<PAGE>
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
For the quarterly period ended
March 31, 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 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 May 7, 1997 was 17,119,236.
=================================================================
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
March 31, 1997
Index
PART I. FINANCIAL INFORMATION Page(s)
Item 1. Financial Statements
Consolidated statements of operations -
three, nine and twelve months ended
March 31, 1997 and 1996
Consolidated balance sheet - March 31,
1997 and 1996 and June 30, 1996
Consolidated statement of stockholders'
equity - nine months ended March 31, 1997
and twelve months ended June 30, 1996
Consolidated statements of cash flows -
three, nine and twelve months ended
March 31, 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 March 31,
----------------------------
1997 1996
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues............... $ 313,931 $ 275,028
Gas purchase costs............... 215,994 178,454
----------- -----------
Operating margin.............. 97,937 96,574
Revenue-related taxes............ 16,975 15,783
----------- -----------
Net operating margin............. 80,962 80,791
Operating expenses:
Operating, maintenance and
general.................... 35,086 26,064
Depreciation and amortization. 8,882 8,003
Taxes, other than on income
and revenues............... 2,979 3,595
----------- -----------
Total operating expenses... 46,947 37,662
----------- -----------
Net operating revenues..... 34,015 43,129
----------- -----------
Other income (expenses):
Interest...................... (8,368) (8,996)
Dividends on preferred securi-
ties of subsidiary trust... (2,370) (2,370)
Other, net.................... 5,944 2,221
----------- -----------
Total other expenses, net.. (4,794) (9,145)
----------- -----------
Earnings before income
taxes................... 29,221 33,984
Federal and state income taxes... 11,543 13,435
----------- -----------
Net earnings available for
common stock.................. $ 17,678 $ 20,549
=========== ===========
Net earnings per common and
common share equivalents...... $ 1.00 $ 1.16
=========== ===========
Weighted average common and
common share equivalents
outstanding................... 17,761,419 17,654,189
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended March 31,
---------------------------
1997 1996
------------ ------------
(thousands of dollars,
except shares and per
share amounts)
Operating revenues................. $ 625,643 $ 526,195
Gas purchase costs................. 410,354 312,885
----------- -----------
Operating margin................... 215,289 213,310
Revenue-related taxes.............. 33,726 29,486
----------- -----------
Net operating margin............... 181,563 183,824
Operating expenses:
Operating, maintenance and
general...................... 87,580 79,540
Depreciation and amortization... 25,765 25,120
Taxes, other than on income
and revenues................. 8,779 10,191
----------- -----------
Total operating expenses..... 122,124 114,851
----------- -----------
Net operating revenues....... 59,439 68,973
----------- -----------
Other income (expenses):
Interest........................ (25,397) (27,300)
Dividends on preferred securi-
ties of subsidiary trust..... (7,110) (7,110)
Other, net...................... 9,323 4,591
----------- -----------
Total other expenses, net.... (23,184) (29,819)
----------- -----------
Earnings before income taxes. 36,255 39,154
Federal and state income taxes..... 14,321 15,457
----------- -----------
Net earnings available for
common stock.................... $ 21,934 $ 23,697
=========== ===========
Net earnings per common and common
share equivalents............... $ 1.24 $ 1.35
=========== ===========
Weighted average common and common
share equivalents outstanding... 17,743,810 17,514,886
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Months Ended March 31,
-----------------------------
1997 1996
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues............... $ 719,839 $ 609,604
Gas purchase costs............... 459,008 348,516
----------- -----------
Operating margin.............. 260,831 261,088
Revenue-related taxes............ 39,126 34,027
----------- -----------
Net operating margin.......... 221,705 227,061
Operating expenses:
Operating, maintenance and
general.................... 115,562 102,034
Depreciation and amortization. 33,627 33,195
Taxes, other than on income
and revenues............... 12,247 12,927
----------- -----------
Total operating expenses... 161,436 148,156
----------- -----------
Net operating revenues..... 60,269 78,905
----------- -----------
Other income (expenses):
Interest...................... (33,929) (37,058)
Dividends on preferred securi-
ties of subsidiary trust... (9,480) (8,269)
Other, net.................... 16,059 5,592
----------- -----------
Total other expenses, net.. (27,350) (39,735)
Earnings before income
taxes................... 32,919 39,170
Federal and state income taxes... 13,843 15,946
----------- -----------
Net earnings available for
common stock................... $ 19,076 $ 23,224
=========== ===========
Net earnings per common and
common share equivalents...... $ 1.08 $ 1.33
=========== ===========
Weighted average common and
common share equivalents
outstanding................... 17,732,609 17,462,594
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
March 31, June 30,
------------------------ ------------
1997 1996 1996
------------ ------------ ------------
(unaudited)
(thousands of dollars)
Property, plant and
equipment:
Plant in service.... $ 949,607 $ 916,358 $ 912,552
Construction work
in progress....... 7,581 11,148 8,411
----------- ----------- -----------
957,188 927,506 920,963
Less accumulated
depreciation and
amortization...... (328,957) (318,182) (310,289)
----------- ----------- -----------
628,231 609,324 610,674
Additional purchase
cost assigned to
utility plant, net.... 131,823 141,825 133,780
----------- ----------- -----------
Net property, plant
and equipment......... 760,054 751,149 744,454
----------- ----------- -----------
Current assets:
Cash and cash
equivalents......... 899 38,436 2,887
Accounts receivable,
billed and unbilled. 120,372 119,661 47,846
Inventories, princi-
pally at average
cost................ 14,051 5,787 27,023
Deferred gas purchase
costs............... 6,612 -- 2,650
Prepayments and other. 2,642 685 1,947
----------- ----------- -----------
Total current
assets............ 144,576 164,569 82,353
----------- ----------- -----------
Deferred charges........ 109,726 114,933 116,286
Investment securities... 6,295 10,763 8,848
Real estate............. 9,098 10,312 9,513
Other................... 2,397 3,574 3,006
----------- ----------- -----------
Total assets.......... $ 1,032,146 $ 1,055,300 $ 964,460
=========== =========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
March 31, June 30,
------------------------ ------------
1997 1996 1996
------------ ------------ ------------
(unaudited)
(thousands of dollars)
Common stockholders'
equity:
Common stock, $1 par
value; authorized
50,000,000 shares;
issued 17,161,741
shares............ $ 17,162 $ 16,270 $ 16,275
Premium on capital
stock............. 225,201 205,993 206,047
Less treasury stock,
at cost........... (794) (794) (794)
Retained earnings... 28,071 28,489 25,631
Unrealized holding
gain (loss)....... 553 -- (1,244)
----------- ----------- -----------
Total common stock-
holders' equity... 270,193 249,958 245,915
Company-obligated manda-
torily redeemable pre-
ferred securities of
subsidiary trust
holding solely
$103,093,000 principal
amount of 9.48% sub-
ordinated notes of
Southern Union due
2025................. 100,000 100,000 100,000
Long-term debt.......... 385,856 441,054 385,394
----------- ----------- -----------
Total capitalization.. 756,049 791,012 731,309
Current liabilities:
Long-term debt due
within one year..... 701 601 615
Notes payable......... 20,800 -- --
Accounts payable...... 52,316 49,789 39,238
Federal, state and
local taxes......... 27,398 31,266 16,741
Accrued interest...... 5,320 5,981 12,773
Accrued dividends on
preferred securities
of subsidiary trust. -- 2,370 2,370
Customer deposits..... 17,539 15,670 15,656
Deferred gas purchase
costs............... -- 16,167 --
Other................. 18,631 17,230 15,937
----------- ----------- -----------
Total current
liabilities....... 142,705 139,074 103,330
----------- ----------- -----------
Deferred credits and
other................. 82,823 86,393 86,287
Accumulated deferred
income taxes.......... 50,569 38,821 43,534
Commitments and
contingencies......... -- -- --
----------- ----------- -----------
Total................. $ 1,032,146 $ 1,055,300 $ 964,460
=========== =========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unrea-
Common Premium lized
Stock, on Treasury 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 earn-
ings... -- -- -- 20,839 -- 20,839
5% stock
divi-
dend... 576 10,701 -- (11,277) -- --
Four-for-
three
stock
split.. 4,054 (4,054) -- -- -- --
Unrea-
lized
holding
loss... -- -- -- -- (1,244) (1,244)
Exercise
of stock
options 75 581 -- -- -- 656
------- -------- ----- ------- ------- --------
Balance
June 30,
1996..... 16,275 206,047 (794) 25,631 (1,244) 245,915
Net earn-
ings.... -- -- -- 21,934 -- 21,934
5% stock
divi-
dend.... 812 18,682 -- (19,494) -- --
Unrealized
holding
gain..... -- -- -- -- 1,797 1,797
Exercise
of stock
options.. 75 472 -- -- -- 547
------- -------- ----- ------- ------- --------
Balance
March 31,
1997..... $17,162 $225,201 $(794) $28,071 $ 553 $270,193
======= ======== ===== ======= ======= ========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
----------------------------
1997 1996
------------ ------------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings................. $ 17,678 $ 20,549
Adjustments to reconcile net
earnings to net cash flows
from operating activities:
Depreciation and
amortization........... 8,882 8,003
Deferred income taxes.... 2,347 1,448
Provision for bad debts.. 7,142 1,712
Deferral of interest and
other expenses......... (1,030) (1,385)
Gain on sale of invest-
ment securities........ (1,786) --
Other, net............... 364 320
Changes in assets and
liabilities:
Accounts receivable,
billed and
unbilled........... 20,546 (11,328)
Accounts payable..... 7,482 3,145
Taxes and other
liabilities........ 967 6,224
Customer deposits.... 324 337
Deferred gas pur-
chase costs........ (46,902) 27,536
Inventories.......... 19,771 18,871
Other accounts....... (30) (232)
----------- -----------
Net cash flow from
operating activities... 35,755 75,200
----------- -----------
Cash flows from (used in)
investing activities:
Additions to property, plant
and equipment.............. (11,443) (9,021)
Purchase of investment
securities................. -- (9,300)
Proceeds from sale of invest-
ment securities............ 9,784 --
Net change in customer
advances................... (158) 605
Net change in deferred
charges and credits........ 6,502 (4,071)
Other, net................... 650 (1,556)
----------- -----------
Net cash flows from (used
in) investing activities. 5,335 (23,343)
----------- -----------
Cash flows from (used in)
financing activities:
Repayment of debt............ (131) (1,288)
Net payments under financing
facilities................. (40,400) (13,000)
Other, net................... 340 47
----------- -----------
Net cash flows used in
financing activities..... (40,191) (14,241)
----------- -----------
Increase in cash and cash
equivalents.................... 899 37,616
Cash and cash equivalents at
beginning of period............ -- 820
----------- -----------
Cash and cash equivalents at end
of period...................... $ 899 $ 38,436
=========== ===========
Supplemental disclosures of
cash flow information:
Cash paid during the
period for:
Interest................. $ 15,161 $ 16,904
=========== ============
Income taxes............. $ 101 $ 783
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended March 31,
---------------------------
1997 1996
------------ ------------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings.................... $ 21,934 $ 23,697
Adjustments to reconcile net
earnings to net cash flows
from operating activities:
Depreciation and
amortization.............. 25,765 25,120
Deferred income taxes....... 6,054 2,765
Provision for bad debts..... 9,978 4,015
Deferral of interest and
other expenses............ (4,281) (3,662)
Gain on sale of investment
securities................ (2,545) --
Other, net.................. 697 1,097
Changes in assets and lia-
bilities, net of acquisi-
tions and dispositions:
Accounts receivable,
billed and unbilled... (79,489) (88,210)
Accounts payable........ 13,078 20,598
Taxes and other
liabilities........... 3,204 21,724
Customer deposits....... 1,883 1,504
Deferred gas purchase
costs................. (3,961) 23,808
Inventories............. 13,134 17,774
Other accounts.......... (57) (198)
----------- -----------
Net cash flow from
operating activities...... 5,394 50,032
----------- -----------
Cash flows used in investing
activities:
Additions to property, plant
and equipment................. (42,553) (37,733)
Acquisition of operations, net
of cash received.............. (1,162) --
Purchase of investment
securities.................... (5,363) (10,763)
Proceeds from sale of invest-
ment securities............... 10,311 --
Maturity of short-term
investments................... -- 19,582
Net change in customer advances. 1,756 2,460
Net change in deferred charges
and credits................... 6,861 (3,096)
Other, net...................... 1,873 (564)
----------- -----------
Net cash flows used in
investing activities........ (28,277) (30,114)
----------- -----------
Cash flows from (used in)
financing activities:
Repayment of debt............... (452) (21,094)
Net borrowings under financing
facilities.................... 20,800 --
Other, net...................... 547 597
----------- -----------
Net cash flows from (used in)
financing activities........ 20,895 (20,497)
----------- -----------
Decrease in cash and cash
equivalents....................... (1,988) (579)
Cash and cash equivalents at
beginning of period............... 2,887 39,015
----------- -----------
Cash and cash equivalents at end
of period......................... $ 899 $ 38,436
=========== ===========
Supplemental disclosures of cash
flow information:
Cash paid during the period
for:
Interest.................... $ 32,103 $ 35,278
=========== ===========
Income taxes (refund)....... $ 5,101 $ (4,405)
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Twelve Months Ended March 31,
-----------------------------
1997 1996
------------ ------------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings.................. $ 19,076 $ 23,224
Adjustments to reconcile net
earnings to net cash flows
from operating activities:
Depreciation and
amortization............ 33,627 33,195
Deferred income taxes..... 12,702 7,886
Provision for bad debts... 11,498 4,081
Deferral of interest and
other expenses.......... (6,283) (4,565)
Gain on sale of invest-
ment securities......... (2,545) --
Other, net................ (209) (445)
Changes in assets and lia-
bilities, net of acquisi-
tions and dispositions:
Accounts receivable,
billed and unbilled. (9,022) (52,372)
Accounts payable...... 2,528 10,198
Taxes and other
liabilities......... (9,379) 15,891
Customer deposits..... 1,868 1,478
Deferred gas purchase
costs............... (22,778) (5,435)
Inventories........... (8,247) 20,753
Other accounts........ (9) 379
----------- -----------
Net cash flow from
operating activities.... 22,827 54,268
----------- -----------
Cash flows used in investing
activities:
Additions to property, plant
and equipment............... (64,196) (54,812)
Acquisition of operations,
net of cash received........ (1,162) --
Purchase of investment
securities.................. (5,363) (10,763)
Proceeds from sale of invest-
ment securities............. 10,311 --
Litigation settlement
proceeds.................... 4,250 --
Net change in customer
advances.................... 2,843 2,836
Net change in deferred
charges and credits......... 6,146 (1,024)
Proceeds from sale of
distribution and trans-
mission properties.......... 14,770 --
Other, net.................... 2,779 (332)
----------- -----------
Net cash flows used in
investing activities...... (29,622) (64,095)
Cash flows from (used in)
financing activities:
Repayment of debt............. (52,148) (36,265)
Net borrowings (payments)
under financing facilities.. 20,800 (18,000)
Issuance of preferred
securities of subsidiary
trust....................... -- 100,000
Issuance cost of preferred
securities of subsidiary
trust....................... -- (3,799)
Other, net.................... 606 597
----------- -----------
Net cash flows from (used
in) financing activities.. (30,742) 42,533
----------- -----------
Increase (decrease) in cash and
cash equivalents................ (37,537) 32,706
Cash and cash equivalents at
beginning of period............. 38,436 5,730
----------- -----------
Cash and cash equivalents at
end of period................... $ 899 $ 38,436
=========== ===========
Supplemental disclosures of cash
flow information:
Cash paid during the
period for:
Interest.................. $ 33,718 $ 36,049
========== ===========
Income taxes (refund)..... $ 6,514 $ (2,355)
========== ===========
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.
The Financial Accounting Standards Board recently issued Earnings
per Share, a standard which revises the computation, presentation
and disclosure requirements for earnings per share. The standard
is effective for periods ending after December 15, 1997. The Com-
pany has not yet determined the impact that this standard will
have on its earnings per share.
INVESTMENT SECURITIES
At March 31, 1997, all securities owned by the Company were clas-
sified as available-for-sale and are intended to be held by the
Company for an indefinite period of time. Accordingly, these
securities are stated at fair value, with unrealized gains and
losses reported in a separate component of stockholders' equity.
Realized gains and losses on sales of investments, as determined
on a specific identification basis, are included in the Consoli-
dated Statement of Operations when incurred.
As of March 31, 1997, investment securities consisted of common
stock with a specific cost of $5,443,000 and a fair value of
$6,295,000. The unrealized holding gain, net of related income
taxes and included as a separate component of common stock-
holders' equity, totaled $553,000 at March 31, 1997. Proceeds
and realized gains from the sales of securities classified as
available-for-sale for the three-month period ended March 31,
1997, were $9,784,000 and $1,786,000, respectively. Proceeds and
realized gains from the sales of securities classified as available-
for-sale for the nine-month period ended March 31, 1997, were
$10,311,000 and $2,545,000, respectively.
As of May 7, 1997, the investment securities classified as
available-for-sale had a specific cost of $5,443,000 and a fair value of
$6,227,000.
DIVESTITURE
On May 1, 1996, Southern Union Company sold certain gas distri-
bution 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 $8,847,000 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. This AAO was
consistent with those which were issued by the MPSC from 1990
through 1993 to Western Resources, Missouri Gas Energy's prior
owner. Since February 1, 1994, the Company has followed the
specifications of the AAO as provided for 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. The Company was
denied a rehearing of that portion of the rate order and has
filed a writ of review in Missouri state circuit court. Absent
a reversal of this part of the rate order, the Company will 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 were $662,000 and $3,860,000 respectively
for the three and nine months ended March 31, 1997. Had the
Company applied the AFUDC rate, as now suggested by the MPSC, the
carrying costs would have been $421,000 and $3,046,000 for the
three and nine months ended March 31, 1997, respectively. The
Company has not provided for any potential disallowance relative
to this matter in its financial statements because it believes
this part of the order is not lawful and that the related
regulatory asset ultimately will be recovered in the future.
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
remaining balance of $13,400,000 at March 31, 1997. These costs
were related to gas deliveries prior to April 30, 1994. Missouri
Gas Energy filed a mechanism to recover these costs with the MPSC
which was approved and allows recovery of these costs from its
Missouri customers. The receivable and liability associated with
these costs have been recorded as a deferred charge and a
deferred credit, respectively, on the consolidated balance sheet
as of March 31, 1997 and 1996.
PREFERRED SECURITIES OF SUBSIDIARY TRUST
On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a
consolidated wholly-owned subsidiary of Southern Union, issued
$100,000,000 of 9.48% Trust Originated Preferred Securities (Pre-
ferred Securities). In connection with the Subsidiary Trust's
issuance of the Preferred Securities and the related purchase by
Southern Union of all of the Subsidiary Trust's common securities
(Common Securities), Southern Union issued to the Subsidiary
Trust $103,092,800 principal amount of its 9.48% Subordinated
Deferrable Interest Notes, due 2025 (Subordinated Notes). The
sole assets of the Subsidiary Trust are the Subordinated Notes.
The interest and other payment dates on the Subordinated Notes
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 Subordinated 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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and Common Security plus accumulated and unpaid distributions.
Southern Union's obligations under the Subordinated Notes and
related agreements, taken together, constitute a full and uncon-
ditional guarantee by Southern Union of payments due on the Pre-
ferred Securities. As of March 31, 1997 and 1996, 4,000,000
shares of Preferred Securities were outstanding.
DEBT
March 31, June 30,
1997 1996
------------ ------------
(thousands of dollars)
7.60% Senior Notes due 2024........ $ 384,515 $ 384,515
Other.............................. 2,042 1,494
------------ ------------
Total debt......................... 386,557 386,009
Less current portion............ 701 615
------------ ------------
Total long-term debt............... $ 385,856 $ 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 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. Amounts outstanding under these facilities at March 31,
1997 and May 7, 1997 totalled $20,800,000 and nil, 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 succes-
sor to People's Light and Power Corporation, an upstream corpo-
rate parent of Green Mountain Power Corp. during the years
1928-1931. Green Mountain Power was settled without admission or
determination of liability with respect to Southern Union by
order dated December 26, 1990. The EPA has since conducted
studies of the clean-up costs for the remainder of the Pine
Street Canal Site, but the ultimate costs are unknown at this
time. On November 30, 1992, Southern Union was named as a
potentially responsible party in a special notice letter from the
EPA. The Company has denied liability for any clean-up costs for
various reasons, including the fact 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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 a 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
public or the environment." In April, 1996, the city closed the
park pending the performance of a risk assessment report.
Although this site was previously listed in the Comprehensive
Environmental Response, Compensation, and Liability Information
System (CERCLIS) database, in a letter dated December 30, 1996,
the United States Environmental Protection Agency removed the
site from the CERCLIS database. Based upon currently available
information, Southern Union does not believe the outcome of this
matter will have a material adverse effect on its financial posi-
tion, results of operations or cash flows.
While the Company's evaluation of these Texas, Arizona and New
Mexico MGP sites is in its preliminary stages, it is likely that
some compliance costs may be identified and become subject to
reasonable quantification. To the extent that such potential
costs are quantified, the Company expects to provide any appro-
priate accruals and seek recovery for such remediation costs
through all appropriate means, including insurance and regulatory
relief. Although significant charges to earnings could be
required prior to rate recovery, management does not believe that
environmental expenditures for such MGP sites will have a
material adverse effect on the Company's financial position,
results of operations or cash flows.
On March 21, 1997, the Company filed a writ of review in Missouri
state circuit court of a portion of the MPSC January 22, 1997
rate case order. See Utility Regulation and Rates included in
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.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the acquisition of Missouri Gas Energy, the Com-
pany assumed certain obligations related to a 1990 settlement of
a Wyoming Tight Sands anti-trust claim. To secure the refund of
the settlement proceeds, the MPSC authorized the establishment of
an independently administered trust to collect cash receipts under
the Tight Sands settlement and repay credit-facility borrowings
used for the lump sum payment. In the event the trust does not
receive cash payments from the gas suppliers as provided by the
Tight Sands settlement agreements, the Company is committed to
pay its applicable portion of the amount owed the lender of the
credit-facility borrowings. The Company's allocable unpaid
portion of the amount the trust owes the lender at March 31, 1997
was $5,530,000.
[remainder of page intentionally left blank]
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's principal line of business is the distribution of
natural gas as a public utility through Southern Union Gas and
Missouri Gas Energy, each of which is a division of the Company.
In addition, subsidiaries of Southern Union have been established
to support and expand natural gas sales and to capitalize on the
Company's gas energy expertise. These subsidiaries market
natural gas to end-users, operate natural gas pipeline systems,
distribute and sell propane and sell commercial gas air condi-
tioning and other gas-fired engine-driven applications. By pro-
viding "one-stop shopping," the Company 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 subsidiaries also own or hold interests in real estate
and other assets, which are primarily used in the Company's
utility business.
Several of these business activities are subject to regulation by
federal, state or local authorities where the Company operates.
Thus, the Company's financial condition and results of operations
have been and will continue to be dependent upon the receipt of
adequate and timely adjustments in rates. In addition, the Com-
pany's business is affected by seasonal weather impacts, competi-
tive factors within the energy industry and economic development
and residential growth in its service areas.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
The Company recorded net earnings available for common stock of
$17,678,000 for the three-month period ended March 31, 1997 com-
pared with net earnings of $20,549,000 for the same period in
1996. Earnings per share, based on weighted average common and
common share equivalent outstanding during the period were $1.00
in 1997 compared with earnings per share of $1.16 in 1996.
Operating revenues were $313,931,000 for the three-month period
ended March 31, 1997, an increase of 14%, compared with
operating revenues of $275,028,000 in 1996. Gas purchase costs
for the three-month period ended March 31, 1997 were
$215,994,000, an increase of 21%, compared with $178,454,000 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 pur-
chased 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 increase in both operating revenues and gas
purchase costs between periods was primarily the result of a
26% increase in the average cost of gas from $3.26 per Mcf
in 1996 to $4.10 per Mcf in 1997. 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. Additionally, revenues were slightly impacted by an
$8,847,000 annual increase to revenues granted by the Missouri
Public Service Commission (MPSC) effective as of February 1,
1997. These increases in operating revenues and gas purchase
costs were partially offset by a 4% decrease in gas sales volume
to 52,696 MMcf in 1997 from 54,746 MMcf in 1996. The decrease in
sales volume was due to warmer weather in certain service terri-
tories during the three-month period ended March 31, 1997, and 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
include the city of Kansas City, Missouri, was 95% of a 30-year
measure for the three-month period ended March 31, 1997, compared
with 106% in 1996. Southern Union Gas service territories, which
include the cities of Austin and El Paso, experienced weather
that was 94% of a 30-year measure in 1997, compared with 93% in
1996.
Net operating margin (operating margin less revenue-related
taxes) increased $171,000 for the three-month period ended
March 31, 1997 compared with the same period in 1996. Net
operating margin increased primarily due to
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
colder weather in Southern Union Gas service territories and the
rate increase granted to Missouri Gas Energy, both previously
discussed. This was partially offset by a reduction in volumes
and the related net operating margin as a result of warmer
weather in Missouri Gas Energy's service territories and the
Texas and Oklahoma Panhandle sale, also previously discussed.
Operating expenses, which include operating, maintenance and
general expenses, depreciation and amortization and taxes, other
than on income and revenues, were $46,947,000 for the three-month
period ended March 31, 1997, an increase of $9,285,000, compared
with $37,662,000 in 1996. The increase is primarily a result of
$5,430,000 in additional reserves for uncollectible accounts due
to significant increases in delinquent customer accounts re-
sulting from increases in the spot market prices of natural gas.
The increases in natural gas prices caused many customers to re-
ceive significantly higher winter heating bills. In addition,
the MPSC has encouraged Missouri Gas Energy to be more lenient in
its collection policies. As a result, delinquent receivable
balances have increased significantly, especially at Missouri Gas
Energy. Other increased expenses are attributable to several
matters including increased depreciation as a result of the
Missouri Gas Energy rate case effective as of February 1, 1997;
increased media advertising, travel and call center labor costs
to inform customers of the significant price spikes in natural
gas during the past winter heating season; increased professional
and legal fees to defend the Company against certain claims and
litigation; increased field and call center labor and other costs
to rectify certain customer billing errors discovered at Missouri
Gas Energy and other increased general operating costs as a
result of the severe January 1997 cold weather in Missouri.
Interest expense was $8,368,000 for the three-month period ended
March 31, 1997, a decrease of 7%, compared to $8,996,000 in 1996.
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 March 31, 1997 compared to the same
period in 1996. See "Debt" in the Notes to the Consolidated
Financial Statements for the quarter ended March 31, 1997.
Other income for the three-month period ended March 31, 1997 was
$5,944,000, compared with $2,221,000 in 1996. Other income in
in 1997 consisted of Incentive Purchased Gas Adjustments at
Missouri Gas Energy for $2,985,000, realized gains on the sale
of investment securities of $1,786,000, deferral of interest and
other expenses of $1,030,000 associated with the Missouri Gas
Energy Safety Program and net rental income from Lavaca Realty
Company (Lavaca Realty), the Company's real estate subsidiary,
of $370,000. The Incentive Purchased Gas Adjustment wass the
first incentive gas purchasing mechanism granted to a gas utility
in the State of Missouri and encourages Missouri Gas Energy to
negotiate the lowest possible gas supply contracts available. If
gas is acquired at a cost below a specified benchmark, both the
customers and the Company share in the savings. Other income in
1996 included the deferral of interest and other expenses associated
with the Missouri Gas Energy Safety Program for $1,385,000, certain
insurance and other claim refunds of $434,000 and the net rental
income from Lavaca Realty of $348,000.
For the three-month period ended March 31, 1997, federal and
state income taxes decreased $1,892,000, or 14%, over the same
period in 1996 due to lower pre-tax earnings as discussed above.
The Company's consolidated federal and state effective income tax
rate was 40% for both the three months ended March 31, 1997 and
1996.
The three-month period ended March 31 is generally the Company's
most profitable quarter. Because Missouri Gas Energy's rate
structure collects a greater percentage of its margin in the
winter heating season months, operating losses are expected
during the upcoming quarters ended June 30 and September 30,
1997.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months Ended March 31, 1997 and 1996
The Company recorded net earnings available for common stock of
$21,934,000 for the nine-month period ended March 31, 1997,
compared with net earnings of $23,697,000 for the same period in
1996. Earnings per share, based on weighted average common and
common share equivalents outstanding during the period, were
$1.24 in 1997 compared with earnings per share of $1.35 in 1996.
Operating revenues were $625,643,000 for the nine-month period
ended March 31, 1997, an increase of 19%, compared with operating
revenues of $526,195,000 in 1996. Gas purchase costs for the
nine-month period ended March 31, 1997 were $410,354,000, an
increase of 31%, compared with $312,885,000 in 1996. Both
operating revenues and gas purchase costs increased in the
nine-month period ended March 31, 1997 primarily due to a 29%
increase in the average cost of gas to $3.91 per Mcf in 1997
from $3.02 per Mcf in 1996 as a result of increases in average
spot market gas prices, previously discussed. Operating revenues
were also affected by a 14% increase in revenue-related taxes.
Additionally, operating revenues and gas purchase costs were
effected by a 1% increase in gas sales volume from 103,534 MMcf
in 1996 to 104,909 MMcf in 1997 and the revenue increase granted
Missouri Gas Energy effective as of February 1, 1997, previously
discussed. The increase in volumes is principally due to
growth in pipeline and marketing sales and improved sales
results in nontraditional markets which was partially offset
by warmer weather experienced during the nine-month period
ended March 31, 1997 compared with 1996 and a reduction in
volumes from the sale of certain operations on May 1, 1996,
previously discussed.
Missouri Gas Energy's service territories experienced weather
which was 102% of a 30-year measure for the nine months ended
March 31, 1997 compared with 105% in 1996. Weather for Southern
Union Gas service territories for the nine-month period ended
March 31, 1997 was 93% of a 30-year measure compared with 94% in
1996.
Net operating margin decreased 1% for the nine-month period ended
March 31, 1997 compared with the same period in 1996. Net
operating margin decreased primarily from the reduction in
volumes and related operating margin as a result of warmer
weather throughout the Company's service territories and the
Texas and Oklahoma Panhandle sale, previously discussed. Despite
warmer weather and the sale of these operations, overall volumes
increased 1% primarily from the addition of lower margin pipeline
and marketing volumes.
Operating expenses were $122,124,000 for the nine-month period
ended March 31, 1997, an increase of $7,273,000, compared with
$114,851,000 in 1996. The increase is primarily a result of
$5,963,000 in additional reserves for uncollectible accounts,
previously discussed. Additionally, operating expenses increased
as a result of additional depreciation due to the Missouri Gas
Energy rate case, costs associated with informing customers about
natural gas price increases, increased legal and professional fees,
costs associated with correction of certain billing discrepancies
and increased operating expenses incurred during the severe January
1997 cold weather in Missouri, all previously discussed.
Interest expense was $25,397,000 for the nine-month period ended
March 31, 1997, a decrease of 7%, compared with $27,300,000 in
1996. The decrease in interest expense is due to the repurchase
of Senior Notes from June 1995 through June 1996 which was par-
tially offset by an increase in interest expense from increased
borrowings under the various financing facilities, both previously
discussed. See "Debt" in the Notes to the Consolidated Financial
Statements for the quarter ended March 31, 1997.
Other income for the nine-month period ended March 31, 1997 was
$9,323,000 compared with $4,591,000 in 1996. Other income in 1997
included $4,281,000 related to the deferral of interest and other
expenses associated with the Missouri Gas Energy Safety Program,
$3,565,000 in Incentive Purchased Gas Adjustments, $3,281,000
related to the deferral of interest and other expenses associated
with the Missouri Gas Energy Safety Program, realized gains on the
sale of investment securities of $2,545,000 and net rental income
from Lavaca Realty of $1,068,000. This was partially offset by the
write-off of $1,150,000 of acquisition-related costs as a result
of termination of various acquisition activities and a $374,000
expense associated with the donation of emissions analysis equip-
ment and software to a Texas university. Other income in 1996
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
included $3,662,000 related to the deferral of interest and other
expenses associated with the Missouri Gas Energy Safety Program,
net rental income from Lavaca Realty of $1,037,000 and $434,000
related to certain insurance and other claim refunds. This 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 nine-month period ended March 31, 1997, federal and state
income taxes decreased $1,136,000 over the same period in 1996
due to reduced pre-tax earnings as discussed above which was
partially offset by an increase in the Company's consolidated
federal and state effective income tax rate from 39% in 1996 to
40% in 1997.
Twelve Months Ended March 31, 1997 and 1996
The Company recorded net earnings available for common stock of
$19,076,000 for the twelve-month period ended March 31, 1997 com-
pared with net earnings of $23,224,000 in 1996. Earnings per
share based on weighted average common and common share equiva-
lents outstanding during the period were $1.08 in 1997 compared
with earnings per share of $1.33 in 1996.
Operating revenues were $719,839,000 for the twelve-month period
ended March 31, 1997, an increase of 18%, compared with operating
revenues of $609,604,000 in 1996. Gas purchase costs for the
twelve-month period ended March 31, 1997 were $459,008,000, an
increase of 32%, compared with gas purchase costs of $348,516,000
in 1996. Both operating revenues and gas purchase costs increased
during the twelve-month period ended March 31, 1997 primarily from
a 33% increase in the average cost of gas from $2.88 per Mcf in
1996 to $3.83 per Mcf in 1997 as a result of increases in average
spot market gas prices, previously discussed. Operating revenues
were also affected by a 15% increase in revenue-related taxes.
These increases in operating revenues and gas purchase costs were
partially offset by a decrease in gas sales volume from 120,925
MMcf in 1996 to 119,821 MMcf in 1997. The decrease in sales
volume was due to warmer weather in certain service territories
during the twelve-month period ended March 31, 1997 and a
reduction in volumes from the sale of certain operations on
May 1, 1996, previously discussed.
Missouri Gas Energy's service territories experienced weather
that was 102% of the 30-year measure for the twelve-month period
ended March 31, 1997 compared with 107% in 1996. Weather for
Southern Union Gas service territories for the twelve-month
period ended March 31, 1997 was 97% of the 30-year measure com-
pared with 95% in 1996.
Net operating margin decreased 2% for the twelve-month period
ended March 31, 1997 compared with the same period in 1996. Net
operating margin decreased primarily from the reduction in
volumes and related operating margin as a result of the Texas and
Oklahoma Panhandle sale and reduced volumes due to warmer weather
in certain service territories during the twelve-month period
ended March 31, 1997, both previously discussed.
Operating expenses were $161,436,000 for the twelve-month period
ended March 31, 1997, an increase of 9%, compared with operating
expenses of $148,156,000 in 1996. The increase in operating
expenses is a result of $7,417,000 in additional reserves for
uncollectible accounts during the twelve-month period ended
March 31, 1997, previously discussed. Additionally, operating
expenses increased as a result of additional depreciation due to
the Missouri Gas Energy rate case, costs associated with informing
customers about natural gas price increases, increased legal and
professional fees, costs associated with correction of certain
billing discrepancies and increased operating expenses incurred
during the severe January 1997 cold weather in Missouri, all
previously discussed. Operating expenses were also impacted
by certain favorable non-recurring adjustments which reduced
various medical, pension and other employee benefit expenses
during the twelve-month period ended March 31, 1996.
Interest expense was $33,929,000 for the twelve-month period
ended March 31, 1997, a decrease of 8%, compared with $37,058,000
in 1996. The decrease in interest expense is the result of the
repurchase of outstanding Senior Notes from June 1995 through
June 1996 which was partially offset by interest expense from
increased borrowings
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
under the various financing facilities, both previously dis-
cussed. See "Debt" in the Notes to the Consolidated Financial
Statements for the quarter ended March 31, 1997.
Dividends on preferred securities of subsidiary trust were
$9,480,000 for the twelve-month period ended March 31, 1997,
compared with $8,269,000 in 1996. 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 Subsidi-
ary Trust" in the Notes to the Consolidated Financial Statements
for the quarter ended March 31, 1997.
Other income for the twelve-month period ended March 31, 1997 was
$16,059,000 compared with $5,592,000 in 1996. Other income for
the twelve-month period ended March 31, 1997 included $6,283,000
related to the deferral of interest and other expenses associated
with the Missouri Gas Energy Safety Program, $3,565,000 in Incen-
tive Purchased Gas Adjustments, realized gains on the sale of in-
vestment securities of $2,545,000, 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, and net rental income from Lavaca
Realty of $1,423,000. This was partially offset by the write-off
of $1,150,000 of acquisition-related costs and a $374,000 expense
associated with the donation of emissions analysis equipment and
software, previously discussed. Other income for the twelve-
month period ended March 31, 1996 included $4,565,000 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 $1,398,000. This was partially offset by esti-
mated costs of $500,000 to close Econofuel's Tech Center,
previously discussed.
For the twelve-month period ended March 31, 1997, federal and
state income taxes decreased $2,103,000 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 42% for the twelve-month period ended March 31, 1997
compared with 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 distribution, transportation, marketing and trans-
mission operations for the three- and twelve-month periods ended
March 31, 1997 and 1996:
Three Months Twelve Months
Ended March 31, Ended March 31,
1997(1) 1996(1) 1997(1) 1996(1)
--------- --------- --------- ---------
Average number of gas
sales customers
served:
Residential....... 872,757 873,093 861,244 864,982
Commercial........ 88,785 89,599 86,164 86,821
Industrial and
irrigation...... 650 721 618 691
Pipeline and
marketing....... 193 423 232 533
Public authorities
and other....... 2,644 2,883 2,689 2,799
-------- -------- -------- --------
Total average
customers
served...... 965,029 966,719 950,947 955,826
======== ======== ======== ========
Gas sales in millions
of cubic feet (MMcf)
Residential....... 34,581 35,263 69,601 68,621
Commercial........ 14,526 14,900 31,374 31,120
Industrial and
irrigation...... 588 694 2,301 2,348
Pipeline and
marketing....... 6,098 4,126 16,772 11,838
Public authorities
and other....... 1,375 1,314 2,791 3,193
-------- -------- -------- --------
Gas sales
billed...... 57,168 56,297 122,839 117,120
Net change in
unbilled gas
sales........... (4,472) (1,551) (3,018) 3,805
-------- -------- -------- --------
Total gas
sales....... 52,696 54,746 119,821 120,925
======== ======== ======== ========
Gas sales revenues
(thousands of
dollars):
Residential....... $216,794 $178,893 $452,357 $367,846
Commercial........ 89,824 74,736 181,518 146,333
Industrial and
irrigation...... 3,453 3,891 10,287 10,185
Pipeline and
marketing....... 18,211 9,241 46,313 24,993
Public authorities
and other....... 6,760 4,708 13,147 8,203
-------- -------- -------- --------
Gas sales
revenues
billed...... 335,042 271,469 703,622 557,560
Net change in
unbilled gas
sales revenues.. (31,463) (5,522) (13,406) 23,482
-------- -------- -------- --------
Total gas
sales
revenues.... $303,579 $265,947 $690,216 $581,042
======== ======== ======== ========
Gas sales margin
(thousands of
dollars)............ $ 87,585 $ 87,493 $231,208 $232,526
======== ======== ======== ========
Gas sales revenue per
thousand cubic feet
(Mcf) billed:
Residential....... $ 6.269 $ 5.073 $ 6.499 $ 5.361
Commercial........ 6.183 5.016 5.786 4.702
Industrial and
irrigation...... 5.876 5.607 4.471 4.338
Pipeline and
marketing....... 1.999 2.240 2.761 2.111
Public authorities
and other....... 4.915 3.583 4.711 2.569
Weather effect:
Degree days:
Southern Union Gas
service
territories..... 1,092 1,102 1,919 1,913
Missouri Gas
Energy service
territories..... 2,661 2,958 5,353 5,617
Percent of normal,
based on 30-year
measure:
Southern Union
Gas service
territories... 94% 93% 97% 95%
Missouri Gas
Energy service
territories... 95% 106% 102% 107%
Gas transported in
millions of cubic
feet (MMcf)......... 17,401 15,896 63,549 66,983
Gas transportation
revenues (thousands
of dollars)......... $ 6,779 $ 5,952 $ 20,949 $ 21,144
- --------------------
(1) Certain gas distribution operations in the Texas and
Oklahoma Panhandle 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 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 source of funds during the three-month period ended
March 31, 1997 included $9,784,000 from the sale of investment
securities and $35,755,000 in cash flow from operations. These
sources provided funds for additions to property, plant and
equipment of $11,443,000 and $40,400,000 in net repayments under
the Company's financing facilities.
The principal sources of funds during the nine-month period ended
March 31, 1997 included $5,394,000 in cash flow from operations,
$10,311,000 from the sale of investment securities and
$20,800,000 from the Company's revolving and uncommitted credit
facilities. These sources, along with beginning cash balance of
$2,887,000, provided funds for additions to property, plant and
equipment of $42,553,000, 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
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 March 31,
1997 and May 7, 1997 were $20,800,000 and nil, respectively.
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. On January 22, 1997
Missouri Gas Energy was notified by the MPSC of its decision to
grant a $8,847,000 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
March 31, 1997.
<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 May 15, 1997 By RONALD J. ENDRES
---------------- ----------------------------
Ronald J. Endres
Executive Vice President and
Chief Financial Officer
Date May 15, 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 Nine Months Twelve Months
Ended Ended Ended
March 31, March 31, March 31,
--------------- --------------- ---------------
1997 1996 1997 1996 1997 1996
------- ------- ------- ------- ------- -------
(in thousands of dollars,
except per share amounts)
Net earnings
available
for common
stock........ $17,678 $20,549 $21,934 $23,697 $19,076 $23,224
======= ======= ======= ======= ======= =======
Primary earn-
ings per
share:
Average
shares
out-
standing.. 17,080 17,028 17,055 16,976 17,049 16,965
Stock
options
and war-
rants
issued
or
granted... 655 586 670 486 670 454
------- ------- ------- ------- ------- -------
Average
shares
out-
standing.. 17,735 17,614 17,725 17,462 17,719 17,419
======= ======= ======= ======= ======= =======
Primary
earnings
per share. $ 1.00 $ 1.17 $ 1.24 $ 1.36 $ 1.08 $ 1.33
======= ======= ======= ======= ======= =======
Fully diluted
earnings per
share:
Average
shares
out-
standing.. 17,080 17,028 17,055 16,976 17,049 16,965
Stock
options
and war-
rants
issued
or
granted... 681 626 689 539 684 498
------- ------- ------- ------- ------- -------
Average
shares
out-
standing.. 17,761 17,654 17,744 17,515 17,733 17,463
======= ======= ======= ======= ======= =======
Fully diluted
earnings per
share....... $ 1.00 $ 1.16 $ 1.24 $ 1.35 $ 1.08 $ 1.33
======= ======= ======= ======= ======= =======
- --------------------
Note: All periods have been adjusted to reflect the five percent
stock dividends distributed on December 10, 1996 and
November 27, 1995 and the four-for-three stock split dis-
tributed in the form of a 33 1/3% stock dividend on
March 11, 1996, as applicable.
<TABLE> <S> <C>
<ARTICLE> UT
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1997
<PERIOD-TYPE> 9-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $ 760,054,000
<OTHER-PROPERTY-AND-INVEST> $ 15,393,000
<TOTAL-CURRENT-ASSETS> $ 144,576,000
<TOTAL-DEFERRED-CHARGES> $ 109,726,000
<OTHER-ASSETS> $ 2,397,000
<TOTAL-ASSETS> $1,032,146,000
<COMMON> $ 17,162,000
<CAPITAL-SURPLUS-PAID-IN> $ 225,201,000
<RETAINED-EARNINGS> $ 28,071,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> $ 270,193,000
$ 0
$ 100,000,000
<LONG-TERM-DEBT-NET> $ 385,856,000
<SHORT-TERM-NOTES> $ 20,800,000
<LONG-TERM-NOTES-PAYABLE> $ 0
<COMMERCIAL-PAPER-OBLIGATIONS> $ 0
<LONG-TERM-DEBT-CURRENT-PORT> $ 701,000
$ 0
<CAPITAL-LEASE-OBLIGATIONS> $ 0
<LEASES-CURRENT> $ 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> $ 254,355,000
<TOT-CAPITALIZATION-AND-LIAB> $1,032,146,000
<GROSS-OPERATING-REVENUE> $ 625,643,000
<INCOME-TAX-EXPENSE> $ 14,321,000
<OTHER-OPERATING-EXPENSES> $ 87,580,000
<TOTAL-OPERATING-EXPENSES> $ 122,124,000
<OPERATING-INCOME-LOSS> $ 59,439,000
<OTHER-INCOME-NET> $ 9,323,000
<INCOME-BEFORE-INTEREST-EXPEN> $ 47,331,000
<TOTAL-INTEREST-EXPENSE> $ 25,397,000
<NET-INCOME> $ 21,934,000
$ 0
<EARNINGS-AVAILABLE-FOR-COMM> $ 21,934,000
<COMMON-STOCK-DIVIDENDS> $ 0
<TOTAL-INTEREST-ON-BONDS> $ 0
<CASH-FLOW-OPERATIONS> $ 5,394,000
<EPS-PRIMARY> $ 1.24
<EPS-DILUTED> $ 1.24
</TABLE>
