UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-722
THE BROOKLYN UNION GAS COMPANY
(Exact name of Registrant as specified in its charter)
New York 11-0584613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
One MetroTech Center, Brooklyn, New York 11201-3851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (718) 403-2000
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at July 11, 1995
$.33 1/3 par value 48,515,098
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information Page No.
Condensed Consolidated Balance Sheet -
June 30, 1995 and 1994, and September 30,
1994 3
Condensed Consolidated Statement of Income -
Three, Nine and Twelve Months Ended June 30,
1995 and 1994 4
Condensed Consolidated Statement of Cash Flows -
Nine and Twelve Months Ended June 30,
1995 and 1994 5
Notes to Condensed Consolidated Financial
Statements 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Review of Independent Public Accountants 16
Report of Independent Public Accountants 17
Part II. Other Information
Item 1 - Legal Proceedings 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 20
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, June 30, September 30,
1995 1994 1994
(Unaudited) (Unaudited) (Audited)
(Thousands of Dollars)
Assets
Property
Utility, at cost $ 1,661,550 $ 1,574,897 $ 1,599,452
Accumulated depreciation (384,800) (347,891) (354,925)
Gas exploration and production, at cost 340,576 265,564 276,659
Accumulated depletion (133,006) (110,701) (115,890)
1,484,320 1,381,869 1,405,296
Investments in Energy Services 111,591 91,256 91,283
Current Assets
Cash 16,724 11,007 11,610
Temporary cash investments 103,260 91,385 41,881
Accounts receivable 196,042 277,851 193,130
Allowance for uncollectible accounts (17,981) (19,154) (14,963)
Gas in storage, at average cost 59,277 63,697 96,076
Materials and supplies, at average cost 13,513 11,672 11,356
Prepaid gas costs 4,381 4,533 14,667
Other 14,684 9,387 31,441
389,900 450,378 385,198
Deferred Charges 167,257 143,755 147,297
$ 2,153,068 $ 2,067,258 $ 2,029,074
Capitalization and Liabilities
Capitalization
Common stock, $.33 1/3 par value stated at $ 515,666 $ 487,652 $ 494,770
Retained earnings 339,293 316,067 279,466
Total common equity 854,959 803,719 774,236
Preferred stock, redeemable 6,900 7,200 7,200
Long-term debt 724,429 705,193 701,377
1,586,288 1,516,112 1,482,813
Current Liabilities
Accounts payable 93,651 142,770 132,491
Dividends payable 17,456 16,551 16,609
Taxes accrued 38,913 42,194 15,213
Customer deposits 22,535 22,582 22,445
Customer budget plan credits - - 18,358
Interest accrued and other 32,818 35,718 45,807
205,373 259,815 250,923
Deferred Credits
Federal income tax 249,097 229,252 230,316
Unamortized investment tax credit 21,211 22,214 22,000
Other 91,099 39,865 43,022
361,407 291,331 295,338
$ 2,153,068 $ 2,067,258 $ 2,029,074
See accompanying notes to condensed consolidated financial statements.
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Nine Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
1995 1994 1995 1994 1995 1994
(Thousands of Dollars)
Operating Revenues
Utility sales $ 198,623 $ 225,297 $ 1,011,075 $ 1,113,975 $ 1,176,737 $ 1,258,017
Gas production and other 19,073 15,364 46,585 47,011 58,509 62,783
217,696 240,661 1,057,660 1,160,986 1,235,246 1,320,800
Operating Expenses
Cost of gas 74,947 99,992 399,578 492,298 467,929 549,071
Operation and maintenance 94,583 92,270 288,050 295,901 378,413 387,708
Depreciation and depletion 18,335 18,407 54,404 53,349 70,842 70,319
General taxes 28,263 29,819 113,217 124,774 139,185 149,103
Federal income tax (credit) (4,758) (3,912) 55,033 54,026 42,625 41,724
Operating Income 6,326 4,085 147,378 140,638 136,252 122,875
Other Income (Expense)
Gain on sale of investment
in Canadian gas company - - - - - 20,462
Write-off of investment
in propane gas company - - - - - (17,617)
Income from equity investments 1,106 1,610 5,132 4,247 6,329 4,762
Other, net (621) (629) (2,292) 772 (553) (1,473)
Federal income tax benefit 550 286 188 283 826 439
Income Before Interest Charges 7,361 5,352 150,406 145,940 142,854 129,448
Interest Charges
Long-term debt 12,054 11,599 36,104 34,972 48,052 46,711
Other 1,412 1,357 3,929 2,855 5,159 3,763
13,466 12,956 40,033 37,827 53,211 50,474
Net Income (Loss) (6,105) (7,604) 110,373 108,113 89,643 78,974
Dividends on Preferred Stock 83 86 254 265 340 354
Income (Loss) Applicable to
Common Stock $ (6,188) $ (7,690) $ 110,119 $ 107,848 $ 89,303 $ 78,620
Per Share of Common Stock $ (0.13) $ (0.16) $ 2.29 $ 2.30 $ 1.86 $ 1.70
Dividends Declared per Share
of Common Stock $ 0.348 $ 0.338 $ 1.043 $ 1.013 $ 1.380 $ 1.343
Average Common Shares
Outstanding 48,373,333 47,143,168 48,060,076 46,820,238 47,909,476 46,236,189
See accompanying notes to condensed consolidated financial statements.
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Twelve Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 110,373 $ 108,113 $ 89,643 $ 78,974
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and depletion 58,728 57,568 76,743 75,794
Deferred Federal income tax 962 10,730 794 5,271
Gain on sale of investment in Canadian gas company - - - (20,462)
Write-off of investment in propane company - - - 17,617
Amortization of investment tax credit (789) (860) (1,003) (1,128)
Income from energy services investments (5,132) (4,247) (6,329) (4,762)
Dividends received from energy services investments 3,145 2,545 4,920 3,739
Allowance for equity funds used during construction (868) (1,733) (1,212) (2,191)
Change in accounts receivable, net 3,172 (49,523) 84,601 (23,918)
Change in accounts payable (36,592) (14,349) (55,941) (1,278)
Gas inventory and prepayments 47,085 48,011 4,572 (2,958)
Other 50,252 33,056 38,135 9,981
Cash provided by operating activities 230,336 189,311 234,923 134,679
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 21,067 22,672 28,224 75,058
Common stock proceeds receivable - 44,910 - -
Issuance of long-term debt 23,052 15,893 19,236 67,493
Commercial paper - 62,000 - 62,000
44,119 145,475 47,460 204,551
Repayments
Preferred stock (300) (300) (300) (300)
Long-term debt - - - (55,000)
Commercial paper - (62,000) - (62,000)
43,819 83,175 47,160 87,251
Dividends paid (50,523) (47,848) (66,679) (63,249)
Other (78) 113 207 313
Cash (used in) provided by financing activities (6,782) 35,440 (19,312) 24,315
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excluding allowance
for equity funds used during construction) (161,210) (154,598) (204,107) (211,662)
Proceeds from sale of investment in Canadian gas company - 11,691 - 41,718
Other 4,149 (711) 6,088 20,400
Cash used in investing activities (157,061) (143,618) (198,019) (149,544)
Change in Cash and Temporary Cash Investments 66,493 81,133 17,592 9,540
Cash and Temporary Cash Investments at Beginning of Period 53,491 21,259 102,392 92,942
Cash and Temporary Cash Investments at End of Period $ 119,984 $ 102,392 $ 119,984 $ 102,392
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 $ 23,500 $ 22,900 $ 37,500 $ 32,900
Interest $ 42,504 $ 40,654 $ 52,174 $ 50,917
See accompanying notes to condensed consolidated financial statements.
5
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited
Condensed Consolidated Financial Statements contain all
adjustments necessary to present fairly the financial position
of the Company as of June 30, 1995 and 1994 and September 30,
1994, and the results of operations for the three, nine and
twelve months ended June 30, 1995 and 1994, and cash flows for
the nine and twelve months ended June 30, 1995 and 1994.
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, 1994.
2. The Company's 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 residential heating sales compared with
total sales. Accordingly, results of operations are
historically 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, while results for the third quarter are marginally
unprofitable, and losses are incurred in the fourth quarter.
Also, results of operations are 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 requires recovery from or refund to firm
customers of shortfalls or excesses of firm net revenues
during a heating season due to variations from normal weather,
which is the basis for projecting base tariff revenue
requirements. Effective October 1, 1994, the adjustment was
modified to exclude weather variations of less than 2.2% from
normal during each billing cycle.
3. Investment in Iroquois Pipeline
A Company subsidiary, North East Transmission Co., Inc.
(NETCO), owns an 11.4% interest in the Iroquois Gas
Transmission System, L.P. (Iroquois), which partnership owns
and operates a 375-mile pipeline from Canada to the Northeast.
The subsidiary's investment in Iroquois was $23.0 million at
June 30, 1995.
In 1992, Iroquois was informed by the U.S. Attorneys' Offices
of various districts of New York of a civil investigation of
alleged violations of the U.S. Army Corps of Engineers (COE)
permit, a related State Water Quality Certification and/or the
Federal Clean Water Act. Further, agency investigations of
matters related to the construction of the Iroquois Pipeline
have been commenced by the COE and the Federal Energy
Regulatory Commission (FERC). Iroquois also has received
inquiries from the Federal Department of Transportation and
the New York State Public Service Commission (PSC) concerning
certain construction activities. Civil penalties could be
imposed if violations of Iroquois' governmental authorizations
are shown to have occurred. No proceedings in connection with
these investigations and inquiries have been commenced.
Also in 1992, a criminal investigation of Iroquois was
initiated and is being conducted by Federal authorities
pertaining to various matters related to the construction of
the pipeline. To date, no criminal charges have been filed.
Iroquois' management believes the pipeline construction and
right-of-way activities were conducted in a responsible
manner. However, Iroquois deems it probable that indictments
will be sought in connection with this investigation and, in
them, substantial fines and other sanctions.
The Company has been informed that Iroquois and its counsel
have met and expect to continue to meet with those responsible
for the civil and criminal investigations, from time to time,
both to gain an informed understanding of the focus and
direction of the investigations in order to defend itself and
to explore possible resolutions that may be acceptable to all
parties. Although a comprehensive resolution of these matters
could have a material adverse effect on Iroquois' financial
condition, the amount of potential loss cannot be reasonably
estimated at this time and no understandings or agreements
have been reached that have led Iroquois to make provision for
any liability associated with the potential disposition of
these matters. Based on information currently available, the
Company does not believe that the resolution of these matters
will have a material effect on its consolidated financial
results for the fiscal year.
4. Environmental Matters
Historically, the Company, or a predecessor entity 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. Moreover, the Company has recently executed a consent
order with DEC with respect to 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 in the process of
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.
The DEC is maintaining open files and requiring the Company to
continue monitoring or related investigatory efforts at two
other Company-owned properties.
Except as described above, no administrative or judicial
proceedings or claims involving other former MGP sites have
been initiated. Although the potential cost of cleanup with
respect to these other sites may be material if the Company
ever is compelled to address these sites, the Company cannot
at this time determine the cost or extent of any cleanup
efforts if cleanup ultimately should be required.
Based upon the terms of the consent order for the Coney Island
site and costs of investigation for the other MGP site under
active consideration, the Company believes that the minimum
cost of MGP-related environmental cleanup will be
approximately $34 million, which, based upon current
information, will be primarily for the Coney Island site.
This amount includes approximately $4.5 million of costs
expended as of June 30, 1995. 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 June 30, 1995, the Company had an unpaid liability of
$29.6 million and a related unamortized regulatory asset of
$33.2 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. Pursuant to that
order, rates commencing in October 1994 reflect the recovery
of $4.1 million of interim response costs deferred as of
September 30, 1993 over a five-year period. Commencing in
October 1995 and 1996, the Company will reflect in rates
increments to the deferred balance of environmental site
investigation and remediation costs recorded as of September
30, 1994 and 1995, respectively, each over a five-year period.
The recovery of these costs in rates 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 carriers.
5. Regulatory Assets
Statement of Financial Accounting Standards (SFAS) No. 121,
issued in March 1995 and effective for 1996, establishes
accounting standards for the impairment of long-lived assets.
The new standard requires impairment losses on long-lived
assets to be recognized when an asset's book value exceeds its
expected undiscounted future cash flows. SFAS No. 121 also
requires that regulatory assets which are no longer probable
of recovery through future revenues be charged to earnings.
This statement is not expected to have an impact on the
Company's financial condition or results of operations upon
adoption. Regulatory assets arise from the allocation of
costs and revenues to accounting periods for ratemaking and
regulatory purposes differently from bases generally applied
by nonregulated companies in accordance with SFAS No. 71,
"Accounting for Certain Types of Regulation."
The Company had net regulatory assets of $104.1 million as of
June 30, 1995, which included $81.3 million related to Federal
income taxes and $33.2 million related to deferred
environmental costs, offset by net deferred credits of $10.4
million. These amounts are included in Deferred Charges and
Deferred Credits-Other in the Condensed Consolidated Balance
Sheet at June 30, 1995. In the event that it was no longer
subject to the provisions of SFAS No. 71, the Company
estimates that the write-off of these net regulatory assets
could result in a charge to net income of approximately $65
million.
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating Results
The following is a summary of items affecting comparative earnings
and a discussion of the material changes in revenues and expenses
during the following periods:
(1) Three Months ended June 30, 1995 vs. Three Months ended
June 30, 1994.
(2) Nine Months ended June 30, 1995 vs. Nine Months ended June 30,
1994.
(3) Twelve Months ended June 30, 1995 vs. Twelve Months ended June
30, 1994.
Consolidated results in the third quarter of fiscal 1995 showed a
loss of $6.2 million, or 13 cents per share, compared to a loss of
$7.7 million, or 16 cents per share, in the third quarter of last
year. The third quarter is typically unprofitable due to the
seasonal nature of gas heating sales, the principal source of
consolidated revenue. Earnings for the nine months ended June 30,
1995 were $110.1 million, or $2.29 per share, compared to $107.8
million, or $2.30 per share, in the nine months ended June 30,
1994. Consolidated earnings in the twelve months ended June 30,
1995 were $89.3 million, or $1.86 per share, compared to $78.6
million, or $1.70 per share, in the twelve months ended June 30,
1994.
Earnings for periods ended June 30, 1995 reflect higher utility
operating margins largely due to cost reduction efforts. Revenues
from large-volume markets both within and outside our traditional
service area have increased in 1995. Sales growth normalized for
weather has slackened from levels attained in recent years.
Earnings in 1995 from gas exploration and production were lower
compared to 1994 due to lower production and pricing. Also,
results in the current quarter include new Canadian operations.
The effect on utility revenues of the extreme variations in the
weather was largely offset by the weather normalization adjustment
included in the Company's tariff. However, effective October 1,
1994, the adjustment was modified to exclude weather variations of
less than 2.2% from normal. This modification resulted in an
increase in utility revenues of approximately $0.4 million for the
quarter ended June 30, 1995, but adversely affected revenues by
approximately $5.0 million for both the nine and twelve month
periods ended June 30, 1995.
Based upon degree days, weather in the third quarter of fiscal 1995
was 22.2% colder than in the third quarter of last year. Firm gas
sales in the quarter ended June 30, 1995 were 21,440 MDTH, compared
to 19,093 MDTH in the quarter ended June 30, 1994. Firm gas sales
were 110,391 MDTH for the nine months ended June 30, 1995
representing a decrease of 8.3% from the same period last year,
which was 15.1% colder. Weather in the twelve months ended June
30, 1995 was 11.4% warmer than normal and 15.8% warmer than it was
in the twelve months ended June 30, 1994. Consequently, firm gas
sales of 123,558 MDTH decreased 7.1% compared with sales in the
corresponding period last year.
Total gas throughput from utility operations, which includes
deliveries to interruptible customers for gas and transportation
services, as well as to off-system customers, was 32,131 MDTH for
the third quarter of fiscal 1995 compared to 32,494 MDTH for the
third quarter last year. Throughput was 153,821 MDTH for the nine-
month period ended June 30, 1995, compared to 153,524 MDTH in the
same period last year. Total gas throughput for the twelve months
ended June 30, 1995 was 181,664 MDTH, an increase of 2,885 MDTH, or
1.6%, compared to throughput in the twelve months ended June 30,
1994. The effect of warmer winter weather on firm gas sales
volumes was offset by increased activity of our New York Market
Hub. Deliveries to off-system customers for the twelve months
ended June 30, 1995 were 44,244 MDTH compared to 32,780 MDTH for
the comparable period a year ago, an increase of 35%.
Net revenues (utility operating revenues less cost of gas of
utility sales) decreased 1.3%, 1.6% and .02%, respectively, for the
three, nine and twelve months ended June 30, 1995. Decreases in
all periods were primarily attributable to the modification of the
weather normalization adjustment and provisions for revenue refunds
of rate settlement items made in the quarter ended June 30, 1995.
The Company and its gas exploration and production subsidiary
employ derivative financial instruments, principally natural gas
futures and swaps, and to a much lesser extent, options on futures,
for the purpose of risk management. Hedging strategies are
independently managed. In connection with utility operations, the
Company primarily uses derivative financial instruments to fix
margins on sales to large-volume customers to whom gas is sold at
a price indexed to the prevailing price of oil, their alternate
fuel. Derivative financial instruments are used by the Company's
gas exploration and production subsidiary to manage the risk
associated with fluctuations in the price received for natural gas
production. All the foregoing transactions meet the criteria for
hedge accounting under Statement of Financial Accounting Standards
No. 80, "Accounting for Futures Contracts."
Gas production and other revenues primarily reflect variations in
revenues from gas exploration and production operations in all
periods presented, principally due to the May 1995 acquisition of
a gas processing plant located in British Columbia, Canada by the
Company's Canadian affiliate. The acquisition added $4.2 million
to revenues. Otherwise, revenues from gas exploration and
production decreased 3.3%, 8.9% and 13.2% for the quarter, nine and
twelve month periods ended June 30, 1995, respectively, compared
with the corresponding periods last year, for the most part
reflecting lower gas production volumes largely due to weather-
related demand. Wellhead prices prevailing during periods ended
June 30, 1995 were substantially lower than in the corresponding
periods ended June 30, 1994. However, the use of derivative
financial instruments resulted in relatively stable effective
prices (average wellhead price received for production including
realized hedging gains and losses, expressed as dollars per
dekatherm) in all comparative periods. Gas exploration and
production revenues for the quarter ended June 30, 1995 reflect a
0.7 billion cubic foot (BCF) decrease in production from off-shore
properties and an effective price of $1.72, which was 6.6% higher
than the corresponding quarter last year. Gas production and
exploration revenues for the nine months ended June 30 reflect a
1.8 BCF decrease in production volume, predominantly off-shore and
an effective price of $1.76 in the nine months ended June 30, 1994.
Revenues for the twelve months ended June 30, 1995 reflect a 4.4
BCF decrease in production volume, also predominantly off-shore.
The effective price for the twelve months ended June 30, 1995 was
$1.70, an increase of 9.0% over the twelve months ended June 30,
1994. Hedging increased gas exploration and production revenues by
$1.6 million, $4.4 million and $5.0 million, respectively, in the
quarter, nine and twelve month periods ended June 30, 1995.
Portions of estimated future production are also covered by hedge
positions as the Company makes additions to its gas reserve base in
futherance of its business plans.
Operation and maintenance expense for the three, nine and twelve
month periods ended June 30, 1995 reflects ongoing productivity
savings and lower operating expense due to the warmer winter
weather. The increase for the quarter ended June 30, 1995 reflects
operation and maintenance expense related to the acquisition of the
gas processing plant discussed above.
Variations in depreciation and depletion expense primarily reflect
higher depreciation expense due to utility property additions,
while depletion expense reflects lower production by the Company's
gas exploration and production subsidiary.
General taxes principally include state and city taxes on utility
revenue and property. Decreases for the three, nine and twelve
month periods ended June 30, 1995 are primarily related to
decreases in utility revenues.
Federal income tax expense in the three, nine and twelve month
periods reflects changes in pre-tax operating income.
Interest charges on long-term debt in all periods generally reflect
higher average subsidiary borrowings. Other interest expense
reflects accruals related to regulatory settlement items.
Dividends on preferred stock reflect reductions in the level of
preferred stock outstanding due to sinking fund redemptions.
Income from equity investments reflects continued positive results
from cogeneration, pipeline and storage projects. (See Notes to
Condensed Consolidated Financial Statements, Note 3., "Investment
in Iroquois Pipeline.") Such income in the twelve months ended
June 30, 1994 included losses related to a propane investment which
was sold in September 1993.
Financial Condition
Cash provided by operating activities during periods ended June 30,
1995 remained strong and has been enhanced substantially by the
timing of utility net margin and gas cost recoveries, which have
been affected by dramatic swings in weather compared with prior
periods. Consolidated capital expenditures for the twelve months
ended June 30, 1995 were $205.3 million, of which $99.1 million was
related to non-utility activities. Capital expenditures for fiscal
years 1995 and 1996 are estimated to be approximately $195 million
and $185 million, respectively, including $80 million in fiscal
1995, and $75 million in fiscal 1996, related to non-utility
activities.
The Company currently has bank lines of credit of $75 million,
which secure the issuance of commercial paper. The lines can be
increased to $150 million by December 1995. Related borrowings,
when necessary, are used primarily to finance seasonal working
capital requirements. In addition, two subsidiaries have credit
lines totaling $84 million, which for the most part support
borrowings under a revolving loan agreement.
Changes in current assets and liabilities at June 30, 1995 compared
to June 30, 1994 reflect the combination of the Company's gas
marketing activities with those of Pennzoil Gas Marketing Co., a
wholly-owned subsidiary of Pennzoil Corporation, in a limited
liability corporation, as of April 1, 1995. Such combination is
being accounted for under the equity method. Previously gas
marketing activities were included in consolidated operations of
the Company. Changes in current assets and liabilities at June 30,
1995 compared to September 30, 1994 reflect the aforementioned
combination as well as seasonal variations.
The Company's 9% and 8.75% Gas Facilities Revenues Bonds became
callable on May 15, 1995 and July 1, 1995, respectively, at
optional redemption prices of $102. The Company is evaluating the
optimal form for the possible refunding of these bonds.
Rate Matters
Rate Settlement Plan: In October 1994, the PSC approved a new
three-year rate settlement agreement which allows an 11.0% return
on common equity devoted to utility operations in fiscal 1995, the
first year of the new rate plan, compared to 12.1% in fiscal 1994.
However, in 1995 improved incentive provisions are expected to
result in an earned rate of return in excess of the allowed return.
The allowed return will be adjusted in each of the last two years
of the rate plan to reflect changes in interest rates.
In addition to improved earnings sharing provisions, the plan
provides new incentives, more flexible pricing in the large-volume
competitive markets, and rate design modifications to improve the
Company's competitive position. The Company is permitted to retain
100% of any earnings from discrete incentives (up to 100 basis
points on utility equity.) With respect to earnings sharing
provisions, the Company can retain 75% of the first 100 basis
points of earnings in excess of the allowed return on utility
equity unrelated to discrete incentives, and 50% of any additional
earnings above that level. In addition, the Company will retain
20% of margins above $1.8 million from "non-traditional" sales and
services (primarily off-system transactions). The settlement
agreement provides for no base rate increase in 1995; however, the
Company is permitted to amortize to income approximately $1.3
million of previously deferred credits. Base rate increases in
years two and three, if any, will be limited to the rate of
inflation and will be partially offset by the use of additional
available deferred credits. See Notes to the Condensed
Consolidated Financial Statements, Note 5., "Regulatory Assets"
On July 15, 1995 the Company made its second stage rate filing in
connection with the three-year rate plan discussed above.
Reflected in the filing is a total revenue requirement of $16.5
million. This amount includes the amortization of $10.9 million in
previously deferred credits, principally made up of $7.1 million
related to excess margins collected in 1995. As a result, the net
rate increase will be $5.6 million. The rate of return on common
equity will be 10.65% for fiscal 1996, reflecting the reduction in
interest rates, and the incentive provisions currently in place
would continue and remain available to permit earned rates of
return above the allowed level. Under the revised agreement, the
subsidiary royalty would be reduced from .75% of the capitalization
of the Company's unregulated subsidiaries to .58%. Subject to
approval by the PSC, these revisions would go into effect on
October 1, 1995.
Restructuring Proceeding: In December 1994, the PSC issued its
order in the gas industry restructuring case. The proceeding was
instituted by the PSC in response to the restructuring of
interstate pipeline services by Federal Energy Regulatory
Commission Order 636, which took effect in November 1993.
The PSC order addresses incentives and margin-sharing issues in a
manner that is generally consistent with the Company's new rate
plan and provides utilities broad discretion to employ market-based
pricing (subject to caps) for services offered to large-volume, or
non-core, customers with dual-fuel capability. The order, which is
pending on rehearing, allows the Company to continue to offer
customers a complete array of bundled sales services as well as
gas-supply pricing flexibility generally comparable to that offered
by unregulated competitors to large-volume customers. While the
order continues to prohibit the Company's gas marketing subsidiary
from operating within the Company's territory, the Company
understands that at its session held on June 28, 1995, the PSC
granted the Company's rehearing application on this issue and
determined to lift the restrictions. The Company must offer core
customers, reliant solely on gas as a heating fuel, access to
available pipeline transportation and storage capacity with
provision for recovery of transition costs and full margin
transportation rates. The order reduces the minimum transportation
service volume requirement for customers, while encouraging the
ultimate elimination of such a requirement. Lastly, the order
initiated a new proceeding currently underway to evaluate gas
purchasing practices and revised gas cost recovery mechanisms and
invites proposals for providing service to small-volume customers
aggregated into gas purchasing groups.
The Company is fully prepared to meet the requirements of the PSC
order. It has prepared tariffs applicable to both core and non-
core markets in compliance with the PSC order, and has proposed an
incentive gas cost recovery mechanism. That mechanism is being
considered in the new proceeding described above. The PSC is
expected to act on this proposal by September 1, 1995.
Environmental Matters
The Company is subject to various Federal, state and local laws and
regulatory programs related to the environment. These
environmental laws govern both the normal, ongoing operations of
the Company as well as the cleanup of historically contaminated
properties. Ongoing environmental compliance activities, which
historically have not been material, are integrated with the
Company's regular operations and maintenance activities. However,
as of June 30, 1995 the Company had an unamortized deferred balance
of $33.2 million representing its estimate of the minimum cost
associated with investigation and remediation at former MGP sites.
Of this amount, $4.5 million was expended by June 30, 1995. (See
Notes to Condensed Consolidated Financial Statements, Note 4.,
"Environmental Matters.")
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 17.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Brooklyn Union Gas Company:
We have reviewed the accompanying condensed consolidated balance
sheets of The Brooklyn Union Gas Company (a New York corporation)
and subsidiaries as of June 30, 1995 and 1994, and the related
condensed consolidated statements of income for the three, nine and
twelve month periods ended June 30, 1995 and 1994, and the
condensed consolidated statements of cash flows for the nine and
twelve month periods ended June 30, 1995 and 1994. 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, 1994, 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 26, 1994, 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, 1994 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which
it has been derived.
ARTHUR ANDERSEN LLP
New York, New York
July 26, 1995
Part II. Other Information
Item 1. Legal Proceedings
The Company has from time to time been named as a defendant in
various legal proceedings. In the opinion of management, the
ultimate disposition of currently asserted claims will not have a
materially adverse impact on the Company's financial position or
results of operations. For information regarding governmental
investigations of alleged environmental, civil and criminal
violations involving the Iroquois Pipeline, see the Notes to
Condensed Consolidated Financial Statements, Note 3., "Investment
in Iroquois Pipeline." For information regarding environmental
matters affecting the Company, see Note 4., "Environmental
Matters."
Item 5. Other Information
Tentative Labor Settlement
On July 16, 1995, Local 3 of the International Brotherhood of
Electrical Workers, which represents approximately 200 employees in
Staten Island, agreed to a three-year labor contract with the
Company, subject to ratification by the membership. The agreement
includes cost containment provisions, and provides for wage
increases of 2.75% in each of the first two years, and 3.00% in the
third year of the contract as well as certain incentive awards.
The Company's contract with Local 101 of the Transport Worker's
Union, representing approximately 1,900 employees in Brooklyn and
Queens, expires on October 15, 1995.
Holding Company Petition
Brooklyn Union intends to file a petition with the New York State
Public Service Commission to organize its consolidated utility
operations and those of its subsidiaries within a holding company.
This form of corporate organization would provide the Company with
the flexibility to take advantage of timely investment and market-
entry opportunities and allow the Company to compete more
effectively against other energy providers.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re computation of per share earnings.
(15) Letter re unaudited interim financial information.
(27) Financial data schedule.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended
June 30, 1995.
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
behalf of the undersigned thereunto duly authorized.
THE BROOKLYN UNION GAS COMPANY
(Registrant)
Date August 4, 1995 s/ V.D. Enright
V.D. Enright
Senior Vice President and
Chief Financial Officer
Date August 4, 1995 s/ R.M. Desmond
R.M. Desmond
Vice President, Comptroller and
Chief Accounting Officer