<PAGE>
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------------------
FORM 10-Q
For the quarterly period ended
------------------------------
September 30, 1997
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 value $1 per share New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing re-
quirements for the past 90 days. Yes X No
--- ---
The number of shares of the registrant's Common Stock outstanding
on October 31, 1997 was 17,123,331.
=================================================================
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
September 30, 1997
Index
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements
Consolidated statements of operations -
three and twelve months ended
September 30, 1997 and 1996
Consolidated balance sheet - September 30,
1997 and 1996 and June 30, 1997
Consolidated statement of stockholders'
equity - three months ended
September 30, 1997 and twelve months
ended June 30, 1997
Consolidated statements of cash flows -
three and twelve months ended
September 30, 1997 and 1996
Notes to consolidated financial statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(See "CONTINGENCIES" under Notes to
Consolidated Financial Statements)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 -- Computation of primary
and fully diluted earnings per share
(b) Exhibit 27 -- Financial Data Schedule
(c) Reports on Form 8-K -- None
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended
September 30,
--------------------------
1997 1996
------------ ------------
(thousands of dollars,
except shares and per
share amounts)
Operating revenues................... $ 74,039 $ 80,830
Gas purchase costs................... 32,442 39,415
----------- -----------
Operating margin................... 41,597 41,415
Revenue-related taxes................ 2,984 3,910
----------- -----------
Net operating margin............... 38,613 37,505
Operating expenses:
Operating, maintenance and general. 23,789 25,315
Depreciation and amortization...... 9,598 8,488
Taxes, other than on income and
revenues......................... 3,821 3,263
----------- -----------
Total operating expenses......... 37,208 37,066
----------- -----------
Net operating revenues........... 1,405 439
----------- -----------
Other income (expenses):
Interest........................... (8,450) (8,287)
Dividends on preferred securities
of subsidiary trust.............. (2,370) (2,370)
Other, net......................... 1,769 1,735
----------- -----------
Total other expenses, net........ (9,051) (8,922)
----------- -----------
Loss before income taxes
(benefit)...................... (7,646) (8,483)
Federal and state income taxes
(benefit).......................... (2,737) (3,078)
----------- -----------
Net loss attributable to common
stock.............................. $ (4,909) $ (5,405)
=========== ===========
Net loss per common share............ $ (.29) $ (.32)
=========== ===========
Weighted average common shares
outstanding........................ 17,121,860 17,034,850
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Months Ended
September 30,
--------------------------
1997 1996
------------ ------------
(thousands of dollars,
except shares and per
share amounts)
Operating revenues................... $ 710,239 $ 630,993
Gas purchase costs................... 442,214 373,125
----------- -----------
Operating margin................... 268,025 257,868
Revenue-related taxes................ 38,576 35,300
----------- -----------
Net operating margin............... 229,449 222,568
Operating expenses:
Operating, maintenance and general. 108,362 107,121
Depreciation and amortization...... 35,939 32,929
Taxes, other than on income and
revenues......................... 12,712 13,857
----------- -----------
Total operating expenses......... 157,013 153,907
----------- -----------
Net operating revenues........... 72,436 68,661
----------- -----------
Other income (expenses):
Interest........................... (33,628) (34,981)
Dividends on preferred securities
of subsidiary trust.............. (9,480) (9,480)
Other, net......................... 2,915 11,641
----------- -----------
Total other expenses, net........ (40,193) (32,820)
----------- -----------
Earnings before income taxes..... 32,243 35,841
Federal and state income taxes....... 12,714 14,809
----------- -----------
Net earnings available for common
stock.............................. $ 19,529 $ 21,032
=========== ===========
Net earnings per common and common
share equivalents.................. $ 1.10 $ 1.19
=========== ===========
Weighted average common and common
share equivalents outstanding...... 17,775,057 17,663,954
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
September 30, June 30,
----------------------
1997 1996 1997
----------- ---------- ----------
(thousands of dollars)
Property, plant and equipment:
Plant in service............ $ 983,275 $ 922,470 $ 963,269
Construction work in
progress.................. 9,911 11,418 7,970
---------- --------- ---------
993,186 933,888 971,239
Less accumulated deprecia-
tion and amortization..... (336,063) (317,083) (329,182)
---------- --------- ---------
657,123 616,805 642,057
Additional purchase cost
assigned to utility
plant, net................ 130,845 133,641 131,539
---------- --------- ---------
Net property, plant and
equipment................. 787,968 750,446 773,596
---------- --------- ---------
Current assets:
Accounts receivable, billed
and unbilled.............. 39,961 37,239 58,659
Inventories, principally at
average cost.............. 36,075 43,219 21,523
Deferred gas purchase costs. 25,210 9,211 --
Investment securities....... -- -- 6,432
Prepayments and other....... 929 2,460 9,609
---------- --------- ---------
Total current assets...... 102,175 92,129 96,223
---------- --------- ---------
Deferred charges.............. 107,591 116,890 109,512
Investment securities......... -- 19,168 --
Real estate................... 9,192 9,258 9,046
Other......................... 1,823 2,943 2,026
---------- --------- ---------
Total assets................ $1,008,749 $ 990,834 $ 990,403
========== ========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
September 30, June 30,
----------------------
1997 1996 1997
----------- ---------- ----------
(thousands of dollars)
Common stockholders' equity:
Common stock, $1 par value;
authorized 50,000,000
shares; issued 17,174,361
shares.................... $ 17,174 $ 16,275 $ 17,171
Premium on capital stock.... 225,267 206,047 225,252
Less treasury stock, at
cost...................... (794) (794) (794)
Retained earnings........... 20,260 20,226 25,169
Unrealized holding gain..... -- 1,978 664
---------- --------- ---------
Total common stockholders'
equity...................... 261,907 243,732 267,462
Company-obligated mandatorily
redeemable preferred securi-
ties of subsidiary trust
holding solely $103,093,000
princial amount of 9.48%
subordinated notes of
Southern Union due 2025..... 100,000 100,000 100,000
Long-term debt................ 392,921 386,143 386,157
---------- --------- ---------
Total capitalization........ 754,828 729,875 753,619
Current liabilities:
Long-term debt due within
one year.................. 797 680 687
Notes payable............... 60,300 55,500 1,600
Accounts payable............ 22,893 24,421 33,827
Federal, state and local
taxes..................... 9,395 10,119 13,699
Accrued interest............ 4,118 5,727 12,840
Customer deposits........... 16,713 16,157 17,214
Deferred gas purchase costs. -- -- 3,565
Other....................... 16,343 17,170 22,291
---------- --------- ---------
Total current liabilities. 130,559 129,774 105,723
Deferred credits and other.... 71,234 84,374 77,083
Accumulated deferred income
taxes....................... 52,128 46,811 53,978
Commitments and contingencies. -- -- --
---------- --------- ---------
Total....................... $1,008,749 $ 990,834 $ 990,403
========== ========= =========
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
------- -------- ------ -------- ------- --------
(thousands of dollars)
Balance
July 1,
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) -- --
Change in
unrealized
holding
gain or
loss....... -- -- -- -- 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
Net loss.... -- -- -- (4,909) -- (4,909)
Change in
unrealized
holding
gain or
loss....... -- -- -- -- (664) (664)
Exercise of
stock
options.... 3 15 -- -- -- 18
------- -------- ----- -------- ------- --------
Balance
September 30,
1997........ $17,174 $225,267 $(794) $ 20,260 $ -- $261,907
======= ======== ===== ======== ======= ========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
September 30,
----------------------
1997 1996
---------- ----------
(thousands of dollars)
Cash flows used in operating activities:
Net loss............................... $ (4,909) $ (5,405)
Adjustments to reconcile net loss to
net cash flows from operating
activities:
Depreciation and amortization...... 9,598 8,488
Deferred income taxes.............. (1,492) 1,529
Provision for bad debts............ 350 1,115
Gain on sale of investment
securities....................... (1,088) --
Deferral of interest and other
expenses......................... (277) (1,557)
Other.............................. 198 107
Changes in assets and liabilities,
net of acquisitions and
dispositions:
Accounts receivable, billed
and unbilled................. 18,348 9,492
Accounts payable............... (10,053) (14,817)
Taxes and other liabilities.... (13,026) (13,668)
Customer deposits.............. (501) 501
Deferred gas purchase costs.... (28,775) (6,560)
Inventories.................... (14,407) (16,034)
Other.......................... 2,902 (1,882)
--------- ----------
Net cash flows used in operating
activities......................... (43,132) (38,691)
--------- ---------
Cash flows from (used in) investing
activities:
Additions to property, plant and
equipment.......................... (17,008) (13,468)
Acquisition of operations, net of
cash received...................... (745) (1,162)
Purchase of investment securities.... -- (5,363)
Increase in customer advances........ 1,056 1,404
Decrease in deferred charges and
credits............................ (4,615) (1,654)
Proceeds from sale of land........... -- 752
Proceeds from sale of investment
securities......................... 6,531 --
Other................................ 309 (19)
--------- ---------
Net cash flows used in investing
activities....................... (14,472) (19,510)
--------- ---------
Cash flows from (used in) financing
activities:
Repayment of debt.................... (225) (186)
Net borrowings under revolving
credit facility.................... 58,700 55,500
Change in cash overdraft............. (889) --
Other................................ 18 --
--------- ---------
Net cash flows used in financing
activities....................... 57,604 55,314
--------- ---------
Decrease in cash and cash equivalents.... -- (2,887)
Cash and cash equivalents at beginning
of period.............................. -- 2,887
--------- ---------
Cash and cash equivalents at end of
period................................. $ -- $ --
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest........................... $ 14,994 $ 15,007
========= =========
Income taxes....................... $ -- $ 500
========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Twelve Months Ended
September 30,
----------------------
1997 1996
---------- ----------
(thousands of dollars)
Cash flows used in operating activities:
Net earnings........................... $ 19,529 $ 21,032
Adjustments to reconcile net earnings
to net cash flows from (used in)
operating activities:
Depreciation and amortization...... 35,939 32,929
Deferred income taxes.............. 4,319 10,643
Provision for bad debts............ 10,533 6,255
Gain on sale of investment
securities....................... (3,633) --
Gain on sale of various operations. -- (2,300)
Deferral of interest and other
expenses......................... (2,449) (7,221)
Other.............................. 1,168 1,339
Changes in assets and liabilities,
net of acquisitions and
dispositions:
Accounts receivable, billed
and unbilled................. (13,255) (9,286)
Accounts payable............... (2,214) (4,417)
Taxes and other liabilities.... (2,333) 1,852
Customer deposits.............. 556 1,669
Deferred gas purchase costs.... (16,000) 13,454
Inventories.................... 7,318 (10,138)
Other.......................... 4,076 (726)
--------- ---------
Net cash flows from operating
activities......................... 43,554 55,085
--------- ---------
Cash flows from (used in) investing
activities:
Additions to property, plant and
equipment............................ (68,003) (58,784)
Acquisition of operations, net of
cash received........................ (1,444) (1,162)
Purchase of investment securities...... -- (16,126)
Litigation settlement proceeds......... -- 4,250
Increase in customer advances.......... 2,122 3,871
Decrease in deferred charges and
credits.............................. (2,955) (5,395)
Proceeds from sale of various
operations........................... 1,130 14,770
Proceeds from sale of land............. 344 752
Proceeds from sale of investment
securities........................... 19,858 --
Other.................................. (29) 54
--------- ---------
Net cash flows used in investing
activities......................... (48,977) (57,770)
--------- ---------
Cash flows (used in) from financing
activities:
Repayment of debt...................... (679) (53,327)
Net borrowings under revolving credit
facility.............................. 4,800 55,500
Change in cash overdraft............... 678 --
Other.................................. 624 512
--------- ---------
Net cash flows from financing
activities......................... 5,423 2,685
--------- ---------
Increase (decrease) in cash and cash
equivalents............................ -- --
Cash and cash equivalents at beginning
of period.............................. -- --
--------- ---------
Cash and cash equivalents at end of
period................................. $ -- $ --
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest........................... $ 32,269 $ 34,343
========= =========
Income taxes....................... $ 5,371 $ 5,897
========= =========
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 and cash flows 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, 1997.
INVESTMENT SECURITIES
During the three months ended September 30, 1997, the Company
disposed of its remaining investment securities portfolio. As a
result of this transaction, the Company recorded proceeds and
realized gains of $6,599,000 and $1,088,000, respectively.
Realized gains and losses on sales of investments, as determined
on a specific identification basis, are included in the Con-
solidated Statement of Operations when incurred.
ACQUISITIONS
On July 23, 1997 two subsidiaries of Southern Union Company
acquired a 42% equity ownership in a natural gas distribution
company serving 16,000 customers in Piedras Negras, Mexico for
$2,700,000. This system is across the border from the Company's
Eagle Pass, Texas service area. On September 8, 1997, the Com-
pany purchased a 45-mile intrastate pipeline for $305,000 which
will augment the Company's gas supply to the city of Eagle Pass
and, subject to necessary regulatory approvals, ultimately
Piedras Negras.
On October 8, 1997, the Company announced the signing of a letter
of intent for the acquisition of Atlantic Utilities Corporation
and Subsidiaries for $22,000,000 in common stock and cash. These
properties provide service to several communities in Florida.
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 September 30,
1997 and 1996, 4,000,000 shares of Preferred Securities were
outstanding.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEBT
September 30, June 30,
1997 1997
------------- --------
(thousands of dollars)
7.60% Senior notes due 2024............. $ 384,515 $384,515
Other................................... 9,203 2,329
--------- --------
Total debt.............................. 393,718 386,844
Less current portion.................. 797 687
--------- --------
Total long-term debt.................... $ 392,921 $386,157
========= ========
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 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 amount outstanding under the Revolving Credit
Facility at September 30, 1997 and October 31, 1997 was
$60,300,000 and $72,900,000, respectively.
The Company is installing an Automated Meter Reading (AMR) system
at Missouri Gas Energy. The installation of the AMR system
involves a potential investment of $27,000,000. The Company is
accounting for this system as a capital lease obligation and has
recorded an increase in plant and long-term debt of $6,599,000
during the three-month period ended September 30, 1997.
UTILITY REGULATION AND RATES
Under the order of the Federal Energy Regulatory Commission, a
major supplier of gas to Missouri Gas Energy is allowed recovery
of certain unrecovered deferred gas costs with a remaining
balance of $7,600,000 at September 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
September 30, 1997 and 1996.
Missouri Gas Energy filed a $27,800,000 request for a rate
increase with the MPSC on October 3, 1997. If a full review of
the case is conducted, new rates would become effective no later
than September 1998. The increase includes recovery of the
ongoing Missouri Safety Program Costs, investments in customer
service, including the first phases of Automated Meter Reading
technology, and higher bad debt expense. Proposed rates would
recover a larger percentage of fixed costs through the monthly
customer charge and a smaller percentage through the volumetric
charge.
CONTINGENCIES
Southern Union has entered into an agreement in principle with
another potentially responsible party for settlement of claims
associated with the removal of hazardous substances from the site
of a former coal gasification plan (Pine Street Canal Site) in
Burlington, Vermont. The cost of the settlement will not have a
materially adverse effect on the Company's financial position,
results of operations or cash flows.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Southern Union and Western Resources entered into an Environ-
mental Liability Agreement (Environmental Liability Agreement) at
the closing of the Missouri Acquisition. Subject to the accuracy
of certain representations made by Western Resources in the
Missouri Asset Purchase Agreement, the Environmental Liability
Agreement provides for a tiered approach to the allocation of
substantially all liabilities under environmental laws that may
exist or arise with respect to Missouri Gas Energy. At the
present time and based upon information available to management,
the Company believes that the costs of any remediation efforts
that may be required for these sites for which it may ultimately
have responsibility will not exceed the aggregate amount subject
to substantial sharing by Western Resources.
In addition to the Pine Street Canal Site and various Missouri
Gas Energy sites described above, the Company is investigating
the possibility that the Company or predecessor companies may
have been associated with Manufactured Gas Plant (MGP) sites in
other of its past, principally in Arizona and New Mexico, and
present service areas in Texas. At the present time, the Company
is aware of certain plant sites in some of these areas and is
investigating those and certain other locations.
The municipal owner of a property adjacent to one of the Com-
pany's service locations has raised concerns over the continued
operation of that property as a park due to its former use as a
portion of an MGP site. The Texas Water Commission (TWC), in
cooperation with the EPA, conducted a site inspection and 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
appropriate 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-
principles. The MPSC rate order of January 22, 1997, however,
retroactively reduced the carrying cost rate applied by the Com-
pany on the expenditures incurred on the Missouri Safety Program
since early 1994 to an Allowance for Funds Used During Construc-
tion (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 $444,000 for the
three months ended September 30, 1997. The Company has not pro-
vided 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 ulti-
mately will be recovered in the future. The Company believes it
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
will ultimately be successful in litigating this matter and,
therefore, will not have a material adverse affect on its finan-
cial position, results of operations or cash flows.
Southern Union and its subsidiaries are parties to other legal
proceedings that its management considers to be the normal kinds
of actions to which an enterprise of its size and nature might be
subject, and not to be material to the Company's overall business
or financial condition, results of operations or cash flows.
As a result of the acquisition of Missouri Gas Energy, the Com-
pany assumed certain obligations related to a 1990 settlement of
a Wyoming Tight Sands anti-trust claim. To secure the refund of
the settlement proceeds, the MPSC authorized the establishment of
an independently administered trust to collect cash receipts
under the Tight Sands settlement and repay credit-facility 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
September 30, 1997 was $4,694,000.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's principal line of business is the distribution of
natural gas as a public utility through Southern Union Gas and
Missouri Gas Energy, each of which is a division of the Company.
In addition, subsidiaries of Southern Union have been established
to support and expand natural gas sales and to capitalize on the
Company's gas energy expertise. These subsidiaries market
natural gas to end-users, operate natural gas pipeline systems,
distribute propane and sell commercial gas air conditioning and
other gas-fired engine-driven applications. By providing "one-
stop shopping," the Company can serve its various customers'
specific energy needs, which encompass substantially all of the
natural gas distribution and sales businesses from natural gas
sales to specialized energy consulting services. Certain sub-
sidiaries own or hold interests in real estate and other assets,
which are primarily used in the Company's utility business.
Several of these business activities are subject to regulation by
federal, state or local authorities where the Company operates.
Thus, the Company's financial condition and results of operations
have been and will continue to be dependent upon the receipt of
adequate and timely adjustments in rates. In addition, the Com-
pany's business is affected by seasonal weather impacts, com-
petitive factors within the energy industry and economic
development and residential growth in its service areas.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 and 1996
- ----------------------------------------------
The Company recorded a net loss attributable to common stock of
$4,909,000 for the three-month period ended September 30, 1997
compared to a net loss of $5,405,000 for the three-month period
ended September 30, 1996. Net loss per common share, based on
weighted average shares outstanding during the period, was $.29
in 1997 compared with a net loss per common share of $.32 in
1996. Due to the seasonal nature of the gas utility business,
the three-month period ending September 30 is typically a loss
period.
Operating revenues were $74,039,000 for the three-month period
ended September 30, 1997, compared with operating revenues of
$80,830,000 in 1996. Gas purchase costs for the three-month
period ended September 30, 1997 were $32,442,000, compared with
$39,415,000 in 1996. The Company's operating revenues are
affected by the level of sales volumes and by the pass-through of
increases or decreases in the Company's gas purchase costs
through its purchased gas adjustment clauses. Additionally,
revenues are affected by increases or decreases in gross receipts
taxes (revenue-related taxes) which are levied on sales revenue
as collected from customers and remitted to the various taxing
authorities. The decrease in operating revenues and gas purchase
costs between periods was primarily the result of a 10% decrease
in gas sales volumes to 11,953 MMcf in 1997 from 13,258 MMcf in
1996. The decrease in sales volume was due to warmer weather in
certain service territories during the three-month period ended
September 30, 1997, and a reduction in pipeline and marketing
sales which typically have lower margins. Additionally,
operating revenues and gas purchase costs were effected by a
decrease in the average cost of gas from $2.96 per Mcf in 1996 to
$2.68 per Mcf in 1997. The decrease in the average cost of gas
is the result of lower gas costs billed to the Missouri customers
due to various regulatory limitations imposed on Missouri Gas
Energy by the MPSC during this past summer. The differential
between such actual billings to these customers and the actual
purchased gas costs is then recorded in the deferred purchase gas
cost accounts for subsequent billing to the customers. Spot
market gas prices throughout the company's distribution system
remained fairly constant during the periods.
Net operating margin (operating margin less revenue-related
taxes) increased $1,108,000 for the three-month period ended
September 30, 1997 compared with the same period in 1996. Net
operating margin increased due to an $8,847,000 annual increase
to revenues granted by the Missouri Public Service Commission
(MPSC) effective as of February 1, 1997. Additionally, net
operating margin increased $332,000 for the three-month period
ended September 30, 1997 compared with the same period in 1996
due to various acquisitions by SUPro Energy Company, a wholly-
owned subsidiary of the Company, which provides propane gas
services to 5,600 customers in Texas.
<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 revenues, were $37,208,000 for the three-month
period ended September 30, 1997, an increase of $142,000, com-
pared with $37,066,000 in 1996. The increase is primarily a
result of a $1,110,000 increase in depreciation and amortization
and a $558,000 increase in taxes, other than on income and
revenues as a result of including certain costs into rate base
that were previously deferred. These items were offset by a
reduction in both bad debt expense and in various legal claims
and assessments.
Interest expense was $8,450,000 for the three-month period ended
September 30, 1997, compared to $8,287,000 in 1996. See "Debt"
in the Notes to the Consolidated Financial Statements included
herein.
Other income for the three-month period ended September 30, 1997
was $1,769,000 compared to $1,735,000 in 1996. Other income for
the three-month period ended September 30, 1997 consists of
$1,088,000 in realized gains on the sale of investment securi-
ties, net rental income from Lavaca Realty Company ("Lavaca
Realty"), the Company's real estate subsidiary, of $266,000 and
$251,000 related to the deferral of interest and other expenses
associated with the Missouri Gas Energy Safety Program. Other
income for 1996 included $1,557,000 related to the deferral of
interest and other expenses associated with the Missouri Gas
Energy Safety Program and net rental income from Lavaca Realty of
$353,000. Offsetting the increase was a $374,000 loss recognized
on a donation of emissions analysis equipment and software to a
Texas university.
For the three-month period ended September 30, 1997, the federal
and state income tax benefit decreased $341,000, or 11%, over the
same period in 1996 due primarily to a decrease in the pre-tax
loss described above. The effective tax rate was 36% in both
1996 and 1997.
Twelve Months Ended September 30, 1997 and 1996
- -----------------------------------------------
The Company recorded net earnings available for common stock of
$19,529,000 for the twelve-month period ended September 30, 1997
compared with net earnings of $21,032,000 in 1996. Earnings per
share, based on weighted average common and common share equiva-
lents outstanding during the period, were $1.10 in 1997 compared
with earnings per share of $1.19 in 1996.
Operating revenues were $710,239,000 for the twelve-month period
ended September 30, 1997, an increase of 13%, compared with
operating revenues of $630,993,000 in 1996. Gas purchase costs
for the twelve-month period ended September 30, 1997 were
$442,214,000, an increase of 19%, compared with gas purchase
costs of $373,125,000 in 1996. Both operating revenues and gas
purchase costs increased in the twelve-month period ended
September 30, 1997 primarily due to a 16% increase in the average
cost of gas to $3.63 per Mcf in 1997 from $3.12 per Mcf in 1996
as a result of increases in average spot market gas prices.
Operating revenues were also affected by a 9% increase in
revenue-related taxes and the $8,847,000 annual increase to rates
granted to Missouri Gas Energy, effective as of February 1, 1997,
previously discussed. Revenue-related taxes are levied on sales
revenues, then collected from the customers and remitted to the
various taxing authorities. Additionally contributing to the
increase in operating revenues for the twelve-month period ended
September 30, 1997 were revenues of $4,877,000 under a gas supply
incentive plan approved by the MPSC in July 1996. Under the
plan, Southern Union and its Missouri customers share in certain
savings below benchmark levels of gas costs incurred as a result
of the Company's gas procurement activities. Operating revenues
and gas purchase costs were also effected by a 2% increase in gas
sales volume from 119,362 MMcf in 1996 to 121,196 Mcf in 1997.
The increase in volumes is principally due to growth in pipeline
and marketing sales.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Missouri Gas Energy service territories experienced weather which
was 104% of a 30-year measure for both the twelve-month periods
ended September 30, 1997 and 1996. Weather for Southern Union
Gas service territories for the twelve-month period ended
September 30, 1997 was 100% of a 30-year measure compared with
95% in 1996.
Net operating margin increased 3% for the twelve-month period
ended September 30, 1997 compared with the same period in 1996.
The increase in net operating margin resulted primarily from the
annual increase in revenues granted to Missouri Gas Energy and
increased revenues under the gas supply incentive plan, both
previously discussed.
Operating expenses were $157,013,000 for the twelve-month period
ended September 30, 1997, an increase of 2%, compared with
operating expenses of $153,907,000 in 1996. The increase in
operating expenses resulted primarily from $4,278,000 in addi-
tional bad debt expense associated with increases in delinquent
customer accounts, primarily at Missouri Gas Energy as a result
of significant increases in natural gas prices during the 1996/
1997 winter heating season; increased media advertising, travel
and call center labor costs as a result of and in response to the
significant price spikes in natural gas during the 1996/1997
winter heating season; increased field and call center labor and
other costs to improve customer service at Missouri Gas Energy;
and increases in depreciation and amortization as a result of
including certain costs into rate base that were previously
deferred. Partially offsetting these factors was a decrease in
medical, dental, pension and injury and damage claims.
Interest expense was $33,628,000 for the twelve-month period
ended September 30, 1997, a decrease of 4%, compared to
$34,981,000 in 1996. The decrease in interest expense is due to
the repurchase of Senior Notes from June 1995 through June 1996
which was partially offset by an increase in interest expense
from increased borrowings under the various financing facilities.
See also "Debt" in the Notes to the Consolidated Financial State-
ments for the period ended September 30, 1997 included herein.
Other income for the twelve-month period ended September 30, 1997
was $2,915,000 compared to $11,641,000 in 1996. Other income for
the twelve-month period ended September 30, 1997 included:
realized gains on the sale of investment securities of
$3,633,000; deferral of interest and other expenses associated
with the Missouri Gas Energy Safety Program of $2,423,000; and
net rental income from Lavaca Realty of $1,242,000. This was
partially offset by $2,125,000 for the settlement of certain
billing errors at Missouri Gas Energy and the write-off of
$1,750,000 acquisition-related costs from the termination of
various acquisition activities. Other income for the twelve-month
period ended September 30, 1996 included: $6,202,000 related to
the deferral of interest and other expenses associated with the
Missouri Gas Energy Safety Program; net rental income from Lavaca
Realty of $1,400,000; a pre-tax gain of $2,300,000 on the sale of
Western Gas Interstate Company (WGI) and other operations; and a
$1,488,000 gain on the repurchase of Senior Notes.
For the twelve-month period ended September 30, 1997, federal and
state income taxes decreased $2,094,000 over the same period in
1996 due to a reduction in pre-tax earnings as discussed above.
The Company's consolidated federal and state effective income tax
rate was 39% for the twelve-month period ended September 30, 1997
compared to 41% in 1996.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain information regarding the
Company's gas utility operations for the three- and twelve-month
periods ended September 30, 1997 and 1996:
Three Months Ended Twelve Months Ended
September 30, September 30,
------------------ -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Average number of gas
sales customers
served:
Residential......... 864,408 848,709 868,407 861,147
Commercial.......... 84,073 83,173 86,221 86,305
Industrial and
irrigation......... 570 583 600 642
Public authorities
and other.......... 2,653 2,572 2,694 2,775
Pipeline and
marketing.......... 225 174 202 378
-------- -------- -------- --------
Total average
customers served. 951,929 935,211 958,124 951,247
======== ======== ======== ========
Gas sales in millions
of cubic feet (MMcf):
Residential......... 4,876 4,837 68,722 69,506
Commercial.......... 2,865 2,986 30,746 31,381
Industrial and
irrigation......... 366 516 1,870 2,497
Public authorities
and other.......... 245 230 2,767 2,709
Pipeline and
marketing.......... 3,387 3,866 17,844 13,131
-------- -------- -------- --------
Gas sales billed.. 11,739 12,435 121,949 119,224
Net change in
unbilled gas sales. 214 823 (753) 138
-------- -------- -------- --------
Total gas sales... 11,953 13,258 121,196 119,362
======== ======== ======== ========
Gas sales revenues
(thousands of
dollars):
Residential......... $ 40,096 $ 42,769 $434,866 $392,787
Commercial.......... 14,657 16,356 173,467 156,639
Industrial and
irrigation......... 1,640 1,851 9,355 10,526
Public authorities
and other.......... 1,078 884 13,168 9,479
Pipeline and
marketing.......... 7,986 9,122 46,577 31,625
-------- -------- -------- --------
Gas revenues
billed........... 65,457 70,982 677,433 601,056
Net change in
unbilled gas sales
revenues........... 2,216 4,146 (3,825) 2,500
-------- -------- -------- --------
Total gas sales
revenues......... $ 67,673 $ 75,128 $673,608 $603,556
======== ======== ======== ========
Gas sales margin
(thousands of
dollars)............. $ 35,586 $ 35,713 $232,695 $230,431
======== ======== ======== ========
Gas sales revenue
per thousand cubic
feet (Mcf) billed:
Residential......... $ 8.224 $ 8.841 $ 6.328 $ 5.651
Commercial.......... 5.115 5.478 5.642 4.992
Industrial and
irrigation......... 4.475 3.591 5.001 4.215
Public authorities
and other.......... 4.404 3.852 4.759 3.499
Pipeline and
marketing.......... 2.358 2.360 2.610 2.408
Weather effect:
Degree days:
Southern Union Gas
service
territories........ 1 3 1,956 1,886
Missouri Gas Energy
service
territories........ 23 85 5,443 5,476
Normal, based on
30-year measure:
Southern Union
Gas service
territories...... 0 0 1,953 1,976
Missouri Gas
Energy service
territories...... 59 61 5,246 5,246
Gas transported in
millions of cubic
feet (MMcf).......... 15,629 14,688 64,668 61,710
Gas transportation
revenues (thousands
of dollars).......... $ 3,834 $ 3,828 $ 21,190 $ 19,309
<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 sea-
sonality results in a high level of cash flow needs during the
peak winter heating season months, resulting from the required
payments to natural gas suppliers in advance of the receipt of
cash payments from the Company's customers. The Company has
historically used 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 September 30, 1997 was $58,700,000 borrowed under the
financing facilities and $6,531,000 proceeds from the sale of
investment securities. These sources provided funds for addi-
tions to property, plant and equipment of $17,008,000, operating
outflows of $43,132,000 and other seasonal working capital needs
of the Company.
The effective interest rate under the Company's current debt
structure is 8.1% (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 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 the facili-
ties are available for Southern Union's working capital, letter
of credit requirements and other general corporate purposes.
Amounts outstanding under these facilities at September 30, 1997
and October 31, 1997 were $60,300,000 and $72,900,000,
respectively.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTHERN UNION COMPANY
----------------------
(Registrant)
Date November 10, 1997 By RONALD J. ENDRES
----------------- ----------------
Ronald J. Endres
Executive Vice President and
Chief Financial Officer
Date November 10, 1997 By 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 Ended Twelve Months Ended
September 30, September 30,
------------------ -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands of dollars, except per
share amounts)
Net earnings (loss)
available for common
stock................ $ (4,909) $ (5,405) $ 19,529 $ 21,032
======== ======== ======== ========
Primary earnings per
share:
Average shares
outstanding........ 17,122 17,035 17,093 17,016
Common stock
equivalents........ -- -- 674 606
-------- -------- -------- --------
Average shares
outstanding........ 17,122 17,035 17,767 17,622
======== ======== ======== ========
Primary earnings
(loss) per share... $ (.29) $ (.32) $ 1.10 $ 1.19
======== ======== ======== ========
Fully diluted
earnings per share:
Average shares
outstanding........ 17,122 17,035 17,093 17,016
Common stock
equivalents........ -- -- 682 648
-------- -------- -------- --------
Average shares
outstanding........ 17,122 17,035 17,775 17,664
======== ======== ======== ========
Fully diluted
earnings (loss)
per share.......... $ (.29) $ (.32) $ 1.10 $ 1.19
======== ======== ======== ========
- --------------------------
NOTE: All periods have been adjusted for the 5% stock dividend
distributed on December 10, 1996.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1997
<PERIOD-TYPE> 3-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $ 787,968,000
<OTHER-PROPERTY-AND-INVEST> $ 9,192,000
<TOTAL-CURRENT-ASSETS> $ 102,175,000
<TOTAL-DEFERRED-CHARGES> $ 107,591,000
<OTHER-ASSETS> $ 1,823,000
<TOTAL-ASSETS> $ 1,008,749,000
<COMMON> $ 17,174,000
<CAPITAL-SURPLUS-PAID-IN> $ 225,267,000
<RETAINED-EARNINGS> $ 20,260,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> $ 261,907,000
$ 0
$ 100,000,000
<LONG-TERM-DEBT-NET> $ 392,921,000
<SHORT-TERM-NOTES> $ 60,300,000
<LONG-TERM-NOTES-PAYABLE> $ 0
<COMMERCIAL-PAPER-OBLIGATIONS> $ 0
<LONG-TERM-DEBT-CURRENT-PORT> $ 797,000
$ 0
<CAPITAL-LEASE-OBLIGATIONS> $ 0
<LEASES-CURRENT> $ 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> $ 192,701,000
<TOT-CAPITALIZATION-AND-LIAB> $ 1,008,749,000
<GROSS-OPERATING-REVENUE> $ 74,039,000
<INCOME-TAX-EXPENSE> $ (2,737,000)
<OTHER-OPERATING-EXPENSES> $ 23,789,000
<TOTAL-OPERATING-EXPENSES> $ 37,208,000
<OPERATING-INCOME-LOSS> $ 1,405,000
<OTHER-INCOME-NET> $ 1,769,000
<INCOME-BEFORE-INTEREST-EXPEN> $ 3,541,000
<TOTAL-INTEREST-EXPENSE> $ 8,450,000
<NET-INCOME> $ (4,909,000)
$ 0
<EARNINGS-AVAILABLE-FOR-COMM> $ (4,909,000)
<COMMON-STOCK-DIVIDENDS> $ 0
<TOTAL-INTEREST-ON-BONDS> $ 0
<CASH-FLOW-OPERATIONS> $ (43,132,000)
<EPS-PRIMARY> $ (.29)
<EPS-DILUTED> $ (.29)
</TABLE>
