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 March 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-722
THE BROOKLYN UNION GAS COMPANY
(Exact name of Registrant as specified in its charter)
New York 11-0584613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
One MetroTech Center, Brooklyn, New York 11201-3851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (718) 403-2000
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding at May 1, 1996
$.33 1/3 par value 49,572,527
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information Page No.
Condensed Consolidated Balance Sheet -
March 31, 1996 and 1995, and September 30,
1995 3
Condensed Consolidated Statement of Income -
Three, Six and Twelve Months Ended March 31,
1996 and 1995 4
Condensed Consolidated Statement of Cash Flows -
Six and Twelve Months Ended March 31,
1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition 11
Review of Independent Public Accountants 18
Report of Independent Public Accountants 19
Part II. Other Information
Item 1 - Legal Proceedings 20
Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 21
Signatures 22
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, March 31, September 30,
1996 1995 1995
(Unaudited) (Unaudited) (Audited)
(Thousands of Dollars)
Assets
Property
Utility, at cost $ 1,714,416 $ 1,634,326 $ 1,690,193
Accumulated depreciation (409,645) (375,295) (393,263)
Gas exploration and production, at cost 390,880 316,182 353,847
Accumulated depletion (149,501) (127,277) (138,136)
1,546,150 1,447,936 1,512,641
Investments in Energy Services 124,247 107,423 121,023
Current Assets
Cash 12,809 12,858 15,992
Temporary cash investments 31,407 64,435 24,550
Accounts receivable 412,645 342,265 146,018
Allowance for uncollectible accounts (20,736) (18,682) (13,730)
Gas in storage, at average cost 16,141 39,089 88,810
Materials and supplies, at average cost 14,225 12,370 13,203
Prepaid gas costs and other 27,752 26,958 35,581
494,243 479,293 310,424
Deferred Charges 156,042 168,491 172,834
$ 2,320,682 $ 2,203,143 $ 2,116,922
Capitalization and Liabilities
Capitalization
Common stock, $.33 1/3 par value stated at $ 537,366 $ 508,875 $ 522,581
Retained earnings 387,793 362,352 303,709
Total common equity 925,159 871,227 826,290
Preferred stock, redeemable 6,600 6,900 6,900
Long-term debt 724,652 714,759 720,569
1,656,411 1,592,886 1,553,759
Current Liabilities
Accounts payable 142,312 128,753 103,705
Dividends payable 18,131 17,176 17,536
Taxes accrued 65,572 57,096 3,635
Customer deposits 22,122 22,748 22,252
Customer budget plan credits - - 24,790
Interest accrued and other 50,628 40,135 39,438
298,765 265,908 211,356
Deferred Credits and Other Liabilities
Federal income tax 258,729 245,240 247,882
Unamortized investment tax credit 20,475 21,474 20,948
Other 86,302 77,635 82,977
365,506 344,349 351,807
$ 2,320,682 $ 2,203,143 $ 2,116,922
See accompanying notes to condensed consolidated financial statements.
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Six Months Twelve Months
Ended March 31, Ended March 31, Ended March 31,
1996 1995 1996 1995 1996 1995
(Thousands of Dollars)
Operating Revenues
Utility sales $ 575,812 $ 468,271 $ 954,008 $ 812,451 $ 1,293,888 $ 1,203,411
Gas production and other 19,626 13,344 39,628 27,512 76,069 54,763
595,438 481,615 993,636 839,963 1,369,957 1,258,174
Operating Expenses
Cost of gas 287,310 189,505 447,613 324,630 569,542 493,003
Operation and maintenance 108,627 102,107 208,915 193,469 396,641 376,436
Depreciation and depletion 18,641 17,756 36,723 36,069 72,674 70,846
General taxes 51,034 48,176 89,637 84,954 139,401 140,742
Federal income tax 39,109 38,169 61,898 59,791 45,391 40,044
Operating Income 90,717 85,902 148,850 141,050 146,308 137,103
Other Income (Expense)
Income from equity investments (24) 2,402 1,606 4,022 7,202 6,831
Other, net (2,754) (1,042) (4,596) (1,862) (7,428) (3,637)
Federal income tax (588) (196) (650) (362) 955 562
Income Before Interest Charges 87,351 87,066 145,210 142,848 147,037 140,859
Interest Charges
Long-term debt 11,614 11,992 23,662 23,854 47,522 47,577
Other 1,242 1,434 2,347 2,516 4,958 5,137
12,856 13,426 26,009 26,370 52,480 52,714
Net Income 74,495 73,640 119,201 116,478 94,557 88,145
Dividends on Preferred Stock 82 85 164 171 330 344
Income Available for
Common Stock $ 74,413 $ 73,555 $ 119,037 $ 116,307 $ 94,227 $ 87,801
Per Share of Common Stock $ 1.51 $ 1.53 $ 2.43 $ 2.43 $ 1.93 $ 1.84
Dividends Declared per Share
of Common Stock $ 0.355 $ 0.348 $ 0.703 $ 0.695 $ 1.398 $ 1.370
Average Common Shares
Outstanding 49,226,883 48,056,163 49,086,888 47,903,448 48,802,940 47,601,934
See accompanying notes to condensed consolidated financial statements.
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Twelve Months
Ended March 31, Ended March 31,
1996 1995 1996 1995
(Thousands of Dollars)
OPERATING ACTIVITIES
Net income $ 119,201 $ 116,478 $ 94,557 $ 88,145
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and depletion 38,697 38,965 76,881 76,078
Deferred Federal income tax (1,521) (3,653) 14,979 (1,609)
Amortization of investment tax credit (473) (526) (999) (1,012)
Income from energy services investments (1,606) (4,022) (7,202) (6,831)
Dividends received from energy services investments 1,756 1,366 3,985 3,321
Allowance for equity funds used during construction (640) (518) (1,396) (1,528)
Change in accounts receivable, net (261,084) (144,286) (72,086) 124,957
Change in accounts payable 38,439 1,584 6,152 (42,517)
Gas inventory and prepayments 90,977 69,902 27,283 (9,956)
Other 66,180 55,502 25,594 15,226
Cash provided by operating activities 89,926 130,792 167,748 244,274
FINANCING ACTIVITIES
Sale of common stock 14,858 14,197 28,645 29,004
Issuance of long-term debt 159,111 13,382 164,921 11,917
173,969 27,579 193,566 40,921
Repayments
Long-term debt (153,500) - (153,500) -
Preferred stock (300) (300) (300) (300)
20,169 27,279 39,766 40,621
Dividends paid (35,116) (33,580) (69,101) (65,792)
Other 4 (27) (18) 252
Cash used in financing activities (14,943) (6,328) (29,353) (24,919)
INVESTING ACTIVITIES
Capital expenditures (excluding allowance
for equity funds used during construction) (76,344) (96,729) (192,347) (185,211)
Other 5,035 (3,933) 20,875 (7,288)
Cash used in investing activities (71,309) (100,662) (171,472) (192,499)
Change in Cash and Temporary Cash Investments 3,674 23,802 (33,077) 26,856
Cash and Temporary Cash Investments at Beginning of Period 40,542 53,491 77,293 50,437
Cash and Temporary Cash Investments at End of Period $ 44,216 $ 77,293 $ 44,216 $ 77,293
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 $ 13,000 $ 22,500 $ 26,500 $ 42,000
Interest $ 28,902 $ 26,431 $ 53,959 $ 51,373
See accompanying notes to condensed consolidated financial statements.
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 March 31, 1996 and 1995, and the results
of operations for the three, six and twelve months ended March
31, 1996 and 1995, and cash flows for the six and twelve
months ended March 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, 1995.
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. The adjustment operates when weather varies
more than 2.2% from normal (positive or negative) during a
billing cycle.
3. INVESTMENT IN IROQUOIS PIPELINE
A Company subsidiary, North East Transmission Co., Inc.
(NETCO), owns a partnership interest in Iroquois Gas
Transmission System, L.P. (Iroquois). Iroquois owns a 375-
mile pipeline from Canada to the Northeast United States. By
purchase transactions completed in April 1996, NETCO increased
its partnership interest in Iroquois from 11.4% to 19.4%.
NETCO's investment in Iroquois was $22.3 million at March 31,
1996.
In 1992, Iroquois was informed by the U.S. Attorneys' Offices
of various districts of a civil investigation of alleged
violations of the U.S. Army Corps of Engineers (COE) permit
and/or the Federal Clean Water Act. Further, agency
investigations of matters related to the construction of the
Iroquois pipeline have been commenced by COE, the Federal
Energy Regulatory Commission, the Federal Department of
Transportation, and the New York Public Service Commission
(PSC). In April 1996, the PSC referred certain matters
relating to construction of the pipeline to its office of
general counsel for consideration of a penalty action. Civil
penalties could be imposed if violations of governmental
authorizations or requirements are shown to have occurred.
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 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
are continuing to meet with those responsible for the civil
and criminal investigations to discuss possible resolutions
that may be acceptable to all parties. The Company is advised
that a comprehensive resolution of these matters is likely,
and could have a material adverse effect on Iroquois'
financial condition. Based on discussions with Iroquois'
management, in the fourth quarter of fiscal 1995 a provision
was recorded to cover NETCO's share of estimated costs related
to these investigations. The ultimate resolution of these
matters is not expected to result in the incurrence of costs
that will materially affect the Company's results of
operations or financial position.
4. 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. Moreover, the Company has recently executed a consent
order with the 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 with respect to that site.
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, primarily will be for the Coney Island site.
This amount includes approximately $5.1 million of costs
expended as of March 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 March 31, 1996, the Company had an accrued liability of
$29.0 million and a related unamortized regulatory asset of
$31.9 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. Initial recovery
of these costs began in fiscal year 1995. 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. The PSC has initiated a generic
proceeding to assess the extent of the potential liability for
cleanup of MGP sites by the State's gas utilities and has
indicated that it may consider in that proceeding generic
policies regarding the recovery of such costs through gas
utility rates. Any such policies may affect the Company's
ability to reflect such costs in rates. At this time, the
Company is unable to predict the outcome of that proceeding.
5. SUBSIDIARY REORGANIZATION LAWSUIT
The Company implemented a reorganization of its exploration
and production subsidiaries' assets and liabilities by
transferring to its subsidiary, The Houston Exploration
Company (Houston Exploration), certain onshore producing
properties and acreage not previously owned by Houston
Exploration. In connection with the reorganization, the
former employees of Fuel Resources Inc., the subsidiary of the
Company that previously held the onshore properties and
acreage transferred to Houston Exploration in the
reorganization, were entitled to remuneration for the value of
these properties prior to the reorganization. Certain of
these individuals filed suit against the Company and Houston
Exploration alleging that they are entitled to receive greater
remuneration as a result of alleged breach of contract, breach
of fiduciary duty, fraud, negligent representation and
conspiracy. Such individuals seek actual damages in excess of
$35 million and an award of punitive damages in an amount in
excess of $70 million. The Company believes that the ultimate
resolution of these allegations will not have a material
adverse impact on the Company's financial position or results
of operations.
6. REGULATORY ASSETS
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 Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for Certain Types of Regulation."
The Company had net regulatory assets as of March 31, 1996 and
1995 of $84.1 million and $116 million, respectively. These
amounts are included in Deferred Charges and Deferred Credits-
Other in the Consolidated Balance Sheet. In the event that it
were no longer subject to the provisions of SFAS-71, the
Company estimates that the write-off of these net regulatory
assets could result in a charge to net income of approximately
$55 million which would be classified as an extraordinary
item.
SFAS-121 issued in March 1995 and effective for fiscal 1997,
establishes accounting standards for the impairment of long-
lived assets. This statement is not expected to have a
material impact on the Company's financial condition or
results of operations upon adoption.
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 March 31, 1996 vs. Three Months ended
March 31, 1995.
(2) Six Months ended March 31, 1996 vs. Six Months ended March 31,
1995.
(3) Twelve Months ended March 31, 1996 vs. Twelve Months ended
March 31, 1995.
Consolidated income available for common stock for the second
quarter of fiscal 1996 was $74.4 million, or $1.51 per share,
compared to $73.6 million, or $1.53 per share, for the second
quarter of last year. Earnings for the six months ended March 31,
1996 were $119.0 million, or $2.43 per share, compared to $116.3
million, or $2.43 per share, in the six months ended March 31,
1995. Consolidated earnings for the twelve months ended March 31,
1996 were $94.2 million, or $1.93 per share, compared to $87.8
million, or $1.84 per share, for the same period a year ago.
Utility operations contributed $1.50 to consolidated earnings in
this year's second quarter compared to $1.49 in last year's second
quarter. Subsidiaries contributed one cent per share to earnings
in this year's second quarter compared to four cents per share in
the quarter a year ago. The decline in subsidiaries' earnings was
due to losses incurred by subsidiaries with investments in
cogeneration projects and related fuel management operations.
Project operating margins, which reflect generally stable pricing
for energy sales, were reduced by the sharp increases in fuel costs
due to the severe winter. Also, the seasonal load characteristics
of new plants added in the summer of 1995 adversely affected
comparative interim results. Subsidiaries involved in gas
exploration, production, marketing and processing had higher
earnings in the second quarter compared with a year ago, primarily
reflecting the acquisition of Canadian gas processing operations in
May 1995.
The increase in earnings for the twelve-month period reflects
achievement of ratemaking incentives applicable to utility
operations in fiscal 1995, as well as higher earnings from the
Company's gas exploration and production, and processing
subsidiaries.
Revenue growth, especially from sales to large-volume customers,
more than offset higher operation expense due to the colder-than-
normal winter. Utility operations continue to reflect sales growth
and ongoing cost reduction efforts.
The effect on utility earnings of variations in revenues due to
colder- or warmer-than-normal weather is largely offset by the
weather normalization adjustment included in the Company's tariff.
Firm gas sales for the second quarter of fiscal 1996, which was
5.9% colder than normal and 15.4% colder than the second quarter of
fiscal 1995, were 61,608 MDTH, compared to 54,410 MDTH in last
year's second quarter. Firm gas sales were 105,376 MDTH for the
six months ended March 31, 1996, representing an 18.5% increase
from the same period last year, which was 12.4% warmer than normal.
Weather for the twelve months ended March 31, 1996 was 6.1% colder
than normal and 23.2% colder than the twelve months ended March 31,
1995. Consequently, firm gas sales of 139,781 MDTH for the twelve
months ended March 31, 1996 increased 15.3% compared with the
twelve months ended March 31, 1995.
Total gas throughput from utility operations, which includes gas
deliveries to interruptible customers and transportation services
primarily to off-system customers, was 75,685 MDTH in the second
quarter of fiscal 1996, compared to 71,451 MDTH in last year's
second quarter. Total gas throughput for the six months ended
March 31, 1996 was 132,993 MDTH compared to 121,690 MDTH in the
same period a year ago. Total gas throughput for the twelve months
ended March 31, 1996 was 188,980 MDTH, compared to 182,027 MDTH in
the corresponding period last year.
Net revenues (utility operating revenues less cost of gas of
utility sales) increased 3.5% in the three months ended March 31,
1996, compared to the same period last year. This increase was
attributable to heating sales additions and the retention of a
portion of margins on the increase in sales due to colder-than-
normal weather. The weather normalization adjustment in the
Company's tariff operates when temperatures vary more than 2.2%
from normal in any billing cycle. Net revenues in the six- and
twelve-month periods ended March 31, 1996 increased 6.0% and 4.6%,
respectively, compared with the corresponding prior year periods.
Net revenues in the twelve months ended March 31, 1996 included
provisions made to reflect regulatory requirements to share margins
on sales to certain large-volume customers for the benefit of firm
core tariff customers.
The Company and its gas exploration and production subsidiaries
employ derivative financial instruments, natural gas futures and
swaps for the purpose of managing commodity price risk. In
connection with utility operations, the Company primarily uses
derivative financial instruments to fix margins on sales to large-
volume customers to which 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.
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. Gas production increased slightly in
all periods. The effective price (average wellhead price received
for production including realized gains and losses on closed
financial instrument positions for hedging) was $1.49 per MCF in
the second quarter of fiscal 1996 compared with $1.77 per MCF in
the second quarter last year, while the average wellhead price was
$2.19 per MCF in this year's second quarter compared with $1.40 per
MCF in the comparable quarter last year. For the six months ended
March 31, 1996, the effective price was $1.65 per MCF compared with
$1.69 per MCF in the six months ended March 31, 1995. Hedging
activities produced a loss of $4.2 million in the quarter compared
with a gain of $1.9 million in the comparable quarter last year.
Hedging losses for the six months ended March 31, 1996 amounted to
$3.7 million compared with a gain of $2.8 million in the same
period last year. The effective price in the twelve months ended
March 31, 1996 was $1.70 per MCF compared with $1.71 per MCF in the
twelve months ended March 31, 1995. For the twelve months ended
March 31, 1996 hedging gains were $0.2 million compared with $2.07
million in same period last year. Portions of future production
are also covered by hedge positions.
The Company reorganized the gas exploration and production
operations of its subsidiaries through the combination of onshore
reserves and properties held by Fuel Resources Inc. with the
offshore reserves and properties held by The Houston Exploration
Company (Houston Exploration). As a result, all domestic oil and
gas properties have been transferred to Houston Exploration, which
has over 200 BCF of proved reserves, with the ability to add value
through development of probable reserves on existing properties.
Depending on market conditions, up to 30% of the stock of the
reorganized company could be sold through a public offering. (See
Notes to Condensed Consolidated Financial Statements, Note 5.,
"Subsidiary Reorganization Lawsuit.")
The increase in operation and maintenance expense in the three, six
and twelve month periods ended March 31, 1996 reflects the effect
of significantly colder weather on utility operations, which are
benefiting from ongoing cost reductions. Moreover, consolidated
operation expense in periods ended March 31, 1996 included costs
related to Canadian gas processing operations.
Depreciation and depletion expense in the three, six, and twelve
months ended March 31, 1996 increased 4.98%, 1.8% and 2.58%,
respectively, compared to the same periods ended March 31, 1995.
Higher depreciation expense related to utility plant additions and
higher oil and gas depletion expense related to higher production
in all periods caused the increase.
General taxes principally include State and City taxes on utility
revenues and property.
Federal income tax expense in periods ended March 31, 1996 reflects
higher pre-tax income.
Other income generally reflects results from investments in energy
services. As previously mentioned, losses were incurred by
subsidiaries with investments in cogeneration projects and related
fuel management operations due to this year's cold winter and the
increase in fuel prices. Also, interim results reflect the
impairment of a Company subsidiary's investment in the Iroquois
pipeline related to investigations regarding construction of the
pipeline. (For information regarding Iroquois, see Notes to
Condensed Consolidated Financial Statements, Note 3., "Investment
in Iroquois Pipeline.") In the twelve months ended March 31, 1996,
other income was lower than in the twelve months ended March 31,
1995 primarily because of the preceding factors.
Interest charges on long-term debt reflect the favorable impact of
the Company's debt refinancing on March 1, 1996, (see "Financial
Condition"). Other interest charges principally include carrying
charges related to regulatory settlement items.
Dividends on preferred stock reflect reductions in the level of
preferred stock outstanding due to sinking fund redemptions.
Financial Condition
In the six months ended March 31, 1996, operating activities
provided $89.9 million in cash flow; whereas, in the six months
ended March 31, 1995, operating activities provided $130.8 million
in cash flow. Generally, the Company settles gas supplier invoices
monthly while its firm customers are billed bi-monthly. Hence, the
lag between payments to gas suppliers and recoveries from
residential heating customers, especially those on budget or flat
payment plans, can adversely affect cash flow from operating
activities when the weather is extremely cold. Thus, the swing in
operating cash flow is almost entirely attributable to colder-than-
normal weather. Also, gas inventory charges increased reflecting
higher average prices. After the heating season, leads and lags
between payments to suppliers and recoveries from customers related
to gas costs reverse and operating cash flow will reflect
underlying trends. Receivables related to budget plan settlements
are recovered over twelve months. Cash provided by operating
activities in the twelve months ended March 31, 1996 largely
reflects the swing in working capital requirements related to
weather as well as the timing of other items recovered through
utility tariff billings. Capital expenditures for fiscal years
1996 and 1997 are estimated to be approximately $195 million in
each year.
On March 1, 1996, the Company refunded $153.5 million of Gas
Facilities Revenue Bonds, including a $98.5 million series of 9%
bonds and a $55 million series of 8.75% bonds. Both series were
called for redemption on that date at optional redemption prices of
102% of the face amount per bond plus accrued interest. The $153.5
million refunding series, which matures in 2021, was issued on
January 29, 1996, with a coupon rate of 5.5% at a price of 99% of
the principal amount of the bonds. The proceeds were placed in
trust pending the redemption on March 1, 1996.
Rate and Regulatory Matters
Rate Settlement Plan
In October 1994, the PSC approved a three-year rate settlement
agreement which provided for no base rate increase in fiscal 1995;
however, the Company was permitted to amortize to income
approximately $1.3 million of deferred credits in the year.
In addition to earnings sharing provisions, the plan provided new
incentives, more flexible pricing in 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 including retention of a
portion of margins above a specified level of sales to certain
large-volume customers (up to 100 basis points on utility equity).
With respect to earnings sharing provisions, the Company will
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 September 1995, the PSC approved the Company's second stage rate
filing covering fiscal 1996. The approval provides for no base
rate increase; however, it permits the amortization to income of
$7.5 million in deferred credits. The authorized rate of return on
utility common equity was set at 10.65% for fiscal 1996, reflecting
generally lower prevailing capital costs. The incentive provisions
continue and remain available to provide the opportunity to achieve
earned rates of return above the authorized level. These revisions
became effective on October 1, 1995.
Additionally, base rate increases, if any, in the third year of the
agreement would continue to be limited to the rate of inflation and
could be offset by amortization of any deferred credits.
Restructuring Proceeding
The PSC has set forth a policy framework to guide the transition of
New York's gas distribution industry in the post-Federal Energy
Regulatory Commission (FERC) Order 636 environment. In March 1996,
the PSC issued an order on utility compliance tariff filings,
including the Company's, related to the policy framework.
Pursuant to this order, as of May 1 a portion of the Company's
small-volume market will be allowed to purchase their gas supplies
from sources other than the Company, which would serve as a gas
transporter. Large-volume customers already have this option.
Small-volume customers can be grouped together by marketers if
their combined minimum threshold usage reaches 50,000 therms of gas
per year, which approximates the usage of 35 homes. The PSC
approved the Company's methodology of recovering the cost of
pipeline capacity and storage service provided to marketing firms.
In addition to transporting gas that customers purchase from
marketers, utilities such as the Company will provide billing,
meter reading and other services for an aggregate fee equivalent to
the distribution charge reflected in otherwise applicable sales
rates to supply these customers. The PSC order placed a limit on
the amount of gas the Company would be obligated to transport in
its core market to 5% of total core sales in each of the next three
years, with no more than 25% of any one service class allowed to
convert to transportation service. Since gas marketers under
present tax law are not subject to New York State gross receipts
taxes, they have an artificial competitive advantage. The PSC
order limiting the conversion to 5% of core sales, or approximately
5.3 BCF per year, gave recognition to the tax differential.
Holding Company Petition and Price Cap Proposal
The Company has pending with the PSC a petition to organize its
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. The Company plans
to expand gas marketing and energy management services to large-
volume customers, potentially through new subsidiaries to be owned
by the holding company. In conjunction with the formation of the
holding company, the Company has proposed to institute a price cap
plan for gas services provided to firm tariff customers and to
modify the ratemaking applicable to margins for large-volume, non-
core transactions. Under this proposal, rate increases, if any,
applicable to core customers would be limited to general price
inflation adjusted for productivity. Further, a specified level of
margins on services to non-core customers would be imputed and
reflected in overall revenue requirements which would be set to
recover cost of service at the outset of the price cap period. In
line with incentive ratemaking, while the price cap is effective,
the Company would realize any benefit or loss associated with
changes in utility margins from the level initially fixed.
Negotiations with the PSC Staff and other interested parties
regarding this petition are ongoing. It is anticipated that the
PSC will act on the Company's petition.
Environmental Matters
The Company is subject to various Federal, State and local laws and
regulatory programs related to the environment. These
environmental laws govern both the normal, ongoing operations of
the Company as well as the cleanup of historically contaminated
properties. Ongoing environmental compliance activities, which
historically have not been material, are integrated with the
Company's regular operation and maintenance activities. As of
March 31, 1996, the Company had an accrued liability of $29.0
million and a related unamortized regulatory asset of $31.9
million. (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 19.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Brooklyn Union Gas Company:
We have reviewed the accompanying condensed consolidated balance
sheets of The Brooklyn Union Gas Company (a New York corporation)
and subsidiaries as of March 31, 1996 and 1995, and the related
condensed consolidated statements of income for the three,six and
twelve month periods ended March 31, 1996 and 1995, and the
condensed consolidated statements of cash flows for the six and
twelve month periods ended March 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, 1995, 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, 1995, 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, 1995 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
April 24, 1996
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." For information regarding a subsidiary's reorganization
lawsuit, see Note 5., "Subsidiary Reorganization Lawsuit."
Item 5. Other Information
Executive Reorganization
Effective May 1, 1996, the Company elected Robert B. Catell,
President and Chief Executive Officer, to Chairman and Chief
Executive Officer; Helmut W. Peter, Executive Vice President, to
Vice Chairman; and Craig G. Matthews, Executive Vice President, to
President and Chief Operating Officer.
By-Laws
On February 1, 1996, the By-Laws of the Company were amended to
increase the number of directors serving on the Executive Committee
of the Board of Directors from five to six, with a majority of the
members of the Executive Committee constituting a quorum.
Other Development
In early December 1995, New York State Governor Pataki endorsed a
proposal to dismantle Long Island Lighting Company (LILCO). Among
other things, the proposal contemplates that Long Island Power
Authority (LIPA) would issue and sell tax-exempt bonds to purchase
LILCO's electric transmission and distribution system, and would
assume a portion of LILCO's debt; LILCO's electric generating
facilities and its gas business would be sold to other companies;
and an energy company would contract with LIPA to manage the
transmission and distribution of electricity to LILCO's customers.
For a number of years the Company has had a continuing interest
principally in LILCO's gas business, and from time to time has had
discussions with and has made approaches to LILCO regarding a
possible transaction. The Company has been following developments
relating to the December 1995 proposal endorsed by Governor Pataki,
and has been having discussions with officials and others
concerning LILCO's gas business as well as its generating,
transmission and distribution assets (but not Shoreham or LILCO's
other nuclear or regulatory assets). The Company expects to
continue these activities, but is unable to predict the course of
developments or whether or how a transaction, if there is one,
might involve the Company.
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
March 31, 1996.
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 May 14, 1996 s/ V.D. Enright
V.D. Enright
Senior Vice President and
Chief Financial Officer
Date May 14, 1996 s/ R.M. Desmond
R.M. Desmond
Vice President, Comptroller and
Chief Accounting Officer