<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
JANUARY 31, 1994
Date of Report (Date of earliest event reported)
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in charter)
DELAWARE 1-6407 75-0571592
(State of (Commission (IRS Employer
incorporation File Number) Identification
Number)
504 LAVACA STREET, EIGHTH FLOOR, AUSTIN, TEXAS 78701
(Address of principal executive offices including zip code)
(512) 477-5981
Registrant's telephone number, including area code
Not applicable
(Former name or address, if changed since last report)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
------------------
<S> <C>
MISSOURI BUSINESS OF GAS SERVICE:
Audited Financial Statements:
Report of Independent Accountants......................................................... F-2
Balance Sheet at December 31, 1992 and 1991............................................... F-3
Statement of Operations for the years ended December 31, 1992, 1991 and 1990.............. F-4
Notes to Financial Statements............................................................. F-5 to F-12
Unaudited Interim Financial Statements:
Balance Sheet at September 30, 1993....................................................... F-13
Statement of Operations for the nine months ended September 30, 1993 and 1992............. F-14
Notes to Unaudited Interim Financial Statements........................................... F-15 to F-16
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS:
Unaudited Pro Forma Combined Condensed Financial Information................................ PF-1
Pro Forma Combined Condensed Statement of Operations for the nine months ended September 30,
1993....................................................................................... PF-2
Pro Forma Combined Condensed Statement of Operations for the twelve months ended September
30, 1993................................................................................... PF-3
Pro Forma Combined Condensed Statement of Operations for the year ended December 31, 1992... PF-4
Notes to Unaudited Pro Forma Combined Condensed Statements of Operations.................... PF-5 to PF-6
Pro Forma Combined Condensed Balance Sheet at September 30, 1993............................ PF-7
Notes to Unaudited Pro Forma Combined Condensed Balance Sheet............................... PF-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Southern Union Company
We have audited the balance sheet of the Missouri Business of Gas Service, a
division of Western Resources, Inc., pursuant to the Agreement for Purchase of
Assets between Western Resources, Inc. and Southern Union Company, as of
December 31, 1992 and 1991 and the related statement of operations for each of
the three years in the period ended December 31, 1992. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Missouri Business of Gas
Service, a division of Western Resources, Inc., as of December 31, 1992 and
1991, and its operations for each of the three years in the period ended
December 31, 1992 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Austin, Texas
September 24, 1993
F-2
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1991 1992
------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Property, plant and equipment......................................................... $ 361,849 $ 393,376
Less accumulated depreciation and amortization...................................... (108,225) (117,925)
------------ ------------
253,624 275,451
------------ ------------
Current assets:
Cash................................................................................ 8 9
Accounts receivable, billed and unbilled............................................ 49,117 57,942
Materials and supplies.............................................................. 4,467 4,764
Other current assets................................................................ 35 35
------------ ------------
53,627 62,750
------------ ------------
Deferred charges and other............................................................ 4,384 5,935
------------ ------------
Total assets...................................................................... $ 311,635 $ 344,136
------------ ------------
------------ ------------
EQUITY AND LIABILITIES
Equity in net assets acquired......................................................... $ 235,506 $ 275,501
------------ ------------
Current liabilities -- accounts payable and accrued liabilities....................... 71,277 64,608
Deferred credits and other............................................................ 4,852 4,027
------------ ------------
Total liabilities................................................................. 76,129 68,635
Contingencies......................................................................... -- --
------------ ------------
Total equity and liabilities...................................................... $ 311,635 $ 344,136
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1990 1991 1992
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues................................................................... $ 302,163 $ 307,667 $ 297,956
----------- ----------- -----------
Cost and expenses:
Gas purchase costs....................................................... 202,229 193,510 183,001
Operating, maintenance and general....................................... 59,311 64,829 66,908
Taxes, other than on income.............................................. 25,598 25,877 25,038
Depreciation and amortization............................................ 9,730 11,628 13,172
----------- ----------- -----------
Total costs and expenses................................................. 296,868 295,844 288,119
----------- ----------- -----------
Net operating revenue...................................................... 5,295 11,823 9,837
----------- ----------- -----------
Other income (expenses):
Interest expense......................................................... (8,342) (9,294) (8,831)
Other, net............................................................... 504 (696) 1,214
----------- ----------- -----------
Total other income (expenses), net....................................... (7,838) (9,990) (7,617)
----------- ----------- -----------
Earnings (loss) before income taxes........................................ (2,543) 1,833 2,220
Income tax provision (benefit)............................................. (1,593) 523 705
----------- ----------- -----------
Net earnings (loss)........................................................ $ (950) $ 1,310 $ 1,515
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Missouri Business of Gas Service (the "Missouri Business"), a division
of Western Resources, Inc., ("Western Resources"), is engaged in the
distribution and sale of natural gas as a public utility in the state of
Missouri. On July 9, 1993, Southern Union Company ("Southern Union" or the
"Company") entered into a purchase and sale agreement with Western Resources
(the "Agreement") to purchase the Missouri Business subject to certain
conditions including the regulatory approval of the Missouri Public Service
Commission ("MPSC" or the "Commission").
The Missouri Business has no separate legal status or existence, and its
activities are controlled by Western Resources. Historically, the operations of
the Missouri Business have been included in the consolidated financial
statements of Western Resources and were not accounted for as a separate entity.
In the normal course of business, the Missouri Business has various transactions
with Western Resources, including various expense allocations, which are
material in amount.
The accompanying historical balance sheet and statement of operations
consists of the assets acquired and liabilities assumed as set forth in the
Agreement and the operations related to the Missouri Business. These financial
statements have been prepared from records maintained by Western Resources, and
may not necessarily be indicative of the conditions which would have existed if
the Missouri Business had been operated as an independent entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL. The accounting policies of the Missouri Business are in accordance
with generally accepted accounting principles as applied to regulated public
utilities. The Missouri Business rates and operations are subject to regulation
by the MPSC and the Federal Energy Regulatory Commission ("FERC"). The principal
accounting policies used in the preparation of the financial statements of the
Missouri Business are described below.
UTILITY PLANT. Utility plant is stated at cost. For constructed plant,
costs include contracted services, direct labor and materials, indirect charges
for engineering, supervision, general and administrative costs, and an allowance
for funds used during construction (AFUDC). The AFUDC rate was 6.07% in 1992,
6.25% in 1991, and 8.25% in 1990. The cost of additions to utility plant and
replacement units of property is capitalized. Maintenance costs and replacement
of minor items of property are charged to expense as incurred. When units of
depreciable property are retired, they are removed from the plant accounts and
the original cost plus removal charges less salvage are charged to accumulated
depreciation. Significant software development costs are capitalized.
DEPRECIATION. Depreciation is provided on the straight-line method based on
the estimated useful lives of property. Composite provisions for Missouri
Business' book depreciation approximated 3.38% in 1992, 3.40% in 1991, and 3.37%
in 1990 of the average original cost of depreciable property.
REVENUES AND GAS PURCHASE COSTS. Gas utility customers are billed on a
monthly-cycle basis. The related cost of gas is matched with cycle billed
revenue through the operation of purchased gas adjustment provisions. An
estimate of unbilled revenues is recognized on a monthly-cycle basis which
includes sales from the cycle-billing dates to the end of the month, unbilled
gas purchase costs and revenue related taxes. The accrual for unbilled revenues
is included in revenues in the statement of operations.
TAXES ON INCOME. The Missouri Business is included in Western Resources'
consolidated federal and state income tax returns. The Missouri Business' annual
provision for income taxes included in the statement of operations was
determined as if the Missouri Business had filed a separate federal and state
income tax return but may include benefits from deductions and tax credits that
are
F-5
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
realizable only on a consolidated basis. Deferred income taxes are not presented
in the accompanying balance sheet as the pending purchase transaction is taxable
and the deferred income taxes pertaining to the Missouri Business will remain
with Western Resources.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES,
which is effective for fiscal years beginning after December 15, 1992. The
statement provides for the replacement of the "deferred method" of interperiod
income tax allocation with the "liability method" which bases the amounts of
current and future assets and liabilities on events recognized in the financial
statements and on income tax laws and rates existing at the balance sheet date.
Western Resources adopted the provisions of SFAS No. 109 as of January 1, 1992
for which there was no material impact on the operations of the Missouri
Business.
3. AFFILIATE TRANSACTIONS
The Missouri Business engages in various transactions with Western Resources
and its affiliates that are characteristic of a consolidated group under common
control. Western Resources has historically provided the Missouri Business with
various financial and administrative functions and services for which the
Missouri Business is charged associated direct costs and expenses. In addition,
certain indirect administrative costs are allocated to the various business
divisions of Western Resources, including the Missouri Business, principally
based on formulas which consider such proportionate variables as number of
customers, number of employees and property balances. The methods utilized are,
in the opinion of the management of Western Resources, reasonable.
Direct and indirect corporate administrative costs including employee
benefits, information systems support, accounting and office services and other
general and administrative costs charged to the Missouri Business by Western
Resources approximated $26.9 million in 1992, $23.2 million in 1991 and $19.5
million in 1990. Amounts are included in "operating, maintenance and general" in
the statement of operations.
Western Resources provides financing and cash management for the Missouri
Business through a centralized treasury system. Western Resources also provides
cash needs not generated internally by the Missouri Business operations. Western
Resources' consolidated interest expense is, in turn, allocated to its business
units, including the Missouri Business, based on a pro rata formula of its net
investment in the Missouri Business. Historically, the weighted average interest
rate of Western Resources was 7.6% in 1992, 8.0% in 1991 and 8.4% in 1990.
4. RATE MATTERS AND REGULATION
The Missouri Business, pursuant to rate orders from the MPSC, recovers
increases in natural gas costs through various purchased gas adjustment clauses
(PGA). The annual difference between actual gas cost incurred and cost recovered
through the application of the PGA are deferred and amortized through rates in
subsequent periods.
MPSC RATE PROCEEDINGS. On February 5, 1993, the Missouri Business filed an
application with the MPSC requesting an increase in natural gas rates for the
Missouri Business of $20.8 million or seven percent.
On January 22, 1992, the MPSC issued an order authorizing the Missouri
Business to increase natural gas rates by $7.3 million annually. On February 5,
1992, the Missouri Business filed an application for the issuance of an
accounting order for the Missouri Business to defer service line replacement
program costs incurred since July 1, 1991, including depreciation expense,
property
F-6
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RATE MATTERS AND REGULATION (CONTINUED)
taxes, and carrying costs for recovery in the next general rate case. The MPSC
subsequently issued an accounting order allowing the deferral of service line
replacement program costs. At December 31, 1992, approximately $3.1 million of
these deferrals have been included in deferred charges and other.
On April 27, 1990, the MPSC approved an agreement among Gas Service, the
MPSC staff, and intervenors to increase natural gas rates $18.5 million
annually, effective May 1, 1990. The Missouri Business discontinued the deferral
of accelerated line surveys and carrying charges on plant investment in new
service lines on April 30, 1990, and began amortizing the balance to expense
over a three-year period which began May 1, 1990.
FERC ORDER NO. 528. In 1990, the FERC issued Order No. 528 which authorized
new methods for the allocation and recovery of take-or-pay settlement costs by
natural gas pipelines from their customers. Negotiation and litigation continues
between Western Resources and suppliers concerning the amount of such costs to
be allocated to the Missouri Business. Due to the present uncertainty of the
outcome of the litigation and negotiations, the management of the Missouri
Business is unable to estimate any further liability for take-or-pay settlement
costs incurred by its pipeline suppliers. The MPSC has approved a mechanism to
recover these take-or-pay costs from the Missouri customers.
FERC ORDER NO. 636. On April 8, 1992, the FERC issued Order No. 636 which
is intended to complete the deregulation of natural gas production and
facilitate competition in the gas transportation industry. Order 636 is expected
to affect the Missouri Business in several ways. The rules provide greater
protection for pipeline companies by providing for recovery of all fixed costs
through contracts with local distribution companies and other customers choosing
to transport gas on a firm (non-interruptable) basis. The order also separates
the purchase of natural gas from the transportation and storage of natural gas,
shifting additional responsibility to distribution companies for the provision
of long-term gas supply and transportation to distribution points. The Missouri
Business may be liable to one or more of its pipeline suppliers for costs
associated with any reduction in firm service demands. However, the management
of the Company believes substantially all of these costs will be recovered from
its customers and additional transition costs will be immaterial to the results
of operations of the Missouri Business. Moreover, the Missouri Business is
participating in pipeline restructuring negotiations and management of the
Company does not anticipate any material difficulty in it continuing the service
provided in the past.
TIGHT SANDS. In December 1991, the MPSC approved an agreement authorizing
the Missouri Business to refund to its customers approximately $20.1 million of
certain anti-trust litigation settlement proceeds to be collected on behalf of
the customers of the Missouri Business. To secure the refund of settlement
proceeds, the MPSC authorized the establishment of an independently administered
trust to collect and maintain cash receipts received under the Tight Sands
settlement agreements, and provide for the refunds made. The trust has a term of
10 years.
5. INTEREST EXPENSE
Allocated interest expense is presented in the accompanying statement of
operations net of AFUDC as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1990 1991 1992
--------- --------- ---------
<S> <C> <C> <C>
Interest expense allocated............................................... $ 8,432 $ 9,314 $ 8,864
Less AFUDC............................................................... (90) (20) (33)
--------- --------- ---------
$ 8,342 $ 9,294 $ 8,831
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-7
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. TAXES ON INCOME
The components of the tax provision (benefit) on income were as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1992
--------------------------------------------
CURRENT DEFERRED INVESTMENT
TAX TAX TAX CREDIT TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Federal................................................... $ (5,762) $ 6,669 $ (296) $ 611
State..................................................... (589) 683 -- 94
--------- --------- ----------- ---------
$ (6,351) $ 7,352 $ (296) $ 705
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
1991
--------------------------------------------
CURRENT DEFERRED INVESTMENT
TAX TAX TAX CREDIT TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Federal................................................... $ 2,529 $ (1,815) $ (299) $ 415
State..................................................... 345 (237) -- 108
--------- --------- ----------- ---------
$ 2,874 $ (2,052) $ (299) $ 523
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
1990
--------------------------------------------
CURRENT DEFERRED INVESTMENT
TAX TAX TAX CREDIT TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Federal................................................... $ 7,336 $ (8,478) $ (307) $ (1,449)
State..................................................... 989 (1,133) -- (144)
--------- --------- ----------- ---------
$ 8,325 $ (9,611) $ (307) $ (1,593)
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
The sources of timing differences and the related deferred tax effects were
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1990 1991 1992
--------- --------- ---------
<S> <C> <C> <C>
Difference between book and tax depreciation........................... $ 989 $ 2,910 $ 2,381
Insurance reserves..................................................... (210) 585 601
Pension plan cost accruals and other employee related.................. (679) (364) 388
Deferred charges....................................................... (2,060) (2,395) 1,635
Purchased gas costs.................................................... (2,786) (915) 2,344
Unbilled revenues...................................................... (5,166) (3,456) --
Software development costs............................................. 251 1,574 3
Customer deposits...................................................... 50 9 --
--------- --------- ---------
Total................................................................ $ (9,611) $ (2,052) $ 7,352
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-8
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. TAXES ON INCOME (CONTINUED)
Total income tax expense differed from the amount computed by applying the
applicable federal income tax rate of 34% to earnings before taxes on income.
The reasons for the differences for each of the years were as follows:
<TABLE>
<CAPTION>
YEAR END DECEMBER 31,
-------------------------------
1990 1991 1992
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).............................. $ (865) $ 623 $ 755
Flow-through of depreciation expense................................... 174 146 540
Reduction in excess deferred income taxes.............................. (272) (3) (55)
State income taxes..................................................... (95) 72 62
Amortization of investment tax credit.................................. (307) (299) (296)
Permanent differences.................................................. 62 27 21
Adjustment of prior year provision..................................... (290) (43) (322)
--------- --------- ---------
Actual tax expense (benefit)........................................... $ (1,593) $ 523 $ 705
--------- --------- ---------
--------- --------- ---------
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment at December 31, 1991 and
1992 were as follows:
<TABLE>
<CAPTION>
1991 1992
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Property, plant and equipment:
Distribution facilities................................................... $ 335,821 $ 364,812
Intangible................................................................ 5,579 4,865
General................................................................... 17,922 19,221
Construction work in progress............................................. 2,527 4,478
------------ ------------
361,849 393,376
Less accumulated depreciation and amortization.............................. (108,225) (117,925)
------------ ------------
Total property, plant and equipment....................................... $ 253,624 $ 275,451
------------ ------------
------------ ------------
</TABLE>
8. EMPLOYEE BENEFIT PLANS
PENSION. The employees and retirees of the Missouri Business participate in
Western Resources' pension plans (the "Plans"), which are non-contributory
defined benefit plans covering substantially all of Western Resources' active
and retired employees. The Plans provide benefits based on a participant's years
of service and compensation during the last ten years before retirement. Western
Resources' policy is to fund pension costs accrued subject to limitations set by
the Employee Retirement Income Security Act of 1974 and the Internal Revenue
Code.
F-9
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table provides information on the components of pension cost,
funded status and actuarial assumptions for Western Resources' Plans:
<TABLE>
<CAPTION>
YEAR END DECEMBER 31,
---------------------------------------
1990 1991 1992
------------ ----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Pension Cost:
Service cost................................................. $ 6,345 $ 6,589 $ 9,847
Interest cost on projected benefit obligations............... 18,729 20,985 29,457
Return on plan assets........................................ (3,819) (59,161) (38,967)
Deferred gain (loss) on plan assets.......................... (15,721) 38,015 7,705
Net amortization............................................. 242 (131) (948)
------------ ----------- ------------
Net pension cost........................................... $ 5,776 $ 6,297 $ 7,094
------------ ----------- ------------
------------ ----------- ------------
Funded Status:
Actuarial present value of benefit obligations:
Vested....................................................... $ 183,262 $ 200,435 $ 316,100
Non-vested................................................... 12,790 13,935 19,331
------------ ----------- ------------
Total...................................................... $ 196,052 $ 214,370 $ 335,431
------------ ----------- ------------
------------ ----------- ------------
Plan assets (principally debt and equity securities) at fair
value....................................................... $ 274,622 $ 324,780 $ 452,372
Projected benefit obligation................................. 262,831 282,062 424,232
------------ ----------- ------------
Plan assets in excess of projected benefit obligation........ 11,791 42,718 28,140
Unrecognized transition asset................................ (1,370) (1,253) (3,092)
Unrecognized prior service costs............................. 29,321 27,216 55,886
Unrecognized net gain........................................ (40,198) (69,494) (106,486)
------------ ----------- ------------
Accrued pension costs........................................ $ (456) $ (813) $ (25,552)
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Actuarial Assumptions:
Discount rate........................................... 8.0% 8.0% 8.0%-8.5%
Annual salary increase rate............................. 6.0% 6.0% 6.0%
Long-term rate of return................................ 8.0% 8.0% 8.0%-8.5%
</TABLE>
The employees and retirees of the Missouri Business comprise approximately
30% of total active employees and retirees of Western Resources at December 31,
1992. As provided in the Agreement, Western Resources will transfer to Southern
Union the assets and liabilities of the Western Resources' Plans applicable to
the employees and retirees of the Missouri Business, which based on a projected
benefit obligation actuarial calculation at December 31, 1992 approximates $100
million.
POST-RETIREMENT. Western Resources provides health care and life insurance
benefits to its retired employees. The cost of retiree health care and life
insurance benefits is recognized as expense when claims and premiums for life
insurance policies are paid. The cost of providing health care and life
insurance benefits for active employees and associated retirees of the Missouri
Business was approximately $6.1 million in 1992, $5.9 million in 1991 and $5.3
million in 1990. Western Resources' cost of providing benefits for 2,928, 1,911,
and 1,886 retirees is not separable from the cost of providing benefits for the
5,138, 4,474, and 4,614 active employees in 1992, 1991 and 1990 respectively.
In December 1990 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard ("SFAS") No. 106, "EMPLOYERS'
ACCOUNTING FOR POST-RETIREMENT BENEFITS
F-10
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
OTHER THAN PENSIONS." Western Resources implemented SFAS No. 106 effective
January 1, 1993. SFAS 106 requires the accrual of post-retirement benefits other
than pensions, primarily medical benefits costs, during the years an employee
provides services.
The Missouri Business annual expense under SFAS 106, commencing after
adoption is approximately $5.9 million and its total unfunded accumulated
post-retirement benefit obligation is approximately $41 million which obligation
will be amortized over 20 years. These costs historically have been allowed in
rates when paid. To mitigate the impact of SFAS 106 expenses, Western Resources
has implemented programs to reduce health care costs and has received approval
from the MPSC to permit initial deferral of SFAS 106 expense and include it in
the computation of cost of service net of an income stream generated from
Western Resources' corporate-owned life insurance (COLI). If the Commission were
to recognize post-retirement benefit costs under a different method, earnings
could be impacted negatively. The cash surrender value of Western Resources'
COLI is not included in the assets acquired pursuant to the Agreement.
POST-EMPLOYMENT. The FASB has issued SFAS 112, "EMPLOYERS' ACCOUNTING FOR
POST-EMPLOYMENT BENEFITS." The new statement requires the recognition of the
liability to provide post-employment benefits when the liability has been
incurred. Adoption of SFAS 112 is required no later than January 1, 1994.
Although the effect of adoption has not been determined, the Company does not
expect adoption to have a material effect on the Missouri Business operations.
EARLY RETIREMENT AND VOLUNTARY SEPARATION PLANS. In January 1992, Western
Resources initiated early retirement plans and voluntary separation programs.
The voluntary early retirement plans were offered to all vested participants in
Western Resources' pension plan who reached the age of 55 with 10 or more years
of service on or before May 1, 1992. Costs associated with the early retirement
plans and voluntary separation programs attributable to the Missouri Business
totaled approximately $2.6 million, and are reflected in "operating, maintenance
and general" in the accompanying statement of operations for the year ended
December 31, 1992.
SAVINGS. Western Resources also maintains savings plans in which
substantially all of its employees participate. Western Resources matches
employees' contributions up to specified maximum limits. The funds of the plans
are deposited with a trustee and invested at each employee's option in one or
more investment funds, including holding stock in a Western Resources, Inc.
fund. Western Resources's contributions on behalf of employees of the Missouri
Business were $0.9 million in 1992, $0.9 million in 1991 and $0.8 million in
1990.
9. COMMITMENTS AND CONTINGENCIES
GAS PURCHASE COMMITMENTS. The Missouri Business has commitments under gas
purchase contracts which contain certain minimum purchase provisions for the
firm supply of quantities of natural gas. In general, these gas purchase
contracts provide for the make-up of volumes which are not purchased by the
Missouri Business and take requirements that are substantially lower than the
total end use demand serviced by the Missouri Business. In addition, the
Missouri Business has contractual access to substantial pipeline storage
capacity which significantly minimizes the risk that the Missouri Business would
be susceptible to take-or-pay provisions contained in certain of its contracts.
LEASE COMMITMENTS. At December 31, 1992, the Missouri Business had
operating leases covering various property and equipment. Rent expense under
those leases was $1.2 million in 1992, $1.3 million in 1991 and $0.8 million in
1990. Future estimated rental commitments are $0.3 million in 1993, $0.3 million
in 1994, $0.2 million in 1995, $0.1 million in 1996 and $0.1 million in 1997. In
F-11
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
addition, the Missouri Business entered into a building lease commencing July
1993 which includes a rent holiday through November 1995. Lease commitments are
$0.03 million in 1995, $0.4 million in 1996 and $0.4 million in 1997.
ENVIRONMENTAL. The Missouri Business owns or is otherwise associated with a
number of sites where manufactured gas plants were previously operated. These
plants were commonly used to supply gas service in the late 19th and early 20th
centuries, in certain cases by corporate predecessors to Western Resources.
By-products and residues from manufactured gas could be located at these sites
and at some time in the future may require remediation by the U.S. Environmental
Protection Agency ("EPA") or delegated state regulatory authority. By virtue of
notice under the Purchase and Sale Agreement and its preliminary, non-invasive
review, the Company is aware of eleven such sites in the service territory of
the Missouri Business. Based on information reviewed thus far, it appears that
neither Western Resources nor any predecessor in interest ever owned or operated
at least three of those sites. Western Resources has informed the Company that
it was notified in 1991 by the EPA that the EPA was evaluating one of the sites
(in St. Joseph, Missouri) for any potential threat to human health and the
environment. Western Resources has also advised the Company that to date, the
EPA has not notified it that any further action may be required. Evaluation of
the remainder of the sites by appropriate federal and state regulatory
authorities may occur in the future. At the present time and based upon the
preliminary information available to it, the Company believes that the costs of
any remediation efforts that may be required for these sites for which it may
ultimately have responsibility will not exceed the aggregate amount subject to
substantial sharing by Western Resources pursuant to the Environmental Liability
Agreement to be entered into at the closing of the Missouri Acquisition. See
"The Missouri Acquisition -- Environmental." In addition, the Company is aware
of the existence of other significant potentially responsible parties from whom
contribution for remediation would be sought, and would expect to make claims
upon its insurers (Western Resources has already done so on its own behalf) and
institute appropriate requests for rate relief. The Company is not presently
aware of any other environmental matters in the Missouri Business which could
reasonably be expected to have a material impact on its operations or financial
position.
LEGAL PROCEEDINGS. The Missouri Business is involved in various legal and
environmental proceedings that management of the Company considers to be normal
kinds of actions to which an enterprise of its size and nature is subject.
Management of the Company believes that adequate provision has been made within
the financial statements for these matters and accordingly believes their
ultimate dispositions will not have a material adverse effect upon the business,
operations or financial position of the Missouri Business.
F-12
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993
------------------
(THOUSANDS OF
DOLLARS)
<S> <C>
Property, plant and equipment................................................................. $ 416,703
Less accumulated depreciation and amortization.............................................. (125,460)
----------
291,243
----------
Current assets:
Cash........................................................................................ 8
Accounts receivable, billed and unbilled.................................................... 10,816
Materials and supplies...................................................................... 4,338
Other current assets........................................................................ 2,401
----------
17,563
----------
Deferred charges and other.................................................................... 10,398
----------
Total assets................................................................................ $ 319,204
----------
----------
EQUITY AND LIABILITIES
Equity in net assets acquired................................................................. $ 288,181
----------
Current liabilities -- accounts payable and accrued liabilities............................... 25,174
Deferred credits and other.................................................................... 5,849
----------
Total liabilities........................................................................... 31,023
Contingencies................................................................................. --
----------
Total equity and liabilities................................................................ $ 319,204
----------
----------
</TABLE>
See accompanying notes to interim financial statements.
F-13
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1992 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Revenues................................................................................ $ 201,007 $ 233,291
----------- -----------
Cost and expenses:
Gas purchase costs.................................................................... 121,130 141,241
Operating, maintenance and general.................................................... 50,315 53,117
Taxes, other than on income........................................................... 18,361 21,470
Depreciation and amortization......................................................... 9,716 9,347
----------- -----------
Total costs and expenses.............................................................. 199,522 225,175
----------- -----------
Net operating revenue................................................................... 1,485 8,116
----------- -----------
Other income (expenses):
Interest expense...................................................................... (6,482) (6,799)
Other, net............................................................................ 718 2,268
----------- -----------
Total other income (expenses), net.................................................... (5,764) (4,531)
----------- -----------
Earnings (loss) before income taxes..................................................... (4,279) 3,585
Income tax provision (benefit).......................................................... (1,417) 997
----------- -----------
Net earnings (loss)..................................................................... $ (2,862) $ 2,588
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to interim financial statements.
F-14
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management of the Company, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial position
and operations for such periods in conformity with generally accepted accounting
principles. The operations for any interim period are not necessarily indicative
of operations for the full year. These financial statements should be read in
conjunction with the audited financial statements and notes thereto of the
Missouri Business of Gas Service ("Missouri Business") contained elsewhere in
this Registration Statement.
ACCOUNTING PRONOUNCEMENTS
Western Resources adopted the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 106, EMPLOYER'S ACCOUNTING FOR POST-RETIREMENT
BENEFITS OTHER THAN PENSIONS, as of January 1, 1993. This statement requires the
accrual of post-retirement benefits other than pensions, primarily medical
benefit costs, during the years an employee provides service.
Based on actuarial projections and an adoption of the transition method
allowing a 20-year amortization of the accumulated benefit obligation, the
annual expense attributable to the employees of the Missouri Business under SFAS
No. 106 will be approximately $5.9 million in 1993 (as compared to approximately
$2.9 million on a cash basis) of which $5.1 million relates to medical benefits
and $0.8 million relates to life insurance benefits. Annual expense in 1993
under SFAS 106 includes $0.5 million service cost, $3.4 million interest cost,
and $2.0 million amortization of the transition obligation. The accumulated
benefit obligation calculated at January 1, 1993 is approximately $41 million of
which $34.9 million relates to medical benefits and $6.1 million relates to life
insurance benefits. The actuarial computations for post-retirement benefits
assumed a discount rate of 8.5%. Health care costs were assumed to be increasing
at an initial rate of 14%, gradually reducing by 1% per year to a long term rate
of 6% for purposes of calculating the post-retirement benefits. If the health
care costs increased at a rate of 1%, the combined effect on the 1993 service
and interest cost components would be a 2% increase and the accumulated benefit
obligation would increase 2%. These costs have historically been allowed in
rates when paid.
To mitigate the impact of SFAS No. 106 expense, Western Resources has
implemented programs to reduce health care costs. In addition, Western Resources
filed an application with the Missouri Public Service Commission ("MPSC") for an
order permitting the initial deferral of SFAS No. 106 expense. To mitigate the
impact SFAS No. 106 expense will have on rate increases, Western Resources
proposed inclusion in the future computation of cost of service the actual SFAS
No. 106 expense and an income stream generated from Western Resources'
corporate-owned life insurance (COLI). To the extent SFAS No. 106 expense
exceeds income from the COLI program, this excess will be deferred (as allowed
by the FASB Emerging Issues Task Force Issue No. 92-12) and offset by income
generated through the deferral period by the COLI program. The MPSC has issued
an order approving the Western Resources application. Should the income stream
generated by the COLI program not be sufficient to offset the SFAS No. 106
expense through the deferral period, the MPSC order allows recovery of such
deficit through the rate making process. Included in "Deferred charges and
other" in the balance sheet at September 30, 1993 is a deferral of $2.2 million
representing the SFAS No. 106 costs deferred pursuant to the above noted MPSC
order. The cash surrender value of Western Resources' COLI is not included in
the assets acquired pursuant to the Agreement for Purchase of Assets between
Western Resources and Southern Union Company (the "Agreement").
F-15
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONTINGENCIES
ENVIRONMENTAL. The Missouri Business owns or is otherwise associated with a
number of sites where manufactured gas plants were previously operated. These
plants were commonly used to supply gas service in the late 19th and early 20th
centuries, in certain cases by corporate predecessors to Western Resources.
By-products and residues from manufactured gas could be located at these sites
and at some time in the future may require remediation by the U.S. Environmental
Protection Agency ("EPA") or delegated state regulatory authority. By virtue of
notice under the Purchase and Sale Agreement and its preliminary, non-invasive
review, the Company is aware of eleven such sites in the service territory of
the Missouri Business. Based on information reviewed thus far, it appears that
neither Western Resources nor any predecessor in interest ever owned or operated
at least three of those sites. Western Resources has informed the Company that
it was notified in 1991 by the EPA that the EPA was evaluating one of the sites
(in St. Joseph, Missouri) for any potential threat to human health and the
environment. Western Resources has also advised the Company that to date, the
EPA has not notified it that any further action may be required. Evaluation of
the remainder of the sites by appropriate federal and state regulatory
authorities may occur in the future. At the present time and based upon the
preliminary information available to it, the Company believes that the costs of
any remediation efforts that may be required for these sites for which it may
ultimately have responsibility will not exceed the aggregate amount subject to
substantial sharing by Western Resources pursuant to the Environmental Liability
Agreement to be entered into at the closing of the Missouri Acquisition. See
"The Missouri Acquisition -- Environmental." In addition, the Company is aware
of the existence of other significant potentially responsible parties from whom
contribution for remediation would be sought, and would expect to make claims
upon its insurers (Western Resources has already done so on its own behalf) and
institute appropriate requests for rate relief. The Company is not presently
aware of any other environmental matters in the Missouri Business which could
reasonably be expected to have a material impact on its operations or financial
position.
LEGAL PROCEEDINGS. The Missouri Business is involved in various legal and
environmental proceedings that the management of the Company considers to be
normal kinds of actions to which an enterprise of its size and nature is
subject. Management of the Company believes that adequate provision has been
made within the financial statements for these matters and accordingly believes
their ultimate dispositions will not have a material adverse effect upon the
business, operations or financial position of the Missouri Business.
OTHER MATTERS
On July 9, 1993, Western Resources reached a definitive agreement to sell
the Missouri Business to Southern Union Company for approximately $360 million,
to be adjusted at the time of closing.
On August 10, 1993, the United States Congress passed, and the President
signed into law, the Omnibus Budget Reconciliation Act of 1993 (the "Act").
Among other provisions in the Act, effective January 1, 1993, the corporate
federal income tax rate was increased to 35% on corporate taxable income in
excess of $10 million.
On October 5, 1993, the MPSC issued a rate order increasing the Missouri
Business natural gas rates by approximately $9.8 million annually, effective
beginning October 15, 1993.
F-16
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information
consists of the Unaudited Pro Forma Combined Condensed Statements of Operations
for the nine months ended September 30, 1993, the twelve months ended September
30, 1993 and the year ended December 31, 1992 (the "Pro Forma Statements of
Operations") and the Unaudited Pro Forma Combined Condensed Balance Sheet as of
September 30, 1993 (the "Pro Forma Balance Sheet," and together with the Pro
Forma Statements of Operations, the "Pro Forma Financial Statements"). The Pro
Forma Statements of Operations have been prepared by combining the consolidated
statements of operations of the Company with the statements of operations of the
Missouri Business for the periods indicated, adjusted to give effect to (i) the
issuance of 2,000,000 shares of Common Stock in the Rights Offering, (ii) the
completion of the Missouri Acquisition, including the sale of Senior Debt
Securities to fund such Acquisition and (iii) the sale of Senior Debt Securities
to refinance certain short-term debt, current maturities of long-term debt and
certain long-term debt outstanding at September 30, 1993, as if such
transactions had been consummated as of the beginning of each such period. The
Pro Forma Balance Sheet has been prepared by combining the consolidated balance
sheet of the Company as of September 30, 1993 with the balance sheet of the
Missouri Business as of September 30, 1993, adjusted to give effect to (i) the
issuance of 2,000,000 shares of Common Stock in the Rights Offering, (ii) the
completion of the Missouri Acquisition, including the sale of Senior Debt
Securities to fund such Acquisition and (iii) the sale of Senior Debt Securities
to refinance certain short-term debt, current maturities of long-term debt and
certain long-term debt outstanding as of September 30, 1993, as if such
transactions had been consummated on September 30, 1993.
The Pro Forma Financial Statements are based on and should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto, included in the 1992 Form 10-K and the Third Quarter Form 10-Q that are
incorporated by reference into this Prospectus, and the Historical Financial
Statements of the Missouri Business that are included elsewhere in this
Prospectus.
The Pro Forma Statements of Operations are not necessarily indicative of the
combined effects on the Company's results of operations that would have resulted
if the Rights Offering and the Missouri Acquisition had actually occurred
earlier.
The pro forma adjustments are based on preliminary assumptions and estimates
made by the Company's management regarding anticipated efficiencies resulting
from the combined operations, reductions in costs planned by management,
purchase accounting adjustments and the fair market value of certain assets
acquired in the Missouri Business. The Pro Forma Statements of Operations do not
reflect the financial impact, if any, of (i) the rate increases granted to
Southern Union Gas and the Missouri Business during 1993 not yet earned and (ii)
the pro forma effect of the results of operations of the Rio Grande Acquisition.
Gas service rates, established by regulatory authorities, are based upon the
utility's costs including operating, administrative and finance costs and
include a return on equity. As a result, reductions in a utility's costs may
have a direct impact on the level of rates it is allowed to collect from its
customers in the future. See "Business -- Regulation." The actual allocation of
the consideration paid for the Missouri Business may differ from that reflected
in the Pro Forma Financial Statements after a more extensive review of the fair
market values of the assets acquired and liabilities assumed in the Missouri
Acquisition has been completed. Amounts allocated will be based upon the
estimated fair values at the time of the Missouri Acquisition, which could vary
significantly from the amounts as of September 30, 1993. The Missouri
Acquisition will be accounted for using the purchase method of accounting.
The following table sets forth a summary of the sources and uses of funds
resulting from (i) the issuance of 2,000,000 shares of Common Stock in the
Rights Offering, (ii) the completion of the Missouri Acquisition, including the
sale of Senior Debt Securities to fund such Acquisition and (iii) the sale of
Senior Debt Securities to refinance certain short-term debt, current maturities
of long-term debt and certain long-term debt outstanding as of September 30,
1993, as if such transactions had been consummated on September 30, 1993 (in
thousands):
<TABLE>
<CAPTION>
SOURCES OF FUNDS
- ------------------------------------------------------------------------------------------------------
<S> <C>
Gross Proceeds from Rights Offering........................................................ $ 50,000
Sale of Senior Debt Securities............................................................. 475,000
---------
$ 525,000
---------
---------
<CAPTION>
USES OF FUNDS
- ------------------------------------------------------------------------------------------------------
<S> <C>
Acquisition of Missouri Business........................................................... $ 342,402
Refinancing of short-term borrowings used to fund the Rio Grande Acquisition............... 31,050
Refinancing of short-term debt............................................................. 28,256
Refinancing of current maturities of long-term debt........................................ 20,000
Refinancing of long-term debt.............................................................. 85,000
Stock and debt issuance costs and premiums on early extinguishment of debt (a)............. 18,292
---------
$ 525,000
---------
---------
<FN>
- ------------------------------
(a) Includes a $3.3 million premium on the $50.0 million of 10.5% debentures due
2017 and a $10.4 million premium on the $10.0 million of 9.45% notes due
2004 and $25.0 million of 10% notes due 2012 for the early extinguishment of
this debt.
</TABLE>
PF-1
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA
SOUTHERN MISSOURI ----------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
----------- ------------ --------------- -----------
(THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues..................................... $ 135,868 $ 233,291 $ 369,159
Gas purchase costs..................................... 67,866 141,241 209,107
----------- ------------ -----------
Operating margin..................................... 68,002 92,050 160,052
----------- ------------ -----------
Operating expenses:
Operating, maintenance and general................... 35,289 53,117 $ (6,880)(a) 81,526
Taxes, other than on income.......................... 9,806 21,470 31,276
Amortization of acquisition adjustment............... 2,292 1,111(b) 3,403
Depreciation and amortization........................ 7,968 9,347 460(c) 17,775
----------- ------------ --------------- -----------
Total operating expenses........................... 55,355 83,934 (5,309) 133,980
----------- ------------ --------------- -----------
Net operating revenue.............................. 12,647 8,116 5,309 26,072
----------- ------------ --------------- -----------
Other income (expenses):
Interest............................................. (8,691) (6,799) 15,371(d) (24,648)
(24,529)(e)
Other, net........................................... 861 2,268 (436)(f) 2,693
----------- ------------ --------------- -----------
Total other income (expenses), net................. (7,830) (4,531) (9,594) (21,955)
----------- ------------ --------------- -----------
Earnings before income taxes (benefit)............. 4,817 3,585 (4,285) 4,117
Federal and state income taxes (benefit)............... 1,825 997 (1,733)(g) 1,089
----------- ------------ --------------- -----------
Earnings from continuing operations before preferred
dividends............................................. 2,992 2,588 (2,552) 3,028
Preferred dividends.................................... 843 (843)(h)
----------- ------------ --------------- -----------
Earnings from continuing operations available for
common stock.......................................... $ 2,149 $ 2,588 $ (1,709) $ 3,028
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
Earnings from continuing operations per common share... $ .41 $ .42
----------- -----------
----------- -----------
Weighted average shares outstanding.................... 5,243,934 2,000,000(i) 7,243,934
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
PF-2
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA
SOUTHERN MISSOURI ----------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
----------- ------------ --------------- -----------
(THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues..................................... $ 201,408 $ 330,240 $ 531,648
Gas purchase costs..................................... 107,943 203,112 311,055
----------- ------------ -----------
Operating margin..................................... 93,465 127,128 220,593
----------- ------------ -----------
Operating expenses:
Operating, maintenance and general................... 47,206 69,710 $ (9,173)(a) 107,743
Taxes, other than on income.......................... 13,231 28,147 41,378
Amortization of acquisition adjustment............... 3,064 1,481(b) 4,545
Depreciation and amortization........................ 10,169 12,803 614(c) 23,586
----------- ------------ --------------- -----------
Total operating expenses........................... 73,670 110,660 (7,078) 177,252
----------- ------------ --------------- -----------
Net operating revenue.............................. 19,795 16,468 7,078 43,341
----------- ------------ --------------- -----------
Other income (expenses):
Interest............................................. (11,633) (9,148) 20,400(d) (33,086)
(32,705)(e)
Other, net........................................... 3,105 2,764 (581)(f) 5,288
----------- ------------ --------------- -----------
Total other income (expenses), net................. (8,528) (6,384) (12,886) (27,798)
----------- ------------ --------------- -----------
Earnings before income taxes (benefit)............. 11,267 10,084 (5,808) 15,543
Federal and state income taxes (benefit)............... 4,058 3,119 (2,421)(g) 4,756
----------- ------------ --------------- -----------
Earnings from continuing operations before preferred
dividends............................................. 7,209 6,965 (3,387) 10,787
Preferred dividends.................................... 1,468 (1,468)(h)
----------- ------------ --------------- -----------
Earnings from continuing operations available for
common stock.......................................... $ 5,741 $ 6,965 $ (1,919) $ 10,787
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
Earnings from continuing operations per common share... $ 1.10 $ 1.49
----------- -----------
----------- -----------
Weighted average shares outstanding.................... 5,242,340 2,000,000(i) 7,242,340
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
PF-3
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1992
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA
SOUTHERN MISSOURI ----------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
----------- ------------ --------------- -----------
(THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues..................................... $ 192,445 $ 297,956 $ 490,401
Gas purchase costs..................................... 102,918 183,001 285,919
----------- ------------ -----------
Operating margin..................................... 89,527 114,955 204,482
----------- ------------ -----------
Operating expenses:
Operating, maintenance and general................... 46,313 66,908 $ (9,173)(a) 104,048
Taxes, other than on income.......................... 13,115 25,038 38,153
Amortization of acquisition adjustment............... 2,958 1,481(b) 4,439
Depreciation and amortization........................ 9,779 13,172 614(c) 23,565
----------- ------------ --------------- -----------
Total operating expenses........................... 72,165 105,118 (7,078) 170,205
----------- ------------ --------------- -----------
Net operating revenue.............................. 17,362 9,837 7,078 34,277
----------- ------------ --------------- -----------
Other income (expenses):
Interest............................................. (12,459) (8,831) 19,551(d) (34,444)
(32,705)(e)
Other, net........................................... 5,928 1,214 (581)(f) 6,561
----------- ------------ --------------- -----------
Total other income (expenses), net................. (6,531) (7,617) (13,735) (27,883)
----------- ------------ --------------- -----------
Earnings before income taxes (benefit)............. 10,831 2,220 (6,657) 6,394
Federal and state income taxes (benefit)............... 4,440 705 (2,370)(g) 2,775
----------- ------------ --------------- -----------
Earnings from continuing operations before preferred
dividends............................................. 6,391 1,515 (4,287) 3,619
Preferred dividends.................................... 2,500 (2,500)(h)
----------- ------------ --------------- -----------
Earnings from continuing operations available for
common stock.......................................... $ 3,891 $ 1,515 $ (1,787) $ 3,619
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
Earnings from continuing operations per common share... $ .74 $ .50
----------- -----------
----------- -----------
Weighted average shares outstanding.................... 5,259,314 2,000,000(i) 7,259,314
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
PF-4
<PAGE>
SOUTHERN UNION COMPANY
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
The following are adjustments to the Pro Forma Statements of Operations to
reflect (i) the issuance of 2,000,000 shares of Common Stock in the Rights
Offering, (ii) the completion of the Missouri Acquisition, including the sale of
Senior Debt Securities to fund such Acquisition and (iii) the sale of Senior
Debt Securities to refinance certain short-term debt, current maturities of
long-term debt and certain long-term debt outstanding at September 30, 1993.
(a) Reflects the adjustment to operations, maintenance and general for certain
anticipated cost savings resulting from the consolidation of operations and
corporate functions, the integration of corporate management and the
elimination of certain other duplicate administrative functions.
(b) Reflects amortization of the estimated excess purchase price over the
historical book carrying value of the assets acquired of the Missouri
Business on a straight line basis over a 30 year period.
(c) Reflects depreciation expense related to the purchase of additional
equipment over their estimated useful lives. See note (a) of Notes to Pro
Forma Balance Sheet.
(d) Reflects the removal of historical interest expense of the Missouri
Business, the elimination of interest expense associated with the borrowings
on the revolving credit facility used for the purchase and redemption of
Southern Union preferred stock, the elimination of historical interest
expense associated with the refinancing of $20.0 million of 10 1/8% notes
due 1994 and the elimination of historical interest expense associated with
the refinancing of $50.0 million of 10.5% debentures due 2017, $10.0 million
of 9.45% notes due 2004 and $25.0 million of 10% notes due 2012.
(e) Reflects interest expense on $430.3 million of the $475.0 million of Senior
Debt Securities at an annual interest rate of 7.60%. The difference of $44.7
million of Senior Debt Securities to be sold and used to refinance certain
short-term borrowings, including those used to fund the Rio Grande
Acquisition (which transaction closed on September 30, 1993), and purchase
estimated net capital expenditures to be incurred by the Missouri Business
subsequent to September 30, 1993 and prior to closing, and related debt
issuance costs were assumed to have occurred on September 30, 1993. As a
result, interest expense associated with these borrowings is not reflected
in the Pro Forma Statements of Operations.
(f) Reflects the amortization of debt issuance costs of approximately $4.2
million associated with the sale of $475.0 million of Senior Debt
Securities, a $3.3 million premium on the early extinguishment of $50.0
million of 10.5% debentures due 2017 and a $10.4 million premium on the
early extinguishment of $10.0 million of 9.45% notes due 2004 and $25.0
million of 10% notes due 2012 on a straight line basis over the life of the
new debt. See note (e) above.
PF-5
<PAGE>
SOUTHERN UNION COMPANY
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS (CONTINUED)
(g) Reflects the income tax provision (benefit) associated with the pro forma
adjustments calculated using the applicable statutory state income tax rates
and the statutory federal income tax rate of 35% for the nine months ended
September 30, 1993, 34.75% for the twelve months ended September 30, 1993
and 34% for the year ended December 31, 1992. The 34.75% rate for the twelve
months ended September 30, 1993 is a weighted average of two statutory rates
in effect during the twelve month period.
Income tax expense, on a pro forma combined basis, differs from the amount
computed when applying the applicable statutory federal income tax rates to
earnings before income taxes. The reasons for the differences are as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
YEAR ENDED NINE MONTHS ENDED ENDED SEPTEMBER
DECEMBER 31, 1992 SEPTEMBER 30, 1993 30, 1993
----------------- ------------------ ------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Computed "expected" tax expense.............. $ 2,174 $ 1,441 $ 5,401
Items for which there are no tax
consequences, principally amortization of
additional purchase cost assigned to utility
plant....................................... 1,025 576 809
Amortization of excess deferred income
taxes....................................... (55) (233) (300)
Flow through of depreciation expense......... 540 (37) 150
Amortization of investment tax credit........ (457) (249) (332)
Adjustment of tax reserve.................... (409) (409)
Adjustment of prior year provision........... (322) (322)
Tax loss on sale of real estate in excess of
book loss................................... (322) (322)
Other........................................ 192 81
------- ------- -------
$ 2,775 $ 1,089 $ 4,756
------- ------- -------
------- ------- -------
</TABLE>
(h) Reflects the elimination of preferred stock dividends resulting from the
purchase and redemption of all outstanding Southern Union preferred stock in
March and June 1993.
(i) Reflects the issuance of 2,000,000 shares of Common Stock in the Rights
Offering.
PF-6
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1993
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA
SOUTHERN MISSOURI ------------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
------------ ------------ ---------------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Property, plant and equipment......................... $ 372,757 $ 416,703 $ 11,950(a) $ 811,410
10,000(b)
Less accumulated depreciation and amortization........ (141,546) (125,460) (267,006)
------------ ------------ ---------------- ------------
231,211 291,243 21,950 544,404
Additional purchase cost assigned to utility plant,
net.................................................. 92,645 44,437(c) 137,082
------------ ------------ ---------------- ------------
Net property, plant and equipment................... 323,856 291,243 66,387 681,486
Current assets........................................ 40,440 17,563 58,003
Deferred charges and other assets..................... 34,751 10,398 17,792(d) 104,581
41,640(e)
------------ ------------ ---------------- ------------
Total............................................. $ 399,047 $ 319,204 $ 125,819 $ 844,070
------------ ------------ ---------------- ------------
------------ ------------ ---------------- ------------
<CAPTION>
STOCKHOLDERS' EQUITY AND LIABILITIES
<S> <C> <C> <C> <C>
Common stockholders' equity:
Common stock........................................ $ 5,304 $ 2,000(f) $ 7,304
Premium on capital stock............................ 144,925 47,500(f) 192,425
Retained earnings................................... 492 492
Less treasury stock, at cost........................ (794) (794)
Equity in net assets acquired....................... $ 288,181 (288,181)(g)
------------ ------------ ---------------- ------------
Total common stockholders' equity................... 149,927 288,181 (238,681) 199,427
Long-term debt........................................ 89,122 475,000(h) 479,122
(50,000)(h)
(25,000)(h)
(10,000)(h)
Current liabilities and current maturities of
long-term debt....................................... 128,399 25,174 15,166(i) 89,433
(28,256)(j)
(31,050)(j)
(20,000)(k)
Deferred credits and other liabilities................ 10,384 5,849 38,640(l) 54,873
Accumulated deferred income taxes..................... 21,215 21,215
Commitments and contingencies......................... -- -- --
------------ ------------ ---------------- ------------
Total............................................. $ 399,047 $ 319,204 $ 125,819 $ 844,070
------------ ------------ ---------------- ------------
------------ ------------ ---------------- ------------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed balance sheet.
PF-7
<PAGE>
SOUTHERN UNION COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The following are adjustments to the Pro Forma Balance Sheet as of September
30, 1993 to reflect (i) the issuance of 2,000,000 shares of Common Stock in the
Rights Offering, (ii) the completion of the Missouri Acquisition, including the
sale of Senior Debt Securities to fund such Acquisition, and (iii) the sale of
Senior Debt Securities to refinance certain short-term debt, current maturities
of long-term debt and certain long-term debt outstanding as of September 30,
1993:
(a) Reflects the purchase accounting adjustments of $4.4 million to record
acquired assets at their estimated fair market value, and estimated
additional expenditures to purchase non-transferable leases on automobiles
of $4.3 million and data processing equipment and software of $3.3 million.
(b) Reflects the recording of the purchase of estimated net capital expenditures
to be incurred by the Missouri Business subsequent to September 30, 1993 and
prior to closing as per the Missouri Asset Purchase Agreement.
(c) Reflects the estimated excess of the purchase price over the historical book
carrying value of the assets acquired of the Missouri Business of $44.4
million.
(d) Reflects the capitalization of estimated debt issuance costs associated with
the sale of $475.0 million of Senior Debt Securities and premiums on the
early extinguishment of $85.0 million of long-term debt to be amortized on a
straight line basis over the life of the new debt. See note (h) below.
(e) Reflects the recording of (i) a regulatory asset of $38.6 million
representing the deferral of the actuarially calculated accumulated
post-retirement benefit obligation assumed in the purchase and (ii) a $3.0
million contribution to the Missouri Business' employees' qualified defined
benefit plans in excess of the minimum required contribution under the
Internal Revenue Code Section 412, as determined by the plans' actuary,
pursuant to the MPSC Stipulation. See note (l) below and the "Accounting
Pronouncements" note included in Notes to the Missouri Business' Interim
Financial Statements included elsewhere herein.
(f) Reflects Southern Union's receipt of $50.0 million in gross proceeds from
the completion of the Rights Offering, less approximately $0.5 million in
estimated stock issuance costs, assuming 2,000,000 shares of Common Stock
are issued in the Rights Offering at $25.00 per share.
(g) Reflects the elimination of the equity in the Missouri Business net assets
acquired.
(h) Reflects the sale of Senior Debt Securities totalling $475.0 million and the
refinancing of $50.0 million of 10.5% debentures due 2017, $10.0 million of
9.45% notes due 2004 and $25.0 million of 10% notes due 2012.
(i) Reflects the recording of certain liabilities of $15.2 million resulting
from the acquisition transactions including the purchase of non-transferable
leases on automobiles of $4.3 million, the purchase of data processing
equipment and software of $3.3 million, a $3.0 million contribution to the
Missouri Business' employees' qualified defined benefit plans (see note (e)
above), and the recording of severance accruals of approximately $2.4
million and other estimated liabilities and contingencies associated with
the acquisition of approximately $2.2 million.
(j) Reflects the utilization of a portion of the proceeds from the sale of
Senior Debt Securities to retire borrowings on the Company's revolving
credit facility, including borrowings of $31.1 million for the Rio Grande
Acquisition and borrowings used for the purchase and redemption of preferred
stock.
(k) Reflects the utilization of a portion of the proceeds from the sale of
Senior Debt Securities for the repayment of certain current maturities of
long-term debt.
(l) Reflects the recording of the actuarially calculated accumulated
post-retirement benefit obligation of $38.6 million. See note (e) above.
PF-8
