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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [_]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[_] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Brooklyn Union Gas
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Brooklyn Union Gas
------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[x] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
(4) Proposed maximum aggregate value of transaction:
- - --------
* Set forth the amount on which the filing fee is calculated and state how it
was determined.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
<PAGE>
[LOGO] BROOKLYN
UNION
One MetroTech Center
Brooklyn, New York 11201-3850
THE BROOKLYN UNION GAS COMPANY
NOTICE OF 1995 ANNUAL MEETING OF SHAREHOLDERS,
PROXY STATEMENT AND
1994 FINANCIAL STATEMENTS
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CONTENTS
PROXY STATEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
Annual Meeting of Shareholders........ 1
Proposal (1) - Election of Directors.. 1
Proposal (2) - Election of Independent
Public Accountants................... 10
Proposal (3) - Shareholder Proposal as
to Cumulative Voting................. 10
Other Information..................... 12
FINANCIAL STATEMENTS - APPENDIX A
Financial Statement Responsibility.... A-1
Report of Independent Public Accoun-
tants................................ A-1
Financial Review and Analysis......... A-2
Summary of Significant Accounting Pol-
icies................................ A-7
Consolidated Financial Statements..... A-9
Notes to Consolidated Financial State-
ments................................ A-13
Supplementary Information............. A-21
Summary of Selected Financial Data and
Statistics........................... A-26
</TABLE>
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[LOGO] BROOKLYN
UNION
One MetroTech Center
Brooklyn, New York 11201-3850
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS FEBRUARY 2, 1995
The Annual Meeting of Shareholders of The Brooklyn Union Gas Company will be
held at the office of the Company, One MetroTech Center, Brooklyn, New York, on
Thursday, February 2, 1995 at 10 a.m., for the purpose of:
(1) Electing Directors;
(2) Electing independent public accountants;
(3) Considering and acting upon a shareholder proposal as to cumulative
voting; and
(4) Transacting such other business as may properly come before the meet-
ing and any adjournment thereof.
The Board of Directors has fixed the close of business on December 14, 1994 as
the record date for the purpose of determining shareholders who are entitled to
notice of and to vote at the meeting.
PLEASE FILL IN, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD WITHOUT DELAY
TO CORPORATE ELECTION SERVICES, P.O. BOX 1150, PITTSBURGH, PENNSYLVANIA 15230,
EVEN IF YOU EXPECT TO BE PRESENT IN PERSON AT THE MEETING.
ROBERT B. CATELL
President and Chief
Executive Officer
ROBERT R. WIECZOREK
Vice President,
Secretary & Treasurer
Brooklyn, New York 11201-3850
December 29, 1994
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PROXY STATEMENT
The Brooklyn Union Gas Company
One MetroTech Center
Brooklyn, New York 11201-3850
December 29, 1994
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD FEBRUARY 2, 1995
To the Shareholders of
The Brooklyn Union Gas Company:
Proxies are being solicited on behalf of the Board of Directors of The Brooklyn
Union Gas Company for use at the Annual Meeting of Shareholders on February 2,
1995 and any adjournment thereof.
The proxy accompanying this statement, even if executed and returned, may be
revoked by the person executing it if it has not yet been exercised. To revoke
a proxy, the shareholder must file with the Secretary of the Company either a
written revocation or a duly executed proxy bearing a later date.
In addition, any shareholder entitled to vote may attend the meeting and vote
whether or not he or she has submitted a signed proxy. All shares represented
by proxies which have been duly executed and returned will be voted at the
meeting and, where a choice has been specified in the proxies, the shares will
be voted in accordance with the specification so made. In the absence of speci-
fication to the contrary, such proxies will be voted FOR Proposals (1) and (2)
and AGAINST Proposal (3).
As of the close of business on December 14, 1994, there were 47,766,450 shares
of Common Stock outstanding. Each share is entitled to one vote. Only share-
holders of record at that time shall be entitled to notice of and to vote at
the meeting except for participants in the Automatic Dividend Reinvestment and
Stock Purchase Plan, the Discount Stock Purchase Plan for Employees and the Em-
ployee Savings Plan who are entitled to vote shares held for their accounts by
the agent or trustee of each such Plan.
PROPOSAL (1) - ELECTION OF DIRECTORS
Three Directors are to be elected at the Annual Meeting. The nominees for three
year terms expiring in 1998 are Robert B. Catell, Kenneth I. Chenault and Ed-
ward D. Miller.
The information provided below with respect to Directors includes: (1) name and
age, (2) the period during which such Director has served as a Director of the
Company, (3) principal occupation and business associations, (4) committee mem-
berships, and (5) number of shares of Common and Preferred Stock beneficially
owned. Unless otherwise noted, each Director has sole voting power and sole in-
vestment power with respect to such shares. No Director or executive officer
owns more than 0.03 percent of the Common Stock. This information has been sup-
plied by the Directors and executive officers. Stock ownership information is
as of September 30, 1994.
1
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NOMINATED FOR THE TERM ENDING 1998
ROBERT B. CATELL, AGE 57, DIRECTOR SINCE 1986
President and Chief Executive Officer, The Brooklyn Union Gas
Company
Trustee, Independence Savings Bank, Brooklyn Law School, Brook-
lyn Botanic Garden, Kingsborough Community College Foundation,
[PHOTO] Inc., and Committee for Economic Development; Director, Brooklyn
Chamber of Commerce and Downtown Brooklyn Development Associa-
tion, Brooklyn Public Library, Brooklyn Bureau of Community
Service, MetroTech Business Improvement District, New York City
Partnership, The Business Council of New York State, Inc., New
York State Energy Research and Development Authority and Gas Re-
search Institute; Chairman and Director, Alberta Northeast Inc.
and Boundary Gas, Inc.; Chairman, Executive Committee of the New
York Gas Group, American Gas Association, New York City Partnership - Borough
Initiatives Group, New York City Commission on the Redevelopment of Naval
Station New York and Advisory Board of CCNY School of Engineering; Member,
Chemical Bank Regional Advisory Board, Executive Committee of the Society of
Gas Lighting, New York Professional Engineers Society, Council for
Environmental Quality, Chancellor's Commission on Educational Standards and
Accountability
Mr. Catell has been with the Company since 1958 and an Officer since 1974. He
was elected Vice President in 1977, Senior Vice President in 1981 and Executive
Vice President in 1984. He was elected Chief Operating Officer in June 1986 and
President in January 1990. He has served as President and Chief Executive Offi-
cer since June 1991.
Member, Executive Committee
Mr. Catell beneficially owns 14,400 common shares.
KENNETH I. CHENAULT, AGE 43, DIRECTOR SINCE 1988
President - U.S.A., American Express Travel Related Services
Co., Inc.
Director, Quaker Oats Company and Junior Achievement of New
[PHOTO] York; Member, Board of Overseers, Bowdoin College
Mr. Chenault began his career with American Express in 1981 as
Director of Strategic Planning. He was elected Vice President-
Marketing Merchandise Services in 1983, Senior Vice President
and General Manager Merchandise Services in 1984, and Executive
Vice President and General Manager-Platinum Card/Gold Card Divi-
sion in 1986. In July 1988 he was elected Executive Vice Presi-
dent and General Manager, Personal Card Division, Consumer Card
Group, U.S.A. He was elected to the position of President, Con-sumer Card and
Financial Services Group, U.S.A. in May 1989. In 1993 he was elected to his
present position.
Member, Organization and Nominating Committee and Executive Committee
Mr. Chenault beneficially owns 1,136 common shares.
2
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EDWARD D. MILLER, AGE 54, DIRECTOR SINCE 1993
President, Chemical Banking Corporation
Trustee, Pace University and New York Blood Center; Division
Chairman, New York Blood Services; President, New York State
Bankers Association; Member, Association of Reserve City Bankers
[PHOTO]
In 1988, Mr. Miller was elected Vice Chairman of Manufacturers
Hanover Corporation and Manufacturers Hanover Trust Company. He
held these positions until December 31, 1991. On December 31,
1991, as a result of the merger of Manufacturers Hanover Corpo-
ration and Chemical Banking Corporation, the new Chemical Bank-
ing Corporation was formed. Mr. Miller was elected Vice Chairman
of the Board and a Director of Chemical Banking Corporation and its flagship
subsidiary, Chemical Bank, in December 1991. Mr. Miller was elected President of
Chemical Banking Corporation and Chemical Bank in January 1994.
Chemical Bank, whose parent merged with Manufacturers Hanover Corporation in
1991, has various banking relationships with the Company, including acting as
one of four banks which may provide loans to the Company under separately nego-
tiated lines of credit and providing trust services on certain tax-exempt bonds
as to which the Company has incurred indebtedness. Chemical Bank also is a
counter-party on certain hedging transactions on derivative securities. It
should be noted that the Company's banking relationships with Chemical Bank are
completely independent of and pre-dated Mr. Miller serving on the Company's
Board of Directors.
Member, Organization and Nominating Committee; Alternate Member, Executive
Committee
Mr. Miller beneficially owns 1,462 common shares.
DIRECTORS WHOSE TERMS EXPIRE IN 1996
DONALD H. ELLIOTT, AGE 62, DIRECTOR SINCE 1981
Partner in the law firm of Mudge Rose Guthrie Alexander & Ferdon
Director, Independence Savings Bank and New York Urban Coali-
[PHOTO] tion; Trustee, Independence Community Bank Corp., WNET (Channel
13) and Long Island University
Mr. Elliott was associated with Webster & Sheffield from 1957
until 1965 and was a Partner from 1973 until 1991. From 1966 un-
til 1973 he was Counsel to the Mayor and then Chairman of the
New York City Planning Commission. In 1991 he joined Mudge Rose
Guthrie Alexander & Ferdon as a Partner.
Chairman, Audit Committee; Member, Organization and Nominating Committee and
Executive Committee
Mr. Elliott beneficially owns 1,650 common shares.
3
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RICHARDSON PRATT, JR., AGE 71, DIRECTOR SINCE 1975
Chairman, Charles Pratt & Co., Inc.; Director, Dime Savings Bank
President Emeritus, Pratt Institute
[PHOTO] Mr. Pratt was elected President of Pratt Institute in 1973 after
having served as Acting President in 1972. Between 1948 and 1971
he was associated with Standard Oil (New Jersey) and Humble Oil
and Refining Co. in various management positions. Mr. Pratt re-
tired as President of Pratt Institute in 1990.
Member, Audit Committee and Executive Committee
Mr. Pratt beneficially owns 3,000 common shares.
DIRECTORS WHOSE TERMS EXPIRE IN 1997
ANDREA S. CHRISTENSEN, AGE 55, DIRECTOR SINCE 1980
Partner in the law firm of Kaye, Scholer, Fierman, Hays & Han-
dler
Director, American Arbitration Association
[PHOTO] Mrs. Christensen began her association with Kaye, Scholer,
Fierman, Hays & Handler in 1968 and has been a Partner since
1976.
Chairman, Organization and Nominating Committee; Member, Audit
Committee and Executive Committee
Mrs. Christensen beneficially owns 4,545 common shares.
ALAN H. FISHMAN, AGE 48, DIRECTOR SINCE 1989
Managing Partner, Columbia Financial Partners, L.P. (Private In-
vestment Company)
Trustee, Helen Keller Services for the Blind; Director, Brooklyn
Academy of Music
[PHOTO]
Mr. Fishman joined Chemical Bank in 1969. He was named Chief Fi-
nancial Officer in 1979. In 1983 he was promoted to Senior Exec-
utive Vice President responsible for Chemical's Investment Bank-
ing activities worldwide. In 1988 he became affiliated with Neu-
berger & Berman and was responsible for an investment partner-
ship. In 1989 he joined American International Group, Inc. as
Senior Vice President and became President of AIG Financial
Services Group. In 1990 he joined the firm of Adler & Shaykin as
a Managing Partner and in 1992 Mr. Fishman formed the firm of
Columbia Financial Partners, L.P. in which he is Managing Partner.
Member, Organization and Nominating Committee; Alternate Member, Executive Com-
mittee
Mr. Fishman beneficially owns 2,316 common shares.
4
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JAMES Q. RIORDAN, AGE 67, DIRECTOR SINCE 1991
Retired Vice Chairman and Chief Financial Officer, Mobil Corp.
Director, Dow Jones & Co., Inc., Tri-Continental Corporation,
Public Broadcasting Service and Seligman Select Municipal Fund,
[PHOTO] Inc.; Director/Trustee of the mutual funds in the Seligman Group
of Investment Companies; Trustee, Committee for Economic Devel-
opment and The Brooklyn Museum; Member, Policy Council of the
Tax Foundation
Mr. Riordan joined Mobil Corp. in 1957 as Tax Counsel. In 1976
he was named a Director and Senior Vice President. In 1986 he
became Vice Chairman and Chief Financial Officer.
He retired from Mobil Corp. in 1989. In 1989 he joined Bekaert Corporation and
was elected President. He retired from Bekaert Corporation in 1992.
Member, Audit Committee; Alternate Member, Executive Committee
Mr. Riordan beneficially owns 1,500 common shares.
As of September 30, 1994 the following officers owned the number of shares of
Common Stock set forth below:
-------------------------------------
<TABLE>
<CAPTION>
Officer Shares
------- ------
<S> <C>
Robert B. Catell 14,400
Craig G. Matthews 7,279
Helmut W. Peter 7,912
Maurice K. Shaw 7,705
Anthony J. DiBrita 2,796
</TABLE>
-------------------------------------
On September 30, 1994 the Directors and executive officers, 22 in number, bene-
ficially owned 89,004 common shares, less than one percent of the outstanding
common shares of the Company. As of September 30, 1994 none of the Company's
Preferred Stock was owned beneficially by any Director or executive officer.
BOARD OF DIRECTORS
The Board of Directors held 12 regularly scheduled meetings in fiscal 1994. The
Board consists of eight members, including seven members who are not employees
of the Company. All of the nominees are members of the Board.
COMMITTEES OF THE BOARD
The Executive Committee held one meeting in fiscal 1994. One officer member of
the Board serves on this committee. The Executive Committee has authority to
exercise all powers of the Board between meetings of the Board except for mat-
ters as to which New York law requires that action be taken by the Board, such
as the filling of vacancies on the Board, the fixing of compensation of Direc-
tors and changes in the By-Laws.
The Audit Committee, all of the members of which are outside Directors, held
five meetings in fiscal 1994. Its function is to review and monitor accounting
and external financial reporting practices, internal controls, auditing activi-
ties and the business practices and ethical standards of the Company. It is re-
sponsible for recommending independent public accountants to the Board for
election by shareholders.
The Organization and Nominating Committee, all of the members of which are out-
side Directors, held five meetings in fiscal 1994. It recommends the remunera-
tion of Directors and officers of the Company, reviews management succession
plans and is charged with the responsibility for recommending nominees for
election to the Board. As a continuing responsibility, each member of the Board
undertakes to search for and to bring to the attention of the Board persons
qualified to serve as Director. Any shareholder who wishes to recommend a can-
didate for election to
5
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the Board should contact the Secretary of the Company for information as to the
procedure to be followed by shareholders in submitting such recommendation.
EXECUTIVE COMPENSATION
ORGANIZATION AND NOMINATING COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Organization and Nominating Committee of the Board of Directors, composed
of five independent, non-employee Directors, administers the executive compen-
sation program. The members of the Organization and Nominating Committee during
fiscal 1994 were Mrs. Christensen and Messrs. Chenault, Elliott, Fishman and
Miller. None of such members is or has been an officer or employee of the Com-
pany or any of its subsidiaries. After review and approval by the committee,
all issues relating to executive compensation are submitted to the entire Board
for approval.
The philosophy of the Company as it relates to executive compensation is that
the Chief Executive Officer and other executive officers should be compensated
at competitive levels to attract, motivate, and retain talented employees. In
this connection, the Organization and Nominating Committee reviews compensation
data from the national and regional utility marketplace in order to assist in
its decision making. There is a direct link to strategic financial measures and
shareholder value for Chief Executive Officer compensation. See also a discus-
sion under the heading "Incentive Compensation Plans" for additional informa-
tion relating to all other executive officers. To achieve this performance
linkage, the Company has established the Corporate Incentive Compensation Plan
which places increased emphasis on performance-based pay and reduced emphasis
on fixed pay in total compensation. In years when the corporate financial goals
are met, corporate and individual awards are paid half in cash and half in the
value equivalent of shares of the Company's Common Stock. The value of these
share equivalents is required to be deferred for three years and is paid in
cash at the then market value of shares of the Company's Common Stock. This de-
ferral supports the long-term corporate interests in increasing stock values
and retaining employees. In years when the corporate financial goals are not
met, no corporate awards are paid and individual awards are reduced. This phi-
losophy ensures that executive compensation is driven by successful business
strategy and results-oriented objectives. The Corporate Incentive Compensation
Plan awards range from two percent to a maximum of 30 percent for all officers
except the Chief Executive Officer. The Chief Executive Officer's incentive
compensation is based solely on corporate and subsidiary performance and will
not be paid if financial goals are not met. The maximum payout for the Chief
Executive Officer is 27 percent for corporate performance and 10 percent for
subsidiary performance.
ORGANIZATION AND NOMINATING COMMITTEE
Andrea S. Christensen, Chairman
Kenneth I. Chenault
Donald H. Elliott
Alan H. Fishman
Edward D. Miller
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SUMMARY COMPENSATION TABLE
The following table indicates the annual compensation for the Chief Executive
Officer and the four other most highly compensated executive officers of the
Company. This information is for fiscal years ended on September 30, 1994, 1993
and 1992. No executive officer serves pursuant to an employment agreement.
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------
Other Annual
Compensation
Name and Principal Year Salary ($) ($)(1)
Position ------- ---------- --------------
<S> <C> <C> <C>
Robert B. Catell 1994 424,000 132,680(2)
President and Chief 1993 392,570 134,600
Executive Officer 1992 361,175 85,845
Helmut W. Peter 1994 281,000 73,358
Executive Vice President 1993 267,333 54,600
1992 248,867 51,303
Craig G. Matthews 1994 281,000 72,970(2)
Executive Vice President 1993 267,333 97,876
1992 248,867 43,524
Maurice K. Shaw 1994 185,800 33,898
Senior Vice President and 1993 178,475 38,953
Corporate Affairs Officer 1992 157,333 69,887
Anthony J. DiBrita 1994 177,000 31,204
Senior Vice President 1993 160,933 32,732
1992 136,613 22,522
</TABLE>
(1) Includes primarily amounts awarded for each fiscal year under Brooklyn
Union's incentive compensation plans. For Mr. Catell and Mr. Matthews, 1993
also includes incentive compensation awarded by a Company subsidiary.
(2) Mr. Catell and Mr. Matthews have been granted non-qualified stock options
under The Houston Exploration Company ("Houston Exploration") 1994 Long-Term
Incentive Plan, which options may be exercised to purchase 50,000 and 35,000
shares, respectively, of Houston Exploration, an indirect subsidiary of the
Company. The date of grant for the options was July 1, 1994 and the exercise
price for each option was $27.71 per share, which represented their estimated
fair market value on the date of grant. As a result, in accordance with gener-
ally accepted accounting principles, no compensation expense was imputed rela-
tive to the options.
INCENTIVE COMPENSATION PLANS
The Board of Directors adopted the Corporate Incentive Compensation Plan (the
"Corporate Plan") in fiscal 1989. The Corporate Plan provides incentives to of-
ficers and other key employees who, by the nature and scope of their positions,
regularly and directly make a significant contribution to the success of the
Company in the achievement of goals that are important to the shareholders and
customers of the Company. These goals, which are approved each year by the
Board of Directors, are intended to improve corporate performance and include
objectives which encourage growth in total return, increases in gross margin,
improved competitive position, improved customer satisfaction and control of
operating expenses. The compensation of executives has been modified by with-
holding a portion of base salary increases for several years in order to shift
part of base salary to incentive awards. Corporate
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awards will not be made in any year unless the Company (a) attains an approved
utility return on equity objective and (b) dividends are increased and do not
exceed a certain dividend payout ratio.
Awards will be based on individual performance as well as corporate perfor-
mance. Individual awards are measured against pre-established goals and cannot
exceed a maximum of 15 percent of a participant's salary. The aggregate incen-
tive compensation for all participants in any fiscal year may not exceed two
percent of the net income available for Common Stock. The payment of incentive
compensation under the Corporate Plan may be reduced or eliminated entirely at
the discretion of the Board of Directors. The amount equal to one-half of any
award made to a participant which is required to be deferred for three years is
subject to forfeiture under certain conditions during the deferral period. Por-
tions of an award which are required to be deferred are treated as if such por-
tions were invested in Common Stock of the Company.
PERFORMANCE GRAPH
The Securities and Exchange Commission's executive compensation rules require
that a line graph be included in the proxy statement comparing cumulative total
shareholder return with a performance indicator of the overall stock market and
either a published industry index or Company-determined peer comparison. As
shown in the following line graph, for a period beginning September 30, 1989
through September 30, 1994, a comparison is made of cumulative total share-
holder returns for the Company, the Standard & Poor's Utilities Index and the
Standard & Poor's 500 Index.
[Performance Graph Appears Here]
8
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<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BU.............................. $100.00 $103.77 $120.15 $140.05 $170.45 $173.41
S&P Utilities................... $100.00 $ 98.89 $114.55 $130.94 $162.70 $141.53
S&P 500......................... $100.00 $ 90.76 $118.95 $131.81 $149.12 $154.66
</TABLE>
Assumes $100 invested on September 30, 1989 in shares of The Brooklyn Union Gas
Company Common Stock, the S&P Utilities Index and the S&P 500 Index, and that
all dividends were reinvested.
COMPENSATION UNDER RETIREMENT PLANS
The Employees' Retirement Plan of the Company provides retirement benefits
based upon the individual participant's years of service and final average an-
nual compensation. Final average annual compensation is the average annual com-
pensation for the highest five consecutive years of earnings during the last
ten years of credited service. The following table sets forth the estimated an-
nual retirement benefits (exclusive of Social Security payments) payable to
participants in the specified compensation and years-of-service categories, as-
suming continued active service until normal retirement age and that the Em-
ployees' Retirement Plan is in effect at such time.
<TABLE>
<CAPTION>
Years of Service
---------------------------------------------------------------
Remuneration(1) 20 25 30 35 40 45
- - --------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$150,000 $ 45,000 $ 56,250 $ 67,500 $ 78,750 $ 90,000 $101,250
$200,000 $ 60,000 $ 75,000 $ 90,000 $105,000 $120,000 $135,000
$250,000 $ 75,000 $ 93,750 $112,500 $131,250 $150,000 $168,750
$300,000 $ 90,000 $112,500 $135,000 $157,500 $180,000 $202,500
$350,000 $105,000 $131,250 $157,500 $183,750 $210,000 $236,250
$400,000 $120,000 $150,000 $180,000 $210,000 $240,000 $270,000
$450,000 $135,000 $168,750 $202,500 $236,250 $270,000 $303,750
$500,000 $150,000 $187,500 $225,000 $262,500 $300,000 $337,500
</TABLE>
(1) Calculated as the average of the highest five consecutive years of earnings
during the last ten years of credited service.
The number of years of credited service for each of the Chief Executive Officer
and the four other highest paid executive officers based on continued service
to normal retirement age will be for R.B. Catell (44 years), H.W. Peter (25
years), C.G. Matthews (42 years), M.K. Shaw (44 years) and A.J. DiBrita (43
years).
The Internal Revenue Code of 1986, as amended, limits the annual compensation
taken into consideration for and the maximum annual retirement benefits payable
to a participant under the Employees' Retirement Plan. For fiscal 1994, these
limits were $235,840 and $115,641, respectively. Annual retirement benefits at-
tributable to amounts in excess of these limits are provided under the Supple-
mental Retirement Plan of The Brooklyn Union Gas Company and not under the Em-
ployees' Retirement Plan.
DIRECTORS COMPENSATION
Each outside Director is paid an annual retainer of $16,000 and a fee of $800
for each meeting of the Board or committee attended. In addition, a committee
member annual retainer fee of $3,000 is paid to each member of the Audit Com-
mittee and the Organization and Nominating Committee. Directors who are offi-
cers receive no compensation in addition to their salaries, as members of the
Board or for attendance at meetings of the Board or committees.
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During the fiscal year ended September 30, 1994, all of the Directors attended
75 percent or more of all meetings of the Board and committees of which they
were members, with the exception of Kenneth I. Chenault.
The Board of Directors has adopted the Retirement Plan for Outside Directors
(Directors who are not entitled to receive benefits under the Company's Employ-
ees' Retirement Plan). This plan provides retirement benefits to retired or
disabled outside Directors for up to ten years depending on length of service,
and is conditioned upon the recipient's availability to consult with the Com-
pany and render it advice. Amounts Directors receive under this plan may not
exceed the amount of the current retainer paid to present Directors, for a max-
imum of ten years. Currently, Mr. Byron W. Cain and Mr. Wilbur A. Levin are re-
ceiving benefits under this plan.
PROPOSAL (2) - ELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, Independent Public Accountants, upon the recommendation of
the Audit Committee of the Board, has been nominated by the Board of Directors,
the officer member not voting, to serve as independent public accountants.
Arthur Andersen LLP has been the independent public accountants of the Company
since 1932. This firm was recommended to serve for the 1994 fiscal year by the
Audit Committee of the Board of Directors and elected by the shareholders at
the Annual Meeting held February 3, 1994.
A representative of the firm will be present at the meeting with the opportu-
nity to make a statement if such representative desires to do so and to answer
questions posed by the shareholders.
WITH RESPECT TO NOMINEES
The Board of Directors proposes the election of three Directors and the re-
election of Arthur Andersen LLP. Each nominee has consented to be named in this
proxy statement and to serve if elected.
The persons acting under the proxies solicited hereby, unless directed to the
contrary, will vote for the above nominees and Arthur Andersen LLP. If for any
reason any nominee shall become unavailable before the date of the meeting,
discretionary authority will be exercised to vote the proxies for the election
of such other person or persons as the Board of Directors shall determine.
PROPOSAL (3) - SHAREHOLDER PROPOSAL AS TO CUMULATIVE VOTING
John J. Gilbert of 29 East 64 Street, New York, New York 10121-7043, Trustee
under the will of Minnie D. Gilbert representing a family interest of 750
shares; and John J. Gilbert, owner of 150 shares; and Margaret R. and John J.
Gilbert, Trustees under the will of Samuel Rosenthal for 600 shares, have in-
formed the Company that they intend to present to the meeting a resolution re-
lating to cumulative voting and have submitted the following:
RESOLVED:
That the stockholders of Brooklyn Union Gas Company, assembled in annual meet-
ing in person and by proxy, hereby request the Board of Directors to take the
steps necessary to provide for cumulative voting in the election of directors,
which means each stockholder shall be entitled to as many votes as shall equal
the number of shares he or she owns multiplied by the number of directors to be
elected, and he or she may cast all of such votes for a single candidate, or
any two or more of them as he or she may see fit.
10
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REASONS:
Continued strong support along the lines we suggest were shown at the last an-
nual meeting when 16.8%, 2,722 owners of 5,000,858 shares, were cast in favor
of this proposal.
A law enacted in California provides that all state pension holdings, as well
as state college funds, invested in shares must be voted in favor of cumulative
voting proposals, showing increasing recognition of the importance of this dem-
ocratic means of electing directors.
Also, the National Bank Act has provided for cumulative voting. Unfortunately,
in so many cases companies get around it by forming holding companies without
cumulative voting. Banking authorities have the right to question the capabil-
ity of directors to be on banking boards. However, unfortunately, in so many
cases authorities come in after and say the director or directors were not
qualified. So there is no reason why this could not be done for corporations
under the SEC and banking authorities.
Because of normal needs to find new directors, the need for directors on com-
pensation committees, we think cumulative voting is the answer. Additionally,
some recommendations have been made to carry out the Valdez 10 points. The 11th
should be having cumulative voting and ending stagger systems of electing di-
rectors, in our opinion.
When Alaska became a state it took away cumulative voting over our objections.
If the citizens had insisted on proper representation the disastrous Valdez oil
spill might have been prevented if environmental directors were elected through
cumulative voting. In many cases huge derivative losses might have been pre-
vented by having directors elected through cumulative voting. I was also de-
lighted to see that the SEC has finally taken action to prevent bad directors
from being on the boards of public companies.
Many successful corporations have cumulative voting. For example, Pennzoil hav-
ing cumulative voting defeated Texaco in that famous case. Another example, in
spite of still having a stagger system, Ingersoll-Rand, which has cumulative
voting, won two awards. In FORTUNE magazine it was ranked second in its indus-
try as "America's Most Admired Corporations" and the WALL STREET TRANSCRIPT
noted "on almost any criteria used to evaluate management, Ingersoll-Rand ex-
cels." In 1994 they raised their dividend. We believe Brooklyn Union Gas should
follow these examples.
If you agree, please mark your proxy for this resolution; otherwise it is auto-
matically cast against it, unless you have marked to abstain.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE AGAINST THIS
PROPOSAL FOR THE FOLLOWING REASONS:
An effective Board of Directors elected by all of the shareholders operates as
a harmonious unit. Cumulative voting could enable a relatively small group of
the shareholders to elect one or more Directors, who might be representative
of, and answerable to, only the group electing them. This could cause divisions
in the Board of Directors and have an adverse effect on the operation of the
business and affairs of the Company. The Board of Directors believes that cumu-
lative voting is not in the best interests of the shareholders and its adoption
could be detrimental to the shareholders' interest as investors in the Company.
An amendment to the Certificate of Incorporation to provide for cumulative vot-
ing would require the affirmative vote of a majority of the outstanding shares
entitled to vote thereon.
11
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OTHER INFORMATION
DEADLINE FOR SHAREHOLDER PROPOSALS
The date by which proposals of shareholders intended to be presented at the
1996 Annual Meeting must be received at the Company's principal executive of-
fice for inclusion in its proxy statement and form of proxy relating to the
meeting is August 31, 1995.
ADDITIONAL INFORMATION
The Company files an annual report on Form 10-K with the Securities and Ex-
change Commission which includes additional information concerning the Company
and its operations. This report, except for exhibits, will be furnished at no
cost to shareholders after December 29, 1994 upon written request to The Secre-
tary, The Brooklyn Union Gas Company, One MetroTech Center, Brooklyn, New York
11201-3850. Certain financial information required to be disclosed in the
Company's Form 10-K is also included in Appendix A of this proxy statement.
The following information is reported as required by the New York Business Cor-
poration Law. Directors and officers liability insurance covering all Directors
and officers of the Company was purchased from Chubb & Son, Aetna Casualty and
Surety Company, National Union Fire Insurance Company of Pittsburgh, Pa., Cor-
porate Officers and Directors Assurance Ltd. and ACE Limited for a one-year pe-
riod commencing May 28, 1994 at a total cost to the Company of $482,250.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's of-
ficers and Directors, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Executive of-
ficers, Directors and greater than ten percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
The Company believes that all filings during the fiscal year ended September
30, 1994, applicable to its executive officers, Directors and greater than ten
percent beneficial owners, were made on a timely basis.
METHOD AND COST OF SOLICITATION OF PROXIES
The Company will bear the cost of solicitation of proxies. In addition to the
use of the mails, proxies may be solicited personally or by telephone by Direc-
tors, officers and employees of the Company. Such Directors, officers and em-
ployees of the Company receive no compensation therefor other than their regu-
lar remuneration. In addition, the Company will reimburse brokers, bank nomi-
nees and other institutional holders for their reasonable out-of-pocket ex-
penses in forwarding proxy soliciting material to the beneficial owners of Com-
mon Stock of the Company.
DISCLOSURE OF "BROKER NON-VOTES" AND ABSTENTIONS
Securities and Exchange Commission rules provide that specifically designated
blank spaces and boxes are provided on the proxy card for shareholders to mark
if they wish either to withhold authority to vote for one or more nominees for
Director or to abstain on one or more of the proposals. In accordance with New
York State law, such abstentions are not counted in determining the votes cast
in connection with the selection of auditors and the approval of the share-
holder proposal. New York State law requires a proposal to receive a majority
of only those votes cast "for" or "against" approval, thus giving both absten-
tions and non-votes no effect. Votes withheld in connection with the election
of one or more of the nominees for Director will not be counted as votes cast
for or against such individuals.
12
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The shareholder proposal relative to cumulative voting is considered "non-dis-
cretionary," and brokers who have received no instructions from their clients
do not have the authority to vote on this item. Such "broker non-votes" will
not be considered as votes cast in determining the outcome of this shareholder
proposal. All abstentions and non-votes are counted towards the establishment
of a quorum.
CONFIDENTIAL VOTING
The Company, considering it to be in the best interest of its shareholders, in
response to a shareholder proposal and for other reasons, has adopted a policy
to the effect that all proxy (voting instruction) cards, ballots and vote tabu-
lations which identify the particular vote of a shareholder are to be kept se-
cret from the Company, its Directors, officers and employees. Accordingly,
proxy cards are returned in envelopes addressed to the tabulator, Corporate
Election Services, P.O. Box 1150, Pittsburgh, Pennsylvania 15230, which re-
ceives and tabulates the proxies and is independent of the Company. The final
tabulation is inspected by inspectors of election who also are independent of
the Company, its Directors, officers or employees. The identity and vote of any
shareholder shall not be disclosed to the Company, its Directors, officers or
employees, nor to any third party except (i) to allow the independent inspec-
tors of election to certify the results of the vote to the Company, its Direc-
tors, officers and employees; (ii) as necessary to meet applicable legal re-
quirements and to assert or defend claims for or against the Company; (iii) in
the event of a proxy solicitation based on an opposition proxy statement filed,
or required to be filed, with the Securities and Exchange Commission; or (iv)
in the event a shareholder has made a written comment on such form of proxy.
OTHER MATTERS
As of a reasonable time prior to the mailing of this proxy statement, the Board
of Directors of the Company knew of no other matter which is likely to be
brought before the meeting. However, if any other matter shall be presented for
action and comes before the meeting, it is the intention of the persons named
as Proxies to vote in accordance with their judgment in such matters.
By Order of the Board of Directors,
ROBERT B. CATELL
President and
Chief Executive Officer
Dated: December 29, 1994
13
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[LOGO] BROOKLYN
UNION
One MetroTech Center
Brooklyn, New York 11201-3850
THE BROOKLYN UNION GAS COMPANY
1994 FINANCIAL STATEMENTS
APPENDIX A
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FINANCIAL STATEMENT RESPONSIBILITY
The Consolidated Financial Statements of the Company and its subsidiaries were
prepared by management in conformity with generally accepted accounting
principles.
The Company's system of internal controls is designed to provide reasonable as-
surance that assets are safeguarded and that transactions are executed in ac-
cordance with management's authorizations and recorded to permit preparation of
financial statements that present fairly the financial position and operating
results of the Company. The Company's internal auditors evaluate and test the
system of internal controls. The Company's Vice President and General Auditor
reports directly to the Audit Committee of the Board of Directors, which is
composed solely of outside directors. The Audit Committee meets periodically
with management, the Vice President and General Auditor and Arthur Andersen LLP
to review and discuss internal accounting controls, audit results, accounting
principles and practices and financial reporting matters.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of 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 cor-
poration) and subsidiaries as of September 30, 1994 and 1993, and the related
Consolidated Statements of Income, Retained Earnings and Cash Flows for each of
the three years in the period ended September 30, 1994. These financial state-
ments 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 stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting 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 pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position and capitalization of The Brook-
lyn Union Gas Company and subsidiaries as of September 30, 1994 and 1993, and
the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1994 in conformity with generally ac-
cepted accounting principles.
As discussed in Notes 1 and 2 to the Consolidated Financial Statements, the
Company changed its method of accounting for income taxes and postretirement
benefits effective as of October 1, 1993.
/s/ Arthur Andersen LLP
October 26, 1994
New York, New York
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FINANCIAL REVIEW AND ANALYSIS
EARNINGS AND DIVIDENDS
In fiscal 1994, consolidated income available for common stock was $87.0 mil-
lion, or $1.85 per share, a record, compared to $76.2 million, or $1.73 per
share, in 1993, and $57.8 million, or $1.35 per share, in 1992.
Consolidated earnings, including income from equity investments, for the last
three fiscal years are summarized below:
<TABLE>
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<CAPTION>
1994 1993 1992
- - -----------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Income Available for
Common Stock
Utility $76,665 $ 69,083 $ 68,365
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Gas exploration and
production
Operations
Domestic 5,707 2,707 2,485
Canadian -- 2,739 840
Gain (impairment) -- 12,500 (13,000)
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5,707 17,946 (9,675)
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Energy services
Pipeline and other 3,358 2,792 2,127
Cogeneration 1,303 907 644
Propane
Operations -- (3,078) (3,666)
Write-off -- (11,451) --
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4,661 (10,830) (895)
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Consolidated $87,033 $ 76,199 $ 57,795
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</TABLE>
In 1994, utility operations provided an equity return of 12.2%. The return,
which included incentives authorized by the State of New York Public Service
Commission (PSC), was slightly higher than the allowed rate of 12.1%. The Com-
pany has earned or exceeded its allowed return on utility common equity in 15
of the last 16 years.
In the last three years, income available for common stock from utility opera-
tions has benefited from rate increases (see "Rate and Regulatory Matters"),
additions of new firm gas heating customers, primarily as a result of con-
verting homes and buildings from oil to gas for space heating, and the benefit
of certain ratemaking incentives. The effect on utility revenues of variations
due to colder- or warmer-than-normal weather during the heating season is
largely offset by the weather normalization adjustment included in the
Company's tariff. In 1994, utility earnings reflected higher operation expense
due to the extremely cold weather last winter. However, cost management strate-
gies employed throughout the year were able to offset substantially the adverse
effects of the cold weather.
In 1994, earnings from gas exploration and production operations increased pri-
marily due to higher U.S. production and higher average prices. Earnings from
gas exploration and production in 1993 included an after tax gain of $12.5 mil-
lion on the sale of a subsidiary's investment in a Canadian gas exploration and
production company. This sale is the reason no earnings resulted from Canadian
operations in 1994; however, the Company intends to again conduct Canadian op-
erations in fiscal 1995. Earnings in 1992 included a non-cash ceiling test im-
pairment charge of $13.0 million after Federal income taxes recorded to reflect
the effect of low natural gas prices in March 1992 on a subsidiary's valuation
of proved gas reserves.
Earnings from investments in energy services are attributable to a number of
factors. The increase in earnings from pipeline and other reflects in part
higher throughput by the Iroquois Gas Transmission System during its second
full year of operation. The increase in cogeneration earnings reflects equity
income arising from the acquisition of an interest in an operating cogeneration
plant, located in Lockport, N.Y., as well as higher income from the investment
in a similar plant serving a Northrop Grumman facility, and continued profit-
able operations from the Company's fuel management subsidiaries. Further, earn-
ings from investments in energy services increased as the Company did not incur
any losses in 1994 related to its former investment in a propane company as it
had in 1993 and 1992.
The consolidated rate of return on average common equity was 11.04% in 1994,
compared to 10.85% in 1993 and 8.74% in 1992.
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In December 1993, the Board of Directors authorized an increase in the annual
dividend on common stock to $1.35 per share from $1.32 per share, reflecting
the three-for-two stock split approved in June 1993. This increase became ef-
fective on February 1, 1994, when the quarterly dividend was raised to 33 3/4
cents per share from 33 cents per share. Common dividends have been increased
for 18 consecutive years and paid continuously for 46 years.
SALES, GAS COSTS AND NET REVENUES
<TABLE>
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<CAPTION>
1994 1993 1992
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(Thousands of Dollars)
<S> <C> <C> <C>
Utility sales $1,279,638 $1,145,315 $1,038,061
Cost of gas (560,657) (466,573) (402,137)
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Net revenues $ 718,981 $ 678,742 $ 635,924
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Gas production and other $ 58,992 $ 60,189 $ 36,799
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</TABLE>
Firm utility gas sales in fiscal 1994 were 133,513 MDTH compared to 128,972
MDTH in 1993 and 122,476 MDTH in 1992. Measured by annual degree days, weather
was 3.1% colder than normal in 1994, and in 1993 and 1992, it was normal and
4.0% warmer than normal, respectively. In 1994, firm sales normalized for
weather increased at a rate slightly below the increases in the prior two fis-
cal years. Sales growth in all markets resulted primarily from conversions to
natural gas from oil for space heating, especially by large apartment build-
ings. During the year, gas at the burner tip was competitive with alternative
grades of fuel oil, although it was priced at some premium to No. 2 grade fuel
oil.
Residential heating sales in markets where the competing fuel is No. 2 grade
fuel oil and sales to other small volume customers were approximately 80% of
firm sales in fiscal 1994. Demand in these markets is less sensitive to peri-
odic differences between gas and oil prices.
In large volume heating markets, where the competing fuel is No. 6 grade fuel
oil, gas service is provided under rates that competitively track the price of
that fuel. There is substantial sales potential in these markets, which include
large apartment houses, government buildings and schools.
Moreover, a significant market for off-system sales has developed as a result
of Federal Energy Regulatory Commission initiatives. In 1994, the Company de-
livered 42.4 BCF of gas to off-system and interruptible customers by making op-
timal use of interstate pipeline capacity and its New York-based market hub.
The benefit of these transactions is passed on to firm customers pursuant to
the Company's tariff.
The cost of gas, $560.7 million in 1994, was $94.1 million or 20.2% higher than
in 1993. This is the result of higher heating sales as weather was colder than
normal during the 1994 heating season, and higher off-system sales. The cost of
gas for firm customers was $3.55 per DTH (one DTH equals 10 therms) in 1994,
compared to $3.49 per DTH in 1993 and $3.29 per DTH in 1992.
Net revenues (utility operating revenues less cost of gas) of $719.0 million in
1994 and $678.7 million in 1993 reflect increased tariff revenues and weather
normalized firm sales growth in each year.
The decrease in revenues from gas production and other in 1994 is due to the
sale of the Canadian gas exploration and production operations at the end of
1993. Revenues from U.S. production were up significantly, reflecting higher
production and average prices. (See Supplemental Gas and Oil Disclosures, page
A-22.) The increase in prior years' revenues was the result of higher produc-
tion volumes.
EXPENSES AND PREFERRED DIVIDENDS
Increases in operation expense in 1994 reflect the effects of severe winter
conditions. Maintenance expense includes costs related to city and state con-
struction projects. Such costs are partially reimbursed by New York City. Ex-
penses in all years reflect generally higher labor and material costs, which
were offset in part by ongoing productivity savings.
The increase in depreciation and depletion expense in 1994 primarily reflects
charges related to utility property additions and increased U.S. gas production
from
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the Company's exploration and production operations. In 1992, depreciation and
depletion expense included a pre-tax impairment charge of $19.7 million re-
corded by the Company's gas exploration and production subsidiary to reduce the
value of its proved gas reserves in accordance with the Securities and Exchange
Commission's asset ceiling test limitations applicable to gas exploration and
production operations accounted for under the full cost method.
General taxes principally include state and city taxes on utility revenues and
property. The applicable tax rates and the property base generally have in-
creased, although the Company has been able to realize significant savings by
the aggressive pursuit of reductions in property value assessments. Taxes based
on revenues reflect the increase in utility revenues each year.
Federal income tax expense reflects changes in pre-tax income and the increase
in the corporate tax rate that occurred in 1993. Also, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS-109) in 1994. Adoption of SFAS-109 had no effect on net income.
(See Note 1, to the Consolidated Financial Statements.)
Interest charges on long-term debt generally reflect higher average levels of
debt and the conversion of variable rate bonds to fixed interest rates. Other
interest charges include interest on deferred regulatory items.
Dividends on preferred stock reflect the Company's redemption of three series
of preferred stock on April 1, 1992 at optional redemption prices. Call premi-
ums are being amortized pursuant to PSC authorization. (See Note 4A, to the
Consolidated Financial Statements.)
CAPITAL EXPENDITURES
Consolidated capital expenditures were $199.6 million in fiscal 1994, $204.5
million in fiscal 1993 and $173.5 million in 1992.
Capital expenditures related to utility operations were $103.8 million in 1994,
$110.8 million in 1993 and $113.8 million in 1992. Utility expenditures in all
years principally were for the renewal and replacement of mains and services.
Plant additions to serve new customers and develop new markets were $28.8 mil-
lion in 1994, compared to $24.9 million in 1993 and $31.7 million in 1992.
Capital expenditures related to gas exploration and production activities were
$71.3 million in 1994, compared to $66.3 million in 1993 and $41.9 million in
1992. The 1994 amount reflects several on-shore acquisitions and increased off-
shore exploration activities. Net proved gas reserves at September 30, 1994
were 148 billion cubic feet. These reserves are located off-shore in the Gulf
of Mexico and on-shore in the Arkoma Basin, East Texas and West Virginia.
Capital expenditures related to energy services were $24.5 million in 1994,
$27.4 million in 1993 and $17.7 million in 1992. Expenditures in all years were
primarily related to the development of the John F. Kennedy International Air-
port cogeneration project and in 1994 include $10.9 million related to the ac-
quisition of an interest in an operating cogeneration plant located in Lock-
port, N.Y.
Consolidated capital expenditures for fiscal years 1995 and 1996 are estimated
to be approximately $185 million in each year, including $75 million per year
related to non-utility activities. The level of such expenditures is reviewed
periodically and can be affected by the timing and scope of investment opportu-
nities. The PSC has authorized the Company to invest up to 20% of its consoli-
dated capitalization in non-utility energy-related businesses. This authoriza-
tion is based on the Company's cash investments less dividends received. At
September 30, 1994, the total investment in non-utility subsidiaries computed
on this basis was approximately 13% of capitalization.
FINANCING
Cash provided by operating activities continues to be strong and is the princi-
pal source for financing capital expenditures.
The Company issued 1,800,000 new shares of common stock on October 6, 1993,
providing net proceeds of $44.9 million. Proceeds from common stock issued
through employee and shareholder stock purchase
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plans have provided the Company approximately $29.8 million in 1994, $27 mil-
lion in 1993 and $23 million in 1992.
In 1993, the Company converted $55 million of Series C Variable Rate Gas Facil-
ities Revenue Bonds to a fixed rate of 5.60% and $50 million of Series D Vari-
able Rate Gas Facilities Revenue Bonds to a fixed rate equivalent of 5.635%. In
addition, $75 million of 9 1/8% Gas Facilities Revenue Bonds were refunded in
1993. The interest rate on the refunding bonds, which mature in 2020, is
6.368%. Increased borrowings by a subsidiary, included in long-term debt, pro-
vided an additional $12.1 million to finance capital expenditures.
As a result of bond refinancings and redemptions of preferred stock, the
Company's composite cost of capital is the lowest in decades. At September 30,
1994, the consolidated annualized cost of long-term debt was 6.9%. Depending on
market conditions, the Company expects to be able to issue additional tax-ex-
empt debt in 1995 in either fixed or variable rate form in conjunction with the
possible refunding of the Company's 9% and 8.75% Gas Facilities Revenue Bonds
which are callable in May 1995 and July 1995, respectively, at optional redemp-
tion prices of $102.
FINANCIAL FLEXIBILITY AND LIQUIDITY
At September 30, 1994, the Company had cash and temporary cash investments of
$53.5 million and available bank lines of credit of $100 million, which lines
are available to secure the issuance of commercial paper. Related borrowings
primarily are used to finance seasonal working capital requirements, which in
recent years have not been significant. At September 30, 1994, there were no
borrowings outstanding. In addition, subsidiaries have lines of credit of $71
million, which for the most part support borrowings under revolving loan agree-
ments.
At September 30, 1994, the common equity component of the Company's capitaliza-
tion was 52.2%.
Fixed charge coverage ratios were 3.21 times in fiscal 1994, 3.19 in 1993 and
2.86 in 1992 (3.27 excluding the ceiling test impairment charge in March 1992
due to low wellhead gas prices).
The Company's Gas Facilities Revenue Bonds continue to be rated A-1 by Moody's
and A by Standard & Poor's, and the series of preferred stock still outstanding
is rated A-2 by Moody's and A by Standard & Poor's. The Company's commercial
paper is rated Prime-1 by Moody's and A-1 by Standard & Poor's.
RATE AND REGULATORY MATTERS
In September 1993, the PSC approved a revenue increase of $31.3 million, in-
cluding $3.0 million of deferred credits, which became effective in fiscal
1994, the final year of a three-year rate settlement. Previously, the PSC had
approved $31.5 million of additional revenues for fiscal 1993 and $31.3 million
for fiscal 1992.
In October 1994, the PSC approved a new three-year rate settlement. The agree-
ment allows an 11.0% return on common equity devoted to utility operations in
fiscal 1995, the first year of the new three-year rate plan. The allowed return
will be adjusted in each of the last two years of the plan to reflect changes
in capital costs. The settlement agreement provides for several discrete incen-
tives in customer service and sales, and affords the Company substantial addi-
tional pricing flexibility in price elastic markets. Under the agreement, the
Company will be permitted to retain 100% of any earnings from 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.
The agreement provides for no rate increase in fiscal 1995; however, the Com-
pany is permitted to amortize to income approximately $1.3 million of previ-
ously deferred credits. Estimated rate increases of $17 million in each of fis-
cal years 1996 and 1997 may be partially offset through the use of additional
available deferred credits.
Moreover, the settlement includes a revenue reduction for a "royalty" based on
the Company's level of investment in unregulated activities. In fiscal 1995,
the royalty is .75% of the capitalization of the Company's un-
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regulated 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.
Additionally, as part of the settlement, the Company agreed to a plan to sepa-
rate utility and subsidiary operations further, and to change the names of two
of its subsidiaries.
RESTRUCTURING PROCEEDING
The PSC has instituted a generic proceeding to determine whether and how to ad-
just services provided by gas utilities in the State of New York so that a
wider range of consumers have access to "unbundled" services envisioned by Fed-
eral Energy Regulatory Commission Order 636. Order 636 requires interstate
pipelines to "unbundle" or separate their sales service from their transporta-
tion and storage services. As a result, the responsibility for procuring gas
supplies and managing 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 for sales to customers currently supplied
by local utilities, and allows these customers to arrange transportation for
their gas supplies, thereby broadening opportunities for gas users to purchase
gas from multiple sources.
The issues for utilities in the PSC proceeding are far-reaching, including
greater flexibility in pricing, competition with brokers/marketers in a
utility's service area, cost of service allocations, and obligations to provide
service to core (small volume) and non-core (interruptible and large volume)
markets.
The Company believes it is prepared to meet the challenges of additional compe-
tition in its traditional service territory and to take advantage of new oppor-
tunities for off-system sales growth. As early as 1984, the Company began re-
structuring its gas purchase contracts with pipelines to transportation-only
contracts, and securing additional competitively priced long-term domestic gas
supplies from major non-pipeline suppliers, and 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.
ENVIRONMENTAL MATTERS
The Company is subject to Federal, state, and local laws and regulatory pro-
grams relating to the environment. These environmental laws govern both the
normal, ongoing operations of the Company as well as the cleanup of histori-
cally contaminated properties.
Ongoing environmental compliance activities are integrated with the Company's
regular operations and maintenance activities. Based upon current information
and regulatory status, no material increases or changes are anticipated for the
Company's ongoing environmental compliance efforts.
The Company may be deemed to be liable for environmental cleanup expenses with
respect to properties or facilities that have sustained historical contamina-
tion, in particular those properties or facilities that supported manufactured
gas plant (MGP) operations or otherwise utilized underground storage tanks.
The Company has reviewed its current and historical properties and identified
fourteen MGP sites and certain other industrial properties which may have sus-
tained historical contamination. Of these properties, four MGP sites are under-
going various stages of preliminary investigations and/or discussions with reg-
ulatory agencies or third parties. Of the four properties being addressed,
based upon current information and regulatory status, three of the properties
are not expected to present material liabilities. The fourth property, the Co-
ney Island site, may result in material cleanup liabilities in the future. As
at September 30, 1994, the Company accrued $8.0 million for potential cleanup
costs at this site and recorded a corresponding regulatory asset. Previously,
the Company had accrued $4.1 million for interim response costs which were
fully paid by September 30, 1994 (see Note 7 to Consolidated Financial State-
ments for additional information).
In October 1994, 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, including the $4.1 million in interim response costs
accrued in 1993 and the $8.0 million liability accrued as at September 30,
A-6
<PAGE>
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- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
1994. In addition, as part of its October 1994 order approving the Company's
three-year rate settlement, the PSC approved the deferral of environmental site
investigation and remediation costs incurred after September 30, 1994. Pursuant
to that order, rates commencing in October 1994 reflect the recovery of the
$4.1 million deferred interim response costs over a five year period, and the
Company may reflect in rates commencing October 1995 and October 1996, the de-
ferred balance of environmental site investigation and remediation costs ac-
crued as at September 30, 1994 and September 30, 1995, respectively, each over
a five year period. The recovery of these costs in rates is conditioned upon
the absence of a PSC determination that such costs have been unreasonable or
imprudently incurred. In general, the Company believes that, based on applica-
ble law and prior PSC precedents with respect to similar expenditures incurred
by other utilities in New York State, the Company will be permitted to recover
its prudently incurred environmental site investigation and remediation costs
in rates.
INFLATION
In recent years, the impact of inflation has diminished. Purchased gas costs,
which have been relatively stable, are passed on to customers through the Gas
Adjustment Clause in the Company's tariff. Gas remains competitively priced
with alternative fuels. Recovery of the cost of utility property is based on
historical cost depreciation charges that are included in utility rates. Such
charges are less than current costs or inflation-adjusted costs. However, the
Company believes its utility rates generally provide an opportunity to earn a
fair return on shareholder investment reflective of its cost of capital and,
therefore, maintain access to capital markets in order to finance property ad-
ditions and replacements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements reflect the accounts of the Company and
its subsidiaries. All significant intercompany transactions are eliminated.
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 con-
struction.
Depreciation is provided on a straight-line basis in amounts equivalent to com-
posite rates on average depreciable property of 3.3% in 1994, and 3.2% in 1993
and 1992.
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 re-
newal of property is charged to maintenance expense.
GAS EXPLORATION AND PRODUCTION PROPERTY - DEPLETION AND DEPRECIATION
The Company's gas exploration and production subsidiaries follow the full cost
method of accounting. All productive and nonproductive costs identified with
acquisition, exploration and development are capitalized. Provisions for deple-
tion are based on the unit-of-production method and, when necessary, include
provisions related to the asset ceiling test limitations required by the regu-
lations of the Securities and Exchange Commission. Costs of unevaluated gas and
oil property 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 asset investments in energy-related
businesses that are accounted for under the equity method.
A-7
<PAGE>
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- - --------------------------------------------------------------------------------
REVENUES
Utility customers generally are billed bi-monthly on a cycle basis. Unbilled
revenue reflects 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 firm cus-
tomers. Changes in gas costs from amounts recovered in base tariff rates are
included in billed firm revenues through the operation of a tariff provision,
the Gas Adjustment Clause (GAC). Net revenues from tariff sales for gas and
transportation service on an interruptible basis as well as from off-system gas
sales and tariff gas balancing services are refunded to firm customers through
the GAC. This provision requires an annual reconciliation of recoverable gas
costs with GAC revenues. Any difference is deferred pending recovery from or
refund to firm customers during a subsequent twelve-month period.
The Company's tariff contains a weather normalization adjustment that provides
for 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.
Gas sales by the Company's marketing subsidiary are classified in gas produc-
tion and other revenue net of their related gas purchase and transportation
costs.
FEDERAL INCOME TAX
The Company adopted Statement of Financial Accounting Standards No. 109 (SFAS-
109) "Accounting for Income Taxes" at the beginning of fiscal 1994. 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. Prior to adoption of
SFAS-109, pursuant to PSC policy, deferred taxes were not provided for certain
construction costs incurred before fiscal 1988 and for bases differences re-
lated to differences between tax and book depreciation methods. An amortization
of the regulatory asset is included in operation expense commencing in 1994
while amounts comparable to this amortization previously were included as part
of Federal income tax expense.
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 prop-
erty.
EFFECTS OF RATE REGULATION
Allocation of costs and revenues to accounting periods for ratemaking and regu-
latory purposes may differ from bases generally applied by nonregulated compa-
nies. Such allocations to meet regulatory accounting requirements are consid-
ered to be generally accepted accounting principles for regulated utilities
provided that there is a demonstrable ability to recover any deferred costs in
future rates. Otherwise, such deferred costs, or regulatory assets, would have
to be expensed. The Company has recorded a net regulatory asset of $95.2 mil-
lion as of September 30, 1994. This asset is largely related to differences in
allocating Federal income tax expense.
A-8
<PAGE>
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- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
For the Years Ended September 30, 1994 1993 1992
- - --------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES
Utility sales $1,279,638 $1,145,315 $1,038,061
Gas production and other 58,992 60,189 36,799
- - --------------------------------------------------------------------------------
1,338,630 1,205,504 1,074,860
- - --------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of gas 560,657 466,573 402,137
Operation 327,356 309,070 281,031
Maintenance 54,340 54,722 52,953
Depreciation and depletion 69,611 64,779 73,930
General taxes 150,743 144,827 135,549
Federal income tax (See Note 1) 41,619 42,433 30,812
- - --------------------------------------------------------------------------------
OPERATING INCOME 134,304 123,100 98,448
OTHER INCOME
Equity income (loss) from energy services
investments 5,689 1,150 (1,041)
Other income (loss), net (2,338) (3,379) 2,935
Gain on sale of investment in Canadian gas
company -- 20,462 --
Write-off of investment in propane company -- (17,617) --
Federal income tax benefit (See Note 1) 921 950 1,593
- - --------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES 138,576 124,666 101,935
INTEREST CHARGES
Long-term debt 46,900 45,344 40,016
Other 4,292 2,759 2,046
- - --------------------------------------------------------------------------------
NET INCOME 87,384 76,563 59,873
DIVIDENDS ON PREFERRED STOCK 351 364 2,078
- - --------------------------------------------------------------------------------
INCOME AVAILABLE FOR COMMON STOCK $ 87,033 $ 76,199 $ 57,795
- - --------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK (Average
shares outstanding of 46,979,597,
44,042,365 and 42,882,627, respectively) $ 1.85 $ 1.73 $ 1.35
- - --------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
For the Years Ended September 30, 1994 1993 1992
- - --------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $255,979 $238,867 $237,156
INCOME AVAILABLE FOR COMMON STOCK 87,033 76,199 57,795
- - --------------------------------------------------------------------------------
343,012 315,066 294,951
LESS:
Cash dividends declared ($1.35, $1.32 and $1.29 per
common share, respectively) 63,652 58,914 55,667
Other adjustments (106) 173 417
- - --------------------------------------------------------------------------------
BALANCE AT END OF YEAR $279,466 $255,979 $238,867
- - --------------------------------------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are
integral parts of these statements.
A-9
<PAGE>
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- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------
September 30, 1994 1993
- - ---------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
PROPERTY
Utility, at cost $1,599,452 $1,523,894
Accumulated depreciation (354,925) (333,468)
Gas exploration and production, at cost 276,659 205,328
Accumulated depletion (115,890) (90,237)
- - ---------------------------------------------------------------------------
1,405,296 1,305,517
- - ---------------------------------------------------------------------------
INVESTMENTS IN ENERGY SERVICES (SEE NOTE 6) 91,283 66,682
- - ---------------------------------------------------------------------------
CURRENT ASSETS
Cash 11,610 10,834
Temporary cash investments 41,881 10,425
Common stock proceeds receivable -- 44,910
Accounts receivable 193,130 230,688
Allowance for uncollectible accounts (14,963) (14,212)
Gas in storage, at average cost 96,076 102,516
Materials and supplies, at average cost 11,356 11,084
Prepaid gas costs 14,667 13,725
Other 31,441 37,304
- - ---------------------------------------------------------------------------
385,198 447,274
- - ---------------------------------------------------------------------------
DEFERRED CHARGES 147,297 78,374
- - ---------------------------------------------------------------------------
$2,029,074 $1,897,847
- - ---------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
Capitalization (See accompanying statement and
Note 4)
Common equity $ 774,236 $ 721,076
Preferred stock, redeemable 7,200 7,500
Long-term debt 701,377 689,300
- - ---------------------------------------------------------------------------
1,482,813 1,417,876
- - ---------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable 132,491 163,876
Dividends payable 16,609 15,868
Taxes accrued 15,213 15,345
Customer deposits 22,445 21,584
Customer budget plan credits 18,358 17,296
Interest accrued and other 45,807 53,491
- - ---------------------------------------------------------------------------
250,923 287,460
- - ---------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Federal income tax 230,316 139,289
Unamortized investment tax credits 22,000 23,074
Other 43,022 30,148
- - ---------------------------------------------------------------------------
295,338 192,511
- - ---------------------------------------------------------------------------
$2,029,074 $1,897,847
- - ---------------------------------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are
integral parts of these statements.
A-10
<PAGE>
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- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CAPITALIZATION
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1994 1993
- - -------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
COMMON EQUITY
Common stock, $.33 1/3 par value, authorized
70,000,000 shares; outstanding 47,590,015 and
46,380,282 shares, respectively, stated at $ 494,770 $ 465,097
Retained earnings (See accompanying statement) 279,466 255,979
- - -------------------------------------------------------------------------------
774,236 721,076
- - -------------------------------------------------------------------------------
PREFERRED STOCK, REDEEMABLE
$100 par value, cumulative, authorized 900,000 shares
4.60% Series B, 75,000 and 78,000 shares outstanding,
respectively 7,500 7,800
Less: Current sinking fund requirements 300 300
- - -------------------------------------------------------------------------------
7,200 7,500
- - -------------------------------------------------------------------------------
LONG-TERM DEBT
Gas facilities revenue bonds (issued through New York
State Energy Research and Development Authority)
9% Series 1985 A due May 2015 98,500 98,500
8 3/4% Series 1985 due July 2015 55,000 55,000
6.368% Series 1993 A and Series 1993 B 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
6.75% Series 1989 A due February 2024 45,000 45,000
6.75% Series 1989 B due February 2024 45,000 45,000
5.6% Series 1993 C due June 2025 55,000 55,000
6.95% Series 1991 A and Series 1991 B due July 2026 100,000 100,000
5.635% Series 1993 D-1 and Series 1993 D-2 due July
2026 50,000 50,000
- - -------------------------------------------------------------------------------
648,500 648,500
Borrowings by subsidiary 52,877 40,800
- - -------------------------------------------------------------------------------
701,377 689,300
- - -------------------------------------------------------------------------------
$ 1,482,813 $ 1,417,876
- - -------------------------------------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are
integral parts of these statements.
A-11
<PAGE>
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CONSOLIDATED STATEMENT OF CASH FLOWS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30, 1994 1993 1992
- - --------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 87,384 $ 76,563 $ 59,873
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and depletion 75,386 71,376 76,959
Deferred Federal income tax 10,897 7,599 7,980
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 (1,074) (1,074) (1,074)
(Income) loss from energy services
investments (5,689) (1,150) 1,041
Dividends received from energy services
investments 4,392 7,421 1,884
Allowance for equity funds used during
construction (2,076) (1,671) (1,876)
- - --------------------------------------------------------------------------------
169,220 156,219 144,787
- - --------------------------------------------------------------------------------
Effect of changes in working capital and other
Accounts receivable, net 31,906 (61,097) (11,559)
Accounts payable (34,121) 41,094 27,808
Gas inventory and prepayments 5,498 (31,063) (4,842)
Other 21,518 7,883 (21,433)
- - --------------------------------------------------------------------------------
24,801 (43,183) (10,026)
- - --------------------------------------------------------------------------------
Cash provided by operating activities 194,021 113,036 134,761
- - --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Sale of common stock 29,828 71,866 23,037
Common stock proceeds receivable 44,910 (44,910) --
Issuance of long-term debt 12,077 186,900 93,400
- - --------------------------------------------------------------------------------
86,815 213,856 116,437
Repayments
Preferred stock (300) (300) (37,273)
Long-term debt -- (180,000) (90,400)
- - --------------------------------------------------------------------------------
86,515 33,556 (11,236)
Dividends paid (64,003) (59,278) (57,745)
Trust funds, utility construction -- 54,610 72,664
Other 106 2,156 (1,106)
- - --------------------------------------------------------------------------------
Cash provided by financing activities 22,618 31,044 2,577
- - --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (excluding allowance for
equity funds used during construction) (197,496) (202,843) (171,591)
Proceeds from sale of investment in Canadian
gas company 11,691 30,027 --
Other 1,398 7,400 (9,045)
- - --------------------------------------------------------------------------------
Cash used in investing activities (184,407) (165,416) (180,636)
- - --------------------------------------------------------------------------------
CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS $ 32,232 $ (21,336) $ (43,298)
- - --------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF
YEAR $ 53,491 $ 21,259 $ 42,595
- - --------------------------------------------------------------------------------
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................................. $ 36,900 $ 32,100 $ 19,800
Interest..................................... $ 50,872 $ 51,804 $ 41,290
- - --------------------------------------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are
integral parts of these statements.
A-12
<PAGE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FEDERAL INCOME TAX
Income tax expense (benefit) is reflected as follows in the Consolidated State-
ment of Income:
<TABLE>
- - ------------------------------------------------------------------
<CAPTION>
1994 1993 1992
- - ------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING EXPENSES
Current $39,466 $29,172 $26,118
Deferred 2,153 13,261 4,694
- - ------------------------------------------------------------------
41,619 42,433 30,812
- - ------------------------------------------------------------------
OTHER INCOME
Current (8,591) 5,786 (3,805)
Deferred 8,744 (5,662) 3,286
Amortization of investment tax credits (1,074) (1,074) (1,074)
- - ------------------------------------------------------------------
(921) (950) (1,593)
- - ------------------------------------------------------------------
Total Federal income tax $40,698 $41,483 $29,219
- - ------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------
September 30, 1994(A)
- - ---------------------------------------------------------
(Thousands of Dollars)
<S> <C>
DEFERRED CREDITS AND OTHER LIABILITIES - FEDERAL INCOME
TAX
Property related
Utility $176,486
Net tax regulatory asset 29,087
Gas production and other 30,841
- - ---------------------------------------------------------
$236,414
- - ---------------------------------------------------------
Regulatory settlement items (9,879)
Gas cost and other 3,781
- - ---------------------------------------------------------
Net deferred income tax liability $230,316
- - ---------------------------------------------------------
</TABLE>
(a) As required by standards in effect prior to the adoption of SFAS-109, the
components of deferred tax expense (benefit) related to the following items in
1993 and 1992 are, respectively: property related - $9,782,000 and $6,684,000;
rate settlement items - $(245,000) and $(311,000); write-off of propane in-
vestment $(7,720,000) and $0; gas costs and other - $5,781,000 and $1,607,000.
The following is a reconciliation between reported income tax and tax computed
at the statutory rate of 35% for 1994, 34.75% for 1993 and 34% for 1992:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993 1992
- - ------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Computed at statutory rate $44,828 $41,021 $30,291
Book-tax differences:
Property related
Utility -- 1,179 718
Gas production and other (1,303) 858 (1,497)
- - ------------------------------------------------------------------
(1,303) 2,037 (779)
- - ------------------------------------------------------------------
Nontaxable interest income (556) (396) (864)
Amortization of investment tax credits (1,074) (1,074) (1,074)
Flow-through items -- 536 1,598
Other (1,197) (641) 47
- - ------------------------------------------------------------------
Total Federal income tax $40,698 $41,483 $29,219
- - ------------------------------------------------------------------
Effective income tax rate 32% 35% 33%
- - ------------------------------------------------------------------
</TABLE>
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" as of October 1, 1993. The adoption of SFAS-109
did not have a material effect on consolidated net income because the Company
recorded a regulatory asset to cover the increase in accumulated deferred Fed-
eral income taxes not previously provided pursuant to regulatory orders.
2. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
A. PENSION: The Company has a noncontributory defined benefit pension plan cov-
ering substantially all employees. Benefits are based on years of service and
compensation. Commencing in fiscal 1994, the Company began recording expense in
accordance with
A-13
<PAGE>
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- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
treatment established by the PSC for ratemaking and accounting purposes in a
generic policy statement issued in September 1993 applicable to the adoption of
SFAS-87, "Employers' Accounting for Pensions," SFAS-88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for Ter-
mination Benefits" and SFAS-106, "Employers' Accounting for Postretirement Ben-
efits Other Than Pensions." Accordingly, the Company's revenue requirement re-
flects the aggregate expenses related to pensions and other postretirement ben-
efit obligations as determined under the applicable accounting standards.
On September 1, 1994, the Company completed a voluntary early retirement pro-
gram for management employees who were age 55 or older with at least 15 years
of service. As a result, the Company recorded a special retirement charge of
$8,465,000. The effect of this program was offset by reductions in other ele-
ments of total expense for postretirement benefits, which in the aggregate re-
mained within the revenue allowance reflected in the Company's rates. There-
fore, the program had no material effect on consolidated net income. A similar
program for bargaining unit employees is expected to be completed in the first
quarter of fiscal 1995. Likewise, this program is not expected to have a mate-
rial effect on consolidated net income.
The Company's funding policy for pensions is in accordance with requirements of
Federal law and regulations. There were no pension contributions in 1994, 1993
and 1992.
The calculation of net periodic pension cost follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------
Year Ending September 30, 1994 1993 1992
- - ----------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost, benefits earned during the year $ 15,100 $ 14,244 $ 11,406
Special retirement charge 8,465 -- --
- - ----------------------------------------------------------------------------
$ 23,565 $ 14,244 $ 11,406
- - ----------------------------------------------------------------------------
Interest cost on projected benefit obligation 29,511 24,617 21,966
Gain on assets (12,430) (76,671) (40,345)
Net amortization and deferral (32,798) 44,976 8,934
- - ----------------------------------------------------------------------------
Total pension cost $ 7,848 $ 7,166 $ 1,961
- - ----------------------------------------------------------------------------
</TABLE>
The following table sets forth the plan's funded status and amounts recognized
in the Company's Consolidated Balance Sheet. Plan assets principally are in-
vestment grade common stock and fixed income securities.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------
September 30, 1994 1993
- - ---------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $(333,890) $(274,118)
Accumulated $(353,172) $(296,375)
Projected $(446,676) $(398,300)
Plan assets at fair value $ 497,280 $ 503,838
- - ---------------------------------------------------------------------------
Plan assets in excess of projected benefit
obligation $ 50,604 $ 105,538
Unrecognized net gain from experience and change
in assumptions (21,007) (65,339)
Unrecognized transition asset (37,218) (41,870)
Expensing of pension cost to reflect amount
included in rates -- 1,671
- - ---------------------------------------------------------------------------
Accrued pension cost $ (7,621) $ --
- - ---------------------------------------------------------------------------
Assumptions:
Obligation discount 8.00% 6.50%
Asset return 8.00% 7.50%
Average annual increase in compensation 5.50% 5.50%
- - ---------------------------------------------------------------------------
</TABLE>
A-14
<PAGE>
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- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
B. RETIREE HEALTH CARE AND LIFE INSURANCE: The Company sponsors noncontributory
defined benefit plans under which it provides certain health care and life in-
surance benefits for retired employees. The Company has been funding a portion
of future benefits over employees' active service lives through a Voluntary Em-
ployee 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 to the ex-
tent rate recoveries are allowed for pension and postretirement benefit costs.
The Company adopted SFAS-106 as of October 1, 1993. SFAS-106 requires that the
costs of postretirement benefits other than pensions be accrued over employee
service lives by the time of retirement eligibility. Its adoption did not have
a material effect on consolidated net income because utility rates in fiscal
1994 reflected full recovery of annual SFAS-106 costs. The transition obliga-
tion upon adoption totaled $77.1 million, which is being amortized and recov-
ered in rates over twenty years. Prior to the adoption of SFAS-106, such costs,
including payments to retirees and trust fund contributions, amounted to
$17,078,000 in 1993 and $13,437,000 in 1992.
The following table sets forth the plans' funded status, reconciled with
amounts recognized in the Company's Consolidated Balance Sheet.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
September 30, 1994
- - -------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C>
Actuarial present value of accumulated postretirement
benefit obligation
Retirees $ (53,218)
Fully eligible active plan participants (17,106)
Other active plan participants (32,890)
- - -------------------------------------------------------------------------------
$(103,214)
Plan assets at fair value, primarily stocks and bonds $ 56,163
- - -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess
of plan assets $ (47,051)
Unrecognized net gain from past experience different
from that assumed and from changes in assumptions (16,875)
Unrecognized transition obligation 71,547
- - -------------------------------------------------------------------------------
Prepaid postretirement benefit cost $ 7,621
- - -------------------------------------------------------------------------------
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------
Year Ended September 30, 1994
- - ---------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C>
Service cost, benefits earned during the year $ 2,826
Interest cost on accumulated postretirement benefit
obligation 7,916
Actual return on plan assets (340)
Net amortization and deferral 141
- - ---------------------------------------------------------------------------
Postretirement benefit cost $10,543
- - ---------------------------------------------------------------------------
</TABLE>
A-15
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The measurement assumes an 8% discount rate and a health care cost trend rate
of 9.5% in 1994, decreasing to 5% by the year 2007 and remaining at that level
thereafter. A 1% increase in the health care cost trend rate would have the ef-
fect of increasing the accumulated postretirement benefit obligation as of Sep-
tember 30, 1994 and the net periodic SFAS-106 expense by approximately
$13,348,000 and $1,706,000, respectively. The expected long-term rate of return
on plan assets was 8.0%.
C. OTHER: In November 1992, the Financial Accounting Standards Board (FASB) is-
sued SFAS-112,
"Employers' Accounting for Postemployment Benefits." This Statement requires
accounting recognition on an accrual basis of any obligation which exists to
provide benefits to former or inactive employees after employment, but before
retirement. The Company adopted SFAS-112 on October 1, 1993. Its adoption had
no material effect on the Company's Consolidated Financial Statements.
3. FIXED OBLIGATIONS
A. LEASES
Lease costs included in operation expense were $15,547,000 in 1994, $14,247,000
in 1993 and $14,103,000 in 1992. The future minimum lease payments under the
Company's various leases, all of which are operating leases, are approximately
$14,200,000 per year over the next five years and $176,900,000 in the aggregate
for years thereafter.
For its corporate headquarters, the Company has a lease agreement with a re-
maining term of 17 years.
B. FIXED CHARGES UNDER FIRM CONTRACTS: The Company has entered into various
contracts for gas delivery and supply services. The contracts have varying
terms that extend from one to twenty years. Certain of these contracts require
payment of monthly charges in the aggregate amount of approximately $4.3 mil-
lion per month in all events and regardless of the level of service available.
Such charges are recovered as gas costs.
4. CAPITALIZATION
A. COMMON AND PREFERRED STOCK: In 1994, 1993 and 1992, the Company issued
1,209,734, 1,128,663 and 1,172,040 shares of common stock for $29,828,000,
$26,956,000 and $23,037,000, respectively, under the Automatic Dividend Rein-
vestment and Stock Purchase Plan, the Discount Stock Purchase Plan for Employ-
ees, and the Employee Savings Plan. At September 30, 1994, 2,398,375 unissued
shares of common stock were reserved for issuance under these plans. On October
6, 1993, the Company issued 1,800,000 shares of common stock providing net pro-
ceeds of $44,910,000.
The 4.60% Series B preferred stock is subject to an annual sinking fund re-
quirement of 3,000 shares at par value.
B. GAS FACILITIES REVENUE BONDS AND OTHER: The Company issues tax-exempt bonds
through the New York State Energy Research and Development Authority (Authori-
ty). Whenever bonds are issued for new gas facilities projects, proceeds are
deposited in trust and subsequently withdrawn by the Company to finance quali-
fied expenditures.
The Company converted $55 million of Series C Variable Rate Gas Facilities Rev-
enue Bonds to a fixed rate of 5.60% in July 1993 and $50 million of Series D
Variable Rate Gas Facilities Revenue Bonds to a fixed rate equivalent of 5.635%
in June 1993. In April 1993, the Company issued through the Authority $37.5
million of Gas Facilities Revenue Bonds 1993 Series A, in the form of Select
Auction Variable Rate Securities (SAVRS) and $37.5 million Gas Facilities Reve-
nue Bonds 1993 Series B, in the form of Residual Interest Bonds (RIBS). The in-
terest rate applicable to the 1993 Series A and B linked RIBS/SAVRS bonds,
which mature in 2020, is 6.368% per annum. The proceeds were received on April
29, 1993 and then applied to the redemption of $75 million of 9 1/8% Gas Facil-
ities Revenue Bonds due May 2013, called on May 1, 1993 at 103% of par value
plus accrued interest.
There are no sinking fund requirements for any Gas Facilities Revenue Bonds.
The Company's 9.0% and
A-16
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8.75% Gas Facilities Revenue Bonds are callable in May 1995 and July 1995, re-
spectively, at an optional redemption price of 102% of par value plus accrued
interest.
Other long-term debt consists of debt of a subsidiary amounting to $52,877,000
under a revolving loan agreement with no payments currently due. Interest on
this debt is at a composite rate which is less than the prime rate.
5. FINANCIAL INSTRUMENTS
In October 1994, the FASB issued SFAS-119, "Disclosure About Derivative Finan-
cial Instruments and Fair Value of Financial Instruments," which required vari-
ous disclosures about financial instruments and related transactions.
A. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's long-term debt consists primarily of publicly traded Gas Facili-
ties Revenue Bonds (see Note 4B), 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, 1994 and 1993 was $651,255,200 and $704,642,400, respec-
tively, 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 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, 1994 and 1993, the
fair value of this stock was $4,796,640 and $4,893,750, respectively, and the
carrying value was $7,200,000 and $7,500,000, respectively.
All other financial instruments included in the Consolidated Balance Sheet are
stated in amounts that approximate fair values.
B. DERIVATIVE FINANCIAL INSTRUMENTS
The Company and its subsidiaries employ derivative financial instruments, prin-
cipally natural gas futures and swaps, for the purpose of risk management, al-
though employment of such instruments with respect to utility operations has
been minimal in 1994.
Natural gas futures are utilized to fix margins on purchases and sales of gas
entered into in the ordinary course of business. The Company and its subsidiar-
ies, principally its marketing subsidiary, had 2,768 futures contracts out-
standing at September 30, 1994, requiring margin deposits with brokers in the
amount of $2,251,600. The underlying transactions are of varying durations,
none of which extend beyond March 1996. The Company would be required to pay
approximately $3,136,600 to settle these contracts at September 30, 1994. De-
ferred losses amounted to $1,240,600 at September 30, 1994.
The Company entered into a series of swap transactions intended to minimize the
Company's exposure to differences in the market prices of gas at certain re-
ceipt points in producing areas. The swap contracts cover 14.5 BCF of gas per
year through October 1996.
The Company's gas exploration and production subsidiary also manages the risk
associated with fluctuations in the price of natural gas through commodity swap
contracts with financial institutions. The subsidiary has several contracts in
effect, at various prices, which cover a significant amount of its estimated
production for the next three years. The Company would be required to pay ap-
proximately $7,130,000 to settle these contracts at September 30, 1994.
All of the foregoing transactions meet the criteria for hedge accounting treat-
ment. Accordingly, gains and losses are recognized when the underlying transac-
tion is completed, at which time these gains and losses are included in earn-
ings as an offset to revenues or costs recognized when the gas is sold, pur-
chased or transported in accordance with a hedged transaction, and are re-
flected as cash flows from operations in the accompanying Consolidated State-
ment of Cash Flows at that time. Further, in cases where the transaction re-
sults in the acquisition of an asset, deferred gains and losses are included as
part of the carrying amount of the asset acquired.
The Company and its subsidiaries are exposed to credit risk in the event of
nonperformance by counterparties to futures and swap contracts, as well as non-
performance by the counterparties of the transac-
A-17
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tions which they are hedged against. The Company believes that the credit risk
related to the futures 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.
6. 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. (Iro-
quois), which partnership owns and operates a 375-mile pipeline from Canada to
the Northeast. NETCO's investment in Iroquois was $20.1 million at September
30, 1994.
In 1992, Iroquois was informed by the U.S. Attorneys' Offices of various dis-
tricts of New York of a civil investigation of alleged violations of the U.S.
Army Corps of Engineers (COE) permit, a related State Water Quality Certifica-
tion and/or the Federal Clean Water Act. Related agency investigations of mat-
ters related to the construction of the Iroquois Pipeline have been commenced
by COE and the Federal Energy Regulatory Commission (FERC). Civil penalties
could be imposed if violations of Iroquois' COE and FERC authorizations are
shown to have occurred. No proceedings in connection with these investigations
have been commenced.
Also 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. Ir-
oquois' management believes the pipeline construction and right-of-way activi-
ties were conducted in a responsible manner. However, Iroquois deems it proba-
ble that indictments will be sought in connection with this investigation and
in them substantial fines and other sanctions.
Iroquois' management has been informed that meetings are expected with those
responsible for the civil and criminal investigations, from time to time, both
to gain an informed understanding of the focus and direction of the investiga-
tion in order to defend itself and, if and when appropriate, to explore possi-
ble resolutions that may be acceptable to all parties. Although the ultimate
outcome of these matters cannot be predicted at this time, based on information
currently available, the Company does not believe that the resolution of these
matters will have a material adverse effect on its consolidated financial re-
sults.
B. COGENERATION PROJECTS: A Company subsidiary, Gas Energy Inc. (GEI), through
affiliates, owns a 50% partnership interest, and has invested approximately
$47.5 million as of September 30, 1994, in a project to construct, own and op-
erate a 100-megawatt cogeneration plant at John F. Kennedy International Air-
port in Queens, New York. The estimated cost of the project is approximately
$292 million, of which $175 million is being financed by proceeds from bonds
issued by the Port Authority of New York and New Jersey and guaranteed by an
international banking group. The partners are committed to make equal contribu-
tions for project costs above $175 million. Construction of the project is
scheduled for completion in 1995.
In addition, a project to construct, own and operate a 40-megawatt cogeneration
plant at the State University of New York at Stony Brook is under construction.
The debt 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, Gas Energy Cogeneration,
Inc., through affiliates, owns a 50% partnership interest in the project, esti-
mated to cost $92.6 million. As of September 30, 1994, the subsidiary had
funded $3.6 million of an expected total of $6.8 million as its share of the
project.
7. ENVIRONMENTAL MATTERS
The Company is involved in environmental site investigation, implementation of
interim remedial measures, and consideration of long-term remedial solutions at
the former manufactured gas plant (MGP) site in Coney Island that was owned and
operated by a predecessor
A-18
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company. This property was the subject of a notice by the City of New York in
January 1993 alleging that the site presented an imminent and substantial en-
dangerment to health and the environment and stating that the City intended to
bring a citizens' suit under the Federal Resource Conservation and Recovery Act
and related statutes to compel cleanup and recover its own response costs. The
Company has denied the City's allegations, but has met informally with City of-
ficials, apprised them of the Company's own ongoing environmental investiga-
tion, and committed itself to keeping the City informed of developments. The
City has not filed suit as of this date.
In addition, the Company in cooperation with the U.S. Coast Guard has been re-
sponding to pollution incidents, occurring and reported to governmental author-
ities during the summer of 1993, involving the apparent seep of oil into Coney
Island Creek from the Coney Island site. This response has included the con-
struction of an interim response measure (IRM) to contain and recover any such
oil seep. While expenses to date have not been material with respect to the
pollution incident, the Coast Guard has not issued its final approval of this
response measure and the Company cannot predict how long the IRM will operate
or whether additional containment or response measures will be required or what
such measures would cost.
In October 1994, the Company had an initial meeting with the New York State De-
partment of Environmental Conservation (DEC) for the purpose of reaching a
consensual agreement under state environmental laws for a long-term site man-
agement plan for the Coney Island site. The discussions with the DEC to date
have been preliminary and the Company is unable to predict which, if any, of
the options discussed with the DEC might be mutually acceptable. Based on these
preliminary discussions, the Company believes that long-term site management
costs will be at least $8,000,000 and may be several times that amount, depend-
ing upon the site management option finally negotiated with the DEC. A
consensual agreement is not likely to be reached before the end of 1995. Ac-
cordingly, as at September 30, 1994, the Company accrued a liability of
$8,000,000 as the minimum estimate of costs most likely to be incurred and a
corresponding regulatory asset, in addition to $4,100,000 of interim response
costs previously recorded. Expenditures related to any negotiated site manage-
ment plan will be over a number of years.
The Company has been approached by the City of New York with respect to another
former MGP property regarding potential cost sharing of environmental cleanup
costs. This property is currently owned by the City. The Company and the City
have had several meetings but discussions are preliminary. Until it becomes
clear that the property will in fact be developed by the City or a third party,
or it is demonstrated that the property presents a significant environmental
risk, the Company cannot determine its potential legal liabilities and/or fi-
nancial exposure, if any, associated with this property.
The Company has notified several of its insurance carriers of potential claims
regarding environmental cleanup liabilities. The Company's consideration of its
potential insurance claims is continuing.
With the exception of the matters referenced above, no significant administra-
tive or judicial proceedings involving the Company have been initiated with re-
spect to any other MGP property. Although the potential cost of cleanup at
these sites may be material if the Company is ever compelled to address these
sites, the Company cannot at this time determine the cost or extent of any
cleanup efforts if cleanup ultimately should be required.
In October 1994, 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, including the $4.1 million in interim response costs
accrued in 1993 and the $8.0 million liability accrued as at September 30,
1994. In addition, as part of its October 1994 order approving the Company's
three-year rate settlement, the PSC approved the deferral of environmental site
investigation and remediation costs incurred after September 30, 1994. Pursuant
to that order, rates commencing in October 1994 reflect the recovery of the
A-19
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$4.1 million deferred interim response costs over a five year period, and the
Company may reflect in rates commencing October 1995 and October 1996, the de-
ferred balance of environmental site investigation and remediation costs ac-
crued as at September 30, 1994 and September 30, 1995, respectively, each over
a five year period. The recovery of these costs in rates is conditioned upon
the absence of a PSC determination that such costs have been unreasonable or
imprudently incurred. In general, the Company believes that, based on applica-
ble law and prior PSC precedents with respect to similar expenditures incurred
by other utilities in New York State, the Company will be permitted to recover
its prudently incurred environmental site investigation and remediation costs
in rates.
A-20
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SUPPLEMENTARY INFORMATION (UNAUDITED)
QUARTERLY INFORMATION
SUMMARY OF QUARTERLY INFORMATION
The following is a table of financial data for each quarter of fiscal 1994 and
1993. 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 miti-
gated by operation of a weather normalization adjustment contained in the
Company's tariff.
<TABLE>
- - ------------------------------------------------------------------------------
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- - ------------------------------------------------------------------------------
(Thousands of Dollars Except Per Share Data)
<S> <C> <C> <C> <C>
1994
Operating revenues 371,478 548,970 240,661 177,521
Operating income (loss) 53,125 83,561 4,085 (6,467)
Income (loss) applicable
to common stock 42,073 73,465 (7,690) (20,815)
Per common share:
Earnings (loss) (a) 0.90 1.57 (0.16) (0.44)
Dividends declared 0.3375 0.3375 0.3375 0.3375
- - ------------------------------------------------------------------------------
1993
Operating revenues 347,283 489,367 208,531 160,323
Operating income (loss) 49,412 84,728 6,723 (17,763)
Income (loss) applicable
to common stock 40,434 71,737 (6,744) (29,228)(b)
Per common share:
Earnings (loss) (a) 0.93 1.63 (0.15) (0.66)
Dividends declared 0.33 0.33 0.33 0.33
- - ------------------------------------------------------------------------------
</TABLE>
(a) Quarterly earnings per share are based on the average number of shares out-
standing 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.
(b) Includes an after-tax gain of $12.5 million on the sale of a subsidiary's
investment in a Canadian gas company and the write-off a subsidiary's invest-
ment in a propane company, an after-tax charge of $11.5 million.
SUMMARY OF QUARTERLY COMMON STOCK INFORMATION
<TABLE>
- - ----------------------------------------------------
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- - ----------------------------------------------------
<S> <C> <C> <C> <C>
1994
High 27 1/2 28 7/8 25 1/8 25 3/4
Low 24 7/8 23 22 1/8 23 1/2
Close 27 3/8 23 3/4 24 3/8 24 7/8
Shares Traded (000) 3,978 2,542 2,206 1,931
- - ----------------------------------------------------
1993
High 22 3/4 27 3/8 27 3/4 27 7/8
Low 21 3/8 21 1/2 24 5/8 25 1/2
Close 22 3/8 27 27 1/2 25 3/4
Shares Traded (000) 1,769 1,804 1,860 3,309
- - ----------------------------------------------------
</TABLE>
A-21
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SUPPLEMENTAL GAS AND OIL DISCLOSURES
CAPITALIZED COSTS RELATING TO GAS AND OIL PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------
September 30, 1994 1993
- - -------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
Unproved properties not being amortized $ 25,335 $ 9,875
Properties being amortized-productive and
nonproductive 240,572 187,856
- - -------------------------------------------------------------------
Total capitalized costs 265,907 197,731
Accumulated depletion (109,885) (84,907)
- - -------------------------------------------------------------------
Net capitalized costs $ 156,022 $ 112,824
- - -------------------------------------------------------------------
</TABLE>
The following is a summary of the costs (in thousands of dollars) which are ex-
cluded from the amortization calculation as of September 30, 1994, by year of
acquisition: 1994-$18,703; 1993-$0; 1992-$3,573 and prior years-$3,059. The
Company cannot accurately predict when these costs will be included in the am-
ortization base, but it is expected that these costs will be evaluated within
the next five years.
COSTS INCURRED IN PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES
<TABLE>
- - ------------------------------------------------------------------------------
<CAPTION>
Total United States Canada
----------------------- --------------- --------------
1994 1993 1992 1993 1992 1993 1992
- - ------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Acquisition of proper-
ties--
Unproved properties $11,022 $ 5,289 $ 6,159 $ 4,937 $ 6,159 $ 352 $ --
Proved properties 28,370 40,091 13,624 30,541 8,206 9,550 5,418
Exploration 18,961 2,831 7,615 2,831 7,615 -- --
Development 9,781 16,588 13,436 11,238 12,681 5,350 755
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Total costs incurred $68,134 $64,799 $40,834 $49,547 $34,661 $15,252 $6,173
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</TABLE>
RESULTS OF OPERATIONS FROM GAS AND OIL PRODUCING ACTIVITIES
<TABLE>
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<CAPTION>
Total United States Canada
----------------------- --------------- --------------
1994* 1993 1992 1993 1992 1993 1992
- - --------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from gas and
oil producing
activities--
Sales to unaffiliated
parties $41,185 $43,076 $24,122 $31,745 $20,379 $11,331 $3,743
Sales to affiliates 2,023 1,482 1,802 1,482 1,802 -- --
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Revenues 43,208 44,558 25,924 33,227 22,181 11,331 3,743
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Production and lifting
costs 5,360 8,608 5,065 4,232 3,363 4,376 1,702
Depletion 24,978 22,525 14,242 20,990 13,749 1,535 493
Impairment -- -- 19,697 -- 19,697 -- --
- - --------------------------------------------------------------------------------
Total expenses 30,338 31,133 39,004 25,222 36,809 5,911 2,195
- - --------------------------------------------------------------------------------
Income (loss) before
taxes 12,870 13,425 (13,080) 8,005 (14,628) 5,420 1,548
Income taxes (benefit) 3,306 4,129 (5,556) 1,691 (6,253) 2,438 697
- - --------------------------------------------------------------------------------
Results of gas and oil
producing activities
(excluding corporate
overhead and interest
costs) $ 9,564 $ 9,296 $(7,524) $ 6,314 $(8,375) $ 2,982 $ 851
- - --------------------------------------------------------------------------------
</TABLE>
* Gas and oil operations were conducted predominantly in the United States in
1994.
A-22
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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 of the years present-
ed. These estimates principally were prepared by independent petroleum consul-
tants. 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 from production of
proved reserves was developed as follows:
1) Estimates are made of quantities of proved reserves and future periods dur-
ing which they are expected to be produced based on year-end economic
conditions.
2) The estimated future cash flows are compiled by applying year-end prices of
gas and oil relating to the Company's proved reserves to the year-end quan-
tities of those reserves except for the reserves devoted to future produc-
tion that is hedged. These reserves are priced at their respective hedge
amount. Future price changes are considered only to the extent provided by
contractual arrangements in existence at year-end.
3) The future cash flows are reduced by estimated production costs, costs to
develop the proved reserves and certain abandonment costs, all based on
year-end economic conditions.
4) Future income tax expenses are based on year-end statutory tax rates giving
effect to the remaining tax basis in the gas and oil properties and other
deductions, credits and allowances relating to the Company's proved gas and
oil reserves.
5) Future net cash flows are discounted to present value by applying a discount
rate of 10%.
The standardized measure of discounted future net cash flows 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, an-
ticipated future changes in prices and costs and a discount factor more repre-
sentative of the time value of money and the risks inherent in reserve esti-
mates.
- - --------------------------------------------------------------------------------
RESERVE QUANTITY INFORMATION
NATURAL GAS (MMCF)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total United States Canada
------------------------- ---------------- ---------------
1994* 1993 1992 1993 1992 1993 1992
- - -------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Proved Reserves--
Beginning of Year 108,847 111,664 69,042 84,171 69,042 27,493 --
Revisions of previous
estimates (2,297) 9,036 5,094 1,438 5,094 7,598 --
Extensions and discov-
eries 25,890 4,696 12,765 3,915 12,765 781 --
Production (22,814) (26,596) (14,302) (21,007) (12,252) (5,589) (2,050)
Purchases of reserves
in place 34,931 91,016 39,065 40,330 9,522 50,686 29,543
Sales of reserves in
place (1,699) (80,969) -- -- -- (80,969) --
- - -------------------------------------------------------------------------------------
Proved Reserves--
End of Year 142,858 108,847 111,664 108,847 84,171 -- 27,493
- - -------------------------------------------------------------------------------------
Proved Developed Re-
serves--
Beginning of Year 100,454 93,417 60,826 65,924 60,826 27,493 --
- - -------------------------------------------------------------------------------------
End of Year 110,225 100,454 93,417 100,454 65,924 -- 27,493
- - -------------------------------------------------------------------------------------
</TABLE>
* Gas and oil reserves were located predominantly in the United States in
1994.
A-23
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SUPPLEMENTAL GAS AND OIL DISCLOSURES (CONTINUED)
CRUDE OIL, CONDENSATE AND NATURAL GAS LIQUIDS (MBBLS)
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<TABLE>
<CAPTION>
Total United States Canada
-------------------- -------------- -------------
1994* 1993 1992 1993 1992 1993 1992
- - -------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Proved Reserves --
Beginning of Year 443 2,304 488 520 488 1,784 --
Revisions of previous es-
timates (140) 184 29 (91) 29 275 --
Extensions and discover-
ies 155 3 90 3 90 -- --
Production (96) (320) (220) (109) (106) (211) (114)
Purchases of reserves in
place 495 121 1,917 120 19 1 1,898
Sales of reserves in
place (50) (1,849) -- -- -- (1,849) --
- - -------------------------------------------------------------------------------
Proved Reserves --
End of Year 807 443 2,304 443 520 0 1,784
- - -------------------------------------------------------------------------------
Proved Developed Re-
serves --
Beginning of Year 407 2,239 424 455 424 1,784 --
- - -------------------------------------------------------------------------------
End of Year 543 407 2,239 407 455 -- 1,784
- - -------------------------------------------------------------------------------
</TABLE>
* Gas and oil reserves were located predominantly in the United States in 1994.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED GAS
AND OIL RESERVES
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
------------------------
1994 1993
- - -----------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
Future cash flow $ 249,437 $ 247,117
Future costs--
Production (47,149) (51,199)
Development (22,241) (12,552)
- - -----------------------------------------------------------------------------
Future net inflows before income tax 180,047 183,366
Future income taxes (26,930) (32,804)
- - -----------------------------------------------------------------------------
Future net cash flows 153,117 150,562
10% discount factor (44,983) (40,155)
- - -----------------------------------------------------------------------------
Standardized measure of discounted future net cash
flows $ 108,134 $ 110,406
- - -----------------------------------------------------------------------------
</TABLE>
A-24
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SUPPLEMENTAL GAS AND OIL DISCLOSURES (CONTINUED)
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED
RESERVE QUANTITIES
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<TABLE>
<CAPTION>
1994 1993 1992
-------- ---------------------------- ---------------------------
United United
TOTAL Total States Canada Total States Canada
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(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Standardized measure -
beginning of year $110,406 $ 90,665 $ 76,695 $ 13,970 50,359 $ 50,359 $ --
Sales and transfers, net
of production costs (37,848) (35,950) (28,995) (6,955) (20,859) (18,818) (2,041)
Net change in sales and
transfer prices, net of
production costs (25,005) 4,001 7,011 (3,010) 9,939 9,939 --
Extensions and
discoveries and
improved recovery, net
of future production 15,536 6,554 5,994 560 14,592 14,592 --
Changes in estimated
future development
costs (1,016) (8,281) (8,281) -- (1,261) (1,261) --
Development costs
incurred during the
period that reduced
future development
costs 6,381 12,354 12,354 -- 5,317 5,317 --
Revisions of quantity
estimates (2,917) 6,195 1,926 4,269 5,709 5,709 --
Accretion of discount 12,397 11,033 8,921 2,112 6,030 6,030 --
Net change in income
taxes 4,001 (3,079) (1,045) (2,034) (10,133) (2,579) (7,554)
Purchases of reserves in
place 27,561 61,410 40,548 20,862 33,638 10,073 23,565
Sales of reserves in
place (2,110) (27,539) -- (27,539) -- -- --
Changes in production
rates (timing) and
other 748 (6,956) (4,721) (2,235) (2,666) (2,666) --
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Standardized measure -
end of year $108,134 $110,406 $110,406 $ -- $ 90,665 $ 76,695 $13,970
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</TABLE>
A-25
<PAGE>
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SUMMARY OF SELECTED FINANCIAL DATA AND STATISTICS
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<TABLE>
<CAPTION>
For Years Ended September 30, 1994 1993 1992 1991 1990
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(Thousands of Dollars Except Per Share Data)
<S> <C> <C> <C> <C> <C>
INCOME SUMMARY
Operating revenues
Utility sales $1,279,638 $1,145,315 $1,038,061 $ 951,711 $ 944,295
Gas production and other 58,992 60,189 36,799 25,550 49,564
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Total operating revenues 1,338,630 1,205,504 1,074,860 977,261 993,859
Operating expenses
Cost of gas 560,657 466,573 402,137 373,048 406,439
Operation and maintenance 381,696 363,792 333,984 302,171 299,611
Depreciation and depletion 69,611 64,779 73,930 42,644 48,644
General taxes 150,743 144,827 135,549 136,245 126,928
Federal income tax 41,619 42,433 30,812 27,017 18,969
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Operating income 134,304 123,100 98,448 96,136 93,268
Income (loss) from energy
services investments 5,689 1,150 (1,041) 136 229
Other, net (2,338) (3,379) 2,935 2,949 5,953
Gain on sale of investment in
Canadian gas company -- 20,462 -- -- --
Write - off of investment in
propane company -- (17,617) -- -- --
Federal income tax benefit 921 950 1,593 3,050 2,087
Interest charges 51,192 48,103 42,062 40,462 45,101
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Net income 87,384 76,563 59,873 61,809 56,436
Dividends on preferred stock 351 364 2,078 3,847 3,922
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Income available for common
stock $ 87,033 $ 76,199 $ 57,795 $ 57,962 $ 52,514
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FINANCIAL SUMMARY
Common stock information
Per share
Earnings ($) 1.85 1.73 1.35 1.45 1.43
Cash dividends declared
($) 1.35 1.32 1.29 1.27 1.23
Book value, year - end
($) 16.27 15.55 14.56 14.37 13.69
Market value, year - end
($) 24 7/8 25 3/4 22 3/8 20 5/8 18 7/8
Average shares outstanding
(000) 46,980 44,042 42,882 39,894 36,798
Shareholders of record 35,233 30,925 31,367 30,749 31,230
Daily average shares traded 42,100 33,100 26,900 30,500 20,700
Capital expenditures ($) 199,572 204,514 173,467 147,745 134,458
Total assets ($) 2,029,074 1,897,847 1,748,027 1,717,493 1,460,728
Common equity ($) 774,236 721,076 632,254 607,573 510,489
Preferred stock, redeemable
($) 7,200 7,500 7,800 44,467 45,389
Long - term debt ($) 701,377 689,300 682,031 685,413 534,093
Total capitalization ($) 1,482,813 1,417,876 1,322,085 1,337,453 1,089,971
Earnings to fixed charges
(times) 3.21 3.19 2.86 2.95 2.47
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UTILITY OPERATING STATISTICS
Gas data (MDTH)
Firm sales 133,513 128,972 122,476 108,694 114,300
Other gas sales and
transportation 42,392 25,032 23,706 15,963 11,726
Maximum daily capacity,
year - end 1,256 1,258 1,199 1,179 1,129
Maximum daily send out 1,022 915 904 837 855
Total active meters (000) 1,122 1,119 1,117 1,111 1,106
Heating customers (000) 446 441 436 428 419
Degree days (normal 4,824;
leap year 4,851) 4,974 4,802 4,659 3,971 4,614
Colder (Warmer) than normal
(%) 3.1 -- (4.0) (19.0) (5.8)
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</TABLE>
A-26
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS REFERENCE
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Page 2 There appears a photograph of R.B. Catel
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Page 2 There appears a photograph of K.I. Chenault
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Page 3 There appears a photograph of E.D. Miller
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Page 3 There appears a photograph of D.H. Elliott
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Page 4 There appears a photograph of R. Pratt, Jr.
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Page 4 There appears a photograph of A.S. Christensen
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Page 4 There appears a photograph of A.H. Fishman
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Page 4 There appears a photograph of J.Q. Riordan
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Page 8 Performance Graph
