<PAGE>
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [_] [_]Confidential, for use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
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 Rule 14a-11(c) or Rule 14a-12
THE BROOKLYN UNION GAS COMPANY
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[X]No fee required.
[_]$500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X]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 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[_]Fee paid previously with preliminary materials.
------------------------------------------------------------------------
[_]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:
<PAGE>
[LOGO OF BROOKLYN UNION One MetroTech Center
GAS COMPANY APPEARS HERE] Brooklyn, New York
11201-3850
THE BROOKLYN UNION GAS COMPANY
NOTICE OF 1997 ANNUAL MEETING OF SHAREHOLDERS,
PROXY STATEMENT AND
1996 FINANCIAL STATEMENTS
<PAGE>
[LOGO OF BROOKLYN UNION One MetroTech
GAS COMPANY APPEARS HERE] Center
Brooklyn, New York
11201-3850
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
FEBRUARY 6, 1997
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 6, 1997 at 10 a.m., for the purpose of:
(1) Electing Directors;
(2) Ratifying 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
meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on December 18, 1996 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 FIRST CHICAGO TRUST COMPANY OF NEW YORK, P.O. BOX 8535, EDISON, NEW
JERSEY 08818-9402, EVEN IF YOU EXPECT TO BE PRESENT IN PERSON AT THE MEETING.
ROBERT B.
CATELL
Chairman and
Chief
Executive
Officer
ROBERT R. WIECZOREK
Vice President,
Secretary & Treasurer
Brooklyn, New York 11201-3850
December 30, 1996
<PAGE>
DIRECTIONS TO METROTECH
PUBLIC TRANSPORTATION VIA BQE WESTBOUND: VIA BROOKLYN BRIDGE:
Exit Tillary Street Exit Adams Street and
SUBWAY: and proceed to Jay proceed to Tillary
The A, F and C IND Street. Turn left on Street. Turn left on
trains stop at Jay Jay and proceed one Tillary and then right
Street. and a half blocks to on Jay Street. Proceed
The numbers 2, 3, 4 One MetroTech. to One MetroTech.
and 5 IRT trains stop
at Borough Hall.
VIA BQE EASTBOUND: PARKING:
The M, N and R BMT Exit Tillary Street The Edison parking
trains all stop at and proceed to Jay garage is located on
Lawrence Street. Street. Turn left on the G1 level of
Jay and proceed one MetroTech. The
and a half blocks to entrance is accessible
One MetroTech. from Lawrence Street.
Parking is also
available in the
Edison garage in the
SIAC building. There
are also several other
parking facilities
along Jay Street.
BUSES:
The numbers 25, 26,
38, 41, 52, 54 and 67
all stop within a
reasonable distance
from the MetroTech
area.
VIA MANHATTAN BRIDGE:
Exit Flatbush Avenue
and take to Tillary
Street. Turn right on
Tillary and then left
on Jay Street. Proceed
to One MetroTech.
[MAP SHOWING DIRECTIONS TO THE ANNUAL MEETING.]
<PAGE>
CONTENTS
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS PROXY STATEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
Annual Meeting of Shareholders....................................... 1
Proposal 1--Election of Directors.................................... 2
Proposal 2--Ratification of Independent Public Accountants........... 16
Proposal 3--Shareholder Proposal as to Cumulative Voting............. 16
Other Matters........................................................ 18
1996 FINANCIAL STATEMENTS............................................ APPENDIX
</TABLE>
<PAGE>
PROXY STATEMENT
The Brooklyn Union Gas Company
One MetroTech Center
Brooklyn, New York 11201-3850
December 30, 1996
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD FEBRUARY 6, 1997
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 ("Brooklyn Union" or the "Company") for use at the
Annual Meeting of Shareholders on February 6, 1997 and any adjournments
thereof.
This Proxy Statement and the accompanying Summary Annual Report are first
being mailed to the shareholders of Brooklyn Union on or about December 30,
1996.
The proxy accompanying this Proxy 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 Brooklyn Union
either a written revocation or a duly executed proxy bearing a later date.
In addition, any shareholder entitled to vote may attend the Annual Meeting
and vote whether or not such shareholder has submitted a signed proxy. All
shares represented by proxies which have been duly executed and returned will
be voted at the Annual 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 specifications to the contrary, such executed proxies
will be voted FOR Proposals 1 and 2, and AGAINST Proposal 3. Each nominee for
director of Brooklyn Union has consented to be named in this Proxy Statement
and to serve if elected. If for any reason any nominee for director of
Brooklyn Union shall become unavailable before the date of the Annual Meeting,
discretionary authority will be exercised to vote the proxies for the election
of such other person or persons as Brooklyn Union's Board of Directors shall
determine.
As of the close of business on December 18, 1996, there were 49,993,378
shares of Brooklyn Union common stock outstanding. Each share is entitled to
one vote. Only holders of record of Brooklyn Union common stock on the record
date are entitled to vote at the Annual Meeting and any adjournments thereof,
except for participants in Brooklyn Union's Dividend Reinvestment and Stock
Purchase Plan and Brooklyn Union's Discount Stock Purchase Plan for Employees,
who are entitled to vote shares held for their accounts by the agent under
each such Plan. Shares held in the names of the trustees under Brooklyn
Union's Employee Savings Plan may be voted by such trustees upon the
instructions of participants in such Plan, or in the absence thereof, as such
trustees deem appropriate.
Brooklyn Union 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
directors, officers and employees of Brooklyn Union. Such directors, officers
and employees of Brooklyn Union receive no compensation therefor other than
their regular remuneration. Also, Brooklyn Union will reimburse brokers, bank
nominees and other institutional holders for their out-of-pocket expenses in
forwarding proxy soliciting material to the beneficial owners of Brooklyn
Union common stock.
Securities and Exchange Commission ("SEC") 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 directors of Brooklyn Union or to abstain on either of
the other Proposals. In accordance with New York law, abstentions and broker
non-votes are not counted in determining the votes cast in connection with the
selection of auditors and the shareholder proposal relating to cumulative
voting since New York law requires a majority of only those votes cast "for"
or "against" approval, thus giving both abstentions 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. The vote of a plurality of the shares of Brooklyn Union common
stock cast is required for the election of directors.
The shareholder proposal relating to cumulative voting is considered "non-
discretionary," and brokers who have received no instructions from their
clients do not have the authority to vote thereon. Such "broker non-votes"
will not be considered as votes cast in determining the outcome of the
shareholder proposal. All abstentions and broker non-votes will be counted
towards the establishment of a quorum.
BROOKLYN UNION'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL DIRECTOR
NOMINEES NAMED IN PROPOSAL 1, "FOR" RATIFICATION OF THE APPOINTMENT OF ARTHUR
ANDERSEN LLP AS INDEPENDENT PUBLIC ACCOUNTANTS AS DISCUSSED IN PROPOSAL 2, AND
"AGAINST" THE SHAREHOLDER PROPOSAL RELATING TO CUMULATIVE VOTING AS DISCUSSED
IN PROPOSAL 3.
<PAGE>
PROPOSAL 1: ELECTION OF DIRECTORS
NOMINEES FOR DIRECTORS
Five Directors are to be elected at the Annual Meeting. The nominee for a
one-year term expiring in 1998 is Charles Uribe who has not yet been elected
by the shareholders. The nominee for a two-year term expiring in 1999 is Craig
G. Matthews who has not yet been elected by the shareholders. The nominees for
three-year terms expiring in 2000 are Andrea S. Christensen, Alan H. Fishman
and James Q. Riordan.
The information provided below with respect to Directors includes: (i) name
and age, (ii) the period during which such Director has served as a Director,
(iii) principal occupation and business associations and (iv) committee
memberships.
Nominated for the Term Expiring in 1998
Charles Uribe, Age 59, Director since 1996
Chairman and Chief Executive Officer, AJ Contracting
Company, Inc.
Director, Business Advisory Council to the City
University of New York, Citizens Housing and Planning
Council, City Parks Foundation, Federal Home Loan Bank of
New York, Jazz at Lincoln Center, Latin Communications
Group, Inc., New York City Partnership/Chamber of
Commerce, Inc., The Police Foundation, Inc., Regional
Alliance for Small Contractors, United Way of New York
City and United Way of Tri-State; Member, The Office of
the President's Investment and Services Policy Advisory
Committee, New York City Police Advisory Board and
Commissioner's Committee on Courtesy, Professionalism and
Respect.
photo
Mr. Uribe has over thirty-six years of experience in
building and construction, including the conversions of
Madison Square Garden in 1976, 1980 and 1992 and Moscone
Convention Center in San Francisco in 1984 for national
political conventions. He was responsible for the
restoration of the New York Public Library and the
interior construction of the Rose Building at Lincoln
Center. Mr. Uribe has also completed major projects for
the Dreyfus Corporation and the New York offices of
several major law firms. He was the first Public Director
of The American Institute of Architects, New York Chapter
and was the founding Chairman of the National Hispanic
Business Group, as well as past Chairman of the Puerto
Rican Traveling Theater.
Mr. Uribe was the President of AJ Contracting of
California, Inc. from 1984 to 1993. In March 1993, such
corporation filed for bankruptcy under Chapter 7 of the
Bankruptcy Code in the U.S. Bankruptcy Court for the
Central District of California, which bankruptcy was
completed in April 1994.
Nominated for the Term Expiring in 1999
Craig G. Matthews, Age 53
President and Chief Operating Officer, The Brooklyn Union
Gas Company
Director, Brooklyn Philharmonic, Greater Jamaica
Development Corporation, National and New York City
Advisory Board of the Salvation Army, Neighborhood
Housing Services, Polytechnic University, Public
Utilities Reports, Inc., Regional Plan Association and
The Houston Exploration Company; Chairman, Brooklyn
Chamber of Commerce; Treasurer, Society of Gas Lighting;
Member, American Gas Association and New York Gas Group
Executive Committee.
photo
2
<PAGE>
Mr. Matthews joined Brooklyn Union in 1965 as a
management trainee and has held various management
positions in the corporate planning, financial, marketing
and engineering areas and has been an officer since 1977.
He was elected Vice President in 1981 and Senior Vice
President in 1985. In 1991, he was elected Executive Vice
President, with responsibilities for Brooklyn Union's
financial, gas supply, information systems and strategic
planning functions, as well as Brooklyn Union's energy-
related investments. In May 1996, he was elected to his
current position, President and Chief Operating Officer.
Nominated for the Term Expiring in 2000
Andrea S. Christensen, Age 57, Director since 1980
Partner in the law firm of Kaye, Scholer, Fierman, Hays &
Handler
Director, American Arbitration Association
Mrs. Christensen joined Kaye, Scholer, Fierman, Hays &
Handler in 1968 and has been a Partner since 1976. Mrs.
Christensen was previously an associate with the law firm
of Kelley Drye & Warren.
photo
Member, Audit Committee, Executive Committee, and
Organization and Nominating Committee
Alan H. Fishman, Age 50, Director since 1989
Managing Partner, Columbia Financial Partners, L.P.
(private investment company)
Director, Brooklyn Academy of Music; Member, Executive
Committee of the Brown University Annual Fund.
Mr. Fishman joined Chemical Bank in 1969. He was named
Chief Financial Officer in 1979 and was promoted to
Senior Executive Vice President responsible for
Chemical's Investment Banking activities worldwide in
1983. He became affiliated with Neuberger & Berman in
1988 and was responsible for an investment partnership.
He joined American International Group, Inc. in 1989 as a
Senior Vice President and became President of AIG
Financial Services Group. He joined the firm of Adler &
Shaykin in 1990 as a Managing Partner and, in 1992, Mr.
Fishman formed the firm of Columbia Financial Partners,
L.P. in which he is a Managing Partner.
photo
Member, Audit Committee, Executive Committee, and
Organization and Nominating Committee
James Q. Riordan, Age 69, Director since 1991
Retired Vice Chairman and Chief Financial Officer, Mobil
Corp.
Director, Dow Jones & Co., Inc., Tri-Continental
Corporation, The Houston Exploration Company and Public
Broadcasting Service; Director/Trustee of the mutual
funds in the Seligman Group of investment companies;
Trustee, Committee for Economic Development and The
Brooklyn Museum; Member, Policy Council of the Tax
Foundation.
photo
Mr. Riordan joined Mobil Corp. in 1957 as Tax Counsel. He
was named a Director and Chief Financial Officer in 1969.
He became Vice Chairman in 1986 and retired from Mobil
Corp. in 1989. Mr. Riordan joined Bekaert Corporation in
1989 and was elected its President. He retired from
Bekaert Corporation in 1992.
Member, Audit Committee and Executive Committee
3
<PAGE>
DIRECTORS CONTINUING IN OFFICE
Directors whose Terms Expire in 1998
Robert B. Catell, Age 59, Director since 1986
Chairman and Chief Executive Officer, The Brooklyn Union
Gas Company
Trustee, Brooklyn Botanic Garden, Brooklyn Law School,
Independence Savings Bank and Kingsborough Community
College Foundation, Inc.; Chairman and Director, Alberta
Northeast Inc., Boundary Gas, Inc. and Business Council
for a Sustainable Energy Future; Chairman, AGA Natural
Gas Council Industrial Task Force, New York City
Commission on the Redevelopment of Naval Station New
York, Taylor Gas Liquids, Ltd. a publicly traded royalty
trust based in Canada, and The Houston Exploration
Company; Director and Past Chairman, American Gas
Association; Director, Brooklyn Academy of Music (ex-
officio), Brooklyn Bureau of Community Service, Brooklyn
Public Library, The Business Council of New York State,
Inc., Empire State Business Alliance, Gas Research
Institute, New York City Investment Fund, New York City
Partnership, New York City Public/Private Initiatives,
New York State Energy Research and Development Authority
and Utility Business Education Coalition; Member,
Brooklyn Chamber of Commerce Executive Committee, CCNY
School of Engineering Advisory Board, Chase's
Metropolitan Advisory Board, Committee for Economic
Development, Council for Environmental Quality, Downtown
Brooklyn Development Association, Energy Association of
New York State Executive Committee, Heartshare for Human
Services Advisory Board, Mayor's Private Sector Committee
on Information Technology, National Petroleum Council,
New York Gas Group, and Society of Gas Lighting Executive
Committee.
photo
Mr. Catell has been with Brooklyn Union 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 was
elected President and Chief Executive Officer in June
1991. In May 1996, Mr. Catell was elected Chairman and
Chief Executive Officer and he relinquished the position
of President.
Kenneth I. Chenault, Age 45, Director since 1988
Vice Chairman, American Express Company
Director, Arthur Ashe Institute for Urban Health, Junior
Achievement of New York, National Collegiate Athletic
Association, NYU Medical Center and Quaker Oats Company;
Member, Council on Foreign Relations.
photo Mr. Chenault joined American Express Company in 1981 as
Director of Strategic Planning. He was named President of
the Consumer Card Group in 1989 and President of the
Travel Related Services Company in the U.S. in 1993 with
responsibility for the Consumer Card Group, Consumer
Financial Services, Travel Services Group and
Establishment Services. He was named Vice Chairman of
American Express Company in January 1995 and assumed
additional responsibilities for Travel Related Services
International in April 1995. Prior to joining American
Express, Mr. Chenault was a management consultant with
Bain & Co. and an associate with the law firm of Rogers &
Wells.
Member, Executive Committee and Organization and
Nominating Committee
4
<PAGE>
Edward D. Miller, Age 56, Director since 1993
Senior Vice Chairman, The Chase Manhattan Corporation and
The Chase Manhattan Bank
Trustee, Pace University and New York Blood Center;
Director, Phoenix House Foundation and New York State
Bankers Association; Member, Bankers Roundtable and
Inner-City Scholarship Fund Executive Council.
photo Mr. Miller is the Senior Vice Chairman and a Director of
The Chase Manhattan Corporation and The Chase Manhattan
Bank ("Chase") and oversees the corporation's regional
banking, nationwide consumer services and has
responsibility for merger integration, technology and
operations, and administration.
Mr. Miller became Senior Vice Chairman of Chase when it
merged with Chemical Banking Corporation in March 1996.
Previously, he had been President of Chemical Banking
Corporation since January 1994, following two years as
Vice Chairman, a position he assumed upon the merger of
Manufacturers Hanover Corporation and Chemical Banking
Corporation in December 1991. Prior to the
Chemical/Manufacturers Hanover merger, Mr. Miller was
Vice Chairman of Manufacturers Hanover Corporation and
Manufacturers Hanover Trust Company, positions he had
held since 1988. Before his election to Vice Chairman of
Manufacturers Hanover, Mr. Miller was sector Executive
Vice President for retail banking. Since 1982, he has
been a member of the Management Committee, the
corporation's top policy-making body.
Chase has various banking relationships with Brooklyn
Union, including acting as one of five banks which may
provide loans to Brooklyn Union under separately
negotiated lines of credit and acting as indenture
trustee for certain tax-exempt bonds as to which Brooklyn
Union has incurred indebtedness. It should be noted that
Brooklyn Union's relationships with Chase are independent
of and pre-dated Mr. Miller serving on Brooklyn Union's
Board of Directors.
Chairman, Organization and Nominating Committee;
Alternate Member, Executive Committee
Directors whose Terms Expire in 1999
Donald H. Elliott, Age 64, Director since 1981
Counsel to the law firm of Hollyer Brady Smith Troxell
Barrett Rockett Hines & Mone LLP
Trustee, Independence Community Bank Corp., WNET (Channel
13) and Long Island University; Director, Independence
Savings Bank; Honorary Member, New York Chapter of the
American Institute of Architects.
photo
Mr. Elliott was associated with the law firm of Webster &
Sheffield from 1957 until 1965 and was a Partner from
1973 until 1991. From 1966 to 1973, he was Counsel to the
Mayor of the City of New York and then Chairman of the
New York City Planning Commission. Mr. Elliott was a
Partner in the law firm of Mudge Rose Guthrie Alexander &
Ferdon from 1991 until 1995, when he became counsel to
Hollyer Brady Smith Troxell Barrett Rockett Hines & Mone
LLP.
Chairman, Audit Committee; Member, Executive Committee
and Organization and Nominating Committee
5
<PAGE>
James L. Larocca, Age 53, Director since 1995
Lawyer and Consultant
Director, European American Bank; Trustee, the Nature
Conservancy (Long Island Chapter); Chairman, Touro
College Law School Board of Visitors and Suffolk County
Industrial and Commercial Incentive Board; Member, the
Stony Brook University Council and Hofstra University
School of Business Advisory Board. Mr. Larocca previously
served as a Director of Brooklyn Union from March 1992
through September 1993.
photo
Mr. Larocca served as the first Energy Commissioner of
New York State and Chairman of the State's Energy
Research and Development Authority from 1977 to 1983. He
served as Trustee of the New York Power Authority from
1982 to 1989. Mr. Larocca was appointed Commissioner of
Transportation of the State of New York in 1983 and
remained in that position until 1985. He served as
President and Chief Executive Officer of the Long Island
Association, Inc. from 1985 to 1993 and as a Partner in
the law firm of Cullen and Dykman from October 1993 to
September 1995.
Mr. Larocca is a consultant to Cullen and Dykman which
serves as Brooklyn Union's general counsel. It should be
noted that Mr. Larocca's current relationship with Cullen
and Dykman is independent of his responsibilities as a
Director of Brooklyn Union.
Member, Organization and Nominating Committee; Alternate
Member, Executive Committee
SECURITY OWNERSHIP OF DIRECTORS AND CERTAIN EXECUTIVE OFFICERS
The following table sets forth information as of September 30, 1996, with
respect to the number of shares of common stock beneficially owned and/or
Common Stock Equivalents owned by the persons to be elected directors and
certain executive officers of Brooklyn Union.
<TABLE>
<CAPTION>
TOTAL OF COMMON
STOCK BENEFICIALLY COMMON STOCK COMMON STOCK
NAME OWNED & EQUIVALENTS BENEFICIALLY OWNED EQUIVALENTS(1)
---- ------------------- ------------------ --------------
<S> <C> <C> <C>
R.B. Catell........... 26,855 17,432 9,423(2)
K.I. Chenault......... 2,293 1,499 794
A.S. Christensen...... 5,878 4,872 1,006
D.H. Elliott.......... 2,807 1,723 1,084
A.H. Fishman.......... 3,840 2,664 1,176
J.L. Larocca.......... 2,842 2,842 --
E.D. Miller........... 4,547 4,547 --
J.Q. Riordan.......... 3,344 1,500 1,844
C. Uribe.............. 315 -- 315
H.W. Peter............ 15,110 9,971 5,139(2)
C.G. Matthews......... 15,619 10,420 5,199(2)
A.J. DiBrita.......... 6,042 4,146 1,896(2)
V.D. Enright.......... 6,305 3,873 2,432(2)
</TABLE>
- - --------
(1) As indicated in the table, certain of the Directors have elected to have
deferred Directors' fees invested in Common Stock Equivalents, which term
will include the Performance Shares referred to in the Long-Term
Performance Incentive Compensation Plan.
(2) As officers and employees of Brooklyn Union, these individuals are not
entitled to receive any Common Stock Equivalents under the Directors'
Deferred Compensation Plan; however, they are participants in the
Corporate Incentive Compensation Plan.
6
<PAGE>
Messrs. Catell, Peter, Matthews, Enright and Riordan also own 3,000, 1,000,
1,000, 1,000 and 500 shares of common stock, respectively, of The Houston
Exploration Company, an indirect subsidiary of Brooklyn Union.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors held fourteen meetings in fiscal 1996. At the end of
fiscal 1996, the Board consisted of nine members, including eight members who
were not employees of Brooklyn Union. During the fiscal year ended September
30, 1996, each Director attended 75 percent or more of all meetings of the
Board and the respective committees of which they were members, with the
exception of Kenneth I. Chenault and Charles Uribe.
The Executive Committee held one meeting in fiscal 1996. 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
matters 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
Directors and changes in the Brooklyn Union by-laws.
The Audit Committee, all of the members of which are outside Directors, held
five meetings in fiscal 1996. The Audit Committee's function is to review and
monitor accounting and external financial reporting practices, internal
controls, auditing activities and the business practices and ethical standards
of Brooklyn Union. The Committee is responsible for recommending independent
public accountants to the Board for election by shareholders.
The Organization and Nominating Committee, all of the members of which are
outside Directors, held seven meetings in fiscal 1996. The Committee
recommends the remuneration of Directors and officers of Brooklyn Union,
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 candidate for election to the Board
should contact the Secretary of Brooklyn Union for information as to the
procedure to be followed by shareholders in submitting such recommendation.
DIRECTORS' COMPENSATION
Each outside Director is paid an annual Board retainer of $18,000 and a fee
of $1,000 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 Committee and the Organization and Nominating Committee. Directors who
are employees of Brooklyn Union receive no compensation in addition to their
salaries, as members of the Board or for attendance at meetings of the Board
or its committees.
Since 1990, Brooklyn Union has had in effect the Retirement Plan for Outside
Directors (Directors who are not entitled to receive benefits under Brooklyn
Union's Employees' Retirement Plan) under which each outside Director whose
service on the Board is terminated, due to retirement or disability, may
receive retirement benefits equal to the amount of the current annual Board
retainer paid to present Directors for a maximum of ten years (depending on
such Director's length of service). Such payment of benefits has been
conditioned upon the recipients' ability to consult with Brooklyn Union and
render it advice. In November 1996, the Board of Directors voted to terminate
this retirement plan effective April 1, 1997. As a result of the plan
termination, an amount equal to the present value of the accrued benefit will
be credited to each then current Director and will be converted into Common
Stock Equivalents, under the existing Directors' Deferred Compensation Plan,
to directly and further align the Directors' financial interests with those of
the shareholders.
7
<PAGE>
The Board of Directors has adopted a compensation plan to directly and
further align the Directors' financial interests with those of the
shareholders that requires all outside Directors to invest a minimum of 40
percent of their compensation as Directors in common stock and/or Common Stock
Equivalents through the Directors' Deferred Compensation Plan which
investment, if in Common Stock Equivalents, may be deferred at the Director's
election, as set forth below. Under this plan, the outside Directors may elect
to defer all or a portion of their compensation. Deferred amounts will, at the
Director's option, either be credited to an interest-bearing account or
invested in Common Stock Equivalents at the market price of the shares of
common stock on the last day of the month. Deferred amounts will be payable in
cash, upon retirement, either in a lump sum or in the number of annual
installments specified by the Director.
ORGANIZATION AND NOMINATING COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Organization and Nominating Committee (the "Committee") of the Board of
Directors, composed of six independent, non-employee Directors, administers
the executive compensation program. The members of the Committee during fiscal
1996 were Mrs. Christensen and Messrs. Chenault, Elliott, Fishman, Larocca and
Miller. None of such members is or has been an officer or employee of Brooklyn
Union 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 Brooklyn Union regarding executive compensation is that
the Chief Executive Officer and other executives should be compensated at
competitive levels to attract, motivate, and retain talented executives needed
to achieve Brooklyn Union's vision of becoming the premier energy company in
the Northeast. The Committee is committed to implementing a compensation
program which furthers such vision. The Committee adheres to the following
compensation policies which are intended to facilitate the achievement of
Brooklyn Union's business strategies:
. Executives' total compensation programs should strengthen the
relationship between pay and performance by emphasizing variable, at-
risk compensation that is dependent upon the level of success in meeting
specified corporate and individual performance goals.
. An appropriate amount of compensation for senior executives should be
comprised of long-term, at-risk pay to focus executives on the long-term
interests of shareholders.
. Each program element should target compensation opportunities comparable
to the compensation paid to executives of comparable utility and at the
median of general industry companies. However, if Brooklyn Union's
performance exceeds that of the comparable group, compensation should be
above the median; likewise, if Brooklyn Union's performance falls below
that of the comparable group, the compensation paid to senior executives
should be below the median of the comparable companies.
Components of Compensation
The Committee compares total compensation levels for Brooklyn Union's senior
executives to the compensation paid to executives in comparable utility and
general industry companies. In this connection, the Committee uses analyses
prepared by a national compensation consultant to review the competitive
compensation levels of executives in the utility industry in the regional and
national marketplace. In addition, the Committee reviews compensation data for
executive positions comparable in scope to those in general industry
companies. The companies analyzed in this process tend to have national
business operations and have positions that are similar in scope with
comparable revenue size or employment levels. Through this process the
Committee identifies the median compensation level, both with respect to base
salary and the overall executive compensation program.
The Committee ensures that compensation provides for a direct link to
strategic financial measures and shareholder value for the executive officers
of Brooklyn Union. To achieve this performance linkage, Brooklyn Union has
established three programs for the direct compensation of executive officers:
the Base Salary Program,
8
<PAGE>
the Corporate Incentive Compensation Plan and the Long-Term Performance
Incentive Compensation Plan. The intent of the programs is to place increased
emphasis on performance-based pay and reduced emphasis on fixed base salary in
determining total compensation.
Each of the three programs is discussed in greater detail below.
The Base Salary Program. In setting base salary levels for each executive
officer, the Committee considers the competitive market data for executives in
comparable positions in other utility and general industry markets. In setting
base salary levels Brooklyn Union currently targets the 50th percentile of the
comparable labor market. The Committee also considers the experience level and
actual performance achieved by the executive as it relates to Brooklyn Union's
corporate goals in setting base salary. The base salary level for the Chief
Executive Officer compared to competitive market data is generally below the
50th percentile of comparable positions while other executives' base salaries
are generally at or above the 50th percentile.
Consistent with Brooklyn Union's ongoing effort to reduce the emphasis upon
fixed base salary, during 1996 when Mr. Robert B. Catell was promoted to and
elected as Chairman and Chief Executive Officer, the Committee concurred with
the recommendation that his base salary not be increased. After Mr. Matthews'
promotion to President and Chief Operating Officer and Mr. Peter's promotion
to Vice Chairman of Brooklyn Union, their base salaries were increased based
upon the factors used to determine base salary.
The Corporate Incentive Compensation Plan. The Board of Directors adopted
the Corporate Incentive Compensation Plan (the "Corporate Plan") in fiscal
1989. The Corporate Plan provides annual incentive awards to officers and
other key employees who, by the nature and scope of their positions, regularly
and directly make a significant contribution to the success of Brooklyn Union
in the achievement of corporate goals that are important to the shareholders
of Brooklyn Union. The specific corporate goals for the Corporate Plan are
established by management and reviewed and approved by the Committee and the
Board of Directors. The goals 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 withholding a portion of base salary increases over several years
in order to shift part of base salary to incentive awards. This shifting of
base salary to incentives is anticipated to continue in the future as more
emphasis is placed upon incentive compensation.
Incentive awards as a percentage of base salary are based upon both
corporate and individual performance. Corporate awards have not been granted
unless Brooklyn Union (a) attained an approved utility return on equity
objective and (b) dividends were increased and did not exceed a certain payout
ratio. When corporate goals were not met, no awards were paid for corporate
performance and individual awards were reduced in the Corporate Plan.
Individual awards are measured against pre-established goals and cannot exceed
a maximum of 13 percent of a participant's base salary. This design ensures
that executive compensation is driven by successful business strategy and
results-oriented objectives.
The incentive award ranges are established annually by the Committee for
eligible executives in the Corporate Plan. Incentive award levels are intended
to provide awards that are competitive within the industry when performance
results are fully achieved. The Corporate Plan awards range from zero percent
to a maximum of 65%, with a target of 50% for the Chairman and Chief Executive
Officer, to a maximum of 50%, with a target of 38% for the President and Chief
Operating Officer, to a maximum of 40%, with a target of 30% for the Vice
Chairman and to a maximum 27%, with a target of 17% for all other officers.
The Chairman's, the President's and the Vice Chairman's awards are based
solely on corporate and subsidiary performance and will not be paid if
threshold financial goals are not met.
Incentive awards to executive officers for achievement in fiscal 1996 (paid
in fiscal 1997) reflect overall performance results that exceeded anticipated
levels of performance in both utility and subsidiary performance as each of
the objectives in the Corporate Plan were met or exceeded resulting in a
record level of earnings in 1996.
9
<PAGE>
The Long-Term Performance Incentive Compensation Plan. As a result of the
Committee's review of the competitiveness of Brooklyn Union's total
compensation program, and an independent consultant review of the long-term
incentive plans used by the majority of the utilities that comprise the
Standard & Poor's Utilities Index, the Committee recommended and the Board of
Directors adopted the Long-Term Performance Incentive Compensation Plan (the
"Incentive Plan") in fiscal 1996. The Incentive Plan was approved at Brooklyn
Union's 1996 Annual Meeting of Shareholders. The Incentive Plan provides for
the award of Incentive Stock Options, Nonqualified Stock Options and
Performance Shares to designated officers and other key employees of Brooklyn
Union and its subsidiaries as determined by the Committee. The purpose of the
Incentive Plan is to optimize Brooklyn Union's performance through incentives
that directly link the executive's personal interests to those of Brooklyn
Union's shareholders and to attract and retain employees who make significant
contributions to the success of Brooklyn Union.
The stock option component in the Incentive Plan entitles the executive to
purchase shares of common stock at an exercise price per share determined by
the Committee which is at least equal to the closing price of shares of common
stock on the New York Stock Exchange on the date of the grant.
The Performance Share component may be awarded on an annual basis at the
commencement of a three-year performance period. At the discretion of the
Committee, Performance Share awards entitle the executive to receive either
the number of shares of common stock based upon achievement of performance
goals over the performance period or a cash award equal to the average of the
fair market value of a share over the 20 consecutive trading days following
the close of the performance period multiplied by the number of earned
Performance Shares. Performance Share awards, in the discretion of the
Committee, may provide the executive with dividend equivalents with respect to
Performance Shares earned. The performance measure in the Incentive Plan is
based upon cumulative total shareholder return over a three-year period using
share price appreciation (depreciation) and cumulative dividends declared
during the three-year period as compared to the three-year performance results
for the companies in the S&P Utilities Index. In order to earn Performance
Shares at the end of the three-year performance period, a minimum percentile
ranking as well as a cumulative positive return to shareholders must be
achieved. Performance Shares earned at the end of the three-year performance
period may range from zero percent to a maximum of 200% of the initial award
based upon the percentile ranking of Brooklyn Union's performance in the S&P
Utilities Index.
In the event of a "change of control" (as defined in the Incentive Plan),
(i) the performance goals for all Performance Shares will be deemed to have
been met and the executive will receive at the discretion of the Committee
either a prorated number of shares of common stock or the equivalent in cash
based on time elapsed during the performance period and (ii) all outstanding
stock options will become immediately exercisable.
Initial grants of Nonqualified Stock Options and Performance Shares made to
executives for fiscal 1995 (granted in fiscal 1996) were generally determined
on the basis of the executive's position within Brooklyn Union and level of
1995 base salary. In determining award size, the Committee considered the
overall total compensation provided by base salary, annual awards and the
long-term component to target the average level of total compensation for
comparable executive positions in shareholder-owned utilities and gas
companies nationwide.
In 1996, Mr. Robert B. Catell received options to purchase 55,000 shares
with an exercise price of $27.00 as is detailed in the table below and was
awarded 4,000 Performance Shares for the three-year performance period which
will end September 30, 1998 (see Options and Performance Shares Table below).
The awards for stock options and performance shares to other executives are
also summarized in such table. The Committee believes that this equity
interest provides the appropriate link to the interest of the shareholders.
The Committee believes that Stock Options can be directly linked to Brooklyn
Union's performance. As the value of the common stock is generally considered
the strongest indicator of overall corporate performance, stock option awards
allow executives to benefit by appreciation in stock price at no immediate
cost to Brooklyn Union and provide a strong incentive to executives by linking
compensation to the future value of the common stock.
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<PAGE>
Policy with Respect to Section 162(m) Deduction Limit
Under Section 162(m) of the Internal Revenue Code, Brooklyn Union cannot
deduct compensation in excess of $1,000,000 paid in any year to the chief
executive officer or any of the four other most highly compensated executive
officers whose compensation must be detailed in the proxy statement.
Compensation paid under plans that are performance-based is not subject to the
$1,000,000 annual limit if certain requirements are satisfied. Although
Brooklyn Union's plans are designed to relate compensation to performance,
they do not meet such requirements because they allow the Committee to
exercise discretion in setting compensation. The Committee is of the opinion
that it is in Brooklyn Union's best interest to have the Committee retain
discretion in order to preserve flexibility in compensating such executive
officers, especially in light of an increasingly competitive marketplace.
Conclusion
The Committee believes that Brooklyn Union's executive compensation policies
and programs serve the interests of shareholders and Brooklyn Union
effectively. The various compensation programs are appropriately balanced to
provide the motivation for executives to contribute to Brooklyn Union's
overall success and enhance the value of Brooklyn Union for shareholders'
benefit.
The Committee will continue to monitor the effectiveness of the total
compensation program to meet current and future needs.
ORGANIZATION AND NOMINATING COMMITTEE
Edward D. Miller, Chairman
Andrea S. Christensen
Kenneth I. Chenault
Donald H. Elliott
Alan H. Fishman
James L. Larocca
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<PAGE>
SUMMARY COMPENSATION TABLE
The following table indicates the annual compensation for the Chairman and
Chief Executive Officer, and the four other most highly compensated executive
officers of Brooklyn Union. This information is for fiscal years ended on
September 30, 1996, 1995 and 1994. No executive officer serves pursuant to an
employment agreement.
<TABLE>
<CAPTION>
LONG-TERM
OTHER ANNUAL INCENTIVE PLAN
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) COMPENSATION ($)(2) PAYOUTS ($)(3)
- - --------------------------- ---- ------------ ------------------- --------------
<S> <C> <C> <C> <C>
Robert B. Catell........ 1996 470,811 248,040 376,169
Chairman and Chief 1995 434,026 152,973 0
Executive Officer 1994 424,000 132,680 0
Craig G. Matthews....... 1996 322,478 138,000 275,273
President and Chief 1995 283,859 86,749 0
Operating Officer 1994 281,000 72,970 0
Helmut W. Peter......... 1996 324,103 111,680 0
Vice Chairman 1995 283,859 90,939 0
1994 281,000 73,358 0
Vincent D. Enright...... 1996 206,436 40,704 0
Senior Vice President
and 1995 180,193 49,817 0
Chief Financial Officer 1994 172,333 35,249 0
Anthony J. DiBrita...... 1996 199,102 41,400 0
Senior Vice President 1995 184,300 50,035 0
1994 177,000 31,204 0
</TABLE>
- - --------
(1) Also, Performance Shares have been awarded as indicated on the Options and
Performance Shares Table.
(2) Represents amounts awarded for each fiscal year under Brooklyn Union's
corporate incentive compensation plans.
(3) Represents Long-Term Incentive Compensation awarded by subsidiaries of
Brooklyn Union including incentive compensation awarded as the result of
the termination of the Fuel Resources Inc. Long-Term Incentive
Compensation Plan. Deferred amounts of $205,619 for Mr. Catell and
$154,338 for Mr. Matthews have not been included. These amounts will be
paid in fiscal 1997. Also includes cash payments related to a buyout of
non-qualified stock options issued under The Houston Exploration Company
1994 Long-Term Incentive Plan. Additional annual payments, which have not
been included above, of $140,000 for Mr. Catell and $98,000 for Mr.
Matthews, will be made in fiscal years 1997 and 1998. Additional awards of
$679,040 related to these Long-Term Incentive Plans were also made to
other officers who are not shown in this table.
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<PAGE>
OPTIONS AND PERFORMANCE SHARES--1996
The following table provides information regarding awards made under the
Long-Term Performance Incentive Compensation Plan during the fiscal year ended
September 30, 1996 to the Chairman and Chief Executive Officer and the four
other most highly compensated executive officers of Brooklyn Union and all
current executive officers as a group.
OPTIONS AND PERFORMANCE SHARES TABLE
<TABLE>
<CAPTION>
% OF TOTAL VALUE OF
NUMBER OF OPTIONS IN-THE-MONEY NUMBER OF
SECURITIES GRANTED EXERCISE GRANT DATE OPTIONS AT PERFORMANCE
UNDERLYING TO EMPLOYEES PRICE(1)(2) PRESENT VALUE FYE(4) SHARES
OPTIONS GRANTED IN FISCAL YEAR ($/SHARE) OF OPTIONS(3) (UNEXERCISABLE) AWARDED(5)
--------------- -------------- ----------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
R.B. Catell............. 55,000 27 27.00 $152,900 $48,125 4,000
C.G. Matthews........... 32,000 16 27.00 88,960 28,000 2,300
H.W. Peter.............. 32,000 16 27.00 88,960 28,000 2,300
V.D. Enright............ 16,000 8 27.00 44,480 14,000 1,100
A.J. DiBrita............ 8,000 4 27.00 22,240 7,000 550
Executive Officers as a
Group.................. 192,000 95 27.00 533,760 168,000 13,000
</TABLE>
- - --------
(1) Fair Market Value of Brooklyn Union common stock on November 15, 1995, the
date of grant.
(2) Options vest ratably over a three-year period from the grant date. The
expiration date of the options is November 14, 2005.
(3) Options have been valued using the Black-Scholes option pricing model
adapted to reflect the specific provisions of Brooklyn Union's Long-Term
Performance Incentive Compensation Plan and related assumptions regarding
exercisability and forfeiture. The values shown are theoretical and do not
necessarily reflect the actual values which may be realized upon the
future exercise of the options. Any actual value will result to the extent
that the market value of the common shares at a future date exceeds the
exercise price. Assumptions for modeling are based on the dividend yield,
risk-free rate of return and standard deviation of prices over a relevant
period as of the grant date.
(4) Represents the difference between the fiscal year-end price of $27 7/8 and
the exercise price. Options are not exercisable as of the fiscal year-end
1996.
(5) The shares granted represent the target number of shares that will vest at
the end of a three-year performance period ending September 30, 1998. The
actual number of Performance Shares to be earned is contingent upon
achieving target levels of total shareholder return in relation to the S&P
Utilities Index. The actual award, which may be paid in cash or shares of
stock, will range from 0 to 200% of the target number of shares and may
include dividend equivalents with respect to any dividends declared on the
number of shares earned.
As of December 18, 1996, the number of outstanding shares of Brooklyn Union
common stock was 49,993,378. The closing price of a share of Brooklyn Union
common stock on the New York Stock Exchange on December 18, 1996 was $29 5/8.
The number of shares of Brooklyn Union common stock reserved for issuance
under the Long-Term Performance Incentive Compensation Plan is 1,500,000 in
the aggregate; however, no more than 750,000 shares of Brooklyn Union common
stock will be available for issuance pursuant to the exercise of Incentive
Stock Options. The maximum number of shares of Brooklyn Union common stock
that may be granted to any participant pursuant to any single award is
125,000.
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<PAGE>
PERFORMANCE GRAPH
The SEC's executive compensation rules require that a line graph be included
in this 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 line
graph below, for a period beginning September 30, 1991 through September 30,
1996, a comparison is made of cumulative total shareholder returns for
Brooklyn Union, the Standard & Poor's Utilities Index and the Standard &
Poor's 500 Index.
[insert chart]
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BU.............................. $100.00 $116.99 $141.81 $144.28 $151.21 $180.57
S&P Utilities................... $100.00 $114.31 $142.04 $123.56 $157.54 $169.03
S&P 500......................... $100.00 $110.81 $125.36 $130.02 $168.56 $202.72
</TABLE>
Assumes $100 invested on September 30, 1991 in shares of Brooklyn Union
common stock, the S&P Utilities Index and the S&P 500 Index, and that all
dividends were reinvested.
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<PAGE>
COMPENSATION UNDER RETIREMENT PLANS
The Employees' Retirement Plan of Brooklyn Union provides retirement
benefits based upon the individual participant's years of service and final
average annual compensation. Final average annual compensation is the average
annual compensation for the highest five consecutive years of earnings during
the last ten years of credited service. The following table sets forth the
estimated annual retirement benefits (exclusive of Social Security payments)
payable to participants in the specified compensation and years-of-service
categories, assuming continued active service until normal retirement age and
that the Employees' Retirement Plan is in effect at such time.
<TABLE>
<CAPTION>
YEARS OF SERVICES
-----------------------------------------------------
REMUNERATION(1) 20 25 30 35 40 45
- - --------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$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
$550,000.................. $165,000 $206,250 $247,500 $288,750 $330,000 $371,250
$600,000.................. $180,000 $225,000 $270,000 $315,000 $360,000 $405,000
$650,000.................. $195,000 $243,750 $292,500 $341,250 $390,000 $438,750
$700,000.................. $210,000 $262,500 $315,000 $367,500 $420,000 $472,500
</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 Chairman and 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),
C.G. Matthews (42 years), H.W. Peter (25 years), V.D. Enright (43 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 1996, these limits were $150,000 and $120,000, respectively. Annual
retirement benefits attributable to amounts in excess of these limits are
provided under the Supplemental Retirement Plan of Brooklyn Union and not
under the Employees' Retirement Plan.
EXECUTIVE COMPENSATION--1997
On November 20, 1996, the Board of Directors, acting on the recommendation
of the Organization and Nominating Committee, approved base salary and
incentive compensation plan modifications to further align total compensation
of officers with corporate performance measures and shareholder returns. For
most officers, base salaries were reduced to place more emphasis on variable
performance based compensation. In addition, Nonqualified Stock Options
covering 343,500 shares were granted to officers to further align compensation
to the interest of the shareholders. No Performance Shares were granted.
SENIOR EXECUTIVE CHANGE OF CONTROL SEVERANCE PLAN
Under the Senior Executive Change of Control Severance Plan (the "Change of
Control Plan"), in the event of the termination of a participant's employment
(i) by Brooklyn Union for any reason other than "cause" (as defined)
(excluding the death of the Participant) or (ii) by the Participant for "good
reason" (as defined) following a "change of control" (as defined) of Brooklyn
Union, severance and other benefit payments will be made to the executives of
Brooklyn Union. The severance benefit is payable in a cash lump sum and is
equal to three times the sum of the officer's salary and Highest Annual Bonus
(as defined) for the Chairman and Chief
15
<PAGE>
Executive Officer, President and Chief Operating Officer, Vice Chairman and
Senior Vice Presidents and two times the sum of the officer's salary and
Highest Annual Bonus (as defined) for Vice Presidents. The share exchange will
not result in a change of control under the Change of Control Plan.
Brooklyn Union adopted the Change of Control Plan to minimize the
uncertainty created by a change of control of Brooklyn Union which might
result in the loss or distraction of senior executives to the detriment of
Brooklyn Union and its shareholders. The Board of Directors considers the
avoidance of such loss and distraction to be essential to protecting and
enhancing the best interests of Brooklyn Union and its shareholders. The Board
also believes that when a change of control is perceived as imminent, or is
occurring, the Board should be able to receive and rely on the disinterested
service from senior executives regarding the best interests of Brooklyn Union
and its shareholders, without concern that senior executives might be
distracted or concerned by the personal uncertainties and risks created by the
perception of an imminent or occurring change of control.
PROPOSAL 2: RATIFICATION 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 for the 1997 fiscal year.
Arthur Andersen LLP has been the independent public accountants of Brooklyn
Union since 1932. This firm was recommended to serve the 1996 fiscal year by
the Audit Committee of the Board of Directors and ratified by the shareholders
at the Annual Meeting held February 1, 1996.
A representative of the firm will be present at the Annual Meeting with the
opportunity to make a statement if such representative desires to do so and to
answer questions posed by the shareholders.
PROPOSAL 3: SHAREHOLDER PROPOSAL AS TO CUMULATIVE VOTING
John J. Gilbert of 29 East 64 Street, New York, New York 10121-7043, owner
of 270 shares; and John J. Gilbert and Margaret R. Gilbert representing an
additional family interest of 150 shares; also representing the Lewis D. and
John J. Gilbert Foundation for 150 shares; and Margaret R. Gilbert and John J.
Gilbert, Trustees under the will of Samuel Rosenthal for 600 shares, have
informed Brooklyn Union that they intend to present to the meeting a
resolution relating to cumulative voting and have submitted the following:
RESOLVED:
That the stockholders of Brooklyn Union Gas Company, assembled in annual
meeting 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.
REASONS:
Continued strong support along the lines we suggest were shown at the last
annual meeting, when 19.86%, an increase over the previous year, 2,964 owners
of 6,377,955 shares, were cast in favor of this proposal. The vote against
included 4,395 unmarked proxies.
16
<PAGE>
A California law 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 democratic
means of electing directors.
The National Bank Act provides for cumulative voting. In many cases
companies get around it by forming holding companies without cumulative
voting. Banking authorities have the right to question the capability of
directors to be on banking boards. In many cases authorities come in after and
say the director or directors were not qualified. We were delighted to see
that the SEC has finally taken action to prevent bad directors from being on
the boards of public companies. The SEC should have hearings to prevent such
persons becoming directors before they harm investors.
We think cumulative voting is the answer to find new directors for various
committees. Some recommendations have been made to carry out the CERES 10
points. The 11th should be, in our opinion, having cumulative voting and
ending staggered boards.
When Alaska became a state it took away cumulative voting over our
objections. The Valdez oil spill might have been prevented if environmental
directors were elected through cumulative voting. The huge derivative losses
might have also been prevented with cumulative voting.
Many successful corporations have cumulative voting. Example, Pennzoil
defeated Texaco in that famous case. Ingersoll-Rand, also having cumulative
voting won two awards. FORTUNE magazine ranked it second in its industry as
"America's Most Admired Corporations" and the WALL STREET TRANSCRIPT noted "on
almost any criteria used to evaluate management, Ingersoll Rand excels." In
1994 and 1995 they raised their dividend.
Lockheed-Martin, as well as VWR Corporation now have a provision that if
anyone has 40% of the shares cumulative voting applies, it applies at the
latter company.
In 1995 American Premier adopted cumulative voting. Alleghany Power System
tried to take away cumulative voting, as well as put in a stagger system, and
stockholders defeated it, showing stockholders are interested in their rights.
If you agree, please mark your proxy for this resolution; otherwise it is
automatically cast against it, unless you have marked to abstain.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE AGAINST THIS PROPOSAL
FOR THE FOLLOWING REASONS:
This proposal has been presented at several previous Annual Meetings and has
been rejected each time by Brooklyn Union's shareholders. Your Board of
Directors believes the current system of voting used by Brooklyn Union
provides the best assurance that the decisions of the directors will be in the
best interests of all shareholders. Cumulative voting, however, could enable
the election of directors that will make decisions representing only the views
of special interest groups that helped to get them elected. In addition,
cumulative voting could create partisanship among directors and interfere with
the effective functioning of the Board. An amendment to Brooklyn Union's
certificate of incorporation to provide for cumulative voting would require
the affirmative vote of a majority of the outstanding shares entitled to vote
thereon.
The Board of Directors recommends you oppose this proposal because it is
contrary to the belief that it is the duty of each director to administer the
business and affairs of Brooklyn Union for the benefit of all shareholders.
17
<PAGE>
OTHER MATTERS
DEADLINE FOR SHAREHOLDER PROPOSALS
Proposals from shareholders to be presented at the 1998 Annual Meeting must
be received by the Secretary of Brooklyn Union at One MetroTech Center,
Brooklyn, New York 11201-3850, no later than September 2, 1997.
Matters intended to be presented by holders of common stock at the 1998
Annual Meeting must be stated in writing, and delivered to the Secretary by
such shareholders during the period between 90 and 60 days prior to the date
of the meeting, which is expected to be held on February 5, 1998.
ADDITIONAL INFORMATION
Brooklyn Union's consolidated financial statements as of September 30, 1996
and for the three-year period then ended, and certain other financial
information, are set forth in the Appendix to this Proxy Statement.
Brooklyn Union's Annual Report on Form 10-K to the SEC includes additional
information concerning Brooklyn Union, its subsidiaries and their operations
and financial condition. This report, except for exhibits, will be furnished
at no cost to shareholders after January 6, 1997 upon written request to the
Secretary, The Brooklyn Union Gas Company, One MetroTech Center, Brooklyn, New
York 11201-3850.
The following information is reported as required by the New York Business
Corporation Law. Directors and officers liability insurance covering all
directors and officers of Brooklyn Union was purchased from ACE Ltd., Aetna
Casualty and Surety Company, Chubb & Son, Corporate Officers and Directors
Assurance Ltd. and Zurich Insurance Company for a one-year period commencing
May 28, 1996 at a total cost of approximately $473,150.
Section 16(a) of the 1934 Act requires Brooklyn Union's directors and
officers, and persons who own more than ten percent of a registered class of
Brooklyn Union's equity securities, to file reports of ownership and changes
in ownership with the SEC. Executive officers, directors and greater than ten
percent shareholders are required by SEC regulation to furnish Brooklyn Union
with copies of all Section 16(a) forms they file. Brooklyn Union believes that
all filings during the fiscal year ended September 30, 1996, applicable to its
executive officers, directors and greater than ten percent beneficial owners,
were made on a timely basis.
CONFIDENTIAL VOTING
Brooklyn Union, 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 tabulations which identify the particular vote of a
shareholder are to be kept secret from Brooklyn Union, its directors, officers
and employees. Accordingly, proxy cards are returned in envelopes addressed to
the tabulator, First Chicago Trust Company of New York, P.O. Box 8535, Edison,
New Jersey 08818-9402, which receives and tabulates the proxies and is
independent of Brooklyn Union. The final tabulation is inspected by an
inspector(s) of election who also is independent of Brooklyn Union, its
directors, officers and employees. The identity and vote of any shareholder
will not be disclosed to Brooklyn Union, its directors, officers or employees,
nor to any third party except (i) to allow the independent inspector(s) of
election to certify the results of the vote to Brooklyn Union, its directors,
officers and employees; (ii) as necessary to meet applicable legal
requirements and to assert or defend claims for or against Brooklyn Union;
(iii) in the event of a proxy solicitation based on an opposition proxy
statement filed, or required to be filed, with the SEC; or (iv) in the event a
shareholder has made a written comment on such form of proxy.
18
<PAGE>
OTHER PROPOSALS
As of the date of this Proxy Statement, the Board of Directors knew of no
other matter which is likely to be brought before the Annual Meeting. However,
if any other matter is presented for action and comes before the Annual
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
Chairman and Chief Executive Officer
Dated: December 30, 1996
19
<PAGE>
APPENDIX
1996 CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
F-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EARNINGS AND DIVIDENDS
In fiscal 1996, consolidated income available for common stock was $122.6
million, or $2.48 per share, compared to $91.5 million, or $1.90 per share, in
1995, and $87.0 million, or $1.85 per share, in 1994. This was the fourth
consecutive year of record earnings.
Consolidated earnings for the last three fiscal years are summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income Available for Common Stock
Utility........................................... $ 82,090 $78,677 $76,665
-------- ------- -------
Gas exploration and production operations (before
reorganization charge)........................... 7,627 7,843 5,707
Reorganization charge............................. (7,800) -- --
Gain on sale of subsidiary stock.................. 23,034 -- --
Gain on sale of Canadian plant.................... 10,505 -- --
-------- ------- -------
33,366 7,843 5,707
-------- ------- -------
Energy services
Pipeline and storage............................ 5,319 979 3,358
Cogeneration.................................... 414 2,670 1,303
Marketing....................................... 1,396 1,329 --
-------- ------- -------
7,129 4,978 4,661
-------- ------- -------
Consolidated.................................. $122,585 $91,498 $87,033
======== ======= =======
</TABLE>
In 1996, regulated utility operations provided an equity return of 12.80%.
The return, which included incentives authorized by the New York State Public
Service Commission (PSC), was higher than the allowed rate of 10.65%. The
Company has earned at or above its allowed return on utility common equity in
17 of the last 18 years.
In the last three years, income available for common stock from utility
operations has benefited from additions of new firm gas heating customers,
principally as a result of customer conversions from oil to gas for space
heating in homes and buildings, as well as earnings incentives provided under
rate stipulations (see "Rate and Regulatory Matters"). In 1996, such
incentive-based earnings were related largely to higher margins on sales to
large-volume and off-system customers and attaining a 93% customer
satisfaction rating in benchmarks used by the PSC. The effect on utility
revenues of variations in weather largely was offset by the weather
normalization adjustment included in the Company's tariff. Utility operating
margins have improved due to ongoing cost reduction efforts.
In 1996, earnings from gas exploration, production and processing operations
decreased, primarily due to a reorganization charge of $7.8 million, net of
federal income taxes, recorded by the U.S. exploration and production
subsidiary, The Houston Exploration Company (THEC). Excluding this charge,
operating results were comparable in 1996 and 1995. However, earnings in 1996
also included an after-tax gain of $23.0 million on the issuance by THEC of
34% of its common stock in September 1996 (see Note 3 to the Consolidated
Financial Statements, "The Houston Exploration Company" for additional
information). Neither the Company, nor THEC, has plans for any further
issuances of THEC stock, nor the stock of any of the Company's other
subsidiaries--except for issuances under ongoing stock plans. Further,
earnings included a gain of $10.5 million on the sale in July 1996 of an
investment in a Canadian gas processing plant, which was sold to realize the
substantial value embodied in the investment at the time. In 1995, earnings
from gas exploration, production and processing operations increased,
primarily due to higher U.S. natural gas production.
F-2
<PAGE>
Earnings from investments in energy services are attributable to various
operations. In April 1996, a Company subsidiary increased its equity interest
in the Iroquois Gas Transmission System, L.P. (Iroquois) by 8.0% to 19.4%,
resulting in higher earnings during the year from Iroquois. In addition,
earnings from pipeline and storage operations in all periods reflect higher
throughput on Iroquois. In 1995, earnings were reduced by a provision for the
Company's proportionate share of estimated costs of legal matters involving
Iroquois. With respect to cogeneration investments, higher fuel prices caused
earnings from cogeneration investments to decrease in 1996. In 1995, the
increase in earnings reflected equity income from the start of operations at
John F. Kennedy International Airport (JFK) and the campus of the State
University of New York at Stony Brook.
Earnings from gas marketing in 1996 were $1.4 million, similar to last year.
Looking toward the future, the Company expects revenue growth as a result of
the rationalization and refocusing of these operations. New wholly-owned
subsidiaries have been formed to operate effectively as part of the Company's
holding company strategy. One of these business units sells gas and expects to
sell electricity inside and outside the traditional utility territory. The
other will provide a variety of technical and maintenance management services
for commercial and industrial customers. The initial focus will be conducted
both independently and through strategic alliances. As an integral part of
this marketing realignment, a Company subsidiary sold its 50% interest in the
gas-marketing venture, PennUnion Energy Services, L.L.C., to the other
partner.
The consolidated rate of return on average common equity was 13.6% in 1996,
10.9% in 1995, and 11.0% in 1994.
In December 1995, the Board of Directors authorized an increase in the
annual dividend on common stock to $1.42 per share from $1.39 per share. This
increase became effective on February 1, 1996, when the quarterly dividend was
raised to 35 1/2 cents per share from 34 3/4 cents per share. Common dividends
have been increased in 20 consecutive years and paid continuously for 48
years.
SALES, GAS COSTS AND NET REVENUES
Firm utility gas sales volumes in fiscal 1996 were 141,948 MDTH compared to
123,356 MDTH in 1995 and 133,513 MDTH in 1994. Measured by annual degree days,
weather was 7.7% colder than normal in 1996, 11.2% warmer than normal in 1995
and 3.1% colder than normal in 1994. Sales growth in all markets resulted
primarily from conversions to natural gas from oil for space heating,
especially by large apartment buildings. In 1996, the growth in firm sales
normalized for weather was 2.4%, similar to that experienced in recent years.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Utility sales............................... $1,351,821 $1,152,331 $1,279,638
Cost of gas................................. (610,053) (446,559) (560,657)
---------- ---------- ----------
Net revenues................................ $ 741,768 $ 705,772 $ 718,981
---------- ---------- ----------
Gas production and other.................... $ 80,181 $ 63,953 $ 58,992
---------- ---------- ----------
</TABLE>
In 1996, higher utility sales primarily reflected higher billings due to
colder weather. In 1995, the opposite occurred as lower utility sales
primarily reflected lower billings for gas costs due to warm weather. For
additional information regarding utility sales and net revenues in the last
three years, see "Rate and Regulatory Matters."
During the year, gas at the burner tip was competitive with alternative
grades of 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 75% of firm sales volume in 1996. Demand in these markets is
less sensitive to periodic differences between gas and oil prices. In large-
volume heating markets, gas service is provided under rates that are set to
compete with prices of alternative fuel, including No. 6 grade heating oil.
There is substantial sales potential in these markets, which include large
apartment houses, government buildings and schools. Competition with other gas
suppliers is expected to continue to increase as a result of deregulation.
F-3
<PAGE>
Moreover, a significant market for off-system gas sales, transportation and
other services has developed as a result of deregulation. These sales or
services reflect optimal use of available pipeline capacity as affected by
weather and the Company's New York Market Hub in balancing on-system
requirements to core customers with off-system services to increase total
margins. In colder-than-normal winters, such as 1996, sales to on-system
customers are higher whereas off-system services are comparatively lower. As a
result, in 1996 gas and transportation sales and services to off-system and
interruptible customers amounted to 42,950 MDTH compared with 49,910 MDTH in
1995.
The Company and its gas exploration and production subsidiary employ
derivative financial instruments, such as natural gas and oil futures, options
and swaps, for the purpose of managing exposures to 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 subsidiary to manage the risk associated with
fluctuations in the price received for natural gas production in order to
achieve a more predictable cash flow. Hedging strategies have been managed
independently. (See Note 7B to the Consolidated Financial Statements,
"Derivative Financial Instruments," for additional information.)
The cost of gas, $610.1 million in 1996, was $163.5 million or 36.6% higher
than in 1995. The higher cost reflects higher heating sales due to colder
weather and higher average gas costs. The cost of gas in 1994 was $560.7
million reflecting higher volumes sold and higher average prices, both of
which were primarily the result of cold weather in that year as compared to
volumes and prices in 1995. The cost of gas for firm customers was $3.49 per
DTH (one DTH equals 10 therms) in 1996, compared to $3.12 per DTH in 1995 and
$3.55 per DTH in 1994. For the year ended September 30, 1996, the utility's
cost of gas included hedging losses of $1.7 million related to its margin
fixing strategy.
The increase in revenues from gas production and other in 1996 is due
primarily to the acquisition of additional natural gas properties (see Note 3
to the Consolidated Financial Statements, "The Houston Exploration Company",
for additional information) and increased production from the gas processing
plant located in British Columbia, Canada, which was purchased in April 1995
and was sold in July 1996. In 1996, gas production, including oil equivalents,
was approximately 27.3 billion cubic feet (BCFe), or 4.6 BCFe above the level
of production last year. In 1996, wellhead prices averaged approximately $2.11
per MCF compared with $1.47 per MCF last year. The realized price (average
wellhead price received for production including recognized hedging gains and
losses) was $1.82 per MCF in 1996 compared with $1.77 per MCF in 1995. Hence,
the Company's hedging strategy stabilized the weather-related volatility
inherent in the wellhead price which showed an increase on average of 64 cents
per MCF in 1996 compared to 1995. The effective price increased 5 cents in
1996 compared to 1995. The effective price in 1996 included a hedging loss of
$7.7 million while the effective price in 1995 included a hedging gain of $6.6
million. (See Note 10 to the Consolidated Financial Statements, "Supplemental
Gas and Oil Disclosures", for additional information.)
EXPENSES, OTHER INCOME AND PREFERRED DIVIDENDS
The increase in operation and maintenance expense in 1996 reflects the
effects of colder weather compared to last year and the reorganization charge
incurred by the U.S. exploration and production subsidiaries. The
reorganization charge of $12.0 million reflects remuneration that certain
former employees of the Company's other exploration and production subsidiary
were paid as the result of the increase in the value of the gas and oil
properties transferred to THEC. The decrease in 1995 reflected warmer weather
and various cost reduction efforts. In 1994, severe winter weather caused
higher utility gas distribution operation expense. The benefit of ongoing cost
reduction programs substantially outweighed the adverse effects of generally
higher labor and material costs. Moreover, consolidated operation expense in
1996 and 1995 included costs related to Canadian gas processing operations,
which ceased in July 1996 when the plant was sold.
F-4
<PAGE>
The increase in depreciation and depletion expense in 1996 reflects higher
depletion charges of subsidiaries due to increased gas production and higher
utility depreciation expense due to property additions.
General taxes principally include state and city taxes on utility revenues
and property. The applicable property base generally has increased, 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 variations in utility revenues each year.
Federal income tax expense reflects changes in pre-tax income.
The increase in earnings from energy services investments in 1996 is
primarily due to the increase in earnings from Iroquois offset by lower
cogeneration earnings, as previously discussed. Other income also includes
pre-tax gains on the sale of the Canadian plant and on the initial public
offering of 34% of THEC's common stock.
Interest charges on long-term debt in each of the last three fiscal years
generally reflect higher average subsidiary borrowings. In fiscal 1996,
interest charges reflected lower utility interest costs due to debt refunding.
Other interest expense primarily reflects accruals of 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.
CAPITAL EXPENDITURES
Consolidated capital expenditures were $302.3 million in 1996, $214.0
million in 1995 and $199.6 million in 1994.
Capital expenditures related to utility operations were $110.8 million in
1996, $108.7 million in 1995 and $103.8 million in 1994. Utility expenditures
in all years principally were for the renewal and replacement of mains and
services.
Capital expenditures related to gas exploration, production and processing
activities were $169.0 million in 1996, $83.0 million in 1995 and $71.3
million in 1994. Expenditures in 1996 reflect two major acquisitions totaling
$84.7 million for gas and oil reserves in South Texas and the Gulf of Mexico,
as well as ongoing exploration and development activities. Expenditures in
1996 primarily reflect increased off-shore development activities. Net proved
gas reserves at September 30, 1996 were approximately 322 BCFe. These reserves
are located off-shore in the Gulf of Mexico and on-shore in Texas, the Arkoma
Basin and West Virginia.
Capital expenditures related to energy services investments were $22.5
million in 1996, $22.3 million in 1995 and $24.5 million in 1994. Expenditures
in 1996 primarily were for the acquisition of the additional interest in
Iroquois. Also, in 1996 the cogeneration plant at JFK was refinanced and cash
flows from investing activities include a return of capital from the proceeds.
In 1995 and 1994, expenditures were primarily related to the construction of
the JFK cogeneration project and, in 1995, also included $5.6 million related
to the Stony Brook cogeneration plant. In 1994, capital expenditures also
included the acquisition of an interest in a cogeneration plant located in
Lockport, New York.
Consolidated capital expenditures for fiscal years 1997 and 1998 are
estimated to be approximately $195 million in each year, including $85 million
per year related to non-utility activities. The level of such expenditures is
reviewed on an ongoing basis and can be affected by timing, scope and changes
in investment opportunities.
F-5
<PAGE>
FINANCING
Cash provided by operating activities continues to be strong and is a
substantial source for financing ongoing capital expenditures. In 1996, cash
flow from utility operations was reduced by the timing of budget plan billing
settlements related to cold weather.
In September 1996, THEC issued 7,130,000 shares of its common stock in an
initial public offering, providing net proceeds of $101.0 million, which were
used to pay down debt and to complete the financing of gas reserve
acquisitions and property additions discussed previously.
In addition, proceeds from common stock issued through the Company's
employee and shareholder stock purchase plans have provided the Company
approximately $27.4 million in 1996, $28.0 million in 1995 and $29.8 million
in 1994. The Company issued 1,800,000 new shares of common stock on October 6,
1993, providing net proceeds of $44.9 million.
In March 1996, the Company refunded $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 were called for redemption at optional redemption
prices equal to 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 Company expects to initiate a call of its Gas Facilities
Revenue Bonds, 7 1/8% Series 1985 I and 7% Series 1985 II, which are callable
on December 1, 1996 at 102% of face amount per bond plus accrued interest to
the call date. If authorization is received from government agencies, the
bonds would be called early in calendar year 1997.
At September 30, 1996, the consolidated annualized cost of long-term debt
was 6.3%, compared to 7.1% in 1995 and 6.9% in 1994.
FINANCIAL FLEXIBILITY AND LIQUIDITY
At September 30, 1996, the Company had cash and temporary cash investments
of $41.9 million and available bank lines of credit of $75 million, which
lines are available to secure the issuance of commercial paper. The lines of
credit can be increased to $150 million by December 1996. Related borrowings
primarily are used to finance seasonal working capital requirements, which in
recent years have not been significant. At September 30, 1996, there were no
borrowings outstanding. In addition, subsidiaries have lines of credit
totaling $150 million, which for the most part support borrowings under
revolving loan agreements. (See Note 5C to the Consolidated Financial
Statements, "Other Long-Term Debt", for additional information.)
At September 30, 1996, the common equity component of the Company's
capitalization was 55.8%.
Fixed charge coverage ratios were 3.99 times in 1996, 3.17 times in 1995 and
3.21 times in 1994.
RATE AND REGULATORY MATTERS
Rate Settlement Matters and Holding Company Agreement
In September 1996, the New York State Public Service Commission (PSC)
granted the Company's petition to restructure into a holding company. The
PSC's holding company order approved a settlement agreement among Brooklyn
Union, the Staff of the Department of Public Service and several intervenor
parties. This agreement contains restrictions and limitations on certain
holding company investments, limitations on the level of dividend payments
from Brooklyn Union to the holding company under certain circumstances,
prohibitions on certain intercompany loans, guarantees and pledges, and
restrictions on transactions among the affiliated holding company group.
The agreement reached in the holding company filing included a new multi-
year rate plan that became effective on October 1, 1996. After an initial rate
reduction of approximately $3.0 million in fiscal 1997, the
F-6
<PAGE>
non-gas component in customer bills will be under specific price caps. Hence,
the total amount for this component 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 cost responsibility more appropriately. The Company also will be
permitted to charge for various ancillary services.
During the six-year term of the rate plan, the costs of gas purchased by the
Company for its customers will be recovered currently in billed firm revenues
through the operation of a tariff provision, the Gas Adjustment Clause (GAC).
Further, in addition to recovering its specific gas costs in applicable rates,
the Company's rates for transporting gas within its local distribution system
provide for full margin recovery of its cost of service. (See Notes to
Consolidated Financial Statements, "Summary of Significant Accounting Policies
and Basis for Financial Statement Presentation--Regulatory Assets.")
Although there is no specific authorized rate of return on common equity, the
rate plan includes provisions for rate changes if certain conditions applicable
to inflation, exogenous costs or changes in financial condition occur. Under
the agreement the Company generally is not subject to any earnings cap or
provisions to share with customers any level of earnings from utility
operations. However, incentive provisions remain for retention of 20% of
margins on sales to off-system customers and capacity release credits, and
expenditures related to remediation of the sites of former gas manufacturing
plants are subject to a provision enabling the Company to retain any savings,
while requiring it to absorb any costs, to the extent that expenditures vary by
10% compared with estimates. The agreement includes a customer service quality
performance plan with a maximum forty basis-point pre-tax equity return penalty
if service quality diminishes in certain categories over the term of the
agreement. Also, the weather normalization adjustment was modified to provide
that the Company may recover or be required to refund 87.5% of all margin
shortfalls or surpluses resulting from weather that is warmer or colder-than-
normal.
In September 1995, the PSC approved the Company's second stage rate filing
covering fiscal 1996. The approval provided for no base rate increase; however,
$7.5 million in deferred credits were amortized to income in 1996. The
authorized rate of return on utility common equity was set at 10.65% for fiscal
1996.
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
amortized to income, as permitted, approximately $1.3 million of deferred
credits in that year. The third year of this agreement was superseded by the
PSC order in the holding company proceeding of September 1996 mentioned above.
Restructuring Proceeding
The PSC has set forth a policy framework to guide the transition of New York
State's gas distribution industry in the deregulated gas industry 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, beginning on May 1, 1996, customers in the Company's
small-volume market have the option to purchase their gas supplies from sources
other than the Company, which would serve as gas transporter. Large-volume
customers have had this option for a number of years. 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 and
transportation customers. 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 under aggregation programs
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.
F-7
<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 operations and maintenance activities. As of September 30, 1996, the
Company had an accrued liability of $28.8 million representing costs associated
with investigation and remediation at former manufactured gas plant sites. (See
Note 9 to the Consolidated Financial Statements, "Environmental Matters," for
additional information.)
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
assurance that assets are safeguarded and that transactions are executed in
accordance 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.
F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Brooklyn Union Gas Company:
We have audited the accompanying Consolidated Balance Sheet and Consolidated
Statement of Capitalization of The Brooklyn Union Gas Company (a New York
corporation) and subsidiaries as of September 30, 1996 and 1995, and the
related Consolidated Statements of Income, Retained Earnings and Cash Flows
for each of the three years in the period ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position and capitalization of The
Brooklyn Union Gas Company and subsidiaries as of September 30, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
October 23, 1996
New York, New York
F-9
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS FOR FINANCIAL STATEMENT
PRESENTATION
Principles of Consolidation
The Consolidated Financial Statements reflect the accounts of the Company
and its subsidiaries. All significant intercompany transactions are
eliminated. All other adjustments are of a normal, recurring nature and
certain reclassifications have been made to amounts in prior periods to
conform with the current period presentation.
Further, the preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Utility Gas Property--Depreciation and Maintenance
Utility gas property is stated at original cost of construction, which
includes allocations of overheads and taxes and an allowance for funds used
during construction.
Depreciation is provided on a straight-line basis in amounts equivalent to
composite rates on average depreciable property of 3.4% in 1996 and 1995, and
3.3% in 1994.
The cost of property retired, plus the cost of removal less salvage, is
charged to accumulated depreciation. The cost of repair and minor replacement
and renewal of property is charged to maintenance expense.
Gas Exploration and Production Property--Depletion and Depreciation
The Company's gas exploration and production subsidiary follows the full
cost method of accounting. All productive and nonproductive costs identified
with acquisition, exploration and development are capitalized. Provisions for
depletion are based on the units-of-production method and, when necessary,
include provisions related to the asset ceiling test limitations required by
the regulations of the Securities and Exchange Commission. Costs of
unevaluated gas and oil properties are excluded from the amortization base
until proved reserves are established or an impairment is determined.
Provisions for depreciation of all other non-utility property are computed
on a straight-line basis over useful lives of three to fifteen years.
Investments in Energy Services
Certain subsidiaries own as their principal assets investments representing
ownership interests of 50% or less in energy-related businesses that are
accounted for under the equity method.
Revenues
Utility customers generally are billed bi-monthly on a cycle basis. Revenues
include unbilled amounts related to the estimated gas usage that occurred from
the last meter reading to the end of each month.
Revenue requirements to establish utility rates are based on sales to
customers. Gas costs are recovered currently in billed firm revenues through
the operation of a tariff provision, the Gas Adjustment Clause (GAC). Net
revenues from off-system gas sales and tariff gas balancing services and
capacity release credits are refunded to firm customers subject to certain
limited sharing provisions in the Company's tariff. Prior to October 1, 1996,
net revenues from tariff sales for gas and transportation services to on-
system customers made on an interruptible basis were refunded to firm
customers subject to sharing provisions. The GAC provision requires an annual
reconciliation of recoverable gas costs and GAC revenues. Any difference is
deferred pending recovery from or refund to firm customers during a subsequent
twelve-month period.
F-10
<PAGE>
Derivative Financial Instruments
The Company and THEC use derivative financial instruments primarily to hedge
exposures in cash flows due to fluctuations in the price of natural gas and
fuel oil, which in certain markets may strongly influence the Company's
selling price for natural gas. Gains and losses on these instruments are
recognized concurrently with the recognition of the underlying exposures.
The Company regularly assesses the relationship between natural gas
commodity prices in "cash" and futures markets. The correlation between prices
in these markets has been well within a range generally deemed to be
acceptable. If correlation were not to remain in an acceptable range, the
Company would account for its financial instrument positions as trading
activities.
Federal Income Tax
Prior to the adoption in 1994 of SFAS-109, "Accounting for Income Taxes",
pursuant to PSC policy, deferred taxes were not provided for certain
construction costs incurred before fiscal 1988 and for bases differences
related to differences between tax and book depreciation methods. In
accordance with SFAS-109, the Company recorded a regulatory asset for the net
cumulative effect of having to provide deferred Federal income tax expense on
all differences between the tax and book bases of assets and liabilities at
the current tax rate.
Investment tax credits, which were available prior to the Tax Reform Act of
1986, were deferred in operating expense and are amortized as a reduction of
Federal income tax in other income over the estimated life of the related
property.
Regulatory Assets
The Company is subject to the provisions of Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain
Types of Regulation". Regulatory assets arise from the allocation of costs and
revenues to accounting periods for utility ratemaking purposes differently
from bases generally applied by nonregulated companies. Regulatory assets are
recognized in accordance with SFAS-71. With the exception of net tax
regulatory assets all other significant assets and liabilities created by the
ratemaking process, including the $33.2 million recorded for environmental
remediation costs as of September 30, 1995, have been reflected in utility
rates pursuant to the agreement approved by the PSC in its September 25, 1996
holding company order. Accordingly, at September 30, 1996 the Company had only
a net tax regulatory asset of $74,885,000 compared to a regulatory asset of
$109,636,000 related to taxes and environmental costs at September 30, 1995.
In the event that it were no longer subject to the provisions of SFAS-71,
the Company estimates that the write-off of this net tax regulatory asset
could result in a charge to net income of approximately $48,675,000 which
would be classified as an extraordinary item.
Subsidiary Common Stock Issuances to Third Parties
The Company follows an accounting policy of income statement recognition for
parent company gains or losses from issuances of stock by subsidiaries.
Research and Development Costs
All research and development costs are expensed as incurred. For the years
ended September 30, 1996, 1995 and 1994, these costs were $12.8 million, $11.9
million and $11.9 million, respectively.
F-11
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
OPERATING REVENUES
Utility sales............................ $1,351,821 $1,152,331 $1,279,638
Gas production and other................. 80,181 63,953 58,992
---------- ---------- ----------
1,432,002 1,216,284 1,338,630
---------- ---------- ----------
OPERATING EXPENSES
Cost of gas.............................. 610,053 446,559 560,657
Operation and maintenance................ 428,977 385,654 384,734
Depreciation and depletion............... 79,610 72,020 69,611
General taxes............................ 143,296 134,718 150,743
Federal income tax (See Note 1).......... 39,508 41,989 40,556
---------- ---------- ----------
OPERATING INCOME........................... 130,558 135,344 132,329
OTHER INCOME
Income from energy services investments.. 13,523 9,458 5,689
Gain on sale of investment in Canadian
plant................................... 16,160 -- --
Gain on sale of subsidiary stock (See
Note 3)................................. 35,437 -- --
Other, net............................... (1,188) 151 700
Federal income tax (See Note 1).......... (19,861) (51) (142)
---------- ---------- ----------
INCOME BEFORE INTEREST CHARGES............. 174,629 144,902 138,576
INTEREST CHARGES
Long-term debt........................... 46,803 47,939 46,900
Other.................................... 4,918 5,128 4,292
---------- ---------- ----------
NET INCOME................................. 122,908 91,835 87,384
DIVIDENDS ON PREFERRED STOCK............... 323 337 351
---------- ---------- ----------
INCOME AVAILABLE FOR COMMON STOCK.......... $ 122,585 $ 91,498 $ 87,033
========== ========== ==========
EARNINGS PER SHARE OF COMMON STOCK
(Average shares outstanding of 49,365,435,
48,211,220 and 46,979,597, respectively).. $ 2.48 $ 1.90 $ 1.85
========== ========== ==========
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR....................... $303,709 $279,466 $255,979
INCOME AVAILABLE FOR COMMON STOCK.................. 122,585 91,498 87,033
-------- -------- --------
426,294 370,964 343,012
LESS:
Cash dividends declared ($1.42, $1.39 and $1.35
per common share, respectively)................. 70,291 67,229 63,652
Other adjustments................................ 30 26 (106)
-------- -------- --------
BALANCE AT END OF YEAR............................. $355,973 $303,709 $279,466
======== ======== ========
</TABLE>
The accompanying Summary of Significant Accounting Policies and Basis for
Financial Statement Presentation and Notes to Consolidated Financial Statements
are integral parts of these statements.
F-12
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Property
Utility, at cost................................... $ 1,782,440 $ 1,690,193
Accumulated depreciation........................... (429,476) (393,263)
Gas exploration and production, at cost (See Note
3)................................................ 510,568 353,847
Accumulated depletion.............................. (165,414) (138,136)
----------- -----------
1,698,118 1,512,641
----------- -----------
INVESTMENTS IN ENERGY SERVICES (SEE NOTE 8).......... 115,529 121,023
----------- -----------
CURRENT ASSETS
Cash............................................... 18,524 15,992
Temporary cash investments......................... 23,397 24,550
Accounts receivable................................ 172,843 146,018
Allowance for uncollectible accounts............... (15,616) (13,730)
Gas in storage, at average cost.................... 91,813 88,810
Materials and supplies, at average cost............ 12,089 13,203
Prepaid gas costs.................................. 11,945 15,725
Other.............................................. 38,888 19,856
----------- -----------
353,883 310,424
----------- -----------
DEFERRED CHARGES..................................... 122,073 172,834
----------- -----------
$ 2,289,603 $ 2,116,922
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (SEE ACCOMPANYING STATEMENT AND NOTE
5)
Common equity...................................... $ 905,808 $ 826,290
Preferred stock, redeemable........................ 6,600 6,900
Long-term debt..................................... 712,013 720,569
----------- -----------
1,624,421 1,553,759
----------- -----------
CURRENT LIABILITIES
Accounts payable................................... 143,561 103,705
Dividends payable.................................. 18,229 17,536
Taxes accrued...................................... 10,905 3,635
Customer deposits.................................. 21,881 22,252
Customer budget plan credits....................... 8,892 24,790
Interest accrued and other......................... 37,244 39,438
----------- -----------
240,712 211,356
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Federal income tax................................. 282,041 247,882
Unamortized investment tax credits................. 20,007 20,948
Other.............................................. 43,573 82,977
----------- -----------
345,621 351,807
----------- -----------
MINORITY INTEREST IN SUBSIDIARY COMPANY (SEE NOTE 3). 78,849 --
----------- -----------
$ 2,289,603 $ 2,116,922
=========== ===========
</TABLE>
The accompanying Summary of Significant Accounting Policies and Basis for
Financial StatementPresentation and Notes to Consolidated Financial Statements
are integral parts of these statements.
F-13
<PAGE>
CONSOLIDATED STATEMENT OF CAPITALIZATION
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
COMMON EQUITY
Common stock, $.33 1/3 par value, authorized
70,000,000 shares; outstanding 49,857,448 and
48,788,320 shares, respectively .................... $ 549,835 $ 522,581
Retained earnings (See accompanying statement)....... 355,973 303,709
----------- -----------
905,808 826,290
----------- -----------
PREFERRED STOCK, REDEEMABLE
$100 par value, cumulative, authorized 900,000 shares
4.60% Series B, 69,000 and 72,000 shares outstand-
ing, respectively................................... 6,900 7,200
Less: Current sinking fund requirements.............. 300 300
----------- -----------
6,600 6,900
----------- -----------
LONG-TERM DEBT
Gas facilities revenue bonds (issued through New York
State Energy Research and Development Authority)
9% Series 1985 A due May 2015...................... -- 98,500
8 3/4% Series 1985 due July 2015................... -- 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
5.5% Series 1996 due January 2021.................. 153,500 --
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
Unamortized premium--Long-term debt.................. (1,489) --
Subsidiary borrowings................................ 65,002 72,069
----------- -----------
712,013 720,569
----------- -----------
$ 1,624,421 $ 1,553,759
=========== ===========
</TABLE>
The accompanying Summary of Significant Accounting Policies and Basis for
Financial Statement Presentation and Notes to Consolidated Financial Statements
are integral parts of these statements.
F-14
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER
30,
-------------------------------
1996 1995 1994
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................... $ 122,908 $ 91,835 $ 87,384
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and depletion.................. 83,006 77,696 75,386
Deferred Federal income tax ................ 25,985 11,037 10,897
Gain on sale of investment in Canadian
operations................................. (16,160) -- --
Gain on sale of subsidiary stock............ (35,437) -- --
Income from energy services investments..... (13,523) (9,458) (5,689)
Dividends received from energy services
investments................................ 11,031 3,595 4,392
Change in accounts receivable, net.......... (24,939) 44,712 31,906
Change in accounts payable.................. 39,856 (29,283) (34,121)
Gas inventory and prepayments............... 777 6,208 5,498
Other....................................... 8,863 14,439 18,474
--------- --------- ---------
Cash provided by operating activities......... 202,367 210,781 194,127
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock.......................... 27,407 27,974 29,828
Proceeds from sale of subsidiary stock ....... 101,041 -- --
Common stock proceeds receivable.............. -- -- 44,910
Issuance of long-term debt.................... 153,500 19,192 12,077
Repayment of long-term debt and preferred
stock........................................ (160,867) (300) (300)
Dividends paid................................ (70,614) (67,566) (64,003)
--------- --------- ---------
Cash provided by (used for) financing activi-
ties......................................... 50,467 (20,700) 22,512
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excluding allowance for
equity funds used during construction)....... (301,307) (212,732) (197,496)
Proceeds from sale of investment in Canadian
plant........................................ 26,938 -- 11,691
Partnership distribution 1996 and other....... 22,914 9,702 1,398
--------- --------- ---------
Cash used in investing activities............. (251,455) (203,030) (184,407)
--------- --------- ---------
CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS. $ 1,379 $ (12,949) $ 32,232
CASH AND TEMPORARY CASH INVESTMENTS AT BEGIN-
NING OF YEAR................................. 40,542 53,491 21,259
--------- --------- ---------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF
YEAR......................................... $ 41,921 $ 40,542 $ 53,491
========= ========= =========
Temporary cash investments are short-term marketable securities purchased
with maturities of three months or less that are carried at cost which
approximates their fair value.
Supplemental disclosures of cash flows
Income taxes................................ $ 37,053 $ 36,000 $ 36,900
Interest.................................... $ 53,210 $ 53,047 $ 50,872
========= ========= =========
</TABLE>
The accompanying Summary of Significant Accounting Policies and Basis for
Financial Statement Presentation and Notes to Consolidated Financial
Statements are integral parts of these statements.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FEDERAL INCOME TAX
Income tax expense (benefit) is reflected as follows in the Consolidated
Statement of Income:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
OPERATING EXPENSES
Current...................................... $ 27,766 $ 31,676 $ 38,403
Deferred..................................... 11,742 10,313 2,153
-------- -------- --------
39,508 41,989 40,556
-------- -------- --------
OTHER INCOME
Current...................................... 6,559 379 (7,528)
Deferred..................................... 14,243 724 8,744
Amortization of investment tax credits....... (941) (1,052) (1,074)
-------- -------- --------
19,861 51 142
-------- -------- --------
Total Federal income tax....................... $ 59,369 $ 42,040 $ 40,698
======== ======== ========
</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,
-----------------------
1996 1995
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Utility property.................................... $ 176,565 $ 180,708
Gas production and other property................... 69,488 49,402
Net tax regulatory asset............................ 26,210 28,214
Other............................................... 9,778 (10,442)
----------- -----------
Net deferred income tax liability................... $ 282,041 $ 247,882
=========== ===========
</TABLE>
The following is a reconciliation between reported income tax and tax
computed at the statutory rate of 35%:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Computed at statutory rate..................... $ 63,797 $ 46,856 $ 44,828
Adjustments related to:
Gas production tax credits................... (1,962) (2,730) (1,303)
Nontaxable interest income................... (678) (870) (556)
Amortization of investment tax credits....... (941) (1,052) (1,074)
Other, net................................... (847) (164) (1,197)
-------- -------- --------
Total Federal income tax....................... $ 59,369 $ 42,040 $ 40,698
-------- -------- --------
Effective income tax rate...................... 33% 31% 32%
======== ======== ========
</TABLE>
2. POSTRETIREMENT BENEFITS
A. PENSION: The Company has a noncontributory defined benefit pension plan
covering substantially all employees. Benefits are based on years of service
and compensation. The Company's funding policy for pensions is in accordance
with requirements of Federal law and regulations. There were no pension
contributions in 1996, 1995 and 1994. Special retirement programs were
initiated in 1995 and 1994.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The calculation of net periodic pension cost follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost, benefits earned during the
year........................................ $ 15,160 $ 11,533 $ 15,100
Special retirement charge.................... -- 5,416 8,465
-------- -------- --------
15,160 16,949 23,565
-------- -------- --------
Interest cost on projected benefit
obligation.................................. 37,128 35,128 29,511
Return on plan assets........................ (78,930) (82,626) (12,430)
Net amortization and deferral................ 31,745 34,786 (32,798)
-------- -------- --------
Total pension cost........................... $ 5,103 $ 4,237 $ 7,848
======== ======== ========
</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 investment grade common stock and fixed income securities.
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------
1996 1995
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested............................................ $ (414,988) $ (401,159)
Accumulated....................................... $ (439,278) $ (423,434)
Projected......................................... $ (563,852) $ (545,825)
Plan assets at fair value......................... $ 608,080 $ 555,906
----------- -----------
Plan assets in excess of projected benefit
obligation....................................... $ 44,228 $ 10,081
Unrecognized net loss (gain) from past experience
different from that assumed and from changes in
assumptions...................................... (32,755) 10,880
Unrecognized transition asset..................... (27,914) (32,566)
----------- -----------
Accrued pension liability......................... $ (16,441) $ (11,605)
----------- -----------
Assumptions:
Obligation discount............................... 7.25% 7.00%
Asset return...................................... 7.75% 7.50%
Average annual increase in compensation........... 5.50% 5.50%
=========== ===========
</TABLE>
B. OTHER--RETIREE HEALTH CARE AND LIFE INSURANCE: The Company sponsors
noncontributory defined benefit plans under which it provides certain health
care and life insurance benefits for retired employees. The Company has been
funding a portion of future benefits over employees' active service lives
through a Voluntary Employee Beneficiary Association (VEBA) trust.
Contributions to VEBA trusts are tax deductible, subject to limitations
contained in the Internal Revenue Code. The Company's policy is to fund the
cost of postretirement benefits in a tax effective manner as part of its
overall strategy to manage the costs of its benefit programs for employees.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net periodic other postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1995
------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Service cost, benefits earned during the year... $ 3,178 $ 2,590
Interest cost on accumulated postretirement
benefit obligation............................. 10,673 9,958
Return on plan assets........................... (9,382) (6,746)
Net amortization and deferral................... 10,961 6,752
------------ ------------
Other postretirement benefit cost............... $ 15,430 $ 12,554
============ ============
</TABLE>
The following table sets forth the plans' funded status, reconciled with
amounts recognized in the Company's Consolidated Balance Sheet.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation
Retirees........................................ $ (88,278) $ (87,022)
Fully eligible active plan participants......... (18,271) (10,980)
Other active plan participants.................. (63,762) (56,157)
----------- -----------
$ (170,311) $ (154,159)
----------- -----------
Plan assets at fair value, primarily stocks and
bonds............................................ $ 93,452 $ 72,638
----------- -----------
Accumulated postretirement benefit obligation in
excess of
plan assets...................................... $ (76,859) $ (81,521)
Unrecognized net loss from past experience
different from that assumed and from changes in
assumptions...................................... 29,285 25,345
Unrecognized transition obligation................ 64,015 67,781
----------- -----------
Prepaid other postretirement benefit.............. $ 16,441 $ 11,605
----------- -----------
Assumptions:
Obligation discount............................. 7.25% 7.00%
Asset return.................................... 7.75% 7.50%
=========== ===========
</TABLE>
The measurement also assumes a health care cost trend rate of 8.5%
decreasing to 5.0% by the year 2007 and remaining at that level thereafter. A
1.0% increase in the health care cost trend rate would have the effect of
increasing the accumulated postretirement benefit obligation as of September
30, 1996 and the net periodic SFAS-106 expense by approximately $23,825,000
and $1,935,000, respectively.
3. THE HOUSTON EXPLORATION COMPANY (THEC)
Certain former employees of Fuel Resources Inc., the subsidiary of the
Company that previously owned certain onshore natural gas and oil producing
properties and acreage, were entitled to receive remuneration for the increase
in the value of these properties should these properties be sold or
transferred. These former employees were paid, and a reorganization charge of
$12.0 million was recorded in operation and maintenance expense in the
accompanying Consolidated Statement of Income, as a result of the transfer of
these properties to THEC in 1996.
In September 1996, THEC completed an initial public offering (the "IPO") of
7,130,000 shares of its common stock at an offering price of $15.50 per share.
The cash proceeds to THEC from the IPO, after deductions for commissions and
offering expenses, were $101.0 million and were used to repay a portion of
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THEC's short-term borrowings incurred as a result of two major acquisitions in
1996 of properties and proved gas reserves for $84.7 million. One of these
acquisitions also required THEC to issue, in conjunction with the IPO, 762,387
shares (the number of shares being determined by the IPO price) of its common
stock as consideration for the $11.8 million portion of the acquisition's
purchase price that was to be funded with THEC's stock.
Further, in September 1996, THEC issued, also in conjunction with the IPO,
145,161 shares of its common stock to its President for certain of his working
interests, valued at $2.3 million, in properties owned by THEC. As a result of
these three stock issuances, the Company's ownership in THEC was reduced from
100% to approximately 66%, and the Company recorded a $35.4 million gain
($23.0 million after tax) in recognition of the net increase in the book value
of the Company's investment in THEC.
4. FIXED OBLIGATIONS
A. LEASES: Lease costs included in operation expense were $13,894,000 in
1996, $14,706,000 in 1995 and $15,547,000 in 1994. The future minimum lease
payments under the Company's various leases, all of which are operating
leases, are approximately $14,143,000 per year over the next five years and
$149,547,000 in the aggregate for years thereafter.
The Company has a lease agreement with a remaining term of 15 years for its
corporate headquarters.
B. FIXED CHARGES UNDER FIRM CONTRACTS: The Company has entered into various
contracts for gas delivery and supply services. The contracts have remaining
terms that cover from one to seventeen years. Certain of these contracts
require payment of monthly charges in the aggregate amount of approximately
$4.3 million per month in all events and regardless of the level of service
available. Such charges are recovered as gas costs.
5. CAPITALIZATION
A. COMMON AND PREFERRED STOCK: In 1996 and 1995, the Company issued
1,069,128 and 1,198,305 shares of common stock for $27,407,000 and
$27,974,000, respectively, under the Dividend Reinvestment and Stock Purchase
Plan, the Discount Stock Purchase Plan for Employees, and the Employee Savings
Plan. At September 30, 1996, 2,355,942 unissued shares of common stock were
reserved for issuance under these plans. Other changes to common stock reflect
the amortization of premiums paid on preferred stock redeemed in prior years
which were deferred in order to reflect the ratemaking treatment. Annual
amortization was approximately $155,000 in each of the past two years.
The 4.60% Series B preferred stock is subject to an annual sinking fund
requirement of 3,000 shares at par value.
B. GAS FACILITIES REVENUE BONDS AND OTHER: The Company can issue tax-exempt
bonds through the New York State Energy Research and Development Authority.
Whenever bonds are issued for new gas facilities projects, proceeds are
deposited in trust and subsequently withdrawn by the Company to finance
qualified expenditures.
There are no sinking fund requirements for any Gas Facilities Revenue Bonds.
The Company's 7 1/8% Series 1985 I and 7% Series 1985 II Gas Facilities
Revenue Bonds became callable on December 1, 1996, each issue at the optional
redemption price of 102% of par value plus accrued interest. The Company is
seeking authorization of government agencies for the call and refunding of
these bond issues.
C. OTHER LONG-TERM DEBT: THEC has a $150 million unsecured line of credit
which for the most part supports borrowings under a revolving loan agreement.
Up to $5 million of this line is available for the issuance of letters of
credit to support performance guarantees. This credit facility matures on July
1, 2000. At September 30, 1996, borrowings of $65 million were outstanding
under this line of credit and $1.6 million was committed under outstanding
letter of credit obligations. Borrowings under this facility bear interest, at
THEC's option, at rates indexed at a premium to the Federal Funds rate or
LIBOR, or based on the prime rate. The interest rate on this debt was 6.5% per
annum at fiscal year-end. Covenants related to this line of credit require the
maintenance of certain financial ratios and involve other restrictions
regarding cash dividends, the purchase or redemption of stock and the pledging
of assets.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK OPTIONS AND AWARDS
On November 15, 1995, the Company implemented the Long-Term Performance
Incentive Compensation Plan and granted 202,800 nonqualified stock options and
13,000 performance shares to officers. The number of shares of Common Stock
reserved for issuance under this Plan is 1,500,000 in the aggregate; however,
no more than 750,000 shares will be available for issuance pursuant to the
exercise of the stock options.
The stock options were awarded at an exercise price of $27.00 (the fair
market value on the grant date). They vest ratably over a three-year period
from the grant date with a ten-year exercise period. The stock options were
not exercisable as of September 30, 1996. The performance shares granted
represent the target number of shares, as defined under the Plan, that will
vest at the end of a three-year performance period ending on September 30,
1998. The actual number of performance shares to be earned is contingent upon
achieving target levels of total shareholder return in relation to the
Standard & Poor's Utilities Index. The actual awards will range from 0 to 200%
of the target number of shares.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation." This statement requires companies to either recognize
compensation costs attributable to employee stock options or similar equity
instruments in net income or, in the alternative, provide pro forma footnote
disclosure on net income and earnings per share. Implementation of this
statement is required in the Company's 1997 fiscal year. The Company does not
anticipate that the provisions of this statement will have a material effect
on the Company's net income.
7. FINANCIAL INSTRUMENTS
A. FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's long-term debt
consists primarily of publicly traded Gas Facilities Revenue Bonds, the fair
value of which is estimated based on quoted market prices for the same or
similar issues. The fair value of these bonds at September 30, 1996 and 1995
was $660,499,600 and $673,408,300, respectively, and the carrying value was
$648,500,000 in both years. Subsidiary debt is carried at an amount
approximating fair value because its interest rate is based on current market
rates.
The fair value of the Company's redeemable preferred stock is estimated
based on quoted market prices for similar issues. At September 30, 1996 and
1995, the fair value of this stock was $4,958,300 and $5,228,800,
respectively, and the carrying value was $6,600,000 and $6,900,000,
respectively.
All other financial instruments included in the Consolidated Balance Sheet
are stated at amounts that approximate fair values.
B. DERIVATIVE FINANCIAL INSTRUMENTS: The Company and THEC employ derivative
financial instruments--natural gas futures, options and swaps--for the purpose
of managing commodity price risk.
The utility tariff applicable to certain large-volume customers permits gas
to be sold at prices established monthly within a specified range expressed as
a percentage of prevailing alternate fuel oil prices. The Company uses
derivatives, primarily futures, to fix profit margins on specified portions of
the sales to this market in line with pricing objectives. Implementation of
the strategy involves establishment of long (buy) positions in gas futures
contracts with offsetting short (sell) positions in oil futures contracts of
equivalent energy value that are capped by options over the same time period.
The long gas futures position follows, generally within a range of 80% to
120%, the cost of gas to serve this market while the short oil futures
position correspondingly replicates, within the same range, the selling price
of gas. The Company has developed a strong sense of the relationship between
gas and oil prices in the target markets, and the implementation of its
strategy has satisfactorily hedged its exposure to the loss of profit margins
on the desired portion of anticipated sales.
With respect to natural gas production operations, THEC generally uses swaps
and standard New York Mercantile Exchange futures contracts or options to
hedge the price risk related to known production plans and capabilities. These
instruments include a fixed price/volume and the swaps are structured as both
straight and
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
participating swaps. In all cases, THEC pays the other parties the amount by
which the floating variable price (settlement price) exceeds the fixed price
and receives the amount by which the settlement price is below the fixed
price.
Two participating swap contracts covering 1,860,000 and 930,000 Mcf in 1997
and 1998, respectively, are priced at $1.98 and $2.05. The volumes under these
two swaps are reduced by 50% in each month where the NYMEX prices for that
month exceed the fixed price under the swap contract.
The following table summarizes the notional amounts and related fair values
of the Company's derivative financial instrument positions outstanding at
September 30, 1996. Fair values are based on quotes for the same or similar
instruments. Differences between the notional contract amounts and fair values
represent implicit gains on gas contracts representing long positions or
losses on oil contracts representing short positions if the instruments were
settled at market.
<TABLE>
<CAPTION>
FISCAL YEAR FIXED PRICE VOLUME NOTIONAL FAIR
OF MATURITY PER MCF (MCF) AMOUNT VALUE
----------- ----------- ----------- -------- -------
GAS (IN THOUSANDS)
TYPE OF INSTRUMENT
- - ------------------
<S> <C> <C> <C> <C> <C>
Futures contracts..... 1997 $1.97-$2.39 13,630,000 $30,447 $30,613
Options............... 1997 $2.30-$3.00 3,020,000 $ -- $ 964
Swap contracts........ 1997 $1.53-$2.09 16,858,000 $32,219 $32,165
1998 $1.53-$2.09 4,280,000 $ 8,054 $ 8,166
<CAPTION>
FISCAL YEAR FIXED PRICE VOLUME NOTIONAL FAIR
OF MATURITY PER GALLON (GALLONS) AMOUNT VALUE
----------- ----------- ----------- -------- -------
OIL (IN THOUSANDS)
TYPE OF INSTRUMENT
- - ------------------
<S> <C> <C> <C> <C> <C>
Futures contracts..... 1997 $0.49-$0.58 122,556,000 $66,297 $81,530
1998 $0.52 6,342,000 $ 3,315 $ 3,592
Options............... 1997 $0.13-$0.22 63,672,000 $ 211 $ 1,018
</TABLE>
Futures contracts expire and are renewed monthly. As of September 30, 1996,
no such contract extended beyond January 1998. Further, swaps contracts are
settled monthly and extend through March 1998. Margin deposits with brokers at
September 30, 1996 and 1995 amounted to $23,619,000 and $1,662,400,
respectively, and are recorded in Other in the current assets section of the
balance sheet. Deferred gains (losses) on closed positions were $1,330,000 and
($748,000) at September 30, 1996 and 1995, respectively.
The Company and THEC are exposed to credit risk in the event of
nonperformance by counterparties to derivative contracts, as well as
nonperformance by the counterparties of the transactions against which they
are hedged. The Company believes that the credit risk related to the futures,
options and swap contracts is no greater than that associated with the primary
contracts which they hedge, as these contracts are with major investment grade
financial institutions, and that elimination of the price risk lowers the
Company's overall business risk.
8. INVESTMENT IN IROQUOIS PIPELINE
A Company subsidiary, North East Transmission Co., Inc. (NETCO), owns a
19.4% partnership interest in Iroquois Gas Transmission System, L.P.
(Iroquois). Iroquois owns a 375-mile pipeline extending from Canada to the
Northeast United States. NETCO's investment in Iroquois was $35.4 million at
September 30, 1996.
In 1992 Iroquois was informed that Federal criminal and civil investigations
of the construction of certain of its pipeline facilities had been commenced.
The investigations were to determine whether Iroquois violated various
environmental and other laws in the construction of such facilities. In
addition, beginning in late 1993, Iroquois was informed by the Federal Energy
Regulatory Commission (FERC), the Army Corps of Engineers,
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the U.S. Department of Transportation (DOT) and the New York State Public
Service Commission that each of these agencies had also commenced
investigations regarding the construction of pipeline facilities.
On May 23, 1996, as part of a comprehensive resolution of these
investigations, Iroquois Pipeline Operating Company (IPOC), the operator of
the pipeline, pleaded guilty to four felony violations of the Clean Water Act
and entered into consent decrees under the Clean Water Act in four federal
judicial districts. Although not a named defendant, Iroquois signed the plea
agreement and consent decrees and is bound by their terms. Iroquois also
entered into a related settlement with the State of New York. Under these
various agreements, Iroquois and IPOC agreed to pay $22 million in fines and
penalties, agreed to remediate 27 wetlands along the length of the pipeline,
and agreed to implement under FERC and DOT orders two ten-year plans to
address certain ground stability and pipeline safety concerns. Iroquois also
entered into a separate settlement with the FERC. In September 1995, a
provision was made in the Company's consolidated earnings for NETCO's share of
the estimated settlement costs. This provision was adequate to account for
NETCO's share of the above costs.
9. ENVIRONMENTAL MATTERS
Historically, the Company, or predecessor entities to the Company, owned or
operated several former manufactured gas plant (MGP) sites. These sites have
been identified for the New York State Department of Environmental
Conservation (DEC) for inclusion on appropriate waste site inventories. In
certain circumstances, former MGP sites can give rise to environmental cleanup
responsibilities for the Company.
Two MGP sites are under active consideration by the Company. One site, which
is located on property still owned by the Company, is the former Coney Island
MGP facility located in Brooklyn, New York. This site is the subject of
continuing interim remedial action under the direction of the U.S. Coast
Guard. The Company executed a consent order with the DEC addressing the
overall remediation of the Coney Island site in accordance with state law. A
schedule of investigative and cleanup activities is being developed, leading
to a cleanup over the next several years. The other site currently is owned by
the City of New York (City). The Company and the City are discussing a mutual
approach to sharing potential environmental responsibility for this site. The
Company believes it is likely that, at a minimum, investigative costs will be
incurred by the Company with respect to that site.
Based upon the Coney Island site consent order and the estimated costs of
investigation of the City site, the Company believes that the minimum cost of
MGP-related environmental cleanup will be approximately $34 million, based
upon current information, primarily for the Coney Island site. The Company's
actual MGP-related costs may be substantially higher, depending upon
remediation experience, eventual end use of the sites, and environmental
conditions not addressed in the consent order or current investigative plans.
Such potential additional costs are not subject to estimation at this time.
As of September 30, 1996, the Company had an unpaid liability of $28.4
million. By order issued February 16, 1995, the PSC approved the Company's
July 1993 petition to defer the costs associated with environmental site
investigation and remediation incurred in 1993 and thereafter. Recovery of
these costs began in fiscal year 1995, and is conditioned upon absence of a
PSC determination that such costs have not been reasonably or prudently
incurred. In addition, the Company must demonstrate that it has taken all
reasonable steps to obtain cost recovery from all available funding sources,
including other responsible parties and insurance sources.
Moreover, the rate agreement that became effective on October 1, 1996,
described in "Rate and Regulatory Matters" of Management's Discussion and
Analysis of Results of Operations and Financial Condition, provides, among
other things, that if the total cost of investigating and remediating the
Coney Island site plus the cost of investigating the City site varies from the
amount originally accrued for these activities, the Company will retain or
absorb 10% of the variation. Under the rate agreement, similar ratemaking
treatment will be available for any additional accrued liabilities for other
MGP sites, should such accrual be required.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. SUPPLEMENTAL GAS AND OIL DISCLOSURES
This information includes amounts attributable to a 34% minority interest at
September 30, 1996. In addition, gas and oil operations, and reserves, were
predominantly located in the United States in all years.
CAPITALIZED COSTS RELATING TO GAS AND OIL PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Unproved properties not being amortized.............. $ 60,137 $ 35,082
Properties being amortized--productive and
nonproductive....................................... 441,024 299,398
----------- -----------
Total capitalized costs.............................. 501,161 334,480
Accumulated depletion................................ (160,128) (132,809)
----------- -----------
Net capitalized costs................................ $ 341,033 $ 201,671
=========== ===========
</TABLE>
At September 30, 1996 and 1995, the Company had an immaterial deficiency in
its asset ceiling test; however, such deficiency was eliminated by subsequent
increases in the price of natural gas.
The following is a break-out of the costs (in thousands of dollars) which
are excluded from the amortization calculation as of September 30, 1996, by
year of acquisition: 1996--$36,557; 1995--$13,312; and prior years--$10,268.
The Company cannot accurately predict when these costs will be included in the
amortization base, but it is expected that these costs will be evaluated
within the next five years.
COSTS INCURRED IN PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Acquisition of properties--
Unproved properties............................... $ 24,577 $10,996 $11,022
Proved properties................................. 89,828 14,983 28,370
Exploration........................................ 20,828 5,907 18,961
Development........................................ 31,005 37,953 9,781
-------- ------- -------
Total costs incurred............................... $166,238 $69,839 $68,134
======== ======= =======
</TABLE>
RESULTS OF OPERATIONS FROM GAS AND OIL PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues from gas and oil producing activities--
Sales to unaffiliated parties....................... $50,431 $40,810 $41,185
Sales to affiliates................................. -- -- 2,023
------- ------- -------
Revenues............................................ 50,431 40,810 43,208
------- ------- -------
Production and lifting costs........................ 8,860 5,762 5,360
Depletion........................................... 27,368 22,906 24,978
------- ------- -------
Total expenses.................................... 36,228 28,668 30,338
------- ------- -------
Income before taxes................................. 14,203 12,142 12,870
Income taxes........................................ 3,037 1,957 3,306
------- ------- -------
Results of gas and oil producing activities (exclud-
ing corporate overhead and interest costs)......... $11,166 $10,185 $ 9,564
======= ======= =======
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The gas and oil reserves information is based on estimates of proved
reserves attributable to the Company's interest as of September 30 for each of
the years presented. These estimates principally were prepared by independent
petroleum consultants. Proved reserves are estimated quantities of natural gas
and crude oil which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
The standardized measure of discounted future net cash flows was prepared by
applying year-end prices of gas and oil to the Company's proved reserves,
except for those reserves devoted to future production that is hedged. These
reserves are priced at their respective hedged amount. The standardized
measure does not purport, nor should it be interpreted, to present the fair
value of the Company's gas and oil reserves. An estimate of fair value would
also take into account, among other things, the recovery of reserves not
presently classified as proved, anticipated future changes in prices and
costs, and a discount factor more representative of the time value of money
and the risks inherent in reserve estimates.
RESERVE QUANTITY INFORMATION
<TABLE>
<CAPTION>
NATURAL GAS (MMCF) 1996 1995 1994
------------------ ------- ------- -------
<S> <C> <C> <C>
Proved Reserves--
Beginning of Year.............................. 195,055 142,858 108,847
Revisions of previous estimates................ (354) 13,539 (2,297)
Extensions and discoveries..................... 13,139 38,985 25,890
Production..................................... (26,435) (21,822) (22,814)
Purchases of reserves in place................. 134,325 21,495 34,931
Sales of reserves in place..................... (1,189) -- (1,699)
------- ------- -------
Proved Reserves--
End of Year.................................... 314,541 195,055 142,858
------- ------- -------
Proved Developed Reserves--
Beginning of Year.............................. 151,594 110,225 100,454
------- ------- -------
End of Year.................................... 222,522 151,594 110,225
------- ------- -------
<CAPTION>
CRUDE OIL, CONDENSATE AND NATURAL GAS LIQUIDS
(MBBLS) 1996 1995 1994
--------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Proved Reserves--
Beginning of Year.............................. 1,162 807 443
Revisions of previous estimates................ (148) 245 (140)
Extensions and discoveries..................... 182 155 155
Production..................................... (136) (148) (96)
Purchases of reserves in place................. 294 103 495
Sales of reserves in place..................... (106) -- (50)
------- ------- -------
Proved Reserves--
End of Year.................................... 1,248 1,162 807
------- ------- -------
Proved Developed Reserves--
Beginning of Year.............................. 974 543 407
------- ------- -------
End of Year.................................... 1,040 974 543
------- ------- -------
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED GAS
AND OIL RESERVES
<TABLE>
<CAPTION>
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Future Cash Flows....................................... $554,798 $314,627
Future Costs--
Production ........................................... (89,303) (57,941)
Development........................................... (60,926) (29,948)
-------- --------
Future net inflows before income tax.................... 404,569 226,738
Future income taxes..................................... (59,623) (43,705)
-------- --------
Future net cash flows................................... 344,946 183,033
10% discount factor..................................... (85,688) (49,512)
-------- --------
Standardized measure of discounted future net cash
flows.................................................. $259,258 $133,521
======== ========
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISOUNTED FUTURE NET CASH FLOWS FROM PROVED
RESERVE QUANTITIES
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Standardized measure--beginning of year....... $133,521 $108,134 $110,406
Sales and transfers, net of production costs.. (41,571) (35,048) (37,848)
Net change in sales and transfer prices, net
of production costs.......................... 44,719 (2,786) (25,005)
Extensions and discoveries and improved recov-
ery, net of related costs.................... 18,894 28,868 15,536
Changes in estimated future development costs. (4,798) (2,351) (1,016)
Development costs incurred during the period
that reduced future development costs........ 15,056 10,360 6,381
Revisions of quantity estimates............... (2,338) 13,858 (2,917)
Accretion of discount......................... 16,880 11,763 12,397
Net change in income taxes.................... 21,026 (7,856) 4,001
Purchases of reserves in place................ 94,945 15,176 27,561
Sales of reserves in place.................... -- -- (2,110)
Changes in production rates (timing) and oth-
er........................................... (37,076) (6,597) 748
-------- -------- --------
Standardized measure-end of year.............. $259,258 $133,521 $108,134
======== ======== ========
</TABLE>
F-25
<PAGE>
SUPPLEMENTARY INFORMATION (UNAUDITED)
QUARTERLY INFORMATION
SUMMARY OF QUARTERLY INFORMATION
The following is a table of financial data for each quarter of fiscal 1996
and 1995. The Company's business is influenced by seasonal weather conditions
and the timing of approved base utility tariff rate changes. The effect on
utility earnings of variations in revenues caused by abnormal weather is
largely mitigated by operation of a weather normalization adjustment contained
in the Company's tariff.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Operating revenues..... 398,083 595,438 254,311 184,170
Operating income(loss). 57,400 88,505 5,495 (20,842)(a)
Gains on sale of
subsidiary stock and
Canadian plant (after
taxes)................ -- -- -- 33,539
Income (loss) applica-
ble to common stock... 44,624 74,413 (4,561) 8,109
Per common share:
Earnings (loss)(b).... 0.91 1.51 (0.09) 0.16
Dividends declared.... 0.3550 0.3550 0.3550 0.3550
1995
Operating revenues..... 358,348 481,615 217,696 158,625
Operating income
(loss)................ 54,580 85,364 5,650 (10,250)
Income (loss) applica-
ble to common stock... 42,753 73,555 (6,188) (18,622)
Per common share:
Earnings (loss)(b).... 0.90 1.53 (0.13) (0.38)
Dividends declared.... 0.3475 0.3475 0.3475 0.3475
</TABLE>
(a) Includes a subsidiary reorganization charge of $7.8 million after taxes.
(b) Quarterly earnings per share are based on the average number of shares
outstanding during the quarter. Because of the increasing number of common
shares outstanding in each quarter, the sum of quarterly earnings per
share does not equal earnings per share for the year.
SUMMARY OF QUARTERLY STOCK INFORMATION
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996
High................................ 29 5/8 29 7/8 27 1/2 28 1/8
Low................................. 24 5/8 25 3/4 24 7/8 24 7/8
Close............................... 29 1/4 26 3/4 27 1/4 27 7/8
Shares Traded (000)................. 3,710 3,884 5,121 3,592
1995
High................................ 25 3/8 24 3/4 26 3/8 26 3/8
Low................................. 21 1/2 22 23 3/4 23 1/4
Close............................... 22 1/4 24 1/8 26 1/4 24 5/8
Shares Traded (000)................. 2,695 3,977 2,543 3,219
</TABLE>
F-26
<PAGE>
SUMMARY OF SELECTED FINANCIAL DATA AND STATISTICS
<TABLE>
<CAPTION>
FOR YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME SUMMARY
Operating revenues
Utility sales......... $1,351,821 $1,152,331 $1,279,638 $1,145,315 $1,038,061
Gas production and
other................ 80,181 63,953 58,992 60,189 36,799
---------- ---------- ---------- ---------- ----------
Total operating reve-
nues................... 1,432,002 1,216,284 1,338,630 1,205,504 1,074,860
Operating expenses
Cost of gas........... 610,053 446,559 560,657 466,573 402,137
Operation and mainte-
nance................ 428,977 385,654 384,734 366,706 336,156
Depreciation and de-
pletion.............. 79,610 72,020 69,611 64,779 73,930
General taxes......... 143,296 134,718 150,743 144,827 135,549
Federal income tax.... 39,508 41,989 40,556 41,413 30,052
---------- ---------- ---------- ---------- ----------
Operating income........ 130,558 135,344 132,329 121,206 97,036
Income (loss) from
energy services
investments............ 13,523 9,458 5,689 1,150 (1,041)
Gain on sale of
investment in Canadian
properties............. 16,160 -- -- 20,462 --
Gain on sale of
subsidiary stock....... 35,437 -- -- -- --
Write-off of investment
in propane company..... -- -- -- (17,617) --
Other, net.............. (1,188) 151 700 (465) 5,107
Federal income (tax)
benefit................ (19,861) (51) (142) (70) 833
---------- ---------- ---------- ---------- ----------
Interest charges........ 51,721 53,067 51,192 48,103 42,062
---------- ---------- ---------- ---------- ----------
Net income.............. 122,908 91,835 87,384 76,563 59,873
Dividends on preferred
stock.................. 323 337 351 364 2,078
---------- ---------- ---------- ---------- ----------
Income available for
common stock........... $ 122,585 $ 91,498 $ 87,033 $ 76,199 $ 57,795
========== ========== ========== ========== ==========
FINANCIAL SUMMARY
Common stock information
Per share
Earnings ($)........ 2.48 1.90 1.85 1.73 1.35
Cash dividends de-
clared ($)......... 1.42 1.39 1.35 1.32 1.29
Book value, year-end
($)................ 18.17 16.94 16.27 15.55 14.56
Market value, year-
end ($)............ 27 7/8 24 5/8 24 7/8 25 3/4 22 3/8
Average shares out-
standing (000)....... 49,365 48,211 46,980 44,042 42,882
Shareholders.......... 33,320 33,669 35,233 30,925 31,367
Daily average shares
traded............... 64,500 49,100 42,100 33,100 26,900
Capital expenditures
($).................... 302,280 214,006 199,572 204,514 173,467
Total assets ($)........ 2,289,603 2,116,922 2,029,074 1,897,847 1,748,027
Common equity ($)....... 905,808 826,290 774,236 721,076 632,254
Preferred stock, redeem-
able ($)............... 6,600 6,900 7,200 7,500 7,800
Long-term debt ($)...... 712,013 720,569 701,377 689,300 682,031
Total capitalization
($).................... 1,624,421 1,553,759 1,482,813 1,417,876 1,322,085
Earnings to fixed
charges (times)........ 3.99 3.17 3.21 3.19 2.86
UTILITY OPERATING STA-
TISTICS
Gas data (MDTH)
Firm sales............ 141,948 123,356 133,513 128,972 122,476
Other gas and trans-
portation sales...... 42,950 49,910 42,392 25,032 23,706
Maximum daily capaci-
ty, year-end......... 1,284 1,256 1,256 1,258 1,199
Maximum daily sendout. 994 963 1,022 915 904
Total active meters
(000).................. 1,126 1,125 1,122 l,119 1,117
Heating customers (000). 461 454 446 441 436
Degree days............. 5,170 4,240 4,974 4,802 4,659
Colder (Warmer) than
normal (%)........... 7.7 (11.2) 3.1 -- (4.0)
</TABLE>
F-27
<PAGE>
EXHIBIT 99.1
[LETTERHEAD OF BROOKLYN UNION]
December 30, 1996
Dear Shareholder:
I am pleased to announce that on December 29, 1996, Brooklyn Union and the Long
Island Lighting Company (LILCO) signed a definitive agreement to merge in a tax-
free transaction that will result in a new holding company. A copy of the merger
agreement has been filed with the Securities and Exchange Commission.
The transaction will be accounted for as a pooling of interests and is
anticipated to increase earnings to Brooklyn Union shareholders immediately
after completion of the merger. A copy of the full press release is attached to
this letter.
This proposed transaction has been approved by both companies' boards of
directors and will eventually require your approval. Because the combination
will result in the formation of a new holding company, Brooklyn Union will not
pursue our plans to form the KeySpan Energy Corporation, as we had originally
envisioned. Accordingly, the proposal to form that holding company has been
withdrawn, although it is extensively discussed in our summary annual report,
which was prepared prior to our decision to merge. That holding company
proposal, therefore, is not included in the enclosed proxy statement.
I am very excited about the proposed merger. The transaction offers shareholders
of both companies the opportunity to participate in the significant upside
potential of the convergence of gas and electric companies within the energy
industry. In particular, our combination with LILCO opens up the huge Long
Island market for Brooklyn Union. This market is particularly attractive because
there is an extremely low penetration of gas as a percent of the total energy
provision in that region. The combination of the two companies will result in
substantial synergy savings in excess of $1 billion over ten years, making rates
more competitive. In addition, this transaction will help spur increased
regional business growth through lower energy prices and enhanced energy-related
products and services. As a result, Brooklyn Union shareholders will benefit
from the attractive growth prospects resulting from access to more than one
million customers in an area with a population of 2.7 million people.
I am very enthusiastic about our company's future and am optimistic that we will
continue to grow and prosper in the competitive marketplace. Thank you for your
continued confidence in Brooklyn Union.
Sincerely,
Robert B. Catell
Chairman and Chief Executive Officer
<PAGE>
EXHIBIT 99.2
FOR IMMEDIATE RELEASE
Contact for Brooklyn Union: Contact for LILCO:
Media: Robert Loftus / Robert Mahony Media: Elaine Davis
718-403-2503 / 718-403-2522 516-545-5052
Investors: Jan Childress Investors: William Catacosinos, Jr.
718-403-3382 516-545-4688
BROOKLYN UNION AND LILCO ANNOUNCE PLAN
TO COMBINE COMPANIES
RATE SAVINGS IN EXCESS OF $1.0 BILLION ANTICIPATED
-----------------------------------------------------
NEW YORK (DECEMBER 29, 1996) -- Brooklyn Union Gas Company (NYSE: BU) and The
Long Island Lighting Company (LILCO) (NYSE: LIL) announced today that they have
signed a definitive agreement to merge in a tax-free transaction resulting in a
new holding company. The combined market value of the two companies based on
their closing stock prices on Friday, December 27, 1996 is approximately $4
billion. The transaction will be accounted for as a pooling of interests.
The proposed transaction, which has been approved by both companies' boards of
directors, would unite Brooklyn Union, a gas company with primary operations in
gas distribution serving Brooklyn, Queens and Staten Island, with LILCO, an
electric and gas company serving Nassau and Suffolk Counties and parts of
Queens. The new company, which has not yet been named, will serve approximately
2.2 million customers and have revenues of more than $4.5 billion.
Under the terms of the transaction, LILCO shareholders will receive .803 shares
of the new holding company's common stock for each share of LILCO they currently
hold. Brooklyn Union shareholders will receive one share of the holding
company's common stock for each share of Brooklyn Union they currently hold.
LILCO shareholders will own approximately 66 percent of the common stock of the
new company while Brooklyn Union shareholders will own approximately 34 percent.
There are no changes with respect to either company's public debt issues or
outstanding preferred stock.
Upon completion of the merger, Dr. William J. Catacosinos, currently chairman
and chief executive officer of LILCO, will become chairman and chief executive
officer of the new holding company; Mr. Robert B. Catell, currently chairman and
chief executive officer of Brooklyn Union, will become president and chief
operating officer of the new holding company. One year after the closing, Mr.
Catell will succeed Dr. Catacosinos as chief executive officer, with Dr.
Catacosinos continuing as chairman. The board of directors of the new company
will be composed of 15 members, six from Brooklyn Union and six from LILCO and
three additional persons previously unaffiliated with either company and jointly
selected by them.
- more -
<PAGE>
-2-
Dr. Catacosinos said, "The combination of Brooklyn Union and LILCO is positive
for our customers, shareholders, and the communities we serve. The consolidation
of our neighboring companies will result in synergy savings in excess of $1
billion over ten years, which will provide rate reductions to customers. We will
continue our commitment to LILCO's electric customers, specifically to lowering
electric rates on Long Island. Together, we can help spur increased regional
business growth through lower energy prices and enhanced energy-related products
and services."
"The combined workforce will allow us to respond more effectively to storm
outages. Employees of both our companies will benefit from being part of a
larger, more competitive company well-positioned in the emerging energy-services
industry. Together, we will be positioned to help our customers find business
solutions that optimize a broad array of energy products and services at
competitive prices," Dr. Catacosinos added.
The companies believe reductions related to synergies can be accomplished
without layoffs through attrition and other voluntary separations.
Mr. Catell said, "Our combination with LILCO opens up the substantial Long
Island market for Brooklyn Union. This market is particularly attractive because
there is a low penetration of gas as a percent of the total energy provision in
that region. Our combined company would have an enhanced ability to provide its
broader customer base with competitive energy products and services well into
the future. The tradition of quality customer service and community involvement,
a hallmark of both Brooklyn Union and LILCO, will continue unabated in the
combined entity. Brooklyn Union shareholders should enjoy immediate earnings
accretion and benefit from the long-term growth prospects inherent in the
combination."
Mr. Catell continued, "This transaction offers shareholders of both companies
the opportunity to participate in the significant upside potential of the
convergence of gas and electric companies within the energy industry. LILCO and
Brooklyn Union together will create a platform to market, trade and arrange
physical delivery of energy products and services on a large scale to all major
market areas. Current and prospective customers will benefit greatly from the
opportunity to deal with an energy services company which can offer one-stop
shopping for the provision -- and management -- of their energy needs. Brooklyn
Union's subsidiary, KeySpan Energy Management, headquartered in Jericho, New
York, already operates throughout the tri-state area and its sister company
KeySpan Energy Services sells natural gas to a growing customer base. The
ability to offer wraparound individualized services capable of encompassing all
customer needs -- from management services to choice of fuel and equipment, and
ultimately appliance services -- means a new day indeed for an entire population
of customers in our new market area."
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The companies noted that they will continue discussions with New York State's
Long Island Power Authority (LIPA) with respect to LIPA's proposal to acquire
certain LILCO assets, including its regulatory assets. If an agreement with LIPA
is reached, the terms of the transaction with Brooklyn Union would be adjusted
to reflect that resolution. Brooklyn Union and LILCO will continue to work with
LIPA and state officials to substantially reduce rates to Long Island electric
customers beyond that which could be achieved by the merger alone. Disposition
of any portion of LILCO's assets to LIPA must be agreed to by all three parties.
The companies will continue their current dividend policies respectively, until
the closing. It is expected that the new company's dividend policy will be
determined prior to closing.
The merger is conditioned upon the approval of each company's common
shareholders and various regulatory agencies including the New York Public
Service Commission, the Federal Energy Regulatory Commission and the Securities
and Exchange Commission. The companies are hopeful that the regulatory approvals
can be obtained in 12 to 18 months.
Merrill Lynch & Co. is serving as financial advisor and has provided a fairness
opinion to Brooklyn Union. Dillon Read & Co. Inc. is serving as financial
advisor and has provided a fairness opinion to LILCO.
Brooklyn Union, with approximately 3,000 employees, distributes natural gas in
the New York City boroughs of Brooklyn and Staten Island and in two-thirds of
the borough of Queens, and serves the growing energy needs of 4 million
residents. Brooklyn Union has energy-related investments in gas exploration,
production and marketing in the United States and Canada, as well as energy
services in the United States, including cogeneration products, pipeline
transportation and gas storage.
LILCO's 5,400 employees provide electric and gas service to more than 1 million
customers in Nassau and Suffolk Counties and on the Rockaway Peninsula in Queens
County. LILCO's service territory covers 1,230 square miles with a population of
approximately 2.7 million people.
The press release includes forward looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements reflect numerous assumptions, and involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are: electric load and customer growth; abnormal weather conditions;
available sources and cost of fuel and generating capacity; the speed and degree
to which competition enters the power generation, wholesale and retail sectors
of the electric utility industry; state and federal regulatory initiatives that
increase competition, threaten cost and investment recovery, and impact rate
structures; the ability of the combined company to successfully reduce its cost
structure; operating performance of nuclear generating facilities,
decommissioning costs associated with such facilities; the degree to which the
combined company develops non-regulated business ventures; the economic climate
and growth in the service territories of the two companies; economies generated
by the merger; inflationary trends and interest rates and the other risks
detailed from time to time in the two companies' SEC reports.
