Introduction

The Long Island Power Authority ("LIPA") has found a number of inaccuracies and false assertions in the Hauppauge Industrial Association's ("HIA") review of the Agreement in Principle among LIPA, Brooklyn Union Gas Company ("BU") and the Long Island Lighting Company ("LILCO"). Listed below are pertinent sections of the HIA's statement in bold faced type followed by LIPA's responses. In addition, the entire HIA statement is attached for reference and marked with letters to coordinate with LIPA's responses.

As stated by the PSC and in each of LILCO's 10-K filings since 1989, the costs of the 1989 Shoreham Settlement were always intended to be recovered over 40-years. The LIPA plan will continue to recover the costs of the 1989 Settlement over a long period of time, but at a lower tax-exempt cost of capital (conservatively estimated at approximately 7%) versus LILCO's weighted cost of capital of approximately 9.32%.

The repayment of the cost of the 1989 Shoreham Settlement is similar to the repayment of a mortgage on a home. Rate payers, like homeowners, must repay through their electric bills the principal and interest on the amount borrowed. As of June 30, 1996, the Company had $4.8 billion of Shoreham related regulatory assets on its books. In the LIPA proposal, a 33-year mortgage style amortization of $4.8 billion at an assumed 7% equals an annual payment of $376 million and total payments of $12.4 billion over 33 years, not $20 billion. Compare these figures to the annual payments of $472 million and total payments of $15.1 billion at LILCO's cost of capital of 9.32% over the remaining term of the agreement.

Wrong. LIPA will pay LILCO slightly less than book value for the equity of the assets being acquired, there is no overall premium or profit to LILCO. It should be noted that LILCO has previously taken a $1.4 billion prudency write off on its investment.

Wrong. The LIPA plan identified and fully disclosed the nature of each component of the immediate distributions as more fully described below.

$82 dollars of the money is the result of a federal racketeering jury verdict against LILCO..."

Our March 19 Comprehensive Presentation clearly states that these monies were being accelerated and paid out to the rate payers immediately rather than being applied as reductions to the customers electric bills through 1999. We also clearly stated that this acceleration and the amount of such payments would have to be approved by the federal judge who awarded this verdict. The table on page 38 of the Comprehensive Presentation and page 13 of the Summary of the Agreement in Principle explicitly excludes this accelerated payment from any savings calculations.

"$19 of the money is what LILCO owes its customers as a result of Phase 1 of LILCO's Tax Certiorari lawsuit against the Town of Brookhaven over the assessment of the Shoreham plant."

Our March 19 Comprehensive Presentation and page 13 of the Summary of the Agreement in Principle clearly identify these monies as relating to the "Shoreham Litigation Settlement Phase I" and explicitly excludes these monies from any savings calculation.

Wrong. The "Agreement and Plan of Merger" between LIPA and LILCO states that all existing tax certiorari lawsuits will be dropped and LILCO will not initiate any tax certiorari litigation relating to the generating facilities unless its assessment is raised other than for new capital additions to a plant or if there is a general increase in assessments for all property tax payers.

The 12 percent rate reductions of the December 1995 Plan were prepared by the same team of professional consultants, including independent accountants, that prepared this proposal. They were led by Bear, Stearns & Co. Inc., an investment banking firm. The prior proposal only presented the immediate rate reduction, not projected rate savings versus LILCO's future rates, because of the provisions of confidentiality agreements.

The projected immediate rate reductions and rate payer savings in the current proposal are based upon the same basic approach as last year; in fact, the table on page 38 of the Comprehensive Presentation begins with "LIPA Base Savings" of 12%, then adjusts the savings for the following new factors.

First, it increases the projected savings for anticipated synergy savings from the BU/LILCO merger, which LILCO estimates will be equal to approximately 2% per year in additional savings. In the Agreement and Plan of Merger, BU/LILCO commit to these savings, whether or not they actually realize any synergy reductions. (It should also be noted that the Management Services Agreement stipulates that the synergy savings are to be achieved without layoffs.) Second, by gaining control of the Shoreham Phase II Litigation, LIPA can immediately offer specific rate reductions which could not be projected as to timing and amount if control of the litigation remained with LILCO. Once again these factors were clearly identified in the table on page 38 of the Comprehensive Presentation and page 13 of the Summary of the Agreement in Principle.

Finally, in our current proposal we are able to project 5 and 10-year average annual savings because we can now publicly present LIPA's rates against LILCO's adjusted rate case projections. The projected increase in LILCO's base rates from 1998 through 2007 are less than 1% per year, significantly less than the assumed rate of inflation, hardly "inconceivable levels".

Competition to meet the needs of projected load growth will begin immediately. LIPA will competitively bid new power supply or load control measures for an average of approximately 75 MW to 125 MW annually each year during the fifteen year power supply contract. In addition, LIPA can reduce or "ramp down" approximately 1500 MW of capacity over the term of the Power Supply Agreement. In addition, LILCO's integrated resource plan indicates a need for 150 MW of incremental supply over the years 1998 to 2000.

"Total kilowatt-hours used on Long Island over the past several years have remained relatively constant. Nonetheless, LIPA cavalierly proclaims an annual growth rate of 100 megawatts for the next 8 years. These are contrived projections that have no real-world basis."

Total kilowatt hours used can not be compared with megawatts of demand for which LIPA has projected an annual growth rate averaging 100 megawatts for the forecast period. LIPA's demand forecast is based on the following components: (i) past demand history which, when normalized, reflects approximately 40 MW per year increase in demand over the past four years and is projected to continue through the forecast period, (ii) sales increase due to price elasticity estimated to increase demand approximately 30 MW per year, (iii) an 18% reserve margin on increased demand equaling approximately 13 MW per year, and (iv) a demand increase attributable to ramp down of LILCO generating capacity which could total up to 300 MW in the first seven years of the Power Supply Agreement contract period. In addition, another 1,140 MW of capacity can be ramped down over the remaining life of the contract and we therefore anticipate an acceleration in annual peak demand increases in the last half of the Power Supply Agreement contract period.

"There are New England power supply companies which are prepared to supply Long Island with low cost competitive power by constructing a $250 million, 600 megawatt transmission line under the Long Island Sound. However, these companies know that the PSC will allow LILCO to add a Shoreham toll to its transmission charge. Result: the line does not get built."

LIPA is currently in discussions with New England Electric Resources regarding an under-Sound cable which would allow LIPA to import additional lower cost power from New England. The decision to build the under-Sound cable will be based on an economic analysis of Long Island's existing power supply costs and the projected cost of the power to be imported from New England. The cost of the transmission and distribution system on Long Island will not impact the economic analysis of building an under-Sound cable.

LIPA is definitely committed to the construction of an under-Sound cable. In order to maximize cost savings, LIPA is open to private ownership or a private-public partnership for the new cross-Sound cable. We will initiate the environmental siting process upon entering into definitive agreements with LILCO and BU.

"The first and only priority of LIPA will be to avoid losing revenue to competitors and defaulting on $7.6 billion of a Shoreham dominated debt structure."

LIPA's first and foremost priority is to lower electric rates for all Long Island rate payers.

As stated by the PSC and in each of LILCO's 10-K filings since 1989, the costs of the 1989 Shoreham Settlement were always intended to be recovered over 40-years. The LIPA plan will continue to recover the costs of the 1989 Settlement over a long period of time, but at a lower tax-exempt cost of capital (conservatively estimated at approximately 7%) versus LILCO's weighted cost of capital of approximately 9.32%.

"The deal was never approved by the state legislature …"

The New York State Legislature was not required to approve the 1989 Shoreham Settlement.

"In light of this admission, how can any public official take the position that the ratepayers are legally bound to the Cuomo deal forever more."

This language states that the PSC could take such a position. In fact, both the past and the present PSC has not taken such a position. LILCO's' statement in its 1989 Prospectus filed with the Securities and Exchange Commission uses the cautionary language that one typically finds in such documents. Subsequent actions by the PSC allowing recovery of Shoreham related costs beyond the "3-year guarantee period" suggested by HIA, and reported comments by the Chairman of the PSC referring to the 1989 Agreement as a contract are more indicative of the PSC's position regarding the 1989 Agreement.

LIPA's proposal settles the $1.2 billion Shoreham Litigation for $625 million, thus avoiding property tax increases averaging 27% in Suffolk County. This reduced settlement is funded not from property tax increases but from a electric rate surcharge in Suffolk County which reduces the electric rate savings. Furthermore, only $463 million of LIPA bonds are issued: $313 million for the benefit of Nassau rate payers ($63 million paid upfront by check, and $50 million in credits to electric bills in each of the first 5 years) and $150 million for Suffolk rate payers ($30 million in credits in each of the first five years). The credits to Suffolk rate payers are in recognition of the fact that all Suffolk rate payers may not be property tax payers, and the need to minimize the rate differential between Nassau and Suffolk Counties in the initial five years for economic development reasons.

Wrong. The first $143 million of debt related to the Shoreham Settlement is included on the chart labeled "LIPA's Initial Debt Service Profile" (Supplemental Information of Financial and Economic Assumptions, page 8.) The debt profile reflecting all five years of Shoreham Settlement issues is shown on the next page (page 9).

Wrong. The deferred tax liability was considered in determining the purchase price for LILCO's stock. The rate payers will receive the benefit of the lower purchase price in lower rates. Also, a significant portion of the deferred tax liability has not been collected from rate payers as reflected in the regulatory tax asset.

Wrong. This statement shows a lack of understanding of accounting and financial statements. LIPA's purchase price relates only to the assets we are acquiring for which we are paying slightly less than book value.

Wrong. The BUG/LILCO agreement, entered into in December 1996, contained a provision in which ownership of the combined company by former LILCO shareholders would increase from 66% to 68% if LIPA were to acquire LILCO's electric system. Based upon the combined market value of the two companies, BUG shareholders would have transferred approximately $80 million in value to LILCO shareholders as of the date of the announcement. LIPA is not a party to that agreement and Long Island rate payers will be unaffected by that provision.

Wrong. LILCO and LIPA are not requesting a waiver but merely confirmation from the IRS that the transaction will be treated under existing law. The request to the IRS relates to rules, expected to go into effect in early June, which would require a not-for-profit entity, such as LIPA, which acquires a for-profit corporation to immediately recognize as a taxable gain the difference between the purchase price of the assets and their tax basis. The tax to be avoided would be a tax to LIPA, not LILCO.

After ten years of failed efforts, this is the first achievable plan. LIPA has examined every conceivable alternative and believes this plan offers the greatest potential for achieving sustainable relief to Long Island electric rate payers. Never-the-less, we remain open to any realistic, comprehensive proposal developed by HIA or any other group.

"Governor Pataki's Public Service Commission should force LILCO Stockholders to write off a sizable portion of the Shoreham debt. If LIPA then refinances the remaining debt, electric rates would be dramatically reduced on Long Island."

To achieve 20% rate payer savings, LILCO would have to write off more than 69% of the book value of the Shoreham regulatory asset, an amount greater than LILCO's common equity, which would result in the bankruptcy of the Company. In bankruptcy, the Company would be run by a trustee whose primary responsibility would be to protect the creditors, not the rate payers. Because the consequences to the Company are so severe, any attempt to force such a write off would result in immediate and protracted litigation, resulting in years of delay, millions of dollars in legal fees and forestalling any chance of near term rate relief.

Any notion that the State could force a write off of the Company's debt and then refinance the balance with new tax-exempt debt is absurd; what investor is going to buy the bonds of an entity that just forced other bond investors to take a significant write off?

The New Hampshire PSC was enjoined by the courts the day after its announcement. A protracted legal battle is expected between Northeast Utilities and the New Hampshire PSC which could take years to resolve. In addition, Northeast Utilities was not the beneficiary of a contract with the State. LIPA's plan can lower electric rates on Long Island as soon as it closes.

Niagara Mohawk consensually restructured its contracts with independent power producers ("IPPs") who were not creditors of Niagara Mohawk. These IPPs agreed to receive cash and stock in Niagara Mohawk in exchange for restructuring their contracts.

This approach would not be cost effective. LIPA's cost of tax-exempt debt (conservatively estimated at approximately 7%) is much lower than an investor owned utilities cost of equity (approximately 10% to 11%).

LIPA has analyzed the condemnation option. This approach would undoubtedly lead to protracted litigation, denying rate payers any near term relief, with no guarantee regarding the price paid for the assets and therefore the ultimate level of rate payer savings.

Long Island's electric rates will no longer be the highest in the continental United States if the LIPA plan is completed. Long Island's rates will drop to the seventh highest in the nation. More importantly, the LIPA transaction will effect the largest percentage and dollar amount electric rate reduction in U.S. history.