SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 8-K
CURRENT REPORT
-----------------------------------
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
DATE OF REPORT (Date of earliest event reported):
September 19, 1997
LONG ISLAND LIGHTING COMPANY
(Exact name of registrant as specified in charter)
New York 1-3571 11-1019782
(State of Incorporation) (Commission File No.) (I.R.S. Employer
Identification No.)
175 East Old Country Road, Hicksville, New York 11801
516-755-6650
(Address and telephone number of Principal Executive Offices)
<PAGE>
Item 5. Other Events
The Company is filing this Current Report on Form 8-K to provide unaudited pro
forma combined condensed financial information for Long Island Lighting Company
("LILCO") and The Brooklyn Union Gas Company ("Brooklyn Union") at June 30, 1997
and for the twelve months ended June 30, 1997 in order to give effect under the
purchase method of accounting to the transactions summarized in Exhibit 99.1
hereto and in the assumptions set forth in the notes thereto.
Based on current facts and circumstances, LILCO and Brooklyn Union believe that
the applicability of the purchase method of accounting is probable. If the LIPA
Transaction is not consummated, it is possible that the combination between
LILCO and Brooklyn Union would qualify for the pooling of interests method of
accounting.
The unaudited pro forma combined condensed financial information set forth in
Exhibit 99.1 to this Current Report on Form 8-K reflects the condensed
consolidated financial information of LILCO and Brooklyn Union contained in
their respective Quarterly Reports on Form 10-Q filed on August 14, 1997, which
Quarterly Report of Brooklyn Union is attached hereto as Exhibit 99.2. Exhibits
99.1 and 99.2 are hereby incorporated by reference in response to this Item 5.
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
The unaudited pro forma combined condensed financial information and Brooklyn
Union's Quarterly Report on Form 10-Q filed on August 14, 1997, referred to
above in Item 5 and incorporated herein by reference, are attached hereto as the
following Exhibits:
Exhibit
Number
99.1 Unaudited pro forma combined condensed financial information for
LILCO and Brooklyn Union at June 30, 1997 and for the twelve months
ended June 30, 1997.
99.2 Brooklyn Union 10-Q Report for the quarter ended June
30, 1997.
- 2 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 19, 1997
LONG ISLAND LIGHTING COMPANY
Registrant
By /s/ Anthony Nozzolillo
-------------------------
ANTHONY NOZZOLILLO
Senior Vice President - Finance
- 3 -
<PAGE>
Exhibit Index
Exhibit
Number
15 Arthur Andersen Letter Re: Unaudited Interim Financial Information,
begins on page 5.
99.1 Unaudited pro forma combined condensed financial information for
LILCO and Brooklyn Union at June 30, 1997 and for the twelve months
ended June 30, 1997, begins on page 6.
99.2 Brooklyn Union 10-Q Report for the quarter ended June 30, 1997
begins on page 13.
- 4 -
Exhibit 15
ARTHUR
ANDERSEN
Arthur Andersen LLP
1345 Avenue of the Americas
New York NY 10105-0032
September 19, 1997
The Long Island Lighting Company
175 East Old Country Road
Hicksville, NY 11801
Gentlemen:
We are aware that Long Island Lighting Company has incorporated by reference in
its current Report on Form 8-K, The Brooklyn Union Gas Company's 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, our report is not considered a
part of a registration statement 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,
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
4
Exhibit 99.1
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
BROOKLYN UNION\LILCO COMBINATION AND LIPA TRANSACTION
The following unaudited pro forma financial information reflects adjustments to
the historical financial statements of LILCO to give effect to the proposed
transfer of LILCO's gas and generation business to subsidiaries of the newly
formed Holding Company (Holding Company), the proposed stock acquisition of
LILCO by a wholly owned subsidiary of LIPA and the proposed combination between
Brooklyn Union and LILCO (Combination). The unaudited pro forma consolidated
condensed balance sheet at June 30, 1997 gives effect to the proposed LIPA
Transaction and the Combination as if they had occurred at June 30, 1997. The
unaudited pro forma consolidated condensed statement of income for the 12-month
period ended June 30, 1997 gives effect to the proposed LIPA Transaction and the
Combination as if they had occurred at July 1, 1996. These statements are
prepared on the basis of accounting for the Combination under the purchase
method of accounting and are based on the assumptions set forth in the notes
thereto. In April 1997 LILCO changed its year-end from December 31 to March 31.
The following pro forma financial information has been prepared from, and should
be read in conjunction with, the LIPA Agreement (Annex D to the Joint Proxy
dated June 27, 1997), and the historical consolidated financial statements and
related notes thereto of Brooklyn Union and LILCO. The following information is
not necessarily indicative of the financial position or operating results that
would have occurred had the proposed LIPA Transaction and the Combination been
consummated on the date, or at the beginning of the period, for which the
proposed LIPA Transaction and the Combination are being given effect nor is it
necessarily indicative of future operating results or financial position.
5
<PAGE>
(BUG/LILCO) HOLDING CORP.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
6/30/97
(In Millions)
<TABLE>
<CAPTION>
Sale Brooklyn
LILCO to Pro Forma LILCO Union Pro Forma Pro Forma
(Historical) LIPA (1) Adjustments As Adjusted (Historical) Adjustments Consolidated
---------- --------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property
Utility Plant
Electric $3,939.2 2,855.1 1,084.1 0.0 0.0 1,084.1
Gas 1,180.9 0.0 0.0 1,180.9 1,815.8 0.0 2,996.7
Common 265.1 0.0 0.0 265.1 0.0 0.0 265.1
Construction work in progress 119.4 53.3 66.1 0.0 0.0 66.1
Nuclear fuel in process and in reactor 15.5 15.5 0.0 0.0 0.0 0.0
Less - Accumulated depreciation 0.0
and amortization (1,790.7) (873.2) (917.5) (447.3) 0.0 (1,364.8)
Gas exploration and production, at cost 0.0 0.0 0.0 591.8 0.0 591.8
Less - Accumulated depletion 0.0 0.0 0.0 0.0 (200.7) 0.0 (200.7)
-------------------- ------------ -------------------------------- ----------
Total Net Utility Plant 3,729.4 2,050.7 0.0 1,678.7 1,759.6 0.0 3,438.3
-------------------- ------------ -------------------------------- ----------
Cost I n Excess of Net Assets Acquired 308.0(6) 308.0
Regulatory Assets
Base financial component (less accumulated
amortization of $808 ) 3,231.1 3,231.1 0.0 0.0 0.0 0.0
Rate moderation component 406.1 406.1 0.0 0.0 0.0 0.0
Shoreham post-settlement costs 1,000.6 1,000.6 0.0 0.0 0.0 0.0
Regulatory tax asset 1,760.5 1,760.5 0.0 0.0 72.5(5) 72.5
Postretirement benefits other than pensions 353.9 0.0 (299.2)(2) 54.7 54.7
Other 439.6 341.7 97.9 0.0 0.0 97.9
-------------------- ------------ -------------------------------- ----------
Total Regulatory Assets 7,191.8 6,740.0 (299.2) 152.6 0.0 72.5 225.1
-------------------- ------------ -------------------------------- ----------
Nonutility Property and Other Investments 19.2 14.9 4.3 165.8 0.0 170.1
-------------------- ------------ -------------------------------- ----------
Current Assets
Cash and cash equivalents 54.0 0.0 2,404.9(3) 2,458.9 81.6 2,540.5
Deferred tax asset 86.4 86.4 119.0(4) 119.0 119.0
Accounts receivable and accrued revenues 435.1 290.0 17.9(2) 163.0 163.0
Other Current Assets 254.8 1.8 0.0 253.0 305.8 0.0 558.8
-------------------- ------------ -------------------------------- ----------
Total Current Assets 830.3 378.2 2,541.8 2,993.9 387.4 0.0 3,381.3
Deferred Charges 81.2 55.1 26.1 131.1 (72.5)(5) 84.7
Contractual recievable from LIPA 281.3(2) 281.3 281.3
-------------------- ------------ -------------------------------- ----------
Total Assets 11,851.9 9,238.9 2,523.9 5,136.9 2,443.9 308.0 7,888.8
======================================================================= ==========
CAPITALIZATION AND LIABILITIES
Capitalization
Common Shareowners' Equity 2,531.4 2,437.9 2,404.9(3) 2,498.4 993.3 253.8(6,7) 3,745.5
Long-term debt 4,458.3 3,414.6 (75.0)(15) 968.7 733.6 0.0 1,702.3
Preferred stock 702.1 339.1 75.0(15) 438.0 6.3 (6.3)(7) 438.0
-------------------- ------------ -------------------------------- ----------
Total Capitalization 7,691.8 6,191.6 2,404.9 3,905.1 1,733.2 247.5 5,885.8
-------------------- ------------ -------------------------------- ----------
Regulatory Liabilities 540.7 509.5 0.0 31.2 0.0 0.0 31.2
-------------------- ------------ -------------------------------- ----------
Current Liabilities
Accounts payable and accrued expenses 263.7 146.7 117.0 170.1 60.8(6,7) 347.9
Acrued taxes (including Federal income tax) 43.1 399.0(4) 442.1 40.1 482.2
Other current liabilites 347.6 64.6 283.0 41.7 (0.3) 324.4
-------------------- ------------ -------------------------------- ----------
654.4 211.3 399.0 842.1 251.9 60.5 1,154.5
-------------------- ------------ -------------------------------- ----------
Deferred Credits
Deferred federal income tax 2,421.0 2,306.3 (280.0)(4) (165.3) 286.1 0.0 120.8
Other 109.1 27.3 81.8 87.4 0.0 169.2
-------------------- ------------ -------------------------------- ----------
Total Deferred Credits 2,530.1 2,333.6 (280.0) (83.5) 373.5 0.0 290.0
-------------------- ------------ -------------------------------- ----------
Operating Reserves 434.9 (7.1) 0.0 442.0 0.0 0.0 442.0
Commitments and Contingencies 0.0 0.0 0.0 0.0 0.0 0.0 0.0
-------------------- ------------ -------------------------------- ----------
Minority Interest in Subsidiary Company 0.0 0.0 0.0 0.0 85.3 0.0 85.3
-------------------- ------------ -------------------------------- ----------
Total Capitalization and Liabilities 11,851.9 9,238.9 2,523.9 5,136.9 2,443.9 308.0 7,888.8
==================== ============ ================================ ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial
Statements.
6
<PAGE>
(BUG/LILCO) HOLDING CORP.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT
OF INCOME For the Twelve Months Ended June 30, 1997
(In Millions Except Per Share Amounts)
<TABLE>
<CAPTION>
Sale Pro Brooklyn
LILCO to Forma LILCO Union Pro Forma Pro Forma
(Historical) LIPA (1) Adjustments As Adjusted (Historical) Adjustments Consolidated
----------- ----------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Electric $2,448.1 $1,499.4(10) $11.5(8) $960.2 $0.0 $0.0 $960.2
Gas - Utility sales 659.5 659.5 1,318.7 0.00 1,978.2
Gas production and other 0.0 141.7 0.0 141.7
----------- ----------- ----------- ---------- ---------- ---------- -----------
Total Revenues 3,107.6 1,499.4 11.5 1,619.7 1,460.4 0.0 3,080.1
Operating Expenses
Operations - fuel and purchased power 942.7 14.5 928.2 602.5 0.0 1,530.7
Operations - other 377.0 226.1 150.9 370.3 0.0 521.2
Maintenance 115.0 66.8 48.2 54.5 0.0 102.7
Depreciation, depletion and amortization 155.9 94.2 61.7 100.3 6.3(6) 168.3
Base financial component amortization 101.0 101.0 0.0 0.0 0.0 0.0
Rate moderation component amortization 16.8 16.8 0.0 0.0 0.0 0.0
Regulatory liability component amortization (88.6) (88.6) 0.0 0.0 0.0 0.0
Other regulatory amortization 67.4 46.2 21.2 0.0 0.0 21.2
Operating taxes 467.6 278.9 188.7 151.7 0.0 340.4
Federal income taxes 213.8 163.2 5.4(9) 56.0 46.4 0.0 102.4
----------- ----------- ----------- ---------- ---------- ---------- -----------
Total Operating Expenses 2,368.6 919.1 5.4 1,454.9 1,325.7 6.3 2,786.9
----------- ----------- ----------- ---------- ---------- ---------- -----------
Operating Income 739.0 580.3 6.1 164.8 134.7 (6.3) 293.2
Other (Income) and Deductions 15.7 26.9 (11.2) 46.5 0.0 35.3
----------- ----------- ----------- ---------- ---------- ---------- -----------
Income Before Interest Charges 754.7 607.2 6.1 153.6 181.2 (6.3) 328.5
Interest Charges 427.8 345.5 (3.8)(9) 78.5 45.6 0.0 124.1
----------- ----------- ----------- ---------- ---------- ---------- -----------
Net Income 326.9 261.7 9.9 75.1 135.6 (6.3) 204.4
----------- ----------- ----------- ---------- ---------- ---------- -----------
Preferred stock dividend requirements 52.1 39.9 23.7(11) 35.9 0.3 (0.3)(7) 35.9
----------- ----------- ----------- ---------- ---------- ---------- -----------
Earnings for Common Stock $274.8 $221.8 ($13.8) $39.2 $135.3 ($6.0) $168.5
=========== =========== =========== ========== ========== ========== ===========
Average Common Shares Outstanding 120.8 120.8 120.8 120.8 50.0 (14.5) 156.3
=========== =========== =========== ========== ========== ========== ===========
Earnings per Common and Equivalent Shares $2.27 $1.84 ($0.11) $0.32 $2.70 $0.41 $1.08
=========== =========== =========== ========== ========== ========== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Condensed Financial
Statements.
7
<PAGE>
Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements
1. The historical financial statements of LILCO have been adjusted to give
effect to the proposed transaction with LIPA, pursuant to which LILCO will
distribute certain of its net assets relating to its gas and generation
business ("Transferred Assets") to subsidiaries of the Holding Company.
LIPA will then acquire LILCO in a stock sale. The adjustments are based
upon a disaggregation of LILCO's balance sheet and operations as estimated
by the management of LILCO, and are subject to adjustment pursuant to the
terms of the LIPA agreement.
In connection with this transaction, the principal assets to be acquired by
LIPA through its stock acquisition of LILCO include the electric
transmission and distribution system ("The LIPA Transmission and
Distribution System"), LILCO's 18% interest in Nine Mile Point 2 nuclear
power station, certain of LILCO's regulatory assets associated with its
electric business and an allocation of accounts receivable and other
assets. The principal liabilities to be assumed by LIPA include LILCO's
regulatory liabilities associated with its electric business, a portion of
LILCO's long-term debt and an allocation of accounts payable, accrued
expenses, customer deposits, other deferred credits and claims.
2. In connection with the LIPA Transaction, LIPA is contractually responsible
for reimbursing the Holding Company for postretirement benefits other than
pension costs, related to employees of LILCO's electric business. A pro
forma adjustment has been reflected to reclassify the associated regulatory
asset for postretirement benefits other than pensions to current and
non-current accounts receivable pursuant to LIPA's obligation to a
subsidiary of the Holding Company.
3. The Cash Purchase Price to be paid by LIPA in connection with its stock
acquisition of LILCO will be $2,497.5 million. The Cash Purchase Price was
determined based upon the estimated net book value of the LILCO Retained
Assets of $2,500.8 million as estimated by LILCO in a projected balance
sheet as of December 31, 1997. Based upon the balance sheet as of June 30,
1997, the net book value of the LILCO Retained Assets amount to $2,437.9
million. In addition, the LIPA Transaction obligates the Holding Company
upon the closing of the transaction to remit to LIPA $15 million associated
with the recovery through litigation of certain real estate taxes
previously paid. Transaction costs are currently estimated to be $18
million. Assuming the LIPA Transaction was completed on June 30, 1997, the
net cash to be received by the Holding Company would amount to:
Cash Purchase Price.............................$2,437.9
Cash paid to LIPA..................................(15.0)
Transaction Costs............................... (18.0)
Net Cash........................................$2,404.9
4. The distribution of the Transferred Assets from LILCO to subsidiaries
8
<PAGE>
of the Holding Company will result in the imposition of federal income
taxes on LILCO. Pursuant to the LIPA Agreement, the subsidiaries created by
the Holding Company to receive the Transferred Assets will receive the
benefit of the increased tax basis of the Transferred Assets and will pay
the LILCO tax. If the LIPA Transaction were to have occurred at June 30,
1997, the tax would have amounted to approximately $399 million. The tax is
derived from the difference between the estimated fair value of the
distributed assets and their existing tax basis. For financial reporting
purposes, the subsidiaries reversed the existing deferred tax liability of
$280 million relating to the Transferred Assets and recorded a $119 million
deferred tax asset reflecting the income tax effect by which the tax basis
of the Transferred Assets exceeded their book basis.
5. The unaudited pro forma condensed consolidated balance sheet as of June 30,
1997 reflects the reclassification of $72.5 million of Brooklyn Union
regulatory tax assets from deferred charges to regulatory assets in order
to consistently present the regulatory assets of Brooklyn Union and LILCO.
6. The purchase price for Brooklyn Union at June 30, 1997, which amounted to
approximately $1.245 billion including approximately $54.1 million of
transaction costs, has been determined based upon an average of LILCO's
opening and closing stock prices for the two trading days before and three
trading days after December 29, 1996. The purchase price has been allocated
to assets acquired and liabilities assumed based upon their estimated fair
values. It is anticipated that the fair value of the utility assets
acquired is represented by their book value, which approximates the value
of these assets recognized by the New York State Public Service Commission
(PSC) in establishing rates which are designed to, among other things,
provide for a return on the book value of these assets and the recovery of
costs included as depreciation and amortization charges. The estimated fair
values of Brooklyn Union's non-utility assets approximate their carrying
values. Both Brooklyn Union and LILCO will seek PSC approval for recovery
of transaction costs.
Based upon current information, the purchase price, including merger-
related transaction costs, exceeds the fair value of the net assets
acquired by $308.0 million, which will be amortized to income over 40
years.
7. In connection with the formation of KeySpan, Brooklyn Union will redeem its
outstanding preferred stock at a premium of 2% per terms of the original
issuance agreement. As a result, accounts payable has been adjusted to
reflect a payable of $6.3 million including premiums of $0.1 million which
have been charged to Common Shareholders' Equity.
8. The agreement with LIPA includes a provision for the Holding Company to
earn in the aggregate approximately $11.5 million in annual management
service fees from LIPA for the management of the LIPA Transmission and
Distribution System and the management of all aspects of fuel and power
9
<PAGE>
supply. These agreements also contain certain incentive and penalty
provisions which could materially impact earnings from such agreements.
9. The pro forma charge of $5.4 million represents the income tax effect
associated with the recording of the pro forma adjustments for the $11.5
million management fee (See Note 8), and a reduction in interest expense of
approximately $3.8 million associated with the recapitalization of the
subsidiary which contains the gas and generation businesses.
10. Revenues for both the assets acquired by LIPA and the Transferred Assets
were determined based upon a revenue requirements model which considered
the cost of service for these assets and a return on capitalization based
upon an imputed allowed rate of return.
11. No adjustments have been made to earnings on common stock to reflect
earnings on net available proceeds of approximately $1.7 billion to be
received, after remittances to the Holding Company's gas and generation
subsidiaries for working capital purposes (see Notes 3 and 12). If these
funds were invested at 6.78% (the 30 year US Treasury Bond yield based on
recent prices), the Holding Company would have realized additional interest
income, net of taxes, of approximately $74.9 million, or approximately $.48
per share, on a pro forma consolidated basis. Each one percent change in
the assumed interest rate, would increase/decrease interest income, net of
taxes, by $11.0 million. LILCO's allowed rate of return on its common
equity for its electric business is currently 11%.
12. Subsequent to the sale to LIPA, a portion of the proceeds to be received by
the Holding Company will be remitted to LILCO's gas and generation
subsidiaries in order to meet the subsidiaries working capital needs. Such
proposed transaction has been eliminated in the consolidation process.
13. The allocation between Brooklyn Union and LILCO and their customers of the
estimated cost savings resulting from the Combination, net of the costs
incurred to achieve such savings, will be subject to regulatory review and
approval. None of the estimated cost savings have been reflected in the
unaudited pro forma consolidated condensed financial statements.
14. The unaudited pro forma consolidated condensed financial statements reflect
the exchange of each share of LILCO Common Stock outstanding into 0.880
shares of Holding Company Common Stock outstanding into one share of
Holding Company Common Stock, as provided in the Brooklyn Union/LILCO
Agreement.
15. As more fully described in the section entitled "The LIPA TRANSACTION-
Agreement and Plan of Merger," LILCO will transfer the Transferred Assets
to subsidiaries of the Holding Company in exchange for shares of the
Holding Company common stock and up to $75 million face amount of Holding
Company Preferred Stock. The privately placed Preferred Stock
10
<PAGE>
will be non-voting, non-convertible and have a five year term. For purposes
of these pro forma financial statements, it is assumed that the Holding
Company will issue $75 million of Preferred Stock, LILCO will sell the
preferred stock for $75 million in proceeds and will retain the proceeds
(i.e. a Retained Asset).
With a $75 million increase in the Retained Assets, the LIPA Agreement
provides that the Retained Debt will increase by a corresponding amount.
The LIPA Agreement also provides that if the Holding Company were to issue
an amount other than $75 million of Preferred Stock, the incremental
difference between the amount actually issued and $75 million, will result
in a corresponding increase or decrease in the amount of accounts payable
retained by LILCO. These pro forma financial statements reflect a reduction
in interest expense for the reduced level of subsidiary debt, and to
reflect an increase in preferred stock dividend requirements. Finally, for
purposes of these pro forma financial statements, it is assumed that the
dividend rate on this privately place Preferred Stock will be 7.95%, which
is equal to the Company's highest cost preferred Stock.
16. The Brooklyn Union earnings for the 12 month period ended June 30, 1997
include non-recurring income aggregating approximately $33.5 million, net
of taxes, or $0.68 per share, relating to gains on the initial public
offering of a subsidiary's stock and the sale of an investment in a
Canadian plant. This income was partially offset by a $7.8 million charge,
net of taxes, or $0.16 per share, relating to reorganization expenses
incurred by the subsidiary.
11
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
1
<PAGE>
<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
- --------------------------------------------------------------------------------------------------
2
<PAGE>
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
</TABLE>
<PAGE>
<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.
</TABLE>
4
<PAGE>
<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.
9
<PAGE>
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 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
10
<PAGE>
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 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.
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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 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
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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 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.
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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 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
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customers and capacity release credits. Expenditures related to remediation of
the sites of former gas manufacturing plants are subject to a provision enabling
the Company to retain any savings and absorb any costs to the extent that actual
expenditures vary by more than 10% compared with estimates. The agreement
includes a customer service quality performance plan, with a maximum forty
basis-point pre-tax return penalty if service quality diminishes in certain
categories over the term of the agreement. Also, the weather normalization
adjustment was modified to provide that the Company may recover or be required
to refund 87.5% of all margin shortfalls or surpluses resulting from weather
that is warmer or colder than normal.
In September 1995, the PSC approved the Company's second stage rate filing
covering fiscal 1996. The approval provided for no base rate increase; however,
$7.5 million in deferred credits were amortized to income in 1996.
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.")
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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.
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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
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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.
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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
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