<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-722
THE BROOKLYN UNION GAS COMPANY
(Exact name of Registrant as specified in its charter)
New York 11-0584613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
One MetroTech Center, Brooklyn, New York 11201-3851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (718) 403-2000
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at February 1, 1997
$.33 1/3 par value 50,074,596
<PAGE> 2
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information Page No.
Condensed Consolidated Balance Sheet -
December 31, 1996 and 1995, and September 30,
1996 3
Condensed Consolidated Statement of Income -
Three and Twelve Months Ended December 31,
1996 and 1995 4
Condensed Consolidated Statement of Cash Flows -
Three and Twelve Months Ended December 31,
1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition 11
Review of Independent Public Accountants 18
Report of Independent Public Accountants 19
Part II. Other Information
Item 1 - Legal Proceedings 20
Item 4 - Submission of Matters to a Vote
of Security Holders 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 22
<PAGE> 3
<TABLE>
<CAPTION>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
- - ---------------------------------------------------------------------------------------------------------------------
December 31, December 31, September 30,
1996 1995 1996
(Unaudited) (Unaudited) (Audited)
- - ---------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Assets
Property
Utility, at cost $ 1,786,688 $ 1,700,034 $ 1,782,440
Accumulated depreciation (428,445) (398,481) (429,476)
Gas exploration and production, at cost 538,551 372,939 510,568
Accumulated depletion (176,814) (143,616) (165,414)
- - ---------------------------------------------------------------------------------------------------------------------
1,719,980 1,530,876 1,698,118
- - ---------------------------------------------------------------------------------------------------------------------
Investments in Energy Services 113,183 122,187 115,529
- - ---------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and temporary cash investments 44,485 7,582 41,921
Accounts receivable 334,106 327,379 172,843
Allowance for uncollectible accounts (16,781) (14,997) (15,616)
Gas in storage, at average cost 81,658 64,596 91,813
Materials and supplies, at average cost 12,691 14,591 12,089
Prepaid gas costs 10,881 8,031 11,945
Other 39,754 30,431 38,888
- - ---------------------------------------------------------------------------------------------------------------------
506,794 437,613 353,883
Deferred Charges 120,230 162,071 122,073
- - ---------------------------------------------------------------------------------------------------------------------
$ 2,460,187 $ 2,252,747 $ 2,289,603
=====================================================================================================================
Capitalization and Liabilities
Capitalization
Common stock, $.33 1/3 par value stated at $ 554,907 $ 529,688 $ 549,835
Retained earnings 382,430 331,276 355,973
- - ---------------------------------------------------------------------------------------------------------------------
Total common equity 937,337 860,964 905,808
Preferred stock, redeemable 6,600 6,900 6,600
Long-term debt 712,031 723,223 712,013
- - ---------------------------------------------------------------------------------------------------------------------
1,655,968 1,591,087 1,624,421
- - ---------------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable 179,857 119,301 143,561
Dividends payable 18,924 17,799 18,229
Commercial paper 28,000 23,000 -
Taxes accrued 42,456 32,145 10,905
Customer deposits 22,699 22,397 21,881
Customer budget plan credits 26,993 41,088 8,892
Interest accrued and other 32,547 50,179 37,244
- - ---------------------------------------------------------------------------------------------------------------------
351,476 305,909 240,712
- - ---------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Federal income tax 286,818 250,224 282,041
Unamortized investment tax credits 19,738 20,711 20,007
Other 65,755 84,816 43,573
- - ---------------------------------------------------------------------------------------------------------------------
372,311 355,751 345,621
- - ---------------------------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Company 80,432 - 78,849
- - ---------------------------------------------------------------------------------------------------------------------
$ 2,460,187 $ 2,252,747 $ 2,289,603
=====================================================================================================================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
- - ---------------------------------------------------------------------------------------------------------------------
Three Months Twelve Months
Ended December 31, Ended December 31,
1996 1995 1996 1995
- - ---------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars, Except Per Share Data)
<S> <C> <C> <C> <C>
Operating Revenues
Utility sales and
transportation $ 405,482 $ 372,551 $ 1,362,397 $ 1,164,063
Gas production and other 41,244 25,532 114,314 87,983
- - ---------------------------------------------------------------------------------------------------------------------
446,726 398,083 1,476,711 1,252,046
Operating Expenses
Cost of gas 197,536 160,303 647,287 471,737
Operation and maintenance 101,877 101,302 421,399 390,749
Depreciation and depletion 24,982 18,081 92,601 71,788
General taxes 41,439 38,722 145,912 136,662
Federal income tax 23,434 22,275 41,104 42,681
- - ---------------------------------------------------------------------------------------------------------------------
Operating Income 57,458 57,400 128,408 138,429
Other Income (Expense)
Income from equity investments 2,290 1,707 12,196 9,639
Gain on sale of investment in
Canadian plant - - 16,160 -
Gain on sale of subsidiary stock - - 35,437 -
Minority interest in earnings
of subsidiary (1,583) - (1,583) -
Other, net (777) 214 1,440 22
Federal income tax (883) (577) (20,155) (423)
- - ---------------------------------------------------------------------------------------------------------------------
Income Before Interest Charges 56,505 58,744 171,903 147,667
- - ---------------------------------------------------------------------------------------------------------------------
Interest Charges
Long-term debt 10,545 12,922 43,928 48,793
Other 1,159 1,115 4,972 5,171
- - ---------------------------------------------------------------------------------------------------------------------
11,704 14,037 48,900 53,964
- - ---------------------------------------------------------------------------------------------------------------------
Net Income 44,801 44,707 123,003 93,703
Dividends on Preferred Stock 79 83 320 334
- - ---------------------------------------------------------------------------------------------------------------------
Income Available for
Common Stock $ 44,722 $ 44,624 $ 122,683 $ 93,369
=====================================================================================================================
Per Share of Common Stock $ 0.90 $ 0.91 $ 2.47 $ 1.92
=====================================================================================================================
Dividends Declared per Share
of Common Stock $ 0.365 $ 0.355 $ 1.430 $ 1.398
=====================================================================================================================
Average Common Shares
Outstanding 49,941,590 48,946,893 49,614,109 48,510,260
=====================================================================================================================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Twelve Months
Ended December 31, Ended December 31,
- - ---------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- - ---------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 44,801 $ 44,707 $ 122,003 $ 93,703
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and depletion 25,911 18,861 90,117 75,955
Deferred Federal income tax 4,558 3,571 29,019 13,397
Gain on sale of investment in Canadian operations - - (16,160) -
Gain on sale of subsidiary stock - - (35,437) -
Income from energy services investments (2,290) (1,707) (13,196) (9,639)
Dividends received from energy services investments 910 2,497 9,633 5,146
Minority interest in earnings of subsidiary 1,583 - 1,583 -
Allowance for equity funds used during construction (109) (366) (716) (1,396)
Change in accounts receivable, net (152,988) (180,324) 4,268 6,204
Change in accounts payable 28,188 15,445 43,738 (31,997)
Gas inventory and prepayments 11,219 31,908 (19,912) 24,779
Other 71,914 55,300 24,976 19,241
- - ---------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 33,697 (10,108) 240,916 195,393
- - ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Sale of common stock 5,601 7,140 25,328 28,276
Proceeds from sale of subsidiary stock - - 101,041 -
Issuance of long-term debt - 2,654 153,500 9,743
Commercial paper, net 28,000 23,000 5,000 19,000
- - ---------------------------------------------------------------------------------------------------------------------
33,061 32,794 284,869 57,019
Repayments
Preferred stock - - (300) (300)
Long-term debt - - (163,223) -
- - ---------------------------------------------------------------------------------------------------------------------
33,061 32,794 121,346 56,719
Dividends paid (18,343) (17,139) (71,819) (67,969)
Other 125 11 (22) 51
- - ---------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 14,843 15,666 49,505 (11,199)
- - ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (excluding allowance
for equity funds used during construction) (49,074) (39,115) (311,266) (201,943)
Proceeds from sale of investment in Canadian Plant - - 26,938 -
Partnership distribution 1996 and other 3,098 597 30,810 11,667
- - ---------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (45,976) (38,518) (253,518) (190,276)
- - ---------------------------------------------------------------------------------------------------------------------
Change in Cash and Temporary Cash Investments 2,564 (32,960) 36,903 (6,082)
Cash and Temporary Cash Investments at Beginning of Period 41,921 40,542 7,582 13,664
- - ---------------------------------------------------------------------------------------------------------------------
Cash and Temporary Cash Investments at End of Period $ 44,485 $ 7,582 $ 44,485 $ 7,582
=====================================================================================================================
Temporary cash investments are short-term marketable securities purchased with maturities of three months or less
that are carried at cost which approximates their fair value.
Supplemental disclosures of cash flows
Income taxes $ - $ - $ 37,053 $ 36,000
Interest $ 12,007 $ 16,709 $ 50,196 $ 52,724
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 6
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 December 31, 1996 and 1995, and the
results of operations for the three and twelve month periods
ended December 31, 1996 and 1995, and cash flows for the three
and twelve month periods ended December 31, 1996 and 1995.
Certain reclassifications were made to conform prior period
financial statements with the current period financial
statement presentation. All other adjustments were of a
normal, recurring nature.
As permitted by the rules and regulations of the Securities
and Exchange Commission, the Condensed Consolidated Financial
Statements do not include all of the accounting information
normally included with financial statements prepared in
accordance with generally accepted accounting principles.
Accordingly, the Condensed Consolidated Financial Statements
should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 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. Results of operations may also be
affected by the timing and comparative amounts of base tariff
rate changes. Therefore, the interim Condensed Consolidated
Statement of Income should not be taken as a prediction for
any future period.
The Company's tariff contains a weather normalization
adjustment that 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
<PAGE> 7
plant (MGP) sites. These sites have been identified for the
New York State Department of Environmental Conservation (DEC)
for inclusion on appropriate waste site inventories. In
certain circumstances, former MGP sites can give rise to
environmental cleanup responsibilities for the Company.
Two MGP sites are under active consideration by the Company.
One site, which is located on property still owned by the
Company, is the former Coney Island MGP facility located in
Brooklyn, New York. This site is the subject of continuing
interim remedial action under the direction of the U.S. Coast
Guard. The Company executed a consent order with the DEC
addressing the overall remediation of the Coney Island site in
accordance with state law. A schedule of investigative and
cleanup activities is being developed, leading to a cleanup
over the next several years. The other site currently is
owned by the City of New York (City). The Company and the
City are discussing a mutual approach to sharing potential
environmental responsibility for this site. The Company
believes it is likely that, at a minimum, investigative costs
will be incurred by the Company with respect to that site.
Based upon the Coney Island site consent order and the
estimated costs of investigation of the City site, the Company
believes that the minimum cost of MGP-related environmental
cleanup will be approximately $34 million, based upon current
information, primarily for the Coney Island site. This amount
includes approximately $5.7 million of costs expended as of
December 31, 1996. The Company's actual MGP-related costs may
be substantially higher, depending upon remediation
experience, eventual end use of the sites, and environmental
conditions not addressed in the consent order or current
investigative plans. Such potential additional costs are not
subject to estimation at this time.
As of December 31, 1996, the Company had an unpaid liability
of $28.4 million. By order issued February 16, 1995, the New
York State Public Service Commission (PSC) approved the
Company's July 1993 petition to defer the costs associated
with environmental site investigation and remediation incurred
in 1993 and thereafter. Recovery of these costs began in
fiscal 1995 and is conditioned upon absence of a PSC
determination that such costs have not been reasonably or
prudently incurred. In addition, the Company must demonstrate
that it has taken all reasonable steps to obtain cost recovery
from all available funding sources, including other
responsible parties and insurance sources.
Moreover, the rate agreement that became effective on October
1, 1996, described in "Rate and Regulatory Matters" of
"Management's Discussion and Analysis of Results of Operations
and Financial Condition," provides, among other things, that
<PAGE> 8
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
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 $32.6 million recorded for
environmental remediation costs as of December 31, 1995, have
been reflected in utility rates pursuant to the rate agreement
that became effective on October 1, 1996. Accordingly, at
December 31, 1996, the Company had only a net tax regulatory
asset of $75.3 million compared to a net regulatory asset of
$96.9 million at December 31, 1995.
In the event that it were no longer subject to the provisions
of SFAS-71, the Company estimates that the write-off of this
net regulatory tax asset could result in a charge to net
income of approximately $48.9 million which would be
classified as an extraordinary item.
4. SHARE EXCHANGE AGREEMENT WITH LONG ISLAND LIGHTING COMPANY
(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 dated 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 hold. 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 hold. Shareholders of the
<PAGE> 9
Company will own approximately 34% of the common stock of the
new holding company while LILCO shareholders will own
approximately 66%. The terms of both companies' outstanding
debt issues and preferred stock will not be altered as a
result of the share exchange transaction.
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.
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.
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
<PAGE> 10
unsecured and Prime-1 short-term ratings on review for
possible downgrade.
In 1995, the Long Island Power Authority (LIPA), an agency of
the State of New York (NYS), was requested by the Governor of
NYS to develop a plan, pursuant to its authority under NYS
law, to provide an electric rate reduction of at least 10%,
provide a framework for long-term competition in power
production and protect property tax-payers on Long Island.
The Share Exchange Agreement contemplates that discussions,
which are currently in progress, will continue with LIPA to
arrive at an agreement mutually acceptable to the Company,
LILCO and LIPA, pursuant to which LIPA would acquire certain
assets or securities of LILCO, the consideration for which
would inure to the benefit of the new holding company. In the
event that such a transaction is completed, the Ratio would be
0.880. In connection with discussions with LIPA, LIPA has
indicated that it may exercise its power of eminent domain
over all or a portion of LILCO's assets or securities, in
order to achieve its objective of reducing current electric
rates, if a negotiated agreement cannot be reached. The
Company is unable to determine when or if an agreement with
LIPA will be reached, or what action, if any, LIPA will take
if such an agreement is not reached.
<PAGE> 11
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating Results
The following is a summary of items affecting comparative earnings
and a discussion of the material changes in revenues and expenses
during the following periods:
(1) Three Months ended December 31, 1996 vs. Three Months ended
December 31, 1995.
(2) Twelve Months ended December 31, 1996 vs. Twelve Months
ended December 31, 1995.
Consolidated income available for common stock for the first
quarter of fiscal 1997 was $44.7 million, or 90 cents per share,
compared to $44.6 million, or 91 cents per share, for the first
quarter of last year. Utility operations contributed 83 cents per
share to consolidated earnings, a decrease of four cents per share
compared to last year's quarterly earnings. Utility operations
continued to reflect sales growth and ongoing cost-reduction
efforts, although comparative results were adversely affected by
weather. Operating results in the first quarter of fiscal 1997
reflect normal weather, while last year's first 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 approximately $1 million
higher in the first quarter of fiscal 1997, contributing seven
cents per share. The higher earnings reflected the Company's
increased investment in the Iroquois Gas Transmission System and
the operations associated with the acquisition of gas and oil
properties by The Houston Exploration Company (THEC) in July and
September 1996.
Consolidated earnings for the twelve months ended December 31, 1996
were $122.7 million, or $2.47 per share, compared to $93.4 million,
or $1.92 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, and were based on
solid performances in both utility operations and energy-related
investments.
Firm gas sales for the first quarter of fiscal 1997, which had
normal weather, were 2,118 MDTH lower than in the first quarter
last year, which was 9% colder than normal. Other gas and
transportation sales, which include gas deliveries to interruptible
customers and transportation services, primarily to off-system
<PAGE> 12
customers, were comparable in the first quarters of both years.
Total sales for the twelve months ended December 31, 1996, which
was 4.8% colder than normal, were 182,874 MDTH, compared to 180,205
MDTH for the corresponding period a year ago, which was 1% warmer
than normal.
Net revenues (utility operating revenues less cost of gas of
utility sales) decreased 2% in the three months ended December 31,
1996 reflecting weather which was normal compared to the same
period last year which was 9% colder than normal. Net revenues
increased 3.3% in the twelve months ended December 31, 1996 as
compared with the corresponding period last year, due to the cold
weather in last year's second quarter, the peak of the heating
season.
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 December 31, 1996, gas and transportation sales and services
to off-system and interruptible customers amounted to 42,959 MDTH
compared with 47,622 MDTH for the comparable period in 1995.
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 and to a lesser extent standard New York Mercantile
Exchange futures contracts or options 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 all cases, THEC pays the counterparties
the amount by which the floating variable price (settlement price)
<PAGE> 13
exceeds the fixed price and receives the amount by which the
settlement price is below the fixed price.
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.
Gas production and other revenues increased in the current periods
as compared with the comparable periods last year, principally due
to the acquisition of gas and oil properties by THEC in July and
September 1996. Gas production for the quarter ended December 31,
1996 was 10.5 BCFe, or 5.2 BCFe above production in the first
quarter last year. For the twelve months ended December 31, 1996,
gas production was 31.9 BCFe, compared with 22.0 BCFe in the twelve
months ended December 31, 1995. The effective price (average
wellhead price received for production including realized gains and
losses) was $2.32 per MCF in the first quarter of fiscal 1997
compared with $1.72 per MCF in the first quarter of 1996. The
average wellhead price was $2.68 per MCF in the current quarter
compared with $1.59 per MCF in the first quarter of 1996. Due to
warmer weather experienced to date in the second quarter, currently
forecasted prices have softened. The effective prices in the
twelve months ended December 31, 1996 and 1995 were $2.00 and $1.78
per MCF, respectively.
Operation and maintenance expense was comparable for the quarters
ended December 31, 1996 and 1995, reflecting the comparatively
warmer weather and ongoing cost-reduction efforts. Also, operation
and maintenance expense for the quarter ended December 31, 1995
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 December 31,1996 increased 7.8%
due to colder weather and the reorganization charge of $12 million
($7.8 million, after taxes) incurred by THEC.
The increase in depreciation and depletion expense in the current
periods reflects higher depletion charges at THEC due to increased
gas production.
General taxes principally include State and City taxes on utility
revenues and property. The applicable property base generally has
increased, although the Company has been able to realize savings by
the pursuit of reductions in property value assessments. Taxes
based on revenues reflect the variations in utility revenues each
year.
Federal income tax expense reflects changes in pre-tax income. The
<PAGE> 14
effective tax rate for the twelve months ended December 31, 1996
was 33%.
Interest charges for the twelve months ended December 31, 1996
reflect lower utility interest costs due to debt refunding offset
slightly by higher average subsidiary borrowings related to gas
exploration and production operations. Other interest charges
principally include carrying charges related to regulatory
settlement items, and for the quarters ended December 31, 1996 and
1995, reflect interest charges related to commercial paper
borrowings to finance seasonal working capital requirements.
Other income includes results from investments in energy services
which reflect increased earnings in the current periods, primarily
associated with an increase of 8% in the Company's investment in
the Iroquois Gas Transmission System which occurred in May 1996.
These increases were offset in part by the 34% minority interest in
the earnings of THEC. The increase in other income for the twelve
months ended December 31, 1996, as compared with the comparable
period last year, reflects 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
In the quarter ended December 31, 1996, operating activities
provided $33.7 million in cash flow; whereas, in the quarter ended
December 31, 1995, operating activities used $10.1 million in cash
flow. The upswing in cash flow of $43.8 million in the quarter
ended December 31, 1996 as compared to the first quarter of last
year is largely attributable to weather. The first quarter last
year was extremely cold compared to this year's quarter and hence
there was less cash tied up in utility customer receivables and gas
inventory accounts. In the twelve months ended December 31, 1996,
operating cash flow increased $45.5 million over the comparable
period a year ago. The increase also largely reflected the effects
of weather on receivables, inventories and payables.
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 - had an initial interest rate
of 3.45%. Substantial savings in interest costs are expected to
result from the refunding.
<PAGE> 15
Rate and Regulatory Matters
Rate Settlement Matters
In September 1996, the PSC approved a regulatory agreement to
<PAGE> 15
permit the Company to reorganize into a holding company structure.
However, on December 29, 1996, the Company and the Long Island
Lighting Company signed a definitive agreement to combine in a tax-
free transaction that would result in the formation of a new
holding company (see Note 4 to the Condensed Consolidated Financial
Statements, "Share Exchange Agreement with Long Island Lighting
Company"). As a result of entering into the agreement with LILCO,
the Board of Directors has made a determination not to have the
Company proceed at this time with its plan to form the holding
company contemplated in the regulatory agreement.
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 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. The Company also will be
permitted to charge for various ancillary services.
During the six-year term of the rate plan, the costs of gas
purchased by the Company for its customers will be recovered
currently in billed firm revenues through the operation of a tariff
provision, the Gas Adjustment Clause (GAC). Further, in addition
to recovering its specific gas costs in applicable rates, the
Company's rates for transporting gas 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
<PAGE> 16
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. The authorized rate of return on
utility common equity was set at 10.65% for fiscal 1996.
In October 1994, the PSC approved a three-year rate settlement
agreement which provided for no base rate increase in fiscal 1995;
however, the Company amortized to income, as permitted,
approximately $1.3 million of deferred credits in that year. The
third year of such agreement, fiscal 1997, was superseded by the
rate plan reflected in the holding company agreement discussed
above.
Restructuring Proceeding
The PSC has set forth a policy framework to guide the transition of
New York State's gas distribution industry in the deregulated gas
industry environment. In March 1996, the PSC issued an order on
utility compliance tariff filings, including the Company's, related
to this framework.
Pursuant to this order, beginning on May 1, 1996, customers in the
Company's small-volume market have 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.
<PAGE> 17
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
<PAGE> 17
historically have not been material, are integrated with the
Company's regular operation and maintenance activities. As of
December 31, 1996, the Company had an accrued liability of $28.4
million representing costs associated with investigation and
remediation at former manufactured gas plant sites. (See Notes to
Condensed Consolidated Financial Statements, Note 2.,
"Environmental Matters.")
<PAGE> 18
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 19.
<PAGE>
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Brooklyn Union Gas Company:
We have reviewed the accompanying condensed consolidated balance
sheets of The Brooklyn Union Gas Company (a New York corporation)
and subsidiaries as of December 31, 1996 and 1995, and the related
condensed consolidated statements of income for the three and
twelve month periods ended December 31, 1996 and 1995, and the
condensed consolidated statements of cash flows for the three and
twelve month periods ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the financial statements referred to above
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet and consolidated
statement of capitalization of The Brooklyn Union Gas Company and
subsidiaries as of September 30, 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
January 22, 1997
<PAGE> 20
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., "Environmental Matters."
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held at the office of
the Company, One MetroTech Center, Brooklyn, New York on
Thursday, February 6, 1997.
(b) Charles Uribe was elected to serve as a director for a one-
year term expiring in 1998. Craig G. Matthews was elected as
a director for a two-year term expiring in 1999. Andrea S.
Christensen, Alan H. Fishman and James Q. Riordan were elected
for three-year terms expiring in 2000. Robert B. Catell,
Kenneth I. Chenault and Edward D. Miller will continue to
serve as directors until their terms expire in 1998. Donald
H. Elliott and James L. Larocca will continue to serve as
directors until their terms expire in 1999. These terms may
not be completed if the Share Exchange Agreement referred to
above is approved and completed.
(c) The vote to elect Arthur Andersen LLP as independent public
accountants was 42,174,608 shares in favor, or 98% of the
shares voted, and 390,906 shares against, or 1% of the shares
voted. Abstentions of 328,128 shares were recorded.
(d) The proposal by a shareholder for cumulative voting for
directors was rejected by a vote of 24,308,266 shares against,
or 69% of the shares voted (12,838 proxies), and 9,031,752
shares in favor, or 25% of the shares voted (2,563 proxies).
Abstentions of 2,098,034 shares (1,580 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.
<PAGE> 21
(b) Reports on Form 8-K
There was a Form 8-K filed on December 30, 1996 pertaining to
the Share Exchange Agreement dated December 29, 1996 among the
Company, Long Island Lighting Company and BUGLILCO Holding Corp.
<PAGE>
<PAGE> 22
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
behalf of the undersigned thereunto duly authorized.
THE BROOKLYN UNION GAS COMPANY
(Registrant)
Date February 9, 1997 s/ V.D. Enright
V.D. Enright
Senior Vice President and
Chief Financial Officer
Date February 9, 1997 s/ R.M. Desmond
R.M. Desmond
Vice President, Comptroller and
Chief Accounting Officer
<PAGE>
Exhibit 15
1345 Avenue of the Americas
New York, NY 10105
February 18, 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 Registration Statements Nos. 33-66182, 333-
04863, 333-03441, 333-06257 and 333-18025, its Form 10-Q for the
quarter ended December 31, 1996, which includes our report dated
January 22, 1997 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, our report is not considered a part of the
registration statements prepared or certified by our firm or a
report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
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