-----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, LbXdABmtH3KuB/MOrqX6Zd5sWPTpiGfTwGWZXweYq7KvMTDGVHIxLujDMp2y9vuv v24OCZ7Q+joLnXWeWAkOew== 0000014525-97-000004.txt : 19970506 0000014525-97-000004.hdr.sgml : 19970506 ACCESSION NUMBER: 0000014525-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970218 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: 97537304 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 December 31, 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 February 1, 1997 $.33 1/3 par value 50,074,596 2 THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES INDEX Part I. Financial Information Page No. Condensed Consolidated Balance Sheet - December 31, 1996 and 1995, and September 30, 1996 3 Condensed Consolidated Statement of Income - Three and Twelve Months Ended December 31, 1996 and 1995 4 Condensed Consolidated Statement of Cash Flows - Three and Twelve Months Ended December 31, 1996 and 1995 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Review of Independent Public Accountants 18 Report of Independent Public Accountants 19 Part II. Other Information Item 1 - Legal Proceedings 20 Item 4 - Submission of Matters to a Vote of Security Holders 20 Item 6 - Exhibits and Reports on Form 8-K 20 Signatures 22 3
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET - - --------------------------------------------------------------------------------------------------------------------- December 31, December 31, September 30, 1996 1995 1996 (Unaudited) (Unaudited) (Audited) - - --------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) Assets Property Utility, at cost $ 1,786,688 $ 1,700,034 $ 1,782,440 Accumulated depreciation (428,445) (398,481) (429,476) Gas exploration and production, at cost 538,551 372,939 510,568 Accumulated depletion (176,814) (143,616) (165,414) - - --------------------------------------------------------------------------------------------------------------------- 1,719,980 1,530,876 1,698,118 - - --------------------------------------------------------------------------------------------------------------------- Investments in Energy Services 113,183 122,187 115,529 - - --------------------------------------------------------------------------------------------------------------------- Current Assets Cash and temporary cash investments 44,485 7,582 41,921 Accounts receivable 334,106 327,379 172,843 Allowance for uncollectible accounts (16,781) (14,997) (15,616) Gas in storage, at average cost 81,658 64,596 91,813 Materials and supplies, at average cost 12,691 14,591 12,089 Prepaid gas costs 10,881 8,031 11,945 Other 39,754 30,431 38,888 - - --------------------------------------------------------------------------------------------------------------------- 506,794 437,613 353,883 Deferred Charges 120,230 162,071 122,073 - - --------------------------------------------------------------------------------------------------------------------- $ 2,460,187 $ 2,252,747 $ 2,289,603 ===================================================================================================================== Capitalization and Liabilities Capitalization Common stock, $.33 1/3 par value stated at $ 554,907 $ 529,688 $ 549,835 Retained earnings 382,430 331,276 355,973 - - --------------------------------------------------------------------------------------------------------------------- Total common equity 937,337 860,964 905,808 Preferred stock, redeemable 6,600 6,900 6,600 Long-term debt 712,031 723,223 712,013 - - --------------------------------------------------------------------------------------------------------------------- 1,655,968 1,591,087 1,624,421 - - --------------------------------------------------------------------------------------------------------------------- Current Liabilities Accounts payable 179,857 119,301 143,561 Dividends payable 18,924 17,799 18,229 Commercial paper 28,000 23,000 - Taxes accrued 42,456 32,145 10,905 Customer deposits 22,699 22,397 21,881 Customer budget plan credits 26,993 41,088 8,892 Interest accrued and other 32,547 50,179 37,244 - - --------------------------------------------------------------------------------------------------------------------- 351,476 305,909 240,712 - - --------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Federal income tax 286,818 250,224 282,041 Unamortized investment tax credits 19,738 20,711 20,007 Other 65,755 84,816 43,573 - - --------------------------------------------------------------------------------------------------------------------- 372,311 355,751 345,621 - - --------------------------------------------------------------------------------------------------------------------- Minority Interest in Subsidiary Company 80,432 - 78,849 - - --------------------------------------------------------------------------------------------------------------------- $ 2,460,187 $ 2,252,747 $ 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 Twelve Months Ended December 31, Ended December 31, 1996 1995 1996 1995 - - --------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars, Except Per Share Data) Operating Revenues Utility sales and transportation $ 405,482 $ 372,551 $ 1,362,397 $ 1,164,063 Gas production and other 41,244 25,532 114,314 87,983 - - --------------------------------------------------------------------------------------------------------------------- 446,726 398,083 1,476,711 1,252,046 Operating Expenses Cost of gas 197,536 160,303 647,287 471,737 Operation and maintenance 101,877 101,302 421,399 390,749 Depreciation and depletion 24,982 18,081 92,601 71,788 General taxes 41,439 38,722 145,912 136,662 Federal income tax 23,434 22,275 41,104 42,681 - - --------------------------------------------------------------------------------------------------------------------- Operating Income 57,458 57,400 128,408 138,429 Other Income (Expense) Income from equity investments 2,290 1,707 12,196 9,639 Gain on sale of investment in Canadian plant - - 16,160 - Gain on sale of subsidiary stock - - 35,437 - Minority interest in earnings of subsidiary (1,583) - (1,583) - Other, net (777) 214 1,440 22 Federal income tax (883) (577) (20,155) (423) - - --------------------------------------------------------------------------------------------------------------------- Income Before Interest Charges 56,505 58,744 171,903 147,667 - - --------------------------------------------------------------------------------------------------------------------- Interest Charges Long-term debt 10,545 12,922 43,928 48,793 Other 1,159 1,115 4,972 5,171 - - --------------------------------------------------------------------------------------------------------------------- 11,704 14,037 48,900 53,964 - - --------------------------------------------------------------------------------------------------------------------- Net Income 44,801 44,707 123,003 93,703 Dividends on Preferred Stock 79 83 320 334 - - --------------------------------------------------------------------------------------------------------------------- Income Available for Common Stock $ 44,722 $ 44,624 $ 122,683 $ 93,369 ===================================================================================================================== Per Share of Common Stock $ 0.90 $ 0.91 $ 2.47 $ 1.92 ===================================================================================================================== Dividends Declared per Share of Common Stock $ 0.365 $ 0.355 $ 1.430 $ 1.398 ===================================================================================================================== Average Common Shares Outstanding 49,941,590 48,946,893 49,614,109 48,510,260 ===================================================================================================================== 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) Three Months Twelve Months Ended December 31, Ended December 31, - - --------------------------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 - - --------------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) OPERATING ACTIVITIES Net income $ 44,801 $ 44,707 $ 122,003 $ 93,703 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and depletion 25,911 18,861 90,117 75,955 Deferred Federal income tax 4,558 3,571 29,019 13,397 Gain on sale of investment in Canadian operations - - (16,160) - Gain on sale of subsidiary stock - - (35,437) - Income from energy services investments (2,290) (1,707) (13,196) (9,639) Dividends received from energy services investments 910 2,497 9,633 5,146 Minority interest in earnings of subsidiary 1,583 - 1,583 - Allowance for equity funds used during construction (109) (366) (716) (1,396) Change in accounts receivable, net (152,988) (180,324) 4,268 6,204 Change in accounts payable 28,188 15,445 43,738 (31,997) Gas inventory and prepayments 11,219 31,908 (19,912) 24,779 Other 71,914 55,300 24,976 19,241 - - --------------------------------------------------------------------------------------------------------------------- Cash provided by (used in) operating activities 33,697 (10,108) 240,916 195,393 - - --------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Sale of common stock 5,601 7,140 25,328 28,276 Proceeds from sale of subsidiary stock - - 101,041 - Issuance of long-term debt - 2,654 153,500 9,743 Commercial paper, net 28,000 23,000 5,000 19,000 - - --------------------------------------------------------------------------------------------------------------------- 33,061 32,794 284,869 57,019 Repayments Preferred stock - - (300) (300) Long-term debt - - (163,223) - - - --------------------------------------------------------------------------------------------------------------------- 33,061 32,794 121,346 56,719 Dividends paid (18,343) (17,139) (71,819) (67,969) Other 125 11 (22) 51 - - --------------------------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities 14,843 15,666 49,505 (11,199) - - --------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (excluding allowance for equity funds used during construction) (49,074) (39,115) (311,266) (201,943) Proceeds from sale of investment in Canadian Plant - - 26,938 - Partnership distribution 1996 and other 3,098 597 30,810 11,667 - - --------------------------------------------------------------------------------------------------------------------- Cash used in investing activities (45,976) (38,518) (253,518) (190,276) - - --------------------------------------------------------------------------------------------------------------------- Change in Cash and Temporary Cash Investments 2,564 (32,960) 36,903 (6,082) Cash and Temporary Cash Investments at Beginning of Period 41,921 40,542 7,582 13,664 - - --------------------------------------------------------------------------------------------------------------------- Cash and Temporary Cash Investments at End of Period $ 44,485 $ 7,582 $ 44,485 $ 7,582 ===================================================================================================================== 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 $ - $ - $ 37,053 $ 36,000 Interest $ 12,007 $ 16,709 $ 50,196 $ 52,724 See accompanying notes to condensed consolidated financial statements.
6 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 December 31, 1996 and 1995, and the results of operations for the three and twelve month periods ended December 31, 1996 and 1995, and cash flows for the three and twelve month periods ended December 31, 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, 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. Results of operations may also be 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 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 7 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. The Company executed a consent order with the DEC 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 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 $5.7 million of costs expended as of December 31, 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 December 31, 1996, the Company had an unpaid liability of $28.4 million. By order issued February 16, 1995, the New York State Public Service Commission (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 1995 and 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. Moreover, the rate agreement that became effective on October 1, 1996, described in "Rate and Regulatory Matters" of "Management's Discussion and Analysis of Results of Operations and Financial Condition," provides, among other things, that 8 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 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 $32.6 million recorded for environmental remediation costs as of December 31, 1995, have been reflected in utility rates pursuant to the rate agreement that became effective on October 1, 1996. Accordingly, at December 31, 1996, the Company had only a net tax regulatory asset of $75.3 million compared to a net regulatory asset of $96.9 million at December 31, 1995. 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 $48.9 million which would be classified as an extraordinary item. 4. SHARE EXCHANGE AGREEMENT WITH LONG ISLAND LIGHTING COMPANY (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 dated 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 hold. 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 hold. Shareholders of the 9 Company will own approximately 34% of the common stock of the new holding company while LILCO shareholders will own approximately 66%. The terms of both companies' outstanding debt issues and preferred stock will not be altered as a result of the share exchange transaction. 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. 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. 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 10 unsecured and Prime-1 short-term ratings on review for possible downgrade. In 1995, the Long Island Power Authority (LIPA), an agency of the State of New York (NYS), was requested by the Governor of NYS to develop a plan, pursuant to its authority under NYS law, to provide an electric rate reduction of at least 10%, provide a framework for long-term competition in power production and protect property tax-payers on Long Island. The Share Exchange Agreement contemplates that discussions, which are currently in progress, will continue with LIPA to arrive at an agreement mutually acceptable to the Company, LILCO and LIPA, pursuant to which LIPA would acquire certain assets or securities of LILCO, the consideration for which would inure to the benefit of the new holding company. In the event that such a transaction is completed, the Ratio would be 0.880. In connection with discussions with LIPA, LIPA has indicated that it may exercise its power of eminent domain over all or a portion of LILCO's assets or securities, in order to achieve its objective of reducing current electric rates, if a negotiated agreement cannot be reached. The Company is unable to determine when or if an agreement with LIPA will be reached, or what action, if any, LIPA will take if such an agreement is not reached. 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 December 31, 1996 vs. Three Months ended December 31, 1995. (2) Twelve Months ended December 31, 1996 vs. Twelve Months ended December 31, 1995. Consolidated income available for common stock for the first quarter of fiscal 1997 was $44.7 million, or 90 cents per share, compared to $44.6 million, or 91 cents per share, for the first quarter of last year. Utility operations contributed 83 cents per share to consolidated earnings, a decrease of four cents per share compared to last year's quarterly earnings. Utility operations continued to reflect sales growth and ongoing cost-reduction efforts, although comparative results were adversely affected by weather. Operating results in the first quarter of fiscal 1997 reflect normal weather, while last year's first 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 approximately $1 million higher in the first quarter of fiscal 1997, contributing seven cents per share. The higher earnings reflected the Company's increased investment in the Iroquois Gas Transmission System and the operations associated with the acquisition of gas and oil properties by The Houston Exploration Company (THEC) in July and September 1996. Consolidated earnings for the twelve months ended December 31, 1996 were $122.7 million, or $2.47 per share, compared to $93.4 million, or $1.92 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, and were based on solid performances in both utility operations and energy-related investments. Firm gas sales for the first quarter of fiscal 1997, which had normal weather, were 2,118 MDTH lower than in the first quarter last year, which was 9% colder than normal. Other gas and transportation sales, which include gas deliveries to interruptible customers and transportation services, primarily to off-system 12 customers, were comparable in the first quarters of both years. Total sales for the twelve months ended December 31, 1996, which was 4.8% colder than normal, were 182,874 MDTH, compared to 180,205 MDTH for the corresponding period a year ago, which was 1% warmer than normal. Net revenues (utility operating revenues less cost of gas of utility sales) decreased 2% in the three months ended December 31, 1996 reflecting weather which was normal compared to the same period last year which was 9% colder than normal. Net revenues increased 3.3% in the twelve months ended December 31, 1996 as compared with the corresponding period last year, due to the cold weather in last year's second quarter, the peak of the heating season. 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 December 31, 1996, gas and transportation sales and services to off-system and interruptible customers amounted to 42,959 MDTH compared with 47,622 MDTH for the comparable period in 1995. 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 and to a lesser extent standard New York Mercantile Exchange futures contracts or options 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 all cases, THEC pays the counterparties the amount by which the floating variable price (settlement price) 13 exceeds the fixed price and receives the amount by which the settlement price is below the fixed price. 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. Gas production and other revenues increased in the current periods as compared with the comparable periods last year, principally due to the acquisition of gas and oil properties by THEC in July and September 1996. Gas production for the quarter ended December 31, 1996 was 10.5 BCFe, or 5.2 BCFe above production in the first quarter last year. For the twelve months ended December 31, 1996, gas production was 31.9 BCFe, compared with 22.0 BCFe in the twelve months ended December 31, 1995. The effective price (average wellhead price received for production including realized gains and losses) was $2.32 per MCF in the first quarter of fiscal 1997 compared with $1.72 per MCF in the first quarter of 1996. The average wellhead price was $2.68 per MCF in the current quarter compared with $1.59 per MCF in the first quarter of 1996. Due to warmer weather experienced to date in the second quarter, currently forecasted prices have softened. The effective prices in the twelve months ended December 31, 1996 and 1995 were $2.00 and $1.78 per MCF, respectively. Operation and maintenance expense was comparable for the quarters ended December 31, 1996 and 1995, reflecting the comparatively warmer weather and ongoing cost-reduction efforts. Also, operation and maintenance expense for the quarter ended December 31, 1995 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 December 31,1996 increased 7.8% due to colder weather and the reorganization charge of $12 million ($7.8 million, after taxes) incurred by THEC. The increase in depreciation and depletion expense in the current periods reflects higher depletion charges at THEC due to increased gas production. General taxes principally include State and City taxes on utility revenues and property. The applicable property base generally has increased, although the Company has been able to realize savings by the pursuit of reductions in 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 14 effective tax rate for the twelve months ended December 31, 1996 was 33%. Interest charges for the twelve months ended December 31, 1996 reflect lower utility interest costs due to debt refunding offset slightly by higher average subsidiary borrowings related to gas exploration and production operations. Other interest charges principally include carrying charges related to regulatory settlement items, and for the quarters ended December 31, 1996 and 1995, reflect interest charges related to commercial paper borrowings to finance seasonal working capital requirements. Other income includes results from investments in energy services which reflect increased earnings in the current periods, primarily associated with an increase of 8% in the Company's investment in the Iroquois Gas Transmission System which occurred in May 1996. These increases were offset in part by the 34% minority interest in the earnings of THEC. The increase in other income for the twelve months ended December 31, 1996, as compared with the comparable period last year, reflects 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 In the quarter ended December 31, 1996, operating activities provided $33.7 million in cash flow; whereas, in the quarter ended December 31, 1995, operating activities used $10.1 million in cash flow. The upswing in cash flow of $43.8 million in the quarter ended December 31, 1996 as compared to the first quarter of last year is largely attributable to weather. The first quarter last year was extremely cold compared to this year's quarter and hence there was less cash tied up in utility customer receivables and gas inventory accounts. In the twelve months ended December 31, 1996, operating cash flow increased $45.5 million over the comparable period a year ago. The increase also largely reflected the effects of weather on receivables, inventories and payables. 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 - had an initial interest rate of 3.45%. Substantial savings in interest costs are expected to result from the refunding. 15 Rate and Regulatory Matters Rate Settlement Matters In September 1996, the PSC approved a regulatory agreement to 15 permit the Company to reorganize into a holding company structure. However, on December 29, 1996, the Company and the Long Island Lighting Company signed a definitive agreement to combine in a tax- free transaction that would result in the formation of a new holding company (see Note 4 to the Condensed Consolidated Financial Statements, "Share Exchange Agreement with Long Island Lighting Company"). As a result of entering into the agreement with LILCO, the Board of Directors has made a determination not to have the Company proceed at this time with its plan to form the holding company contemplated in the regulatory agreement. 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 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. The Company also will be permitted to charge for various ancillary services. 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 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 16 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. The authorized rate of return on utility common equity was set at 10.65% for fiscal 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. 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 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. 17 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 17 historically have not been material, are integrated with the Company's regular operation and maintenance activities. As of December 31, 1996, the Company had an accrued liability of $28.4 million representing costs associated with investigation and remediation at former manufactured gas plant sites. (See Notes to Condensed Consolidated Financial Statements, Note 2., "Environmental Matters.") 18 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 19. 19 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 December 31, 1996 and 1995, and the related condensed consolidated statements of income for the three and twelve month periods ended December 31, 1996 and 1995, and the condensed consolidated statements of cash flows for the three and twelve month periods ended December 31, 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, 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 January 22, 1997 20 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., "Environmental Matters." Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held at the office of the Company, One MetroTech Center, Brooklyn, New York on Thursday, February 6, 1997. (b) Charles Uribe was elected to serve as a director for a one- year term expiring in 1998. Craig G. Matthews was elected as a director for a two-year term expiring in 1999. Andrea S. Christensen, Alan H. Fishman and James Q. Riordan were elected for three-year terms expiring in 2000. Robert B. Catell, Kenneth I. Chenault and Edward D. Miller will continue to serve as directors until their terms expire in 1998. Donald H. Elliott and James L. Larocca will continue to serve as directors until their terms expire in 1999. These terms may not be completed if the Share Exchange Agreement referred to above is approved and completed. (c) The vote to elect Arthur Andersen LLP as independent public accountants was 42,174,608 shares in favor, or 98% of the shares voted, and 390,906 shares against, or 1% of the shares voted. Abstentions of 328,128 shares were recorded. (d) The proposal by a shareholder for cumulative voting for directors was rejected by a vote of 24,308,266 shares against, or 69% of the shares voted (12,838 proxies), and 9,031,752 shares in favor, or 25% of the shares voted (2,563 proxies). Abstentions of 2,098,034 shares (1,580 proxies) were recorded. 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. 21 (b) Reports on Form 8-K There was a Form 8-K filed on December 30, 1996 pertaining to the Share Exchange Agreement dated December 29, 1996 among the Company, Long Island Lighting Company and BUGLILCO Holding Corp. 22 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 February 9, 1997 s/ V.D. Enright V.D. Enright Senior Vice President and Chief Financial Officer Date February 9, 1997 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 February 18, 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 Registration Statements Nos. 33-66182, 333- 04863, 333-03441, 333-06257 and 333-18025, its Form 10-Q for the quarter ended December 31, 1996, which includes our report dated January 22, 1997 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 CO. 1000 U.S. DOLLARS 3-MOS SEP-30-1997 OCT-01-1996 DEC-31-1996 1 PER-BOOK 1,358,243 474,920 506,794 120,230 0 2,460,187 16,678 538,229 382,430 937,337 0 6,600 712,031 0 0 28,000 0 300 0 0 775,919 2,460,187 446,726 23,434 365,834 389,268 57,458 (953) 56,505 11,704 44,801 79 44,722 18,264 10,230 33,697 0.90 0.90
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