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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
SOUTHERN UNION COMPANY
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
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Southern
Union
Company
504 Lavaca Street, Eighth Floor
Austin, Texas 78701
September 17, 1999
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Southern Union Company to be held at 2:00 p.m. (Eastern Time) on Tuesday,
October 19, 1999 at The Plaza Hotel, Fifth Avenue at Central Park South, New
York, New York. A notice of the meeting, a proxy and a proxy statement
containing information about the matters to be acted upon are enclosed.
In addition to the specific matters to be acted upon, there will be a report on
the progress of the Company and an opportunity for questions of general
interest to the stockholders.
Whether or not you plan to attend the meeting on October 19, 1999, please mark,
sign and date the enclosed proxy and return it in the envelope provided (which
requires no postage if mailed in the United States) so that your shares will be
represented. Your prompt cooperation will be appreciated.
On behalf of the Board of Directors,
Sincerely,
/s/ George L. Lindemann
George L. Lindemann
Chairman of the Board and
Chief Executive Officer
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Southern Union Company
504 Lavaca Street, Eighth Floor
Austin, Texas 78701
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held October 19, 1999
To the Holders of Common Stock of
SOUTHERN UNION COMPANY:
The 1999 Annual Meeting of Stockholders of Southern Union Company, a Delaware
corporation, will be held at The Plaza Hotel, Fifth Avenue at Central Park
South, New York, New York on Tuesday, October 19, 1999 at 2:00 p.m. (Eastern
Time) to consider and take action upon the following:
(i) the re-election of three persons to serve as the Class III directors
until the 2002 Annual Meeting of Stockholders or until their
successors are duly elected and qualified;
(ii) approval of (a) the Agreement of Merger between the Company and
Pennsylvania Enterprises, Inc., a Pennsylvania corporation, dated as
of June 7, 1999 whereby PEI will merge with and into the Company,
with the Company being the surviving corporation and (b) the issuance
of shares of Southern Union common stock pursuant to the merger
agreement;
(iii) approval of the following amendments to the Company's Restated
Certificate of Incorporation: (a) to increase the number of
authorized shares of Southern Union common stock from 50,000,000 to
200,000,000; (b) to grant the Board the authority to issue 6,000,000
shares of preferred stock in series the Board deems appropriate and
to establish from time to time the number of shares to be included in
each such series and to fix the designation, powers, preferences and
rights of the shares of each such series and the qualifications,
limitations or restrictions thereof; and (c) to repeal the rights,
powers privileges and preferences of Southern Union's currently
authorized cumulative preferred stock;
(iv) approval of an amendment to the Company's Restated Certificate of
Incorporation to increase the maximum number of directors from 12 to
15; and
(v) approval of an additional 3,000,000 shares of common stock to be
eligible for grant under the Southern Union 1992 Long-Term Stock
Incentive Plan.
Your Board of Directors recommends a vote "FOR" all five proposals. The Board
of Directors is not aware of any other business to come before the Annual
Meeting.
Stockholders of record of Southern Union's common stock at the close of
business on September 3, 1999 will be entitled to vote at the Annual Meeting or
any adjournment or postponement thereof. A complete list of stockholders of
record entitled to vote at the Annual Meeting will be maintained in the
Company's office at 767 Fifth Avenue, 50th Floor, New York, New York 10153, for
ten days prior to the Annual Meeting.
Whether or not you plan to attend the Annual Meeting in person, please mark,
execute, date and return the enclosed proxy in the envelope provided (which
requires no postage if mailed within the United States). Should you attend the
Annual Meeting in person you may, if you wish, withdraw your proxy and vote
your shares in person.
By Order of the Board of Directors,
/s/ Dennis K. Morgan
Dennis K. Morgan
Secretary
Austin, Texas
September 17, 1999
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TABLE OF CONTENTS
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Notice of Annual Meeting of Stockholders.................................. i
Questions and Answers..................................................... 1
Proposals to be Voted Upon................................................ 4
The Merger................................................................ 11
PEI Background of the Merger............................................ 11
PEI Reasons for the Merger; Recommendation of PEI's Board of Directors.. 13
Opinion of PEI's Financial Advisor...................................... 14
Southern Union Background of the Merger................................. 17
Southern Union Reasons for the Merger................................... 19
Recommendation of the Southern Union Board.............................. 20
Opinion of Southern Union's Financial Advisor........................... 21
Potential Conflicts and Interests of Certain Persons in the Merger...... 24
Significant U.S. Federal Income Tax Consequences of the Mergers......... 26
Regulatory Matters...................................................... 27
Management and Other Information........................................ 28
Accounting Treatment.................................................... 28
Listing of Southern Union Common Stock.................................. 28
Federal Securities Law Consequences..................................... 28
Rights of Dissenting Stockholders of Southern Union..................... 29
Merger-Related Financing................................................ 29
The Merger Agreement...................................................... 30
Structure of the Merger................................................. 30
Closing; Effective Time................................................. 30
Subsidiary Mergers...................................................... 30
Merger Consideration.................................................... 30
Representations and Warranties.......................................... 31
Covenants and Other Agreements.......................................... 32
No Solicitation by PEI.................................................. 35
Conditions to the Completion of the Merger.............................. 37
Indemnification and Insurance for PEI Officers and Directors............ 38
Amendments.............................................................. 38
Termination of the Merger Agreement..................................... 38
Termination Fees and Expenses........................................... 40
Business of PEI........................................................... 41
Selected Historical Financial Information................................. 42
Selected Historical Consolidated Financial Information of Southern
Union.................................................................. 42
Selected Historical Consolidated Financial Information of PEI........... 43
Selected Unaudited Pro Forma Combined Condensed Financial Data.......... 45
Comparative Dividends and Market Prices................................... 46
Southern Union.......................................................... 46
PEI..................................................................... 47
Historical Equivalent Per Share Market Values........................... 47
Comparative Per Share Data................................................ 48
Unaudited Pro Forma Combined Condensed Financial Statements............... 50
Forward-Looking Statements May Prove Inaccurate........................... 54
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Where You Can Find More Information....................................... 54
Board of Directors........................................................ 56
Board Size and Composition.............................................. 56
Board Committees and Meetings........................................... 57
Board Compensation...................................................... 58
Directors' Deferred Compensation Plan................................... 58
Board of Directors' Report on Executive Compensation...................... 59
Executive Officers and Compensation....................................... 61
Executive Officers Who Are Not Directors................................ 61
Executive Compensation.................................................. 62
Summary Compensation Table.............................................. 62
Option Grants in 1999................................................... 63
Options Exercised in 1999 and 1999 Year-End Values...................... 63
Retirement Benefits..................................................... 63
Employment Contracts, Termination of Employment and Change-In-Control
Arrangements........................................................... 64
Compensation Committee Interlocks and Insider Participation............. 64
Section 16(a) Beneficial Ownership Reporting Compliance................. 64
Security Ownership........................................................ 65
Common Stock Performance Graph............................................ 68
Certain Relationships..................................................... 69
Experts................................................................... 69
Independent Auditors...................................................... 69
Company's 1999 Annual Report.............................................. 70
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APPENDICES
APPENDIX A Agreement of Merger
APPENDIX B Opinion of Legg Mason Wood Walker, Incorporated
APPENDIX C Opinion of Donaldson Lufkin & Jenrette Securities Corporation
APPENDIX D Agreement and Irrevocable Proxy by and between Pennsylvania
Enterprises, Inc.,
George L. Lindemann, Dr. F.B. Lindemann, Adam M. Lindemann,
George Lindemann, Jr. and Sloan N. Lindemann dated as of June 7,
1999
</TABLE>
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Southern Union Company
504 Lavaca Street, Eighth Floor
Austin, Texas 78701
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PROXY STATEMENT
----------------
The accompanying proxy, to be mailed to stockholders together with the Notice
of Annual Meeting and this Proxy Statement on or about September 17, 1999, is
solicited by Southern Union Company in connection with the Annual Meeting of
Stockholders to be held on October 19, 1999.
"Company" and "Southern Union" as used in this document refer to Southern
Union Company. "PEI," as used in this document, refers to Pennsylvania
Enterprises, Inc. "We" and "our" as used in this document refer to Southern
Union and PEI.
QUESTIONS AND ANSWERS
Q: What am I voting on?
A:. Re-election of three directors (George L. Lindemann, Peter H. Kelley and
Dan K. Wassong);
. Approval of the merger agreement between the Company and Pennsylvania
Enterprises, Inc. and the issuance of common stock pursuant to the
merger agreement;
. Approval of amendments to the Company's Restated Certificate of
Incorporation to change the capitalization of Southern Union;
. Approval of an amendment to the Company's Restated Certificate of
Incorporation to increase the maximum number of directors; and
. Approval of additional shares of Southern Union common stock to be
eligible for grant under the Company's 1992 Long-Term Stock Incentive
Plan.
Q: Who is entitled to vote?
A: Stockholders as of the close of business on the record date, September 3,
1999, are entitled to vote at the annual meeting. Each share of Southern
Union common stock is entitled to one vote. With respect to the election of
directors, stockholders have cumulative voting rights, which entitle each
stockholder to that number of votes which equals the number of shares he or
she holds multiplied by the number of directors to be elected (3). The
Bylaws of the Company require that a stockholder who intends to exercise
cumulative voting rights at the annual meeting must give written notice to
the Secretary of the Company no later than ten (10) days after notice of
the annual meeting was first sent to stockholders.
Q: How do I vote?
A: Sign and date each Proxy Card you receive and return it in the prepaid
envelope. If you do not mark any selections, your Proxy Card will be voted
in favor of the five proposals. You have the right to revoke your proxy at
any time before the annual meeting by (1) notifying Southern Union's
Corporate Secretary, (2) attending the annual meeting and voting in person
or (3) returning a later-dated proxy. If you return your signed proxy card,
but do not indicate your voting preferences, the proxy will be voted FOR
the five proposals on your behalf.
The Board of Directors is not aware of any matter other than the matters
described above to be presented for action at the annual meeting. If a
proposal other than the five listed in the Notice is presented at the
annual meeting, your signed proxy card gives authority to John E. Brennan
and Frank W. Denius to vote on such matters. They intend to vote in
accordance with their best judgment.
Proxies should NOT be sent by stockholders to the Company but to
BankBoston, N.A.
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c/o EquiServe, L.P., the Company's Registrar and Transfer Agent, at 150
Royal Street, Canton, Massachusetts 02021.
Q: Is my vote confidential?
A: Yes. Proxy cards, ballots and voting tabulations that identify individual
stockholders are confidential. Only the inspectors of election and certain
employees associated with processing proxy cards and counting the vote have
access to your card. Additionally, all comments directed to management
(whether written on the proxy card or elsewhere) will remain confidential,
unless you ask that your name be disclosed.
Q: Who will count the vote?
A: Representatives of the Company and its legal counsel, Fleischman and Walsh,
L.L.P., will tabulate the votes and act as inspectors of the election.
Q: What does it mean if I get more than one proxy card?
A: It is an indication that your shares are registered differently and are in
more than one account, including your accounts in Southern Union's Direct
Stock Purchase Plan, the executive compensation plans, employee benefit
plans and shares credited to your Savings Plan account held in custody by
the trustee, Wilmington Trust. Sign and return all proxy cards to ensure
that all your shares are voted.
Q: What constitutes a quorum?
A: As of the record date, 31,235,697 shares of the Southern Union common stock
were issued and outstanding. A majority of the outstanding shares, present
or represented by proxy, constitutes a quorum for the transaction of
adopting proposals at the annual meeting. If you submit a properly executed
proxy card, then you will be considered part of the quorum. If you are
present or represented by a proxy at the annual meeting and you abstain,
your abstention will have the same effect as a vote AGAINST the proposals
to re-elect three directors, approve the merger agreement, amendments to
the Company's Restated Certificate of Incorporation and changes to the 1992
Plan. Abstentions may have the effect of a vote AGAINST the proposal to
approve the issuance of Southern Union common stock pursuant to the merger
agreement. Broker non-votes will be counted as part of the quorum but will
not be part of the voting power present.
Q: Who can attend the Annual Meeting?
A: All stockholders as of the record date can attend.
Q: When are the 2000 stockholder proposals due?
A: In order to be considered for inclusion in next year's proxy statement,
stockholder proposals must be submitted in writing by June 30, 2000, to
Dennis K. Morgan, Corporate Secretary, Southern Union Company, 504 Lavaca
Street, Eighth Floor, Austin, Texas 78701.
Q: How does a stockholder nominate someone to be considered for election as a
director of Southern Union?
A: Any stockholder may recommend any person as a nominee for director of
Southern Union by writing to the Company's Secretary at least 45 days
before an annual meeting (which was September 3, 1999 for this year's
annual meeting) or no later than ten (10) days after the date of the notice
of a special meeting. Accordingly, no stockholder may make additional
nominations at the annual meeting. The notice must include certain
information about the nominating stockholder and the nominee(s). Certain
persons are disqualified from serving as directors. A copy of the relevant
Bylaws provisions may be obtained from the Company's Secretary. As of
September 3, 1999, no stockholder has nominated any person to serve as a
director of the Company.
Q: Who pays for this proxy solicitation?
A: Southern Union will reimburse brokerage houses and other custodians,
nominees and fiduciaries for their reasonable out-of-pocket expenses for
forwarding proxy and solicitation material to the owners of Southern Union
common stock.
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Q. What will happen as a result of the merger?
A. If the merger is completed, PEI will merge into Southern Union, PEI's
utility operations will become a division of Southern Union, and PEI's non-
regulated subsidiaries will become subsidiaries of Southern Union.
Immediately after the merger is completed, Honesdale Gas Company, a wholly
owned subsidiary of PG Energy Inc., a wholly owned subsidiary of PEI, will
be merged into PG Energy and then PG Energy will be merged into Southern
Union.
Q. What do I need to know about the merger?
A. You should carefully read and consider the information contained in this
document. You should complete and sign your proxy and return it in the
enclosed envelope as soon as possible so that your shares may be
represented at the Annual Meeting. Failing to vote in person or by proxy
will have the same effect as a vote AGAINST the merger.
Q. What is the required vote to approve the merger?
A. The merger agreement must be approved by holders of a majority of shares of
Southern Union common stock entitled to vote at the annual meeting. The
issuance of shares of Southern Union common stock pursuant to the merger
agreement must also be approved by a majority of the votes cast on this
proposal at the annual meeting, provided that the total vote cast
represents a majority of the shares of Southern Union common stock
outstanding and entitled to vote at the annual meeting. In addition, the
merger agreement must be approved by the holders of a majority of shares of
PEI common stock entitled to vote at PEI's special meeting of stockholders
to be held on October 19, 1999.
Q. My shares are held in "street name." Will my broker vote my shares on the
merger or on the issuance of Southern Union common stock in connection with
the merger?
A. A broker will vote your shares on the merger agreement and the issuance of
Southern Union common stock in connection with the merger only if you
provide your broker with instructions on how to vote. You should follow the
directions provided by your broker(s) regarding how to instruct brokers to
vote the shares.
Q. Am I entitled to appraisal rights?
A. Under Delaware law, you do not have appraisal rights in connection with the
merger.
Q. When is the merger expected to be completed?
A. Southern Union and PEI are working as quickly as possible and hope to
complete the merger in the last quarter of 1999.
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PROPOSALS TO BE VOTED UPON
1. Re-election of Directors
Nominees for re-election this year are George L. Lindemann, Peter H. Kelley
and Dan K. Wassong. Each has consented to serve a three-year term. (See page 56
for more information.)
Directors are elected by a plurality of the votes of shares present in
person or represented by proxy and entitled to vote in the election. Your Board
recommends a vote FOR these directors.
If any director declines or becomes unable to serve as a director for any
reason, votes will be cast instead for a substitute nominee designated by the
Board of Directors. If no substitute is designated, votes will be cast
according to the judgment of John E. Brennan and Frank W. Denius. If cumulative
voting is in effect by a stockholder, unless authority is withheld, John E.
Brennan and Frank W. Denius will allocate the votes represented by such proxy
in the manner they deem proper in their best judgment.
"Board," "Board of Directors" or "Southern Union board" as used in this
document refer to Southern Union's Board of Directors.
2. Approval of merger and common stock issuance
Summary of the merger:
Merger Agreement. The merger agreement you are being asked to approve and
adopt provides for the merger of PEI into Southern Union. Upon completion of
the merger, PEI's utility operations will become a division of Southern Union,
and PEI's non-regulated subsidiaries will become subsidiaries of Southern
Union. When we speak about the "merger" and the "merger agreement" in this
proxy statement, we mean the merger between PEI and Southern Union and the
agreement that sets forth the details of that merger. The merger agreement is
attached at the back of this proxy statement as Appendix A. We encourage you to
read the merger agreement since it is the legal document that governs the
merger.
Subsidiary Mergers. There are two other mergers that are part of the
Southern Union/PEI transaction. Immediately after the Southern Union/PEI merger
is completed, Honesdale Gas Company, a wholly-owned subsidiary of PG Energy
Inc., a subsidiary of PEI, will be merged into PG Energy and then PG Energy
will be merged into Southern Union. We call these mergers the "subsidiary
mergers." The merger and the subsidiary mergers are sometimes referred to as
the "mergers."
Business of PEI. PEI is a holding company with regulated and non-regulated
subsidiaries. The regulated group consists of PG Energy Inc. and its
subsidiary, Honesdale Gas Company, which together provide natural gas to more
than 152,000 customers in 13 counties in northeastern and central Pennsylvania.
The non-regulated group consists of PEI Power Corp., Theta Land Corp. and PG
Energy Services and its subsidiary, Keystone Pipeline Services, Inc. PG Energy
Services markets energy and energy products in a large area of Pennsylvania
under the name PG Energy Power Plus.
Merger Consideration. At the time the merger is consummated, PEI's
stockholders will be entitled to receive in exchange for each share of PEI
common stock they own that number of whole shares of Southern Union common
stock having a value of $32.00, plus $3.00 in cash (subject to certain
adjustments described in the merger agreement).
Tax Consequences. Southern Union's stockholders will not exchange or
otherwise dispose of any Southern Union common stock in the merger or the
subsidiary mergers, so they will recognize no taxable gain or loss. In
addition, the subsidiary mergers will result in no gain or loss to Southern
Union, PEI or the PEI subsidiaries that are parties to these mergers.
Regulatory Approvals. Approvals from the public utility commissions of
Pennsylvania, Missouri and Florida and from the Federal Energy Regulatory
Commission, as well as the expiration or earlier termination of
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the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, are required to complete the merger. Southern Union
and PEI were granted early termination of the Hart-Scott-Rodino Act's waiting
period on August 20, 1999. As of the date of this proxy statement, none of the
other required regulatory approvals have been obtained.
Termination. PEI and Southern Union may terminate the merger agreement by
mutual written consent without completing the merger. The merger agreement may
also be terminated by either PEI or Southern Union if the merger is not
completed by June 7, 2000 (which may be extended to December 7, 2000 to obtain
governmental approvals) or by PEI if the average trading price used to
determine the number of shares of Southern Union common stock to be received
by PEI stockholders is lower than $17.30, or in certain other circumstances.
Also, under certain circumstances, the merger agreement may be terminated
by the PEI board if it has accepted a superior proposal for a business
combination from another party or by Southern Union if the PEI board fails to
recommend approval of the merger to the PEI stockholders or PEI fails to cause
its utility subsidiary to redeem or repurchase all of its outstanding shares
of preferred stock. In either of these events, PEI may be required to pay to
Southern Union a termination fee of $10 million.
Accounting Treatment. The merger will be accounted for under the purchase
method of accounting.
A more detailed discussion of the merger, including the consideration to be
provided to PEI's stockholders in connection with the merger, background
information regarding the merger, some of the financial and strategic reasons
why PEI and the Company believe the merger is desirable, the accounting
treatment of the merger, potential conflicts of interests of certain PEI
officers and directors with respect to the merger and significant U.S. income
tax consequences of the merger, is set forth in this document under the
heading "The Merger." Please also refer to the section of this proxy statement
entitled "The Merger Agreement" for a description of certain important terms
of the merger agreement.
The proposed merger is a complex transaction. Stockholders are strongly
urged to read and consider carefully the portions of this proxy statement
pertaining to the merger in their entirety.
PEI Approval: The merger agreement must be approved by the holders of a
majority of shares of PEI common stock entitled to vote at the Special Meeting
of PEI Stockholders (the "PEI special meeting") to be held on October 19,
1999.
Southern Union Approval: The Delaware General Corporation Law ("DGCL")
requires the Company to obtain stockholder approval of the merger agreement
because the aggregate number of shares of Southern Union common stock to be
issued pursuant to the merger agreement will be greater than 20% of the total
number of shares of Southern Union common stock issued and outstanding
immediately prior to the completion of the merger. The rules of the New York
Stock Exchange ("NYSE") require Southern Union's stockholders to approve the
issuance of shares of Southern Union common stock pursuant to the merger
agreement (the "stock issuance") because the stock issuance will be greater
than 20% of the total number of shares of Southern Union common stock issued
and outstanding immediately prior to the completion of the merger.
Required Vote: The affirmative vote of a majority of the shares of Southern
Union common stock issued and outstanding on the record date is required to
approve the merger agreement. The affirmative vote of a majority of the votes
cast on the stock issuance at the annual meeting is required to approve the
stock issuance, provided that the total vote cast on the stock issuance
represents a majority of the shares of Southern Union common stock outstanding
on the record date.
Lindemann Proxy: George L. Lindemann, the Chairman of the Southern Union
board and Southern Union's Chief Executive Officer, and four other members of
Mr. Lindemann's family granted PEI an irrevocable proxy to vote the shares of
Southern Union common stock they own for the purpose of securing the
approval and adoption by the stockholders of Southern Union of the merger
agreement and the consummation
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of the transactions contemplated thereby and to prevent any action that would
prevent or hinder in any material respect such approval or consummation. See
"The Merger Agreement--Covenants and Other Agreements--The Lindemann Proxy." As
of the record date, the shares of Southern Union common stock owned by Mr.
Lindemann and the members of his family who granted a proxy to PEI to vote
their shares of Southern Union common stock represented approximately 39% of
the outstanding shares of Southern Union common stock entitled to vote on the
approval of the merger agreement and the stock issuance. The Lindemann Proxy is
attached to this proxy statement as Appendix D.
Share Ownership of Management: At the close of business on September 3,
1999, directors and executive officers, other than the Lindemann family, of the
Company and their affiliates owned and were entitled to vote approximately
1,422,497 shares of Southern Union common stock, which represented 5% of the
shares of Southern Union common stock outstanding on that date. Each of those
directors and executive officers has indicated their present intention to vote,
or cause to be voted, the Southern Union common stock owned by them FOR the
proposal to adopt the merger agreement and approve the stock issuance at the
Annual Meeting.
Abstentions and Broker Non-Votes: Abstentions and proxies from brokers or
nominees indicating that such persons have not received instruction from the
beneficial owners or other persons entitled to vote Southern Union common stock
("Broker Non-Votes") will be considered as present for the purposes of
establishing a quorum. However, abstentions and Broker Non-Votes will not count
as votes cast. Accordingly, since the affirmative vote of a majority of the
Southern Union common stock issued and outstanding on the record date is
required to approve the merger agreement, the failure to vote, abstentions and
Broker Non-Votes will have the effect of a vote AGAINST the merger agreement.
Furthermore, since the affirmative vote of a majority of the votes cast on the
stock issuance at the Annual Meeting is required to approve the stock issuance,
provided that the total vote cast on the stock issuance represents a majority
of the Southern Union common stock outstanding on the record date, abstentions
and Broker Non-Votes may have the effect of a vote AGAINST the stock issuance.
Appraisal Rights: Under the Delaware law, you do not have appraisal rights
in connection with the merger.
Board Recommendations: For the reasons set forth in the sections of this
proxy statement entitled "The Merger--Southern Union Reasons for the Merger"
and "The Merger--Recommendation of the Southern Union Board" and elsewhere in
this proxy statement, your Board recommends a vote FOR the merger agreement and
the stock issuance.
3. Charter Amendments to Change Company's Capitalization.
Introduction: The Company's restated certificate of incorporation provides
that the authorized capital stock of the Company consists of (i) 50,000,000
shares of common stock, par value $1.00 per share, and (ii) 1,500,000 shares of
cumulative preferred stock, no par value. As of the record date, 31,235,697
shares of Southern Union common stock were issued and outstanding and no shares
of Southern Union cumulative preferred stock were issued and outstanding.
Proposed Changes to Company's Capitalization. Your Board has approved and is
recommending approval of certain amendments to the Company's restated
certificate of incorporation, which will change Southern Union's
capitalization. These amendments are as follows:
(i) to increase the number of authorized shares of Southern Union common
stock from 50,000,000 to 200,000,000 (see "Purpose of Proposed
Changes to the Company's Capitalization" on page 7);
(ii) to grant the Board the authority to issue 6,000,000 shares of
preferred stock in series the Board deems appropriate and to
establish from time to time the number of shares to be included in
each such series and to fix the designation, powers, preferences and
rights of the shares of each such series and the qualifications,
limitations or restrictions thereof; and
(iii) to repeal the rights, powers, privileges and preferences of Southern
Union cumulative preferred stock.
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Purpose of Proposed Changes to the Company's Capitalization: The purpose of
these amendments is to ensure that the Company will have available for issuance
that number of shares of Southern Union common stock which PEI's stockholders
will be entitled to receive upon completion of the merger and to enhance
Southern Union's ability to raise capital through the sale or placement of
Southern Union's securities and pursue opportunities for future acquisitions
and business combinations.
Effect of Proposed Amendments: If these amendments to the Company's restated
certificate of incorporation are approved by the Company's stockholders, the
number of authorized shares of Southern Union common stock will increase from
50,000,000 to 200,000,000. In addition, the rights, preferences and powers of
Southern Union's currently authorized cumulative preferred stock will be
repealed in their entirety. Rather, the Board will be granted the authority to
issue 6,000,000 shares of preferred stock in series the Board deems appropriate
and to establish from time to time the number of shares to be included in each
such series and to fix the designation, powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof ("Southern Union Blank Check Preferred Stock"). The dividend rights,
dividend rates, conversion rights and terms, voting rights, redemption rights
and terms and liquidation preferences of each series of Southern Union Blank
Check Preferred Stock may be similar to or significantly different from the
rights, preferences and powers of Southern Union's currently authorized
cumulative preferred stock.
If these amendments are approved and adopted by the Company's stockholders
at the annual meeting, the amendments will become effective upon the filing of
a certificate of amendment to the Company's restated certificate of
incorporation with the Secretary of State of Delaware, which the Company's
management believes will occur promptly after such approval is obtained.
Required Vote: The affirmative vote of the holders of a majority of the
outstanding shares of Southern Union common stock as of the record date is
required to approve these proposed amendments to the Company's restated
certificate of incorporation.
Board Recommendation: Your Board recommends that you vote FOR the proposed
amendments to the Company's restated certificate of incorporation, which will
change the Company's capitalization.
4. Charter Amendment to Increase the Maximum Number of Directors.
Proposed Amendment: Your Board has approved and is recommending approval of
an amendment to the Company's Certificate of Incorporation to increase the
maximum number of directors from twelve (12) to fifteen (15).
Purpose of Amendment: The purpose of the amendment is to enable the Company
to satisfy its obligations under the merger agreement. The Company's restated
certificate of incorporation provides that no more than twelve (12) persons may
constitute the Southern Union board. Ten (10) persons currently serve as
directors on the Southern Union board. Under the merger agreement, Southern
Union has agreed to nominate and recommend for election to the Southern Union
board three (3) individuals to be selected prior to the consummation of the
merger by Southern Union from PEI's Board of Directors (the "PEI board"). If
this proposed amendment is approved by Southern Union's stockholders, Southern
Union anticipates that the Southern Union board will consist of only thirteen
(13) directors after the consummation of the merger even though fifteen (15)
directors may be permitted.
Required Vote: The affirmative vote of the holders of a majority of the
outstanding shares of Southern Union common stock as of the record date is
required to approve this proposed amendment to the Company's restated
certificate of incorporation.
Board Recommendation: Your Board recommends that you vote FOR the proposed
amendment to the Company's restated certificate of incorporation, which will
increase the number of directors that may serve on the Southern Union board.
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5. Proposal of Change to the 1992 Plan
Introduction: The Company's 1992 Long-Term Incentive Plan (the "1992 Plan")
was approved and adopted by the Board as of July 1, 1992 and was adopted by the
Company's stockholders at the annual meeting held on May 12, 1993 and was
amended and approved by the Company's stockholders at the annual meeting held
on November 12, 1998. The 1992 Plan was adopted in order to permit the granting
of a variety of long-term incentive awards to officers and key employees of the
Company and its subsidiaries in order to focus the attention of management and
other employees on the long-term improvement of stockholder value and to align
the interests of management and the Company's stockholders. Specifically,
grants of stock options, stock appreciation rights ("SARs"), dividend
equivalents, restricted stock, and performance shares and units (collectively
referred to as "Awards") may be made under the 1992 Plan. The Board believes
that the use of Awards is important to the Company's ability to attract and
retain talented people to manage the Company. At the annual meeting held on
November 11, 1997, the Company's stockholders, on recommendation of the Board,
approved an increase in the number of shares of Southern Union common stock
available for Awards under the 1992 Plan. As of September 3, 1999, Awards
covering a total of 2,763,551 shares of Southern Union common stock have been
granted out of 3,653,343 shares available under the 1992 Plan.
Please refer to the tables under the heading "Executive Officers and
Compensation" for information regarding awards of stock options made to the
Named Officers under the 1992 Plan.
Description of the 1992 Plan: The 1992 Plan provides for Awards in the form
of stock options, SARs, dividend equivalents, restricted stock and performance
shares and units. Each Award is granted with terms and conditions consistent
with the 1992 Plan, as the Plan Committee determines. See "Board of Directors--
Board Committees and Meetings."
Any officer or other salaried employee of the Company or of any subsidiary
of the Company is eligible to be granted Awards under the 1992 Plan. A person
who has retired from active employment with the Company or any of its
subsidiaries, but continues to receive a salary pursuant to the terms of any
consulting agreement or arrangement (whether written or unwritten), is not
eligible to receive an Award. The Company estimates that substantially all its
non-hourly employees are eligible to participate in the 1992 Plan.
The shares of Southern Union common stock subject to an Award under the 1992
Plan that expires or is forfeited become available again for future Awards.
Non-Qualified Stock Options, if so designated by Plan Committee at the time of
grant, may be gratuitously transferred by the participant (but not the
participant's transferee) to any member of the participant's immediate family,
to a trust for the benefit of one or more members of the participant's
immediate family, to a partnership or other entity in which the only partners
or interest holders are members of the participant's immediate family, and to a
charitable organization, or to any of the foregoing.
Types of Awards:
Stock Options. The term of stock options does not exceed ten years from the
date of grant. The Plan Committee may grant either "Incentive Stock Options,"
as defined in the Internal Revenue Code, or stock options not intended to
qualify as such ("Non-Qualified Stock Options"). The exercise price for the
purchase of shares subject to a stock option may not be less then 100% of the
market value of the shares covered by the option on the date of grant. The
exercise price must be paid in full in cash or shares of Southern Union common
stock, or a combination of both.
Stock Appreciation Rights. The Plan Committee may grant SARs unrelated to
stock options or related to stock options or portions of stock options granted
to employees pursuant to the 1992 Plan. In exchange for surrendering the right
to exercise a related stock option, the employee may exercise a SAR with
respect to the number of shares covered by the surrendered stock option. Upon
the exercise of a SAR, the employee is entitled to receive payment of an amount
equal to the aggregate appreciation in value of the shares covered by
the SAR or by the related stock option. Such payment may be made in cash, in
shares of Southern Union
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common stock or a combination of both. The Plan Committee may also grant
limited SARs which are exercisable only in certain events such as a change in
control of the Company. SARs are not transferable, other than by will or the
laws of descent and distribution.
Dividend Equivalents. The 1992 Plan authorizes the granting of dividend
equivalents which may be granted in conjunction with a stock option or which
may be granted separately. A dividend equivalent entitles the holder to receive
a cash payment(s) equal to any cash dividends paid during the term of the
dividend equivalent with respect to a number of shares of the Southern Union
common stock. The Plan Committee also has the discretion to grant dividend
equivalents entitling the holder to receive cash payment equal in value to any
non-cash (other than stock) dividends as well. When a dividend equivalent is
granted in conjunction with a stock option, no adjustment to the related stock
option will be made in the event of a cash dividend or other distribution on
the Southern Union common stock.
Performance Shares or Units. The 1992 Plan also provides for the granting of
performance shares or units which gives the recipient the right to receive a
specified number of shares of Southern Union common stock or cash upon the
achievement of specified performance objectives within a specified award
period. If a participant dies or terminates his or her position with the
Company prior to the close of an award period, any performance shares or units
granted to him or her for the period would be forfeited unless such restriction
is waived by the Plan Committee. Performance shares and units are non-
transferable.
Restricted Stock. The 1992 Plan also provides for the granting of restricted
stock. Restricted stock is Southern Union common stock that is subject to
forfeiture in the event the recipient ceases to be an employee of the Company
for any reason prior to a date set by the Plan Committee. If the participant
retires, dies or is disabled, then the number of shares of restricted stock
forfeited will depend upon how long the shares of restricted stock had been
held by the participant. If a participant ceases to be an employee for any
other reason, all shares of restricted stock held by the participant which are
still subject to restriction will be forfeited. The Plan Committee may remove
the forfeiture restriction on the stock at any time. Restricted stock is non-
transferable.
Effect of Change in Control: Upon certain events constituting a change in
control of the Company, as specified in the 1992 Plan, all Awards then
outstanding will become immediately exercisable. The merger will not constitute
a "change in control" as defined under the 1992 Plan.
Outstanding Awards: The value of all the types of Awards that may be granted
under the 1992 Plan is based on the value of the Southern Union common stock.
To date, only Awards of stock options and dividend equivalents have been
granted under the plan. The dividend equivalents granted have been awarded in
conjunction with stock options. The exact vesting schedule with respect to any
stock option grant is subject to the complete discretion of the Plan Committee
and will be set forth in the grant of the stock option.
In considering the recommendation of the Board, stockholders should be aware
that employee members of the Board are eligible to participate in the 1992 Plan
and that stockholders' percentage interest in the Company will be diluted as
shares under the Plan are issued.
Proposed Amendment: The Company requests stockholder approval to increase by
3,000,000 the number of shares of Southern Union common stock available for
awards under the 1992 Plan in order to achieve the Plan's purposes in the
future. The Board believes that the use of Awards is important to the Company's
ability to attract and retain talented people to manage the Company. The Board
also believes that the proposed increase in the number of shares available for
Awards will enable Southern Union to continue granting a variety of long-term
incentive awards to officers and key employees of Southern Union and its
subsidiaries, including those that join Southern Union as a result of the
merger. No other changes to the 1992 Plan are proposed.
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Any stockholder may obtain a copy of the current Plan by writing to Southern
Union Company, 504 Lavaca Street, Eighth Floor, Austin, Texas 78701, Attention:
Corporate Secretary.
Vote Required: In order to approve the proposal of change to the 1992 Plan,
a majority of the total number of votes that could be cast at the annual
meeting must vote in favor of the proposal. Your Board recommends a vote FOR
the proposal of change to the 1992 Plan.
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THE MERGER
This section of the proxy statement, as well as the next section entitled
"The Merger Agreement," describe certain aspects of the proposed merger. These
sections highlight key information about the merger and the merger agreement
but they may not include all the information that you would like to know. The
merger agreement is attached as Appendix A to this proxy statement. We urge you
to read the merger agreement in its entirety.
PEI Background of the Merger
As part of its long-term planning, the PEI board has periodically reviewed
and evaluated various strategic options and alternatives available to maximize
the economic return of its stockholders. The PEI board has recognized the need
for PEI to be larger in order to respond to the demands of a deregulated energy
market and to compete with the larger companies being formed in the
consolidation of the energy industry. From time to time, the PEI board has
considered acquisitions and has entered into marketing alliances. But these
actions have not been sufficient to give PEI the necessary size and scope. As
an alternative, the PEI board authorized the exploration of a strategic stock-
for-stock merger with companies chosen because of the strengths they would
bring to the relationship.
In late September 1998, John E. Brennan, Vice Chairman of the Southern Union
board, and Thomas F. Karam, the President and Chief Executive Officer of PEI at
a coincidental meeting discussed, in general terms, their respective companies
and whether it would be appropriate to initiate further discussions between
representatives of Southern Union and PEI regarding a possible business
combination. To follow-up this conversation, on October 5, 1998, Southern Union
sent Mr. Karam copies of Southern Union's recently released 1998 Summary Annual
Report to Stockholders, Annual Report on Form 10-K for the fiscal year ended
June 30, 1998 and Proxy Statement for Southern Union's 1998 annual meeting of
stockholders.
On March 1, 1999, following general conversations between Ronald W. Simms,
the Chairman of the PEI board, Mr. Karam and Mr. Brennan, about the energy
industry and the philosophies of their two companies, Mr. Karam met with George
L. Lindemann, the Chairman of the Southern Union board and Southern Union's
Chief Executive Officer, and Mr. Brennan to discuss the possibility of a
strategic relationship between PEI and Southern Union and to arrange for a
meeting between Messrs. Simms and Karam and Southern Union management in
Austin, Texas. A meeting was held from March 3-4, 1999 at which Southern Union
officers and division heads made a detailed presentation about Southern Union.
Contemporaneously with the discussions between Southern Union and PEI,
Messrs. Simms and Karam held meetings and discussions with five other companies
they had identified as possible strategic stock-for-stock merger partners.
These meetings were similar to the meetings with Southern Union.
On March 19, 1999, Mr. Karam and Mr. Brennan had a general conversation
about the financial terms of a merger.
On March 24, 1999, at a meeting of the PEI board, Messrs. Simms and Karam
described the preliminary discussions they had with possible partners in a
strategic stock-for-stock merger. They stated that they believed that a
strategic merger with a larger company should, among other things, help PEI to
provide all energy alternatives to the consumer, to diversify geographically,
to grow aggressively where advisable and to be better able to take advantage of
opportunities in the energy industry. In addition, a strategic relationship
should not require PEI to significantly reduce employees or other assets in
northeastern Pennsylvania and should help improve service to its customers. It
was the sense of the meeting that Mr. Simms and Mr. Karam should continue these
discussions.
On April 8, 1999, Messrs. Simms and Karam met with Messrs. Lindemann and
Brennan to discuss more specifically a possible strategic relationship. Mr.
Lindemann expressed a desire to proceed and make an indication of interest.
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On April 12, 1999, representatives of Southern Union visited PEI's
facilities to conduct a limited business investigation of PEI and to discuss
the details of a merger with Mr. Karam.
At the PEI board meeting on April 14, 1999, Messrs. Simms and Karam updated
the PEI board on their discussions. They noted the changing competitive
landscape in the energy industry where critical mass and complete energy
solutions are necessary; the increasing merger activity and formation of larger
companies against which PEI must compete; and the capital limitations of PEI.
They reviewed PEI's experience with possible acquisitions and marketing
alliances.
The PEI board discussed generally different methods of valuing PEI and
compared various financial measurements and ratios of PEI with those of
comparable publicly-traded companies. They also reviewed multiples and premiums
in recent gas utility mergers.
PEI's special counsel, Hughes Hubbard & Reed LLP, reviewed the board's
fiduciary duties and the standards of conduct it should follow in considering
whether to proceed with discussions of a strategic stock-for-stock merger and
whether to accept a merger proposal.
The PEI board then appointed Messrs. Simms and Karam as a Special Committee
of the board to continue discussions concerning a possible strategic stock-for-
stock merger.
Following the April 14 board meeting, each of the companies was contacted
and asked to make a firm indication of interest by May 1, if they desired to do
so.
On April 19 and 20, 1999, representatives of Southern Union visited PEI to
discuss a proposed transaction with the Special Committee and to continue their
limited business investigation of PEI.
By May 1, three of the companies had made an indication of interest. Each
company was informed that the indications would be evaluated by the PEI board
at its May 5 meeting and that shortly thereafter the Special Committee would
contact them.
At the PEI board meeting on May 5, 1999, the Special Committee updated the
PEI board on their discussions with possible merger partners and reviewed the
indications of interest. The Southern Union indication of interest was the
highest. The Special Committee analyzed Southern Union's indication of interest
and compared it with recent gas utility deals in the northeast and mid-
Atlantic. The Special Committee and the PEI board then discussed Southern
Union, including its financial condition, an assessment of its management and
operations and the ability of Southern Union to consummate a merger. The PEI
board also considered the Southern Union common stock dividend, the possible
effect of Southern Union's bid for Southwest Gas Corporation on a merger with
Southern Union and the effect of a merger on PEI's employees and customers. The
Special Committee was authorized to negotiate a merger agreement with Southern
Union, subject to PEI board approval.
On May 6, 1999, the Special Committee called Southern Union to express a
desire to enter into more substantive discussions and to negotiate a merger
agreement.
Over the course of the next several weeks, the Special Committee and its
legal advisors discussed the major terms of the merger with Southern Union.
On May 24, 1999, the Special Committee again updated the board on the merger
discussions. Representatives of Southern Union made a presentation to the PEI
board on Southern Union, including its business plan and historical and pro
forma financial information, and responded to questions from the PEI board.
PEI's special counsel reviewed the major issues relating to the merger
agreement for the PEI board.
From May 25 to June 7, 1999, representatives of PEI and Southern Union and
their financial, accounting and legal advisors had numerous communications,
including meetings to conduct additional investigation of the other party's
business and negotiate the terms of the merger agreement.
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At 7:00 a.m. on June 7, 1999, the PEI board met to consider the merger
agreement. PEI's special counsel analyzed the important provisions of the
agreement and discussed the mergers.
The PEI board discussed with counsel a table showing how the merger
consideration would be calculated at various trading levels of Southern Union
common stock, the treatment of PEI benefit plans, the "fiduciary out," the
covenants of Southern Union and the conditions to the closing.
Legg Mason Wood Walker, Incorporated ("Legg Mason"), PEI's financial
advisors, discussed the terms of the transaction between Southern Union and PEI
with the PEI board and rendered a written opinion that, as of the date of the
merger agreement and the meeting and based upon and subject to certain matters
stated in its opinion, the consideration to be received by the stockholders of
PEI in the merger was fair to such stockholders from a financial point of view.
At 9:15 a.m. at the PEI board's request, the NYSE agreed not to open trading
in the stock of PEI while the PEI board and its advisors continued discussions
of the merger. Likewise, at Southern Union's request, the NYSE agreed not to
open trading in the stock of Southern Union while the PEI board continued its
discussions.
The Special Committee then recommended approval of the merger, and the PEI
board, after further discussion and for the reasons set forth below under "--
PEI Reasons for the Merger; Recommendation of PEI's Board of Directors,"
unanimously approved the merger agreement. Representatives of Southern Union
were invited into the meeting and the merger agreement was executed. The merger
was publicly announced and the stocks of the two companies were permitted to
open for trading.
PEI Reasons for the Merger; Recommendation of PEI's Board of Directors
Recognizing the need for PEI to be larger in order to respond to the demands
of a deregulated energy market and to compete with the larger companies being
formed in the consolidation of the energy industry, the PEI board has
considered acquisitions and considered and entered into marketing alliances.
But these actions have not been sufficient to give PEI the necessary size and
scope. As an alternative, the PEI board authorized the exploration of a
strategic stock-for-stock merger. The PEI board believes that the merger with
Southern Union should, among other things, help PEI to provide all energy
alternatives to the consumer, to diversify geographically, to grow aggressively
where advisable and to be better able to take advantage of opportunities in the
energy industry. In addition, this strategic relationship should not require
PEI to significantly reduce employees or other assets in northeastern
Pennsylvania and should help improve service to its customers.
In reaching its decision to approve the merger and the merger agreement and
to recommend that PEI stockholders adopt the merger agreement, the PEI board
consulted with PEI management and its financial and legal advisors and
considered a number of factors, including, without limitation, the following
material factors:
. the belief that the merger with Southern Union will result in a combined
entity with sufficient size and scope to compete effectively in the
deregulated energy market;
. the merger consideration negotiated with Southern Union, including the
collar provision designed to protect PEI stockholders with respect to
the value of the consideration to be received by them in the merger, and
the implied premium that the merger consideration represents over the
recent market price of PEI common stock;
. the written opinion of Legg Mason, a copy of which is attached as
Appendix B to this proxy statement, that, subject to the assumptions and
limitations contained in that opinion, the consideration to be received
in the merger by the stockholders of PEI is fair, from a financial point
of view, to the stockholders and the financial presentation made by Legg
Mason to the PEI board in connection with delivering this opinion;
. the benefits to PEI's employees and the communities served by PEI,
including the retention of local operations and provisions of Southern
Union's benefit plans;
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. the terms and conditions of the merger agreement, including (1)
reciprocal representations and warranties, (2) the closing conditions,
(3) the ability of PEI, under certain circumstances, to provide
information to, and enter into negotiations with, third parties with
respect to certain unsolicited offers to acquire PEI, and to terminate
the merger agreement in order to enter into an agreement with a person
making an unsolicited offer which is more favorable to PEI stockholders
from a financial point of view than the merger after paying a
termination fee to Southern Union and giving Southern Union the
opportunity to match any offer made by such a third party and (4) the
ability of PEI to terminate the merger agreement if the average trading
price of Southern Union common stock for the valuation period ending
shortly before the closing falls below $17.30 (see "The Merger
Agreement");
. the structure of the transaction, which is intended to qualify as a
"reorganization" for United States federal income tax purposes, so that
the stockholders of PEI, as such, will recognize gain only to the extent
they receive cash in exchange for their shares of PEI common stock;
. information concerning the business, financial condition, results of
operations and prospects, including, but not limited to, the potential
for growth, development and profitability of Southern Union;
. the projected pro forma ownership of Southern Union by the stockholders
of PEI implied by the exchange ratio;
. the historical market prices and trading information with respect to PEI
common stock and Southern Union common stock; and
. the likelihood that the merger would be consummated.
During its deliberations regarding the merger and the merger agreement, the
PEI board also analyzed certain risks associated with the merger, including the
integration of the two companies and the risk of obtaining the necessary
regulatory approvals for the merger. After reviewing these matters, the PEI
board determined that the benefits of the merger outweighed any risks entailed
in these matters.
At its meeting on June 7, 1999, the PEI board unanimously approved the terms
of the merger agreement and the related transactions, determined that the terms
of the merger are in the best interests of PEI and PEI's stockholders and
recommended approval and adoption of the merger agreement by PEI's
stockholders.
This discussion of the information and factors considered by the PEI board
in making their decision is not intended to be exhaustive but is believed to
include all material factors considered in connection with the PEI board's
evaluation of the merger. The PEI board did not find it practicable to, and did
not, quantify or otherwise assign relative weights to, the specific factors
considered in reaching its determination. In addition, individual members of
the PEI board may have given different weight to different factors. Based on
the total mix of information available to them, all directors determined to
approve and recommend the merger to PEI stockholders.
In considering the recommendation of the PEI board with respect to the
merger agreement, PEI stockholders should be aware that certain members of the
PEI board and PEI employees have interests in the merger that are different
than, or in addition to, the interests of stockholders of PEI generally. The
PEI board was aware of these interests and considered them, among other
matters, in approving the merger agreement. See "The Merger--Potential
Conflicts and Interests of Certain Persons in the Merger."
Opinion of PEI's Financial Advisor
Legg Mason rendered its oral and written opinion to the PEI board at their
meeting on June 7, 1999, that, as of that date, and subject to certain
assumptions, factors and limitations set forth in such opinion as described
below, the merger consideration to be received by PEI stockholders was fair to
stockholders from a financial point of view.
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The full text of the written opinion of Legg Mason dated June 7, 1999, which
sets forth the assumptions made, matters considered, scope and limitations on
the review undertaken, and procedures followed by Legg Mason in connection with
the opinion, is attached as Appendix B to this proxy statement. Stockholders
are urged to read this opinion in its entirety. Legg Mason's opinion is
directed only to the consideration to be received by stockholders pursuant to
the merger agreement and does not constitute a recommendation to any
stockholder as to how such stockholder should vote at the PEI special meeting.
Legg Mason's opinion will not be updated prior to or at the closing of the
merger. The summary of the opinion of Legg Mason set forth in this proxy
statement is qualified in its entirety by reference to the full text of such
opinion. In connection with this engagement, PEI did not request Legg Mason,
and Legg Mason did not assist PEI, to determine the exchange ratio provided for
in the merger agreement. The exchange ratio was determined through arm's-length
negotiations between PEI and Southern Union.
In connection with its opinion, Legg Mason reviewed, among other things, (a)
the merger agreement and certain related documents, (b) the audited
consolidated financial statements of PEI as of and for the years ended December
31, 1998, 1997, 1996 and 1995, (c) the unaudited financial statements of PEI as
of and for the three-month period ended March 31, 1999, (d) the audited
consolidated financial statements of Southern Union as of and for the years
ended June 30, 1998, 1997, 1996 and 1995 and (e) the unaudited financial
statements of Southern Union as of and for the nine-month period ended March
31, 1999. Legg Mason also had discussions with members of the senior management
of PEI and Southern Union regarding the past and current business operations,
financial condition and future prospects of their respective companies. In
addition, Legg Mason reviewed the reported price and trading activity for the
shares of PEI common stock and the shares of Southern Union common stock,
compared certain financial and stock market data for PEI and Southern Union
with similar information for certain other publicly-traded companies, analyzed
publicly available information concerning the terms of certain selected
business combinations in the gas distribution utility industry, and performed
such other studies and analyses as Legg Mason considered necessary or
appropriate.
Legg Mason relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by them for
purposes of their opinion. Legg Mason did not make an independent evaluation or
appraisal of the assets and liabilities of PEI or Southern Union or any of
their subsidiaries and they were not furnished with any such evaluation or
appraisal.
The following is a summary of the financial analyses Legg Mason utilized in
connection with providing its written opinion to the PEI board.
Stock Trading History. Legg Mason examined the history of the trading price
and volume for the shares of PEI common stock. This examination showed that
during the four-month period from February 4, 1999 to June 4, 1999, the trading
price of PEI common stock ranged from $20.75 per share to $29.69 per share.
This examination also showed that over the period from June 4, 1997 to June 4,
1999, the trading price of PEI common stock ranged from $20.75 per share to
$31.94 per share. This range may be compared to the merger consideration. Legg
Mason also examined the history of the trading price and volume for the shares
of Southern Union common stock (not adjusted for 5% Southern Union stock
dividend distributed on August 6, 1999). This examination showed that during
the four-month period from February 4, 1999 to June 4, 1999, the trading price
of Southern Union common stock ranged from $17.94 per share to $22.81 per
share. The closing price of Southern Union common stock on June 4, 1999 was
$21.625 per share, which was used as the basis for the exchange rate in the
merger agreement. In addition, this examination showed that over the period
from June 4, 1997 to June 4, 1999, the trading price of Southern Union common
stock ranged from $13.16 per share to $24.38 per share.
Comparison of Selected Peer Companies. Legg Mason compared selected
historical stock market and balance sheet data and financial ratios for PEI to
the corresponding data and ratios of the following companies: Colonial Gas
Company, Connecticut Energy Corp., CTG Resources, Inc., Laclede Gas Company,
North Carolina Natural Gas Corp., NUI Corp., Providence Energy Corp., South
Jersey Industries, Inc. and Yankee Energy System, Inc. The multiples of PEI
were calculated using a price of $29.69 per share for PEI common
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stock, the closing price as of June 4, 1999. Such data and ratios included,
among other things, equity value as a multiple of latest twelve months ("LTM")
earnings per share ("EPS"), projected 1999 earnings per share, projected 2000
earnings per share and stockholders' equity; total market capitalization as a
multiple of LTM revenues, of LTM earnings before interest, taxes, depreciation
and amortization ("EBITDA") and of LTM earnings before interest and taxes
("EBIT"). Projected earnings per share data was provided by First Call
Analysts' Research and FactSet Data Systems. EBITDA (which is not a measure of
financial performance under generally accepted accounting principles) is used
by investment banking firms as one measure of a company's financial
performance. EBITDA should not be construed as an alternative to operating
income (as determined in accordance with generally accepted accounting
principles), as an indicator of a company's performance or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) or as a measure of liquidity.
An analysis of equity value as a multiple of LTM earnings per share for the
selected peer companies yielded a range of 15.2x to 26.7x with a median of
19.2x as compared to 27.0x for PEI or 31.9x under the terms of the contemplated
transaction. An analysis of equity value as a multiple of projected 1999 EPS
yielded a range of 14.4x to 21.6x with a median of 17.2x as compared to 22.0x
for PEI or 25.9x under the terms of the contemplated transaction. An analysis
of equity value as a multiple of projected 2000 EPS yielded a range of 12.4x to
19.1x with a median of 15.4x as compared with 20.5x for PEI or 24.1x under the
terms of the contemplated transaction. An analysis of total market
capitalization as a multiple of LTM EBITDA yielded a range of 6.2x to 9.6x with
a median of 7.6x as compared to 11.8x for PEI or 13.3x under the terms of the
contemplated transaction. An analysis of total market capitalization as a
multiple of LTM EBIT yielded a range of 8.7x to 14.1x with a median of 11.5x as
compared to 16.2x for PEI or 18.2x under the terms of the contemplated
transaction.
Selected Transactions Analysis. Using publicly available information, Legg
Mason analyzed the purchase price and implied transaction value multiples paid
or announced to be paid in the following selected merger and acquisition
transactions in the gas distribution utility industry: Eastern
Enterprises/Colonial Gas Co.; Energy East Corp./Connecticut Energy Corp.;
Carolina Power and Light/North Carolina Natural Gas; Dominion Resources,
Inc./Consolidated Natural Gas; NiSource Inc./Bay State Gas; Eastern
Enterprises/Essex County Gas Co.; and Atmos Energy Corp./United Cities Gas Co.
(the "Selected Transactions"). Such analysis indicated that for the Selected
Transactions, (i) total transaction value as a multiple of LTM revenue ranged
from 1.7x to 3.2x with a mean of 2.4x compared to 2.3x for the contemplated
transaction, (ii) total transaction value as a multiple of LTM EBITDA ranged
from 7.5x to 13.9x with a mean of 9.8x, as compared to 13.3x for the
contemplated transaction, (iii) equity value as a multiple of LTM net income
ranged from 20.0x to 26.4x with a mean of 21.8x, as compared to 31.9x for the
contemplated transaction, and (iv) equity value as a multiple of stockholders'
equity ranged from 1.9x to 2.9x with a median of 2.4x as compared to 2.6x for
the contemplated transaction.
No company, transaction, or business used in the comparison with comparable
companies or selected transactions analysis as a comparison is identical to PEI
or the merger. Accordingly, an analysis of the results of the foregoing is not
entirely mathematical. Instead, it involves complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors that could affect the acquisition, public trading or other values
of the comparable companies, selected transactions or the company or
transaction to which they are being compared.
Discounted Cash Flow Analysis. Legg Mason performed a discounted cash flow
analysis of PEI. Legg Mason calculated a net present value of estimated free
cash flows for the years 2000 through 2004 using discount rates ranging from
6.2% to 8.2%. Legg Mason calculated PEI's terminal values in the year 2004
based on multiples ranging from 10.4x EBIT to 12.7x EBIT. These terminal values
were then discounted to present value using discount rates from 6.2% to 8.2%.
Using the foregoing terminal values and discounted cash flows for PEI, the
equity value ranged from $19.12 to $29.88, as compared to the equity value
implied by the exchange ratio of $35.00 per share.
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The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to practical analysis or summary description.
Selecting portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Legg Mason's opinion. In arriving at its fairness
determination, Legg Mason considered the results of all such analyses. The
analyses were prepared solely for purposes of Legg Mason providing its opinion
to the PEI board as to the fairness of the merger consideration pursuant to
the merger agreement to the holders of shares of PEI common stock and do not
purport to be appraisals that necessarily reflect the prices at which assets,
businesses or securities actually may be sold. Analyses based on forecasts of
future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by such analyses.
Because such analyses are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the parties, none of PEI,
Southern Union, Legg Mason or any other person assumes responsibility if
future results are materially different from those forecast.
As described above, Legg Mason's opinion to the PEI board was one of the
many factors taken into consideration by the PEI board in making its
determination to approve the merger agreement. The foregoing summary does not
purport to be a complete description of the analyses performed by Legg Mason
and is qualified by reference to the written opinion of Legg Mason set forth
in Appendix B hereto.
Legg Mason, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. PEI selected Legg
Mason as its financial adviser because Legg Mason is a nationally recognized
investment banking firm that has substantial experience in transactions
similar to the merger.
Legg Mason has previously rendered certain investment banking and financial
advisory services to PEI.
Legg Mason provides a full range of financial, advisory and brokerage
services and in the course of its normal trading activities may from time to
time effect transactions and hold positions in the securities or options on
securities of PEI and/or Southern Union for its own account and for the
accounts of customers.
Pursuant to an engagement letter dated May 27, 1999, PEI engaged Legg Mason
to act as its financial advisor in connection with the possible merger of PEI
and Southern Union. Pursuant to the terms of the engagement letter, PEI agreed
to pay Legg Mason $25,000 upon execution of the engagement letter and $450,000
upon delivery of a written fairness opinion to the board. PEI has agreed to
reimburse Legg Mason for its reasonable out-of-pocket expenses, including
attorney's fees, and to indemnify Legg Mason against certain liabilities,
including certain liabilities under federal securities laws.
Southern Union Background of the Merger
Since 1990 when a new group of stockholders acquired Southern Union and the
Lindemann-led management team took office, Southern Union has carefully
monitored developments in the natural gas utility industry and periodically
evaluated Southern Union's long-term position and strategic alternatives in
view of the trend toward deregulation and consolidation in the gas
distribution industry. Since then, the Southern Union board has consistently
supported a strategy to build stockholder value. As a result, Southern Union's
management has explored and developed strategic plans to respond to the
evolving competitive environment. Southern Union's management has concluded
that Southern Union's competitive position and growth prospects in this new
environment would be significantly enhanced by, among other things, increasing
the scale of its operations and the size of its customer base. To achieve this
strategic goal, Southern Union has, among other things, analyzed, pursued and
attempted to consummate possible business combinations with other natural gas
distribution companies.
In late September 1998, Messrs. Brennan and Karam at a coincidental meeting
discussed, in general terms, their respective companies and whether it would
be appropriate to initiate further discussions between
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representatives of Southern Union and PEI regarding a possible business
combination. To follow-up this conversation, on October 5, 1998, Southern Union
sent Mr. Karam copies of Southern Union's recently released 1998 Summary Annual
Report to Stockholders, Annual Report on Form 10-K for the fiscal year ended
June 30, 1998 and Proxy Statement for Southern Union's 1998 annual meeting of
stockholders.
On March 1, 1999, following general conversations between Mr. Simms, Mr.
Karam and Mr. Brennan, about the energy industry and the philosophies of their
two companies, Mr. Karam met with Mr. Lindemann and Mr. Brennan to discuss the
possibility of a strategic relationship between PEI and Southern Union and to
arrange for a meeting between Messrs. Simms and Karam and Southern Union
management in Austin, Texas.
On March 3, 1999, Mr. Brennan, Peter H. Kelley, the President and Chief
Operating Officer of Southern Union, and Ronald J. Endres, the Executive Vice
President and Chief Financial Officer of Southern Union, met with Messrs. Simms
and Karam. At this meeting, the Southern Union and PEI participants discussed
the possibility of a business combination between Southern Union and PEI. On
March 4, the parties continued their discussions and throughout the day were
joined by various members of Southern Union's senior management team who
described various aspects of business and operations of Southern Union,
particularly its natural gas distribution divisions in Texas, Missouri and
Florida, to PEI's representatives. At the conclusion of the March 4th meeting,
Southern Union's representatives indicated their desire to submit a proposal to
acquire PEI through a merger or other business combination. Mr. Karam, on
behalf of PEI, indicated that PEI would evaluate a Southern Union proposal.
On March 19, 1999, Mr. Karam and Mr. Brennan had a general conversation
about the financial terms of a merger.
On April 8, 1999, Messrs. Simms and Karam met with Messrs. Lindemann and
Brennan to discuss more specifically a possible strategic relationship. Mr.
Lindemann expressed a desire to proceed and make an indication of interest.
On April 12, 1999, representatives of Southern Union visited PEI's
facilities to conduct a limited business investigation of PEI and to discuss
the details of a merger with Mr. Karam.
On April 19 and 20, 1999, representatives of Southern Union visited PEI to
discuss the proposed transaction with Messrs. Simms and Karam and to continue
their business investigation of PEI.
On May 10, 1999, PEI and Southern Union entered into a Confidentiality
Agreement. Shortly thereafter, Southern Union submitted an oral proposal to
acquire PEI at a price of $35.00 a share, consisting of shares of Southern
Union common stock valued at $32.00 plus $3.00 in cash, with a collar on the
share exchange ratios to be determined prior to the execution of a definitive
merger agreement.
During the next ten days, Southern Union discussed the major terms of the
merger with Messrs. Simms and Karam and PEI's legal advisors.
On May 20, 1999, the Southern Union board met, with all members
participating by telephone, except for Frank W. Denius, who did not participate
in the meeting. Also participating were Mr. Endres and Southern Union's outside
legal counsel, Fleischman and Walsh, L.L.P. At the meeting, Southern Union's
management and counsel reported on the status of the discussions with PEI and
provided the Southern Union board with an overview of transaction issues. The
Southern Union board discussed elements of a potential combination with PEI and
authorized management to continue the discussions.
On May 24, 1999, representatives of Southern Union made a presentation to
the PEI board on Southern Union, including its business plan and historical pro
forma financial information, and responded to questions from the PEI board.
Messrs. Lindemann, Kelley and Endres met with Messrs. Simms and Karam on May
25, 1999 to negotiate certain financial terms of the merger agreement. They
agreed on a collar which fixed the exchange ratio if
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Southern Union's average trading price as of the closing date was more than
105% of the closing price of a share of Southern Union common stock on the
trading day immediately preceding the date the merger agreement was executed or
less than 90% of the closing price of a share of Southern Union common stock on
the trading day immediately preceding the date the merger agreement was
executed. They also agreed that the cash portion of the merger consideration
would be more than $3.00 per share if as of the closing date the average
trading price of a share of Southern Union common stock was below 90% of the
closing price of a share of Southern Union common stock on the trading day
immediately preceding the date the merger agreement was executed.
On May 26, 1999, counsel for both parties met for the first time to begin
negotiating the terms of the merger agreement, drafts of which had been
exchanged by counsel during the previous two weeks. Over the next twelve days,
counsel for both parties exchanged additional drafts of the merger agreement
and negotiated its final terms.
On June 4, 1999, the Southern Union board met with senior members of
Southern Union's management, representatives of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), the company retained by Southern Union to
render an opinion as to the fairness to Southern Union from a financial point
of view of the consideration to be paid by Southern Union in connection with
the merger, and its outside legal counsel, Fleischman and Walsh, L.L.P. At the
meeting, Southern Union's management reported on the understandings that had
been reached with respect to the principal remaining open issues relating to
the merger, the results of their financial analysis of PEI and the anticipated
results of Southern Union's completion of its due diligence review of PEI and
its subsidiaries and made a presentation on the principal reasons for the
merger. Southern Union's outside legal counsel described the provisions of the
merger agreement and the responsibilities of the directors with respect to
their decision on the merger agreement, and DLJ rendered its oral opinion as to
the fairness of the transaction from a financial point of view to Southern
Union. The Southern Union board discussed and then unanimously approved the
merger agreement and unanimously voted to recommend its approval to Southern
Union stockholders.
The next business day, Monday, June 7, 1999, the PEI board met to consider
the merger agreement. At the request of Southern Union, the NYSE agreed not to
open trading in the stock of Southern Union while the PEI board and its
advisors continued discussions of the merger. Likewise, at the request of the
PEI board, the NYSE agreed not to open trading in the stock of PEI while the
PEI board continued its discussions. After the PEI board approved the merger
agreement, the merger agreement was signed by both companies, the merger was
publicly announced and the stocks of Southern Union and PEI were permitted to
open for trading.
Southern Union Reasons for the Merger
The board of directors and management of Southern Union believe that the
merger will help position Southern Union to become one of the premier natural
gas distribution companies in the nation. In addition, the merger will enhance
the competitive position of Southern Union in an industry recently subjected to
deregulation and consolidation by increasing its financial flexibility and
providing strategic growth
opportunities that will benefit Southern Union, its stockholders, customers and
employees. Southern Union's management believes that some of the specific
financial and strategic reasons that make the merger desirable are as follows:
. Market Diversification in an Attractive Region. The merger allows
Southern Union to further diversify its service territory. By operating
in diverse geographic areas, Southern Union's earnings will be less
susceptible to weather and economic conditions in any one region.
. Increase Market Float of Southern Union's Equity. Certain members of Mr.
Lindemann's family collectively own approximately 39%, certain members
of the Bass family collectively own approximately 9%, and officers and
directors of Southern Union (other than members of Mr. Lindemann's
family) own approximately 5% of the 31,235,697 shares of Southern Union
common stock outstanding on September 3, 1999. As a result of the
merger, Southern Union will
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issue to PEI stockholders between approximately 15.3 million and 17.8
million shares of Southern Union common stock. The issuance of these
shares will mean that Southern Union's market float (excluding the
shares held by members of Mr. Lindemann's family and other insiders, and
certain members of the Bass family) will more than double upon
completion of the merger. This relatively large issuance of common stock
may increase the investment community's research coverage of Southern
Union (currently two analysts) and possibly increase the liquidity of
Southern Union common stock.
. Entry Into the Electricity Industry. In the fourth quarter of 1997, PG
Energy Services Inc., a subsidiary of PEI, began marketing electricity
and related products and services under the name PG Energy PowerPlus (a
trademark of PG Energy Services Inc.), principally in northeastern and
central Pennsylvania. In addition, another subsidiary of PEI, PEI Power
Corporation, began generating and selling electricity in July 1998, upon
completion of modifications to its cogeneration facility that enable it
to burn both natural gas and methane. Southern Union is not currently
engaged in the business of selling, marketing and generating
electricity. As a result of the merger, Southern Union will have the
opportunity to expand into a new energy market. If these electricity
ventures are successful, Southern Union could transfer this experience
to its other markets.
. Southern Union's Ability to Make Other Acquisitions. The increased size,
reduced leverage and increased debt capacity resulting from the merger
may increase Southern Union's financing capacity so as to improve
Southern Union's prospects for completing other significant
acquisitions. Increased market float may increase the opportunity for
Southern Union to use its stock to acquire attractive assets. Shares of
Southern Union common stock have historically traded at multiples in
excess of comparable companies.
Recommendation of the Southern Union Board
At a special meeting held on June 4, 1999, the Southern Union board
unanimously approved the merger agreement and the merger. Accordingly,
Southern Union's board of directors recommends that Southern Union
stockholders vote FOR the approval of the merger agreement and stock issuance.
In determining to approve, and recommend that Southern Union stockholders
approve, the merger agreement and related transactions, and in reaching its
determination that the merger is in the best interest of Southern Union, its
stockholders, customers and employees, the Southern Union board consulted with
and relied upon information and reports prepared or presented by Southern
Union's management and Southern Union's legal and financial advisors. The
following are the material factors considered by the Southern Union board,
some of which contained both positive and negative elements:
. the factors described under "--Southern Union Reasons for the Merger";
. the terms of the merger agreement described under "The Merger
Agreement";
. the likelihood of receipt of timely and satisfactory regulatory
approvals for the mergers;
. the risk of fluctuations in the price of Southern Union common stock
prior to the consummation of the merger, including the potential effects
of the public announcement of the merger on the trading price of
Southern Union common stock;
. the risk that the merger would not be consummated;
. the substantial management time and effort that will be required to
consummate the merger and integrate the operations of the two companies,
and the risks inherent in such integration;
. other matters described under "Forward-Looking Statements May Prove
Inaccurate";
. the results of Southern Union's business investigation of PEI and its
subsidiaries; and
. the opinion of DLJ that as of the date of DLJ's fairness opinion and
subject to the considerations described therein, the financial terms of
the merger are fair, from a financial point of view, to Southern Union
(see "The Merger--Opinion of Southern Union's Financial Advisor").
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The foregoing discussion of the information and factors considered by the
Southern Union board is not intended to be all-inclusive. In view of the wide
variety of factors considered in connection with its evaluation of the proposed
merger, the Southern Union board did not find it practicable to, and did not,
quantify or otherwise attempt to assign relative weights to the foregoing
factors. Rather, the Southern Union board based its recommendation on the
totality of the information presented to and considered by it.
Opinion of Southern Union's Financial Advisor
Southern Union retained DLJ to render its opinion to the Southern Union
board as to the fairness to Southern Union, from a financial point of view, of
the merger consideration to be paid by Southern Union to the PEI stockholders
pursuant to the merger agreement.
On June 6, 1999, DLJ delivered an oral opinion to the Southern Union board,
subsequently confirmed in writing as of the same date, to the effect that as of
the date of such opinion, and based upon and subject to the assumptions,
limitations and qualifications set forth in such opinion, the merger
consideration to be paid by Southern Union pursuant to the merger agreement was
fair to Southern Union from a financial point of view. As described above under
"--Southern Union Reasons for the Merger," the DLJ opinion was only one of many
factors taken into consideration by the Southern Union board in making its
determination to approve the merger agreement.
The full text of the DLJ opinion is attached to this proxy statement as
Appendix C. You are urged to read the DLJ opinion in its entirety for the
assumptions made, procedures followed, other matters considered and limits of
the review undertaken in arriving at such opinion. The DLJ opinion was prepared
for the Southern Union board and is directed only to the fairness to Southern
Union, from a financial point of view, of the merger consideration. The DLJ
opinion does not:
. address the relative merits of the merger and the other business
strategies considered by Southern Union and does not address the
underlying decision to proceed with the merger;
. constitute a recommendation to any stockholder as to how such
stockholder should vote with respect to the merger and related
transactions; or
. constitute an opinion as to the price at which Southern Union common
stock will actually trade at any time.
DLJ was not engaged by Southern Union to act as its financial advisor, or as
an advisor to or agent of Southern Union stockholders or any other person, in
connection with the merger. Accordingly, DLJ was not requested to, and did not,
advise Southern Union with respect to the structure, relative merits or terms
of the merger (other than with respect to the fairness opinion summarized
herein), nor was DLJ requested, and DLJ did not attempt, to identify potential
alternative transactions. The merger consideration was determined in
arms-length negotiations between Southern Union and PEI, in which negotiations
DLJ did not participate or advise Southern Union.
In arriving at its opinion, DLJ reviewed, among other things, the June 6,
1999 draft of the merger agreement. DLJ also reviewed certain financial and
other information that was publicly available or furnished to it by Southern
Union, including information provided during discussions with Southern Union
management. Included in the information provided to DLJ were certain financial
projections of Southern Union prepared by the management of Southern Union,
certain financial projections of PEI prepared by the managements of PEI and
Southern Union, and certain pro forma financial projections of Southern Union
and PEI prepared by the management of Southern Union. In addition, DLJ compared
certain financial and securities data of Southern Union and PEI with various
other companies whose securities are traded in public markets, reviewed the
historical stock prices and trading volumes of Southern Union common stock and
PEI common stock, reviewed prices and premiums paid in certain other business
combinations and conducted such other financial studies, analyses and
investigations as DLJ deemed appropriate for purposes of rendering its opinion.
Southern Union did not impose any restrictions or limitations upon DLJ
regarding the investigations made or the procedures followed by DLJ.
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In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to it from public sources, that was provided to it by Southern Union and PEI or
their respective representatives, or that was otherwise reviewed by it. DLJ
also assumed that the financial projections and estimates of operating
synergies were reasonably prepared on bases reflecting the best currently
available estimates as to the future operating and financial performance of
Southern Union and PEI, respectively. DLJ has not assumed any responsibility
for making any independent evaluation or appraisal of the assets or liabilities
of Southern Union or PEI, nor did DLJ independently verify the information
reviewed by it. DLJ relied on the advice of counsel to Southern Union as to
certain legal matters.
DLJ performed each of the analyses summarized below in order to provide a
different perspective on the merger and add to the total mix of information
available. However, although the separate analyses are summarized below, DLJ
believes that its analyses must be considered as a whole. Selecting portions of
the analyses or of the summary set forth below, without considering the
analyses as a whole, could create an incomplete or misleading view of the
processes underlying the DLJ opinion. In arriving at its opinion, DLJ
considered the results of each of these analyses together, in their totality
and in light of each of the other analyses. DLJ did not attempt to assign
specific weights to particular analyses or factors considered, but rather made
qualitative judgments as to the significance and relevance of all of the
factors and analyses considered in arriving at its opinion.
Analyses relating to the value of businesses or securities are not
appraisals and do not reflect the prices at which the businesses or securities
can actually be sold. Stockholders should understand that no company or
transaction used in DLJ's analyses as a comparison is directly comparable to
Southern Union, PEI or the merger. It should also be understood that analyses
based upon projections or forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by those analyses. Because these analyses are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the parties, none of Southern Union, PEI or DLJ or any
other person assumes responsibility if future results are different from those
forecast.
The DLJ opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to
DLJ as of, the date of its opinion. It should be understood that, although
subsequent developments may affect its opinion, DLJ does not have any
obligation to update, revise or reaffirm its opinion as a result of changes in
such conditions or otherwise.
Set forth below is a description of the material elements of DLJ's
presentation to the Southern Union board on June 6, 1999 in connection with the
preparation of the DLJ opinion. Unless otherwise indicated, all analyses
summarized below are based on the closing price of Southern Union common stock
on June 4, 1999 of $21.6250 per share and the closing price per share of PEI
common stock on that date of $29.6875. Assuming the average trading price of
Southern Union common stock as of the date of the consummation of the merger
will be equal to the closing price for the Southern Union common stock on June
4, 1999, the exchange ratio pursuant to the merger agreement would equal 1.48
(i.e., 32.000/21.625 = 1.48). If the average trading price of Southern Union
common stock as of the date of the consummation of the merger is $19.46 (i.e.,
the high end of the collar) or less, the exchange ratio pursuant to the merger
agreement would equal 1.64 (i.e., 32.0000/19.4625 = 1.64). It should be
understood that DLJ makes no prediction, and there can be no assurance, as to
what the average trading price or the exchange ratio will actually be.
Discounted Cash Flow Analysis. DLJ performed a discounted cash flow analysis
for the period from calendar year 1999 to calendar year 2003 on the projected,
stand-alone operating free cash flows of Southern Union and PEI, assuming the
merger had not occurred. Operating free cash flows were calculated as the
after-tax operating earnings of Southern Union and PEI, before any cost
savings, plus depreciation and amortization, deferred taxes and net changes in
working capital and other assets, minus projected capital expenditures. These
operating free cash flows estimates were based upon projections provided by
management of Southern Union. DLJ calculated terminal values for both Southern
Union and PEI by applying a range of estimated EBITDA multiples of 7.5x to 9.5x
in 2003. The operating free cash flows and terminal values were
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then discounted to the present year using a range of discount rates of 7.5% to
9.5%. These discount rates represent an estimated range of the weighted average
cost of capital of Southern Union and PEI.
DLJ analyzed the results of its discounted cash flow analysis and calculated
implied exchange ratios, adjusting for the cash to be paid to PEI's
stockholders upon consummation of the merger. This analysis produced a range of
implied exchange ratios from 1.45x to 1.71x. Such implied exchange ratios are
comparable to the exchange ratio at June 4, 1999 of 1.48x (or 1.64x at the high
end of the collar).
Relative Contribution Analysis. DLJ analyzed the relative contributions of
Southern Union and PEI to the projected net income and cash net income (net
income plus goodwill amortization) of the combined company for the calendar
years 1999 through 2003, calculated both before and after allocating any
potential cost savings. Net income and cash net income estimates for these
future periods were based upon projections provided by management of Southern
Union.
Southern Union's net income and cash net income, assuming no potential cost
savings, as a percentage of the combined company ranged from 64.4% to 71.3% and
from 66.4% to 72.5%, respectively. Such net income and cash net income
contributions, after adjusting for the cash to be paid to PEI's stockholders
upon consummation of the merger, would imply a range of exchange ratios from
1.04x to 1.43x and from 0.98x to 1.31x, respectively.
Southern Union's net income and cash net income, assuming savings from the
elimination of duplicative public company cost, as a percentage of the combined
company ranged from 56.1% to 63.9% and from 58.3% to 65.4%, respectively. Such
net income and cash net income contributions, after adjusting for the cash to
be paid to PEI's stockholders upon consummation of the merger, would imply a
range of exchange ratios from 1.47x to 2.03x and from 1.37x to 1.86x,
respectively. Such implied exchange ratios are comparable to an exchange ratio
of 1.48x (or 1.64x at the high end of the collar).
The results of the relative contribution analysis are not necessarily
indicative of the relative contributions that Southern Union and PEI may
actually make to the combined company.
Historical Exchange Ratio Analysis. DLJ analyzed the closing prices of
Southern Union common stock and PEI common stock over the three year period
prior to June 4, 1999 and calculated implied exchange ratios, adjusting for the
cash to be paid to PEI's stockholders upon consummation of the merger. This
analysis produced a range of implied exchange ratios from 0.84x to 1.94x. In
addition, DLJ calculated the average implied exchange ratio, as adjusted for
the cash to be paid to PEI's stockholders upon consummation of the merger, over
the three year period prior to June 4, 1999 to be 1.33x. Such implied exchange
ratios are comparable to an exchange ratio of 1.48x (or 1.64x at the high end
of the collar).
Combined Company Merger Analysis. DLJ prepared analyses of the financial
impact of the merger on the combined company using earnings estimates for
Southern Union and PEI provided by Southern Union management for the period
from fiscal 1999 through 2003. These analyses assumed cost savings resulting
from the elimination of duplicative public company cost. Based on an exchange
ratio of 1.48x, this analysis indicated that the merger is expected to have a
neutral impact on the combined company's earnings per share in 1999 and 2000,
and a marginally dilutive impact on EPS from 2001 to 2003 within a range of
0.5% to 2.7% below Southern Union's stand-alone EPS estimates. (Assuming an
exchange ratio of 1.64x at the high end of the collar, this analysis indicated
combined company EPS figures for the period from 1999 to 2003 which are within
a range of 6.6% to 9.5% below Southern Union's stand-alone EPS estimates).
DLJ also prepared analyses of the financial impact of the merger on the
combined company using estimates of cash earnings per share (i.e., generally,
net income plus goodwill amortization, divided by the total number of shares
outstanding) ("Cash EPS") for Southern Union and PEI provided by Southern Union
management for the period from fiscal 1999 through 2003. These analyses assumed
the elimination of duplicative public company cost resulting from the merger.
Based on an exchange ratio of 1.48x, this analysis
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indicated that the merger is expected to be accretive to Cash EPS from 1999 to
2003 within a range of 5.3% to 10.6% above Southern Union's stand-alone Cash
EPS estimates. (Assuming an exchange ratio of 1.64x at the high end of the
collar, this analysis indicated combined company Cash EPS that is marginally
accretive to Cash EPS from 1999 to 2001, within a range of 1.4% to 3.1% above
Southern Union's stand-alone Cash EPS estimates, and marginally dilutive to
Cash EPS in 2002 and 2003, within a range of 0.7% to 1.6% below Southern
Union's stand-alone Cash EPS estimates.)
Engagement Letter. Pursuant to an engagement letter dated June 4, 1999,
Southern Union agreed to pay DLJ a fee of $750,000 upon DLJ's delivery of its
opinion. No part of DLJ's fee is contingent upon consummation of the merger.
Southern Union also agreed to reimburse DLJ for all of its out-of-pocket
expenses (including fees and expenses of counsel retained by DLJ), and to
indemnify DLJ and certain related persons and entities against certain
liabilities (including liabilities under the federal securities laws), arising
out of DLJ's engagement.
DLJ has performed investment banking and other services for Southern Union
in the past and has been paid for such services, including, during the last two
years, receipt of a $500,000 retainer for certain services performed in
connection with Southern Union's efforts to acquire Southwest Gas Corporation.
In the ordinary course of business, DLJ may actively trade the securities of
both Southern Union and PEI for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. DLJ, as part of its investment banking services, is regularly
engaged in the valuation of businesses and securities in connection with
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
Potential Conflicts and Interests of Certain Persons in the Merger
In considering the recommendation of the Southern Union board with respect
to the merger, you should be aware that members of PEI's management and the PEI
board have the following interests in the merger that may be different from, or
in addition to, the interests of PEI stockholders generally and represent
conflicts of interest.
Change in Control Agreements. PEI has severance agreements containing change
in control provisions with Vincent A. Bonaddio, Harry E. Dowling, John F. Kell,
Jr. and Donna M. Abdalla. These agreements were entered into prior to 1999 and
before PEI began to explore the possibility of a strategic stock-for-stock
merger.
These agreements provide that, if during a period of 36 months (the
"Employment Period") following a "Change in Control" of PEI (as defined in the
agreements and which will be deemed to have occurred for purposes hereof at the
effective time), the officer is terminated without cause or terminates his or
her own employment as a result of certain adverse actions by PEI or its
successors, as more fully set forth in such agreements, such officer shall
receive a lump sum severance amount and continuation of certain welfare plan
benefits. The lump sum severance payment is an amount equal to two times the
highest annual (or annualized) compensation paid to the executive during the
three-year period ending before the date of termination. The maximum value of
the severance payments which may become payable to these four executive
officers in the aggregate under the terms of their agreements is approximately
$999,500.
In addition, if an executive is terminated during the applicable Employment
Period, the executive will also be provided with continued life insurance,
hospitalization and medical plans providing benefits which are substantially
comparable to those provided to the executive under benefit plans of PEI in
effect immediately prior to the change in control of PEI until the earlier of
the third anniversary of the change in control or such time as the executive
has obtained new employment and is covered by equivalent benefits.
The additional lump sum and welfare benefits payable to an individual in
event of such a termination are limited to the amounts that may be paid without
causing the payments to constitute excess parachute payments within the meaning
of Section 280G of the Internal Revenue Code.
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In addition, Mr. Karam has an employment agreement with PEI that provides
for severance benefits. He may agree to forego these benefits and enter into an
employment agreement with Southern Union.
Stock Options. Officers of PEI hold options granted under the 1992 Stock
Option Plan. In the event of a "Change of Control" (as defined in this plan),
all outstanding options become fully exercisable and vested. The approval by
the PEI stockholders of the merger agreement would be a "Change of Control" for
these purposes.
Officers and directors of PEI hold options granted under the Stock Incentive
Plan. Most of these options are subject to the achievement of specified
financial and operational goals for PEI. If these goals are not met, the
options will be forfeited. However, in the event of a "Change of Control" (as
defined in this plan), all outstanding options not previously forfeited will
become fully exercisable and vested. The approval by the PEI stockholders of
the merger agreement would be a "Change of Control" for these purposes.
As of September 3, 1999, there were outstanding options held by directors
and officers to purchase 513,350 shares of PEI common stock. To the extent not
currently exercisable, all of these options would become exercisable as of the
date of PEI stockholder approval of the merger agreement.
Deferred Compensation Plan. PEI's Directors Deferred Compensation Plan
permits outside directors to defer director's fees in the form of stock units.
Settlement of the stock units credited to a director's account is made as of
the first business day following the director's termination of service as a
director. In the event of a "Change of Control" (as defined in this plan), all
stock units credited to a director's account will be settled as of the date of
the Change of Control for cash equal to the highest price of PEI common stock
in any transaction reported on the NYSE, or paid or offered in any transaction
related to a Change of Control, at any time during the 90-day period ending
with the Change of Control. The approval by the PEI stockholders of the merger
agreement would be a "Change of Control" for these purposes.
As of September 3, 1999, an aggregate of 15,816 stock units were
outstanding.
Director Retirement Plan. PEI's Director Retirement Plan provides retirement
benefits to members of PEI's board and PG Energy's board who are not employees
of PEI or any subsidiary of PEI. Upon a "Change of Control" (as defined in this
plan), eligible directors and former directors who have retired with an
entitlement to benefits under this plan (of which there are none) will receive
lump sum cash payments based upon years of service. The approval by the PEI
stockholders of the merger agreement would be a "Change of Control" for these
purposes. Approximately $500,000 will be payable under this plan if the PEI
stockholders approve the merger agreement.
Defense, Indemnification and Insurance for PEI Officers and Directors. For a
period of six years after the effective time, Southern Union has agreed to
indemnify and hold harmless the present and former officers and directors of
PEI and its Subsidiaries in respect of acts or omissions occurring prior to the
effective time to the extent provided under PEI's restated articles of
incorporation and bylaws in effect on the date hereof; provided, however, that
if any claim or claims are asserted or made within such six-year period, all
rights to indemnification in respect of such claims shall continue until the
final disposition of any and all such claims. For six years after the effective
time, Southern Union will use its reasonable best efforts to provide officers'
and directors' liability insurance in respect of acts or omissions occurring
prior to the effective time covering each such person currently covered by
PEI's officers' and directors' liability insurance policy on terms with respect
to coverage and amount no less favorable than those of such policy in effect on
the date hereof; provided that in satisfying this obligation, if the annual
premiums of such insurance coverage exceed 200% of the previous year's
premiums, Southern Union will be obligated to obtain a policy with the best
coverage available, in the reasonable judgment of Southern Union's board, for a
cost not exceeding such amount. See "The Merger Agreement--Indemnification and
Insurance for PEI Officers and Directors."
Election of PEI Representatives to the Southern Union Board. The merger
agreement provides that following the effective time, Southern Union will elect
three members of the PEI board (selected prior to the
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effective time), to serve on the Southern Union board for a term of at least
three years from the effective time. See "The Merger Agreement--Covenants and
Other Agreements--Certain Other Covenants and Agreements."
Significant U.S. Federal Income Tax Consequences of the Mergers
The following discussion is intended only as a summary of the material U.S.
federal income tax consequences of the merger to Southern Union, PEI and
Southern Union stockholders and does not purport to be a complete analysis or
description of all potential tax effects of the merger. In addition, the
discussion does not address all of the tax consequences that may be relevant to
particular taxpayers in light of their personal circumstances or to taxpayers
subject to special tax rules (for example, insurance companies, financial
institutions, dealers in securities, tax-exempt organizations, banks, foreign
taxpayers and taxpayers holding common stock as parts of straddles). No
information is provided with respect to the tax consequences, if any, of the
merger under applicable foreign, state, local or other tax laws.
The discussion is based upon the provisions of the Internal Revenue Code,
applicable Treasury regulations thereunder, IRS rulings and judicial decisions,
as in effect as of the date of this proxy statement. There can be no assurance
that future legislative, administrative or judicial changes or interpretations
will not affect the accuracy of the statements or conclusions set forth herein.
Any such change could apply retroactively and could affect the accuracy of such
discussion.
Each stockholder of Southern Union is urged to consult such stockholder's
own tax advisor as to the specific tax consequences to such stockholder of the
merger under U.S. federal, state, local or any other applicable tax laws.
This summary does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to a decision whether to approve
the merger. This summary is provided for general information purposes only and
does not constitute legal or tax advice.
Tax Opinions. The obligation of Southern Union to consummate the merger is
conditioned on its receipt on the closing date of an opinion from Roberts &
Holland LLP, tax counsel to Southern Union, that the merger will qualify as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code and
the subsidiary mergers will each constitute a tax-free liquidation under
Section 332 of the Internal Revenue Code or a tax-free reorganization under
Section 368(a) of the Internal Revenue Code (the "Southern Union Tax Opinion").
The obligation of PEI to consummate the merger is conditioned on its receipt on
the closing date of an opinion from Hughes Hubbard & Reed LLP, PEI's special
counsel, that the merger will qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code (the "PEI Tax Opinion").
Each of the Southern Union Tax Opinion and the PEI Tax Opinion will be based
on certain representations contained in letters from Southern Union, PEI and
others delivered for the purpose of the opinions and will be subject to certain
limitations and qualifications similar to those set forth in this discussion of
significant U.S. federal income tax consequences of the mergers. Each of the
Southern Union Tax Opinion and the PEI Tax Opinion will be based on certain
assumptions, including that the mergers will be consummated exactly as
described in this proxy statement and in the merger agreement.
An opinion of counsel represents only counsel's best judgment and has no
binding effect or official status of any kind; and no assurance can be given
that contrary positions will not be taken by the IRS or by a court considering
the issues. Neither Southern Union nor PEI has requested or intends to request
a ruling from the IRS with regard to any of the federal income tax consequences
of the mergers.
The discussions below of "Consequences to Southern Union Stockholders" and
"Consequences to Southern Union and PEI" assume that the merger will qualify as
a tax-free reorganization under Section 368(a) of the Internal Revenue Code and
the subsidiary mergers will each constitute a tax-free liquidation under
Section 332 of the Internal Revenue Code or a tax-free reorganization under
Section 368(a) of the Internal Revenue Code.
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Consequences to Southern Union Stockholders. Southern Union stockholders
will not exchange or otherwise dispose of their Southern Union common stock in
any of the mergers. They will therefore realize no taxable gain or loss
whatsoever.
Consequences to Southern Union and PEI. No gain or loss will be recognized
by Southern Union, PEI, PG Energy or Honesdale by reason of the mergers.
Regulatory Matters
The following is a summary of the material regulatory requirements affecting
the merger. While there can be no guarantee if and when any of the consents or
approvals required for the mergers will be obtained or as to the conditions
that they may contain and even though Southern Union and PEI have not yet filed
for the required approvals from all of the agencies discussed, Southern Union's
and PEI's managements currently believe that the necessary approvals can be
obtained in the last quarter of 1999.
State Approvals and Related Matters. The utility operations of Southern
Union are subject to the regulatory jurisdiction of the Missouri Public Service
Commission ("MPSC"), the Florida Public Service Commission ("FPSC"), the
Railroad Commission of Texas ("RRC") and various municipalities in Texas where
Southern Union conducts business. The MPSC must approve the mergers. Southern
Union must also receive approval from the FPSC with respect to the securities
issued and long-term debt assumed by Southern Union in connection with the
mergers. No RRC or municipality approvals are required.
The utility operations of PEI's subsidiaries are subject to the regulatory
jurisdiction of the Pennsylvania Public Utility Commission ("PPUC"). The PPUC
must also approve the mergers.
Assuming the requisite regulatory approvals are obtained, the combined
company and its utility operations will remain subject to the regulatory
jurisdiction of the MPSC, FPSC, PPUC, RRC and various municipalities in Texas.
Federal Energy Regulatory Commission Approval. Certain of the electric
operations of certain of PEI's subsidiaries are subject to the regulatory
jurisdiction of the Federal Energy Regulatory Commission ("FERC"). The FERC
must approve the change in control of these subsidiaries. Assuming such
approvals are obtained, those subsidiaries and their electric operations will
remain subject to the regulatory jurisdiction of the FERC.
Antitrust Considerations. Under the Hart-Scott-Rodino Act and the rules
promulgated thereunder by the Federal Trade Commission (the "FTC"), the mergers
may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the U.S. Department of Justice
Antitrust Division ("Antitrust Division") and specified waiting period
requirements have been satisfied. The expiration or earlier termination of the
Hart-Scott-Rodino Act's waiting period does not preclude the U.S. Department of
Justice or the FTC from challenging the mergers on antitrust grounds either
before or after consummation of the mergers. Private parties and state
attorneys general may also bring legal action under federal or state antitrust
laws under certain circumstances. Southern Union and PEI filed notification and
report forms under the Hart-Scott-Rodino Act with the FTC and the Antitrust
Division on July 23, 1999 and August 5, 1999, respectively, and were granted
early termination of the Hart-Scott-Rodino Act's waiting period on August 20,
1999.
General. Southern Union and PEI's utility subsidiaries possess rights and
franchises, and environmental permits and licenses. Some of these may need to
be transferred, renewed or replaced as a result of the mergers. The companies
do not anticipate any difficulties at the present time in making or obtaining
such transfers, renewals or replacements.
Under the merger agreement, Southern Union and PEI have agreed to use their
reasonable best efforts to obtain all necessary material permits, licenses,
franchises and other governmental authorizations needed to
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consummate or effect the transactions contemplated by the merger agreement.
Various parties may seek intervention in the proceedings associated with the
regulatory approval process in an attempt to oppose the merger or to have
conditions imposed upon the receipt of the necessary approvals. Although
Southern Union and PEI believe that they will receive the requisite regulatory
approvals for the mergers, the timing of their receipt cannot be determined. It
is a condition to the consummation of the mergers (subject to waiver by
Southern Union and PEI) that final non-appealable orders approving the mergers
be obtained from the various federal and state commissions described above. See
"The Merger Agreement--Conditions to the Completion of the Merger."
Management and Other Information
After the consummation of the merger, Southern Union will continue to be
managed by the same board of directors and officers of Southern Union as before
the merger except that Southern Union will elect to the Southern Union board
and thereafter nominate and recommend for reelection three individuals to be
selected prior to the effective time by Southern Union from the PEI board
immediately prior to the effective time. See "--Potential Conflicts and
Interests of Certain Persons in the Merger" and "The Merger Agreement--
Covenants and Other Agreements--Certain Other Covenants and Agreements."
Certain information relating to the management, executive compensation, voting
securities, certain relationships and related transactions and other related
matters pertaining to Southern Union and PEI is set forth in or incorporated by
reference in their respective Annual Reports on Form 10-K for the year ended
June 30, 1999 (Southern Union) and December 31, 1998 (PEI). Such Annual Reports
are incorporated by reference into this proxy statement. See "Where You Can
Find More Information."
Accounting Treatment
The Unaudited Pro Forma Combined Condensed Financial Statements appearing
elsewhere in this proxy statement are based upon certain assumptions, as
described in the pro forma combined condensed financial statements, and are
included for informational purposes only. The merger will be accounted for
under the purchase method of accounting, in accordance with generally accepted
accounting principles. Under the purchase method of accounting, Southern
Union's historical results for periods before the merger will remain unchanged.
On the closing date, the combined company will record PEI's assets and
liabilities of regulated entities at their historical cost basis. PEI's assets
and liabilities of non-regulated entities will be recorded at fair value with
any excess recorded as additional purchase cost assigned to utility plant. See
"Unaudited Pro Forma Combined Condensed Financial Statements."
Listing of Southern Union Common Stock
It is a condition to the completion of the merger that the shares of
Southern Union common stock to be issued in connection with the merger be
approved for listing on the NYSE at or before the effective time. See "The
Merger Agreement--Conditions to the Completion of the Merger."
Federal Securities Law Consequences
All shares of Southern Union common stock received by PEI stockholders in
connection with the merger will be freely transferable, except that shares of
Southern Union common stock received by individuals and entities who are deemed
to be "affiliates" (as such term is defined under the Securities Act) of PEI
before the merger may be resold by them only in transactions permitted by the
resale provisions of Rule 145 under the Securities Act (or Rule 144 under the
Securities Act, in the case of individuals and entities who become affiliates
of Southern Union) or as otherwise permitted under the Securities Act. Persons
who may be deemed to be affiliates of Southern Union or PEI generally include
individuals or entities that control, are controlled by, or are under common
control with, such party and may include certain officers and directors of such
party as well as principal stockholders of such party. The merger agreement
requires PEI to use commercially
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reasonable efforts to cause each of its affiliates to execute and deliver to
Southern Union a letter to the effect that such affiliate will not offer or
sell or otherwise dispose of Southern Union common stock issued to such
affiliate in or pursuant to the merger in violation of the Securities Act or
the rules and regulations adopted by the SEC thereunder. See "The Merger
Agreement--Covenants and Other Agreements--Certain Other Covenants and
Agreements." The delivery of such agreements is also a condition to Southern
Union's obligation to complete the merger. See "The Merger Agreement--
Conditions to the Completion of the Merger--Additional Closing Conditions for
Southern Union's Benefit."
This proxy statement does not cover resales of Southern Union common stock
received by any person who may be deemed to be an affiliate of PEI.
Rights of Dissenting Stockholders of Southern Union
Under Delaware law, you do not have appraisal rights in connection with the
merger.
Merger-Related Financing
Before completion of the merger, Southern Union's management will evaluate
various sources and methods of financing the amount necessary to fund the cash
portion of the consideration to be paid to PEI stockholders under the merger
agreement and other merger-related transaction costs (in total, approximately
$35 million to $55 million, assuming the cash portion of the merger
consideration is only $3 per share). Additional financing may be required if
the average of the closing prices of Southern Union common stock on the NYSE
for a period of ten consecutive trading days ending on the third trading day
before the merger is completed is below $19.4625, which would cause the cash
portion of the merger consideration to be increased. See "The Merger
Agreement--Merger Consideration." Southern Union's management currently
anticipates that substantially all of these costs will be financed through
external sources. In addition, Southern Union anticipates refinancing
substantially all of the current portion of outstanding debt of PEI and its
subsidiaries and the preferred stock of PEI's subsidiaries in connection with
or soon after the consummation of the merger. Sources of financing that
Southern Union is considering include commercial and investment banks,
institutional lenders, institutional investors and public securities markets.
The methods of financing that Southern Union may consider include bank lines of
credit, debt and preferred securities of various maturities and terms. Southern
Union's management believes that Southern Union will have access to many
sources and types of short-term and long-term capital sources at reasonable
rates. As a result of this financing and as shown in the Pro Forma Combined
Condensed Financial Statements, the consolidated capitalization of Southern
Union after completion of the merger will consist of approximately 49% common
equity, 7% preferred equity and 44% long-term debt.
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THE MERGER AGREEMENT
The description of the merger agreement set forth below highlights certain
important terms of the merger agreement. We have attached a copy of the merger
agreement as Appendix A to this proxy statement and incorporated the merger
agreement into this proxy statement by reference. The summary of the merger
agreement we provide below is qualified in its entirety by reference to that
agreement. We encourage you to read the merger agreement because it is the
legal document that governs the merger.
Structure of the Merger
Under the merger agreement, PEI will be merged with and into Southern Union.
After the merger, Southern Union will continue as the surviving corporation and
PEI will be a division of Southern Union. PEI's non-regulated subsidiaries will
become subsidiaries of Southern Union.
Closing; Effective Time
We will close the merger at 10:00 a.m., Eastern Time, within ten business
days after satisfaction or waiver of the conditions set forth in the merger
agreement, unless we agree on a later date (see "--Conditions to the Completion
of the Merger"). This date is referred to as the "closing date." On the closing
date, we will file articles of merger and a plan of merger with the Secretary
of State of the Commonwealth of Pennsylvania in accordance with the PBCL and a
certificate of merger with the Secretary of State of the State of Delaware in
accordance with the DGCL. The merger will become effective upon filing of these
documents. This moment is referred to as the "effective time."
Subsidiary Mergers
Immediately after the effective time, Southern Union will cause Honesdale
Gas Company ("Honesdale"), a wholly-owned subsidiary of PG Energy Inc., which
is a wholly-owned subsidiary of PEI ("PG Energy"), to merge with and into PG
Energy. Immediately after the consummation of the Honesdale merger,
Southern Union will cause PG Energy to merge with and into Southern Union.
These mergers are called the "subsidiary mergers," and the Southern Union/PEI
merger and the subsidiary mergers are sometimes called the "mergers."
Merger Consideration
In the merger, each share of PEI common stock will be converted into that
number of whole shares of Southern Union common stock having a value of $32.00,
plus $3.00 in cash, except as described below. The exact number of shares of
Southern Union common stock and the amount of cash to be received by each PEI
stockholder for each share of PEI common stock owned by the stockholder will
depend on the average price of Southern Union common stock on the NYSE for the
ten trading day period beginning on the twelfth trading day before the closing
date and ending on the third trading day before the closing date (counting from
and including the trading day immediately preceding the closing date).
Depending upon the average price of Southern Union common stock during this ten
trading day period, Southern Union will issue between approximately 15.3
million and 17.8 million shares of Southern Union common stock in the merger.
If the average price of Southern Union's common stock during this ten
trading day period is:
. Above $22.70625, the number of shares of Southern Union common stock
will be fixed at 1.40930 for each share of PEI common stock and PEI
stockholders will receive $3 in cash per share.
. Between $19.4625 and $22.70625, the number of shares of Southern Union
common stock will be adjusted so that each share of PEI's common stock
will be exchanged for Southern Union common stock having a value of $32
per share, plus $3 per share in cash.
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. Below $19.4625 but not less than $17.30, the number of shares of
Southern Union common stock will be fixed at 1.64419 for each share of
PEI common stock. The amount of the cash consideration will be increased
so that PEI stockholders will receive cash sufficient to maintain the
aggregate value of $35 per share. Excluding any cash payments made to
PEI stockholders instead of issuing Southern Union fractional shares,
the maximum amount of cash payable to PEI stockholders in connection
with the merger is $6.55 per share of PEI common stock.
. Below $17.30, PEI has the option to terminate the merger agreement. If
PEI does not terminate the merger agreement, PEI stockholders will
receive 1.64419 shares of Southern Union common stock plus $6.55 in cash
per share of PEI common stock.
No fractional shares of Southern Union common stock will be issued in the
merger. Instead of fractional shares, PEI stockholders will receive cash in an
amount equal to the value of the fractional shares to which they would
otherwise have been entitled based on the closing price of a share of Southern
Union common stock on the NYSE on the trading day immediately prior to the
closing date.
Representations and Warranties
The merger agreement contains certain substantially mutual representations
and warranties made by Southern Union and PEI to each other, relating to, among
other things:
. corporate organization, existence, qualification, standing and power;
. capitalization;
. subsidiaries and investments;
. authorization, execution, delivery, performance and enforceability of
the merger agreement, and absence of violations, breaches or defaults
under organizational documents, certain agreements and government orders
as a result of execution, delivery and performance of the merger
agreement;
. governmental approvals and authorizations necessary to complete the
merger;
. public utility holding company status and regulation as a public
utility;
. absence of violations of applicable legal requirements and material
compliance with governmental authorizations;
. legal proceedings;
. documents filed by each of Southern Union and PEI with the SEC;
. tax matters;
. intellectual property matters;
. title to assets;
. disclosure of indebtedness;
. condition of machinery and equipment;
. absence of defaults under material contracts;
. insurance policies;
. labor and employment matters;
. employee benefit matters;
. environmental matters;
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. absence of material adverse changes since specified balance sheet dates;
. broker's or finder's fees;
. regulatory proceedings;
. rate proceedings;
. information provided for inclusion in this proxy statement, Southern
Union's proxy statement and the registration statement; and
. required stockholder votes in connection with the merger.
In addition, PEI has made representations and warranties to Southern Union
relating to:
. not triggering any right or entitlement of the holders of PEI common
stock or other PEI securities under any rights or similar agreement to
which PEI or any of its subsidiaries is a party; and
. delivery of a fairness opinion of Legg Mason.
Covenants and Other Agreements
Each of Southern Union and PEI has undertaken certain covenants and other
agreements in the merger agreement. The following summarizes the more
significant of these covenants:
Interim Operations. In the merger agreement, Southern Union and PEI have
agreed that, except as provided by the merger agreement or as consented to by
the other party, during the period from the date of the merger agreement until
the effective time, each of Southern Union and PEI and its subsidiaries will:
. not make or permit any material change in the general nature of its
business;
. maintain its ordinary course of business (for Southern Union, only with
respect to its present operations) in accordance with prudent business
judgment and consistent with past practice and policy, and maintain its
assets in good repair, order and condition, reasonable wear and tear
excepted, subject to retirements in the ordinary course of business;
. preserve its ongoing business and use reasonable efforts to maintain its
goodwill; and
. preserve its franchises, tariffs, certificates of public convenience and
necessity, licenses, authorizations and other governmental rights and
permits.
In addition, except as provided by the merger agreement or as consented to
by Southern Union, during the period from the date of the merger agreement
until the effective time, PEI and its subsidiaries will:
. not enter into any material transaction or contract other than in the
ordinary course of business;
. not purchase, sell, lease, dispose of or otherwise transfer or subject
to lien, any of its assets other than in the ordinary course of
business;
. not hire any new employee unless the employee is a bona fide replacement
for a presently-filled position;
. not file any material applications, petitions, motions, orders, briefs,
settlements or agreements in any material proceeding or related appeal
before a government body without, to the extent reasonably practicable,
consulting Southern Union;
. not engage in any new or modify any existing material intercompany
transactions, except in the ordinary course of business, involving any
subsidiary of PEI;
. not voluntarily change in any material respect or terminate any of PEI's
insurance policies unless equivalent coverage is obtained;
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. not make any changes in financial policies or practices, or strategic or
operating policies or practices, except as required by law, rule or
regulation;
. comply in all material respects with all applicable legal requirements
and permits;
. not adopt, amend or assume an obligation to contribute to any of PEI's
employee benefit plans or collective bargaining agreements or enter into
any employment, severance or similar contract or amend any such existing
contracts to increase any amounts payable or benefits provided
thereunder;
. except in the ordinary course of business or in accordance with the
terms of any existing contract, employee benefit plan of PEI or
collective bargaining agreement, not grant any increase or change in
total compensation, benefits or pay any bonus to any employees;
. not grant or enter into any contract, written or oral, with respect to
continued employment for any employee, officer or director;
. not make any loan or advance to any officer, director, stockholder,
employee, individual or entity other than in the ordinary course of
business;
. not terminate any existing, enter into any new, or renew, extend or
negotiate, any gas purchase, exchange, storage, supply or transportation
contract;
. not amend its organizational documents; and
. not assume any note, debenture or other evidence of indebtedness which
by its terms does not mature within two years.
PEI Special Meeting and Southern Union Annual Meeting; Solicitation of
Proxies. Southern Union and PEI have agreed:
. to use their reasonable best efforts to solicit from their respective
stockholders proxies in favor of the merger;
. to take all steps necessary to duly call, give notice of, convene and
hold meetings of their respective stockholders for the purpose of
securing the approval and adoption of the merger agreement and the
consummation of the transactions contemplated thereby by their
respective stockholders;
. to distribute proxy statements to their respective stockholders in
accordance with applicable federal and state law and their respective
organizational documents; and
. subject to the fiduciary duties of their respective boards of directors,
to recommend to their stockholders the approval of the merger agreement.
The Lindemann Proxy. In connection with Southern Union's covenant to use its
reasonable best efforts to solicit proxies in favor of the merger from its
stockholders, George L. Lindemann, the Chairman of Southern Union's board and
Southern Union's Chief Executive Officer, Dr. F.B. Lindemann, Adam M.
Lindemann, George Lindemann, Jr. and Sloan N. Lindemann (collectively, the
"Lindemann Family") executed and delivered to PEI an irrevocable proxy (the
"Lindemann Proxy"). Pursuant to the terms of the proxy, PEI has the power to
vote the shares of Southern Union common stock held by the Lindemann Family for
the purpose of securing the approval and adoption by Southern Union
stockholders of the merger agreement and the consummation of the transactions
contemplated thereby and to prevent any action that would prevent or hinder
such approval or consummation in any material respect. As of the Southern Union
record date, the shares of Southern Union common stock owned by the Lindemann
Family and subject to this proxy represented approximately 39% of the
outstanding shares of Southern Union common stock entitled to vote on the
approval and adoption of the merger agreement and consummation of the
transactions contemplated thereby. The Lindemann Proxy is attached to this
proxy statement as Appendix D.
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Employees; Benefits. For employees (excluding unionized employees) of PEI
and its subsidiaries, Southern Union has agreed:
. to provide such employees who continue their service with Southern Union
with benefits no less favorable in the aggregate than the benefits
provided under PEI's benefit plans during the 12 months immediately
following the closing date;
. to recognize, for purposes of eligibility, vesting and benefit accrual
under all benefit plans provided to such employees after the effective
time, the tenure of employment, as recognized by PEI or any of its
subsidiaries as of the closing date;
. that all vacation time earned by such employees prior to the closing
date must be taken by the end of the calendar year of the closing date,
except where PEI or Southern Union requests that an employee forgo his
or her vacation for business-related reasons;
. to recognize, for purposes of awarding vacation time at the beginning of
each calendar year following the closing date, the tenure of employment,
as recognized by PEI or any of its subsidiaries as of the closing date;
and
. to permit each such employee to carry forward all days of sick leave
accrued prior to the closing date.
Southern Union has also agreed to assume, at the effective time, all
collective bargaining agreements covering employees of PEI and its
subsidiaries, and to discharge when due any and all liabilities of PEI and its
subsidiaries under the collective bargaining agreements relating to periods
after the effective time.
Certain Other Covenants and Agreements. The merger agreement contains
certain mutual covenants and other agreements of the parties, including
covenants and other agreements relating to: access to offices, properties and
records, use of reasonable efforts to obtain all necessary consents, approvals
and waivers from governmental bodies and other third parties and further
assurances.
The merger agreement also contains additional covenants by PEI to, except as
provided in the merger agreement:
. permit Southern Union to insert preprinted single-page customer
education materials into billing documentation to be delivered to
customers affected by the merger agreement;
. not declare or pay or permit any of its subsidiaries to declare or pay
any dividends or make other distributions in respect of PEI's or its
subsidiaries' capital stock, except for regular dividends on PEI common
stock and PG Energy preferred stock;
. not issue or encumber or permit any of its subsidiaries to issue or
encumber any shares of its capital stock or securities convertible into
any such shares;
. not make any changes or permit any of its subsidiaries to make changes
in its or their accounting methods, principles or practices except as
required by law, rule, regulation or generally accepted accounting
principles;
. identify persons who are "affiliates" of PEI within the meaning of Rule
145 under the Securities Act and to use its reasonable efforts to
provide to Southern Union letters from such persons to the effect that
they will not dispose of their shares of Southern Union common stock
received in the merger except in accordance with the applicable
provisions of Rule 145 or in a transaction exempt from registration
under the Securities Act ("Rule 145 Letters");
. cooperate and cause its subsidiaries to cooperate with Southern Union's
requests with respect to the refinancing, repurchase, redemption or
repayment of PEI's or any of its subsidiaries' indebtedness or preferred
stock that may be required or that Southern Union may request prior to
the mergers; and
. except in certain instances, not initiate or encourage any inquiry or
proposal about mergers with other parties, sales of substantial assets,
sales of shares representing a majority or greater interest in PEI or
34
<PAGE>
any of its subsidiaries or other business combinations or, except in
certain instances, negotiate, discuss, approve or recommend any such
alternative acquisition proposal (see "--No Solicitation by PEI").
The merger agreement also contains certain additional covenants of Southern
Union to, except as provided in the merger agreement:
. take all reasonable steps so that the acquisition of the merger
consideration by PEI's officers and directors and cash payments or
substitute Southern Union options issued in exchange for options to
purchase PEI securities will be exempt from Section 16(b) of the
Securities Exchange Act of 1934 by reason of Rule 16b-3 under the
Exchange Act;
. not take, or fail to take, any action before or after the effective time
that will adversely affect the qualification of the mergers as a
reorganization for federal income tax purposes;
. use its best efforts to obtain, prior to the effective date of the
registration statement, all necessary state securities laws or "blue
sky" permits and approvals and pay all related expenses;
. cause the shares of Southern Union's common stock required to be
reserved for issuance in connection with the merger to be listed on the
NYSE;
. cause the election of three individuals to the Southern Union board to
be selected prior to the closing date by Southern Union from the PEI
board immediately prior to the effective time, and thereafter nominate
and recommend such individuals for reelection, if necessary, such that
each of them will have a term of at least three years from the closing
date (see "The Merger--Potential Conflicts and Interests of Certain
Persons in the Merger");
. give full consideration to using or retaining PEI's technology and
management systems for the PEI operations after the completion of the
merger;
. operate the utility operations of PEI and its subsidiaries in
Pennsylvania as a separate division of Southern Union headquartered in
Pennsylvania;
. maintain PEI's charitable contributions of at least the amount given
and/or committed in 1998 for at least the next three calendar years;
. upon the completion of the merger, assume all collective bargaining
agreements covering employees of PEI and any of its subsidiaries and
discharge when due any and all liabilities of PEI and any of its
subsidiaries under such collective bargaining agreements relating to
periods after the effective time; and
. except for an annual 5% stock dividend, not declare, prior to the
effective time, any stock dividend, stock split, reclassification,
recapitalization, combination or distribution of assets, securities or
other property to holders of, or affecting, Southern Union common stock.
No Solicitation by PEI
The merger agreement provides that PEI must terminate all existing
discussions or negotiations with third parties, if any, with respect to a
"Business Combination," which we define below, and that PEI may not, and may
not authorize or permit any of its or any of its subsidiaries' officers,
directors, agents, financial advisors, attorneys, accountants or other
representatives to, directly or indirectly:
. solicit, initiate or encourage submission of proposals or offers
relating to, or that could reasonably be expected to lead to, a Business
Combination; or
. participate in any negotiations or discussions regarding, furnish to any
person any information with respect to, or otherwise cooperate, assist,
participate in, facilitate or encourage any effort or attempt by any
other person to do or seek a Business Combination.
35
<PAGE>
A "Business Combination" is, except as provided in the merger agreement:
. a merger, consolidation or other business combination, share exchange,
sale of shares of capital stock, tender offer or exchange offer or
similar transaction involving PEI or any of its subsidiaries;
. the acquisition in any manner, directly or indirectly, of a material
interest in any capital stock of, or a material equity interest in a
substantial portion of the assets of, PEI or any of its subsidiaries,
including any single or multi-step transaction or series of related
transactions that is structured to permit a third party to acquire
beneficial ownership of a majority or greater equity interest in PEI or
any of its subsidiaries; or
. the acquisition in any manner, directly or indirectly, of any material
portion of the business or assets (other than immaterial or
insubstantial assets or inventory in the ordinary course of business or
assets held for sale) of PEI or any of its subsidiaries.
Prior to receiving the approval of the merger by PEI stockholders, if the
PEI board receives an unsolicited written proposal from a third party with
respect to a Business Combination that the PEI board determines, in its good
faith judgment, after consulting with its financial advisor and outside
counsel, with customary qualifications, is a "Superior Proposal," which we
define below, PEI may:
. furnish information to, and negotiate, explore or otherwise engage in
substantive discussions with the third party that submitted the
unsolicited Superior Proposal if the PEI board determines, in its good
faith judgment after consulting with its financial advisor and outside
counsel, that it is reasonably necessary to engage in such discussions
in order to comply with its fiduciary duties under applicable law; and
. take and disclose to PEI's stockholders a position with respect to
another Business Combination proposal, or amend or withdraw such
position, pursuant to Rule 14d-9 and 14e-2 under the Exchange Act, or
make such disclosure to PEI's stockholders which in the good faith
judgment of the PEI board is required by applicable law, based on the
advice of its outside counsel.
A proposed Business Combination is a "Superior Proposal" if it involves at
least 50% of the shares of capital stock or a material portion of the assets of
PEI and the PEI board determines, after consulting with PEI's financial advisor
and outside counsel, that:
. the proposal is financially superior to the merger; and
. it appears that the party making the proposal is reasonably likely to
have the funds necessary to consummate the Business Combination.
The merger agreement also prohibits the PEI board from withdrawing or
modifying, or proposing publicly to withdraw or modify, in a manner adverse to
Southern Union, its approval or recommendation of the merger agreement or the
merger; approving or recommending, or proposing publicly to approve or
recommend, a Business Combination; or causing PEI to enter into any letter of
intent, agreement in principle, acquisition agreement or other similar
agreement related to any Business Combination unless the following conditions
are satisfied:
. the PEI board determines, in its good faith judgment, after consulting
with its financial advisor and outside counsel, that an unsolicited
proposal regarding a Business Combination is a Superior Proposal; and
. the PEI board determines, in its good faith judgment, after consulting
with its financial advisor and outside counsel, that the failure to
either withdraw or modify its approval or recommendation of the merger
agreement or the merger, approve or recommend a Business Combination, or
cause PEI to enter into any agreement related to any Business
Combination would create a reasonable possibility of a breach of the
fiduciary duties of the PEI board under applicable law.
36
<PAGE>
PEI must promptly notify Southern Union of the receipt of any alternative
acquisition proposal regarding a Business Combination, the material terms and
conditions of any such proposal, the identity of the person or entity making
the proposal and the status and details of any such request or proposal within
one business day of PEI's receipt of any such proposal. PEI is required to use
all reasonable efforts to keep Southern Union informed of the status and
details of any such inquiry, offer or proposal and provide Southern Union two
days' advance notice of the first delivery of non-public information to any
such person or entity. If any such inquiry, offer or proposal is in writing,
PEI has agreed to promptly deliver to Southern Union a copy of such inquiry,
offer or proposal. If PEI decides to accept such Business Combination proposal
and enter into a definitive agreement with respect to such proposal, PEI must
give Southern Union five business days' notice of its intent to enter into a
definitive agreement. In addition, during this five-day period, PEI must give
Southern Union an opportunity to adjust the terms of the merger agreement so
that the parties can proceed with the merger and negotiate in good faith with
Southern Union with respect to any such adjustments. Concurrently with the
termination of the merger agreement in connection with a Business Combination,
PEI must also pay the required termination fee (see "--Termination of the
Merger Agreement" and "--Termination Fees and Expenses--PEI Termination Fee").
Prior to furnishing any non-public information to, entering into
negotiations with or accepting a Superior Proposal from a third party, PEI will
provide written notice to Southern Union to the effect that it is furnishing
information to or entering into discussions or negotiations with such third
party and receive from such third party an executed confidentiality agreement
containing substantially the same terms and conditions as the confidentiality
agreement between PEI and Southern Union.
Conditions to the Completion of the Merger
Mutual Closing Conditions. The obligations of Southern Union and PEI to
complete the merger are subject to the satisfaction or, to the extent legally
permissible and permitted by the merger agreement, waiver of the following
conditions:
. accuracy as of the closing date of the representations and warranties
made by the other party to the extent specified in the merger agreement;
. performance in all material respects by the other party of the
obligations required to be performed by it at or before the closing
date;
. all governmental approvals required in order to complete the merger
having been obtained without conditions that would be reasonably likely
to be materially adverse to PEI's or Southern Union's businesses,
operations, properties, financial condition, or results of operations;
. no court, administrative agency, governmental body or arbitrator having
issued an order to restrain, enjoin or otherwise prevent the
consummation of the merger agreement or the mergers;
. approval by the Southern Union and PEI stockholders;
. Southern Union's registration statement on Form S-4, which includes
portions of this proxy statement, being effective and not subject to any
stop order by the SEC; and
. authorization for listing on the NYSE of the shares of Southern Union
common stock to be issued in the merger.
Additional Closing Conditions for Southern Union's Benefit. Southern Union's
obligation to complete the merger is subject to the following additional
conditions:
. receipt of third party consents required to consummate the mergers,
other than any consents which, if not obtained, are not, individually or
in the aggregate, reasonably likely to result in a material adverse
effect on the business, operations, properties, financial condition or
results of operations of PEI and its subsidiaries after the closing;
37
<PAGE>
. receipt of all consents and approvals required, under the terms of any
note, bond or indenture to which PEI or any of its subsidiaries is a
party;
. if requested by Southern Union, the resignation of each director of PEI
or a subsidiary of PEI of his or her position as a director of PEI or a
subsidiary of PEI effective as of the closing date;
. the receipt by Southern Union on the closing date of an opinion of
counsel to the effect that the merger will constitute a "reorganization"
within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code,
that the Honesdale merger and PG Energy merger will each constitute
"reorganizations" within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code or "liquidations" within the meaning of Section
332 of the Internal Revenue Code, and that no gain or loss will be
recognized by Southern Union, PEI or any of PEI's subsidiaries with
respect to the mergers;
. the redemption or purchase by PEI or repurchase by PG Energy of all of
the outstanding shares of each series of the cumulative preferred stock,
par value $100.00 per share, of PG Energy;
. the demand for payment of dissenters' rights by PEI stockholders with
respect to the merger does not equal or exceed seven percent of the
outstanding shares of PEI common stock entitled to vote on the merger;
and
. each of the individuals and entities who are "affiliates" of PEI within
the meaning of Rule 145 have delivered to Southern Union a Rule 145
Letter.
Additional Closing Condition for PEI's Benefit. PEI's obligation to
complete the merger is subject to the additional condition that on the closing
date, PEI shall have received an opinion of counsel to the effect that the
merger will be treated for federal income tax purposes as a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code, and that no
gain or loss will be recognized for federal income tax purposes by the
stockholders of PEI upon their receipt of the merger consideration, except
that any realized gain will be recognized to the extent of the amount of cash
received.
Indemnification and Insurance for PEI Officers and Directors
For six years after the completion of the merger, Southern Union will
indemnify and hold harmless the present and former officers and directors of
PEI and its subsidiaries in respect of acts or omissions which occurred prior
to the effective time. In addition, for six years after the effective time,
Southern Union will use its reasonable best efforts to provide officers' and
directors' liability insurance in respect of acts or omissions occurring prior
to the effective time covering each such person covered by PEI's officers' and
directors' liability insurance policy on the date of the merger agreement on
terms with respect to coverage and amount no less favorable than those of such
policy in effect on the date of the merger agreement. However, if the annual
premiums of such insurance coverage exceed 200% of the previous year's
premiums, Southern Union will be obligated to obtain a policy with the best
coverage available for a cost not exceeding such amount. See "The Merger--
Potential Conflicts and Interests of Certain Persons in the Merger."
Amendments
PEI and Southern Union may amend in writing any of the terms of the merger
agreement.
Termination of the Merger Agreement
The merger agreement may be terminated at any time before the closing:
. by mutual written consent of Southern Union and PEI;
. by either PEI or Southern Union:
(1) if a court issues a non-appealable order that prohibits the
consummation of the mergers; or
38
<PAGE>
(2) at any time after 5:00 p.m., Eastern Time on June 7, 2000, if the
closing of the merger has not occurred and the party asserting its right
to terminate is not in material breach of its representations,
warranties, covenants or agreements contained in the merger agreement;
however, this date will be extended to December 7, 2000, if even though
all other conditions to the closing of the merger have been fulfilled or
are capable of being fulfilled (i) all approvals, consents, opinions or
rulings of all government agencies required in order to consummate the
mergers have not been obtained by final order in such form as is, and
with no conditions that are, individually or in the aggregate,
reasonably likely to have a material adverse effect on the business,
operations, properties, financial condition or results of operations of
the combined company or, in the case of a termination by Southern Union,
PEI, (ii) the applicable waiting period under the HSR Act relating to
the mergers has not expired or been terminated or (iii) any approval or
authorization of any federal, state or local governmental agency
required in connection with the consummation of the mergers has not been
obtained or become a final order;
. by Southern Union:
(1) if there is a breach of any representation, warranty, covenant or
agreement of PEI, which breach cannot be cured and would make PEI's
representations and warranties materially inaccurate;
(2) if the holders of a majority of the outstanding shares of PEI
common stock do not approve the merger agreement and the merger and
there has not been a material misrepresentation or a material breach by
Southern Union of any of its covenants, warranties or agreements
contained in the merger agreement;
(3) if the PEI board or any committee thereof (i) withdraws or
modifies, or proposes publicly to withdraw or modify, in a manner
adverse to Southern Union, its approval or recommendation of the merger
agreement or the merger, (ii) approves or recommends, or proposes
publicly to approve or recommend, a Business Combination, (iii) causes
PEI to enter into a definitive agreement related to any Business
Combination, (iv) resolves to take any of the foregoing actions or (v)
fails by the effective time to cause PG Energy to redeem or repurchase
all of the outstanding shares of PG Energy preferred stock; or
(4) if a third party, including a group (as defined under the
Exchange Act), acquires securities representing greater than 50% of the
voting power of the outstanding voting securities of PEI; and
. by PEI:
(1) if there is a breach of any representation, warranty, covenant or
agreement of Southern Union, which breach cannot be cured and would make
Southern Union's representations and warranties materially inaccurate;
(2) if (i) PEI gives Southern Union at least five business days'
notice of its intent to enter into a definitive agreement with respect
to a Business Combination proposal, and during this five-day period
gives Southern Union an opportunity to adjust the terms of the merger
agreement so that the parties can proceed with the merger and negotiate
in good faith with Southern Union with respect to any such adjustments,
(ii) PEI has paid the required termination fees and (iii) PEI has
entered into a definitive agreement with respect to a Business
Combination proposal;
(3) if the holders of a majority of the outstanding shares of PEI
common stock do not approve the merger agreement or if the holders of a
majority of the outstanding shares of Southern Union common stock do not
approve the merger agreement and there has not been a material
misrepresentation or a material breach by PEI of any of its covenants,
warranties or agreements contained in the merger agreement; or
(4) if the average trading price of Southern Union common stock as of
the closing date is lower than $17.3000. For this purpose, "average
trading price" means the average of the reported closing
39
<PAGE>
prices of Southern Union common stock on the NYSE for the ten
consecutive trading days ending on the third trading day before the
closing date (counting from and including the trading day
immediately before the closing date). The closing price for each day
in question will be the last sale price, regular way, or, if no sale
takes place on that day, the average of the closing bid and asked
prices, regular way.
If the merger agreement is validly terminated, no provision of the merger
agreement will survive (except for the provisions relating to expenses,
termination fees and miscellaneous provisions of general application) and
termination shall be without any liability on the part of any party, unless
such party is negligent or in willful breach of any provision of the merger
agreement.
Termination Fees and Expenses
Payment of the Merger Expenses Generally. Each of PEI and Southern Union
will pay all costs and expenses of its performance of and compliance with the
merger agreement except as expressly provided in the merger agreement and as
follows:
. PEI will pay the costs and expenses (including legal fees and expenses)
in connection with any action, including the filing of any lawsuit or
other legal action, taken by Southern Union to collect the termination
fee payable to Southern Union under the merger agreement, together with
interest on the amount of any portion of the unpaid termination fee. Any
such interest will be calculated using an annual percentage rate of
interest equal to the prime rate published in The Wall Street Journal on
the date (or preceding business day if such date is not a business day)
such fee was required to be paid, compounded on a daily basis using a
360-day year;
. PEI will pay all fees and expenses of counsel for PEI;
. Southern Union will pay all real estate transfer taxes and real estate
recording fees, if any, including expenses of counsel associated with
real estate title, transfer and recording issues in connection with the
mergers, and all filing and application fees paid to federal, state or
local government agencies in connection with the mergers; and
. Southern Union and PEI will each pay half of the combined costs of
printing and mailing to PEI's stockholders this proxy statement.
PEI Termination Fee. PEI has agreed to pay Southern Union $10 million in
cash if:
. PEI provides Southern Union at least five business days' notice of its
intent to terminate the merger agreement and has entered into a
definitive agreement with respect to a Business Combination proposal;
. Southern Union terminates the merger agreement because the PEI board or
any committee thereof has (i) withdrawn or modified, or proposed
publicly to withdraw or modify, in a manner adverse to Southern Union,
its approval or recommendation of the merger agreement, (ii) approved or
recommended, or proposed publicly to approve or recommend, a Business
Combination, (iii) caused PEI to enter into a definitive agreement
related to any Business Combination, (iv) resolved to take any of the
foregoing actions or (v) failed by the effective time to cause PG Energy
to redeem or repurchase all of the outstanding shares of PG Energy
preferred stock; or
. Southern Union terminates the merger agreement because a third party,
including a group (as defined under the Exchange Act), has acquired
securities representing greater than 50% of the voting power of the
outstanding voting securities of PEI.
40
<PAGE>
BUSINESS OF PEI
PEI is a holding company which, through its subsidiaries, is engaged in both
regulated and nonregulated activities. PEI's regulated activities are conducted
by its principal subsidiary, PG Energy, a public utility regulated by the
Pennsylvania Public Utility Commission, and PG Energy's wholly-owned
subsidiary, Honesdale, also a regulated public utility. Together PG Energy and
Honesdale distribute natural gas to a thirteen-county area in northeastern
Pennsylvania, a territory that includes the cities of Scranton, Wilkes-Barre
and Williamsport. In 1998, PG Energy and Honesdale collectively accounted for
approximately 77% of PEI's operating revenues. Until February 16, 1996, when
its water utility operations were sold, PG Energy was also engaged in the
distribution of water.
PEI's nonregulated activities are conducted through its other subsidiaries,
PG Energy Services Inc. ("Energy Services"), PEI Power Corporation, Theta Land
Corporation and Keystone Pipeline Services, Inc., a wholly-owned subsidiary of
Energy Services. These nonregulated activities include the sale of natural gas,
propane, electricity and other energy-related products and services; the
construction, maintenance and rehabilitation of utility facilities, primarily
natural gas distribution pipelines; and the sale of property for residential,
commercial and other development. In the fourth quarter of 1997, Energy
Services began marketing electricity and other products and services, under the
name PG Energy PowerPlus (a trademark of Energy Services), principally in
northeastern and central Pennsylvania. PEI Power Corporation, an exempt
wholesale generator (within the meaning of the Public Utility Holding Company
Act of 1935), began generating and selling electricity in July 1998, upon
completion of modifications to its cogeneration facility that enable it to burn
both natural gas and methane. In 1998, the revenues of the nonregulated
subsidiaries accounted for approximately 23% of PEI's operating revenues and
37% of its capital expenditures.
As of June 30, 1999, PG Energy provided service to approximately 149,000
natural gas customers and Honesdale provided service to approximately 3,400
natural gas customers.
PEI and its subsidiaries employed approximately 807 persons as of June 30,
1999.
41
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The summary below sets forth selected historical financial and market data
and selected unaudited pro forma combined condensed financial data. The
financial data should be read in conjunction with the documents incorporated by
reference and the historical financial statements and the related notes of
Southern Union and PEI, incorporated by reference, and in conjunction with the
Unaudited Pro Forma Combined Condensed Financial Statements and the related
notes thereto included under "Unaudited Pro Forma Combined Condensed Financial
Statements."
Selected Historical Consolidated Financial Information of Southern Union
The following table shows selected historical financial data for Southern
Union as of and for the years ended June 30, 1999, 1998, 1997, 1996 and 1995.
The selected historical financial data for each year has been derived from
Southern Union's audited historical financial statements for that year. The
information should be read in connection with, and is qualified in its entirety
by reference to, Southern Union's financial statements and notes thereto
incorporated by reference. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1999(a)(b) 1998(a)(b) 1997(a) 1996(a) 1995
---------- --------- -------- -------- --------
(dollars in thousands, except per share
amounts)
<S> <C> <C> <C> <C> <C>
Total operating revenues... $ 605,231 $ 669,304 $717,031 $620,391 $479,983
Earnings from continuing
operations (c)............ 10,445 12,229 19,032 20,839 16,069
Diluted earnings per share
(d)....................... 0.32 0.39 0.62 0.68 0.54
Total assets............... 1,087,348 1,047,764 990,403 964,460 992,597
Common stockholders'
equity.................... 301,058 296,834 267,462 245,915 225,664
Short-term debt and capital
lease obligation.......... 2,066 1,777 687 615 770
Long-term debt and capital
lease obligation,
excluding current
portion................... 390,931 406,407 386,157 385,394 462,503
Company obligated
mandatorily redeemable
preferred securities of
subsidiary trust.......... 100,000 100,000 100,000 100,000 100,000
</TABLE>
- --------
(a) Certain Texas and Oklahoma Panhandle distribution operations and Western
Gas Interstate, exclusive of the Del Norte interconnect, were sold on May
1, 1996.
(b) On December 31, 1997, Southern Union acquired Atlantic Utilities
Corporation and subsidiaries for shares of Southern Union common stock
valued at $18,041,000 and cash of $4,436,000.
(c) As of June 30, 1998, Missouri Gas Energy (a division of Southern Union)
wrote off $8,163,000 pre-tax in previously recorded regulatory assets as a
result of announced rate orders and court rulings.
(d) Earnings per share for all periods presented were computed based on the
weighted average number of shares of Southern Union common stock and
Southern Union common stock equivalents outstanding during the year
adjusted for (i) the 5% stock dividends distributed on August 6, 1999,
December 9, 1998, December 10, 1997, December 10, 1996 and November 27,
1995, and (ii) the 50% stock dividend distributed on July 13, 1998 and the
33 1/3% stock dividend distributed on March 11, 1996.
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<PAGE>
Selected Historical Consolidated Financial Information of PEI
The following table shows selected historical financial data for PEI as of
and for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 and as of
and for the six months ended June 30, 1999 and 1998. The selected historical
financial data for each year has been derived from PEI's audited historical
financial statements for that year. The selected historical financial data for
the six months ended June 30, 1999 and 1998 has been derived from PEI's
unaudited interim financial statements. The information should be read in
connection with, and is qualified in its entirety by reference to, PEI's
financial statements and notes thereto incorporated by reference. See "Where
You Can Find More Information."
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------ -----------------------
1999 1998
1998 1997 1996(1) 1995(1) 1994(1) (unaudited) (unaudited)
-------- -------- -------- -------- -------- ----------- -----------
(thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
INFORMATION:
Operating revenues..... $207,332 $228,046 $184,480 $161,935 $177,097 $150,959 $112,760
Operating expenses
(2)................... 189,133 206,491 166,220 140,984 156,465 136,832 102,655
-------- -------- -------- -------- -------- -------- --------
Operating income....... $ 18,199 $ 21,555 $ 18,260 $ 20,951 $ 20,632 $ 14,127 $ 10,105
======== ======== ======== ======== ======== ======== ========
Income (loss) from:
Continuing operations
(3).................. $ 8,701 $ 13,142 $ 9,794 $ 5,884 $ 6,952 $ 8,661 $ 5,790
Discontinued
operations (2)....... -- -- (363) (3,834) 10,504 -- --
-------- -------- -------- -------- -------- -------- --------
Income before
subsidiary's preferred
stock dividends and
extraordinary loss.... 8,701 13,142 9,431 2,050 17,456 8,661 5,790
Subsidiary's preferred
stock dividends (3)... (1,191) (1,312) (1,730) (2,763) (4,639) (104) (642)
Extraordinary loss
(2)................... -- -- (1,117) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 7,510 $ 11,830 $ 6,584 $ (713) $ 12,817 $ 8,557 $ 5,148
======== ======== ======== ======== ======== ======== ========
COMMON STOCK
INFORMATION:
Weighted basic average
number of shares
outstanding in
thousands (4).......... 9,997 9,661 10,222 11,459 10,913 10,709 9,827
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss)
per share of common
stock: (4)
Continuing operations
(3)................... $ .75 $ 1.22 $ .79 $ .27 $ .21 $ .80 $ .52
Discontinued operations
(2)................... -- -- (.04) (.33) .96 -- --
Discount (premium) on
repurchase/redemption
of subsidiary's
preferred stock....... (.10) .08 (.13) -- (.09) -- --
Extraordinary loss
(2)................... -- -- (.11) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) per
share of common
stock................. $ .65 $ 1.30 $ .51 $ (.06) $ 1.08 $ .80 $ .52
======== ======== ======== ======== ======== ======== ========
Weighted diluted average
number of shares
outstanding in
thousands (4).......... 10,074 9,736 10,243 11,464 10,915 10,799 9,917
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss)
per share of
common stock: (4)
Continuing operations
(3)................... $ .75 $ 1.22 $ .79 $ .27 $ .21 $ .79 $ .52
Discontinued operations
(2)................... -- -- (.04) (.33) .96 -- --
Discount (premium) on
repurchase/redemption
of subsidiary's
preferred stock....... (.10) .08 (.13) -- (.09) -- --
Extraordinary loss
(2)................... -- -- (.11) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) per
share of common
stock................. $ .65 $ 1.30 $ .51 $ (.06) $ 1.08 $ .79 $ .52
======== ======== ======== ======== ======== ======== ========
Cash dividends per share
of common
stock (4).............. $ 1.20 $ 1.19 $ 1.10 $ 1.10 $ 1.10 $ .60 $ .60
======== ======== ======== ======== ======== ======== ========
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------------------- -----------------------
1999 1998
1998 1997 1996 1995 1994 (unaudited) (unaudited)
-------- -------- -------- -------- -------- ----------- -----------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITALIZATION AT END OF
PERIOD:
Common shareholders'
investment............. $132,326 $122,105 $117,651 $162,739 $172,012 $143,900 $126,786
Preferred stock of PG
Energy:
Not subject to
mandatory redemption,
net................... 4,831 15,864 18,851 33,615 33,615 4,745 15,864
Subject to mandatory
redemption............ 240 640 739 1,680 1,760 160 560
Long-term debt.......... 98,000 127,000 75,000 106,706 220,705 95,000 109,000
-------- -------- -------- -------- -------- -------- --------
Total
capitalization...... $235,397 $265,609 $212,241 $304,740 $428,092 $243,805 $252,210
======== ======== ======== ======== ======== ======== ========
TOTAL ASSETS AT END OF
PERIOD:
Continuing operations... $426,202 $388,830 $366,810 $319,968 $321,236 $408,588 $381,999
Discontinued operations,
net (5)................ -- -- -- 204,250 203,196 -- --
-------- -------- -------- -------- -------- -------- --------
Total................ $426,202 $388,830 $366,810 $524,218 $524,432 $408,588 $381,999
======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1) The discontinued operations represent the water utility operations of PG
Energy which were sold to Pennsylvania-American Water Company on February
16, 1996.
(2) Including provision for income taxes.
(3) None of PEI's interest charges and none of PG Energy's preferred stock
dividends was allocated to the discontinued operations through the February
16, 1996 date of disposition. Prior to that time interest charges relating
to indebtedness of PG Energy were allocated to the discontinued operations
based on the relationship of the gross water utility plant of the
discontinued operations to the total of PG Energy's gross gas and water
utility plant. This was the same method as was utilized by PG Energy and
the Pennsylvania Public Utility Commission in establishing the revenue
requirements of its utility operations.
(4) Reflects a two-for-one stock split of PEI common stock effective March 20,
1997, as more fully discussed in Note 4 of the Notes to the 1998
Consolidated Financial Statements of PEI incorporated by reference.
(5) Net of (i) liabilities assumed by Pennsylvania-American Water Company, (ii)
estimated liability for income taxes on sale of discontinued operations,
(iii) with respect to the year ended December 31, 1995, the anticipated
income from the discontinued operations during the phase-out period for
financial statement purposes of April 1, 1995, through February 15, 1996,
and (iv) with respect to the years 1994 and 1993, other net assets of the
discontinued operations (which were written off as of March 31, 1995).
44
<PAGE>
Selected Unaudited Pro Forma Combined Condensed Financial Data
The following selected unaudited pro forma combined condensed financial data
presents the combined financial data of Southern Union and PEI, including their
respective subsidiaries, after giving effect to the merger, assuming the merger
had been effective for the period indicated and assuming the purchase method of
accounting. The selected unaudited pro forma combined condensed financial data
as of and for the year ended June 30, 1999 were derived from and should be read
in conjunction with the Unaudited Pro Forma Combined Condensed Balance Sheet
and the Unaudited Pro Forma Combined Condensed Statement of Operations,
including the notes thereto, which are included in this proxy statement on
pages 50 to 53, and other filings with the SEC by each of Southern Union and
PEI. The selected unaudited pro forma combined condensed financial data should
also be read in conjunction with the historical financial statements of both
Southern Union and PEI which are incorporated by reference. See "Where You Can
Find More Information." The selected unaudited pro forma combined condensed
financial data is presented for purposes of illustration only in accordance
with the assumptions stated in the notes to the financial information set forth
below, and is not necessarily indicative of the operating results or the
financial position that would have occurred if the merger had been consummated
for the period presented nor is it necessarily indicative of the future
operating results or financial position of the combined enterprise. The
selected unaudited pro forma combined condensed financial data does not contain
any adjustments to reflect cost savings or other synergies anticipated as a
result of the merger.
<TABLE>
<CAPTION>
Year Ended
June 30, 1999
-------------
(dollars in thousands,
except per share amounts)
<S> <C>
Total operating revenues......................... $ 838,836
Earnings from continuing operations (a)(b)(c).... 12,550
Diluted earnings per share (d)(e)................ 0.25
Total assets..................................... 1,749,868
Common stockholders' equity (e).................. 648,444
Short-term debt and capital lease obligation
(b)(f).......................................... 2,066
Long-term debt and capital lease obligation,
excluding current portion (b)................... 594,029
Company-obligated mandatorily redeemable
preferred securities of
subsidiary trust................................ 100,000
</TABLE>
- --------
(a) As of June 30, 1999, Southern Union incurred pre-tax costs of $3,839,000
associated with various acquisition efforts unrelated to the merger.
(b) As a result of the merger, long-term debt at an estimated annual interest
rate of 7.5%, which Southern Union believes would be obtained based on
current market rates, would be issued. The long-term debt is assumed to be
utilized: to finance the cash portion of the purchase of PEI common stock
and settlement of PEI stock options; to refinance certain current debt of
PEI; to pay for certain acquisition costs of $5 million related to change
of control agreements, the funding of PEI's Director Retirement Plan,
Director Deferred Compensation Plan and supplemental retirement benefits
and the exercise of certain parachute option payments for certain PEI
executives; and payment of various professional fees estimated to total $4
million.
(c) As a result of the merger, the outstanding PG Energy preferred stock will
be repurchased prior to closing the merger.
(d) Earnings per share were computed based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period adjusted for the Southern Union common stock to be issued in the
merger, the 5% stock dividends distributed on August 6, 1999 and December
9, 1998, and the 50% stock dividend distributed on July 13, 1998.
(e) Reflects the issuance of Southern Union common stock to PEI stockholders at
an exchange ratio of 1.5548 based on an average trading price of $20.58125
for Southern Union common stock at the average closing price per share for
the ten trading day period ending on the third trading day before September
3, 1999. All PEI stock options are assumed to be settled in cash based on
the difference between the total merger consideration per share of $35.00
and the exercise price of such stock options.
(f) Represents Southern Union's historical short-term debt and capital lease
obligation as PEI short-term debt is expected to be refinanced upon or soon
after the completion of the merger.
45
<PAGE>
COMPARATIVE DIVIDENDS AND MARKET PRICES
Southern Union
Southern Union common stock is listed and principally traded on the NYSE
under the symbol "SUG." The table below sets forth the high and low sales
prices (adjusted for any stock dividends and stock splits) of Southern Union
common stock for the calendar periods indicated as reported in The Wall Street
Journal as New York Stock Exchange Composite Transactions. The last day of
Southern Union's fiscal year is June 30. Southern Union does not pay its
stockholders a cash dividend. It distributes an annual 5% stock dividend that
can be sold through its Dividend Sale Plan.
<TABLE>
<CAPTION>
Price Range
-------------
High Low
------ ------
<S> <C> <C>
1996
First quarter..................................................... $12.27 $ 9.20
Second quarter.................................................... 13.99 11.11
Third quarter..................................................... 15.22 11.04
Fourth quarter.................................................... 14.33 12.10
1997
First quarter..................................................... $14.03 $12.23
Second quarter.................................................... 14.54 12.66
Third quarter..................................................... 14.11 12.53
Fourth quarter.................................................... 15.61 13.10
1998
First quarter..................................................... $14.97 $13.84
Second quarter.................................................... 19.73 14.43
Third quarter..................................................... 20.30 14.17
Fourth quarter.................................................... 23.33 17.63
1999
First quarter..................................................... $23.21 $16.55
Second quarter.................................................... 21.79 17.62
</TABLE>
46
<PAGE>
PEI
PEI common stock is listed and principally traded on the NYSE under the
symbol "PNT." The table below sets forth the dividends declared and the high
and low sales price of PEI common stock for the calendar period indicated as
reported in The Wall Street Journal as New York Stock Exchange Composite
Transactions. The last day of PEI's fiscal year is December 31.
<TABLE>
<CAPTION>
Price Range
------------- Cash
High Low Dividends
------ ------ ---------
<S> <C> <C> <C>
1996
First quarter (1)....................................... $20.00 $18.31 $0.28
Second quarter (1)...................................... 21.31 18.81 0.28
Third quarter (1)....................................... 21.44 19.88 0.28
Fourth quarter (1)...................................... 22.94 20.50 0.28
1997
First quarter (1)....................................... $24.06 $21.38 $0.29
Second quarter.......................................... 27.75 21.25 0.30
Third quarter........................................... 30.50 25.25 0.30
Fourth quarter.......................................... 32.75 24.25 0.30
1998
First quarter........................................... $26.56 $23.13 $0.30
Second quarter.......................................... 29.00 22.81 0.30
Third quarter........................................... 27.69 21.13 0.30
Fourth quarter.......................................... 25.94 21.69 0.30
1999
First quarter........................................... $26.00 $20.25 $0.30
Second quarter.......................................... 31.25 23.69 0.30
</TABLE>
- --------
(1) After restatement for the two-for-one split of PEI common stock effective
March 20, 1997.
Historical Equivalent Per Share Market Values
The following table sets forth the market value of Southern Union common
stock (on an historical basis) and the market value of PEI common stock (on an
historical and equivalent per share basis) as of May 5, 1999, the day the PEI
board authorized PEI's representatives to negotiate a merger agreement with
Southern Union based on its indication of interest; as of June 4, 1999, the
last business day preceding the day when Southern Union and PEI entered into
the merger agreement; and as of September 3, 1999, the day used to determine
the exchange ratio for the Unaudited Pro Forma Combined Condensed Financial
Statements. The equivalent per share values were based on an exchange ratio
valuing Southern Union common stock at the average closing price per share for
the ten trading day period ending on the third trading day before each
respective date.
<TABLE>
<CAPTION>
Equivalent
per Share
Southern Union PEI Value
-------------------------- -------------------------- ----------
Date High Low Closing High Low Closing
---- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
May 5, 1999............. $22.2500 $21.7500 $22.2500 $26.0000 $25.5625 $25.6250 $32.3177
June 4, 1999............ 21.6250 21.2500 21.6250 30.0625 29.2500 29.6875 31.2768
September 3, 1999....... 21.5000 21.0000 21.3750 31.5000 31.3750 31.3750 33.2341
</TABLE>
You are encouraged to obtain current market quotations for Southern Union
common stock and PEI common stock.
47
<PAGE>
COMPARATIVE PER SHARE DATA
The following tables set forth certain unaudited historical per share data
of Southern Union and PEI and the combined per share data on an unaudited pro
forma basis after giving effect to the merger assuming the merger had been in
effect for the period indicated, using the purchase method of accounting for
business combinations and assuming an exchange ratio of 1.5548 shares of
Southern Union common stock for each share of PEI common stock and an average
trading price of $20.58125 for Southern Union common stock at the average
closing price per share for the ten trading day period ending on the third
trading day before September 3, 1999. This data should be read in conjunction
with the selected financial data and the Unaudited Pro Forma Combined Condensed
Financial Statements and notes thereto included elsewhere in this proxy
statement/prospectus and the separate historical financial statements of
Southern Union and PEI incorporated by reference. The unaudited pro forma
combined financial data are not necessarily indicative of the operating results
or financial position that would have occurred if the merger had been
consummated as of the beginning of the periods presented, nor are they
necessarily indicative of the future operating results or financial position of
the combined enterprise.
<TABLE>
<CAPTION>
Year Ended
June 30, 1999
---------------
<S> <C>
SOUTHERN UNION--HISTORICAL
Earnings per common share:
Basic......................................................... $ 0.34
Diluted....................................................... 0.32
Cash dividends declared per share (a)........................... --
Book value per share at period end.............................. 9.74
<CAPTION>
12 Months Ended
June 30, 1999
---------------
<S> <C>
PEI--HISTORICAL
Earnings per common share:
Basic......................................................... $ 0.95
Diluted....................................................... 0.94
Cash dividends declared per share............................... 1.20
Book value per share at period end.............................. 13.26
<CAPTION>
Year Ended
June 30, 1999
---------------
<S> <C>
SOUTHERN UNION/PEI--PRO FORMA (b)
Earnings per common share:
Basic......................................................... $ 0.26
Diluted....................................................... 0.25
Cash dividends declared per share (a)........................... --
Book value per share at period end.............................. 13.57
PEI--EQUIVALENT PRO FORMA
Per share data imputed to existing stockholders (c)(d):
Earnings per common share:
Basic....................................................... $ .40
Diluted..................................................... .39
Cash dividends declared per share............................. --
Book value per share at period end............................ 21.09
</TABLE>
- --------
(a) Southern Union for the last six years has distributed and anticipates it
will continue to distribute an annual 5% stock dividend.
(b) See "Unaudited Pro Forma Combined Condensed Financial Statements."
48
<PAGE>
(c) Equivalent pro forma share data is calculated by multiplying the respective
unaudited pro forma combined data by an assumed exchange ratio of 1.5548
shares of Southern Union common stock for each share of PEI common stock.
The assumed exchange ratio is based on an average trading price of
$20.58125 for Southern Union common stock, which is the average closing
price per share for the ten trading day period ending on the third trading
day before September 3, 1999.
(d) Pro forma combined cash dividends declared per share represents the
historical dividend policy of Southern Union, which is to distribute an
annual 5% stock dividend.
49
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Condensed Financial Statements
present the combined financial data of Southern Union and PEI, including their
respective subsidiaries, after giving effect to the merger, assuming the merger
had been effective for the period indicated and assuming the purchase method of
accounting. The pro forma adjustments reflect an estimated additional purchase
cost assigned to utility plant based on the historical cost of the regulated
assets and liabilities of PEI and estimate of the fair value of the non-
regulated assets and liabilities of PEI, plus estimated acquisition costs. The
estimate of the fair value of the non-regulated assets is preliminary and may
be revised after the completion of independent appraisals , which have not been
performed. The unaudited pro forma combined condensed financial information
presented below is based on the assumption that upon completion of the merger
each PEI stockholder will receive, in exchange for each share of PEI common
stock he or she owns, a combination of Southern Union common stock and cash
worth in the aggregate $35, consisting of shares of Southern Union common stock
worth $32 and $3 in cash. The historical financial statements of PEI include
certain reclassifications to conform to Southern Union's presentation. These
reclassifications have no impact on net income or total stockholders' equity.
The fiscal years of Southern Union and PEI end on June 30 and December 31,
respectively, and, accordingly, the accompanying Unaudited Pro Forma Combined
Condensed Financial Statements have been prepared using the financial
statements of Southern Union incorporated by reference combined with the
comparable financial statement periods of PEI derived from its financial
statements incorporated by reference or as previously filed with the SEC. The
Unaudited Pro Forma Combined Condensed Balance Sheet as of June 30, 1999, is
presented as if the merger had occurred on that date and using the Southern
Union and PEI balance sheets at June 30, 1999. The Unaudited Pro Forma Combined
Condensed Statement of Operations for the twelve months ended June 30, 1999
assumes that the merger occurred on July 1, 1998 and includes Southern Union's
results of operations for its fiscal year ended June 30, 1999 and PEI's results
of operations for the twelve month period ended June 30, 1999.
The following unaudited pro forma combined condensed financial statements
have been prepared from, and should be read in conjunction with, the historical
financial statements and related notes thereto of Southern Union and PEI
incorporated by reference. See "Where You Can Find More Information." The
following unaudited pro forma combined condensed financial statements are
presented for purposes of illustration only in accordance with the assumptions
set forth below and are not necessarily indicative of the financial position or
operating results that would have occurred if the merger had been consummated
on the dates as of which, or at the beginning of the period for which, the
merger is being given effect nor is it necessarily indicative of the future
operating results or financial position of the combined enterprise. The
Unaudited Pro Forma Combined Condensed Financial Statements do not contain any
adjustments to reflect cost savings or other synergies anticipated as a result
of the merger.
50
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ --------------------------
Southern Pennsylvania
Union Enterprises,
Company Inc. Adjustments Combined
---------- ------------ ----------- ----------
(thousands of dollars)
<S> <C> <C> <C> <C>
Property, plant and
equipment............... $1,120,176 $ 384,562 $ -- $1,504,738
Less accumulated
depreciation and
amortization............ (376,212) (100,312) -- (476,524)
---------- --------- ---------- ----------
743,964 284,250 -- 1,028,214
Additional purchase cost
assigned to
utility plant, net...... 134,296 -- 252,862 (A) 387,158
---------- --------- ---------- ----------
Net property, plant and
equipment............. 878,260 284,250 252,862 1,415,372
Current assets........... 84,758 51,584 -- 136,342
Deferred charges......... 96,635 40,785 1,070 (B) 138,490
Investment securities.... 12,000 -- -- 12,000
Real estate and other.... 15,695 31,969 -- 47,664
---------- --------- ---------- ----------
Total................ $1,087,348 $ 408,588 $ 253,932 $1,749,868
========== ========= ========== ==========
Common stockholders'
equity.................. $ 301,058 $ 143,900 $ (143,900)(C) $ 648,444
347,386 (D)
Preferred stock of
subsidiary not subject
to mandatory
redemption.............. -- 4,745 (4,745)(E) --
Preferred stock of
subsidiary subject to
mandatory redemption.... -- 160 (160)(E) --
Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trust........ 100,000 -- -- 100,000
Long-term debt and
capital lease
obligation.............. 390,931 95,000 108,098 (F) 594,029
---------- --------- ---------- ----------
Total
capitalization...... 791,989 243,805 306,679 1,342,473
Current liabilities...... 143,628 87,818 (52,667)(G) 178,699
(80)(E)
Deferred credits and
other................... 81,493 14,434 -- 95,927
Accumulated deferred
income taxes............ 70,238 62,531 -- 132,769
Commitments and
contingencies ..........
---------- --------- ---------- ----------
Total................ $1,087,348 $ 408,588 $ 253,932 $1,749,868
========== ========= ========== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
51
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ --------------------------
Southern Pennsylvania
Union Enterprises,
Company Inc. Adjustments Combined
---------- ------------ ----------- ----------
(thousands of dollars, except shares and per
share amounts)
<S> <C> <C> <C> <C>
Operating revenues....... $ 605,231 $233,605 $ -- $ 838,836
Cost of gas and other
energy.................. 342,301 145,319 -- 487,620
---------- -------- ---------- ----------
Operating margin....... 262,930 88,286 -- 351,216
---------- -------- ---------- ----------
Operating expenses:
Operating, maintenance
and general........... 109,693 36,696 -- 146,389
Depreciation and
amortization 41,855 10,291 6,322 (H) 58,468
Taxes, other than on
income................ 46,535 12,415 -- 58,950
---------- -------- ---------- ----------
Total operating
expenses............ 198,083 59,402 6,322 263,807
---------- -------- ---------- ----------
Net operating
revenues............ 64,847 28,884 (6,322) 87,409
---------- -------- ---------- ----------
Other income (expenses):
Interest............... (35,999) (11,395) (8,322)(I) (52,233)
3,483 (J)
Dividends on preferred
securities............ (9,480) -- -- (9,480)
Other, net............. (1,814) 1,173 -- (641)
---------- -------- ---------- ----------
Total other expenses,
net................. (47,293) (10,222) (4,839) (62,354)
---------- -------- ---------- ----------
Earnings before income
taxes................... 17,554 18,662 (11,161) 25,055
Federal and state income
taxes................... 7,109 7,090 (1,694)(K) 12,505
---------- -------- ---------- ----------
Net earnings before
preferred stock dividend
requirements............ 10,445 11,572 (9,467) 12,550
Preferred stock dividend
requirements............ -- (653) 653 (L) --
---------- -------- ---------- ----------
Net earnings available
for common stock........ $ 10,445 $ 10,919 $ (8,814) $ 12,550
========== ======== ========== ==========
Net earnings per share:
Basic.................. $ 0.34 $ 0.26
========== ==========
Diluted................ $ 0.32 $ 0.25
========== ==========
Weighted average shares
outstanding:
Basic.................. 30,894,613 16,878,765 (M) 47,773,378
========== ========== ==========
Diluted................ 32,589,610 16,878,765 (M) 49,468,375
========== ========== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
52
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Adjustments to the Unaudited Pro Forma Combined Condensed Balance Sheet
(A) Reflects the estimated excess of the purchase price and other
transaction costs over the historical cost of the regulated net assets
and the estimated fair value of the non-regulated net assets of PEI.
(B) Reflects the capitalization of estimated debt issuance costs associated
with the long-term debt to be issued in connection with the merger as
more specifically described in Note (F). These debt issue costs are
amortized on a straight line basis over the life of the new debt.
(C) Reflects the elimination of common stockholders' equity of PEI.
(D) Reflects the issuance of Southern Union common stock to PEI
stockholders. See Note (M).
(E) Reflects the repurchase of all of the PG Energy preferred stock prior
to the closing of the merger.
(F) Reflects issuance of long-term debt at an estimated annual interest
rate of 7.5% which Southern Union believes would be obtained based on
current market rates. The long-term debt is assumed to be utilized: to
finance the cash portion of the purchase of PEI common stock and
settlement of PEI stock options; to refinance certain current debt of
PEI; to pay for certain acquisition costs of $5 million related to
change of control agreements, the funding of PEI's Director Retirement
Plan, Director Deferred Compensation Plan and supplemental retirement
benefits and the exercise of certain parachute option payments for
certain PEI executives; and payment of various professional fees
estimated to total $4 million. See Note (M).
(G) Reflects refinancing of certain current debt of PEI.
Adjustments to the Unaudited Pro Forma Combined Statement of Operations
(H) Reflects amortization of the estimated excess purchase price over the
historical cost of the regulated net assets and the estimated fair
value of the non-regulated net assets of PEI on a straight line basis
over a 40-year period based on the estimated useful lives of the
utility assets of PEI.
(I) Reflects interest expense on issuance of long-term debt at an assumed
estimated interest rate of 7.5% which Southern Union believes would be
obtained based on current market rates. The long-term debt is assumed
to be utilized: to finance the cash portion of the purchase of PEI
common stock and settlement of PEI stock options; to refinance certain
current debt of PEI; to pay for certain acquisition costs of $5 million
related to change of control agreements, the funding of PEI's Director
Retirement Plan, Director Deferred Compensation Plan and supplemental
retirement benefits and the exercise of certain parachute option
payments for certain PEI executives; and payment of various
professional fees estimated to total $4 million. For every 1/8 percent
change in the interest rate, interest expense for the twelve months
ended June 30, 1999 would change by $135,000.
(J) Reflects the elimination of historical interest expense of PEI as a
result of refinancing certain current debt of PEI to long-term debt in
connection with the merger. See Note (I).
(K) Reflects the income tax consequences at the federal statutory rate of
the pro forma adjustments after excluding nondeductible goodwill
amortization.
(L) Reflects the elimination of preferred stock dividend requirement due to
the repurchase of all outstanding PG Energy preferred stock prior to
the closing of the merger.
(M) Reflects the issuance of Southern Union common stock to PEI
stockholders at an exchange ratio of 1.5548 based on an average trading
price of $20.58125 for Southern Union common stock at the average
closing price per share for the ten trading day period ending on the
third trading day before September 3, 1999. All PEI stock options are
assumed to be settled in cash based on the difference between the total
merger consideration per share of $35.00 and the exercise price of such
stock options.
53
<PAGE>
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
We have each made forward-looking statements in this document (and in
documents that are incorporated by reference) that are subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of Southern Union and PEI.
Also, when we use words such as "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements. You should note that
many factors, some of which are discussed elsewhere in this document and in the
documents that we incorporate by reference, could affect the future financial
results of Southern Union or PEI and could cause those results to differ
materially from those expressed in our forward-looking statements contained or
incorporated by reference in this document. The factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements include the following:
. the timing and extent of changes in commodity prices;
. gas sales volumes;
. weather conditions and other natural phenomena in our service
territories;
. the achievement of operating efficiencies and the purchase and
implementation of new technologies for attaining such efficiencies;
. impact of relations 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 the companies,
including the restructuring of the natural gas industry in Pennsylvania,
Texas, Missouri and Florida;
. the impact of any year 2000 disruption; and
. the nature and impact of any extraordinary transactions such as any
acquisition or divestiture of a business unit or any assets.
These are representative 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 fluctuations, federal, state and local laws and
regulations affecting the retail gas industry or the energy industry generally,
and other factors.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Any reports,
statements or other information that the companies have filed may be read and
copied at the SEC's public reference rooms at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Please call the SEC at 1-800-732-0330 for further information on
the public reference rooms. Southern Union's and PEI's SEC filings should also
be available to the public from commercial retrieval services and at the
Internet web site maintained by the SEC at http://www.sec.gov.
In addition, materials and information concerning Southern Union and PEI can
be inspected at the New York Stock Exchange, Inc., 20 Broad Street, 7th Floor,
New York, New York 10005, where Southern Union common stock and PEI common
stock are listed.
The SEC allows us to "incorporate by reference" information into this proxy
statement, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this proxy
statement, except for any additional information superseded by information
contained directly in this proxy statement. This proxy
54
<PAGE>
statement incorporates by reference the documents set forth below that were
previously filed with the SEC by Southern Union (SEC File No. 1-6407) and PEI
(SEC File No. 0-7812). These documents contain important information about
Southern Union and PEI and their financial condition.
Regarding Southern Union
. Southern Union's Annual Report on Form 10-K for the fiscal year ended
June 30, 1999.
Regarding PEI
. PEI's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 and the amendment thereto.
. PEI's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
. PEI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
Southern Union and PEI may be required by the SEC to file other documents
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934 between the time this proxy statement is sent and the date the Annual
Meeting is held. These other documents will be deemed to be incorporated by
reference in this proxy statement and to be a part of it from the date they are
filed with the SEC.
Southern Union may have sent you the document regarding Southern Union that
is incorporated by reference, but you can obtain it through Southern Union, the
SEC or the SEC's Internet web site as previously described. Likewise, you can
obtain any of the documents regarding PEI that are incorporated by reference
through PEI, the SEC or the SEC's Internet web site as previously described.
Documents incorporated by reference as exhibits to this proxy statement are
available from Southern Union and PEI without charge. You may obtain documents
incorporated by reference in this proxy statement by requesting them in writing
or by telephone from the appropriate company at the following addresses:
SOUTHERN UNION PEI
Attention: Richard N. Marshall
Attention: George Yankowski Treasurer and Assistant Secretary
Director--Investor Relations One PEI Center
504 Lavaca Street, Eighth Floor Wilkes-Barre, Pennsylvania 18711-0601
Austin, Texas 78701 (570) 829-8843
(512) 477-5852
If you would like to request documents from Southern Union or PEI, please do
so promptly in order to receive them before the Southern Union Annual Meeting.
All information contained in or incorporated by reference in this proxy
statement with respect to Southern Union has been provided by Southern Union.
All information contained in or incorporated by reference in this proxy
statement with respect to PEI has been provided by PEI. Neither Southern Union
nor PEI assumes any responsibility for the accuracy or completeness of the
information provided by the other party.
You should rely only on the information contained or incorporated by
reference in this proxy statement to vote on the merger agreement and the
issuance of Southern Union common stock pursuant to the merger agreement.
Neither Southern Union nor PEI has authorized anyone to provide you with
information that is different from what is contained in this proxy statement.
This proxy statement is dated September 17, 1999. You should not assume that
the information contained in this proxy statement is accurate as of any date
other than that date, and neither the mailing of this proxy statement to
stockholders nor the completion of the merger shall create any implication to
the contrary.
55
<PAGE>
BOARD OF DIRECTORS
Board Size and Composition
The Southern Union board is comprised of ten directors and is divided into
three classes, each of which serves a staggered three-year term. The terms of
the Class III directors expire at the annual meeting. The Class I directors
will serve until the 2000 Annual Meeting of Stockholders and the Class II
directors will serve until the 2001 Annual Meeting of Stockholders. This year's
Nominees, George L. Lindemann, Peter H. Kelley and Dan K. Wassong, are the
Class III directors standing for election for a three-year term of office
expiring at the 2002 Annual Meeting of Stockholders or when their successors
are duly elected and qualified.
The following pages contain information concerning the Nominees and the
directors whose terms of office will continue after the meeting.
NOMINEES
Class III--Term expires in 1999
George L. Lindemann has been Chairman of the Board and Chief Executive
Officer of Southern Union since February 1990. He has been Chairman of the
Executive Committee of the Board of Directors since March 1990. He was Chairman
of the Board and Chief Executive Officer of Metro Mobile CTS, Inc.
("Metro Mobile") from its formation in 1983 through April 1992. He has been
President and a director of Cellular Dynamics, Inc., the managing general
partner of Activated Communications Limited Partnership, a private investment
business, since May 1982. Mr. Lindemann is also a director of Del Laboratories,
Inc., Network Event Theater, Inc. and Total Research Corporation. Age: 63.
Peter H. Kelley has been President and Chief Operating Officer of Southern
Union since February 1990, Chief Executive Officer of Southern Union Gas
Company ("Southern Union Gas"), a division of the Company, since June 1998, and
Chief Executive Officer of Missouri Gas Energy ("MGE"), a division of the
Company, since December 1993. From February 1990 to June 1998 Mr. Kelley was
also President and Chief Operating Officer of Southern Union Gas and from
December 1993 to September 1995, was also President of MGE. Prior to joining
the Company, he had been an officer of Metro Mobile since 1986. Age: 52.
Dan K. Wassong has been the President, Chief Executive Officer and a
director of Del Laboratories, Inc., a manufacturer of cosmetics, toiletries and
pharmaceuticals, for more than the past five years. Mr. Wassong is also a
director of Moore Medical Corporation. Age: 69.
THE BOARD RECOMMENDS A VOTE FOR ALL NOMINEES
TO SERVE AS CLASS III DIRECTORS.
DIRECTORS CONTINUING IN OFFICE
Class I--Term expires in 2000
John E. Brennan has been Vice Chairman of the Board and Assistant Secretary
of Southern Union since February 1990. Mr. Brennan has also been engaged in
private investments since May 1992. Prior to May 1992, Mr. Brennan had been
President and Chief Operating Officer of Metro Mobile. Age: 53.
Frank W. Denius has been Chairman Emeritus of Southern Union since February
1990. Since February 1990, Mr. Denius has been engaged primarily in the private
practice of law in Austin, Texas. Age: 74.
Roger J. Pearson has been an attorney in private practice in Stamford,
Connecticut for more than the past five years. He has been of counsel to the
firm of Neville, Shaver, Hubbard & McLean since 1991. Mr. Pearson has been a
director of the Company since January 1992. Mr. Pearson is also a director of
Workflow Management, Inc. Age: 53.
56
<PAGE>
Class II--Term expires in 2001
Aaron I. Fleischman has been Senior Partner of Fleischman and Walsh, L.L.P.,
a Washington, D.C. law firm specializing in regulatory, corporate-securities,
litigation and legislative matters for telecommunications, regulated utilities
and transportation companies, since 1976. Mr. Fleischman is also a director of
Citizens Utilities Company. Age: 60.
Kurt A. Gitter, M.D. has been an ophthalmic surgeon in private practice in
New Orleans, Louisiana, since 1969. He has also been a Clinical Professor of
Ophthalmology at Louisiana State University since 1978 and an assistant
professor of ophthalmology at Tulane University since 1969. Dr. Gitter has been
a director of the Company since June 1995. Age: 62.
Adam M. Lindemann has been the managing member of Lindemann Capital
Advisors, L.L.C. since November 1996, which manages investments for various
private investment funds including Lindemann Capital Partners, L.P. Previously,
he had been a personal investor manager for Third Point Partners since August
1996. From 1994 until August 1996, he was a securities analyst for Oppenheimer
& Company and previously during 1994 he was a corporate finance associate with
Perry Partners, a money management firm. Adam M. Lindemann is the son of George
L. Lindemann, Chairman of the Board and Chief Executive Officer of Southern
Union. Age: 38.
George Rountree, III has been an attorney in private practice in Wilmington,
North Carolina where he has been a senior partner in the firm of Rountree &
Seagle since its formation in 1977. Age: 66.
With the exception of Messrs. Denius, Gitter and Pearson, each of the above-
named Directors and Nominees first became a director of the Company in February
1990.
Board Committees and Meetings
The Board has an Executive Committee, composed of Messrs. George Lindemann
(Chairman), Brennan and Kelley. The Executive Committee held one meeting and
acted by unanimous written consent on six occasions during fiscal year 1999.
During the intervals between meetings of the Board, this committee has the
authority to, and may exercise all of the powers of, the Board in the
management of the business, property and affairs of the Company in all matters
that are not required by statute or by the Company's Restated Certificate of
Incorporation or Bylaws to be acted upon by the Board. This committee must
exercise such authority in such manner as it deems to be in the best interests
of the Company and consistent with any specific directions of the Board.
The Board has an Audit Committee, currently composed of Messrs. Denius
(Chairman) and Gitter. The Audit Committee met four times during fiscal year
1999. This committee has the duties of recommending to the Board the
appointment of independent auditors, reviewing their charges for services,
reviewing the scope and results of the audits performed, reviewing the adequacy
and operation of the Company's internal audit function, and performing such
other duties or functions with respect to the Company's accounting, financial
and operating controls as deemed appropriate by it or the Board.
The Board has a Long-Term Stock Incentive Plan Committee (the "Plan
Committee") which may consist of no fewer than two directors. The Plan
Committee administers the 1992 Plan and Southern Union's 1982 Stock Option Plan
(the "1982 Plan"). The committee is currently composed of Messrs. Rountree
(Chairman) and Pearson who have the authority to make all decisions regarding:
(i) the granting of awards under the Company's 1992 Plan; (ii) eligibility of
employees to receive awards under the 1992 Plan; and (iii) interpretation of
the 1992 Plan. To serve on the Plan Committee, a director may not receive any
awards under the 1992 Plan during the prior year, cannot currently be eligible
to receive any awards under the 1992 Plan and must be an "outside" non-employee
director. The Plan Committee did not meet during fiscal year 1999.
57
<PAGE>
The Board has a Human Resources Committee currently composed of Messrs.
Pearson (Chairman) and Gitter. The Human Resources Committee was formed in 1998
and met once during the fiscal year 1999. This committee has the authority to
investigate any allegations of harassment or discrimination against any senior
executive officers of the Company. This committee also reviews on a quarterly
basis all outstanding claims of discrimination which result in an
administrative claim or litigation.
The Board held four meetings and acted by unanimous written consent on seven
occasions during fiscal year 1999. Except for Messrs. Denius, Adam Lindemann
and Wassong who were unable to attend one, one and two meetings, respectively,
of the Board, all directors attended all of the meetings of the Board and
committees on which they served that were held in fiscal year 1999 while they
were directors and a member of any such committee.
Board Compensation
Compensation for each director is $20,000 per year, payable in quarterly
installments, except for: Mr. George Lindemann (who is compensated as the Chief
Executive Officer of the Company); Mr. Brennan (who receives $115,606 per year
as Vice Chairman of the Board of the Company and a member of the Executive
Committee); Mr. Kelley (who is compensated as an executive officer and employee
of the Company and its divisions and subsidiaries); and the chairman and the
other member of the Audit Committee of the Board, who receive $30,000 and
$25,000 per year, respectively. Members of the Southern Union board also are
reimbursed for travel expenses incurred in connection with Company business,
including attendance at meetings of the Board and its committees.
Directors' Deferred Compensation Plan
The Board has a Directors' Deferred Compensation Plan (the "Directors'
Plan") which is designed to attract and retain well-qualified individuals to
serve as outside directors and to enhance the identity of their interests and
the interests of stockholders. Participation in the Directors' Plan is
optional.
Under the Directors' Plan, each director who is not also an employee of the
Company may choose to defer all or any percentage of his or her director's fees
and invest such deferred amount in Southern Union common stock. The Directors'
Plan requires the Company to make a matching contribution of 100% of the first
10% of the participant's total directors' fees, to the extent deferred.
A participating director is 100% vested with respect to the amount of
director's fees that he or she elects to defer and any related income, gains
and losses. The Company's matching contributions do not vest until the
participating director either has completed five (5) years of service as a
director or dies while serving as a director. Deferred amounts may not be
withdrawn by a participant until (i) thirty (30) days after such time as the
director either retires or ceases to be a director of the Company; or (ii) with
the permission of the Board, in the event of severe financial hardship.
The Board may terminate, suspend or amend the Directors' Plan under certain
circumstances, but the Board has no discretion regarding its administration.
58
<PAGE>
BOARD OF DIRECTORS' REPORT ON EXECUTIVE COMPENSATION
The Board closely aligns the total compensation of the executive officers
with the profitability of the Company. Merit increases to the base salaries for
the officer group have been moderate in comparison to industry standards. The
1992 Plan was introduced in order to focus the attention of management on the
long-term improvement of stockholder value.
The Company's 1999 short-term incentive plan was aligned with each officer's
and manager's compensation to directly reflect the desired short-term customer
service, safety, reliability and profitability goals of the Company applicable
to such officer or manager. By balancing the use of short- and long-term
incentive and adequate base salary, the Board believes it has been and will
continue to be able to recruit the talent needed to manage the Company, retain
the talents of current management and align the successes of the Company and
management.
The factors and criteria utilized by the Board include the assessment of
comparable information from similarly-sized operations. It is the philosophy of
the Board to set the base salaries and incentives of executive officers at an
amount comparable to a financial peer group of other similarly-sized companies.
This peer group includes neighboring and other similarly sized natural gas
distribution companies and other companies which share operating and financial
characteristics with the Company. The Board believes the performance on which
executive officer compensation is based should be assessed both on an annual
basis and also over a longer period of time to ensure that executive officers
work to support both the Company's current objectives as well as its strategic
objectives.
The Board regularly reviews the Chief Operating Officer's recommended base
salary merit increases, cash incentive plan and stock option plan awards for
the Company's other executive officers. Base salary merit increase and cash
incentive award recommendations, if any, are primarily based on corporate
operating and financial performance, as well as on executive officers'
individual performance, for the prior fiscal year. Merit increases are also
based on a review of peer group base salaries and executive officers'
individual contributions to the Company's strategic objectives. Stock option
recommendations, if any, are primarily based on executive officers' individual
performance during the prior fiscal year, but also relate to performance
judgments as to the past contributions of the individual executive officers and
judgments as to their individual contributions to the Company's strategic
objectives. The Board then determines compensation for such executive officers,
in light of (a) the Company's actual performance as compared to its corporate
financial goals for the prior fiscal year, (b) individual executive officers'
actual performance as compared to their individual goals supporting the
Company's financial and operating objectives, (c) the Company's executive
officer compensation levels relative to its peer group and (d) periodic reports
from independent compensation consultants regarding the compensation
competitiveness of the Company. The Board also reviews the above types of
compensation for the Chief Executive Officer with the assistance of the
Company's human resources staff and recommends adjustments as deemed
appropriate based on the above compensation review criteria and its expectation
as to his future contributions in leading the Company.
Neither the Chairman of the Board and Chief Executive Officer, the Vice
Chairman nor the President and Chief Operating Officer were included in the
Short-Term Incentive Plan for 1999, but are eligible for discretionary bonuses
based on performance as determined by the Board. The Executive Vice President
and Chief Financial Officer, the President--Southern Union Gas and the Senior
Vice President--Legal and Secretary had the ability to obtain short-term
incentive awards for 1999. See "Executive Officers and Compensation--Executive
Compensation."
The 1992 Long-Term Stock Incentive Plan Committee considers all aspects of
compensation provided to the executive officers prior to determining
appropriate awards to be given under the 1992 Plan to each executive.
59
<PAGE>
In 1993, the Board established Southern Union's Supplemental Deferred
Compensation Plan (the "Supplemental Plan"). The Supplemental Plan is designed
to encourage greater ownership of shares of Southern Union common stock by
executive employees by enhancing the Company's matching contribution, and to
provide employee benefits similar to the benefits such employee would have
received under Southern Union's Savings Plan (the "401(k) Plan") if not for the
existence of certain limitations that are set forth in the Internal Revenue
Code of 1986, as amended (the "Code"), relating to "highly compensated
employees" as defined in the Code. Under the Supplemental Plan, an eligible
employee may defer up to 100% of his or her annual compensation (salary and
bonus) through payroll deductions (the "Employee Contributions"). In addition,
the Supplemental Plan requires the Company to make a 100% matching contribution
on Employee Contributions up to a maximum of 10% of the participant's annual
compensation. The first 8% of the Employee Contributions, together with the
Company's matching contributions, are invested by the Supplemental Plan's
trustee in shares of Southern Union common stock.
The Company also provides retirement benefits through various defined
benefit and defined contribution plans. See "Executive Officers and
Compensation--Retirement Benefits."
The Board believes that it has concentrated, and intends to continue to
concentrate, the bulk of Mr. Lindemann's compensation as the Chairman of the
Board and Chief Executive Officer on long-term incentives such as stock option
grants which are directly attributable to increasing stockholder value.
By: The Board of Directors
George L. Lindemann John E. Brennan
Frank W. Denius Peter H. Kelley
Aaron I. Fleischman Kurt A. Gitter, M.D.
Adam M. Lindemann Roger J. Pearson
George Rountree, III Dan K. Wassong
60
<PAGE>
EXECUTIVE OFFICERS AND COMPENSATION
Executive Officers Who Are Not Directors
Executive Officers of the Company are elected by the Board to serve at the
pleasure of the Board or until their successors are elected and qualified.
Generally, officers are reelected annually by the Board. The following
Executive Officers of the Company are not directors.
Steven W. Cattron has been President of MGE since June 1998. Prior to
joining the Company, Mr. Cattron was employed with Kansas City Power and Light
Company since 1982 where most recently he was Vice President--Marketing and
Sales. Age: 43.
Ronald J. Endres has been Executive Vice President since June 1996 and Chief
Financial Officer since October 1989. He was a Senior Vice President from April
1987 until June 1996. Previously, Mr. Endres had held other financial and
operating positions with the Company since June 1969. Age: 55.
David J. Kvapil has been Senior Vice President and Corporate Controller
since January 1998. He was Vice President--Controller from July 1993 to
December 1997, and Controller from August 1992 to July 1993. Age: 44.
Dennis K. Morgan has been Senior Vice President--Legal and Secretary since
January 1998. He was Vice President--Legal and Secretary from April 1991 to
December 1997. Previously, Mr. Morgan had held various legal positions with the
Company or a subsidiary of the Company since June 1981. Age: 51.
David W. Stevens has been President of Southern Union Gas since June 1998.
Previously, Mr. Stevens held other financial and operating positions with
Southern Union Gas since 1993, most recently Senior Vice President of Sales and
Operations from July 1996 to June 1998. Prior to that, Mr. Stevens had held
various operational positions with subsidiaries of the Company since 1984. Age:
39.
61
<PAGE>
Executive Compensation
The following table sets forth the remuneration paid by the Company and its
subsidiaries (i) to the Chairman of the Board and Chief Executive Officer and
(ii) to each of the four most highly compensated key executive officers at June
30, 1999 of the Company (this group is referred to as the "Named Executive
Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary Bonus Compensation(1) Options/SARs(2) Compensation(3)
------------------ ---- -------- -------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
George L. Lindemann
Chairman of the Board
and 1999 $245,971 $ -- $ 41,543(4) -- $ 45,190
Chief Executive
Officer............... 1998 227,861 -- 45,930(4) 165,375 24,248
1997 206,073 30,107 33,557(4) 121,551 14,178
Peter H. Kelley
President and 1999 506,599 87,700 533,562(5)(6) -- 123,365
Chief Operating
Officer............... 1998 468,296 105,679 342,467(5)(6) 165,375 65,610
1997 412,681 71,952 27,313(7) 121,551 33,138
Ronald J. Endres
Executive Vice
President and 1999 297,891 35,615 613,223(5) -- 72,664
Chief Financial
Officer............... 1998 274,745 85,848 464,515(5) 82,688 40,824
1997 263,119 80,046 -- 78,140 23,412
David W. Stevens
President--Southern
Union 1999 198,823 62,903 -- -- 54,989
Gas.................... 1998 185,558 91,251 -- 33,075 32,643
1997 -- -- -- -- --
Dennis K. Morgan
Senior Vice President-- 1999 184,905 42,059 -- -- 46,748
Legal and Secretary.... 1998 172,379 47,819 -- 24,806 26,933
1997 154,611 49,703 -- 8,682 15,698
</TABLE>
- --------
(1) Does not include the value of perquisites and other personal benefits if
the aggregate amount of such items, if any, does not exceed the lesser of
$50,000 or 10 percent of the total amount of annual salary and bonus for
any named individual.
(2) No Stock Appreciation Rights were granted in 1999, 1998 or 1997.
Additionally, no restricted stock awards or long-term incentive plan
payouts were made in 1999, 1998 or 1997.
(3) Company matching provided through the 401(k) Plan and the Supplemental
Plan. Also consists of Company contribution for named officer due to
conversion of various defined benefit plans to a defined contribution plan.
See "--Retirement Benefits."
(4) Represents perquisites and other personal benefits received from the
Company.
(5) Indicates the difference between the price paid by the individual for
Southern Union common stock purchased from the Company upon the exercise of
non-qualified (but not incentive) stock options and the fair market value
of such Southern Union common stock. See "--Options Exercised in 1999 and
1999 Year-End Values."
(6) Also includes forgiveness of interest by the Company. See "Certain
Relationships."
(7) Principally represents forgiveness of interest by the Company. See "Certain
Relationships."
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<PAGE>
Option Grants in 1999
There were no awards of stock options to the Named Executive Officers during
fiscal year 1999.
Options Exercised in 1999 and 1999 Year-End Values
The following table provides information regarding the exercise of stock
options, incentive and non-qualified, by each of the Named Executive Officers
and the value of unexercised "in-the-money" options as of June 30, 1999:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End
Exercisable/ Exercisable/
Unexercisable(1) Unexercisable(2)
-------------------------- -------------------------
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George L. Lindemann..... * * 430,609 257,329 $5,719,795 $1,640,848
Peter H. Kelley......... 50,500 $ 874,205 322,068 291,184 4,097,566 2,105,115
Ronald J. Endres........ 53,496 749,083 203,776 133,457 2,827,154 859,732
David W. Stevens........ 1,575 22,772 46,355 36,851 567,486 185,680
Dennis K. Morgan........ 1,549 23,687 48,165 30,285 668,742 156,373
</TABLE>
- --------
* No options were exercised during the year ended June 30, 1999 by the Named
Executive Officer.
(1) The securities underlying unexercised options have been adjusted to reflect
each of the 5% stock dividends distributed on August 6, 1999, December 9,
1998, December 10, 1997, December 10, 1996, November 27, 1995 and June 30,
1994, and the 50% stock dividend distributed on July 13, 1998, the 33%
stock dividend distributed on March 11, 1996 and the 50% stock dividend
distributed on March 9, 1994.
(2) Based on a closing price on June 30, 1999 of $20.71 per share as reported
by the New York Stock Exchange and adjusted for 5% stock dividend
distributed on August 6, 1999.
Retirement Benefits
The Company sponsors two "Qualified" (Plans A and B) and one "Non-Qualified"
retirement income plans. With respect to the Qualified Plans, Plan B covers all
employees of Missouri Gas Energy and Plan A covers all employees other than
employees of Missouri Gas Energy, Lavaca Realty Company, Atlantic Utilities,
Atlantic Gas Corporation, Mercado Gas Services, Inc., SUPro Energy Company,
Energy WorX, Inc. and ConTigo, Inc. All officers listed in the Summary
Compensation Table are presently covered by Plan A. All officers listed in the
Summary Compensation Table, except Mr. Lindemann, are covered by the Non-
Qualified Plan.
Plan A, the Non-Qualified Plan and the portion of Plan B covering Non-Union
employees were converted effective December 31, 1998 from traditional defined
benefit plans with benefits based on years of service and final average
compensation to cash balance defined benefit plans in which an account is
maintained for each employee. The initial value of the account was determined
as the actuarial present value (as defined in the Plans) of the benefit accrued
at transition (December 31, 1998) under the pre-existing traditional defined
benefit plan. The initial credit for Messrs. Kelley and Endres under the Non-
Qualified Plan was adjusted by dividing the present value described above by a
factor of 0.60 to reflect the effects of taxes at an assumed 40% marginal rate.
Future contribution credits to the accounts are based on a percentage of future
compensation, which varies by individual as shown in the table below.
Compensation in Plan A and Plan B is limited to $160,000 in 1999. Interest
credits to the accounts are based on 30-year Treasury bond yields. Normal
Retirement Age under each of the plans is defined as age 65.
63
<PAGE>
Benefits under Plan A may be paid in a single lump sum payment or as a
monthly pension payable for life, with a 10-year certain period. The single
lump sum payment is the account balance at the time of distribution. The
monthly pension is the sum of the benefit accrued as of December 31, 1998 under
the pre-existing plan plus an amount actuarially equivalent to the value of
post-1998 contribution credits (and interest credits thereon). Benefits under
the Non-Qualified plan are paid in five annual installments which deplete the
account balance.
The data for each of the Named Executive Officers is shown in the table
below, assuming 5% growth in annual compensation, 6% future interest credits
under the cash balance plan, actuarial conversions at normal retirement age
based on a 6% interest rate and a 3% rate of growth in the $160,000
compensation limit under Plans A and B.
<TABLE>
<CAPTION>
Estimated Benefits
Estimated Annual at Normal
Plan A Non-Qualified Benefits at Normal Retirement Age
Contribution Plan Contribution Retirement Age from Non-Qualified
Name Credit Rate Credit Rate from Plan A Plan(1)
---- ------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
George L. Lindemann..... 1.5% -- $19,114 --
Peter H. Kelley......... -- -- 18,235 $3,678,265
Ronald J. Endres........ 3.5% -- 52,975 1,665,941
David W. Stevens........ -- 8.0% 27,485 653,928
Dennis K. Morgan........ 1.0% 4.0% 37,710 190,703
</TABLE>
- --------
(1) Estimated benefits shown are paid in five annual installments.
Employment Contracts, Termination of Employment and Change-In-Control
Arrangements
All executive officers of the Company serve at the discretion of the Board.
Generally, the executive officers are appointed to their position by the Board
annually.
The Company has an agreement with Mr. Kelley that upon certain occurrences,
the outstanding balance on his promissory note due to the company will be
canceled and deemed paid in full. These occurrences include, among other items,
termination of employment other than for cause, diminution in base salary or a
change-in-control of the Company. See "Certain Relationships."
Compensation Committee Interlocks and Insider Participation
The Board does not have a separate compensation committee. Except with
respect to the 1992 Plan, which is administered by the Board's Plan Committee,
all decisions regarding management compensation are made by the full Board.
Chairman Lindemann and Directors Brennan and Kelley, each of whom is also an
executive officer of the Company, participated in deliberations of the Board of
Directors concerning compensation for members of management but did not
participate in Board votes as to compensation for themselves. See "Certain
Relationships."
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on review of the copies of forms furnished to the Company, or
written representations that no annual reports (SEC Form 5) were required, the
Company believes that during 1999, all SEC filings of its officers, directors
and 10% stockholders complied with requirements for reporting ownership and
changes in ownership of Southern Union common stock (pursuant to Section 16(a)
of the Exchange Act).
64
<PAGE>
SECURITY OWNERSHIP
The following table sets forth the number of all shares of Southern Union
common stock beneficially owned by each director, by each Named Executive
Officer, by each person known by the Company to beneficially own 5% or more of
the outstanding Southern Union common stock, and by all directors and executive
officers as a group on September 3, 1999, unless otherwise indicated in the
footnotes. Each of the following persons and members of the group had sole
voting and investment power with respect to the shares shown unless otherwise
indicated in the footnotes. Number of shares held excludes options to acquire
shares of common stock that are not exercisable within sixty days of September
3, 1999.
<TABLE>
<CAPTION>
Beneficial Owner Number of Shares Held Percent of Class
---------------- --------------------- ----------------
<S> <C> <C>
George L. Lindemann................. 4,683,224(1)(2) 14.79%
Adam M. Lindemann................... 2,614,598(2)(3) 8.37%
George Lindemann, Jr. .............. 2,611,831(2) 8.36%
11950 Mainstone Drive
Wellington, Florida 33414
Sloan N. Lindemann.................. 2,611,831(2) 8.36%
767 Fifth Avenue, 50th Floor
New York, New York 10153
John E. Brennan..................... 630,035(4) 2.00%
Frank W. Denius..................... 47,506(5) *
Aaron I. Fleischman................. 520,502(6) 1.66%
Kurt A. Gitter, M.D................. 175,132(7) *
Peter H. Kelley..................... 469,469(8) 1.49%
Roger J. Pearson.................... 39,044(9) *
George Rountree, III................ 56,548(10) *
Dan K. Wassong...................... 53,207(11) *
Ronald J. Endres.................... 313,054(12) 1.00%
Dennis K. Morgan.................... 65,000(13) *
David W. Stevens.................... 70,605(14) *
Baron Capital Group, Inc............ 3,408,521(15) 10.91%
767 Fifth Avenue, 49th Floor
New York, New York 10153
The Equitable Companies
Incorporated....................... 1,709,967(16) 5.47%
1290 Avenue of the Americas
New York, New York 10104
Lee M. Bass......................... 1,192,039(17)(18) 3.82%
201 Main Street
Fort Worth, Texas 76102
Sid R. Bass Management Trust (19)... 1,542,274(17)(20) 4.94%
201 Main Street
Fort Worth, Texas 76102
All Directors and Executive Officers
as a group (15 in group)........... 9,838,588(21) 31.50%
</TABLE>
- --------
* Indicates less than one percent (1%).
(1) Of these shares: 1,938,320 are owned by Mr. Lindemann including 7,388
vested shares held by the 401(k) Plan and 10,833 vested shares held
through the Supplemental Plan; 2,099,135 shares are owned by his wife, Dr.
F.B. Lindemann; and 430,609 shares of Southern Union common stock Mr.
Lindemann is entitled to purchase upon the exercise of presently
exercisable stock options pursuant to the 1992 Plan. Substantially all
shares held by Mr. and Dr. Lindemann and their three children (Adam M.,
George, Jr., and Sloan N.) have been pledged to Activated Communications
Limited Partnership ("Activated"). Activated, which is owned and managed
by or for the benefit of the Lindemanns, provided the funds used
65
<PAGE>
to purchase certain of such shares. Mr. Lindemann is the Chairman of the
Board and President, and Dr. Lindemann is a director, of the sole general
partner of Activated.
(2) This information regarding direct share ownership by members of the
Lindemann family generally was obtained from and is reported herein in
reliance upon a Schedule 13D (as amended through February 6, 1997) as
adjusted for any stock dividends and splits since the date of such report
filed by Adam M. Lindemann, Dr. F.B. Lindemann, George L. Lindemann,
George Lindemann, Jr. and Sloan N. Lindemann. In addition, information
regarding share ownership by George L. Lindemann (including shares owned
by his wife, Dr. F. B. Lindemann) and Adam M. Lindemann reflects
information derived from their respective reports on Form 4 and Form 5
under the Securities Exchange Act filed to date. Each member of the
Lindemann family disclaims beneficial ownership of any shares owned by
any other member of the Lindemann family. Accordingly, with respect to
each member of the Lindemann family who owns Southern Union common stock,
the above table reflects only individual share ownership except that the
shares held by Dr. F. B. Lindemann are reflected as owned by George L.
Lindemann as explained in Note (1).
(3) Includes 3,359 vested shares pursuant to the Directors' Plan.
(4) Of these shares, 3,876 vested shares are held by the 401(k) Plan, 4,753
vested shares are held through the Supplemental Plan, 4,756 shares are
owned by his wife, 199,720 are held in two separate trusts for the
benefit of members of his family and 315,292 represent shares that Mr.
Brennan is entitled to purchase upon the exercise of presently
exercisable stock options granted to him pursuant to the 1982 Plan and
the 1992 Plan. Such number excludes options to acquire shares of common
stock that are not exercisable within sixty days of September 3, 1999.
(5) Includes: 910 shares owned by his wife; 25,921 shares that The Effie and
Wofford Cain Foundation, in which Mr. Denius is a director, own; and
7,200 vested shares pursuant to the Directors' Plan. Mr. Denius disclaims
beneficial ownership of those shares held by the Foundation since he does
not have a pecuniary interest in or control the Foundation's assets.
(6) Includes: 100,506 shares that Fleischman and Walsh, L.L.P., in which Mr.
Fleischman is Senior Partner, is entitled to purchase upon exercise of a
warrant; 12,151 vested shares pursuant to the Directors' Plan; 106,872
shares owned by the Fleischman and Walsh 401(k) Profit Sharing Plan for
which Mr. Fleischman is a trustee and a beneficiary; and 21,147 shares
owned by the Aaron I. Fleischman Foundation for which Mr. Fleischman is
the sole trustee. Mr. Fleischman disclaims beneficial ownership of those
shares held by the Fleischman and Walsh Plan in which he does not have a
pecuniary interest and those shares held by the Aaron I. Fleischman
Foundation.
(7) Includes 5,445 vested shares pursuant to the Directors' Plan.
(8) Includes 322,068 shares that Mr. Kelley is entitled to purchase upon the
exercise of presently exercisable stock options granted pursuant to the
1982 Plan and the 1992 Plan. Such number also includes: 18,265 vested
shares held by the 401(k) Plan; 3,383 vested shares held through the
Southern Union Stock Purchase Plan; and 27,357 vested shares held through
the Supplemental Plan.
(9) Includes 2,936 shares held by Mr. Pearson as Custodian (pursuant to the
Uniform Gifts to Minors Act) for his children; and 3,828 vested shares
pursuant to the Directors' Plan.
(10) Includes 1,376 shares owned by his wife and 14,337 vested shares
allocated to Mr. Rountree pursuant to the Directors' Plan.
(11) Includes 5,127 vested shares pursuant to the Directors' Plan.
(12) Includes 203,776 shares Mr. Endres is entitled to purchase upon the
exercise of presently exercisable stock options pursuant to the 1982 Plan
and the 1992 Plan. Such number also includes: 10,856 vested shares held
through the 401(k) Plan and 17,093 vested shares held through the
Supplemental Plan.
(13) Includes 48,165 shares Mr. Morgan is entitled to purchase upon the
exercise of presently exercisable stock options pursuant to the 1992
Plan. Such number also includes 5,459 vested shares held through the
401(k) Plan and 9,751 vested shares held through the Supplemental Plan.
(14) Includes 46,355 shares that Mr. Stevens is entitled to purchase upon the
exercise of presently exercisable stock options granted pursuant to the
1992 Plan. Such number also includes: 10,601 vested shares held by the
401(k) Plan; 1,738 vested shares held through the Southern Union Stock
Purchase Plan and 10,629 vested shares held through the Supplemental
Plan.
66
<PAGE>
(15) This information regarding share ownership by Baron Capital Group, Inc.
("BCG") was obtained from and is reported herein in reliance upon a
Schedule 13G, as amended through August 4, 1999 (the "Baron Filing") filed
by BCG, BAMCO, Inc. ("BAMCO"), Baron Capital Management, Inc. ("BCM"),
Baron Asset Fund ("BAF") and Ronald Baron (collectively, the "Baron Filing
Group"). Pursuant to the Baron Filing, the members of the Baron Filing
Group own beneficially and have shared power to vote or direct the vote of
and to dispose or direct the disposition of the following number of shares
of Southern Union common stock: BCG-3,408,521 shares; BAMCO-2,707,000
shares; BCM-701,521 shares; BAF-2,173,600 shares; and Mr. Baron-3,408,521
shares. The members of the Baron Filing Group disclaim beneficial
ownership in each other's shares.
(16) This information regarding direct share ownership by The Equitable
Companies Incorporated was obtained from and is reported herein in
reliance upon a Schedule 13G (dated February 10, 1999) as adjusted for any
stock dividends since the date of such report and any 13F filings by The
Equitable Companies Incorporated.
(17) Does not include 132,667, 67,586 and 67,586 shares (all representing less
than 1% of the Southern Union common stock outstanding) owned by Bass
Enterprises Production Co. ("BEPCO"), The Bass Foundation ("BF") and Lee
and Romana Bass Foundation ("LRBF"), respectively. This information, the
information set forth in note (19) and the number of shares owned by Lee
M. Bass and Sid R. Bass Management Trust set forth in the table were
obtained from and is reported herein in reliance upon a Schedule 13D (as
amended through December 30, 1997) filed by Sid R. Bass, Lee M. Bass, Sid
R. Bass Management Trust, Perry R. Bass, BEPCO, BF and LRBF (the "Bass
Filing Group"), as adjusted for any stock dividends and splits since the
date of such schedule. Members of the Bass Filing Group disclaim
beneficial ownership in each other's shares.
(18) Does not include shares reported to be held by Sid R. Bass Management
Trust. See notes (17), (19) and (20).
(19) Sid R. Bass Management Trust is a revocable trust under Texas law for
which Sid R. Bass, Lee M. Bass and one other person are trustees. See note
(17).
(20) Does not include shares reported to be held by Lee M. Bass. See notes (17)
and (18).
(21) Excludes options granted pursuant to the 1982 Plan and the 1992 Plan to
acquire shares of Southern Union common stock that are not presently
exercisable or do not become exercisable within sixty days of September 3,
1999. Includes 209,896 vested shares held through certain Company benefit
and deferred savings plans for which certain executive officers and
directors may be deemed beneficial owners, but excludes shares which have
not vested under the terms of such plans. Also, includes 47,220 shares
held by a "Rabbi Trust" known as the Trust for Miscellaneous Southern
Union Company Deferred Compensation Arrangements ("Rabbi Trust"). The
shares are held as a part of Southern Union's efforts to provide funding
for a portion of the future liability under the Southern Union
Supplemental Executive Retirement Plan ("SERP"). Any assets held for the
benefit of the SERP are held in the Rabbi Trust. Southern Union management
directly or indirectly controls the investment of any assets, and the
voting of any securities, held for the SERP. Of the shares held for the
SERP as of September 3, 1999, 21,700 shares were purchased in the open
market after June 30, 1999. Southern Union anticipates that the SERP may
continue to purchase shares of Southern Union common stock, including in
the open market, to assist in fulfillment of future payment obligations
under the SERP.
67
<PAGE>
COMMON STOCK PERFORMANCE GRAPH
The following performance graph compares the performance of Southern Union
common stock to the Standard & Poor's 500 Stock Index ("S&P 500 Index") and the
Standard & Poor's Utilities 40 Index ("S&P Utilities Index"). The comparison
assumes $100 was invested on June 30, 1994 in Southern Union common stock, the
S&P 500 Index and in the S&P Utilities Index. Each case assumes reinvestment of
dividends.
Comparison of Five-Year Cumulative Total Return
(Southern Union, S&P 500 and S&P Utilities)
[LINE GRAPH]
Southern Union S&P 500 Index S&P Utilities Index
1994 100 100 100
1995 103 126 115
1996 175 159 143
1997 191 214 150
1998 282 278 196
1999 300 342 213
<PAGE>
CERTAIN RELATIONSHIPS
In April 1992, Southern Union advanced $375,980 to Peter H. Kelley,
President, Chief Operating Officer and a director of Southern Union, to enable
him to repay certain funds borrowed by him from his previous employer in
connection with his departure from his previous employer and relocation to
become an executive officer of the Company. In May 1995 the note was
restructured calling for 359 monthly payments of approximately $1,909 and a
balloon payment of $147,746. The restructuring is evidenced by a renewal
promissory note, bearing an annual percentage interest rate equal to 7.4%.
During the fiscal year ended June 30, 1999, $15,606 in interest was forgiven by
the Company. See "Executive Officers and Compensation--Executive Compensation."
The outstanding balance at June 30, 1999 was $206,531.
On October 4, 1993, Southern Union's Board of Directors approved and
ratified payments by the Company to Activated for use by the Company of
Activated's office space in New York City. Chairman George L. Lindemann and
Vice Chairman John E. Brennan control and operate, and Director Adam M.
Lindemann has a beneficial interest in, Activated; none of the foregoing
Directors participated in such Board action. Payments to Activated were
$251,000 in each of the fiscal years ended June 30, 1999, 1998 and 1997.
Director Fleischman is Senior Partner of Fleischman and Walsh, L.L.P., which
provides legal services to the Company and certain of its subsidiaries. For the
fiscal year ended June 30, 1999, the total amount paid by the Company to
Fleischman and Walsh, L.L.P. for legal services was $1,210,702.
EXPERTS
The consolidated financial statements of Southern Union included in its
Annual Report on Form 10-K for the years ended June 30, 1999, 1998 and 1997
have been incorporated in this proxy statement by reference and have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements and schedules of PEI included in its
Annual Report on Form 10-K for the years ended December 31, 1998 and 1997, have
been incorporated in this proxy statement by reference and have been so
incorporated in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements and schedules for the year ended
December 31, 1996 included in PEI's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by reference, were audited by
Arthur Andersen LLP, independent accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP has served as the Certified Public Accountants of
the Company for the fiscal year ended June 30, 1999. Representatives of
PricewaterhouseCoopers LLP are expected to be present at the annual meeting,
and to be given an opportunity to make a statement if they desire to do so and
to be available to respond to appropriate questions. The Board's Audit
Committee presently expects to recommend to the Board, and the Board is
expected to approve, the selection of PricewaterhouseCoopers LLP to serve as
the Company's Certified Public Accountants for the fiscal year ending June 30,
2000.
69
<PAGE>
COMPANY'S 1999 ANNUAL REPORT
The Company's Annual Report to Stockholders and Annual Report on Form 10-K
for the fiscal year ended June 30, 1999, as filed with the Securities and
Exchange Commission are available without charge to stockholders upon writing
to the Secretary of the Company. Neither such Annual Report to Stockholders nor
the Annual Report on Form 10-K for the fiscal year ended June 30, 1999 is to be
treated as part of the proxy solicitation materials or as having been
incorporated herein by reference.
By Order of the Board of Directors,
/s/ Dennis K. Morgan
Dennis K. Morgan
Secretary
Austin, Texas
September 17, 1999
70
<PAGE>
APPENDIX A
AGREEMENT OF MERGER
between
SOUTHERN UNION COMPANY
and
PENNSYLVANIA ENTERPRISES, INC.
Dated as of June 7, 1999
A-i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I DEFINITIONS............................................... 1
Section 1.1 Certain Defined Terms..................................... 1
Section 1.2 Other Defined Terms....................................... 7
ARTICLE II THE MERGER; OTHER TRANSACTIONS............................ 9
Section 2.1 The Merger................................................ 9
Section 2.2 Effective Time of the Merger.............................. 9
Section 2.3 Closing................................................... 9
Section 2.4 Certificate of Incorporation; By-laws..................... 9
Section 2.5 Directors and Officers.................................... 9
Section 2.6 Other Transactions........................................ 9
ARTICLE III CONVERSION OF SHARES...................................... 10
Section 3.1 Effect of the Merger...................................... 10
Section 3.2 Exchange of PNT Common Stock Certificates and PG Preferred
Stock Certificates........................................ 10
Section 3.3 Dissenting Shares......................................... 12
Section 3.4 PNT Option Plans.......................................... 12
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SUG..................... 13
Section 4.1 Organization, Existence and Qualification................. 13
Section 4.2 Capitalization............................................ 13
Section 4.3 Subsidiaries; Investments................................. 13
Section 4.4 Authority Relative to this Agreement and Binding Effect... 13
Section 4.5 Governmental Approvals.................................... 14
Section 4.6 Public Utility Holding Company Status; Regulation as a
Public Utility............................................ 14
Section 4.7 Compliance with Legal Requirements; Governmental
Authorizations............................................ 14
Section 4.8 Legal Proceedings; Orders................................. 14
Section 4.9 SEC Documents............................................. 14
Section 4.10 Taxes..................................................... 15
Section 4.11 Intellectual Property..................................... 15
Section 4.12 Title to Assets........................................... 15
Section 4.13 Indebtedness.............................................. 15
Section 4.14 Machinery and Equipment................................... 15
Section 4.15 Material Contracts........................................ 15
Section 4.16 Insurance................................................. 16
Section 4.17 Employees................................................. 16
Section 4.18 Employee Benefit Plans.................................... 16
Section 4.19 Environmental Matters..................................... 18
Section 4.20 No Material Adverse Change................................ 18
Section 4.21 Brokers................................................... 19
Section 4.22 Regulatory Proceedings.................................... 19
Section 4.23 Proxy Statement; Registration Statement................... 19
Section 4.24 Vote Required............................................. 19
Section 4.25 Disclaimer of Representations and Warranties.............. 19
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PNT..................... 20
Section 5.1 Organization, Existence and Qualification................. 20
Section 5.2 Capitalization............................................ 20
Section 5.3 Subsidiaries; Investments................................. 20
Section 5.4 Authority Relative to this Agreement and Binding Effect... 21
</TABLE>
A-ii
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 5.5 Governmental Approvals.................................... 21
Section 5.6 Public Utility Holding Company Status; Regulation as a
Public Utility............................................ 21
Section 5.7 Compliance with Legal Requirements; Governmental
Authorizations............................................ 21
Section 5.8 Legal Proceedings; Orders................................. 21
Section 5.9 SEC Documents............................................. 22
Section 5.10 Taxes..................................................... 22
Section 5.11 Intellectual Property..................................... 22
Section 5.12 Title to Assets........................................... 23
Section 5.13 Indebtedness.............................................. 23
Section 5.14 Machinery and Equipment................................... 23
Section 5.15 Material Contracts........................................ 23
Section 5.16 Insurance................................................. 23
Section 5.17 Employees................................................. 23
Section 5.18 Employee Benefit Plans.................................... 24
Section 5.19 Environmental Matters..................................... 26
Section 5.20 No Material Adverse Change................................ 26
Section 5.21 Brokers................................................... 26
Section 5.22 PNT Rights Agreement...................................... 26
Section 5.23 Regulatory Proceedings.................................... 26
Section 5.24 Proxy Statement; Registration Statement................... 27
Section 5.25 Vote Required............................................. 27
Section 5.26 Opinion of Financial Advisor.............................. 27
Section 5.27 Disclaimer of Representations and Warranties.............. 27
ARTICLE VI COVENANTS................................................. 27
Section 6.1 Covenants of PNT.......................................... 27
(a) Conduct of the Business Prior to the Closing Date......... 27
(b) Customer Notifications.................................... 29
(c) Access to the Acquired Companies' Offices, Properties and
Records; Updating Information............................. 29
(d) Governmental Approvals; Third Party Consents.............. 30
(e) Dividends................................................. 30
(f) Issuance of Securities.................................... 30
(g) Accounting................................................ 30
(h) No Shopping............................................... 30
(i) Solicitation of Proxies; PNT Proxy Statement.............. 32
(j) PNT Shareholder Approval.................................. 32
(k) Rule 145 Letters.......................................... 32
(l) Financing Activities...................................... 32
(m) PNT Disclosure Schedule................................... 32
Section 6.2 Covenants of SUG.......................................... 33
(a) Governmental Approvals; Third Party Consents.............. 33
(b) Employees; Benefits....................................... 33
(c) Rule 16b-3................................................ 33
(d) Tax Matters............................................... 33
(e) Blue Sky Permits.......................................... 33
(f) Listing Application....................................... 33
(g) Directors................................................. 34
</TABLE>
A-iii
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
(h) Technology: Pennsylvania Operations...................... 34
(i) Charitable Contributions................................. 34
(j) Collective Bargaining Agreements......................... 34
(k) Restrictions on Unusual Distributions; Anti-Dilution..... 34
(l) Solicitation of Proxies; SUG Proxy Statement............. 34
(m) SUG Shareholder Approval................................. 34
(n) SUG Disclosure Schedule.................................. 34
(o) Conduct of the Business Prior to the Closing Date........ 35
(p) Access to SUG's Offices, Properties and Records; Updating
Information.............................................. 35
Section 6.3 Additional Agreements.................................... 35
ARTICLE VII CONDITIONS............................................... 36
Section 7.1 Conditions to SUG's Obligation to Effect the Merger...... 36
Section 7.2 Conditions to PNT's Obligations to Effect the Mergers.... 38
ARTICLE VIII TERMINATION.............................................. 39
Section 8.1 Termination Rights....................................... 39
Section 8.2 Effect of Termination.................................... 40
Section 8.3 Termination Fee; Expenses................................ 40
ARTICLE IX INDEMNIFICATION; REMEDIES................................ 40
Section 9.1 Directors' and Officer's Indemnification................. 40
Section 9.2 Representations and Warranties........................... 41
ARTICLE X GENERAL PROVISIONS....................................... 41
Section 10.1 Expenses................................................. 41
Section 10.2 Notices.................................................. 41
Section 10.3 Assignment............................................... 42
Section 10.4 Successor Bound.......................................... 42
Section 10.5 Governing Law; Forum; Consent to Jurisdiction............ 42
Section 10.6 Waiver of Trial By Jury.................................. 42
Section 10.7 Cooperation; Further Documents........................... 43
Section 10.8 Construction of Agreement................................ 43
Section 10.9 Publicity; Organizational and Operational Announcements.. 43
Section 10.10 Waiver................................................... 43
Section 10.11 Parties in Interest...................................... 43
Section 10.12 Specific Performance..................................... 43
Section 10.13 Section and Paragraph Headings........................... 44
Section 10.14 Amendment................................................ 44
Section 10.15 Entire Agreement......................................... 44
Section 10.16 Counterparts............................................. 44
</TABLE>
<TABLE>
<S> <C> <C>
Disclosure Schedules:
PNT Disclosure Schedule
SUG Disclosure Schedule
</TABLE>
A-iv
<PAGE>
AGREEMENT OF MERGER
This AGREEMENT OF MERGER (this "Agreement") is made as of the 7th day of
June, 1999, by and between SOUTHERN UNION COMPANY, a Delaware corporation
("SUG"), and PENNSYLVANIA ENTERPRISES, INC., a Pennsylvania corporation
("PNT").
RECITALS
WHEREAS, the Board of Directors of each of SUG and PNT has approved and
deems it advisable and in the best interests of their respective shareholders
to consummate the merger of PNT with and into SUG upon the terms and subject
to the conditions set forth herein; and
WHEREAS, in furtherance thereof, the Board of Directors of each of SUG and
PNT has approved this Agreement and the merger of PNT with and into SUG, with
SUG being the surviving corporation (the "Merger");
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, SUG
and PNT hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Certain Defined Terms. For purposes of this Agreement, the
following terms have the meanings specified or referred to in this Article I
(such definitions to be equally applicable to both the singular and plural
forms of the terms defined):
"Acquired Companies"--PNT and its Subsidiaries, collectively, and each, an
"Acquired Company."
"Applicable Contract"--any Contract (a) under which any Acquired Company
has any rights, (b) under which any Acquired Company has any obligation or
liability, or (c) by which any Acquired Company or any of the assets owned or
used by it is bound.
"Average Trading Price"--of SUG Common Stock, as of any date, will equal
the average of the reported closing market prices of such stock for the ten
consecutive trading days ending on the third trading day prior to such date
(counting from and including the trading day immediately preceding such date).
The closing market price for each day in question will be the last sale price,
regular way or, if no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system of the principal national
securities exchange on which SUG Common Stock is listed or admitted to
trading.
"CERCLA"--the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
"Closing Date"--the date on which the Closing actually takes place.
"COBRA"--the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended, or any successor law, and regulations and rules issued pursuant to
that act or any successor law, and also the requirements of Part 6 of Subtitle
B of Title I of ERISA.
"Consent"--any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
A-1
<PAGE>
"Contract"--any agreement, contract, document, instrument, obligation,
promise or undertaking (whether written or oral) that is legally binding.
"DGCL"--the Delaware General Corporation Law.
"Encumbrance"--any charge, adverse claim, lien, mortgage, pledge, security
interest or other encumbrance.
"Environment"--soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins,
and wetlands), groundwaters, drinking water supply, stream sediments, ambient
air (including indoor air), plant and animal life, and any other environmental
medium or natural resource.
"Environmental Law"--any Legal Requirement that requires or relates to:
(a) advising appropriate authorities, employees, and the public of
intended or actual releases of pollutants or hazardous substances or
materials, violations of discharge limits, or other prohibitions and of the
commencements of activities, such as resource extraction or construction,
that could have significant impact on the Environment;
(b) preventing or reducing to acceptable levels the release of
pollutants or hazardous substances or materials into the Environment;
(c) reducing the quantities, preventing the release, or minimizing the
hazardous characteristics of wastes that are generated;
(d) reducing to acceptable levels the risks inherent in the
transportation of hazardous substances, pollutants, oil, or other
potentially harmful; or
(e) making responsible parties pay private parties, or groups of them,
for damages done to their health or the Environment, or permitting self-
appointed representatives of the public interest to recover for injuries
done to public assets or for damages to natural resources.
"ERISA"--the Employee Retirement Income Security Act of 1974, as amended,
or any successor law, and regulations and rules issued pursuant to that act or
any successor law.
"Exchange Act"--the Securities Exchange Act of 1934, as amended, or any
successor law, and regulations and rules issued by the SEC pursuant to that
act or any successor law.
"Facilities"--any real property, leaseholds, or other interests currently
or formerly owned or operated by any Acquired Company and any buildings,
plants, structures, or equipment (including motor vehicles, tank cars, and
rolling stock) currently or formerly owned or operated by any Acquired
Company.
"FERC"--the Federal Energy Regulatory Commission or any successor agency.
"Final Order"--an action by a Governmental Body as to which: (a) no request
for stay of the action is pending, no such stay is in effect and if any time
period is permitted by statute or regulation for filing any request for such
stay, such time period has passed; (b) no petition for rehearing,
reconsideration or application for review of the action is pending and the
time for filing any such petition or application has passed; (c) such
Governmental Body does not have the action under reconsideration on its own
motion and the time in which such reconsideration is permitted has passed; and
(d) no appeal to a court, or a request for stay by a court of the Governmental
Body's action is pending or in effect and the deadline for filing any such
appeal or request has passed.
"GAAP"--generally accepted United States accounting principles, applied on
a consistent basis.
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"Governmental Authorization"--any approval, consent, license, franchise,
certificate of public convenience and necessity, permit, waiver or other
authorization issued, granted, given, or otherwise made available by or under
the authority of any Governmental Body or pursuant to any Legal Requirement.
"Governmental Body"--any:
(a) nation, state, county, city, town, village, district or other
jurisdiction of any nature;
(b) federal, state, county, local, municipal or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official or entity
and any court or other tribunal); or
(d) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory or taxing authority or
power of any nature.
"Hazardous Activity"--the distribution, generation, handling, importing,
management, manufacturing, processing, production, refinement, Release,
storage, transfer, transportation, treatment, or use (including any withdrawal
or other use of groundwater) of Hazardous Materials in, on, under, about, or
from the Facilities or any part thereof into the Environment, any other act,
business, operation, or thing that increases the danger, or risk of danger, or
poses an unreasonable risk of harm to persons or property on or off the
Facilities, or that may affect the value of the Facilities or the Acquired
Companies.
"Hazardous Materials"--any waste or other substance that is listed,
defined, designated, or classified as, or otherwise determined to be,
hazardous, radioactive, or toxic or a pollutant or a contaminant under or
pursuant to any Environmental Law, including any admixture or solution
thereof, and specifically including petroleum and all derivatives thereof or
synthetic substitutes therefor and asbestos or asbestos-containing materials.
"HSR Act"--the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, or any successor law, and regulations and rules issued by the U.S.
Department of Justice or the Federal Trade Commission pursuant to that act or
any successor law.
"IRC"--the Internal Revenue Code of 1986, as amended.
"IRS"--the Internal Revenue Service or any successor agency.
"Knowledge"--an individual will be deemed to have "Knowledge" of a
particular fact or other matter if such individual is actually aware of such
fact or other matter. A Person (other than an individual) will be deemed to
have "Knowledge" of a particular fact or other matter if any individual who is
serving as a director or officer of such Person or any material Subsidiary of
it or other management employee with direct responsibility for such particular
fact or other matter of such Person or any material Subsidiary of it (or in
any similar capacity) has actual knowledge of such fact or other matter.
"Legal Requirement"--any federal, state, county, local, municipal, foreign,
international, multinational, or other administrative order, constitution,
law, ordinance, principle of common law, regulation, rule, tariff, franchise
agreement, statute or treaty.
"Material Contract"--a Contract involving a total commitment by or to any
party thereto of at least $100,000 on an annual basis or at least $500,000 on
its remaining term which cannot be terminated on no more than sixty (60) days'
notice without penalty or additional cost to the Acquired Company as the
terminating party.
"Occupational Safety and Health Law"--any Legal Requirement designed to
provide safe and healthful working conditions and to reduce occupational
safety and health hazards, and any program, whether governmental or private
(including those promulgated or sponsored by industry associations and
insurance companies), designed to provide safe and healthful working
conditions.
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"Order"--any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"Ordinary Course of Business"--an action taken by a Person will be deemed
to have been taken in the "Ordinary Course of Business" only if:
(a) such action and authorization therefor is consistent with the past
practices of such Person and is taken in the ordinary course of the normal
day-to-day operations of such Person; and
(b) such action is not required by law to be authorized by the board of
directors (or similar authority) of such Person or of such Person's parent
company (if any).
"Organizational Documents"--(a) the articles or certificate of
incorporation and the bylaws of a corporation; (b) the partnership agreement
and any statement of partnership of a general partnership; (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (d) the certificate of formation and the members, operating or
similar agreement of a limited liability company; (e) any charter or similar
document adopted or filed in connection with the creation, formation or
organization of a Person; and (f) any amendment to any of the foregoing.
"PBCL"--the Pennsylvania Business Corporation Law.
"Person"--any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, organized
group of persons, entity of any other type, or Governmental Body.
"PG Preferred Stock"--each series of the cumulative preferred stock, par
value $100.00 per share, of PG Energy.
"PNT Balance Sheet"--the audited consolidated balance sheet of the Acquired
Companies at December 31, 1998 (including the notes thereto), provided by PNT
to SUG as part of the PNT Financial Statements.
"PNT Common Stock"--the common stock, no par value, of PNT.
"PNT Disclosure Schedule"--the disclosure schedule delivered by PNT to SUG
concurrently with the execution and delivery of this Agreement.
"PNT Material Adverse Effect"--a material adverse effect (i) on the
business, operations, financial condition or results of operations of PNT and
its Subsidiaries, taken as a whole, or (ii) on the ability of PNT and its
Subsidiaries to consummate the Mergers in accordance with this Agreement.
"PNT Permitted Liens"--Encumbrances securing Taxes, assessments,
governmental charges or levies, or the claims of materialmen, mechanics,
carriers and like persons, all of which are not yet due and payable or which
are being contested in good faith; Encumbrances (other than any Encumbrance
imposed by ERISA) incurred on deposits made in the Ordinary Course of Business
in connection with worker's compensation, unemployment insurance or other
types of social security; the Encumbrances created by and the Encumbrances
permitted under the Indenture of Mortgage and Deed of Trust, dated as of March
15, 1946, between PG Energy (formerly known as Scanton-Spring Brook Water
Service Company) and Morgan Guaranty Trust Company of New York (formerly known
as Guaranty Trust Company of New York), as Trustee, as amended or supplemented
from time to time; in the case of leased real property, Encumbrances (not
attributable to an Acquired Company as lessee) affecting the landlord's (and
any underlying landlord's) interest in any leased real property; and such
other Encumbrances which are not, individually or in the aggregate, reasonably
likely to have a PNT Material Adverse Effect.
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"Proceeding"--any action, arbitration, hearing, litigation or suit (whether
civil, criminal, administrative, investigative, or informal) commenced,
brought, conducted, or heard by or before, or otherwise involving, any
Governmental Body or arbitrator.
"PUHCA"--the Public Utility Holding Company Act of 1935, as amended, or any
successor law, and regulations and rules issued by the SEC pursuant to that
act or any successor law.
"Related Documents"--any Contract provided for in this Agreement to be
entered into by one or more of the parties hereto or their respective
Subsidiaries in connection with the Mergers.
"Release"--any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, or other releasing into the Environment, whether
intentional or unintentional.
"Representative"--with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"SEC"--the United States Securities and Exchange Commission or any
successor agency.
"Securities Act"--the Securities Act of 1933, as amended, or any successor
law, and regulations and rules issued by the SEC pursuant to that act or any
successor law.
"Subsidiary"--with respect to any Person (the "Owner"), any Person of which
securities or other interests having the power to elect a majority of that
other Person's board of directors or similar governing body, or otherwise
having the power to direct the business and policies of that corporation or
other Person (other than securities or other interests having such power only
upon the happening of a contingency that has not occurred) are held by the
Owner or one or more of its Subsidiaries; when used without reference to a
particular Person, "Subsidiary" means a Subsidiary of PNT.
"SUG Balance Sheet"--the audited consolidated balance sheet of SUG at June
30, 1998 (including the notes thereto), provided by SUG to PNT as part of the
SUG Financial Statements.
"SUG Common Stock"--the Common Stock, par value $1.00 per share, of SUG.
"SUG Disclosure Schedule"--the disclosure schedule delivered by SUG to PNT
concurrently with the execution and delivery of this Agreement.
"SUG Material Adverse Effect"--a material adverse effect (i) on the
business, operations, financial condition or results of operations of SUG and
its Subsidiaries, taken as a whole, or (ii) on the ability of SUG to
consummate the Mergers in accordance with this Agreement.
"SUG Permitted Liens"--Encumbrances securing Taxes, assessments,
governmental charges or levies, or the claims of materialmen, mechanics,
carriers and like persons, all of which are not yet due and payable or which
are being contested in good faith; Encumbrances (other than any Encumbrance
imposed by ERISA) incurred on deposits made in the Ordinary Course of Business
in connection with worker's compensation, unemployment insurance or other
types of social security; in the case of leased real property, Encumbrances
(not attributable to SUG as lessee) affecting the landlord's (and any
underlying landlord's) interest in any leased real property; and such other
Encumbrances which are not, individually or in the aggregate, reasonably
likely to have an SUG Material Adverse Effect.
"Tax"--any tax (including any income tax, capital gains tax, value-added
tax, sales and use tax, franchise tax, payroll tax, withholding tax or
property tax), levy, assessment, tariff, duty (including any customs duty),
deficiency, franchise fee or payment, payroll tax, utility tax, gross receipts
tax or other fee or payment, and any related charge or amount (including any
fine, penalty, interest or addition to tax), imposed, assessed or
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collected by or under the authority of any Governmental Body or payable
pursuant to any tax-sharing agreement or any other Contract relating to the
sharing or payment of any such tax, levy, assessment, tariff, duty, deficiency
or fee.
"Tax Return"--any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment,
collection, or payment of any Tax or in connection with the administration,
implementation, or enforcement of or compliance with any Legal Requirement
relating to any Tax.
"Threat of Release"--a reasonable likelihood of a Release that will require
action under Environmental Laws in order to prevent or mitigate damage to the
Environment that may result from such Release.
"Threatened"--a claim, Proceeding, dispute, action, or other matter will be
deemed to have been "Threatened" if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing), or
if any other event has occurred or any other circumstance exists, that would
lead a director, officer or management employee of a comparable gas
distribution company to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken or
otherwise pursued in the future.
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Section 1.2 Other Defined Terms. In addition to the terms defined in
Section 1.1, certain other terms are defined elsewhere in this Agreement as
indicated below and, whenever such terms are used in this Agreement, they
shall have their respective defined meanings.
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
4.10% PG Preferred Stock 5.2
5.75% PG Preferred Stock 5.2
Acquired Company Option Plans 3.4
Agreement Introductory Paragraph
Business Combination 6.1(h)(4)
Cash Consideration 3.1(a)(2)
Certificates 3.2(b)
Closing 2.3
Confidentiality Agreement 6.1(c)
Conversion Price 3.1(a)
Dissenting Shares 3.3
Effective Time 2.2
Employees 6.2(b)
Exchange Ratio 3.1(a)(1)
Honesdale 2.6
Honesdale Merger 2.6
Indemnified Parties 9.1(a)
Initial Termination Date 8.1(j)
Maximum Value 3.1(a)
Merger Recitals
Merger Consideration 3.1(a)
Mergers 2.6
Minimum Value 3.1(a)
NYSE 3.4
Paying Agent 3.2(a)
PBGC 4.18(b)
PG Energy 2.6
PG Energy Merger 2.6
PNT Introductory Paragraph
PNT Benefit Plans 5.18(a)
PNT Commonly Controlled Entity 5.18(e)
PNT Financial Statements 5.9
PNT Meeting 6.1(j)(1)
PNT Options 3.4
PNT Proxy Statement 4.23
PNT Rights 3.1(a)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
PNT Rights Agreement 3.1(a)
PNT SEC Documents 5.9
PNT Shareholders' Approval 5.25
Registration Statement 4.23
Rule 145 Affiliates 6.1(k)
Rule 145 Letters 6.1(k)
Stock Consideration 3.1(a)(1)
SUG Introductory Paragraph
SUG Benefit Plans 4.18(a)
SUG Commonly Controlled Entity 4.18(e)
SUG Financial Statements 4.9
SUG Meeting 6.2(m)
SUG Proxy Statement 4.23
SUG SEC Documents 4.9
SUG Shareholders' Approval 4.24
Superior Proposal 6.1(h)
Surviving Corporation 2.1
Third Party Beneficiary 10.11
</TABLE>
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ARTICLE II
THE MERGER; OTHER TRANSACTIONS
Section 2.1 The Merger. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 2.2), PNT will be
merged with and into SUG in accordance with the laws of the State of Delaware
and the Commonwealth of Pennsylvania. SUG will be the surviving corporation in
the Merger (the "Surviving Corporation") and will continue its corporate
existence under the laws of the State of Delaware. The Merger will have the
effect as provided in the applicable provisions of the DGCL and the PBCL.
Without limiting the generality of the foregoing, upon the Merger, all the
rights, privileges, immunities, powers and franchises of PNT and SUG will vest
in the Surviving Corporation and all obligations, duties, debts and
liabilities of PNT and SUG will be the obligations, duties, debts and
liabilities of the Surviving Corporation.
Section 2.2 Effective Time of the Merger. On the Closing Date, with respect
to the Merger, (i) a duly executed certificate of merger complying with the
requirements of the DGCL will be executed and filed with the Secretary of
State of the State of Delaware and (ii) a duly executed articles of merger and
plan of merger complying with the requirements of the PBCL will be filed with
the Secretary of State of the Commonwealth of Pennsylvania. The Merger will
become effective upon filing the certificate of merger with the Secretary of
State of the State of Delaware and the articles of merger and plan of merger
with the Secretary of State of the Commonwealth of Pennsylvania (the
"Effective Time").
Section 2.3 Closing. Unless this Agreement has been terminated and the
transactions contemplated herein have been abandoned pursuant to Article VIII
hereof, the closing of the transactions contemplated by this Agreement (the
"Closing") will take place at 10:00 a.m., Eastern Time, on the Closing Date to
be specified by the parties, which shall be no later than the tenth business
day after satisfaction or waiver of all of the conditions set forth in Article
VII hereof (other than Sections 7.1(a), 7.1(b), 7.1(c), 7.1(f), 7.1(g),
7.1(h), 7.1(k), 7.1(l), 7.2(a), 7.2(b), 7.2(c), 7.2(e), 7.2(f) and 7.2(h),
which shall be satisfied or waived on the Closing Date) at the offices of
Fleischman and Walsh, L.L.P., counsel to SUG, unless another date or place is
agreed to in writing by the parties hereto.
Section 2.4 Certificate of Incorporation; By-laws. Pursuant to the Merger,
the Restated Certificate of Incorporation of SUG, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter amended as provided by law and (ii) the
By-laws of SUG as in effect immediately prior to the Effective Time, shall be
the By-laws of the Surviving Corporation until thereafter amended as provided
by law.
Section 2.5 Directors and Officers. The directors and officers of SUG
immediately prior to the Effective Time will be the directors and officers of
the Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and By-laws of the Surviving Corporation.
Section 2.6 Other Transactions. Immediately after the Effective Time on the
Closing Date, the Surviving Corporation shall cause Honesdale Gas Company
("Honesdale"), a wholly-owned Subsidiary of PG Energy, Inc., a Subsidiary of
PNT ("PG Energy"), to merge with and into PG Energy by complying with the
requirements of the PBCL (the "Honesdale Merger"). Immediately after the
consummation of the Honesdale Merger on the Closing Date, the Surviving
Corporation shall cause PG Energy to merge with and into SUG, as the Surviving
Corporation, by complying with the requirements of the PBCL and the DGCL (the
"PG Energy Merger"). The Merger, the Honesdale Merger and the PG Energy Merger
shall hereinafter be referred to collectively as the "Mergers."
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ARTICLE III
CONVERSION OF SHARES
Section 3.1 Effect of the Merger. As of the Effective Time, by virtue of
the Merger and without any action on the part of the holders of any shares of
PNT Common Stock:
(a) Each issued and outstanding share of PNT Common Stock (other than
Dissenting Shares (as defined in Section 3.3) covered by Section 3.3) and each
associated stock purchase right (collectively, the "PNT Rights") issued
pursuant to the Rights Agreement, dated as of April 26, 1995 between PNT and
Chemical Bank, as Rights Agent (the "PNT Rights Agreement"), which will be
terminated at the Effective Time (any reference in this Agreement to PNT
Common Stock will be deemed to include the associated PNT Rights), will be
converted into the right of each holder thereof to receive the following
consideration (the "Merger Consideration"):
(1) that number of fully paid and nonassessable shares of SUG Common Stock
(the "Stock Consideration") equal to $32.00 divided by the Conversion Price
(as defined below) rounded to the nearest hundred-thousandth (the "Exchange
Ratio"); and
(2) an amount in cash without interest (the "Cash Consideration") equal to
the sum of $3.00, plus, if the Average Trading Price of SUG Common Stock as of
the Closing Date is less than $19.46250, the product of (x) the amount of such
shortfall not to exceed $2.16250 and (y) the Exchange Ratio.
"Conversion Price" shall mean the Average Trading Price of SUG Common Stock as
of the Closing Date. Notwithstanding the foregoing, if the Conversion Price as
calculated pursuant to the preceding sentence and without regard to this
sentence (i) is less than the Minimum Value, then the Conversion Price will be
equal to the "Minimum Value," or (ii) is greater than the "Maximum Value,"
then the Conversion Price will be equal to the "Maximum Value." "Minimum
Value" will be $19.46250 and "Maximum Value" will be $22.70625.
Each holder of PNT Common Stock shall surrender all such holder's certificates
formerly representing ownership of PNT Common Stock in the manner provided in
Section 3.2. All such shares of PNT Common Stock, when so converted, shall no
longer be outstanding and shall be canceled and automatically converted into
the right to receive the Merger Consideration therefor upon the surrender of
such certificate in accordance with Section 3.2. Any payment made pursuant to
this Section 3.1(a) shall be made net of applicable withholding taxes to the
extent such withholding is required by law.
(b) No fractional share of SUG Common Stock shall be issued in connection
with the Merger. Each holder of shares of PNT Common Stock shall be entitled
to receive in lieu of any fractional share of SUG Common Stock to which such
holder otherwise would have been entitled pursuant to this Section 3.1 (after
taking into account all shares of PNT Common Stock then held of record by such
holder) a cash payment in an amount equal to the product of (i) the fractional
interest of a share of SUG Common Stock to which such holder otherwise would
have been entitled and (ii) the closing price of a share of SUG Common Stock
on the NYSE on the trading day immediately prior to the Effective Time.
Payment of such amounts shall be made by SUG.
Section 3.2 Exchange of PNT Common Stock Certificates and PG Preferred
Stock Certificates.
(a) SUG's registrar and transfer agent, or such other bank or trust company
as may be selected by SUG and be reasonably acceptable to PNT, will act as
paying agent ("Paying Agent") for the holders of PNT Common Stock in
connection with the Merger, pursuant to an agreement providing for the matters
set forth in this Section 3.2 and such other matters as may be appropriate and
the terms of which shall be reasonably satisfactory to SUG and PNT, to receive
the consideration to which holders of PNT Common Stock become entitled
pursuant to Section 3.1. Contemporaneous with the Effective Time, SUG will
deposit in trust with the Paying Agent for the benefit of holders of PNT
Common Stock, the aggregate Cash Consideration and the SUG Common Stock
necessary to pay the aggregate Merger Consideration as contemplated by Section
3.1(a) with respect to each share of PNT Common Stock.
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(b) At the Effective Time of the Merger, SUG will instruct the Paying Agent
to promptly, and in any event not later than three (3) business days following
the Effective Time, mail (and to make available for collection by hand) to
each holder of record of a certificate or certificates, which immediately
prior to the Effective Time represented outstanding shares of PNT Common Stock
(the "Certificates"), whose shares of PNT Common Stock were converted pursuant
to Section 3.1(a) into the right to receive the Merger Consideration (i) a
letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon delivery
of the Certificates to the Paying Agent and shall be in such form and have
such other provisions as SUG may reasonably specify) and (ii) instructions
(which shall provide that at the election of the surrendering holder
Certificates may be surrendered, and payment therefor collected, by hand
delivery) for use in effecting the surrender of the Certificates in exchange
for payment of the Merger Consideration. Upon surrender of a Certificate for
cancellation to the Paying Agent or to such other agent or agents as may be
appointed by SUG, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor
the Merger Consideration for each share of PNT Common Stock formerly
represented by such Certificate, to be mailed (or made available for
collection by hand if so elected by the surrendering holder) within three (3)
business days of receipt thereof, and the Certificate so surrendered shall
forthwith be canceled. If payment of the Merger Consideration is to be made to
a Person other than the Person in whose name the surrendered Certificate is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or shall be otherwise in proper form
for transfer and that the Person requesting such payment shall have paid any
transfer and other Taxes required by reason of the payment of the Merger
Consideration to a Person other than the registered holder of the Certificate
surrendered or shall have established to the satisfaction of the Surviving
Corporation that such Tax either has been paid or is not applicable. Until
surrendered as contemplated by this Section 3.2, each Certificate (other than
Certificates representing PNT Common Stock held by SUG or Dissenting Shares)
shall be deemed at any time after the Effective Time to represent only the
right to receive the Merger Consideration as contemplated by this Section 3.2.
(c) The Paying Agent shall invest the funds representing the aggregate Cash
Consideration, as directed by SUG, in (i) direct obligations of the United
States of America, (ii) obligations for which the full faith and credit of the
United States of America is pledged to provide for the payment of principal
and interest or (iii) commercial paper rated the highest quality by either
Moody's Investors Service, Inc., or Standard and Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. Any net earnings with respect to
such finds shall be the property of and paid over to SUG as and when requested
by SUG; provided, however, that any such investment or any such payment of
earnings may not delay the receipt by holders of Certificates of the Merger
Consideration.
(d) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen or destroyed, the Paying Agent will issue in
exchange for such lost, stolen or destroyed Certificate the Merger
Consideration deliverable in respect thereof as determined in accordance with
this Article III, provided that the Person to whom the Merger Consideration is
paid shall, as a condition precedent to the payment thereof, give the Paying
Agent a bond in such sum as it may ordinarily require and indemnify the
Surviving Corporation in a manner satisfactory to it against any claim that
may be made against the Surviving Corporation with respect to the Certificate
claimed to have been lost, stolen or destroyed.
(e) After the Effective Time, the stock transfer books of PNT shall be
closed and there shall be no transfers on the stock transfer books of the
Surviving Corporation of shares of PNT Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be
canceled and exchanged for the Merger Consideration as provided in this
Article III.
(f) Any portion of the funds held by the Paying Agent that remain
undistributed to the former shareholders of PNT for eighteen (18) months after
the Effective Time shall be delivered by the Paying Agent to the Surviving
Corporation, which shall thereafter act as the Paying Agent, and any former
shareholders of PNT who have not complied with this Article III prior to
eighteen (18) months after the Effective Time shall thereafter look only as a
general creditor to the Surviving Corporation for payment of their claim for
the Merger Consideration.
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(g) The Surviving Corporation shall not be liable to any holder of PNT
Common Stock for Merger Consideration delivered to a public official pursuant
to any applicable abandonment, escheat or similar law. Any amounts remaining
unclaimed by holders of any such shares of PNT Common Stock seven years after
the Effective Time (or such earlier date immediately prior to the time at
which such amounts would otherwise escheat to or become property of any
Governmental Body) shall, to the extent permitted by applicable law, become
the property of the Surviving Corporation, free and clear of any claims or
interest of any such holders or their successors, assigns or personal
representatives previously entitled thereto.
Section 3.3 Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, shares of PNT Common Stock outstanding immediately prior to
the Effective Time the holder of which filed with PNT, prior to the vote to
secure the PNT Shareholders' Approval, a written notice of intention to demand
payment (collectively, the "Dissenting Shares"), shall not be converted into
the right to receive the Merger Consideration, as provided in Section 3.1(a)
hereof, unless and until such holder fails to perfect or effectively withdraws
or otherwise loses his right to appraisal and payment under the PBCL. If,
after the Effective Time, any holder of PNT Common Stock fails to perfect or
effectively withdraws or loses his right to appraisal, such Dissenting Shares
shall thereupon be treated as if they had been converted as of the Effective
Time into the right to receive the Merger Consideration to which such holder
is entitled, without interest or dividends thereon. PNT shall give SUG prompt
notice of any demands received by PNT for appraisal of PNT Common Stock, and,
prior to the Effective Time, SUG shall have the right to participate in all
negotiations and proceedings with respect to such demands. Prior to the
Effective Time, PNT shall not, except with the prior written consent of SUG,
make any payment with respect to or offer to settle, any such demands.
Section 3.4 PNT Option Plans. Each outstanding option to purchase shares of
PNT Common Stock or other similar interest (collectively, the "PNT Options"),
granted under any stock option plans or under any other plan or arrangement of
any Acquired Company (the "Acquired Company Option Plans") together with the
applicable exercise prices, are disclosed in Section 5.18 of the PNT
Disclosure Schedule. Unless otherwise agreed by the parties hereto, each PNT
Option under the PNT 1992 Stock Option Plan as to which the holder has
consented to a conversion to cash and each PNT Option under the PNT Stock
Incentive Plan that is outstanding at the Effective Time shall be converted at
the Effective Time into a right to receive in respect thereof a cash payment
in an amount equal to the product of (x) the amount by which (i) the sum of
the Cash Consideration plus the product of (a) the Exchange Ratio and (b) the
closing price of a share of SUG Common Stock on the New York Stock Exchange
(the "NYSE") on the trading day immediately prior to the date on which the
Effective Time occurs exceeds (ii) the exercise price of such PNT Option (if
less than (i)) and (y) the number of shares of PNT Common Stock subject
thereto. Such cash payment (net of applicable withholding taxes) shall be made
on the Closing Date or as promptly thereafter as reasonably practicable. PNT
shall use its reasonable best efforts to obtain the consent of holders of
options outstanding under the 1992 Stock Option Plan to a conversion to cash
in accordance herewith. PNT Options under the 1992 Stock Option Plan as to
which consent is not obtained shall be converted into such number of options
to purchase SUG Common Stock such that the aggregate option value, based on
the Merger Consideration, and the aggregate exercise price are preserved and
otherwise having the same terms as the PNT Options being converted.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SUG
SUG, as to SUG and its Subsidiaries, represents and warrants to PNT that:
Section 4.1 Organization, Existence and Qualification. SUG is a corporation
duly incorporated, validly existing, and in good standing under the laws of
the State of Delaware, with full corporate power and authority to conduct its
business as it is now being conducted, to own or use the properties and assets
that it purports to own or use, to perform its obligations under all Contracts
to which it is a party, and to execute and deliver this Agreement. SUG is duly
qualified to do business as a foreign corporation and is in good standing
under the laws of each state or other jurisdiction in which either the
ownership or use of the properties owned or used by it, or the nature of the
business conducted by it, requires such qualification as a foreign corporation
except such failures to be so qualified or in good standing as are not,
individually or in the aggregate, reasonably likely to have an SUG Material
Adverse Effect.
Section 4.2 Capitalization. The authorized capital stock of SUG consists of
(i) 50,000,000 shares of SUG Common Stock, of which 29,745,234 shares were
issued and outstanding on May 28, 1999, and (ii) 1,500,000 shares of
Cumulative Preferred Stock, no par value, none of which are issued or
outstanding. The issued and outstanding shares of SUG Common Stock have been
validly issued and are fully paid and nonassessable. The shares of SUG Common
Stock to be issued as part of the Merger Consideration have been duly
authorized and when issued and delivered in accordance with the terms of this
Agreement, will have been validly issued and will be fully paid and
nonassessable and the issuance thereof is not subject to any preemptive or
other similar right. Except as specifically described in the SUG SEC Documents
delivered to PNT prior to the date of this Agreement, as of the date of this
Agreement, no shares of SUG Common Stock are held, in treasury or otherwise,
by SUG or any of its Subsidiaries and except as set forth in Section 4.2 of
the SUG Disclosure Schedule, there are no outstanding (i) securities
convertible into SUG Common Stock or other capital stock of SUG or any of its
material Subsidiaries, (ii) warrants or options to purchase SUG Common Stock
or other securities of SUG or any of its material Subsidiaries or (iii)
commitments to issue shares of SUG Common Stock (other than pursuant to the
Merger) or other securities of SUG or any of its material Subsidiaries.
Section 4.3 Subsidiaries; Investments. Except as set forth in Section 4.3
of the SUG Disclosure Schedule, as of the date of this Agreement, SUG has no
Subsidiaries or investments in any Person except for marketable securities
reflected in the SUG SEC Documents delivered to PNT prior to the date of this
Agreement, and SUG is the registered owner and holder of all of the issued and
outstanding shares of capital stock of its Subsidiaries and has good title to
such shares. The outstanding capital stock of each material Subsidiary of SUG
has been validly issued and is fully paid and nonassessable. All such capital
stock owned by SUG or any of its Subsidiaries is free and clear of any
Encumbrance (except for any Encumbrance imposed by federal or state securities
laws).
Section 4.4 Authority Relative to this Agreement and Binding Effect. The
execution, delivery and performance of this Agreement and the Related
Documents by SUG have been duly authorized by all requisite corporate action,
except, as of the date of this Agreement, for the SUG Shareholders' Approval.
Except as set forth in Section 4.4 of the SUG Disclosure Schedule, the
execution, delivery and performance of this Agreement and the Related
Documents by SUG will not result in a violation or breach of any term or
provision of, or constitute a default or accelerate the performance required
under, the Organizational Documents of SUG, any indenture, mortgage, deed of
trust, security agreement, loan agreement, or Material Contract to which SUG
is a party or by which its assets are bound, or violate any order, writ,
injunction or decree of any Governmental Body, with such exceptions as are
not, individually or in the aggregate, reasonably likely to have an SUG
Material Adverse Effect. This Agreement constitutes and the Related Documents
to be executed by SUG when executed and delivered will constitute valid and
binding obligations of SUG, enforceable against SUG in accordance with their
terms, except as enforceability may be limited by (i) bankruptcy or similar
laws from time to time in effect affecting the enforcement of creditors'
rights generally or (ii) the availability of equitable remedies generally.
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Section 4.5 Governmental Approvals. Except for the Missouri Public Service
Commission (with respect to the Mergers), the Florida Public Service
Commission (with respect to the securities issued and debt assumed by SUG in
connection with the Mergers), the Pennsylvania Public Utility Commission and
as required by the HSR Act, no approval or authorization of any Governmental
Body with respect to performance under this Agreement by SUG is required to be
obtained by SUG in connection with the execution and delivery by SUG of this
Agreement or the consummation of the transactions contemplated by this
Agreement, the failure to obtain which are, individually or in the aggregate,
reasonably likely to have an SUG Material Adverse Effect.
Section 4.6 Public Utility Holding Company Status; Regulation as a Public
Utility. SUG is a "gas utility company" (as such term is defined in PUHCA).
SUG indirectly owns a minority interest in a "foreign utility company" (as
such term is defined in PUHCA) that is exempt from, and is deemed not to be a
public utility company for purposes of, PUHCA pursuant to Section 33 thereof
with respect to which SUG has filed with the SEC a Form U-57 notification of
foreign utility company status. Except as stated above in this Section 4.6,
neither SUG nor any of its Subsidiaries is a "holding company," a "subsidiary
company," a "public utility company" or an "affiliate" of a "public utility
company," or a "holding company" within the meaning of such terms in PUHCA.
Section 4.7 Compliance with Legal Requirements; Governmental
Authorizations.
(a) Except as set forth in Section 4.7 of the SUG Disclosure Schedule or
specifically described in the SUG SEC Documents delivered to PNT prior to the
date of this Agreement, and subject to Section 4.19 of this Agreement, to the
Knowledge of SUG, SUG is not in violation of any Legal Requirement that is
applicable to it, to the conduct or operation of its business, or to the
ownership or use of any of its assets, other than such violations, if any,
which are not, individually or in the aggregate, reasonably likely to have an
SUG Material Adverse Effect.
(b) The SUG SEC Documents delivered to PNT prior to the date of this
Agreement accurately describe all material regulation of SUG that relates to
the utility business of SUG. Except as set forth in Section 4.7 of the SUG
Disclosure Schedule, SUG has and is in material compliance with all material
Governmental Authorizations necessary to conduct its business and to own,
operate and use all of its assets as currently conducted.
Section 4.8 Legal Proceedings; Orders. Except as set forth in Section 4.8
of the SUG Disclosure Schedule or as specifically described in the SUG SEC
Documents delivered to PNT prior to the date of this Agreement, there is no
pending Proceeding:
(1) that has been commenced by or against, or that otherwise relates to,
SUG that is reasonably likely to have an SUG Material Adverse Effect; or
(2) as of the date of this Agreement, that challenges, or that may have
the effect of preventing, delaying, making illegal, or otherwise interfering
with, the Mergers or any of the transactions contemplated hereby.
To the Knowledge of SUG, no such Proceedings, audits or investigations have
been Threatened that are, individually or in the aggregate, reasonably likely
to have an SUG Material Adverse Effect.
Section 4.9 SEC Documents. SUG has made (and, with respect to such
documents filed after the date hereof through the Closing Date, will make)
available to PNT a true and complete copy of each report, schedule,
registration statement (other than on Form S-8), and definitive proxy
statement filed by SUG with the SEC since June 30, 1998 and through the
Closing Date in substantially the form filed with the SEC (the "SUG SEC
Documents"). As of their respective dates, the SUG SEC Documents, including
without limitation any financial statements or schedules included therein,
complied (or will comply), in all material respects with the requirements of
the Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such SUG SEC Documents, and
did not (or will not) contain any untrue
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statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim financial statements
of SUG included in the SUG SEC Documents (collectively, the "SUG Financial
Statements") were (or will be) prepared in accordance with GAAP applied on a
consistent basis (except as may be indicated therein or in the notes thereto
and except with respect to unaudited statements as permitted by Form 10-Q) and
fairly present (or will fairly present) in all material respects the financial
position of SUG as of the respective dates thereof or the results of
operations and cash flows for the respective periods then ended, as the case
may be, subject, in the case of unaudited interim financial statements, to
normal, recurring adjustments which are not material in the aggregate.
Section 4.10 Taxes. Except as set forth in Section 4.10 of the SUG
Disclosure Schedule:
(a) SUG and its Subsidiaries have timely filed all United States federal,
state and local income Tax Returns required to be filed by or with respect to
them or requests for extensions to file such Tax Returns have been timely
filed, granted and have not expired, and SUG and its Subsidiaries have timely
paid and discharged all Taxes due in connection with or with respect to the
periods or transactions covered by such Tax Returns and have paid all other
Taxes as are due or made adequate provision therefor in accordance with GAAP
except where the failures to so file, pay or discharge are not, individually
or in the aggregate, reasonably likely to have an SUG Material Adverse Effect.
There are no pending audits or other examinations relating to any Tax matters.
There are no Tax liens on any assets of SUG or its Subsidiaries. As of the
date of this Agreement, SUG and its Subsidiaries have not granted any waiver
of any statute of limitations with respect to, or any extension of a period
for the assessment of, any Tax. The accruals and reserves (including deferred
taxes) reflected in the SUG Balance Sheet are in all material respects
adequate to cover all material Taxes accruable through the date thereof
(including interest and penalties, if any, thereon and Taxes being contested)
in accordance with GAAP.
(b) Neither SUG nor any of its Subsidiaries is obligated under any Contract
with respect to industrial development bonds or other obligations with respect
to which the excludability from gross income of the holder for federal or
state income tax purposes could be affected by the Merger or any of the
transactions contemplated by this Agreement.
Section 4.11 Intellectual Property. SUG has no Knowledge of (i) any
infringement or claimed infringement by it of any patent rights or copyrights
of others or (ii) any infringement of the patent or patent license rights,
trademarks or copyrights owned by or under license to it, except for any such
infringements of the type described in clause (i) or (ii) that are not,
individually or in the aggregate, reasonably likely to have an SUG Material
Adverse Effect.
Section 4.12 Title to Assets. Except (i) as set forth in Section 4.12 of
the SUG Disclosure Schedule, (ii) as specifically described in the SUG SEC
Documents delivered to PNT prior to the date of this Agreement, (iii) as set
forth in Section 4.19 of this Agreement or (iv) as set forth in Section 4.19
of the SUG Disclosure Schedule, none of SUG's assets are subject to any
Encumbrance other than SUG Permitted Liens.
Section 4.13 Indebtedness. All outstanding principal amounts of
indebtedness for borrowed money of SUG as of June 4, 1999 are set forth in
Section 4.13 of the SUG Disclosure Schedule.
Section 4.14 Machinery and Equipment. Except for normal wear and tear and
with such other exceptions as are not, individually or in the aggregate,
reasonably likely to have an SUG Material Adverse Effect, SUG's machinery and
equipment is in good operating condition and in a state of reasonable
maintenance and repair.
Section 4.15 Material Contracts. Except as described in Section 4.15 of the
SUG Disclosure Schedule or as specifically described in the SUG SEC Documents
delivered to PNT prior to the date of this Agreement, and with such exceptions
as are not, individually or in the aggregate, reasonably likely to have an SUG
Material Adverse Effect, all of SUG's Material Contracts are in full force and
effect and neither SUG nor, to the
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Knowledge of SUG, any other party thereto is in default thereunder nor has any
event occurred or is any event occurring that, with notice or the passage of
time or otherwise, is reasonably likely to give rise to an event of default
thereunder by any party thereto.
Section 4.16 Insurance. Section 4.16 of the SUG Disclosure Schedule sets
forth a list of all policies of insurance held by SUG as of the date of this
Agreement. Since June 30, 1994, the assets and the business of SUG have been
continuously insured with what SUG reasonably believes are reputable insurers
against all risks and in such amounts normally insured against by companies of
the same type and in the same line of business as SUG. As of the date of this
Agreement, no notice of cancellation, non-renewal or material increase in
premiums has been received by SUG with respect to such policies, and SUG has
no Knowledge of any fact or circumstance that could reasonably be expected to
form the basis for any cancellation, non-renewal or material increase in
premiums, except for such cancellations, non-renewals and increases which are
not, individually or in the aggregate, reasonably likely to have an SUG
Material Adverse Effect. SUG is not in default with respect to any provision
contained in any such policy or binder nor has there been any failure to give
notice or to present any claim relating to the business or the assets of SUG
under any such policy or binder in a timely fashion or in the manner or detail
required by the policy or binder, except for such defaults or failures which
are not, individually or in the aggregate, reasonably likely to have an SUG
Material Adverse Effect. As of the date of this Agreement, there are no
outstanding unpaid premiums (except premiums not yet due and payable), and no
notice of cancellation or renewal with respect to, or disallowance of any
claim under, any such policy or binder has been received by SUG as of the date
hereof, except for such non-payments of premiums, cancellations, renewals or
disallowances which are not, individually or in the aggregate, reasonably
likely to have an SUG Material Adverse Effect.
Section 4.17 Employees. Except as set forth on Section 4.17 of the SUG
Disclosure Schedule, as of the date of this Agreement, no labor union or other
collective bargaining unit has been certified or recognized by SUG or its
Subsidiaries, and, to the Knowledge of SUG, as of the date of this Agreement,
there are no elections, organizing drives or material controversies pending or
Threatened between SUG or its Subsidiaries and any labor union or other
collective bargaining unit representing SUG's or its Subsidiaries' employees.
There is no pending or, to the Knowledge of SUG, Threatened labor practice
complaint, arbitration, labor strike or other material labor dispute
(excluding grievances) involving SUG or its Subsidiaries which are,
individually or in the aggregate, reasonably likely to have an SUG Material
Adverse Effect. Except as described in Section 4.18 or specifically described
in the SUG SEC Documents delivered to PNT prior to the date of this Agreement,
as of the date of this Agreement, neither SUG nor its Subsidiaries are a party
to any employment agreement with any employee pertaining to SUG or any of its
Subsidiaries.
Section 4.18 Employee Benefit Plans.
(a) Each of the SUG Benefit Plans has been operated and administered in all
material respects in accordance with its governing documents and applicable
federal and state laws (including, but not limited to, ERISA and the IRC). For
purposes of this Agreement, "SUG Benefit Plans" shall mean all employee
retirement, welfare or other benefit plans, agreements, practices, policies,
programs, or arrangements identified and described in Section 4.18 of the SUG
Disclosure Schedule, which sets forth all SUG Benefit Plans that are
applicable to any employee of SUG or its Subsidiaries employed by SUG or its
Subsidiaries thirty (30) days prior to the date of this Agreement or
maintained by or contributed to by SUG or its Subsidiaries.
(b) As to any SUG Benefit Plan subject to Title IV of ERISA, there is no
event or condition which presents the material risk of plan termination, no
accumulated funding deficiency, whether or not waived, within the meaning of
Section 302 of ERISA or Section 412 of the IRC has been incurred for which any
liability is outstanding, no reportable event within the meaning of Section
4043 of ERISA (for which the notice requirements of Regulation (S)4043
promulgated by the Pension Benefit Guaranty Corporation ("PBGC") have not been
waived) has occurred within the last six years, no notice of intent to
terminate the SUG Benefit Plan has been given under Section 4041 of ERISA, no
proceeding has been instituted under Section 4042 of ERISA
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to terminate the SUG Benefit Plan, there has been no termination or partial
termination of the SUG Benefit Plan within the meaning of Section 411(d)(3) of
the IRC within the last six years, except with respect to the conversion of
the retirement income plan to a cash balance plan for which full vesting was
granted with respect to affected employees, no event described in Sections
4062 or 4063 of ERISA has occurred, all PBGC premiums have been timely paid
and no liability to the PBGC has been incurred, except for PBGC premiums not
yet due.
(c) There is no matter pending (other than qualification determination
applications and filings and other required periodic filings) with respect to
any of the SUG Benefit Plans before the IRS, the Department of Labor, the PBGC
or in or before any other governmental authority.
(d) Each trust funding an SUG Benefit Plan, which trust is intended to be
exempt from federal income taxation pursuant to Section 501(c)(9) of the IRC,
satisfies the requirements of such section and has, whenever required by law,
received a favorable determination letter from the IRS regarding such exempt
status and, to the Knowledge of SUG has not, since receipt of the most recent
favorable determination letter, been amended or operated in any way which
would adversely affect such exempt status.
(e) With respect to any SUG Benefit Plan or any other "employee benefit
plan" as defined in Section 3(3) of ERISA which is established, sponsored,
maintained or contributed to, or has been established, sponsored, maintained
or contributed to or, to the Knowledge of SUG, with respect to any such plan
which has been established, sponsored, maintained or contributed to within six
years prior to the Closing Date, by SUG or its Subsidiaries or any
corporation, trade, business or entity under common control or being a part of
an affiliated service group with SUG, within the meaning of Section 414(b),
(c) or (m) of the IRC or Section 4001 of ERISA ("SUG Commonly Controlled
Entity"), (i) no withdrawal liability, within the meaning of Section 4201 of
ERISA, has been incurred, which withdrawal liability has not been satisfied
and no such withdrawal liability is reasonably expected to be incurred, (ii)
no liability under Title IV of ERISA (including, but not limited to, liability
to the PBGC) has been incurred by SUG or any SUG Commonly Controlled Entity,
which liability has not been satisfied (other than for PBGC premiums not yet
due), (iii) no accumulated funding deficiency, whether or not waived, within
the meaning of Section 302 of ERISA or Section 412 of the IRC has been
incurred for which any liability is outstanding, (iv) there has been no
failure to make any contribution (including installments) to such plan
required by Section 302 of ERISA and Section 412 of the IRC which has resulted
in a lien under Section 302 of ERISA or Section 412 of the IRC and for which
any liability is currently outstanding, (v) to the Knowledge of SUG, no
action, omission or transaction has occurred with respect to any such plan or
any other SUG Benefit Plan which could subject SUG or the plan or trust
forming a part thereof to a material civil liability or penalty under ERISA or
other applicable laws, or a material Tax under the IRC, (vi) any such plan
which is a Group Health Plan has complied in all material respects with the
provisions of Sections 601-608 of ERISA and Section 4980B of the IRC, (vii)
there are no pending or, to the Knowledge of SUG, Threatened claims by or on
behalf of any such plan or any other SUG Benefit Plan, by any employees,
former employees or plan beneficiaries covered by such plan or otherwise by or
on behalf of any person involving any such plan (other than routine non-
contested claims for benefits) which could result in a material liability to
SUG and its Subsidiaries, taken as a whole, and (viii) neither SUG nor any SUG
Commonly Controlled Entity has engaged in, or is a successor or parent
corporation to any entity or person that has engaged in, a transaction
described in Section 4069 of ERISA.
(f) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby will not (i) require SUG to make a later
contribution to, payment or transfer of money or property or payment of
greater benefits under or with respect to any SUG Benefit Plan than SUG or its
Subsidiaries are currently required by the terms and provisions of such SUG
Benefit Plan to do, (ii) create or give rise to any additional eligibility for
participation, vested rights benefits or service credits under any SUG Benefit
Plan, or (iii) in and of themselves cause or result in SUG incurring any civil
liability or penalty under ERISA or other applicable laws or Tax under the
IRC.
(g) SUG is not a party to any Contract nor has it established any policy or
practice, which would require SUG to make a payment or provide any other form
of compensation or benefit to any Person performing (or
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who within the past twelve months performed) services for SUG during or upon
termination of such services which would not be payable or provided in the
absence of the consummation of the transactions contemplated by this
Agreement.
(h) Except as would affect unionized employees and/or retirees who had been
unionized employees, each SUG Benefit Plan which is an "employee welfare
benefit plan," as such term is defined in Section 3(1) of ERISA, may be
unilaterally amended or terminated in its entirety without any liability being
incurred by SUG or any affiliate of SUG, except as to benefits accrued
thereunder prior to such amendment or termination.
(i) Section 4.18 of the SUG Disclosure Schedule contains a true and
complete list as of the date of this Agreement of each SUG Benefit Plan, all
stock option plans of SUG and any management, employment, deferred
compensation, severance (including any payment, right or benefit resulting
from a change in control), bonus or other contract for personal services with
any current or former officer, director or employee, any consulting contract
with any person who prior to entering this such contract was a director or
officer of SUG or any plan, agreement, arrangement or understanding similar to
any of the foregoing.
(j) SUG has not contributed nor been obligated to contribute to any "multi-
employer plan" within the meaning of Section 3(37) of ERISA within the last
six years and has no outstanding liability with respect to any such plan.
Section 4.19 Environmental Matters. Except as set forth in Section 4.19 of
the SUG Disclosure Schedule or as specifically described in the SUG SEC
Documents delivered to PNT prior to the date of this Agreement, and with such
other exceptions as are not, individually or in the aggregate, reasonably
likely to have an SUG Material Adverse Effect:
(a) To the Knowledge of SUG, no Facility owned or operated by SUG is
currently, or was at any time, listed on the National Priorities List
promulgated under CERCLA, or on any comparable state list, and SUG has not
received any written notification of potential or actual liability or a
written request for information from any Person under or relating to CERCLA or
any comparable Legal Requirement with respect to SUG or the Facilities;
(b) To the Knowledge of SUG, SUG and any Person for whose conduct SUG is
reasonably likely to be held responsible, and at all times has been, in
material compliance with any Environmental Law. SUG has not received any
Order, notice, or other communication from (i) any Governmental Body or
private citizen acting in the public interest, or (ii) the current or prior
owner or operator of any Facilities, of any violation or failure to comply
with any Environmental Law, or of any obligation to undertake or bear the cost
of any environmental cleanup, or with respect to any property or Facility at
which Hazardous Materials generated by SUG or any other Person for whose
conduct SUG may be held responsible were transported for disposal;
(c) There are no pending or, to the Knowledge of SUG, Threatened claims or
Encumbrances arising under or pursuant to any Environmental Law with respect
to or affecting any of the Facilities or any other properties and assets
(whether real, personal, or mixed) in which SUG has or had a direct or
indirect interest (including by ownership or use); and
(d) SUG has delivered or made available to PNT true and complete copies and
results of any environmental site assessments, studies, analyses, tests or
monitoring possessed by SUG and of which it has Knowledge pertaining to
Hazardous Materials or Hazardous Activities in, on or under the Facilities, or
concerning compliance by SUG or any other Person for whose conduct SUG is
reasonably likely to be held responsible, with Environmental Laws.
Section 4.20 No Material Adverse Change. Except as described in the SUG SEC
Documents that have been provided to PNT prior to the date of this Agreement,
since the date of the SUG Balance Sheet, there has not been any SUG Material
Adverse Effect, and no events have occurred or circumstances exist that are,
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individually or in the aggregate, reasonably likely to have an SUG Material
Adverse Effect, except that any SUG Material Adverse Effect that results from
or relates to (a) general business or economic conditions, (b) conditions
generally affecting the industries in which SUG competes or (c) the
announcement of the transactions contemplated by this Agreement shall be
disregarded.
Section 4.21 Brokers. SUG is not a party to, or in any way obligated under
any Contract, and there are no outstanding claims against SUG, for the payment
of any broker's or finder's fees in connection with the origin, negotiation,
execution or performance of this Agreement.
Section 4.22 Regulatory Proceedings. Except as set forth in Section 4.22 of
the SUG Disclosure Schedule, other than purchase gas adjustment provisions,
SUG (a) has no rates that have been or are being collected subject to refund,
pending final resolution of any rate proceeding pending before a Governmental
Body or on appeal to the courts, or (b) is a party to any rate proceeding
before a Governmental Body that are, individually or in the aggregate,
reasonably likely to result in any Orders having an SUG Material Adverse
Effect.
Section 4.23 Proxy Statement; Registration Statement. None of the
information supplied or to be supplied to PNT by or on behalf of SUG for
inclusion in the proxy statement, in definitive form, relating to the PNT
Meeting (as defined in Section 6.1(j)) to be held in connection with the
Merger (the "PNT Proxy Statement"), supplied or to be supplied by or on behalf
of SUG in the proxy statement, in definitive form, relating to the SUG Meeting
(as defined in Section 6.2(m)) to be held in connection with the Merger (the
"SUG Proxy Statement") or supplied by or on behalf of SUG in the Registration
Statement on Form S-4 (and any amendments thereto) to be filed by SUG with the
SEC pursuant to the Securities Act to register the shares of SUG Common Stock
constituting the Stock Consideration (the "Registration Statement") will, in
the case of the Registration Statement, at the effective time of the
Registration Statement, at any time the Registration Statement is amended or
supplemented, at the date the PNT Proxy Statement is first mailed to PNT's
shareholders, at any time the PNT Proxy Statement is amended or supplemented,
at the time of the PNT Meeting and at the Effective Time, in the case of the
PNT Proxy Statement, at the date the PNT Proxy Statement is first mailed to
PNT's shareholders, at any time the PNT Proxy Statement is amended or
supplemented and at the time of the PNT Meeting, and in the case of the SUG
Proxy Statement, at the date the SUG Proxy Statement is first mailed to SUG's
shareholders, at any time the SUG Proxy Statement is amended or supplemented
and at the time of the SUG Meeting (giving effect to any documents
incorporated by reference therein), contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Registration
Statement will comply as to form and in substance in all material respects
with the applicable provisions of the Securities Act and the rules and
regulations thereunder. The SUG Proxy Statement will comply as to form and in
substance in all material respects with the applicable provisions of the
Exchange Act and the rules and regulations thereunder.
Section 4.24 Vote Required. At the SUG Meeting, SUG will seek the approval
of the Merger (and any other transaction contemplated by this Agreement which
requires the approval of SUG's shareholders) by the holders of a majority of
the outstanding shares of SUG Common Stock (the "SUG Shareholders' Approval"),
and no other vote of the holders of any class or series of the capital stock
of SUG is required to approve this Agreement and the Mergers.
Section 4.25 Disclaimer of Representations and Warranties. EXCEPT FOR THE
REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS ARTICLE IV, SUG MAKES NO
OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AND SUG HEREBY
DISCLAIMS ANY SUCH OTHER REPRESENTATIONS OR WARRANTIES, WHETHER BY SUG, ANY
SUBSIDIARY OF SUG, OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES,
AGENTS OR REPRESENTATIVES, OR ANY OTHER PERSON, WITH RESPECT TO THIS AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED HEREBY, NOTWITHSTANDING THE DELIVERY OR
DISCLOSURE TO PNT OR ANY OF ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR
REPRESENTATIVES, OR ANY OTHER PERSON, OF ANY DOCUMENTATION OR OTHER
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INFORMATION BY SUG, ANY SUBSIDIARY OF SUG, OR ANY OF THEIR RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR REPRESENTATIVES, OR ANY OTHER
PERSON, WITH RESPECT TO ANY OF THE FOREGOING.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PNT
PNT, as to the Acquired Companies, represents and warrants to SUG as
follows:
Section 5.1 Organization, Existence and Qualification.
(a) Each Acquired Company is a corporation duly incorporated, validly
existing, and in good standing under the laws of its state of incorporation,
with full corporate power and authority to conduct its business as it is now
being conducted, to own or use the properties and assets that it purports to
own or use, and to perform all its obligations under Applicable Contracts.
Section 5.1(a) of the PNT Disclosure Schedule sets forth the name of each
Acquired Company, the state or jurisdiction of its incorporation or formation,
and, except as set forth on Section 5.1(a) of the PNT Disclosure Schedule,
each state or jurisdiction where such Acquired Company is duly qualified as a
foreign corporation. Each Acquired Company is duly qualified to do business as
a foreign corporation and is in good standing under the laws of each state or
other jurisdiction in which either the ownership or use of the properties
owned or used by it, or the nature of the business conducted by it, requires
such qualification as a foreign corporation except such failures to be so
qualified or in good standing as are not, individually or in the aggregate,
reasonably likely to have a PNT Material Adverse Effect.
(b) PNT has delivered to SUG copies of the Organizational Documents, as
currently in effect, of each Acquired Company.
Section 5.2 Capitalization. The capital stock of PNT consists of 30,000,000
shares of PNT Common Stock, of which 10,835,270 shares were issued and
outstanding on May 28, 1999. PG Energy is authorized to issue 997,500 shares
of PG Preferred Stock, of which (i) 47,451 shares of the Series 4.10% PG
Preferred Stock (the "4.10% PG Preferred Stock"), and (ii) 2,396 shares of the
Series 5.75% PG Preferred Stock (the "5.75% PG Preferred Stock"), were issued
and outstanding on May 28, 1999. The issued and outstanding shares of PNT
Common Stock and PG Preferred Stock have been validly issued and are fully
paid and nonassessable. Except as specifically described in the PNT SEC
Documents delivered to SUG prior to the date of this Agreement, as of the date
of this Agreement, no shares of PNT Common Stock or PG Preferred Stock are
held, in treasury or otherwise, by PNT or any of its Subsidiaries and except
as set forth in Section 5.2 of the PNT Disclosure Schedule, there are no
outstanding (i) securities convertible into PNT Common Stock, PG Preferred
Stock or other capital stock PNT or any of its material Subsidiaries, (ii)
warrants or options to purchase PNT Common Stock or other securities of PNT or
any of its material Subsidiaries or (iii) other commitments to issue shares of
any PNT Common Stock, PG Preferred Stock or other securities of PNT or any of
its material Subsidiaries.
Section 5.3 Subsidiaries; Investments. Except as set forth in Section 5.3
of the PNT Disclosure Schedule, as of the date of this Agreement, PNT has no
Subsidiaries or investments in any Person (except for marketable securities
disclosed to SUG) and, except for the issued and outstanding PG Preferred
Stock, PNT is the registered owner and holder of all of the issued and
outstanding shares of capital stock of its Subsidiaries and has good title to
such shares. The outstanding capital stock of each material Subsidiary has
been validly issued and is fully paid and nonassessable. All such capital
stock owned by any Acquired Company is free and clear of any Encumbrance
(except for any Encumbrance disclosed in the PNT SEC Documents filed to date,
or created or incurred by this Agreement in favor of SUG, or imposed by
federal or state securities laws).
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Section 5.4 Authority Relative to this Agreement and Binding Effect. The
execution, delivery and performance of this Agreement and the Related
Documents by PNT have been duly authorized by all requisite corporate action,
except, as of the date of this Agreement, for the PNT Shareholders' Approval,
the approval of the Boards of Directors of PG Energy and Honesdale of the
transactions contemplated hereby and the approval of the holders of common
stock of each of PG Energy and Honesdale of the transactions contemplated
hereby. Except as set forth in the schedule to be delivered by PNT to SUG
within seven days of the date of this Agreement, the execution, delivery and
performance of this Agreement and the Related Documents by PNT will not result
in a violation or breach of any term or provision of, or constitute a default
or accelerate the performance required under, the Organizational Documents of
any of the Acquired Companies, any indenture, mortgage, deed of trust,
security agreement, loan agreement, or Material Contract to which any of the
Acquired Companies is a party or by which its assets are bound, or violate any
order, writ, injunction or decree of any Governmental Body, with such
exceptions as are not, individually or in the aggregate, reasonably likely to
have a PNT Material Adverse Effect. This Agreement constitutes and the Related
Documents to be executed by any of the Acquired Companies when executed and
delivered will constitute valid and binding obligations of such Acquired
Company, enforceable against such Acquired Company in accordance with their
terms, except as enforceability may be limited by (i) bankruptcy or similar
laws from time to time in effect affecting the enforcement of creditors'
rights generally or (ii) the availability of equitable remedies generally.
Section 5.5 Governmental Approvals. Except as set forth in Section 5.5 of
the PNT Disclosure Schedule and as required by the HSR Act, no approval or
authorization of any Governmental Body with respect to performance under this
Agreement by any Acquired Company is required to be obtained by PNT in
connection with the execution and delivery by PNT of this Agreement or the
consummation by the Acquired Companies of the transactions contemplated by
this Agreement, the failure to obtain which are, individually or in the
aggregate, reasonably likely to have a PNT Material Adverse Effect.
Section 5.6 Public Utility Holding Company Status; Regulation as a Public
Utility. PNT is a "holding company" (as such term is defined in PUHCA) exempt
from certain provisions of PUHCA, and has received no adverse notice from the
SEC with respect to the validity of its exempt status, pursuant to Section
3(a)(1) of PUHCA. PG Energy is a "public utility company" (as such term is
defined in PUHCA). Honesdale is a "public utility company" (as such term is
defined in PUHCA). Each of PG Energy and Honesdale is a "subsidiary company"
of PNT, and an "affiliate" of the other and of PNT (as such terms are defined
in PUHCA). Except as stated above in this Section 5.6, none of the Acquired
Companies is a "holding company," a "subsidiary company," a "public utility
company," or an "affiliate" of a "public utility company" or a "holding
company" within the meaning of such terms in PUHCA.
Section 5.7 Compliance with Legal Requirements; Governmental
Authorizations.
(a) Except as set forth in Section 5.7(a) of the PNT Disclosure Schedule
or as specifically described in the PNT SEC Documents delivered to SUG prior
to the date of this Agreement, and subject to Section 5.19 of this Agreement,
to the Knowledge of any Acquired Company, no Acquired Company is in violation
of any Legal Requirement that is applicable to it, to the conduct or operation
of its business, or to the ownership or use of any of its assets, other than
such violations, if any, which are not, individually or in the aggregate,
reasonably likely to have a PNT Material Adverse Effect.
(b) The PNT SEC Documents delivered to SUG prior to the date of this
Agreement accurately describe all material regulation of each Acquired Company
that relates to the utility business of any Acquired Company. Except as set
forth on Section 5.7(a) of the PNT Disclosure Schedule, each Acquired Company
has and is in material compliance with all material Governmental
Authorizations necessary to conduct its business and to own, operate and use
all of its assets as currently conducted.
Section 5.8 Legal Proceedings; Orders. Except as set forth in Section 5.8
of the PNT Disclosure Schedule or as specifically described in the PNT SEC
Documents delivered to SUG prior to the date of this Agreement, there is no
pending Proceeding:
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(1) that has been commenced by or against, or that otherwise relates to,
any Acquired Company that is reasonably likely to have a PNT Material Adverse
Effect; or
(2) as of the date of this Agreement, that challenges, or that may have
the effect of preventing, delaying, making illegal, or otherwise interfering
with, the Mergers or any of the transactions contemplated hereby.
To the Knowledge of PNT, except as set forth in Section 5.8 of the PNT
Disclosure Schedule, as of the date of this Agreement, no such Proceedings,
audits or investigations have been Threatened that are, individually or in the
aggregate, reasonably likely to have a PNT Material Adverse Effect.
Section 5.9 SEC Documents. PNT has made (and, with respect to such
documents filed after the date hereof through the Closing Date, will make)
available to SUG a true and complete copy of each report, schedule,
registration statement (other than on Form S-8), and definitive proxy
statement filed by PNT or PG Energy with the SEC since December 31, 1998
through the Closing Date in substantially the form filed with the SEC (the
"PNT SEC Documents"). As of their respective dates, the PNT SEC Documents,
including without limitation any financial statements or schedules included
therein, complied (or will comply), in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC thereunder applicable to such PNT SEC
Documents, and did not (or will not) contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The audited consolidated financial
statements and unaudited interim financial statements of PNT or PG Energy
included in the PNT SEC Documents (collectively, the "PNT Financial
Statements") were (or will be) prepared in accordance with GAAP (except as may
be indicated therein or in the notes thereto and except with respect to
unaudited statements as permitted by Form 10-Q) and fairly present (or will
fairly present) in all material respects the financial position of PNT and its
Subsidiaries, or PG Energy, as the case may be, as of the respective dates
thereof or the results of operations and cash flows for the respective periods
then ended, as the case may be, subject, in the case of unaudited interim
financial statements, to normal, recurring adjustments which are not material
in the aggregate.
Section 5.10 Taxes.
(a) The Acquired Companies have timely filed all United States federal,
state and local income Tax Returns required to be filed by or with respect to
them or requests for extensions to file such Tax Returns have been timely
filed, granted and have not expired, and the Acquired Companies have timely
paid and discharged all Taxes due in connection with or with respect to the
periods or transactions covered by such Tax Returns and have paid all other
Taxes as are due or made adequate provision therefor in accordance with GAAP
except where failures to so file, pay or discharge are not, individually or in
the aggregate, reasonably likely to have a PNT Material Adverse Effect. There
are no pending audits or other examinations relating to any Tax matters. There
are no Tax liens on any assets of the Acquired Companies. As of the date of
this Agreement, none of the Acquired Companies has granted any waiver of any
statute of limitations with respect to, or any extension of a period for the
assessment of, any Tax. The accruals and reserves (including deferred taxes)
reflected in the PNT Balance Sheet are in all material respects adequate to
cover all material Taxes accruable through the date thereof (including
interest and penalties, if any, thereon and Taxes being contested) in
accordance with GAAP. Prior to the date of this Agreement, no Acquired Company
has at any time adopted a plan of complete liquidation within the meaning of
Section 332 of the IRC.
(b) None of the Acquired Companies is obligated under any Contract with
respect to industrial development bonds or other obligations with respect to
which the excludability from gross income of the holder for federal or state
income tax purposes could be affected by the Merger or any of the transactions
contemplated by this Agreement.
Section 5.11 Intellectual Property. Except as set forth in Section 5.11 of
the PNT Disclosure Schedule, no Acquired Company has any Knowledge of (i) any
infringement or claimed infringement by it of any patent
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rights or copyrights of others or (ii) any infringement of the patent or
patent license rights, trademarks or copyrights owned by or under license to
it, except for any such infringements of the type described in clause (i) or
(ii) that are not, individually or in the aggregate, reasonably likely to have
a PNT Material Adverse Effect.
Section 5.12 Title to Assets. Except (i) as set forth in Section 5.12 of
the PNT Disclosure Schedule, (ii) as specifically described in the PNT SEC
Documents delivered to SUG prior to the date of this Agreement, (iii) as set
forth in Section 5.19 of this Agreement or (iv) as set forth in Section 5.19
of the PNT Disclosure Schedule, none of the Acquired Companies' assets are
subject to any Encumbrance other than PNT Permitted Liens.
Section 5.13 Indebtedness. All outstanding principal amounts of
indebtedness for borrowed money of the Acquired Companies as of June 4, 1999
are set forth in Section 5.13 of the PNT Disclosure Schedule, except for
inter-company indebtedness.
Section 5.14 Machinery and Equipment. Except for normal wear and tear, and
with such exceptions as are not, individually or in the aggregate, reasonably
likely to have a PNT Material Adverse Effect, the machinery and equipment of
the Acquired Companies is in good operating condition and in a state of
reasonable maintenance and repair.
Section 5.15 Material Contracts. Except as specifically described in the
PNT SEC Documents delivered to SUG prior to the date of this Agreement, and
with such exceptions as are not, individually or in the aggregate, reasonably
likely to have a PNT Material Adverse Effect, all Material Contracts of the
Acquired Companies are in full force and effect and no Acquired Company nor,
to the Knowledge of PNT, any other party thereto is in default thereunder nor
has any event occurred or is any event occurring that with notice or the
passage of time or otherwise, is reasonably likely to give rise to an event of
default thereunder by any party thereto.
Section 5.16 Insurance. Section 5.16(a) of the PNT Disclosure Schedule sets
forth a list of all policies of insurance held by the Acquired Companies as of
the date of this Agreement. Except as set forth in Section 5.16(b) of the PNT
Disclosure Schedule, since June 30, 1994, the assets and the business of the
Acquired Companies have been continuously insured with what PNT reasonably
believes are reputable insurers against all risks and in such amounts normally
insured against by companies of the same type and in the same line of business
as any of the Acquired Companies. As of the date of this Agreement, no notice
of cancellation, non-renewal or material increase in premiums has been
received by any of the Acquired Companies with respect to such policies, and
no Acquired Company has Knowledge of any fact or circumstance that could
reasonably be expected to form the basis for any cancellation, non-renewal or
material increase in premiums, except for such cancellations, non-renewals and
increases which are not, individually or in the aggregate, reasonably likely
to have a PNT Material Adverse Effect. None of the Acquired Companies is in
default with respect to any provision contained in any such policy or binder
nor has there been any failure to give notice or to present any claim relating
to the business or the assets of the Acquired Companies under any such policy
or binder in a timely fashion or in the manner or detail required by the
policy or binder, except for such defaults or failures which are not,
individually or in the aggregate, reasonably likely to have a PNT Material
Adverse Effect. As of the date of this Agreement, there are no outstanding
unpaid premiums (except premiums not yet due and payable), and no notice of
cancellation or renewal with respect to, or disallowance of any claim under,
any such policy or binder has been received by the Acquired Companies as of
the date hereof, except for such non-payments of premiums, cancellations,
renewals or disallowances which are not, individually or in the aggregate,
reasonably likely to have a PNT Material Adverse Effect.
Section 5.17 Employees. Section 5.17(a) of the PNT Disclosure Schedule sets
forth a list as of no more than thirty (30) days prior to the date of this
Agreement of all the present officers and employees of the Acquired Companies.
Except as set forth in Section 5.17(b) of the PNT Disclosure Schedule, as of
the date of this Agreement, no labor union or other collective bargaining unit
has been certified or recognized by any of the Acquired Companies, and, to the
Knowledge of the Acquired Companies, as of the date of this Agreement,
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there are no elections, organizing drives or material controversies pending or
Threatened between any of the Acquired Companies and any labor union or other
collective bargaining unit representing any of the Acquired Companies'
employees. There is no pending or, to the Knowledge of PNT, Threatened labor
practice complaint, arbitration, labor strike or other material labor dispute
(excluding grievances) involving any of the Acquired Companies which are,
individually or in the aggregate, reasonably likely to have a PNT Material
Adverse Effect. Except for collective bargaining agreements or as described in
or pursuant to Section 5.18 and Section 6.1(a)(16) or as attached as an
exhibit to, or as specifically described in, the PNT SEC Documents delivered
to SUG prior to the date of this Agreement, as of the date of this Agreement,
to the Knowledge of PNT, none of the Acquired Companies is a party to any
employment agreement with any employee pertaining to any of the Acquired
Companies.
Section 5.18 Employee Benefit Plans.
(a) Except as set forth in Section 5.18 of the PNT Disclosure Schedule,
each of the PNT Benefit Plans has been operated and administered in all
material respects in accordance with its governing documents and applicable
federal and state laws (including, but not limited to, ERISA and the IRC). For
purposes of this Agreement, "PNT Benefit Plans" shall mean all employee
retirement, welfare or other benefit plans, agreements, practices, policies,
programs, or arrangements identified and described in Section 5.18 of the PNT
Disclosure Schedule, which sets forth all PNT Benefit Plans that are
applicable to any employee of the Acquired Companies identified in Section
5.17 of the PNT Disclosure Schedule or maintained by or contributed to by any
of the Acquired Companies.
(b) Except as set forth in Section 5.18 of the PNT Disclosure Schedule, as
to any PNT Benefit Plan subject to Title IV of ERISA, there is no event or
condition which presents the material risk of plan termination, no accumulated
funding deficiency, whether or not waived, within the meaning of Section 302
of ERISA or Section 412 of the IRC has been incurred for which any liability
is outstanding, no reportable event within the meaning of Section 4043 of
ERISA (for which the notice requirements of Regulation (S)4043 promulgated by
the PBGC have not been waived) has occurred within the last six years, no
notice of intent to terminate the PNT Benefit Plan has been given under
Section 4041 of ERISA, no proceeding has been instituted under Section 4042 of
ERISA to terminate the PNT Benefit Plan, there has been no termination or
partial termination of the PNT Benefit Plan within the meaning of Section
411(d)(3) of the IRC within the last six years, no event described in Sections
4062 or 4063 of ERISA has occurred, all PBGC premiums have been timely paid
and no liability to the PBGC has been incurred, except for PBGC premiums not
yet due.
(c) There is no matter pending (other than qualification determination
applications and filings and other required periodic filings) with respect to
any of the PNT Benefit Plans before the IRS, the Department of Labor, the PBGC
or in or before any other governmental authority.
(d) Except as set forth in Section 5.18 of the PNT Disclosure Schedule,
each trust funding a PNT Benefit Plan, which trust is intended to be exempt
from federal income taxation pursuant to Section 501(c)(9) of the IRC,
satisfies the requirements of such section and has received a favorable
determination letter from the IRS regarding such exempt status and to the
Knowledge of any Acquired Company has not, since receipt of the most recent
favorable determination letter, been amended or operated in any way which
would adversely affect such exempt status.
(e) Except as otherwise set forth in Section 5.18 of the PNT Disclosure
Schedule, with respect to any PNT Benefit Plan or any other "employee benefit
plan" as defined in Section 3(3) of ERISA which is established, sponsored,
maintained or contributed to, or to the Knowledge of the Acquired Companies,
with respect to any such plan which has been established, sponsored,
maintained or contributed to within six years prior to the Closing Date, by
the Acquired Companies or any corporation, trade, business or entity under
common control or being a part of an affiliated service group with any of the
Acquired Companies, within the meaning of Section 414(b), (c) or (m) of the
IRC or Section 4001 of ERISA ("PNT Commonly Controlled Entity"), (i) no
withdrawal liability, within the meaning of Section 4201 of ERISA, has been
incurred, which withdrawal liability
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has not been satisfied and no such withdrawal liability is reasonably expected
to be incurred, (ii) no liability under Title IV of ERISA (including, but not
limited to, liability to the PBGC) has been incurred by the Acquired Companies
or any PNT Commonly Controlled Entity, which liability has not been satisfied
(other than for PBGC premiums not yet due), (iii) no accumulated funding
deficiency, whether or not waived, within the meaning of Section 302 of ERISA
or Section 412 of the IRC has been incurred for which any liability is
outstanding, (iv) there has been no failure to make any contribution
(including installments) to such plan required by Section 302 of ERISA and
Section 412 of the IRC which has resulted in a lien under Section 302 of ERISA
or Section 412 of the IRC and for which any liability is currently
outstanding; (v) to the Knowledge of any Acquired Company, no action, omission
or transaction has occurred with respect to any such plan or any other PNT
Benefit Plan which could subject any of the Acquired Companies, the plan or
trust forming a part thereof, or SUG to a material civil liability or penalty
under ERISA or other applicable laws, or a material Tax under the IRC, (vi)
any such plan which is a Group Health Plan has complied in all material
respects with the provisions of Sections 601-608 of ERISA and Section 4980B of
the IRC, (vii) there are no pending or, to the Knowledge of any of the
Acquired Companies, Threatened claims by or on behalf of any such plan or any
other PNT Benefit Plan, by any employees, former employees or plan
beneficiaries covered by such plan or otherwise by or on behalf of any person
involving any such plan (other than routine non-contested claims for benefits)
which could result in a material liability to the Acquired Companies taken as
a whole and (viii) neither the Acquired Companies nor any PNT Commonly
Controlled Entity has engaged in, or is a successor or parent corporation to
any entity or person that has engaged in, a transaction described in Section
4069 of ERISA.
(f) Except as otherwise set forth in Section 5.18 of the PNT Disclosure
Schedule, the execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby will not (i) require SUG to make a later
contribution to, payment or transfer of money or property or payment of
greater benefits under or with respect to any PNT Benefit Plan than any of the
Acquired Companies is currently required by the terms and provisions of such
PNT Benefit Plan to do, (ii) create or give rise to any additional eligibility
for participation, vested rights benefits or service credits under any PNT
Benefit Plan, or (iii) in and of themselves cause or result in SUG incurring
any civil liability or penalty under ERISA or other applicable laws or Tax
under the IRC.
(g) Except as otherwise set forth in Section 5.18 of the PNT Disclosure
Schedule, none of the Acquired Companies is a party to any Contract nor has it
established any policy or practice, which would require it or SUG to make a
payment or provide any other form of compensation or benefit to any Person
performing (or who within the past twelve months performed) services for any
of the Acquired Companies during or upon termination of such services which
would not be payable or provided in the absence of the consummation of the
transactions contemplated by this Agreement.
(h) Except as would affect retirees and unionized employees and as
otherwise set forth in Section 5.18 of the PNT Disclosure Schedule, each PNT
Benefit Plan which is an "employee welfare benefit plan," as such term is
defined in Section 3(1) of ERISA, may be unilaterally amended or terminated in
its entirety without any liability being incurred by any of the Acquired
Companies, SUG or any affiliate of SUG, except as to benefits accrued
thereunder prior to such amendment or termination.
(i) Section 5.18 of the PNT Disclosure Schedule contains a true and
complete list as of the date of this Agreement of each PNT Benefit Plan, all
Acquired Company Option Plans and any management, employment, deferred
compensation, severance (including any payment, right or benefit resulting
from a change in control), bonus or other contract for personal services with
any current or former officer, director or employee, any consulting contract
with any person who prior to entering this such contract was a director or
officer of any Acquired Company or any plan, agreement, arrangement or
understanding similar to any of the foregoing.
(j) None of the Acquired Companies has contributed nor been obligated to
contribute to any "multi-employer plan" within the meaning of Section 3(37) of
ERISA within the last six years, and none of the Acquired Companies has any
outstanding liability with respect to any such plan.
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Section 5.19 Environmental Matters. Except as set forth in Section 5.19 of
the PNT Disclosure Schedule or as specifically described in the PNT SEC
Documents delivered to SUG prior to the date of this Agreement, and with such
other exceptions as are not, individually or in the aggregate, reasonably
likely to have a PNT Material Adverse Effect:
(a) To the Knowledge of any Acquired Company, no Facility owned or operated
by any Acquired Company is currently, or was at any time, listed on the
National Priorities List promulgated under CERCLA, or on any comparable state
list, and no Acquired Company has received any written notification of
potential or actual liability or a written request for information from any
Person under or relating to CERCLA or any comparable Legal Requirement with
respect to any Acquired Company or the Facilities;
(b) To the Knowledge of any Acquired Company, each Acquired Company and any
Person for whose conduct any Acquired Company is reasonably likely to be held
responsible, and at all times has been, in material compliance with any
Environmental Law. No Acquired Company has received any Order, notice, or
other communication from (i) any Governmental Body or private citizen acting
in the public interest, or (ii) the current or prior owner or operator of any
Facilities, of any violation or failure to comply with any Environmental Law,
or of any obligation to undertake or bear the cost of any environmental
cleanup, or with respect to any property or Facility at which Hazardous
Materials generated by any Acquired Company were transported for disposal;
(c) There are no pending or, to the Knowledge of any of the Acquired
Companies, Threatened claims arising under or pursuant to any Environmental
Law with respect to or affecting any of the Facilities or any other properties
and assets (whether real, personal, or mixed) in which any Acquired Company
has or had a direct or indirect interest (including by ownership or use); and
(d) PNT has delivered or made available to SUG true and complete copies and
results of any environmental site assessments, studies, analyses, tests or
monitoring possessed by any Acquired Company of which any Acquired Company has
Knowledge pertaining to Hazardous Materials or Hazardous Activities in, on or
under the Facilities, or concerning compliance by any Acquired Company or any
other Person for whose conduct any Acquired Company is reasonably likely to be
held responsible, with Environmental Laws.
Section 5.20 No Material Adverse Change. Since the date of the PNT Balance
Sheet, except as specifically described in the PNT SEC Documents delivered to
SUG prior to the date of this Agreement, there has not been any PNT Material
Adverse Effect, and no events have occurred or circumstances exist that are,
individually or in the aggregate, reasonably likely to have a PNT Material
Adverse Effect, except that any PNT Material Adverse Effect that results from
or relates to (a) general business or economic conditions, (b) conditions
generally affecting the industries in which the Acquired Companies compete or
(c) the announcement of the transactions contemplated by this Agreement shall
be disregarded.
Section 5.21 Brokers. No Acquired Company is a party to, or in any way
obligated under any Contract, and there are no outstanding claims against any
Acquired Company, for the payment of any broker's or finder's fees in
connection with the origin, negotiation, execution or performance of this
Agreement.
Section 5.22 PNT Rights Agreement. Prior hereto, PNT has delivered to SUG
a true and complete copy of the PNT Rights Agreement. The consummation of the
transactions contemplated by this Agreement will not result in the triggering
of any right or entitlement of the holders of the PNT Common Stock or other
PNT securities under the PNT Rights Agreement or any similar agreement to
which PNT or any of its Subsidiaries is a party.
Section 5.23 Regulatory Proceedings. Except as set forth in Section 5.23 of
the PNT Disclosure Schedule, other than purchase gas adjustment provisions,
none of PNT or its Subsidiaries all or part of whose rates or services are
regulated by a Governmental Body (a) has rates that have been or are being
collected subject to refund, pending final resolution of any rate proceeding
pending before a Governmental Body or on appeal to the courts, or (b) is a
party to any rate proceeding before a Governmental Body that are, individually
or in the aggregate, reasonably likely to result in any Orders having a PNT
Material Adverse Effect.
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Section 5.24 Proxy Statement; Registration Statement. None of the
information supplied or to be supplied by or on behalf of PNT and its
Subsidiaries in either the PNT Proxy Statement or supplied or to be supplied
by PNT to SUG for inclusion in either the SUG Proxy Statement or the
Registration Statement, will, with respect to the Registration Statement, at
the effective time of the Registration Statement, at any time the Registration
Statement is amended or supplemented, at the date the PNT Proxy Statement is
first mailed to PNT's shareholders, at any time the PNT Proxy Statement is
amended or supplemented, at the time of the PNT Meeting and at the Effective
Time, in the case of the PNT Proxy Statement, at the date the PNT Proxy
Statement is first mailed to PNT's shareholders, at any time the PNT Proxy
Statement is amended or supplemented and at the time of the PNT Meeting and in
the case of the SUG Proxy Statement, at the date the SUG Proxy Statement is
first mailed to SUG's shareholders, at any time the SUG Proxy Statement is
amended or supplemented and at the time of the SUG Meeting (giving effect to
any documents incorporated by reference therein), contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The PNT Proxy
Statement will comply as to form and in substance in all material respects
with the applicable provisions of the Exchange Act and the rules and
regulations thereunder.
Section 5.25 Vote Required. Other than the approval of the Merger by the
holders of a majority of the outstanding shares of PNT Common Stock (the "PNT
Shareholders' Approval") and the approval by the holders of common stock of
each of PG Energy and Honesdale, no vote of the holders of any class or series
of the capital stock of any Acquired Company is required to approve this
Agreement and the Mergers.
Section 5.26 Opinion of Financial Advisor. PNT has provided (or promptly
upon receipt of a written copy thereof, will provide) SUG a copy of the
opinion of Legg Mason Wood Walker, Incorporated, dated as of the date hereof,
with respect to the Merger Consideration to be received by the holders of PNT
Common Stock pursuant to the transactions contemplated by this Agreement.
Section 5.27 Disclaimer of Representations and Warranties. EXCEPT FOR THE
REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS ARTICLE V, PNT MAKES NO OTHER
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AND PNT HEREBY DISCLAIMS
ANY SUCH OTHER REPRESENTATIONS OR WARRANTIES, WHETHER BY PNT, ANY SUBSIDIARY
OF PNT, OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR
REPRESENTATIVES, OR ANY OTHER PERSON, WITH RESPECT TO THIS AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED HEREBY, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE
TO SUG OR ANY OF ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR
REPRESENTATIVES, OR ANY OTHER PERSON, OF ANY DOCUMENTATION OR OTHER
INFORMATION BY PNT, ANY SUBSIDIARY OF PNT, OR ANY OF THEIR RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR REPRESENTATIVES, OR ANY OTHER
PERSON, WITH RESPECT TO ANY OF THE FOREGOING.
ARTICLE VI
COVENANTS
Section 6.1 Covenants of PNT. PNT agrees to observe and perform the
following covenants and agreements:
(a) Conduct of the Business Prior to the Closing Date. With respect to the
Acquired Companies, except (i) as contemplated in this Agreement, (ii) for a
sale by PNT of Keystone Pipeline Services, Inc. or by Keystone Pipeline
Services, Inc. of its assets, or the sale by any of the Acquired Companies of
any real property owned by any of them that is not used or useful in the
Acquired Companies' utility operations, (iii) the redemption or repurchase of
the PG Preferred Stock prior to the Effective Time, (iv) as required by law or
regulation or (v) as
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otherwise expressly consented to in writing by SUG which consent will not be
unreasonably withheld or delayed, prior to the Closing, PNT will cause each
Acquired Company to:
(1) Not make or permit any material change in the general nature of its
business;
(2)Maintain its Ordinary Course of Business in accordance with prudent
business judgment and consistent with past practice and policy, and maintain
its assets in good repair, order and condition, reasonable wear and tear
excepted, subject to retirements in the Ordinary Course of Business;
(3)Preserve the Acquired Company as an ongoing business and use
reasonable efforts to maintain the goodwill associated with the Acquired
Company;
(4)Preserve all of the Acquired Companies' franchises, tariffs,
certificates of public convenience and necessity, licenses, authorizations and
other governmental rights and permits;
(5)Not enter into any material transaction or Material Contract other
than in the Ordinary Course of Business;
(6)Not purchase, sell, lease, dispose of or otherwise transfer or make
any contract for the purchase, sale, lease, disposition or transfer of, or
subject to lien, any of the assets of the Acquired Company other than in the
Ordinary Course of Business;
(7)Not hire any new employee unless such employee is a bona fide
replacement for a presently-filled position with the Acquired Company as of
the date hereof except for no more than ten (10) new employees to be hired by
PG Energy Services, Inc. for the conduct of the electric and natural gas
marketing business;
(8)Not file any material applications, petitions, motions, orders,
briefs, settlement or agreements in any material Proceeding before any
Governmental Body which involves the Acquired Company, and appeals related
thereto without, to the extent reasonably practicable, consulting SUG;
provided, however, that if such Proceeding is reasonably likely to have a PNT
Material Adverse Effect, PNT shall not make any such filing without the
consent of SUG, which consent shall not be unreasonably withheld or delayed;
(9)Not engage in any new (other than intercompany short-term financing
arrangements in the Ordinary Course of Business), or modify any existing,
intercompany transactions involving Keystone Pipeline Services, Inc., and not
engage in or modify, except in the Ordinary Course of Business, any material
intercompany transactions involving any other Acquired Company, except as set
forth in Section 6.1(a)(9) of the PNT Disclosure Schedule;
(10)Not voluntarily change in any material respect or terminate any
insurance policies disclosed on Section 5.16(a) of the PNT Disclosure Schedule
that presently are in effect unless equivalent coverage is obtained;
(11)Except as disclosed or specifically contemplated in this Agreement
or in Section 6.1(a)(11) of the PNT Disclosure Schedule, and with respect to
budgeted expenditures known and specifically disclosed in writing to SUG,
subject to adjustments in the Ordinary Course of Business and other deviations
(which in the aggregate shall not exceed 5% on an annualized basis during the
period from the date of this Agreement until the Closing Date), not make any
capital expenditure or capital expenditure commitment;
(12)Not make any changes in financial policies or practices, or
strategic or operating policies or practices, in each case which involve any
Acquired Company, except as required by law, rule or regulation;
(13)Comply in all material respects with all applicable material Legal
Requirements and permits, including without limitation those relating to the
filing of reports and the payment of Taxes due to be paid prior to the
Closing, other than those contested in good faith;
(14)Not adopt, amend (other than amendments that reduce the amounts
payable by SUG or any of its subsidiaries or amendments required by law) or
assume an obligation to contribute to any PNT Benefit
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Plan or collective bargaining agreement or enter into any employment,
severance or similar contract with any Person (including without limitation,
contracts with management of any Acquired Company or any of its affiliates
that might require payments be made upon consummation of the transactions
contemplated hereby) or amend any such existing contracts to increase any
amounts payable thereunder or benefits provided thereunder;
(15)Except in the Ordinary Course of Business or in accordance with the
terms of any existing Contract, PNT Benefit Plan or collective bargaining
agreement, not grant any increase or change in total compensation, benefits or
pay any bonus to any employees;
(16)Not grant or enter into any Contract, written or oral, with respect
to continued employment for any employee, officer or director;
(17)Not make (i) any loan or advance to any officer, director,
stockholder or employee other than in the Ordinary Course of Business or (ii)
make any other loan or advance to any Person other than in the Ordinary Course
of Business;
(18)Not terminate any existing gas purchase, exchange or transportation
contract necessary to supply firm gas at all city gate delivery points or
enter into any new contract for the supply, transportation, storage or
exchange of gas with respect to the Acquired Companies' regulated gas
distribution operations or renew or extend or negotiate any existing contract
providing for the same where such contract is not terminable within sixty (60)
days without penalty unless specifically agreed to by SUG;
(19)Not amend any of its Organizational Documents; and
(20)Subject to Section 6.1(l), not issue or assume any note, debenture
or other evidence of indebtedness which by its terms does not mature within
two year(s) (except that PG Energy shall have no more than $11,999,999 of
indebtedness which matures within one year from the date of any such issuance
or assumption) from the date of execution or issuance thereof, unless
otherwise redeemable or subject to prepayment at any time at the option of the
Acquired Company on not more than thirty (30) days notice without penalty for
such redemption or prepayment.
(b) Customer Notifications. At any time and from time to time reasonably
requested by SUG prior to the Closing Date, each Acquired Company will permit
SUG at SUG's expense to insert preprinted single-page customer education
materials into billing documentation to be delivered to customers affected by
this Agreement; provided that, PNT has reviewed in advance and consented to
the content of such materials, which consent shall not be unreasonably
withheld. Other means of notifying customers may be employed by either party,
at the expense of the initiating party, but in no event shall any notification
be initiated without the prior consent of the other party (which consent shall
not be unreasonably withheld).
(c) Access to the Acquired Companies' Offices, Properties and Records;
Updating Information.
(1)From and after the date hereof and until the Closing Date, the
Acquired Companies shall permit SUG and its Representatives to have, on
reasonable notice and at reasonable times, reasonable access to such of the
offices, properties and employees of the Acquired Companies, and shall
disclose, and make available to SUG and its Representatives all books, papers
and records to the extent that they relate to the ownership, operation,
obligations and liabilities of or pertaining to the Acquired Companies and
their businesses and assets. Without limiting the application of the
Confidentiality Agreement dated May 10, 1999 between PNT and SUG (the
"Confidentiality Agreement"), all documents or information furnished by the
Acquired Companies hereunder shall be subject to the Confidentiality
Agreement.
(2)PNT will notify SUG as promptly as practicable of any significant
change in the Ordinary Course of Business or operation of any of the Acquired
Companies and of any material complaints, investigations or hearings (or
communications indicating that the same may be contemplated) by any
Governmental Body, or the institution or overt threat or settlement of any
material Proceeding involving or affecting any of the
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Acquired Companies or the transactions contemplated by this Agreement, and
shall use reasonable efforts to keep SUG fully informed of such events and
permit SUG's Representatives access to all materials prepared in connection
therewith, consistent with any applicable Legal Requirement or Contract.
(3)As promptly as practicable after SUG's request, PNT will furnish
such financial and operating data and other information pertaining to the
Acquired Companies and their businesses and assets as SUG may reasonably
request; provided, however, that nothing herein will obligate any of the
Acquired Companies to take actions that would unreasonably disrupt its
Ordinary Course of Business or violate the terms of any Legal Requirement or
Contract to which the Acquired Company is a party or to which any of its
assets is subject in providing such information, or to incur any costs with
respect to SUG's external auditors (or the Acquired Companies' external
auditors in the event a report by such auditors is requested by SUG) providing
accounting services with respect to issuing an auditor's report required by or
for SUG.
(d) Governmental Approvals; Third Party Consents. PNT will use its
reasonable best efforts to obtain all necessary consents, approvals and
waivers from any Person required under any license, lease, permit or Contract
applicable to the Acquired Companies, including, without limitation, the
approvals of those Governmental Bodies and the consents of those third parties
listed in Section 5.4 and Section 5.5 of the PNT Disclosure Schedule and as
required by the HSR Act.
(e) Dividends. PNT shall not, nor shall it permit any of its Subsidiaries
to: (i) declare or pay any dividends on or make other distributions in respect
of any of its or their capital stock other than (A) dividends by a wholly
owned Subsidiary to PNT or another wholly owned subsidiary, (B) dividends by a
less than wholly owned Subsidiary consistent with past practice, (C) regular
quarterly dividends on PNT Common Stock with usual record and payment dates
that do not exceed the current rate of $1.20 per fiscal year, or (D) regular
cumulative cash distributions on the 4.10% PG Preferred Stock not to exceed an
annual rate of $4.10 per share or on the 5.75% PG Preferred Stock not to
exceed an annual rate of $5.75 per share; (ii) split, combine or reclassify
any capital stock or the capital stock of any Subsidiary or issue or authorize
or propose the issuance of any other securities in respect of, or in
substitution for, shares of capital stock or the capital stock of any
Subsidiary; or (iii) redeem, repurchase or otherwise acquire any shares of
capital stock of any Subsidiary other than (A) redemptions, repurchases and
other acquisitions of shares of capital stock in connection with the
administration of employee benefit and dividend reinvestment and customer
stock purchase plans as in effect on the date hereof in the ordinary course of
the operation of such plans consistent with past practice, (B) intercompany
acquisitions of capital stock, (C) required redemptions of the 5.75% PG
Preferred Stock, (D) the redemption or repurchase of the PG Preferred Stock as
contemplated herein or (E) as set forth in Section 6.1(l) of this Agreement.
(f) Issuance of Securities. PNT shall not, nor shall it permit any of its
Subsidiaries to, issue, agree to issue, deliver, sell, award, pledge, dispose
of or otherwise encumber or authorize or propose the issuance, delivery, sale,
award, pledge, disposal or other encumbrance of, any shares of its or their
capital stock of any class or any securities convertible into or exchangeable
for, or any rights, warrants or options to acquire, any such shares or
convertible or exchangeable securities, other than as provided for in the PNT
Benefit Plans, Acquired Company Option Plans (including options to be granted
to directors of PNT pursuant to such PNT Benefit Plans and Acquired Company
Option Plans) and any dividend reinvestment or customer stock purchase plans
of PNT in effect as of the date hereof.
(g) Accounting. PNT shall not, nor shall it permit any of its Subsidiaries
to, make any changes in their accounting methods, principles or practices
except as required by law, rule, regulation or GAAP.
(h) No Shopping.
(1)PNT shall not, and shall not authorize or permit any of its (or any
of its Subsidiaries') officers, directors, agents, financial advisors,
attorneys, accountants or other representatives to, directly or indirectly,
solicit, initiate or encourage submission of proposals or offers from any
Person relating to, or that could reasonably be expected to lead to, a
Business Combination or participate in any negotiations or discussions
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regarding, or furnish to any other Person any information with respect to, or
otherwise cooperate in any way with, or assist or participate in, facilitate
or encourage, any effort or attempt by any other Person to do or seek a
Business Combination; provided, however, that, prior to the PNT Shareholders'
Approval, PNT may, in response to an unsolicited written proposal from a third
party with respect to a Business Combination that PNT's Board of Directors
determines, in its good faith judgment, after consultation with and the
receipt of the advice of its financial advisor and outside counsel with
customary qualifications, is a Superior Proposal, (i) furnish information to,
and negotiate, explore or otherwise engage in substantive discussions with
such third party, only if PNT's Board of Directors determines, in its good
faith judgment after consultation with its financial advisors and outside
legal counsel, that it is reasonably necessary in order to comply with its
fiduciary duties under applicable law and (ii) take and disclose to PNT's
shareholders a position with respect to another Business Combination proposal,
or amend or withdraw such position, pursuant to Rule 14d-9 and 14e-2 under the
Exchange Act, or make such disclosure to PNT's shareholders which in the good
faith judgment of PNT's Board of Directors is required by applicable law,
based on the advice of its outside counsel. Prior to furnishing any non-public
information to, entering into negotiations with or accepting a Superior
Proposal from such third party, PNT will (i) provide written notice to SUG to
the effect that it is furnishing information to or entering into discussions
or negotiations with such third party and (ii) receive from such third party
an executed confidentiality agreement containing substantially the same terms
and conditions as the Confidentiality Agreement. PNT will immediately cease
and cause to be terminated any existing solicitation, initiation,
encouragement, activity, discussion or negotiations with any parties conducted
heretofore by PNT or any of its representatives with respect to any Business
Combination.
(2)Except as expressly permitted by this Section 6.1(h), neither the
PNT Board of Directors nor any committee thereof may, (i) withdraw or modify,
or propose publicly to withdraw or modify, in a manner adverse to SUG, the
approval or recommendation by such Board of Directors or such committee of the
Merger or this Agreement, (ii) approve or recommend, or propose publicly to
approve or recommend, a Business Combination or (iii) cause PNT to enter into
any letter of intent, agreement in principle, acquisition agreement or other
similar agreement related to any Business Combination. Notwithstanding the
foregoing, prior to the time at which the PNT Shareholders' Approval has been
obtained, in response to an unsolicited Business Combination proposal from a
third party, if PNT's Board of Directors determines, in its good faith
judgment, after consultation with and the receipt of the advice of its
financial advisor and outside counsel with customary qualifications, that such
proposal is a Superior Proposal and that failure to do any of the actions set
forth in clauses (i), (ii) or (iii) above would create a reasonable
possibility of a breach of the fiduciary duties of PNT's Board of Directors
under applicable law, PNT's Board of Directors may (i) withdraw or modify its
approval or recommendation of the Merger or this Agreement, approve or
recommend a Business Combination or cause PNT to enter into a Business
Combination and (ii) negotiate with a third party with respect to such
Business Combination proposal and, subject to PNT having paid to SUG the fees
described in Section 8.3(a) hereof and having entered into a definitive
agreement with respect to such Business Combination proposal, terminate this
Agreement; provided, however, that prior to entering into a definitive
agreement with respect to a Business Combination proposal, the Company shall
give SUG at least five (5) day's notice thereof, and shall cause its
representatives to, negotiate with SUG to make such adjustments in the terms
and conditions of this Agreement as would enable PNT to proceed with the
transactions contemplated herein on such adjusted terms; provided, further,
that if PNT and SUG are unable to reach an agreement on such adjustments
within five (5) days after such notice from PNT, PNT may enter into such
definitive agreement, subject to the provisions of Article VIII.
(3)PNT shall notify SUG orally and in writing of any such inquiries,
offers or proposals (including, without limitation, the material terms and
conditions of any such offer or proposal and the identity of the Person making
it), within one business day of the receipt thereof, shall use all reasonable
efforts to keep SUG informed of the status and details of any such inquiry,
offer or proposal and shall give SUG two (2) days advance notice of the first
delivery of non-public information to such Person. If any such inquiry, offer
or proposal is in writing, PNT shall promptly deliver to SUG a copy of such
inquiry, offer or proposal.
(4)For purposes of this Agreement, (i) "Business Combination" means
(other than the transactions contemplated or permitted by this Agreement) (A)
a merger, consolidation or other business combination, share exchange, sale of
shares of capital stock, tender offer or exchange offer or similar transaction
involving PNT or
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any of its Subsidiaries, (B) acquisition in any manner, directly or
indirectly, of a material interest in any capital stock of, or a material
equity interest in a substantial portion of the assets of, PNT or any of its
Subsidiaries, including any single or multi-step transaction or series of
related transactions that is structured to permit a third party to acquire
beneficial ownership of a majority or greater equity interest in PNT or any of
its Subsidiaries, or (C) the acquisition in any manner, directly or
indirectly, of any material portion of the business or assets (other than
immaterial or insubstantial assets or inventory in the ordinary course of
business or assets held for sale) of PNT or any of its Subsidiaries and (ii)
"Superior Proposal" means a proposed Business Combination involving at least
50% of the shares of capital stock or a material portion of the assets of PNT
that PNT's Board of Directors determines, after consulting with PNT's
financial advisors and outside counsel, is financially superior to the
transactions contemplated hereby and it appears that the party making the
proposal is reasonably likely to have the funds necessary to consummate the
Business Combination.
(i) Solicitation of Proxies; PNT Proxy Statement. Subject to Section
6.1(h), PNT shall use its reasonable best efforts to solicit from its
shareholders proxies in favor of the Merger and shall take all other action
necessary or, in the reasonable opinion of SUG, advisable to secure the PNT
Shareholders' Approval. PNT shall cause PG Energy and Honesdale to approve the
Honesdale Merger and the PG Energy Merger.
(j) PNT Shareholder Approval.
(1)Subject to the provisions of Section 6.1(h) and Section 6.1(j)(2),
PNT shall, as soon as reasonably practicable after the date hereof (i) take
all steps necessary to duly call, give notice of, convene and hold a meeting
of its shareholders (including all adjournments thereof, the "PNT Meeting")
for the purpose of securing the PNT Shareholders' Approval, (ii) distribute to
its shareholders the PNT Proxy Statement in accordance with applicable federal
and state law and with its Organizational Documents, (iii) subject to the
fiduciary duties of its Board of Directors, recommend to its shareholders the
approval of this Agreement and the transactions contemplated hereby and (iv)
cooperate and consult with SUG with respect to each of the foregoing matters.
(2)The PNT Meeting for the purpose of securing the PNT Shareholders'
Approval, including any adjournments thereof, will be held on such date or
dates as PNT and SUG mutually determine.
(k) Rule 145 Letters. PNT shall promptly identify to SUG all officers and
directors of any Acquired Company and any other persons who are "affiliates"
within the meaning of such term as used in Rule 145 under the Securities Act
("Rule 145 Affiliates"), and PNT shall use its reasonable efforts to provide
to SUG undertakings from such persons ("Rule 145 Letters") to the effect that
no disposition of shares of SUG Common Stock received in the Merger will be
made by such persons except within the limits and in accordance with the
applicable provisions of said Rule 145, as amended from time to time, or
except in a transaction which, in the opinion of legal counsel satisfactory to
SUG, is exempt from registration under the Securities Act.
(l) Financing Activities. PNT shall, and shall cause its Subsidiaries to,
cooperate, to the fullest extent commercially reasonable and practicable, with
SUG's requests with respect to refinancing by the Acquired Companies of the
current maturities of any of their indebtedness, and any repurchase,
redemption or prepayment by any of the Acquired Companies of any of its
indebtedness or preferred stock that may be required prior to or because of
the Mergers or that SUG may request that the Acquired Companies effect prior
to the Mergers, so as to permit SUG to have the maximum opportunity to
refinance, on or promptly after the Closing Date without any penalty except as
may be due pursuant to the terms of the Acquired Companies' indebtedness and
preferred stock as in effect on the date of this Agreement, any of the
Acquired Companies' indebtedness or preferred stock outstanding on the Closing
Date, including, but not limited to, the redemption or repurchase by PG Energy
(or purchase by PNT) by the Effective Time of all outstanding shares of PG
Preferred Stock; provided, however, that no Acquired Company shall be required
to consummate prior to the Effective Time any such refinancing, repurchase,
redemption or repayment requested by SUG.
(m) PNT Disclosure Schedule. On the date hereof, PNT has delivered to SUG
the PNT Disclosure Schedule, accompanied by a certificate signed by an
executive officer of PNT stating the PNT Disclosure Schedule is being
delivered pursuant to this Section 6.1(m). The PNT Disclosure Schedule
constitutes an integral
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part of this Agreement and modifies the representations, warranties, covenants
or agreements of PNT contained herein to the extent that such representations,
warranties, covenants or agreements expressly refer to the PNT Disclosure
Schedule.
Section 6.2 Covenants of SUG. SUG agrees to observe and perform the
following covenants and agreements:
(a) Governmental Approvals; Third Party Consents. SUG will use its
reasonable best efforts at SUG's sole expense to obtain all necessary
consents, approvals and waivers from any Person required under any license,
lease, permit, Contract or agreement applicable to SUG, including, without
limitation, the approvals of the Missouri Public Service Commission, the
Florida Public Service Commission and the Pennsylvania Public Utility
Commission as described in Section 4.5 and as required by the HSR Act.
(b) Employees; Benefits. With respect to the employees (excluding unionized
employees) listed in Section 5.17(a) of the PNT Disclosure Schedule (or their
successors employed pursuant to Section 6.1(a)(7) above) (the "Employees"),
except as otherwise specified herein, SUG agrees as follows:
(1) During the 12 months immediately following the Closing Date, to make
available to the Employees who continue their service with the Surviving
Corporation or any Subsidiary of the Surviving Corporation Benefit Plans that
are no less favorable, in the aggregate, than the Benefit Plans listed in
Section 5.18 of the PNT Disclosure Schedule offered to the Employees
immediately prior to the Effective Time. Notwithstanding the foregoing, SUG's
obligations under PNT's Directors' Retirement Plan, Directors' 1995 Stock
Compensation Plan and Directors' Deferred Compensation Plan shall be limited
to obligations accrued through and including the Effective Time, including,
but not limited to, the change in control provisions contained in such plans.
(2) For purposes of eligibility, vesting and benefit accrual under all
benefit plans provided to the Employees after the Closing Date, SUG will
recognize the tenure of employment, as recognized by the Acquired Companies as
of the Closing Date.
(3) All vacation time earned by the Employees prior to the Closing Date
must be taken by the end of the calendar year of the Closing Date, except
where the Employee is requested by PNT or SUG to forego their vacation for
business-related reasons. For purposes of awarding vacation time at the
beginning of each calendar year following the Closing Date, SUG will recognize
the tenure of employment, as recognized by the Acquired Company as of the
Closing Date.
(4) SUG will permit each of the Employees to carry forward all days of
sick leave accrued prior to the Closing Date.
(c) Rule 16b-3. SUG will take all reasonable steps so that the acquisition
of the Merger Consideration by officers and directors of PNT (including Merger
Consideration with respect to PNT Common Stock held under PNT Benefit Plans),
and cash payments or substitute SUG options issued in exchange for PNT Options
in accordance with Section 3.4, will be exempt from Section 16(b) of the
Exchange Act by reason of Rule 16b-3 promulgated thereunder.
(d) Tax Matters. SUG will not take, or fail to take, any action before or
after the Closing Date that will adversely affect the qualification of the
Merger(s) as a reorganization under Section 368(a)(1)(A) of the IRC.
(e) Blue Sky Permits. SUG shall use its best efforts to obtain, prior to
the effective date of the Registration Statement, all necessary state
securities laws or "blue sky" permits and approvals required to carry out the
transactions contemplated by the Agreement, and will pay all expenses incident
thereto.
(f) Listing Application. Prior to the Closing, SUG shall cause the shares
of SUG Common Stock constituting the Stock Consideration and any other such
shares required to be reserved for issuance in connection with the Merger to
be listed on the NYSE, subject to official notice of issuance thereof.
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(g) Directors. After the Effective Time on the Closing Date, three
individuals to be selected prior to the Closing Date by SUG from the Board of
Directors of PNT immediately prior to the Effective Time shall be elected to
the Board of Directors of SUG as the Surviving Corporation, and thereafter
nominated and recommended for reelection if necessary such that each of them
shall have a term of at least three years from the Closing Date, and each such
individual shall hold office in accordance with the Certificate of
Incorporation and By-laws of SUG as the Surviving Corporation; provided that,
any such individual who is also an officer or employee of the Surviving
Corporation shall be required to resign as a director of the Surviving
Corporation if he resigns or is terminated as an officer or employee of the
Surviving Corporation.
(h) Technology: Pennsylvania Operations. SUG will give full consideration
to using or retaining PNT's technology and management systems for the PNT
operations after the Effective Time, if SUG determines that they are superior
to such technology and management systems being used by SUG in its other
operations and it is in the best interests of SUG and PNT's operations. SUG
intends to operate the Acquired Companies' utility operations in Pennsylvania
as a separate division of the Surviving Corporation headquartered in
Pennsylvania.
(i) Charitable Contributions. SUG will maintain PNT's charitable
contributions of at least the amount given and/or committed in 1998 for at
least the next three calendar years.
(j) Collective Bargaining Agreements. At the Effective Time, SUG agrees to
assume all collective bargaining agreements covering employees of any Acquired
Company, and shall discharge when due any and all liabilities of any Acquired
Company under such collective bargaining agreements relating to periods after
the Effective Time.
(k) Restrictions on Unusual Distributions; Anti-Dilution. Except for an
annual 5% stock dividend, SUG will not, prior to the Effective Time, declare
any stock dividend, stock split, reclassification, recapitalization,
combination or distribution of assets, securities or other property to holders
of, or affecting, SUG Common Stock.
(l) Solicitation of Proxies; SUG Proxy Statement. SUG shall use its
reasonable best efforts to solicit from SUG's shareholders proxies in favor of
the Merger and shall take all other action necessary or, in the reasonable
opinion of PNT, advisable to secure the SUG Shareholders' Approval. All
Lindemann family members who own shares of SUG Common Stock as of the date of
this Agreement have provided PNT with a commitment and irrevocable proxy to
vote all of their shares of SUG Common Stock in favor of the Merger, the form
of which is attached hereto as Schedule 6.2(l).
(m) SUG Shareholder Approval.
(1) Subject to the provisions of Section 6.2(m)(2), SUG shall, as soon as
reasonably practicable after the date hereof (i) take all steps necessary to
duly call, give notice of, convene and hold a meeting of its shareholders
(including all adjournments thereof, the "SUG Meeting") for the purpose of
securing the SUG Shareholders' Approval, (ii) distribute to its shareholders
the SUG Proxy Statement in accordance with applicable federal and state law
and with its Organizational Documents, (iii) subject to the fiduciary duties
of its Board of Directors, recommend to its shareholders the approval of this
Agreement and the transactions contemplated hereby and (iv) cooperate and
consult with PNT with respect to each of the foregoing matters.
(2) The SUG Meeting for the purpose of securing the SUG Shareholders'
Approval, including any adjournments thereof, will be held on such date or
dates as PNT and SUG mutually determine.
(n) SUG Disclosure Schedule. On the date hereof, SUG has delivered to PNT
the SUG Disclosure Schedule, accompanied by a certificate signed by an
executive officer of SUG stating that the SUG Disclosure Schedule is being
delivered pursuant to this Section 6.2(n). The SUG Disclosure Schedule
constitutes an integral part of this Agreement and modifies the
representations, warranties, covenants or agreements of SUG contained herein
to the extent that such representations, warranties, covenants or agreements
expressly refer to the SUG Disclosure Schedule.
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(o) Conduct of the Business Prior to the Closing Date. Except as
contemplated in this Agreement, as required by law or regulation or as
otherwise expressly consented to in writing by PNT which consent will not be
unreasonably withheld, prior to the Closing, SUG will:
(1) Not make or permit any material change in the general nature of its
business;
(2) Maintain its present operations in the Ordinary Course of Business in
accordance with prudent business judgment and consistent with past practice
and policy, and maintain its assets in good repair, order and condition,
reasonable wear and tear excepted, subject to retirements in the Ordinary
Course of Business;
(3) Preserve SUG as an ongoing business and use reasonable efforts to
maintain the goodwill associated with SUG; and
(4) Preserve all of SUG's franchises, tariffs, certificates of public
convenience and necessity, licenses, authorizations and other governmental
rights and permits.
(p) Access to SUG's Offices, Properties and Records; Updating Information.
(1) From and after the date hereof and until the Closing Date, SUG and its
Subsidiaries shall permit PNT and its Representatives to have, on reasonable
notice and at reasonable times, reasonable access to such of the offices,
properties and employees of SUG and its Subsidiaries, and shall disclose, and
make available to PNT and its Representatives all books, papers and records to
the extent that they relate to the ownership, operation, obligations and
liabilities of or pertaining to SUG, its Subsidiaries and their respective
businesses and assets. Without limiting the application of the Confidentiality
Agreement, all documents or information furnished by SUG and its Subsidiaries
hereunder shall be subject to the Confidentiality Agreement.
(2) SUG will notify PNT as promptly as practicable of any significant
change in the Ordinary Course of Business or operation of SUG or any of its
Subsidiaries and of any material complaints, investigations or hearings (or
communications indicating that the same may be contemplated) by any
Governmental Body, or the institution or overt threat or settlement of any
material Proceeding involving or affecting SUG or any of its Subsidiaries or
the transactions contemplated by this Agreement, and shall use reasonable
efforts to keep PNT fully informed of such events and permit PNT's
Representatives access to all materials prepared in connection therewith
consistent with any applicable Legal Requirement or Contract.
(3) As promptly as practicable after PNT's request, SUG will furnish such
financial and operating data and other information pertaining to SUG, its
Subsidiaries and their respective businesses and assets as PNT may reasonably
request; provided, however, that nothing herein will obligate SUG or any of
its Subsidiaries to take actions that would unreasonably disrupt its Ordinary
Course of Business or violate the terms of any Legal Requirement or Contract
to which SUG or any of its Subsidiaries is a party or to which any of its
assets is subject in providing such information, or to incur any costs with
respect to PNT's external auditors (or SUG's external auditors in the event a
report by such auditors is requested by PNT) providing accounting services
with respect to issuing an auditor's report required by or for PNT.
Section 6.3 Additional Agreements.
(a) The Registration Statement, the PNT Proxy Statement and the SUG Proxy
Statement. As soon as practicable after the date hereof, PNT and SUG shall
take such reasonable steps as are necessary for the prompt preparation and
filing with the SEC of (i) the PNT Proxy Statement by PNT, (ii) the SUG Proxy
Statement by SUG and (iii) the Registration Statement, which will include
information contained in the PNT Proxy Statement, by SUG. The foregoing shall
include without limitation: (i) obtaining and furnishing the information
required to be included therein, (ii) after consultation between PNT and SUG,
responding promptly to any comments made by the SEC with respect to the PNT
Proxy Statement, the SUG Proxy Statement and the Registration Statement and
any amendments and preliminary version thereof and (iii) causing the
Registration Statement to become effective, the PNT Proxy Statement to be
mailed to PNT's shareholders at the earliest practicable date and the SUG
Proxy Statement to be mailed to SUG's shareholders at the earliest practicable
date. PNT agrees, as to
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information with respect to PNT, its officers, directors, shareholders and
Subsidiaries contained in the Registration Statement, the PNT Proxy Statement
and the SUG Proxy Statement, and SUG agrees, as to information with respect to
SUG, its officers, directors, shareholders and Subsidiaries contained in the
Registration Statement, the PNT Proxy Statement and the SUG Proxy Statement,
that such information, in the case of the PNT Proxy Statement at the time of
the mailing of the PNT Proxy Statement and (as then amended or supplemented)
at the time of the PNT Meeting, in the case of the SUG Proxy Statement, at the
time of the mailing of the SUG Proxy Statement and (as then amended or
supplemented) at the time of the SUG Meeting or in the case of the
Registration Statement at the time of the mailing of the PNT Proxy Statement
(as then amended or supplemented), at the time of the PNT Meeting and at the
effective time of the Registration Statement, will not contain any untrue
statement of material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading. No representation, warranty, covenant or agreement
is made by or on behalf of PNT with respect to information supplied by any
other party for inclusion in the PNT Proxy Statement, the SUG Proxy Statement
or the Registration Statement. No representation, warranty, covenant or
agreement is made by or on behalf of SUG with respect to information supplied
by any other party for inclusion in the PNT Proxy Statement, the SUG Proxy
Statement or the Registration Statement. No filing of, or amendment or
supplement to, the PNT Proxy Statement, the SUG Proxy Statement or the
Registration Statement shall be made by any party hereto without providing the
other party with the opportunity to review and comment thereon (except for any
ongoing SEC reporting required of SUG, PNT or PG Energy that will be
incorporated by reference). If at any time prior to the Effective Time any
information relating to any party hereto or any of their respective officers,
directors, shareholders or Subsidiaries, should be discovered by any party
hereto which should be set forth in an amendment or supplement to the PNT
Proxy Statement, the SUG Proxy Statement or the Registration Statement so that
the PNT Proxy Statement, the SUG Proxy Statement or the Registration Statement
would not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other party hereto and an
appropriate amendment or supplement describing such information shall be
promptly prepared, filed with the SEC and, to the extent required by law,
disseminated to the shareholders of PNT and/or the shareholders of SUG, as may
be necessary.
(b) Further Assurances. Each of SUG, PNT and any Acquired Company agrees to
take all such reasonable and lawful action as may be necessary or appropriate
in order to effectuate the Merger in accordance with this Agreement as
promptly as possible. If, at any time after the Effective Time, any such
further action is necessary or desirable to carry out the purpose of this
Agreement and to vest PNT or SUG with full right, title and possession to all
assets, property, rights, privileges, powers and franchises of the Acquired
Companies, PNT's shareholders and the officers and directors of the Acquired
Companies immediately prior to the Effective Time are fully authorized in the
name of their respective corporations or otherwise to take, and will take, all
such lawful and necessary action.
ARTICLE VII
CONDITIONS
Section 7.1 Conditions to SUG's Obligation to Effect the Merger. The
obligation of SUG to effect the transactions contemplated by this Agreement
shall be subject to fulfillment at or prior to the Closing of the following
conditions:
(a) Representations and Warranties True as of the Closing Date. PNT's
representations and warranties in this Agreement shall have been accurate in
all material respects as of the date of this Agreement and shall be accurate
in all material respects as of the Closing Date as if made on the Closing
Date, subject to changes expressly contemplated and permitted by this
Agreement; provided that, any such representation or warranty that is
qualified by any standard of materiality (including, but not limited to, PNT
Material Adverse Effect) shall have then been, and shall then be, accurate in
all respects.
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(b) Compliance with Agreements. The covenants, agreements and conditions
required by this Agreement to be performed and complied with by any of the
Acquired Companies shall have been performed and complied with in all material
respects prior to or at the Closing Date.
(c) Certificate. PNT shall execute and deliver to SUG a certificate of an
authorized officer of PNT, dated the Closing Date, stating that the conditions
specified in Sections 7.1(a) and 7.1(b) of this Agreement applicable to the
Acquired Companies have been satisfied.
(d) Governmental Approvals. All approvals, consents, opinions or rulings of
all Governmental Bodies required in order to consummate the transactions
contemplated hereby shall have been obtained by Final Order in such form as
is, and with no conditions that are, individually or in the aggregate,
reasonably likely to have a PNT Material Adverse Effect or a material adverse
effect on the business, operations, properties, financial condition or results
of operations of the Surviving Corporation. The applicable waiting period
under the HSR Act with respect to the transactions contemplated hereby shall
have expired or have been terminated.
(e) Third Party Consents. Each of the consents required under Section 5.4
of this Agreement shall have been obtained to the reasonable satisfaction of
SUG, other than any such consents which, if not obtained, are not,
individually or in the aggregate, reasonably likely to result in a PNT
Material Adverse Effect after the Closing. In addition, all consents and
approvals required, under the terms of any note, bond or indenture listed on
the schedule to be delivered pursuant to Section 5.4, to which any of the
Acquired Companies is a party, shall have been obtained.
(f) Injunctions. On the Closing Date, there shall be no Orders which
operate to restrain, enjoin or otherwise prevent the consummation of this
Agreement or the Mergers.
(g) Resignations. Each director of each Acquired Company shall, if
requested by SUG, resign any position as a director of an Acquired Company
effective as of the Closing Date in accordance with such Subsidiary's
Organizational Documents and applicable provisions of the PBCL; provided that,
such resignations shall not cause the termination of any such Person's
employment as an employee of an Acquired Company or reduce any such employee's
then current level of compensation.
(h) Opinion of Tax Counsel. On the Closing Date, SUG shall have received
from Roberts and Holland, L.L.P., special tax counsel to SUG, an opinion to
the effect that the Merger will constitute a "reorganization" within the
meaning of IRC Section 368(a)(1)(A), that the Honesdale Merger and the PG
Energy Merger will each constitute "reorganizations" within the meaning of IRC
Section 368(a)(1)(A) or "liquidations" within the meaning of IRC Section 332,
and that no gain or loss will be recognized by SUG or any of the Acquired
Companies with respect to the Mergers.
(i) Shareholder Approvals. The SUG Shareholders' Approval and the PNT
Shareholders' Approval shall have been obtained, and all of the outstanding
shares of the PG Preferred Stock shall have been redeemed in accordance with
the Organizational Documents of PG Energy, purchased by PNT or repurchased by
PG Energy.
(j) Dissenter's Rights. Demand for payment of dissenters' rights by
shareholders of PNT with respect to the Merger shall not equal or exceed seven
percent of the outstanding shares of PNT Common Stock entitled to vote
thereon.
(k) Rule 145 Letters. Each Rule 145 Affiliate shall have executed and
delivered to SUG a Rule 145 Letter, in form and substance reasonably
satisfactory to SUG and its counsel.
(l) Registration Statement. The Registration Statement shall have become
effective, no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been initiated or threatened by the SEC.
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(m) Listing of SUG Common Stock. The shares of SUG Common Stock
constituting the Stock Consideration and any other shares of SUG Common Stock
required to be issued or reserved hereunder to consummate the transactions
contemplated by this Agreement shall have been authorized for listing, upon
official notice of issuance, on the NYSE.
Section 7.2 Conditions to PNT's Obligations to Effect the Mergers. The
obligation of PNT to effect the transactions contemplated by this Agreement
shall be subject to fulfillment at or prior to the Closing of the following
conditions:
(a) Representations and Warranties True as of the Closing Date. SUG's
representations and warranties in this Agreement shall have been accurate in
all material respects as of the date of this Agreement and shall be accurate
in all material respects as of the Closing Date as if made on the Closing
Date, subject to changes expressly contemplated and permitted by this
Agreement; provided that, any such representation or warranty that is
qualified by any standard of materiality (including, but not limited to, SUG
Material Adverse Effect) shall have then been, and shall then be, accurate in
all respects.
(b) Compliance with Agreements. The covenants, agreements and conditions
required by this Agreement to be performed and complied with by SUG shall have
been performed and complied with in all material respects prior to or at the
Closing Date.
(c) Certificate. SUG shall execute and deliver to PNT a certificate of an
authorized officer of SUG, dated the Closing Date, stating that the conditions
specified in Sections 7.2(a) and 7.2(b) of this Agreement applicable to SUG
have been satisfied.
(d) Governmental Approvals. All approvals, consents, opinions or rulings of
all Governmental Bodies required in order to consummate the transactions
contemplated hereby shall have been obtained by Final Order in such form as
is, and with no conditions that are, individually or in the aggregate,
reasonably likely to have a material adverse effect on the business,
operations, properties, financial condition or results of operations of the
Surviving Corporation. The applicable waiting period under the HSR Act with
respect to the transactions contemplated hereby shall have expired or have
been terminated.
(e) Injunctions. On the Closing Date, there shall be no Orders which
operate to restrain, enjoin or otherwise prevent the consummation of this
Agreement or the Mergers.
(f) Opinion of Counsel. On the Closing Date, PNT shall have received from
Hughes Hubbard & Reed LLP, counsel to PNT, an opinion to the effect that the
Merger will be treated for federal income tax purposes as a "reorganization"
within the meaning of IRC Section 368(a), and that no gain or loss will be
recognized for federal income tax purposes by the shareholders of PNT upon
their receipt of the Merger Consideration, except that any realized gain will
be recognized to the extent of the amount of cash received.
(g) Shareholder Approvals. The SUG Shareholders' Approval and the PNT
Shareholders' Approval shall have been obtained.
(h) Registration Statement. The Registration Statement shall have become
effective, no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been initiated or threatened by the SEC.
(i) Listing of SUG Common Stock. The shares of SUG Common Stock
constituting the Stock Consideration and any other shares of SUG Common Stock
required to be issued or reserved hereunder to consummate the transactions
contemplated by this Agreement shall have been authorized for listing, upon
official notice of issuance, on the NYSE.
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ARTICLE VIII
TERMINATION
Section 8.1 Termination Rights. This Agreement may be terminated in its
entirety at any time prior to the Closing:
(a) By the mutual written consent of SUG and PNT;
(b) By PNT, on the one hand, or SUG, on the other hand, in writing if there
shall be in effect a non-appealable order of a court of competent jurisdiction
prohibiting the consummation of the Mergers in accordance with this Agreement;
(c) By PNT if there is a breach of any representation, warranty, covenant
or agreement of SUG, which breach cannot be cured and would cause the
conditions set forth in Section 7.2(a) to be incapable of being satisfied;
(d) By SUG if there is a breach of any representation, warranty, covenant
or agreement of PNT, which breach cannot be cured and would cause the
conditions set forth in Section 7.1(a) to be incapable of being satisfied;
(e) By PNT, by written notice to SUG in accordance with Section 6.1(h)(2);
provided, however, that the termination described in this clause (e) shall not
be effective unless and until PNT shall have paid SUG the fee described in
Section 8.3(a) and PNT has substantially contemporaneously entered into a
definitive agreement with respect to a Business Combination Proposal;
(f) By PNT, in writing if the PNT Shareholders' Approval is not obtained at
the PNT Meeting or the SUG Shareholders' Approval is not obtained at the SUG
Meeting or by SUG in writing if the PNT Shareholders' Approval is not obtained
at the PNT Meeting provided that there has not been a material
misrepresentation or a material breach of covenant, warranty or agreement
contained herein on the part of the party asserting its right to terminate
pursuant to this Section 8.1(f);
(g) By PNT, if the Average Trading Price of the SUG Common Stock as of the
Closing is lower than $17.30000;
(h) By SUG, by written notice to PNT, if the Board of Directors of PNT or
any committee thereof (i) withdraws or modifies, or proposes publicly to
withdraw or modify, in a manner adverse to SUG, the approval or recommendation
by the Board of Directors or such committee of the Merger or this Agreement,
(ii) approves or recommends, or proposes publicly to approve or recommend, a
Business Combination, (iii) causes PNT to enter into a definitive agreement
related to any Business Combination, (iv) resolves to take any of the actions
specified in clause (i), (ii) and (iii) above or (v) fails by the Effective
Time to cause PG Energy to redeem or repurchase all of the outstanding shares
of PG Preferred Stock;
(i) By SUG, by written notice to PNT, if a third party, including a group
(as defined under the Exchange Act) acquires securities representing greater
than 50% of the voting power of the outstanding voting securities of PNT; or
(j) By either party in writing at any time after 5:00 p.m., Eastern Time on
June 7, 2000, (the "Initial Termination Date") if the Closing has not occurred
prior thereto; provided, however, that the right to terminate this Agreement
under this Section 8.1(j) will not be available to any party that is in
material breach of its representations, warranties, covenants or agreements
contained herein; and provided, further, that if on the Initial Termination
Date (i) the conditions to closing set forth in Sections 7.1(d) and 7.2(d)
shall not have been fulfilled or (ii) any approval or authorization of any
Governmental Body required in connection with the consummation of the Mergers
shall have not been obtained and such approval or authorizations shall not
have become a Final Order, but all other conditions to Closing shall be
fulfilled or shall be capable of being fulfilled, then the Initial Termination
Date will be extended to December 7, 2000.
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Section 8.2 Effect of Termination. If this Agreement is terminated pursuant
to Section 8.1, this Agreement shall be of no further force and effect and
there shall be no further liability hereunder on the part of any party or its
affiliates, directors, officers, shareholders, agents or other
representatives; provided, however, that no such termination shall relieve any
party of liability for any claims, damages or losses suffered by the other
party as a result of the negligent or willful failure of a party to perform
any obligations required to be performed by it hereunder on or prior to the
date of termination. Notwithstanding anything to the contrary contained
herein, the provisions of Section 8.2, Sections 10.1 through 10.6 and Sections
10.8 through 10.11 of this Agreement shall survive any termination of this
Agreement. Notwithstanding anything to the contrary contained herein, but
subject to Section 7.1(i), Section 8.1(h) and Section 8.2, the failure by PG
Energy to obtain the approval of the transactions contemplated by this
Agreement by the holders of either series of PG Preferred Stock in the event
such approval may be determined to be required shall not constitute a breach
by PNT of any of its representations, warranties or covenants contained
herein.
Section 8.3 Termination Fee; Expenses.
(a) Termination Fee. If this Agreement is terminated pursuant to Section
8.1(e), 8.1(h) or 8.1(i), then PNT shall pay to SUG promptly (but not later
than five business days after notice is received from PNT) an amount equal to
$10 million in cash.
(b) Expenses. The parties agree that the agreements contained in this
Section 8.3 are an integral part of the transactions contemplated by this
Agreement and constitute liquidated damages and not a penalty. Notwithstanding
anything to the contrary contained in this Section 8.3, if PNT fails to pay
promptly to SUG the fee due under Section 8.3(a), in addition to any amounts
paid or payable pursuant to Section 8.3(a), PNT shall pay the costs and
expenses (including legal fees and expenses) in connection with any action,
including the filing of any lawsuit or other legal action, taken to collect
payment, together with interest on the amount of any unpaid fee calculated
using an annual percentage rate of interest equal to the prime rate published
in the Wall Street Journal on the date (or preceding business day if such date
is not a business day) such fee was required to be paid, compounded on a daily
basis using a 360-day year.
ARTICLE IX
INDEMNIFICATION; REMEDIES
Section 9.1 Directors' and Officer's Indemnification.
(a) Indemnification and Insurance. For a period of six years after the
Effective Time, the Surviving Corporation will indemnify and hold harmless the
present and former officers and directors of PNT and its Subsidiaries (the
"Indemnified Parties") in respect of acts or omissions occurring prior to the
Effective Time to the extent provided under PNT's certificate of incorporation
and bylaws in effect on the date hereof; provided, however, that if any claim
or claims are asserted or made within such six-year period, all rights to
indemnification in respect of such claims shall continue until the final
disposition of any and all such claims. For six years after the Effective
Time, the Surviving Corporation will use its reasonable best efforts to
provide officers' and directors' liability insurance in respect of acts or
omissions occurring prior to the Effective Time covering each such person
currently covered by PNT's officers' and directors' liability insurance policy
on terms with respect to coverage and amount no less favorable than those of
such policy in effect on the date hereof; provided that in satisfying its
obligation under this Section, if the annual premiums of such insurance
coverage exceed 200% of the previous year's premiums, the Surviving
Corporation will be obligated to obtain a policy with the best coverage
available, in the reasonable judgment of the Board of Directors of the
Surviving Corporation for a cost not exceeding such amount.
(b) Successors. In the event the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other Person
and is not the continuing or surviving corporation or entity of such
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consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any Person, then and in either such case, proper
provisions must be made so that the successors and assigns of the Surviving
Corporation will assume the obligations set forth in this Section 9.1.
(c) Survival of Indemnification. To the fullest extent permitted by law,
from and after the Effective Time, all rights to indemnification as of the
date hereof in favor of the employees, agents, directors and officers of any
Acquired Company with respect to their activities as such prior to the
Effective Time, as provided in their respective Organizational Documents in
effect on the date hereof, or otherwise in effect on the date hereof, will
survive the Mergers and will continue in full force and effect except for
amendments to make changes permitted by law that would enhance the rights of
past or present officers and directors to indemnification or advancement of
expenses in respect of acts or omissions occurring prior to the Effective
Time. for a period of not less than six years from the Effective Time (or, in
the case of matters occurring prior to the Effective Time which have not been
resolved prior to the sixth anniversary of the Effective Time, until such
matters are finally resolved).
Section 9.2 Representations and Warranties. Each and every representation
and warranty of either party shall expire at, and be terminated and
extinguished with, the Effective Time.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Expenses. Each of the parties will pay all costs and expenses
of its performance of and compliance with this Agreement, except (i) as
provided in Section 8.3 and as expressly provided otherwise herein, (ii) PNT
shall pay all fees and expenses of counsel for PNT, (iii) SUG will pay all
real estate transfer taxes and real estate recording fees, if any, including
expenses of counsel associated with real estate title, transfer and recording
issues in connection with the Mergers, and all filing and application fees
paid to Governmental Bodies in connection with the Mergers and (iv) SUG and
PNT will each pay half of the combined costs of printing and mailing to the
PNT stockholders the prospectus that is a part of the Registration Statement
and the Proxy Statement.
Section 10.2 Notices. All notices, requests and other communications
hereunder shall be in writing and shall be deemed to have been given upon
receipt if either (a) personally delivered, (b) sent by prepaid first class
mail, and registered or certified and a return receipt requested or (c) by
facsimile telecopier with completed transmission acknowledged:
if to SUG, to:
Southern Union Company
504 Lavaca Street, Suite 800
Austin, Texas 78701
Attention: Peter H. Kelley
President and Chief Operating Officer
Telecopier: (512) 477-3879
with a copy to:
Fleischman and Walsh, L.L.P.
Suite 600
1400 Sixteenth Street, N.W.
Washington, D.C. 20036
Attention: Stephen A. Bouchard, Esq.
Telecopier: (202) 265-5706
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if to PNT, to:
Pennsylvania Enterprises, Inc.
One PEI Center
Wilkes-Barre, Pennsylvania 18711-0601
Attention: Thomas F. Karam
President and Chief Executive Officer
Telecopier: (570) 829-8900
with a copy to:
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, New York 10004-1482
Attention: Garett J. Albert, Esq.
Telecopier: (212) 422-4726
or at such other address or number as shall be given in writing by a party to
the other parties.
Section 10.3 Assignment. This Agreement may not be assigned by any party
hereto without the prior written consent of the other parties hereto.
Section 10.4 Successor Bound. Subject to the provisions of Section 10.3,
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns.
Section 10.5 Governing Law; Forum; Consent to Jurisdiction. This Agreement
shall be construed in accordance with and governed by the laws of the State of
New York except to the extent that the terms and consummation of the Mergers
are subject to the DGCL or the PBCL. Each party to this Agreement hereby
irrevocably and unconditionally (i) consents to submit to the exclusive
jurisdiction of the federal courts of the Southern District of New York in the
county of New York and the borough of Manhattan for any proceeding arising in
connection with this Agreement (and each such party agrees not to commence any
such proceeding, except in such courts), (ii) to the extent such party is not
a resident of the State of New York, agrees to appoint an agent in the State
of New York as such party's agent for acceptance of legal process in any such
proceeding against such party with the same legal force and validity as if
served upon such party personally within the State of New York, and to notify
promptly each other party hereto of the name and address of such agent, (iii)
waives any objection to the laying of venue of any such proceeding in the
federal courts of the Southern District of New York in the county of New York
and the borough of Manhattan, and (iv) waives, and agrees not to plead or to
make, any claim that any such proceeding brought in any federal court of the
Southern District of New York has been brought in an improper or otherwise
inconvenient forum.
Section 10.6 Waiver of Trial By Jury. EACH PARTY TO THIS AGREEMENT HEREBY
WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH ANY SUCH PARTY MAY
BE PARTIES ARISING OUT OF OR IN ANY WAY PERTAINING TO (i) THIS AGREEMENT, (ii)
THE MERGERS, (iii) THE CONFIDENTIALITY AGREEMENT OR (iv) ANY RELATED
DOCUMENTS. IT IS AGREED AND UNDERSTOOD THAT THIS WAIVER CONSTITUTES A WAIVER
OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES WHO ARE NOT PARTIES TO THIS
AGREEMENT. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY EACH
PARTY HERETO, AND EACH SUCH PARTY HEREBY REPRESENTS AND WARRANTS THAT NO
REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY PERSON TO INDUCE THIS
WAIVER OR TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. EACH
PARTY TO THIS AGREEMENT FURTHER REPRESENTS AND WARRANTS THAT EACH SUCH PARTY
HAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF
THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF EACH SUCH PARTY'S OWN
FREE WILL, AND THAT EACH SUCH PARTY HAS HAD THE OPPORTUNITY TO DISCUSS THIS
WAIVER WITH COUNSEL.
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Section 10.7 Cooperation; Further Documents.
(a) Each of the parties hereto agrees to use its reasonable best efforts to
take or cause to be taken all action, and to do or cause to be done all things
necessary, proper or advisable under applicable laws, regulations or
otherwise, to consummate and to make effective the transactions contemplated
by this Agreement, including, without limitation, the timely performance of
all actions and things contemplated by this Agreement to be taken or done by
each of the parties hereto.
(b) Each party shall cooperate with the other party in such other party's
discharge of the obligations hereunder, which shall include making reasonably
available to the other party such of its personnel as have relevant
information, with respect thereto.
Section 10.8 Construction of Agreement. The terms and provisions of this
Agreement represent the results of negotiations between PNT and SUG, each of
which has been represented by counsel of its own choosing, and neither of
which has acted under duress or compulsion, whether legal, economic or
otherwise. Accordingly, the terms and provisions of this Agreement shall be
interpreted and construed in accordance with their usual and customary
meanings, and PNT and SUG hereby waive the application in connection with the
interpretation and construction of this Agreement of any rule of law to the
effect that ambiguous or conflicting terms or provisions contained in this
Agreement shall be interpreted or construed against the party whose attorney
prepared the executed draft or any earlier draft of this Agreement.
Section 10.9 Publicity; Organizational and Operational Announcements. No
party hereto shall issue, make or cause the publication of any press release
or other announcement with respect to this Agreement or the transactions
contemplated hereby, or otherwise make any disclosures relating thereto,
without the consent of the other party, such consent not to be unreasonably
withheld or delayed; provided, however, that such consent shall not be
required where such release or announcement is required by applicable law or
the rules or regulations of a securities exchange, in which event the party so
required to issue such release or announcement shall endeavor, wherever
possible, to furnish an advance copy of the proposed release to the other
party.
Section 10.10 Waiver. Except as otherwise expressly provided in this
Agreement, neither the failure nor any delay on the part of any party to
exercise any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise or waiver of any such right,
power or privilege preclude any other or further exercise thereof, or the
exercise of any other right, power or privilege available to each party at law
or in equity.
Section 10.11 Parties in Interest. This Agreement (including the documents
and instruments referred to herein) is not intended to confer upon any Person,
other than the parties hereto and their successors and permitted assigns, any
rights or remedies hereunder, except that the parties hereto agree and
acknowledge that the agreements and covenants contained in Section 6.2(g) are
intended for the direct and irrevocable benefit of each director of PNT
selected by SUG prior to the Closing Date pursuant thereto, and that the
agreements and covenants contained in Section 9.1 are intended for the direct
and irrevocable benefit of the Indemnified Parties described therein and their
respective heirs or legal representatives (each such director or Indemnified
Party, a "Third Party Beneficiary"), and that each such Third Party
Beneficiary, although not a party to this Agreement, shall be and is a direct
and irrevocable third party beneficiary of such agreements and covenants and
shall have the right to enforce such agreements and covenants against the
Surviving Corporation in all respects fully and to the same extent as if such
Third Party Beneficiary were a party hereto.
Section 10.12 Specific Performance. The parties hereto agree that
irreparable damage would occur to a party in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that any
party shall be entitled to an injunction or injunctions to prevent breaches of
this agreement by any other party and to enforce specifically, to the fullest
extent available, the terms and provisions hereof, including each party's
obligation to close, in any court of the United States or any state having
jurisdiction, this being in addition to any other right or remedy to which any
party is entitled at law or in equity.
A-43
<PAGE>
Section 10.13 Section and Paragraph Headings. The section and paragraph
headings in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
Section 10.14 Amendment. This Agreement may be amended only by an
instrument in writing executed by the parties hereto.
Section 10.15 Entire Agreement. This Agreement, the exhibits, annexes and
schedules hereto and the documents specifically referred to herein and the
Confidentiality Agreement constitute the entire agreement, understanding,
representations and warranties of the parties hereto.
Section 10.16 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
A-44
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
SOUTHERN UNION COMPANY
/s/ Peter H. Kelley
By: _________________________________
Name: Peter H. Kelley
Title:President and Chief Operating
Officer
PENNSYLVANIA ENTERPRISES, INC.
/s/ Thomas F. Karam
By: _________________________________
Name: Thomas F. Karam
Title:President and Chief Executive
Officer
A-45
<PAGE>
APPENDIX B
[Letterhead of Legg Mason Wood Walker, Incorporated]
June 7, 1999
The Board of Directors
Pennsylvania Enterprises, Inc.
One PEI Center
Wilkes-Barre, Pennsylvania 18711-0601
Attention: Thomas F. Karam
Members of the Board of Directors:
We are advised that Pennsylvania Enterprises, Inc. (collectively,
"Pennsylvania Enterprises" or the "Company") has entered into an Agreement of
Merger (the "Agreement") with Southern Union Company ("Southern Union"),
pursuant to which Pennsylvania Enterprises will merge into Southern Union and
each outstanding share of Pennsylvania Enterprises common stock will be
converted into the right to receive $32.00 in value of common stock of Southern
Union and $3.00 in cash on terms and conditions as more fully set forth in the
Agreement (the transaction is referred to herein as the "Transaction").
You have requested our opinion, as investment bankers, as to the fairness to
the shareholders of the Company, from a financial point of view, of the
consideration to be received by the shareholders of the Company in the
Transaction.
For purposes of rendering this opinion, we have, among other things:
(i) reviewed the form of the definitive Agreement and certain related
documents;
(ii) reviewed the audited consolidated financial statements of
Pennsylvania Enterprises for the twelve month periods ended December
31, 1998, 1997, 1996 and 1995;
(iii) reviewed the unaudited financial statements of Pennsylvania
Enterprises for the three month period ended March 31, 1999;
(iv) reviewed the audited consolidated financial statements of Southern
Union for the twelve month periods ended June 30, 1998, 1997, 1996
and 1995;
(v) reviewed the unaudited financial statements of Southern Union for
the nine month period ended March 31, 1999;
(vi) reviewed certain publicly available information concerning
Pennsylvania Enterprises and Southern Union;
(vii) reviewed forecast financial statements of Pennsylvania Enterprises
and Southern Union furnished to us by the senior management of
Pennsylvania Enterprises and Southern Union;
(viii) reviewed and analyzed certain publicly available financial and stock
market data with respect to operating statistics relating to
selected public companies that we deemed relevant to our inquiry;
(ix) reviewed the reported prices and trading activity of the publicly-
traded securities of Pennsylvania Enterprises and Southern Union;
(x) analyzed certain publicly available information concerning the terms
of selected merger and acquisition transactions that we considered
relevant to our inquiry;
(xi) held meetings and discussions with certain officers and employees of
Pennsylvania Enterprises and Southern Union concerning the
operations, financial condition and future prospects of Pennsylvania
Enterprises and Southern Union; and
(xii) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed necessary or
appropriate for purposes of our opinion.
B-1
<PAGE>
In connection with our review, we have assumed and relied upon the accuracy
and completeness of all financial and other information supplied to us by
Southern Union and Pennsylvania Enterprises or publicly available, as we have
not independently verified such information. We have further relied upon the
assurances of management of Southern Union and Pennsylvania Enterprises as they
are unaware of any facts that would make such information incomplete or
misleading. We also have relied upon the managements of Southern Union and
Pennsylvania Enterprises, as to the reasonableness and achievability of the
financial projections (and the assumptions and bases therein) provided to us or
prepared for Pennsylvania Enterprises and Southern Union, and we have assumed
that such projections have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of management as to the future
operating performance of Pennsylvania Enterprises and Southern Union, including
without limitation the tax benefits, cost savings and operating synergy to be
enjoyed by Southern Union after the Transaction. Neither Southern Union nor
Pennsylvania Enterprises publicly discloses internal management projections of
the type provided to Legg Mason in connection with Legg Mason's review of the
Transaction. Such projections were not prepared with the expectation of public
disclosure. The projections were based on numerous variables and assumptions
that are inherently uncertain, including without limitation, factors related to
general economic and competitive conditions. Accordingly, actual results could
vary significantly from those set forth in such projections.
We have not been requested to make, and have not made, an independent
appraisal or evaluation of the assets, properties or liabilities of
Pennsylvania Enterprises and we have not been furnished with any such appraisal
or evaluation. We have not reviewed any of the books and records of
Pennsylvania Enterprises or assumed any responsibility for conducting a
physical inspection of the properties or facilities of Pennsylvania
Enterprises. Further, this opinion is based upon prevailing market conditions
and other circumstances and conditions existing on the date hereof. We have
assumed that the Transaction will be consummated on the terms and conditions
described in the form of the Agreement reviewed by us. It is understood that
subsequent developments may affect the conclusions reached in this opinion and
that we do not have any obligation to update, revise or reaffirm this opinion.
It is understood that this letter is directed to the Company's Board of
Directors. The opinion expressed herein is provided for the use of the
Company's Board of Directors in its evaluation of the proposed Transaction and
does not constitute a recommendation to any shareholder of the Company either
of the Transaction or as to how such shareholder should vote on or otherwise
respond to the Transaction. In addition, this letter does not constitute a
recommendation of the Transaction over any other alternative transaction which
may be available to the Company and does not address the underlying business
decision of the Board of Directors of the Company to proceed with or effect the
Transaction. This letter is not to be quoted or referred to, in whole or in
part, in any registration statement, prospectus or proxy statement, or in any
other document used in connection with the offering or sale of securities, nor
shall this letter be used for any other purposes, without the prior written
consent of Legg Mason Wood Walker, Incorporated; provided that this Opinion may
be included in its entirety in any filing made by the Company with the
Securities and Exchange Commission with respect to the Transaction.
In the past, Legg Mason has provided investment banking services to
Pennsylvania Enterprises and received a fee for its services. In addition, Legg
Mason will receive a separate fee for providing this Opinion to the Board of
Directors of Pennsylvania Enterprises.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the consideration to be received by the shareholders of
Pennsylvania Enterprises in the Transaction is fair to such shareholders from a
financial point of view.
Very truly yours,
Legg Mason Wood Walker, Incorporated
By:
/s/ Alexsander M. Stewart
__________________________________
Alexsander M. Stewart
Managing Director
B-2
<PAGE>
APPENDIX C
[Letterhead of Donaldson, Lufkin & Jenrette Securities Corporation]
As of June 6, 1999
Board of Directors
Southern Union Company
504 Lavaca Street--Eighth Floor
Austin, Texas 78701
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to Southern Union Company ("SUG" or the "Company") of the consideration to
be paid by the Company to the stockholders of Pennsylvania Enterprises, Inc.
("PNT") pursuant to the terms of the Agreement of Merger, to be dated as of
June 7, 1999 (the "Agreement"), by and between the Company and PNT and pursuant
to which PNT will be merged (the "Merger") with and into SUG.
Pursuant to the Agreement, at the effective time of the Merger, each issued
and outstanding share of PNT common stock (other than shares with respect to
which dissenter rights have been perfected under applicable law), together with
the associated stock purchase rights, will be converted into the right to
receive (i) that number of whole shares of SUG common stock equal to $32.00
divided by the Conversion Price (as defined in the Agreement) (the "Exchange
Ratio"), subject to a collar (the "Collar") which provides that the Conversion
Price shall not be more than $22.71 nor less than $19.46 (such amounts
representing 105% and 90%, respectively, of the closing price of SUG common
stock on June 4, 1999), with a cash payment to be made by SUG in lieu of any
fractional shares, and (ii) an amount in cash (the "Cash Consideration"),
without interest, equal to the sum of $3.00 plus, if the Conversion Price
(notwithstanding the operation of the Collar) is less than $19.46, the product
of (x) the amount, not to exceed $2.16, by which $19.46 exceeds the Conversion
Price and (y) the Exchange Ratio (the maximum cash amount potentially payable
pursuant to this clause (ii) being $6.55 per share of PNT common stock). The
Exchange Ratio, as bound by the Collar, and the Cash Consideration are
collectively referred to herein as the Merger Consideration.
In arriving at our opinion, we have reviewed the draft dated June 6, 1999 of
the Agreement. We also have reviewed financial and other information that was
publicly available or furnished to us by the Company including information
provided during discussions with Company management. Included in the
information provided during discussions with management were certain financial
projections of PNT for the period beginning January 1, 1999 and ending December
31, 1999 prepared by the management of PNT and certain financial projections of
PNT and the Company for the period beginning January 1, 1999 and ending
December 31, 2003 prepared by the management of the Company. In addition, we
have compared certain financial and securities data of the Company and PNT with
various other companies whose securities are traded in public markets, reviewed
the historical stock prices and trading volumes of the common stock of PNT and
the Company, reviewed prices and premiums paid in certain other business
combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company and PNT or
their respective representatives, or that was otherwise reviewed by us and have
assumed that the Company is not aware of any information prepared by it or its
other advisors that might be material to our opinion that has not been made
available to us. In particular, we have relied upon the estimates of the
management of the Company of the operating synergies achievable as a result of
the Merger. With respect to the financial projections supplied to us, we have
relied on representations that they have been reasonably prepared on the basis
reflecting the best currently available estimates and judgments of the
management of PNT
C-1
<PAGE>
as to the future operating and financial performance of PNT and the best
currently available estimates and judgments of the management of the Company as
to the future operating and financial performance of the Company and PNT. We
have not assumed any responsibility for making any independent evaluation of
any assets or liabilities or for making any independent verification of any of
the information reviewed by us. We have relied as to certain legal matters on
advice of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligations to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which the Company's common stock will actually trade at any time. Our
opinion does not address the relative merits of the Merger and the other
business strategies being considered by the Company's Board of Directors, nor
does it address the Board's decision to proceed with the Merger. Our opinion
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. DLJ is
currently engaged by SUG to act as its exclusive financial advisor in
connection with another potential acquisition. DLJ expects to receive usual and
customary investment banking fees in connection with this assignment.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Merger Consideration to be paid by the Company pursuant
to the Agreement is fair to the Company from a financial point of view.
Very truly yours,
Donaldson, Lufkin & Jenrette Securities
Corporation
By:
/s/ John A. Cavalier
________________________________________
John A. Cavalier
Managing Director
C-2
<PAGE>
APPENDIX D
AGREEMENT AND IRREVOCABLE PROXY
AGREEMENT AND IRREVOCABLE PROXY, dated as of June 7, 1999, by and between
PENNSYLVANIA ENTERPRISES, INC., a Pennsylvania corporation ("PNT") and George
L. Lindemann, Dr. F.B. Lindemann, Adam M. Lindemann, George Lindemann, Jr. and
Sloan N. Lindemann (each a "Shareholder" and collectively the "Shareholders").
RECITALS:
WHEREAS, the Shareholders currently beneficially own (as such term is used
under the Securities Exchange Act of 1934, as amended, and the rules and
regulations issued thereunder) the shares of common stock, par value $1 per
share ("Shares"), of Southern Union Company, a Delaware corporation ("SUG")
shown on Schedule A.
WHEREAS, as a condition of entering into the Agreement of Merger, made as
of the 7th day of June, 1999, by and between SUG and PNT (the "Merger
Agreement"), PNT has requested that the Shareholders agree, and the
Shareholders have agreed to give PNT an irrevocable proxy, coupled with an
interest, to vote the Shares held by the Shareholders, as more fully set forth
herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereby agree as follows:
1. Grant of Irrevocable Proxy. Each Shareholder hereby grants to PNT an
irrevocable proxy, which proxy is coupled with an interest because of the
consideration recited herein, to exercise, at any time and from time to time,
all rights and powers of the Shareholder with respect to the Shares shown
opposite the Shareholder's name on Schedule A to vote, give approvals, and
receive and waive notices of meetings for the purpose of securing the approval
and adoption by the shareholders of SUG of the Merger Agreement and the
consummation of the transactions contemplated thereby and to prevent any
action that would prevent or hinder in any material respect such approval or
consummation. By giving this proxy each Shareholder hereby revokes any other
proxy granted by the Shareholder to vote any of the Shares in a manner
inconsistent with the foregoing grant. The power and authority hereby
conferred shall not be terminated by any act of the Shareholder or by
operation of law, by the dissolution of, by lack of appropriate power or
authority, or by the occurrence of any other event or events and shall be
binding upon all its successors and assigns. If after the execution of this
Agreement the Shareholder shall dissolve, cease to have appropriate power or
authority, or if any other such event or events shall occur, PNT is
nevertheless authorized and directed to vote the Shares in accordance with the
terms of this Agreement as if such dissolution, lack of appropriate power or
authority or other event or events had not occurred and regardless of notice
thereof.
2. Representations and Warranties of the Shareholders. Each Shareholder as
to such Shareholder hereby represents and warrants to, and covenants with, PNT
as follows, assuming with respect to the representations and warranties
contained in the first clause of subsection (b) and in all of subsection
(d) that this Agreement and the proxy granted hereby is valid under the law of
Delaware:
(a) The Shareholder beneficially owns with power to vote the number of
Shares shown opposite the Shareholder's name on Schedule A free and clear of
any and all claims, liens, charges, encumbrances, covenants, conditions,
restrictions, voting trust arrangements, options and adverse claims or rights
whatsoever, except as granted hereby or as would have no adverse effect on
this Agreement and/or the proxy granted hereby. The Shareholder does not own
of record or beneficially any shares of capital stock of SUG or other
securities representing or convertible into shares of capital stock of SUG
except as set forth in the preceding sentence, Shares purchased after the date
hereof which shall become subject to this Agreement and the proxy granted
hereby, and Shares which any of them may have the right to purchase upon
exercise of options or warrants;
D-1
<PAGE>
(b) The Shareholder has the full right, power and authority to enter into
this Agreement and to grant an irrevocable proxy to PNT with respect to the
Shares; there are no options, warrants, calls, commitments or agreements of
any nature whatsoever pursuant to which any person will have the right to
purchase or otherwise acquire the Shares owned by the Shareholder except as
would, if exercised, require such purchaser or acquiror to abide by this
Agreement and the proxy granted hereby with respect thereto; except as
provided in this Agreement, the Shareholder has not granted or agreed to grant
any proxy or entered into any voting trust, vote pooling or other agreement
with respect to the right to vote or give consents or approval of any kind as
to the Shares which proxy, trust, pooling or other agreement remains in effect
as of the date hereof and is in conflict with this Agreement or the proxy
granted hereby;
(c) The Shareholder is not a party to, subject to or bound by any agreement
or judgment, order, writ, prohibition, injunction or decree of any court or
other governmental body that would prevent the execution, delivery or
performance of this Agreement by the Shareholder or the exercise of proxy
rights by PNT with respect to the Shares;
(d) This Agreement has been duly and validly executed and delivered by the
Shareholder and constitutes a legal, valid and binding obligation of the
Shareholder, enforceable in accordance with its terms, subject only to (i) the
effect of bankruptcy, insolvency, reorganization or moratorium laws or other
laws generally affecting the enforceability of creditors' rights and (ii)
general equitable principles which may limit the right to obtain specific
performance or other equitable remedies; and
(e) the Shareholder will take all action necessary in order that its
representations and warranties set forth in this Agreement shall remain true
and correct.
3. Shareholders' Covenants. Each Shareholder shall not enter into any
voting trust agreement, give any proxy or other right to vote the Shares or
take any action that would limit the rights of any holder of the Shares to
exercise fully the right to vote such Shares that would be in conflict with
this Agreement or the proxy granted hereby.
4. Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
5. Assignment. This Agreement shall not be assigned or delegated by any
party hereto, except that PNT may transfer its rights hereunder to any wholly-
owned subsidiary of PNT, and except that any assignment of any of the Shares
by any Shareholder shall require that such Shares remain subject to this
Agreement and the proxy granted hereby. This Agreement shall be binding upon
and inure to the benefit of the Shareholders and their successors and shall be
binding upon and inure to the benefit of PNT and its successors and any
permitted assigns.
6. Specific Performance. The parties hereto acknowledge that damages would
be an inadequate remedy for a breach of this Agreement and that the
obligations of the parties hereto shall be specifically enforceable. In
addition to any other legal or equitable remedies to which PNT would be
entitled, in the event of a breach or a threatened breach of this Agreement by
any Shareholder, PNT shall have the right to obtain equitable relief,
including (but not limited to) an injunction or order of specific performance
of the terms hereof from a court of competent jurisdiction.
7. Amendments. This Agreement may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by all of the parties hereto.
D-2
<PAGE>
8. Notices. All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be deemed given if delivered
personally, by cable, telegram or telex, or mailed by a party hereto by
registered or certified mail (return receipt requested) or by a nationally
recognized overnight mail deliver service, to the other party at the following
addresses (or such other address for a party as shall be specified by like
notice):
if to PNT:
Pennsylvania Enterprises, Inc.
One PEI Center
Wilkes-Barre, Pennsylvania 18711-0801
Attn: Thomas F. Karam, President and Chief Executive Officer
Fax Number: (570) 829-8900
with a copy to:
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, New York 10004
Attn: Garett J. Albert, Esq.
Fax Number: (212) 422-4726
if to any Shareholder, to such Shareholder:
c/o Southern Union Company
767 Fifth Avenue
50th Floor
New York, New York 10153
Fax Number: (212) 754-5789
with a copy to:
Fleischman and Walsh, L.L.P.
Suite 600
1400 Sixteenth Street, N.W.
Washington, D.C. 20036
Attn: Stephen A. Bouchard, Esq.
Fax Number: (202) 265-5706
Any party may change its address for notice by notice so given.
9. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
the principles of conflict of laws thereof.
10. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
11. Term. This Agreement shall terminate, and the proxy granted herein
shall cease to be irrevocable, upon the consummation of the Merger in
accordance with and as defined in the Merger Agreement or such other
expiration or termination of the Merger Agreement in accordance with its
terms, and thereafter this Agreement shall be of no further force or effect
and there shall be no liability on the part of any party with respect thereto
except nothing herein will relieve any party from liability for any prior
breach hereof.
D-3
<PAGE>
IN WITNESS WHEREOF, PNT has caused this Agreement to be duly executed, and
each Shareholder has duly executed this Agreement, on the day and year first
above written.
PENNSYLVANIA ENTERPRISES, INC.
By:
/s/ Thomas F. Karam
__________________________________
Name:Thomas F. Karam
Title:
President and Chief
Executive Officer
/s/ George L. Lindemann
_____________________________________
George L. Lindemann
/s/ Dr. F.B. Lindemann
_____________________________________
Dr. F.B. Lindemann
/s/ Adam M. Lindemann
_____________________________________
Adam M. Lindemann
/s/ George Lindemann, Jr.
_____________________________________
George Lindemann, Jr.
/s/ Sloan N. Lindemann
_____________________________________
Sloan N. Lindemann
D-4
<PAGE>
COMMONWEALTH OF PENNSYLVANIA )
) ss.
COUNTY OF LUZERNE )
On this 10th day of June, 1999, before me personally came Thomas F. Karam,
to me known, who being by me duly sworn, did depose and say that he is
President and Chief Executive Officer of Pennsylvania Enterprises, Inc., the
corporation that executed the foregoing instrument; and that he signed his
name thereto by the authority of the Board of Directors of said corporation.
/s/ JoAnne McHale
_____________________________________
Notary Public in and for said
Commonwealth
D-5
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Shareholder Number of Shares
- ----------- ----------------
<S> <C>
George L. Lindemann 1,828,662*
Dr. F.B. Lindemann 2,204,086
Adam M. Lindemann 2,486,890*
George Lindemann, Jr. 2,493,752
Sloan N. Lindemann 2,493,747
</TABLE>
- --------
* Excludes Shares held, or subject to purchase, pursuant to any Southern
Union Company employee benefit or stock option plan (in the case of George
L. Lindemann) or directors' plan (in the case of Adam M. Lindemann);
provided that, to the extent permitted by such plan with respect to Shares
held or purchased, any such additional Shares shall be subject to this
Agreement.
D-6
<PAGE>
4160-PS-99
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SOUTHERN UNION COMPANY
FOR THE OCTOBER 19, 1999
ANNUAL MEETING OF STOCKHOLDERS
The undersigned hereby appoints John E. Brennan and Frank W. Denius, or
either of them, with power of substitution in each, proxies for the undersigned,
to represent the undersigned and to vote all the Common Stock of the Company
which the undersigned would be entitled to vote, as fully as the undersigned
could vote and act if personally present, at the Annual Meeting of Stockholders
to be held on October 19, 1999 at 2:00 p.m. Eastern Time, at the Plaza Hotel,
Fifth Avenue at Central Park South, New York, New York or at any adjournment or
postponement thereof.
The Proxies are authorized to vote in their discretion upon all matters properly
brought before the meeting, including any matter of which Management was not
aware a reasonable time before the solicitation of this proxy. The Board of
Directors recommends a vote "FOR" each proposal.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
[SEE REVERSE] [SEE REVERSE]
SIDE SIDE
- -------------------------------------------------------------------------------
/\ DETACH HERE/\
<PAGE>
[X] Please mark your votes as in this example.
- ---------------------------------------------------------------------------
1. Election of the following nominees as Class III Directors
Nominees: George L. Lindemann, Peter H. Kelley, and Dan K. Wassong
FOR WITHHOLD MARK HERE FOR [ ]
[ ] [ ] ADDRESS CHANGE
AND NOTE BELOW
[ ]------------------------------------------------------------------------
Withheld for the following only (write the name of the nominee(s) on the
space above)
Date:
- --------------------------------------- -----------
SIGNATURE
Please return your signed proxy at once in the enclosed envelope which requires
no postage if mailed in the United States, even though you expect to attend the
meeting in person.
Please date and sign above. If joint account, each owner should sign. When
signing in a representative capacity, please give title. Please sign here
exactly as name appears to the left.
FOR AGAINST ABSTAIN
2. Proposal to approve (a) the Agreement of Merger [ ] [ ] [ ]
between the Company and Pennsylvania Enterprises,
Inc. (PEI) dated as of June 7, 1999 whereby PEI
will merge with and into the Company with the
Company being the surviving corporation and (b)
the issuance of shares of the Company's common
stock pursuant to the merger agreement.
FOR AGAINST ABSTAIN
3. Proposal to approve the following amendments to [ ] [ ] [ ]
the Company's Restated Certificate of Incorporation:
(a) to increase the number of authorized shares of
the Company's common stock from 50,000,000 to
200,000,000; (b) to grant the Board of Directors
authority to issue 6,000,000 shares of preferred stock
in series the Board of Directors deems appropriate
and to establish from time to time the number of
shares to be included in each such series and to fix
the designations, powers,preferences and rights of
the shares of each such series and the qualifications,
limitations or restrictions thereof; and (c) to repeal
the rights, powers, the privileges and preferences of
the Company's currently authorized cumulative preferred
stock.
FOR AGAINST ABSTAIN
4. Proposal to approve an amendment to the Company's [ ] [ ] [ ]
Restated Certificate of Incorporation to increase
the maximum number of directors from 12 to 15.
FOR AGAINST ABSTAIN
5. Proposal to approve an additional 3,000,000 [ ] [ ] [ ]
shares of the Company's common stock to be
eligible for grant under the Company's 1992
Long-Term Stock Incentive Plan.
DATE:
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SIGNATURE
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