<PAGE>
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------------------
FORM 10-Q
For the quarterly period ended
December 31, 1994
Commission File No. 1-6407
--------------------
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-0571592
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
504 Lavaca Street, Eighth Floor 78701
Austin, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (512) 477-5981
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which registered
------------------- -----------------------------------------
Common Stock, par value American Stock Exchange
$1 per share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
The number of shares of the registrant's Common Stock outstanding
on January 26, 1995 was 11,459,559.
=================================================================
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
December 31, 1994
Index
PART I. FINANCIAL INFORMATION Page(s)
Item 1. Financial Statements
Statements of consolidated operations -
three, six and twelve months ended
December 31, 1994 and 1993
Consolidated balance sheet -
December 31, 1994 and 1993 and
June 30, 1994
Statement of common stockholders' equity -
six months ended December 31, 1994 and
and twelve months ended June 30, 1994
Statements of consolidated cash flows -
three, six and twelve months ended
December 31, 1994 and 1993
Notes to consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(See "CONTINGENCIES" under Notes to Consolidated
Financial Statements)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 -- Computation of primary and fully
diluted earnings per share
(b) Exhibit 27 -- Financial Data Schedule
(c) Reports on Form 8-K -- None
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
Three Months Ended December 31,
-------------------------------
1994 1993
---------- ----------
(thousands of dollars, except
shares and per share amounts)
Operating revenues . . . . . . . . $ 145,497 $ 74,465
Gas purchase costs . . . . . . . . 77,634 42,518
--------- ---------
Operating margin. . . . . . . . 67,863 31,947
--------- ---------
Operating expenses:
Operating, maintenance and
general. . . . . . . . . . . 30,282 14,787
Taxes, other than on income . . 9,930 4,559
Depreciation and amortization . 8,191 4,156
--------- ---------
Total operating expenses . . 48,403 23,502
--------- ---------
Net operating revenues . . . 19,460 8,445
--------- ---------
Other income (expenses):
Interest on long-term debt. . . (9,367) (2,844)
Other interest. . . . . . . . . (959) (1,008)
Other, net. . . . . . . . . . . 801 2,729
--------- ---------
Total other expenses, net. . (9,525) (1,123)
--------- ---------
Earnings before income taxes . . . 9,935 7,322
Federal and state income taxes . . 3,377 2,581
--------- ---------
Net earnings available for
common stock. . . . . . . . . . $ 6,558 $ 4,741
========= =========
Net earnings per common share. . . $ .57 $ .57
========= =========
Weighted average shares
outstanding . . . . . . . . . . 11,455,142 8,367,321
========== =========
See accompanying notes to the consolidated financial statements.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
Six Months Ended December 31,
-----------------------------
1994 1993
---------- ----------
(thousands of dollars, except
shares and per share amounts)
Operating revenues. . . . . . . . . $ 214,611 $ 105,601
Gas purchase costs. . . . . . . . . 106,459 56,854
--------- ---------
Operating margin . . . . . . . . 108,152 48,747
--------- ---------
Operating expenses:
Operating, maintenance and
general . . . . . . . . . . . 56,879 26,283
Taxes, other than on income. . . 16,560 6,960
Depreciation and amortization. . 16,209 7,635
--------- ---------
Total operating expenses. . . 89,648 40,878
--------- ---------
Net operating revenues. . . . 18,504 7,869
--------- ---------
Other income (expenses):
Interest on long-term debt . . . (18,735) (5,732)
Other interest . . . . . . . . . (1,494) (1,544)
Other, net . . . . . . . . . . . 2,336 4,820
--------- ---------
Total other expenses, net . . (17,893) (2,456)
--------- ---------
Earnings before income taxes. . . . 611 5,413
Federal and state income taxes. . . 221 1,926
--------- ---------
Net earnings available for
common stock . . . . . . . . . . $ 390 $ 3,487
========= =========
Net earnings per common share . . . $ .03 $ .42
========= =========
Weighted average shares
outstanding. . . . . . . . . . . 11,452,168 8,319,176
========== =========
See accompanying notes to the consolidated financial statements.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
Twelve Months Ended December 31,
--------------------------------
1994 1993
---------- ----------
(thousands of dollars, except
shares and per share amounts)
Operating revenues. . . . . . . . $ 483,574 $ 209,005
Gas purchase costs. . . . . . . . 260,733 110,384
--------- ---------
Operating margin . . . . . . . 222,841 98,621
--------- ---------
Operating expenses:
Operating, maintenance and
general . . . . . . . . . . 110,262 50,076
Taxes, other than on income. . 39,371 14,365
Depreciation and amortization. 30,494 14,416
--------- ---------
Total operating expenses. . 180,127 78,857
--------- ---------
Net operating revenues. . . 42,714 19,764
--------- ---------
Other income (expenses):
Interest on long-term debt . . (36,571) (11,535)
Other interest . . . . . . . . (1,846) (2,212)
Other, net . . . . . . . . . . 4,462 5,571
--------- ---------
Total other expenses, net . (33,955) (8,176)
--------- ---------
Earnings before income taxes. . . 8,759 11,588
Federal and state income taxes. . 3,480 3,855
--------- ---------
Earnings before preferred
dividends. . . . . . . . . . . 5,279 7,733
Preferred dividends . . . . . . . -- (843)
--------- ---------
Net earnings available for
common stock . . . . . . . . . $ 5,279 $ 6,890
========= =========
Net earnings per common share . . $ .46 $ .83
========= =========
Weighted average shares
outstanding. . . . . . . . . . 11,445,338 8,286,260
========== =========
See accompanying notes to the consolidated financial statements.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, June 30,
----------------------
1994 1993 1994
---------- ---------- ----------
(thousands of dollars)
Property, plant and equipment:
Plant in service. . . . . . $ 839,068 $ 374,963 $ 813,055
Construction work in
progress . . . . . . . . 28,240 2,080 21,991
--------- --------- ---------
867,308 377,043 835,046
Less accumulated deprecia-
tion and amortization. . (287,960) (144,491) (279,120)
--------- --------- ---------
579,348 232,552 555,926
Additional purchase cost
assigned to utility
plant, net . . . . . . . 165,983 92,991 167,374
--------- --------- ---------
Net property, plant and
equipment. . . . . . . . 745,331 325,543 723,300
--------- --------- ---------
Current assets:
Cash and cash equivalents . -- 2,918 5,881
Accounts receivable,
billed and unbilled. . . 85,391 46,292 48,273
Inventories, principally
at average cost. . . . . 38,990 2,950 23,612
Prepayments and other . . . 2,349 2,077 1,621
--------- --------- ---------
Total current assets . . 126,730 54,237 79,387
--------- --------- ---------
Deferred charges . . . . . . . 77,973 16,160 74,367
Real estate. . . . . . . . . . 10,866 11,718 11,983
Other. . . . . . . . . . . . . 1,820 8,549 1,913
--------- --------- ---------
Total . . . . . . . . . . . $ 962,720 $ 416,207 $ 890,950
========= ========= =========
See accompanying notes to the consolidated financial statements.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
December 31, June 30,
----------------------
1994 1993 1994
---------- ---------- ----------
(thousands of dollars)
Common stockholders' equity:
Common stock, $1 par value;
authorized 50,000,000
shares; issued 11,509,294
shares. . . . . . . . . . $ 11,509 $ 7,306 $ 11,497
Premium on capital stock . . 198,355 192,298 198,272
Less treasury stock,
at cost . . . . . . . . . (794) (794) (794)
Retained earnings. . . . . . 390 3,128 --
--------- --------- ---------
Total common stockholders'
equity. . . . . . . . . . 209,460 201,938 208,975
--------- --------- ---------
Long-term debt. . . . . . . . . 478,722 89,019 479,048
--------- --------- ---------
Current liabilities:
Long-term debt due
within one year . . . . . 956 20,555 889
Notes payable. . . . . . . . 44,000 20,100 --
Accounts payable . . . . . . 52,359 27,149 44,631
Federal, state and
local taxes . . . . . . . 10,757 10,982 8,706
Accrued interest . . . . . . 15,566 3,028 15,579
Customer deposits. . . . . . 13,938 3,988 13,029
Deferred gas purchase costs
due to customers. . . . . 23,125 2,648 8,509
Other. . . . . . . . . . . . 12,199 6,309 12,435
--------- --------- ---------
Total current
liabilities. . . . . . 172,900 94,759 103,778
--------- --------- ---------
Deferred credits and other
liabilities. . . . . . . . . 72,258 10,882 69,437
Accumulated deferred income
taxes. . . . . . . . . . . . 29,380 19,609 29,712
Commitments and contingencies . -- -- --
--------- --------- ---------
Total. . . . . . . . . . . . $ 962,720 $ 416,207 $ 890,950
========= ========= =========
See accompanying notes to the consolidated financial statements.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF COMMON STOCKHOLDERS' EQUITY
Trea-
Common Premium sury
Stock on Stock, Retained
$1 Par Capital at Earnings
Value Stock Cost (Deficit) Total
------- ------- ------ --------- -------
(thousands of dollars)
Balance July 1,
1993. . . . . . . $ 5,302 $144,902 $(794) $ 1,744 $151,154
Net earnings. . . -- -- -- 8,378 8,378
Rights Offering
for 2,000,000
shares of
common stock . 2,000 47,351 -- -- 49,351
Three-for-two
stock split. . 3,628 (3,628) -- -- --
Stock dividend. . 545 9,524 -- (10,069) --
Exercise of stock
options. . . . 22 186 -- -- 208
Stock issuance
costs and
other. . . . . -- (63) -- (53) (116)
------- -------- ----- -------- --------
Balance June 30,
1994. . . . . . . 11,497 198,272 (794) -- 208,975
Net earnings. . . -- -- -- 390 390
Exercise of
stock options. 12 83 -- -- 95
------- -------- ----- -------- --------
Balance December 31,
1994. . . . . . . $11,509 $198,355 $(794) $ 390 $209,460
======= ======== ===== ======== ========
See accompanying notes to the consolidated financial statements.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
Three Months Ended December 31,
-------------------------------
1994 1993
---------- ----------
(thousands of dollars)
Net cash flow from operating
activities. . . . . . . . . . $ 15,797 $ 8,326
-------- --------
Cash flow from (used in)
investing activities:
Additions to property,
plant and equipment . . (22,316) (6,589)
Acquisition of operations,
net of cash received. . -- (2,566)
Net change in deferred
charges and deferred
credits . . . . . . . . 95 (3,937)
Other, net . . . . . . . . 283 (84)
-------- --------
Net cash flows used
in investing
activities . . . . . (21,938) (13,176)
-------- --------
Cash flow from (used in)
financing activities:
Net borrowings (pay-
ments) under
revolving credit
facility. . . . . . . . 2,600 (50,300)
Repayment of debt. . . . . (169) (249)
Proceeds from rights
offering, net . . . . . -- 49,351
Credit facility renewal
fee . . . . . . . . . . -- (1,050)
Bank checks outstanding,
less balance per bank . 1,725 --
Other, net . . . . . . . . 59 297
-------- --------
Net cash flows from
(used in) financing
activities . . . . . 4,215 (1,951)
-------- --------
Decrease in cash and cash
equivalents . . . . . . . . . (1,926) (6,801)
Cash and cash equivalents at
beginning of period . . . . . 1,926 9,719
-------- --------
Cash and cash equivalents
at end of period. . . . . . . $ -- $ 2,918
======== ========
Supplemental disclosures of
cash flow information:
Cash paid during the
period for:
Interest . . . . . . $ 733 $ 4,307
========= =========
Income taxes
(refunded). . . . $ (22) $ 2,409
======== ========
See accompanying notes to the consolidated financial statements.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
Six Months Ended December 31,
-----------------------------
1994 1993
---------- ----------
(thousands of dollars)
Net cash flow used in operating
activities. . . . . . . . . . . $ (12,547) $ (2,073)
--------- ---------
Cash flow from (used in)
investing activities:
Additions to property,
plant and equipment . . . (36,605) (11,202)
Acquisition of operations,
net of cash received. . . (1,072) (35,285)
Leasehold improvements . . . (249) (1,112)
Net change in deferred
charges and deferred
credits . . . . . . . . . (1,378) (590)
Other, net . . . . . . . . . 531 929
--------- ---------
Net cash flows used in
investing activities . (38,773) (47,260)
--------- ---------
Cash flow from (used in)
financing activities:
Net borrowings (payments)
under revolving credit
facility. . . . . . . . . 44,000 (8,100)
Repayment of debt. . . . . . (381) (461)
Proceeds from rights
offering, net . . . . . . -- 49,351
Credit facility renewal fee. -- (1,050)
Bank checks outstanding,
less balance per bank . . 1,725 --
Other, net . . . . . . . . . 95 333
--------- ---------
Net cash flows from
financing activities . 45,439 40,073
--------- ---------
Decrease in cash and cash
equivalents . . . . . . . . . . (5,881) (9,260)
Cash and cash equivalents at
beginning of period . . . . . . 5,881 12,178
--------- ---------
Cash and cash equivalents
at end of period. . . . . . . . $ -- $ 2,918
========= =========
Supplemental disclosures of
cash flow information:
Cash paid during the
period for:
Interest . . . . . . . $ 19,231 $ 7,159
========= =========
Income taxes
(refunded). . . . . $ (18) $ 5,435
========= =========
See accompanying notes to the consolidated financial statements.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
Twelve Months Ended December 31,
--------------------------------
1994 1993
---------- ----------
(thousands of dollars)
Net cash flow from operating
activities. . . . . . . . . . $ 88,630 $ 15,017
--------- ---------
Cash flow from (used in)
investing activities:
Additions to property,
plant and equipment . . (64,738) (18,532)
Acquisition of operations,
net of cash received. . (406,364) (35,559)
Leasehold improvements . . (639) (2,018)
Proceeds from sale of
discontinued operation. -- 16,493
Collection of note
receivable. . . . . . . 6,000 --
Net change in deferred
charges and deferred
credits . . . . . . . . (1,069) (993)
Other, net . . . . . . . . 827 757
--------- ---------
Net cash flows used
in investing
activities . . . . . (465,983) (39,852)
--------- ---------
Cash flow from (used in)
financing activities:
Net borrowings under
revolving credit
facility. . . . . . . . 23,900 6,200
Repayment of debt. . . . . (107,227) (938)
Issuance of debt . . . . . 475,000 --
Premium on early
extinguishment of debt. (13,715) --
Debt issuance costs. . . . (5,439) --
Proceeds from rights
offering, net . . . . . -- 49,351
Redemption of preferred
stock . . . . . . . . . -- (25,272)
Payment of preferred
dividends . . . . . . . -- (843)
Credit facility renewal
fee . . . . . . . . . . -- (1,050)
Bank checks outstanding,
less balance per bank . 1,725 --
Other, net . . . . . . . . 191 216
--------- ---------
Net cash flows from
financing
activities . . . . . 374,435 27,664
--------- ---------
Increase (decrease) in cash
and cash equivalents. . . . . (2,918) 2,829
Cash and cash equivalents at
beginning of period . . . . . 2,918 89
--------- ---------
Cash and cash equivalents
at end of period. . . . . . . $ -- $ 2,918
========= =========
Supplemental disclosures
of cash flow information:
Cash paid during the
period for:
Interest . . . . . . $ 24,034 $ 12,820
========= =========
Income taxes . . . . $ 367 $ 9,691
========= =========
See accompanying notes to the consolidated financial statements.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion
of management, reflect all adjustments necessary for a fair
presentation of the results of operations for such periods.
Because of the seasonal nature of the Company's operations, the
results of operations for any interim period are not necessarily
indicative of results for the full year.
As described below, the Company acquired Missouri Gas Energy on
January 31, 1994. The earnings from operations of Missouri Gas
Energy are consolidated with the Company subsequent to that date.
Thus the Company's consolidated results of operations for the
twelve-month period ended December 31, 1994, which exclude Missouri
Gas Energy's operations during the month of January 1994, are not
indicative of results that would necessarily be achieved for a full
year. Likewise, Missouri Gas Energy's rate structure collects a
greater percentage of its operating margin in the winter heating
season of which January historically contributes approximately
17% of the annual operating margin to the Missouri operations.
In addition, the timing of the acquisition of Missouri Gas
Energy also substantially impacts the comparability of the
three-, six- and twelve-month pariods ended December 31, 1994 and
1993.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in Southern Union
Company's ("Southern Union" or the "Company") Transition Report on
Form 10-K for the fiscal year ended June 30, 1994. Certain prior
period amounts have been reclassified to conform with the current
period presentation.
CHANGE IN FISCAL YEAR
On May 25, 1994, Southern Union's Board of Directors approved a
change in the Company's fiscal year-end from December 31 to June 30
effective with the period ended June 30, 1994. The new fiscal year
more closely conforms the Company's reporting of its financial
condition and results of operations to its seasonal business cycle.
ACQUISITIONS
Missouri Gas Energy
On January 31, 1994, the Company consummated the acquisition of
Missouri Gas Energy (the "Missouri Acquisition") from Western
Resources, Inc. ("Western Resources") for $400,300,000 in cash.
The final determination of the purchase price is currently subject
to arbitration. The Company does not anticipate that the outcome
of the arbitration will have a material impact on its financial
position or results of operations. See "Contingencies." The
Missouri Acquisition was financed with proceeds from the sale of
$475,000,000 of 7.60% Senior Notes due 2024 (the "Senior Debt
Securities") completed on January 31, 1994 and net proceeds from
the sale of $50,000,000 of common stock in a subscription rights
offering (the "Rights Offering") completed on December 31, 1993.
See "Capitalization." The assets of Missouri Gas Energy were
included in the Company's consolidated balance sheet at January 31,
1994 and earnings from the operations of Missouri Gas Energy have
been included in the statement of consolidated operations since
February 1, 1994. Missouri Gas Energy serves approximately 468,000
customers in 147 communities in central and western Missouri,
including Kansas City, St. Joseph, Joplin and Monett. The
acquisition was accounted for using the purchase method. The
additional purchase cost assigned to utility plant of approximately
$78,000,000 reflects the excess of the purchase price over the
historical book carrying value of net assets acquired plus certain
accounting entries to record certain preacquisition contingencies.
The additional purchase cost assigned to utility plant is amortized
on a straight-line basis over forty years.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rio Grande Valley
On September 30, 1993, the Company acquired Rio Grande Valley Gas
Company ("Rio Grande") for $30,500,000. Rio Grande serves
approximately 79,000 customers in the south Texas counties of
Willacy, Cameron and Hidalgo. Rio Grande's service area includes
32 towns and cities along the Mexico border, including Harlingen,
McAllen and Brownsville (the southernmost city in the continental
U.S.). The Company initially funded the purchase with borrowings
from its revolving credit facility which were subsequently repaid
with proceeds from the sale of the Senior Debt Securities completed
on January 31, 1994, and the Rights Offering completed on December
31, 1993. The assets of Rio Grande were included in the
consolidated balance sheet at September 30, 1993 and earnings from
operations of Rio Grande has been included in the statement of
consolidated operations beginning October 1, 1993. The acquisition
was accounted for using the purchase method. The additional
purchase cost assigned to utility plant of approximately
$11,644,000 reflects the excess of the purchase price over the
historical book carrying value of the net assets acquired. The
additional purchase cost assigned to utility plant is amortized on
a straight-line basis over forty years.
PRO FORMA CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
The following unaudited pro forma condensed statement of
consolidated operations for the three and twelve months ended
December 31, 1994 and 1993 is presented as though the following
events had been consummated at the beginning of the periods
presented: (i) the Missouri and Rio Grande Acquisitions; (ii) the
sale of the Senior Debt Securities; (iii) the completion of the
Rights Offering; (iv) the refinancing of certain short-term and
long-term debt; and (v) the elimination of preferred stock
dividends resulting from the purchase and redemption of all
outstanding preferred stock. The pro forma financial information
is not necessarily indicative of the results which would have
actually been obtained had the acquisitions of Missouri Gas Energy
and Rio Grande, the Rights Offering, the sale of Senior Debt
Securities or the refinancings been completed as of the assumed
date for the periods presented or which may be obtained in the
future.
Three Months Ended Twelve Months Ended
December 31, December 31,
-------------------- --------------------
1994 1993 1994 1993
--------- --------- --------- ---------
(thousands of dollars, except per
share amounts)
Operating revenues. . $145,497 $189,325 $559,722 $579,548
Gas purchase costs. . 77,634 119,182 314,807 340,047
-------- -------- -------- --------
Operating margin . 67,863 70,143 244,915 239,501
Operating expenses. . 48,403 50,922 192,885 190,417
-------- -------- -------- --------
Net operating
revenues . . . . . 19,460 19,221 52,030 49,084
Interest on long-
term debt. . . . . (9,367) (9,189) (37,658) (36,915)
Other income
(expense), net . . (158) 1,720 1,822 5,179
-------- -------- -------- --------
Earnings before
income taxes. . 9,935 11,752 16,194 17,348
Federal and state
income taxes . . . 3,377 4,466 6,154 6,592
-------- -------- -------- --------
Net earnings
available for
common stock. . $ 6,558 $ 7,286 $ 10,040 $ 10,756
======== ======== ======== ========
Net earnings per
common share . . . $ .57 $ .64 $ .88 $ .94
======== ======== ======== ========
Weighted average
shares outstanding
(thousands). . . . 11,455 11,423 11,445 11,412
======== ======== ======== ========
Percent of normal
weather, based on
30-year average. . 78% 102% 84% 89%
======== ======== ======== ========
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma condensed statement of consolidated operations
includes adjustments that are based on assumptions and estimates
made by the Company's management regarding anticipated efficiencies
resulting from the combined operations, reductions in costs planned
by management, accruals for certain preacquisition contingencies
and the fair market value of certain assets acquired in the
Missouri Acquisition.
FINANCIAL CONDITION
As a result of the Missouri Acquisition on January 31, 1994,
certain balance sheet amounts have changed significantly. Details
of specific line item classifications on the balance sheet as of
December 31, 1994 are set forth below.
Inventories. Inventories consist principally of gas in underground
- -----------
storage and materials and supplies. Gas in underground storage of
approximately $31,084,000 at December 31, 1994 consists of
approximately 14,381,000 MMBtu's of gas attributable to the
operations of Missouri Gas Energy.
Deferred Charges. Deferred charges consist principally of: (i)
- ----------------
unamortized debt issuance costs and premiums on early
extinguishment of debt of approximately $24,500,000; (ii) a
regulatory asset of $38,300,000 for the deferral of the actuarially
calculated accumulated postretirement benefit obligation assumed in
the purchase of Missouri Gas Energy; (iii) a regulatory asset of
approximately $7,475,000 for the deferral of those costs and
expenditures, including depreciation, property taxes and associated
carrying costs, related to a major gas safety program in the
service territories of Missouri Gas Energy; and (iv) approximately
$4,783,000 in take or pay costs associated with Missouri Gas
Energy. See "Capitalization" and "Utility Regulations and Rates."
Deferred Gas Purchase Costs Due to Customers. Deferred gas
- --------------------------------------------
purchase costs due to customers increased due to the gas purchases
and recovery activity since the acquisition of Missouri Gas Energy.
The account also includes a refund of approximately $10,330,000
from a gas supplier of Missouri Gas Energy that will be returned to
its customers.
Deferred Credits and Other Liabilities. Deferred credits and other
- --------------------------------------
liabilities consist principally of non-current liabilities for:
(i) customer advances for construction of approximately $9,559,000;
(ii) approximately $38,300,000 for the deferral of the actuarially
calculated accumulated post-retirement benefit obligation,
previously discussed; (iii) employee severance and other costs
associated with an early retirement program for employees of
Missouri Gas Energy of approximately $9,900,000; (iv) other
Missouri Gas Energy preacquisition contingencies of approximately
$7,867,000; and (v) approximately $4,783,000 in take or pay costs
associated with Missouri Gas Energy.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITALIZATION
First mortgage bonds and other long-term debt outstanding,
including current maturities, were as follows:
December 31, June 30,
1994 1994
------------ --------
(thousands of dollars)
First mortgage bonds:
11.5% due 2000 -- collateralized
by utility plant in service. . . . $ 1,700 $ 1,700
Other long-term debt:
7.60% Senior Notes due 2024 . . . . . 475,000 475,000
Other . . . . . . . . . . . . . . . . 2,978 3,237
--------- --------
Total debt . . . . . . . . . . . . . . . 479,678 479,937
Less current portion. . . . . . . . . 956 889
--------- --------
Total long-term debt . . . . . . . $ 478,722 $479,048
========= ========
On January 31, 1994, Southern Union completed the sale of the
Senior Debt Securities. The net proceeds from the sale of the
Senior Debt Securities, together with the net proceeds from the
Rights Offering and working capital from operations, were used to:
(i) fund the Missouri Acquisition; (ii) repay approximately
$59,300,000 of borrowings under the $100,000,000 revolving credit
facility previously used to fund the Rio Grande Acquisition and
repurchase all outstanding preferred stock; (iii) refinance, on
January 31, 1994, the $10,000,000 aggregate principal amount of
9.45% notes due January 31, 2004 and $25,000,000 aggregate
principal amount of 10% notes due January 31, 2012 and the related
premium of approximately $10,400,000 resulting from the early
extinguishment of such notes; (iv) refinance, on March 2, 1994,
$50,000,000 aggregate principal amount of 10.5% Sinking Fund
Debentures due May 15, 2017 and the related premium of
approximately $3,300,000 resulting from the early extinguishment of
such debentures; and (v) retire, on May 16, 1994, $20,000,000
aggregate principal amount of 10-1/8% notes.
CASH FLOW INFORMATION
Twelve Months Ended
December 31, 1994
-------------------
(thousands of dollars)
Non-cash assets (liabilities) acquired
other than cash:
Working capital. . . . . . . . . . . . $ 51,722
Property, plant and equipment, net . . 350,528
Other noncurrent assets. . . . . . . . 46,914
Noncurrent liabilities . . . . . . . . (42,800)
---------
$ 406,364
=========
Excluded from the statement of consolidated cash flows were the
following effects of non-cash investing and financing activities:
Three Months Ended Twelve Months Ended
December 31, 1994 December 31, 1994
------------------ -------------------
(thousands of dollars)
Other obligations
incurred. . . . . . . $ 4 $ 2,331
======== ========
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK DIVIDEND AND SPLIT
On May 25, 1994, Southern Union's Board of Directors declared a 5%
stock dividend, distributed on June 30, 1994 to stockholders of
record on June 14, 1994. A portion of the 5% stock dividend was
characterized as a distribution of capital due to the level of the
Company's retained earnings available for distribution as of the
declaration date. The 5% stock dividend is consistent with the
Board of Directors' approval in February 1994 of the commencement
of regular stock dividends of approximately 5% annually. In
addition, on February 11, 1994, the Board of Directors declared a
three-for-two stock split distributed in the form of a 50% stock
dividend on March 9, 1994, to stockholders of record on
February 23, 1994. Unless otherwise stated, all per share data
included in the accompanying consolidated financial statements
and in these Notes to Consolidated Financial Statements has
been restated to give effect to the stock dividend and stock
split.
UTILITY REGULATION AND RATES
Prior to the Missouri Acquisition, Western Resources was required
pursuant to a 1989 Missouri Public Service Commission ("MPSC")
order to undertake a major gas safety program in the service
territories of Missouri Gas Energy. Such activities included
replacement of company- and customer-owned gas service and yard
lines, the movement and resetting of meters, the replacement of
cast iron mains and the replacement and cathodic protection of bare
steel mains ("Missouri Safety Program"). In recognition of the
significant capital expenditures associated with this safety
program, the MPSC issued Western Resources certain Accounting
Authority Orders ("AAO") providing for the deferral, and subsequent
recovery through rates, of depreciation expenses, property taxes
and associated carrying costs related to the Missouri Safety
Program.
Missouri Gas Energy is required to continue the Missouri Safety
Program and has deferred depreciation expense, property taxes and
carrying costs associated with Missouri Gas Energy's investment in
the Missouri Safety Program as approved by the MPSC. The Company
has deferred approximately $915,000 and $1,543,000 related to
depreciation, property taxes and associated carrying costs on its
investment in this program for the three- and six-month periods,
respectively, ended December 31, 1994.
The continuation of the Missouri Safety Program will result in
significant levels of future capital expenditures. The Company
estimates incurring capital expenditures of approximately
$27,000,000 in fiscal 1995 related to this program.
CONTINGENCIES
Southern Union is aware of the possibility that it may become a
defendant in an action brought by the United States Environmental
Protection Agency ("EPA") under 42 U.S.C. Section 9607(a) for
reimbursement of costs associated with removing hazardous
substances from the site of a former coal gasification plant (the
"Pine Street Canal Site") in Burlington, Vermont. This knowledge
arises out of the existence of a prior action, United States v.
----------------
Green Mountain Power Corp., et al, Civil No. 88-307 (D. Vt.), in
- ---------------------------------
which Southern Union became involved as a third-party defendant
in January 1989. Green Mountain Power was an action under 42
U.S.C. Section 9607(a) by the federal government to recover
clean-up costs associated with the "Maltex Pond", which is part
of the Pine Street Canal Site. Two defendants in Green Mountain
Power, Vermont Gas Systems and Green Mountain Power Corp.,
claimed that Southern Union is the corporate successor to
People's Light and Power Corporation, an upstream corporate
parent of Green Mountain Power Corp. during the years 1928-1931.
Green Mountain Power was settled without admission or
determination of liability with respect to Southern Union by
order dated December 26, 1990. The EPA has since conducted
studies of the clean-up costs for the remainder of the Pine
Street Canal Site, but the ultimate costs are
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unknown at this time. On November 30, 1992, Southern Union
was named as a potentially responsible party in a special
notice letter from the EPA. On August 16, 1993, Southern
Union's participation in settlement discussions on technical
and allocation issues with the EPA was requested by Green
Mountain Power Corp., Vermont Gas Systems, Inc. and New
England Electric System (the "Gas Plant PRPs"). By letter
dated September 20, 1993, the Company informed the Gas Plant
PRPs of its reasons for its belief that it has no liability
for the site, including (1) that it is not a corporate
successor to any entity that owned or was an operator of the Pine
Street Canal Site during the period the coal gasification plant was
in operation, (2) that any claims against Peoples Light and Power
Corporation were discharged in that company's 1936 Plan of
- -----------
Reorganization, and (3) that Southern Union merged with a successor
to People's Light and Power Company, Inc., a separate company
-------
incorporated following the bankruptcy of Peoples Light and Power
Corporation. Should Southern Union be made party to any action
seeking recovery of remaining clean-up costs, the Company intends
to assert the foregoing defenses and to otherwise vigorously defend
against such an action. The Company has made demands of the
appropriate insurers that they assume the defense of and liability
for any such claim that may be asserted. The Company does not
believe the outcome of this matter will have a material adverse
effect on its financial position or results of operations.
Southern Union and Western Resources entered into an Environmental
Liability Agreement (the "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 Environmental Liability
Agreement provides for a tiered approach to the allocation of
substantially all liabilities under environmental laws that may
exist or arise with respect to Missouri Gas Energy. The
Environmental Liability 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 January 31, 1996, and are not
so reimbursed or recovered, Southern Union will be responsible for
the first $3,000,000, if any, of out-of-pocket costs and expenses
incurred to respond to and remediate any such environmental claim.
Thereafter, Western Resources would share one-half of the next
$15,000,000 of any such costs and expenses, and Southern Union
would be solely liable for any such costs and expenses in excess of
$18,000,000. Missouri Gas Energy owns or is otherwise associated
with a number of sites where manufactured gas plants were
previously operated. These plants were commonly used to supply gas
service in the late 19th and early 20th centuries, in certain cases
by corporate predecessors to Western Resources. By-products and
residues from manufactured gas could be located at these sites and
at some time in the future may require remediation by the EPA or
delegated state regulatory authority. By virtue of notice under
the Missouri Asset Purchase Agreement and its preliminary,
non-invasive review, the Company became aware prior to closing of
11 such sites in the service territory of Missouri Gas Energy.
Based on information reviewed thus far, it appears that neither
Western Resources nor any predecessor in interest ever owned or
operated at least three of those sites. Subsequent to the closing
of the Missouri Acquisition, as a result of an environmental audit,
the Company has discovered the existence of possibly six additional
sites in the service territory of Missouri Gas Energy. Southern
Union has so informed Western Resources. The Company does not know
if any of these additional sites were ever owned or operated by
Western Resources or any of its predecessors in interest. Western
Resources has informed the Company that it was notified in 1991 by
the EPA that it 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 on
September 15, 1994 that as of that date the EPA had 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 information available to management, 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.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 1, 1994 Southern Union filed two lawsuits in the United
States District Court for the Western District of Missouri.
Southern Union Company v. The Bishop Group, Ltd., et al., Civil
- --------------------------------------------------------
Action No. 94-0511-CV-W-8, involves a claim by the Company that two
purported agreements between the Company and the defendants are of
no force and effect. The first matter involves a letter agreement
between the Company and certain of the defendants pursuant to which
the defendants claim they are entitled to certain options for
business from the Company. The second matter involves an agreement
under which the Company purchases gas from certain of the
defendants. In the second matter, the Company also is seeking
damages for excessive charges which Missouri Gas Energy believes it
has incurred in the past. On September 1, 1994 the defendants
filed their answer and counterclaims in which they seek, among
other things, damages for alleged breach. The Company has
responded with various affirmative defenses. Southern Union
--------------
Company v. Western Resources, Inc., The Bishop Group, Ltd., et al.,
- ------------------------------------------------------------------
Civil Action No. 94-0509-CV-W-1, involves a claim by the Company
that it is entitled to be indemnified by Western Resources for any
and all costs and liabilities the Company may incur in connection
with certain gas transportation agreements purportedly assigned to
the Company at the closing of the Missouri Acquisition. In the
event Western Resources is not obligated to provide the
indemnification, the Company has also claimed that Western
Resources nevertheless is liable for any and all damages suffered
by the Company arising out of such agreements due to Western
Resources' fraud and misrepresentation regarding such agreements
prior to their assignment. The Company also has sued the
counterparties to the transportation agreements for a declaratory
judgment that the agreements themselves are of no force and effect.
Western Resources filed its answer, counterclaims and cross-claims
on August 1, 1994. Western Resources denied any responsibility to
the Company arising out of the transportation agreements. Western
Resources also has filed a cross-claim against the counterparties
to the agreements for a declaratory judgment that Western Resources
has fulfilled any responsibilities it ever had to the
counterparties under such agreements.
Western Resources also filed two counterclaims against Southern
Union seeking (i) the payment of certain amounts Western Resources
claims it is owed under the purchase price "true-up" procedures of
Article III of the Missouri Asset Purchase Agreement totaling
$7,100,000 and (ii) a declaratory judgment that substantially all
of the claims made by Southern Union against Western Resources
arising out of the purchase price "true-up" procedures of Article
III of the Missouri Asset Purchase Agreement were not subject to an
arbitration clause contained in that Agreement. On August 25,
1994, Southern Union replied to the counterclaims of Western
Resources with various affirmative defenses and raised
counterclaims of its own against Western Resources seeking (i)
enforcement of the arbitration provision in the Missouri Asset
Purchase Agreement, (ii) damages for breach by Western Resources of
its obligation to make certain payments under that agreement and
(iii) breach by Western Resources of various representations and
warranties. During December 1994, Southern Union and Western
Resources filed suggestions with the Court in support of their
respective positions on the arbitrability issue. On January 18,
1995, the Court granted Southern Union's motion to compel
arbitration of, and ordered Western Resources to arbitrate, all the
disputed purchase price items that Western Resources claimed were
not subject to arbitration. The Company expects there to be a
final determination of the purchase price pursuant to arbitration
by the beginning of the fourth quarter of fiscal 1995. Southern
Union is demanding a refund of approximately $12,000,000 of the
approximately $400,000,000 Southern Union paid to Western Resources
at the closing of the Missouri Acquisition, while Western Resources
is demanding an additional payment of approximately $7,100,000.
On August 10, 1994, the counterparties filed their answer, along
with counterclaims against Southern Union and cross-claims against
Western Resources. The counterparties allege, among other things,
various breaches by and conspiracy to breach between Southern Union
and Western Resources. On September 8, 1994, the Company replied
to the counterclaims of the counterparties with a number of
affirmative defenses. The Company also counterclaimed and
cross-claimed against the counterparties and Western Resources
respectively for tortious interference with business expectancy and
conspiracy. The Company has not yet quantified its damages other
than in connection with the purchase price dispute discussed
previously. The counterparties have alleged a preliminary
computation of
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
damages in the range of $196,000,000 to $270,000,000 against
Southern Union and Western Resources. The Company believes this
allegation to be meritless. The Company intends to vigorously
pursue all claims and to defend against all counterclaims in both
actions. The Company does not believe the outcome of this matter
will have a material adverse effect on its financial position or
results of operations.
Southern Union and its subsidiaries are parties to other legal
proceedings that its management considers to be the normal kinds of
actions to which an enterprise of its size and nature might be
subject, and not to be material to the Company's overall business
or financial condition and results of operations.
Pursuant to the terms of the Missouri Asset Purchase Agreement, the
Company agreed to assume the Missouri portion of certain
obligations of Western Resources related to a 1990 settlement of a
Wyoming Tight Sands anti-trust litigation. The settlement provided
for the refund of $126,000,000 over a 20-year period for certain
previous overcharges by certain gas suppliers. Approximately
$63,400,000 related to customers of Missouri Gas Energy. In 1991,
the MPSC approved a plan authorizing the refund of a lump sum
payment to Missouri Gas Energy's customers with the remaining
balance to be refunded over a ten-year period commencing in the
year 2002. To secure the refund of the settlement proceeds, the
MPSC authorized the establishment of an independently administered
trust to collect cash receipts under the Tight Sands settlement and
repay credit-facility borrowings used for the lump sum payment.
The Company is committed, under the Tight Sands settlement
agreement and the Missouri Asset Purchase Agreement, to take a
minimum of 55,300 MMBtu's per day from certain gas suppliers until
maturity of the trust's credit facility on December 31, 2001. In
addition, in the event the trust does not receive cash payments
from the gas suppliers as provided by the Tight Sands settlement
agreement, the Company is committed to pay its applicable
portion of the amount owed the lender of the credit-facility
borrowings. The Company's unpaid applicable portion of the amount
the trust owes the lender at December 31, 1994 was approximately
$8,900,000.
Under the order of the U. S. Federal Energy Regulatory Commission
("FERC") docket Nos. RP 94-296 and PR 95-3, Williams Natural Gas
Company, the primary pipeline providing gas to Missouri Gas
Energy, is seeking recovery of certain unrecovered deferred gas
costs of approximately $29,600,000. These costs were related to
gas deliveries prior to April 30, 1994. Missouri Gas Energy has
filed a proposed mechanism to recover these costs under case
GR 95-33 with the Missouri Public Service Commission ("MPSC").
The MPSC has not yet issued a final order regarding the recovery of
these costs, however, the Company believes that these costs will be
fully recovered from its Missouri customers.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Union Company is engaged in various activities in the
distribution of natural gas to residential, commercial, industrial,
agricultural and other customers in communities throughout Texas,
western Missouri and the Oklahoma panhandle. The Company's
principal line of business is the distribution of natural gas as a
public utility through Southern Union Gas Company and Missouri Gas
Energy, each of which is a division of the Company. In addition,
the Company operates interstate and intrastate natural gas pipeline
systems, markets natural gas to end-users, holds investments in
real estate, and markets and sells natural gas for natural gas
vehicles. Several of these business activities are subject to
regulation by federal, state or local authorities where the Company
operates. Thus, the Company's financial condition and results of
operations have been and will continue to be dependent upon the
receipt of adequate and timely adjustments in rates. In addition,
the Company's business is affected by seasonal weather impacts,
competitive factors within the energy industry and economic
development and residential growth in its service areas.
On January 31, 1994, Southern Union completed the acquisition of
Missouri Gas Energy (the "Missouri Acquisition"). As of December
31, 1994, Missouri Gas Energy served approximately 468,000
customers in 147 communities in central and western Missouri,
including Kansas City, St. Joseph, Joplin and Monett. In addition,
on September 30, 1993, the Company completed the acquisition of Rio
Grande Valley Gas Company (the "Rio Grande Acquisition") which
serves approximately 79,000 customers in south Texas. These
acquisitions were accounted for as purchases and, accordingly, the
operating results of the acquired companies have been included in
the consolidated operating results after the respective dates of
acquisition. See "Acquisitions" in the Notes to Consolidated
Financial Statements for the three months ended December 31, 1994,
included herein. In addition, since the majority of Missouri Gas
Energy's operating margin is earned during the winter heating
season, the results of operations for the three-, six- and
twelve-month periods ended December 31, 1994 are not indicative
of results that would necessarily be achieved for a full year.
For these reasons, the results of operations of the Company for
the periods subsequent to those acquisitions are not comparable
to those periods prior to the acquisitions nor are the 1994
results of operations comparable with prior periods.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1994 and 1993
The Company recorded net earnings available for common stock of
$6,558,000 for the three-month period ended December 31, 1994
compared with net earnings of $4,741,000 for the same period in
1993. Net earnings per common share, based on weighted average
shares outstanding during the periods, were $.57 in both 1994 and
1993.
Operating revenues were $145,497,000 for the three-month period
ended December 31, 1994, an increase of 95%, compared with
operating revenues of $74,465,000 in 1993. Gas purchase costs for
the three-month period ended December 31, 1994 were $77,634,000, an
increase of 83%, compared with $42,518,000 in 1993. The Company's
operating revenues are affected by the level of sales volumes and
by the pass-through of increases or decreases in the Company's gas
purchase costs through its purchased gas adjustment clauses. The
increase in both operating revenues and gas purchase costs between
periods was primarily the result of a 99% increase in gas sales
volume to 30,804 MMcf in 1994 from 15,499 MMcf in 1993. Missouri
Gas Energy contributed 17,971 MMcf of the increase while the
remaining operations of the Company resulted in a gas sales volume
decrease of 2,666 MMcf. Volume decreases for the three-month
period ended December 31, 1994 were impacted by warmer than normal
weather for Southern Union's operations in Texas which comprise 51%
of the Company's customer base. Weather for the Texas operations
for the three-month period ended December 31, 1994 was 71% of
normal compared to 99% of normal in 1993. Missouri Gas Energy's
service territories experienced 81% of normal weather for the three
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
months ended December 31, 1994. Gas purchase costs were also
effected by an increase in the average cost of gas from $2.68 per
Mcf in 1993 to $3.17 per Mcf in 1994. The increase in the
Company's average cost per Mcf of gas is the result of certain
previously negotiated fixed price gas supply contracts with certain
suppliers to the Missouri operations assigned to the Company in the
Missouri Acquisition which were partially offset by decreases in
average spot market gas prices throughout the Company's
distribution system. Missouri Gas Energy contributed approximately
$81,228,000 to the overall increase in operating revenues and
approximately $47,482,000 in gas purchase costs.
Operating margin (operating revenues less gas purchase costs) for
the three-month period ended December 31, 1994 was $67,863,000
compared to $31,947,000 in 1993. The increase in operating margin
also resulted from the Missouri Acquisition which contributed
approximately $33,746,000 to the overall increase. The operating
margin was also favorably improved by a $463,000 annualized rate
increase in El Paso, Texas effective November 1, 1993.
Operating expenses, which include operating, maintenance and
general expenses, taxes other than on income, and depreciation and
amortization, were $48,378,000 for the three-month period ended
December 31, 1994, an increase of 106%, compared with $23,502,000
in 1993. The increase was primarily attributable to the additional
operating expenses associated with the Missouri Acquisition of
approximately $25,794,000.
Interest expense on long-term debt was $9,367,000 for the
three-month period ended December 31, 1994, an increase of 229%,
compared to $2,844,000 in 1993. The increase in interest expense
is due to the net increase in total long-term debt which included
the sale of the $475,000,000 of Senior Debt Securities, completed
on January 31, 1994 and net of the retirement of $105,000,000 in
long-term debt. The net proceeds from the sale of the Senior Debt
Securities, together with the net proceeds from the $50,000,000
Rights Offering and working capital from operations, was used to
fund the Missouri and Rio Grande Acquisitions, and refinance
certain short-term and long-term debt. See "Capitalization" in the
Notes to the Consolidated Financial Statements for the three months
ended December 31, 1994.
Other income for the three-month period ended December 31, 1994 was
$801,000 compared to $2,729,000 in 1993. Other income for the
three-month period ended December 31, 1994 consists of: rental
income from Lavaca Realty Company ("Lavaca Realty"), the Company's
real estate subsidiary, of approximately $650,000; approximately
$616,000 related to the deferral of interest expense associated
with the Missouri Gas Energy Safety Program; approximately $155,000
from gas appliance merchandising; and investment interest and
interest on notes receivable of approximately $83,000. This was
partially offset by other expense of approximately $750,000 for the
write-down to estimated fair market value of certain Lavaca Realty
real estate held for sale. Other income for 1993 included: a
non-recurring accounting adjustment of approximately $1,177,000
related to the amendment of prior year federal income tax returns
and the reversal of a tax reserve upon the completion of prior
period federal income tax audits; a pre-tax gain of approximately
$494,000 on the sale of undeveloped real estate; rental income from
Lavaca Realty of approximately $470,000; investment interest and
interest on notes receivable of approximately $176,000; and
approximately $99,000 from gas appliance merchandising.
Weighted average shares of common stock outstanding were 11,455,142
for the three-month period ended December 31, 1994 compared to
8,367,321 in 1993. The increase is a result of the Rights Offering
completed on December 31, 1993 to existing stockholders to
subscribe for and purchase 2,000,000 pre-split and pre-dividend
shares of the Company's common stock, par value $1.00 per share, at
a pre-split and pre-dividend price of $25.00 per share for net
proceeds of $49,351,000. The proceeds from the Rights Offering,
together with the proceeds from
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the sale of the Senior Debt Securities, were used to fund the
Missouri and Rio Grande Acquisitions, and to retire or refinance
certain outstanding debt.
Six Months Ended December 31, 1994 and 1993
The Company recorded net earnings available for common stock of
$390,000 for the six-month period ended December 31, 1994 compared
to net earnings of $3,487,000 for the six-month period ended
December 31, 1993. Net earnings per common share, based on
weighted average shares outstanding during the period, were $.03
in 1994 compared with net earnings per common share of $.42 in
1993.
Operating revenues were $214,611,000 for the six-month period ended
December 31, 1994, an increase of 103%, compared with operating
revenues of $105,601,000 in 1993. Gas purchase costs for the six-
month period ended December 31, 1994 were $106,459,000, an increase
of 87%, compared with $56,854,000 in 1993. Both operating revenues
and gas purchase costs increased in the six-month period ended
December 31, 1994 as a result of a 96% increase in gas sales volume
from 21,758 MMcf in 1993 to 42,549 MMcf in 1994 and an increase in
the average cost of gas to $3.29 per Mcf in 1994 from $2.76 per Mcf
in 1993, discussed above. The increase in volumes is principally
due to a 115% increase in the average customer base to
approximately 950,000 customers for the six months ended
December 31, 1994 compared with approximately 441,000 in 1993. The
increase in the customer base is the result of both the Missouri
and Rio Grande Acquisitions. Operating revenues and gas purchase
costs were also impacted by warmer than normal weather for Southern
Union's operations in Texas which comprise 51% of the Company's
customer base for the six-month period ended December 31, 1994.
Weather for the Texas operations for the six-month period ended
December 31, 1994 was 70% of normal compared to near normal weather
in 1993. Missouri Gas Energy's service territories experienced 82%
of normal weather for the six months ended December 31, 1994. The
Missouri and Rio Grande Acquisitions contributed approximately
$114,401,000 and $5,246,000, respectively, to the overall increase
in operating revenues and approximately $60,936,000 and $2,309,000,
respectively, in gas purchase costs for the six months ended
December 31, 1994.
Operating margin for the six-month period ended December 31, 1994
was $108,152,000 compared to $48,747,000 in 1993. The increase in
operating margin resulted from the Missouri and Rio Grande
Acquisitions which contributed approximately $56,402,000 and
increased transportation revenues which contributed $1,170,000 to
the overall increase. The Company's operating margin for the
six-month period ended December 31, 1994 was also favorably
impacted by a $463,000 annualized rate increase in El Paso, Texas
effective November 1, 1993.
Operating expenses, which include operating, maintenance and
general expenses, taxes other than on income, and depreciation and
amortization, were $89,648,000 for the six-month period ended
December 31, 1994, an increase of 119%, compared with $40,878,000
in 1993. The increase was primarily attributable to the additional
operating expenses associated with the Missouri and Rio Grande
Acquisitions of approximately $47,172,000 and $2,468,000,
respectively.
Interest expense on long-term debt was $18,735,000 for the
six-month period ended December 31, 1994, an increase of 227%,
compared to $5,732,000 in 1993. The increase in interest expense
is due to the net increase in total long-term debt which included
the sale of the $475,000,000 of Senior Debt Securities, discussed
above. See "Capitalization" in the Notes to the Consolidated
Financial Statements for the three months ended December 31, 1994.
Other income for the six-month period ended December 31, 1994 was
$2,336,000 compared to $4,820,000 in 1993. Other income for the
six-month period ended December 31, 1994 consists of: rental
income from Lavaca Realty
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of approximately $1,292,000; approximately $976,000 related to the
deferral of interest expense associated with the Missouri Gas
Energy Safety Program; approximately $249,000 from gas appliance
merchandising; and investment interest and interest on notes
receivable of approximately $195,000. This was partially offset by
other expense of approximately $750,000 to record the write-down of
certain real estate, as discussed above. Other income for 1993
included: non-recurring accounting adjustments of approximately
$2,245,000 related to the amendment of prior year federal income
tax returns and the reversal of a tax reserve upon the completion
of prior period federal income tax audits; rental income from
Lavaca Realty of approximately $966,000; a pre-tax gain of
approximately $494,000 on the sale of undeveloped real estate;
investment interest and interest on notes receivable of
approximately $412,000; and approximately $196,000 from gas
appliance merchandising.
Twelve Months Ended December 31, 1994 and 1993
The Company recorded net earnings available for common stock of
$5,279,000 for the twelve-month period ended December 31, 1994
compared with net earnings of $6,890,000 in 1993. Net earnings per
common share, based on weighted average shares outstanding during
the period, were $.46 in 1994 compared with net earnings per common
share of $.83 in 1993.
Operating revenues were $483,574,000 for the twelve-month period
ended December 31, 1994, an increase of 131%, compared with
operating revenues of $209,005,000 in 1993. Gas purchase costs for
the twelve-month period ended December 31, 1994 were $260,733,000,
an increase of 136%, compared with gas purchase costs of
$110,384,000 in 1993. The increase in both operating revenues and
gas purchase costs between periods was primarily the result of a
123% increase in gas sales volume to 99,815 MMcf in 1994 from
44,859 MMcf in 1993 and an increase in the average cost of gas to
$3.01 per Mcf in 1994 from $2.59 per Mcf in 1993. The increase in
volume is primarily attributable to growth in the average customer
base while the increase in the cost of gas is due to increases in
gas prices, both previously discussed above. Partially offsetting
the overall increase in operating revenues and gas purchase costs
was warmer than normal weather for the twelve months ended
December 31, 1994. Weather was 84% of normal for the twelve
months ended December 31, 1994 compared to 89% of normal in 1993.
The Missouri and Rio Grande Acquisitions contributed approximately
$257,903,000 and $21,207,000, respectively, to the overall
increase in operating revenues and approximately $147,513,000 and
$11,258,000, respectively, in gas purchase costs.
Operating margin for the twelve-month period ended December 31,
1994 was $222,841,000 compared to $98,621,000 in 1993. The
increase in operating margin resulted primarily from the Missouri
and Rio Grande Acquisitions which contributed approximately
$120,339,000 to the overall increase. The Company's operating
margin for the twelve-month period ended December 31, 1994 was also
favorably impacted by several rate increases effective during the
past year including a $777,000 annualized increase in the Company's
South Texas Region effective February 10, 1993; a $1,948,000
annualized increase in Austin effected July 1, 1993; and a $463,000
annualized increase in El Paso, previously discussed. In addition,
effective October 15, 1993, the MPSC increased Missouri Gas
Energy's natural gas rates by $9,750,000 annually. Due to the
timing of the closing of the Missouri Acquisition on January 31,
1994, the Company's results of operations for the twelve months
ended December 31, 1994 do not include the full effect of this rate
increase.
Operating expenses, which include operating, maintenance and
general expenses, taxes other than on income and depreciation and
amortization, were $180,127,000 for the twelve-month period ended
December 31, 1994, an increase of 128%, compared with operating
expenses of $78,857,000 in 1993. The increase in these expenses is
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
principally due to the overall increase in operating expenses
associated with the Missouri and Rio Grande Acquisitions of
approximately $94,985,000 and $7,613,000, respectively.
Total other expenses were $33,955,000 for the twelve-month period
ended December 31, 1994, an increase of 315%, compared with other
expenses of $8,176,000 in 1993. The increase is due principally to
the increase in interest expense. Interest expense on long-term
debt was $36,571,000 for the twelve-month period ended December 31,
1994, an increase of approximately 217%, compared with interest
expense of $11,535,000 in 1993 which is due to the increase in
long-term debt, previously discussed. Other net income for the
twelve-month period ended December 31, 1994 included: rental
income from Lavaca Realty of approximately $2,485,000;
approximately $1,253,000 related to the deferral of interest
expense associated with the Missouri Gas Energy Safety Program;
investment interest and interest on notes receivable of
approximately $732,000; and approximately $403,000 from gas
appliance merchandising. This was partially offset by other
expense of $750,000 to record the write-down of certain real
estate, as discussed above. Other net income for the twelve-month
period ended December 31, 1993 included: non-recurring accounting
adjustments of approximately $2,245,000 as previously discussed;
rental income from Lavaca Realty of approximately $1,710,000;
investment interest and interest on notes receivable of
approximately $871,000; a pre-tax gain of approximately $494,000 on
the sale of undeveloped real estate; and $333,000 from gas
appliance merchandising.
Net earnings in 1994 were favorably impacted by the elimination of
$843,000 in preferred dividends as the remaining shares of
cumulative preferred stock were retired in June 1993.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain information regarding the
Company's gas utility operations for the three- and twelve-month
periods ended December 31, 1994 and 1993:
Three Months Twelve Months
Ended December 31, Ended December 31,
1994 1993 1994 1993
-------- -------- -------- --------
Average number of gas
sales customers
served:
Residential. . . . 866,797 447,566 828,839 391,154
Commercial . . . . 87,311 29,106 82,542 26,814
Industrial and
irrigation. . . 637 795 756 774
Public authorities
and other . . . 2,796 2,597 2,695 2,309
Pipeline and
marketing . . . 387 176 409 182
-------- -------- -------- --------
Total average
customers
served . . . 957,928 480,240 915,241 421,233
======== ======== ======== ========
Gas sales in millions
of cubic feet (MMcf)
Residential. . . . 14,820 6,529 56,729 22,171
Commercial . . . . 6,648 2,690 25,947 9,545
Industrial and
irrigation. . . 611 655 2,077 2,615
Public authorities
and other . . . 725 898 2,740 2,938
Pipeline and
marketing . . . 1,809 1,947 7,592 6,934
-------- -------- -------- --------
Gas sales
billed . . . 24,613 12,719 95,085 44,203
Net change in
unbilled gas
sales . . . . . 6,191 2,780 4,730 656
-------- -------- -------- --------
Total gas
sales. . . . 30,804 15,499 99,815 44,859
======== ======== ======== ========
Gas sales revenues
(thousands of
dollars):
Residential. . . . $ 72,597 $ 36,635 $305,394 $117,954
Commercial . . . . 27,753 12,334 118,077 41,219
Industrial and
irrigation. . . 1,765 2,436 8,186 9,206
Public authorities
and other . . . 2,295 3,327 10,005 10,592
Pipeline and
marketing . . . 3,952 4,617 17,636 16,247
-------- -------- -------- --------
Gas revenues
billed . . . 108,362 59,349 459,298 195,218
Net change in
unbilled gas
sales revenues. 25,382 12,141 17,923 4,141
-------- -------- -------- --------
Total gas sales
revenues . . $133,744 $ 71,490 $477,221 $199,359
======== ======== ======== ========
Gas sales margin
(thousands of
dollars). . . . . . . $ 56,110 $ 28,972 $216,488 $ 88,975
======== ======== ======== ========
Gas sales revenue per
thousand cubic feet
(Mcf) billed:
Residential. . . . $ 4.899 $ 5.611 $ 5.383 $ 5.320
Commercial . . . . 4.175 4.585 4.551 4.318
Industrial and
irrigation. . . 2.889 3.719 3.941 3.520
Public authorities
and other . . . 3.166 3.705 3.651 3.605
Pipeline and
marketing . . . 2.185 2.371 2.323 2.343
Weather effect:
Degree days . . . . . 1,057 767 2,482 1,857
Percent of normal,
based on 30-year
average. . . . . . 78% 102% 84% 89%
Gas transported in
millions of cubic
feet (MMcf) . . . . . 16,864 5,022 56,043 22,750
Gas transportation
revenues (thousands
of dollars) . . . . . $ 4,546 $ 1,862 $ 14,299 $ 6,485
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's gas utility operations are seasonal in nature with a
significant percentage of the annual revenues and earnings
occurring in the traditional heating-load months. This seasonality
results in a high level of cash flow needs during the peak winter
heating season months, resulting from the required payments to
natural gas suppliers in advance of the receipt of cash payments
from the Company's customers. The Company has historically used
its revolving loan and credit facilities and internally generated
funds to provide funding for its seasonal working capital,
continuing construction and maintenance programs and operational
requirements.
The principal sources of funds during the three-month period ended
December 31, 1994 included approximately $2,600,000 from the
Company's available credit facility and $15,797,000 in cash flow
from operations. These sources, along with beginning cash balances
of $1,926,000, provided funds for additions to property, plant and
equipment of approximately $22,316,000 and other working capital
needs of the Company.
The principal sources of funds during the six-month period ended
December 31, 1994 included approximately $44,000,000 from the
Company's available credit facility. This primary source, along
with beginning cash balances of $5,881,000, provided funds for
additions to property, plant and equipment of approximately
$36,605,000, the purchase of gas inventories for the winter
heating season months of $15,378,000 and provided other seasonal
working capital needs of the Company.
The effective rate under the current debt structure is
approximately 7.74% (including interest and the amortization of
debt issuance costs and redemption premiums on refinanced debt).
The effective rate of interest on debt outstanding for the
three-month period ended December 31, 1993 was approximately
10.24%.
The Company has availability under a revolving credit facility with
a three year term (the "Revolving Credit Facility") underwritten by
Texas Commerce Bank, N.A. and syndicated to five additional banks
in the aggregate amount of $100,000,000. Borrowings under the
Revolving Credit Facility are available for Southern Union's
working capital, letter of credit requirements and other general
corporate purposes. At June 30, 1994 the outstanding balance under
the Revolving Credit Facility was zero. The amount outstanding
under the Revolving Credit Facility at December 31, 1994 and
January 26, 1995 was approximately $44,000,000 and $35,000,000,
respectively.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTHERN UNION COMPANY
----------------------
(Registrant)
Date January 30, 1995 By RONALD J. ENDRES
---------------- -------------------------
Ronald J. Endres
Senior Vice President of
Administration, and
Chief Financial Officer
Date January 30, 1995 By DAVID J. KVAPIL
---------------- -------------------------
David J. Kvapil
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS Exhibit 11
Three Six Twelve
Months Ended Months Ended Months Ended
December 31, December 31, December 31,
--------------- --------------- ---------------
1994 1993 1994 1993 1994 1993
------- ------- ------- ------- ------- -------
(in thousands of dollars,
except per share amounts)
Net earnings
available
for common
stock. . . . . $ 6,558 $ 4,741 $ 390 $ 3,487 $ 5,279 $ 6,890
======= ======= ======= ======= ======= =======
Primary earnings
per share:
Average
shares out-
standing . 11,455 8,367 11,452 8,319 11,445 8,286
Stock options
issued or
granted. . 269 239 272 242 292 195
------- ------- ------- ------- ------- -------
Average
shares out-
standing . 11,724 8,606 11,724 8,561 11,737 8,481
======= ======= ======= ======= ======= =======
Primary
earnings
per share. $ .56 $ .55 $ .03 $ .41 $ .45 $ .81
======= ======= ======= ======= ======= =======
Fully diluted
earnings per
share:
Average
shares out-
standing . 11,455 8,367 11,452 8,319 11,445 8,286
Stock options
issued or
granted. . 269 239 272 277 292 278
------- ------- ------- ------- ------- -------
Average
shares out-
standing . 11,724 8,606 11,724 8,596 11,737 8,564
======= ======= ======= ======= ======= =======
Fully
diluted
earnings
per share. $ .56 $ .55 $ .03 $ .41 $ .45 $ .80
======= ======= ======= ======= ======= =======
- ---------------------------------
Note: All periods have been adjusted for the 5% stock dividend
distributed on June 30, 1994 and the three-for-two stock
split distributed in the form of a 50% stock dividend on
March 9, 1994.
<PAGE>
FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> UT
<FISCAL-YEAR-END> JUN-30-1994
<PERIOD-END> DEC-31-1994
<PERIOD-TYPE> 6-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $745,331,000
<OTHER-PROPERTY-AND-INVEST> $ 10,866,000
<TOTAL-CURRENT-ASSETS> $126,730,000
<TOTAL-DEFERRED-CHARGES> $ 77,973,000
<OTHER-ASSETS> $ 1,820,000
<TOTAL-ASSETS> $962,720,000
<COMMON> $ 11,509,000
<CAPITAL-SURPLUS-PAID-IN> $198,355,000
<RETAINED-EARNINGS> $ 390,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> $209,460,000
$ 0
$ 0
<LONG-TERM-DEBT-NET> $478,722,000
<SHORT-TERM-NOTES> $ 44,000,000
<LONG-TERM-NOTES-PAYABLE> $ 0
<COMMERCIAL-PAPER-OBLIGATIONS> $ 0
<LONG-TERM-DEBT-CURRENT-PORT> $ 956,000
$ 0
<CAPITAL-LEASE-OBLIGATIONS> $ 0
<LEASES-CURRENT> $ 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> $229,582,000
<TOT-CAPITALIZATION-AND-LIAB> $962,720,000
<GROSS-OPERATING-REVENUE> $145,497,000
<INCOME-TAX-EXPENSE> $ 3,377,000
<OTHER-OPERATING-EXPENSES> $ 30,282,000
<TOTAL-OPERATING-EXPENSES> $ 48,403,000
<OPERATING-INCOME-LOSS> $ 19,460,000
<OTHER-INCOME-NET> $ 801,000
<INCOME-BEFORE-INTEREST-EXPEN> $ 16,884,000
<TOTAL-INTEREST-EXPENSE> $ 10,326,000
<NET-INCOME> $ 6,558,000
$ 0
<EARNINGS-AVAILABLE-FOR-COMM> $ 6,558,000
<COMMON-STOCK-DIVIDENDS> $ 0
<TOTAL-INTEREST-ON-BONDS> $ 0
<CASH-FLOW-OPERATIONS> $ 17,522,000
<EPS-PRIMARY> $ .57
<EPS-DILUTED> $ .56
</TABLE>
