<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 1, 1997
$.33 1/3 par value 50,447,029
<PAGE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information Page No.
Condensed Consolidated Balance Sheet -
June 30, 1997 and 1996, and September 30,
1996 3
Condensed Consolidated Statement of Income -
Three, Nine and Twelve Months Ended June 30,
1997 and 1996 4
Condensed Consolidated Statement of Cash Flows -
Nine and Twelve Months Ended June 30,
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 4 - Submission of Matters to a Vote
of Security Holders 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
2
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<TABLE>
<CAPTION>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
==================================================================================================
June 30, June 30, September 30,
1997 1996 1996
(Unaudited) (Unaudited) (Audited)
- - - --------------------------------------------------------------------------------------------------
(Thousand of Dollars)
<S> <C> <C> <C>
Assets
Property
Utility, at cost $ 1,815,840 $ 1,743,015 $ 1,782,440
Accumulated depreciation (447,277) (419,907) (429,476)
Gas exploration and production, at cost 591,824 402,730 510,568
Accumulated depletion (200,777) (155,599) (165,414)
- - - --------------------------------------------------------------------------------------------------
1,759,610 1,570,239 1,698,118
- - - --------------------------------------------------------------------------------------------------
Investments in Energy Services 165,753 113,497 115,529
- - - --------------------------------------------------------------------------------------------------
Current Assets
Cash and temporary cash investments 81,646 85,904 41,921
Accounts receivable 226,407 251,292 172,843
Allowance for uncollectible accounts (21,805) (22,005) (15,616)
Gas in storage, at average cost 48,675 50,298 91,813
Materials and supplies, at average cost 11,665 13,701 12,089
Prepaid gas costs 2,761 4,426 11,945
Other 38,072 35,147 38,888
- - - --------------------------------------------------------------------------------------------------
387,421 418,763 353,883
Deferred Charges 131,144 163,028 122,073
- - - --------------------------------------------------------------------------------------------------
$ 2,443,928 $ 2,265,527 $ 2,289,603
==================================================================================================
Capitalization and Liabilities
Capitalization
Common stock, $.33 1/3 par value, authorized
70,000,000 shares; outstanding
50,402,980 and 49,669,511 shares,
respectively stated at $ 564,893 $ 545,163 $ 549,835
Retained earnings 428,415 365,574 355,973
- - - --------------------------------------------------------------------------------------------------
Total common equity 993,308 910,737 905,808
Preferred stock, redeemable 6,300 6,600 6,600
Long-term debt 733,571 727,498 712,013
- - - --------------------------------------------------------------------------------------------------
1,733,179 1,644,835 1,624,421
- - - --------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable 122,009 98,771 143,561
Dividends payable 18,437 18,170 18,229
Taxes accrued 40,140 43,223 10,905
Customer deposits 23,208 22,436 21,881
Customer budget plan credits - - 8,892
Interest accrued and other 48,083 57,472 37,244
- - - --------------------------------------------------------------------------------------------------
251,877 240,072 240,712
- - - --------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Federal income tax 286,149 262,057 282,041
Unamortized investment tax credits 19,249 20,240 20,007
Other 68,200 98,323 43,573
- - - --------------------------------------------------------------------------------------------------
373,598 380,620 345,621
- - - --------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Company 85,274 - 78,849
- - - --------------------------------------------------------------------------------------------------
$ 2,443,928 $ 2,265,527 $ 2,289,603
==================================================================================================
See accompanying notes to condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
==================================================================================================================================
Three Months Nine Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
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 $ 213,257 $ 232,142 $ 1,166,496 $ 1,172,533 $ 1,318,714 $ 1,305,991
Gas production and other 33,736 22,169 116,505 75,414 141,744 100,599
- - - ----------------------------------------------------------------------------------------------------------------------------------
246,993 254,311 1,283,001 1,247,947 1,460,458 1,406,590
Operating Expenses
Cost of gas 80,383 106,107 545,922 553,720 602,482 600,701
Operation and maintenance 102,671 99,585 311,166 311,544 424,840 406,421
Depreciation and depletion 26,366 18,871 76,399 55,594 100,291 73,209
General taxes 31,045 28,781 126,109 118,419 151,669 139,920
Federal income tax (3,289) (3,405) 63,275 58,493 46,443 46,743
- - - ----------------------------------------------------------------------------------------------------------------------------------
Operating Income 9,817 4,372 160,130 150,177 134,733 139,596
Other Income (Expense)
Income from equity investments 2,594 3,490 5,828 5,162 13,816 9,484
Gain on sale of investment in Canadian plant - - - - 16,160 -
Gain on sale of subsidiary stock - - - - 35,437 -
Other, net 5,011 179 3,773 (1,439) 6,906 (1,742)
Federal income tax (3,076) 344 (4,168) (305) (21,089) 754
Interest Charges
Long-term debt (9,493) (10,851) (29,291) (34,513) (41,082) (46,468)
Other (1,359) (2,016) (4,112) (4,362) (4,530) (5,443)
Minority interest in earnings of subsidiary (1,185) - (4,729) - (4,731) -
- - - ----------------------------------------------------------------------------------------------------------------------------------
Net Income <Loss> 2,309 (4,482) 127,431 114,720 135,620 96,181
Dividends on Preferred Stock 76 79 233 244 313 327
- - - ----------------------------------------------------------------------------------------------------------------------------------
Income <Loss> Applicable
to Common Stock $ 2,233 $ (4,561) $ 127,198 $ 114,476 $ 135,307 $ 95,854
==================================================================================================================================
Per Share of Common Stock $ 0.04 $ (0.09) $ 2.54 $ 2.33 $ 2.70 $ 1.95
==================================================================================================================================
Dividends Declared per Share
of Common Stock $ 0.365 $ 0.355 $ 1.095 $ 1.065 $ 1.450 $ 1.413
==================================================================================================================================
Average Common Shares
Outstanding 50,300,223 49,531,094 50,119,772 49,234,957 50,029,047 49,092,080
==================================================================================================================================
See accompanying notes to condensed consolidated financial statements.
4
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<TABLE>
<CAPTION>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
======================================================================================================================
Nine Months Twelve Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
- - - ----------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 127,431 $ 114,720 $ 135,620 $ 96,181
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and depletion 79,241 58,754 103,466 77,663
Deferred Federal income tax (2,983) 3,614 35,994 13,857
Gain on sale of investment in Canadian plant - - (16,160) -
Gain on sale of subsidiary stock - - (35,437) -
Income from equity investments, energy related (5,828) (5,162) (13,816) (9,484)
Dividends received from equity investments, energy related 8,982 7,392 12,703 7,842
Minority interest in earnings of subsidiary 6,425 - 7,267 -
Allowance for equity funds used during construction (395) (842) (526) (1,247)
Changes in:
Accounts receivable, net (41,751) (98,572) 18,597 (57,032)
Accounts payable (22,869) (4,356) 20,908 5,952
Gas inventory and prepayments 52,322 53,381 (282) 12,504
Other 52,687 48,244 (23,610) 14,830
- - - ----------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 253,262 177,173 244,724 161,066
- - - ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 15,058 22,696 19,765 29,603
Proceeds from sale of subsidiary stock - - 101,041 -
Increase in long-term debt 21,498 160,429 5,994 160,429
Repayment of long-term debt and preferred stock (300) (153,800) (300) (157,660)
Dividends paid (55,223) (52,834) (73,004) (69,877)
- - - ----------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (18,967) (23,509) 53,496 (37,505)
- - - ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excluding allowance
for equity funds used during construction) (197,401) (138,526) (358,216) (190,049)
Proceeds from sale of investment in Canadian plant - - 26,938 -
Partnership distribution and other 2,831 30,224 28,800 32,408
- - - ----------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (194,570) (108,302) (302,478) (157,641)
- - - ----------------------------------------------------------------------------------------------------------------------
Change in Cash and Temporary Cash Investments 39,725 45,362 (4,258) (34,080)
Cash and Temporary Cash Investments at Beginning of Period 41,921 40,542 85,904 119,984
- - - ----------------------------------------------------------------------------------------------------------------------
Cash and Temporary Cash Investments at End of Period $ 81,646 $ 85,904 $ 81,646 $ 85,904
======================================================================================================================
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 $ 31,000 $ 23,000 $ 47,053 $ 35,500
Interest $ 31,140 $ 41,350 $ 42,155 $ 50,922
===================================================================================================================
See accompanying notes to condensed consolidated financial statements.
5
</TABLE>
<PAGE>
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 June 30, 1997 and 1996, and the results
of operations for the three, nine and twelve month periods
ended June 30, 1997 and 1996, and cash flows for the nine and
twelve month periods ended June 30, 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.
This document contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934.
For any of these statements, the Company claims the protection
of the safe harbor for forward-looking information contained
in the Private Securities Litigation Reform Act of 1995, as
amended.
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 profitable or 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.
6
<PAGE>
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)
for inclusion on appropriate waste site inventories. In
certain circumstances, former MGP sites can give rise to
environmental cleanup responsibilities for the Company.
With respect to one former MGP site located on Company
property, the Brooklyn Borough Gas Works site in Coney Island,
the Company executed an administrative consent order (ACO)
with the DEC in 1995 addressing the overall remediation of the
site. In accordance with the ACO, a schedule of investigative
and cleanup activities has been developed, and a cleanup over
the next several years is expected.
Based upon the current estimated range of the costs of
compliance with the Coney Island ACO, and the estimated costs
of investigation of two other sites, the Company believes that
the minimum cost of MGP-related environmental cleanup will be
approximately $34 million; the majority of which will be
expended for the Coney Island plant site. This amount
includes approximately $6.6 million of costs expended as of
June 30, 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 ACO or current investigative plans.
As of June 30, 1997, the Company had an unpaid liability of
$27.4 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 plant
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
assets arise from the allocation of costs and revenues to
accounting periods for utility ratemaking purposes differently
7
<PAGE>
from bases generally applied by nonregulated companies.
Regulatory assets are recognized in accordance with SFAS-71.
At June 30, 1997, the Company had a net tax regulatory asset
of $72.5 million, which is being recovered in rates, compared
to a net tax regulatory asset of $69.7 million at June 30,
1996. For financial reporting purposes, all other regulatory
assets and liabilities have been settled or are immaterial.
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 $47.1 million, which would be
classified as an extraordinary item.
4. COMBINATION WITH LONG ISLAND LIGHTING COMPANY (LILCO
TRANSACTION) AND REORGANIZATION MATTERS
AMENDED 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, yet to be named. The Share Exchange Agreement was
filed as an exhibit to a Form 8-K filed December 30, 1996.
The Share Exchange Agreement was amended and restated to
reflect certain technical changes as of February 7, 1997 and
again as of June 26, 1997 (Amended LILCO Agreement).
The LILCO Transaction has been approved by both companies'
boards of directors and shareholders of both companies
approved the transaction on August 7, 1997. (See Part II,
Item 4, "Submission of Matters to a Vote of Security Holders"
regarding details of the vote.) Under the terms of the LILCO
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. In the event that the
transaction with the Long Island Power Authority (LIPA
Transaction) is consummated, the Ratio shall become 0.880 (see
LILCO Agreement with LIPA below). The Company believes that
the LILCO Transaction would be accounted for as a purchase if
the LIPA Transaction is consummated.
The Amended LILCO Agreement contains certain covenants of the
parties pending the consummation of the LILCO Transaction.
Generally, the parties must carry on their businesses in the
ordinary course consistent with past practice.
The Company and LILCO expect to continue their respective
8
<PAGE>
current dividend policies until completion of the LILCO
Transaction. It is anticipated that the new holding company
will set an initial annual dividend rate of $1.78 per share of
its common stock.
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.
On June 30, 1997, a Registration Statement on Form S-4 was
filed with the Securities and Exchange Commission in
conjunction with the filing of a Joint Proxy Statement on the
LILCO Transaction. Pursuant to the Joint Proxy Statement,
shareholders of both companies voted to approve the LILCO
Transaction at separate meetings held on August 7, 1997.
The LILCO Transaction is conditioned upon the receipt of
all required regulatory approvals. On July 17, 1997, the
Federal Energy Regulatory Commission (FERC) approved the LILCO
Transaction which is pending approval of the Public Service
Commission. The Company is unable to determine when, or if,
all other required regulatory approvals will be obtained.
REORGANIZATION INTO HOLDING COMPANY STRUCTURE
(REORGANIZATION)
Shareholders, in addition to approving the LILCO Transaction
at the special meeting on August 7, 1997, approved the
Reorganization as an interim step for the Company to take
timely advantage of investment opportunities in unregulated
businesses, as such opportunities may arise, prior to
consummation of the LILCO Transaction. Accordingly, each
share of the Company's common stock will be converted to one
share of KeySpan Energy Corporation's common stock. KeySpan
stock will be used to effect the Amended LILCO Agreement.
Further, the Company plans to redeem its remaining outstanding
preferred stock prior to the consummation of the
Reorganization, which is expected to take place on or before
September 30, 1997.
LILCO AGREEMENT WITH LONG ISLAND POWER AUTHORITY (LIPA)
On June 26, 1997 LILCO and LIPA entered into definitive
agreements pursuant to which, after the transfer of LILCO's
9
<PAGE>
gas distribution assets, non-nuclear electric generation
assets and certain other assets and liabilities to one or more
newly-formed subsidiaries of the new holding company, LILCO's
stock will be sold to LIPA for $2.4975 billion in cash. The
LIPA Transaction was approved by LILCO's shareholders on
August 7, 1997. Upon consummation of the 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, and its electric
regulatory assets and liabilities, and will assume or
refinance approximately $339 million in preferred stock and
approximately $3.6 billion in long term debt.
As part of the LIPA Transaction, the definitive agreements
contemplate that one or more subsidiaries of the newly formed
holding company will enter into agreements with LIPA, pursuant
to which such subsidiaries will provide management and
operations services to LIPA with respect to the 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 LIPA Transaction is
consummated, LIPA will have the 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 July 16, 1997, the New York State Public Authorities
Control Board unanimously approved the definitive agreements
related to the LIPA Transaction subject to the following
conditions: (1) within one year, LIPA must establish a plan
for open access to the electric distribution system; (2) LIPA
may not purchase the generating facilities, as contemplated in
the generation purchase right agreement, at a price greater
than book value; (3) the holding company formed in connection
with the LIPA Transaction (or the LILCO Transaction) must
agree to invest, over a ten year period, at least $1.3 billion
in energy-related and economic development projects, and
natural gas infrastructure projects on Long Island; (4) LIPA
will guarantee that, over a ten year period, average electric
rates will be reduced by no less than fourteen percent when
measured against the Company's rates today. As part of this
guarantee, no less than 2% cost savings to LIPA customers must
result from the savings attributable to the LILCO Transaction;
and (5) LIPA will not increase average customer rates by more
than 2 1/2% over a twelve month period without approval from
the PSC.
The LIPA Transaction is subject to the approval of FERC and
other regulatory agencies. In July 1997, the Company, LILCO
10
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and LIPA filed requests for private letter rulings with the
Internal Revenue Service regarding certain federal income tax
issues that require favorable rulings in order for the LIPA
Transaction to close. The Company is unable to determine when
or if the FERC approval or all other 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
<PAGE>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating Results
The following is a summary of items affecting comparative earnings
and a discussion of the material changes in revenues and expenses
during the following periods:
(1) Three Months ended June 30, 1997 vs. Three Months ended
June 30, 1996.
(2) Nine Months ended June 30, 1997 vs. Nine Months ended June
30, 1996.
(3) Twelve Months ended June 30, 1997 vs. Twelve Months ended
June 30, 1996.
Consolidated income available for common stock for the third
quarter of fiscal 1997 was $2.2 million, or four cents per share,
compared to a loss of $4.6 million, or nine cents per share, for
the third quarter of last year. Utility operations showed a loss
of $2.9 million, or six cents per share, in this year's third
quarter compared to a loss of $8.6 million, or 17 cents per share,
in last year's third quarter. The third quarter is marginally
profitable or unprofitable due to the seasonal nature of gas
heating sales, the principal source of consolidated revenue. The
turn-around in earnings in this year's third quarter is the result
of continued growth in operating earnings from gas distribution,
reflecting development of ancillary revenue streams from expanded
services, continued volume growth in gas and transportation sales
and attainment of cost efficiencies. Earnings from subsidiaries
were $5.1 million for the third quarter of fiscal 1997,
contributing ten cents per share to consolidated income including
a gain of $2.5 million after taxes, or five cents per share, from
the sale of residual interests in Canadian gas production
properties. Last year subsidiaries had earnings of $4.0 million, or
eight cents per share, in the third quarter.
Consolidated earnings for the nine months ended June 30, 1997 were
$127.2 million, or $2.54 per share, compared to $114.5 million, or
$2.33 per share, for the comparable period last year. Gas
distribution operations had earnings of $117.3 million, or $2.34
per share, compared to $107.3 million, or $2.19 per share, in the
corresponding period a year ago. Subsidiaries had earnings of $9.9
million, or 20 cents per share, in the nine months ended June 30,
1997 compared to $7.2 million, or 14 cents per share, in last
year's corresponding period. Operating results this year
reflected warmer-than-normal weather during the winter heating
season and the substantial increase in gas production of the
12
<PAGE>
Company's gas and oil exploration subsidiary, The Houston
Exploration Company (THEC), as a result of acquisitions made in the
fourth quarter of the last fiscal year. In addition, the Company
increased its investment in the Iroquois Pipeline, which also had
higher throughput and earnings this year. Also this year, results
of subsidiaries included a loss of $3.4 million in start-up energy
marketing businesses that were initiated within the last year.
Consolidated earnings for the twelve months ended June 30, 1997
were $135.3 million, or $2.70 per share, compared to $95.9 million,
or $1.95 per share, for the corresponding period a year ago. Higher
earnings included a net gain of $33.5 million, after taxes, or 52
cents per share, from the public offering of THEC's stock and the
sale of a Canadian plant. The net gain includes a subsidiary
reorganization charge of $7.8 million, also after taxes. Income
from operations continues to reflect solid performance in all major
areas.
Firm gas sales were 22,600 MDTH in the third quarter of fiscal
1997. Although firm gas sales showed a decrease of approximately
386 MDTH, firm transportation sales increased 473 MDTH. Other gas
and transportation sales, which include gas deliveries to
interruptible customers and transportation services, primarily to
off-system customers, were 11,765 MDTH, or 3,286 MDTH higher in the
third quarter of this year compared to last year's third quarter.
Total firm sales for the twelve months ended June 30, 1997, which
was 1.3% warmer than normal, were 135,464 MDTH, compared to 141,327
MDTH for the corresponding period a year ago, which was 7.4% colder
than normal. Total sales for the twelve months ended June 30, 1997
were 193,245 MDTH, an increase of 2.2% over the corresponding
period a year ago.
Net sales revenues (gas sales and transportation revenues less cost
of gas) increased $6.8 million and $1.8 million for the three and
nine months ended June 30, 1997, respectively, compared to the
corresponding periods last year. Higher transportation service
revenues primarily from off-system customers were offset by the
effects of warmer weather on firm customers. Net sales revenues
increased $10.9 million for the twelve months ended June 30, 1997
compared to the corresponding period last year. The increase
reflected utility sales growth and increased transportation service
revenues offset in part by warmer weather. Also, the weather
normalization adjustment in effect last year permitted retention of
a portion of the sales margins attributable to cold 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.
13
<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 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 June 30, 1997, gas and transportation sales and services to
off-system and interruptible customers amounted to 52,437 MDTH
compared with 42,925 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 nine month periods ended June 30, 1997 was 11.5 BCFe and
32.6 BCFe, respectively. Gas production for the three and nine
month periods ended June 30, 1996 was 5.9 BCFe and 16.9 BCFe,
respectively. For the twelve months ended June 30, 1997, gas
production was 42.3 BCFe, compared with 22.3 BCFe in the twelve
months ended June 30, 1996.
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 to stabilize margins and cash flows.
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.
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 $1.90 per
MCF in the third quarter of fiscal 1997 compared with $1.89 per MCF
in the third quarter of 1996. The average wellhead price was $1.96
per MCF in the current quarter compared with $2.33 per MCF in the
third quarter of 1996. The effective prices in the twelve months
ended June 30, 1997 and 1996 were $2.11 per MCF and $1.71 per MCF,
respectively.
THEC uses the full cost method of accounting for its investment in
14
<PAGE>
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 third quarter
of 1997 from prices in effect earlier in the year. However, as of
June 30, 1997, using prices in effect as of that date, the ceiling
limitation imposed under full cost accounting rules on total
capitalized cost of natural gas and oil property exceeded actual
capitalized costs and no writedown was required. However,
depending upon natural gas prices and the results of THEC's
drilling programs during the quarter ending September 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 in all periods ended June 30,
1997 reflects ongoing utility cost reduction efforts and includes
increases related to THEC as a result of the expansion of its
operations from acquisitions made in the fourth quarter of fiscal
1996. In addition, costs related to the establishment of new
energy marketing businesses through subsidiaries were higher in
periods ended June 30, 1997. Operation and maintenance costs were
relatively flat in the nine months ended June 30, 1997 as a result
of the sale of a Canadian gas processing plant in the third quarter
of fiscal 1996. Further, operation and maintenance expense in the
12 months ended June 30, 1997 included a $12 million reorganization
charge, before taxes, of THEC. Moreover, on June 1, 1997, the
Company completed an early retirement program in which 274
management and union employees participated. The Company
remeasured its costs related to pension and other post-employment
benefits as of that date. The resulting costs, which have been
reflected in operating expenses for all periods ended June 30,
15
<PAGE>
1997, had no material effect on operating results. Operating
results in the future will reflect payroll savings related to the
early retirement program.
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. Taxes applicable to utility property have
increased and 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 June 30, 1997 was
33.4% compared to 32.4% in 1996.
Interest charges for the three, nine and twelve months ended June
30, 1997 reflect lower long-term utility interest costs due to debt
refinancing at lower rates offset slightly by higher costs of
subsidiary borrowings to finance expansion of 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 June 30, 1997 reflects
interest charges related to commercial paper borrowings, which were
repaid by June 30, 1997, to finance seasonal working capital
requirements and expanded investment opportunities. It is probable
that there will be commercial paper borrowings in the fourth
quarter (see "Financial Condition" below).
Other income includes equity income from investments in the
Iroquois Pipeline and cogeneration projects. Income from
investment in Iroquois was higher in all periods reflecting
increased investment and throughput. During the quarter ended June
30, 1997, income reflected lower earnings from cogeneration
projects and higher allocations of general corporate expenses. In
addition, other income also included a gain of $2.5 million on the
sale of certain residual interests in Canadian gas production
properties. This gain is reported in Other, net in the Condensed
Consolidated Statement of Income. Moreover, other income in the 12
months ended June 30, 1997 included gains of $16.2 million and
$35.4 million from sale of a Canadian plant and public offering of
common stock by THEC, both of which occurred in the fourth quarter
of fiscal 1996.
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 $73.7 million
in the nine months ended June 30, 1997 as compared to the nine
16
<PAGE>
months ended June 30, 1996 is largely attributable to higher
utility net revenues and operating margins, the significant
increase in gas production operations of THEC and generally
favorable pricing in gas production. In the twelve months ended
June 30, 1997, operating cash flow increased $83.5 million over the
comparable period a year ago.
The Long Island Power Authority (LIPA) plans to issue tax-exempt
bonds to finance the cost of acquiring certain of LILCO's electric
operations and related assets. (See Note 4 to the Condensed
Consolidated Financial Statements, "Combination with Long Island
Lighting Company (LILCO Transaction) and Reorganization Matters".)
On July 29, 1997, the Company invested $30 million representing its
50% share as a limited partner in a limited partnership with LILCO.
The purpose of the partnership is to finance an investment in
interest rate swap options in order to hedge exposure of LIPA to
risks related to higher interest rates.
In January 1997, the Company redeemed $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 LILCO and LIPA Transactions
In March 1997, Brooklyn Union and LILCO filed a joint petition with
the PSC seeking its approval under section 70 of the New York
Public Service Law of the Amended LILCO Agreement 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, "Combination with Long Island Lighting
Company (LILCO Transaction) and Reorganization Matters".) 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. 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 PSC staff, on the other
hand, proposes that 100% of the savings net of cost to achieve the
savings be allocated to ratepayers. The ratepayers' portion will
be allocated to both utilities' customers and will reduce both
electric and gas rates by an estimated 2% for the 10 year period
17
<PAGE>
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. 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. The joint petition was amended in May 1997 and
again in July 1997 to reflect changes resulting from the LIPA
Transaction and Brooklyn Union's decision to proceed with the
KeySpan Reorganization. It is currently anticipated that the PSC
will act on the joint petition in the Fall of 1997.
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, 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
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
filed tariff revisions with the PSC together with an application
seeking PSC approval to transfer certain assets related to the
18
<PAGE>
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 will form on or before September 30, 1997.
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. The Company believes this plan 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
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.
19
<PAGE>
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.
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
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 June
30, 1997, the Company had an accrued liability of $27.4 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,
"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 June 30, 1997 and 1996, and the related
condensed consolidated statements of income for the three, nine and
twelve month periods ended June 30, 1997 and 1996, and the
condensed consolidated statements of cash flows for the nine and
twelve month periods ended June 30, 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
July 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 4. Submission of Matters to a Vote of Security Holders
(a) A Special Meeting of Shareholders was held at the Brooklyn
Academy of Music, Brooklyn, New York on August 7, 1997.
(b) The proposal to combine with Long Island Lighting Company
pursuant to the Amended and Restated Agreement and Plan of Exchange
and Merger was approved by a vote of 39,395,750 shares in favor, or
78.2% of the shares outstanding (19,279 proxies), and 1,621,835
shares against, or 3.2% of the shares outstanding (1,392 proxies).
Abstentions of 413,118 shares (376 proxies) were recorded.
(c) The proposal to form a holding company named KeySpan Energy
Corporation pursuant to the Amended and Restated Agreement and Plan
of Exchange was approved by a vote of 39,685,663 shares in favor,
or 78.8% of the shares outstanding (19,542 proxies), and 1,276,796
shares against, or 2.5% of the shares outstanding (1,053 proxies).
Abstentions of 468,246 shares (452 proxies) were recorded.
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
On June 26, LILCO filed a Form 8-K to report that LILCO, BL
Holding Corp., Long Island Power Authority and LIPA
Acquisition Corp. executed an Agreement and Plan of Merger
dated as of June 26, 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 August 14, 1997 s/ V.D. Enright
V.D. Enright
Senior Vice President and
Chief Financial Officer
Date August 14, 1997 s/ R.M. Desmond
R.M. Desmond
Vice President, Comptroller and
Chief Accounting Officer
24
Exhibit 15
1345 Avenue of the Americas
New York, NY 10105
August 14, 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 June 30, 1997, which includes our report
dated July 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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