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