-----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, JGA0fvoNZdF+WSskqlS43j4CenKR7EKVDSIAKr4PHpTNTDJOKJw2ozotaZtRgdb2 Lnw+T5T7OHnDdRsB2zJ78A== 0000060251-97-000005.txt : 19970226 0000060251-97-000005.hdr.sgml : 19970226 ACCESSION NUMBER: 0000060251-97-000005 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970225 ITEM INFORMATION: Acquisition or disposition of assets FILED AS OF DATE: 19970225 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LONG ISLAND LIGHTING CO CENTRAL INDEX KEY: 0000060251 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 111019782 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03571 FILM NUMBER: 97543029 BUSINESS ADDRESS: STREET 1: 175 E OLD COUNTRY RD CITY: HICKSVILLE STATE: NY ZIP: 11801 BUSINESS PHONE: 5165455184 MAIL ADDRESS: STREET 1: 175 E. OLD COUNTRY RD CITY: HICKSVILLE STATE: NY ZIP: 11801 8-K 1 LILCO FORM 8-K CURRENT REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 8-K Current Report ---------- Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ---------- Date of Report: February 25, 1997 ---------- LONG ISLAND LIGHTING COMPANY (Exact name of registrant as specified in charter) New York 1-3571 11-1019782 (State of Incorporation) (Commission File No.) (I.R.S. Employer Identification No.) ---------- 175 East Old Country Road, Hicksville, New York 11801 516-755-6650 (Address and telephone number of Principal Executive Offices) ITEM 5. OTHER EVENTS In connection with the binding share exchanges between Long Island Lighting Company ("LILCO") and The Brooklyn Union Gas Company ("Brooklyn Union") as discussed in LILCO's Report on Form 8-K dated December 30, 1996 (the "Binding Share Exchanges"), LILCO is filing the following: (i) audited financial statements of Brooklyn Union as of September 30, 1996 and 1995 and for each of the three years in the period ended September 30, 1996; (ii) unaudited interim financial statements of Brooklyn Union as of and for the three and twelve months ended December 31, 1996 and 1995; and (iii) unaudited pro forma combined condensed financial information for LILCO and Brooklyn Union, after giving effect to the Binding Share Exchanges as a pooling of interests for accounting purposes, in each case as attached as Exhibits 99.1, 99.2 and 99.3 to this Current Report on Form 8-K, which Exhibits are hereby incorporated by reference herein. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. The audited financial statements, and the unaudited interim financial statements of Brooklyn Union, and the unaudited pro forma combined condensed financial information, referred to above in Item 5 and incorporated herein by reference, are attached hereto as the following Exhibits: Exhibit NUMBER 99.1. Audited financial statements of Brooklyn Union as of September 30, 1996 and 1995 and for each of the three years in the period ended September 30, 1996, including the report and consent of Independent Auditors. 99.2. Unaudited interim financial information of Brooklyn Union for its quarters ended December 31, 1996 and 1995, including the review report and acknowledgment of Independent Auditors. 99.3. Unaudited pro forma combined condensed financial information for LILCO and Brooklyn Union. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LONG ISLAND LIGHTING COMPANY (Registrant) By: /S/ ANTHONY NOZZOLILLO ---------------------------- Anthony Nozzolillo Senior Vice President - Finance Dated: February 25, 1997 EX-99 2 EXHIBIT 99.1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Brooklyn Union Gas Company: We have audited the accompanying Consolidated Balance Sheet and Consolidated Statement of Capitalization of The Brooklyn Union Gas Company (a New York corporation) and subsidiaries as of September 30, 1996 and 1995, and the related Consolidated Statements of Income, Retained Earnings and Cash Flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position and capitalization of The Brooklyn Union Gas Company and subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. /S/ ARTHUR ANDERSEN LLP October 23, 1996 New York, New York SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS FOR FINANCIAL STATEMENT PRESENTATION PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements reflect the accounts of the Company and its subsidiaries. All significant intercompany transactions are eliminated. All other adjustments are of a normal, recurring nature and certain reclassifications have been made to amounts in prior periods to conform them with the current period presentation. Further, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. UTILITY GAS PROPERTY - DEPRECIATION AND MAINTENANCE Utility gas property is stated at original cost of construction, which includes allocations of overheads and taxes and an allowance for funds used during construction. Depreciation is provided on a straight-line basis in amounts equivalent to composite rates on average depreciable property of 3.4% in 1996 and 1995, and 3.3% in 1994. The cost of property retired, plus the cost of removal less salvage, is charged to accumulated depreciation. The cost of repair and minor replacement and renewal of property is charged to maintenance expense. GAS EXPLORATION AND PRODUCTION PROPERTY - DEPLETION AND DEPRECIATION The Company's gas exploration and production subsidiary follows the full cost method of accounting. All productive and nonproductive costs identified with acquisition, exploration and development are capitalized. Provisions for depletion are based on the units-of- production method and, when necessary, include provisions related to the asset ceiling test limitations required by the regulations of the Securities and Exchange Commission. Costs of unevaluated gas and oil properties are excluded from the amortization base until proved reserves are established or an impairment is determined. Provisions for depreciation of all other non-utility property are computed on a straight-line basis over useful lives of three to fifteen years. INVESTMENTS IN ENERGY SERVICES Certain subsidiaries own as their principal assets investments representing ownership interests of 50% or less in energy-related businesses that are accounted for under the equity method. REVENUES Utility customers generally are billed bi-monthly on a cycle basis. Revenues include unbilled amounts related to the estimated gas usage that occurred from the last meter reading to the end of each month. Revenue requirements to establish utility rates are based on sales to customers. Gas costs are recovered currently in billed firm revenues through the operation of a tariff provision, the Gas Adjustment Clause (GAC). Net revenues from off-system gas sales and tariff gas balancing services and capacity release credits are refunded to firm customers subject to certain limited sharing provisions in the Company's tariff. Prior to October 1, 1996, net revenues from tariff sales for gas and transportation services to on-system customers made on an interruptible basis were refunded to firm customers subject to sharing provisions. The GAC provision requires an annual reconciliation of recoverable gas costs and GAC revenues. Any difference is deferred pending recovery from or refund to firm customers during a subsequent twelve-month period. DERIVATIVE FINANCIAL INSTRUMENTS The Company and THEC use derivative financial instruments primarily to hedge exposures in cash flows due to fluctuations in the price of natural gas and fuel oil, which in certain markets may strongly influence the Company's selling price for natural gas. Gains and losses on these instruments are recognized concurrently with the recognition of the related physical transactions. The Company regularly assesses the relationship between natural gas commodity prices in "cash" and futures markets. The correlation between prices in these markets has been well within a range generally deemed to be acceptable. If correlation were not to remain in an acceptable range, the Company would account for its financial instrument positions as trading activities. FEDERAL INCOME TAX Prior to the adoption in 1994 of SFAS-109, "Accounting for Income Taxes", pursuant to PSC policy, deferred taxes were not provided for certain construction costs incurred before fiscal 1988 and for bases differences related to differences between tax and book depreciation methods. In accordance with SFAS-109, the Company recorded a regulatory asset for the net cumulative effect of having to provide deferred Federal income tax expense on all differences between the tax and book bases of assets and liabilities at the current tax rate. Investment tax credits, which were available prior to the Tax Reform Act of 1986, were deferred in operating expense and are amortized as a reduction of Federal income tax in other income over the estimated life of the related property. 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 $33.2 million recorded for environmental remediation costs as of September 30, 1995, have been reflected in utility rates pursuant to the agreement approved by the PSC in its September 25, 1996 holding company order. Accordingly, at September 30, 1996 the Company had only a net tax regulatory asset of $74,885,000 compared to a regulatory asset of $109,636,000 related to taxes and environmental costs at September 30, 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 $48,675,000 which would be classified as an extraordinary item. SUBSIDIARY COMMON STOCK ISSUANCES TO THIRD PARTIES The Company follows an accounting policy of income statement recognition for parent company gains or losses from issuances of stock by subsidiaries. RESEARCH AND DEVELOPMENT COSTS All research and development costs are expensed as incurred. For the years ended September 30, 1996, 1995 and 1994, these costs were $12.8 million, $11.9 million and $11.9 million, respectively. CONSOLIDATED STATEMENT OF INCOME
===================================================================================== For the Year Ended September 30, 1996 1995 1994 ===================================================================================== (Thousands of Dollars) Operating Revenues Utility sales $ 1,351,821 $1,152,331 $1,279,638 Gas production and other 80,181 63,953 58,992 ---------------------------------------------------------------------------------------- 1,432,002 1,216,284 1,338,630 ---------------------------------------------------------------------------------------- Operating Expenses Cost of gas 610,053 446,559 560,657 Operation and maintenance 428,977 385,654 384,734 Depreciation and depletion 79,610 72,020 69,611 General taxes 143,296 134,718 150,743 Federal income tax (See Note 1) 39,508 41,989 40,556 ---------------------------------------------------------------------------------------- Operating Income 130,558 135,344 132,329 Other Income Income from energy services investments 13,523 9,458 5,689 Gain on sale of investment in Canadian plant 16,160 - - Gain on sale of subsidiary stock (See Note 3) 35,437 - - Other, net (1,188) 151 700 Federal income tax (See Note 1) (19,861) (51) (142) ----------------------------------------------------------------------------------------- Income Before Interest Charges 174,629 144,902 138,576 Interest Charges Long-term debt 46,803 47,939 46,900 Other 4,918 5,128 4,292 ---------------------------------------------------------------------------------------- Net Income 122,908 91,835 87,384 Dividends on Preferred Stock 323 337 351 ---------------------------------------------------------------------------------------- Income Available for Common Stock $ 122,585 $ 91,498 $ 87,033 ======================================================================================== Earnings Per Share of Common Stock (Average shares outstanding of 49,365,435, 48,211,220 and 46,979,597, respectively) $ 2.48 $ 1.90 $ 1.85 ========================================================================================
The accompanying Summary of Significant Accounting Policies and Basis for Financial Statement Presentation and Notes to Consolidated Financial Statements are integral parts of these statements. CONSOLIDATED STATEMENT OF RETAINED EARNINGS
======================================================================================= For the Year Ended September 30, 1996 1995 1994 --------------------------------------------------------------------------------------- (Thousands of Dollars) Balance at Beginning of Year $ 303,709 $ 279,466 $ 255,979 Income Available for Common Stock 122,585 91,498 87,033 ---------------------------------------------------------------------------------------- 426,294 370,964 343,012 Less: Cash dividends declared ($1.42, $1.39 and $1.35 per common share, respectively) 70,291 67,229 63,652 Other adjustments 30 26 (106) ----------------------------------------------------------------------------------------- Balance at End of Year $ 355,973 $ 303,709 $ 279,466 ========================================================================================= The accompanying Summary of Significant Accounting Policies and Basis for Financial Statement Presentation and Notes to Consolidated Financial Statements are integral parts of these statements.
=============================================================================================== CONSOLIDATED BALANCE SHEET September 30, 1996 1995 (Thousands of Dollars) Assets Property Utility, at cost $ 1,782,440 $ 1,690,193 Accumulated depreciation (429,476) (393,263) Gas exploration and production, at cost (See Note 3) 510,568 353,847 Accumulated depletion (165,414) (138,136) ------------------------------------------------------------------------------------------------ 1,698,118 1,512,641 ------------------------------------------------------------------------------------------------ Investments in Energy Services (See Note 8) 115,529 121,023 ------------------------------------------------------------------------------------------------ Current Assets Cash 18,524 15,992 Temporary cash investments 23,397 24,550 Accounts receivable 172,843 146,018 Allowance for uncollectible accounts (15,616) (13,730) Gas in storage, at average cost 91,813 88,810 Materials and supplies, at average cost 12,089 13,203 Prepaid gas costs 11,945 15,725 Other 38,888 19,856 ------------------------------------------------------------------------------------------------ 353,883 310,424 ------------------------------------------------------------------------------------------------ Deferred Charges 122,073 172,834 ------------------------------------------------------------------------------------------------ $ 2,289,603 $ 2,116,922 ================================================================================================ Capitalization and Liabilities Capitalization (See accompanying statement and Note 5) Common equity $ 905,808 $ 826,290 Preferred stock, redeemable 6,600 6,900 Long-term debt 712,013 720,569 ------------------------------------------------------------------------------------------------ 1,624,421 1,553,759 ------------------------------------------------------------------------------------------------ Current Liabilities Accounts payable 143,561 103,705 Dividends payable 18,229 17,536 Taxes accrued 10,905 3,635 Customer deposits 21,881 22,252 Customer budget plan credits 8,892 24,790 Interest accrued and other 37,244 39,438 ------------------------------------------------------------------------------------------------ 240,712 211,356 ------------------------------------------------------------------------------------------------ Deferred Credits and Other Liabilities Federal income tax 282,041 247,882 Unamortized investment tax credits 20,007 20,948 Other 43,573 82,977 ------------------------------------------------------------------------------------------------ 345,621 351,807 ------------------------------------------------------------------------------------------------ Minority Interest in Subsidiary Company (See Note 3) 78,849 - ------------------------------------------------------------------------------------------------ $ 2,289,603 $ 2,116,922 ================================================================================================ The accompanying Summary of Significant Accounting Policies and Basis for Financial Statement Presentation and Notes to Consolidated Financial Statements are integral parts of these statements.
CONSOLIDATED STATEMENT OF CAPITALIZATION
========================================================================================= September 30, 1996 1995 ----------------------------------------------------------------------------------------- (Thousands of Dollars) Common Equity Common stock, $.33 1/3 par value, authorized 70,000,000 shares; outstanding 49,857,448 and 48,788,320 shares, respectively $ 549,835 $ 522,581 Retained earnings (See accompanying statement) 355,973 303,709 ------------------------------------------------------------------------------------------ 905,808 826,290 ------------------------------------------------------------------------------------------ Preferred Stock, Redeemable $100 par value, cumulative, authorized 900,000 shares 4.60% Series B, 69,000 and 72,000 shares outstanding, respectively 6,900 7,200 Less: Current sinking fund requirements 300 300 ------------------------------------------------------------------------------------------ 6,600 6,900 ------------------------------------------------------------------------------------------ Long-term Debt Gas facilities revenue bonds (issued through New York State Energy Research and Development Authority) 9% Series 1985A due May 2015 - 98,500 8 3/4% Series 1985 due July 2015 - 55,000 6.368% Series 1993A and Series 1993B due April 2020 75,000 75,000 7 1/8% Series 1985 I due December 2020 62,500 62,500 7% Series 1985 II due December 2020 62,500 62,500 5.5% Series 1996 due January 2021 153,500 - 6.75% Series 1989A due February 2024 45,000 45,000 6.75% Series 1989B due February 2024 45,000 45,000 5.6% Series 1993C due June 2025 55,000 55,000 6.95% Series 1991A and Series 1991B due July 2026 100,000 100,000 5.635% Series 1993D-1 and Series 1993D-2 due July 2026 50,000 50,000 ----------------------------------------------------------------------------------------- 648,500 648,500 Unamortized premium - Long-term debt (1,489) - Subsidiary borrowings 65,002 72,069 ----------------------------------------------------------------------------------------- 712,013 720,569 ----------------------------------------------------------------------------------------- $ 1,624,421 $ 1,553,759 ========================================================================================= The accompanying Summary of Significant Accounting Policies and Basis for Financial Statement Presentation and Notes to Consolidated Financial Statements are integral parts of these statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
============================================================================================================== For the Year Ended September 30, 1996 1995 1994 -------------------------------------------------------------------------------------------------------------- (Thousands of Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 122,908 $ 91,835 $ 87,384 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and depletion 83,006 77,696 75,386 Deferred Federal income tax 25,985 11,037 10,897 Gain on sale of investment in Canadian operations (16,160) - - Gain on sale of subsidiary stock (35,437) - - Income from energy services investments (13,523) (9,458) (5,689) Dividends received from energy services investments 11,031 3,595 4,392 Change in accounts receivable, net (24,939) 44,712 31,906 Change in accounts payable 39,856 (29,283) (34,121) Gas inventory and prepayments 777 6,208 5,498 Other 8,863 14,439 18,474 --------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 202,367 210,781 194,127 --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Sale of common stock 27,407 27,974 29,828 Proceeds from sale of subsidiary stock 101,041 - - Common stock proceeds receivable - - 44,910 Issuance of long-term debt 153,500 19,192 12,077 Repayments of long-term debt and preferred stock (160,867) (300) (300) Dividends paid (70,614) (67,566) (64,003) ---------------------------------------------------------------------------------------------------------------- Cash provided by (used for)financing activities 50,467 (20,700) 22,512 ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excluding allowance for equity funds used during construction) (301,307) (212,732) (197,496) Proceeds from sale of investment in Canadian plant 26,938 - 11,691 Partnership distribution 1996 and other 22,914 9,702 1,398 ---------------------------------------------------------------------------------------------------------------- Cash used in investing activities (251,455) (203,030) (184,407) ---------------------------------------------------------------------------------------------------------------- Change in Cash and Temporary Cash Investments 1,379 (12,949) 32,232 Cash and Temporary Cash Investments at Beginning of Year 40,542 53,491 21,259 ---------------------------------------------------------------------------------------------------------------- Cash and Temporary Cash Investments at End of Year $ 41,921 $ 40,542 $ 53,491 ================================================================================================================ 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 $ 36,900 Interest $ 53,210 $ 53,047 $ 50,872 ================================================================================================================ The accompanying Summary of Significant Accounting Policies and Basis for Financial Statement Presentation and Notes to Consolidated Financial Statements are integral parts of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FEDERAL INCOME TAX Income tax expense (benefit) is reflected as follows in the Consolidated Statement of Income: YEAR ENDED SEPTEMBER 30, 1996 1995 1994 - --------------------------------------------------------- (Thousands of Dollars) OPERATING EXPENSES Current $ 27,766 $ 31,676 $ 38,403 DEFERRED 11,742 10,313 2,153 - ----------------------------------------------------------- 39,508 41,989 40,556 - ----------------------------------------------------------- OTHER INCOME Current 6,559 379 (7,528) Deferred 14,243 724 8,744 Amortization of investment TAX CREDITS (941) (1,052) (1,074) - ------------------------------------------------------------ 19,861 51 142 - ----------------------------------------------------------- TOTAL FEDERAL INCOME TAX $ 59,369 $ 42,040 $ 40,698 - -----------------------------------------------------------
The components of the Company's net deferred income tax liability reflected as Deferred Credits and Other Liabilities - Federal income tax in the Consolidated Balance Sheet are as follows:
SEPTEMBER 30, 1996 1995 - --------------------------------------------------------- (Thousands of Dollars) Utility property $ 176,565 $ 180,708 Gas production and other property 69,488 49,402 Net tax regulatory asset 26,210 28,214 OTHER 9,778 (10,442) NET DEFERRED INCOME TAX LIABILITY $ 282,041 $ 247,882
The following is a reconciliation between reported income tax and tax computed at the statutory rate of 35%:
YEAR ENDED SEPTEMBER 30, 1996 1995 1994 - ---------------------------------------------------------- (Thousands of Dollars) Computed at statutory rate $ 63,797 $ 46,856 $ 44,828 Adjustments related to: Gas production tax credits (1,962) (2,730) (1,303) Nontaxable interest income (678) (870) (556) Amortization of investment tax credits (941) (1,052) (1,074) OTHER, NET (847) (164) (1,197) - ------------------------------------------------------------ TOTAL FEDERAL INCOME TAX $ 59,369 $ 42,040 $ 40,698 - ----------------------------------------------------------- EFFECTIVE INCOME TAX RATE 33% 31% 32% - -----------------------------------------------------------
2. POSTRETIREMENT BENEFITS A. PENSION: The Company has a noncontributory defined benefit pension plan covering substantially all employees. Benefits are based on years of service and compensation. The Company's funding policy for pensions is in accordance with requirements of Federal law and regulations. There were no pension contributions in 1996, 1995 and 1994. Special retirement programs were initiated in 1995 and 1994. The calculation of net periodic pension cost follows:
YEAR ENDED SEPTEMBER 30, 1996 1995 1994 - --------------------------------------------------------- (Thousands of Dollars) Service cost, benefits earned during the year $ 15,160 $ 11,533 $ 15,100 SPECIAL RETIREMENT CHARGE - 5,416 8,465 - ----------------------------------------------------------- 15,160 16,949 23,565 - ----------------------------------------------------------- Interest cost on projected benefit obligation 37,128 35,128 29,511 Return on plan assets (78,930) (82,626) (12,430) NET AMORTIZATION AND DEFERRAL 31,745 34,786 (32,798) - ------------------------------------------------------------ TOTAL PENSION COST $ 5,103 $ 4,237 $ 7,848 - -----------------------------------------------------------
The following table sets forth the plan's funded status and amounts recognized in the Company's Consolidated Balance Sheet. Plan assets principally are investment grade common stock and fixed income securities:
SEPTEMBER 30, 1996 1995 - ------------------------------------------------------- (Thousands of Dollars) Actuarial present value of benefit obligations: Vested $(414,988) $(401,159) Accumulated $(439,278) $(423,434) Projected $(563,852) $(545,825) PLAN ASSETS AT FAIR VALUE $ 608,080 $ 555,906 - ---------------------------------------------------------- Plan assets in excess of projected benefit obligation $ 44,228 $ 10,081 Unrecognized net loss (gain) from past experience different from that assumed and from changes in assumptions (32,755) 10,880 Unrecognized transition asset (27,914) (32,566) ACCRUED PENSION LIABILITY $ (16,441) $ (11,605) - ----------------------------------------------------------- Assumptions: Obligation discount 7.25% 7.00% Asset return 7.75% 7.50% Average annual increase IN COMPENSATION 5.50% 5.50% - -----------------------------------------------------------
B. OTHER - RETIREE HEALTH CARE AND LIFE INSURANCE: The Company sponsors noncontributory defined benefit plans under which it provides certain health care and life insurance benefits for retired employees. The Company has been funding a portion of future benefits over employees' active service lives through a Voluntary Employee Beneficiary Association (VEBA) trust. Contributions to VEBA trusts are tax deductible, subject to limitations contained in the Internal Revenue Code. The Company's policy is to fund the cost of postretirement benefits in a tax effective manner as part of its overall strategy to manage the costs of its benefit programs for employees. Net periodic other postretirement benefit cost included the following components:
YEAR ENDED SEPTEMBER 30, 1996 1995 - --------------------------------------------------------- (Thousands of Dollars) Service cost, benefits earned during the year $ 3,178 $ 2,590 Interest cost on accumulated postretirement benefit obligation 10,673 9,958 Return on plan assets (9,382) (6,746) Net amortization and deferral 10,961 6,752 OTHER POSTRETIREMENT BENEFIT COST $15,430 $12,554
The following table sets forth the plans' funded status, reconciled with amounts recognized in the Company's Consolidated Balance Sheet:
SEPTEMBER 30, 1996 1995 - --------------------------------------------------------- (Thousands of Dollars) Actuarial present value of accumulated postretirement benefit obligation Retirees $ (88,278) $ (87,022) Fully eligible active plan participants (18,271) (10,980) OTHER ACTIVE PLAN PARTICIPANTS (63,762) (56,157) $(170,311) $(154,159) Plan assets at fair value, primarily STOCKS AND BONDS $ 93,452 $ 72,638 - ------------------------------------------------------------ Accumulated postretirement benefit obligation in excess of plan assets $ (76,859) $ (81,521) Unrecognized net loss from past experience different from that assumed and from changes in assumptions 29,285 25,345 UNRECOGNIZED TRANSITION OBLIGATION 64,015 67,781 PREPAID OTHER POSTRETIREMENT BENEFIT $ 16,441 $ 11,605 - ------------------------------------------------------------ Assumptions: Obligation discount 7.25% 7.00% ASSET RETURN 7.75% 7.50%
The measurement also assumes a health care cost trend rate of 8.5% annually decreasing to 5.0% by the year 2007 and remaining at that level thereafter. A 1.0% increase in the health care cost trend rate would have the effect of increasing the accumulated postretirement benefit obligation as of September 30, 1996 and the net periodic SFAS-106 expense by approximately $23,825,000 and $1,935,000, respectively. 3. THE HOUSTON EXPLORATION COMPANY (THEC) Certain former employees of Fuel Resources Inc., the subsidiary of the Company that previously owned certain onshore natural gas and oil producing properties and acreage, were entitled to receive remuneration for the increase in the value of these properties should these properties be sold or transferred. These former employees were paid, and a reorganization charge of $12.0 million was recorded in operation and maintenance expense in the accompanying Consolidated Statement of Income as a result of the transfer of these properties to THEC in 1996. In September, 1996, THEC completed an initial public offering (the IPO) of 7,130,000 shares of its common stock at an offering price of $15.50 per share. The cash proceeds to THEC from the IPO, after deductions for commissions and offering expenses, were $101.0 million and were used to repay a portion of THEC's short-term borrowings incurred as a result of two major acquisitions in 1996 of properties and proved gas reserves for $84.7 million. One of these acquisitions also required THEC to issue, in conjunction with the IPO, 762,387 shares (the number of shares being determined by the IPO price) of its common stock as consideration for the $11.8 million portion of the acquisition's purchase price that was to be funded with THEC's stock. Further, in September 1996, THEC issued, also in conjunction with the IPO, 145,161 shares of its common stock to its President for certain of his working interests, valued at $2.3 million, in properties owned by THEC. As a result of these three stock issuances, the Company's ownership in THEC was reduced from 100% to approximately 66% and the Company recorded a $35.4 million gain ($23.0 million after tax) in recognition of the net increase in the book value of the Company's investment in THEC. 4. FIXED OBLIGATIONS A. LEASES: Lease costs included in operation expense were $13,894,000 in 1996, $14,706,000 in 1995 and $15,547,000 in 1994. The future minimum lease payments under the Company's various leases, all of which are operating leases, are approximately $14,143,000 per year over the next five years and $149,547,000 in the aggregate for years thereafter. The Company has a lease agreement with a remaining term of 15 years for its corporate headquarters. B. FIXED CHARGES UNDER FIRM CONTRACTS: The Company has entered into various contracts for gas delivery and supply services. The contracts have remaining terms that cover from one to seventeen years. Certain of these contracts require payment of monthly charges in the aggregate amount of approximately $4.3 million per month in all events and regardless of the level of service available. Such charges are recovered as gas costs. 5. CAPITALIZATION A. COMMON AND PREFERRED STOCK: In 1996 and 1995, the Company issued 1,069,128 and 1,198,305 shares of common stock for $27,407,000 and $27,974,000, respectively, under the Dividend Reinvestment and Stock Purchase Plan, the Discount Stock Purchase Plan for Employees, and the Employee Savings Plan. At September 30, 1996, 2,355,942 unissued shares of common stock were reserved for issuance under these plans. Other changes to common stock reflect the amortization of premiums paid on preferred stock redeemed in prior years which were deferred in order to reflect the ratemaking treatment. Annual amortization was approximately $155,000 in each of the past two years. The 4.60% Series B preferred stock is subject to an annual sinking fund requirement of 3,000 shares at par value. B. GAS FACILITIES REVENUE BONDS AND OTHER: The Company can issue tax-exempt bonds through the New York State Energy Research and Development Authority. Whenever bonds are issued for new gas facilities projects, proceeds are deposited in trust and subsequently withdrawn by the Company to finance qualified expenditures. There are no sinking fund requirements for any Gas Facilities Revenue Bonds. The Company's 7 1/8% Series 1985 I and 7% Series 1985 II Gas Facilities Revenue Bonds became callable on December 1, 1996, at the optional redemption price of 102% of par value plus accrued interest. The Company is seeking authorization of government agencies for the call and refunding of these bond issues. C. OTHER LONG-TERM DEBT: THEC has a $150 million unsecured line of credit which for the most part supports borrowings under a revolving loan agreement. Up to $5 million of this line is available for the issuance of letters of credit to support performance guarantees. This credit facility matures on July 1, 2000. At September 30, 1996, borrowings of $65 million were outstanding under this line of credit and $1.6 million was committed under outstanding letter of credit obligations. Borrowings under this facility bear interest, at THEC's option, at rates indexed at a premium to the Federal Funds rate or LIBOR, or based on the prime rate. The interest rate on this debt was 6.5% per annum at fiscal year-end. Covenants related to this line of credit require the maintenance of certain financial ratios and involve other restrictions regarding cash dividends, the purchase or redemption of stock and the pledging of assets. 6. STOCK OPTIONS AND AWARDS On November 15, 1995, the Company implemented the Long-Term Performance Incentive Compensation Plan and granted 202,800 nonqualified stock options and 13,000 performance shares to officers. The number of shares of Common Stock reserved for issuance under this Plan is 1,500,000 in the aggregate; however, no more than 750,000 shares will be available for issuance pursuant to the exercise of the stock options. The stock options were awarded at an exercise price of $27.00 (the fair market value on the grant date). They vest ratably over a three-year period from the grant date with a ten-year exercise period. The stock options were not exercisable as of September 30, 1996. The performance shares granted represent the target number of shares, as defined under the Plan, that will vest at the end of a three-year performance period ending on September 30, 1998. The actual number of performance shares to be earned is contingent upon achieving target levels of total shareholder return in relation to the Standard & Poor's Utilities Index. The actual awards will range from 0 to 200% of the target number of shares. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation". This statement requires companies to either recognize compensation costs attributable to employee stock options (or similar equity instruments) in net income or, in the alternative, provide pro forma footnote disclosure on net income and earnings per share. Implementation of this statement is required in the Company's 1997 fiscal year. The Company does not anticipate that the provisions of this statement will have a material effect on the Company's net income. 7. FINANCIAL INSTRUMENTS A. FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's long-term debt consists primarily of publicly traded Gas Facilities Revenue Bonds, the fair value of which is estimated based on quoted market prices for the same or similar issues. The fair value of these bonds at September 30, 1996 and 1995 was $660,499,600 and $673,408,300, respectively, and the carrying value was $648,500,000 in both years. Subsidiary debt is carried at an amount approximating fair value because its interest rate is based on current market rates. The fair value of the Company's redeemable preferred stock is estimated based on quoted market prices for similar issues. At September 30, 1996 and 1995, the fair value of this stock was $4,958,300 and $5,228,800, respectively, and the carrying value was $6,600,000 and $6,900,000, respectively. All other financial instruments included in the Consolidated Balance Sheet are stated at amounts that approximate fair values. B. DERIVATIVE FINANCIAL INSTRUMENTS: The Company and THEC 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. Implementation of the strategy involves establishment of long (buy) positions in gas futures contracts with offsetting short (sell) positions in oil futures contracts of equivalent energy value that are capped by options over the same time period. The long gas futures position follows, generally within a range of 80% to 120%, the cost of gas to serve this market while the short oil futures position correspondingly replicates, within the same range, the selling price of gas. The Company has developed a strong sense of the relationship between gas and oil prices in the target markets, and the implementation of its strategy has satisfactorily hedged its exposure to the loss of profit margins on the desired portion of anticipated sales. With respect to natural gas production operations, THEC generally uses swaps and standard New York Mercantile Exchange futures contracts or options to hedge the price risk related to known production plans and capabilities. These instruments include a fixed price/volume and the swaps are structured as both straight and participating swaps. In all cases, THEC pays the other parties the amount by which the floating variable price (settlement price) exceeds the fixed price and receives the amount by which the settlement price is below the fixed price. Two participating swap contracts covering 1,860,000 and 930,000 Mcf in 1997 and 1998, respectively, are priced at $1.98 and $2.05. The volumes under these two swaps are reduced by 50% in each month where the NYMEX prices for that month exceed the fixed price under the swap contract. The following table summarizes the notional amounts and related fair values of the Company's derivative financial instrument positions outstanding at September 30, 1996. Fair values are based on quotes for the same or similar instruments. Differences between the notional contract amounts and fair values represent implicit gains on gas contracts representing long positions or losses on oil contracts representing short positions if the instruments were settled at market. - ------------------------------------------------------------------
GAS TYPE OF FISCAL YEAR FIXED PRICE VOLUME NOTIONAL FAIR INSTRUMENT OF MATURITY PER MCF (MCF) AMOUNT VALUE (in thousands) Futures contracts 1997 $1.97-$2.39 13,630,000 $30,447 $30,613 Options 1997 $2.30-$3.00 3,020,000 $ - $ 964 Swap contracts 1997 $1.53-$2.09 16,858,000 $32,219 $32,165 1998 $1.53-$2.09 4,280,000 $ 8,054 $ 8,166
OIL TYPE OF FISCAL YEAR FIXED PRICE VOLUME NOTIONAL FAIR INSTRUMENT OF MATURITY PER GALLON (GALLONS) AMOUNT VALUE (in thousands) Futures contracts 1997 $0.49-$0.58 122,556,000 $66,297 $81,530 1998 $0.52 6,342,000 $ 3,315 $ 3,592 Options 1997 $0.13-$0.22 63,672,000 $ 211 $ 1,018 - ------------------------------------------------------------------
Futures contracts expire and are renewed monthly. As of September 30, 1996, no such contract extended beyond January 1998. Further, swaps contracts are settled monthly and extend through March 1998. Margin deposits with brokers at September 30, 1996 and 1995 amounted to $23,619,000 and $1,662,400, respectively, and are recorded in Other in the current assets section of the balance sheet. Deferred gains (losses) on closed positions were $1,330,000 and ($748,000) at September 30, 1996 and 1995, respectively. 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 the futures, options and 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. 8. 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 extending from Canada to the Northeast United States. NETCO's investment in Iroquois was $35.4 million at September 30, 1996. In 1992 Iroquois was informed that Federal criminal and civil investigations of the construction of certain of its pipeline facilities had been commenced. The investigations were to determine whether Iroquois violated various environmental and other laws in the construction of such facilities. In addition, beginning in late 1993, Iroquois was informed by the Federal Energy Regulatory Commission (FERC), the Army Corps of Engineers, the U.S. Department of Transportation (DOT) and the New York State Public Service Commission that each of these agencies had also commenced investigations regarding the construction of pipeline facilities. On May 23, 1996, as part of a comprehensive resolution of these investigations, Iroquois Pipeline Operating Company (IPOC), the operator of the pipeline, pleaded guilty to four felony violations of the Clean Water Act and entered into consent decrees under the Clean Water Act in four federal judicial districts. Although not a named defendant, Iroquois signed the plea agreement and consent decrees and is bound by their terms. Iroquois also entered into a related settlement with the State of New York. Under these various agreements, Iroquois and IPOC agreed to pay $22 million in fines and penalties, agreed to remediate 27 wetlands along the length of the pipeline, and agreed to implement under FERC and DOT orders two ten-year plans to address certain ground stability and pipeline safety concerns. Iroquois also entered into a separate settlement with the FERC. In September 1995, a provision was made in the Company's Consolidated Statement of Income for NETCO's share of the estimated settlement costs. This provision was adequate to account for NETCO's share of the above costs. 9. 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. 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. 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 September 30, 1996, the Company had an unpaid liability of $28.4 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, 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 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. NOTE 10. SUPPLEMENTAL GAS AND OIL DISCLOSURES (Unaudited) This information includes amounts attributable to a 34% minority interest in THEC at September30, 1996. In addition, gas and oil operations, and reserves, were predominantly located in the United States in all years.
CAPITALIZED COSTS RELATING TO GAS AND OIL PRODUCING ACTIVITIES - --------------------------------------------------------------------------- September 30, 1996 1995 - ---------------------------------------------------------------------------- (Thousands of Dollars) Unproved properties not being amortized $60,137 $35,082 Properties being amortized-productive and nonproductive 441,024 299,398 - --------------------------------------------------------------------------- Total capitalized costs 501,161 334,480 Accumulated depletion (160,128) (132,809) - --------------------------------------------------------------------------- Net capitalized costs $341,033 $201,671 - --------------------------------------------------------------------------- At September 30, 1996 and 1995, the Company had an immaterial deficiency in its asset ceiling test; however, such deficiency was eliminated by subsequent increases in the price of natural gas.
The following is a break-out of the costs (in thousands of dollars) which are excluded from the amortization calculation as of September 30, 1996, by year of acquisition: 1996-$36,557; 1995-$13,312; and prior years-$10,268. The Company cannot accurately predict when these costs will be included in the amortization base, but it is expected these costs will be evaluated within the next five years. COSTS INCURRED IN PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES - ------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------- (Thousands of Dollars) Acquisition of properties- Unproved properties $24,577 $10,996 $11,022 Proved properties 89,828 14,983 28,370 Exploration 20,828 5,907 18,961 Development 31,005 37,953 9,781 - ------------------------------------------------------------------ Total costs incurred $166,238 $69,839 $68,134 - ------------------------------------------------------------------
RESULTS OF OPERATIONS FROM GAS AND OIL PRODUCING ACTIVITIES - ------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------ (Thousands of Dollars) Revenues from gas and oil producing activities- Sales to unaffiliated parties $50,431 $40,810 $41,185 Sales to affiliates - - 2,023 - ------------------------------------------------------------------ Revenues 50,431 40,810 43,208 - ------------------------------------------------------------------ Production and lifting costs 8,860 5,762 5,360 Depletion 27,368 22,906 24,978 - ------------------------------------------------------------------ Total expenses 36,228 28,668 30,338 - ------------------------------------------------------------------ Income before taxes 14,203 12,142 12,870 Income taxes 3,037 1,957 3,306 - ------------------------------------------------------------------ Results of gas and oil producing activities (excluding corporate overhead and interest costs) $11,166 $10,185 $9,564 ==================================================================
10. SUPPLEMENTAL GAS AND OIL DISCLOSURES (CONTINUED) The gas and oil reserves information is based on estimates of proved reserves attributable to the Company's interest as of September 30 for each of the years presented. These estimates principally were prepared by independent petroleum consultants. Proved reserves are estimated quantities of natural gas and crude oil which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. The standardized measure of discounted future net cash flows was prepared by applying year-end prices of gas and oil to the Company's proved reserves, except for those reserves devoted to future production that is hedged. These reserves are priced at their respective hedged amount. The standardized measure does not purport, nor should it be interpreted, to present the fair value of the Company's gas and oil reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, and a discount factor more representative of the time value of money and the risks inherent in reserve estimates.
RESERVE QUANTITY INFORMATION Natural Gas (MMcf) - --------------------------------------------------------------- 1996 1995 1994 - --------------------------------------------------------------- Proved Reserves- Beginning of Year 195,055 142,858 108,847 Revisions of previous estimates (354) 13,539 (2,297) Extensions and discoveries 13,139 38,985 25,890 Production (26,435) (21,822) (22,814) Purchases of reserves in place 134,325 21,495 34,931 Sales of reserves in place (1,189) - (1,699) - --------------------------------------------------------------- Proved Reserves- End of Year 314,541 195,055 142,858 - --------------------------------------------------------------- Proved Developed Reserves- Beginning of Year 151,594 110,225 100,454 - --------------------------------------------------------------- End of Year 222,522 151,594 110,225 ===============================================================
Crude Oil, Condensate and Natural Gas Liquids (MBbls) - --------------------------------------------------------------- 1996 1995 1994 - --------------------------------------------------------------- Proved Reserves- Beginning of Year 1,162 807 443 Revisions of previous estimates (148) 245 (140) Extensions and discoveries 182 155 155 Production (136) (148) (96) Purchases of reserves in place 294 103 495 Sales of reserves in place (106) - (50) - --------------------------------------------------------------- Proved Reserves- End of Year 1,248 1,162 807 - --------------------------------------------------------------- Proved Developed Reserves- Beginning of Year 974 543 407 - --------------------------------------------------------------- End of Year 1,040 974 543 - ---------------------------------------------------------------
10. SUPPLEMENTAL GAS AND OIL DISCLOSURES (CONTINUED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED GAS AND OIL RESERVES
- --------------------------------------------------------------- 1996 1995 - --------------------------------------------------------------- (Thousands of Dollars) Future cash flows $554,798 $314,627 Future costs- Production (89,303) (57,941) Development (60,926) (29,948) - --------------------------------------------------------------- Future net inflows before income tax 404,569 226,738 Future income taxes (59,623) (43,705) - --------------------------------------------------------------- Future net cash flows 344,946 183,033 10% discount factor (85,688) (49,512) - --------------------------------------------------------------- Standardized measure of discounted future net cash flows $259,258 $133,521 - ---------------------------------------------------------------
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVE QUANTITIES
- ---------------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------- (Thousands of Dollars) Standardized measure- beginning of year $133,521 $108,134 $110,406 Sales and transfers, net of production costs (41,571) (35,048) (37,848) Net change in sales and transfer prices, net of production costs 44,719 (2,786) (25,005) Extensions and discoveries and improved recovery, net of related costs 18,894 28,868 15,536 Changes in estimated future development costs (4,798) (2,351) (1,016) Development costs incurred during the period that reduced future development costs 15,056 10,360 6,381 Revisions of quantity estimates (2,338) 13,858 (2,917) Accretion of discount 16,880 11,763 12,397 Net change in income taxes 21,026 (7,856) 4,001 Purchases of reserves in place 94,945 15,176 27,561 Sales of reserves in place - - (2,110) Changes in production rates (timing) and other (37,076) (6,597) 748 - ------------------------------------------------------------------ Standardized measure-end of year $259,258 $133,521 $108,134 - ------------------------------------------------------------------
10. SUPPLEMENTAL GAS AND OIL DISCLOSURES (CONTINUED)
AVERAGE SALES PRICES AND PRODUCTION COSTS - PER UNIT - ------------------------------------------------------------------ For the year ended September 30, 1996 1995 1994 - ------------------------------------------------------------------ Average Sales Price* Natural Gas ($/MCF) 2.11 1.47 1.97 Oil, Condensate and Natural Gas Liquid ($/Bbl) 19.21 16.92 15.63 Production Cost Per Equivalent MCF ($) .32 .25 .23 - ------------------------------------------------------------------
ACREAGE - ------------------------------------------------------------------ As of September 30, 1996 GROSS Net - ------------------------------------------------------------------ Producing 258,798 160,154 Undeveloped 111,087 88,554 - ------------------------------------------------------------------
NUMBER OF PRODUCING WELLS - ------------------------------------------------------------------ As of September 30, 1996 GROSS Net - ------------------------------------------------------------------ Gas Wells 1,114 678 Oil Wells 11 3 - ------------------------------------------------------------------
DRILLING ACTIVITY (NET) - ------------------------------------------------------------------ For the year ended September 30, 1996 1995 1994 Pro- Pro- Pro- ducing Dry Total ducing Dry Total ducing Dry Total Net Develop- mental Wells 10.1 0.8 10.9 10.0 3.4 13.4 6.6 - 6.6 Net Explora- tory Wells 2.1 3.4 5.5 1.4 0.4 1.8 2.5 1.2 3.7 - -------------------------------------------------------------------
WELLS IN PROCESS As of September 30, 1996 GROSS Net Exploratory 4.0 1.1 Developmental 2.0 1.1 - -------------------------------------------------------------------
* Represents the cash price received which excludes the effect of any hedging transactions. SUPPLEMENTARY INFORMATION (UNAUDITED) QUARTERLY INFORMATION SUMMARY OF QUARTERLY INFORMATION The following is a table of financial data for each quarter of fiscal 1996 and 1995. The Company's business is influenced by seasonal weather conditions and the timing of approved base utility tariff rate changes. The effect on utility earnings of variations in revenues caused by abnormal weather is largely mitigated by operation of a weather normalization adjustment contained in the Company's tariff.
========================================================================= First Second Third Fourth Quarter Quarter Quarter Quarter ========================================================================= (Thousands of Dollars Except Per Share Data) 1996 Operating revenues 398,083 595,438 254,311 184,170 Operating income(loss) 57,400 88,505 5,495 (20,842)(a) Gains on sale of subsidiary stock and Canadian plant (after taxes) - - - 33,539 Income (loss) applicable to common stock 44,624 74,413 (4,561) 8,109 Per common share: Earnings (loss) (b) 0.91 1.51 (0.09) 0.16 Dividends declared 0.3550 0.3550 0.3550 0.3550 - -------------------------------------------------------------------------- 1995 Operating revenues 358,348 481,615 217,696 158,625 Operating income(loss) 54,580 85,364 5,650 (10,250) Income (loss) applicable to common stock 42,753 73,555 (6,188) (18,622) Per common share: Earnings (loss) (b) 0.90 1.53 (0.13) (0.38) Dividends declared 0.3475 0.3475 0.3475 0.3475 =========================================================================
(a) Includes a subsidiary reorganization charge of $7.8 million after taxes. (b) Quarterly earnings per share are based on the average number of shares outstanding during the quarter. Because of the increasing number of common shares outstanding in each quarter, the sum of quarterly earnings per share does not equal earnings per share for the year.
SUMMARY OF QUARTERLY STOCK INFORMATION ============================================================================ First Second Third Fourth Quarter Quarter Quarter Quarter ============================================================================ 1996 High 29 5/8 29 7/8 27 1/2 28 1/8 Low 24 5/8 25 3/4 24 7/8 24 7/8 Close 29 1/4 26 3/4 27 1/4 27 7/8 Shares Traded (000) 3,710 3,884 5,121 3,592 - ---------------------------------------------------------------------------- 1995 High 25 3/8 24 3/4 26 3/8 26 3/8 Low 21 1/2 22 23 3/4 23 1/4 Close 22 1/4 24 1/8 26 1/4 24 5/8 Shares Traded (000) 2,695 3,977 2,543 3,219 ============================================================================
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated October 23, 1996, covering the consolidated financial statements of The Brooklyn Union Gas Company for the three years ended September 30, 1996, included in this Form 8-K, into The Long Island Lighting Company's previously filed Registration Statement Nos. 33-52963 and 2-87427. /S/ Arthur Andersen LLP New York, New York February 20, 1997 February 21, 1997 The Long Island Lighting Company 175 East Old Country Road Hicksville, New York 11801 Gentlemen: We are aware that The Long Island Lighting Company has incorporated by reference in its previously filed Registration Statements No. 33-52963 and No. 2-87427, our report dated January 24, 1997, covering the unaudited interim consolidated financial statements for The Brooklyn Union Gas Company as of December 31, 1996, contained in this Form 8-K. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /S/ Arthur Andersen LLP EX-99 3 EXHIBIT 99.2
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.
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.
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.
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 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 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 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 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. 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 of the Act. Very truly yours, /S/ Arthur Andersen LLP 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. 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. /S/ ARTHUR ANDERSEN LLP New York, New York January 22, 1997 EX-99 4 EXHIBIT 99.3 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION The following unaudited pro forma financial information combines the historical consolidated balance sheets and statements of income of Brooklyn Union and LILCO including their respective subsidiaries, after giving effect to the Binding Share Exchanges. Brooklyn Union's balance sheet as of September 30, 1996 and results of operations for each of the three fiscal years in the period ended September 30, 1996 have been combined with LILCO's balance sheet as of December 31, 1996 and results of operations for each of the three fiscal years in the period ended December 31, 1996 to arrive at the unaudited pro forma combined condensed balance sheet as of December 31, 1996 and the statements of income for each of the three fiscal years in the period ended December 31, 1996. The unaudited pro forma combined condensed balance sheet at December 31, 1996 gives effect to the Binding Share Exchanges as if they had occurred at December 31, 1996. The unaudited pro forma combined condensed statements of income for each of the three fiscal years in the period ended December 31, 1996 give effect to the Binding Share Exchanges as if they had occurred at January 1, 1994. These statements are prepared on the basis of accounting for the Binding Share Exchanges as a pooling of interests and are based on the assumptions set forth in the notes thereto. The following pro forma financial information has been prepared from, and should be read in conjunction with, the historical consolidated financial statements and related notes thereto of Brooklyn Union included herein and LILCO, as filed in LILCO's Form 10-K for the year ended December 31, 1996. The following information is not necessarily indicative of the financial position or operating results that would have occurred had the Binding Share Exchanges been consummated on the date, or at the beginning of the period, for which the Binding Share Exchanges are being given effect nor is it necessarily indicative of future operating results or financial position.
[BUG/LILCO] HOLDING CORP. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET December 31, 1996 (In Thousands) BROOKLYN UNION LILCO PRO FORMA PRO FORMA (AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED ------------- ------------- ---------------- ------------ ASSETS Property Utility plant Electric....................................... $- $3,882,297 $- $3,882,297 Gas............................................ 1,782,440 1,154,543 - 2,936,983 Common......................................... - 260,268 - 260,268 Construction work in progress.................. - 112,184 - 112,184 Nuclear fuel in process and in reactor......... - 15,454 - 15,454 Less-Accumulated depreciation and amortization................................... (429,476) (1,729,576) - (2,159,052) Gas exploration and production, at cost........ 510,568 - - 510,568 Less: Accumulated depletion.................... (165,414) - - (165,414) ------------- ------------- ---------------- ------------ Total Property................................. 1,698,118 3,695,170 - 5,393,288 Regulatory Assets Base financial component (less accumulated amortization of $757,282)...................... - 3,281,548 - 3,281,548 Rate moderation component...................... - 402,213 - 402,213 Shoreham post-settlement costs................. - 991,795 - 991,795 Shoreham nuclear fuel.......................... - 69,113 - 69,113 Unamortized cost of issuing securities......... - 194,151 - 194,151 Post-retirement benefits other than pensions... - 360,842 - 360,842 Regulatory tax asset........................... - 1,772,778 74,885 (1) 1,847,663 Other.......................................... - 199,879 - 199,879 ------------- ------------- ---------------- ------------ Total Regulatory Assets........................ - 7,272,319 74,885 7,347,204 Nonutility Property and Other Investments...... 115,529 18,597 - 134,126 Current Assets Cash and cash equivalents...................... 41,921 279,993 - 321,914 Special deposits............................... - 38,266 - 38,266 Accounts receivable-net........................ 157,227 491,277 - 648,504 Materials and supplies at average cost......... 12,089 55,789 - 67,878 Fuel oil at average cost....................... - 53,941 - 53,941 Gas in storage at average cost................. 91,813 73,562 - 165,375 Deferred tax asset............................. - 145,205 - 145,205 Prepayments and other current assets........... 50,833 8,569 - 59,402 ------------- ------------- ---------------- ------------ Total Current Assets........................... 353,883 1,146,602 - 1,500,485 Deferred Charges............................... 122,073 76,991 (74,885)(1) 124,179 ------------- ------------- ---------------- ------------ Total Assets................................... $2,289,603 $12,209,679 $- $14,499,282 ============= ============= ================ ============
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
[BUG/LILCO] HOLDING CORP. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET December 31, 1996 (In Thousands) BROOKLYN UNION LILCO PRO FORMA PRO FORMA (AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED ------------- ------------- ----------------- ----------- CAPITALIZATION AND LIABILITIES Capitalization Common stock.................................. $16,619 $603,921 $(619,072)(2) $1,468 Premium on common stock....................... 533,216 1,078,581 619,072 (2) 2,230,869 Retained earnings............................. 355,973 840,867 - 1,196,840 ------------- ------------- ----------------- ----------- Total Common Shareholders' Equity............. 905,808 2,523,369 - 3,429,177 Long-term debt................................ 712,013 4,456,772 - 5,168,785 Preferred stock............................... 6,600 702,164 - 708,764 ------------- ------------- ----------------- ----------- Total Capitalization.......................... 1,624,421 7,682,305 - 9,306,726 Regulatory Liabilities Regulatory liability component................ - 198,398 - 198,398 1989 Settlement credits....................... - 127,442 - 127,442 Regulatory tax liability...................... - 102,887 - 102,887 Other......................................... - 146,852 - 146,852 ------------- ------------- ----------------- ----------- Total Regulatory Liabilities.................. - 575,579 - 575,579 Current Liabilities Current maturities of long-term debt.......... - 251,000 - 251,000 Current redemption requirements of preferred stock......................................... - 1,050 - 1,050 Accounts payable and accrued expenses......... 143,561 289,141 - 432,702 LRPP payable.................................. - 40,499 - 40,499 Accrued taxes................................. 10,905 63,640 - 74,545 Accrued interest.............................. 37,244 160,615 - 197,859 Dividends payable............................. 18,229 58,378 - 76,607 Class Settlement.............................. - 55,833 - 55,833 Customer deposits............................. 30,773 29,471 - 60,244 ------------- ------------- ----------------- ----------- Total Current Liabilities..................... 240,712 949,627 - 1,190,339 Deferred Credits Deferred federal income tax................... 282,041 2,442,606 - 2,724,647 Class Settlement.............................. - 98,497 - 98,497 Other......................................... 63,580 32,105 - 95,685 ------------- ------------- ----------------- ----------- Total Deferred Credits........................ 345,621 2,573,208 - 2,918,829 Operating Reserves Pensions and other post-retirement benefits... - 381,996 - 381,996 Claims and damages............................ - 46,964 - 46,964 ------------- ------------- ----------------- ----------- Total Operating Reserves...................... - 428,960 - 428,960 Commitments and Contingencies................. - - - - Minority Interest in Subsidiary Company....... 78,849 - - 78,849 ------------- ------------- ----------------- ----------- Total Capitalization and Liabilities.......... $2,289,603 $12,209,679 $- $14,499,282 ============= ============= ================= ===========
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
[BUG/LILCO] HOLDING CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME For the Year Ended December 31, 1996 (In Thousands, Except Per Share Amounts) BROOKLYN UNION LILCO PRO FORMA PRO FORMA (AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED ------------- ------------- --------------- ----------- Revenues Electric............................................. $- $2,466,435 - $2,466,435 Gas-Utility sales.................................... 1,351,821 684,260 - 2,036,081 Gas production and other............................. 80,181 - - 80,181 ------------ ------------- ------------- ----------- Total Revenues....................................... 1,432,002 3,150,695 - 4,582,697 Operating Expenses Operations-fuel and purchased power.................. 610,053 963,251 - 1,573,304 Operations-other..................................... 375,257 381,076 - 756,333 Maintenance.......................................... 53,720 118,135 - 171,855 Depreciation, depletion and amortization............. 79,610 153,925 - 233,535 Base financial component amortization................ - 100,971 - 100,971 Rate moderation component amortization............... - (24,232) - (24,232) Regulatory liability component amortization.......... - (88,573) - (88,573) Other regulatory amortization........................ - 127,288 - 127,288 Operating taxes...................................... 143,296 472,076 - 615,372 Federal income taxes................................. 39,508 210,197 - 249,705 ------------- ------------- ------------- ----------- Total Operating Expenses............................. 1,301,444 2,414,114 - 3,715,558 ------------- ------------- ------------- ----------- Operating Income..................................... 130,558 736,581 - 867,139 Other Income and (Deductions) Income from energy services investments.............. 13,523 - - 13,523 Gain on sale of investment in Canadian plant......... 16,160 - - 16,160 Gain on sale of subsidiary stock..................... 35,437 - - 35,437 Rate moderation component carrying charges........... - 25,259 - 25,259 Class Settlement..................................... - (20,772) - (20,772) Other income and deductions, net..................... (1,188) 19,197 - 18,009 Allowance for other funds used during construction... - 2,888 - 2,888 Federal income tax credit-deferred and other......... (19,861) 940 - (18,921) ------------- ------------- ------------- ----------- Total Other Income and (Deductions).................. 44,071 27,512 - 71,583 ------------- ------------- ------------- ----------- Income Before Interest Charges....................... 174,629 764,093 - 938,722 Interest Charges Interest on long-term debt........................... 46,803 384,198 - 431,001 Other interest....................................... 4,918 67,130 - 72,048 Allowance for borrowed funds used during construction......................................... - (3,699) - (3,699) ------------- ------------- -------------- ----------- Total Interest Charges............................... 51,721 447,629 - 499,350 ------------- ------------- --------------- ----------- Net Income........................................... 122,908 316,464 - 439,372 Preferred stock dividend requirements................ 323 52,216 - 52,539 ------------- ------------- --------------- ----------- Earnings for Common Stock............................ $122,585 $264,248 - $386,833 ============= ============= =============== =========== Average Common Shares Outstanding.................... 49,365 120,361 (23,711)(2) 146,015 ============= ============= =============== =========== Earnings per Common and Equivalent Shares............ $2.48 $2.20 - $2.65 ============= ============= =============== ===========
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
[BUG/LILCO] HOLDING CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME For the Year Ended December 31, 1995 (In Thousands, Except Per Share Amounts) BROOKLYN UNION LILCO PRO FORMA PRO FORMA (AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED ------------- ------------- --------------- ----------- Revenues Electric............................................. $- $2,484,014 - $2,484,014 Gas-Utility sales.................................... 1,152,331 591,114 - 1,743,445 Gas production and other............................. 63,953 - - 63,953 ------------- ------------- --------------- ----------- Total Revenues....................................... 1,216,284 3,075,128 - 4,291,412 Operating Expenses Operations-fuel and purchased power.................. 446,559 834,979 - 1,281,538 Operations-other..................................... 330,841 383,238 - 714,079 Maintenance.......................................... 54,813 128,155 - 182,968 Depreciation, depletion and amortization............. 72,020 145,357 - 217,377 Base financial component amortization................ - 100,971 - 100,971 Rate moderation component amortization............... - 21,933 - 21,933 Regulatory liability component amortization.......... - (88,573) - (88,573) Other regulatory amortization........................ - 161,605 - 161,605 Operating taxes...................................... 134,718 447,507 - 582,225 Federal income taxes................................. 41,989 208,338 - 250,327 ------------- ------------- --------------- ----------- Total Operating Expenses............................. 1,080,940 2,343,510 - 3,424,450 ------------- ------------- --------------- ----------- Operating Income..................................... 135,344 731,618 - 866,962 Other Income and (Deductions) Income from energy services investments.............. 9,458 - - 9,458 Rate moderation component carrying charges........... - 25,274 - 25,274 Class Settlement..................................... - (21,669) - (21,669) Other income and deductions, net..................... 151 34,400 - 34,551 Allowance for other funds used during construction... - 2,898 - 2,898 Federal income tax credit-deferred and other......... (51) 2,800 - 2,749 ------------- ------------- --------------- ----------- Total Other Income and (Deductions).................. 9,558 43,703 - 53,261 ------------- ------------- --------------- ----------- Income Before Interest Charges....................... 144,902 775,321 - 920,223 Interest Charges Interest on long-term debt........................... 47,939 412,512 - 460,451 Other interest....................................... 5,128 63,461 - 68,589 Allowance for borrowed funds used during construction......................................... - (3,938) - (3,938) ------------- ------------- --------------- ----------- Total Interest Charges............................... 53,067 472,035 - 525,102 ------------- ------------- --------------- ----------- Net Income........................................... 91,835 303,286 - 395,121 Preferred stock dividend requirements................ 337 52,620 - 52,957 ------------- ------------- --------------- ----------- Earnings for Common Stock............................ $91,498 $250,666 - $342,164 ============= ============= =============== =========== Average Common Shares Outstanding.................... 48,211 119,195 (23,481)(2) 143,925 ============= ============= =============== =========== Earnings per Common and Equivalent Shares............ $1.90 $2.10 - $2.38 ============= ============= =============== ===========
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
[BUG/LILCO] HOLDING CORP. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME For the Year Ended December 31, 1994 (In Thousands, Except Per Share Amounts) BROOKLYN UNION LILCO PRO FORMA PRO FORMA (AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED ------------- ------------- --------------- ----------- Revenues Electric............................................. $- $2,481,637 - $2,481,637 Gas-Utility sales.................................... 1,279,638 585,670 - 1,865,308 Gas production and other............................. 58,992 - - 58,992 ------------- ------------- --------------- ----------- Total Revenues....................................... 1,338,630 3,067,307 - 4,405,937 Operating Expenses Operations-fuel and purchased power.................. 560,657 847,986 - 1,408,643 Operations-other..................................... 330,394 406,014 - 736,408 Maintenance.......................................... 54,340 134,640 - 188,980 Depreciation, depletion and amortization............. 69,611 130,664 - 200,275 Base financial component amortization................ - 100,971 - 100,971 Rate moderation component amortization............... - 197,656 - 197,656 Regulatory liability component amortization.......... - (88,573) - (88,573) Other regulatory amortization........................ - 4,328 - 4,328 Operating taxes...................................... 150,743 406,895 - 557,638 Federal income taxes................................. 40,556 181,781 - 222,337 ------------- ------------- --------------- ----------- Total Operating Expenses............................. 1,206,301 2,322,362 - 3,528,663 ------------- ------------- --------------- ----------- Operating Income..................................... 132,329 744,945 - 877,274 Other Income and (Deductions) Income from energy services investments.............. 5,689 - - 5,689 Rate moderation component carrying charges........... - 32,321 - 32,321 Class Settlement..................................... - (22,730) - (22,730) Other income and deductions, net..................... 700 35,343 - 36,043 Allowance for other funds used during construction... - 2,716 - 2,716 Federal income tax credit-deferred and other......... (142) 5,069 - 4,927 ------------- ------------- --------------- ----------- Total Other Income and (Deductions).................. 6,247 52,719 - 58,966 ------------- ------------- --------------- ----------- Income Before Interest Charges....................... 138,576 797,664 - 936,240 Interest Charges Interest on long-term debt........................... 46,900 437,751 - 484,651 Other interest....................................... 4,292 62,345 - 66,637 Allowance for borrowed funds used during construction......................................... - (4,284) - (4,284) ------------- ------------- --------------- ----------- Total Interest Charges............................... 51,192 495,812 - 547,004 ------------- ------------- --------------- ----------- Net Income........................................... 87,384 301,852 - 389,236 Preferred stock dividend requirements................ 351 53,020 - 53,371 ------------- ------------- --------------- ----------- Earnings for Common Stock............................ $87,033 $248,832 - $335,865 ============= ============= =============== =========== Average Common Shares Outstanding.................... 46,980 115,880 (22,828)(2) 140,032 ============= ============= =============== =========== Earnings per Common and Equivalent Shares............ $1.85 $2.15 - $2.40 ============= ============= =============== ===========
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS 1. The unaudited pro forma combined condensed balance sheet as of December 31, 1996 reflects the reclassification of $74.9 million of Brooklyn Union regulatory tax assets from deferred charges to regulatory assets. All other financial statement presentation and accounting policy differences are immaterial and have not been adjusted in the unaudited pro forma combined condensed financial statements. 2. The unaudited pro forma combined condensed financial statements reflect the conversion of each share of LILCO Common Stock outstanding into 0.803 shares of the new holding company's Common Stock and the exchange of each share of Brooklyn Union Common Stock outstanding for one share of the new holding company's Common Stock, as provided in the Share Exchange Agreement. The unaudited pro forma combined condensed financial statements are presented as if the companies were combined during all periods included therein. 3. The allocation between Brooklyn Union and LILCO and their customers of the estimated cost savings resulting from the Binding Share Exchanges, net of the costs incurred to achieve such savings, will be subject to regulatory review and approval. Transaction costs (including fees for financial advisors, attorneys, accountants, consultants, filings and printing) are not currently estimated. None of the estimated cost savings, the costs to achieve such savings, or transaction costs, have been reflected in the unaudited pro forma combined condensed financial statements. 4. Intercompany transactions between Brooklyn Union and LILCO during the periods presented were not material and, accordingly, no pro forma adjustments were made to eliminate such transactions. 5. The Brooklyn Union earnings for the fiscal year ended September 30, 1996 include non-recurring income aggregating approximately $33.5 million, net of taxes, or $0.68 per share, relating to a gain on the initial public offering of a subsidiary's stock and the sale of an investment in a Canadian gas processing plant. This income was partially offset by a $7.8 million charge, net of taxes, or $0.16 per share, relating to reorganization expenses incurred by the aforementioned subsidiary. -----END PRIVACY-ENHANCED MESSAGE-----