-----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, JP66SSzzHVfxhjo17dtWb9H2W0ylnX3OZRKzqPshLc9HdZ+1/3qhHKzySMHUJ9Fu h/syx0PDLISczV9h3ax7rw== 0000014525-96-000023.txt : 19960916 0000014525-96-000023.hdr.sgml : 19960916 ACCESSION NUMBER: 0000014525-96-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 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: 96613137 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 June 30, 1996 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 August 1, 1996 $.33 1/3 par value 49,773,292 THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES INDEX Part I. Financial Information Page No. Condensed Consolidated Balance Sheet - June 30, 1996 and 1995, and September 30, 1995 3 Condensed Consolidated Statement of Income - Three, Nine and Twelve Months Ended June 30, 1996 and 1995 4 Condensed Consolidated Statement of Cash Flows - Nine and Twelve Months Ended June 30, 1996 and 1995 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Results of Operations and Financial Condition 13 Review of Independent Public Accountants 21 Report of Independent Public Accountants 22 Part II. Other Information Item 1 - Legal Proceedings 23 Item 6 - Exhibits and Reports on Form 8-K 23 Signatures 24 THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET June 30, June 30, September 30, 1996 1995 1995 (Unaudited) (Unaudited) (Audited) (Thousands of Dollars)
Assets Property Utility, at cost $ 1,743,015 $ 1,661,550 $ 1,690,193 Accumulated depreciation (419,907) (384,800) (393,263) Gas exploration and production, at cost 402,730 340,576 353,847 Accumulated depletion (155,599) (133,006) (138,136) 1,570,239 1,484,320 1,512,641 Investments in Energy Services 113,497 111,591 121,023 Current Assets Cash 19,762 16,724 15,992 Temporary cash investments 66,142 103,260 24,550 Accounts receivable 251,292 196,042 146,018 Allowance for uncollectible accounts (22,005) (17,981) (13,730) Gas in storage, at average cost 50,298 59,277 88,810 Materials and supplies, at average cost 13,701 13,513 13,203 Prepaid gas costs and other 39,573 19,065 35,581 418,763 389,900 310,424 Deferred Charges 163,028 167,257 172,834 $ 2,265,527 $ 2,153,068 $ 2,116,922 Capitalization and Liabilities Capitalization Common stock, $.33 1/3 par value stated at $ 545,163 $ 515,666 $ 522,581 Retained earnings 365,574 339,293 303,709 Total common equity 910,737 854,959 826,290 Preferred stock, redeemable 6,600 6,900 6,900 Long-term debt 727,498 724,429 720,569 1,644,835 1,586,288 1,553,759 Current Liabilities Accounts payable 98,771 93,651 103,705 Dividends payable 18,170 17,456 17,536 Taxes accrued 43,223 38,913 3,635 Customer deposits 22,436 22,535 22,252 Customer budget plan credits - - 24,790 Interest accrued and other 57,472 32,818 39,438 240,072 205,373 211,356 Deferred Credits and Other Liabilities Federal income tax 262,057 249,097 247,882 Unamortized investment tax credits 20,240 21,211 20,948 Other 98,323 91,099 82,977 380,620 361,407 351,807 $ 2,265,527 $ 2,153,068 $ 2,116,922 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, 1996 1995 1996 1995 1996 1995 (Thousands of Dollars)
Operating Revenues Utility sales $ 239,313 $ 198,623 $1,193,321 $1,011,075 $ 1,334,577 $ 1,176,737 Gas production and other 14,998 19,073 54,626 46,585 72,013 58,509 254,311 217,696 1,247,947 1,057,660 1,406,590 1,235,246 Operating Expenses Cost of gas 106,107 74,947 553,720 399,578 600,701 467,929 Operation and maintenance 99,585 94,583 311,544 288,050 406,421 378,413 Depreciation and depletion 18,871 18,335 55,594 54,404 73,209 70,842 General taxes 28,781 28,263 118,419 113,217 139,920 139,185 Federal income tax (benefit) (3,405) (4,758) 58,493 55,033 46,743 42,625 Operating Income 4,372 6,326 150,177 147,378 139,596 136,252 Other Income (Expense) Income from equity investments 3,490 1,106 5,162 5,132 9,484 6,329 Other, net 523 (71) (1,744) (2,104) (988) 273 Income Before Interest Charges 8,385 7,361 153,595 150,406 148,092 142,854 Interest Charges Long-term debt 10,851 12,054 34,513 36,104 46,468 48,052 Other 2,016 1,412 4,362 3,929 5,443 5,159 12,867 13,466 38,875 40,033 51,911 53,211 Net Income (Loss) (4,482) (6,105) 114,720 110,373 96,181 89,643 Dividends on Preferred Stock 79 83 244 254 327 340 Income (Loss) Applicabe to Common Stock $ (4,561) $ (6,188) $ 114,476 $ 110,119 $ 95,854 $ 89,303 Per Share of Common Stock $ (0.09) $ (0.13) $ 2.33 $ 2.29 $ 1.95 $ 1.86 Dividends Declared per Share of Common Stock $ 0.355 $ 0.348 $ 1.065 $ 1.043 $ 1.413 $ 1.380 Average Common Shares Outstanding 49,531,094 48,373,333 49,234,957 48,060,076 49,092,080 47,909,476 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, 1996 1995 1996 1995 (Thousands of Dollars)
OPERATING ACTIVITIES Net income $ 114,720 $ 110,373 $ 96,181 $ 89,643 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and depletion 58,754 58,728 77,663 76,743 Deferred Federal income tax 3,614 962 13,857 794 Amortization of investment tax credit (708) (789) (971) (1,003) Income from energy services investments (5,162) (5,132) (9,484) (6,329) Dividends received from energy services investments 7,392 3,145 7,842 4,920 Allowance for equity funds used during construction (842) (868) (1,247) (1,212) Change in accounts receivable, net (98,572) 3,172 (57,032) 84,601 Change in accounts payable (4,356) (36,592) 5,952 (55,941) Gas inventory and prepayments 53,381 47,085 12,504 4,572 Other 48,970 50,252 15,778 38,135 Cash provided by operating activities 177,191 230,336 161,043 234,923 FINANCING ACTIVITIES Sale of common stock 22,696 21,067 29,603 28,224 Issuance of long-term debt 160,429 23,052 160,429 19,236 183,125 44,119 190,032 47,460 Repayments Long-term debt (153,500) - (157,360) - Preferred stock (300) (300) (300) (300) 29,325 43,819 32,372 47,160 Dividends paid (52,834) (50,523) (69,877) (66,679) Other (18) (78) 23 207 Cash used in financing activities (23,527) (6,782) (37,482) (19,312) INVESTING ACTIVITIES Capital expenditures (excluding allowance for equity funds used during construction) (138,526) (161,210) (190,049) (204,107) Proceeds, refinancing of cogeneration project 23,995 - 23,995 - Other 6,229 4,149 8,413 6,088 Cash used in investing activities (108,302) (157,061) (157,641) (198,019) Change in Cash and Temporary Cash Investments 45,362 66,493 (34,080) 17,592 Cash and Temporary Cash Investments at Beginning of Period 40,542 53,491 119,984 102,392 Cash and Temporary Cash Investments at End of Period $ 85,904 $ 119,984 $ 85,904 $ 119,984 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 $ 23,000 $ 23,500 $ 35,500 $ 37,500 Interest $ 41,350 $ 42,504 $ 50,922 $ 52,174 See accompanying notes to condensed consolidated financial statements.
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, 1996 and 1995, and the results of operations for the three, nine and twelve months ended June 30, 1996 and 1995, and cash flows for the nine and twelve months ended June 30, 1996 and 1995. 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, 1995. 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 with 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 usually incurred in the fourth quarter. 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. 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. The adjustment operates when weather varies more than 2.2% from normal (positive or negative) during a billing cycle. 3. INVESTMENT IN IROQUOIS PIPELINE A Company subsidiary, North East Transmission Co., Inc. (NETCO), owns a 19.4% partnership interest in Iroquois Gas Transmission System, L.P. (Iroquois). Iroquois owns a 375- mile pipeline from Canada to the Northeast United States. NETCO's investment in Iroquois was $35.4 million at June 30, 1996. In 1992, Iroquois was informed by the U.S. Attorney's Offices for the Northern, Southern and Eastern Districts of New York that a civil investigation was underway to determine whether environmental violations occurred during construction of the pipeline. In addition, Iroquois and others were targets of a federal criminal investigation commenced by the Northern District of New York in 1992 based on alleged environmental and permit violations during construction. Finally, several federal and state agencies initiated investigations of matters related to construction of the pipeline. After extensive discussions with the involved government authorities and agencies, Iroquois and others entered into a series of settlement agreements to resolve all pending investigations relating to pipeline construction. On May 23, 1996, Iroquois' agent for pipeline construction, Iroquois Pipeline Operating Company (IPOC) entered a plea of guilty to violations of the Clean Water Act in the Northern District of New York. On the same date, the United States lodged civil consent decrees resolving related civil claims against IPOC in the Northern, Southern and Eastern Districts of New York, and the District of Connecticut. Although not named a defendant, Iroquois signed the plea agreement and consent decrees and is bound by their terms. In May 1996, the Department of Transportation approved a Consent Order and Agreement with IPOC, and the Federal Energy Regulatory Commission approved a Stipulation and Consent Agreement with Iroquois, resolving those agencies' investigations relating to pipeline construction. Related to the resolution of the federal investigations, in April 1996, the New York Public Service Commission entered an order terminating its investigation relating to construction and referred the matter to its Office of General Counsel for appropriate action. In May 1996, Iroquois entered into a Settlement Agreement with the New York Public Service Commission, the New York State Department of Environmental Conservation, and the New York State Attorney General resolving potential and pending claims of violations relating to pipeline construction. Under the federal and state settlements, IPOC and Iroquois are responsible for a total of $22 million in criminal fines, civil penalties, and other payments. In addition, IPOC and Iroquois have agreed to implement rate adjustments and remedial and monitoring programs under the supervision of the Army Corps of Engineers, the Department of Transportation, and the Federal Energy Regulatory Commission. The various settlements are contingent upon the entry of the civil consent orders as final decrees by the federal district courts in the four federal jurisdictions, following an opportunity for public comment. In September 1995 a provision was made in consolidated earnings for NETCO's share of the estimated settlement costs. Based on the information currently available, the Company believes that the provision was adequate to account for such costs. 4. 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) 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. This site is the subject of continuing interim remedial action under the direction of the U.S. Coast Guard. Moreover, the Company has recently executed a consent order with the DEC with respect to addressing the overall remediation of the Coney Island site in accordance with state law. A schedule of investigative and cleanup activities is being 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 in the process of 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. The DEC is maintaining open files and requiring the Company to continue monitoring or related investigatory efforts at two other Company-owned properties. Except as described above, no administrative or judicial proceedings or claims involving other former MGP sites have been initiated. Although the potential cost of cleanup with respect to these other sites may be material if the Company ever is compelled to address these sites, the Company cannot at this time determine the cost or extent of any cleanup efforts if cleanup ultimately should be required. Based upon the terms of the consent order for the Coney Island site and costs of investigation for the other MGP site under active consideration, the Company believes that the minimum cost of MGP-related environmental cleanup will be approximately $34 million, which, based upon current information, primarily will be for the Coney Island site. This amount includes approximately $5.2 million of costs expended as of June 30, 1996. 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 June 30, 1996, the Company had an accrued liability of $28.8 million and a related unamortized regulatory asset of $31.3 million. By order issued February 16, 1995, the PSC approved the Company's July 1993 petition to defer the costs associated with environmental site investigation and remediation incurred in 1993 and thereafter. Recovery of these costs began in fiscal year 1995, which is conditioned upon absence of a PSC determination that such costs have not been reasonably or prudently incurred. In addition, the Company must demonstrate that it has taken all reasonable steps to obtain cost recovery from all available funding sources, including other responsible parties and insurance sources. The PSC has initiated a generic proceeding to assess the extent of the potential liability for cleanup of MGP sites by the State's gas utilities and has indicated that it may consider in that proceeding generic policies regarding the recovery of such costs through gas utility rates. Any such policies may affect the Company's ability to reflect such costs in rates. However, while the Company is unable to predict the outcome of the generic proceeding, the recent settlement agreement entered into between the Company, the Staff of the PSC and other intervenor parties, described in "Rate and Regulatory Matters" of Management's Discussion and Analysis of Results of Operations and Financial Condition, provides, among other things, that the Company may use existing deferred credits to extinguish the deferred asset. If the total cost of investigating and remediating the Coney Island site plus the cost of investigating the other site under active consideration varies from the amount originally accrued for these activities, the Company will retain or absorb 10% of the variation. Under the settlement agreement, similar ratemaking treatment will be available for any additional accrued liabilities for other MGP sites, should such accrual be required. The settlement agreement is subject to PSC approval, and the PSC is expected to act in the early Fall 1996. 5. SUBSIDIARY MATTERS On July 30, 1996 an indirect subsidiary of the Company, Solex Development Company Inc., completed the sale of its 46.5% net investment interest in a gas-processing plant in British Columbia, Canada. The investment was placed into a royalty trust and an initial public offering made of units in the trust. It is expected that a gain of approximately $12 million after income taxes will be recognized with respect to this transaction in the fourth quarter. In contemplation of an initial public offering of up to 35% of a subsidiary's common stock, the Company implemented a reorganization of its exploration and production subsidiaries' assets and liabilities by transferring to its subsidiary, The Houston Exploration Company (Houston Exploration), certain onshore producing properties and acreage not previously owned by Houston Exploration. As a result, all U.S. oil and gas properties of Fuel Resources Inc. have been transferred to Houston Exploration. A reorganization charge of approximately $8 million dollars after income taxes will be recorded in the fourth quarter. Also, a gain which is expected to exceed the reorganization charge will be recorded upon completion of the offering which is anticipated to occur in September 1996. In connection with the reorganization, certain former employees of Fuel Resources Inc. have alleged that they were entitled to greater remuneration based on the increase in value of these properties prior to the reorganization. These individuals filed suit against the Company and Houston Exploration alleging that they are entitled to receive such remuneration as a result of alleged breach of contract, breach of fiduciary duty, fraud, negligent representation and conspiracy. Such individuals seek actual damages in excess of $35 million and an award of punitive damages in excess of $70 million. The Company believes that the ultimate resolution of these allegations will not have a material adverse effect on the Company's financial position or results of operations. 6. REGULATORY ASSETS Regulatory 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 Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for Certain Types of Regulation." The Company had net regulatory assets as of June 30, 1996 and 1995 of $74.4 million and $104.1 million, respectively. These amounts are included in Deferred Charges and Deferred Credits- Other in the Consolidated Balance Sheet. In the event that it were no longer subject to the provisions of SFAS-71, the Company estimates that the write-off of these net regulatory assets could result in a charge to net income of approximately $48.4 million. SFAS-121, issued in March 1995 and effective for fiscal 1997, establishes accounting standards for the impairment of long- lived assets. This statement is not expected to have a material adverse effect on the Company's financial condition or results of operations upon adoption. 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 June 30, 1996 vs. Three Months ended June 30, 1995. (2) Nine Months ended June 30, 1996 vs. Nine Months ended June 30, 1995. (3) Twelve Months ended June 30, 1996 vs. Twelve Months ended June 30, 1995. Consolidated results in the third quarter of fiscal 1996 showed a loss of $4.6 million, or nine cents per share, compared to a loss of $6.2 million, or 13 cents per share, for the third quarter of last year. Earnings for the nine months ended June 30, 1996 were $114.5 million, or $2.33 per share, compared to $110.1 million, or $2.29 per share, in the nine months ended June 30, 1995. Consolidated earnings for the twelve months ended June 30, 1996 were $95.9 million, or $1.95 per share, compared to $89.3 million, or $1.86 per share, for the same period a year ago. Utility operations showed a loss of 17 cents per share in this year's third quarter compared to a loss of 20 cents per share in last year's third quarter. Subsidiaries contributed eight cents per share to earnings compared to seven cents in last year's quarter. Earnings in the three, nine and 12-month periods ended June 30, 1996 reflect higher utility sales and operating margins as a result of revenue growth and cost-efficiency efforts. The effect on utility earnings of variations in revenues due to the extremely cold weather during the past winter was, for the most part, offset by the weather-normalization adjustment in the Company's tariff. Earnings from subsidiaries in 1996 reflect higher comparable earnings from pipeline investment and gas-exploration, production and processing operations. Earnings from cogeneration projects were adversely affected by high fuel costs during the past winter and the seasonal nature of the projects' electric sales. Firm gas sales for the third quarter of fiscal 1996, which was 12.6% colder than normal and 12% colder than the third quarter of fiscal 1995, were 22,986 MDTH, compared to 21,440 MDTH a year ago. Firm gas sales were 128,362 MDTH for the nine months ended June 30, 1996, representing a 16.3% increase from the same period last year, which was 11.0% warmer than normal. Weather for the twelve months ended June 30, 1996 was 7.4% colder than normal and 22.0% colder than the twelve months ended June 30, 1995. Consequently, firm gas sales of 141,327 MDTH for the twelve months ended June 30, 1996 increased 14.4% compared with the twelve months ended June 30, 1995. Total gas throughput from utility operations, which includes gas deliveries to interruptible customers and transportation services primarily to off-system customers, of 32,288 MDTH in the third quarter of fiscal 1996 increased slightly from last year's third quarter. Total gas throughput for the nine months ended June 30, 1996 was 165,281 MDTH, compared to 153,821 MDTH in the same period a year ago, while for the twelve months ended June 30, 1996, it was 189,137 MDTH, compared to 181,664 MDTH in the corresponding period last year. Net revenues (utility operating revenues less cost of gas of utility sales) increased 7.7% in the three months ended June 30, 1996, compared to the same period last year. This increase was attributable to heating sales additions and the retention of a portion of margins on the increase in sales due to colder-than- normal weather. Net revenues in the nine and twelve-month periods ended June 30, 1996 increased 4.6% and 3.5%, respectively, compared with the corresponding prior year periods. The Company and its gas exploration and production subsidiary, from time to time and in varying degrees, employ derivative financial instruments, natural gas futures and swaps for the purpose of managing commodity price risk. In connection with utility operations, the Company primarily uses derivative financial instruments to fix margins on sales to large-volume customers to which gas is sold at a price indexed to the prevailing price of oil, their alternate fuel. Gas production and other revenues primarily reflect variations in revenues from gas exploration and production operations in all periods presented, principally due to the May 1995 acquisition of a gas processing plant located in British Columbia, Canada, by the Company's Canadian affiliate. On July 30, 1996, the affiliate completed the sale of its investment in the gas processing plant. In contemplation of this sale, the results of operations and financial condition reflect the deconsolidation of the related investment, which is reported on the equity method for the three months ended June 30, 1996 and fully consolidated in all other periods. (See Notes to Condensed Consolidated Financial Statements, Note 5., Subsidiary Matters.) Gas production increased slightly in all periods. The effective price (average wellhead price received for production including realized gains and losses on closed financial instrument positions for hedging) was $1.79 per MCF in the third quarter of fiscal 1996 compared with $1.70 per MCF in the third quarter last year, while the average wellhead price was $2.21 per MCF in this year's third quarter compared with $1.43 per MCF in the comparable quarter last year. For the nine months ended June 30, 1996, the effective price was $1.69 per MCF compared with $1.68 per MCF in the nine months ended June 30, 1995. Hedging activities produced a loss of $2.5 million in the quarter compared with a gain of $1.6 million in the comparable quarter last year. Hedging losses for the nine months ended June 30, 1996 amounted to $6.3 million compared with a gain of $4.4 million in the same period last year. The effective price in the twelve months ended June 30, 1996 was $1.71 per MCF compared with $1.73 per MCF in the twelve months ended June 30, 1995. For the twelve months ended June 30, 1996 hedging losses were $4.0 million compared with hedging gains of $5.0 million in the same period last year. Portions of future production are covered by hedge positions. In July 1996, Houston Exploration purchased certain oil and gas- related properties in South Texas from TransTexas Gas Corporation and TransTexas Transmission Corporation. These properties include proved reserves estimated at 113 BCF, a gathering system and significant undeveloped acreage, which will serve as the foundation of a new drilling program. Houston Exploration now has over 300 BCF of proved gas reserves. (See Notes to Condensed Consolidated Financial Statements, Note 5., Subsidiary Matters.) KIAC Partners, a general partnership between affiliates of Gas Energy Inc., the Company's cogeneration subsidiary, and Community Energy Alternatives Inc., built and operates the 107-megawatt cogeneration plant at John F. Kennedy International Airport. In June 1996, the plant was refinanced through the sale of $250 million of tax-exempt bonds issued by the Port Authority of New York and New Jersey. These Project Bonds were used to retire outstanding tax-exempt bonds as well as to refund a portion of the equity invested in the project, which is intended to enhance the profitability of the project. A recently formed gas-marketing subsidiary, KeySpan Energy Services Inc., was incorporated in April 1996. Headquartered in Stamford, Connecticut, it is prepared to sell gas both inside and outside Brooklyn Union's traditional service territory. It has contracted to supply gas to more than 450 commercial and residential customers in the New York metropolitan area with annualized sales volumes exceeding 700 MDTH. Deliveries began in July. The increase in operation and maintenance expense in the three, nine and twelve month periods ended June 30, 1996 reflects the effect of significantly colder weather on utility operations, offset partly by ongoing cost reductions. Moreover, consolidated operation expense in the nine and twelve months ended June 30, 1996 and the three months ended June 30, 1995 included costs related to Canadian gas processing operations. Depreciation and depletion expense in the three, nine, and twelve months ended June 30, 1996 increased 2.9%, 2.2% and 3.3%, respectively, compared to the same periods ended June 30, 1995. Higher depreciation and depletion expense related primarily to utility plant additions. General taxes principally include State and City taxes on utility revenues and property. Federal income tax expense in periods ended June 30, 1996 reflects higher pre-tax income. Other income generally reflects results from investments in energy services which for all current periods reflect increased earnings. However, earnings of subsidiaries with investments in cogeneration projects and related fuel management operations were adversely affected by this year's cold winter and the increase in fuel prices, as well as the seasonal nature of electric sales for these projects. Also, interim nine and twelve-month results reflect provisions for estimated costs related to investigations regarding construction of the Iroquois pipeline. Earnings from investment in a Canadian gas processing plant were also accounted for on the equity method and included in other income for the three months ended June 30, 1996. (For information regarding Iroquois, see Notes to Condensed Consolidated Financial Statements, Note 3., Investment in Iroquois Pipeline.) Interest charges on long-term debt reflect the favorable impact of the Company's debt refinancing on March 1, 1996 (see "Financial Condition"). Other interest charges principally include carrying charges related to regulatory settlement items. Dividends on preferred stock reflect reductions in the level of preferred stock outstanding due to sinking fund redemptions. Financial Condition In the nine months ended June 30, 1996, operating activities provided $177.2 million in cash flow; whereas, in the nine months ended June 30, 1995, operating activities provided $230.3 million in operating cash flow. Generally, the Company settles gas supplier invoices monthly while its firm customers are billed bi- monthly. Hence, the lag between payments to gas suppliers and recoveries from residential heating customers, especially those on budget or flat payment plans, can adversely affect cash flow from operating activities when the weather is extremely cold. Thus, the reduction in operating cash flow is almost entirely attributable to colder-than-normal weather. Cash provided by operating activities in the twelve months ended June 30, 1996 also reflects working capital requirements related to weather as well as the timing of other items recovered through utility tariff billings. Cash flow from investing activities in periods ended June 30, 1996 includes proceeds from the refinancing of a cogeneration project in which a Company subsidiary holds an equity interest. Capital expenditures for fiscal years 1996 and 1997 are estimated to be approximately $195 million in each year. Rate and Regulatory Matters Rate Settlement Matters and Holding Company Petition 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 was permitted to amortize to income approximately $1.3 million of deferred credits in the year. In addition to earnings sharing provisions, the plan provided new incentives, more flexible pricing in large-volume competitive markets, and rate design modifications to improve the Company's competitive position. The Company is permitted to retain 100% of any earnings from discrete incentives including retention of a portion of margins above a specified level of sales to certain large-volume customers (up to 100 basis points on utility equity). With respect to earnings sharing provisions, the Company will retain 75% of the first 100 basis points of earnings in excess of the allowed return on utility equity unrelated to discrete incentives, and 50% of any additional earnings above that level. In September 1995, the PSC approved the Company's second stage rate filing covering fiscal 1996. The approval provides for no base rate increase; however, it permits the amortization to income of $7.5 million in deferred credits. The authorized rate of return on utility common equity was set at 10.65% for fiscal 1996, reflecting generally lower prevailing capital costs. The incentive provisions continue and remain available to provide the opportunity to achieve earned rates of return above the authorized level. These revisions became effective on October 1, 1995. Additionally, base rate increases, if any, in the third year of the agreement would continue to be limited to the rate of inflation and could be offset by amortization of any deferred credits. In May 1996, the Company reached an agreement with the staff of the New York State Department of Public Service and other parties to allow the Company to reorganize its gas distribution operations and its subsidiaries into a new holding company. The agreement reached in the holding company filing included a new multi-year rate plan that will become effective on or about October 1, 1996, if approved by the PSC. After an initial rate reduction of approximately $3 million in fiscal 1997, the non-gas component in customer bills will be under specific price caps. Hence, the total amount 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 costs more appropriately. The Company will also be permitted to charge for various ancillary services. The agreement includes provisions for rate changes if certain conditions applicable to inflation or financial condition occur. (See Item 6. Exhibits and Reports on Form 8-K, (b) Reports on Form 8-K.) Restructuring Proceeding The PSC has set forth a policy framework to guide the transition of New York's gas distribution industry in the post-Federal Energy Regulatory Commission (FERC) Order 636 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, as of May 1, the Company's small-volume market will have the option to purchase their gas supplies from sources other than the Company, which would serve as a gas transporter. Large-volume customers already have this option. 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 provided to marketing firms. 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 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. Since gas marketers under present tax law are not subject to New York State gross receipts taxes, they have an artificial competitive advantage. The PSC order, limiting the conversion to transportation of core sales to approximately 5.3 BCF per year, gave some recognition to the effects of the tax differential. 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 June 30, 1996, the Company had an accrued liability of $28.8 million and a related unamortized regulatory asset of $31.3 million. (See Notes to Condensed Consolidated Financial Statements, Note 4., Environmental Matters.) 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. 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 June 30, 1996 and 1995, and the related condensed consolidated statements of income for the three, nine and twelve month periods ended June 30, 1996 and 1995, and the condensed consolidated statements of cash flows for the nine and twelve month periods ended June 30, 1996 and 1995. 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, 1995, 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, 1995, 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, 1995 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 July 24, 1996 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 effect on the Company's financial position or results of operations. For information regarding governmental investigations of alleged environmental, civil and criminal violations involving the Iroquois pipeline, see the Notes to Condensed Consolidated Financial Statements, Note 3., Investment in Iroquois Pipeline. For information regarding environmental matters affecting the Company, see Note 4., Environmental Matters. For information regarding a subsidiary's reorganization lawsuit, see Note 5., Subsidiary Matters. 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 There was a report filed on June 5, 1996, noting that the Company and the staff of the New York State Department of Public Service had reached an agreement permitting the Company to reorganize its gas-distribution operations and its subsidiaries into a new holding company, and a change in the Company's rate- making formula. Consummation of such agreement is subject to approval by the Public Service Commission and the shareholders of the Company. No financial statements were included in that report. 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 August 14, 1996 s/ V.D. Enright Senior Vice President and Chief Financial Officer Date August 14, 1996 s/ R.M. Desmond R.M. Desmond Vice President, Comptroller and Chief Accounting Officer EX-15 2 Exhibit 15 1345 Avenue of the Americas New York, NY 10105 August 14, 1996 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 Registration Statements Nos. 33-66182, 333-04863, 333- 03441 and 333-06257 its Form 10-Q for the quarter ended June 30, 1996, which includes our report dated July 24, 1996 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, our 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 1 U.S. DOLLARS 9-MOS SEP-30-1996 OCT-01-1995 JUN-30-1996 1 PER-BOOK 1,323,108,000 360,628,000 418,763,000 163,028,000 0 2,265,527,000 16,557,000 528,606,000 365,574,000 910,737,000 0 6,600,000 727,498,000 0 0 0 0 300,000 0 0 620,392,000 2,265,527,000 1,247,947,000 58,493,000 1,039,277,000 1,097,770,000 150,177,000 3,418,000 153,595,000 38,875,000 114,720,000 244,000 114,476,000 52,590,000 33,718,000 177,191,000 2.33 2.33
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