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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-722
THE BROOKLYN UNION GAS COMPANY
(Exact name of Registrant as specified in its charter)
New York 11-0584613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
One MetroTech Center, Brooklyn, New York 11201-3850
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (718) 403-2000
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at May 1, 1997
$.33 1/3 par value 50,310,223
<PAGE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information Page No.
Condensed Consolidated Balance Sheet -
March 31, 1997 and 1996, and September 30,
1996 3
Condensed Consolidated Statement of Income -
Three, Six and Twelve Months Ended March 31,
1997 and 1996 4
Condensed Consolidated Statement of Cash Flows -
Six and Twelve Months Ended March 31,
1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition 12
Review of Independent Public Accountants 21
Report of Independent Public Accountants 22
Part II. Other Information
Item 1 - Legal Proceedings 23
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
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<TABLE>
<CAPTION>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
- - --------------------------------------------------------------------------------------------
March 31, March 31, September 30,
1997 1996 1996
(Unaudited) (Unaudited) (Audited)
- - --------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Assets
Property
Utility, at cost $ 1,805,878 $ 1,714,416 $ 1,782,440
Accumulated depreciation (440,122) (409,645) (429,476)
Gas exploration and production, at cost 563,870 390,880 510,568
Accumulated depletion (188,246) (149,501) (165,414)
- - --------------------------------------------------------------------------------------------
1,741,380 1,546,150 1,698,118
- - --------------------------------------------------------------------------------------------
Investments in Energy Services 156,884 124,247 115,529
- - --------------------------------------------------------------------------------------------
Current Assets
Cash and temporary cash investments 52,496 44,216 41,921
Accounts receivable 387,305 412,645 172,843
Allowance for uncollectible accounts (22,555) (20,736) (15,616)
Gas in storage, at average cost 19,841 16,141 91,813
Materials and supplies, at average cost 13,579 14,225 12,089
Prepaid gas costs - - 11,945
Other 23,972 27,752 38,888
- - --------------------------------------------------------------------------------------------
474,638 494,243 353,883
Deferred Charges 120,862 156,042 122,073
- - --------------------------------------------------------------------------------------------
$ 2,493,764 $ 2,320,682 $ 2,289,603
- - --------------------------------------------------------------------------------------------
Capitalization and Liabilities
Capitalization
Common stock, $.33 1/3 par value stated at $ 559,703 $ 537,366 $ 549,835
Retained earnings 444,346 387,793 355,973
- - --------------------------------------------------------------------------------------------
Total common equity 1,004,049 925,159 905,808
Preferred stock, redeemable 6,300 6,600 6,600
Long-term debt 724,551 724,652 712,013
- - --------------------------------------------------------------------------------------------
1,734,900 1,656,411 1,624,421
- - --------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable 122,792 142,312 143,561
Dividends payable 18,831 18,131 18,229
Commercial paper 43,000 - -
Taxes accrued 68,618 65,572 10,905
Customer deposits 23,177 22,122 21,881
Customer budget plan credits - - 8,892
Interest accrued and other 32,946 50,628 37,244
- - --------------------------------------------------------------------------------------------
309,364 298,765 240,712
- - --------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Federal income tax 290,225 258,729 282,041
Unamortized investment tax credits 19,493 20,475 20,007
Other 57,676 86,302 43,573
- - --------------------------------------------------------------------------------------------
367,394 365,506 345,621
- - --------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Company 82,106 - 78,849
- - --------------------------------------------------------------------------------------------
$ 2,493,764 $ 2,320,682 $ 2,289,603
- - --------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
- - --------------------------------------------------------------------------------------------------------------------
Three Months Six Months Twelve Months
Ended March 31, Ended March 31, Ended March 31,
1997 1996 1997 1996 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Gas sales and transportation $ 547,757 $ 571,445 $ 953,239 $ 943,996 $ 1,338,708 $ 1,272,197
Gas production and other 41,525 23,993 82,769 49,640 134,121 97,760
- - --------------------------------------------------------------------------------------------------------------------
589,282 595,438 1,036,008 993,636 1,472,829 1,369,957
Operating Expenses
Cost of gas 266,233 287,310 465,539 447,613 627,234 569,542
Operation and maintenance 108,388 112,282 208,495 214,042 427,337 404,522
Depreciation and depletion 25,051 18,641 50,033 36,723 92,920 72,674
General taxes 53,625 51,034 95,064 89,637 148,724 139,401
Federal income tax 43,130 37,830 66,564 60,104 45,577 42,633
- - --------------------------------------------------------------------------------------------------------------------
Operating Income 92,855 88,341 150,313 145,517 131,037 141,185
Other Income (Expense)
Income (loss) from equity investments 944 (24) 3,234 1,606 13,274 7,202
Gain on sale of investment in
Canadian plant - - - - 16,160 -
Gain on sale of subsidiary stock - - - - 35,437 -
Other, net (461) 901 (1,238) 531 3,265 453
Federal income tax (209) (1,867) (1,092) (2,444) (18,896) (1,803)
Interest Charges
Long-term debt (9,253) (11,614) (19,798) (23,662) (42,581) (47,522)
Other (1,594) (1,242) (2,753) (2,347) (5,324) (4,958)
Minority Interest's Earnings (1,961) - (3,544) - (3,544) -
- - --------------------------------------------------------------------------------------------------------------------
Net Income 80,321 74,495 125,122 119,201 128,828 94,557
Dividends on Preferred Stock 78 82 157 164 316 330
- - --------------------------------------------------------------------------------------------------------------------
Income Available for
Common Stock $ 80,243 $ 74,413 $ 124,965 $ 119,037 $ 128,512 $ 94,227
- - --------------------------------------------------------------------------------------------------------------------
Per Share of Common Stock $ 1.60 $ 1.51 $ 2.50 $ 2.43 $ 2.58 $ 1.93
- - --------------------------------------------------------------------------------------------------------------------
Dividends Declared per Share
of Common Stock $ 0.365 $ 0.355 $ 0.730 $ 0.703 $ 1.440 $ 1.398
- - --------------------------------------------------------------------------------------------------------------------
Average Common Shares
Outstanding 50,117,504 49,226,883 50,029,547 49,086,888 49,836,765 48,802,940
- - --------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Twelve Months
Ended March 31, Ended March 31,
- - ------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- - ------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 125,122 $ 119,201 $ 128,828 $ 94,557
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and depletion 51,864 38,697 96,488 76,881
Deferred Federal income tax 5,149 (1,521) 40,839 14,979
Gain on sale of investment in Canadian operations - - (16,160) -
Gain on sale of subsidiary stock - - (35,437) -
Income from equity investments, energy related (3,234) (1,606) (13,274) (7,202)
Dividends received from equity investments, energy related 1,893 1,756 10,437 3,985
Minority interest's earnings, subsidiary 3,544 - 3,544 -
Allowance for equity funds used during construction (253) (640) (586) (1,396)
Changes in:
Accounts receivable, net (219,812) (261,084) 24,895 (72,086)
Accounts payable (7,869) 38,439 (19,520) 6,152
Gas inventory and prepayments 83,917 90,977 (3,700) 27,283
Other 79,269 65,711 10,943 24,577
- - ------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 119,590 89,930 227,297 167,730
- - ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 9,866 14,858 22,415 28,645
Proceeds from sale of subsidiary stock - - 101,041 -
Commercial paper and revolving lines of credit, net 55,538 5,611 42,899 11,421
Issuance of long-term, tax-exempt debt - 153,500 - 153,500
Repayment of long-term tax-exempt debt and preferred stock (300) (153,800) (300) (153,800)
Dividends paid (36,749) (35,116) (72,246) (69,101)
- - ------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 28,355 (14,947) 93,809 (29,335)
- - ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excluding allowance
for equity funds used during construction) (141,214) (76,344) (366,177) (192,347)
Proceeds from sale of investment in Canadian plant - - 26,938 -
Partnership distribution and other 3,844 5,035 26,413 20,875
- - ------------------------------------------------------------------------------------------------------------
Cash used in investing activities (137,370) (71,309) (312,826) (171,472)
- - ------------------------------------------------------------------------------------------------------------
Change in Cash and Temporary Cash Investments 10,575 3,674 8,280 (33,077)
Cash and Temporary Cash Investments at Beginning of Period 41,921 40,542 44,216 77,293
- - ------------------------------------------------------------------------------------------------------------
Cash and Temporary Cash Investments at End of Period $ 52,496 $ 44,216 $ 52,496 $ 44,216
- - ------------------------------------------------------------------------------------------------------------
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 $ 17,000 $ 13,000 $ 26,445 $ 26,500
Interest $ 25,593 $ 28,902 $ 53,146 $ 53,959
- - ------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
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THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
In the opinion of the Company, the accompanying unaudited
Condensed Consolidated Financial Statements contain all
adjustments necessary to present fairly the financial position
of the Company as of March 31, 1997 and 1996, and the results
of operations for the three, six and twelve month periods
ended March 31, 1997 and 1996, and cash flows for the six and
twelve month periods ended March 31, 1997 and 1996. Certain
reclassifications were made to conform prior period financial
statements with the current period financial statement
presentation. All other adjustments were of a normal,
recurring nature.
As permitted by the rules and regulations of the Securities
and Exchange Commission, the Condensed Consolidated Financial
Statements do not include all of the accounting information
normally included with financial statements prepared in
accordance with generally accepted accounting principles.
Accordingly, the Condensed Consolidated Financial Statements
should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1996.
The Company's gas distribution business is influenced by
seasonal weather conditions. Annual revenues are substantially
realized during the heating season (November 1 to April 30) as
a result of the large proportion of heating sales, primarily
residential, compared with total sales. Accordingly, results
of operations historically are most favorable in the second
quarter (three months ended March 31) of the Company's fiscal
year, with results of operations being next most favorable in
the first quarter. Results for the third quarter are
marginally unprofitable, and losses are usually incurred in
the fourth quarter. Therefore, the interim Condensed
Consolidated Statement of Income should not be taken as a
prediction for any future period.
The Company's tariff contains a weather normalization
adjustment that largely offsets shortfalls or excesses of firm
net revenues during a heating season due to variations from
normal weather.
2. 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)
6
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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. Part of the Coney Island 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 and a
schedule of investigative and cleanup activities has been
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. This amount
includes approximately $6.1 million of costs expended as of
March 31, 1997. 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 March 31, 1997, the Company
had an unpaid liability of $28.0 million.
The rate agreement that became effective on October 1, 1996,
described in "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.
3. 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
7
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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 $31.9 million recorded for
environmental remediation costs as of March 31, 1996, have
been reflected in utility rates pursuant to the rate agreement
that became effective on October 1, 1996. Accordingly, at
March 31, 1997, the Company had only a net tax regulatory
asset of $74.1 million compared to a net regulatory asset of
$84.1 million at March 31, 1996.
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 regulatory tax asset could result in a charge to net
income of approximately $48.2, million which would be
classified as an extraordinary item.
4. SHARE EXCHANGE AGREEMENT WITH THE LONG ISLAND LIGHTING COMPANY
(LILCO) AND AGREEMENT IN PRINCIPLE WITH THE LONG ISLAND POWER
AUTHORITY (LIPA)
SHARE EXCHANGE AGREEMENT WITH LILCO
On December 29, 1996, the Company and LILCO entered into an
Agreement and Plan of Exchange (Share Exchange Agreement),
pursuant to which the outstanding common stock of the
companies will be exchanged for common stock of a new holding
company. The Share Exchange Agreement was filed as an exhibit
to a Form 8-K filed December 30, 1996.
The proposed transaction has been approved by both companies'
boards of directors. Under the terms of the proposed
transaction, the Company's common shareholders will receive
one share of common stock of the new holding company for each
common share of Brooklyn Union they currently own. LILCO
common shareholders will receive 0.803 shares (the Ratio) of
the new holding company's common stock for each share of LILCO
common stock that they currently own. The transaction is
expected to be accounted for as a pooling of interests. The
Share Exchange Agreement contemplates that discussions will
continue with LIPA to arrive at an agreement, mutually
acceptable to all parties, pursuant to which LIPA would
acquire certain assets or securities of LILCO. In such event,
the Ratio shall become 0.880. As a result of an Agreement in
Principle between the companies and LIPA, the companies
believe that, pending shareholder approval and the execution
and approval of definitive agreements with LIPA (see Agreement
in Principle with LIPA below), the Brooklyn Union-LILCO
transaction would most likely be accounted for as a purchase.
8
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The Share Exchange Agreement contains certain covenants of the
parties pending the consummation of the transaction.
Generally, the parties must carry on their businesses in the
ordinary course consistent with past practice, may not
increase dividends on common stock beyond specified levels and
may not issue capital stock beyond certain limits. The Share
Exchange Agreement also contains restrictions on, among other
things, charter and by-law amendments, capital expenditures,
acquisitions, dispositions, incurrence of indebtedness,
certain increases in employee compensation and benefits, and
affiliate transactions.
Upon completion of the share exchange transaction, Dr. William
J. Catacosinos, currently chairman and chief executive officer
of LILCO, will become chairman and chief executive officer of
the new holding company and 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 the
Company, six from LILCO and three additional persons
previously unaffiliated with either company and jointly
selected by them.
The companies may continue to pay dividends on their common
stock during any fiscal year in an amount not to exceed 103%
of the dividends paid in the prior fiscal year, pursuant to
the provisions of the Share Exchange Agreement. It is
expected that the new holding company's dividend policy will
be determined prior to closing.
Following announcement of the Brooklyn Union-LILCO Share
Exchange Agreement, Standard & Poor's Ratings Services placed
Brooklyn Union's corporate credit and senior unsecured debt
ratings of A, as well as the Company's A-1 commercial paper
rating, on CreditWatch with negative implications. Similarly,
Moody's Investors Service placed the Company's A1 senior
unsecured and Prime-1 short-term ratings on review for
possible downgrade.
The share exchange transaction is conditioned upon, among
other things, the approval of the holders of at least two-
thirds of the outstanding shares of common stock of each of
the Company and LILCO and the receipt of all required
regulatory approvals. The Company is unable to determine when
or if all required regulatory approvals will be obtained.
9
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AGREEMENT IN PRINCIPLE WITH LIPA
On March 19, 1997, the Company, LILCO and LIPA entered into an
Agreement in Principle pursuant to which, after the formation
of the new holding company that will own the stock of the
Company and LILCO and the subsequent transfer of LILCO's
assets related to the conduct of its gas utility business,
non-nuclear electric generation, common assets and certain
current assets to, and the assumption of certain long term and
current liabilities and preferred stock of LILCO by, one or
more newly-formed subsidiaries of the holding company, LILCO's
stock will be sold to LIPA for $2.4975 billion in cash. A
portion of these gross proceeds may be applied to satisfy
certain obligations including the possible redemption of
preferred stock assumed by the holding company's subsidiary.
Upon completion of the sale to LIPA transaction, it is
anticipated that LIPA will own LILCO's electric transmission
and distribution system, its 18% interest in the Nine Mile
Point 2 Nuclear Power Station in upstate New York, and its
regulatory assets, and will assume or refinance approximately
$3.6 billion in LILCO's long term debt. The purchase price is
approximately equal to the net book value of the assets being
acquired. In addition, in connection with the transaction,
LILCO's rights under certain tax certiorari suits against
municipalities on Long Island related to the alleged over-
assessment of LILCO's power plants, including the abandoned
Shoreham plant, will be transferred to LIPA, which is expected
to settle such suits with the municipalities.
As part of the LIPA sale, the Agreement in Principle
contemplated that one or more subsidiaries of the newly formed
holding company would enter into agreements with LIPA,
pursuant to which such subsidiaries would provide management
and operations services to LIPA with respect to the LILCO
transmission and distribution system, sell power generated by
the non-nuclear power plants to LIPA, and manage LIPA's fuel
and electric purchases and any off-system electric sales. In
addition, three years after the sale is executed, LIPA would
have a right for a one year period to acquire the non-nuclear
generating assets. The purchase price for such assets would
be the fair market value at the time of the exercise of the
right, which value will be determined by independent
appraisers.
On April 30, 1997, LIPA submitted to the New York State Public
Authorities Control Board for approval, unexecuted drafts of
agreements relating to LIPA's proposed acquisition (via the
purchase of LILCO's common stock) of LILCO's transmission and
distribution system and certain other assets and liabilities.
It is contemplated that prior to LIPA's acquisition of
thecommon stock, certain other assets and liabilities will be
10
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transferred to an affiliate of the holding company to be
formed in connection with the binding share exchange
agreement.
The Company is unable to determine when or if definitive
agreements relating to the LIPA transaction will be executed
by the parties or when or if all consents and approvals
required to consummate the LIPA transaction will be obtained.
5. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 "EARNINGS
PER SHARE"
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128). This statement
supersedes APB Opinion No. 15, "Earnings per Share" and
simplifies the computation of earnings per share (EPS). SFAS
No. 128 will be effective for financial statements for both
interim and annual periods ending after December 15, 1997.
The Company will adopt this statement in its fiscal year
beginning October 1, 1997. The Company does not expect the
effect of adopting SFAS No. 128 to have any impact on its EPS
calculations.
11
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THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating Results
The following is a summary of items affecting comparative earnings
and a discussion of the material changes in revenues and expenses
during the following periods:
(1) Three Months ended March 31, 1997 vs. Three Months ended
March 31, 1996.
(2) Six Months ended March 31, 1997 vs. Six Months ended March
31, 1996.
(3) Twelve Months ended March 31, 1997 vs. Twelve Months ended
March 31, 1996.
Consolidated income available for common stock for the second
quarter of fiscal 1997 was $80.2 million, or $1.60 per share,
compared to $74.4 million, or $1.51 per share, for the first
quarter of last year. Utility operations contributed $1.57 per
share to consolidated earnings, an increase of seven cents per
share compared to last year's quarterly earnings. Utility
operations continued to reflect sales growth, enhanced revenues
from new customer-focused initiatives, and ongoing cost-reduction
efforts, although comparative results were adversely affected by
weather. For all periods ended March 31, 1997, operating results
reflected warmer-than-normal weather, while last year's second
quarter was extremely cold and the weather normalization adjustment
in effect at that time allowed for retention of a portion of the
higher firm margins. Earnings from subsidiaries were $1.6 million
for the second quarter of fiscal 1997, contributing three cents per
share. The higher earnings in all current periods reflected the
operations associated with the gas and oil properties acquired by
The Houston Exploration Company (THEC) in July and September 1996
and the Company's increased investment in the Iroquois Gas
Transmission System. Results from the energy marketing group,
which includes two business ventures initiated in 1996, had losses
of $1.5 million although revenues have been growing.
Consolidated earnings for the twelve months ended March 31, 1997
were $128.5 million, or $2.58 per share, compared to $94.2 million,
or $1.93 per share, for the corresponding period a year ago. Higher
earnings included gains on the sale of subsidiary stock and a
Canadian gas processing plant of $33.5 million, after taxes, or
$0.68 per share, offset by a subsidiary reorganization charge of
$7.8 million, after taxes, or $0.16 per share, as well as solid
performances in both utility operations and ongoing income from
energy-related investments.
12
<PAGE>
Firm gas sales for the second quarter of fiscal 1997, which had
warmer-than-normal weather, were 4,064 MDTH lower than in the
second quarter last year, which was 5.9% colder than normal. Other
gas and transportation sales, which include gas deliveries to
interruptible customers and transportation services, primarily to
off-system customers, were 6,139 MDTH higher in the second quarter
of this year compared to the comparable period last year. Total
firm sales for the twelve months ended March 31, 1997, which was
1.9% warmer than normal, were 135,851 MDTH, compared to 139,781
MDTH for the corresponding period a year ago, which was 6.1% colder
than normal.
Net sales revenues (gas sales and transportation revenues less cost
of gas) decreased $2.6 million and $8.7 million for the three and
six months ended March 31, 1997 compared to the comparable periods
last year. Higher transportation service revenues from off-system
customers were offset by the effects of warmer-than-normal weather
on firm customers. Net sales revenues increased $8.8 million for
the twelve months ended March 31, 1997 compared to the comparable
period last year. The increase reflected utility sales growth and
increased transportation service revenues offset in part by
comparatively warmer-than-normal weather.
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.
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 and the Company's New York Market Hub
in balancing on-system requirements to core customers with off-
system services to increase total margins. For the twelve months
ended March 31, 1997, gas and transportation sales and services to
off-system and interruptible customers amounted to 49,098 MDTH
compared with 44,449 MDTH for the comparable period in 1996.
Gas production and other revenues reflected increases in all
periods associated with the acquisition of gas and oil properties
by THEC in the fourth quarter of fiscal 1996 and new customer-
focused initiatives such as the appliance service program that
enhanced revenue from utility operations. Gas production for the
three and six month periods ended March 31, 1997 was 10.6 and 21.1
BCFe, respectively. Gas production for the three and six month
periods ended March 31, 1996 was 5.7 and 11.0 BCFe, respectively.
For the twelve months ended March 31, 1997, gas production was 36.1
BCFe, compared with 31.2 BCFe in the twelve months ended March 31,
1996.
13
<PAGE>
The Company and THEC, its gas exploration and production
subsidiary, 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.
With respect to natural gas production operations, THEC generally
uses swaps, options to establish collars, and occasionally futures
contracts, to hedge the price risk related to known production
plans and capabilities. Swaps include a fixed price/volume and are
structured as both straight and participating swaps. In swap
transactions, THEC pays the counterparties 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. The effective price (average wellhead price received
for production including realized gains and losses on financial
instrument positions) was $2.30 per MCF in the second quarter of
fiscal 1997 compared with $1.67 per MCF in the second quarter of
1996. The average wellhead price was $2.77 per MCF in the current
quarter compared with $2.28 per MCF in the second quarter of 1996.
The effective prices in the twelve months ended March 31, 1997 and
1996 were $1.83 and $1.70 per MCF, respectively.
THEC uses the full cost method of accounting for its investment in
natural gas and oil properties. Under this method , all costs of
acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and
properties in the pool are depleted and charged to operations using
the unit-of-production method based on the ratio of current
production to total proved natural gas and oil reserves. To the
extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes
exceed the present value (using a 10% discount rate) of estimated
future net cash flows from proved natural gas and oil reserves and
the lower of cost or fair value of unproved properties, such excess
costs are charged to operations. If a writedown is required, it
would result in a charge to earnings but would not have an impact
on cash flows from operating activities.
Natural gas prices declined substantially during the second quarter
of 1997 from prices in effect at December 31, 1996. However, as of
March 31, 1997, using prices in effect as of that date, the ceiling
limitation imposed under full cost accounting rules on total
capitalized natural gas and oil property cost exceeded actual
capitalized costs and no writedown was required. However,
depending upon natural gas prices and the results of THEC's
14
<PAGE>
drilling programs during the quarter ending June 30, 1997, THEC may
be required to write down the carrying value of its natural gas and
oil properties.
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 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.
Operation and maintenance expense was lower in the three and six
month periods ended March 31, 1997 compared to the comparable
periods in 1996, reflecting the comparatively warmer weather and
ongoing cost-reduction efforts especially in gas distribution.
Also, operation and maintenance expense for the three and six month
periods ended March 31, 1996 included costs related to Canadian gas
processing operations which ceased in July 1996 when the plant was
sold. The comparative expense in the twelve months ended March
31,1997 increased 5.6% due to a reorganization charge of $12
million ($7.8 million, after taxes) and higher operating expense
incurred by THEC related to acquisitions, and operating expenses
incurred by two new subsidiaries of the Company, KeySpan Energy
Management Inc. and KeySpan Energy Services Inc.
The increase in depreciation and depletion expense in all current
periods reflects higher depletion charges at THEC due principally
to increased gas production.
General taxes principally include State and City taxes on utility
revenues and property. The applicable utility property base
generally has increased, although the Company has been able to
realize savings by the pursuit of reductions in certain 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
effective tax rate for the twelve months ended March 31, 1997 was
33.4% compared to 32.0% in 1996.
Interest charges for the three, six and twelve months ended March
31, 1997 reflect lower long-term utility interest costs due to debt
refunding offset slightly by higher average subsidiary borrowings
related to gas exploration and production operations. Other
interest charges in all periods principally include carrying
charges related to regulatory settlement items, and for the quarter
ended March 31, 1997 reflects interest charges related to
commercial paper borrowings to finance seasonal working capital
requirements and expanded investment opportunities.
15
<PAGE>
Other income includes results from investments in energy services
which reflect increased earnings in the current periods, primarily
associated with its increase in the Company's investment in the
Iroquois Gas Transmission System from 11.4% to 19.4% which occurred
in May 1996. Other increases for the twelve months ended March 31,
1997, as compared with the comparable period last year, reflect the
gains on the sale of subsidiary stock of $35.4 million ($23
million, after taxes) and the sale of a Canadian plant of $16.2
million ($10.5 million, after taxes).
Dividends on preferred stock reflect reductions in the level of
preferred stock outstanding due to sinking fund redemptions.
Financial Condition
The upswing in cash flow from operating activities of $29.7 million
in the six months ended March 31, 1997 as compared to the six
months ended March 31, 1996 is largely attributable to weather, the
relative increase in gas production operations and favorable
pricing. The six month period ended March 31, 1996 was extremely
cold versus the comparable period this year and hence there was
less cash tied up in utility customer receivables. In the twelve
months ended March 31, 1997, operating cash flow increased $59.6
million over the comparable period a year ago. The increase also
largely reflected the effects of weather on cash flow from
operating activities.
In January 1997, the Company called $125 million of Gas Facilities
Revenue Bonds, consisting of $62.5 million of 7 1/8% bonds and
$62.5 million of 7% bonds. These bonds were called at 102% of the
face amount per bond plus accrued interest to the call date. The
refunding bonds - weekly put bonds - have had an average interest
rate of approximately 3.2%. Substantial savings in interest costs
have resulted from the refunding.
Regulatory Matters
Proposed Brooklyn Union-LILCO Merger
In March 1997, Brooklyn Union and LILCO filed a joint petition with
the PSC seeking approval under section 70 of the New York Public
Service Law to consummate the share exchanges by which Brooklyn
Union and LILCO each would become subsidiaries of a newly-formed
holding company. (See Note 4, to the Condensed Consolidated
Financial Statements, "Share Exchange Agreement with the Long
Island Lighting Company (LILCO) and Agreement in Principle with the
Long Island Power Authority (LIPA)".) In the petition, Brooklyn
Union and LILCO also asked that certain aspects of the holding
company settlement agreement for Brooklyn Union that was approved
by the PSC in September 1996 be amended to more closely reflect the
Brooklyn Union-LILCO business combination, and that LILCO become a
party to and bound by the holding company agreement, as amended.
16
<PAGE>
In addition, the petition proposes, among other matters, that 93%
or $1.0 billion of the estimated total efficiency savings
attributable to operating synergies that are expected to be
realized over the 10 year period following the merger, be allocated
to ratepayers and the remaining 7% or $73.0 million be allocated to
shareholders. The ratepayers' portion will be allocated to both
utilities's customers and will reduce both electric and gas rates
by an estimated 2% for the 10 year period following the closing of
the merger. To accomplish this, the base rates of both utilities
would be reduced immediately following the closing to reflect the
levelized annual amount of the non-fuel related synergy savings
forecasted to materialize over this period. Fuel savings will be
passed back to the ratepayers through a reduction in the respective
fuel adjustment clauses as they are achieved. The companies will
be required to amend the petition to the PSC in order to reflect
certain aspects of the transaction currently contemplated with
LIPA. In the joint petition, Brooklyn Union also asked the PSC to
otherwise confirm the rate plan that became effective in October
1996 pursuant to the holding company settlement agreement, and
LILCO asked the PSC to adopt the long term electric rate plan
proposed by LILCO in September 1996 in a pending LILCO rate
proceeding, and to adopt a long term gas rate plan proposed in the
joint petition. It is currently anticipated that the PSC will act
on the joint petition in the Fall of 1997.
Also, in March 1997, LILCO filed an application with the Federal
Energy Regulatory Commission (FERC) requesting its approval for the
share exchange with the new holding company. FERC action on the
application is expected within 12 to 18 months after the filing.
The Company believes that if the LIPA transaction is consummated as
contemplated, the various contracts with LIPA, the confirmation of
the Brooklyn Union rate plan as proposed in the joint petition to
the PSC (see "Regulatory Matters" in "Management's Discussion and
Analysis of Results of Operations and Financial Condition"), and
the adoption of the long term gas rate plan for LILCO as proposed
in the joint petition would, in the aggregate, provide the new
holding company with a fair opportunity to recover its costs of
providing gas service in the Brooklyn Union and LILCO service
territories, the costs of providing wholesale electric service to
LIPA, and the costs of providing the various management and
operation services to LIPA, as well as earn a compensatory return
on the capital devoted to providing such services.
Appliance Service
On April 4, 1997, the PSC issued its "Order Concerning Gas
Appliance and Repair Service" by which it determined that
non-safety related appliance repair service, other than minor
adjustments, should not be performed by regulated gas utilities,
and required such utilities to file transition plans within sixty
(60) days following the issuance of that order, with the objective
17
<PAGE>
that, by no later than May 1, 2000, all gas utilities currently
performing such services will have ceased to do so.
Pursuant to the holding company settlement agreement, beginning in
October 1996, the Company was permitted to charge separately, on a
market-based tariffed pricing basis, for non-safety related
appliance repair service, the costs of which previously had been
bundled into gas sales rates. The holding company settlement
agreement also requires the Company to exclude such services from
its tariffs by no later than October 1, 1997. In response to the
PSC's April 1997 order concerning appliance servicing, and as
required by the holding company settlement agreement, the Company
currently plans to file tariff revisions with the PSC on or about
June 1, 1997 together with an application seeking PSC approval to
transfer certain assets related to the conduct of the non-safety
related appliance repair business to a subsidiary that would
conduct and carry on that business after the PSC's approval is
secured.
Rate Settlement Matters
In September 1996, the PSC approved a regulatory agreement to
permit the Company to reorganize into a holding company structure,
which the Company has not as yet formed.
On December 29, 1996, the Company and the LILCO signed a definitive
agreement to combine in a tax-free transaction that would result in
the formation of a holding company (see Note 4 to the Condensed
Consolidated Financial Statements, "Share Exchange Agreement with
the Long Island Lighting Company (LILCO) and Agreement in Principle
with the Long Island Power Authority (LIPA)").
The settlement agreement reached in connection with the holding
company proceeding included a new multi-year rate plan that became
effective on October 1, 1996 and will substantially remain in
effect notwithstanding the change in the Company's reorganization
plans resulting from the LILCO transaction. After an initial rate
reduction of approximately $3.5 million in fiscal 1997, the 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.
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 to firm markets within its
local distribution system provide for full margin recovery of its
18
<PAGE>
cost of service. 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. Expenditures related to
remediation of the sites of former gas manufacturing plants are
subject to a provision enabling the Company to retain any savings
and absorb any costs to the extent that actual expenditures vary by
more than 10% compared with estimates. The agreement includes a
customer service quality performance plan, with a maximum forty
basis-point pre-tax 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.
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 such agreement, fiscal 1997, was superseded by the
rate plan reflected in the holding company agreement discussed
above.
Industry 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 had 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
19
<PAGE>
provided to third party sellers 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.
Environmental Matters
The Company is subject to various Federal, State and local laws and
regulatory programs related to the environment. These
environmental laws govern both the normal, ongoing operations of
the Company as well as the cleanup of historically contaminated
properties. Ongoing environmental compliance activities, which
historically have not been material, are integrated with the
Company's regular operation and maintenance activities. As of
March 31, 1997, the Company had an accrued liability of $28.0
million representing estimated costs associated with certain
investigation and remediation at former manufactured gas plant
sites. (See Note 2 to the Condensed Consolidated Financial
Statements, Note 2., "Environmental Matters.")
20
<PAGE>
REVIEW OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP has performed reviews in accordance with
standards established by the American Institute of Certified Public
Accountants of the Condensed Consolidated Financial Statements for
the periods set forth in their report shown on page 22.
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Brooklyn Union Gas Company:
We have reviewed the accompanying condensed consolidated balance
sheets of The Brooklyn Union Gas Company (a New York corporation)
and subsidiaries as of March 31, 1997 and 1996, and the related
condensed consolidated statements of income for the three, six and
twelve month periods ended March 31, 1997 and 1996, and the
condensed consolidated statements of cash flows for the six and
twelve month periods ended March 31, 1997 and 1996. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the financial statements referred to above
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet and consolidated
statement of capitalization of The Brooklyn Union Gas Company and
subsidiaries as of September 30, 1996, and the related consolidated
statements of income, retained earnings, and cash flows for the
year then ended (not presented herein) and, in our report dated
October 23, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet
as of September 30, 1996 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which
it has been derived.
ARTHUR ANDERSEN LLP
New York, New York
April 23, 1997
22
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company and/or its subsidiaries have from time to time been
named as defendants in various legal proceedings. In the opinion
of management, the ultimate disposition of currently asserted
claims will not have a materially adverse impact on the Company's
consolidated financial position or results of operations. For
information regarding environmental matters affecting the Company,
see Note 2. to the Condensed Consolidated Financial Statements,
"Environmental Matters."
Item 5. Other Information
In April 1997, the Company initiated a voluntary early retirement
program for both management and bargaining unit employees. The
cost of this program, which is not expected to have a material
effect on consolidated net income, will be recognized in the third
quarter of fiscal 1997 when elections by eligible employees are
known and an actuarial analysis is performed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re computation of per share earnings.
(15) Letter re unaudited interim financial information.
(27) Financial data schedule.
(b) Reports on Form 8-K
The Company filed a Form 8-K on February 24, 1997 pertaining
to audited financial statements of LILCO as of December 31, 1996
and for the three fiscal years then ended, and unaudited and pro
forma combined condensed financial information for the Company and
LILCO, including historical interim information of LILCO, after
giving effect to the Binding Share Exchanges as a pooling of
interest for accounting purposes, pursuant to the Share Exchange
Agreement included in the Company's Form 8-K filed December 30,
1996. LILCO filed a corresponding Form 8-K on February 25, 1997.
The Company also filed a Form 8-K on March 20, 1997 pertaining to
an Agreement in Principle dated as of March 19, 1997 by and among
LIPA, LILCO and the Company. LILCO filed a corresponding Form 8-K
on March 20, 1997 and a related amended Form 8-K on March 24, 1997.
On April 11, 1997, LILCO filed a Form 8-K to change its fiscal year
from a December 31 year end to a March 31 year end.
23
<PAGE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
behalf of the undersigned thereunto duly authorized.
THE BROOKLYN UNION GAS COMPANY
(Registrant)
Date May 15, 1997 s/ V.D. Enright
V.D. Enright
Senior Vice President and
Chief Financial Officer
Date May 15, 1997 s/ R.M. Desmond
R.M. Desmond
Vice President, Comptroller and
Chief Accounting Officer
24
<PAGE>
Exhibit 15
1345 Avenue of the Americas
New York, NY 10105
May 15, 1997
The Brooklyn Union Gas Company
One MetroTech Center
Brooklyn, NY 11201
Gentlemen:
We are aware that The Brooklyn Union Gas Company has incorporated
by reference in its previously filed Registration Statements Nos.
33-66182, 333-04863, 333-03441, 333-06257 and 333-18025, its Form
10-Q for the quarter ended March 31, 1997, which includes our
report dated April 23, 1997 covering the unaudited interim
financial information contained therein. Pursuant to Regulation C
of the Securities Act of 1933, that report is not considered a part
of the registration statements prepared or certified by our firm or
a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
25
Exhibit 15
1345 Avenue of the Americas
New York, NY 10105
May 15, 1997
The Brooklyn Union Gas Company
One MetroTech Center
Brooklyn, NY 11201
Gentlemen:
We are aware that The Brooklyn Union Gas Company has incorporated
by reference in its previously filed Registration Statements Nos.
33-66182, 333-04863, 333-03441, 333-06257 and 333-18025, its Form
10-Q for the quarter ended March 31, 1997, which includes our
report dated April 23, 1997 covering the unaudited interim
financial information contained therein. Pursuant to Regulation C
of the Securities Act of 1933, that report is not considered a part
of the registration statements prepared or certified by our firm or
a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
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