SOUTHERN UNION COMPANY
504 LAVACA, SUITE 800
AUSTIN, TEXAS 78701
(512) 477-5852
May 13, 1994
VIA EDGAR
_________
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D. C. 20549
RE: Quarterly Report on Form 10-Q
for the period ended
March 31, 1994 of
Southern Union Company;
Commission File No. 1-6407
__________________________
Ladies and Gentlemen:
Enclosed for filing on behalf of Southern Union Company (the
"Company") is the Company's quarterly report on Form 10-Q,
complete with exhibits, for the period ended March 31, 1994.
By copy of this letter, one manually signed copy of such report
complete with exhibits and two conformed copies of such report
without exhibits are being delivered by overnight courier to the
American Stock Exchange, on which the Company's common stock is
quoted under the symbol SUG.
Very truly yours,
DAVID J. KVAPIL
_______________
David J. Kvapil
Vice President and Controller
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
________________________________
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
______________________________
MARCH 31, 1994
Commission File No. 1-6407
_____________________________
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
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)
Registrant's telephone number, including area code: (512) 477-5852
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE IN WHICH REGISTERED
___________________ _________________________________________
Common Stock, par value $1 per share American Stock Exchange
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
___ ___
The number of shares of the registrant's Common Stock
outstanding on May 5, 1994 was 10,900,586.
=================================================================
<PAGE>
1
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 1994
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of consolidated operations - three and twelve
months ended March 31, 1994 and 1993 . . . . . . . . .
Consolidated balance sheet - March 31, 1994 and 1993 and
December 31, 1993. . . . . . . . . . . . . . . . . . .
Statement of common stockholders' equity - March 31, 1994
Statements of consolidated cash flows - three and twelve
months ended March 31, 1994 and 1993 . . . . . . . . .
Notes to consolidated financial statements . . . . . . .
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . .
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(See "CONTINGENCIES" in the Notes to Consolidated
Financial Statements). . . . . . . . . . . . . . . . .
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11
__________
- Computation of primary and fully diluted earnings
per share. . . . . . . . . . . . . . . . . . . . .
(b) Reports on Form 8-K
___________________
- Current report was filed on January 4, 1994 and
included the Missouri Public Service Commission's
("MPSC") report and order (GM-94-90) which included
a stipulation and settlement agreement that
provided the necessary approval for the acquisition
by Southern Union from Western Resources, Inc. of
certain natural gas distribution properties in
central and western Missouri (the "Missouri
Acquisition"). . . . . . . . . . . . . . . . . . .
- Current report was filed on February 15, 1994 and
included the required audited and pro forma
financial statements relative to the Missouri
Acquisition. . . . . . . . . . . . . . . . . . . .
<PAGE>
2
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED MARCH 31,
____________________________
1994 1993
_________ ___________
(THOUSANDS OF DOLLARS, EXCEPT
SHARES AND PER SHARE AMOUNTS)
Operating revenues . . . . . . . . . . . . . . . .$175,454 $ 67,026
Gas purchase costs . . . . . . . . . . . . . . . . 107,760 35,931
________ ________
Operating margin . . . . . . . . . . . . . . . . 67,694 31,095
________ ________
Operating expenses:
Operating, maintenance and general . . . . . . . 23,631 12,095
Taxes, other than on income. . . . . . . . . . . 13,744 4,349
Depreciation and amortization. . . . . . . . . . 6,842 3,400
________ ________
Total operating expenses. . . . . . . . . . . 44,217 19,844
________ ________
Net operating revenues. . . . . . . . . . 23,477 11,251
________ ________
Other income (expenses):
Interest on long-term debt . . . . . . . . . . . (8,088) (2,728)
Other, net . . . . . . . . . . . . . . . . . . . 706 (945)
________ ________
Total other expenses, net . . . . . . . . . . (7,382) (3,673)
________ ________
Earnings before income taxes. . . . . . . . . 16,095 7,578
Federal and state income taxes . . . . . . . . . . 6,141 2,409
________ ________
Earnings before preferred dividends. . . . . . . . 9,954 5,169
Preferred dividends. . . . . . . . . . . . . . . . -- 594
________ ________
Net earnings available for common stock. . . . .$ 9,954 $ 4,575
======== ========
Net earnings per common share. . . . . . . . . . .$ .91 $ .58
======== ========
Weighted average shares outstanding. . . . . . .10,888,915 7,856,415
========== =========
See accompanying notes to the consolidated financial statements.
<PAGE>
3
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
TWELVE MONTHS ENDED MARCH 31,
_____________________________
1994 1993
_________ _________
(THOUSANDS OF DOLLARS, EXCEPT
SHARES AND PER SHARE AMOUNTS)
Operating revenues . . . . . . . . . . . . . . $317,433 $198,962
Gas purchase costs . . . . . . . . . . . . . . 182,213 108,780
________ ________
Operating margin . . . . . . . . . . . . . . 135,220 90,182
________ ________
Operating expenses:
Operating, maintenance and general . . . . . 61,613 46,965
Taxes, other than on income. . . . . . . . . 23,760 13,395
Depreciation and amortization. . . . . . . . 17,858 12,925
________ ________
Total operating expenses. . . . . . . . . 103,231 73,285
________ ________
Net operating revenues. . . . . . . . . . 31,989 16,897
________ ________
Other income (expenses):
Interest on long-term debt . . . . . . . . . (16,896) (11,525)
Other, net . . . . . . . . . . . . . . . . . 5,011 3,457
________ ________
Total other income (expenses), net. . . . (11,885) (8,068)
________ ________
Earnings before income taxes and
discontinued operation . . . . . . . . 20,104 8,829
Federal and state income taxes . . . . . . . . 7,587 3,284
________ ________
Earnings from continuing operations. . . . . 12,517 5,545
Loss from discontinued operation, net of tax . -- (3,014)
________ ________
Earnings before preferred dividends. . . . . . 12,517 2,531
Preferred dividends. . . . . . . . . . . . . . 249 2,469
________ ________
Net earnings available for common stock. . . $ 12,268 $ 62
======== ========
Earnings (loss) per common share:
Continuing operations. . . . . . . . . . . . $ 1.42 $ .39
Discontinued operation . . . . . . . . . . . -- (.38)
________ ________
Net earnings per common share . . . . . . $ 1.42 $ .01
======== ========
Weighted average shares outstanding. . . . . .8,639,657 7,856,415
========= =========
See accompanying notes to the consolidated financial statements.
<PAGE>
4
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
MARCH 31, DECEMBER 31,
_______________________
1994 1993 1993
_________ _________ ____________
(THOUSANDS OF DOLLARS)
Property, plant and equipment:
Plant in service . . . . . . . . . $ 807,209 $ 312,452 $ 374,963
Construction work in progress. . . 13,967 8,736 2,080
_________ _________ _________
821,176 321,188 377,043
Less accumulated depreciation
and amortization. . . . . . . . (277,491) (116,707) (144,491)
_________ _________ _________
543,685 204,481 232,552
Additional purchase cost assigned
to utility plant, net . . . . . 164,934 81,850 92,991
_________ _________ _________
Net property, plant and equipment. 708,619 286,331 325,543
_________ _________ _________
Current assets:
Cash and cash equivalents. . . . . 25,307 24,370 2,918
Accounts receivable, billed and
unbilled. . . . . . . . . . . . 101,141 28,135 46,292
Inventories. . . . . . . . . . . . 14,786 3,700 2,950
Prepayments and other . . . . . . 7,081 6,137 2,077
________ _________ _________
Total current assets. . . . . . 148,315 62,342 54,237
________ _________ _________
Real estate. . . . . . . . . . . . . 12,017 10,446 11,718
Deferred charges . . . . . . . . . . 78,294 9,409 16,160
Other. . . . . . . . . . . . . . . . 2,895 7,741 8,549
_________ _________ _________
Total . . . . . . . . . . . . . $ 950,140 $ 376,269 $ 416,207
========= ========= =========
See accompanying notes to the consolidated financial statements.
<PAGE>
5
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
STOCKHOLDERS' EQUITY AND LIABILITIES
MARCH 31, DECEMBER 31,
_______________________
1994 1993 1993
__________ _________ ____________
(THOUSANDS OF DOLLARS)
Common stockholders' equity:
Common stock, $1 par value;
authorized 50,000,000 shares;
issued 10,952,211 shares $ 10,952 $ 7,934 $ 10,959
Premium on common stock. . . . . . 188,765 142,103 188,645
Retained earnings. . . . . . . . . 13,082 3,173 3,128
_________ _________ __________
212,799 153,210 202,732
Less treasury stock, at cost . . . (794) (794) (794)
_________ _________ __________
Total common stockholders' equity. 212,005 152,416 201,938
_________ _________ __________
Cumulative preferred stock . . . . . -- 18,100 --
_________ _________ __________
Long-term debt . . . . . . . . . . . 479,565 108,922 89,019
_________ _________ __________
Current liabilities:
Long-term debt due within
one year. . . . . . . . . . . . 20,490 524 20,555
Notes payable. . . . . . . . . . . -- 16,300 20,100
Accounts payable . . . . . . . . . 72,718 16,060 27,149
Federal, state and local taxes . . 21,727 20,849 10,982
Accrued interest . . . . . . . . . 7,285 3,626 3,028
Customer deposits. . . . . . . . . 10,252 4,116 3,988
Deferred gas purchase costs. . . . 11,672 1,373 2,648
Other. . . . . . . . . . . . . . . 15,508 5,729 6,309
_________ _________ __________
Total current liabilities . . . 159,652 68,577 94,759
_________ _________ __________
Deferred credits . . . . . . . . . . 79,624 7,191 10,882
Accumulated deferred income taxes. . 19,294 21,063 19,609
Commitments and contingencies. . . . -- -- --
_________ _________ _________
Total . . . . . . . . . . . . . $ 950,140 $ 376,269 $ 416,207
========= ========= ==========
See accompanying notes to the consolidated financial statements.
<PAGE>
6
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF COMMON STOCKHOLDERS' EQUITY
COMMON PREMIUM
STOCK ON
$1 PAR COMMON RETAINED TREASURY
VALUE STOCK EARNINGS STOCK TOTAL
_______ ________ ________ ________ _______
(THOUSANDS OF DOLLARS)
January 1, 1994. . . . . . . . $10,959 $188,645 $ 3,128 $ (794) $201,938
Net earnings . . . . . . . . . -- -- 9,954 -- 9,954
Exercise of stock options. . . 19 149 -- -- 168
Stock issuance costs
and other . . . . . . . . . (26) (29) -- -- (55)
_______ ________ ________ _______ ________
Balance March 31, 1994 . . . . $10,952 $188,765 $ 13,082 $ (794) $212,005
======= ======== ======== ======= ========
See accompanying notes to the consolidated financial statements.
<PAGE>
7
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
THREE MONTHS ENDED MARCH 31,
____________________________
1994 1993
_________ _________
(THOUSANDS OF DOLLARS)
Net cash flows from operating activities . . . $ 84,902 $ 15,180
_________ _________
Cash flows from (used in) investing activities:
Additions to property, plant and equipment . (12,655) (4,069)
Purchase of operations, net of cash
received . . . . . . . . . . . . . . . . (400,334) --
Proceeds from sale of assets of
discontinued operation, net . . . . . . . -- 16,273
Other, net . . . . . . . . . . . . . . . . . 808 2,819
_________ _________
Net cash flows from (used in) investing
activities . . . . . . . . . . . . . . (412,181) 15,023
_________ _________
Cash flows from (used in) financing activities:
Issuance of debt . . . . . . . . . . . . . . 475,000 2,400
Debt issuance costs. . . . . . . . . . . . . (5,089) --
Repayment of debt. . . . . . . . . . . . . . (86,541) (478)
Premium paid on early extinguishment
of debt . . . . . . . . . . . . . . . . . (13,715) --
Repayment of revolving credit facility,
net . . . . . . . . . . . . . . . . . . . (20,100) --
Redemption of preferred stock. . . . . . . . -- (7,010)
Payment of preferred dividends . . . . . . . -- (594)
Other, net . . . . . . . . . . . . . . . . . 113 (240)
_________ _________
Net cash flows from (used in)
financing activities . . . . . . . . . 349,668 (5,922)
_________ _________
Net increase in cash and cash equivalents. . . 22,389 24,281
Cash and cash equivalents at beginning of
period . . . . . . . . . . . . . . . . . . 2,918 89
_________ _________
Cash and cash equivalents at end of period . . $ 25,307 $ 24,370
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . $ 3,567 $ 2,023
========= =========
Income taxes. . . . . . . . . . . . . . . $ 148 $ 82
========= =========
See accompanying notes to the consolidated financial statements.
<PAGE>
8
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
TWELVE MONTHS ENDED MARCH 31,
_____________________________
1994 1993
__________ __________
(THOUSANDS OF DOLLARS)
Net cash flows from operating activities . . $ 83,677 $ 15,783
__________ __________
Cash flows from (used in) investing activities:
Additions to property, plant and
equipment . . . . . . . . . . . . . . . (27,038) (18,782)
Purchase of operations, net of cash
received. . . . . . . . . . . . . . . . (435,324) (507)
Proceeds from sale of assets of
discontinued operation, net . . . . . . -- 16,859
Leasehold improvements . . . . . . . . . . (2,107) (1,195)
Net decrease in customer advances. . . . . (2,478) (397)
Other, net . . . . . . . . . . . . . . . . 1,066 (171)
__________ ___________
Net cash flows used in investing
activities . . . . . . . . . . . . . (465,881) (4,193)
__________ __________
Cash flow from (used in) financing activities:
Issuance of debt . . . . . . . . . . . . . 475,000 15,051
Debt issuance costs. . . . . . . . . . . . (6,139) --
Proceeds from Rights Offerings, net. . . . 49,351 --
Repayment of debt. . . . . . . . . . . . . (86,728) (1,368)
Premium paid on early extinguishment
of debt . . . . . . . . . . . . . . . . (13,715) --
Repayment of revolving credit facility,
net . . . . . . . . . . . . . . . . . . (16,300) --
Redemption of preferred stock. . . . . . . (18,100) (7,114)
Payment of preferred dividends . . . . . . -- (2,469)
Other, net . . . . . . . . . . . . . . . . (228) (958)
__________ __________
Net cash flows from financing
activities . . . . . . . . . . . . . 383,141 3,142
__________ __________
Net increase in cash and cash equivalents. . 937 14,732
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . . 24,370 9,638
__________ __________
Cash and cash equivalents at end of period . $ 25,307 $ 24,370
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . $ 14,364 $ 11,578
========== ==========
Income taxes. . . . . . . . . . . . . . $ 9,757 $ 4,531
========== ==========
See accompanying notes to the consolidated financial statements.
<PAGE>
9
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments necessary for a
fair presentation of the results of operations for such periods.
Because of the seasonal nature of the Company's operations, the
results of operations for any interim period are not necessarily
indicative of results for the full year. Also, as described
below, the Company acquired Missouri Gas Energy on January 31,
1994. Accordingly, the income from operations of Missouri Gas
Energy are consolidated with the Company subsequent to that
date. Thus the results of operations for the twelve-month
period ended March 31, 1994 are not indicative of results that
would necessarily be achieved for a full year since the
majority of the Company's operating margin is recorded during
the winter heating season.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in Southern Union
Company's ("Southern Union" or the "Company") 1993 Annual Report
on Form 10-K. Certain amounts from prior periods have been
reclassified to conform with the current period presentation.
ACQUISITIONS
MISSOURI GAS ENERGY
Missouri Asset Purchase Agreement. 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 which Southern Union
operates as Missouri Gas Energy, a division of Southern Union
headquartered in Kansas City, Missouri. The acquisition was
consummated on January 31, 1994 and has been accounted for as a
purchase. The assets of Missouri Gas Energy were included in the
consolidated balance sheet at January 31, 1994 and income from
operations of Missouri Gas Energy have been included in the
statement of consolidated operations beginning February 1, 1994.
As of March 31, 1994, Missouri Gas Energy served approximately
474,000 customers in 147 communities in central and western
Missouri, including Kansas City, St. Joseph, Joplin and Monett.
Purchase Price. On the date of closing, Southern Union paid
approximately $400,300,000 in cash for Missouri Gas Energy.
The final determination of the purchase price and all prorations
and adjustments are expected to be completed by May 31, 1994.
The purchase price was financed through the sale of $475,000,000
of 7.60% Senior Notes due 2024 and net proceeds from the sale of
a $50,000,000 Rights Offering completed on December 31, 1993.
See "Capitalization."
Missouri Public Service Commission. 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 March
31, 1994, would have been approximately 58%) in order to
implement any general rate increase with respect to Missouri Gas
Energy; (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 Missouri Gas Energy's
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 Missouri Gas Energy's
employees and retirees; and (v) requires the Company to reduce
rate base by $30,000,000 (to be amortized over a ten year period
on a straight-line basis) to compensate rate payers for rate base
reductions that were eliminated as a result of the acquisition.
Liabilities Assumed. Southern Union assumed certain liabilities
of Western Resources with respect to Missouri Gas Energy,
including liabilities arising from certain specified contracts
assigned to Southern Union at closing, including
<PAGE>
10
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Missouri Gas Energy, and liabilities
for certain accounts payable of Western Resources pertaining to
Missouri Gas Energy.
Environmental. Southern Union and Western Resources also entered
into an Environmental Liability Agreement. 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 Missouri Gas Energy. 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 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.
Missouri Gas Energy owns or is otherwise associated with a number
of sites where manufactured gas plants were previously operated.
These plants were commonly used to supply gas service in the late
19th and early 20th centuries, in certain cases by corporate
predecessors to Western Resources. By-products and residues from
manufactured gas could be located at these sites and at some time
in the future may require remediation by the 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 Missouri Gas Energy. 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 United States Environmental
Protection Agency ("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.
Employees. 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
Missouri Gas Energy ("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 Missouri Gas Energy ("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.
Additional Purchase Cost Assigned to Utility Plant. The
additional purchase cost assigned to utility plant of
approximately $72,000,000 consists of approximately $44,500,000 of
the excess of the purchase price over the historical book carrying
value of the utility plant purchased and approximately $27,500,000
of purchase accounting adjustments for certain liabilities and
<PAGE>
11
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contingencies which have been incurred or estimates of amounts
that will be incurred in the future. The purchase accounting
adjustments reflect actual or estimated amounts for: (i)
employee severance and other costs associated with an early
retirement program for employees of Missouri Gas Energy; (ii) a
$3,000,000 contribution to the Company's employees' qualified
defined benefits plan applicable to Missouri Gas Energy's
employees and retirees in excess of the minimum required
contribution under the Internal Revenue Code Section 412, as
determined by the plans' actuary, pursuant to the MPSC
Stipulation; (iii) underwriting, legal and accounting fees
associated with the Missouri Acquisition; and (iv) other
preacquisition contingencies. Amortization of the additional
purchase cost assigned to utility plant is provided on a
straight-line basis over forty years. The Company expects to
finalize its estimate of all preacquisition contingencies within
one year of the date the acquisition was consummated.
Post-retirement Benefits Other Than Pensions. Western Resources
adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 106, Employer's Accounting for Post-
retirement Benefits Other than Pensions, as of January 1, 1993.
This statement requires the accrual of post-retirement benefits
other than pensions, primarily medical benefit costs, during
the years an employee provides service. To mitigate the impact of
SFAS No. 106 expense, Western resources filed an application with
the MPSC for an order permitting the deferral of SFAS No. 106
expense and proposed inclusion in the future computation of cost
of service the actual SFAS No. 106 expense and an income stream
generated from Western Resources' corporate-owned life insurance
("COLI"). To the extent SFAS No. 106 expense exceeds income from
the COLI program, this excess would be deferred (as allowed by
the FASB Emerging Issues Task Force Issue No. 92-12) and offset
by income generated through the deferral period by the COLI
program. The MPSC has issued an order approving the Western
Resources application.
Subsequent to the acquisition of Missouri Gas Energy, the Company
filed an application with the MPSC for an order to permit the
deferral of SFAS No. 106 expense and also proposes the inclusion
in future computation of cost of service the actual SFAS No. 106
expense and income stream generated from a Company-owned COLI.
In anticipation of the MPSC's approval of the application, the
Company has recorded a regulatory asset of approximately
$36,000,000 representing the accumulated benefit obligation at
January 31, 1994.
RIO GRANDE VALLEY
On September 30, 1993, the Company acquired Rio Grande Valley Gas
Company ("Rio Grande") for $30,500,000. Rio Grande serves
approximately 77,000 customers in the south Texas counties of
Willacy, Cameron and Hidalgo. Rio Grande's service area 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 repaid with
proceeds from the sale of a $50,000,000 Rights Offering completed
on December 31, 1993 and the sale of $475,000,000 of 7.60% Senior
Notes due 2024 completed on January 31, 1994. See
"Capitalization." The assets of Rio Grande were included in the
consolidated balance sheet at September 30, 1993 and income from
operations of Rio Grande have been included in the statement of
consolidated operations beginning October 1, 1993. The
acquisition was accounted for using the purchase method. 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. Amortization of the additional purchase cost
assigned to utility plant is provided on a straight-line basis
over forty years.
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
The following unaudited pro forma financial information for the
three- and twelve-month periods ended March 31, 1994 and 1993 is
presented as though: (i) the acquisition of Missouri Gas Energy
and Rio Grande; (ii) the completion of the $50,000,000 Rights
Offering; (iii) the sale of $475,000,000 of 7.60% Senior Notes
due 2024; and (iv) the refinancing of certain short-term and
long-term debt had been consummated at the beginning of the
periods presented. The pro forma financial information is not
necessarily indicative of the results which would have actually
been obtained had the acquisitions of Missouri Gas Energy and Rio
Grande, the rights offering, the sale of senior notes or the
refinancings been completed as of the assumed date for the
periods presented or which may be obtained in the future.
The pro forma adjustments are based on preliminary assumptions
and estimates made by the Company's management regarding
anticipated efficiencies resulting from the combined operations,
reductions in costs planned by management, purchase accounting
adjustments and the fair market value of certain assets acquired
in the Missouri Acquisition. The actual allocation of the
consideration paid for Missouri Gas Energy may differ from that
reflected in the pro forma consolidated financial statements
after the completion of the final determination of the purchase
price and review of the fair market values of the assets acquired
and liabilities assumed in the Missouri Acquisition.
<PAGE>
12
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
________________________ _____________________
1994 1993 1994 1993
__________ __________ __________ _________
(THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE AMOUNTS)
Operating revenues . . . $ 251,602 $ 218,138 $ 613,012 $ 547,319
Gas purchase costs . . . 161,834 133,136 368,745 319,392
__________ __________ _________ _________
Operating margin . . . 89,768 85,002 244,267 227,927
Operating expenses . . . 53,603 53,199 194,036 184,510
__________ __________ _________ _________
Net operating revenues . 36,165 31,803 50,231 43,417
Interest on
long-term debt . . . . (9,427) (9,073) (37,270) (37,028)
Other income
(expenses), net. . . . (121) (819) 5,408 3,695
__________ __________ ________ _________
Earnings before
income taxes. . . . 26,617 21,911 18,369 10,084
Federal and state
income taxes. . . . . 10,274 8,217 6,888 3,782
__________ __________ ________ _________
Net earnings
available for
common stock. . . . $ 16,343 $ 13,694 $ 11,481 $ 6,302
========== ========== ======== ========
Net earnings per
common share. . . . . $ 1.50 $ 1.26 $ 1.06 $ .58
========== ========== ======== ========
Weighted average
shares outstanding. . 10,888,915 10,856,415 10,877,236 10,856,415
========== ========== ========== ==========
FINANCIAL CONDITION
As a result of the Company's acquisition of Missouri Gas Energy
on January 31, 1994, certain balance sheet amounts have changed
significantly. Details of specific line item classifications on
the balance sheet as of March 31, 1994 are set forth below.
Inventories. Inventories consist principally of gas in
underground storage and materials and supplies. Gas in
underground storage of approximately $7,100,000 at March 31, 1994
consists of approximately 4,100,000 MMbtu's of gas attributable
to the operations of Missouri Gas Energy.
Deferred Charges. Deferred charges consist prinicipally of: (i)
debt issuance costs and premiums on early extinguishment of debt
of approximately $25,400,000; (ii) a regulatory asset of
$36,000,000 for the deferral of the actuarially calculated
accumulated post-retirement benefit obligation assumed in the
purchase of Missouri Gas Energy; and (iii) approximately
$8,474,000 for the deferral of those costs and expenditures,
including depreciation, property taxes and associated carrying
costs, related to a major gas safety program in the service
territories of Missouri Gas Energy. See "Capitalization" and
"Utility Regulations and Rates."
Deferred Credits. Deferred credits consist principally of non-
current liabilities for: (i) customer advances for construction
of approximately $10,175,000; (ii) approximately $36,000,000 for
the deferral of the actuarially calculated accumulated post-
retirement benefit obligation, previously discussed; (iii)
employee severance and other costs associated with an early
retirement program for employees of Missouri Gas Energy; and (iv)
other preacquisition contingencies.
<PAGE>
13
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHANGE IN ACCOUNTING ESTIMATE
Additional Purchase Cost Assigned to Utility Plant. The Company's
policy is to amortize additional purchase cost assigned to utility
plant over forty years unless it has obtained, or filed to obtain,
a specific provision in a rate application providing for the
recovery of this amortization in rates collected from customers
over a different period. In those cases where the Company's
regulators have provided for, or are expected to provide for, the
recovery of the amortization of additional purchase cost assigned
to utility plant in rates, the Company's policy is to utilize the
amortization period which follows the rate recovery period.
On February 6, 1990, the Company and SU Acquisition, Inc.
completed a cash merger in accordance with an agreement among
Southern Union, Metro Mobile CTS, Inc., and SU Acquisition, Inc.
This merger was accounted for as a purchase and resulted in the
recording of additional purchase cost assigned to utility plant of
approximately $94,000,000. At the time of the merger, the
Company had anticipated the inclusion of this additional purchase
price in future rates. Accordingly, amortization of the
additional purchase cost assigned to utility plant has been
provided on a straight-line basis over thirty years which
is consistent with the period over which rate recovery was
requested. Subsequent to the merger, the Company has filed
rate applications with several of its significant regulatory
jurisdictions requesting the inclusion of the additional
purchase cost assigned to utility plant in rates. To date,
the requests for rate recovery have not been granted.
Accordingly, the Company is uncertain this cost will be
allowed in future rates and has revised its estimate of the
amortization period of additional purchase cost assigned to
utility plant to its standard policy of forty years.
As a result of this change, amortization expense for the three
months ended March 31, 1994 has been reduced by approximately
$221,000 with a corresponding increase to net earnings of
approximately $221,000, or $.02 per average common share.
In connection with the recent acquisition of Missouri Gas Energy
and as part of the settlement with the MPSC, the Company agreed
to forego recovery of the additional purchase cost in rates.
Accordingly, the excess purchase price relating to the Missouri
Acquisition is amortized on a straight-line basis over forty
years. As provided in the MPSC Stipulation, the Company
reserves the right to propose adjustments in future proceedings
to recognize any alleged benefits resulting from the acquisition.
CAPITALIZATION
On January 31, 1994, Southern Union completed the sale of
$475,000,000 of 7.60% Senior Notes due 2024. The net proceeds
from the sale of the senior notes, together with the net proceeds
from the sale of a $50,000,000 Rights Offering, which was
completed as of December 31, 1993, and working capital from
operations, were or will be used to: (i) fund the acquisition of
Missouri Gas Energy; (ii) 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 outstanding preferred stock; (iii) refinance,
on January 31, 1994, 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 approximately $10,400,000
resulting from the early extinguishment of such notes; (iv)
refinance, on March 2, 1994, $50,000,000 aggregate principal
amount of the 10.5% Sinking Fund Debentures due May 15, 2017
and the related premium of approximately $3,300,000 resulting
from the early extinguishment of such debentures; and (v)
refinance the $20,000,000 aggregate principal amount of the
10-1/8% Notes due May 15, 1994.
<PAGE>
14
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First mortgage bonds, debentures and other long-term debt
outstanding, including current maturities, were as follows:
MARCH 31, DECEMBER 31,
_________ ____________
1994 1993
_________ ____________
Senior notes and other long-term debt:
7.60% Senior Notes due 2024. . . . . . . . . $ 475,000 --
10 1/8% notes due 1994 . . . . . . . . . . . 20,000 $ 20,000
9.45% notes due 2004 . . . . . . . . . . . . -- 10,000
10% notes due 2012 . . . . . . . . . . . . . -- 25,000
Other. . . . . . . . . . . . . . . . . . . . 3,355 1,674
First mortgage bonds:
11.5% due 2000 -- collateralized by
utility plant in service. . . . . . . . . 1,700 2,900
Sinking fund debentures:
10 1/2% due 2017 . . . . . . . . . . . . . . -- 50,000
_________ _________
Total debt . . . . . . . . . . . . . . . . . . 500,055 109,574
Less current portion . . . . . . . . . . . . 20,490 20,555
_________ _________
Total long-term debt. . . . . . . . . . . $ 479,565 $ 89,019
========= =========
CASH FLOW INFORMATION
Excluded from the statement of consolidated cash flows were the
following effects of non-cash investing and financing activities:
THREE MONTHS TWELVE MONTHS
ENDED ENDED
MARCH 31, 1994 MARCH 31, 1994
______________ ______________
Pension liability adjustment to retained
earnings . . . . . . . . . . . . . . . . . . $ -- $ 2,051
Additional purchase cost - Missouri
Gas Energy . . . . . . . . . . . . . . . . . 27,500 27,500
___________ __________
$ 27,500 $ 29,551
=========== ==========
Non-cash assets and liabilities acquired:
Working capital . . . . . . . . . . . . . . . 51,746 51,028
Noncurrent assets . . . . . . . . . . . . . . 389,288 425,167
Noncurrent liabilities . . . . . . . . . . . (40,700) (40,871)
___________ __________
$ 400,334 $ 435,324
=========== ==========
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 were recomputed based on the weighted average
number of shares outstanding during the periods presented
adjusted for the stock split.
ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers Accounting for
Postemployment Benefits", as of January 1, 1994. This statement
requires that the cost of benefits, such as disability and health
care continuation coverage provided to former or inactive
employees after
<PAGE>
15
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
employment but before retirement, be accrued if attributable to
an employee's previously rendered service. The Company had
previously recognized such post-employment benefit costs when
paid and was allowed recovery in rates as payments were
incurred. Consequently, Southern Union has recorded a regulatory
asset to the extent it intends to file rate applications to
include such costs in rates. The adoption of SFAS No. 112
resulted in the recognition of a deferred liability of
approximately $1,100,000.
UTILITY REGULATION AND RATES
Prior to the Company's acquisition of Missouri Gas Energy,
Western Resources was required pursuant to a 1989 MPSC order to
undertake a major gas safety program in the service territories
of Missouri Gas Energy. Such activities included replacement of
company and customer owned gas service and yard lines, the
movement and resetting of meters, the replacement of cast iron
mains and the replacement and cathodic protection of bare steel
mains ("Missouri Safety Program"). In recognition of the
significant capital expenditures associated with this safety
program the MPSC issued Western Resources Accounting Authority
Orders ("AAO") providing for the deferral, and subsequent recovery
through rates, of those costs and expenditures, including
depreciation expense, property taxes and associated carrying
costs, related to the Missouri Safety Program.
Missouri Gas Energy is required to continue the Missouri Safety
Program and has requested approval from the MPSC of an AAO to
defer depreciation expense, property taxes and carrying costs
associated with Missouri Gas Energy's investment in the Missouri
Safety Program. In anticipation of the MPSC's approval of the
requested AAO, the Company has deferred approximately $200,000
related to depreciation, property taxes and associated carrying
costs on its investment in this program during the two months
ended March 31, 1994.
The continuation of the Missouri Safety Program will result in
significant levels of future capital expenditures. The Company
estimates incurring capital expenditures of approximately
$27,000,000 in 1994 related to this program.
CONTINGENCIES
The Company is aware of the possibility that it may become a
defendant in an action brought by the 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. Green Mountain Power Corp., Vermont Gas
Systems, Inc. and New England Electric Systems (the "Gas Plant
PRPs") have advised the Company that they believe that it may
have some responsibility for a portion of the investigatory
costs and subsequent clean-up costs, if any. The Company has
informed the Gas Plant PRPs of its belief for various reasons
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
<PAGE>
16
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
<PAGE>
17
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Union Company is engaged in various activities in the
distribution of natural gas to residential, commercial,
industrial, agricultural and other customers in communities
throughout Texas, western Missouri and the Oklahoma Panhandle.
The Company distributes 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. In addi-
tion, the Company operates interstate and intrastate natural gas
pipeline systems, markets natural gas to end users, holds
investments in real estate and markets and sells natural gas for
natural gas vehicles. Several of these 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 and will continue
to be dependent upon the receipt of adequate and timely adjust-
ments 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.
On July 9, 1993, Southern Union entered into an Agreement for the
Purchase of Assets with Western Resources, Inc. ("Western
Resources"), pursuant to which Southern Union purchased from
Western Resources (the "Missouri Acquisition") certain Missouri
natural gas distribution operations which Southern Union operates
as Missouri Gas Energy, a division of Southern Union
headquartered in Kansas City, Missouri. The acquisition was
consummated on January 31, 1994 and has been accounted for as a
purchase. Accordingly, the operating results of Missouri Gas
Energy have been included in the consolidated operating results
since the date of acquisition. As of March 31, 1994, Missouri
Gas Energy served approximately 474,000 customers in 147
communities in central and western Missouri, including Kansas
City, St. Joseph, Joplin and Monett. See "Acquisitions" in
the Notes to the Consolidated Financial Statements for the
three months ended March 31, 1994, included herein. In
addition, during 1993 the Company completed the acquisitions
of the Rio Grande Valley Gas Company ("Rio Grande"), the Berry
Gas Company and the distribution facilities serving the city of
Eagle Pass, Texas. See "Acquisitions and Divestitures" in the
Notes to the Consolidated Financial Statements for the year
ended December 31, 1993. For these reasons, the results of
operations of the Company for the periods subsequent to those
acquisitions are not comparable to those periods prior to the
acquisitions nor are the 1994 results of operations comparable
with previous periods.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
The Company recorded net earnings available to common stock of
$9,954,000 for the three-month period ended March 31, 1994
compared with net earnings of $4,575,000 for the three-month
period ended March 31, 1993. Net earnings per common share,
based on weighted average shares outstanding during the period,
were $.91 in 1994 compared with net earnings per common share of
$.58 in 1993.
The significant increase in earnings is primarily attributable to
the acquisitions of Missouri Gas Energy and Rio Grande, which
contributed over $5,000,000 to the Company's net earnings for the
three-month period ended March 31, 1994. Earnings for the first
quarter also reflect the favorable impact of several rate
increases effected during 1993, but subsequent to the 1993 winter
heating season. Weather in the Company's service territories
was 12% warmer than normal during the winter heating season of
1994, however, this was an improvement over 1993 when weather was
19% warmer than normal. In addition, earnings in 1994 were
favorably impacted by the elimination of $594,000 in preferred
dividends due to the retirement of the Company's Series A 10%
Cumulative Preferred Stock in March of 1993.
<PAGE>
18
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating revenues were $175,454,000 for the three-month period
ended March 31, 1994, an increase of 162%, compared with
operating revenues of $67,026,000 in 1993. Gas purchase costs
for the three-month period ended March 31, 1994 were
$107,760,000, an increase of 200%, compared with $35,931,000 in
1993. The Company's operating 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
purchased gas adjustment clauses. Both operating revenues and
gas purchase costs increased in the three-month period ended
March 31, 1994 as a result of a 130% increase in gas sales
volumes from 17,157 MMcf in 1993 to 39,447 MMcf in 1994 and by an
increase in the average cost of gas from $2.09 per Mcf in 1993 to
$2.73 per Mcf in 1994. The increase in volumes are due
principally to a 100% increase in the average customer base of
approximatley 802,000 customers in 1994 compared with
approximately 402,000 in 1993 resulting from the acquisition of
Missouri Gas Energy and Rio Grande. The increase in the average
cost per Mcf of gas is due primarily to increases in average
spot market gas prices. The Missouri Gas Energy and Rio Grande
acquisitions contributed approximately $93,440,000 and $9,438,000,
respectively, to the overall increase in operating revenues and
approximately $60,688,000 and $5,590,000, respectively, in gas
purchase costs.
Operating margin for the three-month period ended March 31, 1994
was $67,694,000, or 39% of operating revenues, compared to
$31,095,000, or 46% of operating revenues in 1993. The decrease
as a percent of revenue in operating margin resulted primarily
from the inclusion of Missouri Gas Energy's operating margin of
approximately $32,752,000, or 35% of its operating revenues, in
consolidated operating results. Because of the greater average
throughput per customer in Missouri Gas Energy's service
territories, the operating margin per revenue dollar is generally
lower than the operating margin received by Southern Union Gas.
The Company's operating margin for the three-month period ended
March 31, 1994 was also favorably impacted by several rate
increases effected during 1993 including a $777,000 annualized
increase in the Company's South Texas Region effected
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. In addition, on
October 5, 1993, the Missouri Public Service Commission ("MPSC")
issued a rate order increasing Missouri Gas Energy's natural gas
rates by $9,750,000 annually. The MPSC rate order became
effective on October 15, 1993.
Operating expenses, which include operating, maintenance and
general expenses, taxes other than on income and depreciation and
amortization, were $44,217,000 for the three-month period ended
March 31, 1994, an increase of 123%, compared with $19,844,000 in
1993. The increase was primarily attributable to the additional
operating expenses associated with the Missouri Gas Energy and
Rio Grande acquisitions of approximately $20,633,000 and
$2,539,000, respectively.
Interest expense was $8,088,000 for the three-month period ended
March 31, 1994, an increase of 196%, compared to $2,728,000 in
1993. The increase in interest expense of approximately
$5,360,000 is due principally to the net increase in total long-
term debt including the sale of $475,000,000 of 7.60% Senior
Notes due 2024 completed on January 31, 1994 net of the retirement
of $86,541,000 in long-term debt and mortgages payable. The net
proceeds from the sale of the senior notes, together with the net
proceeds from a $50,000,000 Rights Offering and working capital
from operations, have been or will be used to fund the
acquisition of Missouri Gas Energy and Rio Grande, and refinance
certain short-term and long-term debt. See "Capitalization" in
the Notes to the Consolidated Financial Statements for the three-
month period ended March 31, 1994.
The three-month period ended March 31 is generally the Company's
most profitable quarter. Conversely, the quarters ended June 30
and September 30 have historically resulted in losses. In recent
years, Southern Union Gas has worked with its regulators to
minimize summer earnings deficits by increasing the customer's
monthly minimum bill. Because MGE's rate structure collects a
greater percentage of its margin in the winter heating season
months, losses are expected during the upcoming quarters ended
June 30 and September 30, 1994.
<PAGE>
19
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TWELVE MONTHS ENDED MARCH 31, 1994 AND 1993
The Company recorded net earnings available for common stock of
$12,268,000 for the twelve-month period ended March 31, 1994
compared with net earnings of $62,000 in 1993. Net earnings per
common share, based on weighted average shares outstanding during
the period, were $1.42 in 1994 compared with net earnings per
common share of $.01 in 1993.
Earnings from continuing operations, net of preferred dividends,
for the twelve-month period ended March 31, 1994 were $12,268,000
compared with net earnings from continuing operations of
$3,076,000 in 1993. Earnings from continuing operations per
common share for the twelve-month period ended March 31, 1994
were $1.42 compared with $.39 in 1993.
Operating revenues were $317,433,000 for the twelve-month period
ended March 31, 1994, an increase of 60%, compared with operating
revenues of $198,962,000 in 1993. Gas purchase costs for the
twelve-month period ended March 31, 1994 were $182,213,000, an
increase of 68%, compared with gas purchase costs of $108,780,000
in 1993. The increase in both operating revenues and gas
purchase costs between periods was primarily the result of a 31%
increase in gas sales volume to 66,493 MMcf in 1994 from 50,843
MMcf in 1993 and an increase in the average cost of gas to $2.74
per Mcf in 1994 from $2.14 per Mcf in 1993. The increase in
volume is primarily attributable to growth in the average
customer base resulting from the Missouri Gas Energy and Rio Grande
acquisitions while the increase in the cost of gas is due
principally
to increases in the spot market gas prices, both previously
discussed. The Missouri Gas Energy and Rio Grande acquisitions
contributed operating revenues of approximately $93,440,000 and
$16,780,000, respectively, while incremental gas purchase costs
for these divisions were approximately $60,688,000 and $9,537,000,
respectively.
Operating margin for the twelve-month period ended March 31, 1994
was $135,220,000, or 43% of operating revenues, compared with
$90,182,000, or 45% of operating revenues, in 1993. The decrease
as a percent of revenue in operating margin is principally the
result of the inclusion of Missouri Gas Energy's operating margin
of approximately $32,752,000, or 35% of its operating revenues, in
consolidated operating results, as previously discussed. The
decrease as a percent of revenue in operating margin for the
twelve-month period ended March 31, 1994 was partially offset
by several rate increases effected during 1993, also previously
discussed.
Operating expenses, which include operating, maintenance and
general expenses, taxes other than on income and depreciation and
amortization, were $103,231,000 for the twelve-month period ended
March 31, 1994, an increase of 41%, compared with operating
expenses of $73,285,000 in 1993. The increase in these expenses
is principally due to the operating expenses associated with the
Missouri Gas Energy and Rio Grande acquisitions of approximately
$20,633,000 and $4,945,000, respectively. In addition, operating
expenses for the twelve-month period ended March 31, 1994 included
severance costs of approximately $1,008,000 resulting from the
early retirement program which was finalized during the second
quarter of 1993 and increases in medical and hospitalization
expenses. These expenses were offset by efficiency savings from
the reductions in payroll expense of approximately $2,093,000 as
a result of the early retirement program.
Total other expenses were $11,885,000 for the twelve-month period
ended March 31, 1994, an increase of 47%, compared with other
expenses of $8,068,000 in 1993. The increase is primarily
attributable to the increase in interest expense partially offset
by an increase in other income. Interest expense was $16,896,000
for the twelve-month period ended March 31, 1994, an increase of
approximately 47%, compared with interest expense of $11,525,000
in 1993 due principally to the net increase in long-term debt,
previously discussed. Other income
<PAGE>
20
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for the twelve-month period ended March 31, 1994 included: (i) 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 and the filing of amended federal income tax
returns; (ii) interest income on notes receivable of
approximately $764,000; (iii) rental income of approximately
$1,989,000 from Lavaca Realty, Southern Union's real estate
subsidiary; and (iv) a pre-tax gain of approximately $494,000 on
the sale of undeveloped real estate. Other income for the
twelve-month period ended March 31, 1993 included an
approximately $2,200,000 reversal of certain contingency reserves
recorded at the time of the February 1990 cash merger between the
Company and Metro Mobile CTS, Inc., that were subsequently
resolved or settled and an approximately $950,000 gain resulting
from a litigation settlement.
The overall increase in net earnings for the twelve-month period
ended March 31, 1994 also included the Company's recognition of a
net loss from a discontinued operation of $3,014,000 recorded in
the twelve-month period ended March 31, 1993. In addition, net
earnings in 1994 were favorably impacted by the elimination of
$2,220,000 in preferred dividends.
Because of the acquisition of Missouri Gas Energy on January 31,
1994, the income from operations of Missouri Gas Energy are
consolidated with the Company subsequent to that date. Thus the
results of operations for the twelve-month period ended March 31,
1994 are not indicative of results that would necessarily be
achieved for a full year since the majority of the Company's
operating margin is recorded during the winter heating season.
<PAGE>
21
SOUTHERN UNION COMPANY AND SUBSIDIARIES
COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
SOUTHERN UNION
COMPANY AND MISSOURI
SUBSIDIARIES GAS ENERGY
______________ __________
COMBINED
THREE MONTHS TWO MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31, ENDED MARCH 31,
1994(A) 1994 1994
_______________ _______________ ______________
(THOUSANDS OF DOLLARS)
Operating revenues . . $82,014 $93,440 $175,454
Gas purchase costs . . 47,072 60,688 107,760
_______ _______ ________
Operating margin . . 34,942 32,752 67,694
_______ _______ ________
Operating expenses:
Operating, maintenance
and general . . . 14,056 9,575 23,631
Taxes, other than
on income . . . . 5,282 8,462 13,744
Depreciation and
amortization. . . 4,246 2,596 6,842
_______ _______ ________
Total operating
expenses . . . 23,584 20,633 44,217
_______ _______ ________
Net operating
revenues . 11,358 12,119 23,477
_______ _______ ________
Other income (expenses):
Interest on long-term
debt. . . . . . . (4,233) (3,855) (8,088)
Other, net . . . . . 664 42 706
_______ _______ ________
Total other income
(expenses), net. (3,569) (3,813) (7,382)
_______ _______ ________
Earnings before
income taxes . 7,789 8,306 16,095
Federal and state income
taxes . . . . . . . 2,985 3,156 6,141
_______ _______ ________
Earnings before
preferred dividends. 4,804 5,150 9,954
Preferred dividends. . -- -- --
_______ _______ ________
Net earnings available
for common stock. $ 4,804 $ 5,150 $ 9,954
======= ======= ========
_________________________________________
(A) Includes Rio Grande Valley but excludes Missouri Gas Energy.
<PAGE>
22
SOUTHERN UNION COMPANY AND SUBSIDIARIES
COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
SOUTHERN UNION
COMPANY AND MISSOURI
SUBSIDIARIES GAS ENERGY
______________ __________
COMBINED
TWELVE MONTHS TWO MONTHS TWELVE MONTHS
ENDED MARCH 31, ENDED MARCH 31, ENDED MARCH 31,
1994(A) 1994 1994
_______________ _______________ _____________
(THOUSANDS OF DOLLARS)
Operating revenues . . $223,993 $93,440 $317,433
Gas purchase costs . . 121,525 60,688 182,213
________ _______ ________
Operating margin . . 102,468 32,752 135,220
________ _______ ________
Operating expenses:
Operating, maintenance
and general . . . 52,038 9,575 61,613
Taxes, other than on
income . . . . . 15,298 8,462 23,760
Depreciation and
amortization. . . 15,262 2,596 17,858
_______ ______ ________
Total operating
expenses . . . 82,598 20,633 103,231
_______ _______ ________
Net operating
revenues . . . . . 19,870 12,119 31,989
Other income (expenses):
Interest on long-term
debt. . . . . . . (13,041) (3,855) (16,896)
Other, net . . . . . 4,969 42 5,011
________ _______ ________
Total other income
(expenses), net (8,072) (3,813) (11,885)
________ _______ ________
Earnings before
income taxes and
discontinued
operation . . . 11,798 8,306 20,104
Federal and state
income taxes . . . . 4,431 3,156 7,587
________ _______ ________
Earnings before preferred
dividends. . . . . . 7,367 5,150 12,517
Preferred dividends . . 249 -- 249
________ _______ ________
Net earnings available
for common stock . $ 7,118 $ 5,150 $ 12,268
======== ======= ========
_________________________________________
(A) Includes Rio Grande Valley but excludes Missouri Gas Energy.
<PAGE>
22
SOUTHERN UNION COMPANY AND SUBSIDIARIES
COMBINED BALANCE SHEET
(UNAUDITED)
SOUTHERN UNION
COMPANY AND MISSOURI
SUBSIDIARIES GAS ENERGY
_____________ __________
COMBINED
MARCH 31, MARCH 31, MARCH 31,
1994(A) 1994 1994
_____________ __________ _________
(THOUSANDS OF DOLLARS)
ASSETS
Property, plant and equipment:
Plant. . . . . . . . . . $ 386,245 $ 434,931 $ 821,176
Less accumulated depreciation
and amortization. . . (147,820) (129,671) (277,491)
_________ _________ _________
238,425 305,260 543,685
Additional purchase cost
assigned to utility
plant, net. . . . . . 92,761 72,173 164,934
_________ _________ _________
Net property, plant and
equipment. . . . . 331,186 377,433 708,619
Current assets . . . . . . 69,364 78,951 148,315
Other. . . . . . . . . . . 50,097 43,109 93,206
_________ _________ _________
Total. . . . . . . . . . $ 450,647 $ 499,493 $ 950,140
========= ========= =========
STOCKHOLDERS' EQUITY AND LIABILITIES
Common stockholders' equity:
Common stock . . . . . . $ 10,952 $ -- $ 10,952
Premium on common
stock . . . . . . . . 188,765 -- 188,765
Retained earnings. . . . 7,932 5,150 13,082
__________ _________ _________
207,649 5,150 212,799
Less treasury stock,
at cost . . . . . . . (794) -- (794)
__________ _________ _________
Total common stockholders'
equity. . . . . . . . 206,855 5,150 212,005
Long-term debt . . . . . . 479,565 -- 479,565
Interdivision account. . . (344,693) 344,693 --
Current liabilities. . . . 77,305 82,347 159,652
Other . . . . . . . . . . 31,615 67,303 98,918
__________ _________ _________
Total . . . . . . . . . $ 450,647 $ 499,493 $ 950,140
========== ========= =========
_________________________________________
(A) Includes Rio Grande Valley but excludes Missouri Gas Energy.
<PAGE>
23
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain information regarding the
Company's gas utility operations for the three months ended March
31, 1994 and 1993 (including Missouri Gas Energy subsequent to
its acquisition on January 31, 1994):
THREE MONTHS ENDED MARCH 31,
____________________________
1994 1993
__________ __________
Average customers:
Residential. . . . . . . . . . . . . 727,749 372,081
Commercial . . . . . . . . . . . . . 70,328 26,994
Industrial and irrigation. . . . . . 955 764
Public authorities and other . . . . 2,640 2,207
Pipeline and marketing . . . . . . . 251 107
__________ _________
Total average customers . . . . . 801,923 402,153
========== =========
Gas sales in millions of cubic feet (MMcf):
Residential. . . . . . . . . . . . . 25,497 10,053
Commercial . . . . . . . . . . . . . 10,616 3,615
Industrial and irrigation. . . . . . 351 535
Public authorities and other . . . . 1,295 1,413
Pipeline and marketing . . . . . . . 1,688 1,541
__________ _________
Gas sales billed. . . .. . . . . . . 39,447 17,157
Net change in unbilled gas sales . . (5,083) (1,447)
__________ _________
Total gas sales . . . . . . . . . 34,364 15,710
========== =========
Gas sales revenues:
Residential. . . . . . . . . . . . . $ 132,152 $ 45,485
Commercial . . . . . . . . . . . . . 52,945 14,685
Industrial and irrigation. . . . . . 2,065 1,909
Public authorities and other . . . . 4,954 4,951
Pipeline and marketing . . . . . . . 3,951 3,582
__________ _________
Gas sales revenues billed . . . . 196,067 70,612
Net change in unbilled gas
sales revenues . . . . . . . . . (25,788) (6,186)
__________ _________
Total gas sales revenues. . . . . $ 170,279 $ 64,426
========== =========
Gas sales margin . . . . . . . . . . . $ 62,519 $ 28,495
========== =========
Gas sales revenue per thousand
cubic feet (Mcf) billed:
Residential. . . . . . . . . . . . . $ 5.183 $ 4.525
Commercial . . . . . . . . . . . . . 4.987 4.062
Industrial and irrigation. . . . . . 5.883 3.568
Public authorities and other . . . . 3.825 3.504
Pipeline and marketing . . . . . . . 2.341 2.324
Weather effect:
Degree days. . . . . . . . . . . . . 1,158 1,012
Percent of normal, based on
30 year average . . . . . . . . . 88% 81%
Gas transported for others (MMcf). . . 12,144 5,456
Gas transportation revenues
(thousands of dollars). . . . . . $ 3,579 $ 1,823
<PAGE>
24
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's gas utility operations are seasonal in nature with
a significant percentage of the 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. The Company has
historically used its revolving loan and credit facilities and
internally generated funds to provide funding for its seasonal
working capital, continuing construction and maintenance programs
and operational requirements.
The principal sources of funds during the three-month period
ended March 31, 1994 included $475,000,000 received from the sale
of 7.60% Senior Notes due 2024 and $84,902,000 generated from
operating activities. The principal uses of funds during this
period included: payments of $400,334,000 for the purchase of gas
utility systems; $86,541,000 for the retirement of long-term debt
and mortgages payable; $20,100,000 for the repayment of the
revolving credit facility; $13,715,000 in premiums on refinanced
notes; $5,089,000 in debt issuance costs on the $475,000,000 of
7.60% Senior Notes and $12,655,000 for property, plant and
equipment additions on ongoing operations.
INVESTING ACTIVITIES
As previously discussed, Southern Union acquired Missouri Gas
Energy on January 31, 1994. On the date of closing, Southern
Union paid approximately $400,300,000 in cash for Missouri Gas
Energy. The final determination of the purchase price and all
prorations and adjustments are expected to be completed by
May 31, 1994. The purchase price was financed through the sale
of $475,000,000 of 7.60% Senior Notes due 2024 and net proceeds
from the sale of a $50,000,000 Rights Offering completed on
December 31, 1993.
The additional purchase cost assigned to utility plant reflects
cash paid of approximately $44,500,000 in excess of the
historical book carrying value of the assets acquired and
purchase accounting adjustments of approximately $27,500,000 for
certain liabilities and contingencies which have been incurred or
estimates of amounts that will be incurred subsequent to the
acquisition. The purchase accounting adjustments reflect actual
or estimated amounts for: (i) employee severance and other costs
associated with an early retirement program for employees of
Missouri Gas Energy; (ii) a $3,000,000 contribution to the
Missouri Gas Energy employees' qualified defined benefits plan in
excess of the minimum required contribution under the Internal
Revenue Code Section 412, as determined by the plans' actuary,
pursuant to the terms of a stipulation and settlement agreement
among Southern Union, Western Resources, the Missouri Public
Service Commission ("MPSC") staff and all intervenors in the MPSC
proceeding; (iii) underwriting, legal and accounting fees
associated with the Missouri Acquisition; and (iv) other
preacquisition contingencies. Amortization of the additional
purchase cost assigned to utility plant is provided on a straight-
line basis over forty years. The Company expects to finalize its
estimate of all preacquisition contingencies within one year of
the date the acquisition was consummated.
FINANCING ACTIVITIES
On January 31, 1994, Southern Union completed the sale of
$475,000,000 of 7.60% Senior Notes due 2024. The net proceeds
from the sale of the Senior Notes, together with the net proceeds
from the sale of a $50,000,000 Rights Offering, which was
completed as of December 31, 1993, and working capital from
operations, were or will be used to: (i) fund the acquisition of
Missouri Gas Energy; (ii) repay approximately $59,300,000 of
borrowings under the $100,000,000 revolving credit facility,
which borrowings were used to fund the acquisition
<PAGE>
25
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of Rio Grande and repurchase all outstanding preferred stock;
(iii) refinance, on January 31, 1994, 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 approximately
$10,400,000 resulting from the early extinguishment of such
notes; (iv) refinance, on March 2, 1994, $50,000,000 aggregate
principal amount of the 10.5% Sinking Fund Debentures due
May 15, 2017 and the related premium of approximately $3,300,000
resulting from the early extinguishment of such debentures; and
(v) refinance the $20,000,000 aggregate principal amount of the
10-1/8% Notes due May 15, 1994.
The effective rate of interest on debt outstanding in 1993 was
approximately 10.6%. The effective rate under the new debt
structure is approximately 7.8% (including interest and the
amortization of debt issuance costs and redemption premiums on
refinanced debt) once certain higher-cost debt is fully retired
in May 1994. This reduction in the cost of debt will be
advantageous to the Company's future earnings.
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. At December 31, 1993 the outstanding
balance on the Revolving Credit Facility was approximately
$20,100,000 which was subsequently liquidated with the net
proceeds from the sale of $475,000,000 of 7.60% Senior Notes.
The amount outstanding under the Revolving Credit Facility at
March 31 and May 13, 1994 was zero.
OTHER MATTERS
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 112, Employers Accounting for
Postemployment Benefits, as of January 1, 1994. This statement
requires that the cost of benefits, such as disability and health
care continuation coverage provided to former or inactive
employees after employment but before retirement, be accrued if
attributable to an employee's previously rendered service. The
Company had previously recognized such post-employment benefit
costs when paid and was allowed recovery in rates as payments
were incurred. Consequently, Southern Union has recorded a
regulatory asset to the extent it intends to file rate
applications to include such costs in rates. The adoption of
SFAS No. 112 resulted in the recognition of a deferred liability
of approximately $1,100,000.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTHERN UNION COMPANY
_________________________________________
(Registrant)
Date May 13, 1994 By RONALD J. ENDRES
____________________ ______________________________________
Ronald J. Endres
Senior Vice President - Finance
and Administration and
Chief Financial Officer
Date May 13, 1994 By DAVID J. KVAPIL
____________________ ______________________________________
David J. Kvapil
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
E-1
SOUTHERN UNION COMPANY AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS Exhibit 11
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
______________________ _____________________
1994 1993 1994 1993
__________ __________ __________ _________
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net earnings available
for common stock. . . $ 9,954 $ 4,575 $ 12,269 $ 62
======= ======= ======== ========
Primary earnings per share:
Average shares
outstanding . . . . 10,889 7,856 8,640 7,856
Stock options. . . . . 325 113 232 70
_______ _______ ________ _______
Average shares
outstanding, as
adjusted . . . . . . 11,214 7,969 8,872 7,926
======= ======= ======== =======
Primary earnings
per share . . . . . $ 0.89 $ 0.57 $ 1.38 $ 0.01
======= ======= ======== =======
Fully diluted earnings
per share:
Average shares
outstanding . . . . 10,889 7,856 8,640 7,856
Stock options. . . . . 325 175 273 156
_______ ______ _______ _______
Average shares
outstanding, as
adjusted . . . . . . 11,214 8,031 8,913 8,012
======= ======= ======= =======
Fully diluted earnings
per share . . . . . $ 0.89 $ 0.57 $ 1.38 $ 0.01
======= ======= ======= =======
_____________________________________
Note: Adjusted for the three-for-two stock split distributed in
the form of a 50% stock dividend on March 9, 1994.
