<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 18, 1994)
$475,000,000
SOUTHERN UNION COMPANY
[LOGO]
7.60% SENIOR NOTES DUE 2024
----------------
Interest on the Senior Notes is payable semiannually on February 1 and
August 1 of each year, commencing August 1, 1994. The Senior Notes will mature
on February 1, 2024, are not redeemable prior to maturity and are not entitled
to any sinking fund.
The sale of the Senior Notes is conditioned upon the closing of the Missouri
Acquisition. See "The Missouri Acquisition" in the Prospectus accompanying this
Prospectus Supplement.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) DISCOUNT (2) COMPANY (1)(3)
<S> <C> <C> <C>
Per Senior Note........................... 100% .875% 99.125%
Total..................................... $475,000,000 $4,156,250 $470,843,750
</TABLE>
(1) Plus accrued interest, if any, from January 31, 1994.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933.
(3) Before deducting expenses payable by the Company estimated to be $848,793.
------------------------
The Senior Notes are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by the Underwriters, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the Senior Notes initially offered hereby will be made in New York,
New York on or about January 31, 1994.
------------------------
MERRILL LYNCH & CO. SMITH BARNEY SHEARSON INC.
---------------
The date of this Prospectus Supplement is January 18, 1994.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH THEY MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE OPEN MARKET OR OTHERWISE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
USE OF PROCEEDS
The net proceeds from the sale of the Senior Notes, together with the net
proceeds from the Rights Offering of approximately $49,500,000 and funds
generated from operations, will be used to (i) fund the $360,000,000 estimated
purchase price of the Missouri Acquisition, (ii) refinance the $20,000,000
aggregate principal amount of the Company's 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, which borrowings were used to fund the
Rio Grande Acquisition and repurchase all of Southern Union's outstanding
preferred stock and bear interest at floating rates ranging from 4.2% to 6.0%,
(iv) refinance the $10,000,000 aggregate principal amount of the Company's 9.45%
Senior Notes due January 31, 2004 and the $25,000,000 aggregate principal amount
of the Company's 10% Senior Notes due January 31, 2012 and (v) refinance the
$50,000,000 aggregate principal amount of the Company's 10.5% Sinking Fund
Debentures due May 15, 2017.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the Company for each of the five years in the periods ended December 31, 1992
and for the nine and twelve months ended September 30, 1993 on an historical
basis, and for the year ended December 31, 1992 and the nine and twelve months
ended September 30, 1993 on a pro forma basis. For the purpose of calculating
such ratio, "earnings" consist of income from continuing operations before
income taxes and fixed charges. "Fixed charges" consist of interest,
amortization of debt issue costs, and the portion of rentals for real and
personal properties in an amount deemed to be representative of the interest
factor.
<TABLE>
<CAPTION>
PRO FORMA (A)
------------------------------------------
NINE MONTHS TWELVE MONTHS NINE MONTHS TWELVE MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED ENDED ENDED
------------------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1988 (B) 1989 1990 1991 1992 1993 1993 1992 1993 1993
------- ---- ---- ---- ---- ------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- 1.16 1.11 1.84 1.80 1.44 1.78 1.17 1.15 1.42
<FN>
- ------------------------------
(a) As adjusted to give effect to the increased interest expense related to
the issuance of $475.0 million of Senior Notes which, together with the
proceeds from the Rights Offering, will be used to fund the Missouri
Acquisition, refinance approximately $79.3 million of short-term debt and
current maturities of long-term debt outstanding as of September 30, 1993
and refinance $85.0 million of long-term debt at interest rates ranging
from 9.45% to 10.5% due 2004 through 2017. See "Capitalization." These
ratios and the pro forma financial information from which they are derived
do not reflect the financial impact, if any, of (i) the rate increases
granted to Southern Union Gas and the Missouri Business during 1993 not
yet earned and (ii) the pro forma effect of the results of operations of
the Rio Grande Acquisition. See "Business -- Regulation" and "The
Company."
(b) In 1988 earnings were inadequate to cover fixed charges by approximately
$6.9 million.
</TABLE>
DESCRIPTION OF SENIOR NOTES
The Senior Notes are to be issued under the Indenture dated as of January
15, 1994 (the "Indenture") between Southern Union and The Chase Manhattan Bank
(National Association), which Indenture is more fully described in the
Prospectus accompanying this Prospectus Supplement. The following description of
the particular terms of the 7.60% Senior Notes due 2024 (the "Senior Notes")
offered hereby (referred to in the Prospectus as the "Senior Debt Securities")
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the Senior Debt Securities set forth in
the Prospectus under the caption "Description of the Senior Debt Securities," to
which reference is hereby made. Whenever particular defined terms of the
S-2
<PAGE>
Indenture are referred to, such defined terms are incorporated herein by
reference. The Senior Notes are the $475,000,000 aggregate principal amount of
Senior Debt Securities of Southern Union registered under the Securities Act of
1933, as amended, in January 1994. The Indenture does not limit the amount of
debt that may be incurred by the Company.
GENERAL
Interest on each Senior Note is payable at the annual rate set forth on the
cover page of this Prospectus Supplement, will accrue from January 31, 1994 and
be payable semiannually on February 1 and August 1 of each year, commencing
August 1, 1994, to the person in whose name the Senior Note (or any predecessor
Senior Note) is registered at the close of business on the next preceding
January 15 and July 15, respectively. The Senior Notes will be limited to
$475,000,000 aggregate principal amount and will mature February 1, 2024. The
Senior Notes will be senior unsecured obligations of the Company.
The defeasance and covenant defeasance provisions of the Indenture described
under "Description of the Senior Debt Securities Defeasance and Covenant
Defeasance" in the Prospectus accompanying this Prospectus Supplement will apply
to the Senior Notes.
CERTAIN COVENANTS
In addition to the covenants contained in the Indenture, the Senior Notes
will include the following additional covenants:
LIMITATIONS ON RESTRICTED PAYMENTS. Southern Union will not (and, with
respect to clause (ii) will not permit any Subsidiary to) directly or indirectly
(i) declare or pay any dividend on or make any distribution to the holders of,
any shares of its Capital Stock (other than dividends and distributions payable
solely in shares of its Capital Stock (other than Redeemable Stock) or in
options, warrants or other rights to acquire its Capital Stock (other than
Redeemable Stock)) or (ii) purchase, redeem or otherwise acquire or retire for
consideration any shares of Southern Union's Capital Stock (each of the
foregoing being referred to herein as a "Restricted Payment") UNLESS, at the
time of and after giving effect to such Restricted Payment, (1) no Default or
Event of Default shall have occurred and be continuing and (2) the aggregate
amount of all such Restricted Payments at the time of such Restricted Payment
does not exceed the sum of (A) 50% of the cumulative Consolidated Net Income of
Southern Union from the date of the Indenture through the last day (the "Cut-Off
Date") of the second fiscal quarter during which Southern Union's Equity to
Funded Indebtedness Ratio exceeded 0.73 to 1 (or, if such Consolidated Net
Income is a loss during such period, minus 100% of such loss) and 100% of the
cumulative Consolidated Net Income of Southern Union after the Cut-Off Date (or,
if such Consolidated Net Income is a loss during such period, minus 100% of such
loss), plus (B) the aggregate net proceeds to Southern Union from sales of its
Capital Stock (other than Redeemable Stock and Capital Stock sold to a
Subsidiary) after the date of the Indenture.
"Capital Stock" of any Person means any and all shares, interests,
participations, or other equivalents (however designated) of such Person's
capital stock whether now outstanding or issued after the date of the Indenture.
"Funded Indebtedness" means Indebtedness that matures more than one year
from the date of determination.
"Equity to Funded Indebtedness Ratio" means the ratio of Southern Union's
total common stockholders' equity to Southern Union's consolidated Funded
Indebtedness.
RESTRICTION ON TRANSFER OF ASSETS. Southern Union will not sell, convey,
transfer or otherwise dispose of its assets or property to any of its
Subsidiaries, except for: (i) sales, conveyances, transfers or other
dispositions of assets or property acquired by Southern Union after the date of
the Indenture; (ii) sales, conveyances, transfers or other dispositions of
Existing Assets (a) with a net book value that, when aggregated with all other
such transfers by Southern Union since the date of the Indenture, less the net
book value of Existing Assets transferred to Southern Union from its
Subsidiaries, would not
S-3
<PAGE>
exceed 10% of the Consolidated Assets of Southern Union or (b) to any Subsidiary
if such Subsidiary simultaneously with such transfer executes and delivers a
supplemental indenture to the Indenture providing for the guarantee of payment
of the Senior Notes by such Subsidiary, which guarantee shall be senior to any
guarantee of such Subsidiary of subordinated Debt of Southern Union, and shall
be PARI PASSU with any other Debt of such Subsidiary (which is not subordinated
to any other Debt or guarantee of such Subsidiary); and (iii) sales,
conveyances, transfers or other dispositions of Disposable Assets that would not
exceed 10% of Consolidated Assets of Southern Union. Notwithstanding the
foregoing, any such guarantee of a Subsidiary of the Senior Notes shall provide
by its terms that it shall be automatically and unconditionally released and
discharged (i) on the date that the net book value of the Existing Assets held
by Southern Union is greater than 90% of Consolidated Assets or (ii) upon any
sale, exchange or transfer to any Person not an Affiliate of Southern Union of
all of Southern Union's stock in, or all or substantially all the assets of,
such Subsidiary.
"Consolidated Assets" means the net book value of the Existing Assets shown
on the balance sheet of Southern Union, as determined in accordance with GAAP
consistently applied, as of the last day of Southern Union's last fiscal quarter
prior to the date of the Indenture.
"Disposable Assets" means General Plant (as defined below) and all assets
primarily used in the natural gas vehicular fuels business.
"Existing Assets" means the assets and other property held by Southern Union
(and not its subsidiaries) as of the last day of Southern Union's last fiscal
quarter prior to the date of the Indenture, plus any assets held by Southern
Union (and not its subsidiaries) irrevocably designated from time to time by
Southern Union as Existing Assets.
"General Plant" shall have the meaning set forth under the "Uniform System
of Accounts for Class A and B Gas Utilities 1976 National Association of
Regulatory Utility Commissioners" Chapter 6; Accounts 389 through and including
398.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. Southern Union will not, and
will not permit any Subsidiary to, enter into any transactions with any
Affiliate of Southern Union unless (i) such transactions are between and among
Southern Union and wholly owned Subsidiaries or (ii) (A) the terms of such
transactions are no less favorable to Southern Union or such Subsidiary, as the
case may be, then the terms which could be obtained by Southern Union or such
Subsidiary, as the case may be, in a comparable transaction made on an
arm's-length basis between unaffiliated parties and (B) a majority of the
disinterested directors of the Board of Directors of Southern Union shall by
resolution determine that such transactions meet the criteria set forth in
clause (ii)(A) above.
For additional covenants, see "Description of the Senior Debt Securities --
Certain Covenants" in the Prospectus accompanying this Prospectus Supplement.
S-4
<PAGE>
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms and
conditions of the Underwriting Agreement with Southern Union, to purchase from
Southern Union the principal amount of the Senior Notes set forth below opposite
their respective names. The Underwriters are committed to purchase all of the
Senior Notes if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITER PRINCIPAL AMOUNT
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................................... $ 237,500,000
Smith Barney Shearson Inc................................................... 237,500,000
----------------
Total........................................................... $ 475,000,000
----------------
----------------
</TABLE>
The Underwriters have advised Southern Union that they propose initially to
offer the Notes to the public at the public offering price set forth on the
cover page of this Prospectus Supplement, and to certain dealers at such price
less a concession not in excess of .5% of the principal amount of the Notes. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of .25% of the principal amount of the Notes to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
Southern Union has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Southern Union does not intend to apply for listing of the Senior Notes on a
national securities exchange, but has been advised by the Underwriters that the
Underwriters presently intend to make a market in the Senior Notes, as permitted
by applicable laws and regulations. The Underwriters are not obligated, however,
to make a market in the Senior Notes and any such market making may be
discontinued at any time at the sole discretion of the Underwriters.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Senior Notes.
S-5
<PAGE>
PROSPECTUS
SOUTHERN UNION COMPANY
[LOGO]
SENIOR DEBT SECURITIES
----------------
Southern Union Company ("Southern Union" and, together with its
subsidiaries, the "Company") will offer from time to time its unsecured senior
debt securities (the "Senior Debt Securities") at an aggregate initial offering
price of up to $475,000,000 on terms to be determined at the time of sale. The
specific designation, aggregate principal amount, maturity, rate and time of
payment of any interest, purchase price, any terms relating to mandatory or
optional redemption (including any sinking fund), any modification of the
covenants and any other specific terms in connection with the sale of the Senior
Debt Securities in respect of which this Prospectus is being delivered are set
forth in an accompanying Prospectus Supplement. The Prospectus Supplement also
includes information concerning any listing of the Senior Debt Securities on a
stock exchange.
The Senior Debt Securities may be offered directly, through agents
designated from time to time, through dealers or through underwriters that may
include Merrill Lynch, Pierce, Fenner & Smith Incorporated and Smith Barney
Shearson Inc. See "Plan of Distribution." Any such agents, dealers or
underwriters are set forth in the accompanying Prospectus Supplement. If an
agent of the company or a dealer or underwriter is involved in the offering of
the Senior Debt Securities, the agent's commission, dealer's purchase price,
underwriter's discount and net proceeds to the Company will be set forth in the
Prospectus Supplement. Any agents, dealers or underwriters participating in the
offering may be deemed "underwriters" within the meaning of the Securities Act
of 1933, as amended.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is January 18, 1994.
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR IN AN APPLICABLE PROSPECTUS
SUPPLEMENT IN CONNECTION WITH ANY OFFER MADE BY THIS PROSPECTUS AND SUCH
PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER, DEALER OR AGENT. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY
PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS AND ANY
PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES TO WHICH IT RELATES, OR AN OFFER TO OR SOLICITATION
OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL.
AVAILABLE INFORMATION
This Prospectus constitutes a part of a registration statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement") filed
by the Company with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"). This
Prospectus does not contain all of the information included in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Reference is made to the Registration Statement
and to the exhibits relating thereto for further information with respect to the
Company and the Senior Debt Securities offered hereby.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Commission. The
Registration Statement and amendments thereof, and the exhibits thereto,
reports, proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the Commission's New York Regional Office,
7 World Trade Center, 13th Floor, Room 1400, New York, New York 10048, and its
Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained
from the Public Reference Section of the Commission, Washington, D.C. 20549, at
prescribed rates. In addition such materials may be inspected and copied at the
offices of the American Stock Exchange, 86 Trinity Place, New York, New York
10006-1881.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
(File No. 1-6407) pursuant to the 1934 Act and are incorporated by reference and
made a part of this Prospectus.
(1) The Company's Annual Report on Form 10-K for the year ended December 31,
1992 (the "1992 Form 10-K");
(2) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1993 (the "First Quarter Form 10-Q"), June 30, 1993 (the
"Second Quarter Form 10-Q") and September 30, 1993 (the "Third Quarter
Form 10-Q"); and
(3) The Company's Current Reports on Form 8-K dated April 15, 1993, July 12,
1993, October 13, 1993 and January 3, 1994.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the 1934 Act on or after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein or contained in
this Prospectus shall be deemed to be supplemented, modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein supplements, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on written or oral request of such person, a copy
(without exhibits) of any and all documents incorporated herein by reference.
Requests for such copies should be directed to Dennis K. Morgan, Vice
President-Legal and Secretary, Southern Union Company, 504 Lavaca Street, Eighth
Floor, Austin, Texas 78701 (telephone number (512) 479-5981).
2
<PAGE>
THE COMPANY
Southern Union Company ("Southern Union" and, together with its
subsidiaries, the "Company") is primarily engaged in various aspects of the
natural gas business. 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"), a division of the Company. Southern Union Gas,
which accounts for approximately 88% of the Company's total revenues, serves
approximately 475,000 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. See "Business --
Southern Union Gas." The Company's subsidiaries, which have been established to
support and expand natural gas sales and to capitalize on the Company's gas
energy expertise, 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. See "Business --
Other Company Operations." 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
regulated and unregulated natural gas sales to specialized energy consulting
services.
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 natural gas distribution systems and selectively acquiring additional
natural gas distribution systems. Management developed and continually evaluates
these strategies and their implementation by 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. See "Business -- Business Strategy."
Consistent with this strategy, the Company has actively pursued selected
acquisitions in the natural gas distribution, transportation and sales
industries where management believes there are opportunities to promote new
sales of, and markets for, natural gas and/or synergies that permit enhanced
financial and operating performance. Since 1990, Southern Union has acquired
seven gas distribution systems in Texas. Collectively, these systems have added
nearly 115,000 of Southern Union Gas' present customers representing
approximately $47,700,000 of annual sales revenue to the Company. See "Business
- -- Business Strategy" and "Acquisitions, Divestiture and Merger" in the Notes to
the Company's Consolidated Financial Statements included in the 1992 Form 10-K
that is incorporated by reference into this Prospectus. Southern Union's most
recent acquisition was on September 30, 1993 when it acquired Rio Grande Valley
Gas Company, a subsidiary of Valero Energy Corporation ("Rio Grande"), for
approximately $31,050,000 (the "Rio Grande Acquisition"). See the Third Quarter
Form 10-Q that is incorporated by reference into this Prospectus. The Company
has also agreed to an acquisition that will add approximately 460,000 customers
in western Missouri. See "The Missouri Acquisition."
Southern Union was incorporated under the laws of the State of Delaware in
1932. The Company's corporate headquarters are located at 504 Lavaca Street,
Eighth Floor, Austin, Texas 78701. The Company's telephone number is (512)
477-5981.
3
<PAGE>
THE 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 has agreed to purchase
from Western Resources certain Missouri natural gas operations (the "Missouri
Acquisition"). These operations serve approximately 460,000 customers in western
Missouri, including the cities of Kansas City, St. Joseph and Joplin, Missouri
(the "Missouri Business"). See "Business -- Missouri Business." If the Missouri
Acquisition occurs, the Company will nearly double the number of customers
served by its natural gas distribution systems and become one of the top 15 gas
utilities in the United States, as measured by number of customers. In addition,
the Missouri Acquisition will lessen the sensitivity of the Company's operations
to weather risk and local economic conditions by diversifying operations into
different geographic areas. The incurrence of additional debt and issuance of
new equity in connection with the Missouri Acquisition will significantly change
the Company's capital structure. See "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Future Capital
Needs and Resources" and "Unaudited Pro Forma Combined Condensed Financial
Information." Southern Union intends to operate the Missouri Business as
"Missouri Gas Energy," a separate division of Southern Union to be headquartered
in Kansas City, Missouri.
On December 29, 1993 the Missouri Public Service Commission (the "MPSC")
issued all MPSC approvals necessary to consummate the Missouri Acquisition,
which approvals became effective on January 9, 1994. The MPSC's approval is
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) requires the Company to attain, within three years of the closing of the
Missouri Acquisition, 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 this time, would be approximately 58%) or it will not be able to implement
any general rate increase with respect to the Missouri Business; (ii) prohibits
Southern Union from implementing a general rate increase in Missouri for at
least three years except in certain unusual events; (iii) requires Western
Resources to contribute an additional $9,000,000 to the Missouri Business'
employees' qualified defined benefit plans to be transferred to the Company; and
(iv) requires the Company to contribute, beginning in 1994, an additional
$3,000,000 to the Missouri Business' employees' qualified defined benefit plans.
See the Company's Current Report on Form 8-K dated January 3, 1994, that is
incorporated by reference into this Prospectus.
In addition, on December 31, 1993 Southern Union successfully consummated a
rights offering to its existing stockholders to subscribe for and purchase
2,000,000 shares of Southern Union common stock, par value $1.00 per share
("Common Stock"), at $25.00 per share for aggregate proceeds of $50,000,000 (the
"Rights Offering"). The proceeds from the Rights Offering, together with
proceeds from the sale of Senior Debt Securities, will be used to fund the
Missouri Acquisition.
The following summary does not purport to be complete and is qualified in
its entirety by reference to the Missouri Asset Purchase Agreement and related
agreements described below that are exhibits thereto, copies of which are
attached as Exhibit 10.1 to the Company's Current Report on Form 8-K, dated July
12, 1993, that is incorporated by reference into this Prospectus.
PURCHASE PRICE. The purchase price payable by Southern Union to Western
Resources for the Missouri Acquisition is $327,940,000 in cash, to be adjusted
as of the closing date to reflect permitted capital expenditures and
depreciation relating to the Missouri Business since March 31, 1993 and accounts
receivable net of accounts payable as of closing. At the closing, Southern Union
will pay Western Resources an estimate of this purchase price subject to a final
determination of the purchase price and all adjustments within 120 days after
the closing. Southern Union presently expects the Missouri Acquisition to close
during the first quarter of 1994 and the aggregate purchase price to be
approximately $360,000,000.
4
<PAGE>
LIABILITIES ASSUMED. Southern Union has agreed to assume certain
liabilities of Western Resources with respect to the assets being acquired,
including liabilities arising from certain specified contracts to be 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.
ENVIRONMENTAL. Southern Union and Western Resources have agreed to enter
into an Environmental Liability Agreement at the closing of the Missouri
Acquisition. Subject to the accuracy of certain representations made by Western
Resources in the Missouri Asset Purchase Agreement, the agreement will provide
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
and the assets Southern Union acquires in the Missouri Acquisition. 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. The Company believes that it will be able to obtain substantial
if not complete reimbursement or recovery for any such environmental liabilities
from other potentially responsible third parties, under insurance or rates
charged to customers. See "Business -- Missouri Business -- Environmental."
EMPLOYEES. Southern Union has agreed, pursuant to the terms of an Employee
Agreement with Western Resources entered into on July 9, 1993, to employ after
the closing of the Missouri Acquisition 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 to retired employees who were
necessary to the operation of the Missouri Business ("Retired Employees"), under
Western Resources' qualified defined benefit plans, are to be 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 has
also agreed to establish or maintain a defined contribution plan in which
Continuing Employees covered by Western Resources' defined contribution plan
will be eligible to participate, and to provide Continuing Employees with
certain welfare, separation and other benefits and arrangements. See "Business
- -- Missouri Business -- Employees."
CONDITIONS TO CLOSING. The Missouri Acquisition is subject to the
satisfaction of certain conditions to closing. The Federal Energy Regulatory
Commission ("FERC") must approve the Missouri Acquisition with respect to the
transportation of de minimis volumes of gas between Western Resources' Kansas
operations and the Missouri Business, which approval was issued on January 12,
1994. In addition, Southern Union's ability to consummate the Missouri
Acquisition is dependent upon the receipt of proceeds from the sale of Senior
Debt Securities. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Future Capital Needs and
Resources."
There can be no assurance that all of the conditions to the closing of the
Missouri Acquisition that are contained in the Missouri Asset Purchase Agreement
will be satisfied or waived, or that, if all such conditions are satisfied or
waived, the Missouri Acquisition will occur.
SOUTHERN UNION FINANCING MATTERS. Southern Union represented in the
Missouri Asset Purchase Agreement that, as of closing, it will have available
sufficient funds with which to pay the adjusted purchase price and the other
costs and expenses of the transactions contemplated by the
5
<PAGE>
Missouri Asset Purchase Agreement. Southern Union has agreed, subject to certain
conditions, to pay Western Resources $12,000,000 in cash if the Missouri Asset
Purchase Agreement is terminated (i) by Western Resources due to the inability
of Southern Union to obtain funds sufficient to pay the adjusted purchase price
available to it on the date of closing or (ii) by Southern Union if it fails to
satisfy or agree to comply with a condition or provision contained in a final
order by the MPSC that pertains either to the nature of Southern Union's
financing for the Missouri Acquisition or the Company's capital structure that
would result from the Missouri Acquisition.
TERMINATION PROVISIONS. The Missouri Asset Purchase Agreement also may be
terminated: (i) by either party if all conditions to such party's obligation to
consummate the transactions contemplated by the Missouri Asset Purchase
Agreement are not satisfied by July 9, 1994, unless due to the failure of such
party to comply fully with its obligations under the Missouri Asset Purchase
Agreement; (ii) by either party if a final order or injunction of a governmental
authority has been issued restraining or prohibiting consummation of the
transactions contemplated by the Missouri Asset Purchase Agreement or any
material part thereof; (iii) by either party following a material breach by the
other party of any representation, warranty, covenant or agreement of such other
party, and such other party's failure to cure the same within 30 days of notice
thereof; or (iv) by the mutual consent of both parties.
USE OF PROCEEDS
The net proceeds from the sale of the Senior Debt Securities of any series
will be specified in the Prospectus Supplement applicable to such series and are
expected to be used to fund the Missouri Acquisition, refinance certain of the
Company's existing debt or provide working capital for the Company's operations.
See "The Missouri Acquisition."
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the Company for each of the five years in the period ended December 31, 1992 and
for the nine and twelve months ended September 30, 1993 on an historical basis,
and for the year ended December 31, 1992 and the nine and twelve months ended
September 30, 1993 on a pro forma basis. For the purpose of calculating such
ratio, "earnings" consist of income from continuing operations before income
taxes and fixed charges. "Fixed charges" consist of interest, amortization of
debt issue costs and the portion of rentals for real and personal properties in
an amount deemed to be representative of the interest factor.
<TABLE>
<CAPTION>
PRO FORMA(A)
-----------------------------------------
NINE MONTHS TWELVE MONTHS NINE MONTHS TWELVE MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED YEAR ENDED ENDED ENDED
- ------------------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, SEPTEMBER SEPTEMBER 30,
1988(B) 1989 1990 1991 1992 1993 1993 1992 30, 1993 1993
- ------- ---- ---- ---- ---- ------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- 1.16 1.11 1.84 1.80 1.44 1.78 1.17 1.15 1.42
<FN>
- ------------------------------
(a) As adjusted to give effect to the increased interest expense related to the
issuance of $475.0 million of Senior Debt Securities which, together with
the proceeds from the Rights Offering, will be used to fund the Missouri
Acquisition, refinance approximately $79.3 million of short-term debt and
current maturities of long-term debt outstanding as of September 30, 1993
and refinance $85.0 million of long-term debt at interest rates ranging from
9.45% to 10.5% due 2004 through 2017. See "Capitalization." These ratios and
the pro forma financial information from which they are derived do not
reflect the financial impact, if any, of (i) the rate increases granted to
Southern Union Gas and the Missouri Business during 1993 not yet earned and
(ii) the pro forma effect of the results of operations of the Rio Grande
Acquisition. See "Business -- Regulation" and "The Company."
(b) In 1988 earnings were inadequate to cover fixed charges by approximately
$6.9 million.
</TABLE>
6
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
September 30, 1993 and (ii) the adjusted capitalization of the Company as of
such date after giving effect to (a) the issuance of 2,000,000 shares of Common
Stock in the Rights Offering, (b) the completion of the Missouri Acquisition,
including the sale of Senior Debt Securities to fund such Acquisition, and (c)
the sale of Senior Debt Securities to refinance certain short-term debt, current
maturities of long-term debt and certain long-term debt outstanding as of
September 30, 1993. This capitalization table should be read in conjunction with
the Company's Consolidated Financial Statements and notes thereto included in
the 1992 Form 10-K and the Third Quarter Form 10-Q that are incorporated by
reference into this Prospectus and the Historical Financial Statements of the
Missouri Business and notes thereto and the Unaudited Pro Forma Combined
Financial Statements and notes thereto that are included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1993
-----------------------------------------------------------------------
AS ADJUSTED
FOR THE
RIGHTS
OFFERING,
THE
MISSOURI
AS ACQUISITION
ADJUSTED AND THE SALE
FOR THE OF SENIOR
PRO FORMA RIGHTS PRO FORMA DEBT
HISTORICAL ADJUSTMENTS OFFERING ADJUSTMENTS SECURITIES
---------- ------------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Short-term debt, including current maturities of
long-term debt...................................... $ 90,947 $ 90,947 $(79,306)(b) $ 11,641
---------- ---------- ------------ ------------
Long-term debt:
First mortgage bonds:
11.5% due 2000 -- collateralized by utility plant
in service...................................... 2,700 2,700 2,700
Sinking fund debentures:
10.5% due 2017................................... 50,000 50,000 (50,000)(c) --
Other long-term debt:
9.45% notes due 2004............................. 10,000 10,000 (10,000)(c) --
10% notes due 2012............................... 25,000 25,000 (25,000)(c) --
Other............................................ 1,422 1,422 1,422
Senior Debt Securities:
7.60% Senior Notes due 2024...................... -- -- 475,000(c) 475,000
---------- ---------- ------------ ------------
Total long-term debt................................. 89,122 89,122 390,000 479,122
---------- ---------- ------------ ------------
Common stockholders' equity:
Common stock, $1 par value; authorized 50,000,000
shares; issued 5,252,110 shares (7,252,110 shares
as adjusted for the Rights Offering).............. 5,304 $ 2,000 (a) 7,304 7,304
Premium on capital stock........................... 144,925 47,500 (a) 192,425 192,425
Less treasury stock, 51,625 shares at cost......... (794) (794 ) (794 )
Retained earnings.................................. 492 492 492
---------- ------------- ---------- ------------
Total common stockholders' equity.................... 149,927 49,500 199,427 199,427
---------- ------------- ---------- ------------ ------------
Total capitalization................................. $ 329,996 $ 49,500 $ 379,496 $310,694 $ 690,190
---------- ------------- ---------- ------------ ------------
---------- ------------- ---------- ------------ ------------
<FN>
- ------------------------
(a) Reflects the Company's receipt of $50.0 million in gross proceeds from the
completion of the Rights Offering, less approximately $0.5 million in
estimated stock issuance costs.
(b) Reflects the use of the net proceeds from the Rights Offering together with
a portion of the proceeds from the sale of Senior Debt Securities to retire
approximately $59.3 million of borrowings on the Company's revolving credit
facility and refinance $20.0 million of the Company's 10 1/8% notes due May
15, 1994.
(c) Reflects the sale of Senior Debt Securities totalling $475.0 million which,
together with the proceeds from the Rights Offering, will be used to fund
the Missouri Acquisition and refinance approximately $79.3 million of
short-term debt and current maturities of long-term debt and $85.0 million
of long-term debt outstanding as of September 30, 1993.
</TABLE>
7
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information
consists of the Unaudited Pro Forma Combined Condensed Statements of Operations
for the nine months ended September 30, 1993, the twelve months ended September
30, 1993 and the year ended December 31, 1992 (the "Pro Forma Statements of
Operations") and the Unaudited Pro Forma Combined Condensed Balance Sheet as of
September 30, 1993 (the "Pro Forma Balance Sheet," and together with the Pro
Forma Statements of Operations, the "Pro Forma Financial Statements"). The Pro
Forma Statements of Operations have been prepared by combining the consolidated
statements of operations of the Company with the statements of operations of the
Missouri Business for the periods indicated, adjusted to give effect to (i) the
issuance of 2,000,000 shares of Common Stock in the Rights Offering, (ii) the
completion of the Missouri Acquisition, including the sale of Senior Debt
Securities to fund such Acquisition and (iii) the sale of Senior Debt Securities
to refinance certain short-term debt, current maturities of long-term debt and
certain long-term debt outstanding at September 30, 1993, as if such
transactions had been consummated as of the beginning of each such period. The
Pro Forma Balance Sheet has been prepared by combining the consolidated balance
sheet of the Company as of September 30, 1993 with the balance sheet of the
Missouri Business as of September 30, 1993, adjusted to give effect to (i) the
issuance of 2,000,000 shares of Common Stock in the Rights Offering, (ii) the
completion of the Missouri Acquisition, including the sale of Senior Debt
Securities to fund such Acquisition and (iii) the sale of Senior Debt Securities
to refinance certain short-term debt, current maturities of long-term debt and
certain long-term debt outstanding as of September 30, 1993, as if such
transactions had been consummated on September 30, 1993.
The Pro Forma Financial Statements are based on and should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto, included in the 1992 Form 10-K and the Third Quarter Form 10-Q that are
incorporated by reference into this Prospectus, and the Historical Financial
Statements of the Missouri Business that are included elsewhere in this
Prospectus.
The Pro Forma Statements of Operations are not necessarily indicative of the
combined effects on the Company's results of operations that would have resulted
if the Rights Offering and the Missouri Acquisition had actually occurred
earlier.
The pro forma adjustments are based on preliminary assumptions and estimates
made by the Company's management regarding anticipated efficiencies resulting
from the combined operations, reductions in costs planned by management,
purchase accounting adjustments and the fair market value of certain assets
acquired in the Missouri Business. The Pro Forma Statements of Operations do not
reflect the financial impact, if any, of (i) the rate increases granted to
Southern Union Gas and the Missouri Business during 1993 not yet earned and (ii)
the pro forma effect of the results of operations of the Rio Grande Acquisition.
Gas service rates, established by regulatory authorities, are based upon the
utility's costs including operating, administrative and finance costs and
include a return on equity. As a result, reductions in a utility's costs may
have a direct impact on the level of rates it is allowed to collect from its
customers in the future. See "Business -- Regulation." The actual allocation of
the consideration paid for the Missouri Business may differ from that reflected
in the Pro Forma Financial Statements after a more extensive review of the fair
market values of the assets acquired and liabilities assumed in the Missouri
Acquisition has been completed. Amounts allocated will be based upon the
estimated fair values at the time of the Missouri Acquisition, which could vary
significantly from the amounts as of September 30, 1993. The Missouri
Acquisition will be accounted for using the purchase method of accounting.
The following table sets forth a summary of the sources and uses of funds
resulting from (i) the issuance of 2,000,000 shares of Common Stock in the
Rights Offering, (ii) the completion of the Missouri Acquisition, including the
sale of Senior Debt Securities to fund such Acquisition and (iii) the sale of
Senior Debt Securities to refinance certain short-term debt, current maturities
of long-term debt and certain long-term debt outstanding as of September 30,
1993, as if such transactions had been consummated on September 30, 1993 (in
thousands):
<TABLE>
<CAPTION>
SOURCES OF FUNDS
- ------------------------------------------------------------------------------------------------------
<S> <C>
Gross Proceeds from Rights Offering........................................................ $ 50,000
Sale of Senior Debt Securities............................................................. 475,000
---------
$ 525,000
---------
---------
<CAPTION>
USES OF FUNDS
- ------------------------------------------------------------------------------------------------------
<S> <C>
Acquisition of Missouri Business........................................................... $ 342,402
Refinancing of short-term borrowings used to fund the Rio Grande Acquisition............... 31,050
Refinancing of short-term debt............................................................. 28,256
Refinancing of current maturities of long-term debt........................................ 20,000
Refinancing of long-term debt.............................................................. 85,000
Stock and debt issuance costs and premiums on early extinguishment of debt (a)............. 18,292
---------
$ 525,000
---------
---------
<FN>
- ------------------------------
(a) Includes a $3.3 million premium on the $50.0 million of 10.5% debentures due
2017 and a $10.4 million premium on the $10.0 million of 9.45% notes due
2004 and $25.0 million of 10% notes due 2012 for the early extinguishment of
this debt.
</TABLE>
8
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA
SOUTHERN MISSOURI ----------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
----------- ------------ --------------- -----------
(THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues..................................... $ 135,868 $ 233,291 $ 369,159
Gas purchase costs..................................... 67,866 141,241 209,107
----------- ------------ -----------
Operating margin..................................... 68,002 92,050 160,052
----------- ------------ -----------
Operating expenses:
Operating, maintenance and general................... 35,289 53,117 $ (6,880)(a) 81,526
Taxes, other than on income.......................... 9,806 21,470 31,276
Amortization of acquisition adjustment............... 2,292 1,111(b) 3,403
Depreciation and amortization........................ 7,968 9,347 460(c) 17,775
----------- ------------ --------------- -----------
Total operating expenses........................... 55,355 83,934 (5,309) 133,980
----------- ------------ --------------- -----------
Net operating revenue.............................. 12,647 8,116 5,309 26,072
----------- ------------ --------------- -----------
Other income (expenses):
Interest............................................. (8,691) (6,799) 15,371(d) (24,648)
(24,529)(e)
Other, net........................................... 861 2,268 (436)(f) 2,693
----------- ------------ --------------- -----------
Total other income (expenses), net................. (7,830) (4,531) (9,594) (21,955)
----------- ------------ --------------- -----------
Earnings before income taxes (benefit)............. 4,817 3,585 (4,285) 4,117
Federal and state income taxes (benefit)............... 1,825 997 (1,733)(g) 1,089
----------- ------------ --------------- -----------
Earnings from continuing operations before preferred
dividends............................................. 2,992 2,588 (2,552) 3,028
Preferred dividends.................................... 843 (843)(h)
----------- ------------ --------------- -----------
Earnings from continuing operations available for
common stock.......................................... $ 2,149 $ 2,588 $ (1,709) $ 3,028
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
Earnings from continuing operations per common share... $ .41 $ .42
----------- -----------
----------- -----------
Weighted average shares outstanding.................... 5,243,934 2,000,000(i) 7,243,934
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
9
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA
SOUTHERN MISSOURI ----------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
----------- ------------ --------------- -----------
(THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues..................................... $ 201,408 $ 330,240 $ 531,648
Gas purchase costs..................................... 107,943 203,112 311,055
----------- ------------ -----------
Operating margin..................................... 93,465 127,128 220,593
----------- ------------ -----------
Operating expenses:
Operating, maintenance and general................... 47,206 69,710 $ (9,173)(a) 107,743
Taxes, other than on income.......................... 13,231 28,147 41,378
Amortization of acquisition adjustment............... 3,064 1,481(b) 4,545
Depreciation and amortization........................ 10,169 12,803 614(c) 23,586
----------- ------------ --------------- -----------
Total operating expenses........................... 73,670 110,660 (7,078) 177,252
----------- ------------ --------------- -----------
Net operating revenue.............................. 19,795 16,468 7,078 43,341
----------- ------------ --------------- -----------
Other income (expenses):
Interest............................................. (11,633) (9,148) 20,400(d) (33,086)
(32,705)(e)
Other, net........................................... 3,105 2,764 (581)(f) 5,288
----------- ------------ --------------- -----------
Total other income (expenses), net................. (8,528) (6,384) (12,886) (27,798)
----------- ------------ --------------- -----------
Earnings before income taxes (benefit)............. 11,267 10,084 (5,808) 15,543
Federal and state income taxes (benefit)............... 4,058 3,119 (2,421)(g) 4,756
----------- ------------ --------------- -----------
Earnings from continuing operations before preferred
dividends............................................. 7,209 6,965 (3,387) 10,787
Preferred dividends.................................... 1,468 (1,468)(h)
----------- ------------ --------------- -----------
Earnings from continuing operations available for
common stock.......................................... $ 5,741 $ 6,965 $ (1,919) $ 10,787
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
Earnings from continuing operations per common share... $ 1.10 $ 1.49
----------- -----------
----------- -----------
Weighted average shares outstanding.................... 5,242,340 2,000,000(i) 7,242,340
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
10
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1992
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA
SOUTHERN MISSOURI ----------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
----------- ------------ --------------- -----------
(THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues..................................... $ 192,445 $ 297,956 $ 490,401
Gas purchase costs..................................... 102,918 183,001 285,919
----------- ------------ -----------
Operating margin..................................... 89,527 114,955 204,482
----------- ------------ -----------
Operating expenses:
Operating, maintenance and general................... 46,313 66,908 $ (9,173)(a) 104,048
Taxes, other than on income.......................... 13,115 25,038 38,153
Amortization of acquisition adjustment............... 2,958 1,481(b) 4,439
Depreciation and amortization........................ 9,779 13,172 614(c) 23,565
----------- ------------ --------------- -----------
Total operating expenses........................... 72,165 105,118 (7,078) 170,205
----------- ------------ --------------- -----------
Net operating revenue.............................. 17,362 9,837 7,078 34,277
----------- ------------ --------------- -----------
Other income (expenses):
Interest............................................. (12,459) (8,831) 19,551(d) (34,444)
(32,705)(e)
Other, net........................................... 5,928 1,214 (581)(f) 6,561
----------- ------------ --------------- -----------
Total other income (expenses), net................. (6,531) (7,617) (13,735) (27,883)
----------- ------------ --------------- -----------
Earnings before income taxes (benefit)............. 10,831 2,220 (6,657) 6,394
Federal and state income taxes (benefit)............... 4,440 705 (2,370)(g) 2,775
----------- ------------ --------------- -----------
Earnings from continuing operations before preferred
dividends............................................. 6,391 1,515 (4,287) 3,619
Preferred dividends.................................... 2,500 (2,500)(h)
----------- ------------ --------------- -----------
Earnings from continuing operations available for
common stock.......................................... $ 3,891 $ 1,515 $ (1,787) $ 3,619
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
Earnings from continuing operations per common share... $ .74 $ .50
----------- -----------
----------- -----------
Weighted average shares outstanding.................... 5,259,314 2,000,000(i) 7,259,314
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
11
<PAGE>
SOUTHERN UNION COMPANY
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
The following are adjustments to the Pro Forma Statements of Operations to
reflect (i) the issuance of 2,000,000 shares of Common Stock in the Rights
Offering, (ii) the completion of the Missouri Acquisition, including the sale of
Senior Debt Securities to fund such Acquisition and (iii) the sale of Senior
Debt Securities to refinance certain short-term debt, current maturities of
long-term debt and certain long-term debt outstanding at September 30, 1993.
(a) Reflects the adjustment to operations, maintenance and general for certain
anticipated cost savings resulting from the consolidation of operations and
corporate functions, the integration of corporate management and the
elimination of certain other duplicate administrative functions.
(b) Reflects amortization of the estimated excess purchase price over the
historical book carrying value of the assets acquired of the Missouri
Business on a straight line basis over a 30 year period.
(c) Reflects depreciation expense related to the purchase of additional
equipment over their estimated useful lives. See note (a) of Notes to Pro
Forma Balance Sheet.
(d) Reflects the removal of historical interest expense of the Missouri
Business, the elimination of interest expense associated with the borrowings
on the revolving credit facility used for the purchase and redemption of
Southern Union preferred stock, the elimination of historical interest
expense associated with the refinancing of $20.0 million of 10 1/8% notes
due 1994 and the elimination of historical interest expense associated with
the refinancing of $50.0 million of 10.5% debentures due 2017, $10.0 million
of 9.45% notes due 2004 and $25.0 million of 10% notes due 2012.
(e) Reflects interest expense on $430.3 million of the $475.0 million of Senior
Debt Securities at an annual interest rate of 7.60%. The difference of $44.7
million of Senior Debt Securities to be sold and used to refinance certain
short-term borrowings, including those used to fund the Rio Grande
Acquisition (which transaction closed on September 30, 1993), and purchase
estimated net capital expenditures to be incurred by the Missouri Business
subsequent to September 30, 1993 and prior to closing, and related debt
issuance costs were assumed to have occurred on September 30, 1993. As a
result, interest expense associated with these borrowings is not reflected
in the Pro Forma Statements of Operations.
(f) Reflects the amortization of debt issuance costs of approximately $4.2
million associated with the sale of $475.0 million of Senior Debt
Securities, a $3.3 million premium on the early extinguishment of $50.0
million of 10.5% debentures due 2017 and a $10.4 million premium on the
early extinguishment of $10.0 million of 9.45% notes due 2004 and $25.0
million of 10% notes due 2012 on a straight line basis over the life of the
new debt. See note (e) above.
12
<PAGE>
SOUTHERN UNION COMPANY
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS (CONTINUED)
(g) Reflects the income tax provision (benefit) associated with the pro forma
adjustments calculated using the applicable statutory state income tax rates
and the statutory federal income tax rate of 35% for the nine months ended
September 30, 1993, 34.75% for the twelve months ended September 30, 1993
and 34% for the year ended December 31, 1992. The 34.75% rate for the twelve
months ended September 30, 1993 is a weighted average of two statutory rates
in effect during the twelve month period.
Income tax expense, on a pro forma combined basis, differs from the amount
computed when applying the applicable statutory federal income tax rates to
earnings before income taxes. The reasons for the differences are as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
YEAR ENDED NINE MONTHS ENDED ENDED SEPTEMBER
DECEMBER 31, 1992 SEPTEMBER 30, 1993 30, 1993
----------------- ------------------ ------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Computed "expected" tax expense.............. $ 2,174 $ 1,441 $ 5,401
Items for which there are no tax
consequences, principally amortization of
additional purchase cost assigned to utility
plant....................................... 1,025 576 809
Amortization of excess deferred income
taxes....................................... (55) (233) (300)
Flow through of depreciation expense......... 540 (37) 150
Amortization of investment tax credit........ (457) (249) (332)
Adjustment of tax reserve.................... (409) (409)
Adjustment of prior year provision........... (322) (322)
Tax loss on sale of real estate in excess of
book loss................................... (322) (322)
Other........................................ 192 81
------- ------- -------
$ 2,775 $ 1,089 $ 4,756
------- ------- -------
------- ------- -------
</TABLE>
(h) Reflects the elimination of preferred stock dividends resulting from the
purchase and redemption of all outstanding Southern Union preferred stock in
March and June 1993.
(i) Reflects the issuance of 2,000,000 shares of Common Stock in the Rights
Offering.
13
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1993
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA
SOUTHERN MISSOURI ------------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
------------ ------------ ---------------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Property, plant and equipment......................... $ 372,757 $ 416,703 $ 11,950(a) $ 811,410
10,000(b)
Less accumulated depreciation and amortization........ (141,546) (125,460) (267,006)
------------ ------------ ---------------- ------------
231,211 291,243 21,950 544,404
Additional purchase cost assigned to utility plant,
net.................................................. 92,645 44,437(c) 137,082
------------ ------------ ---------------- ------------
Net property, plant and equipment................... 323,856 291,243 66,387 681,486
Current assets........................................ 40,440 17,563 58,003
Deferred charges and other assets..................... 34,751 10,398 17,792(d) 104,581
41,640(e)
------------ ------------ ---------------- ------------
Total............................................. $ 399,047 $ 319,204 $ 125,819 $ 844,070
------------ ------------ ---------------- ------------
------------ ------------ ---------------- ------------
<CAPTION>
STOCKHOLDERS' EQUITY AND LIABILITIES
<S> <C> <C> <C> <C>
Common stockholders' equity:
Common stock........................................ $ 5,304 $ 2,000(f) $ 7,304
Premium on capital stock............................ 144,925 47,500(f) 192,425
Retained earnings................................... 492 492
Less treasury stock, at cost........................ (794) (794)
Equity in net assets acquired....................... $ 288,181 (288,181)(g)
------------ ------------ ---------------- ------------
Total common stockholders' equity................... 149,927 288,181 (238,681) 199,427
Long-term debt........................................ 89,122 475,000(h) 479,122
(50,000)(h)
(25,000)(h)
(10,000)(h)
Current liabilities and current maturities of
long-term debt....................................... 128,399 25,174 15,166(i) 89,433
(28,256)(j)
(31,050)(j)
(20,000)(k)
Deferred credits and other liabilities................ 10,384 5,849 38,640(l) 54,873
Accumulated deferred income taxes..................... 21,215 21,215
Commitments and contingencies......................... -- -- --
------------ ------------ ---------------- ------------
Total............................................. $ 399,047 $ 319,204 $ 125,819 $ 844,070
------------ ------------ ---------------- ------------
------------ ------------ ---------------- ------------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed balance sheet.
14
<PAGE>
SOUTHERN UNION COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The following are adjustments to the Pro Forma Balance Sheet as of September
30, 1993 to reflect (i) the issuance of 2,000,000 shares of Common Stock in the
Rights Offering, (ii) the completion of the Missouri Acquisition, including the
sale of Senior Debt Securities to fund such Acquisition, and (iii) the sale of
Senior Debt Securities to refinance certain short-term debt, current maturities
of long-term debt and certain long-term debt outstanding as of September 30,
1993:
(a) Reflects the purchase accounting adjustments of $4.4 million to record
acquired assets at their estimated fair market value, and estimated
additional expenditures to purchase non-transferable leases on automobiles
of $4.3 million and data processing equipment and software of $3.3 million.
(b) Reflects the recording of the purchase of estimated net capital expenditures
to be incurred by the Missouri Business subsequent to September 30, 1993 and
prior to closing as per the Missouri Asset Purchase Agreement.
(c) Reflects the estimated excess of the purchase price over the historical book
carrying value of the assets acquired of the Missouri Business of $44.4
million.
(d) Reflects the capitalization of estimated debt issuance costs associated with
the sale of $475.0 million of Senior Debt Securities and premiums on the
early extinguishment of $85.0 million of long-term debt to be amortized on a
straight line basis over the life of the new debt. See note (h) below.
(e) Reflects the recording of (i) a regulatory asset of $38.6 million
representing the deferral of the actuarially calculated accumulated
post-retirement benefit obligation assumed in the purchase and (ii) a $3.0
million contribution to the Missouri Business' employees' qualified defined
benefit plans in excess of the minimum required contribution under the
Internal Revenue Code Section 412, as determined by the plans' actuary,
pursuant to the MPSC Stipulation. See note (l) below and the "Accounting
Pronouncements" note included in Notes to the Missouri Business' Interim
Financial Statements included elsewhere herein.
(f) Reflects Southern Union's receipt of $50.0 million in gross proceeds from
the completion of the Rights Offering, less approximately $0.5 million in
estimated stock issuance costs, assuming 2,000,000 shares of Common Stock
are issued in the Rights Offering at $25.00 per share.
(g) Reflects the elimination of the equity in the Missouri Business net assets
acquired.
(h) Reflects the sale of Senior Debt Securities totalling $475.0 million and the
refinancing of $50.0 million of 10.5% debentures due 2017, $10.0 million of
9.45% notes due 2004 and $25.0 million of 10% notes due 2012.
(i) Reflects the recording of certain liabilities of $15.2 million resulting
from the acquisition transactions including the purchase of non-transferable
leases on automobiles of $4.3 million, the purchase of data processing
equipment and software of $3.3 million, a $3.0 million contribution to the
Missouri Business' employees' qualified defined benefit plans (see note (e)
above), and the recording of severance accruals of approximately $2.4
million and other estimated liabilities and contingencies associated with
the acquisition of approximately $2.2 million.
(j) Reflects the utilization of a portion of the proceeds from the sale of
Senior Debt Securities to retire borrowings on the Company's revolving
credit facility, including borrowings of $31.1 million for the Rio Grande
Acquisition and borrowings used for the purchase and redemption of preferred
stock.
(k) Reflects the utilization of a portion of the proceeds from the sale of
Senior Debt Securities for the repayment of certain current maturities of
long-term debt.
(l) Reflects the recording of the actuarially calculated accumulated
post-retirement benefit obligation of $38.6 million. See note (e) above.
15
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
THE COMPANY
The following table sets forth selected historical financial information
with respect to the Company for the periods indicated. This information should
be read in conjunction with the Company's Consolidated Financial Statements and
notes thereto included in the 1992 Form 10-K and the Third Quarter Form 10-Q
that are incorporated by reference into this Prospectus. The selected historical
financial information for each of the five years in the period ended December
31, 1992 has been derived from financial statements that have been audited by
the Company's independent accountants. The selected historical financial
information for the nine-month periods ended September 30, 1993 and 1992 has
been derived from financial statements that are unaudited, but which, in the
opinion of management, include all adjustments necessary for a fair presentation
of the financial position and results of operations for such periods. Results of
the nine-month periods ended September 30, 1993 and 1992 are not indicative of
results for the full year due to the seasonal nature of the gas distribution
business.
During 1992, the Company acquired the natural gas distribution facilities in
Nixon, Texas. During 1991, the Company acquired natural gas distribution and
transmission facilities serving: an area in south Texas, including the cities of
Lockhart, Luling, Cuero, Shiner, Yoakum and Gonzales; the west Texas city of
Andrews; and the north Texas cities of Mineral Wells, Weatherford, Graham,
Breckenridge, Millsap, Jacksboro and surrounding communities. In 1991, the
Company sold the assets of its Arizona gas utility operations. Because of these
acquisitions and the divestiture in 1992 and 1991, the results of operations of
the Company for the years ended December 31, 1992 and 1991 are not comparable to
prior periods.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, (A)
----------------------------------------------------- --------------------
1988 1989 1990 1991 1992 1992 1993
--------- --------- --------- --------- --------- --------- ---------
(PRE-MERGER) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income statement data:
Operating revenues............................ $ 191,428 $ 197,460 $ 199,865 $ 200,261 $ 192,445 $ 126,904 $ 135,868
Gas purchase costs............................ 110,076 115,921 118,551 109,238 102,918 62,840 67,866
--------- --------- --------- --------- --------- --------- ---------
Operating margin.............................. 81,352 81,539 81,314 91,023 89,527 64,064 68,002
Total operating expenses...................... 78,524 65,381 70,242 77,179 72,165 53,849 55,355
--------- --------- --------- --------- --------- --------- ---------
Net operating revenues...................... $ 2,828 $ 16,158 $ 11,072 $ 13,844 $ 17,362 $ 10,215 $ 12,647
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes and
discontinued operation....................... $ (9,427) $ 2,379 $ 1,413 $ 11,308 $ 10,831 $ 4,380 $ 4,817
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) from continuing operations
available for common stock................... $ (8,266) $ (1,649) $ (3,668) $ 2,173 $ 3,891 $ 298 $ 2,149
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) available for common
stock........................................ $ (12,564) $ (1,649) $ (3,668) $ 987 $ 1,445 $ 1,686 $ 2,149
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, (B)
----------------------------------------------------- --------------------
1988 1989 1990 1991 1992 1992 1993
--------- --------- --------- --------- --------- --------- ---------
(PRE-MERGER) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance sheet data:
Property, plant and equipment, net............ $ 213,207 $ 219,027 $ 323,187 $ 278,881 $ 285,505 $ 281,498 $ 323,856
Total assets.................................. 341,108 316,186 379,856 369,783 377,167 360,116 399,047
Short-term debt and current maturities of
long-term debt............................... 32,172 9,239 10,098 2,385 14,360 9,672 90,947
Long-term debt, less current maturities....... 106,061 104,922 103,783 110,482 109,464 109,743 89,122
Preferred stock............................... 25,000 25,000 25,000 25,000 24,900 25,000 --
Common stockholders' equity................... 85,452 83,207 146,332 147,356 148,003 148,249 149,927
<FN>
- ------------------------------
(a) The Company's operations are seasonal in nature, with a significant
percentage of its annual revenues and earnings occurring during the
traditional heating-load months. Results of operations historically are
most favorable in the first quarter (the three months ended March 31) of
the Company's fiscal year with results of operations being next most
favorable in the fourth quarter. Results for the second and third quarters
are typically less favorable. Accordingly, the results of operations of an
interim period are not necessarily indicative of results of operations for
an annual period. Earnings from continuing operations for the nine-month
periods ended September 30, 1993 and 1992 reflect certain non-recurring
income items. In addition, earnings from continuing operations for the
nine months ended September 30, 1993 were negatively impacted by warmer
than normal weather during the 1993 winter months in those areas served by
Southern Union Gas.
(b) The balance sheet information at September 30, 1993 reflects the Rio
Grande Acquisition. Rio Grande was acquired for approximately $31,050,000
on September 30, 1993. See the Third Quarter Form 10-Q that is
incorporated by reference into this Prospectus.
</TABLE>
16
<PAGE>
MISSOURI BUSINESS
The following table sets forth selected historical financial information
with respect to the Missouri Business for the periods indicated. This
information should be read in conjunction with the Historical Financial
Statements of the Missouri Business and notes thereto included elsewhere in this
Prospectus. The selected historical financial information for each of the three
years in the period ended December 31, 1992 has been derived from financial
statements that have been audited by the Company's independent accountants. The
selected historical financial information for the nine-month periods ended
September 30, 1993 and 1992 has been derived from financial statements that are
unaudited, but which, in the opinion of management of the Company, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position and operations for such periods. Results
for the nine-month periods ended September 30, 1993 and 1992 are not indicative
of results for the full year due to the seasonal nature of the gas distribution
business.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, (A)
------------------------------------- ------------------------
1990 1991 1992 1992 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income statement data:
Operating revenues............................ $ 302,163 $ 307,667 $ 297,956 $ 201,007 $ 233,291
Gas purchase costs............................ 202,229 193,510 183,001 121,130 141,241
----------- ----------- ----------- ----------- -----------
Operating margin.............................. 99,934 114,157 114,955 79,877 92,050
Total operating expenses...................... 94,639 102,334 105,118 78,392 83,934
----------- ----------- ----------- ----------- -----------
Net operating revenues...................... $ 5,295 $ 11,823 $ 9,837 $ 1,485 $ 8,116
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income taxes........... $ (2,543) $ 1,833 $ 2,220 $ (4,279) $ 3,585
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net earnings (loss)........................... $ (950) $ 1,310 $ 1,515 $ (2,862) $ 2,588
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1990 1991 1992 1992 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Acquired assets............................... $ 299,777 $ 311,635 $ 344,136 $ 290,013 $ 319,204
Assumed liabilities........................... 85,934 76,129 68,635 40,589 31,023
<FN>
- ------------------------
(a) The operations of the Missouri Business are seasonal in nature, with a
significant percentage of its annual revenues and earnings occurring
during the traditional heating-load months. Accordingly, the operations of
an interim period are not necessarily indicative of operations for an
annual period. Net earnings for the nine months ended September 30, 1993
were positively impacted by the colder than normal weather during the 1993
winter heading-load months in those areas served by the Missouri Business.
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
The Company is primarily engaged in various aspects of the natural gas
business. The Company's principal line of business is the distribution of
natural gas as a public utility through Southern Union Gas, a division of the
Company. Southern Union Gas, which accounts for approximately 88% of the
Company's total revenues, presently serves approximately 475,000 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. See "Business -- Southern Union Gas." The Missouri
Acquisition will add approximately 460,000 customers in 147 communities in
western Missouri. See "The Missouri Acquisition" and "Business -- Missouri
Business." The Company (through the Southern Union subsidiaries indicated) also
markets natural gas to end-users through Mercado Gas Services, Inc. ("Mercado"),
sells natural gas as a vehicular fuel and converts vehicles to operate on
natural gas through Southern Union Econofuel Company ("Econofuel"), operates
natural gas pipeline systems through Southern Transmission Company ("Southern")
and Western Gas Interstate Company ("WGI") and sells commercial gas air
conditioning and other gas-fired engine-driven applications through Southern
Union Energy Products and Services Company ("SUEPASCO"). Southern Union's
subsidiary, Lavaca Realty Company ("Lavaca"), holds investments in real estate
that primarily relate to the Company's energy business. See "Business -- Other
Company Operations."
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. See "Business --
Regulation."
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. 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 finance 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. See "Business -- Regulation."
In recent years weather variances have significantly impacted the Company's
results of operations. Average temperatures in the Company's service areas have
remained above the 30 year normal temperature during the peak heating season. To
mitigate the impact of these seasonal variances, Southern Union Gas has
requested and received approval for weather normalization clauses in
jurisdictions amounting to approximately half of its present utility investment
in Texas and Oklahoma. These clauses allow for rate adjustments that help
stabilize the utility's customers' monthly bill and the Company's earnings from
the varying effects of weather.
18
<PAGE>
The following table summarizes the weather conditions as a percentage of
normal, based on a 30-year average, during the last three years and for the nine
months ended September 30, 1993.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------- SEPTEMBER 30,
1990 1991 1992 1993
----- ----- ----- -----------------
<S> <C> <C> <C> <C>
Southern Union Gas.................................... 87% 95% 91% 83%
Missouri Business..................................... 89% 95% 90% 108%
- ------------------------
Information with respect to weather conditions is provided by the National Oceanic and Atmospheric
Administration. Percentages of normal are based on the weighted averages (based on number of customers) of the
weather conditions in the service areas indicated.
</TABLE>
Revenues from residential customers are stable. Over the last three years,
an average of 59% of Southern Union Gas' revenues came from sales to its
residential customers while an average of 70% of Missouri Business' revenues
came from sales to its residential customers. The Company's revenues from
residential customers have grown as a result of its 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.
THE COMPANY -- RESULTS OF OPERATIONS
The following discussion of the Company's results of operations should be
read in conjunction with the Company's Consolidated Financial Statements and
notes thereto included in the 1992 Form 10-K and the Third Quarter Form 10-Q
that are incorporated by reference into this Prospectus.
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992
NET EARNINGS AVAILABLE FOR COMMON STOCK
The Company recorded net earnings available for common stock of $2,149,000
for the nine months ended September 30, 1993 compared to net earnings of
$1,686,000 for the nine months ended September 30, 1992, an increase of $463,000
or 27%. The increase in net earnings is due principally to the receipt of
several rate increases during the past year including a $372,000 annualized
increase in Galveston effective August 12, 1992, a $777,000 annualized increase
in the Company's South Texas service area effective February 10, 1993, and a
$1,700,000 annualized increase in Austin effective July 1, 1993.
The Company also recorded a non-recurring accounting adjustment, net of tax,
in the third quarter of 1993 of approximately $1,168,000 to reverse a tax
reserve upon the final settlement of prior period federal income tax audits. 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.
Net earnings for the nine months ended September 30, 1993 were also
positively impacted by the reduction of payroll expenses of approximately
$762,000 resulting from the Company's 1993 early retirement program which was
finalized during the second quarter of 1993 and the reduction of approximately
$1,032,000 of preferred dividends due to the retirement of the Company's Series
A 10% Cumulative Preferred Stock in March and June 1993. The net earnings for
the nine months ended September 30, 1993 were negatively impacted by warmer than
normal weather during the 1993 winter heating season, which was 83% of normal,
and by an increase in operating, maintenance and general expense reflecting
severance costs of $597,000 from the Company's early retirement program
described above. Net earnings for the nine months ended September 30, 1992 were
positively impacted by a nonrecurring gain of $950,000 resulting from a
litigation settlement.
19
<PAGE>
Earnings from continuing operations available for common stock were
$2,149,000 for the nine months ended September 30, 1993 compared to $298,000 for
the nine months ended September 30, 1992. Earnings from Southern Union
Exploration Company, a discontinued operation sold effective January 1, 1993,
were $1,388,000 for the nine months ended September 30, 1992 compared to nil in
1993.
OPERATING REVENUES
Operating revenues were $135,868,000 for the nine months ended September 30,
1993, an increase of 7% compared to operating revenues of $126,904,000 in 1992.
Gas purchase costs for the nine months ended September 30, 1993 were
$67,866,000, an increase of 8%, compared to $62,840,000 in 1992. Operating
margin increased approximately $3,938,000 or 6% in 1993. Both operating revenues
and gas purchase costs increased in the nine months ended September 30, 1993
primarily as a result of a 26% increase in the average cost of gas from $2.04
per Mcf in 1992 to $2.58 in 1993 which was partially offset by a 16% decrease in
gas sales volumes from 35,007 MMcf in 1992 to 29,360 MMcf in 1993. The decline
in gas sales volumes reflected a decline of 5,270 MMcf in gas sales by Mercado,
the Company's marketing subsidiary, as a result of the Company's decision to
reduce sales to off system markets because of low margins.
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NET EARNINGS AVAILABLE FOR COMMON STOCK
The Company's net earnings available for common stock for the year ended
December 31, 1992 increased 46% to $1,445,000 compared to $987,000 in 1991 and a
net loss of $2,150,000 in 1990. The Company's 1992 increase in 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 included approximately $6,900,000 of 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 at the time of the merger, 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 from a discontinued operation of $2,446,000 for the year
ended December 31, 1992, which included net earnings from oil and gas operations
of $1,954,000 offset by an estimated loss on disposal of $4,400,000. See
"Business Held for Sale" in the Notes to the Company's Consolidated Financial
Statements included in the 1992 Form 10-K that is incorporated by reference into
this Prospectus.
The Company's net earnings available for common stock in 1991 increased
$3,137,000 compared to 1990. This increase was due principally to improved
operating margins resulting from the impact of increases in rates and changes in
rate design effected during 1991 and subsequent to the winter heating season in
1990; colder weather in 1991, which was approximately 7% colder than 1990 but
approximately 5% warmer than normal; and the recognition of a tax benefit on the
sale of real estate of approximately $1,300,000. These positive factors were
partially offset by increased depreciation and operating, maintenance and
general expenses resulting from the acquisition of several distribution systems.
In 1991 the Company also recorded a loss from a discontinued operation of
$1,186,000, which included net earnings from operations of $1,064,000 offset by
a valuation adjustment of $2,250,000.
OPERATING REVENUES
Total operating revenues in 1992, 1991 and 1990 were $192,445,000,
$200,261,000 and $199,865,000, respectively. Revenues are affected by the level
of Southern Union Gas' sales volumes and by the pass-through of increases or
decreases in gas purchase costs through Southern Union Gas' purchased gas
adjustment clauses, as well as through rate increases. Revenues decreased in
1992 due to the sale of the Arizona system in November 1991, warmer than normal
weather in 1992, and a 19% decrease in the gas cost billed to residential
customers. These negative factors were partially offset by an increase in sales
in 1992 of approximately $16,400,000 due to Mercado's expanding markets, an
20
<PAGE>
increase in rates of approximately $6,900,000, both described above, and the
first full year of operations provided by the acquisition of the Brazos River
Gas Company and the Andrews Gas Company which increased revenues by
approximately $6,400,000. The sale of the Arizona system decreased operating
revenues by approximately $29,000,000 in 1992 as compared to 1991. Weather
during the winter heating season of 1992 was 81% of normal and was also one of
the warmest winter seasons in the Company's history.
The increase in operating revenues in 1991 as compared to 1990 was
negligible after consideration of the impact of several offsetting factors.
Operating revenues increased due to changes in rate design and rate increases in
the Austin, Texas and Arizona service areas, colder weather experienced in 1991
and an increase in the average customer base. In addition, the effect of the
acquisition of the South Texas properties, Andrews Gas Company and Brazos River
Gas Company during 1991 contributed an additional $7,400,000 to operating
revenues during the year ended December 31, 1991. Offsetting factors included a
decrease of approximately $5,700,000 in operating revenues as compared to 1990
as a result of the sale of the Arizona system and a decrease in the average
price per Mcf of gas sales billed.
GAS SALES AND TRANSPORTATION VOLUMES
Gas sales volumes billed in 1992, 1991, and 1990 totaled 51,147 MMcf, 44,942
MMcf and 43,599 MMcf at an average Mcf sales price of $3.58, $4.39 and $4.41,
respectively. Gas sales volumes fluctuate as a function of weather and customer
base. The increase in gas sales volumes was due in part to the expanding markets
of Mercado to off-system customers during 1992. This increase was partially
offset by the weather patterns in Southern Union Gas' service areas which
averaged 9% warmer than normal in 1992, 5% warmer than normal in 1991, and 13%
warmer than normal in 1990. The average customer bases served in 1992, 1991 and
1990 were approximately 394,000, 428,000 and 407,000, respectively.
Gas transportation volumes in 1992, 1991 and 1990 totaled 25,438 MMcf, 8,608
MMcf and 5,592 MMcf at an average transportation rate per Mcf of $.23, $.66 and
$.80, respectively. Transportation volumes increased significantly in 1992 as
compared to 1991 as a result of WGI's transported volumes into Mexico of
approximately 15,000 MMcf during 1992. Volumes also increased in response to a
decrease in the average transportation rate per Mcf in 1992 and 1991 as compared
to 1990 as the Company increased sales to existing customers and attracted new
customers. The Company's transportation rate per Mcf decreased due to increased
competition in pipeline transportation services.
GAS PURCHASE COSTS
Gas purchase costs in 1992, 1991 and 1990 were $102,918,000, $109,238,000
and $118,551,000, respectively. The decrease in costs in 1992 was due to a
decrease in the average spot market price of natural gas, a decrease in the
customer base resulting from the sale of the Arizona system in November, 1991
and gas sales customers switching to transportation service, thereby essentially
reducing the cost of gas. The average gas purchase cost incurred by Southern
Union Gas was $2.01 per Mcf in 1992, $2.43 in 1991 and $2.72 in 1990. The impact
of the decrease in 1992 and 1991 gas prices was partially offset by an increase
in volumes described above.
OPERATING, MAINTENANCE AND GENERAL EXPENSES
Operating, maintenance and general expenses were $46,313,000, $49,022,000
and $45,683,000 in 1992, 1991 and 1990, respectively. During 1992 these expenses
decreased $2,709,000 compared to 1991 due to the cost containment efforts
implemented by the Company throughout 1992 as well as the sale of the Arizona
system in November 1991. See "Business -- Business Strategy -- Enhancing
Financial and Operating Performance." These factors were partially offset by
increases in medical and hospitalization expenses. During 1991, operating,
maintenance and general expenses increased $3,339,000 compared to 1990 due to
the acquisition of gas distribution systems and increases in employee and
insurance costs.
21
<PAGE>
TAXES
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.
Federal and state income tax expense in 1992, 1991 and 1990 was $4,440,000,
$6,635,000 and $1,026,000, respectively. The decrease in taxes in 1992 as
compared to 1991 is due principally to the sale of the Arizona system which
occurred in 1991. This decrease was partially offset by the achievement of
better overall operating results in 1992. The increase in tax expense in 1991 as
compared to 1990 was, likewise, due to the $4,800,000 tax expense incurred in
the sale of the Arizona system for which a corresponding gain on the sale was
also recognized. See "Taxes on Income" in the Notes to Consolidated Financial
Statements included in the 1992 Form 10-K that is incorporated by reference into
this Prospectus.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense in 1992, 1991 and 1990 was
$12,737,000, $13,317,000 and $10,502,000, respectively. The decrease in
depreciation expense of $580,000 in 1992 compared to 1991 was due principally to
the sale of the Arizona system in November 1991 and was partially offset by a
full year of depreciation on the acquired gas distribution systems. The increase
of $2,815,000 in depreciation and amortization expense in 1991 compared to 1990
was due primarily to the increase in amortization expense of approximately
$1,400,000 resulting from a full year of amortization of the amount of
additional purchase cost assigned to utility plant, approximately $450,000
resulting from the acquisition of several gas distribution and transmission
facilities, and approximately $500,000 resulting from a regulatory increase in
the depreciation rate. Amortization of the additional purchase cost assigned to
utility plant has not been included in rates in the Company's major rate
jurisdictions.
NET OPERATING REVENUES
Net operating revenues in 1992, 1991, and 1990 totaled $17,362,000,
$13,844,000 and $11,072,000 respectively. The increase of $3,518,000 or 25% in
1992 compared to 1991 is due to increases in rates and changes in rate design
effected during 1992 and 1991, described above, as well as decreases in each of
operating, maintenance and general expenses, taxes other than income taxes and
depreciation and amortization. The increase of $2,772,000 or 25% in 1991
compared to 1990 is due to the increase in operating margins resulting from an
increase in revenues and a decrease in gas purchase costs, also described above.
OTHER INCOME (EXPENSES), NET
Other income (expenses), net in 1992, 1991 and 1990 were ($6,531,000),
($2,536,000) and ($9,659,000), respectively. Other income (expenses), net
consists principally of interest expense on the Company's consolidated
indebtedness. The increase in other expenses in 1992 compared to 1991 of
$3,995,000 as well as the decrease in expenses from 1991 compared to 1990 is due
principally to the recognition of the gain of $4,800,000 from the sale of the
Arizona system in 1991.
Other income items recorded in 1992 included a $2,200,000 reversal of
certain contingency accruals recorded at the time of the 1990 merger that were
subsequently resolved or settled and a $950,000 gain resulting from a litigation
settlement. Other income items recorded in 1991 included the recognition of a
pre-tax gain on the sale of the Arizona system of $4,800,000.
Interest expense on short-term debt was $384,000, $697,000, and $594,000 in
1992, 1991 and 1990, respectively. Average short-term debt outstanding during
1992, 1991 and 1990 of $5,912,000, $9,184,000 and $4,898,000, respectively, was
at an average interest rate of 6.3%, 8.1% and 10.3%, respectively. The variance
in the average amounts outstanding coupled with reduced interest rates resulted
in the fluctuation in other interest expense in each of the years.
22
<PAGE>
THE MISSOURI BUSINESS -- RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992
NET EARNINGS
The Missouri Business recorded net earnings of $2,588,000 for the nine month
period ended September 30, 1993 compared to a net loss of $2,862,000 for the
nine month period ended September 30, 1992. Net earnings in 1993 improved
compared to 1992 primarily as a result of significantly colder weather during
the 1993 winter heating season (January through April), which was 108% of normal
compared to 81% of normal in 1992.
OPERATING REVENUES
Revenues were $233,291,000 for the nine months ended September 30, 1993, an
increase of 16% compared to revenues of $201,007,000 in 1992. Gas purchase costs
for the nine months ended September 30, 1993 were $141,241,000, an increase of
17% compared to $121,130,000 in 1992. Both revenues and gas purchase costs
increased in the nine months ended September 30, 1993 primarily as a result of a
21% increase in gas sales volumes due to the significantly colder winter weather
in 1993 described above. The impact of the increase in volumes was partially
offset by a decrease in average purchase gas costs which were $2.93 per Mcf in
the first nine months of 1993 compared to $3.09 in 1992. Gas purchase costs are
passed through to the customers through the Missouri Business' purchased gas
adjustment ("PGA") clauses.
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NET EARNINGS
Missouri Business' net earnings for the year ended December 31, 1992
increased 16% to $1,515,000 compared to $1,310,000 in 1991 and a net loss of
$950,000 in 1990. Net earnings in 1992 improved compared to 1991 primarily due
to the effects of a $7,300,000 annualized rate increase effected in February
1992 in the Missouri Business' service areas. Increased earnings were partially
offset by warmer weather in 1992, which was 90% of normal and approximately 3%
warmer than 1991.
Net earnings in 1991 increased $2,260,000 compared to 1990 due principally
to colder weather in 1991 which was 95% of normal and approximately 7% colder
than 1990. Increased earnings in 1991 were partially offset by increases in
interest expense allocated to the Missouri Business by Western Resources and
increases in operating, maintenance and general and depreciation and
amortization expenses.
OPERATING REVENUES
Revenues in 1992, 1991 and 1990 were $297,956,000, $307,667,000 and
$302,163,000, respectively. Revenues are affected by the level of sales volumes
and by the pass-through of increases or decreases in gas purchase costs through
the Missouri Business' PGA clauses. Revenues decreased 3% in 1992 compared to
1991 due to a reduction in sales volumes of approximately 4% resulting from the
warmer than normal weather in 1992 described above. The effect of the sales
volume decrease in 1992 was partially offset by the rate increase effected in
February 1992, also described above.
Revenues increased approximately 2% in 1991 compared to 1990 due to an
increase in sales volumes of approximately 7% resulting from the colder weather
in 1991 described above. The effect of the sales volume increase in 1991 was
partially offset by an 11% decrease in the average gas purchase cost per Mcf.
GAS PURCHASE COSTS
Gas purchases in 1992, 1991 and 1990 were $183,001,000, $193,510,000 and
$202,229,000, respectively. Gas purchase costs are a function of weather related
volumes and the average purchase gas cost per Mcf incurred. Average purchase gas
costs incurred by the Missouri Business was $2.97 per Mcf in 1992, $3.00 in 1991
and $3.39 in 1990. Gas purchases decreased in 1992 due principally to the
effects of warmer than normal weather, described above, and as a result of the
decrease in average gas
23
<PAGE>
costs per Mcf. Gas purchase costs also decreased in 1991 as compared to 1990 as
a result of an 11% decrease in the average purchase gas cost per Mcf. This
decrease was partially offset by a weather related increase in sales volumes
described above.
OPERATING, MAINTENANCE AND GENERAL EXPENSES
Operating, maintenance and general expenses were $66,908,000, $64,829,000
and $59,311,000 in 1992, 1991 and 1990, respectively. Expenses increased in 1992
compared to 1991 by approximately 3% due mainly to inflationary increases in
operating costs and salaries. Expenses increased in 1991 compared to 1990 by
approximately 9% due to increases in rental expenses as a result of added office
space, cast iron main line repairs, and employee benefits.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expense in 1992, 1991 and 1990 was
$13,172,000, $11,628,000 and $9,730,000, respectively. The increase in
depreciation expense of $1,544,000 or 13% in 1992 compared to 1991 and the
increase of $1,898,000 or 20% in 1991 compared to 1990 was due to increases in
plant resulting from the effects of capital expenditures including the capital
expenditures incurred for the service line replacement program initiated in
1989. Service line replacement capital expenditures in 1992, 1991 and 1990 were
approximately $22,200,000, $19,000,000, and $14,200,000, respectively.
OTHER INCOME (EXPENSES), NET
Other income (expenses), net in 1992, 1991 and 1990 were ($7,617,000),
($9,990,000) and ($7,838,000), respectively. Other income (expenses) consists
principally of interest expense allocated by Western Resources to the Missouri
Business based on its consolidated interest expense. The variance in Western
Resources average debt balance outstanding coupled with fluctuations in average
interest rates resulted in fluctuations in interest expense incurred by Western
Resources and ultimately allocated to the Missouri Business. Western Resources'
weighted average interest rate was 7.6% in 1992, 8.0% in 1991 and 8.4% in 1990.
Other, net includes the deferral and amortization of interest costs
associated with the service line replacement program. Pursuant to accounting
orders issued by the MPSC, the Missouri Business was authorized to defer service
line replacement program costs including depreciation expense, property taxes,
and related interest charges for subsequent recovery in future rates. Costs
incurred from November 1989 through May 1990 were deferred and amortized over a
three year period from May 1990 through April 1993. Additionally, costs incurred
from July 1991 through September 1993 were also deferred and will be included in
rate base and amortized in the cost of service beginning October 1993 for a
period of 20 years. Other, net in 1992, 1991 and 1990 includes the net deferral
(amortization) of interest costs incurred in connection with this program of
approximately $1,388,000, ($630,000), and $604,000, respectively. The accounting
treatment described above, in effect, matches the costs incurred in connection
with the service line replacement program with related revenues collected from
customers as a result of approved increases in rates.
FUTURE CAPITAL NEEDS AND RESOURCES
The Company has needs for new funds beyond those required to fund the
pending Missouri Acquisition and desires to refinance certain short-term debt.
The Company also intends to refinance certain of its outstanding debt securities
which mature in June 1994 in order to extend the maturity date. While
management's decision not to pay cash dividends is a significant source of
capital for the Company's present and future operations, the Company may require
additional financing to fund the seasonal nature of the Company's gas utility
operations and the future growth of its businesses.
The Company has used its revolving credit facility, internally generated
funds, and long-term debt to provide funding for its seasonal working capital,
continuing construction programs, operational requirements, preferred dividend
requirements, and periodic acquisitions. During the three years ended December
31, 1992, Southern Union spent approximately $77,000,000 on capital projects. Of
that total, approximately $59,000,000 was incurred on normal expansion of its
distribution system as well as relocation and replacement and approximately
$18,000,000 was incurred for the acquisition
24
<PAGE>
of distribution operations. In addition, approximately $6,500,000 was incurred
for the purchase of real estate. For the year ended December 31, 1993, the
Company spent approximately $16,000,000 for capital expenditures, exclusive of
any acquisitions of other natural gas distribution properties, which primarily
has been used to fund normal distribution system replacement and expansion. For
the year ended December 31, 1993, capital expenditures for the Missouri Business
were approximately $38,000,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Investing Activities" in the
1992 Form 10-K that is incorporated by reference in this Prospectus.
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 and asset dividends, share
repurchases, certain investments and additional debt. The Revolving Credit
Facility is currently unsecured. Under certain conditions involving the issuance
of secured debt of Southern Union, the Revolving Credit Facility automatically
would become collateralized by a first priority lien on substantially all of the
accounts receivable, inventory and certain related contract rights of the
Company.
On July 9, 1993 the Company entered into the Missouri Asset Purchase
Agreement with Western Resources, pursuant to which the Company has agreed to
purchase certain Missouri natural gas distribution operations. The purchase
price payable at closing is $327,940,000 in cash, to be adjusted as of the
closing date to reflect permitted capital expenditures and depreciation relating
to the Missouri Business since March 31, 1993 and accounts receivable net of
accounts payable as of closing. The actual purchase price will be based upon
Western Resources' books and records as of the closing date of the Missouri
Acquisition. Pursuant to the MPSC Stipulation, the additional purchase cost
assigned to utility plant totalling approximately $44,000,000 may not be
included in rate base nor its amortization in cost of service. In addition, the
Missouri Business' rate base included in any filing for an increase in non-gas
rates completed in the next ten years will be reduced initially by $30,000,000.
This rate base adjustment will be reduced annually by $3,000,000 over this
ten-year period. Based on the March 31, 1993 unaudited financial information
provided to the Company prior to the signing of the Agreement, the adjusted
purchase price for the Missouri Acquisition would have been approximately
$360,000,000. The Company presently expects the Missouri Acquisition to close
during the first quarter of 1994. See "The Missouri Acquisition."
On December 31, 1993 the Company completed the sale of $50,000,000 of Common
Stock in the Rights Offering. The net proceeds from the sale of Common Stock in
the Rights Offering were used to repay borrowings from the Company's Revolving
Credit Facility used to purchase Rio Grande and subsequently will be used to
partially fund the Missouri Acquisition and provide working capital for
operations. Proceeds from the sale of Senior Debt Securities, when added to the
proceeds of the Rights Offering, will be sufficient to fund the Missouri
Acquisition, refinance a portion of the Company's outstanding balance on its
Revolving Credit Facility, and refinance the $20,000,000 balance of the
Company's 10 1/8% notes due 1994, the $50,000,000 aggregate principal amount of
10.5% debentures due 2017, the $10,000,000 aggregate principal amount of 9.45%
notes due 2004 and the $25,000,000 aggregate principal amount of 10% notes due
2012.
FINANCIAL CONDITION
The discussions of the Company's financial condition, liquidity and capital
resources contained in the 1992 Form 10-K and the Third Quarter Form 10-Q, that
are incorporated by reference into this Prospectus, do not reflect the
significant impact that the Missouri Acquisition will have on the Company (see
"The Missouri Acquisition" and "Business -- Missouri Business") and should be
read only in light of the information contained in this Prospectus.
25
<PAGE>
BUSINESS
The Company is primarily engaged in various aspects of the natural gas
business. The Company's principal line of business is the distribution of
natural gas as a public utility through Southern Union Gas, a division of the
Company. Southern Union Gas, which accounts for approximately 88% of the
Company's total revenues, serves approximately 475,000 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. The Company's subsidiaries, which have been established to support and
expand natural gas sales and to capitalize on the Company's gas energy
expertise, 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. 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. Southern Union has agreed
to purchase certain Missouri natural gas operations that will nearly double the
number of customers served by the Company's natural gas distribution systems and
make the Company one of the top 15 gas utilities in the United States, as
measured by number of customers. See "The Missouri Acquisition."
BUSINESS STRATEGY
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 natural gas distribution systems and selectively acquiring additional
natural gas distribution systems. Management developed and continually evaluates
these strategies and their implementation by analyzing the energy industry,
technological advances, market opportunities and general business trends.
PROMOTING NEW SALES OPPORTUNITIES AND MARKETS FOR NATURAL GAS. The sales
profile for a typical natural gas distribution system displays peak utilization
in the winter months and relatively low utilization during the rest of the year.
The Company has identified natural gas uses that should diminish these
utilization gaps, as well as improve operational and financial efficiencies of
the gas distribution system. Technologies such as natural gas driven chillers,
air conditioners, water pumps, electric power co-generators and compressed
natural gas fueled vehicles provide the Company with sales opportunities in and
beyond its utility service areas without requiring substantial infrastructure
investments.
The benefits to the Company of successful execution of this strategy are
beginning to be realized in increased natural gas sales in its existing service
areas. Through shared savings and direct sales programs, the Company has
assisted customers in the replacement of electric powered air conditioners with
new gas driven air conditioners in six commercial sites. The superior
performance demonstrated by these applications is providing additional data for
use in marketing new sales and installations.
Some states, including Texas and Oklahoma, have clean air legislation
requiring alternative fuel usage in public fleets. Natural gas as a vehicular
fuel is a viable ecological solution to attain the clean air standards mandated
by such legislation. The Company is a 50% partner in the "Natural Gas Vehicle
Technology Center" in Austin, Texas, which opened in 1991. Since opening, the
center has converted approximately 1,300 vehicles, including those of government
fleets, public transportation systems and private commercial fleets, which add
approximately $850,000 in gas sales revenue on an annualized basis. Through its
Econofuel subsidiary, the Company has opened eight public refueling stations and
five private refueling stations throughout its Texas service areas.
26
<PAGE>
Water pumping for crop irrigation provides spring, summer and fall loads for
the gas system and unregulated sales opportunities in and beyond the Company's
regulated service areas in Texas and additional regulated sales in Oklahoma.
Since the beginning of 1991, the Company has increased its annual sales revenue
by more than $600,000 as a result of unregulated natural gas sales to over 278
newly connected water wells. The Company expects this market to continue to
increase, particularly when approximately 140,000 acres of farmland throughout
Texas, 460,000 acres throughout Oklahoma and 500,000 acres throughout Missouri
begin to be systematically removed from the Conservation Reserve Program (CRP)
in 1995.
These developing markets for natural gas use offer additional sales
opportunities that can result in profitable growth for the Company. This
strategy will be continued in the Company's existing service areas and will be
initiated in the service areas of systems acquired by the Company.
ENHANCING FINANCIAL AND OPERATING PERFORMANCE. Rather than relying solely
on rate increases to enhance its financial performance, Southern Union seeks to
enhance its financial performance through improved and more cost effective ways
to serve the customer and through increases in its sales base. In an effort to
reduce costs and increase customer service, the Company has eliminated
management layers through early retirement programs, computerized the
dispatching of its customer service personnel, reduced overhead, lowered the
cost of its maintenance and capital improvement programs through the use of
outside contractors and reduced post-retirement and other employee benefits. In
addition, since 1990, the Company has pushed decision-making down into the
organization. Empowered employee teams examine the total process of their work
and change or eliminate those steps that are inefficient or do not add value.
The Company has developed recognition programs to reward employee innovation.
The B.E.S.T. program (Building Employee Strategic Thinking) combines with
programs for top performers, community service and safety to provide incentives
to employees to enhance the Company's performance.
Southern Union has worked with its regulators to implement progressive rate
tariffs and has successfully implemented sales and transportation rate tariffs
that provide the flexibility needed to compete by allowing it to negotiate rates
to attract new load or to retain large customers. Southern Union has also
received approval for weather normalization tariffs in service areas
representing almost half of the Company's investment. These progressive tariffs
help stabilize the customer's bill and the Company's earnings from the varying
effects of weather. Southern Union's local utility service areas have also
approved cost of service indexing tariffs that are designed to adjust billing
rates for annual changes in operating and administrative expenses without the
high costs associated with a full regulatory hearing.
Through the Company's acquisitions, management believes the Company has
been, and expects it to continue to be, able to realize benefits from the
Company's expanded operations. Management believes that further opportunities
for overhead and operational savings with respect to the combined operations are
achievable.
The Company works with local Chambers of Commerce and public officials,
helps cities obtain state and federal projects, and strives to provide safe,
environmentally clean natural gas at competitive prices in order to financially
enhance both the community and the Company. Attracting new businesses to and
promoting expansion of existing businesses in the Company's service areas can
strengthen the local economy and create new sales opportunities for the Company.
Employees are also encouraged to actively participate in community work. Company
sponsorship of local charities, city projects and community causes are
objectively evaluated and pursued.
EXPANDING THE COMPANY THROUGH DEVELOPING EXISTING SYSTEMS AND SELECTIVELY
ACQUIRING ADDITIONAL SYSTEMS. The Company has experienced steady annual growth
in the residential utility customer base in each of its existing service areas.
The stability of this market segment and increasingly active marketing in the
commercial and industrial market segments in the communities it presently serves
have permitted the Company to expand its systems through normal mainline
extensions and programs designed to increase large volume sales load on existing
mainlines.
27
<PAGE>
To complement this system development strategy, the Company has actively
pursued acquisitions that management believes could profitably contribute to the
Company's growth. Since 1990, the Company has acquired seven gas distribution
systems in Texas. Collectively, these systems have added nearly 115,000 of
Southern Union Gas' present customers representing approximately $47,700,000 of
annual sales revenue to the Company. See "Acquisitions, Divestitures and Merger"
in the Notes to the Company's Consolidated Financial Statements included in the
1992 Form 10-K that is incorporated by reference into this Prospectus. Southern
Union's most recent acquisition was on September 30, 1993 when it acquired Rio
Grande for approximately $31,050,000. Rio Grande presently serves approximately
75,000 customers in the south Texas counties of Willacy, Cameron and Hidalgo.
Rio Grande's service areas include 32 towns and cities along the Mexican border,
including Brownsville, Harlingen and McAllen, Texas. See the Third Quarter Form
10-Q that is incorporated by reference into this Prospectus.
On July 9, 1993, Southern Union agreed to acquire the Missouri Business. The
Missouri Business will add approximately 460,000 customers in western Missouri.
If the Missouri Acquisition occurs, the Company will nearly double the number of
customers served by its natural gas distribution systems and become one of the
top 15 gas utilities in the United States, as measured by number of customers.
In addition, the Missouri Acquisition will lessen the sensitivity of the
Company's operations to weather risk and local economic conditions by
diversifying operations into different geographic areas. See "The Missouri
Acquisition." The incurrence of additional debt and issuance of new equity in
connection with the Missouri Acquisition will significantly change the Company's
capital structure. See "Capitalization" and "Unaudited Pro Forma Combined
Condensed Financial Information."
REGULATION
The Company's rates and operations, as well as those of the Missouri
Business, 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. The
FERC and the Texas Railroad Commission have jurisdiction over rates, facilities
and services of WGI and Southern, respectively. In Missouri, rates are
established by the MPSC on a system wide basis. The Missouri Business has
non-exclusive franchises granted by the cities it serves and certificates of
public convenience granted by the MPSC. The MPSC also must approve encumbrance
of any assets necessary or useful in the performance of the Missouri Business.
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 and the Missouri Business to adjust
its sales price as the cost of purchased gas changes. The appropriate regulatory
authority must receive notice of, and in Missouri approve, 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 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.
The Company and the Missouri Business 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.
28
<PAGE>
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. On October 5, 1993 the MPSC issued a rate order increasing the Missouri
Business' natural gas rates by $9,750,000 annually. The MPSC rate order became
effective on October 15, 1993.
The following table summarizes the rate increases that have been granted
over the last three years:
<TABLE>
<CAPTION>
1991 1992 1993
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Southern Union Gas
Austin, Texas..................................................... $ 3,311 $ 1,948
El Paso, Texas.................................................... $ 1,741 463
All other......................................................... 244 1,001 981
--------- --------- ---------
3,555 2,742 3,392
Missouri Business................................................... 7,300 9,750
--------- --------- ---------
$ 3,555 $ 10,042 $ 13,142
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Missouri Business 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. The MPSC has issued accounting orders
in the past to allow the deferral for future recovery in rates of financing
costs, depreciation and taxes. The Company believes the MPSC will allow the
Company to continue such deferral and recovery.
29
<PAGE>
SOUTHERN UNION GAS
STATISTICS OF GAS UTILITY AND RELATED OPERATIONS. The following table shows
certain operating statistics of Southern Union Gas for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, (A) ENDED
------------------------------- SEPTEMBER 30,
1990 1991 1992 1993 (B)
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Average number of gas sales customers served:
Residential..................................................... 374,990 394,508 365,187 372,350
Commercial...................................................... 28,784 30,132 25,853 26,050
Industrial and irrigation....................................... 895 861 796 767
Public authorities and other.................................... 2,415 2,521 2,206 2,213
Pipeline and marketing.......................................... 55 55 157 184
--------- --------- --------- -------------
Total average customers served................................ 407,139 428,077 394,199 401,564
--------- --------- --------- -------------
--------- --------- --------- -------------
Gas sales in millions of cubic feet (MMcf):
Residential..................................................... 22,147 23,102 21,356 15,642
Commercial...................................................... 10,294 10,466 9,059 6,855
Industrial and irrigation....................................... 4,692 2,880 2,881 1,960
Public authorities and other.................................... 3,838 3,545 3,002 2,040
Pipeline and marketing.......................................... 2,628 4,949 14,849 4,987
--------- --------- --------- -------------
Gas sales billed.............................................. 43,599 44,942 51,147 31,484
Net change in unbilled gas sales................................ (304) (1,263) (43) (2,124)
--------- --------- --------- -------------
Total gas sales............................................... 43,295 43,679 51,104 29,360
--------- --------- --------- -------------
--------- --------- --------- -------------
Gas sales revenues (thousands of dollars):
Residential..................................................... $ 113,432 $ 119,604 $ 102,028 $ 81,319
Commercial...................................................... 43,329 44,011 34,261 28,885
Industrial and irrigation....................................... 14,473 9,519 8,655 6,770
Public authorities and other.................................... 13,674 12,409 9,437 7,265
Pipeline and marketing.......................................... 7,515 11,817 28,793 11,630
--------- --------- --------- -------------
Gas revenues billed........................................... 192,423 197,360 183,174 135,869
Net change in unbilled gas sales revenues....................... 482 (7,499) 214 (8,000)
--------- --------- --------- -------------
Total gas sales revenues...................................... $ 192,905 $ 189,861 $ 183,388 $ 127,869
--------- --------- --------- -------------
--------- --------- --------- -------------
Gas sales margin (thousands of dollars)(c)........................ $ 74,354 $ 80,623 $ 80,470 $ 60,003
--------- --------- --------- -------------
--------- --------- --------- -------------
Gas sales revenue per thousand cubic feet (Mcf) billed:(d)
Residential..................................................... $ 5.121 $ 5.177 $ 4.777 $ 5.199
Commercial...................................................... 4.209 4.205 3.782 4.214
Industrial and irrigation....................................... 3.084 3.305 3.004 3.454
Public authorities and other.................................... 3.563 3.500 3.144 3.561
Pipeline and marketing.......................................... 2.860 2.388 1.939 2.332
Weather effect:
Degree days(e).................................................. 2,348 2,439 2,020 1,108
Percent of normal, based on 30-year average..................... 87% 95% 91% 83 %
Gas transported in millions of cubic feet (MMcf).................. 5,592 8,608 25,438 17,728
Gas transportation revenues (thousands of dollars)................ $ 4,460 $ 5,686 $ 5,943 $ 4,623
<FN>
- ------------------------------
(a) Includes the Andrews, South Texas, Nixon and Brazos River operations that
were acquired since 1990 and the Arizona operations that were sold in
1991, for the time periods they were owned.
(b) The Company's operations are seasonal in nature, with a significant
percentage of its annual revenues and earnings occurring during the
traditional heating-load months. Results of operations historically are
more favorable in the first quarter (the three months ended March 31) of
the Company's fiscal year with results of operations being next most
favorable in the fourth quarter. Results for the second and third quarters
are typically less favorable. Accordingly, the results of operations of an
interim period are not necessarily indicative of results of operations for
an annual period.
(c) Gas sales revenues less purchased gas costs is equal to gas sales margin.
(d) Gas price billed in 1992 was lower than amounts billed in 1991 and 1990
due to lower gas costs.
(e) "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>
30
<PAGE>
COMPETITION. Southern Union Gas is not currently in significant direct
competition with any other distributors of natural gas to residential and small
commercial customers within its 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. See "Business -- Other
Company Operations." In addition, the Company has successfully used flexible
rate provisions, when needed, to prevent by-pass of the Company's distribution
system.
As an energy provider, Southern Union Gas also competes 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 Southern Union Gas' service areas generally is higher than the effective cost
of Southern Union Gas' 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 two typical residential energy applications in the two
largest cities (which represent approximately 62% of Southern Union Gas' present
customers) served by Southern Union Gas:
<TABLE>
<CAPTION>
AUSTIN, TEXAS EL PASO, TEXAS
-------------------------- --------------------------
APPLICATION GAS (A) ELECTRIC (B) GAS (A) ELECTRIC (B)
- ----------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Water Heater (c)........................................... $ 102 $ 280 $ 76 $ 292
Furnace
Gas...................................................... $ 105 -- $ 124 --
Electric Heat Pump....................................... -- $ 261 -- $ 492
Electric Resistance...................................... -- $ 480 -- $ 904
<FN>
- ------------------------
(a) Gas prices contain the (i) cost of service rates effective since July 1993
for Austin, Texas and since January 1992 for El Paso, Texas and (ii) cost
of gas rates based on average area prices for the twelve months ended
September 1993. The combined service and gas rates amount to $.4110 per
hundred cubic feet (CCF) of gas in Austin, Texas and $.3071 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 Austin annual average electric rate was $.0933 per kilowatt hour
(KWH), and the winter average rate was $.0833 per KWH. The El Paso annual
average electric rate was $.09744 per KWH, and the winter average rate was
$.09952 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>
Although commercial and industrial customers typically pay lower prices for gas
and electric services, 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 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 Southern Union Gas' service areas, this competition 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 Southern Union Gas' operations.
31
<PAGE>
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 and allows them to sell gas at market
based rates. As a result, gas purchase decisions and associated risks now shift
from the pipeline companies to the gas distributors. The increased demands on
distributors to manage effectively their gas supply in an environment of
volatile gas prices will provide an advantage to distribution companies such as
Southern Union Gas that have demonstrated a history of contracting favorable and
efficient gas supply arrangements in an open market system.
The majority of Southern Union Gas' 1992 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 has firm
supply commitments for all areas that are supplied with gas purchased under
short-term arrangements.
CURTAILMENT EXPERIENCE. 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 Gas 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 any of Southern Union Gas' utility customers during the last ten
years.
The following table shows, for each Southern Union Gas principal service
area, the percentage of gas utility revenues and sales volume for 1992, the
average cost per Mcf of gas in 1992, and the primary delivery systems:
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
GAS UTILITY GAS UTILITY 1992 PRIMARY DELIVERY SYSTEMS
REVENUES SALES VOLUME AVERAGE COST --------------------------------------
SERVICE AREA IN 1992 IN 1992 PER MCF MAJOR PIPELINES
- -------------------------------- ------------- --------------- ------------- --------------------------------------
<S> <C> <C> <C> <C>
El Paso, Texas.................. 32% 32% $1.89 El Paso Natural Gas Company
Austin, Texas................... 27 20 1.99 Valero Transmission Company
Port Arthur, Texas.............. 6 4 2.56 Midcon Texas Pipeline Company
Galveston, Texas................ 4 3 2.33 Houston Pipeline Company
--- ---
69 59
<CAPTION>
LOCAL PIPELINES
--------------------------------------
<S> <C> <C> <C> <C>
Pipeline and marketing.......... 16 29 1.80 Various
Panhandle....................... 10 9 2.49 Various
West Texas...................... 3 2 2.05 Various
South Texas..................... 2 1 3.28 Valero Transmission Company
--- ---
31 41
--- ---
100% 100%
--- ---
--- ---
</TABLE>
32
<PAGE>
MISSOURI BUSINESS
STATISTICAL INFORMATION. The Missouri Business that Southern Union has
agreed to acquire serves approximately 460,000 residential, commercial,
industrial and public authority customers in western Missouri. These customers
are located in approximately 147 communities, including the cities of Kansas
City, St. Joseph and Joplin, Missouri. See "The Missouri Acquisition."
The following table shows certain operating statistics of the Missouri
Business for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------- SEPTEMBER 30,
1990 1991 1992 1993 (A)
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Average number of gas sales customers served:
Residential.............................................. 404,542 397,447 399,421 393,489
Commercial............................................... 38,200 50,609 57,615 57,093
Industrial............................................... 234 238 249 259
----------- ----------- ----------- -------------
Total average customers served......................... 442,976 448,294 457,285 450,841
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Gas sales in millions of cubic feet (MMcf):
Residential.............................................. 41,763 43,506 39,839 35,197
Commercial............................................... 17,731 20,962 19,450 17,080
Industrial............................................... 1,577 1,062 1,254 295
----------- ----------- ----------- -------------
Gas sales billed....................................... 61,071 65,530 60,543 52,572
Net change in unbilled gas sales......................... (1,271) (1,688) 1,043 (4,838)
----------- ----------- ----------- -------------
Total gas sales........................................ 59,800 63,842 61,586 47,734
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Gas sales revenues (thousands of dollars):
Residential.............................................. $ 211,052 $ 207,448 $ 195,073 $ 167,002
Commercial............................................... 79,370 88,267 84,995 75,795
Industrial............................................... 7,214 4,479 4,406 1,773
----------- ----------- ----------- -------------
Gas revenues billed.................................... 297,636 300,194 284,474 244,570
Net change in unbilled gas sales revenues................ (6,216) (5,668) 3,618 (16,612)
----------- ----------- ----------- -------------
Total gas sales revenues............................... $ 291,420 $ 294,526 $ 288,092 $ 227,958
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Gas sales margin (thousands of dollars) (b)................ $ 89,191 $ 101,016 $ 105,091 $ 86,717
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Gas sales revenue per thousand cubic feet (Mcf) billed:
Residential.............................................. $ 5.054 $ 4.768 $ 4.897 $ 4.745
Commercial............................................... 4.476 4.211 4.369 4.438
Industrial............................................... 4.575 4.218 3.514 6.009
Weather effect:
Degree days (c).......................................... 4,686 5,017 4,852 3,656
Percent of normal, based on 30-year average.............. 89% 95% 90% 108 %
Gas transported in millions of cubic feet (MMcf)........... 25,094 27,720 26,381 20,227
Gas transportation revenues (thousands of dollars)......... $ 8,908 $ 11,063 $ 7,888 $ 4,757
<FN>
- ------------------------
(a) The operations of the Missouri Business are seasonal in nature, with a
significant percentage of its annual revenues and earnings occurring
during the traditional heating-load months. Accordingly, the operations of
an interim period are not necessarily indicative of operations for an
annual period. Net earnings for the nine months ended September 30, 1993
were positively impacted by the colder than normal weather during the 1993
winter heating-load months.
(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>
33
<PAGE>
GAS SUPPLY. Natural gas is delivered under long-term contracts through
three pipeline companies. These contracts have various expiration dates ranging
from 1995 through 2009. Natural gas supplies are purchased under long-term and
short-term arrangements with suppliers. The amounts purchased under short-term
arrangements are contingent upon price. The Missouri Business has firm supply
commitments for all areas that are supplied with gas purchased under short-term
arrangements. Recent curtailments in Missouri have been the result of the 1993
flooding of the Missouri River.
The average cost per Mcf of gas in 1992 was $2.79 in the areas served by the
Missouri Business. The primary source of gas supply during 1992 was Williams
Natural Gas Company ("WNG"), which provided approximately 37% of the gas supply
requirements. Effective October 1, 1993, pursuant to FERC Order 636, WNG will
provide transportation services only. Gas supply services previously provided by
WNG are provided by other suppliers including Amoco Production Company,
Occidental Petroleum Corporation and GPM Gas Services Company.
COMPETITION. The Missouri Business is not currently in significant
competition with any other distributors of natural gas to residential and small
commercial customers within its 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 from pipeline systems. As an energy provider, the Missouri
Business also competes 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 Missouri Business's service areas
generally is higher than the effective cost of the Missouri Business's natural
gas service.
The following operating cost analysis provides a comparison of annual gas
and electric costs for two typical residential energy applications in Kansas
City, Missouri, the largest city served by the Missouri Business (which
represents approximately 85% of the Missouri Business' present customers):
<TABLE>
<CAPTION>
KANSAS CITY, MISSOURI
------------------------
APPLICATION GAS (A) ELECTRIC (A)
- -------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Water Heater (b).................................................... $ 97 $ 225
Furnace
Gas............................................................... $ 275 --
Electric Heat Pump................................................ -- $ 604
Electric Resistance............................................... -- $ 1,110
<FN>
- ------------------------
(a) Gas prices are based on the average gas bills for the last twelve month
period. This amounts to $.39239 per CCF of gas in Missouri. Average annual
electric rates (used to calculate water heater costs) were $.075 per KWH.
Winter average electric rates (used to calculate furnace costs) were $.070
per KWH. Furnace consumption is based on normal heating loads for Kansas
City, Missouri.
(b) Based on Department of Energy first hour rating test procedure, an average
family uses 64.3 gallons of hot water per day.
</TABLE>
EMPLOYEES. Southern Union has agreed to employ certain employees of Western
Resources involved in the Missouri Business. See "The Missouri Acquisition." The
Company presently expects that the number of such employees will not exceed
1,144, of which presently 842 are paid on an hourly basis and 302 are paid on a
salary basis. Approximately 80% of the hourly paid employees of the Missouri
Business are represented by unions. If the Missouri Acquisition occurs, then
Southern Union will become subject to the collective bargaining agreements
relating to those employees. The Company believes that the relations that
Western Resources has had with these employees are good. Although there have
been and may be disputes with such collective bargaining units, no such disputes
have disrupted the Missouri Business for at least 20 years.
34
<PAGE>
PROPERTIES. The Missouri Business' system consists of approximately 6,900
miles of mains and approximately 3,100 miles of service lines. The Company
considers this system to be in good condition and to be well maintained.
LEGAL PROCEEDINGS. The Missouri Business is subject to various legal
proceedings that management of the Company considers to be the normal kinds of
actions to which an enterprise of its size and nature might be subject, and
which management considers not to be material to the operations or financial
condition either to the Missouri Business or the Company as a whole.
ENVIRONMENTAL. The Missouri Business owns or is otherwise associated with a
number of sites where manufactured gas plants were previously operated. These
plants were commonly used to supply gas service in the late 19th and early 20th
centuries, in certain cases by corporate predecessors to Western Resources.
By-products and residues from manufactured gas could be located at these sites
and at some time in the future may require remediation by the U.S. Environmental
Protection Agency ("EPA") or delegated state regulatory authority. By virtue of
notice under the 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
Environmental Liability Agreement to be entered into at the closing of the
Missouri Acquisition. See "The Missouri Acquisition -- Environmental." In
addition, the Company is aware of the existence of other significant potentially
responsible parties from whom contribution for remediation would be sought, and
would expect to make claims upon its insurers (Western Resources has already
done so on its own behalf) and institute appropriate requests for rate relief.
The Company is not presently aware of any other environmental matters in the
Missouri Business which could reasonably be expected to have a material impact
on its operations or financial position.
OTHER COMPANY OPERATIONS
Southern Union's subsidiaries, which have been established to support and
expand natural gas sales and to capitalize on the Company's gas energy
expertise, 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.
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
1992, the FERC implemented new regulations under Order 636 that provided for a
restructuring of the pipeline industry. Pursuant to these regulations, WGI will
provide unbundled transportation service for those gas volumes which enter the
pipeline's transmission system. The new regulations provide the opportunity for
WGI to move toward being a pure transporter, to eliminate gas gathering
functions, and to depreciate investments in production and gathering plant on an
accelerated basis. In November 1991, WGI commenced transportation service into
Juarez, Mexico via the Company's Del Norte interconnect with Petroleos Mexicanos
("PEMEX"). This service is authorized pursuant to a Presidential Permit issued
by the FERC. Total volumes transported into Mexico during 1992 were
approximately 15,000 MMcf.
35
<PAGE>
Southern, a wholly owned subsidiary of Southern Union, owns and operates an
intrastate pipeline that 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, 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.
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 converted to operate on natural gas. In 1991, Econofuel together
with Natural Gas Development Company, Inc. formed a joint venture and, in 1992,
opened the Natural Gas Vehicle Technology Centers, L.L.P. in Austin, Texas which
converts gasoline-driven vehicles to operate using natural gas.
SUEPASCO, a wholly owned subsidiary of Southern Union, 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., a wholly owned subsidiary of
Southern Union, was also formed during 1992 to participate in energy related
projects internationally.
The Company also holds investments in commercially developed real estate as
well as undeveloped tracts of land through its wholly owned subsidiary, Lavaca
Realty Company. Most of these properties are related primarily to the Company's
energy business operations. The Company intends to sell the properties not
primarily related to the Company's energy business if and when commercially
reasonable and practicable.
36
<PAGE>
DESCRIPTION OF THE SENIOR DEBT SECURITIES
The Senior Debt Securities are to be issued under an indenture as
supplemented from time to time (the "Indenture"), to be executed by Southern
Union and The Chase Manhattan Bank (National Association), as trustee (the
"Trustee"), as shall be set forth in the Prospectus Supplement relating to
Senior Debt Securities being offered thereby. The form of the Indenture is filed
as an exhibit to the Registration Statement. The statements made under this
heading relating to the Senior Debt Securities and the Indenture are summaries
of the provisions thereof and do not purport to be complete. Parenthetical
references below are to the Indenture or to sections of the Trust Indenture Act
of 1939, as amended (the "TIA") (certain provisions of which govern the terms of
the Indenture), and, whenever any particular provision of the Indenture or the
TIA or any defined term used therein is referred to, such provision or defined
term is incorporated by reference as a part of the statement in connection with
which such reference is made, and the statement in connection with which such
reference is made is qualified in its entirety by such reference. Capitalized
terms used herein but not otherwise defined shall have the meaning assigned to
them in the Indenture.
GENERAL
The Senior Debt Securities will be direct, unsecured obligations of Southern
Union and will rank equally with all other unsecured and unsubordinated
indebtedness of Southern Union. The Senior Debt Securities may be issued in one
or more series. The particular terms of each series of Senior Debt Securities,
as well as any modifications of or additions to the general terms of the Senior
Debt Securities as described herein that may be applicable in the case of a
particular series of Senior Debt Securities, will be described in the Prospectus
Supplement relating to such series of Senior Debt Securities. Accordingly, for a
description of the terms of a particular series of Senior Debt Securities,
reference must be made to both the Prospectus Supplement relating thereto and
the description of Senior Debt Securities set forth in this Prospectus.
Reference is made to the Prospectus Supplement for the following terms of
the Senior Debt Securities being offered thereby: (1) the title of such Senior
Debt Securities; (2) any limit on the aggregate principal amount of such Senior
Debt Securities; (3) the percentage of the principal amount at which such Senior
Debt Securities will be issued and, if other than the principal amount thereof,
the portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof or the method by which such portion shall
be determined; (4) the date or dates, or the method by which such date or dates
will be determined or extended, on which the principal of such Senior Debt
Securities will be payable; (5) the rate or rates at which such Senior Debt
Securities will bear interest, if any, or the method by which such rate or rates
shall be determined; (6) the date or dates from which interest, if any, on such
Senior Debt Securities shall accrue or the method by which such date or dates
shall be determined, the dates on which such interest, if any, will be payable
and the Regular Record Date, if any, for the interest payable on any Registered
Security of the series on any Interest Payment Date, or the method by which any
such date shall be determined, and the basis on which interest shall be
calculated if other than on the basis of a 360-day year of twelve 30-day months;
(7) the period or periods within which, the price or prices at which, the
Currency in which, and the other terms and conditions upon which, such Senior
Debt Securities may be redeemed in whole or in part, at the option of Southern
Union; (8) the obligation, if any, of Southern Union to redeem, repay or
purchase such Senior Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a Holder thereof and the period or periods within
which or the date or dates on which, the price or prices at which, the Currency
in which, and the other terms and conditions upon which, such Senior Debt
Securities shall be redeemed, repaid or purchased, in whole or in part, pursuant
to such obligation; (9) whether such Senior Debt Securities are to be issuable
as Registered Securities or Bearer Securities or both, and whether such Senior
Debt Securities are to be issuable, either temporarily or permanently, in global
form and, if so, whether beneficial owners of interests in any such permanent
global security may exchange such interests for Senior Debt Securities of such
series and of like tenor of any authorized form and denomination and the
circumstances under which any such exchanges may occur, if other than in the
manner provided in the Indenture, and, if Registered Securities of the
37
<PAGE>
series are to be issuable as a global security, the identity of the depository
for such series; (10) if other than U.S. dollars, the Currency in which such
Senior Debt Securities will be denominated and in which the principal of (and
premium, if any) and any interest on such Senior Debt Securities will be
payable; (11) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Senior Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or method
may be based on one or more Currencies, commodities, equity indices or other
indices) and the manner in which such amounts shall be determined; (12) whether
Southern Union or Holder may elect payment of the principal of (and premium, if
any) or interest, if any, on such Senior Debt Securities in one or more
Currencies other than that in which such Senior Debt Securities are denominated
or stated to be payable, the period or periods within which, and the terms and
conditions upon which, such election may be made, and the time and manner of
determining the exchange rate between the Currency in which such Senior Debt
Securities are denominated or stated to be payable and the Currency in which
such Senior Debt Securities are to be so payable; (13) the place or places, if
any, other than or in addition to New York, New York where the principal of (and
premium, if any) and any interest on such Senior Debt Securities shall be
payable, any Registered Securities of the series may be surrendered for
registration of transfer, such Senior Debt Securities may be surrendered for
exchange and notice or demands to or upon Southern Union in respect of such
Senior Debt Securities and the Indenture may be served; (14) if other than
denominations of $1,000 and any integral multiple thereof, the denominations in
which any Registered Securities of the series shall be issuable and, if other
than the denomination of $5,000, the denomination or denominations in which any
Bearer Securities of the series shall be issuable; (15) the identity of the
Trustee for such Senior Debt Securities and, if other than the Trustee, the
Security Registrar and/or the Paying Agent; (16) the applicability, if at all,
to such Senior Debt Securities of the provisions of Article Fourteen of the
Indenture described under "Defeasance and Covenant Defeasance" and any
provisions in modification of, in addition to or in lieu of any of the
provisions of such Article; (17) the Person to whom any interest on any
Registered Security of the series shall be payable, if other than the Person in
whose name that Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest, the
manner in which, or the Person to whom, any interest on any Bearer Security of
the series shall be payable, if otherwise than upon presentation and surrender
of the coupons appertaining thereto as they severally mature, and the extent to
which, or the manner in which, any interest payable on a temporary global
security on an Interest Payment Date will be paid if other than in the manner
provided in the Indenture; (18) whether and under what circumstances Southern
Union will pay Additional Amounts as contemplated by Section 1005 of the
Indenture on such Senior Debt Securities to any Holder who is not a United
States person (including any modification to the definition of such term as
contained in the Indenture as originally executed) in respect of any tax,
assessment or governmental charge and, if so, whether Southern Union will have
the option to redeem such Senior Debt Securities rather than pay such Additional
Amounts (and the terms of any such option); (19) provisions, if any, granting
special rights to the Holders of such Senior Debt Securities upon the occurrence
of such events as may be specified; (20) any deletions from, modifications of or
additions to the Events of Default or covenants of Southern Union with respect
to such Senior Debt Securities, whether or not such Events of Default or
covenants are consistent with the Events of Default or covenants set forth
herein; (21) the date as of which any Bearer Securities of the series and any
temporary global security shall be dated if other than the date of original
issuance of the first of such Senior Debt Securities; (22) if such Senior Debt
Securities are to be issuable in definitive form (whether upon original issue or
upon exchange of a temporary security of such series) only upon receipt of
certain certificates or other documents or satisfaction of other conditions,
then the form and/or terms of such certificates, documents or conditions; (23)
the designation of the initial Exchange Rate Agent, if any; and (24) any other
terms of such Senior Debt Securities.
The Indenture does not contain any provisions which may afford the Holders
of Senior Debt Securities of any series protection in the event of a highly
leveraged transaction or other transaction
38
<PAGE>
which may occur in connection with a takeover attempt resulting in a decline in
the credit rating of the Senior Debt Securities. Any provision that does provide
such protection, if applicable to the Senior Debt Securities, will be described
in the Prospectus Supplement relating thereto.
The Indenture provides that the Senior Debt Securities referred to on the
cover page of this Prospectus and additional unsubordinated, unsecured debt
securities of Southern Union unlimited as to aggregate principal amount may be
issued in one or more series thereunder, in each case as authorized from time to
time by the Board of Directors of Southern Union. (Section 301) The Senior Debt
Securities referred to on the cover page of this Prospectus and any such
additional debt securities so issued under the Indenture are herein collectively
referred to, when a single Trustee is acting for all, as the "Indenture
Securities." The Indenture also provides that there may be more than one Trustee
under the Indenture, each with respect to one or more different series of
Indenture Securities. See also "Resignation of Trustee" herein. At a time when
two or more Trustees are acting, each with respect to only certain series, the
term "Indenture Securities" as used herein shall mean the one or more series
with respect to which each respective Trustee is acting. In the event that there
is more than one Trustee under the Indenture, the powers and trust obligations
of each Trustee as described herein shall extend only to the one or more series
of Indenture Securities for which it is Trustee. If more than one Trustee is
acting under the Indenture, then the Indenture Securities (whether of one or
more than one series) for which each Trustee is acting shall in effect be
treated as if issued under separate indentures.
Some or all of the Senior Debt Securities may be issued under the Indenture
as original issue discount Senior Debt Securities (bearing no interest or
interest at a rate that at the time of issuance is below market rates) to be
issued at prices below their stated principal amounts. Federal income tax
consequences and other special considerations applicable to any such original
issue discount Senior Debt Securities will be described in the Prospectus
Supplement relating thereto.
The Indenture does not contain any provisions that would limit the ability
of the Company to incur indebtedness. Reference is made to the Prospectus
Supplement related to the series of Senior Debt Securities offered thereby for
information with respect to any deletions from, modifications of or additions to
the Events of Default or covenants of Southern Union applicable to such Senior
Debt Securities that are described herein.
Under the Indenture, Southern Union will have the ability to issue Senior
Debt Securities with terms different from those of Senior Debt Securities
previously issued, without the consent of the Holders, to reopen a previous
issue of a series of Senior Debt Securities and issue additional Senior Debt
Securities of such series, in an aggregate principal amount determined by
Southern Union. (Section 301)
DENOMINATIONS, REGISTRATION AND TRANSFER
Senior Debt Securities of a series may be issuable solely as Registered
Securities, solely as Bearer Securities or as both Registered Securities and
Bearer Securities. Registered Securities will be issuable in denominations of
$1,000 and integral multiples of $1,000 and Bearer Securities will be issuable
in the denomination of $5,000 or, in each case, in such other denominations as
may be in the terms of the Senior Debt Securities of any particular series. The
Indenture also provides that Senior Debt Securities of a series may be issuable
in global form. (Section 302) Unless otherwise indicated in the Prospectus
Supplement, Bearer Securities will have interest coupons attached. (Section 201)
Registered Securities of any series will be exchangeable for other
Registered Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations. If (but only if)
provided in the Prospectus Supplement, Bearer Securities (with all unmatured
coupons, except as provided below, and all matured coupons in default) of any
series may be exchanged for Registered Securities of the same series of any
authorized denominations and of a like aggregate principal amount and tenor. In
such event, Bearer Securities surrendered in a permitted exchange for Registered
Securities between a Regular Record Date or a Special Record Date and the
relevant date
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for payment of interest shall be surrendered without the coupon relating to such
date for payment of interest, and interest will not be payable on such date for
payment of interest in respect of the Registered Security issued in exchange for
such Bearer Security, but will be payable only to the holder of such coupon when
due in accordance with the terms of the Indenture. Unless otherwise specified in
the Prospectus Supplement, Bearer Securities will not be issued in exchange for
Registered Securities. (Section 305)
The Senior Debt Securities may be presented for exchange as described above,
and Registered Securities may be presented for registration of transfer (duly
endorsed or accompanied by a written instrument of transfer), at the corporate
trust office of the Trustee in New York, New York or at the office of any
transfer agent designated by Southern Union for such purpose with respect to any
series of Senior Debt Securities and referred to in the Prospectus Supplement.
No service charge will be made for any transfer or exchange of Senior Debt
Securities, but Southern Union may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith. (Section
305) If a Prospectus Supplement refers to any transfer agent (in addition to the
Trustee) initially designated by Southern Union with respect to any series of
Senior Debt Securities, Southern Union may at any time rescind the designation
of any such transfer agent or approve a change in the location through which any
such transfer agent acts, except that, if Senior Debt Securities of a series are
issuable solely as Registered Securities, Southern Union will be required to
maintain a transfer agent in each Place of Payment for such series and, if
Senior Debt Securities of a series may be issuable both as Registered Securities
and as Bearer Securities, Southern Union will be required to maintain (in
addition to the Trustee) a transfer agent in a Place of Payment for such series
located outside the United States. Southern Union may at any time designate
additional transfer agents with respect to any series of Senior Debt Securities.
(Section 1002)
Southern Union shall not be required to (i) issue, register the transfer of
or exchange Senior Debt Securities of any series during a period beginning at
the opening of business 15 days before any selection of Senior Debt Securities
of that series to be redeemed and ending at the close of business on (A) if
Senior Debt Securities of the series are issuable only as Registered Securities,
the day of mailing of the relevant notice of redemption and (B) if Senior Debt
Securities of the series are issuable as Bearer Securities, the day of the first
publication of the relevant notice of redemption or, if Senior Debt Securities
of the series are also issuable as Registered Securities and there is no
publication, the mailing of the relevant notice of redemption; (ii) register the
transfer of or exchange any Registered Security, or portion thereof, called for
redemption, except the unredeemed portion of any Registered Security being
redeemed in part; (iii) exchange any Bearer Security selected for redemption,
except to exchange such Bearer Security for a Registered Security of that series
and like tenor which is simultaneously surrendered for redemption; or (iv)
issue, register the transfer of or exchange any Senior Debt Securities which has
been surrendered for repayment at the option of the Holder, except the portion,
if any, thereof not to be so repaid. (Section 305)
GLOBAL SECURITIES
The registered Senior Debt Securities of a series may be issued in the form
of one or more fully registered global Senior Debt Securities (a "Registered
Global Security") that will be deposited with a depositary (a "Depositary") or
with a nominee for a Depositary identified in the Prospectus Supplement relating
to such series and registered in the name of the Depositary or a nominee
thereof. In such case, one or more Registered Global Securities will be issued
in a denomination or aggregate denominations equal to the portion of the
aggregate principal amount of outstanding registered Senior Debt Securities of
the series to be represented by such Registered Global Security or Registered
Global Securities. Unless and until it is exchanged in whole or in part for
Senior Debt Securities in definitive registered form, a Registered Global
Security may not be transferred except as a whole by the Depositary for such
Registered Global Security to a nominee of such Depositary or by a nominee of
such Depositary to such Depositary or another nominee of such Depositary or by
such Depositary or any such nominee to a successor of such Depositary or a
nominee of such successor.
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The specific terms of the depositary arrangement with respect to any portion
of a series of Senior Debt Securities to be represented by a Registered Global
Security will be described in the Prospectus Supplement relating to such series.
The Company anticipates that the following provisions will apply to all
depositary arrangements.
Ownership of beneficial interests in a Registered Global Security will be
limited to persons that have accounts with the Depositary for such Registered
Global Security ("participants") or persons that may hold interests through
participants ("indirect participants"). Upon the issuance of a Registered Global
Security, the Depositary for such Registered Global Security will credit, on its
book-entry registration and transfer system, the participants' accounts with the
respective principal amounts of the Senior Debt Securities represented by such
Registered Global Security beneficially owned by such participants. The accounts
to be credited will be designated by any dealers, underwriters or agents
participating in the distribution of such Senior Debt Securities. Ownership of
beneficial interests in such Registered Global Security will be shown on, and
the transfer of such ownership interests will be effected only through, records
maintained by the Depositary for such Registered Global Security (with respect
to interests of participants) and on the records of participants (with respect
to indirect participants). The laws of some states may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and such laws may impair the ability to own, transfer or
pledge beneficial interest in Registered Global Securities.
So long as the Depositary for a Registered Global Security, or its nominee,
is the registered owner of such Registered Global Security, such Depositary or
such nominee, as the case may be, will be considered the sole owner or holder of
the Senior Debt Securities represented by such Registered Global Security for
all purposes under the Indenture. Except as set forth below, owners of
beneficial interests in a Registered Global Security will not be entitled to
have the Senior Debt Securities represented by such Registered Global Security
registered in their names, and will not receive or be entitled to receive
physical delivery of such Senior Debt Securities in definitive form and will not
be considered the owners or holders thereof under the Indenture. Accordingly,
each person owning a beneficial interest in a Registered Global Security must
rely on the procedures of the Depositary for such Registered Global Security
and, if such person is an indirect participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a holder under the Indenture. The Company understands that under existing
industry practices, if the Company requests any action of holders or if any
owner of a beneficial interest in a Registered Global Security desires to give
or take any action which a holder is entitled to give or take under the
Indenture, the Depositary for such Registered Global Security would authorize
the participants holding the relevant beneficial interests to give or take such
action, and such participants would authorize beneficial owners owning through
such participants to give or take such action or would otherwise act upon the
instruction of beneficial owners holding through them.
Payments of principal of, premium, if any, and any interest on Senior Debt
Securities represented by a Registered Global Security registered in the name of
a Depositary or its nominee will be made to such Depositary or its nominee, as
the case may be, as the registered owner of such Registered Global Security.
None of the Company, the Trustee or any other agent of the Company or agent of
the Trustee will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in such Registered Global Security or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company expects that the Depositary for any Senior Debt Securities
represented by a Registered Global Security, upon receipt of any payment of
principal, premium, if any, or any interest in respect of such Registered Global
Security, will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in such
Registered Global Security as shown on the records of such Depositary. The
Company also expects that payments by participants to owners of beneficial
interests in such Registered Global Security held through such
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participants will be governed by standing customer instructions and customary
practices, as is now the case with securities held for the accounts of customers
in bearer form or registered in "street name," and will be the responsibility of
such participants.
If the Depositary for any Senior Debt Securities represented by a Registered
Global Security notifies the Company that it is at any time unwilling or unable
to continue as Depositary or ceases to be a clearing agency registered under the
Exchange Act, a successor Depositary registered as a clearing agency under the
Exchange Act is not appointed by the Company within 90 days, the Company will
issue such Senior Debt Securities in definitive form in exchange for such
Registered Global Security. In addition, the Company may at any time and in its
sole discretion determine not to have any of the Senior Debt Securities of a
series represented by one or more Registered Global Securities and, in such
event, will issue Senior Debt Securities of such series in definitive form in
exchange for all of the Registered Global Security or Registered Global
Securities representing such Senior Debt Securities. Any Senior Debt Securities
issued in definitive form in exchange for a Registered Global Security will be
registered in such name or names as the Depositary shall instruct the Trustee.
It is expected that such instructions will be based upon directions received by
the Depositary from participants with respect to ownership of beneficial
interests in such Registered Global Security.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON LIENS. Southern Union will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur, issue or assume any Debt
secured by any Lien on any property or assets owned by Southern Union or any
Subsidiary, and Southern Union will not, and will not permit any Subsidiary to,
create, incur, issue or assume any Debt secured by any Lien on any shares of
stock or Debt of any Subsidiary (such shares of stock or Debt of any Subsidiary
being called "Restricted Securities"), unless (i) in the case of Debt which is
expressly by its terms subordinate or junior in right of payment to the
applicable series of Senior Debt Securities, such Senior Debt Securities
(together with, if Southern Union shall so determine, any other Debt of Southern
Union or such Subsidiary then existing or thereafter created which is not
subordinate to the Senior Debt Securities) are secured by a Lien on such
property or assets that is senior to such other Lien with the same relative
priority as such subordinated Debt has with respect to the applicable series of
Senior Debt Securities or (ii) in the case of Liens securing Debt which is PARI
PASSU with the applicable series of Senior Debt Securities, such Senior Debt
Securities are secured by a Lien on such property or assets that is equal and
ratable with (or prior to) such other Lien, except that any Lien securing such
applicable series of Senior Debt Securities may be junior to any Lien on
Southern Union's accounts receivable, inventory and related contract rights
securing Debt under Southern Union's Bank Credit Facility; PROVIDED, HOWEVER,
that nothing contained in Section 1009 shall prevent, restrict or apply to, and
there shall be excluded from secured Debt in any computation under that Section,
Debt secured by:
(a) Liens on any property or assets or Restricted Securities of Southern
Union or any Subsidiary existing as of the date of the first issuance by
Southern Union of the applicable Senior Debt Securities issued pursuant to
the Indenture or such other date as may be specified in a Prospectus
Supplement for an applicable series of Senior Debt Securities issued
pursuant to the Indenture, subject to the provisions of subsection (h)
below;
(b) Liens on any property or assets or Restricted Securities of any
corporation existing at the time such corporation becomes a Subsidiary, or
arising thereafter (i) otherwise than in connection with the borrowing of
money arranged thereafter and (ii) pursuant to contractual commitments
entered into prior to and not in contemplation of such corporation becoming
a Subsidiary;
(c) Liens on any property or assets or Restricted Securities of Southern
Union or any Subsidiary existing at the time of acquisition thereof
(including acquisition through merger or consolidation or by a sale, lease
or other disposition of the properties of a corporation as an entirety or
substantially as an entirety to Southern Union or a Subsidiary) or securing
the
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payment of all or any part of the purchase price or construction cost
thereof or securing any Debt incurred prior to, at the time of or within 120
days after, the acquisition of such property or assets or Restricted
Securities or the completion of any such construction, whichever is later,
for the purpose of financing all or any part of the purchase price or
construction cost thereof (PROVIDED such Liens are limited to such property
or assets or Restricted Securities, to improvements on such property and to
any other property or assets not then owned by Southern Union or any
Subsidiary or constituting Restricted Securities);
(d) Liens on any property or assets to secure all or any part of the
cost of development, operation, construction, alteration, repair or
improvement of all or any part of such property or assets, or to secure Debt
incurred by Southern Union or any Subsidiary prior to, at the time of or
within 120 days after, the completion of such development, operation,
construction, alteration, repair or improvement, whichever is later, for the
purpose of financing all or any part of such cost (PROVIDED such Liens are
limited to such property or assets, improvements thereon and any other
property or assets not then owned by Southern Union or a Subsidiary);
(e) Liens in favor of the Trustee for the benefit of the Holders and
subsequent holders of the Senior Debt Securities securing the Senior Debt
Securities;
(f) Liens secured by property or assets of Southern Union or any
Subsidiary that comprise no more than 20% of Consolidated Net Tangible
Assets (as defined below);
(g) Liens which secure Debt owing by a Subsidiary to Southern Union or
to another Subsidiary; and
(h) any extension, renewal, substitution or replacement (or successive
extensions, renewals, substitutions or replacements), as a whole or in part,
of any of the Liens referred to in paragraphs (a) through (g) above or the
Debt secured thereby; PROVIDED that (1) such extension, renewal,
substitution or replacement Lien shall be limited to all or any part of the
same property or assets or Restricted Securities that secured the Lien
extended, renewed, substituted or replaced (plus improvements on such
property, and plus any other property or assets not then owned by Southern
Union or a Subsidiary or constituting Restricted Securities) and (2) in the
case of paragraphs (a) through (c) above, the Debt secured by such Lien at
such time is not increased.
For the purposes of Section 1009, the giving of a guarantee which is secured
by a Lien on any property or assets or Restricted Securities, and the creation
of a Lien on any property or assets or Restricted Securities to secure Debt
which existed prior to the creation of such Lien, shall be deemed to involve the
creation of Debt in an amount equal to the principal amount guaranteed or
secured by such Lien; but the amount of Debt secured by Liens on property or
assets and Restricted Securities shall be computed without cumulating the
underlying indebtedness with any guarantee thereof or Lien securing the same.
(Section 1009)
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Company will not, and
will not permit any Subsidiary to, enter into any arrangement after the date of
the original issuance by the Company of the applicable series of Senior Debt
Securities issued pursuant to the Indenture, or such other date as may be
specified in a Prospectus Supplement for an applicable series of Senior Debt
Securities issued pursuant to the Indenture, with any Person (other than the
Company or another Subsidiary) providing for the leasing by the Company or any
such Subsidiary of any property (except a lease for a temporary period not to
exceed three years by the end of which it is intended that the use of such
property by the lessee will be discontinued) that was or is owned or leased by
the Company or a Subsidiary and that has been or is to be sold or transferred by
the Company or such Subsidiary to such Person (herein referred to as a "sale and
leaseback transaction") unless either:
(a) after giving PRO FORMA effect to such transaction, the Attributable
Debt (as defined below) of the Company and its Subsidiaries in respect of
such sale and leaseback transaction and all other sale and leaseback
transactions entered into after the date of the first issuance by the
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Company of Senior Debt Securities issued pursuant to the Indenture (other
than such sale and leaseback transactions as are permitted by paragraph (b)
below) would not exceed 20% of Consolidated Net Tangible Assets, or
(b) the Company, within 180 days after the sale and leaseback
transaction, applies or causes a Subsidiary to apply an amount equal to the
greater of the net proceeds from the sale of the property subject to the
sale and leaseback transaction or the fair market value of the property so
sold and leased back at the time of the sale and leaseback transaction (in
either case as determined by any two of the following: the Chairman, the
President, any Vice President, the Treasurer and the Controller of the
Company) to the retirement of Senior Debt Securities of any series or any
other Debt of the Company (other than Debt subordinated to the Senior Debt
Securities) or Debt of a Subsidiary having a stated maturity more than 12
months from the date of such application or which is extendible at the
option of the obligor thereon to a date more than 12 months from the date of
such application (and, unless otherwise expressly provided with respect to
any one or more series of Senior Debt Securities, any redemption of Senior
Debt Securities pursuant to this provision shall not be deemed to constitute
a refunding operation or anticipated refunding operation for the purposes of
any provision limiting the Company's right to redeem Senior Debt Securities
of any one or more such series when such redemption involves a refunding
operation or anticipated refunding operation); PROVIDED that the amount to
be so applied shall be reduced by (i) the principal amount of Senior Debt
Securities delivered within 180 days after such sale or transfer to the
Trustee for retirement and cancellation and (ii) the principal amount of any
such Debt of the Company or a Subsidiary, other than Senior Debt Securities,
voluntarily retired by the Company or a Subsidiary within 180 days after
such sale or transfer. Notwithstanding the foregoing, no retirement referred
to in this paragraph (b) may be effected by payment at maturity or pursuant
to any mandatory sinking fund payment or any mandatory prepayment provision.
Notwithstanding the foregoing, where the Company or any Subsidiary is the
lessee in any sale and leaseback transaction, Attributable Debt shall not
include any Debt resulting from the guarantee by the Company or any other
Subsidiary of the lessee's obligation thereunder.
CERTAIN DEFINITIONS
"Attributable Debt" means, as to any specified lease under which any Person
is at the time liable for a term of more than 12 months, at any date as of which
the amount thereof is to be determined, the total net amount of rent required to
be paid by such Person under such lease during the remaining term thereof
(excluding any subsequent renewal or other extension options held by the
lessee), discounted from the respective due dates thereof to such date at a rate
equal to the weighted average of the interest rates borne by the Outstanding
Senior Debt Securities, compounded monthly. The net amount of rent required to
be paid under any such lease for any such period shall be the aggregate amount
of the rent payable by the lessee with respect to such period after excluding
any amounts required to be paid on account of maintenance and repairs, services,
insurance, taxes, assessments, water rates and similar charges and contingent
rents (such as those based on sales). In the case of any lease which is
terminable by the lessee upon the payment of a penalty, such net amount of rent
shall include the lesser of (i) the total discounted net amount of rent required
to be paid from the later of the first date upon which such lease may be so
terminated or the date of the determination of such net amount of rent, as the
case may be, and (ii) the amount of such penalty (in which event no rent shall
be considered as required to be paid under such lease subsequent to the first
date upon which it may be so terminated).
"Bank Credit Facility" means the revolving credit facility dated September
30, 1993, as amended on November 15, 1993, between Southern Union and the Banks
as in effect on the date of the Indenture and as such Facility may be amended,
restated, refinanced, supplemented or otherwise modified from time to time.
"Banks" means the lenders from time to time who are parties to the Bank
Credit Facility.
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"Consolidated Net Tangible Assets" means the total amount of assets (less
applicable reserves and other properly deductible items) of the Company and its
consolidated Subsidiaries after deducting therefrom (i) all current liabilities
(excluding any current liabilities which are by their terms extendible or
renewable at the option of the obligor thereon to a time more than 12 months
after the time as of which the amount thereof is being computed) and (ii) all
goodwill, trade names, trademarks, patents, unamortized debt discount and
expense and other like intangibles, all as set forth on the most recent balance
sheet of the Company and its consolidated Subsidiaries and computed in
accordance with generally accepted accounting principles.
EVENTS OF DEFAULT
The Indenture provides, with respect to any series of Senior Debt Securities
outstanding thereunder, that the following shall constitute Events of Default:
(i) default in the payment of any interest upon or any Additional Amounts
payable in respect of any Debt Security of that series, or of any coupon
appertaining thereto, when the same becomes due and payable, continued for 30
days; (ii) default in the payment of the principal of or any premium on any Debt
Security of that series at its Maturity; (iii) default in the deposit of any
sinking fund payment, when and as due by the terms of any Senior Debt Securities
of that series; (iv) default in the performance, or breach, of any covenant or
agreement of Southern Union in the Indenture with respect to any Debt Security
of that series, continued for 60 days after written notice to Southern Union;
(v) cross-acceleration of other Debt of the Company in excess of 10% of
Consolidated Net Worth; (vi) certain events in bankruptcy, insolvency or
reorganization; and (vii) any other Event of Default provided with respect to
Senior Debt Securities of that series. (Section 501) Southern Union is required
to file with the Trustee, annually, an officer's certificate as to Southern
Union's compliance with all conditions and covenants under the Indenture.
(Section 1004) The Indenture provides that the Trustee may withhold notice to
the Holders of Senior Debt Securities of any default (except payment defaults on
the Senior Debt Securities) if it considers it in the interest of the Holders of
Senior Debt Securities to do so. (Section 601)
If an Event of Default, other than certain events with respect to
bankruptcy, insolvency and reorganization of Southern Union or any significant
Subsidiary, with respect to Senior Debt Securities of a particular series shall
occur and be continuing, the Trustee or the Holders of not less than 25% in
principal amount of Outstanding Senior Debt Securities of that series may
declare the Outstanding Senior Debt Securities of that series due and payable
immediately. If an Event of Default with respect to certain events of
bankruptcy, insolvency or reorganization of Southern Union or any Significant
Subsidiary with respect to Senior Debt Securities of a particular series shall
occur and be continuing, then the principal of all the Outstanding Senior Debt
Securities of that series, and accrued and unpaid interest thereon, shall
automatically be due and payable without any act on the part of the Trustee or
any Holders. (Section 502)
Subject to the provisions relating to the duties of the Trustee, in case an
Event of Default with respect to Senior Debt Securities of a particular series
shall occur and be continuing, the Trustee shall be under no obligation to
exercise any of its rights or powers under the Indenture at the request, order
or direction of any of the Holders of Senior Debt Securities of such series,
unless such Holders shall have offered to the Trustee reasonable indemnity and
security against the costs, expenses and liabilities which might be incurred by
it in compliance with such request. (Section 507 and TIA Section 315) Subject to
such provisions for the indemnification of the Trustee, the Holders of a
majority in principal amount of the Outstanding Senior Debt Securities of such
series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee under the Indenture, or
exercising any trust or power conferred on the Trustee with respect to the
Senior Debt Securities of that series. (Section 512)
The Holders of not less than a majority in principal amount of the
Outstanding Senior Debt Securities of any series may on behalf of the Holders of
all the Senior Debt Securities of such series and any related coupons waive any
past default under the Indenture with respect to such series and its
consequences, except a default (i) in the payment of the principal of (or
premium, if any) or interest on
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or Additional Amounts payable in respect of any Debt Security of such series, or
(ii) in respect of a covenant or provision that cannot be modified or amended
without the consent of the Holder of each Outstanding Debt Security of such
series affected thereby. (Section 513)
MERGER OR CONSOLIDATION
The Indenture provides that Southern Union may not consolidate with, merge
into any other corporation, or convey, transfer or lease, or permit one or more
of its Subsidiaries to convey, transfer or lease, all or substantially all of
the property and assets of the Company, on a consolidated basis to any Person
unless either Southern Union is the continuing corporation or such corporation
or Person assumes by supplemental indenture all the obligations of Southern
Union under the Indenture and the Senior Debt Securities, immediately after the
transaction no default or event of default shall exist and the surviving
corporation or such Person is a corporation, partnership or trust organized and
validly existing under the laws of the United States of America, any state
thereof or the District of Columbia. (Section 801)
MODIFICATION OR WAIVER
Modification and amendment of the Indenture may be made by Southern Union
and the Trustee with the consent of the Holders of not less than a majority in
principal amount of all Outstanding Indenture Securities or any series that are
affected by such modification or amendment; PROVIDED that no such modification
or amendment may, without the consent of the Holder of each Outstanding
Indenture Security of such series, among other things: (i) change the Stated
Maturity of the principal of (or premium, if any, on) or any installment of
principal of or interest on any Indenture Security of such series; (ii) reduce
the principal amount or the rate of interest on or any Additional Amounts
payable in respect of, or any premium payable upon the redemption of, any
Indenture Security of such series; (iii) change any obligation of Southern Union
to pay Additional Amounts in respect of any Indenture Security of such series;
(iv) reduce the amount of principal of an original issue discount Indenture
Security of such series that would be due and payable upon a declaration of
acceleration of the Maturity thereof; (v) adversely affect any right of
repayment at the option of the Holder of any Indenture Security of such series;
(vi) change the place or currency of payment of principal of, or any premium or
interest on, any Indenture Security of such series; (vii) impair the right to
institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof or any Redemption Date or Repayment Date therefor; (viii)
reduce the above-stated percentage of Holders of Outstanding Indenture
Securities of such series necessary to modify or amend the Indenture or to
consent to any waiver thereunder or reduce the requirements for voting or quorum
described below; (ix) modify the change of control provisions, if any; or (x)
modify the foregoing requirements or reduce the percentage of Outstanding
Indenture Securities of such series necessary to waive any past default.
(Section 902)
Modification and amendment of the Indenture may be made by Southern Union
and the Trustee without the consent of any Holder, for any of the following
purposes: (i) to evidence the succession of another Person to Southern Union as
obligor under the Indenture; (ii) to add to the covenants of Southern Union for
the benefit of the Holders of all or any series of Indenture Securities; (iii)
to add Events of Default for the benefit of the Holders of all or any series of
Indenture Securities; (iv) to add or change any provisions of the Indenture to
facilitate the issuance of Bearer Securities; (v) to change or eliminate any
provisions of the Indenture, provided that any such change or elimination shall
become effective only when there are no Indenture Securities Outstanding of any
series created prior thereto which is entitled to the benefit of such provision;
(vi) to establish the form or terms of Indenture Securities of any series and
any related coupons; (vii) to secure the Indenture Securities; (viii) to provide
for the acceptance of appointment by a successor Trustee or facilitate the
administration of the trusts under the Indenture by more than one Trustee; (ix)
to close the Indenture with respect to the authentication and delivery of
additional series of Senior Debt Securities, to cure any ambiguity, defect or
inconsistency in the Indenture, provided such action does not adversely affect
the interest of Holders of Indenture Securities of any series in any material
respect; or (x) to supplement
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any of the provisions of the Indenture to the extent necessary to permit or
facilitate defeasance and discharge of any series of Indenture Securities,
provided such action shall not adversely affect the interests of the Holders of
any Indenture Securities in any material respect. (Section 901)
The Indenture contains provisions for convening meetings of the Holders of
Indenture Securities of a series if Indenture Securities of that series are
issuable as Bearer Securities. (Section 1501) A meeting may be called at any
time by the Trustee, and also, upon request, by Southern Union or the Holders of
at least 10% in principal amount of the Indenture Securities of such series
Outstanding, in any such case upon notice given as provided in the Indenture.
(Section 1502) Except for any consent that must be given by the Holder of each
Indenture Security affected thereby, as described above, any resolution
presented at a meeting or adjourned meeting at which a quorum is present may be
adopted by the affirmative vote of the Holders of a majority in principal amount
of the Indenture Securities of that series Outstanding; PROVIDED, HOWEVER, that
any resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
Holders of a specified percentage, which is less than a majority, in principal
amount of Indenture Securities of a series Outstanding may be adopted at a
meeting or adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the Holders of such specified percentage in principal amount
of the Indenture Securities of that series Outstanding. Any resolution passed or
decision taken at any meeting of Holders of Indenture Securities of any series
duly held in accordance with the Indenture will be binding on all Holders of
Indenture Securities of that series and the related coupons. The quorum at any
meeting called to adopt a resolution, and at any reconvened meeting, will be the
persons entitled to vote a majority in principal amount of the Indenture
Securities of a series Outstanding; PROVIDED, HOWEVER, that if any action is to
be taken at such meeting with respect to a consent or waiver which may be given
by the Holders of not less than a specified percentage in principal amount of
the Indenture Securities of a series Outstanding, the Persons entitled to vote
such specified percentage in principal amount of the Indenture Securities of
such series Outstanding will constitute a quorum. Notwithstanding the foregoing
provisions, if any action is to be taken at a meeting of Holders of Indenture
Securities of any series with respect to any request, demand, authorization,
direction, notice, consent, waiver or other action that the Indenture expressly
provides may be made, given or taken by the Holders of a specified percentage in
principal amount of all Outstanding Indenture Securities affected thereby, or of
the Holders of such series and one or more additional series: (i) there shall be
no minimum quorum requirement for such meeting; and (ii) the principal amount of
the Outstanding Indenture Securities of such series that vote in favor of such
request, demand, authorization, direction, notice, consent, waiver or other
action shall be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under the Indenture. (Section 1504)
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that, if the provisions of Article Fourteen are made
applicable to the Senior Debt Securities of or within any series and any related
coupons pursuant to Section 301 of the Indenture, Southern Union may elect
either (a) to defease and be discharged from any and all obligations with
respect to such Senior Debt Securities and any related coupons (except for the
obligation to pay Additional Amounts, if any, upon the occurrence of certain
events of tax, assessment or governmental charge with respect to payments on
such Senior Debt Securities and the obligations to register the transfer or
exchange of such Senior Debt Securities and any related coupons, to replace
temporary or mutilated, destroyed, lost or stolen Senior Debt Securities and any
related coupons, to maintain an office or agency in respect of such Senior Debt
Securities and any related coupons and to hold moneys for payment in trust)
("defeasance") (Section 1402) or (b) to be released from its obligations with
respect to such Senior Debt Securities and any related coupons under Sections
1009 and 1010 (being the restriction described under "Limitation on Liens" and
"Limitations on Sale and Leaseback Transactions") or, if provided pursuant to
Section 301 of the Indenture, its obligations with respect to any other
covenant, and any omission to comply with such obligations shall not constitute
a default or an Event of Default with respect to such Senior Debt Securities and
any related coupons ("covenant defeasance") (Section 1403), in either case upon
the irrevocable deposit by Southern
47
<PAGE>
Union with the Trustee (or other qualifying trustee), in trust, of an amount, in
such Currency in which such Senior Debt Securities and any related coupons are
then specified as payable at Stated Maturity, or Government Obligations (as
defined below), or both, applicable to such Senior Debt Securities and any
related coupons (with such applicability being determined on the basis of the
currency, currency unit or composite currency in which such Senior Debt
Securities are then specified as payable at Stated Maturity) which through the
scheduled payment of principal and interest in accordance with their terms will
provide money in an amount sufficient to pay the principal of (and premium, if
any) and interest, if any, on such Senior Debt Securities and any related
coupons, and any mandatory sinking fund or analogous payments thereon, on the
scheduled due dates therefor.
Such a trust may only be established if, among other things, Southern Union
has delivered to the Trustee an Opinion of Counsel (as specified in the
Indenture) to the effect that the Holders of such Senior Debt Securities and any
related coupons will not recognize income, gain or loss for United States
federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to United States federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such defeasance or covenant defeasance had not occurred, and such Opinion of
Counsel, in the case of defeasance under clause (a) above, must refer to and be
based upon a ruling of the Internal Revenue Service or a change in applicable
United States federal income tax law occurring after the date of the Indenture.
(Section 1404)
"Government Obligations" means securities which are (i) direct obligations
of the government which issued the Currency in which the Senior Debt Securities
of a particular series are payable, for the payment of which its full faith and
credit is pledged, or (ii) obligations of a Person controlled or supervised by
and acting as an agency or instrumentality of the government which issued the
Currency in which the Senior Debt Securities of such series are payable, the
payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America or such other government, which, in
either case, are not callable or redeemable at the option of the issuer thereof,
and shall also include a depository receipt issued by a bank or trust company as
custodian with respect to any such Government Obligation or a specific payment
of interest on or principal of any such Government Obligation held by such
custodian for the account of the holder of a depository receipt, PROVIDED that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the Government Obligation or
the specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt. (Section 101)
Unless otherwise provided in the Prospectus Supplement, if, after Southern
Union has deposited funds and/or Government Obligations to effect defeasance or
covenant defeasance with respect to Senior Debt Securities of any series, (a)
the Holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the terms of such Debt Security to receive payment in a Currency
other than that in which such deposit has been made in respect of such Debt
Security, or (b) the currency in which such deposit has been made in respect of
any Debt Security of such series ceases to be used by its government of
issuance, the indebtedness represented by such Debt Security shall be deemed to
have been, and will be, fully discharged and satisfied through the payment of
the principal of (and premium, if any) and interest, if any, on such Debt
Security as they become due out of the proceeds yielded by converting the amount
so deposited in respect of such Debt Security into the Currency in which such
Debt Security becomes payable as a result of such election or such cessation of
usage based on the applicable Market Exchange Rate. (Section 1405) Unless
otherwise provided in the Prospectus Supplement, all payments of principal of
(and premium, if any) and interest, if any, and Additional Amounts, if any, on
any Debt Security that is payable in a Foreign Currency that ceases to be used
by its government of issuance shall be made in U.S. dollars. (Section 312)
In the event Southern Union effects covenant defeasance with respect to any
Senior Debt Securities and any related coupons and such Senior Debt Securities
and any related coupons are declared due and payable because of the occurrence
of any Event of Default other than the Event of Default described in clause
(iii) or (vi) under "Events of Default" with respect to any covenant with
respect to
48
<PAGE>
which there has been defeasance, the Currency and Government Obligations on
deposit with the Trustee will be sufficient to pay amounts due on such Senior
Debt Securities and any related coupons at the time of their Stated Maturity but
may not be sufficient to pay amounts due on such Senior Debt Securities and any
related coupons at the time of the acceleration resulting from such Event of
Default. However, Southern Union would remain liable to make payment of such
amounts due at the time of acceleration.
The Prospectus Supplement may further describe the provisions, if any,
permitting such defeasance or covenant defeasance, including any modifications
to the provisions described above, with respect to the Senior Debt Securities of
or within a particular series and any related coupons.
FINANCIAL INFORMATION
So long as any of the Senior Debt Securities are outstanding, Southern Union
will file, to the extent permitted under the 1934 Act, with the Commission the
annual reports, quarterly reports and other documents otherwise required to be
filed with the Commission pursuant to Section 13(a) or 15(d) of the 1934 Act as
if Southern Union were subject to such Sections and will also provide to all
Holders and file with the Trustee copies of such reports and documents within 15
days after it files them with the Commission or, if filing such reports and
documents by Southern Union with the Commission is not permitted under the 1934
Act, within 15 days after it would otherwise have been required to file such
reports and documents if permitted, in each case at Southern Union's cost.
(Section 1011)
RESIGNATION OF TRUSTEE
The Trustee may resign or be removed with respect to one or more series of
Indenture Securities and a successor Trustee may be appointed to act with
respect to such series. (Section 608) In the event that two or more persons are
acting as Trustee with respect to different series of Indenture Securities, each
such Trustee shall be a Trustee of a trust under the Indenture separate and
apart from the trust administered by any other such Trustee (Section 609), and
any action described herein to be taken by the "Trustee" may then be taken by
each such Trustee with respect to, and only with respect to, the one or more
series of Indenture Securities for which it is Trustee.
THE TRUSTEE
The Company may from time to time maintain bank accounts and have other
customary banking relationships with and obtain credit facilities and lines of
credit from the Trustee in the ordinary course of business. The Trustee may also
serve as trustee under other indentures covering other debt securities of the
Company.
PAYMENT AND PAYING AGENTS
Unless otherwise provided in the Prospectus Supplement, principal, premium,
if any, and interest, if any, and Additional Amounts, if any, on Bearer
Securities will be payable, subject to any applicable laws and regulations, at
the offices of such Paying Agents outside the United States as Southern Union
may designate from time to time. (Section 1002) Unless otherwise provided in the
Prospectus Supplement, payment of interest and certain Additional Amounts on
Bearer Securities on any Interest Payment Date will be made only against
presentation and surrender of the coupon relating to such Interest Payment Date.
(Section 1001) Unless otherwise provided in the Prospectus Supplement, no
payment with respect to any Bearer Security will be made at any office or agency
of Southern Union in the United States or by check mailed to any address in the
United States or by transfer to an account maintained with a bank located in the
United States. Notwithstanding the foregoing, payments of principal, premium, if
any, and interest, if any, and Additional Amounts, if any, in respect of Bearer
Securities payable in U.S. dollars will be made at the office of Southern
Union's Paying Agent in New York, New York if (but only if) payment of the full
amount thereof in U.S. dollars at all offices or agencies outside the United
States is illegal or effectively precluded by exchange controls or other similar
restrictions. (Section 1002)
Unless otherwise provided in the Prospectus Supplement, principal, premium,
if any, and interest, if any, and Additional Amounts, if any, on Registered
Securities will be payable at any office or
49
<PAGE>
agency to be maintained by Southern Union in New York, New York, except that at
the option of Southern Union, interest (including additional Amounts, if any)
may be paid (i) by check mailed to the address of the Person entitled thereto as
such address shall appear in the Security Register or (ii) by transfer to an
account maintained by the payee located inside the United States. (Sections 307,
1001 and 1002) Unless otherwise provided in the Prospectus Supplement, payment
of any installment of interest on Registered Securities will be made to the
Person in whose name such Registered Security is registered at the close of
business on the Regular Record Date for such interest. (Section 307)
Any Paying Agents outside the United States and any other Paying Agents in
the United States initially designated by Southern Union for the Senior Debt
Securities will be named in the Prospectus Supplement. Southern Union may at any
time designate additional Paying Agents or rescind the designation of any Paying
Agent or approve a change in the office through which any Paying Agent acts,
except that, if Senior Debt Securities of a series are issuable only as
Registered Securities, Southern Union will be required to maintain a Paying
Agent in each Place of Payment for such series and, if Senior Debt Securities of
a series are also issuable as Bearer Securities, Southern Union will be required
to maintain (i) a Paying Agent in New York, New York for payments with respect
to any Registered Securities of the series (and for payments with respect to
Bearer Securities of the series in the circumstances described above, but not
otherwise), and (ii) a Paying Agent in a Place of Payment located outside the
United States where Senior Debt Securities of such series and any coupons
appertaining thereto may be presented and surrendered for payment; PROVIDED that
if the Senior Debt Securities of such series are listed on any stock exchange
located outside the United States and such stock exchange shall so require,
Southern Union will maintain a Paying Agent in any other required city located
outside the United States, as the case may be, for the Senior Debt Securities of
such series. (Section 1002)
50
<PAGE>
PLAN OF DISTRIBUTION
Southern Union may sell the Senior Debt Securities to or through
underwriters or dealers, and also may sell the Senior Debt Securities directly
to one or more other purchasers or through agents.
The Prospectus Supplement sets forth the terms of the offering of the
particular series of Senior Debt Securities to which such Prospectus Supplement
relates, including (i) the name or names of any underwriters or agents with whom
Southern Union has entered into arrangements with respect to the sale of such
series of Senior Debt Securities, (ii) the initial public offering or purchase
price of such series of Senior Debt Securities, (iii) any underwriting
discounts, commissions and other items constituting underwriters' compensation
from Southern Union and any other discounts, concessions or commissions allowed
or reallowed or paid by any underwriters to other dealers, (iv) any commissions
paid to any agents, (v) the net proceeds to Southern Union and (vi) the
securities exchange, if any, on which such series of Senior Debt Securities will
be listed.
Unless otherwise set forth in the Prospectus Supplement relating to a
particular series of Senior Debt Securities, the obligations of the underwriters
to purchase such series of Senior Debt Securities will be subject to certain
conditions precedent and each of the underwriters with respect to such series of
Senior Debt Securities will be obligated to purchase all of the Senior Debt
Securities of such series allocated to it if any such Senior Debt Securities are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.
The Senior Debt Securities may be offered and sold by Southern Union
directly or through agents designated by Southern Union from time to time.
Unless otherwise indicated in the Prospectus Supplement, any such agent or
agents will be acting on a best efforts basis for the period of its or their
appointment. Any agent participating in the distribution of Senior Debt
Securities may be deemed to be an "underwriter," as that term is defined in the
Securities Act, of the Senior Debt Securities so offered and sold. The Senior
Debt Securities also may be sold to dealers at the applicable price to the
public set forth in the Prospectus Supplement relating to a particular series of
Senior Debt Securities who later resell to investors. Such dealers may be deemed
to be "underwriters" within the meaning of the Securities Act.
As one of the means of direct issuance, Southern Union may conduct an
electronic auction of the Senior Debt Securities to purchasers eligible to
participate in such auctions. All participants in any such auction will be
required to be parties to agreements containing rules which provide for the
manner of conduct of the auction and the obligations of the participants.
Certain information concerning the Senior Debt Securities to be offered in any
such auction, including the amount of Senior Debt Securities offered therein and
any previously undisclosed commercial terms other than price and coupon, may be
communicated to participants in such auction at or prior to the time of the
conduct thereof through the auction system. An independent agent will act in
connection with such auction solely as the provider of the electronic auction
system. The independent agent may be deemed an "underwriter" of the Senior Debt
Securities offered through the system for the purposes of the Securities Act. If
Southern Union elects to conduct any such auction, Southern Union will enter
into an agreement with the independent agent for the conduct of such auction.
Purchasers of the Senior Debt Securities through electronic auction that are
broker-dealers may purchase the Senior Debt Securities for their own account,
for resale to customers or for further distribution (through other
broker-dealers or otherwise), and in connection with any such resale or further
distribution may receive or pay compensation in an amount determined by the
difference between the resale price of the Senior Debt Securities and the price
reflected in the Prospectus Supplement. Any such broker-dealer purchaser may be
deemed an "underwriter" of the Senior Debt Securities offered through the system
for purposes of the Securities Act. Any agreement with the independent agent
will contain an indemnification, under certain circumstances, of such broker-
dealer purchasers with respect to certain liabilities, including certain
liabilities that may arise under the Securities Act.
51
<PAGE>
Underwriters, dealers and agents may be entitled, under agreements entered
into with Southern Union, to indemnification by Southern Union against certain
civil liabilities, including liabilities under the Securities Act.
If so indicated in the Prospectus Supplement relating to a particular series
of Senior Debt Securities, Southern Union will authorize underwriters, dealers
or agents to solicit offers by certain institutions to purchase Senior Debt
Securities of such series from Southern Union pursuant to delayed delivery
contracts providing for payment and delivery at a future date. Such contracts
will be subject only to those conditions set forth in the Prospectus Supplement
and the Prospectus Supplement will set forth the commission payable for
solicitation of such contracts.
LEGAL MATTERS
The validity of the Senior Debt Securities offered hereby will be passed
upon for Southern Union by Fleischman and Walsh, Washington, D.C. and for the
Underwriters by Shearman & Sterling, New York, New York. Aaron I. Fleischman,
Senior Partner of Fleischman and Walsh, is a director of Southern Union. Mr.
Fleischman and other attorneys in that firm beneficially own shares of Common
Stock that, in the aggregate, represent less than one percent (1%) of the shares
of Common Stock outstanding.
EXPERTS
The financial statements of the Missouri Business of Gas Service, a division
of Western Resources as of December 31, 1992 and 1991 and for each of the three
years in the period ended December 31, 1992 that are included elsewhere in this
Prospectus, and the financial statements of the Company as of December 31, 1992
and 1991 and for each of the three years in the period ended December 31, 1992
that are incorporated by reference into this Prospectus, have been audited by
Coopers & Lybrand, independent public accountants, as indicated in their report
with respect thereto, and are included in this Prospectus in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
------------------
<S> <C>
MISSOURI BUSINESS OF GAS SERVICE:
Audited Financial Statements:
Report of Independent Accountants......................................................... F-2
Balance Sheet at December 31, 1992 and 1991............................................... F-3
Statement of Operations for the years ended December 31, 1992, 1991 and 1990.............. F-4
Notes to Financial Statements............................................................. F-5 to F-12
Unaudited Interim Financial Statements:
Balance Sheet at September 30, 1993....................................................... F-13
Statement of Operations for the nine months ended September 30, 1993 and 1992............. F-14
Notes to Unaudited Interim Financial Statements........................................... F-15 to F-16
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS:
Unaudited Pro Forma Combined Condensed Financial Information................................ PF-1
Pro Forma Combined Condensed Statement of Operations for the nine months ended September 30,
1993....................................................................................... PF-2
Pro Forma Combined Condensed Statement of Operations for the twelve months ended September
30, 1993................................................................................... PF-3
Pro Forma Combined Condensed Statement of Operations for the year ended December 31, 1992... PF-4
Notes to Unaudited Pro Forma Combined Condensed Statements of Operations.................... PF-5 to PF-6
Pro Forma Combined Condensed Balance Sheet at September 30, 1993............................ PF-7
Notes to Unaudited Pro Forma Combined Condensed Balance Sheet............................... PF-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Southern Union Company
We have audited the balance sheet of the Missouri Business of Gas Service, a
division of Western Resources, Inc., pursuant to the Agreement for Purchase of
Assets between Western Resources, Inc. and Southern Union Company, as of
December 31, 1992 and 1991 and the related statement of operations for each of
the three years in the period ended December 31, 1992. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Missouri Business of Gas
Service, a division of Western Resources, Inc., as of December 31, 1992 and
1991, and its operations for each of the three years in the period ended
December 31, 1992 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Austin, Texas
September 24, 1993
F-2
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1991 1992
------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Property, plant and equipment......................................................... $ 361,849 $ 393,376
Less accumulated depreciation and amortization...................................... (108,225) (117,925)
------------ ------------
253,624 275,451
------------ ------------
Current assets:
Cash................................................................................ 8 9
Accounts receivable, billed and unbilled............................................ 49,117 57,942
Materials and supplies.............................................................. 4,467 4,764
Other current assets................................................................ 35 35
------------ ------------
53,627 62,750
------------ ------------
Deferred charges and other............................................................ 4,384 5,935
------------ ------------
Total assets...................................................................... $ 311,635 $ 344,136
------------ ------------
------------ ------------
EQUITY AND LIABILITIES
Equity in net assets acquired......................................................... $ 235,506 $ 275,501
------------ ------------
Current liabilities -- accounts payable and accrued liabilities....................... 71,277 64,608
Deferred credits and other............................................................ 4,852 4,027
------------ ------------
Total liabilities................................................................. 76,129 68,635
Contingencies......................................................................... -- --
------------ ------------
Total equity and liabilities...................................................... $ 311,635 $ 344,136
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1990 1991 1992
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues................................................................... $ 302,163 $ 307,667 $ 297,956
----------- ----------- -----------
Cost and expenses:
Gas purchase costs....................................................... 202,229 193,510 183,001
Operating, maintenance and general....................................... 59,311 64,829 66,908
Taxes, other than on income.............................................. 25,598 25,877 25,038
Depreciation and amortization............................................ 9,730 11,628 13,172
----------- ----------- -----------
Total costs and expenses................................................. 296,868 295,844 288,119
----------- ----------- -----------
Net operating revenue...................................................... 5,295 11,823 9,837
----------- ----------- -----------
Other income (expenses):
Interest expense......................................................... (8,342) (9,294) (8,831)
Other, net............................................................... 504 (696) 1,214
----------- ----------- -----------
Total other income (expenses), net....................................... (7,838) (9,990) (7,617)
----------- ----------- -----------
Earnings (loss) before income taxes........................................ (2,543) 1,833 2,220
Income tax provision (benefit)............................................. (1,593) 523 705
----------- ----------- -----------
Net earnings (loss)........................................................ $ (950) $ 1,310 $ 1,515
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Missouri Business of Gas Service (the "Missouri Business"), a division
of Western Resources, Inc., ("Western Resources"), is engaged in the
distribution and sale of natural gas as a public utility in the state of
Missouri. On July 9, 1993, Southern Union Company ("Southern Union" or the
"Company") entered into a purchase and sale agreement with Western Resources
(the "Agreement") to purchase the Missouri Business subject to certain
conditions including the regulatory approval of the Missouri Public Service
Commission ("MPSC" or the "Commission").
The Missouri Business has no separate legal status or existence, and its
activities are controlled by Western Resources. Historically, the operations of
the Missouri Business have been included in the consolidated financial
statements of Western Resources and were not accounted for as a separate entity.
In the normal course of business, the Missouri Business has various transactions
with Western Resources, including various expense allocations, which are
material in amount.
The accompanying historical balance sheet and statement of operations
consists of the assets acquired and liabilities assumed as set forth in the
Agreement and the operations related to the Missouri Business. These financial
statements have been prepared from records maintained by Western Resources, and
may not necessarily be indicative of the conditions which would have existed if
the Missouri Business had been operated as an independent entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL. The accounting policies of the Missouri Business are in accordance
with generally accepted accounting principles as applied to regulated public
utilities. The Missouri Business rates and operations are subject to regulation
by the MPSC and the Federal Energy Regulatory Commission ("FERC"). The principal
accounting policies used in the preparation of the financial statements of the
Missouri Business are described below.
UTILITY PLANT. Utility plant is stated at cost. For constructed plant,
costs include contracted services, direct labor and materials, indirect charges
for engineering, supervision, general and administrative costs, and an allowance
for funds used during construction (AFUDC). The AFUDC rate was 6.07% in 1992,
6.25% in 1991, and 8.25% in 1990. The cost of additions to utility plant and
replacement units of property is capitalized. Maintenance costs and replacement
of minor items of property are charged to expense as incurred. When units of
depreciable property are retired, they are removed from the plant accounts and
the original cost plus removal charges less salvage are charged to accumulated
depreciation. Significant software development costs are capitalized.
DEPRECIATION. Depreciation is provided on the straight-line method based on
the estimated useful lives of property. Composite provisions for Missouri
Business' book depreciation approximated 3.38% in 1992, 3.40% in 1991, and 3.37%
in 1990 of the average original cost of depreciable property.
REVENUES AND GAS PURCHASE COSTS. Gas utility customers are billed on a
monthly-cycle basis. The related cost of gas is matched with cycle billed
revenue through the operation of purchased gas adjustment provisions. An
estimate of unbilled revenues is recognized on a monthly-cycle basis which
includes sales from the cycle-billing dates to the end of the month, unbilled
gas purchase costs and revenue related taxes. The accrual for unbilled revenues
is included in revenues in the statement of operations.
TAXES ON INCOME. The Missouri Business is included in Western Resources'
consolidated federal and state income tax returns. The Missouri Business' annual
provision for income taxes included in the statement of operations was
determined as if the Missouri Business had filed a separate federal and state
income tax return but may include benefits from deductions and tax credits that
are
F-5
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
realizable only on a consolidated basis. Deferred income taxes are not presented
in the accompanying balance sheet as the pending purchase transaction is taxable
and the deferred income taxes pertaining to the Missouri Business will remain
with Western Resources.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES,
which is effective for fiscal years beginning after December 15, 1992. The
statement provides for the replacement of the "deferred method" of interperiod
income tax allocation with the "liability method" which bases the amounts of
current and future assets and liabilities on events recognized in the financial
statements and on income tax laws and rates existing at the balance sheet date.
Western Resources adopted the provisions of SFAS No. 109 as of January 1, 1992
for which there was no material impact on the operations of the Missouri
Business.
3. AFFILIATE TRANSACTIONS
The Missouri Business engages in various transactions with Western Resources
and its affiliates that are characteristic of a consolidated group under common
control. Western Resources has historically provided the Missouri Business with
various financial and administrative functions and services for which the
Missouri Business is charged associated direct costs and expenses. In addition,
certain indirect administrative costs are allocated to the various business
divisions of Western Resources, including the Missouri Business, principally
based on formulas which consider such proportionate variables as number of
customers, number of employees and property balances. The methods utilized are,
in the opinion of the management of Western Resources, reasonable.
Direct and indirect corporate administrative costs including employee
benefits, information systems support, accounting and office services and other
general and administrative costs charged to the Missouri Business by Western
Resources approximated $26.9 million in 1992, $23.2 million in 1991 and $19.5
million in 1990. Amounts are included in "operating, maintenance and general" in
the statement of operations.
Western Resources provides financing and cash management for the Missouri
Business through a centralized treasury system. Western Resources also provides
cash needs not generated internally by the Missouri Business operations. Western
Resources' consolidated interest expense is, in turn, allocated to its business
units, including the Missouri Business, based on a pro rata formula of its net
investment in the Missouri Business. Historically, the weighted average interest
rate of Western Resources was 7.6% in 1992, 8.0% in 1991 and 8.4% in 1990.
4. RATE MATTERS AND REGULATION
The Missouri Business, pursuant to rate orders from the MPSC, recovers
increases in natural gas costs through various purchased gas adjustment clauses
(PGA). The annual difference between actual gas cost incurred and cost recovered
through the application of the PGA are deferred and amortized through rates in
subsequent periods.
MPSC RATE PROCEEDINGS. On February 5, 1993, the Missouri Business filed an
application with the MPSC requesting an increase in natural gas rates for the
Missouri Business of $20.8 million or seven percent.
On January 22, 1992, the MPSC issued an order authorizing the Missouri
Business to increase natural gas rates by $7.3 million annually. On February 5,
1992, the Missouri Business filed an application for the issuance of an
accounting order for the Missouri Business to defer service line replacement
program costs incurred since July 1, 1991, including depreciation expense,
property
F-6
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RATE MATTERS AND REGULATION (CONTINUED)
taxes, and carrying costs for recovery in the next general rate case. The MPSC
subsequently issued an accounting order allowing the deferral of service line
replacement program costs. At December 31, 1992, approximately $3.1 million of
these deferrals have been included in deferred charges and other.
On April 27, 1990, the MPSC approved an agreement among Gas Service, the
MPSC staff, and intervenors to increase natural gas rates $18.5 million
annually, effective May 1, 1990. The Missouri Business discontinued the deferral
of accelerated line surveys and carrying charges on plant investment in new
service lines on April 30, 1990, and began amortizing the balance to expense
over a three-year period which began May 1, 1990.
FERC ORDER NO. 528. In 1990, the FERC issued Order No. 528 which authorized
new methods for the allocation and recovery of take-or-pay settlement costs by
natural gas pipelines from their customers. Negotiation and litigation continues
between Western Resources and suppliers concerning the amount of such costs to
be allocated to the Missouri Business. Due to the present uncertainty of the
outcome of the litigation and negotiations, the management of the Missouri
Business is unable to estimate any further liability for take-or-pay settlement
costs incurred by its pipeline suppliers. The MPSC has approved a mechanism to
recover these take-or-pay costs from the Missouri customers.
FERC ORDER NO. 636. On April 8, 1992, the FERC issued Order No. 636 which
is intended to complete the deregulation of natural gas production and
facilitate competition in the gas transportation industry. Order 636 is expected
to affect the Missouri Business in several ways. The rules provide greater
protection for pipeline companies by providing for recovery of all fixed costs
through contracts with local distribution companies and other customers choosing
to transport gas on a firm (non-interruptable) basis. The order also separates
the purchase of natural gas from the transportation and storage of natural gas,
shifting additional responsibility to distribution companies for the provision
of long-term gas supply and transportation to distribution points. The Missouri
Business may be liable to one or more of its pipeline suppliers for costs
associated with any reduction in firm service demands. However, the management
of the Company believes substantially all of these costs will be recovered from
its customers and additional transition costs will be immaterial to the results
of operations of the Missouri Business. Moreover, the Missouri Business is
participating in pipeline restructuring negotiations and management of the
Company does not anticipate any material difficulty in it continuing the service
provided in the past.
TIGHT SANDS. In December 1991, the MPSC approved an agreement authorizing
the Missouri Business to refund to its customers approximately $20.1 million of
certain anti-trust litigation settlement proceeds to be collected on behalf of
the customers of the Missouri Business. To secure the refund of settlement
proceeds, the MPSC authorized the establishment of an independently administered
trust to collect and maintain cash receipts received under the Tight Sands
settlement agreements, and provide for the refunds made. The trust has a term of
10 years.
5. INTEREST EXPENSE
Allocated interest expense is presented in the accompanying statement of
operations net of AFUDC as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1990 1991 1992
--------- --------- ---------
<S> <C> <C> <C>
Interest expense allocated............................................... $ 8,432 $ 9,314 $ 8,864
Less AFUDC............................................................... (90) (20) (33)
--------- --------- ---------
$ 8,342 $ 9,294 $ 8,831
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-7
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. TAXES ON INCOME
The components of the tax provision (benefit) on income were as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1992
--------------------------------------------
CURRENT DEFERRED INVESTMENT
TAX TAX TAX CREDIT TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Federal................................................... $ (5,762) $ 6,669 $ (296) $ 611
State..................................................... (589) 683 -- 94
--------- --------- ----------- ---------
$ (6,351) $ 7,352 $ (296) $ 705
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
1991
--------------------------------------------
CURRENT DEFERRED INVESTMENT
TAX TAX TAX CREDIT TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Federal................................................... $ 2,529 $ (1,815) $ (299) $ 415
State..................................................... 345 (237) -- 108
--------- --------- ----------- ---------
$ 2,874 $ (2,052) $ (299) $ 523
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
1990
--------------------------------------------
CURRENT DEFERRED INVESTMENT
TAX TAX TAX CREDIT TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Federal................................................... $ 7,336 $ (8,478) $ (307) $ (1,449)
State..................................................... 989 (1,133) -- (144)
--------- --------- ----------- ---------
$ 8,325 $ (9,611) $ (307) $ (1,593)
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
The sources of timing differences and the related deferred tax effects were
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1990 1991 1992
--------- --------- ---------
<S> <C> <C> <C>
Difference between book and tax depreciation........................... $ 989 $ 2,910 $ 2,381
Insurance reserves..................................................... (210) 585 601
Pension plan cost accruals and other employee related.................. (679) (364) 388
Deferred charges....................................................... (2,060) (2,395) 1,635
Purchased gas costs.................................................... (2,786) (915) 2,344
Unbilled revenues...................................................... (5,166) (3,456) --
Software development costs............................................. 251 1,574 3
Customer deposits...................................................... 50 9 --
--------- --------- ---------
Total................................................................ $ (9,611) $ (2,052) $ 7,352
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-8
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. TAXES ON INCOME (CONTINUED)
Total income tax expense differed from the amount computed by applying the
applicable federal income tax rate of 34% to earnings before taxes on income.
The reasons for the differences for each of the years were as follows:
<TABLE>
<CAPTION>
YEAR END DECEMBER 31,
-------------------------------
1990 1991 1992
--------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).............................. $ (865) $ 623 $ 755
Flow-through of depreciation expense................................... 174 146 540
Reduction in excess deferred income taxes.............................. (272) (3) (55)
State income taxes..................................................... (95) 72 62
Amortization of investment tax credit.................................. (307) (299) (296)
Permanent differences.................................................. 62 27 21
Adjustment of prior year provision..................................... (290) (43) (322)
--------- --------- ---------
Actual tax expense (benefit)........................................... $ (1,593) $ 523 $ 705
--------- --------- ---------
--------- --------- ---------
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment at December 31, 1991 and
1992 were as follows:
<TABLE>
<CAPTION>
1991 1992
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Property, plant and equipment:
Distribution facilities................................................... $ 335,821 $ 364,812
Intangible................................................................ 5,579 4,865
General................................................................... 17,922 19,221
Construction work in progress............................................. 2,527 4,478
------------ ------------
361,849 393,376
Less accumulated depreciation and amortization.............................. (108,225) (117,925)
------------ ------------
Total property, plant and equipment....................................... $ 253,624 $ 275,451
------------ ------------
------------ ------------
</TABLE>
8. EMPLOYEE BENEFIT PLANS
PENSION. The employees and retirees of the Missouri Business participate in
Western Resources' pension plans (the "Plans"), which are non-contributory
defined benefit plans covering substantially all of Western Resources' active
and retired employees. The Plans provide benefits based on a participant's years
of service and compensation during the last ten years before retirement. Western
Resources' policy is to fund pension costs accrued subject to limitations set by
the Employee Retirement Income Security Act of 1974 and the Internal Revenue
Code.
F-9
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table provides information on the components of pension cost,
funded status and actuarial assumptions for Western Resources' Plans:
<TABLE>
<CAPTION>
YEAR END DECEMBER 31,
---------------------------------------
1990 1991 1992
------------ ----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Pension Cost:
Service cost................................................. $ 6,345 $ 6,589 $ 9,847
Interest cost on projected benefit obligations............... 18,729 20,985 29,457
Return on plan assets........................................ (3,819) (59,161) (38,967)
Deferred gain (loss) on plan assets.......................... (15,721) 38,015 7,705
Net amortization............................................. 242 (131) (948)
------------ ----------- ------------
Net pension cost........................................... $ 5,776 $ 6,297 $ 7,094
------------ ----------- ------------
------------ ----------- ------------
Funded Status:
Actuarial present value of benefit obligations:
Vested....................................................... $ 183,262 $ 200,435 $ 316,100
Non-vested................................................... 12,790 13,935 19,331
------------ ----------- ------------
Total...................................................... $ 196,052 $ 214,370 $ 335,431
------------ ----------- ------------
------------ ----------- ------------
Plan assets (principally debt and equity securities) at fair
value....................................................... $ 274,622 $ 324,780 $ 452,372
Projected benefit obligation................................. 262,831 282,062 424,232
------------ ----------- ------------
Plan assets in excess of projected benefit obligation........ 11,791 42,718 28,140
Unrecognized transition asset................................ (1,370) (1,253) (3,092)
Unrecognized prior service costs............................. 29,321 27,216 55,886
Unrecognized net gain........................................ (40,198) (69,494) (106,486)
------------ ----------- ------------
Accrued pension costs........................................ $ (456) $ (813) $ (25,552)
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Actuarial Assumptions:
Discount rate........................................... 8.0% 8.0% 8.0%-8.5%
Annual salary increase rate............................. 6.0% 6.0% 6.0%
Long-term rate of return................................ 8.0% 8.0% 8.0%-8.5%
</TABLE>
The employees and retirees of the Missouri Business comprise approximately
30% of total active employees and retirees of Western Resources at December 31,
1992. As provided in the Agreement, Western Resources will transfer to Southern
Union the assets and liabilities of the Western Resources' Plans applicable to
the employees and retirees of the Missouri Business, which based on a projected
benefit obligation actuarial calculation at December 31, 1992 approximates $100
million.
POST-RETIREMENT. Western Resources provides health care and life insurance
benefits to its retired employees. The cost of retiree health care and life
insurance benefits is recognized as expense when claims and premiums for life
insurance policies are paid. The cost of providing health care and life
insurance benefits for active employees and associated retirees of the Missouri
Business was approximately $6.1 million in 1992, $5.9 million in 1991 and $5.3
million in 1990. Western Resources' cost of providing benefits for 2,928, 1,911,
and 1,886 retirees is not separable from the cost of providing benefits for the
5,138, 4,474, and 4,614 active employees in 1992, 1991 and 1990 respectively.
In December 1990 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard ("SFAS") No. 106, "EMPLOYERS'
ACCOUNTING FOR POST-RETIREMENT BENEFITS
F-10
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
OTHER THAN PENSIONS." Western Resources implemented SFAS No. 106 effective
January 1, 1993. SFAS 106 requires the accrual of post-retirement benefits other
than pensions, primarily medical benefits costs, during the years an employee
provides services.
The Missouri Business annual expense under SFAS 106, commencing after
adoption is approximately $5.9 million and its total unfunded accumulated
post-retirement benefit obligation is approximately $41 million which obligation
will be amortized over 20 years. These costs historically have been allowed in
rates when paid. To mitigate the impact of SFAS 106 expenses, Western Resources
has implemented programs to reduce health care costs and has received approval
from the MPSC to permit initial deferral of SFAS 106 expense and include it in
the computation of cost of service net of an income stream generated from
Western Resources' corporate-owned life insurance (COLI). If the Commission were
to recognize post-retirement benefit costs under a different method, earnings
could be impacted negatively. The cash surrender value of Western Resources'
COLI is not included in the assets acquired pursuant to the Agreement.
POST-EMPLOYMENT. The FASB has issued SFAS 112, "EMPLOYERS' ACCOUNTING FOR
POST-EMPLOYMENT BENEFITS." The new statement requires the recognition of the
liability to provide post-employment benefits when the liability has been
incurred. Adoption of SFAS 112 is required no later than January 1, 1994.
Although the effect of adoption has not been determined, the Company does not
expect adoption to have a material effect on the Missouri Business operations.
EARLY RETIREMENT AND VOLUNTARY SEPARATION PLANS. In January 1992, Western
Resources initiated early retirement plans and voluntary separation programs.
The voluntary early retirement plans were offered to all vested participants in
Western Resources' pension plan who reached the age of 55 with 10 or more years
of service on or before May 1, 1992. Costs associated with the early retirement
plans and voluntary separation programs attributable to the Missouri Business
totaled approximately $2.6 million, and are reflected in "operating, maintenance
and general" in the accompanying statement of operations for the year ended
December 31, 1992.
SAVINGS. Western Resources also maintains savings plans in which
substantially all of its employees participate. Western Resources matches
employees' contributions up to specified maximum limits. The funds of the plans
are deposited with a trustee and invested at each employee's option in one or
more investment funds, including holding stock in a Western Resources, Inc.
fund. Western Resources's contributions on behalf of employees of the Missouri
Business were $0.9 million in 1992, $0.9 million in 1991 and $0.8 million in
1990.
9. COMMITMENTS AND CONTINGENCIES
GAS PURCHASE COMMITMENTS. The Missouri Business has commitments under gas
purchase contracts which contain certain minimum purchase provisions for the
firm supply of quantities of natural gas. In general, these gas purchase
contracts provide for the make-up of volumes which are not purchased by the
Missouri Business and take requirements that are substantially lower than the
total end use demand serviced by the Missouri Business. In addition, the
Missouri Business has contractual access to substantial pipeline storage
capacity which significantly minimizes the risk that the Missouri Business would
be susceptible to take-or-pay provisions contained in certain of its contracts.
LEASE COMMITMENTS. At December 31, 1992, the Missouri Business had
operating leases covering various property and equipment. Rent expense under
those leases was $1.2 million in 1992, $1.3 million in 1991 and $0.8 million in
1990. Future estimated rental commitments are $0.3 million in 1993, $0.3 million
in 1994, $0.2 million in 1995, $0.1 million in 1996 and $0.1 million in 1997. In
F-11
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
addition, the Missouri Business entered into a building lease commencing July
1993 which includes a rent holiday through November 1995. Lease commitments are
$0.03 million in 1995, $0.4 million in 1996 and $0.4 million in 1997.
ENVIRONMENTAL. The Missouri Business owns or is otherwise associated with a
number of sites where manufactured gas plants were previously operated. These
plants were commonly used to supply gas service in the late 19th and early 20th
centuries, in certain cases by corporate predecessors to Western Resources.
By-products and residues from manufactured gas could be located at these sites
and at some time in the future may require remediation by the U.S. Environmental
Protection Agency ("EPA") or delegated state regulatory authority. By virtue of
notice under the Purchase and Sale Agreement and its preliminary, non-invasive
review, the Company is aware of eleven such sites in the service territory of
the Missouri Business. Based on information reviewed thus far, it appears that
neither Western Resources nor any predecessor in interest ever owned or operated
at least three of those sites. Western Resources has informed the Company that
it was notified in 1991 by the EPA that the EPA was evaluating one of the sites
(in St. Joseph, Missouri) for any potential threat to human health and the
environment. Western Resources has also advised the Company that to date, the
EPA has not notified it that any further action may be required. Evaluation of
the remainder of the sites by appropriate federal and state regulatory
authorities may occur in the future. At the present time and based upon the
preliminary information available to it, the Company believes that the costs of
any remediation efforts that may be required for these sites for which it may
ultimately have responsibility will not exceed the aggregate amount subject to
substantial sharing by Western Resources pursuant to the Environmental Liability
Agreement to be entered into at the closing of the Missouri Acquisition. See
"The Missouri Acquisition -- Environmental." In addition, the Company is aware
of the existence of other significant potentially responsible parties from whom
contribution for remediation would be sought, and would expect to make claims
upon its insurers (Western Resources has already done so on its own behalf) and
institute appropriate requests for rate relief. The Company is not presently
aware of any other environmental matters in the Missouri Business which could
reasonably be expected to have a material impact on its operations or financial
position.
LEGAL PROCEEDINGS. The Missouri Business is involved in various legal and
environmental proceedings that management of the Company considers to be normal
kinds of actions to which an enterprise of its size and nature is subject.
Management of the Company believes that adequate provision has been made within
the financial statements for these matters and accordingly believes their
ultimate dispositions will not have a material adverse effect upon the business,
operations or financial position of the Missouri Business.
F-12
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993
------------------
(THOUSANDS OF
DOLLARS)
<S> <C>
Property, plant and equipment................................................................. $ 416,703
Less accumulated depreciation and amortization.............................................. (125,460)
----------
291,243
----------
Current assets:
Cash........................................................................................ 8
Accounts receivable, billed and unbilled.................................................... 10,816
Materials and supplies...................................................................... 4,338
Other current assets........................................................................ 2,401
----------
17,563
----------
Deferred charges and other.................................................................... 10,398
----------
Total assets................................................................................ $ 319,204
----------
----------
EQUITY AND LIABILITIES
Equity in net assets acquired................................................................. $ 288,181
----------
Current liabilities -- accounts payable and accrued liabilities............................... 25,174
Deferred credits and other.................................................................... 5,849
----------
Total liabilities........................................................................... 31,023
Contingencies................................................................................. --
----------
Total equity and liabilities................................................................ $ 319,204
----------
----------
</TABLE>
See accompanying notes to interim financial statements.
F-13
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1992 1993
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Revenues................................................................................ $ 201,007 $ 233,291
----------- -----------
Cost and expenses:
Gas purchase costs.................................................................... 121,130 141,241
Operating, maintenance and general.................................................... 50,315 53,117
Taxes, other than on income........................................................... 18,361 21,470
Depreciation and amortization......................................................... 9,716 9,347
----------- -----------
Total costs and expenses.............................................................. 199,522 225,175
----------- -----------
Net operating revenue................................................................... 1,485 8,116
----------- -----------
Other income (expenses):
Interest expense...................................................................... (6,482) (6,799)
Other, net............................................................................ 718 2,268
----------- -----------
Total other income (expenses), net.................................................... (5,764) (4,531)
----------- -----------
Earnings (loss) before income taxes..................................................... (4,279) 3,585
Income tax provision (benefit).......................................................... (1,417) 997
----------- -----------
Net earnings (loss)..................................................................... $ (2,862) $ 2,588
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to interim financial statements.
F-14
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management of the Company, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial position
and operations for such periods in conformity with generally accepted accounting
principles. The operations for any interim period are not necessarily indicative
of operations for the full year. These financial statements should be read in
conjunction with the audited financial statements and notes thereto of the
Missouri Business of Gas Service ("Missouri Business") contained elsewhere in
this Registration Statement.
ACCOUNTING PRONOUNCEMENTS
Western Resources adopted the provisions of Statement of Financial
Accounting Standard ("SFAS") No. 106, EMPLOYER'S ACCOUNTING FOR POST-RETIREMENT
BENEFITS OTHER THAN PENSIONS, as of January 1, 1993. This statement requires the
accrual of post-retirement benefits other than pensions, primarily medical
benefit costs, during the years an employee provides service.
Based on actuarial projections and an adoption of the transition method
allowing a 20-year amortization of the accumulated benefit obligation, the
annual expense attributable to the employees of the Missouri Business under SFAS
No. 106 will be approximately $5.9 million in 1993 (as compared to approximately
$2.9 million on a cash basis) of which $5.1 million relates to medical benefits
and $0.8 million relates to life insurance benefits. Annual expense in 1993
under SFAS 106 includes $0.5 million service cost, $3.4 million interest cost,
and $2.0 million amortization of the transition obligation. The accumulated
benefit obligation calculated at January 1, 1993 is approximately $41 million of
which $34.9 million relates to medical benefits and $6.1 million relates to life
insurance benefits. The actuarial computations for post-retirement benefits
assumed a discount rate of 8.5%. Health care costs were assumed to be increasing
at an initial rate of 14%, gradually reducing by 1% per year to a long term rate
of 6% for purposes of calculating the post-retirement benefits. If the health
care costs increased at a rate of 1%, the combined effect on the 1993 service
and interest cost components would be a 2% increase and the accumulated benefit
obligation would increase 2%. These costs have historically been allowed in
rates when paid.
To mitigate the impact of SFAS No. 106 expense, Western Resources has
implemented programs to reduce health care costs. In addition, Western Resources
filed an application with the Missouri Public Service Commission ("MPSC") for an
order permitting the initial deferral of SFAS No. 106 expense. To mitigate the
impact SFAS No. 106 expense will have on rate increases, Western Resources
proposed inclusion in the future computation of cost of service the actual SFAS
No. 106 expense and an income stream generated from Western Resources'
corporate-owned life insurance (COLI). To the extent SFAS No. 106 expense
exceeds income from the COLI program, this excess will be deferred (as allowed
by the FASB Emerging Issues Task Force Issue No. 92-12) and offset by income
generated through the deferral period by the COLI program. The MPSC has issued
an order approving the Western Resources application. Should the income stream
generated by the COLI program not be sufficient to offset the SFAS No. 106
expense through the deferral period, the MPSC order allows recovery of such
deficit through the rate making process. Included in "Deferred charges and
other" in the balance sheet at September 30, 1993 is a deferral of $2.2 million
representing the SFAS No. 106 costs deferred pursuant to the above noted MPSC
order. The cash surrender value of Western Resources' COLI is not included in
the assets acquired pursuant to the Agreement for Purchase of Assets between
Western Resources and Southern Union Company (the "Agreement").
F-15
<PAGE>
MISSOURI BUSINESS OF GAS SERVICE
(A DIVISION OF WESTERN RESOURCES, INC.)
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONTINGENCIES
ENVIRONMENTAL. The Missouri Business owns or is otherwise associated with a
number of sites where manufactured gas plants were previously operated. These
plants were commonly used to supply gas service in the late 19th and early 20th
centuries, in certain cases by corporate predecessors to Western Resources.
By-products and residues from manufactured gas could be located at these sites
and at some time in the future may require remediation by the U.S. Environmental
Protection Agency ("EPA") or delegated state regulatory authority. By virtue of
notice under the Purchase and Sale Agreement and its preliminary, non-invasive
review, the Company is aware of eleven such sites in the service territory of
the Missouri Business. Based on information reviewed thus far, it appears that
neither Western Resources nor any predecessor in interest ever owned or operated
at least three of those sites. Western Resources has informed the Company that
it was notified in 1991 by the EPA that the EPA was evaluating one of the sites
(in St. Joseph, Missouri) for any potential threat to human health and the
environment. Western Resources has also advised the Company that to date, the
EPA has not notified it that any further action may be required. Evaluation of
the remainder of the sites by appropriate federal and state regulatory
authorities may occur in the future. At the present time and based upon the
preliminary information available to it, the Company believes that the costs of
any remediation efforts that may be required for these sites for which it may
ultimately have responsibility will not exceed the aggregate amount subject to
substantial sharing by Western Resources pursuant to the Environmental Liability
Agreement to be entered into at the closing of the Missouri Acquisition. See
"The Missouri Acquisition -- Environmental." In addition, the Company is aware
of the existence of other significant potentially responsible parties from whom
contribution for remediation would be sought, and would expect to make claims
upon its insurers (Western Resources has already done so on its own behalf) and
institute appropriate requests for rate relief. The Company is not presently
aware of any other environmental matters in the Missouri Business which could
reasonably be expected to have a material impact on its operations or financial
position.
LEGAL PROCEEDINGS. The Missouri Business is involved in various legal and
environmental proceedings that the management of the Company considers to be
normal kinds of actions to which an enterprise of its size and nature is
subject. Management of the Company believes that adequate provision has been
made within the financial statements for these matters and accordingly believes
their ultimate dispositions will not have a material adverse effect upon the
business, operations or financial position of the Missouri Business.
OTHER MATTERS
On July 9, 1993, Western Resources reached a definitive agreement to sell
the Missouri Business to Southern Union Company for approximately $360 million,
to be adjusted at the time of closing.
On August 10, 1993, the United States Congress passed, and the President
signed into law, the Omnibus Budget Reconciliation Act of 1993 (the "Act").
Among other provisions in the Act, effective January 1, 1993, the corporate
federal income tax rate was increased to 35% on corporate taxable income in
excess of $10 million.
On October 5, 1993, the MPSC issued a rate order increasing the Missouri
Business natural gas rates by approximately $9.8 million annually, effective
beginning October 15, 1993.
F-16
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information
consists of the Unaudited Pro Forma Combined Condensed Statements of Operations
for the nine months ended September 30, 1993, the twelve months ended September
30, 1993 and the year ended December 31, 1992 (the "Pro Forma Statements of
Operations") and the Unaudited Pro Forma Combined Condensed Balance Sheet as of
September 30, 1993 (the "Pro Forma Balance Sheet," and together with the Pro
Forma Statements of Operations, the "Pro Forma Financial Statements"). The Pro
Forma Statements of Operations have been prepared by combining the consolidated
statements of operations of the Company with the statements of operations of the
Missouri Business for the periods indicated, adjusted to give effect to (i) the
issuance of 2,000,000 shares of Common Stock in the Rights Offering, (ii) the
completion of the Missouri Acquisition, including the sale of Senior Debt
Securities to fund such Acquisition and (iii) the sale of Senior Debt Securities
to refinance certain short-term debt, current maturities of long-term debt and
certain long-term debt outstanding at September 30, 1993, as if such
transactions had been consummated as of the beginning of each such period. The
Pro Forma Balance Sheet has been prepared by combining the consolidated balance
sheet of the Company as of September 30, 1993 with the balance sheet of the
Missouri Business as of September 30, 1993, adjusted to give effect to (i) the
issuance of 2,000,000 shares of Common Stock in the Rights Offering, (ii) the
completion of the Missouri Acquisition, including the sale of Senior Debt
Securities to fund such Acquisition and (iii) the sale of Senior Debt Securities
to refinance certain short-term debt, current maturities of long-term debt and
certain long-term debt outstanding as of September 30, 1993, as if such
transactions had been consummated on September 30, 1993.
The Pro Forma Financial Statements are based on and should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto, included in the 1992 Form 10-K and the Third Quarter Form 10-Q that are
incorporated by reference into this Prospectus, and the Historical Financial
Statements of the Missouri Business that are included elsewhere in this
Prospectus.
The Pro Forma Statements of Operations are not necessarily indicative of the
combined effects on the Company's results of operations that would have resulted
if the Rights Offering and the Missouri Acquisition had actually occurred
earlier.
The pro forma adjustments are based on preliminary assumptions and estimates
made by the Company's management regarding anticipated efficiencies resulting
from the combined operations, reductions in costs planned by management,
purchase accounting adjustments and the fair market value of certain assets
acquired in the Missouri Business. The Pro Forma Statements of Operations do not
reflect the financial impact, if any, of (i) the rate increases granted to
Southern Union Gas and the Missouri Business during 1993 not yet earned and (ii)
the pro forma effect of the results of operations of the Rio Grande Acquisition.
Gas service rates, established by regulatory authorities, are based upon the
utility's costs including operating, administrative and finance costs and
include a return on equity. As a result, reductions in a utility's costs may
have a direct impact on the level of rates it is allowed to collect from its
customers in the future. See "Business -- Regulation." The actual allocation of
the consideration paid for the Missouri Business may differ from that reflected
in the Pro Forma Financial Statements after a more extensive review of the fair
market values of the assets acquired and liabilities assumed in the Missouri
Acquisition has been completed. Amounts allocated will be based upon the
estimated fair values at the time of the Missouri Acquisition, which could vary
significantly from the amounts as of September 30, 1993. The Missouri
Acquisition will be accounted for using the purchase method of accounting.
The following table sets forth a summary of the sources and uses of funds
resulting from (i) the issuance of 2,000,000 shares of Common Stock in the
Rights Offering, (ii) the completion of the Missouri Acquisition, including the
sale of Senior Debt Securities to fund such Acquisition and (iii) the sale of
Senior Debt Securities to refinance certain short-term debt, current maturities
of long-term debt and certain long-term debt outstanding as of September 30,
1993, as if such transactions had been consummated on September 30, 1993 (in
thousands):
<TABLE>
<CAPTION>
SOURCES OF FUNDS
- ------------------------------------------------------------------------------------------------------
<S> <C>
Gross Proceeds from Rights Offering........................................................ $ 50,000
Sale of Senior Debt Securities............................................................. 475,000
---------
$ 525,000
---------
---------
<CAPTION>
USES OF FUNDS
- ------------------------------------------------------------------------------------------------------
<S> <C>
Acquisition of Missouri Business........................................................... $ 342,402
Refinancing of short-term borrowings used to fund the Rio Grande Acquisition............... 31,050
Refinancing of short-term debt............................................................. 28,256
Refinancing of current maturities of long-term debt........................................ 20,000
Refinancing of long-term debt.............................................................. 85,000
Stock and debt issuance costs and premiums on early extinguishment of debt (a)............. 18,292
---------
$ 525,000
---------
---------
<FN>
- ------------------------------
(a) Includes a $3.3 million premium on the $50.0 million of 10.5% debentures due
2017 and a $10.4 million premium on the $10.0 million of 9.45% notes due
2004 and $25.0 million of 10% notes due 2012 for the early extinguishment of
this debt.
</TABLE>
PF-1
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA
SOUTHERN MISSOURI ----------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
----------- ------------ --------------- -----------
(THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues..................................... $ 135,868 $ 233,291 $ 369,159
Gas purchase costs..................................... 67,866 141,241 209,107
----------- ------------ -----------
Operating margin..................................... 68,002 92,050 160,052
----------- ------------ -----------
Operating expenses:
Operating, maintenance and general................... 35,289 53,117 $ (6,880)(a) 81,526
Taxes, other than on income.......................... 9,806 21,470 31,276
Amortization of acquisition adjustment............... 2,292 1,111(b) 3,403
Depreciation and amortization........................ 7,968 9,347 460(c) 17,775
----------- ------------ --------------- -----------
Total operating expenses........................... 55,355 83,934 (5,309) 133,980
----------- ------------ --------------- -----------
Net operating revenue.............................. 12,647 8,116 5,309 26,072
----------- ------------ --------------- -----------
Other income (expenses):
Interest............................................. (8,691) (6,799) 15,371(d) (24,648)
(24,529)(e)
Other, net........................................... 861 2,268 (436)(f) 2,693
----------- ------------ --------------- -----------
Total other income (expenses), net................. (7,830) (4,531) (9,594) (21,955)
----------- ------------ --------------- -----------
Earnings before income taxes (benefit)............. 4,817 3,585 (4,285) 4,117
Federal and state income taxes (benefit)............... 1,825 997 (1,733)(g) 1,089
----------- ------------ --------------- -----------
Earnings from continuing operations before preferred
dividends............................................. 2,992 2,588 (2,552) 3,028
Preferred dividends.................................... 843 (843)(h)
----------- ------------ --------------- -----------
Earnings from continuing operations available for
common stock.......................................... $ 2,149 $ 2,588 $ (1,709) $ 3,028
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
Earnings from continuing operations per common share... $ .41 $ .42
----------- -----------
----------- -----------
Weighted average shares outstanding.................... 5,243,934 2,000,000(i) 7,243,934
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
PF-2
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA
SOUTHERN MISSOURI ----------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
----------- ------------ --------------- -----------
(THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues..................................... $ 201,408 $ 330,240 $ 531,648
Gas purchase costs..................................... 107,943 203,112 311,055
----------- ------------ -----------
Operating margin..................................... 93,465 127,128 220,593
----------- ------------ -----------
Operating expenses:
Operating, maintenance and general................... 47,206 69,710 $ (9,173)(a) 107,743
Taxes, other than on income.......................... 13,231 28,147 41,378
Amortization of acquisition adjustment............... 3,064 1,481(b) 4,545
Depreciation and amortization........................ 10,169 12,803 614(c) 23,586
----------- ------------ --------------- -----------
Total operating expenses........................... 73,670 110,660 (7,078) 177,252
----------- ------------ --------------- -----------
Net operating revenue.............................. 19,795 16,468 7,078 43,341
----------- ------------ --------------- -----------
Other income (expenses):
Interest............................................. (11,633) (9,148) 20,400(d) (33,086)
(32,705)(e)
Other, net........................................... 3,105 2,764 (581)(f) 5,288
----------- ------------ --------------- -----------
Total other income (expenses), net................. (8,528) (6,384) (12,886) (27,798)
----------- ------------ --------------- -----------
Earnings before income taxes (benefit)............. 11,267 10,084 (5,808) 15,543
Federal and state income taxes (benefit)............... 4,058 3,119 (2,421)(g) 4,756
----------- ------------ --------------- -----------
Earnings from continuing operations before preferred
dividends............................................. 7,209 6,965 (3,387) 10,787
Preferred dividends.................................... 1,468 (1,468)(h)
----------- ------------ --------------- -----------
Earnings from continuing operations available for
common stock.......................................... $ 5,741 $ 6,965 $ (1,919) $ 10,787
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
Earnings from continuing operations per common share... $ 1.10 $ 1.49
----------- -----------
----------- -----------
Weighted average shares outstanding.................... 5,242,340 2,000,000(i) 7,242,340
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
PF-3
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1992
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA
SOUTHERN MISSOURI ----------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
----------- ------------ --------------- -----------
(THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues..................................... $ 192,445 $ 297,956 $ 490,401
Gas purchase costs..................................... 102,918 183,001 285,919
----------- ------------ -----------
Operating margin..................................... 89,527 114,955 204,482
----------- ------------ -----------
Operating expenses:
Operating, maintenance and general................... 46,313 66,908 $ (9,173)(a) 104,048
Taxes, other than on income.......................... 13,115 25,038 38,153
Amortization of acquisition adjustment............... 2,958 1,481(b) 4,439
Depreciation and amortization........................ 9,779 13,172 614(c) 23,565
----------- ------------ --------------- -----------
Total operating expenses........................... 72,165 105,118 (7,078) 170,205
----------- ------------ --------------- -----------
Net operating revenue.............................. 17,362 9,837 7,078 34,277
----------- ------------ --------------- -----------
Other income (expenses):
Interest............................................. (12,459) (8,831) 19,551(d) (34,444)
(32,705)(e)
Other, net........................................... 5,928 1,214 (581)(f) 6,561
----------- ------------ --------------- -----------
Total other income (expenses), net................. (6,531) (7,617) (13,735) (27,883)
----------- ------------ --------------- -----------
Earnings before income taxes (benefit)............. 10,831 2,220 (6,657) 6,394
Federal and state income taxes (benefit)............... 4,440 705 (2,370)(g) 2,775
----------- ------------ --------------- -----------
Earnings from continuing operations before preferred
dividends............................................. 6,391 1,515 (4,287) 3,619
Preferred dividends.................................... 2,500 (2,500)(h)
----------- ------------ --------------- -----------
Earnings from continuing operations available for
common stock.......................................... $ 3,891 $ 1,515 $ (1,787) $ 3,619
----------- ------------ --------------- -----------
----------- ------------ --------------- -----------
Earnings from continuing operations per common share... $ .74 $ .50
----------- -----------
----------- -----------
Weighted average shares outstanding.................... 5,259,314 2,000,000(i) 7,259,314
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
PF-4
<PAGE>
SOUTHERN UNION COMPANY
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
The following are adjustments to the Pro Forma Statements of Operations to
reflect (i) the issuance of 2,000,000 shares of Common Stock in the Rights
Offering, (ii) the completion of the Missouri Acquisition, including the sale of
Senior Debt Securities to fund such Acquisition and (iii) the sale of Senior
Debt Securities to refinance certain short-term debt, current maturities of
long-term debt and certain long-term debt outstanding at September 30, 1993.
(a) Reflects the adjustment to operations, maintenance and general for certain
anticipated cost savings resulting from the consolidation of operations and
corporate functions, the integration of corporate management and the
elimination of certain other duplicate administrative functions.
(b) Reflects amortization of the estimated excess purchase price over the
historical book carrying value of the assets acquired of the Missouri
Business on a straight line basis over a 30 year period.
(c) Reflects depreciation expense related to the purchase of additional
equipment over their estimated useful lives. See note (a) of Notes to Pro
Forma Balance Sheet.
(d) Reflects the removal of historical interest expense of the Missouri
Business, the elimination of interest expense associated with the borrowings
on the revolving credit facility used for the purchase and redemption of
Southern Union preferred stock, the elimination of historical interest
expense associated with the refinancing of $20.0 million of 10 1/8% notes
due 1994 and the elimination of historical interest expense associated with
the refinancing of $50.0 million of 10.5% debentures due 2017, $10.0 million
of 9.45% notes due 2004 and $25.0 million of 10% notes due 2012.
(e) Reflects interest expense on $430.3 million of the $475.0 million of Senior
Debt Securities at an annual interest rate of 7.60%. The difference of $44.7
million of Senior Debt Securities to be sold and used to refinance certain
short-term borrowings, including those used to fund the Rio Grande
Acquisition (which transaction closed on September 30, 1993), and purchase
estimated net capital expenditures to be incurred by the Missouri Business
subsequent to September 30, 1993 and prior to closing, and related debt
issuance costs were assumed to have occurred on September 30, 1993. As a
result, interest expense associated with these borrowings is not reflected
in the Pro Forma Statements of Operations.
(f) Reflects the amortization of debt issuance costs of approximately $4.2
million associated with the sale of $475.0 million of Senior Debt
Securities, a $3.3 million premium on the early extinguishment of $50.0
million of 10.5% debentures due 2017 and a $10.4 million premium on the
early extinguishment of $10.0 million of 9.45% notes due 2004 and $25.0
million of 10% notes due 2012 on a straight line basis over the life of the
new debt. See note (e) above.
PF-5
<PAGE>
SOUTHERN UNION COMPANY
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS (CONTINUED)
(g) Reflects the income tax provision (benefit) associated with the pro forma
adjustments calculated using the applicable statutory state income tax rates
and the statutory federal income tax rate of 35% for the nine months ended
September 30, 1993, 34.75% for the twelve months ended September 30, 1993
and 34% for the year ended December 31, 1992. The 34.75% rate for the twelve
months ended September 30, 1993 is a weighted average of two statutory rates
in effect during the twelve month period.
Income tax expense, on a pro forma combined basis, differs from the amount
computed when applying the applicable statutory federal income tax rates to
earnings before income taxes. The reasons for the differences are as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
YEAR ENDED NINE MONTHS ENDED ENDED SEPTEMBER
DECEMBER 31, 1992 SEPTEMBER 30, 1993 30, 1993
----------------- ------------------ ------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Computed "expected" tax expense.............. $ 2,174 $ 1,441 $ 5,401
Items for which there are no tax
consequences, principally amortization of
additional purchase cost assigned to utility
plant....................................... 1,025 576 809
Amortization of excess deferred income
taxes....................................... (55) (233) (300)
Flow through of depreciation expense......... 540 (37) 150
Amortization of investment tax credit........ (457) (249) (332)
Adjustment of tax reserve.................... (409) (409)
Adjustment of prior year provision........... (322) (322)
Tax loss on sale of real estate in excess of
book loss................................... (322) (322)
Other........................................ 192 81
------- ------- -------
$ 2,775 $ 1,089 $ 4,756
------- ------- -------
------- ------- -------
</TABLE>
(h) Reflects the elimination of preferred stock dividends resulting from the
purchase and redemption of all outstanding Southern Union preferred stock in
March and June 1993.
(i) Reflects the issuance of 2,000,000 shares of Common Stock in the Rights
Offering.
PF-6
<PAGE>
SOUTHERN UNION COMPANY
PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1993
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA
SOUTHERN MISSOURI ------------------------------
UNION BUSINESS ADJUSTMENTS COMBINED
------------ ------------ ---------------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Property, plant and equipment......................... $ 372,757 $ 416,703 $ 11,950(a) $ 811,410
10,000(b)
Less accumulated depreciation and amortization........ (141,546) (125,460) (267,006)
------------ ------------ ---------------- ------------
231,211 291,243 21,950 544,404
Additional purchase cost assigned to utility plant,
net.................................................. 92,645 44,437(c) 137,082
------------ ------------ ---------------- ------------
Net property, plant and equipment................... 323,856 291,243 66,387 681,486
Current assets........................................ 40,440 17,563 58,003
Deferred charges and other assets..................... 34,751 10,398 17,792(d) 104,581
41,640(e)
------------ ------------ ---------------- ------------
Total............................................. $ 399,047 $ 319,204 $ 125,819 $ 844,070
------------ ------------ ---------------- ------------
------------ ------------ ---------------- ------------
<CAPTION>
STOCKHOLDERS' EQUITY AND LIABILITIES
<S> <C> <C> <C> <C>
Common stockholders' equity:
Common stock........................................ $ 5,304 $ 2,000(f) $ 7,304
Premium on capital stock............................ 144,925 47,500(f) 192,425
Retained earnings................................... 492 492
Less treasury stock, at cost........................ (794) (794)
Equity in net assets acquired....................... $ 288,181 (288,181)(g)
------------ ------------ ---------------- ------------
Total common stockholders' equity................... 149,927 288,181 (238,681) 199,427
Long-term debt........................................ 89,122 475,000(h) 479,122
(50,000)(h)
(25,000)(h)
(10,000)(h)
Current liabilities and current maturities of
long-term debt....................................... 128,399 25,174 15,166(i) 89,433
(28,256)(j)
(31,050)(j)
(20,000)(k)
Deferred credits and other liabilities................ 10,384 5,849 38,640(l) 54,873
Accumulated deferred income taxes..................... 21,215 21,215
Commitments and contingencies......................... -- -- --
------------ ------------ ---------------- ------------
Total............................................. $ 399,047 $ 319,204 $ 125,819 $ 844,070
------------ ------------ ---------------- ------------
------------ ------------ ---------------- ------------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed balance sheet.
PF-7
<PAGE>
SOUTHERN UNION COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The following are adjustments to the Pro Forma Balance Sheet as of September
30, 1993 to reflect (i) the issuance of 2,000,000 shares of Common Stock in the
Rights Offering, (ii) the completion of the Missouri Acquisition, including the
sale of Senior Debt Securities to fund such Acquisition, and (iii) the sale of
Senior Debt Securities to refinance certain short-term debt, current maturities
of long-term debt and certain long-term debt outstanding as of September 30,
1993:
(a) Reflects the purchase accounting adjustments of $4.4 million to record
acquired assets at their estimated fair market value, and estimated
additional expenditures to purchase non-transferable leases on automobiles
of $4.3 million and data processing equipment and software of $3.3 million.
(b) Reflects the recording of the purchase of estimated net capital expenditures
to be incurred by the Missouri Business subsequent to September 30, 1993 and
prior to closing as per the Missouri Asset Purchase Agreement.
(c) Reflects the estimated excess of the purchase price over the historical book
carrying value of the assets acquired of the Missouri Business of $44.4
million.
(d) Reflects the capitalization of estimated debt issuance costs associated with
the sale of $475.0 million of Senior Debt Securities and premiums on the
early extinguishment of $85.0 million of long-term debt to be amortized on a
straight line basis over the life of the new debt. See note (h) below.
(e) Reflects the recording of (i) a regulatory asset of $38.6 million
representing the deferral of the actuarially calculated accumulated
post-retirement benefit obligation assumed in the purchase and (ii) a $3.0
million contribution to the Missouri Business' employees' qualified defined
benefit plans in excess of the minimum required contribution under the
Internal Revenue Code Section 412, as determined by the plans' actuary,
pursuant to the MPSC Stipulation. See note (l) below and the "Accounting
Pronouncements" note included in Notes to the Missouri Business' Interim
Financial Statements included elsewhere herein.
(f) Reflects Southern Union's receipt of $50.0 million in gross proceeds from
the completion of the Rights Offering, less approximately $0.5 million in
estimated stock issuance costs, assuming 2,000,000 shares of Common Stock
are issued in the Rights Offering at $25.00 per share.
(g) Reflects the elimination of the equity in the Missouri Business net assets
acquired.
(h) Reflects the sale of Senior Debt Securities totalling $475.0 million and the
refinancing of $50.0 million of 10.5% debentures due 2017, $10.0 million of
9.45% notes due 2004 and $25.0 million of 10% notes due 2012.
(i) Reflects the recording of certain liabilities of $15.2 million resulting
from the acquisition transactions including the purchase of non-transferable
leases on automobiles of $4.3 million, the purchase of data processing
equipment and software of $3.3 million, a $3.0 million contribution to the
Missouri Business' employees' qualified defined benefit plans (see note (e)
above), and the recording of severance accruals of approximately $2.4
million and other estimated liabilities and contingencies associated with
the acquisition of approximately $2.2 million.
(j) Reflects the utilization of a portion of the proceeds from the sale of
Senior Debt Securities to retire borrowings on the Company's revolving
credit facility, including borrowings of $31.1 million for the Rio Grande
Acquisition and borrowings used for the purchase and redemption of preferred
stock.
(k) Reflects the utilization of a portion of the proceeds from the sale of
Senior Debt Securities for the repayment of certain current maturities of
long-term debt.
(l) Reflects the recording of the actuarially calculated accumulated
post-retirement benefit obligation of $38.6 million. See note (e) above.
PF-8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES TO WHICH IT RELATES, OR AN OFFER TO OR
SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE THEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Use of Proceeds................................ S-2
Ratio of Earnings to Fixed Charges............. S-2
Description of the Senior Notes................ S-2
Underwriting................................... S-5
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference..................................... 2
The Company.................................... 3
The Missouri Acquisition....................... 4
Use of Proceeds................................ 6
Ratio of Earnings to Fixed Charges............. 6
Capitalization................................. 7
Unaudited Pro Forma Combined Condensed
Financial Information......................... 8
Selected Historical Financial Information...... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 26
Description of the Senior Debt Securities...... 37
Plan of Distribution........................... 51
Legal Matters.................................. 52
Experts........................................ 52
Index to Financial Statements.................. F-1
</TABLE>
$475,000,000
SOUTHERN UNION COMPANY
7.60% SENIOR NOTES DUE 2024
-----------------
PROSPECTUS SUPPLEMENT
-----------------
MERRILL LYNCH & CO.
SMITH BARNEY SHEARSON INC.
JANUARY 18, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
