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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- - ---
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- - ---
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-6407
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-0571592
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 Lavaca Street, Eighth Floor 78701
Austin, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(512) 477-5852
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
Common Stock, par value New York Stock Exchange
$1 per share
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursu-
ant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
----
The aggregate market value of the voting stock held by non-
affiliates of the registrant on September 5, 1996, was
$188,481,223. The number of shares of the registrant's Common
Stock outstanding on September 5, 1996 was 16,223,667.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for
the year ended June 30, 1996, are incorporated by reference in
Parts II and IV.
Portions of the registrant's proxy statement for its annual
meeting of stockholders to be held on November 12, 1996, are
incorporated by reference into Part III.
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PART I
ITEM 1. Business.
Introduction
Southern Union Company (Southern Union and together with its sub-
sidiaries, the Company) was incorporated under the laws of the
State of Delaware in 1932. The Company's principal line of busi-
ness is the distribution of natural gas as a public utility
through Southern Union Gas and Missouri Gas Energy, each of which
is a division of Southern Union. Southern Union Gas, head-
quartered in Austin, Texas, serves 497,000 residential, commer-
cial, industrial, agricultural and other customers in Texas
(including the cities of Austin, Brownsville, El Paso, Galveston
and Port Arthur). Missouri Gas Energy, headquartered in Kansas
City, Missouri, serves 471,000 customers in central and western
Missouri (including the cities of Kansas City, St. Joseph, Joplin
and Monett). See Acquisitions and Divestiture.
Subsidiaries of Southern Union have been established to support
and expand natural gas sales and to capitalize on the Company's
gas energy expertise. These subsidiaries market natural gas to
end-users, operate natural gas pipeline systems, distribute and
sell propane and sell commercial gas air conditioning and other
gas-fired engine-driven applications. By providing "one-stop
shopping," the Company can serve its various customers' specific
energy needs, which encompass substantially all of the natural
gas distribution and sales businesses from natural gas sales to
specialized energy consulting services. Certain subsidiaries
also own or hold interests in real estate and other assets, which
are primarily used in the Company's utility business. See
Company Operations.
The Company is a sales and market-driven energy company whose
management is committed to achieving profitable growth of its
natural gas energy businesses in an increasingly competitive
business environment. Management's strategies for achieving
these objectives principally consist of: (i) promoting new sales
opportunities and markets for natural gas; (ii) enhancing finan-
cial and operating performance; and (iii) expanding the Company
through development of existing systems and selective acquisition
of new systems. Management develops and continually evaluates
these strategies and the Company's implementation of them by
applying their experience and expertise in analyzing the energy
industry, technological advances, market opportunities and
general business trends. Each of these strategies, as imple-
mented throughout the Company's businesses, reflects the Com-
pany's commitment to its core natural gas utility business.
Central to all of the Company's businesses and strategies is the
sale and transportation of natural gas.
The Company has a goal of selected growth and expansion, pri-
marily in the natural gas industry. To that extent, the Company
intends to consider, when appropriate, and if financially prac-
ticable to pursue, the acquisition of other natural gas distribu-
tion or transmission businesses. The nature and location of any
such properties, the structure of any such acquisitions, and the
method of financing any such expansion or growth will be deter-
mined by management and the Southern Union Board of Directors.
Acquisitions and Divestiture
On January 31, 1994, Southern Union purchased certain Missouri
natural gas distribution operations (Missouri Acquisition) which
Southern Union operates as Missouri Gas Energy for $400,300,000
in cash, based on account balances as of December 31, 1993. The
final purchase price, which was determined through post-closing
adjustments and subsequent arbitration, was $401,600,000. The
Missouri Acquisition was financed through the sale of
$475,000,000 of 7.60% Senior Debt Securities due 2024 (Senior
Notes) completed on January 31, 1994 and net proceeds from a
$50,000,000 common stock subscription rights offering (Rights
Offering) completed on December 31, 1993. See Management's
Discussion and Analysis of Results of Operations and Financial
Condition (MD&A) -- Liquidity and Capital Resources and Debt in
the Notes to the Consolidated Financial Statements contained in
the Company's Annual Report to Stockholders for the year ended
June 30, 1996, portions of which are filed as Exhibit 13 hereto
(the Annual Report).
As a result of the Missouri Acquisition, the Company nearly
doubled the number of customers served by its natural gas dis-
tribution system and became one of the top 15 gas utilities in
the United States, as measured by number of customers. In addi-
tion, the Missouri Acquisition lessens the sensitivity of the
Company's operations to weather risk and local economic condi-
tions by diversifying operations into a different geographic
area.
The approval of the Missouri Acquisition by the Missouri Public
Service Commission (MPSC) was subject to the terms of a stipula-
tion and settlement agreement (MPSC Stipulation) which among
other things: (i) provided that the Company attain a total debt
to total capital ratio that does not exceed Standard and Poor's
Corporation's Utility Financial Benchmark ratio of BBB which cur-
rently is approximately 58%, in order for Missouri Gas Energy to
implement any general rate increase; (ii) prohibited Missouri Gas
Energy from implementing a general rate increase in Missouri be-
fore January 31, 1997 except in certain unusual events; and (iii)
required the Company to contribute an additional $3,000,000 to
the Company's qualified defined benefit plan for the benefit of
Missouri Gas Energy's employees and retirees; and (iv) required
Missouri Gas Energy to reduce rate base by $30,000,000 (amortized
over a ten-year period on a straight-line basis) to compensate
rate payers for rate base reductions that were eliminated as a
result of the Missouri Acquisition. The Company has subsequently
attained the financial benchmark ratio described above and on
March 1, 1996 filed for a rate increase with the MPSC primarily
for the recovery of certain capital expenditures under the
Missouri Safety Program. See Changes in Capital Structure,
Utility Regulation and Rates and Properties.
Southern Union and the seller of the Missouri properties entered
into an Environmental Liability Agreement at the closing of the
Missouri Acquisition which provides for a tiered approach to the
allocation of certain liabilities under environmental laws that
may exist or arise with respect to Missouri Gas Energy. 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 Missouri Gas Energy for which it may
ultimately have responsibility will not exceed the aggregate
amount subject to substantial sharing by the seller. The Company
believes that it will be able to obtain substantial reimbursement
or recovery for any environmental liabilities from other
potentially responsible third parties, under insurance or through
rates charged to customers. See Commitments and Contingencies in
the Notes to the Consolidated Financial Statements contained in
the Annual Report.
On September 30, 1993, the Company acquired the Rio Grande Valley
Gas Company (Rio Grande) for $30,500,000. Rio Grande currently
serves 75,000 customers in the south Texas counties of Willacy,
Cameron and Hidalgo which includes 32 towns and cities along the
Mexico border, including Harlingen, McAllen and Brownsville (the
southernmost city in the 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 Notes and the Rights Offering. See MD&A -
- - - Liquidity and Capital Resources.
On October 16, 1995, Southern Union Company entered into an
agreement to sell certain gas distribution operations of the Com-
pany in the Texas and Oklahoma Panhandles and to sell Western Gas
Interstate Company (WGI), a wholly-owned subsidiary of the Com-
pany, exclusive of the Del Norte interconnect operation which
transports natural gas into Mexico, for $14,770,000 subject to
post-closing adjustments. The sale was closed on May 1, 1996.
Changes in Capital Structure
On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a
consolidated wholly-owned subsidiary of Southern Union, issued
$100,000,000 of 9.48% Trust Originated Preferred Securities (Pre-
ferred Securities). In connection with the Subsidiary Trust's
issuance of the Preferred Securities and the related purchase by
Southern Union of all of the Subsidiary Trust's common securities
(Common Securities), Southern Union issued to the Subsidiary
Trust $103,092,800 principal amount of its 9.48% Subordinated
Deferrable Interest Notes, due 2025 (Subordinated Notes). The
issuance of the Preferred Securities was part of a $300,000,000
shelf registration filed with the Securities and Exchange Commis-
sion on March 29, 1995. Southern Union may sell a combination of
preferred securities of financing trusts and senior and subordi-
nated debt securities of Southern Union of up to $196,907,200
(the remaining shelf) from time to time, at prices determined at
the time of any offering. The net proceeds from the Preferred
Securities offering, along with working capital from operations,
were used to repurchase $90,485,000 of Senior Notes through June
1996 with the remaining balance used to provide working capital
for seasonal needs. See Preferred Securities of Subsidiary Trust
and Debt in the Notes to the Consolidated Financial Statements
contained in the Annual Report.
Southern Union has the right under the Subordinated Notes to
defer interest payment periods up to 20 consecutive quarters,
and, as a consequence, quarterly distributions on the Preferred
Securities may be deferred (but will continue to accrue with
interest thereon at a per annum rate of 9.48% compounded quar-
terly) by the Subsidiary Trust during any such extended interest
payment period. If interest payments are deferred by Southern
Union, Southern Union: (i) may not pay cash dividends, or redeem,
purchase or acquire, or make a liquidation payment with respect
to, any of its capital stock or the capital stock of any subsidi-
ary of Southern Union; and (ii) shall not make any payment of
interest, principal or premium, if any, on or repay, repurchase
or redeem any debt securities issued by Southern Union that rank
pari passu with or junior to the subordinate debentures.
June 30, 1996 June 30, 1995
---------------- ----------------
Amount Percent Amount Percent
-------- ------- -------- -------
(thousands, except percentages)
Short-term debt................ $ 615 $ 770
======== ========
Long-term debt
Senior Notes................ 384,515 460,000
Other....................... 879 2,503
-------- --------
385,394 52.7% 462,503 58.7%
Company-obligated Preferred
Securities of Trust.......... 100,000 13.7 100,000 12.7
Common stockholders' equity.... 245,915 33.6 225,664 28.6
-------- ----- -------- -----
Total capitalization........ $731,309 100.0% $788,167 100.0%
======== ===== ======== =====
Company Operations
The Company's principal line of business is the distribution of
natural gas through its Southern Union Gas and Missouri Gas
Energy divisions. Southern Union Gas provides service to a
number of communities and rural areas in Texas, including the
municipalities of Austin, Brownsville, El Paso, Galveston,
Harlingen, McAllen and Port Arthur. Missouri Gas Energy provides
service to various cities and communities in central and western
Missouri including Kansas City, St. Joseph, Joplin and Monett.
The Company's gas utility operations are generally seasonal in
nature, with a significant percentage of its annual revenues and
earnings occurring in the traditional winter heating season.
Mercado Gas Services Inc. (Mercado), a wholly-owned subsidiary of
Southern Union, markets natural gas to commercial and industrial
customers. Mercado's sales and purchasing activities are made
through short-term and long-term contracts. These contracts and
business activities are not subject to direct rate regulation.
Southern Transmission Company (Southern), a wholly-owned subsidi-
ary of Southern Union, owns and operates approximately 310 miles
of intrastate pipeline. Southern's system connects the cities of
Lockhart, Luling, Cuero, Shiner, Yoakum, and Gonzales, Texas, as
well as an industrial customer in Port Arthur, Texas. Southern
also owns a transmission line which supplies gas to the community
of Sabine Pass, Texas.
Norteno Pipeline Company (Norteno), 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, via unbundled transportation service pursuant to FERC
Order No. 636. Norteno also transported 5,545 million cubic feet
(MMcf) to the city of Juarez, Mexico and the Samalayuca Power
Plant in north Mexico in fiscal 1996. These assets, along with
the three Del Norte interconnects, were transferred to Norteno
from WGI during the year due to the sale of WGI on May 1, 1996.
WGI operated interstate pipeline systems which served the Com-
pany's gas distribution properties in the Texas and Oklahoma
panhandles. See Business -- Acquisitions and Divestiture.
Econofuel Company (Econofuel), a wholly-owned subsidiary of
Southern Union, markets and sells 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 primarily serve fleet and governmental
vehicles which have been manufactured or converted to operate on
natural gas. Up until January 5, 1996, Econofuel and Natural Gas
Development Company, Inc. of California operated the Natural Gas
Vehicle Technology Centers, L.L.P. (Tech Center), under a joint
venture agreement. The Tech Center converted gasoline-driven
vehicles to operate using natural gas. Legislation enacted in
Texas in 1995 allowing reformulated gasoline to qualify as an
alternative fuel essentially eliminated the incentive for Texas
fleet owners to convert vehicles to natural gas by 1998. As a
result, the operations of the Tech Center were scaled back and
subsequently closed during 1996. See MD&A -- Other Income and
Expenses, Net contained in the Annual Report.
Energy WorX, a wholly-owned subsidiary of Southern Union formed
in March 1996, provides interactive computer-based training for
the natural gas transmission and distribution industry.
Southern Union Energy Products and Services Company (SUEPASCO), a
wholly-owned subsidiary of Southern Union, markets and sells
commercial gas air conditioning, irrigation pumps and other gas-
fired engine-driven applications and related services.
Southern Union Energy International, Inc. (International), a
wholly-owned subsidiary of Southern Union, seeks to participate
in energy related projects internationally.
ConTigo, Inc., a wholly-owned subsidiary of Southern Union formed
in January 1996, provides centralized call center services for
the majority of the Texas service areas.
The Company also holds investments principally in commercially
developed real estate in Austin and Kansas City, as well as
undeveloped tracts of land through Southern Union's wholly-owned
subsidiary, Lavaca Realty Company (Lavaca Realty).
SUPro Energy Company, a wholly-owned subsidiary of Southern Union
formed in August 1996, provides propane gas services to 1,100
customers located principally in El Paso, Texas.
Competition
The Company's gas distribution divisions are not currently in
significant direct competition with any other distributors of
natural gas to residential and small commercial customers within
their service areas. However, 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 pipe-
line systems. The Company has offered transportation arrange-
ments to customers who secure their own gas supplies. These
transportation arrangements, coupled with the efforts of Southern
Union's unregulated marketing subsidiary, Mercado, enable the
Company to provide competitively priced gas service to these
large volume customers. In addition, the Company has success-
fully used flexible rate provisions, when needed, to retain cus-
tomers who may have access to alternative energy sources.
As energy providers, Southern Union Gas and Missouri Gas Energy
have historically competed with alternative energy sources, par-
ticularly electricity and also propane, coal, natural gas liquids
and other refined products available in the Company's service
areas. At present rates, the cost of electricity to residential
and commercial customers in the Company's service areas generally
is higher than the effective cost of its natural gas service.
There can be no assurance, however, that future fluctuations in
gas and electric costs will not reduce the cost advantage of
natural gas service. The cost of expansion for peak load re-
quirements of electricity in some of Southern Union Gas' service
areas has historically provided opportunities to allow energy
switching to natural gas pursuant to integrated resource planning
techniques. Electric competition has responded by offering
equipment rebates and incentive rates.
Competition between the use of fuel oil and natural gas, particu-
larly by industrial, electric generation and agricultural custo-
mers, has increased as oil prices have decreased. While
competition between such fuels is generally more intense outside
the Company's service areas, this competition affects the nation-
wide market for natural gas. Additionally, the general economic
conditions in its service areas continue to affect certain custo-
mers and market areas, thus impacting the results of the Com-
pany's the Company's operations.
Gas Supply
The low cost of natural gas service is dependent upon the Com-
pany'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 neces-
sary to dispatch and monitor gas volumes on a daily and even
hourly basis to ensure reliable service to customers.
The Federal Energy Regulatory Commission (FERC) has recently
required the "unbundling" of services offered by interstate pipe-
line companies. As a result, gas purchasing and transportation
decisions and associated risks have been shifted from the pipe-
line companies to the gas distributors. The increased demands on
distributors to effectively manage their gas supply in an
environment of volatile gas prices provides an advantage to dis-
tribution companies such as Southern Union who have demonstrated
a history of contracting favorable and efficient gas supply
arrangements in an open market system.
The majority of Southern Union Gas' 1996 gas requirements for
utility operations were delivered under long-term transportation
contracts through four major pipeline companies. All of Missouri
Gas Energy's 1996 gas requirements were delivered under short-
and long-term transportation contracts through three pipeline
companies. These contracts have various expiration dates ranging
from 1997 through 2013. Southern Union Gas also purchases sig-
nificant volumes of gas under long-term and short-term arrange-
ments with suppliers. The amounts of such short-term purchases
are contingent upon price. Southern Union Gas and Missouri Gas
Energy both have firm supply commitments for all areas that are
supplied with gas purchased under short-term arrangements.
Missouri Gas Energy also holds contract rights to over 16 billion
cubic feet (Bcf) of storage capacity to assist in meeting peak
demands.
Gas sales and/or transportation contracts with interruption pro-
visions, whereby large volume users purchase gas with the under-
standing that they may be forced to shut down or switch to
alternate sources of energy at times when the gas is needed for
higher priority customers, have been utilized for load management
by Southern Union and the gas industry as a whole for many years.
In addition, during times of special supply problems, curtail-
ments of deliveries to customers with firm contracts may be made
in accordance with guidelines established by appropriate federal
and state regulatory agencies. There have been no supply-related
curtailments of deliveries to Southern Union Gas or Missouri Gas
Energy utility sales customers during the last ten years.
The following table shows, for each of the Company's principal
utility service areas, the percentage of gas utility revenues and
sales volume for the year ended June 30, 1996 and the average
cost per Mcf of gas in 1996.
Percent
Percent of Gas
of Gas Utility
Utility Sales Average Cost
Service Area Revenues Volume Per Mcf
- - ------------------------------ -------- ------- ------------
Southern Union Gas
Austin and South Texas..... 11 9 $ 2.43
El Paso and West Texas..... 10 12 2.02
Rio Grande Valley.......... 5 3 3.73
Other...................... 7 5 2.49
--- ---
33 29
Missouri Gas Energy........... 67 71 3.55
--- ---
100 100
=== ===
The Company is committed under various agreements to purchase
certain quantities of gas in the future. At June 30, 1996, the
Company has purchase commitments for nominal quantities of gas at
fixed prices. These fixed price commitments have an annual value
of $2,500,000 for Southern Union Gas. Missouri Gas Energy cur-
rently does not have any fixed price commitment contracts for the
1996/1997 winter heating season. At June 30, 1996, the Company
also has purchase commitments for certain quantities of gas at
variable, market-based prices. These market-based priced commit-
ments have an annual value of $41,300,000 for Southern Union Gas
and $79,800,000 for Missouri Gas Energy. The Company's purchase
commitments may extend over a period of several years depending
upon when the required quantity is purchased. The Company has
purchase gas tariffs in effect for all its utility service areas
that provide for recovery of its purchase gas costs under defined
methodologies.
Utility Regulation and Rates
The Company's rates and operations are subject to regulation by
federal, state and local authorities. In Texas, municipalities
have primary jurisdiction over rates within their respective
incorporated areas. Rates in adjacent environs and appellate
matters are the responsibility of the Railroad Commission of
Texas. In Missouri, rates are established by the MPSC on a
system-wide basis. The FERC and the Railroad Commission of Texas
have jurisdiction over rates, facilities and services of Norteno
and Southern, respectively.
The Company holds non-exclusive franchises with varying expira-
tion dates in all incorporated communities where it is necessary
to carry on its business as it is now being conducted. In the
five largest cities in which the Company's utility customers are
located, such franchises expire as follows: Kansas City,
Missouri in 1997; El Paso, Texas in 2000; Austin, Texas in 2006;
and Port Arthur, Texas in 2013. The franchise in St. Joseph,
Missouri is perpetual. The Company fully expects these fran-
chises to be renewed upon their expiration.
Gas service rates are established by regulatory authorities to
permit utilities to recover operating, administrative and finance
costs, and the opportunity to earn a reasonable return on equity.
Gas costs are billed to customers through purchase gas adjustment
clauses which permit the Company to adjust its sales price as the
cost of purchased gas changes. This is important because the
cost of natural gas accounts for a significant portion of the
Company's total expenses. The appropriate regulatory authority
must receive notice of such adjustments prior to billing imple-
mentation.
The Company must support any service rate changes to its regula-
tors using a historic test year of operating results adjusted to
normal conditions and for any known and measurable revenue or
expense changes. Because the rate regulatory process has certain
inherent time delays, rate orders may not reflect the operating
costs at the time new rates are put into effect.
The monthly customer bill contains a fixed service charge, a
usage charge for service to deliver gas, and a charge for the
amount of natural gas used. While the monthly fixed charge pro-
vides an even revenue stream, the usage charge increases the Com-
pany'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 in recent years have
resulted in increased monthly fixed charges which help stabilize
earnings. Weather normalization clauses, in place in Austin,
Galveston and two other service areas in Texas, also help
stabilize earnings. The cities of El Paso and Port Arthur also
approved implementation of weather normalization clauses effec-
tive September 1, 1996, with the El Paso clause approved for a
three-year trial period.
Missouri Gas Energy filed a $34,000,000 request for rate
increases with the MPSC on March 1, 1996. The proposed effective
date for the rate increase, in accordance with the MPSC Stipula-
tion, is February 1, 1997. In addition to the requested
increase, Missouri Gas Energy proposed an annual rider to recoup
costs associated with the Missouri Safety Program; an annual
incentive regulation rider; a change in Missouri Gas Energy's
main extension policy; a weather normalization clause; and a
change in transportation service availability that would extend
transportation service to more customers on their system. Addi-
tionally, the proposed rates would recover a larger percentage of
fixed costs through the monthly customer charge and reduce the
level of fixed costs recovered through the volumetric charge. On
October 15, 1993, Missouri Gas Energy's rates increased by
$9,750,000 annually. On November 1, 1993, El Paso rates changed
to provide an approximate annual revenue increase of $463,000.
During the three-year period ended June 30, 1996, the Company did
not file for any other rate increases in any of its service areas
other than several annual cost of service adjustments. In addi-
tion to the regulation of its utility and pipeline businesses,
the Company is affected by numerous other regulatory controls,
including, among others, pipeline safety requirements of the
U. S. Department of Transportation, safety regulations under the
Occupational Safety and Health Act, and various state and federal
environmental statutes and regulations. The Company believes
that its operations are in compliance with applicable safety and
environmental statutes and regulations.
Statistics of Gas Utility and Related Operations
Gas Utility Customers
as of June 30,
-------------------------
1996 1995 1994
------- ------- -------
Southern Union Gas:
Austin and South Texas.......... 159,129 152,382 153,757
El Paso and West Texas.......... 169,861 168,526 168,350
Galveston and Port Arthur....... 51,392 51,241 52,329
Panhandle and North Texas (1)... 24,777 31,384 31,652
Rio Grande Valley............... 76,707 77,105 77,832
------- ------- -------
481,866 480,638 483,920
------- ------- -------
Missouri Gas Energy:
Kansas City, Missouri
Metropolitan Area............ 372,797 368,440 362,147
St. Joseph, Joplin, Monett
and others................... 103,733 102,714 100,732
------- ------- -------
476,530 471,154 462,879
------- ------- -------
Total........................... 958,396 951,792 946,799
======= ======= =======
- - -----------------
(1) Effective May 1, 1996, the Company sold certain gas distri-
bution operations in the Texas and Oklahoma Panhandles. See
Acquisitions and Divestiture.
Southern Union Gas, Mercado, Norteno, Southern and WGI. The fol-
lowing table shows certain operating statistics of the Company's
gas distribution, transportation, marketing and transmission
operations principally in Texas, the Oklahoma Panhandle and
Arizona:
Year Ended June 30,
--------------------------------
1996 1995 1994
---------- ---------- ----------
Average number of gas sales
customers served (a):
Residential................ 457,187 457,052 432,474
Commercial................. 29,873 29,549 28,593
Industrial and irrigation.. 346 382 722
Public authorities and
other.................... 2,812 2,798 2,522
Pipeline and marketing..... 495 450 273
--------- --------- ---------
Total average customers
served................. 490,713 490,231 464,584
========= ========= =========
Gas sales in millions of
cubic feet (MMcf):
Residential................ 22,945 21,596 23,852
Commercial................. 9,990 9,927 10,173
Industrial and irrigation.. 1,992 2,112 2,216
Public authorities and
other.................... 2,708 2,798 2,959
Pipeline and marketing..... 11,848 7,596 7,482
--------- --------- ---------
Gas sales billed......... 49,483 44,029 46,682
Net change in unbilled
gas sales................ (5) (10) (18)
--------- --------- ---------
Total gas sales........ 49,478 44,019 46,664
========= ========= =========
Gas sales revenues
(thousands of dollars):
Residential................ $ 127,255 $ 118,818 $ 37,135
Commercial................. 42,353 42,112 47,020
Industrial and irrigation.. 6,315 6,746 8,848
Public authorities and
other.................... 9,338 7,938 10,943
Pipeline and marketing..... 27,688 16,409 17,759
--------- --------- ---------
Gas revenues billed...... 212,949 192,023 221,705
Net change in unbilled
gas sales revenues....... 856 (204) (2,018)
--------- --------- ---------
Total gas sales
revenues............. $ 213,805 $ 191,819 $ 219,687
========= ========= ==========
Gas sales margin
(thousands of dollars) (b):.. $ 97,718 $ 95,399 $ 95,136
========= ========= ==========
Gas sales revenue per thousand
cubic feet (Mcf) billed (c):
Residential................ $ 5.546 $ 5.502 $ 5.750
Commercial................. 4.240 4.242 4.622
Industrial and irrigation.. 3.170 3.194 3.992
Public authorities and
other.................... 3.448 2.837 3.698
Pipeline and marketing..... 2.337 2.160 2.374
Weather effect:
Degree days (d).............. 1,901 1,669 1,946
Percent of 30-year
measure (e)................ 96% 83% 96%
Gas transported in millions
of cubic feet (MMcf)......... 31,906 34,133 24,461
Gas transportation revenues
(thousands of dollars)....... $ 9,008 $ 8,378 $ 7,393
- - -----------------------
(a) Variances in the average number of customers served is pri-
marily due to the divestiture of the Texas and Oklahoma
Panhandle distribution operations in May 1996 and the
acquisition of Rio Grande in September 1993, involving 7,000
and 74,000 customers, respectively.
(b) Gas sales margin is equal to gas sales revenues less pur-
chased gas costs.
(c) Fluctuations in gas price billed between each period reflect
changes in the average cost of purchased gas and the effect
of rate adjustments.
(d) "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.
(e) Information with respect to weather conditions is provided
by the National Oceanic and Atmospheric Administration.
Percentages of 30-year measure are computed based on the
weighted average volumes of gas sales billed.
Missouri Gas Energy. The following table shows certain operating
statistics of the gas distribution and transportation operations
in Missouri:
Five
Year Ended Months Year
------------------- Ended Ended
June 30, June 30, June 30, June 30,
1996(a) 1995(a) 1994(a) 1994(a)
--------- --------- --------- ---------
Average number of gas
sales customers served:
Residential......... 414,788 410,291 410,934 400,222
Commercial.......... 59,690 59,087 58,830 57,300
Industrial.......... 322 296 254 257
-------- -------- -------- --------
Total average cus-
tomers served... 474,800 469,674 470,018 457,779
======== ======== ======== ========
Gas sales in millions
of cubic feet (MMcf):
Residential......... 46,775 41,354 21,569 45,407
Commercial.......... 21,578 18,863 10,023 21,363
Industrial.......... 592 241 26 143
-------- -------- -------- --------
Gas sales billed.. 68,945 60,458 31,618 66,913
Net change in un-
billed gas sales.. 31 (19) (6,059) (104)
-------- -------- -------- --------
Total gas sales... 68,976 60,439 25,559 66,809
======== ======== ======== ========
Gas sales revenues
(thousands of dollars):
Residential......... $259,401 $186,716 $108,871 $234,360
Commercial.......... 111,840 77,101 47,257 102,036
Industrial.......... 4,294 1,731 458 1,480
-------- -------- -------- --------
Gas sales reve-
nues billed..... 375,535 265,548 156,586 337,876
Net change in un-
billed gas sales
revenues.......... 2,090 (740) (28,564) (1,210)
-------- -------- -------- --------
Total gas sales
revenues...... $377,625 $264,808 $128,022 $336,666
======== ======== ======== ========
Gas sales margin
(thousands of
dollars) (b).......... $131,462 $116,353 $ 41,445 $103,191
======== ======== ======== ========
Gas sales revenue per
thousand cubic feet
(Mcf) billed:(c)
Residential......... $ 5.546 $ 4.515 $ 5.048 $ 5.161
Commercial.......... 5.183 4.087 4.715 4.776
Industrial.......... 7.253 7.183 17.615 10.350
Weather effect:
Degree days (d)....... 5,495 4,779 1,916 5,277
Percent of 30-year
measure: (e)........ 105% 90% 93% 100%
Gas transported in
millions of cubic
feet (MMcf)........... 30,746 30,464 11,673 29,498
Gas transportation reve-
nues (thousands of
dollars).............. $ 10,299 $ 8,336 $ 2,568 $ 6,614
- - ---------------
(a) Missouri Gas Energy was acquired on January 31, 1994 and,
therefore, its results of operations were consolidated with
the Company beginning February 1, 1994. The increase in the
average number of customers served during the five-month
period ended June 30, 1994 is due to the seasonality of the
Company's business in which a greater number of customers
are served during the winter-heating season.
(b) Gas sales margin is equal to gas sales revenues less pur-
chased gas.
(c) Fluctuations in gas price billed between each period reflect
changes in the average cost of purchased gas and the effect
of rate adjustments.
(d) "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.
(e) Information with respect to weather conditions is provided
by the National Oceanic and Atmospheric Administration.
Percentages of 30-year measure are computed based on the
weighted average volumes of gas sales billed.
Investments in Real Estate
Lavaca Realty owns a commercially developed tract of land in the
central business district of Austin, Texas, containing a combined
11-story office building, parking garage and drive-through bank
(Lavaca Plaza). Approximately 49% of the office space at Lavaca
Plaza is used in the Company's business while the remainder is
leased to non-affiliated entities. The Company sold a mini-bank
facility adjoining Lavaca Plaza subsequent to June 30, 1996.
Lavaca Realty also owns a 2-story office building in El Paso,
Texas. Other real estate investments held at June 30, 1996
include two small commercial tracts in downtown Austin, one-half
acre of undeveloped land in Dallas, Texas, 625 square feet of
undeveloped land in San Antonio, Texas, and 36,000 square feet of
improved property in Kansas City, Missouri, which is leased to a
non-affiliated entity. The Company is attempting to sell all
remaining undeveloped real estate.
Employees
As of July 31, 1996, the Company has 1,623 employees, of whom
1,278 are paid on an hourly basis, 322 are paid on a salary basis
and 23 are paid on a commission basis. Of the 1,278 hourly paid
employees, 54% are represented by unions. Of those employees
represented by unions, 83% are employed by Missouri Gas Energy.
In May 1994, the Company announced an early retirement program
for certain employees of Missouri Gas Energy with an election
period from May 20 to June 23, 1994. Of an eligible 133
employees, 81 accepted the 1994 early retirement program.
From time to time the Company may be subject to labor disputes;
however, such disputes have not previously disrupted its busi-
ness. The Company believes that its relations with its employees
are good.
ITEM 2. Properties.
See Item 1, Business, for information concerning the general
location and characteristics of the important physical properties
and assets of the Company.
Southern Union Gas has 7,600 miles of mains, 4,213 miles of ser-
vice lines and 105 miles of transmission lines. Missouri Gas
Energy has 7,249 miles of mains, 4,453 miles of service lines and
47 miles of transmission lines. Southern Transmission Company
has 310 miles of transmission lines and 217 miles of gathering
lines. Norteno has 6.7 miles of transmission lines. The Company
considers its systems to be in good condition and to be well-
maintained, and it has continuing replacement programs based on
historical performance and system surveillance.
Pursuant to a 1989 MPSC order, Missouri Gas Energy is engaged in
a major gas safety program in its service territories. This pro-
gram includes replacement of company- and customer-owned gas ser-
vice 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 permits the deferral, and sub-
sequent recovery through rates, of depreciation expense, property
taxes and associated carrying costs, related to the Missouri
Safety Program. Missouri Gas Energy was required to continue the
Missouri Safety Program and has deferred depreciation expense,
property taxes and carrying costs of $7,703,000, $4,154,000 and
$600,000 for 1996, 1995 and 1994, respectively.
ITEM 3. Legal Proceedings.
See Commitments and Contingencies in the Notes to Consolidated
Financial Statements contained in the Annual Report for discus-
sions of the Company's legal proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of
Southern Union during the quarter ended June 30, 1996.
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
Market Information
On March 6, 1995, Southern Union's common stock began trading on
the New York Stock Exchange under the symbol "SUG." Prior to
March 6, 1995, Southern Union's common stock was traded on the
American Stock Exchange under the same symbol.
The high and low sales prices (adjusted for any stock dividends
and stock splits) for shares of Southern Union common stock since
July 1, 1994 are set forth below:
$/Share
--------------
High Low
------ ------
July 1 to September 5, 1996................. 24 5/8 20 3/8
(Quarter Ended)
June 30, 1996............................. 25 1/2 20 1/4
March 31, 1996............................ 22 3/8 16 3/4
December 31, 1995......................... 19 7/8 12 5/8
September 30, 1995........................ 13 7/8 12 3/8
(Quarter Ended)
June 30, 1995............................. 13 3/4 11 3/4
March 31, 1995............................ 12 3/4 11 1/8
December 31, 1994......................... 13 11 3/4
September 30, 1994........................ 13 1/8 11 7/8
Holders
As of September 5, 1996, there were 273 holders of record of
Southern Union's common stock. This number does not include
persons whose shares are held of record by a bank, brokerage
house or clearing agency, but does include any such bank,
brokerage house or clearing agency.
There were 16,223,667 shares of Southern Union's common stock
outstanding on September 5, 1996 of which 9,194,206 shares were
held by non-affiliates.
Dividends
Southern Union paid no cash dividends on its common stock during
the three-year period ended June 30, 1996. Provisions in certain
of Southern Union's long-term notes and its bank revolving credit
facility limit the payment of cash or asset dividends on capital
stock. Under the most restrictive provisions in effect, Southern
Union may not declare or pay any cash or asset dividends on its
common stock or acquire or retire any of Southern Union's common
stock, unless no event of default exists and the Company meets
certain financial ratio requirements.
On March 11, 1996 and March 9, 1994 Southern Union distributed a
stock split as a stock dividend of 33 % and 50%, respectively.
On November 27, 1995 and June 30, 1994 the Company distributed
its annual 5% common stock dividend to stockholders of record on
November 15, 1995 and June 14, 1994, respectively. The 5% stock
dividends are consistent with Southern Union's Board of Direc-
tors' February 1994 decision to commence regular stock dividends
of approximately 5% each year. The specific amount and declara-
tion, record and distribution dates for an annual stock dividend
will be determined by the Board and announced at a date that is
not expected to be later than the annual stockholders meeting
each year. The next annual stock dividend is expected to be
declared in connection with the Company's annual meeting of
stockholders to be held on November 12, 1996. A portion of each
of the annual 5% stock dividends was characterized as a distribu-
tion of capital due to the level of the Company's retained
earnings available for distribution as of the date of declara-
tion.
ITEM 6. Selected Financial Data.
Years Ended
Years Ended June 30, December 31,
---------------------------- ---------------------
1996(a) 1995(a) 1994(a)(b) 1993(b)(c) 1992(c)(d)
-------- -------- ---------- ---------- ----------
(thousands of dollars, except per share amounts)
Total
operating
revenues.... $620,391 $479,983 $372,043 $209,393 $191,646
Earnings from
continuing
operations.. 20,839 16,069 8,378 7,733 6,391
Earnings per
common and
common share
equivalents
(e)......... 1.25 .98 .59 .59 .12
Total assets. 964,460 992,597 887,807 416,207 377,167
Common stock-
holders'
equity...... 245,915 225,664 208,975 201,938 148,003
Short-term
debt........ 615 770 889 40,655 14,360
Long-term
debt, ex-
cluding cur-
rent
maturities.. 385,394 462,503 479,048 89,019 109,464
Redeemable
preferred
stock....... -- -- -- -- 24,900
Company-
obligated
mandatorily
redeemable
preferred
securities
of subsidi-
ary trust... 100,000 100,000 -- -- --
Average cus-
tomers
served...... 965,513 959,905 660,425 421,233 394,199
- - ---------------
(a) Missouri Gas Energy, a division of Southern Union was
acquired on January 31, 1994 and was accounted for as a
purchase. Missouri Gas Energy's assets were included in the
Company's consolidated balance sheet at January 31, 1994 and
its results of operations were included in the Company's
consolidated results of operations beginning February 1,
1994. For these reasons, the consolidated results of
operations of the Company for the periods subsequent to the
acquisition are not comparable to prior periods. See Busi-
ness -- Acquisitions and Divestiture.
(b) During 1994, the Company changed its fiscal year-end from
December 31 to June 30. The Company believes the new fiscal
year more closely conforms its financial condition and
results of operations to its natural business cycle. The
consolidated results of operations for the year ended
June 30, 1994 and the year ended December 31, 1993 include
the effects of the following which occurred in the two
quarters in common during the six-month period ended
December 31, 1993: (i) a non-recurring adjustment of
$2,489,000 to reverse a tax reserve upon the final settle-
ment of prior period federal income tax audits; (ii) a pre-
tax gain of $494,000 on the sale of undeveloped real
estate; and (iii) the write-off of $357,000 of acquisition-
related costs as a result of the termination of negotiations
for various acquisitions.
(c) The Company completed the Berry Gas, Eagle Pass and Rio
Grande acquisitions during 1993 and the Nixon acquisition in
1992. For these reasons, 1993 and 1992 results of opera-
operations are not comparable between periods.
(d) In February 1993, the Company sold Southern Union Explora-
tion Company, its former oil and gas exploration and produc-
tion company. The Company recorded an after-tax loss of
$4,400,000 at December 31, 1992 in connection with the sale.
(e) Earnings per share for all periods presented were computed
based on the weighted average number of shares of common
stock outstanding during the year adjusted for the 5% stock
dividends distributed on November 27, 1995 and June 30,
1994, the 33 % stock dividend distributed on March 11, 1996
and the 50% stock dividend distributed on March 9, 1994.
ITEM 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.
"Management's Discussion and Analysis of Results of Operations
and Financial Condition" on pages 23 through 32 of the Company's
Annual Report to Stockholders for the year ended June 30, 1996,
is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of Southern Union
and its consolidated subsidiaries, included in the Company's
Annual Report to Stockholders for the year ended June 30, 1996,
are incorporated herein by reference:
Consolidated statement of operations -- years ended June 30,
1996, 1995 and 1994.
Consolidated balance sheet -- June 30, 1996 and 1995.
Consolidated statement of cash flows -- years ended June 30,
1996, 1995 and 1994.
Consolidated statement of common stockholders' equity -- years
ended June 30, 1996, 1995 and 1994.
Notes to consolidated financial statements.
Report of independent accountants.
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of Registrant.
There is incorporated in this Item 10 by reference the informa-
tion in the Company's definitive proxy statement for the 1996
Annual Meeting of Stockholders under the captions Election of
Directors, Executive Officers Who Are Not Directors and The Board
of Directors.
ITEM 11. Executive Compensation.
There is incorporated in this Item 11 by reference the informa-
tion in the Company's definitive proxy statement for the 1996
Annual Meeting of Stockholders under the captions Management
Compensation and Certain Relationships.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.
There is incorporated in this Item 12 by reference the informa-
tion in the Company's definitive proxy statement for the 1996
Annual Meeting of Stockholders under the caption Security Owner-
ship.
ITEM 13. Certain Relationships and Related Transactions.
There is incorporated in this Item 13 by reference the informa-
tion in the Company's definitive proxy statement for the 1996
Annual Meeting of Stockholders under the caption Certain Rela-
tionships.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a)(1) Financial Statements. The following consolidated finan-
--------------------
financial statements of Southern Union and its consoli-
dated subsidiaries, included in the Company's Annual
Report to Stockholders for the year ended June 30, 1996,
are incorporated by reference in Part II, Item 8:
Consolidated statement of operations -- years ended
June 30, 1996, 1995 and 1994.
Consolidated balance sheet -- June 30, 1996 and 1995.
Consolidated statement of cash flows -- years ended
June 30, 1996, 1995 and 1994.
Consolidated statement of common stockholders' equity --
years ended June 30, 1996, 1995 and 1994.
Notes to consolidated financial statements.
Report of independent accountants.
(a)(2) Financial Statement Schedules. All schedules are omitted
-----------------------------
as the required information is not applicable or the
information is presented in the consolidated financial
statements or related notes.
(a)(3) Exhibits.
--------
3(a) Restated Certificate of Incorporation of Southern
Union Company. (Filed as Exhibit 3(a) to Southern
Union's Transition Report on Form 10-K for the year
ended June 30, 1994 and incorporated herein by
reference.)
3(b) Southern Union Company Bylaws, as amended. (Filed as
Exhibit 3(b) to Southern Union's Transition Report on
Form 10-K for the year ended June 30, 1994 and incor-
porated herein by reference.)
4(a) Specimen Common Stock Certificate. (Filed as Exhibit
4(a) to Southern Union's Annual Report on Form 10-K
for the year ended December 31, 1989 and incorporated
herein by reference.)
4(b) Indenture between Chase Manhattan Bank, N.A., as
trustee, and Southern Union Company dated January 31,
1994. (Filed as Exhibit 4.1 to Southern Union's
Current Report on Form 8-K dated February 15, 1994
and incorporated herein by reference.)
4(c) Officers' Certificate dated January 31, 1994 setting
forth the terms of the 7.60% Senior Debt Securities
due 2024. (Filed as Exhibit 4.2 to Southern Union's
Current Report on Form 8-K dated February 15, 1994
and incorporated herein by reference.)
4(d) Certificate of Trust of Southern Union Financing I.
(Filed as Exhibit 4-A to Southern Union's Registra-
tion Statement on Form S-3 (No. 33-58297) and
incorporated herein by reference.)
4(e) Certificate of Trust of Southern Union Financing II.
(Filed as Exhibit 4-B to Southern Union's Registra-
tion Statement on Form S-3 (No. 33-58297) and
incorporated herein by reference.)
4(f) Certificate of Trust of Southern Union Financing III.
(Filed as Exhibit 4-C to Southern Union's Registra-
tion Statement on Form S-3 (No. 33-58297) and
incorporated herein by reference.)
4(g) Form of Amended and Restated Declaration of Trust of
Southern Union Financing I. (Filed as Exhibit 4-D to
Southern Union's Registration Statement on Form S-3
(No. 33-58297) and incorporated herein by reference.)
4(h) Form of Subordinated Debt Securities Indenture among
Southern Union Company and The Chase Manhattan Bank,
N. A., as Trustee. (Filed as Exhibit 4-G to Southern
Union's Registration Statement on Form S-3 (No. 33-
58297) and incorporated herein by reference.)
4(i) Form of Supplemental Indenture to Subordinated Debt
Securities Indenture with respect to the Subordinated
Debt Securities issued in connection with the
Southern Union Financing I Preferred Securities.
(Filed as Exhibit 4-H to Southern Union's Registra-
tion Statement on Form S-3 (No. 33-58297) and
incorporated herein by reference.)
4(j) Form of Southern Union Financing I Preferred Security
(included in 4(g) above.) (Filed as Exhibit 4-I to
Southern Union's Registration Statement on Form S-3
(No. 33-58297) and incorporated herein by reference.)
4(k) Form of Subordinated Debt Security (included in 4(i)
above.) (Filed as Exhibit 4-J to Southern Union's
Registration Statement on Form S-3 (No. 33-58297) and
incorporated herein by reference.)
4(l) Form of Guarantee with respect to Southern Union
Financing I Preferred Securities. (Filed as Exhibit
4-K to Southern Union's Registration Statement on Form
S-3 (No. 33-58297) and incorporated herein by
reference.)
4(m) The Company is a party to other debt instruments, none
of which authorizes the issuance of debt securities in
an amount which exceeds 10% of the total assets of the
Company. The Company hereby agrees to furnish a copy
of any of these instruments to the Commission upon
request.
10(a) Revolving Credit Agreement, Revolving Note and Loan
Documents between Southern Union Company and the Banks
named therein dated September 30, 1993. (Filed as
Exhibit 99.2 to Southern Union's Current Report on
Form 8-K dated October 13, 1993 and incorporated
herein by reference.)
10(b) First Amendment to Revolving Credit Agreement,
Revolving Notes and Loan Documents dated as of
November 15, 1993. (Filed as Exhibit 10.1 to Southern
Union's Registration Statement on Form S-3 (No. 33-
70604) and incorporated herein by reference.)
10(c) Second Amendment to Revolving Credit Agreement dated
August 31, 1994. (Filed as Exhibit 10(c) to Southern
Union's Transition Report on Form 10-K for the year
ended June 30, 1994 and incorporated herein by
reference.)
10(d) Third Amendment to Revolving Credit Agreement dated
April 28, 1995. (Filed as Exhibit 10.1 to Southern
Union's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995 and incorporated herein by
reference.)
10(e) Asset Purchase Agreement between Southern Union Com-
pany and Western Resources, Inc. dated July 9, 1993.
(Filed as Exhibit 10.1 to the Company's Current Report
on Form 8-K dated July 12, 1993 and incorporated
herein by reference.)
10(f) Southern Union Company 1982 Incentive Stock Option
Plan and form of related Stock Option Agreement.
(Filed as Exhibits 4.1 and 4.2 to Form S-8, File No.
2-79612 and incorporated herein by reference.)(1)
10(g) Form of Indemnification Agreement between Southern
Union Company and each of the Directors of Southern
Union Company. (Filed as Exhibit 10(i) to Southern
Union's Annual Report on Form 10-K for the year ended
December 31, 1986 and incorporated herein by
reference.)
10(h) Southern Union Company 1992 Long-Term Stock Incentive
Plan. (Filed as Exhibit 10(i) to Southern Union's
Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by
reference.)(1)
10(i) Southern Union Company Director's Deferred Compensa-
tion Plan. (Filed as Exhibit 10(g) to Southern
Union's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by
reference.)(1)
10(j) Southern Union Company Supplemental Deferred Compensa-
tion Plan. (Filed as Exhibit 10(h) to Southern
Union's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by
reference.)(1)
10(k) Form of warrant granted to Fleischman and Walsh L.L.P.
(Filed as Exhibit 10(j) to Southern Union's Transition
Report on Form 10-K for the year ended June 30, 1994
and incorporated herein by reference.)
10(l) Renewal Promissory Note Agreement between
Peter H. Kelley and Southern Union Company dated
May 31, 1995. (Filed as Exhibit 10(I) to Southern
Union's Annual Report on Form 10-K for the year ended
June 30, 1995 and incorporated herein by reference.)
11 Computation of Per Share Earnings.
13 Portions of the Company's Annual Report to Stock-
holders for the year ended June 30, 1996, are incorpo-
rated by reference herein: Pages 23-56.
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K. Southern Union filed no current
-------------------
reports on Form 8-K during the three months ended June 30,
1996.
- - ----------------
(1) Indicates a Management Compensation Plan.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Southern Union has duly caused
this report to be signed by the undersigned, thereunto duly
authorized, on September 10, 1996.
SOUTHERN UNION COMPANY
By PETER H. KELLEY
---------------
Peter H. Kelley
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of Southern Union and in the capacities indicated as of
September 10, 1996.
Signature/Name Title
-------------- -----
GEORGE L. LINDEMANN* Chairman of the Board, Chief Executive
Officer and Director
JOHN E. BRENNAN* Director
FRANK W. DENIUS* Director
AARON I. FLEISCHMAN* Director
KURT A. GITTER, M.D.* Director
PETER H. KELLEY Director
- - ---------------
Peter H. Kelley
ADAM M. LINDEMANN* Director
ROGER J. PEARSON* Director
GEORGE ROUNTREE, III* Director
DAN K. WASSONG* Director
RONALD J. ENDRES Executive Vice President and Chief
- - ----------------
Ronald J. Endres Financial Officer
DAVID J. KVAPIL Vice President and Controller
- - ---------------
David J. Kvapil (Principal Accounting Officer)
*By PETER H. KELLEY
---------------
Peter H. Kelley
Attorney-in-fact
<PAGE>
INDEX TO EXHIBITS
Exhibit No.
- - -----------
11 Computation of Per Share Earnings
13 Portions of Company's Annual Report to Stockholders
21 Subsidiaries of the Company
23 Consent of Independent Accountants
24 Power of Attorney
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<PAGE>
COMPUTATION OF PER SHARE EARNINGS Exhibit 11
Years Ended June 30,
----------------------------
1996 1995 1994
-------- -------- --------
(thousands of dollars,
except per share amounts)
Net earnings available for
common stock..................... $ 20,839 $ 16,069 $ 8,378
======== ======== ========
Primary earnings per share:
Average shares outstanding....... 16,181 16,070 13,812
Stock options issued or granted.. 507 357 378
-------- -------- --------
Average shares outstanding....... 16,688 16,427 14,190
======== ======== ========
Primary earnings per share....... $ 1.25 $ .98 $ 0.59
======== ======== ========
Fully diluted earnings per share:
Average shares outstanding...... 16,181 16,070 13,812
Stock options issued or granted. 545 379 378
-------- -------- --------
Average shares outstanding...... 16,726 16,449 14,190
======== ======== ========
Fully diluted earnings
per share..................... $ 1.25 $ .98 $ .59
======== ======== ========
- - ---------------------
Note: All periods have been adjusted for each of the 5% stock
dividends distributed on November 27, 1995 and on June 30,
1994, the four-for-three stock split distributed in the
form of a 33 1/3 stock dividend on March 11, 1996 and the
three-for-two stock split distributed in the form of a 50%
stock dividend on March 9, 1994.
<PAGE>
EXHIBIT 13
PORTIONS OF COMPANY'S ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
PORTIONS OF COMPANY'S ANNUAL REPORT TO STOCKHOLDERS Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Overview Due in large measure to the Company's ongoing efforts
- - --------
to increase gas sales in nontraditional markets, improve
operating efficiencies of existing systems, and expand through
selective acquisitions of new systems, Southern Union Company
recorded its sixth consecutive year of revenues and earnings
growth.
Southern Union Company's principal business is the distribution
of natural gas as a public utility through Southern Union Gas,
serving 497,000 customers in Texas (including the cities of
Austin, Brownsville, El Paso, Galveston and Port Arthur), and
Missouri Gas Energy (MGE), acquired on January 31, 1994, serving
471,000 customers in central and western Missouri (including the
cities of Kansas City, St. Joseph, Joplin and Monett). See
Acquisitions and Divestiture in the Notes to the Consolidated
Financial Statements. The Company also operates natural gas
pipeline systems, markets natural gas to end-users, distributes
propane and holds investments in real estate and other assets.
Results of Operations
Net Earnings Southern Union Company's 1996 (fiscal year ended
- - ------------
June 30) net earnings increased 30% to $20,839,000 ($1.25 per
share), compared with $16,069,000 ($.98 per share) in 1995. The
increase primarily was due to the colder winter throughout most
of the Company's service territories and continued improved
operating efficiencies at MGE. Also contributing to the increase
was a reduction of interest expense after the repurchase of
$90,485,000 of the Company's 7.60% Senior Debt Securities (Senior
Notes) from June 1995 to June 1996. Certain gains on the repur-
chase of the Senior Notes also contributed to an increase in
other income. These positive factors were partially offset by
the May 1995 issuance of $100,000,000 of 9.48% Trust Originated
Preferred Securities (Preferred Securities) which increased divi-
dend expense by $8,321,000 in 1996. Average common and common
share equivalents outstanding increased 1.7% in 1996. The Com-
pany earned 8.8% on average common equity in 1996.
The Company's 1995 net earnings increased 92% to $16,069,000
($.98 per share) compared with $8,378,000 ($.59 per share) in
1994. The increase was due principally to the January 31, 1994
acquisition of MGE and the September 30, 1993 acquisition of Rio
Grande Valley Gas Company (Rio Grande). These acquisitions con-
tributed $8,007,000 to the increase in net earnings for 1995.
This was partially offset by the issuance of the Preferred
Securities which increased dividend expense by $1,159,000 in
1995, previously discussed. Average common and common share
equivalents outstanding increased 15.9% in 1995 primarily as a
result of the December 31, 1993 Rights Offering to existing
stockholders to subscribe for and purchase 2,000,000 pre-split
and pre-dividend shares of the Company's common stock. The Com-
pany earned 7.4% and 4.7% on average common equity in 1995 and
1994, respectively.
Operating Revenues Operating revenues in 1996 increased
- - ------------------
$140,408,000, or 29%, to $620,391,000, while gas purchase costs
increased $119,700,000, or 49%, to $361,539,000.
Operating revenues and gas purchase costs in 1996 were affected
by greater gas sales volumes and increases in the cost of gas.
Gas sales volumes increased 13% in 1996 to 118,454 million cubic
feet (MMcf) due to the demands of the colder winter weather. The
average cost of gas increased $.74 to $3.05 per Mcf in 1996 due
to increases in spot market gas prices as a result of the
increased demand for natural gas during the past winter season.
The average spot market price of natural gas, per million British
thermal units (MMBtu), increased 17% to $1.68 in 1996. Also
contributing to the increase in operating revenues was a
$7,729,000 increase in gross receipt taxes, which are levied on
sales revenues. Gross receipt taxes are collected from the cus-
tomers and remitted to the various taxing authorities.
Southern Union Gas and MGE contributed 32% and 63%, respectively,
of the Company's consolidated 1996 operating revenues.
Gas purchase costs generally do not directly affect earnings
since these costs are generally passed on 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, net operating margin is generally not affected by
increases or decreases in the cost of gas. Four suppliers pro-
vided 43% of gas purchases in 1996.
Gas transportation volumes in 1996 decreased 3% to 62,652 MMcf at
an average transportation rate per Mcf of $.31 compared with $.26
in 1995. Transportation volumes increased from 30,464 MMcf to
30,746 MMcf in 1996 for MGE and decreased 7% in 1996 for Southern
Union Gas and the Company's pipeline subsidiaries. This decrease
was mainly caused by a 66% decrease, or 10,855 MMcf, in volumes
transported into Mexico by Norteno Pipeline Company (Norteno), a
subsidiary of the Company.
Operating revenues in 1995 increased 29%, to $479,983,000, while
gas purchase costs increased 15%, to $241,839,000.
Operating revenues and gas purchase costs in 1995 were affected
by an increase in gas sales volumes which was partially offset by
a decrease in the cost of gas. Gas sales volumes increased 45%
in 1995 to 104,458 MMcf due to an increase in the average number
of customers as a result of the acquisition of MGE. Gas sales
volumes were also directly impacted by the unusually warm winter
weather patterns in 1995 in the Company's service areas. The
average cost of gas decreased $.60 to $2.32 per thousand cubic
feet (Mcf) in 1995 due to decreases in the spot market gas prices
as a result of competitive pricing during the unusually warm
1994/1995 winter season. The average spot market price of
natural gas per MMBtu decreased 25% to $1.43 in 1995. Also con-
tributing to the increase in operating revenues was a $7,617,000
increase in gross receipt taxes.
Gas transportation volumes in 1995 increased 79% to 64,597 MMcf
at an average transportation rate per Mcf of $.26 in 1995 and
$.28 in 1994. Transportation volumes increased 161% and 40% in
1995 for MGE, and Southern Union Gas and the Company's pipeline
subsidiaries, respectively. Increased volumes for MGE were the
result of consolidating these operations with the Company for the
full twelve months of 1995 as compared with only five months in
1994. Norteno also contributed to the increased transportation
volumes due to a 93% increase, or 16,400 MMcf, in volumes trans-
ported into Mexico.
Net Operating Margin Net operating margin in 1996 (operating
- - --------------------
revenues less gas purchase costs and revenue-related taxes)
increased by $12,979,000, or 6%, and increased by $69,611,000, or
49%, in 1995 primarily due to the acquisition of MGE. Revenues
and earnings are primarily dependent upon gas sales volumes and
gas service rates. The level of gas sales volumes is sensitive
to the variability of the weather.
Weather Weather in 1996 was colder than in 1995. Weather in
- - -------
Missouri in 1996 was 17% colder than in 1995 and 105% of a 30-
year measure. Weather in 1996 in Texas and Oklahoma was 16%
colder than in 1995 and 96% of a 30-year measure (weather in El
Paso was 82% of a 30-year measure in 1996). Weather in Missouri
in 1995 was 3% warmer than in 1994 and 90% of the 30-year
measure, while in Texas and Oklahoma weather in 1995 was 14%
warmer than in 1994 and 83% of the 30-year measure.
Customers The average number of customers served in 1996, 1995
- - ---------
and 1994 was 965,513, 959,905 and 660,425, respectively.
Southern Union Gas accounted for 44% of the Company's net
operating margin during 1996 while serving 490,218 residential,
commercial, industrial, agricultural and other customers in the
States of Texas and, until May 1, 1996, Oklahoma. The 1996 cus-
tomer base in Texas and Oklahoma marginally increased over 1995.
MGE accounted for 53% of the Company's net operating margin
during 1996 while serving 474,800 customers in central and
western Missouri. The 1996 customer base in Missouri increased
1% over 1995.
Operating Expenses Operating, maintenance and general expenses
- - ------------------
in 1996 increased $5,150,000, or 5%, to $107,521,000. Included
in this increase were the effects of increased bad debt expense
due to the increase in operating revenues resulting from the
colder winter season, increased provisions for workers compensa-
tion obligations, increased medical costs provided to employees
and certain severance costs at MGE. Partially offsetting these
factors was a decrease in payroll and related benefits due to a
6% reduction in employees, as well as other cost-cutting
measures.
Depreciation and amortization expense in 1996 increased $899,000
to $32,982,000, due to growth in plant. Taxes, other than on
income and revenues, principally consisting of property and pay-
roll taxes, in 1996 increased $1,535,000 to $13,659,000. The
increase was primarily due to general increases in property tax
assessments by various local taxing authorities. Offsetting this
increase was a reduction in payroll taxes from the decrease in
average employees, previously discussed.
Operating, maintenance and general expenses in 1995 increased
$23,419,000, or 30%, to $102,371,000. The acquisition of MGE and
Rio Grande contributed $27,732,000 to the overall increase in
1995 due to the timing of those acquisitions in relation to the
Company's fiscal year-end. Partially offsetting this increase
was a decrease in payroll and related benefits due to a 4% reduc-
tion in employees (which considers the timing of the various
acquisitions and reductions in employees since acquisition), as
well as efforts to reduce costs and improve operating
efficiencies.
Depreciation and amortization in 1995 also increased primarily as
a result of these acquisitions by $10,399,000 to $32,083,000.
Taxes, other than on income and revenues, in 1995 increased
$4,614,000 to $12,124,000 compared with $7,510,000 in 1994, due
primarily to the acquisition of gas distribution systems,
previously discussed.
Employees The Company employed 1,611, 1,720 and 1,794 indi-
- - ---------
viduals as of June 30, 1996, 1995 and 1994, respectively. After
gas purchases and taxes, employee costs and related benefits are
the Company's most significant expense. Such expense includes
salaries, payroll and related taxes and employee benefits such as
health, savings, retirement and educational assistance. On
May 1, 1996, the Company agreed to new three-year contracts with
each of the unions that represent all the bargaining-unit
employees of MGE.
Interest Expense and Dividends on Preferred Securities Total
- - ------------------------------------------------------
interest expense in 1996 declined by $4,052,000, or 10%, to
$35,832,000. Interest expense on long-term debt decreased by
$2,817,000 in 1996 primarily due to the repurchase of $90,485,000
of the Senior Notes at various dates from June 1995 to June 1996.
The funds used for the various repurchases of debt were
obtained, in part, from the May 17, 1995 issuance of the Pre-
ferred Securities and working capital. As a result of the timing
of the issuance of the Preferred Securities, preferred dividend
expense increased in 1996 by $8,321,000 to $9,480,000.
Interest expense on short-term debt in 1996 decreased $1,583,000
to $204,000, due to the average short-term debt outstanding
during 1996 decreasing $24,480,000 to $2,679,000 as a result of
initially utilizing the Preferred Securities proceeds for working
capital needs. The average rate of interest on short-term debt
was 7.4% in 1996 compared with 6.5% in 1995.
Total interest expense in 1995 increased by $14,420,000, or 57%,
to $39,884,000. Interest expense on long-term debt increased by
$13,880,000 in 1995 primarily due to the January 31, 1994
issuance of the Senior Notes which were used, in part, to fund
the acquisition of MGE and to repay and refinance certain out-
standing debt of the Company. Financing costs also increased in
1995 as a result of the issuance of the Preferred Securities in
late fiscal 1995, in which the Company recorded dividends on the
Preferred Securities of $1,159,000.
Interest expense on short-term debt in 1995 increased $375,000 to
$1,787,000, while the average short-term debt outstanding during
1995 increased $790,000 to $27,159,000. The average rate of
interest on short-term debt was 6.5% in 1995 compared with 5.1%
in 1994.
Other Income (Expense), Net Other income, net, in 1996 improved
- - ---------------------------
by $7,649,000 to $11,326,000. The deferral of interest and other
expenses associated with the MGE Safety Program contributed
$3,045,000 to the increase. See Utility Regulation and Rates in
the Notes to the Consolidated Financial Statements. Gains on the
sale of Western Gas Interstate Company (WGI), a subsidiary of the
Company, and other distribution operations contributed $2,300,000
pre-tax to the increase while the gain on the repurchase of the
Senior Notes contributed $1,581,000. In addition, investment
interest and interest on notes receivable increased $1,126,000
over 1995. Offsetting these increases were net losses of
$470,000 on the sale of undeveloped real estate in 1996.
Other income, net, in 1995 decreased by $2,120,000 to
$3,677,000. The decrease was a result of numerous non-recurring
transactions in 1994 which included: (i) $2,489,000 to reverse
a tax reserve upon final settlement of prior period federal
income tax audits (the reversal of the reserve had no impact on
liquidity or cash flows due to the non-cash impact of this ad-
justment); (ii) a $494,000 pre-tax gain on the sale of unde-
veloped real estate; and (iii) $357,000 of acquisition-related
costs which were written off as a result of the termination of
negotiations for various acquisitions. These 1994 transactions
were partially offset by a $2,343,000 increase in the deferral of
interest and other expenses associated with the MGE Safety Pro-
gram in 1995 and the $750,000 write-down of certain real estate
held for sale during 1995.
Federal and State Income Taxes Federal and state income tax
- - ------------------------------
expense in 1996, 1995 and 1994 was $14,979,000, $10,974,000 and
$5,185,000, respectively. The increase in income taxes in 1996
and 1995 was the result of an increase in pre-tax income
attributable to the earnings contributions of recent acquisitions
and the sale of WGI and other distribution properties. Income
taxes in 1994 were impacted by reductions related to amended
prior year federal income tax returns and non-taxable income
items included with "other income" related to the reversal of a
tax reserve recorded in September 1993, previously discussed. In
July 1993 the Company paid the Internal Revenue Service
$1,266,000 in settlement for federal income taxes and interest
related to the tax years 1984 through 1989.
Liquidity and Capital Resources
Operating Activities The seasonal nature of Southern Union's
- - --------------------
business results in a high level of cash flow needs during the
peak winter-heating season months to finance gas purchases, out-
standing customer accounts receivable and certain tax payments.
To provide these funds, as well as funds for its continuing con-
struction and maintenance programs, the Company has historically
used its revolving credit facility along with internally-
generated funds. Because of available short-term credit and the
ability to obtain various market financing, management believes
it has adequate financial flexibility to meet its cash needs.
Cash flow from operating activities in 1996 increased by
$25,823,000 to $67,465,000, and decreased by $53,687,000 to
$41,642,000 in 1995. Operating activities were positively
impacted by increased net earnings in 1996 as well as an increase
in deferred gas purchase costs due to market fluctuations in the
spot market price of natural gas.
Increased net earnings positively impacted cash flow from
operating activities in 1995, which was offset by a decrease in
deferred gas purchase costs due to market fluctuations in the
spot market price of natural gas. The acquisitions of MGE and
Rio Grande impacted 1994 operating cash flow in which net working
capital assets of $50,999,000 were acquired. Subsequent to these
acquisitions, collections on accounts receivable and payments on
accounts payable occurred.
At June 30, 1996, 1995 and 1994, the Company's primary sources of
liquidity included cash, cash equivalents and short-term invest-
ments of $2,887,000, $58,597,000 and $5,881,000, respectively,
and borrowings available under the revolving credit facility,
previously discussed. No amounts under the revolving credit
facility were outstanding at June 30, 1996 or 1995. A balance of
$20,100,000 was outstanding under the facility at July 31, 1996.
Investing Activities Cash flow used in investing activities in
- - --------------------
1996 decreased by $57,657,000 to $31,459,000, and decreased by
$381,539,000 to $89,116,000 in 1995. Investing activity cash
flow was primarily affected by additions to property, plant and
equipment, acquisitions, sale of various properties and invest-
ments in marketable securities.
During 1996, 1995 and 1994, the Company expended $59,376,000,
$67,442,000 and $38,237,000, respectively, for capital expendi-
tures excluding acquisitions. These expenditures primarily
related to normal distribution system replacement and expansion.
Included in these capital expenditures were $19,761,000,
$24,476,000 and $9,505,000 for the MGE Safety Program in 1996,
1995 and 1994, respectively.
On January 31, 1994, MGE was acquired for $401,600,000 and in
September 1993 Rio Grande was acquired for $30,500,000. These
acquisitions were financed through a combination of the revolving
credit facility, the sale of $475,000,000 of Senior Notes com-
pleted on January 31, 1994, and net proceeds from the sale of
$50,000,000 of common stock in the Rights Offering completed on
December 31, 1993.
On May 1, 1996, the Company consummated the sale of various
operations for $14,770,000, subject to post-closing adjustments.
The operations included certain gas distribution operations of
the Company in the Texas and Oklahoma Panhandles and WGI, exclu-
sive of the Del Norte interconnect which transports natural gas
into Mexico.
During 1996, the Company purchased $10,763,000 in common stock
investment securities. These securities are classified as avail-
able for sale and are intended to be held by the Company for an
indefinite period of time. As of June 30, 1996, the investment
securities had a fair value of $8,848,000. At June 30, 1996, the
adjustment to unrealized holding loss, included as a separate
component of common stockholders' equity, totaled $1,244,000.
Subsequent to June 30, 1996, additional common stock investment
securities were purchased. As of July 31, 1996, the investment
securities had a fair value of $16,872,000 and an unrealized
holding gain of $486,000.
Financing Activities Cash flow used in financing activities in
- - --------------------
1996 was $72,134,000, while cash flow from financing activities
decreased $288,421,000 to $80,608,000 in 1995. Financing
activity cash flow changes were primarily due to the various
financing transactions during the past three years. As a result,
the Company's total debt to total capital ratio at June 30, 1996
was 52.7%.
On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a
consolidated wholly-owned subsidiary of Southern Union, issued
$100,000,000 of Preferred Securities. The issuance of the Pre-
ferred Securities was part of a $300,000,000 shelf registration
filed with the Securities and Exchange Commission on March 29,
1995. Southern Union may sell a combination of preferred
securities of financing trusts and senior and subordinated debt
securities of Southern Union of up to $196,907,200 (the remaining
shelf) from time to time, at prices determined at the time of any
offering. The net proceeds from the Preferred Securities
offering, along with working capital from operations, were used
to repurchase $90,485,000 of the Senior Notes through June 1996
with the remaining balance used to provide working capital for
seasonal needs. Depending upon market conditions and available
cash balances, the Company may repurchase additional Senior Notes
in the future. See Preferred Securities of Subsidiary Trust and
Debt in the Notes to the Consolidated Financial Statements.
On January 31, 1994, the Company completed the sale of
$475,000,000 of Senior Notes. In addition, on December 31, 1993
Southern Union completed a Rights Offering to its existing stock-
holders 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 net proceeds from
the sale of the Senior Notes, together with the net proceeds from
the Rights Offering and working capital from operations, were
used to: (i) fund the acquisition of MGE; (ii) repay $59,300,000
of borrowings under the revolving credit facility used to fund
the acquisition of Rio Grande and repurchase all outstanding pre-
ferred stock; (iii) refinance, on January 31, 1994, $10,000,000
aggregate principal amount of 9.45% Senior Notes due January 31,
2004, and $25,000,000 aggregate principal amount of 10% Senior
Notes due January 31, 2012 and the related premium of $10,400,000
resulting from the early extinguishment of such notes; (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 $3,300,000 resulting from the early
extinguishment of such debentures; and (v) refinance, on May 16,
1994, $20,000,000 aggregate principal amount of 10 1/8% Notes.
The Company's effective rate under the current debt structure is
7.9% (including interest and the amortization of debt issuance
costs and redemption premiums on refinanced debt).
Southern Union has available a $100,000,000 revolving credit
facility (Revolving Credit Facility) underwritten by a syndicate
of banks. The Revolving Credit Facility is uncollaterized and
has no borrowing base limitations as long as the Company's Senior
Notes meet certain rating criteria. The Revolving Credit
Facility can also be used in part, but not to exceed $40,000,000,
to fund certain acquisitions and capital expenditures. The
Revolving Credit Facility contains certain financial covenants
that, among other things, restrict cash or asset dividends, share
repurchases, certain investments and additional debt. The
facility expires on December 31, 1997 but may be extended
annually for periods of one year with the consent of each of the
banks. The Revolving Credit Facility is subject to a commitment
fee based on the rating of the Company's Senior Notes. As of
June 30, 1996 the commitment fee was an annualized .15% on the
unused balance.
The Company had standby letters of credit outstanding of
$2,947,000 at both June 30, 1996 and 1995, which guarantee pay-
payment of various insurance premiums and state taxes.
Other Matters
Propane Operations Effective August 30, 1996, the Company pur-
- - ------------------
purchased certain propane distribution properties in El Paso,
Texas, serving 1,100 customers. These operations will compliment
the Company's gas distribution services and are expected to allow
the Company to provide a greater scope of services.
Stock Splits and Dividends On March 11, 1996, a four-for-three
- - --------------------------
stock split was distributed in the form of a 33 1/3% stock divi-
dend and on March 9, 1994 a three-for-two stock split was distri-
buted in the form of a 50% stock dividend. Additionally,
Southern Union distributed annual 5% common stock dividends on
November 27, 1995 and June 30, 1994. A portion of each 5% stock
dividend was characterized as a distribution of capital due to
the level of the Company's retained earnings available for dis-
tribution as of each date of declaration. Unless otherwise
stated, all per share data included herein and in the accom-
panying Consolidated Financial Statements and Notes thereto have
been restated to give effect to the stock splits and stock divi-
dends.
Contingencies The Company has been named as a potentially
- - -------------
responsible party in a special notice letter from the United
States Environmental Protection Agency for costs associated with
removing hazardous substances from the site of a former coal
gasification plant in Vermont. The Company also assumed
responsibility for certain environmental matters in connection
with the acquisition of MGE. Additionally, the Company is
investigating the possibility that the Company or predecessor
companies may have been associated with Manufactured Gas Plant
sites in other of its past, principally in Arizona and New
Mexico, and present service areas in Texas. See Commitments and
Contingencies in the Notes to Consolidated Financial Statements.
Inflation The Company believes that inflation has caused and
- - ---------
will continue to cause increases in certain operating expenses
and has required and will continue to require assets to be
replaced at higher costs. The Company continually reviews the
adequacy of its gas rates in relation to the increasing cost of
providing service and the inherent regulatory lag in adjusting
those gas rates.
Regulatory The majority of the Company's business activities are
- - ----------
subject to various regulatory authorities. The Company's finan-
cial condition and results of operations have been and will con-
tinue to be dependent upon the receipt of adequate and timely
adjustments in rates. Gas service rates, which consist of a
monthly fixed charge and a gas usage charge, are established by
regulatory authorities and are intended to permit utilities to
recover operating, administrative and financing costs and to have
the opportunity 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.
The Company is continuing to pursue certain changes to rates and
rate structures that are intended to reduce the sensitivity of
earnings to weather including weather normalization clauses and
higher minimum monthly service charges. Southern Union Gas has
weather normalization clauses in Austin, El Paso (effective
September 1, 1996), Port Arthur (also effective September 1,
1996), Galveston and in two other service areas in Texas. These
clauses allow for the adjustments that help stabilize customers'
monthly bills and the Company's earnings from the varying effects
of weather.
On March 1, 1996, MGE filed a request for a rate increase with
the Missouri Public Service Commission (MPSC) primarily con-
sisting of the recovery of certain capital expenditures incurred
by MGE for safety improvements under the MGE Safety Program. On
October 15, 1993, MGE's rates increased by $9,750,000 annually.
Southern Union Gas also received several annual cost of service
adjustments in 1996, 1995 and 1994.
Pursuant to a 1989 MPSC order, MGE is engaged in a major gas
safety program in its service territories. This program includes
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. In recognition of the significant capital
expenditures associated with this safety program, the MPSC per-
mits the deferral, and subsequent recovery through rates, of
depreciation expense, property taxes and associated carrying
costs. The continuation of the MGE Safety Program will result in
significant levels of future capital expenditures. The Company
estimates incurring capital expenditures of $20,296,000 in fiscal
1997 related to this program which are expected to be financed
through working capital.
Accounting Pronouncements In March 1995, the Financial
- - -------------------------
Accounting Standards Board (FASB) issued Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed Of, a standard which is effective for fiscal years
beginning after December 15, 1995. This standard requires that
long-lived assets, identifiable intangibles, capital leases and
goodwill be reviewed for impairment whenever changes in circum-
stances indicate that the carrying amount of the assets may not
be recoverable. In addition, this standard requires that regula-
tory assets meet the recovery criteria set forth in a previously
issued standard, Accounting for the Effects of Certain Types of
Regulation, on an ongoing basis in order to continue to defer
applicable costs. Since the Company's policy was basically the
same as the policy prescribed by the new standard, implementa-
tion of this standard had no effect on the Company's financial
position, results of operations or cash flows.
In October 1995, the FASB issued another standard, Accounting for
Stock-Based Compensation which establishes fair value-based
accounting and reporting standards for all transactions in which
a company acquires goods or services by issuing its equity
securities, including all arrangements under which employees
receive stock-based compensation. This standard encourages, but
does not require, companies to adopt fair value accounting to
recognize compensation expense for grants under stock-based com-
pensation plans. However, companies must comply with the fair
value disclosure requirements set forth in the standard, which is
effective for fiscal years beginning after December 15, 1995.
The Company expects to adopt the disclosure requirements of the
standard, which will have no impact on the Company's financial
position, results of operations or cash flows.
See the Notes to Consolidated Financial Statements for other
accounting pronouncements followed by the Company.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended June 30,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(thousands of dollars, except
shares and per share amounts)
Operating revenues............ $ 620,391 $ 479,983 $ 372,043
Gas purchase costs............ 361,539 241,839 211,127
--------- --------- ---------
Operating margin............ 258,852 238,144 160,916
Revenue related taxes......... (34,886) (27,157) (19,540)
--------- --------- ---------
Net operating margin........ 223,966 210,987 141,376
Operating expenses:
Operating, maintenance
and general............... 107,521 102,371 78,952
Depreciation and
amortization.............. 32,982 32,083 21,684
Taxes, other than on income
and revenues.............. 13,659 12,124 7,510
--------- --------- ---------
Total operating expenses.. 154,162 146,578 108,146
--------- --------- ---------
Net operating revenues.... 69,804 64,409 33,230
--------- --------- ---------
Other income (expenses):
Interest.................... (35,832) (39,884) (25,464)
Dividends on preferred
securities of subsidiary
trust..................... (9,480) (1,159) --
Other, net.................. 11,326 3,677 5,797
--------- --------- ---------
Total other expenses, net. (33,986) (37,366) (19,667)
--------- --------- ---------
Earnings before income taxes.. 35,818 27,043 13,563
Federal and state income
taxes....................... 14,979 10,974 5,185
--------- --------- ---------
Net earnings available for
common stock................ $ 20,839 $ 16,069 $ 8,378
========= ========= =========
Earnings per common and
common share equivalents.... $ 1.25 $ .98 $ .59
========= ========= =========
Weighted average common and
common share equivalents
outstanding................. 16,726,016 16,449,370 14,189,549
========== ========== ==========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
June 30,
-----------------------
1996 1995
---------- ----------
(thousands of dollars)
Property, plant and equipment:
Plant in service.................... $ 912,552 $ 882,769
Construction work in progress....... 8,411 14,670
--------- ---------
920,963 897,439
Less accumulated depreciation and
amortization...................... (310,289) (303,327)
--------- ---------
610,674 594,112
Additional purchase cost assigned to
utility plant, net of accumulated
amortization of $19,305,000 and
$16,561,000, respectively........... 133,780 144,629
--------- ---------
Net property, plant and equipment... 744,454 738,741
Current assets:
Cash and cash equivalents........... 2,887 39,015
Short-term investments.............. -- 19,582
Accounts receivable, billed and
unbilled.......................... 47,846 35,465
Inventories, principally at
average cost...................... 27,023 23,561
Deferred gas purchase costs......... 2,650 7,641
Prepayments and other............... 1,947 1,349
--------- ---------
Total current assets.................. 82,353 126,613
Deferred charges...................... 116,286 114,167
Investment securities................. 8,848 --
Real estate........................... 9,513 10,742
Other................................. 3,006 2,334
--------- ---------
Total assets........................ $ 964,460 $ 992,597
========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
June 30,
-----------------------
1996 1995
---------- ----------
(thousands of dollars)
Common stockholders' equity:
Common stock, $1 par value; autho-
rized 50,000,000 shares; issued
16,275,292 shares at June 30, 1996.. $ 16,275 $ 11,570
Premium on capital stock.............. 206,047 198,819
Less treasury stock: 51,625 shares
at cost............................. (794) (794)
Retained earnings..................... 25,631 16,069
Unrealized holding loss............... (1,244) --
--------- ---------
245,915 225,664
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
$103,093,000 principal amount of
9.48% subordinated notes of
Southern Union due 2025............... 100,000 100,000
Long-term debt.......................... 385,394 462,503
Total capitalization.................. 731,309 788,167
Current liabilities:
Long-term debt due within one year.... 615 770
Accounts payable...................... 39,238 28,784
Federal, state and local taxes 16,741 6,310
Accrued interest...................... 12,773 15,194
Accrued dividends on preferred
securities of subsidiary trust...... 2,370 --
Customer deposits..................... 15,656 14,166
Other................................. 15,937 13,621
--------- ---------
Total current liabilities........... 103,330 78,845
Deferred credits and other.............. 86,287 89,529
Accumulated deferred income taxes....... 43,534 36,056
Commitments and contingencies........... -- --
--------- ---------
Total stockholders' equity and
liabilities......................... $ 964,460 $ 992,597
========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash paid for interest in 1996, 1995 and 1994 was $36,893,000,
$38,987,000 and $12,001,000, respectively. Cash paid for income
taxes in 1996, 1995 and 1994 was $11,000, $2,533,000 and
$5,820,000, respectively.
As a result of the Missouri Gas Energy and Rio Grande acquisi-
tions, various non-cash assets and liabilities were acquired
during 1994 including $50,999,000 in working capital,
$385,650,000 in net property, plant and equipment, $46,988,000 in
other noncurrent assets and $42,971,000 in noncurrent
liabilities.
Year Ended June 30,
------------------------------------
1996 1995 1994
---------- ---------- ----------
(thousands of dollars)
Cash flows from
operating activities:
Net earnings........... $ 20,839 $ 16,069 $ 8,378
Adjustments to recon-
cile net earnings
to net cash flows
from operating
activities:
Depreciation and
amortization..... 32,982 32,083 21,684
Deferred income
taxes............ 9,413 5,909 8,943
Provision for bad
debts............ 5,535 4,162 2,897
Deferral of in-
terest expense... (5,664) (2,619) (276)
Other, net......... 191 1,952 (805)
Changes in assets
and liabilities,
net of acquisi-
tions and dispo-
sitions:
Accounts re-
ceivable,
billed and
unbilled..... (17,743) 11,051 63,059
Accounts pay-
able......... 10,048 (7,255) (4,152)
Taxes and
other
liabilities.. 9,141 (7,187) 6,518
Customer
deposits..... 1,489 1,137 (75)
Deferred gas
purchase
costs........ 4,991 (22,537) (4,586)
Inventories.... (3,607) 7,975 (9,240)
Other, net..... (150) 902 2,984
--------- --------- ---------
Net cash flows
from operating
activities....... 67,465 41,642 95,329
--------- --------- ---------
Cash flows from (used in)
investing activities:
Additions to property,
plant and equipment.. (59,376) (67,442) (38,237)
Acquisition of
operations, net of
cash received........ -- (750) (440,666)
Purchase of investment
securities........... (10,763) -- --
Litigation settlement
proceeds............. 4,250 -- --
Maturity (purchase) of
short-term invest-
ments................ 19,582 (19,582) --
Increase (decrease) in
customer advances.... 3,547 725 (3,079)
Increase (decrease) in
deferred charges and
credits.............. (3,811) (3,868) 5,603
Proceeds from notes
receivable........... -- -- 6,368
Proceeds from sale of
various operations... 14,770 -- --
Other, net............. 342 1,801 (644)
--------- --------- ---------
Net cash flows used in
investing activities. (31,459) (89,116) (470,655)
--------- --------- ---------
Cash flows from (used in)
financing activities:
Repayment of debt...... (72,790) (16,212) (107,052)
Net payments under
revolving credit
facility............. -- -- (28,200)
Issuance of debt....... -- -- 475,000
Premium on early
extinguishment of
debt................. -- -- (13,715)
Debt issuance cost..... -- -- (5,450)
Proceeds from rights
offering, net........ -- -- 49,351
Issuance of preferred
securities of sub-
sidiary trust........ -- 100,000 --
Issuance cost of pre-
ferred securities of
subsidiary trust..... -- (3,799) --
Other, net............. 656 619 (905)
--------- --------- ---------
Net cash flows from
(used in) financing
activities........... (72,134) 80,608 369,029
--------- --------- ---------
Increase (decrease) in cash
and cash equivalents..... (36,128) 33,134 (6,297)
Cash and cash equivalents
at beginning of year..... 39,015 5,881 12,178
--------- --------- ---------
Cash and cash equivalents
at end of year........... $ 2,887 $ 39,015 $ 5,881
========= ========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Premium Trea- Unrea-
Stock, on sury lized
$1 Par Capital Stock, Retained Holding
Value Stock at Cost Earnings Loss Total
------- -------- ------- -------- ------- --------
(thousands of dollars)
Balance at
July 1,
1993..... $ 5,302 $144,902 $(794) $ 1,744 $ -- $151,154
Net
earn-
ings... -- -- -- 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) -- -- -- --
5% stock
divi-
dend.... 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
earn-
ings... -- -- -- 16,069 -- 16,069
Exercise
of
stock
op-
tions.. 73 547 -- -- -- 620
------- -------- ----- -------- ------- --------
Balance
June 30,
1995..... 11,570 198,819 (794) 16,069 -- 225,664
Net
earn-
ings... -- -- -- 20,839 -- 20,839
5%
stock
divi-
dend 576 10,701 -- (11,277) -- --
Four-
for-
three
stock
split.. 4,054 (4,054) -- -- -- --
Unrea-
lized
holding
loss... -- -- -- -- (1,244) (1,244)
Exercise
of
stock
op-
tions.. 75 581 -- -- -- 656
------- -------- ----- -------- ------- --------
Balance
June 30,
1996..... $16,275 $206,047 $(794) $ 25,631 $(1,244)$245,915
======= ======== ===== ======== ======= ========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I Summary of Significant Accounting Policies
Operations Southern Union Company (Southern Union and, together
- - ----------
with its wholly-owned subsidiaries, the Company), is a public
utility primarily engaged in the distribution and sale of natural
gas to residential, commercial and industrial customers in ser-
vice areas in Texas and Missouri. Subsidiaries of Southern Union
also market natural gas to end-users, operate intrastate and
interstate natural gas pipeline systems and sell commercial gas
air conditioning and other gas-fired engine-driven applications.
Certain subsidiaries own or hold interests in real estate and
other assets, which are primarily used in the Company's utility
business. Substantial operations of the Company are subject to
regulation.
Principles of Consolidation The consolidated financial state-
- - ----------
ments include the accounts of Southern Union and its wholly-owned
subsidiaries. All significant intercompany accounts and transac-
tions are eliminated in consolidation. All dollar amounts in the
tables herein, except per share amounts, are stated in thousands
unless otherwise indicated. Certain reclassifications have been
made to prior years' financial statements to conform with the
current year's presentation.
Gas Utility Revenues and Gas Purchase Costs Gas utility custo-
- - -------------------------------------------
mers are billed on a monthly-cycle basis. The related cost of
gas is matched with cycle-billed revenues through operation of
purchased gas adjustment provisions in tariffs approved by the
regulatory agencies having jurisdiction. Revenues from gas
delivered but not yet billed are accrued, along with the related
gas purchase costs and revenue-related taxes. The distribution
and sale of natural gas in Texas and Missouri contribute in
excess of 90% of the Company's total revenue, net earnings and
identifiable assets. Four suppliers provided 43% of the Com-
pany's gas purchases in 1996.
Credit Risk Concentrations of credit risk in trade receivables
- - -----------
are limited due to the large customer base with relatively small
individual account balances. In addition, Company policy
requires a deposit from certain customers. The Company has
recorded an allowance for doubtful accounts totaling $4,000,000
and $2,100,000 at June 30, 1996 and 1995, respectively.
Fair Value of Financial Instruments The carrying amounts
- - -----------------------------------
reported in the balance sheet for cash and cash equivalents,
short-term investments, accounts receivable, investment
securities and accounts payable approximates their fair value.
The fair value of the Company's investment securities and long-
term debt is estimated using current market quotes and other
estimation techniques.
Inventories Inventories consist of gas in underground storage
- - -----------
and materials and supplies. Gas in underground storage of
$22,784,000 and $15,427,000 at June 30, 1996 and 1995, respec-
tively, consists of 9,844,000 and 9,701,000 British thermal units
(MMBtu), respectively.
Earnings Per Share The computation of earnings per common and
- - ------------------
common share equivalents is based on the weighted average number
of outstanding common shares during the period plus, when their
effect is dilutive, common share equivalents consisting of cer-
tain shares subject to stock options and warrants. Primary and
fully diluted earnings per share are identical for all periods
presented and, therefore, earnings per common and common share
equivalents represent fully diluted earnings per share.
New Pronouncements The Financial Accounting Standards Board
- - ------------------
recently issued Accounting for Stock-Based Compensation, a
standard which establishes fair value-based accounting and dis-
closure requirements for all transactions in which a company
acquires goods or services in exchange for its equity securities,
including all arrangements under which employees receive stock-
based compensation. This standard encourages, but does not
require, companies to adopt fair value accounting to recognize
compensation expense for grants under stock-based compensation
plans. However, companies must comply with the fair value dis-
closure requirements set forth in the standard which is effective
for fiscal years beginning after December 15, 1995. The Company
expects to adopt the disclosure requirements of this standard,
which will not impact the Company's financial position, results
of operations or cash flows.
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates The preparation of financial statements in con-
- - ----------------
formity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of con-
tingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
II Acquisitions and Divestiture
Missouri Gas Energy On January 31, 1994, the Company consummated
- - -------------------
the acquisition of Missouri Gas Energy from Western Resources,
Inc. (Western Resources or the seller of the Missouri properties)
for $400,300,000 in cash, based on account balances as of
December 31, 1993. The final purchase price, which was deter-
mined through post-closing adjustments and subsequent arbitra-
tion, was $401,600,000. The acquisition of Missouri Gas Energy
was financed through the sale of $475,000,000 of 7.60% Senior
Debt Securities due 2024 (Senior Notes) completed on January 31,
1994 and net proceeds from a $50,000,000 common stock subscrip-
tion rights offering (Rights Offering) completed on December 31,
1993. The assets of Missouri Gas Energy were included in the
Company's consolidated balance sheet at January 31, 1994 and the
results of operations of Missouri Gas Energy have been included
in the statements of consolidated operations and cash flows since
February 1, 1994. The acquisition was accounted for using the
purchase method. The additional purchase cost assigned to
utility plant of $54,000,000 reflects the excess of the purchase
price over the historical book carrying value of net assets
acquired plus various 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.
Rio Grande Valley On September 30, 1993, the Company acquired
- - -----------------
the Rio Grande Valley Gas Company (Rio Grande) for $30,500,000.
The Company initially funded the Rio Grande purchase with
borrowings from its Revolving Credit Facility which were subse-
quently repaid with proceeds from the sale of the Senior Notes
and the Rights Offering. The assets of Rio Grande were included
in the Company's consolidated balance sheet at September 30, 1993
and the results of operations of Rio Grande have been included in
the Company's statements of consolidated operations and cash
flows since October 1, 1993. The acquisition was accounted for
using the purchase method. The additional purchase cost assigned
to utility plant of $12,000,000 reflects the excess of the pur-
chase 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.
Sale of Assets On October 16, 1995, Southern Union Company
- - --------------
entered into an agreement to sell certain gas distribution
operations of the Company in the Texas and Oklahoma Panhandles
and to sell Western Gas Interstate Company (WGI), a wholly-owned
subsidiary of the Company, exclusive of the Del Norte intercon-
nect operation which transports natural gas into Mexico, for
$14,770,000, subject to post-closing adjustments. The sale was
closed on May 1, 1996.
The results of operations of the Company for the periods subse-
quent to these acquisitions and divestiture are not comparable to
those periods prior to the acquisitions and divestiture nor are
the 1996, 1995 and 1994 results of operations comparable with
previous periods. Unaudited pro forma consolidated results for
the twelve months ended June 30, 1994 for operating revenues,
earnings before income taxes, net earnings available for common
stock and net earnings per common and common share equivalents
were $604,962,000, $16,529,000, $10,248,000 and $.64, respec-
tively. These results give effect to the Missouri Gas Energy and
Rio Grande acquisitions, the sale of the Senior Notes, the com-
pletion of the Rights Offering and refinancing of certain short-
term and long-term debt as of July 1, 1993. These results are
not necessarily indicative of the results which would have been
obtained, or may be obtained, in the future.
III Other Income, Net
Other income, net in 1996, 1995 and 1994 was $11,326,000,
$3,677,000 and $5,797,000, respectively.
Other income of $11,326,000 in 1996 included: $5,664,000 related
to the deferral of interest and other expenses associated with
the Missouri Gas Energy Safety Program; $2,300,000 pre-tax gain
on the sale of WGI and other operations; investment interest and
interest on notes receivable of $2,051,000; net rental income
from Lavaca Realty
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company (Lavaca Realty), the Company's real estate subsidiary, of
$1,392,000; and $1,581,000 in net gains from the repurchase of
Senior Notes. This was partially offset by losses of $470,000 on
the sale of undeveloped real estate.
Other income of $3,677,000 in 1995 included: $2,619,000 related
to the deferral of interest and other expenses associated with
the Missouri Gas Energy Safety Program; net rental income from
Lavaca Realty of $1,403,000; and $244,000 from gas appliance
merchandising. This was partially offset by $750,000 for the
write-down to estimated fair market value of certain real estate
held for sale.
Other income of $5,797,000 in 1994 included: a non-recurring
accounting adjustment of $2,489,000 to reverse a tax reserve
upon the final settlement of prior period federal income tax
audits and the filing of amended federal income tax returns; net
rental income from Lavaca Realty of $1,115,000; investment
interest and interest on notes receivable of $950,000; $500,000
from gas appliance merchandising; a pre-tax gain of $494,000 on
the sale of undeveloped real estate; the write-off of $357,000 of
acquisition-related costs as a result of the termination of
negotiations related to various acquisitions and $276,000 related
to the deferral of interest and other expenses associated with
the Missouri Gas Energy Safety Program.
IV Cash Flow Information
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Short-term investments are highly liquid investments with
maturities of more than three months when purchased, and are
carried at cost, which approximates market. The Company places
its temporary cash investments with a high credit quality
financial institution which, in turn, invests the temporary funds
in a variety of high-quality short-term financial securities.
V Property, Plant and Equipment
Plant Plant in service and construction work in progress are
- - -----
stated at original cost net of contributions in aid of construc-
tion. The cost of additions includes an allowance for funds used
during construction and applicable overhead charges. Gain or
loss is recognized upon the disposition of significant utility
properties and other property constituting operating units. Gain
or loss from minor dispositions of property is charged to accumu-
lated depreciation and amortization. The Company capitalizes the
cost of significant internally-developed computer software sys-
tems and amortizes the cost over the expected useful life.
June 30,
---------------------
1996 1995
---------- ----------
Distribution plant..................... $ 870,820 $ 831,401
General plant.......................... 71,127 70,713
Other.................................. 14,636 22,324
--------- ---------
Total plant.......................... 956,583 924,438
Less contributions in aid of
construction......................... (44,031) (41,669)
--------- ---------
Plant in service................... 912,552 882,769
Construction work in progress.......... 8,411 14,670
--------- ---------
920,963 897,439
Less accumulated depreciation and
amortization......................... (310,289) (303,327)
--------- ---------
610,674 594,112
Additional purchase cost assigned to
utility plant, net................... 133,780 144,629
--------- ---------
Net property, plant and equipment...... $ 744,454 $ 738,741
========= =========
During 1996 WGI and other operations were sold in which property,
plant and equipment had a cost and accumulated depreciation and
amortization of $21,111,000 and $10,356,000, respectively.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Acquisitions are recorded at the historical book carrying value
of utility plant. Additional purchase cost assigned to utility
plant is the excess of the purchase price over the book carrying
value of the net assets acquired. In general, the Company has
not been allowed direct recovery of additional purchase cost
assigned to utility plant in rates. Periodically, the Company
evaluates the carrying value of its additional purchase cost
assigned to utility plant, long-lived assets, capital leases and
other identifiable intangibles by comparing the anticipated
future operating income from the businesses giving rise to the
respective asset with the original cost or unamortized balance.
No impairment has been indicated or is expected.
Depreciation and Amortization Depreciation of utility plant is
- - -----------------------------
provided at an average straight-line rate of approximately 3% per
annum of the cost of such depreciable properties less applicable
salvage. Franchises are amortized over their respective lives.
Depreciation and amortization of other property is provided at
straight-line rates estimated to recover the costs of the
properties, after allowance for salvage, over their respective
lives. Internally-developed computer software system costs are
amortized over various regulatory-approved periods. Amortization
of additional purchase cost assigned to utility plant is provided
on a straight-line basis over forty years unless the Company's
regulators have provided for the recovery of the additional pur-
chase cost in rates, in which case the Company's policy is to
utilize the amortization period which follows the rate recovery
period.
Depreciation and amortization of property, plant and equipment in
1996, 1995 and 1994 was $29,264,000, $27,815,000 and $18,197,000,
respectively.
VI Investment Securities
At June 30, 1996, all securities owned by the Company were clas-
sified as available for sale and are intended to be held by the
Company for an indefinite period of time. Accordingly, these
securities are stated at fair value, with unrealized gains and
losses reported in a separate component of common stockholders'
equity. Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included in
the Statement of Consolidated Operations when incurred.
As of June 30, 1996, investment securities consisted of common
stock with a specific cost of $10,763,000 and a fair value of
$8,848,000. The unrealized holding loss, included as a separate
component of common stockholders' equity, totaled $1,244,000 at
June 30, 1996. There were no adjustments to unrealized holding
loss on securities available-for-sale in previous years as no
investment securities were held. Subsequent to June 30, 1996,
additional common stock investment securities were purchased. As
of July 31, 1996, the investment securities available-for-sale
had a fair value of $16,872,000 and an unrealized holding gain of
$486,000.
VII Stockholders' Equity
Stock Dividends and Splits On November 27, 1995 and June 30,
- - --------------------------
1994, Southern Union distributed its annual 5% common stock divi-
dend to stockholders of record on November 15, 1995 and June 14,
1994, respectively. A portion of each 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
each declaration date. On February 13, 1996, the Board of
Directors declared a four-for-three stock split distributed in
the form of a 33 1/3% stock dividend on March 11, 1996, to stock-
holders of record on February 23, 1996. 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 and share data included
herein have been restated to give effect to the dividends and
splits.
Rights Offering On December 31, 1993, Southern Union consummated
- - ---------------
a Rights Offering to its 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 the sale of the Senior Notes, were used to
fund the Missouri Gas Energy and Rio Grande acquisitions and to
retire or refinance certain outstanding debt.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common Stock The Company maintains its 1992 Long-Term Stock In-
- - ------------
centive Plan (1992 Plan) under which options to purchase
1,146,600 shares may be granted to officers and key employees at
prices not less than the fair market value on the date of grant.
The 1992 Plan allows for the granting of stock appreciation
rights, dividend equivalents, performance shares and restricted
stock. The Company also had an incentive stock option plan (1982
Plan) which provided for the granting of 787,500 options, until
December 31, 1991. Upon exercise of an option granted under the
1982 Plan, the Company may elect, instead of issuing shares, to
make a cash payment equal to the difference at the date of exer-
cise between the option price and the market price of the shares
as to which such option is being exercised. Options granted
under both the 1992 Plan and the 1982 Plan are exercisable for
periods of ten years from the date of grant or such lesser
period as may be designated for particular options, and become
exercisable after a specified period of time from the date of
grant in cumulative annual installments.
1992 Plan 1982 Plan
---------------------- ---------------------
Shares Shares
Under Option Under Option
Option Prices Option Prices
------- ------------- ------- ------------
Outstanding
July 1, 1993... 284,445 $6.23 - 7.24 544,635 $5.54 - 6.23
Granted...... 350,595 12.59 -- --
Exercised.... -- -- (37,485) 5.54
Canceled..... (2,205) 6.23 - 7.24 (46,305) 5.54 - 6.23
------- -------
Outstanding
June 30, 1994.. 632,835 6.23 - 12.59 460,845 5.54 - 6.23
Exercised.... (1,544) 7.24 (100,905) 5.54 - 6.23
Canceled..... (3,972) 6.23 - 7.24 -- --
------- -------
Outstanding
June 30, 1995.. 627,319 6.23 - 12.59 359,940 5.54 - 5.66
Granted...... 287,770 15.68 -- --
Exercised.... (33,957) 7.24 - 12.59 (63,997) 5.54 - 5.66
Canceled..... (45,239) 7.24 - 15.68 -- --
------- -------
Outstanding
June 30, 1996.. 835,893 6.23 - 15.68 295,943 5.54 - 5.66
======= =======
At June 30, 1996, 1995 and 1994, options for 290,178, 191,173 and
56,448 shares ranging from $6.23 to $12.59 were exercisable under
the 1992 Plan. At June 30, 1996, 1995 and 1994, options under
the 1982 Plan for 291,533, 293,790 and 310,905 shares were exer-
cisable at prices ranging from $5.54 to $5.66. There were
267,488, 364,299 and 361,462 shares available for future option
grants under the 1992 Plan at June 30, 1996, 1995 and 1994,
respectively. No shares were available for future option grants
under the 1982 Plan at June 30, 1996, 1995 and 1994.
On February 10, 1994, Southern Union granted to Fleischman and
Walsh L.L.P., legal counsel to the Company, a warrant which
expires on February 10, 2004, to purchase up to 55,125 shares of
Common Stock at an exercise price of $12.59.
Retained Earnings Under the most restrictive provisions in
- - -----------------
effect, as a result of the sale of Senior Notes, Southern Union
will not declare or pay any cash or asset dividends on common
stock (other than dividends and distributions payable solely in
shares of its common stock or in rights to acquire its common
stock) or acquire or retire any shares of Southern Union's common
stock, unless no event of default exists and the Company meets
certain financial ratio requirements. In addition, Southern
Union's charter relating to the issuance of preferred stock
limits the payment of cash or asset dividends on capital stock.
VIII Preferred Securities of Subsidiary Trust
On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a
consolidated wholly-owned subsidiary of Southern Union, issued
$100,000,000 of 9.48% Trust Originated Preferred Securities
(Preferred Securities). In connection with the Subsidiary
Trust's issuance of the Preferred Securities and the related pur-
chase by Southern Union of all of the Subsidiary Trust's common
securities (Common Securities), Southern Union issued to the Sub-
sidiary Trust $103,092,800 principal amount of its 9.48% Subordi-
nated Deferrable Interest Notes, due 2025 (Subordinated Notes).
The sole assets of the Subsidiary Trust are the Subordinated
Notes. The interest and other payment dates on the Subordinated
Notes
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
correspond to the distribution and other payment dates on the
Preferred Securities and the Common Securities. Under certain
circumstances, the Subordinated Notes may be distributed to
holders of the Preferred Securities and holders of the Common
Securities in liquidation of the Subsidiary Trust. The Subordi-
nated Notes are redeemable at the option of the Company on or
after May 17, 2000, at a redemption price of $25 per Subordinated
Note plus accrued and unpaid interest. The Preferred Securities
and the Common Securities will be redeemed on a pro rata basis to
the same extent as the Subordinated Notes are repaid, at $25 per
Preferred Security and Common Security plus accumulated and
unpaid distributions. Southern Union's obligations under the
Subordinated Notes and related agreements, taken together, con-
stitute a full and unconditional guarantee by Southern Union of
payments due on the Preferred Securities. As of June 30, 1996
and 1995, 4,000,000 shares of Preferred Securities were out-
standing.
IX Debt
June 30,
--------------------
1996 1995
-------- --------
7.60% Senior Notes....................... $384,515 $460,000
Other.................................... 1,494 3,273
-------- --------
Total long-term debt..................... $386,009 $463,273
======== ========
The maturities of long-term debt for each of the next five years
ending June 30 are: 1997 -- $615,000; 1998 -- $612,000; 1999 --
$266,000; 2000 -- $1,000; 2001 -- none; and thereafter --
$384,515,000.
Senior Notes On January 31, 1994, Southern Union completed the
- - ------------
sale of the Senior Notes. The net proceeds from the sale, to-
gether with the net proceeds from the Rights Offering and working
capital from operations, were used to: (i) fund the acquisition
of Missouri Gas Energy; (ii) repay $59,300,000 of borrowings
under the revolving credit facility; and (iii) refinance
$105,000,000 aggregate principal amount of various notes and
debentures and the related premiums of $13,700,000 resulting from
the early extinguishment of such notes and debentures.
During 1996, $75,485,000 of Senior Notes were repurchased at
prices ranging from $922 to $985 per $1,000 note resulting in a
net pre-tax gain of $1,581,000. In June 1995, $15,000,000 of
Senior Notes were repurchased at prices ranging from $993 to $995
per $1,000 note resulting in a net pre-tax loss of $33,000.
Debt issuance costs and premiums on the early extinguishment of
debt are accounted for in accordance with that required by its
various regulatory bodies having jurisdiction over the Company's
operations. The Company recognizes gains or losses on the early
extinguishment of debt to the extent it is provided for by its
regulatory authorities and in some cases such costs are deferred
and amortized over the term of the new or replacement debt
issues.
The Senior Notes traded at $950 and $933 (per $1,000 note) on
June 30 and July 31, 1996, respectively, as quoted by a major
brokerage firm. The carrying amount of long-term debt at
June 30, 1996 and 1995 was $386,009,000 and $463,273,000,
respectively. The fair value of long-term debt at June 30, 1996
and 1995 was $366,783,000 and $460,973,000, respectively.
Revolving Credit Facility The Company has availability under a
- - -------------------------
$100,000,000 revolving credit facility with a three-year term
(facility) underwritten by a syndication of banks. Borrowings
under the facility are available for Southern Union's working
capital, letter of credit requirements and other general corpo-
rate purposes. The facility is uncollateralized and has no
borrowing base limitations as long as the Senior Debt Notes meet
certain rating criteria. The Company may use up to $40,000,000
of this facility to finance future acquisitions. This facility
contains covenants with respect to financial parameters and
ratios, total debt limitations, restrictions as to dividend pay-
ments, stock reacquisitions, certain investments and additional
liens. The facility expires on December 31, 1997 but may be
extended annually for periods of one year with the consent of
each of the banks. The revolving credit facility is subject to a
commitment fee based on the rating of the Senior Notes. As of
June 30, 1996 the commitment fee was an annualized .15% on the
unused balance. The interest rate on borrowings on the revolving
credit facility is calculated based on a formula using the LIBOR
or prime interest rates. The average interest rate under the
revolving credit facility was 7.4% and 6.5% for the
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
year ended June 30, 1996 and 1995, respectively. No balance was
outstanding under the facility as of June 30, 1996 and 1995. A
balance of $20,100,000 was outstanding under the facility at
July 31, 1996.
X Employee Benefits
Defined Contribution Plan The Company provides a Savings Plan
- - -------------------------
available to all employees. Under the provisions of the plan,
the Company contributes $.50 of Company stock for each $1.00 con-
tributed by a participant up to 7% of the employees' salary.
Company contributions are 100% vested after six years of con-
tinuous service. Company contributions to the plan during 1996,
1995 and 1994, were $1,425,000, $1,344,000 and $859,000, respec-
tively.
Postemployment Benefits Certain postemployment benefits such as
- - -----------------------
disability and health care continuation coverage provided to
former or inactive employees after employment but before retire-
ment, are accrued if attributable to an employee's previously
rendered service. The Company has recorded a regulatory asset to
the extent it intends to file rate applications to include such
costs in rates and such recovery is probable. As of both
June 30, 1996 and 1995, the Company has recorded a regulatory
asset and a related liability of $1,100,000.
Defined Benefit Plan Net pension expense for the years ended
- - --------------------
June 30, 1996, 1995 and 1994 (five months of expenses for Plan B
in 1994) consisted of the following:
Plan A Plan B
---------------------- -------------------------
1996 1995 1994 1996 1995 1994
------ ------ ------ -------- -------- ------
Service cost
of benefits
earned dur-
ing the
year........ $1,442 $1,220 $1,233 $ 1,640 $ 1,125 $ 550
Interest cost
on projected
benefit
obligations. 2,483 2,394 2,269 7,355 7,289 2,957
Actual return
on plan
assets...... (4,204) (2,768) 14 (18,669) (10,318) 3,303
Net amortiza-
tion and
deferral.... 2,277 949 (1,633) 11,556 3,363 (6,464)
------ ------ ------ ------- ------- ------
Net pension
expense..... $1,998 $1,795 $1,883 $ 1,882 $ 1,459 $ 346
====== ====== ====== ======= ======= ======
Plan A Plan B
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
Actuarial present
value of benefit
obligations:
Vested benefits.... $ 26,150 $ 25,893 $ 87,790 $ 87,542
Nonvested benefits. 1,092 1,107 1,149 2,138
-------- -------- -------- --------
Accumulated benefit
obligations......... 27,242 27,000 88,939 89,680
Effect of future
salary increases.... 6,573 7,731 7,381 5,203
-------- -------- -------- --------
Projected benefit
obligation.......... 33,815 34,731 96,320 94,883
Plan assets at
fair value.......... (30,161) (26,624) (100,506) (92,884)
-------- -------- -------- --------
Projected benefit
obligation less
plan assets......... 3,654 8,107 (4,186) 1,999
Unrecognized net
transition asset.... 524 621 -- --
Unrecognized prior
service cost........ (1,627) (1,796) (828) --
Unrecognized net
gain (loss)......... 853 (4,838) 5,468 (1,808)
-------- -------- -------- --------
Accrued retirement
plan liabilities.... $ 3,404 $ 2,094 $ 454 $ 191
======== ======== ======== ========
Actuarial assumptions:
Weighted average
discount rate..... 7.75% 7.5% 7.75% 7.5%
Rate of increase
in future com-
pensation levels.. 5.62% 5.62% 5.8% 5.8%
Weighted average
expected long-
term rate of
return............ 7.75% 8% 7.75% 8%
The Company maintains two trusteed non-contributory defined bene-
fit retirement plans which cover substantially all employees.
Plan A covers those Company employees who are not employed by
Missouri Gas Energy and Plan B covers those employees who are
employed by Missouri Gas Energy. The Company funds the plans'
cost in accordance
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
with federal regulations, not to exceed the amounts deductible
for income tax purposes. The plans' assets are invested in cash,
bond and stock funds.
The actuarial computations for the determination of accumulated
and projected benefit obligations are based on the projected unit
credit method. Prior service cost is being amortized on a
straight-line basis over the average remaining expected future
service of participants present at the time of amendment.
During the year ended June 30, 1994, the Company recorded an
accrual and associated increase in the additional purchase cost
assigned to utility plant of $11,200,000 reflecting employee
severance and other special early termination benefit costs
associated with an early retirement program for employees of
Missouri Gas Energy. This amount has been included in the valua-
tion above. Of an eligible 133 employees, 81 accepted the 1994
early retirement program.
The Company was required by the Missouri Public Service Commis-
sion (MPSC) to contribute $3,000,000 to the Company's employee's
qualified defined benefits plan applicable to Missouri Gas
Energy's employees and retirees earlier than what would be
required under the Internal Revenue Code as determined by the
plan's actuaries. As of June 30, 1996 the Company has con-
contributed the full amount required.
The Company also maintains a supplemental non-contributory
defined benefit retirement plan which covers certain executive
employees. The purpose of the supplemental plan is to provide
part or all of those defined benefit plan benefits which are not
payable to certain employees under the primary plan. The net
pension cost of the supplemental plan for the years ended
June 30, 1996, 1995 and 1994 was not significant.
Postretirement Benefits Other than Pensions
- - -------------------------------------------
1996 1995 1994
------ ------ ------
Service cost of benefits earned
during the year................... $ 313 $ 303 $ 159
Interest cost on benefit
obligations....................... 2,982 3,389 1,629
Actual return on plan assets........ (24) (21) (11)
Amortization of transition
obligation........................ 224 224 224
Net amortization and deferral....... (195) -- 892
------ ------ ------
Net postretirement benefit cost..... 3,300 3,895 2,893
Regulatory deferrals................ (456) (1,319) (1,815)
------ ------ ------
Net expense......................... $2,844 $2,576 $1,078
====== ====== ======
1996 1995
-------- --------
Accumulated postretirement benefit
obligation:
Retirees............................. $ 29,080 $ 37,211
Other fully eligible participants.... 2,037 1,249
Other active participants............ 4,738 5,475
-------- --------
Accumulated benefit obligation........... 35,855 43,935
Plan assets at fair value................ (383) (305)
-------- --------
Accumulated benefit obligations in
excess of plan assets.................. 35,472 43,630
Unrecognized net transition obligation... (3,636) (3,860)
Unrecognized prior service cost.......... 1,347 --
Unrecognized net gain.................... 10,531 3,833
-------- --------
Accrued postretirement benefit cost...... $ 43,714 $ 43,603
======== ========
Postretirement medical and other benefit liabilities are accrued
on an actuarial basis during the years an employee provides ser-
vices. The Company, excluding Missouri Gas Energy, records a
regulatory asset for the difference between the postretirement
cost currently included in rates (cash basis) and the required
accounting accrued expense to the extent the Company, excluding
Missouri Gas Energy, has filed, or intends to file, a rate appli-
cation to include such
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
expense in rates and it is probable that the regulator will allow
such expense in future rates. The Company, excluding Missouri
Gas Energy, amortizes the transition obligation over an allowed
20-year period.
Missouri Gas Energy records a deferral of postretirement medical
expense in excess of the cash basis amount allowed in rates per
an MPSC accounting order. This deferred amount, in turn, is off-
set by the income stream generated from a company-owned life
insurance (COLI) plan. To the extent the deferred expense
exceeds income from the COLI program, this excess is deferred and
offset by future income generated through the deferral period of
the COLI program. Additionally, the State of Missouri has passed
legislation which provides for prospective recognition by the
MPSC of postretirement medical and benefit costs on an accrual
basis. Thus, to the extent that Missouri Gas Energy's COLI does
not offset its accrued postretirement medical liability such
expenses should be recoverable in future rates.
The significant features of the plan include the payment for life
of a portion of the medical benefit costs for individuals (and
their dependents) who are: (i) employees or retirees of Missouri
Gas Energy; (ii) non-Missouri Gas Energy retirees who retired
prior to January 1, 1993; and (iii) non-Missouri Gas Energy
employees (and their dependents) who elected to retire during the
first quarter of 1993. For active non-Missouri Gas Energy
employees hired prior to January 1, 1993, benefits are provided
only to retirees and only until eligibility for Medicare (age
65). The cost-sharing provisions for medical care benefits
include an escalation in the non-Missouri Gas Energy retirees'
share of claims obligations that is expected to follow the trend
of claims net of Medicare reimbursements. The non-Missouri Gas
Energy employees plan was amended during 1993 to substantially
modify the cost-sharing provisions to decrease the employer's
share of expected future claims and make certain other plan
changes. The plan for Missouri Gas Energy employees and retirees
provides payment of a portion of the medical benefit costs for
individuals and their dependents. The cost sharing provisions
include an escalation in the Missouri Gas Energy retirees share
of claims that is expected to follow the trend of claims net of
Medicare, subject to an overall limit on employer expenditures.
The funding policy for the non-Missouri Gas Energy plan is to pay
claims as they arise from a tax-exempt trust through 1999. In
addition, contributions are currently being made to a separate
account within the pension plan to accumulate assets sufficient
to fund claims arising after 1999. The funding policy for the
Missouri Gas Energy plan is to pay claims as they arise through a
tax exempt trust. Assets held in the tax-exempt trust include
primarily short-term obligations.
Assets held in the separate account within the retirement plan
include cash, bond and stock funds. Non-benefit liabilities are
limited to expenses associated with plan operation and adminis-
tration.
The weighted average assumed discount rate used to measure the
accumulated postretirement benefit obligation was 7.75% for the
year ended June 30, 1996 and was 8.25% for the year ended
June 30, 1995. The weighted average expected long-term rate of
return on plan assets was assumed to be 8% on an after-tax basis.
The annual assumed rate of increase in the health care cost trend
rate for 1997 was 7.75% per year, gradually decreasing thereafter
to 6% in year eight and thereafter, of the projection. The
health care cost trend rate assumption has a significant effect
on the amounts reported. Increasing the assumed health care cost
trend rate by one percent for each future year would increase the
aggregate of the service and interest cost components of the net
periodic postretirement health care benefit cost by $270,000 and
would increase the accumulated postretirement benefit obligation
for health care benefits by $2,739,000.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
XI Taxes on Income
Year Ended June 30,
------------------------------
1996 1995 1994
-------- -------- --------
Current:
Federal...................... $ 4,960 $ 4,694 $ (3,592)
State........................ 606 371 (166)
------- ------- --------
5,566 5,065 (3,758)
Deferred:
Federal...................... 8,563 5,218 8,389
State........................ 850 691 554
------- ------- --------
9,413 5,909 8,943
------- ------- --------
Total provision................ $14,979 $10,974 $ 5,185
======= ======= ========
Deferred credits and other liabilities also include $665,000 and
$701,000 of unamortized deferred investment tax credit as of
June 30, 1996 and 1995, respectively.
Deferred income taxes result from temporary differences between
the financial statement carrying amounts and the tax basis of
existing assets and liabilities.
June 30,
---------------------
1996 1995
--------- ---------
Deferred tax assets:
Postretirement benefits............... $ 1,392 $ 791
Bad debt reserves..................... 713 713
Estimated alternative minimum tax
credit.............................. 2,044 2,044
Insurance accruals.................... 1,552 558
Unrealized holding loss on securities. 670 --
Other................................. 1,609 555
-------- --------
Total deferred tax assets............. 7,980 4,661
-------- --------
Deferred tax liabilities:
Property, plant and equipment......... (41,771) (31,234)
Unamortized debt expense.............. (5,712) (6,333)
Other................................. (3,154) (2,263)
-------- --------
Total deferred tax liabilities........ (50,637) (39,830)
-------- --------
Net deferred tax liability.............. (42,657) (35,169)
Less current tax assets................. 877 887
-------- --------
Accumulated deferred income taxes....... $(43,534) $(36,056)
======== ========
The Company accounts for income taxes utilizing the liability
method which bases the amounts of current and future tax assets
and liabilities on events recognized in the financial statements
and on income tax laws and rates existing at the balance sheet
date.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year Ended June 30,
--------------------------
1996 1995 1994
-------- -------- --------
Computed statutory tax expense
at 35%......................... $12,536 $ 9,465 $ 4,747
Changes in taxes resulting from:
State income taxes, net of
federal income tax benefit... 947 690 254
Acquisition adjustment
related to assets sold....... 1,096 -- --
Amortization of acquisition
adjustment................... 884 920 941
Adjustment to tax reserve...... -- -- (615)
Research and experimentation
credit....................... (400) -- --
Other.......................... (84) (101) (142)
------- ------- -------
Actual tax expense............... $14,979 $10,974 $ 5,185
======= ======= =======
XII Utility Regulation and Rates
Pursuant to a 1989 MPSC order, Missouri Gas Energy is engaged in
a major gas safety program in its service territories. This pro-
gram includes replacement of company- and customer-owned gas ser-
vice 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 permits the deferral, and sub-
sequent recovery through rates, of depreciation expense, property
taxes and associated carrying costs, related to the Missouri
Safety Program. Missouri Gas Energy has deferred depreciation
expense, property taxes and carrying costs of $7,703,000,
$4,154,000 and $600,000 for 1996, 1995 and 1994, respectively.
The continuation of the Missouri Safety Program will result in
significant levels of future capital expenditures. The Company
estimates incurring capital expenditures of $20,296,000 in fiscal
1997 related to this program.
As of the date of this filing, Missouri Gas Energy has a request
for a rate increase pending before the MPSC. This rate increase
request primarily consists of the recovery of certain capital
expenditures incurred by Missouri Gas Energy for safety
improvements under the Missouri Safety Program.
Under the order of the Federal Energy Regulatory Commission, a
major supplier of gas to Missouri Gas Energy is allowed recovery
of certain previously unrecovered deferred gas costs with a
remaining balance of $21,500,000 at June 30, 1996. These costs
were related to gas deliveries prior to April 30, 1994. Missouri
Gas Energy filed a mechanism to recover these costs with the MPSC
which was approved and allows recovery of these costs from its
Missouri customers. The receivable and liability associated with
these costs have been recorded as a deferred charge and a
deferred credit, respectively, on the consolidated balance sheet
as of June 30, 1996 and 1995.
As a result of the January 31, 1994 acquisition of Missouri Gas
Energy, the MPSC required Missouri Gas Energy to reduce rate base
by $30,000,000 to compensate Missouri rate payers for rate base
reductions that were eliminated as a result of the acquisition.
This is amortized over a ten-year period on a straight-line base
since the date of acquisition.
XIII Leases
The Company leases certain facilities, equipment and office space
under cancelable and noncancelable operating leases. The minimum
annual rentals under operating leases for the next five years
ending June 30 are as follows: 1997 -- $2,937,000; 1998 --
$2,258,000; 1999 -- $1,298,000; 2000 -- $510,000; 2001 --
$267,000; and thereafter $6,243,000. Rental expense was
$8,098,000, $7,268,000 and $3,605,000 for the years ended
June 30, 1996, 1995 and 1994, respectively.
XIV Commitments and 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) for reimbursement of costs associated
with removing hazardous substances
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
from the site of a former coal gasification plant (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, (Green Mountain Power) 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 asso-
ciated 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 set-
tled 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 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. The Company has denied liability for any clean-up costs
for various reasons, including that it is not a successor to any
entity that owned or operated the site in question. Should
Southern Union be made party to any action seeking recovery of
remaining clean-up costs, the Company intends to 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, results of operations
or cash flows.
Southern Union and Western Resources entered into an Environmen-
tal Liability Agreement (Environmental Liability Agreement) at
the time of the closing of the acquisition of Missouri Gas
Energy. 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 certain liabilities under environ-
mental 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 were 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 pre-
decessors 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
eleven such sites in the service territory of Missouri Gas
Energy. Based on information reviewed thus far, it appears that
not all of these sites may have been owned or operated by Western
Resources or its predecessors in interest. Subsequent to the
closing of the acquisition of Missouri Gas Energy, as a result of
an environmental audit, the Company has discovered the existence
of possibly eight 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, as of September 15, 1994,
the EPA had not notified it that any further action may be
required. Evaluation of the remainder of the sites by appropri-
ate 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 remedi-
ation 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.
In addition to the Pine Street Canal Site and various Missouri
Gas Energy sites described above, the Company is investigating
the possibility that the Company or predecessor companies may
have been associated with Manufactured Gas Plant (MGP) sites in
other of its past, principally in Arizona and New Mexico, and
present service areas in Texas. At the present time, the Company
is aware of certain plant sites in some of these areas and is
investigating those and certain other locations.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The municipal owner of a property adjacent to one of the Com-
pany's service locations has raised concerns over the continued
operation of that property as a park due to its former use as a
portion of an MGP site. The Texas Water Commission (TWC), in
cooperation with the EPA, conducted a site inspection and pre-
liminary assessment of this MGP site. Correspondence received
from the TWC in 1989 concluded that the site "did not appear at
the time of our inspection to pose an apparent threat to the pub-
lic or the environment." In April 1996 the city closed the park
pending the performance of a risk assessment report. Based upon
currently available information, Southern Union does not believe
the outcome of this matter will have a material adverse effect on
its financial position, results of operations or cash flows.
While the Company's evaluation of these Texas, Arizona and New
Mexico MGP sites is in its preliminary stages, it is likely that
some compliance costs may be identified and become subject to
reasonable quantification. To the extent that such potential
costs are quantified, the Company expects to provide any appro-
priate accruals and seek recovery for such remediation costs
through all appropriate means, including insurance and regulatory
relief. Although significant charges to earnings could be
required prior to rate recovery, management does not believe that
environmental expenditures for such MGP sites will have a
material adverse effect on the Company's financial position,
results of operations or cash flows.
On June 1, 1994 Southern Union filed a lawsuit against Western
Resources for damages for fraudulent misrepresentation, breach of
contract, breach of covenant and other grounds. This suit was
settled during 1996 with no adverse effect on the Company's
financial position, results of operations or cash flows.
Southern Union and its subsidiaries are parties to other legal
proceedings that management considers to be normal 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, results of operations or cash flows.
As a result of the acquisition of Missouri Gas Energy, the Com-
pany assumed certain obligations related to a 1990 settlement of
a Wyoming Tight Sands anti-trust claim. 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. In the event the trust
does not receive cash payments from the gas suppliers as provided
by the Tight Sands settlement agreements, the Company is com-
mitted to pay its applicable portion of the amount owed the
lender of the credit-facility borrowings. The Company's allo-
cable unpaid portion of the amount the trust owes the lender at
June 30, 1996 and 1995 was $6,723,000 and $8,204,000, respec-
tively.
The Company is committed under various agreements to purchase
certain quantities of gas in the future. At June 30, 1996, the
Company has purchase commitments for nominal quantities of gas at
fixed prices. These fixed price commitments have an annual value
of $2,500,000 for Southern Union Gas. Missouri Gas Energy cur-
rently does not have any fixed price commitment contracts for the
1996/1997 winter heating season. At June 30, 1996, the Company
also has purchase commitments for certain quantities of gas at
variable, market-based prices. These market-based priced commit-
ments have an annual value of $41,300,000 for Southern Union Gas
and $79,800,000 for Missouri Gas Energy. The Company's purchase
commitments may extend over a period of several years depending
upon when the required quantity is purchased. The Company has
purchase gas tariffs in effect for all its utility service areas
that provide for recovery of its purchase gas costs under defined
methodologies.
On May 1, 1996, the Company agreed to new three-year contracts
with all of the bargaining-unit Missouri employees. Of those
employees represented by unions, 83% are employed by Missouri Gas
Energy.
The Company had standby letters of credit outstanding of
$2,947,000 at both June 30, 1996 and 1995, which guarantee pay-
ment of various insurance premiums and state taxes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
XV Quarterly Operations (Unaudited)
Year Ended Quarter Ended
-----------------------------------------
June 30, 1996 September 30 December 31 March 31 June 30 Total
- - ------------- ------------ ----------- -------- ------- --------
Total
operating
revenues(1). $ 70,228 $ 180,939 $275,028 $94,196 $620,391
Operating
margin(1)... 42,398 74,337 96,575 45,542 258,852
Net operating
revenues(1). 1,581 24,262 43,130 831 69,804
Net earnings
(loss)
available
for common
stock....... (5,598) 8,746 20,549 (2,858) 20,839
Earnings
(loss) per
common and
common
share equiva-
lents(2).... (.35) .53 1.22 (.18) 1.25
Year Ended Quarter Ended
-----------------------------------------
June 30, 1995 September 30 December 31 March 31 June 30 Total
- - ------------- ------------ ----------- -------- ------- --------
Total
operating
revenues(1). $ 69,305 $ 147,749 $179,626 $83,303 $479,983
Operating
margin(1)... 40,480 70,115 79,877 47,671 238,143
Net operating
revenues(1). (641) 19,851 35,268 9,931 64,409
Net earnings
(loss)
available
for common
stock....... (6,168) 6,558 16,153 (474) 16,069
Earnings
(loss) per
common and
common
share equiva-
lent(2)..... (.38) .40 .98 (.03) .98
- - -------------------
(1) Certain amounts may vary from those previously reported due
to reclassifications to conform with the current years'
presentation.
(2) The sum of earnings per share by quarter may not equal the
net earnings per common and common share equivalents for the
year due to variations in the weighted average common and
common share equivalents outstanding used in computing such
amounts.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Southern Union Company:
We have audited the accompanying consolidated balance sheets of
Southern Union Company and Subsidiaries as of June 30, 1996 and
1995, and the related consolidated results of operations, cash
flows and stockholders' equity for each of the three years in the
period ended June 30, 1996. 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated finan-
cial position of Southern Union Company and Subsidiaries as of
June 30, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Austin, Texas
July 31, 1996
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<PAGE>
SUBSIDIARIES OF THE COMPANY Exhibit 21
Name State of Incorporation
- - -------------------- ----------------------
ConTigo, Inc. Delaware
Energy WorX, Inc. Delaware
KellAir Aviation Company Delaware
Lavaca Realty Company Delaware
Mercado Gas Services Inc. Delaware
Norteno Pipeline Company Delaware
Econofuel Company Delaware
Southern Union Energy International, Inc. Delaware
Southern Union Energy Products
and Services Company Delaware
Southern Union Financing I Delaware
Southern Union Financing II Delaware
Southern Union Financing III Delaware
Southern Transmission Company Delaware
SUPro Energy Company Delaware
- - ----------------
Note: Two other wholly-owned subsidiaries of Southern Union Com-
pany, Southern Union Gas Company, Inc. (a Delaware corpo-
ration) and Southern Union Gas Company, Inc. (a Texas
corporation), conduct no business except to the extent
necessary to hold the Corporate name.
<PAGE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23
We consent to the incorporation by reference in the registration
statements of Southern Union Company and Subsidiaries (the "Com-
pany") on Form S-3 (File Nos. 33-58297, 333-02965 and 333-10585)
and Form S-8 (File Nos. 2-79612, 33-37261, 33-61558, 33-69596
and 33-69598) of our report, dated July 31, 1996, on our audits
of the consolidated financial statements of the Company as of
June 30, 1996 and 1995, and for the three years in the period
ended June 30, 1996, which report is incorporated by reference
in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Austin, Texas
September 12, 1996
----
<PAGE>
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
<PAGE>
POWER OF ATTORNEY Exhibit 24
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signa-
ture appears below constitutes and appoints Peter H. Kelley,
Ronald J. Endres and David J. Kvapil, or any of them, as such
person's true and lawful attorney-in-fact and agent, with full
power of substitution and revocation, for such person and in such
person's name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 of Southern Union Company, a Delaware corporation,
and any amendments thereto, and to file the same with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission and the New York
Stock Exchange.
Dated: September 10, 1996
JOHN E. BRENNAN GEORGE L. LINDEMANN
- - --------------- -------------------
John E. Brennan George L. Lindemann
FRANK W. DENIUS ROGER J. PEARSON
- - --------------- ----------------
Frank W. Denius Roger J. Pearson
AARON I. FLEISCHMAN GEORGE ROUNTREE, III
- - ------------------- --------------------
Aaron I. Fleischman George Rountree, III
ADAM M. LINDEMANN DAN K. WASSONG
- - ----------------- --------------
Adam M. Lindemann Dan K. Wassong
KURT A. GITTER, M.D.
- - --------------------
Kurt A. Gitter
<TABLE> <S> <C>
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<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<PERIOD-TYPE> YEAR
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<TOTAL-NET-UTILITY-PLANT> $ 744,454,000
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