-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WYz+SjBk+kQBQwEIAqyfaTM3jXLEdZhGTqX9aZoPcY4PsdS1ER5b74TF7/an6ueO hruywi+LDHbyqTAJNsSBZw== 0000014525-97-000010.txt : 19970522 0000014525-97-000010.hdr.sgml : 19970522 ACCESSION NUMBER: 0000014525-97-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE 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: 97608563 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 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 March 31, 1997 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 11201-3850 (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 May 1, 1997 $.33 1/3 par value 50,310,223 THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES INDEX Part I. Financial Information Page No. Condensed Consolidated Balance Sheet - March 31, 1997 and 1996, and September 30, 1996 3 Condensed Consolidated Statement of Income - Three, Six and Twelve Months Ended March 31, 1997 and 1996 4 Condensed Consolidated Statement of Cash Flows - Six and Twelve Months Ended March 31, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Results of Operations and Financial Condition 12 Review of Independent Public Accountants 21 Report of Independent Public Accountants 22 Part II. Other Information Item 1 - Legal Proceedings 23 Item 5 - Other Information 23 Item 6 - Exhibits and Reports on Form 8-K 23 Signatures 24 2
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET - - -------------------------------------------------------------------------------------------- March 31, March 31, September 30, 1997 1996 1996 (Unaudited) (Unaudited) (Audited) - - -------------------------------------------------------------------------------------------- (Thousands of Dollars) Assets Property Utility, at cost $ 1,805,878 $ 1,714,416 $ 1,782,440 Accumulated depreciation (440,122) (409,645) (429,476) Gas exploration and production, at cost 563,870 390,880 510,568 Accumulated depletion (188,246) (149,501) (165,414) - - -------------------------------------------------------------------------------------------- 1,741,380 1,546,150 1,698,118 - - -------------------------------------------------------------------------------------------- Investments in Energy Services 156,884 124,247 115,529 - - -------------------------------------------------------------------------------------------- Current Assets Cash and temporary cash investments 52,496 44,216 41,921 Accounts receivable 387,305 412,645 172,843 Allowance for uncollectible accounts (22,555) (20,736) (15,616) Gas in storage, at average cost 19,841 16,141 91,813 Materials and supplies, at average cost 13,579 14,225 12,089 Prepaid gas costs - - 11,945 Other 23,972 27,752 38,888 - - -------------------------------------------------------------------------------------------- 474,638 494,243 353,883 Deferred Charges 120,862 156,042 122,073 - - -------------------------------------------------------------------------------------------- $ 2,493,764 $ 2,320,682 $ 2,289,603 - - -------------------------------------------------------------------------------------------- Capitalization and Liabilities Capitalization Common stock, $.33 1/3 par value stated at $ 559,703 $ 537,366 $ 549,835 Retained earnings 444,346 387,793 355,973 - - -------------------------------------------------------------------------------------------- Total common equity 1,004,049 925,159 905,808 Preferred stock, redeemable 6,300 6,600 6,600 Long-term debt 724,551 724,652 712,013 - - -------------------------------------------------------------------------------------------- 1,734,900 1,656,411 1,624,421 - - -------------------------------------------------------------------------------------------- Current Liabilities Accounts payable 122,792 142,312 143,561 Dividends payable 18,831 18,131 18,229 Commercial paper 43,000 - - Taxes accrued 68,618 65,572 10,905 Customer deposits 23,177 22,122 21,881 Customer budget plan credits - - 8,892 Interest accrued and other 32,946 50,628 37,244 - - -------------------------------------------------------------------------------------------- 309,364 298,765 240,712 - - -------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Federal income tax 290,225 258,729 282,041 Unamortized investment tax credits 19,493 20,475 20,007 Other 57,676 86,302 43,573 - - -------------------------------------------------------------------------------------------- 367,394 365,506 345,621 - - -------------------------------------------------------------------------------------------- Minority Interest in Subsidiary Company 82,106 - 78,849 - - -------------------------------------------------------------------------------------------- $ 2,493,764 $ 2,320,682 $ 2,289,603 - - -------------------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements.
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THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) - - -------------------------------------------------------------------------------------------------------------------- Three Months Six Months Twelve Months Ended March 31, Ended March 31, Ended March 31, 1997 1996 1997 1996 1997 1996 - - -------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars, Except Per Share Data) Operating Revenues Gas sales and transportation $ 547,757 $ 571,445 $ 953,239 $ 943,996 $ 1,338,708 $ 1,272,197 Gas production and other 41,525 23,993 82,769 49,640 134,121 97,760 - - -------------------------------------------------------------------------------------------------------------------- 589,282 595,438 1,036,008 993,636 1,472,829 1,369,957 Operating Expenses Cost of gas 266,233 287,310 465,539 447,613 627,234 569,542 Operation and maintenance 108,388 112,282 208,495 214,042 427,337 404,522 Depreciation and depletion 25,051 18,641 50,033 36,723 92,920 72,674 General taxes 53,625 51,034 95,064 89,637 148,724 139,401 Federal income tax 43,130 37,830 66,564 60,104 45,577 42,633 - - -------------------------------------------------------------------------------------------------------------------- Operating Income 92,855 88,341 150,313 145,517 131,037 141,185 Other Income (Expense) Income (loss) from equity investments 944 (24) 3,234 1,606 13,274 7,202 Gain on sale of investment in Canadian plant - - - - 16,160 - Gain on sale of subsidiary stock - - - - 35,437 - Other, net (461) 901 (1,238) 531 3,265 453 Federal income tax (209) (1,867) (1,092) (2,444) (18,896) (1,803) Interest Charges Long-term debt (9,253) (11,614) (19,798) (23,662) (42,581) (47,522) Other (1,594) (1,242) (2,753) (2,347) (5,324) (4,958) Minority Interest's Earnings (1,961) - (3,544) - (3,544) - - - -------------------------------------------------------------------------------------------------------------------- Net Income 80,321 74,495 125,122 119,201 128,828 94,557 Dividends on Preferred Stock 78 82 157 164 316 330 - - -------------------------------------------------------------------------------------------------------------------- Income Available for Common Stock $ 80,243 $ 74,413 $ 124,965 $ 119,037 $ 128,512 $ 94,227 - - -------------------------------------------------------------------------------------------------------------------- Per Share of Common Stock $ 1.60 $ 1.51 $ 2.50 $ 2.43 $ 2.58 $ 1.93 - - -------------------------------------------------------------------------------------------------------------------- Dividends Declared per Share of Common Stock $ 0.365 $ 0.355 $ 0.730 $ 0.703 $ 1.440 $ 1.398 - - -------------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding 50,117,504 49,226,883 50,029,547 49,086,888 49,836,765 48,802,940 - - -------------------------------------------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements.
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THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Twelve Months Ended March 31, Ended March 31, - - ------------------------------------------------------------------------------------------------------------ 1997 1996 1997 1996 - - ------------------------------------------------------------------------------------------------------------ (Thousands of Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 125,122 $ 119,201 $ 128,828 $ 94,557 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and depletion 51,864 38,697 96,488 76,881 Deferred Federal income tax 5,149 (1,521) 40,839 14,979 Gain on sale of investment in Canadian operations - - (16,160) - Gain on sale of subsidiary stock - - (35,437) - Income from equity investments, energy related (3,234) (1,606) (13,274) (7,202) Dividends received from equity investments, energy related 1,893 1,756 10,437 3,985 Minority interest's earnings, subsidiary 3,544 - 3,544 - Allowance for equity funds used during construction (253) (640) (586) (1,396) Changes in: Accounts receivable, net (219,812) (261,084) 24,895 (72,086) Accounts payable (7,869) 38,439 (19,520) 6,152 Gas inventory and prepayments 83,917 90,977 (3,700) 27,283 Other 79,269 65,711 10,943 24,577 - - ------------------------------------------------------------------------------------------------------------ Cash provided by operating activities 119,590 89,930 227,297 167,730 - - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Sale of common stock 9,866 14,858 22,415 28,645 Proceeds from sale of subsidiary stock - - 101,041 - Commercial paper and revolving lines of credit, net 55,538 5,611 42,899 11,421 Issuance of long-term, tax-exempt debt - 153,500 - 153,500 Repayment of long-term tax-exempt debt and preferred stock (300) (153,800) (300) (153,800) Dividends paid (36,749) (35,116) (72,246) (69,101) - - ------------------------------------------------------------------------------------------------------------ Cash provided by (used in) financing activities 28,355 (14,947) 93,809 (29,335) - - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excluding allowance for equity funds used during construction) (141,214) (76,344) (366,177) (192,347) Proceeds from sale of investment in Canadian plant - - 26,938 - Partnership distribution and other 3,844 5,035 26,413 20,875 - - ------------------------------------------------------------------------------------------------------------ Cash used in investing activities (137,370) (71,309) (312,826) (171,472) - - ------------------------------------------------------------------------------------------------------------ Change in Cash and Temporary Cash Investments 10,575 3,674 8,280 (33,077) Cash and Temporary Cash Investments at Beginning of Period 41,921 40,542 44,216 77,293 - - ------------------------------------------------------------------------------------------------------------ Cash and Temporary Cash Investments at End of Period $ 52,496 $ 44,216 $ 52,496 $ 44,216 - - ------------------------------------------------------------------------------------------------------------ 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 $ 17,000 $ 13,000 $ 26,445 $ 26,500 Interest $ 25,593 $ 28,902 $ 53,146 $ 53,959 - - ------------------------------------------------------------------------------------------------------------ See accompanying notes to condensed consolidated financial statements.
5 THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL 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 March 31, 1997 and 1996, and the results of operations for the three, six and twelve month periods ended March 31, 1997 and 1996, and cash flows for the six and twelve month periods ended March 31, 1997 and 1996. Certain reclassifications were made to conform prior period financial statements with the current period financial statement presentation. All other adjustments were of a normal, recurring nature. 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 Annual Report on Form 10-K for the fiscal year ended September 30, 1996. The Company's gas distribution 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 heating sales, primarily residential, compared with total sales. Accordingly, results of operations historically are 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. Results for the third quarter are marginally unprofitable, and losses are usually incurred in the fourth quarter. Therefore, the interim Condensed Consolidated Statement of Income should not be taken as a prediction for any future period. The Company's tariff contains a weather normalization adjustment that largely offsets shortfalls or excesses of firm net revenues during a heating season due to variations from normal weather. 2. ENVIRONMENTAL MATTERS Historically, the Company, or predecessor entities to the Company, owned or operated several former manufactured gas plant (MGP) sites. These sites have been identified for the New York State Department of Environmental Conservation (DEC) 6 for inclusion on appropriate waste site inventories. In certain circumstances, former MGP sites can give rise to environmental cleanup responsibilities for the Company. Two MGP sites are under active consideration by the Company. One site, which is located on property still owned by the Company, is the former Coney Island MGP facility located in Brooklyn, New York. Part of the Coney Island site is the subject of continuing interim remedial action under the direction of the U.S. Coast Guard. The Company executed a consent order with the DEC addressing the overall remediation of the Coney Island site in accordance with state law and a schedule of investigative and cleanup activities has been developed, leading to a cleanup over the next several years. The other site currently is owned by the City of New York (City). The Company and the City are discussing a mutual approach to sharing potential environmental responsibility for this site. The Company believes it is likely that, at a minimum, investigative costs will be incurred by the Company with respect to that site. Based upon the Coney Island site consent order and the estimated costs of investigation of the City site, the Company believes that the minimum cost of MGP-related environmental cleanup will be approximately $34 million, based upon current information, primarily for the Coney Island site. This amount includes approximately $6.1 million of costs expended as of March 31, 1997. The Company's actual MGP-related costs may be substantially higher, depending upon remediation experience, eventual end use of the sites, and environmental conditions not addressed in the consent order or current investigative plans. Such potential additional costs are not subject to estimation at this time. As of March 31, 1997, the Company had an unpaid liability of $28.0 million. The rate agreement that became effective on October 1, 1996, described in "Regulatory Matters" of "Management's Discussion and Analysis of Results of Operations and Financial Condition," provides, among other things, that if the total cost of investigating and remediating the Coney Island site plus the cost of investigating the City site varies from the amount originally accrued for these activities, the Company will retain or absorb 10% of the variation. Under the rate agreement, similar ratemaking treatment will be available for any additional accrued liabilities for other MGP sites, should such accrual be required. 3. REGULATORY ASSETS The Company is subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Regulatory 7 assets arise from the allocation of costs and revenues to accounting periods for utility ratemaking purposes differently from bases generally applied by nonregulated companies. Regulatory assets are recognized in accordance with SFAS-71. With the exception of net tax regulatory assets, all other significant assets and liabilities created by the ratemaking process, including the $31.9 million recorded for environmental remediation costs as of March 31, 1996, have been reflected in utility rates pursuant to the rate agreement that became effective on October 1, 1996. Accordingly, at March 31, 1997, the Company had only a net tax regulatory asset of $74.1 million compared to a net regulatory asset of $84.1 million at March 31, 1996. In the event that it were no longer subject to the provisions of SFAS-71, the Company estimates that the write-off of this net regulatory tax asset could result in a charge to net income of approximately $48.2, million which would be classified as an extraordinary item. 4. SHARE EXCHANGE AGREEMENT WITH THE LONG ISLAND LIGHTING COMPANY (LILCO) AND AGREEMENT IN PRINCIPLE WITH THE LONG ISLAND POWER AUTHORITY (LIPA) SHARE EXCHANGE AGREEMENT WITH LILCO On December 29, 1996, the Company and LILCO entered into an Agreement and Plan of Exchange (Share Exchange Agreement), pursuant to which the outstanding common stock of the companies will be exchanged for common stock of a new holding company. The Share Exchange Agreement was filed as an exhibit to a Form 8-K filed December 30, 1996. The proposed transaction has been approved by both companies' boards of directors. Under the terms of the proposed transaction, the Company's common shareholders will receive one share of common stock of the new holding company for each common share of Brooklyn Union they currently own. LILCO common shareholders will receive 0.803 shares (the Ratio) of the new holding company's common stock for each share of LILCO common stock that they currently own. The transaction is expected to be accounted for as a pooling of interests. The Share Exchange Agreement contemplates that discussions will continue with LIPA to arrive at an agreement, mutually acceptable to all parties, pursuant to which LIPA would acquire certain assets or securities of LILCO. In such event, the Ratio shall become 0.880. As a result of an Agreement in Principle between the companies and LIPA, the companies believe that, pending shareholder approval and the execution and approval of definitive agreements with LIPA (see Agreement in Principle with LIPA below), the Brooklyn Union-LILCO transaction would most likely be accounted for as a purchase. 8 The Share Exchange Agreement contains certain covenants of the parties pending the consummation of the transaction. Generally, the parties must carry on their businesses in the ordinary course consistent with past practice, may not increase dividends on common stock beyond specified levels and may not issue capital stock beyond certain limits. The Share Exchange Agreement also contains restrictions on, among other things, charter and by-law amendments, capital expenditures, acquisitions, dispositions, incurrence of indebtedness, certain increases in employee compensation and benefits, and affiliate transactions. Upon completion of the share exchange transaction, Dr. William J. Catacosinos, currently chairman and chief executive officer of LILCO, will become chairman and chief executive officer of the new holding company and Mr. Robert B. Catell, currently chairman and chief executive officer of Brooklyn Union, will become president and chief operating officer of the new holding company. One year after the closing, Mr. Catell will succeed Dr. Catacosinos as chief executive officer, with Dr. Catacosinos continuing as chairman. The board of directors of the new company will be composed of 15 members, six from the Company, six from LILCO and three additional persons previously unaffiliated with either company and jointly selected by them. The companies may continue to pay dividends on their common stock during any fiscal year in an amount not to exceed 103% of the dividends paid in the prior fiscal year, pursuant to the provisions of the Share Exchange Agreement. It is expected that the new holding company's dividend policy will be determined prior to closing. Following announcement of the Brooklyn Union-LILCO Share Exchange Agreement, Standard & Poor's Ratings Services placed Brooklyn Union's corporate credit and senior unsecured debt ratings of A, as well as the Company's A-1 commercial paper rating, on CreditWatch with negative implications. Similarly, Moody's Investors Service placed the Company's A1 senior unsecured and Prime-1 short-term ratings on review for possible downgrade. The share exchange transaction is conditioned upon, among other things, the approval of the holders of at least two- thirds of the outstanding shares of common stock of each of the Company and LILCO and the receipt of all required regulatory approvals. The Company is unable to determine when or if all required regulatory approvals will be obtained. 9 AGREEMENT IN PRINCIPLE WITH LIPA On March 19, 1997, the Company, LILCO and LIPA entered into an Agreement in Principle pursuant to which, after the formation of the new holding company that will own the stock of the Company and LILCO and the subsequent transfer of LILCO's assets related to the conduct of its gas utility business, non-nuclear electric generation, common assets and certain current assets to, and the assumption of certain long term and current liabilities and preferred stock of LILCO by, one or more newly-formed subsidiaries of the holding company, LILCO's stock will be sold to LIPA for $2.4975 billion in cash. A portion of these gross proceeds may be applied to satisfy certain obligations including the possible redemption of preferred stock assumed by the holding company's subsidiary. Upon completion of the sale to LIPA transaction, it is anticipated that LIPA will own LILCO's electric transmission and distribution system, its 18% interest in the Nine Mile Point 2 Nuclear Power Station in upstate New York, and its regulatory assets, and will assume or refinance approximately $3.6 billion in LILCO's long term debt. The purchase price is approximately equal to the net book value of the assets being acquired. In addition, in connection with the transaction, LILCO's rights under certain tax certiorari suits against municipalities on Long Island related to the alleged over- assessment of LILCO's power plants, including the abandoned Shoreham plant, will be transferred to LIPA, which is expected to settle such suits with the municipalities. As part of the LIPA sale, the Agreement in Principle contemplated that one or more subsidiaries of the newly formed holding company would enter into agreements with LIPA, pursuant to which such subsidiaries would provide management and operations services to LIPA with respect to the LILCO transmission and distribution system, sell power generated by the non-nuclear power plants to LIPA, and manage LIPA's fuel and electric purchases and any off-system electric sales. In addition, three years after the sale is executed, LIPA would have a right for a one year period to acquire the non-nuclear generating assets. The purchase price for such assets would be the fair market value at the time of the exercise of the right, which value will be determined by independent appraisers. On April 30, 1997, LIPA submitted to the New York State Public Authorities Control Board for approval, unexecuted drafts of agreements relating to LIPA's proposed acquisition (via the purchase of LILCO's common stock) of LILCO's transmission and distribution system and certain other assets and liabilities. It is contemplated that prior to LIPA's acquisition of thecommon stock, certain other assets and liabilities will be 10 transferred to an affiliate of the holding company to be formed in connection with the binding share exchange agreement. The Company is unable to determine when or if definitive agreements relating to the LIPA transaction will be executed by the parties or when or if all consents and approvals required to consummate the LIPA transaction will be obtained. 5. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 "EARNINGS PER SHARE" In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This statement supersedes APB Opinion No. 15, "Earnings per Share" and simplifies the computation of earnings per share (EPS). SFAS No. 128 will be effective for financial statements for both interim and annual periods ending after December 15, 1997. The Company will adopt this statement in its fiscal year beginning October 1, 1997. The Company does not expect the effect of adopting SFAS No. 128 to have any impact on its EPS calculations. 11 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 revenues and expenses during the following periods: (1) Three Months ended March 31, 1997 vs. Three Months ended March 31, 1996. (2) Six Months ended March 31, 1997 vs. Six Months ended March 31, 1996. (3) Twelve Months ended March 31, 1997 vs. Twelve Months ended March 31, 1996. Consolidated income available for common stock for the second quarter of fiscal 1997 was $80.2 million, or $1.60 per share, compared to $74.4 million, or $1.51 per share, for the first quarter of last year. Utility operations contributed $1.57 per share to consolidated earnings, an increase of seven cents per share compared to last year's quarterly earnings. Utility operations continued to reflect sales growth, enhanced revenues from new customer-focused initiatives, and ongoing cost-reduction efforts, although comparative results were adversely affected by weather. For all periods ended March 31, 1997, operating results reflected warmer-than-normal weather, while last year's second quarter was extremely cold and the weather normalization adjustment in effect at that time allowed for retention of a portion of the higher firm margins. Earnings from subsidiaries were $1.6 million for the second quarter of fiscal 1997, contributing three cents per share. The higher earnings in all current periods reflected the operations associated with the gas and oil properties acquired by The Houston Exploration Company (THEC) in July and September 1996 and the Company's increased investment in the Iroquois Gas Transmission System. Results from the energy marketing group, which includes two business ventures initiated in 1996, had losses of $1.5 million although revenues have been growing. Consolidated earnings for the twelve months ended March 31, 1997 were $128.5 million, or $2.58 per share, compared to $94.2 million, or $1.93 per share, for the corresponding period a year ago. Higher earnings included gains on the sale of subsidiary stock and a Canadian gas processing plant of $33.5 million, after taxes, or $0.68 per share, offset by a subsidiary reorganization charge of $7.8 million, after taxes, or $0.16 per share, as well as solid performances in both utility operations and ongoing income from energy-related investments. 12 Firm gas sales for the second quarter of fiscal 1997, which had warmer-than-normal weather, were 4,064 MDTH lower than in the second quarter last year, which was 5.9% colder than normal. Other gas and transportation sales, which include gas deliveries to interruptible customers and transportation services, primarily to off-system customers, were 6,139 MDTH higher in the second quarter of this year compared to the comparable period last year. Total firm sales for the twelve months ended March 31, 1997, which was 1.9% warmer than normal, were 135,851 MDTH, compared to 139,781 MDTH for the corresponding period a year ago, which was 6.1% colder than normal. Net sales revenues (gas sales and transportation revenues less cost of gas) decreased $2.6 million and $8.7 million for the three and six months ended March 31, 1997 compared to the comparable periods last year. Higher transportation service revenues from off-system customers were offset by the effects of warmer-than-normal weather on firm customers. Net sales revenues increased $8.8 million for the twelve months ended March 31, 1997 compared to the comparable period last year. The increase reflected utility sales growth and increased transportation service revenues offset in part by comparatively warmer-than-normal weather. In large-volume heating markets, gas service is provided under rates that are set to compete with prices of alternative fuel, including No. 6 grade heating oil. There is substantial sales potential in these markets, which include large apartment houses, government buildings and schools. Competition with other gas suppliers is expected to continue to increase as a result of deregulation. Moreover, a significant market for off-system gas sales, transportation and other services has developed as a result of deregulation. These sales or services reflect optimal use of available pipeline capacity and the Company's New York Market Hub in balancing on-system requirements to core customers with off- system services to increase total margins. For the twelve months ended March 31, 1997, gas and transportation sales and services to off-system and interruptible customers amounted to 49,098 MDTH compared with 44,449 MDTH for the comparable period in 1996. Gas production and other revenues reflected increases in all periods associated with the acquisition of gas and oil properties by THEC in the fourth quarter of fiscal 1996 and new customer- focused initiatives such as the appliance service program that enhanced revenue from utility operations. Gas production for the three and six month periods ended March 31, 1997 was 10.6 and 21.1 BCFe, respectively. Gas production for the three and six month periods ended March 31, 1996 was 5.7 and 11.0 BCFe, respectively. For the twelve months ended March 31, 1997, gas production was 36.1 BCFe, compared with 31.2 BCFe in the twelve months ended March 31, 1996. 13 The Company and THEC, its gas exploration and production subsidiary, employ derivative financial instruments, natural gas futures, options and swaps, for the purpose of managing commodity price risk. The utility tariff applicable to certain large-volume customers permits gas to be sold at prices established monthly within a specified range expressed as a percentage of prevailing alternate fuel oil prices. The Company uses derivatives, primarily futures, to fix profit margins on specified portions of the sales to this market in line with pricing objectives. With respect to natural gas production operations, THEC generally uses swaps, options to establish collars, and occasionally futures contracts, to hedge the price risk related to known production plans and capabilities. Swaps include a fixed price/volume and are structured as both straight and participating swaps. In swap transactions, THEC pays the counterparties the amount by which the floating variable price (settlement price) exceeds the fixed price and receives the amount by which the settlement price is below the fixed price. The effective price (average wellhead price received for production including realized gains and losses on financial instrument positions) was $2.30 per MCF in the second quarter of fiscal 1997 compared with $1.67 per MCF in the second quarter of 1996. The average wellhead price was $2.77 per MCF in the current quarter compared with $2.28 per MCF in the second quarter of 1996. The effective prices in the twelve months ended March 31, 1997 and 1996 were $1.83 and $1.70 per MCF, respectively. THEC uses the full cost method of accounting for its investment in natural gas and oil properties. Under this method , all costs of acquisition, exploration and development of natural gas and oil reserves are capitalized into a "full cost pool" as incurred, and properties in the pool are depleted and charged to operations using the unit-of-production method based on the ratio of current production to total proved natural gas and oil reserves. To the extent that such capitalized costs (net of accumulated depreciation, depletion and amortization) less deferred taxes exceed the present value (using a 10% discount rate) of estimated future net cash flows from proved natural gas and oil reserves and the lower of cost or fair value of unproved properties, such excess costs are charged to operations. If a writedown is required, it would result in a charge to earnings but would not have an impact on cash flows from operating activities. Natural gas prices declined substantially during the second quarter of 1997 from prices in effect at December 31, 1996. However, as of March 31, 1997, using prices in effect as of that date, the ceiling limitation imposed under full cost accounting rules on total capitalized natural gas and oil property cost exceeded actual capitalized costs and no writedown was required. However, depending upon natural gas prices and the results of THEC's 14 drilling programs during the quarter ending June 30, 1997, THEC may be required to write down the carrying value of its natural gas and oil properties. The Company and THEC are exposed to credit risk in the event of nonperformance by counterparties to derivative contracts, as well as nonperformance by the counterparties of the transactions against which they are hedged. The Company believes that the credit risk related to swap contracts is no greater than that associated with the primary contracts which they hedge, as these contracts are with major investment grade financial institutions, and that elimination of the price risk lowers the Company's overall business risk. Operation and maintenance expense was lower in the three and six month periods ended March 31, 1997 compared to the comparable periods in 1996, reflecting the comparatively warmer weather and ongoing cost-reduction efforts especially in gas distribution. Also, operation and maintenance expense for the three and six month periods ended March 31, 1996 included costs related to Canadian gas processing operations which ceased in July 1996 when the plant was sold. The comparative expense in the twelve months ended March 31,1997 increased 5.6% due to a reorganization charge of $12 million ($7.8 million, after taxes) and higher operating expense incurred by THEC related to acquisitions, and operating expenses incurred by two new subsidiaries of the Company, KeySpan Energy Management Inc. and KeySpan Energy Services Inc. The increase in depreciation and depletion expense in all current periods reflects higher depletion charges at THEC due principally to increased gas production. General taxes principally include State and City taxes on utility revenues and property. The applicable utility property base generally has increased, although the Company has been able to realize savings by the pursuit of reductions in certain property value assessments. Taxes based on revenues reflect the variations in utility revenues each year. Federal income tax expense reflects changes in pre-tax income. The effective tax rate for the twelve months ended March 31, 1997 was 33.4% compared to 32.0% in 1996. Interest charges for the three, six and twelve months ended March 31, 1997 reflect lower long-term utility interest costs due to debt refunding offset slightly by higher average subsidiary borrowings related to gas exploration and production operations. Other interest charges in all periods principally include carrying charges related to regulatory settlement items, and for the quarter ended March 31, 1997 reflects interest charges related to commercial paper borrowings to finance seasonal working capital requirements and expanded investment opportunities. 15 Other income includes results from investments in energy services which reflect increased earnings in the current periods, primarily associated with its increase in the Company's investment in the Iroquois Gas Transmission System from 11.4% to 19.4% which occurred in May 1996. Other increases for the twelve months ended March 31, 1997, as compared with the comparable period last year, reflect the gains on the sale of subsidiary stock of $35.4 million ($23 million, after taxes) and the sale of a Canadian plant of $16.2 million ($10.5 million, after taxes). Dividends on preferred stock reflect reductions in the level of preferred stock outstanding due to sinking fund redemptions. Financial Condition The upswing in cash flow from operating activities of $29.7 million in the six months ended March 31, 1997 as compared to the six months ended March 31, 1996 is largely attributable to weather, the relative increase in gas production operations and favorable pricing. The six month period ended March 31, 1996 was extremely cold versus the comparable period this year and hence there was less cash tied up in utility customer receivables. In the twelve months ended March 31, 1997, operating cash flow increased $59.6 million over the comparable period a year ago. The increase also largely reflected the effects of weather on cash flow from operating activities. In January 1997, the Company called $125 million of Gas Facilities Revenue Bonds, consisting of $62.5 million of 7 1/8% bonds and $62.5 million of 7% bonds. These bonds were called at 102% of the face amount per bond plus accrued interest to the call date. The refunding bonds - weekly put bonds - have had an average interest rate of approximately 3.2%. Substantial savings in interest costs have resulted from the refunding. Regulatory Matters Proposed Brooklyn Union-LILCO Merger In March 1997, Brooklyn Union and LILCO filed a joint petition with the PSC seeking approval under section 70 of the New York Public Service Law to consummate the share exchanges by which Brooklyn Union and LILCO each would become subsidiaries of a newly-formed holding company. (See Note 4, to the Condensed Consolidated Financial Statements, "Share Exchange Agreement with the Long Island Lighting Company (LILCO) and Agreement in Principle with the Long Island Power Authority (LIPA)".) In the petition, Brooklyn Union and LILCO also asked that certain aspects of the holding company settlement agreement for Brooklyn Union that was approved by the PSC in September 1996 be amended to more closely reflect the Brooklyn Union-LILCO business combination, and that LILCO become a party to and bound by the holding company agreement, as amended. 16 In addition, the petition proposes, among other matters, that 93% or $1.0 billion of the estimated total efficiency savings attributable to operating synergies that are expected to be realized over the 10 year period following the merger, be allocated to ratepayers and the remaining 7% or $73.0 million be allocated to shareholders. The ratepayers' portion will be allocated to both utilities's customers and will reduce both electric and gas rates by an estimated 2% for the 10 year period following the closing of the merger. To accomplish this, the base rates of both utilities would be reduced immediately following the closing to reflect the levelized annual amount of the non-fuel related synergy savings forecasted to materialize over this period. Fuel savings will be passed back to the ratepayers through a reduction in the respective fuel adjustment clauses as they are achieved. The companies will be required to amend the petition to the PSC in order to reflect certain aspects of the transaction currently contemplated with LIPA. In the joint petition, Brooklyn Union also asked the PSC to otherwise confirm the rate plan that became effective in October 1996 pursuant to the holding company settlement agreement, and LILCO asked the PSC to adopt the long term electric rate plan proposed by LILCO in September 1996 in a pending LILCO rate proceeding, and to adopt a long term gas rate plan proposed in the joint petition. It is currently anticipated that the PSC will act on the joint petition in the Fall of 1997. Also, in March 1997, LILCO filed an application with the Federal Energy Regulatory Commission (FERC) requesting its approval for the share exchange with the new holding company. FERC action on the application is expected within 12 to 18 months after the filing. The Company believes that if the LIPA transaction is consummated as contemplated, the various contracts with LIPA, the confirmation of the Brooklyn Union rate plan as proposed in the joint petition to the PSC (see "Regulatory Matters" in "Management's Discussion and Analysis of Results of Operations and Financial Condition"), and the adoption of the long term gas rate plan for LILCO as proposed in the joint petition would, in the aggregate, provide the new holding company with a fair opportunity to recover its costs of providing gas service in the Brooklyn Union and LILCO service territories, the costs of providing wholesale electric service to LIPA, and the costs of providing the various management and operation services to LIPA, as well as earn a compensatory return on the capital devoted to providing such services. Appliance Service On April 4, 1997, the PSC issued its "Order Concerning Gas Appliance and Repair Service" by which it determined that non-safety related appliance repair service, other than minor adjustments, should not be performed by regulated gas utilities, and required such utilities to file transition plans within sixty (60) days following the issuance of that order, with the objective 17 that, by no later than May 1, 2000, all gas utilities currently performing such services will have ceased to do so. Pursuant to the holding company settlement agreement, beginning in October 1996, the Company was permitted to charge separately, on a market-based tariffed pricing basis, for non-safety related appliance repair service, the costs of which previously had been bundled into gas sales rates. The holding company settlement agreement also requires the Company to exclude such services from its tariffs by no later than October 1, 1997. In response to the PSC's April 1997 order concerning appliance servicing, and as required by the holding company settlement agreement, the Company currently plans to file tariff revisions with the PSC on or about June 1, 1997 together with an application seeking PSC approval to transfer certain assets related to the conduct of the non-safety related appliance repair business to a subsidiary that would conduct and carry on that business after the PSC's approval is secured. Rate Settlement Matters In September 1996, the PSC approved a regulatory agreement to permit the Company to reorganize into a holding company structure, which the Company has not as yet formed. On December 29, 1996, the Company and the LILCO signed a definitive agreement to combine in a tax-free transaction that would result in the formation of a holding company (see Note 4 to the Condensed Consolidated Financial Statements, "Share Exchange Agreement with the Long Island Lighting Company (LILCO) and Agreement in Principle with the Long Island Power Authority (LIPA)"). The settlement agreement reached in connection with the holding company proceeding included a new multi-year rate plan that became effective on October 1, 1996 and will substantially remain in effect notwithstanding the change in the Company's reorganization plans resulting from the LILCO transaction. After an initial rate reduction of approximately $3.5 million in fiscal 1997, the non-gas component in customer bills will be under specific price caps. Hence, the total amount for this component in rates that the Company can charge customers, in the aggregate, will remain constant for the subsequent five years, although rates in certain customer classes may be increased in order to reflect cost responsibility more appropriately. During the six-year term of the rate plan, the costs of gas purchased by the Company for its customers will be recovered currently in billed firm revenues through the operation of a tariff provision, the Gas Adjustment Clause (GAC). Further, in addition to recovering its specific gas costs in applicable rates, the Company's rates for transporting gas to firm markets within its local distribution system provide for full margin recovery of its 18 cost of service. Although there is no specific authorized rate of return on common equity, the rate plan includes provisions for rate changes if certain conditions applicable to inflation, exogenous costs or changes in financial condition occur. Under the agreement, the Company generally is not subject to any earnings cap or provisions to share with customers any level of earnings from utility operations. However, incentive provisions remain for retention of 20% of margins on sales to off-system customers and capacity release credits. Expenditures related to remediation of the sites of former gas manufacturing plants are subject to a provision enabling the Company to retain any savings and absorb any costs to the extent that actual expenditures vary by more than 10% compared with estimates. The agreement includes a customer service quality performance plan, with a maximum forty basis-point pre-tax return penalty if service quality diminishes in certain categories over the term of the agreement. Also, the weather normalization adjustment was modified to provide that the Company may recover or be required to refund 87.5% of all margin shortfalls or surpluses resulting from weather that is warmer or colder than normal. In September 1995, the PSC approved the Company's second stage rate filing covering fiscal 1996. The approval provided for no base rate increase; however, $7.5 million in deferred credits were amortized to income in 1996. In October 1994, the PSC approved a three-year rate settlement agreement which provided for no base rate increase in fiscal 1995; however, the Company amortized to income, as permitted, approximately $1.3 million of deferred credits in that year. The third year of such agreement, fiscal 1997, was superseded by the rate plan reflected in the holding company agreement discussed above. Industry Restructuring Proceeding The PSC has set forth a policy framework to guide the transition of New York State's gas distribution industry in the deregulated gas industry environment. In March 1996, the PSC issued an order on utility compliance tariff filings, including the Company's, related to this framework. Pursuant to this order, beginning on May 1, 1996, customers in the Company's small-volume market have had the option to purchase their gas supplies from sources other than the Company, which would serve as gas transporter. Large-volume customers have had this option for a number of years. Small-volume customers can be grouped together by marketers if their combined minimum threshold usage reaches 50,000 therms of gas per year, which approximates the usage of 35 homes. The PSC approved the Company's methodology of recovering the cost of pipeline capacity and storage service 19 provided to third party sellers and transportation customers. In addition to transporting gas that customers purchase from marketers, utilities such as the Company will provide billing, meter reading and other services for aggregate rates that closely approximate the distribution charge reflected in otherwise applicable sales rates to supply these customers. The PSC order placed a limit on the amount of gas the Company would be obligated to transport in its core market under aggregation programs to 5% of total core sales in each of the next three years, with no more than 25% of any one service class permitted to convert to transportation service. Environmental Matters The Company is subject to various Federal, State and local laws and regulatory programs related to the environment. These environmental laws govern both the normal, ongoing operations of the Company as well as the cleanup of historically contaminated properties. Ongoing environmental compliance activities, which historically have not been material, are integrated with the Company's regular operation and maintenance activities. As of March 31, 1997, the Company had an accrued liability of $28.0 million representing estimated costs associated with certain investigation and remediation at former manufactured gas plant sites. (See Note 2 to the Condensed Consolidated Financial Statements, Note 2., "Environmental Matters.") 20 REVIEW OF INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP 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 22. 21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Brooklyn Union Gas Company: We have reviewed the accompanying condensed consolidated balance sheets of The Brooklyn Union Gas Company (a New York corporation) and subsidiaries as of March 31, 1997 and 1996, and the related condensed consolidated statements of income for the three, six and twelve month periods ended March 31, 1997 and 1996, and the condensed consolidated statements of cash flows for the six and twelve month periods ended March 31, 1997 and 1996. 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 procedures to 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, 1996, 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 23, 1996, 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, 1996 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP New York, New York April 23, 1997 22 Part II. Other Information Item 1. Legal Proceedings The Company and/or its subsidiaries have from time to time been named as defendants 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 consolidated financial position or results of operations. For information regarding environmental matters affecting the Company, see Note 2. to the Condensed Consolidated Financial Statements, "Environmental Matters." Item 5. Other Information In April 1997, the Company initiated a voluntary early retirement program for both management and bargaining unit employees. The cost of this program, which is not expected to have a material effect on consolidated net income, will be recognized in the third quarter of fiscal 1997 when elections by eligible employees are known and an actuarial analysis is performed. 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. (27) Financial data schedule. (b) Reports on Form 8-K The Company filed a Form 8-K on February 24, 1997 pertaining to audited financial statements of LILCO as of December 31, 1996 and for the three fiscal years then ended, and unaudited and pro forma combined condensed financial information for the Company and LILCO, including historical interim information of LILCO, after giving effect to the Binding Share Exchanges as a pooling of interest for accounting purposes, pursuant to the Share Exchange Agreement included in the Company's Form 8-K filed December 30, 1996. LILCO filed a corresponding Form 8-K on February 25, 1997. The Company also filed a Form 8-K on March 20, 1997 pertaining to an Agreement in Principle dated as of March 19, 1997 by and among LIPA, LILCO and the Company. LILCO filed a corresponding Form 8-K on March 20, 1997 and a related amended Form 8-K on March 24, 1997. On April 11, 1997, LILCO filed a Form 8-K to change its fiscal year from a December 31 year end to a March 31 year end. 23 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 behalf of the undersigned thereunto duly authorized. THE BROOKLYN UNION GAS COMPANY (Registrant) Date May 15, 1997 s/ V.D. Enright V.D. Enright Senior Vice President and Chief Financial Officer Date May 15, 1997 s/ R.M. Desmond R.M. Desmond Vice President, Comptroller and Chief Accounting Officer 24 Exhibit 15 1345 Avenue of the Americas New York, NY 10105 May 15, 1997 The Brooklyn Union Gas Company One MetroTech Center Brooklyn, NY 11201 Gentlemen: We are aware that The Brooklyn Union Gas Company has incorporated by reference in its previously filed Registration Statements Nos. 33-66182, 333-04863, 333-03441, 333-06257 and 333-18025, its Form 10-Q for the quarter ended March 31, 1997, which includes our report dated April 23, 1997 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 LLP 25 EX-15 2 Exhibit 15 1345 Avenue of the Americas New York, NY 10105 May 15, 1997 The Brooklyn Union Gas Company One MetroTech Center Brooklyn, NY 11201 Gentlemen: We are aware that The Brooklyn Union Gas Company has incorporated by reference in its previously filed Registration Statements Nos. 33-66182, 333-04863, 333-03441, 333-06257 and 333-18025, its Form 10-Q for the quarter ended March 31, 1997, which includes our report dated April 23, 1997 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 LLP EX-27 3
UT 0000014525 BROOKLYN UNION GAS CO. 1000 U.S. DOLLARS 6-MOS SEP-30-1997 OCT-01-1996 MAR-31-1997 1 PER-BOOK 1,365,756 532,508 474,638 120,862 0 2,493,764 16,735 542,968 444,346 1,004,049 0 6,300 724,551 0 0 43,000 0 300 0 0 715,564 2,493,764 1,036,008 66,564 819,131 885,695 150,313 (2,640) 147,673 22,551 125,122 157 124,965 36,591 19,489 119,590 2.50 2.50
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