<PAGE>
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
For the quarterly period ended
------------------------------
September 30, 1998
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 November 3, 1998 was 28,216,321.
=================================================================
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
September 30, 1998
Index
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements
Consolidated statements of operations -
three and twelve months ended
September 30, 1998 and 1997
Consolidated balance sheet -
September 30, 1998 and 1997 and June 30, 1998
Consolidated statement of stockholders' equity -
three months ended September 30, 1998 and
twelve months ended June 30, 1998
Consolidated statements of cash flows -
three and twelve months ended
September 30, 1998 and 1997
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 27 - Financial Data Schedule
(b) Reports on Form 8-K--None
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended September 30,
--------------------------------
1998 1997
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues............ $ 77,455 $ 74,039
Gas purchase costs............ 34,674 32,442
----------- -----------
Operating margin.......... 42,781 41,597
Revenue-related taxes......... 3,437 2,984
----------- -----------
Net operating margin 39,344 38,613
Operating expenses:
Operating, maintenance
and general............. 26,047 23,789
Depreciation and
amortization............ 10,418 9,598
Taxes, other than on
income and revenues..... 3,506 3,821
----------- -----------
Total operating
expenses.............. 39,971 37,208
----------- -----------
Net operating revenues.. (627) 1,405
----------- -----------
Other income (expenses):
Interest.................. (8,740) (8,450)
Dividends on preferred
securities of subsidiary
trust .................. (2,370) (2,370)
Other, net................ 724 1,769
----------- -----------
Total other expenses,
net................... (10,386) (9,051)
----------- -----------
Loss before income
taxes (benefit)....... (11,013) (7,646)
Federal and state income
taxes (benefit)............. (3,965) (2,737)
----------- -----------
Net loss attributable
to common stock............. $ (7,048) $ (4,909)
=========== ===========
Net loss per share:
Basic..................... $ (.25) $ (.18)
=========== ===========
Diluted................... $ (.25) $ (.18)
=========== ===========
Weighted average shares
outstanding:
Basic..................... 28,207,730 26,966,574
=========== ===========
Diluted................... 28,207,730 26,966,574
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Months Ended September 30,
1998 1997
----------- ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues............ $ 672,720 $ 710,239
Gas purchase costs............ 407,812 442,214
------------ ------------
Operating margin.......... 264,908 268,025
Revenue-related taxes 35,340 38,576
------------ ------------
Net operating margin...... 229,568 229,449
Operating expenses:
Operating, maintenance
and general............. 109,785 108,362
Depreciation and
amortization............ 39,257 35,939
Taxes, other than on
income and revenues..... 13,890 12,712
------------ ------------
Total operating
expenses............ 162,932 157,013
------------ ------------
Net operating
revenues............ 66,636 72,436
------------ ------------
Other income (expenses):
Interest.................. (35,174) (33,628)
Dividends on preferred
securities of
subsidiary trust........ (9,480) (9,480)
Write-off of regulatory
assets.................. (8,163) --
Other, net............... 3,027 2,915
------------ ------------
Total other
expenses, net...... (49,790) (40,193)
------------ ------------
Earnings before
income taxes....... 16,846 32,243
Federal and state income
taxes...................... 6,757 12,714
------------ ------------
Net earnings available
for common stock........... $ 10,089 $ 19,529
============ ============
Net earnings per share:
Basic.................... $ .36 $ .73
============ ============
Diluted.................. $ .35 $ .70
============ ============
Weighted average shares
outstanding:
Basic.................. 27,893,050 26,920,655
============ ============
Diluted................ 29,013,520 27,981,461
============ ============
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
September 30, June 30,
---------------------
1998 1997 1998
---------- ---------- ----------
(thousands of dollars)
Property, plant and equipment:
Plant in service........... $1,069,645 $ 983,275 $1,057,675
Construction work in
progress................. 8,872 9,911 7,783
---------- ---------- ----------
1,078,517 993,186 1,065,458
Less accumulated
depreciation and
amortization............. (364,876) (336,063) (355,430)
---------- ---------- ----------
713,641 657,123 710,028
Additional purchase cost
assigned to utility plant,
net...................... 137,360 130,845 138,381
---------- ---------- ----------
Net property, plant
and equipment............. 851,001 787,968 848,409
---------- ---------- ----------
Current assets:
Accounts receivable,
billed and unbilled...... 36,958 39,961 53,760
Inventories, principally
at average cost.......... 38,551 36,075 26,160
Deferred gas purchase
costs.................... 1,269 25,210 --
Prepayments and other...... 4,084 929 4,747
---------- ---------- ----------
Total current assets... 80,862 102,175 84,667
---------- ---------- ----------
Deferred charges............... 95,270 107,591 94,550
Investment securities.......... 5,000 -- 5,000
Real estate.................... 9,601 9,192 9,741
Other.......................... 5,246 1,823 5,397
---------- ---------- ----------
Total...................... $1,046,980 $1,008,749 $1,047,764
========== ========== ==========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
September 30, June 30,
----------------------
1998 1997 1998
---------- ---------- ----------
(thousands of dollars)
Common stockholders' equity:
Common stock, $1 par
value; authorized
50,000,000 shares;
issued chairs.......... $ 28,262 $ 17,174 $ 28,252
Premium on capital stock.. 252,568 225,267 252,638
Less treasury stock, at
cost.................... (794) (794) (794)
Retained earnings ........ 9,690 20,260 16,738
---------- ---------- ----------
Total common stockholders'
equity.................. 289,726 261,907 296,834
Company-obligated mandatorily
redeemable preferred
securities of subsidiary
trust holding solely sub-
ordinated notes of
Southern Union............ 100,000 100,000 100,000
Long-term debt and capital
lease obligation............ 412,475 392,921 406,407
---------- ---------- ----------
Total capitalization...... 802,201 754,828 803,241
Current liabilities:
Long-term debt and capital
lease obligation due
within one year......... 2,051 797 1,777
Notes payable............. 42,103 60,300 1,600
Accounts payable.......... 19,960 22,893 26,570
Federal, state and local
taxes................... 8,559 9,395 14,017
Accrued interest.......... 5,633 4,118 12,699
Customer deposits......... 17,650 16,713 17,686
Deferred gas purchase
costs................... -- -- 12,257
Other..................... 15,094 16,343 21,095
---------- ---------- ----------
Total current
liabilities......... 111,050 130,559 107,701
---------- ---------- ----------
Deferred credits and
other....................... 73,480 71,234 74,217
Accumulated deferred income
taxes....................... 60,249 52,128 62,605
Commitments and contingencies. -- -- --
---------- ---------- ----------
Total........................ $1,046,980 $1,008,749 $1,047,764
========== ========== ==========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Trea- Unrea-
Common Premium sury lized
Stock, on Stock, Holding
$1 Par Capital at Retained Gain
Value Stock Cost Earnings (Loss) Total
-------- -------- ------ -------- ------- --------
(thousands of dollars)
Balance
July 1,
1997.... $ 17,171 $225,252 $ (794)$ 25,169 $ 664 $267,462
Net
earn-
ings. -- -- -- 12,229 -- 12,229
5% stock
dividend. 856 19,802 -- (20,658) -- --
Three-
for-two
stock
split... 9,400 (9,400) -- (2) -- (2)
Issuance
of stock
for acqu-
isition.. 756 17,285 -- -- -- 18,041
Change in
unrealiz-
ed
holding
gain or
loss..... -- -- -- -- (664) (664)
Exercise
of stock
options.. 69 (301) -- -- -- (232)
-------- -------- ------ -------- ------ --------
Balance
June 30,
1998....... 28,252 252,638 (794) 16,738 -- 296,834
Net loss.. -- -- -- (7,048) -- (7,048)
Exercise
of stock
options.. 10 (70) -- -- -- (60)
-------- -------- ------ -------- ------ --------
Balance
Sept-
ember 30,
1998...... $ 28,262 $252,568 $ (794)$ 9,690 $ -- $289,726
======== ======== ====== ======== ====== ========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended September 30,
1998 1997
------------- --------------
(thousands of dollars)
Cash flows used in
operating activities:
Net loss.................. $ (7,048) $ (4,909)
Adjustments to reconcile
net loss to net cash
flows used in opera-
ting activities:
Depreciation and
amortization........ 10,418 9,598
Deferred income
taxes............... (2,355) (1,492)
Provision for bad
debts............... 111 350
Gain on sale of in-
vestment securi-
ties................ -- (1,088)
Deferred interest
expense............. (195) (277)
Other................. 372 198
Changes in assets
and liabilities,
net of acquisitions
and dispositions:
Accounts receiv-
able, billed
and unbilled..... 16,690 18,348
Accounts payable... (6,324) (10,053)
Taxes and other
liabilities...... (12,524) (13,026)
Customer
deposits......... (36) (501)
Deferred gas pur-
chase costs...... (13,527) (28,775)
Inventories........ (12,390) (14,407)
Other.............. 646 2,902
------------- --------------
Net cash flows used in
operating activities..... (26,162) (43,132)
------------- --------------
Cash flows from (used in)
investing activities:
Additions to property,
plant and equipment...... (14,235) (17,008)
Acquisition of opera-
tions, net of cash
received................. -- (745)
Increase in customer
advances................. 1,153 1,056
Decrease in deferred
charges and credits...... (2,266) (4,615)
Proceeds from sale of
investment securities.... -- 6,531
Other...................... 1,840 309
------------- --------------
Net cash flows used in
investing activities..... (13,508) (14,472)
------------- --------------
Cash flows from (used in)
financing activities:
Repayment of debt and
capital lease obliga-
tion..................... (483) (225)
Net borrowings under
revolving credit
facility................. 40,503 58,700
Change in cash overdraft... (285) (889)
Other...................... (65) 18
------------- --------------
Net cash flows from
financing activities..... 39,670 57,604
------------- --------------
Change 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............... $ 15,272 14,994
============= =============
Income taxes........... $ 100 $ --
============= ==============
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Twelve Months Ended September 30,
1998 1997
------------ --------------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings............... $ 10,089 $ 19,529
Adjustments to reconcile
net earnings to net
cash flows from operat-
ing activities:
Depreciation and
amortization......... 39,257 35,939
Deferred income taxes.. 5,500 4,319
Provision for bad
debts................. 5,222 10,533
Gain on sale of in-
vestment securities.. -- (3,633)
Write-off of regula-
tory assets.......... 8,163 --
Deferred interest
expense.............. (1,589) (2,449)
Other.................. 1,624 1,168
Changes in assets and
liabilities, net of
acquisitions and
dispositions:
Accounts receiv-
able, billed and
unbilled......... (1,526) (13,255)
Accounts payable... (3,337) (2,214)
Taxes and other
liabilities...... 648 (2,333)
Customer deposits.. 666 556
Deferred gas pur-
chase costs...... 23,941 (16,000)
Inventories........ (2,344) 7,318
Other.............. (1,087) 4,076
------------ --------------
Net cash flows from oper-
ating activities......... 85,227 43,554
------------ --------------
Cash flows from (used in)
investing activities:
Additions to property,
plant and equipment...... (74,245) (68,003)
Acquisition of operations,
net of cash received..... 7,247 (1,444)
Purchase of investment
securities............... (5,000) --
Increase in customer
advances................. 3,659 2,122
Increase (decrease) in
deferred charges and
credits.................. 563 (2,955)
Proceeds from sale of
investment securities.... -- 19,858
Other...................... 3,106 1,445
------------ --------------
Net cash flows used in
investing activities... (64,670) (48,977)
------------ --------------
Cash flows from (used in)
financing activities:
Repayment of debt and
capital lease
obligation............... (1,567) (679)
Net (payments) borrowings
under revolving credit
facility................. (18,197) 4,800
Change in cash overdraft... (341) 678
Other...................... (452) 624
------------ --------------
Net cash flows from
(used in) financing
activities............ (20,557) 5,423
------------ --------------
Change 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............... $ 34,275 $ 32,269
============ ==============
Income taxes........... $ 2,861 $ 5,371
============ ==============
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
afair 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, 1998. Certain prior period
amounts have been reclassified to conform with the current period
presentation.
ACQUISITIONS
Effective December 31, 1997, the Company acquired Atlantic
Utilities Corporation and Subsidiaries (Atlantic) for 755,650
pre-split shares of common stock valued at $18,041,000 and cash
of $4,436,000. Atlantic is operated as South Florida Natural
Gas, a natural gas division of Southern Union, and Atlantic Gas
Corporation, a propane subsidiary of the Company. Atlantic
currently serves 4,800 customers in central Florida. Atlantic's
results of operations have been included in the Company's
statements of consolidated operations and cash flows since
January 1, 1998. On the date of acquisition, Atlantic had
$11,683,000 of cash and cash equivalents. The acquisition was
accounted for using the purchase method. The additional purchase
cost assigned to utility plant of approximately $10,000,000
reflects the excess of the purchase price over the historical
book carrying value of the net assets acquired. The additional
purchase cost is amortized on a straight-line basis over forty
years.
WRITE-OFF OF REGULATORY ASSETS
Pursuant to a 1989 Missouri Public Service Commission (MPSC)
order, Missouri Gas Energy is engaged in a major gas safety
program. In connection with this program, the MPSC issued an
accounting authority order in 1994 which authorized Missouri Gas
Energy to defer carrying costs at a rate of 10.54%. The MPSC
rate order of January 22, 1997, however, retroactively reduced
the 10.54% carrying cost rate used since early 1994 to an
Allowance for Funds Used During Construction (AFUDC) rate
of approximately 6%. The Company filed an appeal of this portion
of the rate order in the Missouri State Court of Appeals, Western
District, and on August 18, 1998 was notified that the appeal was
denied. This resulted in a one-time non-cash write-off of
$5,942,000 of previously deferred costs as of June 30, 1998. See
Contingencies.
On August 21, 1998, Missouri Gas Energy was notified by the MPSC
of its decision to grant a $13,300,000 rate increase which, among
other things, disallowed certain previously recorded deferred
costs,requiring an additional pre-tax non-cash write-off of
$2,221,000. Though the Company has requested a rehearing on
significant portions of these disallowances, generally accepted
accounting principles required the Company to record this charge
to earnings, which Southern Union did as of June 30, 1998.
EARNINGS PER SHARE
During the three- and twelve-month periods ended September 30,
1998 and 1997, no adjustments were required in net earnings
available for common stock for the earnings per share
calculations. Average shares outstanding for basic earnings per
share were 28,207,730 and 26,966,574 for the three-month period
ended September 30, 1998 and 1997, respectively, and 27,893,050
and 26,920,655 for the twelve-month period ended September 30,
1998 and 1997, respectively. Diluted earnings per share includes
average shares outstanding as well as common stock equivalents
from stock options and warrants. Common stock equivalents
were nil for both three-month periods ended
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997, respectively, and 1,120,470 and
1,060,806 for the twelve-month period ended September 30, 1998
and 1997, respectively.
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
(Preferred 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 wSubordinated 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 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 unconditional guarantee by
Southern Union of payments due on the Preferred Securities. As
of September 30, 1998 and 1997, 4,000,000 shares of Preferred
Securities were outstanding.
DEBT AND CAPITAL LEASE
September 30, June 30,
1998 1998
------------- ----------
(thousands of dollars)
7.60% Senior notes
due 2024................ $ 384,515 $ 384,515
Other..................... 30,011 23,669
---------- ----------
Total debt and capital
lease................... 414,526 408,184
Less current portion.. (2,051) (1,777)
---------- ----------
Total long-term debt
and capital lease....... 412,475 $ 406,407
========== ==========
The Company has availability under two revolving credit
facilities (the "Revolving Credit Facilities") underwritten by a
syndicate of banks. Of the Revolving Credit Facilities,
$40,000,000 is a short-term facility which expires June 30, 1999,
while $60,000,000 is a long-term facility which expires June 30,
2001. The Company has additional availability under uncommitted
line of credit facilities (Uncommitted Facilities) with various
banks. Covenants under the Revolving Credit Facilities allow for
up to $35,000,000 of borrowings under Uncommitted Facilities at
any one time. Borrowings under these facilities are available
for Southern Union's working capital, letter of credit
requirements and other general corporate purposes. The amount
outstanding under these facilities at September 30, 1998 and
October 31, 1998 was $42,103,000 and $47,400,000, respectively.
Capital Lease The Company began installing an Automated Meter
- -------------
Reading (AMR) system at Missouri Gas Energy during fiscal year
1998 which was completed during the first quarter of fiscal year
1999. The installation of the AMR system involved an investment
of approximately $30,000,000 which is accounted for as a capital
lease obligation. During the three-month period ended
September 30, 1998, the Company recorded an increase in long-term
debt of $6,824,000. As of September 30, 1998, the capital lease
obligation outstanding was $28,144,000.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $2,900,000 at September 30, 1998. Missouri Gas Energy
is allowed to recover these costs from its customers through a
purchase gas adjustment mechanism which is filed with and
approved by the MPSC. 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, 1998 and 1997.
On May 21, 1998, Southern Union Gas filed with the Railroad
Commission of Texas (Commission) an appeal of the city of El
Paso's actions to reduce the Company's rates and require a one-
time cost of gas refund. In the de novo appeal, the City
proposed a $4,136,000 rate reduction and an $884,000 one-time
cost of gas refund. The Company requested a $1,964,000 rate
increase and a finding that no cost of gas refund is warranted.
After an administrative hearing, the hearing examiners issued
their Proposal for Decision in October, 1998 in which they
recommended that the Commission implement a $2,034,000 rate
reduction and an $884,000 one-time cost of gas refund. The
Company has filed extensive exceptions to the examiners' findings
and recommendations. The Commission will consider the examiners'
Proposal for Decision, exceptions filed relating to the Proposal,
and all other evidence in the record in rendering a decision
later in calendar year 1998.
YEAR 2000
Similar to all business entities, the Company will be impacted by
the inability of computer application software programs to
distinguish between the year 1900 and 2000 due to a commonly-used
programming convention. Unless such programs are modified or
replaced prior to 2000, calculations and interpretations based on
date-based arithmetic or logical operations performed by such
programs may be incorrect.
Management's plan addressing the impact of the Year 2000 issue on
the Company focuses on the following areas: application systems,
process control systems (embedded chips), technology
infrastructure, physical infrastructure, and third party business
partners and suppliers with which the Company has significant
relationships. Management's analysis and review of these areas
is comprised primarily of five phases: developing an inventory of
hardware, software and embedded chips; assessing the degree to
which each area is currently in compliance with Year 2000
requirements; performing renovations and repairs as needed to
attain compliance; testing to ensure compliance; and developing a
contingency plan if repair and renovation efforts are either
unsuccessful or untimely.
Management has substantially completed the inventory and
assessment phases regarding application systems, process control
systems and technology infrastructure, and is performing
renovations, repairs and testing of the former two categories.
The review of physical infrastructure and business partners, gas
transporters and suppliers is in the inventory stage. While the
Company anticipates that any additional inventory and assessment
efforts will be completed by the end of calendar year 1998,
renovation, repair and testing of affected areas will continue
through calendar year 1999. Costs incurred to date have
primarily consisted of labor from the redeployment of existing
information technology, legal and operational resources. The
Company expects to spend approximately $3,000,000 for these Year
2000 compliance efforts. To the extent that such costs are
incurred in Year 2000 compliance efforts, the Company will
attempt recovery for such costs through regulatory relief.
In addition to the activities described above, the Company is
currently replacing some of its financial and operating software
programs with new programs that will be Year 2000 compliant.
These new programs have significantly reduced the costs the
Company expects to incur to become Year 2000 compliant. However,
the Company has formed a contingency team to develop a work plan
in the event that such programs are not fully operational by the
end of calendar year 1999. The costs associated with this effort
are being evaluated and cannot yet be determined. Although the
Company does not presently anticipate a material business
interruption as a result of the Year 2000, the worst case
scenario if all of the Company's Year 2000 efforts failed,
including the failure of third party providers to deliver
services,
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
could result in daily lost revenues of approximately $3,200,000.
This estimate is based on historical revenues recognized in the
month of January.
CONTINGENCIES
Southern Union and Western Resources entered into an
Environmental 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 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 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 former service
territories, principally in Arizona and New Mexico, and present
service territories 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.
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 Missouri Gas Energy to defer depreciation expenses,
property taxes and carrying costs at a rate of 10.54% on the
costs incurred in the Missouri Safety Program. This AAO was
consistent with those which were issued by the MPSC from 1990
through 1993 to the predecessor owner of Missouri Gas Energy.
The MPSC rate order of January 22, 1997, however, retroactively
reduced the carrying cost rate applied by the Company on the
expenditures incurred on the Missouri Safety Program since early
1994 to an Allowance for Funds Used During Construction (AFUDC)
rate of approximately 6%. The Company filed an appeal of that
portion of the rate order in the Missouri State Court of Appeals,
Western District. On August 18, 1998, the Missouri State Court
of Appeals denied the Company's appeal resulting in a one-time
non-cash write-off of $5,942,000 of previously recorded deferred
costs which was recorded during fiscal year 1998. The Company
believes that the inconsistent treatment by the MPSC in subse-
quently changing to the AFUDC rate from the previously ordered
rate of 10.54% constitutes retroactive ratemaking. Unfortunate-
ly, the decision by the Missouri State Court of Appeals failed to
address certain specific language within the 1994 AAO that the
Company believed prevented the MPSC from retroactively changing
the carrying cost rate. Southern Union is seeking a transfer of
the case to the Missouri Supreme Court; however, the likelihood
of transfer is uncertain.
On August 18, 1998, a jury in Edinburg, Texas concluded
deliberations on the City of Edinburg's franchise fee lawsuit
against Valero Energy Corporation (Valero) and a number of its
subsidiaries, as well as former Valero subsidiary Rio Grande
Valley Gas Company (RGV) and RGV's successor company, Southern
Union Company. The case, based upon
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
events that occurred between 1985-1987, centers on specific
contractual language in the 1985 franchise agreement between RGV
and the City of Edinburg. Southern Union purchased RGV from
Valero in October 1993. The jury awarded the plaintiff damages,
under several largely overlapping but mutually exclusive claims,
totaling approximately $13,000,000. The actual amount and
appropriate allocation of the surviving portions of the damage
awards will not be determined until further proceedings are
completed, including the trial judge's decision on post-trial
motions. The Company is pursuing having the jury's verdict
overturned or reduced by the trial judge, and if necessary will
vigorously pursue a reversal on appeal. The Company believes it
will ultimately prevail and thus has not provided for any loss
relative to this matter in its financial statements.
Furthermore, the Company has not determined what impact, if any,
this jury decision may have on other city franchises in Texas.
Southern Union and its subsidiaries are parties to other legal
proceedings that management considers to be normal actions to
which an enterprise of its size and nature might be subject, and
not to be material to the Company's overall business or financial
condition, results of operations or cash flows.
<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 three divisions:
Southern Union Gas, Missouri Gas Energy (MGE) and Atlantic
Utilities doing business as South Florida Natural Gas (SFNG). 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 operate
natural gas pipeline systems, market natural gas to end-users and
distribute propane. 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 subsidiaries 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
Company's business is affected by seasonal weather impacts,
competitive factors within the energy industry and economic
development and residential growth in its service areas.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
- ----------------------------------------------
The Company recorded a net loss attributable to common stock of
$7,048,000 for the three-month period ended September 30, 1998
compared to a net loss of $4,909,000 for the three-month period
ended September 30, 1997. Net loss per common share, based on
weighted average shares outstanding during the period, was $.25
in 1998 compared with a net loss per common share of $.18 in
1997. Weighted average shares outstanding increased 5% in 1998
due to the issuance of 755,650 pre-split shares of the Company's
common stock on December 31, 1997 in connection with the
acquisition of Atlantic Utilities Corporation and Subsidiaries
(Atlantic Utilities) in Florida. 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 $77,455,000 for the three-month period
ended September 30, 1998, compared with operating revenues of
$74,039,000 in 1997. Gas purchase costs for the three-month
period ended September 30, 1998 were $34,674,000, compared with
$32,442,000 in 1997. 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 increase in both operating revenues and gas
purchase costs between periods was primarily due to a 2% increase
in gas sales volumes to 12,151 MMcf in 1998 from 11,909 MMcf in
1997, as well as an increase in the average cost of gas from
$2.69 per Mcf in 1997 to $2.80 per Mcf in 1998. Changes in the
average cost of gas result from seasonal impacts on demands for
natural gas and the ensuing competitive pricing within the
industry.
Net operating margin (operating margin less revenue-related
taxes) increased $731,000 for the three-month period ended
September 30, 1998 compared with the same period in 1997. Net
operating margin increased due to a $13,300,000 annual increase
to revenues in the Missouri service territories granted by the
Missouri Public Service Commission (MPSC) effective as of
September 2, 1998 as well as the increased gas sales volumes
discussed above. Additionally, net operating margin increased
$368,000 for the three-month period ended September 30, 1998
compared with the same period in 1997 due to the acquisition of
Atlantic Utilities, which was effective as of December 31, 1997.
Operating expenses, which include operating, maintenance and
general expenses, depreciation and amortization, and taxes other
than on income and revenues, were $39,971,000 for the three-
month period ended September 30, 1998, an increase of $2,763,000,
compared with $37,208,000 in 1997. The increase is primarily a
result of an
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increase in depreciation and amortization as a result of
including certain costs into rate base that were previously
deferred and an increase in reserves for various litigation
claims and settlements.
Interest expense was $8,740,000 for the three-month period ended
September 30, 1998, compared to $8,450,000 in 1997. Interest
expense increased in 1998 primarily due to MGE's capital
lease obligation incurred for the installation of an Automated
Meter Reading (AMR) system. See "Debt and Capital Lease" in the
Notes to the Consolidated Financial Statements included herein.
Other income for the three-month period ended September 30, 1998
was $724,000 compared to $1,769,000 in 1997. Other income for
the three-month period ended September 30, 1998 consists of
$340,000 in net rental income from Lavaca Realty Company ("Lavaca
Realty"), the Company's real estate subsidiary, and $195,000
related to the deferral of interest and other expenses associated
with the Missouri Gas Energy Safety Program. Other income for
1997 included $1,088,000 in realized gains on the sale of
investment securities, $277,000 related to the deferral of
interest and other expenses associated with the Missouri Gas
Energy Safety Program, and net rental income from Lavaca Realty
of $266,000.
For the three-month period ended September 30, 1998, the federal
and state income tax benefit increased $1,228,000, over the same
period in 1997 due primarily to an increase in the pre-tax loss
described above. The effective tax rate was 36% in both 1997 and
1998.
Twelve Months Ended September 30, 1998 and 1997
- -----------------------------------------------
The Company recorded net earnings available for common stock of
$10,089,000 for the twelve-month period ended September 30, 1998
compared with net earnings of $19,529,000 in 1997. Earnings per
diluted share were $.35 in 1998 compared with earnings per
diluted share of $.70 in 1997. Weighted average common and
common share equivalents increased 4% during the twelve-month
period ended September 30, 1998 compared with 1997 due to the
issuance of common stock for the acquisition of Atlantic
Utilities, previously discussed.
Operating revenues were $672,720,000 for the twelve-month period
ended September 30, 1998, a decrease of 5%, compared with
operating revenues of $710,239,000 in 1997. Gas purchase costs
for the twelve-month period ended September 30, 1998 were
$407,812,000, a decrease of 8%, compared with gas purchase costs
of $442,214,000 in 1997. Both operating revenues and gas
purchase costs were primarily impacted by a 4% decrease in gas
sales volume from 120,470 MMcf in 1997 to 115,524 MMcf in 1998.
The decrease in sales volume was primarily due to significantly
warmer weather in the Missouri service areas during the twelve-
month period ended September 30, 1998. Also contributing to the
decrease in operating revenues and gas purchase costs was a 4%
decrease in the average cost of gas to $3.50 per Mcf in 1998 from
$3.66 per Mcf in 1997 as a result of decreases in average spot
market gas prices. Operating revenues were affected by an 8%
decrease in revenue-related taxes, as well as an $8,847,000
annual increase to rates granted to Missouri Gas Energy,
effective as of February 1, 1997.
Missouri Gas Energy service territories experienced weather which
was 90% of a 30-year measure for the twelve-month period ended
September 30, 1998 compared with 104% in 1997. Weather for
Southern Union Gas service territories for the twelve-month
period ended September 30, 1998 was 98% of a 30-year measure
compared with 92% in 1997. About half of the customers served by
Southern Union Gas are weather normalized.
Operating expenses were $162,932,000 for the twelve-month period
ended September 30, 1998, an increase of 4%, compared with
operating expenses of $157,013,000 in 1997. The increase is
primarily a result of a $3,318,000 increase in depreciation and
amortization and a $1,178,000 increase in taxes, other than on
income and revenues, as a result of including certain costs into
rate base that were previously deferred. Additionally contri-
buting to this variance was an increase in various legal claims
and assessments which was partially offset by a reduction in bad
debt expense.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense was $35,174,000 for the twelve-month period
ended September 30, 1998 compared to $33,628,000 in 1997. The
increase in interest expense is due to increased borrowings under
the various financing facilities as well as an increase in long
term debt from the AMR capital lease, previously discussed. See
"Debt and Capital Lease" in the Notes to the Consolidated
Financial Statements for the period ended September 30, 1998
included herein.
During fiscal year 1998, the Company was impacted by pre-tax non-
cash write-offs totaling $8,163,000 of previously recorded
regulatory assets. On August 18, 1998, the Missouri Court of
Appeals denied the previously disclosed appeal by the Company of
the MPSC's January 1997 Rate Order granted to MGE. Because of
this decision, the Company recorded a one-time non-cash write-off
of $5,942,000 of deferred costs recorded since 1994. On August
21, 1998, the MPSC also granted MGE a rate increase which, among
other things, disallowed certain previously recorded deferred
costs requiring an additional pre-tax non-cash write-off of
$2,221,000. See "Write-Off of Regulatory Assets" and
"Contingencies" in the Notes to the Consolidated Financial
Statements for the period ended September 30, 1998 included
herein.
Other income for the twelve-month period ended September 30, 1998
was $3,027,000 compared to $2,915,000 in 1997. Other income for
the twelve-month period ended September 30, 1998 included:
$1,589,000 in deferral of interest and other expenses associated
with the MGE Safety Program; and net rental income of Lavaca
Realty of $1,193,000. 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 $2,449,000; 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.
For the twelve-month period ended September 30, 1998, federal and
state income taxes decreased $5,957,000 over the same period in
1997 due to a reduction in pre-tax earnings as discussed above.
The Company's consolidated federal and state effective income tax
rate was 40% for the twelve-month period ended September 30, 1998
compared to 39% in 1997.
<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 domestic gas utility operations for the three- and
twelve-month periods ended September 30, 1998 and 1997:
Three Months Ended Twelve Months Ended
September 30, September 30,
1998 1997 1998 1997
--------- --------- --------- ---------
Average number of gas
sales customers
served:
Residential........... 880,018 864,408 885,363 868,407
Commercial............ 85,953 84,073 88,152 86,221
Industrial and
irrigation........... 578 570 565 580
Public authorities and
other................ 2,801 2,653 2,792 2,694
Pipeline and
marketing............ 229 225 232 202
--------- --------- --------- --------
Total average
customers served.. 969,579 951,929 977,104 958,104
========= ========= ========= ========
Gas sales in millions
of cubic feet (MMcf)
Residential........... 4,590 4,846 64,129 68,229
Commercial............ 2,738 2,850 28,119 30,518
Industrial and
irrigation........... 414 366 1,656 1,865
Public authorities and
other................ 233 245 2,740 2,767
Pipeline and
marketing............ 3,960 3,387 18,925 17,844
--------- --------- --------- --------
Gas sales billed.. 11,935 11,694 115,569 121,223
Net change in unbilled
gas sales............ 216 215 (45) (753)
--------- --------- --------- ---------
Total gas sales... 12,151 11,909 115,524 120,470
========= ========= ========= =========
Gas sales revenues
(thousands of dollars):
Residential........... $ 41,591 $ 40,096 $ 409,245 $ 434,865
Commercial............ 15,302 14,657 159,828 173,467
Industrial and
irrigation........... 1,689 1,640 7,796 9,355
Public authorities
and other........... 936 1,078 11,141 13,168
Pipeline and
marketing........... 9,427 7,986 46,403 46,577
--------- --------- --------- ---------
Gas revenues
billed............ 68,945 65,457 634,414 677,432
Net change in unbill-
ed gas sales reven-
ues................. 1,242 2,215 195 (3,825)
--------- --------- --------- ---------
Total gas sales
revenues.......... $ 70,187 $ 67,672 $ 634,609 $ 673,607
========= ========= ========= =========
Gas sales margin
(thousands of
dollars).............. $ 32,672 $ 32,601 $ 194,899 $ 194,119
========= ========= ========= =========
Gas sales revenue per
thousand cubic feet
(Mcf) billed:
Residential.......... $ 9.062 $ 8.274 $ 6.382 $ 6.374
Commercial........... 5.590 5.143 5.684 5.684
Industrial and
irrigation.......... 4.076 4.481 4.708 5.016
Public authorities
and other........... 4.011 4.400 4.066 4.759
Pipeline and
marketing........... 2.381 2.358 2.452 2.610
Weather:
Degree days:
Southern Union Gas
service
territories........ 0 1 2,119 1,956
Missouri Gas Energy
service territor-
ies................ 8 23 4,708 5,443
30-year measure:
Southern Union Gas
service territor-
ies................ 5 5 2,152 2,127
Missouri Gas Energy
service territor-
ies................ 59 59 5,218 5,246
Gas transported in mil-
lions of cubic feet
(MMcf)................ 14,655 15,562 58,247 63,867
Gas transportation
revenues (thousands
of dollars)........... $ 3,776 $ 3,834 $ 19,591 $ 21,174
- --------------------
The above information does not include the Company's 42% equity
ownership in a natural gas distribution company serving 17,800
customers in Piedras Negras, Mexico.
<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
seasonality 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 credit
facilities to provide funding for its seasonal working capital,
continuing construction and maintenance programs and operational
requirements.
The principal source of funds during the three-month period ended
September 30, 1998 was $40,503,000 borrowed under the credit
facilities. This provided funds for additions to property, plant
and equipment of $14,235,000, operating outflows of $26,162,000
and other seasonal working capital needs of the Company.
The effective interest rate under the Company's current debt
structure is 7.71% (including interest and the amortization of
debt issuance costs and redemption premiums on refinanced debt).
The Company has availability under two revolving credit
facilities (the "Revolving Credit Facilities") underwritten by a
syndicate of banks. Of the Revolving Credit Facilities,
$40,000,000 is a short-term facility which expires June 30, 1999,
while $60,000,000 is a long-term facility which expires June 30,
2001. The Company had additional availability under uncommitted
line of credit facilities (Uncommitted Facilities) with various
banks. Covenants under the Revolving Credit Facilities allow for
up to $35,000,000 of borrowings under Uncommitted Facilities at
any one time. Borrowings under the facilities 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, 1998 and October 31, 1998 were
$42,103,000 and $47,400,000, 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, 1998 By RONALD J. ENDRES
--------------------- ---------------------------------
Ronald J. Endres
Executive Vice President and
Chief Financial Officer
Date November 10, 1998 By DAVID J. KVAPIL
--------------------- ---------------------------------
David J. Kvapil
Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT 27
FINANCIAL DATE SCHEDULE
<PAGE>
FINANCIAL DATA SCHEDULE
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<PERIOD-END> SEP-30-1998
<PERIOD-TYPE> 3-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $ 851,001,000
<OTHER-PROPERTY-AND-INVEST> $ 14,601,000
<TOTAL-CURRENT-ASSETS> $ 80,862,000
<TOTAL-DEFERRED-CHARGES> $ 95,270,000
<OTHER-ASSETS> $ 5,246,000
<TOTAL-ASSETS> $1,046,980,000
<COMMON> $ 28,262,000
<CAPITAL-SURPLUS-PAID-IN> $ 252,568,000
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<TOTAL-COMMON-STOCKHOLDERS-EQ> $ 289,726,000
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$ 100,000,000
<LONG-TERM-DEBT-NET> $ 412,475,000
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<OTHER-ITEMS-CAPITAL-AND-LIAB> $ 200,625,000
<TOT-CAPITALIZATION-AND-LIAB> $1,046,980,000
<GROSS-OPERATING-REVENUE> $ 77,455,000
<INCOME-TAX-EXPENSE> $ (3,965,000)
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<TOTAL-OPERATING-EXPENSES> $ 39,971,000
<OPERATING-INCOME-LOSS> $ (627,000)
<OTHER-INCOME-NET> $ 724,000
<INCOME-BEFORE-INTEREST-EXPEN> $ 1,692,000
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<NET-INCOME> $ (7,048,000)
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<EARNINGS-AVAILABLE-FOR-COMM> $ (7,048,000)
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