<PAGE>
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------
FORM 10-Q
For the quarterly period ended
------------------------------
March 31, 1999
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 April 30, 1999 was 29,692,749.
=================================================================
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
March 31, 1999
Index
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements
Consolidated statements of operations -
three, nine and twelve months ended
March 31, 1999 and 1998
Consolidated balance sheet - March 31,
1999 and 1998 and June 30, 1998
Consolidated statement of stockholders'
equity - nine months ended March 31,
1999 and twelve months ended June 30,
1998
Consolidated statements of cash flows -
three, nine and twelve months ended
March 31, 1999 and 1998
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 Consoli-
dated 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 March 31,
----------------------------
1999 1998
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues............... $ 251,863 $ 265,176
Gas purchase costs............... 153,757 170,500
----------- -----------
Operating margin.............. 98,106 94,676
Revenue-related taxes............ 14,487 15,240
----------- -----------
Net operating margin.......... 83,619 79,436
Operating expenses:
Operating, maintenance and
general.................... 28,655 29,143
Depreciation and amortization. 10,535 9,775
Taxes, other than on income
and revenues............... 3,782 3,578
----------- -----------
Total operating expenses... 42,972 42,496
----------- -----------
Net operating revenues..... 40,647 36,940
----------- -----------
Other income (expenses):
Interest...................... (8,962) (8,970)
Dividends on preferred securi-
ties of subsidiary trust... (2,370) (2,370)
Other, net.................... (252) 1,257
----------- -----------
Total other expenses, net.. (11,584) (10,083)
----------- -----------
Earnings before income
taxes................... 29,063 26,857
Federal and state income taxes... 11,439 10,608
----------- -----------
Net earnings available for
common stock.................. $ 17,624 $ 16,249
=========== ===========
Net earnings per share:
Basic......................... $ .59 $ .55
=========== ===========
Diluted....................... $ .57 $ .53
=========== ===========
Weighted average shares
outstanding:
Basic...................... 29,686,041 29,595,655
=========== ===========
Diluted.................... 31,071,277 30,657,152
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended March 31,
---------------------------
1999 1998
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues................ $ 503,543 $ 560,377
Gas purchase costs................ 292,370 346,775
----------- -----------
Operating margin............... 211,173 213,602
Revenue-related taxes............. 27,169 29,873
----------- -----------
Net operating margin........... 184,004 183,729
Operating expenses:
Operating, maintenance and
general..................... 81,776 79,602
Depreciation and amortization.. 31,449 28,923
Taxes, other than on income
and revenues................ 10,774 10,331
----------- -----------
Total operating expenses.... 123,999 118,856
----------- -----------
Net operating revenues...... 60,005 64,873
----------- -----------
Other income (expenses):
Interest....................... (26,843) (26,544)
Dividends on preferred securi-
ties of subsidiary trust.... (7,110) (7,110)
Other, net..................... 311 3,619
----------- -----------
Total other expenses, net... (33,642) (30,035)
----------- -----------
Earnings before income
taxes.................... 26,363 34,838
Federal and state income taxes.... 10,413 13,761
----------- -----------
Net earnings available for common
stock.......................... $ 15,950 $ 21,077
=========== ===========
Net earnings per share:
Basic.......................... $ .54 $ .73
=========== ===========
Diluted........................ $ .51 $ .71
=========== ===========
Weighted average shares
outstanding:
Basic....................... 29,647,698 28,743,424
=========== ===========
Diluted..................... 31,020,308 29,844,444
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Months Ended March 31,
-----------------------------
1999 1998
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues................ $ 612,469 $ 648,200
Gas purchase costs................ 351,174 385,609
----------- -----------
Operating margin............... 261,295 262,591
Revenue-related taxes............. 32,183 35,649
----------- -----------
Net operating margin........... 229,112 226,942
Operating expenses:
Operating, maintenance and
general..................... 109,701 101,910
Depreciation and amortization.. 40,963 37,986
Taxes, other than on income
and revenues................ 14,649 13,706
----------- -----------
Total operating expenses.... 165,313 153,602
----------- -----------
Net operating revenues...... 63,799 73,340
----------- -----------
Other income (expenses):
Interest....................... (35,182) (34,613)
Dividends on preferred securi-
ties of subsidiary trust.... (9,480) (9,480)
Write-off of regulatory assets. (8,163) --
Other, net..................... 763 741
----------- -----------
Total other expenses, net... (52,062) (43,352)
----------- -----------
Earnings before income
taxes.................... 11,737 29,988
Federal and state income taxes.... 4,636 11,814
----------- -----------
Net earnings available for common
stock.......................... $ 7,101 $ 18,174
=========== ===========
Net earnings per share:
Basic.......................... $ .24 $ .63
=========== ===========
Diluted........................ $ .23 $ .61
=========== ===========
Weighted average shares
outstanding:
Basic....................... 29,637,869 28,635,171
=========== ===========
Diluted..................... 30,953,086 29,734,581
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
March 31, June 30,
------------------------
1999 1998 1998
----------- ----------- -----------
(unaudited)
(thousands of dollars)
Property, plant and
equipment:
Plant in service..... $1,093,881 $1,033,862 $1,057,675
Construction work in
progress........... 13,199 8,064 7,783
---------- ---------- ----------
1,107,080 1,041,926 1,065,458
Less accumulated de-
preciation and
amortization....... (376,629) (351,084) (355,430)
---------- ---------- ----------
730,451 690,842 710,028
Additional purchase
cost assigned to
utility plant, net. 135,317 136,965 138,381
---------- ---------- ----------
Net property, plant
and equipment...... 865,768 827,807 848,409
---------- ---------- ----------
Current assets:
Cash and cash equiva-
lents................ -- 265 --
Accounts receivable,
billed and unbilled.. 101,553 118,828 53,760
Inventories, princi-
pally at average
cost................. 25,716 17,643 26,160
Prepayments and other.. 2,179 1,613 4,747
---------- ---------- ----------
Total current assets. 129,448 138,349 84,667
Deferred charges......... 90,218 103,698 94,550
Investment securities.... 10,000 5,000 5,000
Real estate.............. 9,438 9,762 9,741
Other.................... 7,953 5,321 5,397
---------- ---------- ----------
Total.................. $1,112,825 $1,089,937 $1,047,764
========== ========== ==========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
March 31, June 30,
------------------------
1999 1998 1998
----------- ----------- -----------
(unaudited)
(thousands of dollars)
Common stockholders'
equity:
Common stock, $1 par
Value; authorized
50,000,000 shares;
issued 29,741,197
shares............. $ 29,741 $ 18,848 $ 28,252
Premium on capital
stock.............. 260,167 261,995 252,638
Less treasury stock,
at cost............ (794) (794) (794)
Retained earnings.... 23,790 25,588 16,738
---------- ---------- ----------
Total common stock-
holders' equity.... 312,904 305,637 296,834
Company-obligated manda-
torily redeemable pre-
ferred securities of
subsidiary trust
holding solely subor-
dinated notes of
Southern Union......... 100,000 100,000 100,000
Long-term debt and capi-
tal lease obligation... 411,460 398,217 406,407
---------- ---------- ----------
Total capitalization... 824,364 803,854 803,241
Current liabilities:
Long-term debt and
capital lease obli-
gation due within
one year............. 2,033 1,367 1,777
Notes payable.......... 18,603 17,000 1,600
Accounts payable....... 49,917 61,515 26,570
Federal, state and
local taxes.......... 28,448 29,890 14,017
Accrued interest....... 5,256 5,190 12,699
Customer deposits...... 18,352 17,914 17,686
Deferred gas purchase
costs................ 14,968 2,191 12,257
Other.................. 16,642 21,714 21,095
---------- ---------- ----------
Total current
liabilities........ 154,219 156,781 107,701
---------- ---------- ----------
Deferred credits and
other.................. 71,763 71,989 74,217
Accumulated deferred
income taxes........... 62,479 57,313 62,605
Commitments and con-
tingencies............. -- -- --
---------- ---------- ----------
Total.................. $1,112,825 $1,089,937 $1,047,764
========== ========== ==========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unrea-
Common Premium Trea- lized
Stock, on sury Holding
$1 Par Capital Stock, Retained Gain
Value Stock at Cost Earnings (Loss) Total
------- -------- ------- -------- ------- --------
(thousands of dollars)
Balance
July 1,
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 ac-
quisi-
tion..... 756 17,285 -- -- -- 18,041
Unrealized
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 earn-
ings..... -- -- -- 15,950 -- 15,950
5% stock
dividend. 1,411 7,483 -- (8,898) -- (4)
Exercise
of stock
options.. 78 46 -- -- -- 124
------- -------- ------ -------- ------ --------
Balance
March 31,
1999...... $29,741 $260,167 $ (794) $ 23,790 $ -- $312,904
======= ======== ====== ======== ====== ========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
----------------------------
1999 1998
------------ ------------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings.................... $ 17,624 $ 16,249
Adjustments to reconcile net
earnings to net cash flows from
operating activities:
Depreciation and amortization. 10,535 9,775
Deferred income taxes......... 1,133 1,332
Provision for bad debts....... 1,192 2,259
Deferral and amortization of
interest and other expenses.. 153 (574)
Other......................... 358 259
Changes in assets and liabili-
ties, net of acquisitions
and dispositions:
Accounts receivable, billed
and unbilled............... (980) 13,411
Accounts payable............ 1,429 (10,766)
Taxes and other liabilities. 6,714 1,812
Customer deposits........... (311) 394
Deferred gas purchase costs. 10,554 31,155
Inventories................. 10,718 20,201
Other....................... 725 3,090
Net cash flow from operating
activities................... 59,844 88,597
Cash flows used in investing
activities:
Additions to property, plant
and equipment.................. (15,433) (12,653)
Acquisition of operations, net
of cash received............... -- 7,247
Purchase of investment
securities..................... (5,000) --
Increase (decrease) in customer
advances....................... (98) 567
Increase (decrease) in deferred
charges and credits............ (1,024) 555
Other........................... (233) (793)
----------- -----------
Net cash flows used in
investing activities.......... (21,788) (5,077)
----------- -----------
Cash flows used in financing
activities:
Repayment of debt and capital
lease obligation............... (477) (341)
Net payments under revolving
credit facility................ (31,400) (76,800)
Decrease in cash overdrafts..... (6,250) (6,122)
Other........................... 71 8
----------- -----------
Net cash flows used in
financing activities.......... (38,056) (83,255)
----------- -----------
Change in cash and cash
equivalents...................... -- 265
Cash and cash equivalents at
beginning of period.............. -- --
----------- -----------
Cash and cash equivalents at end
of period........................ $ -- $ 265
=========== ===========
Supplemental disclosures of cash
flow information:
Cash paid during the period
for:
Interest...................... $ 15,654 $ 15,744
=========== ============
Income taxes.................. $ 1 $ 325
=========== ============
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended March 31,
---------------------------
1999 1998
------------ ------------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings.................... $ 15,950 $ 21,077
Adjustments to reconcile net
earnings to net cash flows
from operating activities:
Depreciation and amortization. 31,449 28,923
Deferred income taxes......... (127) 1,071
Provision for bad debts....... 2,371 4,311
Deferral and amortization of
interest and other expenses.. 517 (1,246)
Gain on sale of investment
securities................... -- (1,088)
Other......................... 1,069 759
Changes in assets and liabil-
ities, net of acquisitions
and dispositions:
Accounts receivable, billed
and unbilled............... (50,165) (63,787)
Accounts payable............ 23,368 27,739
Taxes and other liabilities. 6,989 8,511
Customer deposits........... 665 429
Deferred gas purchase costs. 2,710 (1,374)
Inventories................. 445 4,157
Other....................... 1,393 3,177
----------- -----------
Net cash flow from operating
activities................... 36,634 32,659
----------- -----------
Cash flows used in investing
activities:
Additions to property, plant
and equipment.................. (50,398) (51,828)
Acquisition of operations, net
of cash received............... -- 6,502
Purchase of investment
securities..................... (5,000) (5,000)
Proceeds from sale of
investment securities.......... -- 6,531
Net change in customer advances. 1,610 2,823
Net change in deferred charges
and credits.................... 71 (3,195)
Other........................... 1,518 (1,296)
----------- -----------
Net cash flows used in
investing activities.......... (52,199) (45,463)
----------- -----------
Cash flows from financing
activities:
Repayment of debt and capital
lease obligation............... (1,516) (821)
Net borrowings under revolving
credit facility................ 17,003 15,400
Decrease in cash overdrafts..... (19) (1,567)
Other........................... 97 57
----------- -----------
Net cash flows from financing
activities.................... 15,565 13,069
----------- -----------
Change in cash and cash
equivalents...................... -- 265
Cash and cash equivalents at
beginning of period.............. -- --
----------- -----------
Cash and cash equivalents at end
of period........................ $ -- $ 265
=========== ===========
Supplemental disclosures of cash
flow information:
Cash paid (refunded) during
the period for:
Interest...................... $ 33,434 $ 33,317
=========== ===========
Income taxes.................. $ (933) $ 2,075
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Twelve Months Ended March 31,
-----------------------------
1999 1998
------------ ------------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings.................... $ 7,101 $ 18,174
Adjustments to reconcile net
earnings to net cash flows
from operating activities:
Depreciation and amortization. 40,963 37,986
Deferred income taxes......... 5,165 2,359
Provision for bad debts....... 3,521 5,631
Deferral and amortization of
interest and other expenses.. 92 (694)
Write-off of regulatory
assets....................... 8,163 --
Gain on sale of investment
securities................... -- (1,088)
Other......................... 1,760 1,139
Changes in assets and liabil-
ities, net of acquisitions
and dispositions:
Accounts receivable, billed
and unbilled............... 13,754 (6,409)
Accounts payable............ (11,437) 7,683
Taxes and other liabilities. (1,376) 2,332
Customer deposits........... 437 104
Deferred gas purchase costs. 12,777 8,802
Inventories................. (8,073) (3,286)
Other....................... (615) 2,526
----------- -----------
Net cash flow from operating
activities................... 72,232 75,259
----------- -----------
Cash flows used in investing
activities:
Additions to property, plant
and equipment.................. (75,588) (73,738)
Acquisition of operations, net
of cash received............... -- 5,803
Purchase of investment
securities..................... (5,000) (5,000)
Proceeds from sale of invest-
ment securities................ -- 9,547
Increase in customer advances... 2,349 3,537
Deferred charges and credits.... 1,480 (10,050)
Proceeds from sale of distribu-
tion and transmission
properties..................... -- 1,130
Other........................... 4,389 (2,430)
----------- -----------
Net cash flows used in
investing activities......... (72,370) (71,201)
----------- -----------
Cash flows used in financing
activities:
Repayment of debt and capital
lease obligation............... (2,004) (1,009)
Net borrowings (payments)
under revolving credit
facility....................... 1,603 (3,800)
Increase in cash overdraft...... 603 --
Other........................... (329) 117
----------- -----------
Net cash flows used in
financing activities......... (127) (4,692)
----------- -----------
Change in cash and cash
equivalents...................... (265) (634)
Cash and cash equivalents at
beginning of period.............. 265 899
----------- -----------
Cash and cash equivalents at
end of period.................... $ -- $ 265
=========== ===========
Supplemental disclosures of cash
flow information:
Cash paid during the period
for:
Interest...................... $ 34,114 $ 33,496
=========== ===========
Income taxes.................. $ 1,503 $ 5,845
=========== ===========
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, 1998. Certain prior period
amounts have been reclassified to conform with the current period
presentation.
NEW ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued
Accounting for Derivative Instruments and Hedging Activities,
- ------------------------------------------------------------
which is required to be adopted in years beginning after June 15,
1999. The Statement permits early adoption as of the beginning
of any fiscal quarter after its issuance. The Statement will
require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immedi-
ately recognized in earnings. The Company has not yet determined
what the effect of this statement will have on the earnings and
financial position of the Company.
ACQUISITION ACTIVITIES
Southwest Gas Corporation On February 1, 1999, the Company sub-
- -------------------------
mitted a proposal to the Board of Directors of Southwest Gas Cor-
poration (Southwest Gas) to acquire all of Southwest Gas'
outstanding common stock for $32.00 per share. Southwest Gas
then had a pending merger agreement with ONEOK, Inc. ("ONEOK")
at $28.50 per share. On February 22, 1999, Southern Union and
Southwest Gas both publicly announced Southern Union's proposal,
after the Southwest Gas Board of Directors determined that
Southern Union's proposal was a Superior Proposal (as defined
in the Southwest Gas merger agreement with ONEOK). On April 25,
1999, Southwest Gas' Board of Directors rejected Southern
Union's $32.00 per share offer and accepted an amended offer of
$30.00 per share from ONEOK. On April 27, 1999, Southern Union
increased its offer to $33.50 per share and agreed to pay
interest which, together with dividends, would provide Southwest
Gas shareholders with a 6% annual rate of return on its $33.50
offer, commencing February 15, 2000, until closing. Southern
Union's revised proposal has also been rejected by the Southwest
Gas Board of Directors. Presently, Southern Union, Southwest
Gas and ONEOK are parties to litigation to determine the scope
of Southern Union's permitted activities with respect to its
effort to acquire Southwest Gas securities. In one such pro-
ceeding brought by ONEOK, the Company is the subject of a
preliminary injunction with respect to its compliance with the
standstill provisions of its February 21, 1999 confidentiality
letter agreement with Southwest Gas. Southern Union intends to
appeal that decision and to continue to evaluate its legal
alternatives with respect to the acquisition of Southwest Gas
securities and related proceedings.
Atlantic Utilities Effective December 31, 1997, the Company ac-
- ------------------
quired Atlantic Utilities Corporation and Subsidiaries (Atlantic)
for 755,650 pre-split and pre-stock dividend 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 subsidi
ary of the Company. 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 acquisi-
tion, 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 approxi-
mately $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 (MGE) is engaged in a major gas safety
program. In connection with this program, the MPSC issued an
accounting authority order in 1994 which authorized MGE 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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
resulted in a pre-tax non-cash charge of $5,942,000 of previously
deferred costs as of June 30, 1998. See Contingencies.
On August 21, 1998, MGE was notified by the MPSC of its decision
to grant a $13,300,000 rate increase but disallowed certain
previously recorded deferred costs, requiring an additional pre-
tax non-cash write-off of $2,221,000. Though the Company will
receive a rehearing on 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. See Utility Regulation and Rates.
EARNINGS PER SHARE
Average shares outstanding for basic earnings per share were
29,686,041 and 29,595,655 for the three-month period ended
March 31, 1999 and 1998, respectively, 29,647,698 and 28,743,424
for the nine-month period ended March 31, 1999 and 1998,
respectively, and 29,637,869 and 28,635,171 for the twelve-month
period ended March 31, 1999 and 1998, respectively. Diluted
earnings per share includes average shares outstanding as well as
common stock equivalents from stock options and warrants. During
the three-, nine- and twelve-month periods ended March 31, 1999
and 1998, no adjustments were required in net earnings available
for common stock for the earnings per share calculations. Common
stock equivalents were 1,385,236 and 1,061,497 for the three-
month period ended March 31, 1999 and 1998, respectively,
1,372,610 and 1,101,020 for the nine-month period ended March 31,
1999 and 1998, respectively, and 1,315,217 and 1,099,410 for the
twelve-month period ended March 31, 1999 and 1998, respectively.
INVESTMENT SECURITIES
At March 31, 1999, all securities owned by the Company are
accounted for under the cost method. These securities consist of
preferred stock in a non-public company. Realized gains and
losses on sales of investments, as determined on a specific
identification basis, are included in the Consolidated Statement
of Operations when incurred, and dividends are recognized as
income when received.
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 De-
ferrable 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 corre-
spond to the distribution and other payment dates on the Pre-
ferred 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 Se-
curities in liquidation of the Subsidiary Trust. The Subordi-
nated Notes are redeemable at the option of the Company on or
after May 17, 2000, at a redemption price of $25 per Subordinated
Note plus accrued and unpaid interest. The Preferred Securities
and the Common Securities will be redeemed on a pro rata basis to
the same extent as the Subordinated Notes are repaid, at $25 per
Preferred Security and Common Security plus accumulated and
unpaid distributions. Southern Union's obligations under the
Subordinated Notes and related agreements, taken together, con-
stitute a full and unconditional guarantee by Southern Union of
payments due on the Preferred Securities. As of March 31, 1999
and 1998, 4,000,000 shares of Preferred Securities were out-
standing.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEBT AND CAPITAL LEASE
March 31, June 30,
1999 1998
--------- --------
(thousands of dollars)
7.60% Senior Notes due 2024............. $384,515 $384,515
Other................................... 28,978 23,669
-------- --------
Total debt and capital lease............ 413,493 408,184
Less current portion.................. (2,033) (1,777)
-------- --------
Total long-term debt and capital lease.. $411,460 $406,407
======== ========
The Company has availability under two revolving credit facili-
ties (the "Revolving Credit Facilities") underwritten by a syndi-
cate 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 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 March 31, 1999 and April 30, 1999 were $18,603,000
and $3,000, respectively.
Capital Lease The Company completed the installation of an Auto-
- -------------
mated Meter Reading (AMR) system at MGE 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. As of March 31, 1999, the capital
lease obligation outstanding was $27,324,000.
UTILITY REGULATION AND RATES
Under the order of the Federal Energy Regulatory Commission, a
major supplier of gas to MGE is allowed recovery of certain
unrecovered deferred gas costs with a remaining balance of
$1,175,000 at March 31, 1999. MGE is allowed to recover these
costs from its customers through a purchase gas adjustment
mechanism 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 March 31, 1999 and 1998.
On May 21, 1998, Southern Union Gas filed with the Railroad Com-
mission 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. The Company requested a $1,964,000 base rate
increase and a finding that no cost of gas refund was warranted.
On December 21, 1998, the Commission issued its order imple-
menting an $884,000 one-time cost of gas refund and a $99,000
base rate reduction.
On August 21, 1998, MGE was notified by the MPSC of its decision
to grant a $13,300,000 rate increase which also disallowed cer-
tain previously recorded deferred costs, in which MGE requested a
rehearing on significant portions of these disallowances. On
December 8, 1998, the MPSC denied rehearing requests made by all
parties other than MGE and granted a portion of MGE's rehearing
request. The MPSC will conduct further proceedings to take addi-
tional evidence on those matters for which it granted MGE a
rehearing. If the MPSC adopts MGE's positions on rehearing, then
MGE would be authorized an additional base revenue increase in
the amount of approximately $2,200,000 (from the $13,300,000
initially authorized in its August 21, 1998 order to
$15,500,000). The MPSC's orders may be subject to judicial
review and although certain parties may argue for a reduction in
MGE's authorized base revenue increase on judicial review, MGE
expects such arguments to be unsuccessful.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK DIVIDEND
On December 9, 1998, Southern Union distributed its annual 5%
common stock dividend to stockholders of record on November 23,
1998. A portion of the 5% stock dividend was characterized as a
distribution of capital due to the level of the Company's
retained earnings available for distribution as of the declara-
tion date. 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 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 MGE. At the present time and
based upon information available to management, the Company be-
lieves that the costs of any remediation efforts that may be
required for these sites for which it may ultimately have respon-
sibility will not exceed the aggregate amount subject to substan-
tial sharing by Western Resources.
In addition to the various MGE 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, princi-
pally 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 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.
As previously disclosed in the Company's 1998 Annual Report on
Form 10-K, on August 18, 1998, the Missouri State Court of
Appeals denied the Company's appeal of the MPSC January 22, 1997
rate order which retroactively reduced the carrying cost rate
applied by the Company on the expenditures incurred on the
Missouri Safety Program since early 1994 resulting in a one-time
non-cash write-off of $5,942,000 of previously recorded deferred
costs which was recorded in fiscal year 1998. Southern Union
sought a transfer of the case to the Missouri Supreme Court which
was denied on November 24, 1998.
In August 1998, a jury in Edinburg, Texas concluded deliberations
on the City of Edinburg's franchise fee lawsuit against PG&E Gas
Transmission, Texas Corporation (formerly Valero Energy Corpora-
tion (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 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,
against all defendants under several largely overlapping but
mutually exclusive claims, totaling approximately $13,000,000.
The trial judge subsequently reduced the award to approximately
$700,000 against Southern Union and $7,800,000 against Valero and
Southern Union together. The Company is pursuing reversal on
appeal. The Company believes it will ultimately prevail and thus
has not provided for any loss relative to this matter in its fi-
nancial statements. Furthermore, the Company has not determined
what impact, if any, this jury decision may have on other city
franchises in Texas.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Southern Union Gas,
Missouri Gas Energy (MGE), and Atlantic Utilities, doing business
as South Florida Natural Gas (SFNG), 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 subsidi-
ries 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 pri-
marily 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, 1999 and 1998
- ------------------------------------------
The Company recorded net earnings available for common stock of
$17,624,000 for the three-month period ended March 31, 1999
compared with net earnings of $16,249,000 for the same period in
1998. Earnings per diluted share, based on weighted average
common and common share equivalents outstanding during the period
were $.57 in 1999 compared with earnings per diluted share of
$.53 in 1998.
Operating revenues were $251,863,000 for the three-month period
ended March 31, 1999, compared with operating revenues of
$265,176,000 in 1998. Gas purchase costs for the three-month
period ended March 31, 1999 were $153,757,000, compared with
$170,500,000 in 1998. The Company's operating revenues are
affected by the level of sales volumes and by the pass-through of
increases or decreases in the Company's gas purchase costs
through its purchased gas adjustment clauses. Additionally,
revenues are affected by increases or decreases in gross receipts
taxes (revenue-related taxes) which are levied on sales revenue
as collected from customers and remitted to the various taxing
authorities. The decrease in both operating revenues and gas
purchase costs between periods was primarily the result of a 7%
decrease in the average cost of gas from $3.59 per Mcf in 1998 to
$3.33 per Mcf in 1999. Changes in the average cost of gas result
from seasonal impacts on demands for natural gas and the ensuing
competitive pricing within the industry. Additionally, operating
revenues and gas purchase costs were affected by a 2% decrease in
gas sales volume to 46,068 MMcf in 1999 from 47,077 MMcf in 1998.
The decrease in sales volumes was due to significantly warmer
weather primarily in the Texas service areas during the three-
month period ended March 31, 1999. Slightly offsetting these
factors was a $13,300,000 annual increase to revenues in the
Missouri service territories granted by the Missouri Public Ser-
vice Commission (MPSC) effective as of September 2, 1998. The
impact from this rate order was marginal as it is earned volu-
metrically and therefore was affected by the unusually warm
weather.
Weather for MGE's service territories was 87% of a 30-year
measure for the three-month period ended March 31, 1999, compared
with 85% in 1998. Southern Union Gas service territories experi-
enced weather that was 65% of a 30-year measure in 1999, compared
with 84% in 1998. About half of the customers served by Southern
Union Gas are weather normalized.
Net operating margin (operating margin less revenue-related
taxes) increased $4,183,000 to $83,619,000 for the three-month
period ended March 31, 1999 compared with the same period in
1998. Net operating margin increased
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
primarily due to a $13,300,000 annual increase to revenues in the
Missouri service territories granted by the MPSC effective as of
September 2, 1998.
Operating expenses, which include operating, maintenance and
general expenses, depreciation and amortization and taxes, other
than on income and revenues, were $42,972,000 for the three-month
period ended March 31, 1999, an increase of $476,000, compared
with $42,496,000 in 1998. The increase is primarily a result of
an increase in depreciation and amortization and an increase in
property taxes pursuant to the September 2, 1998 Missouri rate
order, discussed above, which included certain costs into rate
base that had been previously deferred.
Interest expense was $8,962,000 for the three-month period ended
March 31, 1999, compared with $8,970,000 in 1998. See "Debt and
Capital Lease" in the Notes to the Consolidated Financial State-
ments included herein.
Other expense of $252,000 for the three-month period ended
March 31, 1999 primarily consisted of net expense of $153,000
related to the amortization and current deferral of interest and
other expenses associated with the MGE Safety Program. Other
income of $1,257,000 for the three-month period ended March 31,
1998 primarily consisted of $526,000 related to the deferral of
interest and other expenses associated with the MGE Safety Pro-
gram and net rental income from Lavaca Realty Company (Lavaca
Realty), the Company's real estate subsidiary, of $269,000.
The Company's consolidated federal and state effective income tax
rate was 39% for the three-month periods ended March 31, 1999 and
1998.
Nine Months Ended March 31, 1999 and 1998
- -----------------------------------------
The Company recorded net earnings available for common stock of
$15,950,000 for the nine-month period ended March 31, 1999, com-
pared with net earnings of $21,077,000 for the same period in
1998. Earnings per diluted share, based on weighted average
common and common share equivalents outstanding during the
period, were $.51 in 1999 compared with earnings per diluted
share of $.71 in 1998. Weighted average common and common share
equivalents increased 4% during 1999 compared with 1998 due to
the issuance of 755,650 pre-split and pre-stock dividend shares
of the Company's common stock on December 31, 1997 in connection
with the acquisition of Atlantic Utilities Corporation and Sub-
sidiaries (Atlantic Utilities) in Florida.
Operating revenues were $503,543,000 for the nine-month period
ended March 31, 1999, compared with operating revenues of
$560,377,000 in 1998. Gas purchase costs for the nine-month
period ended March 31, 1999 were $292,370,000 compared with
$346,775,000 in 1998. The decrease in both operating revenues
and gas purchase costs between periods was the result of an 8%
decrease in the average cost of gas from $3.56 in 1998 to $3.26
per Mcf in 1999, due to changes in average spot market gas
prices. Additionally, operating revenues and gas purchase costs
were affected by an 8% decrease in gas sales volume to 88,940
MMcf in 1999 from 96,672 MMcf in 1998. The decrease in sales
volumes was due to significantly warmer weather in the Missouri
and Texas service areas during the nine-month period ended
March 31, 1999. The decrease in operating revenues was partially
offset by a $13,300,000 annual increase to revenues granted to
MGE, effective as of September 2, 1998. The impact from this
rate order was marginal as it is earned volumetrically and,
therefore, was affected by the unusually warm weather.
MGE's service territories experienced weather which was 84% of a
30-year measure for the nine months ended March 31, 1999 compared
with 91% in 1998. Weather for Southern Union Gas service terri-
tories for the nine-month period ended March 31, 1999 was 73% of
a 30-year measure compared with 97% in 1998.
Net operating margin increased $275,000 to $184,004,000 for the
nine-month period ended March 31, 1999 compared with the same
period in 1998. Net operating margin increased primarily due to
a $13,300,000 annual increase
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to revenues in the Missouri service territories granted by the
MPSC effective as of September 2, 1998 which was partially offset
by reduced gas sales volumes as a result of significantly warmer
weather, previously discussed.
Operating expenses were $123,999,000 for the nine-month period
ended March 31, 1999, an increase of $5,143,000, compared with
$118,856,000 in 1998. The increase is primarily the result of an
increase in depreciation and amortization and property taxes as a
result of including certain costs into rate base that had been
previously deferred. Also contributing to the increase was the
inclusion of Atlantic Utilities, which was acquired effective
December 31, 1997, as well as increased legal fees and assess-
ments associated with certain claims and litigation.
Interest expense was $26,843,000 for the nine-month period ended
March 31, 1999, compared with $26,544,000 in 1998. The increase
is primarily due to the addition of a capital lease obligation
for the installation of an Automated Meter Reading (AMR) system
at MGE. See "Debt and Capital Lease" in the Notes to the
Consolidated Financial Statements included herein.
Other income for the nine-month period ended March 31, 1999 was
$311,000 compared with $3,619,000 in 1998. Other income for the
nine-month period ended March 31, 1999 included net rental income
from Lavaca Realty of $935,000, which was partially offset by net
expense of $517,000 related to the amortization and current
deferral of interest and other expenses associated with the MGE
Safety Program. Other income for the nine-month period ended
March 31, 1998 included $1,246,000 related to the deferral of
interest and other expenses associated with the MGE Safety Pro-
gram, realized gains on the sale of investment securities of
$1,088,000 and net rental income from Lavaca Realty of $756,000.
The Company's consolidated federal and state effective income tax
rate was and 39% for the nine-month periods ended March 31, 1999
and 1998, respectively.
Twelve Months Ended March 31, 1999 and 1998
- -------------------------------------------
The Company recorded net earnings available for common stock of
$7,101,000 for the twelve-month period ended March 31, 1999 com-
pared with net earnings of $18,174,000 in 1998. Earnings per
diluted share based on weighted average common and common share
equivalents outstanding during the period were $.23 in 1999
compared with earnings per diluted share of $.61 in 1998.
Weighted average common and common share equivalents increased 4%
during the twelve-month period ended March 31, 1999 compared with
1998 due to the issuance of common stock in the acquisition of
Atlantic Utilities, previously discussed.
During fiscal year 1998, the Company was impacted by pre-tax non-
cash write-offs totaling $8,163,000 of previously recorded regu-
latory 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 included herein.
Operating revenues were $612,469,000 for the twelve-month period
ended March 31, 1999, compared with operating revenues of
$648,200,000 in 1998. Gas purchase costs for the twelve-month
period ended March 31, 1999 were $351,174,000, compared with gas
purchase costs of $385,609,000 in 1998. The decrease in both
operating revenues and gas purchase costs between periods was
primarily the result of a 5% decrease in gas sales volume to
108,113 MMcf in 1999 from 114,063 MMcf in 1998. The decrease in
sales volumes was due to significantly warmer weather in the
Missouri and Texas service areas during the twelve-month period
ended March 31, 1999. Additionally, operating revenues and gas
purchase costs were affected by a 4% decrease in the average cost
of gas from $3.35
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
per Mcf in 1998 to $3.23 per Mcf in 1999, due to changes in
average spot market gas prices. The decrease in operating
revenues was partially offset by a $13,300,000 annual increase to
revenues granted to MGE, effective as of September 2, 1998. The
impact from this rate increase was marginal as it is earned
volumetrically and, therefore, was also affected by the unusually
warm weather.
MGE's service territories experienced weather that was 84% of the
30-year measure for the twelve-month period ended March 31, 1999
compared with 95% in 1998. Weather for Southern Union Gas ser-
vice territories for the twelve-month period ended March 31, 1999
was 75% of a 30-year measure compared with 103% in 1998.
Net operating margin increased $2,170,000 to $229,112,000 for the
twelve-month period ended March 31, 1999 compared with the same
period in 1998. Net operating margin increased primarily due to
a $13,300,000 annual increase to revenues in the Missouri service
territories granted by the MPSC effective as of September 2, 1998
which was partially offset by reduced gas sales volumes as a
result of significantly warmer weather as previously discussed.
Operating expenses were $165,313,000 for the twelve-month period
ended March 31, 1999, an increase of $11,711,000, compared with
operating expenses of $153,602,000 in 1998. The increase is a
result of increased legal fees and expenses associated with
various claims and litigation, increased employee benefits costs,
increased general and administrative costs, the inclusion of
operating expenses for Atlantic Utilities, acquired effective
December 31, 1997, as well as acquired and expanded propane
activities. Also contributing to the increase was an increase
in depreciation and amortization and property taxes as a result
of including certain costs into rate base that had been
previously deferred.
Interest expense was $35,182,000 for the twelve-month period
ended March 31, 1999, compared with $34,613,000 in 1998. The
increase is primarily due to the addition of a capital lease
obligation for the installation of an AMR system at MGE,
previously discussed. See "Debt and Capital Lease" in the Notes
to the Consolidated Financial Statements included herein.
Other income for the twelve-month period ended March 31, 1999 was
$763,000 compared with $741,000 in 1998. Other income for the
twelve-month period ended March 31, 1999 included $1,298,000 in
net rental income from Lavaca Realty. Other income for the
twelve-month period ended March 31, 1998 included $1,088,000 in
realized gains on the sale of investment securities, net rental
income from Lavaca Realty of $1,017,000 and $694,000 related to
the deferral of interest and other expenses associated with the
MGE Safety Program. This was partially offset by $2,150,000 for
the settlement of certain billing errors at MGE.
The Company's consolidated federal and state effective income tax
rate was 39% for the twelve-month periods ended March 31, 1999
and 1998.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain information regarding the
Company's gas utility operations for the three- and twelve-month
periods ended March 31, 1999 and 1998:
Three Months Twelve Months
Ended March 31, Ended March 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Average number
of gas sales
customers
served:
Residential.. 906,268 896,600 892,196 877,103
Commercial... 91,432 91,152 88,308 86,941
Industrial
and irriga-
tion........ 572 560 569 569
Pipeline and
marketing... 237 226 233 223
Public
authorities
and other... 2,887 2,841 2,841 2,743
---------- ---------- ---------- ----------
Total
average
customers
served.... 1,001,396 991,379 984,147 967,579
========== ========== ========== ==========
Gas sales in
millions of
cubic feet
(MMcf):
Residential.. 30,156 31,393 57,438 64,833
Commercial... 12,415 12,820 25,624 28,277
Industrial
and irriga-
tion........ 394 504 1,520 1,658
Pipeline and
marketing... 5,807 5,113 20,338 16,707
Public
authorities
and other... 1,076 1,280 2,322 2,714
---------- ---------- ---------- ----------
Gas sales
billed.... 49,848 51,110 107,242 114,189
Net change
in unbilled
gas sales.. (3,780) (4,033) 871 (126)
---------- ---------- ---------- ----------
Total gas
sales.... 46,068 47,077 108,113 114,063
========== ========== ========== ==========
Gas sales reve-
nues (thou-
sands of
dollars):
Residential.. $ 172,746 $ 182,328 $ 368,947 $ 398,140
Commercial... 68,446 72,750 141,510 153,824
Industrial
and irriga-
tion........ 1,913 2,484 6,800 7,736
Pipeline and
marketing... 13,232 12,025 47,714 39,484
Public
authorities
and other... 3,932 4,918 8,818 11,160
---------- ---------- ---------- ----------
Gas sales
revenues
billed.... 260,269 274,505 573,789 610,344
Net change in
unbilled gas
sales reve-
nues........ (19,390) (21,417) 4,261 1,212
---------- ---------- ---------- ----------
Total gas
sales
revenues.. $ 240,879 $ 253,088 $ 578,050 $ 611,556
========== ========== ========== ==========
Gas sales
margin (thou-
sands of
dollars)...... 73,169 68,801 197,143 193,469
========== ========== ========== ==========
Gas sales
revenue per
thousand
cubic feet
(Mcf) billed:
Residential.. $ 5.728 $ 5.808 $ 6.423 $ 6.141
Commercial... 5.513 5.675 5.523 5.440
Industrial
and irriga-
tion........ 4.858 4.929 4.473 4.666
Pipeline and
marketing... 2.279 2.352 2.346 2.363
Public
authorities
and other... 3.654 3.842 3.798 4.112
Weather:
Degree days:
Southern
Union Gas
service
territories. 800 1,055 1,609 2,131
Missouri Gas
Energy ser-
vice terri-
tories...... 2,429 2,388 4,418 4,982
Percent of
normal, based
on 30-year
measure:
Southern
Union Gas
service
terri-
tories..... 65% 84% 75% 103%
Missouri Gas
Energy ser-
vice terri-
tories..... 87% 85% 84% 95%
Gas transported
in millions of
cubic feet
(MMcf)........ 16,700 15,231 55,314 63,446
Gas transporta-
tion revenues
(thousands of
dollars)...... $ 6,351 $ 6,221 $ 19,963 $ 20,066
- -------------------
The above information does not include the Company's 43% 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 season-
ality results in a high level of cash flow needs during the peak
winter heating season months, resulting from the required pay-
ments to natural gas suppliers in advance of the receipt of cash
payments from the Company's customers. The Company has histori-
cally used internally generated funds and its revolving loan and
credit facilities to provide funding for its seasonal working
capital, continuing construction and maintenance programs and
operational requirements.
The principal source of funds during the three-month period ended
March 31, 1999 included $59,844,000 in cash flow from operations.
This source provided funds for additions to property, plant and
equipment of $15,433,000, $5,000,000 for the purchase of invest-
ment securities and $31,400,000 in net repayments under the
Company's revolving credit facility.
The principal sources of funds during the nine-month period ended
March 31, 1999 included $36,634,000 in cash flow from operations
and $17,003,000 from the Company's revolving and uncommitted
credit facilities. These sources provided funds for additions to
property, plant and equipment of $50,398,000 and $5,000,000 for
the purchase of investment securities.
The effective interest rate under the Company's current debt
structure is 7.67% (including interest and the amortization of
debt issuance costs and redemption premiums on refinanced debt).
The Company has availability under two revolving credit facili-
ties (the "Revolving Credit Facilities") underwritten by a syndi-
cate 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 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 March 31, 1999 and April 30, 1999 were $18,603,000
and $3,000, respectively.
YEAR 2000
Similar to all business entities, the Company will be impacted by
the inability of computer application software programs to dis-
tinguish 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 infrastruc-
ture, physical infrastructure, and third party business partners
and suppliers with which the Company has significant relation-
ships. Management's analysis and review of these areas is com-
prised primarily of five phases: developing an inventory of
hardware, software and embedded chips; assessing the degree to
which each area is currently Year 2000 ready; performing renova-
tions and repairs as needed to attain Year 2000 readiness;
testing to ensure Year 2000 readiness; and developing a contin-
gency plan if repair and renovation efforts are either unsuc-
cessful or untimely.
Management has completed the inventory phase and has substan-
tially completed the assessment phase regarding application
systems, process control systems and technology infrastructure,
and is performing renovations, repairs and testing in each of
these categories. The review of physical infrastructure and
critical business partners, gas
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
transporters and suppliers is in the assessment stage. The Com-
pany's inventory efforts were completed prior to the end of
calendar year 1998. The Company's assessment, renovation and
repair efforts are substantially complete. The 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 approxi-
mately $6,500,000 for these Year 2000 readiness efforts.
Included in this estimate are equipment leasing expenses that
will be incurred over the life of the equipment. To the extent
that such costs are incurred in Year 2000 readiness efforts, the
Company will attempt recovery for such costs through regulatory
relief.
During the past several years the Company has replaced most of
its financial and operating software programs. In addition, the
Company is currently in the process of replacing those remaining
programs to be able to be Year 2000 ready. These new programs
have significantly reduced the costs the Company expects to incur
to become Year 2000 ready. Additionally, the Company has formed
a planning team to develop a contingency plan in the event that
supplier or internal operational failures do occur. 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, could result in daily lost revenues of approximately
$3,200,000. This estimate is based on historical revenues recog-
nized in the months of January, February and March.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Management's Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this Form 10-Q
contain forward-looking statements that are based on current ex-
pectations, estimates and projections about the industry in
which the Company operates, management's beliefs and assumptions
made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations
of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guar-
antees of future performance and involve certain risks, uncer-
tainties and assumptions, which are difficult to predict and
many of which are outside the Company's control. Therefore,
actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. The
Company undertakes no obligation to update publicly any forward-
looking statements, whether as a result of new information,
future events or otherwise. Readers are cautioned not to put
undue reliance on such forward-looking statements. Stockholders
may review the Company's reports filed in the future with the
Securities and Exchange Commission for more current descriptions
of developments that could cause actual results to differ
materially from such forward-looking statements.
Factors that could cause or contribute to actual results dif-
fering materially from such forward-looking statements include
the following: cost of gas; gas sales volumes; weather condi-
tions in the Company's service territories; the achievement of
operating efficiencies and the purchases and implementation of
new technologies for attaining such efficiencies; impact of rela-
tions with labor unions of bargaining-unit employees; the receipt
of timely and adequate rate relief; the outcome of pending and
future litigation; governmental regulations and proceedings
affecting or involving the Company; and the nature and impact of
any extraordinary transactions such as any acquisition or
divestiture of a business unit or any assets. These are repre-
sentative of the factors that could affect the outcome of the
forward-looking statements. In addition, such statements could
be affected by general industry and market conditions, and
general economic conditions, including interest rate fluctua
tions, federal, state and local laws and regulations affecting
the retail gas industry or the energy industry generally, and
other factors.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
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 17, 1999 By RONALD J. ENDRES
---------------- -------------------------------
Ronald J. Endres
Executive Vice President and
Chief Financial Officer
Date May 17, 1999 By DAVID J. KVAPIL
---------------- -------------------------------
David J. Kvapil
Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
<PAGE>
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<PERIOD-END> MAR-31-1999
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