[Federal Register Volume 63, Number 49 (Friday, March 13, 1998)]
[Notices]
[Pages 12521-12526]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6530]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 35-26838]


Filings Under the Public Utility Holding Company Act of 1935, as 
Amended (``Act'')

March 6, 1998.
    Notice is hereby given that the following filing(s) has/have been 
made with the Commission pursuant to provisions of the Act and rules 
promulgated thereunder. All interested persons are referred to the 
application(s) and/or declaration(s) for complete statements of the 
proposed transaction(s) summarized below. The application(s) and/or 
declaration(s) and any amendments thereto is/are available for public 
inspection through the Commission's Office of Public Reference.
    Interested persons wishing to comment or request a hearing on the 
application(s) and/or declaration(s) should submit their views in 
writing by March 30, 1998, to the Secretary, Securities and Exchange 
Commission, Washington, D.C. 20549, and serve a copy on the relevant 
applicant(s) and/or declarant(s) at the address(es) specified below. 
Proof of service (by affidavit or, in case of an attorney at law, by 
certificate) should be filed with the

[[Page 12522]]

request. Any request for hearing shall identify specifically the issues 
of fact or law that are disputed. A person who so requests will be 
notified of any hearing, if ordered, and will receive a copy of any 
notice or order issued in the matter. After said date, the 
application(s) and/or declaration(s), as filed or as amended, may be 
granted and/or permitted to become effective.

LG&E Energy Corp. (70-9259)

    LG&E Energy Corp. (``LG&E Energy''), 220 West Main Street, P.O. Box 
3230, Louisville, Kentucky 40232, a Kentucky corporation and an 
electric and gas public utility holding company currently exempt under 
section 3(a)(1) from registration and from all other provisions of the 
Act except section 9(a)(2), has filed an application for an order under 
sections 9(a)(2) and 10 of the Act authorizing the proposed merger of 
KU Energy Corporation (``KU Energy''), a Kentucky corporation and a 
public utility holding company currently exempt from section 3(a)(1) 
from registration and from all other provisions of the Act except 
section 9(a)(2),\1\ with and into LG&E Energy, with LG&E Energy 
emerging as the surviving entity (``Transaction''). LG&E Energy also 
requests an order under section 3(a)(1) exempting it from all 
provisions of the Act, except section 9(a)(2), following consummation 
of the proposed Transaction.
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    \1\ KU Energy's exemption was granted by order of the 
Commission. See KU Energy Corporation, Holding Co. Act Release No. 
25409 (Nov. 13, 1991).
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    LG&E Energy's principal subsidiary, LG&E, is a Kentucky public 
utility company that owns and operates a combined electric and gas 
operation. LG&E is engaged primarily in the generation, transmission, 
and distribution of electricity to approximately 351,000 customers in 
Louisville and adjacent areas in Kentucky.\2\ LG&E also purchases, 
distributes, and sells natural gas to approximately 277,000 customers 
within this service area and in limited additional areas. Included 
within LG&E's service area is the Fort Knox Military Reservation, to 
which LG&E transports gas and provides electric service, but which 
maintains its own distribution systems. Retail sales rates, services 
and other aspects of LG&E's electric and gas retail operations are 
subject to the jurisdiction of the Kentucky Public Service Commission 
(``Kentucky Commission''). The Kentucky Commission also possesses 
regulatory authority over aspects of LG&E's financial activities 
including security issuances, property transfers when the asset value 
is in excess of $100,000, and mergers with other utilities. Wholesale 
rates for electric energy sold in interstate commerce, wheeling rates 
for energy transmission in interstate commerce, and certain other 
activities of LG&E (including its hydro-electric facilities) are 
subject to the jurisdiction of the Federal Energy Regulatory Commission 
(``FERC'').
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    \2\ LG&E's service area covers approximately 700 square miles in 
17 counties in Kentucky and has an estimated population of 800,000.
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    LG&E owes 4.9% of the common stock of Ohio Valley Electric 
Corporation (``OVEC''), an electric utility company under the Act which 
has one wholly owned subsidiary, Indiana-Kentucky Electric Corp. 
(``IKEC''). OVEC and IKEC were organized to supply the entire power 
requirements of the U.S. Department of Energy's gaseous diffusion plant 
in Pike County, Ohio, north of Portsmouth. OVEC owns a 1,075 Megawatt 
(``Mw'') generating station near Cheshire, Ohio and IKEC owns a 1,290 
Mw generating station at Madison, Indiana. All of the electricity sold 
by OVEC and IKEC is sold either to the U.S. Department of Energy or to 
the owners (or their subsidiaries, all of which are utility companies) 
of the stock of OVEC. OVEC and IKEC do not sell electricity to private 
consumers and do not have any securities outstanding in the hands of 
the public. For each of the three years in the period ended December 
31, 1996, LG&E derived less than 0.16% of its net income from its share 
of the earnings of OVEC.
    In addition, LG&E Energy and certain nonutility associates have 
entered into a Joint Plan of Reorganization (``Joint Plan'') with Big 
Rivers Electric Corporation (``Big Rivers''), an electric cooperative 
with generating facilities in Kentucky currently operating under 
Chapter 11 of the U.S. Bankruptcy Code. The Joint Plan will allow Big 
Rivers to emerge from bankruptcy as a financially viable utility 
capable of fulfilling its responsibilities toward its member 
cooperatives at rates that are materially lower than those in effect 
today. The Joint Plan includes a series of agreements among Big Rivers 
and LG&E Energy and its nonutility associates. Throughout the 
approximately 25-year term of these agreements, Big Rivers will 
continue to own all the generating facilities to which it currently has 
title, and will continue to own and operate all its transmission 
facilities and to meet the electricity requirements of its member 
cooperatives. Under the Joint Plan, Big Rivers will sell certain 
inventory and personal property to a wholly owned indirect subsidiary 
of LG&E Energy, Western Kentucky Leasing Corp. Another indirect wholly 
owned subsidiary of LG&E Energy, Western Kentucky Energy Corp. 
(``WKEC''), will conduct day-to-day operation of the facilities. LG&E 
Energy states that it is expected that WKEC will qualify as an exempt 
wholesale generator (``EWG''), as defined under section 32 of the Act. 
After the required regulatory approvals are received, WKEC will lease 
the facilities from Big Rivers, will own the electrical output of the 
facilities, and will sell to LG&E Energy's energy marketing subsidiary 
the net output of the facilities, some of which LG&E Energy's energy 
marketing subsidiary is obligated to resell to Big Rivers.
    Prior to obtaining the necessary regulatory approvals, Big Rivers 
will subcontract with another indirect wholly owned subsidiary of LG&E 
Energy for the day-to-day operation of another facility which is owned 
by the City of Henderson, Kentucky. LG&E Energy's operation of this 
facility is the subject of a separate no-action letter under the act 
requesting confirmation that this LG&E Energy subsidiary is not an 
electric utility company under the Act. After the necessary regulatory 
approvals are obtained, this subsidiary will take assignment of Big 
Rivers' responsibilities under the current Big Rivers' agreements with 
the City of Henderson and will take title to a portion of the 
electrical output of the facility (to the extent the output of the 
facility is not committed to the City of Henderson to meet the 
requirements of its residents). In summary, LG&E Energy states that Big 
Rivers' generation facilities will be dispatched separately from those 
of LG&E and Kentucky Utilities, and, for purposes of the Act, Big 
Rivers' transmission facilities will not be owned, leased, or 
controlled by LG&E or Kentucky Utilities.
    LG&E Energy is also engaged in a number of other business 
activities through two other directly owned subsidiaries, LG&E Energy 
Foundation, Inc. (``LG&E Energy Foundation'') and LG&E Capital Corp. 
(``LG&E Capital''). LG&E Energy Foundation is a tax-exempt charitable 
foundation that makes charitable contributions to qualified entities. 
LG&E Capital, through various subsidiaries and joint ventures, is 
involved in numerous nonutility, energy-related businesses. Through its 
subsidiaries, LG&E Capital has interests in and operates electric power 
plants in several states, Argentina and Spain. Each of these facilities 
is a qualifying cogeneration facility (``QF'') under the Public Utility 
Regulatory Policies Act of 1978, an EWG, or a foreign utility company 
(``FUCO'') under section 33 of

[[Page 12523]]

the Act. LG&E Capital also has interest in and operates two natural gas 
distribution companies in the Mendoza and Cordoba provinces in 
Argentina, both of which are FUCOs. LG&E Capital is activity involved 
through various subsidiaries in energy marketing and trading. With 
respect to natural gas, LG&E Capital also is involved through 
subsidiaries in the gathering, processing, storage, and transportation 
of natural gas.
    For the year ended December 31, 1996, LG&E Energy's operating 
revenues on a consolidated basis were approximately $3.589 billion, of 
which $607 million were attributable to the sales of electricity, $214 
million were attributable to sales of natural gas, and $2.768 billion 
were attributable to nonutility activities. Consolidated assets of LG&E 
Energy and its subsidiaries at December 31, 1996 were approximately 
$3.012 billion, of which approximately $1.449 billion consisted of net 
electric utility property, plant and equipment, $237 million consisted 
of net gas utility property, plant, and equipment. As of September 30, 
1997, LG&E Energy had 66,525,636 issued and outstanding shares of 
common stock (``LG&E Energy Common Stock''). LG&E Energy has no 
preferred stock outstanding.
    KU Energy's principal subsidiary, Kentucky Utilities, is a Kentucky 
electric utility company and an exempt holding company\3\ that 
produces, transmits, and sells electric energy to about 432,900 
customers in over 600 communities and adjacent suburban and rural areas 
in 77 counties in central, southeastern, and western Kentucky, and to 
about 28,800 customers in 5 counties in southwestern Virginia.\4\ In 
Virginia, Kentucky Utilities operates under the name Old Dominion Power 
Company. Kentucky Utilities also sells electric energy at wholesale for 
resale in 12 municipalities in Kentucky. The territory served includes 
most of the Bluegrass Region of central Kentucky and parts of the coal 
mining areas in southeastern and western Kentucky and southwestern 
Virginia. Kentucky Utilities is subject to the jurisdiction of the 
Kentucky Commission and the Virginia State Corporation Commission as to 
retail rates and service, accounts, issuance of securities, and in 
other respects. The FERC has jurisdiction under the Federal Power Act 
over certain of the electric utility facilities and operations, 
wholesale sale of power, and related transactions and accounting 
practices of Kentucky Utilities, and in certain other respects as 
provided in the Federal Power Act. By reason of owning and operating a 
small amount of electric utility property in one county in Tennessee 
(having a gross book value of about $226,000), Kentucky Utilities may 
also be subject to the jurisdiction of the Tennessee Regulatory 
Authority as to retail rates, accounts, issuance of securities, and in 
other respects.
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    \3\Kentucky Utilities is a public utility holding company exempt 
from all provisions of the Act except section 9(a)(2) pursuant to 
section 3(a)(2) and order of the Commission. See KU Energy 
Corporation, Holding Co. Act Release No. 25409 (Nov. 13, 1991).
    \4\The territory served by Kentucky Utilities has an aggregate 
population estimated at about one million. The largest city served 
is Lexington, Kentucky. The population of the metropolitan Lexington 
area is estimated at about 225,000. The populations of the next ten 
largest cities served at retail range from about 21,000 to 9,000.
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    Kentucky Utilities owns 2.5% of the common stock of OVEC. Kentucky 
Utilities also owns 20% of Electric Energy, Inc. (``EEI''), an electric 
utility company under the Act. EEI was formed in the early 1950s to 
provide electric energy to a uranium enrichment plant located near 
Paducah, Kentucky. The enrichment plant was originally operated by the 
Atomic Energy Commission and the Department of Energy and is operated 
today by the United States Enrichment Corporation. EEI owns the Joppa 
Plant, a 1,015 Mw coal-fired electric generating plant located near 
Joppa, Illinois, and six 161 kilovolts transmission lines which 
transmit power from the Joppa Plant to the Paducah enrichment plant. 
EEI's common stock is held by Kentucky Utilities and three other 
utility companies. EEI sells its excess electricity to its sponsoring 
utilities for resale. The uranium enrichment facility is EEI's only 
end-user customer. For each of the three years in the period ended 
December 31, 1996, KU Energy derived less than 3.4% of its net income 
from its share of the earnings of EEI and OVEC.
    In addition to Kentucky Utilities, KU Energy has one other 
subsidiary, KU Capital Corporation (``KU Capital''). KU Capital is KU 
Energy's vehicle for investments in various nonutility energy-related 
ventures. These activities have consisted of investing as an equity 
participant in leases of eight combustion turbine generating units to 
other utilities and investing in limited partnership interests in 
various independent projects that are either QFs or EWGs.
    For the year ended December 31, 1996, KU Energy's operating 
revenues on a consolidated basis were approximately $716 million, of 
which approximately $712 million were attributable to its electric 
utility operations, and approximately $4 million were attributable to 
its nonutility operations. Consolidated assets of KU Energy and its 
subsidiaries at December 31, 1996 were approximately $1.7 billion of 
which approximately $1.5 billion consisted of net electric utility 
property, and $55 million consisted of nonutility assets. As of 
September 30, 1997, KU Energy had 37,817,878 outstanding shares of 
common stock (``KU Energy Common Stock''). KU Energy has no shares of 
preferred stock outstanding.
    The merger agreement provides for KU Energy to be merged with and 
into LG&E Energy, with LG&E Energy as the surviving corporation. Under 
the merger agreement, upon completion of the Transaction, each issued 
and outstanding share of KU Energy Common Stock (except shares held by 
KU Energy shareholders who perfect dissenters' rights), together with 
associated stock purchase rights, will be canceled and converted into 
1.67 shares of LG&E Energy Common Stock, together with associated stock 
purchase rights. Each issued and outstanding share of LG&E Energy 
Common Stock (except shares held by LG&E Energy shareholders who 
perfect dissenters' rights), together with associated stock purchase 
rights, will remain outstanding, unchanged, as one share of LG&E Energy 
Common Stock. The Transaction is expected to qualify as a tax-free 
reorganization under section 368(a) of the Internal Revenue Code of 
1986, as amended, and to be treated as a ``pooling of interests'' for 
accounting purposes.
    As a result of the Transaction, LG&E Energy will be a public-
utility holding company as defined in section 2(a)(7) of the Act with 
ownership of two public-utility companies, LG&E and Kentucky Utilities, 
and indirect ownership, through Kentucky Utilities, of 20% of one other 
public-utility company, EEI. LG&E states that following consummation of 
the Transaction, it will be entitled to an exemption from all 
provisions of the Act except section 9(a)(2) because it and each of its 
public-utility subsidiaries from which it derives a material part of 
its income will be predominantly intrastate in character and will carry 
on their utility businesses substantially within the state of 
Kentucky.\5\
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    \5\ LG&E states that LG&E Energy and each of its material public 
utility subsidiaries will be Kentucky corporations operating 
primarily in Kentucky. Neither OVEC nor IKEC will be a subsidiary of 
LG&E Energy for purposes of the Act following the Transaction 
because LG&E Energy's total indirect ownership of OVEC will be only 
7.4%. Although EEI will be a subsidiary of LG&E Energy for purposes 
of the Act following the Transaction and is not a Kentucky 
corporation, LG&E Energy states that EEI will not be a material 
public utility subsidiary of LG&E Energy for purposes of section 
3(a)(1). KU Energy has not in the past derived a material part of 
its income from EEI (less than 3.5% in each of the last three years) 
and, on a pro forma basis following the Transaction, EEI will 
constitute an even smaller part of LG&E Energy's income on a 
percentage basis.

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[[Page 12524]]

BL Holding Corp. (70-9157)

    BL Holding Corp. (``BL Holding'') One MetroTech Center, Brooklyn, 
New York 11201, a to-be-formed New York public utility holding company 
has filed an application for an order under sections 9(a)(2) and 10 of 
the Act authorizing its proposed acquisitions of KeySpan Energy 
Corporation (``KeySpan''), a New York public utility holding company 
claiming an exemption from registration under section 3(a)(1) under 
rule 2 from all provisions of the Act except section 9(a)(2), and 
KeySpan's wholly owned gas utility subsidiary, The Brooklyn Union Gas 
Company (``Brooklyn Union'') \6\ and Long Island Lighting Company 
(``LILCO''),\7\ a New York electric and gas public utility company and/
or certain of LILCO's assets as described below.\8\ BL Holding also 
requests an order under section 3(a)(1) declaring it exempt from all 
provisions of the Act except section 9(a)(2), following consummation of 
the proposed transactions.
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    \6\ Brooklyn Union distributes natural gas at retail in the 
Boroughs of Brooklyn and Staten Island and two-thirds of the Borough 
of Queens, all in the City of New York. Brooklyn Union's service 
territory is approximately 187 square miles. The population of the 
territory served is approximately four million persons. As of 
September 30, 1997, Brooklyn Union had approximately 1.128 million 
active meters, of which approximately 1.09 million were residential.
    \7\ LILCO supplies electric and gas service in Nassau and 
Suffolk Counties on Long Island, New York, and to the Rockaway 
Peninsula in the Borough of Queens in the City of New York. LILCO's 
service territory covers an area of approximately 1,230 square 
miles, and is contiguous to the service territory of Brooklyn Union. 
The population of the service area is approximately 2.7 million 
persons, including approximately 98,000 persons who reside in the 
Borough of Queens within the City of New York. LILCO serves 
approximately one million electric customers, of which 921,000 are 
residential. LILCO receives approximately 49% of its electric 
revenues from residential customers, 48% from commercial/industrial 
customers and 3% from sales to other utilities and public 
authorities. LILCO also serves approximately 460,000 gas customers, 
412,000 of which are residential, accounting for 61% of the gas 
revenues, with the balance of the gas revenues made up by the 
commercial/industrial customers and off-system sales.
    \8\ The Amended and Restated Agreement and Plan of Exchange and 
Merger dated as of June 26, 1997 was originally between Brooklyn 
Union and LILCO. On September 29, 1997, Brooklyn Union engaged in a 
binding share exchange with its subsidiary KeySpan, with the result 
that Brooklyn Union became a wholly owned subsidiary of KeySpan. 
This agreement is called the amended by the Amendment, Assignment 
and Assumption Agreement among Brooklyn Union, LILCO and KeySpan, 
dated as of September 29, 1997 and KeySpan was substituted for 
Brooklyn Union in the original agreement ``Exchange and Merger 
Agreement.''
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    BL Holding proposes three alternative transactions. The first 
proposal, defined as the ``Combination,'' involves the acquisition by 
BL Holding of all of the issued and outstanding common stock of (1) 
KeySpan and its utility subsidiary, Brooklyn Union and (2) LILCO.
    The second proposal, or ``Modified Combination,'' involves the 
acquisition by BL Holding of the issued and outstanding common stock of 
KeySpan and the equity interests in one or more to-be-formed wholly 
owned subsidiaries (``Transferee Subsidiary''). The Transferee 
Subsidiaries will acquire certain assets of LILCO (``Transferred 
Assets''), if a proposed merger of LILCO into a subsidiary of the Long 
Island Power Authority (``LIPA''), a corporate municipal 
instrumentality and a political subdivision of the State of New York, 
occurs.\9\
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    \9\ BL Holding, LILCO, LIPA, and to-be-formed subsidiary of LIPA 
entered into an Agreement and Plan of Merger, dated as of June 26, 
1997, ``LIPA Agreement.'' Under the LIPA Agreement, LIPA would 
acquire certain assets of LILCO through a stock transaction 
including the electric transmission and distribution system, the 18% 
interest in the Nine Mile Point 2 nuclear power station in upstate 
New York and the electric regulatory assets (as well as certain 
current assets related to LILCO's electric business). LIPA would 
also assume certain of LILCO's current liabilities, long-term debt 
obligations and preferred stock.
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    The third proposal, ``LIPA Transaction,'' involves the acquisition 
by BL Holding of the equity interests of the Transferee Subsidiaries 
and the subsequent transfer of the Transferred Assets without giving 
effect to the acquisition of the common stock of KeySpan. The three 
proposals, the Combination, the Modified Combination and the LIPA 
Transaction are referred to collectively as the ``Transactions.'' Any 
one of these alternative Transactions may occur.

The Combination

    Under the Combination, BL Holding would own and, through LILCO and 
Brooklyn Union, operate the existing gas and electric utility systems 
owned by LILCO and the existing gas utility system owned by Brooklyn 
Union. The Exchange and Merger Agreement provides that, following its 
adoption by the shareholders of both LILCO and Brooklyn Union (each of 
which occurred on August 7, 1997) and the satisfaction or waiver of the 
other conditions to the combination, including obtaining the requisite 
regulatory approvals, the outstanding shares of LILCO common stock 
(``LILCO Common Stock'') will be exchanged for newly issued shares of 
BL Holding common stock, par value $0.01 per share (``BL Common 
Stock''), in a share exchange (``Share Exchange''). In addition, the 
outstanding shares of KeySpan common stock will be converted into the 
right to receive newly issued shares of BL Common Stock.
    Upon the consummation of the Share Exchange, each issued and 
outstanding share of LILCO Common Stock, other than shares held by 
dissenting shareholders, will be exchanged for 0.803 shares of BL 
Common Stock. Thus, BL Holding will become the owner of each share of 
LILCO Common Stock and each share of LILCO Common Stock will be deemed 
to have been exchanged for that fraction of a share of BL Common Stock.
    In addition, each issued and outstanding share of preferred stock 
of LILCO will be unchanged as a result of the Share Exchange and will 
remain outstanding thereafter provided that the transactions 
contemplated by the LIPA Agreement are not consummated.
    Upon the consummation of the Combination, each issued and 
outstanding share of KeySpan common stock, other than dissenting 
shares, will be converted into the right to receive one share of BL 
Common Stock and KeySpan will become a wholly owned subsidiary of BL 
Holding (``KeySpan Merger'').

The Modified Combination

    If the LIPA Transaction is consummated before or contemporaneously 
with the Combination, KeySpan and certain assets of LILCO will be 
combined under the Modified Combination. Instead of consummating the 
Share Exchange, the transactions contemplated by the Exchange and 
Merger Agreement and the LIPA Agreement will be consummated in the 
following way.
    In exchange for the designated number of shares of BL Common Stock 
(``Designated Number'') and up to $75 million face amount of BL Holding 
preferred stock (``Private Placement Preferred Stock''), LILCO will 
transfer the Transferred Assets to the subsidiaries of BL Holding, as 
KeySpan and LILCO direct. The Designated Number will be the number of 
shares of BL Common Stock representing the net fair market value of the 
Transferred Assets, as will be determined in good faith by KeySpan and 
LILCO, less the face amount of the BL Holding preferred stock.
    LIPA Sub \10\ will merge with and into LILCO and the transactions

[[Page 12525]]

contemplated by the LIPA Agreement will be consummated. The cash merger 
consideration will be paid to an exchange agent as agent for the 
holders of LILCO Common Stock to subscribe for and purchase from BL 
Holding a number of shares of BL Common Stock, which number of shares, 
when added to the Designated Number, will represent the number of 
shares of LILCO Common Stock issued and outstanding immediately prior 
to the consummation of the KeySpan Merger, other than LILCO dissenting 
shares, multiplied by 0.880. The KeySpan Merger will then be 
consummated promptly.
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    \10\ Under the LIPA Agreement, LILCO will merge with LIPA 
Acquisition Corporation, a New York corporation to be formed as a 
wholly owned subsidiary of LIPA (``LIPA Sub''). LIPA Sub will be 
merged with and into LILCO, which will be the surviving corporation, 
for aggregate cash merger consideration of $2.4975 billion (subject 
to adjustment), LILCO's Series AA Preferred Stock will be exchanged 
for Series AA preferred stock of BL Holding and each outstanding 
share of the LILCO Series CC Preferred Stock, Series GG Preferred 
Stock, Series QQ Preferred Stock and Series UU Preferred Stock 
(except for shares whose holders perfect their rights to obtain 
judicial appraisal) will be canceled and converted into the right to 
receive cash in the applicable amounts described in the LIPA 
Agreement. Immediately prior to the consummation of the LIPA 
Transaction, LILCO will transfer to BL Holding, or one or more of BL 
Holding's wholly owned subsidiaries, all of the Transferred Assets.
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    Also under the Modified Combination, BL Holding would own and, 
through KeySpan and one or more Transferee Subsidiaries, operate each 
of the existing gas utility systems as well as the non-nuclear 
generating facilities currently owned by LILCO and, through one or more 
other Transferee Subsidiaries, would provide a comprehensive set of 
operational and management services to LIPA to assist LIPA in the 
operation of the electric system (which would continue to be owned by 
LILCO as a wholly owned subsidiary of LIPA).

The LIPA Transaction

    Under the LIPA Transaction, BL Holding would own and, through the 
Transferee Subsidiaries, operate the gas utility system and non-nuclear 
generating facilities currently owned by LILCO and provide electric 
system operational and management services to LIPA.
    Before the closing of the LIPA Transaction (``LIPA Closing''), BL 
Holding will form the Transferee Subsidiaries which will enter into 
certain agreements in connection with the LIPA Transaction, which are 
referred to as the ``Basic Agreements.'' Under the Basic Agreements, 
one or more of the Transferee Subsidiaries will provide: (1) certain 
management services on behalf of LIPA with respect to the operation and 
maintenance of the electric transmission and distribution system to be 
transferred to LIPA as part of the LIPA Transaction; (2) electric 
capacity and energy to LIPA from the generating plants that are among 
the Transferred Assets; and (3) energy management services to purchase 
fuel and electric capacity and energy and manage the scheduling and 
sale of electric capacity and energy on behalf of LIPA. Certain 
schedules to the LIPA Agreement set out the principles and procedures 
to be used to decide which LILCO assets and properties will be part of 
the Transferred Assets and which will remain with LILCO as a subsidiary 
of LIPA. Generally, the Transferred Assets will consist of all those 
assets currently owned and employed by LILCO in the conduct of its gas 
distribution business, LILCO's non-nuclear electric generating assets 
located on Long Island, and certain common assets used by LILCO in the 
operation and management of LILCO's existing gas distribution, electric 
generation and electric transmission and distribution system.
    Immediately prior to the LIPA Closing, LILCO will transfer the 
Transferred Assets to the Transferee Subsidiaries in exchange for the 
(1) Designated Number of shares of BL Common Stock and (2) Private 
Placement Preferred Stock. LILCO will be obligated to sell the Private 
Placement Preferred Stock immediately prior to the LIPA Closing. It is 
anticipated that the Private Placement Preferred Stock will: (1) have a 
final maturity date more than five years after the LIPA Closing; (2) be 
nonvoting (except as a result of BL Holding's failure to pay dividends 
for a specified period of time); (3) be nonconvertible; and (4) have 
other terms and conditions to be determined at the time of sale.
    At the LIPA Closing, the shares of capital stock of LILCO will be 
treated as follows:

    (1) Common and preferred shares held in treasury will be 
canceled and retired. (``Canceled Shares'').
    (2) Each issued and outstanding share of LILCO Common Stock, 
other than Canceled Shares and shares of LILCO Common Stock held by 
any dissenting shareholder, will be canceled and converted into the 
right to receive: (a) an amount in cash equal to the cash merger 
consideration divided by the number of shares of LILCO Common Stock 
outstanding; and (b) a pro rata distribution of BL Common Stock 
received by LILCO in exchange for the Transferred Assets.
    (3) Each holder of shares of LILCO Common Stock, other than 
shares held by any dissenting sharesholders, will be deemed to have 
appointed an exchange agent as its agent to receive the cash 
otherwise due the holder and to use the cash to subscribe for shares 
of BL Common Stock. The total number of shares of BL Common Stock 
distributable to holders of LILCO Common Stock in respect of each 
share of LILCO Common Stock will include the number of distributable 
shares of BL Common Stock received by LILCO in exchange for the 
Transferred Assets, as well as the number of shares distributable 
from the purchase by the exchange agent of additional shares of BL 
Common Stock out of the cash purchase price and, in the aggregate, 
will equal: (a) 0.880 shares of Company Common Stock for each share 
of LILCO Common Stock (other than the dissenting shares) if the 
Combination is consummated concurrently with the LIPA Transaction; 
or (b) one share of BL Common Stock for each share of LILCO Common 
Stock (other than the dissenting shares) if the Combination is not 
consummated concurrently with the LIPA Transaction.
    (4) If the Combination has been consummated prior to the LIPA 
Closing, then (a) no shares of BL Common Stock or Private Placement 
Preferred Stock will be delivered in exchange for the Transferred 
Assets, and BL Holding and/or one or more of its subsidiaries, as 
the holders of all then outstanding LILCO Common Stock, will receive 
all of the cash merger consideration, and (b) an additional 0.077 
shares of BL Common Stock will be distributed to the record holders 
of LILCO Common Stock as of the effective time of the Combination in 
respect of each share of LILCO Common Stock.
    (5) Each issued and outstanding share of Series AA Preferred 
Stock of LILCO, other than Canceled Shares and shares of the 
preferred stock held by any dissenting shareholder, will be canceled 
and converted into the right to receive one fully paid and 
nonassessable share of preferred stock of BL Holding with identical 
rights (including dividend rates) and designations to the Series AA 
Preferred Stock.
    (6) Each issued and outstanding share of LILCO Preferred Stock 
that is subject to optional redemption by LILCO at or before the 
closing date, other than Canceled Shares, will be redeemed for cash 
by LILCO not later than the closing date in accordance with the 
terms applicable to the shares.
    (7) Each issued and outstanding share of LILCO Preferred Stock, 
other than Canceled Shares, dissenting Preferred Shares, shares of 
Series AA Preferred Stock and redeemable preferred stock 
(collectively, ``Non-redeemable Preferred Stock''), will be canceled 
and converted into the right to receive cash in the amount of the 
sum of (a) the Make-Whole Amount,\11\ and (b) accrued

[[Page 12526]]

but unpaid dividends in respect of the sahres through the closing 
date.

    \1\ The Make-Whole Amount means, with respect to the shares, an 
amount equal to the present value of (a) the face or liquidation 
preference amount of the share, and (b) the remaining dividend 
payments due on the share between the LIPA closing date and the 
applicable redemption date computed using a discount rate equal to 
the applicable Fair Market Rate divided by 0.95.
    Fair Market Rate is defined as the Generic General Obligation 
Fair Market Yield for Baa rated Low/Medium Coupon General Municipal 
Obligations at the time of the computation as reported on Bloomberg, 
with a maturity most nearly equal to the period between cancellation 
and final redemption of the series of Non-redeemable Preferred 
Stock. The period between cancellation and redemption refers to the 
period between the closing date of the LIPA Transaction (``LIPA 
Closing Date''): (a) August 1, 2002, with respect to the Series CC 
Preferred Stock; (b) March 1, 1999, with respect to the Series GG 
Preferred Stock; (c) May 1, 2001, with respect to the Series QQ 
Preferred Stock; and (d) October 16, 2018, with respect to the 
Series UU Preferred Stock.
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    The amount by which the aggregate amount payable exceeds 100% of 
the aggregate face or liquidation preference amounts for all shares of 
Non-redeemable Preferred Stock shall be paid by the Company to LILCO 
promptly after the LIPA Closing. The cash merger consideration is based 
upon the assumption that the total long-term indebtedness of LILCO on 
the LIPA Closing Date will not exceed $3.576 billion (``Retained Debt 
Amount'').
    The Retained Debt Amount will be adjusted based upon LILCO's net 
book value, as reflected on LILCO's audited consolidated balance sheet 
as of the date, as follows. The Retained Debt Amount will be either (1) 
increased by the amount, if any, by which the net book value of the 
Retained Assets exceeds $2.5008 billion or (2) decreased by the amount, 
if any, by which the net book value of the Retained Assets is less than 
$2.5008 billion.
    As of the LIPA Closing Date, BL Holding will, and will cause each 
of the Transferee Subsidiaries to, execute and deliver promissory notes 
(``Promissory Notes'') on the following terms: (1) The aggregate 
principal amount will be equal to the excess, if any, of the 
indebtedness of LILCO outstanding on the LIPA Closing Date over the 
Retained Debt Amount; and (2) The rates and maturities will correspond 
to each portion of debt underlying the indebtedness of LILCO on the 
LIPA Closing Date; provided, however, that the interest and principal 
payment dates will be adjusted to require payment by BL Holding 30 days 
prior to the corresponding payment dates on the underlying debt.
    LILCO currently has a series of 7.3% Debentures due July 15, 1999, 
with an approximate aggregate principal amount currently outstanding of 
$397 million, and a series of 8.20% Debentures due March 15, 2023, with 
an approximate aggregate principal amount currently outstanding of $270 
million. Subject to obtaining all required consents, BL Holding will 
assume these obligations as of the LIPA Closing Date under an exchange 
offer to be registered on Form S-4 with the Commission.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Johathan G. Katz,
Secretary.
[FR Doc. 98-6530 Filed 3-12-98; 8:45 am]
BILLING CODE 8010-01-M