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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
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SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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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
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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.
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The aggregate market value of the voting stock held by non-
affiliates of the registrant on September 12, 1997, was
$224,553,757. The number of shares of the registrant's Common
Stock outstanding on September 12, 1997 was 17,122,736.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for
the year ended June 30, 1997, 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 11, 1997, 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. Southern Union is one of the top 15
gas utilities in the United States, as measured by number of
customers. The Company's principal line of business is the dis-
tribution of natural gas as a public utility through Southern
Union Gas and Missouri Gas Energy (MGE), each of which is a divi-
sion of Southern Union. Southern Union Gas, headquartered in
Austin, Texas, serves 497,000 residential, commercial, indus-
trial, agricultural and other customers in Texas (including the
cities of Austin, Brownsville, El Paso, Galveston and Port
Arthur). MGE, headquartered in Kansas City, Missouri, serves
474,000 customers in central and western Missouri (including the
cities of Kansas City, St. Joseph, Joplin and Monett). The
diverse geographic area of the Company's natural gas distribution
systems reduces the sensitivity of Southern Union's operations to
weather risk and local economic conditions.
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 pro-
pane 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 dis
tribution and sales businesses from natural gas sales to special-
ized energy consulting services. The Company distributes propane
to 3,600 customers in western Texas. Certain subsidiaries own or
hold interests in real estate and other assets, which are pri-
marily used in the Company's utility business. Central to all of
the Company's present businesses and strategies is the sale and
transportation of natural gas. See Company Operations.
The Company is a sales and market-driven energy company whose
management is committed to achieving profitable growth of its
utility businesses in an increasingly competitive business
environment. Management's strategies for achieving these objec-
tives principally consist of: (i) promoting new sales opportuni
ties and markets for natural gas and propane; (ii) enhancing
financial and operating performance; and (iii) expanding the Com-
pany through development of existing utility businesses and
selective acquisition of new utilities businesses. Management
develops and continually evaluates these strategies and their
implementation by applying their experience and expertise in
analyzing the energy industry, technological advances, market
opportunities and general business trends. Each of these
strategies, as implemented throughout the Company's existing
businesses, reflects the Company's commitment to its core gas
utility business.
The Company has a goal of selected growth and expansion, pri-
marily in the utilities industry. To that extent, the Company
intends to consider, when appropriate, and if financially practi-
cable to pursue, the acquisition of other utility distribution 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.
See Management's Discussion and Analysis of Results of Operations
and Financial Condition (MD&A) -- Cautionary Statement Regarding
Forward-Looking Information contained in the Company's Annual
Report to Stockholders for the year ended June 30, 1997 (the
Annual Report), portions of which are filed as Exhibit 13 hereto.
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-
ion 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 7.60% Senior Debt
Securities due 2024 (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 de-
fer 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 sub-
sidiary 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.
The following table sets forth the summary capitalization of the
Company.
June 30, 1997 June 30, 1996
---------------- ----------------
Amount Percent Amount Percent
-------- ------- -------- -------
(thousands, except percentages)
Long-term debt
Senior Notes............... $384,515 $384,515
Other...................... 1,642 879
-------- --------
386,157 51.2% 385,394 52.7%
Company-obligated Preferred
Securities of Trust........ 100,000 13.3 100,000 13.7
Common stockholders' equity.. 267,462 35.5 245,915 33.6
-------- ----- -------- -----
Total capitalization....... $753,619 100.0% $731,309 100.0%
======== ===== ======== =====
Company Operations
The Company's principal line of business is the distribution of
natural gas through its Southern Union Gas and MGE 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. MGE 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 sub-
sidiary of Southern Union, owns and operates intrastate pipelines
which connect the cities of Lockhart, Luling, Cuero, Shiner,
Yoakum, and Gonzales, Texas, as well as a line that provides gas
to an industrial customer in Port Arthur, Texas. Southern also
owns a transmission line which supplies gas to the community of
Sabine Pass, Texas. In September 1997, Southern purchased a 45-
mile intrastate pipeline for $305,000 which will augment gas
supply to the city of Eagle Pass, Texas, and ultimately into
Piedras Negras, Mexico.
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. Norteno transported a combined 17 billion cubic feet
(Bcf) for the city of Juarez, Mexico and the Samalayuca Power
Plant in north Mexico in fiscal 1997.
SUPro Energy Company (SUPro), a wholly-owned subsidiary of
Southern Union formed in August 1996, primarily provided propane
gas services to 2,300 customers located principally in El Paso,
Texas during 1997 while selling 2,417,000 gallons of propane. On
June 30, 1997, SUPro acquired additional propane operations,
adding 1,300 customers located in and around Alpine, Texas.
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 Total Energy Systems, Inc., formerly Southern
Union Energy Products and Services Company, a wholly-owned sub-
sidiary 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. (SUEI) and Southern
Union International Investments, Inc. (Investments), both wholly-
owned subsidiaries of Southern Union, participate in energy
related projects internationally. Energia Estrella del Sur,
S. A. de C. V. (Estrella), a wholly-owned Mexican subsidiary of
SUEI and Investments, participate in energy-related projects in
Mexico. Subsequent to June 30, 1997, Estrella acquired a 42%
equity ownership in a natural gas distribution company which
serves 16,000 customers in Piedras Negras, Mexico, across the
border from Southern Union Gas' Eagle Pass, Texas service area.
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.
Econofuel Company (Econofuel), a formerly wholly-owned subsidiary
of Southern Union, marketed and sold natural gas for natural gas
vehicles (NGVs) as an alternative fuel to gasoline. Econofuel
owned fuel dispensing equipment in Austin, El Paso, Port Arthur,
and Galveston, Texas, located at independent retail fuel stations
for NGVs. In January 1997, Econofuel was dissolved. See MD&A --
Other Income (Expense), Net contained in the Annual Report.
The Company also holds investments principally in commercially
developed real estate in Austin, El Paso and Kansas City through
Southern Union's wholly-owned subsidiary, Lavaca Realty Company
(Lavaca Realty).
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 other
pipeline systems. The Company has offered transportation
arrangements 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 suc-
cessfully used flexible rate provisions, when needed, to retain
customers who may have access to alternative energy sources.
As energy providers, Southern Union Gas and MGE have historically
competed with alternative energy sources, particularly electri-
city 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 com-
mercial customers in the Company's service areas generally is
higher than the effective cost of 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 requirements of
electricity in some of Southern Union Gas' and MGE's 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 oils, natural gas and pro-
pane, particularly by industrial, electric generation and agri-
cultural customers, has also increased due to the volitility of
natural gas prices and increased marketing efforts from various
energy companies. While competition between such fuels is
generally more intense outside the Company's service areas, this
competition affects the nationwide market for natural gas. Addi-
tionally, the general economic conditions in its service areas
continue to affect certain customers and market areas, thus
impacting the results of 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) required the
"unbundling" of services offered by interstate pipeline companies
beginning in 1992. As a result, gas purchasing and transporta-
tion decisions and associated risks have been shifted from the
pipeline 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
distribution companies such as Southern Union who have demon-
strated a history of contracting favorable and efficient gas
supply arrangements in an open market system.
The majority of Southern Union Gas' 1997 gas requirements for
utility operations were delivered under long-term transportation
contracts through four major pipeline companies. The majority of
MGE's 1997 gas requirements were delivered under short- and long-
term transportation contracts through three major pipeline com-
panies. These contracts have various expiration dates ranging
from 1998 through 2016. 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 MGE both have
firm supply commitments for all areas that are supplied with gas
purchased under short-term arrangements. MGE also holds contract
rights to over 16 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 MGE utility
sales customers during the last ten years.
During 1997, the Company was impacted by significant increases in
natural gas prices. 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 years ended June 30,
1997 and 1996 and the average cost per thousand cubic feet (Mcf)
of gas in 1997.
Percent
Percent of Gas
of Gas Utility Average
Utility Sales Cost
Service Area Revenues Volume Per Mcf
- ---------------------- ---------- --------- -----------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ----- -----
Southern Union Gas
Austin and South Texas.... 12 11 11 11 $3.47 $2.43
El Paso and West Texas.... 13 10 16 15 3.36 2.02
Rio Grande Valley......... 4 5 3 4 3.90 3.73
Other..................... 6 7 6 6 3.33 2.49
--- --- --- ---
35 33 36 36
Missouri Gas Energy......... 65 67 64 64 4.03 3.42
--- --- --- ---
100 100 100 100
=== === === ===
The Company is committed under various agreements to purchase
certain quantities of gas in the future. At June 30, 1997, 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. MGE currently does not
have any fixed price commitment contracts for the 1997/1998
winter heating season. At June 30, 1997, the Company also has
purchase commitments for certain quantities of gas at variable,
market-based prices. These market-based price commitments have
an annual value of $49,700,000 for Southern Union Gas and
$72,100,000 for MGE. 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 methodolo-
gies.
In August 1997, the Missouri Public Service Commission (MPSC)
issued an order authorizing MGE to begin making semi-annual pur-
chase gas adjustments in November and April, instead of more
frequent adjustments as in the past. Additionally, the order
authorized MGE to establish an Experimental Price Stabilization
Fund for purposes of procuring natural gas financial instruments
to hedge a portion of its gas purchase costs for the 1997/1998
winter heating season. The Company anticipates that these proce-
dures will help stabilize the monthly heating bills for Missouri
customers and, depending on market conditions, could ultimately
reduce the cost of gas which is traditionally passed on to custo-
mers. The Company believes it bears minimal risk under the
authorized transactions.
The MPSC approved a gas supply incentive plan for MGE effective
July 1, 1996. Under the plan, the Company and MGE's customers
share in certain savings below benchmark levels of gas costs
achieved as a result of the Company's gas procurement activities.
Likewise, if natural gas is acquired above benchmark levels, both
the Company and customers share in such costs. For the year
ended June 30, 1997, the incentive plan achieved a reduction of
overall gas costs of $10,200,000, resulting in savings to
Missouri customers of $5,600,000. The Company recorded revenues
of $4,600,000 in 1997 under this program.
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 1998; 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
financing 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 impor-
tant because the cost of natural gas accounts for a significant
portion of the Company's total expenses. The appropriate regula-
tory authority must receive notice of such adjustments prior to
billing implementation.
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. In recent
years, the majority of the Company's rate increases in Texas have
resulted in increased monthly fixed charges which help stabilize
earnings. Weather normalization clauses, in place in Austin, El
Paso service area cities other than the City of El Paso (effec-
tive September 1, 1996), Galveston, Port Arthur (effective
September 1, 1996) and two other service areas in Texas, also
help stabilize earnings. The city of El Paso also approved
implementation of a weather normalization clause effective
September 1, 1996, but rescinded the clause effective February 1,
1997.
On January 22, 1997, MGE was notified by the MPSC of its decision
to grant an $8,847,000 annual increase to revenue effective on
February 1, 1997. Pursuant to a 1989 MPSC order, MGE is engaged
in a major gas safety program in its service area (Missouri
Safety Program). In connection with this program, the MPSC
issued an accounting authority order (AAO) in Case No. GO-92-234
in 1994 which authorized MGE to defer depreciation expenses,
property taxes and carrying costs at a rate of 10.54% on the
costs incurred in the Missouri Safety Program. This AAO was con-
sistent with those which were issued by the MPSC from 1990 to
1993 to MGE's prior owner. The MPSC rate order of January 22,
1997, however, retroactively reduced the carrying cost rate
applied by the Company on the expenditures incurred on the
Missouri Safety Program since early 1994 to an Allowance for
Funds Used During Construction (AFUDC) rate. The Company has
filed an appeal of that portion of the rate order in the Missouri
State Court of Appeals, Western District. The Company intends to
vigorously pursue this appeal since it believes this portion of
the rate order is unlawful. The Company believes it will ulti-
mately be successful in litigating this matter and, therefore,
will not have a material adverse affect on its financial posi-
tion, results of operations or cash flows. Accordingly, the Com-
pany has not provided for any potential disallowance relative to
this matter in its financial statements. Absent a reversal of
this part of the rate order, the Company will have to record a
one-time $5,600,000 pre-tax write-off of the previously deferred
carrying costs. See MD&A -- Cautionary Statement Regarding
Forward-Looking Information and Commitments and Contingencies in
the Notes to the Consolidated Financial Statements contained in
the Annual Report.
Subsequent to June 30, 1997, the Company, the Missouri Office of
Public Counsel (OPC) and MPSC staff proposed global settlements
to resolve complaints brought by the OPC and the MPSC staff
regarding billing errors during the past two winters. The set-
tlements call for credits to gas bills by MGE totaling approxi-
mately $1,575,000 to those customers overbilled and a $550,000
contribution by MGE to a social service organization for the
express purpose of assisting needy MGE customers in paying their
gas bills. The settlement is currently pending final approval by
the MPSC. These balances were accrued as of June 30, 1997.
The approval of the January 31, 1994 acquisition of the Missouri
properties by the MPSC was subject to the terms of a stipulation
and settlement agreement which, among other things, requires MGE
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
acquisition.
During the three-year period ended June 30, 1997, the Company did
not file for any other rate increases in any of its major service
areas other than several annual cost of service adjustments. In
addition to the regulation of its utility and pipeline busi-
nesses, the Company is affected by numerous other regulatory con-
trols, including, among others, pipeline safety requirements of
the United States Department of Transportation, safety regula-
tions 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.
Environmental
The Company has been named as a potentially responsible party in
a special notice letter from the United States Environmental Pro-
tection Agency for costs associated with removing hazardous sub-
stances 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, princi-
pally in Arizona and New Mexico, and present service areas in
Texas. See MD&A -- Cautionary Statement Regarding Forward-
Looking Information and Commitments and Contingencies in the
Notes to the Consolidated Financial Statements contained in the
Annual Report.
Statistics of Utility and Related Operations
Gas Utility Customers
as of June 30,
----------------------------
1997 1996 1995
-------- -------- --------
Southern Union Gas:
Austin and South Texas........... 163,938 159,129 152,382
El Paso and West Texas........... 173,825 169,861 168,526
Galveston and Port Arthur........ 50,856 51,392 51,241
Panhandle and North Texas (a).... 24,903 24,777 31,384
Rio Grande Valley................ 76,704 76,707 77,105
------- ------- -------
490,226 481,866 480,638
------- ------- -------
Missouri Gas Energy:
Kansas City, Missouri
Metropolitan Area.............. 346,060 340,248 337,689
St. Joseph, Joplin, Monett and
others......................... 122,946 119,878 120,038
------- ------- -------
469,006 460,126 457,627
------- ------- -------
SUPro.............................. 3,647 -- --
------- ------- -------
Total.............................. 962,879 941,992 938,265
======= ======= =======
- ---------------------
(a) Effective May 1, 1996, the Company sold certain gas distri-
bution operations in the Texas and Oklahoma Panhandles.
Southern Union Gas, Mercado, Norteno and Southern. The following
table shows certain operating statistics of the Company's gas
distribution, transportation, marketing and transmission opera-
tions principally in Texas, the Oklahoma Panhandle and Arizona:
Year Ended June 30,
----------------------------
1997 1996 1995
-------- -------- --------
Average number of gas sales custo-
mers served (a):
Residential...................... 456,972 457,187 457,052
Commercial....................... 29,030 29,873 29,549
Industrial and irrigation........ 274 346 382
Public authorities and other..... 2,673 2,812 2,798
Pipeline and marketing........... 189 165 150
-------- -------- --------
Total average customers served. 489,138 490,383 489,931
======== ======== ========
Gas sales in millions of cubic
feet (MMcf):
Residential...................... 23,135 22,945 21,596
Commercial....................... 9,759 9,990 9,927
Industrial and irrigation........ 1,562 1,992 2,112
Public authorities and other..... 2,756 2,708 2,798
Pipeline and marketing........... 18,485 11,848 7,596
-------- -------- --------
Gas sales billed............... 55,697 49,483 44,029
Net change in unbilled gas sales. (70) (5) (10)
Total gas sales................ 55,627 49,478 44,019
======== ======== ========
Gas sales revenues (thousands of
dollars):
Residential...................... $152,737 $127,255 $118,818
Commercial....................... 51,392 42,353 42,112
Industrial and irrigation........ 6,122 6,315 6,746
Public authorities and other..... 12,975 9,338 7,938
Pipeline and marketing........... 47,664 27,688 16,409
-------- -------- --------
Gas revenues billed............ 270,890 212,949 192,023
Net change in unbilled gas
sales revenues................... (150) 856 (204)
-------- -------- --------
Total gas sales revenues....... $270,740 $213,805 $191,819
======== ======== ========
Gas sales margin (thousands of
dollars) (b):...................... $ 98,225 $ 97,718 $ 95,399
Gas sales revenue per Mcf
billed (c):
Residential...................... $ 6.602 $ 5.546 $ 5.502
Commercial....................... 5.266 4.240 4.242
Industrial and irrigation........ 3.920 3.170 3.194
Public authorities and other..... 4.708 3.448 2.837
Pipeline and marketing........... 2.579 2.337 2.160
Weather effect:
Degree days (d).................. 1,962 1,901 1,669
Percent of 30-year measure (e)... 100% 96% 83%
Gas transported in MMcf............ 32,895 31,906 34,133
Gas transportation revenues
(thousands of dollars)............. $ 9,103 $ 9,008 $ 8,378
- -----------------------
(a) Variances in the average number of customers served is pri-
marily due to the divestiture of the Texas and Oklahoma Pan-
handle distribution operations in May 1996 involving 7,000
customers.
(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:
Year Ended June 30,
----------------------------
1997 1996 1995
-------- -------- --------
Average number of gas sales
customers served:
Residential..................... 407,505 405,782 401,641
Commercial...................... 56,988 56,448 55,825
Industrial...................... 348 321 294
-------- -------- --------
Total average customers
served........................ 464,841 462,551 457,760
======== ======== ========
Gas sales in MMcf:
Residential..................... 45,566 46,775 41,354
Commercial...................... 21,121 21,578 18,863
Industrial...................... 496 592 241
-------- -------- --------
Gas sales billed.............. 67,183 68,945 60,458
Net change in unbilled gas
sales........................... (88) 31 (19)
-------- -------- --------
Total gas sales............... 67,095 68,976 60,439
======== ======== ========
Gas sales revenues (thousands
of dollars):
Residential..................... $284,803 $259,401 $186,716
Commercial...................... 123,684 111,840 77,101
Industrial...................... 3,539 4,294 1,731
-------- -------- --------
Gas sales revenues billed..... 412,026 375,535 265,548
Net change in unbilled gas
sales revenues.................. (1,745) 2,090 (740)
-------- -------- --------
Total gas sales revenues...... $410,281 $377,625 $264,808
======== ======== ========
Gas sales margin (thousands of
dollars) (a)...................... $134,656 $131,462 $116,353
======== ======== ========
Gas sales revenue per Mcf
billed:(b)
Residential..................... $ 6.250 $ 5.546 $ 4.515
Commercial...................... 5.856 5.183 4.087
Industrial...................... 7.135 7.253 7.183
Weather effect:
Degree days (c)................. 5,506 5,495 4,779
Percent of 30-year measure: (d). 105% 105% 90%
Gas transported in MMcf........... 30,439 30,269 30,464
Gas transportation revenues
(thousands of dollars)............ $ 11,970 $ 10,299 $ 8,336
- ----------------------
(a) Gas sales margin is equal to gas sales revenues less pur-
chased gas.
(b) Fluctuations in gas price billed between each period reflect
changes in the average cost of purchased gas and the effect
of rate adjustments.
(c) "Degree days" are a measure of the coldness of the weather
experienced. A degree day is equivalent to each degree that
the daily mean temperature for a day falls below 65 degrees
Fahrenheit.
(d) 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 51% of the office space at Lavaca
Plaza is used in the Company's business while the remainder is
leased to non-affiliated entities. Lavaca Realty also owns a 2-
story office building in El Paso, Texas. Other significant real
estate investments held at June 30, 1997 include 190,500 square
feet of undeveloped land in Harlingen, Texas, and 36,000 square
feet of improved property in Kansas City, Missouri, which is
leased to a non-affiliated entity.
Employees
As of August 31, 1997, the Company has 1,561 employees, of whom
1,214 are paid on an hourly basis, 321 are paid on a salary basis
and 26 are paid on a commission basis. Of the 1,214 hourly paid
employees, 49% are represented by unions. Of those employees
represented by unions, 95% are employed by Missouri Gas Energy.
On June 4, 1997, Southern Union Gas employees in Austin, Texas
covered by a collective bargaining agreement voted to decertify
their representing union. From time to time the Company may be
subject to labor disputes; however, such disputes have not
previously disrupted its business. 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 7,669 miles of mains, 4,369 miles of ser-
vice lines and 105 miles of transmission lines. Southern and
Norteno have 122.8 miles and 6.7 miles, respectively, of trans- mission lines.
MGE has 7,354 miles of mains, 4,509 miles of service lines and 47
miles of transmission lines. MGE is engaged in the Missouri
Safety Program in its service territories. At the direction of
the MPSC, the Company deferred depreciation expense, property
taxes and carrying costs of $3,729,000, $7,703,000 and $4,154,000
for 1997, 1996 and 1995, respectively, relative to this program.
See Utility Regulation and Rates and Commitments and Contin-
gencies in the Notes to Consolidated Financial Statements con-
tained in the Annual Report.
The Company considers its systems to be in good condition and
well-maintained, and it has continuing replacement programs based
on historical performance and system surveillance.
ITEM 3. Legal Proceedings.
See Commitments and Contingencies in the Notes to Consolidated
Financial Statements contained in the Annual Report for a discus-
sion of the Company's legal proceedings. See MD&A -- Cautionary
Statement Regarding Forward-Looking Information contained in the
Annual Report.
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, 1997.
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
Market Information
Southern Union's common stock is traded on the New York Stock
Exchange under the symbol "SUG". The high and low sales prices
(adjusted for any stock dividends and stock splits) for shares of
Southern Union common stock since July 1, 1995 are set forth
below:
$/Share
---------------
High Low
------ ------
July 1 to September 12, 1997................. 23 7/8 21 3/4
(Quarter Ended)
June 30, 1997................................ 25 1/4 22
March 31, 1997............................... 24 3/8 21 1/4
December 31, 1996............................ 24 7/8 21
September 30, 1996........................... 26 3/8 19 1/8
(Quarter Ended)
June 30, 1996................................ 24 1/4 19 1/4
March 31, 1996............................... 21 3/8 15 7/8
December 31, 1995............................ 18 7/8 12
September 30, 1995........................... 13 1/4 11 3/4
Holders
As of September 12, 1997, there were 645 holders of record of
Southern Union's common stock. This number does not include per-
sons 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 17,122,736 shares of Southern Union's common stock
outstanding on September 12, 1997 of which 9,555,479 shares were
held by non-affiliates.
Dividends
Southern Union paid no cash dividends on its common stock during
the two years ended June 30, 1997. Provisions in certain of
Southern Union's long-term notes and its bank credit facilities
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, Southern Union distributed a stock split as a
stock dividend of 33 1/3%. On December 10, 1996 and November 27,
1995, the Company distributed its annual 5% common stock dividend
to stockholders of record on November 22, 1996 and November 15,
1995, respectively. The 5% stock dividends are consistent with
Southern Union's Board of Directors' February 1994 decision to
commence regular stock dividends of approximately 5% each year.
The specific amount and declaration, 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 11, 1997. A portion of the 5% stock dividend dis-
tributed on November 27, 1995 was characterized as a distribution
of capital due to the level of the Company's retained earnings
available for distribution as of the date of declaration.
ITEM 6. Selected Financial Data.
Year Ended
Years Ended June 30, December 31,
----------------------------------------- ------------
1997(a)(b) 1996(a)(b) 1995(a) 1994(a)(c) 1993(c)(d)
---------- ---------- -------- ---------- ------------
(thousands of dollars, except per share amounts)
Total
operating
revenues. $717,031 $620,391 $479,983 $372,043 $209,393
Earnings
from con-
tinuing
opera-
tions.... 19,032 20,839 16,069 8,378 7,733
Earnings
per com-
mon and
common
share
equiva-
lents
(e)...... 1.07 1.19 .93 .56 .56
Total
assets... 990,403 964,460 992,597 887,807 416,207
Common
stock-
holders'
equity... 267,462 245,915 225,664 208,975 201,938
Short-term
debt..... 687 615 770 889 40,655
Long-term
debt, ex-
cluding
current
maturi-
ties..... 386,157 385,394 462,503 479,048 89,019
Company-
obligated
manda-
torily
redeem-
able pre-
ferred
securi-
ties of
subsidi-
ary
trust.... 100,000 100,000 100,000 -- --
Average
custo-
mers
served... 955,895 952,934 947,691 653,102 421,233
- ------------------
(a) Missouri Gas Energy, a division of Southern Union, was
acquired on January 31, 1994 and was accounted for as a pur-
chase. 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 opera-
tions of the Company for the periods subsequent to the
acquisition are not comparable to prior periods.
(b) Certain Texas and Oklahoma Panhandle distribution operations
and WGI, exclusive of the Del Norte interconnect, were sold
on May 1, 1996.
(c) During 1994, the Company changed its fiscal year-end from
December 31 to June 30. The Company believes the June 30
fiscal year-end more closely conforms its financial condi-
tion 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.
(d) The Company completed the Berry Gas, Eagle Pass and Rio
Grande Valley Gas Company acquisitions during 1993.
(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 (i) the 5%
stock dividends distributed on December 10, 1996,
November 27, 1995 and June 30, 1994, and (ii) the 33 1/3%
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 20 through 27 of the Com-
pany's Annual Report to Stockholders for the year ended June 30,
1997, 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, 1997,
are incorporated herein by reference:
Consolidated statement of operations -- years ended June 30,
1997, 1996 and 1995.
Consolidated balance sheet -- June 30, 1997 and 1996.
Consolidated statement of cash flows -- years ended June 30,
1997, 1996 and 1995.
Consolidated statement of common stockholders' equity -- years
ended June 30, 1997, 1996 and 1995.
Notes to consolidated financial statements.
Report of independent accountants.
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
<PAGE>
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 1997
Annual Meeting of Stockholders under the captions Board of
Directors -- Board Size and Composition and Executive Officers
and Compensation -- Executive Officers Who Are Not 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 1997
Annual Meeting of Stockholders under the captions Executive
Officers and Compensation -- Executive 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 1997
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 1997
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-
--------------------
cial statements of Southern Union and its consolidated
subsidiaries, included in the Company's Annual Report to
Stockholders for the year ended June 30, 1997, are incor-
porated by reference in Part II, Item 8:
Consolidated statement of operations -- years ended
June 30, 1997, 1996 and 1995.
Consolidated balance sheet -- June 30, 1997 and 1996.
Consolidated statement of cash flows -- years ended
June 30, 1997, 1996 and 1995.
Consolidated statement of common stockholders' equity
-- years ended June 30, 1997, 1996 and 1995.
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 incorporated 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
Registration 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
Registration 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 State-
ment 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 Subordi-
nated 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 State-
ment 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 State-
ment 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 instru-
ments 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
Company 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.)(*)
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 Incen-
tive 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.)(*)
10(i) Southern Union Company Director's Deferred Compen-
sation 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.)(*)
10(j) Southern Union Company Supplemental Deferred Com-
pensation 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.)(*)
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, 1997, are
incorporated by reference herein: Pages 20 - 50.
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,
1997.
- -----------------
(*) 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 19, 1997.
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 19, 1997.
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,
------------------------------
1997 1996 1995
-------- -------- --------
(thousands of dollars,
except per share amounts)
Net earnings available for
common stock.................. $ 19,032 $ 20,839 $ 16,069
Primary earnings per share:
Average shares outstanding.... 17,071 16,990 16,874
Common stock equivalents...... 674 532 375
-------- -------- --------
Average shares outstanding.... 17,745 17,522 17,249
======== ======== ========
Primary earnings per share.... $ 1.07 $ 1.19 $ 0.93
======== ======== ========
Fully diluted earnings per share:
Average shares outstanding.... 17,071 16,990 16,874
Common stock equivalents...... 682 572 398
-------- -------- --------
Average shares outstanding.... 17,753 17,562 17,272
======== ======== ========
Fully diluted earnings per
share...................... $ 1.07 $ 1.19 $ .93
======== ======== ========
- -----------------
Note: All periods have been adjusted for each of the 5% stock
dividends distributed on December 10, 1996 and
November 27, 1995 and the four-for-three stock split
distributed in the form of a 33 1/3% stock dividend on
March 11, 1996.
<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 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 474,000 customers in central and western Missouri
(including the cities of Kansas City, St. Joseph, Joplin and
Monett). 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.
To achieve profitability and continued growth, the Company con-
tinues to emphasize gas sales in nontraditional markets,
operating efficiencies of existing systems, and expansion through
selective acquisitions of new systems.
Results of Operations
Net Earnings Southern Union Company's 1997 (fiscal year ended
- ------------
June 30) net earnings were $19,032,000 ($1.07 per share), com
pared with $20,839,000 ($1.19 per share) in 1996. The decrease
was primarily due to $5,763,000 in additional bad debt expense in
1997 as a result of significant increases in delinquent customer
accounts, principally at MGE. The significant increase in
natural gas prices during 1997 caused many customers to receive
considerably higher heating bills. Additionally, certain billing
errors were discovered in MGE's billing practices and procedures.
As a result of the customer's increased bills and negative media
coverage over the high gas costs and billing errors, more custo
mers than usual failed to pay their bills causing an unantici-
pated increase in aged receivables, primarily in Missouri. MGE
also responded to a Missouri Public Service Commission (MPSC)
directive to delay collection efforts by suspending the discon-
nection of customers for non-payment until July 1997. Also
impacting 1997 net earnings was $2,125,000 in various settlement
fees in connection with complaints brought by the Missouri Office
of Public Counsel and the MPSC for the billing errors. Con-
tributing to 1997 net earnings were additional revenues of
$4,600,000 under a gas supply incentive plan approved by the MPSC
in July 1996. Under the plan, Southern Union and its Missouri
customers shared in certain savings below benchmark levels of gas
costs incurred as a result of the Company's gas procurement
activities. The incentive plan achieved a reduction of overall
gas costs of $10,200,000, resulting in savings to Missouri custo-
mers of $5,600,000. Average common and common share equivalents
outstanding increased 1.1% in 1997. The Company earned 7.4% on
average common equity in 1997.
The Company's 1996 net earnings increased to $20,839,000 ($1.19
per share), compared with $16,069,000 ($.93 per share) in 1995.
The increase primarily was due to the colder winter throughout
most of the Company's service territories. Also contributing to
the increase was a reduction of interest expense after the repur-
chase of $90,485,000 of the Company's 7.60% Senior Debt Securi-
ties (Senior Notes) from June 1995 to June 1996. Certain gains
on the repurchase 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 dividend expense by $8,321,000 in 1996. Average common
and common share equivalents outstanding increased 1.7% in 1996.
The Company earned 8.8% and 7.4% on average common equity in 1996
and 1995, respectively.
Operating Revenues Operating revenues in 1997 increased
- ------------------
$96,640,000, or 16%, to $717,031,000, while gas purchase costs
increased $87,649,000, or 24%, to $449,188,000.
Operating revenues and gas purchase costs in 1997 were affected
by an increase in the average cost of gas and greater gas sales
volumes. The average cost of gas increased $.60 to $3.65 per Mcf
in 1997 due to increases in spot market gas prices as a result of
the increased demand for natural gas during the past winter sea-
son. The average spot market price of natural gas increased 38%
to $2.32, per million British thermal units (MMBtu), in 1997.
Gas sales volumes increased 4% in 1997 to 122,722 million cubic
feet (MMcf) due to growth in pipeline and marketing sales which
typically have lower margins. This was partially offset by a
reduction in volumes of 878 MMcf from the sale of certain opera-
tions in the Texas and Oklahoma Panhandles on May 1, 1996. Addi-
tionally impacting operating revenues was an $8,847,000 annual
increase to revenues granted by the MPSC effective as of
February 1, 1997, and increased revenues under the gas supply
incentive plan, previously discussed. Also contributing to the
increase in operating revenues was a $4,616,000 increase in gross
receipt taxes that are levied on sales revenues, then collected
from the customers and remitted to the various taxing authori-
ties.
Southern Union Gas and MGE contributed 33% and 60%, respectively,
of the Company's consolidated 1997 operating revenues. Four sup-
pliers provided 44% of gas purchases in 1997.
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.
Gas transportation volumes in 1997 increased 1,159 MMcf to 63,334
MMcf at an average transportation rate per Mcf of $.33 compared
with $.31 in 1996. Transportation volumes increased from 30,269
MMcf to 30,439 MMcf in 1997 for MGE and increased from 31,906
MMcf to 32,895 MMcf in 1997 for Southern Union Gas and the Com-
pany's pipeline subsidiaries. This was partially offset by a
reduction in volumes of 2,452 MMcf from the sale of certain
operations, previously discussed.
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 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 1995/1996 winter season. The average spot
market price of natural gas, per 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.
Southern Union Gas and MGE contributed 32% and 63%, respectively,
of the Company's consolidated 1996 operating revenues. Four sup-
pliers provided 43% of gas purchases in 1996.
Gas transportation volumes in 1996 decreased 4% to 62,175 MMcf at
an average transportation rate per Mcf of $.31 compared with $.26
in 1995. Transportation volumes decreased from 30,464 MMcf to
30,269 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.
Net Operating Margin Net operating margin in 1997 (operating
- --------------------
revenues less gas purchase costs and revenue-related taxes)
increased by $4,375,000, or 2%, compared with an increase of
$12,979,000, or 6%, in 1996. Operating margins 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. Southern Union Gas and MGE accounted for 42% and
55%, respectively, of the Company's net operating margin in 1997.
Weather Weather in the Missouri service territories in 1997 was
- -------
105% of a 30-year measure. Weather in 1997 in Southern Union Gas
service territories was 100% of a 30-year measure which was 4%
colder than in 1996. Weather in Missouri in 1996 was 105% of the
30-year measure which was 17% colder than in 1995, while weather
in the Southern Union Gas service territories in 1996 was 96% of
the 30-year measure which was 16% colder than in 1995.
Customers The average number of customers served in 1997, 1996
- ---------
and 1995 was 955,895, 952,934 and 947,691, respectively.
Southern Union Gas served 489,138 residential, commercial, indus-
trial, agricultural and other gas utility customers in the State
of Texas during 1997. The 1997 gas utility customer base in
Texas decreased slightly due to the divestiture of certain Texas
and Oklahoma Panhandle distribution operations in May 1996
involving 7,000 customers. MGE served 464,841 customers in
central and western Missouri during 1997. SUPro Energy Company
(SUPro), a subsidiary of the Company, served 1,916 propane custo-
mers in Texas during 1997.
Operating Expenses Operating, maintenance and general expenses
- ------------------
in 1997 increased $2,367,000, or 2%, to $109,888,000. Included
in this increase were $5,763,000 in additional bad debt expense
due to significant increases in delinquent customer accounts
principally at MGE, previously discussed; increased media adver-
tising, travel and call center labor costs as a result of and in
response to the significant price spikes in natural gas during
the past winter heating season; and increased field and call
center labor and other costs to improve customer service at MGE.
Partially offsetting these factors was a decrease in medical,
dental, pension and injury and damage claims.
Depreciation and amortization expense in 1997 increased
$1,847,000 to $34,829,000 as a result of including certain costs
into rate base that were previously deferred as provided in the
MGE rate case effective as of February 1, 1997 and normal growth
in plant. Taxes other than on income and revenues, principally
consisting of property, payroll and state franchise taxes, in
1997 decreased $1,505,000 to $12,154,000. The decrease was pri-
marily due to decreases in assessed property tax values in
several Texas taxing jurisdictions, a decrease in Missouri state
franchise tax and a reduction in payroll taxes from the decrease
in employees.
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, increased provi-
sions for workers compensation 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 in 1996 increased $1,535,000 to $13,659,000.
This increase was primarily due to general increases in property
tax assessments in Texas and Missouri by various local taxing
authorities. Offsetting this increase was a reduction in payroll
taxes from the decrease in employees, previously discussed.
Employees The Company employed 1,595, 1,611, and 1,720 individ-
- ---------
uals as of June 30, 1997, 1996, and 1995, 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
June 4, 1997, Southern Union Gas employees in Austin, Texas
covered by a collective bargaining agreement voted to decertify
their representing union. On May 1, 1996, the Company agreed to
three-year contracts with each of the four unions that represent
the bargaining-unit employees of MGE.
Interest Expense and Dividends on Preferred Securities Total
- ------------------------------------------------------
interest expense in 1997 declined by $2,367,000, or 7%, to
$33,465,000. Interest expense on long-term debt decreased by
$4,205,000 in 1997 primarily due to the timing of 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 Preferred Securities and working capital.
Interest expense on short-term debt in 1997 increased $1,629,000
to $1,833,000, due to the average short-term debt outstanding
during 1997 increasing $27,093,000 to $29,772,000. The average
short-term debt balance outstanding during 1996 of $2,679,000 was
the result of the available cash balance on hand from the sale of
the Preferred Securities. The average rate of interest on short-
term debt was 6.1% in 1997 compared with 7.4% in 1996.
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 Senior
Notes, previously discussed. 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.
Other Income (Expense), Net Other income, net, in 1997 decreased
- ---------------------------
by $8,446,000 to $2,880,000. Other income in 1997 included
$3,729,000 in deferral of interest and other expenses associated
with the MGE Safety Program; realized gains on the sale of
investment securities of $2,545,000; and net rental income of
Lavaca Realty Company, (Lavaca Realty), the Company's real estate
subsidiary, of $1,329,000. This was partially offset by
$2,125,000 for the settlement of certain billing errors,
previously discussed; the write-off of $1,750,000 acquisition-
related costs from the termination of various acquisition activi-
ties; and a $257,000 expense associated with the donation of
emissions analysis equipment and software to a Texas university.
Other income in 1996 included $5,664,000 in deferral of interest
and other expenses associated with the MGE Safety Program; a
$2,300,000 pre-tax gain on the sale of Western Gas Interstate
Company (WGI), a former subsidiary of the Company, and other dis-
tribution operations on May 1, 1996; investment interest and
interest on notes receivable of $2,051,000; net rental income of
Lavaca Realty of $1,392,000; and gains on the repurchase of
Senior Notes of $1,581,000. This was partially offset by losses
of $470,000 on the sale of undeveloped real estate.
Other income in 1995 included $2,619,000 related to the deferral
of interest and other expenses associated with the MGE Safety
Program; net rental income of 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.
Federal and State Income Taxes Federal and state income tax
- ------------------------------
expense in 1997, 1996, and 1995 was $12,373,000, $14,979,000, and
$10,974,000, respectively. The decrease in income taxes during
1997 was due to the decrease in pre-tax income, previously dis-
cussed. The increase in income taxes in 1996 was the result of
an increase in pre-tax income attributable to the earnings con-
tributions of previous acquisitions and the sale of WGI and cer-
tain distribution properties.
Liquidity and Capital Resources
Operating Activities The seasonal nature of Southern Union's
- --------------------
business results in a high level of cash flow needs to finance
gas purchases, outstanding customer accounts receivable and cer-
tain tax payments. To provide these funds, as well as funds for
its continuing construction and maintenance programs, the Company
has historically used its credit facilities along with
internally-generated funds. Because of available short-term
credit and the ability to obtain various market financing, man-
agement believes it has adequate financial flexibility to meet
its cash needs.
Cash flow from operating activities in 1997 decreased by
$19,471,000 to $47,994,000, and increased by $25,823,000 to
$67,465,000 in 1996. Operating activities were impacted by a
reduction in net earnings in 1997, increased accounts receivable
balances due to increases in delinquent customer accounts dis-
cussed above and general changes in other operating accounts.
Increased net earnings positively impacted cash flow from
operating activities in 1996 as well as an increase in deferred
gas purchase costs due to market fluctuations in the spot market
price of natural gas.
At June 30, 1997, 1996 and 1995, the Company's primary sources of
liquidity included cash, cash equivalents and short-term invest-
ments of nil, $2,887,000 and $58,597,000, respectively, and
borrowings available under the Company's credit facilities. A
balance of $1,600,000 and nil was outstanding under the credit
facilities at June 30, 1997 and 1996, respectively. A balance of
$19,000,000 was outstanding under the facilities at July 31,
1997.
Investing Activities Cash flow used in investing activities in
- --------------------
1997 increased by $22,556,000 to $54,015,000, and decreased by
$57,657,000 to $31,459,000 in 1996. Investing activity cash flow
was primarily affected by additions to property, plant and equip-
ment, the sale of various properties and sales and purchases of
investment securities.
During 1997, 1996 and 1995, the Company expended $64,463,000,
$59,376,000 and $67,442,000, respectively, for capital expendi-
tures excluding acquisitions. These expenditures primarily
related to distribution system replacement and expansion.
Included in these capital expenditures were $20,972,000,
$19,761,000 and $24,476,000 for the MGE Safety Program in 1997,
1996 and 1995, respectively. Cash flow from operations has
historically been utilized to finance capital expenditures and is
expected to be the primary source for future capital expendi-
tures.
On May 1, 1996, the Company consummated the sale of various
operations for $15,900,000. The operations included certain gas
distribution operations of the Company in the Texas and Oklahoma
Panhandles and WGI, exclusive of the Del Norte interconnect which
transports natural gas into Mexico.
During 1997, the Company purchased investment securities of
$5,363,000 and had proceeds from the sale of investment securi-
ties of $13,327,000. During 1996, the Company purchased
$10,763,000 in investment securities. As of June 30, 1997, the
investment securities had a fair value of $6,432,000 and are
classified as available for sale. At June 30, 1997, the adjust-
ment to unrealized holding gain, net of related income tax and
included as a separate component of common stockholders' equity,
totaled $664,000. Subsequent to June 30, 1997, all of the
investment securities were used to satisfy short sale positions
of investment securities. Proceeds and realized gains from this
transaction, to be recorded in fiscal 1998, are $6,599,000 and
$1,088,000, respectively.
The Company is in the process of installing an Automated Meter
Reading (AMR) system at MGE. The installation of the AMR system
will involve an investment of $27,000,000. This system will
improve meter reading accuracy and provide electronic accessi-
bility to meters in residential customers' basements, thereby
assisting in the reduction of the number of estimated bills.
Financing Activities Cash flow from financing activities in 1997
- --------------------
was $3,134,000, while cash flow used in financing activities was
$72,134,000 in 1996. Cash flow from financing activities in 1995
was $80,608,000. Financing activity cash flow changes were
primarily due to the various financing transactions during the
past three years. As a result of these financing transactions,
the Company's total debt to total capital ratio at June 30, 1997
was 51.2%, compared with 52.7% and 58.7% at June 30, 1996 and
1995, respectively. The Company's effective debt cost rate under
the current debt structure is 8.1% (which includes interest and
the amortization of debt issuance costs and redemption premiums
on refinanced debt).
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.
Southern Union has availability under a $100,000,000 revolving
credit facility (Revolving Credit Facility) underwritten by a
syndicate of banks. The Company has additional availability
under uncommitted line of credit facilities (Uncommitted Facili-
ties) with various banks. Covenants under the Revolving Credit
Facility allow for up to $35,000,000 of borrowings under Uncom-
mitted Facilities at any one time. Borrowings under these
facilities are available for Southern Union's working capital,
letter of credit requirements and other general corporate pur-
poses. The facilities are uncollateralized and have no borrowing
base limitations as long as the Company's Senior Notes meet cer-
tain rating criteria. The Company may use up to $40,000,000 of
the Revolving Credit Facility to finance future acquisitions.
These facilities contain certain financial covenants that, among
other things, restrict cash or asset dividends, share repur-
chases, certain investments and additional debt. The facility
expires on December 31, 1999 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, 1997
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, 1997 and 1996, which guarantee pay-
ment of various insurance premiums and state taxes.
Other Matters
Propane Operations On August 30, 1996, SUPro purchased certain
- ------------------
propane distribution operations in El Paso, Texas and on June 30,
1997 acquired additional propane operations in and around Alpine,
Texas. SUPro sold 2,417,000 gallons of propane during 1997.
These operations serve 3,600 customers and allow the Company to
provide a greater scope of energy services.
Foreign Operations Subsequent to June 30, 1997, Energia Estrella
- ------------------
del Sur, S. A. de C. V., a wholly-owned subsidiary of Southern
Union Energy International, Inc. and Southern Union International
Investments, Inc., both subsidiaries of the Company, acquired a
42% equity ownership in a natural gas distribution company which
serves 16,000 customers in Piedras Negras, Mexico, which is
across the border from the Company's Eagle Pass, Texas service
area. In September 1997, Southern Transmission Company, another
subsidiary of the Company, purchased a 45-mile intrastate pipe-
line for $305,000 which will augment the Company's gas supply to
the city of Eagle Pass and ultimately Piedras Negras.
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. Additionally, Southern Union distributed annual 5% common
stock dividends on December 10, 1996 and November 27, 1995. A
portion of the 5% stock dividend distributed on November 27, 1995
was characterized as a distribution of capital due to the level
of the Company's retained earnings available for distribution as
of such date of declaration. Unless otherwise stated, all per
share data included herein and in the accompanying Consolidated
Financial Statements and Notes thereto have been restated to give
effect to the stock splits and stock dividends.
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.
In connection with MGE's $8,847,000 annual revenue increase from
the rate case as approved by the MPSC, the rate order also
retroactively reduced the carrying cost rate applied by the Com-
pany on expenditures incurred on the MGE Safety Program. The
Company has appealed this decision to the Missouri Court of
Appeals, Western District. Absent a reversal of this part of the
rate order, the Company will have to record a one-time $5,600,000
pre-tax write-off of the previously deferred carrying costs. The
Company has not provided for any potential disallowance relative
to this matter in its financial statements, as the Company be-
lieves it will ultimately be successful in litigating this matter
as it believes this portion of the rate order is unlawful. See
Commitments and Contingencies in the Notes to Consolidated Finan-
cial 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 reasonable 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.
Subsequent to June 30, 1997, the Company, the Missouri Office of
Public Counsel (OPC) and MPSC staff proposed global settlements
to resolve complaints brought by the OPC and the MPSC staff
regarding billing errors during the past two winters. The set-
tlements call for credits to gas bills by MGE totaling approxi-
mately $1,575,000 to those customers overbilled and a $550,000
contribution by MGE to a social service organization for the
express purpose of assisting needy MGE customers in paying their
gas bills. The settlement is currently pending final approval by
the MPSC. These balances were accrued as of June 30, 1997.
In August 1997, the MPSC issued an order authorizing MGE to begin
making semi-annual purchase gas adjustments in November and
April, instead of more frequent adjustments as in the past.
Additionally, the order authorized MGE to establish an Experimen-
tal Price Stabilization Fund for purposes of procuring natural
gas financial instruments to hedge a portion of its gas purchase
costs for the 1997/1998 winter heating season. The Company
anticipates that these procedures will help stabilize the monthly
heating bills for Missouri customers and, depending on market
conditions, could ultimately reduce the cost of gas which is
traditionally passed on to customers. The Company believes it
bears minimal risk under the authorized transactions.
The MPSC also approved a gas supply incentive plan for MGE
effective July 1, 1996. Under the plan, the Company and MGE's
customers share in certain savings below benchmark levels of gas
costs achieved as a result of the Company's gas procurement
activities. Likewise, if natural gas is acquired above benchmark
levels, both the Company and customers share in such costs. For
the year ended June 30, 1997, the incentive plan achieved a
reduction of overall gas costs of $10,200,000, resulting in
savings to Missouri customers of $5,600,000. The Company
recorded revenues of $4,600,000 in 1997 under this program.
On January 22, 1997, Missouri Gas Energy was notified by the MPSC
of its decision to grant an $8,847,000 annual increase to revenue
effective as of February 1, 1997. Southern Union Gas also
received several annual cost of service adjustments in 1997, 1996
and 1995. See Utility Regulation and Rates and Commitments and
Contingencies in the Notes to Consolidated Financial Statements.
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 $20,000,000 in fiscal
1998 related to this program which are expected to be financed
through cash flow from operations. See Utility Regulation and
Rates and Commitments and Contingencies in the Notes to Consoli-
dated Financial Statements.
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, certain El Paso service
area cities , Port Arthur, 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.
Accounting Pronouncements The Financial Accounting Standards
- -------------------------
Board (FASB) recently issued Earnings per Share and Disclosure of
Information About Capital Structure standards which establish
computation and presentation of earnings per share and disclosure
of information concerning an entity's capital structure, respec-
tively. The Company is required to adopt the provisions of these
standards for periods ending after December 15, 1997, and does
not expect the adoption thereof to have a material effect on the
Company's financial position, results of operations or cash
flows.
The FASB also recently issued Reporting Comprehensive Income and
Disclosures about Segments of an Enterprise and Related Informa-
tion, which establish procedures for reporting and display of
comprehensive income and its components, and certain disclosures
about segment information in interim and annual financial state-
ments and related information about products, services, geo-
graphic areas and major customers, respectively. The Company
will adopt the provisions of these standards for the fiscal year
ending June 30, 1998, but does not expect the adoption thereof to
have a material effect 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.
Cautionary Statement Regarding Forward-Looking Information This
- ----------------------------------------------------------
Management's Discussion and Analysis of Results of Operations and
Financial Condition and other sections of this Annual Report con-
tain forward-looking statements that are based on current expec-
tations, estimates and projections about the industry in which
the Company operates, management's beliefs and assumptions made
by management. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-
looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and
assumptions, which are difficult to predict and many of which are
outside the Company's control. Therefore, actual outcomes and
results may differ materially from what is expressed or fore-
casted in such forward-looking statements. The Company under-
takes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events
or otherwise. Readers are cautioned not to put undue reliance on
such forward-looking statements. Stockholders may review the
Company's reports filed in the future with the Securities and
Exchange Commission for more current descriptions of developments
that could cause actual results to differ materially from such
forward-looking statements.
Factors that could cause or contribute to actual results dif-
fering materially from such forward-looking statements include
the following: cost of gas; gas sales volumes; weather condi-
tions in the Company's service territories; the achievement of
operating efficiencies and the purchases and implementation of
new technologies for attaining such efficiencies; impact of rela-
tions with labor unions of bargaining-unit employees; the receipt
of timely and adequate rate relief; the outcome of pending and
future litigation; governmental regulations and proceedings
affecting or involving the Company; and the nature and impact of
any extraordinary transactions such as any acquisition or divest-
iture of a business unit or any assets. These are representative
of the factors that could affect the outcome of the forward-
looking statements. In addition, such statements could be
affected by general industry and market conditions, and general
economic conditions, including interest rate fluctuations,
federal, state and local laws and regulations affecting the
retail gas industry or the energy industry generally, and other factors.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended June 30,
------------------------------------
1997 1996 1995
---------- ---------- ----------
(thousands of dollars, except
shares and per share amounts)
Operating revenues......... $ 717,031 $ 620,391 $ 479,983
Gas purchase costs......... 449,188 361,539 241,839
--------- --------- ---------
Operating margin......... 267,843 258,852 238,144
Revenue related taxes...... (39,502) (34,886) (27,157)
--------- --------- ---------
Net operating margin..... 228,341 223,966 210,987
Operating expenses:
Operating, maintenance
and general............ 109,888 107,521 102,371
Depreciation and
amortization........... 34,829 32,982 32,083
Taxes, other than on
income and revenues.... 12,154 13,659 12,124
--------- --------- ---------
Total operating
expenses............. 156,871 154,162 146,578
--------- --------- ---------
Net operating revenues. 71,470 69,804 64,409
--------- --------- ---------
Other income (expenses):
Interest................. (33,465) (35,832) (39,884)
Dividends on preferred
securities of
subsidiary trust....... (9,480) (9,480) (1,159)
Other, net............... 2,880 11,326 3,677
--------- --------- ---------
Total other expenses,
net.................. (40,065) (33,986) (37,366)
--------- --------- ---------
Earnings before income
taxes.................... 31,405 35,818 27,043
Federal and state income
taxes.................... 12,373 14,979 10,974
--------- --------- ---------
Net earnings available
for common stock......... $ 19,032 $ 20,839 $ 16,069
========= ========= =========
Earnings per common and
common share equivalents. $ 1.07 $ 1.19 $ .93
========= ========= =========
Weighted average common
and common share
equivalents outstanding.. 17,752,399 17,562,317 17,271,839
========== ========== ==========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
June 30,
-----------------------
1997 1996
---------- ----------
(thousands of dollars)
Property, plant and equipment:
Plant in service.................... $ 963,269 $ 912,552
Construction work in progress....... 7,970 8,411
--------- ---------
971,239 920,963
Less accumulated depreciation and
amortization...................... (329,182) (310,289)
--------- ---------
642,057 610,674
Additional purchase cost assigned to
utility plant, net of accumulated
amortization of $23,082,000 and
$19,305,000, respectively......... 131,539 133,780
--------- ---------
Net property, plant and equipment. 773,596 744,454
Current assets:
Cash and cash equivalents........... -- 2,887
Accounts receivable, billed and
unbilled.......................... 58,659 47,846
Inventories, principally at average
cost.............................. 21,523 27,023
Deferred gas purchase costs......... -- 2,650
Investment securities............... 6,432 --
Prepayments and other............... 9,609 1,947
--------- ---------
Total current assets.............. 96,223 82,353
Deferred charges...................... 109,512 116,286
Investment securities................. -- 8,848
Real estate........................... 9,046 9,513
Other................................. 2,026 3,006
--------- ---------
Total assets........................ $ 990,403 $ 964,460
========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
June 30,
-----------------------
1997 1996
---------- ----------
(thousands of dollars)
Common stockholders' equity:
Common stock, $1 par value;
authorized 50,000,000 shares;
issued 17,170,861 shares at
June 30, 1997..................... $ 17,171 $ 16,275
Premium on capital stock............ 225,252 206,047
Less treasury stock: 51,625 shares
at cost........................... (794) (794)
Retained earnings................... 25,169 25,631
Unrealized holding gain (loss)...... 664 (1,244)
--------- ---------
267,462 245,915
Company-obligated mandatorily redeem-
able preferred securities of sub-
sidiary 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........................ 386,157 385,394
--------- ---------
Total capitalization.............. 753,619 731,309
Current liabilities:
Long-term debt due within one year.. 687 615
Notes payable....................... 1,600 --
Accounts payable.................... 33,827 39,238
Federal, state and local taxes...... 13,699 16,741
Accrued interest.................... 12,840 12,773
Accrued dividends on preferred
securities of subsidiary trust.... -- 2,370
Customer deposits................... 17,214 15,656
Deferred gas purchase costs......... 3,565 --
Other............................... 22,291 15,937
--------- ---------
Total current liabilities......... 105,723 103,330
Deferred credits and other ........... 77,083 86,287
Accumulated deferred income taxes..... 53,978 43,534
Commitments and contingencies......... -- --
--------- ---------
Total stockholders' equity and
liabilities....................... $ 990,403 $ 964,460
========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended June 30,
----------------------------
1997 1996 1995
-------- -------- --------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings................. $ 19,032 $ 20,839 $ 16,069
Adjustments to reconcile net
earnings to net cash flows
from operating activities:
Depreciation and
amortization........... 34,829 32,982 32,083
Deferred income taxes.... 7,340 9,413 5,909
Provision for bad debts.. 11,298 5,535 4,162
Deferral of interest
expense................ (3,729) (5,664) (2,619)
Gain on sale of
investment securities.. (2,545) -- --
Gain on sale of various
operations............. -- (2,300) --
Other.................... 1,077 621 1,952
Changes in assets and
liabilities, net of
acquisitions and
dispositions:
Accounts receivable,
billed and
unbilled........... (22,111) (17,743) 11,051
Accounts payable..... (6,978) 10,048 (7,255)
Taxes and other
liabilities........ (2,975) 11,021 (7,187)
Customer deposits.... 1,558 1,489 1,137
Deferred gas
purchase costs..... 6,215 4,991 (22,537)
Inventories.......... 5,691 (3,607) 7,975
Other................ (708) (160) 902
-------- -------- --------
Net cash flows from
operating activities... 47,994 67,465 41,642
-------- -------- --------
Cash flows from (used in)
investing activities:
Additions to property, plant
and equipment.............. (64,463) (59,376) (67,442)
Acquisition of operations,
net of cash received....... (1,861) -- (750)
Purchase of investment
securities................. (5,363) (10,763) --
Litigation settlement
proceeds................... -- 4,250 --
Maturity (purchase) of
short-term investments..... -- 19,582 (19,582)
Increase in customer
advances................... 2,470 3,547 725
Increase (decrease) in
deferred charges and
credits.................... 6 (3,811) (3,868)
Proceeds from sale of
various operations......... 1,130 14,770 --
Proceeds from sale of land... 1,096 -- --
Proceeds from sale of
investment securities...... 13,327 -- --
Other........................ (357) 342 1,801
-------- -------- --------
Net cash flows used in
investing activities..... (54,015) (31,459) (89,116)
Cash flows from (used in)
financing activities:
Repayment of debt............ (640) (72,790) (16,212)
Net borrowings under
revolving credit facility.. 1,600 -- --
Increase in cash overdrafts.. 1,567 -- --
Issuance of preferred
securities of subsidiary
trust...................... -- -- 100,000
Issuance cost of preferred
securities of subsidiary
trust...................... -- -- (3,799)
Other........................ 607 656 619
-------- -------- --------
Net cash flows from (used
in) financing activities. 3,134 (72,134) 80,608
Increase (decrease) in cash and
cash equivalents............... (2,887) (36,128) 33,134
Cash and cash equivalents at
beginning of year.............. 2,887 39,015 5,881
-------- -------- --------
Cash and cash equivalents at
end of year.................... $ -- $ 2,887 $ 39,015
======== ======== ========
Cash paid for interest, net of amounts capitalized, in 1997,
1996, and 1995 was $32,282,000, $36,893,000, and $38,987,000,
respectively. Cash paid for income taxes in 1997, 1996, and 1995
was $5,871,000, $11,000, and $2,533,000, respectively.
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Trea- Unrea-
Common Premium sury lized
Stock, on Stock, Holding
$ Par Capital at Retained Gain/
Value Stock Cost Earnings (Loss) Total
------- -------- ------ -------- ------- --------
Balance
July 1,
1994........ $11,497 $198,272 $(794) $ -- $ -- $208,975
Net
earnings.. -- -- -- 16,069 -- 16,069
Exercise
of stock
options... 73 547 -- -- -- 620
------- -------- ------ -------- ------- --------
Balance
June 30,
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) -- -- -- --
Unrealized
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
earnings.. -- -- -- 19,032 -- 19,032
5% stock
dividend.. 813 18,681 -- (19,494) -- --
Unrealized
holding
gain...... -- -- -- -- 1,908 1,908
Exercise
of stock
options... 83 524 -- -- -- 607
------- -------- ------ -------- ------- --------
Balance
June 30,
1997........ $17,171 $225,252 $(794) $ 25,169 $ 664 $267,462
======= ======== ===== ======== ======= ========
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. Sub-
sidiaries of Southern Union also market natural gas to end-users,
distribute propane, operate 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 Com-
pany'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 contributed in
excess of 90% of the Company's total revenue, net earnings and
identifiable assets in both 1997 and 1996. Four suppliers pro-
vided 44% and 43% of the Company's gas purchases in 1997 and
1996, respectively.
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 $10,986,000,
$4,000,000, $2,100,000 and $1,600,000 at June 30, 1997, 1996,
1995 and 1994, respectively. The allowance for doubtful accounts
is increased for estimated uncollectible accounts and reduced for
the write-off of trade receivables.
Missouri initiated a special payment plan in 1997 known as Relief
Now to help ease the impact of last winter's high gas bills.
Customers on this plan are allowed to pay their outstanding trade
receivable balance over two years. Imputed interest on the
carrying cost of this plan has been recorded at June 30, 1997,
which was not significant.
Fair Value of Financial Instruments The carrying amounts
- -----------------------------------
reported in the balance sheet for cash and cash equivalents,
accounts receivable, investment securities, accounts payable and
notes payable approximates their fair value. The fair value of
the Company's investment securities and long-term debt is esti-
mated using current market quotes and other estimation
techniques.
Inventories Inventories consist of natural gas in underground
- -----------
storage and materials and supplies. Natural gas in underground
storage of $17,171,000 and $22,784,000 at June 30, 1997 and 1996,
respectively, consists of 7,785,000 and 9,844,000 British thermal
units, 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
- ------------------
(FASB) recently issued Earnings Per Share and Disclosure of
Information About Capital Structure standards which establish
computation and presentation of earnings per share and disclosure
of information concerning an entity's capital structure,
respectively. The Company is required
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to adopt the provisions of these standards for periods ending
after December 15, 1997, and does not expect the adoption thereof
to have a material affect on the Company's financial position,
results of operations or cash flows.
The FASB also recently issued Reporting Comprehensive Income and
Disclosures about Segments of an Enterprise and Related Informa-
tion, which establish procedures for reporting and displaying
comprehensive income and its components, and certain disclosures
about segment information in interim and annual financial state-
ments and related information about products, services, geo-
graphic areas and major customers, respectively. The Company
intends to adopt the provisions of these standards for the fiscal
year ending June 30, 1998, but does not expect the adoption
thereof to have a material effect on the Company's financial
position, results of operations or cash flows.
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
On August 30, 1996, SUPro Energy Company, a wholly-owned sub-
sidiary of the Company, purchased certain propane distribution
operations in El Paso, Texas and on June 30, 1997, acquired pro-
pane operations located in and around Alpine, Texas. These
acquisitions which serve 3,600 customers were for $1,861,000 in
cash and the assumption of $1,475,000 in long-term debt. Subse-
quent to June 30, 1997, Southern Union Energy International,
Inc., another wholly-owned subsidiary, acquired a 42% equity
ownership in a natural gas distribution company which serves
16,000 customers in Piedras Negras, Mexico for $2,700,000.
On May 1, 1996, Southern Union Company sold certain gas distribu-
tion operations of the Company in the Texas and Oklahoma Pan-
handles and Western Gas Interstate Company (WGI), a former
wholly-owned subsidiary of the Company, exclusive of the Del
Norte interconnect operation which transports natural gas into
Mexico, for $15,900,000.
III Other Income, Net
Other income, net in 1997, 1996, and 1995 was $2,880,000,
$11,326,000, and $3,677,000, respectively.
Other income of $2,880,000 in 1997 included: $3,729,000 related
to the deferral of interest and other expenses associated with
the Missouri Gas Energy Safety Program; realized gains on the
sale of investment securities of $2,545,000; and net rental
income of Lavaca Realty Company (Lavaca Realty), the Company's
real estate subsidiary, of $1,329,000. This was partially offset
by $2,125,000 for the settlement of complaints brought by the
Missouri Office of Public Counsel and the Missouri Public Service
Commission (MPSC) for certain billing errors primarily from this
past winter heating season; the write-off of $1,750,000 of
acquisition-related costs as a result of termination of various
acquisition activities; and a $257,000 expense associated with
the donation of emissions analysis equipment and software to a
Texas university.
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 of
Lavaca Realty 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 of
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.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 finan-
cial institution which, in turn, invests the temporary funds in a
variety of high-quality short-term financial securities.
Under the Company's cash management system, checks issued but not
presented to banks frequently result in overdraft balances for
accounting purposes and are classifed in accounts payable in the
consolidated balance sheet.
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,
-----------------------
1997 1996
---------- ----------
Distribution plant..................... $ 919,998 $ 870,820
General plant.......................... 74,375 71,127
Other.................................. 15,872 14,636
---------- ----------
Total plant.......................... 1,010,245 956,583
Less contributions in aid of
construction......................... (46,976) (44,031)
---------- ----------
Plant in service..................... 963,269 912,552
Construction work in progress.......... 7,970 8,411
---------- ----------
971,239 920,963
Less accumulated depreciation and
amortization......................... (329,182) (310,289)
---------- ----------
642,057 610,674
Additional purchase cost assigned to
utility plant, net................... 131,539 133,780
---------- ----------
Net property, plant and equipment...... $ 773,596 $ 744,454
========== ==========
During 1996 WGI and certain distribution operations were sold in
which utility plant and equipment had a cost and accumulated
depreciation and amortization of $21,111,000 and $10,356,000,
respectively.
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 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 at June 30, 1997.
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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
cost assigned to utility plant is provided on a straight-line
basis over forty years unless the Company's regulators have pro-
vided for the recovery of the additional purchase cost in rates,
in which case the Company's policy is to utilize the amortization
period which follows the rate recovery period.
Depreciation of property, plant and equipment in 1997, 1996, and
1995 was $31,051,000, $29,264,000, and $27,815,000, respectively.
VI Investment Securities
At June 30, 1997, all securities owned by the Company were clas-
sified as available for sale. 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 June 30, 1997, investment securities consisted of common
stock with a specific cost of $5,443,000 and a fair value of
$6,432,000. The unrealized holding gain, net of related income
taxes and included as a separate component of common stock-
holders' equity, totaled, $643,000 at June 30, 1997.
As of June 30, 1997, the Company had short sales of investment
securities and recorded a prepayment for the anticipated proceeds
of $6,599,000. The related payable of $6,566,000, based on fair
value of the investment securities, was recorded in other current
liabilities. The unrealized holding gain, net of related income
taxes and included as a separate component of common stock-
holders' equity, totaled $21,000 at June 30, 1997.
Subsequent to June 30, 1997, the outstanding investment
securities were used to satisfy the previously-mentioned short
sales of investment securities. Proceeds and realized gains from
this transaction, to be recorded in fiscal 1998, are $6,599,000
and $1,088,000, respectively.
VII Stockholders' Equity
Stock Dividends and Splits On December 10, 1996 and November 27,
- --------------------------
1995, Southern Union distributed its annual 5% common stock divi-
dend to stockholders of record on November 22, 1996 and
November 15, 1995, respectively. A portion of the 5% stock divi-
dend distributed on November 27, 1995 was characterized as a dis-
tribution of capital due to the level of the Company's retained
earnings available for distribution as of the 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 stockholders of record on
February 23, 1996. Unless otherwise stated, all per share and
share data included herein have been restated to give effect to
the dividends and split.
Common Stock The Company maintains its 1992 Long-Term Stock In-
- ------------
centive Plan (1992 Plan) under which options to purchase
1,203,930 shares were provided to 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 exercise 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. Options
typically vest 20% per year for five years but may be a lesser or
greater period as designated for particular options.
The Company accounts for its incentive plans under an Accounting
Principles Board opinion, Accounting for Stock Issued to
Employees. As a result, the Company recorded no compensation
expense for 1997, 1996 and 1995. During 1997, the Company
adopted the FASB standard, Accounting for Stock-Based Compensa-
tion, for footnote disclosure
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
purposes only. Had compensation cost for these incentive plans
been determined consistent with this standard, the Company's net
income and earnings per share would have been $18,135,000 and
$1.02, respectively, in 1997 and $20,455,000 and $1.16,
respectively, in 1996. Because this standard has not been
applied to options granted prior to July 1, 1995, the resulting
pro forma compensation cost may not be representative of that to
be expected in future years.
The fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1997 and 1996, respectively:
dividend yield of nil for both years; volatility of 21% and 25%;
risk-free interest rate of 6.2% and 6.6%; and expected life
outstanding of 5.5 to 7.2 years and 3.5 to 7.0 years.
1992 Plan 1982 Plan
----------------- -----------------
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
--------- -------- -------- --------
Outstanding July 1, 1994... 664,477 $ 9.34 483,887 $ 5.43
Exercised................ (1,621) 6.90 (105,950) 5.75
Canceled................. (4,171) 11.14 -- --
--------- -------
Outstanding June 30, 1995.. 658,685 9.33 377,937 5.34
Granted.................. 302,159 15.24 -- --
Exercised................ (35,655) 8.62 (67,197) 5.29
Canceled................. (47,501) 10.50 -- --
--------- -------
Outstanding June 30, 1996.. 877,688 11.33 310,740 5.34
Granted.................. 283,300 22.72 -- --
Exercised................ (35,234) 9.86 (49,302) 5.34
Canceled................. (6,414) 11.31 -- --
--------- -------
Outstanding June 30, 1997.. 1,119,340 14.26 261,438 5.35
========= =======
The following table summarizes information about stock options
outstanding under the 1992 Plan at June 30, 1997:
Options
Options Outstanding Exercisable
- ---------------------------------------------- ----------------
Weighted
Average Weighted Weighted
Remaining Average Number Average
Number of Contractual Exercise of Exercise
Exercise Prices Options Life Price Options Price
- --------------- --------- ----------- -------- ------- --------
$ 5.00 - $ 7.00 278,059 5.71 years $ 6.75 230,598 $ 6.72
7.01 - 15.00 513,125 7.60 years 13.42 195,698 12.58
15.01 - 24.00 328,156 9.77 years 21.94 8,971 17.04
--------- -------
1,119,340 435,267
========= =======
The shares exercisable under the 1992 Plan and the corresponding
weighted average exercise price at June 30, 1997, 1996 and 1995
were 435,267 at $9.57; 304,687 at $8.61; and 200,732 at $8.45,
respectively. The shares exercisable under the 1982 Plan and the
corresponding weighted average exercise price at June 30, 1997,
1996 and 1995 were 261,438 at $5.35; 306,110 at $5.34; and
308,480 at $5.34, respectively. The weighted average remaining
contractual life of options outstanding under the 1982 Plan at
June 30, 1997 was 2.94 years. There were 2,008 shares available
for future option grants under the 1992 Plan at June 30, 1997.
No shares were available for future option grants under the 1982
Plan at June 30, 1997.
On February 10, 1994, Southern Union granted a warrant which
expires on February 10, 2004, to purchase up to 57,881 shares of
Common Stock at an exercise price of $11.99 to the Company's
outside legal counsel.
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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 (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
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, 1997
and 1996, 4,000,000 shares of Preferred Securities were out-
standing.
IX Debt
June 30,
-----------------------
1997 1996
---------- ----------
7.60% Senior Notes, due 2024........... $ 384,515 $ 384,515
Other.................................. 2,329 1,494
--------- ---------
Total long-term debt................... $ 386,844 $ 386,009
========= =========
The maturities of long-term debt for each of the next five years
ending June 30 are: 1998 -- $687,000; 1999 -- $431,000; 2000 --
$144,000; 2001 -- $145,000; 2002 -- $160,000; and thereafter --
$385,277,000.
Senior Notes On January 31, 1994, Southern Union completed the
- ------------
sale of the 7.60% Senior Debt Securities (Senior Notes). The net
proceeds from the sale, together with the net proceeds from a
$50,000,000 common stock subscription rights offering (Rights
Offering) completed on December 31, 1993 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 opera-
tions. 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 $966 and $1,020 (per $1,000 note) on
June 30 and July 31, 1997, respectively, as quoted by a major
brokerage firm. The carrying amount of long-term debt at
June 30, 1997 and 1996 was $386,844,000 and
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$386,009,000, respectively. The fair value of long-term debt at
June 30, 1997 and 1996 was $373,770,000 and $366,783,000,
respectively.
Credit Facilities The Company has availability under a
- -----------------
$100,000,000 revolving credit facility (Revolving Credit
Facility) underwritten by a syndicate of banks. The Company has
additional availability under uncommitted line of credit facili-
ties (Uncommitted Facilities) with various banks. Covenants
under the Revolving Credit Facility allow for up to $35,000,000
of borrowings under Uncommitted Facilities at any one time.
Borrowings under these facilities are available for Southern
Union's working capital, letter of credit requirements and other
general corporate purposes. The facilities are uncollateralized
and have no borrowing base limitations as long as the Senior
Notes meet certain rating criteria. The Company may use up to
$40,000,000 of the Revolving Credit Facility to finance future
acquisitions. These facilities contain covenants with respect to
financial parameters and ratios, total debt limitations, restric-
tions as to dividend payments, stock reacquisitions, certain
investments and additional liens. The facilities expire on
December 31, 1999. The Revolving Credit Facility is subject to a
commitment fee based on the rating of the Senior Notes. As of
June 30, 1997, 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
facilities was 6.1% and 7.4% for the years ended June 30, 1997
and 1996, respectively. A $1,600,000 balance was outstanding
under the facilities as of June 30, 1997 but no balance was out-
standing at June 30, 1996. A balance of $19,000,000 was out-
standing under the facilities at July 31, 1997.
X Employee Benefits
Defined Contribution Plan The Company provides a Savings Plan
- -------------------------
available to all employees. Since January 1, 1997, the Company
contributes $.50 of Company stock for each $1.00 contributed by a
non-Missouri Gas Energy participant up to 5% of the employee's
salary. Additionally, the Company contributes $.75 of Company
stock for each $1.00 contributed by a non-Missouri Gas Energy
participant from 6% to 10% of the employee's salary. For
Missouri Gas Energy non-union employees, the Company contributes
$.50 of Company stock for each $1.00 contributed by such a par-
ticipant up to 5% of the employee's salary and the Company con-
tributes $.75 of Company stock for each $1.00 contributed by such
a participant from 6% to 8% of the employee's salary. For
Missouri Gas Energy union employees, the Company contributes $.50
of Company stock for each $1.00 contributed by such a participant
up to 7% of the employee's salary. Company contributions are
100% vested after six years of continuous service. Company con-
tributions to the plan during 1997, 1996, and 1995, were
$1,476,000, $1,425,000, and $1,344,000, respectively.
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, 1997 and 1996, the Company has recorded a regulatory
asset and a related liability of $1,100,000.
Postretirement Benefits Other than Pensions
- -------------------------------------------
1997 1996 1995
-------- -------- --------
Service cost of benefits earned
during the year..................... $ 282 $ 313 $ 303
Interest cost on benefit obligations.. 2,772 2,982 3,389
Actual return on plan assets.......... (31) (24) (21)
Amortization of transition obligation. 224 224 224
Net amortization and deferral......... (1,115) (195) --
------- ------- -------
Net postretirement benefit cost....... $ 2,132 $ 3,300 $ 3,895
======= ======= =======
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1997 1996
---------- ----------
Accumulated postretirement benefit
obligation:
Retirees........................... $ 28,713 $ 29,080
Other fully eligible participants.. 2,424 2,037
Other active participants.......... 4,811 4,738
--------- ---------
Accumulated benefit obligation......... 35,948 35,855
Plan assets at fair value.............. (863) (383)
--------- ---------
Accumulated benefit obligations in
excess of plan assets................ 35,085 35,472
Unrecognized net transition obligation. (3,412) (3,636)
Unrecognized prior service cost........ 1,207 1,347
Unrecognized net gain.................. 7,552 10,531
--------- ---------
Accrued postretirement benefit cost.... $ 40,432 $ 43,714
========= =========
Postretirement medical and other benefit liabilities are accrued
on an actuarial basis during the years an employee provides ser-
vices. Prior to 1997, Missouri Gas Energy recorded a deferral of
postretirement medical expense in excess of cash paid per an
accounting authority order approved by the MPSC. These deferrals
were to be amortized to expense and were to be fully offset by
the net income stream generated from a company-owned life insur-
ance (COLI) plan. Legislation passed in 1996 by Congress elimi-
nated the tax advantages afforded to COLI plans, and the Missouri
Gas Energy COLI program was terminated in February 1997. Addi-
tionally, the State of Missouri passed legislation which provides
for prospective recognition by the MPSC of postretirement medical
and benefit costs on an accrual basis when funded. Amortization
of deferrals recorded prior to the termination of the COLI are
currently included in Missouri Gas Energy rates. The Company
amortizes the transition obligation over an allowed 20-year
period. Fluctuations in the stock market could impact future
plan asset investment returns and ultimately net pension expense.
The significant features of the plan include the payment 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 weighted average assumed discount rate used to measure the
accumulated postretirement benefit obligation was 7.75% for the
year ended June 30, 1997 and 1996. 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 1998 was 7.5% 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 in-
terest cost components of the net periodic postretirement health
care benefit cost by $42,000 and would increase the accumulated
postretirement benefit obligation for health care benefits by
$430,000. Assets held in the separate account within the retire-
ment plan include cash and bond and stock funds. Non-benefit
liabilities are limited to expenses associated with plan opera-
tion and administration.
Defined Benefit Plan The Company maintains two trusteed non-
- --------------------
contributory defined benefit retirement plans which cover sub-
stantially 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 with federal regula-
tions, not to exceed the amounts deductible for income tax
purposes. The plans' assets are invested in cash and bond and
stock funds.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net pension expense for the years ended June 30, 1997, 1996 and
1995 consisted of the following:
Plan A Plan B
---------------------- --------------------------
1997 1996 1995 1997 1996 1995
------ ------ ------ -------- -------- --------
Service cost
of benefits
earned dur-
ing the
year........ $1,405 $1,442 $1,220 $ 1,509 $ 1,640 $ 1,125
Interest cost
on projected
benefit ob-
ligations... 2,759 2,483 2,394 7,487 7,355 7,289
Actual return
on plan
assets...... (6,473) (4,204) (2,768) (20,797) (18,669) (10,318)
Net amortiza-
tion and
deferral.... 4,121 2,277 949 12,025 11,556 3,363
------ ------ ------ ------- ------- -------
Net pension
expense..... $1,812 $1,998 $1,795 $ 224 $ 1,882 $ 1,459
Plan A Plan B
----------------- -----------------
1997 1996 1997 1996
-------- -------- -------- --------
Actuarial present value
of benefit obligations:
Vested benefits......... $29,738 $26,150 $88,541 $87,790
Nonvested benefits...... 1,184 1,092 1,086 1,149
------- ------- ------- -------
Accumulated benefit
obligations.............. 30,922 27,242 89,627 88,939
Effect of future salary
increases................ 5,933 6,573 7,113 7,381
------- ------- ------- -------
Projected benefit
obligation............... 36,855 33,815 96,740 96,320
Plan assets at fair value. (36,931) (30,161) (112,574)(100,506)
------- ------- ------- -------
Projected benefit obliga-
tion less plan assets.... (76) 3,654 (15,834) (4,186)
Unrecognized net
transition asset......... 427 524 -- --
Unrecognized prior
service cost............. (1,515) (1,627) (1,103) (828)
Unrecognized net gain..... 4,555 853 17,324 5,468
------- ------- ------- -------
Accrued retirement plan
liabilities.............. $ 3,391 $ 3,404 $ 387 $ 454
======= ======= ======= =======
Actuarial assumptions:
Weighted average
discount rate........... 7.75% 7.75% 7.75% 7.75%
Rate of increase in
future compensation
levels.................. 5.62% 5.62% 5.8% 5.8%
Weighted average
expected long-term rate
of return............... 8% 7.75% 8% 7.75%
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.
The Company was required by the MPSC in 1994 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 had 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 each of the three years
ended June 30, 1997 was not significant.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
XI Taxes on Income
Year Ended June 30,
----------------------------
1997 1996 1995
-------- -------- --------
Current:
Federal......................... $ 4,437 $ 4,960 $ 4,694
State........................... 596 606 371
------- ------- -------
5,033 5,566 5,065
Deferred:
Federal......................... 6,690 8,563 5,218
State........................... 650 850 691
------- ------- -------
7,340 9,413 5,909
------- ------- -------
Total provision................... $12,373 $14,979 $10,974
======= ======= =======
Deferred credits and other liabilities also include $629,000 and
$665,000 of unamortized deferred investment tax credit as of
June 30, 1997 and 1996, 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,
------------------------
1997 1996
---------- ----------
Deferred tax assets:
Postretirement benefits.............. $ 2,053 $ 1,392
Bad debt reserves.................... 2,643 713
Estimated alternative minimum
tax credit......................... 7,890 2,044
Insurance accruals................... 2,599 1,552
Unrealized holding (gain) loss
on securities...................... (357) 670
Other................................ 1,266 1,609
--------- ---------
Total deferred tax assets.......... 16,094 7,980
--------- ---------
Deferred tax liabilities:
Property, plant and equipment........ (57,839) (41,771)
Unamortized debt expense............. (5,492) (5,712)
Other................................ (3,955) (3,154)
--------- ---------
Total deferred tax liabilities..... (67,286) (50,637)
--------- ---------
Net deferred tax liability............. (51,192) (42,657)
Less current tax assets................ 2,786 877
--------- ---------
Accumulated deferred income taxes...... $ (53,978) $ (43,534)
========= =========
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Year Ended June 30,
----------------------------
1997 1996 1995
-------- -------- --------
Computed statutory tax expense
at 35%.......................... $ 10,992 $ 12,536 $ 9,465
Changes in taxes resulting from:
State income taxes, net of
federal income tax benefit.... 811 947 690
Acquisition adjustment related
to assets sold................ -- 1,096 --
Amortization of acquisition
adjustment.................... 724 884 920
Research and experimentation
credit......................... -- (400) --
Other........................... (154) (84) (101)
-------- -------- -------
Actual tax expense................ $ 12,373 $ 14,979 $10,974
======== ======== =======
XII Utility Regulation and Rates
On January 22, 1997, Missouri Gas Energy was notified by the MPSC
of its decision to grant an $8,847,000 annual increase to revenue
effective on February 1, 1997. See Commitments and Contin-
gencies.
The MPSC approved a gas supply incentive plan for Missouri Gas
Energy effective July 1, 1996. Under the plan, the Company and
Missouri Gas Energy's customers share in certain savings below
benchmark levels of gas costs achieved as a result of the Com-
pany's gas procurement activities. Likewise, if natural gas is
acquired above benchmark levels, both the Company and customers
share in such costs. For the year ended June 30, 1997, the
incentive plan achieved a reduction of overall gas costs of
$10,200,000, resulting in savings to Missouri customers of
$5,600,000. The Company recorded revenues of $4,600,000 under
this 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 $10,200,000 at June 30, 1997. 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, 1997 and 1996.
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 basis
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: 1998 -- $5,440,000; 1999 --
$5,613,000; 2000 -- $4,639,000; 2001 -- $4,356,000; 2002 --
$4,411,000; and thereafter $7,793,000. Rental expense was
$6,797,000, $8,098,000 and $7,268,000 for the years ended
June 30, 1997, 1996 and 1995, 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 damages associated with the site of a
former coal gasification plant (Pine Street Canal Site) in Bur-
lington, 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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
third-party defendant in January 1989. Green Mountain Power was
an action under 42 U.S.C. Section 9607(a) by the federal govern-
ment to recover clean-up costs associated with the Maltex Pond,
which is part of the Pine Street Canal Site. Two defendants in
Green Mountain Power, Vermont Gas Systems and Green Mountain
Power Corp., claimed that Southern Union is the corporate succes-
sor to People's Light and Power Corporation, an upstream corpo-
rate parent of Green Mountain Power Corp. during the years 1928-
1931. Green Mountain Power was settled without admission or
determination of liability with respect to Southern Union by
order dated December 26, 1990. The EPA has since conducted
studies of the clean-up costs for the remainder of the Pine
Street Canal Site, but the ultimate costs are 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, Inc. entered into an
Environmental Liability Agreement (Environmental Liability Agree-
ment) 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 Agree-
ment, 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 asso-
ciated with a number of sites where manufactured gas plants were
previously operated. These plants were commonly used to supply
gas service in the late 19th and early 20th centuries, in certain
cases by corporate predecessors to Western Resources. By-
products and residues from manufactured gas could be located at
these sites and at some time in the future may require remedia-
tion 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 appropriate federal and state regulatory authorities
may occur in the future. At the present time and based upon
information available to management, the Company believes that
the costs of any remediation efforts that may be required for
these sites for which it may ultimately have responsibility will
not exceed the aggregate amount subject to substantial sharing by
Western Resources.
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 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. Although
this site was previously listed in the Comprehensive Environmen-
tal Response, Compensation and Liability Information System
(CERCLIS) data base, in a letter dated December 30, 1996, the
United States Environmental Protection Agency removed the site
from the CERCLIS data base. 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.
Pursuant to a 1989 MPSC order, Missouri Gas Energy is engaged in
a major gas safety program in its service area. 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 (Missouri Safety Program). In
connection with this program, the MPSC issued an accounting
authority order (AAO) in Case No. GO-92-234 in 1994 which
authorized MGE to defer depreciation expenses, property taxes and
carrying costs at a specified rate of 10.54% on the costs
incurred in the Missouri Safety Program. This AAO was consistent
with those which were issued by the MPSC from 1990 through 1993
to the predecessor owner of Missouri Gas Energy. Since
February 1, 1994, the Company has followed the specifications of
the AAO as provided for by generally accepted accounting princi-
ples. The MPSC rate order of January 22, 1997, however, retro-
actively reduced the carrying cost rate applied by the Company on
the expenditures incurred on the Missouri Safety Program since
early 1994 to an Allowance for Funds Used During Construction
(AFUDC) rate which ranged from 6% to 7% from October 1993 to
January 1997. The Company has filed an appeal of that portion of
the rate order in the Missouri State Court of Appeals, Western
District. Absent a reversal of this part of the rate order, the
Company will have to record a one-time $5,600,000 pre-tax write-
ff of the previously deferred carrying costs. Associated
carrying costs deferred by the Company were $3,956,000 for the
twelve months ended June 30, 1997. Had the Company applied the
AFUDC rate, as now suggested by the MPSC, the carrying costs
would have been $2,583,000 for the twelve months ended June 30,
1997, respectively. The Company has not provided for any
potential disallowance relative to this matter in its financial
statements because it believes this part of the order is not
lawful and that the related regulatory asset ultimately will be
recovered in the future. The Company believes it will ultimately
be successful in litigating this matter and, therefore, will not
have a material adverse affect on its financial position, results
of operations or cash flows.
The continuation of the Missouri Safety Program will result in
significant levels of future capital expenditures. The Company
estimates incurring capital expenditures of $20,000,000 in fiscal
1998 related to this program.
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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
committed to pay its applicable portion of the amount owed the
lender of the credit-facility borrowings. The Company's
allocable unpaid portion of the amount the trust owes the lender
at June 30, 1997 and 1996 was $5,116,000 and $6,723,000,
respectively.
The Company is committed under various agreements to purchase
certain quantities of gas in the future. At June 30, 1997, 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 fixed price commitment contracts for the
1997/1998 winter heating season. At June 30, 1997, the Company
also has purchase commitments for certain quantities of gas at
variable, market-based prices. These market-based price commit-
ments have an annual value of $49,700,000 for Southern Union Gas
and $72,100,000 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.
The Company is in the process of installing an Automated Meter
Reading (AMR) system at Missouri Gas Energy. The installation of
the AMR system will involve an investment of $27,000,000. This
system will improve meter reading accuracy and provide electronic
accessibility to meters in residential customers' basements,
thereby reducing the number of estimated bills.
On May 1, 1996, the Company agreed to three-year contracts with
the bargaining-unit Missouri employees. Of the Company's
employees represented by unions, 84% are employed by Missouri Gas
Energy.
The Company had standby letters of credit outstanding of
$2,947,000 at both June 30, 1997 and 1996, which guarantee
payment of various insurance premiums and state taxes.
The Company follows the provisions of an American Institute of
Certified Public Accountants Statement of Position, Environmental
Remediation Liabilities, for recognition, measurement, display
and disclosure of environmental remediation liabilities.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
XV Quarterly Operations (Unaudited)
Year Ended Quarter Ended
- ------------- -----------------------------------------
June 30, 1997 September 30 December 31 March 31 June 30 Total
- ------------- ------------ ----------- -------- ------- --------
Total
operating
revenues(1). $ 80,830 $ 231,462 $316,916 $87,823 $717,031
Operating
margin(1)... 41,415 76,517 100,922 48,989 267,843
Net operating
revenues(1). 439 25,565 37,000 8,466 71,470
Net earnings
(loss)
available
for common
stock....... (5,405) 9,661 17,678 (2,902) 19,032
Earnings
(loss) per
common and
common
share equiv-
alents(2).... (.32) .54 1.00 (.17) 1.07
Year Ended Quarter Ended
- ------------- -----------------------------------------
June 30, 1997 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 equiv-
alents(2).... (.33) .50 1.16 (.17) 1.19
- ----------------------
(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, 1997 and
1996, and the related consolidated results of operations, cash
flows and stockholders' equity for each of the three years in the
period ended June 30, 1997. 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
financial position of Southern Union Company and Subsidiaries as
of June 30, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Austin, Texas
August 13, 1997
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<PAGE>
SUBSIDIARIES OF THE COMPANY Exhibit 21
Name State or Country of Incorporation
- ------------------------ ---------------------------------
ConTigo, Inc. Delaware
Energia Estrella del
Sur, S. A. de C. V. Mexico
Energy WorX, Inc. Delaware
KellAir Aviation Company Delaware
Lavaca Realty Company Delaware
Mercado Gas Services Inc. Delaware
Norteno Pipeline Company Delaware
Southern Union Energy
International, Inc. Delaware
Southern Union Financing I Delaware
Southern Union International
Investments, Inc. Delaware
Southern Union Total Energy
Systems, Inc. (formerly
Southern Union Energy
Products and Services Company) Delaware
Southern Transmission Company Delaware
SUPro Energy Company Delaware
- --------------------------
Note: Six other wholly-owned subsidiaries of Southern Union Com-
pany, Southern Union Financing II (a Delaware corpora-
tion), Southern Union Financing III (a Delaware
corporation), Southern Union Gas Company, Inc. (a Delaware
corporation), Southern Union Gas Company, Inc. (a Texas
corporation), Western Utilities, Inc. (a Delaware corpora-
tion) and Western Utilities, Inc. (a New Mexico corpora-
tion), conduct no business except to the extent necessary
to hold their name.
<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, 33-69596 and 33-69598)
of our report dated August 13, 1997, on our audits of the con-
solidated financial statements of the Company as of June 30, 1997
and 1996, and for the years ended June 30, 1997, 1996, and 1995,
which report is incorporated by reference in this Annual Report
on Form 10-K.
COOPERS & LYBRAND L.L.P.
Austin, Texas
September 19, 1997
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
<PAGE>
POWER OF ATTORNEY Exhibit 24
KNOW ALL PERSONS BY THESE PRESENTS that each person whose
signature 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, 1997 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 15, 1997
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>
<ARTICLE> UT
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<PERIOD-TYPE> YEAR
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $ 773,596,000
<OTHER-PROPERTY-AND-INVEST> $ 9,046,000
<TOTAL-CURRENT-ASSETS> $ 96,223,000
<TOTAL-DEFERRED-CHARGES> $ 109,512,000
<OTHER-ASSETS> $ 2,026,000
<TOTAL-ASSETS> $ 990,403,000
<COMMON> $ 17,171,000
<CAPITAL-SURPLUS-PAID-IN> $ 225,252,000
<RETAINED-EARNINGS> $ 25,169,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> $ 267,462,000
$ 0
$ 100,000,000
<LONG-TERM-DEBT-NET> $ 386,157,000
<SHORT-TERM-NOTES> $ 1,600,000
<LONG-TERM-NOTES-PAYABLE> $ 0
<COMMERCIAL-PAPER-OBLIGATIONS> $ 0
<LONG-TERM-DEBT-CURRENT-PORT> $ 687,000
$ 0
<CAPITAL-LEASE-OBLIGATIONS> $ 0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> $ 234,367,000
<TOT-CAPITALIZATION-AND-LIAB> $ 990,403,000
<GROSS-OPERATING-REVENUE> $ 717,031,000
<INCOME-TAX-EXPENSE> $ 12,373,000
<OTHER-OPERATING-EXPENSES> $ 109,888,000
<TOTAL-OPERATING-EXPENSES> $ 156,871,000
<OPERATING-INCOME-LOSS> $ 71,470,000
<OTHER-INCOME-NET> $ 2,880,000
<INCOME-BEFORE-INTEREST-EXPEN> $ 52,497,000
<TOTAL-INTEREST-EXPENSE> $ 33,465,000
<NET-INCOME> $ 19,032,000
$ 0
<EARNINGS-AVAILABLE-FOR-COMM> $ 19,032,000
<COMMON-STOCK-DIVIDENDS> $ 0
<TOTAL-INTEREST-ON-BONDS> $ 0
<CASH-FLOW-OPERATIONS> $ 47,994,000
<EPS-PRIMARY> $ 1.07
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