<PAGE>
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------
FORM 10-Q
For the quarterly period ended
September 30, 1996
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:
Name of each exchange in
Title of each class which registered
------------------- ------------------------
Common Stock, par value $1 per share New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of the registrant's Common Stock outstanding
on October 15, 1996 was 16,223,667.
=================================================================
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
September 30, 1996
Index
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements
Consolidated statements of operations -
three and twelve months ended
September 30, 1996 and 1995
Consolidated balance sheet -
September 30, 1996 and 1995 and
June 30, 1996
Consolidated statement of stockholders'
equity - three months ended
September 30, 1996 and twelve months
ended June 30, 1996
Consolidated statements of cash flows -
three and twelve months ended
September 30, 1996 and 1995
Notes to consolidated financial statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(See "CONTINGENCIES" under Notes to
Consolidated Financial Statements)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 -- Computation of primary
and fully diluted earnings per share
(b) Exhibit 27 -- Financial Data Schedule
(c) Reports on Form 8-K -- None
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended September 30,
--------------------------------
1996 1995
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues........... $ 80,830 $ 70,227
Gas purchase costs........... 39,415 27,829
----------- -----------
Operating margin........... 41,415 42,398
Revenue-related taxes........ 3,910 3,496
----------- -----------
Net operating margin....... 37,505 38,902
Operating expenses:
Operating, maintenance
and general.............. 25,315 25,715
Depreciation and
amortization............. 8,488 8,540
Taxes, other than on
income and revenues...... 3,263 3,065
----------- -----------
Total operating
expenses............. 37,066 37,320
----------- -----------
Net operating revenues. 439 1,582
----------- -----------
Other income (expenses):
Interest................... (8,287) (9,138)
Dividends on preferred
securities of subsidiary
trust.................... (2,370) (2,370)
Other, net................. 1,735 1,420
----------- -----------
Total other expenses,
net.................... (8,922) (10,088)
----------- -----------
Loss before income
taxes (benefit)........ (8,483) (8,506)
Federal and state income
taxes (benefit)............ (3,078) (2,908)
Net loss attributable to
common stock............... $ (5,405) $ (5,598)
=========== ===========
Net loss per common share.... $ (.33) $ (.35)
=========== ===========
Weighted average common
shares outstanding......... 16,223,667 16,126,071
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Months Ended September 30,
---------------------------------
1996 1995
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues........... $ 630,993 $ 480,906
Gas purchase costs........... 373,125 240,844
----------- -----------
Operating margin........... 257,868 240,062
Revenue-related taxes........ 35,300 26,915
----------- -----------
Net operating margin....... 222,568 213,147
Operating expenses:
Operating, maintenance and
general.................. 107,121 101,667
Depreciation and
amortization............. 32,929 32,669
Taxes, other than on
income and revenues...... 13,857 12,180
----------- -----------
Total operating expenses. 153,907 146,516
----------- -----------
Net operating revenues... 68,661 66,631
----------- -----------
Other income (expenses):
Interest................... (34,981) (39,119)
Dividends on preferred
securities of subsidiary
trust.................... (9,480) (3,529)
Other, net................. 11,641 3,878
----------- -----------
Total other expenses,
net.................... (32,820) (38,770)
----------- -----------
Earnings before income
taxes.................. 35,841 27,861
Federal and state income
taxes...................... 14,809 11,222
----------- -----------
Net earnings available for
common stock............... $ 21,032 $ 16,639
=========== ===========
Net earnings per common and
common share equivalents... $ 1.25 $ 1.01
=========== ===========
Weighted average common and
common share equivalents
outstanding................ 16,822,813 16,484,503
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
September 30, June 30,
---------------------- ----------
1996 1995 1996
---------- ---------- ----------
(thousands of dollars)
Property, plant and
equipment:
Plant in service....... $ 922,470 $ 894,468 $ 912,552
Construction work in
progress............. 11,418 14,701 8,411
--------- --------- ---------
933,888 909,169 920,963
Less accumulated
depreciation and
amortization......... (317,083) (308,875) (310,289)
--------- --------- ---------
616,805 600,294 610,674
Additional purchase
cost assigned to
utility plant, net... 133,641 143,531 133,780
--------- --------- ---------
Net property, plant
and equipment........ 750,446 743,825 744,454
--------- --------- ---------
Current assets:
Cash and cash
equivalents............ -- -- 2,887
Accounts receivable,
billed and unbilled.... 37,239 34,036 47,846
Inventories, principally
at average cost........ 43,219 33,064 27,023
Deferred gas purchase
costs.................. 9,211 22,664 2,650
Prepayments and other.... 2,460 2,513 1,947
--------- --------- ---------
Total current assets... 92,129 92,277 82,353
--------- --------- ---------
Deferred charges........... 116,890 112,944 116,286
Investment securities...... 19,168 -- 8,848
Real estate................ 9,258 10,398 9,513
Other...................... 2,943 2,045 3,006
--------- --------- ---------
Total assets............. $ 990,834 $ 961,489 $ 964,460
========= ========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
September 30, June 30,
---------------------- ----------
1996 1995 1996
---------- ---------- ----------
(thousands of dollars)
Common stockholders'
equity:
Common stock, $1 par
value; authorized
50,000,000 shares;
issued 16,275,292
shares............... $ 16,275 $ 11,570 $ 16,275
Premium on capital
stock................ 206,047 198,819 206,047
Less treasury stock,
at cost.............. (794) (794) (794)
Retained earnings...... 20,226 10,471 25,631
Unrealized holding
gain (loss).......... 1,978 -- (1,244)
--------- --------- ---------
Total common stock-
holders' equity...... 243,732 220,066 245,915
Company-obligated manda-
torily redeemable pre-
ferred securities of
subsidiary trust holding
solely $103,093,000 prin-
cipal amount of 9.48%
subordinated notes of
Southern Union due 2025.. 100,000 100,000 100,000
Long-term debt............. 386,143 442,320 385,394
--------- --------- ---------
Total capitalization..... 729,875 762,386 731,309
Current liabilities:
Long-term debt due
within one year........ 680 780 615
Notes payable............ 55,500 -- --
Accounts payable......... 24,421 28,432 39,238
Federal, state and local
taxes.................. 10,119 6,088 16,741
Accrued interest......... 5,727 6,303 12,773
Accrued dividends on
preferred securities
of subsidiary trust.... -- 2,370 2,370
Customer deposits........ 16,157 14,487 15,656
Other.................... 17,170 15,864 15,937
--------- --------- ---------
Total current
liabilities.......... 129,774 74,324 103,330
--------- --------- ---------
Deferred credits and other. 84,374 88,424 86,287
Accumulated deferred
income taxes............. 46,811 36,355 43,534
Commitments and con-
tingencies............... -- -- --
--------- --------- ---------
Total.................... $ 990,834 $ 961,489 $ 964,460
========= ========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Trea- Unrea-
Common Premium sury lized
Stock, on Stock, Holding
$1 Par Capital at Retained Gain
Value Stock Cost Earnings (Loss) Total
------- --------- ------ --------- -------- ---------
(thousands of dollars)
Balance
July 1,
1995...... $11,570 $198,819 $(794) $ 16,069 $ -- $225,664
Net
earnings. -- -- -- 20,839 -- 20,839
5% stock
dividend. 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
options.. 75 581 -- -- -- 656
------- -------- ----- -------- ------- --------
Balance
June 30,
1996...... 16,275 206,047 (794) 25,631 (1,244) 245,915
Net loss.. -- -- -- (5,405) -- (5,405)
Unrealized
holding
gain..... -- -- -- -- 3,222 3,222
------- -------- ----- -------- ------- --------
Balance Sep-
tember 30,
1996...... $16,275 $206,047 $(794) $ 20,226 $ 1,978 $243,732
======= ======== ===== ======== ======= ========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended September 30,
--------------------------------
1996 1995
------------ ------------
(thousands of dollars)
Cash flows used in operating
activities:
Net loss..................... $ (5,405) $ (5,598)
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation and amortiza-
tion...................... 8,488 8,540
Deferred income taxes...... 1,529 299
Provision for bad debts.... 1,115 395
Deferral of interest and
other expenses............ (1,557) (1,019)
Other, net................. 107 409
Changes in assets and lia-
bilities, net of acquisi-
tions and dispositions:
Decrease in accounts
receivable, billed and
unbilled................ 9,492 1,035
Decrease in accounts
payable................. (14,817) (352)
Decrease in taxes and
other liabilities....... (13,668) (4,499)
Increase in customer
deposits................ 501 321
Decrease in deferred gas
purchase costs.......... (6,560) (15,023)
Increase in inventories.. (16,034) (9,503)
Increase in other
accounts................ (1,882) (1,316)
----------- -----------
Net cash flows used in
operating activities......... (38,691) (26,311)
----------- -----------
Cash flows from (used in)
investing activities:
Additions to property,
plant and equipment......... (13,468) (14,060)
Acquisition of operations,
net of cash received........ (1,162) --
Purchase of investment
securities.................. (5,363) --
Maturity of short-term
investments................. -- 19,582
Increase in customer
advances.................... 1,404 1,080
Decrease in deferred charges
and credits................. (1,654) (70)
Proceeds from sale of land... 752 --
Other, net................... (19) 269
----------- -----------
Net cash flows from (used
in) investing activities... (19,510) 6,801
----------- -----------
Cash flows from (used in)
financing activities:
Repayment of debt............ (186) (19,649)
Net borrowings under
revolving credit facility... 55,500 --
Other, net................... -- 144
----------- -----------
Net cash flows from (used
in) financing activities... 55,314 (19,505)
----------- -----------
Decrease in cash and cash
equivalents................... (2,887) (39,015)
Cash and cash equivalents at
beginning of period........... 2,887 39,015
----------- -----------
Cash and cash equivalents at
end of period................. $ -- $ --
=========== ===========
Supplemental disclosures of
cash flow information:
Cash paid during the period
for:
Interest................... $ 15,007 $ 17,557
=========== ===========
Income taxes (refund)...... $ 500 $ (5,386)
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Twelve Months Ended September 30,
---------------------------------
1996 1995
------------ ------------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings................ $ 21,032 $ 16,639
Adjustments to reconcile net
earnings to net cash flows
from operating activities:
Depreciation and amorti-
zation................... 32,929 32,669
Deferred income taxes..... 10,643 6,239
Provision for bad debts... 6,255 4,557
Deferral of interest and
other expenses........... (7,221) (3,638)
Other, net................ 909 1,960
Changes in assets and lia-
bilities, net of acquisi-
tions and dispositions:
Increase in accounts
receivable, billed and
unbilled............... (9,286) (1,038)
Decrease in accounts
payable................ (4,417) (3,391)
Increase (decrease) in
taxes and other lia-
bilities............... (28) 3,054
Increase in customer
deposits............... 1,669 1,177
Increase (decrease) in
deferred gas purchase
costs.................. 13,454 (31,381)
Decrease (increase) in
inventories............ (10,138) 15,745
Decrease (increase) in
other accounts......... (716) 1,083
----------- -----------
Net cash flows from
operating activities....... 55,085 43,675
----------- -----------
Cash flows used in investing
activities:
Additions to property,
plant and equipment........ (58,784) (67,213)
Acquisition of operations,
net of cash received....... (1,162) --
Purchase of investment
securities................. (16,126) --
Litigation settlement
proceeds................... 4,250 --
Increase in customer
advances................... 3,871 1,805
Decrease in deferred
charges and credits........ (5,395) (2,465)
Proceeds from sale of
various operations......... 14,770 --
Proceeds from sale of land.. 752 336
Other, net.................. 54 2,057
----------- -----------
Net cash flows used in
investing activities...... (57,770) (65,480)
----------- -----------
Cash flows from financing
activities:
Repayment of debt........... (53,327) (35,649)
Net borrowings (payments)
under revolving credit
facility................... 55,500 (41,400)
Issuance of preferred
securities of subsidiary
trust...................... -- 100,000
Issuance cost of preferred
securities of subsidiary
trust...................... -- (3,799)
Other, net.................. 512 727
----------- -----------
Net cash flows from
financing activities...... 2,685 19,879
----------- -----------
Increase (decrease) in cash
and cash equivalents......... -- (1,926)
Cash and cash equivalents at
beginning of period.......... -- 1,926
----------- -----------
Cash and cash equivalents at
end of period................ $ -- $ --
=========== ===========
Supplemental disclosures of
cash flow information:
Cash paid during the
period for:
Interest.................. $ 34,343 $ 38,046
=========== ===========
Income taxes (refund)..... $ 5,897 $ (2,857)
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments (including both
normal recurring as well as any non-recurring) necessary for a
fair presentation of the results of operations for such periods.
Because of the seasonal nature of the Company's operations, the
results of operations for any interim period are not necessarily
indicative of results for the full year.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in Southern
Union Company's (Southern Union and, together with its wholly-
owned subsidiaries, the Company) Annual Report on Form 10-K for
the fiscal year ended June 30, 1996. Certain prior period
amounts have been reclassified to conform with the current period
presentation.
Under the Company's cash management system, checks issued but not
presented to banks frequently result in overdraft balances for
accounting purposes and are classified in accounts payable in the
consolidated balance sheet.
The computation of both primary and fully diluted earnings per
share is based on the weighted average number of outstanding
common stock during the period plus, when their effect is
dilutive, common stock equivalents consisting of certain shares
subject to stock options and warrants.
INVESTMENT SECURITIES
At September 30, 1996, all securities owned by the Company were
classified 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 Consolidated Statement of Operations when incurred.
As of September 30, 1996, investment securities consisted of
common stock with a specific cost of $16,125,000 and a fair value
of $19,168,000. The net unrealized holding gain, included as a
separate component of common stockholders' equity, totaled
$1,978,000 at September 30, 1996. There were no adjustments to
unrealized holding gain on securities available-for-sale in
previous years as no investment securities were held. As of
October 15, 1996, the investment securities available-for-sale
had a fair value of $19,008,000 and a net unrealized holding gain
of $1,874,000. The net unrealied holding gain is accounted for
as required by the Financial Accounting Standards Board standard
Accounting for Certain Investments in Debt and Equity Securities.
- - ----------------------------------------------------------------
DIVESTITURE
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.
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 (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
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
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 September 30,
1996 and 1995, 4,000,000 shares of Preferred Securities were
outstanding.
DEBT
September 30, June 30,
1996 1996
------------ ------------
(thousands of dollars)
7.60% Senior notes due 2024....... $ 384,515 $ 384,515
Other............................. 2,308 1,494
--------- ---------
Total debt........................ 386,823 386,009
Less current portion............ 680 615
--------- ---------
Total long-term debt.............. $ 386,143 $ 385,394
========= =========
The Company has availability under a $100,000,000 revolving
credit facility (Revolving Credit Facility) underwritten by a
syndicate of banks. Borrowings under the Revolving Credit
Facility are available for Southern Union's working capital,
letter of credit requirements and other general corporate pur-
poses. At June 30, 1996 the outstanding balance under the
Revolving Credit Facility was nil. The amount outstanding under
the Revolving Credit Facility at September 30, 1996 and
October 15, 1996 was $55,500,000 and $52,000,000, respectively.
UTILITY REGULATION AND RATES
Pursuant to a 1989 Missouri Public Service Commission (MPSC)
order, Missouri Gas Energy is engaged in a major gas safety pro-
gram in its service territories. This program includes replace-
ment of company- and customer-owned gas service and yard lines,
the movement and resetting of meters, the replacement of cast
iron mains and the replacement and cathodic protection of bare
steel mains (Missouri Safety Program). In recognition of the
significant capital expenditures associated with this safety pro-
gram, the MPSC permits the deferral, and subsequent recovery
through rates, of depreciation expense, property taxes and asso-
ciated carrying costs, related to the Missouri Safety Program.
Missouri Gas Energy has deferred depreciation expense, property
taxes and carrying costs of $2,358,000 for the three-month period
ended September 30, 1996. The continuation of the Missouri
Safety Program will result in significant levels of future capi-
tal expenditures. The Company estimates incurring capital
expenditures of $20,000,000 in fiscal 1997 related to this pro-
gram.
Under the order of the Federal Energy Regulatory Commission, a
major supplier of gas to Missouri Gas Energy is allowed recovery
of certain unrecovered deferred gas costs with a remaining
balance of $18,981,000 at September 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 September 30, 1996 and 1995.
Missouri Gas Energy filed a $34,000,000 request for rate
increases with the MPSC on March 1, 1996. An evidentiary hearing
will be conducted in late October, 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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 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 associated with the Maltex
Pond, which is part of the Pine Street Canal Site. Two defen-
dants in Green Mountain Power, Vermont Gas Systems and Green
Mountain Power Corp., claimed that Southern Union is the corpo-
rate successor to People's Light and Power Corporation, an
upstream corporate parent of Green Mountain Power Corp. during
the years 1928-1931. Green Mountain Power was settled without
admission or determination of liability with respect to Southern
Union by order dated December 26, 1990. The EPA has since con-
ducted 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 closing of the Missouri Acquisition. Subject to the accuracy
of certain representations made by Western Resources in the
Missouri Asset Purchase Agreement, the Environmental Liability
Agreement provides for a tiered approach to the allocation of
substantially all liabilities under environmental laws that may
exist or arise with respect to Missouri Gas Energy. At the
present time and based upon information available to management,
the Company believes that the costs of any remediation efforts
that may be required for these sites for which it may ultimately
have responsibility will not exceed the aggregate amount subject
to substantial sharing by Western Resources.
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.
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 prelim-
inary 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 public
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.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Southern Union and its subsidiaries are parties to other legal
proceedings that its management considers to be the normal kinds
of actions to which an enterprise of its size and nature might be
subject, and not to be material to the Company's overall business
or financial condition, 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
September 30, 1996 was $6,335,000.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's principal line of business 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 the Company.
In addition, 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 condi-
tioning and other gas-fired engine-driven applications. By pro-
viding "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.
Several of these business activities are subject to regulation by
federal, state or local authorities where the Company operates.
Thus, the Company's financial condition and results of operations
have been and will continue to be dependent upon the receipt of
adequate and timely adjustments in rates. In addition, the Com-
pany's business is affected by seasonal weather impacts, competi-
tive factors within the energy industry and economic development
and residential growth in its service areas.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 and 1995
- - ----------------------------------------------
The Company recorded a net loss attributable to common stock of
$5,405,000 for the three-month period ended September 30, 1996
compared to a net loss of $5,598,000 for the three-month period
ended September 30, 1995. Net loss per common share, based on
weighted average shares outstanding during the period, was $.33
in 1996 compared with a net loss per common share of $.35 in
1995. Due to the seasonal nature of the gas utility business,
the three-month period ending September 30 is typically a loss
period.
Operating revenues were $80,830,000 for the three-month period
ended September 30, 1996, an increase of 15%, compared with
operating revenues of $70,227,000 in 1995. Gas purchase costs
for the three-month period ended September 30, 1996 were
$39,415,000, an increase of 42%, compared with $27,829,000 in
1995. The Company's operating revenues are affected by the level
of sales volumes and by the pass-through of increases or
decreases in the Company's gas purchase costs through its pur-
chased gas adjustment clauses. The increase in operating reve-
nues and gas purchase costs between periods was the result of a
7% increase in gas sales volumes to 13,258 MMcf in 1996 from
12,423 MMcf in 1995. Additionally, operating revenues and gas
purchase costs were effected by the increase in the average cost
of gas from $2.24 per Mcf in 1995 to $2.97 per Mcf in 1996. The
increase in the average cost of gas primarily is the result of
increases in average spot market gas prices throughout the com-
pany's distribution system as a result of seasonal impacts on
demands for natural gas and the ensuing competitive pricing
within the industry.
Operating margin (operating revenues less gas purchase costs) for
the three-month period ended September 30, 1996 was $41,415,000
compared to $42,398,000 in 1995. The 2% decrease in operating
margin is the result of a decrease in number of customers served
due to the sale of certain operations in the Texas and Oklahoma
Panhandles which was effective on May 1, 1996, and reduced gas
sales to various electric power plants in the Missouri service
territories as a result of the milder summer weather.
Operating expenses, which include operating, maintenance and
general expenses, taxes other than on income and revenues, and
depreciation and amortization, were $37,066,000 for the three-
month period ended September 30, 1996, a decrease of $254,000,
compared with $37,320,000 in 1995. The decrease is primarily a
result of a $400,000 decrease in operating, maintenance and
general expenses resulting from the sale of certain operations as
previously
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
discussed. Offsetting the decrease in operating, maintenance and
general expenses was an increase in taxes, other than on income
and revenues, due to an increase in property taxes.
Interest expense was $8,287,000 for the three-month period ended
September 30, 1996, a decrease of 9%, compared to $9,138,000 in
1995. The decrease in interest expense is 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 1995
issuance of $100,000,000 of 9.48% Trust Originated Preferred
Securities (Preferred Securities) and working capital. See
"Debt" in the Notes to the Consolidated Financial Statements for
the three-month period ended September 30, 1996.
Other income for the three-month period ended September 30, 1996
was $1,735,000 compared to $1,420,000 in 1995. Other income for
the three-month period ended September 30, 1996 consists of
$1,557,000 related to the deferral of interest and other expenses
associated with the Missouri Gas Energy Safety Program and net
rental income from Lavaca Realty Company ("Lavaca Realty"), the
Company's real estate subsidiary, of $353,000. Offsetting the
increase was a $374,000 loss recognized on a donation of emis-
sions analysis equipment and software to the University of Texas
in Austin, Texas. Other income for 1995 included $1,019,000
related to the deferral of interest and other expenses associated
with the Missouri Gas Energy Safety Program and net rental income
from Lavaca Realty of $344,000.
For the three-month period ended September 30, 1996, the federal
and state income tax benefit increased $170,000, or 6%, over the
same period in 1995 due primarily to an increase in the effective
tax rate from 34% to 36% in 1995 and 1996, respectively.
Twelve Months Ended September 30, 1996 and 1995
- - -----------------------------------------------
The Company recorded net earnings available for common stock of
$21,032,000 for the twelve-month period ended September 30, 1996
compared with net earnings of $16,639,000 in 1995. Net earnings
per common share, based on weighted average shares outstanding
during the period, were $1.25 in 1996 compared with net earnings
per common share of $1.01 in 1995.
Operating revenues were $630,993,000 for the twelve-month period
ended September 30, 1996, an increase of 31%, compared with
operating revenues of $480,906,000 in 1995. Gas purchase costs
for the twelve-month period ended September 30, 1996 were
$373,125,000, an increase of 55%, compared with gas purchase
costs of $240,844,000 in 1995. Operating revenues increased
during the twelve-month period ended September 30, 1996 as a
result of a 13% increase in gas sales volume from 105,617 MMcf in
1995 to 119,362 MMcf in 1996. The increase in volumes is princi-
pally due to a colder 1995/1996 winter season throughout most of
the Company's service territories. Gas purchase costs were also
effected by the increase in sales volume and the increase in the
average cost of gas from $2.28 per Mcf in 1995 to $3.13 per Mcf
in 1996, discussed above.
Weather for Texas and Oklahoma service territories for the
twelve-month period ended September 30, 1996 was 95% of a 30-year
measure compared to 82% in 1995. Weather for Missouri Gas
Energy's service territories was 104% of a 30-year measure for
1996 compared to 91% in 1995.
Operating margin for the twelve-month period ended September 30,
1996 was $257,868,000 compared to $240,062,000 in 1995. The
increase in operating margin resulted primarily from the colder
winter mentioned above.
Operating expenses, which include operating, maintenance and
general expenses, taxes other than on income and revenues, and
depreciation and amortization, were $153,907,000 for the twelve-
month period ended September 30,
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1996, an increase of 5%, compared with operating expenses of
$146,516,000 in 1995. The increase in operating expenses
resulted primarily from an increase in bad debt expense
associated with the increase in operating revenues, an increase
in provisions for workers' compensation obligations, an increase
in employee medical costs and certain severance costs at Missouri
Gas Energy.
Interest expense was $34,981,000 for the twelve-month period
ended September 30, 1996, a decrease of 11%, compared to
$39,119,000 in 1995. The decrease in interest expense is due to
the decrease in total long-term debt previously discussed. See
also "Debt" in the Notes to the Consolidated Financial Statements
for the twelve months ended September 30, 1996 included herein.
Dividends on preferred securities of subsidiary trust were
$9,480,000 for the twelve-month period ended September 30, 1996,
compared with $3,529,000 in 1995. The increase is due to the May
1995 issuance of the Preferred Securities. See "Preferred
Securities of Subsidiary Trust" in the Notes to the Consolidated
Financial Statements for the three-month period ended
September 30, 1996.
Other income for the twelve-month period ended September 30, 1996
was $11,641,000 compared to $3,878,000 in 1995. Other income for
the twelve-month period ended September 30, 1996 included:
$6,202,000 related to the deferral of interest and other expenses
associated with the Missouri Gas Energy Safety Program; net
rental income from Lavaca Realty of $1,400,000; a pre-tax gain of
$2,300,000 on the sale of Western Gas Interstate Company (WGI)
and other operations; and a $1,448,000 gain on the repurchase of
Senior Notes. Other income for the twelve-month period ended
September 30, 1995 included $3,278,000 related to the deferral of
interest and other expenses associated with the Missouri Gas
Energy Safety Program and net rental income from Lavaca Realty of
$1,402,000. This was partially offset by $750,000 for the write-
down to estimated fair market value of certain Lavaca Realty real
estate held for sale.
For the twelve-month period ended September 30, 1996, federal and
state income taxes increased $3,587,000, or 32%, over the same
period in 1995 due to improved pre-tax earnings and as a result
of a gain on the sale of WGI and other distribution properties,
also discussed above.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain information regarding the
Company's gas utility operations for the three- and twelve-month
periods ended September 30, 1996 and 1995:
Three Months Twelve Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
-------- -------- -------- --------
Average number of gas
sales customers served:
Residential............. 858,093 857,411 870,146 869,737
Commercial.............. 86,123 86,359 89,505 89,148
Industrial and irriga-
tion................... 591 685 644 689
Public authorities and
other.................. 2,572 2,720 2,775 2,799
Pipeline and marketing.. 174 644 378 475
-------- -------- -------- --------
Total average custo-
mers served........... 947,553 947,819 963,448 962,848
======== ======== ======== ========
Gas sales in millions of
cubic feet (MMcf)
Residential............. 4,837 5,066 69,506 62,927
Commercial.............. 2,986 3,165 31,381 28,764
Industrial and irriga-
tion................... 516 603 2,497 2,305
Public authorities and
other.................. 230 228 2,709 3,267
Pipeline and marketing.. 3,866 2,668 13,131 8,221
-------- -------- -------- --------
Gas sales billed....... 12,435 11,730 119,224 105,484
Net change in unbilled
gas sales.............. 823 693 138 133
-------- -------- -------- --------
Total gas sales........ 13,258 12,423 119,362 105,617
======== ======== ======== ========
Gas sales revenues
(thousands of dollars):
Residential............. $ 42,769 $ 38,590 $392,787 $305,119
Commercial.............. 16,356 13,806 156,639 118,255
Industrial and irriga-
tion................... 1,851 1,930 10,526 8,185
Public authorities and
other.................. 884 736 9,479 7,839
Pipeline and marketing.. 9,122 5,119 31,625 16,847
-------- -------- -------- --------
Gas revenues billed.... 70,982 60,181 601,056 456,245
Net change in unbilled
gas sales revenues..... 4,146 3,704 2,500 469
-------- -------- -------- --------
Total gas sales
revenues.............. $ 75,128 $ 63,885 $603,556 $456,714
======== ======== ======== ========
Gas sales margin
(thousands of dollars)... $ 35,713 $ 36,056 $230,431 $215,870
======== ======== ======== ========
Gas sales revenue per
thousand cubic feet
(Mcf) billed:
Residential............. $ 8.841 $ 7.617 $ 5.651 $ 4.849
Commercial.............. 5.478 4.362 4.992 4.111
Industrial and irriga-
tion................... 3.591 3.201 4.215 3.551
Public authorities and
other.................. 3.852 3.226 3.499 2.399
Pipeline and marketing.. 2.360 1.919 2.408 2.049
Weather effect:
Degree days:
Southern Union Gas
service territories.... 3 14 1,886 1,679
Missouri Gas Energy ser-
vice territories....... 85 105 5,476 4,820
Normal, based on 30-year
measure:
Southern Union Gas
service territories... 0 0 1,976 2,057
Missouri Gas Energy ser-
vice territories...... 61 61 5,246 5,293
Gas transported in
millions of cubic feet
(MMcf)................... 14,688 15,321 62,187 69,698
Gas transportation reve-
nues (thousands of
dollars)................. $ 3,828 $ 3,797 $ 19,309 $ 19,892
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's gas utility operations are seasonal in nature with
a significant percentage of the annual revenues and earnings
occurring in the traditional heating-load months. This season-
ality results in a high level of cash flow needs during the peak
winter heating season months, resulting from the required pay-
ments to natural gas suppliers in advance of the receipt of cash
payments from the Company's customers. The Company has histori-
cally used its revolving loan and credit facilities to provide
funding for its seasonal working capital, continuing construction
and maintenance programs and operational requirements.
The principal source of funds during the three-month period ended
September 30, 1996 was $55,500,000 borrowed under the revolving
credit facility. This source, along with beginning cash balances
of $2,887,000, provided funds for the purchase of $5,363,000 in
investment securities, additions to property, plant and equipment
of $13,468,000, operating outflows of $38,691,000 and other
seasonal working capital needs of the Company.
The effective interest rate under the Company's current debt
structure is 7.9% (including interest and the amortization of
debt issuance costs and redemption premiums on refinanced debt).
The Company has availability under a $100,000,000 revolving
credit facility (Revolving Credit Facility) underwritten by a
syndicate of banks. Borrowings under the Revolving Credit
Facility are available for Southern Union's working capital,
letter of credit requirements and other general corporate pur-
poses. At June 30, 1996 the outstanding balance under the
Revolving Credit Facility was nil. The amount outstanding under
the Revolving Credit Facility at September 30, 1996 and
October 15, 1996 was $55,500,000 and $52,000,000, respectively.
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-
Preferred Securities was part of a $300,000,000 shelf registra-
tion filed with the Securities and Exchange Commission on
March 29, 1995. Southern Union may sell a combination of pre-
ferred 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 7.60% 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 Subsid-
iary Trust and Debt in the Notes to the Consolidated Financial
Statements.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTHERN UNION COMPANY
----------------------
(Registrant)
Date October 18, 1996 By RONALD J. ENDRES
-------------------- --------------------
Ronald J. Endres
Executive Vice President and
Chief Financial Officer
Date October 18, 1996 By DAVID J. KVAPIL
-------------------- --------------------
David J. Kvapil
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS Exhibit 11
Three Months Twelve Months
Ended Ended
September 30, September 30,
----------------- -----------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands of dollars, except
per share amounts)
Net earnings (loss) avail-
able for common stock..... $(5,405) $(5,598) $ 21,032 $ 16,639
======= ======= ======== ========
Primary earnings per share:
Average shares out-
standing................. 16,224 16,126 16,206 16,095
Stock options issued or
granted.................. -- -- 577 350
------- ------- -------- --------
Average shares out-
standing................. 16,224 16,126 16,783 16,445
======= ======= ======== ========
Primary earnings (loss)
per share................ $ (.33) $ (.35) $ 1.25 $ 1.01
======= ======= ======== ========
Fully diluted earnings
per share:
Average shares out-
standing................ 16,224 16,126 16,206 16,095
Stock options issued or
granted................. -- -- 617 390
------- ------- -------- --------
Average shares out-
standing................ 16,224 16,126 16,823 16,485
======= ======= ======== ========
Fully diluted earnings
(loss) per share........ $ (.33) $ (.35) $ 1.25 $ 1.01
======= ======= ======== ========
<TABLE> <S> <C>
<ARTICLE> UT
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1996
<PERIOD-TYPE> 3-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $750,446,000
<OTHER-PROPERTY-AND-INVEST> $ 9,258,000
<TOTAL-CURRENT-ASSETS> $ 92,129,000
<TOTAL-DEFERRED-CHARGES> $116,890,000
<OTHER-ASSETS> $ 22,111,000
<TOTAL-ASSETS> $990,834,000
<COMMON> $ 16,275,000
<CAPITAL-SURPLUS-PAID-IN> $206,047,000
<RETAINED-EARNINGS> $ 20,226,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> $243,732,000
$ 0
$100,000,000
<LONG-TERM-DEBT-NET> $386,143,000
<SHORT-TERM-NOTES> $ 55,500,000
<LONG-TERM-NOTES-PAYABLE> $ 0
<COMMERCIAL-PAPER-OBLIGATIONS> $ 0
<LONG-TERM-DEBT-CURRENT-PORT> $ 680,000
$ 0
<CAPITAL-LEASE-OBLIGATIONS> $ 0
<LEASES-CURRENT> $ 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> $205,963,000
<TOT-CAPITALIZATION-AND-LIAB> $990,834,000
<GROSS-OPERATING-REVENUE> $ 80,830,000
<INCOME-TAX-EXPENSE> $ (3,078,000)
<OTHER-OPERATING-EXPENSES> $ 25,315,000
<TOTAL-OPERATING-EXPENSES> $ 37,066,000
<OPERATING-INCOME-LOSS> $ 439,000
<OTHER-INCOME-NET> $ 1,735,000
<INCOME-BEFORE-INTEREST-EXPEN> $ 2,882,000
<TOTAL-INTEREST-EXPENSE> $ 8,287,000
<NET-INCOME> $ (5,405,000)
$ 0
<EARNINGS-AVAILABLE-FOR-COMM> $ (5,405,000)
<COMMON-STOCK-DIVIDENDS> $ 0
<TOTAL-INTEREST-ON-BONDS> $ 0
<CASH-FLOW-OPERATIONS> $(38,691,000)
<EPS-PRIMARY> $ (.33)
<EPS-DILUTED> $ (.33)
</TABLE>
