<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-722
THE BROOKLYN UNION GAS COMPANY
(Exact name of Registrant as specified in its charter)
New York 11-0584613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
One MetroTech Center, Brooklyn, New York 11201-3851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (718) 403-2000
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at February 1, 1996
$.33 1/3 par value 49,220,736
<PAGE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information Page No.
Condensed Consolidated Balance Sheet -
December 31, 1995 and 1994, and September 30,
1995 2
Condensed Consolidated Statement of Income -
Three and Twelve Months Ended December 31,
1995 and 1994 3
Condensed Consolidated Statement of Cash Flows -
Three and Twelve Months Ended December 31,
1995 and 1994 4
Notes to Condensed Consolidated Financial
Statements 5
Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
Review of Independent Public Accountants 16
Report of Independent Public Accountants 17
Part II. Other Information
Item 1 - Legal Proceedings 18
Item 4 - Submission of Matters to a Vote
of Security Holders 18
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
<TABLE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, December 31, September 30,
1995 1994 1995
(Unaudited) (Unaudited) (Audited)
(Thousands of Dollars)
<CAPTION>
<S> <C> <C> <C>
Assets
Property
Utility, at cost $ 1,700,034 $ 1,620,198 $ 1,690,193
Accumulated depreciation (398,481) (366,723) (393,263)
Gas exploration and production, at cost 372,939 296,124 353,847
Accumulated depletion (143,616) (122,390) (138,136)
1,530,876 1,427,209 1,512,641
Investments in Energy Services 122,187 99,841 121,023
Current Assets
Cash 7,582 13,664 15,992
Temporary cash investments - - 24,550
Accounts receivable 327,379 335,049 146,018
Allowance for uncollectible accounts (14,997) (15,086) (13,730)
Gas in storage, at average cost 64,596 87,796 88,810
Materials and supplies, at average cost 14,591 11,912 13,203
Prepaid gas costs and other 38,462 32,915 35,581
437,613 466,250 310,424
Deferred Charges 162,071 142,437 172,834
$ 2,252,747 $ 2,135,737 $ 2,116,922
Capitalization and Liabilities
Capitalization
Common stock, $.33 1/3 par value stated at $ 529,688 $ 501,568 $ 522,581
Retained earnings 331,276 305,491 303,709
Total common equity 860,964 807,059 826,290
Preferred stock, redeemable 6,900 7,200 6,900
Long-term debt 723,223 713,480 720,569
1,591,087 1,527,739 1,553,759
Current Liabilities
Accounts payable 119,301 147,061 103,705
Dividends payable 17,799 17,206 17,536
Commercial paper 23,000 4,000 -
Taxes accrued 32,145 38,390 3,635
Customer deposits 22,397 22,650 22,252
Customer budget plan credits 41,088 39,617 24,790
Interest accrued and other 50,179 32,749 39,438
305,909 301,673 211,356
Deferred Credits and Other Liabilities
Federal income tax 250,224 234,391 247,882
Unamortized investment tax credit 20,711 21,736 20,948
Other 84,816 50,198 82,977
355,751 306,325 351,807
$ 2,252,747 $ 2,135,737 $ 2,116,922
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Twelve Months
Ended December 31, Ended December 31,
1995 1994 1995 1994
(Thousands of Dollars)
<CAPTION>
<S> <C> <C> <C> <C>
Operating Revenues
Utility sales $ 378,196 $ 344,180 $ 1,186,347 $ 1,268,970
Gas production and other 19,887 14,168 65,699 62,473
398,083 358,348 1,252,046 1,331,443
Operating Expenses
Cost of gas 160,303 135,125 471,737 550,158
Operation and maintenance 99,830 91,357 385,691 385,956
Depreciation and depletion 18,081 18,313 71,788 70,682
General taxes 38,722 36,778 136,662 148,171
Federal income tax 22,790 21,622 44,451 40,977
Operating Income 58,357 55,153 141,717 135,499
Other Income (Expense)
Income from equity investments 1,707 1,620 9,639 5,479
Other, net (1,258) (628) (5,036) (2,029)
Federal income tax (62) (166) 1,347 824
Income Before Interest Charges 58,744 55,979 147,667 139,773
Interest Charges
Long-term debt 12,922 12,058 48,793 47,099
Other 1,115 1,082 5,171 4,615
14,037 13,140 53,964 51,714
Net Income 44,707 42,839 93,703 88,059
Dividends on Preferred Stock 83 86 334 347
Income Available for
Common Stock $ 44,624 $ 42,753 $ 93,369 $ 87,712
Per Share of Common Stock $ 0.91 $ 0.90 $ 1.92 $ 1.85
Dividends Declared per Share
of Common Stock $ 0.355 $ 0.348 $ 1.398 $ 1.360
Average Common Shares
Outstanding 48,946,893 47,750,732 48,510,260 47,288,335
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Twelve Months
Ended December 31, Ended December 31,
1995 1994 1995 1994
(Thousands of Dollars)
<CAPTION>
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 44,707 $ 42,839 $ 93,703 $ 88,059
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and depletion 18,861 19,572 75,955 75,264
Deferred Federal income tax 3,571 169 13,397 (6,071)
Amortization of investment tax credit (237) (264) (1,025) (1,069)
Income from energy services investments (1,707) (1,620) (9,639) (5,479)
Dividends received from energy services investments 2,497 1,294 5,146 5,593
Allowance for equity funds used during construction (366) (243) (1,396) (1,871)
Change in accounts receivable, net (180,324) (141,994) 6,204 40,458
Change in accounts payable 15,445 18,036 (31,997) (29,004)
Gas inventory and prepayments 31,908 13,337 24,779 11,149
Other 55,537 53,908 20,266 42,127
Cash (used in) provided by operating activities (10,108) 5,034 195,393 219,156
FINANCING ACTIVITIES
Sale of common stock 7,140 6,837 28,276 29,165
Issuance of long-term debt 2,654 12,103 9,743 18,380
Commercial paper, net 23,000 4,000 19,000 (7,500)
32,794 22,940 57,019 40,045
Repayments
Preferred stock - - (300) (300)
32,794 22,940 56,719 39,745
Dividends paid (17,139) (16,736) (67,969) (64,890)
Other 11 (78) 51 52
Cash provided (used in) by financing activities 15,666 6,126 (11,199) (25,093)
INVESTING ACTIVITIES
Capital expenditures (excluding allowance
for equity funds used during construction) (39,115) (49,905) (201,943) (189,252)
Other 597 (1,082) 11,667 (7,266)
Cash used in investing activities (38,518) (50,987) (190,276) (196,518)
Change in Cash and Temporary Cash Investments (32,960) (39,827) (6,082) (2,455)
Cash and Temporary Cash Investments at Beginning of Period 40,542 53,491 13,664 16,119
Cash and Temporary Cash Investments at End of Period $ 7,582 $ 13,664 $ 7,582 $ 13,664
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 $ - $ - $ 36,000 $ 36,200
Interest $ 16,709 $ 15,701 $ 52,724 $ 50,995
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited
Condensed Consolidated Financial Statements contain all
adjustments necessary to present fairly the financial position
of the Company as of December 31, 1995 and 1994, and the
results of operations for the three and twelve months ended
December 31, 1995 and 1994, and cash flows for the three and
twelve months ended December 31, 1995 and 1994. Certain
reclassifications were made to conform prior period financial
statements with the current period financial statement
presentation. All other adjustments were of a normal,
recurring nature.
As permitted by the rules and regulations of the Securities
and Exchange Commission, the Condensed Consolidated Financial
Statements do not include all of the accounting information
normally included with financial statements prepared in
accordance with generally accepted accounting principles.
Accordingly, the Condensed Consolidated Financial Statements
should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1995.
2. The Company's business is influenced by seasonal weather
conditions. Annual revenues are substantially realized during
the heating season (November 1 to April 30) as a result of the
large proportion of residential heating sales compared with
total sales. Accordingly, results of operations are
historically most favorable in the second quarter (three
months ended March 31) of the Company's fiscal year, with
results of operations being next most favorable in the first
quarter, while results for the third quarter are marginally
unprofitable, and losses are incurred in the fourth quarter.
Also, results of operations are affected by the timing and
comparative amounts of base tariff rate changes. Therefore,
the interim Condensed Consolidated Statement of Income should
not be taken as a prediction for any future period.
The Company's tariff contains a weather normalization
adjustment that requires recovery from or refund to firm
customers of shortfalls or excesses of firm net revenues
during a heating season due to variations from normal weather,
which is the basis for projecting base tariff revenue
requirements. The adjustment operates when weather varies
more than 2.2% from normal (positive or negative) during a
billing cycle.
<PAGE>
3. INVESTMENT IN IROQUOIS PIPELINE
A Company subsidiary, North East Transmission Co., Inc.
(NETCO), owns an 11.4% interest in Iroquois Gas Transmission
System, L.P. (Iroquois), which partnership owns and operates
a 375-mile pipeline from Canada to the Northeast. NETCO's
investment in Iroquois was $22.9 million at December 31, 1995.
In 1992, Iroquois was informed by the U.S. Attorneys' Offices
of various districts 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 Certification and/or the
Federal Clean Water Act. Further, agency investigations of
matters related to the construction of the Iroquois pipeline
have been commenced by COE and the Federal Energy Regulatory
Commission. Iroquois also has received inquiries from the
Federal Department of Transportation and the State of New York
Public Service Commission (PSC) concerning certain
construction activities. Civil penalties could be imposed if
violations of Iroquois' governmental authorizations are shown
to have occurred. No proceedings in connection with these
investigations and inquiries 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.
Iroquois' management believes that the pipeline construction
and right-of-way activities were conducted in a responsible
manner. However, Iroquois deems it probable that indictments
will be sought in connection with this investigation and in
them substantial fines and other sanctions.
The Company has been informed that Iroquois and its counsel
have met and expect to continue to meet 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 investigations in order to defend itself and
to explore possible resolutions that may be acceptable to all
parties. A comprehensive resolution of these matters could
have a material adverse effect on Iroquois' financial
condition. Although no agreements have been reached regarding
the disposition of these matters, based on discussions with
Iroquois' management, in the fourth quarter of fiscal 1995 the
Company recorded a provision to cover its proportionate share
of estimated costs related to these investigations. The
ultimate resolution of these matters is not expected to
materially affect the Company's results of operations or
financial position.
<PAGE>
4. ENVIRONMENTAL MATTERS
Historically, the Company, or predecessor entities to the
Company, owned or operated several former manufactured gas
plant (MGP) sites. These sites have been identified for the
New York State Department of Environmental Conservation (DEC)
for inclusion on appropriate waste site inventories. In
certain circumstances former MGP sites can give rise to
environmental cleanup responsibilities for the Company.
Two MGP sites are under active consideration by the Company.
One site, which is located on property still owned by the
Company, is the former Coney Island MGP facility located in
Brooklyn, New York. This site is the subject of continuing
interim remedial action under the direction of the U.S. Coast
Guard. Moreover, the Company has recently executed a consent
order with the DEC with respect to addressing the overall
remediation of the Coney Island site in accordance with state
law. A schedule of investigative and cleanup activities is
being developed, leading to a cleanup over the next several
years. The other site currently is owned by the City of New
York (City). The Company and the City are in the process of
discussing a mutual approach to sharing potential
environmental responsibility for this site. The Company
believes it is likely that, at a minimum,investigative costs
will be incurred by the Company with respect to that site.
The DEC is maintaining open files and requiring the Company to
continue monitoring or related investigatory efforts at two
other Company-owned properties.
Except as described above, no administrative or judicial
proceedings or claims involving other former MGP sites have
been initiated. Although the potential cost of cleanup with
respect to these other sites may be material if the Company
ever is compelled to address these sites, the Company cannot
at this time determine the cost or extent of any cleanup
efforts if cleanup ultimately should be required.
Based upon the terms of the consent order for the Coney Island
site and costs of investigation for the other MGP site under
active consideration, the Company believes that the minimum
cost of MGP-related environmental cleanup will be
approximately $34 million, which, based upon current
information, primarily will be for the Coney Island site.
This amount includes approximately $4.9 million of costs
expended as of December 31, 1995. The Company's actual MGP-
related costs may be substantially higher, depending upon
remediation experience, eventual end use of the sites, and
environmental conditions not addressed in the consent order or
current investigative plans. Such potential additional costs
are not subject to estimation at this time.
<PAGE>
As of December 31, 1995, the Company had an accrued liability
of $29.2 million and a related unamortized regulatory asset of
$32.6 million. By order issued February 16, 1995, the PSC
approved the Company's July 1993 petition to defer the costs
associated with environmental site investigation and
remediation incurred in 1993 and thereafter. Initial recovery
of these costs began in fiscal 1995. The recovery of these
costs in rates is conditioned upon absence of a PSC
determination that such costs have not been reasonably or
prudently incurred. In addition, the Company must demonstrate
that it has taken all reasonable steps to obtain cost recovery
from all available funding sources, including other
responsible parties. The PSC has initiated a generic
proceeding to assess the extent of the potential liability for
cleanup of MGP sites by the State's gas utilities and has
indicated that it may consider in that proceeding generic
policies regarding the recovery of such costs through gas
utility rates. Any such policies may affect the Company's
ability to reflect such costs in rates. At this time, the
Company is unable to predict the outcome of that proceeding.
5. REGULATORY ASSETS
Regulatory assets arise from the allocation of costs and
revenues to accounting periods for utility ratemaking purposes
differently from bases generally applied by nonregulated
companies. Regulatory assets are recognized in accordance
with Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for Certain Types of Regulation."
The Company had net regulatory assets as of December 31, 1995
and 1994 of $96,885,000 and $93,648,000, respectively. These
amounts are included in Deferred Charges and Deferred Credits-
Other in the Consolidated Balance Sheet. In the event that it
were no longer subject to the provisions of SFAS-71, the
Company estimates that the write-off of these net regulatory
assets could result in a charge to net income of approximately
$60,000,000 which would be classified as an extraordinary
item.
SFAS-121 issued in March 1995 and effective for fiscal 1997,
establishes accounting standards for the impairment of long-
lived assets. This statement is not expected to have a
material impact on the Company's financial condition or
results of operations upon adoption.
<PAGE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating Results
The following is a summary of items affecting comparative earnings
and a discussion of the material changes in revenues and expenses
during the following periods.
(1) Three Months ended December 31, 1995 vs. Three Months ended
December 31, 1994.
(2) Twelve Months ended December 31, 1995 vs. Twelve Months
ended December 31, 1994.
Consolidated income available for common stock for the first
quarter of fiscal 1996 was $44.6 million, or 91 cents per share,
compared to $42.8 million, or 90 cents per share, for the first
quarter of last year. Utility operations contributed 87 cents per
share to consolidated earnings, an increase of two cents per share
compared to last year's quarterly earnings. The increase reflected
higher net revenues (revenues less gas costs), which more than
offset higher operation expense due to the extremely cold weather.
Utility operations continue to reflect sales growth and ongoing
cost reduction efforts. Subsidiaries contributed four cents per
share to first quarter earnings. Higher quarterly earnings from gas
exploration and production were offset by lower income from
investments in energy services.
Consolidated earnings for the twelve months ended December 31, 1995
were $93.4 million, or $1.92 per share, compared to $87.7 million,
or $1.85 per share, for the corresponding period a year ago. The
increase in earnings reflects achievement of ratemaking incentives
applicable to utility operations in fiscal 1995, as well as record
earnings from the Company's subsidiaries.
The effect on utility earnings of variations in revenues due to
colder- or warmer-than-normal weather is largely offset by the
weather normalization adjustment included in the Company's tariff.
Firm gas sales for the first quarter of fiscal 1996, which was 9.0%
colder than normal and 37.2% colder than the first quarter of
fiscal 1995, were 43,768 MDTH, compared to 34,541 MDTH in last
year's first quarter. The substantial increase in firm gas sales
volume was primarily due to the significantly colder weather.
Total gas throughput from utility operations, which includes gas
deliveries to interruptible customers and transportation services
primarily to off-system customers, was 57,308 MDTH in the first
<PAGE>
quarter of fiscal 1996, compared to 50,308 MDTH in last year's
first quarter. Total gas throughput for the twelve months ended
December 31, 1995, which was 1.0% warmer than normal, was 184,746
MDTH, compared to 182,965 MDTH in the corresponding period a year
ago, which was 3.2% warmer than normal.
Net revenues (utility operating revenues less cost of gas of
utility sales) increased 4.2% in the three months ended December
31, 1995. This increase was attributable to heating sales
additions and the retention of margins on a portion of the increase
in sales due to cold weather. The weather normalization adjustment
operates when weather varies more than 2.2% from normal. Net
revenues in the twelve months ended December 31, 1995 included
provisions made to reflect regulatory requirements to share margins
on sales to certain large-volume customers for the benefit of
residential heating customers.
The Company and its gas exploration and production subsidiaries
employ derivative financial instruments, natural gas futures and
swaps, for the purpose of managing commodity price risk. In
connection with utility operations, the Company primarily uses
derivative financial instruments to fix margins on sales to large-
volume customers to which gas is sold at a price indexed to the
prevailing price of oil, their alternate fuel. Derivative
financial instruments are used by the Company's gas exploration and
production subsidiaries to manage the risk associated with
fluctuations in the price received for natural gas production.
Hedging strategies are managed individually by each company.
Gas production and other revenues primarily reflect variations in
revenues from gas exploration and production operations in all
periods presented, principally due to the May 1995 acquisition of
a gas processing plant located in British Columbia, Canada by the
Company's Canadian affiliate. The acquisition added $7.6 million
to revenues in the quarter ended December 31, 1995. Revenues from
gas exploration and production decreased in the quarter and twelve
months periods ended December 31, 1995, due to lower gas production
volumes. Gas production for the quarter ended December 31, 1995
was 5.3 BCF, or 0.7 BCF below production in last year's first
quarter. For the twelve months ended December 31, 1995, gas
production was 22.0 BCF, compared with 23.3 BCF in the twelve
months ended December 31, 1994. The effective price (average
wellhead price received for production including realized gains and
losses) was $1.72 per MCF in the first quarter of fiscal 1995, an
increase of 3.0% over the corresponding period last year, while the
average wellhead price was $1.59, representing a 4.0% increase over
wellhead prices in last year's first quarter. The effective price
in both the twelve months ended December 31, 1995 and 1994 was
$1.78 per MCF. Hedging activities helped reduce the effects of
lower wellhead prices, which fell 18.5% in the twelve months ended
December 31, 1995, as compared to the corresponding period a year
ago. Portions of future production are also covered by hedge
<PAGE>
positions.
The Company is in the process of restructuring the gas exploration
and production operations of its subsidiaries through the
combination of onshore reserves and properties held by Fuel
Resources Inc. and the offshore reserves and properties held by The
Houston Exploration Company. Depending on market conditions, up to
30% of the stock of the restructured company, which would have
approximately 200 BCF of proved gas reserves, could be sold through
a public offering.
The increase in operation and maintenance expense in the quarter
ended December 31, 1995 is due to weather, which was significantly
colder compared to last year's first quarter. The comparative
expense in the twelve months ended December 31,1995 showed a modest
decrease, although weather was slightly colder. The decrease was
largely attributable to ongoing cost reduction programs, which
outweighed the adverse effects of generally higher labor and
material costs. Moreover, consolidated operation expense in the
quarter ended December 31, 1995 included $4.8 million of costs
related to Canadian gas processing operations.
Depreciation and depletion expense in the quarter ended December
31, 1995 was essentially flat. Higher depreciation expense related
to utility plant additions was offset by lower depletion charges.
Similarly, such expense in the twelve months ended December 31,
1995 reflects an increase in depreciation expense related to
utility plant additions. The increase was offset by a reduction in
depletion expense which reflected lower gas production.
General taxes principally include State and City taxes on utility
revenues and property. The increase in general taxes in the
quarter ended December 31, 1995 is related primarily to the
increase in utility revenues. The decrease in general taxes in the
twelve months ended December 31, 1995 reflects a reduction in
expense recorded for utility property taxes that are subject to
regulatory settlement in determining utility cost of service.
Federal income tax expense in periods ended December 31, 1995
reflects higher pre-tax income.
Interest charges on long-term debt reflect higher average
subsidiary borrowings related to gas exploration, production and
processing operations. Other interest charges principally include
carrying charges related to regulatory settlement items, and, in
the quarter ended December 31, 1995, reflect interest charges
related to commercial paper borrowings during the quarter. Such
borrowings were necessitated by higher gas cost billings from
suppliers due to colder weather and higher average prices.
Other income reflects generally positive results from investments
in energy services. In the quarter ended December 31, 1995, higher
<PAGE>
income from the equity investment in the Iroquois pipeline offset
increases in other expense. In the twelve months ended December 31,
1995, higher income from cogeneration investments related to major
projects completed in calendar year 1995 more than offset a
provision for estimated expenses related to the investigations
regarding construction of the Iroquois pipeline and increases in
other expense. (For information regarding Iroquois, See Notes to
Condensed Consolidated Financial Statements, Note 3., "Investment
in Iroquois Pipeline.")
Dividends on preferred stock reflect reductions in the level of
preferred stock outstanding due to sinking fund redemptions.
Financial Condition
In the quarter ended December 31, 1995, operating activities used
$10.1 million in cash flow; whereas, in the quarter ended December
31, 1994, operating activities provided $5 million in cash flow.
Generally, the Company settles gas supplier invoices monthly while
its firm customers are billed bi-monthly. Hence, the lag between
payments to gas suppliers and recoveries from residential heating
customers can adversely affect cash flow from operating activities
when the weather is extremely cold. Thus, the swing in operating
cash flow is almost entirely attributable to weather. Also, gas
inventory charges increased reflecting higher average prices. At
the end of the heating season, leads and lags between payments to
suppliers and recoveries from customers related to gas costs
normally reverse and operating cash flow will reflect underlying
trends. Cash provided by operating activities in the twelve months
ended December 31, 1995 largely reflects the swing in working
capital requirements related to weather as well as the timing of
other items recovered through utility tariff billings. Commercial
paper borrowings were used to finance the increase in working
capital due to weather. Capital expenditures for fiscal years 1996
and 1997 are estimated to be approximately $195 million in each
year.
On March 1, 1996, the Company will refund $153.5 million of Gas
Facilities Revenue Bonds, including a $98.5 million series of 9%
bonds and a $55 million series of 8.75% bonds. Both series will be
called for redemption on that date at optional redemption prices of
102% of the face amount per bond plus accrued interest. The $153.5
million refunding series, which matures in 2021, was issued on
January 29, 1996, with a coupon rate of 5.5% at a price of 99% of
the principal amount of the bonds. The proceeds were placed in
trust pending the redemption on March 1, 1996.
<PAGE>
Rate and Regulatory Matters
Rate Settlement Plan
In October 1994, the PSC approved a new three-year rate settlement
agreement which provided for no base rate increase in fiscal 1995;
however, the Company was permitted to amortize to income
approximately $1.3 million of deferred credits in the year.
In addition to earnings sharing provisions, the plan provided new
incentives, more flexible pricing in large-volume competitive
markets, and rate design modifications to improve the Company's
competitive position. The Company is permitted to retain 100% of
any earnings from discrete incentives (up to 100 basis points on
utility equity.) With respect to earnings sharing provisions, the
Company will retain 75% of the first 100 basis points of earnings
in excess of the allowed return on utility equity unrelated to
discrete incentives, and 50% of any additional earnings above that
level. In addition, the Company will retain a portion of margins
above a specified level of sales to certain large-volume customers.
In September 1995, the PSC approved the Company's second stage rate
filing covering fiscal 1996. The approval provides for no base
rate increase; however, it permits the amortization of $7.5 million
in deferred credits. The authorized rate of return on utility
common equity was set at 10.65% for fiscal 1996, reflecting
generally lower prevailing capital costs. The incentive provisions
continue and remain available to provide the opportunity to achieve
earned rates of return above the authorized level. These revisions
became effective on October 1, 1995.
Additionally, base rate increases, if any, in the third year of the
agreement would continue to be limited to the rate of inflation and
could be offset by amortization of any deferred credits.
Restructuring Proceeding
In December 1994, the PSC issued its order in the gas industry
restructuring case. The proceeding was instituted by the PSC in
response to the restructuring of interstate pipeline services by
FERC Order 636, which took effect in November 1993.
The PSC order addressed incentives and margin-sharing issues in a
manner that is generally consistent with the Company's current rate
settlement plan and provides utilities broad discretion to employ
market-based pricing (subject to caps) for services offered to
large-volume, or non-core, customers with dual-fuel capability.
The order allows the Company to continue to offer customers a
complete array of bundled sales services as well as gas-supply
pricing flexibility generally comparable to that offered by
unregulated competitors to large-volume customers. Further, the
order contemplates offerings to core customers, reliant solely on
<PAGE>
gas as a heating or cooling fuel, of unbundled sales and
transportation, including access to available pipeline
transportation and balancing services. The order reduces the
minimum transportation service volume requirement for customers,
while encouraging the ultimate elimination of such a requirement.
Lastly, the order initiated a new proceeding currently underway to
evaluate gas purchasing practices and revised gas cost recovery
mechanisms, and invited proposals for providing service to small-
volume customers aggregated into gas purchasing groups. The PSC
also has lifted its restrictions prohibiting any Company gas
marketing subsidiary from operating within the Company's territory.
The Company is fully prepared to meet the requirements of the PSC
order. It has filed tariffs applicable to both core and non-core
markets in compliance with the PSC order, and has proposed a pilot
incentive gas cost recovery mechanism, which was approved by the
PSC. The mechanism became effective as of September 1, 1995, and
provides for the Company to share the benefits of, or absorb a
portion of the costs related to, variations in its weighted average
cost of gas as compared with a market-based index. Under the terms
of the incentive mechanism, the maximum annual award or penalty
that could be realized is $2.0 million in gas cost recoveries. The
Company's compliance tariff will become effective when approved by
the PSC.
Holding Company Petition and Price Cap Proposal
The Company filed a petition with the PSC to organize its utility
operations and those of its subsidiaries within a holding company.
This form of corporate organization would provide the Company with
the flexibility to take advantage of timely investment and market-
entry opportunities and allow the Company to compete more
effectively against other energy providers. The Company plans to
expand gas marketing and energy management services to large-volume
customers, potentially through new subsidiaries to be owned by the
holding company. In conjunction with the formation of the holding
company, the Company has proposed to institute a price cap plan for
gas services provided to firm tariff customers and to modify the
ratemaking applicable to margins for large-volume, non-core
transactions. Essentially, any rate increase applicable to core
customers would be limited to general price inflation. Further, a
specified level of margins on services to non-core customers would
be imputed and reflected in overall revenue requirements which
would be set to recover cost of service at the outset of the price
cap period. In line with incentive ratemaking, while the price cap
is effective, the Company would realize any benefit or loss
associated with changes in such sales margins from the level
initially fixed. Negotiations with the PSC Staff and other
interested parties regarding this petition are ongoing.
<PAGE>
Environmental Matters
The Company is subject to various Federal, State and local laws and
regulatory programs related to the environment. These
environmental laws govern both the normal, ongoing operations of
the Company as well as the cleanup of historically contaminated
properties. Ongoing environmental compliance activities, which
historically have not been material, are integrated with the
Company's regular operation and maintenance activities. As of
December 31, 1995, the Company had an accrued liability of $29.2
million and a related unamortized regulatory asset of $32.6
million. (See Notes to Condensed Consolidated Financial
Statements, Note 4., "Environmental Matters.")
<PAGE>
REVIEW OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP has performed reviews in accordance with
standards established by the American Institute of Certified Public
Accountants of the Condensed Consolidated Financial Statements for
the periods set forth in their report shown on page 17.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Brooklyn Union Gas Company:
We have reviewed the accompanying condensed consolidated balance
sheets of The Brooklyn Union Gas Company (a New York corporation)
and subsidiaries as of December 31, 1995 and 1994, and the related
condensed consolidated statements of income for the three and
twelve month periods ended December 31, 1995 and 1994, and the
condensed consolidated statements of cash flows for the three and
twelve month periods ended December 31, 1995 and 1994. These
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the financial statements referred to above
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet and consolidated
statement of capitalization of The Brooklyn Union Gas Company and
subsidiaries as of September 30, 1995, and the related consolidated
statements of income, retained earnings, and cash flows for the
year then ended (not presented herein) and, in our report dated
October 23, 1995, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet
as of September 30, 1995 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which
it has been derived.
ARTHUR ANDERSEN LLP
New York, New York
January 24, 1996
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company has from time to time been named as a defendant in
various legal proceedings. In the opinion of management, the
ultimate disposition of currently asserted claims will not have a
materially adverse impact on the Company's financial position or
results of operations. For information regarding governmental
investigations of alleged environmental, civil and criminal
violations involving the Iroquois Pipeline, see the Notes to
Condensed Consolidated Financial Statements, Note 3., "Investment
in Iroquois Pipeline." For information regarding environmental
matters affecting the Company, see Note 4., "Environmental
Matters."
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held at the office of
the Company, One MetroTech Center, Brooklyn, New York on
Thursday, February 1, 1996.
(b) Donald H. Elliott and James L. Larocca were elected to serve
as directors for three-year terms expiring in 1999. Andrea S.
Christensen, Alan H. Fishman and James Q. Riordan will
continue to serve as directors until the next election in
1997. Robert B. Catell, Kenneth I. Chenault and Edward D.
Miller will continue to serve as directors until their terms
expire in 1998.
(c) The vote to elect Arthur Andersen LLP as independent public
accountants was 39,867,775 shares in favor, or 99% of the
shares voted, and 397,173 shares against, or 1% of the shares
voted. Abstentions of 463,395 shares were recorded.
(d) The shareholders approved adoption of a long-term performance
incentive compensation plan by a vote of 35,523,051 shares in
favor, or 90% of shares voted, and 3,848,397 shares against,
or 10% of shares voted. Abstentions of 1,357,895 shares were
recorded.
(e) The proposal by a shareholder for cumulative voting for
directors was rejected by a vote of 25,744,238 shares against,
or 80% of the shares voted (16,079 proxies), and 6,377,955
shares in favor, or 20% of the shares voted (2,964 proxies).
Abstentions of 2,063,197 shares (1,621 proxies) were recorded.
<PAGE>
Item 5. Other Information
By-Laws
On February 1, 1996, the By-Laws of the Company were amended to
increase the number of directors serving on the Executive Committee
of the Board of Directors from five to six, with a majority of the
members of the Executive Committee constituting a quorum.
Other Development
In early December 1995, New York State Governor Pataki
endorsed a proposal to dismantle Long Island Lighting Company
(LILCO). Among other things, the proposal contemplates that Long
Island Power Authority (LIPA) would issue and sell tax-exempt bonds
to purchase LILCO's electric transmission and distribution system,
and would assume a portion of LILCO's debt; LILCO's electric
generating facilities and its gas business would be sold to other
companies; and an energy company would contract with LIPA to manage
the transmission and distribution of electricity to LILCO's
customers.
For a number of years the Company has had a continuing
interest principally in LILCO's gas business, and from time to time
has had discussions with and has made approaches to LILCO regarding
a possible transaction. The Company has been following
developments relating to the December 1995 proposal endorsed by
Governor Pataki, and has been having discussions with officials and
others concerning LILCO's gas business as well as its generating,
transmission and distribution assets (but not Shoreham or LILCO's
other nuclear or regulatory assets). The Company expects to
continue these activities, but is unable to predict the course of
developments or whether or how a transaction, if there is one,
might involve the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re computation of per share earnings.
(15) Letter re unaudited interim financial information.
(27) Financial data schedule.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended
December 31, 1995.
<PAGE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
behalf of the undersigned thereunto duly authorized.
THE BROOKLYN UNION GAS COMPANY
(Registrant)
Date February 9, 1996 s/ V.D. Enright
V.D. Enright
Senior Vice President and
Chief Financial Officer
Date February 9, 1996 s/ R.M. Desmond
R.M. Desmond
Vice President, Comptroller and
Chief Accounting Officer
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<PAGE>
Exhibit 15
1345 Avenue of the Americas
New York, NY 10105
February 5, 1996
The Brooklyn Union Gas Company
One MetroTech Center
Brooklyn, NY 11201
Gentlemen:
We are aware that The Brooklyn Union Gas Company has incorporated
by reference in its previously filed Registration Statements No.
33-66182, No. 33-61283, and No. 33-51561, its Form 10-Q for the
quarter ended December 31, 1995, which includes our report dated
January 24, 1996 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, that report is not considered a part of the
registration statements prepared or certified by our firm or a
report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
