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: February 25, 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
In connection with the binding share exchanges between Long Island Lighting
Company ("LILCO") and The Brooklyn Union Gas Company ("Brooklyn Union") as
discussed in LILCO's Report on Form 8-K dated December 30, 1996 (the "Binding
Share Exchanges"), LILCO is filing the following: (i) audited financial
statements of Brooklyn Union as of September 30, 1996 and 1995 and for each of
the three years in the period ended September 30, 1996; (ii) unaudited interim
financial statements of Brooklyn Union as of and for the three and twelve months
ended December 31, 1996 and 1995; and (iii) unaudited pro forma combined
condensed financial information for LILCO and Brooklyn Union, after giving
effect to the Binding Share Exchanges as a pooling of interests for accounting
purposes, in each case as attached as Exhibits 99.1, 99.2 and 99.3 to this
Current Report on Form 8-K, which Exhibits are hereby incorporated by reference
herein.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
The audited financial statements, and the unaudited interim financial
statements of Brooklyn Union, and the unaudited pro forma combined condensed
financial information, referred to above in Item 5 and incorporated herein by
reference, are attached hereto as the following Exhibits:
Exhibit
NUMBER
99.1. Audited financial statements of Brooklyn Union as of September 30,
1996 and 1995 and for each of the three years in the period ended
September 30, 1996, including the report and consent of Independent
Auditors.
99.2. Unaudited interim financial information of Brooklyn Union for its
quarters ended December 31, 1996 and 1995, including the review
report and acknowledgment of Independent Auditors.
99.3. Unaudited pro forma combined condensed financial information for
LILCO and Brooklyn Union.
<PAGE>
SIGNATURES
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.
LONG ISLAND LIGHTING COMPANY
(Registrant)
By: /S/ ANTHONY NOZZOLILLO
----------------------------
Anthony Nozzolillo
Senior Vice President - Finance
Dated: February 25, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Brooklyn Union Gas Company:
We have audited the accompanying Consolidated Balance Sheet and Consolidated
Statement of Capitalization of The Brooklyn Union Gas Company (a New York
corporation) and subsidiaries as of September 30, 1996 and 1995, and the related
Consolidated Statements of Income, Retained Earnings and Cash Flows for each of
the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position and capitalization of The Brooklyn
Union Gas Company and subsidiaries as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996, in conformity with generally accepted
accounting principles.
/S/ ARTHUR ANDERSEN LLP
October 23, 1996
New York, New York
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS FOR FINANCIAL
STATEMENT PRESENTATION
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements reflect the accounts of the Company and
its subsidiaries. All significant intercompany transactions are eliminated. All
other adjustments are of a normal, recurring nature and certain
reclassifications have been made to amounts in prior periods to conform them
with the current period presentation.
Further, the preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UTILITY GAS PROPERTY -
DEPRECIATION AND MAINTENANCE
Utility gas property is stated at original cost of construction, which includes
allocations of overheads and taxes and an allowance for funds used during
construction.
Depreciation is provided on a straight-line basis in amounts equivalent to
composite rates on average depreciable property of 3.4% in 1996 and 1995, and
3.3% in 1994.
The cost of property retired, plus the cost of removal less salvage, is
charged to accumulated depreciation. The cost of repair and minor replacement
and renewal of property is charged to maintenance expense.
GAS EXPLORATION AND PRODUCTION PROPERTY - DEPLETION
AND DEPRECIATION
The Company's gas exploration and production subsidiary follows the full cost
method of accounting. All productive and nonproductive costs identified with
acquisition, exploration and development are capitalized. Provisions for
depletion are based on the units-of- production method and, when necessary,
include provisions related to the asset ceiling test limitations required by the
regulations of the Securities and Exchange Commission. Costs of unevaluated gas
and oil properties are excluded from the amortization base until proved reserves
are established or an impairment is determined.
Provisions for depreciation of all other non-utility property are computed
on a straight-line basis over useful lives of three to fifteen years.
<PAGE>
INVESTMENTS IN ENERGY SERVICES
Certain subsidiaries own as their principal assets investments representing
ownership interests of 50% or less in energy-related businesses that are
accounted for under the equity method.
REVENUES
Utility customers generally are billed bi-monthly on a cycle basis. Revenues
include unbilled amounts related to the estimated gas usage that occurred from
the last meter reading to the end of each month.
Revenue requirements to establish utility rates are based on sales to
customers. Gas costs are recovered currently in billed firm revenues through the
operation of a tariff provision, the Gas Adjustment Clause (GAC). Net revenues
from off-system gas sales and tariff gas balancing services and capacity release
credits are refunded to firm customers subject to certain limited sharing
provisions in the Company's tariff. Prior to October 1, 1996, net revenues from
tariff sales for gas and transportation services to on-system customers made on
an interruptible basis were refunded to firm customers subject to sharing
provisions. The GAC provision requires an annual reconciliation of recoverable
gas costs and GAC revenues. Any difference is deferred pending recovery from or
refund to firm customers during a subsequent twelve-month period.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company and THEC use derivative financial instruments primarily to hedge
exposures in cash flows due to fluctuations in the price of natural gas and fuel
oil, which in certain markets may strongly influence the Company's selling price
for natural gas. Gains and losses on these instruments are recognized
concurrently with the recognition of the related physical transactions.
The Company regularly assesses the relationship between natural gas commodity
prices in "cash" and futures markets. The correlation between prices in these
markets has been well within a range generally deemed to be acceptable. If
correlation were not to remain in an acceptable range, the Company would account
for its financial instrument positions as trading activities.
FEDERAL INCOME TAX
Prior to the adoption in 1994 of SFAS-109, "Accounting for Income Taxes",
pursuant to PSC policy, deferred taxes were not provided for certain
construction costs incurred before fiscal 1988 and for bases differences related
to differences between tax and book depreciation methods. In accordance with
SFAS-109, the Company recorded a regulatory asset for the net cumulative effect
of having to provide deferred Federal income tax expense on all differences
<PAGE>
between the tax and book bases of assets and liabilities at the current tax
rate.
Investment tax credits, which were available prior to the Tax Reform Act
of 1986, were deferred in operating expense and are amortized as a reduction of
Federal income tax in other income over the estimated life of the related
property.
REGULATORY ASSETS
The Company is subject to the provisions of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation". Regulatory assets arise from the allocation of costs and revenues
to accounting periods for utility ratemaking purposes differently from bases
generally applied by nonregulated companies. Regulatory assets are recognized in
accordance with SFAS-71. With the exception of net tax regulatory assets all
other significant assets and liabilities created by the ratemaking process,
including the $33.2 million recorded for environmental remediation costs as of
September 30, 1995, have been reflected in utility rates pursuant to the
agreement approved by the PSC in its September 25, 1996 holding company order.
Accordingly, at September 30, 1996 the Company had only a net tax regulatory
asset of $74,885,000 compared to a regulatory asset of $109,636,000 related to
taxes and environmental costs at September 30, 1995.
In the event that it were no longer subject to the provisions of SFAS-71,
the Company estimates that the write-off of this net regulatory tax asset could
result in a charge to net income of approximately $48,675,000 which would be
classified as an extraordinary item.
SUBSIDIARY COMMON STOCK ISSUANCES TO THIRD PARTIES
The Company follows an accounting policy of income statement recognition
for parent company gains or losses from issuances of stock by subsidiaries.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred. For the years
ended September 30, 1996, 1995 and 1994, these costs were $12.8 million, $11.9
million and $11.9 million, respectively.
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
=====================================================================================
For the Year Ended September 30, 1996 1995 1994
=====================================================================================
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Revenues
Utility sales $ 1,351,821 $1,152,331 $1,279,638
Gas production and other 80,181 63,953 58,992
----------------------------------------------------------------------------------------
1,432,002 1,216,284 1,338,630
----------------------------------------------------------------------------------------
Operating Expenses
Cost of gas 610,053 446,559 560,657
Operation and maintenance 428,977 385,654 384,734
Depreciation and depletion 79,610 72,020 69,611
General taxes 143,296 134,718 150,743
Federal income tax (See Note 1) 39,508 41,989 40,556
----------------------------------------------------------------------------------------
Operating Income 130,558 135,344 132,329
Other Income
Income from energy services investments 13,523 9,458 5,689
Gain on sale of investment in Canadian plant 16,160 - -
Gain on sale of subsidiary stock (See Note 3) 35,437 - -
Other, net (1,188) 151 700
Federal income tax (See Note 1) (19,861) (51) (142)
-----------------------------------------------------------------------------------------
Income Before Interest Charges 174,629 144,902 138,576
Interest Charges
Long-term debt 46,803 47,939 46,900
Other 4,918 5,128 4,292
----------------------------------------------------------------------------------------
Net Income 122,908 91,835 87,384
Dividends on Preferred Stock 323 337 351
----------------------------------------------------------------------------------------
Income Available for Common Stock $ 122,585 $ 91,498 $ 87,033
========================================================================================
Earnings Per Share of Common Stock
(Average shares outstanding of 49,365,435,
48,211,220 and 46,979,597, respectively) $ 2.48 $ 1.90 $ 1.85
========================================================================================
</TABLE>
The accompanying Summary of Significant Accounting Policies and Basis for
Financial Statement Presentation and Notes to Consolidated Financial
Statements are integral parts of these statements.
<PAGE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
<TABLE>
<CAPTION>
=======================================================================================
For the Year Ended September 30, 1996 1995 1994
---------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Balance at Beginning of Year $ 303,709 $ 279,466 $ 255,979
Income Available for Common Stock 122,585 91,498 87,033
----------------------------------------------------------------------------------------
426,294 370,964 343,012
Less:
Cash dividends declared ($1.42, $1.39 and $1.35
per common share, respectively) 70,291 67,229 63,652
Other adjustments 30 26 (106)
-----------------------------------------------------------------------------------------
Balance at End of Year $ 355,973 $ 303,709 $ 279,466
=========================================================================================
The accompanying Summary of Significant Accounting Policies and Basis for
Financial Statement Presentation and Notes to Consolidated Financial
Statements are integral parts of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================
CONSOLIDATED BALANCE SHEET
September 30, 1996 1995
(Thousands of Dollars)
<S> <C> <C>
Assets
Property
Utility, at cost $ 1,782,440 $ 1,690,193
Accumulated depreciation (429,476) (393,263)
Gas exploration and production, at cost (See Note 3) 510,568 353,847
Accumulated depletion (165,414) (138,136)
------------------------------------------------------------------------------------------------
1,698,118 1,512,641
------------------------------------------------------------------------------------------------
Investments in Energy Services (See Note 8) 115,529 121,023
------------------------------------------------------------------------------------------------
Current Assets
Cash 18,524 15,992
Temporary cash investments 23,397 24,550
Accounts receivable 172,843 146,018
Allowance for uncollectible accounts (15,616) (13,730)
Gas in storage, at average cost 91,813 88,810
Materials and supplies, at average cost 12,089 13,203
Prepaid gas costs 11,945 15,725
Other 38,888 19,856
------------------------------------------------------------------------------------------------
353,883 310,424
------------------------------------------------------------------------------------------------
Deferred Charges 122,073 172,834
------------------------------------------------------------------------------------------------
$ 2,289,603 $ 2,116,922
================================================================================================
Capitalization and Liabilities
Capitalization (See accompanying statement and Note 5)
Common equity $ 905,808 $ 826,290
Preferred stock, redeemable 6,600 6,900
Long-term debt 712,013 720,569
------------------------------------------------------------------------------------------------
1,624,421 1,553,759
------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable 143,561 103,705
Dividends payable 18,229 17,536
Taxes accrued 10,905 3,635
Customer deposits 21,881 22,252
Customer budget plan credits 8,892 24,790
Interest accrued and other 37,244 39,438
------------------------------------------------------------------------------------------------
240,712 211,356
------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Federal income tax 282,041 247,882
Unamortized investment tax credits 20,007 20,948
Other 43,573 82,977
------------------------------------------------------------------------------------------------
345,621 351,807
------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Company (See Note 3) 78,849 -
------------------------------------------------------------------------------------------------
$ 2,289,603 $ 2,116,922
================================================================================================
The accompanying Summary of Significant Accounting Policies and Basis for
Financial Statement Presentation and Notes to Consolidated Financial
Statements are integral parts of these statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CAPITALIZATION
<TABLE>
<CAPTION>
=========================================================================================
September 30, 1996 1995
-----------------------------------------------------------------------------------------
<S> <C> <C>
(Thousands of Dollars)
Common Equity
Common stock, $.33 1/3 par value, authorized 70,000,000 shares; outstanding
49,857,448 and 48,788,320 shares,
respectively $ 549,835 $ 522,581
Retained earnings (See accompanying statement) 355,973 303,709
------------------------------------------------------------------------------------------
905,808 826,290
------------------------------------------------------------------------------------------
Preferred Stock, Redeemable
$100 par value, cumulative, authorized 900,000 shares
4.60% Series B, 69,000 and 72,000 shares outstanding, respectively 6,900 7,200
Less: Current sinking fund requirements 300 300
------------------------------------------------------------------------------------------
6,600 6,900
------------------------------------------------------------------------------------------
Long-term Debt
Gas facilities revenue bonds (issued through New York
State Energy Research and Development Authority)
9% Series 1985A due May 2015 - 98,500
8 3/4% Series 1985 due July 2015 - 55,000
6.368% Series 1993A and Series 1993B due April 2020 75,000 75,000
7 1/8% Series 1985 I due December 2020 62,500 62,500
7% Series 1985 II due December 2020 62,500 62,500
5.5% Series 1996 due January 2021 153,500 -
6.75% Series 1989A due February 2024 45,000 45,000
6.75% Series 1989B due February 2024 45,000 45,000
5.6% Series 1993C due June 2025 55,000 55,000
6.95% Series 1991A and Series 1991B due July 2026 100,000 100,000
5.635% Series 1993D-1 and Series 1993D-2 due July 2026 50,000 50,000
-----------------------------------------------------------------------------------------
648,500 648,500
Unamortized premium - Long-term debt (1,489) -
Subsidiary borrowings 65,002 72,069
-----------------------------------------------------------------------------------------
712,013 720,569
-----------------------------------------------------------------------------------------
$ 1,624,421 $ 1,553,759
=========================================================================================
The accompanying Summary of Significant Accounting Policies and Basis for
Financial Statement Presentation and Notes to Consolidated Financial
Statements are integral parts of these statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
==============================================================================================================
For the Year Ended September 30, 1996 1995 1994
--------------------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 122,908 $ 91,835 $ 87,384
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and depletion 83,006 77,696 75,386
Deferred Federal income tax 25,985 11,037 10,897
Gain on sale of investment in Canadian operations (16,160) - -
Gain on sale of subsidiary stock (35,437) - -
Income from energy services investments (13,523) (9,458) (5,689)
Dividends received from energy services investments 11,031 3,595 4,392
Change in accounts receivable, net (24,939) 44,712 31,906
Change in accounts payable 39,856 (29,283) (34,121)
Gas inventory and prepayments 777 6,208 5,498
Other 8,863 14,439 18,474
---------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 202,367 210,781 194,127
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 27,407 27,974 29,828
Proceeds from sale of subsidiary stock 101,041 - -
Common stock proceeds receivable - - 44,910
Issuance of long-term debt 153,500 19,192 12,077
Repayments of long-term debt and preferred stock (160,867) (300) (300)
Dividends paid (70,614) (67,566) (64,003)
----------------------------------------------------------------------------------------------------------------
Cash provided by (used for)financing activities 50,467 (20,700) 22,512
----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excluding allowance
for equity funds used during construction) (301,307) (212,732) (197,496)
Proceeds from sale of investment in Canadian plant 26,938 - 11,691
Partnership distribution 1996 and other 22,914 9,702 1,398
----------------------------------------------------------------------------------------------------------------
Cash used in investing activities (251,455) (203,030) (184,407)
----------------------------------------------------------------------------------------------------------------
Change in Cash and Temporary Cash Investments 1,379 (12,949) 32,232
Cash and Temporary Cash Investments at Beginning of Year 40,542 53,491 21,259
----------------------------------------------------------------------------------------------------------------
Cash and Temporary Cash Investments at End of Year $ 41,921 $ 40,542 $ 53,491
================================================================================================================
Temporary cash investments are short-term marketable securities purchased with
maturities of three months or less that are carried at cost which approximates
their fair value.
Supplemental disclosures of cash flows
Income taxes $ 37,053 $ 36,000 $ 36,900
Interest $ 53,210 $ 53,047 $ 50,872
================================================================================================================
The accompanying Summary of Significant Accounting Policies and Basis for
Financial Statement Presentation and Notes to Consolidated Financial
Statements are integral parts of these statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1. FEDERAL INCOME TAX
Income tax expense (benefit) is reflected as follows in the Consolidated
Statement of Income:
YEAR ENDED SEPTEMBER 30, 1996 1995 1994
- ---------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING EXPENSES
Current $ 27,766 $ 31,676 $ 38,403
DEFERRED 11,742 10,313 2,153
- -----------------------------------------------------------
39,508 41,989 40,556
- -----------------------------------------------------------
OTHER INCOME
Current 6,559 379 (7,528)
Deferred 14,243 724 8,744
Amortization of investment
TAX CREDITS (941) (1,052) (1,074)
- ------------------------------------------------------------
19,861 51 142
- -----------------------------------------------------------
TOTAL FEDERAL INCOME TAX $ 59,369 $ 42,040 $ 40,698
- -----------------------------------------------------------
</TABLE>
The components of the Company's net deferred income tax liability reflected as
Deferred Credits and Other Liabilities - Federal income tax in the Consolidated
Balance Sheet are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 1995
- ---------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Utility property $ 176,565 $ 180,708
Gas production and other property 69,488 49,402
Net tax regulatory asset 26,210 28,214
OTHER 9,778 (10,442)
NET DEFERRED INCOME TAX LIABILITY $ 282,041 $ 247,882
</TABLE>
<PAGE>
The following is a reconciliation between reported income tax and tax computed
at the statutory rate of 35%:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1996 1995 1994
- ----------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Computed at statutory rate $ 63,797 $ 46,856 $ 44,828
Adjustments related to:
Gas production tax credits (1,962) (2,730) (1,303)
Nontaxable interest income (678) (870) (556)
Amortization of investment
tax credits (941) (1,052) (1,074)
OTHER, NET (847) (164) (1,197)
- ------------------------------------------------------------
TOTAL FEDERAL INCOME TAX $ 59,369 $ 42,040 $ 40,698
- -----------------------------------------------------------
EFFECTIVE INCOME TAX RATE 33% 31% 32%
- -----------------------------------------------------------
</TABLE>
2. POSTRETIREMENT BENEFITS
A. PENSION: The Company has a noncontributory defined benefit
pension plan covering substantially all employees. Benefits are
based on years of service and compensation. The Company's funding
policy for pensions is in accordance with requirements of Federal
law and regulations. There were no pension contributions in 1996,
1995 and 1994. Special retirement programs were initiated in 1995
and 1994.
The calculation of net periodic pension cost follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1996 1995 1994
- ---------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost, benefits earned
during the year $ 15,160 $ 11,533 $ 15,100
SPECIAL RETIREMENT CHARGE - 5,416 8,465
- -----------------------------------------------------------
15,160 16,949 23,565
- -----------------------------------------------------------
Interest cost on projected
benefit obligation 37,128 35,128 29,511
Return on plan assets (78,930) (82,626) (12,430)
NET AMORTIZATION AND DEFERRAL 31,745 34,786 (32,798)
- ------------------------------------------------------------
TOTAL PENSION COST $ 5,103 $ 4,237 $ 7,848
- -----------------------------------------------------------
</TABLE>
<PAGE>
The following table sets forth the plan's funded status and amounts recognized
in the Company's Consolidated Balance Sheet. Plan assets principally are
investment grade common stock and fixed income securities:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 1995
- -------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested $(414,988) $(401,159)
Accumulated $(439,278) $(423,434)
Projected $(563,852) $(545,825)
PLAN ASSETS AT FAIR VALUE $ 608,080 $ 555,906
- ----------------------------------------------------------
Plan assets in excess of
projected benefit obligation $ 44,228 $ 10,081
Unrecognized net loss (gain)
from past experience different
from that assumed and from
changes in assumptions (32,755) 10,880
Unrecognized transition asset (27,914) (32,566)
ACCRUED PENSION LIABILITY $ (16,441) $ (11,605)
- -----------------------------------------------------------
Assumptions:
Obligation discount 7.25% 7.00%
Asset return 7.75% 7.50%
Average annual increase
IN COMPENSATION 5.50% 5.50%
- -----------------------------------------------------------
</TABLE>
B. OTHER - RETIREE HEALTH CARE AND LIFE INSURANCE: The Company sponsors
noncontributory defined benefit plans under which it provides certain health
care and life insurance benefits for retired employees. The Company has been
funding a portion of future benefits over employees' active service lives
through a Voluntary Employee Beneficiary Association (VEBA) trust. Contributions
to VEBA trusts are tax deductible, subject to limitations contained in the
Internal Revenue Code. The Company's policy is to fund the cost of
postretirement benefits in a tax effective manner as part of its overall
strategy to manage the costs of its benefit programs for employees.
<PAGE>
Net periodic other postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1996 1995
- ---------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Service cost, benefits earned
during the year $ 3,178 $ 2,590
Interest cost on accumulated
postretirement benefit obligation 10,673 9,958
Return on plan assets (9,382) (6,746)
Net amortization and deferral 10,961 6,752
OTHER POSTRETIREMENT BENEFIT COST $15,430 $12,554
</TABLE>
The following table sets forth the plans' funded status, reconciled with amounts
recognized in the Company's Consolidated Balance Sheet:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 1995
- ---------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation
Retirees $ (88,278) $ (87,022)
Fully eligible active plan
participants (18,271) (10,980)
OTHER ACTIVE PLAN PARTICIPANTS (63,762) (56,157)
$(170,311) $(154,159)
Plan assets at fair value, primarily
STOCKS AND BONDS $ 93,452 $ 72,638
- ------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets $ (76,859) $ (81,521)
Unrecognized net loss from past
experience different from that assumed
and from changes in assumptions 29,285 25,345
UNRECOGNIZED TRANSITION OBLIGATION 64,015 67,781
PREPAID OTHER POSTRETIREMENT BENEFIT $ 16,441 $ 11,605
- ------------------------------------------------------------
Assumptions:
Obligation discount 7.25% 7.00%
ASSET RETURN 7.75% 7.50%
</TABLE>
The measurement also assumes a health care cost trend rate of 8.5% annually
decreasing to 5.0% by the year 2007 and remaining at that level thereafter. A
1.0% increase in the health care cost trend rate would have the effect of
increasing the accumulated postretirement benefit obligation as of September 30,
1996 and the net periodic SFAS-106 expense by approximately $23,825,000 and
$1,935,000, respectively.
<PAGE>
3. THE HOUSTON EXPLORATION COMPANY (THEC) Certain former employees of Fuel
Resources Inc., the subsidiary of the Company that previously owned certain
onshore natural gas and oil producing properties and acreage, were entitled to
receive remuneration for the increase in the value of these properties should
these properties be sold or transferred. These former employees were paid, and a
reorganization charge of $12.0 million was recorded in operation and maintenance
expense in the accompanying Consolidated Statement of Income as a result of the
transfer of these properties to THEC in 1996.
In September, 1996, THEC completed an initial public offering (the IPO) of
7,130,000 shares of its common stock at an offering price of $15.50 per share.
The cash proceeds to THEC from the IPO, after deductions for commissions and
offering expenses, were $101.0 million and were used to repay a portion of
THEC's short-term borrowings incurred as a result of two major acquisitions in
1996 of properties and proved gas reserves for $84.7 million. One of these
acquisitions also required THEC to issue, in conjunction with the IPO, 762,387
shares (the number of shares being determined by the IPO price) of its common
stock as consideration for the $11.8 million portion of the acquisition's
purchase price that was to be funded with THEC's stock.
Further, in September 1996, THEC issued, also in conjunction with the IPO,
145,161 shares of its common stock to its President for certain of his working
interests, valued at $2.3 million, in properties owned by THEC. As a result of
these three stock issuances, the Company's ownership in THEC was reduced from
100% to approximately 66% and the Company recorded a $35.4 million gain ($23.0
million after tax) in recognition of the net increase in the book value of the
Company's investment in THEC.
4. FIXED OBLIGATIONS
A. LEASES: Lease costs included in operation expense were $13,894,000 in 1996,
$14,706,000 in 1995 and $15,547,000 in 1994. The future minimum lease payments
under the Company's various leases, all of which are operating leases, are
approximately $14,143,000 per year over the next five years and $149,547,000 in
the aggregate for years thereafter.
The Company has a lease agreement with a remaining term of 15 years for its
corporate headquarters.
B. FIXED CHARGES UNDER FIRM CONTRACTS: The Company has entered into various
contracts for gas delivery and supply services. The contracts have remaining
terms that cover from one to seventeen years. Certain of these contracts require
payment of monthly charges in the aggregate amount of approximately $4.3 million
per month in all events and regardless of the level of service available. Such
charges are recovered as gas costs.
<PAGE>
5. CAPITALIZATION
A. COMMON AND PREFERRED STOCK: In 1996 and 1995, the Company issued 1,069,128
and 1,198,305 shares of common stock for $27,407,000 and $27,974,000,
respectively, under the Dividend Reinvestment and Stock Purchase Plan, the
Discount Stock Purchase Plan for Employees, and the Employee Savings Plan. At
September 30, 1996, 2,355,942 unissued shares of common stock were reserved for
issuance under these plans. Other changes to common stock reflect the
amortization of premiums paid on preferred stock redeemed in prior years which
were deferred in order to reflect the ratemaking treatment. Annual amortization
was approximately $155,000 in each of the past two years.
The 4.60% Series B preferred stock is subject to an annual sinking fund
requirement of 3,000 shares at par value.
B. GAS FACILITIES REVENUE BONDS AND OTHER: The Company can issue tax-exempt
bonds through the New York State Energy Research and Development Authority.
Whenever bonds are issued for new gas facilities projects, proceeds are
deposited in trust and subsequently withdrawn by the Company to finance
qualified expenditures.
There are no sinking fund requirements for any Gas Facilities Revenue Bonds. The
Company's 7 1/8% Series 1985 I and 7% Series 1985 II Gas Facilities Revenue
Bonds became callable on December 1, 1996, at the optional redemption price of
102% of par value plus accrued interest. The Company is seeking authorization of
government agencies for the call and refunding of these bond issues.
C. OTHER LONG-TERM DEBT: THEC has a $150 million unsecured line of credit which
for the most part supports borrowings under a revolving loan agreement. Up to $5
million of this line is available for the issuance of letters of credit to
support performance guarantees. This credit facility matures on July 1, 2000. At
September 30, 1996, borrowings of $65 million were outstanding under this line
of credit and $1.6 million was committed under outstanding letter of credit
obligations. Borrowings under this facility bear interest, at THEC's option, at
rates indexed at a premium to the Federal Funds rate or LIBOR, or based on the
prime rate. The interest rate on this debt was 6.5% per annum at fiscal
year-end. Covenants related to this line of credit require the maintenance of
certain financial ratios and involve other restrictions regarding cash
dividends, the purchase or redemption of stock and the pledging of assets.
6. STOCK OPTIONS AND AWARDS
On November 15, 1995, the Company implemented the Long-Term Performance
Incentive Compensation Plan and granted 202,800 nonqualified stock options and
13,000 performance shares to officers. The number of shares of Common Stock
reserved for
<PAGE>
issuance under this Plan is 1,500,000 in the aggregate; however, no more than
750,000 shares will be available for issuance pursuant to the exercise of the
stock options.
The stock options were awarded at an exercise price of $27.00 (the fair market
value on the grant date). They vest ratably over a three-year period from the
grant date with a ten-year exercise period. The stock options were not
exercisable as of September 30, 1996. The performance shares granted represent
the target number of shares, as defined under the Plan, that will vest at the
end of a three-year performance period ending on September 30, 1998. The actual
number of performance shares to be earned is contingent upon achieving target
levels of total shareholder return in relation to the Standard & Poor's
Utilities Index. The actual awards will range from 0 to 200% of the target
number of shares.
<PAGE>
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation". This statement requires companies to either recognize
compensation costs attributable to employee stock options (or similar equity
instruments) in net income or, in the alternative, provide pro forma footnote
disclosure on net income and earnings per share. Implementation of this
statement is required in the Company's 1997 fiscal year. The Company does not
anticipate that the provisions of this statement will have a material effect on
the Company's net income.
7. FINANCIAL INSTRUMENTS
A. FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's long-term debt consists
primarily of publicly traded Gas Facilities Revenue Bonds, the fair value of
which is estimated based on quoted market prices for the same or similar issues.
The fair value of these bonds at September 30, 1996 and 1995 was $660,499,600
and $673,408,300, respectively, and the carrying value was $648,500,000 in both
years. Subsidiary debt is carried at an amount approximating fair value because
its interest rate is based on current market rates.
The fair value of the Company's redeemable preferred stock is estimated based on
quoted market prices for similar issues. At September 30, 1996 and 1995, the
fair value of this stock was $4,958,300 and $5,228,800, respectively, and the
carrying value was $6,600,000 and $6,900,000, respectively.
All other financial instruments included in the Consolidated Balance Sheet are
stated at amounts that approximate fair values.
B. DERIVATIVE FINANCIAL INSTRUMENTS: The Company and THEC employ
derivative financial instruments - natural gas futures, options and
swaps - for the purpose of managing commodity price risk.
The utility tariff applicable to certain large-volume customers permits gas to
be sold at prices established monthly within a specified range expressed as a
percentage of prevailing alternate fuel oil prices. The Company uses
derivatives, primarily futures, to fix profit margins on specified portions of
the sales to this market in line with pricing objectives. Implementation of the
strategy involves establishment of long (buy) positions in gas futures contracts
with offsetting short (sell) positions in oil futures contracts of equivalent
energy value that are capped by options over the same time period. The long gas
futures position follows, generally within a range of 80% to 120%, the cost of
gas to serve this market while the short oil futures position correspondingly
replicates, within the same range, the selling price of gas. The Company has
developed a strong sense of the relationship between gas and oil prices in the
target markets, and the implementation of its strategy has satisfactorily hedged
its exposure to the loss of profit margins on the desired portion of anticipated
sales.
With respect to natural gas production operations, THEC generally uses swaps and
standard New York Mercantile Exchange futures contracts or options to hedge the
price risk related to known production plans and capabilities. These instruments
include a fixed price/volume and the swaps are structured as both straight and
participating swaps. In all cases, THEC pays the other parties the amount by
which the floating variable price (settlement price) exceeds the fixed price and
receives the amount by which the settlement price is below the fixed price.
Two participating swap contracts covering 1,860,000 and 930,000 Mcf in 1997 and
1998, respectively, are priced at $1.98 and $2.05. The volumes under these two
swaps are reduced by 50% in each month where the NYMEX prices for that month
exceed the fixed price under the swap contract.
<PAGE>
The following table summarizes the notional amounts and related fair values of
the Company's derivative financial instrument positions outstanding at September
30, 1996. Fair values are based on quotes for the same or similar instruments.
Differences between the notional contract amounts and fair values represent
implicit gains on gas contracts representing long positions or losses on oil
contracts representing short positions if the instruments were settled at
market.
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
GAS
TYPE OF FISCAL YEAR FIXED PRICE VOLUME NOTIONAL FAIR
INSTRUMENT OF MATURITY PER MCF (MCF) AMOUNT VALUE
(in thousands)
<S> <C> <C> <C> <C>
Futures contracts 1997 $1.97-$2.39 13,630,000 $30,447 $30,613
Options 1997 $2.30-$3.00 3,020,000 $ - $ 964
Swap contracts 1997 $1.53-$2.09 16,858,000 $32,219 $32,165
1998 $1.53-$2.09 4,280,000 $ 8,054 $ 8,166
</TABLE>
<TABLE>
<CAPTION>
OIL
TYPE OF FISCAL YEAR FIXED PRICE VOLUME NOTIONAL FAIR
INSTRUMENT OF MATURITY PER GALLON (GALLONS) AMOUNT VALUE
(in thousands)
<S> <C> <C> <C> <C>
Futures contracts 1997 $0.49-$0.58 122,556,000 $66,297 $81,530
1998 $0.52 6,342,000 $ 3,315 $ 3,592
Options 1997 $0.13-$0.22 63,672,000 $ 211 $ 1,018
- ------------------------------------------------------------------
</TABLE>
Futures contracts expire and are renewed monthly. As of September 30, 1996, no
such contract extended beyond January 1998. Further, swaps contracts are settled
monthly and extend through March 1998. Margin deposits with brokers at September
30, 1996 and 1995
<PAGE>
amounted to $23,619,000 and $1,662,400, respectively, and are recorded in Other
in the current assets section of the balance sheet. Deferred gains (losses) on
closed positions were $1,330,000 and ($748,000) at September 30, 1996 and 1995,
respectively.
The Company and THEC are exposed to credit risk in the event of nonperformance
by counterparties to derivative contracts, as well as nonperformance by the
counterparties of the transactions against which they are hedged. The Company
believes that the credit risk related to the futures, options and swap contracts
is no greater than that associated with the primary contracts which they hedge,
as these contracts are with major investment grade financial institutions, and
that elimination of the price risk lowers the Company's overall business risk.
8. INVESTMENT IN IROQUOIS PIPELINE
A Company subsidiary, North East Transmission Co., Inc. (NETCO), owns a 19.4%
partnership interest in Iroquois Gas Transmission System, L.P. (Iroquois).
Iroquois owns a 375-mile pipeline extending from Canada to the Northeast United
States. NETCO's investment in Iroquois was $35.4 million at September 30, 1996.
In 1992 Iroquois was informed that Federal criminal and civil investigations of
the construction of certain of its pipeline facilities had been commenced. The
investigations were to determine whether Iroquois violated various environmental
and other laws in the construction of such facilities. In addition, beginning in
late 1993, Iroquois was informed by the Federal Energy Regulatory Commission
(FERC), the Army Corps of Engineers, the U.S. Department of Transportation (DOT)
and the New York State Public Service Commission that each of these agencies had
also commenced investigations regarding the construction of pipeline facilities.
On May 23, 1996, as part of a comprehensive resolution of these investigations,
Iroquois Pipeline Operating Company (IPOC), the operator of the pipeline,
pleaded guilty to four felony violations of the Clean Water Act and entered into
consent decrees under the Clean Water Act in four federal judicial districts.
Although not a named defendant, Iroquois signed the plea agreement and consent
decrees and is bound by their terms. Iroquois also entered into a related
settlement with the State of New York. Under these various agreements, Iroquois
and IPOC agreed to pay $22 million in fines and penalties, agreed to remediate
27 wetlands along the length of the pipeline, and agreed to implement under FERC
and DOT orders two ten-year plans to address certain ground stability and
pipeline safety concerns. Iroquois also entered into a separate settlement with
the FERC. In September 1995, a provision was made in the Company's Consolidated
Statement of Income for NETCO's share of the estimated settlement costs. This
provision was adequate to account for NETCO's share of the above costs.
<PAGE>
9. ENVIRONMENTAL MATTERS
Historically, the Company, or predecessor entities to the Company, owned or
operated several former manufactured gas plant (MGP) sites. These sites have
been identified for the New York State Department of Environmental Conservation
(DEC) for inclusion on appropriate waste site inventories. In certain
circumstances, former MGP sites can give rise to environmental cleanup
responsibilities for the Company.
Two MGP sites are under active consideration by the Company. One site, which is
located on property still owned by the Company, is the former Coney Island MGP
facility located in Brooklyn, New York. This site is the subject of continuing
interim remedial action under the direction of the U.S. Coast Guard. The Company
executed a consent order with the DEC addressing the overall remediation of the
Coney Island site in accordance with state law. A schedule of investigative and
cleanup activities is being developed, leading to a cleanup over the next
several years. The other site currently is owned by the City of New York (City).
The Company and the City are discussing a mutual approach to sharing potential
environmental responsibility for this site. The Company believes it is likely
that, at a minimum, investigative costs will be incurred by the Company with
respect to that site.
Based upon the Coney Island site consent order and the estimated costs of
investigation of the City site, the Company believes that the minimum cost of
MGP-related environmental cleanup will be approximately $34 million, based upon
current information, primarily for the Coney Island site. The Company's actual
MGP- related costs may be substantially higher, depending upon remediation
experience, eventual end use of the sites, and environmental conditions not
addressed in the consent order or current investigative plans. Such potential
additional costs are not subject to estimation at this time.
As of September 30, 1996, the Company had an unpaid liability of $28.4 million.
By order issued February 16, 1995, the PSC approved the Company's July 1993
petition to defer the costs associated with environmental site investigation and
remediation incurred in 1993 and thereafter. Recovery of these costs began in
fiscal year 1995, and is conditioned upon absence of a PSC determination that
such costs have not been reasonably or prudently incurred. In addition, the
Company must demonstrate that it has taken all reasonable steps to obtain cost
recovery from all available funding sources, including other responsible parties
and insurance sources.
Moreover, the rate agreement that became effective on October 1, 1996, described
in "Rate and Regulatory Matters" of Management's Discussion and Analysis of
Results of Operations and Financial Condition, provides, among other things,
that if the total cost of investigating and remediating the Coney Island site
plus the cost of investigating the City site varies from the amount originally
accrued for these activities, the Company will retain or absorb 10% of the
variation. Under the rate agreement, similar ratemaking treatment will be
available for any additional accrued liabilities for other MGP sites, should
such accrual be required.
<PAGE>
NOTE 10. SUPPLEMENTAL GAS AND OIL DISCLOSURES (Unaudited)
This information includes amounts attributable to a 34% minority interest in
THEC at September30, 1996. In addition, gas and oil operations, and reserves,
were predominantly located in the United States in all years.
<TABLE>
<CAPTION>
CAPITALIZED COSTS RELATING TO GAS AND OIL PRODUCING ACTIVITIES
- ---------------------------------------------------------------------------
September 30, 1996 1995
- ----------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Unproved properties not being amortized $60,137 $35,082
Properties being amortized-productive and nonproductive 441,024 299,398
- ---------------------------------------------------------------------------
Total capitalized costs 501,161 334,480
Accumulated depletion (160,128) (132,809)
- ---------------------------------------------------------------------------
Net capitalized costs $341,033 $201,671
- ---------------------------------------------------------------------------
At September 30, 1996 and 1995, the Company had an immaterial deficiency in its
asset ceiling test; however, such deficiency was eliminated by subsequent
increases in the price of natural gas.
</TABLE>
<TABLE>
<CAPTION>
The following is a break-out of the costs (in thousands of dollars) which are
excluded from the amortization calculation as of September 30, 1996, by year of
acquisition: 1996-$36,557; 1995-$13,312; and prior years-$10,268. The Company
cannot accurately predict when these costs will be included in the amortization
base, but it is expected these costs will be evaluated within the next five
years.
COSTS INCURRED IN PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES
- -------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Acquisition of properties-
Unproved properties $24,577 $10,996 $11,022
Proved properties 89,828 14,983 28,370
Exploration 20,828 5,907 18,961
Development 31,005 37,953 9,781
- ------------------------------------------------------------------
Total costs incurred $166,238 $69,839 $68,134
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS FROM GAS AND OIL PRODUCING ACTIVITIES
- ------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Revenues from gas and oil
producing activities-
Sales to unaffiliated parties $50,431 $40,810 $41,185
Sales to affiliates - - 2,023
- ------------------------------------------------------------------
Revenues 50,431 40,810 43,208
- ------------------------------------------------------------------
Production and lifting costs 8,860 5,762 5,360
Depletion 27,368 22,906 24,978
- ------------------------------------------------------------------
Total expenses 36,228 28,668 30,338
- ------------------------------------------------------------------
Income before taxes 14,203 12,142 12,870
Income taxes 3,037 1,957 3,306
- ------------------------------------------------------------------
Results of gas and oil producing
activities (excluding corporate
overhead and interest costs) $11,166 $10,185 $9,564
==================================================================
</TABLE>
<PAGE>
10. SUPPLEMENTAL GAS AND OIL DISCLOSURES (CONTINUED)
The gas and oil reserves information is based on estimates of proved reserves
attributable to the Company's interest as of September 30 for each of the years
presented. These estimates principally were prepared by independent petroleum
consultants. Proved reserves are estimated quantities of natural gas and crude
oil which geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs under existing economic
and operating conditions.
The standardized measure of discounted future net cash flows was prepared by
applying year-end prices of gas and oil to the Company's proved reserves, except
for those reserves devoted to future production that is hedged. These reserves
are priced at their respective hedged amount. The standardized measure does not
purport, nor should it be interpreted, to present the fair value of the
Company's gas and oil reserves. An estimate of fair value would also take into
account, among other things, the recovery of reserves not presently classified
as proved, anticipated future changes in prices and costs, and a discount factor
more representative of the time value of money and the risks inherent in reserve
estimates.
<PAGE>
<TABLE>
<CAPTION>
RESERVE QUANTITY INFORMATION
Natural Gas (MMcf)
- ---------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------
<S> <C> <C> <C>
Proved Reserves-
Beginning of Year 195,055 142,858 108,847
Revisions of previous estimates (354) 13,539 (2,297)
Extensions and discoveries 13,139 38,985 25,890
Production (26,435) (21,822) (22,814)
Purchases of reserves in place 134,325 21,495 34,931
Sales of reserves in place (1,189) - (1,699)
- ---------------------------------------------------------------
Proved Reserves-
End of Year 314,541 195,055 142,858
- ---------------------------------------------------------------
Proved Developed Reserves-
Beginning of Year 151,594 110,225 100,454
- ---------------------------------------------------------------
End of Year 222,522 151,594 110,225
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Crude Oil, Condensate and Natural Gas Liquids (MBbls)
- ---------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------
<S> <C> <C> <C>
Proved Reserves-
Beginning of Year 1,162 807 443
Revisions of previous estimates (148) 245 (140)
Extensions and discoveries 182 155 155
Production (136) (148) (96)
Purchases of reserves in place 294 103 495
Sales of reserves in place (106) - (50)
- ---------------------------------------------------------------
Proved Reserves-
End of Year 1,248 1,162 807
- ---------------------------------------------------------------
Proved Developed Reserves-
Beginning of Year 974 543 407
- ---------------------------------------------------------------
End of Year 1,040 974 543
- ---------------------------------------------------------------
</TABLE>
<PAGE>
10. SUPPLEMENTAL GAS AND OIL DISCLOSURES (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED GAS AND OIL RESERVES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
Future cash flows $554,798 $314,627
Future costs-
Production (89,303) (57,941)
Development (60,926) (29,948)
- ---------------------------------------------------------------
Future net inflows
before income tax 404,569 226,738
Future income taxes (59,623) (43,705)
- ---------------------------------------------------------------
Future net cash flows 344,946 183,033
10% discount factor (85,688) (49,512)
- ---------------------------------------------------------------
Standardized measure of
discounted future net
cash flows $259,258 $133,521
- ---------------------------------------------------------------
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
FROM PROVED RESERVE QUANTITIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
Standardized measure-
beginning of year $133,521 $108,134 $110,406
Sales and transfers, net of
production costs (41,571) (35,048) (37,848)
Net change in sales and
transfer prices, net of
production costs 44,719 (2,786) (25,005)
Extensions and discoveries and
improved recovery, net of
related costs 18,894 28,868 15,536
Changes in estimated future
development costs (4,798) (2,351) (1,016)
Development costs incurred
during the period that reduced
future development costs 15,056 10,360 6,381
Revisions of quantity estimates (2,338) 13,858 (2,917)
Accretion of discount 16,880 11,763 12,397
Net change in income taxes 21,026 (7,856) 4,001
Purchases of reserves in place 94,945 15,176 27,561
Sales of reserves in place - - (2,110)
Changes in production rates
(timing) and other (37,076) (6,597) 748
- ------------------------------------------------------------------
Standardized measure-end
of year $259,258 $133,521 $108,134
- ------------------------------------------------------------------
</TABLE>
<PAGE>
10. SUPPLEMENTAL GAS AND OIL DISCLOSURES (CONTINUED)
<TABLE>
<CAPTION>
AVERAGE SALES PRICES AND PRODUCTION COSTS - PER UNIT
- ------------------------------------------------------------------
For the year ended September 30, 1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
Average Sales Price*
Natural Gas ($/MCF) 2.11 1.47 1.97
Oil, Condensate and Natural
Gas Liquid ($/Bbl) 19.21 16.92 15.63
Production Cost Per
Equivalent MCF ($) .32 .25 .23
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ACREAGE
- ------------------------------------------------------------------
As of September 30, 1996 GROSS Net
- ------------------------------------------------------------------
<S> <C> <C>
Producing 258,798 160,154
Undeveloped 111,087 88,554
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF PRODUCING WELLS
- ------------------------------------------------------------------
As of September 30, 1996 GROSS Net
- ------------------------------------------------------------------
<S> <C> <C>
Gas Wells 1,114 678
Oil Wells 11 3
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DRILLING ACTIVITY (NET)
- ------------------------------------------------------------------
For the year ended September 30,
1996 1995 1994
Pro- Pro- Pro-
ducing Dry Total ducing Dry Total ducing Dry Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Develop-
mental Wells 10.1 0.8 10.9 10.0 3.4 13.4 6.6 - 6.6
Net Explora-
tory Wells 2.1 3.4 5.5 1.4 0.4 1.8 2.5 1.2 3.7
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WELLS IN PROCESS
As of September 30, 1996 GROSS Net
<S> <C> <C>
Exploratory 4.0 1.1
Developmental 2.0 1.1
- -------------------------------------------------------------------
</TABLE>
* Represents the cash price received which excludes the effect of any hedging
transactions.
<PAGE>
SUPPLEMENTARY INFORMATION (UNAUDITED)
QUARTERLY INFORMATION
SUMMARY OF QUARTERLY INFORMATION
The following is a table of financial data for each quarter of fiscal 1996 and
1995. The Company's business is influenced by seasonal weather conditions and
the timing of approved base utility tariff rate changes. The effect on utility
earnings of variations in revenues caused by abnormal weather is largely
mitigated by operation of a weather normalization adjustment contained in the
Company's tariff.
<TABLE>
<CAPTION>
=========================================================================
First Second Third Fourth
Quarter Quarter Quarter Quarter
=========================================================================
(Thousands of Dollars Except Per Share Data)
<S> <C> <C> <C> <C>
1996
Operating revenues 398,083 595,438 254,311 184,170
Operating income(loss) 57,400 88,505 5,495 (20,842)(a)
Gains on sale of subsidiary
stock and Canadian plant
(after taxes) - - - 33,539
Income (loss) applicable
to common stock 44,624 74,413 (4,561) 8,109
Per common share:
Earnings (loss) (b) 0.91 1.51 (0.09) 0.16
Dividends declared 0.3550 0.3550 0.3550 0.3550
- --------------------------------------------------------------------------
1995
Operating revenues 358,348 481,615 217,696 158,625
Operating income(loss) 54,580 85,364 5,650 (10,250)
Income (loss) applicable
to common stock 42,753 73,555 (6,188) (18,622)
Per common share:
Earnings (loss) (b) 0.90 1.53 (0.13) (0.38)
Dividends declared 0.3475 0.3475 0.3475 0.3475
=========================================================================
</TABLE>
(a) Includes a subsidiary reorganization charge of $7.8 million after
taxes.
(b) Quarterly earnings per share are based on the average number of shares
outstanding during the quarter. Because of the increasing number of common
shares outstanding in each quarter, the sum of quarterly earnings per share
does not equal earnings per share for the year.
<TABLE>
<CAPTION>
SUMMARY OF QUARTERLY STOCK INFORMATION
============================================================================
First Second Third Fourth
Quarter Quarter Quarter Quarter
============================================================================
<S> <C> <C> <C> <C>
1996
High 29 5/8 29 7/8 27 1/2 28 1/8
Low 24 5/8 25 3/4 24 7/8 24 7/8
Close 29 1/4 26 3/4 27 1/4 27 7/8
Shares Traded (000) 3,710 3,884 5,121 3,592
- ----------------------------------------------------------------------------
1995
High 25 3/8 24 3/4 26 3/8 26 3/8
Low 21 1/2 22 23 3/4 23 1/4
Close 22 1/4 24 1/8 26 1/4 24 5/8
Shares Traded (000) 2,695 3,977 2,543 3,219
============================================================================
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated October 23, 1996, covering the consolidated
financial statements of The Brooklyn Union Gas Company for the three years ended
September 30, 1996, included in this Form 8-K, into The Long Island Lighting
Company's previously filed Registration Statement Nos. 33-52963 and 2-87427.
/S/ Arthur Andersen LLP
New York, New York
February 20, 1997
<PAGE>
February 21, 1997
The Long Island Lighting Company
175 East Old Country Road
Hicksville, New York 11801
Gentlemen:
We are aware that The Long Island Lighting Company has incorporated by reference
in its previously filed Registration Statements No. 33-52963 and No. 2-87427,
our report dated January 24, 1997, covering the unaudited interim consolidated
financial statements for The Brooklyn Union Gas Company as of December 31, 1996,
contained in this Form 8-K. Pursuant to Regulation C of the Securities Act of
1933, that report is not considered a part of the registration statements
prepared or certified by our firm or a report prepared or certified by our firm
within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/S/ Arthur Andersen LLP
<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>
<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>
<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>
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.
<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.
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 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.
<PAGE>
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 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 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>
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 of the Act.
Very truly yours,
/S/ Arthur Andersen LLP
<PAGE>
REVIEW OF INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP has performed reviews in accordance with standards
established by the American Institute of Certified Public Accountants of the
Condensed Consolidated Financial Statements for the periods set forth in their
report shown on page 19.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Brooklyn Union Gas Company:
We have reviewed the accompanying condensed consolidated balance sheets of The
Brooklyn Union Gas Company (a New York corporation) and subsidiaries as of
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.
/S/ ARTHUR ANDERSEN LLP
New York, New York
January 22, 1997
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
The following unaudited pro forma financial information combines the
historical consolidated balance sheets and statements of income of Brooklyn
Union and LILCO including their respective subsidiaries, after giving effect to
the Binding Share Exchanges. Brooklyn Union's balance sheet as of September 30,
1996 and results of operations for each of the three fiscal years in the period
ended September 30, 1996 have been combined with LILCO's balance sheet as of
December 31, 1996 and results of operations for each of the three fiscal years
in the period ended December 31, 1996 to arrive at the unaudited pro forma
combined condensed balance sheet as of December 31, 1996 and the statements of
income for each of the three fiscal years in the period ended December 31, 1996.
The unaudited pro forma combined condensed balance sheet at December 31, 1996
gives effect to the Binding Share Exchanges as if they had occurred at December
31, 1996. The unaudited pro forma combined condensed statements of income for
each of the three fiscal years in the period ended December 31, 1996 give effect
to the Binding Share Exchanges as if they had occurred at January 1, 1994. These
statements are prepared on the basis of accounting for the Binding Share
Exchanges as a pooling of interests and are based on the assumptions set forth
in the notes thereto.
The following pro forma financial information has been prepared from, and should
be read in conjunction with, the historical consolidated financial statements
and related notes thereto of Brooklyn Union included herein and LILCO, as filed
in LILCO's Form 10-K for the year ended December 31, 1996. The following
information is not necessarily indicative of the financial position or operating
results that would have occurred had the Binding Share Exchanges been
consummated on the date, or at the beginning of the period, for which the
Binding Share Exchanges are being given effect nor is it necessarily indicative
of future operating results or financial position.
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
December 31, 1996
(In Thousands)
BROOKLYN
UNION LILCO PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED
------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Property
Utility plant
Electric....................................... $- $3,882,297 $- $3,882,297
Gas............................................ 1,782,440 1,154,543 - 2,936,983
Common......................................... - 260,268 - 260,268
Construction work in progress.................. - 112,184 - 112,184
Nuclear fuel in process and in reactor......... - 15,454 - 15,454
Less-Accumulated depreciation and
amortization................................... (429,476) (1,729,576) - (2,159,052)
Gas exploration and production, at cost........ 510,568 - - 510,568
Less: Accumulated depletion.................... (165,414) - - (165,414)
------------- ------------- ---------------- ------------
Total Property................................. 1,698,118 3,695,170 - 5,393,288
Regulatory Assets
Base financial component (less accumulated
amortization of $757,282)...................... - 3,281,548 - 3,281,548
Rate moderation component...................... - 402,213 - 402,213
Shoreham post-settlement costs................. - 991,795 - 991,795
Shoreham nuclear fuel.......................... - 69,113 - 69,113
Unamortized cost of issuing securities......... - 194,151 - 194,151
Post-retirement benefits other than pensions... - 360,842 - 360,842
Regulatory tax asset........................... - 1,772,778 74,885 (1) 1,847,663
Other.......................................... - 199,879 - 199,879
------------- ------------- ---------------- ------------
Total Regulatory Assets........................ - 7,272,319 74,885 7,347,204
Nonutility Property and Other Investments...... 115,529 18,597 - 134,126
Current Assets
Cash and cash equivalents...................... 41,921 279,993 - 321,914
Special deposits............................... - 38,266 - 38,266
Accounts receivable-net........................ 157,227 491,277 - 648,504
Materials and supplies at average cost......... 12,089 55,789 - 67,878
Fuel oil at average cost....................... - 53,941 - 53,941
Gas in storage at average cost................. 91,813 73,562 - 165,375
Deferred tax asset............................. - 145,205 - 145,205
Prepayments and other current assets........... 50,833 8,569 - 59,402
------------- ------------- ---------------- ------------
Total Current Assets........................... 353,883 1,146,602 - 1,500,485
Deferred Charges............................... 122,073 76,991 (74,885)(1) 124,179
------------- ------------- ---------------- ------------
Total Assets................................... $2,289,603 $12,209,679 $- $14,499,282
============= ============= ================ ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
December 31, 1996
(In Thousands)
BROOKLYN
UNION LILCO PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED
------------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock.................................. $16,619 $603,921 $(619,072)(2) $1,468
Premium on common stock....................... 533,216 1,078,581 619,072 (2) 2,230,869
Retained earnings............................. 355,973 840,867 - 1,196,840
------------- ------------- ----------------- -----------
Total Common Shareholders' Equity............. 905,808 2,523,369 - 3,429,177
Long-term debt................................ 712,013 4,456,772 - 5,168,785
Preferred stock............................... 6,600 702,164 - 708,764
------------- ------------- ----------------- -----------
Total Capitalization.......................... 1,624,421 7,682,305 - 9,306,726
Regulatory Liabilities
Regulatory liability component................ - 198,398 - 198,398
1989 Settlement credits....................... - 127,442 - 127,442
Regulatory tax liability...................... - 102,887 - 102,887
Other......................................... - 146,852 - 146,852
------------- ------------- ----------------- -----------
Total Regulatory Liabilities.................. - 575,579 - 575,579
Current Liabilities
Current maturities of long-term debt.......... - 251,000 - 251,000
Current redemption requirements of preferred
stock......................................... - 1,050 - 1,050
Accounts payable and accrued expenses......... 143,561 289,141 - 432,702
LRPP payable.................................. - 40,499 - 40,499
Accrued taxes................................. 10,905 63,640 - 74,545
Accrued interest.............................. 37,244 160,615 - 197,859
Dividends payable............................. 18,229 58,378 - 76,607
Class Settlement.............................. - 55,833 - 55,833
Customer deposits............................. 30,773 29,471 - 60,244
------------- ------------- ----------------- -----------
Total Current Liabilities..................... 240,712 949,627 - 1,190,339
Deferred Credits
Deferred federal income tax................... 282,041 2,442,606 - 2,724,647
Class Settlement.............................. - 98,497 - 98,497
Other......................................... 63,580 32,105 - 95,685
------------- ------------- ----------------- -----------
Total Deferred Credits........................ 345,621 2,573,208 - 2,918,829
Operating Reserves
Pensions and other post-retirement benefits... - 381,996 - 381,996
Claims and damages............................ - 46,964 - 46,964
------------- ------------- ----------------- -----------
Total Operating Reserves...................... - 428,960 - 428,960
Commitments and Contingencies................. - - - -
Minority Interest in Subsidiary Company....... 78,849 - - 78,849
------------- ------------- ----------------- -----------
Total Capitalization and Liabilities.......... $2,289,603 $12,209,679 $- $14,499,282
============= ============= ================= ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
For the Year Ended December 31, 1996
(In Thousands, Except Per Share Amounts)
BROOKLYN
UNION LILCO PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED
------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Revenues
Electric............................................. $- $2,466,435 - $2,466,435
Gas-Utility sales.................................... 1,351,821 684,260 - 2,036,081
Gas production and other............................. 80,181 - - 80,181
------------ ------------- ------------- -----------
Total Revenues....................................... 1,432,002 3,150,695 - 4,582,697
Operating Expenses
Operations-fuel and purchased power.................. 610,053 963,251 - 1,573,304
Operations-other..................................... 375,257 381,076 - 756,333
Maintenance.......................................... 53,720 118,135 - 171,855
Depreciation, depletion and amortization............. 79,610 153,925 - 233,535
Base financial component amortization................ - 100,971 - 100,971
Rate moderation component amortization............... - (24,232) - (24,232)
Regulatory liability component amortization.......... - (88,573) - (88,573)
Other regulatory amortization........................ - 127,288 - 127,288
Operating taxes...................................... 143,296 472,076 - 615,372
Federal income taxes................................. 39,508 210,197 - 249,705
------------- ------------- ------------- -----------
Total Operating Expenses............................. 1,301,444 2,414,114 - 3,715,558
------------- ------------- ------------- -----------
Operating Income..................................... 130,558 736,581 - 867,139
Other Income and (Deductions)
Income from energy services investments.............. 13,523 - - 13,523
Gain on sale of investment in Canadian plant......... 16,160 - - 16,160
Gain on sale of subsidiary stock..................... 35,437 - - 35,437
Rate moderation component carrying charges........... - 25,259 - 25,259
Class Settlement..................................... - (20,772) - (20,772)
Other income and deductions, net..................... (1,188) 19,197 - 18,009
Allowance for other funds used during construction... - 2,888 - 2,888
Federal income tax credit-deferred and other......... (19,861) 940 - (18,921)
------------- ------------- ------------- -----------
Total Other Income and (Deductions).................. 44,071 27,512 - 71,583
------------- ------------- ------------- -----------
Income Before Interest Charges....................... 174,629 764,093 - 938,722
Interest Charges
Interest on long-term debt........................... 46,803 384,198 - 431,001
Other interest....................................... 4,918 67,130 - 72,048
Allowance for borrowed funds used during
construction......................................... - (3,699) - (3,699)
------------- ------------- -------------- -----------
Total Interest Charges............................... 51,721 447,629 - 499,350
------------- ------------- --------------- -----------
Net Income........................................... 122,908 316,464 - 439,372
Preferred stock dividend requirements................ 323 52,216 - 52,539
------------- ------------- --------------- -----------
Earnings for Common Stock............................ $122,585 $264,248 - $386,833
============= ============= =============== ===========
Average Common Shares Outstanding.................... 49,365 120,361 (23,711)(2) 146,015
============= ============= =============== ===========
Earnings per Common and Equivalent Shares............ $2.48 $2.20 - $2.65
============= ============= =============== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
For the Year Ended December 31, 1995
(In Thousands, Except Per Share Amounts)
BROOKLYN
UNION LILCO PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED
------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Revenues
Electric............................................. $- $2,484,014 - $2,484,014
Gas-Utility sales.................................... 1,152,331 591,114 - 1,743,445
Gas production and other............................. 63,953 - - 63,953
------------- ------------- --------------- -----------
Total Revenues....................................... 1,216,284 3,075,128 - 4,291,412
Operating Expenses
Operations-fuel and purchased power.................. 446,559 834,979 - 1,281,538
Operations-other..................................... 330,841 383,238 - 714,079
Maintenance.......................................... 54,813 128,155 - 182,968
Depreciation, depletion and amortization............. 72,020 145,357 - 217,377
Base financial component amortization................ - 100,971 - 100,971
Rate moderation component amortization............... - 21,933 - 21,933
Regulatory liability component amortization.......... - (88,573) - (88,573)
Other regulatory amortization........................ - 161,605 - 161,605
Operating taxes...................................... 134,718 447,507 - 582,225
Federal income taxes................................. 41,989 208,338 - 250,327
------------- ------------- --------------- -----------
Total Operating Expenses............................. 1,080,940 2,343,510 - 3,424,450
------------- ------------- --------------- -----------
Operating Income..................................... 135,344 731,618 - 866,962
Other Income and (Deductions)
Income from energy services investments.............. 9,458 - - 9,458
Rate moderation component carrying charges........... - 25,274 - 25,274
Class Settlement..................................... - (21,669) - (21,669)
Other income and deductions, net..................... 151 34,400 - 34,551
Allowance for other funds used during construction... - 2,898 - 2,898
Federal income tax credit-deferred and other......... (51) 2,800 - 2,749
------------- ------------- --------------- -----------
Total Other Income and (Deductions).................. 9,558 43,703 - 53,261
------------- ------------- --------------- -----------
Income Before Interest Charges....................... 144,902 775,321 - 920,223
Interest Charges
Interest on long-term debt........................... 47,939 412,512 - 460,451
Other interest....................................... 5,128 63,461 - 68,589
Allowance for borrowed funds used during
construction......................................... - (3,938) - (3,938)
------------- ------------- --------------- -----------
Total Interest Charges............................... 53,067 472,035 - 525,102
------------- ------------- --------------- -----------
Net Income........................................... 91,835 303,286 - 395,121
Preferred stock dividend requirements................ 337 52,620 - 52,957
------------- ------------- --------------- -----------
Earnings for Common Stock............................ $91,498 $250,666 - $342,164
============= ============= =============== ===========
Average Common Shares Outstanding.................... 48,211 119,195 (23,481)(2) 143,925
============= ============= =============== ===========
Earnings per Common and Equivalent Shares............ $1.90 $2.10 - $2.38
============= ============= =============== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
<PAGE>
<TABLE>
<CAPTION>
[BUG/LILCO] HOLDING CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
For the Year Ended December 31, 1994
(In Thousands, Except Per Share Amounts)
BROOKLYN
UNION LILCO PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS COMBINED
------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Revenues
Electric............................................. $- $2,481,637 - $2,481,637
Gas-Utility sales.................................... 1,279,638 585,670 - 1,865,308
Gas production and other............................. 58,992 - - 58,992
------------- ------------- --------------- -----------
Total Revenues....................................... 1,338,630 3,067,307 - 4,405,937
Operating Expenses
Operations-fuel and purchased power.................. 560,657 847,986 - 1,408,643
Operations-other..................................... 330,394 406,014 - 736,408
Maintenance.......................................... 54,340 134,640 - 188,980
Depreciation, depletion and amortization............. 69,611 130,664 - 200,275
Base financial component amortization................ - 100,971 - 100,971
Rate moderation component amortization............... - 197,656 - 197,656
Regulatory liability component amortization.......... - (88,573) - (88,573)
Other regulatory amortization........................ - 4,328 - 4,328
Operating taxes...................................... 150,743 406,895 - 557,638
Federal income taxes................................. 40,556 181,781 - 222,337
------------- ------------- --------------- -----------
Total Operating Expenses............................. 1,206,301 2,322,362 - 3,528,663
------------- ------------- --------------- -----------
Operating Income..................................... 132,329 744,945 - 877,274
Other Income and (Deductions)
Income from energy services investments.............. 5,689 - - 5,689
Rate moderation component carrying charges........... - 32,321 - 32,321
Class Settlement..................................... - (22,730) - (22,730)
Other income and deductions, net..................... 700 35,343 - 36,043
Allowance for other funds used during construction... - 2,716 - 2,716
Federal income tax credit-deferred and other......... (142) 5,069 - 4,927
------------- ------------- --------------- -----------
Total Other Income and (Deductions).................. 6,247 52,719 - 58,966
------------- ------------- --------------- -----------
Income Before Interest Charges....................... 138,576 797,664 - 936,240
Interest Charges
Interest on long-term debt........................... 46,900 437,751 - 484,651
Other interest....................................... 4,292 62,345 - 66,637
Allowance for borrowed funds used during
construction......................................... - (4,284) - (4,284)
------------- ------------- --------------- -----------
Total Interest Charges............................... 51,192 495,812 - 547,004
------------- ------------- --------------- -----------
Net Income........................................... 87,384 301,852 - 389,236
Preferred stock dividend requirements................ 351 53,020 - 53,371
------------- ------------- --------------- -----------
Earnings for Common Stock............................ $87,033 $248,832 - $335,865
============= ============= =============== ===========
Average Common Shares Outstanding.................... 46,980 115,880 (22,828)(2) 140,032
============= ============= =============== ===========
Earnings per Common and Equivalent Shares............ $1.85 $2.15 - $2.40
============= ============= =============== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. The unaudited pro forma combined condensed balance sheet as of December
31, 1996 reflects the reclassification of $74.9 million of Brooklyn Union
regulatory tax assets from deferred charges to regulatory assets. All other
financial statement presentation and accounting policy differences are
immaterial and have not been adjusted in the unaudited pro forma combined
condensed financial statements.
2. The unaudited pro forma combined condensed financial statements reflect
the conversion of each share of LILCO Common Stock outstanding into 0.803 shares
of the new holding company's Common Stock and the exchange of each share of
Brooklyn Union Common Stock outstanding for one share of the new holding
company's Common Stock, as provided in the Share Exchange Agreement. The
unaudited pro forma combined condensed financial statements are presented as if
the companies were combined during all periods included therein.
3. The allocation between Brooklyn Union and LILCO and their customers of
the estimated cost savings resulting from the Binding Share Exchanges, net of
the costs incurred to achieve such savings, will be subject to regulatory review
and approval. Transaction costs (including fees for financial advisors,
attorneys, accountants, consultants, filings and printing) are not currently
estimated. None of the estimated cost savings, the costs to achieve such
savings, or transaction costs, have been reflected in the unaudited pro forma
combined condensed financial statements.
4. Intercompany transactions between Brooklyn Union and LILCO during the
periods presented were not material and, accordingly, no pro forma adjustments
were made to eliminate such transactions.
5. The Brooklyn Union earnings for the fiscal year ended September 30, 1996
include non-recurring income aggregating approximately $33.5 million, net of
taxes, or $0.68 per share, relating to a gain on the initial public offering of
a subsidiary's stock and the sale of an investment in a Canadian gas processing
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
aforementioned subsidiary.
