Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS - - ------------------
THE COMPANY
The Brooklyn Union Gas Company (Company) was incorporated in the State of New York in 1895 as a combination of existing companies, the first of which was granted a franchise in 1849. The Company distributes natural gas at retail, primarily in a territory of approximately 187 square miles, which includes the Boroughs of Brooklyn and Staten Island and two-thirds of the Borough of Queens, all in New York City. The population of the territory served is approximately 4,000,000. As of September 30, 1994, the Company had approximately 1,122,000 active meters, of which approximately 1,082,000 were residential. The Company is subject to the regulatory jurisdiction of the New York State Public Service Commission (PSC). The Company's executive offices are located at One MetroTech Center, Brooklyn, New York 11201-3850. Its telephone number is (718)403-2000.
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 heating sales, primarily residential, compared to total sales. Accordingly, results of operations historically are most favorable in the second quarter (the 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 incurred in the fourth quarter. The effect on utility earnings of variations in revenues caused by abnormal weather during the heating season is largely offset by the operation of a Weather Normalization Adjustment contained in the Company's tariff (see Item 1. "Business-Regulation and Rates"). Also, results of operations are affected by the timing and amounts of approved rate changes.
The Company's customers generally are billed bi-monthly on a cycle basis in therms. One therm equals 100,000 BTUs, the heat content of approximately 100 cubic feet of gas. The heat content of approximately 1,000,000 cubic feet of gas represents 10,000 therms or 1 MDTH. Accordingly, one billion cubic feet (BCF) of gas equals 1,000 MDTH.
For the fiscal year ended September 30, 1994, utility firm gas sales were 133,513 MDTH, of which 76% were residential, 13% commercial, 8% governmental and 3% industrial. In addition, 26,642 MDTH of gas was distributed to interruptible sales customers within the Company's service territory under gas service tariffs and to certain customers off-system under specified contract terms, and 15,750 MDTH of gas was transported for third parties pursuant to utility transportation and balancing service tariffs.
SUBSIDIARIES
The Company's principal wholly owned subsidiaries have operations in gas exploration and production, and investments in gas cogeneration and pipeline projects. In fiscal 1994, earnings from subsidiaries were $10.4 million, or 22 cents per share, representing 11.9% of consolidated earnings. For further information regarding operating results of the subsidiaries, see Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations".
The PSC has approved an agreement that authorizes the Company to invest up to 20% of its consolidated capitalization in energy-related businesses through fiscal 1995. This authorization is based upon the Company's cash investments less dividends received. At September 30, 1994, the total investment in subsidiaries computed on this basis was approximately 13% of capitalization.
GAS EXPLORATION AND PRODUCTION - - ------------------------------
Fuel Resources Inc. (FRI) is engaged in gas exploration, development, production and marketing. FRI operates in the Arkoma Basin and, through its subsidiaries, operates in the Gulf of Mexico, West Virginia, East Texas and Canada. In 1994, FRI increased domestic production over last year from 23,000 MDTH to 24,000 MDTH and also increased its U.S. net gas reserve base from 112 BCF to 148 BCF. This was accomplished mainly through the acquisition of 35.9 BCF of net proved reserves located in the Arkoma Basin and increased exploration activity in the Gulf of Mexico region. Additionally, FRI owns working interests in 180 wells in the Arkoma Basin.
The Houston Exploration Company (formerly Brooklyn Union Exploration Company, Inc.), a wholly owned subsidiary of FRI, continued its drilling and production operations offshore in the Gulf of Mexico. During the year, Houston Exploration drilled fourteen wells, five of which were successful development wells. The other nine were exploration wells, with six resulting in successful finds.
Fuel Resources Production and Development Company, Inc. (FRPD), also an FRI subsidiary, owns working interests in 650 wells in West Virginia and 20 wells in East Texas. FRPD is also participating in several small, onshore projects in the Gulf Coast region.
BRING Gas Services Corp. (formerly Brooklyn Interstate Natural Gas Corp.), FRI's marketing subsidiary, sells gas produced by third parties as well as other FRI affiliates and arranges related transportation services. It placed 640 MDTH of gas per day for delivery in 1994, an increase of 38% over last year's delivery of 463 MDTH per day.
In fiscal 1993, FRI took advantage of high gas prices in
Canada and sold its Canadian gas operations, which generated an after-tax gain of $12.5 million. Headquartered in Calgary, the newly formed Solex Energy Company Inc. will continue FRI's presence in western Canada.
Investment in Energy Services - - -----------------------------
Cogeneration - - ------------
Gas Energy Inc. (GEI) and Gas Energy Cogeneration Inc. (GECI) participate in the development, operation and ownership of cogeneration projects. A GEI subsidiary is a 50% partner in developing a 100-megawatt facility at John F. Kennedy International Airport in Queens, New York. The plant is expected to come on line in 1995. In October 1993, GEI purchased an 11.3% interest in a 174- megawatt gas cogeneration plant located in Lockport, New York. The plant began operating in December 1992 and its major customers under long-term sales agreements include a General Motors production facility and New York State Electric & Gas Corporation. GECI is a 50% partner in developing a 40-megawatt facility that will serve the State University of New York at Stony Brook, Long Island. The plant is also scheduled to be on line in 1995. GECI also is a 45% partner in a 50-megawatt gas cogeneration plant that has been producing heat and power at a Northrop Grumman facility located in Bethpage, Long Island, New York. The plant has been available for operation better than 98% of the time since being placed in service in 1989.
The scope of cogeneration activities also includes providing fuel- management services. GEI subsidiaries provide such services to the Northrop Grumman facility and to another 50-megawatt facility which provides heating and cooling to Nassau Veterans Memorial Coliseum and Nassau Community College. In 1994, these subsidiaries, as fuel managers, delivered 7,000 MDTH of gas to cogeneration projects.
Pipeline and Other - - ------------------
North East Transmission Co., Inc. (NETCO) owns an 11.4% interest in the Iroquois Gas Transmission System (Iroquois), a 375-mile pipeline, which supplies gas to much of the Northeast and into the New York metropolitan area through its southern terminus on Long Island. Iroquois currently transports more than 700 MDTH of Canadian gas supply daily to 25 Northeastern local distribution companies and power generators. The Company currently receives up to 70 MDTH of gas per day of this supply. For information regarding governmental investigations of alleged environmental, civil and criminal violations involving the Iroquois partnership, see Part II, Item 8., "Financial Statements and Supplementary Data," Note 6., "Investments in Energy Services".
The Company has agreed to participate with ANR Pipeline Company and TransCanada PipeLines Ltd. in developing the Mayflower Gas Transmission System, a 200-mile pipeline planned to connect
with Iroquois and serve markets from Eastern New York State to Boston, Massachusetts. The Company and its partners have postponed their plan to build the Liberty Pipeline, which, when built, will connect from New Jersey to Queens, New York.
The Company is no longer involved in the propane business, which did not strategically fit with the Company's natural gas businesses. At the beginning of the year, it completed its exit strategy from Star Gas Corporation by selling its remaining equity. Also, during the year, the Company ceased the operations of Advanced Energy Options, Inc. which sold natural gas space and water heating equipment to residential gas customers. The Company determined that normal distribution channels and trade allies are more effective in serving this market.
GAS SUPPLY
General - - -------
Based on information currently available, the Company's anticipated gas supply is sufficient to meet the requirements of present and new firm customers.
In recent years, the gas industry has been undergoing structural changes in response to the Federal Energy Regulatory Commission's (FERC) policies to increase competition. In 1992, FERC issued Order 636 which established policies to make the gas industry more competitive by requiring interstate gas pipelines to "unbundle" their gas sales service from other regulated tariff services, such as transportation and storage. Anticipating and responding to such changes and policy directives, the Company has modified its gas purchasing arrangements to attain its objective of purchasing gas supply and related transportation service at the lowest cost consistent with long-term security of supply.
As of November 1, 1993, all interstate gas pipelines serving the Company had completed the unbundling of their gas sales services pursuant to Order 636. Consequently, all "bundled" gas sales services previously provided by the interstate pipelines to the Company were replaced by the pipelines with "unbundled" firm transportation and storage services. Further, the Company contracted directly with non-pipeline suppliers for firm gas supply under long- term agreements to replace the gas supply previously provided by the interstate pipelines.
In addition, the Company believes that gas from Canada is a secure, long- term source of supply and has been an active participant in projects that seek to increase the flow of Canadian gas to the Northeast. Further, when economically and contractually advantageous, the Company purchases gas on the spot market. In 1994, 64% of gas supply was purchased from domestic sources under long-term contracts, 22% from Canadian sources under long-term contracts and 14% from spot market sources.
Taking advantage of opportunities arising under Order 636, the Company opened the first New York-based market hub for buyers and sellers of natural gas in the Northeastern United States in fiscal 1994. With interconnections and access to six major pipelines, the New York Market Hub offers transportation, balancing and exchange services to a wide variety of customers, including utilities, municipalities, marketers and large-volume customers. In 1994, the Company delivered 42,392 MDTH of gas and related services to customers in 14 states, with revenues benefiting both firm customers and shareholders, primarily through the operation of the New York Market Hub.
Long-Term Supply - - ----------------
Under long-term contracts and regulatory certificates applicable to pipeline and storage capacity and services, the Company's suppliers will provide maximum firm daily total deliveries of 965 MDTH of gas for the 1994-95 winter, consisting of 376 MDTH per day of firm flowing domestic gas supply, 100 MDTH per day of firm flowing Canadian gas supply and 489 MDTH per day of domestic storage and winter services.
The Company's major providers of interstate pipeline capacity and related services are: Transcontinental Gas PipeLine Corporation (Transco), Texas Eastern Transmission Corporation (Texas Eastern), Tennessee Gas Pipeline Company (Tennessee), and CNG Transmission Corporation (CNG) which provide "unbundled" firm transportation and storage services. These pipelines are the conduit for the delivery of domestic supplies purchased from natural gas sellers to the Company's market. Total maximum daily domestic supplies are 865 MDTH of gas.
Canadian supplies include 70 MDTH of gas per day purchased from western Canadian suppliers and marketers transported by Iroquois and 30 MDTH of gas per day purchased from the Boundary Gas Project and transported by Tennessee. Canadian gas is produced primarily in the Province of Alberta, and is transported within Canada primarily by TransCanada PipeLines, Ltd.
By the beginning of fiscal 1994, pursuant to Order 636, the Company had replaced its remaining gas sales services provided by Texas Eastern and CNG with firm long-term supply purchased directly from non-pipeline suppliers. In 1994, the Company added three new gas suppliers to its supply portfolio: it entered into a long-term contract with Fina Natural Gas Company for 34 MDTH per day of firm supply, contracted with ICC Energy Corporation for 5 MDTH per day of firm long-term supply, and entered into an agreement for 5 MDTH per day with Moore Energy. The Company also increased purchases of gas supply from Amerada Hess Corporation by executing a second long-term firm agreement for 38 MDTH per day. Further, the Company entered into a second contract with Mobil Natural Gas Inc. for an additional 14 MDTH per day of firm long-term supply.
Spot Market Supply - - ------------------
The Company continues to purchase gas on the spot market when contractually and economically feasible. In fiscal 1994, spot purchases totaled 24,271 MDTH of gas.
Peak-day Supply - - ---------------
The Company plans for peak-day demand on the basis of an average temperature of 0/o/F. Gas demand on such a design peak-day is estimated at 1,112 MDTH during the 1994-95 winter. The highest actual 24-hour firm sendout by the Company was 1,022 MDTH on January 19, 1994, when the average temperature was 4/o/F.
For the 1994-95 winter, the Company has the capability to provide a maximum peak-day supply of approximately 1,256 MDTH, consisting of firm flowing supply, pipeline storage supply, seasonal winter supply, and vaporized liquefied natural gas (LNG). The Company's LNG plant has a storage capacity of 1,660 MDTH and peak day sendout capacity of 291 MDTH, or 23% of peak-day supply.
Gas Costs - - ---------
The average cost of gas purchased for firm customers was $3.55 per DTH in fiscal 1994, $3.49 per DTH in 1993 and $3.29 per DTH in 1992. Gas prices were competitive with costs of most other energy sources including alternate grades of fuel oil, although it was priced at some premium to No. 2 grade fuel oil.
Since October 1993, the Company has been using financial instruments to fix margins on certain off-system sales, with the PSC's approval. The Company is also authorized by the PSC to hedge on-system supply prices and to include all of these hedging transactions as part of gas costs.
REGULATION AND RATE MATTERS
Retail sales, which include sales of gas, transportation and balancing services by the Company, are made under rate schedules and tariffs filed with and subject to the jurisdiction of the PSC. In general, the schedules provide for block rates that result in reductions in the unit price as use increases. They contain gas cost adjustment provisions that permit the Company to pass on to firm customers increases and decreases in the cost of gas from levels included in base rates. Revenue requirements for ratemaking purposes are established on the basis of firm sales projections assuming normal weather. Net revenues (revenues less gas costs) from tariff sales for gas, transportation and balancing services on an interruptible basis, as well as from off-system gas sales, are refunded to firm customers through the Gas Adjustment Clause (GAC).
Service is provided to large-volume customers, principally in the multi- family and commercial markets, under a temperature controlled (TC) rate that is competitive with the price of
alternate grades of fuel oil. These large volume customers use gas for space and water heating under the TC rate, except that when the temperature falls below a specified level, then oil, the alternate fuel is used. Service is provided to the small apartment house market under a similar rate.
In October 1993, the Company began offering negotiated "customized" rates to large volume customers both within and outside its service territory. In October 1994, the PSC authorized more pricing flexibility to the Company in the TC market and allowed the Company to retain 20% of net revenues from off-system sales and transportation services in excess of $1.8 million per year. Further, the PSC allowed the Company to utilize financial instruments to protect margins on these sales. ( See Part II, Item 8., "Financial Statements and Supplementary Data," Note 5., "Financial Instruments.")
The Company's tariff contains a Weather Normalization Adjustment that permits recovery from firm heating customers of firm net revenue shortfalls due to warmer-than-normal weather during a heating season. In a colder-than-normal heating season, the Company is required to refund to these customers net revenues from firm gas sales in excess of those which would have been realized under normal weather conditions.
For information regarding the status of rate settlements and other regulatory proceedings, see Part II, Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations - 'Rate and Regulatory Matters' and 'Restructuring Proceeding'." Also, for additional information on the effects of rate regulation see Part II, Item 8., "Financial Statements and Supplementary Data ,'Summary of Significant Accounting Policies - Effects of Rate Regulation'."
COMPETITION
The Company has expanded existing markets and is developing new ones to increase gas sales. In the residential heating market, gas is sold in competition with No. 2 grade fuel oil. During the year, gas at the burner tip was competitive with alternate grades of fuel oil, although it was priced at some premium to No. 2 grade fuel oil. Conversions from oil to gas heat continued during fiscal 1994. Approximately 76% of one-and two-family homes in the Company's service area now use gas for space heating.
The Company's share of the multi-family market is approximately 45%. In this market, gas service under the TC rate is competitively priced with alternate grades of fuel oil. As discussed under "Regulation and Rate Matters" above, the PSC has authorized more pricing flexibility to the Company in this market. In the commercial and industrial markets, the Company offers special area development and business incentive gas rates to businesses that move to or expand operations in designated areas in the Company's territory.
The Company believes that there are promising new markets for use of natural gas as a vehicle fuel as well as in cogeneration, air conditioning and refrigeration applications.
The trend in rate regulation reflects movement from traditional cost-based pricing towards market pricing, with added emphasis on price caps and wider use of incentives. The Company continues to be committed to cost reduction efforts, which include workforce reductions, achieved through normal attrition and special early retirement programs, tax reduction efforts, advanced construction methods and use of state-of-the-art computer technology. The Company is unique among investor-owned utilities in that all of its outstanding long-term debt used to finance utility plant additions is tax-exempt.
RESEARCH AND DEVELOPMENT
In fiscal 1994, the Company spent $11.9 million on research and development (R&D) programs. Of this amount, $2.4 million was spent to support programs of the Gas Research Institute. The Company also provided $2.6 million to other research associations, including the New York State Energy Research and Development Authority (NYSERDA) and the New York Gas Group.
The balance of $6.9 million was devoted primarily to the Company's internal R&D programs relating to efficient gas utilization and operations technologies. These programs include the gas heat pump, fuel cells, new technologies to reduce meter reading costs and vehicles powered by compressed natural gas. The Company is demonstrating the feasibility of natural gas as a fuel well suited for mass transit buses and fleet vehicles.
This year the Company and the gas industry brought to market the YORK Triathlon heating and cooling system which can provide up to 30% lower operating costs than conventional equipment used by commercial customers.
EMPLOYEES
The Company and its subsidiaries employed 3,506 people at September 30, 1994, compared to 3,711 at September 30, 1993. The decrease reflects normal workforce reductions and the effect of a special early retirement program. Three-year labor agreements with unions representing approximately 2,200 employees were signed in 1992. These agreements provide annual wage increases of 4.25% in each of the first two years and 4.5% in the third year.
ENVIRONMENTAL MATTERS
For information regarding environmental matters affecting the Company see Part II, Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters", and Part II, Item 8., "Financial Statements and Supplementary Data," Note 7., "Environmental Matters."
ITEM 2.



ITEM 2. PROPERTIES - - ------------------
In fiscal 1994, consolidated capital expenditures were $199.6 million, of which $103.8 million was primarily for utility property additions and $95.8 million was for subsidiaries. Consolidated capital expenditures are estimated to be approximately $185 million for each of fiscal years 1995 and 1996.
The Company holds franchises to lay gas mains in the streets, highways and public places in the Boroughs of Brooklyn and Staten Island, and the former Second and Fourth Wards of the Borough of Queens. The Company has consents and permits which, with immaterial exceptions, give it the right to carry on its utility operations, substantially as now carried on, in the territory served. The Company's franchises are unlimited in duration, except that a franchise to transmit and distribute gas in the former Fifth Ward of the Borough of Staten Island expires in 2006. Upon expiration, the fee payable to New York City for such franchise is subject to redetermination. Gas sales revenues in the former Fifth Ward are approximately 2.5% of the total gas sales revenues of the Company.
As of September 30, 1994, the Company's distribution pipeline system consisted of approximately 2,028 miles of cast iron main, 1,679 miles of steel main and 230 miles of mains with plastic inserts, with requisite accessory compressor and regulating stations, and two gas storage holders having a capacity of 29 MDTH. The distribution system for the most part is located under public streets.
The Company owns and operates an LNG plant, located at its Greenpoint Energy Center in Brooklyn, to liquefy and store gas during the summer months for vaporization and use during the winter months. This plant has a storage capacity of 1,660 MDTH of natural gas in liquid form and has a vaporization capacity of 291 MDTH per day.
The Company leases its corporate headquarters at One MetroTech Center in downtown Brooklyn. The lease agreement has a remaining term of 17 years and renewal options. The Company owns or leases certain other buildings and facilities for use in the conduct of its business. The Company's gross lease payments are approximately $14.2 million per year.
Principal consolidated properties of subsidiaries and their affiliates include gas and oil leasehold interests, producing wells and related equipment.
For information required by this item concerning the gas and oil exploration, development and producing activities of the Company's subsidiaries, see "Part II, Item 8., "Financial
Statements and Supplementary Data -Supplemental Gas and Oil Disclosures."
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS - - ---------------------------
For information regarding governmental investigations of alleged environmental, civil and criminal violations involving Iroquois, see Part II, Item 8., "Financial Statements and Supplementary Data," Note 6., "Investments in Energy Services." For information regarding environmental matters affecting the Company, see Part II, Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters," and Part II, Item 8., "Financial Statements and Supplementary Data," Note 7., "Environmental Matters."
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - - -------------------------------------------------------------
There was no matter submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report through solicitation of proxies or otherwise.
PART II ----------
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED - - -------------------------------------------------------------- SECURITY HOLDER MATTERS -----------------------
The following is information regarding the Company's common stock. For additional information required by this item, see Part II, Item 6.

ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ----------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS -----------------------------------
EARNINGS AND DIVIDENDS
In fiscal 1994, consolidated income available for common stock was $87.0 million, or $1.85 per share, a record, compared to $76.2 million, or $1.73 per share, in 1993, and $57.8 million, or $1.35 per share, in 1992.
Consolidated earnings, including income from equity investments, for the last three fiscal years are summarized below:
In 1994, utility operations provided an equity return of 12.2%. The return, which included incentives authorized by the State of New York Public Service Commission (PSC), was slightly higher than the allowed rate of 12.1%. The Company has earned or exceeded its allowed return on utility common equity in 15 of the last 16 years.
In the last three years, income available for common stock from utility operations has benefited from rate increases (see "Rate and Regulatory Matters"), additions of new firm gas heating
customers, primarily as a result of converting homes and buildings from oil to gas for space heating, and the benefit of certain ratemaking incentives. The effect on utility revenues of variations due to colder- or warmer-than-normal weather during the heating season is largely offset by the weather normalization adjustment included in the Company's tariff. In 1994, utility earnings reflected higher operation expense due to the extremely cold weather last winter. However, cost management strategies employed throughout the year were able to offset substantially the adverse effects of the cold weather.
In 1994, earnings from gas exploration and production operations increased primarily due to higher U.S. production and higher average prices. Earnings from gas exploration and production in 1993 included an after tax gain of $12.5 million on the sale of a subsidiary's investment in a Canadian gas exploration and production company. This sale is the reason no earnings resulted from Canadian operations in 1994; however, the Company intends to again conduct Canadian operations in fiscal 1995. Earnings in 1992 included a non-cash ceiling test impairment charge of $13.0 million after Federal income taxes recorded to reflect the effect of low natural gas prices in March 1992 on a subsidiary's valuation of proved gas reserves.
Earnings from investments in energy services are attributable to a number of factors. The increase in earnings from pipeline and other reflects in part higher throughput by the Iroquois Gas Transmission System during its second full year of operation. The increase in cogeneration earnings reflects equity income arising from the acquisition of an interest in an operating cogeneration plant, located in Lockport, N.Y., as well as higher income from the investment in a similar plant serving a Northrop Grumman facility, and continued profitable operations from the Company's fuel management subsidiaries. Further, earnings from investments in energy services increased as the Company did not incur any losses in 1994 related to its former investment in a propane company as it had in 1993 and 1992.
The consolidated rate of return on average common equity was 11.04% in 1994, compared to 10.85% in 1993 and 8.74% in 1992.
In December 1993, the Board of Directors authorized an increase in the annual dividend on common stock to $1.35 per share from $1.32 per share, reflecting the three-for-two stock split approved in June 1993. This increase became effective on February 1, 1994, when the quarterly dividend was raised to 33 3/4 cents per share from 33 cents per share. Common dividends have been increased for 18 consecutive years and paid continuously for 46 years.
Firm utility gas sales in fiscal 1994 were 133,513 MDTH compared to 128,972 MDTH in 1993 and 122,476 MDTH in 1992. Measured by annual degree days, weather was 3.1% colder than normal in 1994, and in 1993 and 1992, it was normal and 4.0% warmer than normal, respectively. In 1994, firm sales normalized for weather increased at a rate slightly below the increases in the prior two fiscal years. Sales growth in all markets resulted primarily from conversions to natural gas from oil for space heating, especially by large apartment buildings. During the year, gas at the burner tip was competitive with alternative grades of fuel oil, although it was priced at some premium to No. 2 grade fuel oil.
Residential heating sales in markets where the competing fuel is No. 2 grade fuel oil and sales to other small volume customers were approximately 80% of firm sales in fiscal 1994. Demand in these markets is less sensitive to periodic differences between gas and oil prices.
In large volume heating markets, where the competing fuel is No. 6 grade fuel oil, gas service is provided under rates that competitively track the price of that fuel. There is substantial sales potential in these markets, which include large apartment houses, government buildings and schools.
Moreover, a significant market for off-system sales has developed as a result of Federal Energy Regulatory Commission initiatives. In 1994, the Company delivered 42.4 BCF of gas to off-system and interruptible customers by making optimal use of interstate pipeline capacity and its New York-based market hub. The benefit of these transactions is passed on to firm customers pursuant to the Company's tariff.
The cost of gas, $560.7 million in 1994, was $94.1 million or 20.2% higher than in 1993. This is the result of higher heating sales as weather was colder than normal during the 1994 heating season, and higher off-system sales. The cost of gas for firm customers was $3.55 per DTH (one DTH equals 10 therms) in 1994, compared to $3.49 per DTH in 1993 and $3.29 per DTH in 1992.
Net revenues (utility operating revenues less cost of gas) of $719.0 million in 1994 and $678.7 million in 1993 reflect increased tariff revenues and weather normalized firm sales growth in each year.
The decrease in revenues from gas production and other in 1994 is due to the sale of the Canadian gas exploration and production operations at the end of 1993. Revenues from U.S. production were up significantly, reflecting higher production and average prices. (See Part II, Item 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - - -----------------------------------------------------
FINANCIAL STATEMENT RESPONSIBILITY
The Consolidated Financial Statements of the Company and its subsidiaries were prepared by management in conformity with generally accepted accounting principles.
The Company's system of internal controls is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorizations and recorded to permit preparation of financial statements that present fairly the financial position and operating results of the Company. The Company's internal auditors evaluate and test the system of internal controls. The Company's Vice President and General Auditor reports directly to the Audit Committee of the Board of Directors, which is composed solely of outside directors. The Audit Committee meets periodically with management, the Vice President and General Auditor and Arthur Andersen LLP to review and discuss internal accounting controls, audit results, accounting principles and practices and financial reporting matters.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of 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, 1994 and 1993, and the related Consolidated Statements of Income, Retained Earnings and Cash Flows for each of the three years in the period ended September 30, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1994 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 2 to the Consolidated Financial Statements the Company changed its method of accounting for income taxes and postretirement benefits effective as of October 1, 1993.
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in Item 14 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
October 26, 1994 New York, New York
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements reflect the accounts of the Company and its subsidiaries. All significant intercompany transactions are eliminated.
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 3.3% in 1994, and 3.2% in 1993 and 1992.
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 subsidiaries follow 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 unit-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 property 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.
INVESTMENTS IN ENERGY SERVICES
Certain subsidiaries own as their principal asset investments in energy-related businesses that are accounted for under the equity method.
REVENUES
Utility customers generally are billed bi-monthly on a cycle basis. Unbilled revenue reflects 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 firm customers. Changes in gas costs from amounts recovered in base tariff rates are included in billed firm revenues through the operation of a tariff provision, the Gas Adjustment Clause (GAC). Net revenues from tariff sales for gas and transportation service on an interruptible basis as well as from off-system gas sales and tariff gas balancing services are refunded to firm customers through the GAC. This provision requires an annual reconciliation of recoverable gas costs with GAC revenues. Any difference is deferred pending recovery from or refund to firm customers during a subsequent twelve-month period.
The Company's tariff contains a weather normalization adjustment that provides for 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.
Gas sales by the Company's marketing subsidiary are classified in gas production and other revenue net of their related gas purchase and transportation costs.
FEDERAL INCOME TAX
The Company adopted Statement of Financial Accounting Standards No. 109 (SFAS- 109) "Accounting for Income Taxes" at the beginning of fiscal 1994. The Company recorded a regulatory asset for the net cumulative effect of having to provide deferred Federal income tax expense on all differences between the tax and book bases of assets and liabilities at the current tax rate. Prior to adoption of SFAS-109, 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. An amortization of the regulatory asset is included in operation expense commencing in 1994 while amounts comparable to this amortization previously were included as part of Federal income tax expense.
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.
EFFECTS OF RATE REGULATION
Allocation of costs and revenues to accounting periods for ratemaking and regulatory purposes may differ from bases generally applied by nonregulated companies. Such allocations to meet regulatory accounting requirements are considered to be generally accepted accounting principles for regulated utilities provided that there is a demonstrable ability to recover any deferred costs in future rates. Otherwise, such
deferred costs, or regulatory assets, would have to be expensed. The Company has recorded a net regulatory asset of $95.2 million as of September 30, 1994. This asset is largely related to differences in allocating Federal income tax expense.
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
The accompanying summary of significant accounting policies and notes are integral parts of these statements.
The accompanying summary of significant accounting policies and notes are integral parts of these statements.
CONSOLIDATED STATEMENT OF CAPITALIZATION
The accompanying summary of significant accounting policies and notes are integral parts of these statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying summary of significant accounting policies and notes are integral parts of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
1.FEDERAL INCOME TAX Income tax expense (benefit) is reflected as follows in the Consolidated Statement of Income:
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:
(A) As required by standards in effect prior to the adoption of SFAS-109, the components of deferred tax expense (benefit) related to the following items in 1993 and 1992 are, respectively: property related - $9,782,000 and $6,684,000; rate settlement items - $(245,000) and $(311,000); write-off of propane investment $(7,720,000) and $0; gas costs and other - $5,781,000 and $1,607,000.
The following is a reconciliation between reported income tax and tax computed at the statutory rate of 35% for 1994, 34.75% for 1993 and 34% for 1992:
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" as of October 1, 1993. The adoption of SFAS-109 did not have a material effect on consolidated net income because the Company recorded a regulatory asset to cover the increase in accumulated deferred Federal income taxes not previously provided pursuant to regulatory orders.
2. POSTRETIREMENT AND POSTEMPLOYMENT 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. Commencing in fiscal 1994, the Company began recording expense in accordance with treatment established by the PSC for ratemaking and accounting purposes in a generic policy statement issued in September 1993 applicable to the adoption of SFAS-87, "Employers' Accounting for Pensions," SFAS-88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and SFAS-106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Accordingly, the Company's revenue requirement reflects the aggregate expenses related to pensions and other postretirement benefit obligations as determined under the applicable accounting standards.
On September 1, 1994, the Company completed a voluntary early retirement program for management employees who were age 55 or older with at least 15 years of service. As a result, the
Company recorded a special retirement charge of $8,465,000. The effect of this program was offset by reductions in other elements of total expense for postretirement benefits, which in the aggregate remained within the revenue allowance reflected in the Company's rates. Therefore, the program had no material effect on consolidated net income. A similar program for bargaining unit employees is expected to be completed in the first quarter of fiscal 1995. Likewise, this program is not expected to have a material effect on consolidated net income.
The Company's funding policy for pensions is in accordance with requirements of Federal law and regulations. There were no pension contributions in 1994, 1993 and 1992.
The calculation of net periodic pension cost follows:
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.
B. 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 to the extent rate recoveries are allowed for pension and postretirement benefit costs.
The Company adopted SFAS-106 as of October 1, 1993. SFAS-106 requires that the costs of postretirement benefits other than pensions be accrued over employee service lives by the time of retirement eligibility. Its adoption did not have a material effect on consolidated net income because utility rates in fiscal 1994 reflected full recovery of annual SFAS-106 costs. The transition obligation upon adoption totaled $77.1 million, which is being amortized and recovered in rates over twenty years. Prior to the adoption of SFAS-106, such costs, including payments to retirees and trust fund contributions, amounted to $17,078,000 in 1993 and $13,437,000 in 1992.
The following table sets forth the plans' funded status, reconciled with amounts recognized in the Company's Consolidated Balance Sheet.
Net periodic postretirement benefit cost included the following components:
The measurement assumes an 8% discount rate and a health care cost trend rate of 9.5% in 1994, decreasing to 5% by the year 2007 and remaining at that level thereafter. A 1% increase in the health care cost trend rate would have the effect of increasing the accumulated postretirement benefit obligation as of September 30, 1994 and the net periodic SFAS-106 expense by approximately $13,348,000 and $1,706,000, respectively. The expected long-term rate of return on plan assets was 8.0%.
C. OTHER: In November 1992, the Financial Accounting Standards Board (FASB) issued SFAS-112, "Employers' Accounting for Postemployment Benefits." This Statement requires accounting recognition on an accrual basis of any obligation which exists to provide benefits to former or inactive employees after employment, but before retirement. The Company adopted SFAS-112 on October 1, 1993. Its adoption had no material effect on the Company's Consolidated Financial Statements.
3. FIXED OBLIGATIONS A. LEASES Lease costs included in operation expense were $15,547,000 in 1994, $14,247,000 in 1993 and $14,103,000 in 1992. The future minimum lease payments under the Company's various leases, all of which are operating leases, are approximately $14,200,000 per year over the next five years and $176,900,000 in the aggregate for years thereafter.
For its corporate headquarters, the Company has a lease agreement with a remaining term of 17 years.
B. FIXED CHARGES UNDER FIRM CONTRACTS: The Company has entered into various contracts for gas delivery and supply services. The contracts have varying terms that extend from one to twenty 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.
4. CAPITALIZATION A. COMMON AND PREFERRED STOCK: In 1994, 1993 and 1992, the Company issued 1,209,734, 1,128,662 and 1,172,040 shares of common stock for $29,828,000, $26,956,000 and $23,037,000, respectively, under the Automatic Dividend Reinvestment and Stock Purchase Plan, the Discount Stock Purchase Plan for Employees, and the Employee Savings Plan. At September 30, 1994, 2,398,375 unissued shares of common stock were reserved for issuance under these plans. On October 6, 1993, the Company issued 1,800,000 shares of common stock providing net proceeds of $44,910,000.
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 issues tax-exempt bonds through the New York State Energy Research and Development Authority (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.
The Company converted $55 million of Series C Variable Rate Gas Facilities Revenue Bonds to a fixed rate of 5.60% in July 1993 and $50 million of Series D Variable Rate Gas Facilities Revenue Bonds to a fixed rate equivalent of 5.635% in June 1993. In April 1993, the Company issued through the Authority $37.5 million of Gas Facilities Revenue Bonds 1993 Series A, in the form of Select Auction Variable Rate Securities (SAVRS) and $37.5 million Gas Facilities Revenue Bonds 1993 Series B, in the form of Residual Interest Bonds (RIBS). The interest rate applicable to the 1993 Series A and B linked RIBS/SAVRS bonds, which mature in 2020, is 6.368% per annum. The proceeds were received on April 29, 1993 and then applied to the redemption of $75 million of 9 1/8% Gas Facilities Revenue Bonds due May 2013, called on May 1, 1993 at 103% of par value plus accrued interest.
There are no sinking fund requirements for any Gas Facilities Revenue Bonds. The Company's 9.0% and 8.75% Gas Facilities Revenue Bonds are callable in May 1995 and July 1995, respectively, at an optional redemption price of 102% of par value plus accrued interest.
Other long-term debt consists of debt of a subsidiary amounting to $52,877,000 under a revolving loan agreement with no payments currently due. Interest on this debt is at a composite rate which is less than the prime rate.
5. FINANCIAL INSTRUMENTS In October 1994, the FASB issued SFAS-119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," which required various disclosures about financial instruments and related transactions.
A. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's long-term debt consists primarily of publicly traded Gas Facilities Revenue Bonds (see Note 4.B.), 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, 1994 and 1993 was $651,255,200 and $704,642,400, 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 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, 1994 and 1993, the fair value of this stock was $4,796,640 and $4,893,750, respectively, and the carrying value was $7,200,000 and $7,500,000, respectively.
All other financial instruments included in the Consolidated Balance Sheet are stated in amounts that approximate fair values.
B. DERIVATIVE FINANCIAL INSTRUMENTS The Company and its subsidiaries employ derivative financial instruments, principally natural gas futures and swaps, for the purpose of risk management, although employment of such instruments with respect to utility operations has been minimal in 1994.
Natural gas futures are utilized to fix margins on purchases and sales of gas entered into in the ordinary course of business. The Company and its subsidiaries, principally its marketing subsidiary, had 2,768 futures contracts outstanding at September 30, 1994, requiring margin deposits with brokers in the amount of $2,251,600. The underlying transactions are of varying durations, none of which extend beyond March 1996. The Company would be required to pay approximately $3,136,600 to settle these contracts at September 30, 1994. Deferred losses amounted to $1,240,600 at September 30, 1994.
The Company entered into a series of swap transactions intended to minimize the Company's exposure to differences in the market prices of gas at certain receipt points in producing areas. The swap contracts cover 14.5 BCF of gas per year through October 1996.
The Company's gas exploration and production subsidiary also manages the risk associated with fluctuations in the price of natural gas through commodity swap contracts with financial institutions. The subsidiary has several contracts in effect, at various prices, which cover a significant amount of its estimated production for the next three years. The Company would be required to pay approximately $7,130,000 to settle these contracts at September 30, 1994.
All of the foregoing transactions meet the criteria for hedge
accounting treatment. Accordingly, gains and losses are recognized when the underlying transaction is completed, at which time these gains and losses are included in earnings as an offset to revenues or costs recognized when the gas is sold, purchased or transported in accordance with a hedged transaction, and are reflected as cash flows from operations in the accompanying Consolidated Statement of Cash Flows at that time. Further, in cases where the transaction results in the acquisition of an asset, deferred gains and losses are included as part of the carrying amount of the asset acquired.
The Company and its subsidiaries are exposed to credit risk in the event of nonperformance by counterparties to futures and swap contracts, as well as nonperformance by the counterparties of the transactions which they are hedged against. The Company believes that the credit risk related to the futures 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.
6. INVESTMENTS IN ENERGY SERVICES A. IROQUOIS PIPELINE: A Company subsidiary, North East Transmission Co., Inc. (NETCO), owns an 11.4% interest in Iroquois Gas Transmission System, L.P. (Iroquois), which partnership owns and operates a 375-mile pipeline from Canada to the Northeast. NETCO's investment in Iroquois was $20.1 million at September 30, 1994.
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. Related agency investigations of matters related to the construction of the Iroquois Pipeline have been commenced by COE and the Federal Energy Regulatory Commission (FERC). Civil penalties could be imposed if violations of Iroquois' COE and FERC authorizations are shown to have occurred. No proceedings in connection with these investigations 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.
Iroquois' management has been informed that meetings are expected 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 investigation in order to defend itself and, if and when appropriate, to explore possible resolutions that may be acceptable to all parties. Although the ultimate outcome of these matters cannot be predicted at this time, based on information currently available, the Company does not believe that the resolution of these matters will have a material adverse effect on its consolidated financial results.
B. COGENERATION PROJECTS: A Company subsidiary, Gas Energy Inc. (GEI), through affiliates, owns a 50% partnership interest, and has invested approximately $47.5 million as of September 30, 1994, in a project to construct, own and operate a 100-megawatt cogeneration plant at John F. Kennedy International Airport in Queens, New York. The estimated cost of the project is approximately $292 million, of which $175 million is being financed by proceeds from bonds issued by the Port Authority of New York and New Jersey and guaranteed by an international banking group. The partners are committed to make equal contributions for project costs above $175 million. Construction of the project is scheduled for completion in 1995.
In addition, a project to construct, own and operate a 40-megawatt cogeneration plant at the State University of New York at Stony Brook is under construction. The debt financing is being provided through $79 million of tax-exempt Suffolk County Industrial Development Revenue Bonds and is guaranteed by a letter of credit issued by Toronto-Dominion Bank. Commercial operation is scheduled for the first quarter of 1995. Another Company subsidiary, Gas Energy Cogeneration, Inc., through affiliates, owns a 50% partnership interest in the project, estimated to cost $92.6 million. As of September 30, 1994, the subsidiary had funded $3.6 million of an expected total of $6.8 million as its share of the project.
7. ENVIRONMENTAL MATTERS The Company is involved in environmental site investigation, implementation of interim remedial measures, and consideration of long-term remedial solutions at the former manufactured gas plant (MGP) site in Coney Island that was owned and operated by a predecessor company. This property was the subject of a notice by the City of New York in January 1993 alleging that the site presented an imminent and substantial endangerment to health and the environment and stating that the City intended to bring a citizens' suit under the Federal Resource Conservation and Recovery Act and related statutes to compel cleanup and recover its own response costs. The Company has denied the City's allegations, but has met informally with City officials, apprised them of the Company's own ongoing environmental investigation, and committed itself to keeping the City informed of developments. The City has not filed suit as of this date.
In addition, the Company in cooperation with the U.S. Coast Guard has been responding to pollution incidents, occurring and reported to governmental authorities during the summer of 1993, involving the apparent seep of oil into Coney Island Creek from the Coney Island site. This response has included the construction of an interim response measure (IRM) to contain and recover any such oil seep. While expenses to date have not been material with respect to the pollution incident, the Coast Guard has not issued its final approval of this response measure and the Company cannot predict how long the IRM will operate or whether additional containment or response measures will be required or what such measures would cost.
In October 1994, the Company had an initial meeting with the New York State Department of Environmental Conservation (DEC) for the purpose of reaching a consensual agreement under state environmental laws for a long-term site management plan for the Coney Island site. The discussions with the DEC to date have been preliminary and the Company is unable to predict which, if any, of the options discussed with the DEC might be mutually acceptable. Based on these preliminary discussions, the Company believes that long-term site management costs will be at least $8,000,000 and may be several times that amount, depending upon the site management option finally negotiated with the DEC. A consensual agreement is not likely to be reached before the end of 1995. Accordingly, as at September 30, 1994, the Company accrued a liability of $8,000,000 as the minimum estimate of costs most likely to be incurred and a corresponding regulatory asset, in addition to $4,100,000 of interim response costs previously recorded. Expenditures related to any negotiated site management plan will be over a number of years.
The Company has been approached by the City of New York with respect to another former MGP property regarding potential cost sharing of environmental cleanup costs. This property is currently owned by the City. The Company and the City have had several meetings but discussions are preliminary. Until it becomes clear that the property will in fact be developed by the City or a third party, or it is demonstrated that the property presents a significant environmental risk, the Company cannot determine its potential legal liabilities and/or financial exposure, if any, associated with this property.
The Company has notified several of its insurance carriers of potential claims regarding environmental cleanup liabilities. The Company's consideration of its potential insurance claims is continuing.
With the exception of the matters referenced above, no significant administrative or judicial proceedings involving the Company have been initiated with respect to any other MGP property. Although the potential cost of cleanup at these sites may be material if the Company is ever 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.
In October 1994, 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, including the $4.1 million in interim response costs accrued in 1993 and the $8.0 million liability accrued as at September 30, 1994. In addition, as part of its October 1994 order approving the Company's three-year rate settlement, the PSC approved the deferral of environmental site investigation and remediation costs incurred after September 30, 1994. Pursuant to that order, rates commencing in October 1994 reflect the recovery of the $4.1 million deferred interim response costs over a five year period, and the Company may reflect in rates commencing October 1995 and October 1996, the deferred balance of environmental site investigation and remediation costs accrued as at September 30, 1994 and September 30, 1995, respectively, each over a five year period. The recovery of these costs in rates is conditioned upon the absence of a PSC determination that such costs have been unreasonable or imprudently incurred. In general, the Company believes that, based on applicable law and prior PSC precedents with respect to similar expenditures incurred by other utilities in New York State, the Company will be permitted to recover its prudently incurred environmental site investigation and remediation costs in rates.
SUPPLEMENTAL GAS AND OIL DISCLOSURES CAPITALIZED COSTS RELATING TO GAS AND OIL PRODUCING ACTIVITIES
The following is a summary of the costs (in thousands of dollars) which are excluded from the amortization calculation as of September 30, 1994, by year of acquisition: 1994-$18,703; 1993-$0; 1992-$3,573 and prior years-$3,059. The Company cannot accurately predict when these costs will be included in the amortization base, but it is expected that these costs will be evaluated within the next five years.
COSTS INCURRED IN PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES
RESULTS OF OPERATIONS FROM GAS AND OIL PRODUCING ACTIVITIES
* Gas and oil operations were conducted predominantly in the United States in 1994.
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 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 from production of proved reserves was developed as follows:
1) Estimates are made of quantities of proved reserves and future periods during which they are expected to be produced based on year-end economic conditions. 2) The estimated future cash flows are compiled by applying year-end prices of gas and oil relating to the Company's proved reserves to the year-end quantites of those reserves except for the reserves devoted to future production that is hedged. These reserves are priced at their respective hedge amount. Future price changes are considered only to the extent provided by contractual arrangements in existence at year-end. 3) The future cash flows are reduced by estimated production costs, costs to develop the proved reserves and certain abandonment costs, all based on year-end economic conditions. 4) Future income tax expenses are based on year-end statutory tax rates giving effect to the remaining tax basis in the gas and oil properties and other deductions, credits and allowances relating to the Company's proved gas and oil reserves. 5) Future net cash flows are discounted to present value by applying a discount rate of 10%.
The standardized measure of discounted future net cash flows 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.
RESERVE QUANTITY INFORMATION Natural Gas (MMcf)
* Gas and oil reserves were located predominantly in the United States in 1994.
SUPPLEMENTAL GAS AND OIL DISCLOSURES (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED GAS AND OIL RESERVES
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVE QUANTITIES
SUPPLEMENTAL GAS AND OIL DISCLOSURES (CONTINUED)
AVERAGE SALES PRICES AND PRODUCTION COSTS - PER UNIT
*Represents the cash price received which excludes the effect of any hedging transactions.
**Located predominantly in the United States.
DRILLING ACTIVITY (NET)
At September 30, 1994 the Company, through its subsidiaries, was participating in the drilling of 2 developmental wells and 1 exploratory well with the Company's net interest being 1.0 and .9 wells, respectively.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - - --------------------------------------------------------- ACCOUNTING AND FINANCIAL DISCLOSURE - - -----------------------------------
There have been no changes in accountants. In addition, there have been no disagreements between the Company and its independent public accountants concerning any matter of accounting principles or practices or financial disclosure required to be disclosed by this item.
PART III ----------
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - - ------------------------------------------------------------
Information regarding the Company's directors is incorporated herein by reference to pages 1 through 6 of the Company's definitive Proxy Statement, dated December 29, 1994, for its Annual Meeting of Shareholders to be held on February 2, 1995.
Information regarding the Company's executive officers, who are elected annually by the directors, is found on page 52 hereof.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION - - --------------------------------
Information regarding compensation of the Company's executive officers is incorporated herein by reference to pages 6 through 10 of the Company's definitive Proxy Statement, dated December 29, 1994, for its Annual Meeting of Shareholders to be held on February 2, 1995.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - - ------------------------------------------------------------- MANAGEMENT ----------
Information regarding beneficial ownership and management ownership is incorporated herein by reference to "Proposal (1) - Election of Directors" in the Company's definitive Proxy Statement, on pages 1 through 6, dated December 29, 1994, for its Annual Meeting of Shareholders to be held on February 2, 1995.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - - --------------------------------------------------------
There are no transactions, or series of similar transactions, or contemplated transactions which have occurred since the beginning of the last fiscal year of the Company which exceed $60,000 and involve any director or executive officer of the Company.
No executive officer or director of the Company was indebted to the Company or its subsidiaries at any time since the beginning of the last fiscal year of the Company in an amount in excess of $60,000.
PART IV ---------
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON - - ----------------------------------------------------------------- FORM 8-K --------
(a) 1. All Financial Statements - - ----------------------------------
(a) 2. Financial Statement Schedules - - ---------------------------------------
Separate financial statements for The Brooklyn Union Gas Company are omitted for the reason that the Company's total assets for the fiscal year ended September 30, 1994, exclusive of investments in and advances to its consolidated subsidiaries, constitute more than 75% of the total assets shown by the Consolidated Balance Sheet as of September 30, 1994, and the Company's total gross revenues, exclusive of interest and dividends received or equity in income from the consolidated subsidiaries, constitute more than 75% of the total gross revenues shown by the Consolidated Statement of Income for the year ended September 30, 1994.
The following additional data should be read in conjunction with the financial statements included in Part II, Item 8. Schedules not included herein have been omitted because they are not applicable or the required information is shown in such financial statements or notes thereto.
Executice Officers of the Registrant - - ------------------------------------------- All Executive Officers serve one-year terms.
Index
Schedule V THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES Page 1 of 2 CONSOLIDATED SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED SEPTEMBER 30,1994,1993 AND 1992
-------------------------------------------------- (Thousands of Dollars)
Schedule V THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES Page 2 of 2 CONSOLIDATED SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED SEPTEMBER 30,1994,1993 AND 1992 ------------------------------------------------- (Thousands of Dollars)
Schedule VI THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES Page 1 of 2 CONSOLIDATED SCHEDULE OF ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992 ------------------------------------------------------- (Thousands of Dollars)
Schedule VI THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES Page 2 of 2 CONSOLIDATED SCHEDULE OF ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY,PLANT AND EQUIPMENT FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992 ---------------------------------------------- (Thousands of Dollars)
SCHEDULE VIII
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992 --------------------------------------------------------------- (Thousands of Dollars)
(a) Write-off of bad debts, net of recoveries. (b) Settlements of injury and damage claims.
SCHEDULE X
THE BROOKLYN UNION GAS COMPANY AND SUBSIDIARIES CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992 ----------------------------------------------------------------------------- (Thousands of Dollars)
The above General Taxes together with the other amounts reported as maintenance, depreciation and depletion shown in the Consolidated Statement of Income represent all significant supplementary income statement information.
(a) 3. Exhibits - - ------------------
(3) Articles of incorporation and by-laws
By-laws of the Company, dated April 26, 1989, incorporated by reference from Form S-8 Registration Statement No. 33-29898 amendment dated July 27, 1994 incorporated by reference from Exhibit 4(a) to Post-Effective Amendment No. 1 to For S-8 Registration Statement No. 33-51561.
Restated Certificate of Incorporation of the Company filed August 1, 1989, and Certificate of Amendment filed July 2, 1993; incorporated by reference from Exhibit 4(b) to Form S-3 Registration Statement No. 33- 50249.
(4) Instruments defining the rights of security holders, including indentures:
Official Statement, dated May 15, 1985, respective of $98,500,000 New York State Energy Research and Development Authority, 9% Gas Facilities Refunding Revenue Bonds Series 1985A, incorporated by reference from Form 10-K for the year ended September 30, 1985.
Participation Agreement, dated as of May 15, 1985, between the New York State Energy Research and Development Authority and The Brooklyn Union Gas Company relating to the 9% Gas Facilities Refunding Revenue Bonds Series 1985A, incorporated by reference from Form 10-K for the year ended September 30, 1985.
Indenture of Trust, dated as of May 15, 1985, between the New York State Energy Research and Development Authority and Chemical Bank, as Trustee, relating to 9% Gas Facilities Refunding Revenue Bonds Series 1985A, incorporated by reference from Form 10-K for the year ended September 30, 1985.
Official Statement, dated July 17, 1985, respective of $55,000,000 of New York State Energy Research and Development Authority, 8-3/4% Gas Facilities Revenue Bonds Series 1985, incorporated by reference from Form 10-K for the year ended September 30, 1985.
Participation Agreement, dated as of July 1, 1985, between the New York State Energy Research and Development Authority and The Brooklyn Union Gas Company relating to the 8-3/4% Gas Facilities Revenue Bonds Series 1985, incorporated by reference from Form 10-K for the year ended September 30, 1985.
Indenture of Trust, dated as of July 1, 1985, between the New York State Energy Research and Development Authority and Chemical Bank, as Trustee, relating to 8-3/4% Gas Facilities Revenue Bonds Series 1985, incorporated by
reference from Form 10-K for the year ended September 30, 1985.
Official Statement, dated December 4, 1985, respective of $125,000,000 of New York State Energy Research and Development Authority Variable Rate Gas Facilities Revenue Bonds Series 1985 I and 1985 II, incorporated by reference from Form 10-K for the year ended September 30, 1985.
Participation Agreement, dated as of December 1, 1985, between the New York State Energy Research and Development Authority and The Brooklyn Union Gas Company relating to the Variable Rate Gas Facilities Revenue Bonds Series 1985 I and 1985 II, incorporated by reference from Form 10-K for the year ended September 30, 1985.
Indenture of Trust, dated December 1, 1985, between New York State Energy Research and Development Authority and Chemical Bank, as Trustee, relating to the Variable Rate Gas Facilities Revenue Bonds Series 1985 I and 1985 II, incorporated by reference from Form 10-K for the year ended September 30, 1985.
Official Statement, dated February 23, 1989, respective of $90,000,000 of the New York State Research and Development Authority Adjustable Rate Gas Facilities Revenue Bonds Series 1989A and Series 1989B, incorporated by reference from Form S-8 Registration Statement No. 33- 29898.
Participation Agreement, dated as of February 1, 1989, between the New York State Energy Research and Development Authority and The Brooklyn Union Gas Company relating to the Adjustable Rate Gas Facilities Revenue Bonds Series 1989A, incorporated by reference from Form 10-K for the year ended September 30, 1989.
Participation Agreement, dated as of February 1, 1989, between the New York State Energy Research and Development Authority and The Brooklyn Union Gas Company relating to the Adjustable Rate Gas Facilities Revenue Bonds Series 1989B, incorporated by reference from Form 10-K for the year ended September 30, 1989.
Indenture of Trust, dated February 1, 1989, between the New York State Energy Research and Development Authority and Manufacturers Hanover Trust Company, as Trustee, relating to the Adjustable Rate Gas Facilities Revenue Bonds Series 1989A, incorporated by reference from Form 10-K for the year ended September 30, 1989.
Indenture of Trust, dated February 1, 1989, between the New York State Energy Research and Development Authority and Manufacturers Hanover Trust Company, as Trustee,
relating to the Adjustable Rate Gas Facilities Revenue Bonds Series 1989B, incorporated by reference from Form 10-K for the year ended September 30, 1989.
Official Statement, dated July 24, 1991, respective of $50,000,000 of the New York State Research and Development Authority Gas Facilities Revenue Bonds Series 1991A and $50,000,000 of the New York State Research and Development Authority Gas Facilities Revenue Bonds Series 1991B, incorporated by reference from Form 10-K for the year ended September 30, 1991.
Participation Agreement, dated as of July 1, 1991,between the New York State Energy Research and Development Authority and The Brooklyn Union Gas Company relating to the Gas Facilities Revenue Bonds Series 1991A and 1991B, incorporated by reference from Form 10-K for the year ended September 30, 1991.
Indenture of Trust, dated as of July 1, 1991, between the New York State Energy Research and Development Authority and Manufacturers Hanover Trust Company, as Trustee, relating to the Gas Facilities Revenue Bonds Series 1991A and 1991B, incorporated by reference from Form 10-K for the year ended September 30, 1991.
Official Statement, dated July 23, 1992, respective of $37,500,000 of the New York State Energy Research and Development Authority Gas Facilities Revenue Bonds Series 1993A and $37,500,000 of the New York State Energy Research and Development Authority Gas Facilities Revenue Bonds Series 1993B, incorporated by reference from Form 10-K for the year ended September 30, 1992.
Participation Agreement, dated as of July 1, 1992, between the New York State Energy Research and Development Authority and The Brooklyn Union Gas Company relating to the Gas Facilities Revenue Bonds Series 1993A and 1993B, incorporated by reference from Form 10-K for the year ended September 30, 1992.
Indenture of Trust, dated as of July 1, 1992, between the New York State Energy Research and Development Authority and Chemical Bank, as Trustee, relating to the Gas Facilities Revenue Bonds Form Series 1993A and 1993B, incorporated by reference from Form 10-K for the year ended September 30, 1992.
Official Statement, dated April 29, 1992, respective of $90,000,000 of the New York State Energy Research and Development Authority, 6.75% Gas Facilities Revenue Bonds, replacing $45,000,000 Series 1989A and $45,000,000 Series 1989B, incorporated by reference from Form 10-K for the year ended September 30, 1992.
First Supplemental Participation Agreement dated as of May 1, 1992 to Participation Agreement dated February 1, 1989 between the New York State Energy Research and Development Authority and The Brooklyn Union Gas Company relating to Adjustable Rate Gas Facilities Revenue Bonds, Series 1989A & B, incorporated by reference from Form 10-K for the year ended September 30, 1992.
First Supplemental Trust Indenture dated as of May 1, 1992 to Trust Indenture dated February 1, 1989 between the New York State Energy Research and Development Authority and Manufacturers Hanover Trust Company, as Trustee, relating to Adjustable Rate Gas Facilities Revenue Bonds, Series 1989A & B, incorporated by reference from Form 10-K for the year ended September 30, 1992.
Official Statement, dated July 15, 1993, respective of $25,000,000 of the New York State Energy Research and Development Authority Gas Facilities Revenue Bonds Series D-1 and $25,000,000 of the New York State Energy Research and Development Authority Gas Facilities Revenue Bonds Series D-2, incorporated by reference from Form S-8 Registration Statement No. 33-66182.
Participation Agreement, dated July 15, 1993, between the New York State Energy Research and Development Authority and The Brooklyn Union Gas Company relating to the Gas Facilities Revenue Bonds Series D-1 1993 and Series D-2 1993, incorporated by reference from Form S-8 Registration Statement No. 33-66182.
Indenture of Trust, dated July 15, 1993, between The New York State Energy Research and Development Authority and Chemical Bank as Trustee, relating to the Gas Facilities Revenue Bonds Series D-1 1993 and Series D-2 1993, incorporated by reference from Form S-8 Registration Statement No. 33-60182.
Official Statement, dated July 8, 1993, respective of $55,000,000 of the New York State Energy Research and Development Authority Gas Facilities Revenue Bonds Series C, incorporated by reference from Form 10-K for the year ended September 30, 1993.
First Supplemental Participation Agreement dated as of July 1, 1993 to Participation Agreement dated as of June 1, 1990, between the New York State Energy Research and Development Authority and The Brooklyn Union Gas Company relating to Gas Facilities Revenue Bonds Series C, incorporated by reference from Form 10-K for the year ended September 30, 1993.
First Supplemental Trust Indenture dated as of July 1, 1993 to Trust Indenture dated as of June 1, 1990 between the New York State Energy Research and Development Authority and
Chemical Bank, as Trustee, relating to Gas Facilities Revenue Bonds Series C, incorporated by reference from Form 10-K for the year ended September 30, 1993.
(10) Material contracts
Deferred Compensation Plan Preamble, dated, December 17, 1986, incorporated by reference from Form 10-K for the year ended September 30, 1987.
Corporate Incentive Compensation Plan Description, incorporated by reference from Form 10-K for the year ended September 30, 1989.
Marketing Incentive Compensation Plan Description, incorporated by reference from Form 10-K for the year ended September 30, 1989.
Deferral Plan for Incentive Awards Description, incorporated by reference from Form 10-K for the year ended September 30, 1989.
Agreement of Lease between Forest City Jay Street Associates and The Brooklyn Union Gas Company dated September 15, 1988, incorporated by reference from Form 10-K for the year ended September 30, 1990.
(11) Statement re: Computation of per share earnings. See Part II, Item 8., "Financial Statements and Supplementary Data - Consolidated Statement of Income for the Years Ended September 30, 1994, 1993 and 1992," for information required by this item.
(12) Statement re: Computation of consolidated ratio of earnings to fixed charges
(21) Subsidiaries of the registrant
(23) Consents of experts
(27) Financial data schedule
(b) Reports on Form 8-K: - - --------------------------
There were no reports filed on Form 8-K for the quarter ended September 30, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant, and in the capacities indicated on December 21, 1994.
THE BROOKLYN UNION GAS COMPANY
SIGNATURE TITLE --------- ----- [S] [C]
/s/Robert B. Catell President and Chief Executive - - ----------------------------- Officer (Robert B. Catell)
/s/Craig G. Matthews Executive Vice President - - ----------------------------- (Craig G. Matthews)
/s/Vincent D. Enright Senior Vice President and - - ----------------------------- Chief Financial Officer (Vincent D. Enright)
/s/Richard M. Desmond Vice President, Comptroller - - ----------------------------- and Chief Accounting (Richard M. Desmond) Officer
/s/Kenneth I. Chenault Director - - ----------------------------- (Kenneth I. Chenault)
/s/Andrea S. Christensen Director - - ----------------------------- (Andrea S. Christensen)
/s/Donald H. Elliott Director - - ----------------------------- (Donald H. Elliott)
/s/Alan H. Fishman Director - - ----------------------------- (Alan H. Fishman)
/s/Edward D. Miller Director - - ----------------------------- (Edward D. Miller)
/s/Richardson Pratt, Jr. Director - - ----------------------------- (Richardson Pratt, Jr.)
/s/James Q. Riordan Director - - ----------------------------- (James Q. Riordan)