<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-K
<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
</TABLE>
COMMISSION FILE NO. 1-6407
------------------------
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 75-0571592
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 LAVACA STREET, EIGHTH FLOOR 78701
AUSTIN, TEXAS (Zip Code)
(Address of principal executive
offices)
</TABLE>
Registrant's telephone number, including area code: (512) 477-5981
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE IN WHICH
TITLE OF EACH CLASS REGISTERED
- ---------------------------------------------- ---------------------------------------
<S> <C>
Common Stock, par value $1 per share American Stock Exchange
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments by
this Form 10-K. Yes _X_
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 21, 1994, was approximately $150,238,000. The number of
shares of the registrant's Common Stock outstanding on March 21, 1994 was
10,900,586.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its annual meeting of
stockholders to be held on May 25, 1994 are incorporated by reference into Part
III hereof, to the extent indicated herein.
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<PAGE>
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Southern Union Company ("Southern Union" and, together with its
subsidiaries, the "Company") was incorporated under the laws of the State of
Delaware in 1932. The Company's principal line of business is the distribution
of natural gas as a public utility through Southern Union Gas Company ("Southern
Union Gas") and Missouri Gas Energy, each of which is a division of the Company.
Southern Union Gas serves approximately 483,000 residential, commercial,
industrial, agricultural and other customers in the States of Texas (including
the cities of Austin, Brownsville, El Paso, Galveston and Port Arthur) and
Oklahoma. Missouri Gas Energy, acquired on January 31, 1994, serves
approximately 472,000 customers in central and western Missouri (including the
cities of Kansas City, St. Joseph, Joplin and Monett). See "Missouri
Acquisition."
Subsidiaries of Southern Union have been established to support and expand
natural gas sales and to capitalize on the Company's gas energy expertise. These
subsidiaries market natural gas to end-users, sell natural gas as a vehicular
fuel, convert vehicles to operate on natural gas, operate intrastate and
interstate natural gas pipeline systems, and sell commercial gas air
conditioning and other gas-fired engine-driven applications. By providing
"one-stop shopping," the Company can serve its various customers' particular
energy needs, which encompass substantially all of the natural gas distribution
and sales businesses from natural gas sales to specialized energy consulting
services. A subsidiary also holds investments in real estate which are used
primarily in the Company's utility business. See "Company Operations."
The Company is a sales and market-driven energy company whose management is
committed to achieving profitable growth of its natural gas energy businesses in
an increasingly competitive business environment. Management's strategies for
achieving these objectives principally consist of: (i) promoting new sales
opportunities and markets for natural gas; (ii) enhancing financial and
operating performance; and (iii) expanding the Company through developing
existing systems and selectively acquiring new systems. Management developed and
continually evaluates these strategies and the Company's implementation of them
by applying their experience and expertise in analyzing the energy industry,
technological advances, market opportunities and general business trends. Each
of these strategies, as implemented throughout the Company's businesses,
reflects the Company's commitment to its core natural gas utility business.
Central to all of the Company's businesses and strategies is the sale and
transportation of natural gas.
The Company has a goal of selected growth and expansion, primarily in the
natural gas industry. To that extent, the Company intends to consider, when
appropriate, and if financially practicable to pursue, the acquisition of other
natural gas distribution or transmission businesses. The nature and location of
any such properties, the structure for any such acquisitions, and the method of
financing any such expansion or growth will be determined by management and the
Southern Union Board of Directors.
MISSOURI ACQUISITION
On July 9, 1993, Southern Union entered into an Agreement for the Purchase
of Assets (the "Missouri Asset Purchase Agreement") with Western Resources, Inc.
("Western Resources"), pursuant to which Southern Union purchased from Western
Resources (the "Missouri Acquisition") certain Missouri natural gas distribution
operations (the "Missouri Business"). The purchase was consummated on January
31, 1994. Southern Union paid Western Resources approximately $400,300,000 in
cash for the Missouri Business. The final determination of the purchase price
and all prorations and adjustments is expected to be finalized by May 30, 1994.
Southern Union operates the Missouri Business as Missouri Gas Energy, which
is headquartered in Kansas City, Missouri. As a result of the Missouri
Acquisition, the Company nearly doubled the number of customers served by its
natural gas distribution system and became one of the top 15 gas
1
<PAGE>
utilities in the United States, as measured by number of customers. In addition,
the Missouri Acquisition lessens the sensitivity of the Company's operations to
weather risk and local economic conditions by diversifying operations into a
different geographic area. The incurrence of additional debt and issuance of new
equity in connection with the Missouri Acquisition also significantly changed
the Company's capital structure. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") -- Investing Activities"
and "Subsequent Events" in the Notes to the Consolidated Financial Statements
for the year ended December 31, 1993.
The approval of the Missouri Acquisition by the Missouri Public Service
Commission ("MPSC") was subject to the terms of a stipulation and settlement
agreement (the "MPSC Stipulation") among Southern Union, Western Resources, the
MPSC staff and all intervenors in the MPSC proceeding. Among other things, the
MPSC Stipulation: (i) provides that the Company attain a total debt to total
capital ratio that does not exceed Standard and Poor's Corporation's Utility
Financial Benchmark ratio for the lowest investment grade investor-owned natural
gas distribution company (which, at January 31, 1994, would be approximately
58%) in order to implement any general rate increase with respect to the
Missouri Business; (ii) prohibits Southern Union from implementing a general
rate increase in Missouri before January 31, 1997 except in certain unusual
events; (iii) required Western Resources to contribute an additional $9,000,000
to the Missouri Business' employees' and retirees' qualified defined benefit
plan assets transferred to the Company; and (iv) requires the Company to
contribute an additional $3,000,000 to the Company's qualified defined benefit
plan applicable to the Missouri Business' employees and retirees; and (v)
requires the Company to reduce rate base by $30,000,000 (to be amortized over a
ten year period) to compensate rate payers for rate base reductions that were
eliminated as a result of the acquisition.
The Missouri Acquisition was funded through a $50,000,000 subscription
rights offering of Common Stock (the "Rights Offering") completed in December
1993 and the sale of $475,000,000 of 7.60% Senior Notes due 2024 (the "Senior
Debt Securities") in January 1994. The net proceeds from the Rights Offering,
together with the net proceeds from the sale of the Senior Debt Securities and
working capital from operations, have been or will be used to: (i) fund the
Missouri Acquisition; (ii) refinance $20,000,000 aggregate principal amount of
10 1/8% Notes due May 15, 1994; (iii) repay approximately $59,300,000 of
borrowings under the Company's $100,000,000 revolving credit facility, used to
fund the acquisition of the Rio Grande Valley Gas Company and to repurchase all
of Southern Union's outstanding preferred stock; (iv) refinance $10,000,000
aggregate principal amount of 9.45% Senior Notes due January 31, 2004 and
$25,000,000 aggregate principal amount of 10% Senior Notes due January 31, 2012,
and the related premium of $10,400,000 resulting from the early extinguishment
of the 9.45% and 10% Senior Notes; and (v) refinance $50,000,000 aggregate
principal amount of 10.5% Sinking Fund Debentures due May 15, 2017, and the
premium of $3,300,000 resulting from the early extinguishment of such
debentures. See Business -- "Other Acquisitions and Divestitures" and "MD&A --
Liquidity and Capital Resources."
Southern Union assumed certain liabilities of Western Resources with respect
to the Missouri Business, including liabilities arising from certain specified
contracts assigned to Southern Union at closing, including gas supply and
transportation contracts, office equipment leases and real estate leases,
liabilities arising from certain contracts entered into by Western Resources in
the ordinary course of business, certain liabilities that have arisen or may
arise from the operation of the Missouri Business, and liabilities for certain
accounts payable of Western Resources pertaining to the Missouri Business.
Southern Union and Western Resources also entered into an Environmental
Liability Agreement at closing. Subject to the accuracy of certain
representations made by Western Resources in the Missouri Asset Purchase
Agreement, the agreement provides for a tiered approach to the allocation of
substantially all liabilities under environmental laws that may exist or arise
with respect to the Missouri Business. The agreement contemplates Southern Union
first seeking reimbursement from other potentially responsible parties, or
recovery of such costs under insurance or through rates charged to customers. To
the extent certain environmental liabilities are discovered by Southern
2
<PAGE>
Union prior to July 9, 1995, and are not so reimbursed or recovered, Southern
Union will be responsible for the first $3,000,000, if any, of out of pocket
costs and expenses incurred to respond to and remediate any such environmental
claim. Thereafter, Western Resources would share one-half of the next
$15,000,000 of any such costs and expenses, and Southern Union would be solely
liable for any such costs and expenses in excess of $18,000,000. The Company
believes that it will be able to obtain substantial reimbursement or recovery
for any such environmental liabilities from other potentially responsible third
parties, under insurance or through rates charged to customers.
Pursuant to the terms of an Employee Agreement with Western Resources
entered into on July 9, 1993, after the closing of the Missouri Acquisition,
Southern Union employed certain employees of Western Resources involved in the
operation of the Missouri Business ("Continuing Employees"). Under the terms of
the Employee Agreement, the assets and liabilities attributable to Continuing
Employees and retired employees who had been necessary to the operation of the
Missouri Business ("Retired Employees") under Western Resources' qualified
defined benefit plans were transferred to a qualified defined benefit plan of
Southern Union that will provide benefits to Continuing Employees and Retired
Employees substantially similar to those provided for under Western Resources'
defined benefit plans. Southern Union amended its defined benefit plan to cover
the Continuing Employees and Retired Employees and provide Continuing Employees
and Retired Employees with certain welfare, separation and other benefits and
arrangements.
OTHER ACQUISITIONS AND DIVESTITURES
In September 1993, the Company acquired the Rio Grande Valley Gas Company
("Rio Grande"), a subsidiary of Valero Energy Corporation, for approximately
$30,500,000 (the "Rio Grande Acquisition"). Rio Grande serves approximately
76,000 customers in the south Texas counties of Willacy, Cameron and Hidalgo
which includes 32 towns and cities along the Mexico border, including Harlingen,
McAllen and Brownsville (the southernmost city in the U.S.). The Company
initially funded the purchase with borrowings from its revolving credit
facility, which was subsequently paid down out of the net proceeds from the
Rights Offering and the sale of the Senior Debt Securities. See MD&A --
"Liquidity and Capital Resources."
During May 1993, the Company acquired the natural gas distribution
facilities of Berry Gas Company (the "Berry Gas Acquisition") which serves the
Texas cities and towns of Nome, Raywood, Hull and Devers for approximately
$274,000. In July 1993, the Company acquired the natural gas distribution
facilities serving the city of Eagle Pass, Texas (the "Eagle Pass Acquisition"),
for approximately $2,000,000. Combined, these operations collectively serve
approximately 4,600 customers.
In February 1993, Southern Union Exploration Company ("SX"), a wholly owned
subsidiary of Southern Union, entered into a purchase and sale agreement
pursuant to which it sold substantially all of its oil and gas leasehold
interests and associated production for approximately $22,000,000, effective
January 1, 1993. The Company estimated and recorded a book loss on the sale of
approximately $4,400,000 as of December 31, 1992. In connection with the sale,
the Company recorded an income tax liability of approximately $6,960,000
resulting from the recognition of a tax basis gain of approximately $18,800,000.
During 1992, the Company acquired the natural gas distribution facilities of
Nixon, Texas (the "Nixon Acquisition"). Also, the Company added approximately 12
miles of pipeline which transports gas to the community of Sabine Pass, Texas.
During 1991, the Company acquired the natural gas distribution and transmission
facilities serving an area in south Texas that includes the cities of Luling,
Lockhart, Cuero, Yoakum, Shiner and Gonzales (the "South Texas Acquisition") and
the natural gas distribution facilities serving the city of Andrews, Texas (the
"Andrews Acquisition"). Also in 1991, Southern Union acquired Brazos River Gas
Company (the "Brazos River Acquisition"), a natural gas distribution company
serving the north Texas cities of Mineral Wells, Weatherford, Graham,
Breckenridge, Millsap, Jacksboro and surrounding communities. These distribution
operations collectively serve approximately 35,000 customers.
3
<PAGE>
In November 1991, the Company sold the assets of its Arizona gas utility
operations for approximately $46,000,000, including cash of $40,400,000 and
assumed liabilities of $5,600,000 (the "Arizona Sale"). Cash proceeds after
taxes approximated $32,800,000. The Arizona gas operations served approximately
62,000 customers.
COMPANY OPERATIONS
The Company's principal line of business is the distribution of natural gas
through its Southern Union Gas and Missouri Gas Energy divisions. Southern Union
Gas provides service to a number of communities and rural areas in Texas,
including the municipalities of Austin, Brownsville, El Paso, Galveston,
Harlingen, McAllen and Port Arthur, as well as several communities in the
Oklahoma panhandle. Missouri Gas Energy provides service to various cities and
communities in central and western Missouri including Kansas City, St. Joseph,
Joplin and Monett. The Company's gas utility operations are generally seasonal
in nature, with a significant percentage of its annual revenues and earnings
occurring in the traditional heating-load months.
Western Gas Interstate Company ("WGI"), a wholly owned subsidiary of
Southern Union, operates interstate pipeline systems principally serving the
Company's gas distribution properties in the El Paso, Texas area and in the
Texas and Oklahoma panhandles. During 1993 WGI received approval in its
restructuring and rate case dockets from the Federal Energy Regulatory
Commission (FERC) which allowed WGI to implement services pursuant to FERC Order
No. 636. WGI is now providing unbundled transportation service for those gas
volumes entering the pipeline's transportation system. WGI also completed its
second year of exports to Mexico, transporting approximately 8,500 million cubic
feet (MMcf) to the city of Juarez and the Samalayuca Power Plant.
Southern Transmission Company ("Southern"), a wholly owned subsidiary of
Southern Union, owns and operates approximately 123 miles of intrastate
pipeline. Southern's system connects the cities of Lockhart, Luling, Cuero,
Shiner, Yoakum, and Gonzales, Texas, as well as an industrial customer in Port
Arthur, Texas. Southern also owns a transmission line which supplies gas to the
community of Sabine Pass, Texas.
Mercado Gas Services Inc. ("Mercado"), a wholly owned subsidiary of Southern
Union, markets natural gas to various large volume customers. Mercado's sales
and purchase activities are made through short-term contracts. These contracts
and business activities are not subject to direct rate regulation.
Southern Union Econofuel Company ("Econofuel"), a wholly owned subsidiary of
Southern Union, was formed in 1990 to market and sell natural gas for natural
gas vehicles ("NGVs") as an alternative fuel to gasoline. Econofuel owns fuel
dispensing equipment in Austin, El Paso, Port Arthur, and Galveston, Texas
located at independent retail fuel stations for NGVs. These stations serve fleet
and other public vehicles which have been manufactured or converted to operate
on natural gas. In 1991, Econofuel and Natural Gas Development Company, Inc. of
California, formed a joint venture that, in 1992 opened the Natural Gas Vehicle
Technology Centers, L.L.P. (the "Tech Center") in Austin, Texas. The Tech Center
converts gasoline-driven vehicles to operate using natural gas. Since its
opening, the Tech Center has converted about 1,200 fleet vehicles and buses to
operate on natural gas.
Southern Union Energy Products and Services Company ("SUEPASCO"), a wholly
owned subsidiary of the Company, was formed during 1992 to market and sell
commercial gas air conditioning, irrigation pumps and other gas-fired engine
driven applications and related services.
Southern Union Energy International, Inc. ("International"), a wholly owned
subsidiary of the Company, was also formed during 1992 to participate in energy
related projects internationally.
In addition, the Company holds investments in commercially developed real
estate as well as undeveloped tracts of land through its wholly owned
subsidiary, Lavaca Realty Company ("Lavaca Realty").
4
<PAGE>
COMPETITION
Southern Union Gas and Missouri Gas Energy are not currently in significant
direct competition with any other distributors of natural gas to residential and
small commercial customers within their service areas. In recent years, certain
large volume customers, primarily industrial and significant commercial
customers, have had opportunities to access alternative natural gas supplies
and, in some instances, delivery service from pipeline systems. The Company has
offered transportation arrangements to customers who secure their own gas
supplies. These transportation arrangements, coupled with the efforts of the
Company's marketing subsidiary, Mercado, enable the Company to provide
competitively priced gas service to these large volume customers. In addition,
the Company has successfully used flexible rate provisions, when needed, to
prevent by-pass of the Company's distribution system.
As energy providers, Southern Union Gas and Missouri Gas Energy have
historically competed with alternative energy sources, particularly electricity
and also propane, coal, natural gas liquids and other refined products available
in the Company's service areas. At present rates, the cost of electricity to
residential and commercial customers in the Company's service areas generally is
higher than the effective cost of its natural gas service. There can be no
assurances, however, that future fluctuations in gas and electric costs will not
reduce the cost advantage of natural gas service.
The following operating cost analysis provides a comparison of annual gas
and electric costs for three typical residential energy applications in the
three largest cities (which represent approximately 72% of the present
customers) served by Southern Union Gas and Missouri Gas Energy:
<TABLE>
<CAPTION>
KANSAS CITY,
MISSOURI AUSTIN, TEXAS EL PASO, TEXAS
------------------- ------------------- -------------------
APPLICATION GAS(A) ELECTRIC(B) GAS(A) ELECTRIC(B) GAS(A) ELECTRIC(B)
- --------------------------------------------------- ------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Water Heater(c).................................... $ 128 $ 325 $ 118 $ 490 $ 86 $ 529
Furnace
Gas.............................................. $ 383 -- $ 141 -- $ 173 --
Electric Heat Pump............................... -- $ 484 -- $ 196 -- $ 361
Electric Resistance.............................. -- $ 806 -- $ 587 -- $ 870
<FN>
- ------------------------
(a) Gas prices contain the cost of service rates effective since October 15,
1993 for Kansas City, Missouri; since July 1993 for Austin, Texas; and
since November 1993 for El Paso, Texas. The cost of gas rates are based on
average area prices for the year ended January 1994. The combined service
and gas rates amount to $.457 per hundred cubic feet (CCF) of gas in
Kansas City, Missouri; $.423 per CCF of gas in Austin, Texas; and $.308
per CCF of gas in El Paso, Texas.
(b) Annual average electric rates were used to calculate electric water heater
costs. Winter average electric rates were used to calculate furnace costs.
The Kansas City annual average electric rate was $.093 per Kilowatt hour
(KWH), and the winter average rate was $.062 per KWH. The Austin annual
average electric rate was $.093 per KWH, and the winter average rate was
$.083 per KWH. The El Paso annual average electric rate was $.101 per KWH,
and the winter average rate was $.096 per KWH.
(c) Based on Department of Energy first hour rating test procedure, an average
family uses 64.3 gallons of hot water per day.
</TABLE>
The Company believes that similar gas price advantages exist for commercial
and industrial applications. In addition, the cost of expansion for peak load
requirements of electricity in some of Southern Union Gas' service areas has
historically provided opportunities to allow energy switching to natural gas
pursuant to integrated resource planning techniques. Electric competition has
responded by offering equipment rebates and incentive rates.
Competition between the use of fuel oil and natural gas, particularly by
industrial, electric generation and agricultural customers, has increased as oil
prices have decreased. While competition between such fuels is generally more
intense outside the Company's service areas, this competition
5
<PAGE>
affects the nationwide market for natural gas. Additionally, the general
economic conditions in its service areas continue to affect certain customers
and market areas, thus impacting the results of the Company's operations.
GAS SUPPLY
The low cost for natural gas service is attributable to efficient operations
and the Company's ability to contract for natural gas using favorable mixes of
long-term and short-term supply arrangements and favorable transportation
contracts. The Company has been directly acquiring its gas supplies since the
mid 1980s when interstate pipeline systems opened their systems for
transportation service. The Company has the organization, personnel and
equipment necessary to dispatch and monitor gas volumes on a daily and even
hourly basis to ensure reliable service to customers.
This experience will be of major significance in the post FERC Order 636
procurement environment. FERC Order 636 promotes the "unbundling" of services
offered by interstate pipeline companies. As a result, gas purchasing and
transportation decisions and associated risks now shift from the pipeline
companies to the gas distributors. The increased demands on distributors to
effectively manage their gas supply in an environment of volatile gas prices
will provide an advantage to distribution companies such as Southern Union that
have demonstrated a history of contracting favorable and efficient gas supply
arrangements in an open market system.
The majority of Southern Union Gas' 1993 gas requirements for utility
operations were delivered under long-term transportation contracts through five
major pipeline companies. These contracts have various expiration dates ranging
from 1995 through 2011. Southern Union Gas also purchases significant volumes of
gas under long-term and short-term arrangements with suppliers. The amounts of
such short-term purchases are contingent upon price. Southern Union Gas and
Missouri Gas Energy both have firm supply commitments for all areas that are
supplied with gas purchased under short-term arrangements.
Gas sales and/or transportation contracts with interruption provisions,
whereby large volume users purchase gas with the understanding that they may be
forced to shut down or switch to alternate sources of energy at times when the
gas is needed for higher priority customers, have been utilized for load
management by Southern Union and the gas industry as a whole for many years. In
addition, during times of special supply problems, curtailments of deliveries to
customers with firm contracts may be made in accordance with guidelines
established by appropriate federal and state regulatory agencies. There have
been no supply-related curtailments of deliveries to Southern Union Gas or
Missouri Gas Energy utility sales customers during the last ten years.
The following table shows, for each of Southern Union Gas' principal service
areas, the percentage of gas utility revenues and sales volume for 1993, the
average cost per Mcf of gas in 1993, and the primary delivery systems:
<TABLE>
<CAPTION>
PERCENT OF
GAS UTILITY PERCENT OF GAS
REVENUES IN UTILITY SALES 1993 AVERAGE
SERVICE AREA 1993 VOLUME IN 1993 COST PER MCF PRIMARY SOURCE OF SUPPLY
- ----------------------------------- ------------- --------------- ------------- --------------------------------------
<S> <C> <C> <C> <C>
El Paso............................ 32 34 $ 2.66 El Paso Natural Gas Company
Austin............................. 29 25 2.48 Valero Transmission Company
Port Arthur........................ 6 5 2.64 Midcon Texas Pipeline Company
Galveston.......................... 4 3 2.53 Houston Pipeline Company
Rio Grande Valley.................. 4 2 4.69 Valero Transmission Company
Pipeline and marketing............. 8 16 2.11 Various
Panhandle.......................... 11 11 2.63 Various
West Texas......................... 3 2 2.38 Various
South Texas........................ 3 2 3.73 Valero Transmission Company
--- ---
100 100
--- ---
--- ---
</TABLE>
6
<PAGE>
Missouri Gas Energy provides gas service to Kansas City, St. Joseph, Joplin,
Monett and surrounding communities in central and western Missouri. The average
cost per Mcf of gas supplied to Missouri Gas Energy in 1993 was $3.04. The
primary source of supply to Missouri Gas Energy's service areas is Williams
Natural Gas Company.
UTILITY REGULATION AND RATES
The Company's rates and operations are subject to regulation by federal,
state and local authorities. In Texas, municipalities have primary jurisdiction
over rates within their respective incorporated areas. Rates in adjacent
environs areas and appellate matters are the responsibility of the Railroad
Commission of Texas. Rates in Oklahoma are subject to regulation by the Oklahoma
Corporation Commission. In Missouri, rates are established by the MPSC on a
system wide basis. The FERC and the Railroad Commission of Texas have
jurisdiction over rates, facilities and services of WGI and Southern,
respectively.
The Company holds non-exclusive franchises with varying expiration dates in
all incorporated communities where it is necessary to do so to carry on its
business as it is now being conducted. In the five largest cities in which the
Company's utility customers are located, such franchises expire as follows:
Kansas City, Missouri in 1997; El Paso, Texas in 2000; Austin, Texas in 2006;
and Port Arthur, Texas in 2013. The franchise in St. Joseph, Missouri is
perpetual.
Gas service rates are established by regulatory authorities to collectively
permit utilities to recover operating, administrative and finance costs, and to
earn a return on equity. Gas costs are billed to customers through purchase gas
adjustment clauses which permit the Company to adjust its sales price as the
cost of purchased gas changes. The appropriate regulatory authority must receive
notice of such adjustments prior to billing implementation. This is important
because the cost of natural gas accounts for a significant portion of the
Company's total expenses.
The Company must support any service rate changes to its regulators using an
historic test year of operating results adjusted to normal conditions and for
any known and measurable revenue or expense changes. Because the rate regulatory
process has certain inherent time delays, rate orders may not reflect the
operating costs at the time new rates are put into effect.
The monthly customer bill contains a fixed service charge, a usage charge
for service to deliver gas, and a charge for the amount of natural gas used.
While the monthly fixed charge provides an even revenue stream, the usage charge
increases the Company's annual revenue and earnings in the traditional heating
load months when usage of natural gas increases. The majority of the Company's
rate increases in Texas and Oklahoma in recent years have been reflected in
increased monthly fixed charges which help stabilize earnings. Weather
normalization clauses, now in place in Austin and three other service areas in
Texas, also help stabilize earnings.
On February 10, 1993, the Company's South Texas service area received an
annualized rate increase of $777,000. On June 10, 1993, the Austin City Council
approved an ordinance reflecting (i) an approximate $1,700,000 base revenue
increase, (ii) new and increased fees that will add approximately $250,000
annually, and (iii) weather normalization clause revisions. The Austin rate
increase became effective as of July 1, 1993. On October 5, 1993, the MPSC
approved an order reflecting a $9,750,000 revenue increase to Missouri Gas
Energy. The Missouri rate increase became effective October 15, 1993. On October
12, 1993, the El Paso City Council approved an ordinance reflecting an
approximate revenue increase of $463,000. The El Paso rate increase became
effective November 1, 1993. These rate increases should contribute significantly
to the Company's earnings in 1994.
7
<PAGE>
The following table summarizes the rate increases that have been granted
over the last three years:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Southern Union Gas
Austin, Texas....................................................... $ 1,950 -- $ 3,311
El Paso, Texas...................................................... 463 $ 1,741 --
All other........................................................... 981 1,001 244
--------- --------- ---------
$ 3,394 $ 2,742 $ 3,555
Missouri Gas Energy................................................... 9,750 7,300 --
--------- --------- ---------
$ 13,144 $ 10,042 $ 3,555
--------- --------- ---------
--------- --------- ---------
</TABLE>
In addition to the regulation of its utility and pipeline businesses, the
Company is affected by numerous other regulatory controls, including, among
others, pipeline safety requirements of the Department of Transportation, safety
regulations under the Occupational Safety and Health Act, and various state and
federal environmental statutes and regulations. The Company believes that its
operations are in compliance with applicable safety and environmental statutes
and regulations.
STATISTICS OF GAS UTILITY AND RELATED OPERATIONS
The following table provides by division and/or region the number of gas
utility customers served:
<TABLE>
<CAPTION>
DECEMBER 31
FEBRUARY 1, --------------------
1994 1993 1992
----------- --------- ---------
<S> <C> <C> <C>
Southern Union Gas:
El Paso and West Texas............................................ 169,019 168,361 165,937
Austin and Central Texas.......................................... 153,627 153,096 149,896
Rio Grande Valley................................................. 76,625 75,770 --
Gulf Coast........................................................ 53,087 52,953 52,127
Panhandle......................................................... 32,859 32,821 32,874
----------- --------- ---------
485,217 483,001 400,834
----------- --------- ---------
----------- --------- ---------
Missouri Gas Energy:
Kansas City, Missouri Metropolitan Area........................... 369,659 -- --
St. Joseph, Joplin, Monett and others............................. 102,704 -- --
----------- --------- ---------
472,363 -- --
----------- --------- ---------
957,580 483,001 400,834
----------- --------- ---------
----------- --------- ---------
</TABLE>
8
<PAGE>
STATISTICS OF GAS UTILITY AND RELATED OPERATIONS. The following table shows
certain operating statistics of Southern Union Gas' utility business for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Average number of gas sales customers served:
Residential.............................................................. 391,154 365,187 394,508
Commercial............................................................... 26,814 25,853 30,132
Industrial and irrigation................................................ 774 796 861
Public authorities and other............................................. 2,309 2,206 2,521
Pipeline and marketing................................................... 182 157 55
----------- ----------- -----------
Total average customers served......................................... 421,233 394,199 428,077
----------- ----------- -----------
----------- ----------- -----------
Gas sales in millions of cubic feet (MMcf):
Residential.............................................................. 22,171 21,356 23,102
Commercial............................................................... 9,545 9,059 10,466
Industrial and irrigation................................................ 2,615 2,881 2,880
Public authorities and other............................................. 2,938 3,002 3,545
Pipeline and marketing................................................... 6,934 14,849 4,949
----------- ----------- -----------
Gas sales billed....................................................... 44,203 51,147 44,942
Net change in unbilled gas sales......................................... 656 (43) (1,263)
----------- ----------- -----------
Total gas sales........................................................ 44,859 51,104 43,679
----------- ----------- -----------
----------- ----------- -----------
Gas sales revenues (thousands of dollars):
Residential.............................................................. $ 117,954 $ 102,028 $ 119,604
Commercial............................................................... 41,219 34,261 44,011
Industrial and irrigation................................................ 9,206 8,655 9,519
Public authorities and other............................................. 10,592 9,437 12,409
Pipeline and marketing................................................... 16,247 28,793 11,817
----------- ----------- -----------
Gas revenues billed.................................................... 195,218 183,174 197,360
Net change in unbilled gas sales revenues................................ 4,141 214 (7,499)
----------- ----------- -----------
Total gas sales revenues............................................... $ 199,359 $ 183,388 $ 189,861
----------- ----------- -----------
----------- ----------- -----------
Gas sales margin (thousands of dollars): (a)............................... $ 88,975 $ 80,470 $ 80,623
----------- ----------- -----------
----------- ----------- -----------
Gas sales revenue per thousand cubic feet (Mcf) billed (b):
Residential.............................................................. $ 5.320 $ 4.777 $ 5.177
Commercial............................................................... 4.318 3.782 4.205
Industrial and irrigation................................................ 3.520 3.004 3.305
Public authorities and other............................................. 3.605 3.144 3.500
Pipeline and marketing................................................... 2.343 1.939 2.388
Weather effect:
Degree days (c).......................................................... 1,954 2,020 2,439
Percent of normal, based on 30 year average (d).......................... 89% 91% 95%
Gas transported in millions of cubic feet (MMcf)........................... 22,750 25,438 8,608
Gas transportation revenues (thousands of dollars)......................... $ 6,485 $ 5,943 $ 5,686
<FN>
- ------------------------
(a) Gas sales revenues less purchased gas costs is equal to gas sales margin.
(b) Fluctuations in gas price billed between 1993, 1992 and 1991 reflect
changes in the average cost of purchased gas.
(c) "Degree days" are a measure of the coldness of the weather experienced. A
Degree day is equivalent to each degree that the daily mean temperature
for a day falls below 65 degrees Fahrenheit.
(d) Information with respect to weather conditions is provided by the National
Oceanic and Atmospheric Administration. Percentages of normal are computed
based on the weighted average number of customers.
</TABLE>
9
<PAGE>
The following table shows certain operating statistics of Missouri Gas
Energy for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (A)
-------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Average number of gas sales customers served:
Residential.............................................................. 396,755 399,421 397,447
Commercial............................................................... 57,330 57,615 50,609
Industrial............................................................... 260 249 238
----------- ----------- -----------
Total average customers served......................................... 454,345 457,285 448,294
----------- ----------- -----------
----------- ----------- -----------
Gas sales in millions of cubic feet (MMcf):
Residential.............................................................. 47,244 39,839 43,506
Commercial............................................................... 22,669 19,450 20,962
Industrial............................................................... 309 1,254 1,062
----------- ----------- -----------
Gas sales billed....................................................... 70,222 60,543 65,530
Net change in unbilled gas sales......................................... (58) 1,043 (1,688)
----------- ----------- -----------
Total gas sales........................................................ 70,164 61,586 63,842
----------- ----------- -----------
----------- ----------- -----------
Gas sales revenues (thousands of dollars):
Residential.............................................................. $ 215,806 $ 195,073 $ 207,448
Commercial............................................................... 95,520 84,995 88,267
Industrial............................................................... 2,015 4,406 4,479
----------- ----------- -----------
Gas revenues billed.................................................... 313,341 284,474 300,194
Net change in unbilled gas sales revenues................................ 3,818 3,618 (5,668)
----------- ----------- -----------
Total gas sales revenues............................................... $ 317,159 $ 288,092 $ 294,526
----------- ----------- -----------
----------- ----------- -----------
Gas sales margin (thousands of dollars) (b)................................ $ 107,687 $ 105,091 $ 101,016
----------- ----------- -----------
----------- ----------- -----------
Gas sales revenue per thousand cubic feet (Mcf) billed:
Residential.............................................................. $ 4.568 $ 4.897 $ 4.768
Commercial............................................................... 4.214 4.369 4.211
Industrial............................................................... 6.521 3.514 4.218
Weather effect:
Degree days (c).......................................................... 5,721 4,852 5,017
Percent of normal, based on 30 year average.............................. 106% 90% 95%
Gas transported in millions of cubic feet (MMcf)........................... 28,064 26,381 27,720
Gas transportation revenues (thousands of dollars)......................... $ 6,676 $ 7,888 $ 11,063
<FN>
- ------------------------
(a) Missouri Gas Energy was acquired by the Company on January 31, 1994 and
therefore is not consolidated with the Company as of December 31, 1993.
The Company will include Missouri Gas Energy in its results of operations
subsequent to January 31, 1994.
(b) Gas sales revenues less purchased gas costs is equal to gas sales margin.
(c) "Degree days" are a measure of the coldness of the weather experienced. A
Degree day is equivalent to each degree that the daily mean temperature
for a day falls below 65 degrees Fahrenheit.
</TABLE>
INVESTMENTS IN REAL ESTATE
In February 1993, Southern Union entered into a settlement agreement with
the Resolution Trust Corporation ("RTC") with respect to Southern Union's former
subsidiary, First Bankers Trust & Savings Association. As part of the
settlement, in return for payment by the Company of $4,792,000, the RTC
dismissed a $6,174,000 judgment for specific performance of a contract to
10
<PAGE>
purchase real estate; canceled notes in the principal amount of $1,600,000;
permitted the Company to terminate a $2,000,000 letter of credit; deeded the
Company a 21-acre tract in Austin, Texas; and released certain other claims
asserted in the settled litigation. This settlement had no impact on earnings
since the Company had previously recorded a reserve for the related loss
contingency. In December 1993, Lavaca Realty sold this land for approximately
$794,000, resulting in an after tax gain of approximately $321,000. See "Real
Estate" in the Notes to the Consolidated Financial Statements for the year ended
December 31, 1993.
Lavaca Realty owns a commercially developed tract of land in the central
business district of Austin, Texas, containing a combined 11-story office
building, parking garage, a drive-through bank and a mini-bank facility ("Lavaca
Plaza"). Approximately 49% of the office space at Lavaca Plaza is used in the
Company's business while 51% is leased, or under option to lease, to
non-affiliated entities. Lavaca Realty also owns a commercially developed tract
of land in Austin, Texas that is used exclusively in the Company's business.
Other real estate investments held at December 31, 1993 include 12 acres of
undeveloped land in Dallas, Texas and 42 acres of undeveloped land in Denton,
Texas. The Company is attempting to sell all undeveloped real estate.
BUSINESS HELD FOR SALE
In February 1993, SX entered into a purchase and sales agreement with
certain limited partnerships affiliated with a Dallas-based company to sell all
of its oil and gas leasehold interests and associated production for
approximately $22,000,000, effective as of January 1, 1993. SX, which was
engaged in the development and production of oil and gas, held varying interests
in producing oil and gas wells located primarily in New Mexico and Texas.
The Company accounted for SX as a business held for sale wherein adjustments
were made to reflect the valuation of this business to an estimated net
realizable value. At December 31, 1992 and 1991, the Company estimated and
recorded a book loss on future disposal of $4,400,000 and $2,250,000,
respectively. In addition, at the time of the sale the Company incurred a tax
liability of approximately $6,960,000 resulting from the recognition of a tax
basis gain of approximately $18,800,000. The sale closed on March 31, 1993.
EMPLOYEES
As of February 28, 1994, the Company had 1,923 employees, of whom 1,488 were
paid on an hourly basis, 419 were paid on a salary basis and 16 were paid on a
commission basis. Of the 1,488 hourly paid employees, approximately 57% were
represented by unions. Of those employees represented by unions, 78% are
employed by Missouri Gas Energy.
In December 1992, the Company announced an early retirement program
available to certain of the Company's employees with an election period from
January to March 1993. Approximately 75 of an eligible 109 employees accepted
the early retirement program.
From time to time the Company may be subject to labor disputes; however,
such disputes have not previously disrupted its business. The Company believes
that its relations with its employees are good.
ITEM 2. PROPERTIES.
See Item 1, "Business," for information concerning the general location and
characteristics of the important physical properties and assets of the Company.
Southern Union Gas' system consists of 8,452 miles of mains, 3,601 miles of
service lines and 307 miles of transmission lines. Missouri Gas Energy's system
consists of 6,930 miles of mains, 3,333 miles of service lines and 71 miles of
transmission lines. WGI's system consists of 219 miles of transmission lines and
50 miles of gathering lines and Southern's system consists of 123 miles of
transmission lines. The Company considers the systems to be in good condition
and to be well maintained, and it has a continuing replacement program based on
historical performance and system surveillance.
Missouri Gas Energy is required, pursuant to an MPSC order, to replace
certain service and main lines. This has amounted to an annual capital
expenditure of approximately $20,000,000. In addition,
11
<PAGE>
the MPSC has issued accounting orders in the past to allow the deferral for
future recovery in rates of related financing costs, depreciation and property
taxes incurred in the periods between rate filings. The Company believes the
MPSC will allow Missouri Gas Energy to continue such deferral and recovery.
ITEM 3. LEGAL PROCEEDINGS.
See "Commitments and Contingencies" and "Subsequent Events -- Missouri
Acquisition" in the Notes to Consolidated Financial Statements for the year
ended December 31, 1993 for discussions of the Company's legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders of Southern
Union during the quarter ended December 31, 1993.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
Southern Union's common stock is traded on the American Stock Exchange under
the symbol "SUG". On February 11, 1994 the Company's Board of Directors declared
a three for two stock split distributed in the form of a 50% stock dividend on
March 9, 1994 to stockholders of record on February 23, 1994. The high and low
sales prices (adjusted for the March 9, 1994 distribution) for shares of
Southern Union common stock for the period January 1, 1994 through March 21,
1994 and for each quarter in 1993 and 1992 are set forth below:
<TABLE>
<CAPTION>
$/SHARE
------------------
HIGH LOW
------- -------
<S> <C> <C>
1994:
January 1 to March 21............................................................................ 24 1/2 17 3/8
1993:
Fourth Quarter................................................................................... 21 1/8 13 1/4
Third Quarter.................................................................................... 14 7/8 12 1/2
Second Quarter................................................................................... 13 1/2 11 1/8
First Quarter.................................................................................... 13 7/8 9 3/8
1992:
Fourth Quarter................................................................................... 10 7/8 9 3/8
Third Quarter.................................................................................... 10 7/8 9 1/8
Second Quarter................................................................................... 10 1/8 9 1/8
First Quarter.................................................................................... 10 5/8 9 3/8
</TABLE>
HOLDERS
As of March 21, 1994, there were 272 holders of record of the registrants'
common stock. This number does not include persons whose shares are held of
record by a bank, brokerage house, or clearing agency, but does include any such
bank, brokerage house or clearing agency.
There were 10,900,586 shares of the registrants' common stock outstanding on
March 21, 1994 of which 6,496,772 shares were held by non-affiliates.
DIVIDENDS
Southern Union paid no dividends on its common stock in 1993, 1992 or 1991.
Provisions in certain of Southern Union's long-term notes and its bank revolving
credit facility limit the payment of cash or asset dividends on capital stock.
Under the most restrictive provisions in effect, as a result of the January 1994
sale of Senior Debt Securities, Southern Union may not declare or pay any cash
or asset dividend on its common stock (other than dividends and distributions
payable solely in shares of
12
<PAGE>
its common stock or in rights to acquire its common stock) or acquire or retire
any of Southern Union's common stock, unless no event of default exists and the
Company meets certain financial ratio requirements.
On February 11, 1994, Southern Union's Board of Directors also approved the
commencement of regular stock dividends of approximately 5% annually. The first
such dividend is expected to be a 5% stock dividend to be declared in connection
with the Company's annual meeting of stockholders to be held on May 25, 1994.
The specific declaration, record and distribution dates for each stock dividend
will be determined by the Board and announced at a date no later than the annual
stockholders meeting each year. A portion of the 5% stock dividend expected to
be distributed in 1994 may be characterized as a distribution of capital
depending upon the level of the Company's retained earnings available as of the
record date of that distribution.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1993(A) 1992(A) 1991(A) 1990(A) 1989
----------- ----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Total operating revenues........................ $ 209,005 $ 192,445 $ 200,261 $ 199,865 $ 197,460
Earnings from continuing operations............. 7,733 6,391 4,673 387 851
Earnings (loss) from continuing operations per
share of common stock (b)...................... .87 .49 .27 (.27) (.21)
Total assets (c)................................ 416,207 377,167 369,783 379,856 316,186
Long-term debt.................................. 109,574 109,924 111,618 104,922 106,061
Redeemable preferred stock...................... -- 24,900 25,000 25,000 25,000
Cash dividends paid per share of common stock
(b)............................................ -- -- -- -- .10
<FN>
- ------------------------
(a) The Company completed the Berry Gas, Eagle Pass and Rio Grande
acquisitions during 1993 and the Nixon acquisition in 1992. In addition,
during 1991 the Company completed the South Texas, Brazos River and
Andrews acquisitions and also completed the Arizona Sale. In February
1990, the Company merged with Metro Mobile CTS, Inc. (the "Merger"). For
these reasons the results of operations of the Company for the periods
subsequent to the Merger are not comparable to those periods prior to the
Merger nor are the 1993, 1992 and 1991 results of operations comparable
between periods.
(b) Earnings per share in 1993, 1992 and 1991 were computed based on the
weighted average number of shares of common stock outstanding during the
year adjusted for the three for two stock split effected as a 50% stock
dividend which was distributed on March 9, 1994. Losses per share prior to
1991 were calculated as though the common shares outstanding after the
Merger were outstanding during each period presented. Cash dividends paid
per common share prior to the Merger were not restated for the stock
split.
(c) Certain reclassifications have been made to prior years' amounts to
conform with the current year presentation.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The Company's principal line of business is the distribution of natural gas
as a public utility through Southern Union Gas and, subsequent to January 31,
1994, Missouri Gas Energy, each of which is a division of the Company. Missouri
Gas Energy was acquired in a transaction accounted for as a purchase on January
31, 1994 and, therefore, its results of operations are not consolidated with
those of the Company until after that date. Accordingly, the following
discussion of results of operations does not include Missouri Gas Energy. See
"Item I: Business -- Missouri Acquisition."
13
<PAGE>
In 1993 the Company completed the Rio Grande, Eagle Pass and Berry Gas
Acquisitions. In 1992 the Company completed the Nixon Acquisition and in 1991
the Company completed the South Texas, Brazos River and Andrews Acquisitions and
the Arizona Sale. See "Acquisitions and Divestitures" in the Notes to
Consolidated Financial Statements for the year ended December 31, 1993. For
these reasons, the results of operations of the Company for the periods
presented are not comparable.
On February 11, 1994, the Company's Board of Directors declared a three for
two stock split distributed in the form of a 50% stock dividend on March 9, 1994
to stockholders of record on February 23, 1994. Effective March 9, 1994 the
Company gave retroactive recognition to the equivalent change in capital
structure for all periods presented. Consequently, earnings per share for 1993,
1992 and 1991 have been recomputed based on the weighted average number of
shares outstanding during each year, adjusted for the stock split.
Southern Union Gas, which accounted for approximately 86% of the Company's
total revenues for the year ended December 31, 1993, serves approximately
483,000 residential, commercial, industrial, agricultural and other customers in
the States of Texas (including the cities of Austin, Brownsville, El Paso,
Galveston and Port Arthur) and Oklahoma. In addition, the Company operates
interstate and intrastate natural gas pipeline systems, markets natural gas to
end users and markets and sells natural gas for natural gas vehicles. The
Company also holds investments in real estate.
Several of the Company's business activities are subject to regulation by
federal, state or local authorities where the Company operates. Thus, the
Company's financial condition and results of operations have been dependent upon
the receipt of adequate and timely adjustments in rates. In addition, the
Company's business is affected by seasonal weather impacts, competitive factors
within the energy industry and economic development and residential growth in
its service areas.
The Company's revenues and earnings are primarily dependent upon gas sales
volumes and gas service rates. Gas purchase costs generally do not affect the
Company's earnings because such costs are passed through to customers pursuant
to purchase gas adjustment clauses. Accordingly, while changes in the cost of
gas may cause the Company's operating revenues to fluctuate, operating margin
(defined as operating revenues less gas purchase costs) is generally not
affected by gas purchase cost increases or decreases.
Gas sales volumes fluctuate as a function of seasonal weather impact and the
size of the Company's customer base, which is affected by competitive factors in
the industry as well as economic development and residential growth in its
service areas. The primary factors that affect the distribution and sale of
natural gas are the seasonal nature of gas use, adequate and timely rate relief
from regulatory authorities, competition from alternative fuels, competition
within the gas business for industrial customers and volatility in the supply
and price of natural gas. Gas service rates, which consist of a monthly fixed
charge and a gas usage charge, are established by regulatory authorities and are
intended to permit utilities to recover operating, administrative and financing
costs and to earn a return on equity. The monthly fixed charge provides a base
revenue stream while the usage charge increases the Company's revenues and
earnings in colder weather when natural gas usage increases.
In recent years weather variances experienced during the traditional heating
load months have significantly impacted the Company's results of operations. The
average temperatures in Southern Union Gas' service areas during the past
several winter seasons have been much warmer than the 30 year normal
temperature. To mitigate the impact of these seasonal variances, Southern Union
Gas has requested and received approval for weather normalization clauses in
Austin and Galveston and in two other service areas in Texas. These clauses
allow for rate adjustments that help stabilize the utility's customers' monthly
bills and the Company's earnings from the varying effects of weather.
Over the last three years, an average of 59% of the Company's revenues came
from sales to Southern Union Gas' residential customers. Revenues from
residential customers have grown as a
14
<PAGE>
result of the Company's acquisitions. The growth of its residential base
combined with marketing efforts aimed at large volume users have provided
overall gains in sales volumes in recent years. The Company plans to continue
these marketing efforts.
RESULTS OF OPERATIONS
NET EARNINGS AVAILABLE FOR COMMON STOCK
The Company recorded net earnings available for common stock of $6,890,000
for the year ended December 31, 1993 compared to net earnings of $1,445,000 for
the year ended December 31, 1992, an increase of $5,445,000. Net earnings per
common share, based on weighted average shares outstanding were $.87 in 1993
compared to $.18 in 1992 and $.12 in 1991. (Prior to the March 1994 stock split,
discussed above, earnings per share in 1993, 1992 and 1991 were $1.31, $.27 and
$.19, respectively.) Earnings from continuing operations available for common
stock, net of preferred dividends, were $6,890,000 for the year ended December
31, 1993 compared to $3,891,000 for the year ended December 31, 1992, an
increase of $2,999,000. Earnings from continuing operations per common share for
the year ended December 31, 1993 were $.87 compared to $.49 in 1992 and $.27 in
1991.
Net earnings for the year ended December 31, 1993 were positively impacted
by the receipt of several rate increases during the past year including: a
$777,000 annualized increase in the Company's South Texas service area effective
February 10, 1993; a $1,950,000 annualized increase in Austin effective July 1,
1993; and a $463,000 annualized increase in El Paso effective November 1, 1993.
The Company also recorded a non-recurring accounting adjustment of approximately
$2,345,000 to reverse a tax reserve upon the final settlement of prior period
federal income tax audits and the filing of amended federal income tax returns.
Other factors which positively impacted net earnings for the year ended
December 31, 1993 included the reduction in payroll expenses of approximately
$1,525,000 resulting from the Company's 1993 early retirement program which was
finalized during the second quarter of 1993 and the reduction of approximately
$1,657,000 of preferred dividends due to the retirement of the Company's Series
A 10% Cumulative Preferred Stock in March and June 1993. Net earnings for the
year ended December 31, 1993 were negatively impacted by warmer than normal
weather during 1993, which was 89% of normal, and by an increase in operating
maintenance and general expense associated with severance costs of approximately
$1,298,000 resulting from the early retirement program.
The Company's net earnings available for common stock for the year ended
December 31, 1992 were $1,445,000 compared to $987,000 in 1991. The increase in
1992 net earnings available for common stock was primarily due to reductions in
operating costs, which significantly impacted net operating revenues. Other
positive factors affecting net earnings in 1992 included increases in rates and
changes in rate designs effected during 1992 and subsequent to the winter
heating season of 1991, the reversal of certain contingency accruals of
$2,200,000 recorded in 1990 related to the February 1990 cash merger between the
Company and Metro Mobile CTS, Inc., and the recognition of a gain of
approximately $950,000 resulting from a litigation settlement. These increases
in earnings were partially offset by warmer weather in 1992, approximately 4%
warmer than 1991 and 9% warmer than normal. In addition, the Company recorded a
loss on the disposal of a discontinued operation of $4,400,000. The assets of
the discontinued operation were sold effective January 1, 1993. See "Business
Held For Sale" in the Notes to the Consolidated Financial Statements for the
year ended December 31, 1993.
OPERATING REVENUES
Total operating revenues in 1993, 1992 and 1991 were $209,005,000,
$192,445,000 and $200,261,000, respectively. Revenues are affected by the level
of sales volumes and by the pass-through of increases or decreases in the
Company's gas purchase costs through its purchase gas adjustment clauses.
Operating revenues increased $16,560,000, or approximately 9%, for the year
ended December 31, 1993, primarily from an increase in the customer base
resulting from the Rio Grande Valley, Berry Gas and Eagle Pass Acquisitions as
well as the receipt of rate increases in 1993,
15
<PAGE>
described above. These acquisitions increased revenues by approximately
$8,085,000 in 1993. Operating revenues also increased due to a 24% increase in
the average cost of gas from $2.01 per Mcf in 1992 to $2.50 in 1993, which was
partially offset by a 12% decrease in gas sales volumes from 51,104 MMcf in 1992
to 44,859 MMcf in 1993. The decline in gas sales volumes reflected a decrease of
7,831 MMcf in gas sales by Mercado, the Company's marketing subsidiary,
resulting from the Company's decision in early 1993 to reduce sales to off
system markets.
Operating revenues decreased in 1992 compared to 1991 due to the Arizona
Sale in November 1991, warmer than normal weather in 1992, and a 19% decrease in
gas costs billed to residential customers. These factors were partially offset
by an increase in sales of approximately $16,400,000 due to Mercado's expanding
markets, an increase in rates, described above, and the first full year of
operations provided by the Brazos River and Andrews Acquisitions which increased
revenues by approximately $6,400,000. The Arizona Sale decreased operating
revenues by approximately $29,000,000 in 1992 as compared to 1991. Weather
during 1992 was 91% of normal with one of the warmest winter seasons in the
Company's history.
GAS SALES AND TRANSPORTATION VOLUMES
Gas sales volumes billed in 1993, 1992 and 1991 totaled 44,203 MMcf, 51,147
MMcf and 44,942 MMcf, respectively, at an average Mcf sales price of $4.42,
$3.58 and $4.39, respectively. Gas sales volumes fluctuate as a function of
weather and customer base. The decrease in gas sales volumes is due to the
weather patterns in the Company's service areas which averaged 11% warmer than
normal in 1993 and 9% warmer than normal in 1992. Gas sales volumes also
decreased due to a substantial reduction in gas sales for resale by Mercado, as
previously discussed. The average customer bases served in 1993, 1992 and 1991
were approximately 421,000, 394,000 and 428,000, respectively. The average sales
price per Mcf varied between periods as a result of variations in the average
spot market price of natural gas.
Gas transportation volumes in 1993, 1992, and 1991 totaled 22,750 MMcf,
25,438 MMcf and 8,608 MMcf, respectively, at an average transportation rate per
Mcf of $.29, $.23 and $.66, respectively. Transportation volumes decreased in
1993 as compared to 1992 as a result of a 6,500 MMcf reduction in volume
transported into Mexico by WGI which was partially offset by an increase in
transport volumes to several new customers. In addition, the average
transportation rate per Mcf increased in 1993 as compared to 1992.
Transportation volumes increased in 1992 as compared to 1991 as a result of
WGI's transported volumes into Mexico of approximately 15,000 MMcf during 1992.
GAS PURCHASE COSTS
Gas purchase costs in 1993, 1992 and 1991 were $110,384,000, $102,918,000
and $109,238,000, respectively. The increase in costs in 1993 was due to a 16%
increase in the average spot market price of natural gas from $1.69 per MMbtu in
1992 to $1.96 per MMbtu in 1993 and an increase in the average customer base
resulting from acquisitions of gas distribution systems, previously discussed.
These factors were partially offset by a substantial reduction in gas sales for
resale by Mercado, also previously discussed. The average gas purchase cost
incurred by the Company was $2.50 per Mcf in 1993, $2.01 in 1992 and $2.43 in
1991. The decrease in gas purchase costs in 1992 was due to a decrease in the
average spot market price of natural gas and a decrease in the average customer
base resulting from the Arizona Sale in November 1991. The impact of the
decrease in 1992 and 1991 gas prices was partially offset by an increase in
volumes.
OPERATING, MAINTENANCE AND GENERAL EXPENSES
Operating, maintenance and general expenses were $50,076,000, $46,313,000
and $49,022,000 in 1993, 1992 and 1991, respectively. During 1993 these expenses
increased $3,763,000 or 8% due principally to increased operating costs of
approximately $1,800,000 associated with acquisitions as well as severance costs
of approximately $1,298,000 resulting from the early retirement program, each
previously discussed. Partially offsetting the overall increase was a reduction
in payroll expenses of $1,525,000 as a result of the Company's early retirement
program. During 1992 operating, maintenance and general expenses decreased
$2,709,000 compared to 1991 due to the cost containment
16
<PAGE>
efforts implemented by the Company throughout 1992 as well as the reductions
resulting from the Arizona Sale in November 1991. These factors were partially
offset by increases in medical and hospitalization expenses.
TAXES
Federal and state income tax expense in 1993, 1992 and 1991 was $3,855,000,
$4,440,000, and $6,635,000, respectively. The decrease in taxes in 1993 as
compared to 1992 is due principally to reductions related to amended prior year
federal income tax returns and non-taxable income items included with "other
income" related to the reversal of a tax reserve as discussed below. In July
1993 the Company paid the Internal Revenue Service ("IRS") approximately
$1,266,000 in settlement for federal income taxes and interest related to the
tax years 1984 through 1989. The Company had previously estimated and accrued an
amount for the tax deficiencies and related interest and, as a result of the
settlement with the IRS for a lesser amount, a non-recurring adjustment was
recorded to reverse the tax reserve in excess of the payment made. The reversal
of the reserve had no impact on liquidity or cash flows due to the non-cash
impact of this adjustment. See "Taxes on Income" in the Notes to Consolidated
Financial Statements for the year ended December 31, 1993 for further analysis
of the Company's federal and state income tax expense.
Taxes other than income taxes reflect various state and local business and
payroll related taxes. The state and local business taxes are generally based on
gross receipts and investments in property, plant and equipment and fluctuate
accordingly.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense in 1993, 1992 and 1991 was
$14,416,000, $12,737,000 and $13,317,000, respectively. The increase in
depreciation and amortization expense of $1,679,000 in 1993 compared to 1992 was
primarily attributable to acquisitions of gas distribution systems, previously
discussed. The decrease in depreciation expense of $580,000 in 1992 compared to
1991 was principally due to the Arizona Sale in November 1991 and was partially
offset by a full year of depreciation on the acquired gas distribution systems.
The Company has requested recovery of the amortization of additional purchase
cost assigned to utility plant in recent rate filings. At this time, recovery
has not been included in gas distribution rates in the Company's major rate
jurisdictions. However, during 1993 the Federal Energy Regulatory Commission
issued a rate order approving the recovery of additional purchase costs assigned
to utility plant associated with WGI, which amount is not material to the
consolidated financial statements.
OTHER INCOME AND EXPENSES, NET
Other income and expenses, net in 1993, 1992 and 1991 were $8,176,000,
$6,531,000 and $2,536,000, respectively. During 1993 the Company recorded a
non-recurring adjustment of approximately $2,345,000 to reverse a tax reserve
upon the final settlement of prior period federal income tax audits as
previously discussed. The reversal of the reserve had no impact on liquidity or
cash flows due to the non-cash impact of this adjustment. Other income items
recorded in 1993 also included interest income on notes receivable of
approximately $830,000; rental income from Lavaca Realty, Southern Union's real
estate subsidiary, of approximately $1,835,000; and a pre-tax gain of
approximately $494,000 on the sale of undeveloped real estate.
Other income in 1992 included a $2,200,000 reversal of certain contingency
reserves recorded at the time of the 1990 merger that were subsequently resolved
or settled and a $950,000 gain resulting from a litigation settlement, each
previously discussed. The reversal of these reserves had no impact on liquidity
or cash flows due to the non-cash impact of the adjustment. Other income in 1991
also included the recognition of a gain on the Arizona Sale of $4,782,000, to
the extent of tax expense incurred, interest income on notes receivable of
approximately $528,000 and the recognition of gains on litigation settlements of
approximately $1,792,000.
Interest expense on short-term debt was $1,836,000, $384,000 and $697,000 in
1993, 1992 and 1991, respectively. Average short-term debt outstanding during
1993, 1992 and 1991 of $33,021,000,
17
<PAGE>
$5,912,000 and $9,184,000 was at an average interest rate of 5.3%, 6.3% and
8.1%, respectively. The variance in the average amounts outstanding coupled with
a general reduction in interest rates resulted in the change in other interest
expense in each of the years.
BUSINESS HELD FOR SALE
The loss from discontinued operation of $2,446,000 for the year ended
December 31, 1992 includes net earnings from oil and gas operations of
$1,954,000 which were offset by the estimated loss on disposal of $4,400,000.
Similarly, the 1991 loss from discontinued operation of $1,186,000 included net
earnings from operations of $1,064,000 and a valuation adjustment of $2,250,000.
Increased production volumes in 1992 contributed to an increase in net earnings
from operations. See "Business Held for Sale" in the Notes to Consolidated
Financial Statements for the year ended December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is impacted by its ability to generate funds from
operations and to access capital markets. The gas utility operations are
seasonal in nature with a significant percentage of the Company's annual
revenues and earnings occurring in the traditional heating-load months. This
seasonality results in a high level of cash flow needs during the peak winter
heating-load months, resulting from the required payments to natural gas
suppliers in advance of the receipt of cash payments from the Company's
customers.
FINANCING ACTIVITIES
On December 31, 1993 Southern Union completed a $50,000,000 Rights Offering
(the "Rights Offering") to its existing stockholders to subscribe for and
purchase 3,000,000 shares of the Company's common stock, par value $1.00 per
share, at $16.67 per share, as adjusted for the three for two stock split, for
net proceeds of $49,351,000. In addition, on January 31, 1994, the Company
completed the sale of $475,000,000 of 7.60% Senior Notes due 2024 (the "Senior
Debt Securities"). The net proceeds from the sale of the Senior Debt Securities,
together with the net proceeds from the Rights Offering and working capital from
operations, have been or will be used to: (i) fund the purchase price of the
Missouri Acquisition; (ii) refinance the $20,000,000 aggregate principal amount
of the 10 1/8% Notes due May 15, 1994; (iii) repay approximately $59,300,000 of
borrowings under the $100,000,000 revolving credit facility, which borrowings
were used to fund the Rio Grande Acquisition and repurchase all of the
outstanding preferred stock; (iv) refinance the $10,000,000 aggregate principal
amount of 9.45% Senior Notes due January 31, 2004, and $25,000,000 aggregate
principal amount of 10% Senior Notes due January 31, 2012 and the related
premium of $10,400,000 resulting from the early extinguishment of such notes;
and (v) refinance $50,000,000 aggregate principal amount of the 10.5% Sinking
Fund Debentures due May 15, 2017 and the premium of $3,300,000 resulting from
the early extinguishment of such debentures.
On September 30, 1993, Southern Union entered into a new revolving credit
facility with a three year term (the "Revolving Credit Facility") initially
underwritten by Texas Commerce Bank, N.A. for $80,000,000. On November 15, 1993,
the Revolving Credit Facility was syndicated to five additional banks and the
aggregate amount available to be borrowed was increased to $100,000,000.
Borrowings under the Revolving Credit Facility are available for Southern
Union's working capital and letter of credit requirements. The Revolving Credit
Facility can also be used in part, but not to exceed $40,000,000, to fund
acquisitions and capital expenditures and it provided the funds to complete the
Rio Grande Acquisition. The Revolving Credit Facility contains certain financial
covenants that, among other things, restrict cash or asset dividends, share
repurchases, certain investments and additional debt. The Revolving Credit
Facility is currently uncollaterized. Under certain conditions involving the
issuance of collateralized debt of Southern Union, the Revolving Credit Facility
automatically would become collateralized by a first priority security interest
on substantially all of the accounts receivable, inventory and certain related
contract rights of the Company. The amount outstanding under the Revolving
Credit Facility at March 21, 1994 was zero.
18
<PAGE>
During March 1993 the Company retired 68,000 shares of the Series A 10%
Cumulative Preferred Stock ("Preferred Stock") at $103 per share for $7,004,000.
In April 1993, the Company retired 77,000 shares of Preferred Stock at $102 per
share for $7,854,000. In June 1993, the Company retired 4,000 shares of
Preferred Stock at $103.50 per share for $414,000 and the remaining outstanding
100,000 shares at par for $10,000,000.
In February 1992 the Company repurchased 77,438 shares of common stock at
$10.25, as adjusted for the stock split.
INVESTING ACTIVITIES
The Company has used its revolving loan and credit facilities, internally
generated funds and long-term debt to provide funding for its seasonal working
capital, continuing construction programs, operational requirements, preferred
dividend requirements and acquisitions. During the three years ended December
31, 1993, Southern Union spent approximately $112,000,000 on capital projects.
Of that total, $58,000,000 was incurred on normal expansion of its distribution
system as well as relocation and replacement, and $54,000,000 was incurred for
the acquisition of distribution properties. In addition, during the last three
years, approximately $6,500,000 was incurred for the purchase of real estate.
For the year ended December 31, 1993, the Company spent approximately
$19,000,000 for capital expenditures, exclusive of the acquisitions of natural
gas distribution properties, which was used for normal distribution system
replacement and expansion.
On July 9, 1993, the Company entered into the Missouri Asset Purchase
Agreement pursuant to which the Company on January 31, 1994 purchased certain
natural gas distribution operations in central and western Missouri. The
estimated purchase price paid at closing was $400,300,000 in cash. The Missouri
Acquisition was accounted for as a purchase, as previously discussed. Pursuant
to the MPSC Stipulation, the additional purchase cost assigned to utility plant
may not be included in rate base nor amortized in cost of service. See
"Subsequent Events -- Missouri Acquisition" in the Notes to the Consolidated
Financial Statements for the year ended December 31, 1993.
On September 30, 1993, the Company completed the Rio Grande Acquisition for
approximately $30,500,000. Rio Grande presently serves approximately 76,000
customers in the south Texas counties of Willacy, Cameron and Hidalgo, including
the cities of Harlingen, McAllen and Brownsville (the southernmost city in the
U.S.). The Company initially funded the purchase with borrowings from its
Revolving Credit Facility. The Rio Grande Acquisition was accounted for as a
purchase.
In July 1993, the Company completed the Eagle Pass Acquisition for
approximately $2,000,000. During May 1993, the Company completed the Berry Gas
Acquisition which system serves the Texas cities and towns of Nome, Raywood,
Hull and Devers for approximately $274,000. Combined, these operations
collectively serve approximately 4,600 customers. These acquisitions were also
accounted for as purchases.
In October 1992, the Company completed the Nixon Acquisition for
approximately $415,000. This system serves approximately 650 customers. In
January 1991 the Company completed the South Texas Acquisition consisting of the
natural gas distribution and transmission facilities that serve approximately
12,000 customers in several communities. The purchase price for these facilities
was approximately $10,200,000. In August 1991, the Company completed the Andrews
Acquisition for $1,000,000. This system serves approximately 3,000 customers. In
September 1991 the Company completed the Brazos River Acquisition which provides
distribution services to approximately 18,000 customers in several communities
in north-central Texas. The purchase price for these facilities approximated
$7,000,000 of cash and assumption of $3,500,000 of mortgage bond debt. Also in
September 1991 the Company purchased a commercially developed tract of land in
the central business district of Austin, Texas containing a combined 11-story
office building, parking garage, a drive-through bank and a mini-bank facility
for $5,300,000. In December 1991, the Company also
19
<PAGE>
purchased a commercially developed tract of land in Austin, Texas for
$1,100,000. Each of these acquisitions and purchases was initially funded under
the Company's revolving loan or credit facilities.
In March 1993, Southern Union Exploration Company ("SX"), pursuant to a
purchase and sale agreement entered into in February 1993, sold substantially
all of its oil and gas leasehold interests and associated production, for
$22,000,000 effective January 1, 1993. The Company recorded a book loss on the
sale of approximately $4,400,000 as of December 31, 1992.
In November 1991, the Company completed the Arizona Sale for approximately
$46,000,000, representing cash of $40,400,000 and assumed liabilities of
$5,600,000. The cash proceeds were used to retire the short-term debt which
funded the 1991 acquisitions described above. In addition, during 1991 the
Company sold a three acre office park project in Dallas, Texas for $1,600,000
and a 120 unit apartment project in Nacogdoches, Texas for cash of $500,000 and
a note receivable for $600,000. As a result of these sales, the Company has
divested itself of all developed real estate not otherwise used at least
partially in the Company's business.
OTHER MATTERS
CONTINGENCIES
The Company has been named as a potentially responsible party in a special
notice letter from the United States Environmental Protection Agency for costs
associated with removing hazardous substances from the site of a former coal
gasification plant in Vermont. The Company also assumed responsibility for
certain environmental matters in connection with the Missouri Acquisition. See
"Commitments and Contingencies" and "Subsequent Events -- Missouri Acquisition"
in the Notes to Consolidated Financial Statements for the year ended December
31, 1993.
In 1993 the Internal Revenue Service completed its audit of the Company's
federal income tax return for 1984 through 1989. The Internal Revenue Service
proposed and the Company agreed to deficiencies and related interest of
approximately $1,266,000. The Company had fully accrued for such tax
deficiencies and related interest.
REGULATORY
The Company is continuing to pursue certain changes to rates and rate
structures that are intended to reduce the sensitivity of earnings to weather
including weather normalization clauses and higher minimum monthly service
charges.
On February 10, 1993, the Company's South Texas service area received an
annualized rate increase of $777,000. On June 10, 1993, the Austin City Council
approved an ordinance reflecting (i) an approximate $1,700,000 base revenue
increase, (ii) new and increased fees that will add approximately $250,000
annually and (iii) weather normalization clause revisions. The Austin rate
increase became effective as of July 1, 1993. On October 12, 1993, the El Paso
City Council approved an ordinance reflecting an approximate revenue increase of
$463,000. The El Paso rate increase became effective November 1, 1993. These
rate increases should contribute significantly to Southern Union Gas' earnings
in 1994.
During 1992, the Company's rate cases continued to focus upon the receipt of
timely and adequate revenue increases and on various measures designed to
stabilize earnings. Rate cases resolved in El Paso, South Texas, Dell City, Port
Arthur, Borger, Galveston, Pecos and Monahans resulted in revenue increases of
$2,742,000. The Galveston rate case also provided for an increase in the minimum
residential monthly service charge from $7.50 to $10 and the implementation of a
weather normalization clause.
ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes," effective as of January 1, 1993. SFAS No. 109 provides for the
replacement of the "deferred method" of interperiod
20
<PAGE>
income tax allocation with the "liability method" which bases the amounts of
current and future tax assets and liabilities on events recognized in the
financial statements and on income tax laws and rates existing at the balance
sheet date. The adoption of SFAS No. 109 resulted in the recording of an
insignificant amount in 1993.
The Company also adopted the provisions of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," effective as of
January 1, 1993. SFAS No. 106 requires an accrual of postretirement medical and
other benefit liabilities on an actuarial basis during the years an employee
provides services as compared to the current pay-as-you-go method. The Company
records a regulatory asset for the difference between the postretirement costs
currently included in rates and SFAS No. 106 expense to the extent the Company
files, or intends to file, a rate application to include SFAS No. 106 expense in
rates. It is probable that the regulator will allow such expense in future
rates. Consequently, earnings were not adversely impacted by the adoption of
this statement. The Company's adoption of the provisions of SFAS No. 106
resulted in a transition obligation of approximately $9,328,000 which was
subsequently reduced in 1993 to $4,257,000 primarily as a result of certain plan
amendments. The Company will amortize the remaining transition obligation over
the allowed 20-year period.
SFAS No. 112, "Employees Accounting for Postemployment Benefits," is
required to be adopted effective for fiscal years beginning after December 15,
1993. SFAS No. 112 provides standards for employers who grant benefits to
employees after employment but before retirement. The Company anticipates the
recovery of the periodic expense through rates and the recording of the future
benefits to be paid as a regulatory asset. The Company plans to adopt the
provisions of SFAS No.112 effective as of January 1, 1994. The impact of the
adoption of SFAS No. 112 is not expected to be material to the financial
condition or results of operations of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Consolidated Financial Statements of Southern Union
and its consolidated subsidiaries listed on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The information required is incorporated herein by reference from Southern
Union's definitive Proxy Statement for the annual meeting of stockholders to be
held on May 25, 1994, which will be filed on or before April 4, 1994.
ITEM 11. EXECUTIVE COMPENSATION.
The information required is incorporated herein by reference from Southern
Union's definitive Proxy Statement for the annual meeting of stockholders to be
held on May 25, 1994, which will be filed on or before April 4, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required is incorporated herein by reference from Southern
Union's definitive Proxy Statement for the annual meeting of stockholders to be
held on May 25, 1994, which will be filed on or before April 4, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required is incorporated herein by reference from Southern
Union's definitive Proxy Statement for the annual meeting of stockholders to be
held on May 25, 1994, which will be filed on or before April 4, 1994.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS. Reference is made to the Index on page F-1
for a list of all financial statements filed as part of this Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES. Reference is made to the Index on
page F-1 for a list of all financial statement schedules filed as a part of this
Report.
(a)(3) EXHIBITS. Reference is made to the Exhibit Index on pages E-1 and
E-2 for a list of all exhibits filed as a part of this Report.
(b) REPORTS ON FORM 8-K. A Current Report on Form 8-K was filed on October
13, 1993. Events reported included: (i) the Corpus Christi, Texas, City Council
voted not to hold a referendum on selling the city's gas system to the Company;
(ii) the Company entered into a new Revolving Credit Agreement with Texas
Commerce Bank, N.A., as agent, for an $80,000,000 Revolving Credit Facility, as
amended on November 15 to increase the facility to $100,000,000; and (iii) the
Company entered into a Purchase Agreement pursuant to which it simultaneously
purchased Rio Grande Valley Gas Company for approximately $30,500,000.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Southern Union has duly caused this report to be signed by
the undersigned, thereunto duly authorized on March 28, 1994.
SOUTHERN UNION COMPANY
By /s/ PETER H. KELLEY
-----------------------------------
Peter H. Kelley,
PRESIDENT AND CHIEF OPERATING
OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Southern Union and
in the capacities indicated as of March 28, 1994.
<TABLE>
<CAPTION>
SIGNATURE/NAME TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
GEORGE L. LINDEMANN*
------------------------------------------- Chairman of the Board, Chief Executive Officer and
George L. Lindemann Director
JOHN E. BRENNAN*
------------------------------------------- Director
John E. Brennan
FRANK W. DENIUS*
------------------------------------------- Director
Frank W. Denius
AARON I. FLEISCHMAN*
------------------------------------------- Director
Aaron I. Fleischman
/s/ PETER H. KELLEY
------------------------------------------- Director
Peter H. Kelley
ADAM M. LINDEMANN*
------------------------------------------- Director
Adam M. Lindemann
ROGER J. PEARSON*
------------------------------------------- Director
Roger J. Pearson
GEORGE ROUNTREE, III*
------------------------------------------- Director
George Rountree, III
DAN K. WASSONG*
------------------------------------------- Director
Dan K. Wassong
/s/ RONALD J. ENDRES
------------------------------------------- Senior Vice President of Administration, and Chief
Ronald J. Endres Financial Officer
/s/ DAVID J. KVAPIL
------------------------------------------- Vice President and Controller (Principal Accounting
David J. Kvapil Officer)
By /s/ PETER H. KELLEY
-------------------------------------------
Peter H. Kelley
ATTORNEY-IN-FACT
</TABLE>
23
<PAGE>
SOUTHERN UNION COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page(s)
-------------
<S> <C>
Consolidated financial statements:
Report of independent accountants................................................................ F-2
Statement of consolidated operations -- years ended December 31, 1993, 1992 and 1991............. F-3
Consolidated balance sheet -- December 31, 1993 and 1992......................................... F-4
Statement of consolidated cash flows -- years ended December 31, 1993, 1992 and 1991............. F-5
Notes to consolidated financial statements....................................................... F-6 to F-23
</TABLE>
<TABLE>
<C> <C> <S> <C>
Financial statement schedules:
V -- Property, plant and equipment........................................... S-1
VI -- Accumulated depreciation and amortization of property, plant and
equipment.............................................................. S-2
IX -- Short-term borrowings................................................... S-3
X -- Supplementary statement of operations information....................... S-4
</TABLE>
All other schedules are omitted as the required information is not
applicable or the information is presented in the consolidated financial
statements, related notes or other schedules.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Southern Union Company:
We have audited the consolidated financial statements and financial
statement schedules of Southern Union Company and Subsidiaries listed in the
index on page F-1 of this Form 10-K. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules 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 consolidated financial position of Southern Union
Company and Subsidiaries as of December 31, 1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedules referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
As discussed in the Summary of Significant Accounting Policies note to the
consolidated financial statements, effective January 1, 1993 the Company changed
its method of accounting for income taxes and postretirement benefits other than
pensions.
COOPERS & LYBRAND
Austin, Texas
March 11, 1994
F-2
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
(Thousands of dollars, except shares
and per share amounts)
<S> <C> <C> <C>
Operating revenues....................................................... $ 209,005 $ 192,445 $ 200,261
Gas purchase costs....................................................... 110,384 102,918 109,238
----------- ----------- -----------
Operating margin....................................................... 98,621 89,527 91,023
----------- ----------- -----------
Operating expenses:
Operating, maintenance and general..................................... 50,076 46,313 49,022
Taxes, other than on income............................................ 14,365 13,115 14,840
Depreciation and amortization.......................................... 14,416 12,737 13,317
----------- ----------- -----------
Total operating expenses............................................. 78,857 72,165 77,179
----------- ----------- -----------
Net operating revenues............................................... 19,764 17,362 13,844
----------- ----------- -----------
Other income (expenses):
Interest on long-term debt............................................. (11,535) (11,496) (11,179)
Other interest......................................................... (2,212) (963) (1,402)
Gain on Arizona Sale................................................... -- -- 4,782
Other, net............................................................. 5,571 5,928 5,263
----------- ----------- -----------
Total other expenses, net............................................ (8,176) (6,531) (2,536)
----------- ----------- -----------
Income before taxes and discontinued operation....................... 11,588 10,831 11,308
----------- ----------- -----------
Federal and state income taxes........................................... 3,855 4,440 6,635
----------- ----------- -----------
Earnings from continuing operations...................................... 7,733 6,391 4,673
----------- ----------- -----------
Discontinued operation:
Earnings from operations, net of tax................................... -- 1,954 1,064
Estimated loss on disposal............................................. -- (4,400) (2,250)
----------- ----------- -----------
Loss from discontinued operation..................................... -- (2,446) (1,186)
----------- ----------- -----------
Earnings before preferred dividends...................................... 7,733 3,945 3,487
Preferred dividends...................................................... (843) (2,500) (2,500)
----------- ----------- -----------
Net earnings available for common stock.................................. $ 6,890 $ 1,445 $ 987
----------- ----------- -----------
----------- ----------- -----------
Earnings (loss) per common share:
Continuing operations.................................................. $ .87 $ .49 $ .27
Discontinued operation:
Earnings from operations, net of tax................................. -- .25 .13
Estimated loss on disposal........................................... -- (.56) (.28)
----------- ----------- -----------
Net earnings......................................................... $ .87 $ .18 $ .12
----------- ----------- -----------
Weighted average shares outstanding...................................... 7,891,917 7,888,971 7,929,858
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1992
----------- -----------
<S> <C> <C>
(THOUSANDS OF DOLLARS)
Property, plant and equipment:
Plant in service..................................................................... $ 374,963 $ 312,812
Construction work in progress...................................................... 2,080 4,307
----------- -----------
377,043 317,119
Less accumulated depreciation and amortization....................................... (144,491) (114,210)
----------- -----------
232,552 202,909
Additional purchase cost assigned to utility plant, net of accumulated amortization
of $10,530,000 and $7,357,000, respectively......................................... 92,991 82,596
----------- -----------
Net property, plant and equipment.................................................. 325,543 285,505
----------- -----------
Current assets:
Cash................................................................................. 2,918 89
Accounts receivable, billed and unbilled............................................. 46,292 40,818
Inventories, principally at average cost............................................. 2,950 3,127
Prepayments and other................................................................ 2,077 1,147
----------- -----------
Total current assets............................................................... 54,237 45,181
----------- -----------
Real estate............................................................................ 11,718 10,988
Net assets of business held for sale................................................... -- 16,273
Deferred charges....................................................................... 16,160 11,313
Other.................................................................................. 8,549 7,907
----------- -----------
Total.............................................................................. $ 416,207 $ 377,167
----------- -----------
----------- -----------
STOCKHOLDERS' EQUITY AND LIABILITIES
Common stockholders' equity:
Common stock, $1 par value; authorized 50,000,000 shares; issued 10,958,603 shares at
December 31, 1993................................................................... $ 10,959 $ 7,934
Premium on capital stock............................................................. 188,645 142,103
Less treasury stock: 77,438 shares at cost........................................... (794) (794)
Retained earnings (deficit).......................................................... 3,128 (1,240)
----------- -----------
Total common stockholders' equity.................................................. 201,938 148,003
----------- -----------
Cumulative preferred stock, $100 stated value; issued 250,000 shares; zero outstanding
at December 31, 1993.................................................................. -- 24,900
----------- -----------
Long-term debt......................................................................... 89,019 109,464
----------- -----------
Current liabilities:
Long-term debt due within one year................................................... 20,555 460
Notes payable........................................................................ 20,100 13,900
Accounts payable..................................................................... 27,149 26,291
Federal, state and local taxes....................................................... 10,982 9,722
Accrued interest..................................................................... 3,028 2,718
Customer deposits.................................................................... 3,988 4,357
Deferred gas purchase costs.......................................................... 2,648 4,121
Other................................................................................ 6,309 4,813
----------- -----------
Total current liabilities.......................................................... 94,759 66,382
----------- -----------
Deferred credits, principally customer advances........................................ 10,882 6,444
Accumulated deferred income taxes...................................................... 19,609 21,974
Commitments and contingencies.......................................................... -- --
----------- -----------
Total.............................................................................. $ 416,207 $ 377,167
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C>
Cash flows from operating activities:
Earnings before preferred dividends............................................. $ 7,733 $ 3,945 $ 3,487
Adjustments to reconcile earnings before preferred dividends to net cash flows
from operating activities:
Depreciation and amortization................................................... 14,416 12,737 13,317
Deferred income taxes........................................................... (1,368) (996) 2,424
Amortization of debt discount................................................... 604 -- --
Valuation adjustment of business held for sale.................................. -- 4,400 2,250
Gain on Arizona sale............................................................ -- -- (4,782)
Other, net...................................................................... 559 1,595 428
Changes in assets and liabilities, net of acquisitions and dispositions:
Decrease (increase) in accounts receivable, billed and unbilled................. (1,489) (9,938) 10,602
Increase (decrease) in accounts payable......................................... (2,287) 3,112 (2,939)
Increase (decrease) in taxes and other liabilities.............................. 1,585 (2,748) (1,078)
Decrease in customer deposits................................................... (3,214) (304) (61)
Increase (decrease) in deferred gas purchase costs.............................. (1,473) (2,958) 5,152
Net decrease (increase) in other accounts....................................... (49) 1,905 (7,163)
---------- ---------- ----------
Net cash flows from operating activities...................................... 15,017 10,750 21,637
---------- ---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment...................................... (18,532) (18,623) (19,819)
Purchase of operations, net of cash received.................................... (35,559) (507) (17,506)
Leasehold improvements.......................................................... (2,018) (1,277) 110
Net increase (decrease) in customer advances.................................... 718 (2,294) 429
Net decrease in deferred charges and deferred credits........................... (993) (845) (1,729)
Proceeds from sale of real estate............................................... 794 335 1,814
Purchase of real estate......................................................... -- -- (6,485)
Proceeds from sale of businesses................................................ 16,493 1,050 40,648
Other, net...................................................................... (755) 1,282 (4,776)
---------- ---------- ----------
Net cash flows used in investing activities................................... (39,852) (20,879) (7,314)
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings under revolving credit facility.................................. 6,200 12,651 --
Repayment of debt............................................................... (938) (2,732) (41,214)
Issuance of debt................................................................ -- 1,038 36,641
Proceeds from rights offering, net.............................................. 49,351 -- --
Issuance of common stock........................................................ 216 -- 37
Redemption of preferred stock................................................... (24,900) (100) --
Premium on redemption of preferred stock........................................ (372) (4) --
Payment of dividends on preferred stock......................................... (843) (2,500) (2,500)
Purchase of treasury stock...................................................... -- (794) --
Credit facility renewal fee..................................................... (1,050) -- --
Net financing activities of business held for sale.............................. -- -- (6,208)
---------- ---------- ----------
Net cash flows from (used in) financing activities............................ 27,664 7,559 (13,244)
---------- ---------- ----------
Increase (decrease) in cash....................................................... 2,829 (2,570) 1,079
Cash at beginning of year......................................................... 89 2,659 1,580
---------- ---------- ----------
Cash at end of year............................................................... $ 2,918 $ 89 $ 2,659
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1992 AND 1991
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS AND PRINCIPLES OF CONSOLIDATION
Southern Union Company ("Southern Union" and, together with its wholly owned
subsidiaries, the "Company"), is an investor-owned public utility primarily
engaged in the distribution and sale of natural gas to residential, commercial,
industrial, agricultural and other customers as a public utility in the states
of Texas, Oklahoma and Missouri. See "Subsequent Events -- Missouri
Acquisition." Subsidiaries of Southern Union also market natural gas to
end-users, sell natural gas as a vehicular fuel, convert vehicles to operate on
natural gas, operate intrastate and interstate natural gas pipeline systems, and
sell commercial gas air conditioning and other gas-fired engine-driven
applications. A subsidiary also holds investments in real estate. Substantial
operations of the Company are subject to regulation.
The consolidated financial statements include the accounts of Southern Union
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. All dollar amounts in the
tabulations in the notes to consolidated financial statements, except per share
amounts, are stated in thousands unless otherwise indicated. Certain
reclassifications have been made to the prior years' financial statements to
conform with the current year presentation.
PROPERTY, PLANT AND EQUIPMENT
Utility plant in-service and construction work in progress are stated at
original cost of construction, less contributions in aid of construction, which
includes, where appropriate, payroll related costs such as taxes, pensions,
other employee benefits, general and administrative costs and an allowance for
funds used during construction. Gain or loss is recognized upon the disposition
of significant utility properties and other property constituting operating
units. Gain or loss from minor dispositions of property is charged or credited
to accumulated depreciation and amortization. The Company capitalizes the cost
of significant internally developed computer software systems.
Acquisitions are recorded at the historical book carrying value of utility
plant. Additional purchase cost assigned to utility plant is the excess of the
purchase price over the book carrying value of utility plant purchased. In
general, the Company has not been allowed direct recovery of additional purchase
cost assigned to utility plant in rates. Periodically, the Company evaluates the
carrying value of its additional purchase cost assigned to utility plant by
comparing the anticipated future operating income from the businesses giving
rise to the additional purchase cost with the unamortized balance.
DEPRECIATION AND AMORTIZATION
Depreciation of utility plant is provided at an average straight-line rate
of approximately 3% per annum of the cost of such depreciable properties less
applicable salvage. Franchises are being amortized over their respective lives.
Depreciation and amortization of other property is provided at straight-line
rates estimated to recover the costs of the properties, after allowance for
salvage, over their respective lives. Amortization of the additional purchase
cost assigned to utility plant is provided on a straight-line basis over thirty
years.
BUSINESS HELD FOR SALE
Business held for sale is stated at estimated net after-tax sales proceeds.
LONG-TERM DEBT
Debt issuance costs are amortized over the lives of the related debt issues.
F-6
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GAS UTILITY 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 revenues through operation of purchased gas
adjustment provisions in tariffs approved by the regulatory agencies having
jurisdiction.
The Company recognizes an estimate of unbilled revenues on a monthly-cycle
basis which include 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 operating revenues in the statement of consolidated
earnings.
EMPLOYEE RETIREMENT PLAN AND POSTRETIREMENT BENEFITS
The Company adopted the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions," effective as of January 1, 1993. This statement requires
an accrual of postretirement medical and other benefit liabilities on an
actuarial basis during the years an employee provides services. The Company
records a regulatory asset for the difference between the postretirement costs
currently included in rates and SFAS 106 expense to the extent the Company has
filed, or intends to file, a rate application to include SFAS 106 expense in
rates and it is probable that the regulator will allow such expense in future
rates.
TAXES ON INCOME
The Company adopted the provisions of SFAS No. 109, "Accounting for Income
Taxes," effective as of January 1, 1993. SFAS No. 109 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 tax assets
and liabilities on events recognized in the financial statements and on income
tax laws and rates existing at the balance sheet date.
Prior to the adoption of SFAS No. 109, the Company followed the provisions
of Accounting Principles Board ("APB") No. 11, "Accounting for Income Taxes."
For the years ended December 31, 1992 and 1991, the interperiod allocation of
federal income taxes resulted in the provision of deferred income taxes provided
for timing differences between financial and taxable income, principally
attributable to accelerated tax depreciation. Investment tax credits allowed on
certain qualified properties were deferred and are amortized to income over the
estimated life of the related property.
CASH FLOWS AND CREDIT RISK
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company places its
temporary cash investments with a high credit quality financial institution
which, in turn, invests the temporary funds in a variety of high-quality
financial securities. Concentrations of credit risk in trade receivables are
limited due to the large customer base with relatively small individual account
balances.
EARNINGS PER SHARE
Earnings per common share is based on net earnings available for common
stock using the weighted average shares outstanding during each period. Fully
diluted earnings per share is not presented because the relevant stock options
are not significant.
ACQUISITIONS AND DIVESTITURES
In September 1993, the Company acquired the Rio Grande Valley Gas Company
("Rio Grande") for approximately $30,500,000. Rio Grande serves approximately
76,000 customers in the south Texas counties of Willacy, Cameron and Hidalgo
which includes 32 towns and cities along the Mexico border, including Harlingen,
McAllen and Brownsville (the southernmost city in the U.S.). The Company
initially funded the purchase with borrowings from its revolving credit facility
which were subsequently paid down out of the net proceeds from the sale of a
$50,000,000 Rights Offering completed on
F-7
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1993 (the "Rights Offering") and the sale of $475,000,000 of 7.60%
Senior Notes due 2024 (the "Senior Debt Securities") completed on January 31,
1994. See "Stockholders' Equity -- Rights Offering" and "Long-Term Debt." The
acquisition of Rio Grande was accounted for using the purchase method of
accounting. Rio Grande was merged into Southern Union on the date of the
acquisition and has been integrated into its Southern Union Gas utility
division. The additional purchase cost assigned to utility plant of
approximately $11,644,000 reflects the excess of the purchase price over the
historical book carrying value of the utility plant purchased.
The following unaudited pro forma financial information for the years ended
December 31, 1993 and 1992 is presented as though the acquisition of Rio Grande
had been consummated at the beginning of 1993 and 1992, respectively. The pro
forma financial information, adjusted for the stock split on March 9, 1994, is
not necessarily indicative of the results which would have actually been
obtained had the acquisition been completed as of the assumed date for the
periods presented or which may be obtained in the future.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1993 1992
----------- -----------
<S> <C> <C>
Total operating revenues...................................................... $ 231,425 $ 222,414
Net operating revenues........................................................ 20,454 18,654
Net earnings (loss)........................................................... 4,651 (1,391)
Net earnings (loss) per common share.......................................... .59 (.18)
</TABLE>
In July 1993, the Company acquired the natural gas distribution facilities
serving the city of Eagle Pass, Texas for approximately $2,000,000. In May 1993,
the Company acquired the natural gas distribution facilities of Berry Gas
Company which serves the Texas cities and towns of Nome, Raywood, Hull and
Devers for approximately $274,000. Combined, these operations collectively serve
approximately 4,600 customers. These acquisitions were also accounted for as
purchases.
During 1992, the Company acquired the natural gas distribution facilities in
Nixon, Texas for $415,000. Also, the Company added approximately 12 miles of
pipeline which transports gas to the community of Sabine Pass, Texas. During
1991, the Company acquired the natural gas distribution and transmission
facilities serving an area in south Texas, including the cities of Lockhart,
Luling, Cuero, Shiner, Yoakum and Gonzales, and the natural gas distribution
facilities serving the city of Andrews, Texas. Also, in 1991, Southern Union
acquired Brazos River Gas Company, a natural gas distribution company serving
the north Texas cities of Mineral Wells, Weatherford, Graham, Breckenridge,
Millsap, Jacksboro and surrounding communities. The purchase price for the 1991
acquisitions was $18,200,000 in cash and assumption of $3,500,000 of mortgage
bonds. The distribution operations acquired in 1992 and 1991 collectively serve
approximately 35,000 customers.
In February 1993, Southern Union Exploration Company ("SX"), a wholly owned
subsidiary of Southern Union, entered into a purchase and sale agreement to sell
substantially all of its oil and gas leasehold interests and associated
production for approximately $22,000,000, which sale was completed in March
1993, effective January 1, 1993. See "Business Held For Sale".
In November 1991, the Company sold the assets of its Arizona gas utility
operations (the "Arizona Sale") for approximately $46,000,000, including cash of
$40,400,000 and assumed liabilities of $5,600,000. Cash proceeds approximated
$32,800,000, net of applicable taxes. The Company recognized a gain of
approximately $4,800,000 on the Arizona Sale to the extent of the tax expense
incurred on the transaction. The remaining amount in excess of assets sold of
approximately $11,400,000 was credited to additional purchase cost assigned to
utility plant recorded in February 1990 at the time of the merger of an
acquiring company into Southern Union.
F-8
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Because of the aforementioned acquisitions and divestitures in 1993, 1992
and 1991, the results of operations of the Company for the years ended December
31, 1993, 1992 and 1991 are not comparable.
OTHER INCOME
During 1993, the Company recorded a non-recurring accounting adjustment of
approximately $2,345,000 to reverse a tax reserve upon the final settlement of
prior period federal income tax audits and the filing of amended federal income
tax returns. In July 1993, the Company paid the Internal Revenue Service ("IRS")
approximately $1,266,000 in settlement for federal income taxes and interest
related to the tax years 1984 through 1989. The Company had previously estimated
and accrued an amount for the tax deficiencies and related interest and, as a
result of the settlement with the IRS for a lesser amount, a non-recurring
adjustment was recorded to reverse the tax reserve in excess of the payment
made. The reversal of the reserve had no impact on liquidity or cash flows due
to the non-cash impact of this adjustment. Other income items recorded in 1993
also included: interest income on notes receivable of approximately $830,000;
rental income from Lavaca Realty Company ("Lavaca Realty"), the Company's real
estate subsidiary, of approximately $1,835,000; and a pre-tax gain of
approximately $494,000 on the sale of undeveloped real estate.
During 1992, the Company resolved certain other contingent matters and
reversed approximately $2,200,000 of certain contingency reserves, recorded when
an acquiring company completed a cash merger into Southern Union during February
1990. The reversal of those reserves had no impact on liquidity or cash flows
due to the non-cash impact of this adjustment. In addition, a $950,000 gain
resulting from a litigation settlement was recorded in 1992. Other income in
1991 included approximately $1,792,000 in gains resulting from litigation
settlements and interest income on notes receivable of approximately $528,000.
CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Cash paid during the year for:
Interest (net of amount capitalized)............................... $ 12,820 $ 10,005 $ 11,695
Income taxes....................................................... 9,691 4,449 11,350
</TABLE>
F-9
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Excluded from the statement of consolidated cash flows were the following
effects of non-cash investing and financing activities:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Pension liability adjustment to retained earnings....................... $ 2,051 -- --
--------- --------- ---------
--------- --------- ---------
Non-cash assets and liabilities acquired:
Working capital....................................................... $ (718) -- $ 1,069
Noncurrent assets..................................................... 36,448 $ 507 19,994
Noncurrent liabilities................................................ (171) -- (3,557)
--------- --------- ---------
$ 35,559 $ 507 $ 17,506
--------- --------- ---------
--------- --------- ---------
<CAPTION>
1991
---------
<S> <C> <C> <C>
Non-cash aspects of businesses and investments sold
(Real estate dispositions and Arizona Sale):
Assets sold................................................................................. $ 52,834
Liabilities assumed by purchasers........................................................... (9,680)
---------
43,154
Less receivable............................................................................. (2,590)
Less expenses paid.......................................................................... (551)
---------
Net cash received........................................................................... $ 40,013
---------
---------
Adjustment of real estate to fair market value................................................ $ 1,022
---------
---------
</TABLE>
REAL ESTATE
In February 1993, Southern Union entered into a settlement agreement with
the Resolution Trust Corporation ("RTC") with respect to Southern Union's former
subsidiary, First Bankers Trust & Savings Association. As part of the
settlement, in return for payment by the Company of $4,792,000, the RTC:
dismissed a $6,174,000 judgment for specific performance of a contract to
purchase real estate; canceled notes in the principal amount of $1,600,000;
permitted the Company to terminate a $2,000,000 letter of credit; deeded the
Company a 21-acre tract in Austin, Texas; and released certain other claims
asserted in the settled litigation. This settlement had no impact on earnings
since the Company had previously recorded a reserve for the related loss
contingency. In December 1993, Lavaca Realty sold this land for approximately
$794,000 resulting in an after tax gain of approximately $321,000.
In 1991, Lavaca Realty purchased a commercially developed tract of land in
the central business district of Austin, Texas containing a combined 11-story
office building, parking garage, drive-through bank and mini-bank facility
("Lavaca Plaza") for $5,300,000. Approximately 49% of the office space at Lavaca
Plaza is used in the Company's business while 51% is leased, or is under option
to lease, to non-affiliated entities. During 1991, Lavaca Realty sold a
three-acre office park project in Dallas, Texas for $1,600,000 and a 120 unit
apartment project in Nacogdoches, Texas for cash of $500,000 and a note
receivable for $600,000 and, in 1992, sold 11 acres of undeveloped land in
Austin, Texas for $335,000. The 1991 sales transactions resulted in the
recognition of a tax benefit of approximately $1,300,000.
F-10
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCKHOLDERS' EQUITY
The changes in common stockholders' equity and cumulative preferred stock
were as follows:
<TABLE>
<CAPTION>
Common Stockholders' Equity
----------------------------------------------------------- Cumulative
Common Premium Preferred
Stock on Treasury Retained Stock $100
$1 Par Capital Stock, Earnings Stated
Value Stock at Cost (Deficit) Total Value
--------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1991:
Balance January 1, 1991................. $ 7,929 $ 142,071 $ -- $ (3,668) $ 146,332 $ 25,000
Net earnings.......................... -- -- -- 3,487 3,487 --
Dividends on preferred stock.......... -- -- -- (2,500) (2,500) --
Exercise of stock options for 4,500
shares of common stock............... 5 32 -- -- 37 --
--------- ----------- ----------- --------- ----------- -----------
Balance December 31, 1991........... 7,934 142,103 -- (2,681) 147,356 25,000
Year ended December 31, 1992:
Net earnings.......................... -- -- -- 3,945 3,945 --
Dividends on preferred stock.......... -- -- -- (2,500) (2,500) --
Redemption of preferred stock......... -- -- -- (4) (4) (100)
Purchase of treasury stock............ -- -- (794) -- (794) --
--------- ----------- ----------- --------- ----------- -----------
Balance December 31, 1992........... 7,934 142,103 (794) (1,240) 148,003 24,900
Year ended December 31, 1993:
Net earnings.......................... -- -- -- 7,733 7,733 --
Dividends on preferred stock.......... -- -- -- (843) (843) --
Rights Offering for 3,000,000 shares
of common stock...................... 3,000 46,351 -- -- 49,351 --
Exercise of stock options for 24,750
shares of common stock............... 25 191 -- -- 216
Pension liability adjustment............ -- -- -- (2,051) (2,051)
Redemption of preferred stock........... -- -- -- (471) (471) (24,900)
--------- ----------- ----------- --------- ----------- -----------
Balance December 31, 1993............. $ 10,959 $ 188,645 $ (794) $ 3,128 $ 201,938 $ --
--------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- --------- ----------- -----------
</TABLE>
STOCK SPLIT
On February 11, 1994 Southern Union's Board of Directors declared a three
for two stock split in the form of a 50% stock dividend which was distributed on
March 9, 1994 to stockholders of record on February 23, 1994. Effective March 9,
1994 the Company gave retroactive recognition to the equivalent change in
capital structure for all periods presented. Consequently, earnings per share in
1993, 1992 and 1991 were recomputed based on the weighted average number of
shares outstanding during each year adjusted for the stock split.
RIGHTS OFFERING
On December 31, 1993, Southern Union consummated a Rights Offering to its
existing stockholders to subscribe for and purchase 3,000,000 shares of the
Company's common stock, par value $1.00 per share, at $16.67 per share, as
adjusted for the March 9, 1994 three for two stock split, for net proceeds of
$49,351,000. The proceeds from the Rights Offering, together with the proceeds
from the sale of $475,000,000 of 7.60% of Senior Notes due 2024 on January 31,
1994, were used to fund the acquisitions of Rio Grande and certain gas
distribution assets in Missouri and to retire certain outstanding debt. See
"Acquisitions and Divestitures," "Long-Term Debt" and "Subsequent Events."
F-11
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMON STOCK
The Company had an incentive stock option plan (the "1982 Plan") which
terminated on December 31, 1991. Under the terms of the 1982 Plan, options to
purchase up to an aggregate of 750,000 shares of common stock could have been
granted to officers and key employees at prices not less than fair market value
on the date of grant. Options granted under the 1982 Plan are exercisable for
periods of ten years from the date of grant or such lesser period as may be
designated for particular options, and become exercisable after a specified time
from the date of grant in cumulative annual installments. Upon exercise of an
option, the 1982 Plan permitted the Company to elect, instead of issuing shares,
to make a cash payment equal to the difference at the date of exercise between
the option price and the market price of the shares as to which option is being
exercised.
Options under the 1982 Plan for 19,500 shares at $8.17 were exercised in
1993 and options under the 1982 Plan for 13,500 shares at $8.17 were canceled in
1993. No options under the 1982 Plan were exercised in 1992. Options under the
1982 Plan for 15,000 shares at $8.17 per share were canceled in 1992 due to
employee terminations in 1992. Options under the 1982 Plan for 4,500 shares at
$8.33 were exercised in 1991. No options under the 1982 Plan were granted during
the year ended December 31, 1991. At December 31, 1993, 1992 and 1991, options
under the 1982 Plan for 195,000, 142,500 and 78,000 shares were exercisable at
prices ranging from $8.17 to $9.17.
The 1992 Long-Term Stock Incentive Plan (the "1992 Long-Term Plan") was
approved at the annual meeting of stockholders held on May 12, 1993. Under the
1992 Long-Term Plan options to purchase 780,000 shares may be granted to
officers and key employees at prices not less than the market value on the date
of grant. Options granted under the 1992 Long-Term Plan are exercisable for
periods of ten years from the date of grant or such lesser period as may be
designated for particular options, and become exercisable after a specified
period of time from the date of grant in cumulative annual installments. The
1992 Long-Term Plan also allows for the granting of stock appreciation rights,
dividend equivalents, performance shares and restricted stock.
No options under the 1992 Long-Term Plan were granted during 1993. Options
under the 1992 Long-Term Plan for 5,250 shares at $10.67 were exercised in 1993
and options under the 1992 Long-Term Plan for 6,000 shares at $10.67 were
canceled in 1993. There are 588,000 shares available for future option grants
under the 1992 Long-Term Plan at December 31, 1993. Options for 203,250 shares
at $10.67 per share, along with dividend equivalents, were granted in October
1992 under the 1992 Long-Term Plan. No options under the 1992 Long-Term Plan
were exercised during 1992 and none under the 1992 Long-Term Plan were
exercisable at December 31, 1992. At December 31, 1993, options for 38,400
shares at $10.67 were exercisable under the 1992 Long-Term Plan.
In 1992 the Company purchased 77,438 shares of its common stock at $10.25,
adjusted for the stock split, from a company whose Chairman, Chief Executive
Officer and President, at that time, were also executive officers, directors and
stockholders of Southern Union.
RETAINED EARNINGS
Provisions in certain of Southern Union's long-term notes and Southern
Union's charter relating to the issuance of preferred stock limit the payment of
cash or asset dividends on capital stock. Under the most restrictive provisions
in effect, as a result of the sale of Senior Debt Securities, Southern Union
will not declare or pay any cash or asset dividends on common stock (other than
dividends and distributions payable solely in shares of its common stock or in
rights to acquire its common stock) or acquire or retire any shares of Southern
Union's common stock, unless no event of default exists and the Company meets
certain financial ratio requirements.
F-12
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CUMULATIVE PREFERRED STOCK
During March 1993, Southern Union retired 68,000 shares of the Series A 10%
Cumulative Preferred Stock ("Preferred Stock") at $103 per share for $7,004,000.
In April 1993, Southern Union retired 77,000 shares of Preferred Stock at $102
per share for $7,854,000. In June 1993, Southern Union retired 4,000 shares of
Preferred Stock at $103.50 per share for $414,000 and the remaining outstanding
100,000 shares at par for $10,000,000.
LONG-TERM DEBT
First mortgage bonds, debentures and other long-term debt outstanding,
including current maturities, were as follows:
<TABLE>
<CAPTION>
March 2, December 31,
----------- ------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
First mortgage bonds:
11.5% due 2000 -- collateralized by utility plant in service............. $ 2,900 $ 2,900 $ 3,500
Sinking fund debentures:
10 1/2% due 2017......................................................... -- 50,000 50,000
Other long-term debt:
10 1/8% notes due 1994................................................... 20,000 20,000 20,000
9.45% notes due 2004..................................................... -- 10,000 10,000
10% notes due 2012....................................................... -- 25,000 25,000
7.60% Senior notes due 2024.............................................. 475,000 -- --
Other.................................................................... 1,381 1,674 1,424
----------- ----------- -----------
Total long-term debt....................................................... $ 499,281 $ 109,574 $ 109,924
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The maturities of long-term debt for each of the next five years are: 1994
- -- $20,555,000; 1995 -- $516,000; 1996 -- $545,000; 1997 -- $559,000 and 1998 --
$243,000.
On January 31, 1994, Southern Union completed the sale of the Senior Debt
Securities. The net proceeds from the sale of the Senior Debt Securities,
together with the net proceeds from the Rights Offering and working capital from
operations, have been or will be used to: (i) fund the purchase price of the
Missouri Acquisition; (ii) refinance the $20,000,000 aggregate principal amount
of the 10 1/8% Notes due May 15, 1994; (iii) repay approximately $59,300,000 of
borrowings under the $100,000,000 revolving credit facility, which borrowings
were used to fund the acquisition of Rio Grande and repurchase all of the
outstanding preferred stock; (iv) refinance the $10,000,000 aggregate principal
amount of 9.45% Senior Notes due January 31, 2004, and $25,000,000 aggregate
principal amount of 10% Senior Notes due January 31, 2012 and the related
premium of $10,400,000 resulting from the early extinguishment of such notes;
and (v) refinance $50,000,000 aggregate principal amount of the 10.5% Sinking
Fund Debentures due May 15, 2017 and the premium of $3,300,000 resulting from
the early extinguishment of such debentures. See "Subsequent Events.
NOTES PAYABLE
On September 30, 1993, Southern Union entered into an $80,000,000 revolving
credit facility with one bank to provide its seasonal working capital and
letters of credit requirements. The revolving credit facility was amended on
November 15, 1993 to syndicate it to five additional banks and to increase the
facility to $100,000,000. The Company may use up to $40,000,000 of this facility
to finance future acquisitions. This facility contains covenants with respect to
financial parameters and ratios, total debt limitations, borrowing base
limitations, restrictions as to dividend payments, stock reacquisitions, certain
investments and additional liens. Further, this revolving credit facility is
initially uncollaterized; however, it would become collaterized by a first
priority security interest in substantially all of the Company's accounts
receivable, inventory and certain related contract rights
F-13
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in the event that Southern Union issues debt collaterized by 20% or more of the
property, plant and equipment of Southern Union. The facility expires on
December 31, 1996, but may be extended annually for periods of one year
beginning on September 30, 1994 with the consent of each of the banks. The
revolving credit facility is subject to a commitment fee of an annualized .25%
on the unused balance. The interest rate on borrowings on the revolving credit
facility is calculated based on a formula using the LIBOR and prime interest
rates. The average interest rate under the revolving credit facility was 4.7%
for the year ended December 31, 1993.
EMPLOYEE RETIREMENT PLAN AND POSTRETIREMENT BENEFITS
DEFINED BENEFIT PLAN
The Company maintains a trusteed non-contributory defined benefit retirement
plan which covers substantially all employees. Benefits are based on years of
service and the employee's compensation during the last ten years of employment.
The Company funds plan costs in accordance with federal regulations, not to
exceed the amounts deductible for income tax purposes. The plan's assets are
invested in a cash fund, bond funds and stock funds.
During 1993, the Company completed an early retirement program for certain
of the Company's employees. Approximately 75 of an eligible 109 employees
accepted the early retirement program. As a result, the Company recognized
expenses of approximately $702,000 associated with special termination benefits.
The components of net pension expense for the year ended December 31, 1993,
1992 and 1991 consisted of the following:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Service cost of benefits earned during the year....................... $ 1,067 $ 1,051 $ 1,036
Interest cost on projected benefit obligations........................ 2,358 2,001 1,498
Actual return on plan assets.......................................... (1,099) (1,280) (1,325)
Net amortization and deferral......................................... (632) (252) 199
--------- --------- ---------
Net pension expense................................................... $ 1,694 $ 1,520 $ 1,408
--------- --------- ---------
--------- --------- ---------
</TABLE>
The actuarial computations for the determination of accumulated and
projected benefit obligations using the projected unit credit actuarial cost
method, assumed a discount rate of 7.5% and a weighted average annual salary
increase of 5.8% over the average remaining service lives of employees under the
plan as of December 31, 1993. A discount rate of 9% and a weighted average
annual salary increase of 6.6% were assumed as of December 31, 1992 and 1991. An
expected long-term rate of return on plan assets of 8% was assumed in 1993, 1992
and 1991. As a result of decreasing the discount rate effective January 1, 1994,
the provisions of SFAS No. 87, "Employers Accounting for Pensions" required the
recognition in the balance sheet of an additional minimum liability representing
the excess of accumulated benefits over plan assets. A corresponding amount is
recognized as an intangible asset to the extent of any unrecognized prior
service cost and any remainder as a reduction of stockholders' equity. At
December 31, 1993, the Company recorded an additional liability of $4,917,000,
an intangible asset of $1,809,000 and a reduction in stockholders' equity of
$2,051,000, net of an income tax benefit of $1,057,000.
F-14
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the funded status of the pension plan
and accrued retirement plan liabilities as of December 31, 1993, and 1992:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits................................................................ $ 29,093 $ 20,861
Nonvested benefits............................................................. 1,205 625
--------- ---------
Accumulated benefit obligations.................................................. 30,298 21,486
Effect of future salary increases................................................ 3,448 3,475
--------- ---------
Projected benefit obligation..................................................... 33,746 24,961
Plan assets at fair value........................................................ 23,592 21,976
--------- ---------
Projected benefit obligations in excess of plan assets........................... 10,154 2,985
Unrecognized net transition asset................................................ 768 865
Unrecognized prior service cost.................................................. (1,809) (1,959)
Unrecognized net gain (loss)..................................................... (7,324) 295
Adjustment to recognize minimum liability........................................ 4,917 --
--------- ---------
Accrued retirement plan liabilities.............................................. $ 6,706 $ 2,186
--------- ---------
--------- ---------
</TABLE>
Prior service cost is being amortized on a straight line basis over the
average remaining expected future service of participants present at the time of
amendment.
The Company also maintains a supplemental non-contributory defined benefit
retirement plan which covers certain employees whose annual earnings exceed
$50,000. The purpose of the supplemental plan is to provide part or all of those
defined benefit plan benefits which are not payable to certain employees under
the primary plan. The Company does not currently fund the supplemental plan. The
net pension cost of the supplemental plan for the years ended December 31, 1993,
1992 and 1991 was not significant.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company adopted the provision of SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," effective as of January 1,
1993 which resulted in a transition obligation of approximately $9,328,000 which
was subsequently reduced in 1993 to $4,257,000 primarily as a result of certain
plan amendments. The Company will amortize the remaining transition obligation
over an allowed 20-year period. This statement requires an accrual of
postretirement medical and other benefit liabilities on an actuarial basis
during the years an employee provides services. The Company records a regulatory
asset for the difference between the postretirement cost currently included in
rates and the SFAS No. 106 expense to the extent the Company has filed, or
intends to file, a rate application to include SFAS No. 106 expense in rates and
it is probable that the regulator will allow such expense in future rates. The
total postretirement costs deferred and recorded as a regulatory asset at
December 31, 1993 were approximately $501,000. The postretirement costs
recognized as expense in 1993 were $489,000. Prior years' costs of $155,000 and
$270,000 in 1992 and 1991, respectively, were recognized as expense when claims
were paid.
The significant features of the substantive plan include the payment for
life of a portion of the medical benefit costs for individuals (and their
dependents) who retired prior to January 1, 1993 and for certain individuals
(and their dependents) who elected to retire during the first quarter of 1993
and for active employees hired prior to January 1, 1993 benefits are provided
only to retirees and only until eligibility for Medicare (age 65). The
cost-sharing provisions for medical care benefits include an escalation in the
retirees share of claims obligations that is expected to follow the trend of
claims net of Medicare reimbursements. The substantive plan was amended during
1993 to substantially modify
F-15
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the cost-sharing provisions to decrease the employer's share of expected future
claims and make certain other plan changes. During 1992, the Company
discontinued offering postretirement medical benefits to dependents to the
future retirees after age 65 and employees hired after December 31, 1992.
The funding policy is to pay claims as they arise from a tax-exempt trust
through 1999. In addition, contributions are currently being made to a separate
account within the pension plan to accumulate assets sufficient to fund claims
arising after 1999. Assets held in the tax-exempt trust include primarily
short-term obligations. Assets held in the separate account within the
retirement plan include cash funds, bond funds and stock funds. Non-benefit
liabilities are limited to expenses associated with plan operation and
administration.
The components of net postretirement benefit cost for the year ended
December 31, 1993 consisted of the following:
<TABLE>
<CAPTION>
1993
---------
<S> <C>
Service cost of benefits earned during the year................................................. $ 36
Interest cost on benefit obligations............................................................ 609
Actual return on plan assets.................................................................... (4)
Net amortization and deferral................................................................... 349
---------
Net postretirement benefit cost................................................................. $ 990
---------
---------
</TABLE>
The following is a reconciliation of the funded status of the postretirement
benefit plan and accrued postretirement liabilities as of December 31, 1993.
<TABLE>
<CAPTION>
December 31,
1993
-------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................................ $ 3,911
Other fully eligible participants....................................................... 55
Other active participants............................................................... 434
-------------
Accumulated benefit obligation............................................................ 4,400
Plan assets at fair value................................................................. (277)
-------------
Accumulated benefit obligations in excess of plan assets.................................. 4,123
Unrecognized net transition obligation.................................................... (4,257)
Unrecognized net gain..................................................................... 663
-------------
Accrued postretirement benefit cost....................................................... $ 529
-------------
-------------
</TABLE>
For purposes of computing the 1993 net periodic cost and transition
obligation, the assumed health care cost trend rate used to measure expected
cost benefits covered by the plan was 13.7%, gradually decreasing to 7% in year
17 of the projection. For purposes of the December 31, 1993 benefit obligations,
the health care cost trend rate was 10% for the first seven years of the
projection, thereafter decreasing by .25% per year, reaching 7% in year 18 of
the projection. The weighted average assumed discount rate was 9% for purposes
of the 1993 net periodic cost and transition obligation and 7.5% for purposes of
the December 31, 1993 computation of the accumulated postretirement benefit
obligation. The weighted average expected long-term rate of return on plan
assets is assumed to be 8% on an after tax basis. In addition, prior service
cost is amortized on a straight line basis over the average remaining years of
service to full eligibility for benefits of the active plan participants.
F-16
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A one percentage point increase in the assumed health care cost trend rates
for each future year would increase the aggregate of the service and interest
cost components of the net periodic postretirement health care benefit cost by
approximately $50,000 and would increase the accumulated postretirement benefit
obligation for health care benefits by approximately $500,000.
TAXES ON INCOME
The Company adopted SFAS No. 109 effective January 1, 1993. The effect of
this change was not material. Prior to that date, the Company applied the
provisions of APB No. 11, "Accounting for Income Taxes". The components of taxes
on income relating to continuing operations were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1993
-------------------------------
Current Deferred
Tax Tax Total
--------- --------- ---------
<S> <C> <C> <C>
Federal................................................................. $ 2,417 $ 1,368 $ 3,785
State................................................................... 70 -- 70
--------- --------- ---------
$ 2,487 $ 1,368 $ 3,855
--------- --------- ---------
--------- --------- ---------
<CAPTION>
1992
-------------------------------
<S> <C> <C> <C>
Federal................................................................. $ 3,373 $ 996 $ 4,369
State................................................................... 71 -- 71
--------- --------- ---------
$ 3,444 $ 996 $ 4,440
--------- --------- ---------
--------- --------- ---------
<CAPTION>
1991
-------------------------------
<S> <C> <C> <C>
Federal................................................................. $ 8,079 $ (2,424) $ 5,655
State................................................................... 980 -- 980
--------- --------- ---------
$ 9,059 $ (2,424) $ 6,635
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred credits include $755,000 and $791,000 of unamortized deferred
investment tax credit as of December 31, 1993 and 1992, respectively.
F-17
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes result from temporary differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities. The source of these differences and tax effect of each is as
follows:
<TABLE>
<CAPTION>
December 31,
1993
------------
<S> <C>
Deferred tax assets:
Postretirement benefits................................................................. $ 1,513
Note receivable......................................................................... 921
Insurance accruals...................................................................... 540
Other................................................................................... 571
------------
Total deferred tax assets............................................................... 3,545
------------
Deferred tax liabilities:
Property, plant and equipment........................................................... (21,004)
Unamortized debt expense................................................................ (1,372)
Other................................................................................... (559)
------------
Total deferred tax liabilities.......................................................... (22,935)
------------
Net deferred tax liability................................................................ (19,390)
------------
Less current tax asset.................................................................... 219
------------
Accumulated deferred income taxes......................................................... $ (19,609)
------------
------------
</TABLE>
The sources of timing differences and the related deferred tax effect for
the years ended December 31, 1992 and 1991, pursuant to APB No. 11 were as
follows:
<TABLE>
<CAPTION>
Years Ended December
31,
--------------------
1992 1991
--------- ---------
<S> <C> <C>
Difference between book and tax depreciation...................................... $ 1,535 $ 887
Contributions in aid of construction.............................................. (1,363) (524)
Insurance reserves................................................................ 209 (346)
Loss on retirement of debt........................................................ -- 733
Deferred taxes related to assets sold............................................. -- (2,956)
Pension plan cost accruals........................................................ 263 107
Amortization of excess deferred income tax........................................ (161) (176)
Other, net........................................................................ 513 (149)
--------- ---------
Total........................................................................... $ 996 $ (2,424)
--------- ---------
--------- ---------
</TABLE>
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 $10,000,000. Total income tax expense differed from the amount
computed by
F-18
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
applying the applicable federal income tax rate of 35% in 1993 and 34% in 1992
and 1991 to earnings from continuing operations before taxes on income. The
reasons for the differences for each of the years were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense.................................................... $ 4,056 $ 3,682 $ 3,845
Changes in taxes resulting from:
State income taxes............................................................... 46 45 133
Amortization of acquisition adjustment........................................... 1,060 1,004 1,123
Amortization of excess deferred income tax....................................... (191) (161) (176)
Tax gain (loss) on sale of assets in excess of book gain (loss).................. -- (322) 1,799
Adjustments to tax reserve....................................................... (1,095) -- --
Other............................................................................ (21) 192 (89)
--------- --------- ---------
Actual tax expense............................................................... $ 3,855 $ 4,440 $ 6,635
--------- --------- ---------
--------- --------- ---------
</TABLE>
BUSINESS HELD FOR SALE
In February 1993, SX entered into a purchase and sale agreement to sell
substantially all of its oil and gas leasehold interests and associated
production for approximately $22,000,000, which sale was completed in March 1993
effective as of January 1, 1993. SX, engaged in the development and production
of oil and gas, held varying interests in producing oil and gas wells located
primarily in New Mexico and Texas. The Company accounted for SX as a business
held for sale wherein adjustments were made to reflect the valuation of this
business to an estimated net realizable value. At December 31, 1992 and 1991,
the Company estimated and recorded a book loss on future disposal of $4,400,000
and $2,250,000, respectively. In addition, the Company recorded a tax liability
of approximately $6,960,000 resulting from the recognition of a tax basis gain
of approximately $18,800,000. The sale closed on March 31, 1993. SX also
disposed of various oil and gas properties during 1992 and 1991 for a total of
approximately $800,000 and $2,600,000, respectively.
LEASES
The Company leases certain facilities, equipment and office space under
cancelable and noncancelable operating leases. The minimum annual rentals under
operating leases for the next five years are as follows: 1994 -- $2,325,000;
1995 -- $1,819,000; 1996 -- $1,384,000; 1997 -- $1,113,000; and 1998 --
$900,000; and thereafter $938,000. Rental expense was approximately $2,061,000,
$2,372,000 and $1,881,000 in 1993, 1992 and 1991, respectively.
RELATED PARTIES
In April 1992, Southern Union advanced $375,980 to Peter H. Kelley,
President, Chief Operating Officer and a Director of Southern Union, to enable
him to repay certain funds borrowed by him from his previous employer in
connection with his departure from his previous employer to become an executive
officer of the Company. The advance is evidenced by a note, payable on demand,
bearing an annual percentage interest rate of 6.5% which was equal to the prime
rate announced by Texas Commerce Bank, N.A. on the date the advance was made,
plus one-half percent. As of December 31, 1993, Mr. Kelley's outstanding
principal and accrued but unpaid interest balance was $355,428. This loan is
being repaid on schedule.
In October 1993, Southern Union's Board of Directors approved and ratified
payments by the Company to Activated Communications, Inc. ("Activated") for use
by the Company of Activated's office space in New York City. Activated is
controlled and operated by Company Chairman George L. Lindemann and Vice
Chairman John E. Brennan, who, along with Director Adam M. Lindemann, did
F-19
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
not participate in such Board action. Monthly rental payments commenced
effective as of August 1992 for approximately half of Activated's base lease
payments before certain adjustments. Total payments to Activated in 1993 and
1992 were $187,000 and $104,000, respectively.
Fleischman and Walsh, of which Southern Union Director Aaron Fleischman is
Senior Partner, provides legal services to the Company. In 1993, 1992 and 1991
the total value of legal services provided by Fleischman and Walsh to the
Company was approximately $980,000, $503,000 and $624,000, respectively. On
February 10, 1994, Southern Union's Board of Directors granted to Fleischman and
Walsh a warrant to purchase up to 37,500 shares of Common Stock, $1 par value
per share, at an exercise price of $23.00, as adjusted for the stock split. The
warrant expires on February 10, 2004.
COMMITMENTS AND CONTINGENCIES
The Company is aware of the possibility that it may become a defendant in an
action brought by the United States Environmental Protection Agency ("EPA")
under 42 U.S.C. Section 9607(a) for reimbursement of costs associated with
removing hazardous substances from the site of a former coal gasification plant
(the "Pine Street Canal Site") in Burlington, Vermont. This knowledge arises out
of the existence of a prior action, UNITED STATES V. GREEN MOUNTAIN POWER CORP.,
ET AL, Civil No. 88-307 (D. Vt.) in which the Company became involved as a
third-party defendant in January 1989. Green Mountain Power was an action under
42 U.S.C. Section 9607(a) by the federal government to recover clean-up costs
associated with the "Maltex Pond", which is part of the Pine Street Canal Site.
Two defendants in Green Mountain Power, Vermont Gas Systems and Green Mountain
Power Corp., claimed that the Company is the corporate successor to People's
Light and Power Corporation, an upstream corporate parent of Green Mountain
Power Corp. during the years 1928-1931. Green Mountain Power was settled without
admission or determination of liability with respect to the Company by order
dated December 26, 1990. The EPA has since conducted studies of the clean-up
costs for the remainder of the Pine Street Canal Site, but the ultimate costs
are unknown at this time. On November 30, 1992, the Company was named as a
potentially responsible party in a special notice letter from the EPA. On August
16, 1993, the Company's participation in settlement discussions on technical and
allocation issues with the EPA was requested by Green Mountain Power Corp.,
Vermont Gas Systems, Inc. and New England Electric System (the "Gas Plant
PRPs"). By letter dated September 20, 1993, the Company informed the Gas Plant
PRPs of its reasons for its belief that it has no liability for the site,
including (1) that it is not a corporate successor to any entity that owned or
was responsible for the Pine Street Canal Site during the period the coal
gasification plant was in operation, (2) that any claims against Peoples Light
and Power Corporation were discharged in that company's 1936 Plan of
Reorganization, and (3) that the Company merged with a successor to People's
Light and Power Company, Inc., a separate company incorporated following the
bankruptcy of Peoples Light and Power Corporation. Should the Company be made
party to any action seeking recovery of remaining clean-up costs, it intends to
assert the foregoing defenses and to otherwise vigorously defend against such an
action. The Company has made demands of the appropriate insurers that they
assume the defense of and liability for any such claim that may be asserted.
In 1993, the Internal Revenue Service completed its audit of the Company's
federal income tax return for 1984 through 1989. The Internal Revenue Service
proposed, and the Company agreed to the deficiencies and related interest of
approximately $1,266,000. The Company had fully accrued for the tax deficiencies
and interest. Southern Union and its subsidiaries are parties to other legal
proceedings that its management considers to be the normal kinds of actions to
which an enterprise of its size and nature might be subject. Management believes
the outcome of these legal proceedings will not have a material impact on the
Company's results of operations or consolidated financial position.
The Company has commitments under gas purchase contracts which contain
certain minimum purchase provisions for the firm supply of quantities of natural
gas. The Company's minimum
F-20
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
provisions in its gas supply contracts do not exceed fifty percent of its supply
requirements in its service areas. In addition, the Company manages its gas
supply purchases to ensure it meets the minimum purchase provisions of its gas
purchase contracts. As such, management of the Company believes that take-or-pay
provisions within its contracts will not have a material adverse impact on the
Company's results of operations or consolidated financial position.
SUBSEQUENT EVENTS
MISSOURI ACQUISITION
On July 9, 1993, Southern Union entered into an Agreement for the Purchase
of Assets (the "Missouri Asset Purchase Agreement") with Western Resources, Inc.
("Western Resources"), pursuant to which Southern Union purchased from Western
Resources (the "Missouri Acquisition") certain Missouri natural gas distribution
operations (the "Missouri Business"). The acquisition was consummated on January
31, 1994 and will be accounted for as a purchase. Southern Union paid
approximately $400,300,000 in cash for the Missouri Business. The final
determination of the purchase price and all prorations and adjustments are
expected to be completed by May 30, 1994.
Southern Union operates the Missouri Business as Missouri Gas Energy, a
division of Southern Union which is headquartered in Kansas City, Missouri. As
of January 31, 1994, Missouri Gas Energy served approximately 472,000 customers
in 147 communities in central and western Missouri, including the cities of
Kansas City, St. Joseph, Joplin and Monett.
The approval of the Missouri Acquisition by the Missouri Public Service
Commission (the "MPSC") was subject to the terms of a stipulation and settlement
agreement (the "MPSC Stipulation") among Southern Union, Western Resources, the
MPSC staff and all intervenors in the MPSC proceeding. Among other things, the
MPSC Stipulation: (i) provides that the Company attain a total debt to total
capital ratio that does not exceed Standard and Poor's Corporation's Utility
Financial Benchmark ratio for the lowest investment grade investor-owned natural
gas distribution company (which, at January 31, 1994, would have been
approximately 58%) in order to implement any general rate increase with respect
to the Missouri Business; (ii) prohibits Southern Union from implementing a
general rate increase in Missouri before January 31, 1997 except in certain
unusual events; (iii) required Western Resources to contribute an additional
$9,000,000 to the Missouri Business' employees' and retirees' qualified defined
benefit plans transferred to the Company; (iv) requires the Company to
contribute an additional $3,000,000 to the Company's qualified defined benefit
plan applicable to the Missouri Business' employees and retirees; and (v)
requires the Company to reduce rate base by $30,000,000 (to be amortized over a
ten year period) to compensate rate payers for rate base reductions that were
eliminated as a result of the acquisition.
Southern Union assumed certain liabilities of Western Resources with respect
to the Missouri Business, including liabilities arising from certain specified
contracts assigned to Southern Union at closing, including gas supply and
transportation contracts, office equipment leases and real estate leases,
liabilities arising from certain contracts entered into by Western Resources in
the ordinary course of business, certain liabilities that have arisen or may
arise from the operation of the Missouri Business, and liabilities for certain
accounts payable of Western Resources pertaining to the Missouri Business.
Southern Union and Western Resources also entered into an Environmental
Liability Agreement at closing. Subject to the accuracy of certain
representations made by Western Resources in the Missouri Asset Purchase
Agreement, the agreement provides for a tiered approach to the allocation of
substantially all liabilities under environmental laws that may exist or arise
with respect to the Missouri Business. The agreement contemplates Southern Union
first seeking reimbursement from other potentially responsible parties, or
recovery of such costs under insurance or through rates charged to customers. To
the extent certain environmental liabilities are discovered by Southern
F-21
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Union prior to July 9, 1995, and are not so reimbursed or recovered, Southern
Union will be responsible for the first $3,000,000, if any, of out of pocket
costs and expenses incurred to respond to and remediate any such environmental
claim. Thereafter, Western Resources would share one-half of the next
$15,000,000 of any such costs and expenses, and Southern Union would be solely
liable for any such costs and expenses in excess of $18,000,000.
The Missouri Business owns or is otherwise associated with a number of sites
where manufactured gas plants were previousy 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 EPA or delegated state regulatory
authority. By virtue of notice under the Missouri Asset Purchase 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 terms of an Employee Agreement with Western Resources
entered into on July 9, 1993, after the closing of the Missouri Acquisition,
Southern Union employed certain employees of Western Resources involved in the
operation of the Missouri Business ("Continuing Employees"). Under the terms of
the Employee Agreement, the assets and liabilities under Western Resources'
qualified defined benefit plans attributable to Continuing Employees and retired
employees who had been necessary to the operation of the Missouri Business
("Retired Employees") were transferred to a qualified defined benefit plan of
Southern Union that will provide benefits to Continuing Employees and Retired
Employees substantially similar to those provided for under Western Resources'
qualified defined benefit plans. Southern Union amended its qualified defined
benefit plan to cover the Continuing Employees and Retired Employees and provide
Continuing Employees and Retired Employees with certain welfare, separation and
other benefits and arrangements.
In connection with the Missouri Acquisition, on January 31, 1994 Southern
Union completed the sale of the Senior Debt Securities. See "Long-Term Debt."
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information for the years ended
December 31, 1993 and 1992 is presented to give effect to: the funding of the
Missouri Acquisition; the completion of the Rights Offering; the sale of Senior
Debt Securities; and the refinancing of certain short-term debt, current
maturities of long-term debt and certain long-term debt outstanding at December
31, 1993, as if such transactions had been consummated at the beginning of 1993
and 1992, respectively. The pro forma financial information, adjusted for the
stock split, is not necessarily indicative of the results
F-22
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which would have actually been obtained had the Missouri Acquisition, the Rights
Offering, the sale of Senior Debt Securities or the refinancings been completed
as of the assumed date for the periods presented or which may be obtained in the
future.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1993 1992
----------- -----------
<S> <C> <C>
Total operating revenues...................................................... $ 539,245 $ 490,401
Net operating revenues........................................................ 43,310 34,277
Net earnings.................................................................. 11,036 3,619
Net earnings per common share................................................. 1.02 .33
</TABLE>
OTHER EVENT
On February 11, 1994, Southern Union's Board of Directors declared a three
for two stock split in the form of a 50% stock dividend which was distributed on
March 9, 1994 to stockholders of record on February 23, 1994. See "Stockholder's
Equity."
QUARTERLY OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------
1993 March 31 June 30 September 30 December 31 Total
- ------------------------------------------------ ----------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Total operating revenues........................ $ 67,322 $ 36,913 $ 31,633 $ 73,137 $ 209,005
Net operating revenues (expenses)............... 11,547 1,178 (79) 7,118 19,764
Earnings (loss) before preferred dividends...... 5,169 (924) (1,254) 4,742 7,733
Net earnings (loss) available for common
stock.......................................... 4,575 (1,173) (1,254) 4,742 6,890
Net earnings (loss) per common share............ .58 (.15) (.16 ) .60 .87
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------
1992 March 31 June 30 September 30 December 31 Total
- ------------------------------------------------ ----------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Total operating revenues........................ $ 59,836 $ 33,042 $ 34,025 $ 65,542 $ 192,445
Net operating revenues (expenses)............... 11,043 304 (1,404) 7,419 17,362
Earnings (loss) from continuing operations...... 6,016 (899) (2,944) 4,218 6,391
Earnings (loss) from discontinued operation..... 568 251 569 (3,834) (2,446)
Earnings (loss) before preferred dividends...... 6,584 (648) (2,375) 384 3,945
Net earnings (loss) available for common
stock.......................................... 5,959 (1,273) (3,000) (241) 1,445
Earnings (loss) from continuing operations per
common share................................... .68 (.20) (.45 ) .46 .49
Net earnings (loss) per common share............ .75 (.16) (.38 ) (.03 ) .18
</TABLE>
F-23
<PAGE>
SCHEDULE V
SOUTHERN UNION COMPANY AND SUBSIDIARIES
PROPERTY, PLANT AND EQUIPMENT
THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
COLUMN B COLUMN E COLUMN F
----------- ------------- -----------
COLUMN A BALANCE AT COLUMN C COLUMN D OTHER CHANGES BALANCE
- --------------------------------------------- BEGINNING ----------- -------------- ADDS AT END OF
CLASSIFICATION OF YEAR ADDITIONS RETIREMENTS (DEDUCTS)(A) YEAR
- --------------------------------------------- ----------- ----------- -------------- ------------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Utility plant:
Intangible............................... $ 1,939 $ 186 $ 71 $ -- $ 2,054
Production and gathering................. 3,117 2 213 (14) 2,892
Transmission............................. 9,199 553 244 444 9,952
Distribution............................. 305,506 51,995 956 (430) 356,115
General.................................. 27,468 14,999 1,683 (44) 40,740
----------- ----------- -------------- ------ -----------
Total utility plant.................... 347,229 67,735(b) 3,167 (44) 411,753
Construction work in progress.............. 4,307 21,148 23,375 -- 2,080
Less contributions in aid of
construction.............................. (34,417) (2,477) (104) -- (36,790)
----------- ----------- -------------- ------ -----------
317,119 86,406 26,438 (44) 377,043
Acquisition adjustment..................... 89,953 13,568(b) -- -- 103,521
----------- ----------- -------------- ------ -----------
$ 407,072 $ 99,974 $ 26,438 $ (44) $ 480,564
----------- ----------- -------------- ------ -----------
----------- ----------- -------------- ------ -----------
Year ended December 31, 1992:
Utility plant:
Intangible............................... $ 1,856 $ 92 $ -- $ (9) $ 1,939
Production and gathering................. 3,188 122 -- (193) 3,117
Transmission............................. 8,570 440 4 193 9,199
Distribution............................. 290,761 16,068 1,323 -- 305,506
General.................................. 20,521 7,670 723 -- 27,468
----------- ----------- -------------- ------ -----------
Total utility plant.................... 324,896 24,392 2,050 (9) 347,229
Construction work in progress.............. 5,519 22,174 23,386 -- 4,307
Less contributions in aid of
construction.............................. (30,408) (4,195) (186) -- (34,417)
----------- ----------- -------------- ------ -----------
300,007 42,371 25,250 (9) 317,119
Acquisition adjustment..................... 89,328 769 -- (144) 89,953
----------- ----------- -------------- ------ -----------
$ 389,335 $ 43,140 $ 25,250 $ (153) $ 407,072
----------- ----------- -------------- ------ -----------
----------- ----------- -------------- ------ -----------
Year ended December 31, 1991:
Utility plant:
Intangible............................... $ 1,973 $ 231 $ 334 $ (14) $ 1,856
Production and gathering................. 3,177 -- 8 19 3,188
Transmission............................. 7,554 3,323 2,595 288 8,570
Distribution............................. 294,907 38,229 42,103 (272) 290,761
General.................................. 17,668 4,995 2,835 693 20,521
----------- ----------- -------------- ------ -----------
Total utility plant.................... 325,279 46,778(c) 47,875(d) 714 324,896
Construction work in progress.............. 6,695 -- 1,235 59 5,519
Less contributions in aid of
construction.............................. (31,595) (1,628) (2,815) -- (30,408)
----------- ----------- -------------- ------ -----------
300,379 45,150 46,292 773 300,007
Acquisition adjustment..................... 94,227 7,198(c) 11,384(d) (713) 89,328
----------- ----------- -------------- ------ -----------
$ 394,606 $ 52,348 $ 57,679 $ 60 $ 389,335
----------- ----------- -------------- ------ -----------
----------- ----------- -------------- ------ -----------
<FN>
- --------------------------
(a) Reclassification between accounts.
(b) Additions include the purchase of $44,340,000 of utility plant for Rio
Grande, Eagle Pass and Berry Gas and related acquisition adjustments of
$13,504,000.
(c) Purchase of distribution operations of $25,236,000 utility plant and
$6,287,000 of acquisition adjustment.
(d) Sale of Arizona of $45,074,000 utility plant and $11,384,000 of
acquisition adjustment.
</TABLE>
S-1
<PAGE>
SCHEDULE VI
SOUTHERN UNION COMPANY AND SUBSIDIARIES
ACCUMULATED DEPRECIATION
AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
Column C Column E
Column B ------------ -----------
----------- Additions Other Column F
Column A Balance at Charged to Column D Changes -----------
- ---------------------------------------------- Beginning Costs and ------------- Adds Balance at
Classification of Year Expenses(a) Retirements (Deducts) End of Year
- ---------------------------------------------- ----------- ------------ ------------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Utility plant:
Intangible................................ $ 734 $ 72 $ 71 $ -- $ 735
Production and gathering.................. 1,223 353 208 -- 1,368
Transmission.............................. 3,844 297 244 17 3,914
Distribution.............................. 90,632 30,426 956 -- 120,102
General................................... 17,777 1,816 1,284 63 18,372
----------- ------------ ------------- ----------- -----------
Total................................... 114,210 32,964(b) 2,763 80 144,491
Acquisition adjustment...................... 7,357 3,173 -- -- 10,530
----------- ------------ ------------- ----------- -----------
Total utility plant..................... $ 121,567 $ 36,137 $ 2,763 $ 80 $ 155,021
----------- ------------ ------------- ----------- -----------
----------- ------------ ------------- ----------- -----------
Year ended December 31, 1992:
Utility plant:
Intangible................................ $ 675 $ 59 $ -- -- $ 734
Production and gathering.................. 1,103 120 -- -- 1,223
Transmission.............................. 3,682 162 -- -- 3,844
Distribution.............................. 83,799 8,156 1,323 -- 90,632
General................................... 16,755 1,715 693 -- 17,777
----------- ------------ ------------- ----------- -----------
Total................................... 106,014 10,212 2,016 -- 114,210
Acquisition adjustment...................... 4,440 2,917 -- -- 7,357
----------- ------------ ------------- ----------- -----------
Total utility plant..................... $ 110,454 $ 13,129 $ 2,016 $ -- $ 121,567
----------- ------------ ------------- ----------- -----------
----------- ------------ ------------- ----------- -----------
Year ended December 31, 1991:
Utility plant:
Intangible................................ $ 951 $ 107 $ 326 $ (57) $ 675
Production and gathering.................. 3,059 262 30 (2,188) 1,103
Transmission.............................. 1,715 892 1,172 2,247 3,682
Distribution.............................. 80,917 17,518 14,636 -- 83,799
General................................... 14,568 2,889 1,375 673 16,755
----------- ------------ ------------- ----------- -----------
Total................................... 101,210 21,668(c) 17,539(d) 675 106,014
Acquisition adjustment...................... 1,804 3,281 117(d) (528) 4,440
----------- ------------ ------------- ----------- -----------
Total utility plant..................... $ 103,014 $ 24,949 $ 17,656 $ 147 $ 110,454
----------- ------------ ------------- ----------- -----------
----------- ------------ ------------- ----------- -----------
<FN>
- ------------------------
(a) Additions charged to costs and expenses include depreciation and
amortization shown separately in the statement of consolidated operations,
depreciation, depletion and amortization sustained by the discontinued
operations, depreciation of equipment charged to clearing accounts and
depreciation and amortization charged to other revenue and expense
accounts.
(b) Additions include the purchase of $21,647,000 of utility plant for Rio
Grande Valley, Eagle Pass, and Berry Gas.
(c) Purchase of distribution operations of $10,897,000 utility plant.
(d) Sale of Arizona of $13,964,000 utility plant and $117,000 of acquisition
adjustment.
</TABLE>
S-2
<PAGE>
SCHEDULE IX
SOUTHERN UNION COMPANY AND SUBSIDIARIES
SHORT-TERM BORROWINGS
THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
COLUMN E
COLUMN B COLUMN D ----------------- COLUMN F
------------- COLUMN C ----------------- AVERAGE AMOUNT ---------------------
COLUMN A BALANCE AT ----------------- MAXIMUM AMOUNT OUTSTANDING WEIGHTED AVERAGE
- -------------------------- END WEIGHTED AVERAGE OUTSTANDING DURING THE INTEREST RATE DURING
AMOUNTS PAYABLE TO BANKS OF YEAR INTEREST RATE DURING THE YEAR YEAR(A) THE YEAR(A)
- -------------------------- ------------- ----------------- ----------------- ----------------- ---------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1993..................... $ 20,100 4.7% $ 74,000 $ 33,021 5.3%
Year ended December 31,
1992..................... 13,900 6.0 37,649 5,912 6.3
Year ended December 31,
1991..................... 1,249(b) 6.5 36,249 9,184 8.1
<FN>
- ------------------------
(a) Average amount outstanding and weighted average interest rate were
calculated based on the aggregated daily balance outstanding and the
corresponding interest rate.
(b) In January 1992, the Company issued $35,000,000 of long-term notes to
retire $30,000,000 of short-term debt. These notes were classified as
long-term debt in the consolidated balance sheet at December 31, 1991.
</TABLE>
S-3
<PAGE>
SCHEDULE X
SOUTHERN UNION COMPANY AND SUBSIDIARIES
SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
COLUMN B
-------------------------------
COLUMN A
- -------------------------------------------------------------------------- CHARGED TO COST AND EXPENSES
-------------------------------
ITEM 1992 1991
- -------------------------------------------------------------------------- --------- ---------
1993
---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Maintenance and repairs................................................... $ 5,203 $ 4,817 $ 5,659
Taxes, other than payroll and income taxes................................ 12,860 11,741 13,115
</TABLE>
S-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION HEREIN
- ------- ----------- ------
<S> <C> <C>
3(a) Restated Certificate of Incorporation of
Southern Union Company, as amended. (Filed as
Exhibit 3(a) to Southern Union's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1992 and incorporated herein by
reference.)
3(b) Southern Union Company Bylaws, as amended.
(Filed as Exhibit 3(e) to Southern Union's
Annual Report on Form 10-K for the year ended
December 31, 1989 and incorporated herein by
reference.)
3(c) Amendment to Southern Union's Bylaws dated
June 22, 1992. (Filed as Exhibit 3(c) to
Southern Union's Annual Report on Form 10-K
for the year ended December 31, 1992 and
incorporated herein by reference.)
4(a) Specimen Common Stock Certificate. (Filed as
Exhibit 4(a) to Southern Union's Annual Report
on Form 10-K for the year ended December 31,
1989 and incorporated herein by reference.)
4(b) Indenture dated as of April 1, 1987 and First
Supplemental Indenture dated as of May 1, 1987
between Southern Union and MBank Dallas, N.A.,
relating to Southern Union's 10 1/8% Notes due
May 15, 1994 and 10 1/2% debentures due May 15,
2017. (Filed as Exhibits 4.1 and 4.2 to
Southern Union's Registration Statement on
Form S-3, File No. 33-13225 and incorporated
herein by reference.)
4(c) Indenture between Chase Manhattan Bank
(National Association), as trustee, and
Southern Union Company dated January 31, 1994.
(Filed as Exhibit 4.1 to Southern Union's
Current Report on Form 8-K dated February 15,
1994 and incorporated herein by reference.)
4(d) Officers Certificate dated January 31, 1994
setting forth the terms of the 7.60% Senior
Notes due 2024. (Filed as Exhibit 4.2 to
Southern Union's Current Report on Form 8-K
dated February 15, 1994 and incorporated
herein by reference.)
4(e) The Company is a party to other debt instruments,
none of which authorizes the issuance of debt
securities in an amount which exceeds 10% of the
total assets of the Company. The Company hereby
agrees to furnish a copy of any of these instruments
to the Commission upon request.
10(a) Revolving Credit Agreement, Revolving Note and
Loan Documents between Southern Union Company
and the Bank named therein dated September 30,
1994. (Filed as Exhibit 99.2 to Southern
Union's Current Report on Form 8-K dated
October 13, 1993 and incorporated herein by
reference.)
10(b) First Amendment to Revolving Credit Agreement,
Revolving Notes and Loan Documents dated as of
November 15, 1993. (Filed as Exhibit 10.1 to
Southern Union's Registration Statement on
Form S-3 (No. 33-70604) and incorporated
herein by reference.)
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION HEREIN
- ------- ----------- ------
<S> <C> <C>
10(c) Asset Purchase Agreement between Southern
Union Company and Western Resources, Inc.
dated July 9, 1993. (Filed as Exhibit 10.1
to the Company's Current Report on Form 8-K
dated July 12, 1993 and incorporated herein
by reference.)
10(d) Southern Union Company 1982 Incentive Stock
Option Plan and form of related Stock Option
Agreement. (Filed as Exhibits 4.1 and 4.2 to
Form S-8, File No. 2-79612 and incorporated
herein by reference.)(1)
10(e) Form of Indemnification Agreement between
Southern Union Company and each of the
Directors of Southern Union Company. (Filed
as Exhibit 10(i) to Southern Union's Annual
Report on Form 10-K for the year ended
December 31, 1986 and incorporated herein by
reference.)
10(f) Southern Union Company 1992 Long-Term Stock
Incentive Plan. (Filed as Exhibit 10(i) to
Southern Union's Report on Form 10-K for the
year ended December 31, 1992 and incorporated
herein by reference.)(1)
10(g) Southern Union Company Directors Deferred *
Compensation Plan.(1)
10(h) Southern Union Company Supplemental Deferred *
Compensation Plan.(1)
11 Computation of Per Share Earnings. *
22 Subsidiaries of Southern Union Company. *
24 Consent of Independent Accountants. *
25 Power of Attorney with Respect to Certain *
Signatures.
<FN>
- ------------------
(1) Indicates a Management Compensation Plan.
</TABLE>
E-2
<PAGE>
SOUTHERN UNION COMPANY
DIRECTORS' DEFERRED COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Account . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Beneficiary . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Benefits Committee. . . . . . . . . . . . . . . . . . . 2
1.4 Deferral Contribution . . . . . . . . . . . . . . . . . 2
1.5 Director. . . . . . . . . . . . . . . . . . . . . . . . 2
1.6 Director's Fees . . . . . . . . . . . . . . . . . . . . 2
1.7 Matching Contribution . . . . . . . . . . . . . . . . . 2
1.8 Participant . . . . . . . . . . . . . . . . . . . . . . 2
1.9 Plan. . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10 1993 Plan Year; Plan Year . . . . . . . . . . . . . . . 2
1.11 Revenue Procedure 92-65 . . . . . . . . . . . . . . . . 2
1.12 Southern Union. . . . . . . . . . . . . . . . . . . . . 2
1.13 Southern Union Stock. . . . . . . . . . . . . . . . . . 2
1.14 Year of Vesting Service . . . . . . . . . . . . . . . . 3
ARTICLE 2 PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 3 CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . 3
3.1 Director Deferral Contributions . . . . . . . . . . . . 3
3.2 Southern Union's Matching Contributions . . . . . . . . 4
ARTICLE 4 PARTICIPANT ACCOUNTS. . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 5 VESTING . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.1 Vesting Schedule. . . . . . . . . . . . . . . . . . . . 4
5.2 Forfeitures . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 6 DISTRIBUTIONS; SHAREHOLDER APPROVAL . . . . . . . . . . . . . 5
6.1 Distribution Event. . . . . . . . . . . . . . . . . . . 5
6.2 Shareholder Approval. . . . . . . . . . . . . . . . . . 6
6.3 Unforeseeable Emergency . . . . . . . . . . . . . . . . 6
6.4 Investment Intent . . . . . . . . . . . . . . . . . . . 7
6.5 Issuance of Certificates; Legends . . . . . . . . . . . 8
ARTICLE 7 PARTICIPANTS' RIGHTS. . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 8 ANTIALIENATION. . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE 9 UNFUNDED STATUS . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 10 PLAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . 10
10.1 Powers and Duties . . . . . . . . . . . . . . . . . . . 10
10.2 Consultants . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 11 AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . 10
11.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . 10
11.2 Termination . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 12 GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . 11
12.1 Governing Law . . . . . . . . . . . . . . . . . . . . . 11
12.2 Captions. . . . . . . . . . . . . . . . . . . . . . . . 11
12.3 Facility of Payment . . . . . . . . . . . . . . . . . . 11
12.4 Withholding . . . . . . . . . . . . . . . . . . . . . . 11
12.5 Administrative Expenses . . . . . . . . . . . . . . . . 11
12.6 Severability. . . . . . . . . . . . . . . . . . . . . . 11
12.7 Liability . . . . . . . . . . . . . . . . . . . . . . . 12
12.8 Binding Effect. . . . . . . . . . . . . . . . . . . . . 12
12.9 Construction. . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
ii
<PAGE>
SOUTHERN UNION COMPANY
DIRECTORS' DEFERRED COMPENSATION PLAN
INTRODUCTION
WHEREAS, Southern Union Company ("Southern Union") desires to
provide rewards and incentives, under the provisions of the Southern Union
Company Directors' Deferred Compensation Plan (the "Plan"), as set forth herein,
to its directors who contribute to the success of Southern Union;
WHEREAS, it is the intention of Southern Union that the Plan will
be considered to be unfunded for all purposes, including tax purposes;
NOW, THEREFORE, effective June 1, 1993, Southern Union hereby
adopts the Plan set forth in this document.
ARTICLE 1
DEFINITIONS
Where the following words and phrases appear in the Plan, they
shall have the meanings specified below unless a different meaning is clearly
required by the context.
1.1 ACCOUNT. THE term "Account" refers to the separate account
maintained for each Participant under the provisions of Article 4, to which the
Participant's Deferral Contributions and Southern Union's Matching
Contributions, as well as income, gains and losses with respect to all such
Contributions are credited.
1.2 BENEFICIARY. The term "Beneficiary" refers to the person
or persons that the Participant designates in writing to receive a benefit
hereunder at the time of the Participant's death. If the Participant fails to
make such written designation and the Participant is not married at the time of
his death, the term "Beneficiary" refers to the executor or administrator of the
Participant's estate. If the Participant fails to make such written designation
and the Participant is married at the time of his death, the term "Beneficiary"
refers to the Participant's spouse (or the executor or administrator of the
estate of the Participant's spouse should the spouse be married to the
Participant at the time of the Participant's death but die prior to receiving
the benefit to which the spouse would have been entitled had the spouse
survived).
<PAGE>
1.3 BENEFITS COMMITTEE. The term "Benefits Committee" refers
to the Southern Union Benefits Committee which is made up of individuals
appointed by the Board of Directors of Southern Union, as it exists from time to
time. Any action (including but not limited to decisions, determinations and
interpretations) that may be taken by the Benefits Committee under the Plan may
be taken by the Secretary of the Benefits Committee on behalf of the Benefits
Committee.
1.4 DEFERRAL CONTRIBUTION. The term "Deferral Contribution"
refers to the amount that a Participant elects to defer under the provisions of
Section 3.1 and that is credited to the Participant's Account.
1.5 DIRECTOR. The term "Director" refers to each director of
Southern Union.
1.6 DIRECTOR'S FEES. The term "Director's Fees" refers to the
fees that Southern Union pays to each of its Directors for services as
Directors.
1.7 MATCHING CONTRIBUTION. The term "Matching Contribution"
refers to the amount that Southern Union credits to a Participant's Account
under the provisions of Section 3.2.
1.8 PARTICIPANT. The term "Participant" refers to a Director
who elects to make a Deferral Contribution under the provisions of Section 3.1
and for whom an Account is maintained under the provisions of Article 4.
1.9 PLAN. The term "Plan" refers to the Southern Union Company
Directors' Deferred Compensation Plan.
1.10 1993 PLAN YEAR; PLAN YEAR. The term "1993 Plan Year" shall
refer to the seven-month period beginning on June 1, 1993 (the effective date of
the Plan) and ending on December 31, 1993. The term "Plan Year" shall refer to
the 1993 Plan Year and to each subsequent calendar year beginning on or after
January 1, 1994.
1.11 REVENUE PROCEDURE 92-65. The term "Revenue Procedure 92-
65" refers to Internal Revenue Service Revenue Procedure 92-65, 1992-33 I.R.B.
16.
1.12 SOUTHERN UNION. The term "Southern Union" refers to
Southern Union Company, a corporation existing under the laws of the State of
Delaware.
1.13 SOUTHERN UNION STOCK. The term "Southern Union Stock"
refers to shares of common stock of Southern Union.
2
<PAGE>
1.14 YEAR OF VESTING SERVICE. A Participant shall receive
credit for a "Year of Vesting Service" for each full 12-month period during
which he serves as a Director of Southern Union. A Participant's Years of
Vesting Service shall be determined based on the Participant's period of service
as a Director of Southern Union without regard to the number of hours that the
Participant devotes to his service as a Director and without regard to whether
the Participant's period or periods of service as a Director are contiguous. In
calculating Years of Vesting Service, a Participant shall receive credit for
periods of service as a Director of Southern Union prior to the establishment of
this Plan.
ARTICLE 2
PARTICIPATION
Each Director of Southern Union who is not an employee of
Southern Union shall be eligible to participate in the Plan.
ARTICLE 3
CONTRIBUTIONS
3.1 DIRECTOR DEFERRAL CONTRIBUTIONS. For the 1993 Plan Year,
each Director may elect, in his sole discretion and on or before June 30, 1993,
to defer all or any percentage of each payment of the Director's Fees payable to
him for services rendered beginning July 1, 1993 and ending December 31, 1993.
For Plan Years subsequent to the 1993 Plan Year, each Director may elect, in his
sole discretion and at least six months prior to the commencement of the Plan
Year, to defer all or any percentage of each payment of the Director's Fees
payable to him for services rendered in the Plan Year. A Participant may elect
a Deferral Contribution under the provisions of this Section 3.1 by giving
written notice to Southern Union, which notice (a) must be received by Southern
Union within the time periods set forth above in this Section 3.1, (b) must be
in the form attached hereto as EXHIBIT A and otherwise in accordance with the
Plan, and (c) must set forth the Participant's irrevocable election as to the
percentage of each payment of his Director's Fees to be deferred in accordance
with this Section 3.1. The percentage of his Director's Fees that a Participant
elects to defer under this Section 3.1 shall be deducted from each payment of
his Director's Fees that he receives (a) for services rendered beginning July 1,
1993 and ending December 31, 1993 for the 1993 Plan Year, and (b) for services
rendered in the Plan Year to which the election relates for Plan Years
subsequent to the 1993 Plan Year. A Participant's Deferral
3
<PAGE>
Contributions under this Section 3.1 shall be credited to the Participant's
Account as soon as administratively feasible following the date that such
Deferral Contributions are deducted from the Director's Fees of the Participant
under this Section 3.1.
3.2 SOUTHERN UNION'S MATCHING CONTRIBUTIONS. As soon as
administratively feasible following each date that Participant Deferral
Contributions are credited to the Participant's Accounts under Section 3.1,
Southern Union shall credit to the Account of each Participant who defers a
portion of his Director's Fees as a Deferral Contribution under the provisions
of Section 3.1 3.1, 50 percent of the first seven percent of the Participant's
Director's Fees, to the extent that the Participant elects to defer such first
seven percent of his Director's Fees as a Deferral Contribution under the
provisions of Section 3.1 3.1, with respect to each of the Director's Fees
payable to the Participant (a) for services rendered beginning July 1, 1993 and
ending December 31, 1993 for the 1993 Plan Year, and (b) for services rendered
in the Plan Year to which the election relates for Plan Years subsequent to the
1993 Plan Year. Southern Union's Matching Contributions with respect to a
Participant's Deferral Contributions shall be made in the form of Southern Union
Stock.
ARTICLE 4
PARTICIPANT ACCOUNTS
A separate Account shall be established and maintained for each
Participant and shall reflect the elected Deferral Contributions that are
credited to a Participant's Account under the provisions of Section 3.1,
Southern Union's Matching Contributions that are credited to a Participant's
Account under the provisions of Section 3.2, and all income, gains and losses
from time to time credited with respect to such amounts.
ARTICLE 5
VESTING
5.1 VESTING SCHEDULE. Subject to the provisions of Article 7,
that portion of a Participant's Account that is attributable to the
Participant's Deferral Contributions deferred under the provisions of Section
3.1 and to the income, gains and losses with respect thereto shall be 100
percent vested at all times. Subject to the provisions of Section 6.1, Article
7 and Section 11.2, that portion of a Participant's Account that is attributable
to Southern
4
<PAGE>
Union's Matching Contributions that are credited to the Participant's Account
under the provisions of Section 3.2 and to the income, gains and losses with
respect thereto shall vest, based on the Participant's Years of Vesting Service,
as defined in Section 1.14, in accordance with the following schedule:
<TABLE>
<CAPTION>
YEARS OF VESTING SERVICE VESTED PERCENTAGE
------------------------ -----------------
<S> <C>
Less than 5 years 0%
5 or more years 100%
</TABLE>
The preceding sentence notwithstanding, subject to the provisions of Article 6,
Article 7 and Section 11.2 and subject to the limitation of the following
sentence, that portion of a Participant's Account that is attributable to
Southern Union's Matching Contributions that are credited to the Participant's
Account pursuant to the provisions of Section 3.2 and to the income, gains and
losses with respect thereto shall become 100 percent vested upon the death of
the Participant while the Participant is serving as a Director of Southern
Union. If a Participant dies while serving as a Director of Southern Union and
before such time as the Plan is approved by the shareholders of Southern Union,
the Matching Contributions that are credited to such Participant's Account
pursuant to the provisions of Section 3.2 and to the income, gains and losses
with respect thereto shall become 100 percent vested at such time as the Plan
may be approved by the shareholders of Southern Union, and the provisions of
Section 6.2 shall apply to such funds if the Plan is not approved by the
shareholders under the provisions of Section 6.2.
5.2 FORFEITURES. That portion of a Participant's Account that
is not vested upon the Participant's termination of service as a Director of
Southern Union and that is forfeited shall, at the discretion of Southern Union,
be used to pay expenses relating to the Plan and/or be allocated in the Plan
Year in which the forfeiture occurs (and, if necessary, in subsequent Plan
Years) in the same manner and amounts as Southern Union's Matching Contributions
are allocated under Section 3.2 for such Plan Year or Years, thereby reducing
Southern Union's Matching Contributions for the Plan Year or Years in which so
allocated.
ARTICLE 6
DISTRIBUTIONS; SHAREHOLDER APPROVAL
6.1 DISTRIBUTION EVENT. Except in the case of an earlier
distribution required by Section 11.2, (a) if a Participant ceases to serve as a
Director of Southern Union after such time as the
5
<PAGE>
Plan is approved by the shareholders of Southern Union, the Participant, if he
is living (or the Participant's Beneficiary if the Participant is not living),
shall receive a distribution of the vested portion of the Participant's Account,
as determined under Section 5.1, not later than 30 days following the date on
which the Participant ceases to serve as a Director of Southern Union, and (b)
if a Participant ceases to serve as a Director of Southern Union before such
time as the Plan is approved by the shareholders of Southern Union, subject to
the provisions of Section 6.2, the Participant, if he is living (or the
Participant's Beneficiary if the Participant is not living), shall receive that
portion of his Account that is attributable to the Participant's elected
Deferral Contributions and to the income, gains and losses with respect to such
elected Deferral Contributions not later than 30 days following the date on
which the Participant ceases to serve as a Director of Southern Union and shall
receive that vested portion of his Account, as determined under Section 5.1,
that is attributable to Southern Union's Matching Contributions and to the
income, gains and losses with respect to such Matching Contributions not later
than 30 days following the date on which the shareholders of Southern Union
approve the Plan.
6.2 SHAREHOLDER APPROVAL. Any other provision of the Plan
notwithstanding, in the event that the shareholders of Southern Union do not
approve the Plan at the first annual meeting of shareholders following the
effective date of the Plan, each Participant shall forfeit all rights to that
portion of his Account that is attributable to Southern Union's Matching
Contributions and to the income, gains and losses with respect to such Matching
Contributions, distributions of that portion of each Participant's Account that
is attributable to the Participant's elected Deferral Contributions and to the
income, gains and losses with respect to such elected Deferral Contributions
shall be made not later than 30 days after the date of the first annual meeting
of shareholders following the effective date of the Plan and there shall be no
further Deferral Contributions or Matching Contributions hereunder.
6.3 UNFORESEEABLE EMERGENCY. In the case of a proven
unforeseeable emergency, as determined under this Section 6.3, and in the
discretion of the Benefits Committee in accordance with uniform principles
consistently applied, the Benefits Committee may permit a Participant to
withdraw a portion of his Account under the Plan. Until such time as the Plan
is approved by the shareholders of Southern Union, no withdrawal under this
Section 6.3 may be made from that portion of a Participant's Account that is
attributable to Southern Union's Matching Contributions and to the income, gains
and losses with respect to such Matching Contributions. An unforeseeable
emergency justifying a withdrawal under this Section 6.3 must constitute an
unanticipated emergency that is caused by an
6
<PAGE>
event beyond the control of the Participant and that would result in severe
financial hardship to the Participant if the early withdrawal were not
permitted. An unforeseeable emergency justifying a withdrawal under this
Section 6.3 must constitute a severe financial hardship to the Participant
resulting from a sudden and unexpected illness or accident of the Participant or
of a dependent (as defined in Internal Revenue Code Section 152(a)) of the
Participant, loss of the Participant's property due to casualty, or other
similar extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the Participant. The circumstances that will
constitute an unforeseeable emergency will depend upon the facts of each case,
but, in any case, a withdrawal may not be made under this Section 6.3 to the
extent that the hardship is or may be relieved (i) by reimbursement or
compensation by insurance or otherwise, (ii) by liquidation of the Participant's
assets, to the extent the liquidation of such assets would not itself cause
severe financial hardship, or (iii) by cessation of Deferral Contributions under
the Plan. Examples, without limitation, of circumstances that are not to be
considered unforeseeable emergencies under this Section 6.3 include the need to
send a Participant's child to college or the desire to purchase a home. An
unforeseeable emergency withdrawal under this Section 6.3 shall be limited to
the amount necessary to satisfy the emergency need, as determined in the
discretion of the Benefits Committee.
6.4 INVESTMENT INTENT. Except as provided in Section 6.3, a
Participant shall, contemporaneously with his receipt of a distribution of
Southern Union Stock hereunder, execute and deliver to Southern Union a written
statement, in form satisfactory to Southern Union, in which such Participant
represents and warrants that such Participant has acquired the shares of
Southern Union Stock distributed hereunder for such Participant's own account,
for investment only and not with a view to the resale or distribution thereof,
and agrees that any subsequent offer for sale or sale or distribution of any of
such shares of Southern Union Stock shall be made only pursuant to either (a) a
Registration Statement on an appropriate form under the Securities Act of 1933,
as amended (the "Securities Act"), which Registration Statement has become
effective and is current with regard to the shares of Southern Union Stock being
offered or sold, or (b) a specific exemption from the registration requirements
of the Securities Act, but in claiming such exemption the holder shall, if so
requested by Southern Union, prior to any offer for sale or sale of such shares
of Southern Union Stock, obtain a prior favorable written opinion, in form and
substance satisfactory to Southern Union, from counsel for or approved by
Southern Union, as to the applicability of such exemption thereto. The
foregoing restriction on shares of Southern Union Stock distributed hereunder
shall not apply to (i) issuances
7
<PAGE>
by Southern Union so long as the shares of Southern Union Stock being issued are
registered under the Securities Act and a prospectus in respect thereof is
current or (ii) reofferings of shares of Southern Union Stock by affiliates of
Southern Union as defined in Rule 405 or any successor rule or regulation
promulgated under the Securities Act) if the shares of Southern Union Stock
being reoffered are registered under the Securities Act and a prospectus in
respect thereof is current.
6.5 ISSUANCE OF CERTIFICATES; LEGENDS. Southern Union may
endorse such legend or legends upon the certificates for shares of Southern
Union Stock distributed hereunder and may issue such "stop transfer"
instructions to its transfer agent in respect of such shares of Southern Union
Stock as, in its discretion, it determines to be necessary or appropriate to (i)
prevent a violation of, or to perfect an exemption from, the registration
requirements of the Securities Act, or (ii) implement the provisions of the Plan
and any agreement between Southern Union and the holder of such shares of
Southern Union Stock.
ARTICLE 7
PARTICIPANTS' RIGHTS
Nothing contained in this Plan shall be construed as giving any
Participant the right to be retained as a Director of Southern Union. Nothing
contained in this Plan shall be construed as limiting, in any way, any right
that any party or parties may have to remove a Participant as a Director of
Southern Union or to appoint or to elect another individual to replace a
Participant as a Director of Southern Union. Nothing contained in this Plan
shall be construed as giving any Participant the right to receive any benefit
not specifically provided by the Plan. Any other provision of the Plan
notwithstanding, a Participant shall not have any interest in the amounts
credited to his Account until such Account is distributed in accordance with the
provisions of Article 6 or Section 11.2, and all Deferral Contributions,
Matching Contributions and all earnings, gains and losses with respect to all
such Contributions shall remain subject to the claims of Southern Union's
general creditors in accordance with the provisions of the Plan. With respect
to amounts credited to a Participant's Account, the rights of the Participant,
the Beneficiary of the Participant or any other person claiming through the
Participant under this Plan shall be solely those of unsecured general creditors
of Southern Union, and the obligations of Southern Union hereunder shall be
purely contractual. Such benefits shall be paid from the general assets of
Southern Union. As contemplated by Revenue Procedure 92-65, Participants shall
have
8
<PAGE>
the status of general unsecured creditors of Southern Union and the Plan shall
constitute a mere promise of Southern Union to make benefit payments in the
future.
ARTICLE 8
ANTIALIENATION
The rights of a Participant to the payment of deferred
compensation as provided in this Plan and the rights of a Participant with
respect to amounts credited to his Account shall not be assigned, transferred,
pledged or encumbered or be subject in any manner to alienation or anticipation.
No Participant may borrow against his Account. No Account shall be subject in
any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution or levy of any kind, whether
voluntary or involuntary, including but not limited to any liability which is
for alimony or other payments for the support of a spouse or former spouse, or
for any other relative of a Participant. Neither a Participant's Account
hereunder nor a Participant's rights to benefits hereunder may be assigned to
any other party by means of a judgment, decree or order (including approval of a
property settlement agreement) relating to the provision of child support,
alimony payments, or marital property rights of a spouse, former spouse, child
or other dependent of the Participant. As contemplated by Revenue Procedure
92-65, a Participant's rights to benefit payments under the Plan shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by creditors of the Participant
or the Participant's Beneficiary.
ARTICLE 9
UNFUNDED STATUS
Any and all payments made to a Participant pursuant to the Plan
shall be made from the general assets of Southern Union. Any payments made in
good faith under the terms of the Plan to a Participant, his Beneficiary or to
any other party under the provisions of Section 12.3 shall fully discharge the
Plan, Southern Union and the Benefits Committee from all further obligations
with respect to such payments. Southern Union intends that the Plan shall be
considered unfunded for all purposes, including tax purposes.
9
<PAGE>
ARTICLE 10
PLAN ADMINISTRATION
10.1 POWERS AND DUTIES. The Benefits Committee shall administer
the Plan and shall keep records of individual Accounts. It shall have the
authority to interpret, construe and implement the Plan, to adopt and review
rules and regulations relating to the Plan and to make all other determinations
relating to the administration of the Plan. Any decision or interpretation of
any provision of the Plan adopted by the Benefits Committee shall be final and
conclusive. A Participant who is also a member of the Benefits Committee shall
not participate in any decision involving any requests made by him or relating
in any way solely to his rights, duties and obligations as a Participant under
the Plan.
10.2 CONSULTANTS. The Benefits Committee may employ such
counsel, accountants, actuaries and other agents as it shall deem advisable.
Southern Union shall pay the compensation of such counsel, accountants,
actuaries and other agents and any other expenses incurred by the Benefits
Committee in the administration of the Plan to the extent that such compensation
and expenses are not paid from forfeitures under the provisions of Section 5.2.
ARTICLE 11
AMENDMENT AND TERMINATION
11.1 AMENDMENT. Southern Union reserves the right to amend or
to modify the Plan at any time by formal action of its Board of Directors,
including the right to amend or to modify the Plan retroactively, as long as the
amendment or modification does not adversely affect a Participant's rights with
respect to vested amounts then credited to his Account, which rights are subject
to the provisions of the Plan, including the provisions of Article 6, Article 7
and Section 11.2.
11.2 TERMINATION. Southern Union reserves the right to
terminate the Plan at any time by formal action of its Board of Directors and
approval of its shareholders. If the Plan is terminated after such time as the
Plan is approved by the shareholders of Southern Union, notwithstanding Article
5 of the Plan, upon termination of the Plan, each Participant shall become 100
percent vested in his Account and distributions of all amounts credited to the
Participants' Accounts shall be made not later than 30 days after the
termination of the Plan. If the Plan is terminated before such time as the Plan
is approved by the shareholders of Southern Union, each Participant shall
forfeit all
10
<PAGE>
rights to that portion of his Account that is attributable to Southern Union's
Matching Contributions and to the income, gains and losses with respect to such
Matching Contributions, and distributions of that portion of each Participant's
Account that is attributable to the Participant's elected Deferral Contributions
and to the income, gains and losses with respect to such elected Deferral
Contributions shall be made not later than 30 days after the termination of the
Plan.
ARTICLE 12
GENERAL PROVISIONS
12.1 GOVERNING LAW. Except to the extent superseded by federal
law, the laws of the State of Texas shall be controlling in all matters relating
to the Plan, including the construction and performance hereof, notwithstanding
principles of conflicts of laws.
12.2 CAPTIONS. The captions of Articles and Sections of this
Plan are for convenience of reference only and shall not control or affect the
meaning or construction of any of its provisions.
12.3 FACILITY OF PAYMENT. Any amounts payable hereunder to any
person who is under legal disability or who, in the judgment of the Benefits
Committee, is unable to manage his financial affairs properly may be paid to the
legal representative of such person or may be applied for the benefit of such
person in any manner that the Benefits Committee may select, and any such
payment shall be deemed to be payment for such person's account.
12.4 WITHHOLDING. To the extent required by the laws in effect
at the time compensation or deferred compensation payments are made hereunder,
Southern Union shall withhold from such compensation, or from such deferred
compensation payments, any taxes required to be withheld for federal, state or
local government purposes.
12.5 ADMINISTRATIVE EXPENSES. All expenses relating to the Plan
and its administration shall, at the discretion of Southern Union, be paid from
forfeitures under the provisions of Section 5.2 or shall be borne by Southern
Union.
12.6 SEVERABILITY. Any provision of this Plan prohibited by the
law of any jurisdiction, shall, as to such jurisdiction, be ineffective to the
extent of such prohibition without invalidating the remaining provisions hereof.
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<PAGE>
12.7 LIABILITY. Except as otherwise expressly provided herein,
no member of the Board of Directors of Southern Union, no member of the Benefits
Committee, and no officer, employee or agent of Southern Union or the Benefits
Committee (specifically including but not limited to an employee of Southern
union acting at the direction of the Benefits Committee) shall have any
liability to any person, firm or corporation based on or arising out of the Plan
except in the case of gross negligence or fraud. Southern Union agrees to
indemnify each member of its Board of Directors and each member of its Benefits
Committee against all liabilities arising out of the performance of his duties
hereunder, excluding liabilities resulting from the member's gross negligence or
fraud.
12.8 BINDING EFFECT. This Plan shall be binding upon and shall
inure to the benefit of Southern Union, its successors and assigns and each
Participant and his heirs, executors, administrators and legal representatives.
12.9 CONSTRUCTION. Any words herein used in the masculine shall
be read and construed in the feminine where they would so apply. Words in the
singular shall be read and construed as though used in the plural in all cases
where they would so apply.
EXECUTED this _____ day of June, 1993.
SOUTHERN UNION COMPANY
By:________________________________
Title:_____________________________
12
<PAGE>
SOUTHERN UNION COMPANY
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
PAGE
INTRODUCTION............................................................... 1
ARTICLE 1 DEFINITIONS................................................... 1
1.1 Account................................................ 1
1.2 Beneficiary............................................ 2
1.3 Benefits Committee..................................... 2
1.4 Code................................................... 2
1.5 Compensation........................................... 2
1.6 Employee Salary Deferral Amount........................ 2
1.7 Employee Salary Deferral Contribution.................. 3
1.8 Employer Discretionary Amount.......................... 3
1.9 Employer Discretionary Contribution.................... 3
1.10 Employer Matching Amount............................... 3
1.11 Employer Matching Contribution......................... 3
1.12 Distribution Event..................................... 3
1.13 Highly Compensated Employee............................ 3
1.14 1934 Act............................................... 3
1.15 1994 Shareholders' Meeting............................. 3
1.16 Non-Salary Deferral Amount............................. 4
1.17 Other Participant...................................... 4
1.18 Participant............................................ 4
1.19 Plan................................................... 4
1.20 Plan Year; 1993 Plan Year.............................. 4
1.21 Revenue Procedure 92-64................................ 4
1.22 Revenue Procedure 92-65................................ 4
1.23 Section 16(b) Participant.............................. 4
1.24 Southern Union......................................... 4
1.25 Southern Union Stock................................... 4
1.26 Trust.................................................. 5
1.27 Year of Vesting Service................................ 5
ARTICLE 2 PARTICIPATION................................................. 5
2.1 Eligible Class......................................... 5
2.2 Selection from Eligible Class.......................... 5
ARTICLE 3 CONTRIBUTIONS................................................. 6
3.1 Employee Salary Deferral Contributions................. 6
3.2 Employer Matching Contributions........................ 6
3.3 Employer Discretionary Contributions................... 7
ARTICLE 4 PARTICIPANT ACCOUNTS.......................................... 8
i
<PAGE>
ARTICLE 5 VESTING....................................................... 8
5.1 Vesting Schedule....................................... 8
5.2 Forfeitures............................................ 8
ARTICLE 6 DISTRIBUTIONS................................................. 9
6.1 Termination of Employment.............................. 9
6.2 Unforeseeable Emergency................................ 9
6.3 Investment Intent...................................... 10
6.4 Issuance of Certificates; Legends...................... 10
ARTICLE 7 RESTRICTIONS APPLICABLE TO SECTION 16(b)
PARTICIPANTS.................................................. 11
7.1 Shareholder Approval................................... 11
7.2 Employee Salary Deferral Contributions................. 11
7.3 Other Contributions.................................... 12
7.4 Vesting................................................ 13
ARTICLE 8 PARTICIPANTS' RIGHTS.......................................... 13
ARTICLE 9 ANTIALIENATION................................................ 14
ARTICLE 10 UNFUNDED STATUS............................................... 14
ARTICLE 11 PLAN ADMINISTRATION........................................... 15
11.1 Powers and Duties...................................... 15
11.2 Consultants............................................ 15
ARTICLE 12 AMENDMENT AND TERMINATION..................................... 15
12.1 Amendment.............................................. 15
12.2 Termination............................................ 15
ARTICLE 13 CLAIMS PROCEDURE.............................................. 16
13.1 Claims................................................. 16
13.2 Notice of Decision..................................... 16
13.3 Content of Notice...................................... 16
13.4 Appeal Procedure....................................... 17
13.5 Review Procedure....................................... 17
13.6 Disputes............................................... 17
13.7 Appeals Committee...................................... 17
ii
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ARTICLE 14 GENERAL PROVISIONS............................................ 18
14.1 Governing Law.......................................... 18
14.2 Captions............................................... 18
14.3 Facility of Payment.................................... 18
14.4 Withholding............................................ 18
14.5 Administrative Expenses................................ 18
14.6 Severability........................................... 18
14.7 Liability.............................................. 18
14.8 Binding Effect......................................... 19
14.9 Construction........................................... 19
iii
<PAGE>
SOUTHERN UNION COMPANY
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
INTRODUCTION
WHEREAS, Southern Union Company ("Southern Union") desires to retain the
services of and to provide rewards and incentives to members of a select group
of management employees who contribute to the success of Southern Union;
WHEREAS, the Southern Union Company Supplemental Deferred Compensation
Plan (the "Plan"), as set forth herein, is intended, in general, to provide
supplemental retirement benefits to certain management employees who have been
selected to participate in the Plan and who elect to defer income under the
terms of the Plan;
WHEREAS, some of the benefits to be provided under the Plan may, in
general, be similar to the benefits that would have been provided under the
Southern Union Savings Plan in the absence of certain limitations that are set
forth in the Internal Revenue Code of 1986, as amended (the "Code"), relating
to "highly compensated employees," as defined in the Code;
WHEREAS, it is the intention of Southern Union that the Plan will be
considered to be unfunded for tax purposes and for purposes of Title I of the
Employee Retirement Income Security Act of 1974;
WHEREAS, it is contemplated that funds set aside by Southern Union to
meet obligations under the Plan may be held in the Southern Union Company
Supplemental Executive Retirement Trust, which will conform to the terms of
the model trust described in Revenue Procedure 92-64;
NOW, THEREFORE, effective June 1, 1993, Southern Union hereby adopts the
Plan set forth in this document.
ARTICLE 1
DEFINITIONS
Where the following words and phrases appear in the Plan, they shall
have the meanings specified below unless a different meaning is clearly
required by the context.
1.1 ACCOUNT. The term "Account" refers to the separate account
maintained for each Participant under the provisions of Article 4, to which
the Participant's Employee Salary Deferral
<PAGE>
Contributions, Southern Union's Employer Matching Contributions and Southern
Union's Employer Discretionary Contributions, if any, as well as income, gains
and losses with respect to all such Contributions are credited.
1.2 BENEFICIARY. The term "Beneficiary" refers to the person or
persons that the Participant designates in writing to receive a benefit
hereunder at the time of the Participant's death. If the Participant fails to
make such written designation and the Participant is not married at the time
of his death, the term "Beneficiary" refers to the executor or administrator
of the Participant's estate. If the Participant fails to make such written
designation and the Participant is married at the time of his death, the term
"Beneficiary" refers to the Participant's spouse (or the executor or
administrator of the estate of the Participant's spouse should the spouse be
married to the Participant at the time of the Participant's death but die
prior to receiving the benefit to which the spouse would have been entitled
had the spouse survived).
1.3 BENEFITS COMMITTEE. The term "Benefits Committee" refers to
the Southern Union Benefits Committee which is made up of individuals
appointed by the Board of Directors of Southern Union, as it exists from time
to time. Any action (including but not limited to decisions, determinations
and interpretations) that may be taken by the Benefits Committee under the
Plan may be taken by the Secretary of the Benefits Committee on behalf of the
Benefits Committee.
1.4 CODE. The term "Code" refers to the Internal Revenue Code of
1986, as amended, and as may be amended from time to time subsequent to the
date that this Plan is executed.
1.5 COMPENSATION. The term "Compensation" includes an individual's
base salary from Southern Union, bonuses from Southern Union, salary deferrals
under the Southern Union Savings Plan, which is a Code Section 401(k) plan,
and salary deferrals under the Southern Union Company Employee Flexible
Benefits Plan, which is a Code Section 125 plan, and excludes any severance
payments that an individual may receive from Southern Union.
1.6 EMPLOYEE SALARY DEFERRAL AMOUNT. The term "Employee Salary
Deferral Amount" refers to that portion of a Participant's Account that is
attributable to Employee Salary Deferral Contributions and all income, gains
and losses attributable thereto.
2
<PAGE>
1.7 EMPLOYEE SALARY DEFERRAL CONTRIBUTION. The term "Employee
Salary Deferral Contribution" refers to the amount that a Participant elects
to defer under the provisions of Section 3.1 and that is credited to the
Participant's Account.
1.8 EMPLOYER DISCRETIONARY AMOUNT. The term "Employer
Discretionary Amount" refers to that portion of a Participant's Account that
is attributable to Employer Discretionary Contributions and all income, gains
and losses attributable thereto.
1.9 EMPLOYER DISCRETIONARY CONTRIBUTION. The term "Employer
Discretionary Contribution" refers to the amount that the Board of Directors
of Southern Union elects, in its sole and absolute discretion, to credit to a
Participant's Account under the provisions of Section 3.3.
1.10 EMPLOYER MATCHING AMOUNT. The term "Employer Matching Amount"
refers to that portion of a Participant's Account that is attributable to
Employer Matching Contributions and all income, gains and losses attributable
thereto.
1.11 EMPLOYER MATCHING CONTRIBUTION. The term "Employer Matching
Contribution" refers to the amount that Southern Union credits to a
Participant's Account under the provisions of Section 3.2.
1.12 DISTRIBUTION EVENT. The term "Distribution Event" refers to an
event after which a Participant other than a Section 16(b) Participant would
be entitled to receive a distribution following his termination of employment
with Southern Union under Section 6.1, following a determination by the
Benefits Committee that he is entitled to an unforeseeable emergency
withdrawal under Section 6.2, or following Southern Union's termination of the
Plan under Section 12.2.
1.13 HIGHLY COMPENSATED EMPLOYEE. The term "Highly Compensated
Employee" refers to each employee of Southern Union who qualifies as a "highly
compensated employee" under the provisions of Code Section 414(q).
1.14 1934 ACT. The term "1934 Act" refers to the Securities
Exchange Act of 1934, as amended, and as may be amended from time to time
subsequent to the date that this Plan is executed.
1.15 1994 SHAREHOLDERS' MEETING. The term "1994 Shareholders'
Meeting" refers to the first annual meeting of Southern Union shareholders
following the effective date of the Plan.
3
<PAGE>
1.16 NON-SALARY DEFERRAL AMOUNT. The term "Non-Salary Deferral
Amount" refers to that portion of a Participant's Account comprised of the
Employer Matching Amount and the Employer Discretionary Amount.
1.17 OTHER PARTICIPANT. The term "Other Participant" refers to a
Participant not designated by Southern Union to be an officer subject to the
provisions of Section 16(b) of the 1934 Act.
1.18 PARTICIPANT. The term "Participant" refers to a management
employee of Southern Union who is eligible to participate in the Plan under
the provisions of Section 2.1, who is selected to participate in the Plan
under the provisions of Section 2.2 and for whom an Account is maintained
under the provisions of Article 4.
1.19 PLAN. The term "Plan" refers to the Southern Union Company
Supplemental Deferred Compensation Plan.
1.20 PLAN YEAR; 1993 PLAN YEAR. The term "1993 Plan Year" shall
refer to the seven-month period beginning on June 1, 1993 (the effective date
of the Plan) and ending on December 31, 1993. The term "Plan Year" shall
refer to the 1993 Plan Year and to each subsequent calendar year beginning on
or after January 1, 1994.
1.21 REVENUE PROCEDURE 92-64. The term "Revenue Procedure 92-64"
refers to Internal Revenue Service Revenue Procedure 92-64, 1992-33 I.R.B. 11.
1.22 REVENUE PROCEDURE 92-65. The term "Revenue Procedure 92-65"
refers to Internal Revenue Service Revenue Procedure 92-65, 1992-33 I.R.B. 16.
1.23 SECTION 16(B) PARTICIPANT. The term "Section 16(b)
Participant" refers to a Participant who Southern Union designates to be an
officer subject to the provisions of Section 16(b) of the 1934 Act.
1.24 SOUTHERN UNION. The term "Southern Union" refers to Southern
Union Company, a corporation existing under the laws of the State of Delaware.
1.25 SOUTHERN UNION STOCK. The term "Southern Union Stock" refers
to shares of common stock of Southern Union.
1.26 TRUST. The term "Trust" refers to the Southern Union Company
Supplemental Executive Retirement Trust which may be established by Southern
Union to meet obligations under the Plan and which, if established, will
conform to the terms of the model
4
<PAGE>
trust described in Revenue Procedure 92-64. If established, the assets of the
Trust will be subject to the claims of Southern Union's creditors in the event
of Southern Union's insolvency as determined in the Trust.
1.27 YEAR OF VESTING SERVICE. A Participant shall receive credit
for a "Year of Vesting Service" for each full 12-month period during which he
is employed by Southern Union. A Participant's Years of Vesting Service shall
be determined based on the Participant's period of employment with Southern
Union without regard to the number of hours that the Participant completes
during his employment and without regard to whether the Participant's period
or periods of employment are contiguous. In calculating Years of Vesting
Service, a Participant shall receive credit for periods of employment prior to
the establishment of this Plan.
ARTICLE 2
PARTICIPATION
2.1 ELIGIBLE CLASS. Only those management employees of Southern
Union who are considered Highly Compensated Employees of Southern Union may be
selected to participate in the Plan under the provisions of Section 2.2.
2.2 SELECTION FROM ELIGIBLE CLASS. Eligibility of management
employees for participation in the Plan shall be determined by the Board of
Directors of Southern Union, in its sole discretion, on an individual basis.
The Board of Directors of Southern Union shall have the right to remove a
Participant from participation in the Plan at any time, in its sole
discretion, in which case the Participant shall not be eligible to have
additional Employee Salary Deferral Contributions, additional Employer
Matching Contributions or additional Employer Discretionary Contributions
credited to his Account. The Benefits Committee shall give written notice to
those management employees who have been selected by the Board of Directors of
Southern Union to participate in the Plan and to those Participants who have
been removed by the Board of Directors of Southern Union from participation in
the Plan.
ARTICLE 3
CONTRIBUTIONS
3.1 EMPLOYEE SALARY DEFERRAL CONTRIBUTIONS. For the 1993 Plan Year,
each Participant may elect, in his sole discretion and prior to June 25, 1993,
to defer up to ten percent of the
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Compensation payable to him with respect to each of his payroll checks beginning
with his July 15, 1993 payroll check (which is to cover the June 26, 1993
through July 7, 1993 payroll period) and ending with the final payroll check
that the Participant receives in 1993. For Plan Years subsequent to the 1993
Plan Year, each Participant may elect, in his sole discretion and in accordance
with the following sentence, to defer up to five percent of the Compensation (or
such other percentage of Compensation that may be determined, prior to the
beginning of the Plan Year, by the Board of Directors of Southern Union with
respect to such Plan Year) payable to him with respect to each of his payroll
checks beginning with the first payroll check in such Plan Year that does not
cover a payroll period that includes any period within the prior Plan Year and
ending with the final payroll check that the Participant receives in such Plan
Year. The election under the preceding sentence of each Section 16(b)
Participant must be made at least six months prior to the commencement of the
Plan Year for which the election is being made, and the election under the
preceding sentence of each Other Participant must be made prior to the
commencement of the Plan Year for which the election is being made. A
Participant may elect an Employee Salary Deferral Contribution under the
provisions of this Section 3.1 by giving written notice to Southern Union, which
notice (a) must be received by Southern Union within the time periods set forth
above in this Section 3.1, (b) must be in the form attached hereto as EXHIBIT A
(in the case of each Section 16(b) Participant) or EXHIBIT B (in the case of
each Other Participant) and otherwise in accordance with the Plan, and (c) must
set forth the Participant's irrevocable election as to the percentage of his
Compensation to be deferred in accordance with this Section 3.1. The percentage
of his Compensation that a Participant elects to defer under this Section 3.1
shall be deducted from each of his payroll checks described in the first two
sentences of this Section 3.1. A Participant's Employee Salary Deferral
Contributions under this Section 3.1 shall be credited to the Participant's
Account as soon as administratively feasible following the date that such
Employee Salary Deferral Contributions are deducted from the Participant's
payroll checks under this Section 3.1.
3.2 EMPLOYER MATCHING CONTRIBUTIONS. As soon as administratively
feasible following each date that Participant Employee Salary Deferral
Contributions are credited to the Participants' Accounts under Section 3.1,
Southern Union shall credit to the Account of each Participant who defers a
portion of his Compensation as an Employee Salary Deferral Contribution under
the provisions of Section 3.1, the following amounts: (a) for the 1993 Plan
Year, 50 percent of the first four percent of the Participant's Compensation, to
the extent that the Participant elects to defer such first four percent of
Compensation as an
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Employee Salary Deferral Contribution under the provisions of Section 3.1, with
respect to each of his payroll checks that he receives in 1993, beginning with
his July 15, 1993 payroll check, and (b) for Plan Years subsequent to the 1993
Plan Year, 50 percent (or such other percentage that may be determined, prior to
the beginning of the Plan Year, by the Board of Directors of Southern Union with
respect to such Plan Year) of the first two percent of the Participant's
Compensation (or such other percentage of the Participant's Compensation that
may be determined, prior to the beginning of the Plan Year, by the Board of
Directors of Southern Union with respect to such Plan Year), to the extent that
the Participant elects to defer such percentage as an Employee Salary Deferral
Contribution under the provisions of Section 3.1, with respect to each of his
payroll checks that he receives in such Plan Year, beginning with the first
payroll check in such Plan Year that does not cover a payroll period that
includes any period within the prior Plan Year. Southern Union's Employer
Matching Contributions with respect to the Participants' Employee Salary
Deferral Contributions shall be made in the form of Southern Union Stock.
3.3 EMPLOYER DISCRETIONARY CONTRIBUTIONS. From time to time, the
Board of Directors of Southern Union, in its sole and absolute discretion, may
elect to credit any dollar amount to a Participant's Account. The Board of
Directors of Southern Union may elect, under the provisions of this Section
3.3, to credit an Employer Discretionary Contribution to the Account of an
individual Participant without electing to credit Employer Discretionary
Contributions to the Accounts of other Plan Participants and/or may elect to
credit Employer Discretionary Contributions in different amounts (which may or
may not reflect the Participants' Compensation levels) to two or more
Participants. Southern Union's Employer Discretionary Contributions may be
made in the form of Southern Union Stock.
ARTICLE 4
PARTICIPANT ACCOUNTS
A separate Account shall be established and maintained for each
Participant and shall reflect the elected Employee Salary Deferral
Contributions that are credited to a Participant's Account under the
provisions of Section 3.1, the Employer Matching Contributions that are
credited to a Participant's Account under the provisions of Section 3.2, the
Employer Discretionary Contributions, if any, that are credited to a
Participant's Account under the provisions of Section 3.3 and all income,
gains and losses from time to time credited with respect to such amounts.
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ARTICLE 5
VESTING
5.1 VESTING SCHEDULE. Subject to the provisions of Article 8, a
Participant's Employee Salary Deferral Amount shall be 100 percent vested at
all times. Subject to the limitations set forth in Article 7 with respect to
Section 16(b) Participants and the provisions of Article 8 and Section 12.2, a
Participant's Non-Salary Deferral Amount shall vest, based on the
Participant's Years of Vesting Service as defined in Section 1.27, in
accordance with the following schedule:
<TABLE>
<CAPTION>
YEARS OF VESTING SERVICE VESTED PERCENTAGE
------------------------ -----------------
<S> <C>
Less than 2 years 0%
2 years but not 3 years 20%
3 years but not 4 years 40%
4 years but not 5 years 60%
5 years but not 6 years 80%
6 or more years 100%
</TABLE>
The preceding sentence notwithstanding, subject to the limitations set forth
in Article 7 with respect to Section 16(b) Participants and the provisions of
Article 8 and Section 12.2, a Participant's Non-Salary Deferral Amount shall
become 100 percent vested upon the death of the Participant while the
Participant is employed by Southern Union.
5.2 FORFEITURES. That portion of a Participant's Account that is not
vested upon the Participant's termination of employment and that is forfeited
shall, at the discretion of Southern Union, be used to pay expenses relating to
the Plan and the Trust, if the Trust is established, and/or be allocated in the
Plan Year in which the forfeiture occurs (and, if necessary, in subsequent Plan
Years) in the same manner and amounts as Employer Matching Contributions are
allocated under Section 3.2 for such Plan Year or Years, thereby reducing
Southern Union's Employer Matching Contributions for the Plan Year or Years in
which so allocated.
ARTICLE 6
DISTRIBUTIONS
6.1 TERMINATION OF EMPLOYMENT. Except as provided in Article 7
with respect to Section 16(b) Participants and except in the case of an
earlier distribution required by Section 12.2, if a Participant terminates his
employment with Southern Union, the
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<PAGE>
Participant, if he is living (or the Participant's Beneficiary if the
Participant is not living), shall receive a distribution of the vested portion
of the Participant's Account, as determined under Section 5.1, not later than
the later of (a) 30 days following the Participant's termination of employment
with Southern Union, or (b) July 1, 1994.
6.2 UNFORESEEABLE EMERGENCY. Subject to the limitations set forth
in Article 7 with respect to Section 16(b) Participants, in the case of a
proven unforeseeable emergency, as determined under this Section 6.2, and in
the discretion of the Benefits Committee in accordance with uniform principles
consistently applied, the Benefits Committee may permit a Participant to
withdraw a portion of his Account under the Plan. An unforeseeable emergency
justifying a withdrawal under this Section 6.2 must constitute an
unanticipated emergency that is caused by an event beyond the control of the
Participant and that would result in severe financial hardship to the
Participant if the early withdrawal were not permitted. An unforeseeable
emergency justifying a withdrawal under this Section 6.2 must constitute a
severe financial hardship to the Participant resulting from a sudden and
unexpected illness or accident of the Participant or of a dependent (as
defined in Code Section 152(a)) of the Participant, loss of the Participant's
property due to casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the
Participant. The circumstances that will constitute an unforeseeable
emergency will depend upon the facts of each case, but, in any case, a
withdrawal may not be made under this Section 6.2 to the extent that the
hardship is or may be relieved (a) by reimbursement or compensation by
insurance or otherwise, (b) by liquidation of the Participant's assets, to the
extent the liquidation of such assets would not itself cause severe financial
hardship, or (c) by cessation of Employee Salary Deferral Contributions under
the Plan. Examples, without limitation, of circumstances that are not to be
considered unforeseeable emergencies under this Section 6.2 include the need to
send a Participant's child to college or the desire to purchase a home. An
unforeseeable emergency withdrawal under this Section 6.2 shall be limited to
the amount necessary to satisfy the emergency need, as determined in the
discretion of the Benefits Committee.
6.3 INVESTMENT INTENT. Except as provided in Section 6.2, a
Participant shall, contemporaneously with his receipt of a distribution of
Southern Union Stock hereunder, execute and deliver to Southern Union a
written statement, in form satisfactory to Southern Union, in which such
Participant represents and warrants that such Participant has acquired the
shares of Southern Union Stock distributed hereunder for such Participant's
own account, for investment only and not with a view to the resale or
distribution
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<PAGE>
thereof, and agrees that any subsequent offer for sale or sale or
distribution of any of such shares of Southern Union Stock shall be made only
pursuant to either (a) a Registration Statement on an appropriate form under
the Securities Act of 1933, as amended (the "Securities Act"), which
Registration Statement has become effective and is current with regard to the
shares of Southern Union Stock being offered or sold, or (b) a specific
exemption from the registration requirements of the Securities Act, but in
claiming such exemption the holder shall, if so requested by Southern Union,
prior to any offer for sale or sale of such shares of Southern Union Stock,
obtain a prior favorable written opinion, in form and substance satisfactory
to Southern Union, from counsel for or approved by Southern Union, as to the
applicability of such exemption thereto. The foregoing restriction on shares
of Southern Union Stock distributed hereunder shall not apply to (i) issuances
by Southern Union so long as the shares of Southern Union Stock being issued
are registered under the Securities Act and a prospectus in respect thereof is
current or (ii) reofferings of shares of Southern Union Stock by affiliates of
Southern Union as defined in Rule 405 or any successor rule or regulation
promulgated under the Securities Act) if the shares of Southern Union Stock
being reoffered are registered under the Securities Act and a prospectus in
respect thereof is current.
6.4 ISSUANCE OF CERTIFICATES; LEGENDS. Southern Union may endorse
such legend or legends upon the certificates for shares of Southern Union
Stock distributed hereunder and may issue such "stop transfer" instructions to
its transfer agent in respect of such shares of Southern Union Stock as, in
its discretion, it determines to be necessary or appropriate to (i) prevent a
violation of, or to perfect an exemption from, the registration requirements
of the Securities Act, or (ii) implement the provisions of the Plan and any
agreement between Southern Union and the holder of such shares of Southern
Union Stock.
ARTICLE 7
RESTRICTIONS APPLICABLE TO
SECTION 16(B) PARTICIPANTS
7.1 SHAREHOLDER APPROVAL. Approval of the Plan by the shareholders
of Southern Union shall be required only if Southern Union's securities
counsel determines prior to the 1994 Shareholders' Meeting that shareholder
approval of the Plan is required by Section 16(b) of the 1934 Act. Any other
provision of the Plan notwithstanding, in the event that Southern Union's
Securities counsel determines prior to the 1994 Shareholders' Meeting that
shareholder approval of the Plan is required by
10
<PAGE>
Section 16(b) of the 1934 Act and the shareholders of Southern Union do not
approve the Plan at the 1994 Shareholders' Meeting, (a) each Section 16(b)
Participant (or the Section 16(b) Participant's Beneficiary if the Section 16(b)
Participant is not living) shall forfeit all rights to his Non-Salary Deferral
Amount, (b) each Section 16(b) Participant (or the Section 16(b) Participant's
Beneficiary if the Section 16(b) Participant is not living) shall receive a
distribution of his Employee Salary Deferral Amount not later than the later of
30 days after the date of the 1994 Shareholders' Meeting or July 1, 1994, and
(c) there shall be no further Employee Salary Deferral Contributions, Employer
Matching Contributions or Employer Discretionary Contributions with respect to
any Section 16(b) Participant.
7.2 EMPLOYEE SALARY DEFERRAL CONTRIBUTIONS. Except in the case of
an earlier distribution required by Section 7.1, upon the occurrence of a
Distribution Event with respect to a Section 16(b) Participant, the Section
16(b) Participant (or the Section 16(b) Participant's Beneficiary if the
Section 16(b) Participant is not living) shall be entitled to receive from his
Employee Salary Deferral Amount such part or all of such Employee Salary
Deferral Amount as such Section 16(b) Participant would have been entitled to
receive (on account of such Distribution Event) if such Section 16(b)
Participant had been an Other Participant and at the same time at which any
Other Participant would be entitled to receive a distribution upon the
occurrence of such Distribution Event and under the same circumstances
pursuant to which any Other Participant would be entitled to receive a
distribution upon the occurrence of such Distribution Event. In addition,
special rules relating to Section 16(b) Participants' elections to make
Employee Salary Deferral Contributions to the Plan are set forth in Section
3.1.
7.3 OTHER CONTRIBUTIONS. If, upon the occurrence of a Distribution
Event with respect to a Section 16(b) Participant, Southern Union's securities
counsel has determined that approval of the Plan by the shareholders of
Southern Union is not required by Section 16(b) of the 1934 Act, the Section
16(b) Participant (or the Section 16(b) Participant's Beneficiary if the
Section 16(b) Participant is not living) shall be entitled to receive from his
Non-Salary Deferral Amount such part or all of such vested Non-Salary Deferral
Amount (as determined under Section 5.1) as such Section 16(b) Participant
would have been entitled to receive (on account of such Distribution Event) if
such Section 16(b) Participant had been an Other Participant and at the same
time at which any Other Participant would be entitled to receive a
distribution upon the occurrence of such Distribution Event and under the same
circumstances pursuant to which any Other Participant would be entitled to
receive a distribution upon the
11
<PAGE>
occurrence of such Distribution Event. Any other provision of the Plan
notwithstanding and unless a forfeiture occurs under the provisions of Section
7.1, if, upon the occurrence of a Distribution Event with respect to a Section
16(b) Participant, Southern Union's securities counsel has determined that
approval of the Plan by the shareholders of Southern Union is required by
Section 16(b) of the 1934 Act or has not made a determination as to whether such
shareholder approval of the Plan is required, (a) the Section 16(b) Participant
(or the Section 16(b) Participant's Beneficiary if the Section 16(b) Participant
is not living) shall be entitled to receive the Section 16(b) Participant's
Non-Salary Deferral Amount not later than the latest of (i) 30 days after the
date of the 1994 Shareholders' Meeting, (ii) 30 days after termination of the
Section 16(b) Participant's employment with Southern Union, or (iii) July 1,
1994 in the case of a Distribution Event constituting a termination of
employment with Southern Union under Section 6.1, (b) the Section 16(b)
Participant's Non-Salary Deferral Amount shall not be subject to withdrawal
under the provisions of Section 6.2 until after the 1994 Shareholders' Meeting
in the case of a Distribution Event constituting a determination by the Benefits
Committee that the Participant has experienced an unforeseeable emergency under
Section 6.2, and (c) the Section 16(b) Participant (or the Section 16(b)
Participant's Beneficiary if the Section 16(b) Participant is not living) shall
be entitled to receive his Non-Salary Deferral Amount not later than 30 days
after the later of the 1994 Shareholders' Meeting and the termination of the
Plan in the case of a Distribution Event constituting Southern Union's
termination of the Plan under Section 12.2.
7.4 VESTING. If a Section 16(b) Participant dies after Southern
Union's securities counsel has determined that approval of the Plan by the
shareholders of Southern Union is not required by Section 16(b) of the 1934
Act, the Section 16(b) Participant shall become 100 percent vested in his
Non-Salary Deferral Amount upon his death. Any other provision of the Plan
notwithstanding and unless a forfeiture occurs under the provisions of Section
7.1, if a Section 16(b) Participant dies after Southern Union's securities
counsel has determined that approval of the Plan by the shareholders of
Southern Union is required by Section 16(b) of the 1934 Act or at a time when
Southern Union's securities counsel has not made a determination as to whether
such approval of the Plan is required, the Section 16(b) Participant shall
become 100 percent vested in his Non-Salary Deferral Amount immediately
following the date of the 1994 Shareholders' Meeting.
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<PAGE>
ARTICLE 8
PARTICIPANTS' RIGHTS
Nothing contained in this Plan shall be construed as giving any employee
of Southern Union or any Participant the right to be retained in Southern
Union's service or employ or shall be construed to interfere with the right of
Southern Union to discharge any employee of Southern Union or any Participant
at any time regardless of the effect that such discharge would have upon him
as a Participant in the Plan. Nothing contained herein shall be construed to
interfere with Southern Union's right to discharge any employee at will for
any reason or for no reason at all. Nothing contained in this Plan shall be
construed as giving any employee of Southern Union or any Participant the
right to receive any benefit not specifically provided by the Plan. Any other
provision of the Plan notwithstanding, a Participant shall not have any
interest in the amounts credited to his Account until such Account is
distributed in accordance with the provisions of Article 6, Article 7 or
Section 12.2. All Employee Salary Deferral Contributions, all Employer
Matching Contributions, all Employer Discretionary Contributions and all
earnings, gains and losses with respect to such Employee Salary Deferral
Contributions, Employer Matching Contributions and Employer Discretionary
Contributions shall remain subject to the claims of Southern Union's general
creditors in accordance with the provisions of the Plan and, if the Trust is
established, in accordance with the terms of the Trust. With respect to
amounts credited to a Participant's Account, the rights of the Participant,
the Beneficiary of the Participant or any other person claiming through the
Participant under this Plan shall be solely those of unsecured general
creditors of Southern Union; and the obligations of Southern Union hereunder
shall be purely contractual. To the extent that benefits under the Plan are not
paid from the Trust, if it is established, such benefits shall be paid from the
general assets of Southern Union. As contemplated by Revenue Procedure 92-65,
Participants shall have the status of general unsecured creditors of Southern
Union and the Plan shall constitute a mere promise of Southern Union to make
benefit payments in the future.
ARTICLE 9
ANTIALIENATION
The rights of a Participant to the payment of deferred compensation as
provided in this Plan and the rights of a Participant with respect to amounts
credited to his Account shall not be assigned, transferred, pledged or
encumbered or be subject
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<PAGE>
in any manner to alienation or anticipation. No Participant may borrow against
his Account. No Account shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, charge,
garnishment, execution or levy of any kind, whether voluntary or involuntary,
including but not limited to any liability which is for alimony or other
payments for the support of a spouse or former spouse, or for any other relative
of a Participant. Neither a Participant's Account hereunder nor a Participant's
rights to benefits hereunder may be assigned to any other party by means of a
judgment, decree or order (including approval of a property settlement
agreement) relating to the provision of child support, alimony payments, or
marital property rights of a spouse, former spouse, child or other dependent of
the Participant. As contemplated by Revenue Procedure 92-65, a Participant's
rights to benefit payments under the Plan shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors of the Participant or the Participant's
Beneficiary.
ARTICLE 10
UNFUNDED STATUS
Any and all payments made to a Participant pursuant to the Plan shall be
made from the assets of the Trust, if the Trust is established. If the Trust
is not established, or to the extent that the assets of the Trust are
insufficient to make such payments, such payments shall be made from the
general assets of Southern Union. Any payments made in good faith under the
terms of the Plan to a Participant, his Beneficiary or to any other party
under the provisions of Section 14.3 shall fully discharge the Plan, the Trust
and the Trustee of the Trust (if the Trust is established), Southern Union and
the Benefits Committee from all further obligations with respect to such
payments. Southern Union intends that the Plan and the Trust (if it is
established) shall be considered unfunded for tax purposes and for purposes of
Title I of the Employee Retirement Income Security Act of 1974.
ARTICLE 11
PLAN ADMINISTRATION
11.1 POWERS AND DUTIES. The Benefits Committee shall administer the
Plan and shall keep records of individual Accounts. It shall have the
authority to interpret, construe and implement the Plan, to adopt and review
rules and regulations relating to the
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<PAGE>
Plan and to make all other determinations relating to the administration of the
Plan. Any decision or interpretation of any provision of the Plan adopted by
the Benefits Committee shall be final and conclusive. A Participant who is also
a member of the Benefits Committee shall not participate in any decision
involving any requests made by him or relating in any way solely to his rights,
duties and obligations as a Participant under the Plan.
11.2 CONSULTANTS. The Benefits Committee may employ such counsel,
accountants, actuaries and other agents as it shall deem advisable. Southern
Union shall pay the compensation of such counsel, accountants, actuaries and
other agents and any other expenses incurred by the Benefits Committee in the
administration of the Plan to the extent that such compensation and expenses
are not paid from forfeitures under the provisions of Section 5.2.
ARTICLE 12
AMENDMENT AND TERMINATION
12.1 AMENDMENT. Southern Union reserves the right to amend or to
modify the Plan at any time by formal action of its Board of Directors,
including the right to amend or to modify the Plan retroactively, as long as
the amendment or modification does not adversely affect a Participant's rights
with respect to vested amounts then credited to his Account, which rights are
subject to the provisions of the Plan, including the provisions of Article 6,
Article 7, Article 8 and Section 12.2.
12.2 TERMINATION. Southern Union reserves the right to terminate
the Plan at any time by formal action of its Board of Directors. Subject to the
limitations set forth in Article 7 with respect to Section 16(b) Participants,
notwithstanding Article 5 of the Plan, upon termination of the Plan, each
Participant shall become 100 percent vested in his Account and distributions of
the Participants' Accounts shall be made not later than 30 days after the
termination of the Plan.
ARTICLE 13
CLAIMS PROCEDURE
13.1 CLAIMS. A Participant or any designated Beneficiary of a
deceased Participant may make a claim for benefits by filing a written claim
for such benefits with the Benefits Committee, in a form that may be
prescribed by the Benefits Committee, which shall set forth: (a) the name,
address and Social Security number of the
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<PAGE>
Participant, (b) the period of time the Participant was employed with Southern
Union, and (c) such other information as the Benefits Committee may require.
13.2 NOTICE OF DECISION. If a claim is wholly or partially denied,
notice of the decision, in accordance with Section 13.3, shall be furnished to
the claimant within a reasonable period of time, not to exceed 90 days after
the Benefits Committee's receipt of the claim, unless special circumstances
require an extension of time for processing the claim. If such an extension
of time is required, written notice of the extension shall be furnished to the
claimant prior to the termination of the initial 90-day period. In no event
shall such extension exceed a period of 90 days from the end of such initial
period. The extension notice shall indicate the special circumstances
requiring an extension of time and the date on which the Benefits Committee
expects to render a decision. If neither notice of denial of claim nor notice
of extension of time is furnished, then such claim shall be deemed denied and
the claimant may proceed with the review procedure specified in Sections 13.4
and 13.5.
13.3 CONTENT OF NOTICE. The Benefits Committee shall provide every
claimant who is denied a claim for benefits written notice setting forth, in a
manner calculated to be understood by the claimant, the following: (a) the
specific reason or reasons for the denial; (b) specific reference to pertinent
Plan provisions upon which the denial is based; (c) a description of any
additional material or information necessary for the claimant to perfect the
claim and an explanation of why such material or information is necessary; and
(d) an explanation of the Plan's claims review procedure, as set forth in
Sections 13.4 and 13.5 below.
13.4 APPEAL PROCEDURE. The purpose of the review procedure set
forth in this Section 13.4 and in Section 13.5 is to provide a procedure by
which a claimant, under the Plan, may have a reasonable opportunity to appeal
denial of a claim to the Appeals Committee for a full and fair review. To
accomplish that purpose, the claimant (or his duly authorized representative)
may: (a) request review upon written application to the Appeals Committee; (b)
review pertinent Plan documents; and (c) submit issues and comments in
writing. A claimant (or his duly authorized representative) shall request a
review by filing a written application for review with the Appeals Committee
within 60 days after the claimant receives written notice of the denial of his
claim.
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13.5 REVIEW PROCEDURE. Decision on review of a denied claim shall
be made in the following manner: (a) the decision on review shall be made by
the Appeals Committee, which may, in its discretion, hold a hearing on the
denied claim; (b) the Appeals Committee shall make its decision promptly, and
not later than 60 days after the Appeals Committee receives the request for
review, unless special circumstances require extension of time, in which case
a decision shall be rendered as soon as possible, but not later than 120 days
after receipt of the request for review; (c) if such an extension of time for
review is required, written notice of the extension shall be furnished to the
claimant prior to the commencement of the extension; (d) the decision on
review shall be in writing and shall include specific reasons for the
decision, written in a manner calculated to be understood by the claimant, and
specific references to the pertinent Plan provisions on which the decision is
based; and (e) the decision shall be furnished to the claimant within the
period set forth in Section 13.5(b), but if the decision is not furnished
within the period set forth in Section 13.5(b), the claim shall be deemed
denied on review.
13.6 DISPUTES. If a dispute arises with respect to any matter under
this Plan, the Benefits Committee may refrain from taking any other or further
action in connection with the matter involved in the controversy until the
dispute has been resolved.
13.7 APPEALS COMMITTEE. For purposes of this Article 13, the
Appeals Committee shall consist of a committee of at least three but not more
than five individuals appointed by the Board of Directors of Southern Union.
ARTICLE 14
GENERAL PROVISIONS
14.1 GOVERNING LAW. Except to the extent superseded by federal law,
the laws of the State of Texas shall be controlling in all matters relating to
the Plan, including the construction and performance hereof, notwithstanding
principles of conflicts of laws.
14.2 CAPTIONS. The captions of Articles and Sections of this Plan
are for convenience of reference only and shall not control or affect the
meaning or construction of any of its provisions.
14.3 FACILITY OF PAYMENT. Any amounts payable hereunder to any
person who is under legal disability or who, in the judgment of the Benefits
Committee, is unable to manage his financial affairs properly may be paid to
the legal representative of such person or
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<PAGE>
may be applied for the benefit of such person in any manner that the Benefits
Committee may select, and any such payment shall be deemed to be payment for
such person's account.
14.4 WITHHOLDING. To the extent required by the laws in effect at
the time compensation or deferred compensation payments are made hereunder,
Southern Union shall withhold from such compensation, or from such deferred
compensation payments, any taxes required to be withheld for federal, state or
local government purposes.
14.5 ADMINISTRATIVE EXPENSES. Except as provided in the Trust, if
the Trust is established, all expenses relating to the Plan and its
administration shall, at the discretion of Southern Union, be paid from
forfeitures under the provisions of Section 5.2 or shall be borne by Southern
Union.
14.6 SEVERABILITY. Any provision of this Plan prohibited by the law
of any jurisdiction, shall, as to such jurisdiction, be ineffective to the
extent of such prohibition without invalidating the remaining provisions
hereof.
14.7 LIABILITY. Except as otherwise expressly provided herein, no
member of the Board of Directors of Southern Union, no member of the Benefits
Committee, and no officer, employee or agent of Southern Union or the Benefits
Committee (specifically including but not limited to an employee of Southern
Union acting at the direction of the Benefits Committee) shall have any
liability to any person, firm or corporation based on or arising out of the
Plan except in the case of gross negligence or fraud. Southern Union agrees
to indemnify each member of its Board of Directors and each member of its
Benefits Committee against all liabilities arising out of the performance of his
duties hereunder, excluding liabilities resulting from the member's gross
negligence or fraud.
14.8 BINDING EFFECT. This Plan shall be binding upon and shall
inure to the benefit of Southern Union, its successors and assigns and each
Participant and his heirs, executors, administrators and legal
representatives.
14.9 CONSTRUCTION. Any words herein used in the masculine shall be
read and construed in the feminine where they would so apply. Words in the
singular shall be read and construed as though used in the plural in all cases
where they would so apply.
18
<PAGE>
EXECUTED this _____ day of _______________, 1993.
SOUTHERN UNION COMPANY
By:________________________________
Title:_____________________________
19
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net earnings available for common stock $6,890 $1,445 $ 987
====== ====== ======
Primary earnings per share:
Average shares outstanding at December 31 $7,892 $7,889 $7,930
Stock options 85 22 8
------ ------ ------
Average shares outstanding $7,977 $7,911 $7,938
====== ====== ======
Primary earnings per share $ 0.86 $ 0.18 $ 0.12
====== ====== ======
Fully diluted earnings per share:
Average shares outstanding at December 31 $7,892 $7,889 $7,930
Stock options 117 22 13
------ ------ ------
Average shares outstanding $8,009 $7,911 $7,943
====== ====== ======
Fully diluted earnings per share $ 0.86 $ 0.18 $ 0.12
====== ====== ======
<FN>
- -----------------
Note: Adjusted for the three for two stock split distributed in
the form of a 50% stock dividend on March 9, 1994.
</TABLE>
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF SOUTHERN UNION COMPANY
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
---- ----------------------
<S> <C>
Gas Service Energy Corporation Delaware
Lavaca Realty Company Delaware
Mercado Gas Services Inc. Delaware
Southern Union Econofuel Company Delaware
Southern Union Energy International, Inc. Delaware
Southern Union Energy Products and Services Company Delaware
Southern Union Exploration Company Delaware
Southern Transmission Company Delaware
Western Gas Interstate Company Delaware
Western Utilities, Inc. Delaware
<FN>
- ------------------
Note: Two other wholly owned subsidiaries of Southern Union
Company, Southern Union Gas Company, Inc. (a Delaware
corporation) and Southern Union Gas Company, Inc. (a Texas
corporation), conduct no business except to the extent
necessary to hold the Corporate name.
</TABLE>
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Southern Union Company:
We consent to the incorporation by reference in the registration
statements of Southern Union Company on Form S-8 (File No. 2-79612,
33-37261, 33-61558, 33-69596 and 33-69598) of our report dated
March 11, 1994, on our audits of the consolidated financial
statements and financial statement schedules of Southern Union
Company and Subsidiaries as of December 31, 1993 and 1992 and for
the years ended December 31, 1993, 1992 and 1991, which report is
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND
Austin, Texas
March 28, 1994
<PAGE>
EXHIBIT 25
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose
signature appears below constitutes and appoints Peter H. Kelley,
Ronald J. Endres, and David J. Kvapil, or any of them, as such
person's true and lawful attorney-in-fact and agent, with full
power of substitution and revocation, for such person and in such
person's name, place and stead, in any and all capacities, to sign
the Annual Report on Form 10-K for the fiscal year ended December
31, 1993 of Southern Union Company, a Delaware corporation, and any
amendments thereto, and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities
and Exchange Commission and the American Stock Exchange.
Dated: March 23, 1994
/s/ JOHN E. BRENNAN /s/ GEORGE L. LINDEMANN
- ----------------------------- ------------------------------
John E. Brennan George L. Lindemann
/s/ FRANK W. DENIUS /s/ ROGER J. PEARSON
- ----------------------------- ------------------------------
Frank W. Denius Roger J. Pearson
/s/ AARON I. FLEISCHMAN /s/ GEORGE ROUNTREE, III
- ----------------------------- ------------------------------
Aaron I. Fleischman George Rountree, III
/s/ ADAM M. LINDEMANN /s/ DAN K. WASSONG
- ----------------------------- ------------------------------
Adam M. Lindemann Dan K. Wassong
