<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 June 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-722
THE BROOKLYN UNION GAS COMPANY
(Exact name of Registrant as specified in its charter)
New York 11-0584613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
One MetroTech Center, Brooklyn, New York 11201-3851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (718) 403-2000
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at August 1, 1996
$.33 1/3 par value 49,773,292
<PAGE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information Page No.
Condensed Consolidated Balance Sheet -
June 30, 1996 and 1995, and September 30,
1995 3
Condensed Consolidated Statement of Income -
Three, Nine and Twelve Months Ended June 30,
1996 and 1995 4
Condensed Consolidated Statement of Cash Flows -
Nine and Twelve Months Ended June 30,
1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition 13
Review of Independent Public Accountants 21
Report of Independent Public Accountants 22
Part II. Other Information
Item 1 - Legal Proceedings 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
<PAGE>
<TABLE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, June 30, September 30,
1996 1995 1995
(Unaudited) (Unaudited) (Audited)
(Thousands of Dollars)
<CAPTION>
<S> <C> <C> <C>
Assets
Property
Utility, at cost $ 1,743,015 $ 1,661,550 $ 1,690,193
Accumulated depreciation (419,907) (384,800) (393,263)
Gas exploration and production, at cost 402,730 340,576 353,847
Accumulated depletion (155,599) (133,006) (138,136)
1,570,239 1,484,320 1,512,641
Investments in Energy Services 113,497 111,591 121,023
Current Assets
Cash 19,762 16,724 15,992
Temporary cash investments 66,142 103,260 24,550
Accounts receivable 251,292 196,042 146,018
Allowance for uncollectible accounts (22,005) (17,981) (13,730)
Gas in storage, at average cost 50,298 59,277 88,810
Materials and supplies, at average cost 13,701 13,513 13,203
Prepaid gas costs and other 39,573 19,065 35,581
418,763 389,900 310,424
Deferred Charges 163,028 167,257 172,834
$ 2,265,527 $ 2,153,068 $ 2,116,922
Capitalization and Liabilities
Capitalization
Common stock, $.33 1/3 par value stated at $ 545,163 $ 515,666 $ 522,581
Retained earnings 365,574 339,293 303,709
Total common equity 910,737 854,959 826,290
Preferred stock, redeemable 6,600 6,900 6,900
Long-term debt 727,498 724,429 720,569
1,644,835 1,586,288 1,553,759
Current Liabilities
Accounts payable 98,771 93,651 103,705
Dividends payable 18,170 17,456 17,536
Taxes accrued 43,223 38,913 3,635
Customer deposits 22,436 22,535 22,252
Customer budget plan credits - - 24,790
Interest accrued and other 57,472 32,818 39,438
240,072 205,373 211,356
Deferred Credits and Other Liabilities
Federal income tax 262,057 249,097 247,882
Unamortized investment tax credits 20,240 21,211 20,948
Other 98,323 91,099 82,977
380,620 361,407 351,807
$ 2,265,527 $ 2,153,068 $ 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 Nine Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
1996 1995 1996 1995 1996 1995
(Thousands of Dollars)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Utility sales $ 239,313 $ 198,623 $1,193,321 $1,011,075 $ 1,334,577 $ 1,176,737
Gas production and other 14,998 19,073 54,626 46,585 72,013 58,509
254,311 217,696 1,247,947 1,057,660 1,406,590 1,235,246
Operating Expenses
Cost of gas 106,107 74,947 553,720 399,578 600,701 467,929
Operation and maintenance 99,585 94,583 311,544 288,050 406,421 378,413
Depreciation and depletion 18,871 18,335 55,594 54,404 73,209 70,842
General taxes 28,781 28,263 118,419 113,217 139,920 139,185
Federal income tax (benefit) (3,405) (4,758) 58,493 55,033 46,743 42,625
Operating Income 4,372 6,326 150,177 147,378 139,596 136,252
Other Income (Expense)
Income from equity investments 3,490 1,106 5,162 5,132 9,484 6,329
Other, net 523 (71) (1,744) (2,104) (988) 273
Income Before Interest Charges 8,385 7,361 153,595 150,406 148,092 142,854
Interest Charges
Long-term debt 10,851 12,054 34,513 36,104 46,468 48,052
Other 2,016 1,412 4,362 3,929 5,443 5,159
12,867 13,466 38,875 40,033 51,911 53,211
Net Income (Loss) (4,482) (6,105) 114,720 110,373 96,181 89,643
Dividends on Preferred Stock 79 83 244 254 327 340
Income (Loss) Applicabe to
Common Stock $ (4,561) $ (6,188) $ 114,476 $ 110,119 $ 95,854 $ 89,303
Per Share of Common Stock $ (0.09) $ (0.13) $ 2.33 $ 2.29 $ 1.95 $ 1.86
Dividends Declared per Share
of Common Stock $ 0.355 $ 0.348 $ 1.065 $ 1.043 $ 1.413 $ 1.380
Average Common Shares
Outstanding 49,531,094 48,373,333 49,234,957 48,060,076 49,092,080 47,909,476
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)
Nine Months Twelve Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(Thousands of Dollars)
<CAPTION>
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 114,720 $ 110,373 $ 96,181 $ 89,643
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and depletion 58,754 58,728 77,663 76,743
Deferred Federal income tax 3,614 962 13,857 794
Amortization of investment tax credit (708) (789) (971) (1,003)
Income from energy services investments (5,162) (5,132) (9,484) (6,329)
Dividends received from energy services investments 7,392 3,145 7,842 4,920
Allowance for equity funds used during construction (842) (868) (1,247) (1,212)
Change in accounts receivable, net (98,572) 3,172 (57,032) 84,601
Change in accounts payable (4,356) (36,592) 5,952 (55,941)
Gas inventory and prepayments 53,381 47,085 12,504 4,572
Other 48,970 50,252 15,778 38,135
Cash provided by operating activities 177,191 230,336 161,043 234,923
FINANCING ACTIVITIES
Sale of common stock 22,696 21,067 29,603 28,224
Issuance of long-term debt 160,429 23,052 160,429 19,236
183,125 44,119 190,032 47,460
Repayments
Long-term debt (153,500) - (157,360) -
Preferred stock (300) (300) (300) (300)
29,325 43,819 32,372 47,160
Dividends paid (52,834) (50,523) (69,877) (66,679)
Other (18) (78) 23 207
Cash used in financing activities (23,527) (6,782) (37,482) (19,312)
INVESTING ACTIVITIES
Capital expenditures (excluding allowance
for equity funds used during construction) (138,526) (161,210) (190,049) (204,107)
Proceeds, refinancing of cogeneration project 23,995 - 23,995 -
Other 6,229 4,149 8,413 6,088
Cash used in investing activities (108,302) (157,061) (157,641) (198,019)
Change in Cash and Temporary Cash Investments 45,362 66,493 (34,080) 17,592
Cash and Temporary Cash Investments at Beginning of Period 40,542 53,491 119,984 102,392
Cash and Temporary Cash Investments at End of Period $ 85,904 $ 119,984 $ 85,904 $ 119,984
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 $ 23,000 $ 23,500 $ 35,500 $ 37,500
Interest $ 41,350 $ 42,504 $ 50,922 $ 52,174
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 June 30, 1996 and 1995, and the results
of operations for the three, nine and twelve months ended June
30, 1996 and 1995, and cash flows for the nine and twelve
months ended June 30, 1996 and 1995. Certain reclassifications
were made to conform prior period financial statements with
the current period financial statement presentation. All
other adjustments were of a normal, recurring nature.
As permitted by the rules and regulations of the Securities
and Exchange Commission, the Condensed Consolidated Financial
Statements do not include all of the accounting information
normally included with financial statements prepared in
accordance with generally accepted accounting principles.
Accordingly, the Condensed Consolidated Financial Statements
should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 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 usually 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.
<PAGE>
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.
3. INVESTMENT IN IROQUOIS PIPELINE
A Company subsidiary, North East Transmission Co., Inc.
(NETCO), owns a 19.4% partnership interest in Iroquois Gas
Transmission System, L.P. (Iroquois). Iroquois owns a 375-
mile pipeline from Canada to the Northeast United States.
NETCO's investment in Iroquois was $35.4 million at June 30,
1996.
In 1992, Iroquois was informed by the U.S. Attorney's Offices
for the Northern, Southern and Eastern Districts of New York
that a civil investigation was underway to determine whether
environmental violations occurred during construction of the
pipeline. In addition, Iroquois and others were targets of a
federal criminal investigation commenced by the Northern
District of New York in 1992 based on alleged environmental
and permit violations during construction. Finally, several
federal and state agencies initiated investigations of matters
related to construction of the pipeline.
After extensive discussions with the involved government
authorities and agencies, Iroquois and others entered into a
series of settlement agreements to resolve all pending
investigations relating to pipeline construction. On May 23,
1996, Iroquois' agent for pipeline construction, Iroquois
Pipeline Operating Company (IPOC) entered a plea of guilty to
violations of the Clean Water Act in the Northern District of
New York. On the same date, the United States lodged civil
consent decrees resolving related civil claims against IPOC in
the Northern, Southern and Eastern Districts of New York, and
the District of Connecticut. Although not named a defendant,
Iroquois signed the plea agreement and consent decrees and is
bound by their terms.
<PAGE>
In May 1996, the Department of Transportation approved a
Consent Order and Agreement with IPOC, and the Federal Energy
Regulatory Commission approved a Stipulation and Consent
Agreement with Iroquois, resolving those agencies'
investigations relating to pipeline construction. Related to
the resolution of the federal investigations, in April 1996,
the New York Public Service Commission entered an order
terminating its investigation relating to construction and
referred the matter to its Office of General Counsel for
appropriate action. In May 1996, Iroquois entered into a
Settlement Agreement with the New York Public Service
Commission, the New York State Department of Environmental
Conservation, and the New York State Attorney General
resolving potential and pending claims of violations relating
to pipeline construction.
Under the federal and state settlements, IPOC and Iroquois are
responsible for a total of $22 million in criminal fines,
civil penalties, and other payments. In addition, IPOC and
Iroquois have agreed to implement rate adjustments and
remedial and monitoring programs under the supervision of the
Army Corps of Engineers, the Department of Transportation, and
the Federal Energy Regulatory Commission.
The various settlements are contingent upon the entry of the
civil consent orders as final decrees by the federal district
courts in the four federal jurisdictions, following an
opportunity for public comment.
In September 1995 a provision was made in consolidated
earnings for NETCO's share of the estimated settlement costs.
Based on the information currently available, the Company
believes that the provision was adequate to account for such
costs.
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.
<PAGE>
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 $5.2 million of costs
expended as of June 30, 1996. The Company's actual MGP-
related costs may be substantially higher, depending upon
remediation experience, eventual end use of the sites, and
environmental conditions not addressed in the consent order or
current investigative plans. Such potential additional costs
are not subject to estimation at this time.
<PAGE>
As of June 30, 1996, the Company had an accrued liability of
$28.8 million and a related unamortized regulatory asset of
$31.3 million. By order issued February 16, 1995, the PSC
approved the Company's July 1993 petition to defer the costs
associated with environmental site investigation and
remediation incurred in 1993 and thereafter. Recovery of
these costs began in fiscal year 1995, which is conditioned
upon absence of a PSC determination that such costs have not
been reasonably or prudently incurred. In addition, the
Company must demonstrate that it has taken all reasonable
steps to obtain cost recovery from all available funding
sources, including other responsible parties and insurance
sources. 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. However, while the Company is unable to
predict the outcome of the generic proceeding, the recent
settlement agreement entered into between the Company, the
Staff of the PSC and other intervenor parties, described in
"Rate and Regulatory Matters" of Management's Discussion and
Analysis of Results of Operations and Financial Condition,
provides, among other things, that the Company may use
existing deferred credits to extinguish the deferred asset.
If the total cost of investigating and remediating the Coney
Island site plus the cost of investigating the other site
under active consideration varies from the amount originally
accrued for these activities, the Company will retain or
absorb 10% of the variation. Under the settlement agreement,
similar ratemaking treatment will be available for any
additional accrued liabilities for other MGP sites, should
such accrual be required. The settlement agreement is subject
to PSC approval, and the PSC is expected to act in the early
Fall 1996.
5. SUBSIDIARY MATTERS
On July 30, 1996 an indirect subsidiary of the Company, Solex
Development Company Inc., completed the sale of its 46.5% net
investment interest in a gas-processing plant in British
Columbia, Canada. The investment was placed into a royalty
trust and an initial public offering made of units in the
<PAGE>
trust. It is expected that a gain of approximately $12
million after income taxes will be recognized with respect to
this transaction in the fourth quarter.
In contemplation of an initial public offering of up to 35% of
a subsidiary's common stock, the Company implemented a
reorganization of its exploration and production subsidiaries'
assets and liabilities by transferring to its subsidiary, The
Houston Exploration Company (Houston Exploration), certain
onshore producing properties and acreage not previously owned
by Houston Exploration. As a result, all U.S. oil and gas
properties of Fuel Resources Inc. have been transferred to
Houston Exploration. A reorganization charge of approximately
$8 million dollars after income taxes will be recorded in the
fourth quarter. Also, a gain which is expected to exceed the
reorganization charge will be recorded upon completion of the
offering which is anticipated to occur in September 1996. In
connection with the reorganization, certain former employees
of Fuel Resources Inc. have alleged that they were entitled to
greater remuneration based on the increase in value of these
properties prior to the reorganization. These individuals
filed suit against the Company and Houston Exploration
alleging that they are entitled to receive such remuneration
as a result of alleged breach of contract, breach of fiduciary
duty, fraud, negligent representation and conspiracy. Such
individuals seek actual damages in excess of $35 million and
an award of punitive damages in excess of $70 million. The
Company believes that the ultimate resolution of these
allegations will not have a material adverse effect on the
Company's financial position or results of operations.
6. 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."
<PAGE>
The Company had net regulatory assets as of June 30, 1996 and
1995 of $74.4 million and $104.1 million, 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
$48.4 million.
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 adverse effect 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 June 30, 1996 vs. Three Months ended
June 30, 1995.
(2) Nine Months ended June 30, 1996 vs. Nine Months ended June 30,
1995.
(3) Twelve Months ended June 30, 1996 vs. Twelve Months ended
June 30, 1995.
Consolidated results in the third quarter of fiscal 1996 showed a
loss of $4.6 million, or nine cents per share, compared to a loss
of $6.2 million, or 13 cents per share, for the third quarter of
last year. Earnings for the nine months ended June 30, 1996 were
$114.5 million, or $2.33 per share, compared to $110.1 million, or
$2.29 per share, in the nine months ended June 30, 1995.
Consolidated earnings for the twelve months ended June 30, 1996
were $95.9 million, or $1.95 per share, compared to $89.3 million,
or $1.86 per share, for the same period a year ago.
Utility operations showed a loss of 17 cents per share in this
year's third quarter compared to a loss of 20 cents per share in
last year's third quarter. Subsidiaries contributed eight cents
per share to earnings compared to seven cents in last year's
quarter. Earnings in the three, nine and 12-month periods ended
June 30, 1996 reflect higher utility sales and operating margins as
a result of revenue growth and cost-efficiency efforts. The effect
on utility earnings of variations in revenues due to the extremely
cold weather during the past winter was, for the most part, offset
by the weather-normalization adjustment in the Company's tariff.
Earnings from subsidiaries in 1996 reflect higher comparable
<PAGE>
earnings from pipeline investment and gas-exploration, production
and processing operations. Earnings from cogeneration projects
were adversely affected by high fuel costs during the past winter
and the seasonal nature of the projects' electric sales.
Firm gas sales for the third quarter of fiscal 1996, which was
12.6% colder than normal and 12% colder than the third quarter of
fiscal 1995, were 22,986 MDTH, compared to 21,440 MDTH a year ago.
Firm gas sales were 128,362 MDTH for the nine months ended June 30,
1996, representing a 16.3% increase from the same period last year,
which was 11.0% warmer than normal. Weather for the twelve months
ended June 30, 1996 was 7.4% colder than normal and 22.0% colder
than the twelve months ended June 30, 1995. Consequently, firm gas
sales of 141,327 MDTH for the twelve months ended June 30, 1996
increased 14.4% compared with the twelve months ended June 30,
1995.
Total gas throughput from utility operations, which includes gas
deliveries to interruptible customers and transportation services
primarily to off-system customers, of 32,288 MDTH in the third
quarter of fiscal 1996 increased slightly from last year's third
quarter. Total gas throughput for the nine months ended June 30,
1996 was 165,281 MDTH, compared to 153,821 MDTH in the same period
a year ago, while for the twelve months ended June 30, 1996, it was
189,137 MDTH, compared to 181,664 MDTH in the corresponding period
last year.
Net revenues (utility operating revenues less cost of gas of
utility sales) increased 7.7% in the three months ended June 30,
1996, compared to the same period last year. This increase was
attributable to heating sales additions and the retention of a
portion of margins on the increase in sales due to colder-than-
normal weather. Net revenues in the nine and twelve-month periods
ended June 30, 1996 increased 4.6% and 3.5%, respectively, compared
with the corresponding prior year periods.
The Company and its gas exploration and production subsidiary, from
time to time and in varying degrees, 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.
<PAGE>
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. On July 30, 1996, the affiliate
completed the sale of its investment in the gas processing plant.
In contemplation of this sale, the results of operations and
financial condition reflect the deconsolidation of the related
investment, which is reported on the equity method for the three
months ended June 30, 1996 and fully consolidated in all other
periods. (See Notes to Condensed Consolidated Financial
Statements, Note 5., Subsidiary Matters.) Gas production increased
slightly in all periods. The effective price (average wellhead
price received for production including realized gains and losses
on closed financial instrument positions for hedging) was $1.79 per
MCF in the third quarter of fiscal 1996 compared with $1.70 per MCF
in the third quarter last year, while the average wellhead price
was $2.21 per MCF in this year's third quarter compared with $1.43
per MCF in the comparable quarter last year. For the nine months
ended June 30, 1996, the effective price was $1.69 per MCF compared
with $1.68 per MCF in the nine months ended June 30, 1995. Hedging
activities produced a loss of $2.5 million in the quarter compared
with a gain of $1.6 million in the comparable quarter last year.
Hedging losses for the nine months ended June 30, 1996 amounted to
$6.3 million compared with a gain of $4.4 million in the same
period last year. The effective price in the twelve months ended
June 30, 1996 was $1.71 per MCF compared with $1.73 per MCF in the
twelve months ended June 30, 1995. For the twelve months ended
June 30, 1996 hedging losses were $4.0 million compared with
hedging gains of $5.0 million in the same period last year.
Portions of future production are covered by hedge positions.
In July 1996, Houston Exploration purchased certain oil and gas-
related properties in South Texas from TransTexas Gas Corporation
and TransTexas Transmission Corporation. These properties include
proved reserves estimated at 113 BCF, a gathering system and
significant undeveloped acreage, which will serve as the foundation
of a new drilling program. Houston Exploration now has over 300
BCF of proved gas reserves. (See Notes to Condensed Consolidated
Financial Statements, Note 5., Subsidiary Matters.)
KIAC Partners, a general partnership between affiliates of Gas
Energy Inc., the Company's cogeneration subsidiary, and Community
<PAGE>
Energy Alternatives Inc., built and operates the 107-megawatt
cogeneration plant at John F. Kennedy International Airport. In
June 1996, the plant was refinanced through the sale of $250
million of tax-exempt bonds issued by the Port Authority of New
York and New Jersey. These Project Bonds were used to retire
outstanding tax-exempt bonds as well as to refund a portion of the
equity invested in the project, which is intended to enhance the
profitability of the project.
A recently formed gas-marketing subsidiary, KeySpan Energy Services
Inc., was incorporated in April 1996. Headquartered in Stamford,
Connecticut, it is prepared to sell gas both inside and outside
Brooklyn Union's traditional service territory. It has contracted
to supply gas to more than 450 commercial and residential customers
in the New York metropolitan area with annualized sales volumes
exceeding 700 MDTH. Deliveries began in July.
The increase in operation and maintenance expense in the three,
nine and twelve month periods ended June 30, 1996 reflects the
effect of significantly colder weather on utility operations,
offset partly by ongoing cost reductions. Moreover, consolidated
operation expense in the nine and twelve months ended June 30, 1996
and the three months ended June 30, 1995 included costs related to
Canadian gas processing operations.
Depreciation and depletion expense in the three, nine, and twelve
months ended June 30, 1996 increased 2.9%, 2.2% and 3.3%,
respectively, compared to the same periods ended June 30, 1995.
Higher depreciation and depletion expense related primarily to
utility plant additions.
General taxes principally include State and City taxes on utility
revenues and property.
Federal income tax expense in periods ended June 30, 1996 reflects
higher pre-tax income.
Other income generally reflects results from investments in energy
services which for all current periods reflect increased earnings.
However, earnings of subsidiaries with investments in cogeneration
projects and related fuel management operations were adversely
affected by this year's cold winter and the increase in fuel
prices, as well as the seasonal nature of electric sales for these
<PAGE>
projects. Also, interim nine and twelve-month results reflect
provisions for estimated costs related to investigations regarding
construction of the Iroquois pipeline. Earnings from investment in
a Canadian gas processing plant were also accounted for on the
equity method and included in other income for the three months
ended June 30, 1996. (For information regarding Iroquois, see
Notes to Condensed Consolidated Financial Statements, Note 3.,
Investment in Iroquois Pipeline.)
Interest charges on long-term debt reflect the favorable impact of
the Company's debt refinancing on March 1, 1996 (see "Financial
Condition"). Other interest charges principally include carrying
charges related to regulatory settlement items.
Dividends on preferred stock reflect reductions in the level of
preferred stock outstanding due to sinking fund redemptions.
Financial Condition
In the nine months ended June 30, 1996, operating activities
provided $177.2 million in cash flow; whereas, in the nine months
ended June 30, 1995, operating activities provided $230.3 million
in operating 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, especially those on
budget or flat payment plans, can adversely affect cash flow from
operating activities when the weather is extremely cold. Thus, the
reduction in operating cash flow is almost entirely attributable to
colder-than-normal weather. Cash provided by operating activities
in the twelve months ended June 30, 1996 also reflects working
capital requirements related to weather as well as the timing of
other items recovered through utility tariff billings. Cash flow
from investing activities in periods ended June 30, 1996 includes
proceeds from the refinancing of a cogeneration project in which
a Company subsidiary holds an equity interest. Capital
expenditures for fiscal years 1996 and 1997 are estimated to be
approximately $195 million in each year.
<PAGE>
Rate and Regulatory Matters
Rate Settlement Matters and Holding Company Petition
In October 1994, the PSC approved a three-year rate settlement
agreement which provided for no base rate increase in fiscal 1995;
however, the Company 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 including retention of a
portion of margins above a specified level of sales to certain
large-volume customers (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 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 to income 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.
In May 1996, the Company reached an agreement with the staff of the
New York State Department of Public Service and other parties to
allow the Company to reorganize its gas distribution operations and
its subsidiaries into a new holding company. The agreement reached
in the holding company filing included a new multi-year rate plan
that will become effective on or about October 1, 1996, if approved
by the PSC. After an initial rate reduction of approximately $3
million in fiscal 1997, the non-gas component in customer bills
<PAGE>
will be under specific price caps. Hence, the total amount in
rates that the Company can charge customers, in the aggregate, will
remain constant for the subsequent five years, although rates in
certain customer classes may be increased in order to reflect costs
more appropriately. The Company will also be permitted to charge
for various ancillary services. The agreement includes provisions
for rate changes if certain conditions applicable to inflation or
financial condition occur. (See Item 6. Exhibits and Reports on
Form 8-K, (b) Reports on Form 8-K.)
Restructuring Proceeding
The PSC has set forth a policy framework to guide the transition of
New York's gas distribution industry in the post-Federal Energy
Regulatory Commission (FERC) Order 636 environment. In March 1996,
the PSC issued an order on utility compliance tariff filings,
including the Company's, related to this framework.
Pursuant to this order, as of May 1, the Company's small-volume
market will have the option to purchase their gas supplies from
sources other than the Company, which would serve as a gas
transporter. Large-volume customers already have this option.
Small-volume customers can be grouped together by marketers if
their combined minimum threshold usage reaches 50,000 therms of gas
per year, which approximates the usage of 35 homes. The PSC
approved the Company's methodology of recovering the cost of
pipeline capacity and storage service provided to marketing firms.
In addition to transporting gas that customers purchase from
marketers, utilities such as the Company will provide billing,
meter reading and other services for aggregate rates that closely
approximate the distribution charge reflected in otherwise
applicable sales rates to supply these customers. The PSC order
placed a limit on the amount of gas the Company would be obligated
to transport in its core market to 5% of total core sales in each
of the next three years, with no more than 25% of any one service
class permitted to convert to transportation service. Since gas
marketers under present tax law are not subject to New York State
gross receipts taxes, they have an artificial competitive
advantage. The PSC order, limiting the conversion to
transportation of core sales to approximately 5.3 BCF per year,
gave some recognition to the effects of the tax differential.
<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 June
30, 1996, the Company had an accrued liability of $28.8 million and
a related unamortized regulatory asset of $31.3 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 22.
<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 June 30, 1996 and 1995, and the related
condensed consolidated statements of income for the three, nine and
twelve month periods ended June 30, 1996 and 1995, and the
condensed consolidated statements of cash flows for the nine and
twelve month periods ended June 30, 1996 and 1995. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the financial statements referred to above
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet and consolidated
statement of capitalization of The Brooklyn Union Gas Company and
subsidiaries as of September 30, 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
July 24, 1996<PAGE>
<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 effect 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. For
information regarding a subsidiary's reorganization lawsuit, see
Note 5., Subsidiary Matters.
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 was a report filed on June 5, 1996, noting that the
Company and the staff of the New York State Department of Public
Service had reached an agreement permitting the Company to
reorganize its gas-distribution operations and its subsidiaries
into a new holding company, and a change in the Company's rate-
making formula. Consummation of such agreement is subject to
approval by the Public Service Commission and the shareholders of
the Company. No financial statements were included in that report.
<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 August 14, 1996 s/ V.D. Enright
Senior Vice President and
Chief Financial Officer
Date August 14, 1996 s/ R.M. Desmond
R.M. Desmond
Vice President, Comptroller and
Chief Accounting Officer
Exhibit 15
1345 Avenue of the Americas
New York, NY 10105
August 14, 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 Registration Statements Nos. 33-66182, 333-04863, 333-
03441 and 333-06257 its Form 10-Q for the quarter ended
June 30, 1996, which includes our report dated July 24, 1996
covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933,
our report is not considered a part of the registration statements
prepared or certified by our firm or a report prepared or certified
by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
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