<PAGE>
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------------------------
FORM 10-Q
For the quarterly period ended
------------------------------
December 31, 1996
Commission File No. 1-6407
----------------------------------
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-0571592
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 Lavaca Street, Eighth Floor 78701
Austin, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(512) 477-5852
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which registered
- - - ------------------- -----------------------------------------
Common Stock, par New York Stock Exchange
value $1 per share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of the registrant's Common Stock outstanding
on February 5, 1997 was 17,074,812.
=================================================================
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
December 31, 1996
Index
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements
Consolidated statements of operations -
three, six and twelve months ended
December 31, 1996 and 1995
Consolidated balance sheet - December 31,
1996 and 1995 and June 30, 1996
Consolidated statement of stockholders'
equity - six months ended December 31,
1996 and twelve months ended June 30, 1996
Consolidated statements of cash flows -
three, six and twelve months ended
December 31, 1996 and 1995
Notes to consolidated financial statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(See "CONTINGENCIES" in Notes to Consolidated
Financial Statements)
Item 4. Results of Votes of Security Holders
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 -- Computation of primary
and fully diluted earnings per share
(b) Exhibit 27 -- Financial Data Schedule
(c) Reports on Form 8-K -- None
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended December 31,
-------------------------------
1996 1995
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues.............. $ 230,882 $ 180,939
Gas purchase costs.............. 154,945 106,602
----------- -----------
Operating margin.............. 75,937 74,337
Revenue-related taxes........... 12,840 10,207
----------- -----------
Net operating margin.......... 63,097 64,130
Operating expenses:
Operating, maintenance and
general..................... 27,180 27,761
Depreciation and amortization. 8,395 8,575
Taxes, other than on income
and revenues................ 2,537 3,532
----------- -----------
Total operating expenses.... 38,112 39,868
----------- -----------
Net operating revenues...... 24,985 24,262
----------- -----------
Other income (expenses):
Interest...................... (8,741) (9,165)
Dividends on preferred
securities of subsidiary
trust....................... (2,370) (2,370)
Other, net.................... 1,643 949
----------- -----------
Total other expenses, net... (9,468) (10,586)
----------- -----------
Earnings before income
taxes..................... 15,517 13,676
Federal and state income taxes.. 5,856 4,930
----------- -----------
Net earnings available for
common stock.................. $ 9,661 $ 8,746
=========== ===========
Net earnings per common and
common share equivalents...... $ .54 $ .50
=========== ===========
Weighted average common and
common share equivalents
outstanding................... 17,742,696 17,566,246
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended December 31,
-----------------------------
1996 1995
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues................ $ 311,712 $ 251,166
Gas purchase costs................ 194,360 134,431
----------- -----------
Operating margin................ 117,352 116,735
Revenue-related taxes............. 16,751 13,702
----------- -----------
Net operating margin............ 100,601 103,033
Operating expenses:
Operating, maintenance and
general....................... 52,495 53,476
Depreciation and amortization... 16,883 17,117
Taxes, other than on income
and revenues.................. 5,799 6,597
----------- -----------
Total operating expenses...... 75,177 77,190
----------- -----------
Net operating revenues........ 25,424 25,843
----------- -----------
Other income (expenses):
Interest........................ (17,028) (18,303)
Dividends on preferred
securities of subsidiary
trust......................... (4,740) (4,740)
Other, net...................... 3,378 2,370
----------- -----------
Total other expenses, net..... (18,390) (20,673)
----------- -----------
Earnings before income taxes.. 7,034 5,170
Federal and state income taxes.... 2,778 2,022
----------- -----------
Net earnings available for
common stock.................... $ 4,256 $ 3,148
=========== ===========
Net earnings per common and
common share equivalents........ $ .24 $ .18
=========== ===========
Weighted average common and
common share equivalents
outstanding..................... 17,735,280 17,445,587
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Months Ended December 31,
--------------------------------
1996 1995
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues............. $ 680,936 $ 514,202
Gas purchase costs............. 421,467 269,811
----------- -----------
Operating margin............. 259,469 244,391
Revenue-related taxes.......... 37,934 28,845
----------- -----------
Net operating margin......... 221,535 215,546
Operating expenses:
Operating, maintenance and
general.................... 106,540 99,378
Depreciation and amortiza-
tion....................... 32,748 33,135
Taxes, other than on income
and revenues............... 12,863 11,992
----------- -----------
Total operating expenses... 152,151 144,505
----------- -----------
Net operating revenues..... 69,384 71,041
----------- -----------
Other income (expenses):
Interest..................... (34,557) (37,957)
Dividends on preferred
securities of subsidiary
trust...................... (9,480) (5,899)
Other, net................... 12,335 4,417
----------- -----------
Total other expenses, net.. (31,702) (39,439)
----------- -----------
Earnings before income
taxes.................... 37,682 31,602
Federal and state income taxes. 15,735 12,775
----------- -----------
Net earnings available for
common stock................. $ 21,947 $ 18,827
=========== ===========
Net earnings per common and
common share equivalents..... $ 1.24 $ 1.08
=========== ===========
Weighted average common and
common share equivalents
outstanding.................. 17,705,591 17,363,041
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, June 30,
-------------------------- ------------
1996 1995 1996
------------ ------------ ------------
(unaudited)
(thousands of dollars)
Property, plant and
equipment:
Plant in service..... $ 938,980 $ 905,310 $ 912,552
Construction work in
progress........... 10,506 16,833 8,411
----------- ----------- -----------
949,486 922,143 920,963
Less accumulated
depreciation and
amortization....... (323,341) (315,413) (310,289)
----------- ----------- -----------
626,145 606,730 610,674
Additional purchase
cost assigned to
utility plant, net. 132,700 142,454 133,780
----------- ----------- -----------
Net property, plant
and equipment...... 758,845 749,184 744,454
----------- ----------- -----------
Current assets:
Cash and cash
equivalents........ -- 820 2,887
Accounts receivable,
billed and
unbilled........... 148,059 108,582 47,846
Inventories,
principally at
average cost....... 33,822 24,658 27,023
Deferred gas purchase
costs.............. 4,663 11,369 2,650
Prepayments and
other.............. 1,252 1,273 1,947
----------- ----------- -----------
Total current
assets........... 187,796 146,702 82,353
----------- ----------- -----------
Deferred charges....... 115,738 117,198 116,286
Investment securities.. 15,734 1,463 8,848
Real estate............ 8,956 10,495 9,513
Other.................. 2,771 2,754 3,006
----------- ----------- -----------
Total assets......... $ 1,089,840 $ 1,027,796 $ 964,460
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
December 31, June 30,
-------------------------- ------------
1996 1995 1996
------------ ------------ ------------
(unaudited)
(thousands of dollars)
Common stockholders'
equity:
Common stock, $1 par
value; authorized
50,000,000 shares;
issued 17,120,648
shares............ $ 17,121 $ 12,212 $ 16,275
Premium on capital
stock............. 224,902 210,004 206,047
Less treasury stock,
at cost........... (794) (794) (794)
Retained earnings... 10,393 7,940 25,631
Unrealized holding
gain (loss)....... 1,490 -- (1,244)
----------- ----------- -----------
Total common stock-
holders' equity... 253,112 229,362 245,915
Company-obligated man-
datorily redeemable
preferred securities
of subsidiary trust
holding solely
$103,093,000 princi-
pal amount of 9.48%
subordinated notes
of Southern Union
due 2025.............. 100,000 100,000 100,000
Long-term debt........ 385,988 442,161 385,394
----------- ----------- -----------
Total capitaliza-
tion.............. 739,100 771,523 731,309
Current liabilities:
Long-term debt due
within one year... 700 782 615
Notes payable....... 61,200 13,000 --
Accounts payable.... 89,788 46,644 39,238
Federal, state and
local taxes....... 19,379 17,947 16,741
Accrued interest.... 12,372 14,177 12,773
Accrued dividends
on preferred
securities of sub-
sidiary trust..... -- -- 2,370
Customer deposits... 17,215 15,333 15,656
Other............... 17,643 18,500 15,937
----------- ----------- -----------
Total current
liabilities..... 218,297 126,383 103,330
----------- ----------- -----------
Deferred credits and
other............... 83,717 92,517 86,287
Accumulated deferred
income taxes........ 48,726 37,373 43,534
Commitments and
contingencies....... -- -- --
----------- ----------- -----------
Total............... $ 1,089,840 $ 1,027,796 $ 964,460
=========== =========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unrea-
Common Premium Trea- lized
Stock, on sury Holding
$1 Par Capital Stock, Retained Gain
Value Stock at Cost Earnings (Loss) Total
------- --------- ------- --------- -------- ---------
(thousands of dollars)
Balance
July 1,
1995...... $11,570 $198,819 $ (794) $ 16,069 $ -- $225,664
Net
earnings. -- -- -- 20,839 -- 20,839
5% stock
dividend. 576 10,701 -- (11,277) -- --
Four-for-
three
stock
split.... 4,054 (4,054) -- -- -- --
Unrea-
lized
holding
loss..... -- -- -- -- (1,244) (1,244)
Exercise
of stock
options.. 75 581 -- -- -- 656
------- -------- ------ -------- ------- --------
Balance
June 30,
1996...... 16,275 206,047 (794) 25,631 (1,244) 245,915
Net
earnings. -- -- -- 4,256 -- 4,256
5% stock
dividend. 812 18,682 -- (19,494) -- --
Unrea-
lized
holding
gain..... -- -- -- -- 2,734 2,734
Exercise
of stock
options.. 34 173 -- -- -- 207
------- -------- ------ -------- ------- --------
Balance
Decem-
ber 31,
1996...... $17,121 $224,902 $ (794) $ 10,393 $ 1,490 $253,112
======= ======== ====== ======== ======= ========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended December 31,
-------------------------------
1996 1995
------------ ------------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings................. $ 9,661 $ 8,746
Adjustments to reconcile net
earnings to net cash flows
from operating activities:
Depreciation and amortiza-
tion...................... 8,395 8,575
Deferred income taxes...... 2,178 1,018
Provision for bad debts.... 1,721 1,077
Deferral of interest and
other expenses............ (1,694) (1,258)
Gain on sale of investment
securities................ (759) --
Other, net................. 226 370
Changes in assets and
liabilities:
Increase in accounts
receivable, billed and
unbilled................ (109,527) (75,623)
Increase in accounts
payable................. 60,667 17,805
Increase in taxes and
other liabilities....... 15,905 19,999
Increase in customer
deposits................ 1,058 846
Decrease in deferred gas
purchase costs.......... 4,548 11,295
Decrease in inventories.. 9,397 8,406
Decrease in other
accounts................ 1,855 1,350
----------- -----------
Net cash flows from
operating activities...... 3,631 2,606
----------- -----------
Cash flows used in investing
activities:
Additions to property, plant
and equipment............... (17,642) (14,652)
Purchase of investment
securities.................. -- (1,463)
Proceeds from sale of
investment securities....... 527 --
Increase in customer
advances.................... 510 775
Increase in deferred
charges and credits......... 2,013 1,045
Other, net................... 490 (740)
----------- -----------
Net cash flows used in
investing activities....... (14,102) (15,035)
----------- -----------
Cash flows from financing
activities:
Repayment of debt............ (135) (157)
Net borrowings under
financing facilities........ 5,700 13,000
Increase (decrease) in cash
overdrafts.................. 4,699 (144)
Other, net................... 207 550
----------- -----------
Net cash flows from
financing activities....... 10,471 13,249
----------- -----------
Increase in cash and cash
equivalents................... -- 820
Cash and cash equivalents at
beginning of period........... -- --
----------- -----------
Cash and cash equivalents at
end of period................. $ -- $ 820
=========== ===========
Supplemental disclosures
of cash flow information:
Cash paid during the
period for:
Interest................... $ 1,935 $ 816
=========== ===========
Income taxes............... $ 1,500 $ 200
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended December 31,
-----------------------------
1996 1995
------------ ------------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings................... $ 4,256 $ 3,148
Adjustments to reconcile net
earnings to net cash flows
used in operating activities:
Depreciation and amortiza-
tion........................ 16,883 17,117
Deferred income taxes........ 3,707 1,317
Provision for bad debts...... 2,836 1,472
Deferral of interest and
other expenses.............. (3,251) (2,277)
Gain on sale of investment
securities.................. (759) --
Other, net................... 333 777
Changes in assets and
liabilities, net of acqui-
sitions and dispositions:
Increase in accounts
receivable, billed and
unbilled.................. (100,035) (74,588)
Increase in accounts
payable................... 45,712 17,453
Increase in taxes and
other liabilities......... 2,237 15,500
Increase in customer
deposits.................. 1,559 1,167
Increase in deferred gas
purchase costs............ (2,012) (3,728)
Increase in inventories.... (6,637) (1,097)
Decrease (increase) in
other accounts............ (27) 34
----------- -----------
Net cash flows from
operating activities........ (35,198) (23,705)
----------- -----------
Cash flows used in investing
activities:
Additions to property, plant
and equipment................. (31,110) (28,712)
Acquisition of operations,
net of cash received.......... (1,162) --
Purchase of investment
securities.................... (5,363) (1,463)
Proceeds from sale of
investment securities......... 527 --
Maturity of short-term
investments................... -- 19,582
Increase in customer advances.. 1,914 1,855
Increase in deferred charges
and credits................... 359 975
Other, net..................... 1,223 (471)
----------- -----------
Net cash flows used in
investing activities......... (33,612) (8,234)
----------- -----------
Cash flows from (used in)
financing activities:
Repayment of debt.............. (321) (19,806)
Net borrowings under financing
facilities.................... 61,200 13,000
Increase in cash overdrafts.... 4,837 --
Other, net..................... 207 550
----------- -----------
Net cash flows from (used
in) financing activities..... 65,923 (6,256)
----------- -----------
Decrease in cash and cash
equivalents..................... (2,887) (38,195)
Cash and cash equivalents at
beginning of period............. 2,887 39,015
----------- -----------
Cash and cash equivalents at
end of period................... $ -- $ 820
=========== ===========
Supplemental disclosures
of cash flow information:
Cash paid during the
period for:
Interest..................... $ 16,942 $ 18,373
=========== ===========
Income taxes (refund)........ $ 2,000 $ (5,188)
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Twelve Months Ended December 31,
--------------------------------
1996 1995
------------ ------------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings................. $ 21,947 $ 18,827
Adjustments to reconcile net
earnings to net cash flows
from operating activities:
Depreciation and amortiza-
tion...................... 32,748 33,135
Deferred income taxes...... 11,803 7,558
Provision for bad debts.... 6,899 6,461
Deferral of interest and
other expenses............ (6,638) (4,262)
Gain on sale of investment
securities................ (759) --
Other, net................. (253) (666)
Changes in assets and
liabilities, net of acqui-
sitions and dispositions:
Increase in accounts
receivable, billed and
unbilled................ (43,190) (27,246)
Increase in accounts
payable................. 38,307 745
Increase (decrease) in
taxes and other
liabilities............. (4,122) 8,372
Increase in customer
deposits................ 1,881 1,395
Decrease (increase) in
deferred gas purchase
costs................... 6,707 (40,881)
Decrease (increase) in
inventories............. (9,147) 22,255
Decrease (increase) in
other accounts.......... (211) 3,066
----------- -----------
Net cash flows from
operating activities...... 55,972 28,759
----------- -----------
Cash flows used in investing
activities:
Additions to property, plant
and equipment............... (61,774) (59,549)
Acquisition of operations,
net of cash received........ (1,162) --
Purchase of investment
securities.................. (14,663) (1,463)
Proceeds from sale of
investment securities....... 527 --
Litigation settlement
proceeds.................... 4,250 --
Increase in customer
advances.................... 3,606 2,881
Decrease in deferred
charges and credits......... (4,427) (1,515)
Proceeds from sale of dis-
tribution and transmission
properties.................. 14,770 --
Other, net................... 2,036 1,069
----------- -----------
Net cash flows used in
investing activities....... (56,837) (58,577)
----------- -----------
Cash flows from financing
activities:
Repayment of debt............ (53,305) (35,637)
Net borrowings (payments)
under financing facilities.. 48,200 (31,000)
Increase in cash overdrafts.. 4,837 --
Issuance of perferred
securities of subsidiary
trust....................... -- 100,000
Issuance cost of preferred
securities of subsidiary
trust....................... -- (3,799)
Other, net................... 313 1,074
----------- -----------
Net cash flows from
financing activities....... 45 30,638
----------- -----------
Increase (decrease) in cash
and cash equivalents.......... (820) 820
Cash and cash equivalents at
beginning of period........... 820 --
----------- -----------
Cash and cash equivalents at
end of period................. $ -- $ 820
=========== ===========
Supplemental disclosures
of cash flow information:
Cash paid during the
period for:
Interest................... $ 35,462 $ 38,373
=========== ===========
Income taxes (refund)...... $ 7,197 $ (2,620)
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments (including both
normal recurring as well as any non-recurring) necessary for a
fair presentation of the results of operations for such periods.
Because of the seasonal nature of the Company's operations, the
results of operations for any interim period are not necessarily
indicative of results for the full year.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in Southern
Union Company's (Southern Union and, together with its wholly-
owned subsidiaries, the Company) Annual Report on Form 10-K for
the fiscal year ended June 30, 1996. Certain prior period
amounts have been reclassified to conform with the current period
presentation.
Under the Company's cash management system, checks issued but not
presented to banks frequently result in overdraft balances for
accounting purposes and are classified in accounts payable in the
consolidated balance sheet.
The computation of both primary and fully diluted earnings per
share is based on the weighted average number of outstanding com-
mon shares during the period plus, when their effect is dilutive,
common stock equivalents consisting of certain shares subject to
stock options and warrants.
INVESTMENT SECURITIES
At December 31, 1996, all securities owned by the Company were
classified as available for sale and are intended to be held by
the Company for an indefinite period of time. Accordingly, these
securities are stated at fair value, with unrealized gains and
losses reported in a separate component of common stockholders'
equity. Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included in
the Consolidated Statement of Operations when incurred.
As of December 31, 1996, investment securities consisted of com-
mon stock with a specific cost of $13,443,000 and a fair value of
$15,734,000. The unrealized holding gain, net of related income
taxes and included as a separate component of common stock-
holders' equity, totaled $1,490,000 at December 31, 1996. Pro-
ceeds and realized gains from the sales of securities classified
as available for sale for the three-month period ended
December 31, 1996, were $3,542,000 and $759,000, respectively.
Of these proceeds, $3,015,000 were received after December 31,
1996 and are classified as accounts receivable at that date and
are reflected as a non-cash transaction in the consolidated
statement of cash flows.
From January 1, 1997 to February 5, 1997, proceeds and realized
gains from the sales of securities classified as available for
sale at December 31, 1996 were $5,001,000 and $928,000, respec-
tively. As of February 5, 1997, the investment securities clas-
sified as available-for-sale had a specific cost of $9,370,000
and a fair value of $11,049,000.
DIVESTITURE
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 wholly-owned
subsidiary of the Company, exclusive of the Del Norte intercon-
nect operation which transports natural gas into Mexico, for
$15,900,000.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UTILITY REGULATION AND RATES
MGE Rate Case
On January 22, 1997, Missouri Gas Energy was notified by the
Missouri Public Service Commission (MPSC) of its decision to
grant a $7,533,000 annual increase to revenue effective on
February 1, 1997. 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 the rate of 10.54% on the
costs incurred in the Missouri Safety Program. Since February 1,
1994, the Company has followed the specifications of the AAO as
required by generally accepted accounting principles. 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 of
approximately 6%. The Company has sought rehearing of that por-
tion of the rate order and, if necessary, will vigorously pursue
a court appeal on this matter. Absent a reversal of this part of
the rate order, the Company would have to record a one-time
$6,000,000 pre-tax write-off of the previously deferred carrying
costs. Associated carrying costs deferred by the Company using
the 10.54% rate were $1,694,000 and $3,251,000 for the three and
six months ended December 31, 1996, respectively. Had the Com-
pany applied an AFUDC rate, as now suggested by the MPSC, the
carrying costs would have been $893,000 and $1,708,000 for the
three and six months ended December 31, 1996, 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.
Unrecovered Deferred Gas Costs
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 re-
maining balance of $16,235,000 at December 31, 1996. These costs
were related to gas deliveries prior to April 30, 1994. Missouri
Gas Energy filed a mechanism to recover these costs with the MPSC
which was approved and allows recovery of these costs from its
Missouri customers. The receivable and liability associated with
these costs have been recorded as a deferred charge and a de-
ferred credit, respectively, on the consolidated balance sheet as
of December 31, 1996 and 1995.
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 Subor-
dinated 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 December 31,
1996 and 1995, 4,000,000 shares of Preferred Securities were
outstanding.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEBT
December 31, June 30,
1996 1996
------------ ----------
(thousands of dollars)
7.60% Senior Notes due 2024............ $ 384,515 $ 384,515
Other.................................. 2,173 1,494
----------- ----------
Total debt............................. 386,688 386,009
Less current portion................. 700 615
----------- ----------
Total long-term debt................... $ 385,988 $ 385,394
=========== ==========
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 facilities (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 pur-
poses. Amounts outstanding under these facilities at
December 31, 1996 and February 5, 1997 were $61,200,000 and $52,800,000,
respectively.
STOCK DIVIDEND
On December 10, 1996, Southern Union distributed its annual 5%
common stock dividend to stockholders of record on November 22,
1996. Unless otherwise stated, all per share data included in
the accompanying consolidated financial statements and in these
Notes to Consolidated Financial Statements has been restated to
give effect to the stock dividend.
CONTINGENCIES
Southern Union is aware of the possibility that it may become a
defendant in an action brought by the United States Environmental
Protection Agency (EPA) for reimbursement of costs associated
with removing hazardous substances from the site of a former coal
gasification plant (Pine Street Canal Site) in Burlington, Ver-
mont. This knowledge arises out of the existence of a prior ac-
tion, United States v. Green Mountain Power Corp., et al, (Green
--------------------------------------------------
Mountain Power) in which Southern Union became involved as a
third-party defendant in January 1989. Green Mountain Power was
an action under 42 U.S.C. Section 9607(a) by the federal 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 suc-
cessor to People's Light and Power Corporation, an upstream cor-
porate 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 or-
der 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 finan-
cial position, results of operations or cash flows.
Southern Union and Western Resources entered into an Environmen-
tal Liability Agreement (Environmental Liability Agreement) at
the closing of the Missouri Acquisition. Subject to the accuracy
of certain representations made by Western Resources in the
Missouri Asset Purchase Agreement, the Environmental Liability
Agreement provides for a tiered approach to the allocation of
substantially all liabilities under environmental laws that may
respect to Missouri Gas Energy. At the present time and based
upon information available to management, the Company believes
that the costs of any remediation efforts that may be required
for these sites for which it may
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exist or arise with ultimately have responsibility will not ex-
ceed the aggregate amount subject to substantial sharing by
Western Resources.
In addition to the Pine Street Canal Site and various Missouri
Gas Energy sites described above, the Company is investigating
the possibility that the Company or predecessor companies may
have been associated with Manufactured Gas Plant (MGP) sites in
other of its past, principally in Arizona and New Mexico, and
present service areas in Texas. At the present time, the Company
is aware of certain plant sites in some of these areas and is
investigating those and certain other locations.
The municipal owner of a property adjacent to one of the Com-
pany's service locations has raised concerns over the continued
operation of that property as a park due to its former use as a
portion of an MGP site. The Texas Water Commission (TWC), in
cooperation with the EPA, conducted a site inspection and pre-
liminary assessment of this MGP site. Correspondence received
from the TWC in 1989 concluded that the site "did not appear at
the time of our inspection to pose an apparent threat to the pub-
lic or the environment." In April 1996 the city closed the park
pending the performance of a risk assessment report. Based upon
currently available information, Southern Union does not believe
the outcome of this matter will have a material adverse effect on
its financial position, results of operations or cash flows.
While the Company's evaluation of these Texas, Arizona and New
Mexico MGP sites is in its preliminary stages, it is likely that
some compliance costs may be identified and become subject to
reasonable quantification. To the extent that such potential
costs are quantified, the Company expects to provide any appro-
priate accruals and seek recovery for such remediation costs
through all appropriate means, including insurance and regulatory
relief. Although significant charges to earnings could be re-
quired prior to rate recovery, management does not believe that
environmental expenditures for such MGP sites will have a
material adverse effect on the Company's financial position,
results of operations or cash flows.
On January 31, 1997, the Company filed an application for
rehearing with the MPSC relative to the MPSC report and order of
January 22, 1997. See Utility Regulation and Rates included
herein these Notes to the Consolidated Financial Statements.
Southern Union and its subsidiaries are parties to other legal
proceedings that its management considers to be the normal kinds
of actions to which an enterprise of its size and nature might be
subject, and not to be material to the Company's overall business
or financial condition, results of operations or cash flows.
As a result of the acquisition of Missouri Gas Energy, the Com-
pany assumed certain obligations related to a 1990 settlement of
a Wyoming Tight Sands anti-trust claim. To secure the refund of
the settlement proceeds, the MPSC authorized the establishment of
an independently administered trust to collect cash receipts
under the Tight Sands settlement and repay credit-facility bor-
rowings used for the lump sum payment. In the event the trust
does not receive cash payments from the gas suppliers as provided
by the Tight Sands settlement agreements, the Company is com-
mitted to pay its applicable portion of the amount owed the
lender of the credit-facility borrowings. The Company's allo-
cable unpaid portion of the amount the trust owes the lender at
December 31, 1996 was $5,900,000.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's principal line of business is the distribution of
natural gas as a public utility through Southern Union Gas and
Missouri Gas Energy, each of which is a division of the Company.
In addition, subsidiaries of Southern Union have been established
to support and expand natural gas sales and to capitalize on the
Company's gas energy expertise. These subsidiaries market natu-
ral gas to end-users, operate natural gas pipeline systems, dis-
tribute and sell propane and sell commercial gas air conditioning
and other gas-fired engine-driven applications. By providing
"one-stop shopping," the Company serves its various customers'
specific energy needs, which encompass substantially all of the
natural gas distribution and sales businesses from natural gas
sales to specialized energy consulting services. Certain sub-
sidiaries also own or hold interests in real estate and other as-
sets, which are primarily used in the Company's utility business.
Several of these business activities are subject to regulation by
federal, state or local authorities where the Company operates.
Thus, the Company's financial condition and results of operations
have been and will continue to be dependent upon the receipt of
adequate and timely adjustments in rates. In addition, the Com-
pany's business is affected by seasonal weather impacts, competi-
tive factors within the energy industry and economic development
and residential growth in its service areas.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1996 and 1995
The Company recorded net earnings available for common stock of
$9,661,000 for the three-month period ended December 31, 1996
compared with net earnings of $8,746,000 for the same period in
1995. Earnings per share, based on weighted average common and
common share equivalents outstanding during the period, were $.54
in 1996 compared with earnings per share of $.50 in 1995.
Operating revenues were $230,882,000 for the three-month period
ended December 31, 1996, an increase of 28%, compared with
operating revenues of $180,939,000 in 1995. Gas purchase costs
for the three-month period ended December 31, 1996 were
$154,945,000, an increase of 45%, compared with $106,602,000 in
1995. The Company's operating revenues are affected by the level
of sales volumes and by the pass-through of increases or de-
creases in the Company's gas purchase costs through its purchased
gas adjustment clauses. The increase in both operating revenues
and gas purchase costs between periods was primarily the result
of a 36% increase in the average cost of gas from $2.93 per Mcf
in 1995 to $3.98 per Mcf in 1996. The increase in the average
cost of gas primarily is the result of increases in average spot
market gas prices throughout the Company's distribution system as
a result of seasonal impacts on demands for natural gas and the
ensuing competitive pricing within the industry. Additionally,
operating revenues and gas purchase costs were effected by a 7%
increase in gas sales volume to 38,955 MMcf in 1996 from 36,365
MMcf in 1995. The increase in sales volume was due to improved
sales results in nontraditional markets and colder weather during
the three-month period ended December 31, 1996, which was par-
tially offset by a reduction in volumes from the sale of certain
operations in the Texas and Oklahoma Panhandles on May 1, 1996.
Weather for Missouri Gas Energy's service territories, which in-
clude the city of Kansas City, Missouri, was 110% of a 30-year
measure for the three-month period ended December 31, 1996, com-
pared with 101% in 1995. Southern Union Gas service territories,
which include the cities of Austin and El Paso, experienced
weather that was 96% of a 30-year measure in 1996, compared with
92% in 1995.
Net operating margin (operating margin less revenue-related
taxes) decreased $1,033,000 for the three-month period ended
December 31, 1996 compared with the same period in 1995. Net
operating margin decreased primarily due to the reduction in
volumes and the related operating margin as a result of the Texas
and Oklahoma Panhandle sale, previously discussed. Despite the
sale of these operations, overall net sales volumes increased
primarily from the addition of lower margin pipeline and mar-
keting volumes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating expenses, which include operating, maintenance and
general expenses, depreciation and amortization, and taxes other
than on income and revenue, were $38,112,000 for the three-month
period ended December 31, 1996, a decrease of $1,756,000, com-
pared with $39,868,000 in 1995. The decrease is primarily a re-
sult of the elimination of operating, maintenance and general
expenses resulting from the May 1, 1996 sale of Western Gas
Interstate Company (WGI) and other operations, previously dis-
cussed as well as lower property tax renditions and various prior
year property tax refunds.
Interest expense was $8,741,000 for the three-month period ended
December 31, 1996, a decrease of 5%, compared with $9,165,000 in
1995. The decrease in interest expense is due to the repurchase
of $90,485,000 of the Company's 7.60% Senior Notes (Senior Notes)
at various dates from June 1995 to June 1996. The funds used for
the various repurchases of debt were obtained, in part, from the
May 1995 issuance of $100,000,000 of 9.48% Trust Originated Pre-
ferred Securities (Preferred Securities) and working capital.
The reduction of interest expense from the Senior Note repur-
chases was partially offset by interest expense on the increased
borrowings under the various financing facilities during the
three-month period ended December 31, 1996 compared to the same
period in 1995. See "Debt" in the Notes to the Consolidated
Financial Statements for the quarter ended December 31, 1996.
Other income for the three-month period ended December 31, 1996
was $1,643,000, compared with $949,000 in 1995. Other income for
the three-month period ended December 31, 1996 consists of
$1,694,000 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 $759,000 and net
rental income from Lavaca Realty Company (Lavaca Realty), the
Company's real estate subsidiary, of $346,000. This was par-
tially offset by the write-off of $1,150,000 of acquisition-
related costs as a result of the termination of various
acquisition activities. Other income for 1995 included
$1,258,000 related to the deferral of interest and other expenses
associated with the Missouri Gas Energy Safety Program and net
rental income from Lavaca Realty of $345,000, which was partially
offset by $500,000 in costs in connection with the closing of the
Natural Gas Vehicle Technology Centers, L.L.P. (Tech Center).
The Tech Center was a joint venture between Econofuel Company
(Econofuel), a wholly-owned subsidiary of the Company, and
Natural Gas Development Company, Inc. of California.
For the three-month period ended December 31, 1996, federal and
state income taxes increased $926,000, or 19%, over the same
period in 1995 due to an increase in pre-tax earnings as dis-
cussed above, as well as an increase in the effective tax rate
from 36% to 38% in 1995 and 1996, respectively.
Six Months Ended December 31, 1996 and 1995
The Company recorded net earnings available for common stock of
$4,256,000 for the six-month period ended December 31, 1996 com-
pared with net earnings of $3,148,000 for the same period in
1995. Earnings per share, based on weighted average common and
common share equivalents outstanding during the period, were $.24
in 1996 compared with earnings per share of $.18 in 1995.
Operating revenues were $311,712,000 for the six-month period
ended December 31, 1996, an increase of 24%, compared with
operating revenues of $251,166,000 in 1995. Gas purchase costs
for the six-month period ended December 31, 1996 were
$194,360,000, an increase of 45%, compared with $134,431,000 in
1995. Both operating revenues and gas purchase costs increased
in the six-month period ended December 31, 1996 primarily due to
a 35% increase in the average cost of gas from $2.76 per Mcf in
1995 to $3.72 per Mcf in 1996 as a result of increases in average
spot market gas prices, previously discussed. Additionally,
operating revenues and gas purchase costs were effected by a 7%
increase in gas sales volume from 48,788 MMcf in 1995 to 52,213
MMcf in 1996. The increase in volumes is principally due to
growth in pipeline and marketing sales, improved sales results in
nontraditional markets and cooler weather experienced during the
six-month period ended December 31, 1996 compared with 1995,
which was partially offset by a reduction in volumes from the
sale of certain operations on May 1, 1996, previously discussed.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Missouri Gas Energy's service territories experienced weather
which was 110% of a 30-year measure for the six months ended
December 31, 1996 compared with 103% in 1995. Weather for
Southern Union Gas service territories for the six-month period
ended December 31, 1996 was 96% of a 30-year measure compared
with 94% in 1995.
Net operating margin decreased 2% for the six-month period ended
December 31, 1996 compared with the same period in 1995. Net
operating margin decreased primarily from the reduction in
volumes and related operating margin as a result of the Texas and
Oklahoma Panhandle sale, previously discussed. Despite the sale
of these operations, overall net sales volumes increased 7% pri-
marily from the addition of lower margin pipeline and marketing
volumes.
Operating expenses were $75,177,000 for the six-month period
ended December 31, 1996, a decrease of $2,013,000, compared with
$77,190,000 in 1995. The decrease is primarily a result of the
elimination of operating, maintenance and general expenses re-
sulting from the May 1, 1996 sale of WGI and other operations and
lower property tax renditions and various prior period tax re-
funds, both previously discussed.
Interest expense was $17,028,000 for the six-month period ended
December 31, 1996, a decrease of 7%, compared with $18,303,000 in
1995. The decrease in interest expense is due to the repurchase
of Senior Notes from June 1995 to June 1996 which was partially
offset by an increase in interest expense from increased bor-
rowings under the various financing facilities, both previously
discussed. See "Debt" in the Notes to the Consolidated Financial
Statements for the quarter ended December 31, 1996.
Other income for the six-month period ended December 31, 1996
was $3,378,000 compared with $2,370,000 in 1995. Other income
for the six-month period ended December 31, 1996 included
$3,251,000 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 $759,000 and net
rental income from Lavaca Realty of $698,000. This was partially
offset by the write-off of $1,150,000 of acquisition-related
costs, previously discussed, and a $374,000 expense associated
with the donation of emissions analysis equipment and software to
a Texas university. Other income for the six-month period ended
December 31, 1995 included $2,277,000 related to the deferral of
interest and other expenses associated with the Missouri Gas
Energy Safety Program and net rental income from Lavaca Realty of
$690,000. This was partially offset by estimated costs of
$500,000 to close Econofuel's Tech Center, previously discussed.
For the six-month period ended December 31, 1996, federal and
state income taxes increased $756,000 over the same period in
1995 due primarily to improved pre-tax earnings as discussed
above. The Company's consolidated federal and state effective
income tax rate was 39% for the six months ended December 31,
1996 and 1995.
Twelve Months Ended December 31, 1996 and 1995
The Company recorded net earnings available for common stock of
$21,947,000 for the twelve-month period ended December 31, 1996
compared with net earnings of $18,827,000 in 1995. Earnings per
share, based on weighted average common and common share equiva-
lents outstanding during the period, were $1.24 in 1996 compared
with earnings per share of $1.08 in 1995.
Operating revenues were $680,936,000 for the twelve-month period
ended December 31, 1996, an increase of 32%, compared with
operating revenues of $514,202,000 in 1995. Gas purchase costs
for the twelve-month period ended December 31, 1996 were
$421,467,000, an increase of 56%, compared with gas purchase
costs of $269,811,000 in 1995. Both operating revenues and gas
purchase costs increased during the twelve-month period ended
December 31, 1996 as a result of a 10% increase in gas sales
volume from 110,525 MMcf in 1995 to 121,786 MMcf in 1996. Addi-
tionally, operating revenues and gas purchase costs were affected
by an increase in the average cost of gas to $3.46 per Mcf in
1996 from $2.44 per Mcf in 1995 as a result of spot market
prices. Operating revenues and gas purchase costs were also
impacted by colder weather conditions in 1996.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Missouri Gas Energy's service territories experienced weather
which was 107% of a 30-year measure for the twelve-month period
ended December 31, 1996 compared with 99% in 1995. Weather for
Southern Union Gas service territories for the twelve-month
period ended December 31, 1996 was 97% of a 30-year measure com-
pared with 88% in 1995.
Net operating margin increased 3% for the twelve-month period
ended December 31, 1996 compared with the same period in 1995,
primarily from a 10% increase in gas sales volumes, previously
discussed. This was partially offset from the reduction in
volumes and related operating margin as a result of the Texas and
Oklahoma Panhandle sale, also previously discussed.
Operating expenses were $152,151,000 for the twelve-month period
ended December 31, 1996, an increase of 5%, compared with
operating expenses of $144,505,000 in 1995. The increase in
operating expenses resulted primarily from an increase in bad
debt expense associated with the increase in operating revenues,
an increase in provisions for workers' compensation obligations,
an increase in employee medical costs and certain severance costs
at Missouri Gas Energy.
Interest expense was $34,557,000 for the twelve-month period
ended December 31, 1996, a decrease of 9%, compared with
$37,957,000 in 1995. The decrease in interest expense is due to
the repurchase of Senior Notes from June 1995 to June 1996 which
was partially offset by interest expense from increased borrowing
under the revolving credit facility, both previously discussed.
See "Debt" in the Notes to the Consolidated Financial Statements
for the quarter ended December 31, 1996 included herein.
Dividends on preferred securities of subsidiary trust were
$9,480,000 for the twelve-month period ended December 31, 1996,
compared with $5,899,000 in 1995. The increase is due to the May
1995 issuance of the Preferred Securities and the recording of
dividends since that date. See "Preferred Securities of Sub-
sidiary Trust" in the Notes to the Consolidated Financial State-
ments for the quarter ended December 31, 1996.
Other income for the twelve-month period ended December 31, 1996
was $12,335,000 compared with $4,417,000 in 1995. Other income
for the twelve-month period ended December 31, 1996 included
$6,638,000 related to the deferral of interest and other expenses
associated with the Missouri Gas Energy Safety Program, a pre-tax
gain of $2,050,000 on the sale of WGI and other operations, a
$1,448,000 gain on the repurchase of Senior Notes, net rental
income from Lavaca Realty of $1,401,000 and realized gains on the
sale of investment securities of $759,000. This was partially
offset by the write-off of $1,150,000 of acquisition-related
costs and a $374,000 loss on the donation of emissions analysis
equipment and software, previously discussed. Other income for
the twelve-month period ended December 31, 1995 included
$3,920,000 related to the deferral of interest and other expenses
associated with the Missouri Gas Energy Safety Program and net
rental income from Lavaca Realty of $1,425,000. This was par-
tially offset by estimated costs of $500,000 to close Econofuel's
Tech Center, also previously discussed.
For the twelve-month period ended December 31, 1996, federal and
state income taxes increased $2,960,000 over the same period in
1995 due to an increase in pre-tax earnings.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain information regarding the
Company's gas distribution, transportation, marketing and trans-
mission operations for the three- and twelve-month periods ended
December 31, 1996 and 1995:
Three Months Twelve Months
Ended December 31, Ended December 31,
------------------ ------------------
1996(1) 1995(1) 1996(1) 1995(1)
-------- -------- -------- --------
Average number of gas
sales customers served:
Residential............ 871,762 872,891 870,408 871,261
Commercial............. 89,294 88,457 89,654 89,434
Industrial and
irrigation............ 595 703 626 705
Pipeline and marketing. 185 539 379 513
Public authorities
and other............. 2,701 2,765 2,749 2,791
-------- -------- -------- --------
Total average custo-
mers served......... 964,537 965,355 963,816 964,704
======== ======== ======== ========
Gas sales in millions
of cubic feet (MMcf)
Residential............ 17,743 16,794 70,401 64,901
Commercial............. 8,012 7,579 31,780 29,695
Industrial and
irrigation............ 452 598 2,391 2,292
Pipeline and marketing. 4,735 3,066 14,800 9,478
Public authorities
and other............. 734 605 2,715 3,147
-------- -------- -------- --------
Gas sales billed..... 31,676 28,642 122,087 109,513
Net change in unbilled
gas sales............. 7,279 7,723 (301) 1,012
-------- -------- -------- --------
Total gas sales...... 38,955 36,365 121,786 110,525
======== ======== ======== ========
Gas sales revenues
(thousands of dollars):
Residential............ $113,671 $ 91,958 $414,491 $325,228
Commercial............. 45,930 36,128 166,452 127,005
Industrial and
irrigation............ 2,483 2,286 10,724 8,752
Pipeline and marketing. 12,188 6,470 37,343 19,365
Public authorities
and other............. 3,666 2,046 11,101 7,639
-------- -------- -------- --------
Gas revenues billed.. 177,938 138,888 640,111 487,989
Net increase in
unbilled gas sales
revenues.............. 44,164 34,272 13,003 7,236
-------- -------- -------- --------
Total gas sales
revenues............ $222,102 $173,160 $653,114 $495,225
======== ======== ======== ========
Gas sales margin
(thousands of dollars).. $ 67,157 $ 66,558 $231,647 $225,414
======== ======== ======== ========
Gas sales revenue
per thousand cubic
feet (Mcf) billed:
Residential............ $ 6.406 $ 5.476 $ 5.888 $ 5.011
Commercial............. 5.733 4.767 5.238 4.277
Industrial and
irrigation............ 5.496 3.825 4.486 3.819
Pipeline and marketing. 2.574 2.110 2.523 2.043
Public authorities
and other............. 4.991 3.383 4.088 2.428
Weather effect:
Degree days:
Southern Union Gas
service territories.. 760 720 1,917 1,792
Missouri Gas Energy
service territories.. 2,133 1,980 5,630 5,206
Percent of normal,
based on 30-year
measure:
Southern Union Gas
service territories.. 96% 92% 97% 88%
Missouri Gas Energy
service territories.. 110% 101% 107% 99%
Gas transported in
millions of cubic feet
(MMcf)................. 15,825 15,542 62,207 52,834
Gas transportation
revenues (thousands
of dollars)............ $ 6,701 $ 5,268 $ 20,630 $ 15,346
- - - ---------------------
(1) Certain gas distribution operations in the Texas and Okla-
homa Panhandles were sold on May 1, 1996, which involved
7,000 customers.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's gas utility operations are seasonal in nature with
a significant percentage of the annual revenues and earnings
occurring in the traditional heating-load months. This season-
ality results in a high level of cash flow needs during the peak
winter heating season months, resulting from the required pay-
ments to natural gas suppliers in advance of the receipt of cash
payments from the Company's customers. The Company has histori-
cally used internally generated funds and its revolving loan and
credit facilities to provide funding for its seasonal working
capital, continuing construction and maintenance programs and
operational requirements.
The principal sources of funds during the three-month period
ended December 31, 1996 included $5,700,000 from the Company's
revolving and uncommitted credit facilities, cash overdrafts of
$4,699,000 and $3,631,000 in cash flow from operations. These
sources provided funds for additions to property, plant and
equipment of $17,642,000 and other working capital needs of the
Company.
The principal sources of funds during the six-month period ended
December 31, 1996 included $61,200,000 from the Company's
revolving and uncommitted credit facilities and cash overdrafts
of $4,837,000. These sources, along with beginning cash balances
of $2,887,000, provided funds for additions to property, plant
and equipment of $31,110,000 and provided other seasonal working
capital needs of the Company.
The effective interest rate under the Company's current debt
structure is 7.9% (including interest and the amortization of
debt issuance costs and redemption premiums on refinanced debt).
The Company has availability under a $100,000,000 revolving
credit facility (Revolving Credit Facility) underwritten by a
syndicate of banks. The Company had additional availability
under uncommitted line of credit facilities (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 pur-
poses. Amounts outstanding under these facilities at
December 31, 1996 and February 5, 1997 were $61,200,000 and $52,800,000,
respectively.
On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a
consolidated wholly-owned subsidiary of Southern Union, issued
$100,000,000 of Preferred Securities. The issuance of the Pre-
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 securi-
ties of financing trusts and senior and subordinated debt securi-
ties of Southern Union of up to $196,907,000 (the remaining
shelf) from time to time at prices determined at the time of any
offering. The net proceeds from the Preferred Securities
offering, along with working capital from operations, were used
to repurchase $90,485,000 of 7.60% Senior Notes through June,
1996 with the remaining balance used to provide working capital
for seasonal needs. Depending upon market conditions and avail-
able 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 State-
ments.
The Company's financial condition and results of operations have
been and will continue to be dependent upon the receipt of ade-
quate and timely adjustments in rates. On January 22, 1997,
Missouri Gas Energy was notified by the MPSC of its decision to
grant a $7,533,000 annual increase to revenue effective on
February 1, 1997. See Utility Regulation and Rates in the Notes
to the Consolidated Financial Statements for the quarter ended
December 31, 1996.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
RESULTS OF VOTES OF SECURITY HOLDERS
Southern Union held its Annual Meeting of Stockholders on
November 12, 1996. The following matters were submitted for a
vote and approved by Southern Union's security holders: (i) the
election of three persons to serve as the Class III directors
until the 1999 Annual Meeting of Stockholders or until their suc-
cessors are duly elected and qualified; (ii) approval of a propo-
sal under the Southern Union Company Supplemental Deferred
Compensation Plan to increase maximum permissible employee con-
tributions from five percent to ten percent, to increase the Com-
pany matching contribution from fifty percent to one hundred
percent of employee contributions subject to such Company
matching and to increase employee contributions subject to Com-
pany matching from five percent to ten percent; and (iii)
approval of a proposal under the Southern Union Company Direc-
tors' Deferred Compensation Plan to increase directors contribu-
tions subject to Company matching from seven percent to ten
percent and to increase the Company matching contribution from
fifty percent to one hundred percent of directors contributions
subject to such Company matching.
The number of votes cast in favor, abstain or withheld for each
nominee for director, and for any proposal voted on at the Annual
Meeting of Stockholders, were:
For Abstain Withheld
----------- ------- --------
Election of nominees as
Class II Directors:
George L. Lindemann....... 15,570,388 -- 220,659
Peter H. Kelley........... 15,569,600 -- 221,447
Dan K. Wassong............ 15,557,801 -- 233,246
Proposal of changes under
the Southern Union Company
Supplemental Deferred
Compensation Plan to increase
maximum permissible employee
contributions from 5% to 10%,
to increase the Company
matching contribution from
50% to 100% of employee
contributions subject to
such Company matching and to
increase employee contribu-
tions subject to Company
matching contribution from
5% to 10%..................... 15,535,420 26,184 162,550
Proposal of changes under the
Southern Union Company Direc-
tors' Deferred Compensation
Plan to increase directors
contributions subject to
Company matching from 7% to
10% and to increase the Com-
pany matching contribution
from 50% to 100% of direc-
tors contributions subject
to such Company matching...... 15,113,981 30,391 579,782
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTHERN UNION COMPANY
----------------------
(Registrant)
Date February 14, 1997 By RONALD J. ENDRES
------------------- ------------------
Ronald J. Endres
Executive Vice President and
Chief Financial Officer
Date February 14, 1997 By DAVID J. KVAPIL
------------------- -----------------
David J. Kvapil
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS Exhibit 11
Three Months Six Months Twelve Months
Ended Ended Ended
December 31, December 31, December 31,
-------------- -------------- ---------------
1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------
(in thousands of dollars,
except per share amounts)
Net earnings
available for
common stock.. $ 9,661 $ 8,746 $ 4,256 $ 3,148 $21,947 $18,827
======= ======= ======= ======= ======= =======
Primary
earnings per
share:
Average
shares out-
standing.... 17,050 16,969 17,043 16,950 17,036 16,931
Stock op-
tions and
warrants
issued or
granted.... 693 516 678 445 652 401
------- ------- ------- ------- ------- -------
Average
shares out-
standing.... 17,743 17,485 17,721 17,395 17,688 17,332
======= ======= ======= ======= ======= =======
Primary
earnings
per share... $ .54 $ .50 $ .24 $ .18 $ 1.24 $ 1.09
======= ======= ======= ======= ======= =======
Fully diluted
earnings per
share:
Average
shares out-
standing.... 17,050 16,969 17,043 16,950 17,036 16,931
Stock op-
tions and
warrants
issued or
granted..... 693 597 692 496 670 432
------- ------- ------- ------- ------- -------
Average
shares out-
standing.... 17,743 17,566 17,735 17,446 17,706 17,363
======= ======= ======= ======= ======= =======
Fully
diluted
earnings
per share... $ .54 $ .50 $ .24 $ .18 $ 1.24 $ 1.08
======= ======= ======= ======= ======= =======
- - - -------------------------
Note: All periods have been adjusted to reflect the five percent
common stock dividends distributed on December 10, 1996
and November 27, 1995 and a four-for-three common stock
split distributed in the form of a 33 % stock dividend on
March 11, 1996, as applicable.
<TABLE> <S> <C>
<ARTICLE> UT
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> 6-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $ 758,845,000
<OTHER-PROPERTY-AND-INVEST> $ 24,690,000
<TOTAL-CURRENT-ASSETS> $ 187,796,000
<TOTAL-DEFERRED-CHARGES> $ 115,738,000
<OTHER-ASSETS> $ 2,771,000
<TOTAL-ASSETS> $ 1,089,840,000
<COMMON> $ 17,121,000
<CAPITAL-SURPLUS-PAID-IN> $ 224,902,000
<RETAINED-EARNINGS> $ 10,393,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> $ 253,112,000
$ 0
$ 100,000,000
<LONG-TERM-DEBT-NET> $ 385,988,000
<SHORT-TERM-NOTES> $ 61,200,000
<LONG-TERM-NOTES-PAYABLE> $ 0
<COMMERCIAL-PAPER-OBLIGATIONS> $ 0
<LONG-TERM-DEBT-CURRENT-PORT> $ 700,000
$ 0
<CAPITAL-LEASE-OBLIGATIONS> $ 0
<LEASES-CURRENT> $ 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> $ 288,046,000
<TOT-CAPITALIZATION-AND-LIAB> $ 1,089,840,000
<GROSS-OPERATING-REVENUE> $ 230,882,000
<INCOME-TAX-EXPENSE> $ 5,856,000
<OTHER-OPERATING-EXPENSES> $ 27,180,000
<TOTAL-OPERATING-EXPENSES> $ 38,112,000
<OPERATING-INCOME-LOSS> $ 24,985,000
<OTHER-INCOME-NET> $ 1,643,000
<INCOME-BEFORE-INTEREST-EXPEN> $ 18,402,000
<TOTAL-INTEREST-EXPENSE> $ 8,741,000
<NET-INCOME> $ 9,661,000
$ 0
<EARNINGS-AVAILABLE-FOR-COMM> $ 9,661,000
<COMMON-STOCK-DIVIDENDS> $ 0
<TOTAL-INTEREST-ON-BONDS> $ 0
<CASH-FLOW-OPERATIONS> $ 3,631,000
<EPS-PRIMARY> $ .54
<EPS-DILUTED> $ .54
</TABLE>
