 19,891 13,444 799 593 8,640 270'Total Deferred Credits 57)139 44,843 37,904 30,690 20,690 14,037 8,910

,'eserves for Claims and Damages Total Capitalization and Uabilities 6,446

$3,016,713 7,932

$2,546,545 7,178 6,915 3,678 3,'233

$2.207,721

$1,902,621

$1,639,489

$1,379,305 2,955 S

882.942

COnStruCtiOn EXpendltureS (In thousands of dollars) 1978 1977 1976 1975 1974 1973 1968 Electric Production (includes construction trust)

Transmission Distribution:

0 New business facilities

,0 Other facilities Gen'eral

$321)181 31,865 9,537 16,566 2)716

$279,207 39,788 10,871 15,400 1',502 9,907 9,497 15,753 17,923 2,016 936 11,195 23,712 1,810

$249,045

.$215,512

$169,043 27,466

. '5,770..29,234

$86,045 14,608 11,457 23,463 1,389

$19,121 8,836 12.788 17,210 458 Total Electric Gas Production and storage Transmission and distribution:

0 New business facilities 0 Other facilities General 381>865 1,559 5,196 906 346,768

-'525 1,083 5.507 1,133 486 279 75 "430 303 530 1,787 2;079 5,101 6,118 4,652 5,452 938 264 500 941 304,187 269,638

'34,994 136,962 58,413 60 i

5,406 7,949 193 Total Gas 8,144 8,248 6,828 7,1S1 7,014 8,902 13,728 Common Operations centers Other 3,999 4,404 3,110 11 4,615 97 2.070 649 4,232 442 2,580 Total Common Total Construction Expenditures Retirements of UtilityPlant 3,999

$394,008

$ 23,420 4,404

$359,420 S

7,002 3,110 4,626 2,167 4,881

$314,125

$281,455

$244,175

$150,745 S 10,387 S 17,400 8,787 S 10,607 3,022 S 75,163 S 10,065 44

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Long island Lighting Company 2500id Country Road Mineofa, NY 11501 Bulk Rate U.S. Postage Paid Hicksville. NY Permit No. 254