-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, KCTryxgLDTLP5VrY/xaLhluIyNCjHbfANjkWVcn2tJ4jOHylqmg+fMcj+f6yxUUL i5DJ5dZNv5d/38SUf/osJg== 0000014525-94-000018.txt : 19940826 0000014525-94-000018.hdr.sgml : 19940826 ACCESSION NUMBER: 0000014525-94-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROOKLYN UNION GAS CO CENTRAL INDEX KEY: 0000014525 STANDARD INDUSTRIAL CLASSIFICATION: 4924 IRS NUMBER: 110584613 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00722 FILM NUMBER: 94542763 BUSINESS ADDRESS: STREET 1: ONE METROTEC CENTER CITY: BROOKLYN STATE: NY ZIP: 11201 BUSINESS PHONE: 7184032000 MAIL ADDRESS: STREET 1: ONE METROTEC CENTER CITY: BROOKLYN STATE: NY ZIP: 11201 10-Q 1 TEXT&FINANCIALS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-722 THE BROOKLYN UNION GAS COMPANY (Exact name of Registrant as specified in its charter) New York 11-0584613 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One MetroTech Center, Brooklyn, New York 11201-3851 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (718) 403-2000 NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class of Common Stock Outstanding at July 5, 1994 $.33 1/3 par value 47,315,260 THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES INDEX Part I. Financial Information Page No. Condensed Consolidated Balance Sheet - June 30, 1994 and September 30, 1993 2 Condensed Consolidated Statement of Income - Three, Six and Twelve Months Ended June 30, 1994 and 1993 3 Condensed Consolidated Statement of Cash Flows Nine and Twelve Months Ended June 30, 1994 and 1993 4 Notes to Condensed Consolidated Financial Statements 5 Management's Discussion and Analysis of Results of Operations and Financial Condition 9 Review by Independent Public Accountants 13 Report of Independent Public Accountants 14 Part II. Other Information Item 1 - Legal Proceedings 15 Item 5 - Other Information 15 Item 6 - Exhibits and Reports on Form 8-K 17 Signatures 18
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET June 30, September 30, 1994 1993 (Unaudited) (Audited) _____________ ______________ (Thousands of Dollars) Assets Property Utility , at cost $ 1,574,897 $ 1,523,894 Accumulated depreciation (347,891) (333,468) Gas exploration and production, at cost 265,564 205,328 Accumulated depletion (110,701) (90,237) _____________ ______________ 1,381,869 1,305,517 _____________ ______________ Investments in Energy Services 91,256 66,682 _____________ ______________ Current Assets Cash 11,007 10,834 Temporary cash investments 91,385 10,425 Common stock proceeds receivable - 44,910 Accounts receivable 277,851 230,688 Allowance for uncollectible accounts (19,154) (14,212) Gas in storage, at average cost 63,697 102,516 Materials and supplies, at average cost 11,672 11,084 Prepaid gas costs 4,533 13,725 Other prepayments 9,387 37,304 _____________ ______________ 450,378 447,274 _____________ ______________ Deferred Charges 143,755 78,374 _____________ ______________ $ 2,067,258 $ 1,897,847 Capitalization and Liabilities Capitalization Common stock,$.33 1/3 par value stated at $ 487,652 $ 465,097 Retained earnings 316,067 255,979 _____________ ______________ Total common equity 803,719 721,076 Preferred stock, redeemable 7,200 7,500 Long-term debt 705,193 689,300 _____________ ______________ 1,516,112 1,417,876 _____________ ______________ Current Liabilities Accounts payable 142,770 163,876 Dividends payable 16,551 15,868 Taxes accrued 42,194 15,345 Customer deposits 22,582 21,584 Customer budget plan credits - 17,296 Interest accrued and other 35,718 53,491 _____________ ______________ 259,815 287,460 _____________ ______________ Deferred Credits Federal income tax 229,252 139,289 Unamortized investment tax credit 22,214 23,074 Other 39,865 30,148 _____________ ______________ 291,331 192,511 _____________ ______________ $ 2,067,258 $ 1,897,847 See accompanying notes to condensed consolidated financial statements.
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) Three Months Nine Months Twelve Months Ended June 30, Ended June 30, Ended June 30, _________________________ _________________________ _________________________ 1994 1993 1994 1993 1994 1993 ___________ ___________ ___________ ___________ ___________ ___________ (Thousands of Dollars) Operating Revenues Utility sales $ 225,297 $ 192,741 $ 1,113,975 $ 1,001,274 1,258,017 $ 1,137,366 Gas production and other 15,364 15,790 47,011 43,898 62,783 55,619 ___________ ___________ ___________ ___________ ___________ ___________ 240,661 208,531 1,160,986 1,045,172 1,320,800 1,192,985 Operating Expenses Cost of gas 99,992 71,118 492,298 415,913 549,071 469,188 Operation and maintenance 92,270 87,312 295,901 265,341 387,708 355,836 Depreciation and depletion 18,407 16,546 53,349 47,820 70,319 61,776 General taxes 29,819 29,311 124,774 120,499 149,103 143,193 Federal income tax (credit) (3,912) (2,479) 54,026 54,736 41,724 40,780 ___________ ___________ ___________ ___________ ___________ ___________ Operating Income 4,085 6,723 140,638 140,863 122,875 122,212 ___________ ___________ ___________ ___________ ___________ ___________ Other Income (Loss) Gain on sale of investment in Canadian gas company - - - - 20,462 - Write-off of investment in propane company - - - - (17,617) - Income (Loss) from energy services investments 1,610 (1,547) 4,247 877 4,762 (1,052) Other income (loss), net (629) (741) 772 (1,263) (1,473) (724) Federal income tax benefit 286 663 283 674 439 1,399 ___________ ___________ ___________ ___________ ___________ ___________ 1,267 (1,625) 5,302 288 6,573 (377) Income Before Interest Charges 5,352 5,098 145,940 141,151 129,448 121,835 ___________ ___________ ___________ ___________ ___________ ___________ Interest Charges Long-term debt 11,599 11,341 34,972 33,605 46,711 44,189 Other 1,357 411 2,855 1,844 3,763 2,338 ___________ ___________ ___________ ___________ ___________ ___________ 12,956 11,752 37,827 35,449 50,474 46,527 ___________ ___________ ___________ ___________ ___________ ___________ Net Income (Loss) (7,604) (6,654) 108,113 105,702 78,974 75,308 Dividends on Preferred Stock 86 90 265 275 354 368 Income (Loss) Applicable to Common Stock $ (7,690) $ (6,744) $ 107,848 $ 105,427 $ 78,620 $ 74,940 Per Share of Common Stock * $ (0.16) $ (0.15) $ 2.30 $ 2.40 $ 1.70 $ 1.71 Dividends Declared per Share of Common Stock * $ 0.338 $ 0.330 $ 1.013 $ 0.990 $ 1.343 $ 1.313 Average Common Shares Outstanding * 47,143,168 44,169,860 46,820,238 43,895,139 46,236,189 43,756,934 * Restated for three-for-two stock split effective July 1993. See accompanying notes to condensed consolidated financial statements.
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Nine Months Twelve Months Ended June 30, Ended June 30, __________ __________ __________ __________ 1994 1993 1994 1993 __________ __________ __________ __________ (Thousands of Dollars) OPERATING ACTIVITIES Net income $ 108,113 $ 105,702 $ 78,974 $ 75,308 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and depletion 57,568 53,080 75,794 67,786 Deferred Federal income tax 10,730 6,943 5,271 6,342 Gain on sale of investment in Canadian gas company - - (20,462) - Write-off of investment in propane company - - 17,617 - Amortization of investment tax credit (860) (806) (1,128) (1,060) (Income) Loss from energy services investments (4,247) (877) (4,762) 1,052 Dividends received from energy services investments 2,545 4,300 3,739 4,300 Allowance for equity funds used during construction (1,733) (1,213) (2,191) (1,600) __________ __________ __________ __________ 172,116 167,129 152,852 152,128 __________ __________ __________ __________ Effect of changes in working capital and other Accounts receivable,net (49,523) (89,856) (23,918) (47,386) Accounts payable (14,349) 14,258 (1,278) 25,433 Gas inventory and prepayments 48,011 19,906 (2,958) (17,508) Other 33,056 31,843 9,981 27,730 __________ __________ __________ __________ 17,195 (23,849) (18,173) (11,731) __________ __________ __________ __________ Cash provided by operating activities 189,311 143,280 134,679 140,397 __________ __________ __________ __________ FINANCING ACTIVITIES Sale of common stock 22,672 19,478 75,058 25,281 Common stock proceeds receivable 44,910 - - - Issuance of long-term debt 15,893 135,300 67,493 137,300 Commercial paper 62,000 - 62,000 - __________ __________ __________ __________ 145,475 154,778 204,551 162,581 Repayments Preferred stock (300) (300) (300) (300) Long-term debt - (125,000) (55,000) (125,400) Commercial paper (62,000) - (62,000) - __________ __________ __________ __________ 83,175 29,478 87,251 36,881 Dividends on common and preferred stock (47,848) (43,877) (63,249) (58,027) Trust funds, utility construction - 54,610 - 83,707 Other 113 464 313 (690) __________ __________ __________ __________ Cash provided by financing activities 35,440 40,675 24,315 61,871 __________ __________ __________ __________ INVESTING ACTIVITIES Capital expenditures (excluding allowance for equity funds used during construction) (154,598) (145,876) (211,662) (193,053) Proceeds from sale of investment in Canadian gas company 11,691 - 41,718 - Other (711) 12,268 20,400 (1,536) __________ __________ __________ __________ Cash used in investing activities (143,618) (133,608) (149,544) (194,589) __________ __________ __________ __________ Change in Cash and Temporary Cash Investments $ 81,133 $ 50,347 $ 9,450 $ 7,679 Cash and Temporary Cash Investments at End of Period $ 102,392 $ 92,942 $ 102,392 $ 92,942 Temporary cash investments are short-term marketable securities purchased with maturities of three months or less that are carried at cost which approximates their fair value. Supplemental disclosures of cash flows Income taxes $ 22,900 $ 22,100 $ 32,900 $ 29,600 Interest $ 40,654 $ 41,553 $ 50,917 $ 46,696 See accompanying notes to condensed consolidated financial statements. 4
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. In the opinion of the Company, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments necessary to present fairly the financial position of the Company as of June 30, 1994 and the results of operations for the three, nine and twelve months ended June 30, 1994 and 1993, and cash flows for the nine and twelve months ended June 30, 1994 and 1993. Certain reclassifications were made to conform prior period financial statements with the 1994 financial statement presentation. As permitted by the rules and regulations of the Securities and Exchange Commission, the Condensed Consolidated Financial Statements do not include all of the accounting information normally included with financial statements prepared in accordance with generally accepted accounting principles. Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto included in the Company's 1993 Annual Report to Shareholders, incorporated by reference in Part II, Item 8 of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 2. The Company's business is influenced by seasonal weather conditions. Annual revenues are substantially realized during the heating season (November 1 to April 30) as a result of the large proportion of residential heating sales compared to total sales. Accordingly, results of operations are historically most favorable in the second quarter (three months ended March 31) of the Company's fiscal year, with results of operations being next most favorable in the first quarter, while results for the third quarter are marginally unprofitable, and losses are incurred in the fourth quarter. The Company's tariff contains a weather normalization adjustment that requires recovery from or refund to firm customers of shortfalls or excesses of firm net revenues during a heating season due to variations from normal weather, which is the basis for projecting base tariff revenue requirements. Also, results of operations are affected by the timing and comparative amounts of base tariff rate changes. Therefore, the interim Condensed Consolidated Statement of Income should not be taken as a prediction for any future period. 3. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," on October 1, 1993. As a result of adopting this statement, deferred tax liabilities and related regulatory assets included in deferred charges increased by approximately $76.6 million with no effect on net income. The Company also adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," on October 1, 1993. Its adoption has not had a material effect on consolidated net income because the Company had begun to accrue and fund a portion of the cost of such benefits and, as a result, utility rates in fiscal 1994 reflect full recovery of the estimated annual SFAS-106 costs. 4. Investments in Energy Services (a) Iroquois Pipeline A Company subsidiary, North East Transmission Co., Inc. (NETCO), owns an 11.4% interest in Iroquois Gas Transmission System, L.P. (Iroquois), a 375-mile pipeline which transports gas from Canada to the Northeast. The subsidiary's investment in Iroquois was $20.5 million at June 30, 1994. In 1992, Iroquois was informed by the U.S. Attorney's Offices of various districts of New York of alleged violations of the U.S. Army Corps of Engineers permit, a related State Water Quality Certification and/or the Federal Clean Water Act. Civil penalties could be imposed if such alleged violations are shown to have occurred. No proceedings in connection with this matter have been commenced. In 1992, a criminal investigation of Iroquois was initiated and is being conducted by Federal authorities pertaining to various matters related to the construction of the pipeline. To date no criminal charges have been filed and the Assistant U.S. Attorney in charge of the investigation has stated that he is not yet ready to meet with Iroquois' attorneys to discuss the specifics of this matter. Iroquois has publicly stated it believes that the pipeline construction and right-of-way activities were conducted in a legal and responsible manner, that its environmental program complied with applicable standards, and that at the conclusion of the aforementioned federal investigation it expects the government will reach the same conclusion. Based on information currently available, the Company does not believe that the ultimate resolution of these matters will have a material effect on the Company's consolidated financial position. (b) Star Gas Corporation A Company subsidiary, Star Energy Inc., liquidated its investment in a propane company in December 1993. As of September 1993, the Company had recorded an impairment charge of $11.5 million after Federal income taxes, which was sufficient to reflect the effect of this liquidation. (c) Cogeneration Project Commitments A Company subsidiary, through affiliates, owns a 50% partnership interest, or approximately $45.8 million, as of June 30, 1994, in a project to construct and operate a 100-megawatt cogeneration plant at John F. Kennedy International Airport in Queens, N.Y. The estimated cost of the project is approximately $292 million, of which $175 million is being financed by proceeds of bonds issued by the Port Authority of New York and New Jersey and guaranteed by an international banking group. Construction of the project is scheduled for completion in late summer of 1994. In addition, a similar project to construct, own, and operate a 40-megawatt cogeneration plant at the State University of New York at Stony Brook, N.Y. is under construction. The financing is being provided through $79 million of tax-exempt Suffolk County Industrial Development Revenue Bonds and is guaranteed by a letter of credit issued by Toronto-Dominion Bank. Commercial operation is scheduled for the first quarter of 1995. Another Company subsidiary, through affiliates, owns a 50% partnership interest in the project, estimated to cost $97.6 million. As of June 30, 1994, the subsidiary had funded $3.6 million of a maximum of $9.3 million committed as its share of the project. 5. Environmental Matters The Company is subject to various Federal, state and local laws and regulations relating to the environment. Company operations are conducted in compliance with the statutory requirements of the Resource Conservation and Recovery Act (RCRA), the Toxic Substance Control Act (TSCA), and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The State of New York also has enacted various counterparts of these Federal laws which generally are more stringent in their requirements and are administered through the New York State Department of Environmental Conservation (DEC). The costs of compliance with environmental laws, which have not been material, generally are included as part of applicable operation expense. Moreover, the Company may become a potentially responsible party under relevant environmental laws, which may require clean-up of certain former gas manufacturing plants and other sites that the Company, or its predecessors, currently operates or operated in the past. On June 24, 1994, the City of New York, in a letter to the Company, requested that the Company agree to facilitate the investigation and remediation of contamination at a former coal gasification plant site located in the Carroll Gardens section of Brooklyn, N.Y., and to reimburse the City for its response costs incurred to date in investigating the Carroll Gardens site, pursuant to CERCLA and New York State statutory and common law. The City has indicated that it would prefer to proceed under a consensual agreement in lieu of litigation. The Company has held an initial meeting with the City to discuss this matter, and future meetings have been scheduled. At this time, the Company is unable to determine what the cost to the Company of the investigation and remediation may be. The City of New York notified the Company on January 11, 1993 that it intended to bring suit against the Company under the RCRA seeking remediation of contamination at a former coal gasification plant site located in the Coney Island section of Brooklyn, N.Y. and also seeking recovery of response costs under the CERCLA. The City has not initiated suit against the Company with respect to this site. The Company has met with the City on several occasions to discuss this matter. An interim response measure to address oil seepage, which was discovered in the summer of 1993, has been accepted by the U.S. Coast Guard. The Company currently anticipates that the cost of investigation and containment of the oil seepage will not be material. Further, until completion of the overall long-term site management studies, the Company will be unable to determine whether remediation will be required at the site and, if so, what the appropriate scope and cost of such remediation will be. On February 26, 1993, the Company received a letter from the DEC requesting a preliminary investigation of a release of potentially hazardous substances at a Company facility on Staten Island. This facility is contiguous to one of the Company's former manufactured gas plants. The preliminary investigation has been completed and an initial report has been provided to the DEC. The Company has completed additional investigations requested by the DEC, and anticipates submitting a report and a request to close the matter in the near future. The Company is unable, however, to determine at this time if remediation will be required at the site. The Company deferred $4.1 million based on commitments for investigation and probable response costs related to the Coney Island site. The Company believes, based on prior New York State Public Service Commission precedents and proceedings with respect to similar expenses, that these costs will be recovered in rates. THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Operating Results The following is a summary of items affecting comparative earnings and a discussion of the material changes in revenue and expenses during the following periods. (1) Three Months ended June 30, 1994 vs. Three Months ended June 30, 1993. (2) Nine Months ended June 30, 1994 vs. Nine Months ended June 30, 1993. (3) Twelve Months ended June 30, 1994 vs. Twelve Months ended June 30, 1993. Consolidated results in the third quarter of fiscal 1994 showed a loss of $7.7 million, or 16 cents per share, compared to a loss of $6.7 million, or 15 cents per share, in the third quarter of last year. The third quarter is typically unprofitable due to the seasonal nature of utility gas-heating sales, the principal source of consolidated revenue. Earnings for the nine months ended June 30, 1994 were $107.8 million, or $2.30 per share, compared to $105.4 million, or $2.40 per share, in the same period a year ago. Earnings in the twelve months ended June 30, 1994 were $78.6 million, or $1.70 per share, compared to $74.9 million, or $1.71 per share, in the twelve months ended June 30, 1993. Earnings for the periods ended June 30, 1994 reflect the benefit of continued growth in utility gas-heating sales, offset in part by higher operating expenses related to the severe weather this past winter. In addition, comparative earnings reflect higher production volumes from domestic gas-exploration-and- production operations this year. Moreover, for the twelve months ended June 30, 1994, a gain of $12.5 million after Federal income taxes from the sale of an investment in a Canadian gas company was more than sufficient to offset a loss from the liquidation of a subsidiary's investment in propane operations, which has been fully divested. The effect on utility revenues of variations due to colder- or warmer-than- normal weather is largely offset by the weather normalization adjustment included in the Company's tariff. Per share amounts for periods ended June 30, 1994 reflect the higher number of shares outstanding, primarily as a result of the issuance of 1.8 million shares through a public offering of common stock in September 1993. Firm sales in the quarter ended June 30, 1994 were 19,093 MDTH, compared to 19,513 MDTH in the quarter ended June 30, 1993. Firm sales of 120,346 MDTH for the nine months ended June 30, 1994 represent an increase of 3.5% over the same period of last year. Weather in the first nine months of fiscal 1994 was 4.6% colder than the corresponding period last year. Normalized for weather, firm gas sales continued to reflect growth in large-volume markets where gas service is provided under a volume discount rate. Firm sales of 133,047 MDTH for the twelve months ended June 30, 1994 increased 2.9% compared to sales in the corresponding period last year. Total gas throughput from utility operations, which includes deliveries to interruptible customers for gas and transportation services, as well as to off-system customers, was 32,494 MDTH for the third quarter of fiscal 1994 compared to 22,752 MDTH for the third quarter last year, an increase of 42.8%. Throughput was 153,524 MDTH for the nine- month period ended June 30, 1994, compared to 133,960 MDTH in the same period last year, an increase of 14.6%. Deliveries to off-system customers have increased by 15,508 MDTH since October 1993, primarily reflecting the impact of Federal Energy Regulatory Commission Order 636. As a result of this Order, the Company was able to utilize existing capacity to provide additional services to off-system customers at competitive prices. Margins on most of these sales and transportation volumes are passed back to firm customers. The benefits of increased off-system sales have far outweighed the minimal loss of gas sales to large volume customers within our sales territory. Total gas throughput for the twelve months ended June 30, 1994 was 178,779 MDTH, an increase of 23,356 MDTH, or 15%, compared to throughput in the twelve months ended June 30, 1993. (For additional information regarding regulatory matters that may affect competition, see Part II, Item 5, "Other Information - Restructuring Proceeding".) Utility net revenues (utility operating revenues less cost of gas of utility sales) increased $1.0 million, $30.0 million and $32.7 million in the three, nine and twelve months ended June 30, 1994, respectively. The increases generally reflect gas sales growth, primarily due to conversions to gas from oil for heating and the 2.7% annual revenue increase which became effective in October 1993. Increases in gas production and other revenues were primarily related to higher production volumes, especially from recently acquired properties in the Arkoma Basin and East Texas. Increases in operation expense were due to higher labor and related costs. Maintenance expense includes costs related to city and state construction projects. Such costs are partially reimbursed by the city. Moreover, operating expenses in all periods ended June 30, 1994 reflect the effects of the severely cold weather this past winter. Depreciation and depletion expenses generally reflect charges related to utility property additions and increased production from gas exploration and production operations conducted by a Company subsidiary. In 1994, exploration drilling activity has increased significantly; however, the effect of additions to gas reserves will not be fully evaluated until the end of the fiscal year. Furthermore, the Company's gas exploration and production subsidiary follows the full cost method of accounting for its gas and oil operations and is subject to the asset ceiling test limitation required by the Securities and Exchange Commission. If gas prices were to decline significantly from current yearly average prices the subsidiary might be required to record an additional depletion provision. General taxes principally include state and local taxes on utility revenues and property. Taxes for the three, nine and twelve months ended June 30, 1994 have increased as compared to the corresponding periods last year. The increase is primarily attributable to an increase in utility revenues reflecting higher sales volumes and tariff rates. Federal income tax expense primarily reflects changes in pre-tax income. Interest charges on long-term debt in the three, nine and twelve months ended June 30, 1994 reflect higher levels of long-term debt. Other interest charges reflect expenses related to regulatory settlement items which have increased in current periods. Dividends on preferred stock reflect reductions in preferred stock outstanding due to sinking fund redemptions. Financial Condition Cash provided by operating activities, which reflects seasonal weather variations, continues to be strong and is the principal source for financing capital expenditures. Increased cash flows in periods ended June 30, 1994 reflect, in part, recovery of take-or-pay and GAC costs previously deferred. Capital expenditures for fiscal 1994 are estimated to be approximately $217 million, including $100 million related to subsidiaries principally for gas exploration and development. In fiscal 1995, consolidated capital expenditures are estimated to be approximately $175 million. The Company currently has bank lines of credit of $65 million, which secure the issuance of commercial paper. The lines can be increased to $160 million by December 31, 1994. In addition, subsidiaries have lines of credit of $71 million, which for the most part support borrowings under revolving loan agreements. These credit facilities are used to finance seasonal working capital requirements and capital expenditures. In July 1993, the Company converted $55 million of variable rate gas facilities revenue bonds to fixed rate bonds. At June 30, 1994, the consolidated annualized cost of long-term debt was 6.95%. All long-term utility debt is tax-exempt. In September 1993, the PSC approved a revenue increase of $31.3 million, including $3.0 million of deferred credits, to become effective in fiscal 1994, the final year of a three-year rate settlement. For information regarding the status of a proposed new three-year rate settlement, see Part II, Item 5, "Other Information - Rate Matters". Environmental Matters The Company is subject to various Federal, state and local laws and regulations relating to the environment. The costs of compliance with environmental laws, which historically have not been material, are included as part of applicable operations expense. However, the Company deferred $4.1 million related to response and investigation costs pertaining to a former coal gasification plant site. (See Note 5, "Environmental Matters" to the Notes to Condensed Consolidated Financial Statements for additional information.) REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen & Co. has performed reviews in accordance with standards established by the American Institute of Certified Public Accountants of the Condensed Consolidated Financial Statements for the periods set forth in their report shown on page 14. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Brooklyn Union Gas Company: We have reviewed the accompanying condensed consolidated balance sheet of The Brooklyn Union Gas Company (a New York corporation) and subsidiaries as of June 30, 1994 and the related condensed consolidated statements of income for the three, nine and twelve month periods ended June 30, 1994 and 1993, and the condensed consolidated statements of cash flows for the nine and twelve month periods ended June 30, 1994 and 1993. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to the financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statement of capitalization of The Brooklyn Union Gas Company and subsidiaries as of September 30, 1993, and the related consolidated statements of income, retained earnings, and cash flows for the year then ended (not presented herein) and, in our report dated October 26, 1993, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 1993, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN & CO. New York, New York July 26, 1994 Part II. Other Information Item 1. Legal Proceedings The Company has from time to time been named as a defendant in various legal proceedings. In the opinion of management, the ultimate disposition of currently asserted claims will not have a materially adverse impact on the Company's financial position or results of operations. See the Notes to Condensed Consolidated Financial Statements, Note 4(a), "Investments in Energy Services - Iroquois Pipeline," for information regarding possible legal proceedings based upon alleged environmental and criminal violations involving Iroquois, and Note 5, "Environmental Matters," for information regarding additional environmental matters. Item 5. Other Information Rate Matters In July 1994, an Administrative Law Judge recommended approval of a new three-year rate settlement, which had been negotiated among the Company, the Staff of the Department of Public Service, and three intervenor parties. The agreement provides for full recovery of major costs and allows an 11.0% return on common equity devoted to utility operations in fiscal 1995, the first year of the three-year rate plan. The allowed return will be adjusted in the last two years of the plan, if necessary, to reflect changes in capital costs. The settlement agreement provides for several discrete incentives in customer service and sales, and affords the Company substantial additional pricing flexibility in price elastic markets subject to competitive pressures. Under the agreement, the Company will be permitted to retain 100% of any earnings from such incentives, up to 100 basis points on utility equity, and further will be permitted to retain 75% of the first 100 basis points of earnings unrelated to discrete incentives in excess of its allowed return, and 50% of any additional earnings above that level. Any excess earnings not retained would be used to amortize deferred costs. The agreement results in no base rate increase in fiscal 1995, but the Company would be permitted to amortize to income approximately $1.3 million of previously deferred credits to offset the need for rate relief in that year. Estimated rate increases of $17 million in each of fiscal years 1996 and 1997 would be partially offset by the use of additional available deferred credits. The settlement includes a revenue credit for a "royalty" to customers based on the Company's level of investment in unregulated activities. In fiscal 1995, the royalty would be .75% of the capitalization of the Company's unregulated subsidiaries, and will decline to .30% in fiscal 1997, the last year of the agreement. The "royalty" will not have a material impact on earnings. As part of the settlement of the royalty issue, the Company agreed to a plan to separate utility and subsidiary operations further, and to change the name of two of its subsidiaries. A final Public Service Commission decision on the settlement will be issued in October 1994. Early Retirement Program In June, the Company, as a means of attaining certain productivity savings contemplated in the rate settlement discussed above, initiated an early retirement program for management employees who are 55 years of age or older with at least 15 years of service. Upon completion of an actuarial study and the finalization of various elections by the program participants, the Company will record a special termination charge which will be substantially offset by reductions in other elements of total pension cost to be remeasured as part of the related actuarial study. Therefore, the early retirement program is not expected to have a material effect on income from continuing operations or on consolidated financial position. Restructuring Proceeding The PSC has instituted a generic proceeding to determine how best to implement changes in the services provided by gas companies in New York so that a wider range of consumers realize the benefits of increased competition under FERC Order 636. This Order requires pipelines to "unbundle" or separate their sales service from their transportation service. As a result, the responsibility to procure gas supplies and manage their deliveries to the "city gate" was shifted to local distribution companies such as the Company. Order 636 also allows producers and gas marketers to negotiate directly with very large customers currently supplied by local utilities, and allows these customers to arrange transportation for their gas supplies, thereby broadening opportunities for gas users to participate in the new competitive gas industry. The issues for utilities in the PSC proceeding are far-reaching, including greater flexibility in pricing, competition with brokers/marketers in a company's service area, cost of service allocations, obligations to provide service to core (small residential) and non-core (large business) markets, and the responsibility for building pipeline capacity for market growth. The Company believes it is prepared to meet the challenges of additional competition within its traditional service territory and take advantage of new opportunities to increase sales off-system. As early as 1984 the Company began restructuring its gas purchase contracts with pipelines to transportation-only contracts, and securing additional competitively priced long-term domestic gas supplies from major suppliers, while further diversifying its supply portfolio by importing gas from Canada. The Company is unable to determine at this time how regulatory changes resulting from the PSC proceeding will impact future operations; however, the Company remains committed to striking a balance between the risks and opportunities of increased competition and to ensuring reliable service to residential and small commercial customers. Suspension of Liberty Pipeline Project A Company subsidiary, North East Liberty Transmission Co., Inc. is a sponsor of and owns a 3.3% interest in the Liberty Pipeline Company (Liberty). Liberty was formed to construct a 38-mile pipeline from South Amboy, N.J. to a terminus near John F. Kennedy International Airport in Queens, N.Y. The subsidiary's investment in Liberty was approximately $409,000 at June 30, 1994. On August 2, 1994, the sponsors of Liberty requested the Federal Energy Regulatory Commission to suspend indefinitely its review of the Liberty project. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (11) Statement re computation of per share earnings. (15) Letter re unaudited interim financial information. (23) Consents of experts and counsel. (b) Reports on Form 8-K There were no reports filed on Form 8-K for the quarter ended June 30, 1994. THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE BROOKLYN UNION GAS COMPANY (Registrant) Date August 9, 1994 V.D. Enright Senior Vice President and Chief Financial Officer Date August 9, 1994 R.M. Desmond Vice President, Comptroller and Chief Accounting Officer EXHIBIT INDEX Page (11) Statement re computation of per share earnings. 3 (15) Letter re unaudited interim financial information. 14 (23) Consents of experts and counsel. 20 July 26, 1994 The Brooklyn Union Gas Company One MetroTech Center Brooklyn, New York 11201 Gentlemen: We are aware that The Brooklyn Union Gas Company has incorporated by reference in its previously filed Registration Statements No. 33-66182, No. 33-61283 and No. 33-51561, its Form 10-Q for the quarter ended June 30, 1994, which includes our report dated July 26, 1994 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN & CO. -----END PRIVACY-ENHANCED MESSAGE-----